Relationship between Treaty and Contract Claims under an Umbrella Clause in an Investment Treaty - Essay Example

John et al (2000) define a treaty as an agreement under the international law; it is entered into by actors in international law, namely international organizations and/or sovereign states. Treaties can also be termed as: protocol, an agreement, covenant, exchange of letters, convention, etc. Regardless of all these terminologies that are used, these international agreements when scrutinized under the international law will fall equally under treaties and the rules used are all the same. It is also good to note that while in the rest of the world the term treaty may mean an agreement, in United States constitutional law, the term has a special meaning which is more restricted than its meaning in international law. A contract in law on the other hand is a binding legal agreement enforceable in a court of law. That means that a contract is an exchange of promises having a specific remedy for breach. Agreement is said to be reached when an offer capable of immediate acceptance is met with a "mirror image" acceptance (unqualified acceptance). Parties must have necessary capacities to contract while the contract must not be; indeterminate, trifling, illegal, or impossible. Contract laws are based principles that are expressed in the Latin phrase pacta sunt servanda –it must be kept. Breach of contract will be recognized by the law and remedies provided. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdictions for certain types of agreement, for example when buying a house or land (Stevens, 1995). Introduction It is good to note that there is an increasing number of investment treaty arbitrations involved not only with the treaties but also with investor-state contracts. To some extent of subject matter jurisdiction will not be uniform under the Bilateral Investment Treaties (BITs). One the other hand, the clauses of this kind has been lately added to help provide additional protection to willing and would be investors and is thus directed at covering the investment agreements that most host countries will conclude with any foreign investors. Although the “umbrella clause” has been known since the 1950s and its effects have been discussed in literature and doctrine, it was not until the recent two SGS Société Générale de Surveillance SA cases where it started to be tested (Schreuer, 2004). Common features of a general nature Shihata (1995) asserts that the main common factors between the umbrella clauses are uses of mandatory languages. For instance, Article 8(2) of the German Model BIT 1991(2) reads: “Each Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by nationals or companies of the other Contracting Party” (emphasis added). A different formulation is found in Article 10 of the Australia -Poland BIT 1991 which is phrased in less forceful terms: “A Contracting Party shall, subject to its law, do all in its power to ensure that a written undertaking given by a competent authority to a national of the other Contracting Party with regard to an investment is respected” (emphasis added). The second feature most common to majority of BITs as examined is; they relate to the obligations undertaken by any State and thus do not refer to the obligations found between the private individuals. Structure of the Bilateral Investment Treaty The placement of the umbrella clauses in the frameworks of existing bilateral investment treaties will be an incongruity within and in the treaty systems, the best case in mind to help in the verification of this fact is the Netherlands model that places the umbrella clauses in an article detailing substantive protection that is provided under umbrella clauses treaty. In essence, majority of the BITs concluded by the Switzerland will all follow this format but with a notable exception of 1998 Switzerland-Kuwait BIT that places umbrella clauses in article 3 on the protection of any investments (Reisman et al 2004). Swiss Model BIT format will also be found within the Greek and Finnish Model BITs and BITs that were concluded by the state of Mexico. The third variant will be to place umbrella clauses in separate provisions from substantive protections but it should be before the existing dispute resolution clauses. This structure is similar to the German Model BITs that places the umbrella clauses in Article 8, the effect of placement of the umbrella clauses within overall framework of BIT being uncertain. The Tribunal considered that had the Contracting Parties intended to create a substantive obligation through the umbrella clause it would logically have been placed alongside the other so-called “first order” obligations. By contrast, the SGS v Philippines Tribunal opined that while the placement of the clause may be “entitled to some weight,” it did not consider this factor as decisive. Scope and Effect While some umbrella clauses refer to obligations “entered into” by a State, others refer to obligations “assumed” by the State. The Finish Model BIT refers to obligations which the State may “have” with regard to a specific investment. These variations will then lead to raising the question of whether obligations referred to are contractual obligations between the investor and the State and/or whether it can extend to a unilateral obligation that would be undertaken by the State through, legislative acts, promises and/or administrative measures. It has been suggested that the words “obligations entered into” may be interpreted as confining the obligations in question to those undertaken vis-à-vis the other Contracting. Dolzer (2008) in his article, Principles of International Investment Law asserts that despite the umbrella clause being a major topic of discussion among many scholars for some considerable time now, it has never ever been a part of jurisprudence until very very recently. The first ever ICSID case that had ever addressed the umbrella clause was back in 1998: Fedax NV v. Republic of Venezuela that was based on the BIT between the Netherlands republic and the Venezuela. Back then in the case, the existing tribunal was very much unaware of the existence of an umbrella clause, and thus did not carry out in-depth examinations of the clause and/or its application. It simply applied the “plain meaning” of the provision, that commitments should be observed under the BIT, to the promissory note contractual document. Narrow interpretation The first time ever that an arbitrated tribunal would eve evaluate the scope of any umbrella clause was in the SGS Société Générale de Surveillance, S.A. v. Pakistan case in 2003 which was based on the Switzerland - Pakistan BIT. The Tribunal rejected SGS’s contention that this clause elevated breaches of a contract to breaches of the treaty: “The text itself of Article 11 does not purport to state that breaches of contract alle ged by an investor in relation to a contract it has concluded with a State (widely considered to be a matter of municipal rather than international law) are automatically ‘elevated’ to the level of breaches of international treaty law”. It is worth noting that after the publication of the decision, the Swiss authorities explained in a letter their intention when entering into the Switzerland -Pakistan BIT as follows: “…..the Swiss authorities are alarmed about the very narrow interpretation given to the meaning of Article 11 by the Tribunal, 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…..With regard to the meaning behind provisions such as Article 11 the following can be said:…they are intended to cover commitments that a host State has entered into with regard specific investments of an investor or investment of a specific investor, which played a significant role in the investor’s decision to invest or to substantially change an existing investment, that is;. Commitments that were of such great nature that investors could rely on them…It is furthermore the view of the Swiss authorities that a violation of a commitment of the kind described above should be subject to the dispute settlement procedures of the BIT” (Theodore, 2005). THE 2004 US MODEL BILATERAL INVESTMENT TREATY A claim to Arbitration; in event that disputing parties do consider that an investment dispute will not be settled through negotiation and consultation, then: (a) The claimants, on their own behalf, can submit for arbitration under this Section their claim or claims; That the respondent has breached an obligation under the Articles 3 all the way to 10, an investment authorization, or an investment agreement; and (ii) that in the case that the claimant has incurred loss and/or damage by reason of that breach or maybe arising out of that breach; and (ii) if the enterprise has incurred any loss and/or damage arising out of that breach, provided that the claimant can submit pursuant in their claims for breach of an investment agreement only if subject matter in question of the claim and the claimed damages will directly relate to investment covered and that was acquired and/or established, or sought to be acquired or established, in reliance to the relevant investment agreements. No claim may be submitted to arbitration under this Section unless: (a) The claimant if and when they consent in writing to arbitration in accordance to the procedures set out in the Treaty; and (b) The notice of arbitration is accompanied, (i) For claims submitted to arbitration under Article 24(1)(a), by the claimant’s written waiver, and (ii) For the claims that will be submitted to arbitration under the Article, by the enterprise’s and claimant’s and the written waivers off any right to initiate or continue before any administrative tribunals/courts under the law of either Party, or any other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 24 (Gatdul, 2003). Conclusion The umbrella clause first made its appearance in the 1950's and has since then been a regular but not omnipresent feature of the bilateral investment treaties. It was until recently that it retained the attention of scholars and would be scholars who thought of it as a clause that helped elevate the contractual obligations to their treaty obligations. Not yet had any one tribunal considered the issue, not until the ones that arbitrated the Pakistan and SGS v. v, the existing Philippines cases. It has since then been able to attract very considerable discussions both by the scholars and by the arbitral tribunals. Interpretations by Swiss authorities regarding the clause, in the aftermaths of the SGS v. Pakistan Decision on the Jurisdiction, is the only existing interpretations by a given State in expressing its intentions had been at the time of the addition of that given clause into its existing treaties – in this circumstance, it was to help subject contractual commitments to the treaty disciplines (Gustavo, 1971). Because of the existing diversity of the umbrella clause, proper interpretation of the clause depends on the specific wording of the particular treaty, its ordinary meaning, context, the object and purpose of the treaty as well on negotiating history or other indications of the parties’ intent. The review of the language of this clause included in a representative sample of treaties indicate that, although there are some disparities, the ordinary meaning of “shall observe” “any commitments/obligations” seem to point towards an inclusive, wide interpretation which would cover all obligations assumed/entered into by the contracting States, including contracts, unless otherwise stated. A different wording such as “shall guarantee the observance” or “shall maintain a legal framework apt to guarantee the continuity of legal treatment” might lead to a narrower interpretation (Clift, 1999). It is prudent to note that, on the other hand, there exist clauses which exclude jurisdiction of treaty-based arbitral tribunals in favor of administrative tribunals and/or a court, through the preservations of the distinctive jurisdictional orders for existing contracts. Arbitral tribunals, in their majority, when faced with a “proper” umbrella clause, that is; one drafted in broad and inclusive terms, seem to be adopting a fairly consistent interpretation which covers all state obligations, including contractual ones. Prudence, at the same time requires recognition that no conclusions can or will be drawn for the interpretations of the clause since jurisprudence will constantly be evolving. To add onto that, further interpretations by the governments that are parties to the investment agreements including umbrella clauses and for their intention regarding the same clause, as well as insertion of a clear language in the new treaties formed, it would thus be a welcome of much needed development (Saúl, 2006). Contractual Claims and the Umbrella Clause Having been able to trace the umbrella clause to its roots in the aftermath of the 1952 Anglo Iranian Oil Company case, one should thus start with the standard proviso – deriving from the first general principle. The fact is that some umbrella clauses are equal than others but depending on the interpretative weight put upon them or everything depends on their actual language. Having no time to discuss the 20+ cases mentioning umbrella clauses it would thus be sufficient proof to identify four existing schools of thought/four camps –some dwellers in particular camps may have been thought to have nomadic attitudes and thus their shifts from camp to camp depending on feelings and where they take them. The First camp is able to adopt an extremely narrow interpretation of umbrella parties that any would be breach of contract is a breach of the BIT. Second camps will then go ahead and try to seek to limit the umbrella clauses to breaking of contracts committed by the host State in the exercise of sovereign authority (Thomas, 2005). Third view according Delano (1933), goes to the other extreme: effects of the umbrella clauses is in most cases to help internationalize investment contracts, thus thereby transforming the contractual claims into treaty claims that will directly be subject to treaty rules (Venezuela v Fedax; Noble Ventures v Romania; Eureko v Republic of Poland). Finally, there is the view that that an umbrella clause will operate and form the basis for any substantive treaty claims and that on the other hand it does not convert contractual claims into treaty claims. With reference to the general principals that have been articulated above, there exist very major hardships with the available fist three propositions and thus in accordance with existing general principles, the first may be solely responsible for the depriving of the umbrella clause off any content which is contrary to the principle of effet utile and thus also to apparent intent of the available drafters. The second umbrella clause will impose characterization test at the existing level of breach for which there is no written warrant and which thus is capable of producing arbitrary results. One may, for example, take the formulation of the Tribunal in the CMS case: “Purely commercial aspects of a contract might not be protected by the umbrella clause in some situations, but the protection is likely to be available when there is significant interference by governments or public agencies with the rights of the investor”. There are two responses to this; the first being that it is not able to provide any reliable test to help determine whether a given tribunal has jurisdiction. It instead calls for an appreciation of the character of and/or motive for the breach which in most cases would thus require a hearing on the merits. There are no doubt genuine concerns that will drive this restrictive view, which would thus be a significant extent to reactions against equal and opposite defects of the existing third view. But as seen, the question of scope of a commitment made to arbitrate when made by the State is only a matter of interpretations and thus has nothing to do with attributions (Brie,1999). This then lead to the Pakistan v SGS Tribunal not fully and wholly convinced…“that Article 11 of the BIT has had the effect of entitling a Contracting Party’s investor, like SGS, in the face of a valid forum selection contract clause, to ‘elevate’ its claims grounded solely in a contract with another Contracting Party… to claims grounded on the BIT, and accordingly to bring such contract claims to this tribunal for resolution and decision.” There is then an existing concern about flooding the ICSID with minor contractual claims the classic floodgate argument to which the standard floodgates responses may/could be made. The BIT arbitration is very costly even to a successful claimant; the costs are usually not awarded. Characterization of any claim as contractual is basically a matter of technique and bears no relation to the frequency with which investment disputes arise and may be submitted to arbitration. The fourth and most significant of them all is the concern of whether the umbrella clause will lead to a freezing of the host States sovereignty, a sort of closet stabilization. For example the CMS Tribunal felt able to say that: these laws and regulations became obligations within the meaning of Article II(2)(c), by virtue of targeting foreign investors and applying specifically to their investments, that gave rise to liability under the umbrella clause”. This in short when scrutinized under the integrationist view as would be applied to standard umbrella clauses the claims would thus still be contractual and they would thus be still governed by their own pertinent law. The prevailing distinction between a treaty and a contract is thus maintained with the sole purpose of the umbrella clause being to allow enforcement without any internationalization and without any would be transformation of the character and content of the underlying obligations. The relevant paragraph of the decision reads as follows: In speaking of “any obligations it may have entered into with regard to investments”, it seems clear that Article II (2) (c) is concerned with consensual obligations arising independently of the BIT itself. The paramount view would thus be the integrationist one: that the umbrella clause is an added mechanism for enforcement of claims, but the fundamentals of the transaction will remain almost the same. Summary To summaries all this, t is now evident that there is a gap between what a treaty and a contract is, they are quite similar in nature but since both inhabit different worlds, the gulf between the two is not that enormous as we tend to imagine. Core point that comes out clearly is that any covered investment is a transaction involving the host State and any qualified investor. What the BIT will do is to help provide an added layer of protection for the one transaction: the investment is thus dully and appropriately protected by the BIT, but on the other hand the BIT should not be used as a vehicle to help rewrite the existing investment arrangements. At the level of the jurisdiction there will be no reason to interpret a BIT as not fully covering contractual claims or counterclaims concerning the existing investment. At the level of advantages it must thus be borne in mind that the investment contract is itself an allocation of risks and opportunities, and that that allocation is very relevant in determining whether there has been equitable and fair treatment under the BIT (Dodd, 1951). References Shihata, “Applicable Law in International Arbitration: Specific Aspects in Case of the Involvement of State Parties”, in I.F.I. Shihata and J.D. Wolfensohn (eds.), The World Bank in the Changing World: selected Essays and Lectures, Vol. II, Brill Publishers, Leiden, 1995. R. Dolzer and M. Stevens “Bilateral Investment Treaties”, Kluwer Law, 1995, pp. 81-82. E. Gaillard, “L’arbitrage sur le fondement des traités de protection des investissements”, Revue de l’Arbitrage p.868, note 43. C. Schreuer, “Travelling the BIT Route: of Waiting Periods, Umbrella clauses and Forks in The Road”, J. World Inv (2004) pp.231-256. Bilateral Investment Treaties in the mid-1990s” United Nations, 1998, p. 56. Article 11: Australia-Chile BIT 1996; Article 11 Australia-China BIT 1988; Australia-Papua. Article 9 Mexico-Austria BIT 1998; Article 9 Mexico-Belgium and Luxembourg BIT 1998 Article 8(2) Mexico-Germany BIT 1998; Article 19 Mexico-Greece BIT 2000; Article 10 Mexico-France BIT 1998 . Article 3(4) Mexico-Netherlands BIT 1998 “Each Contracting Party shall observe any other obligation it may have entered into with regard to investments in its territory by nationals of the other Contracting Party…” US-Senegal BIT, US-Panama, US-Zaire BITs. See R.S. Gudgeon, “United States Bilateral Investment Treaties: Comments on their Origin, Purposes, and General Treatment Standards” in 11 Int’l Tax and Bus. L. 105 at 111 (1986). Z Douglas, “The Hybrid Foundations of Investment Treaty Arbitration” (2003) 74 BYIL 151; C McLachlan et al, International Investment Arbitration: Substantive Principles, (OUP, 2007), 90 (paras 4.33-4.34); 127 (paras 4.149-4.151). D Caron & J Crook (eds), The Iran-United States Claims Tribunal and the Process of InternationalClaims Resolution: A Study by the Panel on State Responsibility of the American Society of International Law (Transnational Publishers Inc., New York, 2000), 11-12. Dolzer and M. 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