What is an umbrella clause

Question

What is an ‘umbrella clause’?

Answer

An umbrella clause is a provision in a treaty that protects investments, where State parties agree to observe their obligations in which they may have entered in respect to investments (Weiler, 2005). As such, an umbrella clause has a significant importance to investors, as their contractual rights are protected due to being under the “umbrella” of the investment treaty, elevating their investment contracts to a treaty level (Muchlinski et al, 2008). As a result, a breach of an investment contract may constitute a breach of an investment treaty. However, it must be noted that umbrella clauses can be worded in different ways, and as such their interpretation and application can vary. There are cases where such clauses are interpreted broadly and other where the interpretation has been narrow. A good example is the case of SGS v Pakistan (2003) where it was found that an umbrella clause could not possibly supersede jurisdictional contractual agreements and extend the investment tribunal’s jurisdiction to contractual breaches. However, in SGS v Philippines (2004) the outcome was drastically different and the tribunal found that it had jurisdiction, and as a result, the contractual obligations breaches were elevated to treaty level.

References

Weiler T. (2005) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law. Cameron May

Muchlinski P, Ortino F, Schreuer C. (2008). The Oxford Handbook of International Investment Law. Oxford: OUP

SGS v Pakistan, ICSID Case No. ARB/01/13 (2003)

SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6 (2004)