This article is an extract from The Investment Treaty Arbitration Review, 7th Edition. Click here for the full guide.
On 1 July 2020, with limited exceptions,2 the North American Free Trade Agreement (NAFTA) was terminated by the United States, Canada and Mexico and replaced by a tripartite agreement: Agreement between the United States of America, the United Mexican States, and Canada.3 The landscape of investment rights as related to investor-state dispute settlement (ISDS) among and between investors of each of the signatory states and these three countries shifted dramatically, and is still shifting today. Now more than ever, US, Canadian and Mexican investors should be aware of their rights under both NAFTA and the USMCA.
Part of the urgency stems from the expiry on 1 July 2023 of ISDS rights granted by the USMCA for 'legacy investments' under NAFTA. This date is particularly critical for Canadian investors in Mexico and the United States, and for US and Mexican investors in Canada, given that Canada has not consented to ISDS under the USMCA but did so under NAFTA. Investors with 'legacy investments' have already made use of this fade-out mechanism. In March 2021, a Canadian silver mining company filed a NAFTA claim against Mexico regarding retrospective tax liabilities amounting to more than US$500,000.4 On 9 February 2022, the Alberta Petroleum Marketing Commission filed a notice of intent to submit an arbitration claim under NAFTA for damages of at least C$1.3 billion in relation to US President Joe Biden's decision to revoke a permit for the Keystone XL pipeline.5 More activity of this nature may be expected in the coming months, leading up to the critical date of 1 July 2023.
Going forward, the tiered regime granted by the USMCA for Mexican and US investors will define disputes potentially suitable for investor-state arbitration as among investors from one of these two countries against the other country, respectively. Unlike under NAFTA, access to ISDS under the USMCA depends on the nature of the investment as well as how investment rights are granted: investors with 'covered government contracts' in 'covered sectors' are privileged over other investors, in terms of the substantive claims they may bring as well as the procedural requirements they face for the initiation of international arbitration.
In contrast to the deep and comprehensive commentary already spawned by the negotiation and enactment of the USMCA, this chapter focuses on what should be considered when assessing ISDS options under the USMCA, not only during the dispute resolution stage but also leading up to it. Section II traces the evolution from NAFTA to the USMCA; Section III discusses the substantive protections available under the USMCA; Section IV summarises the dispute settlement provisions under the USMCA, which impose different regimes based on the nationality of the investors as well as the type of investment; and Section V addresses dispute settlement mechanisms outside the USMCA as potential alternatives to investors.
II From NAFTA to the USMCA
NAFTA was a landmark in free trade agreements when it entered into force in January 1994. It liberalised trade and eliminated most tariffs among the United States, Canada and Mexico, thereby creating the world's largest free trade zone.6 The seed of NAFTA may be traced to the 1980s, when US President Ronald Reagan first raised the idea of having a free trade agreement with Mexico, an idea initially not welcomed by Mexico.7 In 1988, the United States and Canada entered into the Canada–US Free Trade Agreement, which came into effect in January 1989.8 Mexico later warmed to the idea of having a free trade agreement with the United States, which then Mexican President Carlos Salinas de Gortari requested in June 1990.9 In 1991, Canada joined negotiations for what ultimately became NAFTA to protect its interests under the Canada–US Free Trade Agreement.10 In the same year that the Treaty of Maastricht created the European Union (1992), NAFTA was signed by the United States, Mexico and Canada. All three nations ratified NAFTA in 1993. The agreement entered into force on 1 January 1994 and the Canada–US Free Trade Agreement then ceased to exist.11
In the United States, NAFTA was a truly bipartisan project, having been negotiated and first signed by the Republican President George H W Bush and then signed into law and implemented under the Democratic President William J Clinton. Time magazine termed NAFTA 'the biggest win of his presidency'.12 Under the administration of President Barack Obama, the terms of NAFTA were revisited and new terms were negotiated for three years, albeit under the umbrella of the Trans-Pacific Partnership (TPP), known as the 'centerpiece of U.S. President Barack Obama's strategic pivot to Asia', which involved 12 countries in the Pacific Rim (including the three NAFTA countries) and covered about 40 per cent of the global economy.13 On his first day in office after succeeding President Obama, President Donald J Trump signed an executive order removing the United States from the TPP.14 The TPP later evolved into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force in December 2018.15 Canada and Mexico are both members of the CPTPP, a significant consideration in terms of ISDS addressed in Section V, below.
President Trump famously called NAFTA 'perhaps the worst trade deal ever made'16 and renegotiated it in around two years.17 The product of this renegotiation, the USMCA, was signed by all three countries on 30 November 2018 and was thereafter ratified by Mexico in June 2019, the United States in early 2020 and Canada in March 2020. It entered into force on 1 July 2020.18
III Substantive protections under the USMCA
At times referred to as the new NAFTA, the USMCA significantly tightened substantive rights for US investors in Mexico that are neither parties to a 'covered government contract' nor operate in a 'covered sector'. Indeed, only certain parties with a covered government contract and that operate in a covered sector enjoy more robust investor protection in terms of both procedure and material claims.19
To qualify for the privileged group of investors, the investment must be in one of the following five covered sectors, as defined: (1) oil and gas activities that a national authority of either Canada or the United States controls, including 'exploration, extraction, refining, transportation, distribution, or sale'; (2) power generation services; (3) telecommunications services; (4) transportation services; and (5) 'ownership or management of roads, railways, bridges, or canals that are not for the exclusive or predominant use and benefit of the government' of the other party.20 The supply of power generation services, telecommunications services, and transportation services must be to the public, on behalf of either the US or Mexican government.21
Beyond the requirement of operating in a covered sector, a covered government contract is needed between a national authority of one party and the investors of another. The requirement of a contract is significant, as this would eliminate other right-granting instruments, such as permits, licences, certificates, approvals or judgments.22 The counterparty of the investor to such a contract is also important. The USMCA defines 'national authority' as an authority at the 'central level of government',23 which is further defined in Chapter 1, Section B as the federal level of governments for both the United States and Mexico. Presumably, then, an investor in the Metropolitan Transportation Authority (MTA) of the State of New York would not be able to access this privileged regime, even if it operates in the covered sector of transportation services, given that the MTA is owned by the State of New York and is not run by the federal government. Potential restrictions such as this should be considered and borne in mind.
On this note, the more robust substantive rights of investors with covered government contracts include a minimum standard of treatment, protection against indirect expropriation and transfer, and exemptions from the requirement of initiating court proceedings as a prerequisite for initiating investment arbitration. All other investors are subject to a less favourable regime and are only able to access the USMCA's ISDS system to enforce a limited number of claims based on violation of one or more of the following standards of investment protection: (1) national treatment; (2) most-favoured nation (MFN) treatment; or (3) direct expropriation; that is only after having first defended their claims in local courts as a prerequisite to initiating investment arbitration. Unless the investment is concerned with a covered sector, the grounds for investment claims that, statistically, are invoked most often – fair and equitable treatment itself and indirect expropriation – are not available to investors under the USMCA.
The USMCA especially elucidates language regarding national treatment and MFN treatment. In determining whether a foreign investor is afforded both national and MFN treatment, a 'like circumstances' analysis applies.24 Under Article 14.4, like circumstances will depend on 'the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives'.
The USMCA still requires that a host state provide a minimum standard of treatment to foreign investors, which includes fair and equitable treatment and full protection and security,25 but Article 14.6 of the USMCA defines the applicable standard of treatment for a covered investment as only the customary international law minimum standard of treatment of aliens. Article 14.6 further states that fair and equitable treatment and full protection and security provisions 'do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights'.26 The same provision does clarify that the mere fact of a party's action, or inaction, inconsistent with an investor's expectation, does not in and of itself constitute a breach of the standard, even if there is resulting loss or damage to the covered investment.27
With regard to protection from indirect expropriation, the USMCA entitles only investors with a qualifying government contract to benefit from the standard, and explicitly precludes indirect expropriation claims by all other investors.
The USMCA also now defines a list of acts that do not constitute indirect expropriation without defining what does.28 What constitutes indirect expropriation under the USMCA will thus have to be decided by judicial decision makers.
In summary, the USMCA significantly narrows the scope of possible arbitral claims on the basis of investments outside covered government contracts in the five enumerated covered sectors, as well as the protections such investors may seek.
IV Dispute settlement under the USMCA
Canada has not acceded to the ISDS provisions of the USMCA, Annex 14-E. Consequently, for Canadian investors in Mexico and the United States or else for Mexican and US investors in Canada, 1 July 2023 will be the last date to access ISDS with respect to legacy investments made under NAFTA, as addressed more comprehensively below.
The USMCA preserves a NAFTA-comparable ISDS regime only for US and Mexican investors in Mexico and the United States, respectively, specifically those that have a covered government contract in a covered sector. For these privileged investors, the shift from NAFTA to the USMCA is likely to be of lesser impact.
For all other US and Mexican investors in Mexico and the United States, respectively, ISDS will still be available but with narrower substantive rights and significant procedural prerequisites.
Section IV.i, below, discusses the legacy investment claims and pending claims, per Annex 14-C; Section IV.ii addresses Mexico–United States investment disputes relating to covered government contracts in covered sectors; and Section IV.iii discusses other Mexico–United States investment disputes, per Annex 14-D.29
i Legacy investment claims and pending claims
Per Annex 14-C, Section C, the USMCA affords 'legacy investments' access to the ISDS regime of NAFTA, Chapter 11 until 1 July 2023 (three years after what is considered the date of termination of NAFTA, i.e., 1 July 2020, the date on which the USMCA entered into force).30 To qualify as legacy investments, investments must be in existence as of 1 July 2020 and should have been made between 1 January 1994 and 1 July 2020.31 Under NAFTA Articles 1116(2) (for claims by an investor of a party on its own behalf) and 1117(2) (for claims by an investor of a party on behalf of an enterprise), not more than three years should have passed from the date on which the claimant had or should have had knowledge of the breach claimed.
The consent preserved in Annex 14-C relates to the 'submission of a claim to arbitration in accordance with Section B of Chapter 11 (Investment) of NAFTA 1994'. Before a claim may be submitted to arbitration, parties must undertake preliminary steps. Article 1118 of NAFTA requires that parties should first attempt to settle a claim through consultation or negotiation. Article 1119 of Section B of Chapter 11 of NAFTA requires that a notice of intention to submit a claim to arbitration be submitted at least 90 days before the claim is submitted. Working backwards from 1 July 2023, this means that notices of intention to submit a claim to arbitration must be submitted on or before 1 April 2023, an important date to be aware of lest qualifying investors unwittingly waive their right to arbitration by failing to fulfil this requirement.
Once initiated under the ISDS provisions of NAFTA, whether as a legacy investment after the entry into force of the USMCA32 or already initiated under NAFTA while still fully in force,33 pending claims will be allowed to continue under the NAFTA provisions.
ii Mexico–United States disputes regarding covered government contracts in covered sectors
As a starting point, the question of why investors are better protected under the ISDS provisions of the now terminated NAFTA rather than the USMCA must be asked. For Canadian investors in Mexico and the United States, and Mexican and US investors in Canada, the answer is clear: the USMCA does not contain Canada's consent to ISDS, albeit it does contain limited consent for legacy investments, as discussed above.34
But for US and Mexican investors in Mexico and the United States, respectively, the answer to this question depends on the nature of the investment as well as the instrument that grants them rights over the investments. Stated more directly, Mexican and US investors who have covered government contracts in covered sectors are still able to access similarly robust rights under the USMCA as under NAFTA.
Like other investors who do not have a covered government contract in a covered sector, and as already discussed above, US and Mexican investors are able to bring claims for direct expropriation and those arising from the breach of the national treatment and MFN treatment standards. But investors with privileged covered government contracts are also able to resort to ISDS for breach of the minimum standard of treatment, which includes the fair and equitable treatment and full protection and security standards, and protection against indirect expropriation. This amounts to substantially broader protection.
In addition, the aforementioned procedural hurdles that privileged investors with covered government contracts face in submitting a claim for arbitration also mirror those in NAFTA and are different from the heightened restrictions imposed by the USMCA for other investors, namely a cooling-off period of six months from 'the events giving rise to the claim'35 and a three-year limit from the date on which claimants should have acquired or did acquire knowledge of the breach for bringing claims.36 Unlike in NAFTA cases, however, there is no notice of intent that must be submitted 90 days prior to the submission for a claim to arbitration.
iii All other (non-privileged) Mexican–United States investment disputes
For all other Mexican and US investors in the respective other country, potential claims under the USMCA are now narrowed to (1) direct expropriation and (2) national treatment and MFN treatment (post-establishment only),37 and exclude any claims based on the breach of the minimum standard treatment and indirect expropriation.
The investor also must first resort to domestic remedies unless they would be 'obviously futile'.38 First, this requires the initiation of proceedings before a competent court or administrative tribunal of the respondent 'with respect to the measures alleged to constitute a breach' of national treatment, MFN treatment and expropriation,39 and second, a final decision from a 'court of last resort' or 30 months elapsing.40 A notice of intent must also be submitted at least 90 days before the claim is submitted to arbitration41 and the claim must be brought within four years of the date on which the claimant first acquired or should have acquired knowledge of the breach to bring claims.42
These time frames must be read together. The outer limit of four years within which prospective claimants should bring their claims to arbitration already includes the 30 months that should be spent fulfilling the local litigation requirement, unless a decision from a final court may be obtained sooner. This effectively leaves only 18 months for the filing of an ISDS claim, which would include all the prerequisites thereunder.
The USMCA also contains two fork-in-the-road provisions to be considered. The first is the general fork-in-the-road provision by which claimants must submit a written waiver of the right to initiate or continue before any court or administrative tribunal, or any other dispute settlement procedures, any proceeding 'with respect to any measure alleged to constitute a breach' of the arbitration claim.43 Prospective claimants may initiate interim injunctive relief actions but only to preserve rights and interests during the pendency of the arbitration.44 The second is the asymmetrical fork-in-the-road provision for US investors. Annex 14-D, Appendix 3 states that:
An investor of the United States may not submit to arbitration a claim that Mexico has breached an obligation under this Chapter . . . if the investor or the enterprise, respectively, has alleged that breach of an obligation under this Chapter, as distinguished from breach of other obligations under Mexican law, in proceedings before a court or administrative tribunal of Mexico.
The potential rationale for the asymmetry is that in Mexico, international treaties automatically become part of domestic law, which means investors have a direct cause of action relating to USMCA claims.45 This is not the same for the United States. The (in)consistency of this requirement with that of first resorting to local litigation will surely be an issue to be interpreted by arbitral tribunals.
V Alternative to the USMCA and NAFTA
Foreign investors not party to a covered government contract under the USMCA could, nonetheless, still put their claims forward by the investor's home country by virtue of the treaty's state-to-state dispute resolution system,46 if they are able to elevate the dispute to a diplomatic level.
All other investors not party to a 'covered government contract' who cannot avail themselves of the benefits of the ISDS system under the USMCA, or are unable to file a claim under NAFTA before those claims become unavailable, may also want to consider alternative avenues to enhance their protection. Restructuring their investment to optimise international investment agreement access may be an option.47 However, when resorting to alternative IIAs, investors should bear in mind the importance of the objective and timing of the restructuring (i.e., whether the restructuring was effectuated before or after the dispute arose), and whether the dispute was foreseeable to the investor at the time of the restructuring.48
In addition, for Canadian investors, protection under the CPTPP can be considered.49 Although some CPTPP provisions were suspended, which limits potential claims under its Chapter 9, a Canadian investor in Mexico could still invoke the following substantive rights:
- national treatment;
- MFN treatment;
- the minimum standard of treatment, including fair and equitable treatment and full protection and security;
- both direct and indirect expropriation; and
- non-discriminatory treatment in the event of armed conflict or civil strife.
Notably, the protections granted to Canadian investors in Mexico under the CPTPP contain certain limitations concerning the types of disputes that can be pursued under the treaty. Mexico has carved out its consent to ISDS with respect to government contracts for the development of infrastructure in the country. Alleged violations of foreign investment protections by Mexican courts cannot be claimed in CPTPP-based ISDS proceedings either.
When the USMCA replaced NAFTA, the investment landscape for US, Canadian and Mexican investors in the foreign territories of the United States, Canada or Mexico, as the case may be, shifted dramatically. Although NAFTA has already been terminated, foreign investors may still be able to avail of the more favourable ISDS regime thereunder by filing for arbitration on or before 1 July 2023, and prerequisite action needs to be taken by no later than 1 April 2023. For US investors in Mexico and Mexican investors in the United States who have a covered government contract and operate in a covered sector, the ISDS that they enjoy is privileged and remains largely as before. This is not the case for investors that do not fall under this category. All investors should assess their rights under the USMCA, also taking into account options outside the USMCA that may best enable them to protect their rights robustly.