The Origins of the Umbrella Clause in the International Law of Investment Protection

Abstract

There is continuing uncertainty surrounding the meaning of the so-called ‘umbrella clause’ which is found in many bilateral investment promotion and protection treaties. Umbrella clauses create a reciprocal international obligation owed by the Contracting States to each other that requires them, as host states, to observe obligations they have entered into with investors of the other Contracting State or with regard to their investments. The proper construction of the umbrella clause has become a matter of contention in a number of recent ICSID cases,1 most notably in two interim decisions on jurisdiction: the August 2003 decision in SGS Societe Generale de Surveillance SA v. Islamic Republic of Pakistan ,2 and the contrasting decision of January 2004 in SGS Societe Generate de Surveillance SA v. Republic of the Philippines? . 3This article does not comment directly on the meanings given (or not given) to the umbrella clauses in those recent decisions. The focus of this article is the history of the umbrella clause which, it is suggested, sheds some valuable light on the problems now being considered. Careful attention must be paid to the particular language of each clause and the structure of the relevant treaty, including the presence of compulsory dispute settlement provisions to discern the true intention of the Contracting States. Different provisions are sometimes indiscriminately and wrongly lumped together under the heading ‘umbrella clause’ but, for example, umbrella clauses may oblige a host state to ‘observe any obligation it may have entered into’, ‘constantly guarantee the observance of the commitments it has entered into’, or ‘observe any obligation it has assumed’ with certain investors or in respect of their investments. The origins of the notion that a treaty can be used effectively to elevate a contract between an investor and a host state to the …

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