Univerzita Palackého v Olomouci 

Právnická fakulta 

 

 

 

 

 

 

 

 

 

 

 

 

Umbrella Clauses & Bilateral 
Investment Treaty 

 

 

 By Alexis Brunet 

 Master Thesis 

 

 

 

 

 

 

 

 

 

Master in International and European Law 

Olomouc 2019 - 2021 


Acknowledgements 

 

I would like to thank all the pedagogical and administrative staff of the Law Faculty of the University 
Palacky of Olomouc for giving me the opportunity to continue my studies as a registered student in 
their institution, for having passed on and shared their knowledge and skills with me over the last few 
years. 

I would also like to thank the Legal team of EMEA Animal Nutrition of the Archer Daniels Midland group 
who gave me the time to work on this thesis and also supported me in my last year of study to make 
me acquire the practice of an international legal counsel, a teaching which I hope is just beginning in 
their midst. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Summary 
Introduction ............................................................................................................................................. 4 
1. The development of Umbrella Clauses in Bilateral Investment Treaties ........................................ 5 
1.1 The emergence of Bilateral Investment Treaties (BITs) .......................................................... 6 
1.2 The origins of Umbrella clauses .............................................................................................. 7 
2. The legal scope of Umbrella clause ............................................................................................... 10 
2.1 Impossible procedural conciliation under Umbrella Clause ................................................. 11 
2.2 The Umbrella clause as reducer of legal uncertainty ............................................................ 16 
2.3 The location of Umbrella clause within BIT ........................................................................... 18 
3. The functions of Umbrella clause .................................................................................................. 19 
3.1 The obligations covered under Umbrella clause ................................................................... 19 
3.1.1 The contractual engagement ............................................................................................... 19 
3.1.2 The unilateral engagement .................................................................................................. 23 
3.2 The determination of breaches that may be sanctioned under Umbrella clause ................ 26 
4. The disparities in the application of Umbrella Clauses ................................................................. 28 
4.1. The divide between developing and developed countries ................................................... 28 
4.2 Umbrella clause as an economic and diplomatic tool for developed countries ................... 31 
4.3 The issue of inconsistency of the case law ............................................................................ 33 
4.4 The notions of commitment and transmission for the application of Umbrella clause ....... 35 
4.5 Brexit, Trade Cooperation Agreement and Umbrella clause ................................................ 36 
5. The future of Umbrella clause ....................................................................................................... 37 
6. Conclusion ..................................................................................................................................... 38 
Bibliography ........................................................................................................................................... 40 
Awards ............................................................................................................................................... 40 
Bilateral Investment Treaties ............................................................................................................ 40 
International Organization Resources ............................................................................................... 40 
Books & Articles................................................................................................................................. 40 


 

 

 


Introduction 

In the 1950s, the world experienced the end of the "reconversion" period: production in most 
countries reached pre-war levels, or was rapidly approaching them, and supply tended to exceed 
demand in the national markets of the major economies, hence the importance of opening up or 
reopening up to developing countries that had been inaccessible during the war1. 

1 L'évolution de la situation économique mondiale en 1950. In: Etudes et conjoncture - Economie mondiale, 6ᵉ 
année, n°1, 1951., pp. 3-35; 

2 P-M. Dupuy & Y. Kerbrat, ‘Précis Dalloz - Droit International Public’, 15ème Ed., 

3 UNCTAD/ITE/IIA/2, Bilateral Investment Treaties 1959-1999, United Nations New York and Geneva, 2000 

4 Cf. 3 

Capital and service flows between developed and developing countries were of considerable economic 
interest to both. For the former, investment in countries that were still poorly or insufficiently 
developed offers direct access to raw materials, inexpensive local labor and the opening of new 
markets. For the latter, the contribution of capital but also of foreign technology was essential to the 
success of their start-up or to consolidate their growth.2 

As countries sough foreign direct investment to advance their development process, a development 
of international protection was also necessary. After the world wars, States have therefore shown an 
important interest in promoting and protecting such investment through national and international 
policy instruments. Part of these efforts involved the adoption of bilateral treaties for the promotion 
and protection of foreign investment3. Bilateral investment treaties (BIT) represent by far the 
foremost vital instrument for the international protection of foreign investment. Since the adoption 
of the primary BIT in 1959, the quantity of such treaties has big steady and, by the top of 1999, 
reached a complete of 1857. The date collected by the UNCTAD observe that between the 1990s and 
2000s the quantity of BITs quintupled to achieved the quantity of 1857.4 

The 1970s and 1980s were characterized by numerous direct confrontations between the host State 
of private investment and the foreign investor home country. Many host States, mostly developing 
ones, were not respecting contractual obligation inducing disequilibrium within contracts and loss for 
foreign investors. Therefore, a need for insurance has been expressed in order for foreign investors to 
have a secured investment that will. 

In 1965 the Washington Convention created the International Centre for Settlement of Investment 
Disputes (ICSID) as a first response for the need for international cooperation for economic 
development and justice between host States and foreign investors. According to the Preamble of the 
Convention, as disputes may arise at any time concerning investments between parties, establishment 
of mechanisms for international conciliation and arbitration, an international solution was necessary. 
The proposed solution was based on the free will of the parties, creating a binding and mutual 
agreement that required the recognition and acceptance of any recommendation of the conciliators 
and the assurance that any award would be enforced. 

From 1985, date of the creation of the Multilateral Investment Guarantee Agency (MIGA), a 
progressive regrouping of international investment law allowed to organize new agreements and 
bilateral conventions in order to put at ease diplomatic and economic tensions. In 1985, the World 
Bank’s Board of Governors began the process of creating a new investment insurance affiliate by 
endorsing the MIGA convention that defined its core mission: "to enhance the flow to developing 
countries of capital and technology for productive purposes under conditions consistent with their 


developmental needs, policies and objectives, on the basis of fair and stable standards to the treatment 
of foreign investment."5 

5 Convention Establishing the Multilateral Investment Guarantee Agency (MIGA), 1988 

6 https://www.miga.org/history 

7 Michel Fouquin, Jules Hugot et Sébastien Jean, ‘Une brève histoire des mondialisations commerciales’, 
©Éditions La Découverte, collection Repères, Paris, 2016 

MIGA was created to complement public and private sources of investment insurance against non-
commercial risks in developing countries. MIGA’s multilateral character and joint sponsorship by 
developed and developing countries were seen as significantly enhancing confidence among cross-
border investors.6 

Even if a search for securitization for international investment has been carried out at the institutional 
level, it is at the level of the commitment of the parties that securitization has found its answer. BITs 
represent today the most efficient and advanced tool. The clauses that comprise them, and in 
particular the umbrella clauses, ensure even more security for foreign investments as by which the 
host State undertakes to respect the commitments it has made to the. In other words, the domestic 
contractual obligations assumed by the State are assimilated to treaty obligations. These types of 
clauses have been added to provide additional protection to investors while coexisting with the 
standards of classical investor protection (fair and equitable treatment, MFN or most favored nation 
clause, etc.). 

1. The development of Umbrella Clauses in Bilateral Investment 
Treaties 

“Our view is that economic isolationism is the wrong way to go. Vibrant, successful growing economies 
that advance the interests of their citizens engage the global economy. And, we’re committed to 
engaging the global economy.” John W. Snow, former United States Secretary of the Treasury under 
U.S. President George W. Bush. 

The term "globalization" is commonly used to characterize the increasing interdependence of 
economies. While some could see the advent of a "world without borders", the intensification of 
international economic relations actually evolves according to international complex modalities such 
as international law, diplomacy, global economy, new international actors. In spite of the spectacular 
nature of recent developments, the phenomenon is moreover not unprecedented since the 19th 
century has also known a period of globalization. 

International economic interdependence is the result of the intensification of trade in goods, but also 
of the flows financial, migratory or informational.7 The disparities between developed countries and 
developing countries have not ceased to grow, the economic strength as, at many times, represents 
an important component of international power. However, the international scene is, since the 20th 
century, opened to new form of investments at the international level as new actors have appeared. 
Important bi-national projects are not conducted anymore by States and sub-country companies only 
but also by States and private investors, citizens, increasing flows between old and new actors of 
international law. 

The increasing development of capital and service flows between ancient and modern actors of 
international economy and international investment law have inclined the system to evolve. The 
evolvement of what is now international investment law have required from States a new form of 


international protection for the investors established within their territories or for the national ones 
investing abroad, creating tensions on the international scene. 

1.1 The emergence of Bilateral Investment Treaties (BITs) 

Historically, BITs did not originate mainly from the Friendship, Commerce and Navigation Treaties (FCN 
Treaties) but rather from the Bilateral Convention on Establishment (BCEs) - sometimes called 
"Treaties of Establishment". BCEs were intended to promote mutual investment between States 
through "establishment provisions"8 meanwhile FCNs were rather oriented to trade and shipping, 
investment issues were only cover occasionally. These provisions provided for the right of nationals of 
one State to establish and conduct business in another State and to receive adequate protection for 
their persons and property. These provisions thus effectively created rights for foreign investors and, 
indirectly, obligations for the host State such as the full protection and security standard (FPS) which 
generated an obligation for the host State not to directly harm investors/investments through acts 
attributable to the State and to protect investors and investments against actions of private parties9. 
However, the FCN treaties only dealt with this area in an ancillary manner and not primarily as they 
were intended to promote international trade.10 Host States therefore, were obliged by very little 
obligations that were not core of the agreements and consequently, mostly did not respect them. 

8 Herman Walker, Jr., ‘Treaties for the Encouragement and Protection of Foreign Investment: Present United 
States Practice’, The American Journal of Comparative Law, Vol. 5, No. 2, Spring, 1956, pp. 229-247 

9Melanie Nadine Eckardt, ‘In Investor-State Disputes - International Investment Law’, 2012 

10 Danilo Ruggero Di Bella, ‘Re-discovering the Origins of Bilateral Investment Treaties’, 2020 

11 T. Walde ‘The Umbrella Clause in Investment Arbitration. A comment on Original Intentions and Recent 
Cases’, 2005 

Moreover, the emergence of bilateral investment treaties responded to the fact that there was a State 
sovereignty perspective that provides significant and unimpeded leeway for government abrogation 
of investment contracts based on national law. International law has been seen as the ideal system to 
assist economic development by forces in favor of a culture of commitment as opposing political State 
power to escape from commitments when they are too inconvenient.11 

Initially, BITs were concluded between a developed and a developing State, mostly at the initiative of 
the developed State : The purpose of the developed State, one with a national market already 
balanced, is to export its capital and develop competitiveness in term of production meanwhile 
developing countries are looking to gain economic power as to be become a weighty actor on the 
international scene and develop economic standards within the “globalization”. 

However, this pattern of contracting developed and developing countries has evolved since the late 
1980’s and particularly within the 1990’s. Many developing countries had parallel growing economies 
and thus began to sign BITs between themselves in important numbers in order to create a positive 
spiral for their economic growth. As a result, the “globalization” dichotomy between developed and 
developing countries as BIT partners was not anymore true. Developed countries were signing BITs not 
in a one-way advantage but as a two-ways : protect outward investments and attract inward 
investment. 

The redaction of bilateral investment treaties were highly influenced by the 1967 OECD draft 
Convention on the Protection of Foreign Ownership, which never entered into force. The first bilateral 
investment treaty signed by the Federal Republic of Germany in 1959 have been often analyze as the 
first globalization investment binding tool to temper the rigor of national legislation through the 
negotiated development of more favorable regimes. Nowadays, BITs occupy a very important place in 


the normative framework of international investment and are the source of economic growth in many 
countries through their citizens acting as investors. The secretariat of the United Nations Conference 
on Trade and Development maintains a website listing these BITs, of which there are now more than 
2,800 worldwide.12 

12 Sidley, The Basics of Bilateral Investment Treaties, https://www.sidley.com/en/us/services/global-
arbitration-trade-and-advocacy/investment-treaty-arbitration/sub-pages/the-basics-of-bilateral-investment-
treaties/, 2021 

13 José A. Tapia, ‘From the Oil Crisis to the Great Recession: Five crises of the world economy’, 2013 

Apart from the classic formula of BAEs, or FCN Treaties, developing countries from every continent 
have, over the past decades, signed many BITs with other developing countries or developed ones, 
thus created an important network of BITs for the protection of investments. However not only 
developing countries decided to sign BITs to develop their economy, many developed countries did 
the same in order to maintain a durable economic growth and avoid recession during the 1970s’13. For 
example, France has concluded more than a hundred agreements of this type since 1972, starting with 
Egypt in 1974, Singapore and the Philippines in 1975 and 1976, respectively, and Israel in 1983 and 
China in 1984. Its protection investment network has subsequently been further extended, particularly 
in the direction of Eastern European countries in correlation with the collapse of the Soviet/communist 
bloc. 

Nowadays, however, the economic world is experiencing a significant slowdown in the number of BITs 
concluded because most countries have already had these agreements signed between them for 
several decades and are renewing them without formalizing a new treaty (tacit renewal). BITs are not 
in the process of disappearing, they are in fact limited to a certain number by the number of existing 
States and it seems that this number will be reached soon. Furthermore, on the 5th of May 2020, 23 
Member States of the European Union (EU) signed a new Treaty entitled “Agreement for the 
Termination of Bilateral Investment Treaties between the Member States of the European Union” 
which provides a list of intra-EU BITs already terminated (Annexe B of the Treaty) and to be terminated 
(Annexe A of the Treaty) for the seek of observance of EU internal market rules. 

1.2 The origins of Umbrella clauses 

The Enlightenment and the nineteenth century elevated on a series of philosophical and general 
principles the agreement of the wills of the parties as the creative force of law. From this period arose 
the theory that society shall recognize the legal validity of the free agreement of wills, then the purely 
ethical theories, and above all the theory of the expression of the will. The philosophers and scholars 
of law wished to recognize that the contract is partly a substantial transfer of will. It seems indeed to 
go in this direction in view of the natural law since the agreement of the parts is today fundamentally 
to appreciate the creation of the contractual obligation which can be born only from a free agreement 
and led in good faith. The umbrella clause has its origin in these ancient theories since it was created 
and implemented to meet the needs of the will of the party. 

The umbrella clause has had several writing sometimes quite long as for example the one contains in 
the Article 2(2) of the UK-Argentina BIT of 1990 : “Investments of investors of each Contracting Party 
shall at all times be accorded fair and equitable treatment and shall enjoy protection and constant 
security in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair 
by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or 
disposal of investments in its territory of investors of the other Contracting Party. Each Contracting 
Party shall observe any obligation it may have entered into with regard to investments of investors of 


the other Contracting Party”. And sometimes, the umbrella clause is extremely short as the one in the 
Germany - Russian Federation BIT of 1989 which explains that, in its Article 7.2 : “Each Contracting 
Party shall comply with any other obligation it assumes in respect of investments made by investors of 
the other Contracting Party in its territory.” 

Nowadays this particular clause can be referred to under multiple names: umbrella clause, mirror 
effect clause, elevator clause, cover clause, parallel protection clause, pacta sunt servanda clause. 

It is generally accepted that the breach of a contract concluded between a State and a foreign investor 
does not in itself constitute a violation of international law14 and accordingly that an explicit mention 
of the elevation of the contractual breach to a treaty breach is necessary. For example, in the context 
of the Anglo Iranian Oil Company case15, H. Lauterpacht, who was advising the British oil company, 
proposed a settlement of the case comprising two instruments: on the one hand, a consortium 
agreement between Iran and certain oil companies that could continue to operate the facilities; on the 
other hand, a hedging treaty between Iran and the United Kingdom that would incorporate the 
consortium agreement and contain a commitment by the Republic of Iran to abide by its terms16. The 
proposed solution therefore made logical sense in terms of respecting the State's obligations both at 
the contractual and at the treaty level. H. Lauterpacht wished to formalize the fact that any violation 
of the consortium agreement that would be concluded between Republic of Iran and the British oil 
companies would also constitute a violation of the treaty of coverage to become between the Republic 
of Iran and the UK. 

14 ICSID, SGS Société Générale de Surveillance S.A. c. Pakistan, Case No. ARB/01/13 ; ICSID, Noble Ventures Inc. 
v. Romania, Case No. ARB/01/11, Award of October 12, 2005, § 53; ICSID, Gustav FW Hamester GmbH & Co KG 
v. Ghana, Case No. ARB/07/24, Award of June 18, 2010, § 328; ICSID, Impregilo S.p.A. v. Argentina, Case No. 
ARB/07/17, Award of June 21, 2011, § 177. 

15 A.C. Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’, 
Arbitration International, 2004, vol. 20, n° 4, pp. 411-434. 

16 ‘Nationalization and International Law: Testimony of Elihu Lauterpacht, Q.C.’, The International Lawyer, Vol. 
17, No. 1, Winter 1983 

17 Abs, Herman and Hartley Shawcross, ‘Draft Convention on Investments Abroad’, The proposed convention to 
protect private foreign investment: a round table, Journal of Public Law (presently Emory Law Journal), vol. 1, 
Spring 1960 

18 CNUCED, International Investment Instruments: A compendium, vol. 5, New York, United Nations, 2000, p. 
395. 

Following the same logic, the umbrella clause has developed in States’ treaty practice to ensure that 
the breach of a State’s commitment to a foreign investor constitutes a breach of the treaty. The 
umbrella clause was drafted mainly as a tool to answer a will / a need of the society. Conventional 
mechanisms of ensuring commitments for investment first appear in the 1959 Abs-Shawcross draft 
convention17, Article II of which provided that "[e]ach 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"18. The draft places the will of the parties at the center of the contractual commitments and gives 
a rather broad scope to the potential obligations related to the investment. The "shall at all times" 
formulation is all the more permissive as it provides a picture of the State's current legal framework. 
Although this convention remained in draft form, it would have been interesting to see the tribunals 
rule on the possibility of the host State modifying its legal framework. Indeed, by promising the 
consistency of the legal framework “at all times” questioned the possibility of the host State to use its 
State prerogatives under war, state of emergency, economic sanctions by other States. 


It is with the bilateral treaty concluded between Germany and Pakistan (1959), regularly identified as 
the first BIT, that the clause from the 1959 Abs-Shawcross draft convention integrates positive 
international law. Article 7 provides: "[…] Each Party shall at all times ensure the observance of the 
undertakings given by it in relation to property of nationals of any other party”19. In effect, this article 
is intended as an application of the pacta sunt servanda principle to the property of nationals of 
another party. Property is not limited to investment but must have a primary connection to that field, 
thus as the Abs-Shawcross draft convention, it is a broad interpretation that States gave to the clause 
in order to offer a stable and secure legal framework for their nationals. 

19 Ch. Leben, ‘La responsabilité internationale de l’Etat sur le fondement des traités de promotion et de 
protection des investissements’, AFDI, 2004, p. 702 

20 OECD, ‘International Investment Law: Understanding Concepts and Tracking Innovations’, ©OECD 2008, 
Chapter 2, Interpretation of the Umbrella Clause in Investment Agreements, 2008 

Despite the reluctance of some States, such as France or the People's Republic of China, for reasons of 
instability of interpretation and an extremely protective national framework towards their citizens 
even abroad, the clause was subsequently incorporated into a considerable number of model bilateral 
investment promotion and protection treaties such as20 : 

- U.S. Model BIT (1983 version), Article II(4): « Each Party shall observe any obligation it may have 
entered into with regard to investors or nationals or companies of the other Party ». 

- Model BIT of the Republic of South Africa (1998), Article 10(2): « Each Party shall observe any other 
obligation it may have entered into with regard to investments of investors of the other Party ». 

Draft multilateral instruments or new conventions primarily related to investment have also included 
umbrella clauses within them: 

- Energy Charter Treaty, Article 10(1): « Each Contracting Party shall, in accordance with the provisions 
of this Treaty, encourage and create stable, equitable, favorable and transparent conditions for 
Investors of other Contracting Parties to make Investments in its Area. ». 

- The draft Multilateral Agreement on Investment (MAI), negotiated within the framework of the 
OECD, proposed two alternative formulations of this clause : 

A first provision entitled "Compliance Clause" stated that "[e]ach Contracting Party shall comply with 
any obligation it has undertaken in respect of a particular investment of a national of another 
Contracting Party". 

The second proposal entitled "Compliance Clause, Substantive Solution" stated that "[e]ach 
Contracting Party shall comply with any other written obligations it has entered into with respect to 
investments in its territory by investors of another Contracting Party. Disputes arising out of such 
obligations shall be settled exclusively in accordance with the terms of the contracts giving rise to the 
obligations.” 

The major difference between the two clauses is the limitation of the accessories to the obligation to 
respect the commitments made specific to an investment. The first clause is much more restrictive in 
that it is only concerned with a particular investment and therefore limits the whole field of investment 
in a generic way. The second alternative, which was not adopted within the MAI, was on the other 
hand much broader in its scope since it referred to investments in a general way. 

Moreover, the wording of the second sentence in the alternative proposal puts the will of the parties 
to the contract at the center of the clause. The fact that the first proposal was adopted suggests that, 


even in the case of a contractually concluded forum and jurisdiction clause, the elevation effect of the 
umbrella clause will be dominant. The will of the parties to the contract is thus relegated to ensure 
priority to the will of the State. 

Due in part to the influence of the OECD Draft, which has likewise influenced BITs of other major 
developed economies, including Spain and the United Kingdom for example, the umbrella clause have 
been a common habits in BITs. However, even if the umbrella clause is not suffering from a broad 
possibilities for redaction, its interpretation has been more than unstable. 

The differences of interpretation are most clearly expressed in the confrontation of the treatment of 
the compliance clause in the SGS v. Pakistan and SGS v. Philippines cases, which alone crystallize the 
criticisms relating to the risks of contradictions in the jurisprudence of the ICSID tribunals. Beyond 
these symbolic cases, the positions of the Tribunals having been the clause are so varied and 
contrasted that it seems quite delicate to proceed otherwise than by questions. 

The multiplication of the umbrella clauses in treaty instruments did not give rise to massive litigation 
until the early 2000s. From the beginning of the twenty-first century, the potential of this type of 
provision has indeed been widely observed, but also the uncertainties and controversies surrounding 
its contentious application. 

By the interpretation of the various wording of umbrella clauses whether what type of obligation can 
be covered by the umbrella clauses, it is understandable that the case-law on their implementation 
has not been entirely uniform 21. Indeed, as much different the wordings can be, the arbitrators 
differently concluded one case from another on the expended or restricted scope for the application 
of these clauses. However, the observation of inconsistency consequently of the wording of the 
umbrella clause went far beyond nuance and it became apparent that no investment law treaty 
provision has given rise to such divergent interpretations by arbitral tribunal. This bicephalous 
approach between extensive and restrictive interpretation has been accredited to irreconcilable 
doctrinal choices on the part of the arbitrators, rather than to variations in the wording of the clauses22. 
The divergences are clearly expressed in the confrontation of the treatment of the umbrella clause in 
the Société Générale de Surveillance SA cases, which crystallize the debates concerning the risks of 
contradictions in the jurisprudence of ICSID tribunals.23 

21 Chr. Schreuer, ‘Investment Treaty Arbitration and Jurisdiction over Contract Claims – the Vivendi I Case 
Considered’, in ‘International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral 
Treaties and Customary International Law’, T. WEILER (ed.), Cameron May, London, 2005, p. 299. 

22 UNCTAD, IAA issues note – Recent Developments in Investor-State Dispute Settlement, 2013, n° 1, Genève, p. 
23 

23 Julien Cazala, ‘La Clause De Respect Des Engagements’, Pédone (ed.), 2015 

2. The legal scope of Umbrella clause 

This distinction between an extensive and a restrictive approach to the application of umbrella clauses 
and their interpretation by the tribunals only increases the amount of case law that cannot be 
anticipated and consequently affects the legal scope of the clause. If case law remains an unpredictable 
variable, the umbrella clause nevertheless remains a reducer of legal uncertainty allowing foreign 
investors to benefit from a certain legal stability. The umbrella clause inserted in BITs also remains a 
subject of consensus between States, which are therefore responsible for the legal framework they 
wish to assign to it. The position of the clause within a BIT is therefore of particular importance in 
identifying the will of the States, which can be interpreted by tribunals. 


2.1 Impossible procedural conciliation under Umbrella Clause 

To illustrate the development of a procedural inconsistency regarding the scope of application of the 
umbrella clause, three particular cases can be distinguished, which have subsequently been followed 
by other cases. First, there is the interpretation of a narrow or restrictive scope, of which SGS v. 
Pakistan remains the leading case. Second, there is the broad interpretation carried by SGS v. Paraguay. 
And, in a third, more nuanced group, between the two polarisms, there is a group of decisions that 
reflect a conditional application of the meaning of umbrella clauses with SGS v. Philippines.24 

24 Patricio Garné, ‘Umbrella Clause Decisions: The Class of 2012 and a Remapping of the Jurisprudence’, Kluwer 
Arbitration Blog, 2013 

25 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13 

26 Article 11, Swiss – Pakistan BIT 

SGS v. Pakistan 

In SGS v. Pakistan25, SGS, a Switzerland-based company, contracted with the Republic of Pakistan in 
1994 to perform pre-shipment inspection ("PSI") services on certain goods destined for Pakistan. 
Under the terms of the agreement, SGS committed to inspect imported goods in Pakistan in order to 
increase customs revenue collection by ensuring that the goods were appropriately classified for 
customs purposes. However, a few years into the contract, Pakistan became dissatisfied with SGS's 
performance and terminated the contract. Subsequently, Pakistan initiated arbitration proceedings in 
Pakistan pursuant to article 11 of the PSI Agreement, which stated that any dispute arising from the 
PSI Agreement "shall be settled by arbitration in accordance with the Arbitration Act of Pakistan...". 

However, SGS in turn initiated ICSID arbitration proceedings, alleging that Pakistan's conduct under 
the PSI Agreement violated its obligations under the Switzerland-Pakistan BIT, which the two countries 
had since concluded in 1995. In particular, SGS alleged that Pakistan's actions violated several 
provisions of the BIT that set substantive standards for the treatment of investments, including, for 
example, Pakistan's obligations under Articles 4(1) and 4(2) respectively to "protect" and ensure the 
"fair and equitable" treatment of Swiss investments in Pakistan. In addition, SGS asserted that Pakistan 
was liable under the BIT for all violations of the PSI Agreement under the BIT's umbrella clause, which 
State, "Each Contracting Party shall at all times ensure compliance with the commitments it has entered 
into with respect to the investments of the investors of the other Contracting Party."26 

An ICSID tribunal was formed and first addressed Pakistan's objections to jurisdiction. Pakistan claimed 
that the claims were substantially contractual in nature and that SGS was mischaracterizing them as 
BIT claims. Since the PSI Agreement expressly deferred any dispute to arbitration in Pakistan, Pakistan 
argued that the ICSID Tribunal lacked jurisdiction to hear SGS's claim. Yet, SGS argued that under the 
BIT's umbrella clause, all contractual claims were automatically "elevated" to BIT claims since Pakistan 
was compelled under the clause to "constantly guarantee" its investment "commitments" to the Swiss 
investors, which included all contractual commitments. As such, SGS asserted that the ICSID Tribunal 
had jurisdiction over the contractual dispute. 

Despite the broad wording of the Article 9 of the BIT stating that any “disputes with respect to 
investments between a Contracting Party and an investor of the other Contracting Party…” The Tribunal 
interpreted the intention of the article as to address any dispute between an investor and a host State, 
it must also include disputes consisting of alleged violations of BIT provisions establishing substantive 
standards of treatment by a host State with respect to investors. Indeed, as above stated the core of 
an investor-host State relation is the trust put in the contractual engagement and all legal disposition 


around it made with/for the investors. Henceforth, if the host States is not respecting its engagements, 
the investors can easily loose the advantages which founded its intention to invest in the host-State 
and leads to an economical and legal reconsideration of the investment. 

Additionally, because the BIT was concluded after the PSI Agreement, the parties could not have 
intended to subject disputes under the BIT to the arbitration procedures laid out in the PSI Agreement. 
Accordingly, the Tribunal determined that it had jurisdiction over those SGS claims premised on BIT 
provisions establishing substantive standards of treatment (the “BIT claims”), including BIT Articles 
3(1), 4(1)-(2) and 6(1), which relate respectively to the promotion of investments, the protection of 
investments, and expropriation. 

Moreover, because the BIT was entered into after the PSI Agreement, the SGS and the host State could 
not have intended to submit BIT disputes to the arbitration procedures under the PSI Agreement. 
Therefore, on a first hand, the Tribunal determined that it had jurisdiction over SGS's claims based on 
BIT provisions establishing substantive standards of treatment for investment promotion, investment 
protection and expropriation. Even if the contractual claims arising from the PSI Agreement were not 
written and agreed under the BIT, as the BIT was formed between both State the PSI has to be 
governed by it. The “umbrella” of the BIT covers past contractual matters and, by consequence, the 
contractual claims were elevated to treaty claims. 

On the other hand, logically, the Tribunal stated that it had no jurisdiction over the contractual claims 
that did not constitute a breach to the substantive standards of the BIT. The Article 11 of the BIT, which 
constitutes the umbrella clause, as not for purpose to elevate all contractual claim and all contractual 
breach to a treaty claim nor a treaty breach. As expressed by the Tribunal, nothing in the umbrella 
clause “appears susceptible of almost indefinite expansion”. The interpretation made by SGS to claim 
all dispute as treaty breaches ones does not have any legal fundament under the BIT. For a contractual 
breach to become a treaty one, it is fundamental to prove the legal and economic impact upon the 
investors of the consequences of the acts made by the host State. The acts committed by the host 
State must be such as to call into question the very existence of the will of the parties to contract under 
the protection of this agreement. The Latin proverb actor incumbit probatio, reus in excipiendo fit actor 
is no exception here, SGS had to provide sufficient evidence of the economic consequences it has 
suffered from the action taken by the Pakistan. SGS failed to do so and therefore fail to prove that the 
coverage offered by the umbrella clause of the BIT shall apply to the contractual matter brought before 
the Tribunal. 

The Tribunal in SGS v. Pakistan chose legal certainty and stability by not enforcing the umbrella clause 
as a decision authorizing this contract claim to become a treaty one would have set a dangerous 
precedent. Indeed, it will be impossible for arbitration Tribunals to be seized of every contractual 
violation made by a State towards an investor. The will of the States signatories of BIT shall be 
respected, if States conclude a bilateral investment treaty the aim is to protect investors and contract 
relating to the investment activity, hence not to all contract concluded between an investor and a host 
State. If States would consider in a more broad-aimed treaty that any contract taken in relation with 
or in link with not only investment matters but all contractual matters to be covered by the umbrella 
clause or within the umbrella clause then, by will of the Parties, the tribunal would most likely have 
ground to hear any contractual claim between a foreigner and a host State. 

Umbrella clauses within an BIT used in extensive approach without respecting will of the Parties would 
give such legal weight to the investor that the contractual balance would be broken. The possibility for 
an investor to have an arbitral tribunal invalidate any act rendered by a State acting in its prerogatives 
do not have any legal foundation as it would be a step in the State’s sovereign powers. Using BITs to 


overprotect investors would mean depriving States of part of their sovereignty, particularly in that it 
may slow down the exercise of their primary functions. This decision rendered by the Tribunal has 
been analyzed2728 as the primacy of the protection of the host States beyond the investor and that, 
therefore, even bound by a BIT, the host State seems remaining unaccountable for the non-respect of 
its contractual obligations. 

27 Jan Ole Voss, ‘The impact of Investment Treaties on Contracts between Host States and Foreign Investors’, 
Martinus Nijhoff Publishers, 2011 

28 Cameron May, ‘International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral 
Treaties and Customary International Law’, 2005 

29 SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6 

30 Yusuf Aksar, ‘Implementing International Economic Law, Through Dispute Settlement Mechanisms’, Martinus 
Nijhoff Publishers, 2011 

31 Decision of the Tribunal on Objections to Jurisdiction - SGS Société Générale de Surveillance S.A. v. Republic 
of the Philippines, ICSID Case No. ARB/02/6 

32 Cf. 31 

SGS v. Philippines 

In SGS v. Philippines29, another ICSID Tribunal, reached a different conclusion in interpreting the 
umbrella clause of the Switzerland-Philippines BIT, which provides that "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." The application of the umbrella clause was at stake to a dispute over 
the amount owed by the Philippines to SGS for unpaid comprehensive import supervision services 
provided under a contract between the parties ("CISS Agreement"). In particular, the question for the 
Tribunal was whether it had jurisdiction over claims regarding breaches of the CISS Agreement under 
the umbrella clause. 

In view of the broad scope of the BIT's umbrella clause, which applies "to any obligation" that has the 
objective of "creating and maintaining favorable conditions for investment...", the Tribunal determined 
that it had jurisdiction. The fact that the umbrella clause has a wording that can be described as 
"broad" or even "imprecise" makes it possible in practice to include in it all contractual obligations that 
are a fortiori ancillary to the investment but that allow its sustainable maintenance. 

Indeed, any claim under the CISS in accordance with the umbrella clause “makes it a breach of the BIT 
for the host State to fail to observe binding commitments, including contractual commitments, which 
it has assumed with regard to specific investments.” The fact that the Tribunal decides to rule positively 
on its jurisdiction thanks to the opening of the umbrella clause makes it possible to widen its scope of 
application which had been seen as restricted and/or reduced in SGS v. Pakistan.30 The clause provides 
that each States “constantly guarantee the observance of [...] commitments” without any mention to 
investment. The Tribunal contrasted with the decision in SGS v. Pakistan, which held that the umbrella 
clause could only cover disputes and obligations in the investment field. 

In addition, the Tribunal reverses the interpretation made by the arbitral Tribunal in SGS v. Pakistan 
which sought to curb the elevation of any contract claim to a treaty claim. The Tribunal held that the 
umbrella clause “does not convert questions of contract law into questions of treaty law”31 and 
therefore the umbrella clause does not have the purpose or the power to override laws of international 
application from those of national scope originally provided for in the contract. 

Moreover, the Tribunal in SGS v. Philippines reproached SGS v. Pakistan for having given a vague and 
imprecise definition of the umbrella clause in the sense that it could be interpreted as "an implicit 
positive commitment" which did not exclude, in "exceptional circumstances"32, the possibility for 


contractual breaches to constitute BIT violations. However, it is the very nature of the clause to admit 
that contractual breaches can be elevated to treaty breaches in order to protect the investor and 
create a balance between the parties in the contract. The Tribunal in SGS v. Philippines also stated that 
the clause cannot be the result of an implied positive commitment and that as a forum clause, its 
purpose and drafting must be free of uncertainty in order to allow the parties to contract freely and in 
an informed manner.33 

33 Cf. 26 

34 Stephan W. Schill, Christian J. Tams, Rainer Hofmann, ‘International Investment Law and History’, Page 232, · 
2018 / SGS Société Générale de Surveillance S.A. v. The Republic of Paraguay, ICSID Case No. ARB/07/29 

35 Andrea K. Bjorklund, ‘Yearbook on International Investment Law and Policy 2012-2013’, p.164, 2014 

It is particularly the expression of the parties that allowed the Tribunal in the present case to reject its 
jurisdiction on the grounds that SGS claimed that the Tribunal should have jurisdiction over all matters 
relating to the contract in accordance with the BIT, whereas the BIT only deals with the investment in 
a general way. In fact, the issue was the non-payment of a service and therefore had no general 
connection with the investment or the maintenance of its protectorate for foreign investors. 

Furthermore, article 12 of the contract between the parties stated that “all actions concerning disputes 
in connection with the obligations of either party to this Agreement shall be filed at the Regional Trial 
Courts of Makati or Manila.” Therefore it would have been legally questionable for the Tribunal to 
grant itself jurisdiction beyond the explicit agreement of the parties. The will of the parties was 
expressed and since the will was free the parties must abide by their commitments. Considering that 
the BIT represents a special regime related to investment that was not applicable to the facts of the 
case, only the general regime applies, the one decided by the free expression of the parties. 

SGS v. Paraguay 

In 2010, an ICSID Tribunal had to rule again on an SGS case following Paraguay's contractual failure by 
its representatives to pay invoices due to SGS for certification and inspection services of goods entering 
Paraguay.34 To invoke the jurisdiction of the Tribunal, SGS relies on Article 11 of the BIT between 
Switzerland and Paraguay containing an umbrella clause. 

The jurisdiction of the Tribunal was rejected by Paraguay, which argued that Article 9 of the contract 
between the parties was a legally formed forum clause by which the parties agreed to confer exclusive 
jurisdiction on the national courts of Paraguay for any dispute arising under the contract. SGS 
countered that its claim was not based on a breach of contract but directly on the BIT and its umbrella 
clause. Paraguay argued that a State's failure to perform the contract could not constitute a breach of 
the BIT unless the plaintiff could show sovereign interference. 

In reaching its decision, the Tribunal first refuted the dichotomous theory that a claim under a treaty 
could not constitute a claim under a contract and therefore the restrictive approach made in the 
previous SGS’s case.35 The claim under one does not kill the claimant's action under the other because 
the legal basis invoked and the fault would be different. Secondly, the Tribunal recalls that it is up to 
the complainant to formulate its claims with precision and clarity so that the Tribunal can judge 
without doubt its jurisdiction for each of the claims as to whether a breach of the treaty is observed. 

In international law, an essential aspect of sovereignty is that all States must have supreme control 
over their internal affairs and therefore the character of sovereign interference invoked by the 


Paraguay has no basis.36 The Tribunal appreciates that any act taken by a State and in particular a 
breach of contract are sovereign acts that are produced by the State for the purpose of its sovereign 
missions. The fact that a State contracts with non-State parties does not diminish the scope or force of 
its acts. 

36 Thomas Fleiner-Gerster, ‘Théorie Générale De L’état’, Publications de l'Institut de hautes études 
internationales, 1986 

37 Michael Waibel, ‘The Backlash Against Investment Arbitration Perceptions and Reality’, 2010 

38 Vienna Convention on the Law of Treaties, 1969 

39 Jeswald W. Salacuse, ‘The Law of Investment Treaties’, Page 191, 2015 

40 Meg Kinnear, Geraldine R. Fischer, ‘Building International Investment Law: The First 50 Years of ICSID’, 2015 

The Tribunal relies on the broad wording of the umbrella clause in the BIT to establish its jurisdiction, 
noting that even though SGS has made claims that are contractual in nature, the fact that they are 
affiliated with treaty claims allows for coverage under the treaty clause. SGS has made the correct form 
of claim in the correct jurisdiction in accordance with the BIT. If SGS had filed only contractual claims 
with the Tribunal, it would have rejected its jurisdiction. The forum clause signed by the parties to the 
contract only covers contractual disputes, since no such clause was drafted here, the Tribunal must 
hear the case and the national courts have no jurisdiction to hear disputes arising from a treaty.37 

The Tribunal, after having analyzed the form of the claims, considered the merits of the claims, namely 
whether they had been correctly qualified and whether they fell within its jurisdiction. Paraguay, 
concerning the request related to the violation of the BIT umbrella clause, maintained that this one 
could be activated only when a State exercises its power or a governmental influence for the violation 
of the aforementioned contract. This was not the case here, as Paraguayan officials did not pay SGS 
for its services, but the State as such did not take any decision, act or provision to deprive SGS of its 
right to receive its money. In accordance with the forum clause, Paraguay wanted the dispute to be 
known only to its national courts. 

The Tribunal relied on article 31.1 of the Vienna Convention on the Law of Treaties to reject Paraguay's 
request not to recognize its jurisdiction to hear the dispute : “A treaty shall 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.”38 The Tribunal recalls that it is a duty to respect the ordinary 
meaning of the clause which establishes an international obligation for parties to the BIT to respect 
contractual obligations towards investors.39 Second, in its decision on jurisdiction, the Tribunal recalls 
that SGS made its claims only under the BIT and specifically under its umbrella clause and not under 
the Contract. Insofar as the Tribunal is entitled to hear all disputes relating to the BIT, and not the 
Contract, the Tribunal has no means of excluding its jurisdiction to hear the dispute except to 
misinterpret the will of the parties to the BIT. Thirdly, in the event that it is necessary to exercise 
jurisdiction under the contract, the forum clause contractually provided for by the parties in no way 
limits the applicability of the provisions of the BIT, since they are not explicitly excluded and are 
intended to govern all contracts entered into by nationals with the host State. In rejecting its 
jurisdiction, the Tribunal would be rejecting the essential effects of the umbrella clause and the BIT as 
a "safety net" of protections under international law. A waiver of protection under international law 
cannot be a tacit agreement for reasons of legal certainty and stability.40 The mechanism offered by 
the umbrella clause must be seen as a complement to the contractual provisions and possibilities 
offered by national law, the possibility of recourse to an arbitral tribunal to hear violations of a treaty 
is a supplementary device. Fourthly, the Tribunal recalls that the jurisdiction of the courts under the 
forum clause is not excluded, it is merely limited to the wish of the parties that the national courts 


should only deal with disputes arising specifically from the contract, implicitly understood as anything 
that cannot be related to the BIT between Switzerland and Paraguay. 

2.2 The Umbrella clause as reducer of legal uncertainty 

Considering the economic, social, scientific and technical environment, characterized by the growing 
influence of the concept of uncertainty, whether it is real or simply felt, it is a duty for States to reflect 
on the best way to deal with this phenomenon.41 

41 Groupe de travail « INCERTITUDE ET SECURITE JURIDIQUE », Première restitution publique : "Incertitude et 
sécurité juridique", Cycle Risques, assurances, responsabilités, 2005, 

42 Alfred Jourdan, ‘Du rôle de l'état dans l'ordre économique: ou, Économie Politique et Socialisme’, page 409, 
1882 

43 Christian Dominicé, ‘L’ordre juridique international entre tradition et innovation’, 2014 

44 Hubert Groutel, ‘Qu’entend-on par insécurité juridique ?’, Exposé introductif, Colloque Insécurité juridique et 
assurance, 1996 (translation by the author) 

45 Anne-Laure Valembois, ‘La constitutionnalisation de l’exigence de sécurité juridique en droit français’, Paris, 
L.G.D.J., 2005 p. 13. (translation by the author) 

46 Martin Nadeau, ‘Perspectives pour un principe de sécurité juridique en droit canadien : les pistes du droit 
européen’, 2010 40-1-2 Revue de Droit de l'Université de Sherbrooke 511, 2010 CanLIIDocs 335 

Adding to this challenge of uncertainty, it is increasingly argued that States are failing in their original 
role as stabilizers in a rapidly changing environment.42 As subjects of international law, they generate 
decisions at every level that may, in fact, increase the degree of uncertainty of the actors instead of 
reducing it. It is to counter the increase in this degree of uncertainty and thus to promote exchanges 
that BITs and umbrella clauses were brought into the international arena between the subject of 
international law and the subject of national law.43 

The principle of legal certainty is at the center of this debate and its declinations such as legal security. 
Recognized in European law by the Court of Justice in Luxembourg and the European Court of Human 
Rights, this principle provides individuals and economic and social actors with a certain level of 
protection of the stability of the legal framework in which they operate, of the contracts they enter 
into and of their obligations towards public authorities or States. 

The rather fluctuating contours of the concept of legal security make that "each one can make his own 
idea of it"44. It therefore seems difficult to conceive the notion in itself, in a generic or abstract way 
because it is multiple statuses (philosophical rule of law, object of study). In spite of the impossibility 
of constituting a perfect definition of legal security, it is not useless to give it a teleological definition 
"which rests essentially on a research of consensus of the doctrine"45. 

The following definition written by Martin Nadeau is made from different philosophical and practical 
approaches for the sole purpose to identify the goals pursued by the proponents of legal security and 
the meaning that is generally attributed to it.46 

Legal security in its teleological definition refers to the idea of a series of requirements legal norms, 
that is, the system as such. First, security is described as the requirement of predictability of the law, 
in this respect, the rules of law must govern only future actions in order to allow litigants to foresee 
the legal consequences of their acts and actions (e.g., principle of non-retroactivity, rule of law, rules 
of transitional law). Secondly, from the perspective of knowing in order to foresee, legal security 


presupposes the accessibility of legal norms. At the formal level, this requires the publication of legal 
norms. At the material level, accessibility requires that litigants be able to understand legal norms (e.g., 
principle of precision of laws, intelligibility of the reasons for judgments). Finally, litigants must be able 
to rely on their forecasts when they update an action over time, which requires the stability of the law 
(e.g.: respect for legitimate expectations, limitation period, appeal period, publicity of rights, res 
judicata, prospective of an unconstitutional law). Legal security is therefore, depending on the status 
that jurists give it and the contexts, a concept, an ideal or a principle that requires predictability, 
stability and accessibility to rules47. 

47 Philippe Raimbault, ‘Recherche sur la sécurité juridique en droit administratif français’, t. 256, Paris, L.G.D.J., 
pp. 197-352., 2009 

48 John Lee, ‘Resolving Concerns of Treaty Shopping in International Investment Arbitration’, Journal of 
International Dispute Settlement, Volume 6, Issue 2, Pages 355–379, 2015 

49 https://icsid.worldbank.org/resources/databases/bilateral-investment-treaties 

The umbrella clause was formed as a tool to allow investors to benefit from the high level of legal 
protection afforded by treaties, despite the contractual nature of their relationship with States. The 
umbrella clause should therefore act as a regulator, in the field of international investment, for legal 
uncertainties. 

Investors are looking for legal stability through BITs and particularly umbrella clauses, which allow 
them to conduct their business and more particularly their investments in a certain legal framework. 
Indeed the practice of BIT shopping allows investors to gain access to favorable foreign investment 
protection that they might not have in some countries. As international investment law is far from 
being universally uniform advantages can be identified and schematized for investors to have the best 
system to be part of in case of any contractual dispute. Investors are “BIT shopping” for the country 
the would gain the most in term of economy or the least in term of protection.48 Umbrella clauses 
represents one of this advantages that permits investors to have legal certainty. And, in case the 
umbrella clause has already been discussed during a judgement, investors can rely on that judgement 
and on the interpretation of the tribunal. Hence not only BIT are used are comparative tools but 
judgements too. BITs are intended to be known by all, precisely to reverse this curve of legal 
uncertainty. It is important for investors to be able to foresee and anticipate possible legal disputes 
and to know the modes of resolution available for them. Today, thanks to the digital era, it is even 
easier to promote and inform the litigants. ICSID has set up a database of bilateral investment 
treaties.49 The database also indicates when these treaties entered into force and whether they refer 
to arbitration or conciliation under the ICSID Convention or the Additional Facility. The data is not 
exhaustive and is based on information provided by States or found on States websites. 

From a technical point of view, it seems obvious at present that the best method to enact a clear, 
stable and accessible body of legislation is to use firstly human and therefore States resources 
(practitioners, researchers,...) for drafting and secondly digital resources as storage or sharing tool. 
When two countries formulate a BIT they aim to provide a clear and stable legal framework for their 
respective investors and to promote financial exchanges. Henceforth, inserting an umbrella clause in 
BITs reduces legal uncertainties and promotes investment, from an investor point of view. As a State 
developing BITs promotes new incomers in the country and therefore new incomes in term of taxes. 
States shall respect contractual obligation taken and therefore shall not be walk back into agreeing on 
a legal tool asserting this obligation of respect. However taking such engagements also increase the 


liability for a State to be sue before a tribunal for every contract the State might conclude with foreign 
investors from a country it sign a BIT with. From a political side, it also a potential risk for a State to 
accept, generally, foreign investment especially in developing countries where developed countries 
investors could invest a lot of money and therefore seize lot of opportunities which are therefore not 
available anymore to nationals. 

2.3 The location of Umbrella clause within BIT 

Tribunals have frequently referred to the placement of umbrella clauses in BITs and have given this 
criterion arguable weight. In SGS v. Pakistan, the umbrella clause was placed not among the standards 
of protective treatment, but between the dispute settlement and final provisions. The Tribunal 
therefore chose to interpret the will of the parties on the assumption that since the umbrella clause is 
only in Article 11 and thus far removed from the articles relating to the respective obligations between 
States, the umbrella clause did not have substantive force in the BIT. 

The power of interpretation given to the Tribunal is an extremely important and dangerous power for 
the contracting parties since all claims related to the contract and therefore to the BIT can be 
interpreted. The difficulty in claims related to umbrella clauses is the interpretation not of the 
contracting parties but of the signatory States of the Treaty. In fact, only one State is represented and 
can therefore give its interpretation. It is rarely accepted in arbitral tribunals that a representative of 
the investor's State sits as a witness. The simplest and safest way to interpret the intention of the 
States is therefore the preambles or exchanges of text, which must be freely accessible to the investors 
and to the judges of the tribunal.50 

50 David Stratas, ‘Manuscrits de la conference Responsabilité, fraternité et développement durable en droit’, 
2011 

The State that does not respect its commitments has every interest in withholding information as to 
the intention of the BIT since according to the Latin maxim in dubio pro reo. Without a written 
document proving the intention of the signatory State, the Tribunal must judge with the elements it 
has, that is to say only the BIT, and not take a decision without legal basis nor proof. 

Indeed, the Tribunal's interpretation of whether the umbrella clause was a substantive term of the BIT 
based solely on the numbering of the clauses seems to have little practical significance. The hierarchy 
of clauses or engagement documents is often found in large or particularly complex contracts. In fact, 
the Switzerland – Pakistan BIT (1995) consists of ten pages. The document could therefore have been 
interpreted as a common set of documents with the same objective and importance, which is the 
objective of BITs in general. Moreover, the fact that the State provide for the resolution of disputes 
between investors and the host State (Article 9) before possible claims between the States themselves 
(Article 10) seems to demonstrate the importance of the signatory State to the proper fulfilment of 
their respective obligations towards the investors of the other State. 

However, it is common practice to insert clauses in commitment documents in order of importance. 
The fact that the umbrella clause relating to the settlement of disputes between investors and the host 
State is only in ninth place, while the general obligations are in the first articles, therefore seems to 
represent a valid argument in the judge's interpretation. Schreuer, referring to SGS v. Pakistan, noted 
that "the argument based on the location of the clause in the BIT is a legitimate supporting argument 


in treaty interpretation”. However, it "cannot be extended to other BITs containing similar clauses" in 
which they "are frequently grouped with the standards of treatment guaranteed by those treaties".51 

51 Ch. Schreuer, ‘Travelling the BIT Route’, J. World Investment, 2004 

52 Qatar - Switzerland BIT (2001) 

53 China - Switzerland BIT (2009) 

In this case, it seems that it is the Swiss BIT model that has done its investors a disservice and that the 
Tribunal's interpretation was well founded. If Switzerland had wanted to correct what would have 
been an error of interpretation by the Tribunal, it would have given the umbrella clause a more 
prominent place in its next BITs. In its 2001 BIT with the Republic of Qatar, the clause is in position 
number eight52 and in its 2009 BIT with the People's Republic of China, the clause is in position number 
eleven53. It is therefore to be assumed that the Tribunal has correctly interpreted Switzerland's 
intention with regard to the umbrella clause in the BIT with Pakistan. 

Although the location of the umbrella clause is not a fundamental proof of the obligations of the 
signatory States of a BIT, no one can ignore the fact that it presents one of the clues or interpretative 
elements that the Tribunal can use. The location of the umbrella clause within the BIT is therefore of 
some importance, considered by the Tribunals in the presence of doubt or in the absence of other 
elements of interpretation. 

3. The functions of Umbrella clause 

Based on the legal effect, the functions of the umbrella clause or rather its interpretations is to 
determine whether a breach of a contract by the host State can be understood as a breach of 
international law obligation because of the BIT contracted. In order to identify the functions of the 
umbrella clause it is necessary to first analyze the obligations covered under it and then observe the 
determination of breaches that may be sanctioned under. 

3.1 The obligations covered under Umbrella clause 

The obligations covered under the umbrellas clauses has two main forms the contractual engagement 
taken between the investor and the host State and the unilateral one taken directly by the host and 
which governs its relations with the investor outside of the written contractual obligations. 

3.1.1 The contractual engagement 

The contractual engagement between an investor and an host State is framed under three main ideas. 
The first one is the economical perspective wanted by the Parties, the financial growth they wish to 
achieve through the contract. It is an expression of their free will that permits the birth of their 
economical and contractual relation. Second one is the limitation of the free will of the parties and the 
economical perspective wanted. Even if parties are free to identify the contract as an investment-
related one, only the arbitrator can rule upon the nature of a contract and the applicability of the 
umbrella clause. Third one is the qualification of investment-related contracts created by the case-law, 
the interpretation of the umbrella clause and thus its applicability to the contracts. 

3.1.1.1 Economical perspective of Umbrella clause 

Economic liberalism is based on a simple concept: when each individual works in his own interest, the 
sum of these actions contributes to the general interest. It is therefore the pursuit of selfish interests 


that allows the general international economy to function properly.54 To ensure the freedom of 
individual actions, liberals therefore seek to promote the defense of economic freedoms, as well as 
fundamental freedoms. Economic liberalism is therefore concerned with liberalizing the market and 
offering important freedoms to individuals in order to promote free enterprise. 

54 Adam Smith, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, 1776 

55 Fedax N.V. v. Republic of Venezuela, ICSID (W. Bank) Case No. ARB/96/3 

The development of the umbrella clause is illustrated in the liberal thesis that the willingness of the 
investor or the State to defend its own interests creates economic and legal obligations. Insofar as 
supply and demand are a balance that constitutes the law of the market, economic exchanges are 
deemed to be only voluntary. In order for the economy to develop, it is necessary that the will of the 
investors not be hindered, on the contrary that this commitment be facilitated. Only the will of the 
investor and the State must be the source of obligations. One cannot oblige someone against his will, 
except by violating his individual freedom. If a contract is considered binding, it is only because the 
person who has entered into the contract has expressed its will, which is why the umbrella clause can 
also be called a pacta sunt servanta clause as stated above. The umbrella clause illustrates the question 
whether and to what extent contractual obligation can be assimilated to treaty obligations. 

In contrast to the theories of Adam Smith and David Ricardo, the umbrella clause is neither the result 
of the invisible hand of the market nor of the absence of the state in the general economy, quite the 
contrary. The umbrella clause is the creation of the state hand seeking to regulate the market and 
make it smoother, more stable. A smoother economic market in terms of the legal framework offers 
more uniform and therefore predictable security and protection for the citizen investor. Because all 
systems are similar, the investor and his investments are more stable and therefore less subject to the 
vagaries of the state. 

In the establishment of umbrella clause suffers therefore the free trade since the comparative 
advantages no longer exist in legal terms. Indeed the financial, legal innovations and special provisions 
of one State are most likely to be adopted and transcribed by another host State if deemed interesting 
or advantageous for investors. In an increasingly market and comparative economy, it seems that the 
umbrella clause and therefore its creation by the States are part of a smoothing approach that was 
against the economical first expectations. 

Contracts between States and investors are covered by the scope of umbrella clauses simply because 
of the host state's promise in the BIT. This undertaking by the State to another State for the protection 
of its citizens, and a fortiori its citizens, is the basis for the investor's performance of its obligation and 
its willingness to contract. The investor is looking for a stable and predictable framework in which his 
rights will be respected, at the expense of the market economy. Although the will of the parties is at 
the heart of the creation of umbrella clauses, it remains a regulatory tool that goes against the free 
management of the global market. Nevertheless, the umbrella clause represents a real advantage for 
foreign investors, particularly in the context of the revival of national economies. The application of 
the umbrella clause is therefore essential for an efficient and effective cooperation between investors 
and States. 

Unfortunately, this collaboration has been undermined as States have sought to escape their 
contractual obligations. Host State breach of investor-state contracts has posed difficulties in 
international commercial arbitration and is due to their consideration as legally covered by umbrella 
clauses and thus as a breach of the treaty ; In Fedax v. Venezuela, for example, promissory bills were 
considered covered by an umbrella clause55. Similarly, the Tribunal in SGS v. Philippines held that an 


umbrella clause "includes commitments or obligations arising under contracts entered into by the host 
States." 56 Similarly, other tribunals have held that umbrella clauses cover "[c]onsensual obligations ... 
with regard to, and as between, obligor and obligee"57, "contractual arrangements"58 and "investment 
contracts."59 The understanding and regulation of the interpretation of umbrella clauses is therefore 
very uneven. Although BITs and umbrella clauses were intended to regulate the global economy at the 
expense of the autonomy of the market, they have created a tool that seems to be imperfect in its 
reading and does not allow to reach, directly or indirectly, a contractual equilibrium or a predictable 
legal framework ideal for investors. 

56 SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, 

57 CMS Gas Transmission Co. v. Argentine Republic, ICSID (W. Bank) Case No. ARB/01/8 

58 Eureko, Partial Award 

59 Noble Ventures, ICSID Case No. ARB/01/11, 

60 Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of 
Ecuador, ICSID Case No. ARB/06/11; Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID 
Case No. ARB/01/3 

61 SGS v. Philippines, ICSID Case No. ARB/02/6, 

62 Bayview Irrigation Dist. v. Mexico, ICSID Case No. ARB(AF)/05/1 

However, limits have been found to umbrella clauses, at least in part, and it has been established as a 
matter of principle that an umbrella clause does not cover all contractual obligations between a foreign 
investor and host States. Indeed, the concept of investment in practice excludes non-investment 
contracts, such as contracts for the sale of goods between an investor and host States.60 An investor 
who sells and delivers goods, such as underground cables or construction equipment, while entering 
into a contract with a foreign state, cannot avail itself of the protection of an investment treaty, as 
cross-border sales contracts are not considered investments. It is appropriate for arbitrators to limit 
the possible claims that a citizen could make that have no direct basis in the investment covered by a 
BIT. The Arbitral Tribunal is there to maintain consistency and balance in the interpretation of rights 
and obligations between the State and the citizen, while protecting the latter in a more favorable 
manner due to his status of "weaker" party to the contract. In order for a tribunal to interpret and 
observe a violation of a BIT, conditions have been identified. These criteria or elements have been 
developed through case law and have been stable in their interpretation by arbitrators. It is basically 
necessary that there be at least a tie to the territory of the host State in the form of an establishment61 
and submission to the power of the host State62. Although thin and undeveloped, these criteria provide 
a useful legal basis for the tribunal to decide whether it can hear claims arising primarily from investors. 
However, it seems logical that the territory and the link with the power of the State should be proven 
in order to observe the elevation of the violation from a contractual claim to a treaty one. The treaty 
would not covered elements that cannot be directly affiliated with the exercise of the powers of a 
State. It is the State having international legal personality that is bound by the BIT. To disregard this 
quality would open up the claims under the clause to a level that is both unpredictable and incongruous 
since each foreign investor could call for the responsibility of the State and not the responsibility of its 
representatives. The State remains an actor of international public law with its prerogatives meaning 
rights and obligations that a foreign citizen subject to national law cannot challenge. 

3.1.1.2 The limitation of the contractual engagement 

Although most claims involving the triggering of umbrella clauses have involved investment-related 
contracts, several decisions have attempted to clarify the limitation of umbrella clauses. The decision 


in Joy Mining v. Egypt63 provided an important clue as to this limitation that is still used by tribunals 
today to decide whether or not they have jurisdiction ratione materiae to hear the dispute. 

63 Joy Mining Machinery Limited v. Arab Republic of Egypt, ICSID Case No. ARB/03/11 

64 Bank guarantees are accessory clauses or contracts in that they represent the option or the conditions of 
potential future remedy in the event that one of the parties fails to fulfill all or part of its obligations under the 
contract. Bank guarantees are a collateral security taken as a matter of principle in contracts of a certain 
importance, they guarantee to the beneficiary party a certain remedy in case of default of the other party. - 
https://dictionary.cambridge.org/fr/dictionnaire/anglais/bank-guarantee 

65 “89. Having concluded that there is no investment in this case and that, moreover, all the claims involved are 
in any event contract-based claims […]”, Award on jurisdiction, ICSID Case No. ARB/03/11 

In this case, the British company Joy Mining claimed breach of the umbrella clause in the Anglo-
Egyptian BIT due to the breach of an agreement with an Egyptian State agency for the supply and 
installation of longwall mining systems for phosphate. A dispute arose after the equipment was 
installed as to whether the investor's performance of its obligations was in accordance with the 
contract and therefore whether the contract had been fulfilled. Alleging that the British company had 
not performed its contractual obligations satisfactorily, the agency refused to release the bank 
guarantees64 given by the British company to secure the performance of its obligations under the 
contract. However, the Tribunal found that neither the bank guarantees nor the contract could be 
considered as investment-related. 

The Tribunal reminded that the umbrella clause inserted in the BIT does not have the effect of 
transforming all contractual disputes into investment disputes under the Treaty unless there is an 
actual and clear breach of Treaty rights and obligations or a breach of the contract of sufficient 
importance to invoke the Treaty. The nature of investment must exist at the time of the contractual 
commitment and, to avoid any risk of exclusion, must be tacitly mentioned by the parties. Although 
the umbrella clause is mentioned in the contract, it is accessory to the nature of the contract. Since 
the dispositions of the contract relevant for the claim do not have an investment character, the 
Tribunal can only exclude the force of the clause65. 

On the one hand, the Tribunal gives a very restrictive reading of the umbrella clause. The framework 
agreement governing the parties' commitment is dissected in order to identify precisely which 
elements of said agreement are covered by the umbrella clause and which are not. The Tribunal, after 
having carried out this dissection, decides on its jurisdiction to hear the dispute. The process of this 
response by the Tribunal excludes the notion of the will of the parties which is at the heart of 
contractual liberalism. The parties could have decided to exclude part of the contracts from the 
agreement and enter into these specific contracts outside the agreement without applying the 
umbrella clause. The Tribunal itself carried out this separation, even though the parties had tacitly 
committed themselves to hand over the entire agreement under the umbrella clause. 

On the other hand, the Tribunal outlines a fair reading of the protection of the States and its sovereign 
powers. It seems clear the Tribunal does not have jurisdiction over disputes which are not within its 
competence and which should be dealt with directly by courts of the host States unless contractual 
provisions provide otherwise. The jurisdiction of the Tribunal is not absolute due to the fact that the 
agreement is protected under the BIT which includes an umbrella clause. In its argumentation, the 
Tribunal recalls that the umbrella clause only covers those elements of the agreement between the 
investor and the host State that relate to the investment and therefore excludes anything else. 


3.1.1.3 The qualification of investment-related contracts 

Under the same understanding, many contracts between a host State and a foreign investor may not 
qualify as investment agreements or investment-related contracts. The Tribunal in SGS v. Philippines 
case stated that "for example the construction of an embassy in a third country, or the provision of 
security services to such an embassy, would not involve investments in the territory of the country 
whose embassy it was, and would not be protected by the BIT”66. Therefore, even if the foreign investor 
is already present on the territory of the host State and is under its subordination for a contract, the 
investment-related matter has to be proven in order to be covered by the umbrella clause. A 
manufacturing, sales or leasing contract cannot be protected by an umbrella clause since there is no 
investment matter involved in these contracts. Logically, the tribunal has no legal competence to 
pronounce itself competent upon a claim that is not meant to be covered under an umbrella clause. 
The fact that the host State unilaterally modify or the terminate of such contracts constitute a violation 
of the investor’s rights but none of them are protected under umbrella clause. It is a violation to a fair 
and equitable treatment and such claim should be brought to justice in accordance with the 
contractual dispositions that have been agreed between the parties. 

66 Cf.31 §99 

67 The public law instrument used in this context is an administrative act (Verwaltungsakt), a unilateral decision 
that grants or imposes rights and duties upon individuals in concrete cases. 

The umbrella clause is a protective tool for investor made especially for foreign investment not a tool 
made to threaten or bypass sovereign capacities of States. In the case a tribunal would appreciate a 
non-investment matter under the umbrella clause of a BIT it is with high certitudes that the host State 
would try to make an application for annulment before its national courts or obtain that the award 
would not be enforced again it. However, the umbrella clause remains an important legal way to force 
States to respect obligations taken within contractual engagements. 

3.1.2 The unilateral engagement 

The regularization of multilateral and therefore international investment protection is not only 
intended to deal with the contractual nature of the relationship but also with the unilateral 
commitment that a host States promises to investors. Indeed, the 1965 Washington Convention stated 
that one of the core objectives of international investment is to avoid the risks inherent to diplomatic 
protection, which companies and investors are never sure to obtain from their State of nationality 
abroad, and therefore are looking for an equivalent protection in the host State. 

Indeed, the scope of umbrella clauses also includes other specific promises made by the host State in 
its national legislation, through individual administrative instruments, etc. In fact, in many legal 
systems, States act towards foreign citizens and ensure legal certainty and stability of large-scale 
investment projects not through contractual agreements, but through unilateral licenses under public 
law. 

In Germany, for example, even the operation of public utilities, such as waste dumps or nuclear power 
plants, is often not conducted on the basis of contracts between investors and States that define 
mutual rights and obligations. Instead, the competent administrative agencies unilaterally grant a 
license on the basis of the applicable statutory law that authorizes the activity of the individual in 
question.67 

Similarly, specific promises to investors are sometimes contained directly in national legislation, such 
as legislative promises to provide special tax benefits over a significant number of future years for 


specific investments to encourage them.68 For example, UK citizens’ companies established in Portugal 
pay no capital gains tax when selling UK citizen’s property69. The promise made by the Portugal is 
therefore not contractual as it is not require for the host State and the investor to formalize a contract 
nor an agreement to obtain this tax benefice. Any investor willing to create a company for selling UK 
properties in Portugal would fall under the local legislation and benefits from it. Therefore it is more a 
unilateral obligation taken by the Portugal, a promise that shall be covered by the State anyhow. The 
fact that this promise is not contractual is more likely to be not covered by an umbrella clause 
depending on the wording of the clause and the interpretation of the tribunal. However, an umbrella 
clause not precising that only contractual obligations are covered but rather all commitments taken by 
the State shall be respected might certainly include this tax benefice. 

68 Schill, Stephan W., ‘Enabling Private Ordering: Function, Scope and Effect of Umbrella Clauses in 
International Investment Treaties’, Minnesota Journal of International Law, 2009 

69 Blevins Franks, “leading international tax and wealth management advisers to UK nationals living in Europe”, 
https://www.blevinsfranks.com/ 

The will of the parties is formed by the simple fact that the national legislation of a State is supposed 
to be known to its residents or a fortiori to its foreign investors. It would seem unlikely that a company 
whose object is the sale of real estate owned by UK citizens would not be aware of the tax advantage 
it can profits from under legal national scope. The contractual engagement is tacitly manifested 
without any writing between the parties and obliges them: on the one hand to respect the object of 
the company created and on the other hand to make the corresponding tax benefit available. The 
absence of writing thus could be the reason why the cover offered by an umbrella clause might not 
apply. 

By creating a legal framework, a State realizes promises or a minima offers them through legislative 
acts. It is a non-contractually written situation as many exist in daily life. As citizen of a State you have 
rights and duties, there is a relationship between the State and the citizen that do not need to be 
written nor signed by both. When an investor decides to invest in a host State he/she therefore agrees 
to commit to a certain bound which is unwritten, a bound which represents a important factor for the 
investor. A commitment, according to the Oxford Dictionary is “a promise to do something or to 
behave in a particular way; a promise to support someone or something”. The legal framework of a 
State and hence its promises to behave in a particular ways through its laws represents a key factor 
for the investors. The behavior of the State may be of consequences for the investment and becomes 
a certain form of unilateral obligations from the State toward the investor. 

The wording of the umbrella clauses tends to give an extensive material coverage, covering not only 
contractual promises but also administrative acts and promises contained in national legislation. 
Indeed, it is only the wording of the clause that allows for the inclusion or not of the "commitments" 
and "obligations" that the State makes to itself. It is to be assumed that an umbrella clause explicitly 
specifying that "only contractual commitments manifested by a written agreement between the two 
parties can be covered by the clause", would de facto exclude any commitment or promise not 
contractually provided for between the parties. 

The functional understanding of umbrella clauses as a support for the relationship between host State 
and foreign investors also seems to be appreciated in a extensive scope of application ratione materiae 
of the clauses. What is decisive is that the State is the basis of a relationship that binds it to the 
investment and that is specific to the transaction between the foreign investor and the host State. 
Regardless of its legal basis in an investor-State contract, a concession, license, administrative act or 
law will be binding on both parties. The parties manifest their will by choosing on the one hand to favor 


by law a category of investor and on the other hand to enter specifically in the legal box created by the 
State to benefit from a particular regime. 

It makes no difference from an economic point of view whether an investor begins to make a specific 
investment on the basis of a contract between an investor and a State or on the basis of a specific 
commitment by the host State in another legal instrument.70 The basis of the clause is to identify why 
an investment was made, and why the State aimed to induce that investment. National legislative or 
regulatory promises should, like contractual promises, qualify as commitments for the purposes of the 
scope of application of umbrella clauses. 

70 Georg Schwarzenberger, ‘Der Schutz Von Auslandsinvestitionen 16‘, 1969 

71 Unforeseeability refers to the situation in which a contract is unbalanced due to a change in circumstances 
that could not have been foreseen at the time of its conclusion, and the party who is the victim of this situation 
may ask his or her co-contractor to renegotiate the contract. If the renegotiation fails, the parties may decide to 
terminate the contract or refer the matter to a judge for revision or annulment. Documentation Dalloz, Ed. 
Francis Lefebvre (2021) 

72 SGS v. Philippines 

73 CMS Gas Transmission Co. v. Argentine Republic, ICSID (W. Bank) Case No. ARB/01/8 

74 LG&E Energy Corp. v. Argentine Republic, ICSID (W. Bank) Case No. ARB/02/1 

However, it is important to note that these regulatory or legislative promises are also a source of legal 
insecurity for investors since they can be abrogated or modified by the State as part of its prerogatives. 
This is a known and certain risk that the investor accepts and which has no basis under the umbrella 
clause. In case of damage caused by the deletion or modification of a national legal text, the investor 
may, potentially, only rely on the theory of unforeseeability71 before the national and sovereign courts 
of the host State. 

A broad interpretation of the type of commitments covered by an umbrella clause is also shared by 
most arbitral jurisprudence. Tribunals focus on the wording of the umbrella clause, which makes it 
possible to say that any commitment, regardless of its legal basis, can be covered by an umbrella clause 
as long as it is specific and related to the investment. In SGS v. Philippines, for example, the Tribunal 
held that commitments covered by umbrella clauses "must have assumed a legal obligation, and that 
obligation must have been assumed in relation to the specific investment - not as a matter of 
application of some general legal obligation"72. 

The Annulment Committee emphasized in CMS v. Argentina that the commitments covered by an 
umbrella clause must constitute "specific obligations concerning the investment. They do not cover 
general requirements imposed by the law of the host country"73 unless they are directly related to 
investment. This position was also supported by the liability decision in LG&E v. Argentina, where the 
Tribunal held that a specific tariff regime contained in the regulatory and legislative framework of the 
gas distribution sector in Argentina was covered by the umbrella clause of the U.S.-Argentina BIT . The 
Tribunal stated: 

In order to determine the applicability of the umbrella clause, the Tribunal should establish if by virtue 
of the provisions of the Gas Law and its regulations, the Argentine country has assumed international 
obligations with respect to LG&E and its investment […] Argentina made these specific obligations to 
foreign investors, such as LG&E, by enacting the Gas Law and other regulations, and then advertising 
these guarantees in the Offering Memorandum to induce the entry of foreign capital to fund the 
privatization program in its public service sector. These laws and regulations became obligations within 
the meaning of Article II(2)(c), by virtue of targeting foreign investors and applying specifically to their 
investments, that gave rise to liability under the umbrella clause.74 


The decisive factor for a commitment to be covered is whether the host State act contains a particular 
commitment that is intended to serve as a functional substitute for a contract between an investor 
and a host State.75 When the host State makes a particular provision by law or regulation, it binds itself 
and the investor as a contract by the manifestation of the will of the parties in their freedom of 
contract. The parties are deemed to be informed of their commitment in the same way as they would 
have been in a contract. The signature has no specific value in this case since the knowledge of the law 
is deemed acquired for each party. 

75 Cf. 62 

76 John Cartwright, Bénédicte Fauvarque-Cosson & Simon Whittaker, ‘The Law Of Contract, The General Regime 
Of Obligations, And Proof Of Obligations’, 2016 

77 Mann, ‘British Investment Treaties’, British Yearbook of International Law, p.246, 1981 / Rudolf Dolzer and 
Margrete Stevens, ‘Bilateral Investment Treaties’ , Martinus Nijhoff Publishers, 1995 

78 Dr. Reinish, ‘Umbrella Clause, Seminar on International Investment Protection’, 2006 

79 Cf. 41 

However, if a regulation or law is not specifically intended to assist investors from abroad or if it does 
not provide a stable and unchanging framework, then it is deemed not to be covered by the umbrella 
clause because it is not intended to create a bond of trust between the parties or to give them an 
advantage fundamental to their commitment. 

3.2 The determination of breaches that may be sanctioned under Umbrella clause 

According to the general principles applicable to liability, the damage likely to be compensated must 
be the consequence of the fault committed by the person who has not respected the undertaking he 
has entered into76. It is the contract or the treaty which makes it possible to determine the obligations 
whose non-performance constitutes a fault. 

It is clear that if an obligation does not fall within the scope of the performance provision, no breach 
of that obligation will trigger the international responsibility of the State under the umbrella clause. In 
order for a contractual breach of the State to be elevated to the level of a treaty breach, the investor 
must place itself or be placed under the protection of the umbrella clause. 

However, the issue arises as to which fault deserves to be elevated, since it is a simple fault to which a 
much more important qualification is attributed by the free interpretation of judges. An umbrella 
clause remains a contractual claim covered under a treaty claim. The major consideration is to what 
extent or to what obligations the umbrella clause extends its application to the benefit of the contract. 

The wording "shall observe" does not appear to offer many different interpretations. It indicates that 
any breach of the covered obligations would be a breach of the umbrella clause. Although the case law 
has not yet addressed this drafting issue, some scholars77 have commented on the question of what 
type of breach goes far enough to trigger the protection of the umbrella clause.78 

Mann placed no restrictions on the violations covered by the umbrella clause. In his view, the effect of 
this provision is to make unlawful "any interference with [the investor's] contractual rights, whether 
resulting from a mere breach of contract or from a legislative or administrative act..." The breach could 
result, for example, "from the modification of the terms of a contract or license by legislative action, 
the termination of the contract or the non-performance of any of its terms, for example, by default of 
payment, the dissolution of the local company with which the investor may have contracted, and the 
transfer of its assets... "79 R. Dolzer and M. Stevens also stated that "[this] provision [...] protects the 


investor’s contractual rights against any interference which might be caused either by a simple breach 
of contract or by administrative or legislative acts [...] ".80 

80 Cf. 41 

81 Occidental Petroleum Corp. v. Ecuador, ICSID Case No. ARB/06/11 

82 Cf. 81, Award §526 

83 Lise Johnson & Oleksandr Volkov, ‘Investor-States Contracts, Host-States “Commitments” And The Myth Of 
Stability In International Law’, American Review of International Arbitration, 2013 

When reading the umbrella clauses, the tribunals have in their power the capacity of interpretation, a 
reading that is both restrictive and extensive has been admitted, which still does not allow for a real 
vision and anticipation of the interpretation on a case by case basis of the cases that will arise. The 
tendency of tribunals mains generally to determine whether it is in the capacity of the State that the 
fault was committed or that the obligations were not respected because of the sovereign power. It is 
appropriate to ask the question of the fact that gave rise to the fault and, in particular, whether this 
fact was generated by the State or its representatives in the exercise or will of the State powers or 
capacities. Judges must ensure the sanctity of the contract and the commitments made by the BIT 
without infringing on the sovereignty of the State. 

The investor's willingness to enter into a contract is mainly based on the stability that the host State 
promises him and consequently, the modification of the legal framework destabilizing the investment 
where the related rights have already been sanctioned by the jurisprudence. 

Occidental v. Ecuador 

A notable example of the breaches sanctioned under through the umbrella clause’s mechanism is the 
2012 Occidental v. Ecuador award under the 1993 US – Ecuador BIT. In its final decision, the Tribunal 
found that the oil participation contract between plaintiff Occidental and Ecuador's State-owned oil 
company, PetroEcuador, contained an implied promise prohibiting Ecuador from later enacting a new 
law taxing the revenues generated by the oil production governed by the contract.81 Although the 
Tribunal refused to characterize the fault as the enactment of a new law, the Tribunal found that the 
U.S. company "had a right to expect" that the risk-benefit agreement between the contracting parties 
"would be respected and not unilaterally modified by the host country"82 through the enactment of a 
law affecting the value of the agreement. Ecuador was therefore found guilty of breaching both the 
contract and the Treaty with the USA.83 

It can be observed from this decision that the Tribunal chose to exclude the characterization of the 
fault by the promulgation of a law that holds the powers of the State and its sovereignty to manage its 
territory. It seems logical that the obligations in the contract with an investor can not result in 
preventing a State from ensuring the proper management of its territory and its nationals otherwise it 
amounts, indirectly, to granting a right of interference to non-nationals or, for the State, to limit its 
own powers. The Tribunal chose to interpret this legislative adoption as a cause and not a consequence 
for the claim of the American company. 

Enron v. Argentina 

In Enron v. Argentina, the Tribunal noted there was no specific provision in the underlying concession 
agreement between the investor and the State that the host State's legal and regulatory framework 
would remain unchanged. However, the Tribunal stated that it was the duty of the host State to make 
it clear at the time of the investment that no promise of stability was made, for example by stating 
that “the tariff regime approved was devised as a permanent feature of the privatization, not a 


transitory one, and if it was intended to be transitory it should have also been clearly advised to 
prospective investors, but again nothing of the sort was done”.84 

84 Enron v. Argentina, ICSID Case No. ARB/01/3 

85 Brazil – India BIT (2020) 

The argument that whether or not there is a clause interpreting the parties' intent on the subject 
suggests that if there is an exclusionary clause, this disturbance of the contractual balance could be 
protected by the Tribunal and the obligations protected under the umbrella clause could be 
contractually diminished. In fact, BITs now provide that investment agreements entered into under 
them shall not limit or restrict a State from passing new laws or regulations even if the consequences 
affect investments. States aim to protect themselves and their sovereign powers even if it means 
weakening the position of investors and the stability of their legal framework. 

Indeed, Brazil and India included a provision in the sense stated in Brazil – India BIT of 2020 that : This 
Treaty shall not prevent the adoption and implementation of new legal requirements or restrictions to 
investors and their investments, as long as they are consistent with this Treaty.85 

In Enron v. Argentina the issue was not whether the State had the right to pass a law but what the 
consequences of the law were for Enron. The Tribunal ruled in favor of its competency to hear the case 
since the new tax regime had a significant impact on the Enron’s investment and stated that its ground 
for competency emerged from the BIT’s provisions. Enron projected and started its investment within 
a tariff regime and thought that the regime in place was permanent and not transitory. The State did 
not precise to Enron that the regime was transitory and a new one would soon be implemented. With 
that information Enron may have not realized that investment and because of it faced a unforeseen 
situation. 

4. The disparities in the application of Umbrella Clauses 

The umbrella clause is not only a legal but also an economic and diplomatic tool. The disparities in 
power between different States play an important role in the application of umbrella clauses and the 
protection given to foreign investors. This disparity can be seen both in the judgments handed down 
by the tribunals and in the wording of the umbrella clause, which allows for an extensive or restrictive 
approach to the contractual obligations covered by it. 

4.1. The divide between developing and developed countries 

The notion of investment and therefore of economic exchange between countries also induces a 
historical variable between these two countries. The umbrella clause is a tool of reciprocal confidence 
as to the treatment reserved for its nationals in the context of an investment in the host State. This 
contractual relationship between a host State and the nationals of the other State is intimately linked 
to the relationship between the countries themselves. The umbrella clause is a mutual commitment 
between the States for their nationals and therefore demonstrates a joint desire to build a project, a 
favorable and sustainable legal framework allowing a perpetuation of their economic and diplomatic 
relations. Indeed, it seems unlikely that two countries with differences would aim to promote their 
respective economic interests and even less to encourage the development of "hostile" foreign 
investment on their territory. 

However, from a historical point of view, many States with a dominant position on the international 
market have been able to give their national investors significant advantages by negotiating BITs and 


umbrella clauses to launch new economic markets or to secure others. Indeed, due to history and 
economic, scientific and technological developments, economic disparities between countries on a 
global scale have caused disparities in BITs and umbrella clauses. 

This divide between developed and developing countries in foreign investment disputes goes back to 
the formation of international investment law, as there was no coherent legal regime for foreign 
investment in the first half of the twentieth century. 

Existing international legal principles regarding investment rights and obligations were often vague 
and open to extensive interpretation. While developed countries asserted that international law 
imposed various obligations on host States to protect foreign investment and compensate for 
expropriation, newly decolonized and developing countries decried this view as serving only to 
entrench the economic dominance of industrialized nations and limit their ability to manage resources 
within their own borders, thereby undermining their sovereignty. 

The dispute impacted on the construction of the umbrella clause within the BITs and persists to this 
day, even though the talking points of the debate have evolved. Indeed, while the earlier disagreement 
concerned the standards applicable to the treatment of investments under international law, the 
current dispute concerns how the agreed standards for the treatment of investments should be 
interpreted. 

Historically, investments were mainly made in the direction of the developed State to the developing 
State and consequently created an imbalance between the signatories. Indeed, the effects of the BITs, 
although imposing obligations on both parties, can only be executed in one direction because the 
developing State has very few investors with the financial resources to invest in the developed State. 
The commitment and the treaty signed by the parties is therefore asymmetrical, not by the wording 
of its content but by the facts that govern it.86 

86 Jarrod Wong, ‘ Umbrella Clauses in Bilateral Investment Treaties: Of Breaches of Contract, Treaty Violations, 
and the Divide Between Developing and Developed Countries in Foreign Investment Disputes’, 2006 

87 Qiang Ren, ‘Public Interests in International Investment Law Balancing Protection for Investor and 
Environment’, 2019 

Therefore, developing countries will seek to interpret restrictively any BIT provision that grants rights 
to the developed State investor and/or imposes obligations on the host State in favor of developed 
State investors. Conversely, developed countries will interpret the same provision expansively to 
protect their investors from any risk of loss. The notion of trust is no longer the master of the 
relationship between States, rather the relationship between the parties is to know which one will be 
able to take more advantage of the BIT provisions and their interpretations. 

The umbrella clause is an excellent example of such a BIT provision, as evidenced by the fact that the 
disputes in the two SGS arbitration proceedings followed the same pattern: Pakistan and the 
Philippines (the developing State) seeking a restrictive interpretation of the umbrella clause, and the 
investors from Switzerland (the developed State) seeking a broader interpretation for their claim to be 
covered. Investors are once again in an unstable legal framework because it is unpredictable.87 If the 
founding relationship of the BIT is biased, then the relationship arising from it through the investors 
and the umbrella clause can only be so biased. In this case, the Tribunals of the SGS cases have all had 
an interpretation of the umbrella clause and their jurisdiction to hear disputes depending on the 
contractual or treaty nature. 

BITs and umbrella clauses can be seen as vectors of economic and legal inequality in the sense that the 
legal framework in some countries is very unstable, in the image of the power in place. The more a 


State is disorganized, the more its competences are centralized, the more the interdependence of the 
powers nourishes an instability for the investors who must calculate their risk taking. Coming from a 
developed State, is it interesting for an investor to invest abroad knowing that the obligations of the 
host State can potentially never be respected? The situation created by the economic imbalance is the 
same in form as that created in substance by the lack of partnership or agreement between countries. 
Investors find themselves unable to anticipate the umbrella clause and the tribunals that hamper 
international investment. 

It is important to recognize that the conflict described in the SGS and affiliates cases is not a contractual 
conflict between investors and host State but really a diplomatic problem between developed and 
developing countries. 

The asymmetry caused in practice by the reading of the umbrella clause and the BITs probably 
describes a system of favoritism towards investors from developed countries as opposed to developing 
countries.88 It is precisely appreciated that the developed State has more cards, more economic and 
commercial assets than the countries at the end of development. Although the will of the parties are 
expressed by the signature of a BIT, question arise whether this agreement is not abusive and do not 
create, indirectly, a situation of dependence for the developing State. Most developing countries are 
dependent on aid and investments made by developed countries or their nationals, asserting this 
position of dominance can only be expressed by an economic pressure and therefore a limitation of 
the parties' will to contract. The equilibrium of the contract requires a willingness of the parties to 
engage themselves in an honest and mutual trust. If this mutual trust or the good faith of each party 
cannot be proven, it becomes natural to doubt the validity of any clause or any international 
agreement. The fact that economic coercion is not clearly stated within article 52 of the Vienna 
Convention on the Law of Treaties and that the Declaration made to complete the Convention is not 
binding do not clearly permits to envisage the nullity of a BIT on that ground with certainty. 

88 Shaw Livermore, ‘Investment, Principles and Analysis‘, 1938 

It is the influence of this signatory State that decides to carry the BIT project and thus to favor its 
investors on new markets or markets where competition is present. It is very complicated, especially 
in view of the jurisprudence, to be able to advance which party is really advantaged during a BIT since 
the arbitral tribunal tends to keep a certain neutrality that potentially a national court would have 
more difficulties to respect. 

In all SGS cases, it is the Swiss company that goes to arbitration and tries to avoid the need to go before 
national courts in developing countries in order to avoid the uncertainty of the judgment and the 
instability of the legal framework promised by the BIT. The tribunals in the SGS cases have each taken 
different approaches to the assessment of the umbrella clause and its application and have attempted 
to bring a legal balance to the dispute based on fact and law. The use of arbitration also allows each 
party to appoint an arbitrator, a neutral specialist who will review the facts of the dispute with a full 
understanding, thus the advantage of appointing a specialist in the field rather than a public court with 
general judges. 

More generally, it should be noted that while the effect of adopting a broad interpretation favors 
investors and developing countries, this result cannot used as a motivation because of the uncertainty 
of the next interpretation. Rather, this reading of the umbrella clause was achieved by applying the 
objective and methodical process of BIT interpretation, relying on both the relevant language and the 
history of the clause, in accordance with well-established principles of international law. 


4.2 Umbrella clause as an economic and diplomatic tool for developed 
countries 

The drafting of the clause is the illustration of the will of the signatory parties. It is important for the 
Tribunal to know and interpret the intention of the parties. The restrictive or inclusive view of the 
umbrella case with regard to damages indirectly related to the investment field can only be based on 
the umbrella clause. The importance of the umbrella clause is therefore to provide a more secure and 
stable legal framework for investors. It is a promised commitment that serves as a vector tool to attract 
investors to invest in a State or not. The more flexible and inclusive the legal regime will be in business, 
the more interested investors will be in knowing that even ancillary obligations of a host State can be 
imposed on it in case of non-compliance through the umbrella clause.89 

89 Jeswald W. Salacuse, ‘BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign 
Investment in Developing Countries’, The International Lawyer, Vol. 24, No. 3, pp. 655-675, 1990 

90 A. Reinisch, Ch. Schreuer, ‘International Protection of Investments - The Substantive Standards’, 2020 

91 Peter M. Oppenheimer, ‘L'économie de la Grande-Bretagne et la politique de Mme Thatcher’, Politique 
étrangère, pp. 593-610, 1981 

92 Werner Bonefeld, ‘The recomposition of the British country during the 1980s’, 1993 

The clause and thus its wording is the basis for legal decisions, it indicates or at least freely allows the 
Tribunal to decide on its jurisdiction over the facts through this clause. Every word and every turn of 
intention in the umbrella clause within the BIT will serve or on the contrary serve the intentions of the 
investors90. 

During the 1970s, the United Kingdom was in a complicated economic situation, particularly because 
of the 1973 oil crisis. In 1976, the government was forced to ask the IMF for help to the tune of 4 billion 
dollars in exchange for a deflationary policy of compression of the money supply and reduction of 
public deficits. In order to allow its investors to make a profit in a stalled national economy,91 the 
United Kingdom decided to enter into BITs with developing countries, notably with the Philippines. 

Article 3(3) of the UK-Philippines BIT of 1980 provides “Each Contracting Party shall observe any 
obligation arising from a particular commitment it may have entered into with regard to a specific 
investment of nationals or companies of the other Contracting Party.” 

The drafting of the umbrella clause is intended to be very protective for countries and a fortiori only 
for the United Kingdom, as very few Filipino investors had the necessary resources to carry out 
operations in the United Kingdom. Each time the State tends to protect itself from its obligations, it is 
necessarily the investors who suffer the consequences of a less protective legal framework and also 
less stable to carry out their business. The United Kingdom, which was already in a situation of 
economic instability at the European level, wants to allow its investors to continue their development 
in order to make up for the loss of earnings due to the deflation process.92 The wording of the umbrella 
clause expressly limits the obligations to investment and the notion of "specific investment" seems to 
be even more restrictive. This term "specific" could be contrasted with so-called "global" or "general" 
investments, which would aim to cover areas ancillary to the subject matter of the investment and 
therefore to its strategy. 

This type of clause is particularly opposed to those between countries of equal economic importance, 
as evidenced by the BIT umbrella clause between Finland and Estonia dating from 1992. 

Finland-Estonia BIT 1992 Article 4 Most Favoured Nation provisions (1) : “Each Contracting Party shall 
observe any obligation it may have entered into with regard to investments”. 


In 1992, Estonia adopted a new constitution in order to integrate into Europe93, and Finland 
experienced an economic revival thanks to the new technologies sector (Nokia, F-Secure and 
biotechnology laboratories, for example) and presented its official request to join the European 
Communities94. Umbrella clause and BIT are part of a diplomatic and political cooperation approach to 
European integration rather than an economic necessity. The interdependence between countries 
with the same economic capacity ensures that each one benefits to the same degree and is part of a 
virtuous economic circle. Indeed, a coordinated fiscal policy has greater effects, in a proportion that in 
some economic models can be doubled, than an isolated policy, since efforts are strategically oriented 
to bring the greatest benefit95. 

93 Madis Ernits & Carri Ginter, ‘The Constitution of Estonia: The Unexpected Challenges of Unlimited Primacy of 
EU Law’, 2019 

94 Anthony F. Upton and Fred Singleton, ‘A Short History of Finland’, 1998 

95Joël Bourdin et Yvon Collin, ‘La coordination des politiques économiques en Europe : le malaise avant la crise 
?’, Rapport d’Information n° 113 (2007-2008) du Sénat, 

96 United Nations Audiovisual Library of International Law, ARTICLES ON DIPLOMATIC PROTECTION by John 
Dugard, 2013 

97 R. Lambert, ‘L'observation des ressemblances, d'après Aristote’, Laval théologique et philosophique, 1966 

98 Note : A tax haven is defined by a set of criteria that demonstrate that the State or territory has deliberately 
adopted tax laws and policies that allow individuals or companies to minimize their taxes in the countries where 
they actually operate. The common features of tax havens are that they offer tax advantages to individuals or 
companies without requiring any real activity in the State, a very low or even zero tax rate, and the adoption of 
laws or administrative practices that prevent the automatic exchange of information, in particular in the context 
of tax proceedings with other State. 

The Finland-Estonia BIT umbrella clause is also intended to be very broad in scope, since there is no 
direct reference to investment. The parties therefore seem to agree that even those sectors that are 
ancillary to investment, or at least that can influence its stability and strategy, are also to be protected. 
It is a real instrument of political, diplomatic, legal and economic confidence that promises and 
promotes to investors a stable framework for their investments96. Knowing that the State of the 
investor and the host State are in the same economic approach and in the same diplomatic objective 
makes it possible to mould a certain similarity between the countries and thus to reassure the 
confidence of the investors from an Aristotelian point of view97. Indeed, Aristotle developed the idea 
that individuals are, in unknown situation, looking for similar things they have at home. By creating 
bridges between system of laws and insuring legal protection, States assure investors to be in a 
framework in which they already partly know and therefore be less afraid to invest in. 

Logically, investors will always find it easier to invest when the host State's system is not totally 
unfamiliar to them and when they can have some insight and predictability on the ins and outs of 
possible legal claims or disputes they might encounter. Estonia and Finland have, through the umbrella 
clause and the entirety of their BIT, provided their nationals with a stable framework for the joint 
development of business that favors their entire economy and contributes to their integration process 
in the European Union. 

Umbrella clauses and BITs are also dangerous tools of competitiveness between States in order to 
attract more investors and to facilitate capital exchanges, especially for countries that are considered 
as "tax havens"98. That the case of Ireland that has one of the lowest taxation system for companies. 
Ireland suffers from that system because other States are afraid to conclude BITs with it because all 
national investors will invest in Ireland but no Irish investors will invest in their country as the State’s 
system would be far less interesting. However, States always seek to benefit from an agreement and 
are therefore capable of making concessions. For example, the 2001 BIT between the European Union 


and the Cayman Island, a few months after the latter was removed from the EU's "black list" of tax 
havens, took place at a time when EU States were suffering from the recession. 

Belgium and Luxembourg-Malta BIT 1987 Article 8 (1) : “Where a dispute arises between an investor 
of one of the Contracting Parties and the other Contracting Party affecting an investment of the former 
and relating to a matter with respect to which the latter has undertaken an obligation in favor of the 
other Contracting Party under this Agreement, such a dispute shall in the first instance be dealt with 
in pursuit of local remedies, unless some other method, including arbitration, has been agreed 
between the investor and the Contracting Party.” 

This is one of the only umbrella clauses where the will of the contracting parties under the BIT is 
mentioned. In this case, the umbrella clause refers to possible forum clauses that could be agreed 
between a domestic investor and the host State. The intention and will of the parties to the contract, 
and not the treaty, is thus at the heart of the agreement and gives a predominant place to the 
contractual commitment and intention of the parties formalized. The clause directly provides that any 
dispute arising from the BIT shall first be dealt with at the local level unless otherwise provided. This 
means that the countries respectively have enough confidence in themselves and their system to 
entrust the management and protection of its nationals to the other signatory.99 And, in the event that 
investors remain skeptical about the ability of national courts to ensure a fair decision, it is possible for 
contracts under the umbrella clause to directly provide for any other means of justice for the resolution 
of disputes related to the contract and the BIT. This wording therefore ensures even greater legal 
stability and is all the more clear for the parties since it is their intention that is the basis for the 
resolution of possible future conflicts. 

99 Michelle Ratton Sanchez Badin, ‘Reconceptualizing International Investment Law from the Global South’, 
2017 

100 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13 

101 Cf. 100 

In addition, the 1987 BIT Benelux-Malta umbrella clause covers a wide range of obligations as it is any 
obligation related to an investment regardless of the subject matter. As Benelux and Malta are tax 
havens, the protection of the ancillary obligations allows for the promotion of trade between these 
countries and provides greater protection to investors and their investment strategy. These countries 
agree on an BIT and an umbrella clause whose main function is to protect the exchange of capital even 
if the protection of the State itself is potentially reduced. It would indeed be more protective for a host 
State to ensure that all contractual disputes are settled before its national courts and to ensure that 
the BIT umbrella clause supplants the forum clause in the contracts concluded. 

4.3 The issue of inconsistency of the case law 

The case law on the umbrella clause has been so varied in its interpretation that it is still impossible 
today to anticipate a tribunal’s decision as to whether it will have jurisdiction to hear the dispute or 
whether it will recognize the contractual violation as not a BIT violation. 

Consider the cases discussed above, SGS v. Pakistan, SGS v. Philippines and SGS v. Paraguay. Each of 
these cases involved umbrella clauses that were almost identically drafted, but each Tribunal 
interpreted the umbrella clause differently. In SGS v. Pakistan, the Tribunal held that "in the face of a 
valid choice of court clause" there was no need to elevate contract claims to treaty claims100. A year 
later, in SGS v. Philippines, the Tribunal held that an umbrella clause "provides assurances to foreign 
investors that the host State will perform its obligations under its own law with respect to specific 
investments"101; however, it decided to suspend the arbitration proceedings to await the Philippine 


courts' determination of the amount owed by the government to SGS. Finally, the tribunal in SGS v. 
Paraguay adopted a different and broader interpretation, finding that the ordinary meaning of the 
word "commitment" in the umbrella clause clearly encompassed contractual obligations, and that the 
clause "provides no basis for excluding contracts from the scope of 'commitments' covered by the 
[umbrella clause]”102. 

102 SGS Société Générale de Surveillance S.A. v. The Republic of Paraguay, ICSID Case No. ARB/07/29 

103 Raul Pereira de Souza Fleury, ‘Closing the umbrella: a dark future for umbrella clauses?’, October 13, 2017 

104 Wenhua Shan, ‘The Legal Protection of Foreign Investment: A Comparative Study’, 2012 

105 ICSID, Review Volume 20, 2005 p. 197 

What is most concerning is that the set of facts in each of the SGS cases was fundamentally the same: 
breach of a service contract for a pre-shipment inspection. Over the years, different tribunals have 
followed not one, but all three interpretations of the SGS cases, as shown in the following table:103 

SGS v. Pakistan Interpretation 

SGS v. 
Philippines Interpretation 

SGS v. 
Paraguay Interpretation 

– Toto Construzioni v. 
Lebanon 

– Salini v. Jordan 

– El Paso v. Argentina 

– Siemens v. Argentina 

– Joy Mining v. Egypt 

– BIVAC v. Paraguay 

– Bosh v. Ukraine 

– Eureko v. Poland 

– Noble Ventures v. Romania 

– Burlington v. Ecuador 

– Duke Energy v. Ecuador 



 

The fact that investors can no longer anticipate the outcome of a proceeding tends to bring back the 
legal insecurity that the umbrella clause wanted to combat when it was created. Without legal security 
investors are septic as for the respect of the State to its contractual obligations and the reception that 
the national courts could reserve them in they would have to go before them.104 In addition to the 
public nature of the hearings, which is generally very little sought after by large companies, national 
or regional decisions have much less impact on an international level and are therefore very little 
known and accessible to the rest of the litigants. 

The umbrella clause suffers in particular from the inconsistency of the States to formulate broad and 
wide clauses in terms of application allowing tribunals to have a less restrictive and limiting 
interpretation of the clause and consequently of their jurisdiction. The fact that when contractual 
claims arise the BIT is not at the heart of the discussions but only the umbrella clause excludes 
discussions on the willingness of the parties to sign the BIT and all the related obligations in the field 
of investment that support it.105 The fact is that although model BITs have been adopted, there is now 
a variety of wording for umbrella clauses that is constantly being scrutinized by tribunals. 

And because of this diversity, it must be said that the correct interpretation of the clause depends on 
the specific labeling of the treaty in each case presented, its general meaning, the context, the object 
and purpose of the treaty, as well as the history of the negotiations or other indications of the intention 
of the parties. In examining treaties referred to in the above cases, one can observe similarities, namely 


that the host State "shall observe" "all engagements and obligations". This wording induces an 
inclusive and broad interpretation of the undertaken by the host State that would be covered by the 
umbrella clause. The fact that all the commitments and obligations of the State are included under the 
umbrella clause allows the Tribunal to rule for its jurisdiction not only on the investment field but on 
any related field that supports it in a comprehensive manner. 

In contrast, umbrella clause language including terms such as "ensures compliance" or "maintains a 
legal framework capable of ensuring continuity of legal treatment" could have a restrictive impact on 
the tribunals’ jurisdiction. Note that parties to a contract who draft a forum clause that is too specific 
could indirectly exclude the possibility of raising a contractual claim at the treaty claim level and 
thereby exclude the Tribunals’ jurisdiction to hear certain disputes.106 Some BITs also include forum 
clauses providing that any dispute related to them and their contents may only be heard by national 
courts in accordance with the force of the contract. 

106 Kenneth J. Vandevelde, ‘Bilateral Investment Treaties : History, Policy, and Interpretation’, 2010 

Generally speaking, when faced with an inclusive umbrella clause, arbitral tribunals tend to adopt a 
consistent interpretation of the parties' intention in the sense that it covers all the States' obligations, 
including those of a contractual nature. This trend is still too inconsistent to satisfy practitioners and 
investors who cannot risk losing all or part of the investment made. The fact that tribunals are missing 
the expression of the will of the States do not help a certain standardization of a clear and precise 
interpretation as to the coverage offered by the umbrella clauses. The States have responded to a need 
and created an imperfect tool which today is regressing in its missions and in its use. 

4.4 The notions of commitment and transmission for the application of 
Umbrella clause 

The drafting of the contract and the umbrella clause in BITs shall ideally leave judges free of any 
interpretation and allow for a constant application of the same jurisprudence. However, in addition to 
the above-mentioned aspects, many other problems arise before the Tribunals which unfortunately 
do not manage to offer a certain continuity in the interpretation of the clauses and in the resolution 
of the conflicts which arise. 

The question has already arisen as to the interpretation and power of judges with respect to the 
transfer of rights and powers clause that the parties to the contract may agree upon. The transfer 
clause allows one of the parties to the contract to be substituted in its obligations and rights by another 
company or a company of the same group. A company of the same group or commonly called 
"affiliated" is defined for companies for which the contracting party owns or is owned at more than 
50%, it is here the notion of control that is predominant. This clause is not to be confused with a 
subcontracting clause, a subcontracting clause only allows for a partial transfer to a third party provider 
of one or more obligations. The transfer clause or the change of control clause is particularly useful for 
large companies that tend to reorganize their corporate structure quite regularly for both legal and 
economic reasons (mergers, acquisitions, tup,...). 

The case therefore arose as to whether the transfer clause in the contract could also transmit the 
competence of the signatory company to invoke the umbrella clause and the BIT to the benefit of the 
company it holds or which holds it in a condition both in the present and in the past. The Tribunals 
have not been able to present a linear and continuous jurisprudence on the subject, especially since 
the contract contained an intuitu personae clause. The intuitu personae clause provides that the 
contract is signed "in consideration of the person", i.e. that the personality of the co-contractors 


determines the validity of the contract. If the co-contractor changes, then the contract may be 
considered null and void and the other signatory no longer has to fulfil its obligations. The Tribunals, 
faced with increasingly complex and litigious cases, have not been able to ensure the establishment of 
a stable framework, frightening investors and States about the possible consequences of a 
misinterpretation on their part of the parties' intentions. 

Specific to the field of transfer of rights is also the question of the right of partners to bring a claim on 
behalf of their partnership as a representative of the contracting party but also as a personal individual 
affected by the State's decision. In the event that a host State enacts a new law that affects the 
conditions for investment in a particular sector, can the companies in addition to all their partners 
bring a claim against the State? In this case, the Tribunals’ tend to dismiss the partners' claims in favor 
of the State's protection since the claims under the umbrella clause would be endless. But by favoring 
the State once again, it is the investment and the investors who suffer from a less favorable legal 
framework. 

In another area, the umbrella clause has also been plagued by an inconsistency: sub-country entities 
and States’ officials who sign public contracts. In order to raise a contractual claim to a treaty claim, it 
must be argued that it was in its capacity as a State that the State interfered with the contract and its 
proper performance. The causal link between the company acting in the name and on behalf of the 
State and the execution of States’ powers is not necessarily conclusive. This is particularly the case 
when a State-owned company refuses to pay invoices to a foreign company. The fact that the State-
owned company refuses to pay or does not pay is not necessarily an exercise of State’s powers, but it 
is still the obligation of a representative of the State party to the BIT. The Tribunals have had an 
approach and a reading that is both restrictive and extensive, which has, once again, failed to provide 
a stable legal basis. 

4.5 Brexit, Trade Cooperation Agreement and Umbrella clause 

The Trade Cooperation Agreement (TCA) that governs the new relationship between the EU and the 
UK includes very few provisions for investment protection. Despite the commitment of the parties to 
establish a climate conducive to the development of trade and investment (Article SERVIN)107, the TCA 
offers only limited protections to foreign investors. This creates significant uncertainty and potential 
risks for UK investors operating in the EU and EU investors operating in the UK.108 

107 Trade and Cooperation Agreement between the European Union and the European Atomic Energy 
Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part 

108 Ben Sanderson, Lucia Bizikova, ‘Investment protection falls victim to Brexit – The analysis of the EU-UK Trade 
and Cooperation Agreement’, 2021 

Even without official estimates, it is easy to assume that thousands of companies, from Italian food 
companies, to French car manufacturers operating in the UK, to UK financial services providers 
operating across Europe, some of which have already had to change their headquarters location 
(Revolut ltd.), could be left with little or no international investment protection and no recourse to 
established international dispute resolution mechanisms. 

In effect, the TCA provides no explicit protection against expropriation, no measures to ensure fair and 
equitable treatment, full protection and security, or other common protections. As a result, investors 
would have to rely on customary international law principles to seek redress. 

Investment is an area that is almost left out by the current situation but will need new agreements to 
ensure real protection for investors. Development and investment will consequently slowdown in 


Europe as the legal framework will no longer have the same stability, a sector that is already strongly 
impacted by the current Covid crisis.109 

109 OECD , ‘Foreign direct investment flows in the time of COVID-19’, 2020 

110 Norwegian draft model BIT 

111 Cf. 93 

5. The future of Umbrella clause 

According to the UNCTAD database, 17 BITs are expected to be signed from agreements made in 2020 
and only one of them has an umbrella clause. This almost non-existent use of umbrella clauses only 
confirms the trend noted in recent years. Indeed, according to the United Nations Conference on Trade 
and Development (UNCTAD), 52 new investment agreements were signed between December 2015 
and October 2017 and only two contain an umbrella clause. 

In addition, more States have since the 2000s modernized their BITs and several have decided to 
abandon umbrella clauses such as the Norwegian draft model BIT begun in 2007 which already stated 
that "[t]he starting point for work on a new model agreement has been that the arbitration tribunal 
will only be able to consider alleged violations of the norms of the interstates investment 
agreement."110 Norway's will is clear on the position of an umbrella clause within its BITs. Because of 
the difficulty in bridging contractual and inter-States disputes, it is simpler, without a clause, to provide 
for the tribunal's jurisdiction by limiting claims to those directly involving the BIT. In addition, the 
models of the draft agreement of the United Kingdom "Free Trade Agreement" or "Free Trade 
Continuity Agreement" or "Economic Partnership Agreement" following the Brexit also exclude the 
drafting of an umbrella clause. This is a trend that the UK is taking as a result of the Brexit which will 
have important consequences for those investors who will not necessarily have a legal framework as 
secure as it was before. 

The concern of States with the umbrella clause is illustrated by the variety of forms and scenarios in 
which the application of umbrella clauses is a problem. The first form already mentioned is the 
difference between contractual and treaty claims, where case law is still not consistent after more than 
50 years of expertise in the field. Second, the question of whether the umbrella clause prevails over a 
choice of forum clause contained in a government contract or even directly in the contract between 
an investor and a host State. The Tribunals have already gone back to the intention of parties both to 
protect the investor and to exercise the sovereign powers of the State. Third, whether shareholders 
and parent companies that have not signed the public contract can benefit from the umbrella clause. 
It is in the nature of industrial contracts or contracts of a certain importance to provide for the situation 
where a company would potentially tup, merge with one of its "affiliates" (entity controlled or 
controlling the signatory party through the ownership of at least 50% of its capital). While transfer 
clauses tend to provide for the full transfer of the parties' rights and obligations, limitations may be 
decided by the parties or interpreted by the Tribunal. Fourth, the Tribunals have been inconsistent in 
determining whether sub-State entities that have signed the public contract are covered by an 
umbrella clause. Again, the issue is whether the sub-State entities or States’ officials breached an 
obligation in their corporate capacity or by using transferred States’ powers.111 

Consensus has never been reached on all of these issues and States have tried to facilitate the work of 
the tribunals by amending the umbrella clauses over time, but it seems impossible for the tribunals to 
be able to truly ascertain the intent of the BIT parties when drafting an umbrella clause. Tribunals also 
struggle to find the correct interpretation of other treaty standards such as fair and equitable 
treatment, full protection and security, and expropriation that have been part of BITs before umbrella 


clauses. These norms establish obligations for States that are clearer than an umbrella clause for 
Tribunals, but these obligations cannot be equated with an umbrella clause. The main purpose of an 
umbrella clause is more ambiguous: it is to place under the "umbrella" treaty obligations of the State 
that arise from a different instrument, namely a contract made with foreign investors. The extend 
given to the clause thanks to its wording, as seen above, to cover international commitments States 
may have entered with respect to investment is and will remain interpretative. Indeed, the intent of 
the State to attract foreign investors and protect national investors has been reached through the 
commitment of BITs including umbrella clauses. However, an umbrella clause is an uncertain balance 
for a State given the responsibility it represents at the international level. 

6. Conclusion 

The generic language of umbrella clauses has contributed to intense debate since the first SGS case 
and continues to do so. Yet treaty practice shows a trend toward eliminating the umbrella clause from 
investment agreements. Umbrella clauses are being replaced by simple obligations of fair treatment 
and prohibition of expropriation, the reason for the umbrella clauses in the first place. The practice 
thus returns to its starting point, framing as much as possible the relationship between host State and 
foreign investors, but without being able to guarantee the respect of contractual obligations. 

Umbrella clauses are still present in the new treaties, but on a much smaller scale. In this sense, it is 
worth mentioning the wording of the one contained in the Austria-Kyrgyzstan BIT, which provides that 
"breach of a contract between the investor and the host state shall amount to a breach of this treaty." 
This extremely extensive wording would provide more certainty in the adjudication of future cases 
under this particular BIT, but few States would necessarily volunteer to adopt the same wording. 

The umbrella clause is a tool that has been present on the international investment law scene for 70 
years, without having reached its peak, it is disappearing to give way to broader obligations and 
therefore less protective for investors. If the objective of the clause was to ensure a quasi-perfect 
equality between a host State and a foreign investor, it is an objective that has unfortunately not been 
achieved. The protection of the State always seems to be favored by the interpretation of the tribunals 
to the detriment of the investors who will perhaps have to foresee the drafting of new particular 
clauses in the next few years in order to protect their interests. Considering the number of 
international capital movements which is in constant gross, it seems that States do not have anymore 
a reason to lower down their legal shield through umbrella clause but rather let the investors do their 
biting through the BIT shopping. 

However, the question arise for the protection of national investors, if States are not willing to add an 
umbrella clause within a BIT there is a risk for their respective national investors. Investors are 
therefore relegated to a secondary position under the will of their State as their protection is 
diminished in order for States to not be liable on the international scene for not respecting contractual 
investment engagements. A part from the legal prospective, in a world of mass-communication, trust 
remain a fundamental point in terms of investment. A State not respecting is contractual engagement 
will lose credibility and thus opportunity to attract new investors. As competitiveness has increased 
between countries and that more individuals are becoming international investors, States can loose 
for the present but also for their future if not respecting their engagements. 

In addition, the disparities between developing and developed countries seem to be increasing. The 
economic crisis linked to the COVID-19 may exacerbate the disparities even more since the countries 
already in difficulty will have to look for new investors creating a demand much stronger than the 
present offer. Developing countries will have to make new concessions in order to attract investors 


from developed countries, even if it means changing their legislation. For example, the notion of “force 
majeure” following the COVID-19 crisis has been taken into account by many countries which allows 
investors in case of unforeseeable event to stop their investments or to delay them. Indeed, many 
investors have lost money because of the absence of this notion of “force majeure” and will certainly 
in the future include this notion in their legal assessment of pre-mortem risk for an investment. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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