ARBITRATION INTERNATIONAL, Vol. 24, No. 3
© LCIA, 2008
351
Treaty and Contract in Investment Arbitration
Treaty and Contract in Investment Arbitration
by JAMES CRAWFORD*
Arbitration InternationalWilliamW. ParkArbitration International, Volume 24 Issue 32008
Article
ABSTRACT
This article addresses one of the most controversial issues in international investment law: the
relationship between BIT claims and contractual claims. The author proposes an integrationist
approach, which seeks to reconcile the opposing views and jurisprudence on the subject. This
approach is developed within the framework of international law, from which the author distils
ﬁve relevant principles. The arbitral and academic disagreement on the topic is discussed in the
context of three different ﬁelds: contractual claims and counter-claims, umbrella clauses, and the
role of legitimate expectations in the application of the fair and equitable treatment standard.
A Subject and a Sovereign are clean different things.
Charles I, speech on the scaffold, 30 January 16491
I
I. 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 bilateral investment treaty (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
* SC, FBA, LLD (Cantab); Whewell Professor of International Law, University of Cambridge; Barrister,
Matrix Chambers. This article was originally presented as the 2007 Annual School of International
Arbitration–Freshﬁelds Bruckhaus Deringer Lecture, London, 29 November 2007. My thanks to Stephanie
Ierino, Research Fellow, Lauterpacht Centre for International Law, for her assistance.
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 (Scholar Press
Ltd, Leeds, reprinted 1966), (6).
2 See e.g., Z. Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ in (2003) 74 BYIL 151; C.
McLachlan et al., International Investment Arbitration: Substantive Principles (OUP, 2007), p. 90, paras. 4.33–4.34,
p.127, paras. 4.149–4.151.
352 Arbitration International, Volume 24 Issue 3
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 any label to it, 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, 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
standards 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 relations 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 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
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 Art. 15,
Art. 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 Art. 8) before the injured person has exhausted all
local remedies.
4 I. Brownlie, Principles of Public International Law (6th edn, OUP, Oxford, 2003), pp. 38–40.
5 C. Schreuer, The ICSID Convention: a Commentary (CUP, Cambridge, 2001), pp. 388–396; McLachlan et al.,
supra n. 2 at p.128, para. 4.152. 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.
Treaty and Contract in Investment Arbitration 353
Convention6 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.7 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 does not 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.
Before I turn to some ways in which this tension has been addressed, a
preliminary remark is called for. According to an inﬂuential view of the
international arbitral function, 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, and 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 intended 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 pluralist view, the well-known disagreement in the
two SGS cases over the umbrella clause8 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, with all due deference to the plural
character of arbitration, I must say that I ﬁnd the current level of dissensus 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
6 Convention on the Settlement of Investment Disputes between States and Nationals of Other States,
Washington, 18 March 1965, 575 UNTS 159.
7 Expert evidence of international law is also tendered before such tribunals: whether or not this is desirable,
the evidence is not inadmissible.
8 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 Rep. 406 (hereafter SGS v. Pakistan); 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 Rep. 515 (hereafter SGS v. Philippines).
354 Arbitration International, Volume 24 Issue 3
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.
II
II. THE INTERNATIONAL LAW FRAMEWORK
I said earlier that I hoped to set out the foundations in general international law
for the integrationist approach. Within the time available I would make ﬁve
points.
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 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.9 The issue was whether the guarantee of freedom of transit
through the Kiel Canal under Article 380 of the Treaty of Versailles of 1919,10 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.11
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. By contrast 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.
9 (1923) PCIJ Ser. A No. 1.
10 225 CTS 188.
11 (1923) PCIJ Ser. A No. 1, 25.
Treaty and Contract in Investment Arbitration 355
This gives rise to the second general principle, the principle that treaty
language is presumed to have its natural and ordinary meaning in its context. It
is stated as the general rule in Article 31(1) of the Vienna Convention on the Law
of Treaties of 1969.12 A corollary is the principle of effet utile: the words of a
substantive treaty provision should be given some rather than no effect. 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.
The next three principles are drawn from the law of state responsibility.
Normally, 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.13
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.14 In the
12 Vienna Convention on the Law of Treaties, Vienna, 23 May 1969, 1155 UNTS 331.
13 The Loewen Group Inc. and Raymond L. Loewen v. United States, ICSID Case no. ARB(AF)/98/3, Award, 26 June
2003, 7 ICSID Rep. 442 (emphasis added).
14 Hereafter ‘ILC Articles’. These are appended to GA Res. 56/83, 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 (CUP, Cambridge, 2002).
356 Arbitration International, Volume 24 Issue 3
words of Article 33(2) of the ILC Articles, in investment arbitration the investor, a
person or entity other than a state, seeks to 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.15
Within the ﬁeld of Part I of the ILC Articles, the following propositions are
relevant.
For state responsibility to arise, the conduct in question must be attributable to
the host state under the rules set out in Articles 4 to 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 characterised 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.16 I am reliably informed that
there is no such entity as ‘Poland’ in Polish law – by contrast, much of twentieth
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.
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 characterisation 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 characterise 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, on both 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.17
15 See ILC Art. 33(2) and commentary, para. 4, reprinted in Crawford, supra n. 14 at pp. 207–208.
16 Cf. Maritime Delimitation and Territorial Questions between Qatar and Bahrain, Jurisdiction and Admissibility,
Judgment, (1994) ICJ Rep. 112, paras. 28–29.
17 See ILC, Commentary to Art. 4, para. 6, reprinted in Crawford, supra n. 14 at p. 96.
Treaty and Contract in Investment Arbitration 357
The irrelevance of the classiﬁcation of the acts of state organs as iure imperii or iure
gestionis was afﬁrmed by all those members of the Sixth Committee who
responded to a speciﬁc question on this issue from the Commission.18
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 subject-matter 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.19
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 France,20
threatened a breach of that treaty, and it would have been irrelevant whether the
British motive was to save money or protect the environment.21
The ﬁfth principle is that of independent characterisation 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.22
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
18 See Report of the ILC, 1998 A/53/10, para. 35.
19 ILC, Commentary to Art. 12, paras. 9, 10, reprinted in Crawford, supra n. 14 at pp. 128–129.
20 Agreement between the Government of the United Kingdom and the Government of the French Republic
regarding the Development and Production of a Civil Supersonic Transport Aircraft, 29 November 1962,
453 UNTS 326.
21 See C. Gardner, British Aircraft Corporation: a History (Batsford, London, 1981), ch. 36, esp. at pp. 270–271.
22 ILC, Commentary to Art. 3, para. 7, reprinted in Crawford, supra n. 14 at p. 89.
358 Arbitration International, Volume 24 Issue 3
breach of treaty is conceptually distinct 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.23
Following numerous disputes, both parties rescinded and claimed the other
was in default. The claimants instituted ICSID arbitration on the basis of the
1991 France-Argentina 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 ﬁrst to bring
proceedings before the administrative courts of Tucumán as provided for by the
contract.24
The tribunal’s award was partially annulled by an ad hoc Committee.25 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 the [contract], by the proper law of the contract,
in other words, the [municipal law].26
23 Concession Contract for Water and Sewage Service in the Province of Tucumán, 18 May 1995, art. 16.4
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’.
24 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 Rep. 299.
25 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 Rep. 340.
26 Ibid. 365, paras. 95–96.
Treaty and Contract in Investment Arbitration 359
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 …27
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 …28
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 …29
Whether particular conduct involves a breach of a treaty is not determined by asking
whether the conduct purportedly involves an exercise of contractual rights.30
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’:31
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.32
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.33 (I note in parenthesis that a second tribunal
upheld Vivendi’s restated claim, awarding damages of US$105,000,000.34)
Vivendi Annulment is predicated on the distinction between contractual claims
and treaty claims. At some level this is obvious, but nonetheless there is
disagreement as to the corollaries of this distinction. In the time remaining I will
take three ﬁelds in which there is arbitral and academic disagreement. These are,
ﬁrst, contractual claims and counterclaims; secondly, umbrella clauses; and
thirdly, the role of legitimate expectations (as contrasted to contractual rights) in
the application of the fair and equitable treatment standard.
III
27 Ibid. 366, para. 98.
28 Ibid. 367, para. 101.
29 Ibid. 368, para. 105.
30 Ibid. 369, para. 110.
31 Ibid. 370, para. 111.
32 Ibid. 370, para. 113.
33 Ibid. 371, para. 115.
34 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, para. 11.1, available at http://ita.law.uvic.ca/
360 Arbitration International, Volume 24 Issue 3
III. 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 (or having only doubtful and contingent effect) 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 English 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 “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.35
35 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).
Treaty and Contract in Investment Arbitration 361
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.36
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.37 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.
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,38 and it has been held that the resulting awards
of the Iran-United States Claims Tribunal are enforceable under the New York
Convention.39
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
36 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958, 330
UNTS 38, Arts. 1, 7.
37 [2005] EWCA Civ. 1116, para. 33.
38 D. Caron and 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), pp. 11–12.
39 Ministry of Defense of Iran v. Gould, Inc., 887 F.2d 1357 (9th Cir. 1989).
362 Arbitration International, Volume 24 Issue 3
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’.40
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 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.41
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 BIT 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 characterised 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.
40 (2002) 6 ICSID Rep. 340 at 356, para. 55.
41 Ibid. 367–371, paras. 102–115.
Treaty and Contract in Investment Arbitration 363
The second qualiﬁcation is that there can only be contractual jurisdiction
under a BIT in respect of an investment contract with the state itself, not with a
separate state entity having its own legal personality, and a fortiori not 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.42
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 BIT.43 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.
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 …
42 (2003) 8 ICSID Rep. 406 at 557–559, paras. 139–148.
43 Agreement between the Argentine Republic and the Republic of France for the Promotion and Reciprocal
Protection of Investments, 3 July 199, 1728 UNTS 298.
364 Arbitration International, Volume 24 Issue 3
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.44
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 counterclaim 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.
Reineccius and others v. Bank for International Settlements45 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 per cent 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 per
cent.46 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.47 Insofar as the breach concerned
the agreement to arbitrate, a similar result could be achieved under a BIT,
although presumably a claimant who has actually commenced a BIT arbitration
will be careful not to pursue competing proceedings before national courts.48
More directly relevant is the second case, Saluka BV v. Czech Republic,49 a
decision of a tribunal presided over by Sir Arthur Watts. In a partial privatisation,
44 2004 US Model Bilateral Investment Treaty, Ofﬁce of the US Trade Representative, available at
www.ustr.gov/index.html
45 Dr Horst Reineccius, First Eagle SoGen Funds, Inc., 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, available at www.pca-cpa.org (hereafter
Bank for International Settlements).
46 Ibid. Partial Award, para. 202.
47 Ibid. Final Award, paras. 103, 138(1) and (4).
48 Cf. ICSID Convention, Art. 26.
49 Saluka Investments BV v. Czech Republic, Decision on Jurisdiction over the Czech Republic’s Counterclaim,
Permanent Court of Arbitration, 7 May 2004, para. 81, available at www.pca-cpa.org
Treaty and Contract in Investment Arbitration 365
Saluka had acquired a substantial minority shareholding in IPB, a Czech stateowned
bank: in controversial circumstances IPB became insolvent, was put 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.50
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 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.51
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.52 In addition, ‘a legitimate counterclaim must have a
close connexion with the primary claim to which it is a response’.53 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.54 It also cited a number of Iran-United
States Claims Tribunal decisions to similar effect.55
The tribunal stated that:
50 Ibid. para. 38.
51 Ibid. para. 39.
52 Ibid. para. 60.
53 Ibid. para. 61.
54 Klöckner v. Cameroon, ICSID Case no. ARB/81/2, Decision on Annulment, 3 May 1985, 2 ICSID Rep. 162
at 165.
55 See e.g., American Bell International, Inc. v. Government of the Islamic Republic of Iran, 19 September 1986, 12 Iran-US
CTR 170; Westinghouse Electric Corp. v. Islamic Republic of Iran, 20 March 1997, 33 Iran-US CTR 60; OwensCorning
Fiberglass Corp. v. Government of Iran, 13 May 1983, 2 Iran-US CTR 322; Morrison-Knudsen Paciﬁc Ltd v.
Ministry of Roads and Transportation, 13 July 1984, 7 Iran-US CTR 54; Harris International Telecommunications, Inc.
v. Iran, 2 November 1987, 17 Iran-US CTR 31.
366 Arbitration International, Volume 24 Issue 3
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 subject-matter 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.56
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 claim put forward by Saluka to fall within the Tribunal’s
jurisdiction under Article 8 of the Treaty.57
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.
IV
IV. CONTRACTUAL CLAIMS AND THE UMBRELLA CLAUSE
I turn to my second major theme, the so-called ‘umbrella clause’. Anthony
Sinclair has usefully traced the origins of the umbrella clause back to their origins
56 Saluka Investments BV v. Czech Republic, Decision on Jurisdiction over the Czech Republic’s Counterclaim, 7
May 2004, para. 76.
57 Ibid. para. 81.
Treaty and Contract in Investment Arbitration 367
in the aftermath of the Anglo Iranian Oil Company case in 1952.58 It is not the least
of the criticisms to be levelled 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
on their actual language. For example, the clause at issue in Salini Costruttori S.p.A.
and Italstrade S.p.A. v. Hashemite Kingdom of Jordan59 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, 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.60 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.61 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 per cent 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.62 The second
camp seeks to limit umbrella clauses to breaches of contract committed by the
58 Anglo-Iranian Oil Co. Case (Jurisdiction) [1952] ICJ Rep. 93. See A.C. Sinclair, ‘The Origins of the Umbrella
Clause in the International Law of Investment Protection’ in (2004) 20 Arb. Int’l 411.
59 Salini Costruttori SpA and Italstrade SpA v. Hashemite Kingdom of Jordan, Decision on Jurisdiction, ICSID Case no.
ARB/02/13, 29 November 2004, (2005) 44 ILM 569.
60 Ibid. paras. 126–127.
61 SGS v. Pakistan, supra n. 8, Decision on Jurisdiction, 6 August 2003. Pakistan-Switzerland BIT, Art. 11,
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’.
62 See e.g., SGS. v Pakistan, supra n. 8 at paras. 163–174; Joy Mining Machinery Ltd v. Arab Republic of Egypt, ICSID
Case no. ARB/03/11, Award on Jurisdiction, 6 August 2004, paras. 80–81, available at http://
icsid.worldbank.org/ICSID/
368 Arbitration International, Volume 24 Issue 3
host state in the exercise of sovereign authority.63 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.64
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;65 on the other hand, the umbrella clause does 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.66
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.
63 Pan American Energy LLC and BP Argentina Exploration Co. v. Argentina, ICSID Case no. ARB/03/13, Decision on
Preliminary Objections, 27 July 2006, paras. 96–113; El Paso Energy International Co. v. Argentina, ICSID Case
no. ARB/03/15, Decision on Jurisdiction, 27 April 2006, paras. 66–88, available at http://
icsid.worldbank.org/ICSID/.
64 Fedax v. Venezuela, ICSID Case no. ARB/96/3, Decision on Jurisdiction, 11 June 1997, 5 ICSID Rep. 186;
Award, 9 March 1998, 5 ICSID Rep. 200, para. 29; Eureko BV v. Republic of Poland, ad hoc Arbitration,
Partial Award, 19 August 2005, 12 ICSID Rep. 331, paras. 244–260, cf. dissenting opinion of Rajski, para.
11; Noble Ventures Inc. v. Romania, Award, ICSID Case no. ARB/01/11, 12 October 2005, paras. 46–62,
available at http://icsid.worldbank.org/ICSID/
65 SGS v. Philippines, supra n. 8; CMS Gas Transmission Co. v. Argentine Republic, ICSID Case no. ARB/01/8,
Decision of the ad hoc Committee on the Application for Annulment of the Argentine Republic, 25
September 2007.
66 CMS v. Argentina, Award, 12 May 2005, para. 299, available from: http://icsid.worldbank.org/ICSID/
FrontServlet (emphasis added).
Treaty and Contract in Investment Arbitration 369
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.67
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 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.68
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 stabilisation. And there is
reason for the concern. For example, the tribunal in LG&E v. Argentina 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.69
67 8 ICSID Rep. 406 at 443, para. 166.
68 Ibid. 442, para. 165.
69 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina, ICSID Case no. ARB/02/1,
Decision on Liability, 3 October 2006, para. 175, available at http://icsid.worldbank.org/ICSID/
370 Arbitration International, Volume 24 Issue 3
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
stabilisation, 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 internationalisation 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).
(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 is 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 tribunal’s 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.
V
Treaty and Contract in Investment Arbitration 371
V. LEGITIMATE EXPECTATIONS
I turn to the third and ﬁnal theme in this article: the doctrine of ‘legitimate
expectations’ and its relationship to contract in the investment treaty context. The
public law principle of ‘legitimate expectations’ is present in many domestic legal
systems. It requires that state authorities respect the ‘legitimate expectations’ of
individuals created through statements of policy or intention as part of their
general duty of fairness, particularly when directed at a particular individual or
entity.70 It is now well established that disappointed expectations can, in some
circumstances, be relevant to a claim under international investment treaties.
However, there are conﬂicting views as to the application of the legitimate
expectations principle in the investment treaty context. One frequently cited
statement comes from the arbitral tribunal’s award in TECMED v. Mexico.71
TECMED, a company incorporated in Spain, successfully claimed for damages
arising out of Mexico’s treatment of its investment in a hazardous waste facility
located in Hermosillo, Sonora, Mexico, in particular the failure of the Mexican
environmental authorities to renew a licence for the facility.
The tribunal held that Mexico had breached the obligations owed to the
Spanish investor under Articles 4(1) (fair and equitable treatment) and 5(1)
(nationalisation and expropriation) of the Mexico-Spain BIT.
In terms of the Article 4(1) obligation of fair and equitable treatment, the
tribunal observed that this obligation required the Contracting Parties to afford
treatment that did not undermine the reasonable expectations forming the basis
of the investor’s decision to invest in the country. Part of those expectations,
according to the tribunal, is that the host state will act in a non-arbitrary,
transparent manner so that the investor can plan and adjust its conduct according
to clear rules. The tribunal considered:
that this provision of the Agreement, in light of the good faith principle established by
international law, requires the Contracting Parties to provide to international investments
treatment that does not affect the basic expectations that were taken into account by the foreign
investor to make the investment. The foreign investor expects the host State to act in a
consistent manner, free from ambiguity and totally transparently in its relations with the foreign
investor, so that it may know beforehand any and all rules and regulations that will govern its
investments, as well as the goals of the relevant policies and administrative practices or
directives, to be able to plan its investment and comply with such regulations. Any and all State
actions conforming to such criteria should relate not only to the guidelines, directives or
requirements issued, or the resolutions approved thereunder, but also to the goals underlying
such regulations. The foreign investor also expects the host State to act consistently, i.e. without
arbitrarily revoking any preexisting decisions or permits issued by the State that were relied
upon by the investor to assume its commitments as well as to plan and launch its commercial
and business activities. The investor also expects the State to use the legal instruments that
govern the actions of the investor or the investment in conformity with the function usually
assigned to such instruments, and not to deprive the investor of its investment without the
70 See e.g., S. Schønberg, Legitimate Expectations in Administrative Law (OUP, Oxford, 2000).
71 Técnicas Medioambientales TECMED SA v. United Mexican States, ICSID Case no. ARB (AF)/00/2, Award, 29
May 2003, 10 ICSID Rep. 130.
372 Arbitration International, Volume 24 Issue 3
required compensation. In fact, failure by the host State to comply with such pattern of conduct
with respect to the foreign investor or its investments affects the investor’s ability to measure the
treatment and protection awarded by the host State and to determine whether the actions of the
host State conform to the fair and equitable treatment principle.72
Other recent awards have endorsed similar standards of conduct. In Occidental
v. Ecuador, the tribunal held that ‘[t]he stability of the legal and business
framework is thus an essential element of fair and equitable treatment’.73 In CMS
Gas Transmission Co. v. Argentine Republic, the tribunal referred to the Preamble to
the relevant BIT which recited that it is desirable ‘to maintain a stable framework
for investments and maximum effective use of economic resources’. The tribunal
held that ‘fair and equitable treatment is inseparable from stability and
predictability’.74
In his lengthy separate opinion in Thunderbird Gaming v. Mexico, Prof. Wälde
engaged in a detailed comparative analysis of the principle of legitimate
expectations.75 He noted that although his survey:
does not specify exactly the contours of this principle, it suggests that under developed systems of
administrative law, a citizen – even more so an investor – should be protected against
unexpected and detrimental changes of policy if the investor has carried out significant
investment with a reasonable, public-authority initiated assurance in the stability of such policy
… The wide acceptance of the ‘legitimate expectations’ principle therefore supports the concept
that it is indeed part of ‘fair and equitable treatment’ as owed by governments to foreign
investors under modern investment treaties and under Art. 1105 of the NAFTA.76
And he concluded that:
One can observe over the last years a significant growth in the role and scope of the legitimate
expectation principle, from an earlier function as a subsidiary interpretative principle to
reinforce a particular interpretative approach chosen, to its current role as a self-standing
subcategory and independent basis for a claim under the ‘fair and equitable standard’ as under
Art. 1105 of the NAFTA.77
Also of relevance in this context is the award and subsequent decision of the ad
hoc annulment committee in MTD v. Chile.78 The tribunal applied the TECMED
standard quoted above, and held that Chile had breached its obligation of fair
and equitable treatment under Article 3(1).79
72 Ibid. 192–193, para. 154.
73 Occidental Exploration and Production Co. v. Republic of Ecuador, LCIA Case no. UN 3467, Final Award, 1 July
2004, 14 ICSID Rep. 54, para. 183.
74 CMS v. Argentina, supra n. 66, Award, para. 276.
75 International Thunderbird Gaming Corp. v. United Mexican States, Arbitral Award, 26 January 2006.
76 Ibid. Sep. Op., para. 30.
77 Ibid. Sep. Op., paras. 30–37.
78 MTD Equity Sdn Bhd and MTD Chile SA v. Republic of Chile, ICSID Case no. ARB/01/7, Award, 25 May 2004,
12 ICSID Rep. 3; Decision on the Application for Annulment, 21 March 2007.
79 Ibid. Annulment, para. 22.
Treaty and Contract in Investment Arbitration 373
In the annulment proceedings, the claimant argued, inter alia, that the tribunal
misapprehended the standard of fair and equitable treatment under the BIT,
applying the standard expressed in a dictum of the TECMED tribunal quoted
above, which was in no way representative of international law. According to the
respondent, ‘the TecMed programme for good governance’ is extreme and does
not reﬂect international law.80 The ad hoc Committee held that:
legitimate expectations generated as a result of the investor’s dealings with the competent
authorities of the host State may be relevant to the application of the guarantees contained in an
investment treaty.81
While the Committee ‘appreciate[d] some aspects of [the respondent’s]
criticisms’, the tribunal did not manifestly exceed its powers in the account it gave
of the fair and equitable treatment standard.82
In my view, the decision of the ad hoc Committee in MTD v. Chile takes the
preferable approach regarding the application of the legitimate expectations
principle in the investment treaty context. The investor’s expectations may be
relevant to the application of the standards and obligations contained in the
relevant investment treaty, in particular the fair and equitable treatment standard.
However, the expectations of the investor cannot act as a substitute for the
relevant contractual and treaty arrangements. In the words of the ad hoc
Committee:
The obligations of the host State towards foreign investors derive from the terms of the
applicable investment treaty and not from any set of expectations investors may have or claim to
have. A tribunal which sought to generate from such expectations a set of rights different from
those contained in or enforceable under the BIT might well exceed its powers, and if the
difference were material might do so manifestly.83
Reference to a general and vague standard of legitimate expectations is no
substitute for contractual rights. The relevance of legitimate expectations is not a
licence to arbitral tribunals to rewrite the freely negotiated terms of investment
contracts.
VI
VI. 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 and contract, but they are part of the same
80 Ibid. Chile’s Annulment Reply, para. 57.
81 Ibid. Annulment, para. 69.
82 See ibid. Award, para. 113.
83 Ibid. Annulment, para. 67.
374 Arbitration International, Volume 24 Issue 3
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.84 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.
84 Mihaly International Corp. v. Democratic Socialist Republic of Sri Lanka, ICSID Case no. ARB/00/2, Award, 15
March 2002, 6 ICSID Rep. 308 at 320, para. 51.