Report No. 260
B. Article 20. Denial of Benefits.
(i) Analysis and comment:
7.2.1 "Denial of benefits" clauses, which exclude certain investors from treaty benefits,98 are included to avoid claims from these entities99 for policy reasons, e.g., security or diplomatic concerns, to prevent treaty shopping, etc. Security and diplomatic concerns are accepted reasons to exclude treaty benefits. Treaty shopping is not prohibited under international investment law, as BITs seek to encourage investment, CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, Partial Award of 13 September 2001 (UNCITRAL Arbitration Proceedings) at p 419. but there are concerns on the issue.
98 OECD Directorate for Financial and Enterprise Affairs, International Investment Law: Understanding Concepts and Tracking Innovations, 2008, p. 18.
99 OECD Directorate for Financial and Enterprise Affairs, International Investment Law: Understanding Concepts and Tracking Innovations, OECD, 2008, p. 28.
7.2.2 In response to the Australian Tobacco Plain Packaging Act, 2011, US-based tobacco major Phillip-Morris said that prohibiting the use of their intellectual property on tobacco packages was expropriation, to which they ought to be compensated by Australia under international investment commitments. Phillip-Morris Asia (incorporated in Hong Kong) brought this claim under the Australian-Hong Kong BIT, as the Australia-USA BIT did not contain necessary clauses on investor-State disputes, and expropriation linked to intellectual property rights. Phillip-Morris therefore chose to bring its claims under a treaty where it would have greater chances of success.
7.2.3 Similarly, in India, most notices of dispute have been issued by subsidiaries of affected parent companies, either because investments were routed through the subsidiaries, or to use more liberal provisions of certain BITs. For instance, after the Supreme Court cancelled 2G telecom licenses, Norway-based Telenor issued notice through its subsidiary Telenor Asia under the India-Singapore Comprehensive Economic Cooperation Agreement.
Similarly, the notice by UK-based Children's Investment Fund alleging mismanagement of Coal India Ltd. was issued under the India-Cyprus BIT. With incomplete facts, it is difficult to assess as to why these specific subsidiaries issued notices. It could be that investments were structured through those subsidiaries for reasons completely independent of benefits of specific BITs.
7.2.4 Indian investors are also affected. For instance, the Indian company Spentex Co. used its subsidiary to bring a claim under the Netherlands-Uzbekistan BIT, instead of the India-Uzbekistan BIT. It is suggested that India must carefully balance its domestic regulatory interests with the interests of Indian investors abroad, and while shielding itself from claims by foreign investors, Indian investors should not be deprived of benefits promised by BITs.
7.2.5 The words "for greater certainty" in Article 20.1 do not add much since the provision is not "clarificatory". Article 20 in fact prescribes a distinct exception on to deny treaty benefits to a party. It is suggested that these words may be deleted.
7.2.6 The phrases "the Host State may" and "at any time" in the 2015 Model suggests that it is both the discretion and decision of the "Host State" to deny treaty benefits. Further, this "includes" situations even "after the institution of the arbitration proceedings". This raises issues as to whether the exercise of discretion/decision is procedurally sound, whether it relates back to the time of entering into of the BIT or making of the investment (retrospective), etc.
Even if this discretion/decision is valid, its exercise would be arbitrable and the tribunal would have to decide whether, besides substantive breach allegations, the exercise of discretion/decision to deny treaty benefits constitutes (another) breach. Therefore, it is suggested that the language be modified to deny treaty benefits to investments/investors without requiring any specific exercise of the clause by the Host State.
7.2.7 Article 20.1(ii) raises a host of issues. Theoretically, States enter into BITs so that investors of the Home State have a minimum level of protection and the Host State can attract investments on the strength of the offer of such protection. Therefore, the investor who gets minimum protection is one who makes the investment "with the primary purpose of gaining access to the dispute resolution mechanisms provided in this Treaty." A clause where a Host State can deny treaty benefits to such investors goes against the theoretical foundation of BITs.
7.2.8 While Article 20 is broad in some respects, it is also narrow by not catering to situations where investor-protection would go against foreign policy, for instance, where doing so would go against measures like trade sanctions, diplomatic blacklisting, etc., adopted by the Host State. India's earlier BITs have such denial-of-benefits clauses.