Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 47
about the obligations arising under the host State’s promise visà-vis
foreign investors. Umbrella clauses thus stabilize investor-
State relations ex post by offering enforcement mechanisms for
investment-related host State promises, independent of whether
the breach is of a sovereign or a commercial nature.
B. DISSOLUTIONS OF THE DUALIST FRAMEWORK IN
INTERNATIONAL DISPUTE RESOLUTION
What the more restrictive line of interpretation of umbrella
clauses also disregards in its strict emphasis on the
national/international law divide is that even under customary
international law the distinction between contract claims and
treaty claims, respectively municipal law and international law,
was never as categorical as the restrictive approach purports.
By contrast, international law has always accepted that States
can submit claims for the violation of municipal law to
international law dispute resolution, including inter-State
proceedings. Similarly, modern investment treaties often allow
for the settlement of both treaty and contract claims based on
broadly worded arbitration clauses. Both of these developments
suggest that the distinction between claims for the violation of
domestic law and claims for the violation of international law
does not constitute a rigid distinction that would need to be
prolonged by a restrictive interpretation of umbrella clauses
that limits the clauses’ scope of application to sovereign
breaches of investor-State contracts.
1. Contract Claims in Classical Inter-State Dispute Settlement
While customary international law only offers a limited
scope of protection to investor-State contracts, it has never
prevented States from submitting pure contract claims to inter-
State dispute resolution. Although States have traditionally
been reluctant to espouse claims by their nationals for simple
breaches of contract by means of diplomatic protection, 123
customary international law did not prohibit the espousal of
such claims. In fact, abundant State practice and older
123. The United States, for example, had a long-standing policy not to intervene
with force based on the breach of an investor-State contract. The reasons for this
were largely of a “political” nature. The fact that the investor had entered freely into
the agreement and voluntarily accepted the risk associated with contractual
breaches played a role. In addition, not upsetting inter-State relations was often
important. See Jennings, supra note 58, at 159, 164, 179–81.