The USA Journals Volume 03 Issue 12-2021
68
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
‘
ABSTRACT
The Bilateral Investment Treaty (BIT) is the most common type of agreement in private international
law to protect the rights and legitimate interests of investors. According to UNCTAD, more than 2,500
bilateral investment agreements have been signed between the two countries to date. The study
found that 40 percent of them applied the “Umbrella clause” rule. The article examines the scientific
and theoretical views of international economists and jurists, the analysis of existing contracts under
the Umbrella clause, as well as international practice in this area, and defines the Umbrella clause rule.
The analysis revealed the pros and cons of the "Umbrella Clause" rule, the advantages and
disadvantages of law enforcement practice under this rule. The impact of the "Umbrella clause" rule
on the outcome of bilateral investment disputes has been evaluated. At the same time, the lack of a
uniform approach to the application of contract terms under the "Umbrella clause" rule in
international arbitration has been described as a constant source of disagreement. The article
discusses the prospects for the application of the “Umbrella clause” rule in bilateral investment
agreements.
KEYWORDS
Umbrella Clause, Bilateral Investment Agreement, International Legal Guarantees, Foreign Investor,
Host Country, Model Agreement, Obligation.
Application Of The Umbrella Article Rule In Bilateral
Investment Agreements International Practice
Rajabov Adkham Amrulloevich,
Lecturer Of “Business Law” Department Of Tashkent State Law University, Uzbekistan
Journal
Website:
https://theamericanjou
rnals.com/index.php/ta
jpslc
Copyright:
Original
content from this work
may be used under the
terms of the creative
commons
attributes
4.0 licence.
The USA Journals Volume 03 Issue 12-2021
69
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
INTRODUCTION
One type of agreement in private international
law that protects the rights of investors and
safeguards their legitimate interests is the
bilateral investment treaty (BIT). According to
UNCTAD, the two countries have signed more
than 2,500 bilateral investment agreements.
[1]. The first bilateral investment agreement
was signed in 1959 between the Federal
Republic of Germany and Pakistan. These
agreements are also divided into types of
agreements that contain different content.
While some of these relate only to disputes
arising from a default under the same
agreement or breach of other requirements of
the agreement, others provide for any
investment-related disputes. However, some
agreements impose obligations on the host
country. For example, these obligations may
include "compliance with any obligations,"
"guarantee of obligations and continued
compliance
with
those
guarantees,"
"performance of any obligations assumed,"
and other investment requirements [p.2,
8].The obligations in this context are
conditions under the “Umbrella Clause”.
Forty
percent
of
bilateral
investment
agreements are governed by the “Umbrella
clause”. Any bilateral investment agreement
entered into by countries such as Switzerland,
Germany, the United Kingdom and the
Netherlands shall include this provision. It is
used in some cases in agreements concluded
by France, Australia and Japan.
The “Umbrella clause” is one of the
international legal guarantees for foreign
investors provided for in bilateral investment
agreements. The “Umbrella clause” is a
guarantee mechanism, as the name implies.
This agreement represents a state guarantee
for all investment commitments made in
bilateral agreements [3].
The “Umbrella clause” has been variously
defined by economists and lawyers as an
international legal guarantee.
For example, according to V.M Shumilov, a
guarantee under the Umbrella clause is a
measure aimed at insuring investments against
risks arising from political events and actions of
the state government in which the investment
is made. [p.4, 260]
Or, according to A. Ya Sukharev and V. E.
Krutskikh, an international guarantee is a
guarantee given by any state or group of states
to other participants in international relations
to fulfill obligations or maintain a certain level
of international relations, as well as to ensure
compliance with established rights and
guarantees. [p.5, 111]
In the UNCTAD rules, the “Umbrella clause”
stipulates that all obligations under the
investment agreement between the investor
and the state must be observed. In this case,
the terms of the investment agreement should
be supplemented by the application of the rule
"Umbrella clause" in case of violation of the
terms of the agreement.[6]In addition, D.M.
Yulov in his literature states that the rule
"Umbrella clause" is one of the international
legal guarantees of the rights of foreign
investors who have concluded a bilateral
investment agreement, according to which the
receiving state of foreign capital provides a
package of guarantees. [p.7, 202]According to
V.Zivkovich, the Umbrella clause is a
mechanism that turns pure contractual
The USA Journals Volume 03 Issue 12-2021
70
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
disputes into disputes under international
agreements. This mechanism ensures that the
dispute over the contract is considered in
international arbitration.[8]
Shroyer said the Umbrella clause is an
additional guarantee for the investor and
defines its protection based on traditional
international standards. If the investor's right
under the investment agreement has been
violated, then it is also a violation of the
bilateral investment agreement. [p.9, 141]A.S.
Yukhno The rule of the Umbrella clause is that
the parties have the right to apply to
international arbitration for an impartial and
correct settlement of a dispute over foreign
investment. [10]
The Umbrella clause rule was first enshrined in
a 1921 intergovernmental agreement between
Great Britain and Peru. According to him,
disputes arising from the concession provided
by the Peruvian government to the British
company will be resolved by the ad hoc
tribunal. Thus, for the first time, the Peruvian
state has an international legal obligation to
the UK under a concession agreement with the
company.
By the 1950s, the“Umbrella clause” was
enshrined in bilateral investment model
agreements between West Germany and the
United Kingdom.
According to Article 2(paragraph 2) of the U.K.
Model Agreement on the Attraction and
Reciprocal Protection of Investments, "The
parties to the agreement must comply with any
obligations arising from investments by
nationals or companies of the other party .[11]
According to Article 7, paragraph 2, of the
German Model Agreement on the Promotion
and Reciprocal Protection of Investments,
"Each Contracting State shall fully fulfill its
obligations to investors of other Contracting
States in its territory.".[12]
The Model Agreement on the Promotion and
Reciprocal Protection of Investments of the
Russian Federation does not provide for the
Umbrella clause, but it is reflected in some
bilateral agreements between Russia and
other countries.[p.13, 56]This is directly related
to the view in Russia that the Umbrella clause
rule could harm state sovereignty.
According to the experience of Germany and
the United Kingdom, any bilateral investment
agreement concluded by these countries
should include the Umbrella clause. In Russian
experience, however, no such obligation has
been established.
The Umbrella clause rule was first applied in a
dispute between the company and the Iranian
government over the nationalization of the
Anglo-Iranian oil company.[p.14, 6]This means
that the UK has considerable experience in
applying this rule.
Resolution of the Cabinet of Ministers of the
Republic of Uzbekistan No. 180 of August 2,
2005 approved the Regulation "On the
procedure
for
concluding,
amending,
terminating and implementing investment
agreements between the Government of the
Republic of Uzbekistan and a foreign investor".
As an appendix to the Regulation, there is a
model investment agreement between the
Government of the Republic of Uzbekistan and
a foreign investor for the implementation of an
investment project. However, neither the
Charter nor the model contract provides for
the Umbrella clause [15]. At the same time,
The USA Journals Volume 03 Issue 12-2021
71
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
conditions are included for the settlement of
disputes and disputes in international
arbitration.
Under the 1965 Washington Convention on the
International Center for the Settlement of
Investment Disputes, bilateral (interstate or
intergovernmental) agreements or contracts
with an investor in an international center must
be enforced by the State party. Such decisions
shall not be subject to the procedure for
recognition and enforcement of decisions of
foreign courts by domestic courts or the
Ministries of Justice. Thus, investment
agreements and the Washington Convention
serve as an international legal protection shield
for foreign investors.
Although the “Umbrella clause” applies to 40
per cent of all bilateral investment agreements,
as noted above, international law enforcement
practice varies. That is, the rule of the Umbrella
clause is interpreted and applied differently in
each arbitration case or when the parties are
settling a dispute. According to Prof. G.M
Velyaminov, the “Umbrella clause” is similar to
the “Troya horse” and serves to violate the
concept of dualism in international law, as well
as used in different interpretations in the
international transformation of the national
obligation of the state.[p.17, 337]
There is no single case law in international
investment arbitration on the interpretation
and application of the Umbrella clause in
resolving investment disputes.[p.18, 8]
Many cases can be cited as examples.“SGS v.
Pakistan's investment dispute is one of them.
The dispute is part of the Pakistani
government's Société Générale de Surveillance
S.A. (“SGS”) began with the filing of an
arbitration claim under national law to
terminate an investment agreement with a
foreign investor. The investor, in turn, has filed
a lawsuit against the Pakistan government at
the International Center for the Settlement of
Investment Disputes. The basis for applying to
the international center was a bilateral
investment agreement between Pakistan and
Switzerland. As noted above, in accordance
with the Swiss Model Agreement on Bilateral
Investment, such agreements shall be
amended to read as follows the Umbrella
clause:
"Each
Contracting
Party
shall
consistently guarantee the observance of the
obligations of the other Contracting Party to its
investors' investments."The same condition
was contained in the investment agreement
between Pakistan and Switzerland.[19]
The International Centre for Settlement of
Investment Disputes rejected the investor's
claim. In principle, the Center stated that the
"Umbrella clause" does not determine
independently whether an investment dispute
is subject to international investment
arbitration, but can only hear the case with the
written consent of both parties to the
Agreement. It was also found that the literal
interpretation
of
bilateral
investment
agreements did not provide a clear expression
of the “Umbrella clause” rule.[20]
The International Center for Investment
Dispute Resolution has narrowly interpreted
the “Umbrella clause” in this case. In the same
way, “Joy Mining Machinery Limited v. Arab
Republic of Egypt”[21],“ CMS Gas Transmission
Company v. Argentine Republic ”[22] and El
Paso Energy International Company v.
Argentine Republic ”[23] cases.
The USA Journals Volume 03 Issue 12-2021
72
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
“Eureko B.V. v. In the Republic of Poland, [24]
the International Center took a different
approach. Here, too, special attention is paid to
the verbal interpretation of the terms of the
bilateral investment agreement. There has also
been a broad interpretation of the “Umbrella
clause” rule. “Eureko B.V. v. In the case of the
Republic of Poland, the Center found the
"must be observed" rule in the “Umbrella
clause” of the contract to be an imperative
norm. It was concluded that "any obligation"
means all the obligations of the state in relation
to investment, and it was agreed to consider
the proceedings of the business center.
Almost simultaneously with this study, the
“Salini Costruttori S.p.A. and Italstrade S.p.A. v.
In the Hashemite Kingdom of Jordan, [25] the
Center stated that it was not authorized to
review the dispute. The zoning clause in Article
2, paragraph 4 of the bilateral investment
agreement between Italy and Jordan provides
that "each Contracting Party shall establish and
provide to investors a legal basis to ensure that
the political regime in its territory shall not be
altered"[26]. The Center did not recognize this
provision as “Umbrella clause” in Article 2.4 of
the Agreement. According to the arbitrators,
the norm provided that states create a legal
basis for investment guarantees, but did not
impose on them the obligation to comply with
the obligations under the investment
agreement.
Another aspect of the issue is that a foreign
investor can sue the Government in
international arbitration only if the investment
agreement with the Government stipulates
that the parties may apply for arbitration. In
this case, the procedure for applying to
arbitration specified in the contract must be
followed. This procedure may include the
possibility of recourse to international
arbitration "if the parties do not reach a mutual
agreement on the dispute within six months",
"if they are dissatisfied with the arbitral award
provided for in the contract".
Based on the above, the following conclusions
can be drawn about the application of the
“Umbrella clause” rule in bilateral investment
agreements:
1)
The “Umbrella clause” rule applies only
if one party to the investment
agreement is an investor and the other
is a direct state. No other legal entity
may assume its obligations in lieu of the
State;
2)
The “Umbrella clause” applies only to
the
performance
of
contractual
obligations
under
a
bilateral
investment agreement and does not
affect the scope of contractual rights
and obligations;
3)
The “Umbrella clause” may be applied
to certain obligations assumed by the
State;
4)
The “Umbrella clause” requires the
state to fulfill all obligations under
investments, including obligations
under
bilateral
investment
agreements. These may include capital
investment
protection,
capital
investment
regime,
transfer
of
payments, subrogation, restriction of
expropriation, and compensation for
losses. In addition, the Umbrella clause
covers the obligations of the state
under other international bilateral and
multilateral investment agreements, as
well as national civil and administrative
legislation;
The USA Journals Volume 03 Issue 12-2021
73
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
5)
The main purpose of the Umbrella
clause is to give the parties the right to
exercise their rights, the other party to
apply
to
impartial
investment
arbitration to ensure the fulfillment of
its obligations. The decision of the
arbitral tribunal is binding on both
parties - the state or the investor
(individual or legal entity);
6)
“Umbrella
clause”
allows
the
interested party to raise the dispute
over a separate (individual) investment
agreement with the state to the level
of an investment agreement and bring
the dispute to investment arbitration,
but this rule is accepted differently by
experts, in some cases creates a
reverse practice;
7)
The concept of international dualism
emerged in international law because
the "Umbrella clause" was formed at
the junction of public international law
and
private
international
law.
According to him, the investor must
protect his rights under the investment
agreement through the diplomatic
protection of his country. The
investor's country is treated as a third
party in investment disputes;
8)
The “Umbrella clause” serves to create
an acceptable investment climate, but
there is a risk that one of the parties
may be abused due to a conscientious
approach to this rule;
9)
The lack of a unified approach to
understanding the “Umbrella clause”
requires the development of a unified
approach that combines the efforts of
the expert community on public and
international investment. The creation
of a single approach will be equally
beneficial for both investors and the
state..
REFERENCES
1.
Find bilateral investment treaties.
https://www.international-arbitration-
attorney.com/ru/find-bilateral-
investment-treaties/
2.
Yannaca-Small. K. Interpretation of the
Umbrella
Clause
in
Investment
Agreements // OECD Working Papers
on International Investment. 2006/3.
URL:http://www.oecd.org/investment/
internationalinvestmentagreements/3
7570220.
(circulation
date:
December 3, 2021.).
3.
State Contracts UNTCAD Series on
issues in international Investment
agreements. United Nations New York
and
Geneva.
2004
//
URL:
http://unctad.org/en/
Docs/iteiit200411_en.pdf
(circulation
date: December 4, 2015:).
4.
Shumilov V. M. International financial
law: textbook. 2nd ed., revised and
supplemented. М. : International
relations., 2011. p. 260.
5.
Sukharev A. Ya. Ya., Krutskikh V. E. The
Big Dictionary of Law. 2nd ed., revised
and extended. M. : Infra-M., 2004. p.
111.
6.
Investor-State Disputes Arising From
Investment
Treaties:
A
Review.
UNCTAD Series on international
Investment Policies for Development.
United Nations New York and Geneva.
2005
//
URL:
http://unctad.org/en/Docs/iteiit20054_
en.pdf (circulation date: December 8,
2021.).
The USA Journals Volume 03 Issue 12-2021
74
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
7.
D.M.Yulov. The umbrella clause as a
guarantee of the rights and legitimate
interests of foreign investors. Current
Problems of Russian Law. 2015. № 11
(60) November. p. 202
8.
Zivkovich, Velimir, Contracts, Treaties
and
Umbrella
Clauses:
Some
Jurisdictional Issues in International
Investment Arbitration. (December 15,
2011 .). Annals of the Law Faculty of
Belgrade - Revision of Belgrade Law,
4/2012. Available at: website. SSRN:
https://ssrn.com/abstract=2119861
9.
AugustReinisch,
ChristophSchreuer.
International
Protection
of
Investments. Cambridge University
Press, 2020. Chapter 7, p. 141
10.
Yukhno A.S. "Umbrella clauses" in the
practice of international arbitration
tribunals:
latest
trends.
https://wiselawyer.ru/poleznoe/43955-
zontichnye-ogovorki-praktike-
mezhdunarodnykh-arbitrazhnykh-
tribunalov-poslednie
11.
UK Model BIT. [Electronic resource]. –
URL:http://investmentpolicyhub.uncta
d.org/Download/TreatyFile/2847
(circulation date — 10.12.2021).
12.
German
Model
Treaty
(2008)
[Electronic
resource].
–
URL:
http://www.italaw.com/sites/default/fil
es/archive/ita1025.pdf (circulation date
– 10.12.2021).
13.
Ksenofontov K. E. Umbrella clauses as
a mechanism for protecting foreign
investments
//
Legislation
and
Economics. – 2014. – № 5. – p. 56
14.
Shenkman
E.,
File
D.
Recent
Developments in Investment Treaty
Jurisprudence: Arbitrating Contract
Claims Under Umbrella Clauses, The
International Comparative Legal Guide
to: International Arbitration 2007, A
practical insight
to cross-border
International Arbitration work. P. 6
15.
Decree of the Cabinet of Ministers of
the Republic of Uzbekistan № 180 of
August 2, 2005 "On measures to
implement the Presidential Decree On
Additional Measures to Stimulate
Foreign Direct Investments". National
Database of Legislation, 01.05.2020 .,
09/20/264/0530
16.
A.Umirdinov. Uzbekistan's lawsuits
against investors: What to look for to
avoid conflict?http://umirdinov.com/
17.
Veliaminov G.M. International Law:
Experiences. – М.: Statute, 2015. – p.
337
18.
Danelyan
A.A.
International
investment
arbitration:
new
challenges, problems and ways to
overcome them International Legal
Courier. – 2014. – № 6 (6). – p. 8
19.
Pakistan–Switzerland
Bilateral
Investment Treaties (1995) [Electronic
resource].
–
URL:
http://investmentpolicyhub.unctad.org
/Download/TreatyFile/2130 (circulation
date – 25.11.2021)
20.
SGS Société Générale de Surveillance
S.A. v. Islamic Republic of Pakistan
(ICSID Case № ARB/01/13) // 8 ICSID
Rep. 406 (2005)
21.
Joy Mining Machinery Limited v. Arab
Republic of Egypt (ICSID Case №
ARB/03/11) // 19 ICSID Rev. – FILJ 486
(2004)
22.
CMS Gas Transmission Company v.
Argentine Republic (ICSID Case №
ARB/01/8) // 42 ILM 788 (2003); 44 ILM
1205 (2005)
The USA Journals Volume 03 Issue 12-2021
75
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
Published:
December 22, 2021 |
Pages:
68-75
Doi:
https://doi.org/10.37547/tajpslc/Volume03Issue12-11
I
MPACT
F
ACTOR
2021:
5.
952
23.
El Paso Energy International Company
v. Argentine Republic (ICSID Case №
ARB/03/15) // 21 ICSID Rev. – FILJ 488
(2006)
24.
Eureko B.V. v. Republic of Poland
[Electronic
resource].
–
URL:
http://www.italaw.com/sites/default/fil
es/case-documents/ita0308_0.pdf
(circulation date — 25.11.2021 .)
25.
Salini Costruttori S.p.A. and Italstrade
S.p.A. v. Hashemite Kingdom of Jordan
(ICSID Case № ARB/02/13) // 20 ICSID
Rev. – FILJ 148 (2005); 44 ILM 569
26.
Agreement between the Government
of the Hashevite Kingdom of Jordan
and the Government of the Italian
Republic jn the Promotion and
Protection of Investments (1996)
[Electronic
resource].
–
URL:
http://investmentpolicyhub.unctad.org
/Download/TreatyFile/3379 (circulation
date — 25.11.2021)
