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> *Columbia FDI Perspectives*
> Perspectives on topical foreign direct investment issues
> Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
> Managing Editor: Riccardo Loschi ([log in to unmask])
> *The Columbia FDI Perspectives are a forum for public debate. The views
> expressed by the authors do not reflect the opinions of CCSI or our
> partners and supporters.*
> No. 331   May 16, 2022
> *Denying the benefits of the Energy Charter Treaty: Shifting the policy or
> just the burden of proof?*
> <>
> by
> Crina Baltag*
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__edn1>
> The modernization of the Energy Charter Treaty (ECT) commenced in November
> 2017 with the Energy Charter Conference declaration in Ashgabat
> <>
> and aims at a “full scale amendment of the ECT.” The main issues are the
> definition of investment, investor and the scope of certain standards of
> protection; the right to regulate; the MFN clause; the denial-of-benefits
> clause; the valuation of damages; third-party funding; sustainable
> development; and corporate social responsibility. Although this process is
> not as transparent as stakeholders would have wished, leaked cables allow
> to make some preliminary observations.
> The ECT’s modernization responds to the need to keep up with, *inter alia*,
> changes in the target of energy investments and how certain policies (e.g.,
> the 2019 EU Clean Energy Package
> <>)
> will affect the ECT’s scope and coverage. It also needs to consider
> tribunals’ evolving practice and criticism related to it. The modernization
> process is also likely to ponder the effects of the *Achmea*
> <>
> and of the *Komstroy*
> <>
> judgments on the intra-EU application of the ECT.
> As mentioned, one important topic is the reform of the denial-of-benefits
> clause in Article 17
> <>,
> which respondent parties have increasingly invoked in recent years.
> The purpose of denial-of-benefits clauses is to guarantee protection
> against the abuse of rights and safeguards of the principle of reciprocity
> embodied in investment treaties by excluding from the protection afforded
> by the applicable treaty investors or investments that only formally meet
> the applicable requirements. The denial-of-benefits clause in the ECT
> excludes from the protection of the treaty (i) investors that are owned or
> controlled by a legal entity of a third state that do not have substantial
> business activities in their home contracting party; and (ii) investments
> by investors of third countries with which the respondent has no diplomatic
> relations or against which it has imposed economic sanctions.
> At present, the predominant view
> <>
> of the ECT contracting parties is to include in the definition of
> “investor” (Article 1(7)
> <>
> *)* the requirement that the investor must have “substantive business
> activities” in the territory of the home contracting party currently
> stipulated by Article 17
> <>
> .[1]
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__edn2>
> The suggested amendment stems from the fact that the denial-of-benefits
> clause has rarely been upheld by arbitral tribunals and onerously burdens
> respondents (see, e.g., *Amto v. Ukraine*
> <>).
> The consequences of this “swap” are significant. First, scenario (i)
> mentioned above will be erased if the “substantial business activity”
> requirement is moved to Article 1(7). Second, the proposed change would
> shift the burden of demonstrating that investors have “substantive business
> activities” in their home countries onto claimants.[2]
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__edn3>
> As mentioned in a previous *Perspective*
> <>,
> a “substantive business activity” requirement to access ECT protection also
> signals that contracting parties are shifting their policy away from the
> promotion and protection toward the regulation of investment. This change,
> arguably, may also be procedurally appropriate: investors are better placed
> to document their activities in the contracting parties in which they are
> organized.
> This change however comes without an “instruction manual”.[3]
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__edn4>
> Unlike other modern investment treaties, such as the 2019 Dutch Model BIT
> <>,
> the ECT modernization draft contains no explanation of how to assess the
> “substantive activity” of investors in a home contracting party.
> An exhaustive definition of “substantive business activity” may not be
> possible, nor desirable, as each business should be assessed on a
> case-by-case basis. A better solution would be the one proposed in the
> Dutch Model BIT, namely, to develop a list of non-exhaustive “indicators”
> to assist in determining the existence of substantive business activities
> in the home country. These may include: (i) the registration and existence
> of an office, administration, headquarters, and/or management in the home
> country, (ii) the number of employees and their qualifications, (iii) the
> turnover generated in the home country, and (iv) production facilities
> and/or research laboratories located there. Other issues to be decided are
> whether such indicators should be assessed individually or globally and
> whether they should be read cumulatively or alternatively. ECT contracting
> parties could also find guidance in tax law, where certain jurisdictions
> (e.g., the U.S.
> <>)
> apply the “substance-over-form” doctrine to prevent the use of artificial
> structures for tax-avoidance purposes. Going a step further, one can wonder
> whether the above-mentioned principle of reciprocity could be better
> achieved by requiring investors to show that they are ultimately owned or
> controlled by citizens or nationals of an ECT Contracting Party, rather
> than by showing a “substantive business activity”.
> The recent round
> <>
> of ECT discussions saw negotiations about various issues, including about
> the definition of investor and the denial-of-benefits clause. However, it
> remains unclear whether consensus has been reached. In any event,
> additional guidance to assess “substantive business activity” would
> increase certainty and clarity, in particular where complex corporate
> structures may trigger concerns of the ECT’s coverage.
> ------------------------------
> *
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__ednref1>
> Crina Baltag ([log in to unmask]) is Associate Professor in
> International Arbitration and director of the Master Program in
> International Commercial Arbitration Law at Stockholm University. The
> author wishes to thank Nathalie Bernasconi, Jarrod Hepburn and Yulia
> Levashova for their helpful peer reviews.
> [1]
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__ednref2>
> The proposal also contemplates changing the term “substantial” to
> “substantive”.
> [2]
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__ednref3>
> Tribunals have only recently held that respondents validly invoked the
> denial-of-benefits clause; see *Littop Enterprises Limited and others v.
> Ukraine*
> <>,
> Final Award, 4 February 2021, para. 639.
> [3]
> <#m_361922105174203202_m_-4575415771703708843_m_-7315063737393969280__ednref4>
> The “substantive business activity” test, as is, risks to be excessively
> abstract and criticized on the same grounds as the “contribution to the
> development of the host state” criterion proposed by the *Salini*
> <>
> test.
> *The material in this Perspective may be reprinted if accompanied by the
> following acknowledgment: “Crina Baltag, ‘Denying the benefits of the
> Energy Charter Treaty: Shifting the policy or just the burden of proof?,’
> Columbia FDI Perspectives No. 331, May 16, 2022. Reprinted with permission
> from the Columbia Center on Sustainable Investment (*
> **
> <>*).”
> A copy should kindly be sent to the Columbia Center on Sustainable
> Investment at **[log in to unmask]* <[log in to unmask]>*.*
> For further information, including information regarding submission to the
> *Perspectives*, please contact: Columbia Center on Sustainable
> Investment, Riccardo Loschi, [log in to unmask]; Luca Jobbagy,
> [log in to unmask]
> *Most recent Columbia FDI Perspectives*
> <>
>    - No 330, Karl P. Sauvant and Rebecca Chacon Naranjo, “WTO processes
>    would benefit from the input of civil society”, Columbia FDI Perspectives,
>    May 8, 2022
>    - No. 329, Stephen Pursey, “They can run but they can’t hide: MNEs and
>    responsible business conduct,” Columbia FDI Perspectives, April 1, 2022
>    - No. 328, Roger Strange, “The future of global value chains: Key
>    issues,” Columbia FDI Perspectives, April 4, 2022
> *All previous FDI Perspectives are available at
> <>*
> .
> *Other relevant CCSI news and announcements*
>    - *Job Opening: Director of Programs:* In collaboration with the CCSI
>    Director, and working collaboratively with Senior Colleagues, the Director
>    of Programs will support the development of effective strategies toward the
>    achievement of CCSI’s mission and strategic goals. In particular, the
>    Director of Programs will help to identify a portfolio of impactful
>    projects, ensuring that resources and programs are effectively and
>    adaptively managed; will contribute a profound understanding of how to
>    leverage research findings into concrete outcomes and impact; and will
>    develop systems to ensure the research team has balanced workloads, strong
>    motivation and workplace fulfilment. *A longer description of the
>    role, including key responsibilities and personal characteristics, is
>    linked here
>    <>. Please
>    see here
>    <> for
>    more details and to apply.*
>    - *Job Opening: Senior Legal Researcher, Investment Law and Policy: *This
>    position will collaborate with CCSI’s Director and Research Staff to
>    execute the Center’s applied research agenda on the laws, policies, and
>    practices that shape international investment and its alignment with
>    sustainable development and human rights. *Please see here
>    <> for
>    more details and to apply.*
>    - *Job Opening: Senior Legal Researcher, Land, Agriculture and Food
>    Systems: *CCSI is seeking a Senior Legal Researcher to work on our Land,
>    Agriculture & Food Systems
>    <> portfolio
>    of projects. The position will support research, advisory work, and the
>    organization and delivery of capacity building programs related to CCSI’s
>    work on strengthening the governance of land-based investment (including
>    agriculture, extractive industries, renewable energy projects, and
>    nature-based solutions). *Please see here
>    <> for
>    more details and to apply.*
> Karl P. Sauvant, Ph.D.
> Resident Senior Fellow
> Columbia Center on Sustainable Investment
> Columbia Law School - Earth Institute
> Ph: (212) 854-0689
> Fax: (212) 854-7946
> *Copyright © 2022 Columbia Center on Sustainable Investment (CCSI), All
> rights reserved.*
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
| w: | t: @CCSI_Columbia

"Agenda for Practice-oriented Research", "WTO Processes Would Benefit from
the Input of Civil Society", "How Would a Future WTO Agreement on
Investment Facilitation for Development Encourage Sustainable FDI Flows,
and How Could it be Further Strengthened?”, "What Foreign Investors Want:
Findings from an Investor Survey", "Incentivising Sustainable FDI",
"Leveraging Digital FDI for Capacity and Competitiveness", "Green FDI:
Encouraging Carbon-neutral Investment", "Facilitating Sustainable
Investment to Build Back Better", "Extending International Legal Aid from
Trade to Investment: An Advisory Centre on International Investment
Law", "Increasing
Transparency in Investment Facilitation: Focussed Support is Needed",
Facilitation for Development: A Toolkit for Policymakers*, "More Attention
to Policies! Improving the Distribution of FDI Benefits", "More and Better
Investment Now!", "Facilitating Sustainable FDI in a WTO Investment
Facilitation Framework: Four Concrete Proposals", "An Inventory of Concrete
Measures to Facilitate the Flow of Sustainable FDI: What? Why? How?",
are available
at .

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