CYIL 2014

399

UMBRELLA CLAUSE ȃ ADDITIONAL PROTECTION OF INVESTMENT BY CLAUS…

UMBRELLA CLAUSE – ADDITIONAL PROTECTION

OF INVESTMENT BY CLAUSE OR NON-PROTECTION

EVEN THROUGH ADDITION OF THE CLAUSE?

Vojtěch Trapl

Abstract:

The legal status of umbrella clauses is clear, but their interpretation is in

a state of confusion. In recent jurisprudence the interpretation should prevail that

the umbrella clause extends to all obligations arising under any investment contract

under a regime of Bilateral Investment Treaty (BIT).

The umbrella clause is agreed between the parties to the international treaty as a

tool that would (additionally) protect an investor in case of violation of a contract.

The issue is whether the umbrella clause shall apply only in the case that the breach

of an obligation could be considered as an internationally attributable breach of

the contract by the state and so the contract is itself internationalized under the

umbrella clause or whether each breach of a contract gives the investor the right to

claim the responsibility of a state in any case.

The first institution similar in nature to an umbrella clause occurred in 1954 in

the Treaty settlement claims Anglo-Iranian Oil Company (Anglo-Iranian Oil

Company, AIOC ) in 1951. The first occurrence of the “umbrella clause” as a

distinct investment protection clause can be traced to the 1959 Abs-Shawcross Draft

Convention on Foreign Investment (Article II). The 1959 Germany-Pakistan BIT

laid the foundation for the 1991 German Model BIT with similar language: “Each

Contracting Party shall observe any other obligation it has assumed with regard

to investments in its territory by nationals or companies of the other Contracting

Party.” The draft of the Multilateral Agreement on Investment (MAI) text also

provided two formulations for a “respect clause”. The U.S. Model BIT of 1983,

1984 and 1987 include similarly worded umbrella clauses, and Article 8(1) of the

U.S. Model BIT 2012 provides it nowadays. The use of umbrella clauses is not

limited to bilateral investment treaties, but some examples can be found even in

multilateral treaties, of which the most prominent example is Article 10(1) of the

Energy Charter Treaty.

The effects of an “umbrella clause” started to be tested in the the first two decisions,

i.e. SGS v. Pakistan and SGS v. Philippines. The Arbitral Tribunals arrived at

interpretations that are to some extent inconsistent with one another.

The author came to the conclusion that an international court has to follow the

proper language of the BIT, specifically its umbrella clause. If the text of the BIT

and the wording of the investment agreement are clear, there is neither a place for

any interpretation nor for any implication of the will of the parties. Therefore, it is