Expected Changes to ISDS Mechanisms under the USMCA

Upon its ratification by all parties, the new United States-Mexico-Canada Agreement (USMCA) will make substantial changes to the former North American Fair Trade Agreement’s (NAFTA) investor-state dispute settlement (ISDS) mechanisms found under Chapter 11. US-Canadian investments will experience the most dramatic changes due to the complete elimination of Chapter 11 ISDS mechanisms. There are big changes coming to US-Mexican investments as well, where new limitations to permissible claims are expected to greatly reduce the number of investment arbitrations submitted under the USMCA.

Canadian and American investors will no longer have the option to commence arbitration proceedings against the State where they have invested. Rather, an investor with a claim that its substantive investment rights were breached must bring its claims to the national courts of the State in which the investment was made.

Canadian Foreign Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo (L-R) spent more than a year negotiating the modernization of the trilateral trade deal. // File Photo: Mexican Government.

Legacy investments, those investments made while NAFTA is still in effect, may still use the NAFTA investor-state dispute settlement system and commence neutral arbitration proceedings for three-years after NAFTA’s termination. The three-year window is consistent with NAFTA’s existing statute of limitations, which already restricts parties to bring claims arising from an act older than three years. Canada likely welcomes the changes. The country has lost eight cases brought against it under NAFTA. In contrast, the United States has never lost.

Mexican and American investors have retained the option to commence arbitration proceedings against the State where they have invested, pursuant to Annexes 14-C, 14-D, and 14-E of USMCA. Legacy investments involving these parties will also be subject to NAFTA governance for up to three years after its termination. After the three-year period, investors will be required to initiate their claims through domestic litigation before commencing arbitration proceedings.

Disputes filed after the three-year period will be permitted but are subject to new conditions and limited consent from both Mexico and the United States. Permitted claims after this period will also be distinguished based on whether the investor has a “regular” investment or whether the investor is a party to a covered government contract.

Going forward under the current proposed USMCA provisions, claimants with “regular” investments may only bring claims related to the State’s breach of national treatment, most-favored nation treatment, or expropriation (excluding indirect expropriation). (See USMCA, Arts. 14.4, 14.5, 14.8). They have a new statute of limitations in which to bring the claims, four-years instead of the three-year limitation provided in NAFTA. In such circumstances, parties must first file their claims in the domestic courts of the State in which the investment was made. Arbitration may only begin if there is a final decision from a “court of last resort of the respondent”, or if 30 months have elapsed after the initiation of the domestic proceedings.

Claimants falling in the second category, those who are parties to covered government contracts, have more leeway than their “regular” investor counterparts. These investors will have a broader scope and direct access to arbitration, limited only by a short six-month waiting period before filing their claims. Their claims may relate to any Article 14 provisions, and they have three years to bring their claims.

USMCA is not finalized or ratified by any of the parties yet, but it is expected to be by the end of this year. Overall, State-to-State and trade dispute resolution procedures will remain largely as they were under NAFTA.

By Leslie Castello, Junior Staffer

Work Cited:  

  1. https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/14%20Investment.pdf
  2. https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico
  3. https://globalarbitrationnews.com/the-new-nafta-20181004/
  4. https://www.iisd.org/blog/usmca-investors
  5. https://www.lexology.com/library/detail.aspx?g=44d1dcd0-8f81-4fea-a023-cd6706d33933

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