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IISD | 30 July 2018
The 2018 draft Dutch model BIT: A critical assessment
by Bart-Jaap Verbeek et Roeline Knottnerus
On May 16, 2018, the Dutch Ministry of Foreign Affairs published its new draft model bilateral investment treaty (BIT). The draft model, which remained available for public comment until June 18, 2018, is intended to replace the 2004 model BIT and be used for renegotiation of the 79 existing Dutch BITs with non-EU countries and negotiation of future agreements.
The idea of revising the model BIT dates back to early 2015 and forms part of a broader rethinking of trade and investment agreements by the Dutch government. Unfortunately, the long-awaited new model BIT continues to fall short of the promised “policy reset” that would put sustainable development first. Despite certain welcome improvements, the model generally misses a golden opportunity to break away from the current regime for treaty-based investment protection and to meaningfully address its systemic imbalances.
A recent report compiled by the Centre for Research on Multinational Corporations (SOMO), among others, found that 12 per cent of all publicly known investor–state dispute settlement (ISDS) cases are filed by investors who claim that the Netherlands is their home country, and that 17.5 per cent of the aggregate claim sums derives from allegedly Dutch investors, even though the Netherlands is party to only 3 per cent of all investment treaties. The report calculated that transnational corporations and other investors using the Netherlands as their home base have submitted investment claims amounting to USD 100 billion. This makes the Netherlands the second most popular home state—after the United States—in ISDS claims.
Only 13 per cent of these investors are in fact Dutch: 84 per cent of the claims come from non-Dutch companies and 3 per cent have an unknown origin. “Mailbox companies” with no substantial commercial or operational presence in the Netherlands have brought 77 per cent of all allegedly Dutch claims. The coverage of 90 investment treaties makes the Netherlands a highly attractive country for investors to set up a subsidiary, especially in combination with the attractive fiscal climate the country also offers.
In recent years, various countries have expressed their discontent with the Dutch approach after being hit by one or more ISDS claims brought under Dutch treaties. Bolivia, Ecuador, India, Indonesia, South Africa, Uganda and Venezuela even proceeded to unilaterally terminate their BITs with the Netherlands. Several of these countries have formulated forward-looking alternative approaches to investment protection, seeking to establish a better balance between the rights of multinationals and their social responsibility, including by setting specific requirements for investors to respect human rights and to contribute to the sustainable development of the host country and local communities.
A closer look at the new Dutch model BIT, however, shows that it largely failed to take a similar path. We now analyze some of the definitions and substantive rights granted to investors in the new Dutch model BIT, many of which emulate the EU approach taken in its recent treaties, notably the EU–Canada Comprehensive Economic and Trade Agreement (CETA).
1. Scope: narrower definition of investor, yet broadest possible definition of investment
In terms of covered investments, the draft model uses an illustrative list that covers not only any type of property or claims to money but also any contractual performance having an economic value, intellectual property rights, asset categories such as goodwill and know-how, and any rights granted under contract. Rights to prospect, explore, extract and exploit natural resources are explicitly mentioned as covered investments. There is no attempt to narrow the scope: the draft model continues to rely on the widest possible definition of investment that covers “every kind of asset” (Art. 1(a)).
Art. 1(b)(iii) requires legal persons to have “substantial business activities” in the territory of the home state. A footnote clarifies that indications of having substantial business activities include a registered office and administration, headquarters and management, an office, production facility or research laboratory, number of employees and turnover generated in the state. This marks a radical break away from existing Dutch treaty practice and is likely to limit the scope for abuse by mailbox companies. It remains to be seen how effective these requirements will be in the context of ISDS. The Netherlands boasts a thriving trust firm sector that may assist foreign shell companies in complying with the necessary substance requirements.
The model BIT lays down that states may deny benefits to an investor that has changed its corporate structure with a main purpose to submit a claim “at a point in time where a dispute had arisen or was foreseeable” (Art. 16(3)). It could however make more sense to treat the issue of corporate restructuring as a jurisdictional issue: if an investor changed its corporate structure in order to submit a claim, the tribunal would not have jurisdiction.
2. No affirmation of states’ duty to regulate—but at least a provision on the right to regulate
The new model BIT continues to leave it to arbitrators to determine, with wide discretion, whether a contested measure taken by a state Party falls within the definition of an action necessary to achieve legitimate policy objectives. It falls far short of Dutch civil society’s demand to affirm states’ duty to regulate in the public interest. However, the model BIT does seek to more effectively enshrine the right to regulate, by stating that “the mere fact that a Contracting Party regulates, including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectation of profits, is not a breach of an obligation under this Agreement” (Art. 2(2)).
3. Fair and equitable treatment broadened with “legitimate expectations” of the investor
The provisions on national treatment and most-favoured-nation (MFN) treatment, fair and equitable treatment (FET) and indirect expropriation largely follow the CETA text. Like CETA, Art. 9 allows arbitral tribunals to “take into account whether a Contracting Party made a specific representation to an investor to induce an investment that created a legitimate expectation,” which is problematic in that it gives broad discretion to tribunals. In addition, Art. 9(5) stipulates that “[w]hen a Contracting Party has entered into a written commitment with investors of the other Contracting Party regarding a specific investment, that Contracting Party shall not […] breach the said commitment through the exercise of governmental authority in a way that causes loss or damage to the investor or its investment.” This provision acts as an umbrella clause, elevating contractual obligations to the international level. The wording of the article accordingly broadens the already elusive understanding of what constitutes FET in customary international law.
4. Little ambition to promote sustainable development, no obligations on investors
The draft model requires investments to have certain characteristics, including a certain duration, a commitment of capital or other resources, the assumption of risk and the expectation of gain or profit. However, a contribution to the economic development of the host state, one of the Salini criteria, is notably missing. Parties merely commit to a best-efforts obligation to “strive to strengthen the promotion and facilitation of investments that contribute to sustainable development” through consultations and exchanges of information regarding investment opportunities (Art. 3(3)), without further clarification.
The article on sustainable development (Art. 6) is unjustifiably weak and lacking in ambition. It does mention the fundamental International Labour Organization (ILO) Conventions, the Universal Declaration of Human Rights and the Paris Agreement on climate change, but only states that Parties reaffirm their commitments under these agreements insofar as they are party to them (Art. 6.5), without requiring their ratification and implementation.
In fact, the only “hard” language in relation to sustainable development appears aimed at protecting economic rights and creating additional rights for investors against the state, rather than expressing an ambition to promote sustainability. Art. 6.4 reads: “A Contracting Party shall not adopt and apply domestic laws contributing to the objective of sustainable development in a manner that would constitute unjustifiable discrimination or a disguised restriction on trade.” Such phrasing is open to broad interpretation.
Like CETA, the new Dutch model BIT limits the scope of ISDS if the investment was “made through fraudulent misrepresentation, concealment, corruption, or similar bad faith conduct amounting to an abuse of process” (Art. 16(2)). This limit could and should have been extended to also include human rights obligations, labour and environmental standards, and responsible business conduct in line with climate change mitigation and adaptation objectives.
As to corporate social responsibility (CSR), in the new model the Parties merely reaffirm its importance by encouraging investors operating in the territory or subject to the jurisdiction of a Party to voluntarily incorporate into their internal policies those internationally recognized CSR standards, guidelines and principles that have been endorsed or are supported by that Party (Art. 7). Thus, the model fails not only to establish a binding obligation, but also to at least raise the bar by holding investors to the most stringent level of CSR applied in either Party.
A tribunal may, when determining compensation, take into account any investor non-compliance with the United Nations Guiding Principles on Business and Human Rights and the Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises (Art. 23). However, a potential reduction in compensation seems inadequate to address human rights violations. Moreover, the tribunal is not directed to take these issues into account; it is only permitted to do so.
5. Enhanced transparency, appointing authorities for arbitrators, no “double hatting”—but otherwise a traditional ISDS mechanism
The draft model provides investors with the possibility to bring ISDS claims for breach of the BIT’s core protection standards. It envisions the future establishment of a multilateral investment court (MIC) by providing that “the ISDS provisions will cease to apply upon the entry into force of an international agreement providing for a [MIC]” (Art. 15). Meanwhile, claims may be submitted only under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) (or the ICSID Additional Facility) or under the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) with the understanding that the Permanent Court of Arbitration (PCA) shall administer the proceedings (Art. 19(1)).
Most notably, the model departs from established ISDS approaches in that it provides for the three members of an arbitral tribunal to be appointed by an appointing authority—the ICSID Secretary-General for ICSID arbitrations or the PCA Secretary-General for UNCITRAL arbitrations (Art. 20). This would effectively put an end to the practice of the disputing parties in tribunals appointing arbitrators under new or renegotiated Dutch BITs. However, the selection of these two appointing authorities may not necessarily translate into a more diverse pool of arbitrators.
The UNCITRAL Transparency Rules are incorporated in Art. 20(11), and the new model text does seek to address the problem of “double hatting” by arbitrators, and the associated conflict of interest, by laying down that arbitrators may not have acted as legal counsel to the disputing parties in the previous five years. However, the model does not adopt the same approach as CETA, which also prohibits tribunal members from acting as party-appointed experts or witnesses in other investment disputes.
The draft model does not include a provision allowing states to bring counterclaims against investors based on international human rights or environmental obligations. Nor does the model allow affected third parties to join a case with full rights and on equal grounds with the main parties to the dispute. As such, ISDS remains based on the asymmetrical regime in which foreign investors are granted rights without accompanying enforceable obligations.
Where a growing number of countries and regions is focusing on binding obligations for investors, in the interest of sustainable development, the revised Dutch model BIT seems a missed opportunity to substantially narrow down treaty-based investment protection and achieve a better balance between the rights and obligations of foreign investors. The Dutch BIT disappoints, as the “trade policy reset” announced by the Ministry of Foreign Affairs had raised hopes for a much more innovative approach to expediting sustainable development.
Bart-Jaap Verbeek and Roeline Knottnerus are researchers at the Centre for Research on Multinational Corporations (SOMO), an independent and non-profit research organization based in Amsterdam, the Netherlands.
 Letter from the Minister of Foreign Trade and Development to the Chair of the House of Representatives, Kamerstuk 21 501-02, nr. 1481, Den Haag, April 9, 2015. Available at https://zoek.officielebekendmakingen.nl/kst-21501-02-1481.html
 Ploumen, L. (2016, September). The Netherlands: Reforming EU trade policy: Protection, not protectionism. (Non-paper). Retrieved from https://www.rijksoverheid.nl/onderwerpen/handelsverdragen-europese-unie/documenten/vergaderstukken/2016/09/01/reforming-eu-trade-policy-protection-not-protectionism
 Knottnerus, R., Van Os, R., Verbeek, B.-J., Dragstra, F., & Bersch, F. (2018, January 13). 50 jaar ISDS. Een mondiaal machtsmiddel voor multinationals gecreëerd en groot gemaakt door Nederland. Amsterdam: TNI, SOMO, BothEnds, Milieudefensie. Retrieved from https://www.somo.nl/nl/50-jaar-isds-een-mondiaal-machtmiddel-voor-multinationals
 Van Os, R. & Knottnerus, R. (2011, October). Dutch bilateral investment treaties: A gateway to “treaty shopping” for investment protection by multinational corporations. Amsterdam: SOMO. Retrieved from https://www.somo.nl/wp-content/uploads/2011/10/Dutch-Bilateral-Investment-Treaties.pdf; International Monetary Fund numbers show that the Netherlands is the world’s number one country in terms of investment flowing into the country and the world’s number two in terms of outward investment, ahead of much larger economies. See http://data.imf.org/?sk=40313609-F037-48C1-84B1-E1F1CE54D6D5&sId=1482247616261
 Parliamentary Enquiry on Fiscal Structures, (2017, June 5). Report of public hearings. Tweede Kamer, vergaderjaar 2016–2017, 34 566, nr. 4. Retrieved from https://www.tweedekamer.nl/kamerstukken/detail?id=2017D20244.
 Knottnerus, R., Van Os, R., Van der Pas, H., Vervest, P. (2015, January). Socialising losses, privatising gains. How Dutch investment treaties harm the public interest. Amsterdam: SOMO, BothEnds, Milieudefensie, TNI. Retrieved from https://www.somo.nl/wp-content/uploads/2015/01/Socialising-losses-privatising-gains.pdf.
 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, July 23, 2001, para. 52. Retrieved from https://www.italaw.com/sites/default/files/case-documents/ita0738.pdf
 See, for example, the 2016 BIT between Nigeria and Morocco: https://www.bilaterals.org/IMG/pdf/5409.pdf