Enabling Private Ordering - the University of Minnesota Law School

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12 MINNESOTA JOURNAL OF INT’L LAW [Vol. 18:1 State to make credible commitments to foreign investors and thus constitutes an impediment to cost-efficient investor-State cooperation. Against this backdrop, Part III submits that umbrella clauses have to be understood as a reaction to the insufficient protection of investor-State contracts by international law and as a departure from a dualist conception that paradigmatically contrasts international relations and investor-State relations. The primary function of the umbrella clause, it is argued, has to be seen in its jurisdictional nature that allows investors to initiate treaty-based arbitration for the breach of promises made by the host State vis-à-vis the investor. By offering enforcement mechanisms on the level of international law, umbrella clauses stabilize the relationship between the host State and foreign investors ex post against opportunistic host State behavior. This departure from the dualist conception is, however, not a fundamental breakage with the essence of international law and international dispute resolution as such. Rather, the international law of nations has always, at various times and in different dispute settlement fora, accepted that States could submit claims for the breach of municipal law to international dispute settlement. Part IV then turns to the effect umbrella clauses have on the substantive relations between investors and host States and the law that governs them. It argues that the clauses, while reinforcing the principle of pacta sunt servanda, do not alter the legal nature of the relationship between investor and host State. They do not automatically elevate their relations to be governed by international law, nor do they transform breaches of domestic law into breaches of international law. Umbrella clauses merely open recourse to investment treaty arbitration in order to enforce host State promises governed by whatever, mostly municipal, law the parties to an investor-State contract chose as governing their relations. Equally, umbrella clauses are limited to targeting and sanctioning opportunistic behavior of host States, but do not provide solutions to problems arising out of contingencies emerging in investor-State relations. The inclusion of an umbrella clause does, therefore, not exclude exceptions to the sanctity of contracts based on doctrines of change of circumstances, force majeure, necessity, or the like under the law governing the relations between investor and State in question, nor does it override the competences of the host State to avail itself of its police power to regulate investor-
2009] UMBRELLA CLAUSES 13 State contracts as recognized under customary international law. Finally, Part V examines the scope of the umbrella clause ratione materiae and analyzes the kind of commitments the clauses cover. It argues that umbrella clauses cover contractual as well as such quasi-contractual commitments that can be viewed as a substitute for an investor-State contract, even though they may take the form of unilateral acts by the host State or emanate from its domestic legislation. It is, however, crucial that such promises relate to an investment as defined in the respective investment treaty. This article submits, therefore, that umbrella clauses break with the limited protection of host State promises under international law by establishing the jurisdiction of investment tribunals for any breach of such promises. They are not limited to protecting against expropriatory, discriminatory, or arbitrary conduct, but comprehensively aim at providing an infrastructure that backs up “private ordering” between investors and States. II. THE DUALIST FRAMEWORK’S LIMITATIONS TO EFFICIENT INVESTOR-STATE CONTRACTING Arbitral jurisprudence on the umbrella clause is fundamentally divided between an approach that gives effect to the plain meaning of the clauses and a more restrictive approach that focuses on systemic issues concerning the relationship between municipal and international law, contract claims and treaty claims. The first approach considers that any breach of a promise made by the host State vis-á-vis a foreign investor gives rise to a violation of the umbrella clause and, accordingly, entitles the investor to damages. 21 This approach mainly relies on three arguments. First, it stresses the plain wording of the clauses that in most cases “say clearly, that each Contracting Party shall observe any legal obligation it has assumed, or will in the future assume, with regard to specific investments covered by the BIT.” 22 Second, it stresses the 21. See cases cited supra note 6. 22. SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID (W. Bank) Case No. ARB/02/6, Decision on Objections to Jurisdiction, para. 115 (Jan. 29, 2004); see also Noble Ventures, Inc. v. Romania, ICSID (W. Bank) Case No. ARB/01/11, Award, para. 51 (Oct. 12, 2005); Siemens A.G. v. Argentine Republic, ICSID (W. Bank) Case No. ARB/02/8, Award, para. 204 (Feb. 6, 2007); Eureko, supra note 6, para. 246.
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