A warning shot for investor-state dispute settlement under NAFTA 2.0?

The US Trade Representative (USTR) is reportedly finalizing a proposal to dramatically restructure NAFTA’s investor-state dispute settlement (ISDS) mechanism, transforming it into an “opt-in” regime under which each NAFTA state would elect whether or not to permit investors of other NAFTA parties to bring claims directly against it.[1] The proposal apparently remains under discussion within the US administration, and has not yet been formally communicated to Canada and Mexico.

The ambition of this reported proposal, which would fundamentally reshape investor protection under NAFTA, far exceeds what the US administration had tabled in advance of the negotiations.[2]

Developed states may have historically viewed the submission to arbitral jurisdiction to resolve disputes with certain investors under investment treaties and free trade agreements primarily as a benefit for their own investors going abroad, rather than as a potential source of liability. However, that appears to be changing with the tides of global investment flows, and as developed states have increasingly been the respondents in investor-state arbitration. US Trade Representative Lighthizer has echoed this criticism, saying that he is “troubled by the fact that nonelected non-Americans can make the final decision that the United States law is invalid“, as the US has committed itself in numerous bilateral and multilateral international agreements, including NAFTA.[3]

This is not the first time that investor-state arbitration, which has the potential to hold states accountable for measures taken in violation of their international obligations, has come under fire. In recent international practice, states have explored alternatives to the investor-state arbitration mechanism. For example, the recently concluded Canada-EU Comprehensive Economic and Trade Agreement (“CETA“) instead adopted an international investment tribunal featuring a regularized 15-person membership and limited appellate procedures, among other innovations.

While the EU has sharply broken with past practice on ISDS mechanisms, the US recently supported including investor-state arbitration in the ill-fated Trans-Pacific Partnership (TPP) and the contemplated US-EU Trans-Atlantic Trade and Investment Partnership (TTIP). ISDS has lost favor among some governments and other stakeholders, but remains popular among influential groups; for example, in advance of the NAFTA renegotiations, the National Association of Manufacturers, which includes many businesses with investments in cross-border supply chains, mobilized to lobby in favor of maintaining NAFTA’s investor-state arbitration mechanisms.[4] The USTR proposal will likely generate significant controversy, as some stakeholders will think it goes too far to strip protections for international investors, while others would prefer the wholesale abandonment of ISDS.

It is, of course, too soon to attempt to draw far-reaching conclusions about the USTR’s reported proposal, but it does appear to signal a significant shift in US policy. Businesses with global supply chains and international investments should closely follow the NAFTA renegotiations, as a move by the US away from ISDS may signal the emergence of serious cracks in the foundations of investment protection under international law.

 

This is part 2 of our ongoing series concerning the future of NAFTA. Round one of the NAFTA renegotiations ended Sunday, August 20, 2017, after which the negotiating parties issued a trilateral statement reaffirming their intentions to continue at a rapid pace. Round two of the talks will take place in Mexico from September 1-5, before moving to Canada for round three from September 23-27.

For more context, see our previous posts:

 

 

If you have specific questions about how the NAFTA renegotiations may affect your business, please contact Christian Leathley, Partner, Timothy Hughes, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 (917) 542 7812
Timothy Hughes
Timothy Hughes
Associate
+1 (917) 542 7836

 

 

[1]        http://www.foxbusiness.com/features/2017/08/22/u-s-bid-to-exit-nafta-arbitration-panels-draws-ire-from-businesses.html

[2]        In the objectives released by the US Trade Representative on July 17, 2017, the administration signaled a more modest agenda in relation to NAFTA’s ISDS mechanisms, including measures to improve transparency and expanded opportunities for non-parties to make submissions in a dispute.

[3]        http://www.foxbusiness.com/features/2017/08/22/u-s-bid-to-exit-nafta-arbitration-panels-draws-ire-from-businesses.html

[4]        https://www.law360.com/articles/952633/biz-groups-mobilize-to-maintain-nafta-investment-arbitration

 

What to watch for as NAFTA (re)negotiators get to work

On August 16, 2017, trade representatives of the United States, Mexico and Canada will convene in Washington, DC for the first of seven scheduled rounds of negotiations in relation to the North American Free Trade Agreement (NAFTA). The negotiations have been covered extensively in national and international media and, given the scope of the interests at stake, we expect that coverage to only intensify.

To provide practical insights to stakeholders in key industries, we have focused this update on the context of the negotiations, the interests and objectives laid out by the states in advance of the talks, and our strategic view of what interested observers should watch for. We will periodically publish sector-focused insights as the negotiations develop. Continue reading

EU trade agreement enters into effect with five southern African countries

On 10 June 2016 the EU signed an Economic Partnership Agreement (EPA) with the Southern Africa Development Community EPA Group comprising Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland (the SADC EPA).

On 10 October 2016 that agreement entered into effect between the EU and five of those countries: with Mozambique in the process of ratifying the agreement and due to join immediately thereafter.

The SADC EPA represents the latest agreement in a scheme to create a free trade area between the EU and the African, Caribbean and Pacific Group of States (ACP).  Like previous EPAs, a key objective is to support the conditions for increasing investment and economic growth in the SADC EPA states. The EU is the SADC EPA Group’s largest trading partner. Export products from the SADC region include, notably, diamonds (from South Africa, Botswana, Lesotho and Namibia) as well as agricultural products, oil and metals. Manufactured goods, wine and food products are exported from South Africa, the largest EU trading partner in the region. EU imports to the SADC EPA Group include vehicles, machinery, electrical equipment, pharmaceuticals and processed food.

The key provisions of the SADC EPA are discussed below.

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Australia and China conclude free trade agreement

On 17 November 2014, Chinese President Xi Jinping and Australian Prime Minister Tony Abbott announced that Australia and China had concluded a free trade agreement that has been under negotiation since April 2005.

The agreement will now be prepared in both English and Chinese for signature by the parties, after which the agreement will go through domestic ratification processes in both Australia and China. Continue reading

NAFTA tribunal considers issues of res judicata and the customary international law minimum standard of treatment

In Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1), a NAFTA chapter eleven tribunal considered issues of res judicata and the customary international law minimum standard of treatment.

In a case notable for its discussion of res judicata and the customary international law minimum standard of treatment, a NAFTA Chapter Eleven tribunal has allowed jurisdictional objections over a significant part of the alleged claims. With respect to the claimants’ remaining claims, the tribunal concluded, on the merits, that the US had not breached any of its commitments under international law.

The tribunal analysed international jurisprudence on res judicata in detail, applying a flexible approach to the question of when claims will be precluded by a prior decision. Following previous NAFTA awards, the award explored the complex relationship between the customary international law minimum standard and the guarantee of fair and equitable treatment and full protection and security contained in NAFTA Article 1105(1).

It did so in the context of the claimants’ novel claims about the status of due process among the protections required by the customary international law minimum standard of treatment. However, the tribunal left for a future tribunal to decide whether NAFTA’s guarantee of most-favoured-nation (MFN) treatment can be used to expand the substantive protections under Article 1105 – a critical topic, in the light of all NAFTA states’ unanimous opposition to that interpretation. (Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1).)

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Recent developments in US legislation on modern slavery

The recent introduction of the Federal Business Supply Chain Transparency on Trafficking and Slavery Bill (H.R. 4842) on 11 June 2014 (the “Bill”) is the U.S. government’s latest initiative in developing its approach towards human rights protections in business. The Bill builds on the California Business Supply Chain Transparency on Trafficking and Slavery Act, which came into force in January 2012 and only applies to retailers and manufacturers doing business in California. Under the Bill, all companies with worldwide annual gross receipts exceeding $100 million, and which are currently required to file annual reports with the Securities and Exchange Commission, are to disclose what measures, if any, they have taken to identify and address conditions of forced labour, slavery, human trafficking and the worst forms of child labour[1] within their supply chains,[2] whether within the US or abroad. These reporting obligations are designed to encourage the adoption of internal policies and processes by exposing businesses to scrutiny. They also incentivise businesses by empowering consumer groups with greater information on companies’ human rights behaviour. In addition to complementing existing US legislation prohibiting human trafficking and forced labour in relation to federal procurement contracts, the Bill is consistent with other initiatives around the world to curb forced labour.

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The Alien Tort Statute – when will a claim “touch and concern” the territory of the United States?

In Kiobel v Royal Dutch Petroleum Co, the US Supreme Court held that the presumption against extraterritorial application of US laws applies to claims under the Alien Tort Statute (ATS). The Supreme Court left open the possibility of ATS claims which “touch upon and concern” US territory, provided that they “do so with sufficient force to displace the presumption against extraterritorial application“. However, they provided limited guidance as to how that standard should be interpreted.

The circumstances in which the presumption against extraterritorial application will be displaced have recently been considered by courts in the Second, Fourth, Ninth and Eleventh Circuits in the cases of In re: South African Apartheid Litigation, Al Shimari v CACI Premier Technology Inc., Doe v Cisco Systems Inc., and Cardona v Chiquita Brands International Inc. Following these decisions, it appears that in order to establish jurisdiction under the ATS it will be necessary to show that some conduct which contributed to the alleged harm has taken place on US soil.

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Australia-Korea FTA concluded: investor-state dispute resolution mechanism included

On 5 December 2013, Australia and South Korea concluded negotiations for a Free Trade Agreement (FTA).

Trade with South Korea was valued at AU$31.9 billion in 2012, making Korea Australia’s fourth biggest two-way trading partner (following China, Japan and the United States) and third largest export market.

As a result of the FTA, tariffs will be eliminated on key Australian exports to Korea such as beef, wheat, dairy, wine, horticulture and seafood, resources, energy and manufactured goods. The FTA will also provide new market opportunities in other  industries such as education, telecommunications and financial, accounting and legal services.

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