Author

Mr Benjamin Samson

Consultant in International Law - Independent

Umbrella Clause

I. Definition

1.

Carved in the 1950s for the purposes of improving the protection of investor-State contracts, 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. Each umbrella clause should be interpreted in accordance with its own particular terms.

II. General treaty practice

2.

Umbrella clauses appear in around 40% of investment protection treaties.1

III. Distinction with other related clauses

3.

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.

IV. Effect

4.

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

a.

Umbrella clauses merely require States to enact a legal framework enabling investors to enforce commitments entered into by the host State.2

b.

Umbrella clauses cover only breaches of contracts or undertakings committed in the exercise of sovereign authority/power.3 This interpretation has been challenged.4

c.

Umbrella clauses internationalise contracts and unilateral undertakings of the Host State.5 Several tribunals have disagreed with this interpretation.6

d.

Umbrella clauses are an enforcement mechanism but do not internationalise contracts and unilateral undertakings of the Host State.7 Under this interpretation, umbrella clauses have merely a jurisdictional function. There is quasi-consensus around this interpretation.

V. Applicable law

5.

Umbrella clauses raise the question of the applicable law:

a.

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).8

b.

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).9 A minority consider that international law is applicable, whether or not it has been designated in the contract or the undertaking.10

VI. Material scope

6.

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

a.

The first type refers only to contractual obligations, expressly or implicitly.11 Despite the English wording of the umbrella clause of the ECT, it applies only to contractual obligations.12

b.

The second type covers contracts and unilateral undertakings whatever their source (e.g. licence, regulation, law),13 as long as they are of a specific nature.14 General legislative acts would however be excluded from the scope of umbrella clauses.15 A minority of tribunals disagrees.16 A limited number of tribunals limits the scope of umbrella clauses to de jure imperii obligations,17 whereas other tribunals refuse to restrict the scope of umbrella clauses, absent explicit language of the relevant BIT.18

 

VII. Privity

7.

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

a.

Do umbrella clauses also cover contracts concluded by a State entity having its own legal personality? No.19 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.20 The domestic law of the Host State controls this determination.21 As a matter of principle, the state responsibility rules on attribution are not applicable to this question,22 although some tribunals have found to the contrary.23

b.

Is a shareholder or the parent company of the private party to the contract entitled to invoke the responsibility of the Host State under the umbrella clause? No, according to the majority of arbitral tribunals.24 A minority of tribunals found that, when the umbrella clause refers to obligations “related to investments”, claims of shareholders or parent companies are admissible.25

VIII. Jurisdiction

8.

The impact of a dispute settlement contract clause is also debated. Arbitral tribunals have either declined jurisdiction,26 proceeded to the merits27 or stayed proceedings pending the decision of the contractually agreed forum.28

BIBLIOGRAPHY

Antony, J., Umbrella Clauses Since SGS v. Pakistan and SGS v. Philippines - A Developing Consensus, Arbitration International, 2013, pp. 607-639.

Ben Hamida, W., La clause relative au respect des engagements dans les traités d’investissements, in Leben, C. (ed.), Le contentieux arbitral transnational relative à l’investissement : Nouveaux développements, 2006, pp. 53-105.

Cahin, G., La clause de couverture (dite umbrella clause), Revue Générale de Droit International Public, 2015, pp. 103-144. 

Cazala, J., La clause de respect des engagements, in Leben, C. (dir.), Droit international des investissements et de l’arbitrage transnational, 2015, pp. 347-173. 

Crawford, J., Treaty and Contract in Investment Arbitration, Arbitration International, 2008, pp. 351-374.

Feit, M., Attribution and the Umbrella Clause – Is there a Way out of the Deadlock?, Minnesota Journal of International Law, 2012, pp. 21-41.

Footer, M., Umbrella Clauses and Widely-Formulated Arbitration Clauses: Discerning the Limits of ICSID Jurisdiction, The Law & Practice of International Courts and Tribunals, 2017, pp. 87-107.

Gadelshina,. E., Hermeneutic Reflections on the Specific Purpose of Umbrella Clauses, The Journal of World Investment and Trade, 2013, pp. 804-828.

Gallus, N., An Umbrella just for two?: BIT Obligations Observance Clauses and the Parties to a Contract, Arbitration International, 2008, pp. 157-169.

Gazzini, T., and Tanzi, A., Handle with care: Umbrella clauses and MFN treatment in investment arbitration, The Journal of World Investment & Trade, 2013, pp. 978-994.

Halonen, L., Containing the Scope of the Umbrella Clause, in Weiler, T. (ed.), Investment treaty arbitration and international law, 2008, pp. 27-38.

Kunoy, B., Singing in the Rain: Developments in the Interpretation of Umbrella Clauses, The Journal of World Investment and Trade, 2006, pp. 275-300.

Lemaire, S., La mystérieuse ‘Umbrella Clause’ (interrogations sur l’impact de la clause de respect des engagements sur l’arbitrage en matière d’investissements), Revue de l’arbitrage, 2009, pp. 479-502.

Lim, C.L., Is the Umbrella Clause Not Just Another Treaty Clause?, in Alternative visions of the international law on foreign investment : essays in honour of Muthucumaraswamy Sornarajah, 2016, pp. 349-376.

Mayer, P., Contract claims et clauses juridictionnelles des traités relatifs à la protection des investissements, Journal du Droit International, 2009, pp. 71-96.

Miles, C.S., Where’s my Umbrella?: an Ordinary Meaning Approach to Answering three Questions that have emerged from the Umbrella Clause Debate, in Weiler, T. (ed.), Investment treaty arbitration and international law, 2008, pp. 3-26.

Schill, S.W., Enabling Private Ordering: Function, Scope and Effect of Umbrella Clauses in International Investment Treaties, Minnesota Journal of International Law, 2009, pp. 1-97.

Sinclair, A.C., The Origins of the Umbrella Clause in the International Law of Investment Protection, Arbitration International, 2004, pp. 411-434.

Sinclair, A.C., Umbrella Clause, in Bungenberg, M., and Others (eds.), International Investment Law, 2015, pp. 887-958.

Schreuer, C., Travelling the BIT Route: of waiting Periods, Umbrella Clauses and Forks in the Road, The Journal of World Investment and Trade, 2004/2, pp. 231-256.

Wälde, T.W., The ‘Umbrella’ Clause in Investment Arbitration. A Comment on Original Intentions and Recent Cases, The Journal of World Investment and Trade, 2005, pp. 183-236.

Wong, J., Umbrella Clauses in Bilateral Investment Treaties: of Breaches of Contract, Treaty Violations, and the Divide between Developing and Developed Countries in Foreign Investment Disputes, George Mason Law Review, 2006, pp. 135-177.

Yannaca-Small, K., Interpretation of the Umbrella Clause in Investment Agreements, OECD Working Papers on International Investment, 2006/03.

Zolia, V., Effect and Purpose of "Umbrella Clauses" in Bilateral Investment Treaties: Unresolved Issues, Transnational Dispute Management, 2005.

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