Originally from American Review of International Arbitration - ARIA

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THE RELEVANCE (OR LACK THEREOF) OF THE
NOTION OF "MANDATORY RULES OF LAW"
TO INVESTMENT TREATY ARBITRATION
Donald Francis Donovan*

 

In a previous article, Alexander Greenawalt and I defined mandatory rules in
the context of international commercial arbitration as rules that "arise outside the
contract, apply regardless of what the parties agree to, and are typically designed
to protect public interests that the state will not allow the parties to waive."1
While mandatory rules encompass a broad range of laws, in the context of
international commercial arbitration the scholarly debate centers primarily on
"substantive laws that may affect the enforceability of contracts or otherwise may
regulate the transaction subject to arbitration."2

Having analyzed the reality--rather than theory--of arbitral practice, we
agreed with an earlier conclusion that there were in fact "virtually no cases where
the arbitrators… relied on the application of a mandatory rule to justify a decision
other than [the one] that would have resulted from the application of the law
chosen by the parties."3 We also noted that many of the situations that are
discussed as applications of mandatory rules are in fact situations in which the
rules are applied without in any way overriding the parties’ choice, either because
the arbitration clause encompasses disputes that the governing law clause does not
encompass; because the chosen law itself requires consideration of the rules,
mandatory or not, of another legal system; because an unchosen national law
constitutes, in effect, an underlying fact (for example, for purposes of force
majeure); or because the conflict of laws rules of the chosen law, if not excluded,
require application of the mandatory rules of another legal system.4

In sum, we concluded that the application of mandatory rules will generally
flow directly from the classical party-driven model of arbitration, without
requiring us to rethink the nature of arbitration and arbitral authority.5 Having
been asked to address the possible application of the mandatory rules debate to
investment treaty arbitration, I now propose a similar conclusion in that context.