University of Amsterdam, 29 July 2016
Umbrella Clause: What If There is a Lack of (Direct) Privity
of Contract?
Master’s Thesis in International and European Law Trade and Investment Law Track
Qian Gu Student Number: 11117729 Supervisor: Hege Elisabeth Kjos
ABSTRACT
The purpose of the present paper is to examine whether the foreign investor can still rely on the protection of the umbrella clause against a violation of the relevant investment-related contract in circumstances where there is no (direct) privity of contract either on the foreign investor’s side or on the host State’s side. In practice, an investment-related contract with the host State may not always be concluded by the foreign investor per se, but may often be concluded by its subsidiary or the local company in which he holds shares. Likewise, such a contract is not always concluded with the foreign investor by the host State per se, but is often concluded by its instrumentalities or a state-owned enterprise or an authority established by the State (state-owned entities or SOEs). In both scenarios, there exists divergent jurisprudence. However, the bones of contention differ for each side. On the investor’s side, the focus is on whether privity of contract is required to trigger the umbrella clause; while on the State’s side, tribunals concentrate on finding whether privity of contract exists.
The methodology of the research is to firstly present the established basic legal natures of the clause and to summarize various formulations of the clause in practice. Then, based on the aforementioned, together with a review of the relevant jurisprudence, to conduct a theoretical analysis on the privity issues on respective sides to clarify the respective bones of contention.
It is submitted that, in the context of the umbrella clause, coherent and consistent legal understandings can be reached in accordance with its established basic legal natures. On the investor’s side, privity is not absolutely required, due to various formulations of the clause in practice. Thus, the privity requirement shall be determined by specific wordings adopted in the clause, case by case, based on the treaty interpretation. On the State’s side, it is generally accepted that privity is required, as is evidenced by relevant jurisprudence and more consistent wordings directed to the State adopted in the clause. Thereby, the bone of contention is whether the State can be held as a party to the contract while there is a lack of direct privity. This paper finds that two points need to be determined to hold the State responsible under the umbrella clause: one is who is the real party to the contract, which shall be decided by the terms of the contract and its governing law; the other is the attribution of the conduct of breach of the contract, which shall be decided by international law.
TABLE OF CONTENTS
List of abbreviations...1
1.Introduction...2
2. Overview of the umbrella clause... 4
2.1. Definition, Designations and Status... 4
2.2. Formulation: Variation in Specific Wordings... 5
2.2.1. “Shall observe”...6
2.2.2. “Any obligation”...7
2.2.3. “Entered into”... 8
2.2.4. “With regard to investments”...9
2.3. Objectives and Function... 9
2.4. Effect...11
3. Lack of privity on the foreign investor’s side...12
3.1. Divergent Jurisprudence... 12
3.1.1. Privity is required...13
3.1.2. Privity is not required...14
3.2. Some Reflections...16
3.2.1. Under the formulation identical or similar to the expansive version: privity not required is more convincing... 16
3.2.2. What about other formulations of the umbrella clause?... 20
4. Lack of direct privity on the state’s side...23
4.1. Preliminary Remark...23
4.2. Divergent Jurisprudence... 24
4.3. A Proposed Solution...27
4.3.1. An issue for the governing law of the contract: who is the actual party to the relevant contract?...27
4.3.2. A matter of international law: who breaches the treaty?... 30
5. Conclusion... 33
LIST OF ABBREVIATIONS
IIA International Investment Agreements
BIT Bilateral Investment Treaties
TPP Trans-Pacific Partnership
CETA Comprehensive Economic and Trade Agreement
(Agreement between Canada and the European Union)
NAFTA North American Free Trade Agreement
VCLT Vienna Convention on the Law of Treaties
ILC Articles Responsibility of States for Internationally Wrongful Act
SOE state-owned entity
UNCITRAL United Nations Commission on International Trade Law
MFN most-favor-nation
ICSID International Centre for Settlement of Investment Disputes
1. INTRODUCTION
It is not an exaggeration to say that the umbrella clause is one of the most controversial standards of protection guaranteed by the host States to foreign investors in international investment agreements (IIAs), and that it has been a struggle for investor-state arbitration tribunals to interpret the clause since it first sparked a debate in the two SGS cases.1 The recently negotiated or concluded IIAs and the newly released model bilateral investment treaties (BITs) of some countries, seem to reflect a trend that the umbrella clause is increasingly excluded by States. For example, the newly concluded TPP2 and the newly negotiated CETA,3 both leave the umbrella clause out of their respective investment chapters, not to mention older IIAs like NAFTA4 and ASEAN–Australia–New Zealand Free Trade Agreement,5 both of which exclude the umbrella clause. In terms of the newly released Model BITs, countries like Colombia, France, and Canada, all no longer include the umbrella clause.6Considering these recent practices, we might assume that the umbrella clause is on the path to dying out in the IIAs, but we may also wonder what caused the States’ reluctance to include it.
The reluctance of the State to include the umbrella clause can be partly attributed to a view of its not being necessary, that is, the breach of the contract can be resolved by other standards of protection in the IIA (in particular the protection from indirect expropriation and fair and equitable treatment) in the absence of the umbrella clause. Besides, to a large extent, it is due to the concern about its uncertainty and unpredictability caused by the inconsistent interpretation by arbitration tribunals. However, though ostensibly inconsistent under jurisprudence, a developing consensus has emerged in many aspects such as the status, scope, function and effect of the
1SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13,
Decision of the Tribunal on Objections to Jurisdiction (6 August 2003); SGS Société Générale de Surveillance S.A.
v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction
(29 January 2004).
2Trans-Pacific Partnership <https://ustr.gov/sites/default/files/TPP-Final-Text-Investment.pdf > accessed 29 July
2016.
3Comprehensive Economic and Trade Agreement between Canada and the EU (and its member states) (‘CETA’)
<http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154329.pdf> accessed 29 July 2016.
4North American Free Trade Agreement, Chapter 11, <http://www.sice.oas.org/trade/nafta/chap-111.asp >
accessed 29 July 2016.
5ASEAN–Australia–New Zealand Free Trade Area, Chapter 11, <http://www.asean.org/storage/images/archive/
22260.pdf > accessed 29 July 2016.
6Katia Yannaca-Small, ‘Interpretation of the Umbrella Clause in Investment Agreements’ (2006) OECD Working
Papers on International Investment 2006/03, 101, 115 <http://dx.doi.org/10.1787/415453814578> accessed 29 July, 2016.
clause. In other words, the portrait of the umbrella clause has recently become a lot clearer through sculpture by arbitral jurisprudence. Still, the issue of privity of contract has recently sparked debate regarding the umbrella clause.
“An umbrella clause is a provision in an investment protection treaty that guarantees the observance of obligations assumed by the host state vis-à-vis the investor.”7Further, the contractual obligation is a form of obligation that underlies the umbrella clause.8Normally, such an investment-related contract shall be directly concluded between the foreign investor and the State. However, in practice, both sides cannot perfectly meet such a standard match. On the foreign investor’s side, investments are often proceeded by the establishment of a subsidiary or by acquiring shares in a local company in the host State, thus those investment-related contracts are not concluded by the investor per se but his subsidiary or the local company in which he holds shares. On the host State’s side, commitments are not always given by the central governments; rather, they may be given by a sub-state instrumentality or a state-owned enterprise or an authority established by the State, which may have domestic legal personality distinct from the State. In this latter scenario, the signatory to the investment-related contract with the investor is not the State per se either.
It is when the investors under the two aforementioned circumstances initiate an arbitration claim under the umbrella clause that the issues of privity of contract arise. Privity of contract is a common law principle which holds that “a contract cannot confer rights nor impose obligations which arising under it on any other person except the parties to it”.9 Apparently, under the two aforementioned scenarios, either the investor or the State is not a (direct) signatory to the investment-related contract. Thus, in these situations, can the investor still rely on the umbrella clause to initiate a claim against the violation of contractual obligations? On this question, jurisprudence reveals different bones of contention as concerns the investor’s side, on the one hand, and on the State’s side on the other. On the investor’s side, the focus lies in whether privity of contract is required; while on the State’s side, general consensus has been reached on the necessity of privity of contract, yet there are diverging methods to determine the real party to the contract. This paper aims to unravel the puzzles on both sides and make clear that in the context of the umbrella clause, coherent and 7Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, OUP 2012) 166. 8F. A. Mann, 'British Treaties For The Promotion And Protection Of Investments' (1982) 52 British Yearbook of
International Law 246.
consistent legal understandings can be reached in accordance with its established basic legal natures.
The legal framework on which the discussion in this paper is based is international investment law and relevant rules and principles of general international law. Specifically, relevant IIAs and arbitral jurisprudence will be examined and compared, and relevant rules and principles of general international law codified in Vienna Convention on the Law of Treaties10(VCLT) and Responsibility of States for Internationally Wrongful Act11 (ILC Articles) will be introduced as grounds for analysis.
As for the structure of this paper, in Section 2, a brief overview of the umbrella clause will be given concerning its definition, designations, status, variant formulations, objective, function and effect. In the following Sections, analysis of the privity of contract issues on the foreign investor’s side (Section 3) and on the State’s side (Section 4) will be conducted respectively. In Section 3, the divergent jurisdiction on whether privity of contract is needed on the investor’s side will firstly be presented, and some reflections will be given afterwards. In Section 4, the privity of contract issue will be switched to a lack of direct privity on the State’s side, and a preliminary remark will firstly be given to explain why privity on the State’s side is needed based on the wordings directed to the State of the umbrella clause. Divergent jurisprudence on the determination of whether the State is the party to the contract will then be discussed, and a solution will be proposed at last. Finally, Section 5 will set out the general conclusions of the paper.
2. OVERVIEW OF THE UMBRELLA CLAUSE 2.1. Definition, Designations and Status
The umbrella clause is the most common designation of such a clause that appears in a large number of IIAs, as obliges a host State to observe obligations incumbent on it vis-à-vis foreign investors.12 Apart from being designated as the
umbrella clause, it is sometimes also labelled as a “mirror effect clause”, “elevator
clause”, “parallel effect clause”, “sanctity of contract clause”, or “pacta sunt servanda
10Vienna Convention on the Law of Treaties (VCLT) (opened for signature 23 May 1969, entered into force 27
January 1980), 1155 U.N.T.S. 331.
11Articles on Responsibility of States for Internationally Wrongful Acts, U.N. Doc. A/56/83 (Aug. 3, 2001). 12Dolzer and Schreuer (n7) 166.
clause”.13 These aforementioned designations, in fact, all reflect some specific aspect of the clause. For example, “elevator clause” suggests its elevated nature that bridges national regime and international regime; “pacta sunt servanda clause” refers to its fundamental basis pacta sunt servanda which is a general and basic principle of international law.14 However, this paper follows the more extensive designation “umbrella clause”, which visually suggests that such a clause brings contractual and other commitments under the treaty’s protective umbrella.15
It is undoubted that the umbrella clause is one of the standards of protection in the IIAs in juxtaposition with most-favoured-nation (MFN) treatment, national treatment, fair and equitable treatment, etc. However, it was once called into question on its status for its different placement in the IIAs. As in SGS v. Pakistan, the tribunal turned down Article 11 (umbrella clause) as a substantive obligation within the Swiss-Pakistan BIT because it is placed separately from those substantive “first order obligations” set out in Articles 3 to 7.16 Such a conclusion, nevertheless, is not followed in subsequent cases. For example, in SGS v. Philippines, the tribunal opined that though the placement of the clause is “entitled to some weight”, it “does not regard the location of the provision is decisive”.17 Besides, as the tribunal in Noble
Ventures v. Romania put it:
“[c]onsidering that Art. II (2)(c) BIT uses the term ‘shall’ and that it forms part of the Article which provides for the major substantial obligations undertaken by the parties, there can be no doubt that the Article was intended to create obligations, and obviously obligations beyond those specified in other provisions of the BIT itself.”18
2.2. Formulation: Variation in Specific Wordings
As previously mentioned, apart from the umbrella clause, there are other synonyms like “mirror effect clause”, “elevator clause” to designate a clause of this kind. However, there is not a single designation that can comprehensively cover and define this clause, because of variations in specific wordings in treaty practices. As
13Yannaca-Small (n 6) 3.
14Anthony Aust, ‘Pacta Sunt Servanda’, MPEPIL (2008) 1449 <
http://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1449#law-9780199231690-e1449> accessed 29 July 2016.
15Yannaca-Small (n 6) 3..
16SGS v. Pakistan (n 1), para169-170. 17SGS v. Philippines (n 1).
Professor Crawford put it, “[t]here is no such thing as the umbrella clause; rather, there are umbrella clauses.” And he continued to state that “[n]o doubt where these are in identical or nearly identical terms they should be given the same or similar meaning; but where different language is used compared with existing standard formulas, it may be presumed that some difference in meaning was intended.”19So it is of great importance to review the language of this clause within specific treaties in order to reach a proper interpretation,20to address the topic of this paper.
Among the great amount of umbrella clauses existing in the IIAs that are currently in force, a more expansive version such as Article II(2)(c) Argentina - US BIT (1991) is phrased as “[e]ach Party shall observe any obligation it may have entered into with regard to investments”.21Under this expansive version, four defining elements can be abstracted: “shall observe”, “any obligation”, “entered into” and “with regard to investments”. As is observed by the author, the formulation of the umbrella clause varies based on the revision of specific wordings under this expansive version. Therefore, a review of the language of the umbrella clause will be given on the basis of the original model of the above-mentioned four defining elements.
2.2.1. “Shall observe”
“Shall observe” is a frequently seen combination among umbrella clauses, and it was once explained in the case Eureko v. Poland: “The plain meaning—the ‘ordinary meaning’ […] is not obscure. The phrase ‘shall observe’ is imperative and
categorical […]”.22 Such an explanation seems to focus on defining the mandatory term “shall”, and it is confirmed that the use of mandatory language is a common feature or factor among umbrella clauses.23 What varies might be the terms after “shall”. Usually, they are synonyms of “observe” like “respect”24, “fulfill”25, which will rarely raise divergences in interpretation. However, in the Pakistan - Switzerland BIT (1995), it is phrased as “shall constantly guarantee the observance”;26 in the Australia - Poland BIT (1991), it is framed as “shall, subject to its law, do all in its
19James Crawford, 'Treaty and Contract in Investment Arbitration' (2008) 24 Arbitration International 351, 355. 20Yannaca-Small (n 6) 22.
21Patricio Grané and Brian Bombassaro, 'Umbrella Clause Decisions: The Class Of 2012 And A Remapping Of
The Jurisprudence' <http://kluwerarbitrationblog.com/2013/01/17/umbrella-clause-decisions-the-class-of-2012-and-a-remapping-of-the-jurisprudence/> accessed 29 July 2016.
22Eureko B.V. v. Republic of Poland, UNCITRAL, Partial Award (19 August 2005) para 246 [emphasis added]. 23Yannaca-Small (n 6) 9.
24Argentina – BLEU BIT (1990) Article 10(2). 25German Model BIT (2008) Article 7(2). 26Pakistan - Switzerland BIT (1995) Article 11.
power to ensure […] is respected”;27 moreover, an IIA like the Czech Republic -Singapore BIT (1995) even extends the host State’s obligations not to breach undertakings incumbent upon it to obligations not to interfere undertakings incumbent upon it, which says: “Each Contracting Party shall not interfere with any commitments[…]”.28 The cases mentioned above may leave wider room for interpretation,29thus giving greater possibility to hold the host State responsible under the umbrella clause. To be noteworthy, words like “shall create and maintain in its territory a legal framework apt to guarantee […]”30 in the Italy - Jordan BIT (1996) was not upheld as an umbrella clause by the tribunal in Salini v. Jordan, because it neither “committed itself to ‘observe’ any ‘obligation’ it had previously assumed with regard to specific investments of the investor of the other party”, nor “even guaranteed the observance of commitments it had entered into with respect to investments of the investors of the other Contracting Party”.31
2.2.2. “Any obligation”
“Obligation” in the sense of the umbrella clause means legal obligation, which is clarified by the Annulment Committee in the CMS v. Argentina.32 On this matter, there exists divergence within jurisprudence. Some tribunals have interpreted it with a broader scope, for example the tribunal in Eureko v. Poland, stated that “‘[a]ny’ obligations is capacious; it means not only obligations of a certain type, but ‘any’ -that is to say, all obligations entered into with regard to investments of investors of the other Contracting Party”.33 However, other tribunals have taken a narrower view, which rejected the scope extending beyond contractual obligations, such as the Annulment Committee in CMS v. Argentina34 and the tribunal in Noble Ventures v.
Roman35. Nonetheless, such divergence, which concerns whether non-contractual obligations (e.g. unilateral obligations created through promises, legislative acts or
27Australia - Poland BIT (1991) Article 10 [emphasis added].
28Czech Republic - Singapore BIT (1995) Article 15 [emphasis added].. 29Yannaca-Small (n 6) 11.
30Italy - Jordan BIT (1996) Article 2(4).
31Salini Costruttori S.p.A. and Italstrade S.p.A. v. The Hashemite Kingdom of Jordan, ICSID Case No.
ARB/02/13, Decision on Jurisdiction (9 November 2004)..
32CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Decision of the ad
hoc Committee on the Application for Annulment of the Argentine Republic (25 September 2007), para 89.
33Eureko v. Poland (n 22), para 246. 34CMS v. Argentina (n 32), para 89-99. 35Noble Ventures v. Romania (n 18), para 51.
administrative measures36) can fall into the scope of the umbrella clause, is not relevant to the topic addressed here. What is clear is the general consensus on contractual obligations that underlie the umbrella clause37, which is a premise to further addressing the issue of privity.
On the basis of “any obligation”, wordings do not significantly change in different IIAs. Commonly, for example, “other” is put in between “any obligation”38; or “obligation” is replaced by synonyms such as “undertaking”39, “commitment”40; or qualifications are introduced to “obligations” by adding “written”41, “contractual”42 before. However, such changes do not alter the scope covering contractual
obligations.
2.2.3. “Entered into”
Following “any obligation”, there comes the phrase “entered into” or another commonly used term, “assumed”43. There is no difference between “entered into” and “assumed” used in the umbrella clause according to the tribunal in EDF v. Romania, which took them as synonyms in its explanation : “[…] The ‘obligations entered into,’ to which Article 2(2) of the BIT refers, are obligations assumed by the Romanian State.”44 In fact, what matters here is the subject of these two verbs—it, which refers to the “Contracting Party”, namely the host State. In this regard, some tribunals “can avail [themselves] of a textual argument stating when an umbrella clause refers to the promise by a State to abide by commitments it has entered into, ‘it’ refers to the State, not legal entities distinct from the State.”45
Changeably, terms like “it entered into” or “it assumed” may be specified as “given by a competent authority” in some IIAs. For example the Australia - Poland BIT (1991) states, “A Contracting Party shall [...] to ensure that a written undertaking
given by a competent authority to a national of the other Contracting Party with regard
36Yannaca-Small (n 6) 10.
37Hege Elisabeth Kjos, Applicable Law In Investor-State Arbitration (OUP2013) 43. 38Germany - Pakistan BIT (1959) Article 7.
39Australia - Poland BIT Art. 10.
40China - Netherlands BIT (2001) Article 3. 41Australia-China BIT (1988) Article 11. 42Austria-Chile BIT (1997) Article 2.
43Mexico - Switzerland BIT (1995) Article. 10.
44EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award (8 October 2009), para 317. 45Jean-Christophe Honlet and Guillaume Borg, 'The Decision Of The ICSID Ad Hoc Committee In CMS V.
Argentina Regarding The Conditions Of Application Of An Umbrella Clause: SGS V. Philippines Revisited' (2008) 7 The Law & Practice of International Courts and Tribunals 1 24.
to an investment is respected”.46 This provision seems to leave less room to define “obligor” in individual cases.
2.2.4. “With regard to investments”
The phrase “with regard to investments” suggest “the object of the obligations”.47In Duke v. Ecuador and Burlington v. Ecuador, this phrase is interpreted as “[denoting] a link between the obligation and the investment”.48 Practically, variations in the wordings of such phrase between IIAs lie in the degree of specificity. Some specify the type of investments: “[…] with regard to approved investment […]”49; some specify the form of investments: “[…] with regard to investments in its territory by agreement […]”;50 some specify the ownership of investments: “[…] with regard to investments in its territory by investors of the other Contracting State”51 or “with regard to investments of nationals or companies of the other Contracting Party”52; some specially change the word order of expression: “[…] entered into with the investors of the other Contracting Party with regard to their investments”53, or even “[…] entered into with an investor or an investment of an investor of any other Contracting Party”54. Such changes mentioned in wordings can exert disparities in the outcome of interpretation.
2.3. Objectives and Function
Before turning to the objective of the umbrella clause, we will first look to the general objective of IIAs as a whole, which envisages the umbrella clause. Basically, the objective of concluding IIAs between States is “to protect and to promote foreign investment flows between the contracting State parties”,55which can find proof in the
46Australia - Poland BIT, Article 10 [emphasis added]. 47Yannaca-Small (n 6) 3.
48Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19,
Award (18 August 2008), para 324; Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability (14 December 2012), para 216.
49China - Denmark BIT (1985) Art.3 [emphasis added]. 50Bangladesh - Germany BIT (1981) Art.7(2) [emphasis added]. 51German Model BIT (2008) Art.7(2) [emphasis added]. 52UK Model BIT (2008) Art. 2(2) [emphasis added]. 53China - Netherlands BIT (2001) Article 3.
54Energy Charter Treaty (signed 17 December 1994, entered into force 16 April 1998) (ECT) 2080 UNTS 95
Article 10(1) .
preambles of abundant IIAs in force.56 In this context, it is not difficult to read that incorporating the umbrella clause into IIAs reinforces the general objectives of investment treaties,57 in other words, the umbrella clause shall also serve to protect
and to promote foreign investment. As Lee puts it: “Although specific terms and
conditions of an umbrella clause vary from treaty to treaty and the scope of the provisions fluctuate, this provision is generally understood to provide a legal scheme which enhances the level of protection accorded to covered foreign investors.”58
Following this objective, it is not appropriate to read the umbrella clause as an
aspirational statement indicated from the interpretation by the tribunal in SGS v. Pakistan.59 If the umbrella clause only serves as a reminder or reaffirmation of pre-existing substantial obligations under IIA, it will exert a status superfluous under IIAs without an effective function. As it is acknowledged that the umbrella clause is one of the standards of protection within IIAs, it shall play an independent role in “[enhancing] the level of protection accorded to covered foreign investors”.60 Therefore, this paper posits that the function of the umbrella clause is jurisdictional as consisting in “opening recourse to investment treaty arbitration in order to enable investors to enforce investment-related promises made by the host state”.61 In this sense, it shall be noted that it is the breach of contractual obligations undertaken by the host State that is agreed upon as the violation of an international obligation under IIAs, rather than internationalizing the whole domestic obligations.62As explained by the tribunal in SGS v. Philippines, the umbrella clause “addresses not the scope of the commitments entered into with regard to specific investments but the performance of these obligations”63, thus its conceivable function is to offer foreign investors assurances with respect to the performance of obligations assumed by the host State concerning specific investments.64
56e.g. in the China - Germany BIT (2003), which reads: “Recognizing that the encouragement, promotion and
protection of such investment will be conducive to stimulating business initiative of the investors and will increase prosperity in both States”.
57Elvira R. Gadelshina, 'Hermeneutic Reflections On The Specific Purpose Of Umbrella Clauses' (2013) 14 The
Journal of World Investment & Trade 804, 806.
58Jaemin Lee, 'Putting a Square Peg into a Round Hole? Assessment Of The "Umbrella Clause" From The
Perspective Of Public International Law' (2015) 14 Chinese Journal of International Law para 2 [emphasis added].
59J. Antony, 'Umbrella Clauses Since SGS v. Pakistan And SGS v. Philippines - A Developing Consensus' (2013)
29 Arbitration International, 613, 615.
60n 58.
61Stephan Schill, International Investment Law And Comparative Public Law (Oxford University Press 2010) 343. 62El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award
(31 October 2011), para 532; Noble Ventures v. Romania (n 18), para 54.
63SGS v. Philippines (n 1), para 126 [emphasis added]. 64ibid.
2.4. Effect
It is confirmed above that the function of the umbrella clause is essentially jurisdictional as providing the investor with access to an international tribunal65 by “engaging the host State's international responsibility for breaches of its investment-related promises”.66 Then, there comes the question: what effect would the umbrella clause have on the underlying contractual relationship between the foreign investor and the host State after bringing such a claim within the jurisdiction of an international tribunal? In other words, what effect would this have on “the substantive obligations of the parties to an investor-State contract”.67
It was first discussed by the tribunal in SGS v. Philippines, which confirmed that the umbrella clause does not convert issues of contract law into that of treaty law, and specified that the proper law governing the underlying contract remains unchanged and the extent of the obligations is still governed and determined by the terms of the contract.68Besides, the Annulment Committee in CMS v. Argentina also gave a clear and categorical explanation: “the effect of the umbrella clause is not to transform the obligation which is relied on into something else; the content of the obligation is unaffected, as is its proper law.”69 The referred stance taken by the tribunals is also followed by subsequent cases like MTD Equity v. Chile70 and the
Marion v. Costa Rica71. In this sense, it has long been recognized that a clear division shall be made between the law applicable to contractual rights and the law applicable to determining state responsibility at the international level.72However, such division shall not be read so strictly as to exert an impediment on a contract claim to be brought under treaty-based dispute settlement.73 On the contrary, it provides a clear line on the application of law under the context of the umbrella clause for international tribunals. In the words of Lee, “[t]hus, the nature of treaty obligation and consequences of a violation thereof are addressed by the specific legal framework of
65Antony (n 59), 614.
66Stephan Schill, ‘Enabling Private Ordering: Function, Scope and Effect of Umbrella Clauses in International
Investment Treaties’ (2009) 18 Minn. J. Int'l L. 1, 61.
67ibid 58-59.
68SGS v. Philippines (n 1), para 126-128. 69CMS v. Argentina (n 32), para 95(c).
70MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award (25 May
2004), para 187.
71Marion Unglaube v. Republic of Costa Rica, ICSID Case No. ARB/08/1, Award (16 May 2012), para 190. 72Kjos (n 37) 252.
state responsibility”;74 and at the same time, the contractual relations between an investor and a host State remain governed by the law the parties have chosen as the applicable law.75
3. LACK OF PRIVITY ON THE FOREIGN INVESTOR’S SIDE
In order to attract foreign investments, host States undertake various commitments in the form of formal bilateral agreements, such as investment accords, development contracts, public service concessions, licenses, and tax stabilization agreements, etc.76Normally, such agreements are directly concluded between foreign investors and the host State. However, in practice, investments of investors are often proceeded by acquiring shares of an existing local company in the host State or by setting up a subsidiary incorporated in the host State for the purpose of investments (e.g. to meet the eligibility requirement as a local company to participate in the biding procedure)77. Therefore, there are cases where the foreign investor itself is not a party to the above-mentioned bilateral agreements but its subsidiary or the existing local company in which he holds shares. Namely, there is no privity between the foreign investor and the host State. As previously said, given that contractual obligations are within the scope of the umbrella clause, therefore, does the clause confer on the foreign investor standing to pursue a contractual claim before an international tribunal in such scenario? Referring to jurisprudence, international tribunals apparently cannot coincide on this issue. In the following analysis, this paper will present the two different stances taken by jurisprudence on this issue, and provide some reflections afterwards.
3.1. Divergent Jurisprudence
Before turning to the disagreement within jurisprudence, it shall be noted that all the cases considered in the following analysis, mostly arose from an umbrella clause identical or similar to the formulation of the expansive version mentioned previously, which is phrased, “[e]ach Party shall observe any obligation it may have
74 Lee (n 56), para 7. 75Schill (n 66) 53 61.
76Jeswald W. Salacuse , The Law Of Investment Treaties (OUP 2010) 299.
77Raul Henrique Pereira de Souza Fleury, "Treaty-Protected Investment Agreements: of Umbrella Clauses and
Privity of Contract" ExpressO (2015) <http://works.bepress.com/raul_pereiradesouzafleury/2/> accessed 29 July 2016.
entered into with regard to investments”.78 Some may differ by indicating the ownership of the investments, which is a formulation introduced previously by the author.79 However, according to the jurisprudence, such a variation in formulation is not a bone of contention, and it does not constitute an influencing factor in the following comparison.
3.1.1. Privity is required
Some tribunals have taken the stance that privity is required on the foreign investor’s side, and declined treaty claims under the umbrella clause initiated by foreign investors basically due to the finding of a lack of privity on the investor’s side of the relevant contract.
Generally, most tribunals have rejected an investor’s eligibility as a claimant under the umbrella clause by merely stating that he is not a party to the relevant contract, without giving further explanation as to what grounds the umbrella clause at issue shall be interpreted as requiring privity on the foreign investor’s side. For example, in Azurix v. Argentina, the tribunal merely pointed out the difference of the parties in the BIT claim and the contractual claim: “[…] the Tribunal finds that none of the contractual claims as such refer to a contract between the parties to these proceedings; neither the Province nor ABA are parties to them [….] Even if for argument’s sake, […] it was ABA and not Azurix which was the party to this Agreement.”80 The tribunal in Siemens v. Argentina engaged in a similar reasoning, but with a more straightforward assertion: “However, to the extent that the obligations assumed by the State party are of a contractual nature, such obligations must originate
in a contract between the State party to the Treaty and the foreign investor”.81Besides, such reasoning, by implicit or explicit expression that privity is required under the umbrella clause, is also followed by the tribunals in BG Group Plc v. Argentina82and Impregilo v. Argentina83in their respective decisions.
However, some tribunals, except dismissing the treaty claims based on the same reasons, have provided further explanation to prove that the relevant contractual
78n 21. 79n 51.
80Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award (14 July 2006), para 384. 81Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Award (17 January 2007) [emphasis
added].
82BG Group Plc. v. The Republic of Argentina, UNCITRAL, Final Award (24 December 2007), para 210. 83Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award (21 June 2011), para 185.
obligations are required, under the umbrella clause, to be assumed by the State vis-à-vis particular persons or entities. For instance, the Annulment Committee in CMS v.
Argentine focused on the interpretation of the words “entered into”, stating “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 […]”.84 It also explained that consensual obligations are obligations between obligor and obligee85 ; while the tribunal in Burlington v. Ecuador paid more attention to the interpretation of the word “obligation”, by giving an in-depth analysis: “in its ordinary meaning, the obligation of one subject is generally seen in correlation with the right of another […] An obligation entails a party bound by it and another one benefiting from it, in other words, it entails an obligor and an obligee.”86 The tribunal further strengthened that “If there is no obligation in the first place, there is nothing to qualify.”87
3.1.2. Privity is not required
Conversely, from other tribunals’ point of view, privity of the foreign investor to the underlying contract is an unambiguously non-relevant condition required to trigger the umbrella clause. In this context, tribunals simply hold as a common view that the foreign investor can rely on the protection of the umbrella clause as long as such relevant contractual or other obligations are assumed with regard to investors’ investments, regardless of whether they are entered into with the investors per se or otherwise. However, it is necessary to note that the following cases upheld by the tribunals are founded on a premise that a broad definition of “investments” is set out in the BITs, which includes “shareholding in a company or enterprise”. Thus, it gives the parent company or shareholders jus standi before the international tribunals as well as allowing the tribunals to avail themselves of the literal interpretation on the umbrella clause at issue in the merit phase.
In CMS v. Argentina, having established in the jurisdiction phase that CMS, as a shareholder of the local company TGN, had jus standi before the tribunal under international law, the 1965 Convention and the Argentina-United States Bilateral
84CMS v. Argentina (n 32), para 95(a). 85ibid, para 95(b) [emphasis in original]. 86Burlington v. Ecuador (n 48), para 214. 87ibid, para 217.
Investment Treaty88, the tribunal implicitly drew its conclusions based on a merely literal interpretation of “obligation with regard to investments.” The tribunal stated that “the obligation under the umbrella clause [...] has not been observed by the Respondent to the extent that legal and contractual obligations pertinent to the
investment have been breached [...]”.89 However, it does not provide a substantive demonstration of how the alleged obligations are “with regard to” the investor’s investments, a question which, in comparison, is addressed by the tribunal in Sempra
v. Argentina. In this case the tribunal affirmed that “[…] the License is the ultimate expression of a series of complex investment arrangements […] and it is therefore
impossible to argue now the separation of the License from the investments made in the resulting process.”90
Further, the tribunal in Enron v. Argentina expressly indicated its textual interpretation of the umbrella clause based on Article 31(1) VCLT: “The Tribunal recalls that the text of Article II(2)(c) […], a text which should be interpreted ‘in good
faith in accordance with the ordinary meaning to be given to the terms of the treaty’
as indicated by Article 31(1) of the Vienna Convention.”91 The tribunal also pointed out that “‘Obligations’ covered by the ‘umbrella clause’ are nevertheless limited by their object: ‘with regard to investments.’”92
Moreover, though the alleged “obligations” in this case were national law and regulations, the tribunal in LG&E v. Argentina specifically outlined the structural approach on the application of the umbrella clause. It noted: “The issue for the Tribunal’s consideration is whether the provisions of the Gas Law and its implementing regulations constitute (i) ‘obligations’ (ii) ‘with regard to’ LG&E’s capacity as a foreign investor (iii) with respect to its ‘investment’, […]”93
Besides, the tribunal in Continental Casualty v. Argentina categorically concluded: “provided that these obligations have been entered ‘with regard’ to investments, they may have been entered with persons or entities other than foreign
88CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Decision on
Objections to Jurisdiction (17 July 2003), para 42-65.
89CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, award (12 May
2005), para 303.
90Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award (28 September
2007), para 312 [emphasis added].
91Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award
(22 May 2007), para 273 [emphasis added].
92ibid.
93LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic, ICSID Case
investors themselves”, and specifically pointed out the case where an undertaking by a host State with a subsidiary of the foreign investor is included.94Support for such an understanding can also be found in Amto v. Ukraine.
3.2. Some Reflections
3.2.1. Under the formulation identical or similar to the expansive version: privity not required is more convincing
When the umbrella clause at issue is formulated as the expansive version, which reads as follows “Each Party shall observe any obligation it may have entered into with regard to investments” or in similar formulations indicating the ownership of investments,95 the stance against “privity” put forward by the tribunals is more convincing in the case where the foreign investor is not a party to the relevant contract. The reason why the author comes to the above conclusion is that, on the one hand, logical defects exist in the reasoning of those tribunals upholding that “privity is required”. The tribunals fail to demonstrate that privity of contract is required on the foreign investor’s side. On the other hand, the stance that “privity is not required” can be deducted from the rules of treaty interpretation as textual interpretation and from the principle of effet utile.
Firstly, let us have an in-depth analysis of the reasoning by those tribunals upholding that “privity is required”. According to the relevant jurisprudence analysed above, it seems that the reasoning by the tribunals is built on a premise according to which it is generally accepted that the foreign investor per se should be the party to the underlying contract. Therefore, some tribunals in the relevant jurisprudence mentioned above simply made a comparison between the party initiating the treaty arbitration (investor) and the private party to the relevant contract, and once they found inconsistency, the claims were categorically dismissed.
However, even though some other tribunals gave further explanations, those explanations, though quite convincing at first, were not given outside the aforementioned premise. Why? Referring back to the relevant jurisprudence above, we can find that the tribunals put much effort on interpreting the words “entered into” and “obligations”. Nevertheless, such an interpretation only served to prove that the
94Continental Casualty Company v. The Argentine Republic, ICSID Case No. ARB/03/9, Award (5 September
2008), para 197.
relevant “obligations” in the context of the umbrella clause must be assumed towards specific persons or entities. In other words, the eligible “obligations” under the umbrella clause shall not be any obligations but those vis-à-vis specific persons or entities. But the problem is that the tribunal did not further specify why the specific
person or entity should be the foreign investor per se, which is the main issue to be
addressed to answer the fundamental question whether privity of contract on the
foreign investor’s side is required to trigger the umbrella clause.
From another perspective, it may be inferred that tribunals, through the above explanation, tried to indicate that it is the obligee (holder of rights) within the relevant underlying contract that is given a direct right of action under the umbrella clause. If so, it can be inferred that the tribunals mistook the distinction between contract and treaty, and put the claimant’s treaty right under the umbrella clause in a position that is subject to the terms of contract and its governing law. As the Annulment Committee in Vivendi v. Argentina put it in its decision:
“In accordance with this general principle (which is undoubtedly declaratory of general international law), whether there has been a breach of the BIT and whether there has been a breach of contract are different questions. Each of these claims will be determined by reference to its own proper or applicable law – in the case of the BIT, by international law; in the case of the Concession Contract, by the proper law of the contract […]”.96
In this sense, the investor failing to be qualified as an obligee of the relevant contract cannot be deprived of his qualification as obligee under the treaty, as he is claiming the breach of treaty before international tribunals, not the breach of contract before national courts.97 The fact that the tribunals used the obligee to the contract to determine the obligee to the treaty under the umbrella clause seems to reveal that the tribunals either internationalized the contractual obligations to treaty obligations, which is against the effect of the umbrella clause, or rendered the treaty obligations tantamount to contractual obligations.
Consequently, the reasoning taken by these tribunals to support the stance that “privity is required” is, seemingly, either without directly demonstrating on what
96Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No.
ARB/97/3, Decision on Annulment (3 July 2002), para 96.
97Azusa Kikuma and Shimpei Ishido, ‘The Applicability of the Umbrella Clause to Obligations under Public
grounds such stance is based, or in violation of the general principle of international law demarcating a distinction between treaty and contract.
In comparison, those tribunals upholding that “privity is not required” in the above-mentioned jurisprudence at least addressed the core issue as to where such a stance comes from. They basically hold that it is the alleged obligations with regard
to investments that matter, not towards whom the relevant obligations are entered into
or assumed. Besides, the grounds supporting such an understandings of the clause are persuasive, which is, apparently, the textual interpretation in light of Article 31(1) VCLT. It required that “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty”.98Since IIAs are treaties between States, they can rely on the interpretative methods codified in Article 31 VCLT under circumstances where the treaty is incomplete or if there is no settled or an incoherent jurisprudence.99As the ILC Commission put it in the Draft Articles on the Law of Treaties with Commentaries: “[…] the Commission was unanimous—that the starting point of interpretation is the meaning of the text […]”.100In this sense, the fact that the tribunals turned to the plain meaning of the text of the umbrella clause is, without doubt, on the right path to addressing the issue of privity. Among the textual interpretations of the relevant jurisprudence, the interpretation given by the tribunal in
Enron v. Argentina provided a clearer and more complete logic. Firstly, the tribunal
turned to the ordinary meaning of the words “any obligations”, which it interpreted as “obligations regardless of their nature”.101 To interpret the plain meaning of “any obligations” aimed not only to prove the scope of “any obligations” that can cover the alleged legislation in that case, but also to confirming that the “obligations” do not indicate any meaning requiring privity of the foreign investor per se. Having drawn this conclusion, the tribunal, therefore, can naturally switch its focus to the plain meaning of the words “with regard to investments” stating that: “‘Obligations’ covered by the ‘umbrella clause’ are nevertheless limited by their object: ‘with regard to investments’.”102On the plain meaning of “with regard to investments”, it indicated that obligations must “concern one or more investments” and not the foreign investor.
98VCLT (n 10), Article 31(1).
99Anne van Aaken, ‘Control Mechanisms in International Investment Law’ in Zachary Douglas, Joost Pauwelyn
and Jorge E Vi uales (eds), The Foundations Of International Investment Law (OUP 2014), 419.
100ILC, ‘Draft Articles on the Law of Treaties with commentaries’ (1966) 2 ILC Yearbook 187, 220. 101Enron v. Argentine (n 91), para 274.
Thus, the tribunal, relying on the plain meaning of the terms, can naturally drew the conclusion that, under the relevant umbrella clause, “provided that these obligations have been entered ‘with regard’ to investments, they may have been entered with persons or entities other than foreign investors themselves”.103 In other words, it means that privity of the underlying contract on the foreign investor’s side is not necessarily required.
Moreover, the principle of effet utile also tends to support such understanding. The principle of effet utile (principle of effectiveness) is “sometimes used to denote a rule for treaty interpretation, namely, the maxim ut res magis valiat quam pereat (‘that the matter may have effect rather than fail’)”.104Accordingly, it requires that a provision “should be understood in that one which will allow it to operate, rather than in that which will deny to it effect.”105The principle of effect utile is a legitimate and solid means of interpretation.106In essence, the principle of effet utile consists of two possible manifestations, as Thirlway suggested, one of which is to ensure that none of the provisions in the treaty is deprived of meaning, while the other is to secure that the treaty is effective in achieving its objects.107 In the context of the relevant umbrella clause in the aforementioned jurisprudence, firstly, two conflicting interpretations by the tribunals are presented. According to the above analysis, it is apparent that those advocating that “privity is required” will render the relevant umbrella clause meaningless and devoid, while those upholding that “privity is not required” will allow it to operate. In view of the current trend and reality that more and more foreign direct investments (FDI) are made through the ownership of shares in public enterprises or subsidiaries incorporated exclusively for the purposes of investment,108 many investment-related contracts are concluded by local public enterprises or subsidiaries within the host States rather than foreign investors per se. Therefore, adopting the interpretation that “privity is required” under the umbrella clause in this formulation apparently excludes foreign investors’ remedy to the umbrella clause under IIAs, thus rendering it meaningless when the investors choose the
above-103Continental Casualty v. Argentine (n 94), para 297. 104Hiroshi Taki, ‘Effectiveness’, MPEPIL (2008) 698
<http://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e698#law-9780199231690-e698> accessed 29 July 2016.
105Phillimore Robert, Commentaries Upon International Law, vol 2 (Butterworths 1855) 76-77. 106Andrea Bianchi and others, Interpretation In International Law (OUP 2015) 46.
107H. W. A Thirlway, The Law And Procedure Of The International Court Of Justice 1960-1989 (BYIL 1994) 44. 108Rau´ l Pereira de Souza Fleury, 'Umbrella Clauses: A Trend Towards Its Elimination' (2015) 31 Arbitration
mentioned mode to proceed with investments. This reality, furthermore, deviates from the objective of the umbrella clause and the treaty in which it is set out. As specified in the second Section, the objective of IIAs is “to protect and to promote foreign investment flows between the contracting State parties”, and the umbrella clause serves not only to fulfil such an objective but also to “enhance the level of protections accorded to foreign investors”.109Thereby, denying the protection of foreign investors under the relevant umbrella clause to the extent that the signatory to the underlying contract is not the foreign investor per se will inevitably result in a negation of the protection, which is definitely not in conformity with the objective of the umbrella clause and the IIA as it is set out. Thus interpretation that “privity is not required” in the present formulation of the umbrella clause is more favorable under the principle of
effet utile.
In sum, if an umbrella clause is formulated as follows “each Party shall observe any obligation it may have entered into with regard to investments (by investor/ nationals or companies of the other Contracting Party)”, the foreign investors’ lack of privity in the underlying contract does not prevent such a foreign investor from relying on the protection of the umbrella clause.
3.2.2. What about other formulations of the umbrella clause?
As previously mentioned, there is not a single form of the umbrella clause considering that wordings vary a lot from treaty to treaty. This increases the complexity of the umbrella clause. Another form of the umbrella clause reads as follows “Each Contracting Party shall observe any commitments it may have entered
into with the investors of the other Contracting Party with regard to their
investments.”110, which can for example be seen in the BIT between the Netherlands and China. Comparing this formulation with those similar or identical to the expansive version previously mentioned, it can be discerned that this latter formulation puts the words “with the investors” after the words “entered into”, which, from the perspective of this paper, settles down the disagreement on the issue whether privity in the underlying contract is required on the foreign investor’s side. In other words, under this formulation of the clause, the answer is that privity is required is warranted.
109n 55, 58.
This is also the outcome of the ordinary meaning of the terms of the clause. Subject to Article 31(1) VCLT, it shows that “any commitments” shall not only be “entered into” in relation to investors’ investments, but also be “entered into” with investors per se instead of someone else. In light of this ordinary meaning, the investors initiating the treaty claim must also be the obligee to the underlying contract, which means that privity on the foreign investor’s side is required under this formulation of the umbrella clause.
Besides, it is in consideration of a fair balance of the rights between foreign investors and the host States under the umbrella clause mechanism. It can be seen from the above that a broad interpretation is given under the expansive version of the umbrella clause, which is obviously favorable to the foreign investor. However, under the current formulation of the umbrella clause, it specially phrased the words as “[…] any commitments it may have entered into with the investors […]”. If such a formulation is also interpreted by tribunals as excluding the privity requirement on the foreign investor’s side, it must exert greater uncertainty on States when considering including the umbrella clause within IIAs. In fact, there must exist a greater possibility that two Contracting States intentionally phrase the language of the clause as “entered into with the investors” rather than “entered into with regard to investments”, in order to exclude international arbitration under the circumstances where the foreign investor lacks privity in the relevant contracts. If such a formulation makes no difference, it will unreasonably limit the right of the host State as well as deviate from the principle of party autonomy. In any event, it is not appropriate and fair to take the umbrella clause as a mechanism by which investors can take advantage of States.111
Above all, concerning a freedom of formulation of the umbrella clause between States and for the sake of a stability in interpretation as well as a fair balance between investors’ and host States’ rights, it is desirable that the umbrella clause in the above formulation shall be interpreted as not requiring privity on the foreign investor’s side. However, it shall be noted that the issue whether the private party to the relevant contract is the same as the foreign investor initiating the treaty arbitration still needs to be determined by the respective governing law of the contract at issue as proposed by the tribunal in Burlington v. Ecuador112.
111Fleury (n77) 17.
In comparison to the two above-mentioned formulations of the umbrella clause, there is a formulation that combines the two, which is the umbrella clause laid down in the ECT: “Each Contracting Party shall observe any obligations it has
entered into with an Investor or an Investment of an Investor of any other Contracting
Party.”113 The Energy Charter Treaty: A Reader's Guide (2002) clarifies that such a clause not only covers a contract between the host State and the foreign investor per se, but also a contract between the host State and the foreign investor’s subsidiary.114 This interpretation can also find support in the award of Amto v. Ukraine.115Therefore, if the umbrella clause is formulated in such a way as in the ECT, privity of contract on the foreign investor’s side is not required.
Besides, there is another formulation of the umbrella clause represented in the Japan-Iraq BIT (2012), which focuses on the words after “with regard to”: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments and investment activities of investors of the other Contracting Party”.116 The words “with regard to… investment activities of investors”, from the perspective of this paper, potentially provide the jus standi of an investor under the circumstance where the IIA he relies on does not provide “shareholding in a company” as a protected “investment”. Because the words “investment activities of investors” may have broader reach compared with the words “investment of investors”, which seem to cover the situation where the relevant obligations are with regard to the subsidiary’s investments, not necessarily the foreign investor’s, as long as such a subsidiary is established by the investor for the purpose of investments and its investments thereby can be viewed as investment activities of investors.
The formulations of the umbrella clause introduced in this Section are not exhaustive, but they can properly illustrate that different formulations may potentially give rise to different interpretations of the umbrella clause thus providing Contracting States with possibilities to choose the formulation in light with the scope of the umbrella clause they intend to give. However, with the aim of establishing clear and consistent jurisprudence of the umbrella clause concerning the issues of privity, it is
113ECT, Article 10(1).
114Energy Charter Secretariat, ‘Energy Charter Treaty: A Reader's Guide’ (2002), 26
<http://www.energycharter.org/fileadmin/DocumentsMedia/Legal/ECT_Guide_en.pdf > assessed 29 July 2016.
115Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award (26 March 2008), para 110. 116Iraq - Japan BIT (2012) Article 5 [emphasis added].
recommended that tribunals recognize the different language used in a specific umbrella clause and provide interpretations with certainty and consistency.
4. LACK OF DIRECT PRIVITY ON THE STATE’S SIDE 4.1. Preliminary Remark
In the last section, we discussed the circumstances where the investment-related contract is not concluded with the foreign investor per se but with his subsidiary or an established local company in which he holds shares. On the State’s side, by the same token, the investment-related contract is not always directly concluded with the State per se either. According to the relevant jurisprudence and investment practices, for example, a foreign investor may have a contractual relationship with a national company117, a national university118, a political subdivision119 a Water and Power Development Authority120, or even a state-owned hotel121. “These entities are typically state-owned or otherwise closely affiliated with the state, they often possess a separate legal personality”122under respective domestic law. Some scholars have categorized these entities as “sub-state entities”, some name them “separate legal entities” or “an entity having a domestic legal personality”, while others label them as “state-owned entities”. Among these designations, for ease of reference, this paper chooses to address them as “state-owned entities” (SOEs).
As introduced in the second Section, formulations of the umbrella clause are inconsistent and their variations exert great influence on the actual meaning and scope of the umbrella clause. However, in comparison to the investor’s side, terms directed to the State adopted in the umbrella clauses in treaty practices tend to be more consistent. In most of the cases, relevant terms in the expansive version introduced in the second Section are adopted. According to the structure and wordings of the expansive version, there exist two types of conduct that need to be determined before engaging the responsibilities of States under the umbrella clause, namely “shall observe” and “entered into”.
117Kardassopoulos v. Republic of Georgia 118Bosh v Ukraine
119Impregilo v. Argentina; Azurix v. Argentina 120Impregilo v. Pakistan
121Alpha v. Ukraine
122Feit Michael, ‘Attribution and the Umbrella Clause: Is there a Way out of the Deadlock?’ (2012) 21 Minn. J.
As previously explained in the second Section, “[t]he phrase ‘shall observe’ is imperative and categorical”. It is the key element in the umbrella clause that exerts the State under a treaty obligation to respect and fulfill its contractual obligations vis-à-vis foreign investors. Given this, when a State fails to observe such obligations, it
breaches its treaty obligations and incurs state responsibility.
Another conduct is “entered into”, which was also explained in the second Section. It can be replaced by another frequently-used word “assumed”123, which, however, does not change the subject of the verb—State. In another word, under the ordinary meaning of treaty interpretation, the contractual obligations within the context of the umbrella clause are not “entered into” or “assumed” by anyone, but the State itself. In view of this, it is not hard to conclude that the umbrella clause requires privity of the underlying contract on the State’s side as a precondition to initiate the umbrella clause claim. Thus, in order to engage the responsibility of the State under the umbrella clause, the obligations emanating from the relevant contracts signed by SOEs must be proved to be incurred by the State in light of some certain link, since “the act breaching the obligation is meaningless if the obligation is not that of the state”.124
Hence, according to the above analysis, both the conduct of “concluding” and the conduct of “breach” within contractual obligations are required to be ultimately imputed to the State in order to engage its responsibility under the umbrella clause. Among these two conducts, it is the conduct of “concluding” that determines whether the State is the party to the relevant contract (or the existence of privity on the State’s side), and that also triggers divergent jurisprudence.
4.2. Divergent Jurisprudence
The jurisprudence of tribunals in the following analysis established their findings by looking into the actual party to the relevant contract before getting into the analysis of “breach”. However, the approaches they applied to determine whether the State is a party to the relevant contract differ, which thus results in divergent jurisprudence on this matter.
123n 43.
124Nick Gallus, 'An Umbrella Just For Two? BIT Obligations Observance Clauses And The Parties To A Contract'
One approach mainly focuses on the legal nature of SOEs under respective domestic law in defining the relationship between the SOEs and the State. Such an approach can be represented by the decision of the tribunal in Impregilo v. Pakistan125.
In this case, the relevant contract was concluded between the foreign investor Impregilo and the Pakistan Water and Power Development Authority (WAPDA). In the decision on jurisdiction, to determine whether it had jurisdiction over Impregilo’s claim under the alleged umbrella clause (Article 11 of the Swiss-Pakistani BIT which is invoked through the MFN clause in Italy-Pakistan BIT) for contractual breach, the tribunal, though hesitating to admit such a function of MFN clause, still went further to make an assumption that, “[e]ven assuming arguendo that Pakistan, through the MFN clause […] has guaranteed the observance of the contractual commitments […] such a guarantee would not cover the present contracts – since these are agreements into which it has not entered.” And it went on to point out that “On the contrary, the contracts were concluded by a separate and distinct entity”.126 The “separate and distinct” legal status of WAPDA is based on the tribunal’s finding under national law.127 This approach can also find support in Amto v. Ukraine128 and Hamester v.
Ghana129. It should be noted that while the tribunals based their reasoning on the
separate legal personality of SOEs under domestic law, they also considered in dictum international law principles of attribution in their respective cases.130
Besides, another approach relied on the different definitions of “state enterprise” and “Party” set out in the BIT to tell the SOE and the State apart as a matter of treaty interpretation. Such an approach is applied by the tribunal in Bosh v.
Ukraine, although it did not solely rely on it to give its decision. By the same token,
the tribunal first observed that the respondent State Ukraine did not enter into the relevant contract with the foreign investor (Bosh), but its SOE (the University) did.131 However, the tribunal did not conclude its analysis here but instead went on to consider “whether the term ‘Party’ in Article II(3)(c) is limited to the two States parties to the BIT or whether it also extends to entities that are controlled by ‘each
125Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction (22 April
2005).
126ibid, para 223 [emphasis added]. 127ibid, para 209.
128Amto v. Ukraine (n 114), para 110.
129Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award (18 June
2010), para 184,347, 348.
130ibid, para 347 (iii); Amto v. Ukraine (n 115), para 102.
131Bosh International, Inc and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11,
