The rise of bilateral investment treaty (BIT) regime world-wide represents a major shift in investor-state relations in developing and emerging economies. As an outcome, this choice presented challenges both to Investors and BIT partner states. Competing demands emerging from this new relationship between investors and treaty partner led to the development of Law of Investment Treaties.
A bilateral investment treaty is a contract between two sovereign states for a specified purpose and its contents are given full effect while enforcing the same. The decades of sixties witnessed the emergence of Bilateral Investment Treaties (BIT). These treaties provided confidence to foreign investors for making investments in developing world. The purpose of such a treaty is to open the domestic market to a foreign investor for making available goods and service by utilising the cost effective resources and cheap labour. In this way both the parties to a treaty are gainers, as one getting the cheap resources and labour, and the other getting employment opportunities and transfer of technology? In this way many countries having resource constraints attracted Foreign Direct Investment (FDI).
Such treaties provide for the safety of foreign businesses and investments through bilateral contractual obligations. These investment treaties consist of many important clauses such as, Umbrella Clauses, Expropriation, Fair Treatment Clause, MFN Clause, Performance Clause, such as National Treatment Clause, Admission Clause, NPM or Non precluded Measures Clauses etc. These contractual provisions create mutual rights and obligations, and also provide for authority to a state to take appropriate measures in response to an extraordinary situation arising in that county.
The most important clause of BITs are known as umbrella clauses. These clauses provide that the state parties undertake to observe any contractual obligation they may have entered into with an investor of the other state party. All these clauses including umbrella clauses have been subject to interpretation and scrutiny before various arbitral forums. An important forum is ICISD where investors approach for an arbitration in case an injury or loss accrues due to different administrative action of a state.
Cases which have been put before these arbitral tribunals met with mixed results, some going in favour of the state and some in favour of investors. These arbitral dictums have created the foundations of the Law of Investment Treaties. Although all the important clauses of the BITs as discussed above have importance, but the most controversial and important clauses are those which are known as umbrella clauses.
How umbrella clauses have influenced the development of this particular field of International Law can be appreciated from the following general principles.
-- Contractual breaches are not necessarily violation of an investment treaty (Vivende Cases)1
-- The umbrella clause creates an exception to a well established principle of international law concerning state contracts with, and obligation to, foreign investors. (Noble Ventures v. Romania)2
-- The intention of an umbrella provision is to impose an international treaty obligation on host countries that requires them to respect obligations they have entered into with respect to investment protected by the treaty. (CMS Gas Transmission Company v. Argentina)3
-- The effect of the umbrella clause is not to transform the obligation which is relied upon into something else; the content of the obligations is unaffected, as its proper law (CSM Gas Transmission Company v. Argentina)4
-- By virtue of umbrella clause, a host state has an international obligation to respect its obligation concerning foreign investment despite the fact that those obligations remain subject to law which they were originally made (CMS Case)5
The conflicting interests of investors and state led to the development of.
-- Abs-Shawcross Draft Convention on Investment Abroad which sought to develop a set of provisions that may protect foreign investment.6
-- Article 117 of the Abs-Shawcross Draft influenced subsequent efforts to develop investment treaty provision, including the 1967 OECD Draft Convention on the protection of foreign property.8
The precise terms of an umbrella clause, create liability on states under international law to respect concessions and contracts in respect of public services, licensing mechanism, landfill operations, tax exemptions and promises made to investment contracts, and even undertakings given by ministers to investors during investment promotion road shows.
Example of the application of umbrella clause
A state must respect any obligations that it has made to an investment covered by the treaty. If it does not respect such obligations, it violates its treaty commitments and is consequently liable to compensate the investor for any resulting loss. If it does not make compensation, it is subject to investor-state arbitration. For example, in the UNCITRAL case9 which arose out of an alleged breach of an agreement between foreign investors and the Polish government in connection with the privatisation of a major Polish state-owned insurance company. The tribunal was required to interpret Article 3.5 of the 1992 Netherlands-Poland BIT.10 The Tribunal observed as under:
"...Shall observe any obligations it may have entered into' with regard to certain foreign investment is not obscure. The phrase 'shall observe' is imperative and categorical. 'Any' obligation is capacious; it means not only obligations of a certain type, but 'any' - that is to say, 'all' - obligations entered into with regard to investments of investors of the other Contracting Party..."11
Thus, some tribunals have claimed that the ordinary meaning of the clause,12 leads to a broad interpretation and that arbitrators should interpret the clear meaning of the terms without regard to possible policy consequences. Others argue that ordinary meaning is not enough, the Vienna Convention obliges tribunals to interpret treaties by giving their words their ordinary meaning in context and in the light of a treaty's objects and purposes. A consideration of a treaty's context, object, and purpose has led some tribunals to adopt a more nuanced and narrower interpretation of the umbrella clause.13
The dispute between Fedax and Venezuela14 was confronted which dealt with a claim by investors that Venezuela had failed to honour promissory notes it made and, as a result, breached the umbrella clause15 which provided that 'each Contracting Party shall observe any obligation it may have entered into with regard to the treatment of investments of nationals of the other Contracting Party'. Hence Venezuela is under an obligation to honour precisely the terms and conditions governing such investment,16 and to honour the specific payments established in the promissory notes issued'.17
In another case18 Pakistan entered into a five-year agreement with SGS, a Swiss corporation, under which SGS was supposed to perform pre-shipment inspection services of goods to be exported from certain countries to Pakistan. Subsequently, SGS claimed that Pakistan wrongfully terminated the agreement, and it brought an ICSID arbitration proceeding for damages. Among its claims, SGS asserted that19 all violations of the pre-inspection services agreement in effect were violations of the BIT. The umbrella clause in Article 11 of the BIT had a somewhat different formulation than similar clauses in other BITs.20
The tribunal rejected SGS's argument that Article 11 had the effect of elevating breaches of the contract into breaches of the treaty. It advanced many grounds to support their conclusion. It stated: (i) that the obligations referred to in Article 11 were not limited to contractual obligations; (ii) Article 11 appeared to be capable of 'infinite expansion'.
According to the tribunal, the legal consequences of the claimants' interpretation of the treaty were 'so far-reaching in scope, and so automatic and unqualified and sweeping in their operation, so burdensome in their potential impact upon a Contracting Party, that clear and convincing evidence had to be adduced by the Claimant' that the two contracting states in fact had such an intention.21 The tribunal found no evidence in the treaty of such intent and no other supporting evidence was presented to it.
The tribunal in Philippines' case found that the umbrella clause means what it says,22 and that it obliged contracting states to respect all the obligations they make, whether by contract or otherwise. It specifically rejected the Philippines' argument that the clause only applied to obligations found in international instruments, stating that if the parties had so intended they would have said so specifically. It also observed that the objective and purpose of the treaty to promote investment was consistent with the view that a state must observe all obligations, contractual and otherwise.23 It then rigorously criticised the SGS case,24 analysing and disputing each of the reasons on which the decision was based.
It may be observed, the current state of the jurisprudence on this question is not uniform and more divergence and more litigation can be expected in the years to come.
It is important for practitioners of investment treaty law to comprehend the complexities of Intentional Law and in particular the contents of a BIT while relying on the provisions contained in umbrella clauses, and one should seek to address the following questions:
1. Character and foundations of the obligation. What is the specific nature and source of the obligation or obligations that the investor claims the host state has violated? Determine the specific content of the obligation and the source from which it is derived. States make commitments, obligations, or undertakings to investors in a variety of ways. These include but are not limited to specific contracts signed by the investors, legislation applicable to investments generally, and oral and written statements made by state authorities at various levels.
2. Obligations of the state. Is the obligation in question attributable to the host state? If the obligation is not a state obligation, then the umbrella clause is not applicable. Undertakings made by certain quasi-governmental agencies and enterprises may not be considered state obligations under the investment treaty.
3. Nature of obligations: Sovereign and Non-Sovereign Obligations. Dose the umbrella clause govern all obligations or only sovereign obligations? What are the distinguishing criteria between the two?
4. Morality of state promises. Whether or not the umbrella clause does cover both contractual and non-contractual obligations, such as those that may have been created through legislation, regulations, or even governmental statements on which the investor has relied?
5. Non-contractual obligations. Whether or not the umbrella clause does cover non-contractual obligations, and which non-contractual obligations are covered and how must they have been created to be covered by the clause in question?
6. To whom must the state owe the obligation: The obligation must be very specific to the aggrieved investor or injured investment to justify a claim under the treaty. In cases in which an obligation is made in respect of an investment, rather than to an investor, many investors, such as shareholders or creditors, in that investment and therefore not a direct party to the obligation or contract covered by the umbrella clause nonetheless they be protected by the umbrella clause.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)
1. Compania de Aguas del Acqunija SA et al v Argentina, ICSID Case No ARB/97/3, Award on (21 November 2000), Annulment decision dated 3-7-2001 and Award (20 August 2007).
2. Nobel Ventures, Inc v Romania, ICSID Case No ARB/01/11 Award (12 October 2005).
3. CMS Gas Transmission Company v Argentina, ICSID Case No 01/08, Award (12 May 2005).
4. Id.
5. Id.
6. Article II: 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.
7. "Draft Convention on Investments Abroad", in "The proposed convention to protect private foreign investment: a round table", Journal of Public Law (presently Emory Law Journal), vol. 1, pp. 115-118 (1960).
8. OECD draft convention on the Protection of Foreign Property (12 October1967).
9. UNCITRAL Case: Eureka BV v Republic of Poland, Award (19 August 2005).
10. That Article provides that 'each Contracting Party shall observe any obligations it may have entered into with regard to investment of investors of the other Contracting Party'. In finding that Poland
11. Id. n1.
12. An analysis required by Article 31 of the Vienna Convention.
13. L Halonen, 'Containing the Scope of the Umbrella Clause' in TJG Weiler (ed), Investment Treaty Arbitration and International Law 27 (2008). This view is often reflected in the tribunal's stated concern that too broad an interpretation will lead to a flood of all sorts of claims that are better settled under domestic law and by domestic institutions.
14. Fedax NV v The Republic of Venezuela, ICSID Case No ARB/96/3 Award (9 March 1998): 37 ILM 1391 (1998).
15. Article 3 of Netherlands - Venezuela BIT.
16. Id
17. Id.
18. SGS Societe Generale de Surveillance SA v Islamic Republic of Pakistan, ISCID Case No ARE/ 01/13 Decision on Objections to Jurisdiction (6 August 2003): 42 ILM 1290 (2003).
19. In the Pakistan -Switzerland BIT.
20. As it provided: 'Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party'.
21. Id.
22. Id.
23. Which a state assumes with regard to investments in its territory.
24. Id.