The Scope and Effect of Umbrella Clauses: The Need for a Theory of Deference

Abstract

This note offers support for the view that all investment-related contracts are within the scope of bilateral investment treaty (BIT) protection under a typical umbrella clause; while ordinary commercial contracts are not. In this category of investment-related contracts, the author argues that the protection is wide and is not, at the jurisdictional threshold, subject to contractual dispute-settlement provisions outside the BIT. This view is based on distinguishing between a treaty breach and a contractual breach – though the latter may result in the former, the two are conceptually distinct and give rise to separate causes of action. Consequently, BIT tribunals have jurisdictions over treaty breaches and are not affected in this regard by contractual adjudicatory mechanisms. At the same time, this note recognizes the practical and efficacy-based difficulties of allowing simultaneous proceedings in both treaty and contract based forums; and possible abuses of turning to treaty-based adjudication simply to get around failure in contract-based adjudication. These difficulties – this note suggests – will best be solved not by treating the matter as one of jurisdiction of treaty-based tribunals, but rather by arriving at a coherent theory of deference to be granted by one tribunal to the other as a matter of merits.