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Last kicks at the Can for Investor Disputes under NAFTA

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In what may well be one of the last decisions Canadian Courts make with respect to Chapter 11 of the North American Free Trade Agreement (“NAFTA”), the Ontario Court of Appeal (“OCA”) in United Mexican States v. Burr dismissed Mexico’s appeal from an Ontario Superior Court decision. The Superior Court had upheld the decision of an arbitral tribunal established under Chapter 11 of NAFTA in response to complaints by individual investors against Mexico.

While presenting an interesting issue, the implementation of the Canada – United States – Mexico Agreement (“CUSMA”) has effectively put an end to these investor-state dispute provisions as far as Canada is concerned, although a limited investor-state dispute mechanism remains in effect between Mexico and the United States.

 Background

The dispute began with the filing of a notice of intent to submit a claim to arbitration under Chapter 11 of NATFA filed by 3 US nationals and 5 US companies that were investors in casinos which were closed in 2014 by the Mexican government.

Chapter 11 of NAFTA provides that a qualifying investor may submit a claim against a party to the treaty for an alleged breach of certain obligations, for example the obligation to treat investors from other NAFTA countries as favourably as domestic investors.

Pursuant to Article 1120 of NAFTA the Investors submitted their claim to arbitration six months after initially giving notice to Mexico. Mexico raised several preliminary jurisdictional issues with the arbitration, including whether the investors had provided an appropriate written consent to arbitration, and whether all of the investors (which by the time of arbitration included 39 US nationals/companies and 7 Mexican companies) had provided sufficient notice of their intention to arbitrate.

The three-person arbitral tribunal held a five-day hearing in Washington D.C. in 2018 to consider the preliminary jurisdictional questions, which they decided in favour of the investors. The tribunal ultimately issued a partial award in favour of the investors as well.

Mexico sought an application in the Ontario Superior Court that the tribunal had erred in concluding they had jurisdiction, but was unsuccessful both there and at the OCA.

CUSMA Changes

NAFTA’s investor-state dispute mechanism has been particularly controversial in Canada because, since 1994, US investors have received $205 million using Chapter 11 against Canada. Additionally, Chapter 11 was used to challenge a wide variety of Canadian laws and policies including: controlled substances regulations, the provision of public postal services, municipal contracts, and tax policy – albeit with varying degrees of success.

This likely played a factor in Canada’s decision not to participate in the investor-state dispute provisions of CUSMA. While there is a state-to-state dispute resolution mechanism in CUSMA that allows a state to bring a claim on behalf of a resident investor, such claims do not result in damages awards.

Based on an agreed transitional wind-down period, NAFTA investors have until July 1, 2023, to commence arbitration proceedings under Chapter 11 against Canada in respect of investments made between January 1, 1994 and the time that CUSMA came into force (July 1, 2020).

Takeaways

While CUSMA may no longer have a practical investor-state dispute mechanism for Canadians, Canadian investors with potential claims under the former NAFTA should know we are partway through the wind-down period for filing such claims. Investors with potential claims should move quickly, and with expert legal advice, to exercise their rights before they expire on July 1, 2023.

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