Introduction
In the second instalment of our series of articles dealing with reforms of the Arbitration Act 1996 (the Act) by the Law Commission, we examine the proposal to amend the Act to provide that the arbitration agreement is governed by the law of the seat, unless the parties expressly agree otherwise.
While a contract with an international dimension will usually specify its underlying governing law, the law applicable to an arbitration agreement is rarely stated expressly within the contract. This omission can cause headaches for disputing parties down the road, since the governing law of the arbitration agreement determines the arbitrability, scope and separability of the clause. Parties that fail to specify a governing law may be more likely to end up in costly and avoidable satellite disputes over these foundational issues.
For these reasons, before executing a commercial contract, parties should ensure that the law governing an arbitration agreement is expressly stipulated. Indeed, a number of arbitration institutions have already introduced such provisions into their model clauses.1 However, where an arbitration agreement does not provide expressly for a governing law, it will fall to a court or tribunal to make a determination.
The current law in England and Wales is based on the UK Supreme Court decision in Enka v Chubb2 which established a multi-stage approach for determining the governing law. However, this approach has been criticised for being complex, uncertain and inconsistent with the principle of party autonomy. The Law Commission in its report on the Act (the Report) proposes a new statutory rule to replace the Enka v. Chubb approach.
The Enka v. Chubb Approach
In Enka v Chubb, the majority in the Supreme Court adopted a complex test in which they held that the governing law of the arbitration agreement is:
- The law expressly chosen by the parties for the arbitration agreement or, in the absence of an express choice, the law of the main contract as impliedly chosen by the parties will generally extend to the arbitration agreement.
- However, this inference may be negated by additional factors that imply that the arbitration agreement should be governed by the law of the seat instead, for example, (a) if any provision of the law of the seat indicates that where an arbitration agreement is subject to that law, the arbitration will also be treated as governed by that country’s law, or (b) if there is a serious risk that the law of the main contract would render the arbitration agreement ineffective.
- In the absence of any choice of law for the main contract or the arbitration agreement, the law with the closest connection governs, usually the law of the seat (the place where the arbitration legally occurs) where the parties have chosen a seat of arbitration.3
This approach means that it is possible for the arbitration agreement to be governed by a different law than the main contract, especially when the arbitration is seated in England and Wales but the main contract is governed by a foreign law.4
The Law Commission’s recommendation
The Report recommends that the Act be amended to introduce a new statutory rule for the governing law of arbitration agreements.5 The proposed rule is:
- The governing law of the arbitration agreement is the law expressly chosen by the parties for the arbitration agreement.
- If there is no express choice, the law of the seat of arbitration applies.
The Law Commission considers that this rule would provide simplicity and certainty for the parties and the courts, and that it would avoid any satellite arguments about foreign arbitration law rules. The rule would also ensure that the arbitration agreement is effective and enforceable under the law of the seat, which is consistent with the doctrine of separability and the rules on arbitrability and scope. The rule would also respect the autonomy of the parties by allowing them to expressly choose the governing law, and it would override any implied foreign law that undermines the express choice to arbitrate.
Comment
The Law Commission's recommendation is likely to be welcomed by many practitioners and users of arbitration, as it would reduce the complexity and uncertainty of the current law. Moreover, from a policy perspective, the recommendation has the advantage that it will give rise to fewer English arbitrations under arbitration clauses governed by foreign law.
Reed Smith participated in both rounds of the consultation process of the Law Commission’s review of the Act and has provided its views and feedback on the proposed rule.
While the proposed statutory rule has clear benefits, the recommendation, if enacted, may raise some new concerns, such as:
- The potential for inconsistency between the governing law of the arbitration agreement and the governing law of the main contract, which may create difficulties in interpreting and applying the contract as a whole.
- The possible loss of flexibility and nuance in determining the governing law of the arbitration agreement, as the proposed rule does not allow for any exceptions or factors that may imply a different intention of the parties.
- The impact on the parties' expectations and choices, especially when they have chosen a foreign law for the main contract but have not expressly chosen a law for the arbitration agreement, or when they have chosen a foreign seat for the arbitration but have not expressly chosen a law for the arbitration agreement.
Pending the UK Government’s decision to implement the Law Commission’s recommendation, parties entering into arbitration agreements specifying a UK seat should ensure these incorporate an express choice of law. This is particularly crucial for contracts with an international element, given that the applicable law of the main contract and the law of the seat may be different.
If necessary, parties may also consider conducting a review of their existing commercial contracts and making appropriate amendments to the dispute resolution clauses to protect their interests.
Our next article in this series will address the proposed reforms to the Arbitration Act 1996 dealing with arbitrators' duty of disclosure and arbitrators' immunity.
- For instance, the London Chamber of Arbitration and Mediation and the Hong Kong International Arbitration Centre have an express choice of governing law for the arbitration agreement in their model clauses, and the International Chamber of Commerce International Court of Arbitration also recommends that parties stipulate the applicable law in the arbitration clause to their contracts. Other institutions, such as the London Court of International Arbitration and London Maritime Arbitrators Association, provide in their latest rules that English law should be the default applicable law unless the parties agree otherwise.
- Enka Insaat ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38, [2020] 1 WLR 4117.
- Enka v. Chubb at [170].
- Enka v. Chubb at [170].
- Recommendation 19 at sections 12.77 and 13.20 of the Report.
Client Alert 2023-118
