Introduction
For the last two decades the popularity of the international investment arbitration and legislation has been dramatically increased. The volume of cases considered by virtue of the interpretation of the provisions of the bilateral investment treaties signed between the parties of the commercial relations has been increased. In addition, this trend reflects the preference of the business units and states in signing agreements with the umbrella clauses due to their simplicity and efficiency in determination of the disputes between the parties. The availability of several mechanisms that can be used for the determination of the interests of the parties is highly appreciated by the states in the international arena. This implies that any bilateral investment treaty is drafted in the manner so that to protect the interests of the parties with guarantee of the enforcement of the rights of investor and proper resolution of the possible disputes out of this agreement. With that, the investment arbitration treaty ensures the high level of flexibility in the determination of the issues by the parties through different legal proceedings under the governance of the International Centre for the Settlement of Investment Disputes. In this regard, the main concern that should be taken into account by the parties to the bilateral investment treaty is the process of development and inclusion of relevant umbrella clause in the text of this legal instrument as it affects directly the enforcement of the bilateral investment treaty, its legal force. Given the importance of the umbrella clause as the instrument for the protection of the interests of the parties to the investment agreement, this essay will explore the notion of the umbrella clause and its concept under the legal framework of the legislation existing in sphere of the international investment legislation. Moreover, the historical development of this concept will be addressed in reference to the case law on the clarification of the scope of umbrella clauses and their application. Consequently, the implications and perspectives on the inclusion of umbrella clauses in the text of the bilateral investment treaties will be defined.
Notion of umbrella clause in Bilateral Investment Treaty
The nature of the bilateral investment treaties is regarded ambiguous in view of its existence as the regulatory instrument for the protection of the interests of the states. With that, there is no common approach to the inclusion of the obligations of the states in the text of the agreement, infringement of the provision of the bilateral investment treaty and other claims. In this regard, it should be stated that the parties usually prefer to develop and include own interpretation of the fulfilment of obligations under the bilateral investment treaty (hereinafter referred as “BIT”) with the subsequent creation of the appropriate obligations. Some commitments are referred to the group of umbrella clause requirements based on which the host state is obliged to take care of the fulfilment of undertake commitment. In fact, the usage of the umbrella clauses contributes to the improvement of the protection over the interests of the investors to the bilateral investment agreement while the state gains an opportunity to avoid violation of the provisions of the agreement signed with the foreign business units as the investors.
There is no common approach to the drafting and inclusion of the umbrella clauses in the text of the bilateral investment agreement. In this regard, the notion of the umbrella clause as the important provision of the investment treaty is better to understand from the different types of these clauses, their scope and applicability. The first group of the umbrella clauses is referred to the restrictive provisions. These clauses imply application of the provisions of particular investment agreement where this clause is included so that to avoid reference to the norms of other legal instrument. Therefore, the drafters of this type of restrictive umbrella clauses intend to reduce the scope of this provision. In particular, the umbrella clause that is provided in the text of the BIT signed between Mexico and Iceland can be regarded as the restrictive umbrella clause. The peculiarity of this provision lies in the fact that it applied to the observance of the obligations of the contracting parties to the agreement that have been envisaged in written form. With that, it obliges the parties to the contract to consider disputes between them through the mechanisms included in the text of the agreements with direct reference to the obligations in question. Considering the nature of this clause, it restrictive application and scope is evident so that the parties do not have other options to the resolution of the cases or attempt to challenge non-performance of the obligations that are not prescribed directly. In addition to this restrictive umbrella clause, there is another type of such provision. In particular, the example of the BIT existing between India and Kuwait sets in stone that the contracting parties should fulfil obligations pertaining to the protection of the investments while the disputes and other claims appeared as the result of this protection should be redressed in compliance with the other provisions of this agreement. This statement should be understood as such that the parties are allowed to rely on mirror effect of the application of umbrella clause in interpretation and usage of this provision. Namely, this provision will impose the judiciaries to establish jurisdiction out of the text of the contract between the parties beyond the substantive provisions of the BIT. The case law on this matter as Lanco dispute confirms that it is up to the tribunal to express its desire and consent to consider similar dispute. However, it is not recommended for the parties to draft umbrella clauses of such nature and they prevent proper enforcement of the obligations and contract itself.
The other type of the umbrella clause is referred to the prototypes. These provisions are regarded as the most common to the approach developed in the text of the BIT signed in 1959 between Pakistan and Germany. This form of the umbrella clause implies that the contracting party to the bilateral investment agreement should take measures pertaining to the observance of the obligation it has undertaken with the purpose to protect the investments of the foreign business units and nationals across the whole territory. Regardless the fact that the wording of this provisions is the simplest one, the judiciaries and parties have several problems during the interpretation of the scope of this provision. In particular, it is usually hard to define what obligations are covered with this notion so that the scope of the umbrella clause should be defined on the case-by-case basis in view of the commitments included by the parties of the agreement. Besides, the tendency on the inclusion of such wording in the text of the bilateral investment agreements is the most common for the states in sphere of the investment arbitration.
The last group of the umbrella clauses is the widest one. It is called as the widely drafted umbrella clauses that extend to several obligations of the contracting parties. The text of this clause usually implies the availability of the compromise between the parties to the bilateral investment treaty that should be maintained in reference to the obligations pertaining to the protection of the investments. Besides, there is one feature of this clause as the parties do not have legal right to file this case for the consideration to the national judicial institution as it should be considered exclusively with the help of the ICSID tribunal. With that, this clause provides for separate legal effect as its application means that the parties state about intentions to act in particular manner while this clause does not bear automatically the appearance of the obligations between the parties. In cases Saini Construttori S.p.A. and Italstrade v. Hashemite Kingdom of Jordan, the arbitration tribunals decided that this group of umbrella clauses does not lead to the creation of the international liability of the contracting parties to defend the interests of all investors. Hence, this clause is used for the establishment of the legal framework based on which the parties should perform their obligations under the investor contract, while there is not direct commitment that proper treatment should be in place towards all foreign business units.
Evolution of “Umbrella Clauses” Concept
The concept of umbrella clauses as the provisions of the bilateral investment agreement appeared in 1950s. However, its importance and effectiveness of usage in the relations between the parties of the international investment arbitration is appreciated only for the recent few years. One of the cases of first usage of umbrella clauses in the investment agreement is referred to the provisions of the Abs Draft International Convention for the Mutual Protection of Private Property Rights in Forting Countries of 1956. According to the text of this legal instrument, the state was obliged to ensure the provision of specific treatment to the national and non-nationals as the direct obligation of the party to this document. With that, in the following version of this legal act as 1959 Abs-Shawcross Draft Convention on Foreign Investment, it was established that any party to the convention should have taken all relevant measures to that to ensure existence of the observance of any business units in reference to the capabilities of the country receiving the investment from the other party to the convention. After the drafting process of this document, the umbrella clause was inserted in the text of the Bilateral Investment Treaty that was signed between two parties as Germany and Pakistan. In compliance with the text of this agreement, the party to the agreement took obligations and observe their fulfilment in the proper manner so that to protect investments of the individuals and business units of the other party to the treaty. Furthermore, the OECD recognized the importance of the umbrella clauses as the mechanism for the regulation of the performance of the duties of the parties. This approach was reflected in the provisions of the OECD Draft Convention of 1967 on the Protection of Foreign Property.
In contrast to the above-mentioned development of the umbrella clause as the legal notion, some scholars believe that this provision takes origins from the international law and its principles pacta sunt servanda. According to the idea of the umbrella clause, the contracting party to the BIT should perform its obligations towards foreign business units or other parties involved with the appropriate aspect and reasonable methods. With that, one should understand that the umbrella clause was designed with the purpose to favour appearance of the violation of the provisions of the investment agreement so that the dispute can be received through the mechanisms of the dispute settlement resolution that are used for the clarification of the nature of the international agreement. Beyond the documents listed above, the other groups of scholars believe that the first cases of the usage of umbrella clauses took place in relation to the provisions of the draft settlement agreement signed by the Anglo-Iranian Oil Company. This business units had significant interest in the oil concessionary agreement while the political instability in Iran gave rise to the adoption of the Iranian Oil Nationalization legislation. This shift resulted in the situation where the state body controlled the transaction and deals of the oil company. Therefore, the Anglo-Iranian Oil Company was in search of the mechanisms by which the significant interest could have been restored. Given the fact that this business unit did not have suitable options for the satisfaction of the claims arising from this situation, it was more than convenient to refer to the umbrella agreement that excused before the United Kingdom and Iran. Therefore, Iran was obliged to fulfil its obligations in favour of the business units as the scope of the umbrella treaty covered in the interests of this organization.
Consequently, the bilateral investment treaty signed between Pakistan and Germany, the model of the bilateral investment agreement of the United States developed in 1983 contains broader umbrella clause drafted in reference to the OECD approach. Namely, this provision states that the party to the treaty should observe any commitment arising in view of the protection of the investment of the business units or nationals of the other country. The other advanced economies accepted this practice as well and nowadays almost all bilateral investment treaties envisage umbrella clause. In order to summarize on the evolution of the umbrella clause, it is possible to state that it is a provision in the bilateral investment agreement that is used for the protection of the obligations of the parties to this agreement while the infringement of these commitments on the protection of the investment of foreign business units or national should be resolved through the mechanisms of the bilateral investment treaty. With that, the evolution of the umbrella clause concept is linked to the case law considered under the premises of the ICSID. In particular, two cases as SGS v. Pakistan, SGS v. Philippines are the most crucial for understanding of the nature and scope of the umbrella clauses, their applicability for the regulation of the relations between the parties to the bilateral investment agreements. Meanwhile, it should be said that in drafting umbrella clauses today, the parties to the investor-state agreements refer to the common clauses that have been already included in the text of the bilateral investment agreements that have been signed with the advanced countries. This approach allows for the parties to ensure enforcement of the obligations and achieve their consideration in the most efficient manner with the dispute settlement mechanisms.
Application of Umbrella Clauses in Case Law
There are two pivotal cases that give insight into the notion of umbrella clause. In particular, the first case of SGS v. Pakistan. According to the merits of the case, the Swiss company entered contractual relations with the Republic of Pakistan for the purposes of accomplishment of pre-shipment inspection. The SGS company pursued the desire to achieve total compliance of Pakistan during importation of the products with the customs requirements. However, Pakistan was not satisfied with the quality of the services delivered by the Swiss partner and opted out to finish this cooperation. In this regard, Pakistan decided to initiate proceedings against Swiss company so that to claim compensation for improper fulfilment of the obligations under agreement. Pakistan believed that the case should have been considered through arbitration because of article 11 of the PSI Agreement. Besides, the Swiss company filed submission for the legal proceedings by virtue of the other type of the dispute settlement mechanism. This implies that the SGS referred to the services of the ICSID for the resolution of the dispute between the Swiss company and Pakistan. The main ground for such submission was the PSI agreement and BIT existing between Switzerland and Pakistan while the later has violated the provisions of these agreements in the protection of the interests of foreign investors and nationals. In addition, the SGS company relied on the umbrella clauses that was stipulated in article 11 of the BIT in question based on which Pakistan should have provided fair and equitable treatment to Swiss investments arriving to the territory of Pakistan. Despite the fact that Pakistan objected to the jurisdiction of the ICSID tribunal on the determination of the claims arising from the text of PSI agreement, the judiciaries of the tribunal have confirmed their authority to consider the case between Swiss company and Pakistan as in relation to the claims under BIT. In the beginning of the examination of the claims of the parties, the ICSID Tribunal referred to article 9 of the BIT and stated that it had the authority to consider all substantive issues pertaining to the protection of the interests of the investors. With that, the tribunal established that the BIT was adopted after signing of the PSI agreement so that the parties could not foresee determination of the disputes by virtue of the ICSID legal proceedings. Therefore, the jurisdiction of ICSID was reasonably justified in reference to the claims of Swiss company.
However, it should be noted that the ICSID tribunal dismissed partially claims on the jurisdiction arising from the umbrella clause claiming by the Swiss company as related to the substantive standards of the BIT agreement. The SGS stood to the position that the umbrella clause should have been read in the manner as it elevated automatically any submission or violation of the provisions of the PSI agreement as equal to the BIT breaches. Besides, the ICSID tribunal did not find any evidence that could support such reasoning and application of umbrella clause. Although, the Tribunal decided that umbrella clause of the BIT allowed to cover contractual relations between the parties of unlimited amount where the commitments of Pakistan as the protector to the investors of the other contracting party to the agreement are envisaged. Hence, the breach of such contractual agreement will be regarded as the infringement of the BIT provisions and obligations. At the same time, the close analysis of the Article 3 and 7 of the BIT revealed that substantive provisions of the BIT agreement will prevail over the simpler violation of the obligations under other contractual relations of the parties.
The other case that is worth attention in view of understanding of the scope and nature of the umbrella clause is the judgment delivered in dispute SGS v. Philippines. In this particular case, the Tribunal decided to consider initially the mirror effect of the umbrella clause. It was stated that the contracting party as the state to the bilateral investment agreement should have proved existence of the legal commitment in reference to the particular investment. Consequently, the Tribunal moved to the analysis of the infringement of the provision of the investor contract as the breach of the provision of the bilateral investment agreement. This violation was considered as the breach of the obligations in the sphere of the international law system. Afterwards, the focus was proceeded to the examination of the overriding effect of the umbrella clause pertaining to the jurisdiction of the tribunal over the case. The judiciaries challenges whether the bilateral investment agreement between the parties could have been regarded as the legal mechanisms for the overriding effect over the umbrella clause in selection of the relevant judicial institution for the determination of the case. With that, the Tribunal concluded that the bilateral investment treaty itself can not be source of the invalidation of the other agreement signed between the parties as the legal basis for the contractual relations between them. Besides, the tribunal decided that the text of the umbrella clause in the agreement signed between Switzerland and Philippines could not be regarded as legally effective. This approach proved that proper drafting of the umbrella clause is the key condition for the enforcement of this provision and subsequent obligations of the parties to this agreement.
Future Perspectives on Usage of Umbrella Clauses
There are several uncertainties around the usage of the umbrella clauses in the bilateral investment agreements. The mere text of the umbrella clause can guarantee for the investor in advance on the effectiveness of the legal proceedings over particular claim. This means that it is recommended for the parties of the investment arbitration treaty to rely on the umbrella clauses for the protection of this interests while it is highly important to draft this provision properly and in view of the previous case law. Besides, there is no guarantee that the tribunal will consider substantive claims of the parties as it will define jurisdiction over the umbrella clause aligning with the exclusive provision. At the same time, it should be noted that the investors of the majority economies prefer to remove the umbrella clauses from the text of the investor agreement so that to achieve clarity in the application of the contractual relations.
Conclusion
The existence of the umbrella clause in the international investment arbitration represent efficient mechanism for the investors to gain increased protection over its assets with the help of the application of the bilateral investment agreement with this clause. Besides, the inclusion of umbrella clauses has twofold effect. In particular, the investor should consider in advance whether certain type of the umbrella clause will be rendered effective by the tribunal. Moreover, there is no common understanding among the scholars that the umbrella clause contributed to the additional protection over the interests of the investor. In this regard, it should be noted that establishment of invalidity of the umbrella clause will cost significantly for the parties seeking compensation for the breach of the commitments under the investor-state contractual obligations. Therefore, the proper development and inclusion of the umbrella clause will allow for the parties to protect their interests with the all available mechanisms that exist in the sphere of the international investment arbitration. Meanwhile, the existence of the umbrella clause in the text of the bilateral investment agreement should be determined in reference of the exclusive jurisdiction clause. The acceptance of these two legal provisions will clarify the application of the umbrella clause and observance of the commitments of the parties towards protection of the interests of foreign nationals. At the same time, the umbrella clauses are important notions in the international investment law as it ensures availability of the legal opportunity for the investors to claim compensation for the violation of their rights. However, it is clear enough that the regulatory framework over the consideration of the umbrella clauses and their legal effect should be improved for the benefits of the participants of the international investment arbitration.
Bibliography
Antony J, 'Umbrella Clauses Since SGS V. Pakistan And SGS V. Philippines - A Developing Consensus' (2013) 29 Arbitration International
Bandrés de Lucas J, 'Umbrella Clauses: Uncertain Contract Protection Under IIAS' (Gcg.universia.net, 2016) <https://gcg.universia.net/article/viewFile/1882/1930> accessed 5 January 2017
Euler D, 'Umbrella Clauses In Treaty-Based Investor-State Arbitration: What Is The Applicable Law On Obligations With Regard To Investments?' SSRN Electronic Journal
Gallus N, 'An Umbrella Just For Two? BIT Obligations Observance Clauses And The Parties To A Contract' (2008) 24 Arbitration International
Grané P, Daele K and Lye K, 'Umbrella Clause Decisions: The Class Of 2012 And A Remapping Of The Jurisprudence - Kluwer Arbitration Blog' (Kluwer Arbitration Blog, 2017) <http://kluwerarbitrationblog.com/2013/01/17/umbrella-clause-decisions-the-class-of-2012-and-a-remapping-of-the-jurisprudence/> accessed 5 January 2017
Pereira de Souza Fleury R, 'Umbrella Clauses: A Trend Towards Its Elimination' [2015] Arbitration International
Wang P, 'Structure Of Umbrella Clause In Institutional Context: SGS Decisions And Beyond' SSRN Electronic Journal
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' (Scholarlycommons.pacific.edu, 2006) <http://scholarlycommons.pacific.edu/cgi/viewcontent.cgi?article=1171&context=facultyarticles> accessed 4 January 2017
Yannaca-Small K, 'Interpretation Of The Umbrella Clause In Investment Agreements' (2006) <https://www.oecd.org/daf/inv/investment-policy/WP-2006_3.pdf> accessed 4 January 2017
