On November 30, 2018, Canada, the United States, and Mexico announced they had signed a new trade agreement, known in the United States as the United States-Mexico-Canada Agreement (USMCA) and in Canada as the Canada-United States-Mexico Agreement (CUSMA). That agreement replaced the North American Free Trade Agreement (NAFTA), and came into force his year, on July 1, 2020. The coming into force of the USMCA/CUSMA heralds significant changes in protections available for Canadian and US companies investing in Mexico and Mexican companies investing in the US or Canada. It is important – particularly for existing investors with legacy investments – to carefully and quickly consider their options as well take a close look at the risk allocation and dispute resolution arrangements within their investments.


Changes to investor-state dispute settlement 

As we previously reported, the most significant development concerns changes to the current investor-state dispute settlement (ISDS) provisions under Chapter 11 of NAFTA, which grant foreign investors from each of the state parties to NAFTA the right to bring a direct claim in arbitration against another state party should that state breach its NAFTA obligations and cause damage to the investor’s investment. Under CUSMA, however, Canada has withdrawn its unilateral consent to ISDS with foreign investors. These changes took effect immediately for new investments made after July 1, 2020. But for investments made prior to July 1, there is a window in which “legacy investment” claims may be brought against Canada under the provisions of NAFTA Chapter 11. 

Currently under NAFTA Chapter 11, all of the state parties have granted unilateral consent to ISDS and the investment provisions apply to “investors of another Party” and “investments of investors of another Party.” Subject to specific carve-outs, all types of investments receive Chapter 11 protection and are subject to the ISDS provisions, which provide for the arbitration of claims for breaches of the protections enumerated in Chapter 11. 

In contrast, under its replacement, CUSMA Chapter 14, investors may only submit Legacy Investment Claims or Pending Claims to arbitration under Chapter 14 (Annex 14-C), claims in respect of Mexico-United States Investment Disputes (Annex 14-D), or Mexico-United States Investment Disputes Related to Covered Government Contracts (Annex 14-E). 

Under Annex 14-C, foreign investors with “legacy investments” may bring claims against Canada, the US or Mexico under the provisions of NAFTA Chapter 11 for three years after NAFTA’s termination (i.e., to June 30, 2023), when each NAFTA party’s consent to such arbitrations will expire. A “legacy investment” is defined to mean an investment of an investor of another party in the territory of the party established or acquired between January 1, 1994 (when NAFTA came into force), and the date of termination of NAFTA, and that existed on the date of CUSMA’s entry into force. Arbitrations that have already been commenced under NAFTA Chapter 11 (i.e., pending claims) will be permitted to proceed to their natural conclusion.

New investor-state claims under Chapter 14 are restricted to claims by US or Mexican investors against Mexico or the United States, respectively. The types of claims that may be submitted to ISDS are also more restricted. For instance, claims for direct expropriation may be submitted to ISDS but claims for indirect expropriation may not.

Furthermore, in terms of the substantive obligations the parties have agreed to in Chapter 14, investors will see more limited protection than previously available under NAFTA Chapter 11. These more limited obligations include a narrowed definition of “expropriation.” 


What do these changes mean for foreign investors? 

Disputes between foreign investors and host states are not uncommon, even in developed countries. There have been at least 67 NAFTA Chapter 11 claims brought by investors in the 26 years that NAFTA has been in force. Canada has been the respondent state to more than a third of those claims (at least 28), Mexico has been the respondent in 22 cases and the US has been the respondent in 17 cases. Canadian investors have been claimants in 18 cases, US investors in 48 cases, and Mexican investors in only one case. Absent ISDS protections, these disputes would have all had to run their course under domestic laws and before the domestic courts of the host states. Alternatively, investors would have had to consider alternate routes for applying pressure to resolve disputes – such as negotiation or seeking intervention by their home government (thus politicizing an otherwise often commercial dispute). The limitations of these options was what led in large part to the global dominance of international arbitration as a system for resolving investor-state disputes. The withdrawal of ISDS rights and narrowing of state obligations to protect foreign investments will necessarily shift the risk landscape for investors. 


What foreign investors should do to protect their investments

With CUSMA in force, foreign investors should take several steps to protect themselves and their investments. 

Existing Canadian investors with potential legacy investment claims under NAFTA Chapter 11 against the US or Mexico, and conversely US or Mexican investors with potential legacy investment claims against Canada, must carefully and quickly assess their options. If they wish to pursue these claims through ISDS they must ensure that any claim is timely brought in accordance with the transitional provisions in CUSMA to avoid any jurisdictional challenge that may risk ultimately barring their claim entirely. 

Even if there is no current dispute, given that the availability of ISDS and investor rights is gradually narrowed under the CUSMA, existing investors should also re-consider the risk allocation and dispute resolution tools available to them to seek redress for state wrongdoing. The withdrawal of these important rights and protections may change the risk profile of the investment as compared to when the investment was first made. Both existing investors and foreign investors considering new investments in Canada, Mexico or the US, will need to carefully consider the domestic law protections afforded to them by the host state – under the law as it stands currently, as well as the likely extent to which it might change. They will also need to assess the adequacy of remedies and the availability of recourse to domestic courts. This is especially the case where the investment involves state or state-owned entities and there is a risk that political pressure may come to bear. There may be concerns over bias, corruption, political interference, excessive delay or cost, or in some instances the domestic judiciary’s capability to deal with these types of disputes, which often involve complex questions of international law. Their investment structure and agreements will need to take into account and mitigate these risks (to the extent possible). For pre-existing investments, they may need to consider what options are available to them to negotiate additional protections or ensure proper treatment.  

Investors may need to consider, for example, structuring the investment to benefit from other treaties which do contain ISDS provisions, or contractual mechanisms that offer some protection against state conduct, such as material adverse change clauses or waivers of state immunity. If the investment is directly with the state under an investment agreement, they may also consider inserting stabilization clauses and/or ISDS provisions into the agreement. The viability of other avenues of recourse (e.g., state to state negotiation) should also be considered. 

Where the investment is by a Canadian national into Mexico, or a Mexican national into Canada, then ISDS may still be available through other legal instruments, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to which both Mexico and Canada are a party. Foreign investors from other countries may have rights under other investment treaties. And of course, investors should also look to what is provided in their contractual documentation in case additional rights of recourse are available. 



The current global economic and political environment is tumultuous – there are pressures from the COVID-19 pandemic, actual and predicted economic downturn in most major economies, an expanding trade war between two of the world’s largest economies, historically low oil prices, deepening concerns over climate change, and disruption posed by technological innovation and the digitalization of many industries. In response to these pressures, many states are implementing or considering implementing significant legislative and policy changes. There is little doubt that some foreign investors will find their investments significantly impacted as a result. Now more than ever, foreign investors need to be alive to the investment protections available to them – as well as any limitations in those protections.

Although CUSMA came into force on July 1, 2020, it is important for investors of the NAFTA parties with investments made in the NAFTA territory up to July 1 to be aware that the ISDS mechanisms under NAFTA will, in principle, remain available to them for three years following the entry into force of the new agreement. New investors as well as investors with legacy investments should carefully consider their rights and protections under CUSMA and other treaties and/or seek to ensure that any new contracts they enter into with states concerning their investments contain appropriate dispute resolution provisions that will offer procedural protections in the event of a dispute. This is a challenging time for foreign investors globally, albeit one that still offers significant opportunity where risks can be sensibly mitigated – and understanding rights and protections to mitigate against state activity should be a key component of any investor’s tool-kit. 

Issue 15

Wording IAR on a red background

International arbitration report

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