REUTERS | Cris Toala Olivares

The CETArisation of future Dutch BITs

Recently, the Dutch Ministry of Foreign Affairs published a new draft model bilateral investment treaty (BIT) text for public consultation. The aim of this draft text is to replace the 2004 model BIT text and align it with the EU’s model treaty text, as exemplified by the Canada-EU FTA (CETA). The draft text is also an attempt to address the perceived shortcomings of existing investment treaties and the investor-state dispute settlement (ISDS) system.

The draft text departs significantly from the existing Dutch BITs and introduces (from the perspective of investors) several new restrictive elements, which will be discussed in more detail below.

Stricter definitions of investor and investment

In contrast to the currently broad definition of “investor” in Dutch BITs, the draft text imposes additional requirements on the definition of investors, which essentially aim to exclude shell mailbox companies from the scope of protection of the BIT. Thus, a legal person must not only be constituted under the law of one of the contracting parties, but must also have “substantial business activities” in that state. If a legal person constituted under the law of either contracting party does not have substantial business activities in that contracting party, it is necessary that it is (in)directly controlled by a legal person that is constituted in that contracting party and has substantial business activities there. In a footnote, several vague criteria are mentioned that may be taken into account for the determination of what constitutes “substantial business activities”.

The draft text also imposes stricter requirements for the definition of an investment, incorporating the Salini conditions. In addition to the Salini criteria, investments must also meet the condition of entailing the expectation of gain or profit. Moreover, claims to money arising solely from commercial contracts for the sale of goods or services between natural/legal persons of the contracting parties are now explicitly excluded.

Besides, the draft text explicitly excludes claims if the investment has been made through fraudulent misrepresentation, concealment, corruption or similar bad faith conduct amounting to an abuse of process. It also includes a denial of benefits clause, whereby an investor cannot gain protection under the BIT if it has changed its corporate structure when a dispute had arisen or was foreseeable.

Stricter definitions of substantive protection standards

The draft text introduces a number of stricter definitions regarding the substantive protection standards.

The most significant difference concerns the introduction of a closed list of breaches of the fair and equitable treatment (FET) standard similar to the one contained in CETA. Accordingly, an arbitral tribunal can only find a breach of the FET standard if measures fall within the listed breaches, which include, inter alia, “fundamental beach of due process, manifest arbitrariness, and direct or targeted discrimination on wrongful grounds”. It should be noted that the contracting parties can further complement this list by adopting a joint interpretative declaration.

Connected with the FET standard is the clarification regarding legitimate expectations, in that arbitral tribunals are given discretion whether or not to take into account “specific representations” that were given by the host state to the investor, on which the investor relied when making the investment. Similarly, the umbrella clause offers a narrower protection, namely only for “written commitments” given to the investor regarding a specific investment, as opposed to “any obligation” that were entered into by the contracting party.

The draft text continues to protect investors against direct expropriation for public policy reasons, which means that direct expropriation is allowed if the measure is taken in the public interest, under due process, in a non-discriminatory manner and against prompt, adequate and effective compensation.

However, the draft text follows the CETA approach regarding indirect expropriation. Accordingly, measures that lead to indirect expropriation when they are adopted for public policy reasons do not breach the BIT unless they are so severe that they “appear to be manifestly excessive”.

In addition, in order to qualify a measure as indirect expropriation, it will be necessary that the “fundamental attributes of property” be taken to be eligible for compensation.

New dispute settlement provisions

Although the draft text continues to offer investors the possibility to use ICSID, ICSID Additional Facility and UNCITRAL as the main dispute arbitration rules, they are significantly modified.

First, the party autonomy for the selection of arbitrators is removed. Instead, an appointing authority (either the Secretary General of ICSID or the Permanent Court of Arbitration (PCA)) will make all three arbitrator appointments. As a result, neither the investor, nor the host state, will be allowed to appoint the arbitrators. The appointing authority is not limited to the ICSID or PCA roster and is called upon to make the appointments after “thorough” consultations with the disputing parties.

Second, arbitrators are excluded from such appointments if they have acted as legal counsel in investment disputes, during the past five years, under this or any other international agreement. This obviously excludes a large number of highly experienced arbitrators from being selected in the future. The draft text also states that arbitrators shall comply with the IBA Guidelines on Conflicts of Interest. In addition, the draft text prescribes that, in all disputes, arbitrators are to be paid a maximum of $375 per hour in accordance with the ICSID fee schedule.

Third, the draft text introduces various time limits for bringing claims and deciding cases. More specifically, investors must consult for at least 60 days and then turn to arbitration within six months of having first requested consultations. Claims must be brought within five years of when the investor acquired (or should have acquired) knowledge of the relevant treatment. If investors first pursued domestic remedies, they must turn to arbitration within two years of having exhausted or abandoned those efforts. Furthermore, a hard ceiling of ten years is provided for claims where the investor first attempted local resolution.

Moreover, the investor is required to disclose to the other disputing party and to the tribunal the name and address of any third party funder.

Besides, in the interest of speed, the draft text calls upon arbitrators to avoid bifurcation, except if the parties wish for it or in order to hear preliminary objections centred around an alleged manifest lack of legal merit of a claim. In this context, it is also noteworthy that the draft text contains the possibility for claimants to request consolidation of similar claims, which arbitral tribunals should in principle accept, in particular where claimants are small and medium-sized enterprises (SMEs).

The draft text states that arbitrators shall “endeavour” to issue their final award within 24 months of the initiation of a case. However, the arbitral tribunal can take more time, simply by giving reasons for the delay. In any case, the disputing parties are not able to enforce the suggested 24 month deadline.

Finally, it is important to note that the draft text contains a referral rule to any future multilateral investment court system, as it is currently being negotiated by an UNCITRAL Working Group. Consequently, any disputes under this new model BIT would be referred to that investment court, making the ISDS provisions unavailable for investors.

New obligations imposed on contracting parties and investors

The draft text is particularly noteworthy for the raft of new obligations which are imposed on contracting parties and investors.

Already the preamble contains an explicit commitment of the contracting parties towards sustainable development and the right to regulate for achieving legitimate public policy objectives, such as the protection of health, safety, environment, labour rights, animal welfare, social and consumer protection and prudential financial reasons. Moreover, a specific sustainable development provision has been included, which calls upon the contracting parties to ensure their obligations under multilateral agreements, such as the Paris Agreement, International Labour Organization (ILO) and Universal Declaration of Human Rights (UDHR).

Of note is also a specific “Rule of Law” provision, which obliges contracting parties to guarantee the principles of “good administrative behaviour”, such as consistency, impartiality, independence, openness and transparency. In addition, contracting parties shall “ensure that investors have access to effective mechanisms of dispute resolution and enforcement, such as judicial, quasi-judicial or administrative tribunals, which should be fair, impartial, independent and based on the rule of law”.

Turning towards investors, the draft text contains a specific provision on corporate social responsibility (CSR), which calls upon the contracting parties to encourage investors to “voluntarily incorporate” in their internal policies those internationally recognised CSR standards that have been endorsed or supported by a contracting party. Reference is made to the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights as well as the Recommendation CM/REC(2016) on human rights and business.

While these obligations might be considered, prima facie, as soft law, they can have a major impact when it comes to the determination of the amount of compensation. The draft text contains a specific provision which states that an arbitral tribunal may, in deciding on the amount of compensation, take into account non-compliance by the investor with its commitments under the UN Guiding Principles and the OECD Guidelines.

Appraisal

The new draft model BIT text contains many significant modifications compared to the model BIT text of 2004. The overall thrust of these modifications is to “re-balance” the rights and obligations of states and investors by expanding the policy space of states to the detriment of investors.

Accordingly, this draft introduces restrictions and limitations regarding the scope of application of the BIT, the substantive protection standards and ISDS procedural aspects.

Clearly, under the new draft text, states can adopt more far-reaching measures, having an indirect expropriatory effect without having necessarily to pay compensation. Connected with that is the imposition of an increasing number of soft law CSR obligations on investors, which nonetheless can have a significant impact.

Another related aim is to clarify a number of concepts that have been considered by some to be too vague and broadly formulated, for example regarding the FET standard, legitimate expectations and umbrella clause.

Although the draft text borrows many elements from the CETA text, it nonetheless does not incorporate all of the “innovative” CETA elements. For example, the draft text falls short of introducing an appeal tribunal in the dispute settlement system. Instead, the draft text prefers to defer to a future permanent multilateral investment court system.

Nonetheless, the removal of the party autonomy regarding the selection of arbitrators and the exclusion of active and experienced arbitrators from being selected reduces the choice, and arguably the quality, of those who are eventually appointed as arbitrators. Moreover, the exclusion of party autonomy and the push towards a centralised appointing mechanism for arbitrators already go a long way in the direction of a roster of semi-permanent pre-selected arbitrators.

In sum, while it is understandable that the Dutch government wishes to present a draft model BIT text that addresses the perceived concerns regarding BITs and ISDS, the current draft text needs further refinement in order to find the right balance between legitimate policy space and effective promotion and protection of foreign investments.

It remains to be seen how the definite text will look like after the consultation has been concluded.

EFILA Nikos Lavranos

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