Recommended actions
US and Canadian investors should be ready to file their notice of intent to submit their claims to arbitration by 30 March 2023. To prepare their notice, they should gather contemporary documents (including correspondence and communications with government officials) and facts to evidence the damages suffered because of measures adopted by Mexico.
In more detail
Executive summary
The Mexican government has adopted several measures to favor the state-owned electrical utility (CFE) and the state-owned oil and gas company (PEMEX) at the expense of foreign investors. The US and Canada have thus activated the State-to-State dispute resolution mechanism under Chapter 31 of the United States-Mexico-Canada Agreement (USMCA) by engaging in consultations with Mexico.1 The State-to-State dispute resolution mechanism seeks to correct Mexico's course of action and reestablish the business conditions that brought US and Canadian energy investors to Mexico.
US and Canadian investors may additionally (and independently) recover financial damages from Mexico because of its actions. Under the North American Free Trade Agreement (NAFTA) (the USMCA's predecessor), US and Canadian investors may bring arbitration proceedings against Mexico under more favorable conditions than those offered by the USMCA.2 These investors will only have access to the NAFTA arbitration mechanism until March 2023. After that, US and Canadian investors might lose access to international arbitration to recover damages for Mexico’s actions.
They should therefore consider preparing and raising their claims regardless of the outcome of the State-to-State dispute resolution mechanism started by the US and Canada. A panel's finding that Mexico has breached the USMCA would strengthen the investor's case to recover damages in an arbitration against Mexico.
How does the USMCA's State-to-State dispute resolution mechanism work?
The US, Mexico and Canada will begin consultations seeking to arrive at a mutually satisfactory resolution.3 Unless the Parties agree otherwise, they must solve the dispute within 75 days.4 If the consultations fail, the US and Canada may request the establishment of a five-member panel (or three-member if the Parties so agree).5 After hearing the parties' arguments, the panel must issue a report with its findings and determine whether the challenged measures violate the USMCA.6 If the panel finds that Mexico's measures violate its obligations under the USMCA, the US, Mexico and Canada must try to agree on how to solve the dispute (i.e., how Mexico could correct its course of action).7 If they cannot agree on a resolution within 45 days after the panel's report, the US and Canada may suspend the application of Mexico's benefits of equivalent effect.8
Why NAFTA Chapter 11 and not USMCA Chapter 14?
Both the NAFTA and the USMCA contain provisions that protect the rights of investors of a contracting party investing in the territory of another contracting party (e.g., a US or Canadian investor investing in Mexico). They also provide for dispute settlement mechanism to enforce the rights of the investors when they feel that the contracting party where they invested has violated their rights. This is known as investor-state dispute settlement (ISDS).
NAFTA offered broad protections and let US investors start arbitrations directly against Canada, and Canadian investors could do the same against the US. Mexican investors could bring arbitration proceedings against the US or Canada, and US and Canadian investors could arbitrate their claims against Mexico, too.
The USMCA changed this. Now, there is no ISDS between Canada and the US (i.e., US investors can no longer arbitrate their claims against Canada and vice versa).9 Canadian investors cannot start arbitrations against Mexico anymore (and vice versa).10 And ISDS between US investors and Mexico is now restricted.11 The USMCA distinguishes between investors with covered government contracts and other investors. The former will still have broader access to ISDS than the latter.12
Investors without covered government contracts may only challenge measures in breach of national treatment and most-favored nation treatment principles and direct expropriation. They will be unable to file claims regarding indirect expropriations, violations of "fair and equitable treatment" or the "full protection and security" standards. These are the most common claims raised in investorState arbitrations. In short, the USMCA deprives investors without government contracts from effective protection against measures that harm their investments.
Why March 2023?
Under Annex 14-C of the USMCA, the NAFTA ISDS mechanism should still apply to claims related to investments established or acquired while NAFTA was in place ("Legacy Investments").13 The opportunity to submit a claim to arbitration under the NAFTA regime expires three years after NAFTA's termination.14 The USMCA became effective and replaced NAFTA on 1 July 2020. So investors should be submitting their claims by 30 June 2023. However, they must bear in mind that they must take some steps before they are allowed to submit their claims to arbitration. First, investors may only submit their claims to arbitration after "six months have elapsed since the events giving rise to a claim."15 Claims against Mexico's energy measures comply with this requirement. Second, they must "attempt to settle [the] claim through consultation or negotiation" with the government.16 Here, investors should try to engage the Mexican government as soon as possible, and no later than 30 January 2023. Third, the investors must "deliver … written notice of its intention to submit a claim to arbitration at least 90 days before the claim is submitted."17 Thus, the investor should be able to serve the Mexican government with a comprehensive notice stating all of its claims by 30 March 2023 at the latest.
What should US and Canada investors do before 2023?
Investors should be ready to file their notice of intent by 30 March 2023. To prepare their case, investors should gather contemporary documents (including correspondence and communications with government officials) and facts to evidence the damages suffered because of measures adopted by Mexico.
1 See United States' Request for Consultations (20 July 2022) available here; Press Release on Canada's Request for Consultations (21 July 2022) available here.
2 See Baker McKenzie Client Alert, "USMCA Restricts Access to International Arbitration" (13 February 2020) available here.
3 See Agreement between the United States of America, the United Mexican States, and Canada (1 July 2020) (USMCA), Art, 31.4.
4 Id., Art. 31.6(1)(b).
5 Id.
6 Id., Art. 31.7.
7. Id., Art. 31.8.
8 Id., Art. 31.9.
9 See Baker McKenzie, Global Arbitration News Blog, "The New NAFTA – the United States-Mexico-Canada Agreement (USMCA) Brings Future Changes to ISDS" (4 October 2018) available here.
10 Id. Note, however, that Canadian investors have access to ISDS against Mexico under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Yet, the CPTPP might be more restrictive than the NAFTA.
11 See Baker McKenzie Client Alert "USMCA Restricts Access to International Arbitration" (13 February 2020)
12 Id.
13 See USMCA, Annex 14-C.
14 Id., Annex 14-C, Art. 3.
15 See North American Free Trade Agreement (1 January 1994) (NAFTA), Art. 1120.
16 Id., Art. 1118.
17 Id., Art. 1119.
