HIGHLIGHTS:

• The European Union (EU) Commission and the Mexican Ministry of Economy published in April 2018 the negotiated text of the modernized EU-Mexico Free Trade Agreement (FTA), although it is not expected to take full effect until at least 2022.
• Although the text of the modernized FTA is not final, an analysis of the text reveals an approach that is similar to that of the Canada-EU Comprehensive Economic and Trade Agreement (CETA), and further reflects the EU's current tendency to restructure its investor-state dispute settlement (ISDS) framework.
• As the EU expands and renews its free trade agreements, there is also a possibility of rising pressures for similar negotiations with other trade allies, especially the United States.

Both the European Union (EU) Commission and the Mexican Ministry of Economy published in April 2018 the negotiated text of the modernized EU-Mexico Free Trade Agreement (FTA).¹ The text has not been signed yet and may be subject to further modifications during the legal review ("legal scrub"), although it is not expected to change in substance. Furthermore, it is possible that the investment treaty provisions may not take effect immediately (at least no sooner than 2022),² but Congressional authorities and investors may be required to further analyze its content and impact in order to better understand the implications and future of investments and investor-state disputes between both regions. This client alert analyzes some of the salient aspects of the agreement.

The New EU Free Trade Agreements

Although the text of the modernized FTA is not final, an analysis of the text reveals an approach that is similar to that of the Canada-EU Comprehensive Economic and Trade Agreement (CETA), and further reflects the EU's current tendency to restructure its investor-state dispute settlement (ISDS) framework.³ For example, the agreement presents a broad definition of "investor" but contains requirements that would impose certain limits to the ISDS mechanism, such as a requirement for enterprises to have substantive business operations in the territory of the state, an express denial of claims made through fraudulent misrepresentation or specific rules on anti-circumvention.

Unsurprisingly, the text of the agreement also states that Mexico and the EU affirm their right to regulate on issues of public health or the environment, and expressly prohibits the adjudicators from deciding on the legality of a measure under domestic law. This attempts to clarify a very common misunderstanding of ISDS.

The agreement also contains all of the traditional measures of protections for investors, including national treatment, most favored nation treatment, fair and equitable treatment, full protection and security, and no expropriation without prompt and adequate compensation. However, the agreement does attempt to tailor some of these key protections by providing more elaborate definitions, limitations or simple clarifications of what were sometimes considered ambiguous concepts. Particularly, with regards to the fair and equitable treatment standard, the text does not make reference to the customary international law as it is Mexico's practice. Rather it provides an elaborate definition and lists specific situations that would constitute a violation. This approach is not surprising considering how many cases have relied on the use of this standard,⁴ but the additional content will definitely raise questions and concerns as to its scope.⁵

The ISDS Mechanism

One of the key aspects of the agreement is the rework of the traditional ISDS proceedings set out in most Bilateral Investment Treaties (BITs). First, the agreement creates a nine-member standing tribunal, from which the members that will decide the cases are selected. Members are appointed for five-year terms. Three members will be from Mexico, three from the EU and three from third countries. Disputes can be decided by a sole member or by a three-member division consisting of one member from Mexico, one from the EU and one from the third country, which will also act as president. For sole member cases, a member from a third country will be appointed. In other words, parties will no longer be able to directly select the decision makers for a particular dispute on an ad hoc basis. Although similar tribunals' composition already exist in the EU's agreement with Canada, it would be the first time Mexico utilizes such a system. Theoretically, having a standing group of adjudicators could bring some consistency to the awards, as well as potentially bring other benefits such as predictability and transparency.⁶

The first step before initiating a claim is to allow for a period of consultations among the disputing parties, as no claim may be brought until 180 days have passed from the date of the request for consultation (claims before the tribunal must match the claims in the consultations). The treaty also allows for the parties to voluntarily submit to mediation to solve their dispute. Disputes may be initiated using the International Centre for Settlement of Investment Disputes (ICSID) rules, the ICSID Additional Facility Rules, the United Nations Commission on International Trade Law (UNCITRAL) rules or any other rules that have been agreed between the parties.⁷ In addition, a claim may be brought against the EU or against the individual member state.⁸

Generally, most other changes in the Mexico-EU ISDS chapter consist of clarifications or delineations to the more traditional aspects of investor-state dispute mechanisms. Some of its key characteristics are:

• Tribunal members are given express jurisdictional discretion to terminate the case in its early stages – such as where the claim is manifestly without merit, unfounded as matter of law or where the dispute was foreseeable and the investor acquired the investment for the purposes of bringing a claim.
• Tribunal members have considerable powers to prevent potential conflicts in the award. For example, by taking into account parallel proceedings that could affect the outcome of the case, by requesting the Mexico-EU Joint Council⁹ for an opinion when there are issues of interpretation. There is also a consolidation process where there are two connected disputes with a question of law or fact in common and which arise out of the same events or circumstances.
• The tribunal members' power to issue interim measures have been tailored. Specifically, the agreement expressly prohibits interim measures for seizure of assets, and allows the tribunal members to order security for costs against a claimant.
• The agreement contains expansive rules on transparency that are similar to those contained in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)¹⁰ For example, the tribunal members must make public all information except for confidential business or privileged information, or information that would impede law enforcement. Hearings will be open to the public and generally the onus is on disputing parties to provide the tribunal members with redacted versions of submissions, and to present a request to preserve confidentiality in orders or awards.
• The agreement has various rules regarding the participation of third parties. Specifically, the parties must notify the tribunal members of any third party funder involved. The tribunal members also have the discretion to allow amicus curiae briefs after consulting with the parties.
• The type of measures that tribunal members can order are expressly limited. The agreement only permits awards for monetary damages and for restitution of property. However, the respondent may instead pay the monetary equivalent of the property. The agreement only permits losses actually incurred by the investors to be recovered. Finally, the agreement expressly prohibits punitive damages.
• Regarding allocation of costs, these are borne by the unsuccessful disputing party.¹¹ Costs would be apportioned only in exceptional circumstances. The reasonable legal costs will also be borne by the unsuccessful disputing party. Where only some claims are successful, the costs are adjusted proportionately, a feature that may discourage weak claims.
• Tribunal members are subject to a code of conduct which prohibits members that have finished their term to participate in investment disputes pending before the tribunal members or appeal tribunal until the end of their term, or in cases connected to the disputes in which they were involved. They may not act as representatives of disputing parties for a period of three years following the end of their term.

Tribunal members must issue their awards within 30 months of the claim being submitted, additional time shall be justified. The agreement also creates an appeal procedure for the award. The appeal period is 90 days after an award is rendered and the appeal stage is meant to last for at least 180 days, but no more than 270 days. Finally, similar to the tribunal, the agreement creates a standing appeal tribunal that would decide all of the appeals submitted. An award is final only if the 90-day period for the appeal has passed or after the appeal is decided. Final awards are not subject to annulment, review or set aside. In addition, they are considered as commercial awards for purposes of the New York Convention, and enforceable under Chapter IV, Section 6 of the ICSID Convention.

Conclusions and Considerations

The new agreement brings a more detailed regulation of investment and ISDS in an attempt at modernizing what has become an oft-criticized system. Generally, the resulting text of the agreement appears to be aimed at limiting the use of ISDS, as well as preserving the domestic powers of the states involved. It is particularly interesting to note the clear interest by the drafters in preventing fraudulent and unnecessary claims, and to more precisely tailor the powers and rights of the adjudicators and parties. Although a well-thought-out approach to ISDS should always be welcome, there is also a risk that the additional steps and requirements in the process will ultimately result in more expensive and complicated proceedings that ultimately deter valid claims.

In addition, the branching consequences of the agreement will be interesting to note. As the EU expands and renews its free trade agreements, there is also a possibility of rising pressures for similar negotiations with other trade allies, especially the United States. Similar treaties will also help the EU standardize the measures of protections between its members and other states.¹² However, it is still too early to gauge the impact this will have on future negotiations and disputes.

Notes

¹ See Mexico Ministry of Economy website and EU Commission website

² Investment issues may not enter into force until all EU member states have ratified the agreement, which may take some time. For example, the Comprehensive Economic and Trade Agreement negotiations concluded in September 2014 and EU member states ratification is still pending (provisional entry into force is dated September 2017, but does not encompass investment issues, as the authority for such matters is shared between the EU and its member states). 

³ Upon entry into force of the agreement, all other investment treaties between Mexico and the EU member states will cease (Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Portugal, Slovakia, Spain, Sweden and the United Kingdom). However, in the case of provisional application of the treaty, the various investment treaties will simply be suspended. 

⁴ As an example, in 2012, the United Nations Conference on Trade and Development (UNCTAD) identified the difficulty posed by this standard: "As mentioned earlier, the wording of most FET clauses is minimalist. Such language, lacking specific meaning, is particularly prone to expansive interpretation simply because an arbitral tribunal does not have sufficient interpretative guidance from the treaty. In particular, the emphasis on investor protection placed by the preambles in many IIAs may as the main objective of the treaty lead a tribunal to adopt a reading of the FET clause against this background (pro-investor)." See UNCTAD, 'FAIR AND EQUITABLE TREATMENT UNCTAD Series on Issues in International Investment Agreements II'

⁵ For example, Simon Lester raises some interesting questions on the wording of the treaty. 

⁶ These are some of the arguments the EU has used to defend the creation of a Multilateral Investment Court; and there are also other multilateral ongoing efforts to reform and modernize the existing ISDS system. However, having a fixed group of members selected ex-ante will limit the existing freedom parties commonly have to appoint arbitrators with specific knowledge or expertise related to the subject matter of the dispute. Additionally, because this mechanism has, to date, not been used, it is too early to know whether the system will achieve the expectations of the treaty members.

⁷ Currently, all EU members, except for Poland, are parties to the ICSID Convention. Mexico signed the ICSID Convention on Jan. 11, 2018. However, the treaty has not entered into force.

⁸ The treaty also requires the claimant to file a Request for Determination. This request sets out whether the claimant intends to submit a claim against the EU or a member state. The EU makes a determination as to which one will act as respondent.

⁹ The Joint Council is an administrative authority established in all free trade agreements subscribed by the EU. The current Joint Council consists of the members of the Council of the European Union and members of the European Commission, and members of the Government of Mexico per article 45 of the current Mexico-EU free trade agreement. 

¹⁰Comprehensive and Progressive Agreement for Trans-Pacific Partnership

¹¹ These provisions may discourage claimants from filing cases that are entirely or clearly supported for fear of  having to cover the entirety of the costs.

¹² For example, in a recent publication, Mexico's Ministry of Economy specified the standardization as a benefit, as it would not only homologate the existing BITs, but it would also bring similar standards vis-a-vis other EU members.