Chapter 31 Dispute Settlement


I. INTRODUCTION


The North American Free Trade Agreement (NAFTA) included three distinct dispute settlement processes – one for state-to-state disputes (Chapter 20), a second one for investor-state disputes (Chapter 11), and a third one for review of anti-dumping and countervailing duty determinations (Chapter 19).  The biggest differences between dispute resolution under the NAFTA and under the USMCA are in the investor-state dispute processes. The USMCA’s processes for resolving state-to-state disputes and antidumping and countervailing duty disputes remain largely unchanged.


II. EXECUTIVE SUMMARY


Chapter 14 of the USMCA deals with investor protection mechanisms, which are significantly reduced from those contained in the NAFTA.  As between the United States and Canada, it does not provide investors the right to arbitrate investor-state disputes; however, procedures for resolving existing investor-state disputes under the NAFTA are phased out over a three-year period.  As between the United States and Mexico, Chapter 14 narrows investors’ protections against non-discriminatory treatment and limits the ability of investors to have investor-state disputes decided by international arbitrators, as opposed to domestic tribunals.


Thanks to Canadian resistance to any material change to the NAFTA’s Chapter 19 dispute resolution mechanism, along with the United States’ need to secure Canada’s participation in the USMCA, minimal meaningful differences exist between the NAFTA’s Chapter 19 process and the new mechanisms contained in the USCMA.  Final antidumping and countervailing duty determinations of a Party will remain subject to binding review in binational arbitration proceedings initiated by affected exporters or producers.


Chapter 20 of the NAFTA was critical to ensuring that the three governments fulfilled their obligations under such trade agreement.  In practice, the United States obstructed the formation of arbitral panels that were supposed to adjudicate state-to-state disputes.  In the USMCA negotiations, the United States pushed for the right to veto panel determinations, which Canada and Mexico vigorously opposed.  In the end, the Parties elected to largely preserve the NAFTA’s state-to-state dispute resolution mechanism in what is now the state-to-state dispute settlement provisions of the USMCA.


III. LEGAL DISCUSSION


Investor-State Disputes. Mexico has a well-known history of expropriating foreign investments.  In 1938, the Mexican government expropriated the assets of nearly all foreign oil companies operating in the country.  In 1982, the Mexican government nationalized fifty-eight of the country’s sixty banks, including those owned by foreign investors.  Thus, before the NAFTA was adopted in 1993, foreign investors were reluctant to make major investments in Mexico based on fears of expropriation and discriminatory treatment of foreign investment by the Mexican government.


Chapter 11 of the NAFTA sought to allay the fears of investors by granting North American investors protections against discriminatory treatment based on their status as foreigners.  For example, it provided for national treatment (an assurance that each NAFTA party’s government would accord investors of the other NAFTA parties treatment no less favorable than that accorded to its own investors) and barred the imposition of export requirements, sales limits and other performance requirements not imposed equally on all investors, regardless of nationality.


Chapter 11 then established a mechanism for the settlement of investor-state disputes, which gave further assurance of equal treatment and due process before an impartial tribunal.  Prior to the NAFTA, U.S. investors whose investments were expropriated or impaired by the Mexican government were left to sue the Mexican government in its own courts, which many viewed as not being impartial or fair.  Under the NAFTA’s Chapter 11, an investor could avoid Mexican courts by submitting a claim that its rights had been violated to binding arbitration under the Convention of the International Centre for the Settlement of Investment Disputes (“ICSID”) or the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL”).  Importantly, Chapter 11 stated that “a disputing party shall abide by and comply with an award without delay” and provided that the governments were to make final arbitration awards enforceable against them in their domestic courts.


The USMCA’s Chapter 14 regulating investment replaces Chapter 11 of the NAFTA.  The biggest change from Chapter 11 is that the treatment of United States and Mexican investors was separated from that of United States and Canadian investors.  Canada, which had been ordered to pay damages of more than $300 million to foreign investors under Chapter 11, sought to terminate such Chapter’s protections and dispute resolution mechanism.  Although the United States has never been ordered to pay damages by a Chapter 11 arbitral tribunal, in the USCMA negotiations, the Trump administration was not committed to retaining Chapter 11, in part due to a view that its dispute resolution process diminished United States sovereignty. 


Thus, Annex 14-C to Chapter 14 of the USMCA provides that the Parties’ consent to resolve disputes under NAFTA Chapter 11 “shall expire three years after the termination of NAFTA 1994” and applies only to arbitrations initiated “while NAFTA 1994 is in force.” See USMCA, Chapter 14, Annex 14-(C)(3) & (5).  This means that investment disputes against Canada may not be initiated after the NAFTA terminates, and any “legacy” disputes, which remain in the arbitration pipeline, should be concluded no later than three years thereafter. Because both Canada and Mexico are parties to the Trans-Pacific Partnership (TPP), which contains a dispute resolution mechanism for investor-state disputes, Canada’s withdrawal from the NAFTA’s Chapter 11 mechanisms does not impair the ability of Canadian investors to protect their investments in Mexico or of Mexican investors to protect their investments in Canada.  Canada’s gain is that it will no longer be the target of Chapter 11 arbitration claims by United States investors.


The rights and protection of United States and Mexican investors are governed by Annex 14-D of Chapter 14 of the USMCA.  That Annex permits U.S investors who have invested in Mexico and Mexican investors who have invested in the United States to submit limited types of claims to international arbitration.  Only claims that a Party has violated its national treatment, most-favored-nation treatment and “direct expropriation” obligations may be arbitrated.  And those claims may be arbitrated only after the investor has first: (a) tried to resolve the dispute through consultation and negotiation; and (b) initiated a proceeding before a competent court or administrative tribunal of the respondent Party and obtained a final decision from a court of last resort, or thirty months have elapsed from the date the proceeding was initiated. Additionally, pursuant to Appendix 3 to Annex 14-D, a United States investor waives the right to arbitrate a claim under Annex 14-D if the investor alleges in proceedings before a Mexican court or administrative tribunal that Mexico breached an obligation under Chapter 14.  In other words, the investor’s allegations in the underlying Mexican proceeding must be limited to claims that Mexico violated its obligations under Mexican law, independent of any obligations under Chapter 14.  Like NAFTA Chapter 11, Annex 14-D provides that final arbitration awards may include monetary damages and restitution of property, and such may be enforced in the territory of the respondent country.


Notably, Annex 14-E to Chapter 14, which addresses Mexico-United States disputes related to covered government contracts, in Paragraph (6)(B),carves out investment related to government contracts in defined covered sectors – i.e., oil and natural gas, public power generation, public telecommunications services, public transportation services and the ownership and management of certain roads, railways, bridges or canals.  United States investors in these sectors will be able to continue to arbitrate their disputes with Mexico in much the same way originally provided for under the NAFTA. 


In addition to reducing the types of claims that are subject to international arbitration, pursuant to Articles 14.4(4) and 14.5(4) of Chapter 14 of the USMCA,  a legitimate public welfare objectives exception to the government’s national treatment and most-favorite-nation treatment obligations was created, thereby diluting the investor rights emanating from such principles.  Moreover, although the USMCA prohibits both direct expropriation and measures that constitute indirect expropriation of investment, only claims of direct expropriation are subject to international arbitration. See Article 14.8(1) and Annex 14-D, Paragraph 14.D.3(1)(a)(i)(B). 


Unfair Trade Disputes. To offset unfair trade practices such as dumping and government subsidies, and sometimes for purely political motives, governments impose antidumping and/or countervailing duties on imports.  Chapter 19 of the NAFTA established a process through which final determinations by an agency in antidumping and countervailing duty cases would be subject to binding review by independent binational arbitrators, instead of by domestic courts. 


Going into the negotiation of the USMCA, the United States and Canada held diametrically opposing views of NAFTA Chapter 19.  The United States sought the wholesale removal of the Chapter based on sovereignty concerns stemming from the ability of international tribunals to alter or undo the decisions of United States trade authorities.  Canada, which had used Chapter 19 to successfully reverse the United States government’s imposition of duties on certain Canadian exports, demanded that Chapter 19’s dispute resolution mechanism remain in place.  Ultimately, Canada prevailed, and the NAFTA Chapter 19 dispute resolution process remains largely the same under USMCA Chapter 10 Trade Remedies, Section D, and a handful of Annexes thereto.


State-to-State Disputes. Chapter 20 of the NAFTA established a process for the resolution of disputes between the Parties regarding the interpretation or application of the NAFTA and whenever an actual or proposed measure of a party was inconsistent with or would impair rights under such trade agreement.  That process began with consultation between the disputing parties.  If consultations did not resolve a dispute, a party could request the NAFTA’s Free Trade Commission (composed of cabinet-level officials) to intervene to resolve the dispute.  If the Commission proved unable to resolve a dispute, a Party could request the establishment of an arbitral panel. A five-member panel was then to be drawn from a standing thirty-person roster of qualified arbitrators.  Following an initial report and an opportunity for the Parties to comment thereon, the panel was to issue a final report.  The disputing Parties then were to agree on a resolution of the dispute that should conform to the panel’s determinations.  Absent a mutually satisfactory agreement, the complaining party could suspend NAFTA benefits “of equivalent effect” to the party complained against.


In practice, the United States disrupted the functioning of the Chapter 20 dispute resolution process by refusing to make appointments to the roster of qualified arbitrators.  When the United States pushed in USMCA negotiations for the ability to veto panel decisions, Mexico and Canada determined that preservation of the Chapter 20 mechanism (despite its shortcomings) was a better alternative.  Thus, the state-to-state dispute resolution mechanism of the NAFTA has remained largely intact.


Chapter 31 of the USMCA on Dispute Settlement replaces NAFTA Chapter 20.  Many of Chapter 20’s provisions were transplanted into the USMCA with no change at all.  Other provisions were slightly reworded, and the organization or order of many provisions changed.  One of the biggest changes, in view of advances in technology since the NAFTA entered into force in 1994, is a new requirement, pursuant to Article 31.12, of electronic filing of all documents relating to a dispute.      


IV. CONCLUSION


On balance, the USMCA’s dispute resolution process for investor-state disputes reflects a retreat from advances made in the NAFTA.  The clearest examples of this are Canada’s withdrawal from the investor-state dispute resolution process altogether, the dilution of foreign investor rights which existed under NAFTA Chapter 11, and the reduction in the ability of foreign investors to prosecute disputes before binational arbitral panels instead of domestic courts.  Largely owing to Canada’s insistence, the NAFTA’s mechanism for resolving antidumping and countervailing duty disputes remains substantially unaltered in the USMCA.  Finally, rather than revising Chapter 20 of the NAFTA to eliminate the ability of a respondent party (mostly the United States) to obstruct the state-to-state dispute resolution process, Canada and Mexico were pleased to preserve such process under the USMCA and subdue the United States’ effort to further weaken or debilitate the process. 



CONTACT INFORMATION

Robert M. Barnett | rbarnett@ccn-law.com
Tel: +1 (210) 222-1642

Jorge Sánchez-Cubillo | jcubillo@ccn-law.com.mx
Tel: +52 (55) 5093-9700

David Lopez | dlopez@ccn-law.com
Tel: +1 (210) 222-1642

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