NAFTA’s Sunset Period Will End in June 2023 and Claims Must Be Notified Earlier, in Some Cases by Year-End 2022 – NAFTA Investors Should Consider their Options Now

State conduct may adversely affect foreign investors and their investments.  Investors protected under international investment treaties may bring arbitration proceedings against States in those cases, seeking financial compensation for their losses.

The North American Free Trade Agreement ("NAFTA") among Canada, Mexico, and the United States has protected cross-border investments in North America since 1994.  To date, there have been over 76 claims under NAFTA: 30 against Canada, 27 against Mexico and 19 against the US.¹ NAFTA was replaced by the Agreement between the United States of America, the United Mexican States, and Canada ("USMCA") on July 1, 2020.  While the treaties are similar, USMCA is less favorable to investors in some important respects. 

Investors who invested under NAFTA should therefore consider availing themselves of a USMCA provision that allows the arbitration of so-called "legacy claims" based on the protections available under NAFTA. Legacy claims will survive until June 30, 2023 (often referred to as the "Sunset Period"). But investors bringing such legacy claims must serve the host State with a so-called notice of intent at least 90 days before commencing arbitration, and even earlier (six months) for expropriation claims related to taxation measures. Thus, time is of the essence.

Investor-State Arbitration under USMCA

In several important respects, the investment regime under USMCA is less favorable to investors than that of NAFTA.

Canada Did not Sign on to Investor-State Arbitration under USMCA

Canada did not sign on the investor-State dispute settlement mechanism under USMCA.  As a result, investment arbitration is no longer available for (i) Canadian investors with investments in Mexico and the US, and (ii) US and Mexican investors with investments in Canada. However, investment disputes between Canadian investors and Mexico and between Mexican investors and Canada may be arbitrated under a separate treaty, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to which Canada and Mexico (but not the US) are parties.

Limited Access to Investment Arbitration under USMCA

Unlike the broad access to arbitration under NAFTA, investor-State arbitration under USMCA is generally limited to a subset of investment protections.

• Under NAFTA, an investor could bring arbitration claims that the host State (directly or indirectly) expropriated its investment or failed to afford the investor or its investment certain standards of treatment, namely: the minimum standard of treatment (including the State's obligation to afford investments fair and equitable treatment, which is the most common basis for investment treaty claims), national treatment, and most-favored-nation treatment.²
• USMCA limits investor-State arbitration to claims that the host State directly expropriated an investment or violated the national treatment or most-favored-nation standards.³  Claims for indirect expropriation (for instance, that a regulation deprived an investment of its value) and violations of the minimum standard of treatment cannot be submitted to arbitration.

In addition, USMCA requires investors to bring proceedings before a competent court or administrative tribunal of the host State over the measures that violate the treaty before starting an arbitration.⁴ Investors are required to either obtain a final judgment from a local court with jurisdiction or prove that they have been unable to obtain such a final judgment after 30 months of local proceedings.⁵

Investors with a Covered Government Contract

Investors who have concluded a written "Covered Government Contract" with a national authority of the host State can arbitrate violations of all substantive protections available under the USMCA.  Covered Government Contracts are "written agreement[s] between a national authority [of one State] and a covered investment or investor of [another State], 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."⁶ Covered sectors include oil and natural gas, power generation, telecommunications, transportation, and infrastructure.⁷

The substantive rights of investors with Covered Government Contracts are nevertheless arguably more limited than under NAFTA:

• Investors can bring claims that the host State violated the minimum standard of treatment, but "the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor's expectations does not constitute a breach of [the minimum standard of treatment], even if there is loss or damage to the covered investment as a result."⁸  While unclear, States may seek to rely on this language to argue that legitimate expectations (the most common basis for a claim for breach of the fair and equitable treatment standard) may not found such a claim under the USMCA.
• Investors arguing that an indirect expropriation under USMCA has occurred must prove that the State measure destroyed the economic value of the investment. However, the mere fact "that an action or series of actions by [the host State] has an adverse effect on the economic value [of an investment], standing alone, does not establish that an indirect expropriation has occurred."⁹ Tribunals under USMCA must also consider (i) if the State measure "interferes with reasonable investment-backed expectations" of the investor, and (ii) "the character of the government action, including its object, content and intent."¹⁰ Under NAFTA, by contrast, tribunals have held that an expropriation is established through proof of "a substantially complete deprivation of the economic use and enjoyment of the [investor's] rights to the property, or of identifiable distinct parts thereof," without reference to the additional elements described above.¹¹ USMCA also codifies the so-called police powers doctrine, whereby measures adopted to protect legitimate public welfare objectives do not normally constitute indirect expropriations, except in rare circumstances.¹²

As to procedural protections, investors with Covered Government Contracts, unlike other investors under USMCA, do not need to exhaust local remedies before commencing an arbitration.

Availability of NAFTA Legacy Claims

USMCA's Annex 14-C grants investors who established or acquired an investment when NAFTA was in effect (i.e., on or before June 30, 2020) a three-year Sunset Period to bring arbitration claims they might have under NAFTA (i.e., until June 30, 2023).¹³

Investors bringing such legacy claims must serve the host State with a so-called notice of intent at least 90 days before commencing an arbitration.¹⁴ Investors with expropriation claims related to taxation measures must communicate their intent to arbitrate earlier, six months before June 30, 2023.¹⁵

USMCA is silent as to whether investors can bring NAFTA legacy claims over State measures that occurred during NAFTA's Sunset Period (i.e., since July 1, 2020).  No arbitral tribunal has addressed this issue so far. The outcome may depend on the circumstances of each case.  For example, an investor challenging violations that occurred during the Sunset Period may have a stronger basis for a NAFTA legacy claim if the violations are part of a series of wrongful State acts that started before the Sunset Period.

Three publicly known arbitrations concerning NAFTA legacy claims are currently pending.¹⁶

Investors Should Consider Their Options Now

Time is pressing for investors to consider if they have viable NAFTA legacy claims. This is particularly important for Canadian investors with investments in the US and US investors with investments in Canada, as they will no longer have access to investor-State arbitration. It is also important to US investors with investments in Mexico and Mexican investors with investments in the US who do not have a Covered Government Contract, as they enjoy lesser protections under USMCA than under NAFTA.

For example, as reported here and here, Mexico has recently adopted—or tried to adopt—transformational reforms affecting investors in several areas of the country's economy. US investors should consider whether a NAFTA legacy claim offers them a unique opportunity to recover damages caused by such measures or whether to will be able to bring claims under USMCA's investment arbitration regime. 

Investors who do not currently have disputes should consider restructuring their investments to access investment treaty protections and investor-State arbitration under other treaties than USMCA.

_{1 See Investment Policy Hub, Investment Dispute Settlement Navigator, available here. 
2 See NAFTA Articles 1116 and 1117.
3 See USMCA Annex 14-D, Article 14.D.3.
4 The local litigation requirement does not apply to the extent recourse to domestic remedies was obviously futile. See USMCA Annex 14-D, Article 14.D.3, footnote 25. 
5 See USMCA Annex 14-D, Article 14.D.5.
6 USMCA Annex 14-E, Article 14.E.6.
7 USMCA Annex 14-E, Article 14.E.6 defines "covered sector" as "(i) activities with respect to oil and natural gas that a national authority of an Annex Party controls, such as exploration, extraction, refining, transportation, distribution, or sale, (ii) the supply of power generation services to the public on behalf of an Annex Party, (iii) the supply of telecommunications services to the public on behalf of an Annex Party, (iv) the supply of transportation services to the public on behalf of an Annex Party, or (v) the ownership or management of roads, railways, bridges, or canals that are not for the exclusive or predominant use and benefit of the government of an Annex Party."
8 See USMCA Article 14.6(4).
9 See USMCA Annex 14-B, Article 14.B.3.
10 See USMCA Annex 14-B, Article 14.B.3. See also Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/4/21, Award, Nov. 30, 2017, ¶¶ 377, 389.
11 See, e.g. Fireman's Fund Insurance Company v. The United Mexican States, ICSID Case No. ARB(AF)/02/1, Award, July 17, 2006, ¶ 176.  See also NAFTA Article 1110 and USMCA Annex 14-B, Article 14.B.3..
12 See USMCA Annex 14-B, Article 14.B.3.
13 See USMCA Annex 14-C, Article 14.C.3.
14 See NAFTA Article 1119.
15 See NAFTA Article 2103.6. 
16 TC Energy Corporation and TransCanada PipeLines Limited v. United States of America, ICSID Case No. ARB/21/63, Request for Arbitration, Nov. 22, 2021, available here; Alberta Petroleum Marketing Commission v. United States of America, Notice of Intent to Submit a Claim to Arbitration, Feb. 9, 2022, available here; Access Business Group LLC v. United Mexican States, Notice of Intent to Submit a Claim to Arbitration, Oct. 11, 2022, available here.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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