The "New NAFTA" And Its Revised Dispute Resolution Mechanisms - Arbitration & Dispute Resolution

Ending with final bilateral negotiations between the US president and the Canadian prime minister that concluded September 30, the United States, Canada and Mexico have reached agreement on a revised version of the 1994 North American Free Trade Agreement ("NAFTA"). Implementation of the newly negotiated US-Mexico-Canada Agreement ("USMCA") is pending ratification by all three countries' legislators. Well beyond its new name, the revised agreement includes a number of changes to applicable dispute resolution mechanisms, especially where Investor State Dispute Settlement ("ISDS") is concerned. Below is a summary of major highlights.

No US-Canada ISDS Arbitrations

Most significantly, the USMCA eliminates ISDS arbitrations between Canadian parties invested in the United States and vice versa (i.e., US parties invested in Canada). This is in line with President Trump's broader efforts to encourage US investors to spend in the United States rather than abroad and to prevent foreign investors in the United States from avoiding US courts.

The USCMA does not include an ISDS provision between Canada and Mexico, but both Canada and Mexico are also parties to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP"), which includes an ISDS provision. Thus, investors should be able to assert investor-state claims against those countries under CPTPP. The United States is not a party to CPTPP. President Trump withdrew the United States from that agreement on his first full day in office—January 24, 2017.

Limited US-Mexico ISDS Arbitrations

The USMCA significantly narrows the circumstances under which US parties investing in Mexico or vice versa can bring ISDS actions. Most notably, the revised agreement prevents many US and Mexican investors from asserting claims under the "fair and equitable treatment" standard. That standard is a key protection included in most international investment treaties and is a frequent basis for ISDS claims. Generally, the doctrine obligates states to treat foreign investors and their investments equitably under international law, i.e., to afford reasonable due process.

The USCMA also precludes many US and Mexican investors from asserting claims for indirect expropriation. Another common basis for ISDS claims, this protection prevents states from engaging in certain inequitable actions, e.g., denying permits required for a project. Similarly, these same US and Mexican investors will not be able to assert ISDS discrimination claims, i.e., claiming that, as a foreign investor, they were discriminated against in favor of a domestic competitor when attempting to secure an investment in a project. The new agreement does, however, include a carve-out for government contracts in certain sectors for both the fair and equitable treatment doctrine, as well as for indirect expropriation claims (i.e., these protections will continue to apply much like they did under NAFTA). Carved-out sectors include oil and gas, power-generation, telecommunications, transportation and entities that own or manage certain infrastructures (e.g., railways). .

The USMCA imposes new procedural restrictions where US-Mexico ISDS arbitrations are permitted. For example, in some instances, investors must first initiate a claim in a national court and wait 30 months, or for a final determination by the national court of last resort, unless recourse to a national court would be "obviously futile or manifestly ineffective." Investors should consult with counsel to determine whether arbitration is permitted under USMCA and to ensure procedural compliance.

Continued Anti-Dumping and Countervailing Duties Arbitration

In what is viewed as a concession on the part of the United States, NAFTA's binational arbitration process for resolving disputes over anti-dumping and countervailing duty measures remains in place. Under Chapter 19, NAFTA provides for a panel of trade experts to review government determinations regarding anti-dumping and countervailing duty measures—determinations typically subject to appeal in domestic courts. Canada and Mexico advocated for continued inclusion of this system in the new agreement because they are concerned that US courts will exercise bias in favor of domestic industrial interests. President Trump, on the other hand, initially advocated for elimination as part of a general effort to strengthen US trade laws and efforts to combat injurious imports. Continued inclusion of Chapter 19's provisions in the USMCA is likely to make the agreement's passage by the US Congress problematic. Many US stakeholders (e.g., steel industry) have criticized these procedures, some even questioning their constitutionality.

Takeaways

Looking forward, effects of the USMCA are difficult to predict, though, as a general matter, reduced protections and increased likelihood of litigation in foreign courts typically have restricted investor interest in a foreign market. Looking backward, NAFTA's original ISDS provision will apply retroactively to claims made within three years of NAFTA's termination, which may provoke a wave of claims by Canadian investors against the United States and by US investors against Canada.

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