UMBRELLA CLAUSE
The umbrella clause has played played a pivotal role in enforcing and upholding the host state’s undertakings and obligations towards the investment made by foreign investors. The Umbrella clause is a form of an additional protection given to the investors which is complimentary to the other substantive protections available under the Bilateral Investment treatise (‘BIT’), it can also be considered as a clause that would enforce the state’s private undertakings under international law. Thus any breach of the above undertaking is a breach of umbrella clause which the state can be held accountable for. This gave the ability to investors to initiate arbitration at ICSID for disputes arising out of the domestic law of the host states as umbrella clause allows private disputes, even those which were not in violation of law of foreign investment, into international Tribunal. However, the application of umbrella clause has no concrete test or standard. Even the interpretation of commentators and academics vary when umbrella clause provision are discussed. Brower, for instance, claims that the clause’s scope of Rationae Materiae is limited in a way in which only the state while exercising its sovereignty can or is capable of creating a breach, but the all other commercial acts and contracts are an implied exception to the clause. Whereas F. Mann states that the clause protects the investors from any breach of his contractual rights regardless when such breach arises out of a commercial act, an administrative act or a legislative act of the host state . Professors Prosper Weil and E. Gaillard state that these undertaking clauses or in the latter’s word “Clauses with a mirror effect” permits a breach of contractual duty to be characterised into a breach of international treaty obligation, in other words the clause would oblige the state to perform and respect the contract as this contractual obligation could turn into an international obligation under the umbrella clause.
To make matters more spiral there is no consensus even between different Tribunals of ICSID on the scope and application of umbrella clauses. In SGS v Pakistan and LG&G v Argentina the Tribunal that the umbrella clause had a wide scope offsite undertaking including the undertakings which arose from the host states municipal law., While in Noble Ventures v Romania the Tribunal was of the opinion that general legislation needed to be excluded from the scope of umbrella clauses while only including the contractual undertaking. The other view taken in El Paso v Argentina was that the scope of the umbrella clause was so narrow that protection could only be provided to those undertakings in which the state had not acted as a commercial party but acted as a sovereign and the dispute arose because of their exercise of such power.
Hence it can be seen that there are multiple interpretations and applications of the umbrella clause and is, without taking into consideration, the language used in the BITs to incorporate the umbrella clause. The different languages used for establishing umbrella clauses, in themselves, create a whole new cauldron of interpretations which we need not go into. But nonetheless umbrella clauses have been the aid and rescuer of investors and has helped them ward off the use off excess power in the name of sovereignty by the host state in breaching their obligation to the international investment.
ECONOMIC STABILISATION GUARANTEE
Moving further to the economic stabilisation guarantee. The clause of Economic stabilisation guarantee provides predictability, assurance and continuity to the foreign investors. When used in reference to BITs it signifies that the host states will not make any legal anomalies that could adversely affect the international investment. This stabilisation clause enables a reassurance to a foreign investor and helps attracting foreign investments. The state acting in its sovereign capacity exercising its sovereign powers can adopt, impose, or annul laws which apply and regulate their territory. Hence after attracting international investment the state has full authority to change the law that governs the investment contracts or the investment itself or the taxation of such investment. This is why an assurance in the form of stabilisation guarantee is preferred by an investor, because despite the government sovereignty it is bound by international contracts that it enters into, pacta sunt servanda
There are various types of stabilisation clauses for example, freezing clauses or clauses that prevent the state from unilateral action or economic stabilisation clause which relates to compensation and sponging future monetary affect, however, for the purpose of this essay the economic stabilisation clause is only discussed. The economic stabilisation clause provides to the investor a compensation or a sponging affect of any new laws proposed by the host state which affects the direct income of the investor. This is most likely done in the field of tax, where either the government or any person representing the government promises to sponge of future tax affect. Therefore, if the taxes are raised by the the host country, then the investor is compensated by the host. However, if the taxes are reduced below the agreed rates, the host is compensated by the investor. The Tribunal in the case of Amaco v Iran, laid out that the freezing clause was to freeze the provision of the national law that governed the contract in order to prevent any future altercations that could affect the contract. But it is pertinent to note that the economic stabilisation clause is in essence different from other stabilisation clauses. To mention a few, the economic stabilisation clause unlike freezing clause does not restrict the state from using its legislative powers but merely asks it to absorb its affects. Further, the economic stability guarantee is a contractual obligation which when not performed is not a breach of a sovereign duty but a breach of commercial duty by the host state. The same above principle has been laid down by the Tribunal in Burlington v Ecuador. Hence, it is fair assume that amongst other stabilisation clauses the economic stability guarantee is one which the Tribunal should have the least hesitation in implementing.
ENTANGLEMENT
Having established the scope and workings of the umbrella clause and the economic stabilisation guarantee, we will now look how the two interplay and how the Tribunal in Burlington v Ecuador have sewn them two together. To reiterate, the umbrella clause is an additional protection provided to a foreign investor that would enforce the states private undertakings. Hence, if a state fails to perform its contractual obligation or if a dispute arises out of the municipal law of the host state the investor could still find feet to stand on at ICSID Tribunal owing to the umbrella clause. The economic stability guarantee by the host state is a contractual obligation and not sovereign obligation. In other words this guarantee can also apply between any two or multi-commercial bodies. There is no role of a sovereign state in the fulfilment of the said guarantee. Therefore, a breach of the same guarantee is also a breach of ones commercial capacity and not of sovereign capacity. Hence, linking the two above arguments on the understanding and application of umbrella clause and the economic stability guarantee it is logical to conclude that a breach in the economic stability guarantee by the host state would enable the investor to initiate action under the umbrella clause.
The above analysis leads to a further conclusion that the breach of the stability guarantee finds its ground in the umbrella clause because in its very essence the economic stability guarantee distinguishes itself from other stability guarantees such as freezing clauses. The exercise of power and the duty to fulfil the above guarantees, differs. While the freezing clauses require the host state to act with its sovereign authority, or not act in most cases, in contrast, the economic stabilisation guarantee requires the host states or its representatives to act in their commercial capacity. To understand how the above analysis is made one should dwell into the workings of the economic stabilisation guarantee. Unlike freezing clauses, the economic stabilisation guarantee does not restrict the host state from exercising its sovereign power, whereas merely asks to act in a commercial capacity where in case the host state choses to make or change such laws that adversely affect the inflow of income, they would acting in commercial capacity indemnify the investor.
James Crawford stated “it would be very odd indeed if a state could defend itself against a claim for a repudiation of an investment agreement by arguing that it was acting for commercial reason”. It would then be bizarre that if the above is accepted as then it becomes a blanket defence for the host state to make stating it was action for commercial reasons. The Tribunal in the El Paso case case considered that an umbrella clause would only apply in protection of an investor, if the host state had breached its obligation in their sovereign capacity and not in their commercial capacity. As previously established that the obligation of economic stability guarantee is a commercial obligation and the breach of the same is a commercial breach and not a sovereign breach, the narrow approach taken by the above Tribunals would affectively allow the state to freely breach any economic stabilisation guarantee without the fear of any repercussions. So the umbrella clause should protect the investors from both the host states sovereign and commercial conduct. Therefore, any breach in commercial capacity of the state must be a breach covered under the umbrella clause and in cases where such breach in commercial duty by the host state is made, should find jurisdiction at an ICSID Tribunal under the same clause.
The Tribunal in Burlington case assumed a very contradictory position. While claiming that a commercial breach of obligation would find jurisdiction under the scope of umbrella clause, it swayed away from the above understanding by holding the respondent not liable for such breaches due to factors discussed ahead. The argument that only Ecuador could affect the working of the contract between itself and the investor through its sovereign power is factual but irrelevant while determining whether the breach in question is commercial or sovereign. The reason is because PetroEcuador, a representative of the respondent had agreed to absorb any future tax implication and the breach of this promise led to the said dispute. Though the situation arose due to the sovereign act of respondent, the breach only arose due to the failure of the commercial act of the state representatives. Hence, the Tribunal was wrong in the application of the given facts to the principles of ICSID convention. It should also be understood that in practice the host state requires the contract holder to have a company registered in its territory and the operation run through their local entity. This form of organisational structure must be overlooked while determining privity as the parent company does not formally conclude the contract with the host state. Privity can only lie with the local entity as it is now the formal holder of the contract. But then the above implies that the umbrella clause would altogether be ineffective in protecting the foreign investor for the lack of privity and a local entity cannot pursue an investment claim as by definition it is not a foreign investor. This argument was recognised by the dissenting arbitrator and claimed that privity should not be essential in order to receive protection from an umbrella clause. Finally, the ambiguity in the determination of what actions fall under the scope of umbrella protection, that is covering commercial act or sovereign act or both leads parties to great deal of legal uncertainty. The above coupled with the parent company not being a direct party to the contract containing the economic stability guarantee could lead to failed action at the ICSID Tribunal as seen in the Burlington case.
In conclusion, the duty breached in the breach of the Economic stability guarantee is of commercial capacity and not sovereign capacity. As established previously the umbrella clause provides protection to an investor from breach by the host state in its duty regardless of the fact whether it is a commercial breach or a breach through a sovereign act. Hence, the umbrella clause covers all contractual breaches regardless whether their breaches by sovereign duty or commercial duty. Therefore, the umbrella clause also covers a breach in the economic stability guarantee. The Tribunal in Burlington v Ecuador though being of the opinion similar to the one above, failed in the correct application of the above principal and held that they lacked jurisdiction over the Umbrella clause claim. Lack of concrete tests and ambiguity in interpretations will make this case and error in application not an isolated one.
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