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
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
V. Applicable law
Umbrella clauses raise the question of the applicable law:
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
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
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
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
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
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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