The Law Commission consults in England and Wales on determining the law of an arbitration agreement

The Law Commission has opened a second consultation as part of its ongoing review of the Arbitration Act 1996. As part of this consultation, the Commission has proposed to reform how the law of an arbitration agreement is determined. This would be an important consideration for parties wishing to use arbitration.

Rather than follow the multi-stage test established by the UK Supreme Court in Enka v Chubb (2020), the proposal would introduce a new rule into the Act whereby the law of the arbitration agreement would be the law of the seat of the arbitration unless the parties have expressly agreed otherwise in the arbitration agreement.

The current position

In Enka v Chubb, the Supreme Court decided that determining the law of an arbitration agreement requires first deferring to any express or implied choice of law in the arbitration agreement or the main contract. In the absence of such a choice, the law of the arbitration agreement will likely be that of the jurisdiction with which the arbitration is most closely connected (with some exceptions).

The Commission has noted that this decision received some criticism, mostly because the nature of the multi-stage test leaves scope for argument and creates uncertainty.

The proposal – law of the seat

The Commission has provisionally proposed to introduce into the Act a new rule to provide that the law of the arbitration agreement is the law of the seat unless the parties expressly agree otherwise within the arbitration agreement. Its reasoning for this proposal includes the following:

• the proposal is more straightforward and certain than the test under Enka;
• by choosing an English seat, many parties may intend for (arbitration-friendly) English law to govern the arbitration agreement, despite choosing a (less arbitration-friendly) non-English law to govern the underlying contract; and
• the proposal would align England and Wales with other jurisdictions, such as Scotland and France.

However, it is also possible that parties may intend for the governing law of the underlying contract, not the law of the seat, to govern the arbitration agreement. If this proposal is implemented, parties will need to express this clearly in the arbitration agreement.

Osborne Clarke comment

The Commission's proposal touches on a hotly debated topic. If implemented, it has the potential to supplant a decision by the Supreme Court and may be controversial.

However, the potential benefits to clients – such as increased certainty as to which law governs the arbitration agreement and greater reliability that English arbitration law will apply when England is selected as the seat – may outweigh concerns.

If it goes ahead, parties who pursue arbitration seated in this jurisdiction will need to be aware of the implications of how their arbitration agreement is drafted, including what it does and does not say. Only then will they reliably enjoy the benefits.

The consultation is open until 22 May 2023 and users of arbitration in industries such as energy, construction, manufacturing and life sciences may wish to respond. It can be accessed here.