With similar provisions to NAFTA, USMCA’s Chapter 14 contains a set of rules for protecting investments of nationals from other State Parties regarding Mexico: American and Canadian investors. Among these protective provisions are several principles of international investment law (national treatment, most-favored-national treatment, etc.), the prohibition of unfair takings and investment arbitration proceedings.

This new instrument also permits resort to investor-state arbitration in only two general cases. First, the so-called “Legacy Investments”[1] (Annex 14-C) where breaches are normally submitted to “traditional” arbitration under NAFTA’s Chapter 11, and, second, Mexico-United States investment disputes, both in general and related to government contracts (Annexes 14-D and 14-E, respectively). Canada has not agreed to be subject to investment arbitration under this new treaty.

Article 14.1 of USMCA defines “investment” in similar terms as NAFTA, and deems as species of this concept: “management, production, concession, revenue-sharing, and other similar contracts”. The USMCA though more clearly includes activities typically featured in E&P Contracts as investments protected under its provisions.[2]

Nonetheless, the international legal protection granted by USMCA to E&P Contracts raises two issues: i) whether the administrative rescission may or not be a cause of action for the arbitration under the treaty, since in principle the breach of a government contract might not be the subject matter of investment arbitration; and ii) whether the arbitration provided is still admissible, albeit the prohibition of section 21 of the Hydrocarbons Act[3] (HA) and the exclusion of these proceedings is stipulated in the Contracts.

Here “it is necessary to distinguish the State as a merchant from the State as a sovereign”; assessing if the administrative rescission involves the exercise of public powers that interfere with the contract at stake.[4]

Under Mexican law, administrative rescission is deemed an act of (state) authority, and not a contractual behavior. In the Commisa case, the Mexican Supreme Court clearly ruled that the administrative rescission is an “act of authority”: a deed of an entity that is “in a different and more favorable situation” than its contractual counterparty, and which exercises a “legally-vested power” that is “alien to a mere relationship between private persons”.[5]

Therefore, the administrative rescission of an E&P Contract is a sovereign act which might entail a violation of several protections afforded to investors under USMCA, especially those regarding the principle of Fair and Equitable treatment—related to the corresponding process of decision-making—, and the guarantees regarding direct or indirect expropriation.

Section 21 of the HA should not bar access to investment arbitration provided in USMCA under international law and domestic law.

Under international law the referred statutory provision should not be taken into account because it forbids access to an international investment arbitration that is not ruled by domestic law, but by international law: investment arbitration is a proceeding agreed by the host state as an assurance in favor of foreign investors that they will get a fair trial in a neutral forum that ensures an impartial decision over their right to fair treatment[6]. While under Mexican law international treaties prevail over federal legislation, so ordinary statutes—such as the HA—cannot validly override access to investment arbitration provided in the USMCA.[7]

In conclusion, since consistent Mexican State practice, that should be taken in account for international legal matters, has deemed administrative rescission as an act of authority, and, because of its international legal nature, access to investment arbitration under USMCA should prevail over the exclusive Section 21 of the HA.


[1] In simple terms, an investment established or acquired by the investor while NAFTA was effective. Cf. Annex 14-C, para. 6(a), USMCA.
[2] Cf. Annex 14-C, para. 6(a), USMCA.
[3] Emphasis added. “Tratándose de controversias referidas a los Contratos para la Exploración y Extracción, con excepción de lo mencionado en el artículo anterior, [es decir, la rescisión administrativa,] se podrán prever mecanismos alternativos para su solución, incluyendo acuerdos arbitrales en términos de lo dispuesto en el Título Cuarto del Libro Quinto del Código de Comercio y los tratados internacionales en materia de arbitraje y solución de controversias de los que México sea parte”.
[4] Cf. El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jurisdiction of April 27, 2006, http://bit.ly/2QpHAqW, § 79 (case regarding hydrocarbons and electricity concessions).
[5] Second Panel, amparo en revisión 1081/2006, opinion of June 23, 2006, http://bit.ly/2IqBALQ, con. IV, pp. 64-65.
[6] See Moses, op. cit., note 142, p. 245; Bantekas, op. cit., note 4, p. 280; McLachlan, Shore & Weiniger, op. cit., note 186, p. 4; Scheu, op. cit., note 165, pp. 102-103; and Francioni, Francesco, “Access to Justice, Denial of Justice and International Investment Law”, in: Dupuy, Pierre-Marie, Francesco Francioni & Ernst-Ulrich Petersmann (eds.), Human Rights in International Investment Law and Arbitration, Oxford, Oxford University Press, 2010, pp. 63-65.
[7] See “Tratados internacionales. Se ubican jerárquicamente por encima de las leyes federales y en un segundo plano respecto de la Constitución federal”, Plenary Bench (SCJN), SJFG, 9th epoch, vol. X, November 1999, thesis P. LXXVII/99, reg. 192867 (http://bit.ly/2DytfGh), p. 46; and “Jerarquía normativa. Es inexistente entre las leyes reglamentarias expedidas por el Congreso de la Unión que se limitan a incidir en el ámbito federal y las demás leyes federales”, Plenary Bench (SCJN), SJFG, 9th epoch, vol. XXXI, February 2010, thesis P. VIII/2010, reg. 165231 (http://bit.ly/2Dg3Mkc), p. 25.

By Rubén Sánchez, Of Counsel at Muvoil Consulting

Muvoil Consulting is a group of specialists in the O&G sector: legal, fiscal, social and environmental. Our multidisciplinary approach allows us to design strategic solutions that can unravel the most complex regulatory and transactional challenge that a petroleum project can face. Do not hesitate to contact us for further details.