Enabling Private Ordering - the University of Minnesota Law School

82 MINNESOTA JOURNAL OF INT’L LAW [Vol. 18:1
contract by the host State that impose additional obligations or
interfere with established contractual rights can thus be
justified by showing that the parties do not assume the full costs
of their behavior, but instead impose social costs on third
parties. 228 The imposition of additional obligations—through
subsequent regulation—to protect the environment, the
investor’s employees, or not to interfere with competition, can
thus be justified from an economic perspective with the
externalities created by the parties’ behavior. 229 Such regulation
of investor-State contracts will therefore not constitute a
violation of an umbrella clause that engages the host State’s
international responsibility for unlawful behavior. By contrast,
if the regulation of investor-State contracts constitutes
disguised opportunistic behavior of the host State that does not
aim at furthering a public interest but at enriching the host
State’s budget, the State’s international responsibility for
violation of an umbrella clause will be engaged. 230 It is, thus,
necessary to distinguish meticulously between regulatory
behavior and opportunism in order to avoid general regulation
that is merely used as a pretext to change the contractual
equilibrium to the detriment of foreign investors.
A different issue concerns the question of whether the host
State, in case of non-opportunistic and thus, as regards the
functioning of umbrella clauses, generally permissible
regulation of investor-State contracts, has to provide
compensation. This will depend on a number of factors,
including the importance of the public interest at play, the
degree and the consequences of the interference with an
investor-State contract, the existence of alternative, less
restrictive measures, the question of whether, and to what
degree, the investor’s behavior harms competing rights and
interests, etc. These aspects can come into play via a balancing
or proportionality analysis that weighs the public interests
against those of the foreign investor. 231 Consequently, the
228. See Ronald H. Coase, The Problem of Social Costs, 3 J. L. & ECON. 1 (1960).
229. Cf. Schwartz, supra note 35, at 555.
230. In the event that the host State derives a direct benefit from the regulation
one could depart from a refutable presumption that the regulation constitutes
opportunistic behavior and thus requires compensation. See Sedco, Inc. v. NIOC
(Iran), 9 Iran-U.S. Cl. Trib. Rep. 248, 274−79 (1985), for a parallel case concerning
the regulation of property, where the Iran-United States Claims Tribunal
established such a presumption.
231. See generally Alec Stone Sweet & Jud Mathews, Proportionality Balancing
and Global Constitutionalism, Yale Law School Faculty Scholarship Series No. 14