Author

Mr Mohammed Bashir

Partner - International Business Legal Associates

Denial of Benefits

I. Definition

1.

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

II. Aim

2.

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

III. Conditions

3.

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:

  1. Entities owned or controlled by a third non-contracting party with no substantial activity in the home state;9 10 11
  2. Entities owned by a national of a State that does not have diplomatic relations with the host state;12
  3. Entities owned by nationals of the host state.13
4.

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.

IV. Invocation

5.

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

V. Timing of the Invocation

6.

Two strands of cases exist on the retrospectiive application of the DOB:22

  1. 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
  2. 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

BIBLIOGRAPHY

Sinclair, A. C., The Substance of Nationality Requirements in Investment Treaty ArbitrationICSID Review—Foreign Investment Law Journal, 2005, p. 388. 

APEC and UNCTAD, Flexibilities and General Exceptions (Denial of Benefits)’, International Investment Agreement Negotiators Handbook: APEC/ UNCTAD Modules, 2012, pp. 105-108.

UNCTAD, The Protection of National Security in IIAs, UNCTAD Series on International Investment Policies for Development, 2009.

Bertola, E., and Others, Denial of Benefits, New Genration IAA’s: A Negotiators Handbook, 2019, pp. 67-72.

Gaillard, E., and Banifatemi, Y., Taking into account control under Denial of Benefit clauses, Jurisdiction in Investment Treaty Arbitration, 2018.

Gastrell, L., and Le Cannu, P.J., Procedural Requirements of ‘Denial of Benefits’ Clauses in Investment Treaties: A Review of Arbitral Decisions, ICSID Review, 2015, pp. 78-97.

Mistelis, L. A., and Baltag, C. M., Denial of Benefits and Article 17 of the Energy Charter Treaty, Penn State Law Review, 2009, pp. 1302-1321.

Mistelis, L. A., and Baltag, C., Denial of Benefits’ clause in Investment Treaty Arbitration, Queen Mary University of London, School of Law, 2018, pp. 1-4.

Ramachanderan, R., 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.

Dolzer, R., and Schreuer, C., Principles of International Investment Law, 2012, p. 55.

Schacherer, S., Pac Rim Cayman LLC v El Salvador, in Bernasconi-Osterwald, N., and Brauch, M. D., International Investment Law and Sustainable Development: Key Cases from the 2010’s, 2018, pp. 36-41.

Feldman, M., Chapter 33: Denial of Benefits after Plama v. Bulgaria, in Kinnear, M., Fischer, G. R., et al. (eds), Building International Investment Law: The First 50 Years of ICSID, 2014, pp. 463-476.

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