Originally from  Jurisdiction in Investment Treaty Arbitration - IAI Series No. 8

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INTRODUCTION

Denial of benefits clauses play an increasingly important role in investment law and investment arbitration.  Originally developed in the U.S. treaty practice, these clauses “allow a party to deny the benefits of the treaty to certain investors that lack a sufficient connection to the BIT party in which they are incorporated.”   These clauses generally have two functions: either denying treaty protection to investors whose home State does not maintain diplomatic relations with the host State,  or preventing third country nationals who own or control the investor from gaining access to treaty protection when they would otherwise not benefit from such protection due to their nationality.

The varied wording of denial of benefits clauses, the differences among international investment agreements (“IIA”), and the diverse factual circumstances in which such clauses have been relied upon have given rise to a rich arbitral case law on the topic.  Section I of the present contribution examines how the particular wording of a denial of benefits clause reveals the policy underlying its inclusion in an IIA.  Section II analyses arbitral tribunals’ interpretation of the conditions generally included in denial of benefits clauses.  Finally, Section III considers two specific issues concerning the operation of denial of benefits clauses, namely whether a denial of benefits affects an arbitral tribunal’s jurisdiction or the substantive protections under the treaty, and whether a host State may deny treaty benefits after an investor has submitted a claim to arbitration.