Introduction
Limitations for investors and investments qualifying for protection
New provisions potentially circumscribe scope of investors' protection
Two-way street: importance of investor behaviour
Striking procedural changes

Renegotiation instead of termination of existing BITs: no sunset protection
From the Dutch 'gold standard' for investors to more limited protection


Introduction

A consultation process on the new draft Dutch model bilateral investment treaty (BIT) recently ended. The government is expected to publish the finalised text of the new model BIT later in 2018. The new model will serve as the basis for renegotiation of the 79 BITs that the Netherlands has with states outside the European Union (it is expected to terminate its intra-EU BITs following the recent decision of the European Court of Justice 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:

  • achieving a more balanced approach towards the obligations of states and investors, taking into account recent criticism by host states and non-governmental organisations of investment treaties and investment treaty arbitration; and
  • introducing 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.

In anticipation of the final new model BIT, this update discusses some of the key proposed changes.

Limitations for 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 a 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"; and
  • 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 scope of investors' 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 that accorded by the host state to investors and investments of a third-party state (most-favoured nation (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)).

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 Organisation for Economic and Cooperation and Development 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 or appoint arbitrators. Instead, the secretary general of the International Centre for Settlement of Investment Disputes or 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 (Articles 20(1) to (2)).
  • Increased transparency – details including the composition of the tribunal, the names of the parties, the 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 past five years may act as arbitrators (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 a 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 when they made their investment, often by continuing BIT protection for 10 to 15 years post-termination. In contrast, such protections may be unavailable if a BIT is renegotiated (as proposed by the government) rather than terminated. If the 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 to consider their position carefully to ensure that they continue to have adequate investment treaty protection.

For further information on this topic please contact Joep Wolfhagen at Freshfields Bruckhaus Deringer LLP's Netherlands office by telephone (+31 20 485 7000) or email ([email protected]. Alternatively, please contact Natalie Sheehan at Freshfields Bruckhaus Deringer LLP's London office by telephone (+44 20 7936 4000) or email ([email protected]). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.