Overriding Mandatory Rules in International Arbitration: Balancing Business Freedom and State Interests

What Are “Overriding Mandatory” Rules (and How Are They Different)?

Overriding mandatory rules are laws a country considers so vital that they apply no matter what law the parties chose for their contract. In other words, if a dispute has a close connection to that country, its crucial laws override the parties’ choice of a different law. These are typically laws protecting core public interests – think of anti-corruption statutes, sanctions, competition (antitrust) laws, or financial regulations. A classic definition of this concept of overriding mandatory rules is “imperative norms designated by a legislature to apply to all cases within their scope, even when a foreign law governs the contract”.

Why These Rules Challenge International Arbitration

International arbitration is built on party autonomy – the idea that businesses from different countries can choose how and where to resolve their disputes. Parties usually select a neutral governing law and an arbitration seat that they trust, precisely to avoid surprises from each other’s local courts. Arbitrators, unlike national judges, aren’t automatically bound to any one country’s legal procedures or conflict-of-law rules. This flexibility is part of arbitration’s appeal, but it also creates a dilemma when overriding mandatory rules enter the picture.

The core tension is between freedom of contract and the reach of state interests. If arbitrators simply ignore a state’s overriding mandatory law because “the parties didn’t choose it,” they risk delivering an award that a court will later refuse to enforce or even annul. For instance, an award enforcing a contract steeped in corruption or violating trade sanctions might be rejected by courts on public policy grounds – wasting time and money and undermining the credibility of arbitration. On the other hand, if arbitrators over-zealously apply every possible mandatory law, they could undermine the parties’ autonomy and make arbitration unpredictable. After all, businesses choose arbitration and a particular legal framework to avoid being subject to every country’s laws.

Another complicating factor is the debate over whether arbitration has a legal “home court.” In court litigation, a judge will apply their country’s conflict-of-law rules, which often direct the judge on when to apply foreign laws or local overriding laws. But an arbitral tribunal isn’t a court of any single nation. Some experts argue arbitration is “delocalised,” floating above any single national system, which would give arbitrators wide freedom to choose how to handle conflicting laws. Others favour “localisation,” anchoring the arbitration to the law of the seat (the country where the arbitration is legally based). 

In this regard, my thesis leans toward a moderate localization approach: arbitrators should be mindful of the law of the seat and other concerned jurisdictions to ensure their award will hold up in those places. In practice, this means arbitrators often adopt a cautious approach. For example, they might check that the outcome of a case would be valid under not just the chosen law, but also under the laws of any country deeply connected to the deal (or where enforcement is likely). This approach, sometimes called a cumulative conflict-of-laws analysis, helps arbitral awards survive challenges by showing consistency across different legal systems.

Striking a Balance Between Party Autonomy and Public Interest

Arbitration exists because parties want a high degree of party autonomy – they can choose neutral ground, select expert arbitrators, and tailor the process to their needs. But this freedom isn’t absolute. States have a public interest in enforcing certain regulations, protecting societal values, and not allowing private tribunals to undermine important laws. The ongoing challenge is to balance these two: (a) the flexibility and (b) the predictability businesses crave versus the sovereign right of states to uphold crucial laws.

My research emphasises maintaining what I call the “grand bargain” between arbitration and national courts. This grand bargain is essentially striking a balanced deal: countries worldwide (through treaties like the New York Convention) agree to recognise and enforce arbitration awards, giving businesses confidence that an award is as good as a court judgment. In return, arbitration is expected to respect fundamental laws and not become a loophole to bypass important regulations. If arbitrators routinely ignored anti-bribery laws or sanction orders under the guise of party autonomy, courts would justifiably lose trust in arbitration. Conversely, if arbitrators and parties take overriding mandatory rules seriously, state authorities are more likely to stay hands-off. It’s a delicate equilibrium: too much deference to state laws, and arbitration loses its appeal; too little, and states lose faith in arbitration’s legitimacy. The key is proportionality and foresight.

Keeping Arbitration Safe and Legitimate

The takeaway from my comparative study is that arbitrators should apply overriding mandatory rules when appropriate – not as a random add-on, but carefully and with justification, when a law is truly fundamental to a dispute’s context. By doing so, they safeguard the enforceability and legitimacy of their decisions. An arbitrator might ask: Will ignoring this law jeopardize the award in court? If yes, it’s likely wise to apply or at least consider that law in the reasoning. The research suggests some best practices, like prioritising the law of the arbitration seat if it has imperative rules (to avoid annulment at the seat)and being mindful of laws in countries where enforcement is likely. Arbitrators are encouraged to explicitly mention in their awards how they handled any mandatory rules, showing transparency and diligence. On the flip side, national courts are encouraged to support the arbitral process by focusing on due process: was the overriding mandatory law issue raised and thoughtfully considered by the tribunal? If yes, courts should hesitate to redo the case from scratch, intervening only if the final result blatantly violates public policy. 

In conclusion, overriding mandatory rules are a pressure point. Finding the right balance is not always easy, but it is essential for arbitration to remain a “robust, credible mechanism for resolving cross-border disputes” that is deeply recognized by national states.