Law Commission’s Draft Arbitration Bill to Fine-Tune the Arbitration Act 1996: What Does it Look Like?

The Law Commission of England and Wales (the "Law Commission") has published its Final Recommendations to reform the Arbitration Act 1996 (the "Act"), with an accompanying draft Arbitration Bill (the “Arbitration Bill”). There are six “major initiatives”¹  proposed by the Law Commission in addition to minor amendments.  The Arbitration Bill does not reflect “root and branch” reform² , rather it is intended to ensure that the Act remains “state of the art”³ , both for domestic arbitrations, and in support of London as a world-leading seat for international commercial arbitrations.

The most important changes include:

1. a new statutory rule to determine the law governing the arbitration agreement;
2. codification of an arbitrator’s duty of disclosure;
3. strengthening arbitrators’ immunity;
4. a new power of summary disposal;
5. clarification of court powers in support of (i) arbitration proceedings in respect of third parties, and (ii) emergency arbitrators; and
6. a revised framework for challenges under section 67 of the Act (challenging awards on the basis that the tribunal lacked substantive jurisdiction).

This Legal Update provides a snapshot of what the Arbitration Bill currently looks like. If adopted, we will likely see a new Arbitration Act in early 2024 (although it could be as early as late 2023).

1.  Territorial Extent of the Arbitration Bill

The Arbitration Bill applies to England and Wales only (as the Law Commission can only make reform proposals covering those countries). However, since the Act extends to Northern Ireland as well, the Law Commission hopes that the Government will consider implementing the reforms in Northern Ireland, “after appropriate engagement and consultation.”⁴

2.  Major Changes Proposed in the Arbitration Bill

• Governing Law of the Arbitration Agreement
  The Arbitration Bill includes a new statutory default rule that the arbitration agreement will be governed by the law of the seat, unless the parties expressly agree otherwise.  This reverses the current common law position that in the absence of an express party choice, the law of the matrix contract governs the arbitration agreement. We provided our preliminary observations on this important change in our prior Legal Update, which also includes a practical flowchart for parties to ascertain the law governing their own arbitration agreements by virtue of the new rule.

• Impartiality: Arbitrator’s Duty of Disclosure
  The Arbitration Bill codifies an arbitrator’s continuing duty to disclose any circumstances which might reasonably give rise to justifiable doubts as to their impartiality. The Law Commission’s view is that a statutory duty, rather than contractual duty, adds certainty as it: (i) will extend to pre-appointment discussions; (ii) is not dependent on the ability to imply a term in the arbitrator’s appointment contract⁵ ; and (iii) ensures the duty is owed to all parties.
  
  The Arbitration Bill does not prescribe what needs to be disclosed; that will vary from case to case and will be developed through case law or addressed in arbitral rules. The Arbitration Bill does, however, address an arbitrator’s state of knowledge, which has not been addressed in the common law to date.
  
  Arbitrators will be under a duty to disclose what they actually know and what they ought reasonably to know⁶. Whether this means that the arbitrator is under a duty to make inquiries will depend on the circumstances. 

• Arbitrator immunity
  The Arbitration Bill extends the scope of arbitrator immunity by ensuring arbitrators are not liable for: (a) resignation, unless the resignation is proved to be unreasonable; or (b) the costs of any application for their removal, unless it is shown that they have acted in bad faith.
  
  Change (a) is designed to let arbitrators feel comfortable resigning, if it is appropriate to do so, without fear of incurring liability, yet also means parties will not be liable for the wasted costs caused by improper resignations. Change (b) ensures that the costs of section 24 removal applications only fall on the arbitrator in circumstances aligned with general arbitrator immunity under section 29 of the Act .⁷

• Summary Disposal
  The Arbitration Bill provides that (subject to the parties’ right to opt out – e.g. in their arbitration agreement or by agreement after the dispute has arisen) tribunals may, on the application of a party, issue an award on a summary basis. This amounts to a new express power of summary disposal, invokable by a party if it feels another party has “no real prospect of succeeding” on a claim, defence or issue. While arbitrators probably have an implicit power to use summary disposal, an express power to this effect may encourage its use given that “due process paranoia” has, according to stakeholders, discouraged its use by arbitrators to date.
  
  The precise procedure will be a matter for the tribunal, having consulted with the parties (the parties will have a reasonable opportunity to make representations to the tribunal). The Law Commission preferred to stipulate the threshold for summary disposal so that there is certainty and consistency in all English and Welsh seated arbitrations.  The meaning of “no real prospect of success” has been established in English case law.⁸

• Court’s powers in support of arbitration proceedings vis-à-vis third parties
  The Arbitration Bill makes it clear that orders that the court can make in support of arbitration under section 44 of the Act can also be made against third parties. Given the uncertainties on this point in case law, this suggested change is for clarity.
  
  The reforms also confirm that third parties have the full rights of appeal, i.e. third parties do not need the court’s consent to appeal a section 44 decision (this contrasts with arbitral parties, who still need permission from the court they are appealing from).  This is for fairness, since the third party did not consent to arbitration and cannot appear before a tribunal to make arguments about any court order.

• Emergency Arbitrators
  The Law Commission neither recommends a self-standing scheme for emergency arbitrators to be administered by the court nor that the Act should generally apply to emergency arbitrators (claiming that much of it is “not suited” to them). It concludes that arbitral rules are the best means of regulating emergency arbitrators. However, the Arbitration Bill contains two proposed changes which seek to promote the enforcement of emergency arbitrators’ orders. Emergency arbitrators will have:

(i) the same means as other arbitrators to enforce their peremptory orders; and
(ii) the same power as other arbitrators to give arbitral parties permission to apply to court for a section 44 order.

• Challenges to Awards
  Currently section 67 challenges (challenging an award on jurisdictional grounds) take the form of a full rehearing before the court.  In the interests of preventing objecting parties from having ‘two bites of the cherry’ and for cost efficiency, the Law Commission recommends that the Act confers power for court rules⁹ to be implemented as follows:
  
  where an objection has been made to the tribunal that it lacks jurisdiction, and the tribunal has ruled on its jurisdiction, then in any subsequent section 67 challenge by a party who has taken part in the arbitration: (i) the 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 (ii) evidence will not be reheard, save in the interests of justice.
  
  The Arbitration Bill also ensures that the remedies under section 67 are consistent with those currently available under sections 68 and 69.¹
  
  Further, where there is a request for correction of an award, or for an additional award, which is material to a challenge/appeal under sections 67, 68 or 69, timings in relation to those challenges are also amended, through a new section 70(3A), which confirms that the time for challenge/appeal runs from the date of the correction or additional award (or the date of notification not to grant that request for a correction or additional award). 

3.  Minor Changes Proposed in the Arbitration Bill

In addition to the major changes, the Law Commission also recommends the following minor changes:

• Jurisdiction of tribunal
  The Arbitration Bill expressly confirms that a court’s preliminary ruling on jurisdiction under section 32 is only available where the tribunal has not already ruled on its own jurisdiction. Parties therefore have two options: they can (i) ask the court to rule directly under section 32; or (ii) ask the tribunal to rule first and then challenge jurisdiction under section 67, if needed (removing the possibility of a section 32 application followed by a section 67 challenge).
  
  The Arbitration Bill also confirms that a tribunal can make a costs award in the arbitration even where it is held (by a court or the tribunal) that the tribunal has no substantive jurisdiction.  

• Appeals available from stay applications
  The Arbitration Bill confirms that an appeal is available from a decision of the court under section 9 (stay of legal proceedings). This codifies case law to this effect.

• Changes to requirements for court to consider applications under section 32 (jurisdiction) and section 45 (on points of law)
  The Arbitration Bill proposes simplifying section 32 and section 45 applications so that either the agreement of the parties or the permission of the tribunal is needed.   At present, where the tribunal permission option is pursued, the court must be satisfied with additional requirements (promptness, substantial costs savings etc.) but these requirements have been removed from the Arbitration Bill. This streamlined process is designed to encourage more use of these sections.

• Repeal of provisions relating to domestic arbitration agreements
  The Arbitration Bill repeals the sections of the Act which concern domestic arbitration agreements, which have never been brought into force.  The Law Commission’s view is that there should not be any distinction between domestic and international arbitrations, and the Act has survived without these distinctions for 25 years.

4.  Changes Considered but Not Recommended for Reform

A variety of other changes were considered by the Law Commission during their review process but they ultimately did not end up featuring in the Arbitration Bill (for reasons explained in the Law Commission’s Final Report).  These include, amongst others, whether:

1. the Act should include a statutory rule on confidentiality;
2. the Act can accommodate a prohibition on discrimination in arbitral appointments and in arbitration proceedings more generally;
3. reform is needed to section 69 (appeals on a point of law);
4. to make section 7 (separability of arbitration agreement) a mandatory section;
5. to repeal or amend section 44(5) to address the “misperception of [the] Gerald Metals” decision; and
6. to expressly reference remote hearings and electronic documentation in the Act.

5.  Concluding Remarks

The consultation process by the Law Commission has been a thorough one - it involved two detailed consultation papers which fostered broad engagement, and “often detailed” ¹¹feedback, from a wide range of consultees.¹² The Law Commission appears to have listened to the needs, desires and criticisms of the consultees and gave detailed reasoning for why it reached its conclusions on (sometimes polarized) topics. The end product is an Arbitration Bill which seeks to finetune rather than revamp the Act, which to date has played a vital role in the UK’s position as a world-leading seat for arbitration.  

6.  Next Steps

It is now down to the UK Government to decide whether to introduce the Arbitration Bill into Parliament. Lord Bellamy KC, Parliamentary Under Secretary of State in the Ministry of Justice, has acknowledged the importance of arbitration to “resolve disputes swiftly and effectively”  ¹³;and has committed to respond to the Law Commission’s final recommendations “shortly”¹⁴ . We will closely monitor this development and provide regular updates. 

 

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¹ See https://www.lawcom.gov.uk/project/review-of-the-arbitration-act-1996/.

² Ibid.

³ Ibid.

⁴ Paragraph 1.21 of the Law Commission’s Final Report.

⁵ Unlike an English law governed contract, it might not be possible to imply a duty of disclosure into a foreign law governed appointment contract.

⁶ The Law Commission feels constructive knowledge is important given that disclosure maintains (the appearance of) impartiality in arbitrators and notes that this standard aligns with the usual standard expected of similar professionals (like barristers and solicitors).

⁷ This provides that arbitrators have no liability in the discharge (or purported discharge) of their functions unless their act or omission is shown to have been in bad faith.

⁸ It requires a party (whether claimant or respondent) to establish that another party’s case does not have a realistic prospect of success (“realistic” meaning moe than “fanciful”).

⁹ The Law Commission considers this a “softer” type of reform as the rules can be tried, evaluated, and amended if needed.

¹⁰ Remedies: (i) declaring the award to be of no effect in whole/in part; and (ii) remitting the award to the tribunal for reconsideration in whole/ in part, have been added to section 67.  A new proviso states that the court must not set aside or declare the award to be of no effect unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration.

¹¹ Paragraph 1.10 of the Law Commission’s Final Report

¹² Consultees include: individual practitioners, academics, domestic and international firms, and institutions as well as specialist bodies.

¹³ Ibid

¹⁴ Ibid.