McCarthy Tétrault | 30 May 2023
New mining laws in Mexico could give rise to challenges under international investor treaties
by Martha Harrison, Shawn Doyle, Oksana Migitko
On May 8, 2023, Mexico enacted comprehensive changes to its mining and water laws. The changes reserve most new mineral exploration activities in Mexico to the Mexican state, require all new mining concessions to be granted pursuant to a public tendering process, reduce the duration of mining concessions, limit each new mining concession to a single mineral, impose new indigenous consultation requirements and new environmental safeguards, create new closure bonding requirements, eliminate legal procedures allowing miners to access surface properties, and generally tighten the requirements for water concessions, among other things. The new laws also contain subjective new standards for the revocation of concessions, and contain many ambiguities, including with respect to the manner in which existing mining and water concessions will be treated. While some of these issues may be resolved via the promulgation of regulations (which are due within 180 days), others may not be.
The new laws create significant risks for long-term investments in the Mexican mining sector. As a result, many Canadian miners with investments in Mexico are contemplating possible legal remedies, including challenges under Mexico’s constitution.
Remedies may also be available under the Canada-United States-Mexico trade agreement (“CUSMA”). However, given that there is no investor-state arbitration mechanism for Canadian miners to pursue remedies under the CUSMA, any Canadian action under this treaty would need to be undertaken by the Canadian government through diplomatic channels, or more formally through a state-to-state dispute challenge.
There is, however, another trade agreement to which both Canada and Mexico are parties – the Comprehensive & Progressive Trans Pacific Partnership (“CPTPP”) – which does provide a mechanism for investor-state arbitrations. Direct remedies may therefore be available to Canadian miners under the CPTPP in relation to the changes to Mexico’s mining laws. This article briefly discusses the relevant aspects of the CPTPP, including possible claims, as well as some key procedural provisions.
What is covered under the CPTPP
The CPTPP is a free trade agreement between Canada and ten other countries in the Pacific Rim, including Mexico. The CPTPP covers a broad range of sectors and a wide range of trade activities between Canada and other member countries, with the general goal of facilitating trade through the reduction of tariffs and non-tariff barriers. Like most other international trade and investment treaties, the CPTPP provides investors with a comprehensive set of rules requiring fair and non-discriminatory investment treatment, including protections against discrimination (national treatment and most-favoured nation commitments), undue expropriation, abusive treatment, treatment below the standard of customary international law, denials of justice, and so on.
Possible claims under the CPTPP
Any analysis of possible claims under a given investment treaty is by nature very fact-specific. However, given the breadth of the new Mexican laws and their far-reaching impact on foreign investments in the mining sector, there are several types of potentially viable claims that should be investigated by investors if the new laws ultimately have adverse impacts on their existing or planned investments in Mexico.
Minimum Standard of Treatment
Article 9.6 of the CPTPP sets out that states shall afford treatment to covered investments in accordance with applicable customary international law principles, including fair and equitable treatment and full protection and security. The fair and equitable treatment provision under the CPTPP includes the obligation “not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world”.[1] We note that this list is not exhaustive and could potentially capture other forms of unfair treatment, such as manifest arbitrariness, targeted discrimination, or abusive treatment.
The CPTPP explicitly refers to the customary international law minimum standard of treatment of foreign investors and specifies that this head of protection does not require treatment that goes beyond that which is required by the standard.
The standard of fair and equitable treatment has become a prominent obligation in investor-state arbitration, and is regularly invoked by investors. It is established in jurisprudence under other treaties that the standard requires states to provide treatment to international investments that does not affect the basic expectations that were taken into account by the foreign investor in making its investment.[2] This does not mean that laws may not be changed; and it is generally understood that in order to constitute a violation of the fair and equitable treatment standard, the impugned behaviour must be outrageous and in bad faith.[3] We note, however, that as the CPTPP is a novel treaty, the normative content of the “fair and equitable treatment” standard under it is yet to be established. In other investor-state contexts, inconsistent state actions, arbitrary modifications of regulatory frameworks, and frequent normative changes have been found to violate the fair and equitable standard.
Most Favoured Nation Treatment
Most favoured nation (“MFN”) treatment is a foundational standard of international trade and investment law. At its core, it fosters the establishment of equal competitive opportunities between trading nations in respect of the matters to which the particular MFN clause applies.
Article 9.5 of the CPTPP requires states to accord to investors (and covered investments) treatment no less favourable than that it accords, in like circumstances, to investors of any other state with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. The CPTPP explicitly excludes international dispute resolution procedures or mechanisms under the treaty from the application of the MFN provision. At a high level, MFN is essentially an obligation that trading partners should not discriminate against each other’s investors to favour investors from any other country.
Though the new Mexican mining and water laws do not, on their face, directly discriminate against foreign companies, any meaningful difference in the causal effects on investment(s) that the new laws have as between Mexican and foreign investors, could potentially provide a basis for an MFN claim. A practical application of the MFN clause would require a thorough analysis to identify comparable investors and investments, including circumstances in which such investors operate, as well as an in-depth comparison of the treatment afforded to such investors.
Expropriation
Expropriation is generally understood as the taking of property belonging to a foreign investor by the host state, which, if unlawful, triggers certain obligations on the host state, including the obligation to make fair compensation to the property owner.
There are two distinct types of expropriation: direct and indirect expropriation. Direct expropriation consists of the mandatory transfer of the legal title to an investment or property, or its complete physical seizure. Indirect expropriation is a more subtle legal construct. At its core, in the case of indirect expropriation, the investor may retain its property, but it is prevented from enjoying the investment in any meaningful way as a result of the measure.
Article 9.8 of the CPTPP explicitly covers indirect expropriation by establishing that no state shall expropriate or nationalise a covered investment either directly or indirectly through measures equivalent to expropriation or nationalisation, except: (a) for a public purpose; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate and effective compensation; and (d) in accordance with due process of law.
Annex 9-B of the CPTPP stipulates that an action cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in an investment. Whether or not the new Mexican laws interfere with property rights or interests is partially a question of Mexican law, is very fact-specific, and would require additional analysis based on the actual investment circumstances. This is addressed in Annex 9-B of the CPTPP, where the factual matrix to be considered includes, among other factors: (a) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (b) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (c) the character of the government action. Annex 9-B instructs that non-discriminatory regulatory actions that are designed and applied to protect legitimate public welfare objectives do not constitute indirect expropriations, except in rare circumstances. Among such legitimate public welfare objectives Annex 9-B lists “safety and the environment”. This could potentially create a limitation on expropriation claims in the context of the Mexican Laws, which have environmental protection as their declared goal. That said, while most investor-state treaty regimes include various carve-outs for environmental measures, many measures purportedly enacted with environmental objectives in mind are still found to violate treaty obligations.
As there is no international arbitration jurisprudence as of yet under the CPTPP, it is not clear how the above expropriation provisions will be interpreted by tribunals. Generally speaking, the threshold question for any indirect expropriation claim is what degree of government interference with an investor’s property amounts to expropriation. Indeed, the requisite degree of interference is one of the most contentious topics in indirect expropriation jurisprudence to date. Even though tribunals use varying language to describe what can be treated as an act of indirect expropriation, the state action must be such as to deprive the investor of a “substantial” part of the value of the investment.[4]
If the implementation of the Mexican Laws, which change the regulatory regime pertaining to mining concessions, “substantially deprives” investors of the value of their investments in Mexico, indirect expropriation claims could serve a useful tool to obtain an investor protection.
Fork-in-the-Road Provisions
Annex 9-J of the CPTPP precludes investors from bringing investor-state claims where those claims have already been pursued by the investor before a domestic body (the so-called “fork-in-the-road” provision). Further, through Article 9.21, the CPTPP requires that any notice of arbitration be accompanied by a written waiver of any right to initiate or continue the same claims before any court.
Traditionally, in investor-state jurisprudence, arbitral tribunals have applied fork-in-the-road provisions through the lens of a triple-identity test. Under this test, a local claim would only preclude the international arbitration claim if they both had: 1) the same parties, 2) the same object, and 3) the same cause of action. Arguably, therefore, any substantive differences in the object of the claim, cause of action, or the composition of the parties could prevent the application of the fork-in-the-road clause under the CPTPP. Accordingly, fork-in-the-road provisions should be taken into account strategically, in considering any possible constitutional or other legal actions in Mexico.
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Given the significant change of the regulatory landscape brought by the newly adopted Mexican laws, Canadian investors in the Mexican mining sector should carefully review these new measures to determine the potential impact on their existing or planned investments. If these impacts are ultimately found to be significant, potential international arbitration remedies could be considered as a mechanism to seek compensation for incurred damages.
Notes
[1] The CPTPP, Article 9.6(2).
[2] Tecnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, at para. 154
[3] Alex Genin, v. Republic of Estonia, Case No. ARB/99/2, Award, at para. 367
[4] Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Award, at para. 120
