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Current trends in ‘umbrella clause’ claims arising from breaches of contractual obligations

Thursday 3 June 2021

Samantha J Rowe
Debevoise & Plimpton, London
sjrowe@debevoise.com

Svetlana Portman
Debevoise & Plimpton, London
sportman@debevoise.com

Introduction

‘Observance of obligations’ clauses in investment treaties – so-called ‘umbrella clauses’ – have been the subject of discussion in the arbitration community for decades.

This debate is typically traced back to the decisions issued in two separate investment-treaty arbitrations brought by the same claimant, SGS Société Générale de Surveillance S.A.: SGS v Pakistan (2003) and SGS v Philippines (2004).[1] Since then, tribunals faced with umbrella clause claims have issued diverging decisions, particularly with regards to three key issues:

  • the function and scope of an umbrella clause, ie whether an umbrella clause elevates all, or only certain, contract claims to a treaty claim (or, alternatively, whether it is merely an ‘aspirational statement’ that creates no treaty rights at all);
  • the effect of a contractual forum section clause, ie whether such a clause deprives an investment treaty tribunal of jurisdiction or renders the claimant’s umbrella clause claim inadmissible; and
  • the privity issue, ie, whether the host state and the foreign investor claimant must both be parties to the contract alleged to have been breached for the tribunal to establish jurisdiction over an umbrella clause claim

This article explores current trends in relation to these issues through the lens of a series of recent decisions addressing umbrella clause claims.

Background: SGS v Pakistan and SGS v Philippines

In SGS v Pakistan and SGS v Philippines, the tribunals considered, inter alia, whether the claimant could bring a claim for breach of contract before an investment treaty tribunal as a violation of the umbrella clause in the Switzerland-Pakistan bilateral investment treaty (BIT) and the Switzerland-Philippines BIT, respectively.

Applying the customary international law rules of treaty interpretation, the SGS v Pakistan tribunal concluded that there was not:

‘a convincing basis for accepting the Claimant’s contention that [the umbrella clause] of the BIT has had the effect entitling a Contracting Party’s investor, like SGS, in the face of a valid forum selection contract clause, to ‘elevate’ its claims grounded solely in a contract with another Contract Party … to claims grounded on the BIT, and accordingly to bring such contract claims to this Tribunal for resolution and decision.’

The tribunal held that the legal consequences of allowing an investor to bring an umbrella clause claim against a host state premised upon a breach of contract would be ‘so far-reaching in scope, and so automatic and unqualified and sweeping in their operation, so burdensome in their potential impact upon a Contracting Party’, that ‘clear and convincing evidence that such was indeed the shared intent of the Contracting Parties’ must be adduced. In the absence of such evidence, the tribunal dismissed the umbrella clause claim.[2]

In contrast, in a decision issued just a year later, the tribunal in SGS v Philippines disagreed with the SGS v Pakistan tribunal’s ‘highly restrictive interpretation to the “umbrella clause”’, and concluded that the umbrella clause in the Switzerland–Philippines BIT elevated the claimant’s claim for breach of contract to a claim for breach of the BIT. However, the SGS v Philippines tribunal held that the umbrella clause could not override the contractual dispute resolution clause agreed by the parties, which provided that Philippine courts would have exclusive jurisdiction over claims for breach of the contract. It therefore stayed the proceedings until the Philippine courts had the opportunity to decide the dispute.[3]​​​​​​​

Current trends in relation to umbrella clause claims arising from contractual breaches

The function and scope of the umbrella clause

In the years since the decisions in the SGS cases, questions have remained regarding the function and scope of the umbrella clause. Three approaches can be identified in the case law:

  • the umbrella clause is merely ‘aspirational’, and provides no independent or substantive treaty rights for investors;[4]
  • the umbrella clause transforms all breaches of contract into treaty violations;[5] and
  • the umbrella clause is only engaged when the respondent state has exercised sovereign power (puissance publique), either with regard to the quality of the breach of contract (ie, where the breach of contract involves the exercise of sovereign power) or with regard to the quality of the contractual obligation (ie, where the obligation alleged to have been breached has a sovereign rather than a commercial quality).[6]​​​​​​​

Recent jurisprudence appears to reject the non-substantive ‘aspirational’ approach to umbrella clauses.[7] For example, in Nissan v India, the tribunal noted that the ordinary meaning of the term ‘any’ in the umbrella clause obligation found in the Comprehensive Economic Partnership Agreement between Japan and India (CEPA) (‘[e]ach Party shall observe any obligation it may have entered into with regard to investment activities in its Area of investors of the other Party’)[8] ‘is all-encompassing’. It found that ‘[t]he phrasing draws no distinctions based on the mechanism through which the commitment is conveyed, and certainly does not suggest that State contracts were meant to be excluded or covered only in certain circumstances.’[9] Notably, the Nissan tribunal did not address the question whether the breach of contract must involve the exercise of sovereign power in order to engage the umbrella clause in its decision on jurisdiction, and the dispute settled before the merits phase of the proceedings.

Most recently, in ESPF v Italy, a majority of the tribunal adopted a broad interpretation of the umbrella clause in the Energy Charter Treaty (ECT) (‘[e]ach Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party’).[10] After interpreting the plain meaning of the term ‘any obligation’, the tribunal stated that ‘[t]here is no dispute that contracts between the state and an investor or its investment are protected obligations under the Umbrella Clause’, which ‘become elevated to an obligation under international law.’[11]​​​​​​​

The tribunal went on to hold that Italy had violated the umbrella clause through ‘the enactment of the Spalmaincentivi Decree’ which violated ‘the guarantees under the legislative framework in the Conto Energia regime’ and Italy’s ‘obligations to the Claimants’ Investments’.[12] As such, the ESPF tribunal did not explicitly address the question whether the breach of contract must involve the exercise of sovereign power in order to engage the umbrella clause, likely because the specific breach in that case (the enactment of a legislative decree) met that criteria.

In Strabag v Libya, the tribunal appeared to adopt the second approach, rejecting Libya’s arguments that (1) the umbrella clause in the Austria-Libya BIT (‘[e]ach Contracting Party shall observe any obligation it may have entered into with regard to specific investments by investors of the other Contracting Party’)[13] cannot transform claims rooted in contract into international law claims; and (2) the umbrella clause is only engaged where the state acts in a sovereign capacity. While noting that puissance publique language is absent in the BIT’s umbrella clause, the tribunal stated that ‘in any case … the factual circumstances clearly show that [the contracts at issue] were all made for significant public infrastructural projects in the interest of Libya’, that ‘contracting for such public works contracts is in fact a typical State function, not a commercial activity carried out Jure privatorum’, and that ‘their performance involved actions by a range of State organs exercising their governmental powers.’[14]

The tribunal awarded the claimant compensation for, inter alia, unpaid payment certificates and losses suffered as a result of delay, inefficient working conditions and force majeure.[15]

In Supervision v Costa Rica, the tribunal leaned towards the third approach and focused on the quality of the breach necessary to engage the umbrella clause. It held that ‘not any contractual breach by the State signatory to an Investment Treaty that contains an umbrella clause can be alleged as a direct violation of the Treaty.’

The tribunal followed El Paso v Argentina, in which ‘the Tribunal stated that an umbrella clause cannot transform any contractual claim into a claim under the treaty, and held that the clause would only be applicable if in the specific case the State acts as sovereign entity not as a private party’.[16]​​​​​​​

The effect of the contractual forum selection clause

A final issue that has been considered by tribunals is the effect of a forum selection clause in the underlying contract that provides for the exclusive jurisdiction of local courts or arbitral tribunals over claims for breach of contract. Some tribunals have considered that a claimant investor remains bound by the contractual dispute resolution clause, which therefore deprives an investment treaty tribunal of jurisdiction over contract claims brought via an umbrella clause or renders such claims inadmissible.[17] Other tribunals have considered that the contractual dispute resolution clause is irrelevant to umbrella clause claims, even though they are premised upon breach of an underlying contract, on the grounds that contract claims and treaty claims are distinct and the forum selection clause does not apply to the latter.[18]

In certain recent decisions, tribunals have adopted the latter view and have held that a contractual forum selection clause does not deprive them of jurisdiction over umbrella clause claims.[19]

In Nissan v India, the tribunal opined that carving-out contracts with dispute resolution clauses from the CEPA’s umbrella clause ‘would be a significant limitation on the reach of the umbrella clause, and one for which the Contracting Parties have not indicated any such intent’:

‘The Tribunal accepts that some tribunals have been uncomfortable with the potential consequences of permitting investors to prosecute umbrella clause claims without first pursuing resolution of complaints through domestic law remedies provided in the underlying contract. Postulating that the Contracting States could not have intended such a result, some tribunals have tried to limit the consequences through application of the doctrine of admissibility. This has led some tribunals to stay international proceedings to allow local remedies to be pursued first, while others have dismissed treaty claims outright as prematurely filed, while leaving open the possibility of an investor reverting to international arbitration following domestic proceedings. However, this Tribunal does not see it as its role as delineating a proper sequence for proceedings in two potential venues, each of which has a legitimately designated basis of jurisdiction over a type of dispute.’[20]

The tribunal found that nothing in the CEPA forbids the possibility of related contractual and treaty proceedings progressing in parallel, and that ‘[i]t certainly does not require arbitral tribunals with jurisdiction over treaty claims to stay their hand in circumstances where there is no parallel proceeding on the horizon, in order to force an investor to pursue potential contract remedies rather than treaty ones.’[21]

Likewise, in Belenergia v Italy, the tribunal dismissed the respondent’s jurisdictional objection that the contract’s dispute resolution clause deprived it of jurisdiction over the claimant’s umbrella clause claims. The tribunal explained that such an approach would deprive the umbrella clause in the ECT of its meaning and effect because each and every contract, even one without a dispute resolution clause, would inherently be subject to state-court jurisdiction pursuant to conflicts-of-law rules.[22]

In contrast, other tribunals have maintained that a contractual forum selection clause limits the tribunal’s jurisdiction over umbrella clause claims. In Consutel Group v Algeria, for instance, the tribunal observed that the umbrella clause does not encompass a contract that contains a dispute resolution clause.[23] The tribunal held that the contract must be taken as a whole and the investor cannot, through the umbrella clause, pick and choose certain obligations from the contract and excuse itself from others.[24]

Interestingly, the tribunal in Strabag v Libya questioned whether the dispute resolution clauses in the contracts at issue in that case – which provided for the exclusive jurisdiction of the Libyan courts – were capable of being performed. The tribunal considered ‘the protracted conditions of insecurity in Libya since 2011’, and concluded that, as a matter of international law, its treaty-based jurisdiction was not barred by the contractual dispute resolution provisions. This was because the claimant could not pursue its contract claims in the Libyan courts in safety or with any reasonable expectation of a considered and expeditious outcome.[25]​​​​​​​

The privity issue

The question whether privity of contract is required arises in cases where one or both of the respondent state or the foreign investor claimant is not a party to the contract on the basis of which the umbrella clause claim is brought. While some tribunals have considered privity – ie, that both the respondent and the claimant to the investment-treaty arbitration are party to the contract – to be an essential requirement,[26] others have dismissed this argument, usually on the basis of the wording of the umbrella clause at issue.[27]

A number of recent arbitral decisions have addressed this issue.[28] For instance, in Gavrilovic v Croatia, the tribunal found that the state was not a named party to, and did not sign, the underlying contract that was alleged to have been breached. The tribunal also opined that the international law doctrine of attribution does not create obligations for a state under a contract to which it is not party. As such, the state could not be considered a party to the relevant contract and the umbrella clause was not engaged.[29]

The reverse situation occurred in WNC v The Czech Republic, in which it was the investor claimant that was not party to the contract upon which the umbrella clause claim was based. The tribunal rejected the claimant’s contention that it was not required to establish privity, stating that such an argument ‘finds no authoritative support in the case law of international investment tribunals.’ To the contrary, ‘tribunals have rather consistently resolved that they have no jurisdiction under umbrella clauses to consider contractual obligations between host states and investors’ locally incorporated subsidiaries.’[30]

However, the tribunal in Supervision v Costa Rica – analysing the wording of the umbrella clause in the Costa Rica-Spain BIT – emphasised that it refers to obligations ‘related to investments by investors of the other Contracting Party’. According to the tribunal, where an umbrella clause refers to obligations in respect of an investor’s investments, it may be engaged where the host state has breached a contract entered into with the claimant investor’s subsidiary. Consequently, the tribunal found that the umbrella clause encompassed contractual obligations between Costa Rica and the locally-incorporated company in which the claimant held a majority stake.[31]

In ESPF v Italy, the tribunal focused on the particular wording of the ECT’s umbrella clause, which states that ‘[e]ach Contracting Party shall observe any obligations it has entered into with … an Investment of an Investor of any other Contracting Party’.[32]. As such, the tribunal had jurisdiction to hear the claimants’ umbrella clause claim, even though it was not a party to the underlying contract. The tribunal emphasised that, the claimants were not claiming for breach of contract, but rather, for breach of obligations owed to their investments pursuant to an ‘internationalised’ umbrella clause claim.[33]

In Nissan v India, India had argued that the word ‘it’ in the CEPA’s umbrella clause (‘[e]ach Party shall observe any obligation it may have entered into ….’) refers to the state, and therefore did not extend to the contract at issue, which had been concluded with the provincial Government of Tamil Nadu. The tribunal ‘defer[red] the substantive issue of the scope of India’s obligations … for examination as a merits defense, rather than as a putative barrier to jurisdiction’.[34] As noted above, the dispute settled before the merits phase.

Conclusions

The scope and function of umbrella clauses is a topic that continues to evolve. The starting point for the interpretation of any treaty provision – including umbrella clauses – is that it should be ‘interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.’[35] In the words of the Strabag v Libya tribunal, the issues discussed above ‘cannot be resolved by comparing the number of awards expressing one view or another … it is the words of a particular treaty that matter.’[36]​​​​​​​

Nevertheless, certain overarching themes can be identified, as this article endeavours to do.

It is also notable that many states are refraining from including umbrella clauses in new-generation bilateral investment treaties. As recently reported by the United Nations Conference on Trade and Development (UNCTAD),[37] while approximately half of the old-generation treaties contain an umbrella clause (particularly ones that were concluded in the 1980s and 1990s), almost all recently concluded international investment agreements omit it. This trend may signal the beginning of the end for the umbrella clause. For the time being, however, umbrella clause disputes will continue to arise under the old-generation treaties – and debate concerning the issues discussed in this article will no doubt continue.


[1] SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction, 6 August 2003; SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, Decision of the Tribunal on Objections to Jurisdiction, Decision of the Tribunal on Objections to Jurisdiction, 29 January 2004.

[2] SGS v. Pakistan, supra note 1, paras. 165–173.

[3] SGS v. Philippines, supra note 1, paras. 115–132.

[4] See eg, SGS v. Pakistan, supra note 1, paras. 171–173.

[5] See eg, SGS v. Philippines, supra note 1, paras. 127–128; Eureko B.V. v. Republic of Poland, Ad Hoc, Partial Award, 19 August 2005, para. 245, 246; Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, paras. 52, 60, 62; 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, para. 141; SGS Société Générale de Surveillance S.A v. Republic of Paraguay, ICSID Case No. ARB/07/29, Decision on Jurisdiction, 12 February 2012, para. 170.

[6] See eg, Joy Mining Machinery Limited v. Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, 6 August 2004, para. 72; El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jurisdiction, 27 April 2006, paras. 79–84; Pan American Energy LLC and BP Argentina Exploration Company v. The Argentine Republic, ICSID Case No. ARB/03/13, Decision on Preliminary Objections, 27 July 2006, paras. 108–110.

[7] Nissan Motor Co., Ltd. v. Republic of India, PCA Case No. 2017-37, Decision on Jurisdiction, 29 April 2019, para. 277; ESPF Beteiligungs GmbH, ESPF Nr. 2 Austria Beteiligungs GmbH, and InfraClass Energie 5 GmbH & Co. KG v. Italian Republic, ICSID Case No. ARB/16/5, Award, 14 September 2020, paras. 752, 793, 811; Strabag SE v. Libya, ICSID Case No. ARB(AF)/15/1, Award, 29 June 2020, paras. 161–165, 373, 391, 399, 485-486, 590-591, 645, 707, 722, 735, 768, 779, 874; Kontinental Conseil Ingénierie v. Gabonese Republic, PCA Case No. 2015, award not publically available, see ‘Revealed: The Reasons Why Arbitrators in Kontinental (KCI) v. Gabon Case Saw Breach of Organisation for Islamic Cooperation (OIC) Investment Agreement, But Awarded Limited Compensation’, (IAReporter, 9 July 2019), available at: www.iareporter.com/articles/revealed-the-reasons-why-arbitrators-in-kontinental-kci-v-gabon-case-saw-breach-of-organisation-for-islamic-cooperation-oic-investment-agreement-but-awarded-limited-compensation/); ICS Inspection and Control Services Limited v. The Argentine Republic (II), UNCITRAL, Award on Jurisdiction, 8 July 2019, paras. 343–346; Georg Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia, ICSID Case No. ARB/12/39, Award, 25 July 2018, para. 420; Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, 19 December 2016, Award, para. 330; Philip Morris Brands Sarl, Philip Morris Products S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award, 8 July 2016, paras. 472, 477, 480; Oxus Gold v. Republic of Uzbekistan, UNCITRAL. Award, 17 December 2015, para. 365.

[8] Art. 87(2) of the CEPA (emphasis added).

[9] Nissan v. India, supra note 7, para. 277.

[10] Art. 10(1) of the ECT.

[11] ESPF v. Italy, supra note 7, paras. 752, 793.

[12] Ibid. para. 811.

[13] Art. 8(1) of the Agreement between the Republic of Austria and the Great Socialist People’s Libyan Arab Jamahiriya for the Promotion and Protection of Investments.

[14] Strabag v. Libya, supra note 7, paras. 161–165.

[15] Ibid. paras. 373, 391, 399, 485–486, 590–591, 645, 707, 722, 735, 768, 779, 874.

[16] Supervision y Control S.A. v. Republic of Costa Rica, ICSID Case No. ARB/12/4, Final Award, 18 January 2017, paras. 282–283.

[17] See eg, SGS v. Philippines, supra note 1, para. 134; BIVAC v. Paraguay, supra note 5, para. 154; Toto Costruzioni Generali S.p.A. v. The Republic of Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009, para. 202.

[18] See eg, Eureko v. Poland, supra note 5, paras. 92-114, 250; SGS v. Paraguay, supra note 5, para. 138.

[19] Garanti v. Turkmenistan, supra note 7, para. 245; Gavrilovic v. Croatia, supra note 7, paras. 421-423; Nissan v. India, supra note 7, paras. 277-281; ICS v. Argentina (II), supra note 7, paras. 337-340; Belenergia S.A. v. Italian Republic, ICSID Case No. ARB/15/40, Award, 28 August 2019, paras. 355-359; ESPF v. Italy, supra note 7, paras. 793, 816.

[20] Nissan v. India, supra note 7, para. 280.

[21] Ibid. paras. 277-281.

[22] Belenergia v. Italy, supra note 19, paras. 355-359.

[23] Consutel Group S.p.A. in liquidazione v. People's Democratic Republic of Algeria, PCA No. 2017-33, Final Award, 3 February 2020, paras. 372–375; Kontinental Conseil Ingénierie v. Gabon supra note 7.

[24] Consutel v. Algeria, supra note 23, paras. 372–375.

[25] Strabag v. Libya, supra note 7, paras. 196, 204–208.

[26] See eg, Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Award, 17 January 2007, paras. 204–205; CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Decision of the ad hoc Committee on the Application for the Annulment of the Argentine Republic, 25 September 2007, para. 95(c).

[27] See eg, Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, para. 323; Continental Casualty Company v. The Argentine Republic, ICSID Case No. ARB/03/9, Award, 5 September 2008, para. 297.

[28] Oxus v. Uzbekistan, supra note 7; WNC Factoring Limited v. The Czech Republic, PCA Case No. 2014-34, Award, 22 February 2017, para. 334; Gavrilovic v. Croatia, supra note 7, paras. 852, 856, 864; Consutel v. Algeria, supra note 23, paras. 365-369; Guris v. Libya, ICC Case No. 20971/MCP/DDA, Partial Award, 4 February 2020, not publicly available, see ‘Analysis: Tribunal in Guris v. Libya Award Draws Contrast with Cengiz Award on FPS Interpretation and Sides With Majority of Prior Libya Awards with respect to War Losses Clause’, (IAReporter, 5 March 2020), available at: www.iareporter.com/articles/analysis-tribunal-in-guris-v-libya-award-draws-contrast-with-cengiz-award-on-fps-interpretation-and-sides-with-majority-of-prior-libya-awards-with-respect-to-war-losses-clause/); Staur Eiendom AS, EBO Invest AS and Rox Holding AS v. Republic of Latvia, ICSID Case No. ARB/16/38, Award, 28 February 2020, para. 518; Strabag v. Libya, supra note 7, para. 187; Venezuela US, S.R.L. v. Bolivarian Republic of Venezuela, PCA Case No. 2013-34, Partial Award (Jurisdiction and Liability), 5 February 2021, paras. 235–236.

[29] Gavrilovic v. Croatia, supra note 7, paras. 852, 856, 864.

[30] WNC v. The Czech Republic, supra note 28, para. 334.

[31] Supervision v. Costa Rica, supra note 16, para. 287.

[32] Art. 10(1) of the ECT.

[33] ESPF v. Italy, supra note 7, paras. 793, 816.

[34] Nissan v. India, supra note 7, para. 284.

[35] Art. 31(1) of the Vienna Convention on the Law of Treaties.

[36] Strabag v. Libya, supra note 7, para. 159.

[37] UNCTAD, ‘IIA Issues Note, International Investment Agreements, Review of ISDS Decisions in 2019: Selected IIA Reform Issues’, January 2021, available at: https://unctad.org/system/files/official-document/diaepcbinf2021d1_en.pdf); UNCTAD, ‘Mapping of IIA clauses’, available at: https://investmentpolicy.unctad.org/pages/1031/mapping-of-iia-clauses).