«Umbrella clauses» in production sharing agreements

Debevoise & Plimpton lawyers Samantha J Rowe, Svetlana Portman, published a legal article entitled «Current Trends in Umbrella Clause Claims Arising from Breach of Contractual Obligations» on the International Bar Association website on Thursday, June 3, 2021.

In the article, the authors comprehensively analyze the application of the «umbrella clause» through the prism of more than 37 arbitration awards.

Having analyzed the arbitration motivation and judicial approaches, the authors gave the following interpretation to the «umbrella provisions»:

1) the provisions of the investment treaty that do not provide for substantial contractual rights for investors;

2) the umbrella provision applies only when the respondent state has exercised sovereign power;

3) the provisions on the quality of the contractual obligation (the breach is not of a commercial nature).

A common feature in the adopted arbitration awards using «umbrella provisions» was the use of norms from interstate investment agreements on mutual cooperation and norms of international conventions.

Can umbrella clauses be applied in production sharing agreements?

The answer is probably no. Here’s why:

1) in production sharing agreements, the grounds for termination and termination are delimited with reference to the clauses and articles of these agreements;

2) production sharing agreements have an industry-specific application algorithm (failure to fulfill the following condition makes subsequent implementation impossible). For example, without geological study, industrial development of a deposit is impossible. Without drilling, geological study of areas is impossible, etc.;

3) production sharing agreements have a definition of essential conditions and non-essential ones;

4) the jurisdiction of national courts and arbitrations is delimited on issues specified in the sharing agreement.