Enabling Private Ordering - the University of Minnesota Law School

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92 MINNESOTA JOURNAL OF INT’L LAW [Vol. 18:1 meaning of Article II(2)(c), by virtue of targeting foreign investors and applying specifically to their investments, that gave rise to liability under the umbrella clause. 257 What is decisive for a commitment to be covered is whether the host State’s act contains a specific commitment that serves as a functional substitute for an investor-State contract. 258 While determination of whether a legislative commitment is specific enough to constitute a commitment covered under an umbrella clause will depend on the specific circumstances of the case, it will usually be necessary for the legislative commitment to confer specific and individual rights upon investors as an incentive to invest, or make specific promises in return for certain actions an investor engages in. This is the case, for example, if the host State passes general legislation that intends to promote investments in a specific economic sector and is fully aware that the stability of the legislative promise is the precondition for investors to engage in the desired activity. What will, by contrast, not be sufficient as constituting a commitment covered by an umbrella clause are rules of the general legal framework that merely aim at regulating certain investment activities without intending to create reliance of the investor in the stability of this framework or intending to create a deliberate incentive for certain investment activities. 257. LG&E Energy Corp. v. Argentine Republic, ICSID (W. Bank) Case No. ARB/02/1, Decision on Liability, para. 174 (Oct. 3, 2006) (citing v. Philippines, ICSID Case No. ARB/02/6, at para. 121, concerning the juxtaposition of general and specific commitments). 257. See also FRICK, supra note 206, at 205 (“Die Vertragsstaaten sichern sich gegenseitig zu, auch solche nicht-völkerrechtliche Verpflichtungen einzuhalten, die sie in Bezug auf Kapitalanlagen von Investoren der anderen Vertragspartei in ihrem Hoheitsgebiet übernommen haben. Damit sind all die einseitigen oder auf Grund vertragsähnlicher Vereinbarungen gemachten Zusagen staatlicher Zulassungsstellen angsprochen. Die speziellen Verpflichtungen, die eine Einzelstaat gegenüber einem ausländischen Investor im Interesse der Förderung der nationalen Wirtschaft übernimmt, werden in dieser Weise ihrem Inhalt und Bestand nach völkerrechtlich abgesichert, auch soweit sie ausschließlich auf innerstaatlichem Recht beruhen und nicht in irgendeiner Form‚ internationalisiert’ sind.”) (footnotes omitted). Recent Swiss investment treaty practice also confirms that umbrella clauses do not only intend to cover contractual promises of host States vis-à-vis foreign investors but also specific obligations and promises stemming from national legislation, international agreements, or undertakings under administrative law. See MICHAEL SCHMID, SWISS INVESTMENT PROTECTION AGREEMENTS: MOST- FAVOURED-NATION TREATMENT AND UMBRELLA CLAUSES 63 (2007).
2009] UMBRELLA CLAUSES 93 VI. CONCLUSION: TAMING THE SPIRITS The application and interpretation of umbrella clauses have posed significant problems for arbitral tribunals and brought about incompatible and conflicting decisions. Inconsistencies have arisen with respect to the construction of umbrella clauses, the scope of commitments covered by them, the effect of the clauses on the jurisdiction of treaty-based tribunals, and their effects on the regulatory power of States regarding investor- State cooperation. Above all, what has been unsettled since arbitral tribunals began applying umbrella clauses is their function and relation to customary international law, with its limited protection of investor-State contracts. In this regard, it is essentially two views that compete. One regards the clauses as a codification of customary international law that merely clarifies that investor-State contracts are protected against expropriatory conduct. Consequently, umbrella clauses in this view require that the host State engages in conduct à titre de souverain in breaching one of its earlier promises vis-à-vis the foreign investor. The opposite position attributes a more expansive function to umbrella clauses. In this view, the clauses allow investors to bring a claim for the violation of an investment treaty based on the breach of an investment-related promise by the host State, independent of whether the breach was based on sovereign or commercial conduct. This article argues that the more restrictive view that requires host State conduct à titre de souverin is unconvincing and does not give a convincing account of the function of umbrella clauses, since the protection against sovereign conduct is already afforded by other investors’ rights, in particular by the protection against direct and indirect expropriation and the fair and equitable treatment standard. The restrictive approach thus turns umbrella clauses into superfluous treaty provisions. Furthermore, arguments concerning the historical emergence of umbrella clauses suggest that the clauses were intended to serve a proper function in filling gaps resulting from the traditional dualist conception of international law that distinguished categorically between international law and national law, the investor-State and the inter-State relations, as well as claims for the breach of contracts and treaties. The function of umbrella clauses, it was argued, thus consists in opening recourse to an international dispute settlement forum in order to enable investors to enforce contractual and quasicontractual promises made by the host State and to counter
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Enabling Private Ordering - the University of Minnesota Law School

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