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UMBRELLA CLAUSES IN INTERNATIONAL INVESTMENT LAW

- By Harshad Pathak

Keywords: arbitration, umbrella clauses, international treaty obligations, uninhibited creative choices

The jurisprudence developed by investment arbitration tribunals is often criticised for being inconsistent. And if one examines the interpretation of Umbrella Clauses over the past few years, this criticism is justified. While it is commonplace for a body of law to be divided in its understanding of a legal principle, when this division leads to possibly four distinct schools of interpretation, it is likely to promote arbitrariness in the decision-making process. It is in the above context that one must assess the varying interpretations of Umbrella Clauses in international investment law. The purpose is not to suggest a preference for a particular school of thought, but as a first step, merely gauge the breadth of the inquiry at hand.


An Umbrella Clause is a treaty provision that is bereft of a static definition; its scope depending on the manner in which it is articulated. To borrow words from James Crawford, “[s]ome umbrella clauses are more equal than others to the interpretative weight put upon them or to put it in less Orwellian terms, everything depends on their actual language.” [1]

Nonetheless, at the risk of oversimplification, an Umbrella Clause refers to an undertaking contained in a treaty by which the contracting parties commit to observe, or at least guarantee the observance of its previously assumed commitments, in relation to investments made by the investors of the other contracting party.


For instance, Article 87(2) of the India-Japan CEPA 2011 is a straightforward example of an Umbrella Clause, which states that “[e]ach Party shall observe any obligation it may have entered into with regard to investment activities in its Area of investors of the other Party.”[2] However, as confirmed by the Tribunal in Salini v. Jordan,[3] this cannot be said about Article 2(4) of the Italy-Jordan BIT 1996, by which a contracting party does not undertake to observe its previous commitments, but only agrees to “create and maintain in its territory a legal framework apt to guarantee to investors the continuity of legal treatment, including the compliance, in good faith, of all undertakings assumed with regard to each specific investor.”[4]


Despite the above guidance, the nature of the obligation contained in an Umbrella Clause and its implications in investor-state dispute settlement (ISDS) poses several questions that divide opinion even today. Broadly, it is possible to interpret an Umbrella Clause in four distinct manners.


Firstly, as observed by the Tribunal in SGS v. Pakistan,[5] an Umbrella Clause does not elevate a host state’s non-treaty commitments to a treaty obligation that is grounded in the BIT. Consequently, an investor cannot rely on an Umbrella Clause to advance a treaty claim against a host state, premised solely on the latter’s alleged breach of a non-treaty commitment. Even though this interpretation was considered “more than conclusive” by the tribunal in El Paso v. Argentina [6] (even though the tribunal did not endorse it fully), it has not received much support in recent years.


Secondly, the next school of interpretation builds on the decision in SGS v. Pakistan. However, it ultimately limits the effect of umbrella clauses to contractual breaches committed by the host state in the exercise of sovereign authority.[7] For instance, despite its partial endorsement of SGS v. Pakistan, the Tribunal in El Paso v. Argentina confined its jurisdiction to the “claims based on the violation of an investment agreement entered into by the foreign investor with the State as a sovereign.”[8]


Thirdly, the tribunal in SGS v. Philippines differed from the above interpretations and furthered a more balanced approach. On the one hand, the tribunal disagreed with SGS v. Pakistan to note that where the commitments made by a state towards any specific investment create binding obligations under the applicable municipal law, an Umbrella Clause brings these commitments within the treaty framework.[9] On the other hand, the tribunal cautioned that it did not elevate a non-treaty obligation into a treaty obligation since an Umbrella Clause does not alter the fact that the commitment at issue continues to be governed by the applicable municipal law.[10] Consequently, the tribunal construed an Umbrella Clause as an expansion of its jurisdiction ratione materiae; enabling it to adjudicate claims based on an alleged breach of non-treaty obligations assumed by the host state under the applicable municipal law. In case of contractual commitments, this was, however, subject to any exclusive forum selection clause present in the contract in question.[11]


A similar approach was adopted by the tribunal in BIVAC v. Paraguay, where the tribunal noted that the expression “any obligation” in the Umbrella Clause was sufficiently broad to encompass a contractual arrangement entered into by the investor and the host state.[12]

Finally, in stark contrast to the decision in SGS v Pakistan, the fourth school of interpretation suggests that an Umbrella Clause elevates a non-treaty obligation of a host state to the level of a treaty obligation; thereby, bringing it within the jurisdiction ratione materiae of an investment treaty arbitral tribunal. For instance, in Eureko v. Poland, the tribunal, through a majority decision, observed that the respondent state’s breach of its contractual commitments may be viewed as a treaty breach since it transgresses its treaty obligation to observe any obligations it may have entered into with regard to the claimant’s investments.[13] A clearer affirmation of this position arrived in Noble Ventures v. Romania, where the tribunal concluded that “[a]n umbrella clause is usually seen as transforming municipal law obligations into obligations directly cognizable in international law.”[14]

The above analysis demonstrates that an Umbrella Clause is susceptible to various competing interpretations; with each interpretation supported by a tenable analysis. As stated above, the object is not to opine on the appropriateness of any particular approach, which naturally necessitates a far more nuanced analysis. To the contrary, the object is to merely highlight the wide field of “uninhibited creative choices”[15] proffered by international investment law for interpreting Umbrella Clauses.

In what is increasingly perceived to be a defining trait of ISDS jurisprudence, this inconsistency in arbitral interpretation is detrimental to the uniform development of international investment law. However, it also provides fertile ground for practitioners, academics and arbitrators to continuously engage with the recurring issue of Umbrella Clauses with zeal. Whereas proponents of ISDS and those representing the interests of foreign investors have incentives to favour the third or fourth school of interpretation, those skeptical of the ISDS regime tend to ally with either the first or the second school.

The above divide is best illustrated by the decision in Eureko v. Poland. While the majority of the tribunal interpreted an Umbrella Clauses as elevating a state’s non-treaty obligation to the level of a treaty obligation, this finding also invited a Dissenting Opinion from Professor Jerzy Rajski Rajski. In a proverbial tribute to the Argentine jurist Carlos Calvo, Professor Rajski did not hesitate in condemning the majority for creating a privileged class of foreign investors, who may conveniently transform their contractual disputes with state-owned companies into treaty disputes, and circumvent the exclusive jurisdiction clauses contained in these contracts.[16]

No matter where an appropriate answer may lie, what is evident is that the issue of Umbrella Clauses in international investment law provides some encouragement to all.


Harshad Pathak is an alumnus of the Geneva LL.M. in International Dispute Settlement (MIDS). At present, Mr. Pathak is a senior associate at P&A Law Offices, focusing on the practice areas of commercial and investment treaty arbitration, and civil litigation.


Preferred Method of Citation – Harshad Pathak, ‘Umbrella Clauses in International Investment Law’ (ICAR, 14 July 2020) < insert link of the accessed article here>.


ENDNOTES

[1] James Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24 Arbitration International 351, 366. [2] Comprehensive Economic Partnership Agreement between Japan and the Republic of India (2011), Art. 87(2). [3] Salini Costruttori S.p.A. & Italstrade S.p.A. v. The Hashemite Kingdom of Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction (9 November 2004), ¶126. [4] Agreement between the Government of the Hashemite Kingdom of Jordan and the Government of the Italian Republic on the Promotion and Protection of Investments (1996), Art. 2(4). [5] SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction (6 August 2003), ¶165. [6] El Paso Energy International Company v. Republic of Argentina, ICSID Case No. ARB/03/15, Decision on Jurisdiction (27 April 2006), ¶71. [7] James Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24 Arbitration International 351, 367. [8] El Paso Energy International Company v. Republic of Argentina, ICSID Case No. ARB/03/15, Decision on Jurisdiction (27 April 2006), ¶86. [9] SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 January 2004), ¶117. [10] SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 January 2004), ¶126. [11] SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 January 2004), ¶143. [12] BIVAC v Paraguay, ICSID Case No. ARB/07/9, Decision on Objections to Jurisdiction (29 May 2009), ¶141. [13] Eureko BV v. Poland, Partial Award (19 August 2005), ¶250. See also Consorzio Groupement L.E.S.I.-DIPENTA v. People’s Democratic Republic of Algeria, ICSID Case No. ARB/03/08, Award (10 January 2005), ¶25(ii). [14] Noble Ventures v. Romania, ICSID Case No. ARB/01/11, Award (12 October 2005), ¶53. [15] Julius Stone, ‘Functional Elements in Treaty Interpretation – A Study in the International Judicial Process’ (1954) 1 SLR 344, 360. [16] Eureko BV v. Poland, Partial Award (19 August 2005), Dissenting Opinion of Professor Jerzy Rajski Rajski, ¶11.


The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.

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