October 5, 2018

Mexico Keeps Investment Disputes Mechanism Under New USMCA

Holland & Knight Alert
Carlos Vejar | Laura Yvonne Zielinski

HIGHLIGHTS:

  • After months of uncertainty, the United States, Mexico and Canada recently reached a new trilateral trade agreement, the United States-Mexico-Canada Agreement (USMCA), to replace the North American Free Trade Agreement (NAFTA).
  • This new agreement is a win for Mexico, who as net importer of Foreign Direct Investment (FDI) managed to include an Investor-State Dispute Settlement (ISDS) mechanism despite strong resistance from the U.S. administration.
  • Under the USMCA, the new protections offered to most U.S. investors in Mexico are much more limited than the ones provided by NAFTA Chapter 11.

After long months of uncertainty with respect to the survival of the North American Free Trade Agreement (NAFTA) in general – and its investment chapter in particular – and more recently regarding Canada's continued participation in any updated agreement, Mexico, the United States and Canada finally on Sept. 30, 2018, reached a new trilateral agreement named the United States-Mexico-Canada Agreement (USMCA). However, it leaves Canada out of the new Investor-State Dispute Settlement (ISDS) mechanisms1 agreed to on a bilateral basis between Mexico and the United States.

This new agreement is a win for Mexico, who as net importer of Foreign Direct Investment (FDI) managed to include an ISDS mechanism despite strong resistance from the U.S. administration. As a net importer of FDI, it was crucial for Mexico to maintain at least some reduced protection for U.S. companies investing in Mexico.2

The new investment chapter agreed to between the U.S. and Mexico modernizes NAFTA's Chapter 11 and brings it somewhat in line with other recent trade agreements signed by Mexico, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), although it contains particular provisions that differ from those in other agreements.

Key Points of Interest for U.S. Investors

The key features of the new investment chapter of the USMCA of most interest to U.S. investors in Mexico are the following:3

  • Legacy claims under NAFTA may still be initiated after the USMCA enters into force (expected in 2020) for a period of up to three years, and ongoing cases will not be affected by the termination of NAFTA and the start of the USMCA.
  • ISDS under the USMCA is much more restricted than under NAFTA. The substantive protections available to U.S. investors and their investments in Mexico will be significantly limited and moreover, for many investors, subjected to a 30-month litigation period in Mexican courts before being able to bring an arbitration claim against the government. This latter provision might not be enforced in all cases, as it remains to be seen whether an ISDS tribunal will require compliance with this obligation in all cases, particularly when recourse to legal courts might be futile. In this context, it is worth mentioning that there is no incorporation of the ISDS standards in Mexican law. The expected results from local litigation may therefore be different from those expected under an ISDS mechanism. The same could be true for the recovery of damages from expropriation of certain assets that under Mexican law will most likely be lower.4
  • U.S. investors in certain industry sectors (oil and gas, power generation, telecommunications, transportation and infrastructure) that have signed government contracts with Mexico will enjoy broader access to substantive and procedural protections (such as the minimum standard of treatment, protection against indirect expropriation and an exemption from the local litigation requirement). This being said, these substantive protections provided to investments related to covered investment contracts have also been further restricted providing, for example, the taking into account of public welfare objectives.
  • One of the most relevant changes found in the new text concerns the most favored-nation treatment. The USMCA clearly limits the interpretation of this obligation by excluding the possibility of invoking in disputes under the USMCA any protections contained in other international trade or investment agreements signed by Mexico (and the U.S.). Another relevant change is that U.S. and Mexico will only accept claims derived from losses or damages incurred by investors in their capacity as investors (this would exclude claims brought to recover losses or damages resulting from exports).
  • Cases under the investment chapter of the USMCA will be public and may allow for submissions by third parties after consultation by the tribunal with the disputing parties.
  • Interestingly, the new text allows the parties to comment on a final award before it is issued.

Conclusion

The investment chapter of the USMCA is certainly good news for U.S. investors in Mexico as the more likely alternative seemed to be a complete loss of investment protection with the possible negative effects on investment flows this could have caused for Mexico. However, the new protections offered to most U.S. investors under the USMCA (those related with a covered government contract to a lesser extent) are much more limited than the ones provided by NAFTA Chapter 11.

Both U.S. and Canadian investors in Mexico are well advised to be aware of the three-year period following the entry into force of the USMCA during which time they will still be able to file claims under NAFTA Chapter 11. In parallel and afterward, Canadian investors could recur to the CPTPP ISDS to file disputes against Mexico once it enters into force.

Clients seeking more information or assistance on how the USMCA will impact them may contact the authors or a member of Holland & Knight's International Trade Group.


 

Notes

1 Preliminary text of the agreement, that is still subject to a legal review and ratification by both Mexico and the U.S., can be consulted online.

2 Earlier this year, in the context of uncertainty with regard to the survival of ISDS in a new NAFTA deal, Mexico joined the ICSID Convention, sending a positive signal to foreign investors.(See Holland & Knight alert, "ICSID Convention Now in Force in Mexico," August 27, 2018).

3 The ISDS chapter has never been formally used by Mexican investors against the U.S. under the ICSID Convention Rules (The ICSID website reports only seven cases in total against the U.S., six of which were brought by Canadian claimants). Meanwhile, U.S. investors have brought 13 cases against Mexico (out of 21 total ICSID claims).

4 Mexican Constitution Article 27 (VI), states that: "... The price fixed as indemnification for the expropriated property shall be based on its registered value, as it appears in the records of the cadastral bureau or tax collection office, regardless of whether such value was reported by the owner, or tacitly accepted by him, for having paid his taxes according to such base. Only the increased or decreased value of said private property due to any improvements or to any deterioration occurring after the tax appraisal base was set, shall be the portion of its value subject to the assessment of experts and to judicial resolution. The same provision shall apply to any objects whose value is not fixed in tax collection offices." Meanwhile Article 14.8 (2) of the USMCA, states that compensation for expropriation or nationalization, directly or indirectly, should "..(a) be paid without delay; (b) be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (the date of expropriation); (c) not reflect any change in value occurring because the intended expropriation had become known earlier; and (d) be fully realizable and freely transferable."


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.


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