The institution of investment arbitration has transformed the landscape of investment protection. (1) Substantive norms aside, investors' ius standi to directly invoke the arbitration procedure has infused a sense of security in cross-border investment. (2) Free from the political uncertainty of diplomatic protection and (the often inadequate) local remedies, this so-called 'arbitration without privity' mitigates the substantial political risk associated with foreign investment. (3)
This 'internationalisation' of disputes, however, has witnessed a chequered past. Wary of adopting onerous obligations, host states have sought to limit the scope of their consent. (4) Controversially, this conflict has manifested itself in varying interpretations of 'umbrella clauses'. Broadly, umbrella clauses are 'catch-all statements' stipulating that conditions and privileges negotiated between the investor and the host state will be protected by a treaty. (5) These unassuming inclusions in bilateral investment treaties ('BITs'), found in almost 40 per cent of such instruments, (6) stand to elevate primarily contractual disputes between investors and host states into treaty claims. Crucially, investor-friendly investment arbitral tribunals are impinging upon the formerly exclusive jurisdiction of municipal courts. (7)
This carries an obvious risk of subjecting sovereign action (in contractual matters no less) to international tribunals. This consequence has not gone unnoticed; recently, it has prompted capital importing (8) (and indeed exporting (9)) states to question the prudence of retaining dispute resolution clauses in BITs. This development, no doubt, is of great concern to the framework of investment protection, and more specifically, international investment arbitration. In this context, the recent decision of an International Centre for Settlement of Investment Disputes ('ICSID') Tribunal in SCS Societe Cenerale de Surveillance v Republic of Paraguay (A ward) (10) offers a fresh perspective on umbrella clauses.
With consistent interpretation eluding 20 tribunals in the past decade, disagreement seems to remain the only continuing feature in this area. (11) In SCS v Paraguay, the Tribunal adopted a broad, and largely textual, interpretation of the umbrella dause contained in art XI of the Switzerland-Paraguay BIT. (12) In doing so, it imputed an intention to state parties to include contractual undertakings within its fold. This broad interpretation, coupled with the existing uncertainty in arbitral practice, may alarm states. Accordingly, a closer look at the decision in the context of surrounding arbitral practice is in order.
This dispute concerned a contract between Societe Generale de Surveillance SA ('SGS'), a Swiss company, and the Ministry of Finance of Paraguay for the provision of certification services based on pre-shipment inspection of cargoes destined for Paraguay. SGS claimed a breach of art XI of the Switzerland-Paraguay BIT on account of non-payment of dues under the contract. Article XI reads: 'Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the other investors of the Contracting Party.'
The dispute in the decision on jurisdiction was not the merit of SGS' claim for breach, but, rather, whether art XI created a substantive obligation on Paraguay to perform its contract--an obligation that could be arbitrated independently under the BIT. This question of jurisdiction depended on three primary, though related, inquiries: (1) whether the language of art XI admitted such claims, given the text and context (that is, parties' intent) of the provision; (2) whether a broad interpretation rendered art XI 'susceptible of almost indefinite expansion'; (13) and (3) the effect of characterisation of a contractual claim as breach of a treaty standard. …