On 10 February 2012, an arbitral tribunal established under the International Centre for the Settlement of Investment Disputes (“ICSID”) published its award in SGS Société Générale de Surveillance v. The Republic of Paraguay (“SGS”). In that award, Paraguay has been held liable for breaching the bilateral investment treaty (“BIT”) in place between itself and Switzerland through its failure to pay invoices due under a contractual arrangement with SGS, a Swiss company based in Geneva. Paraguay has been ordered to pay USD $39,025,950.86 in damages, plus interest dating from July 1999, the date of contractual termination.
In 1995, the Ministry of Finance of Paraguay (the “Ministry”) invited five companies, including SGS, to submit their respective bids to provide inspection services of imported goods prior to shipment. The purpose of these services was to provide for the accurate collection of import information and to assist in the collection of customs duties. SGS and another company, Bureau Veritas, Inspection, Valuation, Assessment and Control BIVAC B.V. (“BIVAC”) were successful in their bids. In 2007, BIVAC commenced a parallel ICSID claim against Paraguay, the outcome of which is still pending.
On 6 May 1996, SGS signed an Agreement on the Rendering of Technical Services for Import Pre-Shipment Inspection (the “Contract”). Under that contract, SGS’s obligations included the creation of a customs database and the provision of training for Paraguayan customs officials in how to use that database.
By mutual agreement, SGS and Paraguay agreed not to extend the life of the Contract beyond its initial term of three years. During that three-year term, SGS issued thirty-five monthly invoices, carrying out approximately 100,000 inspections. However, only ten of these invoices were paid by the Ministry. The remaining twenty-five of SGS’s invoices were unpaid, totaling in principal (not including interest), $39,025,950.86 USD.
Between July 1996 and the termination of the Contract in June 1999, SGS and Paraguay engaged in on-going discussions regarding the unpaid invoices and the terms of the Contract. However, these discussions were largely unsuccessful. In October 2007, SGS commenced arbitration proceedings against Paraguay at ICSID under the BIT. In February 2010, the Tribunal issued a Decision on Jurisdiction in which it confirmed its jurisdiction to decide the claims of SGS under the BIT.
Article 11 of the Paraguay-Switzerland BIT – The Umbrella Clause
Article 11 states as follows:
“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.”
SGS claimed that Paraguay has breached its obligations towards SGS under Article 11 of the BIT in two main respects; firstly, Paraguay breached the Contract by failing to meet its payment obligations and secondly, that Paraguay made (and broke) promises to pay the unpaid invoices though both oral and written representations made during and after the life of the Contract.
The Tribunal firstly rejected Paraguay’s argument that a simple breach of contract, as here, could not be elevated to a breach of Article 11 of the BIT unless combined with an abuse of sovereign authority. In the Tribunal’s view, the “ordinary meaning” and “unqualified text” of Article 11 did not support Paraguay’s interpretation. To the contrary, the Tribunal could: “see no basis on the face of the clause to believe that it should mean anything other than what it says – that the State is obliged to guarantee the observance of its commitments with respect to the investments of the other State party’s investors.” Commercial contracts of the State were not excluded from this scope.
Paraguay’s contention that the Tribunal was deprived of jurisdiction over SGS’ claim by the forum selection clause contained in Article 9 of the Contract was also dismissed. In the Tribunal’s view, “it would sweep too broadly to say that all umbrella clause claims … can be disposed of on contractual grounds by the contractual forum”. Such a decision would have placed the Tribunal, it felt, at “risk of failing to carry out its mandate under the Treaty and the ICSID Convention.”
Consequently, the Tribunal concluded that SGS was entitled to damages equal to the entire amount of the invoices left unpaid by Paraguay, namely USD $39,025,950.86, plus interest accruing from July 1999, the date on which the Contract was terminated.
Umbrella clauses can, as here, allow investors to successfully seek recourse to dispute settlement for breaches of specific and individual promises made by a State. Whilst an investor-friendly decision, this recent SGS award does little, however, to resolve the uncertainty which continues to surround the meaning and effect of these clauses in international investment arbitration. Indeed, this award illustrates once again the widely divergent answers that are being given by bespoke arbitral tribunals to this question; the interpretation of Article 11 of the Paraguay-Switzerland BIT in this decision directly contradicts the approach taken by the tribunal in the earlier SGS v. Pakistan decision which considered identical language contained in the Pakistan-Switzerland BIT. This lack of consistency in jurisprudence highlights the pivotal role which individual arbitrators continue to play in the outcome of investors’ claims.