UK Arbitration Act 2025 - an exception for treaties

One of the most notable reforms is the new default rule that, in the absence of an express agreement between the parties on the law governing the arbitration agreement, it is the law of the seat that applies. The Act states that this rule applies even if the seat of the arbitration is outside England and Wales or Northern Ireland or no seat has been designated or determined. An exception to this rule, in Section 6A(3), is that it “does not apply to an arbitration agreement derived from a standing offer to submit disputes to arbitration where the offer is contained in – (a) a treaty, or (b) legislation of a country or territory outside the United Kingdom”. The Explanatory Notes (18) explain that: “This means, for example, that non-ICSID [i.e. International Centre for Settlement of Investment Disputes] investor-state arbitration agreements will tend not to be covered by the default rule in section 6A(1).” 

How did this exception come about?

During the Bill's passage through the House of Lords, the applicability of the default rule to arbitration agreements arising under offers of arbitration contained in investment treaties and foreign legislation was questioned. While the Law Commission had determined that there were benefits in applying the default rule to commercial arbitrations, it was unclear that this is also true of non-ICSID investor-State arbitrations. 

Based on sector feedback, the Government included the treaty exception ahead of introducing the Bill a second time, considering this to be an “improvement… ensuring that [the] default rule on governing law did not apply inappropriately to certain investor-state arbitrations” (see Hansard record). 

Why is the exception important?

There are good reasons to have the treaty exception:

1. Investment arbitration tribunals interpret the substantive obligations and the dispute resolution provision in investment treaties pursuant to the Vienna Convention on the Law of Treaties, which outlines principles of treaty interpretation that are reflective of customary international law. Domestic law only comes into play when required by the treaty, such as when the treaty only admits investments made in accordance with the law of the host State.
   
   Applying the default rule in investor-State arbitrations seated in London risks confining the arbitral tribunal to English law principles when analysing an arbitration agreement formed partly on the basis of an international treaty. This may be inappropriate or unnecessary, depending on how the default rule is applied in this context. For example, given that English courts have held that international law may be one of the sources of the common law, an arbitral tribunal may consider that the application of the default rule in the context of a treaty arbitration nonetheless directs it to apply – as is usual – principles of treaty interpretation under international law, rendering the default rule largely inconsequential. 
2. Many investment treaties offer investors access to investor-State dispute settlement without specifying a seat of arbitration. The seat will be agreed by the parties, or decided by an arbitral institution or the arbitral tribunal, after a dispute has arisen. This means that, under the same investment treaty, there could be several arbitrations seated in different jurisdictions. A London-seated tribunal applying the default rule, to the extent that it differs from the principles under international law, may reach a different interpretation of, and conclusion on, the scope and validity of the same arbitration agreement, to a tribunal seated in a non-English jurisdiction. The default rule may therefore increase inconsistency between arbitrations under the same investment treaty.
3. When a foreign State consents to arbitrate through an investment treaty, it likely does not intend for the validity or scope of its consent to be interpreted through the domestic law of another State, such as English law. It may therefore infringe comity to insist on the application of the default rule in this context.
4. There is the question of whether the principle of separability applies to offers to arbitrate in investment treaties similarly to how consent to arbitration in a contract is treated as separate and distinct from the “main” contract.
5. In commercial arbitration, the default rule simplifies the arguably unpredictable legal framework resulting from Enka v Chubb and UniCredit Bank v RusChemAlliance for determining the governing law of an arbitration agreement and accordingly reduces satellite litigation. However, these issues are less significant in non-ICSID investor-State arbitration, where it is clear that arbitral tribunals ought to be guided by the principles of treaty interpretation under international law. In other words, there is no clear upside to applying the default rule to arbitration agreements arising partly from treaties that would counterbalance the risks and complexities described above. To the contrary, the default rule may deter parties and arbitrators from selecting London as the seat for their non-ICSID investor-State arbitration.

A&O Shearman participated in the consultation relating to the treaty exception and its view is reflected in the Arbitration Act 2025.