Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 75
and application of the umbrella clause in backing up private
ordering between investors and host States. While opportunistic
breaches of investor-State contracts clearly constitute a breach
of the umbrella clauses, reactions to contingencies do not engage
the international responsibility of the host State. However, in
case the host State invokes a change of circumstances in order
to change the terms of an investor-State contract or to deny
performance of its obligations, specific attention has to be paid
to the question of whether a specific circumstance is within or
outside the allocation of risk provided for in the original
bargain. The danger, of course, exists that the host State will
use changes in circumstances as a pretext in order to extract
additional benefits from the initial bargain and, thus act
opportunistically. Consequently, an investment tribunal will
have to apply strict scrutiny in order to delineate opportunistic
behavior and the good faith reaction to contingencies.
Notwithstanding, umbrella clauses do not exclude the
invocation of doctrines addressing contingencies and
consequently do not make host States liable for unforeseen
future developments that are outside the contractual risk
allocation.
D. REGULATION AND TERMINATION OF INVESTOR-STATE
CONTRACTS
While doctrines relating to the change of circumstances
concern the influence of future contingencies upon the
relationship between the parties, another source of significant
interference with the contractual rights under investor-State
contracts is the host State’s power to regulate or even terminate
contracts in the public interest. 208 Both regulation and
termination in the public interest can abridge the original
promises made by the host State and thus negatively influence
the contractual rights of an investor. Thus, the regulation of
investor-State contracts—e.g. changing emission standards for a
production plant run by a foreign investor—may impose
additional burdens on the investor’s economic activity, make the
performance of its obligations more onerous, and thus affect the
initial contractual equilibrium. The question, therefore, arises
whether umbrella clauses prohibit such host State measures
and immunize investor-State contracts against any regulation
208. Cf. COOTER & ULEN, supra note 35, at 185–87 (discussing the impact of
government zoning regulation on private party relationships for development).