The role of the “umbrella clause”

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The role of the “umbrella clause”
in Investment Protection Treaties
Nadine Kaissi-Tayara
(October 2006)


Having greatly facilitated international exchanges as well as foreign investments, economic globalization has also created the need to come up with a legal framework providing more protection and security for the parties involved in international trade.

And indeed,international law has been witnessing for some time now, a multiplication of treaties – some multilateral, but mostly bilateral – aiming to promote and protect foreign investments by setting certain standards of protection (such as “fair and equitable treatment”, “non-discriminatory treatment”, “protection against expropriation” or “most-favored-nation treatment”).

In addition, those investmentprotection treaties commonly contain dispute resolution mechanisms, providing that disputes concerning investments between a contracting party to the treaty and an investor of the other contracting party are to be submitted to international arbitration, often being under ICSID Rules[i].

Clearly, such dispute resolution clauses are meant to secure a neutral, international forum for foreigninvestors alleging a violation of the treaty standards by the contracting State.
In fact, by making available several procedural options to those investors, such clauses are also creating what is known as “forum shopping in favorem”[ii].

The first option is for an investor who has a contractual relationship with a foreign State or any of its constituent subdivisions or agencies, to present itsclaims against it in the forum and according to the dispute resolution mechanism foreseen in the contract, which will typically be an ordinary commercial arbitration.

However, there are some cases in which such commercial arbitration will not be sufficient or satisfactory for the investor seeking to protect his investment.

Indeed, it is possible, and it has been seen often enough, that theState, respondent in the arbitration, might try to defeat the arbitrator's jurisdiction, by resorting to the national courts of the seat of arbitration, or even its own national courts.
Besides, it is possible that the contract does not contain an arbitration clause and yet the investor wishes to settle its disputes by way of arbitration.
Moreover, in many cases, an investor may possess contractualrights under a contract entered into with the Host State, in addition to treaty rights under an investment treaty with the Host State.

In view of all of the abovementioned cases, a second option is available to the investor, which is to present his claims under a Multilateral or a Bilateral Investment Treaty (BIT) in the forum designated in that treaty[iii] (for example, before an ICSIDTribunal).

Thus, theoretically foreign investors have the opportunity to decide which forum is more appropriate for presenting their claims, and therefore to choose between the forum determined in their contract and the one determined in the investment protection treaty.

But the question is: what is the extent of a treaty-based tribunal’s jurisdiction?
In other words, having chosen arbitration onthe basis of a treaty; will investors be able to present all of their claims – claims for breach of the contract in addition to claims for breach of the treaty – before the treaty-based tribunal?

The object of this paper is to examine whether such tribunals could rule on an alleged contractual breach or whether their jurisdiction is limited to ruling on breaches of the substantive provisions ofthe treaty only.
In considering this issue, we will focus on the role and the effect of a clause frequently included in investment protection treaties and known as the “umbrella clause” (also referred to as the "observation of commitments" or “observance of undertakings” or “pacta sunt servanda” or “sanctity of contract” or “respect for contract” clause).

Definition of the “umbrella clause”...