The United States, Mexico and Canada Agreement (USMCA) entered into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA), which has been in effect since 1994. The USMCA has a sunset provision that provides that investors may continue to use NAFTA’s legacy investment dispute settlement mechanism for up to three years after NAFTA’s termination, i.e. until June 30, 2023[1]
Although the three-year sunset period ends on June 30, 2023, in practice the deadline is actually March 31, 2023 because NAFTA Article 1119 requires an investor to file a “Notice of Intent” 90 days before filing an investor-state arbitration claim.[2]
US, Canadian and Mexican investors with investment claims should assess their situation and decide whether to file a NAFTA arbitration claim by this deadline. Investors with legacy NAFTA investments should be aware of how investment arbitration under the USMCA is less favorable in certain respects than investment arbitration under NAFTA. Thus, filing for NAFTA investment arbitration by the deadline may present a better opportunity to defend and recover damages with respect to an injured investment.
The main differences regarding investor-state arbitration between the two treaties are as follows:
(1) Canada is not part of the investor-state dispute settlement mechanism of the USMCA. Thus, Canadian investors cannot bring a USMCA investment arbitration claim against Mexico or the US, and Mexican and US investors will not be able to bring a USMCA investment arbitration claim against Canada. In other words, investment arbitrations between the US and Canada will no longer be possible under the USMCA. The only way US and Canadian investors will be able to resolve investment disputes in their respective countries will be through local courts. However, investment arbitrations between Canada and Mexico will be possible under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
(2) Under the USMCA, only certain investment claims will be directly referable to investor-state arbitration. Foreign investors must be parties to a “covered government contract” and their investments must be “privileged investments”, defined as investments in certain “covered sectors”:
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Oil and gas;
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electricity production;
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telecommunications;
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transportation; or
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infrastructure.[3]
If the investment is not in these listed sectors, it is considered a “non-privileged investment” and the USMCA requires the investor to first resolve its claims in the courts of the host country (domestic courts) before commencing investment arbitration.
(3) The USMCA does not permit claims for indirect expropriation and requires a case-by-case analysis to determine whether a claim is for indirect expropriation. The USMCA also identifies government action that does not even constitute indirect expropriation—nondiscriminatory regulatory action “designed and applied to protect” welfare goals such as health, safety, and the environment.
(4) The USMCA increased the transparency of investment arbitration proceedings. Once the arbitral tribunal has taken the necessary measures to protect confidential or privileged information, the hearings and the entire proceeding shall be public.
To date, more than 1,229 known contract-based cases have been filed worldwide.[4] Of those cases, 76 were filed under the auspices of Chapter 11 of NAFTA. Investors have filed 30 cases against Canada, 27 cases against Mexico and 19 cases against the United States.
No investor has initiated USMCA investor-state arbitration to date. However, there are four known pending NAFTA legacy investor-state arbitrations brought pursuant to the termination provision.[5] The number of these legacy NAFTA cases will most likely increase in the coming months.
FOOTNOTES
[1] USMCA. Appendix 14-C (3).
[2] Modern investment arbitration emerged as a means of dispute resolution with the signing of the first Bilateral Investment Treaty (BIT) between Germany and Pakistan in 1959 and the entry into force of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Convention of ICSID) in 1966. Two cornerstones of investor-state arbitration were the first arbitration based on investment law in 1984 (Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ICSID Case No. ARB/84/3) and the first BIT-based arbitration in 1987 (Asian Agricultural Products Ltd (AAPL) v Sri Lanka ICSID Case No. ARB/87/3).
[3] USMCA. Appendix 14-D
[4] look United Nations Conference on Trade and Development, Investment Policy Centre, Investment Dispute Settlement Navigator, available at https://investmentpolicy.unctad.org/investment-dispute-settlement
[5] ID. The cases are Koch v. CanadaICSID Case No. ARB/20/52; First Majestic vs. MexicoICSID Case No. ARB/21/14; Finley et al. against MexicoICSID Case No. ARB/21/25; and TC Energy and TransCanada v. United States (II)ICSID Case No. ARB/21/63.
Francisco Victoria-Andreu also contributed to this article.
© 2023 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume XIII, Number 32