Denial of Benefits 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, denial of benefits clauses allow States to preemptively avoid claims by investors they did not intend to protect.2
Denial of benefits 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
Denial of benefits clauses aim to achieve different objectives. These objectives are categorically two-fold.
Commonly, denial of benefits clauses aim to deny benefits to an investor if the conditions stipulated in the denial of benefits 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 denial of benefits if the investor falls under one of the following categories:
The right to deny the investor’s protections must be affirmatively exercised by the denying State, and its effect is not automatic.18 Some treaties require mutual consent of the States to invoke the denial of benefits clause.19 Most treaties, however, entitle the denying State to unilaterally invoke the denial of benefits clause.
V. Burden of proof
VI. Timing of the invocation
Two strands of cases exist on the retrospective application of the denial of benefits:23
Conversely, other tribunals rejected this line of reasoning.29 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."30 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.”31 If the tribunal supports the view that a denial of benefits applies retrospectively, the State can invoke the clause in the jurisdictional objection phase and no later than in the statement of defense.32
Sinclair, A.C., The Substance of Nationality Requirements in Investment Treaty Arbitration, ICSID Review-FILJ, Vol. 20, Issue 2, 2005, p. 388.
Gastrell, L. and Le Cannu, P.J., Procedural Requirements of ‘Denial of Benefits’ Clauses in Investment Treaties: A Review of Arbitral Decisions, ICSID Review, Vol. 30, Issue 1, 2015, pp. 78-97.
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, Oxford University Press, 2012, p. 55.
Schacherer, S., Pac Rim Cayman LLC v El Salvador, in Bernasconi-Osterwald, N. and Brauch, M.D. (eds.), 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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