Introduction
Currently, NAFTA Chapter 11 protects U.S. investors and their investments in Canada and Mexico, Canadian investors and their investments in the U.S. and Mexico, and Mexican investors and their investments in the U.S. and Canada. Foreign investors, including corporate investors and natural persons alike, have rights that could lead to monetary damages to compensate for harms caused by the U.S., Canada, or Mexico to those foreign investors’ investments. Investors could bring ISDS arbitration claims for compensation due to expropriation, a violation of fair and equitable treatment, and/or discriminatory treatment in breach of national treatment and most-favored nation obligations.
NAFTA terminated as of July 1, 2020. However, the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA, extended NAFTA Chapter 11 ISDS rights for three years for legacy investment claims.1 That three year window is coming to an end and investors must file a Request for Arbitration before July 1, 2023, or they will forfeit all claims under NAFTA Chapter 11.
Beginning on July 1, 2023, the protections contained in NAFTA’s successor agreement, the USMCA will remain. The USMCA eliminated ISDS rights for U.S. investors in Canada or Canadian investors in the U.S. It only protects U.S. investors in Mexico and Mexican investors in the U.S., and curtailed those rights as compared to those that currently exist under NAFTA. Additionally, Canadian investors may bring investment disputes against Mexico under the high-standard Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
NAFTA Article 1119 also requires that the aggrieved foreign investor deliver to the U.S., Canada, or Mexico a written notice of intention to submit claims to arbitration (Notice of Intent) “at least 90 days before the claim is submitted.” Under this procedural rule, the latest date to file a Notice of Intent and trigger the start of a NAFTA legacy dispute is prior to April 1, 2023.
What steps investors should take prior to commencing arbitration?
Under NAFTA, a Notice of Intent is an early-stage document used to start discussions with the foreign government seeking to amicably settle the dispute. It intends to put the government on notice of a dispute. The Notice of Intent is a precursor step to filing arbitral claims. The Notice of Intent initiates the “cooling off” or consultation period. The filing of a Notice of Intent does not amount to filing of arbitral claims – it’s merely a mechanism to start the clock on waiting periods specified under treaties, and to facilitate negotiation with the host government to resolve the dispute. During this period, investors will attempt to resolve the dispute amicably prior to commencing any ISDS arbitration as a formal contentious matter.
If 90 days have elapsed after filing the Notice of Intent and a settlement has not been reached, the investor may file the Request for Arbitration, a more detailed document formally starting the arbitration. If the arbitration proceeds, the parties will select arbitrators and exchange written submissions and document disclosures. The panel of arbitrators will hear the parties’ contentions, and ultimately issue a decision in the form of an enforceable arbitral award.
Why file claims under NAFTA before the deadline?
Because of NAFTA’s strong substantial protections, strong procedural benefits, and the large amount of investment arbitration cases providing a track record under NAFTA, NAFTA is a leading international agreement to serve as the basis for investment claims. When NAFTA legacy claims are no longer available, investors may lose valuable rights and claims for damages.
The USMCA is another international agreement which could serve as the basis to bring ISDS claims. However, NAFTA contains a broader scope of substantive protections, broader ISDS rights, and fewer procedural hurdles. USMCA’s standards of protection, by contrast, are more limited.
The USMCA investment arbitration mechanism covers two distinct categories of investments. Under USMCA’s first category, general investors can only claim discrimination and direct expropriation. Under the second category only investors in specific industries can claim the wider protections of the treaty. NAFTA does not draw this distinction and grants equal protection to different types of investments.
For more details on the USMCA investment chapter and related ISDS rights, see our past article: “The USMCA enters into force: a glimpse into its investment chapter.”
Under the USMCA, the Governments of the U.S., Canada, and Mexico will still have access to the State-to-State dispute settlement to resolve investment disputes. However, there are very few instances of State-to-State disputes under international investment agreements.
Additional considerations
NAFTA provides a path for investors to seek damages involving harmful measures taken by the U.S., Canada, and Mexico. In order to successfully prosecute a NAFTA claim, an investor should prepare a detailed factual record to establish treaty breaches. The first step to seeking such damages is to submit a Notice of Intent prior to April 1, 2023 so as not to forfeit those rights.
Hogan Lovells’ leading international investment arbitration and public international law practices bring extensive knowledge and years of experience in helping clients navigate international investment agreements. Please contact us to discuss how you could exercise your rights before they expire.
Authored by Luis Enrique Graham, Gonzalo Rodríguez-Matos, Michael Jacobson, Orlando Cabrera, and Sylvia Sámano.
References
1 USMCA, Annex 14-C provides that a protected “legacy investment” is an investment of a U.S. investor in Mexico established or acquired before NAFTA’s termination that was already in existence on the date of USMCA’s entry in force on July 1, 2020.
