FA Mann remarked that it is ‘a provision of particular importance in that it protects the
investor against any interference with his contractual rights, whether it results from a mere
breach of contract or legislative or administrative act’1.
Historical origins
During late 20th century, non-fulfilment of state obligations not governed by international law
does not engage state responsibility, unless there is non-fulfilment of an international
obligation governing the treatment of foreign investors/property 2. In Serbian Loans case3,
PCIJ foun that ‘[a]ny contract which is not a contract between States in their capacity as
subjects of international law is based on the municipal law of some country’. This was later
recognised in investment treaty arbitration. In Noble Ventures v Romania4, tribunal ruled that
‘the well established rule of general international law that in normal circumstances per se a
breach of a contract by the State does not give rise to direct international responsibility on the
part of the State. This derives from the clear distinction between municipal law on the one
hand and international law on the other, two separate legal systems (or orders) the second of
which treats the rules contained in the first as facts, as is reflected in inter alia Article Three
of the International Law Commission’s Articles on State Responsibility adopted in 2001.’ In
Compañía de Aguas v Argentina5, ad hoc Committee stated ‘A state may breach a treaty
without breaching a contract, and vice versa, and this is certainly true of these provisions of
the BIT […] In accordance with this general principle (which is undoubtedly declaratory of
general international law), whether there has been a breach of the BIT and whether there has
been a breach of contract are different questions. Each of these claims will be determined by
reference to its own proper or applicable law – in the case of the BIT, by international law; in
the case of the Concession Contract, by the proper law of the contract, in other words, the law
of Tucumán.’
Despite this distinction between treaty and contractual breaches, partial remedies may
be available where Host State acted so flagrantly in violation of its commitments that its
actions constitute a denial of FET, full protection and security, or other treatment standards
included in the treaty. This led to umbrella clauses that typically guarantee observance of
Host State’s obligations, which ‘elevate’ or bring Host State’s contractual/other commitments
under the treaty’s protective umbrella6. These are also known as ‘elevators’, ‘mirror effect’,
‘parallel effect’, ‘umbrella’ or ‘sanctity of contracts/pacta sunt servanda’ clauses7.
The umbrella clause’s origins can be tracked back to a dispute between Anglo-Iranian
Oil Company (AIOC) and Iran in the 1950s regarding Iran’s oil nationalisation programme
under a new government in power. After a coup d’etat, Iran and AIOC negotiated a new
settlement. Elihu Lauterpacht recommended an ‘umbrella treaty’ between UK and Iran,
which would rule that any breach became a breach of international law.
1
F A Mann, ‘British Treaties for the Promotion and Protection of Investments; 1982 Vol 52(1) BYIL 241 at 246
2
Andrew Newcombe and Lluís Paradell, 'Chapter 9 – Observance of Undertakings', in Law and Practice of
Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 439-440
3
Case Concerning the Payment of Various Serbian Loans Issued in France (France v Kingdom of Serbs, Croats
and Slovenes) (1929) PCIJ Rep Series A, No 20, at 41
4
Noble Ventures, Inc v Romania, ICSID Case No ARB/01/11, Award (12 October 2005) para 53
5
Compañía de Aguas del Aconquija SA and Vivendi Universal S.A. v Argentina, ICSID Case No ARB/97/3,
Decision on Annulment (3 July 2002) paras 95-96
6
Rudolf Dolzer and Christoph Schreuer (2012), Principles of International Investment Law (2nd edn, OUP
2012) 166
7
Anthony C Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’,
Arbitration International, Vol. 20, No. 4, (2004), p. 411 at 412.
, How have umbrella clauses been applied in treaty practice?
Umbrella clauses were subsequently approved by multilateral initiatives and treaty practice,
although it received little attention in academic discussion or arbitral practice until 2003 8.
Article II of 1959 Abs-Shawcross Draft Convention on Foreign Investment provided
‘Each Party shall at all times ensure the observance of any undertakings which it may have
given in relation to investments made by nationals of any other party.’ Similar provisions
appeared in Article 7 of 1959 Pakistan-Germany BIT and Article 2 of 1967 OECD draft
Convention on Protection of Foreign Property. States later adopted different formulations
of the umbrella clause to restrict its scope. Article 13(2) of 1995 Germany-India BIT and
1999 Portugal-Mexico BIT explicitly require dispute resolution mechanisms agreed in the
contract and reference written obligations. Article 8(2) of 1999 India-Australia BIT
requires parties to submit contractual claims to Host State’s local, administrative or judicial
authorities, or otherwise to international arbitration. Article 3(2) of 1999 Argentina-New
Zealand BIT requires observance of obligations according to parties’ laws.
However, it is not as prevalent in treaties as other provisions like FET or
expropriation9. It only exists in 1107 of 2574 treaties mapped by UNCTAD, whereas FET
clauses appear in 2444 treaties10. Also, US/France/Canada Model BITs, NAFTA, USMCA
and ASEAN-Australia-New Zealand FTA do not contain them. 2004 US Model BIT omitted
the umbrella clause, and instead expressly extended treaty-based jurisdiction over investment
agreements. Article 24(1)(a) explicitly includes only contractual claims from a written
investment agreement. This restrictive approach was to prevent wide interpretations
potentially given under umbrella clauses. Some authors explain that this was based on US
experience from NAFTA that has no umbrella clause, in which US showed ‘interest in
reaching a better balance between the protection of investment and the protection of state
sovereignty’11. Although new treaties like Austria-Kyrgyzstan BIT clarifies that ‘the breach
of a contract between the investor and the host State will amount to a violation of this treaty’,
it may be too late for other treaties to include such certainty as treaty practice shows a trend
towards eliminating umbrella clauses from investment agreements12.
When may umbrella clauses ‘elevate’ breaches of contract to breaches of investment treaties?
Restrictive interpretation
Some case law has adopted a restrictive interpretation of the umbrella clause. In SGS v
Pakistan13, a pre-shipment inspection for goods imported into Pakistan agreement between
Pakistan and SGS was terminated. Tribunal denied that Article 11 of Switzerland-Pakistan
BIT allowed elevation of Pakistan’s breach of contract to treaty claim because to do so would
be ‘so far-reaching in scope, and so automatic and unqualified and sweeping in their
8
Rudolf Dolzer and Christoph Schreuer (2012), Principles of International Investment Law (2nd edn, OUP
2012) 168
9
Andrew Newcombe and Lluís Paradell, 'Chapter 9 – Observance of Undertakings', in Law and Practice of
Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 443-444
10
UNCTAD, ‘Mapping of IIA Content’
11
G. Gagné and J-F. Morin, ‘The Evolving American Policy on Investment Protection: Evidence from Recent
Ftas and the 2004 Model Bit’, 9(2) J. Int. Econ. Law (2006) p. 357.
12
Raul Pereira de Souza Fleury (2017), ‘Closing the umbrella- a dark future for umbrella clauses?’, Kluwer
Arbitration Blog (13 October 2017)
13
SGS v Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction (6 August 2003) para 167
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