20 Years of the Energy Charter Treaty

Paris, 7 March 2014

Denial of Benefits

Stephen Jagusch

ECT Article 17(1)

“Each Contracting Party reserves the right to deny the

advantages of this Part [III] to:

(1) a legal entity if citizens or nationals of a third state

own or control such entity and if that entity has no

substantial business activities in the Area of the

Contracting Party in which it is organized”

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The Mischief

• States reluctant to extend treaty protection to:

- ‘mailbox’ companies

- ‘shell’ companies

- ‘fronts’ for non-qualifying real parties in interest

• In other words, where there is no real or meaningful

investment by the claimant investor; no capital origination

from a qualifying investor; the “abuse” of corporate form to

obtain treaty protection

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ECT Article 2

• The aspiration of the Contracting Parties was to create:

“[a] legal framework in order to promote long term co-operation in the energy field based on complementarities and mutual benefits”

(emphasis added)

• Hence, ECT not intended to confer benefits in the absence of mutuality

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However

• Most treaties define “investor” merely to include persons or

entities bearing a requisite nationality

• Persons: normally straight forward but consider dual or multi-

nationals

• Entities: incorporation theory widely accepted – invites

deployment of mailbox companies

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ECT Article 1(7)(a)(ii)

“Investor” means:

... a company or other organization organized in

accordance with the law applicable in that

Contracting Party

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ECT Article 1(7)(a)(ii)

• Pros

- ease, certainty, predictability

• Cons

- no guarantee of substantial or continuous link

- no guarantee of ultimate ownership or control by a

Contracting Party

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One Solution

• Host State reserves right to deny benefits / advantages /

protection

• Not commonplace, but

- ECT 17(1) (as seen)

- NAFTA

- CAFTA

- most US and some Australian BITS

- US and Canadian model BITS

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Formulations

• not consistent

• Vienna Convention: the treaty text is of primary

importance

• hence, non-ECT decisions generally unhelpful

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ECT Article 17(1)

“Each Contracting Party reserves the right to deny the

advantages of this Part [III] to:

(1) a legal entity if citizens or nationals of a third state

own or control such entity and if that entity has no

substantial business activities in the Area of the

Contracting Party in which it is organized”

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Issues

• “third state”

• “substantial business activities”

• “reserves the right to deny”

‒ must this right be exercised?

‒ if so, how?

‒ … and with retrospective or prospective effect?

• jurisdiction or the merits?

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“third state”

• A non Contracting Party

- Yukos cases (-v- Russia)

- Libananco –v- Turkey

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“substantial business activities”

• required for material social and economic contribution• … but not defined• buying, selling, contracting• employees engaged in the business• managers engaged in decision making for the business• substantial (non frivolous) transactions• payment of taxes

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“substantial business activities”

• Amto –v- Ukraine

the purpose of Article 17(1) is to exclude from ЕСТ 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

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Other formulations

• actually doing business... place of effective

management (Philippines - UK BIT)

• main headquarters (Italy - Libya BIT)

• real economic intentions (Romania - Philippines BIT)

• effective management (ASEAN)

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Application of Article 17(1)

• On its face, Article 17(1) reserves a right• For 17(1) to apply, must that right be exercised?

‒ no State (as yet) has contended otherwise• If so, how?

‒ mechanics yet to be an issue; States have asserted their denials in the face of actual claims

‒ blanket denials?• … and when?

‒ all (so far) after claims raised‒ … i.e. no blanket denials

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Application of Article 17(1)

• Prospective or retrospective?

‒ Plama –v- Bulgaria: prospective‒ Petrobart –v- Kyrgyz Republic: conditions not

satisfied‒ Stati –v- Kazakhstan: must invoke the right prior

to the dispute (i.e. prospective)‒ Liman –v- Kazakhstan: prospective‒ Yukos cases: prospective

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Application of Denial Clauses

• not 17(1) but in other ‘denial’ cases:

‒ Ulysseas –v- Ecuador (September 2010): “The Tribunal sees no valid reasons to exclude retrospective effects”

‒ Guaracachica/Rurelec –v- Bolivia (January 2014): Host State can decide to deny benefits when claim presented

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Jurisdiction or merits?

• Arguable both ways

‒ 17(1) denies Part III, not the dispute resolution provisions

‒ … but without Part III, there can be no dispute, hence nothing over which to take jurisdiction

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Jurisdiction or merits?

• But what if there is a dispute as to whether the conditions of 17(1) exist, or whether the right has been exercised, or whether it’s exercise is retrospective or prospective?‒ must be merits‒ Yukos cases‒ Empresa –v- Ecuador

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