Law Commission Proposes Seat of Arbitration as the Default Law of the Arbitration Agreement
On 6 September 2023, the Law Commission of England and Wales ("Law Commission") published a Final Report outlining its recommended reforms to the Arbitration Act 1996 (the "Act"), with an accompanying draft Bill. The Final Report recommends a "few major initiatives", including the introduction of a new statutory, default rule that the arbitration agreement will be governed by the law of the seat ("Default Rule"), unless the parties expressly agree otherwise.
There has been a longstanding debate in the English courts and arbitration community as to whether the law governing the arbitration agreement should, in the absence of an express choice, align with the general choice of law in the matrix contract or with the law of the seat; the English courts have come out on both sides of the fence. By adding the Default Rule into the Act, the Law Commission seeks to promote certainty and remove opportunities for satellite litigation on this complex issue.
If adopted, this Default Rule would replace1 the current position as decided by the Supreme Court in Enka2 - a general rule that, in the absence of an express party choice, the law of the matrix contract governs the arbitration agreement (when such law was expressly chosen by the parties). The Law Commission's proposal therefore has significant ramifications for parties with arbitration agreements3 with an international dimension.
In this Legal Update, we summarise the current law and the practical significance of the law of the arbitration agreement, set out the Law Commission's proposed reforms, and provide some preliminary observations. We explain the implications for parties with arbitration agreements with a multi-jurisdictional dimension (i.e. where the law of the matrix contract is not the same as the law of the seat) if this proposal were to become law, and provide a practical flowchart for parties to ascertain the law governing their arbitration agreements.
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1 In all circumstances, save for when there is no seat of arbitration designated as the Law Commission's Final Report confirms that the English common law will apply, pending such determination.
2 See https://www.supremecourt.uk/cases/uksc-2020-0091.html.
3An arbitration agreement is the same as an arbitration clause. The terms are used interchangeably.
