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UMBRELLA CLAUSE ȃ ADDITIONAL PROTECTION OF INVESTMENT BY CLAUS…
stipulated provisions in the concession contract, there was no choice possible to solve
potential disputes before an arbitration forum. The discussions on drafting a settlement
agreement started under the auspices of Elihu Lauterpacht. The settlement agreement
should have been comprised of two parts. While the first part of the Consortium
Agreement allowed some oil facilities to continue to operate, the second part was
called an “Umbrella Treaty” and was a contract which must be signed and the content
of which would be an agreement establishing a consortium and ensuring compliance
with the United Kingdom’s liabilities onto the Iranian side. A breach of the investment
agreement and the settlement agreement would lead directly to a breach of the
Agreement, and any dispute which arose through a breach of the settlement would
fall directly under the jurisdiction of the International Court of Justice, and not of
Iranian national courts. Although this agreement was never realized, due to the fact
that the AIOC finally resolved the situation by other means, the new principle of
an investor’s protection appeared through the provisions of an international treaty.4
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), which provided a wording as follows: “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”.5 It is commonly known that the
first effective umbrella clause appeared in Article 7 of the first BIT between Germany
and Pakistan in 1959: “Either Party shall observe any other obligation it may have
entered into with regard to investments by nationals or companies of the other party”. The
umbrella clause was also one of the core substantive rules of the 1967 OECD Draft
Convention on the Protection of Foreign Property (Article 2)5, which provided that:
“Each Party shall at all times ensure the observance of undertakings given by it in relation
to property of nationals of any other Party”.6
The 1959 Germany-Pakistan BIT would lay the foundation for the 1991 German
Model BIT, Article 8(2),which is an umbrella clause with substantially 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.” 7
The draft text of the Multilateral Agreement on Investment (MAI) provided two
formulations for a “respect clause” as follows: “Each Contracting Party shall observe any
obligation it has entered into with regard to a specific investment of an investor of another
4 See Eureko B.V. v. Poland, Partial Award on Liability, 251 (ad hoc arbitration of Aug. 19, 2005),
available at:) and see J. WONG,
Umbrella Clauses in Bilateral Investment Treaties: Of Breaches of Contract, Treaty Violations, and
the Divide between Developing and Developed Countries in Foreign Investment Disputes. George
Mason Law Review, 2006, No 14. pp. 143-144.
5 See 1959 Abs-Shawcross Draft Convention on Foreign Investment, available at:
sections/dite/iia/docs/Compendium/en/137%20volume%205.pdf.
6 See
7 1991 German Model Treaty on the Encouragement and Reciprocal protection of Investments,
Sept. 1991, reprinted in 11 ICSID Rev.-Foreign Investment L.J. 221, 226 (1996).