In the end, however, the tribunal did not apply the clause and therefore it considered that there was no need to express any definitive conclusion as to whether the

end p.977

umbrella clause perfectly assimilates any breach or whether some limitation should be applied, in light of the nature and object of the BIT. 60 Interestingly, the tribunal considered a possible restriction based on the distinction between commercial and sovereign acts. The respondent state had argued that this distinction should be made so that not every breach of contract would result in a breach of international law. The tribunal agreed with the respondent that the principle of pacta sunt servanda does not entail that every breach by a state of a contract constitutes a breach of international law, but continued:

[b]ut that does not mean that breaches of contract cannot, under certain conditions, give rise to liability on the part of a State. On the contrary, where the acts of a governmental agency are to be attributed to the State for the purposes of applying an umbrella clause, such as Art. II(2)(c) of the BIT, breaches of a contract into which the State has entered are capable of constituting a breach of international law by virtue of the breach of the umbrella clause. 61 (Emphasis in the original)

Therefore a breach of the relevant contract might constitute a breach attributable to the respondent by virtue of the umbrella clause. 62 In this case, however, the tribunal concluded that the claimant's claim failed not because a proved breach would not have constituted a breach of the BIT (ie the umbrella clause contained therein), but because there was no breach of contract. 63

Finally, three cases conclude this overview. They demonstrate actual reluctance to apply the umbrella clause while approaching the issue in a rather different way than the above cases, which seem to support at least the principle of elevation. In CMS v Argentina , 64 the tribunal agreed with the respondent that not all contract breaches result in breaches of the treaty:

Purely commercial aspects of a contract might not be protected by the treaty in some situations, but the protection is likely to be available when there is significant interference by governments or public agencies with the rights of the investor. 65

Then again, none of the measures complained of in CMS could be described as commercial 66 and therefore the tribunal was willing to give some effect to the umbrella clause. However, the actual effect seems to have been limited because the tribunal itself stressed that the kind of effect given is not very different from the protection that would have been provided under the treaty anyway:

While many, if not all, such interferences are closely related to other standards of protection under the Treaty, there are in particular two stabilization clauses contained in the Licence

end p.978

that have significant effect when it comes to the protection as extended to them under the umbrella clause. 67

In El Paso v Argentina , 68 the tribunal first emphasized the need for a balanced interpretation of the BIT, taking into account the state's sovereignty as well as its responsibility. 69 It then reviewed earlier cases and clearly sided with the restrictive interpretation and in particular the approach followed by the tribunal in SGS v Pakistan, the general reasoning of which it considered quite convincing. 70 The tribunal stressed the need not to interpret the clause in such a way that it would be deprived of any effect, which it sought to do by distinguishing the state as a merchant and the state as a sovereign:

Interpreted in this way, the umbrella clause in Article II of the BIT, read in conjunction with Article VII, will not extend the Treaty protection to breaches of an ordinary commercial contract entered into by the State or a State-owned entity, but will cover additional investment protections contractually agreed by the State as a sovereign—such as a stabilization clause—inserted in an investment agreement. 71

The last case in this group is the recent decision in PanAmerican v Argentina . 72 Two of the three arbitrators (including the chairman) in this case also sat on the El Paso tribunal, which involved a claim based on the same BIT (US-Argentina). Except for minor textual differences, the passages on the umbrella clause are identical to the El Paso decision. 73

(ii) Umbrella Clauses—The Future

The overview above illustrates the inconsistency in the approach in relation to umbrella clauses. The key issue is clearly the scope and effect of these clauses. Two basic positions can be distinguished: on the one hand, there are those who argue that the clause cannot operate so as to elevate the breach of municipal legal norms into breaches of international law. The consequence of this view is that effectively umbrella clauses are meaningless. 74 The opposite view is that umbrella clauses do have the effect of transforming (breaches of) national legal norms into (those of) international norms. This position attributes considerable significance to the clause;

end p.979

in fact, so much so that it has been argued that the consequence is that the other provisions of the BIT have become redundant. 75 This view in turn has been vigorously denied by others. 76 Indeed, this argument lacks persuasiveness. Establishing breach of contract in a municipal law claim requires fulfilment of different criteria compared with claims based on expropriation or non-discrimination. Compare the distinction between contract and tort claims in national law: especially when these are related, there will be some overlap but the criteria are not identical. In short, either the umbrella clause is redundant or the other provisions of the BIT are redundant.

Before attempting to draw any conclusion about the scope and effect of umbrella clauses in general, a specific category of contractual obligations requires special attention, namely contractual forum selection clauses. If, hypothetically, one were willing to accept that an umbrella clause has the effect of transforming all contract-ual (rights and) obligations into obligations at the international level, this would mean that also any contractual forum selection clause is also ‘internationalized’. The consequence thereof would often be that contradictory terms would govern the dispute resolution mechanism (the mechanism provided for in the BIT and the mechanism provided for in the contract).

Few tribunals have thus far explicitly dealt with this topic—understandably, since many either did not conclude elevation was appropriate on the facts or otherwise restricted application of this principle. The tribunal in SGS v Philippines , however, focused clearly on this problem. In short, the tribunal held that the claimant should not be able to pick and choose with respect to the underlying contract: ‘if it claims under the contract, it should comply with the contract in respect of the very matter which is the foundation of its claim’. 77

In other words, claimants should reckon with the ‘boomerang effect’ of the forum selection clause, in this case the reference to the Philippine courts. The recognition of this logically inevitable step forced the tribunal to create the construction whereby it first accepted jurisdiction and then held that the scope and extent of the respondent's obligation to pay should be dealt with in local court and that until the Philippine court had issued its decision, the claim was inadmissible. 78

end p.980

This method is reminiscent of the private international law mechanism of renvoi whereby a reference to a foreign law is held to include a referral to that law's conflict rules. In theory, the determination of the applicable law may bounce back and forth endlessly. 79 Although this may be an unsatisfactory outcome, the conclusion that the referral to the underlying contract requires giving effect to all its provisions appears inevitable. 80

At the same time, the two main general approaches to umbrella clauses, that is, elevation yes or no, are somewhat unsatisfactory. This sense of dissatisfaction appears to explain various tribunals' struggling with the issue, more than, for example, the variant texts of the umbrella clauses at issue. 81

The emphasis on exact wording, although important, 82 does not appear a convincing argument, if for no other reason than that the wording of all the clauses are ambiguous and that none explicitly refers to obligations derived from any underlying contracts. Rather, even the more specific clauses refer obliquely to ‘any obligation’ that the state has assumed or has entered into ‘with regard to investments’. 83

To some extent an analysis of the origins of the umbrella clause is useful in trying to solve the dilemma of the umbrella clause. Sinclair's in-depth review of the origin of these clauses and W?lde's subsequent work have helped to place these clauses in historical perspective. 84 W?lde explains that the predecessors of the umbrella clauses were the pacta sunt servanda clauses. Their purpose was to ‘internationalize’, both in terms of substantive law and in terms of adjudication, the protection of investment agreements with governments against an abuse of the powers of government as an adjunct of the expropriation provision. These clauses sought to prevent the state from invoking the invalidity of a contract to which the government entity is a party. 85 W?lde concludes that based on this original intention, application in modern times of such clauses should have the effect of triggering the conversion of

end p.981

contractual into international law breaches only if the government exercises its particular sovereign prerogatives to escape from its contractual commitments. 86

Although tribunals thus far have not explicitly relied on the provenance of the umbrella clause to limit its scope to some certain obligations, 87 the kind of limitation that has been applied is to some extent in line with the suggestions proposed by W?lde. See, in particular, the decisions of tribunals in CMS v Argentina88 and El Paso v Argentina . 89 Nevertheless, W?lde's rather forceful conclusion in a subsequent publication that ‘there is widespread acceptance that purely (or mainly?) commercial disputes are “out” while disputes with a significant (or predominant?) government dimension are “in”?’ 90 may be somewhat overstated, also keeping in mind the different views expressed by some tribunals not covered in his publications. 91 The attraction of this approach is that it does not result in a one-sided pro-investor interpretation, against which tribunals have cautioned, 92 while doing justice to the ratio of adding to, rather than subtracting something from, the protection otherwise enjoyed by investors. 93 Where to draw the line is not clear, however. The main example given by tribunals and authors alike, are stabilization clauses.

end p.982

If that remains the only type of provision for which the umbrella clauses have any significance, the scope remains highly restricted. 94 It has also been suggested that the better approach would be to focus on the coexistence, rather than the clash, of jurisdictions of international tribunals and domestic courts. 95

The direction future tribunals will take is therefore not clear. As Gaillard concludes, ‘it might make sense to better define the borders between dispute settlement mechanisms of the investment treaty and the underlying contract’. 96 This might be done in the contract, which the El Paso tribunal appears to have envisaged, when it suggested that it was up to a contracting party to include an ICSID arbitration clause in its contract if it really envisaged the need for adjudication at an international level. 97 However, this option is not realistic: it is precisely because states are often not willing to include international arbitration provisions in international investment contracts, that the indirect route, namely the incorporation through BITs of (ICSID) arbitration has become so successful. 98 More fundamentally, it is questionable to what extent contractual provision can affect rights and obligations founded in international law. 99 Therefore, the only effective way to address this ambiguity is to amend the terms of the BITs, rather than the contracts. 100 Until then, a certain amount of ambiguity and even contradiction is inevitable. 101

end p.983

(3) The Waiver of the Protection Granted by Investment Treaties

Another issue which is inextricably linked to the dichotomy in the relationship between local courts and international tribunals is whether the inclusion of a domestic forum selection clause in a subsequently concluded investment contract might constitute a waiver of the access to international arbitration provided for in a BIT. 102 Arbitral tribunals have responded to this issue in two ways: they introduced a distinction between treaty claims and contract claims and ruled that the contractual domestic forum selection clause only applied to disputes arising from the contract and did not deprive them of their jurisdiction to decide whether rights under the treaty had been violated. This approach has been discussed in detail above. Another answer tribunals developed in certain cases was to rule that the local forums stipulated in the relevant contract did not actually qualify as a commonly agreed settlement procedure since they were administrative courts which could not be selected by mutual agreement. 103

Curiously, however, most awards raising this issue do not address whether the investor would be able at all to waive his access to international arbitration. 104 This question arises due to the nature of the foundations of modern investment arbitration. It finds its basis in bilateral or multilateral investment agreements. These are concluded between states in order to promote and protect foreign direct investment, thereby granting the investor of the home state rights against the host state should the latter fail to accord the investor the protection foreseen in the treaty. Thus, the question arises whether the rights granted in treaties are rights bestowed directly upon the investor or rights the investor derives from the state to which they belong. 105