USMCA investor-state dispute settlement provisions: Key differences for Mexico
The United States-Mexico-Canada Agreement (USMCA), which entered into force on July 1, 2020, is designed to facilitate trade across North America and includes chapters pertaining to rules of origin, intellectual property, labor, environmental issues, and investment. Notably, a comparison of the investor-state dispute settlement (ISDS) provisions in the USMCA with its predecessor agreement, NAFTA, reveals key differences. Importantly, Canada is not a party to the USMCA’s chapter on ISDS (Chapter 14). This means that ISDS claims cannot be asserted by Canadian investors or against Canada. ISDS provisions between the US and Mexico, on the other hand, remain in effect, but these provisions depart in many ways from dispute resolution under NAFTA’s Chapter 11.
One of the most striking differences is that the USMCA includes a local litigation requirement as a prerequisite for ISDS claims. Once this requirement is fulfilled or 30 months have elapsed, the following substantive claims may be brought against a state: a) direct–not indirect–expropriation; b) violations of national treatment; and c) violations of the most favored nation provision.
The USMCA’s fork-in-the-road provision is asymmetrical
Party consent is foundational to international arbitration because it provides arbitral jurisdiction. However, before a party is allowed to bring a claim, there are sometimes certain preconditions. One such condition may be a fork-in-the-road provision, which requires claimants to make the irrevocable choice of seeking relief either through arbitration or in domestic courts. The purpose of such a clause is to prevent parallel proceedings concerning the same investment dispute.
Many of the USMCA’s ISDS provisions favor states over investors. However, one exception is the fork-in-the-road provision in Appendix 3.[1] This provision establishes that an American investor cannot bring an arbitration claim against Mexico if the investor has already alleged such a breach before a Mexican court or an administrative tribunal.
There is no similar provision, on the other hand, for Mexican investors, meaning that this is an asymmetrical fork-in-the-road provision.
USMCA v. NAFTA
There are several major changes in the USMCA concerning ISDS involving Mexico.
First, the USMCA increases the complexity of investment arbitration by requiring the claimant to commence legal proceedings in national courts as a prerequisite to pursuing investment arbitration.
Second, the USMCA provides more protection for investors who are parties to a “Covered Government Contract” by granting them a minimum standard of treatment, protection against risks of indirect expropriation and transfer, and exemptions from the requirement to commence legal proceedings in national courts as a prerequisite before initiating investment arbitration.
NAFTA provided little detail in defining expropriation claims and, as a result, tribunals allowed indirect expropriation claims to proceed. In contrast, the USMCA precludes indirect expropriation claims.[2] Although the USMCA provides that a case-by-case analysis is required to determine what in fact constitutes an indirect expropriation claim, it also defines a list of acts that do not constitute indirect expropriation. This list includes, for example, non-discriminatory regulatory actions that protect legitimate public welfare objectives, such as health, safety, and the environment.
Finally, it is important to mention that the ISDS procedures are more balanced between states and investors but are realigned in favor of states by establishing provisions that are to be interpreted in favor of states. This is in addition to the introduction of the new fork-in-the-road clause contained in Appendix 3 and described above.
The USMCA and NAALC
The USMCA supersedes NAFTA without prejudice to the provisions set forth in the USMCA that refer to provisions contained in the NAFTA. Also, upon taking effect, the North American Agreement on Labor Cooperation (NAALC), which is a NAFTA side agreement under which the parties agreed to enforce their own labor standards, shall be terminated.[3] USMCA parties are required to conduct a joint review of the agreement after six years, and the agreement will expire after 16 years if not renewed.
