The Final Report on Proposed Reforms for the U.K. Arbitration Act 1996
The Law Commission of England and Wales yesterday has published its final report with conclusions and recommendations to reform the U.K. Arbitration Act 1996.
The massive, 189-page Sept. 5 final report, which includes a draft bill that contains proposed amendments to the Arbitration Act 1996.The process began in late 2021 with the announcement of the Law Commission that it will review the law with the purpose to ensure that the act preserves its effectiveness and maintains its status as the “best in class.”
The Law Commission has published two consultation papers in September 2022 (first consultation paper) and March 2023 (second consultation paper). For background, see Asmar Ismayilova, “What Changes will the Reform Proposals Bring to the U.K. Arbitration Act 1996?” CPR Speaks (May 17, 2023), (available here).
The Law Commission has made recommendations on the following major issues:
- codifying an arbitrator’s duty of disclosure;
- strengthening arbitrator immunity (for resignation and removal);
- establishment of a power of “summary disposal”;
- a new rule on the governing law of an arbitration agreement to provide that the arbitration agreement is governed by the law of the seat, unless the parties expressly agree otherwise (a different position, the report notes, than decided in the high-profile Enka v. Chubb case);
- updates for court challenges to arbitration awards under Arbitration Act 1996 Section 67, and
- updates on court powers in support of arbitral proceedings and emergency arbitrators.
Below are key recommendations made by the Law Commission along with some issues not recommended for further action, with the commission’s reasoning.
Arbitrator Independence and Disclosure
Impartiality and independence of arbitrators is crucial for a fair and unbiased award. Impartiality requires the arbitrator to be neutral. It is covered in Arbitration Act 1996 Sections 24 and 33.
Independence means that an arbitrator does not depend on parties’ authority or pressure because the arbitrator has no connection to them, as well as to the dispute. If there is any connection, then disclosure is needed. But there is no rule regarding disclosure and independence of arbitrators in the act, and the commission was considering whether to add any or not.
Regarding independence, the Law Commission does not recommend any reform, including a statutory duty of independence in the act. If an arbitrator meets the requirements of impartiality, then any connection to parties and dispute loses its relevance, the report suggests.
Regarding disclosure, the Law Commission recommends adding rules to make arbitrators have a continuing duty to disclose any circumstances which could “reasonably give rise to justifiable doubts as to their impartiality”(page 26). As the U.K. Supreme Court decided in Halliburton Co. v. Chubb Bermuda Insurance Ltd case (2020) UKSC 48, disclosure of any connection is necessary to ensure integrity in arbitration for public interest.
The recommendation does not specify what should be disclosed and leaves it to the case law for better development of details. Moreover, the Law Commission recommends that the duty of disclosure should encompass not only the information which the arbitrator is aware of, but also the information which the arbitrator ought to know.
Arbitrator Immunity
The Arbitration Act 1996 regulates the immunity of arbitrators in Section 29. Case law, however, shows that arbitrators can be liable for trial costs related to the resignation or for the removal at the court.
The Law Commission proposes to strengthen arbitrator immunity. It recommends shielding an arbitrator from incurring liability for resignation unless the resignation is shown to be unreasonable. The burden of proof will rely upon the claimant.
Regarding the removal of arbitrators, it is recommended to protect arbitrators from being liable for costs, unless it is shown that they have acted in bad faith. The rationale is to avoid the arbitrators’ fear of incurring liability if any party becomes unsatisfied with the decision.
Summary Disposal
Summary judgment is a widely applied rule in civil procedure. The court decides the case without a trial because facts and evidence are obvious, and the party has no prospect of success.
In arbitration, summary disposition has the same meaning as in civil procedure and the same purposes: to expedite the process without a full evidentiary hearing. This is covered indirectly by Section 33, This section, however, also requires arbitrators to give each party a reasonable opportunity to put on their case. Otherwise, the award can be challenged before the courts. Consequently, arbitrators can be discouraged from applying summary disposal.
In the first consultation paper, the Law Commission asked whether it would be effective to include an explicit provision about the availability of summary disposal. The final report confirms this proposal and recommends including it in Arbitration Act 1996, subject to the parties agreement. Moreover, the procedure should be decided by the tribunal, having consulted with the parties.
The Proper Law
The question of governing law of an arbitration agreement can occur when it is a clause of a main contract, and a contract involves international features. That is why it is essential to explicitly define the contract’s governing law. The arbitration agreement and main contract can have different governing laws; however, governing law which applies to each must be specifically stated in the contract.
The question of how to determine the proper law of the arbitration agreement, if not chosen by parties, was addressed in Enka Insaat ve Sanayi AS v. OOO Ins. Co. Chubb case [2020] UKSC 38, [2020] 1 WLR 4117 (available at https://bit.ly/31fqWWp): It should be the law of the contract.
The Law Commission recommends a new rule which defines two bases for determining the governing law of the arbitration agreement:
- the law that the parties expressly agree on applies to the arbitration agreement; or
- where no such agreement is made, the law of the seat of the arbitration in question.
According to the final report, the main policy behind the new rule is to provide parties with the niceties arbitration law of England and Wales, which is more supportive on questions of arbitrability, scope, and separability.
Section 44: Court Support
The first consultation paper discussed (a) whether it is needed to explicitly state that third parties are bound by orders and what consultees think about granting third parties the right to appeal like in domestic courts, and (b) powers of emergency arbitrators.
The Law Commission recommends in the new final report that due to conflicting views by courts, and continuing uncertainty about third parties, the law should clearly state that orders can be made against third parties. Furthermore, third parties should enjoy usual rights of appeal when they are subject to orders made under Section 44.
It is also recommended that the powers of emergency arbitrators should be the same with ordinary arbitrators in terms of enforcement of orders.
The Law Commission does not recommend making any amendments in regard to section 44(2)(a), on taking witness evidence, and does not recommend repealing section 44(5).
Challenging the Award: Substantive Jurisdiction
One of the grounds for the challenges of arbitral awards is the lack of jurisdiction of the tribunal. Most important part of it is that nearly all arbitration tribunals are granted with competency to hear jurisdictional claims which emanates from the principle of Kompetenz-Kompetenz. Gary Born, International Commercial Arbitration 1048 (2nd edition) (Kluwer International).
Meanwhile, depending on arbitration rules (for instance, UNCITRAL Rules Article 21(1)), in some jurisdictions not only tribunals have the power to hear their own jurisdictional challenges but courts are also authorized to decide those claims (for instance, Federal Arbitration Act Section 4, 9 U.S.C. §§ 1-14).
Section 67 sets forth rules for jurisdictional challenge. The question on how the court should conduct hearings if the tribunal had already issued a decision on its jurisdiction was answered in the Dallah v. Gov’t of Pakistan [2010] UKSC 46 case by the U.K. Supreme Court. The answer was “full hearing.”
Now the Law Commission recommends changing that approach: “[T]he court will not entertain any new grounds of objection, or any new evidence, unless even with reasonable diligence it could not have been put before the tribunal; . . . and evidence will not be reheard, save in the interests of justice.”
“Our proposal seeks to restore the balance,” writes the commission: “a challenge before the court is allowed; but there are limits to the arguments and evidence which can be presented.”
Interestingly, the Law Commission suggests making changes through court rules instead of making amendments to Arbitration Act 1996.
Remedies under Section 67
The court while deciding on jurisdiction under Section 67 has power either to confirm the award, vary the award, or “set aside the award in whole or in part.” Meanwhile, other sections about challenging awards--Sections 68 and 69--have an additional option: to remit to the tribunal.
But in the first consultation paper, the Law Commission did not consider the necessity of including this option to Section 67(3). It proposed to include another remedy like “declaring the award to be of no effect, in whole or in part” to section 67(3).
“Setting aside” can be done when an arbitral tribunal continues its work on another award, while “having no effect of the award” is granted when the tribunal has already finished its work. Thus, the reason behind the proposal was the situation when the court under Section 67 decides that the tribunal does not have jurisdiction to hear the case and sets aside the award.
For example, if a party challenges the tribunal’s jurisdiction and the court finds that indeed the tribunal did not have jurisdiction, then the court cannot set aside the award, and should declare the award to be of no effect. Most of the consultees approved this proposal and the Law Commission added a recommendation for including two more remedies to Section 67: “declaring the award to be of no effect, in whole or in part; and remitting the award to the tribunal, in whole or in part, for reconsideration.”
Costs
The Law Commission recommends making more certain the power of an arbitral tribunal to issue an award of costs if the court or tribunal decides that the tribunal has no substantive jurisdiction. The purpose of this proposal is to prevent wrongful initiatives.
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No amendments are recommended regarding the following issues:
Confidentiality
It is undeniable that confidentiality is one of the core features of arbitration and makes it attractive. The Law Commission initially asked for opinions on whether it is needed to codify a rule with some exceptions.
The majority of consultees opposed a proposal and the Law Commission in its final report shares this vision. The reason behind this is that the default rule is in contradiction with the real situation: one size does not fit all. The commission also acknowledges that some disputes resolved through arbitration might require transparency like investor-state disputes.
Furthermore, parties are free to express their will and opt for confidential arbitration to which full support is provided even without amendments to the Arbitration Act 1996. It is also noted that arbitral rules recognize confidentiality and do this in a number of ways. Thus, a single rule in a statute will not be effective. Regarding the exceptions to confidentiality, the commission emphasizes the role of courts and relies on case law to continue developing a non-exhaustive list of exceptions.
Discrimination
Discrimination was discussed in both consultation papers. The first one was proposing to apply the principles of Equality Act 2010 to arbitrators as well. After receiving different views on this question, the Law Commission modified the proposal and suggested having an exception to the general prohibitory rule to the appointment of arbitrators: selecting from neutral nationality--that is, other than the parties--should not be considered as discrimination.
Moreover, to avoid discrimination not only in the process of appointment but also during the arbitration proceedings, the Law Commission was asked if it would be practical to have a general prohibition of discrimination. Received opinions did not favor the reforms, because specifically adding rules about neutral nationality might give the impression that a non-neutral nationality is not impartial, and amendments could create other practical problems.
Thus, the Law Commission has decided that amendments to the act to address discrimination will be unlikely to be successful and it does not propose any changes.
Appeal on a Point of Law
Parties, in limited circumstances, may apply to the court under Section 69 and challenge an award for a question of law. According to the first consultation paper (page p.92, 9.26, linked above), two visions on this matter were hotly discussed: the first group believed that Section 69 should be annulled, in order to give arbitral rulings more weight and ensure finality. The second group of people were in the opinion that expansion of the scope would give the court more opportunities to address legal issues.
The final report does not recommend amending Section 69 and finds it satisfactory because the Law Commission considers that the existing rule ensures balance between the two competing motivations. Moreover, this section is non-mandatory, and parties have the right to opt out.
Next, the U.K. Government will decide whether to accept and implement the recommendations.
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The author was a CPR Spring 2023 intern based in Baku, Azerbaijan. She is a recent LLM graduate from the University of Missouri-Columbia School of Law.