1. 20 Years of the Energy Charter Treaty Paris, 7 March 2014 Denial of Benefits Stephen Jagusch

2. 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” 2

3. 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 3

4. 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 4

5. 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 5

6. ECT Article 1(7)(a)(ii) “Investor” means:... a company or other organization organized in accordance with the law applicable in that Contracting Party 6

7. 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 7

8. 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 8

9. Formulations not consistent Vienna Convention: the treaty text is of primary importance hence, non-ECT decisions generally unhelpful 9

10. 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” 10

11. 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? 11

12. “third state” A non Contracting Party - Yukos cases (-v- Russia) - Libananco –v- Turkey 12

13. “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 13

14. “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 14

15. 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) 15

16. 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 16

17. 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 17

18. 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 18

19. 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 19

20. 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 20