This article is an extract from TLR The Investment Treaty Arbitration Review - Edition 8. Click here for the full guide.

I Introduction

On 1 July 2020, the North American Free Trade Agreement (NAFTA) was replaced by another tripartite agreement: the Agreement between the United States of America, the United Mexican States and Canada (USMCA).2 While NAFTA may have been terminated, its investor-state dispute settlement (ISDS) regime continues to define disputes today. Up until 1 July 2023, the USMCA preserved ISDS rights for legacy investments under NAFTA. Necessitating this preservation of rights was the radical overhaul of the ISDS regime under the USMCA. The significant tightening of the substantive rights for US investors in Mexico and Mexican investors in the United States, especially those who are not parties to a covered government contract, and Canada's blanket exclusion from the ISDS mechanism, count among the disadvantages of the USMCA compared to NAFTA.

Closing the chapter on the saga that began with the negotiation and enactment of the USMCA and provoked comprehensive commentary from the political, legal and economic fields, this chapter focuses on the ISDS of the legacy investments under NAFTA's 'sunset provision'. The legal issues arising from the ISDS of legacy investments may shed light not only on NAFTA but also on its successor treaty, the USMCA.

Section II sets the backdrop of this analysis by providing a brief overview of the trajectory from NAFTA to the USMCA. Section III provides a survey of claims brought under the sunset period of NAFTA, encompassing a description of the substantive ISDS protections under the USMCA, an explanation of the access of legacy investments to ISDS under NAFTA, an account of the new claims brought and an analysis of issues that are specific to NAFTA. Section IV provides alternatives for US, Mexican and Canadian investors to consider.

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. The origins of NAFTA may be traced to the 1980s, when then US President Ronald Reagan first raised the idea of having a free trade agreement with Mexico, an idea initially not welcomed by Mexico.3 In 1988, the United States and Canada entered into the Canada–US Free Trade Agreement (FTA), which came into effect in January 1989.4 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 1990.5 In 1991, Canada joined negotiations for what ultimately became NAFTA to protect its interests under the Canada–US FTA.6 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 FTA then ceased to exist.7

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'.8

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.9

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.10 The TPP later evolved into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force in December 2018.11 Canada and Mexico are both members of the CPTPP, a significant consideration in terms of ISDS as addressed in Section IV, below.

President Trump famously called NAFTA 'perhaps the worst trade deal ever made'12 and renegotiated it in around two years.13 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 2020.14

III Survey of claims brought under the sunset period

i Substantive protections under the USMCA compared to NAFTA

The starting point is the question of why investors were better protected under the ISDS provisions of NAFTA rather than the USMCA. 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.15 Canada has not acceded to the ISDS provisions of Annex 14-E of the USMCA. Beyond this, 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.

Stated differently, 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, effectively reserving for only certain parties with a covered government contract and that operate in a covered sector the more robust investor protections in terms of both procedure and material claims that all investors enjoyed under NAFTA.16

Just as in NAFTA, the more robust substantive rights of investors with covered government contracts under the USMCA 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. Unlike in NAFTA, 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 the violation of one or more of the following standards of investment protection: national treatment, most-favoured nation (MFN) treatment or 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 and indirect expropriation – are not available to investors under the USMCA.

To join 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 Mexico 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.17

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.18

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 eliminates other right-granting instruments, such as permits, licences, certificates, approvals or judgments.19 The counterparty of the investor to the contract is also important. The USMCA defines 'national authority' as an authority at the 'central level of government',20 which is further defined in Chapter 1, Section B as the federal level of government for both the United States and Mexico.

Moreover, 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.21 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,22 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 the 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'.23 The same provision clarifies 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.24

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 defines a list of acts that do not constitute indirect expropriation without defining what does.25 What constitutes indirect expropriation under the USMCA will, therefore, have to be decided by judicial decision makers.

In addition, the aforementioned procedural hurdles that privileged investors with covered government contracts face in submitting a claim to arbitration 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'26 and a three-year limit from the date on which claimants should have acquired or did acquire knowledge of the breach for bringing claims.27 Unlike in NAFTA cases, however, there is no notice of intent that must be submitted 90 days prior to the submission of a claim to arbitration.

In sum, 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 the investors may seek. For investors who do not have a covered government contract in a covered sector, US and Mexican investors are only able to bring claims for direct expropriation and those arising from the breach of the national treatment and MFN treatment standards; however, 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. Mexican and US investors who have covered government contracts in covered sectors are still able to access similarly robust investment protection rights under the USMCA as under NAFTA. For all other investors, NAFTA offered far more favourable ISDS protection.

ii Legacy investments

Under Annex 14-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)).28 To qualify as legacy investments, investments must have been in existence as of 1 July 2020 and should have been made between 1 January 1994 and 1 July 2020.29 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 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 have been submitted on or before 1 April 2023. The last working day preceding 90 days before 1 July 2023 is 31 March 2023.

Once initiated under the ISDS provisions of NAFTA, whether as a legacy investment after the entry into force of the USMCA30 or already initiated under NAFTA while still fully in force,31 pending claims will be allowed to continue under the NAFTA provisions.

iii Roster of new claims

To date, there have been over 79 claims under NAFTA. At least 31 NAFTA claims have been filed against Canada, 29 against Mexico and 19 against the United States.32 After NAFTA was officially terminated on 1 July 2020, until the expiration of its sunset period on 1 July 2023, a number of investors with legacy investments have filed claims, or put the host state on notice of their intention to file claims, to preserve their rights under the terminated treaty. This section provides an overview of NAFTA claims filed under the legacy provision of the USMCA over the past three years.

Among the three parties to the treaty, Mexico has seen the most claims filed by US and Canadian investors (six in total) and has received at least two more notices of dispute.33 The claims emerge mainly out of the oil and gas34 and transportation35 sectors, with two claims relating to the telecommunications and agriculture sectors.36

In March 2021, a Canadian silver mining company, First Majestic Silver Corp, filed a NAFTA legacy claim against Mexico over retrospective tax liabilities amounting to over US$500,000.37 The Canadian investor alleged that the Mexican government violated the following investment protections under the treaty: national treatment, MFN treatment, fair and equitable treatment and indirect expropriation. The case is currently pending before an International Centre for Settlement of Investment Disputes (ICSID) tribunal.38

Only two months later, a US investor, Finley Resources Inc, and its two affiliated companies, MWS Management Inc and Prize Permanent Holdings, LLC, filed a second legacy claim, and the first NAFTA energy claim, against Mexico.39 The Texas-based Finley Resources contracted with the Mexican state-owned company Pemex after Mexico opened its upstream oil and gas sector to foreign investors in 2013. It was involved in upstream oil and gas operations in Mexico until 2018, when the government started introducing restrictions on foreign investment. In the case pending before an ICSID tribunal, the claimants allege that the Mexican government acted in violation of national treatment and fair and equitable treatment.40

In November 2021, another US investor launched a NAFTA legacy claim against Mexico over the cancellation of a concession for the replacement and maintenance of taximeters in Mexico City. In March 2022, the case was consolidated with the Espíritu Santo Holdings, LP v. United Mexican States (ESH) case and subsequently discontinued.41 L1bre Holding's legacy claims, which will now be heard by the ESH tribunal, essentially mirror the ESH's claims and revolve over the following treaty breaches, resulting from the cancellation of the concession: national treatment, MFN treatment, fair and equitable treatment and indirect expropriation.42

This case also raised interesting questions relating to provisional measures. The claimants applied for provisional measures seeking protection from domestic criminal proceedings that were lodged by the Mexican government against two of their corporate representatives and fact witnesses in the arbitration proceedings – allegedly in retaliation for ICSID proceedings. The claimants requested an order directing Mexico to stay the criminal proceedings, end the detention of one of the witnesses and refrain from initiating additional proceedings. The tribunal held that an 'exceptionally high standard' needed to be met for an ICSID tribunal to enjoin domestic criminal proceedings. And while the tribunal found that it had the power to order or recommend provisional measures, it ultimately concluded that the claimants failed to prove that the criminal proceedings had been lodged in retaliation for the ICSID arbitration or to prevent individuals from testifying in the arbitration, thus failing to meet this high standard.43

In September 2022, a US-based company, Doups Holdings LLC, launched the fourth NAFTA legacy claim against Mexico.44 The claim was filed over the Mexican government's revocation of two concession contracts related to metered parking systems in Mexico City. Invoking the protection under the ISDS provisions of NAFTA via Annex 14-C of the USMCA, the claimant alleges the following treaty breaches: national treatment, MFN treatment, fair and equitable treatment, and indirect expropriation.

In early 2023, Mexico faced two more NAFTA legacy claims, in the oil and gas and transportation sectors, respectively. In Goldgroup Resources, Inc. v. United Mexican States,45 a Canadian gold mining company filed a NAFTA legacy claim in connection with its legal dispute against DynaResource (a Mexican company through which it held interest in Mexican gold mining projects) in the Mexican court. In its request for arbitration, Goldgroup Resources alleged that the Mexican litigation lasted for over 10 years, without relief, and that the treatment and inaction by the Mexican courts have resulted in a judicial expropriation of its subsidiary's investment in DynaResource and a denial of justice in breach of Mexico's obligations under NAFTA.46

In March 2023,47 the US-based Sepadeve International launched an ICSID arbitration over the Mexican government's alleged failure to respond to its request for a transition of its temporary administrative permits to permanent vehicle parking concessions on public streets. The claimant alleges that the government violated the MFN principle under NAFTA, which requires the Mexican state to treat investors fairly and equitably.48

In the latest NAFTA legacy claim against Mexico,49 the US-based Access Business Group (ABG) lodged a US$3 billion arbitration claim against Mexico over an alleged wrongful seizure of the company's agricultural land in the Mexican state of Jalisco. According to the notice of intent, Mexico indirectly expropriated ABG's land because of a need to convey the land to the alleged beneficiaries of the presidential resolution issued in 1939.50

Canada, on the other hand, has faced two NAFTA legacy claims to date. In December 2020, two US investors launched claims against Canada over the 2018 cancellation of an emissions trading programme (as part of which the claimants reportedly bought emission allowances of US$30 million) by the Canadian province of Ontario, allegedly acting in violation of fair and equitable treatment, and both directly and indirectly expropriating the claimants' investment.51

In the latest oil and gas NAFTA legacy claim, the US-based Ruby River Capital launched a US$20 billion claim against Canada over a failed liquefied natural gas and gas pipeline project.52 The claim arose out of the denial of environmental permits for the project, which effectively brought the project to a halt. The claimant alleges that Canada breached NAFTA's provisions on minimum standard of treatment, national treatment, MFN treatment and expropriation.

However, perhaps the most notable case to date is the over-US$1 billion NAFTA legacy claim launched by the Alberta Petroleum Marketing Commission against the United States in connection with US President Joe Biden's 2021 Order revoking a 2019 presidential permit to construct the Keystone XL Pipeline.53 The Canadian investors' claims – which raise specific questions on the interpretation and scope of application of NAFTA and which will be addressed in the next section – invoke the following treaty violations: national treatment, MFN treatment, fair and equitable treatment, full protection and security, and indirect expropriation.

iv Analysis of the issues that are specific to NAFTA and USMCA claims

The past three years have seen a rush of NAFTA legacy claims. As anticipated, investors that would either have a lower degree of protection under the USMCA, or no protection at all, have taken advantage of the sunset provision to bring a NAFTA legacy claim – something they otherwise would have been unable to do under the USMCA.

Of all the legacy claims brought in the course of the past three years, two are particularly noteworthy as they raise specific interpretative questions of NAFTA.

First, in Koch Industries v. Canada, the parties, and the United States as a non-disputing party, presented opposing views on a number of issues, including the following NAFTA-specific issues:

  1. the interpretation of the definition of investment under Article 1139 of NAFTA;
  2. the interpretation of Articles 1116 and 1117 of NAFTA, in the context of claims for indirect losses; and
  3. the scope of the minimum standard of treatment under NAFTA.

While the claimants argue that the emission allowances54 fulfil the requirements under Articles 1139(g) and 1139(h) of NAFTA to constitute a qualifying investment, Canada disputes both the existence of a qualifying investment, as well as the fact that the claimant has made a prima facie damages claim under Article 1116 of NAFTA.55 The interpretation of the minimum standard of treatment under the treaty is yet another NAFTA-specific contentious question between the parties. While Canada contends that the minimum standard of treatment under NAFTA establishes a very high threshold, the claimants argue that the standard includes elements such as 'denial of justice, a fundamental breach of due process, manifest arbitrariness, targeted discrimination, or the abusive treatment of investors'.56 The United States, which has been invited to submit its views as a non-disputing party, took the position that NAFTA provides an 'exhaustive, not illustrative, list of what constitutes an investment' and that the customary international law minimum standard of treatment does not encompass discrimination.57 With respect to claims for damages, the United States took the view that an investor may only recover damages under Article 1116 of NAFTA if it is able to show proximate causation. The matter is in its early procedural stages, and it is yet to be seen how the tribunal will rule on these questions.

Second, TC Energy Corporation and TransCanada Pipelines Limited v. United States of America raised a question relating to the scope of application of the NAFTA legacy provision. More specifically, the respondent claims that the NAFTA legacy provision contained in Annex 14-C of the USMCA only applies to claims arising out of facts that predate NAFTA's termination in 2020 and, since the claimants' claim relates to the cancellation of the Keystone XL Pipeline project in early 2021, the claimants are not entitled to rely on NAFTA's substantive standards of protection via legacy clause.58 In its observations to the respondent's request for bifurcation, the claimants allege that the interpretation advanced by the respondent is supported neither by the USMCA text, nor by the context of the relevant provision, and that the respondent is trying to 'game the system'.59

With both cases currently pending before ICSID tribunals, once resolved, the decisions could prove to be a helpful guide in any forthcoming NAFTA legacy claims.

IV Alternative to the USMCA and NAFTA

Foreign investors that missed the three-year window to file a NAFTA legacy claim and that are not party to a covered government contract under the USMCA can still advance their claims through the USMCA's state-to-state dispute resolution system60 if they are able to elevate the dispute to a diplomatic level.

Chapter 31 of the USMCA provides for state-to-state dispute resolution and is especially amenable to this route. This was seen in January 2023, when the United States established a dispute settlement panel regarding Canada's dairy tariff-rate quota allocation measures and in July 2022, when the United States requested USMCA dispute settlement consultations with Mexico concerning certain measures by Mexico that undermine US companies and US-produced energy in favour of Mexico's state-owned electrical utility, CFE, and state-owned oil and gas company, PEMEX.

All other investors that are not party to a covered government contract and that cannot avail themselves of the benefits of the ISDS system under the USMCA may also want to consider alternative avenues to enhance their protection. Restructuring their investment to optimise international investment agreement access may be an option.61

However, when resorting to alternative international investment agreements, 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.

In addition, for Canadian investors, protection under the CPTPP can be considered.62 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:

  1. national treatment;
  2. MFN treatment;
  3. the minimum standard of treatment, including fair and equitable treatment and full protection and security;
  4. both direct and indirect expropriation; and
  5. non-discriminatory treatment in the event of armed conflict or civil strife.

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.

V Conclusion

While NAFTA was replaced with the USMCA on 1 July 2020, its ISDS regime remained accessible under strict conditions for three years thereafter, and the effects of that accessibility are before us today. While in their nascent stages, some of the disputes brought under the sunset period of NAFTA raise interesting questions under that treaty that may still be relevant for better understanding of its successor treaty, the USMCA and the political issues underlying the same.