1
The 22nd
Freshfields Lecture on International Arbitration
London, 29 November 2007
TREATY AND CONTRACT IN
INVESTMENT ARBITRATION
James Crawford∗
“A Subject and a Sovereign are clean different things.”
Charles I, speech on the scaffold, 30 January 16491
1. Introduction
No issue in the field of investment arbitration is more fundamental, or more disputed,
than the distinction between treaty and contract.2
There is a struggle between those who
believe BIT claims should be insulated from contractual claims and those who want to
relate the two. That struggle has led to a divided jurisprudence and – as often happens
when jurisprudes are divided – to a tendency to caricature opposing positions. In these
circumstances both time and further reflection are necessary before any consensus can
emerge, and the views of one proponent in the debate are no more likely to achieve
immediate acceptance than the views of any other. What I will try to do here, however, is
to set out the foundations in general international law for the approach I prefer. I am
reluctant to attach a label to that approach – which until it was termed “extreme” I fondly
regarded as some form of happy medium. But for convenience I will call it the
integrationist approach, since it attempts a reconciliation between two propositions both
generally agreed but which seem to be in perpetual tension with each other in this field –
on the one hand, the proposition that a host State cannot rely on its own law as a
justification for failing to comply with its international obligations, including those
obligations arising under treaties for the protection of foreign investment; on the other,
© James Crawford, 2007. This text is not to be cited or reproduced without the author’s permission.
∗
SC, FBA, LLD (Cantab); Whewell Professor of International Law, University of Cambridge; Barrister,
Matrix Chambers. Thanks to Stephanie Ierino, Research Fellow, Lauterpacht Centre for International Law,
for her assistance with this text.
1
“King Charls his Speech made upon the Scaffold at Whitehall-Gate immediately before his Execution,
on Tuesday the 30 of Jan 1648. With a Relation of the manner of his going to Execution.” in The Trial and
Execution of King Charles I: Facsimiles of the contemporary official accounts contained in the Charge of
the Commons of England Against Charls Stuart, King Charls His Tryal, King Charls His Speech Made
Upon the Scaffold (reprinted 1966, Scholar Press Limited, Leeds), (6).
2
See e.g. Z Douglas, “The Hybrid Foundations of Investment Treaty Arbitration” (2003) 74 BYIL 151; C
McLachlan et al, International Investment Arbitration: Substantive Principles, (OUP, 2007), 90 (paras
4.33-4.34); 127 (paras 4.149-4.151).
2
the proposition that an investment is, in the very first place and by definition, a
transaction occurring in the host State and governed by its laws.
Now of course there is only one world, however we may divide it conceptually:
there is no such place as the “international plane”. In the modern period, investment
contracts have always coexisted with international law standard for the protection of
investments, so this tension is not novel – as students of the old mixed arbitral tribunal
decisions will not need reminding. International law resolved that tension in two ways,
thereby underpinning the dominant dualist theory about the relation between international
and national law. The first was by strictly applying the exhaustion of local remedies rule:
national law issues had to be resolved first before the competent national courts.3
The
second was by way of the rule that for an international tribunal, national law is a pure
question of fact,4
a fact for the most part determined by the very resort to local remedies
which international law mandated in the field of diplomatic protection. Thus there was a
conceptual separation secured by a temporal separation; international law covered the
distinct field of interstate claims premised upon the failure to resolve the underlying
individual dispute first through national courts and national law.
But in the field of investment arbitration, neither of these rules applies. First,
there is no requirement of exhaustion of local remedies prior to commencing investment
arbitration – unless, exceptionally, that requirement has been expressly maintained.5
(This does not mean that the existence of an adequate local remedy may not be relevant
to the merits of a treaty claim – but that is another matter.) Secondly, the standard
applicable law clause in BITs – however it may be formulated – mandates and may even
require the tribunal to apply the law of the host State alongside international law. Faced
with article 42 of the ICSID Convention or some equivalent provision in a BIT, it cannot
be argued that the law of the host State is a mere matter of fact. It is true that tribunals
have to be informed, by expert evidence or otherwise, of the content of host State law
with which they may not be familiar. (Expert evidence of international law is also
tendered before such tribunals: whether or not this is desirable, the evidence is not
inadmissible.) It is also true that a treaty provision which mandates the application of the
law of a State is presumed to do so subject to the international law conflicts rule, that
international law prevails over national law in case of inconsistency. But that is a rule of
conflict of laws – it doesn’t treat national law as a mere matter of fact. And in the large
majority of cases where there is no inconsistency between international law and the law
of the host State, the two laws have to be applied in parallel.
3
ILC (Dugard, Special Rapporteur), “Draft Articles on Diplomatic Protection with Commentaries” in
Report of the International Law Commission on the Work of its Fifty-eighth Session (1 May – 9 June; 3 July
– 11 August 2006) UN Doc A/61/10. Part 3 of the Draft Articles deals with Local Remedies. Subject to
the exceptions in Article 15, Article 14(1) provides that a State may not present an international claim in
respect of an injury to a national (or a stateless person or refugee as provided for under Article 8) before the
injured person has exhausted all local remedies.
4
I Brownlie, Principles of Public International Law (6th
edn, OUP, 2003), 38- 40.
5
C Schreuer, The ICSID Convention: A Commentary (CUP, 2001), 388-396; McLaughlan et al, 128 (para.
4.152).
3
Before I turn to some ways in which this tension has been addressed, two
preliminary remarks are called for.
The first concerns the character of the international arbitral function. According
to an influential, it may be the dominant, view, it is an illusion to think that there is a right
or correct method of resolving such issues as these. Arbitrators are not judges, there is no
method of ensuring “correct” decisions, there will be unresolvable disagreements at the
general level between arbitrators depending on their own legal traditions and approaches.
The requirement that arbitrators give reasons – imposed for example by Articles 48(3)
and 52(1)(e) of the ICSID Convention – is a process requirement; it is there to ensure that
the tribunal does its job and does not decide in an arbitrary manner; it is not intended to
enable substantive review of the reasons for deciding the merits of the disputes submitted
to arbitration. According to this view, the well-known disagreement in the two SGS cases
over the umbrella clause6
should not be allowed to mask the fact that the two tribunals
reached similar functional conclusions, both allowing contract claims to proceed before
national level forums (in one case domestic arbitration, in another, national courts) where
the parties to the investment contracts had agreed on the exclusive jurisdiction of those
forums. On this view it is a mistake to look for a jurisprudence constante such as might
characterise a unified jurisdiction with a unitary system of law. Rather the search must
be for patterns of decisions and for an acceptable spectrum of views.
Evidently legal theorists have debated this issue for ages, and it must be added to
the lengthening list of points which in the confines of a lecture (if not a lifetime) I am not
going to be able to settle. But I must say that I find the current level of dissensus between
arbitrators on core questions disturbing; the carpet looks very much as if different people
have started from different ends without many common threads – a crazy quilt rather than
a Persian rug. At any rate I think we should strive towards a closer agreement on such
questions as the effect of the standard umbrella clause or the role of legitimate
expectations, rather than rejoicing in a complete system of laissez faire.
My second point is more personal. Inevitably a number of the issues I will be
discussing arise in pending cases in which I am involved as arbitrator or otherwise.
Nothing I say should be taken as indicating any concluded views on the specific issues in
these cases.
2. The International Law Framework
I said earlier that I hoped to set out the foundations in general international law for the
integrationist approach. Let me do that now. Within the time available I would make
five points.
(1) The first is that there is no a priori limitation on the scope or content of treaty
obligations, even those concerning what would otherwise be internal affairs. There is no
6
SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan (ICSID Case No. ARB/01/13),
Decision on Objections to Jurisdiction, 6 August 2003, 8 ICSID Reports 406; SGS Société Générale de
Surveillance SA v Republic of the Philippines (ICSID Case No. ARB/02/6), Decision on Objections to
Jurisdiction, 29 January 2004, 8 ICSID Reports 515.
4
a priori definition of what is or is not international. Nor is there any presumption of the
restrictive interpretation of treaties. We find authority for this in The Wimbledon, the first
contentious case to come before the first permanent international court.7
The issue was
whether the guarantee of freedom of transit through the Kiel Canal under Art 380 of the
Treaty of Versailles of 1919,8
a guarantee which extended to ships of “all nations at peace
with Germany”, required Germany to allow the transit through the canal of a ship
carrying munitions to Poland, then at war with Russia. It was argued that a treaty
provision should be restrictively interpreted because otherwise it would amount to an
infringement on Germany’s sovereignty. The Court, in a passage echoed many times
since...
“decline[d] to see in the conclusion of any Treaty by which a State...
undertakes to perform... a particular act an abandonment of its
sovereignty. No doubt any convention creating an obligation of this kind
places a restriction upon the exercise of the sovereign rights of the State,
in the sense that it requires them to be exercised in a certain way. But the
right of entering into international engagements is an attribute of State
sovereignty.”9
Thus an argument from sovereignty was evaded by an appeal to sovereignty: if states
could not enter into binding international obligations, they would lack an attribute of
statehood.
I should observe that the German argument in that case had considerable weight
because it was supported by another basic rule, that the rights of third States are
unaffected by treaties to which they are not party. Germany relied on its obligation of
neutrality vis-à-vis Russia, not a party to the Treaty of Versailles, in support of a
restrictive interpretation of the transit regime for the Kiel Canal under that Treaty – but to
no avail. In the investment context, the rights and obligations in question are those of the
host State, by definition a party to the treaty. No third State problem arises.
(2) This in turn gives rise to the second general principle, the principle that treaty
language is presumed to have its natural and ordinary meaning in its context. This is
stated as the general rule in Article 31(1) of the Vienna Convention on the Law of
Treaties of 1969. A corollary is the principle of effet utile; the words of a substantive
treaty provision should be given some rather than no effect – i.e. the normal effect its
terms would indicate. A further corollary is that each investment treaty has to be
interpreted in its own terms and in its own right. There is no such thing as the umbrella
clause; rather, there are umbrella clauses. No 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.
7
PCIJ Ser A No 1 (1923).
8
225 CTS 188.
9
PCIJ Ser A No 1 (1923), 25.
5
The next three principles are drawn from the law of State responsibility. As a
general matter the responsibility of States in the field of investment treaty arbitration is a
species of State responsibility, i.e. the responsibility of a State party for breach of the
substantive international obligations created by the investment treaty. For this purpose it
makes no difference whether these obligations are owed to the other State party to the
treaty or directly to the investor. The former view was adopted by the NAFTA Tribunal
in the Loewen case, when it said that:
“233. …Rights of action under private law arise from personal obligations
(albeit they may be owed by or to a State) brought into existence by
domestic law and enforceable through domestic tribunals and courts.
NAFTA claims have a quite different character, stemming from a corner
of public international law in which, by treaty, the power of States under
that law to take international measures for the correction of wrongs done
to its nationals has been replaced by an ad hoc definition of certain kinds
of wrong, coupled with specialist means of compensation. These means
are both distinct from and exclusive of the remedies for wrongful acts
under private law: see Articles 1121, 1131, 2021 and 2022. It is true that
some aspects of the resolution of disputes arising in relation to private
international commerce are imported into the NAFTA system via Article
1120.1(c), and that the handling of disputes within that system by
professionals experienced in the handling of major international
arbitrations has tended in practice to make a NAFTA arbitration look like
the more familiar kind of process. But this apparent resemblance is
misleading. The two forms of process, and the rights which they enforce,
have nothing in common. There is no warrant for transferring rules
derived from private law into a field of international law where claimants
are permitted for convenience to enforce what are in origin the rights of
Party states.”10
That view has been followed and applied by the majority in another NAFTA case, as yet
unreported.
This is a fascinating issue – but in the majority of cases it will make no difference
to the result. Even if the primary obligation is owed only to the other State party to the
BIT and is defeasable on an interstate basis, the responsibility invoked by the investor in
investor-State arbitration is the responsibility of the State and it is governed, as
declaratory of international law, by Part 1 of the ILC Articles on Responsibility of States
for Internationally Wrongful Acts.11
In the words of Article 33(2) of the ILC Articles, in
investment arbitration the investor, a person or entity other than a State, seeks to
10
The Loewen Group Inc. and Raymond L. Loewen v United States of America (ICSID Case No.
ARB(AF)/98/3), Award, 26 June 2003, 7 ICSID Reports 442 (emphasis added).
11
Hereafter the ILC Articles. These are appended to GA Res 56/83 of 14 December 2001; they and the
ILC’s commentaries are reprinted in J Crawford, The International Law Commission’s Articles on State
Responsibility: Introduction, Text and Commentaries, (2002, Cambridge, CUP).
6
vindicate a “right, arising from the international responsibility of a State”, and it does so
whether or not the primary obligation is owed to that person or entity.12
Within the field of Part I of the ILC Articles, the following propositions are
relevant.
(3) For state responsibility to arise, the conduct in question must be attributable to the
host State under the rules set out in Articles 4-11 of the ILC Articles. Attribution is a
legal operation by which the conduct of a range of domestic law entities is treated as
conduct of an international law entity, the State. In some cases, as with Article 4 organs,
all the conduct of such organs is attributable to the State, whether or not it is
characterized as conduct iure imperii or iure gestionis. In other cases, as with separate
entities exercising elements of governmental authority under Article 5, only certain
conduct is so attributable. In principle attribution does not involve any piercing of the
corporate veil – although that may be called for in specific cases. Nor does the process of
attribution redefine the State in terms of its own internal law: who represents the State
domestically may be different from who does so in international law.13
I am reliably
informed that there is no such entity as Poland in Polish law – by contrast much of 20th
century history concerned its existence and identity as a matter of international law. Thus
the mere fact that acts of separate entities may be attributable to the State in particular
cases does not mean that the contracts of such entities are State contracts.
(4) The fourth proposition, also drawn from the law of State responsibility, concerns
breach. In general a finding of a breach of international law does not depend on the
characterization of the conduct in question as “governmental”, or as involving the
exercise of sovereign authority. There are only two questions: what is the State obliged
to do or refrain from doing, and has it complied with that obligation? Unless the primary
rule which is the source of the obligation requires it, there is no third question, how to
characterize the breach. Still less is there any requirement to prove any particular motive,
whether financial or “governmental”. That point is made in the ILC’s commentaries,
both on Articles 4 and 12. Thus the ILC said on Article 4:
“It is irrelevant for the purposes of attribution that the conduct of a State
organ may be classified as ‘commercial’ or ‘acta iure gestionis’. The
breach by a State of a contract clearly does not as such entail a breach of
international law. Something further is required before international law
becomes relevant, e.g. a denial of justice by the courts of the State in
proceedings brought by the other contracting party. But the entry into or
breach of a contract by a State organ is nonetheless an act of the State for
the purposes of article 4, and it may amount to an internationally wrongful
act.”14
The irrelevance of the classification of the acts of State organs as iure imperii or iure
12
See ILC Art 33(2) & commentary, para (4), reprinted in Crawford, 207-208.
13
Cf Maritime Delimitation and Territorial Questions between Qatar and Bahrain, Jurisdiction and
Admissibility, Judgment, ICJ Reports 1994, 112, paras. 28-29.
14
See ILC, Commentary to Art 4, para (6), reprinted in Crawford, 96.
7
gestionis was affirmed by all those members of the Sixth Committee who responded to a
specific question on this issue from the Commission.15
Similarly in its commentary on Article 12, the basic article on breach, the ILC
noted that:
“International awards and decisions specifying the conditions for the
existence of an internationally wrongful act speak of the breach of an
international obligation without placing any restriction on the subjectmatter
of the obligation breached. Courts and tribunals have consistently
affirmed the principle that there is no a priori limit to the subject matters
on which States may assume international obligations… [T]he breach by a
State of an international obligation constitutes an internationally wrongful
act, whatever the subject matter or content of the obligation breached, and
whatever description may be given to the non-conforming conduct.”16
To take an example, the refusal at one point by the United Kingdom to proceed with the
Concorde project – as required by a bilateral treaty with France17
– threatened a breach of
that treaty, and it was irrelevant whether the British motive was to save money or protect
the environment.
(5) The fifth principle is that of independent characterization and is stated in Article 3
of the ILC Articles:
“The characterization of an act of a State as internationally wrongful is
governed by international law. Such characterization is not affected by the
characterization of the same act as lawful by internal law.”
The relevance of this for our inquiry is explained in the commentary:
“Especially in the fields of injury to aliens and their property and of
human rights, the content and application of internal law will often be
relevant to the question of international responsibility. In every case it will
be seen on analysis that either the provisions of internal law are relevant as
facts in applying the applicable international standard, or else that they are
actually incorporated in some form, conditionally or unconditionally, into
that standard.”18
To summarise, State responsibility for breach of international law is distinct from
the liability of a State for breach of its contracts. But there may be important overlaps:
for example, a State may commit by treaty to comply with a contract, in which case its
failure to do so is (subject to any circumstance precluding wrongfulness) also a breach of
an international obligation. Responsibility for breach of treaty is conceptually distinct
15
See Report of the ILC…1998 A/53/10, para 35.
16
ILC, Commentary to Art 12, paras (9), (10), reprinted in Crawford, 128-129.
17
Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and
the Government of the French Republic regarding the development and production of a civil supersonic
transport aircraft, 29 November 1962, 453 UNTS 326.
18
ILC, Commentary to Art 3, para (7), reprinted in Crawford, 89.
8
from responsibility for breach of contract – but the latter may, depending on the context,
entail or imply the former.
These five principles provide the necessary background to what is still the leading
case on the contract/treaty distinction, the Vivendi Annulment decision. The claimants
operated water and sewerage systems in Tucumán, a province of Argentina, pursuant to a
contract with the first claimant, a locally-incorporated Vivendi affiliate, and Tucumán.
The contract conferred exclusive jurisdiction on Tucumán’s administrative tribunals for
“interpretation and application” of the contract.19
Following numerous disputes, both parties rescinded and claimed the other was in
default. The claimants instituted ICSID arbitration on the basis of the 1991 FranceArgentina
BIT, alleging that its investor rights had been infringed by public health orders,
mandatory service obligations and rate regulations. The Tribunal held that the contract
did not prevent the investor from proceeding against Argentina under the ICSID
Convention on the basis of its alleged violation of the BIT. However, all the claims
concerning the action of the Argentine province arose from disputes concerning the
performance of the Contract, and the Claimant had agreed to submit those disputes
exclusively to the jurisdiction of the Tucumán courts. As it was impossible to separate
breaches of the contract by Tucumán from potential violations of the BIT, the Claimant
had to first bring proceedings before the administrative courts of Tucumán as provided
for by the contract.20
The Tribunal’s award was partially annulled by an ad hoc Committee.21
The
Committee distinguished between determining whether there has been a breach of the
BIT which must be considered by reference to international law, and whether the contract
has been breached which must be determined by reference to the proper law of the
contract (Tucumán law, in the present case):
“As to the relation between breach of contract and breach of treaty… [a]
state may breach a treaty without breaching a contract, and vice versa… 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
19
Article 16.4 of the Concession Contract for Water and Sewage Service in the Province of Tucumán,
May 18, 1995 provided as follows:
“For purposes of interpretation and application of this Contract the parties submit
themselves to the exclusive jurisdiction of the Contentious Administrative Tribunals of
Tucumán.”
20
Compañía de Aguas del Aconquija SA and Compagnie Générale des Eaux/Vivendi Universal v
Argentine Republic (ICSID Case No. ARB/97/3) Award, 21 November 2000, 5 ICSID Reports 299.
21
Compañía de Aguas del Aconquija SA and Compagnie Générale des Eaux/Vivendi Universal v
Argentine Republic (ICSID Case No. ARB/97/3) Decision on Annulment, 3 July 2002, 6 ICSID Reports
340.
9
the [contract], by the proper law of the contract, in other words, the
[municipal law].”22
The Tribunal ought not to have allowed Argentina to rely on the contract’s exclusive
jurisdiction clause to avoid the characterisation of its conduct as internationally unlawful
under the BIT:
“In a case where the essential basis of a claim brought before an
international tribunal is a breach of contract, the tribunal will give effect to
any valid choice of forum clause in the contract.”23
“On the other hand, where ‘the fundamental basis of the claim’ is a treaty
laying down an independent standard by which the conduct of the parties
is to be judged, the existence of an exclusive jurisdiction clause in a
contract between the claimant and the respondent state or one of its
subdivisions cannot operate as a bar to the application of the treaty
standard. At most, it might be relevant – as municipal law will often be
relevant – in assessing whether there has been a breach of the treaty.”24
“It is one thing to exercise contractual jurisdiction…and another to take
into account the terms of a contract in determining whether there has been
a breach of a distinct standard of international law...”25
“Whether particular conduct involves a breach of a treaty is not
determined by asking whether the conduct purportedly involves an
exercise of contractual rights.”26
By refusing to interpret the contract, the Tribunal “failed to decide whether or not the
conduct in question amounted to a breach of the BIT.”27
“A treaty cause of action is not the same as a contractual cause of action; it
requires a clear showing of conduct which is in the circumstances contrary
to the relevant treaty standard. The availability of local courts ready and
able to resolve specific issues independently may be a relevant
circumstance in determining whether there has been a breach of
international law… But it is not dispositive, and it does not preclude an
international tribunal from considering the merits of the dispute.”28
The Committee held that the tribunal committed a manifest error of jurisdiction if, having
upheld its jurisdiction over an admissible treaty claim, it declined to decide that claim.29
22
Ibid., paras 95-96.
23
Ibid., para 98.
24
Ibid., para 101.
25
Ibid., para 105.
26
Ibid., para 110.
27
Ibid., para 111.
28
Ibid., para 113.
29
Ibid., para 115.
10
(I note in parenthesis that a second tribunal upheld Vivendi’s restated claim, awarding
damages of US$105,000,000.30
)
Vivendi Annulment is predicated on the distinction between contractual claims and
treaty claims. At some level this is obvious, but nonetheless there is strong disagreement
as to the corollaries of this distinction. In the time remaining I will take two fields in
which there is arbitral and academic disagreement. These are (1) contractual claims and
counter claims; (2) umbrella clauses. Time does not allow an analysis of a third field
pertaining to merits issues – legitimate expectations – although similar lessons can be
learnt there about the role of contracts in shaping investments and the need to focus on
the real rather than an imagined transaction.
3. Contractual Claims and Counterclaims under BITs
If treaties and contracts were “clean different things”, one would expect them to inhabit
different worlds. As between sovereigns there could be promises to submit investment
disputes to arbitration but those promises would be interstate ones only: they would not
sound in contract as against their intended beneficiaries – or at least they would not do so
without domestic implementation. It should be noted that BITs are virtually never relied
on as part of the internal law of the host State, and they will almost by definition not be
part of the law of the seat of the arbitration. Lacking status as internal law, they are relied
on exclusively as treaties.
But even in legal systems which give no legal effect to treaties as such, a dualistic
construction does not prevail. The established understanding is that an offer to arbitrate
is contained in the BIT and is accepted by the investor’s notice of arbitration or by such
other consent as the treaty may require. At that point, and not before, there is a perfected
agreement to arbitrate between a qualified investor and the host State. As the Court of
Appeal said in Republic of Ecuador v Occidental Exploration and Production Co:
“The treaty involves… a deliberate attempt to ensure for private investors
the benefits and protection of consensual arbitration; and this is an aim to
which national courts should, in an internationalist spirit and because it
has been agreed between states at an international level, aspire to give
effect… The present treaty at article VI(3)(a) holds out to investors on a
standing basis the right to ‘choose to consent in writing to the submission
of the dispute for settlement by binding arbitration’ … and, at article
VI(3)(b), once such consent is given, ‘either party to the dispute may
initiate arbitration in accordance with the choice so specified in the
consent’. The treaty expressly goes on to provide that the consent of the
relevant state ‘hereby’ to the submission of any investment dispute for
settlement by binding arbitration... together with the investor’s written
consent when choosing such arbitration, shall satisfy the requirement for
written consent under the ICSID Convention and at article VI(4)(b) for ‘an
30
Compañía de Aguas del Aconquija SA and Compagnie Générale des Eaux/Vivendi Universal v
Argentine Republic (ICSID Case No. ARB/97/3), Award, 15 August 2007, <http://ita.law.uvic.ca/>, para
11.1.
11
“agreement in writing” for purposes of article II of the [New York]
Convention’; and that any arbitration shall be held in a state party to that
convention. This purpose can only be fulfilled, in a legal system with a
dualist approach to international law like the English, if the operation of
the mechanism for consensual arbitration in the treaty does in fact
generate an ‘agreement in writing’. The application of the New York
Convention depends on such an agreement, and the provisions of the
Arbitration Act 1996 (sections 100-104) relating to the enforcement of
foreign arbitral awards give effect to this requirement in English law. We
would not in the circumstances accept...that the consensual aspect of the
arbitration contemplated in article VI of the treaty is a matter of mere
form. It must, as it seems to us, have been intended to give rise to a real
consensual agreement to arbitrate, even though by a route prescribed in the
treaty.
Further … the agreement to arbitrate which results by following the treaty
route is not itself a treaty. It is an agreement between a private investor on
the one side and the relevant state on the other.”31
Thus the separate agreement to arbitrate an investment claim under a BIT is a contract
and not a treaty. If the agreement to arbitrate in Occidental had been a treaty, it would
have been unenforceable and issues arising under it would have been non-justiciable
before an English court, which the Court of Appeal expressly denied. The investor has
neither international legal personality nor treaty-making capacity, and it does not acquire
either merely by accepting an offer to arbitrate made in a treaty. If the agreement to
arbitrate was a treaty, the resulting award would not be enforceable under the New York
Convention of 1958, which has no application to international law arbitrations, e.g.
between States or other international legal persons.32
But there is a distinction between a treaty the parties to which are international
legal persons and a contract the proper law of which is international law. In the
Occidental case the Court of Appeal held that the proper law of the agreement to arbitrate
is international law.33
It could not be the law of the seat of the arbitration since the seat
will often not be identified at the time the agreement to arbitrate was concluded, and
English law cannot abide a floating proper law any more than nature a vacuum. Nor is it
likely that the parties could have agreed on the law of the host State as the proper law of
the arbitration agreement. That left international law as the only option. It was a credible
option since the content of the agreement to arbitrate is determined largely by reference
to the BIT, itself undoubtedly governed by international law. Thus the BIT brings forth a
binding commitment to arbitrate enforceable through national courts under national law,
specifically under the Arbitration Act 1996. In short, a treaty breeds a contract.
31
Republic of Ecuador v Occidental Exploration and Production Co [2005] EWCA Civ 1116, paras 32-33
(Lord Phillips of Worth Matravers MR, Clarke, Mance LJJ).
32
Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, 330 UNTS 38,
Articles 1, 7.
33
Republic of Ecuador v Occidental Exploration and Production Co, para 33.
12
That raises in turn the question whether a BIT can provide a basis for
straightforward contractual jurisdiction, independently of any umbrella clause. If a treaty
can provide a basis for consent to arbitrate treaty claims with the host State, why can it
not provide a basis of consent to arbitrate contractual claims? Indeed it has done so:
under the Claims Settlement Declaration which is part of the Algiers Accords of 1980,
individual claimants brought thousands of contractual claims against Iran,34
and it has
been held that the resulting awards of the Iran-US Claims Tribunal are enforceable under
the New York Convention.35
Of course, contractual jurisdiction can only be asserted if the terms of the BIT
were wide enough to encompass claims under investment contracts. Some BITS are
quite clear in excluding that possibility. For example under Articles 1116 and 1117 of
the NAFTA, the only claims which may be submitted to arbitration are claims that
another NAFTA Party has breached an obligation under specified articles of Chapter 11
itself. Indeed in some cases it has been clear that there were breaches of the investment
contract by State organs: that might conceivably be taken into account in applying the
minimum standard of treatment in Article 1105(1) on the NAFTA but it would only be
relevant incidentally.
By contrast the standard arbitration clauses in BITs make a clear distinction
between investment disputes arising between investors and host States, and disputes
concerning the interpretation and application of the BIT arising between the States parties
to the BIT. The point was made by the Vivendi Annulment panel by reference to the
France-Argentina BIT, which was in a fairly standard form. Article 8(1) provided that
“[a]ny dispute relating to investments made under this Agreement between one
Contracting Party and an investor of the other Contracting Party”, if not settled by
negotiation, could be referred either to the domestic courts or to international arbitration,
the choice between them being final. There was no restrictive definition of “dispute
relating to investments”. As the Committee noted:
“Article 8 does not use a narrower formulation, requiring that the
investor’s claim allege a breach of the BIT itself. Read literally, the
requirements for arbitral jurisdiction in Article 8 do not necessitate that the
Claimant allege a breach of the BIT itself: it is sufficient that the dispute
relate to an investment made under the BIT. This may be contrasted, for
example, with Article 11 of the BIT, which refers to disputes ‘concerning
the interpretation or application of this Agreement’.”36
The issue arose in that case not because the claimants called on the Tribunal to award
damages under the Concession Contract – they expressly did not – but because the phrase
““[a]ny dispute relating to investments” was capable of covering the same dispute,
whether it was presented in the form of a claim under the substantive provisions of the
34
D Caron & J Crook (eds), The Iran-United States Claims Tribunal and the Process of International
Claims Resolution: A Study by the Panel on State Responsibility of the American Society of International
Law (Transnational Publishers Inc., New York, 2000), 11-12.
35
Ministry of Defense of Iran v Gould, Inc, 887 F.2d 1357 (9th
Cir. 1989).
36
Compañía de Aguas del Aconquija SA and Compagnie Générale des Eaux/Vivendi Universal v
Argentine Republic), Decision on Annulment, 3 July 2002, para 55.
13
BIT or a claim under the investment contract. Factually there was one dispute not two,
whatever causes of action might be invoked. For that reason the Committee was of the
view that the claimants, by invoking the jurisdiction of an international tribunal under
Article 8, had taken the fork in the road and elected their remedy. In declining to decide
the claim under the BIT, the first Vivendi Tribunal had deprived the Claimants of a right
which the Treaty expressly conferred.37
The implication of all this is that contractual jurisdiction can be invoked under
any sufficiently clear generic dispute settlement clause in a BIT, such as Article 8 of the
Argentina-France Treaty which was applied in the Vivendi case. But this conclusion is
subject to a number of qualifications which significantly limit its scope.
The first qualification is that the contractual claim must be characterized at the
same time as a claim “relating to investments”. Not every contract entered into by an
investor is an investment contract – the classic example is an ordinary contract for the
supply of goods and services.
The second qualification is that there can only be contractual jurisdiction under a
BIT in respect of an investment contract with the State itself, and not with a separate
State entity having its own legal personality, and a fortiori with a third party. It is
sometimes argued that the question is one of attribution under Chapter 2 of Part I of the
ILC’s Articles on State Responsibility, but attribution has nothing to do with it. The
issue of attribution arises when it is sought to hold the State responsible for some breach
of an international obligation – including one arising under a substantive provision of a
BIT. The problem here concerns jurisdiction, not merits; the formation of a secondary
agreement to arbitrate, not the breach of a primary obligation concerning the protection of
investments. In short, the question is one of interpretation of the jurisdictional offer, not
attribution of conduct to the State.
The third qualification concerns the common case where the investment contract
with the State contains its own exclusive dispute settlement clause. An investor invoking
contractual jurisdiction pursuant to an offer made by the State must itself comply with its
contractual arrangements for dispute settlement with that State. The principle pacta sunt
servanda is not a one-way street. This was the basis for the majority holding in SGS v
Philippines that a contractual claim under a BIT cannot be pursued in breach of an
applicable exclusive jurisdiction clause. In SGS v Philippines that issue arose under an
umbrella clause, a matter to which I will return. But it would arise equally under a
generic dispute settlement clause such as Article 8 of the France-Argentina Treaty.
Indeed it is arguable that under a generic dispute settlement clause this should be
classified as an issue of jurisdiction properly so-called, and not one of admissibility.
Whatever answer may be given to the question whether an investor can by contract in
advance renounce the right to arbitrate treaty claims, there cannot be any doubt that it can
renounce the right to arbitrate contract claims in a treaty forum. An exclusive jurisdiction
clause in a contract is surely intended to do just that.
37
Ibid., paras 102-115..
14
It is worth noting that the drafters of the 2004 US Model BIT sought to achieve
essentially this result, though—in the tradition of that instrument—they did so by rather
complex drafting. Article 24 of the Model BIT provides, in relevant part:
“1. In the event that a disputing party considers that an investment dispute
cannot be settled by consultation and negotiation:
(a) the claimant, on its own behalf, may submit to arbitration under
this Section a claim
(i) that the respondent has breached
…
(C) an investment agreement;
and
(ii) that the claimant has incurred loss or damage by reason of,
or arising out of, that breach…”
…
provided that a claimant may submit… a claim for breach of an
investment agreement only if the subject matter of the claim and the
claimed damages directly relate to the covered investment that was
established or acquired, or sought to be established or acquired, in reliance
on the relevant investment agreement.”38
Article 24 does not deal with the contingency of an exclusive jurisdiction clause in an
investment agreement.
There is a second implication of all this, which concerns counterclaims. The core
problem with counterclaims in BIT arbitration is that the treaty commitments of the host
State towards the investor are unilateral, and anyway the investor is not a party to the
BIT. Moreover the agreement to arbitrate, though it incorporates by reference the
jurisdictional requirements of the BIT, does not incorporate its substantive provisions nor
does it make them applicable bilaterally. In the case of a narrowly drawn counter-claim
provision in the applicable arbitration rules, such as Article 19(3) of the UNCITRAL
Rules (Article 19(3) of the PCA Rules), it will be argued that no counterclaim is possible
because the host State’s counterclaim would not “arise out of the same contract” within
the meaning of Article 19(3).
In fact two Tribunals applying the terms of Article 19(3) have held that
counterclaims are in principle permissible.
38
2004 US Model Bilateral Investment Treaty (“Treaty between the Government of the United States of
America and the Government of [Country] concerning the encouragement and reciprocal protection of
investment”), Office of the United States Trade Representative website <http://www.ustr.gov/index.html>.
15
Reineccius & others v Bank for International Settlements39
was not a BIT claim: it
arose under the 1930 Convention respecting the Bank for International Settlements and
concerned the amount of compensation payable for the recall of the 13.73% of privately
held shares in the Bank. The Tribunal held that the Claimants were entitled to
compensation for their recalled shares corresponding to a proportionate share of the net
asset value of the Bank, discounted by 30%.40
It also upheld the counterclaim of the
Bank against one of the claimants, awarding the Bank’s costs of defending proceedings
brought by it in the United States in breach of the agreement to arbitrate.41
In so far as
the breach concerned the agreement to arbitrate, a similar result could be achieved under
a BIT – although presumably a claimant which has actually commenced a BIT arbitration
will be careful not to pursue competing proceedings before national courts.42
More directly relevant is the second case, Saluka BV v Czech Republic,43
a
decision of a tribunal presided over by Sir Arthur Watts. In a partial privatisation, Saluka
had acquired a substantial minority shareholding in IPB, a Czech state-owned bank: in
controversial circumstances IPB became insolvent, was out into administration and sold
for a pittance to another bank. Saluka claimed violations of the deprivation of investment
(Article 5) and fair and equitable treatment (Article 3) of the Netherlands-Czech Republic
BIT. The Czech Republic brought a counterclaim which inter alia alleged breaches of the
original share purchase agreement with the privatisation agency, a State organ. The
arbitration was conducted under the UNCITRAL Rules.
In its interlocutory decision on the Counterclaim, the Tribunal said:
“Both parties have… accepted that counterclaims might fall within the
scope of the Tribunal’s jurisdiction under Article 8: the Respondent has
done so by virtue of having presented such a counterclaim, and the
Claimant has done so by acknowledging that circumstances could be
envisaged in which a counterclaim could properly be made, as where a
primary claim was presented on the basis of an investment contract and a
counterclaim was presented on the basis of that same contract.”44
The Tribunal held that
“the jurisdiction conferred upon it by Article 8, particularly when read
with Article 19.3, 19.4 and 21.3 of the UNCITRAL Rules, is in principle
39
Dr Horst Reineccius, First Eagle SoGen Funds, Inc., Mr Pierre Mathieu and la Société de Concours
Hippique de la Châàtre v Bank for International Settlements, Partial Award on the Lawfulness of the
Recall of the Privately Held Shares on 8 January 2001 and the Applicable Standards for Valuation of those
Shares, 22 November 2002; Final Award on the Claims for Compensation for the Shares Formerly Held by
the Claimants, Interest Due Thereon and Costs of the Arbitration and on the Counterclaim of the Bank
against First Eagle Sogen Funds, Inc, 19 September 2003, Permanent Court of Arbitration website
<www.pca-cpa.org> (hereafter ‘Bank for International Settlements’).
40
Bank for International Settlements, Partial Award, para 202.
41
Ibid., Final Award, paras 103, 138(1) and (4).
42
Cf ICSID Convention, Art 26.
43
Saluka Investments BV v Czech Republic, Decision on Jurisdiction over the Czech Republic’s
Counterclaim, 7 May 2004, para 81.
44
Ibid., para 38.
16
wide enough to encompass counterclaims. The language of Article 8, in
referring to ‘All disputes,’ is wide enough to include disputes giving rise
to counterclaims, so long, of course, as other relevant requirements are
also met. The need for a dispute, if it is to fall within the Tribunal’s
jurisdiction, to be ‘between one Contracting Party and an investor of the
other Contracting Party’ carries with it no implication that Article 8
applies only to disputes in which it is an investor which initiates claims.”45
However jurisdiction in respect of the counterclaim, as for the primary claims, was
circumscribed by Article 8 of the Treaty which refers to disputes “concerning an
investment”. The counterclaim had to satisfy that requirement to fall within the
Tribunal’s jurisdiction.46
In addition, “a legitimate counterclaim must have a close
connexion with the primary claim to which it is a response.”47
The Tribunal cited the
ICSID arbitral decision in Klöckner v Cameroon, which emphasised the need for the
subject-matter of the counterclaim to be intimately connected with the subject matter of
the primary claim.48
It also cited a number of Iran-US Claims Tribunal decisions to
similar effect.49
The Tribunal stated that:
“Article 19.3 of the UNCITRAL Rules, Articles 25(1) and 46 of the
ICSID Convention and Article II(1) of the Iran-US Claims Settlement
Declaration, all reflect essentially the same requirement: the counterclaim
must arise out of the ‘same contract’ (UNCITRAL Rules, Article 19.3), or
must arise ‘directly out of an investment’ and ‘directly out of the subjectmatter
of the dispute’ (ICSID, Articles 25(1) and 46), or must arise ‘out of
the same contract, transaction or occurrence that constitutes the subject
matter of [the primary] claims’ (Article II(1) of the Claims Settlement
Declaration). The Tribunal is satisfied that those provisions, as interpreted
and applied by the decisions which have been referred to, reflect a general
legal principle as to the nature of the close connexion which a
counterclaim must have with the primary claim if a tribunal with
jurisdiction over the primary claim is to have jurisdiction also over the
counterclaim.”50
The Tribunal concluded it was without jurisdiction in respect of the Respondent’s
counterclaim on the basis that the disputes “which have given rise to the Respondent’s
counterclaim are not sufficiently closely connected with the subject-matter of the original
45
Ibid. para 39.
46
Ibid., para 60.
47
Ibid., para 61.
48
Klöckner v Cameroon (ICSID Case No ARB/81/2) Decision on Annulment, 3 May 1985, 2 ICSID
Reports 162, 165.
49
Eg. American Bell International, Inc. v The Government of the Islamic Republic of Iran, et al.;
Westinghouse Electric Corp. v The Islamic Republic of Iran et al; Owens-Corning Fiberglass Corp. v The
Government of ran et al.; Morrison-Knudsen Pacific Ltd. v The Ministry of Roads and Transportation et
al.; Harris International Telecommunications, Inc. v Iran.
50
Saluka Investments BV v Czech Republic, Decision on Jurisdiction over the Czech Republic’s
Counterclaim, 7 May 2004, para 76.
17
claim put forward by Saluka to fall within the Tribunal’s jurisdiction under Article 8 of
the Treaty.”51
To summarise, where the host State has a counterclaim arising from the
investment contract which falls within the description of a dispute concerning an
investment within the terms of the relevant BIT, such a counterclaim may be admissible
depending on the actual connection with the primary claim. The term “contract” in
Article 19.3 of the UNCITRAL Rules should be interpreted to include the BIT on which
the investor’s claim is based, and where there is a generic dispute settlement clause in the
BIT claims by the host State under an investment contract to which it is a party,
counterclaims under the investment contract may be admissible. A fortiori this should be
true when the ICSID Arbitration Rules apply: Article 40 refers to “a counter-claim
arising directly out of the subject-matter of the dispute”, and as in Vivendi a treaty claim
and a contract claim, while remaining legally distinct causes of action, may have the
same subject-matter. To conclude, contractual claims and counterclaims may be brought
under appropriately worded BITs.
This conclusion seems desirable as a matter of policy as well as law. Despite the
inherently asymmetrical character of a BIT, BIT tribunals should be able to hear closely
connected investment counterclaims arising under the investment contract. Otherwise the
maxim pacta sunt servanda operates in only one direction.
3. Contractual Claims and the Umbrella Clause
I turn to my second major theme, the so-called “umbrella clause”. In doing so I
acknowledge the assistance given by the work of two current doctoral students at
Cambridge, Anthony Sinclair and Monique Sasson. In particular Anthony Sinclair has
usefully traced the origins of the umbrella clause back to their origins in the aftermath of
the Anglo Iranian Oil Company case in 1952.52
It is not the least of the criticisms to be
leveled at the narrow interpretations of the umbrella clause that they disregard this
history.
I should start with the standard proviso – deriving from my first general principle.
Some umbrella clauses are more equal than others to the interpretative weight put upon
them – or to put it in less Orwellian terms, everything depends in their actual language.
For example the clause at issue in Salini Costruttori S.p.A. and Italstrade S.p.A. v.
Hashemite Kingdom of Jordan,53
provided that:
“Each Contracting Party shall create and maintain in its territory a legal
framework apt to guarantee to investors the continuity of legal treatment,
51
Ibid., para 81.
52
Anglo-Iranian Oil Co. case (Jurisdiction), ICJ Reports 1952 p 93. See AC Sinclair, “The Origins of the
Umbrella Clause in the International Law of Investment Protection” (2004) 20 Arbitration International
411.
53
Salini Costruttori SpA & Italstrade SpA v Hashemite Kingdom of Jordan, Decision on Jurisdiction, 9
November 2004 (Guillaume, President; Cremades and Sinclair).
18
including the compliance, in good faith, of all undertakings assumed with
regard to each specific investor.”
This was rightly held not to involve any guarantee by the host State with regard to
specific transactions.54
It was not an umbrella clause at all. Likewise the clause in SGS v
Pakistan was curiously worded and might have given grounds for a narrower
construction.55
In what follows I will limit myself to umbrella clauses by which the host
State commits itself to comply with obligations it has entered into with regard to
investments. For example the 1984 and the 1987 US Model BITs provided that: “Each
Party shall observe any obligation it may have entered into with regard to investments.”
The 2004 US Model BIT abandoned this formulation, adopting instead the jurisdictional
provision with regard to investment agreements to which I have already referred. But
similar provisions subsist in the UK, Swiss and German Model BITs. No doubt in
consequence, around 40% of BITs contain some version of an umbrella clause.
There is neither the time nor would it be productive to go into the details of the 20
or so cases in which umbrella clauses have been discussed. It is sufficient to identify four
schools of thought, if you like, four camps – though some of the dwellers in particular
camps may be thought to have a nomadic attitude and to move from camp to camp as the
feeling takes them.
The first camp adopts an extremely narrow interpretation of umbrella clauses,
holding that they are operative only where it is possible to discern a shared intent of the
parties that any breach of contract is a breach of the BIT (SGS v Pakistan; Joy Mining v
Egypt56
).
The second camp seeks to limit umbrella clauses to breaches of contract
committed by the hot State in the exercise of sovereign authority (Pan American Energy
v Argentina; El Paso Energy v Argentina).
A third view goes to the other extreme: the effect of umbrella clauses is to
internationalise investment contracts, thereby transforming contractual claims into treaty
claims directly subject to treaty rules (Fedax v Venezuela; Eureko v Republic of Poland;
Noble Ventures v Romania).
Finally there is the view that that an umbrella clause is operative and may form
the basis for a substantive treaty claim, but that it does not convert a contractual claim
into a treaty claim. On the one hand it provides, or at least may provide, a basis for a
treaty claim even if the BIT in question contains no generic claims clause (SGS v
Philippines, CMS v Argentina (Annulment)); on the other hand, the umbrella clause does
54
Ibid., paras. 126-7.
55
SGS Société Générale de Surveillance S.A. v Islamic Republic of Pakistan, Decision on Jurisdiction, 6
August 2003 (Feliciano, President; Faurès and Thomas). Article 11 of the Pakistan-Switzerland BIT
provides that: “Either Contracting Party shall constantly guarantee the observance of the commitments it
has entered into with respect to the investments of the other Contracting Party”.
56
Joy Mining Machinery Ltd v The Arab Republic of Egypt (ICSID Case No. ARB/03/11) Award on
Jurisdiction, 6 August 2004.
19
not change the proper law of the contract or its legal incidents, including its provisions
for dispute settlement.
In accordance with the general principles articulated above, there are major
difficulties with the first three positions. The first effectively deprives the umbrella
clause of any content, contrary to the principle of effet utile and to the apparent intent of
the drafters. The second imposes a characterisation test at the level of breach for which
there is no textual warrant and which is capable of producing arbitrary results. One may,
for example, take the formulation of the Tribunal in the CMS case:
“Purely commercial aspects of a contract might not be protected by the
[umbrella clause] in some situations, but the protection is likely to be
available when there is significant interference by governments or public
agencies with the rights of the investor”.57
There are two obvious responses to this. The first is that it does not provide a reliable or
even a determinate test for determining whether a tribunal has jurisdiction. Instead it
calls for an appreciation of the character of or motive for the breach which in most cases
would require a hearing on the merits. The second response is that it would be very odd
indeed if a State could defend itself against a claim for repudiation of an investment
agreement by arguing that it was acting for commercial reasons!
No doubt there are genuine concerns driving the restrictive view, which is to a
significant extent a reaction against the equal and opposite defects of the third view.
These need to be addressed.
First there is the problem of scope:
“the ‘commitments’ subject matter of Article 11 may, without imposing
excessive violence on the text itself, be commitments of the State itself as a
legal person, or of any office, entity or subdivision (local government units)
or legal representative thereof whose acts are, under the law on state
responsibility, attributable to the State itself”.58
But as we have seen, the question of the scope of a commitment to arbitrate made by the
State is a matter of interpretation and has nothing to do with attribution. International law
does not treat separate entities with their own legal personality as part of the State for all
purposes.
Then there is the possibility that an umbrella clause might enable an investor to
evade agreed-upon exclusive jurisdiction arrangements in the investment contract,
whether these provide for domestic courts or local or international arbitration. Thus the
SGS v Pakistan Tribunal was not convinced…
“that Article 11 of the BIT has had the effect of entitling a Contracting
Party’s investor, like SGS, in the face of a valid forum selection contract
57
CMS v Argentina, para. 299.
58
SGS v Pakistan, para. 166.
20
clause, to ‘elevate’ its claims grounded solely in a contract with another
Contracting Party… to claims grounded on the BIT, and accordingly to bring
such contract claims to this tribunal for resolution and decision.”59
I agree entirely with this concern – but it implies that the obligations of a host State under
a general BIT are to be applied without regard to the conduct, including the contractual
obligations, of the investor. That is not – and ought not to be – the case, as SGS v
Philippines showed.
Then there is a concern about flooding ICSID with minor contractual claims, a
classic floodgates argument to which standard floodgates responses may be made. BIT
arbitration is expensive and even to a successful claimant costs are usually not awarded.
The characterisation of a claim as contractual or otherwise is essentially a matter of
technique and bears no relation to the frequency or otherwise with which investment
disputes arise and are submitted to arbitration.
Fourth and most significant, there is the concern that the umbrella clause leads to
a freezing of host State sovereignty, a sort of closet stabilization. And there is reason for
the concern. For example the CMS Tribunal felt able to say that:
“[t]hese laws and regulations became obligations within the meaning of
Article II(2)(c), by virtue of targeting foreign investors and applying
specifically to their investments, that gave rise to liability under the umbrella
clause”.60
But it is a confusion to equate a State law or regulation with an obligation entered into by
the State, or to regard an umbrella clause as implicitly freezing the laws of the State as at
the date of admission of an investment. The enactment of a law by a State, whether it is
specific or general, is not the entry by the State into an obligation distinct from the law
itself. No doubt a State is obliged by its own laws, but only for so long as they are in
force. In the absence of express stabilization, investors take the risk that the obligations
of the host State under its own law may change, and the umbrella clause makes no
difference to this basic proposition.
In short, under the integrationist view as applied to standard umbrella clauses the
claims are still contractual and they are still governed by their own applicable law. The
distinction between treaty and contract is maintained. The purpose of the umbrella clause
is to allow enforcement without internationalization and without transforming the
character and content of the underlying obligation.
This can be seen from the decision of the ad hoc Committee in CMS v Argentina
(Annulment), where the Tribunal’s conclusion on the umbrella clause was annulled. The
relevant paragraph of the decision reads as follows:
“95. Moreover there are major difficulties with this broad interpretation
of Article II(2)(c).
59
Ibid., para. 165.
60
Ibid., para. 175.
21
(a) 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 arising
independently of the BIT itself (i.e. under the law of the
host State or possibly under international law). Further
they must be specific obligations concerning the
investment. They do not cover general requirements
imposed by the law of the host State.
(b) Consensual obligations are not entered into erga omnes but
with regard to particular persons. Similarly the
performance of such obligations or requirements occurs
with regard to, and as between, obligor and obligee.
(c) 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.
If this is so, it would appear that the parties to the
obligation (i.e., the persons bound by it and entitled to rely
on it) are likewise not changed by reason of the umbrella
clause.
(d) The obligation of the State covered by Article II(2)(c) will
often be a bilateral obligation, or will be intrinsically linked
to obligations of the investment company. Yet a
shareholder, though apparently entitled to enforce the
company’s rights in its own interest, will not be bound by
the company’s obligations, e.g. as to dispute settlement.
(e) If the Tribunal’s implicit interpretation is right, then the
mechanism in Article 25(2)(b) of the ICSID Convention in
unnecessary wherever there is an umbrella clause.
(f) There is no discussion in the award of the travaux of the
BIT on this point, or of the prior understandings of the
proponents of the umbrella clause as to its function.”
The decision on this point was annulled for failure to state reasons, leaving open the
question whether a broad interpretation of the umbrella clause would have involved a
manifest excess of power, even if it had been properly motivated.
For these reasons, the better view is the integrationist one: the umbrella clause is
an extra mechanism for the enforcement of claims, but the basis of the transaction
remains the same.
4. Conclusions
To conclude, treaties and contracts are different things. But they are not clean different
things, in the sense of inhabiting different worlds: between them there is no great gulf
fixed. No doubt distinctions between legal systems should be observed – but not at the
expense of appropriate connections between them. There is a distinction between treaty
22
and contract, but they are part of the same one world with many legal systems that
international arbitrators have long inhabited.
Applied to international arbitration this insight produces consequences both for
jurisdiction and merits. The core point is that a covered investment is a transaction
involving a qualified investor and the host State. Contractual or other commitments by
each to the other go to define the investment: as Mihaly v Sri Lanka held, if there is no
intention to enter into legal relations then there is no investment. What a BIT does is to
provide an additional layer of protection for the one transaction: the investment is
protected by the BIT, but the BIT should not be used as a vehicle to rewrite the
investment arrangement. At the level of jurisdiction – and subject always to the caveat
that what matters is the actual language of the BIT – there is no reason to interpret a BIT
as not covering contractual claims or counterclaims concerning the investment. There
may be – as with appropriately-worded umbrella clauses – an international obligation to
observe the investment contract, though this does not convert the contract into a treaty or
change its applicable law. At the level of the merits it must be borne in mind that the
investment contract is itself an allocation of risks and opportunities, and that that
allocation is relevant in determining, in particular, whether there has been fair and
equitable treatment under the BIT. In particular the doctrine of legitimate expectations
should not be used as a substitute for the actual arrangements agreed between the parties,
or as a supervening and overriding source of the applicable law.