Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 59
arbitration and forum selection clauses included in an
agreement between investor and State. Do umbrella clauses
only open an additional forum for the settlement of contractual
and quasi-contractual disputes between investors and host
States, or do they also affect the content of the substantive
obligations? Do they also stabilize the contractual relationship
between investor and host State and immunize it against every
change in the regulation of the contract? The latter is often
suggested when describing umbrella clauses as endorsing the
principle of pacta sunt servanda.
Yet, this section argues that umbrella clauses in investment
treaties do not incorporate the sanctity of contracts as a
principle that immunizes investor-State relations against any
future changes in the governing law or the regulatory
environment, or shield the contractual bond from all sorts of
commercial risks. Instead, this section argues that the general
function of umbrella clauses to protect investors against
opportunistic behavior of host States translates into a more
differentiated framework for the substantive function of
umbrella clauses. Even though disputes about any breach of an
investor-State contract can be submitted to investment treaty
arbitration based on an umbrella clause, the umbrella clause
does not have the effect of stabilizing the contractual bond
against every conceivable risk. Instead, it only upholds the
sanctity of contracts against opportunistic behavior of host
States, but does not provide solutions to problems arising from
gaps in investor-State contracts; nor does it exclude good faith
regulation of contracts based on the police power of the State or
the exercise of the State’s prerogative of eminent domain in
regard of contractual rights. In this respect, umbrella clauses
are indeed merely codifications of customary international law.
Concerning the relation between treaty-based arbitration and
forum selection clauses, by contrast, this section supports the
primacy of the consent of the host State to arbitration under the
treaty.
A. UMBRELLA CLAUSES AND APPLICABLE LAW
The application of umbrella clauses gives rise to the
question whether the clauses change the applicable law
governing the relationship between the investor and the State
and accordingly constitute choice of law clauses. In fact, some
tribunals have based their unease concerning the application of
umbrella clauses on the idea that the clauses would transform