Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 83
termination of investor-State contracts will usually require the
host State to provide compensation, unless the termination will
only be effective far into the future and thus will allow the
investor to recuperate the costs of the investment and derive
some benefits from it. Otherwise, compensation is necessary in
order to stabilize the host State’s original promises and allow for
efficient private ordering between investors and States.
In cases of mere regulation of investor-State contracts that
do not go as far as termination of the entire contractual
arrangement, the question of whether compensation is due may
equally be solved based on a proportionality analysis. If the
regulation of an investor-State contract that the host State
imposes strikes a reasonable and proportionate balance in
furthering a legitimate policy goal, for instance the protection of
some interest that is external to the investor-State relationship,
or aims at avoiding negative externalities on third-parties
resulting from the activity of the investor in performing his
contractual obligations, and is based on general and nondiscriminatory
rules, such regulation will, in principle, not
require compensation. The situation may be different when the
pursuance of a legitimate policy goal requires the imposition of a
disproportionate or unreasonable burden for foreign investors or
when general regulation has the result of unequally burdening
specific investors who are, because of special circumstances,
affected more than other investors. In such cases of general
regulation imposing “special burdens” on some, but not all
investors, compensation may be necessary in order to
counterbalance disproportionate burdens. 232
The argument that umbrella clauses do not remove the
power of the host State to terminate or regulate investor-State
contracts in the public interests can also be supported by
drawing a parallel to the protection of property against
expropriation under both customary international law and
investment treaties. With regard to both bodies of law, States
are entitled to take property of foreign investors based on the
State’s power of eminent domain for a public purpose,
implemented in a non-discriminatory manner, and subject to
(2008).
232. Cf. Thomas W. Wälde & Abba Kolo, Environmental Regulation, Investment
Protection and “Regulatory Taking” in International Law, 50 INT’L & COMP. L.Q.
811, 845−46. (2001) (discussing a similar view in the context of the regulation of
property).