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The Chile-Singapore Model

The model for investment used in the post-NAFTA bilateral agreements with Chile and Singapore goes further in expanding the scope of covered investments.  It makes international investment arbitration available to investors who claim breaches of individual “investment authorizations” and individual “investment agreements.”

This second category of “investment agreements” covers contracts and concessions between private investors and the government that relate to:

  • extraction of natural resources, such as oil, gas, and minerals;
  • infrastructure projects such as roads, ports, dams, and pipelines; and
  • public utilities, such as drinking water, wastewater, and electricity.  

Definition of investment.  The Chile and Singapore FTAs introduced a new and more complex definition of investment less closely tied to the concept of business enterprises that arguably might include public debt.  Also particularly noteworthy is an extension of coverage to include ” licenses, authorizations, permits, and other similar rights” provided that they create “rights protected under domestic law.”

Minimum Standard of Treatment Obligation.  The Chile and Singapore agreements contain new language regarding the 'MST' obligation.  It has become the model for subsequent agreements, including:

  • Clarification that "minimum standard of treatment" means the "customary international law minimum standard of treatment of aliens." 
  • A member-state’s breach of another provision of the FTA does not breach the minimum standard of treatment.  

This language, which parallels an official interpretation of NAFTA, is helpful in that it prevents WTO and other treaty law from being incorporated by reference under the minimum treatment standard.  Beyond that, the “customary international law standard” is uncertain and subject to multiple interpretations, again leaving arbitrators without adequate guidance.

The Chile/Singapore model also includes language further defining "fair and equitable treatment" as "including the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in legal systems around the world."

The Chile/Singapore “fair and equitable treatment” language codifies the finding in Loewen v. United States that the acts of state courts can be subject to review by international investment tribunals.  

Beyond that, the Chile/Singapore language establishes due process standards based on vague international norms, with no reference to any language that captures U.S. constitutional norms of substantive due process--as required by the 2002 Trade Act. What guidance do arbitrators get from wooly terms like “deny justice” and “due process embodied in legal systems around the world?”  

Compensation for expropriation obligation.  USTR argued that the post-NAFTA Chile/Singapore model clarifies the scope of "indirect expropriation."  Language in an Annex to the Chile and Singapore agreements instructs investment tribunals to apply a three-part “test,” derived from the U.S. Supreme Court’s decision in Penn Central Transportation Co. v. City of New York.  USTR's assumption is that this short-hand version of the Penn Central decision sufficiently encapsulates U.S. constitutional law for determining when a government action constitutes a compensable regulatory taking.

But the U.S. constitutional doctrine of regulatory takings is not that simple--or so heavily weighted in favor of property rights.  The Penn Central decision was a carefully-crafted decision with several moving pieces that relate to each one another in ways that are specific to the fact-pattern of the case.  Moreover, Penn Central was conducted in a dispute setting--the U.S. courts--that are very different from the setting of an international investor dispute panel.  Penn Central provides considerable deference to government regulatory authority.

The U.S. Supreme Court never intended for the Penn Central factors to be a test to be mechanically “applied”--which is what is suggested in the Chile/Singapore annex.   Taking the whole of the Penn Central opinion out of the context of U.S. regulatory taking doctrine and applying it in this very different legal setting is problematic.  Remember that successful regulatory takings claims in the United States are extremely rare.

The expropriation article and appendix in Chile/Singapore does make a marginal improvement on NAFTA’s expropriation article by limiting the scope of coverage to “a tangible or intangible property right or property interest in an investment.”  

Changes introduced in new FTAs with Latin American states gave further scope of rights to investors in major extractive-industry and infrastructure projects.

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