Law Commission Proposes Seat Of Arbitration As The Default Law Of The Arbitration Agreement

• Published date: 13 September 2023
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution
• Law Firm: Mayer Brown
• Author: Mr Raid Abu-Manneh, Menachem Hasofer, Stephen Moi, Sam Prentki, Kate Apostolova, Isabela Lacreta, Jawad Ahmad, Maleeha Khan and Lisa Dubot

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. You can click on the links to those sections in this paragraph to navigate quickly between the sections.

Background to the Law Commission's Proposed Reform

The Law Commission is an independent statutory body that keeps the laws of England and Wales under review and recommends reform where it is needed. Pursuant to a request by the UK Government, the Law Commission reviewed the Act, which provides the framework for arbitration in England and Wales and Northern Ireland, and issued its Final Report proposing amendments designed to ensure that the Act (i) remains fit for purpose; and (ii) continues to promote England and Wales as a leading destination for commercial arbitrations.

The Significance of the Law of the Arbitration Agreement

The law governing the arbitration agreement applies to matters relating to the formation, existence, scope, validity, legality, interpretation, termination, effects, and enforceability of the arbitration agreement. The need to determine this law can arise at any stage of an arbitration. For example, it may be relevant if a party:

• contests that it is bound by an arbitration agreement;
• argues that its arbitration agreement is not valid;
• argues that the governing law of the arbitration agreement includes an implied term of confidentiality;
• argues that a claim or a subject matter is outside the scope of the arbitration agreement;
• has a dispute about the interpretation of the arbitration agreement; or
• disputes the tribunal's

In practice, though, courts often grapple with determining the law of the arbitration agreement at the enforcement or annulment stage and, due to differences in approach, courts around the world often take different views on the...