• Umbrella Clauses in Investment Arbitration
  • September 15, 2017
  • Introduction
    The obligations observance clauses, namely, umbrella clauses, are aimed to elevate contractual and other commitments of host states under an investment treaty's protective umbrella1. Neither the doctrine nor the case law has a common application of umbrella clauses that may be described as the provisions in international investment agreements that oblige host States to acknowledge their obligations rising from these clauses2. This Article covers the diverging jurisprudence related to umbrella clauses in investment arbitrations in order to solidify the controversial issues raised on this matter.
    The Awards Giving Effect to Umbrella Clauses
    Umbrella clauses are highly debated in arbitral awards since they provide an opportunity to foreign investors to elevate their breach of investment contract claims to the violation of investment treaties under international law.
    In Noble Ventures v. Romania3, the Tribunal discussed the scope and application of the umbrella clause of the Bilateral Investment Treaty ("BIT") concluded between the United States of America and Romania. The wording of the clause is as follows: "Each party shall observe any obligation it may have entered into with regard to investments." The Claimant affirmed that by failing to comply with its contractual obligation to renegotiate the debts of a state-owned company obtained by the investor, Romania had breached the umbrella clause4. The Tribunal concluded that breach of contract at the municipal level created violation of the investment treaty between the states, and gave rise to the international responsibility of the host State.5 This reasoning and award was in line with the award of SGS v. Philippines6.
    As a further approach, in Eureko v. Poland7, the Tribunal concluded that breach of contract by Poland could be evaluated as breach of the BIT's umbrella clause that has the commitment to observe any obligations it may have entered into in relation to the Claimant's investments, even if other standards of the BIT signed between the Netherlands and Poland were not infringed upon8. Accordingly, the tribunals, placing emphasis on the full effect of the umbrella clauses, had escalated the level of breach of contract to breach of the investment treaty9.
    The Awards Reducing the Effect of the Umbrella Clauses
    In SGS v. Pakistan10, the pre-shipment inspection services contract concluded among the Claimant and Pakistan containing forum selection for Pakistani courts was unilaterally terminated by Pakistan. However, the Claimant commenced arbitral proceedings before the International Center for Settlement of Investment Disputes under the BIT between Pakistan and Switzerland. The Tribunal had given a widely criticized decision and ruled that the umbrella clause is not effective on the breach of contract between the parties. The tribunal reasoned its decision that although the Tribunal acknowledges that States may agree in a BIT that coverts all breaches of States' contracts into breaches of the BIT, in this case, there is no clear, nor persuasive, evidence showing that this was the actual intention of both states while adopting the umbrella clause in the BIT.11
    Similar arguments were raised by the tribunals in El Paso v. Argentina12, Pan America v. Argentina13, CMS v. Argentina14 and Sempra v. Argentina15 that had added a distinction between the sovereign and merchant status of the states to their reasoning. The tribunals underlined that the umbrella clauses in investment arbitrations shall only cover those disputes related to the investment agreements or contracts in which states are involved as a sovereign, rather than as a commercial contractor16. Hence, these decisions clarified the view of limiting the scope of the obligations arising from umbrella clauses in investment agreements, unless the state has acted within its sovereign capacity.
    The Status of Umbrella Clauses Before Unilateral Acts of the States
    Another debated issue in relation to umbrella clauses is whether they are protective or not before unilateral acts, such as legislation of the states.
    It is often concluded that the scope of umbrella clauses are not limited merely on the contractual obligations of the host states, and cover the obligations rising from legislative and executive acts, eventually17. In LG v. Argentina18, the Tribunal concluded that by enacting the Gas Law and other regulations, Argentina gave rise to its liability under the umbrella clause19.
    The Privity of Contract Claims Against Umbrella Clauses
    The attribution of state entities', governmental agencies' and territorial subdivision' acts towards states is another debated point in relation to umbrella clauses. Correspondingly, it is argued by some that the legal entities of investors shall not be protected under umbrella clauses due to the privity of contract principle.
    In Noble Ventures v. Romania20, the Tribunal ruled that even if the contract was concluded among the Claimant and the Romanian State Ownership Fund, which is its own legal entity, the umbrella clause shall be applicable to the contract since the Romanian Government can be held liable for the breach of contract made by a fund granted with governmental power. To the contrary, in Impregilo v. Pakistan21, it was concluded that the Claimant cannot benefit from the umbrella clause of the BIT signed between Italy and Pakistan since the contract was not concluded directly with Pakistan, but with a separate and distinct entity, the Pakistan Water and Power Development Authority22.
    Regarding the disputes in which the Respondents claim that the investors' local subsidiaries are not entitled to request protection under the umbrella clauses, some tribunals extended the effect of the umbrella clauses to the persons or entities who were in a contractual relationship with the states as regard to investments23. In contrast, some others requested the Claimant to be a direct foreign investor, but not its local subsidiary, in order to enjoy the protection of the umbrella clauses24.
    Conclusion
    Umbrella clauses are amongst the most contested claims raised in investment disputes since they enable investors to elevate their breach of investment contract claims to the level of violation of international law. Tribunals have been assessing these matters from diverging aspects and creating variances in jurisprudence.
    1 Rudolf Dolzer / Christoph Schreuer, Principles of International Investment Law, Oxford University Press, 2nd Edition, Oxford 2012, p.166; Katia Yannaca-Small, "Interpretation of the Umbrella Clauses in Investment Agreements," OECD Working Papers on International Investment, 2006/03, OECD Publishing, p.3, available at: http://dx.doi.org/10.1787/415453814578.
    2 Shotaro Hamamoto, "Parties to the Obligations in the Obligations Observance (Umbrella) Clause, ICSID Review, Vol. 30, No.2, 2015, p.449.
    3 Noble Ventures, Inc. v. Romania, Award, ICSID Case No. ARB/01/11, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/01/11.
    4 Dolzer / Schreuer, Ibid, p. 169.
    5 Dikran M. Zenginkuzucu, "The Effect of the Umbrella Clauses on the Jurisdiction of ICSID Arbitral Tribunal," Journal of International Trade and Arbitration Law, Vol:2, Issue:1, Istanbul, 2013, p.179-180; Noble Ventures, Inc. v. Romania, par. 53;
    6 SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, the Decision on the Jurisdiction, ICSID Case No. ARB/02/6, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/02/6; Zenginkuzucu, Ibid, p. 175-176.
    7 Eureko v. Poland, Partial Award, available at: https://www.italaw.com/sites/default/files/case-documents/ita0308_0.pdf.
    8 Eureko v. Poland, par.250.
    9 For further caselaw giving effect to umbrella clauses, please see; AMTO v. Ukraine, Duke Energy Electroquil Partners and Electroquil S.A v. Republic of Ecuator, LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, Siemens A.G. v. Argentine Republic, Plama Consortium Limited v. Republic of Bulgaria.
    10 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/01/13, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/01/13.
    11 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, par. 173;Christopher Screuer, "Travelling the BIT Route - of Waiting Periods, Umbrella Clauses, Forks in the Road," The Journal of World Investment and Trade, Vol: 5, No:2, p. 252, available at: http://www.univie.ac.at/intlaw/pdf/68.pdf; Zenginkuzucu, Ibid, p. 174.
    12 El Paso Energy International Company v. Argentine Republic, Decision on Jurisdiction, ICSID Case No. ARB/03/15, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/03/15.
    13 Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, Decision on Preliminary Objections, ICSID Case No. ARB/03/13, available at: https://www.italaw.com/cases/808.
    14 CMS Gas Transmission Company v. Argentine Republic, Award, ICSID Case No. ARB/01/8, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/01/8; Zenginkuzucu, Ibid, p.182.
    15 Sempra Energy International v. Argentine Republic, Award, ICSID Case No. ARB/02/16, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/02/16.
    16 Dolzer / Schreuer, Ibid, p. 173.
    17 Dolzer / Schreuer, Ibid, p. 177.
    18 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, Decision on Liability, ICSID Case No. ARB/02/1, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/02/1.
    19 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, par. 175.
    20 Noble Ventures, Inc. v. Romania, par. 82.
    21 Impregilo S.p.A. v. Islamic Republic of Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/03/3, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/03/3.
    22 Impregilo S.p.A. v. Islamic Republic of Pakistan, par. 223; Zenginkuzucu, Ibid, p.181.
    23 For caselaw on this matter please see: Continental Casualty Company v. Argentine Republic, CMS Gas Transmission Company v. Argentine Republic, Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentine Republic, Sempra Energy International v. Argentine Republic, Duke Energy Electroquil Partners and Electroquil S.A. v. Republic of Ecuador.
    24 For caselaw on this matter please see: Siemens A.G. v. Argentine Republic, El Paso Energy International Company v. Argentine Republic; Dolzer / Schreuer, Ibid, p. 176.
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