USMCA Update: Rules of Origin and Dispute Resolution

After many years, Mexico, USA, and Canada successfully negotiated and replaced NAFTA (North America Free Trade Agreement), implemented in 1994, with USMCA (United States-Mexico-Canada Agreement), which took effect on July 1, 2020.

USMCA’s Chapter 4 addresses the rules of origin, an important topic for industries like automotive as well as construction. Rules of origin are the criteria used to determine the national source of a product, and will determine whether specific components are free of duties or subject to custom fees. In this regard, companies that use goods with several components are tied to the rules of origin.

Production chains are also affected because producers need to verify that the materials used in the goods comply with the rules of origin. If materials do not comply, producers will need to decide whether to pay customs fees or to use some other suppliers that comply with the rules of origin.

Another issue addressed is the way to solve any dispute related to the interpretation and application of USMCA. USMCA’s Chapter 31 creates a dispute resolution system which strives to operate under the principle of cooperation. Under such basis, a Party may request “Consultations” under Article 31.4, which is a procedure where a Party that feels USMCA is being applied unjustly and/or in an anticompetitive manner by another Party can notify the other Party in writing of the reason for the request and legal basis for the complaint. USMCA requires the Parties to make every attempt through cooperation and consultations to arrive at a mutually satisfactory resolution. If the Parties do not arrive a resolution through the consultations, they can start the procedure to establish a Panel to make findings, determinations, and recommendations.

On this basis, in August 2021, Mexico requested USMCA consultations with the United States to solve a dispute over differing interpretations of the automotive rules of origin. 

The dispute relates to how the United States was calculating the Regional Value Content (RVC) for an automobile’s core parts to fulfill the rules of origin. Core parts of an automobile must have a 75% RVC to qualify as having USMCA origination.

Mexico argued that the United States’ interpretation imposes strict requirements inconsistent with considering a core part qualify as originating as long as it satisfies the 75% RVC requirement. This interpretation could make products cost more due to import duties and be less attractive than competitor markets.

The consultations did not resolve the dispute. For that reason, on January 6, 2022, Mexico requested a Panel, which under Article 31.9 consists of five members and may render findings, determinations, and recommendations regarding the differing interpretations. Canada recently announced that it would join Mexico in requesting the Panel. A decision is expected around September 2022. Although this dispute only relates to automotive rules of origin, it may affect all manufactured goods.

 Author Juan Pablo Sandoval: jpsandoval@comad.com.mx.

Should You Use the DRB or Go Straight to Arbitration?

Dispute Resolution Boards (“DRBs”) continue to grow in popularity, particularly for major infrastructure projects. As such, we can expect that construction lawyers will increasingly be advising clients on whether to send a dispute to the DRB or go directly to arbitration. In this post, we outline a few of the factors that may inform whether your client should submit a dispute to the DRB or go straight to arbitration.

DRBs (also known as “Review Boards”) are most common in major infrastructure projects. They typically consist of three independent and impartial experts, such as engineers. Lawyers can also make up the DRB. The DRB is actively involved in the project from its inception so its members are familiar with the parties and need little time to get up to speed on the events leading to a dispute.

When disputes arise, the parties may refer it to the DRB. The DRB will then typically investigate the dispute, hear submissions from each side through an informal process, and render either a binding or a non-binding opinion, depending on the nature of the DRB. The precise process followed by a DRB depends on the terms of the applicable contract.

DRBs usually play a very important role in major projects by dealing with issues as they arise on site. By providing prompt decisions, they allow construction projects to proceed without delay. Real-time prevention and resolution by the DRB often promotes open communication, trust, and cooperation between the parties.

When considering whether to refer a dispute to the DRB, clients may be concerned that most DRB decisions are non-binding recommendations. There is a risk the parties will still need to arbitrate (or even litigate) after a DRB recommendation is rendered. Fortunately, it appears that the vast majority of disputes resolved by DRBs do avoid further dispute resolution steps.¹

However, DRBs may also have some downsides. In Canada, there are reports that parties are increasingly seeking a lawyer to chair the DRB committee because of their knowledge of legal processes.² The emphasis on legal procedure may erode the cost and time-saving benefits of the DRB while leaving the parties without the benefits of arbitration, such as finality of the decision.

Moreover, the nature of the dispute may not be within the DRB members’ expertise. While members of the DRB with engineering expertise may be well positioned to adjudicate technical disputes, claims involving contract interpretation and other legal matters may be outside their expertise. Such disputes might be better left to an adjudicator with legal training.

Parties should also consider whether they will end up arbitrating or litigating related disputes. In one high profile project involving the construction of a subway station in Toronto, Canada, one dispute was resolved through the DRB but over 40 individual claims are still being litigated.³ If the parties are already incurring the expense of complex litigation, there may be little benefit gained by hiving off one issue for a separate hearing through the DRB.

The DRB’s heavy involvement in the project can sometimes be problematic too. Depending on the relationships that form on site, parties may benefit from the fresh perspective of an arbitrator who is new to the project. An arbitrator may alleviate any concerns about bias from members of the DRB who have worked on site for months or years.

Overall, DRBs are usually an excellent option for resolving disputes in real time on site. However, it is still important to weigh the other dispute resolution options carefully before choosing to proceed with the DRB.

Author Laura Brazil is a partner in the Toronto office of McMillan LLP. Her practice is focused on construction and real estate disputes. She primarily acts for owners and contractors but also represents subcontractors, material suppliers, designers and other members of the construction pyramid.

Author Anthony Labib is an articling student in the Toronto office of McMillan LLP. He is a graduate of Western University’s Faculty of Law.

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1 “Construction Dispute Resolution Arbitration and Beyond”, American Jurisprudence Trials, August 2021 Update, by Thomas H Oehmke and Joan M Brovins.^↩
2 https://canada.constructconnect.com/dcn/news/government/2019/10/dispute-resolution-board-use-on-the-rise-in-canada.^↩
3 Walsh Construction Company Canada v. Toronto Transit Commission, 2020 CarswellOnt 8055, 2020 ONSC 3688.^↩

Is the Med-Arb Format Right For You?

By Nicholas P. Brown, Pierce Atwood, LLP

As the cost of litigation has grown and the appetite for its attendant risks declined, owners and contractors have increasingly relied upon mediation and binding arbitration to resolve disputes. One particularly unique dispute resolution format is the combination mediation/arbitration (or “med-arb”) where the same neutral serves as both mediator and, if needed, arbitrator. In the med-arb format, mediation and arbitration are scheduled concurrently so that the threat of arbitration, and its binding result, hangs over the mediation like the proverbial Sword of Damocles. The parties know that if mediation fails, arbitration immediately follows without delay.

 

The significant wrinkle in the med-arb approach is that the neutral mediator also serves as fact-finder and decision-maker in the event of arbitration. This is not the case in the traditional mediation/arbitration scenario where the mediator has no role in the arbitration and decision-making process. Thus, the parties know that their discussions with the mediator are confidential and will not have any influence on the arbitrator’s decision. This traditional separation between mediation and arbitration enables the mediator to encourage a level of candor from the parties that may be difficult to achieve in the med-arb format.

 

With the med-arb format, the parties must recognize that the mediator may learn facts about the dispute or the parties that might otherwise be inadmissible in arbitration. The mediator is expected to disregard such information in the event he or she subsequently sits as arbitrator. But human nature can make it difficult if not impossible for the mediator to erect the appropriate mental barriers and “forget” what he or she has heard. As such, parties to the mediation may withhold information harmful to their case that they might normally share with a traditional neutral mediator. Where the parties exercise such caution, the likelihood of a mediated settlement may decline.

By the same token, parties may disclose to the mediator wholly irrelevant yet harmful information about the other party in an effort sway the soon-to-be-arbitrator’s impressions of the case. In this way, the mediation may be used as a means of presenting evidence that might never have been heard.

Given this dynamic, you may be wondering about the benefits of the med-arb approach. First and foremost, is the opportunity for a quick and relatively inexpensive resolution. A recent dispute I worked on took less than nine months to fully resolve from the moment the case came through the door. Once the parties agreed to the med-arb format, it took just four months for the arbitrator to issue her decision and award. Considering the significant number of issues presented by the parties, litigation likely would have dragged on for two or more years and likely would have entailed extensive discovery. Under the circumstances, med-arb offered a tremendous opportunity to save the time, expense, and aggravation of a prolonged litigation schedule. 

Second, the threat of immediate arbitration may provide the necessary incentive for the parties to approve a mediated settlement. With traditional mediation and arbitration, the arbitration hearings are often not even scheduled at the time of mediation. Thus, arbitration may seem more theoretical than real to your clients whose rights and interests will be ultimately be decided should mediation fail. Without the imminent possibility of loss at arbitration, settlement may remain out-of-reach until just prior to arbitration.

 

Ultimately, these benefits must be weighed against the risk of having the same person serve as mediator and arbitrator. Attorneys are well advised to consider the relative strength of their case taking into consideration all facts and circumstances that might be shared with the mediator by the opposing party. Thus, if you are concerned that your client may be cast in an unflattering light by the disclosure of otherwise inadmissible evidence during mediation, the med-arb format may not provide a benefit to your client. In contrast, if your client has a strong case and you believe there is little risk that the mediator will be swayed by irrelevant information, med-arb may offer a cost-effective alternative to litigation. Regardless, attorneys should assess the strength of their case using a holistic approach that might not normally be needed.

 

For further information and an interesting discussion of the merits and pitfalls of the med-arb format, the following articles are recommended. See Martin C. Weisman, Med-Arb: The Best ofBoth Worlds, Dispute ResolutionMagazine, Spring 2013, at 40; Brian A. Pappas, Med-Arb: The Best of Both Worlds May Be Too Good to Be True, Dispute Resolution Magazine, Spring 2013, at 42. Both articles and others are available at http://guides.library.harvard.edu/content.php?pid=442479&sid=4396465