Effectiveness of Umbrella Clauses in Bilateral Treaties - Essay Example

There is some confusion as to whether or not an umbrella clause applies to investment contracts concluded under the BIT containing the clause.  Put another way, the main question is whether or not the umbrella clause renders a breach of an investment contract a treaty claim.3 A review of previous arbitration decisions on the issue has produced mixed results. It would appear that with contradictory rulings on the matter, umbrella clauses can sometimes be effective for resolving disputes arising out of investment contracts concluded under the authority of BITs. Wong argues however that, contradictory rulings only serve to nullify umbrella contracts and thus render them ineffective as a means of resolving disputes arising out of an investment contract.

4 This paper evaluates umbrella clauses to determine whether or not a rule of law can be identified in the jurisprudence pointing to the when and how umbrella clauses can be used effectively to resolve disputes arising out of an investment contract. Case Law Consistency in arbitration decisions is an allusive concept because arbitration panels are formed specifically for a case. As a result, panels do not sit consistently and therefore they do not have the persistent experience and consistency that court-appointed judges may have and usually accumulate.

Moreover, international arbitration does not have a hierarchal structure in which appeals can be heard by a higher arbitration panel to establish or clarify a rule of law. In the meantime, arbitration decisions are usually heard in private, and where they are published and shared, the publication is delayed and highly selective. For example, the International Chamber of Commerce (ICC) only publishes 12% of its cases and even then, the case is only reported three years after the award is given (Guillaume, 2011).

5 Therefore in evaluating case law in international commercial arbitration, it is difficult to know with any degree of reasonable certainty, what the actual jurisprudence is on a particular legal matter. The available cases reveal only limited jurisprudence and any evaluation is therefore qualified by the fact, that a complete analysis of the legal rule is not possible. This analysis of the effectiveness of the umbrella clause for the resolution of disputes arising under an investment contract can only be determined based on the available published arbitration cases.

The first case of note is the 2003 case of SGS Societe Generale de Surveillance S.A. v the Islamic Republic of Pakistan. This case involved a dispute which arose under a contract between Pakistan and a Swiss company for the latter’s services as a shipment inspection agency. Pakistan terminated the contract later on and the Swiss company, relying on the BIT between Switzerland and Pakistan submitted the matter to arbitration and claimed that in addition to breaching the terms of the contract, Pakistan also violated its obligations under the BIT and especially the umbrella clause.

Pakistan argued however that the dispute arose under an investment contract and therefore the panel did not have jurisdiction over the matter.6 The arbitral panel ruled that the investment contract between Pakistan and the Swiss company predated the BIT and the applicability of the umbrella clause must be viewed in that light.