United States: NAFTA 2.0 - Investment Protection And Dispute Settlement Under Chapter 14 Of The United States-Mexico-Canada Agreement

After more than a year of sometimes contentious negotiations, the United States, Mexico, and Canada reached an agreement on September 30 to revise the North American Free Trade Agreement (NAFTA)—renaming it the United States-Mexico-Canada Agreement (USMCA). Although the substantive protections for foreign investment in Chapter 14 of the USMCA largely track those in Chapter 11 of the NAFTA, the scope of investor-State dispute settlement is drastically reduced. These changes appear to reflect the Trump Administration's broader skepticism of international dispute resolution mechanisms. Moreover, in a significant departure from the NAFTA, Canada has not signed on to the investment arbitration mechanism. This means that U.S. and Mexican investors cannot bring claims against Canada under the USMCA, nor can Canadian investors bring such claims against Mexico or the United States.

Changes to Investment Protections

There are three changes of potential importance to the substantive investment protections in Chapter 14 of the USMCA, as compared to Chapter 11 of the NAFTA: (i) the definition of investment in Article 14.1; (ii) the definition of claimant under Article 1 of Annex 14-D; and (iii) the provision on the minimum standard of treatment for investments in Article 14.6.

Under Article 1139 of the NAFTA, "investment" is defined by a closed list of examples that include "an enterprise," "real estate or other property, tangible or intangible," and certain kinds of contracts. In contrast, Article 14.1 of the USMCA—like other recent U.S. free trade agreements—defines investment in a manner more typical of investment treaties, as "every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk." This more general definition is then followed by an open list of examples, with an express exclusion only for "an order or judgment entered in a judicial or administrative action" and "claims to money that arise solely from commercial contracts for the sale of goods or services" and related extensions of credit. It remains to be seen whether this potentially more expansive definition of investment will be interpreted in a materially different way than Article 1139 of the NAFTA.

Under Article 1 of Annex 14-D of the USMCA, "claimant" is defined as "an investor of an Annex Party [i.e., the United States or Mexico], excluding an investor that is owned or controlled by a person of a non-Annex Party that the other Annex Party considers to be a non-market economy, that is a party to a qualifying investment dispute." This restriction on U.S. or Mexican claimants owned or controlled by a national or enterprise of a non-market economy is new compared to the NAFTA and appears to be directed at Chinese-owned or -controlled investments in the United States and Mexico. While both the NAFTA (in Article 1113) and the USMCA (in Article 14.14) already contain denial of benefits clauses, those clauses only allow a respondent State to deny the benefits of the investment chapter—including access to investor-State arbitration—to an enterprise of another Party that is owned or controlled by third-State nationals and that has no substantial business activities in the territory of the Party in which it is incorporated. The new exclusion for U.S. or Mexican claimants owned or controlled by a national or enterprise of a non-market economy is broader because it excludes a would-be claimant from arbitration even where the U.S. or Mexican company engages in substantial business activities in its State of incorporation.

Finally, Article 14.6 of the USMCA requires the Contracting Parties to "accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security." This language is almost identical to that found in Article 1105(1) of the NAFTA. The USMCA, however, also incorporates the clarification in the NAFTA Free Trade Commission's July 31, 2001, statement to the effect that the treatment required is limited to the customary international law minimum standard of treatment. Article 14.6 of the USMCA goes further than the FTC's statement by providing that "the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor's expectations does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result." This new provision, at Article 14.6.4, appears directed at recent NAFTA awards relying on the respondent State's frustration of an investor's legitimate expectations about the stability of the regulatory environment in finding a violation of the minimum standard of treatment in Article 1105(1). The language in Article 14.6.4 codifies the litigation position of the NAFTA Parties in responding to these claims and may further constrain tribunals' interpretation of the scope of the minimum standard of treatment.

Changes in Dispute Settlement

Turning to dispute settlement, the most significant changes to Chapter 14 of the USMCA in comparison to the NAFTA relate to the investment arbitration mechanism as laid out in Annexes 14-C, -D, and -E. Perhaps the biggest change, noted above, is that Canada has not signed on to Annexes 14-D and -E. As a result, other than for Legacy Claims under Annex 14-C (discussed below), U.S. and Mexican investors cannot bring arbitration claims against Canada under the USMCA, nor can Canadian investors bring such claims against the United States or Mexico. (Canadian investors in Mexico and Mexican investors in Canada will, however, have access to investment arbitration under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership once it enters into force.) There are also numerous changes to the investment arbitration regime for claims against Mexico (by U.S. investors) or the United States (by Mexican investors).

The Annexes to Chapter 14 of the USMCA create three categories of claims:

  1. Legacy Claims. Investment arbitrations that are ongoing under the NAFTA may continue (Annex 14-C, paragraph 5). In addition, investors that have made investments covered by the NAFTA before it is terminated have three years from the date of termination of the NAFTA in which they can bring a claim under the provisions of the NAFTA (Annex 14-C, paragraphs 1, 3, and 4). This is important because investment arbitration under the USMCA is significantly more limited than under the NAFTA, as discussed below. Those U.S. or Mexican investors that are eligible to submit claims under Annex 14-E, however, must use that mechanism even if they would otherwise qualify for arbitration under the NAFTA (Annex 14-C, footnote 21).
  2. Mexico-United States Investment Disputes. The majority of claims under the USMCA will likely arise under Annex 14-D. The arbitration mechanism in Annex 14-D is similar to that in Section B of NAFTA Chapter 11, but there are some key differences. First, the substantive basis for investment claims under Annex 14-D of the USMCA is limited. Most importantly, an investor cannot bring a claim for breach of the minimum standard of treatment in Article 14.6 or for indirect expropriation under Article 14.8 (Annex 14-D, Article 3). Given that these have been the two most-often used bases for claims under the NAFTA, their exclusion from the arbitration mechanism under Annex 14-D makes the protections under the USMCA of significantly less value to investors than the protections that are currently available under the NAFTA. Claimants under Annex 14-D can only bring claims for certain kinds of national treatment and most-favored-nation treatment (MFN) violations and for direct expropriations (Annex 14-D, Article 3). National treatment and MFN claims related to the establishment or acquisition of an investment are also excluded; a claimant is therefore limited to claims alleging discrimination with respect to the "expansion, management, conduct, operation, and sale or other disposition of investments" (Articles 14.4 and 14.5). Moreover, a claimant may not use the MFN clause to seek to incorporate more favorable substantive protections from other investment treaties to which the United States or Mexico is a party (Annex 14-D, footnote 22).1

    Second, in contrast to the NAFTA (and most other investment treaties), the USMCA requires that a would-be claimant first litigate the challenged measure "before a competent court or administrative tribunal of the respondent" (Annex 14-D, Article 5). The claimant must litigate until it receives a "final decision from a court of last resort" or 30 months have passed from the date the local court proceedings were initiated. This time counts against the four-year statute of limitations for claims under Annex 14-D. Moreover, if U.S. investors in Mexico allege a breach of the USMCA itself (as opposed to a breach of Mexican law) in the local court proceedings, this will bar any subsequent investment arbitration (Annex 14-D, Appendix 3). There is an exception to this local litigation requirement "to the extent recourse to domestic remedies was obviously futile or manifestly ineffective" (Annex 14-D, footnote 24).

    Third, there are some procedural innovations in the USMCA compared to the NAFTA. For example, if the disputing parties fail to agree on a place of arbitration, the tribunal may choose a place of arbitration in any State party to the New York Convention (Annex 14-D, Article 7.1). The NAFTA, in contrast, limits the tribunal to a place of arbitration within the NAFTA States (Article 1130). This change may be due to the fact that the limitation of investment arbitration to two States, rather than three, means that there is no "neutral" third State party to the treaty in which an arbitration can be seated. The USMCA also establishes a mechanism for the expedited consideration of jurisdictional objections and objections that a claim is manifestly without legal merit (Annex 14-D, Articles 7.4 and 7.5), along the lines of the mechanism in Article 10.20 of the CAFTA-DR. Unusually, the USMCA provides the disputing parties a right to review and comment on a draft of the award before it is issued (Annex 14-D, Article 7.12).

    In addition to transparency provisions ensuring the publication of arbitration-related documents and access to hearings (Annex 14-D, Article 8) and permitting amicus participation (Annex 14-D, Article 7.3), the USMCA also imposes certain ethical obligations on arbitrators (Annex 14-D, Article 6.5). Specifically, arbitrators must comply with the International Bar Association Guidelines on Conflicts of Interest in International Arbitration and refrain from taking instructions from any organization or government regarding the dispute. The USMCA also prevents "double-hatting" by requiring arbitrators to "refrain, for the duration of the proceedings, from acting as counsel or as party-appointed expert or witness in any pending arbitration under the annexes to this Chapter." These obligations can be seen as a response to criticisms that arbitrators in investment disputes currently lack sufficient independence.
  3. Mexico-United States Investment Disputes Related to Covered Government Contracts. In contrast to the limited set of claims available under Annex 14-D, Annex 14-E allows investment arbitration for alleged breaches of any of the substantive protections in Chapter 14 (including indirect expropriation and violation of the minimum standard of treatment) for disputes related to covered government contracts. Annex 14-E does not include the pre-arbitration local litigation requirement that applies to U.S. and Mexican claimants under Annex 14-D.

    Covered government contracts are limited to written agreements between an investor or investment and a "national authority" of the respondent State related to certain sectors, which the investor relied on in making its investment. The covered sectors are oil and gas, power generation, telecommunications, transportation, and ownership or management of infrastructure. This provision appears intended to provide additional protections to U.S. investors, especially in the oil and gas sector, that have entered into contracts with Mexican national authorities.

    Certain caveats apply even to arbitration under Annex 14-E. Claimants must wait at least six months from the events giving rise to the claim before initiating arbitration (Annex 14-E, paragraph 4). There is also a three-year statute of limitations for claims (Annex 14-E, paragraph 4). The respondent State must be a party to at least one other "international trade or investment agreement that permits investors to initiate dispute settlement procedures to resolve an investment dispute with a government" (Annex 14-E, paragraph 2(a)(i)(B)). And the United States and Mexico expressly retain the right to "modify or eliminate this Annex" (Annex 14-E, paragraph 5).

Conclusion

The investment arbitration provisions in the USMCA represent a significant departure from the NAFTA. U.S. and Mexican investors in Canada cannot bring claims against Canada under the USMCA, nor can Canadian investors bring such claims against the United States or Mexico. U.S. and Mexican claimants will have fewer potential bases for a claim (except where they are relying on a government contract in a covered sector) and will have to undertake potentially onerous domestic litigation before initiating arbitration.

The USMCA still has to clear major hurdles, as the United States, Canada, and Mexico must each ratify the agreement in their domestic legal systems before it can enter into force. In the United States, that will require Congress to pass implementing legislation. The timing of a Congressional vote is uncertain as of this writing. Nevertheless, in light of these possible changes, investors with potential claims may choose to consider initiating a claim under the NAFTA while it is still in force or during the three-year sunset period under the USMCA, rather than waiting until a later time when they may be limited to bringing claims under Annex 14-D of the USMCA. More generally, going forward, U.S. investors may have to consider other potential means of protecting their investments in Canada and Mexico beyond investment arbitration under the USMCA.

Footnote

1. A U.S. or Mexican investor can also use this mechanism to bring an investment arbitration claim under Chapter 17 on Financial Services, subject to similar limitations on the type of claims available (Chapter 17, Annex 17-C, paragraph 2). There are, however, some differences in the procedures that a would-be claimant must follow.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions