Source: https://jusmundi.com/en/document/wiki/en-denial-of-benefits
Timestamp: 2020-07-08 01:56:45
Document Index: 293081984

Matched Legal Cases: ['Art. 14', 'Art. 13', 'Art. 12', 'Art. 10', 'Art. 17', 'Art. 17', 'Art. 10', 'Art. 12', 'Art. 14', 'Art. 113', 'Art. 11', 'Art. 11', 'Art. 9', 'Art. 17', 'Art. 17', 'Art. 17', 'Art. 26', 'art 10', 'art 5', 'Art. 30', 'Art. 8', 'Art. 11', 'Art. 10', 'Art. 1113', 'Art. 17', 'Art. 17', 'Art. 17', 'Art. 17', 'Art. 17']

Partner - International Business Legal Associates
V. Timing of the Invocation
Denial of Benefits (“DoB”) clauses are designed to deny the protections of the treaty to certain categories of investors that the treaty did not intend to protect.1 Similar to how investors seek to construct their legal structure in ways that would grant them favorable legal protection, DoB clauses allow States to preemptively avoid claims by investors they did not intend to protect.2 DoB clauses aim to achieve different goals and their language vary accordingly.3 They most commonly exist to allow States to “counteract strategies that seek the protection of particular treaties by acquiring a favorable nationality”.4 Thereby, investors who formally satisfy the definition of “Investor”, yet have no real economic connection with the home state (“mailbox” companies), are excluded from the treaty benefits; contributing to the developmental goals underpinning an investment treaty outlined below.5
Limited Liability Company Amto v. Ukraine, Arbitration No. 080/2005, Final Award, 26 March 2008, para. 61 (“Article 17 can be read together with the definition of ‘Investor’ in Article 1(7) as establishing two classes of Investors of a Contracting Party for the purposes of the ECT. The first class comprises Investors with an indefeasible right to investment protection under the ECT. This class includes nationals of another Contracting Party -whether natural persons or juridical entities- except for those nationals falling within the second class. The second class comprises Investors that have a defeasible right to investment protection under the ECT, because the host State of the investment has the power to divest the Investor of this right. In this second class are legal entities that satisfy the nationality requirement by reason of incorporation but are owned or controlled by nationals of a third state in a manner potentially unacceptable to the host State. Such foreign ownership or control is potentially unacceptable where it involves a State with which the Host State does not maintain normal diplomatic or economic relationships, or where it is not accompanied by substantial business activity in the state of incorporation.”); Ulysseas, Inc. v. The Republic of Ecuador, PCA Case No. 2009-19, Interim Award, 28 September 2010, para. 167 (“Applying this rule of interpretation to the instant case, two cumulative conditions must be met for Respondent to deny Claimant the BIT advantages: a) Claimant must be controlled by third party nationals, and b) either Claimant does not conduct substantial business activities in the United States or Claimant is controlled by nationals of a third country with which Respondent does not maintain normal economic relations.”).
DoB clauses aim to achieve different objectives. These objectives are categorically two-fold. First, DOBs help preserve reciprocity by restricting the treaty benefits to investors of the States that accepted the reciprocal treaty obligations.6 Secondly, DOBs help combatting abusive practices, referred to as “treaty shopping” or “round tripping”, by investors that structure their investment simply to gain access to treaty protections without having substantive operations in the home state.7
Elena Bertola, Mohammed Bashir and Maria Florencia Sarmiento, “Denial of Benefits”, New Generation IAA’s: A Negotiators Handbook (2019).
APEC and UNCTAD, “Flexibilities and General Exceptions (Denial of Benefits)”, International Investment Agreement Negotiators Handbook: APEC/ UNCTAD Modules (2012), pp. 105-108.
Commonly, DoB clauses aim to deny benefits to an investor if the conditions stipulated in the DoB clause are met and are an element of the contracting party’s conditional consent to arbitration.8 These conditions hinge on the language of the treaty. These conditions could be either alternative or cumulative, contingent on the exact wording of the clause. Most common forms permit a State to trigger the DoB if the investor falls under one of the following categories:
Entities owned or controlled by a third non-contracting party with no substantial activity in the home state;9 10 11
Entities owned by a national of a State that does not have diplomatic relations with the host state;12
Entities owned by nationals of the host state.13
Whether the DoB clause should be considered as a matter of jurisdiction,14 admissibility15 or merits16 largely depends on the language of the underlying treaty.
Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, PCA Case No. 2011-17, Award, 31 January 2014, para. 372 (“Whenever a BIT includes a denial of benefits clause, the consent by the host State to arbitration itself is conditional and thus may be denied by it, provided that certain objective requirements concerning the investor are fulfilled. All investors are aware of the possibility of such a denial, such that no legitimate expectations are frustrated by that denial of benefits.”).
Austria-Libya BIT, concluded on 18 June 2002, Article 9 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party and to its investments, if investors of a Non-Contracting Party own or control the first mentioned investor and that investor has no substantial business activity in the territory of the Contracting Party under whose law it is constituted or organized.”); India-Nepal BIT, concluded on 21 October 2011, Art. 14 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Contracting Party and persons of a non-Party, or of the denying Contracting Party, own or control the enterprise.”); Argentina – United Arab Emirates BIT, concluded on 16 April 2018, Art. 13 (“Either Party may at any time, even after the dispute settlement mechanism set forth in Section B hereof has been activated, deny the benefits of this Agreement to: (a) an investor of the other Party that is a legal person of such other Party and to investments of that investor, if an investor of a non-Party owns or control the legal person and the legal person has no substantial business activities in the territory of such other Party”); United States of America – Grenada BIT, concluded on 2 May 1986, Art. I (“Each Party reserves the right to deny to any company the advantages of the Treaty if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country with which the denying Party does not maintain normal economic relations.”); India-Myanmar BIT, concluded on 24 June 2008, Art. 12 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Contracting Party and persons of a non-Party, or of the denying Contracting Party, own or control the enterprise.”); Austria-Azerbaijan BIT, concluded on 4 July 2000, Art. 10 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party and to its investments, if investors of a Non-Contracting Party own or control the first mentioned investor and that investor has no substantial business activity in the territory of the Contracting Party under whose law it is constituted or organized.”).
In the meantime, “the materiality, not the magnitude” is typically decisive in determining “substantial business activity”.; Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008, para. 69 (“The ECT does not contain a definition of ‘substantial’, nor does the Final Act of the European Energy Charter Conference that would serve as guidance for interpretation. As stated above, the purpose of Article 17(1) is to exclude from ECT protection investors which have adopted a nationality of convenience. Accordingly, ‘substantial’ in this context means ‘of substance, and not merely of form’. It does not mean ‘large’, and the materiality not the magnitude of the business activity is the decisive question. In the present case, the Tribunal is satisfied that the Claimant has substantial business activity in Latvia, on the basis of its investment related activities conducted from premises in Latvia, and involving the employment of a small but permanent staff.”); Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, paras. 253-254 (“There is no definition in the ECT itself of ‘substantial business activities.’ The Tribunal has had regard, however, to the decision of the tribunal in AMTO in which it concluded that: ‘[…] 'substantial' in this context means ‘of substance and not merely of form’. It does not mean ‘large’, and the materiality, not the magnitude of the business activity is the decisive question.’ The Tribunal adopts this analysis.”).
Moreover, the activity of the “enterprise” and not the group of claimant’s companies is determinative; Pac Rim Cayman LLC v. The Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent's Jurisdictional Objections, 1 June 2012, para. 4.66 (“However, in the Tribunal’s view, this first condition under CAFTA Article 10.12.2 relates not to the collective activities of a group of companies, but to activities attributable to the ‘enterprise’ itself, here the Claimant. If that enterprise’s own activities do not reach the level stipulated by CAFTA Article 10.12.2, it cannot aggregate to itself the separate activities of other natural or legal persons to increase the level of its own activities: those would not be the enterprise’s activities for the purpose of applying CAFTA Article 10.12.2.”).
U.S. Model BIT (2004), Art. 17 (“1. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if persons of a non-Party own or control the enterprise and the denying Party: (a) does not maintain diplomatic relations with the non-Party; or (b) adopts or maintains measures with respect to the non-Party or a person of the non- Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Treaty were accorded to the enterprise or to its investments. 2. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and persons of a non-Party, or of the denying Party, own or control the enterprise […]”); Rwanda – United States of America BIT, concluded on 19 February 2008, Art. 17 (“A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if persons of a non-Party own or control the enterprise and the denying Party: a. does not maintain diplomatic relations with the non-Party; or […]”); China – Uzbekistan BIT, concluded 19 April 2011, Art. 10 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party that is an enterprise of such other Contracting Party and to investments of that investor if nationals of a non-Party own or control the enterprise when/if: (a) the denying Contracting Party does not maintain diplomatic relations with the non-Party”); Iran – Japan BIT, concluded on 5 February 2016, Art. 12 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party that is an enterprise and to its investments where the former Contracting Party establishes that: (a) the enterprise is owned or controlled by an investor of a non-Contracting Party which does not maintain diplomatic relations with the denying Contracting Party; or […]”); India-Nepal BIT, concluded on 21 October 2011, Art. 14 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party and to investments of that investor, if persons of a non-Party own or control such investor and the denying Contracting Party (i) does not maintain diplomatic relations with such non- Party; or […]”).
Free Trade Agreement between the Government of the People’s Republic of China and the Government of the Republic of Peru, concluded on 28 April 2009, Art. 113 (“A Party may deny the benefits of this Chapter to: (a) service suppliers of the other Party where the service is being supplied by a juridical person that is owned or controlled by persons of a non-Party and the juridical person has no substantive business activities in the territory of the other Party; or (b) service suppliers of the other Party where the service is being supplied by a juridical person that is owned or controlled by persons of the denying Party and the juridical person has no substantive business activities in the territory of the other Party.”); Gambia-Turkey BIT, concluded on 12 March 2013, Art. 11 (“A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party that is a company of such other Contracting Party and to investments of such investor if the company has no substantial business activities in the territory of the Contracting Party under whose law it is constituted or organized, and investors of a non-Contracting Party or investors of the denying Contracting Party, own or control the company.”); Azerbaijan – San Marino BIT, concluded on 25 September 2015, Art. 11 (“A Contracting Party may deny the benefits of this Agreement, including the right to commence or to continue dispute settlement proceedings, to an investor of the other Contracting Party and to the investments of that investor, if: a. the investor is owned or controlled by persons having the nationality of a State that is not a Contracting Party or of the denying Party […]”); Azerbaijan – Serbia BIT, concluded on 8 June 2011, Art. 9 (“A Contracting Party may deny the benefits of this Agreement, to an investor of the other Contracting Party and to the investments of that investor, if: the investor is owned or controlled by persons having the nationality of a third state or nationality of the denying Party […]”).
Pac Rim Cayman LLC v. The Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent's Jurisdictional Objections, 1 June 2012, para. 4.4 (“As expressly worded in CAFTA, it is significant that the ‘benefits’ denied under CAFTA Article 10.12.2 include all the benefits conferred upon the investor under Chapter 10 of CAFTA, including both Section A on ‘Investment’ and Section B on ‘Investor-State Dispute Settlement.’ Section B specifically includes CAFTA Article 10.16(3)(a) providing for ICSID arbitration, as here invoked by the Claimant for its claims under CAFTA to establish the Tribunal’s jurisdiction to decide those CAFTA claims against the Respondent. This jurisdictional issue under CAFTA does not therefore resemble the more limited issue under Article 17(1) of the Energy Charter Treaty, although in this respect it resembles the position under Article 1113(1) of NAFTA. The Tribunal is not aware of any decision as to denial of benefits under NAFTA; and none was brought to its attention by the Parties.”); Ulysseas, Inc. v. The Republic of Ecuador, PCA Case No. 2009-19, Interim Award, 28 September 2010, para. 172 (“The first question concerns whether there is a time-limit for the exercise by the State of the right to deny the BIT’s advantages. In the Tribunal’s view, since such advantages include BIT arbitration, a valid exercise of the right would have the effect of depriving the Tribunal of jurisdiction under the BIT. According to the UNCITRAL Rules, a jurisdictional objection must be raised not later than in the statement of defence (Article 21(3)). By exercising the right to deny Claimant the BIT’s advantages in the Answer, Respondent has complied with the time limit prescribed by the UNCITRAL Rules. Nothing in Article 1(2) of the BIT excludes that the right to deny the BIT’s advantages be exercised by the State at the time when such advantages are sought by the investor through a request for arbitration.”).
Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, para. 15.7 (“In the absence of any competing considerations advanced by the Respondent, the Tribunal is satisfied that ‘third country control’ over Generation Ukraine is a prerequisite for any purported invocation of Article I(2) by the Respondent. Furthermore, the burden of proof to establish the factual basis of the ‘third country control’, together with the other conditions, falls upon the State as the party invoking the ‘right to deny’ conferred by Article 1(2). This is not, as the Respondent appears to have assumed, a jurisdictional hurdle for the Claimant to overcome in the presentation of its case; instead it is a potential filter on the admissibility of claims which can be invoked by the respondent State.”); Isolux Infrastructure Netherlands B.V. v. Kingdom of Spain, SCC Case No. V2013/153, Award, 12 July 2016, para. 711 (“En cuanto a la primera cuestión, el Tribunal Arbitral no duda que la denegación de beneficios del Artículo 17 TCE plantee una cuestión de admisibilidad.”).
Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, para. 151 (“For these reasons, the Tribunal decides that the Respondent’s case on Article 17(1) cannot support a complaint to the jurisdiction of the Tribunal in this case. It would ordinarily be appropriate to stop here as regards any further consideration of Article 17(1) ECT. However, for understandable reasons, both parties requested the Tribunal to decide upon the application or non-application of Article 17(1) ECT even if it did not relate to the Tribunal’s jurisdiction but related to the merits of their dispute. Accordingly, the Tribunal now proceeds further to meet the parties’ request.”); Empresa Eléctrica del Ecuador, Inc. (EMELEC) v. Republic of Ecuador, ICSID Case No. ARB/05/9, Award, 2 June 2009, para. 71 ( “The Tribunal considers that Ecuador announced the denial of benefits to EMELEC at the proper stage of the proceedings, i.e. upon raising its objections on jurisdiction. If the Tribunal should agree to hear the merits of the present case, only then would it be appropriate to examine the substantive requirements for the denial of benefits, i.e. the determination of whether EMELEC has substantial business activities in the territory of the United States.”); Khan Resources Inc., Khan Resources B.V. and Cauc Holding Company Ltd. v. the Government of Mongolia and Monatom Co., Ltd., PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012, para. 411 (“At the outset, it must be stated that in the Tribunal's view, the Respondent’s argument cannot affect the Tribunal’s jurisdiction over Khan Netherlands’ claims under the ECT. The introductory section of Article 17 of the ECT specifies that it concerns the denial of advantages of ‘this Part,’ that is, Part III of the Treaty, which is titled ‘Investment Promotion and Protection’ and sets forth the substantive protections that each Contracting Party shall accord to investors of other contracting parties. Article 26 of the ECT, on which the Claimants rely to establish the Tribunal's jurisdiction, is found in Part V, which is dedicated to ‘Dispute Settlement.’ Thus, on a reading of the ordinary meaning of the terms of Article 17, this provision can operate to deny Khan Netherlands the benefit of the substantive protections it would otherwise be entitled to under the Treaty, but not to deny it the advantage of arbitrating its dispute with the Respondents before this Tribunal. The question of the application of Article 17 is therefore one for the merits, not jurisdiction.”); Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan, SCC Case No. 116/2010, Award, 19 December 2013, paras. 716-717 (“Respondent seeks to improperly and retroactively deny ECT benefits to Ascom on the basis of the so-called ‘[denial] of benefits’ provision of Art. 17 ECT. Respondent contends that because Ascom is incorporated in Moldova and controlled by a Romanian national, Mr. Anatolie Stati, Ascom falls within the denial of benefits provision in Art. 17 ECT. Kazakhstan’s reliance on Art. 17 ECT is misplaced. Article 17 ECT only applies to Part III of the ECT, leaving unaffected the dispute resolution provision in Art. 26 ECT. Article 17 ECT concerns only the merits and not jurisdiction, and this view has been relied on by the tribunal in Plama v. Bulgaria, and was adopted by the Yukos tribunal.”).
The right to deny the investor’s protections must be affirmatively exercised by the denying State, and its effect is not automatic.17 The burden of proof to establish the conditions necessary to deny benefits in the meantime typically lies on the respondent State,18 although several tribunals have ruled otherwise.19 Some treaties require mutual consent of the States to invoke the DOB clause.20 Most treaties, however, entitle the denying State to unilaterally invoke the DOB clause. Minor variances to the unilateral invocation do exist in treaty practice. For example, some treaties require prior notification or consultation.21
Khan Resources Inc., Khan Resources B.V. and Cauc Holding Company Ltd. v. the Government of Mongolia and Monatom Co., Ltd., PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012, para. 419 (“Article 17(1) of the ECT provides that the Contracting Party ‘reserves the right’ to deny the benefits of Part III of the ECT. The ordinary meaning of the verb ‘to reserve’ suggests that the right to deny the benefits of the Treaty is being kept by the Contracting Party, to be exercised in the future. Had Article 17 been intended to deny benefits automatically, it could easily have been phrased to do so. A formulation such as: ‘The advantages of Part III of the ECT shall be denied to’ would have made such meaning plain. This leads the Tribunal to conclude that the Contracting Party’s right to deny the benefits of Part III of the ECT must be exercised actively.”); Hulley Enterprises Ltd. v. Russian Federation PCA Case No. 2005-03/AA226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 455 (“In the view of the Tribunal, the position of Claimant on the interpretation and application of Article17(1) to the instant case is more persuasive than that of Respondent. Article 17(1) does not deny simpliciter the advantages of Part III of the ECT—as it easily could have been worded to do—to a legal entity if the citizens or nationals of a third State own or control such entity and if that entity has no substantial business in the Contracting Party in which it is organized. It rather ‘reserves the right’ of each Contracting Party to deny the advantages of that Part to such an entity.”).
Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008, para. 63 (“There are important differences in drafting between Article 17(1) and 17(2). In particular, Article 17(2) places the burden of proof to establish the facts necessary to exercise this power on the State Party, while Article 17(1) is expressed in a neutral manner in respect of the burden of proof.”); Ulysseas, Inc. v. The Republic of Ecuador, PCA Case No. 2009-19, Interim Award, 28 September 2010, para. 166 (“The Tribunal agrees with Claimant that the burden of proving that the conditions for the exercise of the right to deny the BIT advantages is to be borne by Respondent as the party advancing this specific defence to the Tribunal’s jurisdiction.”); Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No. ARB/07/14, Award, 22 June 2010, para. 164 (“Taking into account the above contentions of the Parties, the Tribunal notes that the Parties agree on the general principle that the burden of proof generally lies with Claimants to establish the facts on which the claim is based. However, the Tribunal considers that the burden of proof can shift to Respondent with regard to any exception on which Respondent relies in its defence. The denial of advantages according to Article 17(1) of the ECT is such a situation in which the burden shifts to Respondent.”); Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, para. 15.7 (“Furthermore, the burden of proof to establish the factual basis of the ‘"third country control’, together with the other conditions, falls upon the State as the party invoking the ‘right to deny’ conferred by Article 1(2).”); Pac Rim Cayman LLC v. The Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent's Jurisdictional Objections, 1 June 2012, para. 4.92 (“Accordingly, for these several reasons above, the Tribunal decides that as from 3 August 2010 the Respondent has established under CAFTA to the required standard and burden of proof, as a matter of fact and international law, that the Claimant as an investor and its investments in El Salvador can receive no benefits from Part 10 of CAFTA upon which the Claimant’s CAFTA claims necessarily depend; and accordingly that the Centre (ICSID) and this Tribunal can have no jurisdiction or other competence in respect of any such CAFTA claims. This decision regarding the Denial of Benefits issue, however, does not affect the Claimant’s other Non-CAFTA claims, as next explained by the Tribunal below, in Part 5 of this Decision.”); Petrobart Limited v. The Kyrgyz Republic (II), SCC Case No. 126/2003, Award, 29 March 2005, para. 314 (“As such, the denying Contracting Party must establish (i) that the legal entity to which it wishes to deny the advantages of Part III of the Treaty is a legal entity owned or controlled by citizens or nationals of a third state, and (ii) that the entity in question has no substantial business activities in the Area of the Contracting Party in which such an entity is organised. It is clear that the conjunction ‘and’ makes the test a cumulative one. Both of these conditions must be present for Article 17(1) to apply and in this case neither of them applies to Petrobart.”). See also Ulysseas, Inc. v. The Republic of Ecuador, PCA Case No. 2009-19, Interim Award, 28 September 2010, para. 170 (“Only natural persons may be at the upper end of the chain of control of a company, the last company in the chain having natural persons as shareholders or general partners. This means that in order to satisfy the control test under Article 1(2) of the BIT the natural person who is the ultimate controller of Ulysseas and its nationality must be identified.”);
Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 89 (“As already indicated, the burden of proof to establish ownership and Control is on Claimant.”); Bridgestone Americas, Inc. and Bridgestone Licensing Services, Inc. v. Republic of Panama, ICSID Case No. ARB/16/34, Decision on Expedited Objections, 13 December 2017, para. 289 (“The other preliminary issue is which Party to this proceeding bears the burden of proof. The Tribunal considers that the overall burden is on Panama as the Party asserting an entitlement to deny benefits. As, however, Panama has to prove a negative in relation to matters that fall essentially within the knowledge of the Claimants, the evidential burden is readily shifted. In this case, as the Tribunal anticipated, the burden of proof is immaterial as there is ample material to enable the Tribunal to reach its decision. That decision is final and has to be reached on the evidence.”).
APEC and UNCTAD, “Flexibilities and General Exceptions (Denial of Benefits)”, International Investment Agreement Negotiators Handbook: APEC/ UNCTAD Modules (2012), pp. 105-108. See also Ampal-American Israel Corp., EGI-Fund (08-10) Investors LLC, EGI-Series Investments LLC, BSS-EMG Investors LLC and David Fischer v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1 February 2016, para. 147 (“The Party wishing to invoke the denial-of-benefits provision of the Treaty has the obligation to consult with the other Party in order to search for a mutually satisfactory resolution of the matter and such consultations must be held promptly.”).
Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, para. 157 (“The Tribunal was referred to Article 1113(2) NAFTA as an example of a term providing for the denial of benefits which provides for a form of prior notification and consultation; and whilst the wording is materially different from Article 17(1) ECT, this term does suggest that the Tribunal's interpretation is not unreasonable as a practical matter.”); Mexico – United Arab Emirates BIT, concluded on 19 January 2016, Art. 30 (“The Contracting Parties may decide jointly in consultation to deny the benefits of this Agreement to an enterprise of the other Contracting Party and to its investments, if a natural person or enterprise of a non-Contracting Party owns or controls such enterprise.”); Moldova – Qatar BIT, concluded on 10 December 2012, Art. 8 (“Following notification, and subject to its national laws and regulations a Contracting Party may deny the benefits of this Agreement to […]”); Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area, concluded on 27 February 2009, Chapter 11, Art. 11 (“Following notification, a Party may deny the benefits of this Chapter […]”); Central America-Dominican Republic-United States Free Trade Agreement (DR-CAFTA), adopted on 5 August 2004, Art. 10.12 (“Subject to Articles 18.3 (Notification and Provision of Information) and 20.4 (Consultations), a Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of any Party, other than the denying Party, and persons of a non-Party, or of the denying Party, own or control the enterprise.”); North American Free Trade Agreement, adopted on 17 December 1992, Art. 1113 (“Subject to prior notification and consultation in accordance with Articles 1803 (Notification and Provision of Information) and 2006 (Consultations), a Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investors if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the Party under whose law it is constituted or organized.”).
Two strands of cases exist on the retrospectiive application of the DOB:22
Some tribunals, especially in disputes arising out of the ECT, held that the DOB clause is only prospective in effect.23 This means that the State cannot deny the benefits after initiating the arbitral proceedings.24 In reaching this conclusion, the tribunals did not rely on the plain language of the DoB clause, but rather reached this view by relying on the object and purpose of the ECT.25 The tribunals reasoned that applying the DoB retrospectively runs counter the object and purpose of the ECT,26 which is to establish a “predictable legal framework for investments”.27
Conversely, other tribunals rejected this line of reasoning.28 For example, in Guaracachi v Bolivia, the tribunal held that “the denial can and usually will be used whenever an investor decides to invoke one of the benefits of the BIT.”29 Furthermore, the tribunal in Ulysseas provided “the conditions for a valid and effective denial of advantages are to be met [on the date in which the] claimant has claimed the BIT’s advantages that Respondent intends to deny”.30 If the tribunal supports the view that a DoB applies retrospectively, the State can invoke the clause in the jurisdictional objection phase and no later than in the statement of defense.31
Plama Consortium Limited v. Republic of Bulgaria, ICSID case No ARB103/24, Decision on Jurisdiction, 8 February 2005, paras. 161-162 (“In the Tribunal's view, therefore, the object and purpose of the ECT suggest that the right's exercise should not have retrospective effect. A putative investor, properly informed and advised of the potential effect of Article 17(1), could adjust its plans accordingly prior to making its investment. If, however, the right's exercise had retrospective effect, the consequences for the investor would be serious. The investor could not plan in the ‘long term’ for such an effect (if at all); and indeed such an unexercised right could lure putative investors with legitimate expectations only to have those expectations made retrospectively false at a much later date. Moreover, in the present case, the Respondent asserts a retrospective effect from a very late date, even after the Claimant’s Request for Arbitration and the accrual of the Claimant’s causes of action under Part III ECT.”); Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No ARB/07/14, Award, 22 June 2010, para. 225 (“With regard to the question of whether the right under Article 17(1) of the ECT can only be exercised prospectively, the Tribunal considers that the above mentioned notification requirement - on which the Parties agree - can only lead to the conclusion that the notification has prospective but no retroactive effect. Accepting the option of a retroactive notification would not be compatible with the object and purpose of the ECT, which the Tribunal has to take into account according to Article 31(1) of the VCLT, and which the ECT, in its Article 2, expressly identifies as ‘to promote long-term co-operation in the energy field’. Such long-term co-operation requires, and it also follows from the principle of legal certainty, that an investor must be able to rely on the advantages under the ECT, as long as the host state has not explicitly invoked the right to deny such advantages. Therefore, the Tribunal finds that Article 17(1) of the ECT does not have retroactive effect.”); Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 458 (“In any event, if the passage in Respondent’s First Memorial quoted above in paragraph 447 is construed as an exercise of the reserved right of denial, it can only be prospective in effect from the date of that Memorial. To treat denial as retrospective would, in the light of the ECT’s ‘Purpose,’ as set out in Article 2 of the Treaty (‘The Treaty establishes a legal framework in order to promote long-term cooperation in the energy field...’) be incompatible ‘with the objectives and principles of the Charter.’ Paramount among those objectives and principles is ‘Promotion, Protection and Treatment of Investments’ as specified by the terms of Article 10 of the Treaty. Retrospective application of a denial of rights would be inconsistent with such promotion and protection and constitute treatment at odds with those terms.”); Anatolie Stati, Gabriel Stati, Ascom Group S.A. and Terra Raf Trans Trading Ltd v. The Republic of Kazakhstan, SCC Case No. V116/2010, Award, 19 December 2013, para. 745 (“Art. 17 ECT would only apply if a state invoked that provision to deny benefits to an investor before a dispute arose and Respondent did not exercise this right.”); Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, para. 239 (“A majority of the Tribunal accepts that submission. It considers that it would contradict the text and the purposes of the ECT to say that a Contracting State may deny benefits retrospectively, after an investment has been made and a dispute has arisen. That would be contrary to the transparency, co-operation and stability objectives of the ECT and it would lead to anomalous results. The majority notes that a majority of tribunals, which has considered this issue, has concluded that before disputes arise, a Contracting State must act, whether by adopting legislation denying benefits generally (or to a specific sector or sectors) or by promulgating measures directed at specific investors. That is both practical and consistent with the object and purpose of the ECT - co-operation, transparency and predictability.”).
Ampal-American Israel Corp., EGI-Fund (08-10) Investors LLC, EGI-Series Investments LLC, BSS-EMG Investors LLC and David Fischer v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1 February 2016, paras. 167-168 (“The Tribunal agrees with the Claimants that the jurisdiction of the Centre must be determined at the time that the Request for Arbitration is registered. Article 25(1) of the ICSID Convention is very clear. The jurisdiction of the Centre is to be assessed at the time that jurisdiction is invoked, which is when the investor’s Request for Arbitration is registered by the Centre. When jurisdiction has crystallized, ‘no Party may withdraw its consent unilaterally’, says plainly Article 25(1).”); Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, para. 239 (“A majority of the Tribunal accepts that submission. It considers that it would contradict the text and the purposes of the ECT to say that a Contracting State may deny benefits retrospectively, after an investment has been made and a dispute has arisen. That would be contrary to the transparency, cooperation and stability objectives of the ECT and it would lead to anomalous results. The majority notes that a majority of tribunals, which has considered this issue, has concluded that before disputes arise, a Contracting State must act, whether by adopting legislation denying benefits generally (or to a specific sector or sectors) or by promulgating measures directed at specific investors. That is both practical and consistent with the object and purpose of the ECT - cooperation, transparency and predictability.”). Loukas A. Mistelis and Crina Mihaela Baltag,”Denial of Benefits and Article 17 of the Energy Charter Treaty”, Penn State Law Review (2009), p. 1302
Khan Resources Inc., Khan Resources B.V. and Cauc Holding Company Ltd. v. the Government of Mongolia and Monatom Co., Ltd., PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012, paras. 425-431 (“In the Tribunal’s view, this question of interpretation is not solved by reference to the terms of Article 17(1). It is therefore necessary to investigate with particular attention the ‘object and purpose’ of the Treaty.”); Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, paras. 161-162 (“The ECT’s express ‘purpose’ under Article 2 ECT is the establishment of ‘ ... a legal framework in order to promote long-term co-operation in the energy field... in accordance with the objectives and principles of the Charter’ (emphasis supplied). It is not easy to see how any retrospective effect is consistent with this ‘long-term’ purpose. In the Tribunal’s view, therefore, the object and purpose of the ECT suggest that the right’s exercise should not have retrospective effect.”); Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No. ARB/07/14, Award, 22 June 2010 (“Accepting the option of a retroactive notification would not be compatible with the object and purpose of the ECT, which the Tribunal has to take into account according to Article 31(1) of the VCLT, and which the ECT, in its Article 2, expressly identifies as ‘to promote long-term co-operation in the energy field’.”); Hulley Enterprises Ltd. v. Russian Federation, PCA Case No. 2005-03/AA226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 455 (“In the view of the Tribunal, the position of Claimant on the interpretation and application of Article17(1) to the instant case is more persuasive than that of Respondent. Article 17(1) does not deny simpliciter the advantages of Part III of the ECT—as it easily could have been worded to do—to a legal entity if the citizens or nationals of a third State own or control such entity and if that entity has no substantial business in the Contracting Party in which it is organized. It rather ‘reserves the right’ of each Contracting Party to deny the advantages of that Part to such an entity […]”); Veteran Petroleum Limited v. The Russian Federation, PCA Case No. 2005-05/AA228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 498 (“The holding of the tribunal in Plama v. Bulgaria is on point: ‘Article 26 provides a procedural remedy for a covered investor’s claims; and it is not physically or juridically part of the ECT’s substantive advantages enjoyed by that investor under Part III. [. . .] This limited exclusion from Part III for a covered investor, dependent on certain specific criteria, requires a procedure to resolve a dispute as to whether that exclusion applies in any particular case; and the object and purpose of the ECT, in the Tribunal’s view, clearly requires Article 26 to be unaffected by the operation of Article 17(1).’ This Tribunal finds the reasoning of the Plama tribunal on this point convincing and adopts it.”); Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. 2005-04/AA227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 458 (“In any event, if the passage in Respondent’s First Memorial quoted above in paragraph 447 is construed as an exercise of the reserved right of denial, it can only be prospective in effect from the date of that Memorial. To treat denial as retrospective would, in the light of the ECT’s ‘Purpose,’ as set out in Article 2 of the Treaty (‘The Treaty establishes a legal framework in order to promote long-term cooperation in the energy field...’) be incompatible ‘with the objectives and principles of the Charter.’ Paramount among those objectives and principles is ‘Promotion, Protection and Treatment of Investments’ as specified by the terms of Article 10 of the Treaty. Retrospective application of a denial of rights would be inconsistent with such promotion and protection and constitute treatment at odds with those terms.”).
Ramya Ramachanderan, “Enabling Retrospective Application of the Denial of Benefits Clause: an Analysis of Decisions of Tribunals Under the Energy Charter Treaty”, University of Miami International and Comparative Law Review (2018), pp. 212-237.
Khan Resources Inc., Khan Resources B.V. and Cauc Holding Company Ltd. v. the Government of Mongolia and Monatom Co., Ltd., PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012, para. 426 (“The Treaty seeks to create a predictable legal framework for investments in the energy field […]”).
Pac Rim Cayman LLC v. The Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent's Jurisdictional Objections, 1 June 2012, para. 4.83 (“There is no express time-limit in CAFTA for the election by a CAFTA Party to deny benefits under CAFTA Article 10.12.2. In a different case under different arbitration rules, this third question might have caused this Tribunal certain difficulties given the importance of investor-state arbitration generally and, in particular, the potential unfairness of a State deciding, as a judge in its own interest, to thwart such an arbitration after its commencement […]”); Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, PCA Case No. 2011-17, Award, 31 January 2014, paras. 379 (“As a matter of fact, it would be odd for a State to examine whether the requirements of Article XII had been fulfilled in relation to an investor with whom it had no dispute whatsoever. In that case, the notification of the denial of benefits would— per se— be seen as an unfriendly and groundless act, contrary to the promotion of foreign investments. On the other side, the fulfilment of the aforementioned requirements is not static and can change from one day to the next, which means that it is only when a dispute arises that the respondent State will be able to assess whether such requirements are met and decide whether it will deny the benefits of the treaty in respect of that particular dispute.”); 380 (“The Tribunal further notes that in this particular case (contrary to what occurred in the Plama case) the investment did not follow the entry into force of the BIT but was made prior to the BIT's entry into force. The benefits contained in the BIT thus did not play any role in the decision of the investor to make this investment. In the Plama case, the tribunal emphasized the fact that the investor had relied on the protection afforded by the BIT when deciding whether to invest in the respondent State.”); Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, para. 162 (“In the Tribunal's view, therefore, the object and purpose of the ECT suggest that the right's exercise should not have retrospective effect. A putative investor, properly informed and advised of the potential effect of Article 17(1), could adjust its plans accordingly prior to making its investment. If, however, the right's exercise had retrospective effect, the consequences for the investor would be serious. The investor could not plan in the ‘long term’ for such an effect (if at all); and indeed such an unexercised right could lure putative investors with legitimate expectations only to have those expectations made retrospectively false at a much later date. Moreover, in the present case, the Respondent asserts a retrospective effect from a very late date, even after the Claimant's Request for Arbitration and the accrual of the Claimant's causes of action under Part III ECT.”); Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan, SCC Case No. 116/2010, Award, 19 December 2013, paras. 716-717 (“Respondent seeks to improperly and retroactively deny ECT benefits to Ascom on the basis of the so-called ‘[denial] of benefits’ provision of Art. 17 ECT. […] Regardless, however, Art. 17 ECT only applies if a state invoked that provision to deny benefits to an investor before a dispute otherwise arose. Since Kazakhstan did not exercise this right, Art. 17 ECT is completely irrelevant to this case. (C-II ¶¶ 87-90; CPHB 1 ¶¶ 50-52; CPHB 2 ¶ 13). Article 17 ECT has only a prospective effect and, even if this Tribunal were to find that exercise of the ‘denial of benefits"’could be retroactive, Art. 17(1) would still be inapplicable because the two elements of that article are not met […]”).
Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, PCA Case No. 2011-17, Award, 31 January 2014, para. 378 (“[…] the Tribunal agrees that the denial can and usually will be used whenever an investor decides to invoke one of the benefits of the BIT. It will be on that occasion that the respondent State will analyse whether the objective conditions for the denial are met and, if so, decide on whether to exercise its right to deny the benefits contained in the BIT, up to the submission of its statement of defence.”).
Ulysseas, Inc. v. The Republic of Ecuador, PCA Case No. 2009-19, Interim Award, 28 September 2010, para. 174 (“As provided by Procedural Order No. 2 of 10 February 2010 (point 10), the date on which the conditions for a valid and effective denial of advantages are to be met in the instant case is the date of the Notice of Arbitration, i.e. 8 May 2009, this being the date on which Claimant has claimed the BIT’S advantages that Respondent intends to deny.”); Empresa Eléctrica del Ecuador, Inc. (EMELEC) v. Republic of Ecuador, ICSID Case No. ARB/05/9, Award, 2 June 2009, para. 71 (“The Claimant invokes additional grounds on which to found ICSID’s jurisdiction. It claims that the Respondent recognized ICSID jurisdiction because, at the first session of the Tribunal held on June 5, 2006, Ecuador invoked a reservation under the Treaty contained in Article I (2) of the BIT, which would deny the benefits of arbitration to EMELEC and by invoking said reservation, the Claimant argues, the Respondent has recognized ICSID jurisdiction. The Claimant also argues that jurisdiction exists by the very fact that, since 1925, the Claimant has always been treated as a United States company. The Tribunal considers these jurisdictional arguments inadmissible because they have no legal substance. It is inaccurate to say that Ecuador introduced a reservation to the terms of the Treaty in the sense of the Vienna Convention on the Law of Treaties and in accordance with the legal term ‘reservation,’ as defined therein. This is an argument erroneously put forward by EMELEC. What Ecuador did was to invoke a clause in the Treaty, by which both the United States and Ecuador reserved ‘the right to deny to any company the advantages’ of the Treaty ‘if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country with which the denying Party does not maintain normal economic relations’ (Art. I (2) of the BIT). Since EMELEC is a ‘company of the other Party,’ Ecuador has the power to deny it the advantages of the BIT if the company has no substantial business activities in the United States. The Tribunal considers that Ecuador announced the denial of benefits to EMELEC at the proper stage of the proceedings, i.e. upon raising its objections on jurisdiction. If the Tribunal should agree to hear the merits of the present case, only then would it be appropriate to examine the substantive requirements for the denial of benefits, i.e. the determination of whether EMELEC has substantial business activities in the territory of the United States.”); Pac Rim Cayman LLC v. The Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent's Jurisdictional Objections, 1 June 2012, para. 4.83 (“There is no express time-limit in CAFTA for the election by a CAFTA Party to deny benefits under CAFTA Article 10.12.2. In a different case under different arbitration rules, this third question might have caused this Tribunal certain difficulties given the importance of investor-state arbitration generally and, in particular, the potential unfairness of a State deciding, as a judge in its own interest, to thwart such an arbitration after its commencement.”).
Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, PCA Case No. 2011-17, Award, 31 January 2014, para. 377 (“The Contracting Parties to the BIT could have agreed otherwise, but they decided not to do so. Instead they agreed that a Contracting Party could deny benefits (including the benefit of having a dispute decided by an arbitral tribunal) subject to meeting certain conditions, none of which entails that such denial is only effective in relation to disputes arising after the notification of such denial or imposes any other limitation period that would occur before the Respondent's submission of its Statement of Defence.”); Ulysseas, Inc. v. The Republic of Ecuador, PCA Case No. 2009-19, Interim Award, 28 September 2010, para. 172 (“The first question concerns whether there is a time-limit for the exercise by the State of the right to deny the BIT’s advantages. In the Tribunal’s view, since such advantages include BIT arbitration, a valid exercise of the right would have the effect of depriving the Tribunal of jurisdiction under the BIT. According to the UNCITRAL Rules, a jurisdictional objection must be raised not later than in the statement of defence (Article 21(3)).”); Pac Rim Cayman LLC v. The Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent's Jurisdictional Objections, 1 June 2012, para. 4.85 (“Second, this is an arbitration subject to the ICSID Convention and the ICSID Arbitration Rules, as chosen by the Claimant under CAFTA Article 10.16(3)(a). Under ICSID Arbitration Rule 41, any objection by a respondent that the dispute is not within the jurisdiction of the Centre, or, for other reasons, is not within the competence of the tribunal ‘shall be made as early as possible’ and ‘no later than the expiration of the time limit fixed for the filing of the counter-memorial’. In the Tribunal’s view, that is the time-limit in this case here incorporated by reference into CAFTA Article 10.12.2. Any earlier time-limit could not be justified on the wording of CAFTA Article 10.12.2; and further, it would create considerable practical difficulties for CAFTA Parties inconsistent with this provision’s object and purpose, as observed by Costa Rica and the USA from their different perspectives as host and home States (as also by the Amicus Curiae more generally). In the Tribunal’s view, the Respondent has respected the time-limit imposed by ICSID Arbitration Rule 41.”).
Sinclair, A. C., The Substance of Nationality Requirements in Investment Treaty Arbitration, ICSID Review—Foreign Investment Law Journal, 2005, p. 388.
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