‘Denial of Benefits’ Clause in Investment Treaty Arbitration

Abstract

‘Denial of benefits’ clause has been in the spotlight in the past ten years or so as a method of countering treaty shopping and preventing the misuse of the benefits of international investment agreement (IIA). No doubt, the matter is now one of the elements of the broader debate for an investor-state dispute settlement (ISDS) reform. This paper presents the evolution and framework of the ‘denial of benefits’ clause in IIAs and discusses the application of the clause by investment arbitral tribunals. As shown, there are clear divergent opinions on certain aspects concerning these ‘denial of benefits’ clauses, some of which are the result of the diverse language employed by this provision, in particular with respect to Energy Charter Treaty (ECT) and non-ECT scenarios.

On the issues raised by the application of the ‘denial of benefits’ clause, the analysis reveals that arbitral tribunals often come to divergent conclusions. Arbitral tribunal do agree that if the language of the ‘denial of benefits’ clause requires, this right must be actively exercised by the denying state. As such, it is understood that there is no automatic application of this provision. The manner in which the host state should exercise the ‘denial of benefits’ right and any prior notification or consultation requirements are still not uniformly decided. Nevertheless, it is understood that most arbitral tribunals would be comfortable to consider these requirements if they are spelled out in the ‘denial of benefits’ clause. The reason for this, as explained by the tribunal in Ampal v. Egypt, is that such negotiations or consultations, if they are mandatory, would trigger the inapplicability of the ‘denial of benefits’ clause. Furthermore, it is still under debate whether the ‘denial of benefits’ clause is an issue pertaining to the jurisdiction or to the merits of the case. While opinions are not uniform, it is agreed that arbitral tribunals remain competent to assess whether the denying state has exercised the denial of benefits right within the framework ascribed by the applicable IIA. Related to this, it seems that there is consensus that the burden to prove the fulfilment of the requirements for the application of the ‘denial of benefits’ clause rests on the denying state. The substantive requirements for the application of the ‘denial of benefits’ clause usually refer to (1) ownership or control of the legal entity by nationals of a third state, and that (2) the legal entity has no substantial business activities at the place of incorporation. The paper discusses these elements, and in particular the notion of ‘control’ and ‘substantial business activities’, showing that there is little to no recommendation as to the meaning of these notions in the context of a relevant IIA.

In conclusion, the paper highlights the increasing role the ‘denial of benefits’ has commenced to play in the economy of the existing IIAs and, in particular, with a view of the current discussion on the legitimacy and the efficiency of ISDS. It is, thus, expected that states will consider inserting this clause in their IIAs, as a standard clause, and relying on its application in related ISDS proceedings.

Keywords: Denial of benefits, ISDS, Investment Arbitration, Energy Charter Treaty, jurisdiction, admissibility, legitimacy, treaty-shopping, investment law, investment arbitration