History of BITs – A Bright Start
On the 23rd of May 1963, the Netherlands entered into its first Bilateral Investment Treaty (BIT) with Tunisia. The treaty was signed to create conducive and reasonable conditions for foreign investors and, to encourage private entrepreneurship and prosper bilateral relations between the two states. The BIT contained binding provisions guaranteeing foreign investors fair and non-discriminatory treatment, compensation in cases of expropriation, and an arbitration clause for the resolution of disputes. Over the course of the last seven decades, the Netherlands has been successful in signing 108 BITs, out of which 75 BITs are still in force mostly with lower and middle-income countries across Asia, Africa, and South America (refer to Fig. 6). The Netherlands’ most fruitful tenure came in the 1990s, during which most of the treaties were entered and given effect. The Dutch Government to spark the interest of investors offered a plethora of investor-friendly provisions in the BITs. The provisions of the Dutch BITs accorded maximum coverage to the investors by providing broadly formulated investment protection standards, and a host of arbitration rules for the protection of the investors.
Reinventing the Dutch BIT Practices – Conforming to CETA Norms
The recent position of the Netherlands in relation to the BITs is on a decline as more BITs have been terminated than entered into, showing growing disapproval of the governments with the present treaty regime in place. The focus of the Dutch government on negotiating bilateral treaties has been superseded by their interest in the European Union (EU) Free Trade Agreements.
The existing regime of Dutch BITs received severe criticism and backlash from civil society groups in the Netherlands. Against the backdrop of the sharp criticism of its existing 2004 model BIT, the demands for a newer and holistic model BIT for renegotiating the existing 75 BITs and negotiating future BITs was met by the Dutch government with the introduction of the Model Investment treaty in 2019. The new regime mandates the companies to have substantial business activities in the Netherlands to reduce the number of empty shell companies from the ambit of treaty protection. Indicators such as the number of employees, and the yearly turnover are taken into consideration for the determination of the level of business activities at which the company is operating (Article 1(b)(iii), Netherland Model BIT, 2019). Furthermore, to make the model BIT more holistic in nature, several provisions relating to human rights, climate, environment, (Article 16(2)), and corporate social responsibility have been included (Article 7, Netherland Model BIT, 2019). However, core investment provisions relating to indirect expropriation and fair and equitable treatment to all the investors have been retained in the new Model BIT.
The new Model BIT was introduced to replace the 2004 model BIT that existed then. The Dutch Government wanted to align its new model BIT with the EU’s model treaty text as symbolized by the Canada-EU Comprehensive Economic and Trade Agreement (CETA). The new Model BIT is an attempt to significantly sway away from the 2004 Dutch model BIT and conform to the provisions laid down by the CETA. In the new Model BIT of 2019, the Dutch introduced restrictive definitions and other changes to make Model BIT more in line with the provisions of CETA.
Strict definitions of Investment and Investor
In the past, the Dutch BITs were criticized for encompassing broad definitions of investors and investments, due to which the number of cases against the Dutch BITs had been on the rise over the years (refer to Fig 9).
Also, the Netherlands became one of the most popular states from which ISDS claims were filed as the Netherlands became a preferred destination for foreign investors (refer to Fig 8.), the reason behind this was the broad and open-ended provisions of the Dutch BIT.
These liberal provisions in the Dutch Model BIT 2004 were the reason behind the largest awards/settlements being awarded in the ISDS regime to date (refer to Fig. 13).
To be an investor, under the new Model BIT, the requirement is not only to be a legal person under the law of any of the contracting parties but now also requires to have ‘substantial business activities’ in that state. In an alternate scenario, wherein the legal person under the law of any of the contracting parties does not have ‘substantial business activities’ in the state, it becomes imperative that the legal person then should indirectly be owned by another legal person constituted in the same state as the contracting party and also have ‘substantial business activities’ in the state (Article 1(b)(iii), Netherland Model BIT, 2019).
The new model BIT introduced a stricter definition by the introduction of the new threshold of requirement. Apart from the Salini criteria for investment laid down under Article 25(1) of the ICSID Convention, according to which an alleged investment must satisfy the four requirements i.e., (a) a contribution, (b) a certain duration of time, (c) risk involved, (d) the extent of economic development of the host country. The new model BIT requires that the investments must also satisfy the requirement of generating a prospect of gain or profit. Furthermore, to make the definition of investment restrictive, claims of money arising out of purely commercial contracts for the sale of goods or services between legal or natural persons are specifically excluded and not considered a part of the investments under the new Dutch Model BIT (Article 1(a), Netherland Model BIT, 2019).
Substantive protections accorded a restrictive meaning
An extensive list has been introduced outlining the various ways in which the standard of fair and equitable treatment could be violated, like the one laid down in CETA (Article 8.10.2, CETA). The list of the breaches of FET standards meant that a measure taken by a party would be considered a violation of the FET standards, only if the measure finds a place as a breach of the FET standards according to the list provided. The list providing the breaches includes breaches that are fundamentally arbitrary in nature, violate due process, or promote inherent discrimination on wrongful grounds. Further, subject to the agreeability of each of the contracting parties, new grounds for breaches of the FET standards could also be laid and added to the list (Article 9, Netherland Model BIT, 2019).
The umbrella clauses were used to protect investors against investments, but they were narrowed down so that they only applied to “written commitments” made to the investor about a specific investment and not “any obligation” that the contractual party may have made. CETA’s approach to the rules on indirect expropriation is similar to that of the new Model BIT. If actions are taken for public policy reasons that lead to indirect expropriation, they would not be considered to breach the BIT unless they seem to be especially excessive. The basic features of the property in question must be taken into account by the standard that is used to decide if a measure is an indirect expropriation (Article 8.12, CETA).
New provisions for settling the disputes
Under the new Model BIT, the provisions relating to the settlement of disputes have also been modified. First, the independence that the parties enjoyed with respect to the appointment of arbitrators was taken away and removed. Instead of the parties themselves, now the appointing authority (whether the Secretary General of ICSID or PCA) would appoint three arbitrators for the resolution of the dispute. Therefore, neither the investor nor the home state is rendered with any powers for the appointment of the arbitrators (Article 20(1), Netherland Model BIT, 2019). Second, the new provisions of the Model BIT also prohibit the appointment of those arbitrators who have indulged in investment disputes as legal counsel over the duration of the last 5 years, under such or any other international agreement (Article 20(5), Netherland Model BIT, 2019). The provisions also make it compulsory for the arbitrators to strictly adhere to the guidelines laid down on conflict of interest in International Arbitration by the International Bar Association in 2004. The remuneration prescribed to the arbitrators has also been fixed to the ceiling limit of $375 per hour (Article 20(6) Netherland Model BIT, 2019).
Investors under the proposed rules must engage in at least 60 days of consultation before pursuing arbitration, (Article 18(3), Netherland Model BIT, 2019) with the arbitration process needing to commence within six months of the initial consultation request (Article 19(1), Netherland Model BIT, 2019) Claims regarding mistreatment must be filed within five years of the investor becoming aware of the issue (Article 18(4)(a), Netherland Model BIT, 2019). If local remedies are sought first, arbitration must start within two years of exhausting or abandoning those remedies, and claims from cases initially seeking local solutions must be made within ten years (Article 18(4)(b), Netherland Model BIT, 2019). Disclosure requirements mandate that investors inform the opposing party and the tribunal if they are receiving third-party funding. To streamline proceedings, arbitrators are advised to avoid splitting cases unless requested by both parties and if there’s a clear legal issue. Claimants can request the consolidation of similar claims, a measure particularly beneficial for small to medium-sized businesses. Although arbitrators should aim to issue a final award within 24 months of initiating a case, they can extend this timeframe if justified, without enforcement by the opposing parties. Notably, any future disputes would be directed to an international investment court, rendering the current arbitration system unavailable to investors (Article 22(1), Netherland Model BIT, 2019).
Conclusion and Analysis
The current language of the Model Bilateral Investment Treaty (BIT) differs significantly from the version that was in place in 2004. The objective of this updated model BIT is to “re-balance” the rights and obligations of governments and investors. This has been achieved through the introduction of restraints and limitations on the applicability of the Bilateral Investment Treaty (BIT), substantive protection standards, and Investor-State Dispute Settlement (ISDS) procedural components, the intention behind these changes is to broaden the policy and regulatory latitude available to states, even if it entails providing investors with a lesser degree of protection compared to the previous version of the treaty.
This new Model BIT does not include all the “innovative” components that are included in the Comprehensive Economic and Trade Agreement (CETA), even though it draws inspiration from that agreement. To give one example, it does not include the establishment of an appeals tribunal inside the framework for the resolution of disputes (Article 8.28, CETA); rather, it refers to a potential permanent global investment court system.
Furthermore, there have been some concerns voiced about the impact that the new Model BIT will have on the appointment of arbitrators and the quality of those arbitrators. The absence of party autonomy in the selection of arbitrators, in conjunction with the exclusion of active and experienced arbitrators, may result in a reduction in the number of arbitrators that are appointed, as well as a potential decrease in the quality of those arbitrators. In addition, the transition towards a centralized system for the appointment of arbitrators may result in a roster of semi-permanent arbitrators who have been pre-selected, which would restrict both diversity and variety of competence.
Author(s)
Shravin Relan
Student at JGLS, Sonipat