Practical Implications

South Carolina Journal of International Law and Business
Volume 11
Article
Issue 2 Spring
5
2015
2015
Practical Implications from an Expansive Interpretation of

Umbrella Clauses in International Investment Law
Katherine Jonckheere
Ghent University
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Jonckheere, Katherine (2015) "Practical Implications from an Expansive Interpretation of
Umbrella Clauses in International Investment Law," South Carolina Journal of International
Law and Business: Vol. 11 : Iss. 2 , Article 5.
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PRACTICAL IMPLICATIONS FROM AN
EXPANSIVE INTERPRETATION OF
UMBRELLA CLAUSES IN INTERNATIONAL
INVESTMENT LAW
Katherine Jonckheere*
ABSTRACT
The right way to interpret so-called 'umbrella clauses' has

been debated for over a decade. Interpreted restrictively, these
clauses merely reinforce the substantive commitments and
protections listed in the remainder of the investment treaties in which
they are found. An expansive interpretation on the other hand gives
these clauses the effect of elevating purely contractual obligations
undertaken by the state vis-à-vis specific investors to full-blown
treaty obligations under international law, subject to the investment
treaty's dispute settlement provisions. Although an expansive reading
seems to have gained considerable ground amongst investment
arbitration tribunals over the years, this article will show that the
consequences of such an interpretation still differ materially in
practice by looking at (i) what happens to the dispute resolution
mechanism of the investment treaty when there is also an exclusive
forum selection clause in the underlying contract between a state and
a foreign investor, and (ii) what type of obligations can be elevated
via umbrella clauses. Both states and investors are advised to take
these practical implications into consideration when entering into
investment agreements or treaties.
I. INTRODUCTION
For over a decade, investment arbitration tribunals have

been divided over the best way to interpret so-called umbrella clauses.
*
LL.M. (Stanford Law School), J.D. (Ghent University).
144 SOUTH CAROLINA JOURNAL OF [Vol. 11.2
INTERNATIONAL LAW & BUSINESS
Found in many bilateral investment treaties (BITs), umbrella clauses

typically provide that contracting states explicitly agree to meet
certain obligations undertaken vis-à-vis investors from counter-party
states.1 While some investment arbitration tribunals maintain that an
umbrella clause merely reinforces the substantive commitments listed
in its respective investment treaty, such as the commitment of the
host-state to treat foreign investors in a fair and equitable way, others
have read such clauses more broadly to enforce obligations beyond
those explicitly mentioned in the treaty.
The split between restrictive and expansive interpretations
of umbrella clauses comes up in a situation where a host-state has
entered into certain obligations with an investor in addition to those
listed in the investment treaty—for example, by executing a
production-sharing contract with a specific foreign investor. If the
host-state does not subsequently fulfill its contractual obligations
towards that investor, the latter arguably has a claim against the host-
state for breach of contract. This contract-based claim can be
distinguished from a traditional treaty-based claim, such as an
alleged breach of an investment treaty’s mutually guaranteed
standards of protection for investors. 2 It is undisputed that treaty-
based claims can be adjudicated under the auspices of the dispute
resolution mechanism designated in the investment treaty (typically
by referring them to the International Centre for Settlement of
Investment Disputes (ICSID)). However, by adopting an expansive
interpretation of umbrella clauses, purely contract-based claims could
also be brought under the auspices of the investment treaty’s dispute
settlement provisions.
Over time, the debate has gradually subsided in favor of an
expansive reading.3 Rather than advancing one interpretation over
the other, this article will focus on what such interpretations mean for
1
An example of an umbrella clause can be found in the BIT between the
United States and Romania: “Each Party shall observe any obligation it may
have entered into with regard to investments.” Treaty with Romania
Concerning the Reciprocal Encouragement and Protection of Investment,
U.S.-Rom., art. II, ¶ 2, May 28, 1992, S. TREATY DOC. NO. 102-36 (1992)
[hereinafter U.S.-Rom. BIT].
2
For example, a violation of the host-state’s obligation to protect the
foreign investor from arbitrary or discriminatory measures or its obligation to
guarantee the foreign investor equal national treatment.
3
See Jude Anthony, Umbrella Clauses Since SGS v. Pakistan and SGS
v. Philippines – A Developing Consensus, 29 ARBITRATION INTERNATIONAL
607, 607 (2013).
2015 PRACTICAL IMPLICATIONS FROM AN 145
EXPANSIVE INTERPRETATION OF UMBRELLA
CLAUSES IN INTERNATIONAL INVESTMENT
LAW for its stakeholders, namely
the debate’s practical implications
sovereigns and investors. The following section will first provide a
brief overview of the main arguments invoked by tribunals and
scholars for both restrictive and expansive interpretations. Section
III will then discuss how investment arbitration tribunals favoring
expansive interpretations have decided cases involving claims
brought under umbrella clauses, focusing on two issues that are still
controversial amongst them. First, what is the relationship between
an exclusive forum selection clause in a contract between a host-state
and an investor and the dispute settlement provision in the applicable
investment treaty? Second, which types of obligations are elevated
to the level of an investment treaty breach? Would a unilateral
promise of a host-state to share with a foreign investor a certain cost
related to the investment qualify as an “obligation” that can be
elevated to an obligation under the relevant investment treaty, or
would contractual obligations be required? Section IV will conclude
by discussing the practical implications of differing expansive
interpretations of umbrella clauses and thereby offer
recommendations for both investors and states.
II. DEBATE ON THE INTERPRETATION OF UMBRELLA

CLAUSES
As the ICSID tribunal in BIVAC B.V. v. Paraguay aptly

explained, “there is no jurisprudence constante on the effect of
umbrella clauses[;] . . . the subject is one on which legal opinion is
divided.” 4 The debate began a good ten years ago when two
tribunals—deciding shortly after one another—reached vastly
different outcomes when dealing with an umbrella clause in SGS v.
Pakistan5 and SGS v. Philippines.6 Both cases addressed the question
of whether the host-state’s commitments referenced in the respective
4
Bureau Veritas, Inspection, Valuation, Assessment & Control, BIVAC
B.V. v. Republic of Para., ICSID Case No. ARB/07/9, Objections to
Jurisdiction, ¶ 141 (May 29, 2009),
http://www.italaw.com/sites/default/files/case-documents/ita0103.pdf.
5
Société Générale de Surveillance S.A. v. Islamic Republic of Pak.,
ICSID Case No. ARB/01/13, Objections to Jurisdiction, ¶¶ 172–73 (Aug. 6,
2003), 8 ICSID Rep. 406 (2005).
6
Société Générale de Surveillance S.A. v. Republic of the Phil., ICSID
Case No. ARB/02/6, Objections to Jurisdiction, ¶ 128 (Jan. 29, 2004), 8
ICSID Rep. 518 (2005).
investment treaties’ umbrella clause also included “obligations

arising under otherwise independent investment contracts between
the investor and the host State.”7 If the answer was “yes” (utilizing
an expansive umbrella clause interpretation as adopted in SGS v.
Philippines), breach of the host state’s contractual commitments
would amount to a breach of the BIT and the matter would be subject
to ICSID jurisdiction. 8 In the alternative (utilizing a restrictive
interpretation as adopted in SGS v. Pakistan), the local forum would
adjudicate the investor’s contractual claim. 9
A. RESTRICTIVE INTERPRETATION
In SGS v. Pakistan, the claimant argued for an expansive

interpretation of the umbrella clause contained in Article 11 of the
Switzerland-Pakistan BIT, which reads: “[e]ither Contracting Party
shall constantly guarantee the observance of the commitments it has
entered into with respect to the investments of the investors of the
other Contracting Party.” 10 The arbitration tribunal rejected the
argument that Article 11 “elevated” SGS’s contractual claims to
treaty claims, subject to ICSID jurisdiction.11
Still the leading case, SGS v. Pakistan summarizes some of
the key arguments in favor of a narrow interpretation of umbrella
clauses. The first is a “floodgate” argument, pointing to the far-
reaching consequences an expansive interpretation would create.
Namely, an expansive view would make umbrella clauses
“susceptible of almost indefinite expansion” and “so far-reaching in
scope, and so automatic and unqualified and sweeping in their
operation, so burdensome in their potential impact upon a
Contracting Party, we believe that clear and convincing evidence
must be adduced.”12 The tribunal concluded that no evidence of such
7
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, 14 GEO. MASON
L. REV. 135, 136–37 (2006).
8
See SGS v. Phil., Objections to Jurisdiction, ¶¶ 129–31; SGS v. Pak.,
Objections to Jurisdiction, ¶ 168.
9
See SGS v. Phil., Objections to Jurisdiction, ¶ 155.
10
SGS v. Pak., Objections to Jurisdiction, ¶ 97.
11
See id. ¶¶ 54, 172–73.
12
Id. ¶¶ 166–67; see also Matthew Wendlandt, SGS v. Philippines and
the Role of ICSID Tribunals in Investor-State Contract Disputes, 43 TEX.
INT’L L.J. 523, 541 (2008).
intent could be found in the text LofAW the umbrella clause. 13 The SGS v.
Pakistan tribunal also set forth what would become a more “widely
accepted principle . . . that under general international law, a
violation of a contract entered into by a State with an investor of
another State, is not, by itself, a violation of international law.” 14
Three years later, the arbitration tribunal in El Paso v.
Argentina followed the SGS v. Pakistan tribunal’s view that
contractual claims could only be transformed to treaty claims if this
had been stated “clearly and unambiguously.”15
The tribunals in both SGS v. Pakistan and a case that
followed shortly after, Joy Mining v. Egypt, applied the Vivendi
“essential basis” test—distinguishing investment treaty breaches and
contractual breaches by “the fundamental basis of the claim”—in
rejecting jurisdiction over contract-based claims. 16 This test explains
that where a claim’s fundamental basis is a BIT, international law is
applicable; on the other hand, when its fundamental basis is a
contract, the law applicable to the contract will govern. 17
B. EXPANSIVE INTERPRETATION
Shortly after the SGS v. Pakistan tribunal reached its

decision, the tribunal in SGS v. Philippines, another landmark
decision, reached the opposite conclusion and accepted jurisdiction
13
SGS v. Pak., Objections to Jurisdiction, ¶ 167.
14
Id.; see also Michael Feit, Responsibility of the State under
International Law for the Breach of Contract Committed by a State-Owned
Entity, 28 BERKELEY J. INT’L L. 142, 152, 161 (2010).
15
El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No.
ARB/03/15, Decision on Jurisdiction, ¶ 74 (Apr. 27, 2006), 21 ICSID Rev.
488 (2006).
16
Id., ¶ 63; Joy Mining Mach., Ltd. v. Arab Republic of Egypt, ICSID
Case No. ARB/03/11, Award on Jurisdiction, ¶ 75 (Aug. 6, 2004), 13 ICSID
Rep. 123 (2008); SGS v. Pak., Objections to Jurisdiction, ¶ 148 (quoting
Compañia de Aguas del Aconquija S.A. & Vivendi Universal v. Argentine
Republic, Case No. ARB/97/3, Annulment, ¶ 101 (July 3, 2002), 8 ICSID
Rep. 490 (2005)).
17
Vivendi Universal v. Argentine Republic, Annulment, ¶ 96. In
Vivendi, the panel agreed that the “proper law of the contract” for the
Concession Contract was the law of Tucumán Province, not international law
rules of arbitration, because Tucumán “possesses separate legal personality
under its own law and is responsible for the performance of its own
contracts.” Id.
over contractual claims on the basis that 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.” 18 An expansive
interpretation of umbrella clauses requires that breaches of
obligations the host-state has undertaken with respect to foreign
investors are elevated to breaches of the umbrella clause included in
the investment treaty. Therefore, a simple breach of a commercial
contract between a host-state and an investor could be transformed
into a breach of a treaty. Article 10 of the Switzerland-Philippines
BIT stipulates the following umbrella clause: “[e]ach Contracting
Party shall observe any obligation it has assumed with regard to
specific investments in its territory by investors of the other
Contracting Party.”19 Admittedly, the language of the umbrella
clause in SGS v. Philippines seems weaker than this of the clause in
SGS v. Pakistan, which does not mention “specific” investments “in
the host-state’s territory.” The SGS v. Philippines tribunal even
makes a reference to the “vaguer terms” of the umbrella clause
contained in the Swiss-Pakistan BIT. 20 However, the slight textual
differences between umbrella clauses do not satisfactorily explain the
basis for the split in international investment law.
Tribunals advancing an expansive construction of umbrella
clauses have typically relied on Article 31, paragraph 1, of the
Vienna Convention on the Law of Treaties, which provides that a
treaty must be interpreted (i) in accordance with the ordinary
meaning of its terms in their context and (ii) in light of its objective
and purpose.21 First, they have pointed out the plain language of
umbrella clauses, 22 such as the mandatory character of “shall
18
ICSID Rep. 518 (2005).
19
Id. ¶ 115.
20
Id. ¶ 119.
21
See Eureko B.V. v. Republic of Pol., Partial Award, ¶ 247 (Aug. 19,
2005), 12 ICSID Rep. 335 (2007) (quoting Vienna Convention on the Law of
Treaties, art. 31, May 23, 1969, 1155 U.N.T.S. 331); Enron Corp. v.
Argentine Republic, ICSID Case ARB/01/3, Award, ¶ 273 (May 22, 2007),
22
Société Générale Surveillance S.A. v. Republic of Para., ICSID Case
No. ARB/07/29, Decision on Jurisdiction, ¶ 168 (Feb. 12, 2010),
http://www.italaw.com/sites/default/files/case-documents/italaw1526.pdf.
observe” and the broad phrasingLof AW“any obligation,” 23 which would
arguably include not only obligations specified in the investment
treaty but also purely contractual obligations under national law. 24
Second, and related to this interpretation, is the argument
under international law that a provision in an international treaty
must be “interpreted as meaningful rather than meaningless,” and to
be rendered “effective rather than ineffective.” 25 Proponents of an
expansive interpretation seem to agree that a restrictive interpretation
would render umbrella clauses redundant. 26 The tribunal in SGS v.
Philippines criticized the SGS v. Pakistan decision in this respect by
stating that the latter “failed to give any clear meaning to the
umbrella clause.”27 In SGS v. Paraguay, the umbrella clause was
similarly interpreted to provide jurisdiction over contract-based
claims in order “to give purpose and effect to that provision.” 28 This
is also how the ad hoc arbitration tribunal in Eureko B.V. v. Poland
reached the conclusion that an umbrella clause “must be interpreted
to mean something in itself,” namely, to include the obligations
undertaken by the host-state with respect to the investments made by
foreign investors in accordance with the BIT. 29 The ICSID
arbitration tribunal in SGS v. Paraguay similarly held that an
umbrella clause means what it says—“that the State is obliged to
guarantee the observance of its commitments with respect to the
investments of the other State party’s investors.”30 The tribunal in
23
See, e.g., Bureau Veritas, Inspection, Valuation, Assessment &
Control, BIVAC B.V. v. Republic of Para., ICSID Case No. ARB/07/9,
Objections to Jurisdiction, ¶ 141 (May 29, 2009), http://www.italaw.com/
sites/default/files/case-documents/ita0103.pdf (stating that “[t]he words any
obligation are all encompassing.”); SGS v. Phil., Objections to Jurisdiction, ¶
115 (citing the language “shall”).
24
SGS v. Phil., Objections to Jurisdiction, ¶ 115; BIVAC B.V. v. Para.,
Objections to Jurisdiction, ¶ 141.
25
Eureko B.V. v. Republic of Pol., Partial Award, ¶ 248.
26
Stephen W. Schill, Enabling Private Ordering: Function, Scope and
Effect of Umbrella Clauses in International Investment Treaties, 18 MINN. J.
INT’L L. 1, 39–40 (2009).
27
SGS v. Phil., Objections to Jurisdiction, ¶ 125 (internal quotations
omitted).
28
29
Id. ¶ 249.
30
Id. ¶ 168.
BIVAC B.V. v. Rep. of Paraguay agreed that “the umbrella clause has
to be interpreted in such a way as to give it some meaning and
practical effect.”31
Third, investment arbitration tribunals adopting an
expansive interpretation have turned to the objective and purpose of
the investment treaties in which umbrella clauses are found. 32
According to the tribunal in Eureko B.V. v. Poland, “the
encouragement and reciprocal protection of investment” must be read
into the umbrella clause. 33 Therefore, when in doubt, the umbrella
clause ought to be interpreted in favor of encouraging investment. 34
Allowing for resolution of all disputes arising from the same
investment by a single forum (i.e., the forum designated in the
investment treaty) would make foreign investment more attractive for
investors who might not wish to refer their disputes to the host-state’s
national courts for fear of bias or an underdeveloped judicial
system.35
Finally, proponents of an expansive interpretation have
traced back the historical origins of umbrella clauses to the 1950s and
1960s.36 The 1967 OECD Draft Convention on the Protection of
Foreign Property was the first treaty to include an umbrella clause,
titled “Observance of Undertakings.”37 The commentary to the Draft
31
Bureau Veritas, Inspection, Valuation, Assessment & Control,
BIVAC B.V. v. Republic of Para., ICSID Case No. ARB/07/9, Objections to
32
See supra text accompanying notes 21–28.
33
Eureko B.V. v. Republic of Pol., Partial Award, ¶ 248 (Aug. 19,
2005), 12 ICSID Rep. 335 (2007).
34
ICSID Rep. 518 (2005) (citing Treaty between the United States of America
and the Argentine Republic Concerning the Reciprocal Encouragement and
Protection of Investment, U.S.-Arg., pmbl., Nov. 14, 1991, 31 I.L.M. 124).
35
Id. ¶ 132.
36
For further discussion, see Eureko B.V. v. Republic of Pol., Partial
Award, ¶ 251; Jonathan B. Potts, Stabilizing the Role of Umbrella Clauses in
Bilateral Investment Treaties: Intent, Reliance and Internationalization, 51
VA. J. INT’L L. 1005, 1008 (2011); Schill, supra note 26, at 36, 55, 56; Wong,
supra note 7, at 149.
37
Organisation for Economic Co-operation and Development [OECD],
Draft Convention on the Protection of Foreign Property, at 13, No. 15,637
(1962), available at http://www.oecd.org/investment/
Convention explains that “anyLAW right originating under such an
undertaking gives rise to an international right.” 38 The tribunal in
Eureko B.V. v. Poland emphasizes how scholars in the 1970s and
1980s have further interpreted the umbrella clause to transform
contractual obligations into international ones. 39
III. THE EXPANSIVE INTERPRETATION OF UMBRELLA

CLAUSES IN PRACTICE
Although host-states (who have an interest in avoiding

international law breaches) and foreign investors (who have an
interest in seeing their claims adjudicated in international forums) are
likely to continue to disagree on one interpretation, the arguments for
a broad definition seem to have gained traction with arbitration
tribunals as is demonstrated by the substantial number of cases
decided this way. Instead of fueling the debate, section III will focus
on what an expansive interpretation of umbrella clauses means in
practical terms and will consider two questions that are controversial
within the ranks of supporters of a broad interpretation. The first
question relates to what happens when there is an umbrella clause in
the investment treaty, thereby elevating contractual claims to treaty
claims, and an exclusive forum selection clause in the contract. Does
the dispute resolution mechanism in the investment treaty override
the forum selection clause in this scenario? The second question asks
which types of “obligations” can be brought into the treaty realm.
Would they need to be contractual or could they have a wider scope
and include, for example, unilateral promises or statements made by
the host-state?
A. EFFECT OF EXCLUSIVE FORUM SELECTION CLAUSES
In SGS v. Pakistan, the tribunal expressed concern that

elevating any contractual breach to a treaty breach would “negate
routine forum selection clauses in thousands of state-investor
internationalinvestmentagreements/39286571.pdf. The umbrella clause

provided that “each Party shall at all times ensure the observance of
undertakings given by it in relation to the property of nationals of another
Party.” Id.
38
Id. at 14–15.
39
Eureko B.V. v. Republic of Pol., Partial Award, ¶ 251 (internal
quotations omitted).
contracts.”40 For this reason, a forum selection clause in a contract

between host-state and foreign investor had to take precedence over
BIT jurisdiction. However, expansive interpretations of umbrella
clauses have varied with respect to their effect on such forum
selection clauses. This section distinguishes three scenarios that arise
once an investment arbitration tribunal has accepted jurisdiction over
a contractual claim on the basis of the applicable investment treaty’s
umbrella clause. First, the contract between the host-state and
investor does not contain a forum selection clause; consequently,
there is nothing standing in the way of the tribunal deciding on the
merits of any contractual claim. Second, there is an exclusive forum
selection clause and the tribunal gives the selected forum precedence
over BIT dispute resolution, meaning that it does not decide the
merits of the case. Finally, there is an exclusive forum selection
clause but the tribunal gives precedence to BIT dispute resolution
and therefore decides itself the merits of the case.
The different approaches that tribunals supporting a broad
interpretation have taken to decipher umbrella clauses are not just
theoretical; there have been tangible consequences. For example, in
BIVAC B.V. v. Paraguay, the tribunal accepted jurisdiction over a
contractual claim but then declared this claim “inadmissible” because
of the exclusive forum selection clause in the contract, deflecting a
decision on the merits of the case to the local courts indicated in the
forum selection clause.41 Contrarily, in SGS v. Paraguay, a case
stemming from a similar set of facts, the tribunal ignored the
exclusive forum selection clause to decide for itself the merits of the
case.42 It is interesting to contrast the vastly different results of
BIVAC B.V. v. Paraguay and SGS v. Paraguay with the outcomes of
the respective poster cases for the restrictive and expansive
interpretations of umbrella clauses, SGS v. Pakistan and SGS v.
Philippines. Both cases also had an exclusive forum selection clause
in the underlying contract between the host-state and the foreign
40
Société Générale de Surveillance S.A. v. Islamic Republic of Pak.,
ICSID Case No. ARB/01/13, Objections to Jurisdiction, ¶ 56 (Aug. 6, 2003),
8 ICSID Rep. 406 (2005).
41
42
LAW to be drastically different, 44 the
investor .43 Although often perceived
outcomes of these two cases were nonetheless largely the same—the
local courts of the host-state could decide the merits of the investor’s
contractual claims45—thereby illustrating how the interpretational
divide runs deeper than a simply restrictive versus expansive
approach.
1. TRIBUNAL GIVES PRECEDENCE TO THE

FORUM SELECTION CLAUSE
As it turns out, a number of proponents of an expansive

interpretation would render an umbrella clause ineffective in the
presence of an exclusive forum selection clause, including the
arbitrators in SGS v. Philippines. In the latter case, by accepting
jurisdiction over the foreign investor’s contractual claim on the basis
that the umbrella clause in the Swiss-Philippines BIT rose to a treaty
claim, the tribunal paved the way for adopting an expansive
interpretation in case law, while at the same time declaring the
contractual claim inadmissible because of the forum selection clause
in the underlying agreement between investor and host-state. 46
As one author astutely observed, “this is to take away with
one hand what was given with the other, leaving investors no less
empty-handed than they were under SGS v. Pakistan.”47 Another
commentator tries to defeat this criticism by pointing out that ICSID
tribunals should have the freedom to decide the merits of contractual
claims if they wish, and simply did not think it appropriate in SGS v.
Philippines.48 A third argues that an exclusive forum selection clause
should override the BIT dispute resolution mechanism because
foreign investors should be able to “negotiate more lucrative
43
See Yuval Shany, Notes and Comments, Contract Claims vs. Treaty
Claims: Mapping Conflicts between ICSID Decisions on Multisourced
Investment Claims, 99 AM. J. INT’L L. 835, 839–42 (2005).
44
Id.
45
See SGS v. Pak., Objections to Jurisdiction, ¶ 145–46; Société
Générale de Surveillance S.A. v. Republic of the Phil., ICSID Case No.
ARB/02/6, Objections to Jurisdiction, ¶ 162 (Jan. 29, 2004), 8 ICSID Rep.
518 (2005).
46
See Shany, supra note 43, at 842–43.
47
Wong, supra note 7, at 165–66.
48
Wendlandt, supra note 12, at 552–54.
contracts” with the host-state by forfeiting dispute resolution as

determined in the treaty.49
In BIVAC v. Paraguay, a case concerning unpaid invoices
arising from a contract between a Dutch company and the
Paraguayan Ministry of Finance, the tribunal accepted jurisdiction
over the Dutch company’s contractual claim. 50 However, and similar
to SGS v. Philippines, it did not decide the merits of the case because
of the exclusive forum selection clause in the contract where the
parties had chosen the Tribunals of the City of Asunción. 51 Although
the tribunal declared it had jurisdiction over the contractual claim, it
considered that claim to be inadmissible, stating that a broad reading
of the umbrella clause indicated that the entire contract is imported
into the BIT, including the exclusive forum selection clause. 52 The
tribunal then addressed whether the proceedings should be stayed—
as was done in SGS v. Philippines—or the contractual claim
dismissed, which would be the normal practice for an inadmissible
claim.53 The tribunal finally decided that a stay of proceedings was
the most appropriate way to deal with the issue of admissibility. 54
However, the decision seemed to imply that the contractual claim
might still become admissible if the forum selected in the contract
fails to meet “expectations with regard to the sound administration of
justice.”55 In conclusion, the tribunal appeared to have assumed a
supervisory role, as had been argued for by the claimant.56
Another ICSID tribunal came to the same conclusion in
Bosh International, Inc. v. Ukraine.57 There, the tribunal did not
need to decide what happens after an umbrella clause is breached
because the contractual breaches alleged by the claimant were not
49
Potts, supra note 36, at 1042.
50
Jurisdiction, ¶ 142 (May 29, 2009), http://www.italaw.com/sites/default/
files/case-documents/ita0103.pdf.
51
Id. ¶ 145.
52
Id. ¶ 159.
53
Id. ¶ 161.
54
Id.
55
Id. ¶ 290.
56
See id. ¶ 288.
57
Bosh Int’l, Inc. v. Ukraine, ICSID Case No. ARB/08/11, Award, ¶
254 (Oct. 25, 2012), http://www.italaw.com/sites/default/files/case-
documents/italaw1118.pdf.
attributable to the host state.LAW58
However, “for the sake of
completeness,” the tribunal added that the contractual claim would
not be allowed because there was an exclusive forum selection clause
in the contract.59
2. TRIBUNAL GIVES PRECEDENCE TO INVESTMENT

TREATY DISPUTE RESOLUTION
Having ignored the exclusive forum selection clause in the

underlying contract in favor of BIT dispute resolution, the investment
arbitration tribunals in Eureko B.V. v. Poland, LG&E Energy Corp. v.
Argentine Republic, and SGS v. Paraguay on the other hand found
themselves in a position to decide the merits of the contractual claims
brought before them.60
In Eureko v. Poland, the ad hoc arbitration tribunal decided
that the allegations of contractual breach were admissible despite the
contract’s exclusive forum selection clause, reasoning that the
umbrella clause in the Dutch-Polish BIT had the effect of elevating
the contractual breach to a treaty breach. 61 Applying Polish law, the
tribunal found a breach of the contract, which automatically
constituted a breach of the treaty’s umbrella clause. 62
58
Id. ¶ 178.
59
Id. ¶ 250. “The present Tribunal agrees, and concludes that where a
contractual claim is asserted under an umbrella clause, the claimant in
question must comply with any dispute settlement provision included in that
contract.” Id. ¶ 252.
60
Eureko B.V. v. Republic of Pol., Partial Award, ¶¶ 190–91 (Aug. 19,
2005), 12 ICSID Rep. 335 (2007); LG&E Energy Corp. v. Argentine
Republic, ICSID Case No. ARB/02/1, Decision on Liability, ¶¶ 132–39 (Oct.
3, 2006), http://www.italaw.com/sites/default/files/case-
documents/ita0460.pdf; Société Générale Surveillance S.A. v. Republic of
Para., ICSID Case No. ARB/07/29, Decision on Jurisdiction, ¶ 185 (Feb. 12,
2010), http://www.italaw.com/sites/default/files/case-
documents/italaw1526.pdf.
61
Eureko B.V. v. Republic of Pol., Partial Award, ¶ 250. Article 3.5 of
the Dutch-Polish BIT provides: “Each Contracting Party shall observe any
obligations it may have entered into with regard to investments of investors
of the other Contracting Party.” Id. ¶ 77.
62
See id. ¶ 260. Interestingly, the decision is accompanied by a strong
dissent, which asserts that the Tribunal’s findings are wholly incompatible
with Polish law. See Eureko B.V. v. Republic of Poland, Dissenting Opinion,
¶ 11.
In SGS v. Paraguay, the forum selection clause asserted that

“[a]ny conflict, controversy or claim deriving from or in connection
with this Agreement, breach, termination or invalidity, shall be
submitted to the Courts of the City of Asunción under the Law of
Paraguay.”63 Although arising from facts similar to those in BIVAC v.
Paraguay, 64 SGS v. Paraguay had very different practical
implications. Instead of giving precedence to the forum selection
clause, the tribunal stated that directing SGS’s contractual claims to
the Paraguayan courts would place it “at risk of failing to carry out
its mandate under the Treaty and the ICSID Convention.” 65 The
tribunal also stressed that it would need “strong cause” not to
exercise jurisdiction.66 In reaching its conclusion, the tribunal relied
in part on the Vivendi Annulment decision, which asserted that a
“[t]ribunal, faced with such a claim and having validly held that it
had jurisdiction, [is] obliged to consider and to decide it.” 67
Although the Vivendi Annulment Committee was referring to
traditional treaty claims,68 the tribunal in SGS v. Paraguay had no
reservations in applying their reasoning, because it considered the
contractual breaches to amount to breaches of the treaty’s umbrella
clause.69 Thus, contractual claims brought under an umbrella clause
are, in the tribunal’s view, treaty claims.70 Unless it can be shown
63
SGS v. Para., Decision on Jurisdiction, ¶ 126.
64
Both cases involved foreign companies that had contracted with the
Paraguayan Ministry of Finance to perform certification and pre-shipment
inspection services for cargoes but were note paid after mutual termination of
their respective contracts. See Bureau Veritas, Inspection, Valuation,
Assessment & Control, BIVAC B.V. v. Republic of Para., ICSID Case No.
ARB/07/9, Objections to Jurisdiction, ¶ 160 (May 29, 2009),
65
Id. ¶ 172.
66
Id. ¶ 175.
67
Id. ¶ 171.
68
Compañia de Aguas del Aconquija S.A. & Vivendi Universal v.
Argentine Republic, Case No. ARB/97/3, Annulment, ¶ 11 (July 3, 2002), 8
ICSID Rep. 490 (2005); SGS v. Para., Decision on Jurisdiction, ¶ 142.
69
“Even if the alleged breach of the treaty obligation depends upon a
showing that a contract or other qualifying commitment has been breached,
the source of the obligation cited by the claimant, and hence the source of the
claim, remains the treaty itself.” SGS v. Para., Decision on Jurisdiction, ¶
142.
70
Id.
that the parties clearly intended LAWto exclude BIT jurisdiction, the
tribunal will decide the merits of the case.71
Finally, in LG&E Energy Corp. v. Argentine Republic, the
tribunal again made its decision based on the merits of the
contractual claim. The arbitrators began their analysis by stating that
umbrella clauses award “extra protection” to a state’s obligations
towards foreign investors, without addressing whether or not the
contractual forum selection clause should be applied. 72 It then went
straight to the merits of the investor’s claim, deciding that Argentina
had breached the obligations it had undertaken with respect to the
claimant by repealing the statutory scheme it had constructed to
attract foreign investors for its gas distribution sector. 73
The aforementioned cases show that when a host-state
enters into contractual obligations with a foreign investor, inserting
an exclusive forum selection clause in the contract does not
necessarily guarantee that the courts designated in such a clause will
adjudicate potential disputes arising from the contract. 74 The dispute
resolution mechanism agreed to in the BIT may very well supersede
the exclusive forum selection clause in the contract. 75 Because it is
generally in a state’s interest to have its own local courts deal with
these contractual disputes, the host-state should be aware of this risk.
B. SCOPE OF OBLIGATIONS AFFECTED
A second contentious point amongst supporters of a broad

interpretation concerns the scope of umbrella clauses. In other words,
which types of obligations can be brought under the umbrella clause?
There appears to be a consensus that contractual obligations relating
to investments would qualify.76 As early as 2006, the tribunal in
71
Id. ¶¶ 179–80.
72
LG&E Energy Corp. v. Argentine Republic, ICSID Case No.
ARB/02/1, Decision on Liability, ¶ 170 (Oct. 3, 2006),
73
Id. ¶¶ 171–174.
74
See SGS v. Para., Decision on Jurisdiction, ¶¶ 138–39.
75
For further arguments in support of this interpretation, see Wong,
supra note 7, at 136–37.
76
Bosh Int’l, Inc. v. Ukraine, ICSID Case No. ARB/08/11, Award, ¶¶
231, 248 (Oct. 25, 2012), http://www.italaw.com/sites/default/files/case-
documents/italaw1118.pdf; see also Bureau Veritas, Inspection, Valuation,
LG&E Energy Corp. v. Argentine Republic pointed out that multiple

tribunals—referring inter alia to the tribunal in SGS v. Philippines—
“have concluded that the breach of a contractual obligation in a
contract between the State and an investor gives rise to a claim under
the umbrella clause.”77 Also illustrative is the more recent ICSID
case of Bosh International, Inc. v. Ukraine, where the tribunal
followed the decision on jurisdiction in BIVAC B.V. v. Paraguay’s as
to include contractual obligations in the types covered by umbrella
clauses.78
Several authors would moreover go beyond purely
contractual arrangements to include other types of commitments,
such as unilateral promises or legislation implemented to induce
foreign investment. 79 Others believe there should be a clearer
delineation, as illustrated by one scholar’s criticism of the LG&E
Energy Corp. v. Argentine Republic decision to include regulatory
measures entered into by the host-state under the umbrella clause’s
definition of obligations: “[i]t would be a startling proposition in any
system of contract law that the regulatory system is a part of the
contract, unless[,] of course, they were mandatory provisions that
required their incorporation into contracts.”80
Investment arbitration tribunals have generally tried to strike
a balance. For example, in determining the proper scope of the
words “any obligation” in the Swiss-Philippines BIT umbrella clause,
the tribunal in SGS v. Philippines emphasized that the legal
obligation “must have been assumed vis-à-vis the specific investment
—not as a matter of the application of some legal
ARB/07/9, Objections to Jurisdiction, ¶ 142 (May 29, 2009),

77
LG&E Energy Corp. v. Argentine Republic, Decision on Liability, ¶
171.
78
Bosh v. Ukraine, Award, ¶ 252.
79
Megan Wells Sheffer, Bilateral Investment Treaties: A Friend or Foe
to Human Rights?, 39 DENV. J. INT’L L. & POL’Y 483, 510 (2011); Schill,
supra note 26, at 84–85, 89; Lise Johnson & Oleksandr Volkov, Investor-
State Contracts, Host-State “Commitments” and the Myth of Stability in
International Law, 24 AM. REV. INT’L ARB. 361, 377 (2013).
80
El Paso Energy Int’l Co. v. Republic of Arg., ICSID Case No.
ARB/03/15, Legal Opinion of M. Sornarajah, ¶ 96 (Mar. 5, 2007),
https://www.international-arbitration-attorney.com/wp-
content/uploads/arbitrationlawita0970.pdf.
LAW
obligation of a general character.” 81
The tribunal in LG&E Energy
Corp. v. Argentine Republic seemed to support this proposition when
it concluded that Argentina had implemented a statutory framework
that was targeted directly at attracting foreign investors to fund the
privatization of the country’s natural gas industry. 82 The tribunal
held that a violation of these guarantees amounted to a violation of
the umbrella clause, stipulating that “[e]ach party shall observe any
obligation it may have entered into with regard to investments.” 83
In Sempra Energy Int’l v. Argentine Republic, 84 a case
where the same statutory framework was at issue, the tribunal
similarly concluded that Argentina’s abrogation of its obligations
undertaken through regulatory measures constituted a breach of the
umbrella clause in the Argentina-U.S. BIT. 85 Notably, the tribunal
distinguished “conduct that only a sovereign State function or power
could effect” from “ordinary commercial breaches,” the latter of
which would not constitute treaty breaches. 86 Not every contractual
dispute would therefore be eligible for BIT dispute resolution; a
purely contractual dispute over non-payment, for example, would
arguably not be included in the umbrella clause’s scope.87
In a series of decisions concerning Argentina’s privatization
of natural gas distribution, the tribunal in Enron Corp. v. Argentine
Republic once more confirmed that both the contract between host-
state and investor, as well as the legal framework that Argentina put
into place to attract foreign investors, constituted “obligations” that
81
ICSID Rep. 518 (2005).
82
LG&E Energy Corp. v. Argentine Republic, Decision on Liability, ¶¶ 174–
75.
83
Id. ¶ 169.
84
Sempra Energy Int’l v. Argentine Republic, ICSID Case No.
ARB/02/16, Decision on the Argentine Republic’s Application for
Annulment of the Award, (June 29, 2010),
http://www.italaw.com/sites/default/files/case-documents/ita0776.pdf. The
Award in this case was later annulled for reasons not related to the umbrella
clause.
85
Sempra Energy Int’l v. Argentine Republic, ICSID Case No.
ARB/02/16, Award, ¶ 314 (Sep. 28, 2007),
86
Id. ¶ 310.
87
Id.
had been elevated through the umbrella clause in the Argentina-U.S.

BIT.88
Finally, the investor in SGS v. Paraguay alleged that in
addition to contractual breaches, breaches of the “oral and written
commitments” made by Paraguayan officials that outstanding
amounts would be paid constituted breaches of the umbrella clause. 89
The tribunal in its preliminary decision on jurisdiction agreed with
SGS that “Paraguay failed to observe commitments it allegedly made
to SGS, both under the contract and under its alleged subsequent oral
and written promises to make good on the claimed debt to SGS.”90
In its award on the merits two years later, the tribunal nonetheless
concluded that “it need not resolve these matters [of extra-contractual
statements]” since their “breach would not result in any additional
liability” on top of the contractual breach.91
IV. CONCLUSION
The expansive interpretation of umbrella clauses, which has

the sweeping effect of transforming breaches of obligations a state
has entered into with regard to specific investments to breaches of
international law, has won significant support over the last ten years.
Its adoption has nonetheless produced varied results, as has been
demonstrated in this article by listing the different ways investment
arbitration tribunals have dealt with exclusive forum selection
clauses contained in the underlying investment contracts, and by
comparing arbitrators’ diverging opinions on the scope of obligations
affected. By laying out the practical implications resulting from
broad interpretations of umbrella clauses, the author has tried to
present a workable framework for states and investors to consider
when entering into contractual or other agreements relating to foreign
investments, or when negotiating investment treaties. In this respect,
88
Enron Corp. v. Argentine Republic, ICSID Case ARB/01/3, Award, ¶
277 (May 22, 2007), http://www.italaw.com/sites/default/files/case-
documents/ita0293.pdf.
89
90
Id. ¶ 171.
91
No. ARB/07/29, Award, ¶ 158 (Feb. 10, 2012),
a foreign investor should be LawareAW that it might not have an
international avenue for bringing its claims when allowing a forum
selection clause into its contract with a state. Notwithstanding their
broad reading of umbrella clauses, several international investment
tribunals have referred such disputes to the respective contractually
selected courts.92 At the same time, states should take into account
that an exclusive forum selection clause does not necessarily shield it
from investment treaty dispute resolution.93 Sovereigns are moreover
advised to take note of the possibility that they may have an
obligation under international law to keep their promises made to
investors through unilateral statements94 or regulatory measures.95
By carefully considering the above parameters, both states and
investors will be in a better position to deal with projects of foreign
investment.
92
See generally Société Générale de Surveillance S.A. v. Republic of
the Phil., ICSID Case No. ARB/02/6, Objections to Jurisdiction, (Jan. 29,
2004), 8 ICSID Rep. 518 (2005); Bureau Veritas, Inspection, Valuation,
ARB/07/9, Objections to Jurisdiction, (May 29, 2009),
http://www.italaw.com/sites/default/files/case-documents/ita0103.pdf; Bosh
Int’l, Inc. v. Ukraine, ICSID Case No. ARB/08/11, Award, (Oct. 25, 2012),
93
See generally Eureko B.V. v. Republic of Pol., Partial Award, (Aug.
19, 2005), 12 ICSID Rep. 335 (2007); LG&E Energy Corp. v. Argentine
Republic, ICSID Case No. ARB/02/1, Decision on Liability, (Oct. 3, 2006),
http://www.italaw.com/sites/default/files/case-documents/ita0460.pdf;
Société Générale Surveillance S.A. v. Republic of Para., ICSID Case No.
ARB/07/29, Decision on Jurisdiction, (Feb. 12, 2010),
94
See generally SGS v. Para., Decision on Jurisdiction.
95
See generally Sempra Energy Int’l v. Argentine Republic, ICSID
Case No. ARB/02/16, Award, (Sep. 28, 2007),
http://www.italaw.com/sites/default/files/case-documents/ita0770.pdf; Enron
Corp. v. Argentine Republic, ICSID Case ARB/01/3, Award, (May 22, 2007),

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South Carolina Journal of International Law and Business

Practical Implications from an Expansive Interpretation of

Follow this and additional works at:

The right way to interpret so-called 'umbrella clauses' has

For over a decade, investment arbitration tribunals have

Found in many bilateral investment treaties (BITs), umbrella clauses

II. DEBATE ON THE INTERPRETATION OF UMBRELLA

As the ICSID tribunal in BIVAC B.V. v. Paraguay aptly

investment treaties’ umbrella clause also included “obligations

In SGS v. Pakistan, the claimant argued for an expansive

Shortly after the SGS v. Pakistan tribunal reached its

III. THE EXPANSIVE INTERPRETATION OF UMBRELLA

Although host-states (who have an interest in avoiding

A. EFFECT OF EXCLUSIVE FORUM SELECTION CLAUSES

In SGS v. Pakistan, the tribunal expressed concern that

internationalinvestmentagreements/39286571.pdf. The umbrella clause

contracts.”40 For this reason, a forum selection clause in a contract

1. TRIBUNAL GIVES PRECEDENCE TO THE

As it turns out, a number of proponents of an expansive

contracts” with the host-state by forfeiting dispute resolution as

2. TRIBUNAL GIVES PRECEDENCE TO INVESTMENT

Having ignored the exclusive forum selection clause in the

In SGS v. Paraguay, the forum selection clause asserted that

B. SCOPE OF OBLIGATIONS AFFECTED

A second contentious point amongst supporters of a broad

LG&E Energy Corp. v. Argentine Republic pointed out that multiple

ARB/07/9, Objections to Jurisdiction, ¶ 142 (May 29, 2009),

had been elevated through the umbrella clause in the Argentina-U.S.

The expansive interpretation of umbrella clauses, which has

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