- The Law Commission has proposed a reform of the Arbitration Act 1996 to clarify the law on identifying the governing law of arbitration agreements with an international element.
- The reform would introduce a new default rule that the arbitration agreement is governed by the law of the seat, unless the parties expressly agree otherwise.
- The reform aims to simplify and harmonise the law, avoid complex and unpredictable disputes, and uphold the choice to arbitrate and the party autonomy principle.
- However, the proposed statutory rule might, in some cases, give rise to inconsistency between the governing law of the arbitration agreement and the governing law of the main contract; loss of flexibility and nuance in determining the governing law of the arbitration agreement; and unexpected results for commercial parties that have chosen a seat of arbitration without considering whether it would impact the law governing the arbitration agreement itself.
- For the time being, 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.
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.