09.01.2023

The Chile-EU Advanced Framework Agreement (AFA) – Facilitating and Protecting EU In-vestments Relevant for Energy Transition and E-Mobility

Background

In mid-December 2022, the European Union (EU) and Chile have reached an agreement in principle on the modernisation of the 20-year-old EU-Chile Association Agreement. Chile is considered one of the major (future) markets for renewable energies, including green hydrogen. It has an estimated generation potential of 1,800 Gigawatt for renewable energy, exceeding domestic demand by more than 70 times, and pursues plans to establish a corridor for exporting green hydrogen to Europe. Chile is also the largest producer of lithium, a crucial element for electric cars and other batteries. The modernised trade deal, the Advanced Framework Agreement (AFA), is therefore expected to help the EU cut its dependency on Russian fossil fuels and Chinese imports. While the AFA may lower the investment protection standards for EU investors compared to existing agreements between Chile and individual EU member states, it importantly continues to provide for investment protection, including investor-state dispute settlement. This may gain relevance not only due to increasing investments but also in light of ongoing political transformation processes.

The Implementation of the New Agreement

Seeking to ensure a smooth implementation of the modernised agreement, the EU and Chile have agreed on a twofold structure: the AFA as such will encompass a political and cooperation pillar as well as a trade and Investment pillar, including procedural and substantive provisions for investment protection. In line with the European Court of Justice’s Singapore opinion, the AFA will need to be ratified as a mixed agreement, with the EU and all its Member States as signatories, since the EU does not hold the exclusive competence for all investment protection matters.

Next to the AFA, however, an Interim Free Trade Agreement (iFTA) shall be established, which is intended to cover only those parts of the AFA’s trade and investment pillar falling within the EU’s exclusive competence. This iFTA is intended to be adopted more quickly through the EU-only ratification process, and will expire once the AFA enters into force. Upon its entry into force, the AFA will then replace bilateral investment agreements between Chile and individual EU Member States. This will affect Chile’s agreements with France, Germany and the Belgian-Luxembourg Economic Union (BLEU), amongst others (see here).

Substantive Investment Protection under the AFA

The substantive and procedural provisions of the AFA’s investment protection chapter follows the model of other EU free trade and investment agreements, such as the Comprehensive Economic and Trade Agreement between the EU and Canada (CETA) and the EU’s investment protection agreements with Viet Nam and Singapore, as well as the agreement in principle on the modernised EU-Mexico Global Agreement.

In terms of substantive protections, while underscoring the parties’ right to regulate to achieve legitimate policy objectives (e.g. the protection of the environment or public health), Chile, the EU and its Member States commit themselves to the investment protection standards of fair and equitable treatment (FET) and full protection and security (FPS). In line with the EU’s practice so far, both standards have a restricted scope compared to traditional investment agreements. FPS is limited to physical security of investors and investments, whereas FET is narrowed down to the protection for investors from denial of justice, fundamental breaches of due process, manifest arbitrariness, targeted discrimination on manifestly wrongful grounds, and abusive treatment.

Additionally, the AFA provides for national treatment of EU investors in Chile as well as Chilean investors in the EU. Furthermore, the AFA permits direct and indirect expropriations only subject to compensation. In accordance with the trend to tie economic cooperation with commitments to human rights protection, the AFA permits any party to deny investment protection to investors violating or circumventing human rights.

The Investment Court System (ICS) and Its Procedure

On the procedural side, also similarly to previous EU agreements, the AFA establishes a two-tier investment court system (ICS). Its Tribunal and Appeal Tribunal will be composed of an equal number of independent Chilean and European appointees, as well as nationals of third states. In line with the EU Commission’s plans, the AFA further foresees that the EU and Chile shall cooperate toward the future establishment of a multilateral investment court systems, which may – once established – replace the individual court systems under the AFA, CETA and their like.

Likewise, the AFA follows the shift in investment dispute settlement towards wider transparency. It provides for the application of the UNCITRAL Transparency Rules in ICS proceedings as well as provisions on the intervention of non-disputing parties. Third-party funding must also be disclosed.

Conclusions

The often more pronounced differences between the political parties in Latin America, leading to more abrupt changes in government policy, have historically turned Latin America into the region with the highest number of investment disputes. In addition, investments in the energy sector frequently become adversely affected by government measures during their typically long lifetimes and investment-return cycles. This has been particularly true in recent years for investments in renewable energies in the EU, also evidencing that such protection is vital even in seemingly politically stable countries.

The number of investment arbitrations involving Chile has been low compared to its Latin American neighbors. Yet, given the experiences in the EU and Chile’s relevance for the energy transition – also in Europe – the continued protection of EU investors in Chile under the AFA can only be welcomed. Moreover, the AFA will even further broaden the investment treaty coverage between EU Member States and Chile. For instance, Dutch investors will – once ratified – benefit from the new system, while they presently cannot rely on an investment treaty for their activities in Chile.

Until the AFA’s entry into force, many EU investors will also remain protected by the existing bilateral investment treaties, typically offering even wider protections. The AFA’s ratification may well be a longer process, involving some still unresolved hurdles. For example, according to a recent judgment by the Irish Supreme Court, the ratification of CETA requires a referendum or a revision of the Irish Arbitration Act. EU Investors are therefore well advised not to wait for the AFA’s entry into force but to also consider already existing investment treaties to ensure that their (future or existing) investments in Chile are (fully) protected in case investment disputes arise in the future.

Autor/in
Tim Rauschning

Tim Rauschning
Counsel
Hamburg
tim.rauschning@luther-lawfirm.com
+49 40 18067 15999

Sebastian Wuschka LL.M. (Geneva MIDS)

Sebastian Wuschka LL.M. (Geneva MIDS)
Of Counsel
Hamburg
sebastian.wuschka@luther-lawfirm.com
+49 40 18067 12944