Throughout the past half-century, the field of international investment law has been largely defined by the rise of bilateral investment treaties (BITs). Meant to replace traditional treaties of friendship, commerce, and navigation, these instruments are designed to encourage foreign investment by offering a baseline of substantive protection to investors entering a foreign state. The value of these treaties is especially potent for developing nations, where judicial systems often fail to measure up to investor expectations. Thus, to attract foreign investment, BITs normally permit claimants to bypass these questionable judicial systems and submit certain disputes to international arbitration. Most notably, arbitration is available through the International Centre for the Settlement of Investment Disputes (ICSID), which operates under the auspices of the World Bank. Currently, over 200 cases have been concluded under ICSID, with over 100 pending. Beyond the actual dispute resolution process itself, the pervasiveness of BITs cannot be overlooked: The United States currently has forty BITs in force, among approximately 2600 concluded worldwide.

In the past decade, ICSID tribunals have struggled to determine the proper scope of certain clauses that purport to include contractual claims within the "umbrella" of a BIT's protections. These "umbrella clauses" are considered innovative because, by general consensus, "mere violation" of a contract cannot trigger treaty protection under customary international law. These provisions attempt to circumvent this traditional notion through a supposedly explicit statement that breaches of contract will be considered breaches of the treaty as well. In their usual formulation, the clauses impose an obligation on the domestic government to observe all obligations it undertakes with respect to investors from the foreign state.

The question of whether to permit umbrella clauses to sidestep traditional international law in this manner has proved troubling for a number of tribunals. Fearful of overwhelming the ICSID system with a tide of minor disputes, a number of tribunals have exhibited reluctance to apply the clauses to their full potential, and some have declined to give the terms any substantive force whatsoever. In contrast, a handful of tribunals have demonstrated willingness to allow the clauses to expand coverage beyond the traditional framework. In either event, it is of considerable importance that tribunals reach some form of consistency in their interpretation. Umbrella clauses implicate countless investment contracts, considering that approximately forty percent of BITs possess some version of an umbrella clause.

This Note proposes a systematic approach to resolve the current inconsistencies. Part I provides a brief history of umbrella clauses, beginning with their birth over fifty years ago in the context of an oil dispute between Iran and a British investor. Part II focuses on the split that has developed among ICSID tribunals regarding the interpretation of these provisions within the past decade and demonstrates the wide divergence of interpretations accorded to umbrella clauses. Finally, Part III proposes a resolution to this split by focusing on three elements. First, despite initial reluctance from some tribunals to interpret umbrella clauses broadly, their historical development points to a clear intention for them to be interpreted substantively. Second, to determine the proper scope, it is suggested that the enforcement of umbrella clauses cannot be confined to situations that involve a state's exercise of its sovereign powers. Instead, umbrella clauses should be applicable to situations relating to investments where the relationship is either explicit or founded upon investor reliance, even when an agreement may be considered peripheral to the underlying investment. Finally, from a mechanical perspective, disputed contracts should be considered to undergo a process of "internationalization," where they are elevated to the level of an international agreement. By doing so, parties can tailor their legal rights to fit their own respective needs, which reflects both investor and state autonomy, with the most notable result being the potential to contract out of ICSID arbitration.