CYIL 2014

UMBRELLA CLAUSE ȃ ADDITIONAL PROTECTION OF INVESTMENT BY CLAUS… The use of umbrella clauses is not limited to bilateral investment treaties, but rather some examples can also be found in multilateral treaties – of which the most prominent example is Article 10(1) of the Energy Charter Treaty, which stipulates that: “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”. While the Energy Charter Treaty, in the final sentence of Article 10(1), requires that each contracting party shall observe any obligations it has entered into with an investor , as mentioned above, this is, however, accompanied by a derogatory provision included in Annex IA of said Treaty. This provision allows the contracting parties to opt out of the final sentence of Article 10(1) by not permitting their investors to submit a dispute concerning this provision to international arbitration. Four ECT contracting parties have chosen to apply this provision: Australia , Canada, Hungary, and Norway. 12 Jurisprudence It should be noted that none of the examples given of umbrella clause wording neither purported any consequences in the case of possible breach by the State party nor give a reason that a significant number of BITs possess umbrella clauses which would be a solution more beneficial to the host states as well as to the investors. Just the opposite. The effects of an “umbrella clause” began to be observed in the following two decisions, i.e: SGS v. Pakistan 13 and SGS v. Philippines. 14 The Arbitral Tribunals arrived at interpretations that are to some extent inconsistent with one another, and current jurisprudence provides little prediction about the outcome of BIT breaches in connection with an umbrella clause. In SGS Société Générale de Surveillance (SGS) v. Pakistan , SGS, a Swiss company, executed a pre-shipment inspection services agreement (“PSI”) with the Republic of Pakistan (“Pakistan”) in 1994. After some years Pakistan became dissatisfied and terminated the agreement. Pakistan initiated arbitration proceedings in Pakistan, in accordance with the arbitration clause (Article 11 of the PSI) which provided that any dispute arising out of the PSI Agreement “shall be settled by arbitration in accordance with the Arbitration Act of Pakistan”. In reaction, SGS initiated another arbitration proceeding and submitted the dispute to ICSID, under the Switzerland-Pakistan BIT of 1995, which allowed SGS to sue Pakistan. SGS alleged five breaches of the BIT, including a claim based upon what it called the Article 11 “umbrella clause”, which states: “Either Contracting Party shall constantly guarantee 13 See Société Général de Surveillance S. A. v. Pakistan , Decision of the Tribunal on Objections to Jurisdiction, ICSID (W. Bank) Case No. ARB/01/13 (2003), available at: http://www.worldbank.org/ icsid/cases/SGS-decision.pdf. 14 See Société Général de Surveillance S. A. v. Philippines , Decision of the Tribunal on Objections to Jurisdiction, ICSID (W. Bank) Case No. ARB/02/6 (2004), available at: http://www.worldbank.org/ icsid/cases/SGS-decision.pdf. of undertakings given by it in relation to property of nationals of any other Party”. 12 http://www.encharter.org/fileadmin/user_upload/document/EN.pdf#page=211.

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