Investment protection under the USMCA

Introduction

After protracted negotiations which have been covered extensively in the press, the US signed the new United States, Mexico and Canada Agreement (“USMCA”) with Mexico and Canada on 30 November 2018 (available here).  The USMCA replaces the North American Free Trade Agreement 1994 (“NAFTA”) which had governed trade relations between the parties. The investment provisions were contained in Chapter 11 of NAFTA and applied to all investments and investors of any party.  Subject to specific carve outs, all such investments were subject to the dispute settlement provisions in Chapter 11 which provided for investor-state arbitration.  The proposed investment regime in Chapter 14 of USMCA is a significant departure from its equivalent Chapter 11 of NAFTA. 

Only disputes permitted under the various annexes to Chapter 14 may be submitted to arbitration under the USMCA (Annex 14-C, Annex 14-D and Annex 14-E).  The changes to the investment regime, and the related dispute resolution mechanisms, proposed under the USMCA are discussed below.

It should be noted that NAFTA has not yet been terminated and continues to be in force until its termination by the parties.

Claims against Canada

No claims can be brought against Canada or by a Canadian investor under the USMCA as Article 14.2(4) of the USMCA excludes such claims.

Legacy investment claims and pending claims

Any pending claims which have already been filed by investors under NAFTA would not be affected by the USMCA in accordance with paragraph 5, Annex 14-C of the USMCA.  Further, Annex 14-C of the USMCA permits new claims under NAFTA to be brought by investors for a period of three years after the termination of NAFTA in accordance with Chapter 14 of the USMCA provided that the claims pertain to legacy investments (those being investments acquired by investors prior to the termination of the NAFTA). 

Claims against the United States/Mexico

The USMCA permits claims against the US and Mexico by investors in their territories for breach of the protections offered in Chapter 14.  However, the protections under Chapter 14 of the USMCA are limited in a number of ways, including:

• Limited bases for claims – the USMCA excludes claims for breach of minimum standard of treatment and indirect expropriation.  This means only claims for breach of national treatment, most-favoured nation, and direct expropriation can be submitted under paragraph 3, Annex 14-D of the USMCA, unless the contract qualifies as a covered government contract (as defined in and governed by Annex 14-E).
• Acquisition and establishment of investments excluded – breach of national treatment, most-favoured nation or direct expropriation cannot be alleged with respect to the acquisition and establishment of investments (paragraph 3, Annex 14-D).  This exclusion does not apply to contracts which qualify as a covered government contract under Annex 14-E.
• Requirement to pursue local remedies – claimants can only submit a claim for arbitration after obtaining a final decision from a court of last resort of the respondent or 30 months after initiating local proceedings (paragraph 5(1)(b), Annex 14-D).  
• Four-year limitation period – a claim must be brought within four years of the claimant’s knowledge of the breach or of the loss and damage being incurred (paragraph 5(1)(c), Annex 14-D).  This four-year period includes the requirement to pursue local remedies, which could take up to 30 months.
• US investors might be precluded from bringing arbitration claims – if an investor of the US brings a claim for breach of the USMCA (as distinct from breaches of Mexican law) in the Mexican courts, subsequent arbitration claims with respect to that breach are barred (Appendix 3, Annex 14-D).   
• Legitimate expectations – frustration of legitimate expectations no longer constitutes a breach of the minimum standard of treatment (Article 14.6(4)).

Considerations for investors

The USMCA might take some time to come into force as, first, it must be ratified by all three states.  The USMCA would, however, significantly restrict investors’ substantive and procedural protections against state wrongdoing.  Investors who have, to date, relied on the protections offered by the NAFTA may in future wish to consider their options in terms of the dispute settlement tools available to them under other legal instruments (such as the Trans-Pacific Partnership to which both Mexico and Canada are party).  The other option available to investors is recourse to the domestic courts of each party.  If investors consider that such protections are inadequate, they could consider restructuring their investments in a manner which would afford them more protections under other treaties (either multi-lateral or bilateral investment treaties).  Such restructurings are permitted under international law provided proceedings against the host state are not reasonably contemplated at the time of the restructuring. 

Akshay Sewlikar would like to thank Seraphina Chew for her assistance in the preparation of this article.