A Solution Due South: Canada, Mexico, and Investor-State Arbitration in the U.S.M.C.A.

Ellen Aldin
Vol. 41 Associate Editor

Canada has a good argument that the Investor-State Dispute Settlement (ISDS) provisions present in Chapter 11 of the North American Free Trade Agreement (NAFTA) have disproportionately harmed it. As of January 1, 2018, 48 percent of all NAFTA ISDS claims were lodged against Canada, with a tripling in claims lodged against it after 2005.[1] Of the 17 cases concluded where Canada was a respondent, the government lost eight and won nine, leading to a payout of over $219 million in damage awards to investors.[2] This number doesn’t even include the over $95 million Canada had to pay in legal fees to adequately defend itself in NAFTA ISDS tribunals.[3] This number is in stark contrast to its neighbor to the south; though the United States has an economy ten times the size of the Canadian one, it has never lost a NAFTA ISDS claim and has paid $0 in damages in its 11 concluded cases.[4] The U.S. Government maintains that this is due to a transparent regulatory system,[5] while skeptics point to a bias in favor of the United States[6] or Canada’s willingness to pay arbitral awards.[7]

Canada does not universally oppose ISDS; indeed, the country signed onto the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which replaced the Trans-Pacific Partnership (TPP), which included an ISDS provision, as late as 2018.[8] However, a series of NAFTA ISDS tribunal rulings gave the Canadian government and Canadians with a feeling that these tribunals create arbitrary rulings with harsh penalties and no recourse for appeal.[9] Canada took particular offense to the Bilcon v. Canada award, fearing that the tribunal’s seemingly arbitrary decision awarding damages to a U.S. mining company would chill the country’s ability to regulate in the environmental space so much that it attempted to seek recourse in Canadian court to annul the award.[10] This challenge was unsuccessful, and criticisms of the lack of an appellate mechanism of NAFTA ISDS rulings continued in earnest.[11]

When the United States announced that it would begin negotiations to replace NAFTA with another treaty instrument, the NAFTA parties, including Canada, seized the opportunity to reform the trade pact’s ISDS provisions.[12] At the outset, Canadian and Mexican diplomatic staff supported maintaining some form of ISDS, but reforming the provisions to make them more predictable.[13] However, Canada’s priorities began to shift, and the country began to receive public pressure to withdraw from ISDS entirely.[14] Per a release of Canadian government public comments on possible changes to a new NAFTA-type agreement, a plurality of submissions supported scrapping Chapter 11 entirely.[15] Sure enough, once the draft text of the U.S.-Mexico-Canada Agreement (USMCA) was released, the document set to replace NAFTA, in August 2018, it became clear that Canada had completely withdrawn from any ISDS mechanisms, with only Mexico and the United States participating.[16]

If the criticisms of the Bilcon tribunal are indicative of the reasons why Canada wanted ISDS out of NAFTA, an adequate solution would create more consistency in opinions and allow for appeal. Completely eliminating ISDS in the USMCA would only partially solve these problems. Without ISDS, when a Canadian investor feels that it has been wrongly treated in, say, the United States, its only recourse would be in American courts.  However, it is far from clear that U.S. courts would provide the consistency and neutrality of opinions that Canada wants. NAFTA had been in force for over 20 years before its repeal, and its ISDS provision allowed investors to pursue a remedy in arbitration without any waiting period or attempt to resolve the dispute in domestic courts.[17] Thus, American courts do not have a vast well of precedent to draw upon when it comes to NAFTA investment provision. Very few cases interpret investment treaty provisions involving ISDS directly, and those that even mention popular ISDS provisions like expropriation and fair and equitable treatment arise from challenges on if arbitration tribunals were overzealous in their mandate, rather than interpreting the provision independently of the tribunal.[18] Such interpretation will have to happen; though the USMCA attempts to define standards like Fair and Equitable Treatment to include things like “obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.”[19] Courts will necessarily have to determine what “due process embodied in the principal legal systems of the world” means, and since many U.S. courts do not regularly handle foreign affairs issues, the results could be as inconsistent as any arbitral tribunal.[20]

Granted, leaving these disputes to American courts will leave Canadian investors with recourse to the appellate system, which allows them to contest rulings that they believe are unjust. However, the result will be the same as a tribunal if a final appellate body takes an opinion that a Canadian investor does not like. Such a result is quite possible; one of the motivating factors for instituting ISDS regimes was to prevent preferential treatment of a host state against investors working in host state courts.[21] Are there ways to guard against this risk and protect investor interest while allowing domestic courts to develop precedent and improve consistency for future cases?

To solve this problem, Canada should look to its partner in the USMCA: Mexico. Though Mexico has not been as big a target as Canada in NAFTA ISDS, it still has lost five ISDS claims under NAFTA and paid over $205 million in damages as a result of its losses.[22] Mexico maintained its position in advocating for reform of ISDS in the USMCA and did not advocate scrapping the provision,[23] and it shows. Annex 14-D of the USMCA draft applies to both the United States and Mexico, and it allows American and Mexican investors to seek recourse through ISDS, but only after the claimant “first initiated a proceeding before a competent court or administrative tribunal of the respondent”[24] and “the claimant or the enterprise obtained a final decision from a court of last resort of the respondent or 30 months have elapsed from the date the proceeding . . . was initiated.”[25]

Such a clause would force the home state courts to interpret vague USMCA provisions and create a baseline level of doctrine that would lead to more predictability in future litigation. However, as this precedent is being developed and results are inconsistent, investors could pursue ISDS if a final result is unfair or biased against a foreign investor. This would solve both of Canada’s problems and avoid potentially negative outcomes; though Canadian investors have not been successful against the United States in arbitration, it still provides a failsafe if U.S. courts make a truly bizarre and punitive interpretation, and the protection would still exist for claims against Mexico.

The USMCA is not a final document. The U.S. Senate is still debating the treaty and has not ratified it,[26] and neither has Canada.[27] Even after ratification, the treaty could still be amended.[28] It may behoove Canada to alter the treaty and join Mexico in this revised ISDS annex to prevent outcomes negative to Canadian investors.


[1] Scott Sinclair, Canada’s Track Record Under NAFTA Chapter 11: North American Investor-State Dispute Resolution to January 2018 3 (Canadian Ctr. for Policy Alt.), https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2018/01/NAFTA%20Dispute%20Table%20Report%202018.pdf.

[2] Id. at 4.

[3] Id. at 1.

[4] Id. at 4.

[5] Jeffrey Zeints, Investor-State Dispute Settlement (ISDS) Questions and Answers, The Obama White House (Feb. 26, 2015), https://obamawhitehouse.archives.gov/blog/2015/02/26/investor-state-dispute-settlement-isds-questions-and-answers (last visited Oct. 30, 2019).

[6] Frequently Asked Questions About Investor-State Dispute Settlement, Norton Rose Fulbright  (June 2017), https://www.nortonrosefulbright.com/en-us/knowledge/publications/8014c6b7/frequently-asked-questions-about-investor-state-dispute-settlement (last visited Oct. 30, 2019).

[7] Sincalir supra note 1, at 10.

[8] Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Gov’t of Can., https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/index.aspx?lang=eng (last visited Oct. 19, 2019).

[9] Sinclair, supra note 1, at 5-8.

[10] Paul Withers, Canada Loses Bid to Overturn NAFTA Ruling on Rebuffed N.S. Quarry, Can. Broadcasting Corp. (May 2, 2018), https://www.cbc.ca/news/canada/nova-scotia/bilcon-443-million-denied-ns-quarry-1.4645199 (last visited Oct. 19, 2019).

[11] Sinclair, supra note 1, at 7-8.

[12] Doug Palmer, Canada, Mexico Say Improve ISDS, Don’t Drop it from NAFTA, Politico: Morning Trade (Sept. 15, 2017), https://www.politico.com/tipsheets/morning-trade/2017/09/15/canada-mexico-say-improve-isds-dont-drop-it-from-nafta-222312  (last visited Oct. 19, 2019).

[13] Id.

[14] See Greg Quinn, Canada’s Opposition to NAFTA’s Chapter 11 Gives Trudeau Leeway, Bloomberg News (Apr. 17, 2018), https://www.bloomberg.com/news/articles/2018-04-17/canadian-opposition-to-nafta-s-chapter-11-gives-trudeau-leeway.

[15] Id. (The release of public comment from the Canadian government was incomplete, but the fact that the government chose to release a plurality of public comments supporting

[16]Agreement Between the United States of America, the United Mexican States, and Canada, Can.-Mex.-U.S., art. 14.D.1, May 30, 2019, Office of the U.S. Trade Representative, https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/14_Investment.pdf[Hereinafter Draft U.S.M.C.A.].

[17]North American Free Trade Agreement, Can.-Mex.-U.S., Art 1120, Dec. 17, 1992, 32 I.L.M. 289.

[18] See Mesa Power Grp., LLC v. Gov’t of Can., 255 F. Supp. 3d 175, 189 (D.D.C. 2017); Rusoro Mining Ltd. v. Bolivarian Republic of Venez., 300 F. Supp. 3d 137, 146 (D.D.C. 2018).

[19] Draft U.S.M.C.A., supra note 16, at art. 14.6.2.a.

[20] See James C. Wolff, Comment, The Jurisprudence of Treaty Interpretation, 21 U.C. Davis L. Rev. 1023, 1023-24 (1988).

[21] 81 Am Jur. Trials 1 §4 (2001).

[22] Sinclair, supra note 1, at 4-5.

[23] Palmer, supra note 12.

[24] Draft U.S.M.C.A., supra note 16, at art. 14.D.5.1.a.

[25] Id. at art. 14.D.5.1.b.

[26] Rafael Bernal, Mexican President Urges Pelosi to Get USMCA Trade Deal Approved, The Hill (Oct. 11, 2019), https://thehill.com/latino/465380-mexican-president-urges-pelosi-to-get-usmca-trade-deal-approved (last visited Oct. 19, 2019).

[27] William Allen Reinsch, Road to USMCA Ratification: Is the End in Sight?, Ctr. for Strategic & Int’l Stud. (Sept. 5, 2019), https://www.csis.org/analysis/road-usmca-ratification-end-sight (last visited Oct. 19, 2019).

[28] Draft U.S.M.C.A., supra note 16, at art. 30.2.1.b.

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