1 See McLachlan, Shore, and Weiniger, International Investment Arbitration, Substantive Principles para 4.97 (OUP, 2007).
2 The Energy Charter Treaty has an umbrella clause in the last sentence of Art 10(1). Also, the ASEAN Agreement for the Promotion and Protection of Investments has one in Art III(3).
3 F A Mann, ‘British Treaties for the Promotion and Protection of Investments’ (2008) BYIL 241, 246. The umbrella clause is not an unlimited guarantee and is subject to certain limits, some of which depend on the precise wording of a particular clause. A ‘serious limitation’ identified by F A Mann is that the clause covers only obligations assumed by the state itself.
4 See Part B of this chapter for discussion on relevant cases.
5 Umbrella clauses can potentially extend protection to non-contractual obligations undertaken by host states towards foreign investors in the form of, for instance, laws, regulations, or licences. For example, a UNCTAD research notes that: ‘the language of the provision is so broad that it could be interpreted to cover all kinds of obligations, explicit or implied, con-tractual or non-contractual, undertaken with respect to investment generally. A provision of this kind might possibly alter the legal re-gime and make the agreement subject to the rules of international law.’
UNCTAD, ‘Bilateral Investment Treaties in the mid-1990s (United Nations, 1998), 56.
6 It has been noted that the concept of umbrella clause was first conceived by Sir Elihu Lauterpacht, CBE, QC, the when he was advising the Anglo–Iranian Oil Company in the early 1950s. And the purposes of such a device were to ensure that the host state observe its commitments towards foreign investors undera particular investment contract. A C Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ 20 Arbitration International (2004, No. 4), 414–18. See also T Wälde, ‘The ‘Umbrella Clause’ in Investment Arbitration: A Comment on Original Intentions and Recent Cases’ The Journal of World Investment and Trade (Vol. 6, April 2005 No. 2), 200–9.
7 See for example, A C Sinclair, ‘The origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International, Vol. 20, No. 4, (2004), p. 411; J Gill, M Gearing and G Birt, Contractual Claims and Bilateral Investment Treaties: A comparative Review of the SGS Cases, Vol 21(5) Journal of International Arbitration p. 397 (2004); T. Wälde, The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases, Journal of World Investment and Trade, Vol 6 No 2 (April 2005) p. 183; V Zolia, Effect and Purpose of ‘Umbrella Clauses’ in Bilateral Investment Treaties: Unresolved Issues, TDM Vol 2 Issue 5 (2005); E Gaillard, ‘Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered’ in Todd Weiler (Ed) International Investment Law and Arbitration: Leading cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, p. 325 (Cameron May, 2005); L Martinez, The Interplay of Contract Claims and Treaty Claims: Bayindir v Pakistan (ICSID Case No. ARB/03/29), TDM Vol 3 Issue 2 (2006); D Foster, Umbrella Clauses: A Retreat from the Philippines? 9 (4) International Arbitration Law Review, (2006) pp. 100–108; E Teynier, Les ‘umbrella clauses’, in Mourre Alexis (ed.) Gazette du Palais Les cahiers de l’arbitrage: volume III (2006); B Kunoy, Singing in the Rain-Developments in the Interpretation of Umbrella Clauses, The Journal of World Investment and Trade (2006) 275;T J Grierson Weiler (ed), Investment Treaty Arbitration and International Law (Juris Net Llc, 2008) Part I, 3–60; S Schill ‘Enabling Private Ordering – Function, Scope and Effect of Umbrella Clauses in International Investment Treaties’ International Law and Justice Working Papers, IILJ 2008/9.
8 The Energy Charter Treaty (ECT) has an umbrella clause in Art 10(1) final sentence. There has been no award dealing with the application of this provision. The Alstom v Mongolia (Alstom Power Italia SpA and Alstom SpA v Republic of Mongolia, ICSID Case No. ARB/04/10) arbitration commenced under both the ECT and the Italy-Mongolia BIT was settled. It is understood that the investors’ claim relied on the umbrella clause in Art 10(1) of the ECT, see Investment Treaty Arbitration and Asia: Survey and Comment, John Savage Asian International Arbitration Journal, Vol. 1 No. 1 (2005), pp. 3–48. The ASEAN Agreement for the Promotion and Protection of Investments (ASEAN Agreement) also contains an umbrella clause in Art III(3) which provides that ‘[e]ach 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 Parties’. There is no equivalent in NAFTA, See Waste Management, Inc. v Mexico (Number 2), ICSID Case No. ARB(AF)/00/3 Award 30 April 2004, para 73.
9 A C Sinclair, ‘The origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International, Vol. 20, No. 4, (2004), p. 411 at 415. He notes that there were earlier examples of ‘umbrella treaties’ from the 1920s.
11 K Yannaca-Small, ‘Interpretation of the Umbrella Clause in the Investment Treaties’, OECD Working Papers on International Investment (No 2006/3, Oct 2006), at 4.
12 As cited in Yannaca-Small, ibid, at 5.
14 J Gill et al., ‘Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases’ 21 J. Int’l. ARB. 397, 403 fn 31 (2004) (finding that approximately 40% of a sample of BITs taken from INVESTMENT TREATIES (ICSID ed., 2003) contained umbrella clauses).
15 This is clearly illustrated by the cases filed annually at ICSID eg four cases filed between 1966, the year the treaty entered into force, and 1975, whereas 36 cases were filed in 2007, see www.worldbank.org/icsid/cases/pending.htm
16 Although there was an umbrella clause in Art 3(4) of the BIT applied by the tribunal in Fedax NV v Venezuela, ICSID Case No. ARB/96/3, Award, 9 March 1998. However, the tribunal did not examine the application of the clause other than to confirm that Venezuela ‘was under an obligation to honor precisely the terms and conditions governing such investment, laid down mainly in Art 3 of the Agreement, as well as to honor the specific payments established in the promissory notes issued …’ para 29. In addition, CMS argued there had been a breach of the umbrella clause although this was not dealt with in the Jurisdiction award of 17 July 2003. A breach of the umbrella provision was confirmed in the merits award of 12 May 2005, CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8, Award of 12 May 2005, paras 296–303.
17 SGS Société Générale de Surveillance SA v Pakistan, ICSID Case No. ARB/01/13, Award on Jurisdiction, 6 August 2003, para 99. See also A C Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International, Vol. 20, No. 4, (2004), p. 411 at 412 where he confirms that the uncertainty in effect of the clause is reflected in the ‘diverse metaphors used to describe them, including “elevator”, “mirror effect”, “parallel effect”, “umbrella” or “sanctity of contracts/pacta sunt servanda’.”
21 The tribunal in Eureko v Poland (Award 19 August 2005) felt that reliance on this maxim was essentially a ‘reversion to a doctrine that has been displaced by contemporary customary international law, particularly as that law has been reshaped by the conclusion of more than 2000 essentially concordant bilateral investment treaties’. para 258.
22 SGS Société Générale de Surveillance SA v Philippines, ICSID Case No. ARB/02/6. Award on Jurisdiction, 29 January 2004.
23 J Crawford, ‘Treaty and Contract in Investment Arbitration,’ 24(3), Arbitration Interna-tional (2008), 351, 368.
27 J Crawford, ‘Treaty and Contract in Investment Arbitration’, Vol 24(3), Arbitration International (2008), 251, 368.
28 This approach has been criticized not least in the separate declaration made by one of the arbitrators, Professor Antonio Crivellaro. He could see no reason, having accepted the admissibility of the claims, why the tribunal ‘could not deal with and decide on the merits of the payment claim, including quantum, after proper examination of either party’s future arguments and defences.’ Separate Declaration para 11. See also V Zolia, Effect and Purpose of ‘Umbrella Clauses’ in Bilateral Investment Treaties: Unresolved Issues, TDM Vol 2 Issue 5 (2005), p. 31 and E Gaillard, ‘Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered’ in Todd Weiler (ed) International Investment Law and Arbitration: Leading cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, 344
29 BP America Production Co. and Others v Argentina, ICSID Case No. ARB/04/8 Award on Jurisdic-tion, 27 July 2006, para 105.
30 SGS v Pakistan, Jurisdiction, para 173(emphasis added). See also BP America Production Co. and Others v Argentina, id, para 103 (where the tribunal refers to this nuance).
31 The Swiss government wrote an open letter expressing its alarm at the narrow interpretation applied by the tribunal to the provision ‘which not only runs counter to the intention of Switzerland when concluding the Treaty but is quite evidently neither supported by the meaning of similar articles in BITs concluded by other countries nor by academic comments on such provisions.’ 19 Mealey’s International Arbitration Reports (February, 2004) E-1. It is not clear whether the tribunal would have reached a different conclusion if SGS had submitted evidence from the Swiss government to this effect during the arbitration.
32 Joy Mining Machinery Limited v Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction 6 August 2004; Salini Construttori SpA and Italstrade SpA v Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 9 November 2004; El Paso Energy International Company v Argentina, ICSID Case No. ARB/03/15, Award on Jurisdiction, 26 April 2006 and BP America Production Co. and Others v Argentina, ICSID Case No. ARB/04/8 Award on Jurisdiction, 27 July 2006.
33 LG&E v Argentina, ICSID Case No. ARB/02/1, Award on Jurisdiction, 30 April 2004; Consortium Groupement L.E.S.I.- DIPENTA v Algeria, ICSID Case No. ARB/03/08, Award, 10 January 2005; Eureko BV v Poland, Partial Award, 19 August 2005, and Noble Ventures, Inc. v Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005.
34 Joy Mining v Egypt, Jurisdiction, para 81. It is not clear how this somewhat absurd ‘magnitude’ test would actually apply.
35 Salini v Jordan, Jurisdiction, para 126.
36 Art 2(4) Italy/Jordan BIT. The tribunal did confirm that the State parties were still bound by their contractual obligations, ‘this undertaking was not reiterated in the BIT. Therefore, these obligations remain purely contractual in nature and any disputes regarding the said obligations must be resolved in accordance with the dispute settlement procedures foreseen in the contract.’ ibid para 127. In fact this provision was said not to be ‘an umbrella clause at all’ by Professor Crawford when discussing the significance of the language of each umbrella clause, J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 367.
37 Eureko v Poland, Partial Award, para 260. There was a strong dissenting opinion by Professor Rajski on this point. He felt that Eureko had ‘adopted tactics to politicize on an international level its commercial dispute with the State Treasury, as a PZU shareholder, in order to be able to mask it as a BIT dispute with the Republic of Poland.’ Dissenting Opinion, para 6. The claimant was able to avoid the pre-agreed jurisdiction forum in the contract.
38 Noble Ventures, Inc. v Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para 53.
40 ibid, para 51. It was in fact legislative acts that had to be considered by the tribunal in LG&E v Argentina.
41 CMS v Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para 299.
42 J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 368.
43 TGN was one of the companies created to transport gas after the restructuring by Argentina of the industry in 1992 which was subsequently privatized. CMS held a 29.42% holding in this company.
44 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v Argentina ICSID Case No. ARB/02/1, Award 3 October 2006, para 170.
45 ibid, para 176. The tribunal concluded that there had been a breach of the standard of fair and equitable treatment by Argentina but that the actions were not arbitrary nor did they amount to an indirect expropriation. It also accepted Argentina’s submission on necessity and excused it from liability for any breaches between 1 December 2001 and 26 April 2003. Damages for violations falling outside this period of the state of necessity and interest will be determined in the second phase of the arbitration.
46 Dolzer and Stevens in their seminal work had referred to this possibility in comments on the umbrella clause which ‘seek to ensure that each Party to the treaty will respect specific undertakings towards nationals of the other Party. The provision is of particular importance because it protects the investor’s contractual rights against any interference which might be caused by either a simple breach of contract or by administrative or legislative acts … (emphasis added) R Dolzer and M Stevens, Bilateral Investment Treaties (1995), p. 82.
47 J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 370.
48 Although both tribunals accepted that umbrella clauses may cover investment contracts entered into by the state as a sovereign. See El Paso Energy International Company v Argentina ICSID Case No. ARB/03/15, Award on Jurisdiction, 27 April 2006, para 81 and Pan American Energy LLC and BP Argentina Exploration Company v Argentina, ICSID Case No. ARB/03/13, Decision on Preliminary Objections, 27 July 2006, para 109.
49 Sempra Energy International v Argentina ICSID Case No. ARB/02/16, Award on Jurisdiction 11 May 2005, para 101.
50 Azurix v Argentina ICSID Case No. ARB/01/12 Award 14 July 2006 where it submitted that ‘Azurix intently confuses Investment Agreement with investment, terms that are not equivalent or amalgamable.’ Para 290.
51 Siemens A.G. v Argentina, ICSID Case No. ARB/02/08, Award 6 February 2007 paras 200 and 206.
52 PSEG Global et al v Turkey, ICSID Case No. ARB/02/5, Award of 19 January 2007.
53 ibid para 271. The tribunal was referring to the award in Joy Mining Machinery Limited v Egypt (ICSID Case No. ARB/03/11), Award on Jurisdiction of 6 August 2004, paras 78, 81.
54 S Schwebel, International Arbitration: Three Salient Problems (CUP, 1987) p. 111
55 See the much cited cases of the American-Mexican Claims Commission of North American Dredging Company Case (1926), 4 UN Rep. 26 and the American –Venezuelan Claims Commission in Woodruff (1903), Reports of International Arbitral Awards, vol. IX, p. 213.
56 For more on the distinction between treaty rights and contract claims see B Cremades and D Cairns, ‘Contract and Treaty Claims and Choice of Forum in Foreign Investment Disputes’, in N Horn (Ed) Arbitrating Foreign Investment Disputes, p. 325 where they identify five criteria to distinguish a treaty claim from a contract claim. See also S Alexandrov, ‘Breaches of Contract and Breaches of Treaty. The Jurisdiction of Treaty-based Arbitration Tribunals to Decide Breach of Contract Claims in SGS v Pakistan and SGS v Philippines’, 5 Journal of World Investment and Trade (August 2004); C Schreuer, ‘Investment Treaty Arbitration and Jurisdiction over Contract Claims– the Vivendi 1 case Considered’ in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) p. 281; Y Shany, Contract Claims v Treaty Claims: Mapping Conflicts Between ICSID Decisions on Multi-Sourced Investment Claims, Vol. 99, American Journal of International Law p. 835 (2005) and A El-Kosheri, ‘Contractual Claims and Treaty Claims Within the ICSID Arbitration System’ in B Cremades and J Lew (Ed) Parallel State and Arbitral Procedures in International Arbitration: Dossiers, ICC Institute of World Business Law (ICC, 2005).
57 See for a comprehensive review of the awards and the implications of contract forum selection clauses in a contract between an investor and a host state, Z Douglas, The Hybrid Foundation of Investment Treaty Arbitration, 74 British Yearbook of International Law (2004) 141 at 241 et seq.
58 Azurix v Argentina, ICSID Case No. ARB/01/12 Award, 14 July 2006 para 383.
59 Art II(2)(c) contains the umbrella clause: ‘Each Party shall observe any obligation it may have entered into with regard to investments’.
60 Azurix v Argentina, ICSID Case No. ARB/01/12 Award, 14 July 2006, para 384.
61 Noble Ventures v Romania, Award, para 55.
62 Compañiá de Aguas del Aconquija SA and Vivendi Universal v Argentina, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, para 96.
63 D Bishop, J Crawford, and M Reisman, Foreign Investment Disputes, Cases, Materials and Commentary, (Kluwer, 2005) p. 811.
64 Salini Construtorri SpA and Italstrade SpA v Morocco, ICSID Case No. ARB/00/4, Jurisdiction, 23 July 2001, para 61.
65 Impregilo SpA v Pakistan, ICSID Case No. ARB/03/3 Award on Jurisdiction 22 April 2005, para 262. See also A Harb, The Wrongful Acts of Independent State Entities and Attribution to States in International Investment Disputes TDM, Volume 3 (5) (December 2006) pp.13–16.
66 For all of the grounds pleaded by Argentina see CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8, Argentine Republic’s Application for Annulment, 8 September 2005.
67 CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8 Annulment Decision 25 September 2007 para 95. This decision was voted by practitioners in the field of investment arbitration to be the most significant award in 2007 (not just for its impact on the umbrella clause debate as it also had to consider the other award findings on state of necessity etc). See OGEMID Archives at www.transnational-dispute-management.com.
68 CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8 Award 12 May 2005 para 299.
69 CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8 Annulment Decision 25 September 2007 para 97.
70 J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 370. See also generally N Gallus, ‘An umbrella just for two? BIT obligations observance clauses and the parties to a contract’ (2008) 24(1) Arbitration International, 157.
71 See online discussions on OGEMID Archive S Schill, ‘CMS Annulment and umbrella clause’ (2007) 12 October.
74 This view has been endorsed by other awards, for example, in Salini para 126 and Noble Ventures paras 56 and 58–9.
75 OECD Working papers on International Investment, No 2006/3, Interpretation of the Umbrella Clause in Investment Agreements (October 2006) p. 22. Online at: www.oecd.org/dataoecd/3/20/37579220.pdf
76 See Rajski, Dissenting Opinion in Eureko v Poland, Particl Award, para 11 and in Pan American Energy LLC and BP Argentina Exploration Company v Argentina, Preliminary Objections, para 106.
77 Charles N Brower, ‘The Future of Foreign Investment—Recent Developments in the International Law of Expropriation and Compensation’ in V S Cameron (eds), Private Investors Abroad – Problems and Solutions in International Business in 1975 (Southwestern Legal Foundation Symposium Series, Private Investors Abroad, Matthew Bender, New York, 1976), pp. 93, 105 n. 27 as cited by Antony Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International 2004, Vol. 20, No 4, pp. 411–434.
78 S M Schwebel, ‘On Whether Breach by a State of a Contract With an Alien is a Breach of International Law’, in Justice in International Law: Selected Writings of Judge Stephen M Schwebel (1994), 425, 428.
79 Thomas Wälde, ‘The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases’, The Journal of World Investment and Trade, Vol. 6 No 2, April 2005, 236.
80 The former tribunal held that it does not have jurisdiction at all on the contractual disputes, whilst the latter considered it had jurisdiction but could not admit the case and therefore decided to stay the proceeding directing the parties to seek remedies first from the local courts designated in the underlying contract. See SGS v Pakistan and SGS v Philippines.
81 El Paso Energy International Company v Argentina ICSID Case No. ARB/03/15, Award on Jurisdiction, 27 April 2006, para 81. This view was endorsed by the tribunal (comprised of two of the same members as in El Paso) in Pan American Energy LLC and BP Argentina Exploration Company v Argentina ICSID Case No. ARB/03/13 and BP America Production Co. and Others v Argentina ICSID Case No. ARB/04/8 Award on Jurisdiction 27 July 2006 at para 108 where it confirmed ‘it was necessary to distinguish the State as a merchant from the State as a sovereign.’ There has been some concern voiced over the reliance by the tribunal on Art VII (the investor/state dispute resolution provision) to interpret and essentially define the scope of a substantive provision of the treaty.
82 CMS v Argentina, Jurisdiction, para 299.
83 However, as discussed below, general obligations in the form of legislative acts may be caught by the umbrella clause in case the applicable umbrella clause expressly covers both ‘general and specific’ obligation/commitments, such as Art 3.3 of the New Zealand BIT.
With regard to the specific forms of specific obligation/commitments by host states, Fatouros considers that they include three types of commitments, namely approval instruments, concession agreements, and guarantee contracts. Among them, both concession agreement and guarantee contracts are contractual commitments, whilst only approval instruments (or licence/authorization) are non-contractual instruments. For further details see AA Fatouros, government Guarantees to Foreign Investors (Columbia University Press 1962), at 120–28.
84 SGS v Philippines para 121.
85 It is a complex issue to ascertain whether a particular piece of legislation creates specific commitments towards certain investments or investors. The decisive criterion should be whether the target ‘investments or investors’ are specific, not whether the commitments contained in the legislation are specific. In other words, if an act only applies to one or certain expressly identified foreign investors or foreign investment projects, as the special local regulation in the Changchun Huijin case discussed below, it may be said that the act is targeting those investors or investments identified and may therefore create specific obligation towards them. On the contrary, if an act does not expressly target any specific investment or investor, it may be assumed that it does not create specific commitments vis-à-vis those investments or investor, unless it can be proved that the act actually targeted certain specific investment projects or investors which can be clearly identified at the time of the adoption of the act. The LG & E tribunal seemed to have missed the point here as it mainly analysed the contents of the Gas Law and concluded that it created specific commitments, without sufficiently looking into the question whether the law actually targeted a particular investment project.
86 A few other BITs contain a ‘preservation of rights’ clause, which has similar effect to an umbrella clause. See Section 6.50 below.
87 J Gill et al., ‘Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases’ 21 J. Int’l. ARB. 397, 403 fn 31 (2004) (finding that approximately 40% of a sample of BITs taken from INVESTMENT TREATIES (ICSID ed., 2003) contained umbrella clauses).
88 Both the 1980 and the 1990 Model BITs of China maintain the same umbrella clause, which states that ‘Each Contracting Party shall observe any commitments it may have entered into with the investors of the other Contracting Party as regards to their investment.’ See Art. 2 (2), 1980 Model BIT and Art. 10(2), 1990 Model BIT. It is interesting that the later Model BIT of China of 1994 does not appear to have any umbrella clause at all, see text online at: www.unctad.org/sections/dite/iia/docs/Compendium//en/64%20volume%203.pdf
89 The 1991 Model BIT of UK (Art 2(2)), the 2000 Model BIT of Denmark (Art. 2.3), the 2002 Model BIT of Sweden (Art. 2(4)), for example, all follow this model. UNCTAD IIA Issue Papers: ‘State Contract’ (2004) 20.
91 The English translation is: Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to investments of investors of the other Contracting Party.
92 Art 11, Swiss-Pakistan BIT.
93 The Swiss–Philippines BIT stipulates 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’.
See Art X (2), Swiss–Philippines BIT.
94 V Lowe, ‘Changing Dimensions in International Investment Law’, Lectures at the Chinese Academy of International Law at Xiamen, China, University of Oxford Faculty of Law Legal Studies Working Paper Series No 4/2007 (March 2007), at 104.
95 K Yannaca-Small, ‘Interpretation of the Umbrella Clause in the Investment Treaties’, (2006), OECD Working Papers on International Investment No 2006/3, 3.
96 Lowe, ‘Changing Dimensions in International Investment law’, at 106.
97 Eureko BV v Poland, Partial Award 19 August 2005 at para 246.
98 SGS v Philippines, para 119. See also, Lowe, ‘Changing Dimensions in International Investment Law’, above, at 106.
99 El Paso Energy International Company v The Argentine Republic, ICSID Case No. ARB/03/15 Award on Jurisdiction 27 April 2006 para 70. See also Pan American Energy LLC and BP Argentina Exploration Company v Argentine Republic, ICSID Case No. ARB/03/13, Award on Jurisdiction 27 July 2006 para 99. See for a critical analysis of this approach JP Gaffney and JL Loftis, ‘The ‘Effective Ordinary meaning’ of BITs and the Jurisdiction of Treaty-Based Tribunals to Hear Contract Claims’ (2007) 8(1) Journal of World Investment and Trade 5.
100 See eg art 10.2, Lebanon BIT; Art 10.2, Brunei BIT.
101 Australia BIT, Art. 11.
102 W Ben Hamida, La clause relative au respect des engagements dans les traités d’investissement, Institut des Hautes Études internationales, May 2005 at 21, as cited in Yannaca-Small, 2006, p. 10–11.
103 This interpretation might be relevant when the umbrella clause refers to ‘obligations entered into with regard to investments’, rather than ‘obligations entered into with regard to investments of investors of the other Contracting Party’. Whilst European BITs tend to use the latter, earlier US BIT as exemplified by Art 2(2)(c) of the US–Argentina BIT adopted the former formation. Art 2(2)(c) of the US-Argentina BIT reads, ‘[E]ach Party shall observe any obligation it may have entered into with regard to investments’.
104 SGS v Pakistan, Jurisdiction, paras 163–6.
105 Noble Ventures, Inc. v Romania, ICSID Case No. ARB/01/11, Award 12 October 2005 para 51.
106 Art 4.2 Thailand BIT.
107 Art 11, Australia BIT.
108 See eg Salini Costruttori SpA and Italstrade SpA v Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction of July 23, 2001; Saipem SpA v People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Decision on Jurisdiction of March 21, 2007; and Tokios Tokelés v Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction of April 29, 2004.
109 Fraport AG Frankfurt Airport Services Worldwide v Philippines, ICSID Case No. ARB/03/25, Award 16 August 2007, para 396. See also Inceysa Vallisoletana S.L. v El Salvador, ICSID Case No. ARB/03/26, Award 2 August 2006 where the tribunal also declined jurisdiction as the investments had been fraudulently made and were not in accordance with the law.
111 Art 8(2), Germany BIT (1983). In the new BIT, the ‘legal change’ limitation is lifted. See Art 10(2), 2003 Germany BIT.
112 Art 4.2, Thailand BIT.
113 It was partly for the avoidance of such consequences that the SGS v Pakistan tribunal denied the ‘elevator effect’ of the umbrella clause in the Swiss–Pakistan BIT. The SGS v Philippines tribunal disagreed with SGS v Pakistan on the exact scope of application of the clause. It nevertheless shared the same concern and held that the umbrella clause only applied to a legal obligation that a host state assumed ‘vis-à-vis the specific investment—not as a matter of the application of some legal obligation of a general character’. SGS v Pakistan, para 166; SGS v Philippines, para 121.
114 LG&E v Argentina, para 174.
115 As can be seen in the provision and as said above, the BIT also attaches a double ‘domestic law’ limitation. Art 11, Australia BIT.
116 Other such Australian BITs include these signed with Chile, Papua New Guinea, and Poland. See Yannaca-Small, 2006, p. 11.
117 Including Mexican BITs entered into with Austria, Belgium-Luxemburg, Germany, Greece, and France. ibid.
118 The 1967 OECD draft Convention on the Protection of Foreign Property (Art 2), for example, adopted a rather broad general formulation with its umbrella clause, which says: ‘[E]ach Party shall at all times ensure the observance of undertakings given by it in relation to property of nationals of any other Party’. However, its accompanying commentary insists that undertakings to be covered by this clause ‘must relate to the property concerned; it is not sufficient if the link is incidental’. ‘Draft Convention on the protection of foreign property and Resolution of the Council of the OECD on the Draft Convention’, OECD Publication No 23081, November 1967, Notes and Comments to Art 2, para 3(a). Dolzer and Stevens also considered that these clauses ‘seek to ensure that each party to the treaty will respect specific undertakings towards nationals of the other party.’ (emphasis added) See R Dolzer and M Stevens ‘Bilateral Investment Treaties’, Kluwer Law, 1995, pp. 81–2.
119 Art 8.2, Austria BIT.
121 Enron Corporation and Ponderosa Assets, LP v Argentina, ICSID Case No. ARB/01/3, Award 22 May 2007 para 274.
123 Art 2.3, United Arab Emirates BIT.
124 The 2004 US Model BIT defines the two terms as follows: ‘investment agreement’ means a written agreement between a national authority of a Party and a covered investment or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor:
‘Investment authorization’ means an authorization that the foreign investment authority of a Party grants to a covered investment or an investor of the other Party.
See Art 1, US Model BIT 2004.
125 See eg Eureko v Poland, LG&E v Argentina, Enron v Argentina, Siemens v Argentina, and the discussion above in Part B of this chapter. There has been disquiet about such a wide interpretation voiced by the awards in El Paso Energy International Company v Argentina and Pan American Energy LLC and BP Argentina Exploration Company v Argentina.
126 Art 15, Singapore BIT; Art 15 Sri Lanka BIT; Art 10, Yugoslavia BIT.
127 Art 15, Singapore BIT.
128 Thomas Wälde, ‘The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases’, (2005) Vol. 6 (2) The Journal of World Investment and Trade, 236.
129 CMS v Argentina, ICSID Case No. ARB/01/8, Award 12 May 2005, para 299.
130 Such BITs include these with France (Art 9), Czech (2005, Art 10.2), Korea (Art 12.2), Cambodia (Art 10), Qatar (Art 10), Zimbabwe (Art 10).
132 They are BITs concluded with Kuwait (Arts 2.2 and 11), United Arab Emirates (Arts 2.3 and 13), Egypt (Arts 2.2 and 13), Tunisia (Arts 10.1–3), and Argentina (Arts 3.1 and 9).
133 Impregilo SpA v Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, 22 April 2005, para 221.
135 See for example Maffezini v Spain, ICSID Case No. ARB/97/7 where the tribunal endorsed the view that the investor could avail of more favourable dispute resolution provisions in another BIT.
136 SGS v Pakistan, para 163.
137 For instance, it is settled that the MFN clause should be applied to benefits resulting from legal instruments of the same nature (ejusdem generis) to a BIT, rather than treaties of any kind. Often, it is also subject to express exceptions stipulated in BITs such as customs unions, free trade areas, double taxation treaties, etc. Likewise, it is suggested that umbrella clauses should only cover obligations/commitments towards a ‘specific investment’, rather than universally applicable obligations or commitments. Shan, legal framework (stating limitations on MFN clause application), 151; SGS v Philippines, para 121 (stating that: ‘For Art X(2) to be applicable, the host State must have assumed a legal obligation, and it must have been assumed vis-à-vis the specific investment—not as a matter of the application of some legal obligation of a general character. This is very far from elevating to the international level all ‘the municipal legislative or administrative or other unilateral measures of a Contracting PArty’.’
138 The tribunal reasoned that:‘Given the above structure and sequence of the rest of the Treaty, we consider that, had Switzerland and Pakistan intended Art 11 to embody a substantive ‘first order’ standard obligation, they would logically have placed Art 11 among the substantive ‘first order’ obligations set out in Art s 3 to 7. The separation of Art 11 from those obligations by the subrogation Article and the two dispute settlement provisions (Art s 9 and 10), indicates to our mind that Art 11 was not meant to project a substantive obligation like those set out in Art s 3 to 7, let alone one that could, when read as SGS asks us to read it, supersede and render largely redundant the substantive obligations provided for in Art s 3 to 7.’
See SGS v Pakistan, para 170.
139 They include the BITs with Demark (Art 3.1), Netherlands (2001, Art 3.4), UK (Art 2.2), Switzerland (Art 5), Hungary (Art 3.1), Spain (1992, Art 3.1), Greece (Art 2.6), Iceland (Art 2.2), Macedonia (Art 2.3), Bosnia Herzegovina (Art 3.2), Thailand (Art 4.2), Kuwait (Art 2.2), United Arab Emirates (Art 2.3), New Zealand (Art 3.3), Egypt (Art 2.2), and Argentina (Art 3.1).
140 The tribunal concluded that as the contract in that case had been entered into between Impregilo and WAPDA (the Pakistan Water and Power Development Authority) and not the state of Pakistan, the investor could not rely on the MFN in Art 3 of the BIT to import the obligations under the umbrella clause in Pakistan’s other BITs. In fact, the tribunal held that even ‘assuming arguendo that Pakistan, through the MFN clause and the Swiss–Pakistan BIT, has guaranteed the observance of the contractual commitments into which it has entered together with Italian investors, such a guarantee would not cover the present Contracts – since these are agreements into which it has not entered. On the contrary, the Contracts were concluded by a separate and distinct entity’. Impregilo v Pakistan, ICSID Case No. ARB/03/3, para 223.
141 For an introduction to the various forms of foreign investment in China, including EJV, CJV, JE, and BOT mentioned in this pArt, see Chapter 1 of this book.
142 JV arrangements can have an ‘agreement’ (Xieyi), in addition to the contract (Hetong) between the pArties. For example, CJVL, EJVL, and their implementing regulations general require the JV pArties to submit both the ‘agreement’ and the ‘contract’ for approval. See Art 3, EJVL, and Art. 7 of its implementing regulations, and Art 5, CJVL, and Art. 7 of its implementing regulations.
143 Despite a legacy of a restricted economy, more than two decades of economic reform has significantly transformed Chinese companies to independent legal entities undertaking obligations in their own names. Most of them are no longer an auxiliary to a governmental depArtment, nor do they exercise any public authority. Therefore, the contracts they enter into with foreign investors should generally be regarded as purely commercial contracts, rather than state contracts. See M Yao, Textbook on Foreign Investment Enterprises (Law Press China, 1990), 72–3.
There are, nevertheless, still certain State Owned Enterprises (SOEs) that may be exercising some elements of governmental authority, which will be discussed later.
144 The ICC tribunal arrived at a decision in favour of the foreign investors, SPP and SPP ME, and held that Egypt should be considered as a pArty to the contract. The tribunal reasoned that:‘In our view, the requirement of the Minister’s signature meant and was understood to mean by the pArties that through the signature of the Minister, not only was the government confirming its approval of all contractual obligations undertaken by EGOTH in compliance with the laws of Egypt, but it was also guaranteeing to the investor its continuing agreement and support of the project. By the Minister signing not only ‘approved’ but also ‘agreed’ (which clearly means the undertaking of an obligation of its own) the government also became a contractual pArty to the December Agreement.’ (emphasis added).
For further details of the award, see International Chamber of Commerce Court of Arbitration: Award in the Arbitration between S.P.P. (Middle East) Limited, Southern Pacific Properties Limited v the Arab Republic Of Egypt, The Egyptian General Company for Tourism and Hotels (March 11, 1983), 22 International Legal Materials (ILM) 752, pp. 766–7, para 46.
145 France: Court of Appeals of Paris Decision in Arab Republic of Egypt v Southern Pacific Properties, Ltd et al (Appellate Review of Arbitral Awards between States and Private PArties), 23 International Legal Materials (ILM) 1004, 1056; France: Court of Cassation Decision in Southern Pacific Properties Ltd et al v Arab Republic Of Egypt (Appellate Review of Arbitral Awards Between States and Private PArties, January 6, 1987), 26 International Legal Materials (ILM) 1004, 1007. See the English High Court decision in Kazakhstan v Istil Group Inc:  EWHC 448 where an LCIA award was set aside and the court confirmed there was no ‘basis for disregarding that separate legal personality on the basis that Karmet was ‘an organ’ of [the state]’ para 66. The government’s power to appoint directors of Karmet and any requirement that Karmet should obtain prior approval from the government to enter into any contract did not justify piercing the corporate veil. However, see to the contrary the decision of the US Court of Appeals Fifth Circuit in Bridas SAPIC v Turkmenistan (21 April 2006) where the court reversed the vacatur of an award of US$495million against Turkmenistan. It confirmed that the government had in fact exercised control over Turkmenneft, manipulating it legally and economically to repudiate the contract with Bridas.
146 ILA State Responsibility Articles, Art 5. The commentary on Art 5 confirms that it covers a ‘wide variety of bodies which, though not organs, may be empowered by the law of a State to exercise elements of governmental authority.’ Art 5 refers to entities that have been ‘empowered to a limited extent or in a specific context, to exercise specified elements of governmental authority.’ J Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries (CUP, 2002) p. 100 paras (1) and (3).
148 In this connection, it is useful to recall a recent UNCTAD definition on state contracts, which include not only contract concluded by a state, but also contracts entered into by ‘an entity of the State, which… may be defined as any organization created by statute within a State that is given control over an economic activity’. See UNCTAD Series on issues in international investment agreements: State Contracts (UNCTAD/ITE/IIT/2004/ 11) 3.
150 Art. 3, EJVL; Art. 5, CJVL. For further details on the approval process, see Shan, ibid, pp. 123–36.
151 France: Court of Appeals of Paris Decision in Arab Republic of Egypt v Southern Pacific Properties, Ltd et al (Appellate Review of Arbitral Awards between States and Private Parties), 23 International Legal Materials (ILM) 1004, 1057.
The English Court of Appeal reached a different conclusion in Svenska Petroleum Exploration AB v Government of the Republic of Lithuania and another (No 2)  EWCA Civ 1529. The Lithuanian government although not a party to the JV added this rubric to the end of the contract confirming that it: ‘hereby approves the above agreement and acknowledges itself to be legally and contractually bound as if the government were a signatory to the Agreement.’ An ICC tribunal found that Lithuania was essentially bound by the JV and the Court of Appeal upheld the award as it was clear that the government intended to go beyond mere approval of the JV.
152 The Implementing Regulations of EJVL, Art 4.
153 The Implementing Regulations of CJVL, Art 9.
154 Contract law of the People’s Republic of China, Art 54 (2).
155 This factor was interpreted by the ICC tribunal as signalling the government’s willingness to be bound by the contract and become a party to it, but was subsequently rejected by the Paris Court of Appeal, which held that:‘even if it is not common for a supervisory authority to affix his authorization directly on the document submitted for his supervision, the exceptional nature of the negotiations in question could be sufficient to explain this circumstance’ and that ‘on the contrary, it should be emphasized that the parties carefully separated their signatures and that the Minister’s signature was affixed separately and clearly placed at the end of the contract’.
See International Chamber of Commerce Court of Arbitration: Award in the Arbitration between S.P.P. (Middle East) Limited, Southern Pacific Properties Limited v the Arab Republic Of Egypt, The Egyptian General Company for Tourism and Hotels (March 11, 1983), 22 International Legal Materials (ILM) 752, p 766, para 44; and France: Court of Appeals of Paris Decision in Egypt v Southern Pacific Properties, Ltd et al (Appellate Review of Arbitral Awards between States and Private Parties), 23 International Legal Materials (ILM) 1004, 1058.
156 MOFTEC (now MOFCOM) Notice on the Adoption of the New Version of the ‘Certificate of Foreign Invested Enterprises of the People’s Republic of China’, adopted by the MOFTEC on 5 October 1993, which attaches a standard Certificate of Approval.
157 In this connection, it is interesting to note that the ICC tribunal in the SPP v Egypt case has attempted to set out certain specific obligations that the Egyptian government had committed by the signature of approval of the Minister of Tourism: ‘By the signature of the Minister the government undertook the following obligations:
Whilst it is commendable to make effort to clarify such obligations, it perhaps has gone a step too far in subjecting the host government to such an extensive list of obligations, particularly those under item Nos. 2 & 3. See International Chamber of Commerce Court of Arbitration: Award in the Arbitration between S.P.P. (Middle East) Limited, Southern Pacific Properties Limited v Egypt, The Egyptian General Company for Tourism and Hotels (March 11, 1983), 22 International Legal Materials (ILM) 752, p. 766, para 46;
158 As can be seen from Table 1, by the end of 2005, there have been 317,438 JV project and hence at least the same number of JV contracts that have been signed between foreign and local JV partners in China.
160 Art 2.3, United Arab Emirates BIT.
161 A Chen, Monograph on International Economic Law (Higher Education press China, 2002, in Chinese), 642–3.
162 AA Fatouros, Government Guarantees to Foreign Investors (Columbia University Press, 1962), 123–4.
It must be noted that different states adopt different methods of approving foreign investment projects. Whilst some countries, such as China, distance themselves from direct involvement in the JV contractual relationship, other countries tend to be substantially involved therein. For example, in some African states, important foreign investment projects are subject to the same approval procedures as international treaties. In other African states such as Ghana, the review and approval process does not only involve passive assessment of the eligibility of the projects, but also positive suggestions and proposed changes, which would amount to ‘a kind of agreement between the state and the investor’, as described by Fatouros. Indeed, the Capital Investment Act of Ghana requires that the approval granted by its Foreign Investment Commission be transformed into an official agreement between the foreign investor and the Ministry of Finance. Ghana: Capital Investment Act 1963, Section Z(3), as cited in M Yao, Comparative Foreign Investment Law (Wuhan University Press, 1993, in Chinese), 557.
163 Royal Decree of 30 May/23 June 1956, concerning the approval of an investment on the exploitation of asbestos in Greece by an American company, Kennecott Copper Corporation, as cited in Fatouros, ibid, 124 fn 219.
167 The Implementing Regulations of the Law of Mineral Resources define the right to explore mineral resources within the prescribed scope of the licence (contract), whereas the latter refers to the right to exploit and acquire mineral resources within the prescribed scope of the granted licence (contract). Such definition would be helpful in defining the two terms. See the Implementing Regulations of the Law of Mineral Resources, at 6.
170 For example, CNOOC owns 51% interests in the Penglai 19–3 oilfield, while Phillips China Ltd acts as the operator. See ‘China’s largest offshore oilfield is in production’ China Ocean News (in Chinese), 7 January 2003; Zhiguo Gao, above, 167.
171 Zhiguo Gao, ibid, 169.
173 J Yu, International Investment Law (Law Press China, 2003, in Chinese) 98–9; M Yao, International Investment Law (Wuhan University Press, 1987, in Chinese), 212–13.
176 Wintershall A G et al v Government of Qatar (1989), Partial Award on Liability of 5 February 1988, 28 ILM 795 (1989).
177 UNCTAD Series on issues in international investment agreements: State Contracts (UNCTAD/ITE/IIT/2004/ 11) at 3.
178 Another form of concession agreement is arguably track land development contracts between a foreign investor and a local land administrative authority. The governing laws are the Interim Me