Enabling Private Ordering - the University of Minnesota Law School

76 MINNESOTA JOURNAL OF INT’L LAW [Vol. 18:1
or termination in the public interest.
Unlike the unilateral reaction of the host State to
contingencies, the regulation of contracts actually interferes
with contractually negotiated rights and obligations. Contract
regulation could thus be seen as a case of opportunistic behavior
that constitutes a violation of an umbrella clause, since the host
State avails itself of its sovereign power to modify or terminate
the initial bargain. However, not every regulatory interference
with contractual relationships constitutes opportunistic and
rent-seeking behavior of the host State. Instead, certain
regulatory conduct solely serves to further contract-external
public interests. Such regulation, it is submitted, can be
implemented without constituting a violation of an umbrella
clause based on an implicit police power exception.
Furthermore, in certain limited circumstances States can also
terminate investor-State contracts based on a superseding
public interest. Such an exception for the regulation of investor-
State contracts can be justified, despite the lack of a basis in the
wording of most umbrella clauses, with the host State’s duty to
act in the public interest that has always been recognized under
customary international law and domestic legal systems and
has arguably not been superseded by the conclusion of
investment treaties. It is thus argued that a police power
exception has to be read into the interpretation and application
of umbrella clauses. Under this exception, the regulation of
investor-State contracts and the interference with contractual
rights in the public interest is permissible, provided that it does
not impose disproportionate or discriminatory burdens on the
foreign investor. In some cases this may require the payment of
compensation in order to make the interference lawful. Yet,
such interferences will not engage the host State’s international
responsibility for unlawful behavior based on a violation of an
umbrella clause.
1. The State’s Power to Interfere with Investor-State Contracts
under Customary International Law
State practice and jurisprudence of international courts and
tribunals has rather consistently recognized that under
customary international law States hold the power to interfere
with investor-State contracts in the public interest and cannot
contract away this power. Thus, in the Oliva Case the Italian-
Venezuelan Claims Commission considered that the termination