One common mode of entry for foreign direct investment is through the making of a foreign investment contract with the State (State contracts). The issue of State contracts, as it relates to international investment agreements, concerns a number of specific matters. First, the extension of investment agreements´ protection to State contracts depends on the scope of the definition of investment, the exclusion of certain State contracts from their coverage and in how far dispute settlement provisions of the agreements apply to State contracts. Arbitral tribunals have interpreted so-called umbrella clauses differently so that their protective effect cannot be fully assessed yet. Second, the preservation of host country discretion in the negotiation, conclusion and regulation of State contracts can be based on inscribing the basic principle of good faith and periodic review into an international investment agreement. Third, the duties towards private investor parties to State contracts compensate for the more favourable position of the State by allowing for clauses on stabilization, choice of law, arbitration and the breach of contract on the part of the host country government. Fourth, the development of substantive regimes of State contracts in international investment agreements is related to the commitment on the side of the government.
Accordingly, the aim of this paper is to consider more specific IIA provisions that act to affect the negotiation, conclusion and observance of State contracts by both the governmental and private parties. The substantive standards of treatment that governments may be expected to observe, in relation to foreign investors that are parties to State contracts, are covered by other papers in this Series.