Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 29
subject a contract to international law as the governing law. By
means of such contractual arrangements, investors and States
were able to deal with some of the problems arising out of the
national/international law divide under customary international
law and the difficulties of host States to make credible and
enforceable commitments vis-à-vis foreign investors absent
effective third-party dispute settlement and enforcement
mechanisms. Arbitration clauses removed the settlement of
disputes from the realm of domestic adjudication and alleviated
the deficiencies existing in this respect; 70 choice of law clauses,
stabilization clauses, and internationalization clauses, in turn,
constitute a contractual solution to protect investor-State
contracts against unilateral changes in the governing law by the
host State that might affect the contractual equilibrium. 71
Nevertheless, purely contractual arrangements have
significant drawbacks compared to a permanent institutional
structure that provides for dispute settlement and enforcement
of host State promises vis-à-vis foreign investors in general as it
is done under modern investment treaties. 72 Above all, in the
absence of permanent dispute settlement and enforcement
mechanisms, investor-State cooperation constantly requires
negotiation about such mechanisms—negotiations that are not
only time-consuming, but make the enforceability of the host
State’s promise itself part of the bargaining mass—making not
only the negotiations but the entire investment cooperation less
efficient.
Furthermore, while large-scale multinational firms may
prove quite successful in such negotiations, even to a point
where it makes no difference whether investment protection is
offered by an international treaty or by the contractual
framework set out in an investor-State contract, the situation
for middle or even small-scale foreign investors is different.
They may not have the necessary market and bargaining power
to negotiate comparable protection mechanisms. Smaller
investors are thus placed at a structural disadvantage compared
to larger investors because the host State commitments in
relation to them may be less credible due to the absence of pre-
AUSLÄNDISCHER PRIVATUNTERNEHMEN 76–144 (Athenaum Verlag 1971).
70. See supra Part I.B.1.a.
71. See supra Part I.B.2.b.
72. See Barton Legum, The Innovation of Investor-State Arbitration under
NAFTA, 43 HARV. INT’L L.J. 531 (2002) (discussing the differences between State
consent in modern investment treaties and more classical cases).