Because of the way Investments are structured nowadays, Contracting Parties usually become aware of the circumstances justifying the application of Article 17 of the ECT only after Investor files the claim.628 As noted by SINCLAIR and JAGUSCH,
“[t]he host State may not even be aware of the establishment of a new investment in its territory, let alone the nationality of that investor, the extent of its business activities in its home State, and the nationality of its underlying owners or controllers. […] The host State may only learn of the conditions that would justify invoking its right to deny at such time as an investor notifies it that a dispute under the ECT has arisen and possibly not even then”629
Article 17 provides that each Contracting Party “reserves the right to deny the advantages” of Part III of the ECT. Several questions in connection with this introductory part of the denial of benefits clause have been raised in practice. They mainly concern the moment when a Contracting Party may invoke the denial of benefits right; whether there are special requirements for the exercise of this right; and what are the effects of the denial of benefits clause.
The wording of Article 17 suggests that the right to deny the benefits of Part III of the ECT to certain Investors or Investments must be exercised by a Contracting Party. A Contracting Party may choose to exercise this right or not. The tribunal in Plama v.
Bulgaria explained this as follows:
628 For example, in the application of Art. 17(1) of the ECT, denying Contracting Parties must be aware not only of the ownership and control of the Investor, but also whether it conducts substantial business activities in the Contracting Party where it is organized. While the ownership or control could be exposed prior to arbitration, Contracting Parties will most probably not engage in finding out whether or not Investor has substantial business activities in another Contracting Party.
629 Jagusch, Stephen; Sinclair, Anthony; The Limits of Protection for Investments and Investors under the Energy Charter Treaty, p. 101, in Ribeiro, C. (ed.); supra at FN 89. LEGUM supports this opinion by referring to the obligations under a bilateral investment treaty as being de facto obligations erga omnes :
“[…] although each investment treaty is drafted as a bilateral set of obligations, to comply with those obligations the host state must treat them as obligations erga omnes: obligations owed to every state and every company.
This conclusion flows from the fact that, under normal circumstances, host state officials will never know at the time they must take action whether a given company is covered by a given treaty.” (Legum, B.; supra at FN 289, pp. 524–525, emphasis original, footnote omitted)
“In the Tribunal’s view, the existence of a "right" is distinct from the exercise of that right. For example, a party may have a contractual right to refer a claim to arbitration; but there can be no arbitration unless and until that right is exercised. In the same way, a Contracting Party has a right under Article 17(1) ECT to deny a covered investor the advantages under Part III; but it is not required to exercise that right; and it may never do so. The language of Article 17(1) is unambiguous; and that meaning is consistent with the different state practices of the ECT’s Contracting States under different bilateral investment treaties […].”630
The same argument was noted by the Yukos tribunal:
“Article 17(1) does not deny simpliciter the advantages of Part III of the ECT–
as it easily could have been worded to do […]. It rather “reserves the right” of each Contracting Party to deny the advantages of that Part to such entity. This imports that, to effect denial, the Contracting Party must exercise the right.”631
ECT tribunals were confronted with practical issues of the exercise of the denial of benefits right.632 The main question concerned the manner in which the Contracting
630 Plama v. Bulgaria; supra at FN 93, para. 155. The tribunal further stated that
“[…] the interpretation of Article 17(1) ECT under Article 31(1) of the Vienna Convention requires the right of denial to be exercised by the Contracting State.” (ibid., para. 158)
631 Yukos Cases; supra at FN 98, para. 456, emphasis original. In the Yukos Cases, the claimants’
argument relied on the wording of Art. 17(1) of the ECT:
“Article 17(1) could have been otherwise drafted, as is Article VI of the ASEAN Framework Agreement on Services, to state that the advantages of Part III “shall be denied” to “a juridical person owned or controlled by persons of a non-Member State constituted under the laws of a Member State, but not engaged in substantive business operations in the territory of Member States. But the drafters of the ECT […]
deliberately chose to provide for a reserved, optional right in Article 17(1), a right that must be exercised to take effect, and only prospectively.” (Yukos Cases; supra at FN 98, para. 454)
632 Also controversial is whether investor or the denying Contracting Party has the burden of proof under Art. 17(1) of the ECT. While Art. 17(2) of the ECT, which provides that “the denying Contracting Party establishes”, appears to suggest that the burden of proof is upon the denying Contracting Party, Art. 17(1) is silent on this issue. Although procedural aspects are not covered by this Thesis, it is, however, useful to summarize here the main conclusions of the jurisprudence.
In Amto v. Ukraine, the tribunal held that the burden to prove that the Investor falls under Art. 17(1) of the ECT lies on the respondent Contracting Party:
“The burden of proof of an allegation in international arbitration rests on the party advancing the allegation, in accordance with the maxim onus probandi actori incumbit. In application of this principle, a claimant has the burden to prove that it satisfies the definition of an Investor so as to be entitled to the Part III protections and the right to arbitrate disputes in Article 26. On the same basis, the claimant would be expected to have the burden of proof that it controls, directly or indirectly, an Investment for which protection is sought, and this is a fact explicitly stated in Understanding 3 to the Final Act. However, when a respondent alleges that the claimant is of the class of Investors only entitled to defeasible protection, so that the respondent can exercise its power to deny, then the burden passes to the respondent to prove the factual prerequisites of Article 17 on which it relies. Article 17(2) adopts exactly this approach but, as already mentioned, Article 17(1) is neutral on the question of burden of proof.” (Amto v. Ukraine; supra at FN 529, para. 64)
In Plama v. Bulgaria, the tribunal held that “[…] the burden of proof to establish ownership and control is on Claimant.” See, Plama v. Bulgaria, Award; supra at FN 621, para. 89. The ICSID tribunal in Generation Ukraine v. Ukraine held that the burden of proof that a legal entity is denied the benefits of the BIT’s protection falls upon the denying state:
“[…] 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).”
(Generation Ukraine v. Ukraine; supra at FN 617, para. 15.7, p. 433)
Parties should carry out such right. In Plama v. Bulgaria, the tribunal concluded that the denying Contracting Party must exercise the denial of benefits right in a public manner that must be reasonably made available to Investors:
“The exercise would necessarily be associated with publicity or other notice so as to become reasonably available to investors and their advisers. To this end, a general declaration in a Contracting State’s official gazette could suffice; or a statutory provision in a Contracting State’s investment or other laws; or even an exchange of letters with a particular investor or class of investors.”633
The Plama v. Bulgaria tribunal further explained that
“[b]y itself, Article 17(1) ECT is at best only half a notice; without further reasonable notice of its exercise by the host state, its terms tell the investor little; and for all practical purposes, something more is needed.”634
However, the conclusion of the Plama v. Bulgaria tribunal regarding the notice to be given to Investors is not based on the ordinary meaning of the terms of Article 17.
Article 17 of the ECT does not provide for any requisites which should be complied with by the Contracting Party in denying the benefits of Part III to an ECT Investor.635 Unlike Article 17 of the ECT, Article 1113 of the NAFTA expressly provides that the application of the denial of benefits clause is subject to prior notification and In CCL v. Kazakhstan, the tribunal concluded that
“[…] a Claimant party, requesting arbitration on the basis of the Treaty, provides the necessary information and evidence concerning the circumstances of ownership and control, directly or indirectly, over [Claimant-investor] at all times. This is especially the case when reasonable doubt has been raised as to the actual ownership of and control over the company seeking protection.” (CCL Oil v. Kazakhstan, Decision on Jurisdiction of 2003, p. 152)
For further comments on the burden of proof and Art. 17(1) of the ECT, see, Essig, H.; Balancing Investors’ Interests and State Sovereignty: The ICSID–Decision on Jurisdiction Plama Consortium Ltd. v.
Republic of Bulgaria, 5(2) OGEL 2007; Chalker, J.; supra at FN 626, pp. 11–15; Shore, L; supra at FN 626, pp. 60–62.
633 Plama v. Bulgaria; supra at FN 93, para. 157.
634 Id.
635 Article 1113 of the NAFTA provides the following:
“1. 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 investor if investors 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 that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments.
2. 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.”
consultation where the legal entity is owned or controlled by nationals of a third state and has no substantial business in the Contracting Party where it is organized. The state denying the benefits of Chapter XI of the NAFTA must give prior notice to the state which the entity in question is asserting to be a national of, and consultations must be conducted in accordance with Article 2006 of the NAFTA. The commentators of the NAFTA see the consultation requirement as “a safeguard preventing a too–hasty decision on the real nationality of an enterprise by permitting the other Party to provide information about the alleged “sham” corporation […].”636 Similarly, the 2004 Canadian Model BIT allows the denial of benefits to companies with no substantial business activity subject to prior notification and consultation.637 However, the Plama v.
Bulgaria tribunal saw in Article 1113 of the NAFTA the justification for an implied prior notice in the application of the denial of benefits clause under the ECT:
“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
636 Kinnear, Meg; Bjorklund, Andrea; Hannaford, John F.G.; Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11, Alphen aan den Rijn: Kluwer Law International, 2006, para.
1113–6. Nevertheless, the commentators acknowledge that the requirement of such prior notification is
“somehow unclear” and it “most likely means that, before asserting Article 1113 as a defense before a tribunal, the respondent Party must notify, and commence consultations with, the Party in which the claimant is located”. (id.)
637 Art. 18 of the 2004 Canadian Model BIT. Art. 18 makes reference to “notification and consultation in accordance with Art. 19 of the Canadian Model BIT, which does not provide per se for such procedure, as it mainly regulates transparency issues. Nevertheless, Art. 19(2) reads as follows:
“To the extent possible, each Party shall:
(a) publish in advance any such measure that it proposes to adopt; and
(b) provide interested persons and the other Party a reasonable opportunity to comment on such proposed measures.”
See also, Art. 18(2) of the Canada–Peru BIT, which refers to the following:
“Subject to Article 19(3), a Party may deny the benefits of this Agreement to an investor of the other 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.” (Agreement between Canada and the Republic of Peru for the Promotion and Protection of Investments, signed on 14 November 2006, not in force)
Art. 19(3) of the Canada–Peru BIT provides that
“[u]pon request by a Party, information shall be exchanged on the measures of the other Party that may have an impact on covered investments.”
Art. 70(2) of the Mexico–Japan Free Trade Agreement reads as follows:
“Subject to prior notification and consultation, a Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of such Party and to investments of such investor if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities in the Area of the Party under whose law it is constituted or organized.” (Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership, 1 April 1995)
from Article 17(1) ECT, this term does suggest that the Tribunal’s interpretation is not unreasonable as a practical matter.”638
Such an implied requirement conflicts with the provisions of Article 31 of the Vienna Convention. The ordinary meaning of the terms used by Article 17 does not validate an implied requirement for a prior notification of investors by the Contracting Parties before exercising the denial of benefits right.639 Scholars agree with this:
“A natural and ordinary reading of the words in Article 17(1) yields no express or necessary condition that the denying State must first give prior notification for the denial of advantages to be effective.”640
The plain wording of the introductory part of Article 17 of the ECT justifies the right of a Contracting Party to deny, at any time and without any formality, the advantages of Part III of the ECT.641
In Plama v. Bulgaria, the tribunal also found that when a Contracting Party exercises the right to deny the benefits of the promotion and protection of Investments, it can only do so with prospective effect. The tribunal rejected the retrospective effects of Article 17 of the ECT, relying on the legitimate expectations of Investors and on the purpose of the ECT:
638 Plama v. Bulgaria; supra at FN 93, para. 157. As noted by CHALKER,
“[t]he tribunal did not address why the absence of a prior-notification provision, like NAFTA’s, in Article 17(1)ECT did not indicate that such notification was not required to deny an investor the Treaty’s investment protections.” (Chalker, J.; supra at FN 626, p. 9)
639 See, Morocco Case; supra at FN 304, p. 199.
640 Jagusch, Stephen; Sinclair, Anthony; Part II–Denial of advantages under Article 17(1), p. 35, footnote omitted, in Coop, G; Ribeiro, C. (eds.); supra at FN 90. Other authors, however, suggested that states should enact “a law containing an abstract and general denial of benefits provision” (Essig, H.; supra at FN 632, p. 10), or that prudent states will make a declaration in its official gazette regarding the exercise of the rights under Article 17 of the ECT (Shore, L.; supra at FN 626, p. 63).
641 See also, JAGUSCH and SINCLAIR who refer to the negotiations of the ECT and the rejection of the proposal to include a notification procedure for bringing into effect the denial of benefits clause under Art. 17. (Jagusch, S.; Sinclair, A.; supra at FN 640, p. 38). The authors are of the opinion that
“[…] the Plama decision also appears to engender in States a perverse incentive to publish blanket denials or attempt to screen inward investment, neither of which would seem to be in accord with one of the overall purposes of the ECT to promote foreign investments in the energy sector.” (Jagusch, S.; Sinclair, A.; supra at FN 640, p. 40, emphasis original)
“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.”642
The tribunal in the Yukos Cases concluded, in line with the decision of the Plama v.
Bulgaria tribunal, that the application of the Article 17 of the ECT may only have prospective effects:
“To treat denial as retrospective, would, in the light of the ECT’s “Purpose,”
as set out in Article 2 of the Treaty […] 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.643
Article 2 provides that the purpose of the ECT is to develop a legal framework for the promotion of “long–term cooperation in the energy field”, which should be based on
“complementarities and mutual benefits”. As the Amto v. Ukraine tribunal suggested, the denial of benefits clause is intended to strengthen long–term cooperation based on mutual benefits:
“As the purpose of the ЕСТ is to establish a legal framework 'in order to promote long–term cooperation in the energy field, based on complementarities and mutual benefits...' then the potential exclusion of foreign owned entities from ЕСТ investment protection under Article 17 is readily comprehensible. 'Long term economic cooperation', 'complementarities' or 'mutual benefits' are unlikely to materialise for the host State with a State that serves as a nationality of convenience devoid of
642 Plama v. Bulgaria; supra at FN 93, para. 161, emphasis original. The tribunal also noted that
“[t]he covered investor enjoys the advantages of Part III unless the host state exercises its right under Article 17(1) ECT; and a putative covered investor has legitimate expectations of such advantages until that right’s exercise. A putative investor therefore requires reasonable notice before making any investment in the host state whether or not that host state has exercised its right under Article 17(1) ECT. At that stage, the putative investor can so plan its business affairs to come within or without the criteria there specified, as it chooses. It can also plan not to make any investment at all or to make it elsewhere. After an investment is made in the host state, the "hostage-factor" is introduced; the covered investor’s choices are accordingly more limited;
and the investor is correspondingly more vulnerable to the host state’s exercise of its right under Article 17(1)
and the investor is correspondingly more vulnerable to the host state’s exercise of its right under Article 17(1)