Originally from American Review of International Arbitration - ARIA

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Do mandatory rules play any role at all in investment arbitration?  Pierre Mayer defines mandatory law as “an imperative provision of law which must be applied to an international relationship irrespective of the law that governs that relationship.”   Under that definition, an investment arbitration would appear not to give rise to the application of mandatory law.   Investment treaty arbitrations are typically governed by international law, whether that law takes the form of treaty terms or customary international law as incorporated by the treaty.   As Donald Donovan notes, the applicable legal system – international law – itself establishes the hierarchy of rules by which competing norms will apply.   Moreover, international law is made by States and, aside from jus cogens norms, can be changed by States.  Thus, so long as the treaty provisions do not violate a jus cogens norm – an unlikely contingency – a tribunal need consider no other law:  the treaty provisions, as lex specialis, would trump other conflicting sources of international law.   

If municipal law were to play a role in a particular investment arbitration, even a mandatory municipal law should not displace the international law made applicable by the investment treaty.  Indeed, it is axiomatic that a State may not invoke an inconsistent domestic law to justify its failure to abide by its international obligations.    One can say that the very purpose of an investment treaty is to guard against a host State’s use of its sovereign authority to enact or change municipal law to the detriment of a foreign investor.

In other words, in an investment treaty arbitration it seems there is no need for arbitrators to decide whether or not to displace chosen law to make way for mandatory rules.   The States party to the treaty have themselves identified which law trumps; as lawmakers they have the authority to jettison laws with which private parties might not be able to dispense.

A second glance, however, reveals a more complicated picture in which mandatory laws, whether domestic or international, might play a role in an investment arbitration.  How can this be so? 

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Part I of this essay explores briefly the role of mandatory rules in international commercial arbitration.  Part II discusses the mandatory nature of international law.  While only jus cogens norms are immutable, much of international law is relatively static and is not easily derogated from, even if such is theoretically possible.  Part III addresses mandatory rules – both domestic and international – as they relate to investment arbitration. In that context mandatory rules will rarely displace the law chosen by the parties to the dispute; it is much more likely that the law will be specifically applicable to the dispute by way of choice-of-law principles and the broad array of rules and laws that govern any single dispute.  Yet mandatory laws may have more claim to application than more garden-variety municipal or international laws.  They are likely to be in issue when a tribunal seeks to reconcile conflicting, or apparently conflicting, obligations undertaken by a State.  They may be at issue when States seek to raise defenses or counterclaims to claimants’ cases.  They may also appear in the arguments respecting quantum as States seek to set off amounts they owe as damages by allegations of failure by the claimants to comply with particular laws.