The Dutch Government has recently published the final version of its model Bilateral Investment Treaty (the Model BIT). The key changes since the May 2018 Draft Model BIT (discussed in our blog post here) are addressed below.
The Model BIT includes some practical guidance for investors as to how the requirement of “substantive business interests” in a Contracting Party may be fulfilled. Among the innovative provisions, it includes a potential liability on investors in their home State for significant damage, personal injury or loss of life caused in the host State and a commitment to promote equal opportunities and participation for women and men in the economy.
The Model BIT reflects a change in emphasis in modern international investment agreements. The investor protections remain but there is an undoubted rebalancing of the operation of those provisions in the context of the treaty as a whole to address what is perceived by many to be a historic investor-bias in treaty drafting. Further, the Model BIT seeks to implement policy aims through a number of provisions which require recognition of, or aspirational behaviour towards, the achievement of certain development goals by the Contracting Parties.
Definition of “substantive business activities”
As described in our previous blog post here, the Draft Model BIT potentially affects the protection for shell companies/SPVs by limiting the scope of protection to investors who have “substantive business activities” in a Contracting Party. The Model BIT now includes a non-exhaustive list of “indications” of having “substantive business activities” in a Contracting Party, focusing on matters such as the undertaking’s administration, headquarters, number and qualification of employees, and turnover, in the Contracting Party. The indications “should be assessed in the specific case, taking into account the number of employees, and … the nature and maturity of the activities” carried out. The indicative criteria give more certainty to investors seeking to understand the scope of protection of the BIT. However, it is clear that these criteria are not intended to provide a “checklist”, and their application may differ from case to case.
Possibility of claims against the investor in their home State
Article 7(4) is a particularly significant provision as it raises the spectre of a claim being brought against an investor in its home state in respect of the investment. It provides that: “Investors shall be liable in accordance with the rules concerning jurisdiction of their home state for the acts or decisions made in relation to the investment where such acts or decisions lead to significant damage, personal injuries or loss of life in the host state.”
It is not clear whether this provision would be sufficient for the courts of an investor’s home state to establish that they had jurisdiction to hear such a claim, and the scope of the investor’s liability is undefined, as are the standards that would be applied to assess a claim. Indeed, with no legal framework around the cause of action, it may be possible that a foreign investor could be liable in their home state under the BIT in circumstances in which a domestic investor in the host State would not be liable in a claim under domestic law. This provision (if incorporated into future BITs), would appear therefore to give rise to some uncertainty for investors, with the potential for claimants to test the boundaries of the provision by bringing claims against the investor in its home state.
Corporate Environmental and Social Responsibility: Investor due diligence (Article 7).
Article 7(3) of the Model BIT includes a “reaffirm[ation]” by the Contracting Parties of “the importance of investors conducting a due diligence process to identify, prevent, mitigate and account for the environmental and social risks and impacts of its investment“. It is not clear how such a provision would be applied by a tribunal, given that it confirms the voluntary nature of CSR, does not impose any direct obligation on investors and ultimately does not appear to qualify the substantive investment protections guaranteed by the Contracting Parties elsewhere in the treaty.
Obligation of promotion of favourable conditions for investment: sustainable economic development
The Model BIT obliges the Contracting Parties to promote economic cooperation and encourage the creation of favourable conditions for “responsible investment in its territory that contribute to sustainable economic development” (new wording in bold). This is an interesting limitation on the scope of the Contracting Parties’ obligation: it puts the tribunal in a position of determining whether a particular investment is both responsible and contributes to sustainable economic development – both potentially broad concepts.
Since the publication of the last draft of the Model BIT in October 2018, a new recital has been introduced to “[r]ecogniz[e] the importance of equality between men and women when formulating, implementing and reviewing measures within the field of international trade and investment.” The link between trade, investment and gender equality is also emphasised in Article 6(3) of the Model BIT: “The Contracting Parties emphasize the important contribution by women to economic growth through their participation in economic activity, including in international investment. This includes removing barriers to women’s participation in the economy and the key role that gender-responsive policies play in achieving sustainable development. The Contracting Parties commit to promote equal opportunities and participation for women and men in the economy. Where beneficial, the Contracting Parties shall carry out cooperation activities to improve the participation of women in the economy, including in international investment”.
The drafting is undoubtedly light-touch. With the exception of the broadly-defined commitment “to promote equal opportunities and participation for women and men in the economy“, the provision does not impose any concrete obligations on the Contracting Parties and its potential impact on achieving gender equality is therefore unclear. However, the inclusion of such provisions nonetheless represents a positive recognition of the nexus between trade, investment, gender equality and development.
Gender diversity also features in the dispute resolution provisions which require an appointing authority in appointing the tribunal, to “strive for gender and geographic diversity“.
Business-related human rights abuse and protection of human rights
A further innovative provision included in Article 5 of the Model BIT recognises the duty of the Contracting Party to protect against business-related human rights abuse and imposes an obligation on the Contracting Parties to “take appropriate steps to ensure, through judicial, administrative, legislative or other appropriate means, that when such abuses occur within their territory and/or jurisdiction those affected have access to effective remedy. These mechanisms should be fair, impartial, independent, transparent and based on the rule of law.”
This provision potentially expands the obligations which the Contracting Parties may otherwise owe in the field of human rights. For some States, the requirement to provide an “effective remedy” in their domestic law for business-related human rights abuses may be problematic. The legal landscape in many countries is changing at national level, with new standards, legislation, and regulations addressing the human rights-related obligations of businesses. However not all domestic legal systems have fully addressed business-related human rights issues, such that an effective remedy is provided in respect of liability of private actors for all violations.
Article 5(2) is a reminder of the hybrid nature of investment treaties. Whilst the protections focus on investors, the obligations in investment treaties are owed by the Contracting Parties to each other. Consistent with this, there is also a recognition, in Article 7, of the Contracting Parties’ commitment to multilateral soft law instruments on business and human rights (the UN Guiding Principles and the OECD Guidelines for Multinational Enterprises), as well as a “commit[ment] to strengthen this framework“.
The future of ISDS and transparency
The Model BIT provides for investor-State disputes to be resolved by arbitration, however it also commits the Contracting Parties to “pursue with each other and other interested partners the multilateral reform of ISDS.” Notably, unlike the EU’s trade agreements, there is no commitment to a specific type of multilateral reform.