Umbrella clauses: Who has the last word?

It is well-known that foreign investments have become one of the most important issues for a country’s economic development and financial prosperity. Cross-border investment has boosted the number of legal business relationships between public and private companies. It has allowed the global trade evolution and both private and public finance development in different countries.

For that, there are different tools created to protect investors and investments, some from an international perspective and others from a bilateral point of view. However, in the last 10 years, there has been an increase in arbitrations relating to a state’s obligations towards foreign investors, which finds its origin in different sources, whether in commercial contracts or bilateral treaties.

All of these legal relationships may have different consequences for the host states and investors. This article will lead the readers to analyse the relationship between treaties and investment contracts, and the significance of “Umbrella Clauses” from an international investment law perspective.


Bilateral Investment Treaties (BITS) 

First, it is important to recognise BITS’s relevance in international investment law and the legal force that they have for nations.

BITS are agreements that have several substantive and procedural rules to protect foreign investments and to give investors legal certainty in their operations, mainly due to expropriation or nationalization measures from host states.

These treaties are agreed upon between two countries to “stimulate foreign investments by reducing political risks[1], and to:

i) provide adequate protection to investors in countries where their rights are still they were not covered by existing agreements;

ii) persuade direct other states to implement and enforce policies of market that provide fair and equitable treatment to investors foreign versionists; and

(iii) contribute to the increase of rules of international law consistent with the two previous purposes.[2]

In this regard, BITS include legal provisions which guarantee fair treatment to investors from countries other than the host state. Likewise, it’s common for these agreements to include an “Umbrella Clause” or a “Clause of general protection”. In general, this clause requires state parties to respect all the investment obligations acquired with investors from another state party.[3]

More specifically, through the “Umbrella clause”, the signatories mutually bind themselves to comply with any commitment or obligation assumed with respect to specific investments in their territory made by nationals of the other country. For instance, this clause is contained within the agreement between Pakistan and Germany.[4]

However, these umbrella clauses were understood as a mechanism to elevate contractual and other commitments of host states under an international treaty’s protection.[5] As a result, these clauses have been excessively used for disputes that are not central to the investment treaty or other controversies which are not related to foreign investment. These clauses have also resulted in confusion about a state’s responsibility for investment contract breaches, and as to who is the competent authority to resolve any dispute of this nature.

Therefore, it is important that parties are cautious at the time of drafting of a bilateral investment treaty. They must carefully look at the wording of an umbrella clause, so as to avoid any ambiguities or subsequent misinterpretations.

The most common dispute resolution mechanisms are arbitration under the rules of the International Center for Settlement of Investment Disputes (ICSID) or ad hoc arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL).


Contractual investment protection

Contracts are the main legal instruments through which parties agree on their rights and obligations. This tool has its own legal force under the principle “Pacta Sunt Servants”, which means that legal provisions included in a contract are the law for the contracting parties and they must be obeyed. 

Due to the legal force of a contract, foreign investors and host states sign these agreements when they have commitments or guarantees that go further than those contained in existing BITS. However, as with any agreement, there is always the chance that one party would breach the contract.

Therefore, it is very important for investment contracts to have a carefully drafted dispute resolution settlement clause, which clearly provides the competent dispute resolution forum and any mandatory pre-dispute steps.


Effects of the umbrella clauses breadth

Umbrella clauses are one of the most contested claims raised in investment disputes since they enable investors to elevate a breach of a commercial contract to a violation of an investment treaty.

The view which arbitral tribunals tend to take on this issue is varied. For instance, in the dispute between the “Société Générale de Surveillance S.A” (SGS) and the Islamic Republic of Pakistan, the arbitral tribunal concluded that it had “no jurisdiction with respect to claims [ …] based on alleged breaches of the PSI Agreement[6], and that “the broad wording used in the general protection clause [in a bilateral investment treaty] could not be interpreted in such a way as to encompass contractual obligations”.[7] This is considered to be a strict interpretation of the umbrella clauses, and was also adopted in the following cases[8]: El Paso v Argentina, Joy Mining v Egypt, Salini v Jordan, and Siemens v Argentina.

The opposite end of the spectrum is a broad interpretation of the umbrella clauses. Some arbitral tribunals have concluded that contractual commitments by states fall under the ambit of an umbrella clause, and the dispute resolution under the investment treaty can be triggered to decide contractual matters based on the wording of an umbrella clause.[9] This view, however, also does not proffer a blanket application of umbrella clauses on contractual disputes. Some tribunals have taken a more balanced view, in that they accept the applicability of an umbrella clause provided that the recourse to the dispute forum under the commercial contract has first been exhausted.[10]

Given the significance of an umbrella clause, and the difference in approach, the following guidelines given by an arbitral tribunal is helpful.

First, further to Article 31 of the Vienna Convention on the Law of Treaties 1969, an investment treaty has to be read as a whole with context to the purpose for which it has been signed, rather than simply taking words that are the subject of controversy and digging out their meaning.[11] Second, there is a need to distinguish between a “Iure imperi” and “Iure gestioni”. In other words, whether a state is acting in its capacity as the sovereign power or as/through a private entity. On this basis, arbitral tribunals tend to agree that Umbrella Clauses only protect investment agreements when the state acts in its capacity as a sovereign[12] or they otherwise significantly interfere with the investor’s rights.[13]

That said, arbitral tribunals have a tricky task to identify whether the actions of a state constitute an action as the sovereign or as a private contracting party.

At the same time, states should also carefully consider their investment treaty commitments, including restricting the scope of or entirely eliminating the umbrella clause. One example is the 2019 Netherlands Model BIT. It limits the umbrella clause’s interpretation to only those matters which relate to the fair and equitable treatment of investors:[14]

Article 9: When a Contracting Party has entered into a written commitment with investors of the other Contracting Party regarding a specific investment, that Contracting Party shall not, either itself or through an entity exercising governmental authority, breach the said commitment through the exercise of governmental authority in a way that causes loss or damage to the investor or its investment.

For greater certainty, a breach of another provision of this Agreement or any other international agreement does not constitute a breach of this Article. Besides, the fact that a measure breaches domestic law does not, in and of itself, establish a breach of this Article.

Likewise, other states have chosen not to include the umbrella clause at all, including Canada, France, Colombia, Norway, India, and the Czech Republic.[15]



There is a strong relationship between BITS and investment contracts, because both instruments have the purpose to give foreign investors the necessary protection needed for their operations. It would appear that a state could transgress an international treaty without violating an investment contract, and vice versa. The treatment of a contractual dispute under an investment treaty will depend on the nature of the state action and the circumstances of a specific case.

There is a need to shuffle the status quo of the BITS, particularly the application of umbrella clauses. As the first step, the scope of umbrella clauses should be limited, and uniformity in language should be introduced, such that there is no ambiguity as to the scope of a state’s obligations thereunder. States could also seek to renegotiate or review umbrella clauses in previously executed BITS, and not to include the same in any new investment treaties.

That said, in the current climate, it is also important that more certainty is provided by arbitral tribunals on this issue, particularly in respect of determining the scope of existing umbrella clauses and setting a uniform criterion to resolve new claims around it.


[1]The Importance of Bilateral Investment Treaties (BITs) When Investing in Emerging Markets”, (American Bar Association, 22 March 2014) <,investments%20by%20reducing%20political%20risk.

[2] Jeffrey Lang, “The International Regulation of Foreign Direct Investment: Obstacles and Evolution”, 31 CORNELL INT’L L.J. 457 (1998).

[3] Thomas Hartmann, “Umbrella clauses. An analysis of ICSID decisions and scholarly opinion” (Laws 526 – International Economic Law, Victoria University of Wellington, 2007).

[4] International Agreement between Federal Republic of Germany and Pakistan, article 7, Pakistan, 25 November of 1959.

[5] Rudolf Dolzer / Christoph Schreuer, “Principles of International Investment Law”, (2nd Edition, Oxford University Press, 2012).

[6] SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, 2013, Case No. ARB/01/13, International Centre for Settlement of Investment Disputes.

[7] Tai-Heng Cheng, “Power Authority and International Investment Law”, (American University International Law Review 20, No. 3 2005).

[8] Kartika Paramita, “Much in Little: The Umbrella Clause that Changes the International Investment Protection Standard” (Volume 6 Issue 1, Hasanuddin Law Review, 2020)

[9] Ibid.

[10] Ibid.

[11] Richard Gardiner, “Treaty Interpretation”, (2nd Edition, Oxford Public International Law, 2015).

[12] José Pacheco, “Aproximación al concepto de cláusulas paraguas”, 2020, Columna 7, <, accessed 31 May 2021

[13] CMS Gas Transmission Company c. Republic of Argentina, 2008, Case No. ARB/01/8, par. 299, International Centre for Settlement of Investment Disputes.

[14] Hasanuddin Law Rev. p 40.

[15] Ibid, p 41.


Maria Camila Lizarazo Gonzalez


Maria is an international trade lawyer with extensive knowledge in customs, taxes, and foreign trade issues.

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