Goodbye NAFTA, hello USMCA

The possibility of enforcing rights granted to investors in a treaty is, of course, of particular significance. Both NAFTA and the USMCA, contain a mechanism through which investors can arbitrate disputes with state parties. The USMCA, however, brings several significant changes to this system.      

Disputes involving investments to or from Canada

The USMCA does not provide for arbitration of disputes between US or Mexican investors, on the one hand, and Canada, on the other hand (or between Canadian investors and the US or Mexico). Annex 14-C, however, stipulates that disputes deriving from so-called legacy investments, i.e. an investment established or acquired before the termination of NAFTA and still in existence when USMCA enters into force, can be arbitrated under the rules set out in chapter 11 of NAFTA. Hence, any dispute arising from an existing investment is not left completely without protection though it should be noted that there is a sunset provision limiting the time in which to commence such proceedings.

Mexico – United States Investment Disputes

As to arbitrating disputes between investors and Mexico or the United States, the USMCA incorporates substantial changes.  The key changes contained in Annex 14-D of Chapter 14 are:

Consent to Arbitration and its Limitations

Article 1122 of NAFTA and Article 4 of Annex 14-D of USMCA define consent to arbitration. There has been no change in the language between the two articles. However, Article 5 of Annex 14-D of USMCA stipulates the “Conditions and Limitations on Consent.” That article restricts the submission of claims to arbitration by requiring that: (i) a claimant “first initiated a proceeding before a competent court or administrative tribunal of the respondent with respect to the measures alleged to constitute a breach,” (ii) the claimant has a final decision “from a court of last resort” or it has been more than 30 months since the court action has been initiated; (iii) the claimant consent in writing to arbitration; and (iv) the notice of arbitration contains the claimant’s written waiver of any right to bring the claim in any other forum. This provision therefore re-introduces the requirement of the exhaustion of local remedies, which actually had long been abolished in investment arbitration.

This is in addition to the language in Article 2 of Annex 14-D that parrots 1118 NAFTA noting that “parties should first attempt to settle a claim through consultation or negotiation.” This greatly restricts the ability of claimants to bring a claim under this dispute resolution mechanism and prohibits parties from using this system as the primary attempt at dispute resolution. The USMCA thus yields a three-step process of attempted consultation followed by court action followed by arbitration.

Selection of Arbitrators

Article 6 of the USMCA reduces the time limit after which the Secretary-General (of ICSID) can appoint an arbitrator, if the parties have not done so, from 90 to 75 days. Additionally, it removes the provision of 1124(4) of NAFTA which required the State Parties to establish and maintain a list of 45 presiding arbitrators (“experience in international law and investment matters”) from which the Secretary-General was to pick a presiding arbitrator. Under the USMCA, the Secretary General makes the appointments “in his or her discretion” which accordingly provides substantially more flexibility.

Article 6(5)(c) may in practice limit the freedom of parties to choose arbitrators quite considerably. According to this provision, arbitrators shall “refrain, for the duration of the proceedings, from acting as counsel or as party-appointed expert or witness in any pending arbitration under the annexes to this Chapter.” Hence, the pool of available arbitrators will likely be limited somewhat.

Conduct of the Arbitration

Provisions concerning the conduct during the proceedings were previously covered by individual sections but have now been consolidated and amended into Article 7 of Annex 14-D. The new and improved procedure permits for interested third parties to submitamicus curiae briefs and allows for disputing parties to respond to such submissions. This again, is a step in increasing the transparency in these proceedings and allowing interested third parties’ involvement.

Further, Article 7 has added detail of the procedure of the tribunal addressing objections that as a matter of law a claim submitted is not a claim for which an award in favor of the claimant may be made, or that a claim is manifestly without legal merit, as preliminary questions. The article also permits for expedited preliminary questions if they are raised within 45 days after the tribunal is constituted, as well as awarding costs and attorney’s fees to the prevailing party.

Finally, the article provides for a timeline within which parties must take steps to further the proceedings or else risk a discontinuance of the dispute and allows for a 60 days comment period for parties concerning any aspect of the proposed decision or award.

Transparency of Arbitral Proceedings

A major noteworthy addition is Article 8, which makes a very clear attempt at enhanced transparency for the dispute resolution process. Article 8 requires the respondent of a USMCA dispute resolution to promptly make available to the public “(a) the notice of intent; (b) the notice of arbitration; (c) pleadings, memorials and brief submitted to the tribunal by a disputing party and any written submissions submitted pursuant to Article 7.2 (Conduct of the Arbitration) and Article 7.3 and Article 12 (Consolidation); (d) minutes of transcripts of hearings of the tribunal, if available; and (e) orders, awards and decisions of the tribunal.” Further, the article requires the hearings to be open to the public, however, still allowing for exclusion of protected information.

The addition of the explicit possibility of public hearings may help counter a major point of criticism the NAFTA dispute resolution mechanism has received and will enable the public to become more knowledgeable about the disputes that arise under the highly sophisticated trade deals conducted between the signatory countries.

Awards

Article 13 has, like many of the clauses been revamped and additional detail has been added. Although the types of awards have not changed, they still prohibit punitive damages, the tribunal may now allocate reasonable costs and attorney’s fees and by whom they should be paid. The enforcement of the final award has not changed, and awards made by the tribunal continue to be binding solely on the disputing parties in the particular case.