In: International Trade Dispute Settlement
Since its inception, the World Trade Organization (“WTO”) has never been short of naysayers. This reached a whole new level after the fateful Ministerial Conference in Seattle in 1999, when ill wishes for the organization became fashionable, at least among some quarters. But it sailed through the treacherous waters and managed to launch a new round of negotiations in Doha two years later.
Then came the collapse of the Doha Round in 2008, when the demise of the organization became the talk of the town, even among some insiders. Yet again, the WTO soldiered on.
Fast forward ten years.
“The WTO Appellate Body is dying”, said some in 2018, and they might be right this time.
And what a slow and painful death it has been!
The first heavy blow was thrown by the US in mid-2016, when they refused to support the reappointment of Prof. Seung-wha Chang, a leading WTO scholar. While rather painful, this proved to be non-fatal, as the US later changed its position and supported the appointment of Mr. Hyun Chong Kim to replace Prof. Chang. However, when Mr. Kim was tapped as the Minister of Trade by the new government under President Moon Jae-in in July 2017, he resigned from the position. Since then, the US has been blocking the selection of new AB members by the WTO’s Dispute Settlement Body (“DSB”). As the terms of one Appellate Body member after another expired without replacement, the AB is inching closer and closer to its ultimate doom.
As of Jan 2019, the Appellate Body is left with only three Members, which is barely sufficient for the DSB-mandated quorum to hear a case. Moreover, the terms of two of these Members are scheduled to end this December, which will leave the Appellate Body completely paralyzed.
When that happens, the consequences would not be limited solely to the Appellate Body, but the entire WTO dispute settlement system. This is because Panel and Appellate Body reports are not binding on their own, but must be formally adopted by the DSB before they have legal effects. At the same time, according to Article 16.4 of the Dispute Settlement Understanding, “[i]f a party has notified its decision to appeal, the report by the panel shall not be considered for adoption by the DSB until after completion of the appeal”. This means that the losing WTO Member in any case can essentially block the adoption of the panel report by simply lodging a short notice of appeal. With the wrench thrown into the process, the adoption of the panel report will be postponed indefinitely.
Moreover, the ripples of the Appellate Body blockage will be felt beyond the narrow confines of the multilateral trading system. As the only binding international dispute settlement system operating at a truly global level, the WTO dispute settlement system has been praised as the “Crown Jewel” of the WTO and regarded as the beacon of hope for a rule-based international system by all international lawyers in the otherwise hopeless realm of international law. When the Appellate Body dies, such hope will be gone too.
While the ultimate end seems to be certain, this doesn’t necessarily mean that the only option left is accepting the fate. Instead of fading quietly into the background, like some of their colleagues have done, the remaining three Appellate Body members should at least try to “rage against the dying of the light” before the light is put off. At least, we need a strong-worded admonition against the rogue behaviour of the US from the three remaining AB members, or better still, from all current and former Appellate Body members. While such swan song might not be able to prevent the inevitable, it will provide the saving grace for international lawyers and international law by letting the world know that they have refused to “go gentle into that good night”.
The 8th edition of the Herbert Smith Freehills – SMU Asian Arbitration Lecture, jointly organised with the Centre for Cross-border Commercial Law at the Singapore Management University, took place on 18 October 2018. The distinguished event, graced by Chief Justice Sundaresh Menon, hosted a panel comprising: Sir Christopher Greenwood, DAG Lionel Yee, Judith Gill QC and Alastair Henderson (moderator). This post takes a closer look at the keynote speech delivered by Sir Christopher Greenwood.
The event was set against the sombre backdrop of increasing criticisms about investor-state arbitration (“ISA”). This was reflected in recent trends such as withdrawal of Bolivia, Ecuador and Venezuela from the ICSID Convention, and Australia’s aversion to ISA clauses in its Free Trade Agreements. Further, the famous Achmea decision by the EU Court of Justice earlier this year lent support to opponents of ISA (see Kluwer Articles here, here,here and here). Indeed, in Sir Greenwood’s words, “the storm clouds have been gathering” (for further analysis, see Kluwer Articles here, here and here).
But does ISA have a future, and should it? In addressing these questions, Sir Greenwood helpfully outlined the four major criticisms against ISA and provided suggestions for reform. While acknowledging that the future of ISA is “much more open to question”, he expressed hopes for its continued relevance.
Intrusion into state sovereignty
Sir Greenwood first observed that the entire system of ISA has been negatively viewed as an intrusion on the sovereignty of states. This has emerged in recent years as part of a wider backlash against globalisation, evidenced by Brexit and “America First” campaign under President Trump.
As Sir Greenwood noted, this criticism is perhaps unsurprising, for ISA tribunals are increasingly being involved in states’ domestic regulatory policies, possibly overriding a democratically-elected government’s view of what is in its best interest. A primary example of this is seen in the case of Philip Morris Asia Limited, where the Permanent Court of Arbitration (“PCA”) was made to decide on a matter relating to Australia’s plain packaging legislation for cigarettes.
In response to this, however, he suggested that the matter is perhaps “more complicated than it seems”. A bilateral investment treaties (“BIT”) involves, at all levels, two sovereignties. A state’s act of concluding of a BIT itself is a sovereign act – where each state party agrees to limit the exercise of its sovereign regulatory powers. This is further evidenced in the nature of bilateral investments, as the investment in a recipient state by another’s sovereign wealth fund necessarily involves the sovereignty of both. Even if the investment is by a private company, it would have to have been permitted to commit a portion of the sovereign wealth to overseas investment by its state’s domestic legislation. ISA thus involves sovereignty of both jurisdictions.
Vagueness of applicable standards
Sir Greenwood then shared his thoughts on the perception that concepts – such as indirect expropriation, and fair and equitable treatment – are too vague to be applied with certainty by tribunals. He disagreed with the view that parties would shy away from ISA because these terms led to unpredictability in arbitral awards. Ultimately, if it were truly the case that such terms are so vague to be unworkable, then it is “extraordinary” the terms in BITs concluded over the past 50 years have remained significantly unchanged. Any “bad reputation” should, in Sir Greenwood’s view, be attributed to the quality of claims raised and not the awards themselves.
Notwithstanding the admonition against extravagant claims, he cautioned arbitrators against examining these terms in the abstract. Treaty interpretation is an exercise distinct from interpreting domestic statutes or contracts. There is thus a need to assess what parties meant in the treaty, with reference to treaty definitions and practices of the states in applying the treaty after concluding it. For instance, if a treaty provides that the interpretations of the Free Trade Commission are binding, the tribunal should give effect to the treaty’s provisions even if the Commission’s interpretation is objectionable.
On this note, Sir Greenwood acknowledged that the very nature of ISA, in resolving disputes that are closely intertwined with administrative law and other public law issues, concerns fundamental issues of policy. Arbitrators involved in the proceedings must, in his words, “face up to the magnitude of the task of investor-state arbitration” and take caution in their assessment of disputes.
Lack of institutional framework and accountability
Sir Greenwood observed that yet another criticism levelled against ISA pertained more to the nature of arbitration as a dispute resolution mechanism. Several characteristics of arbitration were discussed. First, he noted that as compared to courts where judges are appointed according to established mechanisms, arbitral tribunals have been criticised for not having to go through any stringent selection and formation process. In response, he questioned the basis for this conception that courts have more legitimacy than arbitral tribunals. Ultimately, a BIT-formed arbitral tribunal derives its legitimacy from a treaty, no different from the International Court of Justice, International Criminal Court, or European Court of Human Rights. Yet, the same criticism about the lack of legitimacy does not apply in the same vein to these international courts.
Secondly, he was also critical of the argument that tribunals are neither subject to a general set of ethical standards nor held accountable through elaborate appellate mechanisms. Such arguments on accountability could, in his opinion, also be raised against national systems worldwide where the provision of judicial tenure makes policing of accountability difficult. In any case, even if we look to national courts that are often impartial and efficient, they are primarily governed by domestic legislations and unable to give effect to a treaty standard.
Thirdly, Sir Greenwood touched upon the recent debates over the level of transparency expected of arbitral tribunals. He observed anecdotally, that the state was often the party that strove to ensure confidentiality of proceedings, pleadings and even awards. He also pointed out that the default rule in UNCITRAL remains one of confidentiality, as most treaties that are still being heard were completed before the 2013 Rules of Transparency came into effect. In his opinion, awards should minimally be published with reduction, for anything less would “abandon any concept of courts and tribunals as we know them today”. Further, tax payers should not be expected to fork out so much money with no understanding of the grounds which the state has lost the case.
As a last note on transparency, Sir Greenwood stressed that there is a “need to be candid about who writes the arbitration award”; referring to the need for appointed arbitrators to perform their jobs, instead of relying on their secretaries or other unknown individuals.
No longer cheap or fast
The final criticism raised is related to the view that ISA no longer provides a quick resolution process, is expensive, and does not uphold confidentiality as before. While acknowledging these issues, Sir Greenwood suggested that these partly results from attempts to tackle other existing criticisms. For instance, in response to the calls for greater transparency, awards must provide a more detailed account of pleadings, effectively requiring more time. This is enshrined within Article 52(1)(e) of the ICSID Convention, which provides for the failure to state reasons as one of the grounds for annulment. Additionally, disputing parties played a role in causing delays and high costs, particularly through submissions that are unnecessarily long and overloaded with arguments in hopes that one might stick.
Sir Greenwood advocated calibrating the award on costs to reflect the quality of arguments and the corollary delayed caused, as was done in the Philip Morris case. He acknowledged, however, that this suggestion may prove impractical where costs are issued alongside the merits of an award.
In summary, in Sir Greenwood’s words, when viewed with a sense of proportion, the ISA “edifice is not crumbling”. Despite the withdrawals from the ICSID Convention, 154 states have ratified it. While the number of cases have slowed down, ICSID alone has over 50 new cases in 2017–2018 – almost half of all cases including those before the PCA and the International Chamber of Commerce. Concurrently, Australia has relaxed its hostility while the UK remains as big a proponent of ISA.
Sir Greenwood also underscored that given the lack of viable alternatives, the abolition of ISA would cause a return to a “Wild West World” – one of snatch and grab expropriation, with abuse of regulatory power under the guise of protectionism. ISA obviates the need to rely completely on states discretion to bring claims against another, and avoids risking diplomatic relationships in every dispute.
On a final note, Sir Greenwood pointed out that the recent criticisms of ISA have arisen precisely because ISA has been evolving to address the problems of the past. In our opinion, its relevance is aptly seen in Singapore, which has been involved in the Sanum v. Laos and Lesotho v. Swissborough cases, despite being neither the investing nor receiving state. While reforms are undoubtedly needed in specific areas, there is hope that ISA will move into a better age.
November 12, 2018
Author: Associate Professor Pasha Hsieh( Singapore Management University,Lee Kong Chian Fellow)
My research focuses on the legal issues that arise from free trade agreements (FTAs), as these proliferating agreements are critical to growth and development in Singapore and other Asia-Pacific countries. Alongside the ongoing trade war between the US and China, the world is entering a new era of trade regionalism. Against this backdrop, I am particularly interested in exploring the emergence of mega-FTAs, which will change the politics and norms of the global trading system.
The ‘Fragmentation Problem’ Resolved
Conventionally, international lawyers have focused the ‘fragmentation problem’ on jurisdictional clashes between the World Trade Organization (WTO) and FTAs.
In a cardinal WTO case, Mexico based its defense on the ‘forum exclusion clause’ of the North American Free Trade Agreement (NAFTA) when the United States brought a WTO complaint against Mexico’s tax measures. Mexico argued that, as the case constituted part of “a broader dispute” that it had previously brought against Washington in NAFTA proceedings, the ‘forum exclusion clause’ mandated that the NAFTA be the only forum for the case. The WTO Appellate Body disagreed. It held that a panel declining its own jurisdiction would “diminish” a complaining party’s rights under the Dispute Settlement Understanding (DSU). Consequently, based on WTO jurisprudence, it will be difficult for FTA forum exclusion clauses to bar the WTO’s jurisdiction.
Rise of the Mega-FTA
Following U.S. President Donald Trump’s withdrawal from the Trans-Pacific Partnership, the remaining 11 countries concluded a revised deal known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). After Australia became the sixth nation to ratify the pact recently, the CPTPP will enter into force in December 2018. Additionally, the 16-party Regional Comprehensive Economic Partnership (RCEP), consisting of ASEAN and many of its regional economic partners, is also expected to be substantially concluded this year.
While these mega-FTAs push for further trade liberalization, their co-existence with bilateral and regional trade and investment agreements will aggravate the fragmentation problem in dispute settlement due to overlapping dispute settlement provisions.
First, as multiple FTAs exist between the same countries, different dispute settlement mechanisms will lead to forum shopping. To illustrate, Singapore may bring a claim against China under a bilateral FTA, the Association of Southeast Asian Nation (ASEAN)-China FTA and, prospectively, the RCEP. Currently, ASEAN+1 FTAs such as the ASEAN-Japan FTA and the ASEAN-Australia-New Zealand FTA do not offer clear guidance in their “relations to other agreements” provisions. These FTAs follow what I call the ‘three-phase approach’. Substantively, “[e]ach Party reaffirms its rights and obligations under” existing agreements to which they are parties in the text of ASEAN+1 FTAs. These ASEAN+1 FTAs should not “be construed to derogate from” existing obligations arising from other agreements. Procedurally, a party “shall immediately consult with” another party should any inconsistency between ASEAN+1 FTAs and other agreements materialize.
Second, contemporary FTAs that incorporate investment chapters may conflict with co-existing BITs. Investor-state dispute settlement (ISDS) mechanisms in FTAs and BITs have inconsistent scopes and carve-outs. Notably, the China-Singapore FTA (CSFTA) provides a distinct model. Without its own investment provisions, the CSFTA makes the ASEAN-China Investment Agreement “an integral part of” the CSFTA. Because the Investment Agreement alone provides the ISDS mechanism, no jurisdiction conflict exists with the CSFTA. However, legal issues may arise from the 1985 China-Singapore BIT, which continues to co-exist with the FTA. This BIT limits ISDS to “the amount of compensation” and confines the forum to “arbitral tribunals established by both parties.” A party may well resort to the CSFTA for additional procedural guarantees. In this regard, more detailed provisions under the CSFTA may facilitate de facto FTA-BIT consolidation.
As these examples illustrate, the potential jurisdictional challenges that arise from FTA and BIT conflicts will likely increase in the new era of regionalism. Without a politically feasible legal approach, consultations and negotiations between governments are essential to minimize the litigation cost. Moreover, the fragmentation issues remind us that reinvigorating multilateral trade and investment talks in the WTO and UNCITRAL will be essential and any attempts to paralyze the dispute settlement functions at the WTO can be detrimental to a rule-based system.