Abstract: Umbrella clauses in bilateral investment treaties (BITs) occupy a contentious space in international investment law, compelling host states to honour obligations toward foreign investments. This essay examines the fractured jurisprudence on umbrella clauses, focusing on two seminal arbitral awards: SGS v. Pakistan and SGS v. Philippines. The conflicting interpretations stem from divergent approaches to treaty language—whether to prioritize state consent or broader normative ideals—highlighting a deeper systemic indeterminacy in international law.
Part I traces the historical evolution of umbrella clauses, from their conceptual origins in the mid-20th century to their entrenchment as mechanisms for safeguarding state-investor commitments. Part II explores the scope and nature of these clauses, identifying how they extend or limit the internationalization of contractual obligations. The subsequent analysis in Part III juxtaposes narrow and literal interpretations of umbrella clauses, illuminating how tribunals oscillate between normative and positivist registers. This divergence exemplifies Martti Koskenniemi’s “apology versus utopia” dichotomy, which frames international law as a field perpetually vacillating between legitimizing state interests and pursuing liberal values.
By situating umbrella clauses within this theoretical framework, Part IV argues that their inconsistent application reflects the structural tensions of international law itself. The essay critiques the expansive interpretation’s systemic bias favoring investors, underscoring the role of political economy in shaping arbitral outcomes. Finally, Part V proposes reform pathways, from omitting umbrella clauses in future BITs to codifying explicit limits on their scope, thereby reducing interpretative ambiguity.
In conclusion, resolving the interpretative deadlock surrounding umbrella clauses necessitates systemic changes to the investor-state dispute settlement regime. Ensuring greater consistency and legitimacy in arbitral practice is crucial as global economic shifts foreground new challenges, including South-South treaties and climate-related obligations.
INTRODUCTION
Umbrella Clauses are an increasingly common feature of modern BITs. In essence, umbrella clause essentially requires the host state to fulfil and obligations it has undertaken towards an investment. They are thus called “umbrella clauses” because they bring the host state’s contractual obligations within the umbrella of treaty obligations. An example of a typical umbrella clause is the Article X of the Switzerland- Philippines BIT-
“…Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party”[1]
The jurisprudence on the interpretation and scope of umbrella clauses has been contentious, with tribunals ruling that contractual breaches cannot be raised to the level of treaty breaches[2] on one end and on the other end of the spectrum, rulings that umbrella clauses must be interpreted literally and any contract breaches by the host state do in fact constitute a breach of BIT in question[3]. While, there is sufficient scholarship on the debate within the ambit of International Investment Law about the interpretation and specific content of umbrella clauses, there is insufficient exploration of how umbrella clauses relate to general principles and norms of public international law. This essay builds the argument that there are two diverging strands of jurisprudence on umbrella clauses primarily because of two fundamentally differing worldviews on international law. Parts I and II trace the development and settled law on umbrella clauses; Part III lays down the two diverging strands of jurisprudence by centering two prominent arbitral awards- SGS v. Pakistan and SGS v. Philippines; Part IV contextualizes this tension within a systemic tension within international law itself wherein international lawyers tend to argue constantly within a register of “apology” or “utopia”; Part V proposes some solutions out of the deadlock.
[1] Article X, Switzerland- Philippines BIT (1997)
[2]A Newcombe and L Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 451-453
[3]Ibid