US-Mexico-Canada trade agreement introduces new arbitration rules

The United States, Canada, and Mexico have reached an agreement – the USMCA (the United States-Mexico-Canada Agreement) – to replace NAFTA (the North American Free Trade Agreement). Once in force, the USMCA will significantly alter the investor-state dispute settlement (ISDS) that is currently included in Chapter 11 of NAFTA. Under the new rules, in the case of US-Canada relations, the parties will not have an option to start arbitration proceedings; instead, the investor will have to file a claim in the national court of the host state – the state where the investment has been made and the investors’ rights are breached. In the case of US-Mexican relations, three years after the termination of NAFTA, the USMCA makes a distinction between regular investments and those involving government contracts. Claimants with regular investments may only challenge measures in breach of regulations on national treatment, most-favored nation treatment, and expropriation, excluding indirect expropriation. Before submitting the claim to arbitration, the claimant must first file the claim with the courts of the host state. The arbitration can only commence if there is a final decision of a ‘court of last resort of the respondent or 30 months have elapsed’ from the start of the domestic court proceedings. In the case of Canada-Mexico relations, the USMCA does not regulate the arbitration proceedings. Instead, the investors will have to file claims under the dispute settlement regulations of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) expected to be ratified by Canada on 29 October. The treaty is not yet in force. See also: Canada, Mexico and the US reach a deal to revise NAFTA