THE AUTHORS:
Hannah Ambrose, Partner at Herbert Smith Freehills LLP
Vanessa Naish, Professional Support Consultant & Practice Manager at Herbert Smith Freehills LLP
Liz Kantor, Professional Support Lawyer at Herbert Smith Freehills LLP
Introduction
Following the general election on 4 July 2024, the new UK Government has re-introduced the Arbitration Bill (the Bill) to Parliament’s legislative agenda (see our blogpost here). While the drafting of the Bill remains largely unchanged since Parliament was dissolved in late May, one key clarificatory change has been made.
As previously, Clause 1 of the Bill implements the Law Commission’s proposal to introduce a new default rule in the Arbitration Act. This rule states that an arbitration agreement will be governed by the law of the seat unless the parties expressly agree otherwise. The law of the arbitration agreement is the law that governs its interpretation, including questions concerning its scope and validity.
The possibility that a different law governs the arbitration agreement than the law that governs the matrix contract arises from the fact that arbitration agreements are considered “separable”. The doctrine of separability is a “legal fiction” intended to ensure that, where a party alleges that a contract which contains an arbitration agreement is invalid, non-existent, or ineffective, that dispute must still be referred to arbitration and not to the courts. It is the doctrine of separability which gives rise to the need for a law that governs the arbitration agreement, and for this reason, these two concepts are intrinsically linked. The new default rule in the Bill aims to provide certainty and prevent complex disputes between parties regarding the governing law of their arbitration agreement.
Following its re-introduction by the Government, additional wording has been added to Clause 1(3) of the Bill. This provision states that the default rule “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 “carve-out“).
In this article, we discuss the background to and significance of this change.
Background
During the Bill’s passage through the House of Lords in April of this year, Lord Thomas raised the question of whether Clause 1 should apply to non-ICSID investor-State arbitration agreements in treaties and foreign legislation. This question was not relevant to ICSID arbitration, because the Arbitration (International Investment Disputes) Act 1966 clarifies that the Arbitration Act 1996 does not apply to ICSID Convention proceedings.
The issue raised by Lord Thomas had not arisen during the Law Commission’s consultation and had not been considered by the House of Lords Committee. Based on a plain reading of the original drafting of Clause 1, it was not clear whether and how Clause 1 would apply in the context of treaties or foreign investment legislation.
To address this uncertainty, the then Parliamentary Under Secretary of for Justice, Lord Bellamy KC, sought the views of various stakeholders with expertise in the field of investor-State arbitration, including Herbert Smith Freehills LLP.
For the reasons we explain in this article, we concluded that there is no need for the Arbitration Act to provide a default position to address the governing law of arbitration agreements arising out of treaties or foreign investment legislation and that there would be potential negative implications if it did so.
Culture Clash: Arbitration Agreements in a Commercial vs Investment Context
The issue of separability and the related question of which law governs an arbitration agreement arises frequently in the commercial arbitration context (culminating in the cases of Enka v Chubb and most recently Unicredit v RusChemAlliance), because English law on the interpretation of contracts (including arbitration agreements) focuses on party intention. In a commercial context, however, the parties will choose a (domestic) governing law for their contract and will typically identify their chosen seat of arbitration in their arbitration agreement (even if they do not specifically address the governing law of the arbitration agreement). Conversely, an arbitration agreement in a treaty or legislation has a different profile.
In an investment treaty (and also in some foreign legislation), it is customary to include a standing offer to arbitrate disputes, which indicates the States’ consent to arbitrate, conditional upon the investor meeting the jurisdictional requirements of the treaty (or the legislation). The standing offer will then be accepted or “perfected” subsequently by an investor when they bring an arbitration claim. The treaty will not usually contain a choice of seat for non-ICSID arbitration. Once an investor commences an arbitration, the seat will typically be chosen (by party agreement or by the tribunal) based on considerations such as neutrality or convenience, rather than on the basis of any particular connection with the parties or their dispute. As a consequence, the seat of arbitration may differ in arbitrations under the same treaty. The “choice” of the seat of arbitration in investment treaty arbitration is therefore very different to that in a commercial arbitration where the parties choose a seat and include it in their arbitration agreement, usually before a dispute has arisen.
The substantive obligations in a treaty are international law obligations. The provisions of the treaty are interpreted in accordance with public international law (in particular, the 1969 Vienna Convention on the Law of Treaties (VCLT)), either because the relevant States are party to the VCLT or because the principles articulated by the VCLT represent customary international law. The question of whether a State has consented to arbitration of the dispute – and therefore whether an arbitral tribunal has jurisdiction – is governed by the wording of the treaty, interpreted in accordance with public international law.
Accordingly, when faced with questions of jurisdiction under non-ICSID arbitration agreements arising from investment treaties, the English courts and investment treaty tribunals have interpreted the arbitration agreement by reference to public international law (see for example Ecuador v Occidental Exploration and Production [2005] EWCA Civ 1116). There is no need to follow the “legal fiction” of contractual “separability” in an investment treaty context nor to consider whether the arbitration agreement should be governed by the law of the seat or some other domestic law.
Foreign domestic investment legislation may include standards of protection defined under domestic law and/or may contain a reference to international law, such as a reference to the minimum standard of treatment under customary international law. The starting point for such legislation would be to interpret it in accordance with the relevant domestic law of the host State, including when assessing the validity and scope of both the State’s consent to arbitrate and the perfected agreement to arbitrate.
The Impact of Not Including a Carve-Out
Without a carve-out in Clause 1, the English court would be required, as a default, to apply English law to the arbitration agreement arising out of an investment treaty or foreign domestic investment law where an English seat has been chosen. It is possible that, when tasked with doing this, the English court would have nonetheless referred to public international law (either because customary international law is a source of common law or because English law directs them to do so).
However, there would be uncertainty and unpredictability. For example, it is usually investment tribunals who are first tasked with considering issues of consent and jurisdiction, not the English court. This would therefore present tribunals with the challenging task of applying nuanced analysis as to the relevance of international law when applying English law as the law of the arbitration agreement. In particular, it would be unclear whether the statutory default rule in Clause 1 would require the English court or a tribunal to apply English substantive law on contractual interpretation (which may include bodies of arbitration case law such as Fiona Trust), law on third party rights, arbitrability, pleading, and evidencing fraud, to name just a few.
Additional implications could have included:
- An outcome inconsistent with the agreement of the State parties, because non-UK States who sign a treaty (or, indeed, any foreign State enacting domestic investment law) would not have anticipated that English law may apply to the interpretation of any aspect of the arbitration agreement arising from it. A default application of English law to either a treaty or foreign legislation could also be contrary to principles of comity – with the impact being more significant in the context of foreign domestic investment legislation if English law were to displace by default a host State’s domestic law.
- Unpredictability and uncertainty, as the interpretation of a treaty or piece of legislation would, in the case of each separate dispute, depend on whether or not an English seat of arbitration was designated.
- Difficulties enforcing any resulting arbitral award in the host State, based on the application of English law to the arbitration agreement by default.
Ultimately, this uncertainty could have resulted in States, investors, and tribunals being less willing to select London as the seat of their non-ICSID investor-State arbitration or arbitration under a foreign direct investment law. More generally, it could have detracted from London’s standing as a seat of arbitration.
Conclusion
The introduction of the carve-out ensures that tribunals and the English courts have the necessary flexibility and nuance in determining the applicable law to this particular category of arbitration agreements. While public international law or a foreign domestic law, or, indeed, the law of the seat, can be applied where necessary and appropriate, the carve-out aligns with the expectations of parties to and stakeholders in investor-State arbitration, and avoids the challenges and uncertainties that could arise without it.
ABOUT THE AUTHORS
Hannah Ambrose is a Partner and solicitor advocate in the international arbitration and public international law group Herbert Smith Freehills LLP.
She advises clients and colleagues globally on complex issues relating to commercial and investment arbitration, dispute resolution, enforcement of awards and judgments, and public international law.
Hannah has acted as counsel in ad hoc commercial arbitrations and proceedings under the auspices of major arbitral institutions, including the ICC, LCIA and SCC. She has acted as counsel on a number of investment treaty claims, and advised clients on investment structuring. She also has experience in advising on a range of other public international law matters, including state immunity, immunity of international organisations, and boundaries. She works across a number of sectors, including energy, mining, pharma and financial institutions and banks.
Vanessa Naish is a Professional Support Consultant and Arbitration Practice Manager in the global arbitration practice of Herbert Smith Freehills LLP. She has a particular interest in innovative fee arrangements and in using technology to predict both the cost and outcome of arbitrations.
She advises clients and colleagues on complex issues relating to arbitration. She also advises on public international law, in particular State immunity and investment protection issues. She helps to lead and drive the firm’s thought leadership and client and external engagement on key developments in both areas. Vanessa’s role is heavily focused on client engagement in arbitration and public international law issues.
Vanessa was a Senior Associate in the international arbitration practice of another global law firm before joining the firm.
Liz Kantor is a Professional Support Lawyer in the global arbitration practice of Herbert Smith Freehills LLP. She provides technical advice to clients and colleagues on complex issues relating to international arbitration. She also helps to lead and drive the firm’s thought leadership and client and external engagement on key developments in arbitration.
She also supports the management of the global arbitration practice in business planning and strategy development. She is particularly interested in deriving client insights from the firm’s arbitration data.
Before taking up this role, Liz was a Senior Associate in the London arbitration team.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
