The Law Commission’s Second Consultation Paper on Review of the Arbitration Act 1996 and the Proposed Overhaul of the Right to Challenge an Arbitral Award on the Basis that the Tribunal Lacked Substantive Jurisdiction under Section 67
Emile Yusupoff is a junior commercial Barrister at 36 Stone (part of the 36 Group)
What is the Law Commission Proposing?
One of the most significant and controversial proposals in the Law Commission’s first Consultation Paper (“CP1”) on the English Arbitration Act 1996 (the “Act”) was the suggested overhaul of s.67 of the Act.
Section 67 allows parties to apply to the Court to challenge an arbitral award on jurisdiction and/or the merits of the case on the ground that the tribunal lacks substantive jurisdiction. Section 67 challenges are currently determined at de novo re-hearings, with the court making an independent assessment, including potentially of the facts. This means that the court does not need to give any weight to the tribunal’s decision on jurisdiction and can consider the matter afresh.
In CP1, the Commission proposed reforming s.67 such that, where a party has engaged in arbitral proceedings and agreed to the tribunal determining jurisdiction under s.30 of the Act in the first instance, s.67 challenges would instead be heard as appeals, with the court reviewing the tribunal’s decision rather than considering the matter afresh. The court would not ordinarily receive oral evidence or any new evidence that was not put before the tribunal.
As of their second Consultation Paper (“CP2”), the Commission has modified its position, in form if not in substance. Rather than using the language of “re-hearing” and “review/appeal”, they have particularised the following proposals for restricting a s.67 challenge where a party has participated in the proceedings:
“(1) the court should allow the challenge where the decision of the tribunal on its jurisdiction was wrong; (2) the court should not entertain any new grounds of objection, or any new evidence, unless even with reasonable diligence the grounds could not have been advanced or the evidence submitted before the tribunal; (3) evidence should not be reheard, save exceptionally in the interests of justice.”
The Commission is also clear that the decision of the tribunal should be treated with “deference” by the court.
The Commission proposed that these limitations be addressed through rules of court, which they consider to be a “softer” approach to reform than an amendment to the Act.
Why is the Law Commission Proposing Reform?
The Commission maintain that a de novo rehearing can cause delay and increase costs, and risks fundamental unfairness. They consider that the challenging party can treat an initial hearing on jurisdiction before the tribunal as a dress rehearsal before they have a “second bite of the cherry” before the court.
The Commission recognises the need to balance competing considerations. The principle of competence-competence, which is internationally accepted and is enshrined by s.30 of the Act, means that tribunals are entitled to rule on their own jurisdiction. However, arbitration is fundamentally a creature of contract and consent. Tribunals cannot be the final arbiters of their own jurisdiction, as that would allow them to “bootstrap” their way into asserting jurisdiction they did not in fact have.
The Commission accepts that reform would be based on a thicker, more “positive” notion of competence-competence than that which is usually recognised in English law. However, they maintain that the greater deference to tribunals that this would entail would be a positive development, and that reform would not totally disregard party autonomy and the need for court oversight, as the court could still review tribunal decisions.
The Commission admit that reform is partly motivated by a desire to ensure that England remains an attractive jurisdiction for international arbitration. Although reform would apply to both parties, the Commission’s real concern is with recalcitrant respondents attempting to frustrate the arbitral process. The logic appears to be that shoring up the tribunal’s position is inherently positive, because it will give parties greater confidence that English seated arbitrations will proceed efficiently.
Why is this Controversial?
Consultees to CP1 were divided, with both the Bar Council and COMBAR submitting responses containing majority and minority opinions (the former being majority pro-reform, and the latter majority against).
Several issues have been raised by consultees, of which the following are the most notable:
- The necessity of reform is questionable. Whilst some consultees apparently did consider that unmeritorious s.67 challenges occurred too frequently and resulted in significant wasted time and costs, many suggested that such complaints are overblown. Indeed, as the Commission recognised, the Commercial Court Guide already has provisions for dealing with unmeritorious challenges on paper and for imposing adverse cost consequences on bad faith applicants.
- Reform would make this jurisdiction an outlier. Although the Commission points to Switzerland as a counterexample, almost all major arbitration jurisdictions and the UNCITRAL Arbitration Rules allow for a de-novo re-hearing for court review of a tribunal’s ruling on jurisdiction. This raises the question of whether there is any real demand for reform and suggests that reform may serve to make England a less attractive jurisdiction.
- As a matter of principle, a full re-hearing is an important safeguard. If a tribunal in fact lacks jurisdiction, then its decisions on what evidence can be admitted and its assessment of oral evidence should not receive such deference that the court is restricted from reconsidering and re-hearing evidence to form its own conclusions.
Attempts to Address Controversy in CP2
The Commission points to anecdotal material from individual consultees to demonstrate that “duplicated” hearings can result in significant wasted time and costs. This does not demonstrate a pressing need for an overhaul. The Commission does not identify how many of these purportedly wastefully expensive re-hearings resulted from meritless applications and how many resulted in the court reaching a different conclusion from the tribunal, at least in part on the basis of re-hearing evidence. Cost savings and expediency are not the be all and end all of justice or the only metrics for judging the attractiveness of an arbitral seat.
The Commission seeks to make much of the analogy with appeals against court judgment, where new evidence is only admissible if: it could not have been obtained with reasonable diligence for use at first instance; it would probably have an important (if not decisive) influence on the determination of the case; and it must be apparently credible. Although this can be a high bar, the Commission emphasise that it should still allow the court to consider evidence that the tribunal has wrongly excluded.
This sits uneasily with the Commission’s championing of deference to the tribunal, which would mean a reluctance to interfere with approaches to evidence. Likewise, the Commission propose highly restrictive rules for the re-hearing of oral evidence, suggesting the high bar of only allowing it exceptionally in the interest of justice. The reality is that, if the reform went ahead, then, by design, the court would perform a review only in most cases.
In any case, a s.67 challenge is not akin to an appeal against a court judgment. There is more publicity, scrutiny, and accountability of judicial decisions than arbitral decisions. More fundamentally, arbitral jurisdiction is founded on consent. Where that is lacking, it is perverse to cede excessive power to a tribunal to invent jurisdiction for itself.
The Commission seeks to assuage this concern by pointing out that they are merely proposing reform for cases where the applicant has engaged in the arbitral proceedings. The Commission maintain that this involvement and competence-competence are enough to deem that the party has consented to the tribunal determining jurisdiction. This is a bit of a sleight of hand, however.
Much as the tribunal cannot be the final arbiter of jurisdiction, the same must surely apply to the consideration of the evidence on the issue of jurisdiction. Merely engaging with proceedings in order to challenge jurisdiction does not, on its face, look like consent to the tribunal being given the final say on the evidence concerning jurisdiction.
Further, the alternative of not engaging in proceedings and challenging jurisdiction under s.72 of the Act or waiting to resist enforcement of an award is reasonably unattractive for many respondents. Non-participation risks the non-participating party being subject to an adverse award, even though they may well have substantive defences as well as jurisdictional objections. From a policy perspective, effectively encouraging non-participation by respondents hardly promotes confidence in English arbitration.
The Commission is also overly dismissive of the already extensive, statutory, and procedural restraints on the pursuit of s.67 challenges. Section 73 of the Act limits the scope for raising new objections before the court. Security for costs can be sought under s.70 of the Act by a party opposing a s.67 challenge. The Commercial Court Guide restricts and allows for the imposition of sanctions for the pursuit of unmeritorious s.67 challenges. And, the court can refuse to admit immaterial or prejudicial new evidence.
The only reason the Commission gives for these existing provisions being inadequate is that the current regime could in principle allow parties to be lackadaisical in gathering evidence for their hearing before the tribunal, knowing they’ll have a second chance before the court. No data has been provided to suggest that this is a real, systemic problem as opposed to a hypothetical or marginal one.
Emile Yusupoff is a junior commercial barrister at 36 Stone (part of the 36 Group), specialising in international commercial arbitration, international trade, and shipping. He is regularly instructed in arbitrations and English litigation as sole and junior counsel. He contributed to Combar’s response to the Law Commission’s Consultation Paper on the Arbitration Act 1996, has spoken at international conferences, and has had work on maritime law published in leading journals.