On 19 October 2018, the Dutch government adopted a new Model Bilateral Investment Treaty (BIT). The text narrows the definition of a qualifying "investor" and "investment" and expressly permits arbitral tribunals to take into account a qualifying investor's non-compliance with human rights guidelines when awarding compensation. These changes appear to respond to public concerns regarding the abuse of Dutch BITs by "mailbox" companies and a perceived imbalance favouring the protection of investors' interests over the State's policy-making and regulatory powers.
The Dutch government will now need to obtain authorisation from the European Commission in order to (re)negotiate existing or new BITs (excluding existing intra-EU BITs).
What is a BIT?
A BIT is an agreement between two States offering reciprocal protection of investments in their respective territories. BITs are signed and ratified by States, but those who benefit from the treaty protections are typically investors. Model BITs are used by States as preferred templates when negotiating or renegotiating their BITs.
What's new in the Dutch Model BIT?
It defines a qualifying "investment" as requiring an expectation of gain or profit and the assumption of risk (i.e. it adopts the majority of the Salini criteria). It also expressly states that "claims to money" cannot constitute qualifying investments if they relate to contracts for the sale of goods and/or services.
The definition of a qualifying "investor" in the Model BIT requires Dutch-registered entities to have (i) substantial business activities in The Netherlands or (ii) be indirectly or directly owned by a Dutch national or Dutch registered entity that has substantial business activities in the country.
Article 23 of the Model BIT permits the arbitral tribunal dealing with a claim under the BIT to take into account an investor's non-compliance with its commitments under the UN Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises (OECD Guidelines) when awarding compensation. The OECD Guidelines state, amongst other things, that enterprises and their business partners should contribute to economic and social progress, that their systems and practices should foster confidence and mutual trust with the societies they operate in and that they should engage with relevant stakeholders.
How will this impact investors?
Dutch claimants have referred the second highest number of disputes to arbitration under investment treaties, which is unsurprising given the number of investments structured via Dutch companies to benefit from favourable tax treatment and investment treaty protection. However, the Model BIT, with its narrower definitions of "investment" and "investor", may result in investments structured via Dutch special purpose vehicles with no substantial business activity in The Netherlands not benefiting from investment treaty protections such as (i) the relevant State's undertakings regarding non-discriminatory treatment, fair and equitable treatment, full protection and security, and protection against nationalisation and expropriation, and (ii) the ability to refer claims for a breach of the BIT to arbitration under the rules of the International Centre for Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL), instead of relying on domestic courts.
Where investment protection in the form of the Dutch Model BIT does apply, investors should note the express link in Article 23 between quantum awarded by the tribunal and the investor's non-compliance with the UNGP and the OECD. Under Article 7, the Contracting Parties also reaffirm the importance of investors conducting a due diligence process to identify, prevent, mitigate and account for the environmental and social risks and impacts of their investments and express their commitment to strengthening the international framework on business and human rights. Parties to ICSID or UNCITRAL arbitrations under new or renegotiated BITs adopting the Model BIT's provisions may therefore be required to produce expert reports on the investment's environmental and social impact and the parties' compliance with international human rights standards.
Some ICSID and UNCITRAL tribunals have already considered investors' compliance with such international standards and guidelines. In the case of Bear Creek Mining Corporation v. Peru (ICSID Case No. ARB/14/21), a tribunal member, Professor Sands, stated in his partial dissenting opinion that the collapse of the relevant mining project largely related to the investor's failure "to give effect to the aspirations of the Aymara peoples in an appropriate manner" and obtain a "social licence". Taking into account the investor's compliance with the International Labour Organisation Convention 169 and relevant domestic legislation, he was of the view that the investor's compensation should be halved (this did not form part of the award as it was a minority dissenting opinion).
Similarly, in the case of Urbaser SA and another v. Argentina (ICSID Case No. ARB/07/26), Argentina filed a counterclaim alleging the investor had administered the relevant concession in a manner which breached the human right to water. The tribunal accepted jurisdiction over the issue and concluded that the investor had a negative obligation and the State had a positive obligation to protect the human right to water under the relevant international conventions. The investor was not deemed to have breached its negative obligation on this occasion.
Companies planning to structure investments via Dutch entities will need to check whether investment treaty protection applies when new or existing Dutch BITs are (re)negotiated. Given the focus in the Dutch Model BIT on international guidelines and standards on human rights, we recommend that investors review, record and improve their compliance with such guidelines and rights if necessary. This may mitigate the potential negative impact on compensation awarded in future arbitrations under new or renegotiated Dutch BITs.
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