Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 19
have entered into a contract for the construction of a power
plant in the host country and its subsequent operation by the
investor for thirty years. Under the contract, the investor is
required to build the plant within a certain period, to operate it,
and to supply electricity. The host State, in turn, grants the
investor a thirty-year concession for the operation of the plant
and gives guarantees for the investor’s tariff calculation. Based
on their mutual expectation, the contract aims at realizing gains
from cooperation: the investor intends to make profits by selling
energy; the host State expects to be supplied with energy and
benefit from the investor’s know-how in constructing and
operating the plant. Yet, the investor’s investment decision is
based on the expectation to earn future cash returns from the
operation of the plant and presupposes that the host State will,
inter alia, comply with its original promises not to interfere with
the tariff regime.
In economic terms, the situation of the foreign investor is
characterized by the asset or transaction specificity of the
investment. Once its obligations to construct the plant have
been fulfilled, the investor cannot simply sell the plant or the
energy to third parties or relocate the plant if the host State
does not comply with its obligations, for example by unilaterally
changing the investment contract, imposing additional
obligations on the investor, or even completely withdrawing
from its original promises in order to extract a greater benefit
from the bargain. Unlike in situations of self-enforcing
contracts, where “the threat by either party no longer to deal
with the other is sufficient in and of itself to induce
performance,” 37 investor-State contracts typically involve a risk
that the host State will not abide by its original promise, but try
to “renegotiate” the original bargain or even openly breach it.
The typical situation in investor-State relations is thus prone to
be affected by opportunistic behavior of the host State with nonrecoverable,
sunk costs as a consequence. Certainly, the reverse
situation of foreign investors behaving opportunistically and
attempting to renege on their original promises also exists.
However, the host State as a sovereign actor is typically able to
react to such conduct by unilaterally imposing sanctions upon
the investor and enforcing them against the assets of the
investment project. 38 The fact that the host State disposes of the
37. Schwartz & Scott, supra note 35, at 557 (emphasis in the original).
38. There are exceptional situations where this mechanism does not work
effectively, for example, because the investor does not have any or sufficient assets