HL Deb 12 December 1978 vol 397 cc434-64

3.46 p.m.

The LORD CHANCELLOR

My Lords, this short Bill proposes significant changes in the law of commercial arbitration. Its purpose is to remove certain legal obstacles which at present stand in the way of London being used to its full potential as an international centre for arbitration. Arbitration is, of course, a method of settling disputes by referring them for adjudication to a private tribunal of the parties' own choosing rather than to the courts of law. The speed, informality and privacy of arbitration proceedings, coupled as they frequently are with the advantage of having a judge who is himself an expert in the field concerned, make arbitration a normal feature of commercial life, and an essential part of international trade. All the major trading nations are bound together by agreements for the enforcement of arbitral awards.

All this means that arbitration is an important subject for a country like ours, which lives by trade: and the City of London is in fact one of the world's leading centres of arbitration. "London arbitration" is a term that has been used in international contracts for very many years. A high percentage of the world's shipping arbitrations are carried out in London and there are also numerous commodity arbitrations carried out by members ofthe various London Commodity Exchanges, such as the Grain and Food Trades Association. Efficient arbitration arrangements are important to the United Kingdom for the protection of its own traders, as a valuable source of income and foreign exchange, and as a part of the range of legal, financial and trading services offered here, and particularly by the City of London.

In these circumstances, it is important to ensure that our law of arbitration conforms with the needs and wishes of the commercial community, so far as public policy allows. Our law on arbitration is largely contained in the Arbitration Act 1950 (which consolidated earlier enactments) as amended by the Arbitration Act 1975, which was passed to enable us to accede to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Part I of the 1950 Act lays down the circumstances in which arbitration agreements are to be recognised by the courts, and a framework for the procedure to be followed in arbitrations and the powers of the arbitrator. It also provides, in Section 21, a procedure, called the case stated procedure, by which the courts can control arbitrators and ensure that their awards conform with the general law. It is this case stated procedure with which we are mainly concerned in the Bill today, because it has recently been the subject of a good deal of criticism.

Your Lordships may recall that last May we had a well-informed and useful discussion on this subject which was raised by the noble Lord, Lord Hacking. Several noble Lords then observed that the case stated procedure under Section 21 of the 1950 Act had become a serious deterrent to the use of London as an arbitration centre, and they urged that something should be done as soon as possible to remedy the position. In response, I informed the House that I had recently received the draft Report on Arbitration by the Commercial Court Committee, which discussed the workings of Section 21. I undertook that the Committee's recommendations would be studied urgently. That has been done, and this Bill is the result.

In it, we propose to give effect to the recommendations in the Committee's report, which was published as a Command Paper in July. We have moved quickly in this matter and have followed the recommendations of the Committee pretty faithfully, with the exception of some of the minor proposals which it did not seem feasible to implement in the time available. I should like to pay tribute to the rapid and workmanlike way in which Mr. Justice Donaldson and his colleagues have dealt with this problem, and also to the previous contribution made by Mr. Mark Littman and a number of judges and practitioners who collaborated with him.

I should now like briefly to explain the origins and purpose of the much-criticised case stated procedure in arbitration. As the noble and learned Lord, Lord Diplock, explained in his admirable Alexander Lecture on the "Use and Abuse of the Case Stated", it was a 19th century adaptation of a similar procedure used by the criminal courts of quarter sessions, and was originally applied to arbitration under the Common Law Procedure Act 1854. Until then, a decision could only be upheld or quashed by the Court of Queen's Bench. If the decision was quashed, the arbitration had to be started all over again. The case stated procedure, by contrast, allowed a point of law to be determined without putting the whole proceedings in jeopardy and it was thus at the time a useful reform.

The present procedure provides for an arbitrator to state, in the form of a special case for the decision of the High Court, his award or any question of law arising in the course of the reference to arbitration. Although the arbitrator has the discretion whether or not to state his award in the form of a special case, and the High Court has the discretion whether or not to order an arbitrator to do so, the practice has developed that the arbitrator generally adopts the special case procedure on the application of any of the parties to the arbitration, even if there is no great sum of money in dispute, even if no point of general importance is involved and even if the answer is reasonably clear. The procedure is therefore capable of being used by undeserving parties for the sole purpose of postponing the evil day when they have to meet their liabilities. It is difficult to discourage unmeritorious applications, since a decision has to be taken on the use of the special case procedure at a stage when often the arbitrator has not yet made any findings of fact upon which such a decision might be based. In this situation, it can be very difficult to be certain whether a serious question of law is in issue, and the doubt is usually resolved in favour of the applicant and the special case procedure adopted.

In the past, the penalty of costs and interest on awards was a sufficient discouragement to unmeritorious applications. Now, however, the large amounts of money in issue, the importance of liquidity to the cash flow of companies, and fluctuations in interest rates and exchange rates, have, despite such penalties, led parties to arbitration to use the case stated procedure as a means of postponing the eventual date of payment of any award made against them. This procedure facilitates such delay, since until the court has decided the point at issue there is no decision and consequently, at any rate prima facie, no award on which enforcement proceedings can be based. Further delays can be engineered through appeals from the High Court to the Court of Appeal, and even to your Lordships' House.

Furthermore, there is no provision in English law for the parties to contract out of the case stated procedure. This position follows from the judgment in the case of Czarnikow v. Roth, Schmidt & Co.in 1922, when the Court of Appeal held that it was against public policy to allow parties to an agreement to oust the jurisdiction of the courts. The availability of the case stated procedure, and the impossibility of contracting out of it, has had the advantages of keeping the law as administered by arbitrators and that developed by the judges in line, and of enabling the United Kingdom commercial law to develop in a uniform and coherent way which has given it great international prestige and authority. However, on the evidence which has been presented to us, the existence and un-avoidability of the case stated procedure now acts in two ways as a substantial deterrent to parties who might otherwise be willing to arbitrate in London.

First, there is the knowledge that in many cases the other party to an arbitration can successfully use the case stated procedure and subsequent appeal for the purpose of postponing payment of an award. A principal objective of arbitration—the achievement of a speedy and final decision—can in this way be thwarted.

Secondly, there is the increasing number of large supranational development contracts. The parties are often consortia which directly or indirectly include foreign Governments or their agencies. Such Governments, perhaps understandably, are reluctant to submit to the jurisdiction of foreign courts. Accordingly, although they might prefer English law as the proper law of a contract and prefer to have their disputes resolved in England by English arbitrators, who have high standing, they are nevertheless deterred by the case stated procedure.

This new Arbitration Bill, which I now recommend to the House, contains provisions which would remove these deterrents, while at the same time allowing the continued development of commercial law. It does this by abolishing the special case procedure and introducing instead of it a new limited right of appeal on a point of law only; and by allowing the parties to most international arbitration agreements to exclude that right of appeal if they so wish. Clause 1 of the Bill therefore repeals Section 21 of the 1950 Act, and with it the case stated procedure, and sets up instead a limited right of appeal to the High Court on points of law. It also puts further limitations on appeal from the High Court to the Court of Appeal. The clause also empowers the High Court to order arbitrators to give reasons for their awards, a practice which would bring us more in line with other countries, and ensure that the new right of appeal will be effectively and properly exercisable. Clause 2 gives the High Court jurisdiction to determine preliminary points of law arising in the course of reference to arbitration. Clause 3 is particularly important, since it provides for the right to make agreements excluding the jurisdiction of the High Court altogether.

However, this question of exclusion is not entirely straightforward. I have already referred to the judgment which held that it was against public policy to allow parties to an agreement to oust the jurisdiction of the courts. That is under the law of England and Wales. But, under Scottish law, the position is different, as is so often the case in regard to Scottish law. Section 3 of the Administration of Justice (Scotland) Act 1972 allows parties to an arbitration agreement to contract out of a case stated procedure. Clause 3 would also therefore have the effect of moving English law in that direction. But the Commercial Court Committee recommends that the law in England and Wales should reflect the different circumstances of the various types of arbitration.

Accordingly, Clause 3 of the Bill provides that in the case of domestic arbitrations—that is, arbitrations not involving foreign nationals or companies—where one of the parties, such as a consumer or small trader, may often be in a weak bargaining position, the right of appeal to the High Court can only be excluded after the arbitration has begun. By this means the consumer or small trader will be protected by Clause 3 from being bullied by a stronger party into agreeing in advance to forgo the benefits of the new right of appeal to the High Court should a dispute arise. However, when a dispute has already arisen, the need for protection is less, and accordingly the Bill would allow the parties by agreement to exclude the right of appeal once that stage had been reached.

There is also separate provision for certain "special category disputes" as they are described, and they are so described not because they are some rare species of dispute but only because that is the name adopted for them in the Commercial Court Committee's report. The term is used to describe disputes arising out of maritime and insurance contracts and contracts relating to commodities. In fact such disputes form a very large proportion of the disputes arbitrated in London each year. Usually the parties to such contracts, where they are international in character, are of more equal bargaining power than in the case of the domestic arbitration agreements to which I have referred, and it might be suggested that all such parties should be free to enter into exclusion agreements before, as well as after, arbitration has commenced. The Commercial Court Committee considered, however, that the retention of a right of recourse to the courts from such arbitrations is very important to the proper development of English commercial law and its maintenance as the first choice of law in international commerce.

The Committee, therefore, recommended that for a two to three year period the right of appeal should be entrenched in these special category disputes to the same extent as in domestic arbitration agreements. In other words, there should be no power to exclude the right of appeal by agreement before any dispute arises. However, Clause 3 introduces a measure of flexibility by enabling the Secretary of State by order to remove this so-called entrenchment so as to allow parties to special category disputes to have a right of exclusion even before arbitration has commenced.

Finally, Clause 3 provides that parties to all other agreements—that is, apart from domestic agreements and special category disputes—should be free at any time to exclude the right of appeal to the High Court. This provision would mean that parties to such agreements—for example, foreign Governments involved in supranational development contracts—could ensure that they could use English arbitration without fear of having to submit to the jurisdiction of the High Court.

The other clauses in the Bill involve minor, if significant, amendments recommended by the Commercial Court Committee. They provide for sanctions against parties who fail to comply with the orders of an arbitrator, the appointment of arbitrators and arbitration awards, and the application of certain provisions of Part I of the Arbitration Act 1950.

My Lords, in conclusion, I should like to thank again those noble Lords who earlier this year so clearly argued the case for amendment of the Arbitration Act 1950. I hope your Lordships will be generous enough to think that the Government have responded quickly in the face of the propositions that were put to them. It is important that the City of London and other centres of arbitration in England and Wales should not be hampered in the maintenance and expansion of their important and historical role in arbitration matters. As I have said, the contribution of the City, particularly to our balance of payments, from the City's services, is very considerable. The Bill should remove the deterrents in our arbitration practices that have recently emerged, and I believe that the procedures now envisaged should be attractive to all potential parties to arbitration proceedings. I hope, therefore, my Lords, that the Bill will have a speedy passage through Parliament, and I commend it to the House.

Moved, That the Bill be now read 2a.—(The Lord Chancellor.)

4.7 p.m.

Lord RAWLINSON of EWELL

My Lords, one of the spin-offs of a Parliament lasting into the fifth year and a Government perhaps living off borrowed time is that the Government have the opportunity of doing very sensible things. The noble and learned Lord, the Lord Chancellor, is indeed to be thanked for having used the opportunity of this, the fifth year of this Parliament, for responding, as he said, swiftly to the representations which were made to him earlier in the year and for introducing this Bill. It is a Bill which I believe will commend itself not only to both sides of your Lordships' House but to a much wider audience and a much wider class of persons who will be making use of it.

It is, as the noble and learned Lord said, based on the Commercial Court Committee's report. That report is expressed, if I may say so, with the lucidity which is expected from Mr. Justice Donaldson and which was the hallmark of his judgments in another short-lived court over which he presided, but also of the judgments which he usually gives in all matters with which he is dealing. I think it would be right, too, if I may, to pay a personal tribute to the noble Lord, Lord Hacking, for his initiative in pressing upon the Government and upon my noble friends the need for this Bill, and for the persistence which he showed in urging the Government of the day—because that was in the summer and it might have been a different Government—to legislate in this field. He has the advantage of practising the law, and as a practising and experienced lawyer he sees the problem from overseas, he can recognise the need, much better perhaps than those of us in this country, for removing what was a needlessly self inflicted wound. Therefore to him goes a great deal of credit for having been a spur behind everybody to see that this Bill was introduced.

My Lords, the international community, unlike some persons in this country, have a very high respect and admiration for the administration of the law within the United Kingdom. We hear many voices in this country continuously critical of the practice and the administration of the law. But there is no doubt that overseas they have a very wide admiration, not only for the administration of the law generally but also for the manner and mode and the men who are employed in resolving disputes. I believe there is a great need to exploit and utilise in the modern world those skills which we in this country still possess, and to harness those talents for a public benefit which could bring and would bring great advantage to this country.

My Lords, as the noble and learned Lord, the Lord Chancellor, has said, the arbitration law, or the practice of it, has been marred by the special case procedure with the two different forms of judicial review; the first, the motion to set aside the award for error on its face, and, secondly, the reference to the High Court of an award in the form of a special case. In the first case, often English arbitrators avoid giving reasons, with the result that when an arbitration has to be given effect to overseas doubt arises because it is said that the award, with no reasons, is unmotivated. Secondly, with regard to the special case concerning Section 21, as the noble and learned Lord, the Lord Chancellor, has pointed out, there will be the opportunity for questions of law to be reviewed by the High Court and from the High Court to the Court of Appeal and then to your Lordships' House.

Most people would agree that the effect has been to give the English commercial law an opportunity to develop so that it has become the popular choice for commercial interests throughout the world. However, it has introduced an additional stage of judicial review, and it will be obvious to noble Lords that it is speed and finality which is often sought and which is the purpose of the arbitration. And, with the advent of that which the noble and learned Lord, the Lord Chancellor, spoke about—the supranational development contract—it has been a major disadvantage. The result has been that parties have reluctantly been going elsewhere for arbitral purposes, with the loss to this country—as my noble friend Lord Cullen of Ashbourne pointed out earlier this year—of a vast sum of money.

So we come to the Bill. The noble and learned Lord, Lord Diplock, is to take part in the debate and I would point out that his Alexander Lecture was of the greatest importance. I wish to hear his comments—as I have heard those of the noble and learned Lord, the Lord Chancellor—regarding the special categories disputes group. I see that it is said in the Committee's report that it is proposed on the grounds not only of economic interest but also of the contributions which this group makes and has made to the development of English commercial law and to its popularity in the commercial world. The purpose of such a reservation is given in the Committee's report, but I personally should certainly be interested to hear what the noble and learned Lord, Lord Diplock, has to say on that matter if he proposes to advise the House.

These are simple reforms but they are urgent. There is a problem nowadays with commerce throughout the world and the influence thereon of the Third World and of many countries especially in Latin America and the Middle East which do not conform to the international agreements in respect of arbitration. Indeed, many countries in Latin America consider arbitration a rival to the courts and therefore not admissible, and in the Middle East it is only Israel, the Lebanon and Syria which have adequate arbitration laws.

However, it is certainly in the interests of the commercial life of this country that more and more nations should be encouraged to adhere to the New York Convention of 1958 and that the wider use of fair and ordered arbitral proceedings which are efficient and enforceable, should be more and more widely used, because that will undoubtedly redound to the prosperity of the United Kingdom. Therefore, I congratulate the noble and learned Lord, the Lord Chancellor, for having had the opportunity to bring forward the Bill, which is most important. It sets our domestic house in order. It is a major step to attract back much of what has now gone elsewhere. It is for those reasons that I wholeheartedly welcome the Bill.

4.14 p.m.

Lord LLOYD of KILGERRAN

My Lords, may I join in congratulating the noble and learned Lord, the Lord Chancellor, on his detailed and lucid summary of the terms of this very important Bill. It is important because it introduces significant steps towards facilitating the settlement of disputes on a national and international scale. If I may also say so without being thought to be presumptuous, I should also like to congratulate the Commercial Court Committee on its report of July 1978 on arbitration, particularly because it has recognised, at least in some degree, how the system of English arbitration awards differs from that of most other countries in Europe and that there are many disadvantages in the English arbitration system which have been accentuated, particularly during the last decade, with the advent of the vast new supranational contracts. That proliferation of arbitration in relation to such contracts has happened quite apart from our entry into the EEC. Whether the Bill modifies adequately our existing practices regarding arbitration procedures in England and Wales in the context of the recent EEC conventions and practice is a matter to which I shall come presently.

As the report states and as the noble and learned Lord, Lord Rawlinson, has indicated, English law has become very popular—as I well know—for commercial contracts and interests throughout the world. But the one great stumbling block to the conducting of arbitration under English law, was the entrenched right, so far inherent under English arbitration law, that the High Court can review the award of an arbitrator by way of case stated to the High Court. As the noble and learned Lord, the Lord Chancellor, has indicated, there have been complaints about this procedure which has mitigated against speedy and final decisions. It has caused arbitrations to be held elsewhere, and I join in praising the noble Lord, Lord Hacking, for the initiative he has taken in pressing that the matter of arbitration law should be reviewed.

Indeed, the time had come to replace the English courts' system of judicial review based on the special case procedure in modern arbitration practice. Accordingly, as the noble and learned Lord, the Lord Chancellor, has explained, Clause 1 of the Bill enacts that Section 21 of the Arbitration Act 1950 regarding statements of case for decision of the High Court shall cease to have effect. But there seems to be serious qualifications to that situation arising in Clause 3 which the noble and learned Lord Chancellor has indicated is a complex clause.

However, before I come to consider Clause 3, as far as I can understand the report of the Arbitration Committee and indeed, the speech of the noble and learned Lord Chancellor, specific developments in the Jaw under the European Economic Community have, surprisingly enough, had nothing to do with the origin of the Bill. But, the Bill comes, certainly to my mind, at a very apposite time in the context of EEC developments, in that at least it diminishes the power of the English courts to intervene in arbitration matters.

To all lawyers in the commercial area the EEC Judgments Convention of 1968 has been a most important community instrument. Article 220 of the Treaty of Rome provides for reciprocal recognition and enforcement of judgments of the courts in all the Member states. When the United Kingdom adhered to the Treaty, we were required to agree, and did agree, that we would adhere to the Judgments, Convention. Since our entry into the Common Market there have been extensive negotiations with which the noble and learned Lord, Lord Kilbrandon, has been closely associated for a number of years. Those deliberations have resulted in a further draft of a judgments convention. That has recently been signed by the noble and learned Lord, the Lord Chancellor, on behalf of the United Kingdom Government. There will inevitably still be considerable delays, of perhaps two or three years, before the new convention forms part of our law, but, in my view, the EEC convention must have considerable effect on the thinking about the jurisdiction to be applied to contracts and the recognition and enforcement of judgment in international commercial matters.

The relevance of this new EEC Judgements Convention to the English arbitration procedures, and perhaps to this Bill, is that it states in paragraph 1 that it does not apply inter alia to arbitration. Apparently, under Article 1 of this new Convention arbitration procedures are excluded. Therefore, the exclusion of arbitration is very significant.

It has never been clear what precisely is comprised within the word "arbitration". Arbitration is governed by other conventions, such as the New York Convention of 1958, which is now embodied in the United Kingdom Arbitration Act 1975. In my submission, therefore, if the EEC Judgments Convention proves unsatis factory in practice to international com mercial lawyers and industrialists, it may be that in the field of contract, and particularly perhaps in the field of insurance, there will be a very considerable increase in the number of cases which go to arbitration rather than to the national courts. Therefore, in the light of this Convention it seems to me to be desirable, even at this stage, to consider to what extent we should modify our existing practices on arbitration within the United Kingdom, and particularly in relation to the EEC countries and to the: United States of America.

With that somewhat lengthy introduction, I ask your Lordships, briefly, to consider the scope of—and I use the words of the noble and learned Lord the Lord Chancellor—" the significant"Clause 3 of the present Bill. It is a most complex clause and very difficult to understand. For its main purpose, it has to exclude rights under subsections (1) and (2). To put it briefly, it serves to give the courts some jurisdiction, albeit limited, over arbitration under English law. The complexity of this clause is really due to the real concern, that on contracts under English law, if arbitration in the United Kingdom become entirely free of control by the courts, in effect they may set up their own system of commercial law, apart from that of the courts. As the noble and learned Lord the Lord Chancellor has indicated, this would be contrary to public policy, particularly in view of a Court of Appeal decision of 1922, to which the noble and learned Lords has referred, and which still remains the law.

To my mind the question for consideration is whether the scope of Clause 3 as it is at present drafted is too wide, and whether the class of contracts as regards contracting out of the right of appeal should be enlarged. At this stage it is not appropriate to go into the details as to the way in which to my mind there should be enlargement of Clause 3. However, in my view this Bill is still too tightly drawn in relation to control of arbitration matters by the High Courts in this country, although of course it is an enormous improvement on the past.

I should like to welcome another clause in the Bill, which may have considerable practical value in the future; it is a part of Clause 5. In many of the disputes with which I have been concerned and in the contracts giving rise to disputes, it has been the habit to include a clause that the arbitrator shall be appointed by, say, the Chartered Institute of Patent Agents or by the chambers of commerce. Often serious delays have arisen because there has been no agreement between the parties as to who the arbitrators should be. In the future, under Clause 5, where there have been serious delays in the appointment of an arbitrator it will be possible for the High Court to appoint an arbitrator.

I should like to refer specifically to page 6 of the Bill. Line 22 refers to a period of time of seven clear days after the service of the notice when the High Court or a judge can act on the application of the party who gave the notice. This is quite a small point, but it seems to me that perhaps the period of seven days is rather short in view of the complexity of some of the disputes which may have to be dealt with. In conclusion, may I also thank the noble and learned Lord the Lord Chancellor and his Department for the speed with which they have acted upon the Commercial Court Committee's Report.

4.26 p.m.

Lord DIPLOCK

My Lords, it may appear upon the face of it that this Bill deals with a highly technical facet of law, intelligible only to lawyers and of interest only to them. However, in reality it is of practical importance to all concerned and interested in the commerce and industry of this country and—as my noble and learned friend upon the Woolsack has already said—of great economic importance to this country, a matter which was stressed in the debate which we held on 15th May last on the proposal of the noble Lord, Lord Hacking, and which it is unnecessary for me to repeat now.

Arbitration is, of course, generally the preferred method of settling commercial disputes, for the reasons given by my noble and learned friend the Lord Chancellor. But the purpose of the case stated procedure is the important one; that in arbitrations as well as in courts the rule of law shall prevail. If the contract is governed by English law, that law ought to be correctly applied whether the application is before an arbitral tribunal or before the courts; because unless that is so, no one entering into a contract can know what his rights and obligations under that contract are until a dispute arises, and then what they are depends upon the whim of the arbitrator, unless it is subject to some control.

The case stated is a device by which mistakes of law by an arbitrator can be detected and corrected by the court. In the past it has served us well, for it is through this procedure that we have been enabled to work out a corpus of commercial law, more detailed and more comprehensive than that in any other country. It is largely for this reason that English law has become the law which is most often chosen by foreigners to govern their contracts, because under it they know better where they stand than under any other system. It is largely for this reason that London has become the pre-eminent centre for international arbitrations. But the present procedure by way of case stated is open to abuse in domestic as well as in international contracts.

The demand for a case stated which, in practice, it is almost impossible to resist, holds up the enforcement of the arbitral award and, under the present system, imposes no real limitation upon the right to make that demand. Once that demand is made and the case has gone to the High Court, there is an automatic right of appeal to the Court of Appeal. So the possibilities of using this procedure not for the purpose of correcting mistakes of law but for the purpose of securing delay in the payment of the amount awarded are very considerable.

Clauses 1 and 2 of this Bill are designed to cure this defect as regards both domestic and international arbitration. The leave of the Court will, in future, be required before there can be an appeal to the Court against a mistake of law made by the arbitrator and it will, I hope, be granted—indeed I am sure it will be granted—only in serious cases where there is a genuine point of law which is important to the rights of the parties to be decided; and appeal to the Court of Appeal will lie only where the judge in the commercial court has certified that the question of law involved is of wider interest than those of the parties alone—that it is a matter which needs to be decided in the public interest in order to bring certainty into a particular part of the law.

Most important, the Court is empowered to impose conditions upon the grant of leave to appeal upon a point of law. I contemplate that those conditions will include the right to require security to be put up by the appellant, or the obligation to bring the amount at stake into court in order to ensure that delay will not be profitable and will not be a motive for asking for an appeal. There are one or two Amendments which I should venture to suggest to Clauses 1 and 2 in relation to conditions, but those can best be left until the Committee stage.

I turn, then, to Clause 3, which has been mainly discussed up until now. It applies to international contracts only. Foreigners who resort to London arbitration and wish to have their contracts governed by English law may want finality more than anything else, and be prepared to take the risk that English law may not be accurately applied by the arbitrator they have chosen. This is particularly so in the case of the vast contracts, the multimillion pound contracts—what are called in the report the "one-off contracts"—in which governments or governmental agencies are often parties. For understandable reasons of national pride, though happy to have consensual arbitration, they may not wish to submit themselves to the jurisdiction of the English courts. There is no reason, in my view, to compel them to do so if one can be sure it is by their free choice that they have elected for finality at the risk of some mistakes in law. So Clause 3 permits the parties to exclude appeal—recourse to the courts—in all categories of international contract except what are called the special category disputes.

Why, then, was it necessary to have the special category contract, in which recourse to the courts under the reformed system of appeal should not be allowed to be excluded? I was intimately concerned with the discussions and negotiations which took place and which resulted in the report of the Committee. My reason for accepting this special category and indeed for thinking it desirable that, for the time being—because this is capable of alteration later—we should retain the case stated was that those contracts, unlike the one-off contracts, are not in practice freely negotiated between the parties to the contract.

What I wanted to exclude for the time being was what I should describe as the standard term contract. There are many branches, or at any rate several branches of commerce in which it is impossible in practice to trade, or to enter into a transaction, except upon a standard form prepared by a trade association, customarily on the Baltic, or whatever it may be. If you want to enter into that kind of contract, that kind of transaction, at all, you are, for practical purposes, forced to contract upon the standard terms. The danger is that the standard terms will include an exclusion term to which the other party to the contract, or indeed neither party to the contract, has an opportunity of saying, "No, we want to reserve our normal rights." That was the reason why I, at any rate, took the view that the special category contract ought to be excluded for the time being. Those are the contracts which raise questions of law of general importance, whereas the one-off contract specially entered into for a particular transaction does not generally raise matters of wider import than the particular contract itself.

The dividing line between the two types of contract represents a compromise which was hammered out after very detailed consideration and discussion by, I think I may say, all the interests—commercial, legal and that of arbitrators—concerned with this kind of problem. As one who has taken part in these discussions and in my capacity as President of the Institute of Arbitrators, I have had representations made to me some saying the special category should be enlarged, others saying it should be reduced; they cancel one another out.

At present I do not think the division which the Committee has settled on can be improved, remembering all the time that this is not permanent; there is provision for a greater exclusion when the time comes. The notion of the Committee was that we should let it run for another two or three years under the reformed procedure for the case stated to see how it works and to see whether there is a demand which does not exist now among those who enter into contracts in the excluded category.

I strongly recommend the House to accept the principles of the Bill and indeed its details, subject perhaps to some very minor drafting Amendments in Committee. If the House does so, then I believe we can retain London's pre-eminence as an international arbitration centre. If it does not, and the Bill is not passed quickly, we are in danger of losing that pre-eminence to other commercial centres who would be only too glad to inherit it from us.

4.43 p.m.

Lord HACKING

My Lords, this Lord is most happy to express generous feelings towards Her Majesty's Government (on this subject) and most willing to express satisfaction and thanks—satisfaction for the good progress that has been made in so short a time and thanks for the speed and quality of the work of senior officers' of the noble and learned Lord's Department and of the Department of Trade, led by the Solicitor himself, who have given an enormous amount of time and effort to bring us so quickly to this stage. The noble and learned Lord, in a mild reproach towards me during the May Debate, said I had "jumped the gun". May I, in return use an American metaphor, and thank him for "biting the bullet" so firmly.

Our reputation in international arbitration is much worse than our wrong. This Bill takes us a long way down the right road. As I have argued several times recently in America, the strength of our arbitration laws lies in the support which those laws provide for arbitration—the support arbitrators receive from the courts. Indeed, it is the weakness of institutional arbitrations—for example, the International Chamber of Commerce arbitrations—that they are not directly supported by national courts. In the last debate, I took a little time to draw the attention of noble Lords to certain sections of the Arbitration Act 1950 to illustrate that point. It is therefore nice to record, as other noble Lords have, that this Bill represents a joint effort by judges and arbitrators to put matters right. Indeed, before this matter came before the House, earlier credit must, as the noble and learned Lord said, go to Mr. Mark Littman, who, among his other responsibilities, is an international arbitrator, and Sir John Donaldson, a senior judge in our Commercial Court.

This is not the Committee stage, but I believe there is still progress to be made on the Bill and I think it would be helpful if I drew certain matters to the attention of the House. The Bill, in the treatment of arbitration law, divides, on the one hand, domestic arbitrations and certain categories of international arbitrations referred to in the report as "special category disputes"—and I refer of course to commodity, insurance and maritime arbitrations—and, on the other hand, the remaining international agreements which are sometimes referred to by that curious phrase, "one-off contracts". It is a rather curious phrase when one considers that these contracts concern the building of airports and sometimes the building of entire cities.

There is no logic in law in either of those divisions and, for this reason, I have been long concerned over the proposed different treatment of these arbitrations. But I have come to the firm conclusion, for the strong practical reasons voiced by the noble and learned Lord, Lord Diplock, that we should accept this division. It will ensure, in international arbitrations, that the bridge between the arbitrators and the judges is still used. It will also give opportunity to test the new proposals in international arbitrations as well as in domestic ones and, after all, the Bill leaves the future open. However, I ought to place on record that I have received correspondence showing that there are substantial bodies overseas in the commercial and shipping communities who use London arbitration and who express a desire to contract out, a right which is not given to them under the Bill; yet as I said, let us see how it works for the Bill leaves the matter open.

Considering other parts of the Bill, I believe it to be most important that we should get our arbitration law right and be seen to get it right. Dealing just with international arbitrations—the one-off agreements to which I referred—I ask your Lordships to consider what might be described as the "contracting in-contracting out debate." Noble Lords will be aware that it was the advice in the Commercial Court Committee's report that the contracting out procedure should be used. On the other hand, noble Lords will also be aware that the London Arbitration Group's advice was that the contracting in procedure should be used.

For existing contracts, there must, as the Bill proposes, be a procedure of contracting out because, if we had it any other way, the parties would be deprived of their existing rights to enter into the judicial process via the case stated procedure. Is it right, however, for all future contracts that the parties should not be free of judicial process unless they focus on the problem and contract out? The danger is that parties will still find themselves against their will subject to judicial process.

Laying aside the foreign law contracts—I shall come to thos contracts shortly—of course parties negotiating an English proper law contract should obtain full English law advice. However, the reality is that these parties sometimes do not. Indeed, decisions on the arbitration clause and on the proper law clause often come at the very end of the contract negotiations. Sometimes parties do not even select a law at all to govern the contract. Hence, there remains the danger with "contracting out" that parties will, unwittingly still be caught. All this would be avoided if the rule was the other way round: no judicial process unless the parties expressly contracted in; and that was the recommendation of the London Arbitration Group.

I turn now to a foreign law declaratory clause. At the moment, against the recommendations of both the groups to which I have referred, there is no foreign law declaratory clause. I recognise the view that it may not be necessary, but is this always right, is the matter almost cut and dried? Above all, it is most important—is it not?—that the matter should be put on record right and be beyond doubt.

Next, I turn to another recommendation made by Mr. Justice Donaldson's Committee; namely, the recommendation of the Arbitration Rules Committee. Indeed I hope to have a little support from the noble and learned Lord, Lord Hailsham of Saint Marylebone, because when I discussed the matter with him some time ago last May it was his immediate view that many of these matters could be dealt with under rules of court. The: recommendation, in outline, by Mr. Justice Donaldson's Committee is that there should be set up an Arbitration Rules Committee, similar to the Supreme Court Rules Committee, under Section 99 of the Supreme Court of Judicature Act 1925. Such a committee would deal with all matters of procedure; for example, the recommendation that there should be a power in the courts to consolidate arbitration proceedings. Also it will provide an ongoing review of arbitration procedural law.

Another matter for your Lordships' attention, which is not included in the Bill, concerns fraud. Under Section 24(2) of the 1950 Arbitration Act, on an allegation of fraud a party has the right to go to the courts and have the arbitrator deprived of continuing the arbitration proceedings. As every member of the English Bar knows, an allegation of fraud is not made—and this is a matter of ethical standards of practice—unless that member of the Bar, or the pleader of the document, has seen documents which have the appearance of fraud.

I have also had certain experiences in the United States of America—and we are dealing here with international matters and international parties. I am bound to tell your Lordships, in matters of litigation and arbitration in America, that allegations such as fraud are very easily made, and are made upon grounds which would be considered quite insubstantial in England. A danger here is that the unscrupulous opponent, who saw advantages for doing so, could make the allegation of fraud, and hence bring the matter back again into the venue of the courts, despite the passage of this Bill.

Since 1934 it has been the belief that matters of fraud in civil proceedings should be handled by the courts. Is this judgment right, my Lords? The truth is—is it not?—that judges do not have special qualities in dealing with matters of fraud, but different qualities. They have the experience of trying many cases, and of assessing and valuing evidence. On the other hand, arbitrators have a knowledge of the trade, and therefore have an easier ability to spot the wrong, and if needs be, the fraud. An example has recently been given to me concerning a log book which was fraudulently entered up. It was a matter which an experienced maritime arbitrator could see with great ease. The importance here, as with other matters which I have brought before your Lordships' attention, is that we must get it right, and we must not allow this to be a source of abuse.

I refer now to Clause 4 of the Bill where more extensive powers are given for interlocutory orders to be made. I will not go through the detail. It will suffice to say that these powers are designed to give the arbitrators extensive power which would, I suppose, include the striking out of defence under certain circumstances. I put this again in question form: have consultations been held with other countries? We do not want to lose the efficacy of this provision by finding that our arbitration awards are not enforceable abroad; contrary, for example, to Ordre Publique under Napoleonic law. I do not know the answer, but I believe this to be an area for inquiry.

Finally, I draw your Lordships' attention to smaller, but still important, amendments to arbitration law. If there is to be no Arbitration Rules Committee, we ought to use the Bill to get other matters right. I have in mind, for example, the absence—to which I have already referred—of any power to consolidate arbitration proceedings. I also draw your Lordships" attention to another point which comes out in Mr. Justice Donaldson's report; namely, the language that is used in Section 23, in which for "misconduct" an arbitrator can be removed from office, and those arbitration proceedings terminated. This is a highly offensive description for a procedural error by an arbitrator, and it would seem here that a small amendment could provide assistance.

I end, as I began, by thanking Her Majesty's Government, and the noble and learned Lord personally, for all that has been done, and all that has been done so swiftly. I thank also the noble Lord, Lord Rawlinson of Ewell, and others for the kind compliments directed towards me. This is indeed an excellent opportunity for us to re-assert our position in international arbitration, and, in the meantime, I anticipate that I will be a regular client with the Laker Skytrain.

4.56 p.m.

Lord DENNING

My Lords, I regret not having been here earlier owing to my iudicial duties. I wish to say a few words in welcome of the Bill. I have been concerned in arbitrations for many years at the Bar, both as counsel and as arbitrator, and I have spent many years on the Bench dealing with cases stated. Owing to arbitrations and cases which are stated for the opinion of the court, the commercial law of England is the commercial law of the world. Other countries do not have a procedure like ours by cases stated to get the points of law before their courts. They end with the arbitrators.

The Bill will make one of the most important improvements in our procedure for getting cases before the courts of law. The cases stated by arbitrators could be productive, and were productive, of infinite delays, not only through the courts of first instance but through the courts of appeal and the House of Lords, and people who were owing money could invoke this system so as to cause great delays and, in these days of inflation, get off very cheaply.

The procedure in the Bill is simply to have reasoned decisions by the arbitrators which can, if they are wrong in point of law, be taken with leave to the High Court, and with special leave to the Court of Appeal, and they will be decisive. This would be rather similar to the tribunals which now throughout the country have to state their reasons and on points of law can be taken to the higher courts. That simple improvement in procedure will be a great advance altogether.

Perhaps I may illustrate the importance by showing how cases from all over the world come to London. Commercial contracts of shipping, or for commodities, and the like, all contain the clause "Arbitration in London". Here I should like to mention one illustration—and we have had many lately. In 1973 Soya bean meal traffic from United States ports to Europe was all on the clause which we call"Incorporated GAFTA form 100"—Grain and Feed Trade Association. Those cargoes from the United States to Europe were held up because of the Mississippi floods. There were prohibitions on exports from the United States; there were string contracts from the shippers to the buyers, and every one was subject to arbitration in London. Several hundred arbitrations were started because the soya bean meal was not supplied and not shipped to Europe. Those arbitrations have been held in London, and they have been and are being held up on cases stated to the courts on the construction of the contract. That is an instance of how, from all over the world, commercial disputes are decided in London.

There is one great drawback in our system which has been felt by those abroad, and that is that, by case stated, they can be taken on against their will and cannot contract out of the arbitration clauses. The great improvement contained in this Bill is that it allows contracting out when the initial contract is made and, in many cases, after the dispute has arisen. They can contract out in regard to all our domestic arbitrations; they will be able to contract out, after the dispute has arisen, in regard to commodities and the like. These provisions for contracting out will, I hope, attract many people to the use of our system, especially those concerned in the great international contracts. At the moment, great firms and some countries do not come to London for arbitration because they fear the process of case stated. If they are allowed to contract out, I hope that those arbitrations will come to London. The arbitrators in London, with their expertise, their integrity and their impartiality are trusted throughout the world; and if the provisions of this Bill are passed through quickly, as I hope they will be, it will mean, I hope, that in future many of these concerns will come to London for their arbitrations and to have their disputes settled. My Lords, I greatly welcome this Bill.

5.2 p.m.

Lord HAILSHAM of SAINT MARY-LEBONE

My Lords, I do not want to detain the House long. Indeed, on Second Reading it is perhaps only necessary for me to say that, as the noble and learned Lord on the Woolsack knows, I myself would have been prepared to introduce a Bill of this kind as a Private Member's Bill if the Government had not kindly indicated to me their intention to do so, for which I thank them and congratulate them. There are important commercial interests of this country at stake here, as has been said again and again. It is thought that the abolition of the case stated procedure will attract a great many commercial arbitrations to this country. If this be the case, that alone would be a strong reason for accepting the Bill; and I hope it has the effect which is predicted for it. If I go rapidly through a number of points which might otherwise be thought to be Committee points, I do so in order not necessarily to prolong the debate or to ask the noble and learned Lord to reply to them in detail, but in order that he may think about them and, if indeed be, write to me about them or possibly discuss them in Committee.

In the first place, I should like to say that I thought, despite what the noble Lord, Lord Hacking, persuasively said, that the Government had got it about right in regard to contracting in and contracting out. I think the Bill as it stands is probably the right balance to be taken at the moment. I personally rather dislike the phrases "contracting out" and "contracting in" because, as the noble Lord, Lord Hacking, found in the middle of a sentence, they are rather muddling phrases in this connection. Do you contract into the jurisdiction or contract out of the jurisdiction of the courts? In your contract, are you excluding reference to the courts, or are you including it? I think they are confusing phrases to use, and I hope a rather happier terminology will have been discovered before the Bill has completed its passage. But I personally think the Government have got the body of the thing quite right.

Secondly, I should like to support what the noble Lord, Lord Hacking, said about some sort of rules committee. As to whether it could be a sub-committee of the existing Supreme Court Rules Committee or a separate committee, I should like the Lord Chancellor seriously to think about it. I think it is rather a pity that we should have to hold a full-dress Second Reading debate on so technical a subject if Parliament were prepared—and I hope it would be prepared in a matter of this kind—to do the same thing in regard to arbitration law as it does to a great many procedural questions under the Supreme Court Rules. With the Lord Chancellor in the chair and rules which are subject to the scrutiny of Parliament, I rather wonder whether we would need a full-dress debate every time we wanted to alter arbitration law. Thirdly, as to fraud, I think we have to remember that it is not simply the importance of the issue to the parties which matters here. At the moment, fraud is reserved for the courts because it is possible for a fraudulent party to achieve complete secrecy during the course of arbitration proceedings; it is not possible to achieve complete secrecy when the matter comes before the court. I think that there is therefore a public interest in securing publicity here.

There is one major point that I should like to make. This has very largely been a debate between grandees. One need hardly do more than look at the list of the names of the speakers who have taken part in this debate to realise that we are dealing with a very specialised class of professionals and business interests who deal in millions and sometimes in hundreds of millions of pounds. But I would ask the noble and learned Lord to comment upon my own submission in this respect. In the middle of all this, we must not lose sight of the prevalence of small arbitrations of a domestic character, and in dealing with the grandees and the great commercial interests involved here we must be very careful not to prejudice the small arbitrations which are constantly coming before the small arbitrators in the London Court of Arbitration and elsewhere. Incidentally, I have forgotten to disclose an interest. I am a Fellow of the Institute, and as I subscribe I suppose I ought to say so; so I am not entirely without an interest in this matter.

My Lords, under present procedure, very often the small arbitrator does not give reasons for his award—he tends just to make his award—and I think there is no general demand that he should. If your Lordships look at this Bill, it will be seen that in place of the case stated there is an appeal by leave and on a matter of law under Clause 1; and, of course, a corollary of that is that under subsection (5) of Clause 1 the arbitrator has to state his reasons. I quite understand that, as a substitute for the case stated procedure, this may be a very sensible thing—it was all dealt with in the Donaldson Committee Report—but I can conceive that in relation to a small arbitrator, where the arbitrator gives a plain award without stating either any or any sufficient reasons, subsection (5) could be used as an instrument of deliberate delay. I should like the noble and learned Lord, not necessarily to deal with this in his reply to this debate but to give the matter some thought and perhaps tell me what he thinks.

At the moment, the provisions about judge arbitrators, owing to the legislation by reference in the clause relating to it, are not absolutely plain to me. I am referring to subsections (3) and (4) of Clause 4 of the Bill. I should like them explained at some stage in a little greater detail; and the same applies to the reference in the Bill to the county court arbitrations which are becoming, I hope, an increasing feature of small claims in the county courts. How, if at all, will they be affected by the Bill?

In the meantime, I should like the noble and learned Lord to meditate on the two following short points. First, he and I had a difference of opinion (if he will remember) about the Unfair Contract Terms Act when it was a Bill before the House, I claiming that arbitration was an increasingly desirable form of settling disputes and he claiming, on behalf of the Government—and ultimately, of course, prevailing because the Government always do—that arbitration clauses should be brought within the terms of the Unfair Contract Terms Act. I wonder whether he would not meditate, now that he is bringing in a Bill for the improvement of arbitration, for its increasing popularity and for its increasing detachment from legal procedures, as to whether he was right in his original opposition to my view, which was that it was quite wrong to include arbitration clauses in the Unfair Contract Terms Act.

Finally, I should like him to meditate on this, a point about which we have not hitherto had any difference of opinion. He will be aware, as we all are, that the case stated procedure is not confined to arbitrations. It is perhaps used over an increasingly wide field of tribunals and other forms of reference to the High Court and elsewhere. If we are right to abolish the case stated procedure in relation to arbitration throughout, which is the purpose of this Bill, are we right to retain it elsewhere? It has been my experience, both at the Bar and on the occasions when I have been happy enough to sit in the Appellate Committee, to find that cases stated have become worse and worse as time goes on. More and more magistrates and other persons who have to state them state the evidence and then in effect say to the court, "Now get on with it and tell us what the legal consequences are". This is not what a case stated is about. When I first went to the Bar one had to be extremely cautious and careful about the draftsmanship and that the thing looked like a workmanlike, professional job. It now looks less and less like a workmanlike, professional job and more and more like a recitation of the evidence followed by an appeal to Heaven in the shape of the High Court.

If we are going to abolish the case stated procedure here, I wonder whether the Government, or particularly the noble and learned Lord who sits on the Woolsack, would not be good enough to reflect and to meditate about the philosophy of the case stated in relation to other forms of litigation in disputes.

Lord DIPLOCK

My Lords, we are not abolishing the case stated procedure as far as domestic arbitrations are concerned. The jurisdictions to which the noble and learned Lord is referring are domestic.

Lord HAILSHAM of SAINT MARY-LEBONE

My Lords, I was just looking at Clause 1 of the Bill and wondering whether perhaps—despite what my noble and learned friend has said—there was not a trace of that in Clause 1, which I think is of more general application than he thought. I may be wrong in my reading of it and perhaps I am wrong in giving it that general application. At any rate, the point is generally a valid one, that if we are now looking at the case stated procedure, we ought to reflect—whether it is either restriction or abolition, whichever of us is right about this little difference of opinion—upon whether it is limited to arbitration or whether a new philosophy might not be applied to it in other matters as well. Having said that, relatively briefly and, I hope, in such a way as to be acceptable to the House, I sit down, wishing the noble and learned Lord all good fortune in his legislation.

5.15 p.m.

The LORD CHANCELLOR

My Lords, I am grateful to the noble Lords who have spoken and who have put me in the agreeable position not only of having a Government Bill approved of but of the Government actually being congratulated on the speed with which they have done what is commonly and generally thought to be desirable. It is not always a weekly experience of a Minister in this Administration or, probably, of many others. I am particularly grateful to noble Lords who have raised matters that they have conceded may be more appropriate for later discussion as the Bill takes its course through your Lordships' House and who accordingly have indicated that they do not expect me to answer points of detail which were made. I shall take advantage, if I may, of their forbearance.

There were sins of omission that have been raised which we will look at. The noble Lord, Lord Lloyd of Kilgerran, was perhaps the most critical and he confined his criticism principally to Clause 3 of the Bill; but I hope that he was reassured by the explanation of the need for it which was given by the noble and learned Lord, Lord Diplock. Like him and like the noble and learned Lord, Lord Hailsham, I think that we have got the balance about right in the Bill—and, in any event, there is provision for changing the procedure by order in due course in the light of experience of how the thing works.

I share the gratitude that has been expressed to the noble and learned Lord, Lord Hacking, who has flown all the way across the Atlantic to give us the benefit of his views and to express his concern that we should move in this way. I blame him for "jumping the gun" because he raised the debate before I had had the advantage of reading fully the report of the Commercial Court Committee. But all is well. I am happy to have "bitten the bullet", indigestible as that operation sometimes proves to be. It is reassuring that the noble and learned Lord, Lord Denning, has given his approval to the Bill in the light of his vast experience in this field—as, indeed, has been the experience of other noble Lords who have spoken, the noble and learned Lord, Lord Diplock, himself and the noble and learned Lord, Lord Hailsham, who is the author of one of the leading works in this difficult field. Therefore, it is a great reassurance to me that that degree of expertise has been available to us. We will certainly protect the position, or seek to do so, at any rate, regarding the small arbitrations. We certainly do not want to diminish the value which has been attached to small claims procedures by suggesting that reasons for decisions should be required. They are rarely given and now are given only when an appeal on a point of law is contemplated.

A more general question has been raised (as he so often properly raises questions) by the noble and learned Lord, Lord Hailsham, as to whether we should look at the case stated procedure as a whole. That is worthy of consideration. We will have a look at it, but I am not sure that I can give any promises of movement in that direction in the near future. Other points of detail were also raised, such as the seven-day period; but we are advised—I am advised, at any rate—that that follows Section 10 of the Arbitration Act 1950, and I do not think it has proved to be difficult in its operation.

My Lords, there is another important matter to follow this debate. I repeat my gratitude to the noble Lords and the noble and learned Lords who have spoken and I am reassured by their wish that this Bill should make its way through your Lordships' House at high speed.

On Question, Bill read 2a and committed to a Committee of the Whole House.