Umbrella Clauses in Treaty-Based Investor-State Arbitration: What is the Applicable Law on Obligations with Regard to Investments?

Abstract

At the beginning of this century, crisis forced American, Asian, European governments to take measures to stabilise the economy. Ecuador and Argentina nationalised some previous privatised sectors and thereby triggered several lawsuits. In some claims, investors of the United States of America (US) claimed a violation of the Argentina-US Bilateral Investment Treaty (BIT) and Ecuador-US BIT; inter alia, damage or compensation based on a breach of contract under the Umbrella Clause. Not only tribunals constituted under these BITS came to no conclusion, but neither did other treaty-based investor-state tribunal interpreting a breach of obligation under the Umbrella Clause. The classical approach to govern this clause by international law was enriched by two significant decisions. In SGS v Pakistan, in which the arbitral tribunal limited the wording by teleological interpretation to exclude purely commercial transactions, and SGS v Philippines, in which the tribunal gave effect to an arbitration clause in the contract. Both tribunals dealt with a similar Umbrella Clause in the BIT, both decided in different ways. The paper starts with a historical review of the cases involving investors claiming compensation due to an obligation in relation to an investment in treaty-based investor-state arbitration. Secondly, it refers to the applicable law in cases involving an umbrella clause and a breach of obligation in relation to an investment, and lastly, the qualification of the obligation and standard of interpretation.