Going Dutch: Netherlands Model BIT "splits the bill" between investor protection and State regulation

We have previously reported¹ that a number of States have made clear an intention to renegotiate or altogether terminate their bilateral investment treaties (BITs). Those actions most likely result from growing public scrutiny of BITs and, in particular, the investor-State dispute settlement (ISDS) provisions contained within them (ISDS clauses allow foreign investors to bring claims directly against States and have, in recent years, resulted in a number of high-value arbitral awards against States).

The Netherlands is taking action to renegotiate or terminate its BITs. It is specifically looking to renegotiate all of its non-EU BITs and, following the ruling of the European Court of Justice in Slowakische Republik (Slovak Republic) v Achmea BV² , to terminate its BITs with EU Member States. 

In May 2018, the Dutch Government, which has traditionally been a leader in the development of international law, released a draft of a new model investment agreement for public consultation. That process concluded in June 2018 with over 1,600 responses having been received. After taking into consideration the comments received, the Dutch Council of Ministers, on 19 October 2018, adopted a new Model Investment Agreement (the New Model BIT), which is to be used as the basis for the Netherlands to renegotiate its non-EU BITs. 

The New Model BIT represents a policy shift from the former pro-investor treaty, to one which places a greater emphasis on the right of State parties to regulate the activities of investors to achieve legitimate policy objectives (this is expressly recognised in Article 2(2) of the New Model BIT). There are a number of changes to the status quo which may in due course serve to limit the protection currently afforded both to foreign investors investing in the Netherlands and to foreign investors investing in other States using Dutch corporate vehicles. This article summarises the key changes likely to be of interest. 

New definition of "investor" 

Perhaps the most significant change in the New Model BIT is the new definition of "investor". The Netherlands' favourable fiscal climate and investor-friendly BITs have resulted in significant numbers of foreign investors routing their investments through companies incorporated in the Netherlands.³  The Netherlands' previous Model BIT (the 2004 Model BIT) afforded substantive protection to the investments of "nationals" of one of the State parties to the treaty. "Nationals" was defined broadly as encompassing:

1. natural persons having the nationality of that Contracting Party;
2. legal persons constituted under the law of that Contracting Party;
3. legal persons not constituted under the law of that Contracting Party but controlled, directly or indirectly, by natural persons as defined in (1) or by legal persons as defined in (2).

This definition was adopted in a significant number of Dutch BITs. It was therefore sufficient, for the purposes of the 2004 Model BIT, and those BITs that adopted this definition, for an investor to be no more than a "brass plate" or "mailbox" entity in the Netherlands. A lack of substantial business activities in the Netherlands would not preclude a Dutch-registered corporate vehicle from seeking to benefit from the substantive provisions of the treaty. 

The New Model BIT departs from such an approach by making clear that the substantive protections afforded apply to:

1. any natural person having the nationality of that Contracting Party under its applicable law;
2. any legal person constituted under the law of that Contracting Party and having substantial business activities in the territory of that Contracting Party; or
3. any legal person that is constituted under the law of that Contracting Party and is directly or indirectly owned or controlled by a natural person as defined in (1) or by a legal person as defined in (2). 

Investors would thus not qualify for protection under the New Model BIT unless they had either (i) substantial business activities in the relevant Contracting State (i.e. the Netherlands or the counterparty State to the BIT), or (ii) a majority of shareholders of Contracting State nationality. The New Model BIT seeks to clarify what is meant by the term "substantial business activities". Article 1(c) makes clear that the location of the undertaking's registered office, administration or management, the number of employees, turnover of the undertaking, and the nature and maturity of the activities carried out will be taken into account when determining whether a corporate entity has substantial business activities in the Contracting State in which it is established. 

New definition of "investment"

The 2004 Model BIT afforded protection to "investments", which term was broadly defined as "every kind of asset". A non-exhaustive list of examples applied, which included "claims to money".⁴ 

The New Model BIT seeks to narrow the definition of "investment". The text provides that "investment" means "every kind of asset that has the characteristics of an investment, which includes a certain duration, the commitment of capital or other resources, the expectation of gain or profit, and the assumption of risk".⁵  Claims to money that arise solely from commercial contracts for the sale of goods or services, the domestic financing of such contracts, and any related order, judgment or arbitral award, have been expressly excluded from the definition.⁶  

The new wording imposes a number of additional criteria which are already commonly applied by investment tribunals in considering whether an "investment" exists for the purpose of an arbitration conducted under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). However, by specifically including these criteria in the New Model BIT, an additional jurisdictional hurdle has been imposed which would have to be overcome in all proceedings under the New Model BIT (and not only in ICSID proceedings). The New Model BIT also includes a requirement of an expectation of gain or profit, which many tribunals do not consider to be a pre-requisite for establishing that an investment exists. This means that non-profit activities are unlikely to constitute "investments". 

Most-Favoured Nation (MFN) clause

The MFN clause is frequently used by investors to import into one treaty more favourable provisions that have been included in other treaties to which the investor is not party. For example, in CME Czech Republic BV (The Netherlands) v The Czech Republic, the MFN clause in the Czech Republic-Netherlands BIT was used to import the more favourable provisions on expropriation compensation contained in the Czech Republic-United States BIT, to the Dutch investor's benefit.⁷

The New Model BIT seeks to avoid this practice, clarifying at Article 8(3) that, in the absence of measures adopted or maintained by a Contracting State, substantive obligations in other BITs do not themselves constitute "treatment" giving rise to a breach of MFN. Put simply, in order to import a more favourable standard of treatment from another BIT using the MFN clause, an investor would not only have to show that the other BIT provides for a more favourable standard of treatment but that the host State had adopted specific measures that ensured that a more favourable treatment was provided. It will therefore be more difficult for investors to import (and rely upon) more favourable provisions set out in other treaties. Article 8(3) of the New Model BIT also makes clear that the MFN clause cannot be used to import the ISDS provisions contained in other Dutch BITs. 

Fair and Equitable Treatment

Changes have been made to the fair and equitable treatment provision in the New Model BIT. Article 3(1) of the 2004 Model BIT provided investors with wide protection, requiring the host State to "ensure fair and equitable treatment of the investments of nationals of the other Contracting Party" and "not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those nationals". There was no definition of "fair and equitable treatment" and there have been a number of cases where different actions (and inactions) of the State were held to constitute a breach of the standard.

Article 9(2) of the New Model BIT is more comprehensive. It lists a number of circumstances that constitute a breach of the fair and equitable treatment standard including, denial of justice, fundamental breach of due process, and manifest arbitrariness. Breach of legitimate expectations that existed at the time of investment is expressed as a factor that may be taken into account when determining a breach of fair and equitable treatment.⁸  Of course, there have been many cases to date in which the circumstances listed in Article 9(2) were held to constitute a breach of fair and equitable treatment. But the new text is helpful in "codifying" the circumstances which may give rise to a claim.

Dispute Resolution

Article 9 of the 2004 Model BIT provided for resolution of disputes under the ICSID Convention. The ISDS mechanism under the New Model BIT is considerably more elaborate. The Netherlands also clearly envisages the establishment, in due course, of a "multilateral investment court" for resolution of investor-State disputes. This is an initiative which has been promoted by the European Union. In the event that such a court is established, it would have jurisdiction over disputes arising under the treaty and there would no longer be a role for independent arbitral tribunals.⁹  Although there is some doubt as to whether there will ever be sufficient international consensus for the establishment of such a court.

Pending the establishment of the court (if ever), investors may commence arbitration under the New Model BIT but with some notable procedural changes. Article 19 of the New Model BIT provides for resolution of disputes by arbitration under either the ICSID Convention, the ICSID Additional Facility Rules or the UNCITRAL Arbitration Rules. There is thus more choice for investors. The introduction of the ICSID Additional Facility Rules is particularly advantageous as Dutch investors can now commence ICSID arbitration against a non-ICSID Contracting State. This was not possible under the 2004 Model BIT. Given that ICSID is a World Bank institution, the threat of ICSID proceedings (and the reputational issues that would attach to them) can be a powerful tool for investors. 

The availability of UNCITRAL arbitration may also be tactically advantageous for investors – the most recent version of the UNCITRAL Rules incorporates provisions on transparency that would (by default) require hearings to be public and documents relating to the proceedings to be made available online. Indeed, Article 20(13) of the New Model BIT separately makes clear that the UNCITRAL Transparency Rules will apply to all proceedings. However, a number of States have been reluctant to agree to such transparency rules, as they may be used by investors as leverage in the event a potential dispute arises. It remains to be seen whether States would agree to include these provisions in renegotiated BITs and not all States see virtue in a spotlight being cast on their activities. Another new initiative is the inclusion of Article 23 which allows the tribunal to take into consideration, in assessing the quantum of compensation, an investor's non-compliance with the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises. Arbitral tribunals are increasingly faced with human rights issues when determining investment-related claims,¹⁰  and it is helpful to have the requirement specifically stated in the New Model BIT.

Article 20 of the New Model BIT provides detailed rules for the constitution and functioning of the arbitral tribunal. Significantly, parties are no longer empowered to nominate arbitrators and all appointments are made either by the Secretary-General of ICSID or by the Secretary-General of the Permanent Court of Arbitration, depending on the applicable arbitration rules.