The Evolution of Umbrella Clauses and the Interpretation of Chinese Concession Loan Agreements in Nigeria

Abstract

This article proposes that, based on the evolution of international investment law and investment arbitration, umbrella clauses are substantially implicated in the interpretation of Chinese concession loan agreements in Nigeria. So far, the outcome of the oversight functions of the National Assembly of Nigeria indicates that umbrella clauses have not been considered a significant legal issue in the negotiation of these agreements. With the growing use of Chinese concession loan agreements in Nigeria, this article offers a historical analysis that should be a guide to organs of government, policy advisers and others charged with the sourcing and negotiation of concession loans for development projects in Nigeria. The article makes the case that a proper understanding of the evolution of umbrella clauses is germane to the negotiation and interpretation of these agreements, compared to standard immunity clauses that appear to have overtaken in the debate about these loans in Nigeria.

Introduction

This article examines the increasing use of Chinese concession loan agreements in Nigeria that are negotiated to fund development projects. As a matter of law and public policy, the negotiation of these agreements should proceed with the assumption that investment disputes arising from these loans are more likely to occur than not. Concession loans of this nature implicate international investment law and qualify as foreign direct investment (FDI) in the host country. Beyond the host country's own legal system, these types of loans are governed by the rules and obligations inherent in international investment law and FDI dispute-settlement mechanisms.¹ The development opportunities offered by these loans in the host country are enormous, and in many instances in the national interest. In Nigeria, the use of concession loans from foreign investors has been a recurring policy thrust of successive administrations since the advent of the Fourth Republic on 29 May 1999. In a bold move that would pass as a consolidation of this policy, Muhammadu Buhari's administration revised the External Borrowing Guidelines for the Federal and State Governments to streamline the process of negotiating these loans with foreign investors to fund development projects in Nigeria.²

Recently, as part of its oversight functions, the House Committee on Treaties, Protocols, and Agreements of Nigeria's National Assembly (NASS) queried the immunity clause under article 8(1) of the loan agreement signed between Nigeria and the Export–Import Bank of China (EIBC), worth USD 500 million, to fund Phase II of Nigeria's information and communication technology infrastructure backbone.³ The focus on the EIBC's standard concession loans agreement is pertinent because the latter is the major financing institution for Chinese companies investing in Nigeria and the African continent. Also under consideration is the Nigerian government's negotiation with the EIBC to obtain a USD 8.3 billion concession loan facility to construct a railway line that will link the commercial city of Lagos with the northern city of Kano. Nigeria is Africa's largest economy, with enormous oil and gas resources and other development potential; perhaps this explains Chinese investment interests in Nigeria. Understandably, the questions raised by the House Committee generated uproar and legitimate public debate. Some argued that this waiver is tantamount to ceding Nigeria's sovereignty to China, while the government responded that the clause is effectively an undertaking by Nigeria that it will meet its obligations under the concession loan agreement.⁴ Under international investment law, the immunity clause is standard in most FDI agreements; it is a means for protecting FDI and is utilized by foreign investors to remove interpretation of the agreement from the reach of local jurisdiction and jurisprudence. The clause does not cede Nigeria's sovereignty to China.

However, considering China's ratification of the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Federal Government of Nigeria's (FGN) open offer of investment arbitration to foreign investors under the same Convention, the concession loans negotiated by the FGN with Chinese entities to fund development projects in Nigeria raise a weightier legal and economic question: the implications of umbrella clauses in the interpretation of concession loan agreements under international investment law and arbitration.⁵ Nigeria's admission that the standard immunity clause in the concession loan agreement is an undertaking to meet its obligation under the contract elevates the so-called immunity clause to the status of an umbrella clause. Consequently, under international investment law, the ICSID Convention and umbrella clauses are elements of the regulatory regime of FDI in Nigeria.⁶ Beyond the ICSID Convention and other implicative international norms in the interpretation of FDI in Nigeria, the country's FDI regulatory regime comprises other local laws and institutions designed to attract, monitor and regulate the conduct of FDI.⁷ The combination of these laws and institutions represents the FDI regulatory architecture in Nigeria.

It is arguable whether the extant FDI regulatory regime meets current realities.⁸ Proceeding with reference to an emerging status quo on the use of concession agreements as a means of FDI, this article is an attempt to address the implications of standard umbrella clauses in the context of Chinese concession loan agreements in Nigeria. The use of concession loan agreements by Chinese entities in developing countries, including Nigeria, is a part of China's “One Belt, One Road” (OBOR) foreign investment policy initiated over two decades ago. Through this policy, China continues to give loans running into billions of dollars, mostly under concession agreements, as a means of investing in the Middle East, Central Asia, Europe and Africa. Its loans and projects have been extended to more than 150 countries.⁹ Following diplomatic relations signed between China and Nigeria in 1972, the latter has become one of China's major trading partners in Africa.¹⁰ Between the suspicion of economic colonization and domestic economic development considerations, the exact intent of China's OBOR foreign investment policy is still a matter of serious public debate in African economies.¹¹ While there are valid reasons to applaud China's economic interests in Africa, it is important not to lose sight of the legal meaning and implications of the international instrument Beijing uses to conduct FDI in the continent.¹² China's approach is a reflection of its distinct multinational and transactional FDI policy in developing countries that merits attention because of its powers and enormous resources.¹³

This article offers a historical analysis of umbrella clauses and their likely implications in the interpretation of Chinese concession loan agreements in Nigeria under international investment law. Based on Nigeria's FDI architecture, the arbitral award for breach of a concession loan agreement could be economically and politically dire for the host country, leading to serious economic and legal challenges because of the implications, application and interpretation of umbrella clauses inherent in agreements of this nature.¹⁴ Consequently, a proper historical understanding and analysis of umbrella clauses is a more serious legal and policy question in the negotiation of these loans compared to the standard immunity clauses that appear to have overtaken in this debate in Nigeria.

The article is divided into six sections. The next section explores the fluidity and broad meaning of umbrella clauses and how they have influenced the shaping of FDI in host countries within the framework of the settlement of FDI disputes. The history and metamorphosis of the umbrella clause into one of the most important factors in the interpretation and settlement of FDI disputes is then traced. The emergence of the clause in international investment and arbitration is testament to the need for the protection of FDI in the host country. There then follows a commentary on the jurisprudence and conflicts surrounding the interpretation of umbrella clauses by arbitral tribunals; this section lays the foundation for analysis of Nigeria's FDI regime and the implication of umbrella clauses. The subsequent section references Nigeria's primary FDI legislation to address the implication of umbrella clauses in the context of the country's open offer of ICSID arbitration to foreign investors that include Chinese entities. The conclusion recommends that the implication of umbrella clauses in the interpretation of the legal obligations of the host country should be considered a more serious factor than the sovereign immunity clause in the negotiation of concession loan agreements in Nigeria.

The meaning and nature of umbrella clauses in concession loan agreements

Under international investment law, the meaning and effect of an umbrella clause is the host country's undertaking to abide by its contractual obligations with the foreign investor.¹⁵ It is a clause through which the host agrees that it will be liable under international law for any breach of an underlying investment agreement between the investor and the host state.¹⁶ I argue that article 8(1) of the concession loan agreement between Nigeria and the EIBC has the effect of an umbrella clause under international investment law and arbitration; this article provides that “the borrower irrevocably waives any immunity on the grounds of sovereign or otherwise for itself or its property, in connection with any arbitration proceeding pursuant to Art. 8(5), thereof with the enforcement of any arbitral award pursuant thereto, except for the military assets and diplomatic assets”. This provision brings the concession agreement within the protection and umbrella of international law, within the framework of investment treaty arbitration. Umbrella clauses create international obligations for the host country towards foreign investors by raising contract claims to the level of international investment law and arbitration. In Nigeria's case, as the host country of this form of FDI, the umbrella clause is applicable in the interpretation of its legal obligations under the agreement, such that any breach of its terms automatically grants standing to Chinese lenders and investors to seek redress through international investment arbitration.¹⁷

Apart from the admission of Nigeria's Minister of Transport, I argue that the host country may unilaterally assume the obligation connected to an umbrella clause in favour of the investor through the enactment of FDI legislation.¹⁸ In the case of Nigeria's FDI architecture, this argument is valid, and a unilateral assumption of the obligations under an umbrella clause will be upheld by an arbitral tribunal based on three reasons. Firstly, Nigeria's open offer to foreign investors to ICSID arbitration under the Nigerian Investment Promotion Commission (NIPC) Act without any pre-conditions is a unilateral assumption of the obligations of an umbrella clause.¹⁹ Secondly, the obligations connected to an umbrella clause may still be applied under the NIPC Act through the application of the customary international law norm of pacta sunt servanda.²⁰ Thirdly, the obligation required by an umbrella clause may be independently imposed by international law through the expropriation provision of the NIPC Act in the absence of an applicable substantive bilateral investment treaty (BIT). These reasons will be examined in the context of Nigeria's international investment regime later; for now, let us examine the origin and development of umbrella clauses under international investment law and arbitration.

A short history of umbrella clauses

The origin of umbrella clauses may be traced to the 1959 Abs–Shawcross Convention, article 2 of which provides that “[e]ach party shall at all times ensure the observance of any undertakings which it may have given in relation to the investments made by nationals of any other party” (emphasis added).²¹ However, the umbrella clause might have first appeared in the Abs Draft Convention for the Protection of Private Property Rights in foreign countries.²² The Abs Draft Convention contains a specific provision that a promise of better treatment to non-nationals, including most-favoured nation clauses, must prevail.²³ It was after the occurrence of the clause in the Abs–Shawcross Convention that it then appeared in the first Germany–Pakistan BIT.²⁴

Historically, the concept of an umbrella clause, as the term is understood in international investment law, is the direct result of lack of trust in the host country's legal system to resolve investment disputes impartially. From the perspective of foreign investors from developed economies, there was a widely held belief that there is a profound absence of a culture of commitment to investment contracts in the host countries, in contrast to in developed economies, such that the host country's commitment to an investment contract could be subject to the dictates of domestic politics, corruption, the failure of government institutions and other forms of socio-political risk. This notion raised legitimate concerns about the protection of foreign investments in the host country, particularly with respect to the protection of FDI contracts. The protection of FDI and property was seen as a pillar for economic prosperity and integration in the context of international trade.²⁵

Writing against the background of the metamorphosis of the umbrella clause, Wälde argues that to achieve economic prosperity, there is a need for “investment-receiving societies” to adopt a culture of contractual commitment to do away with anachronistic and xenophobic perceptions of legal anarchy that comes to light “under the cloak of popular and legal sovereignty”.²⁶ After making this argument, he goes on to complain, albeit accepting the reality, that in practice, arbitral tribunals subtly espouse the view that the legal systems of developing countries are not seen to be independent enough for the settlement of investment disputes. But he is more unequivocal when he states that the underpinning of an umbrella clause arose from the universally held notion that a foreign investor should not be expected to have confidence in the impartiality of the domestic legal system of the host country. Wälde's thesis may be connected to the widely held view that a host country's legal systems are usually influenced by their governments, against the interests of foreign investors.²⁷

Wälde's characterization is convincing when the history of the umbrella clause is viewed against the spate of uncompensated expropriation of alien property, particularly in the Calvo and Hull era.²⁸ At the same time, the subjection of investment contracts to the vagaries of domestic law provided little or no compensation for expropriated alien property. Customary international law was also at a crossroads regarding the protection of foreign investments, which was mainly in the traditional sense of states protecting the investments of their citizens. This particularly related to the question of whether a breach of contract by the host country is tantamount to a violation of international law.²⁹ The debate generated in the attempt to answer this question created what appears to be a quagmire of conflicting views in international investment law with respect to the conduct of FDI in host countries. I nevertheless suggest that the question has been answered through the evolution of international investment law by the operation of umbrella clauses. The most fundamental effect and implication of umbrella clauses is the granting of standing to foreign investors to directly arbitrate investment disputes in international arbitration forums, including ICSID arbitration mechanisms.

Some interesting legal developments in the 1950s further influenced the need to consolidate the focus on the internationalization of the contract obligations of the host country through the application of umbrella clauses to investment disputes. Most scholars agree that the 1954 draft settlement agreement in the Anglo-Iranian Oil Company's (AIOC) claims is the pivotal moment in the crusade for the internationalization of host countries’ contractual obligations.³⁰ The AIOC claims were essentially a claim on the expropriation of the claimant's assets in the Iranian oil and gas industry through the promulgation of the Iranian Oil Nationalization Law that terminated the AIOC's long-term concessionary oil contract; the AIOC was unsuccessful in its attempt to arbitrate the claims or to seek other legal remedies pursuant to the concession agreement. After unsuccessful legal attempts to resolve the dispute, a United States-sponsored coup that changed the political landscape in Iran at the time presented an opportunity to settle the AIOC investment claims with the government of Iran.³¹ To settle the dispute, the AIOC sought legal advice from Elihu Lauterpacht; the substance of his advice was premised on the idea that any future investment contract between his client and the government of Iran should be “incorporated or referred to in a treaty between Iran and the United Kingdom in such a way that a breach of the contract or settlement shall be ipso facto deemed to be a breach of the treaty”.³²

The premise of Lauterpacht's legal advice is understandable for obvious reasons. For instance, it echoed the need to counter the view that investment contracts should be anchored in and subject to domestic law and jurisdiction that is likely to be subjected to legislative interference or oversights by the host country.³³ Sinclair reports that to achieve the objectives outlined in his landmark legal advice to the AIOC, Lauterpacht proposed two legal instruments, “a Consortium Agreement and an Umbrella Treaty”. According to Sinclair's findings, the Consortium Agreement would henceforth regulate the activities of oil companies, with a guarantee by Iran to fulfil the terms of the agreement such that any breach would be elevated to a treaty claim by operation of the proposed umbrella treaty.³⁴ Thus under Lauterpacht's proposed framework, it was anticipated that the umbrella treaty would provide an international and neutral forum for the settlement of potential claims, thereby excluding Iranian domestic jurisdiction.³⁵

However, Lauterpacht's advice never came to fruition because the proposed settlement could not be consolidated, and the anticipated umbrella treaty articulated by Lauterpacht never saw the light of day.³⁶ Despite the misfortune of the framework of Lauterpacht's legal advice to the AIOC, I argue that the attempt laid the foundation for the resurrection of the idea in the Abs and Abs–Shawcross Draft Conventions about five years later. Indeed, this may be the context in which the umbrella clause emerged on the stage of investment treaty arbitration in connection with FDI. Thus I would argue that the framework for the application of umbrella clauses has been consolidated through an enforcement mechanism provided by international arbitration. As a result of the introduction of umbrella clauses, two developments in international investment law are discernible: firstly, umbrella clauses became the catalyst for the internationalization of investment disputes. Secondly, international arbitration tribunals provided a neutral forum for the settlement of investment disputes, outside the reach of the domestic jurisdiction of the host country.

However, in more recent times, the umbrella clause has not been present in all the BITs or other international loan agreements which have been executed: of the 2,500 or more BITs currently in force globally, only about 40 per cent expressly contain an umbrella clause.³⁷ At the same time, there is no uniform approach by states in the formulation of umbrella clauses. While umbrella clauses in some BITs or commercial agreements contain language that mandates the observance of any obligation the host country may have entered into, others “require each party to observe any obligation it has entered into with investors of the other [party] with regard to their investment”.³⁸

The interpretation of umbrella clauses in investment treaty arbitration

The interpretation of umbrella clauses in FDI agreements with developing countries has become one of the most contentious issues in investment arbitration.³⁹ The umbrella clause in a concession loan agreement presupposes the existence of an agreement between the host country and the foreign investor that creates two sources of legal obligation for the host country. According to Mills, these sources are usually within an applicable BIT and the actual investment agreement. Thus there is a treaty and a contractual obligation that operates to elevate a contractual breach to a parallel violation of the applicable BIT between the host country and the home country of the investor.⁴⁰

The difficulty that may be associated with the interpretation of an umbrella clause is the fundamental premise of the controversy surrounding the meaning and effect of such clauses in international investment law and arbitration. This issue is usually brought to the forefront of investment arbitration to answer the question of whether a breach of the investment contract is also a breach of the umbrella clause in the concession loan agreement or BIT. Often, arbitral practice has espoused the view that the answer is in the affirmative.⁴¹ But there is a real debate surrounding the question of whether this affirmation ought to be upheld in cases where there is also an exclusive forum selection clause in the pertinent provision of the investment contract or legislation. In some agreements, the exclusive forum selection clause makes it mandatory that disputes should be settled through a framework different from the dispute resolution mechanism in the applicable agreement.⁴² In such scenarios, an arbitral tribunal is faced with the task of determining the proper forum to settle the investment dispute in view of a valid umbrella clause in the agreement.

Arbitral tribunals have often addressed this question in the context of the exercise of jurisdiction over the contract claims subject matter of the investment dispute and investment arbitration under applicable international agreements. While attempting to resolve this quagmire of views in international investment law and arbitration, Wong explains that the umbrella clause “means that the investor can now seek redress of a breach of any investment contract between it and the host country through international arbitration under the agreement”and that “an umbrella clause enables an arbitral tribunal to exercise jurisdiction over claims concerning such breaches of contract, which are also BIT violations under the clause”.⁴³ According to Wong, this interpretation of an umbrella clause allows an arbitral tribunal to exercise jurisdiction over contract claims regardless of an exclusive forum selection clause in the investment contract.

Essentially, what is at stake in the debate over the interpretation of umbrella clauses is the neutrality that international investment arbitration offers to foreign investors, as opposed to investment disputes being subjected to domestic jurisdiction by operation of an exclusive forum selection clause in the investment contract. In other words, the issue revolves around the question of whether jurisdictional clauses in investment contracts between the host country and the foreign investor should supersede the jurisdiction of treaty-based tribunals by virtue of an exclusive forum selection clause. Proponents of neutrality, in favour of international investment arbitration, hinge their argument on the history and purpose of the umbrella clause: the history supports the proposition that the clause emerged because of the need to elevate the contractual obligation of the host country “to allow for their breach to be resolved as BIT violations”.⁴⁴ This internationalizes the contractual obligations of the host country. The international law obligation, in a mirror of investment arbitration, is grounded in the provision of the umbrella clause in the international agreement that binds the host country.⁴⁵ This is the case in the concession loan agreement between Nigeria and the EIBC.⁴⁶

However, the encompassing effect of an umbrella clause on the conduct of foreign investment in the host country has been well elaborated by Mann, who writes that the umbrella clause:

“is a provision of particular importance in that it protects the investor against any interference with his contractual rights, whether it results from a mere breach of contract or a legislative or administrative act, and independently of the question whether or not such interference amounts to expropriation. The variation of the terms of a contract or license by legislative measures, the termination of the contract or the failure to perform any of its terms, for instance, by non-payment, the dissolution of the local company with which the investor may have contracted and the transfer of its assets (with or without liabilities) – these and similar acts the treaties render wrongful.”⁴⁷

Mann's reasoned analysis spotlights the effect of an umbrella clause on a host country's exercise of a legitimate regulatory objective in the form of any act, legislative or administrative, that may adversely affect foreign investments, for example a negative or overbearing legislative oversight by an organ of the host country, such as the NASS oversight committee. In this regard, the umbrella clause operates to make the alleged breach treaty-based in order to activate the investment arbitration mechanism under the BIT or the concession loan agreement. While it may be convincing that umbrella clauses operate to grant jurisdiction to an arbitral tribunal over breach of contractual claims, the interpretation that a different forum designated by an exclusive forum selection clause should deal with incidental contract claims has been a topic of serious debate.⁴⁸ In recent times, the debate has been brought to ICSID arbitration by the contrasting decisions of two tribunals that specifically addressed the application and interpretation of umbrella clauses in investment treaty arbitration.⁴⁹ Indeed, Wong's thesis is a response to the confusion generated by the conflicting interpretations of umbrella clauses in the decisions of these tribunals.

The dispute in SGS v Pakistan arose from the termination of a Pre-Shipment Inspection (PSI) agreement between the investor and the Islamic Republic of Pakistan. The ICSID arbitration was mainly centred on the application, interpretation and effect of an umbrella clause in the context of a valid forum selection clause in the contract between the host country and the foreign investor. Pursuant to article 2 of the PSI agreement, the parties agreed to refer “[a]ny dispute, controversy or claim arising out of, or relating to the agreement or breach, termination or invalidity thereof, to arbitration in accordance with the Arbitration Act of Pakistan as presently in force”. The applicable Switzerland–Pakistan BIT also contains a valid umbrella clause.⁵⁰ After the termination of the PSI agreement, necessitated by alleged unsatisfactory performance of the claimant, the respondent commenced arbitration in Pakistan in accordance with the provisions of the agreement. Thereafter, the claimant commenced ICSID arbitration, alleging that the respondent's conduct and their termination of the PSI agreement violated pertinent provisions of the Switzerland–Pakistan BIT. The claimant specifically alleged a violation of the fair and equitable treatment standard under the BIT and asserted that the respondent was liable for breaches of the PSI agreement by operation of the umbrella clause in the BIT.⁵¹ On the effect of this clause, the claimant argued that the alleged unlawful termination of the PSI contract by the respondent elevated its claim to a treaty claim under international law. The claimant's contentions on the effect of the umbrella clause were premised on the obligation of the respondent to constantly guarantee its commitments to Swiss investors in relation to all contractual undertakings in accordance with the clause.⁵² In its counter-memorial to the submissions of the claimant on this issue, the respondent countered that the claims in the ICSID arbitration were contractual in nature and should not be allowed by the arbitral tribunal to be reformulated as BIT claims. The respondent drew support for its argument from the PSI agreement, which “requires the parties to bring any dispute to the PSI agreement arbitrator, regardless of whether such claims are found in contract, tort, or treaty”.⁵³ The arbitral tribunal rejected the submissions of the claimant on the interpretation of the effect and scope of the umbrella clause in view of the forum selection clause in the PSI agreement, which the tribunal recognized as valid and binding.⁵⁴

Based on its reasoning on the scope and application of the umbrella clause, the arbitral tribunal went on to conclude that it has no jurisdiction over contractual claims submitted by the claimant based on alleged breaches of the PSI agreement. The tribunal based its reasoning on the ground that breaches of the PSI agreement were not tantamount to breaches of the substantive provisions of the Switzerland–Pakistan BIT.⁵⁵ Therefore, the arbitral tribunal's view on this issue proposed that umbrella clauses do not apply to set aside a valid forum selection clause in investment treaty arbitration.

About six months after the decision in SGS v Pakistan on the scope and interpretation of umbrella clauses, the SGS v Philippines tribunal examined a similar case but adopted a different approach and reached a different conclusion.⁵⁶ This ICSID arbitration was commenced by the claimant over an alleged breach of the investment agreement between the claimant and the respondent. On the question of the interpretation of the umbrella clause in the Switzerland–Philippines BIT, this arbitral tribunal was called upon to make a determination on the following queries: whether the umbrella clause in the BIT grants jurisdiction over investor–state contract claims; whether the phrase “dispute concerning an investment” covers claims that are contractual in nature; the effect of article 12 of the investor–state agreement on the ICSID proceedings that provides for a forum selection clause; and whether the present claims could be interpreted as a breach of the BIT, independent of the investor–state agreement, by operation of the umbrella clause.⁵⁷ The claimant in this arbitration proceeding argued in the affirmative with respect to the issues raised by the interpretation and scope of the umbrella clause in the Switzerland–Philippines BIT. The respondent disagreed with the submissions of the claimant, relying substantially on the reasoning and decision of the SGS v Pakistan tribunal.

To answer the questions raised in this ICSID arbitration with specific reference to the effect of the umbrella clause, this tribunal began by criticizing the analysis and conclusion of the tribunal in SGS v Pakistan.⁵⁸ It particularly questioned the restrictive approach adopted by that tribunal on the interpretation of the umbrella clause in the context of the specific language in article X(2) of the Switzerland–Pakistan BIT. The text of the umbrella clause in the latter is in pari materia with a similar provision in the Switzerland–Philippines BIT. Proposing its own theory on the interpretation of the umbrella clause, the tribunal questioned the rationale of the SGS v Pakistan tribunal in reaching its conclusion and distinguished between contractual obligations and obligations assumed by the host country “with regard to specific investment”. It appears to make the case that an umbrella clause should be upheld where the host country assumes a legal obligation with reference to a specific investment and “not as a matter of the application of some legal obligation of a general character”.⁵⁹ It is important to note that the Nigeria–EIBC concession loan agreement referenced above is specific to an investment – the funding of a development project in Nigeria.

The SGS v Philippines tribunal particularly noted that the established notion that “a violation of a contract entered into by a State with an investor of another State, is not, by itself, a violation of international law” may be rebuttable where a clause requires a state to “observe specific domestic commitments”.⁶⁰ The tribunal concluded that the SGS v Pakistan tribunal missed an opportunity to give a clear meaning to the umbrella clause in the context of investment arbitration, stating that the reasons advanced by the earlier tribunal were not convincing. It then presented what it considered the proper interpretation of the umbrella clause in an international agreement:

“it [an umbrella clause] does not convert non-binding domestic commitments into binding international obligations. It does not convert questions of contract law into questions of treaty law. In particular it does not change the proper law of the CISS Agreement [the investor–state agreement] from the law of the Philippines [the host state] to international law.”⁶¹

In light of this reasoning and the interpretation of umbrella clauses in a BIT, the SGS v Philippines tribunal reached a different conclusion on the effect of an umbrella clause vis-à-vis a valid forum selection clause.⁶² The tribunal thus assumed jurisdiction in the ICSID arbitration over the contractual claims, which arose from the investor–state contract whether or not such claims were independent of treaty claims contrary to the decision on the interpretation of umbrella clauses in the earlier case of SGS v Pakistan. Still, this tribunal violated its own logic when it ultimately declined to exercise the same jurisdiction over the claimant's contractual claims. The decision of the arbitral tribunal to decline jurisdiction in this respect was based on its interpretation of the effect of the forum selection clause in the CISS Agreement between the claimant and the respondent.⁶³ It should be noted that the dispute resolution mechanism under the Switzerland–Philippines BIT has a contrasting provision that gives the option to the investor to submit disputes with respect to investment to domestic jurisdiction of the host country or to international arbitration under ICSID or United Nations Commission on International Trade Law (UNCITRAL) rules.⁶⁴

Pursuant to article 12 of the CISS Agreement, it was mandatory for all contractual disputes arising out of the agreement to be submitted to specific courts in the Philippines. The tribunal rejected the submission of the claimant that the investment disputes resolution mechanism under the Switzerland–Philippines BIT supersedes the forum selection clause contained in article 12 of the CISS Agreement; according to the tribunal, the substance of the claims was within the scope of this article. Thus, “prima facie[,] article 12 is a binding obligation, incumbent on both parties, to resort exclusively to one of the named Regional Trial Courts in order to resolve any disputes”.⁶⁵ The tribunal relied on the Latin canon of statutory construction, generalia specialibus non derogant, to make the proposition that the dispute resolution mechanism in the Switzerland–Philippines BIT is not “intended to override an exclusive jurisdiction clause in an investment contract, so far as contractual claims are concerned”.⁶⁶

The rationale for the SGS v Philippines tribunal's reasoning was that the BIT under reference was not concluded with respect to any specific investment agreement. Therefore a presumption cannot be made that “a general provision has the effect of overriding specific provisions of particular contracts, freely negotiated between the parties”.⁶⁷ The arbitral tribunal noted that the BIT was intended by state parties to supplement investor–state agreements, as opposed to replacing or setting aside the express provisions of the latter.⁶⁸ It also considered and distinguished article 26 of the ICSID Convention.⁶⁹ The claimant had submitted that this article operates to override the forum selection clause under article 12 of the CISS Agreement; the tribunal held that such an argument is not supported by the Convention's legislative history. It relied on Schreuer's analysis to explain that article 26 “was intended as a rule of interpretation, not a mandatory rule”.⁷⁰ Thus the tribunal posited that the proper question is to what extent the forum selection or exclusive jurisdiction clause under the CISS Agreement affects the substance of the claimant's contractual claims for non-payment for services under that agreement.⁷¹ In its answer to this characterization, the tribunal sought to distinguish between the admissibility of and jurisdiction over contractual claims. It then answered the question by making the determination that it is not a matter for the jurisdiction of the arbitral tribunal but of the admissibility of the contractual claims of the claimant.⁷² It noted that compliance with the terms of a contract in this regard “is more naturally considered as a matter of admissibility than jurisdiction”.⁷³ Ultimately, the tribunal stayed the proceedings of the ICSID arbitration, giving effect to article 12 of the CISS Agreement to resolve the contractual claims of the claimant in accordance with the national jurisdiction of the Philippines.⁷⁴

The decisions in the SGS cases on the scope and interpretation of umbrella clauses in the context of a valid forum selection clause have been widely criticized.⁷⁵ With reference to the effect of umbrella clauses in light of these clauses, the SGS v Pakistan arbitral tribunal held that a valid forum selection clause should be upheld to override the effect of the umbrella clause in order to prevent the elevation of contractual claims to treaty violation. Conversely, the SGS v Philippines tribunal opined that an umbrella clause applies to all alleged breaches of an investor–state agreement but should not be applied where there is a valid forum selection clause contrary to the provisions of the applicable BIT. The synthesis of the two conflicting approaches to the effect and application of umbrella clauses in the SGS cases raised more questions than it resolved the issue about the proper scope and interpretation of an umbrella clause in the context of investment treaty arbitration. Following the decisions of the SGS tribunals, the additional question that now arises is whether an arbitral tribunal can exercise jurisdiction over contract claims in view of a valid umbrella clause and a forum selection clause that designates a different mechanism for resolution.⁷⁶

Nigeria's FDI regime and umbrella clauses

There has been mixed jurisprudence generated by arbitral tribunals in the wake of the SGS cases on the interpretation of umbrella clauses in the context of forum selection clauses in investor–state contracts in investment treaty arbitration. For instance, it is still controversial whether or not tribunals should extend the application of an umbrella clause to all contractual obligations where they tend to follow the approach in SGS v Philippines.⁷⁷ While some arbitral tribunals have held that umbrella clauses apply to some contractual obligations of the host state and the investor, other tribunals espouse the view that they apply to all contractual obligations without exceptions, to the extent that the dispute relates to an investment covered by the applicable BIT.⁷⁸ It is beyond the scope of this article to discuss the merits of the jurisprudence since the decisions of the SGS cases; suffice to state that the prevailing view in investment treaty arbitration appears to be that umbrella clauses should apply to all contractual obligations of the host country in connection with FDI.⁷⁹ I would argue that this prevailing view is the more convincing one; it aligns better with the theory of the internationalization of state contracts regarding FDI and investment treaty arbitration.⁸⁰

In view of the preceding analysis, in practice it is likely that the umbrella clauses in Nigeria's BIT regime would be broadly interpreted by an arbitral tribunal.⁸¹ This could create potential liability for Nigeria in the context of investment treaty arbitration on many fronts, beyond the Chinese concession loan agreements. For example, foreign investors (such as those operating in the oil and gas industry in Nigeria) whose home countries have concluded a BIT with Nigeria containing an umbrella clause could allege a violation of a BIT based on the discriminatory principle against the interest of foreign investors embedded in Nigeria's Local Content Act.⁸² This view is based on the prevailing proposition that an umbrella clause extends to any breach of an investor–state contract relating to an investment covered by a BIT; therefore the argument that umbrella clause provisions do not offer protection for energy-related FDI is not accurate and is a misunderstanding of the interpretative implications of standard umbrella clauses contained in FDI contracts such as concession loan agreements.⁸³

The combination of articles 2, 6 and 10 of the China–Nigeria BIT and Nigeria's open offer of ICSID arbitration to foreign investors under the NIPC Act is a further reinforcement of Nigeria's acceptance of the implications of an umbrella clause under the EIBC concession loan agreement.⁸⁴ Recently, a Chinese investor took advantage of investment treaty arbitration to settle an investment dispute in Nigeria in Zhongshan Fucheng Industrial Investment Co Ltd v The Federal Republic of Nigeria, where the Chinese company had acquired rights to develop a huge area of land it called the Ogun Guangdong Free Trade Zone in Ogun State, southwestern Nigeria.⁸⁵ The acquisition of the rights was made pursuant to an investment contract entered into by the foreign investor with a subsidiary of the Ogun State government. Under the agreement, the Nigerian subsidiary of the foreign investor developed infrastructure such as roads, constructed perimeter fencing, a sewage system and a power and water network and committed substantial resources for marketing.⁸⁶ The claimant was appointed a permanent manager of the trade zone, acquiring a majority shareholding under a 2013 joint venture agreement executed by the parties. In 2016, the Ogun State government allegedly terminated the claimant's appointment and took a series of actions aimed at driving the claimant out of Nigeria, including police and immigration harassment of the claimant's foreign staff to make it impossible for them to work in the country.⁸⁷ The claimant initially challenged the actions of the Ogun State government in local courts, seeking possession of the trade zone, damages and interests. Dissatisfied with the outcome of the cases in the Nigerian courts, in August 2018 the claimant commenced investment treaty arbitration against Nigeria under the China–Nigeria BIT.⁸⁸ In March 2021, the arbitral tribunal found Nigeria in breach of its obligations under the China–Nigeria BIT and awarded the claimant USD 70 million.⁸⁹

The investment in the Zhongshan arbitration case is an example of the active use of the establishment and development of special economic zones by Chinese investors as a means of FDI in developing countries.⁹⁰ The final arbitral award against Nigeria underscores the futility, and the abysmal reputation, of local courts in the settlement of investment disputes. The Zhongshan award also exemplifies foreign investors’ penchant for and recourse to international law against host states where norms and gradations of international law have been breached or implicated under applicable BITs.⁹¹ From the perspective of mitigating or avoiding the risks of umbrella clauses, the Morocco–Nigeria BIT has been hailed for not containing an express umbrella clause.⁹² Further, this BIT has been commendable for making important progress in the standard of protection for and obligations of foreign investors in the host state. The BIT broadened the definition of investment by adding commitment of capital, search for profit and assumption of risks, and specifically excluded portfolio investments.⁹³ The Morocco–Nigeria BIT is significant from the perspective of its contribution to the economic development of the host state. However, it does not resolve the implications of umbrella clauses in light of Nigeria's open offer of ICSID arbitration under the NIPC Act and is certainly not relevant to the interpretation of Chinese concession loan agreements in Nigeria.

Nevertheless, it is my proposition that foreign investors whose home country has no BIT in force with Nigeria can still take advantage of the protection of an umbrella clause in two ways. Firstly, Nigeria's open offer to foreign investors for ICSID arbitration creates the opportunity for the application of the customary international law norm of pacta sunt servanda in the context of investor–state contracts made pursuant to the NIPC Act. In this respect, the application of pacta sunt servanda in the interpretation of FDI-related agreements in Nigeria requires consistent conduct with respect to FDI on the part of the host country. Secondly, pacta sunt servanda also presents an avenue for the consideration and application of the fair and equitable treatment standard under international investment law.⁹⁴ In the context of umbrella clauses, there is an established principle that foreign investment treatment standards should be considered in the interpretation of the obligations of the host country even if not covered by the investment contract.⁹⁵ Therefore, in the absence of an applicable BIT, the application of the effect of an umbrella clause is possible with respect to concession loan agreements and the conduct of FDI in Nigeria generally; there are no better examples than the Chinese concession loan agreements with the FGN. This possibility supports the contention that Nigeria, as a host country, has unilaterally assumed the obligations associated with the effect and operation of an umbrella clause through legislation.

Furthermore, section 25 of the NIPC Act makes provision for the standard guarantee against expropriation of FDI in Nigeria. Section 25(2)(b) grants the foreign investor “a right of access to the courts for the determination of the investor's interest or right and the amount of compensation to which he is entitled”. It may be argued that this section is a valid forum selection clause with respect to any investment dispute relating to the amount of compensation payable in the occurrence of a valid act of expropriation exercised by the FGN. However, when read together, the combined effect of sections 26(2)(c) and 26(3) of the NIPC Act, granting the option of ICSID arbitration to aggrieved foreign investors in respect of “any dispute” (my emphasis) arising from an investment made pursuant to the NIPC Act, makes the forum selection clause under section 25(2)(b) contentious. Considering the analysis of the SGS cases above, the phrase “any dispute” will be interpreted broadly in the context of investment treaty arbitration.

Based on prevailing arbitral practice on the interpretation of the obligations of the host country to guarantee the observance of its contractual obligations, an arbitral tribunal may give effect to sections 26(2)(c) and 26(3) of the NIPC Act to elevate investment claims to the altar of the principles of international law that include the concept of pacta sunt servanda. In this respect, the obligation imposed by an umbrella clause may be independently imposed by international law in the absence of an express provision in an applicable BIT. Moreover, through the NIPC Act, Nigeria guarantees any obligation that may be attributable to any interest connected to the investment.⁹⁶

Conclusion

Barring any interference or corruption in the regulatory framework for negotiating concession loans from international sources to fund development projects in Nigeria, it is often true that the economic development considerations behind this policy are in the national interest. However, because of the legal effects of umbrella clauses, based on the election of both parties to opt for arbitration to address potential investment disputes, the need for a proper understanding of the implications of umbrella clauses in the interpretation of these agreements is a weightier issue than what appears to be an obsession in Nigeria with standard immunity clauses. Thus appreciation and understanding of umbrella clauses is a better approach, through which a reasoned and well-informed concession loan agreement may be negotiated by Nigeria.