What Is the USMCA? The Facts Explained by Attorney John Keenan Esq.

Since the mid-1960s, the U.S. and other countries have entered into investment treaties to protect the rights of individuals and corporations investing in host signatory countries. Due to sovereign immunity protections in most independent nations, governments are exempt from legal action…

The U.S. – Mexico – Canada Agreement (USMCA) is a trade agreement between the named parties that entered into force on July 1, 2020.

If you are considering a significant commercial investment from the United States into Canada or vice versa, this article should be of particular interest. The updated United States-Mexico-Canada Trade Agreement effectively eviscerated your rights, a fact not known generally to potential investors.

History of United States-Mexico-Canada Trade Agreements

Since the mid-1960s, the U.S. and other countries have entered into investment treaties to protect the rights of individuals and corporations investing in host signatory countries. Due to sovereign immunity protections in most independent nations, governments are exempt from legal action unless they expressly waive that exemption; individuals and corporations could not successfully sue a foreign government.

Before Investment Treaties, the only recourse for a person or entity aggrieved by the actions of a foreign government was to have their government press their case through diplomatic channels. Without consulting the injured party, the government had sole and absolute discretion on whether to settle the claim and for what amount.

By the mid-20th century, these facts discouraged investment from wealthy countries such as the United States into areas such as Latin America, thus exacerbating a global imbalance between wealth and the third world. There needed to be a method of protecting investments and at the same time encouraging the influx of wealth to the third world.

NAFTA Safety Nets Are History Under USMCA

Investment treaties introduced the innovation of granting specific rights to investors and, importantly, an independent and impartial arbitration tribunal to hear disputes when a host government takes actions that damage or destroy an investment. Investment treaties typically allow for a choice of arbitration institutions to administer the arbitration, including the International Centre for the Settlement of Investment Disputes (ICSID) established under the Washington Convention of 1965.

Sec. 1101 of the North American Free Trade Agreement (NAFTA) established rights for investors regarding Canadian, United States, and Mexican investments. NAFTA also provided mandatory mediation and a six-month cooling-off period before filing a treaty arbitration. Under sec. 1120 of the former North American Free Trade Agreement, investors were given the choice of an ICSID arbitration if both signatories to the treaty were members of the ICSID Convention. If only one of the parties was a signatory, then the arbitration could take place under the auspices of the ICSID additional facility. Finally, NAFTA provided a choice to investors to arbitrate under the United Nations Commission on International Trade (UNCITRAL) laws.

The United States-Mexico-Canada Agreement (USMCA), which took effect July 1, 2020, quietly ended the dispute resolutions procedures for investors investing in the U.S. and Canada. Those protections continue for investments into Mexico by U.S. investors or into the U.S. for Mexican investors (USMCA Annex 14-D). Canadian/U.S. investments made before July 1, 2020, are grandfathered in until three years after the termination of NAFTA (USMCA Annex 14-C). New U.S./Canada investors have no rights to an arbitration tribunal for resolution.

U.S. Investors are now Disadvantaged

Enforcing rights regarding new investments under USMCA exist because governments have partially waived sovereign immunity. For U.S. investors, legal action against the Canadian federal government or individual provinces can commence in a province’s superior courts (the section 96 courts under the Canadian constitution) or the federal courts with limited jurisdiction.

Problematically, a Supreme Court of Canada ruling, Just v. British Columbia, [1989] 2 SCR 1228, made a distinction between policy decisions and operational decisions. Consequently, if the Canadian government makes a decision that is considered a policy decision, its implementation will not give rise to tortious liability. The Just decision essentially expands the policy power exceptions to rights of governments to enact laws that negatively affect investors. In determining claims for treaty rights, the Court should be using international law principles, not domestic law principles.

Canadian Investors Have It Worse

Canadians investing in the U.S. have limited options. In 1982, the U.S. established The United States Court of Federal Claims as a court of record with national jurisdiction primarily for tort claims. The Tucker Act allows contract claims against the U.S. to be heard in the U.S Court of Federal Claims and grants concurrent jurisdiction to U.S. District Courts for contract claims less than $10,000. However, there are only 15 judges of this Court for the entire United States, and all other options for Canadian investors to sue the United States Government are very narrow.

These options are a far cry from the independent, impartial arbitration tribunals contemplated by ICSID under the Washington Treaty of 1965 or any of the other recognized arbitral organizations.

Instead, litigants who are not nationals of the defendant, host government will have to argue their cases before judges appointed by the governments against which the investor is litigating. These scenarios are less than ideal.

Legal Risks to Cross Border Investment

If you are considering a commercial investment under the USMCA, don’t hesitate to contact the attorneys at The Keenan Law Firm to discuss strategies to mitigate your risk and effectively protect your investment.

By: John James Keenan Esq.

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