British Institute of International and Comparative Law
Third Conference of the Investment Treaty Forum
"THE RELATIONSHIP BETWEEN LOCAL COURTS
AND INVESTMENT TREATY ARBITRATION"
Senate House, University of London, 10 September 2004
"The Origins of the Umbrella Clause in the
International Law of Investment Protection"
Anthony C. Sinclair
International Arbitration Group
Allen & Overy LLP
1.
The Umbrella Clause
The umbrella clause is an international law obligation created by treaty that a
host State shall…

'observe any obligation it may have entered into'

'constantly guarantee the observance of the commitments it has entered
into'

'observe any obligation it has assumed'

(and other variants)
… with respect to investors having the nationality of another Contracting
State, or with respect to the investments of such investors.
These provisions create an effective international remedy only when coupled
with watertight compulsory dispute settlement provisions.
2.
Recent ICSID Decisions

SGS Société Générale de Surveillance SA v. Islamic Republic of Pakistan
(Decision on Jurisdiction, August 2003)

SGS Société Générale de Surveillance SA v. Republic of the Philippines
(Decision on Jurisdiction, January 2004)
3.
Diversity of Metaphors

Elevator

Mirror effect

Parallel effect

Sanctity of contract

Pacta sunt servanda

Umbrella
4.
Assistance from the History of the Umbrella Clause

1953-1954 Advice of Mr. Elihu Lauterpacht to the Anglo-Iranian Oil
Company in connection with the settlement of the Iranian oil
nationalisation dispute

1956-57 Advice of Mr. Lauterpacht to a group of oil companies
contemplating a trunk pipeline from Iraq in the Persian Gulf through Syria
and Turkey to the Eastern Mediterranean

1956-59 Abs Draft International Convention for the Mutual Protection of
Private Property Rights in Foreign Countries ('the Abs Draft')

1958-59 Shawcross Draft Convention on Foreign Investments
('Shawcross Draft')


1959 Abs-Shawcross Draft Convention on Foreign Investment (“AbsShawcross Draft”)
1962 and 1967 OECD Draft Conventions on the Protection of Foreign
Property
5.
Early 'Umbrella Treaties'

1921 Agreement between the United Kingdom and Peru Respecting the
Mineral Property 'La Brea y Pariñas' signed at Lima, 27 August 1921
(1921) VII League of Nations Treaty Series No. 195, 280

Other examples include a German-Polish Convention of 1922 and a
French-Lebanese Agreement of January 1948
6.
1953-54 Advice: Anglo-Iranian Oil Company
Settlement
The Settlement Agreement
'shall be incorporated or referred to in a treaty between Iran and the
United Kingdom in such a way that a breach of the contract or settlement
shall be ipso facto deemed to be a breach of the treaty'.
Two principal objectives for the umbrella treaty:

Stabilise the underlying settlement agreement; and

Guarantee an effective international law remedy
7.
1956-57 Advice: Middle East (Iraq-Syria-Turkey)
trunk pipeline
Proposed umbrella treaties between the national States of oil consortium
members and transit States that would provide 'parallel protection' for
pipeline contracts concluded between the consortium and transit States.
8.
1956-9 Abs Draft: 'International Convention for the
Mutual Protection of Private Property Rights in
Foreign Countries'
Article IV(3):
A state shall not directly or indirectly restrict the freedom of foreign
nationals 'in acquiring, administering and utilizing property, rights and
interests' and in particular, 'not by laws, regulations, administrative
measures or in some other way, in so far as these are apt to cause or
produce … the limitation or cancellation of licences within the meaning of
Article III(e)'.
Article III(e):
'…licences under public law in the field of trade and industry, which
confer upon the licensee a long-term title'.
8.
1956-9 Abs Draft: 'International Convention for the
Mutual Protection of Private Property Rights in
Foreign Countries' (continued)
Article IV(4):
'In so far as better treatment is promised to non-nationals than to
nationals either under inter-governmental or other agreements, or by
administrative decrees of one of the High Contracting Parties, including
most-favoured-nation clauses, such promises shall prevail'.
Abs (1958) on Article IV(4):
if 'individual private agreements' promised 'better treatment to investors
… than to residents, the promise to accord such treatment must in all
circumstances be respected'.
9.
1958-9 Shawcross Draft: ‘Convention on Foreign
Investments’
Sir Hartley Shawcross (1961) was preoccupied by:
'the binding force of contract and the right to own property' (and) 'how to
promote this flow of private capital to those countries where it could do
most good'.
Michael Brandon (1959) reporting that the Shawcross Draft provided
for:
'[t]he application by States of the rule pacta sunt servanda to their
"specific engagements" with aliens howsoever arising'.
10. 1959 Abs-Shawcross Draft ‘Convention on
Investments Abroad’
Article II:
'Each Party shall at all times ensure the observance of any undertakings
which it may have given in relation to investments made by nationals of
any other Party'.

'any undertakings' intended to cover inter alia contractual
undertakings;

covered undertakings may be express and direct, or implied and
indirect, and include unilateral undertakings.
Shawcross (1961) claimed the Draft sought:
'merely to reaffirm the more elementary and generally accepted principles
of International Law in this field, particularly the rules as to compensation
and sanctity of contract'.
10. 1959 Abs-Shawcross Draft ‘Convention on
Investments Abroad’ (continued)
Schwarzenberger (1960) described Article II as:
'a far-reaching departure from the law as it stands'.
Metzger (1961):
'an effort to convert private contracts between one country and a national
of another into "international" agreements between countries, which they
are not under international law'.
Seidl-Hohenveldern (1961):
'the very aim of Article II of the Abs- Shawcross Draft is to change this
and to bring concession contracts under its umbrella of protection' (…)
'The purpose of the clause is to dispel whatever doubts may possibly
exist as to whether a unilateral violation of a concession contract is an
international wrong'.
Article II was said to transform public-private undertakings into international
obligations 'paralleled by corresponding obligations between the Parties'.
11.
1962 and 1967 OECD Draft ‘Convention on the
Protection of Foreign Property’
Article 2, 'Observance of Undertakings':
'Each Party shall at all times ensure the observance of undertakings
given by it in relation to property of nationals of any other Party'.
The Commentary to Article 2 describes it as:
'an application of the general principle of pacta sunt servanda' in favour of
the property of nationals of another party.
Amongst the typical property rights protected include 'undertakings' such as
claims to money, rights to performance and undertakings under a contract or
concession.
The official Commentary to Article 2 confirmed that undertakings may include
'consensual' bargains as well as 'unilateral engagements' provided that they
'relate to the property concerned; it is not sufficient if the link is incidental'.
11.
1962 and 1967 OECD Draft ‘Convention on the
Protection of Foreign Property’ (continued)
Haight (1966):
'undoubtedly the basic norm of every legal system governing agreements
between States and foreign nationals'.
Lauterpacht (1962):
'[s]uch contracts are thus in a sense put on a special plane in that breach
of them becomes immediately a breach of convention'.
American Bar Association (1963):
'would do no more than affirm what already exists: namely affirm that
contractual rights vested in aliens are protected by international law and
that that law will give effect to State undertakings in derogation of
municipal law where an intention to be bound to that extent is clearly
evidenced'.
11.
1962 and 1967 OECD Draft ‘Convention on the
Protection of Foreign Property’ (continued)
Brower (1976) considered that Article 2 departed from general
international law:
'to the extent that it recognizes the applicability of the principle of pacta
sunt servanda to agreements between a state and nationals of other
states and accordingly regards the state's breach of such an agreement
as a per se violation of international law'.
11.
1962 and 1967 OECD Draft ‘Convention on the
Protection of Foreign Property’ (continued)
American Bar Association (1963):
'[w]hat the Convention would do in respect of State undertakings to aliens
would be to provide a remedy for their enforcement. It would not turn
private contracts into treaties; it would not create obligations where none
arose under the applicable law; it would not impair sovereignty or the
police power; but it would provide for giving effect in an international
forum to acquired rights arising from State contracts, and in this way it
would ensure the application of an international standard where under
international law that standard should be applied'.
Seidl-Hohenveldern (1961):
'like any other treaty [the umbrella clause] would be subject to the
clausula rebus sic stantibus'.