Does the Umbrella Clause Really Help? : A Critical View on the Umbrella Clause
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As protection of foreign investment and foreign investors has become one of the key issues in managing international economic relations, the number of Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) has increased substantially in recent days. For instance, as of September 2009, Korea has signed BITs or FTAs with as many as 94 countries. As this is a relatively recent phenomenon, these investment treaties and ensuing investment disputes tend to touch upon new areas and present noble issues. One of such new areas or issues concerns a particular provision contained in the BITs and FTAs, which is colloquially called an “umbrella clause.” This provision is designed (or interpreted) to turn a contractual obligation based on a contract between a foreign investor and the host state’s government into a treaty obligation between the investor’s national government and the host state’s government, hence providing for a mechanism where a contract violation is escalated into a treaty violation. Protection of foreign investors is certainly a noble cause and an important goal to pursue under the current global economic regime. The sanctity of the cause, however, does not necessarily mean that any mechanism to achieve the goal is always justified in whatever legal planes. As such, the wisdom of having an umbrella clause should merit careful contemplation. Given the fact that BITs and FTAs are agreements to strike a balance between foreign investors and host states, focusing only on the foreign investor protection aspect of the agreements would fail to provide a bird’s eye view of the entire spectrum of relevant issues. In light of this, there should be more discussions between state parties, either prior to or during negotiations to conclude a BIT or FTA, for the purpose of setting forth rights and obligations of state parties in detail with respect to the umbrella clause. Inserting a vague provision in the treaty and looking to arbiters for interpretation of the provision by referring to the general canon would only invite more confusion and controversy. Barring clear intention of the parties concerned, it is also questionable whether the umbrella clause is fully consistent with relevant principles of international law. Although it is almost undisputable that an umbrella clause does help increase the level of protection for a particular investor in a particular instance, it is still questionable whether the provision serves well in terms of the general operation of the framework of BITs and FTAs. If an institutional interest of the BITs and FTAs is somehow compromised because of the need to provide more protection to individual investors, a careful scrutiny may be in order. If the institutional interest is compromised, the application of the provision may cause unexpected and unintended problems in the long run.
Abstract
As protection of foreign investment and foreign investors has become one of the key issues in managing international economic relations, the number of Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) has increased substantially in recent days. For instance, as of September 2009, Korea has signed BITs or FTAs with as many as 94 countries. As this is a relatively recent phenomenon, these investment treaties and ensuing investment disputes tend to touch upon new areas and present noble issues. One of such new areas or issues concerns a particular provision contained in the BITs and FTAs, which is colloquially called an “umbrella clause.” This provision is designed (or interpreted) to turn a contractual obligation based on a contract between a foreign investor and the host state’s government into a treaty obligation between the investor’s national government and the host state’s government, hence providing for a mechanism where a contract violation is escalated into a treaty violation. Protection of foreign investors is certainly a noble cause and an important goal to pursue under the current global economic regime. The sanctity of the cause, however, does not necessarily mean that any mechanism to achieve the goal is always justified in whatever legal planes. As such, the wisdom of having an umbrella clause should merit careful contemplation. Given the fact that BITs and FTAs are agreements to strike a balance between foreign investors and host states, focusing only on the foreign investor protection aspect of the agreements would fail to provide a bird’s eye view of the entire spectrum of relevant issues. In light of this, there should be more discussions between state parties, either prior to or during negotiations to conclude a BIT or FTA, for the purpose of setting forth rights and obligations of state parties in detail with respect to the umbrella clause. Inserting a vague provision in the treaty and looking to arbiters for interpretation of the provision by referring to the general canon would only invite more confusion and controversy. Barring clear intention of the parties concerned, it is also questionable whether the umbrella clause is fully consistent with relevant principles of international law. Although it is almost undisputable that an umbrella clause does help increase the level of protection for a particular investor in a particular instance, it is still questionable whether the provision serves well in terms of the general operation of the framework of BITs and FTAs. If an institutional interest of the BITs and FTAs is somehow compromised because of the need to provide more protection to individual investors, a careful scrutiny may be in order. If the institutional interest is compromised, the application of the provision may cause unexpected and unintended problems in the long run.
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