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The Umbrella (or Sanctity of Contract/Pacta sunt Servanda) Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases
Introduction
The extent to which customary law (in the past) and modern investment treaties (bilateral/multilateral) at present protect contracts concluded with the state and its attributed entities has been controversial in the past and continues to be so. The issues relate to substantive law (To which extent is international and treaty-based law applicable to such contracts? To which extent is domestic law relevant for the application of international law?) and to procedural law (What is the relationship between treaty-based international arbitration and other jurisdiction based on domestic law and specific contractual jurisdictional provisions?).
The issue has been emerging as one of the key - and in my view so far largely unresolved - challenges in modern, treaty-based direct investor-state investment arbitration ("arbitrage transnational"). Over 2000 BITs have by now been concluded[1] and several plurilateral or multilateral investment treaties amounting to the equivalent of more than another 2000 BITs[2]. Governments, tribunals and scholars have been divided on the scope of such protection to be offered[3]. As usually, there is an approach highlighting state sovereignty which provides a large, unfettered leeway for abrogation of such contracts by governments relying on domestic law; this view is largely affiliated with the adherents of the 1970s concept of the "New International Economic Order" and the then in developing countries prevailing, subsequently waning and now possibly re-emerging Calvo doctrine[4].
The opposite view - associated at least since the 1920s (and probably much earlier) with a liberal and cosmopolitan view in favour of international commerce[5] - reflects the needs of international commerce, now conceptualised as "good governance" for the "global economy". It emphasises that contracts freely entered into by governments cannot be cancelled by government fiat without proper compensation[6]. General views on the desirability of protecting aliens' contracts and other proprietary rights, the specific context of particular litigated disputes and sentiments about the proper balance between unrestricted national sovereignty on one hand and the controls imposed by international law on the exercise of governmental power all have been playing a role in determining attitudes and legal argument. Lawyers and legal scholars closer in background, cultural and professional affinity and loyalty to the state are likely to emphasise sovereignty over contract, while those closer to economics, commerce and finance will appreciate more the link between prosperity and sanctity of contract[7]. The same thinking is likely to apply in procedural terms - with preference to be given either to the primacy of domestic courts versus primacy to international arbitration.
This study will examine the role of the clause in investment treaties relating to the "observation of commitments" (labelled "umbrella" or "pacta sunt servanda" or "sanctity of contract" or "respect for contract" clause). This clause appeared firstly in the 1959 German-Pakistan bilateral investment treaty, has since become a widespread practice in investment treaties, but has neither been analysed in any depth in scholarly commentary nor been subject to serious testing until the two SGS cases of 2003 (v. Pakistan; v. Philippines).
We will first sketch the economic and conceptual context relating to the principle of "sanctity of contract", then the treatment of contracts by government agencies with foreign investors under customary international law and summarise how the umbrella clause in modern investment treaties should be read. The study will then examine in more detail the reading given to the clause in the two SGS cases, add some comments on contracts with state enterprises and conclude with a proposal how arbitral tribunals should deal with this clause.
Footnotes
[1] The most extensive work in terms of collecting and analysing bilateral and multilateral investment instruments has been carried out by the Unctad Division on International Investment which now also makes a large number of such instruments directly available via: http://www.unctadxi.org/templates/Startpage____718.aspx
[2] Mainly the NAFTA (US, Canada, Mexico) and the Energy Charter Treaty (over 50 states plus the European Communities).
[3] See among many others the as usually incisive analysis by F. A. Mann State contracts and State responsibility, 54 AJIL 572 (1960); R. Jennings, State Contracts in International Law, 37 BYIL 156 (1961); Stephen Schwebel, "International Protection of Contractual Agreements" (1959) A.S.I.L. Proc. 273 and idem, The Breach by a State of a contract , in: Essays in Honour of Roberto Ago, Milano, Giuffre 1987, also: published as: On Whether the Breach by a state of a contracxt with an alien is a breach of international Law, in: Justice in International Law, Selected Writings of Stephen Schwebel, Grotius, Cambridge 1994, 425; 401; most recently on coverage by BITs of contract claims: B. Cremades, Clarifying the Relationship Between Contract and Treaty Claims in Investor-State Arbitrations, in: N. Horn (Ed) Investment Arbitration, forthcoming 2004 and: Recent Developments in Investment Arbitration: Claims under Investment Treaties for Conduct that also involves Contracts with Government or Government-attributed Entities?; OGEL 2 - Issue #01 February 2004 at www.gasandoil.com/ogel; Charles Leben, La theorie du contrat d'etat et l'evolution du droit international des investissements, hague lecture 2003.
[4] The most recent presentation: M. Sornarajah, The International Law on Foreign Investment Cambridge 1994.; on the context: T. Wälde, A Requiem for the New International Economic Order, in: : Liber Amicorum Professor Ignaz Seidl-Hohenveldern, Ed.G. Hafner et.al. Kluwer 1998; Garcia-Amador, F., V., "Calvo Doctrine, Clavo Clause", in Bindschedler, R., L., (ed.), Encyclopaedia of Public International Law, Volume One (1992), pp. 521-523; Francisco Orrego Vicuna 11 N.Y.U. Envtl. L.J. 19 (2002), Regulatory Expropriations In International Law: Carlos Calvo, Honorary Nafta Citizen. US legislation qualified as "taking", under the Hickenlooper amendment (Public Law NO. 87-195, 22 USC para 2370 (e) (1) 1994 the repudiation or nullification of any contract with any US person.
[5] It is likely that a more thorough historical analysis will find such emphasis on a culture and legal order protecting contractual commitments in all historical periods with a developed commercial intercourse among nations - and not least in Islamic Law where the principle of sanctity of contract - essential in the context of long-distance trade as dominated Mekka at the time of Mohammad - is supported by the following verse from the Quran. "Oh you who believe, observe covenants". (Almaeda Sura, Chapter 5, verse 1 ); Walied El-Malik, Minerals Investment under the Sharia Law, Graham and Trotman, 1993, p. 102. For a historical survey of economic liberalism in international law: S. Neff, Friends, but no Allies: Economic Liberalism and the Law of Columbia U. Press, 1991 who traces such international law perspectives back to E. Vattel and H.Grotius.
[6] The pertinent arguments - sovereigntist and statist versus advocates of sanctity of contract - have also been made in the context of national and constitutional law - see only the most instructive majority decision with strong dissent by the US Supreme Court in: US v. Winstar, 116 SCt 2432 (1996)
[7] These issues played a large role in the establishment of the United States, the economic success of which is often attributed to the priority given to protection of property, sanctity of contract and observance of financial commitments to develop its public credit, for a discussion of the controversy between the first US Secretary of the Treasury (and main author of the "Federalist Papers"), Alexander Hamilton and his more populist antagonists: Ron Chernow, Alexander Hamilton, 2004.
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