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NAFTA Arbitration: Investors Face Possible Loss
US investors face possible loss of investment treaty arbitration under NAFTA.
BY CARLOS VEJAR AND
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 as early as next week, 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.
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?" 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."
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. 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).
MEXICO ELECTIONS
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. 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.
ENSURING MAXIMUM PROTECTION
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); this would then also grant foreign investors jurisdiction to initiate investment treaty arbitration under a different free trade agreement or bilateral investment treaty.
• 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 available.
Carlos Véjar is a domestic and international trade attorney in the Mexico City office of Holland & Knight.
This article is based on a client alert from Holland & Knight. Republished with permission from Holland & Knight.
