Extension of jurisdiction to contract-based claims

a) Introduction: Jurisdiction of Tribunals over contract-based claims

Under general international law, not every breach of a contract with a foreign national constitutes a breach of international law.⁶⁵⁸ More specifically, the breach of a contract by a State in ordinary commercial intercourse is generally not considered a violation of in-ternational law, while the use of the sovereign authority of a State to violate a contract with an alien is considered a violation of international law.⁶⁵⁹ The decisive criterion under

656 For the same view, see Vesel, Clearing a Path Through a Tangled Jurisprudence, p. 172, and Markert, Streitschlichtungsklauseln in Investitionsschutzabkommen, pp. 304, 305.

657 See e.g. the Germany-Pakistan BIT.

658 American Law Institute, Restatement of the Law (Third), The Foreign Relations Law of the United States, vol. 2 (1987), § 712, Comment h, p. 201 stipulates that “[…] not every repudiation or breach by a state of a contract with a foreign national constitutes a violation of international law.” See also Joy Mining v. Egypt, Award on Jurisdiction, 6 August 2004, ICSID Case No. ARB/03/11, para. 72; CMS v. Argentina, Award, 12 May 2005, ICSID Case No. ARB/01/8, para. 299.

659 Schwebel, On whether the breach by a state of a contract with an alien is a breach of international law, in: International law at the time of its codification, pp. 408, 409. See also Salini v. Jordan, Decision on Jurisdiction, 15 November 2004, ICSID Case No. ARB/02/13, para. 155; Consortium R.F.C.C. v. Morocco,

general international law is therefore whether the violation was undertaken “for govern-mental rather than commercial reasons”.⁶⁶⁰ ICSID tribunals have uniformly accepted the existence of treaty claims that are independent from contractual claims and have affirmed their jurisdiction over treaty claims even though they were related to or arose out of the same set of facts as contractual claims.⁶⁶¹ Even if the claims are interwoven, an invest-ment tribunal may not decline jurisdiction over BIT claims on the ground that another fo-rum is competent for adjudicating on the contract claim. Dispute settlement clauses in contracts are designed to deal with contract claims, while dispute settlement clauses in BITs give tribunals jurisdiction to hear claims arising from the terms of the BIT. Alt-hough the two proceedings may arise from the same set of facts, they are still based on different causes of action. The distinction between treaty claims under international law and contract claims does not mean that tribunals never have jurisdiction to deal with con-tract claims. Parties may under certain circumstances have the right to submit concon-tractual claims to arbitration if contractual rights are included in the protection of the relevant BIT. There are basically three situations in which tribunals affirmed their jurisdiction over contract-based claims, namely the rise of a contract violation to a treaty violation or the inclusion of a broadly drafted dispute settlement clause or of an umbrella (pacta sunt servanda) clause in the treaty.

Sentence arbitrale, para. 51; Impregilo v. Pakistan, Decision on Jurisdiction, 22 April 2005, ICSID Case No. ARB/03/3, para. 260. The American Restatement of the Law provides in § 712 (2) that a state is re-sponsible under international law for injury resulting from: […]

(2) a repudiation or breach by the state of a contract with a national of another state

(a) where the repudiation or breach is (i) discriminatory; or (ii) motivated by other non-commercial consid-erations and compensatory damages are not paid; or

(b) where the foreign national is not given an adequate forum to determine his claim of breach or is not compensated for any breach determined to have occurred; […]

660 Schwebel, On whether the breach by a state of a contract with an alien is a breach of international law, in: International law at the time of its codification, p. 412.

661 Compañía de Aguas de Acoquija and Vivendi Universal v. Argentina, Decision on Annulment, 3 July 2002, ICSID Case No. ARB/97/3, paras 60, 95-97, 101-105, 112; SGS v. Pakistan, Decision on Objec-tions to Jurisdiction, 6 August 2003, ICSID Case No. ARB/01/13, para. 148; SGS v Philippines, Decision on Objections to Jurisdiction, 29 January 2004, ICSID Case No. ARB/02/6, para. 162; Impregilo v. Paki-stan, Decision on Jurisdiction, 22 April 2005, ICSID Case No. ARB/03/3, para. 258; Siemens v. Argentina, Decision on Jurisdiction, 3 August 2004, ICSID Case No. ARB/02/8, para. 180. See also Ben Hamida, L’arbitrage transnational face à un désordre procedural, in: Horchani (ed.), Où va le droit de l’investissement?, p. 199.

183 aa) Breach of contract amounting to a violation of international law

While not every breach of contract amounts to a breach of international law, it does not follow that only because a breach of contract is involved, there can be no violation of the bilateral investment treaty. The fact that treaty and contract violations are based on differ-ent standards does not mean that no violation of the BIT can arise from breaches of con-tract. This is underlined by the fact that contracts are a protected form of investment under most BITs. For example, the SGS-Pakistan tribunal has indicated that there would be a treaty breach if the investor was prevented from submitting disputes to the contractual dispute settlement mechanism.⁶⁶² Moreover, it has long been accepted that measures of a State affecting contractual rights may amount to expropriation contrary to international law.⁶⁶³

bb) Submission of Contractual Disputes on the Basis of a Widely Drafted Dispute Settlement Provision

Second, a treaty-based tribunal has jurisdiction to decide on contractual claims where the respective dispute settlement clause in the BIT grants jurisdiction over a broad category of disputes not limited to disputes relating to substantive treaty provisions. Some BITs contain limited dispute settlement clauses that only cover disputes relating to obligations under the BIT.⁶⁶⁴ In these cases, jurisdiction of the tribunal is restricted to claims of treaty violations. Others extend jurisdiction to any dispute between a foreign investor and a State relating to a protected investment.⁶⁶⁵ The question is whether in such a situation the tribunal is competent to decide on purely contractual claims that do not necessarily amount to a claim for violation of a treaty. From the broad wording of the clause, which

662 SGS v. Pakistan, Decision on Objections to Jurisdiction, 6 August 2003, ICSID Case No.

ARB/01/13, para. 172.

663 Norwegian shipowners’ claims, Award, 13 October 1922, R.I.A.A. vol. I, p. 325; Case Concerning Certain German Interests in Polish Upper Silesia (Merits), PCIJ Series A No. 7 (1926), p. 44; Letco v. Libe-ria, Award, 31 March 1986, ICSID Case No. ARB/83/2, 2 ICSID Reports, p. 366.

664 E.g. Art. XIII Canada-Ecuador BIT; Art. 9 (1) of the Netherlands-Venezuela BIT; Art. X (1) of the Costa Rica-Paraguay BIT.

665 E.g. Art. 11 I German Model BIT, 9 (1) Italy-Pakistan BIT, Art. 8 (1) of the Argentina-France BIT;

Art. XI (1) and (2) of the Ecuador-Netherlands BIT.

generally refers to “any disputes with respect to investments”, one can follow that dis-putes arising from breaches of contract can fall under these clauses, with the necessary prerequisite only being the existence of an investment.⁶⁶⁶ The term “investment” in the majority of BITs includes a broad range of contractual rights, which means that disputes relating to investments generally encompass contractual disputes. The majority of tribu-nals have accordingly interpreted these broad jurisdictional provisions as extending their jurisdiction beyond disputes concerning the BIT’s substantive provisions to disputes in-volving breaches of contract.⁶⁶⁷

cc) Submission of Contractual Disputes on the Basis of an Umbrella Clause

Many bilateral investment treaties explicitly provide by means of a so-called umbrella clause that the contracting states shall observe their contractual obligations. A typical um-brella clause provides:

“Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.”⁶⁶⁸

Umbrella clauses can for example be found in the BITs concluded by Switzerland with Bolivia and Kazakhstan, but not in the BIT concluded between Switzerland and Ecuador.

Another example is the German model BIT, whereas the treaty between Germany and the United Arab Emirates does not contain an umbrella clause. Article 13 (2) of the Germany-India BIT as well departs from the German Model BIT, providing that “Each Contracting Party shall observe any other obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party, with disputes arising from such

666 Alexandrov, Breaches of Contract and Breaches of Treaty, pp. 573, 575; Gaffney/ Loftis, The “Ef-fective Ordinary Meaning” of BITs, p. 14; Schreuer, Investment Treaty Arbitration and Jurisdiction over Contract Claims, in: Weiler (ed.), International Investment Law and Arbitration, pp. 296, 299.

667 Salini v. Morocco, paras 59-61; Vivendi, Decision on Annulment, para. 55; SGS v Philippines, De-cision on Objections to Jurisdiction, 29 January 2004, ICSID Case No. ARB/02/6, paras 131-135. For the contrary position, see SGS v. Pakistan, Decision on Objections to Jurisdiction, 6 August 2003, ICSID Case No. ARB/01/13, para. 161. The question was left open in Impregilo v. Pakistan, Decision on Jurisdiction, 22 April 2005, ICSID Case No. ARB/03/3.

668 Article 10 (1) last sentence ECT. See also Article 8 (2) of the German Model BIT.

185 gations being only redressed under the terms of the contracts underlying the obliga-tions.”⁶⁶⁹

It is highly controversial whether an international arbitration tribunal constituted under the dispute settlement provisions of an investment treaty has the authority to exercise ju-risdiction over claims for breaches of a contract concluded between a foreign investor and a State where the Contracting States have included an umbrella clause in the treaty. One could argue that it is the effect of umbrella clauses to put contractual commitments under the BIT’s protective umbrella.⁶⁷⁰ Under this interpretation, the clause elevates every tractual obligation into an international obligation and thus transforms a breach of con-tract into a treaty violation. The jurisdictional consequence of this transformation would be that a BIT-based tribunal may assert jurisdiction over claims arising out of the contract due to the host State’s international obligations under the umbrella clause.⁶⁷¹ Contract vio-lations are thus transformed into justiciable obligations under the international law of the treaty. Summing up, the umbrella clause has two effects under this interpretation: First, it

669 Emphasis by the author. A similar difference can be found in Mexican BITs. For instance, Article 10 of the Mexico-Switzerland BIT provides: “Each Contracting Party shall observe any other obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party.” Article 9 of the Austria-Mexico BIT contains a first sentence that is almost identical with Article 10 of the Mexico-Switzerland BIT, but adds in its second sentence: “Disputes arising from such obligations shall be settled under the terms of the contracts underlying the obligations.”

670 See SGS v Philippines, Decision on Objections to Jurisdiction, 29 January 2004, ICSID Case No.

ARB/02/6, paras 115-128; Noble Ventures v. Romania, Award, 12 October 2005, ICSID Case No.

ARB/01/11, paras 54, 60; Alexandrov, Breaches of Contract and Breaches of Treaty, p. 572; Weil, Prob-lèmes relatifs aux contrats passés entre un Etat et un particulier, pp. 130-132; Gaillard, Investment Treaty Arbitration and Jurisdiction Over Contract Claims, in: Weiler (ed.), International Investment Law and Arbi-tration, p. 345; Mann, British Treaties for the Promotion and Protection of Investments, pp. 245, 246;

Dolzer/ Stevens, Bilateral Investment Treaties, pp. 81-82; Schreuer, Of Waiting Periods, Umbrella Clauses and Forks in the Road, pp. 231-256, 250; Schreuer, Investment Treaty Arbitration and Jurisdiction over Contract Claims, in: Weiler (ed.), International Investment Law and Arbitration, p. 299; von Walter, Die Reichweite von Schirmklauseln in Investitionsschutzabkommen, p. 816; Rigaux, Les situations juridiques individuelles, pp. 229-230; Shihata, Applicable Law in International Arbitration, in: Shihata/ Wolfensohn (eds), The World Bank in a Changing World, vol. II, p. 601; Karl, The Promotion and Protection of German Foreign Investment Abroad, p. 23; UNCTAD, Bilateral Investment Treaties 1995-2006, p. 75.

671 This effect can be evaded under the ECT, which provides in its Annex IA that Contracting Parties may opt out of the umbrella clause by not permitting their investors to submit a dispute concerning this pro-vision to international arbitration. The decision whether the pacta sunt servanda clause has the effect of creating jurisdiction for contractual claims may also depend on the specific wording of the relevant pacta sunt servanda clause. This is stressed by the SGS-Philippines Tribunal (SGS v Philippines, Decision on Objections to Jurisdiction, 29 January 2004, ICSID Case No. ARB/02/6, para. 119) and the Noble Ventures Tribunal (Noble Ventures v. Romania, Award, 12 October 2005, ICSID Case No. ARB/01/11, para. 56).

lifts contracts out of the exclusive domain of the domestic legal system, which means that an interference with the investor’s contractual rights is governed by international law.

Second, on the procedural plane, a violation of an investor-State agreement is subject to the BIT’s dispute settlement mechanism, and the jurisdiction of the arbitral tribunal is ex-tended to contractual disputes. Proponents of this view argue that when inserting a pacta sunt servanda clause, the State intends to provide the investor with an international reme-dy as an inducement to invest in its territory and that it is the object and purpose of an umbrella clause to add extra protection to the investor.⁶⁷² Moreover, an effet utile argu-mentation is used insofar as it is argued that the clause would be deprived of any effect if it was nevertheless required that there must be a treaty violation to establish the jurisdic-tion of the arbitral tribunal.⁶⁷³ This view is supported by the origins and the historical use of the clause, which shows that the insertion of the clause became common in order to elevate breaches of contract to treaty violations.⁶⁷⁴ Moreover, it finds support in the pacta sunt servanda logic.⁶⁷⁵

In contrast, the SGS-Pakistan tribunal denied the establishment of jurisdiction over con-tract claims by virtue of the relevant umbrella clause.⁶⁷⁶ This reading of the clause up-holds the distinction between contractual and treaty obligations, preventing investors from using the provision in order to submit to arbitration trivial disputes and minor disagree-ments on details of contract performance, such as for example a small delay in paying.

This interpretation reflects an understanding of the object and purpose of investment agreements as instruments to protect investors against political rather than against purely economic risks.

In order to avoid the submission of trivial exclusively contractual disputes before interna-tional tribunals and to take into account the aim of investment arbitration, which is not the

672 , Investment Treaty Arbitration and Jurisdiction over Contract Claims, in: Weiler (ed.), Interna-tional Investment Law and Arbitration, p. 301.

673 , Investment Treaty Arbitration and Jurisdiction over Contract Claims, in: Weiler (ed.), Interna-tional Investment Law and Arbitration, p. 301; Wälde, The Umbrella Clause, pp. 220, 221.

674 For an overview of the history of the umbrella clause see Sinclair, The Origins of the umbrella clause, pp. 411-434.

675 Jacob, BITs, in: Wolfrum (ed.), Encyclopedia of Public International Law, para. 62.

676 See SGS v. Pakistan, Decision on Objections to Jurisdiction, 6 August 2003, ICSID Case No.

ARB/01/13, paras 165-173. See also Joy Mining v. Egypt, Award on Jurisdiction, 6 August 2004, ICSID Case No. ARB/03/11, para. 81.

187 protection of investors against purely commercial risks, but their protection against arbi-trary exercise of State power, it is preferable to follow an intermediary approach accord-ing to which one has to distaccord-inguish between breaches of contract by the government in case the government exercised its particular sovereign prerogatives to escape from its contractual commitments and cases in which the government acted solely on a commer-cial basis. The fact that BITs are designed to protect investors from political, but not from commercial risks militates against an interpretation which would apply the umbrella clause to such situations involving only trivial contract violations. If the main focus of a dispute involves a purely commercial dispute, the umbrella clause should therefore not be applicable.⁶⁷⁷

b) Case Law

aa) Salini Costruttori S.p.A. and Italstrade S.p.A. v. Jordan

The Salini tribunal was the first tribunal to reject the application of a most-favoured-nation clause to dispute settlement provisions. The subject of the case was a controversy about the outstanding amount of money that the investor could claim from the Respond-ent for the construction of a dam in Jordan. The Claimants invoked violations of the State contract and of the BIT. The case concerned the question whether a clause in the basic BIT excluding jurisdiction over contract-based claims can be overridden by means of the relevant MFN clause. The question in Salini was whether the most-favoured-nation stand-ard could be invoked in order to override a treaty provision requiring that contractual dis-putes must be submitted to the contractual dispute settlement mechanism. The Italy-Jordan investment treaty provided in Article 9 (2) that in case a dispute settlement mecha-nism was provided for in a state contract, the application of such dispute settlement mechanism should take priority over the dispute settlement mechanism in the treaty.⁶⁷⁸

677 Wälde, The Umbrella Clause, at p. 235 states: “[i]f the core or centre of gravity of a dispute is not about the exercise of governmental powers […] but about ‘normal’ contract disputes, then the BIT and the umbrella clause have no role.”

678 Art. 9 (2): “In case the investor and an entity of the Contracting Parties have stipulated an invest-ment Agreeinvest-ment, the procedure foreseen in such investinvest-ment Agreeinvest-ment shall apply.”

The investment was subject to an investment contract providing that disputes should be finally settled by reference to the competent court of law in the Jordanian Kingdom, un-less both parties agree that the dispute shall be referred to arbitration. Nevertheun-less, the Claimants brought their contractual claims before an ICSID tribunal. They argued that they were entitled to bypass Article 9 (2) of the Italy-Jordan BIT by operation of the most-favoured-nation clause since the Jordan-United States BIT and the Jordan-United Kingdom BIT arguably allowed investors to not only bring claims for the violation of the respective BIT, but also contractual claims for the breach of an investor-State contract.⁶⁷⁹ The tribunal refused to override Article 9 (2) of the BIT by virtue of the most-favoured-nation clause. It made an effort to distinguish the Maffezini case from the present case, partly by underlining the narrower formulation of the most-favoured-nation clause in the present case, which did not make reference to “all rights or matters covered by this agreement”.⁶⁸⁰ In contrast, the Siemens Tribunal had not considered the lack of a refer-ence to “all matters covered by the agreement” in the MFN clause an obstacle to its ap-plicability to procedural provisions, arguing that the term “treatment” was so general that the tribunal could not limit its application unless in cases of specific agreement by the parties.⁶⁸¹ Salini reached the diametrically opposite result although it was decided only three months after Siemens, without however making any reference to the Siemens case.

Apart from the focus on the wording of the clause, the judgment is based on the argument that the Claimant did not submit evidence of a common intention of the parties to apply the most-favoured-nation clause to dispute settlement provisions. In contrast to the Maf-fezini case, the Claimant in Salini had not adduced any evidence with regard to state prac-tice of Italy and Jordan that supported the assumption that it was the intention of the

679 According to Article 6 of the Jordan-United Kingdom BIT, the parties consent to submit all legal disputes concerning an investment before an ICSID tribunal. Article IX of the United States-Jordan invest-ment treaty allows investors to bring claims before ICSID arbitration “regardless of any clause in the in-vestment agreement providing for a different dispute settlement mechanism”.

680 Salini v. Jordan, Decision on Jurisdiction, 15 November 2004, ICSID Case No. ARB/02/13, para.

117. The most-favoured-nation clause of the Italy-Jordan BIT provided: “Both Contracting Parties, within the bounds of their own territory, shall grant investments effected by, and the income accruing to, investors of the other Contracting Party no less favourable treatment than that accorded to investments effected by, and income accruing to, its own nationals or investors of Third States.”

681 See Part VI D.I.2.b.

189 ties to apply the most-favoured-nation clause to dispute settlement.⁶⁸² The order to the Claimant to show that the most-favoured-nation clause covers dispute settlement provi-sions indicates a shift of the burden of proof. In Maffezini, the tribunal had assumed that an MFN clause generally applies to dispute settlement, unless there is a compelling argu-ment for a contrary intention. In contrast, the Salini tribunal started from the presumption that the MFN clause generally does not apply to dispute settlement provisions unless there is specific evidence to the contrary.

Moreover, the tribunal concluded from the party intention expressed in Article 9 (2) to exclude contractual disputes from international arbitration that it was also the parties’ in-tention that this could not be changed by operation of the most-favoured-nation clause.

The Tribunal held:

“Furthermore, the Claimants have submitted nothing from which it might be estab-lished that the common intention of the Parties was to have the most-favored-nation clause apply to dispute settlement. Quite on the contrary, the intention as expressed in Article 9 (2) of the BIT was to exclude from ICSID jurisdiction contractual dis-putes between an investor and an entity of a State Party in order that such disdis-putes might be settled in accordance with the procedures set forth in the investment agreements.”⁶⁸³

bb) Impregilo S.p.A. v Islamic Republic of Pakistan

This dispute involved the question whether the jurisdiction of the ICSID tribunal could be extended to contract-based claims by means of incorporation of an umbrella clause. Im-pregilo was the project leader of a joint venture that was formed to construct hydroelectric power facilities in Pakistan. Two contracts were concluded between the Claimant acting on behalf of the joint venture and the Pakistan Water and Power Development Authority (WAPDA). According to the Claimant, the implementation of these contracts was

682 Salini v. Jordan, Decision on Jurisdiction, 15 November 2004, ICSID Case No. ARB/02/13, paras 117, 118.

683 Salini v. Jordan, Decision on Jurisdiction, 15 November 2004, ICSID Case No. ARB/02/13, para.

118.

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