New model BIT goes beyond consultation draft and introduces sweeping changes for investors

Introduction
Limitations to investors and investments qualifying for protection
Changes to scope of protection
Key jurisdictional and procedural changes
Two-way street: investor behaviour more important under new model BIT
Renegotiation instead of termination of existing BITs: no sunset protection
European Commission to have final say

Introduction

On 19 October 2018 the government adopted its new model bilateral investment treaty (BIT). The proposed changes, which are likely to limit investor protection (for further details please see "New draft Dutch model BIT: significant changes ahead for investors"), have now been incorporated into the new model BIT, together with additional important amendments. Once authorised by the European Commission, the government will start renegotiating the 78 BITs that it currently has with non-EU countries on the basis of the model BIT. Intra-EU BITs will be terminated following the European Court of Justice's early 2018 decision in Slovak Republic v Achmea. This article discusses the key changes and the timing of the renegotiation process.

The model BIT reflects two government objectives:

• a sustainable investment policy; and
• a better balance between the rights and obligations of both states and investors.

Limitations to investors and investments qualifying for protection

Perhaps the most significant change from the perspective of treaty structuring is the abolition of the protection of Dutch shell companies. For legal persons to qualify as investors under the model BIT, they must undertake substantial business activities in their home state. Article 1 of the model BIT provides a number of indications as to what can constitute such 'substantial business activities', including:

• a company's registered office, administration, headquarters and/or management being established in the Netherlands;
• a certain number of employees and their qualifications being based in the Netherlands;
• a certain amount of turnover being generated in the Netherlands; and
• an office, production facility and/or research laboratory being established in the Netherlands.

These indications will be assessed on a case-by-case basis, taking into account a company's total number of employees and turnover and the nature and maturity of its activities.

This new requirement may significantly limit which investors will be granted protection under the BIT. Importantly, protection will also be denied if an investor changes its corporate structure to gain protection under the BIT once a dispute arises or is foreseeable (Article 16(3)). If investments have been procured through fraud or similar bad-faith conduct, a tribunal must also decline protection (Article 16(2)).

Changes to scope of protection

The model BIT contains changes that may circumscribe the substantive protection available to qualifying investors. It contains more nuanced definitions of 'fair and equitable treatment' and 'expropriation' (Articles 9 and 12, respectively) and emphasises the right of contracting states to regulate to achieve 'legitimate policy objectives' (Article 2). It also provides for a more nuanced tax treatment provision, expressly allowing host states to adopt particular taxation measures (Article 10).

Investors should be particularly mindful of the limitation of the most-favoured nation (MFN) provision (Article 8). Substantive obligations in other treaties will no longer qualify as treatment and can no longer give rise to a breach of the MFN provision unless the host state has adopted or maintained measures pursuant to those obligations. Investors will no longer be able to rely on dispute resolution clauses in other treaties.

Key jurisdictional and procedural changes

The model BIT proposes a number of procedural changes to the conduct of, and access to, arbitral proceedings (Articles 15, 19 and 20), including as follows:

• A six-month waiting period has been introduced. No arbitral proceedings can be initiated before parties have (unsuccessfully) undertaken a consultation process. Importantly, the request for such consultation process must be submitted within a particular timeframe. Failure to abide by time limits may render a claim inadmissible.
• Domestic or international court proceedings relating to the same measures must be withdrawn or discontinued. If an investor wants to pursue an investment claim in arbitral proceedings, it must waive its right to initiate related proceedings in other domestic or international fora.
• Parties can no longer appoint arbitrators. Rather, all arbitrators will be appointed by the secretary general of either the International Centre for Settlement of Investment Disputes or the Permanent Court of Arbitration. In appointing arbitrators, the secretary general will:
  • thoroughly consult the parties;
  • strive for gender and geographical diversity; and
  • ensure that arbitrators have not acted as legal counsel in investment disputes in the past five years.
• On the entry into force of an agreement between the contracting parties providing for a multilateral investment court, disputes under the BIT will be submitted to that investment court rather than to arbitration.
• There will be increased transparency. Appointing institutions must publish on their websites:
  • the composition of tribunals;
  • the names of the parties to disputes;
  • the legal basis for claims; and
  • the relief sought.

Further, claimants will have to disclose the identity of any third-party funder.

• There will be scope for participation as amicus curiae. Interested parties may, in accordance with the United Nations Commission on International Trade Law Rules on Transparency in Treaty-Based Investor-State Arbitration (Transparency Rules), request to make amicus curiae (or non-disputing party) submissions. While such requests may be denied, the tribunal and the parties must give the request positive consideration.

Two-way street: investor behaviour more important under new model BIT

The model BIT contains several provisions emphasising the importance of investor behaviour. Importantly, in awarding an investor compensation, the tribunal may consider its (non-)compliance with its commitments under the United Nations Guiding Principles on Business and Human Rights and the Organisation for Economic Cooperation and Development Guidelines for Multinational Enterprises (Article 23). Separately, "investors shall be liable in accordance with the rules concerning jurisdiction of their home state" for acts or decisions concerning the investment that resulted in significant damage in the host state (Article 7).

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. Such protection may not be available if BITs are renegotiated rather than terminated. Without a transitional provision – which is not included in the model BIT – certain investors (eg, those without substantial business activities in the Netherlands) and investments may therefore lose adequate protection under the model BIT.

European Commission to have final say

Only the European Commission can authorise the opening of formal renegotiations of BITs and will need to approve any final version of a revised BIT between the Netherlands and another state. On 26 October 2018 the Dutch minister for foreign and development cooperation informed Parliament that the government will notify the European Commission of its intention to renegotiate its non-EU BITs. Notification must be given five months before formal negotiations are to commence. Upon notification, the European Commission has 90 days to authorise the government to open formal negotiations, if no additional information is needed. The renegotiation process is therefore likely to start at the earliest in five months, with the possibility (albeit unlikely) that negotiations start immediately after authorisation has been granted.

As the minister informed Parliament, the model BIT is a negotiation tactic and, as such, an opening offer. As with every negotiation, the individual renegotiations of the 78 (non-EU) BITs will have their own dynamics, rendering the outcomes difficult to predict. In terms of the duration of such renegotiation, it is likely that this will take one to two years. The renegotiated BITs will need to be approved by the government and Parliament, as well as by the other state party, with the European Commission having to approve the renegotiated BIT.

A claim commenced under an existing BIT would be governed by that BIT, notwithstanding its subsequent renegotiation or termination. Investors with a potential claim under an existing Dutch BIT would be wise to consider carefully the timing of bringing such a claim in view of these developments.

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 (joep.wolfhagen@freshfields.com. Alternatively, please contact Natalie Sheehan at Freshfields Bruckhaus Deringer LLP's London office by telephone (+44 20 7936 4000) or email (natalie.sheehan@freshfields.com). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.