AFRAID OF THE SHADOWS?: REVISITING UMBRELLA CLAUSES IN INVESTOR-

STATE DISPUTE RESOLUTION

Meriç Şar1

I. Introduction .......................................................................................................................... 1 II. Purpose of umbrella clauses .............................................................................................. 3 III. A brief history on umbrella clauses ................................................................................ 6 IV. Defining the divide ............................................................................................................ 7 A. Narrow approach ...................................................................................................... 10

1. SGS v. Pakistan .................................................................................................................. 10 2. Joy Mining v. Egypt ........................................................................................................... 14 3. El Paso v. Argentina ........................................................................................................... 16 4. Hamaster v. Ghana .............................................................................................................. 18

B. Conditional approach ................................................................................................ 20 1. SGS v. Phillippines ............................................................................................................. 21 2. CMS v. Argentina ............................................................................................................... 23 3. BIVAC v. Paraguay ............................................................................................................ 25

C. Broad Approach ......................................................................................................... 28 1. SGS v. Paraguay ................................................................................................................. 28 2. EDF v. Argentina ................................................................................................................ 33

V. Discussion .......................................................................................................................... 35 A. Floodgates theory and states’ ‘true’ intent .............................................................. 35 B. Sovereign act requirement and issues of attributibility ......................................... 38 C. Reading Vivendi: Forum selection clauses, paralellism of treaty and contract rights,

claim characterization. ................................................................................................................... 40

I. Introduction

The scope of protection, which can be provided by treaty arbitration to investors with

regards to contractual disputes where a State or a State entity is the counterparty, continues to be

a much-debated area of international investment law.2 As the number of investment arbitration

cases continues to increase and investors tend to resort for treaty arbitration for a ever-wider

range of disputes that were traditionally dealt within the domestic adjudication of host States, the

uncertainty about the scope and meaning of “umbrella clauses” persists, perhaps due to the scale

of what is at stake floating in the relevant legal quagmire. In fact, the discussion surrounding

“umbrella clauses” involves some of the deepest divergences between differing perceptions on

1 Attorney and international law scholar (Member of Istanbul and New York State Bar Associations), LL.B. (Istanbul), LL.M. (Georgetown). This note was presented as a written assignment for the seminar class of INVESTOR-STATE DISPUTE SETTLEMENT, Mark N. Bravin, Borzu Sabahi & Don Wallace, Jr. GEORGETOWN UNIVERSITY LAW CENTER, Spring 2013. This paper is still under revision, therefore before referring this paper the reader is kindly encouraged to contact the author at mericsar@gmail.com together with any comments. 2 Emmanuel Gaillard, Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered, in INTERNATIONAL INVESTMENT LAW AND ARBITRATION: LEADING CASES FROM THE ICSID, NAFTA, BILATERAL TREATIES AND CUSTOMARY INTERNATIONAL LAW (Todd Weiler ed., 2005) at 325.

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state liability, economic liberalism, sanctity of contract, and primacy of international dispute

resolution over domestic courts.3

Umbrella clauses are creatures of treaty making under international law that are most

frequently encapsulated in the text of a bilateral investment treaty (BIT) governing the reciprocal

undertakings of two Sovereigns with respect to the investments made by the respective nationals

of both states in each other’s territories. Generally, an umbrella clause obliges a host state to

“observe any obligation it may have entered into”, “constantly guarantee the observance of the

commitments it has entered into”, or “observe any obligation it has assumed” with regards to the

investors of the counterparty and their investments in host state’s territory. Yet despite their

relatively straightforward language, scholars and lawyers continue to struggle to define the exact

legal consequences of such overarching treaty expressions.4 For the sake of clarity, the

expansionist approach argues that an umbrella clause serves to transform all contractual

obligations of primarily domestic law character undertaken by a state against investors into

obligations with international character.5 On the other end, the restricted approach tends to limit

the scope of “umbrella clauses” by interpreting them as mere statements of good intent, and at

their maxim only as granting substantial protection over “sovereign acts” of a state, strictly

opposing to the idea of covering all commercial obligations of domestic law character6. As a

lawyer’s approach towards this divergence tends to be also defined mostly by her cultural and

3 T. W. Wålde, The “Umbrella“ (or Sanctity of Contract/Pacta sunt Servanda) Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases, TRANSNAT’L DISP. MGMT 4 (2004), available at www.transnational-dispute-management.com/article.asp?key=286, at 1. 4 For the application of the 1969 Vienna Convention by investment tribunals, see Christoph H. Schreuer, Diversity & Harmonization of Treaty Interpretation in Investment Arbitration, TRANSNAT’L DISP. MGMT 2 (2006). 5 ‘In light of these conclusions, the parties’ discussion of whether Paraguay took actions of a sovereign nature, and, if so, whether such actions were an abuse of government authority, is irrelevant. In short, if Paraguay failed to observe its contractual commitments, then it breached Article 11. No further examination of whether Paraguay’s actions are properly characterized as “sovereign” or “commercial” in nature is necessary.’ SGS Societe Generale de Surveillance S.A. v. The Republic of Paraguay [hereinafter “SGS v. Paraguay”], ICSID Case No. ARB/07/29, Award (10 February 2012) (Alexandrov, Donovan, Mexía) para. 95. 6 Referring to the tribunal in El Paso v. Argentina ‘[…] if this interpretation were to be followed – the violation of any legal obligation of a State, and not only of any contractual obligation with respect to investment, is a violation of the BIT, whatever the source of the obligation and whatever the seriousness of the breach – it would be sufficient to include a so-called “umbrella clause” and a dispute settlement mechanism, and no other articles setting standards for the protection of foreign investments in any BIT. If any violation of any legal obligation of a State is ipso facto a violation of the treaty, then that violation needs not amount to a violation of the high standards of the treaty […].’ and ‘In other words, in the so-called State contracts, there is usually an” internationally secured legal remedy”, while in the mere commercial contracts governed by national law, there is no reason why such a mechanism should be available, as stated by Judge Schwebel, when he said that “it is generally accepted that, so long as it affords remedies in its Courts, a State is only directly responsible, on the international plane, for acts involving breaches of contract, where the breach is not a simple breach… but involves and obviously arbitrary or tortious element.” [citation omitted]’ ICSID Case No. ARB/03/15, Decision on Jurisdiction (27 April 2006) (Caflisch, Stern, Bernardini) [hereinafter “El Paso v. Argentina”] para. 70 etc.

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theoretical background, 7 “lawyers and legal scholars closer in background, cultural and

professional affinity and loyalty to the state are likely to emphasize sovereignty over contract,

while those closer to economics, commerce and finance will appreciate more the link between

prosperity and sanctity of contract”.8 Unsurprisingly, while these competing world views try to

win ground in this legal battle by trying to dictate their own “understandings” of very basic

principles of international law, in practice little consensus exists on how to tackle “umbrella

clauses” with the existing mechanics of investment arbitration, especially at the jurisdictional

stage of proceedings when a purely contractual claim is brought before investment arbitration

where already a domestic contractual forum selection exists.

The discussion on umbrella clauses continues to evolve with each new award, and

undoubtedly will continue to do so in the visible future. This note has the modest aim to guide

the reader – practitioner or student - through this maze, and illuminate the least common

denominators among the various poles of thought. For those who are not familiar with the

concept, Section II will briefly illustrate the purpose behind the umbrella clauses and delineate

the contours of the opposing views, while Section III will provide a quick look on the origins of

the concept. Section IV aims to deconstruct the leading case law in an objective way with a

particular emphasize on the factual distinctions of the disputes and the decision-making patterns

by the tribunals dealing with the subject. Finally, Section V will discuss various issues, which

stood out as the most acute grounds of disagreement among the arbitral tribunals.

II. Purpose of Umbrella Clauses

Under general international law, it is widely accepted that a State’s breach of a contract it

has entered into with a private investor does not per se qualifies as a violation of international

law.9 In an effort to overcome this hindrance and strengthen State’s abidance by its contractual

commitments, a substantial percentage of BITs contain an umbrella clause10 - referred also as

7 Moshe Hirsch, The Sociology of International Investment Law, in THE FOUNDATIONS OF INTERNATIONAL INVESTMENT LAW: BRINGING THEORY INTO PRACTICE (Z. Douglas, J. Pauwelyn, and J.E. Viñuales eds., Oxford University Press) (forthcoming 2014). 8 Wälde, supra note 3, at 3. 9 See LASSO OPPENHEIM, ROBERT JENNINGS & ARTHUR WATTS, OPPENHEIM’S INTERNATIONAL LAW 927 (9th ed. 1992); Christopher H. Schreuer, Travelling the BIT Route – Of Waiting Periods, Umbrella Clauses and Forks in the Road, 5 J. WORLD INVESTMENT & TRADE 231 (2004); Stephen M. Schwebel, On Whether the Breach by a State of a Contract with an Alien is a Breach of International law, in INTERNATIONAL LAW AT THE TIME OF ITS CODIFICATION, ESSAYS IN HONOUR OF ROBERTO AGO, III (Giuffrè, 1987) at 401. 10 In a study it was found that 40% of BITs deposited at World Bank has a form of umbrella clause. See Judith Gill et al., Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases, 21 J. INT’L. ARB. 397, 403 (2004).

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elevation, mirror or parallel effect clause and pacta sunt servanda clause-, serving for the basic

purpose of holding the contracting State responsible under international law to observe all

investment obligations it has assumed with respect to investors from the other contracting

State. 11 Hence, at its hypothethical extreme, contractual rights embodied in investment

agreements as well as unilateral guarantees, executive acts or legislations can be elevated into the

level of an international obligation through an umbrella clause. This elevating function of

umbrella clauses bases its legitimacy on the assumption that an appropriately worded clause,

when placed within a BIT and agreed upon by the host State, brings all such agreements between

host State and the private investors of the other contracting State under the treaty’s protection,

and therefore any breach of such domestic investment agreement will in parallel constitute a

breach of the relevant BIT, resulting in the responsibility of the State under international law. 12

In its ultimate form, a claimant can bring a treaty claim based on a contractual breach benefiting

from the protection of the umbrella clause, and neither a sovereign act (being an act which can

only exercised by a State as part of its sovereign powers) nor meeting the elements of various

tests as normally triggered for claims made under minimum standards of treatment is required for

a State to be held responsible under the umbrella clause.13 The history of the umbrella clause

sets forth that by its very design an umbrella clause potentially allows for any dispute arising

from a contractual or regulatory undertaking of the state to be resolved before an international

tribunal.14 As mentioned above, in the absence of a BIT containing an umbrella clause, a state’s

breach of a contractual obligation it has entered into with a private investor does not constitute a

breach of international law per se, unless the act impairs a separate norm among the investor

11 Anthony C. Sinclair, The Origins of the Umbrella Clause in the International Law of Investment Protection, in 20 ARBITRATION INTERNATIONAL, Issue 4, at 412. 12 RESTATEMENT OF THE LAW, FOREIGN RELATIONS OF THE UNITED STATES § 712 (1986) Comment h, Vol. 2, at .201: "… not every repudiation or breach by a state of a contract with a foreign national constitutes a violation of international law." As also Schreuer refers to Oppenheim in this regard: “It is doubtful whether a breach by a state of its contractual obligations with aliens constitutes per se a breach of an international obligation, unless there is some such additional element as denial of justice, or expropriation, or breach of treaty, in which case it is that additional element which will constitute the basis for the state’s international responsibility. However either by virtue of a term in the contract itself or of an agreement between the state and the alien, or by virtue of an agreement between the state allegedly in breach of its contractual obligations and the state of which the alien is a national, disputes as to compliance with the terms of contracts may be referred to an internationally composed tribunal, applying, at least in part, international law.” Schreuer, supra note 9, at 250; OPPENHEIM’S INTERNATIONAL LAW, at 927. 13 Schreuer, supra note 9, at 255. 14 See generally Sinclair, supra note 11.

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rights provided within a BIT or minimum standards of treatment as found within customary

international law.15

Normally, to the extent that the State’s breaching conduct does not impair a separate

international legal norm – namely, an act without a sovereign element (i.e. non-payment under

the contract, breach of representations and warranties or other contractual covenants), not

different than a private party would be capable of conducting, the State’s breach of a domestic

contract is deemed as a commercial matter to be dealt within the state’s domestic law16.

However this approach is inherently problematic for a FDI regime where investors seek an equal

footing with the State especially in long term projects whose chance to create wealth for host

country is dependent on its feasibility under commercial and economic realities. First, in the

absence of any other device, domestic courts of the host state are often the only forum before

which the investor can seek remedies regarding commercial disputes arising from purely

contractual issues, where a State is one of the parties. Secondly, these courts and tribunals are

likely to decide about the dispute under domestic law without much regard to the established

principles of international law. It is without a doubt an acute concern in some systems were the

domestic legal system lacks stability, whereas both the domestic law applicable to the substance

of the contract and national courts might be vulnerable to the unilateral interference of the State

in varying degrees. This absolute authority the State has as the ultimate lawmaker and

administrator of the domestic adjudication puts the State in an advantageous position in the

contractual relationship and emphasizes the importance of stability devices such as umbrella

clauses for investors as a viable mechanism to balance the States’ advantage.17 As Wälde puts it:

‘If international economic treaties should help prosperity – in particular in the investment-

receiving societies, then they do have to anchor and reinforce a culture of contractual

commitment against forces which tend to combine economic authoritarianism, legal anarchism,

xenophobia and protectionism under the cloak of popular and legal sovereignty.’18

15 Minimum standard of treatment under customary international law involves principles such as non-discrimination, fair and equitable treatment, no expropriation without compensation and full protection and security for investments. See generally CHRISTOPHER F. DUGAN, DON WALLACE, JR., NOAH D. RUBINS, & BORZU SABAHI, INVESTOR-STATE ARBITRATION (Oxford Univ. Press, 2008). 16 Parties may choose the contract to be subject to the substantive law of another particular country. This does not impair the domestic nature of the contract. The contract continues to be a creature of the domestic legal order. 17 The theory of obsolescing bargain and the price cycle in international commodities markets are considered as the primary natural causes for legal instability and governmental intervention in international energy projects. PETER CAMERON, INTERNATIONAL ENERGY INVESTMENT LAW: THE PURSUIT OF STABILITY 1.03 (Oxford Univ. Press, 2010). 18 Wälde, supra note 3, at 7.

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III. A brief history of umbrella clauses

The theoretical foundations of umbrella clauses lead back to the internationalization of

private law contracts. Sinclair tracks back the origins for the concept of a treaty clause, which is

designed to elevate contractual obligations to international obligations, to an advice given by

Elihu Lauterpacht in late 1953 to Anglo-Iranian Oil Company in the context of the settlement of

the Iranian oil nationalization dispute.19 Ignaz Seidl-Hohenveldern and Prosper Weil were two

of the early commentators, who endorsed the concept and elaborated on its potential to expand

the reach of investment treaties.20 Similarly, an arrangement regarding a mineral concession

dated 1921 between United Kingdom and Peru stipulated an arbitral mechanism, whose awards

on various issues of municipal law will be binding not just between the investor and host state,

but also in the international legal sphere and towards United Kingdom, the state of the investor.21

The Draft Convention on Investments Abroad (‘Abs-Shawcross Draft’) was a joint-effort

between Dr. Herman Abs (Chairman of Deuthsche Bank) and Sir Hartley Shawcross (then the

Director of the Shell-Petroleum Company) to codify a draft convention on the protection of

foreign investments. This draft convention included an umbrella clause following a wording

almost identical to the modern BIT usage.22 Commentators back then agreed on the intended

scope of usage for the relevant clause as covering contractual commitments.23

Looking into the BIT practice, indeed, the first ever modern BIT entered in 1959 between

Germany and Pakistan included an “umbrella clause”24. According to a recent OECD study, the

majority of BITs signed by Switzerland, Germany, Netherlands and United Kingdom incorporate

an umbrella clause, whereas countries like France, Australia, Canada and Japan resort to

19 Sinclair, supra note 11, at 412. 20 I. Seidl-Hohenveldern, The Abs-Shawcross Draft Convention to Protect Private Foreign Investment: Comments on the Round Table, in 10 J. PUB. L 100, 104 (1961); P. Weil, Problèmes relatifs aux contrats passés entre un etat et un particulier, in 128 RECUEIL DES COURS 102, 130 (1969-III). 21 Sinclair, supra note 11, at 414. 22 Article II reads ‘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.’ See Abs–Shawcross Draft, in UNCTAD, INTERNATIONAL INVESTMENT INSTRUMENTS: A COMPENDIUM, vol. V (2000), 332. 23 See JAN OLE VOSS, IMPACT OF INVESTMENT TREATIES ON CONTRACTS BETWEEN HOST STATES AND FOREIGN INVESTORS 226 (Leiden/Boston: Martinus Nijhoff Publishers, 2011). 24 For an interview with the Attorney General of Pakistan on his thoughts about the past 50 years and Pakistan’s experience with BITs see Lauge Skovgaard Poulsen and Damon Vis-Dunbar, Reflections on Pakistan’s investment-treaty program after 50 years: An interview with the former Attorney General of Pakistan, Makhdoom Ali Khan (16 March 2009) available at http://www.iisd.org/itn/2009/03/16/pakistans-standstill-in-investment-treaty-making-an-interview-with-the-former-attorney-general-of-pakistan-makhdoom-ali-khan/ (last visited Apr. 10, 2013).

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umbrella clauses in their BITs in substantially lesser frequency.25 On the other hand, it is

remarkable that U.S. suspended the inclusion of umbrella clause within its BITs as per the

proclamation of the 2004 US Model BIT.26

Looking to the multilateral agreements, while NAFTA does not contain an umbrella

clause, the Energy Charter Treaty remarkably harbors an umbrella clause within its Article 10(1).

However it should be noted that the text of the treaty permits Member States to opt out of this

obligation.27

These all lead to the conclusion that umbrella clauses –albeit far from being a gold

standard in international investment law- are well recognized under international law. Both the

positive and negative practice with regards to umbrella clauses (the frequent inclusion of such

clauses in investment treaties, as well as some States’ willful abstinence from giving such

clauses place in their BITs) affirm their intended function as a device of contract/claim

internationalization, as well as the natural deterrent effect such function inherently invokes in

host states.

IV. Defining the divide

The subject of umbrella clauses are controversial in several aspects as one cannot

interpret the scope of umbrella clauses without inevitably having a stance towards several other

unsettled closely related issues. The most important of these issues is whether under a broad

enough BIT language (especially in the BIT’s dispute resolution clause) ICSID tribunals can

have (or should have) jurisdiction on contractual disputes, and which rules should apply to the

division of labor between national and international proceedings.28 The former question seems

to be answered in arbitral practice as more and more tribunals accepted jurisdiction over

contractual disputes under properly worded BITs even absent an umbrella clause.29 However,

25 OECD, Interpretation of Umbrella Clause in Investment Agreements (Working Papers on International Investment, No. 2006/3, October 2006) available at www.oecd.org (last visited Apr. 12 2013), at 3. 26 Yet the U.S. 2004 Model BIT includes a broad dispute resolution clause which covers disputes arising from ‘investment agreements’. See Article 24 of The 2004 Model Treaty between The Government of the United States of America and The Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment (2004) [hereinafter, “U.S. Model BIT”], available at http://www.state.gov/documents/organization/117601.pdf. 27 Significant countries like Australia, Canada, Hungary and Norway have accordingly chosen to opt out from the application of this Article. 28 Yuval Shany, Contract Claims vs. Treaty Claims: Mapping Conflicts between ICSID Decisions on Multisourced Investment Claims, in 99 AM. J. INT’L L. 835, 843, Issue 4 (2004). 29 “[…] many treaties providing for investment arbitration do not restrict the jurisdiction of tribunals to claims based on breaches of international law. They extend the tribunals’ jurisdiction to “any dispute relating to investments”. [citation omitted] On the basis of these wider definitions of arbitrable disputes, the majority of tribunals have found that jurisdiction is not restricted to claims asserting violations of the BITs’ substantive provisions but includes

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although States tend to avoid parallel proceedings through mechanisms like fork in the road

provisions in BITs, no uniform rule exists (rules such as lis pendens or res judicata can hardly

solve these issues due to the asymmetrical nature of claims) to regulate the relationship between

domestic courts and treaty tribunals due to the seperate natures of domestic litigation and treaty

arbitration.30 The reader should be aware of these bigger policy concerns while studying any

award dealing with umbrella clauses.

Although umbrella clauses found their way into BITs starting from 1950s, no arbitral

tribunal extensively dealt with their interpretation until 2003, due to the curious fact that no

claimant formulated a purely contractual claim (which involves virtually no exercise of exclusive

governmental authority) as a treaty breach under an umbrella clause before.31 Since then the

approaches taken by arbitral tribunals while dealing with umbrella clauses can be categorized

into three basic categories: narrow approach, conditional broad approach (briefly ‘conditional

approach’), and unconditional broad approach (briefly ‘broad approach’).

The tribunal in SGS v. Pakistan32 can be referred as the standard bearer of the narrow

approach as the first ever tribunal which dealt with an umbrella clause in depth and refused to

exercise jurisdiction over contractual claims, denying the umbrella clause the full effect as

elevating contractual breaches to the status of treaty breaches. Yet following a period less than a

year, another ICSID tribunal in SGS v. Phillipinnes had to face with another investor claim based

on the elevation effect of an umbrella clause and followed a substantially different legal

reasoning regarding a factual pattern closely resembling the one in SGS v. Pakistan.33 First, the

contract claims.” Christoph H. Schreuer, Calvo’s Grandchildren: The Return of Local Remedies in Investment Arbitration, in THE LAW AND PRACTICE OF INTERNATIONAL COURTS AND TRIBUNALS 1: (2004) (Koninklijke Brill NV, Leiden) at 8; see Salini v. Morocco, Decision on Jurisdiction, 23 July 2001, paras. 59-62, 6 ICSID Reports 398, 415; Compañía de Aguas del Aconquija, S. A. & Compagnie Générale des Eaux v. Argentine Republic [hereinafter ‘Vivendi Annulment’], Decision on Annulment, 3 July 2002, para. 55, 6 ICSID Reports 340, 356; Société Générale de Surveillance S.A. v. The Republic of the Phillippines [hereinafter ‘SGS v. Phillippines’] ICSID Case N° ARB/02/6 Decision on Jurisdiction (29 January 2004) (El-Kosheri, Crawford, Crivellaro) paras. 130-135; Tokios Tokelés v. Ukraine (Decision on Jurisdiction, 29 April 2004) ICSID Case No. ARB/02/18, 11 ICSID Rep 313, (2005) 20 ICSID Rev 205, [hereinafter ‘Tokio Tokeles v Ukraine (Jurisdiction)]. 30 As the tribunal in Enron v. Argentina notes “[…] It has accordingly been held that even if there was recourse to local courts for breach of contract this would not prevent resorting to ICSID arbitration for violation of treaty rights, or that in any event, as held in Benvenuti & Bonfant, any situation of lis pendens would require identity of the parties.” Enron Corporation and Ponderosa Assets, L.P. ���v. ���The Argentine Republic ��� (Decision On Jurisdiction, 14 January 2004) ICSID Case No. Arb/01/3, (Vicuña, Espiell, Tschanz), para. 96, [hereinafter ‘Enron v. Argentina’]. 31 The Fedax v. Venezuela arbitration involved the Netherlands – Venezuela BIT (which included an umbrella clause) and dealt with the respondent State’s failure to honor the promissory notes it has issued. The tribunal decided in favor of the claimant, yet without interpreting the application of the umbrella clauses directly. Fedax N.V. v. The Republic of Venezuela, (Award, 9 March 1998) 37 I.L.M. 1391 (1998) [hereinafter ‘Fedax’]. 32 See generally SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (Decision on Jurisdiction, 6 August 2003) ICSID CASE No. ARB/01/13 (Feliciano, Faures, Thomas) [hereinafter ‘SGS v. Pakistan’]. 33 See generally SGS v. Phillippines.

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tribunal at SGS v. Phillipinnes accepted in theory that the relevant umbrella clause was valid in

terms of its purpose to elevate contractual breaches into treaty breaches, and it is within the

powers of an ICSID tribunal to exercise jurisdiction over a contractual dispute brought under the

protection of an umbrella clause.34 Yet the tribunal found the claim as inadmissible considering

that the same contract had a forum selection clause for the resolution of any disputes arising

under the contract.35 However despite the fact that the tribunal in practice rejected the claims

much like the tribunal in SGS v. Pakistan by refusing to enter into the merits of the case, and

suspending the proceedings earliest until the domestic tribunal adjudges the contractual claims,

the tribunal’s reasoning in SGS v. Phillippines was seen as a progress for the validity of umbrella

clauses as it explicitly yet conditionally recognized their legal function and ICSID tribunals’

power to adjudicate purely contractual claims. 36 Nevertheless, the tribunal’s conditional

reasoning set forth a relatively high threshold for future claims similarly arising from contractual

commitments to be eligible for adjudication before ICSID tribunals, considering that few

agreements where a State entity is a party will not include a forum selection clause. This

approach was followed by several tribunals37 into different extents, and can be generally called

the conditional approach. Last to mention here, the third approach, which can be called the

broad approach, albeit perhaps controversial for skeptics of investment arbitration, seems to be

gradually gathering momentum as adopted by the tribunals in some of the more recent cases.38

The last installment in this series of cases brought by SGS against States under different BITs all

of which contain some form of an umbrella clause, namely SGS v. Paraguay, is likely to be

34 ‘Interpreting the text of Article VIII in its context and in the light of its object and purpose, the Tribunal accordingly concludes that in principle (and apart from the exclusive jurisdiction clause in the CISS Agreement) it was open to SGS to refer the present dispute, as a contractual dispute, to ICSID arbitration under Article VIII(2) of the BIT.’ SGS v. Phillippines, para. 135. 35 ‘SGS should not be able to approbate and reprobate in respect of the same contract: if it claims under the contract, it should comply with the contract in respect of the very matter which is the foundation of its claim.’ SGS v. Phillippines, para. 155. 36 For an analysis of the award’s approach to the distinction of admissibility and jurisdiction see Jan Paulsson, Jurisdiction and Admissibility, in GLOBAL REFLECTIONS ON INTERNATIONAL LAW, COMMERCE AND DISPUTE RESOLUTION, LIBER AMICORUM IN HONOUR OF ROBERT BRINER, ICC Publishing, Publication 693 (2005), at 607.

37 Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. The Republic of Paraguay ICSID Case No. ARB/07/9, (Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009) (Knieper, Fortier, Sands) [hereinafter ‘BIVAC v. Paraguay’]; Bosh vs. Ukraine. 38 SGS v. Paraguay; EDF International S.A., SAUR International S.A., and León Participaciones Argentinas S.A. v. Argentine Republic, ICSID Case No. ARB/03/23, (Award, 11 June 2012) (Kauffmann-Kohler, Remón, Park) [hereinafter ‘EDF v. Argentina’].

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recognized as proposing this new approach requiring substantially less jurisdictional barriers

towards contractual disputes brought under umbrella clauses.39

A. Narrow approach

Cases which are considered under the narrow approach typically involve tribunals with a

conservative stance towards giving expansive interpretation to umbrella clauses found within

BITs, and tend to propose a higher threshold for the internationalization of contractual disputes

through umbrella clauses.

1. SGS v. Pakistan

SGS v. Pakistan case continues to be the standard case following the narrow

approach with regards to umbrella clauses. Although the award faced frequent criticism with

regard to the tribunal’s reluctance at recognizing the intended function of umbrella clauses, the

award poses a thoughtful analysis of ICSID’s jurisdiction over contractual disputes and the effect

of umbrella clauses in a factual pattern one can frequently be faced with.

The case involved a Pre-Shipment Inspection Agreement (PSI Agreement) under

which SGS, a company incorporated under the laws of Switzerland, undertook to perform import

inspection services for goods entering Pakistan.40 The PSI Agreement contained a forum

selection clause for the settlement of disputes before a domestic arbitral tribunal under Pakistani

law.41 In December 1996, Pakistani government unilaterally terminated the PSI Agreement, and

abstained from making the payment of some outstanding sums demanded by SGS. Seeking for

remedies for the outstanding amounts, SGS first initiated a lawsuit against Pakistan before Swiss

courts, which denied the request under sovereign immunity doctrine.42 In 2000, Pakistan filed a

claim before the contractually agreed forum (under the PSI Agreement) in Pakistan. While

raising objections against these proceedings, SGS also brought a counter-claim against Pakistan

without prejudice to its objections on jurisdictional grounds. Parallel to this, SGS initiated

arbitral proceedings against Pakistan on 12 October 2001 before ICSID under the Switzerland -

Pakistan BIT. Pakistan reacted by pleading before the Pakistani Supreme Court for an

injunction to bar SGS from following the proceedings before ICSID. In parallel, SGS requested

39 See infra …... 40 SGS v. Pakistan, para. 11. 41 Id., para. 15. 42 The court of first instance denied the request based on a different ground, the forum selection clause.

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a similar order against the Pakistani arbitration proceedings, and on 16 October 2002, the

tribunal recommended that the proceedings in Pakistan be stayed.43 In November 2002,

Pakistani arbitrator decided for the stay of the domestic proceedings in favor of ICSID tribunal’s

jurisdictional decision on a temporary basis.

In the proceedings SGS argued that by failing to make the payment of service fees

Pakistan breached the PSI Agreement, and this breach constituted a parallel breach of the

umbrella clause44 within the relevant Switzerland – Pakistan BIT, which grants jurisdiction to the

tribunal to adjudge the relevant claims as breaches of treaty obligations.45 Pakistan objected to

the tribunal’s jurisdiction on several grounds, namely (i) the forum selection clause found within

the PSI Agreement constituted an exclusive jurisdiction agreement which bars ICSID from

adjudicating the claim46; (ii) the essential basis of the claims was a contract claim without the

existence of a separate treaty claim47; (iii) the ICSID tribunal should step aside in favor of

domestic proceedings by virtue of the lis pendens rule48. On the counter, SGS responded that

despite the overlapping factual core, treaty and contract claims had separate legal foundations.

Hence, should the ICSID tribunal reject to exercise jurisdiction, SGS would not be able to bring

the treaty claims before the arbitral proceedings in Pakistan, thereby being stripped from its

rights as an investor under the treaty.49

In its decision on jurisdiction dated August 6th 2003, the tribunal accepted jurisdiction

over SGS’s treaty claims, however rejected its jurisdiction over the contractual claims which fall

43 SGS v. Pakistan, (Procedural Order No. 2, 16 October 2002). 44 Article 11 of the Switzerland – Pakistan BIT states that: “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”. 45 ‘In particular, Pakistan has […] taken measures of expropriation, or measures having the same nature or the same effect, against SGS’s investment, in violation of Article 6(1) of the BIT. This violation exists, in particular, because Pakistan has not provided SGS with effective and adequate compensation; and failed to constantly guarantee the observance of the commitments it has entered into with respect to SGS’s investments, in violation of Article 11 of the BIT. In particular, Pakistan has failed to guarantee the observance of its contractual commitments under the PSI Agreement [emphasize added].’ SGS v. Pakistan, para. 35. 46 ‘Pakistan says that the essential basis of the present claims is breach of contract and that even if the labels in the Request for Arbitration were accepted at face value and SGS’s claims were analyzed in terms of the three categories of “Contract, Defamation and BIT” claims, the broad PSI Agreement arbitration clause requires the parties to bring any dispute to the PSI Agreement arbitrator, regardless of whether such claims sound in contract, tort, or treaty.’ Id., para. 45. 47 Tribunal formulated the Pakistan’s rejection as ‘the claims, “irrespective of how SGS labels them, are entirely contractual in nature.”’ Id., para. 43. Based on this interpretation Pakistan made an argument referring to a statement of the ad hoc Annulment Committee at Vivendi Annulment, which reads “[i]n a case where the essential basis of a claim brought before an international tribunal is a breach of contract, the tribunal will give effect to any valid choice of forum clause in the contract.” Vivendi Annulment, para. 98. 48 ‘Pakistan makes a number of other objections to this proceeding based on the doctrines of lis pendens, waiver, and estoppel.’ SGS v. Pakistan, para. 46. 49 SGS v. Pakistan, para. 119, 154.

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under the jurisdiction of the domestic tribunal as agreed upon within the PSI Agreement.50 For

the tribunal the central issue was the legal consequence of the forum selection clause, and in a

secondary fashion the tribunal also questioned the legitimacy of umbrella clauses should they be

granted with the broad meaning given by the claimant. The arbitrators found that ‘[…] the

Tribunal has no jurisdiction with respect to claims submitted by SGS and based on alleged

breaches of the PSI Agreement which do not also constitute or amount to breaches of the

substantive standards of the BIT.’51 The tribunal rejected the SGS’s argument that Article 11 of

the BIT was serving as an umbrella clause, and transforming all contractual breaches to treaty

level. Reading the language of the BIT, the tribunal failed to find enough intention by the

contracting parties to grant Article 11 such power to cover both treaty claims and claims with

“purely contractual” basis.52 When coming to this conclusion, the tribunal interpreted the

location of the umbrella clause within the overall structure of the treaty as an indicator for the

drafters’ intent, and concluded that since the clause was not located within the substantive

obligations, the drafters apparently did not have the intention to attribute umbrella clauses such

an overarching meaning, as they would place it together with other important substantive

provisions should they have such intent.53 In the same vein the tribunal was hesitant to read the

BIT as granting to the ICSID dispute settlement mechanism prevalence over all other

contractually agreed forum selection clauses between Swiss investors and Pakistan.54 While

denying the umbrella clause the proposed meaning, the tribunal also reasoned that the term

“commitments” found within the umbrella clause had an all-encompassing nature (possibly

covering all legislative and administrative measures in addition to contractual obligations), such

that an agreement cannot be interpreted to “signal the creation and acceptance of a new

50 By doing that the tribunal referred to the separation approach and essential basis test as adopted by the tribunal in Vivendi Annulment and interpreted by Pakistan in its objections. Id., para. 147. ‘The distinction based on the cause of action and the relationship between the dispute resolution clauses contained respectively within the BIT and in the underlying investment agreement is now well recognised in investment treaty arbitration. This distinction found emphasis in Lanco v. Argentina, Salini v. Morocco, as well as in the annulment decision rendered in Vivendi v. Argentina and, later on, in the decision on jurisdiction in Azurix v. Argentina. The authority resulting from these cases, although on the basis of somewhat diverging rationales, is that the investor has a right to seek the international responsibility of the host State on the basis of the applicable investment treaty notwithstanding the forum selection clause contained in the investment agreement.’ Gaillard, supra note 2, 329. 51 SGS v. Pakistan, para. 162. 52 Id., para. 161. 53 Id., para. 170. 54 Id.

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international law obligation”, and if so, such liability was “susceptible of almost indefinite

expansion.” 55

Although the tribunal abstained from granting to the umbrella clause the effect argued by

the claimant, it did not render the clause as a nullity either. In tribunal’s view, first, the clause

signaled an implied affirmative commitment to harmonize the domestic law in a manner, which

would give effect to State’s commitments.56 Second, in extreme circumstances where the State

materially impeded the investor’s ability to pursue claims before tribunals or abstained from

enforcing the legitimate awards of such tribunals, a breach of the umbrella clause could be

assumed.57

While coming to this conclusion, the tribunal remarkably left the door open for different

factual patterns reasoning that parties could in theory agree upon ICSID’s jurisdiction over

claims contractual in nature.58 Yet as proved by the agreed upon forum selection clause within

the PSI Agreement, the parties’ have intended to act otherwise and agreed on a non-ICSID

jurisdiction over the contractual disputes under PSI Agreement in tribunal’s view on the present

case.59 By doing that the tribunal relied on the reasoning of the ad hoc tribunal in Vivendi

Annulment which obiter dicta formulated the separation of treaty and contract claims.60 For

theoretical concerns it is remarkable that although the tribunal used its full authority as a judicial

interpreter by applying the essential basis test of Vivendi Annulment to distinguish the SGS’s

claims as being contractual or treaty-based, it did not see itself in a position to look behind the

claimant’s factual claims and stated that “[we] conclude that, at this jurisdiction phase, it is for

55 Id., para. 166. 56 Id., para. 172. 57 Id. 58 Id., para. 161. 59 ‘We believe that Article 11.1 of the PSI Agreement is a valid forum selection clause so far as concerns the Claimant’s contract claims which do not also amount to BIT claims, and it is a clause that this Tribunal should respect. We are not suggesting that the parties cannot, by special agree- ment, lodge in this Tribunal jurisdiction to pass upon and decide claims sounding solely in the contract. Obviously the parties can. But we do not believe that they have done so in this case. And should the parties opt to do that, our jurisdiction over such contract claims will rest on the special agreement, not on the BIT.’ Id., para. 161. 60 ‘BIT Claims and contract claims appear reasonably distinct in principle. Complexities, however, arise on the ground, as it were, particularly where, as in the present case, each party claims that one tribunal (this Tribunal or the PSI Agreement arbitrator) has jurisdiction over both types of claims which are alleged to co-exist. In the Vivendi Annulment decision, the Annulment Committee went on to say that: In a case where the essential basis of a claim brought before an international tribunal is a breach of contract, the tribunal will give effect any valid choice of forum clause in the contract. […] On the other hand, where the fundamental basis of the claim is a treaty laying down an independent standard by which the conduct of the parties is to be judged, the existence of an exclusive jurisdiction clause in a contract between the claimant and the respondent state—cannot operate as a bar to the applica- tion of the treaty standard. At most, it might be relevant—as municipal law will often be relevant—in assessing whether there has been a breach of the treaty.’ (Emphasize added) See Ibid, para. 146-155. Vivendi Annulment, paras. 95 - 97.

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the Claimant to characterize the claims as it sees fit.”61 This pattern of reasoning indicated that

the tribunal applied during its jurisdictional analysis two different standards of a prima facie case

to claimant’s factual allegations and its substantive legal formulation of its claims. As much as

the tribunal’s reluctance towards recognizing umbrella clauses with their full effect, it is also

striking that the tribunal did not hesitate to grant jurisdiction under “fair and equitable” treatment

over factual allegations which were primarily based on contractual non-payment in contrary to

other tribunals which tend to apply a stricter jurisdictional threshold to predominantly contractual

claims.

2. Joy Mining v. Egypt

In Joy Mining v. Egypt62, the tribunal was faced with a claim under United Kingdom-

Egypt BIT deriving from a dispute over bank guarantees issued for equipment in a mining

project. Joy Mining entered into a contract with the project manager, General Organization for

Industrial and Mining Projects of the Arab Republic of Egypt (“IMC”), for the provision of

mining systems and supporting Equipment for the Abu Tartur Phosphate Mining Project

(“Mining Project”). While the contract envisaged a two staged process for the replacement of

the old system and installment of the new one, Joy Mining had to provide letters of guarantee for

the performance of the contract.63

During the installation process, which started in February 1999, both parties claimed for

various performance problems. Joy Mining asserted that the difficulties were due to geological

problems at the project site and the poor management of IMC, while IMC claimed that the

problems arose from the malfunction of the equipment provided by Joy Mining. Joy Mining was

paid in full purchase price as agreed under the contract, however the guarantees have not been

released by IMC. Joy Mining submitted the dispute to ICSID under the UK – Egypt BIT and

claimed that the Contract was an investment under the Treaty and that the decision given by IMC

and Egypt to not to release these guarantees was in violation of the Treaty provisions. Joy

Mining claimed that the IMC’s actions were equivalent to expropriation, discrimination has

taken place and the host State did not accord fair and equitable treatment and full protection and

61 SGS v. Pakistan, para. 145. 62 Joy Mining Mach., Ltd. v. Arab Republic of Egypt (‘Joy Mining v. Egypt’), ICSID Case No. ARB/03/11, Award on Jurisdiction (6 August 2004) (Vicuña, Craig, Weeramantry), 19 ICSID Rev. 486. 63 Id., para. 17.

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security.64 Furthermore, according to the claimant the breach of the contract was directly a

breach of the umbrella clause of the treaty.65

The tribunal in its decision on jurisdiction, refused to exercise jurisdiction over the Joy

Mining’s claims. The tribunals decision was primarily based on the lack of an investment within

the meaning of ICSID Convention and the applicable BIT. After analyzing past awards on the

way they defined the scope of an investment, the tribunal concluded that the production and

supply of the kind of equipment involved in the case was a normal activity of the Joy Mining,

and not required a particular development of production that could be assimilated to an

investment.66 To differentiate the present case from Fedax, where a tribunal accepted the

purchase of promissory notes as an investment, the tribunal emphasized that the bank guarantees

at the present issue merely involved ordinary commercial conduct, as opposed to the public

credit status of the promissory notes purchased by the claimant in the Fedax case.67

Similar with the approach taken by the tribunal in SGS v. Pakistan to formulate the

essential basis of the claim for jurisdictional purposes, the tribunal relied on the reasoning of the

ad hoc committee in Vivendi Annulment68, and favored the contractual forum selection for the

settlement of the contractual disputes.69 In the tribunal’s view, the release of bank guarantees

was simply a commercial element of the contract70.

With regards to the umbrella clause, the tribunal’s opinion was short and clear. Despite

the recent award in SGS v. Phillipines which recognized the power of umbrella clauses as

elevating contract breaches to treaty breaches, the tribunal refused to grant umbrella clauses such

power due to the “missing link” between the Contract and the Treaty which prevents such

effect.71 Yet the tribunal did not explain how such link could be built.

64 Id., para. 22. 65 Id., para. 23. 66 Id., para. 56. 67 Id., para. 60. 68 ‘To the extent that a dispute might involve the same parties, object and cause of action [citation omitted] it might be considered to be a dispute where it is virtually impossible to separate the contract issues from the treaty issues and to draw any jurisdictional conclusions from a distinction between them. A purely contractual claim, however, will normally find difficulty in passing the jurisdictional test of treaty-based tribunals, which will of course require allegation of a specific violation of treaty rights as the foundation of their jurisdiction. As the Annulment Committee held in Vivendi, “[a] treaty cause of action is not the same as a contractual cause of action; it requires a clear showing of conduct which is in the circumstances contrary to the relevant treaty standard.”’  Id. para. 75.   69 Id. paras. 89-99. 70 Id. para. 78. 71 ‘In this context, it could not be held that an umbrella clause inserted in the Treaty, and not very prominently, could have the effect of transforming all contract disputes into investment disputes under the Treaty, unless of course there would be a clear violation of the Treaty rights and obligations or a violation of contract rights of such a

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3. El Paso v. Argentina

El Paso, a company incorporated under the laws of Delaware, held various controlling

and non-controlling stakes in various companies conducting business in the Argentinian energy

market during the privatization period

Argentina followed in the 1990s. El Paso brought this lawsuit against Argentina alleging that the

regulatory measures taken by Argentinian government regarding the energy sector during the

later economic crisis were in breach of its BIT rights. The measures taken by Argentina were

claimed to have substantially impaired El Paso’s business and its subsidiaries became virtually

insolvent. A part of the claims argued that the measures were a breach of contractual and also

legislative and administrative commitments of the Argentinian government under the umbrella

clause.72

Similar with the tribunal in SGS v. Pakistan, the tribunal accepted jurisdiction over

claims to the extent they relate to breaches of treaty, while denying jurisdiction to purely

contractual claims despite the existence of the umbrella clause.73 Analyzing the claimant’s

assertions from a jurisdictional perspective, the tribunal elaborated on the validity and effect of

the umbrella clause found within the US-Argentina BIT.74 Mostly following the reasoning of the

SGS v. Pakistan, the tribunal observed that the relevant umbrella clause in the BIT was referring

to commitments in general and lacking sufficient language to prove the State parties’ intent to

attribute a broader meaning to it. If interpreted as elevating contract claims to treaty claims, the

umbrella clause should do so also with regards to legislative or administrative acts of the State,

which should also constitute commitments in the same vein.75 Such broad scope appeared in

tribunals’ view to be susceptible of almost indefinite expansion. Natural consequence of such

expansive interpretation would render useless all substantive standards of protection of the

Treaty. Feeling obliged to comment on the expansive interpretation of umbrella clauses taken by

the tribunal in SGS v. Phillippines, the tribunal found that the conclusions drawn in SGS v.

magnitude as to trigger the Treaty protection, which is not the case. The connection between the Contract and the Treaty is the missing link that prevents any such effect.’ Id. para. 81. 72 El Paso v. Argentina, paras. 11-33. 73 Id., para. 86. 74 Id., para. 67. 75 Id., para. 72.

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Phillippines were contradictory.76 The tribunal similarly rejected the “internationalization”

theory adopted by the Noble Ventures award.77

From a practical viewpoint the tribunal reasoned that investors generally enter either into

commercial contracts or investment agreements with host states. The tribunal opined that when

there is an investment agreement, quite often the investors manage to insert to the contract

mechanisms which proposes some type of an “internationally secured legal remedy” for the

enforcement of the contractual obligations of the host state parties. However the tribunal

rejected the notion that such a mechanism should be necessary for purely commercial contracts

governed by national law, whereas only in cases of serious arbitrary conduct the State should be

liable under international law, as long as the state offers remedies in its courts.78 The tribunal

further elaborated on the State’s liability for contractual breaches under international law as a

concept which require the State to act under sovereign capacity while entering the contract,

which only occur with regards to the so-called investment agreements as distinguished from

commercial contracts where the state acts as a merchant.79 In the tribunal’s view, when the

umbrella clause was read in conjunction with Article VII(1) of the Argentine-US BIT (which

should only refer to acts exercised under sovereign capacity, not as a merchant), ‘the umbrella

clause will not extent the treaty protection to breaches of an ordinary commercial contract

entered into by the State or a State-owned entity, but will cover additional investment protections

contractually agreed by the State as a sovereign – such as a stabilization clause – inserted in an

investment agreement.’80

76 ‘[…] among other things, the Tribunal stated that, although the umbrella clause transforms the contract claims into treaty claims, first “it does not convert the issue of the extent or content of such obligations into an issue of international law” [citation omitted], which means that the “contract claims/treaty claims” should be assessed according to the national law of the contract and not the treaty standards, and, second, that the umbrella clause does not “override specific and exclusive dispute settlement arrangements made in the investment contract itself” [citation omitted], which explains that the Tribunal has suspended its proceedings until the “contract claims/treaty claims would be decided by the national courts in accordance with the dispute settlement provisions of the contract”, stating that “the Tribunal should not exercise its jurisdiction over a contractual claim when the parties have already agreed on how such a claim is to be resolved, and have done so exclusively” [citation omitted]. In other words, the Tribunal asserts that a treaty claim should not be analysed according to treaty standards, which seems quite strange, and that it has jurisdiction over the contract claims/treaty claims, but at the same time that it does not really have such jurisdiction over the contract claims/treaty claims, but at the same time that it does not have such jurisdiction – until the contract claims are decided. This controversy has been going on ever since these two contradictory decisions.’ Id., para. 76. 77 Id., para. 77. 78 Id.. see Judge Schwebel’s remarks in supra note 6. 79 Id., paras. 80 etc. 80 Id., para. 81.

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4. Hamaster v. Ghana

Hamaster v. Ghana was a recent award given on jurisdiction by an ICSID tribunal over a

mixed set of contract and treaty claims brought by a German company, which succeeded another

German company through a corporate merger.81 Through its predecessor, Hamaster acquired

interests in a Joint Venture Agreement (“JVA”) executed with Ghana Cocoa Board (“GCB”), an

entity established by a legislation under Ghanaian law which was also the successor of Ghana

Cocoa Marketing Board. The JVA between German company and the GCB was aimed at the

rehabilitation of an old factory owned by GCB and increase its production capacity. For this

purpose, in 1992 the JVA parties incorporated a company (“WAMCO”) under the laws of Ghana

which would take over the assets and titles of the old factory. Hamaster held 60% of shares

while the GCB held the remaining 40%. The majority of the board was elected by Hamaster.

Hamaster was further to provide technology, know-how and funding, while GCB was to

contribute assets and to supply beans to be processed. The JVA stipulated mutual agreement of

the parties as a condition for the determination of the qualities of the beans to be sold and the

methods of pricing of such beans. The JVA was governed by the laws of Ghana, and its Article

12(b)) referred all disputes to dispute resolution at ICSID. 82 Hamaster was purchasing the entire

output of the plants exclusively since the plant became operational in 1993.

The case involves a wide range of disputed factual issues primarily arising from pricing

disputes in a dysfunctional corporate structure and supply chain with various accounting and

management problems. To brief the procedural history it all starts in January 2007, when

WAMCO filed a lawsuit before the supreme court in Ghana demanding Hamaster to pay EUR

31,614,501.68 for coca products supplied in 2002.83 Further in the same year, GCB and CMC

jointly sued WAMCO for an amount of approximately USD 32 million, which was settled on

terms in favor of GCB, which is entitled to enforce judgment against WAMCO any time.

After these events, the claimant submitted several arguments before the ICSID tribunal

under the BIT, claiming that the government of Ghana failed to observe its obligations with

81 Gustav F W Hamester GmbH & Co KG v. Republic of Ghana (ICSID Case No. ARB/07/24) (Award, 18 June 2010) (Stern, Cremades, Landau) [hereinafter ‘Hamester v. Ghana’]. 82 Id., para. 27. Interestingly the claimant when it initially sought to commence ICSID proceedings under the forum selection clause of the JVA, the Centre declined jurisdiction on the grounds that GCB was not designated as a constituent subdivision or agency of Ghana under Article 25(1) of the ICSID Convention. 83 To the best of the tribunal’s knowledge “[i]t is unclear whether the proceedings are still pending.” Id., para. 64.

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regards to investments, including the obligations GCB under the JVA.84 The claimant further

argued that same categories of acts were also breaches of the other substantive protections under

the BIT.85 The claimant argued that government’s acts such as suspension of bean deliveries,

imposition of a price agreement, failure to honor supply obligations and interference with

Hamaster’s management rights over WAMCO constituted the principal breaches of the JVA.86

Only two complaints were characterized by the claimant as not constituting parallel breaches of

contract and treaty.87 The respondent’s primary objections were based on the principles of

attribution under customary international law, and lack of jurisdiction ratione materiae, in other

words, absence of a protected investment due to fraud and breaches of fiduciary duties.88

Narrowing down its analysis on allegations of fraud at the jurisdictional level to the question on

whether the JVA as an investment was obtained on the basis of fraud the tribunal rejected the

Respondent’s jurisdictional objections based on fraud in order to revisit the allegations in the

merits phase,89 yet accepted the majority of respondent’s objections on attribution issues.90 For

the tribunal’ the remaining issue was the question as to the manner in which commercial acts, if

attributed to the State, should be dealt with.91 The tribunal denied its jurisdiction over

contractual claims under Article 2(1), 4(2) and 4(3) of the BIT (expropriation and breach of fair

and equitable treatment). Referring to the tribunals in Waste Management v. Mexico and Azurix

v. Argentina, the tribunal stated that for a violation of the contract to constitute a violation of a

BIT provision, there must be an act taken by the State or a separate entity entailing the use of

84 Article 9(2) of the Ghana-Germany BIT was an umbrella clause. ‘The contract claims which are said to have been transformed into treaty claims are summarized by the Claimant as follows:

“In breach of the JV Agreement the Respondent acting directly and/or via the state entity Cocobod:

(i) Failed in violation of Article 7 of the JV Agreement to agree a price properly or at all which would guarantee profitability of the Joint Venture for the Claimant

(ii) Failed in violation of Article 7 of the JV Agreement to provide properly or at all the supplies of cocoa required and requested by WAMCO

(iii) Failed to observe the agreed means of management of WAMCO and to allow the Claimant to enjoy proper management of WAMCO without due interference.”’ Id., para. 70. 85 Id., para. 71. 86 Id., para. 73. 87 These complaints relate to an export ban and the harassment of an executive. Id. Para. 76. 88 Id., para. 92. According to the respondent, Hamaster was abusing its control over WAMCA to take Wamco’s entire output at artificially low prices. Respondent’s allegations include falsification of invoices and usage of WAMCO’s funds to purchase local football players for affiliated German football clubs. Id., paras. 99 etc. 89 Id., para. 139. 90 Id. 91 Id., para. 325.

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governmental powers.92 The tribunal similarly denied the claim for the breach of legitimate

expectations considering it as a simple attempt to present contract claims as treaty claims.93

Analyzing the effect of the umbrella clause on the contractual claims, the tribunal stated

its concurrence with the view expressed in Impregilo v. Pakistan94, in which it was held that

contracts concluded between an investor and a legal entity separate from Islamic Republic of

Pakistan did not fall within the scope of an umbrella clause.95 The tribunal denied to give Article

9(2) of the BIT the meaning to impose upon Ghana an assumption of all obligations taken by

GCB. The tribunal took the wording of the relevant clause which refers to those obligations that

have been “assumed by the State”96 as implying to limit the scope of the umbrella clause for

contracts entered by the State. Being hesitant to grant the provision an expansive interpretation,

the tribunal stated that there was no evidence that the JVA was concluded by GCB in the

exercise of governmental authority under Article 5 of ILC Articles, or alternatively on the

instructions of, or under the direction or control of Ghana within the meaning of Article 8 of ILC

Articles.97

B. Conditional approach

Tribunals following the conditional approach recognize in theory the internationalization

effect of umbrella clauses. Most of the awards rendered post-SGS v. Pakistan tend to agree on

the validity of the umbrella clause obiter dicta, however abstain from giving it full effect with

regards to the specific case dealt with by the tribunal. Conflict between the forum selection

clauses within the BITs and investment agreements, and perceived lack of governmental element

92 Id., para. 329. “[…] an enterprise is not expropriated just because its debts are not paid or other contractual obligations towards it are breached. There was no outright repudiation of the transaction in the present case, and if the City entered into the Concession Agreement on the basis of an over-optimistic assessment of the possibilities, so did Acaverde. It is not the function of Article 1110 to compensate for failed business ventures, absent arbitrary intervention by the State amounting to a virtual taking or sterilising of the enterprise.” Waste Management, Inc. v. United Mexican States (Number 2), ICSID Case No. ARB(AF)/00/3, Final Award, April 30, 2004, para. 160.; “The Tribunal agrees that contractual breaches by a State party or one of its instrumentalities would not normally constitute expropriation. Whether one or series of such breaches can be considered to be measures tantamount to expropriation will depend on whether the State or its instrumentality has breached the contract in the exercise of its sovereign authority, or as a party to a contract.” Azurix v. Argentine Republic, ICSID Case No. ARB/01/12, Award, July 14, 2006, para. 315.; 93 Id., para. 334. The tribunal expressed its concern to interpret the concept in an expansive way which could give the standard of a fair and equitable treatment an all-encompassing meaning. 94 Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, April 22, 2005. 95 Hamaster v. Ghana, para. 343. However it is worth to note that the BIT in Impregilo v. Pakistan did not include an umbrella clause. The umbrella clause was introduced by the claimant’s attempt to use the Most Favored Nation clause to benefit from an umbrella clause found within another BIT to which Pakistan was a party. 96 Id,, para. 347(i). 97 Id., para. 347(iii).

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in the investment relationship or alleged breach can be given as typical situations, where

tribunals following the conditional approach tend to abstain from giving umbrella clauses full

effect and exclude such factual patterns from the scope of umbrella clauses’ protection. They

mostly reflect the theoretical tension among the different views dealing with asymmetrical

jurisdictional conflicts between domestic and international legal systems, and seek for

reconciliatory theories to govern this conflict.98

1. SGS v. Phillippines

Decided a year after SGS v. Pakistan, SGS v. Phillippines is the benchmark award, where

for the first time an ICSID tribunal recognized the validity of umbrella clauses as opposed to the

restrictive approach taken by the tribunal in SGS v. Pakistan.99 Arising from a factual

background very similar with its predecessor, the claims were centered around non-payment

under a contract for pre-shipment inspection services carried out on behalf of governmental

authorities of the importing country (“CISS Agreement”).100 Yet, although the tribunal’s final

decision of inadmissibility due to contractual selection clause prevented the claimant from

ultimately succeeding in its claims, the tribunal’s reasoning differed from SGS v. Pakistan to a

great extent, and its explanations on umbrella clauses precipitated a major step forward for the

legitimacy of umbrella clauses before arbitral tribunals.

Having found that the SGS’s activities with regards to the Phillippines met the threshold

for an investment made within the territory of the host state101, the tribunal dealt with the question

of whether it has jurisdiction under the umbrella clause.102 Facing with a strict precedent about

umbrella clauses such as the one in SGS v, Pakistan, the tribunal began its analysis by comparing

the umbrella clause within the Swiss-Phillippines BIT with the one in Swiss-Pakistan BIT.103

Recognizing the SGS v. Pakistan tribunal’s concern about the potential of an indefinite scope for

98 For a discussion on Integrationist vs. Disintegrationist approaches see Shany, p. 844. 99 Société Générale de Surveillance S.A. v. The Republic of the Phillippines (‘SGS v. Phillippines’) ICSID Case N° ARB/02/6 Decision on Jurisdiction (29 January 2004) (El-Kosheri, Crawford, Crivellaro). 100 Id., para. 12. 101 Id., para. 112. 102 ‘[…]the principal jurisdictional submission of SGS is that, having failed to pay for services due under the CISS Agreement, the Philippines is in breach of Article X(2) of the BIT, and that the Tribunal’s jurisdiction is attracted by Article VIII(2) in respect of such breaches. The Philippines for its part denies that Article X(2) has such an effect, relying inter alia on the decision of the SGS v. Pakistan Tribunal on the equivalent BIT provision in that case.’ Id., para. 113. 103 Article X(2) of Swiss-Phillipinnes BIT reads: “Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party.” See supra fn 40 for Article 11 of Swiss-Pakistan BIT.

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the umbrella clauses, the tribunal found that Article X(2) of Swiss-Phillippines BIT was likewise

not just limited to contractual obligations. However, the tribunal observed that Article X(2) is

limited to “obligations… assumed with regard to specific investments”. The tribunal interpreted

this difference in text as a legitimate limitation on the scope of the umbrella clause, limiting its

scope of protection to those instances where the State actually assumed a legal obligation vis-à-

vis the specific investment.104 The tribunal further differentiated Vivendi Annullment, upon

which the tribunal in SGS v. Pakistan has relied for the application of the general principle that

“a violation of a contract entered into by a State with an investor of another State, is not, by

itself, a violation of international law105.” In tribunal’s view, since no umbrella clause was found

within the BIT at issue, ad hoc committee in Vivendi Annulment did not need to consider

whether a clause in a treaty requiring a State to observe specific domestic commitments has

effect in international law, whereas this possibility is recognized by the commentary of the

Article 3 of ILC Articles.106 Denying to give decisive importance to the location of the umbrella

clause within the BIT, the tribunal also criticized SGS v. Pakistan’s rejection of umbrella clauses

claiming that they increase the scope of international obligations. In the tribunal’s view,

umbrella clauses addresses not the scope of the commitments entered into with regards to

specific investments but the performance of these obligations.107 The tribunal concluded that

Article X(2) makes it a breach of the BIT for the host State to fail to observe binding

commitments, including contractual commitments, but it does not convert the issue of the extent

or content of such obligations into an issue of international law. The tribunal found that in

104 Id., para. 121. 105 SGS v. Pakistan, para. 167. 106 SGS v. Phillipinnes, para. 122. Commentary to Article 3, para (7) states that ‘[t]he rule that the characterization of conduct as unlawful in international law cannot be affected by the characterization of the same act as lawful in internal law makes no exception for cases where rules of international law require a State to conform to the provisions of its internal law, for instance by applying to aliens the same legal treatment as to nationals. It is true that in such a case, compliance with internal law is relevant to the question of international responsibility. But this is because the rule of international law makes it relevant, e.g. by incorporating the standard of compliance with internal law as the applicable international standard or as an aspect of it. Especially in the fields of injury to aliens and their property and of human rights, the content and application of internal law will often be relevant to the question of international responsibility. In every case it will be seen on analysis that either the provisions of internal law are relevant as facts in applying the applicable international standard, or else that they are actually incorporated in some form, conditionally or unconditionally, into that standard.’ J Crawford, The International Law Commission’s Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge, CUP, 2002) 89. 107 SGS v. Phillippines, para. 126. The tribunal referred to a UNCTAD Study for this distinction. ‘Its effect [sc. of the umbrella clause] is not to transform the provisions of a State contract into international obligations... However, it makes the respect of such contracts... an obligation under the treaty” (emphasis in original).’ Bilateral Investment Treaties (Graham & Trotman, NY, 1988) 55-6

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principle the tribunal was open to SGS to refer the present dispute, as a contractual dispute, to

ICSID arbitration under Article VIII(2) of the BIT.108

Nevertheless, the tribunal abstained from exercising jurisdiction over the claims, sharing

the concern of the tribunal in SGS v. Pakistan, that the broad interpretation of the ICSID

jurisdiction could impair freely negotiated dispute settlement clauses in the contracts States enter

into with investors.109 Despite the SGS’s claims that the BIT by entering into force after the

execution of the CISS Agreement superseded the contract’s terms, the tribunal found the BIT as

a document with a general application whereas the CISS agreement should be given preference

as the more specific document.110

The tribunal’s declining to enter into the merits of the claim due to inadmissibility, albeit

following a different reasoning, created a result similar with SGS v. Pakistan, where parties who

were relying on umbrella clauses as substantial mechanisms of protection received virtually no

protection from an investment tribunal. Since only few contracts where the State is a party

would not include a forum selection clause, it is difficult to imagine a constellation in practice

where the claimant would have the chance to bring its claims before an investment tribunal

without impairing the contractual agreement. However the tribunal’s way of defining and

illustrating the effect and scope of an umbrella clause set an important standard for other

tribunals to follow.

2. CMS v. Argentina

CMS v. Argentina was an investment arbitration case brought by a private gas

transmission company who filed claims against several governmental and regulatory measures

taken by the Argentinian government during the 90s economic crisis.111 The original claim

asserted that the measures were equivalent to expropriation, in breach of fair and equitable

treatment, and Argentina’s undertakings under the umbrella clause found within the Argentina-

US Bilateral Investment Treaty by way of breaching the terms of a license given by the

108 SGS v. Phillipinnes, para. 134. 109 ‘SGS should not be able to approbate and reprobate in respect of the same contract: if it claims under the contract, it should comply with the contract in respect of the very matter which is the foundation of its claim. The Philippine courts are available to hear SGS’s contract claim. Until the question of the scope or extent of the Respondent’s obligation to pay is clarified—whether by agreement between the parties or by proceedings in the Philippine courts as provided for in Article 12 of the CISS Agreement—a decision by this Tribunal on SGS’s claim to payment would be premature.’ Id., para. 155. 110 Id., para. 141. 111 CMS Gas Transmission Co. v. Argentine Republic (‘CMS v. Argentina’), ICSID Case No. ARB/01/8, Award, 12 May 2005 (Vicuña, Lalonde, Rezek).

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Argentinian government to a local company where CMS was a minority shareholder. The terms

of the relevant license included also a forum selection clause.

In its decision on jurisdiction the tribunal affirmed its jurisdiction on the claims as

presented by the claimant including the ones relating to the umbrella clause, by referring to past

awards and stating that the ‘clauses in the license referring certain kinds of disputes to the local

courts of the Republic of Argentina are not a bar to the assertion of jurisdiction by an ICSID

Tribunal under the Treaty, as the functions of these various instruments are different.’112

In its award on merits the tribunal denied the expropriation claim, however found that the

government’s actions were against the fair and equitable treatment principle and also constituted

a breach of the umbrella clause. 113 In its finding regarding the umbrella clause, the tribunal

simply recognized the validity of the umbrella clause by referring to its decision on jurisdiction

which dealt with the question of umbrella clauses in a somehow limited extent compared to SGS

cases due to the obviously governmental nature of the relevant acts. However the tribunal

distinguished the commercial disputes arising from a contract from disputes arising from the

breach of treaty standards and their respective causes of action.114 Yet due to the nature of the

acts exercised by the Argentina, which involved sovereign authority, the umbrella clause

provided protection to the investor against such acts.115 The tribunal also paid attention to the

importance of the two stabilization clauses contained in the license. Obviously these provisions

had a convincing effect when combined with the umbrella clause. Accordingly, the government

acted in breach of the umbrella clause and its obligations thereunder “to the extent that legal and

contractual obligations pertinent to the investment [had] been breached and [had] resulted in the

violation of the standards of protection under the Treaty”.116

The award was subject to an annulment procedure under the respondent’s objections.117

Interestingly, the annulment committee held the award as valid except its conclusion on the

umbrella clause. In the ad hoc committee’s opinion the tribunal erred by finding Argentina

112 CMS v. Argentina, Decision of the Tribunal on Objection to Jurisdiction, ICSID Case No. ARB/01/01, 17 July 2003, para. 76 113 CMS v. Argentina, Award, p. 139. 114 Id., para. 300. 115 Id., para. 301. ‘None of the measures complained of in this case can be described as a commercial question as they are all related to government decisions that have resulted in the interferences and breaches noted.’ 116 Id., para. 303. 117 CMS v. Argentina, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic, 25 September 2007 (Guillaume, Elaraby, Crawford).

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liable against CMS under the umbrella clause. In ad hoc committee’s opinion, the license was a

contractual device entered into between Argentina and the local company where CMS is a

minority shareholder. CMS had no direct rights under this license, and umbrella clause could not

serve to transfer these rights to CMS. Despite the umbrella clause, the claims arising under the

contract continued to be subject to Argentinian law, whereas such as in many domestic legal

systems, a contractual obligation does not enter into ergo omnes, but with regard to particular

parties.118 Yet in ad hoc committee’s opinion, the tribunal failed to deal with these issues in its

award by merely referring to its decision on jurisdiction, which dealt with the umbrella clauses in

a limited fashion, and therefore the award should be partially annulled for failure to state

reasons.119

3. BIVAC v. Paraguay

The dispute between Bureau Veritas, Inspection, Valuation, Assessment and Control,

BIVAC B.V. (a Dutch company providing pre-shipment inspection services) and Paraguay, which

arose under a contract between BIVAC and Paraguayan Ministry of Finance, closely resembles

the SGS v. Pakistan and SGS v. Phillippines with regards to its factual background.120 More

interestingly, an identical contract with an administrative nature (‘Inspection Contract’) was

executed by the Paraguayan Ministry of Finance with the Swiss company, SGS.121 This latter

contract eventually led to an investment arbitration case as well, yet with quite a different

outcome as it will be dealt with in the next chapter.122 It is worth to note that the Inspection

118 Id., para. 95. ‘The effect of the umbrella clause is not to transform the obligation which is relied on into something else; the content of the obligation is unaffected, as is its proper law. If this is so, it would appear that the parties to the obligation (i.e., the persons bound by it and entitled to rely on it) are likewise not changed by reason of the umbrella clause. […] The obligation of the State covered by Article II(2)(c) will often be a bilateral obligation, or will be intrinsically linked to obligations of the investment company. Yet a shareholder, though apparently entitled to enforce the company’s rights in its own interest, will not be bound by the company’s obligations, e.g. as to dispute settlement. […] If the Tribunal’s implicit interpretation is right, then the mechanism in Article 25(2)(b) of the ICSID Convention in unnecessary wherever there is an umbrella clause. […]There is no discussion in the award of the travaux of the BIT on this point, or of the prior understandings of the proponents of the umbrella clause as to its function.’ 119 Id., para. 97. 120 Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. The Republic of Paraguay (‘BIVAC v. Paraguay’) ICSID Case No. ARB/07/9, Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009 (Knieper, Fortier, Sands). 121 ‘The two contracts were intended to execute a “programme of pre-shipment inspection” of goods to be imported into Paraguay, as established by the Ministry of Finance (Preamble to the Contract). […] By the terms of the Contract BIVAC was inter alia required to: (i) physically identify the goods prior to shipment, (ii) appraise the reasonableness of the price charged by the seller, (iii) estimate the customs value, (iv) issue certificates of inspection, (v) train Paraguayan personnel, and (vi) assist in the establishment of a database.’ Id., para. 7. 122 See SGS v. Paraguay at supra fn 3, infra _.

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Contract included a forum selection clause for the disputes within its scope being referred to the

Tribunals of the City of Asunción.123

The claims of BIVAC were centered on the 19 unpaid invoices amounting to some US $

22 million among the 35 invoices issued during a three years period where BIVAC argues that it

has carried out 70,000 inspections.124 BIVAC argued in its claims that Paraguay’s acts amount to

expropriation125, breach of fair and equitable treatment and the umbrella clause of the Paraguay-

Dutch BIT.126 The tribunal dealt with the question on whether it has jurisdiction over the claims

brought under fair and equitable treatment standard and whether they are admissible under the

existence of a forum selection clause, after affirming Paraguay’s consent for arbitration and the

existence of an investment.

Paraguay claimed that BIVAC has not alleged facts that give rise to a prima facie claim,

for the reason that the allegations were centered on a lack of payment under a municipal contract

without any genuine allegation for the breach of a substantive treaty standard.127 In its analysis,

first the tribunal differentiated the present dispute from SGS v. Phillippines, where the tribunal

found that the claim was premature as the dispute with regards to the amount payable was still

unresolved, and should be referred to the mutually agreed domestic court. In the tribunal’s view

the current dispute was different as there were no differences which should be dealt with as a

preliminary matter by a domestic court, since the Ministry of Finance recognized the debt under

19 invoices and expressed willingness to pay amounts due following an audit.128 In the

tribunal’s view which followed Vivendi Annulment in this respect, the fundamental basis of the

claim turned into the interpretation of the alleged acts of Paraguay from the perspective of fair

and equitable treatment, and the domestic court cannot be expected to handle such an issue

pertaining treaty standards. Therefore the forum selection clause did not bar the contractual

123 BIVAC v. Paraguay, para. 8. 124 Id., para. 9. 125 Although the dispute was contractual in its origin, BIVAC argued that the invoiced amounts were recognized by the Paraguayan government as the government responded to the BIVAC’s initial requests by conducting various internal reviews and audits, which affirmed BIVAC’s compliance with the contracts and the Paraguay’s indebtedness. However despite the results of the government’s internal investigations and the Minister expressed the government’s willingness to pay the relevant amounts, Paraguay failed to make the payments, which amounts to an indirect expropriation of property. This claim was rejected on the jurisdictional phase. Id., paras. 10 etc., 117. 126 Article 3(4) of the treaty reads as: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments of the other Contracting Party.” Id. para. 19. 127 Id., para. 118. 128 Id., paras. 121-125.

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claims from being admissible before an ICSID Tribunal to the extent that they relate to the fair

and equitable treatment.129

Concentrating on the issue of the umbrella clause at the end, the tribunal dealt with the

questions of jurisdiction and admissibility separately. The tribunal found that the Article 3(4) of

the BIT established an international obligation for the parties to the BIT to observe contractual

obligations with respect to investors.130 Distinguishing the umbrella clause from the one in the

Swiss-Pakistan BIT, the tribunal referred to the fact that the clause appeared early in the BIT,

which expressed the parties’ intent to grant to it an expansive meaning. Further the clause has to

be interpreted in such a way as to give it some practical effect, whereas Paraguay failed to

explain an alternative interpretation in this respect.131 The tribunal also recognized that on a

plain meaning it was capable of being read to include contractual arrangements, whereby the

alleged breaches of the Ministry were attributable to the State, and therefore it had jurisdiction

over the claim as presented.132

However when it dealt with the question of admissibility, the tribunal followed the SGS v.

Phillippines into a great extent, and found the claim as inadmissible primarily due to the

existence of the contractual selection clause. When analyzing the relationship between the

contractual forum selection clause with the Article 3(4) of the BIT, the tribunal noted that

chronologically the contract has entered into force after the BIT, which indicated the parties

intention to agree on an exclusive contractual forum selection.133 In tribunal’s view, the forum

selection clause should be interpreted as an implicit obligation of the Paraguay to ensure that the

tribunals of the City of Asunción were available to resolve contractual disputes, therefore only if

Paraguay had taken steps to effectively prevent the domestic tribunals from exercising

jurisdiction over a dispute in relation to the Contract, then BIVAC would be entitled to challenge

such an act under the umbrella clause.134 Under the Vivendi Annulment’s test on the basis of the

claims, BIVAC’s claims had their fundamental basis in the contract, not in the BIT, and therefore

“where the essential basis of a claim brought before an international tribunal is a breach of

129 Id., para. 127. 130 Id. para. 141. 131 Id. 132 Id., para. 142. 133 Id., para. 146. 134 Id., para. 147.

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contract, the tribunal will give effect to any valid choice of forum clause in the contract.”135

Having regard to the need to respect the autonomy of the parties, BIVAC cannot rely on the

Contract as the basis of the claim when the contract itself refers that claim exclusively to another

forum, in the absence of exceptional reasons.136 The tribunal analyzed the BIVAC’s arguments

relying on past awards respectively, however failed to find compelling reason to follow these

tribunals due to factual differences.137 After rejecting the claims under umbrella clause as

inadmissible, the tribunal accepted jurisdiction over the claim under fair and equitable treatment

standard.

C. Broad Approach

Broader approach involve broadly all cases where the tribunal found breaches of

umbrella clauses without any reservation. Typically these tribunals approach umbrella clauses as

valid BIT mechanisms and tend to favor interpretations which would enable umbrella clause to

have a meaningful effect.

1. SGS v. Paraguay

Following a wide range of cases mentioned above which dealt with the issue of umbrella

clauses and relevant questions, the tribunal in the recent case of SGS v. Paraguay138 stands apart

with regards to its strong stance at interpreting umbrella clauses in the most favorable manner for

investors.

SGS v. Paraguay was a case brought by the Swiss company SGS concerning non-

payment under a contract entered into between the SGS and the Ministry of Finance of Paraguay,

135 Id., para. 152. 136 Id., para. 159. 137 ‘The first award referred to is Eureko v Poland [citation omitted], where the tribunal rejected Poland’s argument on the inadmissibility of a claim under the umbrella clause in circumstances in which there was an exclusive jurisdiction clause for contractual disputes: since the Claimant “advances claims for breach of Treaty ... every one of those claims must be heard and judged by this Tribunal”. As to the violations of the contract at issue in that case, the tribunal concluded that Poland’s actions and inactions that were in breach of its obligations under the BIT - those held to be unfair and inequitable and expropriatory in effect – were also in breach of the umbrella clause and the underlying contractual obligations. The award provided no assessment or analysis of the contractual provisions that were in issue in that case, so that it appears that its conclusions are to be understood against the background of the particular facts that were there in issue. The second award invoked by BIVAC is Noble Ventures v Romania. [citation omitted] Although that award dealt with the meaning and effect of an umbrella clause, there is no indication that the underlying contract included an exclusive jurisdiction clause or that there was any argument as to admissibility. Accordingly that award can provide no assistance to BIVAC on this issue. The third case invoked by BIVAC is Siemens v Argentina [citation omitted]. In its decision on jurisdiction the tribunal did not address the issue of admissibility with regards to the umbrella clause. In a single line it ruled that “The dispute as formulated by the Claimant is a dispute under the Treaty”, and on that basis found that it had jurisdiction.[citation omitted] At the merits phase the tribunal found that the Claimant was not a party to the contract, and accordingly rejected the claim as regards breach of the contract. The decision therefore provides no support for BIVAC’s position as to admissibility.’ BIVAC v. Paraguay, at paras 156-158. 138 SGS Societe Generale de Surveillance S.A. v. The Republic of Paraguay (“SGS v. Paraguay”), ICSID Case No. ARB/07/29, Award (10 February 2012) (Alexandrov, Donovan, Mexía).

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under which SGS was hired to perform pre-shipment inspection and certification services for

cargoes destined for Paraguay (‘Inspection Contract II’). The contract was almost identical to

the one executed with BIVAC, which was the subject of the aforementioned arbitration case

adjudicated by a different ICSID tribunal meanwhile139. In a similar fashion, the Inspection

Contract II included a dispute resolution clause referring the disputes arising under the contract

to the Courts of the City of Asunción. In the same vein with the former cases it has brought

against Pakistan and Phillippines, SGS sought for damages arising from the non-payment under

the Inspection Contract II by arguing that the Paraguay’s non-payment under the contract was a

breach of Paraguay’s treaty obligations specifically under the umbrella clause (also together with

other substantive rights like fair and equitable treatment) found within the Swiss-Paraguay BIT,

whereby Paraguay undertook to observe all commitments it has undertaken with regards to

investments in its territory.

Starting with its jurisdictional analysis, the tribunal found it necessary to clarify its view

on the issue of “prima facie” case standard, which is in the tribunal’s view often adopted by

treaty tribunals in a technically wrong manner.140 The tribunal’s particular emphasize on this

issue and its application on umbrella clauses constitutes an important divergence from the

decision-making pattern of prior tribunals.

After exhausting the issues of consent and existence of an investment, the tribunal dealt

with the question of whether it has jurisdiction over the claimant’s claims as stated and whether

such claims are admissible. Interpreting the nature of the claims as formulated by SGS, the

tribunal followed a very different approach compared to its predecessors, which hesitated to

interpret claims brought umbrella clauses as treaty-claims, and oftentimes rather deemed such

claims as being contractual by referring to the “essential basis” test used to differentiate contract

139 Both tribunals were aware of the ongoing proceedings and the tribunal in SGS v. Paraguay consulted during the proceedings with the parties on their views on the conclusions of the latter tribunal. 140 SGS v. Paraguay, Decision on Jurisdiction, paras. 50-58. ‘Once a claimant has offered evidence that makes a prima facie showing, respondent must then produce evidence to rebut the claimant’s factual assertions. But this is a matter for the merits phase, during which the tribunal weighs the sufficiency of the Parties’ evidence. At the jurisdictional phase, the claimant is not asked to make a prima facie showing of its case on the merits; it is not required to produce evidence to support its allegations about the respondent’s purported default. As discussed above, all a claimant needs to do is show that the facts that it has alleged (though not yet proven) could violate the treaty in question.’ However in the tribunal’s view, the threshold to be applicable during the jurisdictional stage to alleged breaches of substantive rights is different than the analysis to be made on issues such as the existence of an investment, state consent and investor nationality, which are jurisdictional elements to be satisfied under the explicit language of the ICSID Convention and the BITs. Issues pertaining to such jurisdictional elements are to be adjudicated during the jurisdictional phase in an extensive and conclusive manner by exhausting all necessary evidence as they relate to the tribunal’s legal authority.

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and treaty claims in Vivendi Annulment.141 In the tribunal’s view, the claimant has not asked the

Tribunal to decide the claims under the Inspection Contract II but rather under the BIT,

notwithstanding that the BIT’s dispute resolution clause was broad enough to cover contractual

disputes and claimant could rightfully structure its claims as purely contractual as well.142 For

the tribunal, the contractual breach and the treaty breach are phenomena, which can co-exist in

parallel realms of domestic and international law despite their intertwined factual background.143

In the present case, the tribunal was asked only to consider whether there has been a breach of

the treaty, and the tribunal had to analyze the contractual issues as facts only insofar as they

relate to a breach of the respondent’s obligation to observe its commitments under the umbrella

clause.144 The tribunal rejected the Paraguay’s argument that the claims should be characterized

as strictly contractual and therefore cannot give rise to a breach of a BIT, since the allegations

amount to no more than a non-performance of contractual obligations and lacking any sovereign

interference.145 In the tribunal’s view it was a logically troublesome act, to differentiate an act of

State as being merely commercial or jure imperii, and conclude that the State’s actions are no

longer acts of the State solely because they occur in the contest of a contract or a commercial

transaction.146 Referring to its explanations on the threshold to be applicable to the claims during

the jurisdictional stage, the tribunal found that the claimant alleged sufficient facts for its case

and the resolution of the dispute should be properly reserved to the merits phase where the

parties will have the chance to fully present their evidence and arguments.147 The tribunal

141 Although it did not deal with an umbrella clause, the fundamental basis test adopted by the ad hoc tribunal in Vivendi Annulment embodied the standard when tribunals deal with contractual disputes. Albeit perhaps the dominant view today has left this approach as also argued early in this paper, still the awards where tribunals refused their jurisdiction over contractual disputes hold importance in this respect. See especially Salini Costruttori S.pA. and Italstrade S.p.A. v. The Hashemite Kingdom of Jordan, Decision on Jurisdiction, November 15, 2004 (ICSID Case No. ARB/02/13) (Salini v. Jordan). On ICSID tribunal’s competence to adjudicate contractual disputes in general see Anthony Sinclair, Bridging The Contract/Treaty Divide in INTERNATIONAL INVESTMENT LAW FOR THE 21ST CENTURY: ESSAYS IN HONOUR OF CHRISTOPH SCHREUER (eds. Binder, Kriebaum, Reinisch & Wittich), 93-104. 142 SGS v. Paraguay, Decision on Jurisdiction, para. 129. Under this reasoning, a dispute arising from a contract can be brought before an ICSID tribunal in two manners: (i) claiming for a breach of contract and seeking ICSID’s jurisdiction under a broad dispute resolution clause found within a BIT (in which case the tribunal will deal with a purely contractual dispute); (ii) claiming for a breach of a substantive BIT protection such as the umbrella clause which 143‘Other investment treaty arbitration decisions are in accord. The tribunal in SGS v. Pakistan averred that “[a]s a matter of general principle, the same set of facts can give rise to different claims grounded on differing legal orders: the municipal and the international legal orders.”[citation omitted]’ Id., para 132. 144 ‘Likewise, the tribunal in Impregilo v. Pakistan held that “contrary to Pakistan’s approach in this case, the fact that a breach may give rise to a contract claim does not mean that it cannot also – and separately – give rise to a treaty claim. Even if the two perfectly coincide, they remain analytically distinct, and necessarily require different enquiries.” [citation omitted]’ Id. 145 Id., para. 134. 146 Id., para. 135. 147 Id., para. 136.

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conceded that different questions would arise about the relationship between the contractual

(Article 9 of Inspection Contract II) and treaty based dispute resolution clauses, in case the

claimant had not advanced claims for breach of the treaty, and brought merely claims for breach

of contract.148 The tribunal referred to certain sections of the Vivendi Annulment to further

support its finding that a state cannot rely on a forum selection clause to avoid the

characterization of its act as internationally wrongful.149

When assessing the validity and scope of the umbrella clause found within the BIT

(Article 11)150, the tribunal unconditionally recognized the clause’s legal effect creating an

obligation for the State to constantly guarantee the observance of its commitments entered into

with respect to investments without having a limitation to the nature of commitments, whether

established by contract or by law.151 Considering the unqualified text and the ordinary meaning

of Article 11, the non-textual limitations as proposed by the respondent (e.g. requirement of

exercising state power, or undue government influence) were not admissible. Thereby finding

jurisdiction, the tribunal emphasized its duty to consider and decide the case referring to the

words of Vivendi Annulment, ‘[t]ribunal, faced with such a claim and having validly held that it

had jurisdiction, [is] obliged to consider and to decide it [citation omitted]’.152 Given the

extensive commonalities of the facts confronting the tribunals in the present case and in BIVAC

v. Paraguay, the tribunal felt obliged to explain its reasoning why it did not follow BIVAC v.

Paraguay’s approach, which refused the umbrella clause claims as inadmissible due to the forum

selection clause. First, the tribunal emphasized that the alleged breaches of respondent’s

commitments cannot be judged under the contract alone, and it must be decided with reference to

the BIT and the applicable bodies of law specified under it. Therefore the claims were treaty-

148 Id., para. 138. 149 ‘In the Committee’s view, it is not open to an ICSID tribunal having jurisdiction under a BIT in respect of a claim based upon a substantive provision of that BIT, to dismiss the claim on the ground that it could or should have been dealt with by a national court. In such a case, the inquiry which the ICSID tribunal is required to undertake is one governed by the ICSID Convention, by the BIT and by applicable international law. Such an inquiry is neither in principle determined, nor precluded, by any issue of municipal law, including any municipal law agreement of the parties. […] Moreover the Committee does not understand how, if there had been a breach of the BIT in the present case (a question of international law), the existence of Article 16(4) of the Concession Contract could have prevented its characterisation as such. A state cannot rely on an exclusive jurisdiction clause in a contract to avoid the characterisation of its conduct as internationally unlawful under a treaty.’ Vivendi Annulment, paras. 102-03. 150 Article 11 of the Swiss-Paraguay BIT states that ‘[either] Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of other investors of the Contracting Party’. 151 SGS v. Paraguay, Decision on Jurisdiction, para. 167. 152 Id., para. 171.

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based, and involved issues beyond the jurisdiction of an ordinary domestic tribunal.153 Second,

the tribunal denied the respondent’s contention that since the fundamental basis of claims are

contractual the claims should be assessed under the contract. In the tribunal’s view, this would

be an argument for declining jurisdiction, rather than being an issue of inadmissibility.154 Third,

the court further held that finding jurisdiction and then to dismiss the claims on admissibility

grounds would divest the umbrella clause agreed within the BIT of its core purpose and effect.

Referring to the Professor Gaillard the tribunal stated that ‘an investor’s right to choose an

international arbitral tribunal for the settlement of its investment disputes and, in the same breath,

requires that the selected tribunal stay the proceedings on the basis of an exclusive forum

selection clause contained in the investment contract, it results in the BIT tribunal having

jurisdiction over an empty shell and depriving the BIT dispute resolution process of any

meaning.’155 Fourthly, in the tribunal’s view it was not a viable approach for the tribunal to

dismiss the umbrella clause claims as inadmissible due to the forum selection clause, which

would in effect conclude that every investment agreement that specifies a dispute resolution

mechanism constitutes an implied waiver of BIT rights.156 For these reasons the tribunal

concluded that it has jurisdiction over the claims, and the claims were admissible.

In its award on merits the tribunal analyzed on substance whether the respondent failed to

observe its commitments under the umbrella clause. The claimant’s allegations for breach under

umbrella clause were related with two types of commitments, first the ones found within the text

of the Inspection Contract II, and second the obligations undertaken by the respondent through

various oral and written representations during and after the term of the Inspection Contract II.157

With respect to respondent’s obligations under the Inspection Contract II, the tribunal found that

as a matter of the ordinary meaning of the umbrella clause, there was no element implying a

government will only fail to observe its commitments it if abuses its sovereign authority.

Therefore, abuse of sovereign authority was not a required element for a breach of umbrella

clause, unlike an analysis to be done under fair and equitable treatment and imposition of unfair

153 Id., para. 173. 154 Id., para. 174. 155 Id., para. 176; referring to Emmanuel Gaillard, Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered, supra fn 1, 393. 156 Id., para. 177. 157 SGS v. Paraguay, Award, para. 69.

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and discriminatory measures. 158 Dealing with the respondent’s defense that the existence of a

forum selection clause precluded the finding of liability and the respondent’s obligations were

merely consisted of its contractual commitments and in case of its failure to make payments the

submission of the dispute to local courts, the tribunal found that lacking any reference to a

convincing legal authority the respondent was merely rearguing its defense on jurisdiction as a

defense on the merits.159 With regards to the extra-contractual commitments, the tribunal

abstained from resolving these matters as the background of the legal issues related with its

analysis on contractual issues were intertwined with the relevant claims on extra-contractual

commitments. Similary the tribunal did not find it necessary to analyze the claims on fair and

equitable treatment and discrimination after delivering its judgment on the respondent’s

obligations under the umbrella clause. 160 In its decision the tribunal awarded to the claimant

damages approximately amounting to $ 40 million US Dollars.

2. EDF v. Argentina

In a recent award delivered by another ICSID tribunal, the issue of umbrella clauses was

tested again, this time in the context of most-favored nation clauses and regulatory actions taken

during one of the direst financial crisis in recent history, namely the economic crisis in

Argentina.161 The arbitration was brought by a consortium of three companies who as a result of

Argentina’s privatization program acquired the shares of a Argentinian power distribution

company, EDEMSA, which was the party of a concession agreement entered into with the local

government of Mendoza for a duration of 30 years.162

Starting in late 2001, Argentina fell into a state of economic turmoil, and the government

began to adopt radical measures to stabilize the crisis such as the enactment of the National

Emergency Law, which unilaterally abrogated currency and tariff terms involving foreign

158 Id., para. 92. See also id., para. 95 stating that ‘[i]n light of these conclusions, the parties’ discussion of whether Paraguay took actions of a sovereign nature, and, if so, whether such actions were an abuse of government authority, is irrelevant. In short, if Paraguay failed to observe its contractual commitments, then it breached Article 11. No further examination of whether Paraguay’s actions are properly characterized as “sovereign” or “commercial” in nature is necessary. ‘ 159 Id., paras. 104-109. 160 Id., para. 161. 161 EDF International S.A., SAUR International S.A., and León Participaciones Argentinas S.A. v. Argentine Republic (‘EDF v. Argentina’), ICSID Case No. ARB/03/23, Award, 11 June 2012 (Kauffmann-Kohler, Remón, Park). 162 Id., paras. 63-72. The agreement which was setting forth the terms for the provision of power distribution services included a currency clause and various other provisions detailing the methods for periodic adjustment of tariff rates during the agreement’s effective period based on various factors such as the changes in distribution costs. Id., paras. 81-92.

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currencies contained in public utilities contracts including the concession agreement to which

EDEMSA was a party to.163 The emergency regulations further authorized the national executive

power to renegotiate a wide range of public contracts, and prohibited public utility

concessionaires including EDEMSSA from derogating contractual obligations during the

renegotiation process.164 Following these events the consortium members filed claims before

ICSID against the Argentinian government. As the parties claimed that the aforementioned

emergency measures in breach of the concession contract also amounted to a breach of their

various BIT rights, including Argentina’s commitments under an umbrella clause165 found within

Luxembourg-Argentina BIT and invoked by the claimants through the most-favored nation

clause166 found within the France-Argentina BIT (which otherwise in its own text did not include

an umbrella clause).

In its decision of merits, the tribunal found it necessary to start by expressing its opinion

on a defense raised by the respondent that the emergency measures were legitimate under

international law for the preservation of jus cogens and human rights during the crisis.

Considering that the imbalance caused in EDEMSA’s business persisted beyond the post-2002

period when economic indicators in Argentina showed a stable trend toward recovery, the

tribunal found no persuasive evidence which signaled that the measures as taken together with

their effects were necessary to guarantee human rights.167

Analyzing the effect of the most-favored nation clause, the tribunal recognized the

divergence of opinion on the application of MFN clauses especially with different effect on

jurisdictional and procedural terms. Yet, in the tribunal’s view umbrella clause was clearly a

substantive term, and therefore the relevant theoretical divergence had no effect on the

163 Id., paras. 141-150. 164 Id., paras. 151-154. 165 Article 10(2) of the Argentina-Luxembourg BIT reads as ‘[e]ach of the Contracting Parties shall respect at all times the commitments it has undertaken with respect to investors of the other Party.’ 166 Article 4 of the Argentina-France BIT, so-called MFN Clause, provides in pertinent part: ‘Within its territory and in its maritime zone, each Contracting Party shall provide to the investors of the other Party, with respect to their investments and activities associated with such investments, a treatment no less favorable than that accorded to its own investors or the treatment accorded to investors of the most favored Nation if the latter is more advantageous. For the same reason, the nationals of either of the Contracting Parties authorized to work in the territory and in the maritime zone of the other Contracting Party shall be able to enjoy suitable terms for the conduct of their professional activities. […]’ 167 Id. para 93-94.

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applicability of the MFN clause in the present case as both theories agree that MFN clauses are

at their minimum still applicable to substantive terms of third-country treaties.168

Analyzing the validity of the umbrella clause, the tribunal interpreted the Argentina-

Luxemburg BIT as having a broad language, and affirmed that the concession agreement

embodied obligations undertaken towards a foreign investor for specific investments, thereby

concluding that breaches in the agreement would fall within the protection of the umbrella

clause.169 The tribunal stated that since the present case involved clearly governmental acts, it

was unnecessary to discuss whether a governmental element should be required for a contractual

breach to amount to a breach of an umbrella clause.170 In its analysis on the contractual

provisions, the tribunal opined that the currency clause served as a risk allocation clause, and its

breach would clearly fall under the umbrella clause.171

V. Discussion

As illustrated above, existing awards tend to reflect very different views and policy

concerns adopted by tribunals with regards to umbrella clauses. This section aims to identify the

axes of divergence in the tribunals’ interpretation and seeks to posit a reconciliation attempt

between different interpretations under the light of the evolving arbitral practice and decision-

making.

A. Floodgates theory and states’ intent

Looking at the prevalent objection against broader application of umbrella clauses one

can identify that the floodgates theory is the biggest concern has two aspects, which can be split

into jurisdictional (feasibility of treaty arbitration for the resolution of contractual disputes) and

substantive (state’s intent to bind itself under international law for all investment related

commitments) concerns. Generally, the jurisdictional concern contends that adopting a broader

interpretation and allowing any contract claim to fall under the jurisdiction of ICSID tribunals

will result in ever-increasing numbers of minor disputes finding their way into treaty arbitration

thus diluting the efficiency and integrity of an otherwise exceptional dispute resolution

mechanism. This approach reflects the outdated skepticism about treaty arbitration’s availability

168 Id., paras. 921-937. 169 Id., paras. 938-939. 170 Id., para. 941. 171 Id., paras. 943-969.

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for contractual disputes under ICSID Convention. Yet as mentioned above172, this question

seems to be resolved at least to the extent it relates to the ICSID Convention, and states are free

to agree on BITs, which allow contractual disputes to be resolved by treaty arbitration when

parties agree to do so.

Parallel to the concerns about their own power to resolve contractual disputes, especially

the first tribunals who dealt with umbrella clause claims based on purely contractual issues (e.g.

non-payment of service fees) hesitated from reaching the conclusion that the evidence presented

was sufficient to interpret states’ intent to give umbrella clauses the power to elevate contract

breaches into treaty breaches.173 These tribunals emphasized the potentially indefinite scope of

state’s obligations under a broadly interpreted umbrella clause, which would include not only

contractual commitments but also any unilateral commitment under domestic law in the forms of

legislation or regulation, thus effectively resulting in an all-encompassing stabilization effect on

the host state. Denying this effect to umbrella clauses, some tribunals required a parallel breach

in one of the other substantive protections provided by a BIT.174 In the SGS v. Pakistan tribunal’s

view, to agree on such a clause would effectively render all other substantive protections (e.g.

fair and equitable treatment) unnecessary, since any breach of contract or municipal law

provision could serve to trigger a treaty arbitration under a simple umbrella clause.175

Floodgates theory has indeed various flaws. First of all, the perceived threat of the

potential for an exponential rise in the number of arbitration cases is groundless. The investment

arbitration is an expensive tool for investors, and the related costs are likely to serve as a

deterrence for both abusive and minor claims.176 Secondly, an umbrella clause is only a

substantive undertaking by the host state to observe its investment related commitments. Yet,

similar with claims brought under different substantive protections (fair and equitable treatment,

indirect expropriation), mere allegation of a breach is oftentimes not sufficient to establish the

172 See supra note 17. 173 SGS v. Pakistan, Objections to Jurisdiction, para. 168; Joy Mining v. Egypt, Award on Jurisdiction, paras. 71-82, ‘In this context, it could not be held that an umbrella clause inserted in the Treaty, and not very prominently, could have the effect of transforming all contract disputes into investment disputes under the Treaty, unless of course there would be a clear violation of the Treaty rights and obligations or a violation of contract rights of such a magnitude as to trigger the Treaty protection, which is not the case. The connection between the Contract and the Treaty is the missing link that prevents any such effect. This might be perfectly different in other cases where that link is found to exist, but certainly it is not the case here.’ 174 Joy Mining v. Egypt, para. 75. 175 SGS v. Pakistan, Objections to Jurisdiction, para. 168. 176 James Crawford, Treaty and Contract in Investment Arbitration, The 22nd Freshfields Lecture on International Arbitration London, 29 November 2007, p. 20.

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jurisdiction of a treaty tribunal. The tribunal’s decision on its jurisdiction oftentimes rests upon

other jurisdictional elements such as the existence of an investment, which requires a substantial

relationship more than the existence of a mere contract between the investor and the host state.

Undoubtedly, these jurisdictional requirements serve as natural barriers for fraudulent or

irrelevant claims, and filter them under different and more neutral criteria at the jurisdictional

phase. Therefore, from a policy point of view on patterns of arbitral decision making, it is a

more favorable approach to leave these questions to the analysis on whether an investment

exists.177

As to the issue of state intent, as clearly documented in the history of umbrella clauses in

treaty practice, for several decades treaty drafters explored the possibility of a mechanism for the

internationalization of investment agreements.178 Although generally under international law a

mere breach of a contract does not result in state responsibility under international law, the

dominant view clearly recognizes the states’ right to agree on exceptions to this rule.179

Notwithstanding the principle that each BIT should be analyzed in its own context, indeed, the

dominant BIT practice closely resembles the wording used in Article II of 1959 Abs-Shawcross

Draft Convention on Foreign Investment180, thus indicating a purposeful effort by BIT drafters to

incorporate such a protection mechanism into BITs in order to be enforced through treaty

arbitration.181 Therefore, abstaining from giving a meaningful effect to such clauses in BITs and

depriving them from their primary function, is contrary to the effet utile principle well

established in treaty interpretation.182 Considering the already historically established meaning

given to the umbrella clauses, the assumption must be in favor of giving them validity, unless the

drafters explicitly narrowed its scope in the respective texts of the BIT.

177 In same opinion, see Mihir C. Naniwadekar, ‘The Scope and Effect of Umbrella Clauses: The Need for a Theory of Deference?’, TRADE, LAW AND DEVELOPMENT, Vol 2, No 1 (2010). 178 See also on stabilization clauses in investment agreements, Thomas W. Waelde & George Ndi, ‘Stabilizing International Investment Commitments: International Law Versus Contract Interpretation’, in 31 TEX. INT’L L. J. 216.

179 Schreuer, Travelling the BIT Route, p. 250; OPPENHEIM’S INTERNATIONAL LAW, p. 927. 180 “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”. UNCTAD, INTERNATIONAL INVESTMENT INSTRUMENTS: A COMPENDIUM IN UNITED NATIONS, New York, 2000, Vol. V. p. 395. 181 Jonathan B. Potts, Stabilizing the Role of Umbrella Clauses in Bilateral Investment Treaties: Intent, Reliance, and Internationalization, Virginia Journal of International Law, Volume 51, Number 4, at 1005, p. 1033. 182 James Crawford, Treaty and Contract in Investment Arbitration, The 22nd Freshfields Lecture on International Arbitration London, 29 November 2007, p. 19; SGS v. Paraguay, Decision on Jurisdiction, para. 182.

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B. Requirement for Sovereign element and attribution

As a limitation for the scope of umbrella clauses, it is common for tribunals to refuse to

extend the reach of the umbrella clauses to contractual relationships where there is insufficient

sovereign element. These incidents can be broadly categorized in two groups. First group

entails umbrella clause claims alleging the breach of an ordinary commercial contract where the

State is directly a party. Accordingly, this view finds it necessary to “distinguish the State as a

merchant from the State as a sovereign,” especially in cases where the alleged breach relates to

an “ordinary” commercial contract entered by a State, which was acting merely as a merchant

without exercising governmental powers.183 To reach that conclusion, these tribunals apply at

the jurisdictional level a characterization test to umbrella clause claims and refuse to exercise

jurisdiction over the contractual claims to the extent that they do not involve governmental

actions (ius imperii).184 There are several problematic issues related with this approach.

Firstly, there is no clear rule under international law to distinguish an ordinary

commercial contract from a contract with a public element when there is a State party. This

distinction seems to over-complicate matters. In majority, the mere fact that a State or one of its

organs deemed it necessary to enter into a contractual relationship should be sufficient as an

indicator of a public element in the relevant activity. Besides, mere sale of goods or sporadic

transactions already do not qualify to meet the jurisdictional requirement as an investment under

ICSID Convention. Therefore it is a doubtful practice for a tribunal to analyze the nature of the

contractual relationship in the context of an umbrella clause, since the tribunal is already obliged

to do so for jurisdictional purposes in the first place during its analysis on whether an investment

exists. As a result, to look for the exercise of state sovereignty does not provide a reliable test

for determining whether a tribunal has jurisdiction.185 Oftentimes this inquiry would require an

analysis on the merits186 and exceed the purpose of jurisdictional analysis in a way against the

established standards of a prima facie case. At the jurisdictional level, the claimant is only

183 El Paso v. Argentina, para. 79; see also Joy Mining v. Egypt, paras. 79-81. 184 CMS v. Argentina, para. 299. ‘Purely commercial aspects of a contract might not be protected by the [umbrella clause] in some situations, but the protection is likely to be available when there is significant interference by governments or public agencies with the rights of the investor.’ 185 Crawford, at 19. 186 Id.

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required to allege the breach of treaty rights, and the tribunal is only obliged to analyze whether

the alleged facts taken in their face value could result in the violation of the treaty.187

The second category of cases which illustrate a potential limit for the scope of the

umbrella clauses involve those contractual disputes where the counterparty is merely a State-

owned commercial entity as opposed to State or one of its organs.188 This is a legit concern,

since the umbrella clauses are open-ended devices in their textuality, and it is without a question

that not all contractual commitments undertaken by State-owned entities can be attributed to the

States. State-owned entities and enterprises are mostly considered as separate entities with an

independent governance structure in the majority of domestic legal systems. Umbrella clauses

should in principle internationalize only those commitments which are entered by the State, and

a contract entered between two private entities cannot be interpreted as guaranteed by the state

unless persuasive evidence exists in that regard.

In this respect, a clear line should be drawn on when the obligations under such contracts

can be attributed to the host state. ILC Articles on state responsibility provides helpful guidance

in this respect as several tribunals did not hesitate to refer to when dealing with problems of

attribution. Especially Article 5189 and Article 8190 are relevant here, as they stipulate the

conditions for state liability for conduct of persons or entities exercising elements of

governmental authority or acting under governmental instructions in a fashion which can

potentially cover private entities under a functional assessment. Furthermore, it is arguable that

doctrines such as piercing the corporate veil can find application in the investment arbitration

context as well.191

187 See Case Concerning Oil Platforms (Iran v USA) 1996 ICJ Rep 803, 810. SGS v. Paraguay, para. 136, ‘In any event the Tribunal need not, and cannot, at this stage decide whether Claimant has made a showing of Treaty breach. As we explained in Section III.B above, the threshold at the jurisdictional stage is whether the facts alleged by Claimant could, if proven, make out a claim under the Treaty. Claimant maintains it has alleged sufficiently “sovereign” acts in connection with contractual non-performance; Respondent maintains it has not. Resolution of that dispute is properly reserved to such time as both Parties have fully presented their evidence and arguments.’

188 See Hamaster v. Ghana. 189 Article 5 of ILC Articles reads ‘[t]he conduct of a person or entity which is not an organ of the State under article 4 but which is empowered by the law of that State to exercise elements of the governmental authority shall be considered an act of the State under international law, provided the person or entity is acting in that capacity in the particular instance.’ 190 Article 8 of ILC Articles reads "[t]he conduct of a person or group of persons shall be considered an act of a State under international law if the person or group of persons is in fact acting on the instructions of, or under the direction or control of, that State". 191 See Michael Feit, Responsibility of the State under International Law for the Breach of Contract Committed by a State-Owned Entity, 28 BERKELEY J. INT'L LAW 142 (2010). Available at: http://scholarship.law.berkeley.edu/bjil/vol28/iss1/5 (25 March 2013).

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C. Shadow of Vivendi: Forum selection clauses, co-existence of treaty

rights, and characterization of claims.

Treaty arbitration provides important advantages for investors. Indeed, undoubtedly the

sharp increase in the number of investment arbitration claims reflects this perception. However,

behind this surge lie also other important factors related with the evolution of investment

arbitration as well. First of all, the past success of investment arbitration as a one-shop dispute

resolution mechanism and the incentives it inherently offers (as a neutral dispute resolution

mechanism producing awards which are final and virtually enforceable everywhere in the world

without being subject to domestic legal review) encourage investors and investment lawyers to

refer to international investment law and treaty arbitration more and more as a recourse for a

wider range disputes. With each award given in evermore diverse factual circumstances,

investors come to a better understanding of the protection afforded by BITs and do not hesitate

from exploring the limits of this protection. As a result, unsurprisingly investment arbitration is

no longer seen as a remedy only for the gravest incidents of unjust Sovereign interference, but as

a rightful request from the States to honor the promises they have given. Thus, understanding

the scope of umbrella clauses is crucial to be able to meaningfully draw the lines of BIT

protection.

More and more contractual disputes find their way into ICSID arbitration. However, few

contracts entered between a State and an investor refer the relevant disputes to ICSID, and the

majority of such contracts include a forum selection clause referring the disputes to domestic

courts or commercial arbitration. Yet, classical rules of lis pendens and res judicata fail to

provide a meaningful standard to deal with situations of asymmetrical jurisdictional conflict

between BIT tribunals and domestic judicial fora, as BIT tribunals and domestic adjudication are

based on different normative sources which co-exist, and no hierarchical relationship exists

between these bodies. Therefore it is especially problematic in BIT arbitration, which rules

apply on how to allocate the adjudicative authority between the BIT tribunal and the contractual

forum when the tribunal faces with a purely contractual dispute brought under an umbrella

clause.192 In that respect, following the dualist view one approach tends to emphasize the

prevalence of international adjudication over domestic adjudication, while the opposing

192 Umbrella clause claims involving manifestly sovereign acts find more easily jurisdiction before ICSID tribunals, which find it unnecessary to delve into the discussion of contract/treaty claims.

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approach sees this dominance of international adjudication as a prospective threat for domestic

adjudication and tries to purport rules regulating the interplay between the both systems.

Although the dispute did not involve an umbrella clause, the tribunals tackling this

problem oftentimes refer to the Vivendi case and the test it proposed to distinguish the treaty

claims from contract claims in cases where a contractual form selection exists.193 Referring to

Vivendi, SGS v. Phillippines looked into the fundamental basis of the claims which were

contractual in the tribunal’s opinion. As a matter of principle, the tribunal favored the

contractually agreed forum over the BIT tribunal, as the contract is the more specific instrument

regulating the parties’ relationship. In its reasoning, the tribunal observed the umbrella clause

had indeed internationalized the contract by virtually elevating it to the international sphere

much like an annex of the BIT.194 Yet, in the tribunal’s opinion the Tribunal should not exercise

its jurisdiction when the fundamental basis of the claims is the contract, and the parties have

already agreed on how contractual claims are to be resolved on an exclusive basis.195 The

tribunal found that BIT tribunals’ jurisdiction had a general nature and the parties had the right to

opt for a different dispute resolution mechanism with regards to their contractual relationship,

and indeed have done so by agreeing upon an exclusive dispute resolution mechanism in the

investment agreement. The approach taken by SGS v. Phillipines was endorsed by various

authors196 and celebrated as an integrationist approach trying to harmonize overlapping norms

and procedures in a pragmatic fashion.197 Schreuer criticizes this approach by arguing that the

tribunal ignored the fact that the dispute settlement clause in the BIT is merely a standing offer

which is only to be perfected with the investor’s acceptance, ‘While the contract clause refers to

any dispute arising from the contract, the ICSID arbitration agreement, as perfected through the

institution of proceedings, applies only to the specific dispute.’198 Therefore the principle

generalia specialibus non derogant should work in favor of the ICSID, not the domestic forum.

Nevertheless, referring to Vivendi’s fundamental test again, SGS v. Paraguay reached to a

conclusion fundamentally different than SGS v. Phillippines. In SGS v. Paraguay the tribunal

193 See supra notes ………… 194 Potts, at supra note 175, p. 1041. 195 SGS v. Phillippines, para. 155. 196 Zachary Douglas, INTERNATIONAL LAW OF INVESTMENT CLAIMS, Cambridge, 2009, at p. 363. 197 Shany, p. 845. See also Jan Paulsson, Jurisdiction and Admissibility, in GLOBAL REFLECTIONS ON INTERNATONAL LAW, COMMERCE AND DISPUTE RESOLUTION, LIBER AMICORUM IN HONOUR OF ROBERT BRINER, ICC Publishing, Publication 693, at 601. 198 Christoph Schreuer, Calvo’s Grandchildren, p. 10.

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found that the treaty and contract claims co-existed, and the claimant was free to base its claims

on one of the both. In the case before the tribunal, the plaintiff preferred to file a lawsuit before

the ICSID tribunal by claiming for breaches of the BIT, more specifically the umbrella clause.199

Therefore considering the basis of the claims found within the treaty, the ICSID tribunal was in a

better place to analyze the claims in this respect, while the domestic courts would not likely to

take the BIT issues into account. In that respect the tribunal denied to interpret the contractual

forum selection clause as a waiver of the ICSID arbitration.

The conflicting approaches of these two tribunals can be summed up in two aspects.

First, SGS v. Phillippines and SGS v. Paraguay had different approaches on how to characterize

the claims as brought by the claimant. Interestingly, after accepting the effect of the umbrella

clause as elevating the contractual breaches to treaty breaches, SGS v. Phillippines still deemed it

necessary to characterize the fundamental basis of the claim as contractual. One can argue that

this is a self-defeating approach, especially after the tribunal’s recognition of the respondent’s

international obligations under the umbrella clause. Secondly, the tribunals seem to have a

different perception on the co-existence of contract and treaty claims.

Umbrella clauses are not jurisdictional devices, they only affirm the host state’s

obligation to honor its commitments in contractual or other form taken with regards to specific

investments. Although such commitment is often embodied in a contractual document, the

international obligation itself does not arise from the contract, and has its basis in the BIT, thus a

claimant is free to bring to base its claim on the breach of such a substantive protection much

like any other. 200 A claim brought under fair and equitable treatment might similarly involve a

dispute which is based predominantly on a contractual relationship, yet the tribunal is obliged to

analyze whether the relevant actions amount to a treaty breach, if the claimant argues so.201

Indeed the very first ICSID tribunal similarly dealt with a contractual claim (without an umbrella

clause) and declared its jurisdiction over certain contractual matters ancillary to the main dispute

199 The tribunal deemed it necessary to emphasize obiter dicta that the claimant could alternatively bring contract claims under the broad dispute resolution clause of the BIT. Yet, it case it had done so, probably the tribunal would deny to exercise jurisdiction due to the forum selection clause. 200 SGS v. Paraguay, para. 130. ‘Of course, it is apparent that several of Claimant’s claims under the Treaty will stem from Respondent’s alleged failure to pay for SGS’s services under the Contract. That is an action that may (or may not) also constitute a contractual breach, but we are not called upon to decide that question as such. We are called upon to decide whether Respondent’s actions, such as its alleged non-payment, breach the aforementioned Articles of the Treaty. In doing so, we are in concert with the well-established jurisprudence regarding the distinction between contract claims and treaty claims.’ 201 According to Vivendi Annulment the forum-selection clause “of the Concession Contract cannot be deemed to prevent the investor from proceeding under the ICSID Convention against the Argentine Republic on a claim charging the Argentine Republic with a violation of the Argentine-French BIT.” Vivendi Annulment, para. 54.

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despite the existence of a forum selection clause, referring to the principle that ‘international

proceedings in principle have primacy over purely internal proceedings’.202 Therefore, SGS v.

Paraguay follows a more sensible solution to this conundrum with its principled approach on

both the nature of the commitments the States enter when accepting umbrella clauses.

A natural - assumption deployed by the tribunals who favor this approach is that umbrella

clauses are jurisdictional devices.203 However, this view ignores the very basic purpose and

substantive effect of umbrella clauses as a State’s covenant for complying with its obligations

evidenced by their very textual meaning and the fact that umbrella clauses are placed together

with other substantive rights in the majority of BITs.204 Tribunals resisting to grant jurisdiction

over purely contractual claims brought under umbrella clauses tend to extend their jurisdictional

analysis (which should normally require only a prima face standard when filtering substantive

allegations) and rationalize this approach by referring to the fundamental basis test as deployed

by Vivendi Annulment. However, Vivendi Annulment did not involve an umbrella clause and its

reasoning emphasizing the preference of I contractually selected forum over BIT Dispute

Resolution should be only applied under factual circumstances where a claimant - rather than

honoring the contractually agreed forum- brings a purely contractual claim under a treaty which

does not include an umbrella clause. The skepticism of the tribunals dealing with the first wave

of umbrella clause claims can be understood under policy grounds. Yet it seems like recent

awards like SGS v. Paraguay and EDF v. Argentina will contribute to stabilize the confusion in

this respect. Lastly, the logical result of seeking for the exercise of sovereign elements purports

that a State may escape from liability under an investment agreement by merely arguing that it

was acting for commercial reasons.205

Some authors argue that the umbrella clauses create unpredictability as they provide for

investors an escape from contractually agreed dispute resolution mechanisms, and thus constitute

a hindrance for efficient contract drafting.206 It should be noted that even if one follows the

202 Schreuer, Calvo’s Grandchildren, p. 5. 203 Crawford accepts umbrella clauses as jurisdictional devices. See Id. However, this approach seems to be effected by the practical effect of umbrella clauses thus ignoring the difference of a generic dispute resolution clause (which as a jurisdictional clause might cover also contractual disputes) and an umbrella clause. Technically, umbrella clauses are substantive covenants whereby the host state undertakes to observe its contractual commitments. 204 The tribunal in EDF v. Argentina opined that umbrella clauses are substantive provisions in the context of MFN clauses. EDF v. Argentina, paras. 93-94. 205 Crawford, at 19. 206 Sam Foster Halabi, Efficient Contracting Between Foreign Investors and Host States: Evidence from Stabilization Clauses, 31 Nw. J. Int’l L. & Bus. 306.

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broad approach on umbrella clauses, investors can still waive BIT protection if they deem it

appropriate.207 This can be an important concern with regards to large scale projects where the

legal aspects of the project are dealt with in depth, and investors are more likely to have a more

equal foot on the negotiations with a broader range of contractual devices at their disposal.

Investors might indeed feel necessary to trade BIT protection in order to receive more favorable

terms in different aspects of the contract. However, such waiver should have an explicit

language, and in the absence of such a waiver, it is not a sensible solution to assume that any

contractual forum selection clause will override BIT protection.

207 ‘In this regard, we agree with the tribunal in Aguas del Tunari v. Bolivia, which considered the question of whether and under what circumstances a contractual forum selection clause could be held to work a waiver of the treaty right to invoke ICSID jurisdiction. The Aguas del Tunari tribunal drew a distinction between “(1) a separate document [i.e. a contract] that waives the right to invoke, or modifies the extent of, ICSID jurisdiction (where the intent of the parties to alter the possibility of ICSID jurisdiction is direct); and, (2) a separate document that contains an exclusive forum selection clause designating a forum other than ICSID (where the intent of the parties to alter the possibility of ICSID jurisdiction must be implied).” [citation omitted] As to the second circumstance—the one that we also face in the present case— the Aguas del Tunari tribunal insisted that the mere designation of a non-ICSID forum in a contract, without an express waiver of ICSID jurisdiction, was insufficient to cause the tribunal to refrain from exercising its jurisdiction under the BIT.’ SGS v. Paraguay, at para. 179.