August 03, 2020 article

What the United States-Mexico-Canada Agreement Means for International Construction Disputes

R. Zachary Torres-Fowler and Cindy Lee

On March 13, 2020, the United States, Canada, and Mexico ratified the long-awaited “Agreement between the United States of America, the United Mexican States, and Canada,” otherwise known as the “USMCA.”  The USMCA made a number of revisions to the trade regulations previously governed by NAFTA, including significant modifications to NAFTA’s former dispute resolution framework — Investor State Dispute Settlement (ISDS).

In concept, ISDS affords companies that invest abroad certain treaty-based protections against unfair treatment by foreign governments (e.g., discrimination, denial of due process, expropriation). If a foreign government violates a treaty protection, ISDS allows the injured investor to bring treaty-based claims against that foreign government in an investor-state arbitration.

For the construction sector, investments involving “turnkey, construction, management, [and] production” contracts continue to receive special protection under the USMCA. However the treaty imposes new limitations on how contractors, owners, and other entities may avail themselves of those protections. As a result, entities with international construction projects in North America should pay close attention to the USMCA’s revised dispute resolution framework. This article introduces ISDS and analyzes how the USMCA has altered NAFTA’s previous framework.

Growth of ISDS and Controversy

Once an obscure feature of NAFTA, ISDS has become an increasingly common form of dispute resolution among bilateral and multilateral investment treaties like the USMCA. And over the past decade, investment treaty claims by investors against foreign governments have grown exponentially. ISDS is novel in that governments waive their right to sovereign immunity and permit foreign nationals to directly bring claims against them in exchange for the free trade agreement’s economic benefits.  In doing so, ISDS theoretically creates a stable and neutral legal regime that encourages foreign direct investment into capital hungry jurisdictions.

However, the protections afforded to foreign investors under NAFTA’s ISDS framework, are not without controversy. Critics argue that ISDS affords foreign corporate investors greater rights than domestic entities and potentially exposes governments to liability for passing legitimate laws/regulations. Critics also question whether private arbitral tribunals, rather than the courts, should decide claims that raise weighty public policy concerns.

As explained below, the USMCA attempts to address some of these concerns.

Treaty Protections Under the USMCA

There is a large body of law addressing the criteria that a claimant-investor must satisfy before asserting an investment treaty claim against a respondent state—far too much law to cover here. However, in broad strokes, under the criteria set forth in the USMCA, contractors or owners, operating on projects based in a foreign state (e.g., a U.S. contractor operating on a project in Mexico), would be entitled to bring investment treaty claims against the foreign state if the foreign state violates the USMCA’s protections.

Specifically, the USMCA generally recognizes three core categories of protections: (1) protection against discrimination (Art. 14.4 “National Treatment” and Art. 14.5 “Most-Favored-Nation Treatment”); (2) protection against denials of due process and security (Art. 14.6 “Minimum Standard of Treatment”); and (3) protection against expropriation (Art. 14.8 “Expropriation and Compensation”). The USMCA’s protections are similar to the protections afforded under NAFTA, but they are arguably more limited in scope. For example, the USMCA’s antidiscrimination protections include a “public welfare” exception that allows a host-state to discriminate between different foreign investors, or foreign investors and domestic investors, if there is a legitimate public welfare objective to do so. A similar “public welfare” exception also applies to the USMCA’s protection against expropriation—thus, curbing the ability of claimants to treat indirect regulatory takings as a form of indirect expropriation. These limitations did not exist under NAFTA.

How the USMCA Has Changed ISDS

In addition to the above, the USMCA fundamentally alters the dispute resolution framework depending on the nationality of the claimant-investor and respondent-state.

Canadian and U.S. Investment Disputes

The USMCA essentially abolishes investor-state arbitrations associated with Canadian and U.S investors/investments. After a phase-out period, the treaty calls for all Canadian/U.S. investors to resolve treaty claims against the U.S./Canadian governments through the host state’s local courts. This may have a number of ramifications for claimants and respondents.

First, while there is a cottage industry of specialized arbitrators handling international investment disputes, the field has remained largely outside the purview of the local courts. As a result, the U.S. and Canadian courts will need to become well-versed in international investment law, and there may be growing pains as the judiciary grapples with this relatively new area of law.

Second, the investor-state arbitration framework used by ISDS applies substantively different procedures, including significant limitations on document disclosure and discovery. With investment treaty claims being handled by the courts, claimants and respondents will encounter added complexities of U.S. and Canadian civil procedure, and most significantly, robust discovery.

Third, concerns over neutrality may feature more prominently in future disputes before the courts. Indeed, the purpose of utilizing international arbitration under ISDS is to guarantee a neutral forum to resolve claims. Now that claims against the U.S. and Canada will be presented in their respective courts, claimants may raise concerns over a denial of due process.

Mexican and Canadian Investment Disputes

The USMCA also eliminates ISDS as it applies to Mexican-Canadian investment disputes. Instead, trade negotiators opted to rely on the dispute resolution framework under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPATTP), to which Mexico and Canada are parties.  The CPATTP utilizes an ISDS/investor-state arbitration framework similar to NAFTA, with slightly different protections and procedures.

Mexican and U.S. Investment Disputes

For investments between the U.S. and Mexico, investors may still rely on ISDS with some additional procedural limitations. Specifically, the USMCA imposes a four-year statute of limitation on treaty claims by Mexican or U.S. investors against the United States or Mexico. Further, the USMCA requires investors to first pursue their treaty claims in the local courts for at least 30 months before utilizing ISDS unless domestic remedies would render recourse to the local courts futile or the investment concerns a “government contract” in a “covered sector.” The USMCA defines a “government contract” as a written agreement between a foreign investor and a “national authority,” and “covered sectors” include oil and gas, power generation, transportation services, telecommunications, and transportation infrastructure—notably, all of which touch on the construction industry.

The 30-month waiting period significantly limits a claimant-investor’s ability to avail itself of the USMCA’s treaty protections. Given the issues discussed above concerning the prosecution of investment treaty claims before the local courts, we expect that the meaning of “government contract” and “covered sectors” or claims concerning the futility of local remedies, will be heavily debated topics as claimant-investors attempt to avoid the 30-month waiting period.

Conclusion

The construction industry is global in nature, and contractors and owners operating on international construction projects across North America must remember the rights and remedies afforded to them under bilateral and multilateral trade agreements like the USMCA. The USMCA’s revisions to ISDS certainly limit the protections previously available under NAFTA, but with careful thought and planning, contractors and owners adversely affected by government actions may still be able to enjoy safeguards of the USMCA.

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R. Zachary Torres-Fowler

Troutman Pepper Hamilton Sanders LLP, Division 8: International Construction

Cindy J. Lee

Troutman Pepper Hamilton Sanders LLP, Division 8: International Construction