The new Labour government are proposing several amendments to the Arbitration Act 1996 in a bill presently being considered by the Parliament.
What is the Arbitration Bill?
On 17 July 2024, King Charles III opened the first session of the new parliament with the King’s Speech. The related briefing notes released on the same day confirmed that, among 39 others, the Arbitration Bill (“the Bill”) would form part of the new Labour government’s plan for legislative reform. The Bill underwent First Reading in the House of Lords the next day, on 18 July 2024, and has since had its Second Reading.
The Bill proposes amendments to the Arbitration Act 1996 (“the Act”). The Bill was previously introduced by the former government in November 2023, following a review of the Act by the Law Commission in 2022-23, but was not brought into force because the general election was called. The form of amendments originally proposed by the Law Commission and the Bill are substantially similar.
As summarised in the Law Commission’s final report there is a “consensus that the Act works well, and that root and branch reform is not needed or wanted.” With this in the mind, the Bill only proposes a handful of amendments which, while important, would not overhaul the current system of arbitration in England, Wales and Northern Ireland.
Why are changes to the arbitration system important?
Arbitration is a method of dispute resolution in which the parties to a dispute agree to appoint an independent person as an arbitrator (or a panel of people as arbitrators) to determine the outcome of a dispute. A benefit of arbitration for sophisticated contracting parties is the ability to choose the law applicable to the arbitration. An effective contract arrangement that submits to arbitration will usually have:
- An express governing law of the main contract between the parties.
- An express governing law of the “arbitration agreement”, which is the agreement between the parties that allows disputes to be referred to arbitration. The arbitration agreement is usually included as a clause in the main contract. The governing law of the main contract and the arbitration agreement is often, but not always, the same.
- A choice of “seat” for the arbitration which is where the arbitration will formally take place. The choice of seat does not have to align with the governing law, but it will have an impact on how the arbitration occurs.
The Explanatory Memorandum of the Bill states that “…there are at least 5,000 domestic and international arbitrations each year in England and Wales, worth £2.5 billion to the British economy in arbitration and legal fees alone.” Many of the proposed amendments in the Bill are directed to strengthening the current arbitration system in order to incentivise more arbitrations to take place in England, Wales and Northern Ireland.
At the Second Reading of the Bill, Lord Ponsonby stated that the Bill would “…enable efficient dispute resolution, attract international legal business and promote the UK’s economic growth.”
What are the proposed changes to the arbitration system?
The Bill’s proposed amendments fall broadly into the following categories:
1. Clarifying the applicable law
The governing laws and seat of an arbitration can cause disputes, especially where there has not been express agreement between the parties. Currently, in the absence of express agreement, the law applicable to an arbitration is determined by the law chosen to govern the main contract unless that law would render the arbitration agreement invalid, in which case, the law chosen to govern the arbitration would be the law most closely connected to the arbitration (which may default to the seat of the arbitration). This is leading to uncertain outcomes for arbitrating parties.
The Bill proposes an amendment that simplifies this. A new section would be inserted into the Act which states that the law applicable to an arbitration agreement is:
- the law that the parties expressly agree applies to the arbitration agreement, or
- where no such agreement is made between the parties, the law of the seat of the arbitration in question.
This proposed section would not apply to arbitrations which are derived from treaty or non-UK legislation.
Further, the amendment is drafted to clarify that an agreement as to the governing law in the main contract which contains the arbitration agreement, will not constitute an express agreement that that governing law also applies to the arbitration agreement. If the Bill is passed, parties should keep this in mind when drafting agreements.
2. Duty of disclosure on arbitrators
The Act currently imposes a duty of impartiality on arbitrators. The Bill proposes to place a positive, statutory duty on arbitrators (or person approached for a possible appointment as an arbitrator) to disclose any relevant circumstances which might reasonably give rise to justifiable doubts as to their impartiality. This is already the position at common law.
3. Additional protections for arbitrators
The Bill proposes changes so that arbitrators would not be held liable for:
- costs in Court proceedings for their removal as arbitrator unless it is shown that they acted in bad faith; and
- costs liabilities where the arbitrator resigns unless it can be shown by a complainant (who must apply to the Court) that the resignation was unreasonable.
4. Powers of the Court and the Tribunal
a) Tribunal’s right to determine jurisdiction
The Bill proposes a change to section 32 of the Act which would have the effect that if the tribunal (i.e. the arbitration) has made a primary ruling that it has jurisdiction to hear a dispute, then a party is prevented from making an application to the Court to determine the same point.
A party that disagrees with a tribunal’s ruling regarding jurisdiction would still able to apply to the Court on a jurisdictional point, but only under s 67 of the Act which requires the arbitrator to have decided upon an award. The Bill also proposes an amendment to s 67 of the Act to clarify this position.
b) Tribunal’s right to award costs despite a lack of jurisdiction
Where a tribunal determines that it does not have jurisdiction to hear a dispute, the tribunal must cease the arbitration. The Bill proposes an amendment to allow the tribunal to determine costs of the arbitration in these circumstances, up to the point at which the arbitration ceases.
c) Tribunal’s right to make an award on a summary basis
The Bill proposes that a tribunal is given the power to make an award on a summary basis (i.e. without a full hearing) in relation to a claim/defence where a party has no real prospect of succeeding. However, this could only be done on application by a party and the tribunal must afford the parties a reasonable opportunity to make representations on such an application. Parties can agree to opt out of this proposed amendment.
d) Extension of powers to emergency arbitrators
The Bill proposes to extend some powers of arbitrators to emergency arbitrators, which are arbitrators appointed on an interim basis. The proposed amendment would allow emergency arbitrators to make orders for the following, where it is urgent:
- peremptory orders under s 41 of the Act;
- applications to the Court for compliance with the arbitrator’s orders under s 42 of the Act; and
- general applications to the Court to make orders under s 44 of the Act.
e) Clarifying the ability of the Court to make orders against third parties
The Act provides the Court with the powers to make a range of orders under s 44 of the Act, mainly in relation to evidence compulsion and preservation. The Bill adds further drafting in this section to clarify that the Court’s powers extend to making these orders against third parties. If the Bill is passed, third parties that find themselves involved in an arbitration unrelated to them should be mindful of this power.
f) Clarifying the remedies available to the when an award is challenged
As stated above, parties to an arbitration can challenge an award through s 67 of the Act. Upon an application under s 67 of the Act, the Court may confirm, vary or set aside an award. The Bill proposes that the Court be given additional power to make orders remitting the award to the tribunal for reconsideration and declaring the award to be of no effect.
The proposed amendment also includes a section clarifying that the Court must not set aside or declare an award to be of no effect unless it is satisfied that it would be inappropriate to remit it back to the tribunal.
The power to make these orders is already available to the Court for challenges or appeals under ss 68 and 69 of the Act.
5. Procedural amendments
a) Process for challenges under s 67 of the Act
The Bill proposes an amendment to the procedure for challenges under s 67 of the Act so that where a party that took part in the arbitration makes the application under s 67, and the application relates to something that the tribunal has already ruled upon, the general position would be that there will not be a full rehearing of that issue before the Court. This is a change from the current common law position.
b) Time limits
The Bill proposes to clarify the time limits under s 70 of the Act for challenges of awards to the Court. The amendment would make it clear that a party has 28 days to challenge the award from either the date of the award or, if the party exercises its rights under s 57 of the Act to have the award changed, then the 28-day time limit will run from the outcome of the process under s 57 of the Act.
c) Minor changes
The Bill also proposes several amendments which it terms as “Miscellaneous minor amendments”. The proposed amendments are:
- modifying s 9 of the Act to expressly state that leave of the Court is required for appeals from decisions of the Court whether to stay legal proceedings in favour of arbitration proceedings;
- modifying ss 32 and 45 of the Act to remove the requirement to satisfy the Court of various matters when making an application to the Court for preliminary rulings on jurisdiction and points of law; and
- repealing several sections which are currently unused in practice relating to “domestic” arbitration agreements.
What will happen next?
The Bill has progressed to Committee stage, which is scheduled for 11 September 2024. Winckworth Sherwood will continue to monitor the Bill’s and keep our clients informed of any impacts. If you have any queries about how the Bill might effect you, please contact Ashley Pappin or Greg Carter.