April 6, 2018

U.S. Investors Face Possible Loss of Investment Treaty Arbitration Under NAFTA

A Look at the Potential Risks for Foreign Investors in Mexico
Holland & Knight Alert
Laura Yvonne Zielinski


  • The survival of investment treaty arbitration under the North American Free Trade Agreement (NAFTA) renegotiation process is at a critical point.
  • An agreement in principle, which could be announced soon, potentially could exclude an investment chapter, as there seemingly has been no progress on discussions over a concrete textual proposal to retain or "modernize" the existing Chapter 11.
  • Foreign investors should analyze now whether, and to what extent, they and their investments in Mexico are currently covered, as well as if such coverage might disappear with the elimination of the investment chapter in NAFTA.

The survival of investment treaty arbitration1 under the North American Free Trade Agreement (NAFTA) renegotiation process is at a critical point. An agreement in principle, which could be announced as early as next week,2 potentially could exclude an investment chapter. That's a distinct possibility because, up to now, there seems to have been no progress on discussions over a concrete textual proposal to retain or "modernize" the existing Chapter 11.3

U.S. Trade Representative Robert Lighthizer justifies U.S. opposition to the existing investment protections with the idea that the current investment treaty arbitration mechanism (ISDS) under NAFTA promotes investment out of the U.S., saying, "Why is it a good policy of the United States government to encourage investment in Mexico?"4 That implies that without ISDS, U.S. companies would be inclined to invest more in the U.S. rather than abroad.

At this point it is difficult, however, to determine with certainty what the outcome of the negotiations will be. U.S. Sen. Orrin Hatch (R-Utah) and Rep. Kevin Brady (R-Texas), for example, have warned Lighthizer that "he is seriously risking the chances that a NAFTA 2.0 will make it through Congress if he does not revise his approach on investor protections."5

Nonetheless, the possibility of an exclusion of investment treaty arbitration from any future agreement is real. While Mexico openly states that it is in favor of keeping ISDS, it is hard to imagine what it can do to preserve it in the face of U.S. opposition. Under Mexican law, international treaties and trade agreements require reciprocity of dispute settlement provisions.6 This would prevent Mexico from unilaterally maintaining ISDS for U.S. investors without similar protections for Mexican investors/investments in the United States (in addition to any political balancing considerations).7

The Upcoming Mexican Election

The upcoming Mexican election is also of great concern to foreign investors and potential investors – not just from the U.S., but from around the world – as there seems to exist a real risk of radical changes to the current investment environment in Mexico, depending on the electoral outcome.8 This could result in a possible cascade of investment treaty arbitration cases against the new Mexican government – a remedy of which U.S. investors could be deprived if a future NAFTA text does not include ISDS provisions.

Changes in the political and regulatory landscape of a host state that negatively affect an investment can indeed, under certain circumstances, provide a basis for a foreign investor to initiate proceedings against the host state. Prominent examples include arbitrations initiated against Venezuela on the basis of nationalizations carried out by the Chávez Administration; a case brought against Germany after the German government's decision to reverse its nuclear policy following the Fukushima incident; and a number of proceedings brought by a variety of investors against Spain following the Spanish government's reversal of its subsidies for renewable energies. More recently – and more controversially – it has been discussed whether the British government's decision to exit the European Union in accordance with the outcome of the corresponding referendum might constitute a basis for foreign investors to sue the United Kingdom to recover any losses they might suffer due to the consequent changes in their investment environment.9

Ensuring Maximum Investment Protection Coverage in View of These Uncertainties

Common protections offered by investment treaties cover fair and equitable treatment, full protection and security, the free transfer of funds, non-discrimination, protection against unjustified expropriation and against arbitrary treatment by the host state,treatment no less favorable than that provided to investors under other treaties. Also included usually, and crucially, is access to investment arbitration.

Such protections can vary, however, substantially from one treaty to another. Therefore, it is recommended that foreign investors analyze now:

  • whether, and to what extent, they and their investments in Mexico are currently covered
  • if such coverage might disappear with the elimination of the investment chapter in NAFTA
  • what they can do now to strengthen and broaden investment protections available to them

Particular points to consider are:

  • if it might be prudent to undertake corporate restructurings ahead of the Mexican election in July to ensure the best possible investment protection coverage before a dispute might arise (after which such corporate changes to improve investment coverage might become illegal);10 this would then also grant foreign investors jurisdiction to initiate investment treaty arbitration under a different free trade agreement or bilateral investment treaty11
  • with regard to U.S. investors that will not or cannot benefit from restructure, to evaluate if there are existing grounds to initiate investment treaty arbitration proceedings under NAFTA while this option remains available12

Holland & Knight's Mexico City office has attorneys with extensive experience regarding investment treaty arbitration who have the knowledge to advise you on such matters. 



1 ISDS refers to disputes brought by a foreign investor against the state hosting its investment. It is typically based on a treaty signed by the home state of the investor and the state hosting the investment. Such bilateral (BITs) or multilateral investment treaties grant covered investors the right to bring actions against the host state under certain circumstances. Eminent examples of multilateral investment treaties include NAFTA and the Energy Charter Treaty (ECT). Investment arbitration can also be based on an arbitration clause in an investment agreement concluded between an investor and the corresponding host state or on a state's national investment law that provides for state consent to arbitration.

2 "Looming Deadlines Explain Why Trump Is Hurrying for a Nafta Deal," Bloomberg, April 3, 2018.

3 "Investor dispute provision in NAFTA still at impasse ahead of Washington meeting," Politico, Feb. 21, 2018.

4 "Another Way NAFTA Encourages U.S. Firms to Ship Jobs Overseas," Polizette, Feb. 11, 2018.

5 "Hatch, Brady warn Lighthizer that his ISDS approach in NAFTA will risk congressional passage," Inside Trade, March 14, 2018.

6 Ley Sobre la Aprobación de Tratados Internacionales en Materia Económica, Article 4(I)(a).

7 U.S. investors/investments have brought 17 cases against Mexico. Of these, five have been decided in favor of the investor, seven have been decided in favor of the state, two have been discontinued and three are currently pending. (Investmentpolicyhub.com). In comparison, Mexican investors have brought only one case, which is still pending, against the U.S. government (Investmentpolicyhub.com).

8 See, for example, "AMLO won't be part of airport 'corruption'," Mexico News Daily, March 23, 2018; "Mexico's Andres Manuel Lopez Obrador hits out at Trump as he launches his presidential campaign," CNBC via Reuters, April 1, 2018.

9 "Could Brexit trigger investment claims?", Global Arbitration Review, June 19, 2017.

10 Prospective nationality planning or "treaty shopping" within the existing treaty framework has been accepted by tribunals as legal, but this means that the corporate arrangements must have been in place before the facts that led to the dispute occurred. (Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Oxford University Press, Second Edition, 2012, p. 54).

11 Mexico has 30 bilateral investment treaties that are currently in force, three bilateral investment treaties that have been signed but are not yet in force and 11 Free Trade Agreement chapters with ISDS provisions (Investmentpolicyhub.com).

12 There is no public language available yet on how existing NAFTA provisions would cease to exist or when, but we will continue to monitor the developments.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

Related Insights