Enabling Private Ordering - the University of Minnesota Law School

2009] UMBRELLA CLAUSES 95
commercial breaches that do not involve sovereign conduct.
While this enforcement function of umbrella clauses
reinforces the principle of pacta sunt servanda for the host
State’s commitments vis-à-vis the foreign investor, it does not
alter the legal nature of the relationship between investor and
host State. Umbrella clauses do not transform breaches of
commitments under domestic law into breaches of international
law; they merely open recourse to investment treaty arbitration
in order to enforce host State promises that are governed by
municipal law, or whatever law is chosen by the parties.
Whether a host State has made a specific commitment and
whether this commitment has been breached is determined
purely according to the law governing the relations between the
investor and the host State, not by the umbrella clause.
Similarly, umbrella clauses are limited to targeting
opportunistic behavior of host States and do not prohibit nonopportunistic
behavior, such as the alteration of host State
promises in view of future contingencies that affect the
relationship between foreign investor and host State, nor do
they influence the filling of gaps that become apparent in
investor-State relations. Consequently, umbrella clauses do not
exclude exceptions to the sanctity of contracts based on
doctrines of change of circumstances, force majeure, or necessity,
nor do they exclude the State’s police power to regulate or even
terminate investor-State contracts in the public interest, subject
to a compensation requirement depending on the circumstances.
With respect to the substantive protection they offer,
umbrella clauses do not impose stricter standards upon the
observance of commitments by States vis-à-vis aliens than
customary international law. They do, however, provide an
international forum for the settlement of disputes arising out of
the breach of a host State’s promise vis-à-vis a foreign investor
which encompasses not only breaches that were traditionally
considered to constitute violations of customary international
law, but offer dispute settlement and enforcement for any
breaches of host State promises. Access to treaty-based
arbitration for such disputes is determined independently by the
obligation of the host State under the umbrella clause to observe
commitments vis-à-vis foreign investors. Jurisdiction of treatybased
tribunals, it was argued, can also not be excluded by
forum selection clauses entered into in the investor-State
relations as the claims for the violation of the umbrella clause
constitute a treaty claim even though it is closely connected to a