Publish in Perspectives - Wednesday, October 31, 2018
The USMCA includes an investment chapter that drastically differs from NAFTA in several aspects bringing a new era in investment arbitration. (Photo: Wharton)
USMCA investment arbitration rules differ drastically from NAFTA.
BY ORLANDO F CABRERA
On September 30, 2018, Canada, Mexico and the US announced that they had reached an agreement on the new NAFTA: the United States-Mexico-Canada Agreement (USMCA). Like NAFTA, the USMCA includes an investment chapter – Chapter 14. This chapter drastically differs from NAFTA in several aspects bringing a new era in investment arbitration.
Canada does not play the game of investment arbitration
Canada is no longer a party to the investor-State arbitration under this chapter. This makes sense. UNCTAD in the IIA Issues Notes frequently reports that Canada appears as the sixth most frequent respondent state in investment arbitration. However, upon the USMCA’s entry into force, NAFTA will still protect Canadian investments and investors in Mexico and the US and vice versa for an additional period of three years. A part from that, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will protect Canadian investors in Mexico and Mexicans in Canada once it enters into force.
Two Protection Schemes
USMCA encompasses two protection schemes:
1. Sheme 1 – General Investments: Under this scheme, after the establishment or acquisition of the investment, investors may only invoke the protection of following three standards:
a. National Treatment
b. Most Favored Nation Treatment
c. Direct Expropriation
2. Scheme 2 – Covered Government Contracts (oil & gas, power generation, telecommunications, transportation and certain infrastructure). Under this scheme, investors may claim braches to any standard of the chapter, i.e. the three above standards plus the following ones:
a. National Treatment
c. Performance Requirements
d. Senior Management and Board of Directors, and
e. Indirect expropriation
These provisions substantially limit the risk and claims’ scope for the US and Mexico. For instance, the Loewen case cannot easily occur again under this chapter. Not only because USMCA will not protect Canadians, but mainly because the Minimum Standard of Treatment does not protect General Investments.
Covered Government Contracts appear under Annex 14-E. USMCA defines Covered Government Contracts in a similar vein to “investment agreements.” These agreements appeared in some Bilateral Investment Treaties (BIT) in the 90s but without a definition. The US Model BIT of 1994 defined “investment agreements.” Later, the US Model BITs of 2004 and 2012 further elaborated on defining these terms.
The Trans-Pacific Partnership (TPP) implemented the last version on defining the “investment agreement’s terms.” Upon the US withdrawal from TPP, the remaining 11 countries decided to suspend the effects of this terms under the CPTPP. After the US withdrawal from the treaty, Japan may have been the sole capital-exporting country interested in maintaining the terms. This points that “Covered Government Contracts” represent an additional layer of protection to foreign investors. These Covered Government Contracts may resemble to a modern umbrella clause, but more sophisticated and evolved.
The Covered Government Contracts stands out as the most prominent victory of US companies investing in the hydrocarbon sector in Mexico. The Mexican Hydrocarbons Law in force expressly excludes from commercial arbitration the administrative rescission of contracts to produce and extract oil. Thus, oil companies have to litigate the administrative rescission before Mexican courts. However, the Covered Government Contracts under USMCA give an additional layer of protection to bring claims arising out of these contracts before an investment tribunal, but the requirement to litigate before Mexican courts prevails.
Exhaust local remedies prior to arbitration and time frame to advance a claim
USMCA requires to exhaust local remedies for 30 months. This contrasts with other treaties concluded by Argentina where the requirement exists but only for 18 months. NAFTA did not contain the requirement. Several investment tribunals have passed over this requirement under the Most Favored Nation (MFN) clause, as the Impreglio majority, or when the opportunity was unrealistic, as the Abaclat majority did. USMCA allows to pass over this requirement when local remedies were “obviously futile or manifestly ineffective.” This follows Abaclat majority. Nevertheless, USMCA points that MFN excludes provisions of other treaties regarding dispute resolution. Hence, USMCA adopted Prof. Brigitte Stern’s dissenting opinion in Impreglio.
USMCA expands the time limit to advance investment arbitration: (i) 4 years for General Investments, and (ii) 3 years for the Covered Government Contracts. NAFTA’s time frame is 3 years.
Assuming that USMCA enters into force, investments made prior this treaty and those that continue after its entry may benefit from NAFTA’s protection for an additional period of three years.
During the thirty-fifth UNCITRAL session, states expressed concern in respect to the conflicts of interest caused by arbitrators that change hats. USMCA requires arbitrators to comply with the IBA Guidelines on Conflict of Interest, and refrain from acting as counsel or as party-appointed expert or witness in any pending arbitration under this Chapter.
Under ICSID Convention, arbitrators decide the challenges to another arbitrator. USMCA mandates that challenges will be conducted under the UNCITRAL arbitral rules.
Defining and Limiting Investment
Investment does not mean “an order or judgment entered in a judicial or administrative action.” Thus cases like Saipem v. Bangladesh are unlikely to come any time soon.
“Like circumstances” appears in the National Treatment and the Most Favored Nation Treatment. USMCA points that these treatments as the treatment of one country , with respect to the government, in like circumstances, for that government. Claimant cannot compare the treatment granted by the Government of Texas with the Government of the Miami-Dade County in Florida.
Legitimate expectations appears as topic subject to much debate in investment arbitration. USMCA refers that legitimate expectations are reasonable to the extent that the government has made binding written assurances and the nature and extent of the governmental regulation. The “mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach.”
These highlights bring investment arbitration to a new era. USMCA addresses many states’ concerns by substantially limiting risks for states and clarifying the states will on several matters. Other countries will follow the path designed by the US and Mexico under USMCA. But still the system requires a major reform that ICSID pretends to address in its current amendment process. Meanwhile, we should await the USMCA final version that Canada, Mexico and the US will sign.
Orlando F Cabrera C is an associate at Hogan Lovells.
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