An umbrella clause (known also as an umbrella agreement or an observance of undertakings clause) is a provision in a bilateral investment treaty (BIT) by which a state agrees to comply with all of its obligations owed to foreign investors. An umbrella clause can be highly advantageous to investors as it may allow the investor to argue that issues ordinarily governed by local law and jurisdiction (ie a breach by the state of its contractual obligations owed to the investor) can also be characterised as a breach of an investment treaty obligation by virtue of the umbrella clause. Therefore, the investor may be able to elevate all of its disputes with the state to the international forum under the protective umbrella of the BIT.
However, whether in fact a clause elevates domestic law obligations in this way (and if so, which obligations are elevated), is a matter of interpretation of the clause. Interpretation of umbrella clauses has proved controversial and this Practice Note will examine some of the key decisions on this issue.