USMCA Has Serious Implications for Investor-State Dispute Settlement and Arbitration

On Oct. 1, the White House announced that President Trump had negotiated a new United States-Mexico-Canada Agreement to replace the North American Free Trade Agreement. The USMCA has serious implications for disputes related to foreign investments in the United States, Mexico and Canada. For example, Canada did not consent to arbitration under the USMCA, so U.S. investors in Canada do not have recourse to investor-state arbitration if Canada takes action that violates the investment protections of the USMCA. The same is also true for Mexican investors in Canada, and Canadian investors in the United States and Mexico. Additionally, the scope of claims that investors can bring against the United States or Mexico under the USMCA is more limited than those that they can bring under NAFTA.

The USMCA will enter into force after the United States, Mexico and Canada complete their internal procedures to approve it and then notify the other parties. For example, in the United States, Congress must consider and pass implementing legislation. In the meantime, NAFTA remains in force. Given the significant changes to investor-state dispute settlement and arbitration under the USMCA, investors who have claims or potential claims under NAFTA should assess their options and take appropriate action to protect their investments and rights to investor-state arbitration.

Investment Protections: USMCA v. NAFTA

Compared to NAFTA, there are three changes of potential import to investment protections under the USMCA. First, Article 14.1 of the USMCA defines "investment" more broadly than NAFTA. "[I]nvestment means 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 definition is more modern and typical of recent investment treaties and free trade agreements compared to NAFTA. Article 1139 of NAFTA defines "investment" with a closed list that includes, for example, "an enterprise," "an equity security," "a debt security," "a loan," "an interest in an enterprise" that meets certain requirements, "real estate or other property," and "contracts" that meet certain requirements. The USMCA thus encompasses a broader range of foreign investments than NAFTA.

Second, the USMCA places limits on who can be a claimant in an investment dispute. Under Annex 14-D (Article 1) of the USMCA, "claimant means 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 limit on claimants is reportedly directed at Chinese-owned or -controlled investments in the United States or Mexico. For example, under the USMCA, a Chinese-owned or -controlled U.S. company that invested in Mexico likely could not be a claimant in an investment dispute against Mexico. The same is not true under NAFTA.

Third, the USMCA includes a provision that may constrain arbitral tribunals' interpretation of the minimum standard of treatment of investments. Article 14.6.1 of the USMCA states: "Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security." However, Article 14.6.4 includes a limiting clause, stating "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 [14.6], even if there is loss or damage to the covered investment as a result." The limit in Article 14.6.4 apparently responds to arbitral awards finding a violation of the minimum standard of treatment under NAFTA and codifies the litigation position of the respondents that have opposed such claims and awards.

Investment Disputes: USMCA v. NAFTA

Compared to NAFTA, there are three significant changes to investor-state dispute settlement and arbitration under Annex 14-D of the USMCA. First, Canada is not a party to Annex 14-D and therefore has not consented to investor-state arbitration under the USMCA. This means that U.S. and Mexican investors cannot initiate claims against Canada, and Canadian investors cannot initiate claims against the United States or Mexico.

Second, Annex 14-D (Article 3) of the USMCA limits the substantive bases for investment claims. For example, an investor cannot bring claims for violations of the minimum standard of treatment (Article 14.6) or for indirect expropriation (Article 14.8). These have been the most used bases for claims under NAFTA, so, as a practical matter, the inability to bring such claims under the USMCA should concern investors.

Third, under Annex 14-D (Article 5) of the USMCA, a claimant cannot initiate an investor-State arbitration unless the claimant "first initiated" local proceedings before "a competent court or administrative tribunal" of the respondent state -- i.e., the United States or Mexico. The claimant must either obtain "a final decision from a court of last resort of the respondent or 30 months have elapsed from the date the proceeding ... was initiated." Claimants thus must exhaust their local remedies, which is a departure from both NAFTA and many other investment treaties.

Pending and Legacy Claims Under NAFTA

Given the limitations of investor-state dispute settlement and arbitration, investors should be aware of the provisions of the USMCA related to pending and legacy claims. First, claims pending before the termination of NAFTA are grandfathered. Annex 14-C of the USMCA states that "[f]or greater certainty, an arbitration initiated pursuant" to NAFTA while NAFTA "is in force may proceed to its conclusion in accordance with" NAFTA.

Second, the USMCA allows for "legacy investment claims" under NAFTA for up to three years after the termination of NAFTA. Investors who made foreign investments while NAFTA was in force thus have three years from its termination to bring claims under NAFTA. Given the changes to investor-state dispute settlement and arbitration under the USMCA, legacy investors who have claims or potential claims would be smart to evaluate their options and take appropriate action to protect their investments and their rights under NAFTA.

Ultimately, the investor-state dispute settlement and arbitration provisions under the USMCA represent a significant change from NAFTA. Although the USMCA has not yet come into force, investors should evaluate their current options under NAFTA. Once the USMCA comes into force, investors should consider other options to protect their foreign investments.