Enabling Private Ordering - the University of Minnesota Law School

94 MINNESOTA JOURNAL OF INT’L LAW [Vol. 18:1
opportunistic behavior of the host State that can undermine the
initially-struck bargain, independent of whether the host State’s
breach was based on commercial or sovereign conduct. By
providing a forum for settling disputes arising out of investor-
State relations, umbrella clauses therefore enable effective and
comprehensive “private ordering” between investors and host
States because the investor is in a position to enforce promises
made by the State and have a sanction imposed in the form of
damages in case they are breached. As regards their scope of
application ratione materiae, this article argues that umbrella
clauses cover specific promises by host States contained in
investor-State contracts, but also those quasi-contractual
commitments under domestic law, including administrative law
instruments and legislation, that specifically aim at inducing
certain investment-related activity and are thus functionally
equivalent to an investor-State contract.
Viewing the function of umbrella clause in enabling “private
ordering” in investor-State relations can also be supported with
arguments stemming from an economic analysis of what
institutional infrastructure is necessary in order to allow for
efficient investor-State cooperation. Efficient cooperation
between investors and host States, it was argued, requires
above all the immunization of the contractual relationship
against opportunistic behavior of the host State, independent of
whether it materializes in sovereign or commercial conduct,
through institutionalizing structures of ex post control and
governance by third-party dispute settlement. While customary
international law as well as investment treaty standards such
as the guarantee of fair and equitable treatment or the concept
of indirect expropriation already protected foreign investments,
including investor-State contracts, against interference of a
sovereign nature, breaches of investor-State contracts based on
commercial conduct of the host State were left uncovered under
international law. Consequently, it was argued that umbrella
clauses aimed at closing this gap in protection by stabilizing
investor-State cooperation ex post by offering effective
enforcement mechanisms on the level of international law in
order to counter opportunistic host State behavior of both
sovereign and commercial nature. The more restrictive approach
that limits the scope of application of umbrella clauses to
contract breaches à titre de souverain, by contrast, fails to
provide the enforcement mechanisms necessary to counter
opportunistic behavior by host States with respect to simple,