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Umbrella Clause
Practical Law UK Glossary 8-519-0939 (Approx. 3 pages)
Glossary
Umbrella Clause
In the context of a bilateral investment treaty (BIT), a clause that obliges the host state to observe specific undertakings towards its foreign investors. An umbrella clause protects investments by bringing obligations or commitments that the host state entered into in connection with a foreign investment under the protective "umbrella" of the BIT. Investors often rely on an umbrella clause as a catch-all provision to pursue claims when a host state's actions do not otherwise breach the BIT. Umbrella clauses are usually broadly written to cover every conceivable obligation of the host state.
Practically speaking, an umbrella clause can elevate a contract claim to the level of a treaty claim. Usually, violating a contract does not invoke treaty protection under international law. However, adding an umbrella clause to a BIT:
- Effectively circumvents that customary restriction by expressly stating that a violation of an investment contract is deemed a violation of the BIT.
- Removes the need for investors to rely on the dispute resolution clauses in an investment contract (which may, for example, give exclusive jurisdiction to local courts).
- Allows an investor to bring the claim before an international arbitral body, such as the International Centre for Settlement of Investment Disputes (ICSID). Investors typically prefer ICSID awards over other arbitral awards, as the host state is more likely to comply with an ICSID award. This is because ICSID is part of the World Bank Group, and the host state's failure to comply with the award may jeopardise the state's access to World Bank funding or international credit in general.
For more information, see Practice note, Umbrella Clauses in bilateral investment treaties.