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a breach may simply be treated as a domestic commercial matter. As such, investors
were often forced to resolve any disputes over their contracts with the host state in
that state’s municipal courts and under its domestic laws, which were vulnerable to
unilateral variation by the state. It was in this context that the umbrella clause first
arose.
Definition
Although many countries rely on their own model agreements when negotiating
individual BITs, BITs are remarkably similar in their organization and content. In
general, BITs address four substantive issues: (1) conditions for the admission of foreign
investors to the host State; (2) standards of treatment of foreign investors; (3) protection
against expropriation; and (4) methods for resolving investment disputes.
2
BITs typically contain definitions of investments which are often broad, as well
as definitions of investors. Many BITs cover both existing and future investments.
Exceptionally, BITs can also have had the effect in the past of encouraging foreign
investors before the treaty was executed.
3
The umbrella clause is agreed upon between the parties to the international
treaty as a tool that would (additionally) protect an investor in the case a violation
of a contract which is seen as an obligation or commitment by the state occurs, and
when the dispute resolution is at stake in connection with international investments,
while the investment as such is protected and supported by all other measures taken
byincluded in the BIT.
The umbrella clause is not stipulated in each BIT, and once agreed upon by the
parties it does not have any uniform wording. On contrary, its wording varies from
BIT to BIT. Therefore, the umbrella clause is always a particular rule constituted
by the consent of the parties to the respective agreement and cannot be seen as a
customary rule of general international law.
The issue at hand is whether the umbrella clause should 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 therefore 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.
History
The first institution of a similar nature to an umbrella clause occurred in 1954
in the Treaty settlement claims Anglo-Iranian Oil Company (Anglo-Iranian Oil
Company
,
AIOC) in 1951. After years of negotiations in attempting to repair poorly
2
George M. von Mehren et al., Navigating Through Investor-State Arbitrations: An Overview of
Bilateral Investment Treaty Claims,
Dispute Resolution Journal
, April 2004, pp. 69-70.
3
See
Fedax N.V. v. Venezuela, Decision of the Tribunal on Objections to Jurisdiction, ICSID (W. Bank)
Case No. ARB/96/3 (1997), “Most contemporary bilateral treaties of this kind refer to ‘every kind of
asset’ or to ‘all assets.”