Adopted model goes beyond consultation draft, introducing sweeping changes for investors
On 19 October 2018, the Dutch government adopted its new model Bilateral Investment Treaty (BIT) (the Model BIT). In the context of the consultation process on the Model BIT, we previously discussed the proposed changes and their likely limitation of investor protection in our blog post of July 2018. Those proposed changes, together with additional important amendments, have now made their way into the new Model BIT. Once authorised by the European Commission, the Dutch government will start renegotiating the 78 BITs it currently has with non-EU countries on the basis of the Model BIT. In this updated blog post, we discuss the most important changes, as well as the timing of the renegotiation process.
The Model BIT reflects two government objectives: a sustainable investment policy and a better balance between rights and obligations of both states and investors. This comes in the wake of the Dutch government announcing its intention to terminate its intra-EU BITs following the decision earlier this year of the Court of Justice of the European Union in Slovak Republic v Achmea.
Limitations to investors and investments qualifying for protection
Perhaps the most significant change from the perspective of treaty structuring of investors is the abolition of the protection of Dutch “shell” companies. For legal persons to qualify as investors under the Model BIT they must have “substantial business activities” in their home state. The Model BIT provides a number of indications as to what can constitute such “substantial activities”, including: a company’s registered office, administration, headquarters and/or management being established in the Netherlands; the number of employees and their qualifications based in the Netherlands; the turnover generated in the Netherlands; and having an office, production facility and/or research laboratory established in the Netherlands (Article 1). These indications will be assessed on a case by case basis, taking into account the total number of employees, turnover, and the nature and maturity of the activities.
This new requirement may significantly limit which investors will be granted protection under the BIT. Importantly, protection will also be denied if an investor changed its corporate structure to gain protection under the BIT once a dispute had arisen or was foreseeable (Article 16(3)). If investments have been procured through fraud or similar bad faith conduct, a tribunal must also decline protection (Article 16(2)).
Changes to the scope of protection
The Model BIT contains changes that may circumscribe the substantive protection available to qualifying investors. It contains more nuanced definitions of fair and equitable treatment as well as expropriation (Articles 9 and 12), and emphasises the right of contracting states to regulate to achieve “legitimate policy objectives” (Article 2). It also provides for a more nuanced tax treatment provision, expressly allowing the host state to adopt particular taxation measures (Article 10).
Investors should be particularly mindful of the limitation of the most favoured nation provision (MFN provision) (Article 8). Substantive obligations in other treaties will no longer qualify as “treatment” and can no longer give rise to a breach of the MFN provision unless the host state has adopted or maintained measures pursuant to those obligations. Investors will no longer be able to rely on dispute resolution clauses in other treaties.
Key jurisdictional and procedural changes
The Model BIT proposes a number of procedural changes to the conduct of, and access to, arbitral proceedings, most importantly (Articles 15, 19 and 20):
- Six month waiting period. No arbitral proceedings can be initiated before parties have (unsuccessfully) gone through a so-called consultation process. Importantly, the request for such consultation process must have been submitted within a particular timeframe. Failure to abide by time limits may render a claim inadmissible.
- Withdrawal or discontinuation of domestic or international court proceedings relating to the same measures. If an investor wants to pursue an investment claim in arbitral proceedings, it must waive its right to initiate related proceedings in other domestic or international fora.
- No more party-appointed arbitrators. All arbitrators will be appointed by the Secretary-General of either ICSID or the Permanent Court of Arbitration. In appointing arbitrators, the Secretary-General shall “thoroughly” consult the parties, strive for gender and geographical diversity, and ensure that arbitrators have not acted as legal counsel in investment disputes for the last five years.
- Investment court instead of arbitration. Upon the entry into force of an agreement between the contracting parties providing for a multilateral investment court, disputes under the BIT will be submitted to that investment court rather than to arbitration.
- Increased transparency. The appointing institution shall publish the composition of the tribunal, names of the parties, the legal basis for the claim and the relief sought on its website. Claimants will have to disclose the identity of any third party funder.
- Scope for participation as amicus curiae. Interested parties may, in accordance with the UNCITRAL Transparency Rules, request to make amicus curiae (or non-disputing party) submissions. While the request may be denied, the tribunal and the parties shall give “positive consideration” to such request.
Two-way street: investor behaviour more important under the new Model BIT
The Model BIT contains several provisions emphasising the importance of investor behaviour. Importantly, in awarding an investor compensation, the tribunal may take into account the 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). Separately, “investors shall be liable in accordance with the rules concerning jurisdiction of their home state” for acts or decisions in relation to the investment that resulted in significant damage in the host state (Article 7).
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. Such protection may not be available if BITs are renegotiated rather than terminated. Without a transitional provision – which is not included in the Model BIT – certain investors (e.g. those without “substantial business activities” in the Netherlands) and investments may therefore lose adequate protection under the Model BIT.
The European Commission will have the final say
Only the European Commission can authorise the opening of formal renegotiations of the BITs and will need to approve any final version of a revised BIT between the Netherlands and another state. On 26 October 2018, the Dutch Minister for Foreign and Development Cooperation informed Parliament that the Dutch government will notify the Commission of its intention to renegotiate its non-EU BITs. Notification must be given five months before formal negotiations are to commence. Upon notification, the Commission has 90 days to authorise the government to open formal negotiations, if no additional information is needed. The renegotiation process is therefore likely to start at the earliest in five months, with the possibility (albeit unlikely) that negotiations start immediately after authorisation has been granted.
As the Minister informed Parliament, the Model BIT is a “negotiation tactic” and, as such, an opening offer. As with every negotiation, the individual renegotiations of the 78 (non-EU) BITs will have their own dynamics, rendering the outcomes difficult to predict. In terms of the duration of such renegotiation, it is likely that this will take one to two years. The renegotiated BITs will need to be approved by the Dutch government and Parliament, as well as by the other state party, with the Commission having to approve the renegotiated BIT.
A claim commenced under an existing BIT would be governed by that BIT, notwithstanding its subsequent renegotiation or termination. Investors with a potential claim under an existing Dutch BIT would be wise to consider carefully the timing of bringing such a claim in view of these developments.