By Natalie Sheehan, Lee Rovinescu and Joep Wolfhagen
A consultation process on the new draft Dutch model Bilateral Investment Treaty (BIT) (the draft model) recently ended. The Dutch Government is expected to publish the finalised text of the new model BIT later this year. The new model will serve as the basis for renegotiation of the 79 BITs that the Netherlands has with states outside of the EU (it is expected to terminate its intra-EU BITs following the recent decision of the Court of Justice of the European Union in Slovak Republic v Achmea). With the draft model proposing sweeping changes that would limit investor protection and many public contributions supporting the draft, investors relying on Dutch BITs should start considering how the proposed reforms would affect the scope of protection enjoyed under existing BITs, including whether they would still qualify for protection.
The proposed new model reflects two key government objectives: (i) achieve a more “balanced approach” towards the obligations of states and investors, taking into account recent criticism by host states and NGOs of investment treaties and investment treaty arbitration; and (ii) introduce changes designed to protect the Netherlands in the event of claims by foreign investors, in the wake of recent investment treaty claims brought against Spain and Germany (see further our International Arbitration Top Trends 2018 report).
In anticipation of the final new model BIT, we discuss some of the key proposed changes.
Limitations to investors and investments qualifying for protection
Under the current Dutch BITs, natural persons and Dutch companies or companies (in)directly owned by a Dutch company or natural person, qualify as protected investors. That is likely to change. The draft model BIT requires a company – or its (in)direct parent – to have substantial business activities in the Netherlands to be protected under the BIT (Article 1(b)).
It is unclear which business activities will qualify as “substantial”. The draft model contains indications of what could constitute “substantial business activities”, including a company’s registered office and administration, or headquarters and management, being located in the Netherlands. Other relevant factors include the number of employees and the turnover generated in the Netherlands, taking into account the total number of employees and turnover of the company.
Moreover, under the draft model, the host state may deny benefits to an investor that has restructured for treaty protection reasons, not only when a dispute has already arisen, but also when a dispute was foreseeable (Article 16(3)).
In a further departure from the existing Dutch Model BIT of 2004, the new draft model specifies that an investment must meet certain characteristics to qualify for protection (following Salini), including being of a "certain duration", involving "the commitment of capital or other resources", "the expectation of gain or profit" and "the assumption of risk". Claims to money arising solely from commercial contracts for the sale of goods or services, or any related order, judgment or arbitral award, are not covered (Article 1(a)).
New provisions potentially circumscribe the scope of an investor’s protection
The draft model also contains provisions that may have the effect of circumscribing the scope of an investor’s protection.
The model BIT will not affect the right of contracting parties to regulate within their territories to achieve “legitimate policy objectives” (Article 2(2)).
Under the draft model, investors and investments are to receive treatment no less favourable than the treatment accorded by the host state to investors and investments of a third party state (MFN provision). However, the draft also provides that substantive obligations and procedural protections offered by the host state to investors and investments of third party states in other international investment treaties do not constitute “treatment” for the purposes of the MFN provision (Article 8(2)-(3)).
A two-way street: importance of investor behaviour
One of the most important revisions – which some may consider the most progressive aspect of the proposal – is that a tribunal may take into account investor behaviour when deciding the amount of compensation to award for a breach of the BIT. In particular, damages could be reduced in the event of an investor’s non-compliance with its commitments under the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises (Article 23).
Striking procedural changes
The draft model proposes significant changes to the conduct of arbitral proceedings:
- No party-appointed arbitrators. Most strikingly, parties would not be able to select / appoint the arbitrators. Instead, the Secretary-General of ICSID or the Secretary-General of the Permanent Court of Arbitration would appoint all arbitrators in all cases. Parties would be “thoroughly” consulted on the constitution of the tribunal, the scope and extent of which is unclear (Article 20(1)-(2)).
- Increased transparency. Details including the composition of the tribunal, names of the parties, legal basis for the claim(s) and relief sought will be made public (Article 20(4)). The identity of any third party funder will be disclosed to the respondent and the tribunal (Article 19(8)).
- A no ‘double hatting’ policy. Only individuals who have not acted as legal counsel in investment disputes for the last five years may act as arbitrator (Article 20(5)).
- Upon the entry into force of an international agreement between the contracting parties providing for a multilateral investment court (as the European Commission has proposed), disputes under the BIT will be submitted to that investment court rather than to arbitration (Article 15).
Renegotiation instead of termination of existing BITs: no sunset protection
Sunset provisions normally protect investors against the termination of BITs that were in force at the time they made their investment, often by continuing BIT protection for 10-15 years post-termination. In contrast, such protections may not be available if a BIT is renegotiated (as proposed by the Dutch Government) rather than terminated. If the Dutch Government does not negotiate a transitional provision, Dutch investors could be forced to rely on available protections under the renegotiated BIT, provided that they still qualify as investors for the purposes of the renegotiated BIT. This is likely to be a key issue for investors without “substantial business activities” in the Netherlands.
From the Dutch ‘gold standard’ for investors to more limited protection
Dutch BITs have long been considered the ‘gold standard’ of investment protection, providing broad, clearly defined protection for investors. For this reason, many investors have chosen to structure their investments through the Netherlands. If the draft model BIT is adopted in its current form and is used to renegotiate existing Dutch BITs over the next few years as currently proposed, investors will need carefully to consider their position to ensure that they continue to have adequate investment treaty protection.
