The Relevance (Or Lack Thereof) Of The Notion Of Mandatory Rules Of Law To Investment Treaty Arbitration – Vol. 18 No. 1-2

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Author: Donald Francis Donovan*

Published: April 2008

Commercial Disputes
Investment Disputes
Dispute Resolution and Litigation
Mandatory Rules

Description: 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.” 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.”

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.” 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.

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. 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.

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*Partner, Debevoise & Plimpton LLP; Adjunct Professor of Law, New York University School of Law. The author wishes to thank George A. Bermann and Loukas Mistelis for prompting this article, as well as the participants of the Colloquium on Mandatory Rules of Law in International Arbitration, held at Columbia Law School on June 8, 2007, for their insightful comments on a preliminary version of it. Mr. Donovan also wishes to thank his Debevoise colleagues Eran Shamir-Borer, Roy Schondorf, and Yulia Andreeva for their assistance in its preparation.