Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 11
enhance the capacity of host States to make credible and
enforceable commitments in their relations with foreign
investors by establishing effective, treaty-based dispute
settlement and enforcement mechanisms for host State
promises. Umbrella clauses allow host States and investors to
achieve bargains that are more cost-efficient compared to the
investor-State cooperation that takes place outside the realm of
effective contract enforcement. This function of umbrella
clauses, it is submitted, is not limited to mitigating inequalities
between foreign investors and a host State stemming from the
sovereign power and prerogatives of the host State, but equally
targets the shortcomings in dispute settlement and enforcement
in the case of non-sovereign breaches of investor-State contracts
by the host State. 19 In accordance with this function, a
distinction between interferences of a governmental and those of
a commercial character is not adequate. Overall, umbrella
clauses are understood to enable and strengthen forms of
“private ordering” in investor-State relations, forms that involve
the empowerment of investors and States to cooperate and order
their interactions based on consensual agreement reached
among equals by way of negotiation. 20
In order to forward this argument, Part II focuses on the
limitations the traditional dualist distinction between
international and national law imposes on cost-efficient
investor-State contracting and cooperation. It outlines the
significance of making credible commitments in order to
immunize investor-State bargains from opportunistic behavior
of the host State and to allow for efficient investor-State
cooperation, and submits that this often requires effective
enforcement mechanisms through independent third party
dispute resolution. However, under both domestic legal systems
and the customary international law framework, there are
shortcomings in regards to effective enforcement mechanisms
for host State promises. Above all, the dualist framework of
international law, with its strict distinction between municipal
and international law and the distinction between contract
claims and treaty claims, attenuates the capacity of the host
19. Cf. Pierre Mayer, La neutralisation du pouvoir normatif de l’Etat en
matière de contrats d’Etat, 113 J. DU DROIT INTERNATIONAL 5 (1986) (noting that the
normative power of the host State comprises both its function as legislator and judge
over the scope of enforceability of the promises it makes).
20. Cf. Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of
the Law: The Case of Divorce, 88 YALE L. J. 950 (1979).