The Umbrella Revolution: State Contracts

and Umbrella Clauses in Contemporary

Investment Law

Olga Boltenko

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
State Contracts and Their Role in the “Umbrella Revolution” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Umbrella Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Umbrella Clauses in Chinese Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MFN and Umbrellas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
State Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Evolution of Umbrella Clauses in Investment Protection Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Current State of Law on the Interpretation and Application of Umbrella Clauses . . . . . . . . . . . . . 15
Conclusions and Policy Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Abstract
This chapter provides an overview of umbrella clauses in investment protection
treaties; it also seeks to set out the evolution of umbrella clauses in investment
treaties and explores the treaty tribunals’ interpretative process in umbrella
clauses-related treaty disputes.

Keywords
Umbrella clauses · State contracts · Investment protection treaties · FDI · Foreign
property · Investment protection

The views of the author do not represent the views of Fangda Partners or of the Hong Kong
University; all mistakes and omissions are mine. I am grateful for the invaluable contribution to this
paper by my colleagues at Fangda Partners in Hong Kong John Zhou and Junqing Chao.

O. Boltenko (*)
Fangda Partners Hong Kong, The University of Hong Kong, Hong Kong, Hong Kong SAR PRC
e-mail: boltenko@hotmail.com

© Springer Nature Singapore Pte Ltd. 2020 1

J. Chaisse et al. (eds.), Handbook of International Investment Law and Policy,
https://doi.org/10.1007/978-981-13-5744-2_54-1
2 O. Boltenko

“But such a tiny and trivial thing as an umbrella can deprive you of the sight of such a
stupendous fact as the sun.” – Meher Baba
“You have to close down your umbrella when you are under a canopy.” – Israelmore Ayivor

On 11 August 2019, a yellow umbrella unfolded its cloth-covered spikes at the

Hong Kong International Investment Arbitration and Mediation Academy, where an
entire day’s lecture was dedicated to umbrella clauses in investment protection
treaties.
Academy’s delegates – hailing predominantly from African states and
representing predominantly African governments – took suspicious, incredulous
interest in the functioning of umbrella clauses in investment treaties. For a host of
developing nations, it appeared unfair that a treaty with an umbrella clause would
expose the State to a range of what seems to be contract claims – in addition to the
existing hefty exposure to treaty claims. The delegates’ suspicions over the fairness –
or even functionality – of umbrellas were further exacerbated as it became apparent
through the Academy studies that the umbrella clauses-related case law is inconsis-
tent; that the tribunals tend to interpret umbrella clauses differently, and that, in the
worlds of Jonathan B Potts, “investors looking for consistency in pursuing claims
and states contemplating new BITs have been placed in a quandary.”1
This chapter seeks to explain the philosophical and conceptual underpinnings of
umbrella clauses in investment protection treaties; it also offers policy observations
based on the views expressed by developing States.

Introduction

A significant majority of foreign direct investment in developing States flows

through State contracts.2 UNCTAD reports that “State contracts have played a
major role in the foreign direct investment process, especially in developing coun-
tries that are dependent upon the exploitation of natural resources for their

1
See, Potts JB (2011) Stabilizing the role of umbrella clauses in bilateral investment treaties: intent,
reliance, and internationalization. Va J Int Law 51:1005; see also Duke Energy, ICSID Case
No. ARB/04/19, } 319–320
2
See, UNCTAD report on State Contracts: “A “State contract” can be defined as a contract made
between the State, or an entity of the State, which, for present purposes, may be defined as any
organization created by statute within a State that is given control over an economic activity, and a
foreign national or a legal person of foreign nationality. State contracts can cover a wide range of
issues, including loan agreements, purchase contracts for supplies or services, contracts of
employment, or large infrastructure projects, such as the construction of highways, ports or
dams. One of the commonest forms of State contracts is the natural resource exploitation contract,
sometimes referred to as a “concession agreement”, though this is not a strict term of art (Brownlie,
2003, p. 522). Such agreements feature prominently in the natural resource sectors of developing
countries. Historically, these sectors have provided the most important source of income for the
domestic economy and have often been State controlled, so that foreign entrants into the sector had
to make contracts with the State entity in control.”
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 3

economic welfare. Often, operation in a sector, such as petroleum, is open only to a

State entity or through the making of a contract with the relevant State entity.”3
While the statistics accuracy in support of this proposition might be challenging
to assess, given the predominantly confidential nature of State contracts, ICSID
reports that of all ICSID cases registered by the first quarter of 2019, 16% claims
were brought under State Contracts.4 This is an indication of how frequently foreign
investors resort to structuring their investment through individual agreements with
host States.
Traditionally, host States have insisted on submitting their State contracts with
foreign investors to the known safety of their own domestic laws, unwilling to
relinquish control over strategic investments within their territory. This, however,
exposed foreign investment to the risks of nationalization and undue government
interference without providing a credible neutral avenue to resolving investment
disputes. This, in turn, made foreign investment more expensive, in particular in
those jurisdictions where sovereign risks are traditionally high. Ironically, it is those
jurisdictions that need foreign investment the most.
By way of a hard-fought compromise, in particular where there is no investment
treaty in place between the State where the investment originates and the host State,
the parties sought to address the protection gap by subjecting State contracts to
international law or to neutral domestic legal systems, often selecting either ICSID
with its delocalized procedure or a seat in a neutral jurisdiction for the resolution of
their disputes.5
This phenomenon – an investor-State negotiated compromise that allows a
foreign investor to subject its State contract to international law or to a neutral
legal system – is known as “internationalization of State contracts.” Professor
Sornarajah has explored the subject in a number of comprehensive treatises that
have since their publication become the leading authority. Sornarajah’s disciples
carried his studies of internationalization of State contracts further.
One of Sornarajah’s disciples, Professor Jean Ho, explains in her latest treatise on
internationalization of State contracts that

the idea of internationalisation likely surfaced in the 1930 arbitral award in Lena Goldfields v
USSR, and gained more defined contours in the 1950s to the 1970s in the innovative
proposal to prevent Iran from interfering with concessionary rights of the Anglo-Iranian
Oil Company, as well as a string of arbitral awards on termination of concessions in the
Middle East. The proposal called for the inclusion of a non-interference clause in the

3
State Contracts, UNCTAD Reports (2004) Available at https://unctad.org/en/docs/iteiit200411_
en.pdf
4
See, ICSID Case Load Statistics (2019) Available at https://icsid.worldbank.org/en/Documents/
resources/ICSID%20Web%20Stats%202019-1(English).pdf
5
Ibid.
4 O. Boltenko

concession, and its incorporation by reference into a treaty concluded between Iran and the
United Kingdom, thereby elevating every breach of contract into a breach of treaty.6

The compromise that the investment community has found, thus, was to incor-
porate umbrella clauses into investment protection treaties such that a breach of the
State contract might be elevated to the breach of the underlying treaty between the
two States, in appropriate circumstances.7
Umbrella clauses are described as “international law obligations created by
treaty that a host State shall (1) ‘observe any obligation it may have entered into’,
(2) ‘constantly guarantee the observance of the commitments it has entered into’,
(3) ‘observe any obligation it has assumed’, and other variants, with respect to
investors having the nationality of another Contracting State, or with respect to the
investments of such investors.”8 In other words, umbrella clauses seek to achieve the
international sanctity of private law contracts.9
Typically, treaty tribunals tasked with resolving claims brought under umbrella
clauses would first see if the alleged breach of the underlying contract is attributable
to the State and then see if the breach amounts to a violation of the umbrella clause.
In performing this two-stepped exercise, the tribunal would be guided by the
attribution rules on the one hand and then by the wording of the umbrella clause
in the underlying treaty on the other hand.10

6
Ho J (2018) State responsibility for breaches of investment contracts. CUP Press EBA Program,
p 238 and footnotes
7
Depending on the wording of the umbrella clause, it is at least arguable that umbrella clauses might
extend treaty coverage not only to State contracts, but also to non-contractual obligations: “‘the
language of the provision is so broad that it could be interpreted to cover all kinds of obligations,
explicit or implied, contractual or non-contractual, undertaken with respect to investment gener-
ally. A provision of this kind might possibly alter the legal regime and make the agreement subject to
the rules of international law,” – UNCTAD (1998) Bilateral investment treaties in the mid-1990s.
United Nations, p 56
8
Sinclair A (2004) The origins of the umbrella clause in the international law of investment
protection, a speech delivered at BIICL Third Conference of the Investment Treaty Forum on
10 September 2004.
9
Lim CL. Is the umbrella clause not just another Treaty Clause? – Essays in honour of Professor
Sornarajah.
10
At this juncture, it is important to note the tension between contract claims and treaty claims that
umbrella clauses bring about. This tension becomes of paramount importance when it comes to
applicable law issues. As the Vivendi Annulment Committee found, “Each of these claims will be
determined by reference to its own proper or applicable law—in the case of the BIT, by interna-
tional law; in the case of the Concession Contract, by the proper law of the contract, in other words,
the law of Tucumán. For example, in the case of a claim based on a treaty, international law rules of
attribution apply, with the result that the state of Argentina is internationally responsible for the acts
of its provincial authorities. By contrast, the state of Argentina is not liable for the performance of
contracts entered into by Tucumán, which possesses separate legal personality under its own law
and is responsible for the performance of its own contracts.” - Compañiá de Aguas del Aconquija
SA and Vivendi Universal v Argentina, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July
2002, para 96.
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 5

Whether an investment treaty extends its protection to State contracts depends on

a number of factors, including the availability of the umbrella clause in the under-
lying treaty, the wording of the jurisdictional clause in the State contract, the
definition of investment that the treaty itself contains, as well as on whether the
treaty contains a carve-out to explicitly exclude State contracts from its protective
scope, as well as on the treaty’s dispute resolution clause.11

State Contracts and Their Role in the “Umbrella Revolution”

State contracts are entered into between a foreign investor and a State agency or
other creation of statute, often on the basis of a public procurement process that often
leaves no scope for the investor to negotiate the terms and conditions of the contract.
State contracts may be terminated by the State through what the State may
consider to be its sovereign legitimate act or policy, not necessarily driven by
commercial considerations, and not necessarily giving rise to the standard contrac-
tual remedies for wrongful termination.
State contracts have therefore often been regarded as vulnerable to the changing
domestic policy of the host State, to the Government changes, and just generally to
the ever evolving political landscape of the host States. Against this backdrop, it is
only natural that investors seek to secure more viable protection for their interests in
their commercial relationship with the host States.

Umbrella Clauses

One of the most powerful mechanisms to ensure investment protection of State

contracts is an umbrella clause in an investment protection treaty between the State
where the investment originates and the host State.
Typically, investment protection treaties are not designed to protect individual
contracts, but to “ensure the stability of the operating structure of the investment
within the host country (which may include investments covered by State
contracts).”12
Individual investors have no say in the structure and content of investment
protection treaties between their States of origin and the host States. It is a matter
of inter-State negotiations to grant umbrella protection to foreign investment.
Against this backdrop, umbrella clauses have gained in popularity since the first
mention of the construct in the Abs-Shawcross Draft Convention in 1958 – a
veritable “umbrella revolution.”

11
State Contracts (2004) UNCTAD series on issues in international investment agreements
12
Ibid., IIA issues paper series, p 6.
 6

200

150

100

Without umbrella clause With umbrella clause

50

1959
1960
1961
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1966
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1970
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2004
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2009
2010
2011
2012
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2015
2016

Fig. 1 Evolution of BITs with umbrella clause, signed between 1959 and 2016. (Source: UNCTAD Investment Policy Hub available at https://
investmentpolicyhub.unctad.org/Pages/mapping-of-iia-clauses)
O. Boltenko
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 7

Since then, umbrella clauses were used extensively in the first generation of
Bilateral Investment Treaties (BITs) concluded between 1980s and 1990s (Fig. 1).
By 2019, however, with the host States attempting to limit their exposure to treaty
claims, contemporary treaty-making practice has seen a steady decline in the number
of treaties with umbrella clauses in them.
For example, ASEAN has seemingly decided to do away with the umbrella
clauses in its latest FTAs, eliminating the umbrella texts from the ACIA and from
the AANZFTA. Other contemporary investment treaties, such as SADC, Canadian
treaties, and others, also chose to eliminate the umbrella clauses.13
Conversely, the EU-Vietnam FTA does contain a rather elaborate umbrella clause,
providing, in article 14, as follows:

“Where a Party has entered into a written agreement with investors of the other Party or
their investments referred to in article 13 [Scope of section II Investment Protection] that
satisfies all of the following conditions, that Party shall not breach the said agreement
through the exercise of government authority. The conditions are:

(a) The written agreement is concluded and takes effect after the date of entry into force of
this Agreement;
(b) The investor relies on that written agreement in deciding to make or maintain an
investment referred to in article 13 . . . other than the written agreement itself and the
breach causes actual damage to that investment;
(c) The written agreement creates an exchange of rights and obligations in connection to
the said investment, binding on both parties; and
(d) The written agreement does not contain a clause on the settlement of disputes between
the parties to that agreement by international arbitration.”14

In other words, the EU-Vietnam FTA sets out a number of conditions for an
investment agreement to fulfill in order to be covered by the protective umbrella of
the treaty.
The EU-Singapore FTA, on the other hand, takes a somewhat different approach.
Instead of setting out positive requirements for an agreement to fulfill in order to
benefit from the treaty, it sets out a negative requirement (the agreement will not
benefit from the treaty protection unless there is a specific undertaking):

“Where a Party, itself or through any entity mentioned in paragraph 5 of Article 9.1
(Definitions), had given a specific and clearly spelt out commitment in a contractual written
obligation towards a covered investor of the other Party with respect to the covered
investor’s investment or towards such covered investment. That Party shall not frustrate
or undermine the said commitment through the exercise of its governmental authority either:

(a) Deliberately; or

13
See, de Souza Fleury RP (2017) Closing the umbrella: a dark future for umbrella clauses? Kluwer
Arbitration Blog, 13 October. Available at http://arbitrationblog.kluwerarbitration.com/2017/10/13/
closing-umbrella-dark-future-umbrella-clauses/
14
See, EU-Vietnam FTA, Chapter 8, Article 14.
8 O. Boltenko

(b) In a way which substantially alters the balance of rights and obligations in the
contractual written obligations unless the Party provides reasonable compensation to
restore the covered investor or investment to a position which it would have been in had
the frustration or undermining not occurred.”15

Of other latest investment protection instruments, the Austria-Kyrgyzstan BIT

and the Japan-Iran BIT contain umbrella clauses. The umbrella clause in the Austria-
Kyrgyzstan BIT is yet again a creative product of the latest attempts to do away with
the interpretative uncertainty. Article 11.1 of the treaty provides as follows:

Each Contracting Party shall observe any obligation it may have entered into with regard to
specific investments by investors of the other Contracting Party. This means, inter alia, that
the breach of a contract between the investor and the host State will amount to a violation of
this treaty.16

The trend to eliminate the umbrella clauses in the latest treaty-making practice, or
to qualify what comes under the treaty umbrella quite significantly, reflects the
uncertainty that the clauses bring along – in terms of what breaches may be elevated
to treaty breaches, what the thresholds are, whether attribution issues come into play,
and many other uncertainties, exacerbated by the inconsistent case law.

Umbrella Clauses in Chinese Treaties

Looking at China – a jurisdiction that has treated investment protection treaties with
considerable suspicion since inception – umbrella clauses make appearance in a
large number of second and third generation of China’s BITs.
To date, the Chinese umbrella clauses have not been tested by a treaty tribunal,
thus leaving it to the future case law to determine how Chinese umbrellas would
operate.
A large majority of Chinese umbrella clauses are modeled after European umbrellas.
Article 2(2) of the China-UK BIT contains the following – rather standard –
formulation:

Each Contracting Party shall observe any obligation it may have entered into with regard to
investments of nationals or companies of the other Contracting Party.17

These clauses are, however, in decline. In 2009–2019, China very rarely included
umbrella clauses in its BITs. The latest umbrella appears in the China-Mali BIT:

15
See, EU-Singapore FTA, Chap. 9, Art. 9.4.
16
See, Kyrgyzstan-Austria BIT, Art. 11.1.
17
See, China-UK BIT, Article 2(2).
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 9

Chaque Partie Contractante doit tenir tout engagement qu’il aura pris avec les investisseurs
de l’autre Partie Contractante concernant leurs mvestlssements.
[Each contracting Party shall observe all obligations it has undertaken with the investors
of the other Contracting Party with respect to their investments.]18

Again, the existing Chinese umbrella clauses are largely modeled after the
European umbrellas, suggesting that potentially, tribunals tasked with deciding
disputes under such clauses might be guided by the existing SGS umbrella-related
case law, as described below.

MFN and Umbrellas

A nowadays rarity – treaties with umbrella clauses – might be utilized through MFN
clauses in other treaties. That would, potentially, allow a claimant investor to import
a broadly worded umbrella clause from another treaty through an MFN provision.
After all, an MFN clause typically opens up the country’s entire treaty network to an
ailing investor.
In EDF v Argentina, a tribunal sitting under the France-Argentina BIT allowed
the investor to import an umbrella clause from the Luxembourg-Argentina BIT
through an MFN clause. In that regard, the tribunal found that

[t]he Tribunal concludes that the MFN clause does in fact permit recourse to the umbrella
clauses of third-country treaties, which leads to arbitration rather than the administrative
courts of the City of Mendoza.19

In the recently revealed award in Magdaleni v Kazakhstan, the tribunal found that
the claimant investor could not benefit from the umbrella clause in the Turkey-
Kazakhstan BIT, because Kazakhstan has not undertaken any obligations with
respect to the investor in the underlying contract:

Kazakhstan had not undertaken any obligation with respect to the Association Agreement.
Whereas the latter mentioned at some point that “guarantees” were given by the state to the
investor, the tribunal had found in its award on jurisdiction that these guarantees were not
substantiated.20

Further on that, in Hamester v Ghana (a 2010 award penned by an impressive

panel of Toby Landau, Brigitte Sterne, and Bernanrdo Cremades), the tribunal found

18
See, China-Mali BIT, Article 10(2).
19
See, EDF and others v Argentina (ICSID Case No. ARB/03/23), Award dated 11 June 2010,
para 929.
20
See, reporting by IAReporter available through subscription at https://www.iareporter.com/
articles/revealed-tribunal-hearing-claims-against-kazakhstan-refuses-to-construe-local-litigation-
requirement-as-binding-but-shows-deference-to-states-need-for-post-soviet-transition-and-sees-no-
breach-of/
10 O. Boltenko

that Ghana’s responsibility as a State cannot be engaged under the draft Articles of
Attribution of State Responsibility for Internationally Wrongful Acts for breaches of
a joint venture agreement concluded between a Ghanaian SOE – an entity separate
from Ghana – and a foreign investor:

the contractual commitments of Cocobod, being a separate entity from the State, cannot be
considered as elevated – and transformed in nature – by Article 9(2) of the BIT, into treaty
commitments of the State itself. It follows that a violation by Cocobod – if such a violation
had been found – could not have constituted a violation of the BIT.21

The Hamester tribunal left a note of caution in the award, stating that:

As a concluding remark, the Tribunal wishes to point out that the consequence of an
automatic and wholesale elevation of any and all contract claims into treaty claims risks
undermining the distinction between national legal orders and international law.260 In the
Tribunal’s view, this is not a result that is in line with the general purpose of the ICSID/BIT
mechanism for the international protection of foreign investments.22

Curiously, another treaty tribunal dealing with a similarly worded case reached a
completely different conclusion, also in 2010. In Kardassopoulos v. Georgia, an
equally impressive tribunal (Yves Fortier, Francisco Vicuna, and Vaughan Lowe)
found that contractual commitment undertaken by two Georgia SOEs could be
attributed to Georgia under the ECT’s umbrella clause:

whether one applies the principles of attribution set forth in the ILC Articles on State
Responsibility or the tests developed in arbitral jurisprudence to ascertain whether the acts
or omissions of a particular entity are attributable to a State, the answer in these arbitrations
is the same. The relationship between SakNavtobi and Transneft, on the one hand, and the
Georgian State, on the other hand, bears all of the hallmarks of attribution under international
law. The Tribunal is therefore satisfied that, for the purpose of determining a breach of the
applicable treaties, any acts or omissions of SakNavtobi and/or Transneft constituting such
breach may be attributed to the Respondent and it so finds.23

The usage of the treaties’ umbrella clauses, either directly or through MFN, has
been objectively inconsistent in the reported jurisprudence. Some scholars, however,
attempt to find consistency where there appears to be none. In his article “Attribution
and the Umbrella Clause – is there a way out of the deadlock,” Dr Michael Feit
ascertains that the case law inconsistency may be reconciled by taking “the under-

21
See, Gustav F W Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No. ARB/07/24,
Award dated 18 June 2010, para 348.
22
Ibid., para 349
23
See, Ioannis Kardassopoulos and Ron Fuchs v Republic of Georgia, ICSID Case Nos. ARB/05/18
and ARB/07/15, Award dated 3 March 2010, paras 273–280.
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 11

lying motives of the tribunals into account.”24 Others suggest that the interpretative
differences are irreconcilable.
UNCTAD reports that from 1987 to 2017, of all known ISDS cases, umbrella
clauses were invoked in 114 disputes, which is less than modest compared to the
often used expropriation and FET standards, but still significant.25

State Contracts

Umbrella clauses would not have existed without the underlying contractual obliga-
tions between foreign investors and host States or their agencies – in other words,
without the State contracts. It is only if the underlying contractual obligation in a
State contract is broken that the umbrella clause mechanism is engaged.
Thus, a foray into the umbrella clause universe would be impossible without a brief
discussion of State contracts and the theory of internationalization. Traditionally,
umbrella clauses have been viewed as treaty mechanisms that internationalize State
contracts by rendering them effective under international law. This construct of umbrella
clauses, however, has created a major conceptual controversy in international law.
First, State contracts typically have their own proper applicable law, as well as their
own dispute resolution mechanism. In other words, State contracts exist in the domestic
law plane – a legal environment that does not seek, typically, to overlap with public
international law or investment treaties concluded between two or more States.
Second, interpretation that allows turning purely contractual obligations into
equivalent international law obligations under investment protection treaties – if
accepted – would allow private parties to expand indefinitely the undertakings that
contracting States make when negotiating and concluding investment protection
treaties. Such dramatic outcome could not have been intended by the majority of
negotiating States, in particular the developing, capital-importing States.
The primary criticism of the “internationalization of contracts” through umbrella
clauses – as advocated by Professor Sornarajah – is that the “internationalization” of
State contracts is a myth.26 He argues that contracts are valid by virtue of domestic
legal systems to which they are subjected, not by virtue of international law.
Nothing, in his view, including the controversial umbrella clauses, would allow
State contracts to “levitate” in the international law plane detached from the domes-
tic legal system that brought the contract into the world in the first place.27
A way to address that criticism is offered by one of Sornarajah’s disciples – Prof
C. L. Lim – who suggests that umbrella clauses are not designed to elevate State
contracts and the commitments thereunder to international plane. Instead, it is not the

24
See, Feit M. Attribution and the umbrella clause – is there way out of the deadlock? Available at
http://minnjil.org/wp-content/uploads/2015/07/Feit.docx.pdf
25
See, https://unctad.org/en/PublicationsLibrary/diaepcb2017d7_en.pdf
26
Sornarajah M. International law on foreign investment, 3rd edn., p 304
27
Sornarajah M. (1992) Law of international joint ventures. Longman, Spore, p 298
12 O. Boltenko

contractual obligation itself, but a breach of that obligation that might be a breach of
the underlying treaty, through an umbrella clause:

viewed in this way, umbrella clauses should be treated like any other garden-variety treaty
clause, requiring only the ordinary methods of treaty interpretation to be applied to their
construction.28

Prof Lim’s position, while intellectually appealing, does not resolve the main
controversy surrounding the concept of umbrella clauses. The main question here
should be not in the semantics of the controversy – or whether it is the contractual
obligation itself that is elevated to the international level or the breach thereof – but
whether contractual obligations in private contracts may be enforced through an
investment treaty against the host State directly. The key question there would be
whether the umbrella clause elevates any contract breach to a treaty breach, and if
not, then what is the threshold of the breaches.
In his essay on umbrella clauses in Sornarajah’s Alternative Visions of the
International Law, Professor Lim does not give a simple, straightforward answer to
the question of enforcement of contractual obligations through treaty’s umbrella
mechanisms. Instead, he conditions the “breach threshold” upon the wording of the
underlying treaty, ascertaining whether the treaty commits to protect “specific”
obligation, or “any” obligations: “Thus, one starts with the treaty clause itself.”29
Another prominent critic of the notion of internationalization of State Contracts
is, unsurprisingly, Brownlie. In his Principles of Public International Law, he finds
that “the view that the contractual selection of public international law as the
applicable law places the contract on the international plane cannot be correct.”30
Rather, he argues, the rules of public international law accept the normal operation of
rules of private international law and when a claim for a breach of contract between an
alien and a government arises, the issue will be decided according to the applicable
system of municipal law designated by the rules of private international law.31
The controversy is being fed by the ever increasing number of State contracts
concluded between investors and host States. One has not better solution to the
umbrella clause question but to accept Professor Sornarajah’s and Lim’s views that a
contractual obligation exists on the domestic law plane, and that umbrella clause
does not render a contractual obligation valid under international law. Rather, a
breach of that contractual obligation, under certain circumstances, and depending on
the wording of the treaty, might be a breach of the applicable treaty.
With that premise in mind, the chapter moves on to the analysis of the evolution
of umbrella clauses in international law.

28
Lim CL. Is the umbrella clause not just another treaty clause? – Essays in honour of Professor
Sornarajah
29
Lim CL. Is the umbrella clause not just another treaty clause? – Essays in honour of Professor
Sornarajah, p 357
30
Brownlie I (2008) Principles of public international law, 7th edn. Oxford University Press,
Oxford, pp 549–550
31
Ibid.
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 13

Evolution of Umbrella Clauses in Investment Protection Law

Umbrella clauses made their debut in the Abs-Shawcross Draft Convention, an

attempt at establishing a universal substantive investment protection framework,
undertaken by Lord Hartley Shawcross and the former Deutsche Bank chairman
Hermann Abs:

Each Contracting Party shall at all times ensure the observance of any undertakings, which it
may have given in relation to investment made by nationals of any other Party.32

While the Abs-Shawcross draft never took off – and to date is a reminder that the
global investment community would be better off in the presence of a uniform global
substantive investment protection framework – the umbrella clause wording found
its way into the majority of bilateral investment treaties, as well as into the draft
OECD Convention on the Protection of Foreign Property:

Each Party shall at all times ensure the observance of undertakings given by it in relation to
property of nationals of any other Party.33

The umbrella clauses since then have gone through multiple iterations in the
various treaties that have adopted them:

“Either Party shall observe any other obligation it may have entered into with regard to
investments by nationals or companies of the other party.”34 [emphasis added]
“Each Contracting Party shall create and maintain in its territory a legal framework apt
to guarantee to investors the continuity of treatment, including the compliance, in good faith,
of all obligations assumed with regard to each specific investor.”35 [emphasis added]
“Each Contracting Party shall observe any obligation it may specifically have entered
into with regard to investment in its territory by investors of the other Contracting Party.”36
[emphasis added]

It is estimated that of the 2500 or more BITs currently in existence approximately

40% contain an umbrella clause.37
Given the nature of umbrella clauses, they are more frequently used by capital
exporting States with stronger negotiations power in their treaties with capital-
importing States, as opposed to the treaties concluded between States with equal
negotiations leverage (Figs. 2 and 3).

32
Draft Convention on Investments Abroad, 1959, Article II.
33
Draft OECD convention on the protection of foreign property, 12 October 1967. Aailable at http://
www.oecd.org/investment/internationalinvestmentagreements/39286571.pdf
34
Germany-Pakistan BIT.
35
Italy-Jordan BIT, at the heart of Salini v Jordan.
36
Switzerland-China BIT of 2009 (currently in force), Article 8.
37
Figure cited in Gill, Gearing, Birt (2004) Contractual claims and bilateral investment treaties: a
comparative review of the SGS cases. J Int Arb 21:5. 397 at footnote 31
14 O. Boltenko

Fig. 2 Top ten countries concluding BITs that contain umbrella clauses. (Source: UNCTAD
Investment Policy Hub available at https://investmentpolicyhub.unctad.org/Pages/mapping-of-iia-
clauses)

Fig. 3 Number and share of BITs with and without umbrella clause, signed between 1959 and
2016. (Source: UNCTAD Investment Policy Hub available at https://investmentpolicyhub.unctad.
org/Pages/mapping-of-iia-clauses)

However, given the exposure that the umbrella clauses bring upon a host State, as
well as the uncertainty of the scope of obligations that the State will guarantee by
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 15

agreeing to an umbrella clause, the contemporary treaty-making practice sees a

steady decline in treaties with umbrella clauses in them.
The question here is therefore why umbrella clauses have gained so much
popularity, and how to resolve the controversy around the concept of the umbrella
clause? Certain critics argue that umbrella clauses are essentially redundant, and the
breaches that they are intended to catch may be caught by the network of other
substantive protections, such as FET, FPS clauses, as well as clauses prohibiting
arbitrary and discriminatory treatment and other similar substantive protection
standards. In other words, the critics argue that umbrella clauses perform no function
at all. This line of reasoning, while potentially compelling, would not explain the
popularity of umbrella clauses, neither would it explain the controversy surrounding
the umbrella clauses, and nor would it be in line with the effet utile interpretation
principles.
C.L. Lim argues in response to that criticism that umbrella clauses do not simply
provide treaty protection in parallel with other treaty standards, rather, umbrella
clauses “expand the scope of treaty protection by including contractual commitments
which do not always fall within the FET, full protection and security and expropri-
ation clauses. Umbrella clauses are controversial precisely because they are not
superfluous.”38
Following Professor Lim’s line of reasoning, umbrella clauses would have gained
popularity because they offer a separate standard of protection of foreign investment
by including contractual obligations into the treaty’s protective umbrella; impor-
tantly, the value of umbrella clauses is in their ability to allow international arbitra-
tion for disputes between investors and host States, along with its enforcement
regime, where such option would not be available otherwise.
There are three landmark awards in which treaty tribunals have had to interpret
umbrella clauses to bring forward the value of umbrella clauses as a separate
substantive treaty protection.

Current State of Law on the Interpretation and Application

of Umbrella Clauses

In Serbian Loans – arguably the first case in which an international judicial authority
has had to consider the quizzical nature of State Contracts and to decide whether
State Contracts give rise to “international contractual rights” as opposed to the
rights of pure contractual nature, the Permanent Court of International Justice found
that State Contracts are “mere creatures of municipal, not international, law.” No
discussion of umbrella clauses has been entertained in Serbian Loans. Whether or

Lim CL. Is the umbrella clause not just another treaty clause? – Essays in honour of Professor
38

Sornarajah.
16 O. Boltenko

not a State Contract creates “international contractual obligations” or not is a moot

question in the context of the umbrella clause debate. In that context, what matter is
whether a breach of the State Contract is also a breach of the underlying treaty by
virtue of the treaty’s umbrella clause.
SGS v Pakistan is arguably the first case in which an investment tribunal has had
to consider the effects on an umbrella clause, in this case in the Switzerland-Pakistan
BIT. The SGS v Pakistan tribunal rejected the claimant investor umbrella-based
claims.39 The dispute arose out of Pakistan’s termination of a preshipment inspection
agreement that the Government had concluded with SGS Société Générale de
Surveillance S.A. (the “PSI Agreement”). SGS argued, in addition to its other
claims, that by unilaterally terminating the PSI Agreement the Government was in
breach of the Switzerland-Pakistan BIT which contains an umbrella clause.40 In
response, Pakistan argued that SGS’s claims were contract-based, not treaty-based,
for which reason the tribunal had no jurisdiction. The tribunal rejected SGS’s
umbrella arguments, noting that there was no evidence that Switzerland and
Pakistan had intended for the umbrella clauses to elevate contract breaches to treaty
breaches.
A few years later, the SGS v Philippines tribunal arrived at a completely different
finding with respect to the investor’s umbrella arguments.41 In that case, the dispute
arose out of a contract for the provision of import supervision services, which the
Philippines Government discontinued. One of SGS’s claims was that by
discontinuing the services under the contract, the Government was in breach of the
umbrella clause in the Switzerland-Philippines BIT, which required that the Philip-
pines observe commitments made to specific investments. In defense, the Philip-
pines argued, again, that the dispute was purely contractual in nature, and that the
underlying contract contained an exclusive jurisdiction clause requiring that the
disputes of such nature be resolved in the Philippines courts. The tribunal found,
in stark contrast to the tribunal’s restrictive finding in SGS v Pakistan, that it had
jurisdiction to hear SGS’s contract claims under the umbrella clause, but that it
would give effect to the forum selection clause in the underlying contract, thus
staying the proceedings.
In Noble Ventures v Romania, the tribunal found that that “a contractual breach
has of itself nothing to do with international law unless it also amounts to a violation
of a treaty standard.”42

39
SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case
No. ARB/01/13 (Decision on Objections to Jurisdiction).
40
Article 11 of the Switzerland-Pakistan BUT provides 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”.
41
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case
No. ARB/02/6 (Decision on Objections to Jurisdiction and Separate Declaration)
42
Lim CL. Is the umbrella clause not just another treaty clause? – Essays in honour of Professor
Sornarajah.
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 17

In Vivendi v Argentina, the tribunal found that the exclusive jurisdiction clause in
the underlying contract required that contract disputes be resolved before adminis-
trative courts of Tucuman. The Annulment Committee, however, disagreed and
found that the contractual choice of the Tucuman courts “did not mean that Vivendi’s
treaty rights could then be ignored or extinguished,”43 that each source of law –
contract and treaty – existed within its own proper sphere, and famously – that “a
breach of a contract does not yet amount to the breach of a treaty, and vice versa.”
Finally, in CMS v Argentina,44 the tribunal found that “the effect of the umbrella
clause is not to transform the obligation which is relied upon into something else; the
content of the obligation is unaffected, as is its proper law.”45 The Annulment
Committee then carried on to find that “the source of contractual validity remains
the applicable law of the contract. The contract continues to be governed by that law
in respect of the usual incidents of contract notwithstanding any treaty consequences
which may apply to the breach.”46 In this case, the tribunal found that Argentina was
in breach of the umbrella clause in the US-Argentina BIT by violating the stabiliza-
tion clause in the underlying license. The Annulment Committee, however, annulled
the tribunal’s finding on the umbrella clause claims for failure to state reasons.
In these and other cases, the tribunals arrived at their – at times opposed – findings
as a result of application on the VCLT interpretative techniques on the basis of plain
and ordinary meaning of the wording of the relevant umbrella clauses. The fact that
the umbrella clauses that were at the heart of the tribunal’s findings differ rather
significantly explains, if not justifies, the opposed findings. As the Noble Ventures
tribunal found, “a clause that is readily capable of being interpreted in this way and
which would otherwise be deprived of practical applicability is naturally to be
understood as protecting investors also with regard to contracts with the host
state generally in so far as the contact was entered into with regard to an
investment.”47
Treaty interpretation considerations apart, what adds complexity to the effect of
the umbrella clause, and more specifically, to the “breach threshold” debate, is that a
number of tribunals have made a distinction between the State acting in a commer-
cial capacity and the State acting as a sovereign when breaching the State contract. In
Joy Mining v Egypt, the tribunal found that a dispute over a performance guarantee
was purely commercial in nature and removed from the notion of investment, thus
evidencing that the State committing a breach of the guarantee was acting in a
commercial capacity rather than in its capacity as a sovereign. On that basis, the

43
Lim CL. Is the umbrella clause not just another treaty clause? – Essays in honour of Professor
Sornarajah, p 355
44
CMS Gas Transmission Co. v. Republic of Argentina, ICSID Case No. ARB/01/8
45
ICSID Case No. ARB/01/8, Decision on Annulment, 25 September 2007, para 95.
46
As quoted in Lim CL. Is the umbrella clause not just another treaty clause? – Essays in honour of
Professor Sornarajah, p 355
47
Noble Ventures v Romania, ICSID Case No. ARB/01/11, Award, para 52.
18 O. Boltenko

tribunal found that a commercial breach of a contract should not be elevated to the
breach of the international law obligations of the host State under the treaty:

Disputes about the release of bank guarantees are a common occurrence in many jurisdic-
tions and the fact that a State agency might be a party to the Contract involving a commercial
transaction of this kind does not change its nature. It is still a commercial and contractual
dispute to be settled as agreed to in the Contract, including the resort to arbitration if and
when available. It is not transformed into an investment or an investment dispute.48

Ultimately, as Professor Sornarajah has concluded in his expert opinion in El

Paso v Argentina, investors’ rights under State contracts exist in domestic law, and
such rights can be elevated to treaty rights through appropriate wording, bit only to
the extent that they exist in the applicable domestic law of the underlying contract:

Being domestic contracts, contracts of foreign investment create obligations only in domes-
tic law. It is without doubt that, through the use of appropriate language, the rights so created
can be lifted up and subjected to an international regime of protection. But, the extent of
those rights must depend on domestic law . . . they can be protected only to the extent that
they exist in domestic law.49

Conclusions and Policy Remarks

Umbrella clauses are inherently controversial. Their various iterations give rise to
varying degrees of application by treaty tribunals and produce criticism ranging from
mild to vile.
Ironically, the most open-worded iterations of umbrella clauses (“shall observe
all obligations”) that are – in the ideal world – designed to give all-encompassing
protection to State contracts – produce exactly the opposite result, with treaty
tribunals rejecting to apply such open-worded umbrella clauses for fear of indefi-
nitely expanding the protective scope of the treaty.
On a more reasonable approach, it appears that the umbrella clauses that are
drafted in a more conservative manner – limiting the treaty protection to only
“specific” obligations relating to “investment” – appear to be more effective in
protecting State contracts that fall within such treaty limitations.
There is no doubt that the controversy around the umbrella clauses as a concept is
far from being settled. The critics lament the opposed approaches taken by tribunals
on the basis of almost identical treaty wording and very similar facts, thus fuelling
the controversy almost indefinitely. That, in addition to the heated debate over the
internationalization of State contracts, does not exactly contribute to the

48
Joy Mining Machinery Limited v. Egypt, ICSID Case No. ARB/03/11 (United Kingdom/Egypt
BIT), Award on Jurisdiction, 6 August 2004, paras 78–79.
49
Legal Opinion of M. Sornarajah in El Paso v Argentina, ICSID Case No. ARB/03/15, 5 March
2007, para 12.
The Umbrella Revolution: State Contracts and Umbrella Clauses in. . . 19

predictability and stability of the international law protective regime, in particular

when it comes to umbrella clauses and State contracts.
The contemporary treaty practice has seen a decline in umbrella clauses in the
latest investment treaties and free trade agreements. The umbrella clause controversy
has no doubt contributed to the States’ suspicion towards the umbrella mechanism.
Some States have thought to resolve the controversy, at least on a bilateral level, by
clarifying the umbrella clause “breach threshold” in the treaty itself: “the breach of a
contract between the investor and the host State will amount to a violation of this
treaty.”50 Other treaties remain open-worded and vague; while some treaties forego
the umbrella concept altogether.
Ultimately, umbrella protection is only as good as the umbrella clause in the
underlying treaty; it is for the policy-makers themselves – the negotiating States – to
ensure that the umbrella clause in the treaty is functional and not subject to a wide
range of possible interpretations.
The frequent lamentation of umbrella clauses for their ambiguity, as well as the
generalized whining over the inconsistent nature of case law that umbrella clauses
generate, has had an impact on the more general debate over treaty-based investment
protection system. The ISDS backlashers use umbrella case law to decry the alleged
toxic inconsistency created by the numerous ISDS tribunals – the inconsistency that
– apparently – removes stability and predictability from the treaty-based investment
protection regimes. It is for that reason, the backlashers allege, that the existing ISDS
regime needs to be cancelled out and replaced by something new and untested.
One must caution the backlashers that it is a treacherous path to take – to attack an
entire system for the peculiarity of one of the system’s elements.
Umbrella clauses in investment treaties are foreign investors’ only protective tool
when investors bid for large State-backed infrastructure contracts. There, often,
investors have no leverage to negotiate either the applicable law or the dispute
resolution clause. As a result, investors are often left with domestic law of the host
State as applicable law, and with the local courts to resolve investment disputes with
the State. In such situations, without umbrella clauses in the applicable treaties,
foreign investment projects in fragile jurisdictions would be more expensive and
risky, and thus less forthcoming.
It is for the States to agree on the appropriate scope of the umbrella protection in
their treaties, based on the State’s FDI needs, and based on what exposure the States
can afford in exchange.
In any event, a controversy over one element of treaty protection should not cause
the demise of the entire treaty-based investment protection system – “But such a tiny
and trivial thing as an umbrella can deprive you of the sight of such a stupendous
fact as the sun.”

50
See, Austria-Kyrgyzstan BIT, Article 11.