The deadline to file claims for existing investments under NAFTA is approaching. It is time for investors to assess their options

Time is running out for Canadian and U.S. investors in Mexico. July 1, 2023 marks the last day on which investors may file a request for arbitration under the investment chapter of the North American Free Trade Agreement (“NAFTA”). However, in order to file a request for arbitration, investors must first submit a notice of intent 90 days before the commencement of the arbitration, that is, no later than April 1, 2023. Therefore, the first quarter of 2023 will be crucial for foreign investors, as they will have to analyze their situation and determine whether to initiate arbitration proceedings under an existing investment claim, pursuant to NAFTA, or risk the preclusion of that right. The Agreement between the United States, Mexico and Canada (“USMCA”) entered into force on July 1, 2020, replacing NAFTA. Nevertheless, in accordance with Annex 14-C of the USMCA, investors may resort to the NAFTA investment dispute settlement mechanism for “existing investments” for up to three years after the date of NAFTA’s termination. This provision is also known as the “cláusula de caducidad” or by its English term, “sunset clause.” An existing investment is any investment made between January 1, 1994 (the date NAFTA entered into force) and July 1, 2020 (the date of its termination). This three-year period will expire on July 1, 2023. As of that date, investors who made investments between 1994 and 2020 will no longer have access to the NAFTA investment protection mechanism. This date will mark a turning point for investors in the region. The NAFTA investment dispute settlement mechanism has been successful to date. So far, more than 76 claims have been filed under Chapter 11 of NAFTA: 30 against Canada, 27 against Mexico and 19 against the United States. By contrast, no investment arbitration has yet been initiated under the USMCA, and there are at least three known existing disputes pending under NAFTA, with several other notices of intent already filed. This is no coincidence. Several factors lead to the conclusion that investment protection under NAFTA is more favorable than under the USMCA: First, Canada did not sign the USMCA investment dispute settlement mechanism. Consequently, investment arbitration under the USMCA will no longer be available to (i) Canadian investors with investments in Mexico or the United States and (ii) Mexican and U.S. investors with investments in Canada. Investment disputes between Canadian investors and Mexico and between Mexican investors in Canada may still be resolved under a separate international treaty, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”). However, the United States is not a party to this treaty, which means that Canadian investors in the United States and U.S. investors in Canada will no longer have access to investment arbitration against the State in which they have invested. Second, the substantive and procedural investment protection provisions under the USMCA are more limited in scope than those of NAFTA. For example, unlike Chapter 11 of NAFTA, Chapter 14 of the USMCA does not allow traditional investors to submit to arbitration claims relating to indirect expropriation and violations of the minimum standard of treatment. In addition, the USMCA requires investors to initiate proceedings before a competent judicial or administrative court before commencing an arbitration. Investors must demonstrate that they have obtained a final decision from a competent court or that they have been unable to obtain one after 30 months of litigation. By contrast, the NAFTA investment dispute settlement mechanism does not contain this limitation. Although investors with a “covered government contract” under the USMCA may have broader protection than ordinary investors, this protection is still less favorable than that of NAFTA. Covered government contracts only encompass certain specific sectors: oil and natural gas, power supply, telecommunications, transportation and infrastructure. Moreover, investors with covered government contracts may bring claims relating to violations of the minimum standard of treatment. However, the treaty provides that “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 this Article, even if there is loss or damage to the covered investment as a result.” NAFTA does not include this wording. Nevertheless, on July 31, 2001, the Free Trade Commission issued an interpretive note on certain provisions of Chapter 11 of NAFTA, in which it determined that “the concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.” Similarly, even though a covered investment under the USMCA is protected against indirect expropriation, investors must prove that the State’s measure destroyed the economic value of the investment, since the mere fact that an action of 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.” The NAFTA provisions do not include this express limitation. In conclusion, the expiration of the deadline to file claims for existing investments under NAFTA may adversely affect foreign investors in the region, since the USMCA does not contain the same level of protection. Consequently, investors must act quickly if they intend to initiate investment arbitration proceedings based on the NAFTA sunset clause. Von Wobeser y Sierra’s dispute resolution, public law and corporate practices have extensive knowledge and years of experience to help their clients effectively protect their investments through domestic and international proceedings. Likewise, our Mergers and Acquisitions practice is expert in designing appropriate corporate structures to protect new foreign investments in the country through international treaties. We will be pleased to resolve any questions regarding the protection of your investments and the timely exercise of your rights under domestic and international law. Should you require additional information, please contact: Claus von Wobeser, Partner, Co-Leader of the Arbitration Practice: +52 (55) 5258-1011 | cvonwobeser@vwys.com.mx Adrián Magallanes, Partner, Co-Leader of the Arbitration Practice: +52 (55) 5258-1077 | amagallanes@vwys.com.mx Montserrat Manzano, Partner: +52 (55) 5258-1000 | mmanzano@vwys.com.mx Rodrigo Barradas, Associate: +52 (55) 5258-1077 | rbarradas@vwys.com.mx Jorge Vázquez, Associate: +52 (55) 5258-1059 | jvazquez@vwys.com.mx

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