What Foreign Investors Need to Know

(In collaboration with Orlando Cabrera, Senior Associate)

Foreign direct investment in Mexico remains robust, fueled by significant manufacturing and energy projects. However, foreign investors often express concern about regulatory changes and judicial unpredictability. In this context, investment arbitration — the primary international mechanism for resolving disputes between foreign investors and states — serves as an essential risk management tool. Boards and in-house counsel seeking to safeguard assets in Mexico can leverage investment arbitration to secure additional layers of international protection.

What Is Investment Arbitration?

Investment arbitration, often referred to as investor-state dispute settlement (ISDS), is an international procedure that empowers foreign investors to bring claims directly against a host State before an independent arbitral tribunal. In investment treaty arbitration, the foreign investor must allege that the State violated substantive protections under an applicable treaty, such as the investment chapter of a free trade agreement (FTA) like the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), or a bilateral investment treaty (BITs) like the Agreement between Mexico and Germany on the Promotion and Reciprocal Protection of Investments.

Mexico has concluded BITs with Argentina, Austria, Bahrein, Belarus, Belgian-Luxemburg Union, China, Czech Republic, Cuba, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Italy, Korea, Kuwait, The Netherlands, Portugal, Singapore, Slovakia, Spain, Sweden, Switzerland, Trinidad and Tobago, Turkey, United Arab Emirates, United Kingdom and Uruguay. Additionally, Mexico has concluded FTAs with an investment chapter with Central American countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua), Chile, Colombia, Japan, Panama, Peru, Uruguay, the United States, the countries of the Pacific Alliance (Colombia, Chile and Peru), and most recently Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam through the CPTPP.

For business leaders, the key takeaway is that a foreign investor can transform a treaty breach, such as arbitrary permit cancellations, discriminatory regulations, uncompensated expropriation, or even egregious judicial decisions, into a legal claim for monetary compensation before a neutral panel of arbitrators. The independence of an international tribunal, free from local government influence, offers additional assurance of a fair decision. Moreover, arbitral awards are generally enforceable in numerous jurisdictions, giving this mechanism substantial leverage in negotiations and dispute strategy.

These BITs and FTAs typically provide a range of substantive protections and standards, including fair and equitable treatment, safeguards against indirect expropriation, protection from discrimination, full protection and security, and umbrella clauses that elevate private agreements to matters of international law, among others. Foreign investors impacted by violation of these provisions from Mexico may enforce the above standards through investment arbitration as provided in the controlling BIT or the investment chapter of the FTA.

Fair and Equitable Treatment (FET)

In interpreting the FET standard, tribunals have identified the following elements: “procedural fairness and due process; action in good faith requiring absence of coercion and harassment; lack of discrimination and arbitrariness; reasonableness, proportionality, transparency, stability, and predictability; as well as the protection of the legitimate expectations of investors, and the legality of host State action.”[1] In CMS vs. Argentina, the tribunal found that “a stable legal and business environment is an essential element” of FET.[2]

Nondiscrimination: National Treatment (NT) and Most Favored Nation Treatment (MFN)

Under the NT standard, the host state must treat foreign investors and their investments at least as favorably as it treats domestic investors and investments. This standard ensures equality and prohibits the host state from discriminating between domestic and foreign investors.[3] Similarly, MFN clauses require the host state to treat protected investors at least as favorably as it treats investors from any other foreign country, thereby ensuring equality and non-discrimination. The Bayindir tribunal ruled that MFN clauses are designed to “provide a level playing field … between foreign investors from different countries.”[4]

Indirect Expropriation

Treaties normally protect investors against unlawful expropriation. This includes “covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property.”[5]  Expropriation can also occur indirectly, without a formal transfer of legal title or physical seizure of the investor’s property. When governmental measures deprive an investment of its economic value, the host state commits an indirect expropriation. “[D]e facto expropriations or indirect expropriations, i.e., measures that do not involve an overt taking but that effectively neutralize the benefit of the property of the foreign owner, are subject to expropriation claims.” [1]

Practical Recommendations

Foreign investors planning to invest in Mexico should safeguard and strengthen their investments by leveraging available treaty protections. Corporate restructuring plays a crucial role in protecting both existing and future foreign investments. Additionally, foreign companies operating in Mexico can structure their investments through third countries to enhance protection, especially when existing BITs do not provide robust standards.[6]

Additionally, local companies affected by actions of Mexican authorities should review their corporate structures to confirm coverage under strong investment treaty protections. If they face harmful government measures, they should assess whether to bring an investment claim against Mexico, considering the facts, available evidence, and the relevant statute of limitations.

[1] Chapter 2: Fair and Equitable Treatment’, in August Reinisch and Christoph H. Schreuer, International Protection of Investments, (Cambridge University Press 2020), pp. 251 – 535, para. 1433.

[2] CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, (Award, 12 May 2005), para. 274.

[3] Pawlowski AG and Project Sever s.r.o. v. Czech Republic, ICSID Case No. ARB/17/11 (Award, 1 November 2021), para. 309

[4] Bayındır İnşaat Turizm Ticaret ve Sanayi A.Ş. v. Islamic Republic of Pakistan (I), ICSID Case No. ARB/03/29, (Award, 27 August 2009) para. 387.

[5] Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, (Final Award, 30 August 2000), para. 103.

[6] See https://www.hoganlovells.com/en/publications/foreign-investors-should-consider-treaty-protections-when-structuring-their-investments-abroad