New NAFTA Agreement Curbs Investor-State Settlement Mechanism

The revised North American Free Trade Agreement (NAFTA) will likely render obsolete the popular investor-state dispute settlement (ISDS), the mechanism foreign companies use to sue states for damages when sudden government decisions harm their business.

The mechanism was opposed by the US and Canadian negotiators as they thought that it puts the rights of corporations above sovereignty of states. The Donald Trump administration, in particular, is of the belief that such a mechanism might encourage job outsourcing to Mexico.

Reports say Mexico may continue the arbitration mechanism, but the United States and Canada will certainly pull the plug on the practice.

The new agreement, known as USMCA (United States Mexico and Canada), yet to be approved by the US Congress, leaves investors to explore the option of bringing their cases before national courts.

However, the disputes already under trial will be continued even after the implementation of the revised agreement.

Companies carrying out government contracts in sectors – including oil and gas, infrastructure, energy generation and telecommunications – may continue using ISDS to resolve their disputes.

Canada is reported to have lost more ISDS cases than Mexico, and the United States has never lost a case and the American investors loved the mechanism than anyone else.

The Canadian Centre for Policy Alternatives stated in a report last year that the mechanism cost country as much as CAD$314 million.

The settlement mechanism, mentioned in Chapter 11 in NAFTA, was designed to instill confidence among investors by providing an impartial tribunal to settle disputes with governments.