While the changes may be some way off and will depend on parliamentary time being allocated for their debate and enactment, it is important that parties to, or considering, arbitration clauses that specify London-seated arbitration understand the effects of the changes.
The most significant areas of the Bill are:
- What test should the English court apply in deciding on a challenge to an arbitral tribunal's ruling on its own substantive jurisdiction?
- Should there be a statutory provision specifically addressing the question of which law governs an arbitration agreement?
- "Summary disposal" of unmeritorious claims or defences.
Court challenges to a tribunal's ruling on jurisdiction
Respondents in arbitration proceedings commonly raise jurisdictional objections, alleging (for example) that the arbitration clause relied on by the claimant is not valid, that it does not cover the particular dispute referred to arbitration, or that the respondent is not a party to the arbitration agreement.
Such objections are fundamental: arbitration is an agreement-based dispute resolution mechanism and it would be unjust for a party who has not agreed to arbitrate with the claimant (either at all or in respect of the specific claim that the claimant has referred to arbitration) to be subjected to an arbitration process and a possible arbitral award against it (for example, ordering it to pay damages to the claimant) that is likely to be enforceable in most jurisdictions worldwide.
When such jurisdictional objections are raised, the internationally recognised "Kompetenz-Kompetenz" principle requires that the arbitral tribunal itself should have the first, but not the final, say on whether the objections are or are not well-founded; the courts at the seat of arbitration will have the final say. This principle applies not only in cases where the arbitral tribunal rules that it does but also in cases where it rules that it does not, have jurisdiction.
The question with which the Law Commission has grappled and on which there has been significant debate is: as a matter of principle, what test should the English court apply when an arbitral tribunal's jurisdictional ruling is challenged? Should the court's role be limited to deciding whether the arbitral tribunal was entitled to reach the decision that it did (in effect an appeal of the arbitral tribunal's ruling on jurisdiction)? Or should the court instead conduct its own "full rehearing" or "de novo" independent investigation and determination of the underlying jurisdictional question?
This issue is of real importance to users of international arbitration and could be a factor in their choice of seat of arbitration for their international disputes. This is due to a perceived risk of unnecessary and unjustified repetition before the English court of evidence and submissions already canvassed before the arbitral tribunal (and, thus, increased legal and other costs) if the "de novo" approach is adopted, due to the possible need for two full hearings (one before the arbitral tribunal, one before the court) on precisely the same jurisdictional issues. As against this, however, the English courts already have (under the English Civil Procedure Rules) broad case-management powers which should enable them to ensure that any unnecessary and unjustified repetition of evidence and/or submissions is avoided. For example, the English courts are already empowered under those Rules to dispense with live witness evidence and to rely instead on transcripts of oral evidence already given before the arbitral tribunal.
As matters currently stand, pursuant to s67 of the 1996 Act and case-law applying that statutory provision, England adopts the "de novo" approach. Several other leading jurisdictions for international arbitration, including Singapore, Hong Kong and France, also adopt this approach. However, there has been a vigorous debate on whether this should remain the position or whether a new approach should now be adopted in the Bill.
Ultimately, in the Bill, the Law Commission opted for what it has previously described as a "compromise" or "softer" type of reform. The Bill will, if passed into law in its current form, confer an explicit power to amend the English Civil Procedure Rules so that, if an arbitral tribunal has made a ruling on an objection as to its substantive jurisdiction, in any subsequent English court challenge to that ruling by a party who has taken part in the arbitration:
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- the applicant cannot raise before the court a ground for the jurisdictional objection that it did not raise before the arbitral tribunal unless it shows that, at the time it took part in the arbitration, it did not know and could not with reasonable diligence have discovered the ground;
- the applicant cannot rely on evidence that was not heard by the arbitral tribunal unless the applicant shows that, at the time it took part in the arbitral proceedings, it could not with reasonable diligence have put the evidence before the arbitral tribunal; and
- the court cannot re-hear evidence that was heard by the arbitral tribunal, unless it considers it necessary to do so in the interests of justice.
This "compromise" solution, if enacted and then subsequently reflected in amendments to the English Civil Procedure Rules, would mark a significant departure from the current, "de novo" approach.
Which law governs the arbitration agreement?
The second key area of reform proposed by the Law Commission relates to a further important issue, and one which has been the subject of significant controversy in recent years, namely: what is (or should be) the test for determining which law governs an arbitration agreement? This is an important issue because any question regarding the validity and interpretation of the arbitration agreement (as well as other potentially important questions such as, for example, the assignability of the arbitration agreement) will fall to be determined in accordance with that law and arises because an arbitration agreement is separable from the commercial contract of which it typically forms part.
Commercial contracts containing an arbitration agreement often include a "general" governing law clause which does not specifically address the governing law of the arbitration agreement. For example, the contract might provide that "This Contract shall be governed by and take effect in accordance with English law", without specifically addressing the governing law of the arbitration agreement. In such cases, there is unlikely to be any dispute regarding the governing law of the arbitration agreement if the agreed seat of arbitration matches the governing law of the contract. For example, if there is a London seat and English law governs the wider contract, there will be a very strong presumption that the parties agreed that the governing law of the arbitration agreement is English law. But where the seat of arbitration does not match the governing law of the contract (for example: Paris seat, English law), there is scope for disputes regarding the governing law of the arbitration agreement.
The UK Supreme Court decided recently that, where a contract contains a "general" governing law clause which does not specifically stipulate the governing law of the arbitration agreement, the choice of governing law for the contract will usually (subject to certain possible exceptions) also apply to the arbitration agreement. This decision sparked concerns that there could now be a greater number of cases in which parties seek unjustifiably to derail or delay English-seated arbitrations on the alleged ground that the arbitration agreement is invalid under the foreign law stipulated in the general governing law clause.
In response to those concerns, in its final report the Law Commission proposes that a new rule be enacted to the effect that:
- where a governing law clause in a contract does not specifically address the governing law of the arbitration agreement which forms part of that contract, that governing law clause does not constitute an express agreement that the chosen law also applies to the arbitration agreement itself;
- in such cases, unless the parties agree otherwise in the arbitration agreement itself, the arbitration agreement shall be governed by the law of the seat of the arbitration; and
- where there is no governing law clause in a contract, and the arbitration agreement which forms part of that contract does not provide otherwise, the arbitration agreement shall be governed by the law of the seat of the arbitration.
This proposed new statutory rule, if enacted, promises to clarify an issue which has caused significant uncertainty in recent years.
"Summary disposal"
The Law Commission has also proposed a new statutory provision conferring an express power on arbitral tribunals to make an arbitral award on a "summary basis" to dispose of a claim, defence or issue where an arbitrating party has "no real prospect" of succeeding on that claim, defence or issue. "Summary basis" means that the arbitral tribunal has adopted an expedited procedure (the precise nature of which will be for the arbitral tribunal to decide in consultation with the parties) to decide whether a party has a real prospect of succeeding on the relevant claim, defence or issue.
However, this will not be a mandatory provision: parties to an arbitration agreement will be free to agree that the "summary disposal" provision shall not apply.
Discrimination
Finally, it is worth noting that, in its interim report, as we reported at the end of 2022, the Law Commission proposed new statutory provisions prohibiting discrimination in relation to the appointment of arbitrators. Ultimately, however, the Law Commission has decided not to recommend such further legislation, in order to avoid possible unwarranted satellite litigation and challenges to arbitral awards.
Authored by Ben Hornan, Kieron O'Callaghan, Nathan Searle, and Jerome Finnis.
