The role of the “umbrella clause” in Investment Protection Treaties
By
Nadine Kaissi-Tayara
(October 2006)

Introduction

Having greatly facilitated international exchanges as well as foreign investments, economic globalization has also created the need to come up with a legal framework providing more protection and security for the parties involved in international trade.

And indeed, international law has been witnessing for some time now, a multiplication of treaties – some multilateral, but mostly bilateral – aiming to promote and protect foreign investments by setting certain standards of protection (such as “fair and equitable treatment”, “non-discriminatory treatment”, “protection against expropriation” or “most-favored-nation treatment”).

In addition, those investment protection treaties commonly contain dispute resolution mechanisms, providing that disputes concerning investments between a contracting party to the treaty and an investor of the other contracting party are to be submitted to international arbitration, often being under ICSID Rules[i].

Clearly, such dispute resolution clauses are meant to secure a neutral, international forum for foreign investors alleging a violation of the treaty standards by the contracting State.
In fact, by making available several procedural options to those investors, such clauses are also creating what is known as “forum shopping in favorem”[ii].

The first option is for an investor who has a contractual relationship with a foreign State or any of its constituent subdivisions or agencies, to present its claims against it in the forum and according to the dispute resolution mechanism foreseen in the contract, which will typically be an ordinary commercial arbitration.

However, there are some cases in which such commercial arbitration will not be sufficient or satisfactory for the investor seeking to protect his investment.

Indeed, it is possible, and it has been seen often enough, that the