Latin America Arbitration Update - April 2023

From NAFTA to USMCA: U.S., Mexican, and Canadian Investors’ Rights Under the USMCA

The United States-Mexico-Canada Agreement (“USMCA”) entered into force on July 1, 2020, and replaced its predecessor, the North American Free Trade Agreement (“NAFTA”).  Except for those investors who filed a Notice of Intent to arbitrate a claim under NAFTA (“NAFTA legacy claim”) before April 2, 2023, NAFTA is no longer available for legacy claims.  This is why it is important to understand the differences between NAFTA and the USMCA and the remedies still available for investors under the USMCA. 

The USMCA compared to NAFTA

There are key differences between the USMCA and NAFTA that will impact an investor’s substantive rights and ability to protect their foreign investment.

• USMCA’s Investor-State Arbitration Protections Apply Only to the U.S. and Mexico

Although the USMCA includes the United States, Mexico, and Canada, Canada did not sign on to the USMCA’s Annexes 14-D and 14-E, which refer to investment disputes between an investor and an Annex Party and investment disputes related to covered government contracts. USMCA Articles 14.D.1 and 14.E.1. Therefore, under the USMCA, U.S. and Mexican nationals who invested in Canada and Canadian nationals who invested in the U.S. or Mexico will not be able to submit their investment disputes to arbitration under the USMCA.  However, Canadian investors who invest in Mexico and Mexican investors who invest in Canada do have recourse to investor-state arbitration under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CP-TPP”).  Because the U.S. did not sign on to the CP-TPP, this option is not available for U.S. investors in Canada or Canadian investors in the United States.  Mexican nationals who invested in the U.S. and U.S. nationals who invested in Mexico will still have some access to investor-state dispute mechanism under USMCA, although with some limitations in terms of substantive protections available and preconditions that need to be satisfied for bringing a claim to arbitration.  USMCA Annex 14-D.

• USMCA’s Investor-State Arbitration Provision Has Two Protection Schemes

USMCA’s Chapter 14 protects (i) investments involving government contracts in “covered” sectors (also referred to as “covered government contracts” or “covered investments”) and (ii) general investments.  However, unlike the extensive protections afforded under NAFTA, the USMCA limits the substantive rights of investors based on the type of investment.

• Covered Government Contracts: Under the USMCA, the investment of a foreign investor, or local enterprise owned or controlled by the investor, who has a contract with the host state’s government in a “covered sector,” has broader protections than those granted to the other investors under the treaty. USMCA Annex 14-E(6)(a). Covered sectors include (1) oil and gas, (2) telecommunications, (3) transportation, (4) certain infrastructure, like roads and railways, and (5) power generation. USMCA Annex 14-E(6)(b). An investor with a covered investment may submit an arbitration claim alleging the host state breached any of its obligations to provide investors (1) the Minimum Standard of Treatment (“MST”), including fair and equitable treatment and full protection and security; (2) National Treatment; (3) Most Favored Nation (“MFN”) treatment; (4) either directly or indirectly expropriated their investment; and 5) Treatment in Case of Armed Conflict or Civil Strife.  USMCA Articles 14.4, 14.5, 14.6(4), 14.7, and 14.8.
• General Investments: Under the USMCA, all other investments are considered a general investment. Such investors can submit an arbitration claim only if (1) the host state directly expropriated their investment, or (2) breached the National Treatment or MFN Treatment standards. USMCA Article 14.D.3(1)(a).  Unlike NAFTA, the USMCA no longer allows investors with general investments to bring a claim for a state’s violation of MST, fair and equitable treatment and full protection and security, or the host state’s indirect expropriation of the investment. USMCA Article 14.6(2)(b). 

In addition, while an investor with a covered investment can bring a claim for a host state’s breach of MST, the UMSCA is clear that “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 [MST]” USMCA Article 14.6.4.  

Further, the USMCA also emphasizes that host states can adopt new regulations to protect legitimate public welfare objectives, even if the measure indirectly impacts an investment. Except in “rare circumstances,” non-discriminatory regulatory actions designed to protect legitimate public welfare objectives will not constitute indirect expropriation.  USMCA Article 14.6(2)(b).

• USMCA Limits Investors’ Access to Arbitration

The USMCA, unlike NAFTA, also limits investors’ ability to submit an arbitration claim until they exhaust local remedies and do so within a certain time period.  Unless “recourse to domestic remedies was obviously futile,” the USMCA requires investors with general investments to exhaust local remedies “with respect to the measures alleged to constitute a breach” before seeking arbitration.  Thus, investors must either (1) obtain a final decision “from a court of last resort” or (2) show that after 30 months of local proceedings, the investor is unable to obtain a final judgment.  USMCA Article 14.D.5.  Additionally, investors with general investments must serve the host state with a mandatory Notice of Intent to arbitrate the claims 90 days prior to filing the arbitration.  USMCA Article 14.D.3.  Accordingly, the investor may need approximately three years to comply with the requirements under the USMCA to be able to file the arbitration.  The investor’s assessment of these requirements and deadlines is critical as the investors’ overall time limit to submit claims to arbitration under USMC is four years from the date the investor acquired, or should have acquired, knowledge of the treaty violation and the damages suffered.

Investors with covered investments do not need to exhaust local remedies before asserting a claim under the USMCA’s investor-state dispute mechanism, but, like investors with general investments, they must wait for period of six months after the breach before submitting the dispute to arbitration to comply with the USMCA’s cooling-off period and their claims are subject to a three-year time bar.  USMCA Article 14.E.4.

USMCA Claims: Time Is of the Essence

For U.S. or Mexican investors who may have unfiled NAFTA legacy claims or new potential USMCA claims, it is necessary to consider options quickly given the deadlines and requirements under the USMCA outlined above.  Quinn Emanuel has a specialized team of bilingual partners and associates who regularly conduct investment treaty cases in Spanish and English.  We are always pleased to help assess if investors have a valid claim worth pursuing and if so, advise on the most favorable legal strategy for their claim.