This article is an extract from The Investment Treaty Arbitration Review - Edition 6. Click here for the full guide.
The debate about the seemingly innocuous 'observance of obligations' or 'umbrella' clause2 is ongoing, despite those who would believe that there is nothing left to be said on the matter. On key questions of scope and effect, the investment arbitration community remains divided. This chapter provides a brief review of the existing authorities and highlights the more recent cases to illustrate the main current open questions.
The framework for large-scale foreign investment is often set out in a contract with the state or a state-owned entity. These contracts may provide for international arbitration of disputes before a delocalised tribunal.3 In many cases, however, they do not, and the investor's recourse is to the local courts or domestic arbitration. If the state of the investor's nationality has concluded a bilateral investment treaty (BIT), multilateral treaty or free trade agreement with an investment chapter with the state in which the investment has been made, the investor might seek to bring its contract dispute before an international arbitral tribunal, rather than the local courts, and under the treaty rather than its contract. But how to get there when, generally, the violation of a contract governed by internal laws does not alone constitute a violation of international law in the absence of any exercise of puissance publique?4 Enter the umbrella clause, found in a number of BITs that, on the face of it, requires states to observe obligations that they have entered into with respect to investments.
One of the first investors to seek to enforce an umbrella clause was SGS Société Générale de Surveillance SA (SGS), a Swiss company that provides, among other things, certifications based on pre-shipment inspections of goods. SGS was involved in three separate arbitrations, under three separate treaties, each invoking a form of umbrella clause and giving rise to diverging findings. In each case, SGS's claims involved breaches of an underlying pre-shipment inspection contract, although the nature of the disputes differed slightly.
II Jurisdictional decisions
i SGS v. Pakistan
The first of those decisions, SGS v. Pakistan,5 is widely considered to be the first decision discussing the scope and effect of an umbrella clause in any detail.6 The dispute concerned, among other things, a claim that Pakistan had wrongfully terminated a pre-shipment inspection contract, which itself contained a domestic arbitration clause. The tribunal considered whether it had jurisdiction to hear SGS's claims under Article 11 of the Switzerland–Pakistan BIT, which required Pakistan to 'constantly guarantee the observance' of commitments entered into with respect to investments. The question for the tribunal, as it put it, was whether Article 11 of the BIT transformed 'purely contractual claims into BIT claims'.7
Citing to customary canons of interpretation, the tribunal said that the wording of the clause did not signal the creation and acceptance of a new international law obligation where there was none before.8 Moreover, Article 11 of the BIT was not placed in the treaty 'together with the substantive obligations undertaken by the Contracting Parties'9 (Articles 3 to 7), but rather was towards the end. Given that the consequences of the claimant's interpretation were, in the tribunal's view, so 'far reaching in scope, and so automatic and unqualified and sweeping in their operation, so burdensome in their potential impact',10 the claimant was required, and had failed, to show 'clear and persuasive evidence'11 that the interpretation it sought had been the BIT contracting parties' intent.
The 'indefinite expansion'12 concerning the tribunal was explained as the 'incorporat[ion] by reference [of] an unlimited number of State contracts, as well as other municipal law instruments setting out State commitments including unilateral commitments'.13 That concern presumed a certain interpretation of the scope of the obligations to which the umbrella clause applies, which remains in contention. In reaching its conclusions, the tribunal also expressed concern that a broad interpretation of the umbrella clause would 'nullify any freely negotiated dispute settlement clause in a State contract', and render the substantive provisions of the BIT 'superfluous' as, it contended, there would be no need to demonstrate a violation of treaty standards if a simple breach of contract or municipal regulation would suffice to engage international responsibility.14 The tribunal concluded that it did not have jurisdiction under the treaty to hear SGS's claims that Pakistan breached the contract.
Although the tribunal's ruling left considerably in doubt what would be covered by the clause at issue, the tribunal indicated that the clause may be violated in 'exceptional circumstances' such as where a state 'materially impedes' an investor from going to international arbitration, having previously agreed to such arbitration in a contract.15
ii SGS v. Philippines
The SGS v. Philippines16 jurisdictional decision, rendered a little over half a year later, concerned a dispute about the amount of money owed under a similar contract, which itself provided for resolution of disputes before local courts. The tribunal considered Article X(2) of the Switzerland–Philippines BIT, which required the Philippines to 'observe any obligation it has assumed' with regard to investments.
The tribunal said that Article X(2) 'means what is [sic] says',17 namely that breaches of legally binding commitments made by states towards specific investments may be brought within the framework of the BIT,18 on the basis that the object and purpose of the BIT (to promote and protect investments) supported an effective interpretation of the relevant clause.19 After reaching this 'provisional conclusion',20 the tribunal went on to consider the SGS v. Pakistan tribunal's findings, noting the distinction between the wording of the two treaties but stating that the SGS v. Pakistan findings were nevertheless still relevant to consider.21 The tribunal criticised the Pakistan tribunal's reasoning as 'unconvincing', and stated that it had failed to give any clear meaning to the clause.22 In particular, the tribunal cautioned that the clause did not transform a domestic obligation into an international obligation.23 It said that the 'extent or content' of the obligations to which the umbrella clause might apply were still matters of contract, ascertained and governed by the contractual proper law, which was Philippine law. It was only the performance of the obligation, once ascertained, that was an international law matter.24
Although the tribunal disagreed with the SGS v. Pakistan tribunal's conclusion that there was no jurisdiction to hear pure contract claims, it had sympathy with the concern that the general provisions of the BIT should not override the specific exclusive dispute settlement arrangements in the contract.25 The tribunal concluded that the claim was for the time being inadmissible, given that the parties had agreed to an exclusive jurisdiction clause in the contract,26 and stayed the proceedings on the basis that the Philippine courts were to decide the scope or extent of the respondent's obligation to pay before it could make a ruling on the umbrella clause.27
How did two tribunals, coincidentally seized with claims from the same claimant, come to such starkly opposite conclusions? Or, in the words of one tribunal, how can we 'defend the coherence of the arbitration system in the face of apparently contradictory awards involving the same claimant'?28 Some tribunals and commentators have sought to explain the differences by distinguishing the wording of the treaty clauses,29 but others – including the tribunal in the final SGS case described next – have found that clauses with the wording that a state shall 'constantly guarantee the observance of commitments' can operate as umbrella clauses.30
iii SGS v. Paraguay
In the SGS v. Paraguay case, which, like the Philippines case, concerned a dispute about the payment of outstanding invoices, the tribunal considered Article 11 of the Swiss–Paraguay BIT, which contained the same language as the Swiss–Pakistan BIT: 'constantly guarantee the observance of commitments'. The tribunal stated that it had little difficulty in establishing jurisdiction over the umbrella clause claims based on a reading of the 'plain language' of the clause and its 'ordinary meaning'.31 The tribunal refused to read into the text any requirement that a breach could only be established through an abuse of state power: Article 11 had 'no limitations on its face' and was 'unqualified'.32 The tribunal acknowledged that its findings directly contradicted those of the SGS v. Pakistan tribunal, but insisted upon its right to disagree.33
The underlying contract in the SGS v. Paraguay case had an exclusive jurisdiction clause in favour of the Paraguayan courts. Unlike the tribunal in the SGS v. Philippines case, the tribunal in SGS v. Paraguay found that the claims were admissible. The tribunal stated that it would be 'incongruous' to find jurisdiction but then dismiss the claims on admissibility grounds because 'the effect would be, once again, to divest the provision of its core purpose and effect, to the same extent as if we had denied jurisdiction outright'.34
Since the initial SGS decisions, opinion on the proper scope and effect of the umbrella clause has been divided among tribunals and commentators alike. Three often-cited cases decided in the early years following the Pakistan and Philippines decisions espoused the view that an umbrella clause does not confer jurisdiction on a tribunal to hear claims for 'pure' breaches of contract: Joy Mining v. Egypt,35 Pan American v. Argentina36 and El Paso v. Argentina.37 Two of these cases – Pan American and El Paso – shared the same presiding arbitrator and respondent-nominated arbitrator.38 These tribunals reasoned, among other things, that commercial transactions should be distinguished from state interference with the operation of a contract,39 and that the broad interpretation of the umbrella clause should not be upheld, as it would allow investors to invoke an umbrella clause for trivial disputes.40 Instead, the tribunals suggested that the umbrella clause was intended to safeguard 'additional investment protections contractually agreed by the State as a sovereign – such as a stabilisation clause – inserted in an investment agreement';41 however, the umbrella clause would operate only where an independent violation of the substantive treaty standards was also established.42 The tribunals concluded that they had no jurisdiction over pure contract claims.43
The Pan American and El Paso decisions, published in 2006, caused waves in the international arbitration community, as they appeared amid several awards that had without manifest difficulty found umbrella clauses effective to protect contractual rights.44
The nature of the debate continues to evolve. Although it might be said that the majority of published awards since the El Paso and Pan American decisions have sought to give an umbrella clause substantive meaning over and above the other substantive provisions of the BIT,45 there are still a number of issues that remain. The remainder of this chapter briefly highlights the direction of the debate on these issues.
III Forum selection clauses
In BIVAC v. Paraguay,46 the tribunal followed the approach of the SGS v. Philippines tribunal, and declined to hear the claim on the grounds of non-admissibility.47 The dispute concerned Paraguay's failure to pay invoices under a pre-shipment inspection contract. The tribunal concluded that although the umbrella clause in the Netherlands–Paraguay BIT 'has to be interpreted in such a way as to give it some meaning and practical effect' and thus it 'establishes an international obligation for the parties to the BIT to observe contractual obligation with respect to investors',48 the claim was inadmissible because of the forum selection clause in the contract. The tribunal characterised the dispute as a purely contractual claim49 and concluded that the parties were not 'free to pick and choose' only parts of a contract to incorporate into an umbrella clause and to ignore others, especially their contractually negotiated dispute settlement arrangements.50 In Bosh v. Ukraine, the tribunal stated obiter that it would follow the BIVAC v. Paraguay tribunal's ruling and decline to hear the claim.51
In Toto v. Lebanon,52 the tribunal declined jurisdiction altogether over 'pure contract' claims brought under the umbrella clause on grounds that the underlying contract in question contained a conflicting dispute settlement clause. The dispute arose out of a contract to construct a highway. The claimant alleged both breaches of contract as well as breaches of treaty. In relation to the contract claims, the tribunal stated that it agreed with a view espoused by Judge Crawford, that 'an umbrella clause is operative and may form the basis for a substantive treaty claim, but that it does not convert a contractual claim into a treaty claim'.53 For the tribunal, this meant that the umbrella clause did not change the proper law of the contract or its legal incidents, including provisions for dispute settlement, and although the clause could be used as a 'mechanism for the enforcement of claims', it did not 'elevate pure contractual claims into treaty claims'.54 Thus, it found it had 'no jurisdiction over the contractual claims arising from the contract referring disputes to Lebanese courts'.55
In Garanti Koza v. Turkmenistan,56 which concerned a contract for the planning and construction of a highway, the tribunal indicated that if the claimant's claims amounted merely to claims for breach of contract, they would be 'beyond the jurisdiction of an ICSID tribunal and also that they would be subject to the forum-selection clause in the Contract'.57 However, given that a breach of the umbrella clause was asserted by the claimant in addition to other substantive BIT claims, and was 'pleaded as a breach of the [BIT]',58 the tribunal considered that it had jurisdiction over the umbrella clause claims.
In Gavrilovic v. Croatia,59 the tribunal adopted the analysis of the SGS v. Paraguay tribunal when considering whether a forum selection clause in a contract would impact its jurisdiction.60 The tribunal stated that it would not be 'fulfil[ling] its mandate' if it declined to 'decide whether or not contractual obligations have been observed and, as a consequence, whether or not there has been a violation of the umbrella clause'.61 A similar approach was followed by the Tribunal in Stuar Eiendom and ors v. Latvia,62 where the tribunal said that unless it was 'manifest' that the claims advanced could 'only be' contract claims and not conceivably treaty claims, it would not be appropriate for the tribunal to decline jurisdiction – particularly given the claims were made against a number of actors other than the contractual party. In that case, the umbrella clause claim failed on grounds that a contract entered into by a state-owned entity was not an obligation entered into by the state of Latvia.63
In Belenergia v. Italy,64 a case brought under the Energy Charter Treaty (ECT), the tribunal said that it could not agree with the approach taken in SGS v. Philippines in respect of forum selection clauses in the underlying contract, because such an approach 'would automatically deprive the umbrella clause under Article 10(1) ECT of its meaning because each and every contract, even one without a choice of forum clause, would inherently be subject to a State court based on default rules on conflicts of jurisdiction'.
In Nissan Motor v. India,65 the tribunal 'expresse[d] discomfort with the dividing line, in this particular context, between jurisdiction and admissibility'. It said that the parties to the Japan–India Comprehensive Economic Partnership Agreement (CEPA) must have understood at the time of its conclusion that many state contracts have their own forum selection clauses, but gave no indication in the text of the treaty that such jurisdiction clauses could be relevant to the scope or reach of the umbrella clause itself. The tribunal declined to read in such a requirement, which it explained would be 'a significant limitation on the reach of the umbrella clause'.66 The tribunal recognised that its approach was not the same as the approaches followed by some other tribunals, but it said that it 'd[id] not see it as its role as delineating a proper sequence for proceedings in two potential venues, each of which has a legitimately designated basis of jurisdiction over a type of dispute'.67 While it was possible that overlapping sources of jurisdiction could result in parallel proceedings interpreting contractual obligations, the tribunal said that nothing in the CEPA forbade that possibility.
IV Privity of contract
One of the concerns driving the SGS v. Pakistan tribunal had been a fear that a certain interpretation of the umbrella clause might have opened the floodgates to a multitude of claims. Subsequent attention to the scope of obligations protected by the umbrella clause, and the parties who might avail of its protection, suggests those fears may have been overstated.
The majority view appears to be that umbrella clauses cannot be invoked by claimants who are not themselves party to the underlying contract (a question that commonly arises when the claimant's local subsidiary has concluded the contract, rather than the claimant).68 In WNC v. Czech Republic, the tribunal identified and distinguished the few cases that have allowed claimants that were non-parties to the underlying contract to invoke an umbrella clause.69
There is less consensus when it comes to the matter of privity concerning the state party to the underlying contract. A number of tribunals have found that where a legal entity separate to the state concludes a contract with the claimant, and under the proper law of the contract, the state itself cannot be found to be a party to that contract, no umbrella clause claim can be brought. These tribunals reject the application of the rules of attribution under general international law,70 which do not open avenues to sue the state for breach of contractual obligations for which it is not directly bound.71 In Impregilo v. Pakistan, for example, the tribunal found that Pakistan's Water and Power Development Authority (over which Pakistan exercised control) was properly characterised as an autonomous corporate body, legally and financially distinct from Pakistan by reference to Pakistan's domestic laws.72 In rejecting jurisdiction over the claimant's contract claims, the tribunal said that international law rules on state responsibility and attribution apply only to conduct that violates international law and not to responsibility of a state for the conduct of an entity that breaches a municipal law contract.73 Similarly, in Gavrilovic v. Croatia, the tribunal reminded the parties that the rules of attribution could not operate to impose primary obligations on a state under a contract to which the state was not a party.74
Other tribunals, however, have indicated that they would apply a different approach. The tribunals in Alpha Projecktholding v. Ukraine, Bosh v. Ukraine and CC/Devas v. India premised their findings that the umbrella clause was inapplicable on the basis that the conduct of the entities involved was not attributable to the state.75 In CC/Devas v. India, the tribunal said that because the relevant state-owned entity that had concluded the contract was not acting as an organ of the state under rules of attribution when entering into the contract, the contract did not constitute an obligation the state had entered into within the meaning of the umbrella clause.76
In Strabag SE v. Libya,77 construction contracts concluded between the claimant or its local subsidiary and various Libyan state-owned entities were disrupted by the 2011 armed conflict between Libyan government forces and rebel forces seeking control of Libya, leading to significant losses of equipment and facilities. A significant portion of the claimant's claim relied on Article 8(1) of the Austria–Libya BIT, which provided for each contracting party to 'observe any obligation it may have entered into with regard to specific investments'. The tribunal found that the question was ultimately one of treaty interpretation.78 It rejected 'floodgates' arguments on the basis that policy-based arguments have no place in treaty interpretation.79 With respect to privity of contract, the tribunal stated that the matter involved more than simply asking who was the formal party to the contract under Libyan law. The question was in fact a matter of treaty interpretation as to whether Libya had 'entered into' the relevant obligations.80 The tribunal found that it had, on the basis (among other things) of Article 5 of the ILC Articles, although it recognised in its reasoning that the circumstances were exceptional.81
V 'Governmental' or 'Merely Commercial' conduct
Although there is a line of decisions emphatically rejecting the notion that obligations protected by the umbrella clause must be governmental or sovereign in nature,82 in Gavrilovic v. Croatia, the tribunal reasoned along the same lines as the CMS v. Argentina and EDF v. Argentina tribunals,83 when it cautioned that not just any breach of contract could amount to a breach of the treaty's umbrella clause:
A failure by a government agency to pay for a box of pencils delivered pursuant to an agreement to provide office supplies, for example, would not come within the reach of Article 2(2), because it would have nothing to do with an investment. But an act of an organ of a state that results in the breach of a contractual obligation relating to an investment of a national or company of the other state party to the BIT does seem to this tribunal to come within the reach of that article, especially where the immediate cause of the breach is an action by an organ of the state other than the agency that is the party to the agreement. This is the situation presented by the facts of this case.84
VI Unilateral commitments
The final question is whether, in addition to contractual commitments, relevant obligations may be found in general legislation or unilateral commitments. Although there is arbitral support for the application of the umbrella clause to unilateral or legislative commitments,85 several tribunals have found that where the umbrella clause refers to obligations or commitments that have been 'entered into' by the state, the BIT is concerned with contractual obligations alone.86 In Eskosol v. Italy,87 the tribunal found that the ordinary meaning of 'enter[ing] into' an obligation with 'an investor' under Article 10(1) ECT requires a commitment to a specific class of investors, and laws of general applicability would not suffice.88 In Micula v. Romania, the tribunal stated that the question of whether the state had an obligation was a matter of Romanian law, and the claimants had not proven that the relevant commitment was an obligation under such law.89
While arbitral practice appears to have moved on from the early SGS cases and, in particular, there appears to be growing acceptance towards ascribing substantive meaning to the umbrella clause, separate from the other provisions of the treaty,90 there are still a number of unsettled questions. The umbrella clause continues to provide fertile ground for creative lawyering and further debate.