Enabling Private Ordering - the University of Minnesota Law School

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16 MINNESOTA JOURNAL OF INT’L LAW [Vol. 18:1 In essence, the broader or “plain meaning” approach can be characterized as a contract centered approach that focuses on the contractual bond between investor and State and its implementation, while the more restrictive view is primarily driven by the systematic concern to delineate the scope of application of the domestic and the international legal orders. This approach is, therefore, primarily contract law centered 30 and stresses the importance of the applicable legal order for determining the rights and obligations in investor-State relations. The contract centered approach perceives the contract primarily as a social and economic bond between the parties that empowers them to order their mutual relations autonomously, 31 while the contract law centered approach understands the contract as a legal institution that restricts the private ordering of the parties and embeds their relations into and restricts their autonomy within the confines of a legal framework. 32 For the contract law centered approach, contracts only exist within the limits of the law, 33 whereas the contract The Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award, para. 160 (June 26, 2003); cf. Amoco International Finance Corporation v. Iran, 15 Iran-U. S. Claims Trib. Rep. 189, 222 (1987) (discussing the importance of customary international law for interpreting treaty law). 30. The term “contract law” in this context is understood in a broad and nontechnical sense as designating the law that governs the contractual relations between the parties. It is not understood in the more technical terms as the specific field of law that governs contractual relations in general. 31. See Maurice Bourquin, Arbitration and Economic Development Agreements, 15 BUS. LAW. 860, 867 et seq. (1960) (arguing that special arbitration tribunals between states and private parties “throw[] into relief the special position of the legal relationship resulting from the agreement”); Alfred Verdross, Protection of Private Property under Quasi-International Agreements, NEDERLANDS TIJDSCHRIFT VOOR INTERNATIONAAL RECHT, JULY 1959, at 356–59 (1959) (arguing that “an agreement concluded in application of the principle ‘pacta sunt servanda’ can found a new community”). See generally Alfred Verdross, Quasi-International Agreements and International Economic Transactions, 18 Y.B. WORLD AFF. 230 (1964); Weil, supra note 3, 177–78. 32. This approach becomes apparent, for example, in F. A. Mann, State Contracts and State Responsibility, 54 AM. J. INT’L L. 572, 581 (1960) (stating that the “law [governing a contract] ‘not merely sustains but, because it sustains, may also modify or dissolve the contractual bond’”) (quoting Kahler v. Midland Bank LD., [1950] A.C. 24, 56 (H.L.) (appeal taken from Eng.) (U.K.)). 33. Cf. Weil supra note 3, at 181–88 (“On voit mal comment la volonté des parties pourrait à elle seule engendrer un nouvel order juridique; cette volonté ne produit elle-même des effets de droit que dans la mesure où elle s’intègre dans un ordre préexistant qui decide que l’accord des volontés peut produire, dans certaines conditions, de tels effets de droit. Le principe pacta sunt servanda et celui de l’autonomie de la volonté eux-mêmes ne flottent pas dans le vide, et il faut un
2009] UMBRELLA CLAUSES 17 centered approach attributes to the governing law the function of backing up the economic exchange the contracting parties envisage and that underlies their relations. It stresses the parties’ autonomy and considers that their relations are established by force of their contractual consensus, not by any governing law. The difference between both approaches reflects the difference between understanding contracts primarily as embedded social institutions versus understanding them primarily as a regulated social phenomenon. 34 As will be argued in this section, the contract law centered approach that focuses primarily on the distinction between breaches of contracts and breaches of treaties drawn by the dualist tradition in international law, with its categorical national/international law divide, inhibits investor-State contracting by increasing the costs of foreign investment activities. Umbrella clauses aim at overcoming such impediments that stem from the limited capacity of host States to make credible commitments under the dualist conception by opening investor-State dispute settlement to claims for the breach of promises of the host State vis-à-vis the foreign investor. In terms of methodology, it is suggested that the starting point for the legal analysis and construction of umbrella clauses should be contract centered in stressing the economic rationales and incentives that are at play in investor-State cooperation and contracting, rather than taking the contract law centered approach that interprets umbrella clauses against the background of the abstract relationship between the international and the domestic legal orders without taking note that this approach can have detrimental effects for investor- State cooperation by making it more cost-intensive. Accordingly, this section first outlines the institutional infrastructure that is necessary for efficient consensual investor-State cooperation and outlines the importance of effective dispute settlement mechanisms as a backbone for such cooperation. Secondly, it shows that enforcement mechanisms for host State promises are often not provided by domestic legal système de droit pour leur conférer force juridique. ”). 34. On the underlying differences in understanding contracts as legal and social institutions and the need to combine both views, see Gunther Teubner, In the Blind Spot: The Hybridization of Contracting, 8 THEORETICAL INQUIRIES IN LAW 51 (2007); Peer Zumbansen, The Law of Society, Governance Through Contract, CLPE Research Paper 2/2007, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=988610 (to appear in Indiana Journal of Global Legal Studies).
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