Interpretation Of The Umbrella Clause In Bilateral Investment Treaties

In the aftermath of World War II, rapid economic development and the increasingliquidity in international capital markets caused the international investmentenvironment to change dramatically. In order to regulate the increasingly complicatedinvestment environment, a multinational effort created a comprehensive legalstructure to deal with it utilizing Bilateral Investment Treaties (“BITs”). At the heartof BITs is the disputes settlement clause, the so-called “umbrella clause,” which hasbecome a controversial issue because of its significant influence on investors and hostStates.This article focuses on academic theories regarding the umbrella clause andcontemporary cases from the International Center for the Settlement of InvestmentDisputes (“ICSID”). Multiple aspects of the umbrella clause are analyzed-jurisdictional issues, its scope, and different perspectives on it.. Then, China’s currentsituation is evaluated and some recommendations are made about how the Chinesegovernment might deal with the umbrella clause in BITs.Chapter One introduces the background and discusses the academic perspectiveof the umbrella clause in BITs.Chapter Two discusses the jurisdictional issues of the umbrella clause. In myopinion, when arbitration arises under the umbrella clause, it should differ dependingon whether or not there is a ‘forum selection clause’ in the investor-host State contract. If the contract does include the forum selection clause, then the investor should try tosettle the dispute according to the specific forum selection clause first. If thecontract does not include the forum selection clause then the investor has the right tosubmit the dispute directly to the international arbitration organization.Chapter Three analyzes the scope of the umbrella clause by discussing the notionof investment and the unilateral promises by the host State. I believe that ‘reasonablerestriction’ is the best way to understand the scope of the umbrella clause.Depending on the breach actions of the host State, contract breaches can be dividedinto commercial breaches and sovereign breaches. Most recently, however, theumbrella clause has evolved into dealing primarily with breaches of a sovereignnature.Chapter Four discusses interpretative approaches by analyzing ICSID cases. Inmy opinion, under the current international investment environment, a comparativelynarrow interpretation is the more reasonable way to understand this problem. On theone hand, it fits the purpose of the umbrella clause while, on the other hand, it avoidsthe abuse of judicial rights.Chapter Five discusses China’s current position by analyzing relevant data, andconcludes by offering some advice to Chinese authorities and investors.