The investment chapter of the United States-Mexico-Canada Agreement ("USMCA")1 restricts access to international arbitration for most US companies investing in Mexico. Contrary to the North American Free Trade Agreement (“NAFTA”), which is still in force, the USMCA distinguishes between two types of investors: investors with covered government contracts and those without them. The former will still have unrestricted access to arbitration, similar to the one that NAFTA offers. The latter, on the other hand, will only be able to start arbitration proceedings under limited circumstances.
However, US corporate investors without covered government contracts may regain unrestricted access to investment arbitration by restructuring their investments (i.e., channeling their investments through entities from countries that have entered into other international investment agreements with Mexico.)
The USMCA limits access to investor-State arbitration
From the perspective of potential investor-State disputes, most US companies investing in Mexico will have access to fewer remedies under the USMCA than under NAFTA.
Under Annexes 14-C, 14-D and 14-E of the USMCA, US investors in Mexico will be able to bring arbitration proceedings against Mexico under certain conditions.
Under Annex 14-C, claims with respect to investments established or acquired while NAFTA is still in effect and in existence on the date of entry into force of the USMCA (“legacy investments”) will remain in place until three years after the termination of NAFTA. This means that U.S. investors who have invested in Mexico prior to the termination of NAFTA will be entitled to the protections of NAFTA (including the right to arbitration) for three years following its termination. The key here is that potential US investors would need to invest in Mexico prior to the termination of NAFTA. Once NAFTA is terminated, any investments made after that date – even if made in the three-year sunset period – will not be susceptible to arbitration pursuant to NAFTA. For claims filed after the three-year period, Mexico and the U.S. have conditioned and limited their consent to arbitration, distinguishing between investors who are parties to covered government contracts and other investors.2
Claimants without covered government contracts may only challenge measures in breach of Articles 14.4 (national treatment) and 14.5 (most-favored nation treatment), in both cases other than with respect to the establishment or acquisition of an investment, and 14.8 (expropriation, excluding indirect expropriation). Also excluded are claims for breach of minimum standard of treatment, including fair and equitable treatment (“FET”), and full protection and security.
Moreover, and importantly, claimants must initiate domestic litigation in the courts of the host state before submitting their claim to arbitration. They can only commence arbitration if there is a final decision of a “court of last resort of the respondent or 30 months have elapsed” after the initiation of the domestic court proceedings. Another noteworthy addition is a four-year statute of limitations for investment-related claims. This means that investors may have to be quick to bring their claim in the courts in order to make sure they have time to bring their arbitration claim following the 30-month litigation period.
Claimants who are parties to covered government contracts enjoy the usual scope (including FET and indirect expropriation protection) and direct access to arbitration (after a six-month cooling off period). They may challenge measures in breach of the whole Chapter 14. Claims under a covered government contract will be subject to a three-year statute of limitations.
But there is corporate restructuring
Mexico has entered into international investment agreements (including free trade agreements) (“IIAs”) with multiple countries, like those that comprise the European Union, Australia, Canada, China, Japan, Singapore, South Korea, Switzerland, Turkey, and the UK. Like NAFTA, IIAs provide investors with a number of substantive rights (e.g., FET, national and most favored nation treatment, and protection against unlawful direct and indirect expropriations) and a mechanism to enforce these rights (i.e., investor-State arbitration.)
For example, under the IIA between Mexico and the Netherlands, all Dutch investors may bring arbitration proceedings against Mexico over breaches of all the substantive obligations. By contrast, under the USMCA, only some investors will be able to claim all the substantive protections in an arbitration, leaving some investors without an appropriate mechanism to enforce their rights.
US investors who are losing their right to arbitration under the USMCA should consider restructuring the manner in which their investments are made so that they can benefit from other IIAs to which Mexico is a party and thereby regain their “full” access to international arbitration. This can be done by:
- Forming a special purpose entity organized under the laws of a country with which Mexico has an IIA ("IIA Country") to be the investor into Mexico; or
- Interjecting a company organized under the laws of an IIA Country for it to own or control the Mexican entity that is the investor into Mexico; or
- Interjecting a company organized under the laws of an IIA Country for it to own or control the US entity that is the investor into Mexico.
Although the investment chapter of the USMCA effectively deprives most US corporate investors from the mechanism to enforce their rights before a neutral and impartial forum, those entities may gain access to this mechanism by planning their investments carefully.
US companies with material investments in Mexico should review their situation to see where they stand in light of the above, and, if they have concerns about potential adverse Mexican governmental actions, consider the possibility of implementing a different corporate structure that could afford them a higher level of protection.
1 To date, the USMCA, which was executed on November 30, 2018, and amended on December 10, 2019 by the US, Mexico and Canada, (i) has been ratified by the Mexican Congress, (ii) signed into law by President Trump on January 29, 2020 for the US, and (iii) is expected to be ratified by the Canadian Parliament later this Spring; it will take effect about two months after ratification by all three States. Upon taking effect, it will replace NAFTA.
2 The USMCA defines covered government contracts as “a written agreement between a national authority of [Mexico] and a covered investment or investor of [the US], on which the covered investment or investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor in a covered sector.” Covered sectors are oil and gas, power generation, telecommunications, transportation, and infrastructure.