In investment arbitration, an umbrella clause can constitute an advantage for investors, protecting investments by placing obligations entered into by a host State of investment under the protective “umbrella” of an international treaty. By linking the violation of local law to the violation of a Bilateral Investment Treaty (“BIT”), contract claims may in particular be elevated to the level of the violation of an international obligation.
The Principle of the Umbrella Clause in Investment Arbitration
The general principle is the indifference regarding the characterization of the behaviour of the State under its internal law for the purposes of its international qualification: “The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law.”
The dissociation of the internal legal order and the international legal order may generate that a lawful act under the internal legal order can be considered as a violation of international law. However, a wrongful act under the internal legal order is not automatically considered as a violation of international law. Accordingly, jurisprudence has established a distinction between contract claims and treaty claims.
Without the incorporation of a protective umbrella clause into a BIT, the violation of an internal engagement by the host State cannot typically be considered to be a breach of a treaty. It remains a violation of internal law but does not necessarily constitute a violation of an international obligation. In most cases, arbitral jurisprudence enshrines the principle of the umbrella clause by considering a violation of internal law as an international violation, although the engagement of the host State remains internal. In other terms, it is not the violation of the internal engagement that constitutes the international violation, but the sole fact of breaching the BITs international obligation to respect the engagement.
Hence, tribunals generally declare themselves competent over cases including an umbrella clause in the relevant BIT concerning internal engagements entered into by the host State. It shall be noted that in many cases where the main contract incorporates a dispute resolution clause involving other jurisdictions, the umbrella clause is used to maintain the competence of the arbitral tribunal over the case.
Conditions to Apply the Umbrella Clause in Investment Arbitration
Violation of a Contractual Engagement
In many cases, an umbrella clause does not specify if it applies to contractual engagements taken by the host State or not. In these cases, arbitral tribunals often consider that the umbrella clause applies to contractual engagements. 
Certain BITs expressly include the protection of contractual engagements of the host State towards the investor. For instance, this possibility is illustrated in Article 2 of the Agreement between the Republic of Chile and the Republic of Austria for the Promotion and Reciprocal Protection of Investment signed on 8 September 1997:
(4) Each Contracting Party shall observe any contractual obligation it may have entered into towards an investor of the other Contracting Party with regard to investments approved by it in its territory.
Violation of the State’s Unilateral Commitments
The umbrella clause can also be drafted in broad language. In other terms, it is possible to expressly incorporate even a unilateral commitment taken by a host State. Regulatory or legislative acts can also be covered by such a clause. Some tribunals  have affirmed that two main conditions are needed:
- The umbrella clause needs to be drafted in broad language so that its scope can incorporate unilateral commitments taken by the host State; and
- The existence of a real unilateral commitment taken by the host State to benefit the investor, resulting in a legislative or regulatory act.
State Entities Liable Under the Umbrella Clause
The undertaking is supposed to be taken by the State since it is the debtor of the international obligation. Therefore, it is important to identify the entities that can make engagements regarding the investor and engage the host State at the same time.
It is well established in practice that engagements taken by entities emanating from the host State are considered the State’s engagements. However, other entities that possess an independent legal personality are the subject of debate in doctrine. Either it is not accepted to include companies with independent legal personalities, or it is confirmed that an entity that acts on behalf of the State is considered liable for its engagements.
The Entities That Can Benefit from the Umbrella Clause
Two main aspects exist. The first one is pertinent to an umbrella clause only including the term “investments” without further specifications. In this case, the scope of interpretation is wide and can allow an arbitral tribunal to even integrate investors who are not party to the contract into the scope of protection of the umbrella clause. For instance, Article 10 of the Swiss-Qatar BIT signed the 12 November 2001 states that:
Each contracting party shall observe any contractual obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party.
The second aspect is that, if the umbrella clause only incorporates the term “investors”, it may be interpreted restrictively by tribunals. In other terms, tribunals may require a perfect identity between the parties in the procedure and in the engagement taken.
While many underestimate the power of an umbrella clause, and many investors incorrectly assume that a violation of local law automatically constitutes the violation of an international obligation, umbrella clauses can be advantageous to investors when the necessary conditions are united. Before entering into a contractual relationship with a State, an investor would also be wise to look at the applicable BIT in order to determine whether it contains an umbrella clause.
 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction, 6 August 2003; see also, Noble Ventures Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005.
 Impreglio S.p.A v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on jurisdiction, 22 April 2005.
 CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005.