Consequences for Mexico after subscribing to the ICSID convention

Lexology | 11 January 2018

Consequences for Mexico after subscribing to the ICSID convention

For more than two decades, Mexico has promoted policies to encourage the entry and participation of foreign investment in the country’s economic activities1. However, despite being one of the 10 most active countries in investment disputes2, Mexico continues to be part of a small block of countries that are not part of the International Centre for Settlement of Investment Disputes (ICSID) Convention3, which currently has 153 countries as members.

However, today in Washington, D.C., Mexico’s Secretary of Economy, Ildefonso Guajardo, will take the first step to change this situation, by signing Mexico’s accession to the ICSID Convention. The decision would still be pending the approval of the Mexican Senate to define the effective date of entry into the Convention, which is expected to be 30 calendar days after the date of deposit of the instrument of ratification, acceptance or approval.

What is ICSID?

ICSID is an intergovernmental organization of the World Bank, created through an international treaty called the "The Convention on the Settlement of Investment Disputes between States and Nationals of Other State" (the ICSID Convention), which provides support services and facilitates procedural rules for the conciliation and arbitration of investment-related differences, among others4.

What is the Purpose of the ICSID?

The ICSID, among other activities, serves as a reliable, specialized and impartial system for resolving investment disputes, avoiding favoritism on the part of local courts or the use of diplomatic protection for its resolution. In providing services for the administration of investment disputes, the ICSID competes with other international organizations and institutions, although today it continues to be the most recognized institution.

What Will Change with Mexico’s Entry into the ICSID Convention?

Once the process of entry into the ICSID by Mexico has concluded, virtually all international investment disputes that are initiated against it may be subject to the conciliation and arbitration rules established in the Convention5. Currently, disputes against Mexico are conducted under ICSID Additional Facility Rules6 (except in those cases in which the United Nations Commission on International Trade Law rules are chosen), which do not foresee the application of the "definition" of investment provided by the Convention. (The ICSID Convention requires the application of Article 25.7) Under the current rules, awards cannot be subject to the ICSID annulment mechanism, and there is not the same degree of certainty regarding the execution of the awards granted by the Convention. In addition to being a member of the ICSID, Mexico will be able to participate in the decision-making process of the organization, which is relevant given the growing need to reform the system of investment arbitration8.

What Benefits Did Mexico Receive for Not Being a Part of the ICSID? Why is Mexico Signing the Convention Now?

The answer to the first question has not been clearly articulated by the Government of Mexico yet. It is likely that the only advantage could have been the possibility of "complicating" the execution of awards since the ICSID Convention facilitates its execution, bypassing the New York Convention Provisions9. However, some would argue that it would always be better to try to nullify an award before local courts than before arbitrators of the same ICSID system who will watch over the interests of the institution before the interests of whoever requests the nullity (but this is a really subjective view, cases such as the taxes on fructose 10 show that resorting to local courts did not mean any advantage to Mexico).

The second question can be answered in the context of a North American Free Trade Agreement (NAFTA) renegotiation, in which one of its participants does not seem to have any interest in strengthening the investment arbitration mechanism. In addition, the upcoming elections generate uncertainty on the economic agenda of the next administration (including whether a new party administration in Mexico will be supportive of protecting foreign investors’ interests), as well as how new and important investments in the Mexican energy sector will be received. All of these require sending clear signals to provide certainty to the markets regarding foreign investment protection in Mexico (in addition to the need of congruency with Mexico’s own investment policy, since today more than 35 Agreements for the Promotion and Reciprocal Protection of Investments and Free Trade Agreements have been subscribed with investment mechanisms, and still Mexico was not an ICSID member).

What’s Next for Mexico?

Once Mexico makes this trade policy change, many questions arise: What will be the new agenda for Mexico in the field of investment after ICSID is approved? Should Mexico modernize the Bilateral Investment Treaties (BITs) signed more than 20 years ago? Should Mexico subscribe to new agreements such as the Energy Charter Treaty? Should the country actively participate in the discussion forums of the ICSID to establish an enhanced system for the protection of investments, etc.?

These questions are as of yet unanswered, however, it will be important to keep an eye on developments and make your views known to the Mexican government in order to positively shape Mexican trade policy.

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source: Lexology