Law applicable to arbitration agreements: Law Commission consults on new statutory rule
In a widely welcomed move, the Law Commission of England and Wales has provisionally proposed that a new rule be included in the Arbitration Act 1996 to the effect that the law of the arbitration agreement is the law of the arbitral seat, unless the parties agree expressly otherwise in the arbitration agreement itself.1 The proposal, if adopted, should give welcome certainty for clients choosing London as a seat of international arbitration.
A change of heart?
The Law Commission previously noted it had “not yet” been persuaded the Act required amendment to introduce a new regime which departed from the UK Supreme Court’s seminal decision in Enka v Chubb [2020] UKSC 38.2
The door was left open for alternative views however, and 31 responses to the Law Commission’s first consultation paper recommended the question of determining the applicable (or proper or governing) law of an arbitration agreement should be reconsidered as part of the Law Commission’s focused review of the Act.3
Such sentiment was also found among members of the disputes community attending events during the Autumn 2022 consultation period, and lawyers of this firm (including some authors of this article) expressed the view that the Law Commission’s initial proposal to leave the topic alone amounted to a “missed opportunity” to address some of the issues arising out of the Supreme Court’s decision.4
Is the decision in Enka v Chubb problematic?
The Commission’s own, useful summary of what the Supreme Court decided in Enka v Chubb reveals the complexity and room for argument on this issue:
- If there is a choice of law, express or implied, directed to the arbitration agreement itself, then that chosen law will govern the arbitration agreement, unless that choice of law is contrary to public policy.
- If there is no such choice, and if the arbitration agreement forms part of a matrix contract, and if there is a choice of law, express or implied, for the matrix contract, then that chosen law will also govern the arbitration agreement.
- However, that chosen law “may” be displaced in some circumstances (for example, where the law of the seat itself provides that the arbitration agreement is governed by the law of the seat, or where there is a serious risk that the chosen law might render the arbitration agreement invalid).
- If there is no choice of law anywhere, the arbitration agreement will be governed by the law with which it has the closest and most real connection. According to the majority, this will be the law of the seat of the arbitration (although, again, that chosen law may perhaps be displaced if there is a serious risk that the chosen law might render the arbitration agreement invalid).5
The Supreme Court’s decision can be viewed as sound – even orthodox – from a conflict of laws perspective, but it is apparent from the above summary that it did not allow for certainty in the unique context of arbitration agreements.
What are some advantages of the Law Commission’s proposal for a default rule?
The advantages include at least these:
- Certainty - Having a clear, readily understandable default rule in the Act itself removes the need for clients (and their advisors) to navigate the decision in Enka v Chubb and its implications in individual cases. This advantage may be particularly important for those less familiar with English arbitration law, and common law approaches more generally.
- Greater alignment with some client expectations - One consequence of the decision in Enka v Chubb is that more arbitration agreements will be governed by non-English law, even where the parties have agreed to legally seat their arbitrations in England and Wales. This is because many international contracts contain a non-English governing law clause in the wider, matrix or main contract, and that law will govern the arbitration agreement in many circumstances (see bullet two of the Law Commission’s summary above). Contracting parties who choose English arbitration law to apply to their disputes may be surprised that, following Enka v Chubb, the effect of choosing another law to govern the substantive rights and obligations under the wider contract containing the arbitration agreement may in some circumstances displace their choice of arbitration law. The Law Commission’s proposal will result in important issues related to the arbitration (such as the separability of the arbitration agreement, the arbitrability of disputes, the scope of the arbitration agreement, and the confidentiality and privacy of the arbitral proceedings) being determined by the law of the seat in more cases.
And what are some disadvantages of having such a default rule?
The disadvantages include (but are not limited to):
- Defeating some client expectations - For some clients, the proposed default rule may come as an unwelcome surprise if it was intended (although not expressed) that the governing law of the matrix contract extend to the arbitration agreement.
- Two governing laws - Having different governing laws for the main contract and the arbitration agreement may create problems in certain circumstances (a scenario which may also occur under the current law as set out in Enka v Chubb). For example, it might lead to someone being held a party to the arbitration clause, under its governing law, and yet not a party to the main contract, under its different governing law.
- Overruling the Supreme Court - It is not widely considered that the Supreme Court reached the wrong decision or applied an incorrect analysis in Enka v Chubb, but the effect of the Law Commission’s proposal would be to some extent to overturn the unanimous view of a recent Supreme Court decision.
Our take
The authors of this article are in favour of the Law Commission’s proposal.
On balance, we agree that the advantages of reform outweigh the disadvantages. From a client perspective, a simple, readily identifiable rule on this issue makes practical, commercial sense. It also avoids the potential for confusion, argument, and satellite litigation.
From an international arbitration perspective, the alignment of client choice of arbitral seat and the governing law of the arbitration agreement presents more certainty regarding the legal implications of party choice of “London arbitration”, and aligns with, for example, the approach taken under French and Swedish law to this issue.
It will be interesting to see how consultees respond to the Law Commission’s proposal.
So, what’s next?
Those interested in responding to the second consultation paper can do so before 22 May 2023.
Thereafter, the Law Commission will likely produce its final recommendations in a report and prepare any draft amendments to the Act. It will then be for the UK Government to decide whether to implement any recommendations.
Note: the second consultation paper covers issues other than the law of the arbitration agreement, namely: the procedure for jurisdictional challenges before the English court under section 67 of the Act and tackling discrimination in arbitral appointments and procedure. These matters are not discussed in this article.
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1The proposal was included in the Law Commission’s Review of the Arbitration Act 1996 Second Consultation Paper of March 2023. The Second Consultation Paper follows responses to the First Consultation Paper which was published in September 2022. For discussion of the First Consultation Paper, see our article here.
2First Consultation Paper, para 11.14
3As the Law Commission noted in the First Consultation Paper, its work has been guided by stakeholders (para 1.33), and the Law Commission had concluded before that paper was published that the Act “still works very well and there is no need for extensive reform.”
4Lexology and GAR webinar, “Reform of the Arbitration Act 1996: Maintaining England as a “gold standard’ seat of international arbitration” (December 2022).
5Law Commission, Review of the Arbitration Act 1996, Second Consultation Paper Summary, para 1.16. See also a slightly more detailed summary in para 2.14 of the Second Consultation Paper.
