Australia: A rebalancing of the Dutch investment protection framework: how will this affect foreign investors?

The proposed changes to the Dutch model bilateral investment treaty (BIT) may have significant implications for existing and future foreign investors seeking to take advantage of the Netherlands’ traditionally generous treaty protections. The proposed changes narrow investment protection and deny that protection to shell companies incorporated in the Netherlands without a substantial business presence in the Netherlands.

INTRODUCTION

The Netherlands has traditionally attracted foreign investors because of the country’s favourable tax regime (facilitating corporate tax optimisation strategies) and the broad investment protections offered by Dutch BITs. Dutch BITs (based on the 2004 Dutch model BIT) contain few requirements for “nationals” and “investors”, which allow shell companies to be incorporated in the Netherlands to take advantage of the investment protections. The investment protections (such as fair and equitable treatment and expropriation) are also ill-defined and broadly expressed.

However, a rebalancing of the Dutch investment protection framework is emerging.

The Netherlands has released a new draft model BIT to replace the 2004 model BIT. The new draft model BIT departs from the current text in a number of respects. Most notably, it will now not be possible for investors from non-party States to structure their investment through a Dutch shell or mailbox company to take advantage of the treaty. The draft Model BIT may therefore have important implications for existing investors structured through a Dutch shell company but without a substantial presence in the Netherlands, as well as future investors.

Another significant change is the removal of party autonomy in the appointment of arbitrators and the prohibition against arbitrators engaging in the practice known as “double-hatting”.

The draft Model BIT is open for public consultation until 18 June 2018. If adopted, it will provide a starting point for renegotiating existing BITs, as well as investment agreements that the Dutch government signs with nations outside the EU.

We discuss some of the key changes in more detail below.

KEY CHANGES

Investor

The amendment to the definition of ‘investor’ in Article 1(b) of the draft Model BIT is significant. An investment must now be held by a company incorporated in the Netherlands that has ‘substantial business activities’ in the Netherlands or is owned or controlled by another Dutch company that has substantial business activities in the Netherlands. The definition excludes shell or mailbox companies owned by persons of a third country that do not have substantial business activities in the Netherlands.

The phrase ‘substantial business activities’ is not defined. It will be a question of fact as to whether the business activities of the investor are “substantial”. Presumably if activities are undertaken as a commercial enterprise and for a profit, this will be sufficient.

The definition of ‘investor’ must also be read together with the draft BIT’s new denial of benefits clause in Article 16(3), which permits the exclusion of certain investors from protection. It enables the Netherlands to deny the benefits of the BIT to an investor who has changed its corporate structure ‘with a main purpose to gain the protection of this Agreement at a point in time where a dispute had arisen or was foreseeable’. The clause adds that this ‘particularly includes situations where an investor has changed its corporate structure with a main purpose to submit a claim to its original home state’.

Article 16(3) reflects the doctrine of abuse of rights, which has found application in investment jurisprudence where an investment is restructured to attract treaty protection at a time when a dispute with a host State had arisen or was foreseeable.

The BIT does not state when the denial of benefits clause should be invoked, but arguably it would have to be invoked in a timely manner, which may be at the time at which objections to jurisdiction are raised.

Investment

Like the definition of ‘investor’, the definition of ‘investment’ in Article 1(a) has been amended but the new definition is unlikely to affect traditional forms of investment. An investment will not be eligible for protection unless it has the ‘characteristics of an investment’ such as a certain duration, the commitment of capital, the assumption of risk and, most notably, the expectation of gain or profit. This definition is commonly used in modern investment treaties.

The definition of investment expressly excludes claims to money that arise solely from commercial contracts for the sale of goods or services, and ‘any related order, judgment or arbitral award’.

Expropriation

The draft BIT now defines direct and indirect expropriation and, in so doing, the obligation not to expropriate (unless certain conditions are complied with) is no longer described only in terms of a ‘deprivation’. The term ‘expropriation’ carries with it the connotation of ‘taking’ a person’s property with a view to transferring ownership of that property to another person (such as the State). By contrast, a ‘deprivation’ can occur without a ‘taking’. The protection is thereby narrowed.

Pursuant to Article 12, direct expropriation is said to occur when an investment is nationalised or otherwise directly taken through formal transfer of title or outright seizure. Indirect expropriation is said to occur if a measure has an effect equivalent to direct expropriation, in that it substantially deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of the investment, without formal transfer of title or outright seizure. The draft BIT lists factors which may evidence an indirect expropriation such as the economic impact, duration and character of the measure in question, and this will be assessed on a case-by-case basis, as a fact-based inquiry.

Appointment of arbitrators

The draft Model BIT removes the scope for party appointment of arbitrators. Instead, all tribunal members are to be appointed by an appointing authority – either the Secretary-General of ICSID if the claimant chooses arbitration pursuant to the ICSID Convention, or the Secretary-General of the Permanent Court of Arbitration, if the claimant chooses arbitration pursuant to the UNCITRAL Arbitration Rules. The Secretary-General of ICSID is not limited to its panel of arbitrators.

The appointing authority is required to appoint members who fulfil the conditions set out in Article 20(5) and (6) ‘after thoroughly consulting the disputing parties’. One such condition is that the member has not acted as legal counsel for the last five years in investment disputes under any international agreement. Notably, this practice, known as “double hatting”, was abolished recently at the Court of Arbitration for Sport.

The move away from party-appointed arbitrators reflects a growing concern that the unilateral appointment of arbitrators undermines the legitimacy of the arbitral process due to the risk of partiality and bias.

Yet, according to the 2018 Queen Mary University of London International Arbitration Survey, the ability of parties to select arbitrators is one of the most valuable characteristics of arbitration. It is considered that party appointment of arbitrators strongly appeals to parties because of the degree of control and engagement the parties have in the arbitral process.

The requirement in the draft Model BIT to consult with the disputing parties before making an appointment may be interpreted as encouraging the use of a “list” system, whereby the appointing authority prepares a list of candidates and invites each party to submit preferences, or allows each party a (limited) right to veto the proposed candidates. This may achieve the necessary balance between the competing requirements of, on the one hand, impartiality and (perceived) lack of bias and, on the other hand, party autonomy in the constitution process. Of course, any arbitrator nominated to a tribunal is required to provide full and frank disclosure as to any matters that may affect their impartiality or independence.

OTHER KEY FEATURES

The draft Model BIT contains a number of other significant features, many of which reflect current opinion and policy issues, for example:

  • (State’s right to regulate) The preamble and Article 2(2) recognise the contracting party’s ‘right to regulate’ in the public interest. It is the State’s right to pursue ‘legitimate policy objectives’ even if this affects an investor’s expectations. The preamble also recognises the parties’ commitment to ‘sustainable development’. In Section 3, the parties commit to the objective of sustainable development and reaffirm the importance of corporate social responsibility.
  • (FET protection) The draft Model BIT gives meaning to the protection afforded by ‘fair and equitable treatment’ (FET). Article 9(2) sets out the circumstances in which a contracting party will be deemed to be in breach of the FET obligation.
  • (MFN clause) The draft Model BIT clarifies a point of controversy in investment jurisprudence by expressly excluding procedures for the resolution of disputes provided for in other investment agreements from the ambit of the MFN clause (Article 8(3)).
  • (Third party funding) The draft Model BIT provides (at Article 19(8)) that the claimant must disclose to the other disputing party and the Tribunal any third party funder, either at the time of submission of claim or as soon as possible if funding is granted after submission of claim.
  • (Transparency) Article 20 provides that the appointing institution must publish the composition of each tribunal on its website, with the names of the disputing parties and other relevant information, and that the UNCITRAL Transparency Rules shall apply.

In 2016-2017, Suzie Crossland was seconded to the international arbitration team of De Brauw Blackstone Westbroek in Amsterdam.

In 2017, Lee Carroll was seconded to Bredin Prat in Paris where she worked in their arbitrage team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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