"THE RELATIONSHIP BETWEEN LOCAL COURTS AND INVESTMENT TREATY ARBITRATION" Senate House, University of London, 10 September 2004

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"THE RELATIONSHIP BETWEEN LOCAL COURTS AND
INVESTMENT TREATY ARBITRATION"Senate House,
University of London, 10 September 2004
British Institute of International and
Comparative Law Third Conference of the
Investment Treaty Forum

• "The Origins of the Umbrella Clause in the
  International Law of Investment Protection"
• Anthony C. Sinclair
• International Arbitration Group
• Allen Overy LLP

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1. The Umbrella Clause

• The umbrella clause is an international law
  obligation created by treaty that a host State
  shall
• 'observe any obligation it may have entered into'
• 'constantly guarantee the observance of the
  commitments it has entered into'
• 'observe any obligation it has assumed'
• (and other variants)
• with respect to investors having the
  nationality of another Contracting State, or with
  respect to the investments of such investors.
• These provisions create an effective
  international remedy only when coupled with
  watertight compulsory dispute settlement
  provisions.

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2. Recent ICSID Decisions

• SGS Société Générale de Surveillance SA v.
  Islamic Republic of Pakistan (Decision on
  Jurisdiction, August 2003)
• SGS Société Générale de Surveillance SA v.
  Republic of the Philippines (Decision on
  Jurisdiction, January 2004)

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3. Diversity of Metaphors

• Elevator
• Mirror effect
• Parallel effect
• Sanctity of contract
• Pacta sunt servanda
• Umbrella

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4. Assistance from the History of the Umbrella
Clause

• 1953-1954 Advice of Mr. Elihu Lauterpacht to the
  Anglo-Iranian Oil Company in connection with the
  settlement of the Iranian oil nationalisation
  dispute
• 1956-57 Advice of Mr. Lauterpacht to a group of
  oil companies contemplating a trunk pipeline from
  Iraq in the Persian Gulf through Syria and Turkey
  to the Eastern Mediterranean
• 1956-59 Abs Draft International Convention for
  the Mutual Protection of Private Property Rights
  in Foreign Countries ('the Abs Draft')
• 1958-59 Shawcross Draft Convention on Foreign
  Investments ('Shawcross Draft')
• 1959 Abs-Shawcross Draft Convention on Foreign
  Investment (Abs-Shawcross Draft)
• 1962 and 1967 OECD Draft Conventions on the
  Protection of Foreign Property

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5. Early 'Umbrella Treaties'

• 1921 Agreement between the United Kingdom and
  Peru Respecting the Mineral Property 'La Brea y
  Pariñas' signed at Lima, 27 August 1921 (1921)
  VII League of Nations Treaty Series No. 195, 280
• Other examples include a German-Polish Convention
  of 1922 and a French-Lebanese Agreement of
  January 1948

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6. 1953-54 Advice Anglo-Iranian Oil Company
Settlement

• The Settlement Agreement
• 'shall be incorporated or referred to in a treaty
  between Iran and the United Kingdom in such a way
  that a breach of the contract or settlement shall
  be ipso facto deemed to be a breach of the
  treaty'.
• Two principal objectives for the umbrella treaty

• Stabilise the underlying settlement agreement
  and
• Guarantee an effective international law remedy

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7. 1956-57 Advice Middle East (Iraq-Syria-Turkey)
trunk pipeline

• Proposed umbrella treaties between the national
  States of oil consortium members and transit
  States that would provide 'parallel protection'
  for pipeline contracts concluded between the
  consortium and transit States.

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8. 1956-9 Abs Draft 'International Convention
for the Mutual Protection of Private Property
Rights in Foreign Countries'

• Article IV(3)
• A state shall not directly or indirectly restrict
  the freedom of foreign nationals 'in acquiring,
  administering and utilizing property, rights and
  interests' and in particular, 'not by laws,
  regulations, administrative measures or in some
  other way, in so far as these are apt to cause or
  produce the limitation or cancellation of
  licences within the meaning of Article III(e)'.
• Article III(e)
• 'licences under public law in the field of trade
  and industry, which confer upon the licensee a
  long-term title'.

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8. 1956-9 Abs Draft 'International Convention
for the Mutual Protection of Private Property
Rights in Foreign Countries' (continued)

• Article IV(4)
• 'In so far as better treatment is promised to
  non-nationals than to nationals either under
  inter-governmental or other agreements, or by
  administrative decrees of one of the High
  Contracting Parties, including most-favoured-natio
  n clauses, such promises shall prevail'.
• Abs (1958) on Article IV(4)
• if 'individual private agreements' promised
  'better treatment to investors than to
  residents, the promise to accord such treatment
  must in all circumstances be respected'.

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9. 1958-9 Shawcross Draft Convention on
Foreign Investments

• Sir Hartley Shawcross (1961) was preoccupied by
• 'the binding force of contract and the right to
  own property' (and) 'how to promote this flow of
  private capital to those countries where it could
  do most good'.
• Michael Brandon (1959) reporting that the
  Shawcross Draft provided for
• 'the application by States of the rule pacta
  sunt servanda to their "specific engagements"
  with aliens howsoever arising'.

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10. 1959 Abs-Shawcross Draft Convention on
Investments Abroad

• Article II
• 'Each Party shall at all times ensure the
  observance of any undertakings which it may have
  given in relation to investments made by
  nationals of any other Party'.
• 'any undertakings' intended to cover inter alia
  contractual undertakings
• covered undertakings may be express and direct,
  or implied and indirect, and include unilateral
  undertakings.
• Shawcross (1961) claimed the Draft sought
• 'merely to reaffirm the more elementary and
  generally accepted principles of International
  Law in this field, particularly the rules as to
  compensation and sanctity of contract'.

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10. 1959 Abs-Shawcross Draft Convention on
Investments Abroad (continued)

• Schwarzenberger (1960) described Article II as
• 'a far-reaching departure from the law as it
  stands'.
• Metzger (1961)
• 'an effort to convert private contracts between
  one country and a national of another into
  "international" agreements between countries,
  which they are not under international law'.
• Seidl-Hohenveldern (1961)
• 'the very aim of Article II of the Abs- Shawcross
  Draft is to change this and to bring concession
  contracts under its umbrella of protection' ()
  'The purpose of the clause is to dispel whatever
  doubts may possibly exist as to whether a
  unilateral violation of a concession contract is
  an international wrong'.
• Article II was said to transform public-private
  undertakings into international obligations
  'paralleled by corresponding obligations between
  the Parties'.

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11. 1962 and 1967 OECD Draft Convention on the
Protection of Foreign Property

• Article 2, 'Observance of Undertakings'
• 'Each Party shall at all times ensure the
  observance of undertakings given by it in
  relation to property of nationals of any other
  Party'.
• The Commentary to Article 2 describes it as
• 'an application of the general principle of pacta
  sunt servanda' in favour of the property of
  nationals of another party.
• Amongst the typical property rights protected
  include 'undertakings' such as claims to money,
  rights to performance and undertakings under a
  contract or concession.
• The official Commentary to Article 2 confirmed
  that undertakings may include 'consensual'
  bargains as well as 'unilateral engagements'
  provided that they 'relate to the property
  concerned it is not sufficient if the link is
  incidental'.

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11. 1962 and 1967 OECD Draft Convention on the
Protection of Foreign Property (continued)

• Haight (1966)
• 'undoubtedly the basic norm of every legal system
  governing agreements between States and foreign
  nationals'.
• Lauterpacht (1962)
• 'such contracts are thus in a sense put on a
  special plane in that breach of them becomes
  immediately a breach of convention'.
• American Bar Association (1963)
• 'would do no more than affirm what already
  exists namely affirm that contractual rights
  vested in aliens are protected by international
  law and that that law will give effect to State
  undertakings in derogation of municipal law where
  an intention to be bound to that extent is
  clearly evidenced'.

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11. 1962 and 1967 OECD Draft Convention on the
Protection of Foreign Property (continued)

• Brower (1976) considered that Article 2 departed
  from general international law
• 'to the extent that it recognizes the
  applicability of the principle of pacta sunt
  servanda to agreements between a state and
  nationals of other states and accordingly regards
  the state's breach of such an agreement as a per
  se violation of international law'.

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11. 1962 and 1967 OECD Draft Convention on the
Protection of Foreign Property (continued)

• American Bar Association (1963)
• 'what the Convention would do in respect of
  State undertakings to aliens would be to provide
  a remedy for their enforcement. It would not
  turn private contracts into treaties it would
  not create obligations where none arose under the
  applicable law it would not impair sovereignty
  or the police power but it would provide for
  giving effect in an international forum to
  acquired rights arising from State contracts, and
  in this way it would ensure the application of an
  international standard where under international
  law that standard should be applied'.
• Seidl-Hohenveldern (1961)
• 'like any other treaty the umbrella clause
  would be subject to the clausula rebus sic
  stantibus'.