SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13 (Decision on Objections to Jurisdiction)

(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000–2010; republished on this website on October 18, 2018. Read more here.)

Decision available at https://www.italaw.com/cases/1009

Keywords

Contractual forum selection clause, definition of “investment,” “fork-in-the-road” clause, jurisdiction, multiple/parallel proceedings, umbrella clause, waiting periods

Key dates

Request for Arbitration: 12 October 2001

Constitution of Tribunal: 9 August. 2002 (The Tribunal was originally constituted on 25 April 2002, with Mr. Toby Landau serving as the respondent appointee. Mr. Thomas was appointed after Mr. Landau resigned.)

Decision on Jurisdiction: 6 August 2003

Arbitrators

Judge Florentino P. Feliciano (president)

Mr. André Faurès (claimant appointee)

Mr. J. Christopher Thomas QC (respondent appointee)

Forum and applicable procedural rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable treaty

Switzerland–Pakistan Bilateral Investment Treaty (BIT)

Alleged treaty violations

• Expropriation
• Fair and equitable treatment
• Impairment
• Investment promotion
• Protection
• Umbrella clause

Other legal issues raised

• Jurisdiction—broad dispute resolution provision
• Jurisdiction—definition of “investment”
• Jurisdiction—effect of a contractual forum selection clause
• Jurisdiction—multiple/parallel proceedings
• Jurisdiction—umbrella clause
• Jurisdiction—waiting periods

1.0 Case Summary

1.1 Factual and procedural background

On 29 September 1994, the Government of Pakistan entered into a pre- shipment inspection agreement (the “PSI Agreement”) with SGS Société Générale de Surveillance S.A. (“SGS”), pursuant to which SGS agreed to provide pre-shipment inspection services with respect to goods to be exported from certain countries to Pakistan. The objective of the inspection was to ensure that goods were classified properly for duty purposes and to enable Pakistan to increase the efficiency of its customs revenues collection.

On 12 December 1996, the Government of Pakistan notified SGS that the PSI Agreement would be terminated with effect from 11 March 1997. In January 1998, SGS initiated a claim against Pakistan in the Swiss courts with respect to the termination of the PSI Agreement and non-payment of its invoices. Various lower Swiss courts rejected SGS’s claims, and the Swiss proceedings finally concluded with the Swiss Federal Tribunal’s denial of SGS’s appeal on 23 November 2000.

On 11 September 2000, Pakistan commenced arbitration proceedings (the “Pakistan Arbitration”) in Pakistan relating to the dispute and seeking to enforce arbitration provisions in the PSI Agreement. SGS filed preliminary objections in the Pakistan Arbitration and a counter-claim against Pakistan for alleged breaches of the PSI Agreement.

On 12 October 2001, SGS filed a Request for Arbitration with ICSID against Pakistan for violations of the Switzerland–Pakistan Bilateral Investment Treaty (BIT) and the PSI Agreement. On 4 January 2002, SGS sought an injunction against the Pakistan Arbitration in the Pakistani courts. SGS’s application was rejected at various lower court levels until the matter finally reached the Supreme Court of Pakistan. On 3 July 2002, the Supreme Court granted Pakistan’s request to proceed with the Pakistan Arbitration and restrained SGS from participating in the ICSID arbitration. The Supreme Court of Pakistan noted that the Switzerland–Pakistan BIT had no legal effect under Pakistani law because it had not been implemented into municipal law and that the parties’ contractual agreement to arbitrate in Pakistan should be enforced. Notwithstanding that decision of the Pakistani Supreme Court, the ICSID Tribunal (“the Tribunal”) decided to proceed with hearing the matter. On 12 November 2002, the sole arbitrator in the Pakistan Arbitration agreed to stay proceedings until the Tribunal determined whether it had jurisdiction to consider SGS’s claims.

1.2 Summary of legal issues and decisions on jurisdiction

SGS asserted that the Tribunal had a broad jurisdiction that encompassed both the alleged breaches of the BIT and the PSI Agreement. SGS submitted that Pakistan’s violations of the Switzerland–Pakistan BIT included a failure to promote SGS’s investment, impairment of the enjoyment of its investments, failure to accord fair and equitable treatment, and expropriation without compensation. SGS also argued that Pakistan had breached its obligations under Article 11 (the “umbrella clause”) of the Switzerland–Pakistan BIT by violating the PSI Agreement. According to SGS, the umbrella clause had the effect of elevating violations of the PSI Agreement, which were contract claims, into treaty claims.

Pakistan argued against ICSID jurisdiction on the ground that the parties had previously agreed to arbitration in Pakistan under the PSI Agreement, which pre-dated the ICSID arbitration request. Pakistan submitted, in the alternative, that the Tribunal had no jurisdiction because SGS’s claims were contract and not treaty-based claims. Pakistan also asserted that SGS’s conduct in the Swiss legal proceedings and Pakistan Arbitration amounted to a waiver of its right to bring ICSID arbitration under the BIT and that, in any event, SGS’s request for ICSID arbitration was premature because the BIT required a 12-month consultation period prior to arbitration. Pakistan also contested that SGS had failed to make an investment under the BIT.

The Tribunal accepted and rejected some of each party’s arguments. It found it had jurisdiction to decide SGS’s claims of violations of the Switzerland–Pakistan treaty. It held that the right to exercise jurisdiction over treaty claims did not depend on the findings of the Pakistan Arbitration (which was adjudicating issues of contract breach arising under the PSI Agreement), thereby permitting parallel proceedings arising from the same set of facts, albeit under different governing laws. The Tribunal similarly rejected several of Pakistan’s other jurisdictional arguments. More specifically, it found that the expenditures made by SGS pursuant to the PSI Agreement constituted an “investment” within the meaning of the BIT and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) and that, because the BIT did not contain a “fork-in-the-road” clause, SGS had not waived its rights to arbitration under the BIT by participating in the Swiss and Pakistani legal proceedings; it also found that the 12-month consultation period in the BIT was directory and procedural rather than mandatory and jurisdictional in nature.

The Tribunal, however, declined jurisdiction with respect to claims based on alleged breaches of the PSI Agreement that did not amount to breaches of the BIT, rejecting SGS’s assertion that it had jurisdiction to decide contract disputes under the broad offer to arbitrate at ICSID in the Switzerland–Pakistan BIT and noting that such a provision could not supersede or invalidate the jurisdiction clause in the PSI Agreement. The Tribunal likewise refused SGS’s contention that the umbrella clause could convert breaches of Pakistan’s contracts to violations of the BIT, noting that there was no evidence that this was the shared intention of both Switzerland and Pakistan.

2.0 Select Legal Issues

SGS v. Pakistan was the first case in which an ICSID tribunal ruled on the effect of an umbrella clause or “undertaking of obligations clause” that is now the subject of several conflicting decisions by tribunals. The term “umbrella clause” is commonly used to describe clauses in investment treaties in which states undertake to uphold all or any obligations owed to investors. The legal implications of the broad language used in such provisions was first considered in this decision when the Tribunal assessed whether such a clause would encompass all the obligations of a state toward an investor—whether under contract, domestic or international law— therefore making any contractual or domestic law breach a breach of a bilateral investment treaty, subject to the treaty’s dispute resolution mechanism. In addition to the important issues it addresses on this point, the ruling of the SGS v. Pakistan Tribunal also raises important issues for developing states, particularly with respect to the definition of “investment,” broad offers to arbitrate in treaties and the impact of treaty claims on jurisdiction clauses in investor–state contracts.

The Tribunal in SGS v. Pakistan did not find that the umbrella clause in the Switzerland–Pakistan BIT would place the state’s contractual and domestic law obligations under the treaty arbitration mechanism. It similarly refused to find that a broad arbitration clause in a treaty covering disputes “with respect to investments” would subject investor–state contractual disputes to the treaty arbitration mechanism in replacement of the agreed-upon dispute resolution mechanism in the investor–state contract. Notably, however, the so-called restrained approach inSGS v. Pakistan was not followed by the subsequent SGS v. Philippines Tribunal, which concluded that umbrella clauses and broad dispute resolution clauses (sometimes referred to as “procedural umbrella clauses”) could indeed give a treaty tribunal jurisdiction over contract claims.

2.1 Accepting jurisdiction due to a broad interpretation of “investment”

The Tribunal noted that the ICSID Convention left the contracting parties with a large measure of freedom to define the term “investment” and that the definition of that term in the Switzerland–Pakistan BIT is broad, including “every kind of asset” and, in particular, “claims to money or to any performance having economic value” and “concessions under public law… as well asall other rights given by law, by contract or by decision of the authority in accordance with law” (para. 134, emphasis added by Tribunal). The Tribunal found that SGS made certain expenditures in the territory of Pakistan to carry out its obligations under the PSI Agreement that constituted an investment under the Switzerland–Pakistan BIT. Further, it held that the PSI Agreement amounted to a concession under public law within the BIT’s definition of “investment” (para. 140).

The Tribunal’s finding indicates the importance of how “investment” is defined in investment treaties. As is clear from the decision, a broad definition can be interpreted to cover a wide range of activities and expenditures made by investors, including, in this instance, a contract for services under which Pakistan (state) had hired SGS (claimant) for a period of time. This has important implications for the scope of investment agreements and host states’ obligations under those agreements.

2.2 Interpreting broad investor–state arbitration clauses in BITs

The Tribunal noted the sparseness of language in the broad offer to arbitrate in the BIT (Article 9), which refers to “disputes with respect to investments between a Contracting Party and an investor of the other Party.” The Tribunal found that the offer to arbitrate disputes in the BIT did not specify whether it referred to violations of the BIT only or whether it also included breaches of contracts between the investor and state.

The Tribunal noted that disputes arising from violations of the BIT and the PSI Agreement can both be described as “disputes with respect to the investments,” the phrase used in the BIT. It added, however, that this phrase alone did not necessarily imply “that both BIT and purely contract claims are intended to be covered by the Contracting Parties” (para. 161). It opined that such a clause could not “set at naught all otherwise valid non-ICSID forum selection clauses in all earlier agreements between Swiss investors and the Respondent” (para. 161). Based on that reasoning, the Tribunal held that it must respect the jurisdiction clause agreed upon by the parties in the PSI Agreement. The Tribunal concluded that it had no jurisdiction with respect to claims submitted by SGS based on the alleged breaches of the PSI Agreement that did not constitute or amount to breaches of the BIT.

According to the Tribunal, its jurisdiction was limited to deciding violations of the BIT. It thus declined to interpret a so-called broad dispute resolution clause to bring contract claims before the treaty tribunal. An opposing view, however, can be found in cases that follow the approach taken in SGS v. Philippines, which gives wide effect to such dispute resolution clauses by interpreting the phrase “disputes with respect to investments” as covering both treaty and contract claims.

The different interpretations of the broad dispute resolution clauses indicate the danger of using sparse and wide language; states may therefore want to consider clarifying the type of disputes covered by their offers to arbitrate in the treaties to which they are party.

Moreover, although the Tribunal took a view that broad offers to arbitrate in treaties did not bestow tribunals with jurisdiction to hear contract-based claims, its decision leaves the door open for parallel proceedings to take place on similar facts: the breaches of contract that also amount to treaty breaches can be raised before the treaty tribunal; in addition, those contract breaches can be adjudicated before the forum agreed upon by the parties in the investor–state contract.

2.3 Adopting a narrow reading of umbrella clauses as not automatically transforming purely contractual claims into treaty claims

The Switzerland–Pakistan BIT includes a so-called “umbrella clause” (Article 11) that provides, “Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party.” Umbrella clauses have the potential to place all forms of domestic administrative, regulatory or contractual commitments under the “umbrella” of the treaty. TheSGS v. Pakistan Tribunal was the first international arbitral tribunal to examine the legal effect of such a clause. It rejected SGS’s claim that the clause had the effect of entitling the investor to, notwithstanding the existence of a valid contractual forum selection clause, “elevate” its contract claims to claims grounded on the BIT, thereby allowing it to bring such contract claims to the ICSID Tribunal for resolution and decision. It reasoned that to read umbrella provisions as suggested by SGS—i.e., to be “so far-reaching in scope, and so automatic and unqualified and sweeping in their operation, [and] so burdensome in their potential impact upon a Contracting Party”—there should be “clear and convincing evidence” that that was what the parties had intended. Because SGS had adduced no such evidence of intent, its asserted interpretation of the umbrella clause failed (para. 167).

The Tribunal, however, did not close the door completely on the possibility of a treaty provision elevating contractual breaches to treaty breaches, by noting that “Article 11 of the BIT would have to be considerably more specifically worded before it can reasonably be read in the extraordinarily expansive manner submitted by the Claimant” (para. 171).

Subsequent tribunals, starting with the SGS v. Philippines decision, have taken a less restrictive view of the effect of umbrella clauses, leading to a split in investment treaty jurisprudence on this common provision in treaties.