Time is Running Out to File an International Investment Arbitration Claim Under NAFTA

The United States-Mexico-Canada Agreement (USMCA) entered into force on July 1, 2020 replacing the North American Free Trade Agreement (NAFTA) that has been in force since 1994. The USMCA has a sunset provision providing that investors may continue using NAFTA’s dispute resolution mechanism for NAFTA legacy investments for up to three years after NAFTA’s termination, i.e., until June 30, 2023.[1]

Although the three-year sunset period ends on June 30, 2023, as a practical matter, the deadline is actually March 31, 2023 because NAFTA Article 1119 requires an investor to file a “Notice of Intent” 90 days before filing an Investor-State arbitration claim.[2]

US, Canadian, and Mexican investors with investment claims need to assess their situation and decide whether to file a NAFTA arbitration claim by this deadline.  Investors with NAFTA legacy investments need to be cognizant of how investment arbitration under the USMCA is less favorable in certain respects than investment arbitration under NAFTA.  Thus, filing a NAFTA investment arbitration by the deadline could represent a better opportunity to protect and recover damages with respect to a harmed investment.

The main differences regarding Investor-State arbitration between the two treaties are as follows:

       (1) Canada is not a part of the USMCA Investor-State dispute resolution mechanism. Thus, Canadian investors are not able to bring a USMCA investment arbitration claim against Mexico or the US, and Mexican and US investors will not be able to bring a USMCA investment arbitration claim against Canada.  In other words, investment arbitrations between the US and Canada will no longer be possible under the USMCA. The only way American and Canadian investors will be able to resolve investment disputes in the respective countries, will be in domestic courts.  Investments arbitrations between the Canada and Mexico will be possible, however, under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

      (2) Under the USMCA, only certain investment claims will be able to proceed directly to Investor-State arbitration.  Foreign investors need to be parties to a “covered government contract” and their investments need to be “privileged investments” defined as investment in certain “covered sectors”:

• oil and gas;
• power generation;
• telecommunications;
• transportation; or
• infrastructure.[3]

If the investments are not in these listed sectors, they are considered “non-privileged investments” and the USMCA requires an investor first to resolve its claims in the host state’s courts (domestic courts) before initiating investment arbitration.

      (3) The USMCA does not permit indirect expropriation claims and requires case-by-case analysis to determine whether the claim is one for indirect expropriation.  The USMCA also identifies state action that does not even constitute indirect expropriation—non-discriminatory regulatory actions “designated and applied to protect” welfare objectives such as health, safety, and the environment.

      (4) The USMCA has increased transparency of investment arbitration proceedings.  Once the arbitral tribunal has taken the necessary measures to protect confidential or privileged information, the hearings and the entire proceeding shall be public.

To date, more than 1,229 known treaty-based cases have been filed worldwide.[4]  Of these cases, 76 have been submitted under the auspices of Chapter 11 of NAFTA. Investors have brought 30 cases against Canada, 27 cases against Mexico, and 19 cases against the United States.

No investor has initiated a USMCA investor-state arbitration to date.  There are, however, four known pending NAFTA legacy Investor-State arbitrations brought pursuant to the sunset provision.[5]  The number of these NAFTA legacy cases will most likely increase in the coming months.

For more information, please contact the authors Ivan W. Bilaniuk, head of the Dinsmore & Shohl LLP International Dispute Resolution Practice, or International Arbitration Lawyer Francisco Victoria-Andreu.