Umbrella Clause

I. Definition

Carved in the 1950s for the purposes of improving the protection of investor-State contracts,¹ umbrella clauses provide that host States shall “observe” (or e.g. “respect”, “comply with”, “fulfil” or “ensure the observance of”) “obligations” (or e.g. “undertakings” or “commitments”) they have “entered into” (or e.g. “assumed” or “incurred”) with regard to investments. Umbrella clauses cover only undertakings of the host State and not those of foreign investors.² Each umbrella clause should be interpreted in accordance with its own particular terms.

II. General treaty practice

Umbrella clauses appear in around 40% of investment protection treaties.³ Some treaties exclude umbrella clause disputes from the scope of the consent to arbitrate.⁴

III. Distinction with other related clauses

Umbrella clauses should not be confused with the obligation to create and maintain a legal framework apt to guarantee the compliance of commitments towards investors, preservation-of-right or stabilization clauses.⁵

IV. Effect

The effect of umbrella clauses remains debated. Four main interpretations have emerged.

Umbrella clauses merely require States to enact a legal framework enabling investors to enforce commitments entered into by the host State.⁶

Umbrella clauses cover only breaches of contracts or undertakings committed in the exercise of sovereign authority/power.⁷ This interpretation has been challenged.⁸

Umbrella clauses internationalise contracts and unilateral undertakings of the host State. Very few tribunals, if any, have adopted this approach.⁹ Several tribunals have expressly disagreed with this interpretation.¹⁰

Umbrella clauses are an enforcement mechanism but do not internationalise contracts and unilateral undertakings of the host State.¹¹ Under this interpretation, umbrella clauses have essentially a jurisdictional function.¹² There is quasi-consensus around this interpretation.

V. Applicable law

Umbrella clauses raise the question of the applicable law:

With respect to the issues of existence and scope of the obligation, the applicable law is the domestic law of the host State (or, for contractual obligations, the law applicable to the contract of the parties).¹³

With respect to the execution of the obligation, a majority of authors and arbitral tribunal considers that the applicable law is the law of the host State (or, for contractual obligations, the law applicable to the contract).¹⁴ A minority consider that international law is applicable, whether or not it has been designated in the contract or the undertaking.¹⁵

VI. Material scope

With respect to their material scope, two types of umbrella clause may be distinguished:

The first type refers only to contractual obligations, expressly or implicitly.¹⁶ Despite the English wording of the umbrella clause of the ECT,¹⁷ it is generally admitted that it applies only to consensual obligations, not to a State's general legislation.¹⁸

The second type covers contracts and unilateral undertakings whatever their source (e.g. licence, regulation, law),¹⁹ as long as they are of a specific nature.²⁰ General legislative acts would however be excluded from the scope of umbrella clauses.²¹ A minority of tribunals disagrees.²² A limited number of tribunals limits the scope of umbrella clauses to de jure imperii obligations,²³ whereas other tribunals refuse to restrict the scope of umbrella clauses, absent explicit language of the relevant BIT.²⁴ See the application of an umbrella clause to claims related to a law on taxation.²⁵

In practice, tribunals found a breach of umbrella clauses as a result of a failure to comply both with legal²⁶ and contractual²⁷ obligations, including under the ECT.²⁸

VII. Privity

As regards the issue of privity of contract, two questions arise.

Do umbrella clauses also cover contracts concluded by a State entity having its own legal personality? No, according to the case law.²⁹ In the absence of textual evidence in the umbrella clause, the investor must prove that the host State intended to be bound by contracts concluded by its State entity.³⁰ The domestic law of the host State controls this determination.³¹ As a matter of principle, the State responsibility rules on attribution are not applicable to this question,³² although some tribunals have found to the contrary.³³

Is a shareholder, an affiliate or the parent company of the investor entitled to invoke the responsibility of the host State under the umbrella clause? No, according to the majority of arbitral tribunals.³⁴ A minority of tribunals found that, when the umbrella clause refers to obligations “related to investments”, claims of shareholders or parent companies are admissible.³⁵

VIII. Jurisdiction

The impact of a dispute settlement contract clause is also debated. Arbitral tribunals have either declined jurisdiction,³⁶ proceeded to the merits³⁷ or stayed proceedings pending the decision of the contractually agreed forum.³⁸ See also Treaty claims / Contract claims.

IX. Application through a most-favoured nation clause

10.

Umbrella clauses have usually been considered as substantive provisions that could be imported into a treaty through the effect of a most-favoured nation clause.³⁹ Some tribunals refused to do so when this would amount to introducing a new substantive right into the treaty.⁴⁰

Bibliography

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Subsequent citations of this document as a whole:

Subsequent citations of this excerpt:

Umbrella Clause

Umbrella Clause

I. Definition

II. General treaty practice

III. Distinction with other related clauses

IV. Effect

V. Applicable law

VI. Material scope

VII. Privity

VIII. Jurisdiction

IX. Application through a most-favoured nation clause

Bibliography

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