Poorly drafted arbitration agreements can be costly, time-consuming and hard to enforce, meaning it’s essential that they’re clear and without ambiguity.
A significant reform to the UK Arbitration Act 2025 – establishing a default rule on the governing law of arbitration agreements – aims to reduce uncertainty and promote consistency. Singapore and Hong Kong have not yet followed suit, and it remains to be seen whether they will adopt a similar default rule.
This reform underscores the importance for contracting parties to carefully consider an often-overlooked detail when drafting arbitration clauses. That is, to expressly agree on the governing law of the arbitration agreement – particularly if they wish to avoid the default rule set out in section 6A of the UK Arbitration Act 2025.
This is relevant for New Zealand businesses entering into contracts with overseas customers or suppliers which contain arbitration clauses.
Background
The UK Arbitration Act 2025 received Royal Assent in February 2025 and is expected to come into force as soon as practicable.
Now aligning with international best practice, it marks a significant evolution in the legal framework governing arbitration in England and Wales.
One of the biggest impacts is the introduction of Section 6A, which establishes a default rule for determining the governing law of arbitration agreements.
The issue: governing law of arbitration agreements
The governing law of an arbitration agreement is critical because it determines the agreement’s formation, validity, and scope. Before the 2025 Act, the question of which law governed an arbitration agreement – especially when not explicitly stated – was a source of considerable legal uncertainty.
This issue came to the forefront in the UK Supreme Court’s decision in Enka v Chubb [2020] UKSC 38, where the Court held that the governing law of the arbitration agreement should be determined by a complex multi-stage test.
This approach often led to unpredictability and increased litigation costs. Notably, the Supreme Court was divided on both the law and its application to the facts of the case before it.
The Law Commission’s review
In 2022, the Law Commission of England and Wales launched a review of the Arbitration Act 1996. One of the key recommendations of this review was to simplify and clarify the rules around the governing law of arbitration agreements.
The Commission, while addressing these issues, proposed a default rule that would enhance legal certainty.
Section 6A: the new default rule
Enacted as part of the Arbitration Act 2025, Section 6A provides that:
“Unless the parties expressly agree otherwise, the law governing the arbitration agreement is the law of the seat of arbitration.”
This provision ensures that the arbitration agreement is governed by the same legal system as the procedural framework of the arbitration itself, unless the parties clearly choose a different law.
Positions in Singapore and Hong Kong
In contrast, Singapore and Hong Kong have not adopted a statutory default rule. Both jurisdictions continue to apply the common law approach, using the three-stage tests articulated in Sulamérica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A [2012] EWCA Civ 638:
- Have the parties made an express choice of law governing the arbitration agreement?
- If not, is there an implied choice, typically inferred from the governing law of the main contract?
- If neither applies, the arbitration agreement is governed by the system of law which has the closest and most real connection to the arbitration agreement – the law of the seat.
This approach maintains flexibility and allows courts to consider various contextual factors on a case-by-case basis. For example, under the second stage, courts may assess facts that could displace the “inference” or rebut the “presumption” that the governing law of the main contract also applies to the arbitration agreement. These factors include:
- Whether the parties chose a different country as the seat of the arbitration.
- Whether there was a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective – invoking the validation principle, which holds that an interpretation preserving the validity of a transaction is to be preferred over one that renders it invalid or ineffective.
New Zealand businesses – what you need to know
Arbitration agreements are often finalised at the eleventh hour. When poorly drafted, they can lead to costly and time-consuming satellite disputes. It is therefore essential that arbitration agreements are drafted clearly and without ambiguity to ensure enforceability.
One of the most critical – and often overlooked – aspects of drafting an arbitration agreement is specifying the governing law of the arbitration agreement itself. The UK’s introduction of a default rule has brought renewed attention to this issue.
For New Zealand businesses entering into cross-border contracts, particularly with parties in the Asia-Pacific region, this is highly relevant. Singapore and Hong Kong are frequently chosen as seats of arbitration, yet neither jurisdiction has adopted a statutory default rule. If the governing law is not specified, tribunals or courts in these jurisdictions will apply a flexible but potentially unpredictable common law test.
To mitigate these risks, New Zealand businesses should:
- Ensure that the governing law of the arbitration agreement is expressly specified in the contracts.
- Seek legal review of dispute resolution clauses to ensure they are tailored to protect their interests.
- Be aware that, if the governing law is not specified, tribunals or courts in Singapore or Hong Kong may apply a flexible but unpredictable common law test which could lead to unintended outcomes.
