Umbrella Clause in Bilateral Investment Treaties

The Umbrella Clause has nearly become one of the most common rules of the most investment treaties, which provides more protections for foreign investor. Providing a proper and true sense of this clause has become highly controversial issue in international investment law that has led many arbitral tribunals to adopt specific stance in this respect. Here, the fundamental point is whether the forum stipulated in the bilateral investment treaty is competent to settle disputes, which are arisen from investment contract between host State and foreign investor, or not? If it so, then the next question would be: what will be the effect of the determining the forum by stipulated dispute settlement clause in the contract. Does this clause turn contract claims into the treaty claims? And what will be the impacts and limits of this clause? Answering to these questions, the arbitral tribunals have responded in two different ways. Some of them have interpreted the clause in a narrow sense; they have distinguished sovereign from non-sovereign act of host State. According to their point of view, the Umbrella Clause of BIT may be violated if the host State measure, in breaching its contractual obligation, is applied on the basis of its sovereignty. In contrast, the other tribunals have interpreted this clause in a broad sense which the violation of any contractual obligation of host State leads to a breach of this clause and consequently the forum in the investment treaty is qualified to hear the dispute. It seems that the broad interpretation and second approach is more logical in the interpretation of the clause; it is also more consistent with the purpose and history of the emergence of this clause and makes it more efficient.