European Yearbook of International Economic Law 2021 (European Yearbook of International Economic Law, 12) 3031050827, 9783031050824

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Jelena Bäumler · Christina Binder Marc Bungenberg · Markus Krajewski Giesela Rühl · Christian J. Tams Jörg Philipp Terhechte · Andreas R. Ziegler

20021

Editors

European Yearbook of International Economic Law 12 3

European Yearbook of International Economic Law Volume 12

Series Editors Jelena Bäumler, Lüneburg, Germany Christina Binder, Neubiberg, Germany Marc Bungenberg, Saarbrücken, Germany Markus Krajewski, Erlangen, Germany Giesela Rühl, Berlin, Germany Christian J. Tams, Glasgow, UK Jörg Philipp Terhechte, Lüneburg, Germany Andreas R. Ziegler, Lausanne, Switzerland Assistant Editor Judith Crämer, Lüneburg, Germany Advisory Editors Armin von Bogdandy, Heidelberg, Germany Thomas Cottier, Bern, Switzerland Mary Footer, Nottingham, UK Stefan Griller, Salzburg, Austria Armin Hatje, Hamburg, Germany Christoph Herrmann, Passau, Germany Meinhard Hilf, Hamburg, Germany Locknie Hsu, Singapore, Singapore William E. Kovacic, Washington, USA Gabrielle Marceau, Geneva, Switzerland Ernst-Ulrich Petersmann, Florence, Italy Hélène Ruiz Fabri, Luxembourg, Luxembourg Bruno Simma, München, Germany Rudolf Streinz, München, Germany Tania Voon, Melbourne, Australia

The European Yearbook of International Economic Law (EYIEL) is a Springerpublication in the field of International Economic Law (IEL), a field increasingly emancipating itself from Public International Law scholarship and evolving into a fully-fledged academic discipline in its own right. With the yearbook, editors and publisher make a significant contribution to the development of this "new" discipline and provide an international source of reference of the highest possible quality. The EYIEL covers all areas of IEL, in particular WTO Law, External Trade Law of major trading countries, important Regional Economic Integration agreements, International Competition Law, International Investment Regulation, International Monetary Law, International Intellectual Property Protection and International Tax Law. The yearbook consists of four major parts: (1) Part one brings together topical articles dealing with current legal problems in the different areas of IEL as described above, (2) part two provides analytical reports on the development of regional economic integration around the globe, (3) part three covers the developments inside the major international institutions engaged with IEL (WTO, IMF, Worldbank, G8 etc.), and (4) part four contains book reviews and documentation. EYIEL publishes articles following a substantive review by the editors and external experts as appropriate. The editors have published extensively in the field of IEL and European Law alike. They are supported by an international Advisory Board consisting of established scholars of the highest reputation.

Jelena Bäumler • Christina Binder • Marc Bungenberg • Markus Krajewski • Giesela Rühl • Christian J. Tams • Jörg Philipp Terhechte • Andreas R. Ziegler Editors

European Yearbook of International Economic Law 2021

Editors Jelena Bäumler Leuphana University of Lüneburg Lüneburg, Germany

Christina Binder Bundeswehr University Munich Neubiberg, Germany

Marc Bungenberg Saarland University Saarbrücken, Germany

Markus Krajewski University of Erlangen-Nuremberg Erlangen, Germany

Giesela Rühl Humboldt-Universität zu Berlin Berlin, Germany

Christian J. Tams University of Glasgow Glasgow, UK

Jörg Philipp Terhechte Leuphana University of Lüneburg Lüneburg, Germany

Andreas R. Ziegler Université de Lausanne Lausanne, Switzerland

ISSN 2364-8392 ISSN 2364-8406 (electronic) European Yearbook of International Economic Law ISBN 978-3-031-05082-4 ISBN 978-3-031-05083-1 (eBook) https://doi.org/10.1007/978-3-031-05083-1 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Editorial

Volume 12 of the European Yearbook of International Economic Law (EYIEL) sees the light of day in times which remain challenging for international relations: the COVID-19 pandemic continues to impact the lives of many individuals, societies and nations. Yet, also international political, economic and security crises have a significant effect on global affairs. In these challenging times, it is important to recall one of the cornerstones of the law of the community of states enshrined in Article 2 of the Charter of the United Nations: All Members shall settle their international disputes by peaceful means in such a manner that international peace and security, and justice, are not endangered.1

The implementation of the principle of the peaceful settlement of disputes through various judicial and quasi-judicial mechanisms in international law is nowhere as diverse and differentiated as in the field of international economic law. At the same time, well-established bodies and institutes of dispute settlement in international economic law face significant practical and fundamental questions. The editors have therefore decided to dedicate the focus section of EYIEL 12 to the future of dispute settlement in international economic law. Most contributions were received following a call for papers which attracted a variety of authors at different stages of their professional and academic careers. The first four chapters address dispute settlement in the World Trade Organisation (WTO). Lindsey Garner-Knapp, Shaina D. Western and Henry Lovat discuss the relationship between the United States and WTO dispute settlement, in particular the Appellate Body (AB). As a result of the US’ blocking of the appointment of new AB members, the institution is currently inactive. Considering that the US was among the principal architects of the AB, this seems remarkable. To assess this development, the authors examine US attitudes and behaviour towards the WTO in the context of broader developments in US domestic and external policy. The authors

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Charter of the United Nations, 24 October 1945, 1 U.N.T.S. XVI (1945). v

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explore both continuity and change in American attitudes through this examination and find that US behaviour over time is not as perplexing as it may appear. Rather, the current situation can be understood as reflective of longstanding US preferences and concerns, with successive administrations having been unable to address these within the WTO/AB framework as set up in 1995. Emmanuel Kolawole Oke focusses on a more specific question and assesses the role of the Appellate Body in preserving the “glocal” space in international intellectual property law. The author uses the term glocal to describe the space available to states to experiment and adjust global rules to suit their local needs. The chapter explores how viewing glocalisation as an autonomous concept can be applied in the context of international intellectual property law and argues that the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) should not be conceptualised as simply a global agreement but as an agreement that contains both global and glocal spaces. Built on this, the author critically analyses the role that the AB has played in preserving the glocal space in international intellectual property law. Even though the WTO’s dispute settlement system is the most prominent system of settling disputes in international trade law, it is not the only one. In fact, many regional trading agreements also establish such systems which are, however, not used as frequently as the WTO system. Annabel Nanjira therefore compares the efficacy of the African Continental Free Trade Area Agreement (AfCFTA) and the WTO in resolving trade disputes between African States. Apart from comparing the main features of the two systems, Nanjira assesses whether recourse to one system automatically bars a state party from seeking a remedy in the other dispute resolution system and highlights lessons for AfCFTA from other dispute settlement mechanisms on the African continent. In the last chapter addressing dispute settlement in international trade law, Georgie Juszczyk comes back to the legitimacy crisis of the WTO’s Appellate Body and asks if there are other ways to overcome that crises than through the Multiparty Interim Appeal Arbitration Arrangement (MPIA). Juszczyk argues that the crisis currently facing the Appellate Body is one of legitimacy, and the MPIA is not the correct forum for addressing questions about the identity of the WTO. Hence, the MPIA cannot serve as a permanent solution to the AB crisis. Nevertheless, the MPIA offers important lessons to be considered during any future reforms seeking to address the legitimacy crisis. The second part of the focus section on dispute settlement contains contributions addressing questions from international investment law. The first chapter in this context asks if frivolous counterclaims in international investment arbitration can be prevented through summary dismissals. Vishakha Choudhary argues that this option is not a one-way-street: Even though summary procedures can be used for the dismissal of frivolous counterclaims, there are various explicit and implicit restrictions which bar claimants from seeking early dismissal of such counterclaims. Given the emerging practice of including investors’ obligations in investment treaties and the increasing frequency with which counterclaims are litigated, precluding investors from challenging frivolous counterclaims runs against the current.

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Choudhary highlights that the rationale for summary dismissal procedures is equally relevant to the adjudication of counterclaims and proposes possible rules in this regard. Erlend M. Leonhardsen contributes to the ongoing debates about reforming existing international investment agreements (IIAs) to increase states’ discretion with respect to the measures they undertake vis-à-vis foreign investors. Such discretion is most famously associated with the “margin of appreciation” in the case law of the European Court of Human Rights (ECtHR). Leonhardsen analyses investment treaty reforms and examines further developments of this doctrine. He shows that the margin of appreciation may be evolving from a “thin” version, which mainly involves discretion, into a “thick” version, involving subsidiarity and the relationship between the ECtHR and national bodies. The author concludes that there are many examples of awards in which tribunals have afforded discretion, resembling such a “thin” version, but only few examples of the “thick” version. Moving away from the specific questions of investor-state dispute settlement (ISDS) Domenico Pauciulo asks if conciliation can be an instrument for the settlement of disputes between sovereign debtors and their creditors. Observing that states’ financial instability and debt restructuring are impaired by predatory behaviours of private creditors, including the use of ISDS, the author suggests that conciliation could provide an alternative to judicial and ISDS proceedings to solve disputes involving sovereign debt between private creditors and debtor states because of its procedural and practical benefits. Pauciulo proposes to create a compulsory “conciliation scheme” managed by the United Nations Conference on Trade and Development (UNCTAD) Sovereign Debt Workout Institution in order to create a reliable system for the resolution of sovereign debt disputes. Patricia Cruz Trabanino addresses state counterclaims and the “legitimacy crisis” in investment treaty arbitration. Historically, state counterclaims in ISDS have generally failed due to ISDS’s procedural and substantive asymmetry, which contributed to the “legitimacy crisis” of ISDS; yet some tribunals have shown greater openness towards states’ counterclaims. Cruz Trabanino analyses six such cases which exemplify a more permissive interpretation of the jurisdictional requirements for counterclaims and a novel approach to the imposition of substantive obligations on investors. If future arbitral awards adopt and expand these cases’ openness towards counterclaims, they could trigger a trend of increased receptiveness to and success of state counterclaims, potentially mitigating some of the concerns that fuel the backlash against ISDS. The well-known Achmea ruling of the European Court of Justice (CJEU) marked the end of treaty-based intra-EU arbitration and is the starting point of the next chapter: Berta Boknik discusses a return to contract-based arbitration as a possible response to Achmea. Arguably, ISDS clauses in investor-state contracts neither violate the principle of mutual trust nor the principle of non-discrimination foreseen in Article 18(1) TFEU. However, there are concerns with regard to Articles 267 and 344 TFEU, as well as the autonomy of EU law. Nevertheless, there might be a reason to assess contract-based investment arbitration differently than treaty-based

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arbitration and, in fact, subject it to the standard applied to commercial arbitration: the fact that ISDS clauses in investor-state contracts do not represent a system solution. In the final chapter on investment dispute settlement, Ioannis Glinavos focuses on the remit of sovereign discretion on cultural and religious grounds when it intersects with investor protections under international law. Public policy aspects relating to culture and religion are frequently left unexplored by investment tribunal jurisprudence. The author explores options in investment arbitration for foreign investors affected by changes brought about by sovereign decisions based on religious and cultural grounds, shedding light in this politically and emotionally charged corner of international economic law. The paper initiates this discussion by investigating the possibility that the Switzerland-Turkey Bilateral Investment Treaty (BIT) of 1988 may offer bases for compensation to SICPA, the—until recently— operator of the Hagia Sophia museum in Istanbul, a world heritage site of global religious and cultural significance transformed again into an operational place of worship in 2020. The remaining three chapters of the focus section on dispute settlement in international economic law address other fora than trade and investment dispute settlement. Willem Theus asks if International Commercial Courts (ICCs) recently established in various states in Europe, the Middle East and Asia are the new frontier in international commercial dispute resolution. ICCs are as such often in direct competition with international commercial arbitration, yet the line between them has become increasingly blurred in some respects. Theus shows that ICCs build on an enduring legacy of “internationalised” national or “hybrid” courts, i.e. courts which have an international element such as serving foreign judges. On a more theoretical level, Relja Radović critically assesses the judicialization and proliferation of international courts and tribunals in international economic law. Radović questions whether every dispute resolution mechanism can be deemed judicial. As new trade and investment dispute resolution mechanisms face constraints on their powers, the chapter inquires whether the promotion of such constrains impairs the judicial character of these dispute settlement bodies. Radović concludes that the advancement of certain constraints on judicial powers in the field of international economic law marks a departure from the promotion of the judicial towards more administrative dispute settlement means and could lead to a “dejudicialization” of dispute settlement in international economic law. Sebastian Lukic takes a closer look at the dispute settlement mechanism in the EU-UK Withdrawal Agreement. If a dispute arises and no solution can be reached following political consultation, either the EU or the UK may resort to arbitration. As such a dispute may give rise to questions on the interpretation of Union law, a reference mechanism is built into the Withdrawal Agreement requiring the arbitration panel to request the Court of Justice of the EU to give a ruling on the respective Union law issues; the CJEU’s ruling shall then be binding on the arbitration panel. Such direct judicial dialogue between two international judicial fora in the form of a reference mechanism is a rare feature in international treaties.

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Outside of the focus section, Anjum Rosha and Clara Thiemann discuss the most recent new allocation of Special Drawing Rights (SDRs) to the Members of the International Monetary Fund (IMF); a historic event—both for the IMF and its membership. As it is only the fourth general allocation since the SDR was created in 1969, and the largest allocation so far, it provides IMF member countries with an unprecedented level of unconditional liquidity for urgent spending needs or as reserve buffer. Lüneburg, Germany Neubiberg, Germany Saarbrücken, Germany Erlangen, Germany Berlin, Germany Glasgow, UK Lüneburg, Germany Lausanne, Switzerland February 2022

Jelena Bäumler Christina Binder Marc Bungenberg Markus Krajewski Giesela Rühl Christian J. Tams Jörg Philipp Terhechte Andreas R. Ziegler

Contents

Part I

The Future of Dispute Settlement in International Economic Law

The US, the WTO, and the Appellate Body: From Great Expectations to Hard Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lindsey Garner-Knapp, Shaina D. Western, and Henry Lovat

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The Role of the Appellate Body of the WTO in Preserving the ‘Glocal’ Space in International Intellectual Property Law . . . . . . . . . . . . . . . . . . Emmanuel Kolawole Oke

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Two Sides of the Same Coin? Analysing the Efficacy of the African Continental Free Trade Area and WTO’s Dispute Settlement Mechanisms in Resolving Trade Disputes Between African States . . . . . Annabel Nanjira Legitimacy Crisis at the World Trade Organisation Appellate Body: Other Ways Than the MPIA? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Georgie Juszczyk

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Preventing Frivolous Counterclaims in Investor-State Arbitration: Need for Summary Dismissal Procedures . . . . . . . . . . . . . . . . . . . . . . . . 121 Vishakha Choudhary Designing Deference: Towards a Thin Margin of Appreciation Doctrine in International Investment Law? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Erlend M. Leonhardsen Conciliation as Method to Solve Sovereign Debt Disputes Between States and Private Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 Domenico Pauciulo

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State Counterclaims and the “Legitimacy Crisis” in Investment Treaty Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Patricia Cruz Trabanino Return to Contract-Based Arbitration as a Possible Response to Achmea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Berta Boknik Hagia Sophia at ICSID? The Limits of Sovereign Discretion . . . . . . . . . 253 Ioannis Glinavos International Commercial Courts: A New Frontier in International Commercial Dispute Resolution? Lessons from the Mixed Courts of the Colonial Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 Willem Theus The Dejudicialization of International Economic Law . . . . . . . . . . . . . . 309 Relja Radović Enter the Dialogue: Reference Mechanisms in Dispute Resolution Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 Sebastian Lukic Part II

Current Challenges, Development and Events in European and International Economic Law

A Booster Shot for Reserves: Overview of the IMF’s $650 Billion Allocation of SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 Anjum Rosha and Clara Thiemann

Part I

The Future of Dispute Settlement in International Economic Law

The US, the WTO, and the Appellate Body: From Great Expectations to Hard Times Lindsey Garner-Knapp, Shaina D. Western, and Henry Lovat

Contents 1 2 3 4 5 6

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William J. Clinton (1993–2000): Paved with Good Intentions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . George W. Bush (2001–2008): Crisis at Home and Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Barack H. Obama (2009–2016): Enforcement to Blockages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donald J. Trump (2017–2021): Playing the Trump Card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analysis: Consistency and Change Across Administrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Consistency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Conclusions: Biden and Beyond. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 7 13 16 21 25 25 27 29 30

Abstract The United States (US) began blocking members’ appointment and reappointments to the World Trade Organization’s (WTO) Appellate Body (AB) in 2011, causing creeping paralysis of this institution. Currently, the AB has no members and is inactive. The prospects for resurrecting the AB in its pre-crisis form currently appear dim, moreover, though the present crisis may prompt fresh thinking about world trade governance and dispute settlement. The likelihood of an enduring dispute settlement solution replicating the heavily legalised AB system is debatable, given the political and legal dynamics that have led to the present impasse. Blame for the current predicament of the Appellate Body is often cast on recent US administrations, with Barack Obama beginning a practice of blocking specific appointments, a strategy that evolved under Donald Trump, and to date appears to remain in place under the Biden administration. Given that the US was one of the principal architects of the AB and the WTO regime more generally, the central role

L. Garner-Knapp and S. D. Western University of Edinburgh, Edinburgh, UK e-mail: [email protected]; [email protected] H. Lovat (*) University of Glasgow, Glasgow, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 3–32, https://doi.org/10.1007/8165_2021_76, Published online: 5 May 2022

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of these administrations in undoing the AB is remarkable. To understand how international trade law and dispute settlement are to move forward, we accordingly need to understand how we reached the present situation. To this end, we examine US attitudes and behaviour towards the WTO, focusing on the AB specifically and international trade governance more generally, set in the context of broader developments in US domestic and external policy. Our survey extends from the WTO’s creation under the Clinton administration to the collapse of the Appellate Body under the Trump administration, using official sources and additional primary and secondary materials to trace US attitudes and conduct. We explore both continuity and change in American attitudes through this examination and outline how we reached the present situation, highlighting in turn potential systemic and institutional changes that may conceivably overcome this impasse. In general, we find that US behaviour over time is not as perplexing as it may appear. Rather, the Trump administration’s actions and attitudes can be understood as reflective of longstanding US preferences and concerns, with successive administrations having been unable to address these within the WTO/AB framework as set up in 1995.

1 Introduction The United States (US) was central to the design of the World Trade Organization (WTO), including the Appellate Body (AB). Yet, US actions have since rendered the AB inert. Accounts of this turn tend to focus on Obama- and Trump-era law and politics,1 and while there are references in this literature to broader US concerns, there is relatively little on how these concerns emerged and evolved.2 Proposed solutions to the present situation that do not consider the underlying issues that have shaped US attitudes and behaviour over time are unlikely to prove sustainable.3 Identifying and addressing these issues is accordingly central to overcoming the present impasse. Without this, there is a significant risk that proposed “fixes” will prove neither sufficient nor sustainable. As a first step in identifying these underlying concerns and considering their implications, we trace how domestic and international challenges have shaped US policy and attitudes towards the WTO and AB through four US presidential administrations (Clinton-Trump). We find that many of the now-apparent cracks in the system were in effect politically and legally baked in from the outset.4 Consequently,

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Kuijper (2018) and Condon (2018). A notable exception to this can be found in: Bown and Keynes (2020). 3 Howse (2021). 4 Charnovitz (2018); Charnovitz S (2019) How WTO dispute settlement succumbed to the Trump administration. GWU Law School Public Law Research Paper No. 2019-73 https://scholarship.law. 2

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as the WTO and member states seek to move forward with the Biden administration, it is vital to recognise that the current situation does not arise solely from attitudes specific to the Trump administration, but rather reflects longstanding and deepseated US concerns. To identify US concerns, we focus on US government discourse and policy towards the WTO. To be clear, substantive US concerns about the WTO and AB at any one point may go beyond the issues stated in publicly available documents: it is nevertheless important to have a solid grasp of the stated concerns to understand the evolution of US engagement with the WTO. To this end, we analyse a range of primary and secondary sources, including government and WTO documents, speeches, statements, newspaper articles, and academic literature, paying attention to US concerns and critiques regarding the WTO in general, and the AB specifically. We highlight the interplay between domestic and international forces for each administration, noting how these together shape policy positions and behaviour.5 Our purpose here is not to assess the validity or persuasiveness of US claims regarding the WTO and AB at any given juncture or overall, but rather to trace the origins and evolution of these, including how the US has attempted to address its concerns within the WTO/AB system. We are aware that doctrinal and policy claims may be made both in support of and opposition to the views presented by the US. Equally the views presented may track individual actors’ policy preferences at different points. Dismissal of stated US concerns on such grounds, however, has proven counterproductive. Our nearly three-decade (1992–2021) analysis highlights that while critique has evolved alongside practice within the WTO/AB, core US concerns reflect the AB’s genesis and design, and long-standing US domestic debates over foreign economic policy. Our approach foregrounds the effect of change in presidential administrations and Congress in US foreign policy related to the WTO, but also reveals continuity. Taking the long view of these dynamics underlines the scope of the challenge facing those seeking to find a viable, long-term solution to the ongoing dispute resolution crisis. This study has three significant findings regarding US attitudes and behaviours towards the AB and WTO and the challenges required to reinstitute binding trade adjudication.6 First, there is a degree of continuity across administrations. The Uruguay Round agreements sowed the seeds of US discontent with the WTO and the WTO/AB. Political misgivings and challenges under Clinton took root under the Bush administration and flowered under Obama. That the reaping occurred under Trump should not mask the longstanding nature of these concerns, which appear to

gwu.edu/cgi/viewcontent.cgi?article¼2728&context¼faculty_publications (last accessed 28 February 2021; Kuijper (2018). 5 Putnam (1988), p. 427. The approach adopted in this article may be situated in the ‘empirical turn’ in international law scholarship. (See Shaffer and Ginsburg (2012).) 6 By any measure the AB as presently constituted cannot be considered “effective”. On factors that may enable effectiveness to be assessed, see Shany (2014).

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inform US foreign policy under Joe Biden. Indeed, we find that the stated issues and associated policy challenges shaping US concerns have persisted across administrations, manifesting most clearly concern about a lack of transparency in the system and an inefficient dispute settlement. Second, the withering of the AB cannot be laid solely at the door of the US, given the consensus-based nature of decision making within the WTO.7 Indeed, the situation may have been avoided had the WTO’s broader membership proved able to address US concerns sooner through institutional reform measures. Moreover, while US grievances are longstanding, elements of these concerns also appear to be shared by other governments.8 Because US behaviour is endogenous to the trade regime’s operation, a “return to normal” ultimately seems improbable without substantial reform.9 Last, some responsibility rests with the AB itself, which developed a “prevailing ethos”, body of jurisprudence and practices that aggravated US concerns.10 Third, our findings suggest that revision of the Dispute Settlement Understanding (DSU) alone is unlikely to prove sufficient to “resurrect” effective dispute resolution at the WTO: rather, more substantial changes to the current multilateral trade regime are likely to be needed. The US, for its part, seems unlikely to sanction measures to strengthen the AB’s ability to function as an independent adjudicatory body within the current institutional framework, while changes to the DSU to satisfy US demands seem unlikely to be palatable to others. Accordingly, rather than focus on tinkering with WTO dispute settlement arrangements, sustainable solutions seem more likely

“[The] crisis we now face could have been avoided if it had been addressed head-on, as it began to escalate. The WTO is a consensus-based collective. This means that this crisis should not be attributed to one Member. . .No matter how difficult or insurmountable the issues may seem, all those who are part of the WTO community must be willing to engage and must refrain from putting personal or national trade interests ahead of attempting to come up with a solution.” from RamírezHernández R (28 May 2018) Farewell Speech of Appellate Body Member Ricardo RamírezHernández. WTO: Appellate Body, https://www.wto.org/english/tratop_e/dispu_e/ ricardoramirezfarwellspeech_e.htm (last accessed 24 February 2021). 8 This point is often in US documents and appears in some of the literature on US-AB relations. (See e.g. Lighthizer R, Report on the Appellate Body of the World Trade Organization, USTR, February 2020 https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_ Organization.pdf (last accessed 28 February 2021); Ragosta et al. (2003).) Available evidence suggests that support for the US position has been broader than often recognised, including within the WTO Secretariat. See e.g. Graham TF (5 March 2020) Farewell speech of Appellate Body member Thomas R. Graham. WTO: Appellate Body https://www.wto.org/english/tratop_e/dispu_ e/farwellspeechtgaham_e.htm (last accessed 27 February 2021). See also observations regarding developing world concern about AB overreach in Babu (2020), pp. 97–99. Despite these critiques, the extent of US dissatisfaction with the AB appears to be unmatched elsewhere. 9 Graham TF (5 March 2020) Farewell speech of Appellate Body member Thomas R. Graham. WTO: Appellate Body https://www.wto.org/english/tratop_e/dispu_e/ farwellspeechtgaham_e.htm (last accessed 27 February 2021). 10 Graham TF (5 March 2020) Farewell speech of Appellate Body member Thomas R. Graham. WTO: Appellate Body https://www.wto.org/english/tratop_e/dispu_e/ farwellspeechtgaham_e.htm (last accessed 27 February 2021); Howse (2021). 7

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to emerge from a more general reconsideration of the functions, and limits, of multilateral trade rules and governance in the political, economic, and legal context of the twenty-first century.

2 William J. Clinton (1993–2000): Paved with Good Intentions Bill Clinton campaigned for the presidency on the domestic economy, criticising George H.W. Bush’s focus on foreign policy.11 The linkages between domestic and international economic health, however, became evident early in the Clinton administration,12 prompting Clinton to embrace trade liberalisation, a view shared by key economic advisors and international partners.13 Pursuing a liberalising agenda, however, proved politically difficult. Clinton inherited from Bush a draft set of Uruguay Round agreements, with US input into the latter shaped principally by an ambition to address trade deficits.14 The result was a “grand bargain”, with the US overcoming developing world hesitance over multilateral regulation of investment, services and intellectual property rights via a combination of threats and concessions on agriculture and textiles.15 A key US objective in these negotiations was a ‘legalised’ and enforceable dispute resolution mechanism to make it more difficult for counterpart states to stymie trade disciplines: this resulted in the creation of new dispute settlement institutions—the Dispute Settlement Body (DSB) and the Appellate Body—and the removal of governments’ ability (under the previous General Agreement on Tariffs and Trade (GATT) regime) to unilaterally prevent the adoption of adverse reports.16 Despite avowed presidential confidence,17 however, the appeals proposals—particularly the Luce E, US Democrats Should Remember, “It’s the Economy, Stupid”. Financial Times (27 March 2019). 12 Barshefsky C, Charlene Barshefsky Oral History. Presidential Oral Histories Miller Center, University of Virginia Charlene Barshefsky Oral History | Miller Center (last accessed 24 February 2021); Lovett (2004) p. 142. 13 (24 February 1993) The president’s news conference with Prime Minister John Major of the United Kingdom. Public Papers of POTUS https://www.govinfo.gov/content/pkg/PPP-1993book1/pdf/PPP-1993-book1-doc-pg196.pdf (last accessed 1 November 2020); (9 March 1993) Exchange with reporters prior to discussions with President Francois Mitterrand of France. Public Papers of POTUS, https://www.govinfo.gov/content/pkg/PPP-1993-book1/pdf/PPP-1993-book1doc-pg257-2.pdf (last accessed 1 November 2020). 14 Chorev (2011), p. 151. 15 Chorev (2011), p. 155; Hopewell (2016), p. 68. 16 Chorev (2011), Ch. 6; Sutherland (2000), p. 19; Moynihan (2008), p. 272. 17 Clinton argued that the new dispute settlement mechanisms would “provide for a more effective and expeditious dispute resolution mechanism and procedures which will enable better enforcement of United States rights.” [Clinton WJ (15 December 1993) Letter to Congressional Leaders on the General Agreement on Tariffs and Trade, Public Papers of POTUS, https://www.govinfo.gov/ 11

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prospect of lengthy proceedings delaying settlements and the perceived risk of US discretion to deploy retaliatory measures being constrained—remained contentious in Congress.18 Congressional passage of the WTO agreement was accordingly—and unsurprisingly—difficult. Opposition emerged principally amongst “labor, environmental, and consumer-protection activists” and business associations, as well as from conservative political actors,19 resulting in the administration relying on Republican votes to overcome Democratic recalcitrance. In a concession to Republican Senate leader Bob Dole, the 1994 Uruguay Round Agreements Act (URAA)20 was also closely followed by the introduction in the Senate of the 1995 WTO Dispute Settlement Review Commission Act: this legislation would have provided for a federal commission to review the operation of the WTO DSU/AB, holding out the prospect of US withdrawal if the commission decided that the AB had exceeded its power or acted improperly.21 Although never enacted, the debates around this measure indicate the extent of political unease with the putative trade regime during this period.22 Section 125 of the URAA itself, moreover, provides for a 5-yearly review of US participation in the WTO: in 2000, 2005, and 2020 these were accompanied by motions to withdraw the US from the WTO in Congress, all of which failed.23 Once in operation, the WTO’s institutions and mechanisms were deployed in a manner that proved challenging to member state governments.24 Specifically, despite having been envisioned originally as a non-standing institution,25 the AB began to act “like a court and not as part of the enforcement wing of the WTO

content/pkg/PPP-1993-book2/pdf/PPP-1993-book2-doc-pg2180.pdf (last accessed 15 November 2021), p. 2181.] 18 Elsig (2017), p. 311. 19 Chorev (2011), p. 159. 20 Pub.L. 103-465, 108 Stat. 4809, enacted December 8, 1994. 21 Chorev (2011), p. 160; Stutchbury M, Dole wants law to let US quit WTO. Australian Financial Review, 18 November 1994 https://www.afr.com/politics/dole-wants-law-to-let-us-quit-wto-1 9941118-jfjqp (last accessed 24 February 2021). 22 WTO Dispute Settlement Review Commission Act 1995 H.R.1434—104th Congress (1995–1 996): WTO Dispute Settlement Review Commission Act | Congress.gov | Library of Congress (last accessed 25 February 2021); see concessions made in defence of antidumping and countervailing practices to US steel industry in Chorev (2011), pp. 170–172; Palmer D. Exclusive: Congress can take vote to withdraw from WTO in July. Politico, 23 June 2020. https://www.politico.com/ news/2020/06/23/exclusive-congress-can-take-vote-to-withdraw-from-wto-in-july-336115; Herman (1995). 23 Fergusson and Davis (2020), https://www.everycrsreport.com/files/2020-05-21_IN11399_3 aee22dd470f642306e23883f95b2c04d55e9a88.pdf. Ciminio-Isaacs C., Feferlan R and Fergusson F. (2020). World Trade Organization: Overview and Future Direction. Congressional Research Service. https://crsreports.congress.gov/product/pdf/ R/R45417. 24 Hopewell (2016), p. 38. 25 Wagner (2020), p. 71.

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institution. . . the Appellate Body created itself as a judicial branch in a distant, even potentially contentious or oppositional, relationship with the WTO institution.”26 Numerous AB measures can be associated with this trend,27 developed initially through a series of decisions in the late 1990s. Japan–Alcohol,28 for example, saw the AB in 1996 diminish the normative value of GATT panel reports. This was followed in 1997 by EC-Bananas,29 where the AB permitted private counsel to represent a state party in proceedings,30 and 1998 in EC–LAN Equipment where the AB explicitly subordinated negotiating history as an interpretive tool to the disciplines of the Vienna Convention on the Law of Treaties.31 These decisions ran counter to the expectations of GATT-era ‘trade-insiders’,32 with similar divergences apparent between the AB’s understanding of its role and previous GATT-era practice evidenced in India–Patents (1998),33 India–Quantitative Restrictions (1999),34 Turkey–Textiles (1999),35 and notably Shrimp-Turtle (1998)36 and EC– Asbestos (2001).37 In these two last cases, the AB ushered in a non-traditional approach, in the former explicitly taking into account non-trade international law and values. In a subsequent WTO General Council (GC) meeting, it became clear how far the AB had gone beyond insiders’ expectations: ‘most [WTO] members’ heavily criticised the AB in the aftermath of its formal (albeit not de facto) welcoming of amicus briefs in proceedings, with the AB advised to “exercise extreme caution in future cases until Members had considered what rules were needed.”38 The US was also the sole defender of “the Appellate Body’s exercise of jurisdiction to set out the

26

Howse (2016), p. 31; Unterhalter (2015), p. 469. Howse (2016), p. 31. 28 Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/ R, WT/DS11/AB/R, adopted 1 November 1996, DSR 9 January 1998. 29 Appellate Body Report, European Communities – Regime for the Importation, Sale, and Distribution of Bananas, adopted WT/DS27/AB/R, 11 December 2008, DSR 8 November 2012. 30 Ehrenhaft (2001), p. 985; Cortell and Peterson (2005), p. 33. 31 Appellate Body Report, European Communities – Customs Classification of Certain Computer Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998. 32 Howse (2016), p. 32. 33 Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998. 34 Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/AB/R, adopted 22 September 1999, DSR 17 December 1998. 35 Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, adopted 19 November 1999. 36 Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, WT/DS58/AB/RW, adopted 21 November 2001. 37 Appellate Body Report, European Communities – Measures Affecting Asbestos and AsbestosContaining Products, WT/DS135/AB/R, adopted 5 April 2001. 38 Chair of the Council, WTO GC, Minutes of Meeting Held in the Centre William Rappard, WT/GC/M/60 (Geneva 22 November 2000), p. 28; Cortell and Peterson (2005), p. 36. 27

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procedure for submission of amicus briefs.”39 This support was in line with the Clinton administration’s broader push for transparency as a means of building confidence in and the legitimacy of the AB.40 Indeed, consistent with this position, the US itself was an “early adopter” of the new dispute settlement process—even though its record of success was mixed.41 A further key juncture during Clinton’s presidency was the collapse of the WTO ministerial meeting in Seattle in 1999. The designers of the WTO had anticipated that the organisation would serve as a standing negotiation forum, enabling continual updating and progressive liberalisation of international trade.42 The perceived need for negotiating “rounds” re-emerged quickly, however, with the US proposing to launch a “Millennium Round” in 1999. The Seattle meeting failed in this ambition, though, principally owing to a lack of consensus amongst key trade partners, aggravated by US ambitions to promote environmental and labour issues and greater transparency within the trade regime, as well as the mass protests that had accompanied the meeting, illustrating the extent of domestic public concern about “globalisation”.43 Overall, three themes emerge during Clinton’s tenure that later prove critical for the AB and US-WTO relations more generally. First, while the administration touted the benefits of a rules-based trading system, many US concerns about the WTO system were present from the outset. Perhaps most critically, the US sought to ensure that other states observed their international commitments, but chafed when the US was itself found to be acting inconsistently with its own commitments, particularly where panel rulings were overturned by the AB.44 39

Howse (2016), p. 41; citing account in Charnovitz (2002), pp. 219–240. Clinton WJ, United States: Statement by H.E. Mr. William J. Clinton, President, Geneva WTO Ministerial 1998, 18 May 1998 https://www.wto.org/english/thewto_e/minist_e/min98_e/anniv_e/ clinton_e.htm (last accessed 1 December 2020); Barshefsky C, Prepared for delivery, Institute for International Economics, Clinton Digital Library, 15 April 1998, https://clinton.presiden tiallibraries.us/items/show/45791 (last accessed 25 February 2021), pp. 9–10. 41 Cameron (2005), p. 119. 42 “The Uruguay Round was an incredible undertaking and it was presumed that the scope and scale of such a negotiation would no longer be possible, even if certain topics were reopened, but by 1996 there were new calls for rounds.” The Uruguay Round. Understanding the WTO: Basics, https:// www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm (last accessed 26 February 2021); quoting Roberto Azevedo “I think that when the WTO came into force back in 1995, it was clear that it would need to keep updating itself even though it was built to avoid rounds. . . .Well, six years later, from 1995, a new round was launched. I think that kind of single undertaking with that kind of ambition at that time was a very tall order for an organization that had been born just six years earlier. I think that maybe was the original sin” in WTO at 25: Conversations with former DGs. WTO, 25 November 2020 https://www.youtube.com/watch?v¼gUfVcHLW6QE (last accessed 28 February 2021), ts. 5:03-6:03. 43 Washington and Ottawa were behind the push for greater WTO transparency and Odell highlights that while this proposition had the potential to be seen as a mutual gain, for others it was deemed to be a loss in Odell (2009), pp. 273–299. 44 https://www.govinfo.gov/content/pkg/CRPT-106hrpt672/html/CRPT-106hrpt672.htm 11 May 2021. 40

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Prominent political figures of the time also expressed concerns about judicial “overreach” from the outset both as an abstract concern and in relation to adverse rulings: although encompassing a range of elements, the overarching criticism typically levelled is that the AB has, in one fashion or another, exceeded its mandate, notwithstanding Article 19(2) of the DSU stating that the “Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements.” Indeed, domestic US concern about overreach was evident in an early loss in US-Gasoline.45 The US also expressed concerns about timely decision-making and transparency—concerns shared by other states, including Australia, Canada, Hong Kong, and Norway.46 These problems were framed during this period as inefficiencies in a system that generally promoted US interests: accordingly, the US goal was to help the system function more in accordance with American expectations. Second, once in operation, it rapidly became apparent how difficult the consensual nature of decision-making amongst WTO member states made it to amend the WTO agreements (including the DSU), or otherwise to rein in the AB. This difficulty put more pressure on the AB, with litigation effectively substituting for substantive treaty negotiations amongst WTO members. Third, the WTO was established in a moment of American power preponderance, when the “victory” of liberal, democratic, market economies seemed inevitable following the collapse of the Soviet bloc. With the “end of history” having arrived, a prevailing US presumption was that over time market economies would prevail

Sanger, D Trade group orders U.S. to alter law for first time. The New York Times, 18 January 1998. 46 Clinton highlights that unilateral action in trade disputes was held back in reserve because previous dispute settlement processes had been time consuming and that the dispute settlement process needed to be quick and fair. In: Clinton WJ (23 February 1996) Exchange with reporters prior to discussions with PM Ryutaro Hashimoto of Japan in Santa Monica, California. Public Papers of the POTUS. Clinton also states the need for quick disputes particularly in the modern economy In Clinton WJ (1998) United States: Statement by H.E. Mr. William J. Clinton, President, Geneva WTO Ministerial 1998 https://www.wto.org/english/thewto_e/minist_e/min98_e/anniv_e/ clinton_e.htm (accessed 27 February 2021). Regarding transparency, Clinton argued that transparency inside and outside the WTO was necessary and that the WTO needed to be more efficient (Clinton (17 December 1999) United States-European Union summit statement on the World Trade Organization. Public Papers of the POTUS). Similarly, the US put forward proposals on increasing transparency in WTO (11 October 2000) General Council Informal consultations on external transparency October 2000: Submission from the United States, WTO GC WT/GC/W/413, pp. 1–6) which Australia supported faster derestriction of document including minutes WT/GC/ W/414, paras 5–6, Canada supported the US and proposed significantly greater public access and transparency including webcasting, document access, public dialogues WT/GC/W/415, Hong Kong, China “shares the view that a more transparent organization is not only essential to building confidence in the multilateral trading system, but also helps Member governments bring the public on board in pursuing further multilateral trade liberalisation” (para 2) but did not support “direct participation of civil society in the Organization” (para 9) WT/GC/W/418, and Norway supported increased transparency through faster derestriction of some documents and greater public engagements WT/GC/W/419. 45

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over non-market economies and bring about the transformation of the latter into democratic, market-economy states.47 With the US leading the way and building on GATT trade rules that presumed members were committed to a market economy, these assumptions were embodied in the WTO.48 To broaden WTO membership to include non-market economies, accession protocols were developed, requiring non-market economies to restructure their markets.49 This period accordingly saw the widening of participation in the WTO to more developing economies, including the preparation for China joining the WTO which would occur early in the Bush administration. For example, in bilateral US-Chinese negotiations over Permanent Normal Trade Relations (a necessary precursor to China joining the WTO), United States Trade Representative (USTR) Charlene Barshefsky achieved extensive Chinese concessions across a range of issues.50 The administration framed this initiative as facilitating Chinese economic and political reform via WTO membership.51 Having recently joined, developing states were reluctant to grant further concessions in negotiations, arguing that significant concessions had already been made on accession.52 Yet, as developing economies grew—in the case of China, without the political reforms anticipated by Clinton—US confidence in the WTO institutional arrangements for these states also began to wane, with the persistence of “special and differential treatment” for these states giving rise to claims that the WTO permitted

47

Fukuyama (1992). Huang (2009), p. 62. 49 Huang (2009), p. 62. 50 Jones (2004), p. 20; Devereaux et al. (2006), p. 281. 51 Clinton explicitly expressed that bringing China into the WTO would lead to economic reforms in China in Clinton WJ (8 March 2000) Message to the Congress transmitting proposed legislation on Permanent Normal Trade Relations with China. Public Papers of POTUS, https://www.govinfo. gov/content/pkg/PPP-2000-book1/pdf/PPP-2000-book1-doc-pg409.pdf (last accessed 27 February 2021), p. 409; Webster highlights both the hopes for reform that the WTO would have for China’s economic policy and lingering US concerns about the extent China would comply in practice. He finds that China’s track record is mixed and has trended towards paper compliance or other superficial changes to problematic laws, allowing inconsistent rules to remain in effect, not entirely dissimilar from other states in Webster (2014), p. 525; The lack of genuine reforms is a US criticism of China and the WTO in United States Trade Representative (2020) 2020 Report to Congress on China’s WTO compliance. https://ustr.gov/sites/default/files/files/reports/2020/2020 USTRReportCongressChinaWTOCompliance.pdf (last accessed 25 February 2021). Barshefsky C, Charlene Barshefsky Oral History. Presidential Oral Histories Miller Center, University of Virginia Charlene Barshefsky Oral History | Miller Center (last accessed 24 February 2021), pp. 16–17; Kantor M, Michael “Mickey” Kantor Oral History, Presidential Oral Histories: Bill Clinton, 28 June 2002. 52 Hopewell (2020). 48

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an “unfair playing field”.53 The continued absence of Clinton’s vaunted political liberalisation in China has haunted subsequent US administrations.54

3 George W. Bush (2001–2008): Crisis at Home and Abroad The 2000 presidential election was the closest in American history, with Bush initially promising a more “compassionate conservatism”.55 Internationally, however, Bush’s foreign policy was principally shaped by the events of 11 September 2001 and the ensuing wars in Afghanistan and Iraq.56 These international challenges were compounded by the collapse of the dotcom bubble, a gasoline price crisis, and later by the housing bubble presaging the Great Recession.57 In terms of foreign economic policy, Bush built on Clinton’s successes, with the Doha “Development” round of trade negotiations commencing in November 2001, and Congress granting President Bush—for the first time since lapsing under Clinton in 1994—fast-track Trade Promotion Authority. The focus on national security following 9/11, however, limited Bush’s ability to prioritise trade and international economic governance. The extent to which the Doha Round truly focused on development is debatable.58 Bush made mixed statements on the topic: a primary focus, for example, was cutting subsidies, but the US predicated this on concessions from the European Union (EU) and Japan.59 Critically, the early years of the Doha Round illustrated the difficulty in progressing multilateral trade liberalisation beyond the Uruguay agreements.60 This stalemate signalled effective ‘legislative’ deadlock and greater reliance on the AB to settle disputes. Despite a smattering of early victories, for the Bush administration the AB accordingly emerged as a critical arena of contention. This tendency became evident

53

Hopewell (2016). Van den Bossche and Zdouc (2019), p. 29; High-level meeting on integrated initiatives for LeastDeveloped Countries trade development, WTO, WT/LDC/HL/M/1, 26 November 1997; Moore M, The WTO is not a world government and no one has any intention of making it one, Moore tells NGOs. WTO News: 1999 Press Release, 29 November 1999 https://www.wto.org/english/news_e/ pres99_e/pr155_e.htm (last accessed 26 February 2021) where Moore links trade liberalisation and social policies and values. 55 Moens (2004). 56 Moens (2004). 57 Quinn and Turner (2020). 58 Hopewell (2016), p. 89. 59 USTR (2004) 2004 Trade policy agenda and 2003 annual report.https://ustr.gov/archive/ Document_Library/Reports_Publications/2004/2004_Trade_Policy_Agenda/Section_Index.html (last accessed 28 February 2021), pp. 5–6. 60 Hopewell (2016). 54

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early in Bush’s tenure: for example, in India-Textiles in 2001,61 the AB adopted a standard of review for anti-dumping measures that the US viewed as inconsistent with more deferential wording permitting member states greater discretion and flexibility that US negotiators understood they had successfully included in the Anti-Dumping Agreement.62 Steel also emerged as a challenging issue area, with US measures to safeguard domestic industries from foreign competition held by the AB to be inconsistent with GATT 1994 and the Agreement on Safeguards in 2003 in US-Steel Safeguards,63 prompting ire from Washington DC.64 The US similarly— accompanied by New Zealand—exhibited concerns in Canada-Dairy (2002) about procedures adopted by the AB in that case.65 Reflecting a bipartisan sense that the AB appeared to have exceeded its mandate, Bush called for reforms to the AB in 2001. The proposed reforms, echoing Clinton, centred on transparency: public access to DSB meetings, timely reports, and amicus curiae submissions at the AB.66 In 2002, the administration proposed suggestions to the WTO Negotiating Group on Rules, providing, inter alia, for greater access to DSB meetings: these gained support from the EU and Norway, again suggesting that these objectives had some international support.67 Finally, in the Bush administration’s final days, the US put forward three recommendations to improve the AB’s functioning: changing AB members’ positions to full-time roles, increasing support staff, and providing professional development.68 The US under Bush also appeared reluctant to comply with adverse AB rulings, especially where congressional action was required. This tendency was particularly Appellate Body Report, European Communities – Anti-Dumping Duties on Imports of CottonType Bed Linen from India, WT/DS141/AB/R, adopted 24 April 2003. 62 Tarullo (2003), pp. 373–393. Debate here has revolved around the AB’s treatment (or overlooking) of Article 17.6(ii) of the Anti-Dumping Agreement. 63 Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS248/AB/R, WT/DS249/AB/R, WT/DS251/AB/R, WT/DS252/AB/R, WT/DS253/AB/R, WT/DS254/AB/R, WT/DS258/AB/R, WT/DS259/AB/R, adopted 10 December 2003, DSR 2003:VII, 3117. 64 Quoting Scott McClellan In White House Report, Nov. 10: U.S. steel subsidies. State Department Press Releases and Documents (10 November 2003); Quoting Richard Mills In Temporary safeguard measures justified under WTO rules, USTR spokesman says. State Department Press Releases and Documents: The Washington File, Washington (10 November 2003). 65 Appellate Body Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products, WT/DS103/AB/RW2 WT/DSB/M/116, adopted 9 May 2003. 66 Bush GW (20 July 2001) G7 Statement in Genova. Public Papers of POTUS, https://www. govinfo.gov/content/pkg/PPP-2001-book2/pdf/PPP-2001-book2-doc-pg880.pdf (last accessed 24 February 2021), pp. 880–883; Bush GW (21 October 2001) APEC economic leaders declaration Shanghai, China. Public Papers of POTUS, https://www.govinfo.gov/content/pkg/PPP-2001book2/pdf/PPP-2001-book2-doc-pg1278.pdf (last accessed 24 February 2021), pp. 1278–1286; Rosenblum-Bazquez E, International trade update, Mondaq Business Briefing, 30 October 2002. 67 Rosenblum-Bazquez E, International trade update, Mondaq Business Briefing, 30 October 2002. 68 USA (16 January 2009) Improvements for the WTO Appellate Body. WTO DSB, WT/DSB/W/ 398 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename¼Q:/WT/DSB/W398.pdf& Open¼True (last accessed 27 February 2021), pp. 1–2. 61

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apparent in litigation over the Byrd Amendment,69 passed in the Clinton administration’s waning days (over Clinton’s objections), which mandated that domestic businesses harmed by dumping receive associated countervailing duties. To provide a flavour of the responses this legislation provoked, then-EU Trade Commissioner Pascal Lamy observed in July 2002 that the Byrd Amendment was not a US-EU problem “but a US-rest of the world problem. . . [flying] in the face of the letter and spirit of the WTO rules”.70 An adverse panel report on the Byrd Amendment in October 2002 was swiftly followed by an unsuccessful appeal to the AB.71 The Bush administration’s initial reaction to the latter was focused on complying with the adverse ruling.72 Congress, however, proved more resistant, with bipartisan resistance delaying the Byrd Amendment’s removal until 2005.73 The Bush administration also saw the politicisation of the AB appointment procedure. Famously, one of the administration’s nominees in 2003 was Robert Lighthizer—later Trump’s USTR, and already an outspoken critic of the WTO regime.74 In 2007, moreover, when Merit Janow stepped down, the US explicitly sought a nominee for the “US seat” on the AB who was persuasive and who shared US concerns about the WTO:75 the AB member nomination process became a political focal point for the US before either Obama or Trump. Across the Bush administration, we also see themes emerge regarding the WTO and AB that echo closely those of the Clinton years. As with Clinton, the Bush administration appeared to support the rules-based trading order and was willing to comply with adverse WTO AB rulings, but was increasingly constrained by domestic politics. Second, during the Doha Round the difficulty of significantly altering the Uruguay “bargain” became glaringly evident, the challenges posed by the emergence of developing countries within the WTO proving particularly salient as

69 USTR. USTR pledges compliance with WTO ruling on Byrd Amendment—Underlying antidumping laws not affected, USTR emphasizes. State Department Press Releases and Documents, 16 January 2003. 70 WTO dispute panel rules against US Byrd Amendment on anti-dumping. Market News International, 17 July 2002. 71 Hervey (2003). 72 USTR Deputy Allgeier urges WTO market access work go on—in Geneva, he cites development issues’ prominence. State Department Press Releases and Documents. 19 July 2002. 73 Rus (2007), pp. 427–443. 74 United States nominates WTO Appellate Body candidates. Office of the United States Trade Representative, 5 September 2003, https://ustr.gov/archive/Document_Library/Press_ Releases/2003/September/United_States_Nominates_WTO_Appellate_Body_Cidates.html (last accessed 17/2/2021). As Bacchus would later note: “After nearly 25 years, Lighthizer remains unreconciled to the decision by the US Congress in 1994 to support inclusion of the establishment of a binding dispute settlement system as part of the WTO, when approving the Uruguay Round trade agreements” Bacchus (2018), p. 6; Merit Janow was subsequently appointed to the position. 75 Elsig and Pollack (2014), pp. 391–415. Jennifer Hillman was subsequently nominated by Bush for this position.

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prominent developing states—Brazil, India and China—pushed against developed states’ preference for further liberalisation, focusing on implementing existing trade disciplines.76 The growing economic weight of these states in turn made acceding to developing country demands more difficult, contributing again to the atrophy of the “legislative” arm of the WTO and placing tremendous pressure on an Appellate Body increasingly identified by the US government as a key venue in shaping international trade law and policy.

4 Barack H. Obama (2009–2016): Enforcement to Blockages During the 2008 Democratic primary, both Barack Obama and future Secretary of State Hillary Clinton adopted somewhat sceptical views of the international trading system. Echoing previous administrations, the Obama campaign in particular raised concerns about the environment and working conditions. There was also a sense from Obama, however, that the outgoing Bush administration had not defended US trade interests sufficiently at the WTO, particularly with reference to China.77 When Obama took office in 2009, though, his primary focus was on dealing with the consequences of the collapse of the housing market and recession, and subsequently on the ensuing political backlash and right-wing mobilisation.78 Moreover, the WTO regime proved pivotal to avoiding a return to global protectionism in dealing with the economic crisis.79 The primary stated trade aim of the Obama administration during this period was to ensure a “level playing field”, allowing American workers to reap the benefits of trade.80 This phrase has developed specific connotations in American trade policy, referring to “reciprocal” trade concessions, where foreign markets would lower trade barriers, provide market access, and ensure protections for intellectual property

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Hopewell (2016). Schott (2009), pp. 150–153. 78 Bartels (2013), pp. 47–76. 79 Drezner (2014). 80 USTR (2009) 2009 Trade policy agenda and 2008 annual report. https://ustr.gov/about-us/policyoffices/press-office/reports-and-publications/2009/2009-trade-policy-agenda-and-2008-annualreport (last accessed 28 February 2021); Obama B (22 January 2010) Remarks at a town hall meeting and a question-and-answer session in Elyria, Ohio. Public Papers of the POTUS, https:// www.govinfo.gov/content/pkg/PPP-2010-book1/pdf/PPP-2010-book1-doc-pg55.pdf (last accessed 25 February 2021). 77

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rights.81 In short, Obama’s administration was pro-trade, provided that trade reflected America’s interests, priorities and values.82 Over the course of the Obama administration there was also a shift in broader US trade liberalisation priorities, as reflected in the annual Trade Policy Agenda. Initially, the Obama administration focused on the WTO negotiations and worked to revive the Doha Round negotiations that had reached an impasse in 2008:83 bilateral and plurilateral agreements were presented as second-order considerations. Over time, however, this switched, with the latter—especially the Trans-Pacific Partnership (TPP)—presented as higher priority for trade policy than WTO negotiations.84 The Obama administration also emphasised the value of a “rules-based” trading order as being “in the interest of all Americans”.85 The first term of the administration focused on enforcing WTO rules, which the administration argued had been insufficiently pursued under Bush, enabling parties such as China to maintain “unfair” trade practices.86 To facilitate more effective US prosecution of these trade disputes, Obama established a Trade Enforcement Unit within the Office of the USTR.87 His administration also launched cases against China and the EU.88 The 81

Hopewell (2016). Obama B (7 July 2010) Remarks announcing the President’s Export Council. Public Papers of the POTUS, https://www.govinfo.gov/content/pkg/PPP-2010-book2/pdf/PPP-2010-book2-docpg1022.pdf (last accessed 25 February 2021), pp. 1022–1026. 83 USTR (2009) 2009 Trade policy agenda and 2008 annual report. https://ustr.gov/about-us/policyoffices/press-office/reports-and-publications/2009/2009-trade-policy-agenda-and-2008-annualreport (last accessed 28 February 2021); Obama B (7 July 2010) Remarks announcing the President’s Export Council. Public Papers of the POTUS, https://www.govinfo.gov/content/pkg/ PPP-2010-book2/pdf/PPP-2010-book2-doc-pg1022.pdf (last accessed 25 February 2021), pp. 1022–1026. Re the Doha Round, under Obama member states reached the ‘Bali package’ which was not nearly as ambitious as planned or as needed; moreover, many states failed to implement the package. Differences remain on deadlines and forums for post-Bali work on agriculture. World Trade Organization: 2014 News Items, 16 September 2014, https://www.wto. org/english/news_e/news14_e/agcom_16sep14_e.htm#implementingbali (last accessed 25 February 2021) offers a discussion on the period after the agreement was reached, India did not accept it by the agreed upon deadlines and states were unable to reach a solution. 84 This trend is noticeable in the Presidential Trade Policy Agendas where the focus of the reports moves from the WTO to regional and bilateral agreements over the course of his administration. 85 USTR (2009) 2009 Trade policy agenda and 2008 annual report. https://ustr.gov/about-us/policyoffices/press-office/reports-and-publications/2009/2009-trade-policy-agenda-and-2008-annualreport (last accessed 28 February 2021), p. 3. 86 The trade enforcement unit was originally set up via executive order but was put into law in 2015 see Obama Announces Creation of Trade Enforcement Unit (2012), pp. 144–157; Anderson C, Standing up for American workers & businesses: The Obama administration’s trade enforcement record. The White House: President Barack Obama, 24 February 2016 https://obamawhitehouse. archives.gov/blog/2016/02/24/protecting-american-workers-businesses-obama-administrationstrade-enforcement (last accessed 25 February 2021). 87 Obama Announces Creation of Trade Enforcement Unit (2012), pp. 144–157. 88 Office of the Press Secretary (12 January 2017) FACT SHEET: The Obama Administration’s record on the trade enforcement, The White House, https://obamawhitehouse.archives.gov/the82

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US enforcement strategy, however, albeit almost certainly inadvertently, ultimately exacerbated US concerns about “pre-existing conditions” at the AB, with more cases imposing a greater workload on members and subsequently delaying decisionmaking.89 At first glance, it appears this strategy paid off, in the form of significant US “wins” at the panel and AB level.90 Despite these victories, however, it proved difficult for the administration to persuade respondents to comply with AB rulings. Delays in rulings and settlements in turn led to growing US concern that the AB was neither effective nor efficient, particularly as the DSU permits only forward-looking sanctions, making settlement delays costly for states that are affected by unfair trade practices.91 For example, the 2011 AB report in EC and Certain Member States – Large Civil Aircraft was touted as a US success during Obama’s re-election campaign.92 This was followed, however, by further rounds of panel and AB litigation, with retaliation only authorised under the Trump administration: at the time of writing this dispute is unresolved.93 The US lost several significant cases during this period,94 some of which were troubling to the administration.95 US – Clove Cigarettes (2012),96 for example,

press-office/2017/01/12/fact-sheet-obama-administrations-record-trade-enforcement (last accessed 27 February 2021). 89 Ehlermann (2017), pp. 705–734 notes that the increased complexity of these cases (panel reports length, legal issues raised in appeals, and number of parties) additionally adds to the workload. 90 Appellate Body Report, United States – Measures Affecting Imports of Certain Passenger Vehicle and Light Truck Tyres from China, WT/DS399/AB/R, adopted 5 October 2011, DSR 2011:IX, p. 4811; Appellate Body Report, European Communities – Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, p. 135; Appellate Body Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R, adopted 1 June 2011, DSR 2011:I, p. 7. 91 Schwartz and Sykes (2002). 92 Appellate Body Report, European Communities and Certain Member States -- Measures Affecting Trade in Large Civil Aircraft WT/DS316/AB/R, adopted 28 May 2018, authorization to retaliate 14 October 2019, 2nd recourse Panel report circulated 2 December 2019. 93 Consultations on this case began in 2005 (under Bush), the AB decision was circulated in 2011, AB report adopted in 2018, and retaliation was authorised in 2019 see Appellate Body Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft WT/DS316/AB/R, adopted 28 May 2018, authorization to retaliate 14 October 2019, 2nd recourse Panel report circulated 2 December 2019, https://www.wto.org/english/tratop_e/dispu_e/ cases_e/ds316_e.htm ( last accessed 16 February 2021). 94 Notably, the US continues to lose on issues of zeroing and countervailing duties and in its subsidies to Boeing. 95 Appellate Body Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/AB/R, adopted 23 March 2012, DSR 2012:I, p. 7. 96 Appellate Body Report, United States -- Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/AB/R, WT/DS103/AB/RW2, WT/DSB/M/116, adopted 4 April 2012, DSR 3 October 2014; Obama administration’s reaction to this decision was to ignore the ruling see WTO tells U.S. to change flavored cigarette rules: The Hill reports. The fly on the wall, 5 April 2012.

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proved particularly difficult,97 with the US explicitly critiquing the AB report on grounds of judicial overreach, claiming that the AB had “placed itself in the position of the regulator”.98 In terms of AB reform, the Obama administration also moved from more traditional tactics—calling for AB reforms—to more extreme measures, blocking specific, individual appointments to the AB of individuals based on their views or perceived conduct so that candidates that were more acceptable from a US point of view could be chosen instead.99 Whereas earlier US administrations had expressed similar concerns using means and methods commonly adopted by other states parties, this move was significant as the US stepped outside the “consensus” of commonly acceptable modes of behaviour at the WTO, exercising a veto right that had not been previously used. The implications of this move should also not be understated: in unilaterally withholding consent to the appointment of AB members, the administration not only expressed the seriousness and depth of American concerns, it risked diminishing the potential effectiveness of the AB by limiting its ability to function. This tactic was implemented for the first time in 2011, when the US took the thenunprecedented step of blocking the reappointment of American AB member Jennifer Hillman.100 Both candidates nominated to replace Hillman, John Greenwald and Thomas Graham, shared administration concerns about overreach—though once appointed Graham was unable to address them.101 In 2013–2014, the US then blocked the appointment to the AB of James Gathii, an American citizen supported by Kenya, prompting Kenya to withdraw his nomination.102 Finally, in 2016 the Obama administration announced that it would block the reappointment of South Korean member Seung Wha Chang for a second term,

97

Trade reps examine WTO ruling against Tobacco Control Act. FDA Week, 13 April 2012. WTO (24 April 2012) WTO adopts clove cigarette rulings; Antigua and Barbuda seeks resolution in gambling case. WTO News https://www.wto.org/english/news_e/news12_e/dsb_24apr12_e.htm (last accessed 27 February 2021). 99 Bown and Keynes (2020). 100 There was debate at the time about the non-reappointment as to whether this was due to Hillman specifically or a desire for the Obama administration to pick their own candidate see USTR Blocks Hillman’s bid for second WTO Appellate Body term. Inside U.S. Trade, 29 April 2011. 101 Greenwald (2003) argues that AB rulings had gone beyond the letter of the negotiated texts and wrote out flexibility that governments had purposely built into the treaty. Graham, who was a AB Member for 8 years, stated in his farewell speech that from the outself he largely agreed with longstanding ‘US critique of the Appellate Body’s departure from that proper role’ see Graham TF (5 March 2020) Farewell speech of Appellate Body member Thomas R. Graham. WTO: Appellate Body https://www.wto.org/english/tratop_e/dispu_e/farwellspeechtgaham_e.htm (last accessed 27 February 2021). 102 Elsig M, Pollack M, Shaffer G, The U.S. is causing a major controversy in the World Trade Organization: Here’s what’s happening. Washington Post, 6 June 2016 https://www. washingtonpost.com/news/monkey-cage/wp/2016/06/06/the-u-s-is-trying-to-block-thereappointment-of-a-wto-judge-here-are-3-things-to-know/ (last accessed 15 February 2021). 98

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maintaining that the reports he participated in did “not accord with the role of the Appellate Body”.103 This tactic of blocking appointments and reappointments, importantly, targeted specific individuals based on their writings or past rulings, reflecting US concerns about how they had decided cases previously or might decide cases if appointed or reappointed. The AB as an institution was not itself the principal “target” of these measures—though certainly affected by them—but rather the targets were specific members or nominees. Indeed, when Obama left office in 2017, there remained six members on the AB, with several appointments made during his tenure, including Graham’s reappointment in 2015: it was only under the subsequent Trump administration that the practice of blocking appointments evolved into a campaign against the AB as an institution. US attitudes towards and concerns about the AB during the Obama administration were, moreover, not markedly inconsistent with those of previous administrations. The administration, for example, emphasised the importance of trust in a rules-based system. US trust, however, was predicated on the assumption that under a “properly-construed” system, the US would generally prevail in trade disputes: American losses were in turn attributable to unreasonable AB practices or problems with the rules. A target of US ire during this period was the differentiated obligations of member states that maintained developing country status within the WTO system, despite being middle-income countries.104 These concerns were evident in Congress, which in turn constrained executive conduct.105 In reviewing Obama’s record, there are echoes of Clinton’s and Bush’s emphasis on transparency at the AB. Generally, though, even with Obama’s new, more aggressive tactics, the US again made little progress in furthering reforms. The WTO and other member states’ ongoing failure to address US concerns presaged the subsequent hardening of US attitudes and conduct under Trump.106

103

USA (23 May 2016) Statement by the United States at the meeting of the WTO Dispute Settlement Body. WTO, Geneva, https://www.wto.org/english/news_e/news16_e/us_statment_ dsbmay16_e.pdf (last accessed 27 February 2021), p. 3. 104 The Uruguay Treaty provides special and differential obligations for developing states. Developing state status is self-defined and as such many middle-income countries are classified as developing states. (See: https://www.wto.org/english/tratop_e/devel_e/d1who_e.htm). 105 The fast-track trade promotion authority granted to Obama, for example, stated that: “[t]he principal negotiating objectives of the United States with respect to dispute settlement and enforcement of trade agreements. . . [included] (C) to seek adherence by panels convened under the Dispute Settlement Understanding and by the Appellate Body to—(i) the mandate of those panels and the Appellate Body to apply the WTO Agreement as written, without adding to or diminishing rights and obligations under the Agreement; and (ii) the standard of review applicable under the Uruguay Round Agreement involved in the dispute, including greater deference, where appropriate, to the fact finding and technical expertise of national investigating authorities”. (Defending Public Safety Employees’ Retirement Act (HR 2146, Title I—Trade Promotion Authority, Sec. 102(b)(16)). 106 Condon (2018), pp. 535–556.

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Second, US attitudes and behaviours under Obama underline the hazards of legislative deadlock in the GC. During Obama’s tenure, the Doha Round stuttered on, with an arguable highlight the Bali Package of 2013. A “package deal” remained elusive, however, reflecting the challenges of growing membership in the postUruguay era, as well as the strong preferences of various groups of states and prevailing norms around consensus-based decision-making. Where progress was made in negotiations, moreover, these were in narrower, issue-specific areas, limiting the ability of parties to consider broader trade-offs or other means of promoting broader trade liberalisation goals. Third, dating back to Clinton, there was a longstanding American expectation that with growing trade and enlargement of the economic pie globally, domestic and international living standards would increase alongside development in environmental regulations, workers’ rights and wages.107 When this failed to transpire as anticipated, however, the US already had relatively low barriers to trade “wiredin” in both the WTO and regional trade agreements. Consequently, the US turned to more ambitious regional trade initiatives to secure trade partner commitments to labour and environmental standards. The Obama administration, for example, effectively leveraged access to Japan’s market during the TPP negotiations to obtain concessions from trade partners with which the US already had trade agreements.108

5 Donald J. Trump (2017–2021): Playing the Trump Card During the 2016 presidential election campaign, both Donald Trump and Hillary Clinton expressed scepticism about US trade policy, reflecting concerns among the American public that trade agreements had not delivered promised benefits.109 Trump’s election consequently saw substantial changes in trade policy, including imposition of tariffs premised on national security interests110 and greater attention to trade deficits and surpluses.111 107 Indeed, the Preamble to the Agreement establishing the WTO (Apr. 15, 1994, 1867 U.N.T.S. 154) references employment and environmental sustainability. 108 Froman M, Lindsay J (25 July 2017) Remaking Trade. The President’s Inbox https://www.cfr. org/podcasts/remaking-trade (last accessed 27 February 2021). 109 Roberts D and Felton F, Trump and Clinton’s free trade retreat: a pivotal moment for the world’s economic future. The Guardian, 20 August 2016, https://www.theguardian.com/us-news/2016/ aug/20/trump-clinton-free-trade-policies-tpp (last accessed 15 February 2021); USTR (2017) 2017 Trade policy agenda and 2016 annual report, Executive Office of the President of the United States https://ustr.gov/sites/default/files/files/reports/2017/AnnualReport/AnnualReport2017.pdf (last accessed 28 February 2021). 110 Lester S, Zhu H (25 June 2019) Closing Pandora’s box: The growing abuse of the national security rationale for restricting trade. CATO Institute, Policy Analysis No 874. https://www.cato. org/policy-analysis/closing-pandoras-box-growing-abuse-national-security-rationale-restrictingtrade (last accessed 27 February 2021). 111 This trend is noticeable in Trump’s rhetoric, for example “We racked up nearly $4 trillion in trade deficits in goods with China during those years. And the numbers are absolutely astounding —

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Trump’s trade policy and positions were, however, neither as clear nor as consistent as those of previous administrations: to an extent, the administration repeated the calls for free and fair trade made under previous administrations.112 The Trump administration also reiterated concern that trade agreements incentivised corporate offshoring to benefit from weaker labour and environmental standards.113 Trump also, however, “repudiated the longstanding American establishment consensus favoring commercial globalization, which he described. . .as the ‘rule of corrupt power-hungry globalists’ who want ‘the globe to do well’ and who don’t ‘care about our country so much.’”114 Trump’s approach to trade policy was also more aggressive than previous administrations. Shortly after taking office, he walked away from the Trans-Pacific Partnership115 and demanded the renegotiation of the North American Free Trade

what’s been happening over the last 10 years in particular” in Trump DJ (23 May 2019) Remarks by President Trump on Supporting America’s Farmers and Ranchers. The White House Office of the Press Secretary https://www.whitehouse.gov/briefings-statements/remarks-president-trumpsupporting-americas-farmers-ranchers/ (last accessed 18 January 2021). There is a more general focus on “reciprocal” trade agreements and highlighting deficits as a negative impact of trade both from Trump and other senior administration officials. See Trump DJ (22 January 2020) President Trump news conference in Davos, Switzerland. C-Span https://www.c-span.org/video/?468400-1/ president-trump-holds-news-conference-davos (last accessed 28 February 2021). Moreover, the USTR Office focuses more on deficits and balanced trade. See USTR (2017) 2017 Trade policy agenda and 2016 annual report, Executive Office of the President of the United States https://ustr. gov/sites/default/files/files/reports/2017/AnnualReport/AnnualReport2017.pdf (last accessed 28 February 2021) which highlights trade deficits, a striking change from the Obama-era reports. See USTR (2020) 2020 Trade policy agenda and 2019 annual report, Executive Office of the President of the United States https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_ and_2019_Annual_Report.pdf (last accessed 28 February 2021) for a section on the WTO at 25 highlights trade imbalances under the WTO era. 112 “President Trump is working to open new markets for American goods and services, while ensuring any deal is enforceable and creates a level playing field for our workers and companies” quoted in President Donald J. Trump will promote worldwide economic growth and prosperity at the G20 summit. Whitehouse.gov, 27 June 2019. 113 USTR (2019) 2019 Trade policy agenda and 2018 annual report. Executive Office of the President of the United States https://ustr.gov/sites/default/files/2019_Trade_Policy_Agenda_ and_2018_Annual_Report.pdf (last accessed 28 February 2021). 114 Schlesinger JM, Vierira P, Peker E, WTO Members work to overhaul trade watchdog amid Trump’s criticism; failure to meet U.S. demands could leave global commercial court in limbo: ‘every case potentially becomes a trade war,’ one WTO official says. The Wall Street Journal Online, 23 October 2018. 115 Trump DJ, Presidential memorandum regarding withdrawal of the United States from the TransPacific Partnership negotiations and agreement. Trump White House Archives, 23 January 2017 Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement—The White House (archives.gov) (last accessed 21 January 2021).

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Agreement (NAFTA).116 Trump also initiated a “trade war” with China, using a series of escalating tariffs to exert pressure in bilateral negotiations, seeking to diminish China’s economic strength.117 Under Trump, the US also pressured South Korea to classify itself as a developed country for WTO purposes.118 Critically, although tone and tenor towards the international trading system sharpened under Trump,119 the concerns evinced about the WTO/AB—and associated techniques adopted—were strikingly consistent with those of preceding administrations. In justifying policies, for example, the administration explicitly highlighted the history of US dissatisfaction with the world trade regime and institutions and the failure of previous efforts at reform.120 Prominent voices also raised claims of AB overreach, with the Office of the USTR (under Lighthizer) observing in 2018 that the AB tended to read “text into the Agreement, applying standards of its own devising”,121 and in 2019 that “[w]e will not allow the WTO Appellate Body and dispute settlement system to force the United States into a straitjacket of obligations to which we never agreed”.122 Similarly, USTR’s 2018 Trade Policy Agenda and 2017 Annual Report highlighted concerns about AB “advisory opinions” and obiter dicta—ranging in its reports beyond the issues strictly required to resolve a dispute—noting that the “US has repeatedly raised concerns for more than 16 years on this issue.”123 Concerns were also raised about appeals exceeding the DSU’s 90-day deadline and the AB not consulting parties about delays. There were also broader concerns 116 President Donald J. Trump is keeping his promise to renegotiate NAFTA. Fact Sheet: Trump White House Archives, 27 August 2018 President Donald J. Trump is Keeping His Promise to Renegotiate NAFTA—The White House (archives.gov) (last accessed 21 January 2021). 117 Ward A, Trump’s China strategy is the most radical in decades — and it’s failing. Vox, 19 September 2018. https://www.vox.com/world/2018/9/18/17790600/us-china-trade-war-trumptariffs-taiwan (last accessed 28 February 2021). 118 Chung J and Roh J, South Korea to give up developing country status in WTO talks. Reuters, 25 October 2019 https://www.reuters.com/article/us-southkorea-trade-wto-idINKBN1X401W (last accessed 21 January 2021). 119 Carnegie and Carson (2019) find that Trump focuses more of his rhetoric on trade violations than his predecessors, generating pessimism about trade compliance more broadly. 120 USTR (2020) 2020 Trade policy agenda and 2019 annual report, Executive Office of the President of the United States https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_ and_2019_Annual_Report.pdf (last accessed 28 February 2021), p. 7. 121 USTR (2018) I. The president’s trade policy agenda. 2018 Trade policy agenda and 2017 annual report, Executive Office of the President of the United States https://ustr.gov/sites/default/files/files/ Press/Reports/2018/AR/2018%20Annual%20Report%20I.pdf (last accessed 28 February 2021), p. 24. 122 USTR (2019) 2019 Trade policy agenda and 2018 annual report. Executive Office of the President of the United States https://ustr.gov/sites/default/files/2019_Trade_Policy_Agenda_ and_2018_Annual_Report.pdf (last accessed 28 February 2021), p. 27. 123 USTR (2018) I. The president’s trade policy agenda. 2018 Trade policy agenda and 2017 annual report, Executive Office of the President of the United States https://ustr.gov/sites/default/files/files/ Press/Reports/2018/AR/2018%20Annual%20Report%20I.pdf (last accessed 28 February 2021), pp. 22–28.

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about a lack of transparency regarding the release of AB reports, echoing previous administrations’ focus on enhancing the AB’s transparency.124 The politicisation of the AB member appointment process culminated under Trump. USTR’s 2020 Trade Policy Agenda and 2019 Annual Report unapologetically notes, that “[t]he Trump Administration took action by exercising its right as a WTO Member to decline to approve new Appellate Body members, forcing the WTO to engage in a long-overdue debate about the role of the Appellate Body”.125 In response, other WTO members proposed amendments to AB processes, including permitting AB members to sit on cases to conclude reports commenced during their terms of office.126 The US not only objected to these proposals, however, it went further.127 In a 2020 DSB meeting on US – Supercalendered Paper it claimed that the AB’s report was invalid.128 This claim disputed the standing of AB members whose terms of appointment had formally ended when the report was submitted to the DSB.129 The US also challenged the standing of the sole remaining serving AB member on the grounds of affiliation with the Chinese Ministry of Commerce, which the US argued contravened WTO rules.130 Given Trump-era tactics, there were more substantive conversations amongst WTO members about institutional reforms during this period. Yet from the US perspective most of the proposed measures would have provided the AB more discretion in key areas: these discussions tended to aggravate the Trump administration.131 Despite the more bombastic tone of American trade policy and more aggressive measures adopted towards the AB, attitudes during the Trump administration were

124 USTR (2018) I. The president’s trade policy agenda. 2018 Trade policy agenda and 2017 annual report, Executive Office of the President of the United States https://ustr.gov/sites/default/files/files/ Press/Reports/2018/AR/2018%20Annual%20Report%20I.pdf (last accessed 28 February 2021), pp. 22–28. 125 USTR (2020) 2020 Trade policy agenda and 2019 annual report. Executive Office of the President of the United States, https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_ and_2019_Annual_Report.pdf (last accessed 28 February 2021), p. 12. 126 Galbraith (2019), p. 822. 127 WTO (14 May 2020) Dispute Settlement Body—Minutes of meeting, WT/DSB/M/441; also Lighthizer R, Report on the Appellate Body of the World Trade Organization, USTR, February 2020 https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_ Organization.pdf (last accessed 28 February 2021). 128 WTO (14 May 2020), Dispute Settlement Body—Minutes of meeting, WT/DSB/M/441, p. 19. 129 Appellate Body Report, United States — Countervailing Measures on Supercalendered Paper from Canada, WTO, WT/DS505/AB/R, adopted 6 February 2020. 130 The US claims the CV used to hire her was misleadingly translated. WTO (14 May 2020) Dispute Settlement Body—Minutes of meeting, WT/DSB/M/441, p. 19. 131 Vaughn S, 111: Trade policy under Trump. Trade Talks, Interview, 25 November 2019. “It is very troubling to see that China believes that giving more authority to the Appellate Body would be in China’s interest” from USTR (2019) 2019 Trade Policy Agenda and 2018 Annual Report. Executive Office of the President of the United States, https://ustr.gov/sites/default/files/2019_ Trade_Policy_Agenda_and_2018_Annual_Report.pdf (last accessed 28 February 2021), p. 26.

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remarkably consistent with those of previous US administrations. Indeed, the administration reiterated that: “[t]he United States remains committed to fulfilling its obligations under WTO agreements”, adding, however, that: “[u]nder the leadership of President Trump. . . the United States will certainly reject efforts by the AB to create new obligations to which WTO Members have not agreed.”132 Moreover, the administration framed its actions, including Trump’s AB appointment-blocking strategy, as consistent with support for a rules-based international system. It argued that forcing difficult conversations about WTO/AB reform was within the rules and that these measures were designed to counteract what it deemed to be rule-breaking behaviour by the AB.133

6 Analysis: Consistency and Change Across Administrations Each of the administrations covered in this study has had a different relationship with the WTO and AB. Despite these differences, however, the persistence of central US concerns and claims regarding the WTO and AB is remarkable. Accordingly, it is impossible to dismiss the current impasse as reflecting a temporary, aberrant strand of US policy. Equally, given the persistence over time of US concerns, other WTO members and the AB itself also bear some responsibility for the consequences of collective failure to assuage these concerns.

6.1

Consistency

All US administrations surveyed have, at different times, challenged the transparency, scope, and management of WTO dispute settlement processes. Despite this, however, there has also been a consistent formal US commitment to rules-based international trade governance. Each administration has used the DSB and AB, suggesting sustained recognition of the value of maintaining this “form” of international trade dispute resolution. Equally, however, as put by Jennifer Hillman: “[t]he US view across multiple US Administrations had been clear and consistent: When the Appellate Body overreached and abused the authority it had been given within the dispute settlement 132 USTR (2019) 2019 Trade Policy Agenda and 2018 Annual Report. Executive Office of the President of the United States, https://ustr.gov/sites/default/files/2019_Trade_Policy_Agenda_ and_2018_Annual_Report.pdf (last accessed 28 February 2021), p. 27. 133 Elsig M, Pollack M Shaffer G, Trump is fighting an open war on trade. His stealth war on trade may be even more important. The Washington Post, 27 September 2017. https://www. washingtonpost.com/news/monkey-cage/wp/2017/09/27/trump-is-fighting-an-open-war-on-tradehis-stealth-war-on-trade-may-be-even-more-important/ (last accessed 28 February 2021).

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system, it undermined the legitimacy of the system and damaged the interests of all WTO Members who cared about having the agreements respected as they had been negotiated and agreed.”134 Making substantive changes to the DSU or to broader WTO agreements will likely be challenging. The US has persistently raised concerns with the WTO and pushed for reforms, in some instances with support from other member states.135 Yet, given the reversion to a de facto panel-only system, with appeals “into the void”,136 it is unclear what reforms would now be acceptable to the US. Indeed, a central problem in recent years has been that “no one knows for certain exactly what the United States seeks in terms of changes to the Appellate Body.”137 Moreover, even if the US wished “for the Appellate Body to apply the rules as they were written when the WTO was created in 1995”,138 such an “ideal-form” body, tailored perfectly to US understandings of the covered agreements, is unlikely to appear. Member states that have used the AB to secure trade policy “wins” against the US may be reluctant to agree to US demands. Consequently, while each of the administrations discussed here has brought forward proposals to address US concerns, including Clinton’s call for greater transparency, Bush’s commitment to the Doha Round, Obama’s efforts to promote transparency at the AB, and even, arguably, Trump’s “forcing the debate” on the DSU and future of the AB, all these efforts at reform have fallen flat. Arguably US views of the WTO were based on faulty initial assumptions. Clinton presented the WTO as a tool to promote economic liberalisation and development.139 Accordingly, US policy anticipated that economic development would lead to enhanced labour and environmental protections globally.140 These developments, in turn, were expected to bring about a “level playing field” in trade.

134

WTO (25 March 1998) Dispute Settlement Body—Minutes of meeting, WT/DSB/M/441. Babu (2020); See WTO (9–10 December 2019) GC—Minutes of meeting, WT/GC/M/181 directdoc.aspx (wto.org) (last accessed 3 March 2021), s5 for discussion and support of the Walker report/principles and US support (albeit weak) from Nigeria s.5.51, Barbados s5.64, Canada s5.171, and Australia s5.175 yet the US refused support for the draft (s5100–5.124). 136 See Pauwelyn (2019). 137 Hillman J (2018) Three approaches to fixing the World Trade Organization’s Appellate Body: The good, the bad, and the ugly? Institute of International Economic Law, Georgetown University Law Centre, Washington DC https://www.law.georgetown.edu/wp-content/uploads/2018/12/ Hillman-Good-Bad-Ugly-Fix-to-WTO-AB.pdf (last accessed 25 February 2021), p. 4. 138 Hillman J (2018) Three approaches to fixing the World Trade Organization’s Appellate Body: The good, the bad, and the ugly? Institute of International Economic Law, Georgetown University Law Centre, Washington DC https://www.law.georgetown.edu/wp-content/uploads/2018/12/ Hillman-Good-Bad-Ugly-Fix-to-WTO-AB.pdf (last accessed 25 February 2021), p. 4, n. 10. 139 WTO Agreement: Marrakesh Agreement Establishing the World Trade Organization, 15 April 1994, 1867 U.N.T.S. 154, Preamble. 140 Clinton highlighted increasing funding for labour and environmental standards as part of the WTO agenda in The Clinton Administration agenda for the Seattle WTO, Clinton White House Archives, 24 November 1999 https://clintonwhitehouse4.archives.gov/WH/New/WTO-Conf-1999/ factsheets/fs-007.html (last accessed 28 February 2021). 135

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These expectations appear to have been misplaced, however. Formal changes from developing to developed country status have been the exception rather than the rule. Moreover, the greater the share of developing states in the global economy, the greater the prospect that the persistence of “special and differential” benefits on the part of such states will prompt concerns and claims of market distortion from developed states.141

6.2

Change

AB and WTO dispute settlement arrangements have evolved in ways not necessarily anticipated by those who negotiated and drafted the WTO agreements.142 Indeed, scholars and retiring AB members alike have noted the development of a distinct dispute settlement “ethos” within the AB, reflected inter alia in a preference for consensus decision-making and more limited discretion for member states than the drafters of the WTO agreements might have anticipated.143 Critically, this dominant ethos appears to be at odds with longstanding US expectations and preferences.144

141

Hopewell (2020). “I think we can be encouraged already by the operation of the new system. First, governments are making use of it. . .Around 20 cases have come to the Dispute Settlement Body – a number far greater than any single year of the GATT’s 47-year existence. Second, the rapid automatic procedure together with the knowledge that at its conclusion the system is enforceable seems to be concentrating minds and encouraging quick settlements through the initial consultative process. . . And that is the objective – to resolve trade disputes quickly, not, primarily, to generate jurisprudence” in Ruggiero R, The global challenge: opportunities and choices in the multilateral trading system. WTO News: 1995-99 Speeches—Renato Ruggiero, Former DG, 16 October 1995 https://www.wto.org/english/news_e/sprr_e/harvar_e.htm (last accessed 26 February 2021). 143 When Seung Wha Chang was not reappointed both former (Letter to Ambassador Xavier Carim from WTO AB Members 31 May 2016, http://worldtradelaw.typepad.com/files/abletter.pdf (last accessed 28 February 2021), pp. 1–3) and current (AB members challenge US over reappointment of Seung Wha Chang. SUNS #8244, 20 May 2016, https://twn.my/title2/wto.info/2016/ti160516. htm (last accessed 28 February 2021)) members expressed their concern about US actions. See similarly: Zhao H. (30 November 2020) Farewell speech of Appellate Body member Prof. Dr. Hong Zhao, WTO: AB https://www.wto.org/english/tratop_e/dispu_e/farwellspeechhzhao_e.htm (last accessed 28 February 2021) which acknowledges scope for different understandings of the AB and different views around the nature and purpose of international adjudication. 144 For example Brown CP and Keynes S, Why Trump shot the sheriffs: The end of WTO dispute settlement 1.0. Peterson Institute for International Economics Working Paper; Unterhalter D (22 January 2014) David Unterhalter Farewell speech of Appellate Body Member, https://www. wto.org/english/tratop_e/dispu_e/unterhalterspeech_e.htm (last accessed 28 February 2021); Zhao H. (30 November 2020) Farewell speech of Appellate Body member Prof. Dr. Hong Zhao, WTO: AB https://www.wto.org/english/tratop_e/dispu_e/farwellspeechhzhao_e.htm (last accessed 28 February 2021). 142

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At the same time, the cases submitted to the AB have also grown in both number and complexity.145 The AB remains, moreover, only one element of the WTO’s institutional architecture. One of the original expectations of the WTO was that it would provide a standing venue for continuous negotiation and that trade agreements would be updated to reflect changing economic circumstances and to address lacunae or ambiguities in the 1994 agreements. The WTO’s “legislative” arm has, however, ossified, as attested by the drawn-out, unsuccessful Doha Round. These legislative failures have led member states to rely on the DSB and AB, drawing the AB into matters perhaps better resolved in a legislative setting.146 Reflecting the above, viable “fixes” must recognise that US challenges to the WTO’s dispute resolution regime are endogenous to the conduct of both the AB and of other member states. Given this tendency, it may for example be preferable in future for a reconstituted AB to be able to refer issues back to the DSB or GC to consider, providing an “escape valve” to save the AB from stepping into a quasilegislative role itself. In similar fashion, to address “level playing field” concerns both from the US and other developed countries, it may be helpful to revisit the discretion of individual states to accord to themselves “developing” status and hence benefit from special and differential rights. In a 2018 interview, when there were still four AB members, then-WTO Director General Roberto Azevedo warned of the potential paralysis of the AB. He equally observed, though, that: “[t]here is nothing in my contacts with the United States that indicates that there is a possibility of the United States leaving the WTO. . . They are concerned with some issues that are discussed here but they have also told me that . . . the organization is very important . . . and that they want reforms”.147 For such reform to take place, however, all members’ concerns need to be appreciated. We presume that the broader WTO membership seeks both revitalisation of the trade regime and its dispute settlement function and US buy-in to this endeavour. If the latter is correct, then the membership must collectively address US concerns: “tinkering at the margins” may risk further institutional distress.148 Given the persistent shortcomings in the WTO’s legislative arm and the knock-on effect that has had on the AB, moreover, focusing exclusively on reform of the WTO’s judicial arm is likely to be insufficient to address US concerns about judicial “gap-filling”. As Hong Zhao, the last-departing AB member observed in November 2020, “[t]here needs to be a grand bargain, where issues old or new,

145 Zhao H. (30 November 2020) Farewell speech of Appellate Body member Prof. Dr. Hong Zhao, WTO: AB https://www.wto.org/english/tratop_e/dispu_e/farwellspeechhzhao_e.htm (last accessed 28 February 2021); Van Damme (2010), pp. 605–648. 146 Condon (2018). 147 Azevedo quoted in The WTO warns of the risk of “paralysis” of the institution by the United States. CE Noticias Financieras English, 20 February 2018. 148 For an overview of possible steps that have been suggested see Hillman (2018).

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trade-related or not, shall be put on the table. Then let the Members draw a blueprint with a vision, and make it happen, either all at once or step by step.”149 It remains an open question whether the WTO and AB can be reformed to address US concerns in a manner that will enable functional international trade governance, or whether the current, impaired institutional infrastructure will persist, at least for the time being, as a “new normal”.

7 Conclusions: Biden and Beyond. . . Initial indications are that the Biden administration’s attitudes and actions towards the WTO and AB will be broadly consistent with those of his predecessors. There are some indications that the US will constructively engage with the WTO. Biden supported the election of Nigerian Dr. Ngozi Okonjo-Iweala as the new WTO Director General, enabling Okonjo-Iweala’s appointment by consensus.150 Okonjo-Iweala in turn recognised this shifted position and highlighted the significance of US support, observing to the GC that: “[w]ithout the recent swift action by the Biden-Harris Administration to join the consensus of the membership on my candidacy, we would not be here today.”151 With a new DG interested in finding a “third way” to work at the WTO,152 and a new administration signalling renewed openness to cooperation with other members and the new DG, there may be more readiness to address the issues facing the WTO and AB. The persistence of US concerns over the preceding 25 years indicates, however, that any sustainable solution will likely require substantial institutional changes, particularly to the AB. Critically, the Biden administration has maintained Trump’s strategy of blocking all AB appointments in light of the “systemic concerns” that have spanned multiple administrations.153 In her Senate confirmation hearings, moreover, incoming USTR Katherine Tai both echoed the concerns of previous

149

Zhao H. (30 November 2020) Farewell speech of Appellate Body member Prof. Dr. Hong Zhao, WTO:AB https://www.wto.org/english/tratop_e/dispu_e/farwellspeechhzhao_e.htm (last accessed 28 February 2021). 150 History is made: Ngozi Okonjo-Iweala chosen as Director-General. WTO News, 15 February 2021 WTO | 2021 News items—History is made: Ngozi Okonjo-Iweala chosen as Director-General (last accessed 16 February 2021). 151 Okonjo-Iweala N, Statement of Director-General elect Dr. Ngozi Okonjo-Iweala to the Special Session of the WTO GC, WTO, 13 February 2021 dgno_15feb21_e.pdf (wto.org) (last accessed 21 February 2021), p. 1. 152 New WTO Director-General Ngozi Okonjo-Iweala addresses the media. SABC News, 15 February 2021 https://www.youtube.com/watch?v¼-GWz90Ry0PA (last accessed 21 February 2021). 153 USA (22 February 2021) Statements by the United States at the meeting of the WTO Dispute Settlement Body. WTO, Geneva, https://geneva.usmission.gov/wp-content/uploads/sites/290/ Feb22.DSB_.Stmt_.as_.deliv_.fin_.public.pdf (last accessed 27 May 2021), p. 12.

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administrations and suggested consistency with historic US positions and policy.154 Specifically, she highlighted that the AB would not be revived without addressing underlying US concerns with AB overreach and that addressing US concerns within the existing WTO framework will be challenging.155 Asked about WTO reform, Tai also stressed US engagement and leadership in the system, again consistent with previous emphases in the rules-based system. In line with our analysis, she also highlighted the need for systemic reforms: “[w]e need to be having hard conversations in Geneva in a constructive way to be asking ‘What is the value of the WTO to its members? Is it accomplishing the goals that its founders and members expect of it?’ And also, in today’s world of 2021, how does the WTO rise to the challenges in today’s world?”156 Acknowledgments The authors gratefully acknowledge the financial support of the Carnegie Trust for the Universities of Scotland.

References Babu RR (2020) WTO Appellate Body overreach and the crisis in the crisis in the making: a view from the south. In: Lo CF, Nakagawa J, Chen TF (eds) The Appellate Body of the WTO and its reform. Springer, Singapore Bacchus J (2018) Might unmakes right: the American assault on the rule of law in world trade. Centre for International Governance Innovation Papers No. 173: 1-40 Bartels LM (2013) Political effects of the great recession. Ann Am Acad Polit Soc Sci 605(1):47–76 Bown CJ, Keynes S (2020) Why Trump shot the sheriffs: the end of WTO dispute settlement 1.0. Peterson Institute for International Economics Working Paper 20-4 Cameron F (2005) US foreign policy after the cold war: global hegemon or reluctant sheriff? 2nd edn. Routledge, New York Carnegie A, Carson A (2019) Reckless rhetoric? Compliance pessimism and international order in the age of Trump. J Polit 81(2) Charnovitz S (2002) Judicial independence in the World Trade Organization. In: Boisson de Chazournes L, Romano CPR, MacKenzie R (eds) International organizations and international

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Bade G, At USTR, a Straight-shooter will have to navigate Biden’s old guard in Washington. Politico, 1 February 2021 https://www.politico.com/news/2021/02/01/katherine-tai-ustr-biden-463 668 (last accessed 28 February 2021). 155 Tai K. Hearing to consider the nomination of Katherine C. Tai, of the District of Columbia, to be United States Trade Representative, with the rank of Ambassador Extraordinary and Plenipotentiary. Senate Finance Committee, 25 February 2021. https://www.finance.senate.gov/imo/media/ doc/Katherine%20Tai%20Senate%20Finance%20Committee%20QFRs%202.28.2021.pdf (last accessed 27 May 2021). 156 Tai presentation in (25 February 2021) At Finance Hearing, Portman secures Commitment from USTR nominee to conduct top-to-bottom review of U.S.-China trade relationship, pursue reform at World Trade Organization. Senator Rob Portman Website, https://www.portman.senate.gov/index. php/newsroom/press-releases/finance-hearing-portman-secures-commitment-ustr-nominee-con duct-top-bottom (last accessed 27 May 2021).

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dispute settlement: trends and prospects, 1st edn. Transnational Publishers Inc., New York, pp 219–240 Charnovitz S (2018) How American rejectionism undermines international economic law. Trade Law Dev 10(2):226 Chorev N (2011) Remaking U.S. trade policy: from protectionism to globalization. Cornell University Press, Ithaca Condon BJ (2018) Captain America and the tarnishing of the crown: the feud between the WTO Appellate Body and the USA. J World Trade 52(4):535–555 Cortell AP, Peterson S (2005) Synthesizing rationalist and constructivist approaches to international organizations: lessons from the WTO and WHO, pp 1–44. https://people.wm.edu/~smpete/files/ synthesizing.pdf. Last accessed 25 February 2021 Devereaux C, Lawrence RZ, Watkins MD (2006) Case studies in US Trade Negotiation, vol 1: Making the rules. Peterson Institute for International Economics Drezner DW (2014) The system worked: how the world stopped another great depression. Oxford University Press, Oxford Ehlermann CD (2017) The workload of the WTO Appellate Body: problems and remedies. J Int Econ Law 20:705–734 Ehrenhaft P (2001) Role of lawyers in the World Trade Organization. Vanderbilt J Transnatl Law 34(4):963–988 Elsig M (2017) Legalization in context: the design of the WTO’s dispute settlement system. Br J Polit Int Relat 19(2):304–319 Elsig M, Pollack MA (2014) Agents, trustees, and international courts: nomination and appointment of judicial candidates in the WTO Appellate Body. Eur J Int Relat 20(2):391–415 Fergusson I, Davis C (2020) The WTO withdrawal resolutions. Congressional Research Service Fukuyama F (1992) The end of history and the last man. Free Press, London Galbraith J (2019) United States continues to block new appellate body members for the world trade organization, risking the collapse of the appellate process. Am J Int Law 113(4):822–831 Herman AD (1995) The WTO Dispute Settlement Review Commission: an unwise extension of extrajudicial roles. Hast Law J 47:1635 Hervey C (2003) The Byrd Amendment battle: American trade politics at the WTO. Hast Int Comp Law Rev 27(1):131 Hillman J (2018) Three approaches to fixing the World Trade Organization’s Appellate Body: the good, the bad and the ugly. IIEL Issue Briefs. Hopewell K (2016) Breaking the WTO: how emerging powers disrupted the neoliberal project. Stanford University Press, Stanford Hopewell K (2020) Clash of powers: US-China rivalry in global trade. Cambridge University Press, Cambridge Howse R (2016) The World Trade Organization 20 years on: global governance by judiciary. Eur J Int Law 27(1):9–77 Howse R (2021) Appointment with destiny: selecting WTO judges in the future. Glob Policy 12: 71–82 Huang C (2009) Non-market economies’ accessions to the WTO: evolution of the approach and implications for the organization. Hague J Dipl 4(1):61–81 Jones KA (2004) Who’s afraid of the WTO? Oxford University Press, Oxford Kuijper PJ (2018) From the board: the US attack on the WTO appellate body. Leg Issues Econ Integr 45:1 Lovett WA (2004) Rebalancing U.S. trade. In: Lovett WA, Brinkman RL, Eckes A Jr (eds) U.S. trade policy: history, theory, and the WTO. Routledge, London, pp 130–180 Moens A (2004) The foreign policy of George W. Bush: values, strategy, and loyalty. Routledge, Florence Moynihan DP (2008) Senate debate on the World Trade Organization (Uruguay Round Agreements Act), Congressional Record, 103rd Congress, 2nd Session, 30 November 1994. In: Duckenfield M (ed) Battles over free trade, 1st edn. Routledge, London

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Obama Announces Creation of Trade Enforcement Unit (2012) Foreign Policy Bull 22(2):144–157 Odell JS (2009) Breaking deadlocks in international institution negotiations: the WTO, Seattle and Doha. Int Stud Q 53(2):273–299 Pauwelyn J (2019) WTO Dispute Settlement post 2019: what to expect? J Int Econ Law 22(3): 297–321 Putnam R (1988) Diplomacy and domestic politics: the logic of two-level games. Int Organ 42(3): 427–460 Quinn W, Turner JD (2020) Boom and bust: a global history of financial bubbles. Cambridge University Press, Cambridge Ragosta J, Joneja N, Zeldovich M (2003) WTO dispute settlement: the system is flawed and must be fixed. Int Lawyer 37(3):697–752 Rus TN (2007) The short, unhappy life of the Byrd Amendment. Legis Publ Policy 10:427–443 Schott JJ (2009) Trade policy and the Obama administration. Bus Econ 44(3):150–153 Schwartz WF, Sykes AO (2002) The economic structure of renegotiation and dispute resolution in the World Trade Organization. J Leg Stud 31:S1 Shaffer G, Ginsburg T (2012) The empirical turn in International Legal Scholarship. Am J Int Law 106(1):1–46 Shany Y (2014) Assessing the effectiveness of international courts. Oxford University Press, Oxford Sutherland PD (2000) Concluding the Uruguay Round: creating the new architecture of trade for the global economy. Fordham Int Law J 24(1-2):15–29 Tarullo DK (2003) Paved with good intentions: the dynamic effects of WTO review of antidumping action. World Trade Rev 2(3):373–393 Unterhalter D (2015) The authority of an institution: the Appellate Body under review. In: Marceau G (ed) A history of law and lawyers in the GATT/WTO: the development of the rule of law in the multilateral trading system. Cambridge University Press, Cambridge Van Damme I (2010) Treaty interpretation by the WTO Appellate Body. Eur J Int Law 21(3): 605–648 Van den Bossche P, Zdouc W (2019) The law and policy of the World Trade Organization: text, cases and materials, 4th edn. Cambridge University Press, Cambridge Wagner M (2020) The impending demise of the WTO Appellate Body: from centrepiece to historical relic? In: Lo CF, Nakagawa J, Chen TF (eds) The Appellate Body of the WTO and its reform. Springer, Singapore Webster T (2014) Paper compliance: how China implements WTO decisions. Mich J Int Law 35(3): 525

Lindsey Garner-Knapp is a PhD candidate in Politics and International Relations at the University of Edinburgh. She received a MA from the University of Toronto and is a former Canadian and British civil servant. Shaina D. Western is a Lecturer of International Relations at the University of Edinburgh, where she directs the International Relations MSc programme. She received her PhD in Political Science from the University of California, Davis in 2015. Her work has also been published in International Studies Quarterly, the British Journal of Political Science, and International Negotiation. Henry Lovat is Lecturer in International Law and Politics at the University of Glasgow. He was formerly a legal adviser with the UK Government, prior to which he was in private practice as an English-qualified solicitor.

The Role of the Appellate Body of the WTO in Preserving the ‘Glocal’ Space in International Intellectual Property Law Emmanuel Kolawole Oke

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Analysing the International Intellectual Property System Through the Lens of Glocalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Intellectual Property Disputes at the Appellate Body: A Summary of the Four Cases . . . . . 4 The Appellate Body and the Preservation of the Glocal Space in International Intellectual Property Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Applicability of the Concept of “Legitimate Expectations” in the Interpretation of the TRIPS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Importance of Articles 7 and 8 of the TRIPS Agreement in the Interpretation and Implementation of the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 International Trademark Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Enforcement of Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34 36 42 45 46 49 51 58 59 60

Abstract This chapter introduces a novel way of conceiving the international intellectual property system and it contends that the system can be conceptualised as consisting of three spaces i.e. the global space, the glocal space, and the local space. The focus of this chapter is on the glocal space. The glocal space is the space available to states to experiment and adjust global rules to suit their local needs. The glocal space is thus an important space in the international intellectual property system. Building on the work of sociologists with regard to the concept of glocalisation, this chapter makes two key contributions. First, it critically explores how viewing glocalisation as an autonomous concept can be applied in the context of international intellectual property law and, in this regard, it contends that the World Trade Organisation’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) should not be conceptualised as simply a global agreement but as an agreement that contains both global and glocal spaces. Secondly, the E. K. Oke (*) Edinburgh Law School, University of Edinburgh, Edinburgh, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 33–60, https://doi.org/10.1007/8165_2021_72, Published online: 29 October 2021

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chapter critically analyses the role that the WTO’s Appellate Body has played in preserving the glocal space in international intellectual property law.

1 Introduction Intellectual property rights can have both local and global connections. For instance, it is not uncommon for an invention belonging to a multinational corporation to be patented in multiple countries contemporaneously. However, in such a situation, while the ownership of the patent might belong to a global entity, the patent protection of the invention occurs at the local (national) level and the nature of this protection may vary from country to country. This “glocal” nature of some contemporary intellectual property rights inevitably creates a tension between the local and the global in the international intellectual property system. Moreover, while it may be convenient to conceptualise the international intellectual property system through the binary options of local and global, there is however another aspect of the system that is often typically conflated with ‘policy space’. This aspect connects the local and the global spaces in the system and it can be conceptualised as the “glocal” space in the international intellectual property system. It is contended in this chapter that what is usually referred to as ‘policy space’ should be seen as consisting of two distinct spaces i.e. the glocal space and the local space. Thus, just as there are some intellectual property rights that can be regarded as “glocal” intellectual property rights, the international intellectual property system equally has a glocal space. It is this glocal space in the international intellectual property system that is the focus of the analysis in this chapter. In this chapter, the international intellectual property system is examined through the unique lens of glocalisation (as opposed to the more popular lens of globalisation).1 The rationale behind the adoption of the metaphor of ‘glocalisation’ in this context is to provide a theoretical framework that justifies the importance of the freedom available to states under international intellectual property law. Terms like ‘policy space’ and ‘national regulatory autonomy’ may evoke sentiments of economic nationalism or protectionism2 that can create the impression that they have no basis in international law i.e. that they are divorced from global rules. Employing the metaphor of ‘glocalisation’ therefore helps to situate policy space within the context of global rules. Using the term ‘glocal’ also helps to distinguish this space from the ‘local space’. While the use of the policy space available to states under international

1 Matthews (2002); Sell (2003); Archibugi and Filippetti (2010), p. 137; Yamane (2011); Seuba (2017). 2 Monica de Bolle and Jeromin Zettelmeyer, ‘Measuring the Rise of Economic Nationalism’ Working Paper 19-15, Peterson Institute for International Economics (August 2019). https:// www.piie.com/sites/default/files/documents/wp19-15.pdf (last accessed 17 May 2021).

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rules can indeed be motivated by protectionism, it is necessary to draw a distinction in this regard between aspects that fall within the glocal space and those that fall within the local space. Elements that fall within the glocal space do have their origins in global rules. Essentially, within this framework, the boundaries of the glocal space is contested and determined within the parameters of the current global rules. Therefore, referring to this space as the glocal space helps to highlight the connection of (what is typically referred to as) policy space or national regulatory autonomy to the existing global rules. In other words, the rules contained in the glocal space have their origin in global rules. The same cannot however be said regarding the local space which is unregulated by global rules. The glocal space is the space available to states to adjust global rules to suit their local needs. Also, while experimentation may not be possible within the global space (containing mandatory rules), experimentation can take place within both glocal and local spaces. However, in some cases, it can be quite difficult to delineate the precise boundaries of the glocal space that is available to states in the international intellectual property system. Moreover, the glocal space is also where some actors attempt to transform local rules into global rules. The glocal space is thus an important space in the international intellectual property system. Building on the work of sociologists with regard to the concept of glocalisation, the aim of this chapter is to critically explore how viewing glocalisation as an autonomous concept can be applied in the context of international intellectual property law. Using the conceptual framework of glocalisation, this chapter contends that the World Trade Organisation’s (WTO’s) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement)3 should not be conceptualised as simply a global agreement but as an agreement that contains both global and glocal spaces. In this regard, the chapter specifically analyses the role that the WTO’s Appellate Body has played in delineating and preserving the glocal space in international intellectual property law. Concerning the role of the WTO’s dispute settlement process and the Appellate Body in the international intellectual property system, there have been some important contributions by scholars in the field of intellectual property law. For instance, Kennedy has examined how the WTO’s Dispute Settlement Understanding (DSU) functions when applied to intellectual property under the TRIPS Agreement.4 Gervais has also questioned whether the Appellate Body “makes” intellectual property law.5 Moreover, Evans has examined the role that the Appellate Body can play in the harmonisation of international trademark law.6 There has however been no critical analysis of the role of the Appellate Body in the

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Agreement on Trade-Related Aspects of Intellectual Property Rights, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, April 1994, 1869 U.N.T.S. 3; 33 I.L.M. 1197 (1994). 4 Kennedy (2016). 5 Gervais (2018), pp. 494–516. 6 Evans (2007), pp. 1127–1162.

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delineation and preservation of the glocal space available to states under international intellectual property law. This chapter fills this lacuna in the existing literature. While not ignoring the fact that the TRIPS Agreement has constrained the glocal space available to states under international intellectual property law prior to the establishment of the WTO, the objective of this chapter is to investigate and highlight the fact that the Appellate Body has done a fairly decent job with regard to preserving the existing glocal space in international intellectual property law. Bearing in mind the contestations regarding the boundaries of the glocal space in international intellectual property law and the crucial importance of this space to states, it is necessary to evaluate the role of the Appellate Body with regard to the delineation and preservation of this space. The importance of such an evaluation is further underscored by the current crisis regarding the appointment of members to the Appellate Body. The chapter is structured into three main sections. Section 2 presents a critical analysis of the international intellectual property system through the lens of glocalisation and, in the process, it highlights some of the key elements that constitute the glocal space in international intellectual property law. Section 3 presents a brief overview of the four intellectual property disputes that have been brought before the Appellate Body while Sect. 4 discusses the role of the Appellate Body in delineating and preserving the glocal space in international intellectual property law. The chapter concludes with the view that, given the critical role that the Appellate Body has played in preserving the glocal space in international intellectual property law, the current crisis regarding the appointment of members to the Appellate Body that has disabled the Body is a huge loss especially for developing countries that require this glocal space.

2 Analysing the International Intellectual Property System Through the Lens of Glocalisation There is a divergence of opinion amongst certain sociologists regarding how to conceptualise glocalisation. Specifically, there is a debate regarding how to think about glocalisation vis-à-vis globalisation. It is necessary to explore this debate in order to properly understand the connection of the glocal space to the global space and to simultaneously underscore the distinction between the glocal space and the global space. Some sociologists, such as Roland Robertson, regard globalisation as glocalisation. Robertson conceptualises “glocalisation as a refinement of the concept of globalisation.”7 Robertson contends that it is not reasonable to define globalisation largely in terms of homogenisation and that it is equally not sensible to define the global in a way that excludes the local.8 From Robertson’s perspective, 7 8

Robertson (2012), p. 191. Robertson (2012), p. 199.

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globalisation is concretised in local forms and the local is equally influenced and built in response to the global.9 This approach to glocalisation has however been criticised. It has been noted that Robertson’s approach to glocalisation fails to account for temporality i.e. “the degree to which temporal variation shapes the relationship between the global and the local.”10 In other words, Robertson’s approach does not help to explain how the interface between the global and the local is reshaped within time intervals.11 Robertson’s approach also overlooks the problem of power relations. As Roudometof points out, “[o]ppositional politics in particular tend to view the local-global binary relationship not as mutually constitutive but as redressing the exploitation-resistance binary.”12 In contrast to Robertson’s approach which views globalisation as glocalisation, George Ritzer views glocalisation as globalisation. Ritzer defines glocalisation as “the interpenetration of the global and the local, resulting in unique outcomes in different geographic areas.”13 In developing his approach to glocalisation, Ritzer coined the term “grobalization”. Ritzer describes grobalization as the “imperialistic ambitions of nations, corporations, organizations, and other entities and their desire – indeed, their need – to impose themselves on various geographic areas.”14 In Ritzer’s view, the main interest of these nations, corporations, and organizations “is in seeing their power, influence, and (in some cases) profits grow (hence the term ‘grobalization’) throughout the world.”15 According to Ritzer, the real conflict is not between globalisation and the local but between grobalization and glocalisation.16 In Ritzer’s framework, much of what we think of as local should be seen as glocal because almost everything in the world has been touched by globalisation.17 Thus, if (as Ritzer contends) everything is more or less glocal now, then glocalisation itself becomes (another form of) globalisation. Ritzer therefore contends that those who oppose globalisation (and grobalization) need to align themselves with the alternative form of globalisation i.e. glocalisation.18 It is however unclear how embracing glocalisation as described by Ritzer can help those opposed to globalisation. As Roudometof notes, “Ritzer effectively denies the possibility of the glocal being anything other than an instrument of global capitalism.”19 Under

9

Roudometof (2016a), p. 392. Roudometof (2016a), p. 392. 11 Roudometof (2016a), p. 393. 12 Roudometof (2016b), pp. 48–49. 13 Ritzer (2003), p. 193. 14 Ritzer (2003), p. 194. 15 Ritzer (2003), p. 194. 16 Ritzer (2003), p. 207. 17 Ritzer (2003), p. 207. 18 Ritzer (2003), p. 207. 19 Roudometof (2016a), p. 397. 10

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Ritzer’s approach, “local agency is effectively negated.”20 This approach is however problematic because globalisation does not necessarily render the local (or nations) redundant.21 Roudometof offers a different way of conceptualising glocalisation vis-à-vis globalisation. In contrast to both Robertson’s approach (globalisation as glocalisation) and Ritzer’s approach (glocalisation as globalisation), Roudometof contends that glocalisation should be construed as an analytically autonomous concept.22 According to Roudometof, “the analytical autonomy of glocalization is meant to provide a foundation for using the concept to designate a process possessing analytical autonomy vis-à-vis other related concepts (local, global).”23 Thus, instead of conflating glocalisation with globalisation by either subsuming globalisation under glocalisation (as Robertson does) or subsuming glocalisation under globalisation (as Ritzer does), Roudometof contends that the glocal should be granted the analytical autonomy that it deserves.24 In order to do this, Roudometof argues that “it is necessary to look at the precise manner in which the relationship between the global and local is shaped.”25 Roudometof employs the metaphor of refraction to explain the relationship between the global and the local by “conceiving of globalization as a generic process in terms of waves spreading around the globe” and using the idea of refraction of waves to explain how the local relates to the global i.e. how the local reacts or responds to the waves produced by the global.26 Essentially, depending on the strength of the local, the waves produced at the global level can either be reflected or refracted at the local level. Glocalisation is what happens when the global becomes refracted (instead of being reflected) at the local level. Roudometof’s approach of viewing glocalisation as an analytically autonomous concept overcomes some of the deficiencies in the approaches suggested by both Robertson and Ritzer. In contrast to Ritzer’s approach where the global more or less consumes the local and the local disappears, the local plays a significant role in Roudometof’s approach. Moreover, unlike Robertson’s approach which overlooks the issue of power relations, Roudometof’s approach addresses the issue of power relations. Specifically, Roudometof’s approach revolves around the ability of the local to project (reflect) or resist (refract) the waves of globalisation. More importantly, in Roudometof’s approach, “power emanates and potentially can reside in all actors participating in global-local interactions.”27

20

Roudometof (2016b), p. 54. Calhoun (2007), p. 9; Rodrik (2011), p. 208. 22 Roudometof (2016a), p. 397; Roudometof (2016b), p. 59. 23 Roudometof (2016a), p. 397. 24 Roudometof (2016a), pp. 397–398. 25 Roudometof (2016a), p. 398. 26 Roudometof (2016a), p. 399. 27 Roudometof (2016a), p. 400. 21

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It is contended here that Roudometof’s approach of construing glocalisation as an analytically autonomous concept, especially his analysis of power relations in the context of glocalisation, is perhaps the most appropriate approach in terms of critically examining the international intellectual property system through the lens of glocalisation. In this regard, Roudometof provides three useful categories of how power relations can occur in the local-global relationship i.e. how the local can interact with the global. These three categories are discussed and applied to the international intellectual property system below. Firstly, Roudometof notes that some locales can “originate waves consistently and persistently across the world stage” and he equally notes that there could be “cultural, political, economic and military power that enables a configuration of power to play a critically important role as a source.”28 In other words, a locale (which could be either a single country or a group of countries acting collectively through their joint political or economic power) can be the source of globalising waves. In relation to the international intellectual property system, it is worth highlighting the fact that developed countries played a crucial role in the emergence of the current global framework governing intellectual property rights i.e. the TRIPS Agreement.29 These countries can therefore be regarded as the source of the current globalising waves in the international intellectual property system. Secondly, Roudometof equally notes the “ability of a locale to be wave-resistant” i.e. “the ability to insulate itself from waves of ‘undesirable’ outside influences.”30 This is however hardly possible in the context of the TRIPS Agreement as there are certain minimum standards that all members of the WTO have to implement at the national level. Nevertheless, depending on the “wave resistance capacities” of a country, it can resist signing up to trade agreements that require the implementation of TRIPS-Plus standards. Thirdly, Roudometof further notes the “ability of a locale to modify or alter the waves that pass through it” and he states that this is a “well-known and often evoked ability to cause mutations, alterations or fractures into whatever is introduced from ‘outside’”.31 This third category is one that has resonance in the context of the international intellectual property system. A number of countries, including developing countries, have exercised their ability to modify the intellectual property rules contained in agreements such as the TRIPS Agreements. For instance, India has been able to successfully adapt the provisions of the TRIPS Agreement at the national level in order to facilitate access to affordable medicines for its citizens.32 It should, however, be noted that India has been able to do this because of the existence of what can be referred to as the “glocal space” in the international intellectual property system and, specifically, in the TRIPS Agreement. If one

28

Roudometof (2016a), p. 401. Drahos (1995), p. 6; Drahos and Braithwaite (2002); Sell (2003); May and Sell (2006). 30 Roudometof (2016a), p. 402. 31 Roudometof (2016a), p. 402. 32 Oke (2015), p. 82. 29

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examines the international intellectual property system through the lens of glocalisation, the system can be structured into three spaces viz., the local space, the glocal space, and the global space. The glocal space is the space within the international intellectual property system where nations (locales) can alter or modify global waves of intellectual property standards. The TRIPS Agreement should therefore not merely be seen as a global agreement but as an agreement that contains both global and glocal spaces. Analysing the TRIPS Agreement through the lens of glocalisation helps to avoid the mistake of conceptualising the Agreement as one aimed at harmonising the rules of international intellectual property law. It also helps one to appreciate why there is diversity in the use of the glocal space available under the Agreement. In reality, the ability to make use of this glocal space will vary from country to country. Nevertheless, the use (or non-use) of this glocal space can have significant implications for the technological and economic development of a country. It is thus necessary to critically explore the contours of this glocal space in the international intellectual property system and, specifically, in the TRIPS Agreement. It is equally important to distinguish the glocal space from both the local and global spaces. The global space in the international intellectual property system can be defined as the space where mandatory standards are contained in international agreements. This is the space from which the globalising waves of intellectual property standards are dominant and overpowering. In this regard, the end goal of the global space is homogenization of intellectual property standards across the globe. For instance, Article 33 of the TRIPS Agreement contains the mandatory term for patents i.e. 20 years from the dating of filing the patent application. This is a mandatory standard and countries have no discretion with regard to how they implement it. The glocal space in the international intellectual property system can be defined as the space where flexible and optional rules are contained in international agreements. These flexibilities permit states to adapt global rules to suit their local circumstances. It is within this space that, depending on their wave resistance capabilities, states can resist or adapt the globalising waves flowing from the international intellectual property system. Notably, unlike the global space, the glocal space is not expressly designed to result in the homogenization of intellectual property standards across the world. In fact, it should facilitate heterogeneity as it should allow different states to adapt and modify global rules to suit their local circumstances. In this regard, there are numerous flexibilities, limitations, and exceptions in the TRIPS Agreement that constitute the elements of this glocal space. Some of these flexibilities, limitations, and exceptions can be found in the following provisions of the TRIPS Agreement: Article 13 (limitations and exceptions to copyright); Article 17 (exceptions to the rights of trademark owners); Article 20 (permitting the imposition of justifiable encumbrances on the use of trademarks in the course of trade); Articles 27.2 & 27.3 (providing for subject matter that may be excluded from patent protection); Article 30 (exceptions to the rights of patent owners); and Article 31 (permitting the compulsory licensing of patents).

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Moreover, while not flexibilities as such, Articles 7 and 8 of the TRIPS Agreement, which set out the objectives and principles respectively of the Agreement, are equally important in terms of defining or delineating the boundaries of the glocal space in international intellectual property law. These two provisions explicitly permit WTO members to adopt measures to, inter alia, protect public health, promote the public interest, and foster technology transfer (provided those measures are consistent with the TRIPS Agreement). Articles 7 and 8 are of crucial importance when it comes to the interpretation and implementation of the flexibilities contained in the Agreement, especially where the provisions that grant these flexibilities contain ambiguous terms.33 The glocal space is however the most contentious space in the international intellectual property system as it can be difficult to define the precise contours of the glocal space in the system. Moreover, due to its importance to states, it is contended here that the glocal space should be considered as an autonomous space (distinct from the global space) within the international intellectual property system. The glocal space should also not be conflated with the local space in this regard. As noted in the introduction to this chapter, the rules contained in the glocal space have their origin in global rules. Thus, whenever a state makes use of the glocal space, this should not be regarded as economic nationalism or protectionism. Importantly, employing the spatial model of glocalisation helps one to treat the glocal space in international intellectual property law as an autonomous space that is distinct from both the global space and the local space in the international intellectual property system. The local (national) space in the international intellectual property system can be described as those areas of intellectual property law, such as the protection of image rights, which are not currently regulated by multilateral agreements. Another local space in the international intellectual property system is the exhaustion of intellectual property rights. Thus, Article 6 of the TRIPS Agreement provides that: “For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.” In this regard, states are completely free to design their laws in any way they deem fit. In other words, since the issue of exhaustion is not addressed by the TRIPS Agreement, it falls within the local space and this means that states are free to choose between national, regional, or international exhaustion. Thus, the difference between these different types of exhaustion is not relevant in this context. The key point is that it is up to states to choose which type of exhaustion they prefer (as this matter falls within the local space under the international intellectual property system). It is worth highlighting why the glocal space is important in the context of international intellectual property law. It should be noted that glocalisation can be a development strategy for states.34 Thus, glocalisation enables states to adapt and

33 34

Slade (2016), p. 998. Khondker (2005), p. 197.

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modify global rules to suit their local circumstances. It is thus vital for countries, especially developing countries, that the glocal space in international intellectual property law be maintained and preserved. This applies as much in the context of international intellectual property law as it applies in other areas of international law.

3 Intellectual Property Disputes at the Appellate Body: A Summary of the Four Cases The Appellate Body has so far dealt with four disputes involving intellectual property rights and these are listed below: 1. India – Patent Protection for Pharmaceutical and Agricultural Chemical Products35 (hereinafter, India – Patent Protection). 2. Canada – Term of Patent Protection36 (hereinafter, Canada – Patent Term). 3. United States – Section 211 Omnibus Appropriations Act of 199837 (hereinafter, US – Appropriations Act). 4. Australia – Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging38 (hereinafter, Australia – Plain Packaging). The first dispute, India – Patent Protection, involved a complaint brought by the United States against India’s failure to comply with its obligations to provide a means for filing patent applications for pharmaceutical and agricultural chemical inventions in a manner that adequately preserves the novelty and priority of those applications pursuant to Article 70.8(a) of the TRIPS Agreement. This system, also known as the system of mailbox applications, was meant to be implemented by WTO members that took advantage of the transition period available to developing countries with regard to delaying the grant of patent protection for 10 years to areas of technology such as pharmaceutical inventions that were not previously protectable in their territories prior to the adoption of the TRIPS Agreement.39 India had taken advantage of this transition period. The US also complained that India failed to provide exclusive marketing rights to products subject to the patent application under Article 70.8(a) as required by Article 70.9 of the TRIPS Agreement. WTO, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, Appellate Body Report, WT/DS50/AB/R (19 December 1997). 36 WTO, Canada – Term of Patent Protection, Appellate Body Report, WT/DS170/AB/R (18 September 2000). 37 WTO, United States – Section 211 Omnibus Appropriations Act of 1998, Appellate Body Report, WT/DS176/AB/R (2 January 2002). 38 WTO, Australia – Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging, Appellate Body Report, WT/DS435/AB/R, WT/DS441/AB/R (9 June 2020). 39 Article 65(3) of the TRIPS Agreement. 35

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In this case, the Appellate Body agreed with the dispute settlement panel that the system set up by India to fulfil its obligations under Article 70.8(a), i.e. a system based on “administrative instructions” rather than via a legislative amendment to its Patents Act, was not consistent with Article 70.8 of the TRIPS Agreement. The Appellate Body equally agreed with the panel that, as there was no mechanism for the grant of exclusive marketing rights in India, there was a violation of Article 70.9 of the TRIPS Agreement. The Appellate Body however disagreed with the panel’s use of the concept of “legitimate expectations” (which derives from non-violation complaints) in the interpretation of the TRIPS Agreement. As will be shown in Sect. 4 below, this aspect of the Appellate Body’s ruling is very important with regard to the preservation of the glocal space in international intellectual property law. The second dispute, Canada – Patent Term, involved a complaint brought by the United States against Canada regarding the duration of the patent term for patent applications that were filed prior to the adoption of the TRIPS Agreement. Specifically, the United States contended that pursuant to Canada’s Patent Act, patents that were granted as a result of applications filed before 1 October 1989 (known as “Old Act” patents) only enjoyed a term of 17 years from the date on which the patent was granted. The United States argued that this was inconsistent with Canada’s obligations pursuant to Articles 33 and 70 of the TRIPS Agreement. In this regard, Canada argued that the applicable provision was Article 70.1 of the TRIPS Agreement which stipulates that the “Agreement does not give rise to obligations in respect of acts which occurred before the date of application of the Agreement for the Member in question.” The United States however contended that the applicable provision was Article 70.2 of the TRIPS Agreement which provides inter alia that “[e]xcept as otherwise provided for in this Agreement, this Agreement gives rise to obligations in respect of all subject matter existing at the date of application of this Agreement for the Member in question, and which is protected in that Member on the said date”. Both the panel and the Appellate Body agreed with the arguments of the United States. The Appellate Body drew a distinction between acts (such as the grant of patents) and the rights that result from such acts. Thus, Article 70.2 is applicable to existing rights under the Old Act patents even though those patents were the results of acts (i.e. the grant of patents) that took place prior to the entry into force of the TRIPS Agreement. Both the panel and the Appellate Body equally rejected Canada’s alternative argument that its Patent Act complied with the requirements of Article 33 of the TRIPS Agreement which stipulates that the “term of protection available shall not end before the expiration of a period of twenty years counted from the filing date.” In this regard, Canada contended that the grant of 17 years from the date of grant was effectively equivalent to the 20-year term from the filing date required by the TRIPS Agreement because of informal and statutory delays that could be used to prolong the term of patent protection. This argument was however rejected by both the panel and the Appellate Body. The Appellate Body ruled that the 20-year term required by the TRIPS Agreement must be a “readily discernible and specific right, and it must

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be clearly seen as such by the patent applicant when a patent application is filed.”40 The Appellate Body was however careful to note that its findings in this case “do not in any way prejudge the applicability of Article 7 or Article 8 of the TRIPS Agreement in possible future cases with respect to measures to promote the policy objectives of the WTO Members that are set out in those Articles.”41 The importance of this statement with regard to the preservation of the glocal space in international intellectual property law will be further explored in Sect. 4 below. The third dispute, US – Appropriations Act, concerned a complaint brought by the European Communities (EC) regarding Section 211 of the United States Omnibus Appropriations Act of 1998 which prohibits the registration or renewal in the United States of trademarks related to businesses confiscated by the Cuban government without the consent of the original owner. The EC alleged that Section 211 was inconsistent with a number of provisions in the TRIPS Agreement and in the Paris Convention for the Protection of Industrial Property42 (hereinafter, Paris Convention). Specifically, the EC contended that the provision was inconsistent with Articles 3, 4, 15.1, 16.1, and 42 of the TRIPS Agreement and also with Articles 2 (1), 6quinqiesA(1), 6bis, and 8 of the Paris Convention (which WTO Members are required to comply with pursuant to Article 2.1 of the TRIPS Agreement). The dispute settlement panel rejected all the claims of the EC in this regard except in relation to Article 42 of the TRIPS Agreement. The panel also took the view that trade names, which are required to be protected pursuant to Article 8 of the Paris Convention, are not a category of intellectual property covered by the TRIPS Agreement. On appeal, the Appellate Body took a different view. Specifically, the Appellate Body agreed that Section 211 did not violate Articles 15.1, 16.1, and 42 of the TRIPS Agreement and Article 6quinqiesA(1) of the Paris Convention. It however ruled that Section 211 violated Articles 3 and 4 of the TRIPS Agreement (i.e. the provisions on national treatment and most-favoured-nation treatment respectively) and also with Article 2(1) of the Paris Convention (which also deals with national treatment). The Appellate Body also ruled that trade names are covered under the TRIPS Agreement. In the course of its analysis, the Appellate Body made a number of important findings regarding the scope of the obligations under Articles 15.1, 16.1, and 42 of the TRIPS Agreement that are relevant to the preservation of the glocal space in international intellectual property law. These important findings will be further discussed in Sect. 4 below. In the fourth dispute, i.e. Australia – Plain Packaging, four countries (i.e. Honduras, the Dominican Republic, Cuba, and Indonesia) challenged Australia’s Tobacco Plain Packaging (TPP) measures. The TPP measures comprise a number of legal instruments i.e.: the Tobacco Plain Packaging Act of 2011; the

Canada – Patent Term, Appellate Body Report, para 92. Canada – Patent Term, Appellate Body Report, para 101. 42 Paris Convention for the Protection of Industrial Property, 1883, as last revised at Stockholm in 1967 and as amended in 1979, 828 U.N.T.S. 305. 40 41

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Tobacco Plain Packaging Regulations of 2011 as amended by the Tobacco Plain Packaging Amendment Regulation of 2012; and the Trade Marks Amendment (Tobacco Plain Packaging) Act of 2011. The measures were enacted in order to discourage the consumption of tobacco products in Australia and in compliance with Australia’s obligations pursuant to the Framework Convention on Tobacco Control (FCTC) that was adopted by members of the World Health Organization in 2003. The TPP measures, as it affects tobacco trademarks, essentially: permits only the use of word marks in prescribed form on retail packaging of tobacco products; prohibits stylized word marks, figurative marks, and composite marks on retail packaging of tobacco products; and prohibits the use of all trademarks on cigarettes but permits trademarks on cigar bands provided they appear in prescribed form. The four complainants contended that the TPP measures violate Articles 6quinqies and 10bis of the Paris Convention (as incorporated into the TRIPS Agreement via Article 2.1 of the TRIPS Agreement) and also Articles 15.4, 16.1, 16.3, 20, 22.2(b), and 24.3 of the TRIPS Agreement. The dispute settlement panel however ruled in favour of Australia. Thereafter, two of the complainants (i.e. Honduras and the Dominican Republic) unsuccessfully appealed the panel’s decisions to the Appellate Body concerning the panel’s ruling on the claims relating to Articles 16.1 and 20 of the TRIPS Agreement. In the course of its decision in this regard, the Appellate Body made some important findings in relation to both Articles 16.1 and 20 that are relevant to the preservation of the glocal space in international intellectual property law. The Appellate Body also made some observations with regard to Article 8 of the TRIPS Agreement which are quite crucial with regard to delineating the boundaries of the glocal space in international intellectual property law. These important findings and observations will be further critically explored in Sect. 4 below.

4 The Appellate Body and the Preservation of the Glocal Space in International Intellectual Property Law The Appellate Body can only make pronouncements and findings on issues raised in the appeals brought before it. As noted above, the Appellate Body has only had to deal with four disputes involving intellectual property rights. However, in spite of this limited number of cases, the Appellate Body has made important pronouncements and findings that demonstrate the crucial role that it plays in delineating and preserving the glocal space in international intellectual property law. What follows below is an analysis of how the Appellate Body has been able to accomplish this feat.

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The Applicability of the Concept of “Legitimate Expectations” in the Interpretation of the TRIPS Agreement

In India – Patent Protection, the panel had taken the view that, “when interpreting the text of the TRIPS Agreement, the legitimate expectations of WTO Members concerning the TRIPS Agreement must be taken into account”.43 The panel had arrived at this conclusion by relying on the requirement that treaties should be interpreted in good faith as stipulated in Article 31(1) of the Vienna Convention on the Law of Treaties (VCLT). According to the panel, “good faith interpretation requires the protection of legitimate expectations derived from the protection of intellectual property rights provided for in the Agreement.”44 Noting that Article 64 of the TRIPS Agreement requires the application of Article XXIII of the General Agreement on Tariffs and Trade (GATT) 1994 in the context of dispute settlement under the TRIPS Agreement, the panel further observed that the “protection of legitimate expectations of Members regarding the conditions of competition is a well-established GATT principle, which derives in part from Article XXIII, the basic dispute settlement provisions of GATT (and the WTO).”45 In the panel’s view, “[t]he protection of legitimate expectations is central to creating security and predictability in the multilateral trading system.”46 The panel further clarified that, in the context of intellectual property, the “concept of the protection of legitimate expectations” applies “to the competitive relationship between a Member’s own nationals and those of other Members (rather than between domestically produced goods and the goods of other Members, as in the goods area)”.47 On appeal to the Appellate Body, India questioned the panel’s conclusion in this regard. The Appellate Body disagreed with the panel on this issue. With regard to the panel’s view that a good faith interpretation requires the protection of legitimate expectations, the Appellate Body noted that the panel incorrectly applied Article 31 of the VCLT.48 The Appellate Body cautioned against “the imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended.”49 According to the Appellate Body, “[t]he legitimate expectations of the parties to a treaty are reflected in the language of the treaty itself.”50 Thus, the

WTO, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, Panel Report, WT/DS50/R (5 September 1997), para 7.22. 44 India – Patent Protection, Panel Report, para 7.18. 45 India – Patent Protection, Panel Report, para 7.20. 46 India – Patent Protection, Panel Report, para 7.21. 47 India – Patent Protection, Panel Report, para 7.21. 48 India – Patent Protection, Appellate Body Report, para 45. 49 India – Patent Protection, Appellate Body Report, para 45. 50 India – Patent Protection, Appellate Body Report, para 45. 43

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legitimate expectations of the parties to the TRIPS Agreement have already been expressed in the text of the Agreement. In relation to the panel’s claim that the “protection of legitimate expectations of Members regarding the conditions of competition is a well-established GATT principle”, the Appellate Body noted that this claim “does not accurately reflect GATT/WTO practice.”51 According to the Appellate Body: In developing its interpretative principle, the Panel merges, and thereby confuses, two different concepts from previous GATT practice. One is the concept of protecting the expectations of contracting parties as to the competitive relationship between their products and the products of other contracting parties. This is a concept that was developed in the context of violation complaints involving Articles III and XI, brought under Article XXIII:1 (a), of the GATT 1947. The other is the concept of the protection of the reasonable expectations of contracting parties relating to market access concessions. This is a concept that was developed in the context of non-violation complaints brought under Article XXIII:1 (b) of the GATT.52

In this regard, it is worth emphasizing that, as at the time of this dispute, the original moratorium with regard to the non-applicability of non-violation and situation complaints in the context of disputes involving the TRIPS Agreement pursuant to Article 64.2 of the TRIPS Agreement was still in force. Article 64.2 expressly provides that non-violation and situation complaints should not apply to disputes involving the TRIPS Agreement for a period of 5 years from the date of entry into force of the WTO Agreement. Article 64.3 of the TRIPS Agreement further provides that, during this 5-year period, the TRIPS Council should examine the “scope and modalities” for such complaints and submit its recommendations to the Ministerial Conference for its approval. Article 64.3 goes on to state that “[a]ny decision of the Ministerial Conference to approve such recommendations or to extend the period in paragraph 2 shall be made only by consensus, and approved recommendations shall be effective for all Members without further formal acceptance process.” However, till date, WTO Members have not been able to reach any consensus with regard to the applicability of non-violation and situation complaints to disputes involving intellectual property rights and they have extended the moratorium under Article 64.2 a number of times.53 At the meeting of the WTO’s General Council on 10 December 2019, there was an agreement to once again extend the moratorium until the Twelfth Ministerial Conference which was meant to take place in 202054 but which, as at the time of writing, has not yet taken place due to the COVID-19 pandemic but is now scheduled to take place in late 2021. The inability of WTO Members to reach a consensus with regard to the applicability of these types of complaints in the context of disputes involving the TRIPS Agreement can perhaps be India – Patent Protection, Appellate Body Report, para 36. India – Patent Protection, Appellate Body Report, para 36 (emphasis in the original). 53 WTO, “‘Non-Violation’ Complaints (Article 64.2)”, https://www.wto.org/english/tratop_e/trips_ e/nonviolation_e.htm (last accessed 13 January 2021). 54 WTO, “TRIPS Non-Violation and Situation Complaints Moratorium,” General Council Decision, WT/L/1080 (11 December 2019). 51 52

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attributed to the unique nature of these types of complaints as opposed to violation complaints. As the Appellate Body noted with regard to non-violation complaints: “Non-violation” complaints are rooted in the GATT’s origins as an agreement intended to protect the reciprocal tariff concessions negotiated among the contracting parties under Article II. In the absence of substantive legal rules in many areas relating to international trade, the “non-violation” provision of Article XXIII:1(b) was aimed at preventing contracting parties from using non-tariff barriers or other policy measures to negate the benefits of negotiated tariff concessions. Under Article XXIII:1(b) of the GATT 1994, a Member can bring a “non-violation” complaint when the negotiated balance of concessions between Members is upset by the application of a measure, whether or not this measure is inconsistent with the provisions of the covered agreement. The ultimate goal is not the withdrawal of the measure concerned, but rather achieving a mutually satisfactory adjustment, usually by means of compensation.55

Importantly, a number of developing countries have expressed concerns about the impact that the introduction of non-violation and situation complaints can have on the glocal space available to them under international intellectual property law. Apart from arguing that the TRIPS Agreement is “not designed to protect market access or the balance of tariff concessions”,56 these developing countries have stressed that the application of these types of complaints to disputes involving the TRIPS Agreement can “limit use of the flexibilities inherent in the TRIPS Agreement to secure objectives relating to public health, nutrition, the transfer of technology and other issues of public interest in sectors of vital importance to socioeconomic and technological development.”57 It is therefore worth highlighting what the Appellate Body said with regard to Article 64.2 of the TRIPS Agreement in India – Patent Protection: The meaning of this provision [i.e. Article 64.2] is clear: the only cause of action permitted under the TRIPS Agreement during the first five years after the entry into force of the WTO Agreement is a “violation” complaint under Article XXIII:1(a) of the GATT 1994. This case involves allegations of violation of obligations under the TRIPS Agreement. However, the Panel’s invocation of the “legitimate expectations” of Members relating to conditions of competition melds the legally-distinct bases for “violation” and “non-violation” complaints under Article XXIII of the GATT 1994 into one uniform cause of action. This is not consistent with either Article XXIII of the GATT 1994 or Article 64 of the TRIPS Agreement. Whether or not “non-violation” complaints should be available for disputes under the TRIPS Agreement is a matter that remains to be determined by the Council for Trade-Related Aspects of Intellectual Property (the “Council for TRIPS”) pursuant to Article 64.3 of the TRIPS Agreement. It is not a matter to be resolved through interpretation by panels or by the Appellate Body.58

India – Patent Protection, Appellate Body Report, para 41. WTO, “Non-Violation and Situation Nullification or Impairment under the TRIPS Agreement,” Communication from Argentina and others, IP/C/W/385/Rev.1 (27 May 2015) 1. 57 WTO, “Non-Violation and Situation Nullification or Impairment under the TRIPS Agreement,” Communication from Argentina and others, IP/C/W/385/Rev.1 (27 May 2015) 2. 58 India – Patent Protection, Appellate Body Report, para 42 (emphasis in the original). 55 56

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If the Appellate Body had not rejected the panel’s importation of the concept of legitimate expectations into the interpretation of the TRIPS Agreement, this could have indirectly opened the door for non-violation complaints disguised as violations of legitimate expectations in the context of disputes involving the TRIPS Agreement. Thus, the Appellate Body’s conclusion in this regard that it does not “agree with the Panel that the legitimate expectations of Members and private rights holders concerning conditions of competition must always be taken into account in interpreting the TRIPS Agreement”59 helps to preserve the glocal space available to states under international intellectual property law (at least until when WTO Members agree to extend the application of non-violation complaints to disputes involving the TRIPS Agreement). The fact that the Appellate Body arrived at this conclusion in the first dispute involving the TRIPS Agreement that it was confronted with demonstrates that the Body was willing to play a role in preserving the glocal space available to states under the Agreement.

4.2

The Importance of Articles 7 and 8 of the TRIPS Agreement in the Interpretation and Implementation of the Agreement

As noted in Sect. 3 above, in Canada – Patent Term, the Appellate Body stated that its findings in that case “do not in any way prejudge the applicability of Article 7 or Article 8 of the TRIPS Agreement in possible future cases with respect to measures to promote the policy objectives of the WTO Members that are set out in those Articles.”60 It further noted that Articles 7 and 8 “still await appropriate interpretation.”61 However, for a number of years after this statement, neither dispute settlement panels nor the Appellate Body provided an “appropriate interpretation” of Articles 7 and 8 thus leading to some uncertainty regarding the role of these provisions in the interpretation and implementation of the TRIPS Agreement. This is not to say that dispute settlement panels have not made certain pronouncements with regard to both Articles 7 and 8 of the TRIPS Agreement. For instance, in a separate patent dispute involving Canada, i.e. Canada – Patent Protection of Pharmaceutical Products,62 (hereinafter, Canada – Pharmaceutical Patents), the panel noted that Articles 7 and 8.1 must be “borne in mind” when interpreting Article 30 of the TRIPS Agreement.63 The panel did not however succeed in terms of clearly demonstrating what it means to interpret the terms of India – Patent Protection, Appellate Body Report, para 48 (emphasis in the original). Canada – Patent Term, Appellate Body Report, para 101. 61 Canada – Patent Term, Appellate Body Report, para 101. 62 WTO, Canada – Patent Protection of Pharmaceutical Products, Panel Report, WT/DS114/R (17 March 2000). 63 Canada – Pharmaceutical Patents, Panel Report, para 7.26. 59 60

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Article 30 in light of the object and purpose of the TRIPS Agreement. The panel really only focused on the ordinary meaning of the terms of Article 30 of the TRIPS Agreement. Furthermore, the panel in the US – Appropriations Act case extrapolated an obligation to implement the TRIPS Agreement in good faith as one of the objectives enshrined in Article 7 of the TRIPS Agreement.64 This was neither approved nor disapproved on appeal by the Appellate Body. Moreover, in European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs, the dispute settlement panel relied on Article 8.1 of the TRIPS Agreement to explain why there is no general exception provision like Article XX of GATT 1994 in the TRIPS Agreement.65 It was not until the recent report of the dispute settlement panel in the Australia – Plain Packaging case that a genuine attempt was made at clarifying the role of Articles 7 and 8 in the interpretation and implementation of the TRIPS Agreement. Specifically, the panel in this case drew on Articles 7 and 8 whilst interpreting the term “unjustifiably” in Article 20 of the TRIPS Agreement (discussed further below in Sect. 4.3.3). According to the panel: Article 7 reflects the intention of establishing and maintaining a balance between the societal objectives mentioned therein. Article 8.1, for its part, makes clear that the provisions of the TRIPS Agreement are not intended to prevent the adoption, by Members, of laws and regulations pursuing certain legitimate objectives, specifically, measures “necessary to protect public health and nutrition” and “promote the public interest in sectors of vital importance to their socio-economic and technological development”, provided that such measures are consistent with the provisions of the Agreement. Article 8 offers, in our view, useful contextual guidance for the interpretation of the term “unjustifiably” in Article 20. Specifically, the principles reflected in Article 8.1 express the intention of drafters of the TRIPS Agreement to preserve the ability for WTO Members to pursue certain legitimate societal interests, at the same time as it confirms their recognition that certain measures adopted by WTO Members for such purposes may have an impact on [intellectual property] rights, and requires that such measures be “consistent with the provisions of the [TRIPS] Agreement”.66

On appeal to the Appellate Body, Honduras (one of the complainants) disagreed with the panel’s interpretation of the term “unjustifiably” in Article 20 and it contended, inter alia, that “only concerns that are directly linked to the trademark, such as its potentially misleading nature, can permissibly trigger an encumbrance on the trademark’s use.”67 Honduras took the view that the panel’s approach opens the

US – Section 211 Appropriations Act, Panel Report, para 8.57. WTO, European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs (US), Panel Report, WT/DS174/R (15 March 2005) para 7.210; WTO, European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs (Australia), Panel Report, WT/DS290/R (15 March 2005) para 7.246. 66 Australia – Plain Packaging, Panel Report, paras 7.2403–7.2404. 67 Australia – Plain Packaging, Appellate Body Report, para 6.648. 64 65

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door to potentially any type of policy considerations.68 The Appellate Body however disagreed with the view that the reasons for imposing special requirements have to relate to the trademark itself and it agreed with the panel that “encumbrances on the use of trademarks by special requirements under Article 20 may also be imposed in pursuit of public health objectives.”69 According to the Appellate Body: . . .Article 20, which regulates the imposition of encumbrances on the use of a trademark through special requirements, is silent as to the reasons for which special requirements may be imposed. In this connection, we note that Article 8 of the TRIPS Agreement, titled “Principles”, provides, in paragraph 1, that Members may “adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement”. Measures seeking to protect public health and nutrition encompass a range of measures specifically contemplated by the TRIPS Agreement, including through exceptions to exclusive patent rights (Article 30), compulsory licences (Article 31), and the disclosure to the public of test data (Article 39.3). In this vein, we agree with the Panel that encumbrances on the use of trademarks by special requirements under Article 20 may also be imposed in pursuit of public health objectives.70

The approach of the Appellate Body in this regard is commendable as it underscores the importance of Article 8.1 of the TRIPS Agreement to the interpretation and implementation of not just Article 20 but also other provisions that deal with issues that relate to public health such as Articles 30, 31, and 39.3 of the TRIPS Agreement. The adoption of Honduras’ arguments in this regard by the Appellate Body would have constrained the glocal space available to states under international intellectual property law. The approach of both the panel and the Appellate Body with regard to Articles 7 and 8 thus helps to preserve the glocal space available to states under the TRIPS Agreement.

4.3

International Trademark Law

The Appellate Body has only had to deal with disputes involving just two (i.e. patents and trademarks) out of the various types of intellectual property rights covered by Part II of the TRIPS Agreement. Out of these two types of intellectual property rights, the Appellate Body has made significant pronouncements with regard to the glocal space in the field of trademarks. The Appellate Body’s pronouncements in disputes involving patent rights (i.e. the India – Patent Protection and the Canada – Patent Term cases examined above) have generally only confirmed the rules contained in the global space in international patent law. However, in relation to international trademark law, the Appellate Body has specifically made key pronouncements that preserve the glocal space available to states with regard to

Australia – Plain Packaging, Appellate Body Report, para 6.648. Australia – Plain Packaging, Appellate Body Report, para 6.649. 70 Australia – Plain Packaging, Appellate Body Report, para 6.649. 68 69

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the conditions for the registration and ownership of trademarks, the rights of trademark owners, and the imposition of encumbrances on the use of trademarks. These pronouncements made in the US – Appropriations Act and the Australia – Plain Packaging cases is the focus of the analysis in this section of the chapter.

4.3.1

The Conditions for the Registration and Ownership of Trademarks

In US – Appropriations Act, one of the key issues that had to be determined was whether the conditions for the determination of the ownership of trademarks falls within (what is described in this chapter as) the global space or glocal space in international trademark law. The United States took the view that both the Paris Convention and the TRIPS Agreement leave “the determination of trademark ownership to the national laws of each WTO Member”71 i.e. within the glocal space available to states. In the process of deciding this issue, the Appellate Body also had to address the scope of the glocal space available to states with regard to determining the conditions for the filing and registration of trademarks. Specifically, the EC had contended that Section 211 of the United States Omnibus Appropriations Act was inconsistent with Article 6quinquies A(1) of the Paris Convention. Article 6quinquies (which is part of the TRIPS Agreement by virtue of Article 2.1 of the Agreement) imposes an obligation on states to accept for filing and protection as is (i.e. in the same form) every trademark that has been registered in its country of origin. The EC took the view that the obligation in Article 6quinqies A(1) extended beyond the form of a trademark and Section 211 violates this obligation because it prevents the owner of a trademark registered in another country from obtaining trademark registration in the United States without the consent of the original owner of the trademark.72 The United States however contended that Article 6quinqies does not impose an obligation on states to register or renew a trademark “if the person registering or renewing it is not the true owner of the trademark under United States law.”73 Thus, for the United States, since Section 211 deals with ownership of trademarks, there was no violation of Article 6quinqies because the latter provision does not specify “how trademark ownership is to be determined.”74 In resolving this issue, the Appellate Body affirmed the right of states to determine the conditions for filing and registration of trademarks. Citing Article 6(1) of the Paris Convention, the Appellate Body stated that: Article 6(1) states the general rule, namely, that each country of the Paris Union has the right to determine the conditions for filing and registration of trademarks in its domestic

US – Appropriations Act, Appellate Body Report, para 129. US – Appropriations Act, Appellate Body Report, para 128. 73 US – Appropriations Act, Appellate Body Report, para 129. 74 US – Appropriations Act, Appellate Body Report, para 129. 71 72

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legislation. This is a reservation of considerable discretion to the countries of the Paris Union – and now, by incorporation, the Members of the WTO – to continue, in principle, to determine for themselves the conditions for filing and registration of trademarks. Thus, in our view, the general rule under the Paris Convention (1967) is that national laws apply with respect to trademark registrations within the territory of each country of the Paris Union, subject to the requirements of other provisions of that Convention. And, likewise, through incorporation, this is also now the general rule for all WTO Members under the TRIPS Agreement.75

The Appellate Body further confirmed that the obligation under Article 6quinqies A(1) does not cover all the features and aspects of trademarks and it noted that, if this provision is interpreted too broadly, “the legislative discretion reserved for Members under Article 6(1) [of the Paris Convention] would be significantly undermined.”76 The Appellate Body equally noted, inter alia, that it was not the intention of the drafters of the Paris Convention to “establish a global system for determining trademark ownership.”77 Thus, the Appellate Body agreed with the panel that the obligation under Article 6quinqies A(1) “does not encompass matters related to ownership.”78 Also in US – Appropriations Act, the Appellate Body had to determine the scope of the obligations under Articles 15.1 and 15.2 of the TRIPS Agreement. Specifically, the EC had contended that Section 211 was inconsistent with Article 15.1 because it prohibits the registration of “protectable” trademarks. Article 15.1 provides that any sign or combination of signs that is capable of distinguishing the goods or services of one business from those of others “shall be capable of constituting a trademark” and “shall be eligible for registration as trademarks.” The United States countered this by arguing that there was no violation of Article 15.1 as Section 211 did not deal with protectable subject matter. Alternatively, the United States contended that Section 211 fell within the exception in Article 15.2 of the TRIPS Agreement which permits the denial of trademark registration on “other grounds” as long as there is no derogation from the provisions of the Paris Convention. The EC however argued that, for this alternative argument to succeed, Section 211 had to fall within an exception “expressly foreseen” under the Paris Convention. Thus, the Appellate Body had to decide whether WTO Members have to register every trademark that satisfies the eligibility requirements under Article 15.1 and also whether, with regard to Article 15.2, they could deny trademark registration on other grounds besides those “expressly” stated in the Paris Convention and the TRIPS Agreement. With regard to the scope of the obligation under Article 15.1, the Appellate Body clarified that WTO Members do not have an obligation to automatically register every sign that is capable of and eligible for registration (i.e. every sign that is

US – Appropriations Act, Appellate Body Report, para 132 (emphasis in the original). US – Appropriations Act, Appellate Body Report, para 139. 77 US – Appropriations Act, Appellate Body Report, para 141 (emphasis added). 78 US – Appropriations Act, Appellate Body Report, para 147. 75 76

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distinctive).79 The Appellate Body stressed that Article 15.1 only describes trademarks that are capable of registration and it does not specify that trademarks that are capable of registration must be registered.80 Based on this, the Appellate Body ruled that “the wording of Article 15.1 allows WTO Members to set forth in their domestic legislation conditions for the registration of trademarks that do not address the definition of either ‘protectable subject matter’ or of what constitutes a trademark.”81 The Appellate Body supported its conclusion in this regard by citing Article 15.2 of the TRIPS Agreement and noting that “[t]he right of Members under Article 15.2 to deny registration of trademarks on grounds other than the failure to meet the distinctiveness requirements set forth in Article 15.1 implies that Members are not obliged to register any and every sign or combination of signs that meet those distinctiveness requirements.”82 It also cited Article 6(1) of the Paris Convention and it noted that “[i]f Article 15.1 required the registration of any and every sign or combination of signs that meets the distinctiveness criteria specified in that Article, then WTO Members would be deprived of the legislative discretion they enjoy under Article 6(1) of the Paris Convention (1967).”83 Concerning Article 15.2, i.e. whether WTO Members can deny trademark registration on other grounds besides those “expressly” stated in the Paris Convention and the TRIPS Agreement, the Appellate Body clarified that the “other grounds” in Article 15.2 are not confined to those expressly stated in either the Paris Convention or the TRIPS Agreement.84 Citing Article 6(1) of the Paris Convention again, the Appellate Body noted that states have the right to determine the conditions for the registration of trademarks through their national laws.85 However, this glocal space to determine the conditions for the registration of trademarks has boundaries i.e. states must still comply with the grounds both for refusing and not refusing trademark registration contained in the Paris Convention.86 Thus, for instance, WTO Members must still comply with the requirements of Articles 6(2), 6ter, 6quinquies, and 7 of the Paris Convention. They also have to comply with all the necessary requirements contained in Article 15 of the TRIPS Agreement. However, beyond these requirements, states remain free to determine the conditions for the registration of trademarks. Furthermore, the Appellate Body also confirmed in US – Appropriations Act that, while Article 16.1 of the TRIPS Agreement confers exclusive rights on the owner of a registered trademark, it does not specify how the “ownership of a registered

US – Appropriations Act, Appellate Body Report, para 155. US – Appropriations Act, Appellate Body Report, para 155. 81 US – Appropriations Act, Appellate Body Report, para 156 (emphasis in the original). 82 US – Appropriations Act, Appellate Body Report, para 159. 83 US – Appropriations Act, Appellate Body Report, para 165. 84 US – Appropriations Act, Appellate Body Report, para 178. 85 US – Appropriations Act, Appellate Body Report, para 175. 86 US – Appropriations Act, Appellate Body Report, paras 175–176. 79 80

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trademark is to be determined.”87 Thus, according to the Appellate Body, the TRIPS Agreement “does not establish or prescribe a regime of ownership of trademarks” and it agreed with the panel that “the definition of the conditions of ownership has been left to the legislative discretion of individual countries”.88 Thus, as none of the provisions of either the Paris Convention or the TRIPS Agreement regulates this issue, the determination of the conditions of the ownership of trademarks falls within the glocal space available to states under international trademark law.

4.3.2

The Nature of the Rights of Trademark Owners

In Australia – Plain Packaging, the Appellate Body made some key pronouncements regarding the nature of the rights conferred on the owners of registered trademarks pursuant to Article 16.1 of the TRIPS Agreement that further confirms the glocal space available to states under international trademark law. Article 16.1 confers on the owners of registered trademarks the “exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion.” The Appellate Body has now confirmed in Australia – Plain Packaging that the rights conferred on trademark owners under Article 16.1 is only a negative right to exclude third parties and not a positive right to use a trademark. According to the Appellate Body: . . . neither the TRIPS Agreement nor the provisions of the Paris Convention (1967) that are incorporated by reference into the TRIPS Agreement confer upon a trademark owner a positive right to use its trademark or a right to protect the distinctiveness of that trademark through use. Accordingly, there is no corresponding obligation on Members to “give effect” to such “rights”. Rather, in accordance with Article 1.1 of the TRIPS Agreement, Members are required to give effect to Article 16.1 by ensuring that, in the Members’ domestic legal regimes, the owner of a registered trademark can exercise its “exclusive right to prevent” the infringement of its trademark by unauthorized third parties.89

This confirms similar rulings by previous panels with regard to the nature of the rights conferred on trademark owners.90 The implication of not conferring a positive right to use trademarks on trademark owners is that states can implement measures that may affect the use of trademarks as long as those measures comply with the requirements of the TRIPS Agreement. Moreover, this further implies that states have no obligation to maintain the distinctiveness of trademarks or to refrain from US – Appropriations Act, Appellate Body Report, para 187. US – Appropriations Act, Appellate Body Report, paras 188–189. 89 Australia – Plain Packaging, Appellate Body Report, para 6.586. 90 WTO, European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs (US), Panel Report, WT/DS174/R (15 March 2005) para 7.210 and para 7.611, footnote 558; Australia – Plain Packaging, Panel Report, para 7.1978. 87 88

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adopting regulatory measures that may negatively affect the distinctiveness of registered trademarks. This was confirmed by both the panel and the Appellate Body in the Australia – Plain Packaging case where one of the issues that the panel had to decide was whether the Australian TPP measures violate Article 16.1 by impairing the distinctiveness of tobacco-related trademarks.91 In the same vein, there is no obligation on states to provide a minimum opportunity for trademark owners to use their trademarks.92 The approach of both the panel and the Appellate Body with regard to the interpretation of the nature of the rights conferred on trademark owners thus helps to preserve the glocal space available to states under international trademark law.

4.3.3

The Imposition of Encumbrances on the Use of Trademarks

The first sentence of Article 20 of the TRIPS Agreement provides in part that “[t]he use of a trademark in the course of trade shall not be unjustifiably encumbered by special requirements.” This indicates that states can impose encumbrances on the use of trademarks as long as these are not “unjustifiable”. In Australia – Plain Packaging, the Appellate Body made some key findings with regard to the interpretation of Article 20 that helps to preserve the glocal space available to states under this provision. Two of these key findings will be highlighted below. Firstly, unlike the panel, the Appellate Body clarified that, when determining whether an encumbrance is justifiable pursuant to Article 20, it is unnecessary to apply a rigid and exact set of factors. Based on its own analysis, the panel had developed a test consisting of three factors that in its view should be considered in determining whether the use of a trademark in the course of trade is being “unjustifiably” encumbered by special requirements. According to the panel, these should involve a consideration of the following factors: 1. the nature and extent of the encumbrance resulting from the special requirements, bearing in mind the legitimate interest of the trademark owner in using its trademark in the course of trade and thereby allowing the trademark to fulfil its intended function; 2. the reasons for which the special requirements are applied, including any societal interests they are intended to safeguard; and 3. whether these reasons provide sufficient support for the resulting encumbrance.93 However, it is not entirely clear from the panel report whether, in determining if the use of a trademark is being unjustifiably encumbered, the consideration of these

Australia – Plain Packaging, Panel Report, para 7.2005; Australia – Plain Packaging, Appellate Body Report, para 6.592. 92 Australia – Plain Packaging, Panel Report, para 7.2029; Australia – Plain Packaging, Appellate Body Report, paras 6.601–6.602. 93 Australia – Plain Packaging, Panel Report, para 7.2430. 91

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three factors is mandatory or not. Crucially, when the panel initially stated its threefactor test in the paragraph quoted above, it stated that “a determination of whether the use of a trademark in the course of trade is being “unjustifiably” encumbered by special requirements should involve a consideration of the following factors”.94 This suggests that the three factors must be considered. However, in a latter part of the same report, the panel seems to suggest that a consideration of these three factors is not mandatory. In this latter part of the report, the panel stated that: “. . .a consideration of whether the use of a trademark is “unjustifiably encumbered” will normally involve a consideration of various elements, including the nature and extent of the encumbrance arising from the special requirements at issue, the reasons for which these requirements are applied, and whether these reasons sufficiently support them.”95 The Appellate Body however clarified this confusion and in this regard it expressed its preference for a less rigid test in determining whether the use of a trademark is unjustifiably encumbered. In a footnote, the Appellate Body stated that: “while an inquiry under Article 20 could include the consideration of the abovementioned factors, the degree of discretion vested in Members under Article 20 does not call for a rigid and exact set of considerations that are relevant for the examination of whether the use of a trademark is unjustifiably encumbered by special requirements.”96 The Appellate Body therefore modified the three factor test that was developed by the panel and adopted a less rigid approach.97 The approach of the Appellate Body in this regard shows greater deference to states and it respects the regulatory autonomy that states have under Article 20 of the TRIPS Agreement. Secondly, the Appellate Body equally clarified that it is unnecessary to consider alternative measures under Article 20 of the TRIPS Agreement. In challenging the panel’s interpretation of Article 20 on appeal, Honduras contended, inter alia, that the panel was in error because it did not consider it necessary for states to opt for a less trademark-encumbering special requirement when imposing such special requirements.98 In this regard, Honduras attempted to import a necessity test into Article 20 and it argued that encumbrances must at least be necessary in order to be justifiable.99 The Appellate Body however disagreed with Honduras in this regard and it held that: Honduras’ suggestion that the encumbrances imposed by special requirements “must at least be ‘necessary’ in order to be ‘justifiable’” presupposes that the standard of “unjustifiability” under Article 20 should be at least equivalent to the standard of “necessity”. As noted, the use of the term “unjustifiably” in Article 20, as opposed to other provisions of the TRIPS Agreement, which refer to the concept of necessity, indicates that the degree of discretion

Australia – Plain Packaging, Panel Report, para 7.2430 (emphasis added). Australia – Plain Packaging, Panel Report, para 7.2441 (emphasis added). 96 Australia – Plain Packaging, Appellate Body Report, para 6.651, footnote 1683. 97 Australia – Plain Packaging, Appellate Body Report, paras 6.651, 6.659. 98 Australia – Plain Packaging, Appellate Body Report, para 6.652. 99 Australia – Plain Packaging, Appellate Body Report, para 6.652. 94 95

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The approach of the Appellate Body with regard to the issue of alternative measures is highly commendable. Importantly, it respects and preserves the regulatory autonomy available to states to implement measures that they deem necessary to achieve specific public health objectives. Crucially, both of these key findings contribute towards the delineation and preservation of the glocal space available to states under international trademark law.

4.4

Enforcement of Intellectual Property Rights

The Appellate Body has not said much regarding the enforcement of intellectual property rights. However, in US – Appropriations Act, it made two key pronouncements regarding the glocal space in Article 42 of the TRIPS Agreement. Article 42 requires WTO Members, in the context of civil and administrative procedures for the enforcement of intellectual property rights, to make available “civil judicial procedures” that are fair and equitable. Among other things, it requires states to ensure that parties are represented by independent legal counsel and that they are entitled to present all relevant evidence. The two key pronouncements made by the Appellate Body that are relevant to the glocal space available to states under this provision are briefly examined below. Firstly, as Article 42 does not define “civil judicial procedures”, the Appellate Body has interpreted this to mean that WTO Members have “a degree of discretion” in this regard and that this takes into account the “differences in national legal systems” as recognised in the second recital of the Preamble to the TRIPS Agreement.101 As the Appellate Body further noted, “no Member’s national system of civil judicial procedure will be identical to that of another Member.”102 The discretion of WTO Members in this regard is of course subject to the “procedural minimum standards” in the TRIPS Agreement.103 In essence, this confirms that

Australia – Plain Packaging, Appellate Body Report, para 6.653. US – Appropriations Act, Appellate Body Report, para 216. 102 US – Appropriations Act, Appellate Body Report, para 216. 103 US – Appropriations Act, Appellate Body Report, para 216. 100 101

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WTO Members do not have to set up identical civil judicial procedures for the enforcement of intellectual property rights. Secondly, the Appellate Body equally confirmed that “the rights which Article 42 obliges Members to make available to right holders are procedural in nature.”104 As a result of this, Article 42 does not prevent WTO Members from stipulating through legislation that “its courts must examine each and every requirement of substantive law at issue before making a ruling.”105 Thus, where the courts of a WTO Member have to first determine whether a claimant has met the requirements of substantive law (such as those relating to the ownership of a trademark) before ruling on the claimant’s claim to a trademark in an enforcement proceeding, there is no violation of Article 42.106

5 Conclusion This chapter makes two key contributions. Firstly, it critically examines international intellectual property law through the lens of glocalisation and it highlights the glocal space in international intellectual property law. Secondly, it also critically highlights the role of the Appellate Body in preserving the glocal space in international intellectual property law which is an overlooked aspect of the Appellate Body’s function in the international intellectual property system. Importantly, treating the elements of the glocal space in international intellectual property law as an autonomous aspect of the international intellectual property system implies that it would be wrong to attempt to harmonise elements of this glocal space or assimilate them into the global space in international intellectual property law. The glocal space in international intellectual property law exists to foster diversity and enable states to calibrate the rules of international intellectual property law to suit their local needs and context. The preservation of the glocal space is particularly useful to developing countries. The current crisis regarding the appointment of members to the Appellate Body that has disabled the Body is thus a huge loss for developing countries that require this glocal space. One therefore hopes that the crucial role of the Appellate Body in preserving the glocal space in international intellectual property law will not be forgotten in the context of the current crisis and that this crisis would be resolved soon.

US – Appropriations Act, Appellate Body Report, para 221 (emphasis in the original). US – Appropriations Act, Appellate Body Report, para 226 (emphasis in the original). 106 US – Appropriations Act, Appellate Body Report, para 226. 104 105

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Emmanuel Kolawole Oke is a Lecturer in International Intellectual Property Law at Edinburgh Law School, University of Edinburgh. He holds LLB and LLM degrees from the University of Lagos, an LLM in Intellectual Property and Technology Law from the National University of Singapore, and a PhD from University College Cork, Ireland. His research explores the interface between intellectual property and other branches of international law such as international trade law, international investment law, international taxation law, and international human rights law.

Two Sides of the Same Coin? Analysing the Efficacy of the African Continental Free Trade Area and WTO’s Dispute Settlement Mechanisms in Resolving Trade Disputes Between African States Annabel Nanjira

“The presence of law does not suggest that there will be no conflicts. To the contrary, law exists because there will always be differences that are not automatically reconcilable.” (Allan Wolff 2018)

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Dispute Settlement at the World Trade Organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Procedure for the Settlement of Disputes Under the WTO Regime . . . . . . . . . . . . . 2.2 The Appellate Body Crisis at the WTO and Proposals for Reforms . . . . . . . . . . . . . . . . . . 3 The Multilateral Trading System and Regionalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Overview of the African Continental Free Trade Area: Scope, Objectives and Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Dispute Resolution in the African Continental Free Trade Area . . . . . . . . . . . . . . . . . . . . . . 3.3 The Procedure for the Settlement of Disputes Under AfCFTA . . . . . . . . . . . . . . . . . . . . . . . 4 Concurrent Jurisdiction Between the WTO Dispute Settlement Mechanisms and Dispute Settlement Mechanisms Under Regional Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Concurrent Jurisdiction: A Case Study of the AfCFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Similarities Between the Two Dispute Settlement Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Lessons Learned from Previous Dispute Resolution Systems Applied in Africa for the AfCFTA Dispute Resolution Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The World Trade Organisation (WTO) has often referred to its dispute resolution system as the “crown jewel” of the world trading system. However, the current crisis on the lack of a quorum in the Appellate Body is slowing down the dispute resolution process at the WTO considerably. Notwithstanding, African countries have an alternative dispute resolution mechanism available under the A. Nanjira (*) ALP – East Africa, Kakamega, Kenya © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 61–86, https://doi.org/10.1007/8165_2022_82, Published online: 21 May 2022

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soon to be operationalized African Continental Free Trade Area Agreement (AfCFTA Agreement). This paper aims to highlight the efficiency of the AfCFTA dispute resolution mechanism as compared to that of the WTO. To this end, it is divided into four parts. Section 1 sets the background to this paper by expounding dispute settlement at both the WTO and AfCFTA. Section 2 focuses on the concept of concurrent jurisdiction between the two systems. It intends to find out whether recourse to one system automatically bars a state party from seeking a remedy in the other dispute resolution system. Section 3 concentrates on the similarities between the two systems. Section 4 highlights the lessons that AfCFTA may draw from other dispute settlement mechanisms (DSM) on the African continent and recommends changes to the AfCFTA dispute resolution system.

1 Introduction The WTO is an institution that regulates global rules of trade between nations. It was established in 1995 by the Marrakesh Agreement and is a result of the Uruguay Round of Multilateral Trade Negotiations, which took place under the framework of the General Agreement on Tariffs and Trade (GATT 1947).1 The Uruguay Round, much of which was held in Geneva, constituted the eighth of such multilateral trade liberalization negotiations.2 The key successes of this round were not only a further contribution to the liberalization of international trade but also facilitated the creation of the WTO—the first multilateral trading system. Whereas the GATT system only dealt with trade in goods, the WTO covers trade in goods, services and trade-related intellectual property rights. Therefore, it has several functions including the administration of the WTO agreements, providing a forum for trade negotiations, handling trade disputes, monitoring trade policies, providing technical assistance and training for developing economies and cooperating with other international organizations.

2 Dispute Settlement at the World Trade Organisation The WTO dispute settlement system is established by the Understanding on Rules and Procedure Governing the Settlement of Disputes (DSU). It forms the backbone of the multilateral trading system.3 The spirit of the (back then) new mechanism for

1

Qureshi and Gao (1999), p. 236. Qureshi and Gao (1999), p. 236. 3 Shedd et al. (2012), p. 2. 2

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the settlement of disputes is embodied in the Punta Del Este Declaration, which states came up with during the Uruguay Round. The Declaration states: To assure prompt and effective resolution of disputes to the benefit of all contracting parties, negotiations shall aim to improve and strengthen the rules and procedures of the dispute settlement process, while recognizing the contribution that would be made by more effective and enforceable GATT rules and disciplines. Negotiations shall include the development of adequate arrangements for overseeing and monitoring of the procedures that would facilitate compliance with adopted recommendations. (GATT, 1986)4

The WTO dispute settlement system succeeded the dispute resolution system provided for in the GATT 1947. With reference to the latter, if a party believed that another member state’s measure either violated or impaired the benefits accorded under the GATT then it had the option to invoke consultations and dispute resolution procedures pursuant to Articles XXII and XXIII.5 The GATT did not establish the specific mechanisms for the resolution of disputes; to fill this void member states established ad hoc panels.6 However, over time this proved to be problematic, since there was a lack of consensus in the adoption of decisions and no appellate mechanism nor a real means of enforcement in case of non-compliance with deadlines available. As a successor of the GATT dispute settlement system, the WTO brought about several reforms in a bid to foster consistency in the multilateral trading system. Some of these key reforms are the introduction of the reverse consensus rule and the creation of an Appellate Body (AB). The provision which applies to the different deadlines during the dispute resolution processes and the adoption of the panel as well as AB reports states that a decision shall be adopted unless all WTO members vote against its adoption.7

2.1

The Procedure for the Settlement of Disputes Under the WTO Regime

Article 2 DSU creates the Dispute Settlement Body (DSB).8 The DSB consists of representatives of all WTO members and its function is to administer the WTO dispute settlement proceedings.9 The overall goal of the DSB is to provide security and predictability to the multilateral trading system (Article 3 DSU).10 It forms a

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General Agreement on Tariff and Trade Punta Del Este Declaration 1986. Article XXII and XXIII General Agreement on Tariff and Trade 1994. 6 Alilovic (2000), pp. 282–283. 7 Guan (2014), pp. 80–81. 8 Article 2 of the Understanding on the Rules and Procedure governing the settlement of disputes. 9 Article 2 of the Understanding on the Rules and Procedure governing the settlement of disputes. 10 Appellate Body Report, Japan — Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/ R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996: I, 97, p. 31. 5

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central pillar of the multilateral trading system due to the lack of a dispute settlement system including an enforcement mechanism for trade rules.11 Since the first half of the year 2020, the Appellate Body has managed to circulate over 150 reports.12 The WTO itself defines a trade dispute as a “broken promise” with respect to a trade rule established by the members of the multilateral trading system. Such disputes usually arise when a member adopts a trade policy measure or another trade measure which another WTO member considers to be in violation of the WTO obligations. Members having an interest in the dispute may also be enjoined as third parties.13 The legal test for a member state to apply to participate in the dispute resolution as a third party is established under Article 10 DSU. It provides that any member with a substantial interest in a matter may request the DSB to have the opportunity to be heard and make written submissions.14 Such submissions are required to be taken into consideration by the panel in writing its report. The interpretation of substantial interest has been interpreted by the panel in EC – Bananas III to mean that a third party does not need to have a legal interest in the matter.15 In that decision, the panel responded to an argument by the European Community (EC) that a complaining party must have a legal right or interest in the claim it is pursuing. This position has been clarified by the panel in US – Shrimp where in the same vein the panel established that a substantial interest does not entail a legal claim.16

2.1.1

Consultation Stage

Article 4 DSU provides for the consultation phase in the dispute resolution process.17 This stage is mandatory and its only after consultations have failed that an aggrieved party may request the DSB to establish a panel. The provision also states that any third party with a substantial interest in the matter may engage in the process already at the consultation stage if the respondent state agrees. With respect to specific timelines for consultations, the respondent state is required to reply to consultations within 10 days after the request has been made. There is also 60-day time limit within which the parties are supposed to have concluded this stage. In case 11 Understanding the WTO: Settling Disputes A unique contribution available at https://www.wto. org/english/thewto_e/whatis_e/tif_e/disp1_e.htm. 12 Appellate Body Annual Report for 2019-2020 July 2020 WT/AB/30, p. 12. 13 Understanding the WTO: Settling Disputes A unique contribution available at https://www.wto. org/english/thewto_e/whatis_e/tif_e/disp1_e.htm. 14 Article 10 of the Understanding on the Rules and Procedure governing the settlement of disputes. 15 Appellate Body Report, European Communities — Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997: II, 591, paras. 132. 16 Appellate Body Report, United States — Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998: VII, 2755, para. 101. 17 Article 4 of the Understanding on the Rules and Procedure governing the settlement of disputes.

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of failure of which, the aggrieved party may make a request to the DSB to establish a panel. However, if the dispute is sorted out at this stage, then there is no need for the establishment of a panel. The rationale for consultations has been highlighted by the Appellate Body in the Mexico – Corn Syrup case, namely the assessment of strengths and weaknesses of the other member state’s case, to narrow down the scope of differences between the parties and if possible, reach a mutually agreed solution.18

2.1.2

Panel Stage

If the disputing parties do not settle their differences at the consultation phase, then the aggrieved party may make a formal written request to the chair of the Dispute Settlement Body to constitute a panel. This request acts as the legal foundation for the complainant and defines the scope of the dispute at hand. The request is circulated to all WTO members. The function of the panel upon being constituted is set out in Article 15 DSU and includes assisting the DSB in coming up with an objective assessment of the facts of the case and reviewing the conformity with the relevant WTO Agreements. The panel is mostly constituted of three to five members. WTO member states are usually required to submit a list of potential panel members and in case a dispute proceeds to this stage then a number of panellists are picked by the Secretariat for the specific dispute at hand. Legal proceedings before the panel usually include both oral and written submissions. At the end of the legal proceedings, the panel is mandated to issue its report.

2.1.3

Appellate Body

A party aggrieved by the decision of the panel has 60 days to appeal. The Appellate Body has seven members, three of whom (the division) are selected to preside over an appeal by rotation. An appellant has 10 days to submit its legal arguments concerning the relevant points of law in the panel report, followed later by an oral hearing. The objective of the Appellate Body is to resolve the dispute, which may require it to complete the legal analysis of the respective case by examining other claims not dealt with by the original panel. After drafting, the Appellate Body report is circulated to all WTO Members and published. It is also submitted to the DSB for adoption and the parties to a dispute must accept its recommendations unconditionally in the absence of a negative consensus.

Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States, WT/DS132/13, adopted 26 November 2001, para. 54.

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The Appellate Body Crisis at the WTO and Proposals for Reforms

The WTO dispute settlement system has over 25 years ensured consistency and predictability in the multilateral trading system. This is because of the finality and binding nature of the reports it issues.19 As a brainchild of the Uruguay Round of multilateral trade negotiations, it has greatly helped in filling in the gaps in dispute resolution that existed in the GATT system. Its effectiveness even led the WTO to characterizing the Appellate Body as “the jewel in the crown”.20 But has the jewel in the crown become a mirage? Since December 2019, the Appellate Body has been facing a threat to its existence. However, the Appellate Body’s woes did not start in 2019. Already back in 2016, the United States issued a press statement indicating that they would not be voting in favour of the renewal of one Appellate Body member, Mr Chang.21 Since 30 November 2020, there is no sitting member of the AB left, rendering it incapable of making any decision.22 Allan Wolff stated that at present the Appellate Body’s functions within the WTO is being threatened with extinction.23 The United States proposal for a reform to the WTO dispute settlement system related to the following issues: (a) that the AB has completely outlawed zeroing under the Anti-Dumping Agreement (ADA)—a practice still employed by the United States trade authorities still practice—which meant that the AB had exceeded its jurisdictional limits beyond those set out in the Dispute Settlement Understanding and (b) that the AB has been continuously exceeding its 90-day deadline in issuing reports. The current AB crisis poses a significant risk to the multilateral trading system. The lack of a functioning AB means that by appealing into the void the respondent can frustrate a complainant’s right to a binding decision.24 There is also a significant risk that erroneous decisions will be made, and it creates uncertainty in the whole WTO system.

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Payosova et al. (2018), p. 18. Lo et al. (2020), p. 52. 21 Statement by the United States at the meeting of the WTO Dispute Settlement Body Geneva May 23rd, 2016 available at https://www.wto.org/english/news_e/news16_e/us_statment_dsbmay16_e. pdf. 22 Hoekman and Mavroidis (2019), p. 3. 23 Allan Wolf, Deputy Director WTO, The Rule of law in the Age of Conflict Keynote Address at the Closing Ceremony World Trade Institute Master Programmes University of Bern 29 June 2018. 24 Kotzampasakis (2020). 20

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The Multi Party Interim Appeals Arbitration Arrangement (MPIA) as a Temporary Solution to the Appellate Body Crisis

Jennifer A. Hillman, in her paper titled “Three Approaches to Fixing the World Trade Organisation’s Appellate Body: The Good, the Bad and the Ugly?”,25 posited that one of the solutions to the AB crisis is the arbitration provision set out in Article 25 DSU. She further stated that by using arbitration, there will be no need to change the DSU rules or the consensus rule in the decision making by the DSB. Indeed, this solution to the AB crisis has been transferred into the MPIA and was first proposed by the European Union (EU) and further supported by twenty-three other countries.26 The MPIA is a temporary arrangement that allows members to bring appeals and solve disputes among them. The main objective of the MPIA is deviating from the practice of the AB especially with regard to the latter’s legal reasoning.27 Some of the key features of the MPIA include: arbitration being conducted by a panel of three arbitrators, a 10-day notification period for the aggrieved party to appeal a panel decision and that the arbitration procedures mirror those of the AB.28

3 The Multilateral Trading System and Regionalism Regional Trade Agreements (RTAs) under the WTO framework exists as an exception to the most-favoured-nation (MFN) principle.29 A number of the WTO Agreements make provision for RTAs including the General Agreement on Tariffs and Trade, the General Agreement on Trade in Services (GATS) and the Decision on Differential and More Favourable Treatment, Reciprocity, and the Fuller Participation of Developing Countries (the Enabling Clause). Article XXIV GATT specifically recognises a member states’ right to closer integration. In this regard, it allows WTO members to form either a customs union or a free trade area. However, such regional trade agreements should facilitate trade and not raise barriers to trade for other contracting parties within such territories.30 But why do countries enter into RTAs? There are two main theories that provide an explanation to this: trade creation and trade diversion.31 These theories were first

25

Hillman (2009), pp. 8–10. EU and other member countries statement on the MPIA available at https://trade.ec.europa.eu/ doclib/docs/2020/january/tradoc_158596.pdf. 27 Malkawi (2020), pp. 3–4. 28 Jaswant (2020). 29 OECD (2003). 30 Article XXIV (4) of the General Agreement on Tariffs and Trade 1994. 31 Woolcock et al. (2007), pp. 236–259. 26

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proposed by Jacob Viner in his 1950s book “The Customs Union Issue”.32 Trade creation refers to a situation whereby members of a regional trade agreement grant tariff concessions to each other, leaving tariff on imports from non-members unconstrained. The resulting effect of the granted tariff preferences is that they are likely to increase trade between member countries of the regional trade agreement (trade creation) but can also lead members to substitute imports previously sourced from non-members to members within the regional trade area (trade diversion). However, it is important to note that Viner’s theory has subsequently been criticized in the sense that it mainly applied to “shallow” trade agreements.33 These are regional trade agreements that solely centre on trade in goods. Currently, regional trade agreements have expanded their framework to include aspects such as intellectual property, competition policy and trade in services.

3.1

Overview of the African Continental Free Trade Area: Scope, Objectives and Principles

The Agreement establishing the African Continental Free Trade Area was signed on 21 March 2018 in Kigali, Rwanda. It subsequently came into force on 30 May 2019 after receiving the required number of ratifications (22).34 AfCFTA forms part of the objective of African countries in establishing an African Economic Community by 2063.35 This objective is embodied in the Abuja Treaty which was adopted in June 1991. AfCFTA seeks to create a common market within the continent, boost intraAfrican trade, increase competition in trade and address the problem of multiple membership in Regional Economic Communities (RECs) among African countries.36 AfCFTA is a regional trade arrangement that takes the form of a free trade area. Article XXIV GATT allows WTO members to sidestep their MFN obligations in order to form either a customs union or a free trade area.37 Such regional arrangements are allowed to exist within the WTO multilateral trading system because of their role in the promotion of trade liberalization through the removal of barriers to substantially all trade between members to such agreements.38 To this end, regional

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Mattoo et al. (2019). Woolcock (2003), pp. 18–19. 34 Article 23 Agreement establishing the African Continental Free Trade Area. 35 Article 6 Treaty Establishing the African Economic Community available at https://au.int/sites/ default/files/treaties/7775-treaty-0016_-_treaty_establishing_the_african_economic_community_ e.pdf. 36 Article 3 Agreement Establishing the African Continental Free Trade Area, available at https://au. int/sites/default/files/treaties/36437-treaty-consolidated_text_on_cfta_-_en.pdf. 37 Article XXIV General Agreement on Trade and Tariffs. 38 Gathii (2011), p. 86. 33

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trade agreements should aim to “facilitate trade between constituent territories and not raise trade barriers to the trade of other contracting parties”.39 In 2012, the idea of an Africa free trade area was re-invented during the 18th session of African Heads of States and Governments that took place in Addis Ababa, Ethiopia. The session resolved to establish an African free trade area by 2017.40 Unfortunately, this did not come to pass. As a result, further initiatives were channelled through the 2017 Action Plan for Boosting Intra-African Trade (BIAT).41 The action plan is based on eight broad clusters including trade finance, trade policy, market integration, and trade facilitation, infrastructural development that boosts trade, productive capacity, trade information and factoring market integration.42 The BIAT was successful in that it saw the coming into force of the AfCFTA Agreement on 30 May 2019 after receiving the minimum number of ratifications by states (22).43 AfCFTA aims to bring together 55 African states which have a combined GDP of US$3.4 trillion and a market of over 1.2 billion people. Currently, the number of countries which have ratified the AfCFTA Agreement is 27 with Nigeria being the latest country to sign and ratify it.44 The AfCFTA commenced its operation in January 2021 despite the suspension of its coming into force due to the novel corona virus disease. As mentioned earlier in this paper, the AfCFTA seeks to create a common market for goods and services as well as to facilitate the free movement of people and investments. These initiatives are geared towards the end goal, which is the creation of a customs union in Africa. The AfCFTA also aims to boost intra-African trade and create a common market for the whole continent. This will be achieved through coordination and harmonization of RTAs which are the building block of the AfCFTA. All these achievements will be made possible through the AfCFTA protocols on goods, services, investment, the free movement of people, dispute resolution, among others. Article 25 AfCFTA Agreement expressly excludes reservations.

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Article XXIV of The General Agreement on Tariffs and Trade 1948. African Union webpage: African Union Decision and Declarations: Assembly of the African Union Eighteenth Ordinary session available at https://au.int/en/focus-countries/ethiopia. 41 African Union webpage available at https://au.int/. 42 Article 23 African Union, Action Plan for Boosting Intra African Trade 2012. 43 Agreement Establishing the African Continental Free Trade Area. 44 African Union Webpage: List of countries which have signed, ratified or acceded to the Agreement establishing the African Continental Free Trade Area available at https://au.int/sites/default/ files/treaties/36437-sl-AGREEMENT%20ESTABLISHING%20THE%20AFRICAN%20CONTI NENTAL%20FREE%20TRADE%20AREA.pdf. 40

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Dispute Resolution in the African Continental Free Trade Area

Dispute resolution is a critical element of a regional trade agreement. The arrangement of settling disputes as put forth by Stefan Szepesi is one of the elements that determine the overall credibility of an international trade agreement as an instrument that can be enforced.45 He goes further to opine that in trade agreements, an effective dispute resolution mechanism can help to demonstrate that the parties are committed to the agreed elimination of trade barriers or will not impose unilateral measures which defeat the overall objective of the regional trade agreement. He further concludes that, “any provision of dispute resolution in a regional trade agreement has a two-fold objective (a) deterrence of the parties from violating the provisions of the agreement and (b) prevention of the member states from imposing counter measures in the event that a dispute arises.” This assertion is supported by Olabisi Akinkugbe who opines that, dispute settlement systems play a key role in international economic integration. In his view, an active, independent, efficient, and reliable dispute settlement mechanism is essential to not only the settling of disputes between state parties in upholding a rules-based regime; but also, critical to developing relevant jurisprudence that will guide the single market economy objective of the constituent trade agreement.46 One of the objectives of the African Continental Free Trade Area is to establish a mechanism for the settlement of disputes concerning the rights and obligations of the parties.47 Notably, Article 20 AfCFTA Agreement speaks to the fact that substantive provisions on dispute resolution shall be effected through the AfCFTA Protocol on Rules and Procedure on Settlement of Disputes (AfCFTA DSM Protocol).48 The Protocol’s applicability extends to disputes between AfCFTA state parties and also creates a dispute settlement mechanism that is modelled on the one of the WTO.49 Further, the AfCFTA dispute settlement system mirrors the WTO dispute settlement system by providing predictability and security to the African regional trading system.50 The Protocol aims to provide a dispute resolution mechanism that is fair, transparent, and accountable. The Protocol establishes a Dispute Settlement Body (DSB) which is key to the dispute resolution process. The DSB is comprised of a chairperson who is elected by the state parties. Representatives of the AfCFTA state parties also form part of the DSB. The DSB’s mandate is to establish Dispute Settlement Panels and an Appellate Body; adopt Panel and Appellate body reports, maintain surveillance of the 45

Szepesi (2004), p. 1. Akinkugbe (2020), p. 138. 47 Article 4 of The African Continental Free Trade Area Agreement 2018. 48 Article 20 of The African Continental Free Trade Agreement, 2018. 49 Article 20(1) of The African Continental Free Trade Agreement, 2018. 50 Article 4 African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 46

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implementation of rulings and recommendations of the Panels and the Appellate Body; and authorize the suspension of concessions and other obligations under the Agreement.51 Decisions to be taken by the DSB shall be by consensus.52 Apart from the mainstream resolution of trade disputes through litigation, the protocol makes provision for other dispute resolution mechanisms such as mediation, conciliation, good offices and consultations.53 This paper holds the position that these alternative dispute resolution mechanisms are particularly important since African countries rarely litigate against each other in matters relating to trade disputes. This assertion is also supported by Victor Mosoti, who states that African countries have largely been absent as key players at the WTO dispute settlement mechanism.54

3.3

The Procedure for the Settlement of Disputes Under AfCFTA

Similar to the WTO dispute settlement system, the first step to dispute resolution under the AfCFTA is an attempt by the parties to resolve their differences through consultations. Consultations are to be held with a view to encouraging the amicable resolution of disputes under the Agreement. The complainant state is required to send a formal written notification to the DSB of its intention to hold consultations with the respondent state. The notification is supposed to highlight the legal issues and give an indication of the legal basis of the complaint. The request has to be answered within 10 days, unless agreed otherwise. The Protocol stipulates that consultations shall be entered into by both parties in good faith. Consultations ought to be confidential and should not prejudice the rights of any state party.55 The period for consultations is 60 days. If no consensus is reached at the consultation stage, then the complainant may request the DSB to establish a panel to determine the dispute.56 The panellists are selected from a list of individuals proposed by each state party and maintained by the secretariat. Apart from having sufficient expertise on the matter at hand, the panellists are supposed to (a) have experience in law or international trade, (b) be 51

Article 5(3) of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 52 Article 5(6) of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 53 Article 8. African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 54 Mosoti (2006), p. 9. 55 Article7 of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 56 Article 8 of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes.

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chosen strictly on the basis of objectivity, (c) be independent and impartial and lastly (c) adhere to the code set by the DSB and approved by the Council of Ministers.57 To ensure the integrity of the whole dispute resolution process, the panellists shall act in their own individual capacity and not as representatives of their governments or organisations they are affiliated to.58 The main mandate of the panel is to assist the DSB in undertaking its obligations under the AfCFTA Agreement. To achieve this, the panels are tasked with the responsibility of conducting an objective assessment of the facts and the relevant law to enable the DSB to come up with recommendations and rulings. The panellists also have the flexibility of setting their own timetable for conducting the proceedings. The panel report is supposed to be issued within a period of 5 months, with the only exception to this rule being a time period of one and a half months for disputes relating to perishable goods.59 Any state party to the dispute that is aggrieved may have recourse to the Appellate Body established under the Articles of the Protocol. The Appellate Body is comprised of seven members; however, any decision may be taken by three members. Only the parties to the dispute at the panel stage may appeal against the panels’ decision to the Appellate Body. The Appellate Body has a period of 90 days to come up with a report. Such a report is final and is to be adopted by the DSB, unless there is consensus among the state parties for the decision not to be adopted. With regard to enforcement under the Protocol, state parties are under an obligation to comply with the recommendations and rulings of the DSB. In the event that the defaulting state does not comply with such recommendations and rulings, the aggrieved state may either suspend concessions or demand compensation. Concessions are essentially trade privileges in form of tariff exemptions extended from one state party to the other. It is important to note that the two latter remedies are only temporary in nature. Lastly, parties to a dispute have the option of instituting arbitration proceedings as an alternative to the AfCFTA dispute resolution process.60

3.3.1

Mediation, Conciliation and Good Offices Under the AfCFTA

Article 8 AfCFTA DSM Protocol provides for good offices, conciliation and mediation. Sometimes, the involvement of an outside, independent person unrelated to the parties of a dispute can help the parties to find a mutually agreed solution.61 Just 57

Article 10(3) of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 58 Article 10(10) of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 59 Article 15(4) of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 60 Article 25 of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 61 Article 8 of the Protocol on Rules and Procedures on the Settlement of Disputes.

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like consultations, proceedings that involve good offices, conciliation and mediation are confidential and do not prejudice the rights of the state parties in any future proceedings. Good Offices, conciliation and mediation may be instituted and terminated at any time by the state parties to the dispute but not prior to a request for consultations. However, when a request for good offices, conciliation and mediation is made after a request for consultations, the complaining party has to wait for the good offices, conciliation and mediation to run its 60 days course before requesting the establishment of a panel, except in cases where the parties jointly consider that the good offices, conciliation and mediation procedure has failed to resolve the dispute. In some cases, the state parties may agree that the procedure continues while the panel stage is initiated and set in motion.

3.3.2

Arbitration Under the AfCFTA

The Protocol provides for the use of consultations, mediation, the Dispute Settlement Body and arbitration to settle disputes arising from the Agreement.62 Notably, the Protocol provides that the DSB will only hear disputes from state parties to the AfCFTA Agreement. Despite the foregoing provisions, it also provides for arbitration as an elective process that state parties may opt for. It specifically provides that “where the parties to a dispute consider it expedient to have recourse to arbitration as the first dispute settlement avenue, the parties to a dispute may proceed with arbitration as provided for in Article 27 of this Protocol.”63 Article 27 AfCFTA DSM Protocol provides that “parties to a dispute may resort to arbitration subject to their mutual agreement and shall agree on the procedures to be used in the arbitration proceedings.”64 Such a referral of a dispute to arbitration shall bar parties from simultaneously referring the same matter to the dispute settlement mechanism. “The parties to an arbitration proceeding shall abide by the arbitration award and the award shall be notified to the DSM for enforcement.”65 However, such arbitration seems to be only on trial basis since the Protocol provides that “in the event of a Party to a dispute refusing to cooperate, the Complaining Party shall refer the matter to the DSB for determination.”66 Where arbitration awards are not contested, the same “shall be enforced in accordance with the provisions of Articles 24 and 25 of this Protocol mutatis mutandis.”67

62

Articles 4 (27) of the Protocol on Rules and Procedures on the Settlement of Disputes. Article 6(6) of the Protocol on Rules and Procedures on the Settlement of Disputes. 64 Article 27(1) of the Protocol on Rules and Procedures on the Settlement of Disputes. 65 Article 27(5) of the Protocol on Rules and Procedures on the Settlement of Disputes. 66 Article 27(6) of the Protocol on Rules and Procedures on the Settlement of Disputes. 67 Article 27(7) of the Protocol on Rules and Procedures on the Settlement of Disputes. 63

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Concurrent Jurisdiction Between the Dispute Settlement Systems

The relationship between WTO law and RTAs is regulated by Article XXIV GATT, Article V GATS and the Enabling Clause. The Enabling Clause mostly facilitates the creation of regional trade agreements between developing and least developed countries. It was adopted in 1979 as a result of the Tokyo Round of trade negotiations68 and provided for stronger legal basis for the special and differential treatment of developing countries.69 Essentially, the Enabling Clause serves as an exception to Article I GATT by allowing WTO members to grant preferential treatment to developing and least developed countries without granting the same preferences to the other contracting parties. However, the provision of such preferential treatment to developing countries and least developed countries through the Enabling Clause should facilitate trade and not create barriers to trade.70 With respect to regional trade arrangements between developing countries, Paragraph 2(c) of the Enabling Clause acknowledges that it is applicable to regional and global agreements among less-developed contracting parties. Such RTAs should be for the reduction of tariffs and should have been formed according to the procedure agreed upon by the contracting parties. The Enabling Clause does not specify as to whether such RTAs should be either a customs union or a free trade area. The notification of membership to a regional trade agreement among developing countries by a member country of the regional trade agreement should be made to the WTO Committee on Trade and Development. The Committee has the mandate of examining such regional trade agreements formed under the auspice of the Enabling Clause.71 It has additional functions such as monitoring the participation of developing countries in the multilateral trading system and overseeing the implementation of transparency mechanisms in Preferential Trade Agreements (PTAs). In addition to notifying the WTO Trade and Development Committee, developing countries forming a regional trade agreement are required to notify other WTO members and provide them with an opportunity to engage in consultations.72 The requirement of notifying all other WTO members was included to increase transparency in the formation and existence of RTAs.

68

World Trade Organisation, Differential and more favourable treatment reciprocity and fuller participation of developing countries available at https://www.jus.uio.no/lm/wto.gatt.developing. countries.enabling.clause.1979/landscape.a4.pdf. 69 Gathii (2011), p. 122. 70 World Trade Organisation, Differential and more favourable treatment reciprocity, and fuller participation of developing countries available at https://www.wto.org/english/docs_e/legal_e/ enabling1979_e.htm (Enabling Clause), Paragraph 3(a). 71 World Trade Organisation, Committee on Trade and Development, available at https://www.wto. org/english/tratop_e/devel_e/d3ctte_e.htm. 72 WTO Legal Note on Regional Trade Agreements under the Enabling Clause 13 May 2013, WT/COMTD/W/114.

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Over the years, RTAs have been embraced by many countries as trade policy instruments, and in the best of cases, as a complement to the MFN principle.73 According to Jagdish Bhagwati, the resulting effect is that the more agreements countries conclude amongst themselves, the more complex trade agreements become making trade liberalization an exercise in futility. In simple terms, he describes such a phenomenon as “the spaghetti bowl effect.”74 This same scenario has been replicated in Africa whereas as of 2021, the African Union has recognised eight Regional Economic Communities.75 This problem has been acknowledged by the AfCFTA and to end it, it seeks to address the problem of multiple and overlapping membership in regional trade agreements across the continent.76 Most regional trade arrangements incorporate dispute resolution clauses into the agreements establishing them. Others go ahead setting out detailed procedures on dispute resolution in separate protocols to the main agreement. An example is the African Continental Free Trade Area. Since the legality of regional trade arrangements stems from the WTO, there is often an inter-relationship between the dispute resolution mechanisms found in RTAs and that of the WTO. This inter-relationship may be explained by two main concepts: (a) choice of forum clauses and (b) concurrent jurisdiction. The inter-relationship between the two DSMs has over time been a subject of conflict in international trade law.77 In as much as the AfCFTA DSM has not dealt with any dispute at the time of writing this paper, this section expounds how the AfCFTA attempts to resolve such a conflict. According to Ljiljana Biukovic, “the types of dispute resolution regimes chosen by the parties to an international treaty usually reflect the depth of integration the parties seek to achieve. Furthermore, it displays the economic and political goals underpinning the attempted integration including the level of internal or domestic support for the agreement in each participating state, the relationship between the parties to the RTA, and the parties’ attitudes towards the role of international institutions and the institutions’ dispute resolution mechanisms.78” Biukovic further opines that, “a rule-based dispute resolution mechanism would be beneficial to a developing country that lacks international economic, legal and political influence. Even further, if the treaty is more comprehensive then it has the effect of promoting deeper integration between the parties.” Gabrielle Marceau and Kyung Kwak set out that, “the relationship between the dispute settlement mechanism of the WTO and those of regional trade agreements illustrates the difficulties surrounding the issue of overlap or conflict of jurisdiction

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Crawford and Fiorentina (2005), p. 39. Bhagwati (1995), p. 1. 75 African Union Website: Regional Economic Communities available at https://au.int/en/recs. 76 Article 3 of the African Continental Free Trade Area Agreement 2018. 77 This was a matter in consideration in the Mexico – Tax Measures on Soft Drinks and Other Beverages, WT/DS308/AB/R, (Soft Drinks case). 78 Biukovic (2012), pp. 110–115. 74

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and of hierarchy of norms in international law.79” They further state that, “when the dispute settlement mechanisms of two agreements are triggered in parallel or in sequence, there are problems on two levels: two tribunals may claim final jurisdiction (supremacy) over the matter, and they may reach different, or even opposite results.”

3.3.4

Choice of Forum Clauses in Regional Trade Agreements

As mentioned above, most RTAs have their own dispute settlement mechanism alongside that provided for by the WTO. To the extent that the obligations set out in an RTA are similar to that provided for under the WTO Agreements, a violation of either of the two sets of obligations would trigger both DSMs. If hypothetically, both DSMs were to decide on a matter, then a situation could arise where the two might come up with conflicting decisions. To avoid this problem, member states to an RTA have three options: (a) to decide that the WTO DSM would have exclusive jurisdiction on matters relating to disputes under the RTA, (b)80 to opt for dispute resolution under the RTA to the exclusion of the WTO’s DSM and lastly (c) to allow the two disputing states to only choose either one of the two forums, a concept which is referred to as a fork-in-the-road clause. According to Caroline Henckels, “the DSM options available to a state party ordinarily depend on the type of regional arrangement, they are a party to.” She states that, “customs unions and closely integrated regional trade agreements often confer exclusive jurisdiction on the dispute settlement mechanism, precluding members from bringing the dispute to the WTO. FTAs, by contrast, usually allow parties to choose their preferred forum, although many of these agreements prevent the parties from bringing the claim a second time to another tribunal.81”A choice of forum clause in the context of international trade law, is therefore the selection of a dispute settlement mechanism by disputing state parties. The choice of forum clause in RTAs may also be complimented by a fork-in-the-road provision or exclusive forum clauses. Gabrielle Marceau states that these clauses may lead to an apparent and temporary jurisdictional conflict since in principle the WTO DSM cannot be restrained from exercising its jurisdiction over a dispute between state parties.82 When fork-in-the road clauses appear in WTO proceedings, the first problem which arises is that these clauses do not have a legal basis in the WTO Agreements.83 Although in the Mexico – Taxes on Soft Drinks case the fork-in-the-road provision was found to be an impediment to the jurisdiction of the WTO panel, the WTO Appellate Body did not specify on which particular legal grounds it relinquished its

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Kwak and Marceau (2002), p. 83. Molina and Khoroshavina (2018). 81 Henckels (2008), p. 3. 82 Marceau (2015), p. 15. 83 Pauwelyn and Salles (2009), pp. 19–20. 80

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jurisdiction. In the light of the debate on the applicable law before the WTO adjudicative bodies, the probability of successful invocation of the fork-in-the-road provision is fifty-fifty.

4 Concurrent Jurisdiction Between the WTO Dispute Settlement Mechanisms and Dispute Settlement Mechanisms Under Regional Trade Agreements The WTO’s DSM as on division of the multilateral trading system is not immune to challenges. One such challenge is the proliferation of RTA’s.84 When RTAs include their own dispute settlement mechanisms alongside that provided for by the WTO, a situation arises whereby there is an overlap of jurisdiction between the two DSMs. Such a circumstance may be conceptualised as concurrent jurisdiction. According to Gabrielle Marceau, such an overlap of jurisdiction may arise in a situation where a dispute between two state parties is brought before two distinct fora or DSMs. William J. Davey and Andre Sapir, on the other hand, expound a situation whereby a member to a Regional Trade Agreement challenges another state member before said RTA DSM and additionally approaches the WTO DSM. This, according to the two, is a concept known as “double breach”.85 Such an overlap poses the risk of forum shopping and the fragmentation of international trade law caused by conflicting decisions from different DSMs on the same issues. It would gravely undermine the security and predictability of both the WTO DSM and the dispute settlement mechanisms established under RTAs.86 According to Volker Wiese, “the issue of concurrent jurisdiction can either result in a negative or a positive conflict of jurisdiction. A negative conflict of jurisdiction occurs in a situation where no international court is willing to accept jurisdiction over the matter.87 The danger of a negative conflict of jurisdiction is that it results in the obstruction as well as denial of justice. A positive conflict of jurisdiction, on the other hand, refers to a case where every international court is prepared to accept jurisdiction over the case. It results in forum shopping which is detrimental to defendants who deserve fairness.” Many RTAs provide for compulsory jurisdiction mandating member states to refer their disputes to an institution established under the Regional Economic Communities.88 However, some RTAs provide for forum shopping or a forum choice clause, allowing the settlement of a dispute either in the RTA forum or in the WTO forum at the discretion of the complaining party. Other RTAs contain 84

Marceau and Wyatt (2010a, b), p. 69. Davey and Sapir (2009), p. 23. 86 Nguyen (2008), p. 115. 87 Wiese (2018), p. 17. 88 Kwak and Marceau (2002), p. 85. 85

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exclusive forum clauses (fork-in-the-road clauses), in addition to the choice of forum clause, providing that, once a matter has been brought before either forum, the procedure initiated shall be used to the exclusion of any other. Article 23.1 DSU states that “when members seek the redress of a violation of obligations or other nullification of impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by the rules of procedures of this Understanding”.89 Furthermore, Article 23.2 prohibits WTO members to “make a determination to the effect that a violation has occurred except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding”.90 In as much as Article 23 DSU is a specific treaty clause that seems to prevent other jurisdictions from adjudicating WTO law violations,91 there exits is no clear rule as regards the relationship between the WTO jurisdiction and other jurisdictions. Article XXIV GATT does not make any reference to the dispute settlement mechanisms of RTAs. To govern this issue, a set of principles have been developed. Some of these principles are applicable in a scenario where a state, by initiating a second proceeding on the same matter, may be viewed as abusing its procedural rights.92 Other private international law principles applicable to resolve such jurisdiction overlaps are: (a) the forum conveniens doctrine which provides that “a court taking jurisdiction on the ground that the local forum is the appropriate forum (or an appropriate forum) for trial or that the forum abroad is inappropriate.”93 With reference to WTO disputes Article 23 DSU reflects the clear intention of WTO Members to ensure that WTO adjudicating bodies can always exercise exclusive jurisdiction on any WTO-related claim. The WTO forum is always a “convenient forum” for any WTO grievance; in fact, it seems to be the exclusive forum for WTO matters. The other applicable principle is lis alibi pendens which is related to the doctrine of res judicata. The lis alibi pendens principle provides that “once a process has begun, no other parallel proceedings may be pursued. The object of the lis alibi pendens rule is to avoid a situation in which parallel proceedings, involving the same parties and the same cause of action, simultaneously continue in two different states, with the possible consequence of irreconcilable judgments.”94 According to Yuval Shany, “a proper examination of Article 23 DSU has to be made in accordance with the Vienna Convention on the Law of Treaties (VCLT). Article 31.1 VCLT provides that first recourse should be had to the method of objective treaty interpretation, meaning “in good faith and in accordance with the

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Article 23.1 of the Understanding on the Rules and Procedure governing the settlement of disputes. 90 Article 23.2 of the Understanding on the Rules and Procedure governing the settlement of disputes. 91 Yannaca-Small (2008), p. 1015. 92 Zang (2018), p. 22. 93 Wu (2007), p. 91. 94 Wu (2007), p. 93.

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ordinary meaning” of the words.95”Article 23.2 DSU bars the unilateral “determination” by members that a treaty has been breached. Therefore, if members “seek the redress of a violation” of a WTO-covered agreement then the WTO DSM is the compulsory forum.96 The interplay between the WTO DSM and the DSM under a regional trade arrangement has been a matter of deliberation within the WTO. In the Mexico – Taxes on Soft Drinks case,97 which related to the market of sweeteners, the US and Mexico being both member states of the North Atlantic Free Trade Agreement (NAFTA) disputed over the imposition of export restrictions by the US on sweeteners from Mexico. One of Mexico’s arguments was that the dispute should be referred to the NAFTA panel as opposed to the WTO DSB. The panel in its decisions while disagreeing with Mexico’s request, stated that the DSU did not allow the panel to decline the exercise of jurisdiction over a matter that had been properly placed before it. In Mexico – Taxes on Soft Drinks, Mexico initially referred the dispute concerning the USA’s dumping of sweeteners to the North American Free Trade Agreement (NAFTA Agreement) tribunal which by virtue of Article 2005 NAFTA Agreement had exclusive jurisdiction once chosen as an appropriate forum (fork-inthe-road clause). The USA refused to appoint the panellists for the NAFTA tribunal to hear the case. In response, Mexico adopted a 2% tax on imports of sweeteners other than sugar. The USA brought the claim before the WTO panel arguing that Mexico’s increase in tax is discriminatory. Mexico argued that the dispute between the USA and Mexico should be resolved only by the NAFTA tribunal, which confirmed its exclusive jurisdiction, but could not proceed with the resolution of the dispute due to the bad faith actions of the USA. Consequently, the WTO panel confronted the issue whether it should have seized itself of the dispute regardless of the declared NAFTA tribunal’s jurisdiction. Mexico’s main argument was that the claim brought before the WTO panel was inextricably linked to a wider dispute in the context of the NAFTA Agreement.98 Mexico insisted that the NAFTA tribunal had exclusive jurisdiction over the case which would have been exercised but for the USA’s bad faith inaction. Hence, Mexico suggested, the WTO panel should relinquish its jurisdiction in favour of the NAFTA tribunal. To support its position that the WTO panel is empowered to abstain from exercising its jurisdiction over substantive issues, Mexico relied on the principle of judicial economy and the principle of implied jurisdictional powers.

95

Article 31 of the Vienna Conventions on the Law of Treaties. Shany (2004), p. 1016. 97 Panel Report, Mexico – Tax Measures on Soft Drinks and Other Beverages, WTO Doc WT/DS308/R (7 October 2005) (‘Mexico – Taxes on Soft Drinks’); Appellate Body Report, Mexico – Taxes on Soft Drinks and Other Beverages, WTO Doc WT/DS308/AB/R (6 March 2006). 98 Report of the Panel Mexico – Soft Drinks case, paras. 5.311, 8.206. 96

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The principle of judicial economy entails that the WTO panel does not have to rule on each and every argument invoked by the disputing party.99 As for the principle of implied jurisdictional powers, it means that each tribunal has an inherent competence to determine whether it has jurisdiction and in the absence of it to refrain from considering the case (la compétence de la compétence). Regarding the “broader dispute” argument on which Mexico laid so much emphasis, the USA did not contest the presence of a dispute under the NAFTA Agreement, but rather claimed that the dispute brought before the WTO panel was distinct in terms of its legal basis.100 The USA maintained that the NAFTA dispute concentrated on market-access obligations under the NAFTA Agreement and, thus, it was not legally connected with the dispute on allegedly discriminatory taxes within the WTO legal framework. Hence, the USA declared that if the WTO panel refused to consider the dispute on the alleged inconsistency of Mexico’s tax measures with Article III GATT which was properly brought before it in conformity with all procedural requirements, it would diminish the USA’ rights. The WTO panel and subsequently the WTO Appellate Body essentially upheld the USA’s arguments in reliance on Articles 3.2 and 19.2 DSU. The WTO Appellate Body confirmed the operation of the principle of implied jurisdictional powers within the WTO legal system.

4.1

Concurrent Jurisdiction: A Case Study of the AfCFTA

The AfCFTA seeks to economically integrate all the countries in the continent. The majority of African countries are members to the WTO except for Sudan, Ethiopia, and Algeria.101 This paper posits that in the event of a dispute among African countries which are both members of the WTO and the AfCFTA, the matter can be referred to either the WTO dispute settlement system or the AfCFTA mechanism to the resolution of disputes. However, if the parties seek redress in one of the two dispute resolution systems, then the other option is not available to them. This is because both dispute resolution systems act as “courts” of first instance and not appeal mechanisms as will be explained below. The AfCFTA Dispute Resolution Protocol confirms this when it provides that a state party which has invoked the rules and procedures of the Protocol in relation to a specific matter it shall not invoke another dispute resolution forum with regard to the same matter.102 Later on in the dispute resolution procedure, the Protocol establishes

99

Frischtak (2005), p. 950. Mitchell and Heaton (2019), pp. 55–56. 101 WTO list of members and observers available at https://www.wto.org/english/thewto_e/whatis_ e/tif_e/org6_e.htm. 102 Article 3(4) of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 100

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that the dispute settlement body shall decide the matter (the dispute between state parties) and in doing so, its decision shall be binding and final to the parties to the dispute.103 In essence, this means that an AfCFTA member state cannot resort to the WTO DSB or any other Regional Economic Communities’ dispute settlement system after the institution of dispute settlement proceedings under the AfCFTA DSM. According to Mihreteab Tsighe, “the African Continental Free Trade Area and its supplemental Protocol on Rules and Procedures on the Settlement of Disputes has emerged at a peculiar time. A time where multilateralism in general and International Courts (ICs) in particular are in a state of crisis, with states pulling out or threatening to withdraw from international organization and ICs.104” The AfCFTA does not mention if, or when its members should have recourse to the WTO. Article 3 AfCFTA DSM Protocol precludes sequential or simultaneous filings, but it is not clear whether this is a claim of exclusive jurisdiction. This paper opines that the absence of a clear forum shopping provision may result in rivalling bodies of case law and thus, could become a serious concern. In turn, it would undermine the predictability of rules-based trade within Africa, and between the AfCFTA and the rest of the world.

4.2

Similarities Between the Two Dispute Settlement Systems

The AfCFTA dispute resolution mechanism mirrors the one set by WTO. Olabisi Akinkugbe holds the view that it is not fatal to transplant the WTO dispute settlement system into a regional trade agreement. The success of such transplant will, however, depend on the extend of the adaptation to the social and political realities of the destination.105 This paper agrees with this assertion in the sense that even though the AfCFTA adopts a similar dispute resolution process as the WTO, it places more emphasis on alternative dispute resolution mechanisms such as negotiation and good offices. This is particularly important, since African states rarely litigate against each other on matters relating to international trade. The DSM of the African Continental Free Trade Area is similar to the WTO DSM in the following: Firstly, consultations, since both DSMs require the disputing parties to attempt to solve the dispute by consultations before resorting to the panel stage. Both provide for other alternative dispute resolution mechanisms such as good offices, conciliation, and mediation. Secondly, parties that fail to come up with a solution at both AfCFTA and the WTO DSM proceed to the panel stage. Thirdly, both DSMs establish an Appellate Body whose mandate is to determine

103 Article 5 of the African Continental Free Trade Area Protocol on Rules and Procedure on the Settlement of Disputes. 104 Tsighe (2019). 105 Akinkugbe (2020), p. 140.

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appeals from the panel stage. Fourthly, both DSMs are overseen by a dispute settlement body whose obligation is to ensure that the decisions of the panels and the appellate body are adopted. Another key similarity between the WTO DSM is the provision of arbitration as an alternative dispute resolution mechanism. Article 25 DSU makes provision for arbitration. This provision has been utilised by the European Union and other states in establishing the Multi Party Interim Appeals Arbitration Arrangement.106 As previously highlighted, the AfCFTA Agreement at Article 27 of the AfCFTA also precludes a member state to the Agreement from approaching another DSM upon instituting a dispute at the AfCFTA DSM. The key distinction between the AfCFTA DSM and the WTO DSM relates to the appointment of members to the Appellate Body. Article 20 AfCFTA DSM Protocol sets out that the DSB shall appoint persons to serve on the AB for a 4-year term, and each person may be reappointed once. A person appointed to replace a person whose term of office has not expired shall hold office for the remainder of the predecessor’s term. The DSB shall appoint a person to fill the vacancy within 2 months from the date the vacancy arose. Where the DSB fails to appoint a person to fill the vacancy within 2 months, the Chairperson of the DSB in consultations with the Secretariat shall within a period of 1 month fill the vacancy. Another distinction between the two dispute settlement mechanisms is that in the AfCFTA, unlike under the WTO, good offices, conciliation and mediation may commence at any time and do not require consultations to have taken place.

4.3

Lessons Learned from Previous Dispute Resolution Systems Applied in Africa for the AfCFTA Dispute Resolution Mechanism

According to Wilfred Mutumbwa, “the establishment of a reliable, independent, efficient, and acceptable continental dispute resolution in Africa will play an important role in strengthening the regional integration efforts.107” He points out that some of the problems facing the formal adjudication of disputes in the continent is the lack of supremacy of their decisions over national courts. This is particularly true especially with reference to the Southern African Development Community (SADC) tribunal which was suspended in 2010 after delivering several judgements against Zimbabwe.108 Therefore, for the AfCFTA DSM to retain its legitimacy, member states must be willing to comply with decisions against them.

106

European Union, Interim Appeal arrangement for WTO disputes becomes effective available at https://trade.ec.europa.eu/doclib/press/index.cfm?id¼2143. 107 Mutumbwa (2021), p. 91. 108 Southern African Development Community available at https://www.sadc.int/about-sadc/sadcinstitutions/tribun/.

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Another challenge associated with regional and sub-regional courts in the continent is that the private sector prefers dispute settlement before administrative organs to litigation in national courts in matters relating to trade and investment.109 The likelihood of this problem arising has been diminished by the AfCFTA DSM, since it only provides state parties with legal standing. However, state parties rarely trade among each other and trade transactions mostly involve corporate entities within their territory. Therefore, it would be prudent for the AfCFTA DSM to extend locus standi to natural persons and companies. This approach has been adopted by courts of justice of the Common Market for the Eastern and Southern Africa (COMESA), the Economic Community of West African States (ECOWAS) and the East African Community (EAC).

5 Conclusion This paper has highlighted the importance of an effective dispute resolution system not only in the multilateral trading system but also at a regional level, more so in Africa. It has illustrated how the two systems interact in so far as concurrent jurisdiction exists. The paper went ahead by pointing out the effect of an African country instituting dispute settlement in either of the two systems. The resulting effect being that once the dispute resolution mechanism under the AfCFTA has been triggered by an African state then the same state cannot seek to settle the dispute under the WTO Dispute settlement System. It highlighted the dispute resolution procedures both at the WTO and under the AfCFTA. Finally, it sets out the lessons the AfCFTA DSM can draw from DSMs existing in Regional Economic Communities prior to its creation and the WTO. The more profound lessons being the extension of locus standi to individuals to appear before the court and the unique procedure of appointing Appellate Body members that the AfCFTA has come up with.

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Payosova T, Clyde G, Schott J (2018) The dispute settlement crisis in the World Trade Organisation: causes and cured. Peterson Institute for International Economics, Policy Brief 18(5), pp 1–11 Qureshi AH, Gao X (1999) International economic law. Routledge Shany Y (2004) The competing jurisdictions of international courts and tribunals. Oxford University Press, Oxford, pp 348–350 Shedd DT, Murill BJ, Smith J (2012) Dispute settlement at the World Trade Organisation: an overview. Congressional Res Serv 7(500):4–8 Szepesi S (2004) Comparing EU Free Trade Agreement Dispute Settlement, In Brief. Heidi Ullrich, London School of Economics 6, pp 1–2 Tsighe M (2019) Can the dispute settlement mechanism be a crown jewel of the African continental free trade area? Afronomicslaw of 8 April 2019 Wiese V (2018) Private international law and the legal harmonisation in an economic union: key aspects of the European experience in harmonisation of laws in the East African Community: The State of Affairs with comparative insights from the European Community and other regional economic communities. TGCL Series 5 Law Africa Woolcock S (2003) A framework for assessing regional trade agreements WTO plus. In: Sampson GP, Woolcock S (eds) Regionalism, multilateralism and economic integration: the recent experience. United Nations University Press, pp 18–19 Woolcock S et al (2007) Competing regionalism-patterns economic impacts and implications for the multilateral trading systems. Intereconomics 42(1):236–259 Wu T (2007) The world trade law of censorship and internet filtering. Chic J Int Law 7(1):276–278 Yannaca-Small K (2008) The Oxford handbook of international investment law. Oxford University Press, Oxford Zang M (2018) When the multilateral meets the regionals: regional trade agreements at WTO dispute settlement. World Trade Rev 18(1):33–61

Annabel Nanjira is a Kenyan based lawyer who holds an LLM in International Trade and Investment Law from the University of Pretoria and a Bachelor of Laws Degree from Kabarak University. Her interest areas include; International Trade Law, Investment Arbitration and Regional Integration in Africa. She has previously worked with CUTS-Geneva, which is a non-governmental organisation that focuses on international economic law topics in developing countries. She has also worked as an intern at Trade Law Centre (TRALAC).

Legitimacy Crisis at the World Trade Organisation Appellate Body: Other Ways Than the MPIA? Georgie Juszczyk

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 What Is the Problem? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 What Is the Solution? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 What Is the MPIA? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 What Has the MPIA Achieved? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Is the MPIA Effective? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 An Effective Alternative Appeal Arrangement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 An Effective Solution to the Appellate Body Crisis? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The World Trade Organisation (WTO) is the foremost international organisation regulating the conduct of international trade law. It provides political and legal mechanisms through which Member-States’ rights and obligations regarding international trade law are negotiated, agreed upon, clarified, and enforced. As the primary means through which these rights and obligations are clarified and preserved, and as the last avenue of appeal in the WTO’s dispute settlement system, the Appellate Body is the ‘crown jewel’ of that system. However, the crown jewel has been ‘stolen’, and the Appellate Body hamstrung by the United States’ refusal to approve the appointment of Appellate Body members and satisfy its quorum— causing an ‘Appellate Body crisis’. This chapter contributes to the debate on resolving this crisis by analysing just one of the possible solutions—the Multiparty Interim Appeal Arbitration Arrangement (MPIA), an alternative appeal arrangement under Article 25 of the Dispute Settlement Understanding (DSU). The chapter argues that the crisis currently facing the Appellate Body is one of legitimacy, and the MPIA is not the correct forum for This chapter is correct as at the time of authorship. G. Juszczyk (*) Australian National University, Canberra, ACT, Australia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 87–120, https://doi.org/10.1007/8165_2021_75, Published online: 7 April 2022

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addressing questions about the identity of the WTO. For that reason, this chapter asserts that the MPIA is not a permanent solution to the Appellate Body crisis and explains why that is the case. Furthermore, it explains that—although not a solution—the MPIA offers important lessons which should be considered during any future reforms seeking to address the legitimacy crisis. This argument is conducted in four parts. Section 2 provides background and context to the legitimacy crisis—it explains the Appellate Body’s role and importance within the WTO, how the current crisis arose, and how this impacts the Appellate Body’s function. Section 3 outlines the theoretical framework upon which this chapter relies. Section 4 then uses a mix of interpretive techniques and contextual analysis to analyse the MPIA, make predictions as to its likely implementation, and assesses the MPIA’s effectiveness at addressing the criticisms of the Appellate Body that spurred the current crisis. Finally, Sect. 5 explores the chapter’s conclusion that, while the MPIA is not a permanent solution to the crisis, it provides guidance as how best to pursue reform(s) going forward.

1 Introduction Since 10 December 2019, the ‘crown jewel’ of the World Trade Organisation (WTO)—the Appellate Body—has been paralysed.1 Due to the United States’ (US) refusal to approve the appointment of new arbitrators to the Appellate Body, the Appellate Body no longer meets the required quorum of three arbitrators per case (also called a ‘division’) and is unable to hear appeals.2 The Multiparty Interim Appeal Arbitration Arrangement (MPIA),3 concluded by 17 WTO members (Member) (with 23 members as at the time of publication) on the 27 March 2020, is one possible solution to this crisis. It provides an alternative appeal arbitration arrangement under Article 25 of the Dispute Settlement Understanding (DSU).4 This chapter contributes to the debate on resolving the Appellate Body crisis by analysing the MPIA, making predictions as to its implementation, and evaluating its effectiveness. In doing so, it aims to fill a gap in the literature, as comprehensive interpretations of the MPIA have yet to be released. Section 2 briefly provides background and

Pascal Lamy, WTO Director-General, ‘Receiving honorary doctorate in Turkey, Lamy warns against remote global governance’, World Trade Organisation, 15 March 2013, . 2 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.1. 3 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) (Multi-Party Interim Appeal Arbitration Arrangement Pursuant to Article 25 of the DSU) (MPIA). 4 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 25. 1

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context to the ‘Appellate Body crisis’—it explains the Appellate Body’s function and importance within the WTO and outlines the consequences of its paralysis. Section 3 uses a combination of textual and contextual analysis to analyse and predict how the MPIA is likely to be implemented. Section 4 evaluates the MPIA’s effectiveness. This chapter argues that while the MPIA is ‘effective’ as an alternative appeal arrangement, it is not effective as a solution to the Appellate Body crisis as a whole. This is because the Appellate Body crisis is, at its core, an identity crisis, caused by conflicting visions for the Dispute Settlement System (DSS) and whether it should be an inherently legal or political institution. This chapter argues the MPIA is not the appropriate venue for deciding such questions. At best, the MPIA is an opportunity for Member-States to test-drive possible reforms to the crisis on a small scale.

2 What Is the Problem? The WTO is the foremost international organisation regulating the conduct of international trade law. It provides political and legal mechanisms through which Member-States’ rights and obligations under international trade law are negotiated, agreed upon, clarified, and enforced.5 The Dispute Settlement Body (DSB) facilitates the negotiation of these rights and obligations while the DSS enforces them. The DSS is unique in international law in that it is exclusive, compulsory, and contains both an initial and appellate stage.6 The first tier of the DSS are panels, which are convened on an ad hoc basis at the request of the complaining MemberState, after any preliminary consultations have concluded.7 Where disputing parties are dissatisfied with a panel decision they may file a notice of intention to appeal to the DSS’ second-tier, the Appellate Body.8 The Appellate Body can “uphold, modify or reverse the legal findings and conclusions of the panel” within its scope

This chapter assumes the objectives of the WTO—namely the ‘substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations’—are worthwhile goals: Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 1867 UNTS 3 (entered into force 1 January 1995). On whether free trade itself is a worthwhile objective, see van den Bossche and Zdouc (2017), Chapter 1. 6 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 6.1; Panel Report, United States – Sections 301–310 of the Trade Act of 1974, WT/DS152/R (22 December 1999) [7.43], [7.75]. 7 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 6.1. 8 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 16.4. 5

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of review.9 Appellate Body rulings and recommendations can then be “adopted by the DSB and unconditionally accepted by the parties to the dispute”10 via ‘reverse consensus’.11 Since 2017, the US has blocked the appointment of new arbitrators to the Appellate Body. On 10 December 2019, the terms of service for the two remaining Appellate Body arbitrators lapsed, leaving Hong Zhao as the sole member.12 While paralysed, the Appellate Body is unable to hear and complete appeals.13 Any notice of an intent to appeal thus becomes an ‘appeal into the void’.14 Appellate Body review was the quid pro quo for the institution of ‘reverse consensus’.15 It was reasoned that if panel decisions were to be quasi-automatically adopted, the Appellate Body should be able to correct potentially ‘problematic’ panel reports.16 Unlike other international dispute settlement bodies, the Appellate Body cannot do this through advisory opinions.17 Thus, paralysis prevents the Appellate Body from fulfilling one component of the DSU’s object and purpose, to “clarify the existing provisions. . . in accordance with customary rules of interpretation of public international law.”18 Panel reports that are ‘appealed into the void’ are also not legally binding.19 This is because countermeasures under Articles 21–22 DSU can only be authorised by the DSB in response to non-compliance with binding rules or recommendations that

9

Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Arts 17.13, 17.6, 19.2. 10 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Arts 16.14, 17.14. 11 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.14. 12 WTO, ‘Members urge continued engagement on resolving Appellate Body issues’ (News item, 18 December 2019) (last accessed 11 August 2021); WTO Secretariat’s Information and External Relations Division, ‘Members reiterate joint call to launch selection process for Appellate Body members’ (Media Release, 22 November 2019) (last accessed 11 August 2021). 13 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 16.4; Tetyana Payosova, Gary Clyde Hufbauer and Jeaffrey J Schott, The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures (Peterson Institute for International Economics, Policy Brief 18-5 March 2018). 14 Simon Lester, ‘Can Interim Appeal Arbitration Preserve the WTO Dispute System?’ (2020) 77 Herbert A. Stiefel Center for Trade Policy Studies Free Trade Bulletin, Cato Institute, 3. 15 Van den Bossche (2005b), p. 64; Voon and Yanovich (2006), p. 240. 16 Steger (1996), p. 322; Van den Bossche (2005a), p. 5; Jacyk (2008), p. 245. 17 Van den Bossche and Zdouc (2017), p. 1; Voon and Yanovich (2006), p. 246. 18 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 3.2. 19 Pauwelyn (2019), (last accessed 11 August 2021).

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have been adopted via reverse consensus20—and it is not possible to adopt an Appellate Body report until the appeal process is complete. Since the DSS has compulsory, exclusive jurisdiction there is also no possibility of litigating the matter elsewhere.21 Thus, if panel decisions are not enforceable due to the Appellate Body’s paralysis, and compliance becomes less likely,22 this impedes fulfilment of another component of the DSU’s object and purpose, “to provide security and predictability to the multilateral trading system.”23

3 What Is the Solution? 3.1

What Is the MPIA?

On 24 January 2020, 17 Member-States announced via joint statement their intention to craft an interim appeal arbitration arrangement.24 On 27 March 2020, the MPIA was concluded.25 As an alternative appeal arrangement created under Article 25 DSU, the MPIA does little to alter the existing dispute settlement system. The MPIA mandates the creation of its own standing pool of arbitrators available for 20

Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Arts 21, 22; Tetyana Payosova, Gary Clyde Hufbauer and Jeaffrey J Schott, The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures (Peterson Institute for International Economics, Policy Brief 18-5 March 2018) 9. 21 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 6.1; Panel Report, United States – Sections 301–310 of the Trade Act of 1974, WT/DS152/R (22 December 1999) [7.43] [7.75]. 22 For an explanation of why a lack of coercive countermeasures will likely decrease compliance, see Sect. 3.1. 23 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 3.2. 24 ‘Statement by Ministers, Davos, Switzerland, 24 January 2020’, 24 January 2020, (last accessed 11 August 2021). 25 European Council, ‘Council approves a multi-party interim appeal arbitration arrangement to solve trade disputes’ (Press release, 15 April 2020, Council of the European Union) (last accessed 11 August 2021); Hestermeyer H, ‘Op-Ed: “Saving Appeals in WTO Dispute Settlement: The Multi-Party Interim Appeal Arbitration Arrangement Pursuant to Article 25 of the DSU”’. EU Law Live, 2 April 2020

(last accessed 11 August 2021). As at the time of writing, the following WTO Members are Parties to the MPIA: Australia, Benin, Brazil, Canada, China, Chile, Colombia, Costa Rica, Ecuador, European Union, Guatemala, Hong Kong, China, Iceland, Mexico, Montenegro, New Zealand, Nicaragua, Norway, Pakistan, Singapore, Switzerland, Ukraine, and Uruguay.

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appointment to appeals on a rotating basis “on the basis of the same principles and methods that apply to form a division of the Appellate Body. . . including the principle of rotation.”26 This ‘pool’ of arbitrators is selected using the same criteria as Article 17.3 DSU and will largely rely upon existing administrative and legal support structures available to the Appellate Body under Article 17.7 DSU. However, these structures are to be “entirely separate from the WTO Secretariat staff” and “answerable, regarding the substance of their work, only to appeal arbitrators”27 and the US has requested Parties to the MPIA to fund the system themselves.28 Likewise, the MPIA’s object and purpose differs only slightly from the DSU’s.29 This is important both because of how it signals the drafters’ intention to replicate the 26

Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 6; Annex 2, 7; Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.1 of the DSU; Working Procedures for Appellate Review, WT/AB/WP/6 (1995) (‘Working Procedures’) 6(2). 27 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.7; Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 7. 28 Letter from the Permanent Mission of the United States to the WTO, 5 June 2020 (last accessed 11 August 2021). 29 The DSU’s object and purpose is to provide ‘security and predictability to the multilateral trading system’, through the ‘prompt settlement’ and ‘positive and effective resolution’ of disputes: Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2 Art 3.2, 3.3, 3.4; Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/ R (4 October 1996) 31; Appellate Body Report, European Communities – Customs Classification of Certain Computer Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R (05 June 1998) [82]; Panel Report, United States – Sections 301–310 of the Trade Act of 1974, WT/DS152/R (22 December 1999) [7.75]; Appellate Body Report, United States – Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan, WT/DS244/AB/R (15 December 2003) [82]; Appellate Body Report, United States – Final Antidumping Measures on Stainless Steel from Mexico, WT/DS344/AB/R (30 April 2008) [160]–[161]; Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R (21 December 2009) [213]; Appellate Body Report, United States – Continued Dumping and Subsidy Offset Act of 2000, WT/DS217/AB/R, WT/DS234/AB/R (16 January 2003) [311]; Appellate Body Report, European Communities – Customs Classification of Frozen Boneless Chicken Cuts, WT/DS269/ AB/R, WT/DS286/AB/R (12 September 2005) [161]; Appellate Body, United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R (25 April 1997) 19. Interpreted ‘in accordance with customary rules of interpretation of public international law’: Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 3.2. Articles 31–32 of the VCLT codify customary rules of interpretation of public international law: Appellate Body Report, United States – Final Anti-dumping Measures on Stainless Steel from Mexico, WT/DS344/AB/R (30 April 2008) [161]; Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R (29 April 1996) [15]–[16] (‘US – Gasoline’); Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R,

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DSS as closely as possible, and also because, should any ambiguity arise, an agreement’s “object and purpose” is the guiding interpretive principle by which ambiguities are resolved.30 While both the DSU and MPIA seek to give effect to the “essential principles and features” of the DSS, only the latter explicitly identifies them.31 These “essential principles and features” mandate a binding, independent and impartial appeal stage with “consistent and coherent”32 decision-making.33

3.2

What Has the MPIA Achieved?

3.2.1

Avoiding the ‘Appeal Into the Void’

Parties to the MPIA prevent pending or future disputes being ‘appealed into the void’, by resolving not to pursue appeals under Articles 16.4 and 17 DSU.34 Several safeguard provisions close loopholes Parties might have exploited to avoid this undertaking.35 While not adopted by the DSB, arbitral awards are final and binding between Parties (including after their withdrawal from the MPIA if applicable).36 WT/DS11/AB/R (4 October 1996) [104]; Oxford Public International Law (2020), [B.1] (last accessed 11 August 2021). 30 Vienna Convention on the Law of Treaties, opened for signature 23 May 1969, 1155 UNTS 331 (entered into force 27 January 1980) Art 31.1; Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (4 October 1996) fn. 20; Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R (12 October 1998) [114]. 31 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble; Pauwelyn (2019), p. 312 (last accessed 11 August 2021). The only reference to ‘independence’ in the DSU is Article 8.2 DSU which requires ‘Panel members should be selected with a view to ensuring the independence of the members, a sufficiently diverse background and a wide spectrum of experience’ (emphasis added). There is no equivalent for the Appellate Body, and no reference at all to impartiality. 32 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 5. 33 Given that such ‘consistency and predictability in the interpretation of rights and obligations. . . is of significant value to Members’: Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble. 34 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 9. Or for members who later join the MPIA, the date of their notification to the DSB that they endorse the MPIA is deemed to be the relevant date for the purposes of paras 9 and 10. 35 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 14, 15; Annex 1, 18; Annex 1, 18, fn.10; Annex 2, 9. 36 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 14, 15.

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Reports are enforceable via Articles 21 and 22 DSU,37 meaning coercive countermeasures are still available to encourage compliance.38

3.2.2

Addressing Criticisms of the Appellate Body

The US’ refusal to approve the appointment of new members to the Appellate Body has been characterised as ‘hostage-taking’ in an attempt to force reform of several procedural and systemic issues the US says plague the WTO.39 The MPIA introduces several innovations which may (partially) address these criticisms and help to resolve the crisis by assuaging US concerns.

3.2.3

90-Day Deadline for Appeals

What Is the Problem? Just as the ‘just, quick and cheap’40 resolution of disputes is a priority in domestic jurisdictions, Article 3.3 DSU states, “[t]he prompt settlement of . . . [disputes] is essential to the effective functioning of the WTO.” Article 17.5 DSU imposes a mandatory requirement that “proceedings shall not exceed 60 days. . . In no case shall the proceedings exceed 90 days.”41 However, Appellate Body proceedings take an average of 179 days.42 Since 2011, the number of times the Appellate Body has failed to meet the 90-day deadline has increased.43 Possible reasons include: the

37

Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 17. 38 For an explanation of how countermeasures encourage compliance, see Sect. 3.1. 39 Tetyana Payosova, Gary Clyde Hufbauer and Jeaffrey J Schott, The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures (Peterson Institute for International Economics, Policy Brief 18-5 March 2018). 40 For example, think of s 56(1) of the Civil Procedure Act 2009 (NSW) which outlines ‘[t]he overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings.’ (emphasis added) 41 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.5 (emphasis added). 42 The longest time taken was 691 days for Appellate Body Report, Australia – Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging, WT/DS435/AB/R, WT/DS441/AB/R (09 June 2020) and the shortest time taken was 47 days for Appellate Body Reports, India – Measures Affecting the Automotive Sector, WT/DS146/AB/R, WT/DS175/AB/R (19 March 2002). These numbers are current as at 30 June 2020. 43 DSU – Article 17 (Practice), (WTO Analytical Index: Guide to WTO Law and Practice, Annex 2: Dispute Settlement Understanding) 4 [4] (last accessed 11 August 2021).

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deadline was always ‘overly optimistic’; the Appellate Body is ‘a victim of its own success’ as increasing popularity has also increased its workload;44 as international trade law has developed, cases have become more complex and time-consuming;45 and/or the workload has increased because the Appellate Body has incorrectly expanded its scope of review.46 Of course, since 2017, the failure to re-appoint arbitrators has exacerbated delays by reducing the number of arbitrators available to decide cases.47 This delay is problematic for several reasons.48 Coercive countermeasures49 and reputational costs50 cannot be authorised/inflicted until a report is issued. Meanwhile, Members may delay litigation to protect illegal trade measures by insisting on the “full extent of time-consuming procedural niceties.”51 Lack of resolution also impedes determinacy and coherence of the jurisprudence52 and prevents the development of a robust “iterative discourse” which may otherwise assist in developing norms and jurisprudence.53 This, in turn, means there is little opportunity for such norms to be internalised as domestic values.54 The United States Trade Representative (USTR) says that, by repeatedly failing to meet the deadline, the Appellate Body “diminishes the rights of Members and undermines their confidence in the WTO’s rules-based trading system.”55

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Saunders (2021). Johnson K, ‘How Trump May Finally Kill the WTO’. Foreign Policy, 9 December 2019 (last accessed 11 August 2021). 46 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 26. 47 Johnson K, ‘How Trump May Finally Kill the WTO’. Foreign Policy, 9 December 2019 (last accessed 11 August 2021). 48 For an explanation of why delay is problematic with reference to the five models of compliance theory used in this chapter, see Sect. 3.1. 49 Model 1. 50 Model 2. 51 Porges (2003–2004), p. 182. 52 Model 3. 53 Model 4. 54 Model 5. 55 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 26. 45

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How Does the MPIA Address the Issue (If at All)? The MPIA addresses the issue of delay in the dispute settlement system in two ways. Firstly, instead of mandating 60-days as an initial deadline and 90-days as a last resort,56 90-days is now the standard deadline.57 Secondly, the MPIA allows Parties to modify arbitral procedures. This may be done for two purposes: after consulting with Parties,58 procedures may be adapted at the panel stage “to the extent it is necessary to facilitate the proper administration of the appeal arbitration procedure.”59 Where a panel is unwilling to modify procedures at the request of Parties, Parties are to “agree on alternative procedural modalities to preserve the effects of the relevant provisions of these agreed procedures.”60 This innovation does not address US criticisms—it is more a practical necessity to ensure the MPIA is integrated into the existing DSS. However, Parties also have a broad remit to “mutually agree to depart from the procedures set out in the appeal arbitration agreement” where desired.61 Parties are given flexibility to resolve the dispute by whatever means and on whatever timeline they deem necessary in order to “enhanc [e] the procedural efficiency of appeal proceedings”62 and better meet the 90-day deadline.63 At first glance, it appears this ‘procedural streamlining’ does little to address US criticisms. Under the existing DSS, Article 25 DSU already provides a similar departure procedure, stipulating that “resort to arbitration shall be subject to mutual agreement of the parties which shall agree on the procedures to be followed.”64 The key difference, however, is that under the MPIA the arbitrators

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Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.5 (emphasis added). 57 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 12. 58 Working Procedures for Appellate Review, WT/AB/WP/6 (1995) 16. 59 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 8. For example, Parties request panels notify then in advance of the circulation of a panel report: Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 2, 3. Paragraph 4 makes similar requests for adjusting existing procedure, confidentiality, and communicating the finalization of panel records to arbitrators. 60 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 19 fn.11. 61 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 11. 62 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 3. 63 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 12. 64 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 25.2 (emphasis added).

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themselves may initiate these changes65 and without Party consent.66 This discretion is comparable to (increasingly common) judicial case management practices in domestic jurisdictions.67

3.2.4

Continued Service of Appellate Body Arbitrators

What Is the Problem? Article 17.2 DSU states, “[t]he DSB shall appoint persons to serve on the Appellate Body for a four-year term, and each person may be reappointed once.” However, Rule 15 of the Working Procedures allows Appellate Body Members to continue to serve past their term’s expiry in order to finalise outstanding reports.68 Due to chronic delay in Appellate Body proceedings, in practice, an arbitrator may remain in office for months or years.69 This is despite some AB Members already being denied reappointment, or one instance where an arbitrator was appointed to a new division only 3 days before their term ended.70 The US and the Appellate Body disagree about what Article 17.2 DSU requires in practice. The US insists on a narrow, legalistic interpretation which makes arbitral appointments the exclusive preserve of the DSB. By allowing arbitrators to continue working, the Appellate Body is said to wield this power for itself.71 The USTR argues Appellate Body reports signed by such arbitrators do not have the same legal status and cannot be ‘properly adopted’ by the DSB.72 If accepted, this proposition

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Examples include imposing deadlines and limits on pages, time and hearing length and frequency: Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 12. 66 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 11. 67 Colbran et al. (2015), [2.2.1]. 68 Working Procedures for Appellate Review, WT/AB/WP/6 (1995) 15. 69 For an explanation of how this raises issues regarding arbitrators’ compensation structures see: WTO Secretariat’s Information and External Relations Division, ‘Members reiterate joint call to launch selection process for Appellate Body members’ (Media Release, 22 November 2019)

(last accessed 11 August 2021). 70 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 33 fn. 45. 71 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 32. 72 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 37.

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would upend decades of jurisprudential development.73 The Appellate Body, by contrast, argues such continued service is necessary to ensure a smooth transition between arbitrators’ terms. It maintains such practices have (until now) never been questioned74 and are considered ‘best practice’ by other international adjudicative bodies.75 Other Members concur, arguing it is within the Appellate Body’s remit to implement the principle of rotation as it sees fit,76 given the power granted to it to establish its own Working Procedures.77 Those same Members deny this constitutes a modification of the DSU’s ‘substantive provisions’.78

How Does the MPIA Address the Issue (If at All)? The MPIA provides for reappoint in the event of an arbitrator’s resignation79 and allows the pool of arbitrators to be modified at any time via consensus.80 The MPIA does not outline a term limit for its pool of arbitrators, instead importing the 4-year term for Appellate Body arbitrators outlined in Article 17.2 DSU. Thus, it does not address the issue of continued service of Appellate Body arbitrators.

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Model 3. While the Appellate Body’s practice has rarely been questioned it is not technically correct to say it has ‘never’ been questioned. India did so in 1996, upon Rule 15’s adoption: United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 35, fn.52. 75 Background Note on Rule 15 of the Working Procedures for Appellate Body Review, WT/AB/28 (24 November 2017) (Communication from the Appellate Body 24 November 2017). The USTR dismisses such explanations as ‘unsolicited’ and raising ‘more questions than answers’: United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 34. 76 Dispute Settlement Body, Minutes of the Meeting, WT/DSB/M/409 (28 February 2018) para 7.21. 77 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.9. 78 Both the US and the Appellate Body agree the Appellate Body’s discretion regarding its Working Procedures does not give them ‘authority to disregard or to modify other explicit provisions of the DSU’: Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R (19 December 1997) [92]; United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 34. 79 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 2, 6. 80 This is somewhat ironic, given it is the same consensus requirement in Article 2(4) DSU which de facto grants the US the ‘veto power’ to block Appellate Body appointments: Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 2, 3–5; Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 2(4). 74

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Extraneous Judgments: Advisory Opinions/Obiter Dicta

What Is the Problem? The Appellate Body may not issue extraneous judgments.81 This is because the object and purpose of the DSU speaks only of ‘preserving’, ‘clarifying’ and ‘maintaining’ Member-States’ rights and obligations and “[r]ecommendations and rulings of the DSB cannot add to or diminish the rights and obligations. . .”82 The DSS is a procedure for the enforcement of pre-existing rights and obligations, not an avenue for creating new ones.83 Nor does the DSU leave room for abstract or hypothetical questions. The DSU requires Parties to clearly identify “the measures at issue” and the “legal basis for the complaint”,84 Similarly, the panels and the Appellate Body shall only address “the matter referred to”85 and “each of the issues raised.”86 Article 11 DSU states that it is the function of the panels to “assist the DSB in making the recommendations. . .” Advisory opinions/obiter dicta exceed this mandate,87 as the DSU prevents the Appellate Body from “‘make law’ by clarifying existing provisions of the WTO Agreement outside the context of resolving a particular dispute.”88 Yet, this is exactly what the USTR accuses the Appellate

81 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 50. 82 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 3.2; Art 19.2. The combined effect of Articles 3.2 and 19.2 DSU are to ‘explicitly caution’ Appellate Body against judicial activism: Croley and Jackson (1996), p. 199; Van den Bossche and Zdouc (2017), p. 190, fn. 146. 83 Appellate Body, United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R (25 April 1997) 19. This interpretation is confirmed by the travaux préparatoires (as per Art 32 VCLT): Van den Bossche and Zdouc (2017), p. 198. 84 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Arts 4.4, 6.2; United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 48. 85 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 7.1. 86 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.12. 87 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 11. Any limitation upon a panel’s mandate applies, by necessity, to the Appellate Body since Articles 17.3 and 17.6 DSU limit the scope of Appellate Body review to a panel’s findings: Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.3 and 17.6. 88 Appellate Body, United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R (25 April 1997) 19.

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Body of doing by issuing reports which constitute advisory opinions and obiter dicta in substance, if not namely.89

How Does the MPIA Address the Issue (If at All)? The MPIA does not speak to the issue of extraneous judgments. However, judicial economy is encouraged under the MPIA, as “arbitrators shall only address those issues that are necessary for the resolution of the dispute” and “only those issues that have been raised by the parties.”90 This is narrower language than that in Article 17.12 DSU, which requires that “[t]he Appellate Body shall address each of the issues raised. . .”91 Both the US and the Appellate Body encourage judicial economy,92 as the practice helps to streamline the appeals process and promptly settle disputes.93

3.2.6

Precedent

What Is the Problem? There is no doctrine of stare decisis under international law.94 However, the USTR claims the Appellate Body has created a de facto doctrine of precedent by requiring that “. . .absent cogent reasons, an adjudicatory body will resolve the same legal

89 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 52–53. 90 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 2, 10 (emphasis added). This is ‘without prejudice to their obligation to rule on jurisdictional issues.’ 91 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.12 DSU (emphasis added). 92 The Appellate Body states, ‘[a] panel need only address those claims which must be addressed in order to resolve the matter in issue in the dispute’ (Appellate Body, United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R (25 April 1997) 19) while the USTR confirms that judicial economy is ‘appropriate and is wholly consistent with Article 17.12 because to “address” an issue requires only consideration of and disposal of the issue; the Appellate Body is under no obligation to write an interpretation of every issue’: United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 51 (emphasis added). 93 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 3.1. 94 Oxford Public International Law (2020), [B.1] (last accessed 11 August 2021).

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question in the same way in a subsequent case.”95 The US argues this grants Appellate Body reports the same weight as authoritative interpretations in their ability to develop law96. Appellate Body reports should be recalled for their persuasive value only.97 The Appellate Body denies US criticisms, arguing the DSU’s object and purpose—to provide “security and predictability”—contemplates an obligation to develop jurisprudence.98

How Does the MPIA Address the Issue (If at All)? Since MPIA arbitration(s) “shall be governed, mutatis mutandis, by the provisions of the DSU and other rules and procedures applicable to Appellate Review”99 the MPIA will likely follow the Appellate Body’s “absent cogent reasons” jurisprudence100—that is, while there is no ‘precedent’ to speak of, in the manner experienced by a domestic common law system, for example, previous Appellate Body decisions will remain persuasive “absent cogent reasons” otherwise. Previous international arbitral tribunals follow similar practices.101 It is unclear whether arbitral awards under the MPIA will themselves hold any precedential value. MPIA arbitrators could take the opportunity to develop or

95 Appellate Body Report, United States – Final Anti-dumping Measures on Stainless Steel from Mexico, WT/DS344/AB/R (30 April 2008) [161] (emphasis added); Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R (12 October 1998); Appellate Body Report, United States – Continued Existence and Application of Zeroing Methodology, WT/DS350/AB/R (04 February 2009) [160], [312]; United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 55. 96 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 56. 97 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 61. 98 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 61. 99 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 3; Mignolli (2020). 100 Malkawi B, ‘MPIA and Use of Arbitration: Bypassing the WTO Appellate Body’. The Jurist, 28 May 2020 (last accessed 11 August 2021). 101 See, for example, Saipem SpA v People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Decision on Jurisdiction and Provisional Measures (21 March 2007) [67]; Daimler Financial Services AG v Argentine Republic, ICSID Case No ARB/05/1, Award (22 August 2012) [52].

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experiment with existing jurisprudence which could be adopted by the Appellate Body upon its resumption. However, arbitral awards arguably have lesser “precedential value” because they “shall be notified to. . .the DSB”102 but shall not be “adopted by, the DSB. . .”103 Also, adopting reasoning from the MPIA’s arbitral awards would likely attract additional criticism to the Appellate Body, for circumventing the DSU and adopting law without Members’ consensus under the established procedure for authoritative interpretations. As one commentator observes, “I expect that it will be understood that MPIA arbitration awards will have served a particular need at a particular point in time.”104

3.2.7

Over-Expansive Scope of Review

What Is the Problem? The Appellate Body has also been criticised for expanding its scope of review through an over-expansive interpretation of Articles 11 and 17.6 DSU.105 Article 17.6 DSU Article 17.6 states: “[a]n appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel.”106 In short, only panels may consider factual findings.107 The words “covered in the panel report” and 102

Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 25.3. 103 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 15; Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.4. 104 Malkawi B, ‘MPIA and Use of Arbitration: Bypassing the WTO Appellate Body’. The Jurist, 28 May 2020 (last accessed 11 August 2021). 105 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 26. While international courts are competent to decide upon their own competence, the Appellate Body cannot alter the scope of review under the DSU: Appellate Body Report, United States – AntiDumping Act of 1916, WT/DS136/AB/R (26 September 2000) 30, [54]. 106 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.6. 107 This is similar to the division of labour between trial and appellate courts in many domestic jurisdictions: Voon and Yanovich (2006), p. 241; Croley and Jackson (1996), p. 202. There are several compelling policy reasons for precluding Appellate Body factual review: Voon and Yanovich (2006), p. 240. The DSU imposes stricter timelines on the Appellate Body than panels: Panel proceedings must conclude within 9 months (Art 12.9 DSU) while Appellate Body reports must conclude within 90 days (Art 17.5 DSU); Panels conduct two meetings with disputing parties (Art 15 DSU), whereas the Appellate Body typically only has one: Working Procedures for

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“developed by the panel” are clear on their face—if the Appellate Body cannot identify an ‘issue’ or ‘interpretation’ in a panel report, the subject is precluded from their scope of review. The phrases “issues of law covered in the panel report” and “legal interpretations developed by the panel”108 comprise two separate ‘limbs’ or limitations. However, these terms are not defined in the DSU and their ordinary meaning(s) are so expansive as to be incapable of helpful definition.109 Thus, their interpretation is controversial. The Appellate Body has refrained from issuing definitive interpretations, preferring instead to apply Article 17.6 on a case-by-case basis.110 For example, the question of how best to categorise municipal law—as a ‘factual finding’, ‘issue of law’ or ‘legal interpretation’—is highly contested. The US claims the Appellate Body has incorrectly “reviewed the meaning of a Member’s domestic law de novo as a legal issue”—despite Member-States’ agreement to the contrary111—while the Appellate Body denies ever having done so. Article 11 DSU Under Article 11 DSU, the question of whether a panel has made “an objective assessment of the matter before it”112 has become a ground of appeal.113 Combined with the Appellate Body’s interpretation of Article 17.6 DSU, so-called ‘Article 11 claims’ have been attacked as a ‘catch-all’ ground of appeal. Such claims seem to be raised “[a]ny time [a Member-State has] a concern regarding an insufficiency or flaw in a panel’s reasoning or an approach which is difficult to fit within a specific legal obligation. . .”114 Recently, there has been an exponential increase in such claims, introducing further “complexity, duplication, and delay” into already-delayed appeals.115 Perhaps more important, Article 11 claims are also criticised as ‘trojan Appellate Review, WT/AB/WP/6 (1995) 27. Panels also have better investigative tools at their disposal: panels provide Member-States an interim report for comment (Art 15 DSU) and have ‘the right to seek information and technical advice from any individual or body which it deems appropriate’ (Art 15 DSU). 108 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 17.6. 109 Oxford English Dictionary, ‘law’ (def 1); ‘legal’ (def 1a and 1b); ‘issue’ (def I); ‘interpretation’ (def 1a); ‘interpret’ (def 1a) (last accessed 27 September 2020). 110 Voon and Yanovich (2006), p. 244. 111 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 6. 112 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 11. 113 It remains controversial whether Article 11 DSU was intended to be a ground of appeal or sought to establish aspirational goals. 114 Lester (2012), p. 131. 115 United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 44.

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horses’ or ‘back doors’ through which the Appellate Body “routinely reviews panel findings of fact”.116

How Does the MPIA Address the Issue (If at All)? Article 17.6 DSU Arbitrations under the MPIA are “based on the substantive and procedural aspects of Appellate Review pursuant to Article 17 of the DSU, in order to keep its core features. . .”117 The Preamble re-affirms that “arbitration awards cannot add to or diminish the rights and obligations provided in the covered agreements”, referencing Articles 3.2 and 19.2 DSU.118 When outlining its scope of review, the MPIA copies language directly from Articles 17.3 and 17.6 DSU.119 Thus, the scope of review for the Appellate Body and the MPIA are the same. However, the MPIA does not clarify those terms any more clearly than the DSU itself does. Article 11 DSU One key change is that, under the MPIA, arbitrators may propose to exclude Article 11 DSU claims as a ground of appeal.120 Such proposals are not legally binding and require Parties’ consent.121 Importantly, a failure to consent “shall not prejudice the consideration of the case or the rights of the parties.”122 Arbitrators may only propose these “substantive measures” where doing so is “necessary in

116

United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 6. 117 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble; [3]. 118 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble. Recommendations from the pool of arbitrators are to be issued ‘as envisaged in Article 19 of the DSU’, reiterating, once again, that ‘the Appellate Body cannot add to or diminish the rights and obligations. . .’: Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 19.2 DSU; MPIA, Annex 2, 9. 119 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 9. 120 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 13; Annex 1, 13. 121 Cf. Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 11. 122 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 13.

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order to issue the award within the 90 day time-period. . .”123 Thus, arbitrators avoid the complexity, delay, and criticisms which accompany Article 11 DSU claims without needing to answer for themselves controversial questions of interpretation. Those questions are instead open to resolution via political means. If successful, this same approach could be implemented by the Appellate Body.

4 Is the MPIA Effective? There are two questions by which the MPIA’s effectiveness can be evaluated: firstly, whether the MPIA is effective as an alternative appeal arrangement; and secondly, whether the MPIA is effective as a solution to the Appellate Body crisis as a whole. In Sect. 4.1, this chapter answers in the affirmative, while in Sect. 4.2, this chapter answers in the negative.

4.1

An Effective Alternative Appeal Arrangement?

This chapter uses compliance theory as the theoretical framework against which the MPIA’s effectiveness as an alternative appeal arrangement is assessed. This theory was chosen as the theoretical framework for Sect. 1 because, unlike other international relations and political science theories, compliance theory focusses on the ‘organisation’ as the relevant unit of analysis.124 Compliance theory was first developed by Etzioni to explain the different types of power organisations exert over their members to influence behaviour. While Etzioni identifies only three types of organisational power—coercive, utilitarian, and normative—and three types of involvement—alienative, calculative, and moral—the theory has since been expanded upon and applied in other contexts.125 Applied to the international trade law context, compliance theory can be used to explain and predict whether Member-States will comply and help us to answer the question of the MPIA’s effectiveness. The MPIA will be an effective alternative appeal arrangement where it ensures Member-States continue to comply with their rights and obligations under the WTO Agreement, even in the absence of a functioning Appellate Body. This chapter focuses on five models or iterations of compliance theory, selected for their seminal status and/or relevance to the WTO context. In the following paragraphs, this chapter will apply these models to both the Appellate Body and the MPIA in order to show how the MPIA uses certain types

123 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 13; Annex 1, 13. 124 Étienne (2010), p. 493. 125 See Lunenburg (2012), p. 1 for a brief but excellent summary of Etzioni’s theory.

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of power to direct the behaviour of its Parties, subsequently increasing the likelihood of compliance.

4.1.1

Five Models of Compliance Theory

Firstly, realism argues compliance is more likely where it can be enforced by coercive means, such as sanctions.126 As explained in Sect. 1, the DSB cannot authorise coercive countermeasures until the Appellate Body report in question has been adopted by the DSB—which cannot occur if the report is ‘appealed into the void’.127 Under the MPIA, arbitration awards are binding and the doctrine of res judicata still applies.128 It is the agreement of the Parties to be bound by the awards, and the continued application of Articles 21–22 DSU which achieves this ‘binding’ effect.129 By avoiding the ‘appeal into the void’, the MPIA ensures these coercive countermeasures, and their compliance benefits, remain available to Parties. A second model of compliance theory argues reputational cost is the most accurate predictor of compliance. Non-compliance causes reputational damage which impedes an actor’s ability to extract future concessions and cooperation from others,130 disincentivising non-compliance. By clarifying Member-States’ rights and obligations, the Appellate Body provided a consistent and transparent means for identifying non-compliance.131 Member-States often used Appellate Body reports to legitimise their condemnation of other’s non-compliance. While MPIA membership is not as far-reaching as the WTO,132 and MPIA awards will not likely be vested with the same precedential authority as Appellate Body reports, such awards may be used in a similar way. A third compliance theory model argues compliance is more likely where Member-States see international law and its institutions as legitimate and fair, generating a ‘compliance pull’. Franck identifies four key factors which influence a law or institution’s ‘legitimacy’: (1) the determinacy or clarity of the rule; (2) symbolic validation (particularly through rituals); (3) coherence;133 and (4) adherence to

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Guzman (2002), p. 1825. Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Arts 21 and 22. 128 Boisson de Chazournes (2005), p. 186. 129 Guzman (2002), p. 1861. 130 Guzman (2002), p. 1861. 131 Guzman (2002), p. 1861. 132 The MPIA has 17 Members, relative to the WTO’s 164. 133 Franck distinguishes between coherence and consistency—‘consistency requires that “likes be treated alike” while coherence requires that distinctions in the treatment of ‘likes’ be justifiable in principled terms’: Franck (1995) p. 144. 127

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‘right process’.134 The MPIA’s very existence assists with determinacy or clarity, by ensuring an appeal arrangement with the ability to clarify potentially problematic panel reports is available.135 It is not clear what (if any) of the Appellate Body’s rituals and symbology the MPIA will adopt.136 So far, the MPIA has continued the Appellate Body tradition of recruiting highly regarded scholars of international trade law137 and maintained the principle of collegiality.138 The Appellate Body’s ‘cogent reasons’ doctrine—which the MPIA will likely adopt—creates coherence. Finally, the MPIA relies on the same body of ‘secondary’ rules as the Appellate Body.139 Arguably, the MPIA’s existence is a triumph of ‘right process’ in itself, as it is through following the secondary rule of Article 25 DSU that the MPIA was born— despite US obstructionism that disregards such processes. The fourth model is a ‘managerial model’ in which the Chayeses outline how participation in an ‘iterative discourse’ generates authoritative interpretations that gather momentum and create pressure towards compliance.140 The Appellate Body used both non-judicial dispute resolution techniques (such as good offices, conciliation, and mediation141) and quasi-judicial hearings to create such an ‘iterative discourse’. The opportunity for third party participation,142 or for Member-States to comment upon and resolve issues with reports via the DSB, expands this ‘discourse’ to include Member-States not directly involved in the dispute. The MPIA offers the same non-judicial dispute resolution techniques and access to third parties. Under the MPIA, third parties with a notified “substantial interest”143 may “make written submissions to, and shall be given an opportunity to be heard by, the arbitrators.”144 Franck (1995), pp. 50–66. ‘Right process’ reinforces ‘primary’ international law via ‘secondary’ rules which adjudicate how primary rules are to be interpreted and enforced. 135 See Sect. 1. 136 For example, the progressively formal swearing-in speech: Steger (2003), p. 131. 137 For the list of MPIA arbitrators, see Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12/ Suppl.5 (Notification of MPIA Pool of Arbitrators) 1. 138 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 8. 139 Franck (1995), pp. 50–66. 140 Chayes and Chayes (1998), p. 123. 141 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 5. 142 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Art 10. 143 It is likely that the arbitrators will borrow from existing Appellate Body ‘case law’ to determine the meaning of ‘substantial interest’, as the same language is used in Article 10.2 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2. 144 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 16. Note also that Rule 24, Working Procedures for Appellate Review, WT/AB/WP/6 (1995) applies mutatis 134

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Fifthly, Koh blends Franck and the Chayeses’ models to argue that perceptions of legitimacy and fairness, reinforced through ‘iterative discourse’, must be consolidated at the domestic level to secure compliance. Koh argues that as “repeated compliance gradually becomes habitual obedience”, international trade law will permeate the domestic legal system, eventually “becoming part of that nation’s internal value set”.145 Although difficult to identify due to its intangibility, one example of such internalisation in the Appellate Body context is the repeated reference to a commitment to a ‘rules-based international order’ used by Western governments. It is not possible to assess the MPIA’s effectiveness under this compliance model, as no decisions have yet been made under the MPIA. However, it is clear that, by largely replicating the existing DSS, the MPIA also capitalises upon decades of Member-States’ ‘buy-in’ to the DSS. The majority of panel reports have been appealed since the Appellate Body’s introduction (an average of 70% per year since 1996146) and, once adopted, both panel and Appellate Body reports have been largely respected.147 Member-States’ continued efforts to find a solution to the Appellate Body crisis, in spite of US obstructionism, is also indicative of buy-in to the system.148

mutandis: Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 16. 145 Koh (1997), pp. 2601–2602. 146 DSU – Article 17 (Practice), (WTO Analytical Index: Guide to WTO Law and Practice, Annex 2: Dispute Settlement Understanding) [1.4.4] (last accessed 11 August 2021); Simon Lester, ‘Can Interim Appeal Arbitration Preserve the WTO Dispute System?’ (2020) 77 Herbert A. Stiefel Center for Trade Policy Studies Free Trade Bulletin, Cato Institute, 2. High appeal rates could also be explained as Members defending their interests to the fullest extent, making their actions more justifiable to their domestic constituents. 147 DSU – Article 17 (Practice), (WTO Analytical Index: Guide to WTO Law and Practice, Annex 2: Dispute Settlement Understanding) [1.4.4] (last accessed 11 August 2021). The Appellate Body is also one of the most prolific of the international state-to-state dispute resolution systems. Between 1 January 1995 and 1 October 2016 a total of 566 disputes were registered with the WTO, resulting in the issuance of 202 Panel reports and 127 Appellate Body decisions. During the same period, the International Court of Justice produced 65 judgments and 5 advisory opinions, while the International Tribunal on the Law of the Sea produced 12 judgments, 2 advisory opinions and issued orders in 11 cases: Van den Bossche and Zdouc (2017), p. 165 [1]. 148 For example, in May 2018 the European Union and Canada’s joint proposals to reform the Appellate Body and launch the selection process for arbitrators was met with approval by over 70% of Member-States: Payosova, Hufbauer and Schott (2018) (last accessed 11 August 2021). On 22 November 2019, 117 WTO members issued a call at the WTO’s Dispute Settlement Body meeting to launch the process for filling vacancies on the Appellate Body, marking 2 years since proponents first issued their joint appeal: WTO Secretariat’s Information and External Relations Division, ‘Members reiterate joint call to launch selection process for Appellate Body members’ (Media Release, 22 November 2019) (last accessed 11 August 2021).

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Accession, Exit and Intended Duration of the MPIA

The greater the number of Parties to the MPIA, the more effective it will be as an alternative appeal arrangement. Parties to the MPIA will also be able to exert more pressure for reform—using the consensus represented by the MPIA—where a critical mass of signatories has been achieved. Despite the US’ size and significance in international trade terms, it is not in their best interests to be a ‘perpetual outsider’,149 especially if other heavyweights such as China, India, and Brazil enlist.150 According to compliance theory, the MPIA’s policies regarding accession, exit, and intended duration are all likely to increase membership to the MPIA. Cognisant that Member-States may be adopting a ‘wait and see’ approach to accession,151 the MPIA allows later accession to the agreement; Member-States are “welcome to join the MPIA at any time” by notification to the DSB.152 The MPIA also allows for third party involvement. Ceasing participation is equally easy, requiring only a notification to the DSB of the Party’s intention to withdraw.153 There is no required notice period, although the MPIA continues to apply to disputes pending on the date of withdrawal, preventing Parties from simply withdrawing at the first sign of discomfort.154 Counter-intuitively, the ease of exiting the MPIA likely makes accession more attractive to prospective Parties who may otherwise be dissuaded by a greater upfront commitment. It is also a strength of the MPIA that it strives for the resolution of the Appellate Body crisis as a ‘matter of priority’.155 Once the Appellate Body is ‘fully functional’,

149

Saunders (2021). China and Brazil are already signatories. India is not a signatory due to sensitivities surrounding sugar subsidies, tariffs on IT goods, and the withdrawal of their developing country status: Malkawi B, ‘MPIA and Use of Arbitration: Bypassing the WTO Appellate Body’. The Jurist, 28 May 2020 (last accessed 11 August 2021. 151 Malkawi B, ‘MPIA and Use of Arbitration: Bypassing the WTO Appellate Body’. The Jurist, 28 May 2020) (last accessed 11 August 2021). 152 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 12 (emphasis added). 153 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 14. 154 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 9. 155 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble. 150

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and able to hear appeals,156 the MPIA will cease.157 However, the MPIA is also realistic in establishing mechanisms for its continued operation, acknowledging that a resolution to the crisis will take some time. Examples include the ability to re-compose the pool of arbitrators,158 replace arbitrators who resign,159 and annually review the MPIA.160 This review “may concern any feature of the MPIA”,161 although this chapter argues the provision has more to do with giving Parties flexibility than it does leaving the door open to allow the MPIA to develop into something ‘more’. Similar to how providing greater exit opportunities may increase the likelihood of accession, this flexibility likely makes the MPIA more attractive to prospective Parties. Under the models/iterations of compliance theory examined above, it is likely that the MPIA will be an effective alternative appeal arrangement, as it fulfills its avowed purpose of preserving the “essential principles and features” of the DSS by avoiding

156 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 2, 2 also states that “. . .such situation is deemed to arise where, on the date of issuance of the final panel report to the parties, there are fewer than three Appellate Body members.” 157 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 15; Government of Canada, ‘Statement by Ministers, Davos, Switzerland, 24 January 2020’ (Press release, 24 January 2020) (last accessed 11 August 2021); Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble, Annex 1, 2, Annex 2, 5; The EU Commissioner for Trade Phil Hogan described the agreement as but a “stopgap measure” and reaffirmed the EU’s continued commitment “to restore the appeal function of the WTO dispute settlement system as a matter of priority”: European Commission, ‘EU and 15 World Trade Organization members establish contingency appeal arrangement for trade disputes’ (Press release, 27 March 2020) (last accessed 11 August 2021). 158 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 2, 5. It is not clear how this partial re-composition is to occur, other than a reference to the original criterion and selection process, which does not speak to when that process should be initiated, whom it should be initiated by or how to decide which arbitrator will be subject to ‘re-composition’. 159 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 2, 6. 160 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 13. The first review is scheduled for 27 March 2021, 1 year after the date of the original Communication. 161 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) 13. Most processes in the MPIA can also be modified at any time by consensus.

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the ‘appeal into the void’162 while negotiations to find a ‘lasting solution’ to the crisis are ongoing.163

4.2

An Effective Solution to the Appellate Body Crisis?

However, the MPIA is not an effective solution to the Appellate Body crisis as a whole. Instead of resolving or rebuffing criticisms levelled at the Appellate Body, the MPIA replicates the language of the DSU without offering new interpretation (s) or settle upon existing ones. This hypothesis is explored in the following sections. Section 4.2.1 argues that US obstructionism is symptomatic of a broader identity crisis within the WTO. Section 4.2.2 then argues the MPIA is not an effective solution to the Appellate Body crisis because it is not the appropriate forum to resolve this identity crisis and decide questions about the WTO’s conflicting ‘legal’ and ‘political’ identities.

4.2.1

US Obstructionism Is a Symptom of a Broader Malaise

Pauwelyn164 argues the organisation’s ‘legitimacy crisis’ is caused by an imbalance between Member-States’ opportunities to influence the development of international trade law via political/diplomatic mechanisms and their ability to depart from those rights and/or obligations or the WTO.165 As Member-States’ flexibility have been reduced by progressive legalisation and institutionalisation, the opportunities for Member-States to exercise their opportunities for representation have not increased in parallel. Since its establishment in 1995, the Appellate Body has transformed from an ‘afterthought’ of the General Agreement on Tariffs and Trade 1947 negotiating process to the centrepiece of trade dispute resolution globally.166 Yet, the DSB has not similarly grown in authority or influence. Applying this Pauwelyn’s argument, one explanation for the US’s current obstructionism is that the US felt it had no other choice—its voice was not being heard and exit was not an option under the Appellate Body’s compulsory and exclusive jurisdiction. But why is the US the only one seen to be voicing its concerns

See Sect. 2 for a greater explanation of how the MPIA preserves the DSS and avoids the ‘appeal into the void’. 163 As per the drafters’ intentions: Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble. 164 Pauwelyan is now an MPIA arbitrator. 165 Pauwelyn (2005), p. 4; Hirschman (1970), p. 33. 166 Ehlermann (2002), p. 4; Van den Bossche (2005b), p. 1. 162

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in this way? There are two reasons. Firstly, the US’ status as one of the largest global economies affords it greater opportunity to pursue obstructionism167—as does the Trump administration’s love of such strategies.168 Secondly, this chapter argues the Appellate Body crisis is symptomatic of a broader debate about the WTO, between conflicting ideas about whether the WTO should be a legal or political beast of burden.

US Vision for the DSS Simply put, the United States Trade Representative paints a US vision for the DSS, politics is primary; the purpose of the Appellate Body is merely to facilitate politics. Member-States act through the DSB to develop law via authoritative interpretations.169 To allow otherwise—through issuing advisory opinions/obiter dicta, developing jurisprudence through precedent, or accepting the Appellate Body’s own interpretations as to its scope of review—would transform the Appellate Body into more court than arbitral tribunal170 with the capacity to ‘add to’ or ‘diminish’ the rights and obligations of Member-States, contrary to Article 19.2 DSU.171 Developing law in this way would be ‘undemocratic’, circumventing the due process and consensus requirements for adopting authoritative interpretations.172 This, in turn, would see the Appellate Body accrue too much power, depriving states of their sovereignty and ability to advance their own self-interest(s). Member-States also

US criticism of the Appellate Body has transitioned from ‘pushback’ (“ordinary resistance occurring within the confines of the system but with the goal of reversing developments in law”) to ‘backlash’ (“extraordinary resistance challenging the authority of . . . [the Appellate Body] with the goal of not only reverting to an earlier situation of the law, but also transforming or closing . . . [the Appellate Body]”: Madsen et al. (2018), p. 203. Compare this with smaller economies who typically pursue negotiating tactics centred on collaboration and coalition-building. 168 Schneider (2019) (last accessed 11 August 2021). 169 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995), Art IX:2; Appellate Body Report, United States – Import Measures on Certain Products from the European Communities, WT/DS165/AB/R (11 December 2000) [92]; Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (4 October 1996) 13; Payosova, Hufbauer and Schott (2018) (last accessed 11 August 2021). 170 The ability to issue advisory opinions is not always a feature of courts. See, for example, Re Judiciary & Navigation Acts (1921) 29 CLR 257 in which the High Court ruled it was not competent to issue advisory opinions due to Australian Constitution s 76. 171 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Arts 11, 17.2, 19.2. 172 This is ‘undemocratic’ because the Appellate Body is accountable to neither Members nor the citizens they represent: United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 53, 57. 167

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have little incentive to negotiate in good-faith in a system where new rights and obligations can be introduced via a ‘back door’173 or where enforcement is at the (supposed) whim of an unaccountable third party.174

Other Visions for the DSS Another vision for the DSS175 sees the Appellate Body as the ““World Trade Court” in all but name”.176 Under this system, the Appellate Body develops de facto ‘quasicase law’ within the confines of the DSU until otherwise advised via authoritative interpretation. This vision sees and supports the WTO’s expansion into more politically sensitive areas, such as health regulation and intellectual property, as inevitable.177 Some believe increasing legalisation is inevitable with the gradual thickening of legal-normative structures over time.178 Others assert the WTO’s political process is ‘broken’. The consensus requirements needed to pass authoritative interpretations are no longer a realistic threshold for an expanded (in both number and diversity) WTO membership for increasingly complex issues (now all the ‘low-hanging fruit’ has been plucked).179 The Appellate Body has since evolved to fill that role.

4.2.2

The MPIA Cannot Resolve the Appellate Body Identity Crisis

With this characterisation of the Appellate Body crisis in mind, it is clear the MPIA is not an effective solution to the Appellate Body crisis as a whole. This is because it does not, and should not, address this deeper issue of the WTO’s ‘identity crisis’. As 173

United States Trade Representative (USTR), Report on the Appellate Body of the WTO (Report, Office of the United States Trade Representative Ambassador Robert E. Lighthizer, February 2020) 55. 174 Payosova, Hufbauer and Schott (2018) (last accessed 11 August 2021). 175 While there are more than two acceptable ‘voice-exit’ ratios, this chapter presents them as two binary ‘visions’ for the WTO for the purpose of simplicity and comprehension—‘visions’ being a simple means by which to convey the conflicting scholarship on what role the Appellate Body should play, as governed by the intention of Member-States. One major proponent of this approach is the European Union. Even before the MPIA, the EU was active in seeking interim arbitration arrangements to mitigate the impending crisis. For example, the EU-Canada interim appeal agreement signed on the 25 July 2019 and the EU-Norway from October 2019. Both agreements assert the signatory’s intentions to maintain, as much as possible, the function of the WTO’s DSS, by seeking to replicate the procedures of that institution: Saunders (2021). 176 Ehlermann (2002), p. 4; Van den Bossche (2005b), p. 1. 177 Pauwelyn (2005), p. 5. 178 Pauwelyn (2005), p. 5. 179 Van den Bossche and Zdouc (2017), p. 192.

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explained above, the MPIA does not attempt to reform or address substantive criticisms levelled at the Appellate Body, and so does not change the legal-political balance of the WTO. The restraint of the MPIA drafters in this regard is admirable for several reasons—legally, the MPIA is still constrained by the rights and obligations outlined in the DSU; practically, the MPIA is limited in its ability to enact reform because of the politics of negotiation. These two rationales are explored below.

The MPIA Is Limited by Substantive Law in the DSU The MPIA has a limited capacity to substantively alter the DSS, despite suggestions to the contrary. It has been suggested that alternative arbitration arrangements under Article 25 DSU may hold a lex specialis status under the DSU which would allow them to alter the treaty’s substantive obligations.180 Under this logic, parties to an Article 25 DSU arbitration agreement who mutually agree to depart from procedures under the DSU, could develop ‘additional or special procedures’ under Article 1.2 DSU.181 However, the “Special or Additional Rules and Procedures Contained in the Covered Agreements” in Annex 2 of the DSU is a restrictive list which does not include arbitration awards, indicating they do not have lex specialis status.182 Thus, as an arbitration agreement made under Art 25 DSU, the MPIA is governed by the limitations outlined in the DSU. Article 25.2 DSU indicates that while Parties can create tailor-made alternative appeal agreements between themselves, these are limited as “otherwise provided in this Understanding. . .” Additionally, Article 25.4 DSU confirms that counter-measures apply to alternative arbitration arrangements, indicating arbitration awards fall within the structure of the broader DSS. Boisson de Chazournes argues that the explicit inclusion of Articles 21–22 DSU demonstrates the drafters’ intention for the Appellate Body to serve as the primary means of dispute settlement, and to have primacy over any potential arbitration awards, “since the enactment of the ruling issued by an arbitration procedure under Article 25 is rooted in the general procedure of dispute settlement.”183 It has also been suggested that Parties to an Article 25 DSU alternative appeal agreement could decide, by common agreement, that WTO law is not applicable to the dispute in question. Leaving aside the policy implications which would advise such a decision to be unwise, Boisson de Chazournes argues that the ‘security and predictability’ required under Article 3.2 DSU makes such a

180

Boisson de Chazournes (2005), p. 181. Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, 198. 182 Boisson de Chazournes (2005), p. 198. 183 Boisson de Chazournes (2005), p. 200. 181

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hypothesis ‘unsustainable’.184 Thus, even if it was desirable, it would not have been possible for the MPIA to make bold advances in designing a DSS differentiated from the DSU. Hence, this is why much of the limiting language of the DSU—such as Articles 3.2, 17.6 and 19.2 DSU—is directly incorporated into the MPIA.

The MPIA Leaves the Door Open for Substantive Negotiations The MPIA is also not well-equipped to resolve the broader Appellate Body crisis for several practical reasons. Firstly, by replicating existing Appellate Body procedures, the MPIA capitalises on the success of the Appellate Body185 and makes MemberStates more likely to accede to the MPIA if they are already familiar with its terms. Secondly, taking time to address substantive criticisms of the Appellate Body would detract time, resources, and political will from mainstream negotiations. Instead, by explicitly disavowing the possibility of the MPIA as a replacement DSS,186 Parties to the MPIA have ensured reform efforts are focussed on resolving the Appellate Body crisis, not fractured by attempts at coalition building. This mitigates the risk of complacency now a temporary, semi-workable solution has been found.187 It also lends greater credibility to the MPIA Parties’ assertions of the DSS’s inherent value—the Parties are signalling that the current system cannot be easily replaced and therefore, should be mended. Thirdly, while the MPIA’s negotiation represent the kind of political/diplomatic decision-making the US should favour under its vision of the WTO the US is not currently a signatory. Interpreting the DSU without the US’ input would likely further alienate the US. US acquiescence is needed both due to its significance as one of the largest global economies, and because of the very consensus requirements which gave them the power to block Appellate Body appointments in the first place.188 The MPIA acknowledges the need for US acquiescence, saying in the Preamble that its Parties are “Determined to work with the whole WTO Membership to find a lasting improvement to the situation. . .”189 The US has long-demonstrated a deep-seated and bipartisan frustration with the WTO pre-dates Trump’s

184

Boisson de Chazournes (2005), p. 200. See Sect. 3.1. 186 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble, 1, 15. 187 Malkawi B, ‘MPIA and Use of Arbitration: Bypassing the WTO Appellate Body’. The Jurist, 28 May 2020 (last accessed 11 August 2021). 188 Article 2(4) DSU requires decision-making by consensus, granting Members an effective veto power: Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 187 UNTS 3 (entered into force 1 January 1995) Annex 2, Article 2.4. 189 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Preamble (emphasis added). 185

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Presidency—for example, the Obama administration also blocked three arbitrators’ appointments (although those appointments were eventually made).190 However, should the change in administration following the November 2020 US Presidential election results make the US more open to negotiations the MPIA leaves open the door for further negotiations. Had the focus of the MPIA been to substantively alter the DSS or create a new system entirely, this would not be the case.

The Silver Lining As well as being a ‘sandbox’ in which small, incremental reforms can be experimented with on a small scale, the MPIA may also establish a precedent for a more flexible DSS. As “probably the most diplomatic procedure among WTO adjudicating bodies since it was designed”191 it is surprising that Article 25 DSU has not been better utilised before. The MPIA is only the second instance of arbitration under Article 25 DSU, after US – Section 110(5) Copyright Act (Article 25.3) in 2000.192 Article 25 DSU’s low levels of historical usage in the WTO’s history has been described as unusual by many.193 Several explanations have been offered for the Article’s lacklustre reception: historical inertia “rather than an overriding preference for litigation”;194 a lack of an ‘arbitration culture’; and/or the broad and ambiguous language of Article 25 DSU which makes its implementation unclear.195 However, if successfully implemented, the MPIA could be instrumental in overcoming this ‘inertia’, building an ‘arbitration culture’, and providing a model for exactly what such broad language would look like—in particular, because it is such a high profile example of Article 25 DSU’s use. In the future, this may encourage disgruntled Parties to have resort to alternative arrangements under Article 25 DSU, instead of obstructionism.

Saunders (2021); Johnson K, ‘How Trump May Finally Kill the WTO’. Foreign Policy, 9 December 2019 (last accessed 11 August 2021). For examples of the Obama administration’s actions see: Shaffer G, ‘Will the US Undermine the World Trade Organization?’ Huffington Post, 23 May 2016 (last accessed 11 August 2021); Hufbauer (2011) (last accessed 11 August 2021). 191 Monnier (2002), p. 512. 192 Arbitration Award, United States – Section 110(5) of the US Copyright Act – Recourse to Arbitration under Article 25 of the DSU, WT/DS160/ARB25/1 (09 November 2001). 193 Malkawi (2007), pp. 183–185. 194 Boisson de Chazournes (2005), p. 244. 195 Malkawi (2007), pp. 185–188. 190

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5 Conclusion The MPIA is significant in several ways. Through independent and impartial appellate review of panel reports the MPIA maintains the binding, two-tier DSS that gives the WTO its ‘bite’. The MPIA introduces several innovative reforms possible under the remit of Article 25 DSU which address some of the US’ procedural and systemic concerns. Its implementation is an opportunity for arbitrators and Parties to experiment with innovations and develop best practices, interpretations, and norms which may be transferrable to the Appellate Body context. To a lesser degree, the MPIA is also significant as only the second instance of arbitration under Article 25 DSU. However, the MPIA is not a ‘solution’ to the Appellate Body crisis. A ‘solution’ implies finality,196 but the MPIA is both temporary and superficial; it does no more than provide an alternative appeal mechanism and does not address the underlying causes of the crisis. It does not reinterpret the DSU or settle upon an existing interpretation. For example, instead of offering a workable test for Article 11 claims, the MPIA allows arbitrators to exclude Article 11 claims altogether,197 and when referencing Article 17.6, the MPIA copies the wording of DSU Articles without elaborating on their meaning.198 As such, focus should remain on resolving the Appellate Body crisis through other means. Acknowledgements To my thesis supervisor, Dr Imogen Saunders. Thank you for being the person to first pique my interest in International Trade Law. Thank you for answering, with endless patience, my endless lists of questions. Thank you for challenging me and teaching me to always do better. To my many mentors at the ANU College of Law—in particular, Dr Heather Roberts and Associate Professor Sarah Heathcote. I am lucky to have such wonderful women to model myself after. To my family, who have endured my enthusiasm for this topic with lots of love and perhaps a little bemusement.

References Boisson de Chazournes L (2005) Arbitration at the WTO: a terra incognita to be further explored. In: Charnovitz S et al (eds) Law in the service of human dignity: essays in honour of Florentino Feliciano. Cambridge University Press, Cambridge Chayes A, Chayes A (1998) The new sovereignty: compliance with international regulatory agreements. Harvard University Press

Oxford English Dictionary (online at 27 September 2020) ‘solution’ (last accessed 11 August 2021). 197 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 13. 198 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, JOB/DSB/1/Add.12 (30 April 2020) Annex 1, 9. 196

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Colbran S, Spender P, Jackson S, Douglas R (2015) Civil procedure: commentary and materials, 6th edn. LexisNexis Croley S, Jackson J (1996) WTO dispute procedures, standard of review, and deference to national governments. Am J Int Law 90:193 Ehlermann C-D (2002) Six years on the bench of the ‘World Trade Court’: some personal experiences as Member of the Appellate Body of the World Trade Organization. J World Trade 36:1 Étienne J (2010) Compliance theories: a literature review. Revue française de science politique 60(3):493 Franck T (1995) Fairness in international law and institutions. Oxford University Press Guzman A (2002) A compliance-based theory of international law. Calif Law Rev 90(6):1823 Hirschman A (1970) Exit, voice, and loyalty: responses to decline in firms, organizations, and states. Harvard University Press, Cambridge Jacyk D (2008) The integration of Article 25 arbitration in WTO dispute settlement: the past, present and future. Aust Int Law J 15:235 Koh H (1997) Why do nations obey international law? Yale Law J 106(8):2599 Lester L (2012) The development of standards of appellate review for factual, legal and law application questions in WTO dispute settlement. In: Bhattacharya P, Ram JR (eds) Trade law and development, vol IV(1), p 126 Lunenburg F (2012) Compliance theory and organizational effectiveness. Int J Scholarly Acad Intellect Diversity 14(1):1 Madsen MR et al (2018) Backlash against international courts: explaining the forms and patterns of resistance to international courts. Int J Law 14:197 Malkawi B (2007) Arbitration and the World Trade Organization: the forgotten provisions of Article 25 of the dispute settlement understanding. J Int Arbitr 24:173 Mignolli A (2020) The European Union faces the crisis of the WTO dispute settlement system: tensions between multilateralism and unilateralism in international trade law. Ordine internazionale e diritti umani. ISSN 2284-3531 Monnier P (2002) Working procedures before panels, the Appellate Body and other adjudicating bodies of the WTO. Law Pract Int Courts Tribunals 1(3):512 Pauwelyn J (2005) The transformation of world trade. Duke Law School Legal Studies Research Paper 66, 1 Pauwelyn J (2019) WTO Dispute Settlement Post 2019: what to expect? J Int Econ Law. https:// papers.ssrn.com/sol3/papers.cfm?abstract_id¼3415964. Last accessed 21 Aug 2021 Porges A (2003–2004) Settling WTO disputes: what do litigation models tell us? Ohio State J Dispute Resolu 19:141 Saunders I (2021) Populism, backlash and the ongoing use of the world trade organization dispute settlement system: state responses to the appellate body crisis. Maryland J Int Law 35:172 Schneider A (2019) Negotiating from the Bully Pulpit: Teaching Trump, Tactics, and Turmoil. Harv Law Sch Negot J 35(1). https://onlinelibrary.wiley.com/doi/full/10.1111/nejo.12280. Last accessed 21 Aug 2021 Steger D (1996) WTO dispute settlement: revitalisation of multilateralism after the Uruguay Round. Leiden J Int Law 9:2 Steger D (2003) The struggle for legitimacy in the WTO. In: Curtis JM, Ciuriak D (eds) Trade Policy Research, Minister of Public Works and Government Services, Canada, p 111

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Van den Bossche P (2005a) From afterthought to centerpiece: the WTO appellate body and its rise to prominence in the world trading system, Working Paper. University of Maastricht Faculty of Law 1 Van den Bossche P (2005b) The making of the ‘World Trade Court’: the origins and development of the appellate body of the world trade organization. In: Yerxa R, Wilson B (eds) Key issues in WTO dispute settlement: the first ten years. Cambridge University Press Van den Bossche P, Zdouc W (2017) The law and policy of the World Trade Organisation, 4th edn. Cambridge University Press Voon T, Yanovich A (2006) The facts aside: the limitation of WTO appeals to issues of law. J World Trade 40(2):239

Georgie Juszczyk received First Class Honours from the Australian National University in Law/International Security Studies in 2020. She currently works as an Associate at the Federal Court of Australia and will be commencing a graduate program with Herbert Smith Freehills (Sydney) in 2022.

Preventing Frivolous Counterclaims in Investor-State Arbitration: Need for Summary Dismissal Procedures Vishakha Choudhary

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Rules on Frivolous Claims: History and Status Quo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Early Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Shifting Trends: Towards Equitable Rules on Summary Dismissal . . . . . . . . . . . . . . . . . 2.3 Signs of Regression: Summary Dismissal Procedures in ISDS Reform Projects . . . 3 The Need for Summary Procedures for Frivolous Counterclaims . . . . . . . . . . . . . . . . . . . . . . . . . 4 Do Summary Procedures for Counterclaims Require Drastic Innovation? . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This article argues in favour of including summary procedures for the dismissal of frivolous counterclaims in arbitral rules and investment treaties. Arbitral tribunals and commentators have consistently recognised the contribution of rules on summary procedures towards screening out unmeritorious claims and enhancing the overall efficiency of investor-state dispute settlement (ISDS). However, various explicit and implicit restrictions in existing rules bar claimants from seeking early dismissal of frivolous counterclaims. Given the emerging practice of including investors’ obligations in investment treaties and the increasing frequency with which counterclaims are litigated in ISDS proceedings, precluding investors from challenging frivolous counterclaims runs against the current. The article highlights that the rationale for summary dismissal procedures is equally relevant to the adjudication of counterclaims and proposes possible rules in this regard.

The views expressed or implied in this article are those of the author and should not be attributed to the Secretariat. V. Choudhary (*) World Trade Organization, Legal Affairs Division, WTO Secretariat, Geneva, Switzerland e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 121–150, https://doi.org/10.1007/8165_2022_83, Published online: 11 May 2022

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1 Introduction In the course of a dispute, either party may raise a “frivolous” allegation against the other, that is an allegation “lacking a legal basis or legal merit”, “not serious” or “not reasonably purposeful”.1 In investor-state dispute settlement (ISDS), the rules governing arbitration proceedings or the applicable treaties may grant arbitral tribunals the power to summarily dismiss frivolous claims at a preliminary stage. By their express terms, these rules appear party-neutral.2 In practice, they have largely been wielded as shields by respondent States to avoid expending time and resources on a fundamentally defective claim.3 This trend in and of itself is not disconcerting; international investment agreements (IIAs) were traditionally designed to encourage foreign investments and typically imposed obligations upon State parties.4 Hence, more often than not, challenges in ISDS were directed by investors towards host States and counterclaims were not commonplace. Despite a steady increase in the number of State counterclaims in recent years, investors have not readily used these rules to seek dismissal of frivolous counterclaims.5 Even if they choose to do so, they may be unable to leverage these rules due to inter alia onerous time limits governing procedures for summary dismissal, implicit and explicit restrictions in the scope of the applicable rules, and restricted standing under these rules. Black’s Law Dictionary (2010), p. 739. This article uses the terms “frivolous”, “vexatious” and “unmeritorious” interchangeably to refer to the same notion. For an overview of what may be considered a “frivolous” allegation in international adjudication, see Potestà and Sobat (2012), pp. 137 et seq. 2 See for instance ICSID Arbitration Rules, rule 41(5) (“Unless the parties have agreed to another expedited procedure for making preliminary objections, a party may, no later than 30 days after the constitution of the Tribunal, and in any event before the first session of the Tribunal, file an objection that a claim is manifestly without legal merit” (emphasis added)); see however CAFTA-DR, Art. 10.20.4 (“a tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 10.26” (emphasis added)). 3 In the context of ICSID arbitration, see ICSID, Decisions on Manifest Lack of Legal Merit, https:// icsid.worldbank.org/cases/content/tables-of-decisions/manifest-lack-of-legal-merit. 4 Reisman (2009), p. 188. For an overview of such obligations, see Radi (2020), pp. 219 et seq. 5 The only publicly-known instance of a claimant invoking summary dismissal procedures is that of Elsamex v Honduras, where the claimant objected to the respondent’s application to annul an award made in the preceding ICSID arbitration on the basis that the respondent’s application clearly lacked legal merit. See Elsamex SA v Honduras, ICSID Case No ARB/09/4, Decision on Elsamex SA’s Preliminary Objections (7 January 2014). See also Global Trading Resource Corp. and Globex International, Inc. v Ukraine, ICSID Case No. ARB/09/11, Award (1 December 2010) (“Global Trading v Ukraine”), para. 29 (“Rule 41(5) opens the way – in the absence of agreement between the parties on another expedited procedure – to either party to apply to the tribunal at a very early stage in the arbitral proceedings to rule that ‘a claim is manifestly without legal merit.’”) and footnote 1 (“[T]he drafters [of the ICSID Arbitration Rules] might equally well have said ‘the respondent’, since the procedure is hardly likely to hold much interest for a claimant”). 1

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However, with a new generation of investment treaties on the horizon, securing protection for a claimant against frivolous counterclaims will be essential. Reference to social goals in modern IIAs may be improperly deployed as grounds for counterclaims against distressed investors. Aggressive counter-litigation by host States against investors may not only deter impecunious investors from engaging in ISDS proceedings, but it may also deter investments by foreign nationals altogether,6 frustrating the objective of IIAs. Since summary dismissal procedures are intended to protect any litigant from unnecessary costs,7 procedural rights available in this respect must equally serve the interests of an aggrieved claimant. Arbitration’s inherent virtues—equality of the parties and expeditious dispute resolution—will also be promoted in the process. This contribution proposes that reforms in ISDS—especially those under consideration at the United Nations Commission on International Trade Law (UNCITRAL) and the International Centre for Settlement of Investment Disputes (ICSID)—should accommodate an investor’s ability to object to manifestly unmeritorious counterclaims as a preliminary matter. Section 2 provides an overview of existing rules on summary dismissals and their shortcomings. Section 3 discusses the rationale for rules on frivolous counterclaims. Section 4 addresses possible novelties and safeguards for rules on frivolous counterclaims. Section 5 concludes.

2 Rules on Frivolous Claims: History and Status Quo 2.1

Early Efforts

The practice of concluding treaties specifically for investment protection began in 1959.8 However, until recently, neither institutional arbitration rules used in ISDS proceedings nor IIAs explicitly recognised a tribunal’s authority to summarily dismiss frivolous claims or counterclaims.9 The discontent of States with 6

Krajewski (2020), p. 120; Magnarelli (2020). Lotus Holding Anonim Sirketi v Turkmenistan, ICSID Case No. ARB/17/30, Award (6 April 2020) (“Lotus v Turkmenistan”), para. 159; Brandes Investment Partners, LP v The Bolivarian Republic of Venezuela, ICSID Case No. ARB/08/3, Decision on the Respondent’s Objection Under Rule 41(5) of the ICSID Arbitration Rules (2 February 2009) (“Brandes v. Venezuela”), para. 52; Duong (2021), p. 37. 8 Paradell and Newcombe (2009), p. 42. 9 It has been argued that these tribunals could dismiss a claim as frivolous or vexatious pursuant to their inherent powers, albeit without reference to clear standards and procedures. See de Chazournes (2020), p. 468; Van Harten (2014), p. 48; Puig and Brown (2011), p. 32; Jan Paulsson and Georgios Petrochilos, Revision of the UNCITRAL Arbitration Rules: A Report, 2006, www.uncitral.org/pdf/ english/news/arbrules_report.pdf, p. 65; ICC, Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration, 1 January 2021, https://iccwbo.org/content/ uploads/sites/3/2020/12/icc-note-to-parties-and-arbitral-tribunals-on-the-conduct-of-arbitrationenglish-2021.pdf, pp. 16–17. 7

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proceedings that unnecessarily consumed financial and legal resources prompted gap-filling exercises to remedy this.10 States have also attributed the need for such procedures to the increase in the number of investor-State disputes, which in turn has bolstered concerns that investors abuse the ISDS system with frivolous claims.11 As early as 2004, the United States of America (US) in its model bilateral investment treaty (BIT) recognised the need for special procedures in this respect.12 The catalyst for this change was the decision of the tribunal in Methanex v United States,13 where the tribunal found that it had no express or implied powers under the arbitration rules or the NAFTA to summarily dismiss the claimant’s claims for “lack of legal merit.”14 According to the United States, the proceedings lasted 3 years and required “millions of dollars of additional expense”, only for the tribunal to dismiss all claims for clear lack of jurisdiction.15 In this light, the US has negotiated summary dismissal procedures for frivolous claims in all its subsequent IIAs.16 The provisions of the 2004 US Model BIT, retained in the 2012 model, are today reflected in the text of US-negotiated treaties such as the Dominican RepublicCentral America Free Trade Agreement (DR-CAFTA),17 the US-Colombia Trade Promotion Agreement,18 the US-Peru Trade Promotion Agreement,19 the Korea-US Free Trade Agreement (KORUS FTA),20 and the Trans-Pacific Partnership agreement (TPP).21

10

Schreuer (2009), p. 542; Potestà and Sobat (2012), p. 137. UNCTAD, Investor-State Dispute Settlement and Impact on Investment-Rulemaking, UNCTAD/ ITE/IIA/2007/3, https://unctad.org/system/files/official-document/iteiia20073_en.pdf, p. 82, also noting that “[i]nvestors may be eager to claim as many violations of the applicable IIA as possible in order to increase their chances of success”; Parra (2007), p. 56. It should be noted here that these interventions do not consider the increase is ISDS claims relative to the proliferation of investment treaties or the increase in foreign investment generally. 12 US Model BIT 2004, Art. 28. 13 Menaker (2005), p. 127; Sampliner (2013), p. 160. 14 Methanex Corp. v United States of America, NAFTA/UNCITRAL, Partial Award (7 August 2002) (“Methanex v US”), paras. 109 and 126. 15 Jin Hae Seo v The Republic of Korea, HKIAC Case No. 18117, Submission of the United States of America (19 June 2019), paras. 2–3; The Renco Group, Inc. v Republic of Peru [I], ICSID Case No. UNCT/13/1, Non-Disputing State Party Submission of the United States of America (10 September 2014), paras. 2–3. 16 Id. See also Vandevelde (2010), p. 454; and Chen (2015), p. 66 explaining that this procedure is modelled after summary judgement procedures in US civil litigation. 17 DR-CAFTA, Art. 10.20.4. 18 US-Colombia TPA, Art. 10.20.4. 19 US-Peru TPA, Art. 10.20.4. 20 KORUS FTA, Art. 11.20.6. 21 The TPP never entered into force. However, Article 9.23 of the TPP (concerning procedures for summary dismissal of claims without legal merit) was incorporated by reference into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) mutatis mutandis. CPTPP, Art. 1.1. 11

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Among arbitral institutions, the ICSID Secretariat is credited with making early efforts to institute similar summary procedures. Under the ICSID Convention, the Secretary-General exercises a screening power over requests for arbitration received by the Centre.22 The Secretary-General also performs a similar function in respect of arbitrations under the ICSID Additional Facility Rules (ICSID AF Rules).23 However, their authority is restricted to screening out requests that manifestly fall outside the jurisdiction of the Centre,24 such as a request impleading a State which has not consented to the Centre’s jurisdiction. These provisions do not allow the SecretaryGeneral to otherwise deny the registration of claims, such as those that lack substantive merit.25 In order to alleviate concerns about the limited screening authority of the Secretary-General, the ICSID Arbitration Rules and AF Rules were amended to establish a procedure through which parties could seek dismissal of claims “manifestly without legal merit” at an early stage.26 These rules, introduced in 2006, can be found in Rule 41(5) of the ICSID Arbitration Rules and Article 45 (6) of the ICSID AF Rules.27 Tribunals apply the same legal standard in respect of each of these provisions.28 Today, several IIAs and institutional arbitration rules recognise the need for summary procedures to address frivolous claims. The following paragraphs discuss common features of such rules. As is explained in greater detail in these paragraphs, these rules often implicitly or explicitly carve out the ability of claimants to challenge frivolous counterclaims.

22

ICSID Convention, Art. 36(3). ICSID AF Rules, Art. 4; Robert Azinian, Kenneth Davitian, & Ellen Baca v The United Mexican States, ICSID Case No. ARB (AF)/97/2, Award (1 November 1999), paras. 38–39. 24 Schreuer (2009), p. 468 citing the Report of the Executive Directors on the ICSID Convention, 1 ICSID Reports 27; Parra (2007), p. 65. 25 Puig and Brown (2012), p. 172; Antonietti (2006), pp. 438–439. 26 ICSID Secretariat, Possible Improvements for the Framework of ICSID Arbitration, 22 October 2004, https://icsid.worldbank.org/sites/default/files/publications/Possible%20Improvements%20of %20the%20Framework%20of%20ICSID%20Arbitration.pdf, p. 7; ICSID Secretariat, Suggested Changes to the ICSID Rules and Regulations, May 2005, https://icsid.worldbank.org/sites/default/ files/publications/Suggested%20Changes%20to%20the%20ICSID%20Rules%20and%20Regula tions.pdf, pp. 7–8. 27 The difference between the draft and final versions of these rules was the addition of the word “legal” in the phrase “manifestly without legal merit”. This was done to ensure that factual issues were not litigated at a preliminary stage. See Antonietti (2006), p. 440, cited in Trans-Global Petroleum, Inc. v The Hashemite Kingdom of Jordan, ICSID Case No. ARB/07/25, Decision on the Respondent’s Objection Under Rule 41(5) of the ICSID Arbitration Rules (12 May 2008), (“TransGlobal v Jordan”), para. 97. 28 Lion Mexico Consolidated L.P. v United Mexican States, ICSID Case No. ARB(AF)/15/2, Decision on Preliminary Objection under Article 45(6) of the ICSID Arbitration (Additional Facility) Rules (12 December 2016) (“Lion v Mexico”), para. 56. 23

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Residual Nature

Rules on summary dismissal of frivolous claims may recognise the primacy of party autonomy. In particular, they may state that default procedures prescribed under the legal instrument in question are without prejudice to the parties’ right to agree to a different expedited review procedure for such claims.29 As a result, lex specialis rules applicable between disputing parties pursuant to an IIA or an investor-State contract would prevail over any similar general rule in the rules governing the arbitration.30

2.1.2

Standing

Procedures for dismissal of frivolous claims may prima facie appear to be available to both claimant(s) and the respondent State. For example, Rule 41(5) of the ICSID Arbitration Rules allows either “party” to resort to this procedure. In practice, they cannot be meaningfully used by a claimant to challenge a vexatious counterclaim due to a variety of factors discussed in the following paragraphs.31 Some IIAs also explicitly restrict the right to challenge frivolous claims, making them available only to “the respondent”.32 These IIAs further define the term “respondent” to mean the State party defending against a claim made by an investor.33 Such provisions, when read together, preclude the possibility of deeming an investor defending itself against a counterclaim as “respondent” for the limited purposes of the counterclaim. Hence, under these targeted rules, the investor would have no standing to challenge a counterclaim raised by the respondent State as frivolous.

29

ICSID Arbitration Rules, rule 41(5). Puig and Brown (2011), p. 251; Yeo and Yen (2021), p. 84; Pac Rim Cayman LLC v Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Preliminary Objections (2 August 2010) (“Pac Rim Cayman v El Salvador”), paras. 84 and 85. 31 See Sects. 2.1.3–2.1.5 below. 32 2012 US Model BIT, Art. 28(4); Comprehensive Economic and Trade Agreement (CETA), Art. 8.32.1; see also 2016 Indian Model BIT, Art. 21.1 which refers to the “Defending Party”. 33 2012 US Model BIT, Art. 1 (“‘respondent’ means the Party that is a party to an investment dispute”); CETA, Art. 8.1 (“respondent means Canada or, in the case of the European Union, either the Member State of the European Union or the European Union”); see also 2016 Indian Model BIT, Art. 13.7 (“‘Defending Party’ means a Party against which a claim is made under this Article”) and Art. 16 describing claim in reference to the investor. Moreover, treaty parties may also agree on the limited purpose of summary dismissal rules. See The Renco Group, Inc. v Republic of Peru, ICSID Case No. UNCT/13/1, Non-Disputing Party Submission of the United States (10 September 2014) para. 3 (stating that “the United States has negotiated expedited review mechanisms that permit a respondent State to assert preliminary objections in an efficient manner”); Peru’s Comments on the Non-Disputing Party Submission (3 October 2014), paras. 7–11 noting Peru’s agreement with the United States on the function and purpose of Article 10.2.4 of the US-Peru TPA. 30

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This interpretation of the relevant rules may be further confirmed by reference to their preparatory materials and the circumstances under which they were developed. For instance, according to the United States, the summary dismissal mechanism established under its treaties is intended to allow for “a respondent State to seek to efficiently and cost-effectively dispose of claims that cannot prevail as a matter of law.”34 Similar objectives can be gleaned in the Secretariat’s approach to the 2006 amendment to the ICSID Arbitration Rules introducing Rule 41(5).35 On the whole, the plain text of these rules in their context as well as the relevant supplementary materials indicate cumulatively that an investor has no standing to object to frivolous counterclaims.

2.1.3

Scope

Summary dismissal procedures are typically available for parties to challenge “a claim” as frivolous or manifestly lacking legal merit.36 Arguably, the term “claim” may be understood to include a claim for damages brought by the respondent State against an investor.37 However, arbitral tribunals do not necessarily share this view. For instance, the tribunal in Lotus Holding v Turkmenistan recently held that “a claim can only be defined by reference to the Request for Arbitration. This accords with legal principle”.38 Some IIAs even go as far as to specify that the term “claim” refers to an averment with respect to which an award in favour of “the claimant” may be made.39 A narrowed understanding of claims in IIAs and arbitration rules may operate as an additional bar against potential challenges to frivolous counterclaims. Admittedly, rules on summary dismissals generally provide that these procedures are without prejudice to a tribunal’s authority to address other objections as

34

Bridgestone Licensing Services, Inc. and Bridgestone Americas, Inc. v Republic of Panama, ICSID Case No. ARB/16/34, U.S. Submission Pursuant to Article 10.20.2 of the U.S.-Panama TPA (28 August 2017), paras. 3 and 5. 35 ICSID Secretariat, Possible Improvements of the Framework for ICSID Arbitration, 22 October 2004, https://icsid.worldbank.org/sites/default/files/publications/Possible%20Improvements%20of %20the%20Framework%20of%20ICSID%20Arbitration.pdf; see also Diop (2010), p. 312; and Parra (2007), p. 65. 36 ICSID Arbitration Rules, Rule 41(5); 2012 US Model BIT, Art. 28(4); 2016 Indian Model BIT, Art. 21.1. 37 See Black’s Law Dictionary (2010), p. 402, defining a “counterclaim” as “[a] claim for relief asserted against an opposing party after an original claim has been made”. See generally, Canfor Corporation and others v United States of America, UNCITRAL, Order of the Consolidation Tribunal (7 September 2005), para. 107 and Sociedad Anónima Eduardo Vieira v Republic of Chile, ICSID Case No. ARB/04/7, Award (21 August 2007), paras. 243–244 favouring broad interpretations of the term “claims” in the NAFTA and the Chile-Spain IIA respectively. 38 Lotus v Turkmenistan, para. 164. 39 2012 US Model BIT, Art. 28(4); EU-Singapore FTA, Art. 3.1; see also 2016 Indian Model BIT, Art. 21.1 which refers to “a claim submitted by the investor”.

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preliminary questions.40 This may be interpreted to preserve an investor’s right to seek dismissal of frivolous counterclaims. However, in the absence of any prescribed legal standard based on which a counterclaim may be considered “frivolous”, it is unclear whether tribunals will exercise their inherent authority to grant such requests. It is important to recall here that the early rules on summary procedures for frivolous claims were devised in response to a tribunal’s failure to dismiss frivolous claims of its own motion in the absence of express powers and relevant standards in the applicable legal instruments.41

2.1.4

Temporal Limitations

IIAs and arbitration rules generally require an objecting party to challenge any claims that it considers frivolous as early as possible.42 This corresponds to the general objectives of arbitration to secure the expeditious resolution of a dispute, to minimise costs for disputing parties, and to avoid dedication of a tribunal’s or a party’s resources on claims that are bound to fail. In this vein, legal instruments may stipulate a particular number of days (for example, within 30 days from the constitution of the tribunal43), a particular stage of proceedings (for example, no later than the date for the submission of the counter-memorial44) or both,45 beyond which a party cannot make an application seeking summary dismissal of frivolous claims. These temporal conditions pose further impediments for claimants seeking to challenge frivolous counterclaims. Take the example of an arbitration governed by the ICSID Arbitration Rules. An objection to a counterclaim under ICSID Arbitration Rule 41(5) on summary dismissals would have to be filed “no later than 30 days after the constitution of the tribunal, and in any event before the first session of the tribunal”. This is prohibitive for claimants seeking to challenge frivolous counterclaims, since any application for dismissal of the same would have to be made before the timetable for the pleadings has been set and when the only available written submission is the claimant’s request for arbitration. Counterclaims are generally filed

40

2012 US Model BIT, Art. 28(4); 2016 Indian Model BIT, Art. 21.1; CETA, Art. 8.32.6; see also ICSID Arbitration Rules, Rule 41(1). 41 See Sect. 2.1 above discussing the tribunal’s decision in Methanex v US and the impact thereof. 42 For example, in Desert Line Projects LLC v The Republic of Yemen, ICSID Case No. ARB/05/17, Award (6 February 2008), para. 97 the tribunal noted that the fact that Rule 41(1) of the ICSID Arbitration Rules provided for objections to be filed “no later” than the deadline for the countermemorial did not mean that the respondent was not bound to raise them before that date if such objections were or ought to have been already manifest. 43 CETA, Art. 8.32.1. 44 2012 US Model BIT, Art. 28(4)(a); 2016 Indian Model BIT, Art. 21.2; CETA, Art. 8.33.2. 45 ICSID Arbitration Rules, Rule 41(5). See also Trans-Global v Jordan, paras. 24–29 noting that the two temporal conditions provided in Rule 41(5) are cumulative.

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only in the respondent State’s counter-memorial.46 Rules requiring that any objections challenging a claim as frivolous be raised before the submission of the countermemorial by the respondent clearly carve out claimants seeking to object to frivolous counterclaims.47 Are parties expected to strictly adhere to the deadlines prescribed in rules on summary dismissals? It would seem so. For instance, tribunals evaluating applications under Rule 41(5) of the ICSID Arbitration Rules have previously dismissed applications as untimely for failing to observe the deadlines under this rule.48 Pertinently, even outside the context of summary dismissal procedures, respondent States readily object to preliminary objections against counterclaims as untimely.49

2.1.5

Procedure

In evaluating an objection to an allegedly frivolous claim, an arbitral tribunal follows a truncated procedure. As noted above, the respondent is usually required to file its objection at the earliest stage possible and within the deadlines stipulated under the applicable legal instrument. The respondent should also state the basis for its objection clearly.50 Upon receiving the objection, the tribunal may even suspend ongoing proceedings and establish a special schedule for the consideration of the respondent’s objection.51 After giving the parties the opportunity to present their respective case,52 the tribunal renders a decision on the objection.53 In making its decision, the tribunal must generally assume the factual allegations in support of the claim to be true.54

46 Schreuer (2009), p. 526; see also ICSID Arbitration Rules, Rule 40(2) (“a counter-claim [shall be presented] no later than in the counter-memorial”). 47 Poon and Popova (2015), p. 245; Potestà (2017), p. 254. 48 Mabco Constructions v Republic of Kosovo, ICSID Case No. ARB/17/25, Decision on Jurisdiction (30 October 2020), para. 36. See generally Lotus v Turkmenistan, para. 156 on the strict construction of the time limits under ICSID Arbitration Rules, Rule 41(5). 49 For instance, see Perenco Ecuador Limited v Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Claimant Application for Dismissal of Respondent Counterclaims (18 August 2017), paras. 17 et seq and See also Inmaris Perestroika Sailing Maritime Services GmbH and others v Ukraine, ICSID Case No. ARB/08/8, Award (1 March 2012), para. 20. 50 ICSID Arbitration Rules, Rule 41(5); CETA, Art. 8.32.3. 51 2012 US Model BIT, Art. 28(4); 2016 Indian Model BIT, Art. 21.3; CETA, Art. 8.32.4. 52 While this may prolong the summary procedures beyond what is desirable, failure to provide the parties with the opportunity to present their case would constitute a fundamental departure from due process, which could leave the tribunal’s award open to annulment or set-aside proceedings. See Schreuer (2009), p. 543, Global Trading v Ukraine, paras. 32–33. 53 ICSID Arbitration Rules, Rule 41(5); CETA, Art. 8.32.5. 54 2012 US Model BIT, Art. 28(4)(c); 2016 Indian Model BIT, Art. 21.3; CETA, Art. 8.32.5.

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If the tribunal finds that a respondent’s objection characterising a claim as frivolous is valid in whole or part, it can issue an award or order to that effect.55 It may also be required to state the reasons for its decision.56 An award rendered under such an expedited review mechanism is final. If the tribunal dismisses all the claims before it as vexatious, the proceedings are discontinued.57 If claims are summarily dismissed in part, the proceedings would continue with respect to the remaining claims.58 Notably, control mechanisms that apply to other awards (e.g. annulment, revision) are equally applicable to awards dismissing claims or parts thereof as frivolous.59

2.1.6

Threshold for Dismissal

Rules on summary dismissal use various formulations to prescribe the test for deeming a claim unmeritorious, such as a claim submitted is not a claim for which an award in favour of the claimant may be made,60 is manifestly without legal merit,61 is not within the scope of the tribunal’s jurisdiction,62 or is unfounded as a matter of law.63 The threshold under each of these tests depends upon the exact treaty language. For instance, ICSID tribunals have largely found that a “manifest” lack of legal merit must be “evident”, “obvious”, or “clearly revealed to the eye, mind, or judgement”.64 In other words, the claimant must not have a tenable or arguable case.65 On the other hand, to find that a claim submitted is not one for which “an award in favour of the claimant may be made”, tribunals have generally applied a

55

ICSID Arbitration Rules, Rule 41(6); 2012 US Model BIT, Art. 28(4)(b). 2012 US Model BIT, Art. 28(4)(b); 2016 Indian Model BIT, Art. 21.3. 57 Diop (2010), p. 335. 58 See Trans-Global v Jordan, para. 74. 59 Elsamex, S.A. v Republic of Honduras, ICSID Case No. ARB/09/4, Decision on Preliminary Objections (7 January 2014), paras. 89–101; Puig and Brown (2011), p. 257. 60 2012 US Model BIT, Art. 28(4); CETA, Art. 8.33.1; EU-Singapore FTA, Art. 3.15. 61 ICSID Arbitration Rules, Rule 41(5); Article 9.23 TPP; Article 11.20.6 KORUS FTA; CETA, Art. 8.32.1. 62 2016 Indian Model BIT, Art. 21.1. 63 2016 Indian Model BIT, Art. 21.1. 64 Trans-Global v Jordan, paras. 83–88 and 92; Global Trading v Ukraine, para. 35; Lion v Mexico, paras. 62–67, Lotus v Turkmenistan, para. 158. 65 PNG Sustainable Development Program Ltd. v. Independent State of Papua New Guinea, ICSID Case No. ARB/13/33, ICSID Decision on Respondent Article 41(5) Objections (28 October 2014) (“PNG v Papua New Guinea”), paras. 88–89; MOL Hungarian Oil and Gas Company Plc v Republic of Croatia, ICSID Case No. ARB/13/32, Decision on Respondent Application under ICSID Arbitration Rules 41(5) (2 December 2014) (“MOL v Hungary”), para. 45. 56

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likelihood of success standard, notwithstanding whether the claim is patently unfounded.66 Irrespective of how they are worded, these standards are not easily met. For example, the ICSID standard of “manifest lack of legal merit” has been reached very rarely, such as failure of the claimant to demonstrate legal rights under a treaty,67 clear lack of a qualifying investment,68 plainly ascertainable derogation of the limitation period of a treaty,69 and an obvious failure to comply with the mandatory pre-dispute procedures prescribed in the treaty.70 The standard under the CAFTA (a claim is not one in respect of which an award in favour of the claimant may be made) is similarly high.71 Depending on the language of the treaty provision or the applicable arbitration rules, a tribunal’s authority under summary dismissal procedures can be understood to extend to consideration of jurisdictional objections, objections based on merits,72 or both.73 Such rules have also been successfully employed to dismiss claims leading to abuse of process.74

66 Pac Rim Cayman LLC v Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Preliminary Objections (2 August 2010) (“Pac Rim Cayman v El Salvador”), paras. 108-110. At para. 118, the tribunal considering an objection under Article 10.20.4 of the CAFTADR further noted that it was not guided by Rule 41(5) of the ICSID Arbitration Rules due to its “different wording” and the difference in object and purpose of the two provisions. See also Rovine (2016), p. 90; Polonskaya (2017), p. 24. 67 Trans-Global v Jordan, paras. 118–119; Lotus v Turkmenistan, para. 180. 68 Global Trading v Ukraine, para. 51; Lotus v Turkmenistan, para. 195. 69 Ansung Housing Co., Ltd. v People’s Republic of China, ICSID Case No. ARB/14/25, Award (9 March 2017) (“Ansung Housing v China”), paras 142–44; Corona Materials v Dominican Republic, para. 237. 70 Almasyria v Kuwait, para. 34–48. 71 Pac Rim Cayman v El Salvador, para. 110. 72 The Renco Group, Inc. v Republic of Peru [I], ICSID Case No. UNCT/13/1, Decision as to the Scope of the Respondent Preliminary Objections Under Article 10.20.4 (18 December 2014), paras. 184–185. See also Jin Hae Seo v Republic of Korea, HKIAC Case No. HKIAC/18117, Final Award (27 September 2019), para. 82 noting that an objection that a claim is not a claim for which an award may be made under Article 11.26 of the KORUS FTA must relate to “the type of relief requested” by the claimant. 73 This is the case for the ICSID Arbitration Rules, where the terms “without legal merit” in Rule 41(5) have been interpreted to mean lack of legal merit either on jurisdictional grounds or due to substantive defects. Brandes v Venezuela, paras. 50–55; Global Trading v Ukraine, para. 30. See additionally in this regard Diop (2010), pp. 322–323. 74 RSM Production Corporation and others v Grenada, ICSID Case No. ARB/10/6, Award (10 December 2010), paras. 7.3.6–7.3.7 (“RSM v Grenada”); Brabandere (2012), p. 44.

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Costs

Most arbitration rules and IIAs confer a broad discretion on arbitral tribunals to apportion the costs of the proceedings between parties as they deem fit.75 However, a respondent State that is successful in securing summary dismissal of a frivolous claim may additionally benefit from favourable apportionment of costs. In particular, the applicable legal instruments may suggest that an arbitral tribunal may award to the prevailing respondent reasonable costs and attorney’s fees incurred in submitting the successful objection to a frivolous claim.76 Simultaneously, if the respondent’s objection against a sound claim is proven to be frivolous, the tribunal may award to the claimant costs incurred in defending against such an objection.77 As in the case of a respondent objecting to a vexatious claim, a claimant may also incur significant costs in defending itself against a counterclaim that is patently unfounded. However, in their current form, IIAs and arbitration rules do not expressly recognise a claimant’s right to recover such costs.

2.2

Shifting Trends: Towards Equitable Rules on Summary Dismissal

Increasingly, arbitration institutions—including those that have adopted rules specifically for the administration of ISDS proceedings—seem to recognise the need for summary dismissal procedures for counterclaims. The rules adopted by the Singapore International Arbitration Centre (SIAC),78 the Stockholm Chamber of Commerce (SCC),79 the Hong Kong International Arbitration Centre (HKIAC),80 and the China International Economic and Trade Arbitration Commission (CIETAC)81 deserve special attention.

75

See for instance ICSID Convention, Art. 61(2). 2012 US Model BIT, Art. 28(6); 2016 Indian Model BIT, Art. 21.6. 77 2012 US Model BIT, Art. 28(6). While the 2016 Indian Model BIT acknowledges a tribunal’s authority to grant favourable costs only to “the prevailing Defending Party”, it goes on to state that the tribunal may grant such costs “incurred in submitting or opposing the objection [as to a frivolous claim]”. There thus appears to be an internal inconsistency in the Indian Model Treaty. 78 2017 SIAC Investment Arbitration (SIAC IA) Rules. There is no previous iteration of these rules. 79 2017 SCC Rules. The 2007 iteration of the SCC Rules did not contain any rules on summary dismissals. However, the SCC Board of Directors was granted a limited screening power, akin to that enjoyed by the ICSID Secretary General, to dismiss a case over which the SCC Institute manifestly lacked jurisdiction. See 2007 SCC Rules, Art. 10(i). 80 2018 HKIAC Rules. The 2013 and 2008 versions of the HKIAC’s rules did not envisage procedures for summary dismissals. 81 2018 CIETAC International Investment Arbitration (CIETAC IIA) Rules. There is no previous iteration of these rules. 76

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The procedures on summary dismissals fashioned by these institutions are partyneutral; either party may invoke these procedures to challenge a frivolous allegation against it.82 The neutral standing in these rules is further fortified by the use of partyneutral terms to describe the scope of the rules. For example, instead of referring solely to “a claim”, these rules acknowledge that “a counterclaim”,83 a “defence”84 or, even more generally, any “points of law or fact”85 can be potential subjects of a request for summary dismissal. A comparison of the 2012 US Model BIT and the SCC Rules reveals how neutrality is ensured in the latter. The former allows a respondent to seek summary dismissal on the grounds that “a claim submitted is not a claim for which an award in favour of the claimant may be made”.86 The latter avoids such less restrictive language, allowing a party to seek summary dismissal on the grounds that “even if the facts alleged by the other party are assumed to be true, no award could be rendered in favour of that party under the applicable law”.87 Hence, unlike the US Model BIT, the SCC rules leave sufficient room for a claiming investor to argue that a counterclaim is not one with respect to which an award in favour of the respondent State may be rendered, even if the factual allegations of the respondent State are accepted pro tem. As noted above,88 temporal limitations in rules on summary dismissal may operate as an implicit bar against challenges to frivolous counterclaims. Recent iterations of institutional arbitration rules seem to recognise and remedy this. For instance, the SIAC IA Rules and the SCC Rules do not impose any deadlines for objecting to frivolous claims or counterclaims.89 The HKIAC Rules only provide that such objections should be raised at the earliest.90 The CIETAC IIA Rules are particularly clear: they state that an application for early dismissal of a counterclaim can be raised by an investor till it files its reply to a counterclaim.91 The procedural steps for summary dismissals under these rules are also described in party-neutral terms: the objecting party must state the basis of its objection

82

SIAC IA Rules, Art. 26.1; 2017 SCC Rules, Art. 39(2)(ii); CIETAC IIA Rules, Art. 26.1; HKIAC Rules, Art. 43.1. 83 CIETAC IIA Rules, Art. 26.1. 84 SIAC IA Rules, Art. 26.1. In this sense, the SIAC IA Rules are broader than the ICSID Arbitration Rules that inspired them. See Boog and Wimalasena (2017), p. 81. 85 HKIAC Rules, Art. 43.1; see also SCC Rules, Art. 39(1) (“A party may request that the Arbitral Tribunal decide one or more issues of fact or law by way of summary procedure”). 86 2012 US Model BIT, Art. 28(4). 87 2017 SCC Rules, Art. 39(2)(ii). 88 See Sect. 2.1.4. 89 Rule 26.4 of the SIAC IA Rules only requires that the Tribunal make its award or order within 90 days of the application. 90 HKIAC Rules, Art. 43.3. 91 CIETAC IIA Rules, Art. 26.3.

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clearly,92 a tribunal must consult with both parties before arriving at its decision,93 it must render its decision on such preliminary objections at the earliest,94 and it must terminate proceedings in respect of the claim, counterclaim or defence which is found frivolous.95 Finally, on costs, these rules accommodate the tribunal’s discretion to order the losing party (whether claimant or respondent) to compensate the winning party for the expenses reasonably incurred by it in pursuing its case.96 The SCC Rules go one step further and require that in awarding costs, the tribunal should have regard to “each party’s contribution to the efficiency and expeditiousness of the arbitration”.97 A claimant successful in securing the dismissal of a frivolous counterclaim may therefore be able to recover costs incurred in raising such objections due to its contribution to the efficient conduct of the proceedings. Simultaneously, a respondent State could be deterred from raising vexatious counterclaims to avoid unnecessary costs. In summary, the recent practice of arbitral institutions shows that they are cognisant of the need to secure true equality between disputing parties, including the availability of special procedural mechanisms. However, as is discussed in the following section, the two most frequently used arbitration rules in ISDS—the ICSID Arbitration Rules and the UNCITRAL Rules—are still far from achieving similar results.

2.3

Signs of Regression: Summary Dismissal Procedures in ISDS Reform Projects

Reforms in the rules governing ISDS proceedings are being discussed nationally and internationally. A recurring theme of these discussions is to enhance the time and cost efficiency of such proceedings. Keeping this objective in mind, the reluctant attitude towards summary dismissal procedures for frivolous counterclaims seems counterintuitive.

92

SIAC IA Rules, Rule 26.2; 2017 SCC Rules, Art. 39(3); CIETAC IIA Rules, Art. 26.2; HKIAC Rules, Art. 43.4. 93 SIAC IA Rules, Art. 26.3; 2017 SCC Rules, Art. 39(6); CIETAC IIA Rules, Art. 26.4; HKIAC Rules, art. 43.5. 94 SIAC IA Rules, Art. 26.4; 2017 SCC Rules, Art. 39(6); CIETAC IIA Rules, Art. 26.5; HKIAC Rules, Art. 43.6. 95 CIETAC IIA Rules, Art. 26.6. 96 CIETAC IIA Rules, Art. 53.3; SIAC IA Rules, Arts. 33 and 35. 97 SCC Rules, Arts. 49 and 50.

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ICSID Amendments

In October 2016, ICSID launched its first amendment process since 2006. One of the stated objectives of this process is “reducing time and cost” of ICSID arbitration proceedings.98 Still, the proposed rules on “Manifest Lack of Legal Merit” in the ICSID’s working papers largely retain the contents of the current ICSID Arbitration Rule 41(5).99 Furthermore, they fortify the time limits for raising objections under Rule 41(5),100 which operate as an implicit bar against claimants seeking to challenge frivolous counterclaims.101 Pertinently and in response to requests that these rules be expressly extended to allow dismissal of frivolous counterclaims,102 the Secretariat noted that “this does not fit with the objective of the rule which is to dispose of the case at an early stage, as counterclaims and defences are generally filed at a later stage of the proceeding.”103 As a consequence, parties simply operate in a state of inequality: While a respondent State may be able to secure the summary disposal of a claim, a claimant has no such avenues. In this regard, the ICSID Secretariat suggests that a claimant may file preliminary objections concerning counterclaims under Rule 41(1) of the ICSID Arbitration Rules or otherwise request that a tribunal deals with them on an expedited

98

ICSID Secretariat, Backgrounder on Proposals for Amendment of the ICSID Rules, 2 August 2018, https://icsid.worldbank.org/sites/default/files/publications/Amendment_Backgrounder. pdf, p. 2. 99 The amendments under consideration only clarify the scope of the rule, the procedure and the time limit for submitting an objection, and the timing of the Tribunal’s ruling. See ICSID Secretariat, Proposals or Amendment of the ICSID Rules—Working Paper, 2 August 2018, https://icsid. worldbank.org/sites/default/files/publications/WP1_Amendments_Vol_3_WP-updated-9.17.18. pdf (ICSID Amendments Working Paper No. 1), p. 178. 100 ICSID Amendments Working Paper No. 1, p. 102 (“Proposed [rule] 8 concerns time limits specified in the Convention and the AR, for example, the time limit to file an objection that the dispute is manifestly without legal merit (current AR 41(5)). . . Because these time limits are not fixed by the Tribunal, they cannot be extended by the Tribunal”). 101 See Sect. 2.1.4 above. 102 ICSID Secretariat, Rule Amendment Project—Member State & Public Comments on Working Paper # 1 of August 3, 2018, 15 March 2019, https://icsid.worldbank.org/sites/default/files/ amendments/Compendium_Comments_Rule_Amendment_3.15.19.pdf, p. 254 (“[A]s drafted and in conjunction with the deadline, this Rule appears to preclude the striking out of counterclaims and defenses that are manifestly without legal merit. This creates an unfair distinction between the parties that bring claims and those that defend against them, and exacerbates the problem of unnecessary litigation and added time and expense”). 103 ICSID Amendments Working Paper No. 1, pp. 178–179.

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basis.104 Admittedly, even with the amendments proposed to Rule 41(1),105 a claimant could raise a preliminary objection concerning the tribunal’s jurisdiction over a counterclaim or the merits thereof. This seemingly simple solution to the aforementioned inequality ignores three significant issues. First, while a respondent State has three opportunities to object to a vexatious claim—before the Secretary General,106 under Rule 41(5), and under Rule 41 (1)107—a claimant only has one among these options. As a result, while foundational defects in a frivolous claim may be agitated in no less than three instances, equal opportunity is not available to claimants in respect of frivolous counterclaims. This is significant because Rule 41(5) envisages a claim so defective that it can be dismissed outright.108 By contrast, an objection to a claim under Rule 41(1) “requires for its disposition more elaborate argument or factual enquiry”.109 Hence, if the only way for a claimant to raise preliminary objections against a counterclaim is under Rule 41(1), it has no opportunity to avail the kind of “summary” procedures that are available to a respondent State seeking dismissal of unmeritorious claims.110 A more equitable solution compared to the one proposed by the Secretariat would be for Rule 41(5) procedures to be available to both disputing parties—thereby allowing a tribunal to weed out those claims or counterclaims that can be summarily dismissed—and making further Rule 41(1) procedures unavailable in respect of those issues that have already been discussed under Rule 41(5).111 This will also

104 ICSID Amendments Working Paper No. 1, p. 179; ICSID Secretariat, Proposals or Amendment of the ICSID Rules—Working Paper #3, 16 August 2019, https://icsid.worldbank.org/sites/default/ files/amendments/WP_3_VOLUME_1_ENGLISH.pdf, pp. 52–53. 105 ICSID Secretariat, Proposals or Amendment of the ICSID Rules—Working Paper, 15 June 2021, https://icsid.worldbank.org/sites/default/files/publications/WP%205-Volume1-ENG-FINAL. pdf (ICSID Amendments Working Paper No. 5), p. 297. 106 Ansung v China, para. 72 (“registration does not and cannot pre-judge an application under ICSID Arbitration Rule 41(5)”). 107 Brandes v Venezuela, para. 53 (“there are actually three levels at which jurisdictional objections could be examined. First by the Secretariat, and if the case passes that level, it would then be under Rule 41(5), and if it passes that level, it might still be under Rule 41(1)”); Global Trading v Ukraine, para. 33 (“the rejection of an objection under Rule 41(5) at the pre-preliminary stage does not stand in the way of its resurrection later in the normal way as if Rule 41(5) did not exist”); Emmis v Hungary, para. 84. See also Brabandere (2012), p. 33. 108 MOL v Hungary, para. 44. 109 Id., para. 44. See also Trans-Global v Jordan, para. 103 (“[ICSID decisions applying the ICJ’s decision in Oil Platforms] were directed at objections based on the tribunal’s jurisdiction or competence under Article 41 of the ICSID Convention and Rule 41(1) of the ICSID Arbitration Rules. . . Moreover, the procedure for [Rule 41(1)] jurisdictional objections is also different from Rule 41(5): the timing of the respondent’s jurisdictional objection can follow the claimant’s first memorial, long after the request for arbitration and the first session; and the tribunal can postpone its decision or award by joining the objection to the merits of the dispute”); Parra (2015), p. 596. 110 Potestà (2017), p. 254 noting that by contrast to Rule 41(1) proceedings, Rule 41(5) proceedings are considerably accelerated. 111 For example, see Transglobal Green Energy, LLC and Transglobal Green Energy de Panama, S.A. v The Republic of Panama, ICSID Case No. ARB/13/28, Decision on the Admissibility of

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serve to cut down the length of proceedings, since Rule 41(5) proceedings are significantly expedited. Second, Rule 41(1) only permits preliminary objections concerning the jurisdiction of a tribunal over a claim or a counterclaim.112 However, much like a frivolous claim, a counterclaim may be vexatious on the merits, such as by raising a cause of action that has no legal basis in the applicable IIA.113 Neither Rule 41(1) nor any of the proposed amendments to the ICSID Arbitration Rules provide an avenue to mount preliminary objections against such counterclaims. On the other hand, Rule 41(5) provides the possibility to seek summary dismissal of claims that are “frivolous as to the merits”.114 Finally, current rules on costs in the ICSID Arbitration Rules afford wide discretion to a tribunal to apportion costs as it deems fit.115 Proposed amendments to these rules have clearer directions, including a presumption in favour of (only) the respondent State if a tribunal renders an award dismissing a claimant’s case summarily.116 A claimant that raises a successful preliminary objection about a counterclaim does not benefit from a similar presumption. Further, the proposed amendments on the allocation of costs also list factors to be considered by tribunals in making their decision. The indicative list of factors includes the parties’ conduct during the proceeding, such as “the extent to which they acted in an expeditious and

Respondent Preliminary Objection to the Jurisdiction of the Tribunal under Rule 41(5) (17 March 2015), para. 32 (“a decision pursuant 41(5) rejecting an objection would be dispositive, but would not deprive Respondent of its right to raise objections under Rule 41(1) that are distinct from the objections already decided under Rule 41(5)”). See also Schreuer (2009), p. 544 (“it is doubtful whether a party should be allowed to insist on the application of the prima facie test at the stage of jurisdiction (. . .) once its objection that a claim is manifestly without legal merit has been dismissed in summary proceedings”). 112 ICSID Arbitration Rules, Rule 41(1) permits preliminary objections pertaining to the “jurisdiction of the Centre” or the “competence of the Tribunal”. See also Pac Rim Cayman LLC. v Republic of El Salvador, ICSID Case No. ARB/09/12, Award (14 October 2016), paras. 5.41 and 5.42; Peteris Pildegovics and SIA North Star v Kingdom of Norway, ICSID Case No. ARB/20/11, Decision on Bifurcation and Other Matters (12 October 2020), para. 7; Antonietti (2006), p. 439. 113 Urbaser SA and others v Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016), para. 1220 (emphasising the lack of legal ground in the treaty or international law for the respondent’s counterclaim). On the other hand, claims may be dismissed as frivolous if they agitate non-existent legal rights of the claimant or non-existent legal obligations of the respondent. See Accession Mezzanine Capital L.P. and Danubius Kereskedöház Vagyonkezelö Zrt. v Hungary, ICSID Case No. ARB/12/3, Decision on Respondents Objection Under Arbitration Rule 41(5) (16 January 2013), para. 77; Trans-Global v Jordan, para. 95. 114 Parra (2007), p. 56; Antonietti (2006), p. 440. See for instance, Emmis International Holding, B. V., Emmis Radio Operating, B.V., MEM Magyar Electronic Media Kereskedelmi és Szolgáltató Kft. v The Republic of Hungary, ICSID Case No. ARB/12/2, Decision on Respondent’s Objection Under ICSID Arbitration Rule 41(5) (11 March 2013), para. 72; Brandes v Venezuela, para. 52; Global Trading v Ukraine, para. 30. 115 ICSID Arbitration Rules, Rule 61(2). 116 ICSID Amendments Working Paper No. 5, p. 305. The proposed rules do not provide for a presumption in favour of a claimant that successfully fends off a Rule 41(5) objection.

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cost-effective manner”.117 Read together with the presumption discussed above, a tribunal may readily find that a claimant whose claim is dismissed for manifest lack of merit acted against the interests of timely and cost-effective dispute resolution by bringing a frivolous claim. However, a respondent State’s inability to defend its counterclaim against a preliminary objection may not be judged as harshly and invite similar cost consequences since it is not coloured as frivolous under the arbitration rules. Past jurisprudence indicates that the characterization of a claim as “frivolous” (and not simply the dismissal of a claim pursuant to a preliminary objection) is material in tribunals’ decisions to award costs to a party.118 Even the risk of the inequality resulting from the foregoing should prompt reconsideration of the proposed rules. In sum, the ICSID Secretariat’s solution to the lack of summary dismissal procedures for counterclaims, when read together with the amendments proposed, effectively preserves the skewed status quo under the current Rule 41(5).

2.3.2

UNCITRAL Working Group III

Attempts to reform lengthy and costly ISDS proceedings are also underway in the UNCITRAL’s Working Group III on Investor-State Dispute Settlement Reform (Working Group).119 Early on in its deliberations, the Working Group noted the importance of a summary dismissal mechanism to deal with unfounded “claims”.120 However, these discussions have consistently revolved around preventing abuse of ISDS procedures by claimants.121 Despite recognising that “any dispute between a State and an investor is a burden on both parties” and that “a dispute or even the possibility of a dispute could increase transactional costs of investors”,122 the Working Group does not shift its focus to more neutral territory.

117

ICSID Amendments Working Paper No. 1, p. 122. See for instance Commerce Group Corp. and San Sebastian Gold Mines, Inc. v The Republic of El Salvador, ICSID Case No. ARB/09/17, Award (14 March 2011), para. 137; Corona Materials LLC v. Dominican Republic, ICSID Case No. ARB(AF)/14/3, Award (31 May 2016) (Corona Materials v Dominican Republic), para. 277; Daniel W. Kappes and Kappes, Cassiday & Associates v Republic of Guatemala, ICSID Case No. ARB/18/43, Decision on the Respondent’s Preliminary Objection (13 March 2020) (“Kappes v Guatemala”), para. 231. 119 UNCITRAL, Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its 34th session (Vienna, 27 November–1 December 2017)—Part I, 26 February 2018, https://undocs.org/en/A/CN.9/930/Rev.1, p. 7. 120 UNCITRAL, Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its 34th session (Vienna, 27 November–1 December 2017)—Part II, 26 February 2018, https://undocs.org/en/A/CN.9/930/Add.1/Rev.1, p. 2. 121 Ibid. See also UNCITRAL, Possible reform of investor-State dispute settlement (ISDS)— Security for cost and frivolous claims, 16 January 2020, https://undocs.org/en/A/CN.9/WG.III/ WP.192, pp. 6–8. 122 UNCITRAL, Possible reform of investor-State dispute settlement (ISDS)—cost and duration, 31 August 2018, https://undocs.org/en/A/CN.9/WG.III/WP.153, p. 2. 118

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The Working Group is also exploring the possibility for ISDS tribunals to order the claimant to pay all costs associated with a frivolous claim.123 In addition, the Working Group suggests that rules on allocation of cost should require tribunals to consider specific factors such as the parties’ conduct along similar lines as discussed in the context of ICSID reforms.124 However, as discussed above, if a respondent State’s frivolous counterclaim is not held to the same yardstick as a claimant’s frivolous claim, there is a risk of unequal treatment of parties not only with respect to their procedural rights but also the allocation of costs. Of particular significance is the Working Group’s observation that the costs of ISDS may burden “particularly small and medium-sized enterprises” and either limit the access of such enterprises to ISDS mechanisms or deter their use.125 This problem will only be exacerbated if host States pursue strategic counterclaims against MSMEs which are unlikely to succeed but are solely mounted with the aim to extinguish the original claim. Just as “challenges of capacity” in ISDS proceedings affect developing and least-developed economies,126 they may equally cripple MSMEs. This is especially relevant in an environment where MSME investments are being encouraged under international investment agreements, and respondent States in ISDS proceedings are very often developed nations. The Working Group has suggested the possibility of introducing a mechanism for the summary dismissal of manifestly unfounded appeals, modelled after Rule 41 (5) of the ICSID Rules, to manage the caseload of a proposed ISDS appellate mechanism.127 Even in the context of a multilateral instrument on ISDS, the Working Group envisages including control mechanisms for frivolous appeals.128 Scholarly writing on multilateral ISDS institutions take the same approach.129 However, an appeal against an award of the first instance may be filed either by the original claimant or the respondent.130 If such appeal is filed by the respondent, the claimant may well exercise its right to seek the dismissal of such appeal as frivolous. When neutral procedures are made available at the appellate stage, there seems no justifiable reason for the UNCITRAL Working Group to shy away from extending this neutrality to first instance proceedings. 123

UNCITRAL, Possible reform of investor-State dispute settlement (ISDS)—Note by the Secretariat, 30 July 2019, https://undocs.org/en/A/CN.9/WG.III/WP.166, p. 11. 124 Ibid, p. 21. 125 Ibid., p. 3. 126 Polonskaya (2017), p. 16. 127 UNCITRAL, Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its 40th session (Vienna, 8–12 February 2021), 17 March 2021, https://undocs.org/en/A/ CN.9/1050, p. 12. 128 UNCITRAL, Possible reform of investor-State dispute settlement (ISDS)—Multilateral instrument on ISDS reform, 16 January 2020, https://undocs.org/en/A/CN.9/WG.III/WP.194, p. 4. 129 Bungenberg and Reinisch (2018), pp. 65–66. 130 Marc Bungenberg and August Reinisch, Draft Statute of the Multilateral Investment Court, November 2020, https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/ bungenberg_reinisch_draft_statute_of_the_mic.pdf, pp. 16–17.

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ECT Modernisation

The EU’s text proposal for the modernisation of the ECT131 does not prescribe an expedited review procedure for frivolous counterclaims. A proposed new article in the ECT provides that only “[a] Contracting Party which is a party to the dispute” may file an objection that “a claim” is “manifestly without legal merit” or, as a matter of law, “not a claim for which an award in favour of the Investor may be made, even if the facts alleged were assumed to be true”. Like other institutional and treaty-based rules in this respect, the proposed text of the ECT provides that the expedited review procedure described above shall not prejudice a party’s right to object to the legal merits of a claim subsequently or a tribunal’s authority to address other objections as a preliminary question. A new proposed article circulated in the fifth round of ECT modernisation negotiations also stipulates that costs shall be borne by the unsuccessful party unless exceptional circumstances call for their apportionment between the parties. Many of the proposed rules on summary dismissals in the ECT seem to be inspired by the CETA. For the same reasons advanced above in the context of the CETA and the ICSID and UNCITRAL reform projects, the ECT preserves the inherent inequality that characterises summary dismissal procedures in these rules. The primary objective guiding the reform process seems to be sovereign efforts to combat regulatory-chill introduced by numerous ISDS proceedings.132 In the process, the procedural rights available to distressed and possibly impecunious investors, especially small enterprises, continue to be compromised.

3 The Need for Summary Procedures for Frivolous Counterclaims States have long expressed their discontent with the apparent lack of equilibrium in the rules regulating investor-State relations arising from (a) the conferral of rights but no obligations upon investors and (b) unilateral dispute resolution clauses. To address the asymmetry in these rules, they have taken two key steps: first, to stipulate obligations incumbent upon an investor, including those in respect of environmental protection, protection of human rights, and corporate social responsibility in IIAs;133 and second, to provide either explicitly or implicitly, for the possibility of filing 131 European Union, EU Text Proposal for the Modernisation of the Energy Charter Treaty, 27 May 2020, https://trade.ec.europa.eu/doclib/docs/2020/may/tradoc_158754.pdf. 132 Energy Charter Secretariat, Decision on the Energy Charter Conference, Document CCDEC 2019 08 STR, 6 October 2019, p. 30, https://www.energycharter.org/fileadmin/DocumentsMedia/ CCDECS/2019/CCDEC201908.pdf. 133 For instance, 2016 Indian Model BIT, Art. 12; 2018 Netherlands Model BIT, Art. 7; Belarus-India BIT, Art. 11(ii); Japan-Argentina BIT, Art. 17; Brazil-UAE BIT, Art. 15(1); Nigeria-Morocco BIT, Art. 18(2).

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counterclaims against investors found in breach of their obligations in IIAs,.134 Armed with these new powers, host States of investments have gradually transformed themselves from perpetual respondents to aspiring counterclaimants.135 While the number of counterclaims filed by host States continues to rise,136 their success rate does not necessarily keep up. Among the 36 known cases surveyed in which counterclaim(s) were asserted by the respondent, the respondent failed (in whole or part) in all but four cases for inter alia the following reasons: – The applicable treaty did not recognise the tribunal’s jurisdiction over the alleged counterclaim(s);137 – The obligations allegedly breached by the investor did not arise out of the investment, the investment agreement, or the IIA;138 – There was no basis in the applicable law for the alleged counterclaim;139

COMESA Investment Agreement, Art. 28(9) sets out that “a Member State against whom a claim is brought by a COMESA investor [. . .] may assert as a defense, counter-claim, right of set off or other similar claim, that the COMESA investor bringing the claim has not fulfilled its obligations’”. See also SADC Model BIT, Arts. 19 and 29(19) and the Draft Pan-African Investment Code, Art. 43. 135 Poon and Popova (2015). 136 The first 10 publicly known counterclaims in ISDS proceedings, in which decisions have been rendered, were filed between 1977 and 2004. The remaining 27 have been filed in the years since. 137 Iberdrola Energía, S.A. v Republic of Guatemala (II), PCA Case No. 2017-41, Final Award (24 August 2020), paras. 391–392 (noting that according to the treaty wording, only the investor was entitled to file claims); Anglo American PLC v Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/14/1 (18 January 2019), para. 528 (noting that the wording of the arbitration offer excluded the possibility of filing counterclaims) 138 Klöckner Industrie-Anlagen GmbH and others v United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No. ARB/81/2, Decision of the Ad Hoc Committee (3 May 1985), para. 5 (with respect to counterclaims alleging contractual breaches); Amco Asia Corporation and others v Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction in Resubmitted Proceeding (10 May 1988), para. 126-127 (in relation to the obligation not to engage in tax fraud arising from Indonesian domestic law); Saluka Investments B.V. v The Czech Republic, UNCITRAL, Decision on Jurisdiction over the Czech Republic’s counterclaim (7 May 2004) (“Saluka v Czech Republic”), paras. 80–81 (with respect to claims based on violation of Czech law), further noting in para. 36 that the tribunal considered whether the counterclaims, “in their terms as pleaded, and consider whether there is at least a reasonable possibility that they could be determined, after subsequent proceedings on the merits, in the Respondent’s favour”; Sergei Paushok and others v Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability (28 April 2011) (“Paushok v Magnolia”), para. 694 (noting that counterclaims arising out of Mongolian public law and raising issues of non-compliance with Mongolian public law would fall within the scope of the exclusive jurisdiction of Mongolian courts); Teinver and others v Argentina, ICSID Case No. ARB/09/1, Award (21 July 2017), para. 1066 (noting that the Respondent “did not identify any legal right or obligation on which it relied for its Counterclaim”). 139 AMTO LLC v Ukraine, SCC Case No. 080/2005, Final Award (26 March 2008) (“AMTO v Ukraine”), para. 118 (based on the lack of legal basis in the applicable law for a claim of nonmaterial injury to reputation). 134

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– Even if the respondent’s assertions were assumed to be true, they did not entail a breach of the claimant’s obligations,140 or alternatively, could not result in a finding in favour of the respondent State;141 – Based on the facts asserted, the fault alleged was clearly not committed by the claimant;142 or – The counterclaim was clearly unconnected to the principal claim.143 These reasons are not very different from those tribunals may advance in dismissing unmeritorious claims at the outset.144 Some decisions on counterclaims have also ventured into an explicit discussion on costs in relation to the counterclaim. The Patrick Mitchell v Congo tribunal held that due to the respondent’s failed counterclaim, it should bear part of the claimant’s costs.145 The RSM v Grenada tribunal, noting that the respondent had failed on its

140

Damien Charlotin, Looking Back: In Atlantic Triton V. Guinea, Arbitrators Ordered Claimant To Post A Bank Guarantee To Minimize Risk Of Double Recovery; Tribunal Saw Nothing Wrong With Claimant’s Attempt To Get Provisional Measures In French Court, https://www.iareporter. com/articles/looking-back-in-atlantic-triton-v-guinea-case-arbitrators-ordered-claimant-to-post-abank-guarantee-to-minimize-risk-of-double-recovery-from-arbitral-and-court-proceedings/, 7 August 2018; Paushok v Magnolia, para. 696 noting that the obligations allegedly breached strictly concerned another entity and not the investor; Hesham Talaat M Al-Warraq v Republic of Indonesia, UNCITRAL, Award (15 December 2014) (“Al-Warraq v Indonesia”), para. 669 (noting that the parties to the claim and the counterclaim must be the same and the respondent’s counterclaim concerned a non-party to the proceedings). 141 Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v The Republic of Estonia, ICSID Case No. ARB/99/2, Award (25 June 2001) (“Genin v Estonia”), paras. 377–378 (questioning whether the respondent was even the proper party to assert the counterclaim); Desert Line Projects LLC v Republic of Yemen, ICSID Case No. ARB/05/17, Award (6 February 2008), para. 224 (in relation to obligations upon the claimant that could no longer be considered to exist); Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No. ARB/07/24, Award (18 June 2010), para. 356 (on the basis that the losses, if any, would have been suffered by an entity that was not a party to the arbitration and not an organ of the State); Al-Warraq v Indonesia, para. 670 (“the counterclaim is based on frauds committed against Bank Century, and the losses were initially incurred by bank Century and only passed on to the State when a bailout of Bank Century was required. While the subrogation of the State to claims of Bank Century might be juridically possible, the legal basis of the Respondent’s rights to recover these losses has not been demonstrated to the Tribunal in this case”). 142 Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award (20 May 1992), paras. 255–256. 143 Paushok v Magnolia, paras. 696-697; Marco Gavazzi and Stefano Gavazzi v Romania, ICSID Case No. ARB/12/25, Decision on Jurisdiction, Admissibility and Liability (21 April 2015), para. 154. 144 For example in Trans-Global v Jordan, paras. 189–119, the tribunal accepted the ICSID Rule 41(5) objection since the essential legal basis for the claim was entirely missing. See also Sect. 2.1.6 above. 145 Mr. Patrick Mitchell v Democratic Republic of the Congo, ICSID Case No. ARB/99/7, Award (9 February 2004), para. 100.

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counterclaims, adopted an issue-based approach to costs.146 In Roussalis v Romania, the tribunal apportioned costs noting that while Romania had been successful in securing the rejection of all claims, it had submitted “a lengthy Counterclaim and failed to demonstrate that the Tribunal had jurisdiction over the Counterclaim”.147 Other tribunals have also indicated the role that an unsuccessfully mounted counterclaim may play in the apportionment of costs.148 It is clear from the foregoing that not only have States mounted unmeritorious counterclaims in the past—especially the kind of counterclaims that may well be disposed summarily—but that tribunals also refer to the respondent’s actions in this regard in awarding costs. Consequently, the provision of summary dismissal procedures in respect of such counterclaims is both appropriate and practically useful. Does the decision of some arbitral tribunals to reject counterclaims for apparent defects mean that additional summary procedures are unnecessary? Decidedly not. Note here that despite the availability of inherent powers and general preliminary procedures in respect of claims, IIAs and arbitration rules still provide for special summary procedures. Summary procedures for frivolous counterclaims are necessary for the same reasons: to prevent the abuse of ISDS mechanisms through vexatious assertions, to discourage parties from clogging judicial systems and utilising precious resources, and to protect the interests of the defending party (here, a distressed investor) against aggressive counter-litigation.149 In other words, summary procedures encourage both disputing parties to pursue their interests in good faith.150 With clear summary procedures and accompanying discretion in respect of costs, tribunals may also make awards of costs and fees more frequently, thus providing further deterrence to frivolous counterclaims. This may also prevent respondents from pressuring micro, small and medium enterprises (who may

146 RSM Production Corporation v Grenada, ICSID Case No. ARB/05/14, Final Award, 13 March 2009, paras. 495–496. 147 Spyridon Roussalis v Romania, ICSID Case No. ARB/06/1, Award (7 December 2011), paras. 881–882. 148 Saluka v Czech Republic, para. 89; Anglo American PLC v Venezuela, para. 557; David Aven and others v Republic of Costa Rica, Case No. UNCT/15/3, Award (18 September 2018), para. 760; Al-Warraq v Indonesia, para. 680. 149 The notion has also garnered support in relation to business and human rights arbitrations. See Lisa E. Sachs, Lise Johnson, Kaitlin Y. Cordes, Jesse Coleman & Brooke Güven, The Business and Human Rights Arbitration Rule Project: Falling Short of its Access to Justice Objectives, 2019, https://scholarship.law.columbia.edu/sustainable_investment_staffpubs/152 (“[a] frivolous counterclaim by a defendant company, for example, might be designed to intimidate rights holder claimants”). See also European Commission, Report on the online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), 13 January 2015, p. 22 (“In order to counter the risk of a state systematically raising objections with the purpose of delaying the [arbitral] procedure, certain NGOs, business associations and law firms suggest that the [summary dismissal] procedure should deal also with ‘frivolous objections’”). 150 See Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Final Award (16 March 2017), para. 455.

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be wary of vast fiscal liabilities) into a settlement and safeguard their access to justice. In a similar vein, the argument that tribunals could exercise their “inherent powers” to dismiss frivolous counterclaims on their own initiative, thereby rendering specific procedures redundant, does not withstand scrutiny. It may be difficult to persuade tribunals to grant summary dismissals of unmeritorious counterclaims in the absence of a clear legal basis due to the consequences this may entail for the recognition or enforcement of the award. The tribunal in Metalpar v Argentina, faced with essentially a request for a summary dismissal of a claim, noted that in the absence of explicit rules, this was “not procedurally possible”.151 Tribunals may also be reluctant to summarily dismiss counterclaims without any explicit legal basis for fear of being perceived as curtailing the respondent State’s right to be heard.152 Finally, with discussions on consistency in ISDS decision-making gaining momentum and support, it would be unwise to leave it to tribunals to exercise their discretion or their inherent powers in varying manners. On the other hand, indications of explicit consent to early claim-vetting for counterclaims would ensure that tribunals are well empowered to exercise their authority only in specific circumstances. It may be contended that additional summary procedures will increase the overall costs of litigation by allowing multiple reviews of counterclaims. However, a study by Howes, Stowell and Choi reveals that concluded ICSID arbitrations in which summary dismissal applications have been decided are resolved substantially more quickly than the average ICSID arbitration, irrespective of whether the applications are successful, indicating that they serve to narrow or streamline the proceedings.153 For instance, in Trans-Global v Jordan, the tribunal dismissed ICSID Arbitration Rule 41(5) objections against two claims, while noting that if various elements of those claims “were advanced by the Claimant as independent claims, each allegedly capable by itself of establishing a liability against the Respondent, the tribunal would be minded to decide that [those claims] were manifestly without legal merit within the meaning of Rule 41(5) of the ICSID Arbitration Rules”. Since the claimant subsequently clarified that it was not pursuing these aspects independently, the respondent’s objection under Rule 41(5) was rejected. At the same time, the tribunal cautioned the claimant “to make [its] position abundantly clear in its next Memorial”. Hence, summary dismissal procedures generally serve to cut down arbitral costs by focusing the tribunal’s attention to key issues early on in the proceedings.154 151

Metalpar S.A. and Buen Aire S.A. v Argentina, ICSID Case No. ARB/03/05, Award on the Merits (6 June 2008), para. 11. 152 See Goldsmith (2008), pp. 683–686 also cited in Yeo and Yen (2021), p. 80. 153 Howes et al. (2019), p. 10 (also noting that to date, Rule 41(5) arbitrations have lasted, on average, over a year less than all ICSID arbitrations). 154 Goldsmith (2008), p. 675. Other arbitral tribunals also share this view. See PNG v Papua New Guinea, para. 410 (“The Tribunal also agrees with the Respondent that its Rule 41(5) Application has significantly expedited and focused the discussion on the issues of jurisdiction”). The tribunal in

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Moreover, since arbitral tribunals will evaluate whether counterclaims are unmeritorious as a matter of law and assume the facts asserted in this regard to be true, the costs of fact-finding—which constitute a significant portion of litigation costs155—will be minimal with the addition of this procedural step. Finally, summary dismissal of a counterclaim saves the respondent from expending time and resources on the pursuit of a counterclaim that cannot succeed. With this context in mind, the next section discusses potential features of summary procedures for frivolous counterclaims and how they may be fortified against possible misuse.

4 Do Summary Procedures for Counterclaims Require Drastic Innovation? The road ahead is relatively simple: IIAs and arbitration rules do not need to fix what is not (entirely) broken. Following the approach of the SIAC, SCC, CIETAC, and HKIAC, treaty parties and arbitration institutions may equip tribunals to summarily dismiss frivolous counterclaims by introducing true party-neutrality in the existing procedures. This may involve inter alia removal of restrictive standing provisions, expanding the scope of the available procedures explicitly to counterclaims and/or defences, amending time limitations under the applicable rules, and revisiting rules on the allocation of costs. The various standards applied in the context of frivolous claims all have utility in respect of frivolous counterclaims. For example: – “even if the facts alleged by the other party are assumed to be true, no award could be rendered in favour of that party under the applicable law”:156 by the application of this standard, the claimant may be able to secure the dismissal of a counterclaim that concerns rights or obligations of third parties; – “manifestly without legal merit”:157 counterclaims alleging breach of obligations that are not owed by the investor to the host State (for example, a mere reference to social goals in IIAs without specifying any obligations incumbent upon investors towards the achievement of those goals) may be thus rejected on a preliminary basis;

Emmis v. Hungary also pointed to the “narrowing of the issues that has been achieved as a result of the discussions and exchanges of pleadings between the Parties” in relation to ICSID Rule 41(5) objections. Emmis v Hungary, para. 63. The tribunal in MOL v Hungary, para. 53 also indicated to the claimant in the course of ICSID Rule 41(5) proceedings that if it were to mount certain arguments in subsequent submissions, they would not be entertained. 155 Matthew Hodgson, Counting the Costs of Investment Treaty Arbitration, 24 March 2014, https:// globalarbitrationreview.com/counting-the-costs-of-investment-treaty-arbitration. 156 See 2017 SCC Rules, Art. 39(2)(ii). 157 See ICSID Arbitration Rules, Rule 41(5).

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– “manifestly outside the jurisdiction of the arbitral tribunal”:158 this standard may discipline counterclaims if treaty parties have not perfected consent over counterclaims—in other words, where the treaty clearly provides that the tribunal only has jurisdiction over claims brought by the investor under the IIA; – “manifestly inadmissible”:159 this standard can be useful in precluding respondents from presenting free-standing counterclaims, i.e., counterclaims that clearly lack any legal or factual connection to the principal claim; – “such points of law or fact that are manifestly outside the arbitral tribunal’s jurisdiction”:160 counterclaims clearly based on domestic law or contractual obligations in respect of which arbitral tribunals have no jurisdiction can thus be excluded. While a detailed examination of how costs should ideally be allocated is beyond the scope of this contribution, it is reasonable to expect that the same principles that guide the allocation of costs in the face of frivolous claims should extend to procedures for summary dismissal of frivolous counterclaims. Traditional fee-shifting models in ISDS are largely premised on the notion that the claimant is a perpetual investor and the host state, which is “constantly on the receiving side”, stands to make no financial gain.161 Counterclaims constitute a rebalancing act in this respect;162 since States may now also secure damages (or the reduction of their liability) by advancing their own claims, any fee-shifting models should adequately reflect that parties operate on equal footing. The question that follows is whether any adjustments should be made to these summary procedures due to the particularities of counterclaims in ISDS. For example, in the context of ICSID annulment proceedings, arbitral tribunals have taken the view that the bar under ICSID Rule 41(5) should be higher, since an annulment decision (in contrast to an award) is not subject to further recourse.163 In a similar vein, it could be argued that applicable rules should provide a higher threshold for summary dismissals of counterclaims since—as explained by Tomuschat in the context of inter-State proceedings—“an application filed by a sovereign State with its many human resources will never be totally baseless”.164 However, it is difficult to transpose this reasoning to counterclaims advanced in investor-State disputes when the respondent State acting as a counterclaimant essentially seeks to realize monetary interests in ongoing proceedings.

158

CIETAC IIA Rules, Art. 26.1. SIAC IA Rules, Art. 26.1. 160 HKIAC Rules, Art. 43.1. 161 Chen (2015), p. 75. See also Polonskaya (2017), p. 17. 162 Bjorklund (2013), p. 465. 163 Damien Charlotin, Ad-Hoc Committee’s Reasoning Surfaces, Thus Illuminating Venoklim’s Failure to Annul Award in the Venezuela Case, 8 February 2018, https://www.iareporter.com/ articles/analysis-ad-hoc-committees-reasoning-surfaces-thus-illuminating-venoklims-failure-toannul-award-in-venezuela-case/. 164 Tomuschat (2006), p. 650. See also van Dijk et al. (2006), p. 198. 159

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It is also important to consider here that counterclaims may raise novel and complex issues. Especially in the light of emerging treaty practice and proliferation of provisions of the kind that have never been contemplated by a tribunal before, there may seem to be a risk that tribunals will deploy summary procedures inappropriately in respect of such novel issues. This risk is not hypothetical; already, tribunals’ approaches to issues of jurisdiction and admissibility over counterclaims have varied significantly, leading to different outcomes in similar situations.165 However, arbitral tribunals have traditionally taken a conservative approach, declining to resolve issues involving complex treaty interpretation,166 interpretation of treaties that have never been interpreted before,167 or matters that require a detailed enquiry into the history and negotiation of treaty provisions168 by means of summary procedures. They have similarly declined to summarily dismiss claims that require the examination of complicated or heavily disputed facts169 or concern issues in respect of which jurisprudence is far from settled.170 Admittedly, this approach is not uniform;171 accordingly, tribunals could be provided relevant guidance in applicable IIAs or arbitration rules. Coupled with the high threshold for a summary dismissal, respondents can be sufficiently safeguarded against improper rejections of their counterclaims. How could summary dismissals of counterclaims play out procedurally? Interested claimants may be directed to file these objections at the earliest—ideally, shortly after the respondent has filed its counterclaim (which is usually filed in the counter-memorial, along with the objections to jurisdiction). The tribunal may enjoin the summary review of the counterclaim to other preliminary questions that are pending resolution, including the respondent’s objections to jurisdiction. While the standards of review applied to these questions may be different, their overall nature

165 For an overview, see Vishesh Sharma and Vishakha Choudhary, Do New-Age International Investment Agreements Introduce a Method to the Madness of State Counterclaims in Investment Arbitration?, 30 April 2019, https://efilablog.org/2019/04/30/do-new-age-international-investmentagreements-introduce-a-method-to-the-madness-of-state-counterclaims-in-investment-arbitration/. 166 PNG v Papua New Guinea, paras 94–97; MOL v Hungary, para. 53; Brandes v Venezuela, paras. 71–72; Lion v Mexico, paras. 81–83; Eskosol S.p.A. in liquidazione v Italian Republic, ICSID Case No. ARB/15/50, Decision on Respondent’s Application Under Rule 41(5) (20 March 2017) (“Eskosol v Italy”), paras. 41 and 98. 167 PNG v Papua New Guinea, para. 95; See also Almasryia for Operating & Maintaining Touristic Construction Co. L.L.C. v State of Kuwait, ICSID Case No. ARB/18/2, Dissenting Opinion on the Respondent’s Application under Rule 41(5) of the ICSID Arbitration Rules (1 November 2019), para. 79 et seq. 168 MOL v Hungary, para. 48. 169 The Renco Group, Inc. v. Republic of Peru [II], PCA Case No. 2019-46, Decision on Expedited Preliminary Objections (30 June 2020), para. 151; Brandes v Venezuela, para. 75. 170 Eskosol v Italy, para. 120. 171 See for example Kappes v Guatemala, para. 231 resolving the “novel issue” of whether a treaty provision was available for “indirect loss” claims through summary dismissal procedures. Interestingly, the majority’s decision in respect of this complex matter led to a partial dissent. See Kappes v Guatemala, Partial Dissenting Opinion of Zachary Douglas.

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is the same, i.e. to address inherent flaws in the other party’s case. Alternatively, the tribunal may adopt a specific timetable to address the counterclaim in question separately. If the tribunal finds that the counterclaim should be summarily dismissed, it may make an order to that effect at this stage. Further, as discussed above, if the claimant fails in its objection, the tribunal should not allow it to agitate this question as yet another preliminary objection.172

5 Conclusion The principle of good faith manifests in numerous ways in international law. In addition to its implications for the substantive obligations of international actors, it also controls the use and abuse of the various procedural rights available to them. The bar against frivolous claims in ISDS proceedings is but another manifestation of this principle, intended to prevent investors from burdening host States and arbitral tribunals. That this bar operates one way would only be appropriate if the host State was the perpetual respondent. With the proliferation of State counterclaims in recent years, this is certainly not the case anymore. In these circumstances, the lack of summary procedures for frivolous counterclaims illuminates a skewed approach to the good faith principle, by effectively extending a presumption of good faith to State counterclaims but not to investors’ claims. As reforms are being contemplated in both investment treaties and arbitration rules, the time is ripe to remedy this.

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Vishakha Choudhary is Junior Dispute Settlement Lawyer, Legal Affairs Division, WTO Secretariat. The author thanks Professor Marc Bungenberg for his comments and input on the concept.

Designing Deference: Towards a Thin Margin of Appreciation Doctrine in International Investment Law? Erlend M. Leonhardsen

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Reform in International Investment Agreements: The Right to Regulate, Increased Exceptions and Increased Deference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Developments in International Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The UNCITRALization of IIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 European Human Rights Law as Inspiration? From the Margin of Appreciation to Positive Subsidiarity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Turn Towards Subsidiarity: A “Thick” MOA Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Margin of Appreciation as a Structural Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Deference in Investment Treaty Arbitration: Towards a Thin MOA Doctrine? . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Epistemic Deference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Institutional Deference and the Right to Regulate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Democratic Deference and Institutional Quality Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Rejections of MOA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion: A Rose by Any Other Name? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

152 154 154 158 160 160 162 165 165 165 168 170 171 175 179 180

Abstract In light of increasing criticism against Investor-State Dispute Settlement, States have in recent years engaged in considerable reform of existing international investment agreements (IIAs). Reforms have often aimed at providing States greater discretion with respect to the measures they undertake vis-à-vis foreign investors to avoid breaching IIAs. In international dispute settlement, such discretion is most famously associated with the “margin of appreciation” (MOA) in the case law of the European Court of Human Rights (ECtHR). An earlier version of this chapter was presented at the 2020 ASIL IEcLIG Biennial Conference, University of Miami School of Law 15 February 2020. It forms part of the author’s PhD thesis at the University of Oslo, Faculty of Law. E. M. Leonhardsen (*) EFTA Surveillance Authority, Brussel, Belgium © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 151–182, https://doi.org/10.1007/8165_2021_74, Published online: 2 January 2022

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The chapter analyses such treaty reforms and examines developments of the MOA in the ECtHR. It shows that the MOA there may be evolving from a “thin” version, which mainly involves discretion, into a “thick” version, involving subsidiarity and the relationship between the ECtHR and national bodies. The chapter then analyses practice of arbitral tribunals under IIAs where the tribunals have applied, or rejected, MOA-like reasoning. It concludes that while there are many examples of awards in which tribunals have afforded discretion, resembling a “thin” version of the MOA, there are few if any examples of the “thick” version. The “thin” version may often be compatible with the wording of specific IIAs. However, tribunals should ensure that their reasoning is based on the applicable treaty rather than borrowed concepts, which may not always be fully understood, whether by advocates, arbitrators or their audiences.

1 Introduction As investment treaty arbitration has risen rapidly over the last decades, it has faced considerable and increasing criticism from States, scholars, and civil society. This criticism, often referred to as a “backlash”,1 has taken many forms,2 and it has encompassed a “large range of acts”.3 It should fruitfully be seen as part of a larger landscape of increased criticism of international adjudication,4 which in the last years has involved a high amount of withdrawals from treaties and even in the words of one writer has seen a renaissance for the rebus sic stantibus doctrine.5 As Caron and Shirlow have pointed out, such backlash acts “include decisions of States to review, not renew, terminate, or withdraw from existing treaties; refusals by States to negotiate or sign investment treaties; and changes in the approaches of States to the negotiation of new treaties.”6 Backlash therefore involves “action away from the regime even if the alternative is not fully articulated.”7 The result is already a “dramatic change in the landscape” of international investment law.8 Much of this backlash has been directed toward arbitral decision-making as placing too much emphasis on investor rights and too little on States’ right to

1

See e.g. Waibel et al. (2010); Langford et al. (2018); Schefer (2020), p. 241. See Dimitropoulos (2020). 3 Caron and Shirlow (2018), p. 161. 4 Mclachlan (2019). 5 Kuluga (2020); see also Leonhardsen (forthcoming). 6 Caron and Shirlow (2018), p. 161 (internal references omitted). 7 Caron and Shirlow (2018) p. 161. 8 Trakman and Musayelyan (2016). 2

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regulate.9 Many have argued that tribunals engage in what has been regarded as judicial activism.10 As Dimitropoulos has recently argued, “the backlash-related discussion in international investment law has been very productively transformed into a reform debate”.11 This arbitrator-driven area of law is now experiencing a recurrence of the State. While the overarching goal of this recurrence can perhaps be conveniently expressed in the British Brexit slogan “take back control”,12 the modality through which this goal may be reached is through the use of the main control powers available to states under the applicable treaty and the general law of treaties: exit, amendment, or renewal. So far this process has to a large extent taken place through treaty revisions, which afford States a larger degree of discretion. The practice of arbitral tribunals under these amended treaties, as already seen under current ones, will potentially seek to create a new equilibrium, aimed at minimizing States’ perceived need to amend or exit their investment agreements. The main tool available for tribunals in that respect is to show deference towards the state measures subject to legal proceedings in each particular case. Treaty revisions may function as a signal to tribunals that much of the earlier jurisprudence was politically controversial and sometimes undesirable. Moreover, States have increasingly sought to design treaties specifically so that adjudicators ought to provide States discretion, or, in the parlance of European human rights law, a Margin of Appreciation (MOA). The role of the MOA in investment treaty arbitration represents an experiment in treaty design and norm diffusion.13 This is because the doctrine originally was created by the European Court of Human Rights (ECtHR). In recent years, the European Convention on Human Rights (ECHR) has undergone revisions with an aim that is somewhat parallel to (and part of the same trend as) the backlash movement in International Investment Law (IIL). Under the ECHR, the States parties have signaled that the role of the ECtHR should only be of subsidiary nature, emphasizing instead a larger role for national courts.

9 See e.g. Korzun (2017). As an example of Tribunals generally recognising this effect, the Tribunal in Plama noted that “The specific exclusion [of the Most Favoured Nation (“MFN”) clause of dispute resolution mechanisms] in the draft [Free Trade of the Americas] is the result of a reaction by States to the expansive interpretation made in the Maffezini case. That interpretation went beyond what State Parties to BITs generally intended to achieve by an MFN provision in a bilateral or multilateral investment treaty” Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/ 24, Decision on Jurisdiction, 8 February 2005, para 203. 10 See e.g. Alter et al. (2016) and Zarbiyev (2012). 11 Dimitropoulos (2020), p. 417. 12 Dimitropoulos (2020), p. 418, for instance, notes that “States have been trying accordingly to transfer important decision-making powers back to the domestic level of government, and thus reconcile and sometimes undo the separation of the economic and political spheres that was brought about during the intense globalization period of the end of the twentieth century”. 13 See Leonhardsen (2014).

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Importantly, this has also largely transformed the MOA doctrine from a standard of judicial deference into a mechanism governing the interaction between domestic and international courts. This is what I refer to as a “thick” MOA. These developments may be relevant for IIL as well, although here the MOA is playing a more a limited role. From these initial observations, I show in Sect. 3 how the European human rights law MOA model encompasses several modalities of judicial review and has in recent years often taken the form of a procedural inquiry. I then argue that, based on the differing structure and function of investment treaties, tribunals should be careful when employing the doctrine as developed in European human rights law. Unless incompatible with the relevant International Investment Agreement (IIA), however, the MOA maybe a way to empower domestic regulators but also courts to play a greater role in the protection of foreign investment. Based on this analysis, I examine recent arbitral practice in Sect. 4 and show how tribunals have already often acted in line with these alleged State signals, but with subtle differences. Section 5 examines examples of rejection of this approach. Section 6 concludes that we may be seeing the emergence of a form of weak, or thin, MOA doctrine in international investment law, though with few signs of the more recent developments from the ECHR.

2 Reform in International Investment Agreements: The Right to Regulate, Increased Exceptions and Increased Deference 2.1

Developments in International Investment Agreements

Multilateralism has so far failed in IIL.14 It is still mainly based on a web of about 3000 bilateral investment treaties (BITs). The last decade saw criticism of international investment law move from the epistemic domain of relatively isolated scholars and activists to single States through acts of exit, renegotiation and design of new model agreements. At the closing of that decade, criticism and various reform proposals, in particular relating to Investor-State Dispute Settlement (ISDS) had become the dominant State discourse in multilateral forums. Thus, when multilateralism emerged it was in a critical form. As early as 2007, the United Nations Conference on Trade and Development (UNCTAD) observed a trend in which IIA preambles increasingly indicate that the agreements “do not purport to promote and protect investment at the expense of other key values such as health, safety, labour protection and the environment”.15 As 14

See e.g. Berge and Hveem (2018). UNCTAD, Bilateral Investment Treaties 1995–2006: Trends in Investment Rulemaking (2007) 3–5. 15

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Schefer has observed in connection with a discussion of IIL “backlash”, one of the most noticeable responses by governments to the “strong backlash against the whole investment law framework” was “to redraft IIAs with detailed language to limit tribunals’ discretion in finding indirect expropriations at all.”16 According to UNCTAD, 241 out of 2577 mapped treaties contain such public health and environment exceptions in the preamble. For instance, the 2012 US Model BIT, the 2012 BIT between Austria and Kazakhstan, the 2011 BIT between Azerbaijan and the Czech Republic and the 2015 Norwegian Draft Model BIT all emphasize health, safety, and the environment as important values that the BIT should not override.17 A similar trend is occurring in the substantive provisions that provide protection to foreign investors. This can take the form of general exception clauses. For example, Article 19(2), Chapter 9 of the 2017 Pacific Agreement on Closer Economic Relations Plus (PACER Plus) provides: Nothing in this Chapter shall be construed to prevent a Party from adopting or maintaining any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to its environmental, health, or other regulatory objectives.18

It has also become common for new investment treaties to specify that except in certain “rare circumstances”, non-discriminatory regulatory measures that are “designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment”,19 do not constitute indirect expropriations.20 16

Schefer (2020), p. 241. Paras 6, 6, 6, 4 and 4 respectively. A similar result can be achieved by including a separate provision on the objective of the treaty, which may include the right to regulate, cf. e.g. Article 1 of the investment chapter of the 2013 Agreement between New Zealand and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu on Economic Cooperation, according to which the objective is to encourage the mutual flow of investments “while recognising the rights of Parties to regulate and the responsibility of governments to protect public health, safety and the environment.” 18 Signed on 14 June 2017 between Australia, Cook Islands, Micronesia, Federated States of, Kiribati, Nauru, New Zealand, Niue, Palau, Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu. Entered into force on 13 December 2020. Italics are mine. This approach is not uniform. For example, in the 2017 BIT between Colombia and the United Arab Emirates (not entered into force), the general exceptions clause in Article 11 states: “nothing in this Agreement shall be construed to prevent a Contracting Party from adopting, maintaining or enforcing any measure that is appropriate” in order to reach various listed public policy objectives. Thus, the clause is not self-judging. On the other hand, unlike many earlier IIAs, which used the term “necessary”, the current trend seems to favour the term “appropriate”. Plainly, it seems easier for a state measure to qualify as “appropriate” for reaching a public policy goal than to qualify as “necessary” for reaching a public policy goal. 19 See e.g. the Trans-Pacific Partnership (TPP) Agreement, Annex 9-B Expropriation, para 3. (b). The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed on 8 March 2018. It has partially entered into force. The CPTPP is a separate treaty that incorporates, by reference, the provisions of the original TPP signed on 4 February 2016. 20 See also Article 6.8 of the Norwegian Draft Model BIT 2015. That draft also includes a separate right to regulate clause in Article 8, which somewhat confusingly emphasizes somewhat different 17

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135 out of 2577 treaties mapped by UNCTAD contain a right to regulate clause Some, like Comprehensive Economic and Trade Agreement (CETA) between the European Union (EU) and Canada, include even more specific and detailed clauses than those discussed above.21 45 out of those 2577 treaties include a right to regulate in the preamble, while only 17 contain it both in the preamble as well as a substantive clause. In the TPP, a clause providing regulatory discretion vis-à-vis investors and in opposition to treaty tribunals is located in Article 9.16,22 but it widens the scope to encompass “environmental, health or other regulatory objectives.” Notably, these clauses include a self-judging clause that appears to make the State the primary decider about the legality of the measures undertaken,23 though, unless explicitly excluded, presumably subject to review by tribunals.24 It seems clear, first, that such clauses lead to increased discretion. For instance, as the Panel in Russia – Traffic in Transit put it, “it is left, in general, to every [WTO] Member to define what it considers to be its essential security interests”.25 However, that discretion is limited by the “obligation to interpret and apply” such provisions “in good faith.”26 Such clauses, second, entail a shift in ex post interpretative control over treaty provisions from adjudicators to States, and will likely lead to a more values (e.g. the former emphasizes health and human rights, while the latter also includes labour rights). 21 CETA Article 8.9 subparagraphs 1–4. The CETA approach inter alia clarifies the right to regulate and labour and environmental protection standards. See the Joint Interpretative Instrument on the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member States (available at http://eur-lex.europa.eu/legal-content/EN/TXT/? uri¼CELEX:22017X0114(01). Compare e.g. the recent REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP AGREEMENT Annex 10B (4). 22 See also e.g. the United States 2012 Model BIT Article 12 (2) and Article 16 of the investment chapter of the 2013 Agreement between New Zealand and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu on Economic Cooperation. 23 See e.g. Sempra Energy International v. Argentina, Award, 28 September 2007, ICSID Case No. ARB/02/16, para 384. But see Sempra Energy International v. Argentina, Decision on the Argentine Republic’s Application for Annulment of the Award, 29 January 2010, para 127 (holding that “by disregarding the self-judging nature of Article XI, the Tribunal manifestly exceeded its powers”.) On such clauses, see generally e.g. Blanco and Pehl (2020) and Sabanogullari (2018). 24 See e.g. Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para 182. 25 Russia—Measures Concerning Traffic in Transit, Report of the Panel (5 April 2019), WT/DS512/ R, para 7.131. I am not aware of treaty tribunals finding that a clause is self-judging and then discussing the discretion granted by that clause. See, however, the Sempra Annulment Decision. However, discussions concerning discretion of clauses that the State party alleges are self-judging can be found. See e.g. Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para 181 and CC/Devas (Mauritius) Ltd., Devas Employees Mauritius Private Ltd. and Telecom Devas Mauritius Ltd. v India, Award on Jurisdiction and Merits, 25 July 2016, PCA Case No. 2013-09, para 218. 26 Russia—Measures Concerning Traffic in Transit, Report of the Panel (5 April 2019) WT/DS512/ R, para 7.132. See generally e.g. Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), Judgment of 4 June 2008, ICJ Reports 2008, 177, para 145.

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lenient standard of review by Tribunals as far as conduct governed by these clauses is concerned.27 Even though these signals through treaty amendments largely occur within bilateral or regional treaties, they still send a clear message because the investment treaty regime has proven susceptible to intra-regime spill over effects, also for existing treaties. For instance, as Ortino has recently observed with respect to clarifications in annexes, the approach based on keeping the original language in the basic provision on expropriation but adding a clarification in an annex to the treaty may have the additional effect of influencing how investment tribunals would interpret existing investment treaties, which do not include such an annex.28

As we have seen above, these processes have occurred from a treaty design perspective. States accordingly display strong degrees of learning. As will further be examined below, it does also appear to take place in the adjudicative phase through the decision-making of arbitral tribunals. As a furthering of this trend, States have in recent IIAs often included broad exceptions clauses similar to that of Article XX in the General Agreement on Tariffs and Trade (GATT).29 A far-going example in this regard is the Norwegian 2015 Model BIT, which includes a whole section on exceptions. This section not only contains a general exception clause, but also a Prudential Regulation exceptions clause, a security exceptions clause, a cultural exceptions clause, and a taxation exceptions clause. All of these come in addition to the narrow expropriation protection clause and the right to regulate clause discussed above. Textually, the combination of such changes invites adjudicators to employ a less strict standard of review, by which I mean the “degree of scrutiny” tribunals display vis-à-vis governments in assessing factual and legal matters.30 A part of this is that tribunals afford a considerable discretion to a State.

27

However, several Tribunals have noted that security exceptions ought to be interpreted restrictively. See e.g. Enron Corp. and Ponderosa Assets L. P. v Argentina, Award (22 May 2007) ICSID Case No. ARB/01/3, paras 331–332. See generally the excellent discussion in Blanco and Pehl (2020). 28 Ortino (2019), p. 95. While I believe States may be attempting to send such signals, and while Tribunals may sometimes act accordingly, there are however important legal limits to the impact of new treaties upon the interpretation and application of existing treaties. On “cross-treaty interpretation”, see e.g. Schill (2009), pp. 294–295. 29 See e.g. the broad exceptions clause in Article 10 of the 2004 Canadian Model BIT, incorporated verbatim e.g. in the 2006 Canada-Peru BIT and the comprehensive clause in Article 17 of the 2012 Japan-Kuwait BIT, which also includes a duty to notify the other party of any measures taken. For the investment chapters of FTAs it is more common to incorporate either GATT Article XX or GATS Article XIV (or both) by reference. Other IIAs use more explicit carve outs, for instance by using annexes which carve out specific sectors. See e.g. Agreement between Australia and Japan for an Economic Partnership, Annex 6, Non-Conforming Measures relating to para 1 of Articles 9.7 and 14.10. 30 Henckels (2012), p. 238.

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There are several possible approaches to interpret these exceptions. More specifically, these considerations have in practice often taken the form of a necessity analysis, in which a variety of approaches has been taken by tribunals so far,31 but where even the stricter approaches seem to allow for the acceptance of regulatory discretion of a State.32 In my view a prudent approach is to consider these exceptions as intended to provide host States with increased flexibility when pursing such specified legitimate objectives as set out in the exceptions.33 Lim, Ho and Paparinskis point out that such changes “may be superfluous since general international law already recognises the right of States to regulate”.34 I agree with that from a doctrinal perspective. Nonetheless, their pithy observation that “more States now favour precision over laconicism” masks that also changes in IIAs which are legally speaking superfluous may nonetheless influence the adjudicative behaviour of arbitrators.35 In the next section I will go on to consider more thoroughly the function of this regulatory flexibility; as the result of a lenient adjudicatory standard of review, a result which can also be described under the increasingly MOA common label.

2.2

The UNCITRALization36 of IIL

First, however we shall, examine one additional trend in contemporary treaty making, which may perhaps be less obviously linked to the same matter as the above. When applying and interpreting each individual treaty, adjudicators must carefully examine specific texts on the basis of their terms and specific wording. Nonetheless, the criticism and associated reform processes are today increasingly taking place in multilateral settings which allow States and (groups of States) to share and build upon experiences and concerns, individual and common. This “UNCITRALization” of international investment law making is an important factor for the scope, dynamic and force of current reform processes,37 which appear to be driven by impressive ambition and creativity among both State Parties, academics and non-governmental organisations (NGOs).

31

See e.g. Mitchell and Henckels (2013). E.g. Suez, Sociedad General de Aguas de Barcelona SA, and InterAgua Servicios Integrales del Agua SA v Argentina, ICSID, Case No. ARB/03/17, Decision on Liability, 30 July 2010, para 217. 33 Schefer (2020), p. 242. 34 Lim et al. (2021), p. 79. 35 Lim et al. (2021), p. 79. 36 United Nations Commission on International Trade Law (UNCITRAL). 37 See e.g. the overview provided by the UNCITRAL Secretariat, “Possible reform of investor-State dispute settlement (ISDS) Multilateral instrument on ISDS reform”16 January 2020, A/CN.9/WG. III/WP.194 (available at https://uncitral.un.org/sites/uncitral.un.org/files/wp194_multilateral_instru ment_for_submission.pdf). 32

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The “concerns” which these reform processes in particular relate to, seem to be falling into three broad categories. These can be summed up as “those pertaining to lack of consistency, coherence, predictability and correctness of arbitral decisions by ISDS tribunals; those pertaining to arbitrators and decision-makers; and those pertaining to cost and duration of ISDS cases”.38 The UNCITRAL process has in particular addressed two concerns that relate to our topic here. First, concerning the so-called “regulatory chill”: The regulatory chill effect of ISDS was mentioned ISDS or the mere threat of using ISDS had resulted in regulatory chill and discouraged States from undertaking measures aimed to regulate economic activities and to protect economic, social and environmental rights. (. . .) It was noted that States were in the process of reforming their investment agreements to preserve their sovereign right to regulate.39

Second, concerning the exhaustion of domestic remedies: It was agreed that requiring investors to exhaust local remedies before bringing their claims to investment arbitration was a tool to be considered in reforming ISDS rather than a concern to be addressed.40

According to UNCTAD, 88 out of 2577 mapped treaties contain such exhaustion of remedies clauses. Most of these are quite old, but there are also newer treaties, such as the 2007 BIT between Albania and Lithuania.41 The recent India model BIT has taken this approach a step further.42 In itself, this clause may appear as a specific statute of limitations, with a short limitation period for investors. With two exceptions,43 it is only when those remedies have been exhausted that a “Notice of Dispute” may be submitted. Pursuant to Article 14.3(iv), this must be accompanied with one year of best efforts to continue to resolve the dispute, including through domestic courts, before it can lead to arbitration. However, this can only be done provided that one of two time-related conditions are complied with by the investor. It is instructive to compare this approach with the recent Netherlands Model BIT (2019).44 It does not contain an exhaustion of remedies clause. Instead, its Article 5 states the following:

38

Draft report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its 36th session, 6 November 2018, A/CN.9/964 (available at https://uncitral.un.org/sites/uncitral.un. org/files/draft_report_of_wg_iii_for_the_website.pdf). 39 UNCITRAL, Report of Working Group III (Investor-State Dispute Settlement Reform) on the Work of its 37th Session (New York, 1–5 April 2019), A/CN.9/970, paras 36–37. 40 UNCITRAL, Report of Working Group III (Investor-State Dispute Settlement Reform) on the Work of its 37th Session (New York, 1–5 April 2019), A/CN.9/970, para 30. 41 Article 8(2). Entry into force 7 December 2007. 42 Available at https://www.mygov.in/sites/default/files/master_image/Model%20Text%20for%20 the%20Indian%20Bilateral%20Investment%20Treaty.pdf. 43 Article 14.3 second subparagraph. 44 Available at https://globalarbitrationreview.com/digital_assets/820bcdd9-08b5-4bb5-a81ed69e6c6735ce/Draft-Model-BIT-NL-2018.pdf.

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Article 5 Rule of law 1. The Contracting Parties shall guarantee the principles of good administrative behavior, such as consistency, impartiality, independence, openness and transparency, in all issues that relate to the scope and aim of this Agreement. 2. Each Contracting Party shall ensure that investors have access to effective mechanisms of dispute resolution and enforcement, such as judicial, quasi-judicial or administrative tribunals or procedures for the purpose of prompt review, which mechanisms should be fair, impartial, independent, transparent and based on the rule of law.

Rather than requiring the foreign investor to rely on domestic courts, it entails a requirement for the State Parties to make independent and effective courts and tribunals available for the foreign investor. Notably, the requirement found in this provision largely corresponds to requirements upon courts and tribunals which the Netherlands as a party to the Treaties of the European Union and the ECHR would be required to comply with anyway. In particular, the Court of Justice of the European Union (CJEU) has in a series of recent rulings strengthened the independence requirements for the domestic courts of the EU Member States.45 From that perspective, it may be that this requirement would be novel only for the other parties to the treaties the Netherlands enters into which contain such a clause. As I see it, the India approach and the Netherlands approach may well be designed to do the same thing, in the spirit of the UNCITRAL reports. They both underline, though in a quite different manner, the importance of domestic proceedings. Indeed, they both serve as a reminder that local courts may sometimes be a viable alternative to ISDS. In the next section we shall examine how deference plays out in an international court which does require the exhaustion of remedies. As we shall see, in the case law of the ECtHR deference is today quite closely tied to the behaviour of domestic courts, showing that considerable potential for international legal instruments such as IIAs to strengthen and empower such institutions.

3 European Human Rights Law as Inspiration? From the Margin of Appreciation to Positive Subsidiarity 3.1

Introduction

Although often referred to as a “rule”, the MOA should more appropriately be seen as a flexible, sometimes relatively lenient, other times stricter, adjudicatory standard

45

See e.g. Joined Cases C-585/18, C-624/18 and C-625/18A.K. v Krajowa Rada Sądownictwa, and CP and DO v Sąd Najwyższy, 19 November 2019. See also similarly from the ECtHR, Baka v Hungary, Application no 20261/12, 23 June 2016.

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of review. While also applied by the Court of Justice of the European Union,46 it grew forth in the practice of the ECtHR47 in a somewhat similar context as that currently seen in investment treaty arbitration. The MOA can be defined broadly as the freedom of States to act. It can be seen as the degree of deference which the ECtHR will afford to national legislative, executive, administrative and judicial bodies before an act or omission is considered as a breach of the treaty.48 As a starting point, the MOA has an “accordion-like nature” but is “as such, devoid of norms that would require great or little deference.”49 Instead it is these particular provisions of the ECHR, their wording and the context in which they operate which “require the ECtHR to apply deferential standards of review, and it is these provisions, along with other circumstances, that determine the degree of deference.” As the Court explained in the recent Klaus Müller case, “[t]he breadth of [the MOA] varies and depends on a number of factors including the nature of the Convention right in issue, its importance for the individual, the nature of the interference and the object pursued by the interference”50 It is thus a highly flexible, varied and context-dependent doctrine. The MOA doctrine was written into the preamble of the ECHR as per Article 1 of additional protocol no. 15 of 16 May 2013 which entered into force on 1 August 2021.51 This development largely corresponds to the amendments and developments in IIAs described above. It also came at a critical time for the Court, which underlines the crucial political context and function of the doctrine. A related development was the signing of the Copenhagen Declaration in 2018. It explains further the role of the principle of subsidiarity that strengthening it is not intended to limit or weaken human rights protection, but to underline the responsibility of national authorities to guarantee the rights and freedoms set out in the Convention. Notes, in this regard, that the most effective means of dealing with human rights violations is at the national level, and that encouraging rights-holders and decision-makers at national level to take the lead in upholding Convention standards will increase ownership of and support for human rights.52

Again, this can be compared with the rule of law provision in Article 5 of the Netherlands Model BIT.

46

That practice has not been much discussed or referred to in investment treaty arbitration and will therefore not be explored here. See generally Zglinski (2020). 47 Morrisson Jr (1973). 48 Leonhardsen (2014), p. 139. 49 Fukunga (2018). 50 Klaus Müller v. Germany, 24173/18, judgment 19 November 2020, para 66. 51 Per its Article 7, it entered into force three months after the consent of all parties had been obtained. 52 Copenhagen Declaration on the reform of the European Convention on Human Rights system, 13 April 2018, para 10.

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The Turn Towards Subsidiarity: A “Thick” MOA Doctrine

The explanatory report to Protocol 15 above links the notion of MOA to the principle of subsidiarity, noting that the Court’s jurisprudence makes clear that the States Parties enjoy a margin of appreciation in how they apply and implement the Convention, depending on the circumstances of the case and the rights and freedoms engaged. This reflects that the Convention system is subsidiary to the safeguarding of human rights at national level and that national authorities are in principle better placed than an international court to evaluate local needs and conditions.53

As noted by Brems, there are however not many references to an understanding of the MOA as subsidiarity in the case law of the Court.54 When there are, it sometimes appears to be a mainly fact-related understanding of the MOA. For instance, in Austin and others v UK, the Court held that The question whether there has been a deprivation of liberty is, therefore, based on the particular facts of the case. In this connection, the Court observes that within the scheme of the Convention it is intended to be subsidiary to the national systems safeguarding human rights (. . .). Subsidiarity is at the very basis of the Convention, stemming as it does from a joint reading of Articles 1 and 19.55

In immigration cases, the Court has taken a particular approach. Here the approach is limited, so that “its sole concern, in keeping with the principle of subsidiarity, is to examine the effectiveness of the domestic procedures and ensure that they respect human rights.”56 However, this effectiveness precisely concerns independence. Indeed, “[w]hen the ‘authority’ concerned is not a judicial authority, the Court makes a point of verifying its independence” and the procedural guarantees it offers,57 bearing in mind that courts and tribunals must always satisfy independence requirements. There are however more direct links between subsidiarity and MOA. In Hatton, the Grand Chamber reiterated “the fundamentally subsidiary role of the Convention. The national authorities have direct democratic legitimation and are, as the Court has held on many occasions, in principle better placed than an international court to evaluate local needs and conditions”58 It went on to recall that as concerned “matters of general policy, on which opinions within a democratic society may reasonably

53

Explanatory report, para 9, available at https://rm.coe.int/CoERMPublicCommonSearchServices/ DisplayDCTMContent?documentId¼09000016800d383d. 54 Brems (2019). 55 Austin and others v UK, Grand chamber application no 39692/09, para 61. 56 De Souza Ribeiro v France, application no 22689/07, para 84. 57 Ibid, para 79. 58 Hatton and others v UK, Application no. 36022/97, para 97.

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differ widely, the role of the domestic policy-maker should be given special weight (. . .).59 However, as it explained in Selami, subsidiarity does not mean renouncing all supervision of the result obtained from using domestic remedies; otherwise the rights guaranteed by the Convention would be devoid of any substance. In this connection it reiterates that the Convention is intended to guarantee not theoretical or illusory rights, but rights that are practical and effective60

There are also a few examples in the case law of subsidiarity as a duty. For instance, in Fabris, the Court recalled that it had “previously held that where an applicant’s pleas relate to the “rights and freedoms” guaranteed by the Convention the courts are required to examine them with particular rigour and care and that this is a corollary of the principle of subsidiarity”.61 In other words, insofar as subsidiarity is a right for States, it also comes with considerable responsibility. As Brems has explained, this is also a way to understand the relationship between subsidiarity and the margin of appreciation.62 The margin of appreciation in this view is not generally wide or narrow. Instead, it can be considered as conditional, based on how the principle of subsidiarity is complied with. Subsidiarity in this context can be connected with one particular understanding of the margin of appreciation, sometimes referred to as “substantive”.63 This substantive concept is what States are trying to create in new IIAs with broad exception clauses described above. In this vein, if the scrutiny of state behaviour in light of the principle of subsidiarity shows that the treatment afforded to the applicant was, for instance, ostensibly conducted by an independent authority with due regard to procedural guarantees, then the margin of appreciation may be wider. If scrutiny in light of the principle of subsidiarity shows that those structural and procedural guarantees were not adhered to, then the margin afforded to the national authorities may well be much narrower. In cases where an interference by the State with the freedom of an individual is established by the ECtHR but not deemed to amount to a violation of a right, the role of the MOA is to identify the point when an interference amounts to a violation. The most important criterion for identifying the distinction between a permissible and non-permissible interference is the principle of proportionality.64 Notably, however, the ECtHR’s necessity tests differ from those employed so far in investment treaty arbitration in that they are qualified by the additional phrase “in 59

Ibid, my emphasis. Selami and Others against North Macedonia, Application no. 78241/13, Judgment of 3 March 2018, para 101. 61 Fabris v France, Application no. 16574/08, para 72. 62 Brems (2019), p. 11. 63 See Leonhardsen (2014), pp. 141–143. 64 The principle of proportionality often serves as an important tool for investment arbitration tribunals in similar situations, although not necessarily under the MOA label. 60

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a democratic society”. This phrase serves as a limit upon the MOA. All else being equal, this would seem to imply that without this phrase the margin is wider. This seems to be the case with ECtHR property protection jurisprudence (where the provision does not include the “democratic society” qualification), although it hardly seems to be true for investment treaty arbitration so far—presumably because the treaty texts so far have been very different. In general, the notion of democracy in the Court’s case law can be understood as respect for democracy as a process, which is what we might consider as the inner core of the values the MOA ought to protect. This can be thought of more broadly as institutional quality requirements. Marks has suggested that the Mellacher decision, a case about rent control legislation under the property protection clause, can be interpreted in this manner.65 There it was observed that the proportionality of the measures in question had been disputed both in the parliament and in public debate.66 The Court seemed to agree with this procedural aspect by noting that it would “respect the legislature’s judgment as to what is in the general interest unless that judgment be manifestly without reasonable foundation”.67 While the case law may be in a state of flux, subsidiarity and the margin of appreciation may now entail supranational scrutiny over the form and content of the democratic process behind a particular governmental measure.68 Scholars have thus argued that the emphasis on subsidiarity has led to a “turn to procedure” in the case law of the court.69 As Kleinlein has explained, many judgments “indicate a procedural approach to the margin of appreciation, which means that granting a margin of appreciation and the breadth of that margin depend on an analysis of domestic procedures.”70 In Animal Defenders International, it observed that “[t]he quality of the parliamentary and judicial review of the necessity of the measure is of particular importance [when assessing the legislative choices underlying a general measures], including to the operation of the relevant margin of appreciation.”71 As we shall see in Sect. 4 below, a similar approach does not have much, if any, support in investment treaty arbitration. To sum up, if the Court determines that a particular measure was enacted pursuant to thorough deliberation by lawmakers or enacted/adopted by de facto and de jure independent domestic courts, regulators and prosecutors in the course of due

65

Marks (1995), p. 218. Mellacher and Others v. Austria, Commission, Application No. 10522/83, 11 July 1988, para 211. 67 Mellacher and Others v. Austria, Judgment, 19 December 1989, para 45. 68 Leonhardsen (2012). 69 Kleinlein (2019). 70 Kleinlein (2019), p. 93. 71 Animal Defenders International v the United Kingdom, Judgment (Merits and Just Satisfaction), 22 April 2013, para 108. See also Correia de Matos v Portugal, 56402/12, para 137. 66

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process, this ought to mean that it allows for a wider MOA.72 Conversely, the standard of review may be stricter if these formal aspects are not in place.

3.3

The Margin of Appreciation as a Structural Concept

Another way in which the Court is using the MOA is as what has been referred to as a “structural concept”.73 It is used to address the intensity of the scrutiny of the international adjudicator. The structural MOA concept, highlights one of the more important differences between international investment law and the ECHR. This relates to the key function of the ECtHR as harbinger and protector of democracy, which would be undermined by too strict review of legitimate governmental acts. The approach taken by the ECtHR in striking the right balance between the sovereignty of the States and the Court’s role as protector of the rights enshrined in the ECHR sometimes takes the form of an examination into the degree of consensus among the state parties. If there is no consensus on the issue in question “consensus inquiry” the respondent State is afforded a degree of discretion.74 For instance, in X, Y and Z v United Kingdom, it observed that there was “no common European standard with regard to the granting of parental rights to transsexuals. Since the issues in the case, therefore, touch on areas where there is little common ground amongst [States]”, they must be afforded wide discretion.75

4 Deference in Investment Treaty Arbitration: Towards a Thin MOA Doctrine? 4.1

Introduction

There seem to be two main reasons for references to the MOA in investment treaty arbitration: epistemic and institutional. However, in general, there is little trace of the subsidiarity related use of the MOA in the ECtHR case law. As can be expected, there is also no trace of the structural MOA concept in arbitral practice. In investment treaty arbitration, the MOA instead mainly seems to have been used as a synonym for deference. In the next section, I will examine more closely some of the rejections, of the MOA. Here, however, I will first examine Born et al. which is the so far most sophisticated, powerful and comprehensive critique of the MOA in investment treaty 72

Similarly, Kleinlein (2019). See Leonhardsen (2014), pp. 142–146. 74 See Leonhardsen (2014), pp. 142–146 with further references. 75 X, Y and Z v United Kingdom, Judgment, 22 April 1997, para 13. 73

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arbitration. In essence, the argument is that the MOA is not a rule of international law and that it should not be transplanted from its ECtHR context. For that reason, Born et al. deserves to be dealt with extensively. Such a treatment may also shed light on some criticism against MOA. It should be noted that the present author is not an advocate in favour of (or against) the MOA. Indeed, from a normative and doctrinal perspective I am sympathetic to much of the criticism brought forth by Born et al. However, it is in my view useful that such criticism is anchored in an as broad and thorough understanding of the MOA and arbitral practice as possible. A first, general criticism of the view set forth by Born et al. is that it seems to be based on a too narrow understanding of the functioning of the margin of appreciation. Contrary to what is claimed it is not only the ECtHR which applies it. As noted above, so too does that other powerful European court, the Court of Justice of the European Union. As Zglinski has shown in a recent work, which includes an extensive empirical study, “deference is on the rise.”76 In his sample, Zglinski found that the CJEU afforded a margin of appreciation in 21.76% of the cases (2020), p. 42. The functioning of the CJEU is arguably closer to that of investment tribunals than is the ECtHR. It is very often engaged with economic law and second it is very often, although far from exclusively, considering measures by a host state against foreign persons. A second criticism, concerning the ECtHR’s own basis for applying the MOA, is that it is supported by the travaux of the ECHR77—and therefore presumably less applicable to other treaties which do not share that basis. However, a careful examination of that source reveals that it simply concerned the national implementation of the freedoms qua an obligation of result, then, like now, in accordance with general international law.78 Third, Born et al. claim that “[w]hen applied, the ECtHR’s margin of appreciation generally allows for a substantial, if ill-defined and varying, presumption in favor of the propriety of measures imposed by a state.”79 However, as we saw above, this is not at all how the Court applies it in practice. Instead, the margin is sometimes broad, sometimes narrow. Fourth, more technically, while advocating that Tribunals should follow a doctrinal approach rather than applying layers of deference not supported by the applicable law (a view which I am in principle sympathetic to), Born et al., admittedly like some tribunals,80 often seem to conflate the approach to be taken under the VCLT, which is to be based on the object and purpose of the treaty, with one which 76

Zglinski (2020), p. 197. Born et al. (2020), p. 80. See also Philip Morris, Concurring and Dissenting Opinion Co-Arbitrator Gary Born, 8 July 2016, para 183, referring to Travaux préparatoires to the ECHR, 17th Sitting, 7 September 1949, p. 1150. 78 See e.g. ICJ, Avena Interpretation, Provisional Measures, ICJ Reports 2008, p. 331, para 326. 79 Born et al. (2020), p. 79. 80 See e.g. Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para 164; Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italy, ICSID Case No. ARB/14/3, Final Award 27 December 2016, para 319. 77

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is based on the object and purpose of the provisions in question.81 The object and purpose of substantive provisions may typically be to afford protection to investors, while the whole IIA may have a broader object, or indeed, many different objects. While technical, this may have practical consequences. For instance, in Adel A Hamadi Al Tamimi the Tribunal found that parties had intended the Treaty to be interpreted to give effect to the objectives of environmental protection and conservation, which it linked to its finding that “the State Parties intended to reserve a significant margin of discretion to themselves in the application and enforcement of their respective environmental laws”.82 Fifth, some of the cases referred to by Born et al. as supporting merely limited deference does, following closer examination, merit a stronger conclusion. For instance, Born et al. refer to Mercer,83 but elsewhere in that award the Tribunal stated that it “also accepts as a general legal principle, in the absence of bad faith, that a measure of deference is owed to a State’s regulatory policies”.84 Sixth, the few awards which Born et al. argue are the only ones which have relied on the MOA are far from exhaustive. Indeed, a more thorough examination of the arbitral practice, reveals that there are many arbitral awards which rely on a MOA. Therefore, Sects. 4.2–4.4 reviews MOA related arbitral practice. Not all of this practice necessarily includes a direct reference to that phrase. While some of my analyses here include awards which Born et al. consider a rejection of the MOA,85 I do not see that as a fundamental difference relating to the status of the MOA in international law in general and in investment treaty arbitration in particular. Notwithstanding the ample references to the MOA in arbitral practice, which will be examined more thoroughly in the next parts, it is in my view not clear that there is such a rule in international law. For analytical purposes, I have sought to organize the practice under three separate grounds for deference. It is unfortunate that there is a lack of clarity in the case law on this issue. Perhaps, rather than considering the MOA as a rule, when not grounded in the applicable treaty, its use can better be explained as part of the inherent powers of arbitral tribunals. However, I have not seen this approach explicitly articulated.

81

Born et al. (2020), pp. 109, 120, 123, 124, 128, 130. Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No. ARB/11/33, Award, 3 November 2015, para 389 and footnote 777. 83 Born et al. (2020), p. 115 referring to Mercer International Inc. v. Government of Canada, ICSID Case No. ARB(AF)/12/3, Award, 6 March 2018, para 7.33. 84 Mercer International Inc. v. Government of Canada, ICSID Case No. ARB(AF)/12/3, Award, 6 March 2018, para 7.42. 85 Some cases which I analyse below might have been considered a rejection of MoA by Born et al., but are not referred to. See e.g. Apotex Holdings Inc. and Apotex Inc. v. the United States, ICSID, Case No. ARB(AF)/12/1, Award, 25 August 2014, para 9.37. 82

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Epistemic Deference

An epistemic-related form of deference seems to be the most widespread.86 In these cases, expertise is the justification for deference afforded by arbitral tribunals.87 As the Tribunal in Saluka observed: In the absence of clear and compelling evidence that the [Czech National Bank] erred or acted otherwise improperly in reaching its decision, which evidence has not been presented to the Tribunal, the Tribunal must in the circumstances accept the justification given by the Czech banking regulator for its decision.88

The Tribunal in Chemtura noted that it was not its role “to second-guess the correctness of the science-based decision-making of highly specialized national regulatory agencies”.89 In Crystallex, the tribunal established that there was a presumption that governmental bodies tasked with technical and scientific decision were competent. They “should enjoy a high level of deference for reasons of their expertise and competence (which is assumed to be present in those institutions called to make the relevant decisions) and proximity with the situation under examination.”90 Tribunals should neither “second-guess the substantive correctness of the reasons which an administration were to put forward in its decisions”, nor “question the importance assigned by the administration to certain policy objectives over others.”91 Windstream concerned a moratorium on offshore wind farms in Ontario. The tribunal indicated that whereas scientifically backed measures are not likely to entail a breach of IIAs, such basis as a policy reason must be genuine.92 In Apotex, the tribunal recalled that earlier tribunals had emphasized the need “to recognise the special roles and responsibilities of regulatory bodies charged with protecting public health and other important public interests.”93 It added that it addressed “under NAFTA Article 1105(1) a ‘minimum’ standard of treatment, with no permissible margin of appreciation below such minimum.” Still, the tribunal reiterated how “these other decisions indicate the need for international tribunals to exercise caution in cases involving a state regulator’s exercise of discretion,

86

See also Henckels (2012), p. 128. See further Leonhardsen (2014). 88 Saluka Investments B.V. v. The Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para 273. 89 Chemtura Corporation v. Canada, UNCITRAL, Award, 2 August 2010, para 134. 90 Crystallex International Corporation v. Venezuela, ICSID, Case No. ARB(AF)/11/2, Award, 4 April 2016, para 583. 91 Ibid. 92 Windstream Energy LLC v. Canada, PCA Case No. 2013-22, Award, 27 September 2016, para 378. 93 Apotex Holdings Inc. and Apotex Inc. v. the United States, ICSID, Case No. ARB(AF)/12/1, Award, 25 August 2014, para 9.37. 87

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particularly in sensitive areas involving protection of public health and the wellbeing of patients.”94 The same was the case in Methanex, where scientific studies differed.95 In Ioannis Kardassoupoulos and Ron Fuchs the Tribunal noted that the State was entitled to deference with respect to the fact “that oil pipeline infrastructure was of crucial national importance to the country’s political independence in the region and its economic development.”96 In Glamis, the tribunal agreed with the respondent that it was not the “Tribunal’s task to become archaeologists and ethnographers and to draw a definitive conclusion as to the location of the Trail of Dreams”,97 a sacred site for Native Americans, which was located near land where the claimant had mining rights. As was observed in that case, it was beyond the role of the international adjudicator “to supplant its own judgment of underlying factual material and support for that of a qualified domestic agency”.98 A similar position was taken in Micula concerning a factual decision by Swedish immigration authorities relating to the requirements of naturalization.99 In Perenco Ecuador, an approach was taken which seems somewhat mixed with democratic deference more broadly. Thus, the Tribunal recognized the “wide latitude under international law” a State has “to prescribe and adjust its environmental laws, standards and policies in response to changing views and a deeper understanding of the risks posed by various activities, including those of extractive industries such as oilfields.”100 Thus, epistemic deference can encompass a broad range of determinations, including decision-making in the sense of complex choices among competing alternatives being entrusted to experts on the matter, acceptable risk level assessment, to expertise in establishing facts, and as seen in Bilcon and Mesa,101 there is 94

Ibid. Methanex Corporation v. the United States, UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits, 3 August 2005, para 101. 96 Ioannis Kardassoupoulos and Ron Fuchs v. Georgia, ICSID, Case Nos. ARB/05/18 and ARB/07/15, Award, 3 March 2010, para 391. 97 Glamis Gold, Ltd v. the United States, UNCITRAL, Award, 8 June 2009, para 779. 98 Glamis, para 779. 99 Ioan Micula et al v. Romania, ICSID, Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008, paras 94–95. The deference here, however, was not shown to respondent, but to Sweden for the purposes of determining whether the foreign investor qualified under the Sweden/Romania BIT. 100 Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID, Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim, 11 August 2015, para 35. 101 William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v. Canada, UNCITRAL, PCA Case No. 2009-04, Award on Jurisdiction and Liability 17 March 2015, para 437. This paragraph was cited approvingly in Mesa Power Group, LLC v. Government of Canada, UNCITRAL, PCA Case No. 2012-17, Award, 24 March 2016, para 505. 95

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even room for mistakes. However, as Windfarm shows, if the government relies on scientific arguments for its policy, it must be prepared to demonstrate that it has done enough to obtain such studies.

4.3

Institutional Deference and the Right to Regulate

Similar to instances of purely epistemic deference, a special category of cases is related to different alternatives available to a State in order to reach a regulatory goal. This was a very controversial topic in many of the awards related to measures enacted by Argentina during and after its 2001–2002 financial crisis.102 Deference in these cases encompass elements of both epistemic and democratic deference, but they are sufficiently different to be treated independently. This is especially because the difficult question usually revolves around the appropriate degree of scrutiny of decision-making in crisis-like situations. If the MOA is indeed a useful juridical tool in these situations, it is interesting to observe that there seems to be two main approaches taken so far: one of which appears to support this proposition, and one of which does not. On the one hand, some tribunals have recognized that there may be several, legitimate regulatory responses in a crisis.103 The tribunal in Continental Casualty emphasized this point, noting that its: objective assessment must contain a significant [MOA] for the State applying the particular measure: a time of grave crisis is not the time for nice judgments, particularly when examined by others with the disadvantage of hindsight.104

However, certain other tribunals, deciding on the same facts, have taken a stricter approach,105 basically denying that there existed a MOA at all under the applicable treaty provision.106 Consequently, the task of the Tribunal, as it was argued in Sempra and Enron, was “to determine whether the choice made was the only way available”.107 A more sophisticated approach was chosen in Urbaser, where the tribunal highlighted that other available choices had to be captured in two perspectives: “the wide one, taking into account the needs of Argentina and its population

102

The literature here is immense, but see generally on these cases e.g. Henckels (2012) with further references. 103 LG&E, para 239; Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008; Total, paras 164–165. See also Pope & Talbot Inc. v. Canada, UNCITRAL Award on Damages, 31 May 2002, para 155. 104 Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para 181. 105 CMS; Enron; Sempra. 106 Such as Article XI of the US-Argentina BIT. 107 Sempra, para 351; Enron, para 309.

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nation-wide, and the narrower one of the situation of investors engaged in performing contracts protected by the international obligations arising out of one of the many BITs.”108 It then observed that the investor had not addressed the broader perspective, whereas Argentina “had made more than a prima facie showing that the emergency measures taken were the only ones available to the Argentine Government at the time, taking into account the extreme economic, institutional and social disturbances suffered by the country and its population.”109 Still, even the stricter approach seems to acknowledge deference to States in general with respect to economic policy choices, something which perhaps relates more to the epistemic deference mentioned above: “While one or the other party would like the Tribunal to point out which alternative was recommendable, it is not the task of the Tribunal to substitute its view for the Government’s choice between economic options.”110 More generally, this can be seen as part of the State’s right to regulate, which has been confirmed in several cases.111 It seems clear that there is no uniform MOA approach in these cases, but the strict approaches entail the risk that crucial decision-making, or perhaps rather secondguessing, powers have been ceded to arbitrators.

4.4

Democratic Deference and Institutional Quality Control

I noted above that the Strasbourg approach could be interpreted so as to give greater deference to measures when they have been thoroughly debated by the legislature. I have found little evidence that this approach has been followed by arbitrators so far. The best example is perhaps Glamis, where the tribunal seemed to put weight on the procedural democratic aspects of the measures in question, combining aspects of epistemic and institutional deference. It agreed with the respondent’s starting point “that governments must compromise between the interests of competing parties and, if they were bound to please every constituent and address every harm with each

108

Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentina, ICSID Case No. ARB/07/26, Award, 8 December 2016, para 716. 109 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentina, ICSID Case No. ARB/07/26, Award, 8 December 2016, para 717. 110 Sempra, para 351; Enron, para 309. 111 Teco Guatemala Holdings v. The Guatemala, ICSID, Case No. ARB/10/17, Award, 19 December 2013, para 490; Foresight Luxembourg Solar 1 S. Á.R1., et al. v. Spain, SCC Case No. 2015/150, para 363, citing Philip Morris Brands SÀRL, Philip Morris Products S.A. and Abal Hermanos S.A., v. Uruguay, ICSID Case No. ARB/10/7, Final Award, 8 July 2016, para 422. See also e.g. ES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para 9.3.73 and Novenergia II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR, v. Spain, SCC Case No. 2015/063, para 688 and Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No. ARB/11/33, Award, 3 November 2015, para 389.

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piece of legislation, they would be bound and useless.”112 This had consequences for the question whether the legislation in question was “arbitrary” and thus could entail a breach of the fair and equitable treatment (FET) standard. In Philip Morris, the tribunal noted that “[t]he responsibility for public health measures rests with the government and investment tribunals should pay great deference to governmental judgments of national needs in matters such as the protection of public health.”113 Indeed, it agreed with the respondent that the MOA “‘applies equally to claims arising under BITs,’ at least in contexts such as public health.”114 The same understanding can be reached from RREEF, which has been recently confirmed by several other Tribunals.115 The RREEF case concerned tariff changes under the Energy Charter Treaty. Here, the starting point for the Tribunal was that there can be no doubt that States enjoy a margin of appreciation in public international law and the exercise of such a power of appreciation must be more particularly recognized when States apply the ECT, whose common purpose is ‘to promote the development of an efficient energy market throughout Europe’ in view of creating “a climate favourable to the operation of enterprises” and ‘to the flow of investments and technologies by implementing market principles in the field of energy.’ Such common goal may be reached by different ways, depending on the circumstances as appreciated by each State.116

Notably, however, the Tribunal also noted that “such a margin of appreciation is not without limits. In the first place, it can only be exercised in so far as the State Party does not violate the special legal regime, established by the ECT itself, that applies to the energy sector in and amongst the member States.”117 A similar analysis follows from Lemire, where the tribunal noted that “arbitrators are not superior regulators; they do not substitute their judgment for that of national bodies applying national laws”.118 In Rusoro Mining, the tribunal found that “States enjoy extensive discretion in establishing their public policy”, and that it would not “second-guess the appropriateness of the political or economic model adopted by the 112

Glamis, para 804. Philip Morris Brands SÀRL, Philip Morris Products S.A. and Abal Hermanos S.A., v. Uruguay, ICSID Case No. ARB/10/7, Final Award, 8 July 2016, para 399. 114 Ibid. 115 AES Solar and Others (PV Investors) v Spain, PCA Case No. 2012-14, 28 February 2020, Final Award, para 583; Hydro Energy 1 S.à r.l and Hydroxana Sweden AB v Spain, ICSID Case No. ARB/15/42, Decision on Jurisdiction, Liability and Directions on Quantum, 9 March 2020, para 589. “The expression “margin of appreciation” can be used to convey the point that the State’s right to regulate is subject to a wide latitude, subject to its compliance with its duties under the ECT and customary international law.” See also Cavalum SGPS S.A. v Spain, Decision on Jurisdiction, Liability and Directions on Quantum, ICSID Case No. ARB/15/34 31 August 2020, paras 419 and 432. 116 RREEF v. Spain, Decision on Responsibility and on the Principles of Quantum, 30 November 2018, paras 241–242. 117 Ibid. 118 Joseph Charles Lemire v. Ukraine, ICSID, Case No. ARB/06/18, Decision on Jurisdiction and Liability, 24 October 2010, para 283. 113

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legitimate organs of a sovereign State,” and very similar statements were made in Blusun.119 As the tribunal held in Frontier Petroleum, as long as such conclusions are reached by plausible interpretations, the State enjoys “a certain margin of appreciation in determining what [its] own conception of international public policy is”.120 A more convoluted approach was taken in Tecmed. In that case the measures in question had been taken by, inter alia, the National Ecology Institute, i.e. the measures were not subject to deliberative reasoning. The tribunal appeared to respect internal divisions of power, however, by acknowledging that due deference must be shown to the State “when defining the issues that affect its public policy or the interests of society as a whole, as well as the actions that will be implemented to protect such values.”121 That being said, it is somewhat unclear what, if anything, this deference meant in practice. Vestey is an interesting example which emphasizes the limit of deference to domestic policy decisions, though not in the form of any qualitative scrutiny of democratic processes as in the ECtHR.122 The context was a 2011 nationalization in Venezuela of Agroflora, a British cattle farming business. The tribunal noted first that international tribunals generally should “accept the policies determined by the state for the common good, except in situations of blatant misuse of the power to set public policies”.123 In that specific instance, Venezuela’s measures had been part of a larger food strategy to provide resources to its population. The tribunal said plainly that it deferred to this policy determination: “In any event, that policy appears perfectly legitimate and worth of protection and there is no suggestion in the record that it was not.”124 However, to the tribunal that finding did “not end the inquiry”, which it combined with an additional analytical step, where the idea was “to determine whether the measure had a reasonable nexus with the declared public purpose or in other words, was at least capable of furthering that purpose.” This method of limiting deference reminds strongly of some form of proportionality review.125 Most recently, that was done explicitly in AES Solar.126

119 Rusoro Mining Limited v. Venezuela, ICSID, Case No. ARB(AF)/12/5, Award, 22 August 2016, para 385 and Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italy, ICSID Case No. ARB/14/3, Final Award 27 December 2016, para 318. See also Reinhard Unglaube v. Costa Rica, ICSID, Case No. ARB/09/20, Award, 16 May 2012, para 246. 120 Frontier Petroleum v. Czech Republic, UNCITRAL, Final Award, 12 November 2010, para 527. 121 Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003, para 122. Similarly, Electrabel S.A. v Hungary. ICSID Case No. ARB/07/19. Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para 8.35. 122 Vestey Group Ltd v. Venezuela, ICSID, Case No. ARB/06/4, Award, 15 April 2016. 123 Ibid, para 294. 124 Ibid. 125 See Leonhardsen (2012). 126 “In the Tribunal’s view, the limits of the State’s power are drawn by the principles of reasonableness and proportionality, which must guide a tribunal’s assessment of the allegedly harmful

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In light of recent case law, similar arguments can be made with respect to institutional quality requirements under the label of good governance, exemplified by prosecution, domestic court and central bank decision-making. For instance, in Vanessa Ventures Ltd, the investor argued that it had been mistreated by the domestic courts in Venezuela, which “were less than independent and impartial”, and that this amounted to breach of the fair and equitable treatment (FET) standard.127 The Tribunal did not exclude that such determination could be possible.128 Though it rejected the claim on the basis of lack of evidence, the bar it indicated was high, and noted that something like this had to be proved in each case.129 In Teco the tribunal held that it “may of course give deference to what was decided as a matter of Guatemalan law by the Guatemalan Constitutional Court.”130 As I indicated in Sect. 2 with respect to the Rule of Law provision in Article 5 of the Netherlands Model BIT, these are considerations which arguably may be extended to an inquiry into the structure of the judicial system. Article 6 ECHR is often interpreted in this manner, requiring, for instance “an appearance of independence”.131 The Court has also noted that “the notion of the separation of powers between the political organs of government and the judiciary has assumed growing importance in” its case-law.132 The American Convention on Human Rights (ACHR) and the International Covenant on Civil and Political Rights (ICCPR) contain similar provisions.133 Here we can also point to more due process related aspects of domestic adjudicative conduct. This can also be discussed under FET standards and can be used to distinguish legitimate regulatory activity from indirect expropriation. For instance, in Deutsche Bank the majority held that the Supreme Court acted in breach of due process requirements in this manner, and that the actions taken by the Central Bank amounted to “financially motivated and illegitimate regulatory expropriation by a regulator lacking in independence.”134 These justifications were used by the tribunal to deny discretion to the government decisions.

changes in the legislation.” AES Solar and Others (PV Investors) v Spain, PCA Case No. 2012-14, 28 February 2020, Final Award, para 583. 127 Vanessa Ventures Ltd v. Venezuela, ICSID, Case No. ARB (AF)/04/6, Award, 16 January 2013, para 217. 128 See also e.g. Parkerings-Compagniet AS v. Lithuania ICSID Case No. ARB/05/8, Award, 11 September 2007, para 318. 129 Vanessa Ventures Ltd v. Venezuela, para 228. 130 Teco Guatemala Holdings v. Guatemala, ICSID, Case No. ARB/10/17, Award, 19 December 2013, para 483. See also the discussion in paras 511–519. 131 Langborger v. Sweden, Judgment, 22 June 1989, para 32. 132 E.g. Henryk Urban and Ryszard Urban v. Poland, Application No. 23614/08, Judgment, 30 November 2010, para 46. 133 Article 8(1) and 14(1) respectively. 134 Deutsche Bank AG v. Sri Lanka, ICSID Case No. ARB/09/2, Award of 31 October 2012, para 524.

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Similarly, in Rompetrol prosecutorial authority that involved “procedural irregularities” toward the investor amounted to a breach of the FET requirement, again inspired by ECHR Article 6.135 Somewhat similarly, in the Occidental case the tribunal noted that it could accept “that some punishment or other step [against Claimant] may well have been justified, or at the very least defensible”,136 but such punishment could not be disproportional to the acts it addressed. In other words, the government had discretionary powers to enact measures against the investor, but its discretion did not go beyond what was considered proportional. These examples provide two perspectives on deference in defence of democracy as a value in the broad sense and in accordance with the subsidiarity approach under the ECHR. On the one hand, this includes deference to parliamentary decisions, though without any evidence of qualitative inquiry into parliamentary scrutiny. On the other hand, it entails non-deference to decisions made by governmental bodies where either the decision or even the structure of the decision-making body as such failed to adhere to minimum requirements concerning the appearance of impartiality and separation of powers. It is not entirely unproblematic that these awards are often based on vague treaty standards and both explicit and implicit analogies from human rights law, where the treaty texts are clearer and often more detailed.137 Nonetheless, neither is it clear that such scrutiny by investment tribunals ought to be seen as judicial overreach. The treaty changes discussed in Sect. 2 would hardly have affected these findings, and the jurisprudence is in my view not out of sync with international trends. This jurisprudence might at the very least signal a future for investment treaty arbitration towards a kind of inquiry that is less open for critique in the sense that it represents judicial activism than earlier trends. Whether such jurisprudence opens up for other forms of criticism, and whether this criticism is more powerful, is another question.

5 Rejections of MOA Investment tribunals have occasionally rejected the application of the MOA outright. For instance, in Quasar de Valores, the Tribunal distinguished the two regimes by noting that human rights conventions establish minimum standards to which all individuals are entitled irrespective of any act of volition on their part, whereas investment-protection treaties

135

The Rompetrol Group NV v. Romania, ICSID, Case No. ARB/06/3, Award, 6 May 2013, para 279. 136 Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, para 450. 137 See generally the critique of Philip Morris, Concurring and Dissenting Opinion Co-Arbitrator Gary Born, 8 July 2016, paras 180–196.

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contain undertakings which are explicitly designed to induce foreigners to make investments in reliance upon them. It therefore makes sense that the reliability of an instrument of the latter kind should not be diluted by precisely the same notions of ‘margins of appreciation’ that apply to the former.138

In Siemens, the Tribunal observed that “that Article I of the First Protocol to the European Convention on Human Rights permits a margin of appreciation not found in customary international law or the [BIT between Germany and Argentina].”139 In Bernhard von Pezold, the tribunal opined in response to a reference by the respondent to the ECHR MOA and that the state should be given a wide margin when determining what was in its public interest that due caution should be exercised in importing concepts from other legal regimes (in this case European human rights law) without a solid basis for doing so. Balancing competing (and non-absolute) human rights and the need to grant States a margin of appreciation when making those balancing decisions is well established in human rights law, but the Tribunal is not aware that the concept has found much support in international investment law.140

To the tribunal, this was “a very different situation from that in which margin of appreciation is usually used. Here, the Government has agreed to specific international obligations and there is no ‘margin of appreciation’ qualification within the BITs at issue.”141 It also determined that the MOA had not achieved customary international law status and therefore declined to apply it.142 Similarly, in his powerful concurring and dissenting opinion in Philip Morris, Gary Born disagreed with the conclusion of the Tribunal in its adoption of the MOA (which was mentioned above) as part of a FET-analysis. In his view, this was neither “mandated or permitted by the BIT or applicable international law.”143 Instead, to Born, the MOA was “a specific legal rule, developed and applied in a particular context, that cannot properly be transplanted to the BIT (or to questions of fair and equitable treatment more generally).”144 From a doctrinal perspective, Born, in my view, had a good point. However, it is not clear from the reasoning of the majority exactly how it relied on the MOA. Born next went on to argue that “[t]here are well-considered legal rules, already applicable to questions of fair and equitable treatment, which serve similar purposes to those of the “margin of appreciation,” but in a more nuanced and balanced manner.”145

138 Quasar de Valores SICAV S.A., Orgor de Valores SICAV S.A., GBI9000 SICAV S.A and Alos 34 S.L. v. The Russian Federation, SCC No. 24/2007, Award, 20 July 2012, para 22. 139 Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, para 354. 140 Bernhard von Pezold and others v. Zimbabwe, ICSID Case No. ARB/10/15, Award, 28 July 2015, para 465. 141 Ibid, para 466. 142 Ibid. 143 Philip Morris, Concurring and Dissenting Opinion Co-Arbitrator Gary Born, 8 July 2016, para 87. 144 Ibid. See also his “Additional Observations” in paras 180–196. 145 Ibid.

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Indeed, as Born explained, language used by the tribunals in for instance Electrabel and Lemire do not necessarily indicate an application of the ECtHR’s doctrine of a margin of appreciation but are general references to deference as a standard of review. It is uncontroversial that a degree of deference should be afforded to the state but the Award errs, in my view, in endorsing a standard of review transposed from, and as wide as that afforded by, the ECtHR’s margin of appreciation.146

However, as indicated above, the MOA in the case law of the Court is highly adaptive, flexible and indeed “nuanced”. One is left to wonder what would have happened if the majority either had been a bit more careful in its description of the MOA and how it was using it or, alternatively, if it had simply relied on deference as part of the FET-test under the applicable BIT.147 Here, we should also mention that the Philip Morris case actually did give the Tribunal a chance to apply the MOA in the broad, subsidiary-minded manner I outlined above. As will be recalled, in that perspective, the responsibility to uphold the ECHR is chiefly up to the national authorities. The Court will control how this process takes place. If it is sufficient, a broad MOA will be afforded. If it does not satisfy these requirements, the MOA will be much more narrow. In Philip Morris, the relevant issue was whether two conflicting judgments from the Supreme Court and the Tribunal de lo Contencioso Administrativo (TCA), two co-equal judicial bodies, concerning one of the tobacco regulatory measures in question amounted to a denial of justice. In a thinly reasoned decision,148 the TCA considered duly authorised by the legislator a measure which the Supreme Court had previously considered unauthorised. This was considered from the perspective of denial of justice, as part of the FET standard of the BIT. The majority here referred to an ECtHR case, Sahin v Turkey,149 where a similar issue arose. There the Court held that “it must avoid any unjustified interference in the exercise by the States of their judicial functions or in the organisation of their judicial systems. Responsibility for the consistency of their decisions lies primarily with the domestic courts and any intervention by the Court should remain exceptional.”150 While not directly referring to the MOA or the principle of subsidiarity, it is submitted that this judgment by the Court may have rested upon such considerations.

146

Ibid, 189. However, if para 176 of the Concurring and Dissenting Opinion is any indication, it would not have helped much: “In these circumstances, and even accepting the Tribunal’s “margin of appreciation” for the sake of argument, I cannot agree that the single presentation requirement satisfied the requirements of rationality and proportionality. Mindful of Uruguay’s extensive legislative authority and broad regulatory discretion, it is still impossible to see how a hastily-adopted measure that is so ill-suited to its articulated purpose, and that treads so far onto protected rights and interests, can satisfy even the Tribunal’s stated standard.” 148 Concurring and Dissenting Opinion, paras 28–31. 149 Case of Nejdet Şahin and Perihan Sahin v. Turkey, Application No. 13279/05, Judgment of 20 October 2011. 150 Ibid, para 94. 147

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Here is not the place to analyse this issue from the perspective of denial of justice without any particular “margin of appreciation”.151 Notably, however, the ECtHR held in a later case, Kurşun, that conflicting decisions in Turkey’s courts could be problematic under Article 6 ECHR: While the Court is aware that the delivery of conflicting decisions by national courts will not, by itself, constitute a violation of Article 6 of the Convention (. . .), it nevertheless considers that such divergence suggests a lack of clarity in the interpretation of the relevant time-limit rule on the present facts, and thus reinforces the applicant’s allegations of unforeseeability. In this connection, the Court finds it problematic that despite the applicant’s persistent requests, the 4th Chamber of the Court of Cassation provided no reasoning as to why it diverged from decisions delivered by another chamber in circumstances that were, in substance, identical to those of the applicant.152

As I understand the Court’s reasoning, the conflicting decisions may not in themselves have been sufficient for a finding of a violation of Article 6. However, they may have heightened the requirement to give reasons, also under Article 6. In my view, this is one way subsidiarity and the MOA may operate. Furthermore, it could (with the benefit of hindsight) have been a useful approach in Philip Morris as well, where, frankly, the acts and omissions attributable to the national judiciary as described in the award appear problematic on a similar level to those in Kurşun. It is interesting to compare this criticism from Born with relatively similar criticism from Volterra in his Dissenting Opinion in RREEF:153 There are examples of international courts and tribunals referencing something called a “margin of appreciation”, when analysing the conduct of a State in a given context. However, the concept of a “margin of appreciation” is not a legal standard under international law. It is an analytical tool that can be useful in evaluating the conduct of a State that is acting within its legal authority but in a manner that brings into question its compliance otherwise with its legal obligations. It would be incorrect to juxtapose as a binary legal choice, in evaluating the conduct of a State in this context, either that a State enjoys a margin of appreciation so broad that it is always allowed to do whatever it likes consequence-free or that an implicit stabilisation obligation exists that limits a State’s conduct.

As I understand it, Volterra’s criticism could also have been criticism against Born’s approach above. First, Born (like Born et al.) seems to assume that the MOA is necessarily wide.154 Second, unlike Born, Volterra does not appear to have a problem with the reference to the MOA as such. However, both criticisms appear to target the majority reasoning in both Philip Morris and RREEF.

151

In his dissenting and concurring opinion, Born effectively distinguished the Sahin case from what took place in the Philip Morris case, noting in particular that in contrast with the Sahin case, in Philip Morris the conflicting issues concerned the same entity and the same facts. 152 Kurşun v. Turkey, application no 22677/10, 30 October 2018, paras 98–99. 153 RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. v. Kingdom of Spain ICSID Case No. ARB/13/30, Decision on Responsibility and on the Principles of Quantum, 30 November 2018, Dissenting Opinion of Volterra. 154 Philip Morris, Concurring and Dissenting Opinion Co-Arbitrator Gary Born, 8 July 2016, para 189.

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In reality, therefore, it may be that such statements from arbitral tribunals refer to particular understandings of the MOA, and they need not entail a rejection or acceptance of all the ways the MOA may be used.

6 Conclusion: A Rose by Any Other Name? A “thin” version of the MOA appears to exist in investment treaty arbitration. At least it has been identified by numerous tribunals. In practice, this MOA appears to amount to little more than general deference to the State. As such, that appears to be relatively uncontroversial. Some aspects of the MOA do not appear to exist at all in investment treaty arbitration. This is a consequence of the fact that it is not the primary role of treaty tribunals to function as guardians of a multilateral international convention like the ECHR. Certainly, arbitrators ignore concerns about state’s regulatory space at their own peril. Nonetheless, the proper use of discretion is mainly in my view a question of treaty design, application and interpretation. This role of tribunals should not be understood as exercising the function of an administrative review body with the aim of ensuring that “municipal agencies perform their tasks diligently, conscientiously or efficiently. That function is within the proper domain of domestic courts and tribunals that are cognizant of the minutiae of the applicable regulatory regime”.155 For actions and omissions of the host State towards a foreign investor that do not reach the threshold of specific substantive provisions of the applicable investment treaty—for example regulations that limit the right of the investor to utilize its investment but that do not amount to an expropriation—there is discretion for the host government to undertake such non-discriminatory regulatory measures as it sees fit. Perhaps it may minimize everyone’s confusion and potential misunderstandings if the approach of the Tribunal in Chemtura is adopted. It found it necessary to address whether the protection granted by NAFTA Article 1105 was “lessened by a margin of appreciation granted to domestic regulatory agencies and, if so, to what extent.”156 It concluded that it had to “take into account all the circumstances, including the fact that certain agencies manage highly specialized domains involving scientific and public policy determinations.” However, in its view, taking this into account was “not an abstract assessment circumscribed by a legal doctrine about the margin of appreciation of specialized

155

Generation Ukraine, Inc. v. Ukraine, ICSID, Case No. ARB/00/9, Award, 16 September 2003, para 20.33. 156 Chemtura, supra note 89, para 123. See however para 134.

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regulatory agencies. It is an assessment that must be conducted in concreto.”157 Perhaps it is as simple as that. For the ongoing reform processes of IIL it seems useful to underline that Tribunals appear ready to accept deference to State measures enacting public policy as well as to decisions by domestic courts. However, to the extent that States want to strengthen the role of domestic courts in IIL, such as by requiring exhaustion of domestic remedies, they should consider whether this might also entail the approach of “positive subsidiarity”, which may be inferred from the ECtHR case law. In effect, this seems to function as a duty of care for domestic courts and other authorities. If those actors fail their duty of care, they will be faced not with a non-intrusive standard of review, but instead with heightened judicial scrutiny. As such, the MOA in a thick form in investment treaties can also empower national courts and afford them a role in which they may ensure that their treatment of foreign investors is equal to that of domestic actors in like situations.

References Alter KJ, Gathii JT, Helfer LR (2016) Backlash against international courts in west, east and southern Africa: causes and consequences. Eur J Int Law 27(2):293–382 Berge TL, Hveem H (2018) The international regime for investment: a history of failed multilateralism. In: Nölke A, May C (eds) Handbook of the international political economy of the corporation. Edward Elgar, p 311 Blanco SM, Pehl A (2020) National security exceptions in international trade and investment agreements: justiciability and standards of review. Springer Born G, Morris D, Forrest S (2020) “A Margin of appreciation”: appreciating its irrelevance in international law. Harv J Int Law 61(1):65–134 Brems E (2019) Positive subsidiarity and its implications for the margin of appreciation doctrine. Netherlands Q Hum Rights 37(3):210–227 Caron D, Shirlow E (2018) Dissecting backlash: the unarticulated causes of backlash. In: Føllesdal A, Ulfstein G (eds) The judicialization of international law: a mixed blessing? Oxford University Press, pp 159–182 Dimitropoulos G (2020) The conditions for reform: a typology of “backlash” and lessons for reform in international investment law and arbitration. Law Pract Int Courts Tribunals 18:416 Fukunga Y (2018) Margin of appreciation as an indicator of judicial deference: is it applicable to investment arbitration? J Int Dispute Settlement 10(1):69–87 Henckels C (2012) Indirect expropriation and the right to regulate: revisiting proportionality analysis and the standard of review in Investor-State Arbitration. J Int Econ Law 15:223 Kleinlein T (2019) The procedural approach of the European Court of Human Rights: between subsidiarity and dynamic evolution. ICLQ 68:91 Korzun V (2017) The right to regulate in Investor-State Arbitration: slicing and dicing regulatory carve-outs. Vanderbilt J Transnatl Law 50:355 Kuluga J (2020) A renaissance of the doctrine of Rebus Sic Stantibus? Int Comp Law Q 69:477

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Langford M, Behn D, Fauchald OK (2018) Backlash and state strategies in international investment law. In: Aalberts T, Gammeltoft-Hansen T (eds) The changing practices of international law. Cambridge University Press, p 70 Leonhardsen E (2012) Looking for legitimacy: exploring proportionality analysis in investment treaty arbitration. J Int Dispute Settlement 3(1):95–136 Leonhardsen E (2014) Treaty change, arbitral practice and the search for a balance: standards of review and the margin of appreciation in international investment law. In: Gruszczynski L, Werner W (eds) Deference in International Courts and Tribunals: standard of review and margin of appreciation. Oxford University Press, p 135 Leonhardsen EM (forthcoming) Pride and perseverance - strategic use of Rebus Sic Stantibus in Russian Foreign Policy 1870–1950. German Yearb Int Law, 51 pp. Lim CL, Ho J, Paparinskis M (2021) International investment law and arbitration: commentary, awards and other materials, 2nd edn. Cambridge University Press, Cambridge Marks S (1995) The European Convention on Human Rights and its ‘Democratic Society’. Br Year Book Int Law 66:209 McLachlan C (2019) The assault on international adjudication and the limits of withdrawal. Int Comp Law Q 68:499 Mitchell AD, Henckels C (2013) Variations on a theme: comparing the concept of ‘Necessity’ in international investment law and WTO law. Chic J Int Law 14:93 Morrisson C Jr (1973) The margin of appreciation in European Human Rights Law. Revue des Droit de l’Homme 6:263 Ortino F (2019) The origin and evolution of investment treaty standards: stability, value, and reasonableness. Oxford University Press, Oxford Sabanogullari L (2018) General exception clauses in international investment law: the recalibration. Nomos, Baden-Baden Schefer KN (2020) International investment law: text, cases and materials, 3rd edn. Edward Elgar Schill SW (2009) The multilateralization of international investment law. Cambridge University Press, Cambridge Trakman LE, Musayelyan D (2016) The repudiation of Investor-State Arbitration and subsequent treaty practice: the resurgence of qualified Investor-State Arbitration. ICSID Rev Foreign Investment Law J 31:194 Waibel M, Kaushal A, Chung KW (2010) The backlash against investment arbitration: perceptions and reality. Kluwer Law International, Alphen aan den Rijn Zarbiyev F (2012) Judicial activism in international law: a conceptual framework for analysis. J Int Dispute Settlement 3(2):247–278 Zglinski J (2020) Europe’s passive virtues: deference to national authorities in EU free movement law. Oxford University Press, Oxford

Erlend M. Leonhardsen is Legal Adviser at the EFTA Surveillance Authority (“ESA”) where he represents ESA before European Courts. In addition, he is a PhD candidate at the University of Oslo. He holds a law degree from the University of Oslo and an LLM from Georgetown University Law Center. Over the past decade, he has acted in cases before the Court of Justice of the European Union, the EFTA Court, the European Court of Human Rights, arbitral tribunals and Norwegian courts.

Conciliation as Method to Solve Sovereign Debt Disputes Between States and Private Creditors Domenico Pauciulo

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Private Creditors and Sovereign Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Procedural Aspects of Conciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Institution of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Appointing the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Procedure and Its Outcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Reasons for Conciliating Sovereign Debt Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Making Conciliation “Effective” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract States’ financial instability and debt restructuring could be impaired by predatory behaviors of private creditors, including entities that buy distressed sovereign bonds with the aim of litigating and recovering inflated sums. Scholars have suggested a wide-range of normative solutions to alleviate these problems, including the creation of a multilateral international sovereign bankruptcy framework and the institution of dedicated arbitral tribunals or international courts. Conciliation could provide an alternative to judicial and investor-state dispute settlement (ISDS) proceedings to solve disputes involving sovereign debt between private creditors and debtor States because of its procedural and practical benefits. The flexibility of the procedure, the reduced amount of time and costs, the recourse to equity and legal principles favour such mechanism over other dispute resolution procedures. It is therefore proposed to create a compulsory “conciliation scheme” managed by the United Nations Conference on Trade and Development (UNCTAD) Sovereign Debt Workout Institution in order to create a reliable system for the resolution of sovereign debt disputes.

D. Pauciulo (*) Department of Law, LUISS Guido Carli, Rome, Italy e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 183–202, https://doi.org/10.1007/8165_2021_80, Published online: 5 May 2022

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1 Introduction Conciliation is considered the most “advanced” method to settle international disputes involving the intervention of a third party, since it combines elements typical of investigation, mediation, arbitral and judicial procedures, thus standing out from all the foregoing dispute resolution procedures.1 International law, however, does not provide for a definition of conciliation. Many authors quote the 1961 Resolution adopted by the Institut de Droit International, which outlines conciliation as a procedure led by a commission that analyses, with impartiality, a dispute and proposes terms of settlement to the parties.2 Traditionally, conciliation concerned inter-State disputes:3 with the development of economic and trade law, international conciliation has broadened its scope and now also tackles transnational law issues and disputes between States and non-State actors.4 This study suggests the recourse to a “conciliation scheme” to solve disputes involving sovereign debt between private creditors and debtor States as alternative to judicial or arbitral proceedings. Foreign debt has indeed alarmed the international community for decades, having a significant incidence on States’ budgets and consequently on their sovereign functions, largely impacting their respect of international obligations with regard to economic, social and cultural rights. Debt servicing, indeed, reduces the amount of resources available to fulfil basic rights, since reserves normally devoted for education, health, housing, work, social security and public services are diverted to repay the loans received:5 Argentina’s default of 2001 and the Greek bailout in the aftermath of the global financial crisis of 1

Palmisano (2019) p. 112. Institut de Droit International, International Conciliation, Sec. 1- Definition of Conciliation, in Annuaire de l’Institut de Droit International, 1961, p. 275, (hereinafter, 1961 Resolution). The exact wording is: “conciliation means a method for the settlement of international disputes of any nature according to which a Commission set up by the Parties, either on a permanent basis or on an ad hoc basis to deal with a dispute, proceeds to the impartial examination of the dispute and attempts to define the terms of a settlement susceptible of being accepted by them, or of affording the Parties, with a view to its settlement, such aid as they may have requested”. 3 Notorious examples are the establishment of the “Chaco Commission” by Bolivia and Paraguay in 1929 to solve disputes following armed activities in the area surrounding the border between the two countries and the disputes between Siam and France regarding the status of certain territories during 1947. For an analysis of early cases of conciliation, see Steiger (2020). 4 Cot (2006). 5 See United Nations, Human Rights Council, Activities of vulture funds and their impact on human rights. Final report of the Human Rights Council Advisory Committee, A/HRC/41/51, 7 May 2019, paras. 65–71. A 2007 study focusing on debt servicing demonstrated that several countries have spent more than 20% of their public expenditure in debt servicing, surpassing the amount used for health and education: Lebanon, for example, allocated 52.1% of its annual budget to debt servicing, while expenditures in social services amounted to 23.1%, see the report by The New Economics Foundation, Debt relief as if justice mattered. A framework for a comprehensive approach to debt relief that works, 2008, p. 3. In literature, see Lumina (2018), pp. 169–170. See also United Nations, Consolidation of Findings of the High-Level Task Force on the Implementation of the Right to Development, UN Doc A/HRC/15/WG.2/TF/2/Add.1, 25 March 2010, para. 87. 2

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2007–2008 constitute clear examples of such situation. Nevertheless, no single bankruptcy system exists at international level. States going through financial and budgetary crisis can be further harmed by individual creditors seeking to make unreasonable profits. In the global capital market, frequently, investment funds buy up, at negligible prices, States’ distressed debt, in order to subsequently undertake legal actions intended to force States to pay the original full-face value of the credit, plus accrued interest. Because of their predatory modus operandi, these entities are known as “vulture funds”.6 Creditors’ prolonged litigation can cause significant delays in resolving the debt crisis, since it could generate a condition of “debt dependence” for Governments, which cannot craft economic and social policies without first satisfying their creditors:7 the main effect, therefore, is an increased instability resulting in a partial or even total default. During Spring 2020, for example, amid the Covid-19 pandemic, Argentina, Ecuador and Lebanon defaulted on their debt, generating concerns with regard to the financial situation of these countries and its effects on their social fabric.8 This study addresses whether conciliation could have a beneficial impact and whether it can redress the concerns raised by predatory practices.

2 Private Creditors and Sovereign Debt When a State faces problems of debt sustainability, international law proposes restructuring procedures entailing a direct re-negotiation of the loan conditions with the creditors. The existing restructuring mechanisms address only liabilities

6

See United Nations, Human Rights Council, Promotion and Protection of all Human Rights, Civil, Political, Economic, Social and Cultural Rights, Including the Right to Development, Report of the Independent Expert on the Effects of Foreign Debt and other Related International Financial Obligations of States on the Full Enjoyment of all Human Rights, Particularly Economic, Social and Cultural Rights, Cephas Lumina, A/HRC/14/21, 29 April 2010, para. 8 (hereinafter, Report of the Independent Expert 2010), that defines vulture funds as “private commercial entities [. . .] acquire, for purchase, sale or other form of transaction, insolvent or bad debts, or even effective judgments, in order to obtain a high return”. 7 Malawi constitutes an example of how debt repayments may impact negatively Government’s policies. In 2002, following a poor harvest, seven million people out of a population of eleven million faced a serious food shortage because the Government was forced to sell the maize from its National Food Reserve Agency to raise funds to repay its debt, see United Nations, Human Rights Council, Report of the independent expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights, A/HRC/11/10, 3 April 2009, available at https://documentsdds-ny.un.org/doc/UNDOC/GEN/G09/128/05/PDF/G0912805.pdf?OpenElement, para. 30. 8 See the report by Fitch, Sovereign Default Set to Hit Record in 2020, 12 May 2020, available at https://www.fitchratings.com/research/sovereigns/sovereign-defaults-set-to-hit-record-in-2020-1205-2020-1.

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due towards States, institutional lenders or commercial banks.9 Private investors, instead, receive a unilateral exchange offer by the debtor, which expresses a proposal to “swap” the existing debt for a novel obligation. Thus, bondholders’ participation to the restructuring offer is voluntary: creditors might reject the offer and seek to retrieve principal and interests by initiating litigation or filing investment arbitration. If a favourable judgment is issued, then creditors will seek to enforce it in different jurisdictions, challenging State immunity.10 Practice shows that creditors usually attach properties and monies of different nature: in the decades of litigation following the Argentine default, funds tried to enforce their judgments by targeting the Latin American State’s participation in an international satellite program,11 its presidential plane, sums detained by the Argentine embassies in Brussels and Paris,12 as well as through the retention of the frigate Ara Libertad.13 In addition, other bondholders attempted to initiate investor-State arbitration by classifying their bonds as “investments” under specific Bilateral

9

The main forum for debt restructuring at multilateral level is the Paris Club, which represents 22 countries with a large exposure to other States and certain International Organizations. Restructuring procedures involving debt owed to commercial banks are instead negotiated through ad hoc Bank Advisory Committees (BACs, also labelled “London Club”). Both Clubs operates on a case-by-case informal approach, discussing and creating procedures for debt restructuring that normally consist in rescheduling or postponing the due dates or, in some cases, in reducing or even erasing the debt servicing. See Viterbo (2020a, b); Mauro (2019), pp. 440–448. 10 The relative doctrine of State immunity prescribes that immunity should be denied to foreign States engaged in commercial activities ( jure gestionis) as opposed to actions carried out in their sovereign capacity ( jure imperii). Such principle, considered to have customary character, is embedded in the UN Convention on Jurisdictional Immunities of States and their Property, adopted on 2 December 2004 in New York by UN General Assembly resolution A/59/38, not yet into force. The issuance of sovereign debt bonds, which includes also the re-financing of the debt in case of default, is considered a commercial activity that bans the State from claiming sovereign immunity, as recognized by the US Supreme Court in the case Republic of Argentina et al. v. Weltover, Inc, et al., 12 June 1992. 11 See US District Court for the Central District of California, NML Capital Ltd v. Spacefort Systems International and the Republic of Argentina, 25 April 2011, 788 F. Supp. 2d 1111, 1124 (2011). 12 See Cour de Cassation, Société NML Capital Ltd v. La République Argentine, arrêts N
394, 395, 396, 28 March 2013, and Cour de Cassation, NML Capital Ltd v. La République Argentine, arrêt N
867, 28 September 2011. 13 This order was issued by the Supreme Court of Ghana at the request of a vulture fund while the ship was in Tema (Ghana), see High Court of Justice (Commercial Division), NML Capital Limited v. The Republic of Argentina, 11 October 2012, Suit No. RPC/343/12, The dispute was finally settled 77 days after the attachment of the Frigate with a ruling entered into by the International Tribunal for the Law of the Sea, which established that the ship was State’s property, thus exempted from execution, and ordered its immediate release, see International Tribunal for the Law of the Sea, The Ara Libertad Case, Argentina v Ghana, 15 December 2012, Case No. 20, Provisional Measures, Order, available at https://www.itlos.org/fileadmin/itlos/documents/cases/case_no.20/ published/C20_Order_151212.pdf.

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Investment Treaties (BITs) and pursuant to Article 25 of the International Centre for Settlement of Investment Disputes (ICSID) Convention, with different results.14 Consequently, speculative creditors are able to jeopardize the achievement of the goals set by the international initiatives for debt restructuring and, also, the achievement of sustainable development objectives, protracting national economic stagnation and interests’ accumulation.15 So far, reactions by the international community have gained the status of national provisions or generic soft law obligations of broad content, relying almost exclusively on voluntary commitments by debtors and creditors.16 In the absence of a common strategy at the international level to halt vultures’ lawsuits, some States have decided to enact specific measures aimed at limiting the impact of disruptive litigation. First, bonds now include collective action clauses

14

Claims by Italian bondholders against Argentina were upheld at the jurisdictional stage in three different arbitrations, see Abaclat and others v. Argentine Republic, ICSID Case No. ARB/07/05, Decision on Jurisdiction and Admissibility, 4 August 2011; Ambiente Ufficio S.p.A. and others v. Argentine Republic, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013; Giovanni Alemanni and others v. Argentine Republic, ICSID Case No. ARB/07/8, Decision on Jurisdiction and Admissibility, 14 November 2014. Tribunals, however, never rendered a decision on the merits, since the case were settled or discontinued. Contrariwise, see Poštová Banka, a.s. and Istrokapital SE v. Hellenic Republic, ICSID Case No. ARB/13/8, Award, 9 April 2015, were the arbitral tribunal unanimously decided that bonds were not a covered investment under the applicable BIT. 15 Creditors normally target the poorest countries of the world. See African Development Bank, Vulture Funds in the Sovereign Debt Context, available at http://www.afdb.org/en/topics-andsectors/initiatives-partnerships/african-legal-support-facility/vulture-funds-in-the-sovereign-debtcontext/, that states that almost two thirds of HIPCs State were hit by vulture funds’ activities. In practical terms, “Vulture fund litigation prevents heavily indebted poor countries from using resources freed up by debt relief for their development and poverty reduction programmes, and therefore diminishes the capacity of these countries to create the conditions necessary for the realization of human rights for their people. Money that is earmarked for poverty reduction and basic social services, such as health and education, is diverted to settling the substantial claims of vulture funds. In short, vulture funds erode the gains from debt relief for poor countries and jeopardize the fulfilment of these countries’ human rights obligations”, See Report of the Independent Expert 2010, par. 33. 16 UN bodies have directed several legal instruments to the challenges posed by sovereign debt and its related problems: first, the United Nations Conference on Trade and Development (UNCTAD) formulated the Principles on Promoting Responsible Sovereign Lending and Borrowing, Geneva, 10 January 2012 (hereinafter UNCTAD Principles). Such rules aim at preventing irresponsible financing and its consequences, halting non-cooperative or abusive behaviours by creditors and sovereign debtors, proposing responsibilities for both lenders and borrowers. Some provisions seek to address vultures’ activities, suggesting that, once a debtor has opted for restructuring, it is empowered to stay its debt service and litigation and enforcement activities during the whole duration of the process and to limit the amount recoverable by litigating creditors. Also, courts should refrain from granting full contractual remedies to uncooperative creditors, but only a fraction of their claims in comparable treatment with creditors who accept the restructuring. Following this initiative, in 2015 the UN General Assembly endorsed its Basic Principles on Sovereign Debt Restructuring by resolution 69/319, a soft law instrument to be applied in sovereign debt restructuring, which share similar content with the UNCTAD Principles.

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(CACs) intended to allow a supermajority of bondholders to modify contractual terms during the restructuring process, binding also dissenting minorities and preventing holdout litigation.17 In the Euro area, for instance, following the Conclusions of the European Council of 24–25 March 2011, CACs have become mandatory for Euro States.18 Also, in order to facilitate a more orderly debt restructuring and to remove risks of protracted holdout litigation, legislative provisions were adopted. An effective example is the Greek Bondholder Law, which compelled holders of Greek-law governed bonds to participate in the exchange offer.19 Additionally, Belgium, the United Kingdom and France have also introduced national anti-vulture laws.20 Such legislations put a restraint on the amount that a litigating creditor can obtain through a lawsuit or settlement before national courts, limiting the recoverable part of the debt to what the creditors would have obtained had they taken part in the restructuring or to the price paid to repurchase such debts.21 Notwithstanding the foregoing commitment by States and International Institutions, the equitable management of States’ insolvency is still prevented by the absence of a strong legal framework and, also, of an ad hoc international institution. In addition, as reported by the Human Rights Council Advisory Committee and by the European Central Bank, lawsuits and attachment attempts are constantly

17

In general terms on CACs, Ohler (2017); Häseler (2011). This political obligation was translated into a binding provision with the inclusion of Article 12(3) in the European Stability Mechanism (ESM) Treaty, ratified by all 19 Euro area Member States, stipulating the mandatory inclusion of CACs in any bond issued from 1 January 2013, see Grosse Steffen et al. (2019). 19 Law No. 4050/2012 of 23 February 2013, Government Gazzette A 36/2012. According to its provisions, any amendment to the existing bonds decided with the participation of a majority of bondholders was deemed effective for any bondholder, including holdouts. 20 See Debt Relief (Developing Countries) Act, 2010 Chapter 22, 8 April 2010, available at http:// www.legislation.gov.uk/ukpga/2010/22/introduction (hereinafter, DRA): following the adoption of the statute in the United Kingdom, parallel provisions were adopted also in self-governing dependencies of the Isle of Man and Jersey See, respectively, the Heavily Indebted Poor Countries (Limitation on Debt Recovery) Bill 2012, 11 December 2012, available at http://www.tynwald.org. im/business/bills/Bills/HEAVILY_INDEBTED_POOR_COUNTRIES_(LIMITATION_ON_ DEBT_RECOVERY)_BILL_2012.pdf, and the Debt Relief (Developing Countries) Law 2013, 1 March 2013, available at https://www.jerseylaw.je/laws/revised/Pages/17.200.aspx#_Toc3 55967644. France followed the legislative efforts and recently, introduced relevant provisions in the Loi relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique (Loi n. 2016-1691, 9 December 2016, available at https://www.legifrance.gouv.fr/ affichTexte.do?cidTexte¼JORFTEXT000033558528&categorieLien¼id, Loi Sapin II. 21 Article 2, Loi relative à la lutte contre les activités des fonds vautours, 2018040447, 12 July 2015. See Vivien R (2019), Analyse de la loi belge du 12 juillet 2015 contre les fonds vautours et de sa conformité au droit de l’UE, available at https://www.cadtm.org/Analyse-de-la-loi-belge-du-12juillet-2015-contre-les-fonds-vautours-et-de-sa, and Wozny 2017. 18

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increasing: in the time frame from 1976 and 2010 there were 158 lawsuits against 34 defaulting countries before US and UK courts alone, with a high success rate (72%) that encourages such trend.22 The adoption of rules and common mechanisms at the international level seems therefore necessary in order to strengthen the architecture of the international financial system. The foundation of a multilaterally agreed sovereign restructuring mechanism would indeed close current gaps in the sovereign debt legal context that are easily exploited by speculative creditors. Already 20 years ago, in 2002, the Deputy Managing Director of the IMF Anne Osborn Krueger proposed the establishment of a Sovereign Debt Restructuring Mechanism.23 Such facility would have provided for a single restructuring procedure valid for all creditors, binding also holdouts and vulture funds.24 Several proposals followed the IMF’s pamphlet, including the institution of a Sovereign Debt Tribunal,25 the creation of an ad hoc arbitration procedure,26 and the recourse to mediation.27 However, none of these proposals was ultimately implemented: several countries still fear that the introduction of institutional and statutory mechanisms for debt restructuring would impair their access to international capital markets and discourage capital inflows. More recently, the United Nations Conference on Trade and Development (UNCTAD) envisaged the establishment of a Sovereign Debt Workout Institution (SDWI) to assist the debtor in restructuring, facilitating the implementation of the rules expressed in UNCTAD texts through technical support and expertise.28 Such proposal, if sustained by the necessary political support by UN Member States, could finally provide for a dedicated international forum for sovereign debt. This author proposes that States and International Institutions, including UNCTAD, should

22

See Human Rights Council, Activities of vulture funds and their impact on human rights, Final report of the Human Rights Council Advisory Committee, A/HRC/41/51, 7 May 2019, paras. 28–32; and Schumacher et al. (2018). 23 Osborn Krueger (2002). 24 At the heart of the SDRM was the creation of a Sovereign Debt Dispute Resolution Forum (SDDRF). This Forum was the ultimate decision maker in relation to any debt settlement under the SDRM, while, however, any “group” of creditors would have to consent to the proposal. The Forum itself would be established out of a pool of arbitrators, identified by the IMF board or, according to a later version, by the Managing Director and a selection panel identified by him, see Report of the Managing Director to the International Monetary and Financial Committee on a Statutory Sovereign Debt Restructuring Mechanism, 8 April 2003, available at http://www.imf.org/ external/np/omd/2003/040803.htm. 25 See Paulus and Kargman (2008). 26 See Raffer (2005). Also, see Halverson Cross (2006). 27 Sudborough (2019). 28 See United Nations, United Nations Conference on Trade and Development, Sovereign Debt Workouts, Guide, pp. 62–63.

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consider conciliation as the most effective mechanism for debt restructuring disputes: therefore, an overview of its basic features will be useful to better articulate such suggestion.

3 Procedural Aspects of Conciliation Conciliation constitutes an attractive alternative to judicial and arbitration proceedings. Practitioners normally associate conciliation with mediation and use the two terms interchangeably.29 Nevertheless, the procedures are manifestly different: first, in conciliation proceedings, the third party is a normally a group of individuals (or a single conciliator) which undertake a formal process with some essential procedural requirements, while mediation is less institutionalised and more flexible and can be considered as an “assisted” form of negotiation conducted by one mediator.30 Also, the roles of mediators and of conciliators differ: in mediation proceedings, the third party facilitates the achievement of an agreement between the parties while focusing on their best interests. Instead, conciliation commissions suggest terms of settlement, after having conducted an evaluative process addressing both factual and legal issues. As matter of fact, when carrying out its tasks, the conciliation commission usually hear the parties out and examine all their legal issues (claims, objections, evidence). Thus, conciliators assess the parties’ positions either by applying the law or in an equitable manner, while in mediation proceeding there is generally no “interpretation” of the law.

29

Mediation is defined by the 2018 United Nations Convention on International Settlement Agreements Resulting from Mediation, A/RES/73/198, UN C.N.155.2019, as “[. . .] a process, irrespective of the expression used or the basis upon which the process is carried out, whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a third person or persons (“the mediator”) lacking the authority to impose a solution upon the parties to the dispute”. The practice to use the terms “conciliation” and “mediation” as synonyms is confirmed also by the work of the UNCITRAL, see Draft Guide to Enactment and Use of the UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation (2018), A/CN.9/1025, 1 April 2020, paras. 8–9: “In its previously adopted texts, including the 2002 Model Law and relevant documents, UNCITRAL used the term “conciliation” with the understanding that the terms “conciliation” and “mediation” were interchangeable. In preparing the amendment to the Model Law, the Commission decided to use the term “mediation” instead in an effort to adapt its terminology to the actual and practical use of the terms and with the expectation that this change will facilitate the promotion and heighten the visibility of the Model Law. This change in terminology does not have any substantive or conceptual implications. In practice, proceedings in which the parties are assisted by a third person to settle a dispute are referred to by expressions such as mediation, conciliation, neutral evaluation, mini-trial or similar terms. The Model Law uses the term “mediation” to encompass all such procedures”. 30 Sudborough (2019), p. 228.

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This foregoing element emphasizes the existence of similarities between conciliation and arbitral and judicial procedures, which are “legal” proceedings. However, there are also important differences: for instance, the conciliator is not empowered to decide the parties’ dispute, but simply to negotiate with the and to propose a solution in an effort to persuade them to reach a mutually agreed solution. Arbitration, contrarily, produces a final decision by a neutral adjudicator, which is fully binding and enforceable.31 In addition, conciliation is less formal, while arbitration and judicial proceedings have a predetermined set of procedural rules and formalities.

3.1

The Institution of Proceedings

Similar to other international dispute resolution mechanisms, conciliation is based on the parties’ mutual consent arising from a prior contract or a subsequent ad hoc agreement. The “classic” model of conciliation, as described in the 1961 Resolution, sets forth the voluntary aspects of the procedure, namely that the decision to resort to conciliation is that of the parties. In this case, conciliation is optional, i.e. a possible “tool” available to the disputing parties. However, parties can also opt for a compulsory resort to conciliation: in this circumstance, they are bound to initiate such proceeding once the dispute arises. However, even in this latter scenario, the only existing obligation encompasses to initiate the conciliation procedure, not to accept its outcome. Recent practice shows that conciliation might also constitute a pre-condition for arbitration or judicial proceedings: once the conciliation attempt fails, therefore, the parties may then resort to a more “powerful” alternative. Several International Investment Agreements (IIAs), for example, include a multi-tier dispute resolution clause that provides for compulsory conciliation procedure as a preliminary “step” before investor-State arbitration.32 The advantage of such clauses is that they force, at the very least, the parties to attempt an amicable composition of the dispute, and this increases the chances to reach a settlement. Anyway, if the agreement or the dispute resolution clause provides for a specific procedure to set up the conciliation commission, such procedure can be triggered unilaterally by one of the parties to the dispute33, as in judicial and arbitral proceedings.

31

Born (2012), p. 5. See the BIT concluded between Hong Kong and the United Arab Emirates, whose art. 8 provides for a three-levels dispute resolution clause that requires the exhaustion of a prior consultation for an amicable settlement. If the dispute cannot be settled amicably within 6 months from the date of receipt of the written notice for consultation, it shall be submitted to conciliation. In case of failure of the conciliation proceeding, the investor can request the establishment of an arbitral tribunal. Similarly, see the Indonesia- Australia Comprehensive Economic Partnership Agreement, Ch. 14, sec. B, art. 14.23. 33 Such system is frequently present in inter-State conciliation, as in the case of the Convention on Conciliation and Arbitration within the Conference on Security and Cooperation in Europe (1992 Stockholm Convention), arts. 20–22. 32

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Appointing the Commission

Parties to a dispute need to select one or more conciliators: the appointment of a single conciliator is expressly provided by certain institutional rules and by the United Nations Commission on International Trade Law (UNCITRAL) Model Law.34 Practice, however, shows that parties prefer to appoint a commission composed by an odd number of conciliators (normally, three). In such cases, it is custom that each party selects one member of the commission, while the third—which will be the president—is chosen by mutual agreement by the appointed conciliators or by the parties themselves. Appointing authorities may also select the “neutral” conciliator when there is no agreement:35 clearly, members appointed jointly or by an external authority ensure the impartiality of the body. Conciliation commissions might be appointed ad hoc: parties are therefore free to pick any individual they consider suitable for the office. Following the development of multilateral treaties, specific “courts” of conciliation have been set up. In these frameworks, conciliators can be chosen from a list of persons designated by member States and administrated by a secretariat: such procedure is in place before the Organization for Security and Co-operation in Europe (OSCE) Court of Conciliation and Arbitration and in ICSID conciliation proceedings.36 The parties might nevertheless choose personalities who are not on the list if they find it more appropriate. Criteria for the selection of conciliators prescribed for international arbitration and mediation should be considered applicable also to conciliation proceedings:37 such benchmarks address both the conduct and the background and competence of the potential candidates for the conciliation commissions. First, conciliators must be independent and impartial. In particular, adjudicators shall not be influenced by selfinterest, outside pressure, political considerations or allegiance to a party to the proceedings. High standard of integrity and fairness must guide their activity at any stage of the procedure and they shall avoid and disclose any potential conflict of

34 See PCA Optional Conciliation Rules, 1 July 1996, available at https://docs.pca-cpa.org/2016/01/ Permanent-Court-of-Arbitration-Optional-Conciliation-Rules.pdf;, art. 3; 2018 UNCITRAL Model Law, art. 6. 35 Vienna Convention on the Law on the Treaties (VCLT), 23 May 1969, UNTS vol. 1155, p. 331, whose Annex I designated the UN Secretary General as appointing authority in case of default of the procedure. 36 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), 18 March 1965, 575 UNTS 159, Arts. 12–16, that allow Member States to designate for a renewable term of 6 years four persons to each Panel (of Arbitrators and of Conciliators). Also, the Chairman of the Centre may designate ten persons to each Panel. 37 Specific codes regarding the conducts of mediators have been adopted by, ex pluribus, the Singapore International Arbitration Centre, SIAC Code of Ethics for an Arbitrator, available at https://www.siac.org.sg/images/stories/articles/rules/Code_of_Ethics_Oct2015.pdf; by the Milan Chamber of Arbitration, Code of Ethics, available at https://www.camera-arbitrale.it/en/ arbitration/arbitration-rules/code-of-ethics.php?id¼104.

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interest, fact or circumstance that might question the conciliators’ independence and impartiality.38 In light of the complexities and technicalities of sovereign insolvency disputes, conciliators should also have a qualified background, competence and experience in dealing with intricate contracts and issues pertaining to sovereign financing, public policy and international commercial law.39 Parties and institutions providing for panels of conciliators should therefore take into consideration such necessary qualifications and expertise in proposing potential candidates.

3.3

The Procedure and Its Outcome

Normally and contrary to mediation, the conciliation’s procedure is quite formal, with both a written and an oral phase, as well as specific rules regarding evidence. Both procedures, however, are characterized by confidentiality: conciliation usually takes place behind closed doors and the final report itself is very often not made public, unless the parties have otherwise decided.40 Secrecy can only be waived by way of an agreement between the parties or if required by the law.41 Conciliation procedures always include elements of flexibility and autonomy, since the parties are free to choose and modify the rules governing the proceeding as they prefer. Disputing parties may therefore opt for conducting the proceedings on an ad hoc basis: in such cases, they will have to agree on and regulate every aspects of the procedure, employing time in finding solutions to practical problems, as the appointment of the commission; the rules to be applied; issues of time and costs. However, in the current dispute resolution “environment”, it is very common to select a specialized institution entrusted with the administration of proceedings. A number of organizations provide conciliation and mediation services for international users, often tailor-made to their particular needs. Such rules establish the basic procedural framework for the proceedings, including the role of the institution in appointing the adjudicators, the place of the proceedings, the fees to be paid, etc. The Permanent Court of Arbitration (PCA), ICSID and several other arbitral institutions have adopted procedural rules that apply when parties have agreed to conciliate or mediate pursuant to them, typically by incorporating such

38

In May 2020, the ICSID Secretariat and UNCITRAL endorsed a Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement to provide applicable principles and provisions addressing matters such as independence and impartiality, and the duty to conduct proceedings with integrity, fairness, efficiency and civility. The Draft Code is based on a comparative review of canons and standards found in codes of conduct in investment treaties, arbitration rules applicable to ISDS, and of international courts: it might therefore constitute a model for other frameworks, as conciliation proceedings. 39 See, in relation to mediators, Sudborough (2019), pp. 137–138. 40 Forlati (2020). 41 PCA Optional Conciliation Rules, art. 14; 2018 UNCITRAL Model Law, art. 10.

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procedures in the dispute resolution provision of the contract or, in some cases, in the applicable investment treaty.42 Conciliation is concluded with the adoption of a report by the commission: this document evaluates every aspect under the conciliators’ scrutiny and usually contains the solutions proposed to the parties. In some instances, however, the report might be very concise, as in the case when it only states that it was not possible to reconcile the different positions of the parties.43 The final report and the proposed solutions are never binding on the parties: they can be considered, instead, recommendations that the disputing parties are free to accept or not, in whole or in part, through the conclusion of an agreement that incorporates them.44 Only this latter agreement will bind the parties and render the conciliators’ “determinations” compulsory. Anyway, parties are still free not to conclude any agreement or to enter in a different deal.

3.4

Assessment

Conciliation has so far led to very limited results in international disputes. A handful of cases have been submitted to conciliation commissions, notwithstanding the fact that several bilateral treaties concluded before and after the World War I included provisions for conciliation45 and the reference to this procedure within the Charter of the United Nations.46 Conciliation is also prescribed by important codification

42

ICSID Conciliation Rules, 25 September 1967, available at http://icsidfiles.worldbank.org/icsid/ icsid/staticfiles/basicdoc/parte-chap01.htm. The current Conciliation Rules were approved by written vote of the Administrative Council in 2006 and were effective from April 10, 2006. In addition, several arbitral centres opted for mediation facilities for investment and commercial disputes, as the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the Singapore International Arbitration Centre (SIAC), the Hong Kong International Arbitration Centre (HKIAC), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), the Milan Chamber of Arbitration (CAM). 43 See art. 9, 1961 Resolution: “If any of the Parties do not accept the settlement and the Commission decides that no purpose will be served by attempting to reach an agreement between the Parties on the terms of a different settlement, a procès-verbal will be drawn up as provided above, stating, without setting forth the terms of the proposed settlement, that the Parties were unable to accept the conciliation proposal”. 44 Palmisano (2019), pp. 131–135. 45 See the seven Locarno Treaties concluded between Belgium, France, Germany, Great Britain, Italy, Czechoslovakia, and Poland in 1925. First examples of this practice are resembled by the Bryan Treaties, a series of bilateral agreements negotiated by US Secretary of State W. Jennings Bryan and concluded with various other countries before World War I aiming to defer all disputes which cannot be settled by arbitration or diplomatic means for investigation by a previously established international commission in charge to determine the facts in dispute but also to advise on ways for the peaceful settlement of a dispute. See Villani (1989). 46 Charter of the United Nations, 26 June 1945, available at https://treaties.un.org/doc/Publication/ CTC/uncharter-all-lang.pdf, Art. 33. It should be noted that in 1995, with A/RES/50/50, the UN

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conventions and multilateral treaties. The Vienna Convention on the Law of the Treaties (VCLT) prescribes compulsory conciliation for disputes related to the interpretation and application of the rules regarding invalidity, termination, withdrawal from or suspension of the operation of a treaty.47 However, it should be noted that, despite the existence of conciliation in multilateral treaties, this diffusion has not given rise to relevant case law.48 Even in case of economic and trade issues, conciliation has not been a success. In international economic law there is a limited record of mediation and conciliation:49 elements of such procedures can be identified in the World Trade Organization (WTO) disputes settlement system50 and, mostly, in investment disputes. As said, ICSID and the PCA have adopted autonomous rules of procedure for conciliation proceedings: in investment disputes, however, jurisdiction must first be established. The commission shall therefore be persuaded that the purchase of sovereign bonds constitutes a protected investment under both the ICSID Convention and the applicable IIA. To favor the use of conciliatory proceedings, in 2002, the United Nations Commission on International Trade Law has adopted a Model Law revisited in 2018.51 Nevertheless, conciliation has until now played a negligible part in practice: ICSID, for example, has registered only 13 conciliation procedures since its inception.52

General Assembly adopted the United Nations Model Rules for the Conciliation of Disputes between States in order to substantiate the conduct of conciliation proceedings between States. 47 VCLT, art. 66 and Annex I. 48 Apparently, no cases were submitted to conciliation following the provisions contained in the 1975 Vienna Convention on the Representation of States in their Relations with International Organizations of a Universal Character, the 1978 Vienna Convention on Succession of States in Respect of Treaties, the 1983 Vienna Convention on Succession of States in Respect of State Property, Archives and Debts, the 1986 Vienna Convention on the Law of Treaties between States and International Organizations or between International Organizations, the 1985 Vienna Convention on the Protection of the Ozone Layer, the 1992 Convention on Biological Diversity. All texts are available at https://treaties.un.org/. Also, Annex V and Arts. 297 and 298 of the 1982 United Nations Convention on the Law of the Sea (UNCLOS), 10 December 1982, UNTS 1833, p. 3, calls for conciliation for the settlement of certain specific disputes, see Virzo (2008), pp. 22–35: notably, the UNCLOS provisions were activated only recently by the compulsory non-binding conciliation initiated by Timor-Leste on 11 April 2016 under Annex V of UNCLOS on its maritime boundary dispute with Australia in the Timor Sea. 49 Reinisch (2017), p. 130. 50 Art. 5, para. 1, of Dispute Settlement Understanding (DSU), Annex 2 of the Agreement Establishing the World Trade Organization, 15 April 1994, available at https://www.wto.org/ english/tratop_e/dispu_e/dsu_e.htm, explicitly refers to conciliation as a method for dispute settlement that can be resorted before or during the WTO panel process. 51 On 2002, UNCITRAL adopted the Model Law on International Commercial Conciliation, UN Doc A/RES/57/17, superseded and amended by the 2018 UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation, UN Doc A/RES/73/17. 52 See https://icsid.worldbank.org/cases/case-database. See Titi and Fach Gomez (2019).

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4 Reasons for Conciliating Sovereign Debt Disputes Conciliation can be extremely suitable in the framework of sovereign debt. Obviously, there is no such thing as perfection: every dispute settlement procedure also implies limits and shortcomings.53 From a procedural point of view, however, conciliation holds several benefits vis-á-vis judicial and arbitral procedures. First, conciliatory proceedings are more flexible in nature. Arbitral and judicial proceedings have procedural formalities that are not necessarily followed by a conciliation commission. Indeed, the conciliation procedure can be adapted to suit the needs of the parties and the nature of the dispute itself. As an example, conciliation can be halted or suspended at any time; its time and location can be tailored to the particular needs of the parties; the “structure” of the proceeding can be written, oral, or a combination of both and can allow the participation of experts, witness and third parties. Even when parties choose a specific set of institutional rules, it is normally allowed to exclude any rule by mutual agreement.54 This flexibility can be of significant aid in resolving complex disputes regarding sovereign financing in a simple and efficient manner, with also essential practical consequences. Conciliation has also a shorter duration. Arbitration and litigation normally last several years, while party autonomy and the absence of formal procedural requirements limits the amount of time necessary to complete the conciliation procedure. The (scarcely) public accessible data shows that such process is normally concluded within a year.55 This constitutes an essential gain for the parties, as a settlement can be reached in an expedited way. Limited duration and the adaptability of the procedure involve also minor costs and fewer legal expenses, imposing a minimal financial burden on the parties—in contrast to lengthy judicial and arbitral procedures—and, especially in the case of debtor States, diverting less funds from legitimate public policy objectives.56 Such advantages are common to other means of dispute settlement, as mediation. Still, conciliation presents supplementary benefits: in particular, it creates a more stable legal framework for sovereign debt. On the one hand, mediation, good offices and assisted “problem-solving” initiatives facilitate parties’ negotiations focusing on their interests. In order to find an acceptable solution, mediators normally do not 53

Reinisch (2017), p. 129; Sudborough (2019), pp. 231–234. See ICSID Convention, Art. 33: “Any conciliation proceeding shall be conducted in accordance with the provisions of this Section and, except as the parties otherwise agree, in accordance with the Conciliation Rules in effect on the date on which the parties consented to conciliation. If any question of procedure arises which is not covered by this Section or the Conciliation Rules or any rules agreed by the parties, the Commission shall decide the question”. 55 ICSID conciliation practice slightly differs, since most cases were rapidly settled before the constitution of the commission or during the proceedings: an overview of the cases is available at https://icsid.worldbank.org/cases/case-database. As an additional example, the average duration of an ICC mediation is 4 months. 56 Sudborough (2019), p. 229. 54

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clarify the rights and obligations of the disputing parties. On the other hand, conciliation is a process through which all the elements of a dispute, including an examination of the questions of law, shall be determined: such activity shall be performed with the aim of reaching a solution acceptable for both parties, under the guidance of principles of objectivity, fairness and justice, “giving consideration to, among other things, the rights and obligations of the parties and the circumstances surrounding the dispute”.57 Conciliation thus involves an analysis of the relevant substantial law to be applied or, instead, it refers to the principles of equity and fairness: this attitude fosters legal certainty. As a consequence, conciliation might favor the application of principles and rules relevant for sovereign debt, as those promoted by International Institutions and by other entities: such norms normally take into account interests of different nature (public policy vis-á-vis purely commercial concern) which would not necessarily be protected in a negotiation or a settlement that might be affected by the political or economic “weight” of the parties involved. Additionally, confidentiality is often cited among the advantages of conciliation.58 The principal procedural frameworks still provide for keeping confidential all the information regarding the proceedings: indeed, avoiding public disclosure might be of particular importance for the parties, in particular for the debtor State, which might be concerned about maintaining a good reputation on financial markets in order to continue borrowing money with a favorable interest rate.59 However, it is noteworthy that a trend for increased transparency in dispute resolution proceedings at international level is setting. In investment law, for example, treaties,60 legal texts61 and authors are calling for a better publicity of ISDS proceedings:62 57

See PCA Optional Conciliation Rules, art. 7. Forlati (2020), pp. 190–191. 59 Sovereign bonds are normally graded by rating agency: the rating indicates the State’s credit quality, namely its ability to pay a bond’s principal and interest in timely fashion. The grade therefore influences both bond pricing and interest rates. On this issue, see Cervone (2015); Pernazza (2014). 60 In 2014 the United Nations Convention on Transparency in Treaty-Based Investor State Arbitration (Mauritius Convention), available at https://uncitral.un.org/sites/uncitral.un.org/files/mediadocuments/uncitral/en/transparency-convention-e.pdf, was adopted in the effort to create an universal obligation of publicity during arbitral proceedings: the Convention, however, was signed by 23 States and ratified by 9. States, therefore, inserted transparency provisions in IIAs and BITs, as in the case of the Comprehensive Economic Partnerhsip Agreeement (CETA) concluded between the European Union and Canada in 2016. Art. 8.36 is titled “Transaprency of proceedings” and establishes that all the requests, agreements, notices, decisions and documents connected with an investment dispute shall be made public. Similarly, the Central American Free Trade Agreement (CAFTA), art. 20:10, stipulates publicity of documents and hearings, also to facilitate the participation of non-disputing third parties. 61 See UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration, 1 April 2014, available at https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/ rules-on-transparency-e.pdf. 62 Kotuby and Sobota (2017); Euler et al. (2018); Bianchi and Peters (2013); Malatesta and Sali (2013). 58

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investment arbitrations touch public interest and are often the subject of much criticism regarding the legitimacy of the system, a “pro-investor” partiality, broad investor rights and conflicting interpretation. While conciliation does not suffer of these preconceptions, it would be advantageous to designate transparency and openness obligations: confidentiality, indeed, harm the legitimacy and credibility of dispute resolution bodies because it limits the public scrutiny of the decisions.63 Fairness and an increased participation could consolidate the role of conciliation commissions as an effective and efficient tool in the resolution of disputes, at a time when international arbitration suffers from the notorious “backlash”.64 Lastly, it seems that recent international cooperation has redressed the most complex obstacle to the diffusion of conciliation, namely the absence of a mechanism for the execution and recognition of settlement agreements.65 In practical terms, any agreement concluded in the context of conciliation or mediation has a contractual nature: if such agreement is not respected by one of the parties, it would be necessary to start another legal procedure to obtain its performance. On the other hand, Article 54 ICSID Convention provides for the automatic enforcement of awards adopted by its arbitral tribunals and,66 in the commercial sphere, the New York Convention regulates the enforcement of foreign arbitration awards:67 no equivalent instrument existed for conciliatory proceedings. Quite recently, however, the Singapore Convention entered into force: the text provides for the recognition and execution of agreements resulting from a conciliation or mediation procedures.68 This treaty creates an enforcement mechanism comparable to that existing for arbitration awards, making the recourse to conciliation even more “appealing”, notwithstanding the current limited number of ratifications. Such development, together with some intrinsic characteristics, theoretically make conciliation a useful instrument for commercial conflicts.

63

Magraw and Amerasinghe (2009), pp. 337–360. It must be stressed that the UNCTAD Principle 11 provides for an obligation of disclosure by the sovereign borrower, that must unveil all the information regarding its economic and financial situation, also in restructuring proceedings. 64 Waibel et al. (2010). 65 Zeller (2019). 66 ICSID Convention, Art. 54. 67 Convention on the Recognition and Enforcement of Foreign Arbitral Award (New York Convention), 6 July 1958, available at http://www.newyorkconvention.org/11165/web/files/original/1/ 5/15432.pdf. 68 The United Nations Convention on International Settlement Agreements Resulting from Mediation (the “Singapore Convention”), A/RES/73/198, 20 December 2018, entered into force on 12 September 2020.

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5 Making Conciliation “Effective” With regard to sovereign debt, the most effective way to ensure that parties initiate conciliation proceedings seems to be the incorporation of a conciliation clause directly in the debt contract, in order to bind the parties to participate to such procedure. This clause should state that the parties cannot commence arbitration or judicial proceedings until the conclusion of the procedure before the conciliation commission or until a certain amount of time has elapsed. This provision will therefore allow holdouts and debtor States to seek to pursue an amicable settlement with the assistance of experienced conciliators instead of (or before) engaging in a costly legal battle. Hypothetically, such “conciliation clause” could also bar creditors to have recourse to national courts; likewise, it can provide for the bindingness of the solution endorsed by conciliators. However, as eminently stated, in the sovereign debt market creditors’ perception is central.69 Bondholders might indeed sense the unavailability of judicial and arbitral remedies as a minimal commitment by the State to repay its debt and, also, as an unjustifiable reduction of their contractual rights: such situation would perhaps affect bonds marketability and, as a consequence, the purchasing of financial resources by States. Nevertheless, the presence of an institutionalized and internationally-recognized disputes settlement mechanism would compensate potential negative opinions by capital markets, investors and rating agencies. Indeed, as for arbitration proceedings, the presence of an institution reduces the risks of procedural breakdowns and of technical defects. Institutional rules also contain a more definite procedural framework that make the process more effective. At the moment, however, the current legal and institutional panorama does not present any entity specifically related to sovereign debt. An important role can be played by the proposed Sovereign Debt Workout Institution that, under the UNCTAD’s auspices, could perform the tasks that are normally assigned to arbitration and mediation institutions in order to administer conciliation proceedings. The SDWI could supervise the selection of experts to seat in conciliation commissions, developing a panel of possible candidates able to represent both private creditors and debtor States. The Institution could also set the procedure and manage its phases, assisting disputing parties and ensuring a smooth and efficient development of the conciliation proceedings.70 Until October 2021, however, the mandate of the proposed SDWI still remains unclear: UNCTAD left open several alternatives and recognized that it might vary from very informal and technical tasks (as advisory support, good offices) to binding measures (as dispute resolution services). Also, its nature, legal status and specific powers are not well-defined, leaving several alternatives open such as the creation of a supranational treaty-based organization; a subsidiary body of the UN General 69

Waibel (2011), p. 168. See UNCTAD, Sovereign Debt Workouts: Going Forward Roadmap and Guide, April 2015, available at https://unctad.org/system/files/official-document/gdsddf2015misc1_en.pdf, pp. 62–63. 70

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Assembly; an independent private-law institution.71 In any case, such an institution would fill the vacuum of an international forum dealing with the resolution of sovereign debt problems, ensuring global coherence. The SDWI will therefore support debtor’s quest for restructuring through advisory services but also recurring to conciliation in the event of disagreements over the restructuring terms: the independent expertise provided for by UNCTAD could favour an impartial assessment and a settlement attempt in observance of the rules and principles established by the Conference itself.72 Should such settlement be accepted by the supermajority of creditors, it could also directly bind all the parties pursuant to specific contractual clauses on the legal effects of conciliation. Its functioning, therefore, will discourage vultures’ litigation, imposing terms of restructuring to all bondholders. Entrusting UNCTAD with the conduction of conciliation of sovereign debt disputes would improve the widespread use of this mechanism, remedying to the inexistence of a settled practice and favouring the recourse to conciliation also in other sectors of international economic relations.

6 Concluding Remarks This study intended to highlight potential benefits of conciliation procedures: its flexibility, the reduced amount of time and costs, the recourse to equity and legal principles favour such mechanism over other dispute resolution procedures, as courts or international arbitration. There is therefore a large potential that could be explored further following the—potential—institution of the SDWI. Indeed, linking conciliation to the main UN multilateral forum for sovereign debt would allow to overcome existing shortcomings of the debt framework. A “SDWI conciliation” would thus foster the creation and stabilisation of a normative framework for sovereign bankruptcy and would also facilitate debt restructuring, offering to the parties a flexible, less costly and efficient solution that combines legal positions with opposing interests. Additionally, conciliation will enable the disputing parties to maintain a stable and positive commercial relation, that would ensure financing for the debtor States and also minimize “litigation-risks” for the private investors. More importantly, such “conciliation scheme” would curtail vulture funds’ tactics, impeding the exploitation of financial crisis and protecting the social fabric of debtor States.

71

Ibid. The proposed restructuring terms, indeed, should be tailored to the specific situation of the debtor country, as well as to the potential effects of the restructuring on financial markets and other States, see UNCTAD, Sovereign Debt Workouts: Going Forward Roadmap and Guide, April 2015, available at https://unctad.org/system/files/official-document/gdsddf2015misc1_en.pdf, p. 54. 72

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Domenico Pauciulo is Researcher in International Law at Università degli Studi di Napoli “Federico II” and Post Doctoral Research Fellow at LUISS Guido Carli in Rome. He is an Italian lawyer (qualified in 2012) and holds a PhD from Università degli Studi del Molise. He is a member of several societies and associations, including the Italian Society of International Law.

State Counterclaims and the “Legitimacy Crisis” in Investment Treaty Arbitration Patricia Cruz Trabanino

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Asymmetry and the Legitimacy Crisis in ISDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Procedural Asymmetry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Substantive Asymmetry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Counterclaims’ Revitalization: Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Counterclaims as a Recalibration Mechanism: Their Potential and Their Limits . . . . . . . . . 4.1 Minimizing the Fragmentation of Disputes via Increased Access to Counterclaims 4.2 Turning to External Legal Instruments and Principles to Source or Expand Investor Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Way Forward: How Might the International Community Respond to These Jurisprudential Developments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

204 206 208 209 211 219 219 222 223 226 227

Abstract Historically, State counterclaims in investor-State dispute settlement (ISDS) have generally failed. ISDS’s procedural and substantive asymmetry, by which investors enjoy unilateral rights to initiate arbitration against States and enjoy protections without reciprocal obligations, has greatly limited States’ ability to pursue counterclaims against investors under investment treaties. State counterclaims’ lack of success has been identified as a factor contributing to the so-called “legitimacy crisis” of ISDS, giving rise to a myriad of concerns, including concerns about regulatory chill, inconsistent decisions, and even pro-investor bias. In the last decade, some tribunals have shown greater openness towards States’ counterclaims. This article focuses on six such cases—Roussalis v. Romania, Goetz v. Burundi, Burlington v. Ecuador, Urbaser v. Argentina, Perenco v. Ecuador, and Aven

I am grateful to the participants in the 8th Conference of the Postgraduate and Early Professionals/ Academics Network of the Society of International Economic Law (PEPA/SIEL) for their helpful and thoughtful feedback on this paper. I am especially grateful to Lise Johnson and Simon Weber for their detailed comments. P. Cruz Trabanino (*) Washington, DC, USA © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 203–227, https://doi.org/10.1007/8165_2022_84, Published online: 21 May 2022

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v. Costa Rica—which exemplify a more permissive interpretation of the jurisdictional requirements for counterclaims and a novel approach to the imposition of substantive obligations on investors. If future arbitral awards adopt and expand these cases’ openness towards counterclaims, they could trigger a trend of increased receptiveness to and success of State counterclaims, potentially mitigating some of the concerns that fuel the backlash against ISDS. Through the lens of these cases, this article evaluates counterclaims’ potential to address the legitimacy crisis. This article suggests that increased access to and greater success of counterclaims can reduce concerns about the system’s asymmetry, but at the same time may give rise to new concerns that might be best addressed through other mechanisms, such as treaty drafting and binding interpretations.

1 Introduction Just over 10 years ago, the investment treaty arbitration field witnessed the publication of an article pessimistically titled “State Counterclaims in Investor-State Disputes: A History of 30 Years of Failure.”1 The author’s grim, yet well-founded assessment was that State counterclaims in investor-State arbitration “always fail” due to a combination of restrictive interpretations of jurisdictional requirements and a lack of substantive obligations imposed on investors by the relevant international investment agreement (IIA).2 The article’s publication coincided with what some authors consider to be the height of the so-called “legitimacy crisis” in investor-State dispute settlement (ISDS). This crisis—a scepticism and distrust of ISDS, even among some of the system’s supporters—has been triggered by the perception that ISDS has created overly expansive rights for foreign investors, coupled with an extremely robust dispute resolution mechanism.3 The combination of these two factors, it is said, has brought about an explosion of litigation against States, multimillion awards in investors’ favour, a chilling effect on States’ exercise of regulatory power, and concerns about inconsistent decisions or even pro-investor bias.4 There is little reason to doubt that States’ inability to successfully present counterclaims, while remaining at risk of serious liability for investors’ claims, contributed to the backlash against ISDS. Much has changed in the decade since the publication of “A History of 30 Years of Failure.” In some recent investment arbitration cases, tribunals have shown

1

Vohryzek-Griest (2009), p. 83. Vohryzek-Griest (2009), Abstract. 3 Langford and Behn (2018), p. 552. 4 Langford and Behn (2018), pp. 552–553; Franck (2005), pp. 1586–1587; Brower and Schill (2009), pp. 474–475. 2

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greater openness towards States’ counterclaims, in terms of both jurisdiction and merits. This article will focus on six such cases—Roussalis v. Romania,5 Goetz v. Burundi,6 Burlington v. Ecuador,7 Urbaser v. Argentina,8 Perenco v. Ecuador,9 and Aven v. Costa Rica10—which exemplify a more permissive interpretation of the jurisdictional requirements for counterclaims and a novel approach to the imposition of substantive obligations on investors. If future arbitral awards adopt and expand these cases’ openness towards counterclaims, they could trigger a trend of increased receptiveness to and success of State counterclaims. Such a trend could have the potential to mitigate some of the concerns that fuel the backlash against ISDS. Through the lens of these cases, this article evaluates counterclaims’ potential to address the legitimacy crisis. This article will focus mainly on treaty-based disputes, rather than those based on contract, for two reasons. First, because procedural access to counterclaims and the existence of investor obligations are less controversial when the dispute arises from a contract, which often explicitly provides for the initiation of proceedings by either party, and spells out the substantive obligations of each. And second, because a large majority of investor-State disputes arise from bilateral investment treaties (BITs), multilateral treaties, or other kinds of treaties, while only a minority have a contractual basis.11 This article suggests that increased access to and greater success of counterclaims, as foreshadowed by the cases to be discussed, can indeed reduce concerns about the system’s asymmetry, and therefore, its fairness. At the same time, however, it may give rise to new legitimacy concerns that might be best addressed through other mechanisms, such as treaty drafting and binding interpretations. The argument proceeds in four sections. Section 2 describes the structural asymmetries in ISDS and analyses why these are perceived to contribute to the system’s legitimacy crisis. Section 3 highlights jurisprudential developments in the last decade that could make future counterclaims more likely to succeed in terms of

5

Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award (7 December 2011). Antoine Goetz & Consorts et S.A. Affinage des Métaux c. République du Burundi, Affaire CIRDI No. ARB/01/2, Sentence (21 juin 2012). 7 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (7 February 2017). 8 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016). 9 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015). 10 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018). 11 See e.g., International Centre for Settlement of Investment Disputes, The ICSID caseload— statistics 2020-2, 13 August 2020, https://icsid.worldbank.org/sites/default/files/publications/The %20ICSID%20Caseload%20Statistics%20%282020-2%20Edition%29%20ENG.pdf, p. 11 (showing that contracts serve as the basis of consent to ICSID jurisdiction in only 16% of cases, while BITs, multilateral, and other treaties serve as the basis in 76% of cases). 6

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jurisdiction and merits. Section 4 evaluates the ways in which this jurisprudential trend may recalibrate the system’s asymmetries, and assesses whether this recalibration mitigates or strengthens criticisms about the system’s legitimacy. Section 5 discusses possible policy recommendations to further address concerns stemming from the system’s asymmetry, in light of the international community’s potential and present reactions to the jurisprudential developments on counterclaims of the last decade. Section 6 concludes.

2 Asymmetry and the Legitimacy Crisis in ISDS In its broadest sense, the legitimacy of a legal system refers to “the grounds on which at any given time most of the people accept, or are willing to use, the legal order as they find it,” an acceptance made possible by a belief among users of the system that the law “justly serve[s], the people who live within it.”12 Legitimacy, then, imbues a legal order with moral authority, the element which enables actors to trust in, use, and comply with the system.13 Legitimacy captures concepts such as “justice, fairness, accountability, representation, correct use of procedure, and opportunities for review.”14 The legitimacy of ISDS, therefore, hinges in part on maintaining a reputation as a fair system, with procedures and substantive obligations that do not favour one type of party over another. It follows that perceptions of pro-investor asymmetry, embodied in investors’ unilateral rights to initiate arbitration against States and to enjoy protections that constrain States’ range of action, may threaten the system’s legitimacy, if the asymmetry is not otherwise justified. Indeed, some States have recently criticized the asymmetrical nature of ISDS and formally stated that facilitating access to counterclaims was “an important aspect of ensuring an appropriate balance between respondent States and claimant investors.”15 Accordingly, under this view, for ISDS reform proposals to be legitimate, they must take into account States’

12

Franck (2005), p. 1584, n. 309 [citing Willard Hurst (1971), p. 224]. Franck (2005), p. 1584, n. 309 [citing Kornhauser (2002), pp. 830–831] (explaining that legitimacy justifies the moral authority of the existing order and any substantial challenge to legitimacy threatens the capacity to govern). 14 Franck (2005), p. 1584, n. 311 [citing Caron (1993), pp. 560–561; Junne (2001), pp. 189, 191, 195]. 15 UNGA, “Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fourth session (Vienna, 27 November–1 December 2017) Part II” (26 February 2018), A/CN.9/930/Add.1/Rev.1, para. 5; UNGA, “Possible reform of Investor-State dispute settlement (ISDS) - Submission from the Government of South Africa” (17 July 2019), A/CN.9/WG.III/ WP.176, para. 64 (“The State is always defendant and cannot bring counter-claims against investors for any breach of their obligations. The system is asymmetrical and should allow counterclaims to address the imbalance in the existing ISDS mechanism.”). 13

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concerns regarding access to counterclaims and the imposition of enforceable obligations on investors.16 The legitimacy of ISDS’s asymmetric nature was not always in question. ISDS’s asymmetry is by design: the grant of procedural and substantive rights to investors via IIAs was intended to remedy the “asymmetry that exists if a state can exercise its sovereign authority to change the playing field on which the investor is operating,” which the State may do “in an unfair manner and without being held to account in its local courts.”17 ISDS, therefore, was structured so as to rectify a perceived pre-existing imbalance. That is, asymmetry was conceived as a feature to make the system fairer, not less so. The view that asymmetry contributes to ISDS’s legitimacy crisis is a phenomenon of a relatively recent vintage. Scholars track the first high-profile investment treaty arbitrations to the early 2000s, a period during which a string of cases, many of them arising under the North American Free Trade Agreement (NAFTA), raised fears about investment arbitration’s threat to State regulatory autonomy, inconsistent decisions, and a prioritization of investor protections to the detriment of human rights and environmental concerns.18 In the 2000s, this critique of ISDS coalesced around the view that “investment treaties and investment-treaty arbitration institutionalize a pro-investor bias that casts the legitimacy of the entire system of international investment law and arbitration into doubt.”19 This critique was grounded in part on the supposedly unfair asymmetric nature of the substance and procedure of ISDS. With regard to substantive asymmetry, many States have recognized that “investment treaties were generally formulated to provide protection to investors. As the latter had limited reciprocal obligations, the respondent States did not have a basis to bring a counterclaim.”20 One author noted that “investment treaties do not match investors’ rights with investors’ obligations and therefore pose a threat to the authority of the state in advancing public interests that compete with the protection of property and investment.”21 The same author added that, as a matter of procedure,

UNGA, “Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1–5 April 2019)” (9 April 2019), A/CN.9/970, paras. 34–35, 39. 17 Bjorklund (2013), p. 462. 18 Langford and Behn (2018), pp. 555–556; see also Brower and Schill (2009), pp. 473–474 (describing the strands within the general critique of ISDS: concerns about unpredictability, inconsistency, and the protection of investment without sufficient regard to non-investment interests of States). 19 Brower and Schill (2009), pp. 474–475. 20 UNGA, “Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fourth session (Vienna, 27 November–1 December 2017) Part II” (26 February 2018), A/CN.9/930/Add.1/Rev.1, para. 4. 21 Brower and Schill (2009), pp. 474–475. 16

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the imbalance is exacerbated “by providing investors with a right to initiate investment-treaty arbitration, but denying such a right to the host state.”22 More recently, the critique of ISDS has expanded to include the structure of the system as an obstacle to the realization of human rights obligations. In March 2019, a group of United Nations human rights experts identified “[t]he inherently asymmetric nature of the ISDS system, [and] lack of investors’ human rights obligations” as elements that “undermine States’ ability to regulate economic activities and to realize economic, social, cultural and environmental rights.”23 In sum, the asymmetry critique of the system focuses on two major components: (1) the procedural asymmetry stemming from States’ inability to initiate investment arbitration proceedings against investors and (2) the substantive asymmetry that exists as a result of IIAs that often impose no express obligations on investors. Each of these components has been perceived to affect the system’s legitimacy in different ways.

2.1

Procedural Asymmetry

One of the defining features of investment treaty arbitration is its procedural asymmetry. As Jan Paulsson’s seminal article “Arbitration Without Privity” explained back in 1995, investment arbitration is procedurally different than commercial arbitration. In commercial arbitration, “[e]ither party can commence proceedings as a claimant; once an arbitration has started, the defendant may raise a counterclaim.”24 In contrast, in investment arbitration, “the defendant could not have initiated the arbitration, nor is it certain of being able even to bring a counterclaim.”25 This phenomenon is a result of the way most IIAs are drafted, with language permitting investors to bring claims against host States but without creating a clear reciprocal right for host States to bring claims against investors. Consequently, there is often no investor consent to have claims against it arbitrated before an international tribunal applying international law. States wishing to bring claims against investors must often do so in its domestic courts, in proceedings governed by domestic law.26

22

Brower and Schill (2009), pp. 474–475. Letter from the Working Group on the issue of human rights and transnational corporations and other business enterprises, et al. to UNCITRAL Working Group III (7 March 2019), https://uncitral. un.org/sites/uncitral.un.org/files/public_-_ol_arm_07.03.19_1.2019_0.pdf. 24 Paulsson (1995), p. 232. 25 Paulsson (1995), p. 232. 26 See UNGA, “Possible reform of investor-State dispute settlement (ISDS) Multiple proceedings and counterclaims” (22 January 2020), A/CN.9/WG.III/WP.193, para. 35. 23

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So while the State is certainly not without recourse, its claims against the investor are to be resolved on an entirely different plane than the investor’s claims. Thus, not only must the State face the inefficiencies of pursuing its claims in one (domestic) forum, while defending itself from related claims in a different (international) forum, it must also deal with the potential inconsistencies that may arise from the application of domestic and international law by each forum to similar fact patterns. In addition, when limited to domestic proceedings, the State does not enjoy one of the key advantages of investment arbitration: the enforceability of arbitral awards, which, unlike domestic court judgments, are covered by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) or the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).27 Even where an IIA formally permits either party (host State or investor) to initiate arbitration proceedings, this procedural right may nonetheless only be available, in practice, to the investor. A number of IIAs expressly limit the scope of a tribunal’s jurisdiction to disputes concerning a host State’s breach of the IIA’s substantive standards of protection. For example, the bilateral investment treaty between the United Kingdom and Venezuela permits either party to submit the dispute to international arbitration, but only where the dispute concerns an obligation of the host State under the treaty.28 In such cases, even if the ability to initiate an arbitration is afforded by the IIA to both the host State and the investor, this procedural right would nonetheless be asymmetric: an investor’s claims could be brought before an arbitral tribunal, but the host State’s counterclaims could not. It has been argued that this combination of factors—the inability to commence arbitration proceedings or file counterclaims, the application of domestic law in a domestic forum, the settlement of a State’s related claims in a proceeding separate from the arbitration addressing the investor’s claims, and the more limited enforceability of domestic court judgments—places States at a procedural disadvantage vis-à-vis investors.

2.2

Substantive Asymmetry

Even if, as a general rule, States had the procedural right to initiate arbitration proceedings or bring counterclaims against investors, such a right would be of little value in the absence of a substantive norm that could be enforced against them. Consistent with the traditional view that international law generally does not impose

27

Bjorklund (2013), p. 464. Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Venezuela for the Promotion and Reciprocal Protection of Investments (signed 15 March 1995, entered into force 1 August 1996) (“United Kingdom—Venezuela BIT”), Article 8.

28

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obligations directly on non-State actors,29 IIAs often do not impose obligations on investors.30 Some scholars have characterized this asymmetry as an “accountability gap” that “undermines [the] legitimacy” of international investment law.31 According to this view, international investment law overprotects investors without properly addressing investor misconduct, thus allowing “abusive, pollutive and corrupt investor behavior to thrive.”32 In the case of treaty-based arbitration, and in the absence of explicit obligations in the IIA, the availability of counterclaims might depend on the IIA’s applicable law clause, which may identify potential sources of obligations binding on investors.33 Some treaties expressly allow for the application of the treaty and international law only, while others also allow for the application of the host State’s domestic law.34 The majority of IIAs, however, do not contain rules on applicable law.35 In the case of ICSID arbitration, where the IIA contains no rule on applicable law, Article 42 (1) of the ICSID Convention directs tribunals to apply domestic law and such rules of international law as may be applicable.36 Regardless of which law is applicable, however, the State may have difficulty finding a substantive basis for a counterclaim. As mentioned, international law generally does not impose direct obligations on investors. Meanwhile, even if domestic law is part of the applicable law, the State’s ability to bring claims for domestic law breaches may be limited by issues of legal personality. While the international arbitration involves a foreign investor, it is often the investment itself— usually the investor’s local subsidiary in the host State—that would be liable for breaches of domestic law. Procedural efficiency and equitable concerns may advocate in favour of permitting such counterclaims and holding the investor liable for

29

Bjorklund (2013), p. 463. Gathii and Puig (2019), p. 1. 31 Ho (2019), p. 10. 32 Ho (2019), p. 10. 33 As mentioned in Sect. 5, some treaties might include investor obligations through treaty provisions other than the applicable law clause, but this is uncommon. 34 Compare Agreement Between Canada and ----------------------- for the Promotion and Protection of Investments (“Canada Model FIPA”) (2004), Article 40(1) (“A Tribunal established under this section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law”) with Fra La Repubblica Italiana E La Repubblica Argentina Sulla Promozione E Protezione Degli Investimenti (“Argentina-Italy BIT”), Article 8(7) (“The arbitration tribunal will decide on the basis of the laws of the Contracting Party involved in the dispute – including its rules on the conflict of laws – and of the provisions of the Agreement, of clauses of any particular agreements relating to the investment, as well as on the basis of the applicable principles of international law.”) (unofficial translation from the original Italian). 35 Schreuer (2014), p. 12. 36 International Centre for Settlement of Investment Disputes, ICSID Convention (April 2006), Article 42(1) (“The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.”). 30

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the breaches of its subsidiary, but this area of law is not yet settled, raising questions about the viability of imposing liability in this manner.37 In addition, counterclaims based on domestic law may give rise to legitimacy concerns about arbitral tribunals applying domestic laws with which they have no particular expertise, removed from the processes that may correct any misapplication of the law.38 Under this view, arbitral tribunals applying domestic law in a counterclaim could be seen as encroaching upon domestic courts’ jurisdiction and expertise, contributing to perceptions of ISDS’s illegitimacy. As a result, even where counterclaims are available procedurally, in the absence of substantive investor obligations, counterclaims would do little to alleviate concerns about pro-investor bias. If anything, the existence of a procedural right with no “teeth” might stoke even greater criticism among those who are already sceptical of ISDS.

3 Counterclaims’ Revitalization: Recent Developments Despite the so-called “thirty years of failure,” States have remained undeterred and have continued filing counterclaims over the last decade. In response, some tribunals have shown a greater openness towards counterclaims, both in their jurisdictional determinations and their conclusions regarding applicable law. Some of the cases that exemplify this revitalization in counterclaims jurisprudence are Roussalis v. Romania,39 Goetz v. Burundi,40 Perenco v. Ecuador,41 Burlington v. Ecuador,42 Urbaser v. Argentina,43 and Aven v. Costa Rica.44 As much has been written about these decisions, only certain key aspects relevant to counterclaims will be highlighted here. The earliest of these decisions, the Roussalis award of December 2011, declined jurisdiction over Romania’s claim, finding that neither Article 46 of the ICSID

37

Bjorklund (2013), pp. 477–478. Bjorklund (2013), p. 478. 39 Spyridon Roussalis v. Romania, ICSID Case No ARB/06/1, Award (7 December 2011). 40 Antoine Goetz & Consorts et S.A. Affinage des Métaux c. République du Burundi, Affaire CIRDI No. ARB/01/2, Sentence (21 juin 2012). 41 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015). 42 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (7 February 2017). 43 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016). 44 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018). 38

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Convention45 nor Article 40 of the ICSID Arbitration Rules,46 which allow for the possibility of counterclaims, were a sufficient basis to demonstrate the existence of the investor’s consent to arbitrate counterclaims, where the relevant BIT expressly limited consent to disputes concerning an obligation of the host State.47 The award is notable, however, for Prof. Michael Reisman’s separate opinion, in which he put forth the view that “when the States Parties to a BIT contingently consent, inter alia, to ICSID jurisdiction, the consent component of Article 46 of the Washington Convention is ipso facto imported into any ICSID arbitration which an investor then elects to pursue.”48 Prof. Reisman’s highly discussed opinion signalled to States and advocates that tribunals might be willing to infer the existence of consent to adjudicate counterclaims from sources external to the IIA itself. In addition, Prof. Reisman’s opinion highlighted the normative benefits of ipso facto jurisdiction over counterclaims pursuant to Article 46 of the ICSID Convention, namely, procedural economy and efficiency that benefits both the respondent State and the claimant investor.49

45

International Centre for Settlement of Investment Disputes, ICSID Convention (April 2006), Article 46 (“Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subjectmatter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.”). 46 International Centre for Settlement of Investment Disputes, ICSID Arbitration Rules (April 2006), Rule 40(1) (“Except as the parties otherwise agree, a party may present an incidental or additional claim or counter-claim arising directly out of the subject-matter of the dispute, provided that such ancillary claim is within the scope of the consent of the parties and is otherwise within the jurisdiction of the Centre.”). 47 Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award (7 December 2011), paras. 864–871. The BIT’s arbitration clause stipulated that: “1. Disputes between an investor of a Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement, in relation to an investment of the former, shall, if possible, be settled by the disrupting parties in an amicable way. 2. If such disputes cannot be settled within six months from the date either party requested amicable settlement, the investor concerned may submit the dispute either to the competent courts of the Contracting Party in the territory of which the investment has been made or to international arbitration.” Agreement between the Government of the Hellenic Republic and the Government of Romania for the Promotion and Reciprocal Protection of Investments, (signed 23 May 1997, entered into force 11 June 1998), Article 9. 48 Reisman WM, Declaration (signed 28 November 2011). 49 Reisman WM, Declaration (signed 28 November 2011) (“It is important to bear in mind that such counterclaim jurisdiction is not only a concession to the State Party: Article 46 works to the benefit of both respondent state and investor. In rejecting ICSID jurisdiction over counterclaims, a neutral tribunal – which was, in fact, selected by the claimant – perforce directs the respondent State to pursue its claims in its own courts where the very investor who had sought a forum outside the state apparatus is now constrained to become the defendant. (And if an adverse judgment ensues, that erstwhile defendant might well transform to claimant again, bringing another BIT claim.) Aside from duplication and inefficiency, the sorts of transaction costs which counter-claim and set-off procedures work to avoid, it is an ironic, if not absurd, outcome, at odds, in my view, with the objectives of international investment law.”).

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In June 2012, soon after the Roussalis decision, the Goetz v. Burundi award was issued. Citing Prof. Reisman’s opinion in Roussalis, the Goetz tribunal determined that the BIT, in providing for ICSID arbitration, reflected consent to the arbitration of counterclaims in accordance with the ICSID Convention and the ICSID Arbitration Rules.50 However, despite asserting jurisdiction over the counterclaim, the tribunal rejected Burundi’s claim on the merits.51 Nonetheless, the tribunal’s decision seemed to confirm that consent could be derived from the parties’ choice of forum and rules, even if the underlying IIA did not unambiguously include counterclaims within the scope of consent.52 A majority of subsequent tribunals, however, have disagreed with the Goetz decision, noting that a tribunal’s jurisdiction extends to an investor’s claims only where the underlying BIT expressly provides the necessary consent.53 With regard to substantive investor obligations, the Urbaser, Burlington and Perenco cases have substantially contributed to the development of the law. As detailed in the December 2016 Urbaser decision, Argentina brought a counterclaim against the investor, a shareholder in a concessionaire for the supply of water and sewage services, claiming that its failure to properly invest in the concession constituted a violation of the human right to water. The tribunal examined the arguments regarding the potential sources of international law that could impose human rights obligations on investors. After noting that the BIT did not include an

50 Antoine Goetz & Consorts et S.A. Affinage des Métaux c. République du Burundi, Affaire CIRDI No. ARB/01/2, Sentence (21 juin 2012), paras. 278–279. 51 Antoine Goetz & Consorts et S.A. Affinage des Métaux c. République du Burundi, Affaire CIRDI No. ARB/01/2, Sentence (21 juin 2012), para. 287. 52 The underlying BIT stipulated: “1. For the purposes of this article, a dispute relating to an investment is defined as a dispute concerning: (a) The interpretation or application of a specific investment agreement between a Contracting Party and an investor of the other Contracting Party; (b) The interpretation or application of any investment authorization granted by the authorities of the State where the investment is made in respect of foreign investments; (c) The alleged violation of any right conferred or established by this convention with regard to investments. [. . .]” Agreement between the Belgo-Luxembourg Economic Union and the Republic of Burundi Concerning the Encouragement and Reciprocal Protection of Investments (signed 13 April 1989, entered into force 12 September 1993) (“BLEU-Burundi BIT”), Article 8. 53 See e.g., Karkey Karadeniz Elektrik Uretim A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/13/1, Award (22 August 2017), para. 1015 (“The Goetz v. Burundi II award relied on by Pakistan is the only ICSID award that has ever adopted the ipso facto consent theory advanced by Pakistan in this case. Like this Tribunal, most ICSID tribunals have not found the theory of ipso facto consent to be sufficient to conclude that an investor’s consent to ICSID counterclaims is automatic.”); Iberdrola Energía, S.A. v. The Republic of Guatemala, PCA Case No. 2017-41, Award (24 August 2020), paras. 389, 391 (“While the Tribunal agrees that arbitration rules referred to in a treaty are incorporated by reference, this is only to the extent that they are not contradicting the treaty. [. . .] [T]he Tribunal comes to the conclusion that the Treaty wording showing that only the investor is entitled to file claims must prevail over any contrary meaning that the arbitration rules to which the Treaty refers may suggest. As a result, the Tribunal lacks jurisdiction over the counterclaim [. . .].”).

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obligation to comply with domestic law while pursuing the investment,54 the tribunal considered the possibility that human rights obligations may be incorporated into the BIT from external sources.55 It reasoned that corporations can and do hold rights under international law, and conversely, can also be subject to international legal obligations.56 After reviewing the Universal Declaration on Human Rights (UDHR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR), the tribunal concluded that private parties do have human rights obligations, though these are “obligations to abstain”, rather than positive obligations.57 Though Argentina’s claim was ultimately dismissed on the merits, the tribunal’s analysis raises the possibility of using ISDS to bring claims against investors on the basis of conduct that actively violates human rights (as opposed to conduct that fails to realize human rights). Two months after the Urbaser decision, in February 2017, the Burlington decision on counterclaims was issued. The case was initiated by Burlington Resources—a member of a consortium that included Perenco, which also initiated an arbitration against Ecuador, to be discussed next—after Ecuador implemented measures intended to increase the State’s share of rising oil revenues. Burlington’s claims mainly arose out of Ecuador’s increase of a “windfall” tax on oil revenues that exceeded the benchmark price stipulated in contracts, from 50% to 99%. Meanwhile, Ecuador’s counterclaims related to environmental damage it alleged resulted from Burlington’s oil exploration and production activities in the Amazon region. There was no dispute in Burlington about the tribunal’s jurisdiction over the counterclaims. Though the case arose under the Ecuador-United States BIT, the claimant and the respondent had consented in a separate instrument (a contract signed in 2011) to permit counterclaims if disputes were referred to arbitration.58 There was no agreement, however, regarding the law applicable to the counterclaim, thus triggering Article 42 of the ICSID Convention, which directs the tribunal to “apply the law of the Contracting State party to the dispute [. . .] and such rules of international law as may be applicable.”59 Ecuador had raised counterclaims based

54

Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016), para. 1185. 55 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016), paras. 1187–1192. 56 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016), para. 1194. 57 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (8 December 2016), paras. 1195–1210. 58 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (7 February 2017), paras. 60–62. 59 International Centre for Settlement of Investment Disputes, ICSID Convention (April 2006), Article 42.

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on Ecuadorian law only,60 leading the tribunal to determine that it only needed to apply domestic law to address Ecuador’s claims. Nonetheless, the tribunal also acknowledged that it could have applied international law. In its analysis of Article 42, the tribunal stated that under the second leg [of Article 42], international law also ‘may be applicable’. According to prevailing case law, it is left to the Tribunal’s discretion to apply either domestic or international law depending on the type of issue to be resolved. Subject to any particular matter that may call for the application of international law, which will be discussed if and when it arises in the analysis, the Tribunal will thus apply Ecuadorian law to the environmental counterclaims.61

Applying domestic law, the tribunal held Burlington liable for US$41.7 million.62 The tribunal’s deliberate venture into the applicability of international law to Ecuador’s counterclaim was curious, given that Ecuador had, as the tribunal was clear to assert just lines before, “affirmed throughout the proceedings that its action is solely based on Ecuadorian tort law.”63 The tribunal ultimately did not look to international law in its analysis of the investor’s obligations and liability, but its brief incursion into the relevance of international law is an indication of the tribunal’s willingness and ability to consider whether investor obligations could arise from international law beyond the BIT, as the Urbaser tribunal had done, even where the counterclaim was not substantively based on international law. The Perenco case, which involved a similar set of facts and environmental counterclaims similar to those in Burlington, is notable for its approach to the interpretation of domestic law for the purpose of discerning the scope of investors’ obligations. As in the Burlington case, jurisdiction over Ecuador’s counterclaim was undisputed, allowing the tribunal’s analysis to proceed directly to the merits of the counterclaim.64 The applicability of Ecuadorian environmental law to the

60

Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (7 February 2017), paras. 73, 75. 61 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (7 February 2017), para. 74. 62 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (7 February 2017), para. 1099(b). Ten months after the award was issued, Ecuador and Burlington reached a settlement. See ConocoPhillips to receive $337 million in accord with Ecuador. Reuters, 4 December 2017, https://www.reuters.com/article/us-conocophillips-ecuador/ conocophillips-to-receive-337-million-in-accord-with-ecuador-idUSKBN1DY1KP. 63 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (7 February 2017), para. 73 (emphasis added). 64 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Claimant’s Application for Dismissal of Respondent’s Counterclaims (18 August 2017), para. 35 (“The Tribunal further observes that Perenco never in the past challenged its jurisdiction to hear Ecuador’s counterclaims nor their admissibility.”). Though Perenco did object to the counterclaims’ admissibility, the tribunal held that this objection was presented belatedly, “after more than five years of arbitrating before this Tribunal, and after the Tribunal had issued its Interim Decision [on the Environmental Counterclaim].” Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Claimant’s Application for Dismissal of Respondent’s Counterclaims

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counterclaim was likewise not disputed by either party.65 In its analysis of applicable Ecuadorian law, the tribunal pointed to the Ecuadorian Constitution’s “focus on environmental protection” to infer that “when choosing between certain disputed (but reasonable) interpretations of the Ecuadorian regulatory regime, the interpretation which most favours the protection of the environment is to be preferred.”66 Applying this principle, the tribunal disagreed with Perenco’s argument that some of Ecuador’s claims were time-barred pursuant to Ecuador’s 4-year statute of limitations for tort claims. The tribunal held that claims were admissible if presented up to 4 years after discovery of the damage, rather than up to 4 years after the damage occurred, as this was the “interpretation of Ecuadorian law” that would “favour [. . .] the protection of the environment.”67 The tribunal further applied this principle to conclude that where there is doubt about the land-use designation applicable to a particular site, “the more stringent land-use designation should be applied,” as this would be consistent with “the Constitution’s imperative in favour of the protection of the environment.”68 The tribunal ultimately found Perenco liable for US$54.4 million for violations of local environmental law.69 Unlike the Burlington tribunal, the tribunal in Perenco did not discuss the applicability of international law to the counterclaim; rather, it focused exclusively on Ecuadorian law. The tribunal’s interpretation of Ecuadorian law was guided by what the tribunal described as the “fundamental imperatives of the protection of the environment in Ecuador.”70 These imperatives arose not only out of the applicable law, such as the Constitution’s “focus on environmental protection” that the tribunal identified, but seemingly also from general international environmental principles, as evident in the tribunal’s reference to “[p]roper environmental stewardship [that] has assumed great importance in today’s world.”71 In addition, the tribunal noted, but did not discuss, that the Constitution incorporates into Ecuadorian law the rights and

(18 August 2017), para. 44. The tribunal added that the rulings in this August 2015 interim decision were res judicata and could not be reconsidered. Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Claimant’s Application for Dismissal of Respondent’s Counterclaims (18 August 2017), para. 41. 65 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), paras. 36, 44. 66 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), para. 322. 67 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), para. 364. 68 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), para. 495. 69 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), para. 899. 70 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), para. 35. 71 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), paras. 34, 322.

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guarantees set forth in international human rights instruments, which include environmental rights.72 In guiding its reasoning in light of these environmental imperatives, the tribunal’s decision can be seen as affirming the relevance of international principles to the interpretation of investor obligations under domestic law in an ISDS proceeding. This interpretive approach could lead to ambiguity in the applicable law being resolved in favour of the protection of the commons, rather than the protection of private interests, which would likely benefit States pursuing counterclaims more so than investor claimants. This is so because many international legal principles, such as those enshrined in human rights instruments and in international environmental law, focus more on the protection of shared and public resources than on commercial interests. The final case under discussion, the Aven award of September 2018, also dealt with an environmental counterclaim. The Aven tribunal asserted jurisdiction over Costa Rica’s counterclaim, making three key findings. First, the tribunal determined that the treaty text did not expressly preclude counterclaims (as was the case in, for example, Roussalis).73 Second, the tribunal noted that counterclaims were desirable as a matter of procedural efficiency (as argued by Prof. Reisman in his separate opinion in Roussalis).74 And third, the tribunal concluded that there were “no substantive reasons to exempt foreign investor of the scope of claims for breaching obligations under Article 10 Section A DR-CAFTA, particularly in the field of environmental law.”75 To reach this third conclusion, the tribunal analysed both the treaty and international law more generally, finding that either could impose obligations on foreign investors. The tribunal first analysed the treaty, agreeing that “in general, the dispute settlement under DR-CAFTA is conceived for claims against host States,” and noting that per the treaty “any claim must indicate that the respondent has breached an obligation under Section A.”76 Observing that Section A “sets out only State’s obligations,” the tribunal concluded that it could be deduced that “only States can be sued and that the investors cannot be respondents even in a counterclaim.”77 The tribunal nonetheless agreed that these provisions could be read more broadly, recognizing that “[i]t could be argued that Section A also contains, at least implicitly, 72

Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (11 August 2015), n. 133. 73 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 740. 74 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 741. 75 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 739. 76 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 731. 77 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 732.

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some obligations to investors, especially with respect to the environmental laws of the host State.”78 Specifically, Section A’s reference to the State’s ability to adopt environmental protection measures “could be” understood as meaning that those measures are “compulsory for everybody under the jurisdiction of the State, particularly the foreign investors.”79 Under that interpretation, investors would have the obligation under both domestic law and the treaty “to abide and comply the environmental domestic laws and regulations.”80 The tribunal then turned to international law more generally, concluding that it can indeed impose obligations on foreign investors.81 For this proposition, the tribunal cited Urbaser favourably, stating that “it can no longer be admitted that investors operating internationally are immune from becoming subjects of international law,” particularly when environmental protection is at issue.82 The tribunal further noted that the International Court of Justice has stated that environmental rights are so important that all States have a legal interest in their protection.83 The tribunal ultimately dismissed the counterclaim on the merits, finding that the treaty did not impose affirmative obligations on the investor,84 that breaches of domestic law did not amount to treaty breaches,85 and that Costa Rica failed to plead its counterclaim in accordance with the applicable arbitration rules.86 Nevertheless, the tribunal’s reasoning is notable for highlighting the importance of environmental protection as a matter of international law, recognizing foreign investors’ responsibility to abide by environmental laws, and suggesting that counterclaims could be a feasible and efficient mechanism for enforcing compliance with environmental obligations. In addition, the Aven tribunal appeared to acknowledge that the treaty language could be read as imposing obligations on investors, though it ultimately

78

David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 732. 79 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 734. 80 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 734. 81 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 737 (“environmental law is integrated in many ways to international law, including DR-CAFTA. It is true that the enforcement of environmental law is primarily to the States, but it cannot be admitted that that a foreign investor could not be subject to international law obligations in this field, particularly in the light of Articles 10.9.3, 10.11 and 17 of DR-CAFTA.”). 82 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 738. 83 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 738. 84 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 743. 85 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 743. 86 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award (18 September 2018), para. 745–747.

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backed away from adopting such an interpretation. Although the tribunal held that DR-CAFTA did not impose enforceable obligations on foreign investors, its analysis appeared to imply that it would be desirable for treaties to do so. The tribunal’s decision thus may encourage treaty drafters—i.e., States—to include text expressly imposing environmental obligations on investors, in light of the importance of ensuring compliance with domestic and international environmental protection rules.

4 Counterclaims as a Recalibration Mechanism: Their Potential and Their Limits In light of these developments, counterclaims appear to be slowly gaining viability.87 If the trend continues, could counterclaims alleviate legitimacy concerns about the asymmetry in ISDS? If so, to what extent?

4.1

Minimizing the Fragmentation of Disputes via Increased Access to Counterclaims

As described earlier, one component of the legitimacy critique of ISDS is the procedural asymmetry that allows investors to pursue claims at the international level and greatly limits States’ ability to do the same. As a result, a State’s claim against the investor might be heard in its domestic courts, applying domestic law, in a proceeding where much of the evidence may overlap with that presented in the international arbitration, and the resulting judicial decision may be of limited enforceability and may even be inconsistent with the arbitral decision. This differential access to a dispute resolution mechanism can be considered illegitimate if it is perceived as unfairly disadvantaging States. Greater access to counterclaims could go a long way towards addressing these concerns, and recent arbitral decisions have chipped away at one of the main reasons for dismissal of counterclaims: the absence of express investor consent to arbitrate them. Prof. Reisman’s Roussalis opinion and the Goetz decision signal an expansion

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This is not to say that a majority of tribunals have shown greater openness to counterclaims; they have not. In fact, some tribunals have recently made even more restrictive interpretations of the admissibility and viability of counterclaims than is typical. See, e.g., Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1, Decision on Jurisdiction and Liability (10 November 2017), para. 1445 (“an agreement between the Contracting Parties on a liability of the investor would constitute an impermissible agreement at the expense of a third party to the Treaty, i.e., the investor in the present case.”). The cases discussed in this article nonetheless mark a departure from counterclaims’ near universal and decisive failure over the past several decades, making these tribunals’ reasoning worthy of attention.

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of the type of evidence that can demonstrate the existence of consent to counterclaims. Though jurisdiction was declined by the Roussalis majority, it did so in light of a dispute resolution clause that clearly restricted consent to “disputes [. . .] concerning an obligation of the [host State] under this Agreement”; more favourable treaty language could have led the majority to join the reasoning in Prof. Reisman’s opinion that consent to ICSID arbitration implies consent to counterclaims. The Goetz tribunal, faced with a broader dispute resolution clause, was satisfied that consent to counterclaims was sufficiently demonstrated even in the absence of an express treaty provision to that effect. In Goetz, the choice of arbitral rules permitting counterclaims paired with a broad dispute resolution clause was sufficient to permit the counterclaim to proceed. This may be a positive development for the system’s legitimacy. Facilitating States’ ability to present their claims in the same forum as investors, ensuring equality of procedural rights in this regard, may strengthen ISDS’s reputation by quieting accusations of pro-investor bias.88 In addition, at least one State has publicly expressed the view that greater access to counterclaims may “discourage[e] frivolous claims and it may also have an effect on third party funding decisions as funders would have to assess the likelihood of affirmative liability in addition to the likelihood of success on the merits in the case against the opposing party.”89 In other words, counterclaims could also improve legitimacy if their increased use reduces the frequency of unmeritorious claims, which may rise to the level of abuse of process.90 Counterclaims can expand the legal and factual scope of the arbitration, allowing the State to bolster its own defence by presenting evidence about the investor’s conduct, and forcing potential funders to take into account a fuller picture of the investor and its investment. Counterclaims may also strengthen legitimacy by improving efficiency. Resolving investor and State claims in the same proceeding could reduce the incidence of parallel proceedings, duplication of proof, and the potential for conflicting decisions. Greater procedural efficiency could encourage actors to perceive the system as more effective, to use it more frequently, and to comply with its decisions more readily.91 See UNGA, “Possible reform of investor-State dispute settlement (ISDS) Multiple proceedings and counterclaims” (22 January 2020), A/CN.9/WG.III/WP.193, para. 38. 89 Roberts and Bouraoui (2018). 90 See e.g., Europe Cement Investment & Trade SA v. Republic of Turkey, ICSID Case No ARB (AF)/07/2, Award (13 August 2009) (where the claimant presented fraudulent documents in an attempt to establish jurisdiction); Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No ARB/09/12, Decision on the Respondent’s Jurisdictional Objections (1 June 2012) (where the claimant’s corporate structure was modified after the dispute arose to artificially create the required nationality for jurisdiction purposes). 91 See Franck (2005), p. 1584, n. 309 [citing Willard Hurst (1971), p. 224] (explaining that legitimacy reflects people’s willingness to use the legal system because of a perception that it serves them justly); UNGA, “Possible reform of investor-State dispute settlement (ISDS) Multiple proceedings and counterclaims” (22 January 2020), A/CN.9/WG.III/WP.193, para. 38 (“The Working Group may wish to consider devising a framework in which States could raise counterclaims in ISDS, which would reduce uncertainty, promote fairness and rule of law, and ultimately 88

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Some commentators have also posited that facilitating the filing of counterclaims does away with one of the ironies of asymmetric proceedings: that of investors insisting that States should pursue claims against them in domestic courts—the very courts the investor sought to avoid in bringing its own claims before an international tribunal.92 All these reasons suggest these procedural developments might be an overall boon to legitimacy. But there are serious downsides that may outweigh the benefits. Increased access to counterclaims as in Goetz carries legitimacy risks of its own. Some commentators disagree with the view that consent to arbitrate counterclaims may be inferred from the mere choice of arbitral rules in the absence of explicit reference to counterclaims in the treaty.93 Given that party consent is essential to the tribunal’s exercise of jurisdiction, inferring the existence of such consent in the absence of an express provision to that effect can be controversial and may undermine a tribunal’s authority to adjudicate the dispute. Another potential legitimacy concern is that counterclaims, especially when dealing with issues of domestic law, can be seen as encroaching on domestic courts’ jurisdiction and expertise. As Canada stated in the 2018 meetings of the United Nations Commission on International Trade Law (UNCITRAL) Working Group III, “bringing everything into the ISDS system – whether it be an investment tribunal, multilateral investment tribunal or ad hoc tribunals – has the potential of raising even more concerns about the legitimacy of the system and taking away from domestic courts which may be much better placed to deal with domestic law issues and concerns.”94 If international investment tribunals are viewed as illegitimately adjudicating disputes involving the investor’s conduct in the host State, then an increase

ensure a balance between respondent States and claimant investors. Such a framework could also have a positive impact on the duration and cost of the proceedings as well as on a number of other procedural issues.”). 92 Reisman WM, Declaration (signed 28 November 2011); see also Kalicki and Silberman (2012), p. 14 (“Commentators have likewise noted the irony in a State’s moving so far towards trust in international arbitration that it is willing to forgo using its own national courts to pursue claims against an investor, only to be sent back to those courts by the very arbitral tribunal the investor convened to resolve other aspects of a related dispute.”). 93 Bjorklund (2013), p. 480 (“While the arbitral rules most likely to govern investment treaty disputes envision counterclaims, reference to them is a slim reed on which to base an investor’s consent”); (“Given the centrality of consent to tribunal authority, the argument that consent can be found in the applicable arbitration rules is tenuous. Explicit reference to counterclaims in the investment treaty itself would eliminate time consuming and inefficient arguments about tribunal authority.”). 94 Roberts and Bouraoui (2018). Germany expressed a similar sentiment: “Counterclaims very often are subject to local laws or domestic laws and in investment arbitration the usual applicable law is public international law and investment treaty rules. So we have to consider whether it’s actually appropriate and possible for a tribunal to substantially look into claims that are either based on domestic public law or domestic private law, and whether arbitrators or judges have the competence to do so and if it can be assured that their rulings will then also be enforceable in the domestic legal systems accordingly and there will not be any conference towards national jurisdiction.” Roberts and Bouraoui (2018).

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in the resolution of counterclaims by these tribunals would only exacerbate the criticism.

4.2

Turning to External Legal Instruments and Principles to Source or Expand Investor Obligations

The legitimacy critique of substantive asymmetry in ISDS is based on the premise that IIAs should impose obligations on investors, but do not do so sufficiently. The Urbaser and Burlington tribunals appear to offer a solution to this concern: turning to legal sources outside the IIA, such as international human rights instruments, to incorporate obligations into the IIA and enforce them against the investor. Perenco further appears to expand the possible scope of investor obligations by interpreting ambiguities in applicable domestic law in light of international legal principles that often may favour of the public interest (such as environmental protection) over private interests (such as the protection of a specific investment). While the concern about substantive asymmetry is well founded, the solution proposed by Urbaser and Burlington could be problematic and even ineffective. Absent a clear provision in the IIA allowing for the importation of specific international legal obligations, an investor may not be able to foresee the obligations with which it must comply. The lack of defined obligations would make compliance extremely difficult, as investors cannot conform their conduct to an unknown standard. As one commentator explained, “in the context of investment arbitration, [determinacy] means that investors’ rights and Sovereigns’ obligations are expressly spelled out. [. . .] [I]ndeterminate rules obscure the boundaries of appropriate conduct and also facilitate the creation of justifications for non compliance.”95 Indeterminacy, therefore, not only hinders compliance, but also calls the predictability and fairness of the system into question. Note that this concern is most relevant to obligations sourced from international law. The concern could be greatly reduced in the case of investor obligations sourced from the host State’s domestic law, as it is presumed that investors are sophisticated actors who research and monitor the legal framework of the jurisdiction in which they have chosen to operate. Nonetheless, as Perenco illustrates, domestic law may sometimes be ambiguous, requiring an arbitral tribunal to decide among many possible reasonable interpretations, and potentially giving rise to legitimacy concerns about arbitral tribunals applying domestic laws with which they have no particular expertise.96 Whether investors can reasonably be expected to monitor and comply with international legal obligations is a legal and factual question to be determined on a case-by-case basis. The Urbaser tribunal considered that investors are bound, and 95 96

Franck (2005), p. 1585, n. 313 [citing Franck (1995), pp. 30 and 31]. See supra note 38 and accompanying text.

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should know that they are bound, by an obligation to abstain from human rights violations. It remains an open question which other kinds of norms tribunals will deem binding on investors and will require investors to be aware of these norms’ binding nature. Indeed, the Aven case, more than showing how treaty provisions may be interpreted as imposing obligations upon investors despite the absence of clear language to that effect, is an example of a tribunal hesitant to import obligations from international law into the treaty. Though the tribunal’s analysis shows that it could have interpreted DR-CAFTA’s language expansively to require investors to comply with environmental protection laws and regulations, it declined to do so—a result that advocates in favour of including express affirmative obligations in future treaties.

5 The Way Forward: How Might the International Community Respond to These Jurisprudential Developments? The legal developments in Roussalis, Goetz, Burlington, Urbaser, Perenco and Aven, if accepted and furthered developed by future tribunals, could expand access to counterclaims and boost their likelihood of success. The ability to present affirmative claims, rather than only defences, may lead States to engage more frequently and more willingly with the system. In recent years, States exercised their exit and voice power to express dissatisfaction with ISDS.97 If States made greater use of the system, it would indicate that their trust in ISDS is rebounding. Increased use of counterclaims might also be a positive development for investors. As Prof. Reisman explained in his Roussalis opinion, counterclaims benefit both the investor and the host State, by allowing the State to pursue its claims before an international tribunal and thus preventing the State from dragging the investor back to the very domestic courts the investor chose to avoid as a forum for its own claims.98 These efficiency benefits notwithstanding, investors have generally opposed the inference of consent from the choice of arbitral rules, indicating that efficiency gains do not outweigh the value placed by investors on the requiring of express consent to arbitrate counterclaims. Nonetheless, some prominent commentators support the Goetz conclusion that, where the parties have agreed to arbitrate in accordance with rules permitting counterclaims, it may be presumed, absent a clear agreement to the contrary, that they have expressed consent to arbitrate counterclaims.99

97

Langford and Behn (2018), p. 556. Reisman WM, Declaration (signed 28 November 2011). 99 See e.g., Bjorklund (2013), pp. 452 and 466 [citing Douglas (2010), p. 256]. 98

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If the promised efficiency gains led investors to acquiesce to the inference of consent to arbitrate counterclaims, then greater access to counterclaims, enabled by more lenient requirements for proving consent to arbitrate counterclaims, could be a net gain to the system’s procedural legitimacy. Nonetheless, if host States and investors’ home States consistently come to view counterclaims as desirable, they may prefer to expand access to them by including explicit provisions in IIAs, rather than by passively accepting tribunals’ case-by-case assertions of jurisdiction over counterclaims. Indeed, it would be more desirable for consent to arbitrate counterclaims to be explicit in IIAs to avoid the legitimacy concerns that arise from tribunals inferring such consent from reference to arbitral rules. On the substantive asymmetry side of the equation, the calculus might be different. While sourcing investor obligations from legal instruments outside the IIA or expanding existing obligations by reference to external instruments and principles can also quell concerns about investors bearing too few obligations in investment law, it simultaneously creates new legitimacy concerns about the indeterminacy of those obligations. Neither investors nor host States seem fully satisfied with this development. Investors may naturally be concerned about being held liable for breaches of obligations they were unaware of, or the contours of which were ill defined. Likewise, some States have expressed unease at the lack of clarity and the resulting non-compliance. In recent discussions about ISDS reforms, some States have expressed a desire to incorporate express investor obligations into IIAs, and avoid seeking recourse to unidentified external instruments. At least one State has emphasized that counterclaims should, as a normative matter, be based on “a specific obligation in a specific instrument at issue.”100 Another has suggested that, rather than importing obligations from unnamed international legal instruments, such instruments should be incorporated into the treaty’s applicable law clause.101 Indeed, some recently drafted treaties already include explicit obligations binding upon investors.102 The 2015 Indian Model BIT, for example, imposes obligations relating to the prohibition on corruption.103 The Canada-Burkina Faso BIT refers to “internationally recognized standards of corporate social responsibility [. . .], such as statements of principle that have been endorsed or are supported by the Parties” on issues such as “labour, the environment, human rights, community relations and

100

Roberts and Bouraoui (2018). Roberts and Bouraoui (2018). Note, however, that these submissions only reflect the positions of the States making the submissions. Whether the expressed opinions are shared by a critical mass of States remains an open question. 102 See UNGA, “Possible reform of investor-State dispute settlement (ISDS) Multiple proceedings and counterclaims” (22 January 2020), A/CN.9/WG.III/WP.193, para. 41. 103 Bilateral Investment Treaty Between the Government of the Republic of India and—“Model Text for the Indian Bilateral Investment Treaty” (2015) (“Indian Model BIT 2015”), Article 9. 101

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anti-corruption,” which could be understood as imposing obligations too.104 The 2012 Model BIT of the Southern African Development Community establishes the duty of investors “to respect human rights in the workplace and in the community and State in which they are located,” further specifying, in stronger language, that “investors and their investments shall not undertake or cause to be undertaken acts that breach such human rights.”105 The Organization for the Islamic Conference (OIC) agreement on protection of investment requires investors to comply with domestic law and refrain from any act that may disturb the public order or prejudice the public interest.106 As a more recent example, Morocco’s 2019 model bilateral investment treaty expressly imposes obligations on investors. These include the obligation to comply with the host State’s laws and regulations, the obligation to manage and operate investments in accordance with the contracting parties’ international obligations regarding the environment, labour and human rights, and the obligation not to engage in corruption, money laundering or financing of terrorism.107 Other States have imposed obligations via provisions allowing for set-offs. The Netherlands Model BIT, for example, provides that, in allocating compensation in the case of a violation of international law by the State, the arbitral tribunal may “take into account non-compliance by the investor with its commitments under the UN Guiding Principles on Businesses and Human Rights, and the OECD Guidelines for Multinational Enterprises”.108 Similarly, the Common Market for Eastern and Southern Africa (COMESA) Investment Agreement (2007) provides in Article 28 (9) that the respondent State may “may assert as a defence, counterclaim, right of set off or other similar claim” that the investor has not complied with domestic law.109 As shown, obligations specified in an IIA can span a wide variety of duties, from compliance with specific standards on corruption, corporate social responsibility and human rights, to compliance with domestic law generally. Express reference to specific investor obligations would greatly reduce the legitimacy concerns about indeterminacy and the ensuing unpredictability. Treaty drafters should consider whether it would be appropriate to include express reference to investor obligations

104

Agreement Between the Government of Canada and the Government of Burkina Faso for the Promotion and Protection of Investments (signed 20 April 2015, entered into force 11 October 2017) (“Canada—Burkina Faso BIT”), Article 16. 105 Southern African Development Community Model Bilateral Investment Treaty Template with Commentary (July 2012), Article 15.1. 106 Agreement on Promotion, Protection and Guarantee of Investments Among Member States of the Organisation of the Islamic Conference (signed 6 May 1987, entered into force February 1988) (“OIC Agreement”), Article 9. 107 Accord entre le Royaume du Maroc et ------------------ pour la promotion et la protection réciproques des investissements (June 2019) (“Moroccan Model BIT”), Articles 18–19. 108 Agreement on Reciprocal Promotion and Protection of Investments Between ------------------ and the Kingdom of the Netherlands (19 October 2018) (“Netherlands Draft Model BIT”), Article 23. 109 Investment Agreement for the COMESA Common Investment Area (signed 23 May 2007) (“COMESA Investment Agreement”), Article 28(9).

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in future agreements. In the case of existing IIAs, States may wish to consider the possibility of using interpretive statements to achieve a similar purpose.110

6 Conclusion Counterclaims may serve a useful role in restoring trust in ISDS, but the approaches taken by the tribunals in Roussalis, Goetz, Burlington, Urbaser, Perenco and Aven are somewhat controversial and could lead to mixed results for the system’s legitimacy. Counterclaims’ positive effect would be stronger if treaty drafters facilitated access to counterclaims and imposed obligations on investors through the inclusion of express treaty provisions to that effect. Such an approach would provide the most clarity and certainty about counterclaims’ procedural and substantive bases, by grounding them in the treaty text. As treaty (re)drafting and interpretive statements may not be a feasible solution for many of the IIAs already in existence, further research could investigate whether other legal concepts can provide some of the legitimacy benefits of counterclaims— such as greater examination of the investor’s conduct in the host State and consideration of the interests that the host State may wish to protect—in cases where counterclaims are precluded or not desirable. These could include contributory fault principles precluding liability111 or reducing compensation,112 and tribunal’s consideration, in determining State liability, of the impact that foreign investment may have on indigenous rights, environmental rights, public health and human rights more generally.113

110

See generally Johnson L and Razbaeva M, State Control over Interpretation of Investment Treaties. Vale Columbia Center on Sustainable International Investment, April 2014, http://ccsi. columbia.edu/files/2014/04/State_control_over_treaty_interpretation_FINAL-April-5_2014.pdf. 111 See e.g., Ioan Micula et al. v. Romania, ICSID Case No ARB/05/20, Award (11 December 2013), para. 926. 112 MTD Equity Sdn. Bhd. and MTD Chile SA v. Chile, ICSID Case No ARB/01/7, Award (25 May 2004); Occidental Petroleum Corporation, Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No ARB/06/11, Award (5 October 2012). 113 See e.g., Glamis Gold, Ltd. v. United States of America, UNCITRAL, Award (8 June 2009), para. 8 (remarking on the environmental and indigenous rights involved in the dispute); Philip Morris Brands SÀRL, Philip Morris Products SA and Abal Hermanos SA et al. v. Oriental Republic of Uruguay, ICSID Case No ARB/10/7, Award (8 July 2016), para. 418 (showing “substantial deference” to the State’s decisions regarding measures taken to address the public health effects of tobacco); Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No ARB(AF)/09/1, Award (22 September 2014), para. 595 (acknowledging the State’s responsibility to protect the environment and the population).

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Patricia Cruz Trabanino is a lawyer specializing in international investment law and international arbitration. She is based in Washington, DC and holds a JD from Harvard Law School.

Return to Contract-Based Arbitration as a Possible Response to Achmea Berta Boknik

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Arguments in the Achmea Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Exclusivity of the System of Adjudication Under EU Law . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Allocation of Powers as Threat to the Autonomy of EU Law . . . . . . . . . . . . . . . . . . . . . . . 2.3 No Referrals by Treaty-Based Arbitral Tribunals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Possible Discriminatory Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Potential Indicator of Mutual Distrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Assessment of Contract-Based Arbitration in Light of Achmea . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Current Legal Uncertainty: PL Holdings S.à.r.l. v. Poland . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Concerns Not Raised by Contract-Based Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Concerns Potentially Raised by Contract-Based Arbitration . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The Achmea ruling marked the end of treaty-based intra-EU arbitration. Apart from an increasing recourse to state courts, the extinction of the BIT system within the EU could lead to a revival of arbitration clauses in investor-state contracts. This begs the question of whether the arguments brought forward by the ECJ translate to contract-based arbitration. ISDS clauses in investor-state contracts neither violate the principle of mutual trust nor the principle of non-discrimination foreseen in Article 18(1) TFEU. Concerns arise with regard to Articles 267 and 344 TFEU, as well as the autonomy of EU law. Intra-EU investment arbitral proceedings are typically governed by EU law, even if initiated on a contractual basis. Nevertheless, the arbitral tribunals do not have the power to refer questions for a preliminary ruling, while dealing with

The author wishes to thank Julian Scheu, LL.M. (International Investment Law Centre Cologne) for the stimulating first discussions on this topic. B. Boknik (*) Higher Regional Court of Cologne, Cologne, Germany © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 229–252, https://doi.org/10.1007/8165_2021_77, Published online: 19 February 2022

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disputes which, according to the vision of the European Treaties, fall within the jurisdiction of state courts. But even in light of these similarities, there might be a reason to assess contractbased investment arbitration differently from treaty-based arbitration and, in fact, subject it to the standard applied to commercial arbitration: the fact that ISDS clauses in investor-state contracts do not represent a system solution.

1 Introduction The basis for consent in international investment arbitration can be found either in a direct contract between the host state and the investor (investor-state contract) or in an offer made by the host state through national legislation or in an international investment treaty to be accepted by the investor, typically through the initiation of arbitral proceedings.1 As for the use of these different options, the history of international investment law has, for a long time, accounted for a shift from contractto treaty-based arbitration.2 The emergence of bilateral investment treaties (BITs) with investor-state dispute settlement clauses (ISDS clauses), so-called secondgeneration BITs, played an important role in this regard.3 The majority of international investment cases nowadays relies on treaties as the basis of consent. From the cases registered under the International Centre for Settlement of Investment Disputes (ICSID) Convention and Additional Facility Rules as of June 30, 2020 60 % alone were based on BITs and in only 16 % an investor-state contract was invoked as basis of consent.4 This is the reason why treaty-based arbitration is considered to be the “darling of ISDS today” and contract-based arbitration only “its kissing cousin”.5 In so far as cross-border investments within the European Union (EU) are concerned (intra-EU investments) this long-lasting development is bound to end. In its famous Achmea ruling of March 6, 2018 the Court of Justice of the European Union (European Court of Justice, ECJ) declared ISDS clauses in BITs concluded between Member States (intra-EU BITs) to be contrary to EU law.6 Thereby, the ECJ marked the end of intra-EU arbitration based on BITs.7 Its fate was ultimately

1

See Dolzer and Schreuer (2012), pp. 254–264. For a detailed overview of this transition see de Nanteuil (2020), paras. 1.001–1.102. 3 Cp. Griebel (2008), p. 93. 4 ICSID, The ICSID Case Load Statistics – Issue 2020-2, p. 11. 5 Brower (2019), p. 110. 6 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158. 7 Cp. Lavranos N, Black Tuesday: the end of intra-EU BITs. Thomson Reuters Practical Law Arbitration Blog, 7 March 2018, http://arbitrationblog.practicallaw.com/black-tuesday-the-end-ofintra-eu-bits/. 2

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sealed when, following declarations made in reaction to Achmea in January 2019,8 23 Member States agreed to terminate intra-EU BITs on May 5, 2020.9 The main criticism voiced by the ECJ with regard to intra-EU ISDS was that the arbitral tribunals removed investment law cases from the jurisdiction of the national courts of the Member States which was foreseen by the European Treaties.10 In light of this argument, it appears likely that European investors seeking the settlement of a dispute regarding their investment in another Member State in the post-Achmea era will start to turn to the national courts of their host state. This would correspond with the result the European Commission has been aiming to reach through its campaign against intra-EU BITs. Long before the Achmea ruling, the European Commission had taken the view that intra-EU BITs were incompatible with EU law and had pursued its goal of abolishing them by intervening in arbitration proceedings,11 declaring payments made in implementation of arbitral awards issued on the basis of intra-EU BITs to be state aid contrary to EU law12 and, eventually, initiating infringement proceedings against Member States for a failure to terminate their corresponding treaties.13 In its amicus curiae brief in the Achmea proceedings the European Commission stressed that in the system of adjudication foreseen by the European Treaties national courts have jurisdiction for disputes between a Member State and a private party as juges de droit commun du droit communautaire.14 Apart from an increasing resort to state courts, the extinction of the BIT system within the EU could, however, also lead to a revival of arbitration clauses in investor-state contracts. After all, it has been argued in the past that foreign investors wishing to legally secure their economic relations could do so effectively through the institution of contracts rather than to rely on BITs.15 This article examines the question of whether a return to contract-based arbitration can be expected. Therefore, it is pivotal to assess whether the arguments put forward by the ECJ in the Achmea 8

There were three declarations in total, because Finland, Luxembourg, Malta, Slovenia and Sweden, on the one hand, and Hungary, on the other hand, had diverging opinions on the impact of the Achmea ruling on the ECT and the steps necessary in this regard. For the declaration signed by the majority of 22 Member States, see Declaration on the Legal Consequences of the Judgment of the Court of Justice in Achmea and on Investment Protection in the European Union, 15 January 2019, https://ec.europa.eu/info/publications/190117-bilateral-investment-treaties_en. 9 Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union, OJ 2020 L 169/1. On the content of the agreement see Farhadi and Van Waeyenberge (2020), p. 940 f., who attest to a ‘language of moderate legal pluralism’. 10 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 55. 11 See e.g. European American Investment Bank AG (Austria) v. The Slovak Republic, Award on Jurisdiction (22 October 2012) PCA Case No. 2010–17, paras. 116–120; Ioan Micula et al. v. Romania, Award (11 December 2013) ICSID Case No. ARB/05/20, paras. 334–336. 12 See e.g. Commission Decision (EU) No. 2015/1470 on State aid SA.38517 (2014/C) (ex 2014/ NN) implemented by Romania – Arbitral award Micula v Romania of 11 December 2013, OJ 2015 L 232/43. 13 European Commission, IP/15/5198. 14 European Commission, Written observation in Case C-284/16, para. 51. 15 Yackee (2008), p. 122 ff. Cp. also Puig and Shaffer (2018), p. 384 f.

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ruling translate into contract-based arbitration. Investors will only be willing to follow the path proposed by the European Commission, if it raises no concerns in light of EU law, thus offering them a certain degree of security with regard to the enforceability of future arbitral awards.

2 Arguments in the Achmea Case The Achmea saga began when Achmea B.V. (Achmea), a Dutch insurance company, initiated arbitral proceedings against Slovakia after the implementation of legislative measures that harmed its subsidiary, which provided private sickness insurance services on the Slovak market. A final award was issued on the basis of the applicable intra-EU BIT that required Slovakia to pay damages.16 Slovakia filed action for the setting aside of the arbitral award before a German court. After the challenge was rejected in first instance,17 Slovakia appealed the ruling to the German Federal Court (Bundesgerichtshof, BGH). The BGH requested a preliminary ruling of the ECJ on the questions of whether Articles 344, 267 and 18(1) of the Treaty on the Functioning of the European Union (TFEU) had to be interpreted as precluding the application of ISDS clauses in intraEU BITs.18 The ECJ answered in respect to Article 344 TFEU (see Sect. 2.1) and Article 267 TFEU (see Sect. 2.3) in the affirmative and, in consequence, saw no need to address Article 18(1) TFEU (see Sect. 2.4). It also based its decision on the principle of mutual trust (see Sect. 2.5) and the autonomy of EU law (see Sect. 2.2).

2.1

Exclusivity of the System of Adjudication Under EU Law

Article 344 TFEU stipulates that Member States undertake not to submit a dispute concerning the interpretation or application of the European Treaties to any method of settlement other than those provided for therein, insofar establishing the exclusivity of the system of adjudication under EU law.19 According to the European Treaties the national courts have, in principle, jurisdiction for disputes in which an investor wishes to defend himself against a host state’s measure regarding his investment.20 Pursuant to Article 19(1)(2) of the Treaty on the European Union

Achmea B.V. (formerly known as ‘Euroko B.V.’) v. Slovak Republic, Final Award (7 December 2012) PCA Case No. 2008-13. 17 Higher Regional Court Frankfurt (18 December 2014) 26 Sch 3/13. 18 German Federal Court (3 March 2016) I ZB 2/15. 19 Cp. Dittert (2015), para. 1. 20 Cp. Andersen and Hindelang (2016), p. 997. 16

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(TEU) Member States have the duty to provide corresponding legal remedies.21 Within the multi-level judicial system of the EU, the national judicial procedures are flanked by the preliminary ruling and infringement proceedings at EU level.22 The examination of a possible violation of Article 344 TFEU by ISDS clauses in intra-EU BITs raises the question of whether proceedings based on them constitute disputes concerning the interpretation or application of European Treaties in the sense of the provision. In the Achmea ruling, the ECJ answered in the affirmative and defined for the first time what requirements disputes must meet in order to qualify as disputes within the meaning of Article 344 TFEU: It is sufficient if the dispute can potentially lead to the application of EU law which is the case if EU law is one of the legal orders applicable to the substantive legal issues.23 The relevant provision in the Achmea case, as ISDS clauses in intra-EU BIT typically do,24 foresaw that the arbitral tribunal, when making its decision, should take into account in particular the law in force of the host state and the relevant agreements between the contracting parties.25 In light of this, the ECJ found that the arbitral tribunal in question may be called to interpret or even apply EU law on the twofold basis that it forms part of the law in force in every Member State and derives from an international agreement between Member States.26 The ECJ did not address the highly debated question of whether the involvement of an investor in ISDS could preclude the applicability of Article 344 TFEU.27 By finding that the provision had been violated, the ECJ implicitly stated that that was not the case.

21

Cp. Paparinskis (2016), p. 935 f. who stresses the relevance of domestic law for investor’s remedies in EU law. 22 Cp. Klages (2018), p. 218; Andersen et al. (2016), p. 997. For an overview of the remedies available to investors to enforce their rights under EU law against Member States see Gonin and O’Reilly (2020), pp. 81–88. 23 Cp. Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, paras. 39–42. 24 See Boknik (2020), pp. 94–112. 25 Article 8(6) of the BIT between the Kingdom of the Netherlands and the Czech and Slovak Federative Republic, published in Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU: C:2018:158, para. 4. 26 Cp. Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, paras. 41 f. 27 On an extensive interpretation of the provision see e.g. European Commission, Written observation in Case C-284/16, paras. 93–98. On a restrictive interpretation see e.g. Reinisch (2014), p. 153; Kaddous (2013), p. 5. At the time of the ruling, at least in German-speaking literature the opinion prevailed that Article 344 TFEU only applied to disputes between Member States and ISDS, therefore, did not fall within its scope, see e.g. Kottmann (2016), p. 519; Tietje (2011), p. 17; cp. Wehland (2008), p. 233; for a different view see Jaeger (2016), p. 225.

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Allocation of Powers as Threat to the Autonomy of EU Law

Already in 1999, it was argued that the—back then—Court of Justice of the European Communities (CJEC) had, at least during the first decades, insisted too much on the radical autonomy of the European legal order.28 The final sentence of the Achmea ruling indicates that this assessment would probably not be any different today: In those circumstances, Article 8 of the BIT has an adverse effect on the autonomy of EU law.29

The principle of the autonomy of EU law is closely linked to the question of the exclusivity of the system of adjudication under EU law. But even if the ECJ considers it to be “enshrined in particular in Article 344 TFEU”30, the independent meaning of this broad principle should not be underestimated.31 The ECJ has addressed potential interferences with the autonomy of the EU legal order regularly when examining international agreements providing for the creation of a court entrusted with the interpretation of their provisions.32 According to settled case-law, international agreements cannot affect the allocation of powers fixed by the European Treaties.33 What is pivotal in light of this constitutional function of the autonomy of the EU legal order, is that the essential character of the powers of the EU and its institutions as conceived in the European Treaties remains unaltered.34 The powers conferred to the ECJ and the courts of the Member States as part of the system of adjudication under EU law are of great importance in this regard; in particular the role of the Member States’ courts as “ordinary” courts within the EU legal order and their power provided for in Article 267 TFEU.35 The ECJ has regularly held that Member States cannot confer the jurisdiction to resolve disputes on a court created by an international agreement which would deprive the courts of the Member States of their task to implement EU 28

Dupuy (1999), p. 796 f. Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 59. 30 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 32. 31 Cp. Bermann (2019), p. 974 who refers to a ‘major development in EU law that has been brewing for a while’ in this regard. 32 See e.g. Opinion 2/13, ECLI:EU:C:2014:2454; Opinion 1/09, ECLI:EU:C:2011:123; Opinion 1/91 ECLI:EU:C:1991:490. 33 See e.g. Opinion 2/13, ECLI:EU:C:2014:2454, para. 201; Joined Cases C-402/05 P and 415/05 P Yassin Abdullah Kadi and Al Barakaat International Foundation v. Council of the European Union, ECLI:EU:C:2008:461, para. 282; Case C-459/03 Commission of the European Communities v. United Kingdom of Great Britain and Northern Ireland, ECLI:EU:C:2006:345, para. 123; Opinion 1/91, ECLI:EU:C:1991:490, para. 35. 34 Cp. Opinion 1/00, ECLI:EU:C:2002:231, paras. 12, 20; Opinion 1/92, ECLI:EU:C:1992:189, paras. 32, 41. 35 See Opinion 1/09, ECLI:EU:C:2011:123, para. 80. 29

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law and, thereby, of their power, or, as the case may be, even obligation, to refer questions for a preliminary ruling.36 In light of these considerations, the ECJ came to the conclusion that the potential effect ISDS clauses in intra-EU BITs might have on the allocation of powers conferred by the European Treaties posed a threat to the autonomy of EU law: [Through ISDS clauses in intra-EU BITs] Member States agree to remove from the jurisdiction of their own courts, and hence from the system of judicial remedies which the second subparagraph of Article 19(1) TEU requires them to establish in the fields covered by EU law, disputes which may concern the application or interpretation of EU law.37

2.3

No Referrals by Treaty-Based Arbitral Tribunals

The keystone of the judicial system established by the European Treaties is the preliminary ruling procedure provided for in Article 267 TFEU.38 The dialogue set up between the courts and tribunals of the Member States on the one side and the ECJ on the other has the object of securing the uniform interpretation of EU law.39 One of the core questions in the Achmea case was whether arbitral tribunals based on intra-EU BITs can submit a request for a preliminary ruling to the ECJ. Article 267 TFEU grants the power of referral to the courts and tribunals of the Member States. In order to determine whether a body qualifies, the ECJ has developed a catalogue of guiding criteria.40 According to settled case-law, it has to be taken into account whether the body is established by law, whether it is permanent, whether its jurisdiction is compulsory, whether its procedure is inter partes,

36

Opinion 1/09, ECLI:EU:C:2011:123, para. 80. Cp. also Opinion 2/15, ECLI:EU:C:2017:376, paras. 292, 303. 37 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 55 [reference ommitted]. 38 Joined Cases C-558/15 and 563/18 Miasto Łowicz v. Skarb Państwa – Wojewoda Łódzki, ECLI: EU:C:2020:234, para. 55; Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 37. 39 Joined Cases C-558/15 and 563/18 Miasto Łowicz v. Skarb Państwa – Wojewoda Łódzki, ECLI: EU:C:2020:234, para. 55; Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 37. 40 The starting-point was Case 61/65, Mrs. G. Vaassen (née Göbbels)(a widow) v. Management of the Beambtenfonds voor het Mijnbedrijf, ECLI:EU:C:1966:39.

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whether it applies rules of law and whether it is independent.41 Since 1982,42 the ECJ has consistently denied contractual arbitral tribunals the power of referral on the twofold basis that, firstly, they lack a sufficiently close link to the organization of legal remedies through the courts in the Member State since its public authorities are neither involved in the decision to opt for arbitration nor required to intervene of their own accord in the proceedings before the arbitrator and, secondly, that the contracting parties are under no obligation, in law or in fact, to refer their disputes to arbitration.43 Upon examination, arbitral tribunals based on BITs do not meet the guiding criteria developed by the ECJ. Being based on a contractual arbitration agreement between the arbitrator and the host state, they do not have a legal basis.44 Their jurisdiction is not of a compulsory nature, as investors looking for a way to defend themselves against a host state’s measure can always choose to sue before national courts.45 In view of the requirement of a permanent character, it plays a decisive role for the ECJ whether a Member State has entrusted the institution with the dispute in the exercise of its procedural autonomy as part of the national dispute resolution system.46 This cannot be affirmed with regard to investment arbitral tribunals.47 The ECJ came to the same result in its Achmea ruling, but relied solely on the missing close link between the investment arbitral tribunal and the judicial systems of the Member States in question.48 In relation to commercial arbitration, the ECJ has held that it was sufficient for the efficiency of the preliminary ruling procedure that national courts could be in a

41 See inter alia Case C-503/15 Ramón Margarit Panicello v. Pilar Hernández Martínez, ECLI:EU: C:2017:126, para. 27; Case C-203/14 Consorci Sanitari del Maresme v. Corporació de Salut del Maresme i la Selva, ECLI:EU:C:2015:664, para. 17; Case C-222/13 TDC A/S v. Erhvervsstyrelsen, ECLI:EU:C:2014:2265, para. 27. See also ECJ, Recommendations to national courts and tribunals in relation to the initiation of preliminary ruling proceedings, OJ 2019 C 380/01, para. 4. 42 Case 102/81 Nordsee Deutsche Hochseefischerei GmbH v. Reederei Mond Hochseefischerei Nordstern AG und Co. KG et al., ECLI:EU:C:1982:107. 43 Case C-377/13 Ascendi Beiras Litoral e Alta, Auto Estradas das Beiras Litoral e Alta SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2014:1754, para. 27; Case C-555/13 Merck Canada Inc. v. Accord Healthcare Ltd et al., ECLI:EU:C:2014:92, para. 17; Case C-125/04 Guy Denuit and Betty Cordenier v. Transorient – Mosaïque Voyages et Culture SA, ECLI:EU:C:2005: 69, para. 13; Case C-126/97 Eco Swiss China Time Ltd v. Benetton International NV, ECLI:EU: C:1999:269, para. 34; Case 102/81 Nordsee Deutsche Hochseefischerei GmbH v. Reederei Mond Hochseefischerei Nordstern AG und Co. KG et al., ECLI:EU:C:1982:107, paras. 11–13. 44 For a different opinion see Basedow (2015), p. 377 f. 45 For a different opinion see Paschalidis (2017), pp. 681–683. 46 Cp. Case C-377/13 Ascendi Beiras Litoral e Alta, Auto Estradas das Beiras Litoral e Alta SA v. Autoridade Tributaria e Aduaneira, ECLI:EU:C:2014:1754, paras. 25 f. 47 For a different opinion, in particular with regard to ICSID tribunals see von Papp (2013), p. 1072. 48 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, paras. 43–49.

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position to refer the Union law issues arising in the arbitral proceedings.49 It found that it is in the interest of efficient arbitration proceedings that review of arbitration awards should be limited in scope and that annulment of or refusal to recognise an award should be possible only in exceptional circumstances.50

In its Achmea ruling the ECJ confirmed this long-standing case-law, while adding that it must be provided that the fundamental provisions of EU law can be examined in the course of that review and, if necessary, be the subject of a reference to the Court for a preliminary ruling.51

Against the background of this case-law, the ECJ carefully differentiated between commercial arbitration and treaty-based investment arbitration, coming to the conclusion that the previous considerations could not be transferred:52 While the latter [commercial arbitration proceedings] originate in the freely expressed wishes of the parties, the former [arbitration proceedings based on BIT] derive from a treaty by which Member States agree to remove from the jurisdiction of their own courts, and hence from the system of judicial remedies which the second subparagraph of Article 19(1) TEU requires them to establish in the fields covered by EU law, disputes which may concern the application or interpretation of EU law.53

2.4

Possible Discriminatory Effect

ISDS clauses in intra-EU BITs only grant access to ISDS to investors of one Member State operating in another Member State, without granting this possibility to investors from other Member States who are in the same position. This could raise concerns with regard to the principle of non-discrimination, if Article 18(1) TFEU were to be interpreted as containing an obligation to treat EU foreigners equally. Such an evolutionary interpretation of the provision, which does not limit its scope to the defence against protectionist measures, would reflect the current level of

49

Case 102/81 Nordsee Deutsche Hochseefischerei GmbH v. Reederei Mond Hochseefischerei Nordstern AG und Co. KG et al., ECLI:EU:C:1982:107, paras. 14 f. 50 Case C-126/97 Eco Swiss China Time Ltd v. Benetton International NV, ECLI:EU:C:1999:269, para. 35. 51 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 54 [reference ommitted]. 52 See Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 55. 53 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 55 [Reference omitted].

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integration within the EU.54 It does not, however, correspond to the prevailing opinion today.55 The ECJ has left the question open for now.56

2.5

Potential Indicator of Mutual Distrust

The ECJ stresses regularly that, as follows from Article 2 TEU, EU law is based on the fundamental premiss that each Member State shares with all the other Member States, and recognises that they share with it, a set of common values on which the European Union is founded.57 According to the ECJ, that premiss implies and justifies the existence of mutual trust between the Member States that those values will be recognised, and therefore, that EU law implementing them will be respected.58 The ECJ acknowledges that this principle is of fundamental importance, as it enables the creation and maintenance of an area without internal borders.59 One dimension of the principle of mutual trust concerns the trust in the rule of law and, consequently, in the independence of the national judicial systems of other Member States. This aspect in mind, the ECJ criticised ISDS clauses in intra-EU BIT as an expression of distrust of the contracting Member States towards each other’s national courts.60 This interpretation is understandable insofar as the establishment of an alternative legal path implies a certain scepticism towards the pre-existing alternative. Nevertheless, there are no compelling reasons to regard a joint act of the Member States manifesting their concurring will as an indicator of mutual distrust. This is particularly true in light of the fact that the ECJ has previously not accorded absolute effect

54

On the evolutionary interpretation of Article 18(1) TFEU see Boknik (2020), pp. 266–272. See e.g. Heesen (2015), p. 336 f.; Henquet (2013), p. 377 f. 56 Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 61. 57 Case C-327/18 PPU, RO, ECLI:EU:C:2018:733, para. 34; Case C-216/18 PPU LM, ECLI:EU: C:2018:586, para. 35; Case C-220/18 PPU ML, ECLI:EU:C:2018:589, para. 48; Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 34; Case C-64/16 Associação Sindical dos Juízes Portugueses v. Tribunal de Contas, ECLI:EU:C:2018:117, para. 30; Opinion 2/13, ECLI:EU:C:2014:2454, para. 168. 58 Case C-327/18 PPU, RO, ECLI:EU:C:2018:733, para. 34; Case C-216/18 PPU LM, ECLI:EU: C:2018:586, para. 35; Case C-220/18 PPU ML, ECLI:EU:C:2018:589, para. 48; Case C-64/16 Associação Sindical dos Juízes Portugueses v. Tribunal de Contas, ECLI:EU:C:2018:117, para. 30; Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 34; Opinion 2/13, ECLI:EU:C:2014:2454, para. 168. 59 See Case C-34/17 Eamonn Donnellan v. The Revenue Commissioners, ECLI:EU:C:2018:282, para. 40; Case C-216/18 PPU LM, ECLI:EU:C:2018:586, para. 36; Case C-220/18 PPU ML, ECLI: EU:C:2018:589, para. 49; Joined Cases C-404/15 and 659/15 PPU, Pal Aranyosi and Robert Căldăraru, ECLI:EU:C:2016:198, para. 78; Opinion 2/13, ECLI:EU:C:2014:2454, para. 191. 60 See Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 58. 55

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to the principle of mutual trust, but has drawn the line inter alia where an abstract and concrete danger to the right to an independent tribunal manifested itself.61

2.6

Summary

In conclusion, the ECJ found that ISDS clauses in intra-EU BITs do not comply with EU law because they violate Articles 344 and 267 TFEU, have an adverse effect on the autonomy of EU law and call into question the principle of mutual trust between the Member States. Article 18(1) TFEU was not addressed. The discriminatory effect of ISDS clauses could have, however, served as another basis for its decision. The question that follows is: Which of these lines of argument can be transferred to contract-based investment arbitration?

3 Assessment of Contract-Based Arbitration in Light of Achmea Through its reasoning, the ECJ made it clear that its assessment in the Achmea ruling was not only valid for the ISDS clause in question, but could be transferred to all ISDS clauses in intra-EU BITs. The question remains, however, whether contractbased arbitration dealing with intra-EU investments would suffer the same faith when being assessed in light of EU law. Both types of arbitration resemble each other to a large extent. The main difference between them concerns their basis. In both cases, the jurisdiction of the arbitral tribunal is ultimately based on an arbitration agreement between the investor and its host state. However, while in treaty-based arbitration the host state’s offer to arbitrate stems from the pertinent BIT, it is addressed directly to the individual investor in contract-based arbitration. This could justify a different treatment of contract-based arbitration and, in particular, an alignment to the approach adopted with regard to commercial arbitration.

3.1

Current Legal Uncertainty: PL Holdings S.à.r.l. v. Poland

The legal uncertainty pertaining to contract-based arbitration dealing with intra-EU investments is demonstrated clearly in the case PL Holdings S.à.r.l. v. Poland.62

61

Cp. Case C-216/18 PPU LM, ECLI:EU:C:2018:586, para. 58 f. For an overview of this case and five other cases in the Swedish courts concerning intra-EU disputes and the impact of the Achmea ruling see Hope and Åkerlund (2020), p. 105 ff.

62

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Between 2010 and 2013, PL Holdings S.à.r.l., a limited company registered in Luxembourg (PL Holdings), acquired shares in two Polish banks which eventually merged. In 2013, the competent Polish authority decided to revoke PL Holding’s voting rights in that bank and forced its sale. In reaction and relying on the ISDS clause in the BIT between Poland, on the one hand, and Luxembourg and Belgium, on the other hand, PL Holdings initiated arbitral proceedings under the arbitration rules of the Arbitration Institute of the Stockholm Chamber of Commerce in which it claimed damages from Poland. In its statement of defence Poland objected to the jurisdiction of the arbitral tribunal for different reasons, but only later in the proceedings, Poland challenged the validity of the arbitration agreement on the ground that the dispute resolution provision provided for in the relevant BIT violated EU law. The arbitral tribunal rejected this intraEU jurisdictional objection63 and found that PL Holdings was entitled to damages.64 Poland unsuccessfully filed an action for the setting aside of the arbitral award before the Svea Court of Appeal (Court).65 Affirming that the Achmea ruling had the effect of rendering the ISDS clause in the BIT invalid between the parties, the Court came to the conclusion that the standing offer made to investors through that clause was void.66 It went on to state, however, that the invalidity did not preclude a Member State and an investor from entering expressly or implicitly into an arbitration agreement regarding the same dispute at a later stage based on party autonomy.67 In light of the principle of procedural autonomy of the Member States, it took the view that, in any case, Poland’s objection regarding the validity of the ISDS clause was made in an untimely manner and was, therefore, time-barred under national law.68 Poland appealed the ruling before the Swedish Supreme Court (Supreme Court).69 Deliberating what consequence was to be drawn from the invalidity of the ISDS clause in the BIT as to the possibility of contract-based arbitration, the Supreme Court held that, [a] possible conclusion is [. . .] that the standing proposal to commence arbitration proceedings which the State may be deemed to have made to an investor by the dispute

63

PL Holdings S.à.r.l. v. Republic of Poland, Partial Award (28 June 2017) SCC Case No. V 2014/ 163, paras. 307–317. 64 PL Holdings S.à.r.l. v. Republic of Poland, Final Award (28 September 2017) SCC Case No. V 2014/163. 65 Svea Court of Appeal (22 February 2019) T 8538-17, T 12033-17. This paper takes the unofficial translation made by www.arbitration.sccinstitute.com as a reference. 66 Svea Court of Appeal (22 February 2019) T 8538-17, T 12033-17, p.42. 67 Svea Court of Appeal (22 February 2019) T 8538-17, T 12033-17, p. 43 f., 48, 51. 68 Svea Court of Appeal (22 February 2019) T 8538-17, T 12033-17, pp. 52–56. 69 Swedish Supreme Court (4 February 2020) T 1569-19. This paper takes the request for a preliminary ruling as translated and published as working document by the ECJ in Case C-109/ 20 as a reference.

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settlement provision is also invalid, since the proposal is closely linked to the investment contract.70

At the same time, the Supreme Court considered that the situation here is different in that the proposal is constituted by the commencement of the procedure. The State could then accept, of its free will, expressly or tacitly, the jurisdiction in accordance with the principles identified by the Court of Justice which apply to commercial arbitration.71

Considering that the manner in which EU law was to be interpreted in light of this question was unclear and had not been clarified,72 the Supreme Court submitted a request for a preliminary ruling to the ECJ: Do Articles 267 and 344 TFEU, as interpreted in Achmea, mean that an arbitration agreement is invalid if it has been concluded between a Member State and an investor — where an investment agreement contains an arbitration clause that is invalid as a result of the fact that the contract was concluded between two Member States — [despite the fact that] the Member State, after arbitration proceedings were commenced by the investor, refrains, by the free will of the State, from raising objections as to jurisdiction?73

In other words: Does EU law as shaped by the Achmea decision also preclude intra-European contract-based investment arbitration?

3.2

Concerns Not Raised by Contract-Based Arbitration

Not all concerns that arise in light of EU law in relation to treaty-based arbitration present themselves in the same way with regard to contract-based arbitration that deals with intra-EU investments. In particular, the arguments pertaining to the principle of non-discrimination enshrined in Article 18(1) TFEU and the principle of mutual trust cannot be transferred.

3.2.1

No Discriminatory Effect

It is already questionable, whether ISDS clauses in intra-EU BITs are incompatible with Article 18(1) TFEU. Until now, the ECJ has not addressed this issue. A violation can, nevertheless, be argued on the basis that the relevant provisions only grant access to ISDS to investors of one Member State operating in another

70

Swedish Supreme Court (4 February 2020) T 1569-19, para. 54. Swedish Supreme Court (4 February 2020) T 1569-19, para. 55. 72 Swedish Supreme Court (4 February 2020) T 1569-19, para. 56. 73 Swedish Supreme Court (4 February 2020) T 1569-19, para. 57. 71

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Member State, without granting an equal possibility to investors from other Member States in the same position.74 The situation is fundamentally different in contract-based arbitration. Through a contractual agreement the participating Member State does not express an offer to commence arbitration to a wider group of investors. The scope of the proposal is, on the contrary, very limited, as the access to ISDS is only granted to the contractual partner. Other investors, regardless of their home state, do not benefit. In the case of contract-based arbitration, there is, therefore, no unequal treatment on the basis of nationality, as required for a violation of Article 18(1) TFEU. In the absence of such a differentiation based on nationality a discriminatory effect of contractual arbitration agreements in violation of EU law cannot be affirmed.

3.2.2

No Violation of the Principle of Mutual Trust

In light of the principle of mutual trust, the ECJ criticised ISDS clauses in intra-EU BITs as an expression of distrust of the contracting Member States towards each other’s national courts.75 When a Member State enters into a contractual arbitration agreement with an investor, no such sign of distrust can be found. In this hypothesis, the Member State does not call into question the independence of the national judicial system of another Member State. Instead, the host state responds to the investor’s desire not to have to resort to its own national courts in the event of a dispute. Thus, if one will, the Member State only enables the circumvention of its own local remedies. This circumvention, while possibly problematic with regard to other aspects of EU law, does not violate the principle of mutual trust.

3.3

Concerns Potentially Raised by Contract-Based Arbitration

There are other arguments, on the basis of which the ECJ concluded that ISDS clauses in intra-EU BITs violate EU law, that cannot be dismissed so easily in the context of contract-based arbitration. This applies, in particular, to the violation of Articles 344 and 267 TFEU and the adverse effect on the autonomy of EU law.

74 75

See already above under Sect. 2.4. See already above under Sect. 2.5.

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Similarities with Treaty-Based Arbitration

At first sight, contract-based arbitration when dealing with intra-EU investments raises the same problems as treaty-based arbitration with regard to Articles 267, 344 TFEU and the autonomy of EU law. There is a strong tendency amongst arbitral tribunals in contract-based investment arbitration to consider the national law of the host state and international law as law applicable to the merits, be it on the basis of a choice of law clause or in accordance with a default rule like Article 42(1) ICSID Convention.76 When being seized on the basis of an investor-state contract regarding an intra-EU investment, they may, thus, be called to interpret or apply EU law. In light of the ECJ’s broad interpretation of Article 344 TFEU, they must be considered to deal with disputes concerning the interpretation or application of the EU Treaties, which fall within the scope of the exclusivity of the system of adjudication under EU law. Against the background of the Achmea ruling, it can also be argued that by agreeing to contractual arbitration in investor-state contracts, Member States deprive their own courts of their task as “ordinary” courts within the EU legal order by conferring jurisdiction to resolve disputes on arbitral tribunals. Finally, just like their treaty-based counterpart, contract-based arbitral tribunals do not meet the guiding criteria developed by the ECJ for determining if an institution is empowered by Article 267 TFEU. In consequence, they, as well, may be called to interpret or even apply EU law without having the power to refer questions for a preliminary ruling to the ECJ.

3.3.2

Main Difference: No System Solution

Upon closer examination, however, contract-based arbitration differs from treatybased arbitration in one crucial aspect: The conclusion of individual arbitration agreements with certain investors, in contrast to the establishment of a dense network of BITs with ISDS clauses, cannot be considered to be a system solution by the Member States.77 For one, contracts in contrast to international investment agreements typically do not bind several governments in a row, but are renegotiated on a regular basis.78 What is even more important in this context is that contractual arbitration clauses only open up the recourse to arbitration in individual cases. Thereby, they only lead to the issuance of a limited number of arbitral awards. The scope and impact of contract-based arbitration is, in consequence, infinitely smaller than that of a treaty-based investment regime.

76

Boisson De Chazournes (2019), pp. 98–101. On the corresponding qualification of the treaty-based regime see Poland, Written observation in Case C-284/16, para. 116. Cp. also Czech Republic, Written observation in Case C-284/16, para. 22. 78 See Yackee (2008), p. 139. 77

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Moreover, contract-based investment arbitration has this characteristic of not being a system solution in common with commercial arbitration. This difference, therefore, does not only raise the question of whether a different assessment of contract- and treaty-based investment arbitration is warranted. It also speaks in favour of aligning the standard applied to investment contract-based arbitration with the standard applied to commercial arbitration. This would have the result of dismissing all concerns that prima facie still exist in light of the above-mentioned rules and principles of EU law.79 First, the fact that contract-based arbitration is not a system solution can be put forward to support the finding that there is no violation of Article 344 TFEU. In this sense, one can contend that individual investment arbitral tribunals similar to individual commercial arbitral tribunals, do not suffice to affect the exclusivity of the system of adjudication under EU law. Secondly, it can also serve as an argument for a different assessment in light of the autonomy of EU law. One can already question, whether it was convincing by the ECJ to assume that the essential character of the powers as conceived in the European Treaties had been altered with an adverse effect on the autonomy of EU law by the mere removal of the exclusive jurisdiction of the Member States courts.80 After all, a recourse to national courts remained possible to the investors, with the result that an actual withdrawal of jurisdiction with regard to investment disputes never took place.81 But, even if one were to agree with the ECJ that the mere opening of an additional legal remedy through BITs was sufficient for such an alteration, the same does not necessarily apply to the isolated opening to arbitration effected by contractual provisions. Their effect on the allocation of powers as conceived in the European Treaties, like that of provisions foreseeing the establishment of arbitral tribunals in commercial proceedings, is marginal, which speaks clearly against the assumption of an adverse effect on the autonomy of EU law. Thirdly, it must be noted that national courts can find themselves in a position, namely in the context of enforcement and annulment proceedings following contract-based arbitration, in which they can refer the EU law issues that have arisen, regardless of whether they concern commercial or investment disputes. The concerns with regard to Article 267 TFEU can, therefore, be dispelled if by applying the standard developed with regard to commercial arbitration, this would be considered sufficient for the efficiency of the preliminary ruling procedure in the context of contract-based investment arbitration. In conclusion, the fact that contractual arbitration agreements do not establish a system solution must be taken into account in the context of their assessment in light

79

This assessment is made under the assumption that the ECJ’s favourable position towards commercial arbitration does not change. On a potentially very disruptive relationship between private arbitration and the principle of effectiveness of EU law see, however, Penades Fons (2020), p. 1069 ff. 80 Cp. Case C-284/16 Slovak Republic v. Achmea BV, ECLI:EU:C:2018:158, para. 55. 81 On the coexistence of parallel jurisdictions in investment disputes see Audit (2015), p. 941.

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of EU law. This characteristic element reveals an important parallel to commercial arbitration. One could take this parallel as a reason to subject contract-based arbitration in investment matters to the standard applied to commercial arbitration. Whether such an alignment is convincing must be examined on the basis of a comparison of both types of arbitration.

3.3.3

Justifying an Equal Treatment of Commercial Arbitration and Contract-Based Investment Proceedings

Brower coined the term “investomercial arbitration” when arguing in favour of an all-embracing concept which encompasses commercial arbitration, treaty-based arbitration and inter-state disputes.82 His thesis is based on the argument that in international investment law, all these different legal fora are, in fact, private-public disputes, and the idea of clean separating borders is, therefore, an absolute fallacy.83 Can the application of this concept justify the extension of the standard developed by the ECJ for commercial arbitration to contract-based investment proceedings? The contrary is already suggested by the delimitation of the scope of the case-law exercised in Achmea. If one were to assemble all different legal fora under one concept, the differentiation as executed by the ECJ would be uncalled for. However, asking for such an overarching understanding of dispute settlement mechanisms also goes far beyond what Brower advocated for. He delimits the scope of his concept to commercial disputes where at least one of the parties is a state or where a privateprivate dispute camouflages what is in reality a private-public arbitration.84 The ECJ’s case-law regarding commercial arbitration does not differentiate on the basis of the parties to the disputes. When contemplating whether its scope can be enlarged one cannot, therefore, only take into consideration commercial disputes that can, in fact, be considered private-public arbitration. A general argument against differentiating between intra-European commercial and investment arbitration is that in both cases EU law may be applied by external arbitral tribunals. As a consequence, the lack of control by the ECJ is equally problematic with regard to the necessary guarantee of a uniform interpretation of EU law.85 Moreover, the requirements of efficient arbitration proceedings, on which the ECJ’s assessment regarding commercial arbitration is based,86 also apply in the context of investment arbitration.

82

Brower and Kumar (2015), p. 35 ff. Brower (2019), p. 107 f., 113 f. 84 Brower (2019), p. 115; see ibid pp. 115–120 for examples of cases in which a private-public relationship underlies the dispute although no state is a direct party. 85 Cp. Wehland (2009), p. 319. 86 See Case C-126/97 Eco Swiss China Time Ltd v. Benetton International NV, ECLI:EU:C:1999: 269 para. 35. 83

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However, these general reasons alone do not suffice to justify an equal treatment. They relate to both contract- and treaty-based investment arbitration and were not sufficient for the ECJ in the Achmea case to assume that an equal treatment to commercial arbitration was in order. Further arguments that speak specifically in favour of the equal treatment of contract-based arbitration in commercial and investment proceedings must therefore be examined. In this sense, the fact that both forms of arbitration have their basis in a contractual provision that only applies to the relationship between the parties speaks in favour of an equal treatment. In both cases, the two contracting parties declare their willingness to conduct arbitration proceedings only vis-à-vis their contracting partner. Unlike in BITs, the proposal to commence arbitration is not made to an unlimited number of investors. Instead of setting up a system solution, the host state makes a case-by-case decision. The natural consequence of this is that the number of arbitral proceedings conducted on the basis of such contractual arbitration agreements is small. After all, the disputes can only ever be between the same two parties. As a result, the number of arbitral awards issued on the basis of the contractual arbitration agreements is correspondingly low. The small absolute number of arbitral awards means that there is no noticeable influence on the legal situation or an appreciable development of the law. This is especially true since arbitral awards do not have any precedent effect. Also, these individual arbitral awards do not call into question the general allocation of powers provided for in the European Treaties. However, there are also reasons in favour of a difference in treatment. These are primarily arguments that apply equally to contract- and treaty-based investment arbitration. In the past, they were often raised in connection with the question of whether treaty-based arbitration could be subjected to the standard of commercial arbitration. In favour of a differentiation, it was argued that investment arbitration deals with completely different issues than commercial disputes.87 While commercial arbitration regularly concerns questions of interpretation of commercial contracts, investment arbitration typically deals with state measures in areas of high social relevance, such as public health and environment.88 It was pointed out that it was particularly important in these areas to examine the provisions of EU law, especially those relating to the internal market.89 In general, it was noted, that the existing trend to examine investment arbitral tribunals from a comparative public law perspective and to compare them with administrative courts made the public law character of the

87

Czech Republic, Written observation in Case C-284/16, para. 21. Cp. Czech Republic, Written observation in Case C-284/16, para. 21; von Papp (2013), p. 1059. 89 Czech Republic, Written observation in Case C-284/16, para. 21. See, however, Penades Fons (2020), p. 1071 who argues that even if the legislation in certain areas is aimed at regulating private relationships, the EU instruments in those areas ultimately also pursue objectives pertaining to the area of regulatory law, like the establishment of harmonized normative frameworks and standards of protection in sectors which are deemed strategic for the internal market. 88

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proceedings clear.90 Building on this, it was suggested that the subordination in the relationship between the parties involved in the investment proceedings precluded the comparability with commercial arbitration under private law, which, in turn, is based on the equal ranking of the parties.91 This parity also exists when the state participates in commercial arbitration. It cannot be denied that the cases brought before investment and commercial arbitral tribunals differ greatly from each other, thus testifying to the fundamentally different nature of the two arbitration branches. Even though a state can also participate in commercial arbitration, its necessary involvement gives investment arbitration a special political sensitivity. This is partly because the damages awarded might have negative effects felt by the taxpayers who ultimately have to finance them.92 It is, however, mainly due to the circumstances under investigation. It is a key feature of ISDS that it opposes private economic interests and the exercise of sovereign powers.93 Investment arbitral tribunals, in contrast to commercial arbitral tribunals, are typically called upon to assess acta iure imperii, the assessment of which is naturally incumbent on the courts of the state.94 This often requires the consideration of rules of EU law in politically sensitive areas of high social relevance. It also results, even in the case of contract-based arbitration, in a special subordination relationship between the parties to the proceedings. At the same time, it allows for a political finger-pointing that can tarnish the reputation of a state and result in deterring effects on future foreign investments.95 The potential negative economic and political consequences of an investment dispute, therefore, go far beyond those of a purely commercial dispute. Against this background, it remains unsure, whether contract-based investment arbitration can be subjected to the standard applied to commercial arbitration. There are more reasons that speak in favour of an equal treatment than in the case of treatybased investment arbitration. In light of the arguments that speak against such an alignment, it seems nevertheless unlikely that these reasons will ultimately prevail. Once again, it is only the ECJ who can provide legal certainty.

90

von Papp (2013), p. 1059 with a further reference. Cp. also Schill (2011), p. 144. von Papp (2013), p. 1059 f. 92 Cp. Brower (2019), p. 120 f. 93 Brower (2019), p. 108. 94 Cp. Van Harten (2008), p. 65. 95 Brower (2019), p. 120 f. 91

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Summary

The impact the Achmea ruling has on contract-based arbitration cannot be easily determined. One can, therefore, only applaud the Supreme Court’s request for a preliminary ruling from the ECJ on this point.96 The main question is, whether the differences between contract- and treaty-based investment arbitration justify a difference in treatment and whether it is convincing in light of existing similarities to subject contract-based arbitration in investment matters to the standard applied to commercial disputes. ISDS clauses in investor-state contracts violate neither the principle of mutual trust nor the principle of non-discrimination foreseen in Article 18(1) TFEU. Through them Member States only enable the circumvention of their own local remedies and do not express any distrust of another Member State’s courts. The access to ISDS is only granted to the contractual partner without there being any differentiation based on nationality. Other companies, regardless of their home state, do not benefit. The lines of argument in the Achmea ruling pertaining to the violation of Articles 344 and 267 TFEU and the adverse effect on the autonomy of EU law do, however, translate to contract-based arbitration. But the fact, that the conclusion of individual arbitration agreements, in contrast to the establishment of a dense network of BITs with ISDS clauses, does not constitute a system solution by the Member State must be taken into account. Whether contract-based investment arbitration must be considered as violating EU law depends, ultimately, on the question of whether it can be treated like commercial arbitration. There are more reasons that speak in favour of such an equal treatment than in the case of treaty-based investment arbitration. Nevertheless, in light of the opposing arguments and in view of the position taken by the ECJ in its Achmea ruling, it remains to be seen, which position will eventually prevail.

4 Conclusion All in all, the return to contract-based arbitration might be a somewhat appealing, but legally controversial response to Achmea. There are reasons for and against its submission under the same standard like commercial arbitration. Regardless of its basis, investment arbitration remains, in the end, a circumvention of the domestic courts and thereby a circumvention of the system of adjudication set up by the European Treaties. Additionally, it must be taken into account that typically only investors of a certain weight succeed in procuring investor-state contracts with an arbitration

96

See Swedish Supreme Court (4 February 2020) T 1569-19.

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clause.97 In case investors are unable to deploy sufficient leverage, their only option remains the recourse to state courts. When assessing the conformity of the ISDS system envisaged in the Comprehensive Economic and Trade Agreement, the ECJ stressed the importance of the small and medium-sized enterprises’ access.98 Against this background, it is not unlikely that Article 47 of the EU Charter of Fundamental Rights will ultimately be one of the deciding factors in the evaluation of contractbased arbitration in light of EU law.

References Andersen TT, Hindelang S (2016) The day after: alternatives to intra-EU BITs. J World Invest Trade 17(6):984–1014 Audit M (2015) La coexistence de procédures contentieuses en matière d’investissements étrangers. In: Leben C (ed) Droit international des investissements et de l’arbitrage transnational. Editions A. Pedone, Paris, pp 941–965 Basedow J (2015) EU law in international arbitration: referrals to the European Court of Justice. J Int Arbitr 32(4):367–386 Behn D (2015) Legitimacy, evolution, and growth in investment treaty arbitration: empirically evaluating the state-of-the-art. Georgetown J Int Law 46(2):363–416 Bermann GA (2019) European Union law and international arbitration at a crossroads. Fordham Int Law J 42(3):967–980 Boisson De Chazournes L (2019) The blurring of the line between contract-based and treaty-based investment arbitration. ITA Rev 1(2):98–106 Boknik B (2020) Das Verhältnis von EuGH und Investitionsschiedsgerichten auf der Grundlage von intra-EU BIT – eine Analyse anhand des Falls Achmea. Nomos, Baden-Baden Brower CN (2019) Keynote remarks: State parties in contract-based arbitration: origins, problems and prospects of private-public arbitration. ITA Rev 1(2):107–131 Brower CN, Kumar SP (2015) Investomercial arbitration: whence cometh it? What is it? Whither goeth it? ICSID Rev 30(1):35–55 Brower CN, Schill SW (2009) Is arbitration a threat or a boon to the legitimacy of international investment law. Chicago J Int Law 9(2):471–498 de Nanteuil A (2020) International investment law. Edward Elgar Publishing, Cheltenham Dittert D (2015) Artikel 344 AEUV. In: von der Groeben H et al (eds) Europäisches Unionsrecht. Nomos, Baden-Baden Dolzer R, Schreuer C (2012) Principles of international investment law. Oxford University Press, Oxford Dupuy PM (1999) The danger of fragmentation or unification of the international legal system and the International Court of Justice. New York Univ J Int Law Polit 31(4):791–807 Farhadi AA, Van Waeyenberge A (2020) Reconciling international investment law and European Union law in the wake of Achmea. Int Comp Law Q 69(4):907–943 Gonin E, O’Reilly R (2020) Intra-EU investment protection and the rule of law. In: Stanič A, Baltag C (eds) The future of investment treaty arbitration in the EU: Intra-EU BITs, the energy charter

97 See Brower and Schill (2009), p. 481 f.; but see also the evidence presented in Behn (2015), pp. 384–386 which according to the author suggests that, due to the high resources necessary for international legal claims, investment treaty arbitration, as well, is primarily geared for large and extra-large MNEs. 98 Opinion 1/17, ECLI:EU:C:2019:341, paras. 214–219.

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treaty, and the multilateral investment court. Kluwer Law International, Zuidpoolsingel, pp 63–88 Griebel J (2008) Internationales Investitionsrecht. C. H. Beck, Munich Heesen J (2015) Interne Abkommen – Völkerrechtliche Verträge zwischen den Mitgliedstaaten der Europäischen Union. Springer, Heidelberg Henquet T (2013) International investment and the European Union: an uneasy relationship. In: Baetens F (ed) Investment law within international law – integrationist perspectives. Cambridge University Press, Cambridge, pp 375–386 Hope J, Åkerlund T (2020) All eyes on Sweden: Swedish challenge cases post-Achmea. In: Stanič A, Baltag C (eds) The future of investment treaty arbitration in the EU: Intra-EU BITs, the energy charter treaty, and the multilateral investment court. Kluwer Law International, Zuidpoolsingel, pp 105–113 Jaeger T (2016) Zum Vorschlag einer permanenten Investitionsgerichtsbarkeit. Europarecht:203–229 Kaddous C (2013) Arbitrage, Union européenne et accords bilatéraux d’investissement. Swiss Rev Int Eur Law 23(3):3–8 Klages R (2018) Autonomie sticht Schiedsklausel. Europäische Zeitschrift für Wirtschaftsrecht:217–218 Kottmann M (2016) Investitionsschutzrecht: EuGH-Vorlage zur Wirksamkeit von Schiedsvereinbarungen in Investitionsschutzabkommen. Europäische Zeitschrift für Wirtschaftsrecht:512–520 Paparinskis M (2016) Investors’ remedies under EU law and international business law. J World Invest Trade 17(6):919–941 Paschalidis P (2017) Arbitral tribunals and preliminary references to the EU Court of Justice. Arbitr Int 33(4):663–685 Penades Fons M (2020) The effectiveness of EU law and private arbitration. Common Mark Law Rev 57(4):1069–1106 Puig S, Shaffer G (2018) Imperfect alternatives: institutional choice and the reform of investment law. Am J Int Law 112(3):361–409 Reinisch A (2014) The EU on the investment path – Quo vadis Europe? The future of EU BITs and other investment agreements. Santa Clara J Int Law 12(1):111–157 Schill S (2011) Arbitration procedure: the role of the European Union and the Member States in investor-state arbitration. In: Kessedjian C (ed) Le droit européen et l’arbitrage d’investissement. Panthéon-Assas, Paris, pp 129–147 Tietje C (2011) Bilaterale Investitionsschutzverträge zwischen EU-Mitgliedstaaten (Intra-EU-BITs) als Herausforderung im Mehrebenensystem des Rechts. Beiträge zum Transnationalen Wirtschaftsrecht 104 Van Harten G (2008) Investment treaty arbitration and public law. Oxford University Press, Oxford von Papp K (2013) Clash of ‘autonomous legal orders’: Can EU Member State courts bridge the jurisdictional divide between investment tribunals and the ECJ? A plea for direct referral from investment tribunals to the ECJ. Common Mark Law Rev 50(4):1039–1082 Wehland H (2008) Schiedsverfahren auf der Grundlage bilateraler Investitionsschutzabkommen zwischen EU-Mitgliedstaaten und die Einwendung des entgegenstehenden Gemeinschaftsrechts. Zeitschrift für Schiedsverfahren:222–234 Wehland H (2009) Intra-EU investment agreements and arbitration: Is European community law an obstacle? Int Comp Law Q 58(2):297–320 Yackee JW (2008) Do we really need BITs - toward a return to contract in international investment law. Asian J WTO Int Health Law Policy 3(1):121–146

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Berta Boknik is a former graduate research fellow at the International Investment Law Centre Cologne (IILCC) and conducts her legal clerkship at the Higher Regional Court of Cologne. She studied law at the Universities of Cologne and Paris I Panthéon-Sorbonne (LL.B./maîtrise en droit, 2014; first state law examination, 2016; Dr. iur., 2020) and wrote her doctoral thesis on the relationship between the ECJ and arbitral tribunals based on intra-EU BITs. Before joining the IILCC, Berta worked as a legal assistant in the antitrust, competition and trade group of an international law firm in Cologne and Dusseldorf.

Hagia Sophia at ICSID? The Limits of Sovereign Discretion Ioannis Glinavos

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 What Could Be Claimed in the Current Case? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Can Culture Trump Investor Protections? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 What Is the Meaning of Cultural Property? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The paper focuses on an underdeveloped area of jurisprudence in international economic law, that of the remit of sovereign discretion on cultural and religious grounds when it intersects with investor protections under international law. This aspect of public policy that relates to culture and religion contains issues frequently left unexplored by investment tribunal jurisprudence. An investigation on the limits of sovereign discretion on issues of religion and culture is the next frontier in debates on investor-state dispute settlement (ISDS). The paper explores options in investment arbitration for foreign investors affected by changes brought about by sovereign decisions based on religious and cultural grounds, shedding light in this politically and emotionally charged corner of international economic law. This investigation therefore revisits the jurisprudence of international investment tribunals on expropriation, the meaning of fair and equitable treatment, exclusions from protection based on public policy, or on grounds of national security. The paper initiates this discussion by investigating the possibility that the Switzerland-Turkey Bilateral Investment Treaty (BIT) of 1988 may offer bases for compensation to SICPA, the—until recently—operator of the Hagia Sophia museum in Istanbul, a I. Glinavos (*) University of Westminster, London, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 253–274, https://doi.org/10.1007/8165_2021_78, Published online: 14 February 2022

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world heritage site of global religious and cultural significance transformed again into an operational place of worship in 2020.

1 Introduction Did Turkey respect its obligations under international (investment) law in the summer of 2020, when it proceeded to change the status of the Hagia Sophia in Istanbul from a museum to a functioning mosque? This paper will attempt to answer this question from the point of view of investor rights as protected by international treaties. It explores the avenues that are available to states wishing to defend themselves against actions in investment treaty arbitration initiated by investors protesting policy decisions based on religious and cultural grounds. The paper evaluates the potential of general exemptions from protection to offer states more flexibility in decision making, using as a case-study Turkey’s termination of contracts relating to the touristic exploitation of the Hagia Sophia site in Istanbul. It investigates the possibility that the Switzerland-Turkey Bilateral Investment Treaty (BIT) of 1988 may offer grounds for compensation to SICPA, the foreign investor. This example provides an opening for a broader reflection on the limits of sovereign discretion when determining public policy in the area of religion and culture, especially in relation to cultural property. The Turkish example offers a unique opportunity to delve into an underdeveloped area of jurisprudence in international economic law, that of the remit of exceptions to investor protection on cultural grounds. When sovereign discretion on cultural and religious grounds intersects with investor protection under international law, we enter a domain less well defined by investment treaty jurisprudence. While issues of expropriation, the meaning of fair and equitable treatment, exclusions from protection based on public policy on grounds of national security have been thoroughly examined by international investment tribunals, this aspect of public policy that relates to culture and religion leaves many key issues unexplored. In summary, the paper explores options for investment arbitration for foreign investors affected by changes brought about by sovereign decisions based on religious and cultural grounds, shedding light on this politically and emotionally charged corner of international economic law. We start by laying out the facts of the case study and present the key stages of establishing the jurisdiction of an arbitral tribunal before explaining how Turkey could face a claim for expropriation leading to a demand for payment of compensation arising from its decision to change the status of the Hagia Sophia site from a museum to a mosque. We then explore the extent to which policy making in the area of culture can serve as an exception to investment protections, and whether the use of sites, such as the one under consideration, comes within definitions of cultural property and heritage. We then present a series of cases from relevant jurisprudence and conclude our discussion.

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2 What Could Be Claimed in the Current Case? 2.1

The Facts

Following a court decision on July 10, 2020,1 the Turkish authorities proceeded to change the status of Hagia Sophia, Istanbul’s sixth century cathedral, turning the building from a museum into a functioning place of worship. The Hagia Sophia is a historic site on the United Nations Educational, Scientific and Cultural Organization ‘s (UNESCO) World Heritage List,2 originally built in 537 as a Christian Orthodox cathedral. It proceeded to serve (briefly) as a Roman Catholic cathedral in the thirteenth century and was converted into a mosque after the Ottoman conquest of Constantinople in 1453. It is believed to have been the world’s largest house of worship until 1520 and it became a museum after the establishment of the secular Turkish Republic in 1934, operating as a major tourist attraction since 1935.3 The 2020 decision by Turkey’s Council of State annulled the Kemalist 1934 museum conversion based on Ottoman Sultan Mehmet’s original legal proclamation determining that the site should operate as a mosque. The decision was the culmination of a 15-year legal battle. It allowed President Erdogan to finally deliver on what has been and continues to be a heated political objective.4 The site’s change of status is not merely an issue of cultural, religious, and political significance. It also disrupts a contract with the Swiss Company, SICPA, which had purchased the right to operate Hagia Sophia ticket sales, a business generating an annual revenue obtained from the entrance fees to the museum estimated at 400 million liras (around 57 million US$ on 2021 exchange rates).5 Hagia Sophia is one of the key tourism sites in Istanbul with 3.7 million visitors reported in 2019.6 With entry fees in the region of $10 per visitor, the museum generated significant income for Turkey and the Swiss company SICPA, contracted

1

Dal A and Karadag K, Turkey: Court strikes down Hagia Sophia museum decree, Anadolu Agency, 10 July 2020, https://www.aa.com.tr/en/turkey/turkey-court-strikes-down-hagia-sophiamuseum-decree/1906171. 2 UN Educational, Scientific and Cultural Organisation (UNESCO), Convention Concerning the Protection of the World Cultural and Natural Heritage, Nov. 16, 1972, 1037 U.N.T.S. 151. 3 Lixinski and Tzevelekos (2020). 4 Presidency of the Republic of Turkey Directorate of Communications, Presidential Decree on the opening of Hagia Sophia to worship promulgated on the Official Gazette (10 July 2020) https:// www.iletisim.gov.tr/english/haberler/detay/presidential-decree-on-the-opening-of-hagia-sophia-toworship-promulgated-on-the-official-gazette-of-the-republic-of-turkey/. 5 BIA News Desk, Will Turkey pay damages to the Swiss company for Hagia Sophia? (15 July 2020) bianet https://m.bianet.org/english/other/227459-will-turkey-pay-damages-to-the-swiss-com pany-for-hagia-sophia. 6 Governorship of Istanbul, The Most Visited Museums of Turkey: Hagia Sophia Museum (12 March 2020) http://en.istanbul.gov.tr/the-most-visited-museums-of-turkey-hagia-sophiamuseum.

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to run the ticketing system.7 SICPA is a Lausanne-based company, which won a Turkish ministry of culture and tourism tender in 2018 to provide this service. SICPA bid a reported 3.9 billion US dollars, to win the tender for operating Turkey’s 54 museums and archaeological sites for a period of 9 years.8 As SICPA loses its rights to ticketing on the Hagia Sophia site 2 years into its nine-year contract, the issue arises as to whether the Swiss company will be paid compensation for its loss. Compensating a foreign investor does not seem to be the intention of the Turkish government, however, as in November 2020 the Turkish Culture and Tourism Minister responded to a written request from an opposition Member of Parliament (MP) that Turkey would not pay compensation to the Swiss company.9 The following discussion examines what SICPA specifically, and any other foreign investor in similar circumstances, would need to prove in order to seek compensation for its losses before an investor-state dispute settlement (ISDS) tribunal. The aim of this discussion is not to offer unsolicited advice to a specific corporation, but to explain the mechanics of investment treaty arbitration as a prelude to a discussion on the limits of sovereign discretion in the field of cultural and religious matters.

2.2

Jurisdiction

Establishing the jurisdiction of the tribunal is the first step in bringing an investorstate dispute settlement claim. There are two aspects to this, one has to do with the legal ability of the tribunal to constitute a panel, and the other has to do with the identity of the investor and the nature of the investment.10 Each investment treaty requires different sets of criteria upon the fulfilment of which a claim may be brought. There are some frequently encountered items, however, such as the existence of an offending measure, an effect of the measure on the investment attributable to the host state, and a relation between the measure and the investment or the investor.11 To have a realistic prospect of success, investors will need to complain about specific impacts on their businesses, not a general detrimental effect of state actions on costs and future profitability.12 In the particular case under discussion, SICPA’s investment in Turkey would come under the Switzerland-Turkey Bilateral Editor, Swiss firm SICPA announces TL 5B investment in R&D in Turkey (6 April 2020) Daily Sabah https://www.dailysabah.com/business/swiss-firm-sicpa-announces-tl-5b-investment-in-rdin-turkey/news. 8 Mavris, G. Hagia Sophia’s mosque conversion has Swiss fallout (17 July 2020) https://www. swissinfo.ch/eng/the-hagia-sophia-s-reconversion-to-mosque-has-swiss-fallout/45910490. 9 Editor, Turkey Will Not Pay Compensation to Swiss Company For Hagia Sophia (7 November 2020) Akunq.net https://allinnet.info/news/turkey-will-not-pay-compensation/. 10 Giorgetti (2014). 11 Salacuse (2015), p. 26. 12 Glinavos (2018), p. 387. 7

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Investment Treaty of 1988. Article 8 of the Treaty defines an investment dispute as a dispute involving an alleged breach of any rights and obligations conferred or created by the Treaty and after a period of consultation has passed gives the right to an affected investor to refer the issue to arbitration at the International Centre for Settlement of Investment Disputes (ICSID). Bringing an investment under the definition of “protected investment” will depend on the terms of the treaty in question, an assessment of locality—which can raise issues for immaterial assets, such as contractually derived rights13—and, to a degree, by the circumstances surrounding the investment and the investor’s legitimate expectations at the time of establishment. In Nagel v. Czech Republic14 the tribunal referred to the investor’s legitimate expectations in trying to determine whether the claim involved a protected investment under the relevant bilateral investment treaty.15 A useful reference is Article 25 of the ICSID Convention of 1965 which provides that ICSID’s jurisdiction extends to any legal dispute arising directly out of an investment between a contracting state and a national of another contracting state. The concept of investment itself is not defined in the Convention, but it has been a matter of extensive debate in tribunals.16 In Salini v Morocco,17 for example, the tribunal focused on a number of criteria in helping determine the existence of an investment. These are a substantial commitment to the host country or a contribution to its development,18 the duration of the investment, any assumption of risk on the part of the investor, and the regularity of profit for the investor. The above criteria can be helpful to other tribunals, but are not an all-inclusive list, as shown in Deutsche Bank v Sri Lanka,19 where the majority of the Tribunal indicated that there is no basis for a strict application in every case of the criteria such as those suggested by the tribunal in Fedax v Venezuela20 and subsequently restated in Salini.21 Jurisprudence suggests the existence of only three core criteria, namely contribution, risk and duration. It is also important to note that an investment will usually be a bundle of rights, and not limited to distinct individual

13

Collins (2011), pp. 225–244. Nagel v Czech Republic, SCC Case 49/2002, Award (9 September 2003), 2004(1) Stockholm Arb. Rep. 141. 15 Snodgrass (2006), p. 10. 16 Burgstaller (2021). 17 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No Arb/00/ 04). 18 Malaysian Historical Salvors SDN, BHD v Government of Malaysia ICSID Case N0. ARB/05/ 10. 19 Deutsche Bank AG v Sri Lanka, ICSID Case No ARB/09/02, Award (31 October 2012), para. 294. 20 Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Award (9 March 1998). 21 Garcia, A. ICSID tribunal considers Salini criteria (27 March 2013) UK Practical Law uk. practicallaw.thomsonreuters.com/9-525-4681?__lrTS¼20170608091923938. 14

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contracts.22 It is common to include as protected investments all types of assets, tangible and intangible that have an economic value, including direct or indirect contributions in cash, kind or services invested or received.23 In the case of Turkey, in our example, SICPA would have no difficulty arguing that their contractually bound expectations can come within the definition of protected investment, using the criteria examined above. We are assuming here that SICPA retained its status as a foreign investor in bringing its extensive operations to Turkey, even though the running of these operations was carried out by a local subsidiary. As mentioned above intangible assets, including shares in locally registered corporations would satisfy the tests for investment under international law. The Switzerland Turkey BIT determines (Article 1) as investors companies, including corporations, business associations or other organisations, which are incorporated, constituted or otherwise duly organised under the law of either Contracting Party and in which nationals of one or the other Contracting Party have, directly or indirectly, a prevailing interest. It further includes within the definition of investment rights conferred by law, including concessions to search for, extract or exploit natural resources as well as all other rights given by contract or by decision of the authority in accordance with the law. SICPAs local operations and the ticketing contract for the Hagia Sophia museum would come under these definitions. A claimant can only access investor-state arbitration if they can establish a strong link between a state action and its impact on a specific investment as required by Article 25(1) ICSID Convention and a range of cases as for example Methanex v USA.24 In evaluating a potentially unlawful state act,25 even non-discriminatory measures could be declared offending if they represent a violation of the investor’s expectations. In CMS v. Argentina,26 for example, an ICSID Tribunal found that it had jurisdiction to examine whether specific measures affecting the investment or even measures of general economic policy had been adopted in violation of legally binding commitments made to the investor in treaties, legislation or contracts. The Switzerland Turkey BIT offers details on standards of protection in Article 3. Each Contracting Party commits to protect within its territory investments made in accordance with its legislation by investors of the other Contracting Party and shall not impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, extension, sale and liquidation of such investments. Each Contracting Party shall ensure fair and equitable treatment within its territory of the investments of the investors of the other Contracting Party. This treatment shall not be less favourable than that granted by the Contracting Party to investments

22

Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8. 23 Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18. 24 Methanex Corporation v. United States of America, UNCITRAL, Award (3 August 2005). 25 UNCTAD, ‘ISDS: UNCTAD Series on Issues in International Investment Agreements II’ (United Nations 2012) 33 http://unctad.org/en/PublicationsLibrary/diaeia2013d2_en.pdf. 26 CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8).

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made within its territory by its own investors, or than that granted by the Contracting Party to the investments made within its territory by investors of the most favoured nation, if this latter treatment is more favourable. The early termination of SICPAs contract by presidential decree would constitute a state act that violates the investor’s legitimate expectations resulting in quantifiable loss of income. A question remains however whether SICPA could carve out the Hagia Sophia concession from its portfolio in order to argue that the deprivation of economic rights it suffered is significant enough to warrant protection, or whether the totality of its investment in Turkey would be taken into account. In the latter case, Hagia Sophia remains the jewel in SICPAs crown, but the impact of the loss of this site would be less in the context of the overall investment as described earlier in the paper. That said however, SICPA is more likely to rely on a specific claim of expropriation, rather than a violation of its legitimate expectations under Article 3 of the Treaty. The next section considers therefore in detail a potential claim of expropriation against the Turkish authorities.

2.3

Expropriation

Article 5 of the Switzerland Turkey BIT provides that neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measure having the same nature or the same effect against investments belonging to investors of the other Contracting Party, unless the measures are taken in the public interest, on a non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation. The amount of compensation shall be paid to the investor entitled thereto without delay and made freely transferable. Given the Turkish authorities stated intention not to offer compensation to SICPA for its losses, the company could consider protesting the cancellation of their contract as an uncompensated act of expropriation. As expropriation in international law can only occur in accordance with established standards, be non-discriminatory and (in addition27) followed by a payment of prompt, adequate and effective compensation, it would appear at first glance that Turkey would have a valid claim to defend against Article 5, paragraph 1, reads: Neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measure having the same nature or the same effect against investments belonging to investors of the other Contracting Party, unless the measures are taken in the public interest, on a non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation. The amount of compensation shall be paid to the investor entitled thereto without delay and made freely transferable.

27

Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5.

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International investment law safeguards the sanctity of a contract by guarding against regulatory taking and other governmental actions that thwart the legitimate expectations of foreign investors.28 Bilateral and multilateral instruments generally address the issue of expropriation by defining it as a compulsory transfer of property rights. This is not the only way in which an offending act can take place. Regulatory takings are also viewed as indirect expropriations, disguised expropriations or creeping expropriations that will generate an obligation for the payment of compensation. While it is generally required that governments will need to offer compensation for actions amounting to expropriation, it is accepted that states are not liable for economic losses arising from bona fide regulation within the accepted scope of “police powers” including the operation of competition law, consumer protection, securities regulation, environmental protection, land planning and other similar legislation.29 Under international law, liability does not arise from actions that are non-discriminatory and are within the commonly accepted taxation and police powers of states.30 In the United States, the Supreme Court has offered some guidance for determining when compensation will be awarded in the case of indirect expropriatory measures.31 In Penn Central Transportation v City of New York,32 for example, the court offered a three part test in determining whether a state action could amount to expropriation: One should examine the character of the government action (seizure of property or regulatory intervention); interference with reasonable investment-backed expectations; and the extent of the diminution in value.33The key challenge for an investor facing a situation such as that involving SICPA would be to show that state interference with their contractual rights can give rise to an expropriation claim under an investment treaty and that the investor has suffered actual quantifiable deprivation, in whole or significant part, of the economic benefits of its investment. From the facts that are known of this case at the time of writing, SICPA would have a straightforward claim of expropriation against the Turkish authorities as the revocation of their license is a direct form of expropriation. The main problem for the investor from a jurisdictional point of view would be on classing the deprivation suffered as significant, if (as mentioned earlier) the Hagia Sophia based claim is assessed against the totality of the company’s Turkish investment, as opposed to a concession-by-concession consideration. Indeed, ICSID tribunals adopt a broad view of what constitutes expropriation including direct and indirect takings and violations of investor expectations. For example, the Tribunal in Metalclad v. Mexico34 defined expropriation under NAFTA as including not only open, deliberate and acknowledged takings of property, such as outright seizure or

28

Waelde (1996), p. 429. Wagner (1999), p. 518. 30 Aldrich (1994), p. 609. 31 Baughen (2006), p. 208. 32 US: 1978, 438 US 104 Penn Central Transportation v City of New York. 33 Glinavos (2011), p. 73. 34 Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1. 29

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formal or obligatory transfer of title in favour of the host State, but also 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 even if not necessarily to the obvious benefit of the host State. Therefore, one could expect that sovereign decisions that lead to high levels of interference resulting in significant losses will usually warrant compensation under the heading of expropriation and this includes interference with contractual rights. In Southern Pacific Properties v. Egypt35 the tribunal did not accept the argument that the term expropriation applies only to jus in rem and accepted that there is considerable authority for the proposition that contractual rights are entitled to the protection of international law and that the taking of such rights involves an obligation to pay compensation. In establishing a right to compensation for expropriation, SICPA could rely on ample precedent such as Wena Hotels v. Egypt,36 RFCC v. Morocco,37 Impregilo v. Pakistan,38 Bayindir v. Pakistan39 and Mondev International v. USA.40 Turkey would in response turn to decisions such as Ronald S. Lauder v. Czech Republic41 where the tribunal held that actions would not amount to an appropriation by the State, if they did not benefit the state taking the measure or any person or entity related thereto and were taken for a public purpose. What exactly constitutes such a public purpose, and the extent to which cultural and religious objectives come within a definition of exceptions from protection, is what the rest of this paper examines in detail. Before we move to that part of the discussion, however, we will briefly consider how SICPA would go about in calculating an amount of compensation a tribunal was to accept for the compensable expropriation which took place in 2020.

2.4

Compensation

A violation of a treaty obligation causing loss to an investor entitles the injured party to compensation.42 As a matter of international law, when a state breaches a treaty obligation, its conduct is considered a wrongful act for which reparation is due for

35 Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, ICSID Case No. ARB/84/3. 36 Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4. 37 Consortium R.F.C.C. v. Kingdom of Morocco ICSID Case No. ARB/00/6. 38 Impregilo S.p.A. v. Islamic Republic of Pakistan ICSID Case No. ARB/03/3. 39 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29. 40 Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2. 41 Ronald S. Lauder v. The Czech Republic, UNCITRAL, Final Award of 3 September 2001. 42 Eiser Infrastructure Limited and Energı’a Solar Luxembourg Sa’rl v Kingdom of Spain, ICSID Case No ARB/13/36, para. 420.

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any injury caused thereby.43 The International Law Commission’s Articles of State Responsibility (ILC Articles) provide that an internationally wrongful act occurs when there is state conduct that constitutes a breach of an international obligation of the state.44 Thus, a failure by a state to accord treatment as set out in an applicable investment treaty is an internationally wrongful act giving rise to the obligation to make full reparation for any injury caused thereby.45 If SICPA is successful in a potential ISDS claim against Turkey, how would the tribunal go about assessing compensation? The Switzerland-Turkey BIT, as well as standard wording in international investment agreements require prompt, adequate and effective compensation. This usually is interpreted to equal the fair market value of the lost investment as the most direct way to provide full compensation for the damage the investor has suffered.46 Usually, an award of the fair market value of the investment will include the loss of future cash flows.47 Any public policy defences that the state may have brought, are only relevant in determining whether the state has been at fault and tribunals tend not to consider issues like the public interest, regulatory autonomy or host state human rights or other international law obligations at the remedies stage of investment claim determinations.48 It is important to note that the decision of the sovereign that gives rise to a claim for compensation, in the case under consideration, an expropriation, can be within the regulatory discretion of the state and legal in national law. At the same time, this same decision can give rise to liability as it constitutes a violation of a higher law, that derived for example from international law obligations under a bilateral investment treaty, with “fair market value” as the baseline standard for assessing compensation.49 This standard allows the investor to receive appropriate compensation.50 An example of this approach can be found in the 1992 World Bank Guidelines on the Treatment of Foreign Direct Investment51 observe that the amount of compensation

43

Fry (2007), p. 85. United Nations, Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries (2001) Report of the International Law Commission on the work of its fifty-third session https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf. 45 Cohen-Smutny, A. Principles Relating to Compensation in the Investment Treaty Context’ (19 September 2006) IBA Annual Conference, 2 www.josemigueljudice-arbitration.com/xms/ files/02_TEXTOS_ARBITRAGEM/01_Doutrina_ScolarsTexts/investment_arbitration/compensa tion_in_inv_treaties-_abbey_cohen_smutny.pdf. 46 Ripinsky (2015). 47 CMS Gas Transmission Company v Argentine Republic, ICSID Case No ARB/01/8. 48 Devaney (2012). 49 OECD Indirect Expropriation and the Right to Regulation in International Investment Law (September 2004) OECD Working Papers on International Investment 2004/4 https://doi.org/10. 1787/780155872321. 50 Devaney (2012), p. 12. 51 Wendrich (2005). 44

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that ordinarily will be just or appropriate will be the fair market value of the investment. In calculating what this actually means, the claimant will not necessarily need an active market for the property in question to be valued for purposes of compensation. Any award will strive to reflect an objective, real and full value.52 SICPA would have little difficulty demonstrating the loss of future revenue out of ticketing services for the Hagia Sophia museum as visitor numbers, entry fees and the value of the overall concession were well known, and future profitability could be projected with a fair amount of confidence. Having addressed the nature of investor protection, considered the facts of our Turkish case study and reflected on the elements of the investor’s potential claim, we can now move to the critical part of this paper, which is an investigation of sovereign discretion in areas touching upon culture and religion. We continue therefore with a presentation of general exceptions from protection in international law and the way these could be utilised by Turkey in defending its decisions in relation to the use of the Hagia Sophia site.

3 Can Culture Trump Investor Protections? So far, our discussion has focused on the issue of expropriation, and as we have seen, even the legitimate exercise of public authority, when it results in a ‘taking’, can only be lawful upon payment of compensation.53 We have accepted, for the sake of discussion, that Turkey’s actions in relation to the status of Hagia Sophia were a legitimate exercise of public authority, meaning that Turkey had a lawful policy objective to pursue in changing the status of the site from museum, to place of worship. The rest of our discussion asks whether culturally grounded public policy decisions should be perceived as legitimate exercises of authority, and under which circumstances. Leaving aside the position of SICPA—the foreign investor in our example concerned about the loss of revenue—for a moment, we can examine the nature of Turkey’s took the decision to change the use of the Hagia Sophia site, from a revenue generating museum to a functioning place of worship which will be free to visit, apart from when services are taking place when it will only be available to worshipers. It is possible to view this action as part of an attempt to redefine how cultural heritage should be utilised and safeguarded. Just as virtually any area of public policy making may impact on investment activities, the safeguarding of cultural heritage may conflict with the international obligations of the State regarding the protection of foreign investment.54 Turkey’s action is a good example of how

52

Glinavos (2014), pp. 475–497. Glinavos (2020), p. 26. 54 Claros (2015). 53

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cultural heritage policies can conflict with non-cultural international obligations of the State.55 The consequences may come as a surprise to investors, as investment treaty rights are traditionally blind to state obligations on cultural heritage issues.56 The question becomes therefore whether a nation, like Turkey, could avoid the network of investor protection obligations enshrined in international treaties, by arguing that its actions aimed at the protection of cultural heritage are an exercise of legitimate public policy, relying on general exceptions from investment protection standards? Such general exceptions can be found in some BITs but are more common in Free Trade Agreements (FTAs). An example are the provisions contained in the General Agreement on Trade in Services (GATS). The Switzerland Turkey BIT does not contain any general exemptions, but there is some possibility that deviations from standards can be excluded based on cultural reasons and for government action aiming to preserve cultural property based on customary international law. Seeking a general exemption from standards of investor protection is not the same as a frequently employed state defence because of necessity, but there are links between the two.57 The necessity doctrine derives to a degree from Non-Precluded Measures (NPM) clauses, found in some bilateral investment treaties. Alternatively, a customary international law defence of necessity derives from Article 25 ILC Articles.58 Such a clause would allow a state to take actions otherwise inconsistent with treaty obligations when, for example, they are necessary for the protection of essential security, the maintenance of public order, or to respond to a public health emergency.59 Non-precluded measures or general exceptions from protection standards can encompass less pressing issues of public policy than public order or emergency. To be qualified as a NPM under such provisions, a measure would need to be adopted for the protection of selected public interests and also meet the key requirement of “necessary” attached to the different public interests. It is important to reiterate that the measure in question must also be applied in a manner that does not constitute a means of arbitrary or unjustifiable discrimination against, or a disguised restriction on, the investors or investments.60 In the absence of wording on specific exceptions, or an NPM clause in a BIT, one could turn to multilateral instruments, such as Article XX of the General Agreement on Tariffs and Trade (GATT) 1994 which offers a list of “general exceptions” allowing WTO Members to enact measures of certain specified varieties, regardless of their impact on any other obligation contained in the GATT and provided that these measures are not covert trade protectionism. The listed categories of relevance

55

Borelli and Lenzerini (2012). Claros (2015), p. 4. 57 Ziff (2010–2011), p. 45. 58 International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, 2001 http://legal.un.org/avl/ha/rsiwa/rsiwa.html. 59 Von Burke-White and Staden (2008), pp. 307–410. 60 Wang (2017), p. 448. 56

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to investment are measures necessary to protect public morals, measures necessary to protect human, animal or plant life or health, those necessary to secure compliance with laws or regulations—including those relating to customs enforcement, enforcement of monopolies, the protection of patents, trademarks and copyrights, and the prevention of deceptive practices, measures relating to the conservation of exhaustible natural resources.61 Further, the GATS enacted in 1995 to govern trade in services, contains similarly worded general exceptions in its Article XIV. Those relevant to investment, in this case, and similarly to the wording seen above in the GATT, include measures necessary to protect public morals or to maintain public order, those necessary to protect human, animal or plant life or health, those necessary to secure compliance with laws or regulations, including those relating to the prevention of deceptive and fraudulent practices, the protection of the privacy of individuals, and safety. Of course, the exceptions are subject to the requirement that they are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.62 In summary, what these WTO-law derived exceptions mean specifically in relation to culture and cultural property, is that subject to the requirements that measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between states, or a disguised restriction on trade in goods or services or investment, the WTO agreements are not meant to prevent the adoption or enforcement by member states of measures necessary to protect national works or specific sites of historical or archaeological value, or to support creative arts of national value. Could these exceptions therefore, were they to be found in a bilateral or multilateral treaty, offer the leeway that a state, such as Turkey in our example, would be seeking in order to avoid an obligation to pay compensation for an apparent expropriatory measure? Especially, when that measure is part of a wider policy having to do with the function of cultural property and stems from a sovereign decision on access to heritage for cultural and religious reasons? To conclude our discussion and arrive at an answer we need to consider in more detail the meaning of cultural property as defined in international law.

4 What Is the Meaning of Cultural Property? Posner defines cultural property as property that has some special relationship with a particular culture or nation state.63 Cultural property includes objects found at archaeological sites, which provide insights into earlier civilizations, and artworks

61

Collins (2011), p. 578. See United States – Import Prohibition of Certain Shrimp and Shrimp Products, Report of the Appellate Body WT/DS58/AB/R (1998). 63 Posner (2007), p. 213. 62

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produced by members of a culture that are thought to embody or represent that culture in a distinctive way. Cultural property has key features that distinguish it from natural resources in that it has scholarly and aesthetic value, providing a window into the past and frequently having an intrinsic artistic merit.64 Most of the literature on cultural property involves artworks and items of historical value.65 But does the definition include buildings and sites themselves? Cultural property, like any other form of property, is valuable to the extent that people care about it and are willing to pay to consume or enjoy it. If cultural property is “normal” property, however, then there is no reason to treat it differently from other forms of property. Following the long literature on law and economics,66 in any market, the people who value an item the most, will seek to purchase it.67 If a great many people value it, then the state may acquire it and place it in a museum. This could involve purchasing the most valuable cultural property and revealing it to the public for a fee. If a cultural asset is nothing more than normal property, assuming it comes under the definition of a protected investment, it should benefit from the same levels of protection as other covered investments under international law.68 Does international law cover historical, religious and cultural sites as well as artifacts and items of cultural value? In answering this question, we can refer to the Convention for the Protection of Cultural Property in the Event of Armed Conflict of May 14, 1954 (the Hague Convention 1954). The Hague Convention 1954 is a direct descendant of the work of Francis Lieber, who is credited with laying the cornerstone on which the laws of war are based.69 Lieber prepared a code of conduct by belligerent forces in war to apply to the conduct of the Union forces in the American Civil War. Articles 34–36 of the code deal with protection of cultural property and provide that as a general rule, the property belonging to churches, to hospitals, or other establishments of an exclusively charitable character, to establishments of education, or foundations for the promotion of knowledge, whether public schools, universities, academies of learning or observatories, museums of the fine arts, or of a scientific character such property is not to be considered public property [. . .]; but it may be taxed or used when the public service may require it.70

War unfortunately has been the key motivator to initiatives to protect cultural sites through international law. Such protection became a significant issue during World War 2 and communications from Allied forces in Europe in 1943–1945 provide various examples. During the Italian campaign for instance, General Eisenhower issued clear directions for the preservation of cultural property arguing “we are 64

Posner (2007), p. 224. Francioni and Scheinin (2008), pp. 1–15. 66 Coase (1960), pp. 1–44. 67 Glinavos (2010). 68 Posner (2007), p. 222. 69 Hartigan (1983). 70 Merryman 1986), p. 833. 65

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fighting in a country which has contributed a great deal to our cultural inheritance, a country rich in monuments which by their creation helped and now in their old age illustrate the growth of the civilization which is ours. We are bound to respect those monuments as far as war allows.”71There are several international law instruments72 concerning the protection of cultural property. One could highlight the Treaty on the Protection of Artistic and Scientific Institutions and Historic Monuments (known as the Roerich Pact) adopted in 1935, the Hague Convention on the Protection of Cultural Property in the Event of Armed Conflict of 1954, mentioned above, and the Convention for the Protection of the World Cultural and Natural Heritage (WHC), adopted in 1972. Article 1 of the Hague Convention 1954 offers a definition of cultural property which covers irrespective of origin or ownership: (a) movable or immovable property of great importance to the cultural heritage of every people, such as monuments of architecture, art or history, whether religious or secular; archaeological sites; groups of buildings which, as a whole, are of historical or artistic interest; works of art; manuscripts, books and other objects of artistic, historical or archaeological interest; as well as scientific collections and important collections of books or archives or of reproductions of the property defined above; (b) buildings whose main and effective purpose is to preserve or exhibit the movable cultural property defined in sub-paragraph (a) such as museums, large libraries and depositories of archives, and refuges intended to shelter, in the event of armed conflict, the movable cultural property defined in sub-paragraph (a); (c) centers containing a large amount of cultural property as defined in sub-paragraphs (a) and (b), to be known as ‘centers containing monuments’.

The 1972 World Heritage Convention, ratified by Switzerland in 1975 and Turkey in 1983, imposes certain binding obligations on member states. The convention introduces the concept of cultural heritage, instead of the narrower concept of “cultural property” discussed above. The change was due to the conceptual necessity of bringing together natural sites and cultural properties of outstanding and universal value. The holistic approach taken by this convention was followed by subsequent treaties and international legal instruments.73 The concept of heritage is distinguished from that of property as it has a collective and public character and connotes legacy irrespective of ownership.74 Recognising that all people contribute to the diversity and richness of civilizations and cultures, which constitute the common heritage of humankind,75 cultural heritage is protected because it uniquely contributes to cultural diversity. Indeed, certain cultural sites are deemed to have outstanding universal value and have been included in the World Heritage List. As mentioned earlier, the historic part of Istanbul and the cathedral of Hagia Sophia are present on 71

Merryman (1986), p. 839. Toman (1996). 73 Vadi (2011), p. 806. 74 Pokorny (2002), p. 356. 75 United Nations Declaration on the Rights of Indigenous Peoples, G.A. Res. 61/295, U.N. Doc. A/RES/61/295 (Sept. 13, 2007), 46 I.L.M. 1013 (2007). 72

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this list.76Having a secure grasp of the meaning of cultural property and the extent to which it applies to historical sites, we can now move to conclude our discussion and offer an assessment of the potential consequences of Turkey’s actions in relation to Hagia Sophia in 2020 in the context of international investment law. It is questionable whether international investment law remains focused on a pure international economic culture or whether it is open to encapsulate non-economic or cultural concerns.77 However, several arbitral awards have shown an increasing awareness of the need to protect cultural heritage within investment disputes, with arbitrators considering non-investment related values in the context of investment disputes.78 We now present the best-known cases highlighting conflicts between cultural and heritage-based decisions and investor rights. A number of these cases have already been referred to in the discussion above, but it is hoped that a summary of the facts can highlight the key issues and help us reach a conclusion in the case study motivating the discussion in this paper, namely the potential dispute between Turkey and SICPA over the conversion of Hagia Sophia into a mosque. A good place to start is Parkerings-Compagniet AS v Lithuania,79 which involved a Norwegian investor’s bid for a tender to construct a parking in the historical centre of Vilnius in Lithuania. The investor’s proposal involved excavation under the Cathedral, a site included in the World Heritage List as a part of a cultural heritage area of outstanding universal value. The investor was not successful as necessary impact assessments raised cultural heritage concerns. The investor filed an investorstate claim on the grounds of discrimination when the tender was awarded to a competing bid which satisfied cultural heritage conditionality present in the laws of Lithuania. The Tribunal held that historical and archaeological preservation and environmental protection could be, and in this case were, a lawful justification for the refusal of the investor’s project bid, dismissing the claim. Glamis Gold v United States of America,80 was a case directly concerning religious freedom and cultural practices. In this case, a foreign investor complained that local regulations on the operation of open-pit gold mines, designed to protect the rights of an indigenous tribe to performed spiritual pilgrimages, constituted a form of indirect expropriation. The complaint protested the introduction of emergency regulations requiring reparatory work on the investor’s open-pit mines designed to re-create the approximate contours of the land prior to mining taking place. The investor argued that federal and state actions deprived its property rights of their value, complaining that restoring the land would be uneconomical and arbitrary. In the view of the investor, the regulations were not genuine in their stated intentions, but only served the covert aim of preventing the mining operation from taking place altogether. The tribunal found that, without the legislative measures under

76

See https://whc.unesco.org/en/list/356. Vadi (2008), p. 2. 78 Vadi (2009), pp. 593–96 79 Parkerings-Compagniet AS v Lithuania ICSID Case N0. ARB/05/08. 80 Glamis Gold v United States of America (Award, 8 June 2009) NAFTA/UNCITRAL Arbitration. 77

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consideration, the landscape would be harmed by extensive mining operations and noted that Article 12 of the World Heritage Convention requires states to protect their cultural heritage even if it is not listed in the World Heritage list.81 The investor lost. Such precedent could be used by Turkey in demonstrating that their decision to change the use of the site of Hagia Sophia was part of a legitimate exercise of authority, for a valid public purpose. While this would not absolve them from an obligation to compensate for expropriation, it would help in shaping investor expectations and delineate sovereign authority around access to and use of culturally significant sites. As the following cases demonstrate, a legitimate public purpose will also influence a tribunal’s assessment of damages, even in these cases where compensation is warranted, regardless of the aims of a sovereign action. In Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt82 a foreign investor was involved in the development of a tourist village in the vicinity of the pyramids of Giza in Egypt. The government cancelled their contract and added the area to the World Heritage List after artefacts of archaeological importance were discovered. Things went better for the investor in this case, as the tribunal found that inclusion of this site to the Heritage List had been requested after the cancellation of the project, making the state was contractually liable. In such a case, the cancellation of the contract amounted to an expropriation that could only take place lawfully with fair compensation. Nonetheless, the outcome was not a complete success for the claimant, as the amount of compensation itself would reflect the fact that retail sales in the areas registered with the World Heritage Committee under the UNESCO Convention would have been illegal under international law. Therefore compensation could only cover profits which are legitimate, even if they do not fully cover the investors loss of expected revenue. In Compañia del Desarrollo de Santa Elena S.A. v Republic of Costa Rica,83 authorities directly expropriated the property of a group of American investors with the aim of enlarging the Guanacaste Conservation Area, a site of natural beauty encompassing over 30 km of Pacific coastline, as well as numerous river springs, forests and mountains. This site, similar to the Egyptian case discussed above, was subsequently added to the World Heritage List. Also the outcome was similar to the Egyptian case, since the act was deemed to be one of expropriation. The tribunal awarded compensation to the investors based on the land’s fair market value relying on an interpretation of international law permitting a host state to expropriate foreign-owned property for a public purpose only against prompt, adequate and effective compensation. The rationale for expropriation in this case did not affect the calculation of compensation, placing the US investors in a better position than those 81

Vadi, V. Culture Clash: Investor’s Rights v. Cultural Heritage in International Investment Law & Arbitration (2012) Society of International Economic Law, Online Proceedings Working Paper No. 2012/07 https://papers.ssrn.com/sol3/papers.cfm?abstract_id¼2087823, p. 13. 82 Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt ICSID Case No. ARB/84/3. 83 Compañia del Desarrollo de Santa Elena S.A. v Republic of Costa Rica ICSID Case No. ARB/96/ 1.

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at the Giza site. The same conclusion was reached in the case of Marion Unglaube and Reinhard Hans Unglaube v. Republic of Costa Rica a few years after the Santa Elena proceedings on similar factual basis, resulting in another win for the investors.84 To summarise, what these cases demonstrate is that a legitimate exercise of public policy, including in the field of culture and heritage, does not absolve a sovereign from the responsibility to compensate a claimant investor for the violation of their legitimate expectations as protected by international law. The requirement of payment of compensation for expropriation is additional to the expectation that any expropriation needs to be actioned for a legitimate public purpose and carried out in a non-discriminatory manner, free from capricious or political reasons. Where the rationale behind the state action comes into play is more in the quantum of damages, rather than on the finding of a violation in itself. As the cases above demonstrate, it is likely that a valid objective motivating the state act will be taken into account at the stage of quantification of loss and not in a determination of breach of investment protection standards. What would this mean for Turkey, were they to face a claim by SICPA before an investment tribunal? It would most likely mean that Turkey would be found in breach of the terms of their BIT with Switzerland but may hope for a reduction in the level of damages awarded by demonstrating a legitimate interest behind making access free of charge to a place of worship for all those wishing to participate in religious services. There is sufficient authority in the jurisprudence of international investment tribunals to support such a conclusion.

5 Conclusion This paper has explored options for investment arbitration for foreign investors affected by changes brought about by sovereign decisions based on religious and cultural grounds. Our discussion offered an overview of investor rights under bilateral and multilateral investment treaties, as well as in customary international law. This controversial area of international economic law was investigated from the perspective of Turkey, facing the dismay of foreign investors over the cancellation of ticketing rights over the Hagia Sophia site in Istanbul. Using a potential ISDS claim by the Swiss foreign investor SICPA, our case study presented the key stages of establishing the jurisdiction of an arbitral tribunal before explaining how a claim for expropriation could lead to a demand for payment of compensation. This example allowed us to explore the extent to which policy making in the area of culture can serve as an exception to investment protection, and whether the use of sites, such as the one under consideration, comes within the definitions of cultural property and/or heritage. The paper explored relevant jurisprudence to reach the conclusion that in

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Marion Unglaube and Reinhard Hans Unglaube v. Republic of Costa Rica ICSID Case No. ARB/09/20.

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fact Turkey violated the provisions of its bilateral investment treaty with Switzerland by its actions in 2020. If a foreign investor, in the context of our case study SICPA, could surmount the barriers of establishing jurisdiction, it would have a fair chance of success in convincing an investment tribunal that its contractually derived rights have been expropriated. The tribunal would then calculate compensation on the basis of a market value standard and the best Turkey could hope for is to try to ameliorate the relevant amounts, citing legitimate public policy objectives around the use of its cultural heritage. What does this all mean for the future of international economic law broadly, and international investment law, specifically? Inherently relative definitions of terms such as public order raise the wider question as to whether there can ever be a uniform international jurisprudence as to the meaning of culturally relative terms. Could culture and heritage ever offer a concrete exemption from investor protection? It is always possible for states to provide precise meanings for such terms through definitions in a treaty. Indeed, recent initiatives to reform the investor-state dispute settlement process and to contain the expansion of interpretations of investment standards abound.85 Where bilateral or multilateral instruments, however, do not offer a concrete definition, ascribing one state’s or one culture’s understanding of such terms to another these issues will continue to generate disputes. The result may well be asymmetric treaty obligations in that state signatories to an investment treaty may end up with divergent understandings of what public policy can and should cover.86 The end of this reflection could well be a return to the purpose behind investor protection, the promotion of investment. The reason behind investor protection enshrined in international law is to offer assurances to investors that transcend personal, governmental, and political appetites.87 The more exceptions in favour of policy discretion one carves out, the less certainty surrounds long term investments. Turkey may believe it has done the right thing politically, culturally, and religiously, but foreign investors will draw their own conclusions from SICPA’s predicament, whether a claim materialises before an investment tribunal or not.

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Ioannis Glinavos is Senior Lecturer in Law at the University of Westminster with long teaching experience in international economic law, international development law and international investment law. Ioannis is an active researcher and prolific writer with publications in top ranked peerreviewed journals and across international media including The Independent, Forbes, Newsweek, and HuffPost amongst others. The focus of his research is investor state dispute settlement.

International Commercial Courts: A New Frontier in International Commercial Dispute Resolution? Lessons from the Mixed Courts of the Colonial Era Willem Theus

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Historical Antecedents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Origins: Consular Courts and the Principle of Extraterritoriality . . . . . . . . . . . . . . . 2.2 The Mixed Courts of the Colonial Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Enduring Legacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Hybrid Courts: The Mixed Courts of the Present? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 International Commercial Courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 What Is an International Commercial Court? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 ICC Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 ICCs in the Footsteps of the Mixed Courts: An Alternative to International Arbitration? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion: A New Frontier in International Commercial Dispute Resolution? . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter aims to provide a general background and overview of the so-called International Commercial Courts (ICCs) recently established in various states in Europe, the Middle East and Asia. In essence, ICCs are specialised Englishspeaking commercial courts that focus on international commercial dispute resolution. ICCs are as such often in direct competition with international commercial arbitration, yet the line between them has become increasingly blurred in some aspects. This Chapter originates from my on-going PhD research. It is related to another forthcoming chapter of mine on the contextualisation of Mixed Arbitral Tribunals - Theus (2021). I would like to thank all members of my supervisory Committee: my promoter Geert Van Calster, my copromotor Wim Decock, Gleider Hernández, Julien Chaisse and Georgios Dimitroupoulos for their remarks and exchanges. I would also like to thank Michel Erpelding for giving me an early copy of his entries on mixed courts for the Max Planck Encylopedias of International Law. All mistakes are mine alone. W. Theus (*) KU Leuven, Institute for Private International Law, Leuven, Belgium e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 275–308, https://doi.org/10.1007/8165_2021_81, Published online: 13 March 2022

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ICCs are more grounded in history than often presumed. They build forth upon an enduring legacy of “internationalised” national or “hybrid” courts, i.e. courts which have an international element such as serving foreign judges. This practice has existed throughout the ages and continues to be the norm in various jurisdictions worldwide, including in certain major legal hubs such as Hong Kong. Especially the colonial-era mixed courts invite comparisons with ICCs as these courts often also acted as a special forum for foreign businesses and interests. Plus ça change?

1 Introduction In recent years, numerous International Commercial Courts (ICCs) have been established in various jurisdictions worldwide ranging from Dubai to the Netherlands. Despite a plethora of different names and set-ups they all pursue the common goal of providing a smooth, modern, English-speaking legal procedure in order to efficiently handle international commercial disputes.1 Some ICCs act as the main courts of a Special Economic Zone and have foreign judges, allow foreign lawyers to their Bar and use a complete foreign legal system as their default applicable law, whereas others are merely an international chamber in an existing (domestic) court. ICCs play an important role in the competition for legal services by states, and in the showcasing of a jurisdiction as being at the forefront of efficient, knowledgeable, rule of law-compatible dispute resolution. In a bid to attract as many litigants as possible, various ICCs invest heavily in new (court) technologies, leading Abu Dhabi’s ICC (the Abu Dhabi Global Market Court) to claim to be the world’s first “fully digital court”.2 Arguably, ICCs can be seen as “next-generation” courts and as a state-based claw back against privately run international arbitration institutions. But are they truly a new frontier in international dispute resolution? The idea of a special court or zone partially run by foreigners for mostly foreign businesses was actually a common practice throughout history. Consular courts could for example be seen as the first “investment” courts as they were founded abroad by virtue of treaties between Sovereigns and/or city-states and/or polities in order to protect their merchants abroad. The right to have one’s own laws and courts follow him/her abroad, i.e. the right of extraterritoriality, was enshrined in numerous treaties of commerce. Ad-hoc “mixed” consular courts/tribunals were often established to deal with “mixed” cases, i.e. between merchants of various backgrounds. In later times we see a further evolution of this concept to mixed courts. Mixed courts were treaty-based national courts with an international participation that were founded in the non-colonised world to deal with “mixed” cases , i.e. cases with a “foreign” element. Certain mixed courts partially functioned as commercial 1 2

Bookman (2020a), pp. 261–264. ADGM Courts, Digital Approach, https://www.adgm.com/adgm-courts/digital-approach.

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courts for foreigners and could rule against their host state, acting as a precursor to investor state arbitration and investment courts.3 This chapter provides a general background and overview of these mixed courts and ICCs, which are arguably their partial successors. It can therefore not provide detail on every single court, nor can it exhaustively discuss the case law of the mentioned courts. Such work has already been and is being conducted elsewhere, especially on ICCs.4 The focus of this chapter is rather to shed a light on the past, especially on the understudied and undervalued mixed courts. It will emerge that there are many striking similarities between the past and present and that these can help us better understand (and predict) legal developments such as the establishment of new types of ICCs. This historical background of ICCs has so far barely been discussed or mentioned. The first section will explore exactly the antecedents of ICCs. The focus here will especially be on the mixed courts, as they show remarkable similarities with ICCs. Mixed courts share with many ICCs that they are in fact national courts with a certain international influence and outlook, whereas numerous other historical mixed legal institutions such as the Mixed Commissions or Mixed Arbitral Tribunals were rather deemed to be international courts/tribunals.5 A categorisation of mixed courts on the basis of territorial jurisdiction (or how/where they are “embedded”) is quasi-identical to such a categorisation of ICCs. The second section briefly takes a closer look at the current-day continuation of mixed courts—now known as hybrid courts—that likewise show important similarities with ICCs. ICCs themselves and their categorisation on the basis of territorial jurisdiction are discussed extensively in the third section, as well as the question if ICCs could emerge as an alternative to international (commercial/investment) arbitration. Certain historical precedents do certainly seem to point to just that. Finally the fourth and concluding section offers a recap and raises the question: are we reintroducing the systems of the past?

2 Historical Antecedents 2.1

The Origins: Consular Courts and the Principle of Extraterritoriality

Since Antiquity and until quite recently, the co-existence of a plurality of (foreign) legal systems in a certain territory was mostly the norm and not the exception as is

3

Erpelding (2020a), para 41. See for example: Kramer and Sorabji (2019), Blair (2019), Requejo Isidro (2019) and Erpelding (2020b). 5 A more comprehensive historical contextualisation and a deeper look at certain similarities between the other mixed legal institutions and ICCs has been offered elsewhere by myself: Theus (2021). 4

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the case today.6 The system in place was one based on the concept of personal jurisdiction (or personality of laws): one’s tribal or religious affiliation determined the laws applicable to oneself or one’s company.7 Personal jurisdiction has not disappeared: in countries such as in Egypt, Israel and Lebanon, religious courts have exclusive jurisdiction in certain personal status matters, purely on the basis of the religion of a person.8As international trade further blossomed and international exchanges expanded, personal jurisdiction became more and more manifested in the right to be made subject to the laws of one’s home nation, in the host nation—i.e. what would later become known as the principle of extraterritoriality. The exact demarcation between personal jurisdiction and the principle of extraterritoriality is a difficult one to make, and falls outside of the scope of this chapter.9 In what follows the focus is therefore on extraterritoriality, as it was via this principle that international trade was conducted. Extraterritoriality was seen as an easy and convenient way to deal with foreigners. Foreign Sovereigns often restricted the foreigners (mostly merchants) to a certain “territory” (i.e. to a specific district or “colony”) within or nearby their own cities, with the right to apply their own laws and to have their own officials. This practice seems to have been the standard throughout Antiquity and beyond. It was seemingly quite universal, with many major ancient civilizations and empires ranging from imperial China to the Greeks and the Arabs having a variant of such a system in place.10 International trade, diplomatic relations and extraterritoriality were very intertwined as mentioned earlier. A good example of this is the 888 AD Treaty between the Venetian Doge Pietro Tribuno and the future Roman Emperor Arnulf of Carinthia that stipulated that any Venetian in Imperial Italy would remain under the jurisdiction of the Doge and Venetian laws.11 This treaty expanded previous extradition rights with regard to criminals and was aimed to protect Venetian merchants operating in Italy.12 Later treaties seem to expand on this concept and allowed for the right to maintain a resident magistrate. A first reference to such a privilege is a concession by King Baldwin I of the Kingdom of Jerusalem to the Venetian Doge in 1110 for the Venetian help in the taking of the city of Acre.13 The first “formal” treaty with a specific reference to a consular court appears to be the treaty concluded 6

Liu (1925), p. 9. Guterman (1966). 8 Scolnicov (2006) and Ghandour (1990). 9 Lupoi and Belton (2010), pp. 388–405. However, the very naming and definition of these concepts might be a nineteenth century invention by scholars of that time. See: Kannowski (2017), pp. 477–480. More research on these concepts and their exact demarcation is required, especially seeing that the concepts of “nation” and “territory” were interpreted differently depending on the region and time. 10 For the Romans: Daube (1951), pp. 66–70. For others: Keeton (1949), p. 296. 11 Norwich (1983), pp. 82–83. The term Holy Roman Empire is only used from 962 onwards, hence the use of the term Roman Emperor here. 12 Norwich (1983), pp. 82–83. 13 Norwich (1983), p. 83. 7

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between the Italian cities of Amalfi and Naples in 1190.14 Such treaties gave the right to trade (often with discussions on tariffs included) to the subjects of the Sovereigns and to have their own laws and courts follow them “abroad”. Various similar treaties with other European (city-) states/polities and the Ottomans and Persians followed and evolved over time.15 Important to note here is that this practice appears to have been reciprocal.16 The consular courts established by these treaties were often staffed by consuljudges or merchant-judges.17 They mostly handled civil (and sometimes criminal) cases amongst their nationals. If there were “mixed” cases—between parties having different laws applicable to themselves—one would appear before an ad-hoc mixed court/tribunal composed of the (consul)-judges of the nationality of the parties involved or before the defendant’s or a local court, depending on the exact circumstances and era.18 In the latter case, there was often still legal aid available by your nation’s embassy—a practice that continues to this day. In a way, consular courts can perhaps be seen as the very first investment courts, as they were established for the protection of the own nationals—often merchants—abroad. This practice continued to evolve and change over time. In Europe and other western (-ruled) nations, the concept of consular courts and extraterritoriality eventually experienced a strong decline with the rise of the concept of territorial sovereignty starting from the Treaty of Westphalia.19 Local courts eventually gained authority of all cases—including those dealing with foreigners—within their territory. In the directly European-ruled colonies there were however often still different courts for the “Europeans” and the “local population”—thus, on the basis of personal jurisdiction.20 If there were disputes between so-called “civilised” western nation states, these were often resolved via Mixed Commissions or via arbitration. The precedents to the dispute resolution mechanisms found in contemporary international economic law, such as the Jay Treaty Mixed Claims Commissions, are to be placed in this setting. Especially worth mentioning here are the Mixed Arbitral Tribunals (MATs), which were highly successful dispute resolution forums for private claims arising from World War I between parties from the victorious and losing nations.21 MATs have certain traits than can be found again in ICCs, especially their hybrid court-arbitral tribunal nature.22 14

Liu (1925), p. 11. Özsu (2016) and Van Den Boogert (2005). 16 For example in Sicily, with the establishment of new Norman Kingdom, the Muslims were allowed Muslims to continue to operate their own courts. See: Davis-Secord (2007), p. 49. Likewise Persians certainly had a consular court in Egypt in the twentieth century as demonstrated in Salem Case, United States (on behalf of Salem) v Egypt, Award, (1949) II RIAA 1161, (1945) 6 ILR 188, 8th June 1932, p. 1168. 17 Bartolomei (2018), para 1. 18 Erpelding (2020a), para 7. 19 Buxbaum (2009), pp. 632–633. 20 For example for Belgian-ruled Congo see: Sohier (1938), pp. 288–289. 21 Requejo Isidro and Hess (2019), pp. 239–276. 22 See Theus (2021). 15

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However, in the so-called “uncivilised” or non-colonised (i.e. the non-western/ Christian ruled) world extraterritoriality continued to be the norm often leading to “judicial chaos”.23 Over time extraterritoriality mostly become a unilateral concession granted/demanded by western imperial powers to protect their nationals and businesses abroad.24 For example, in the Far East, the western powers managed to secure the Unequal Treaties with China, Japan, Korea and other Asian countries.25 Through these treaties, which also regulated many other different matters such as diplomatic representation, the western imperial powers amongst other things gained access to districts of certain ports—later to be known as the treaty ports—as well as the right to set up consular courts for their own subjects.26 This right was then further extended to other smaller western/Christian (-run) nations via the most-favoured nation principle.27 Interesting to point out here is that such treaties were coined as Treaties of Friendship and Commerce28 and were also concluded between western nations themselves, though in that case excluding any extraterritorial jurisdiction. It is out of these treaties that the current-day bilateral investment treaties (BITs) and investor–State arbitration practice eventually emerged.29

2.2

The Mixed Courts of the Colonial Era

Arguably the partial predecessors to ICCs may be found in within the setting of the non-colonised world in the nineteenth-twentieth centuries: the mixed courts. Such courts were established in the Ottoman Empire,30 Egypt31 Tangier,32 Bahrain,33 Anam,34 the New Hebrides (now Vanuatu),35 Ethiopia,36 China

23

Cobbing (2018), p. 282; Theus (2021). The concepts “civilised” and “uncivilised” or “semicivilised” worlds were never really clearly defined. A discussion hereof falls out of the scope of this chapter; for more on this see: Heraclides and Dialla (2015). 25 Kayaoğlu (2010). 26 The term subjects is to be interpreted widely in some cases, including non-European subjects from the direct colonies. For the situation in Siam for example see: Sayre (1929), p. 75 ff. 27 Erpelding (2020a), para 7. 28 See for example the Treaty of Friendship and Commerce between Siam and Great Britain, signed at Bangkok, April 18, 1855, https://en.wikisource.org/wiki/Bowring_Treaty. Sometimes different terms are used or these treaties are expanded to also deal with navigation; e.g. Treaty of Peace, Amity, Commerce and Navigation. 29 Jacob (2014), para 10. 30 Muslu (2014). 31 Brinton (1968), Brown (1993) and Erpelding (2020b). 32 Hudson (1927a), Stuart (1955) and Erpelding and Rherrousse (2019). 33 Brown (1997), p. 132. 34 Erpelding (2020a), para 22. 35 Stevens (2017), Laracy (1991) and Mander (1944). 36 Feyissa (2018); Feyissa (2016); Vanderlinden (1966), p. 250. 24

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(in particular Shanghai and Kulangsu),37 Siam,38 Japan,39 Tunisia,40 the French Mandate of Syria and Lebanon,41 and the Trucial States in the Gulf.42 Qatar was to have one but it was never established.43 Mixed courts were not a uniform court type.44 In general, mixed courts were national courts with both international (mostly western) and local participation that were established in certain nations in the mid/late nineteenth century-early twentieth century in order to handle “mixed” cases, i.e. cases involving a “foreign” element.45 They were a part of the national legal order and the local government therefore nominally appointed the foreign judges, prosecutors and other foreign legal officials.46 They were often established to help modernise (read “westernise”) the local legal systems and “to educate the semi-civilised”, i.e. the non-colonised states, in administrative and legal matters.47 Simultaneously they also protected (western) foreigners, companies and (economic) interests.48 Their “mixedness” (or “mixity”) often went further than their composition: many mixed courts used foreign languages (especially French), had a mixed bar, prosecution and bench encompassing foreigners and locals, and used special (often French inspired) codifications next to local and customary law.49 Consular courts often remained in existence next to these mixed courts for intra-national cases. Their exact jurisdiction varied: some mixed courts could hear almost all cases including administrative, penal and constitutional matters, whereas others were limited to civil and commercial disputes.50 Nearly all had an appeal court too. All mixed courts were deemed to be under the sovereignty of the host nation, although this was often only in theory so, with western imperial powers wielding a large degree of influence. One way to categorise mixed courts is to focus on their territorial jurisdiction, i.e. on their area of operations. By doing so one can distinguish two 37 Stephens (1992); Cassel (2020); Hudson (1927b); Kotenev (1925); United States Department of State, Report of the Commission on Extraterritoriality in China, September 16, 1926, https:// catalog.hathitrust.org/Record/001153343. 38 James (1922) and Sayre (1929). 39 Cassel (2013). 40 Ben Achour (2007). 41 Erpelding (2020a), para 17. 42 Al-Muhairi (1996). 43 Brown (1997), p. 133. This was to be a “joint court” (see infra). There were most likely other mixed courts—this is ongoing research. 44 Erpelding (2020a), paras 9–10. Also note that some mixed courts were coined as a “joint court” if only two nations were involved with the setting up. However, in French they were still called tribunaux mixtes. 45 Erpelding (2020a), paras 1 & 18. 46 Erpelding (2020a), para 11 & paras 16–17. 47 Erpelding (2020a), para 8. 48 Erpelding (2020a), para 41. 49 Erpelding (2020a), paras 9–31; Petricca (2012), p. 724 ff; Hoyle (1985), pp. 327–345. 50 Erpelding (2020a), para 20.

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“types”: the “special zone/region” mixed court and the “integrated” mixed court. Both have subcategories. This categorisation of mixed courts shows some remarkable similarities with a similar categorisation of the current-day ICCs, but more on that later. However, other categorisations are possible and exist, such as the one put forth by Michel Erpelding in his recent entry on Mixed Courts of the Colonial Era in the Max Planck Encyclopedia of International Procedural Law.51 It must be noted here that mixed courts remain an understudied field; numerous mixed courts have never been thoroughly analysed recently or at all.

2.2.1

Mixed Court of a Special Zone or Region

This type of mixed court acted as the main court of a designated special zone within the “host” nation. Two different types of special zones existed: one was truly an international/joint zone with local “mixed” institutions, whereas the other one is merely a region within a nation with some special provisions for foreigners such as mixed courts but with no other mixed institutions. Mixed Court of International/Joint Zones52 The mixed courts of these special zones often had competences in civil, commercial and criminal matters, although the exact jurisdiction varied. One can arguably differentiate here between a joint zone, which came out of a treaty or practice between two states, and other international zones, where more than two states or international organisations were involved. Both are in current day international law defined as a condominium: a territory over which two or more States jointly exercise governmental authority.53 Examples of mixed courts of a special joint zone are the joint court of the New Hebrides—these islands were deemed to be a Anglo-French condominium—and the Mixed Court of the French concession in Shanghai.54 These courts were staffed with judges of both nations involved and handled the cases between the nationals of both and between other foreigners. Another example is the unique inter-war Upper Silesia Arbitral Tribunal, established by the 1922 Geneva Convention concluded between Poland and Germany.55 This tribunal certainly had enough court elements to also qualify it as a mixed court, despite its name.56

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Erpelding (2020a), paras 15–23. Note that not all special international zones throughout history had mixed courts. For example the Free City of Danzig or the Free Territory of Trieste were under international supervision but never had mixed courts. 53 Morrison (2006), para 1. 54 Stevens (2017); Cassel (2020), para 10. 55 Convention between Germany and Poland relating to Upper Silesia, 9 LNTS 465, 118 BSP 365, (1867–1945) RGBl Teil II, 238. 56 Conway (2019), pp. 116–122; Erpelding (2019), pp. 286–287. Note that it was only established for a limited duration. 52

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Examples of international zones that had mixed courts are the international settlement of Shanghai & Kulangsu in China and the Tangier International Zone. These international zones were in fact often largely self-running and governed, having their own police force, a certain fiscal autonomy, an international municipal/legislative assembly, executive agency and of course also a mixed court system.57 The Tangier International Zone and its mixed court arguably had the most power and jurisdiction, as it was a treaty-based internationally run zone and the western powers had abandoned their extraterritorial privileges in favour of this court.58 The bench was for a large part solely international, with local judges only added at a later phase.59 The Shanghai International Settlement Mixed Court had a more restricted jurisdiction as it grew more organically and the consular courts stayed into existence next to the mixed court.60 These international zones were important legal, business and cultural hubs, much like many special economic zones of today aspire to be. Therefore these international zones and their mixed courts seem to hold a certain relevance to certain current-day special economic zones that have their own legal and governmental institutions and legal order, although the context of their establishment is of course very different. Mixed Court of Special Region These mixed courts were established in regions with numerous foreigners, which were never formally ceded as a concession to foreign powers or under any direct international supervision. Examples here include the Siamese International Courts (first generation)61 and the Chinese Special District Court (CSDC) for the Three North-eastern Provinces, which was a mixed Russian-Chinese court.62 I cannot discuss both courts in detail, but they were both established exactly to deal with “intra-national” cases amongst those foreigners and mixed cases in certain designated regions. The former, the first generation Siamese International Courts, were designed for the northern provinces of Siam (mainly Chiengmai, Lakon, Lampoonchi). They applied local Siamese laws and only employed local judges, but with an right of evocation enjoyed by the foreign national’s consul.63 The latter, the CSDC, took over a fully functioning Russian legal system operating in China that had organically grown from the construction and operation of the Eastern China Railway by the Russians. The CSDC was meant to take back Chinese control over

57 Cassel (2020), para 6; Schwietzke (2008), paras 10–17; Erpelding and Rherrousse (2019), paras 13–24; Fraser (1939). 58 With the exception of the United States of America. Erpelding and Rherrousse (2019), paras 51–65. 59 Erpelding and Rherrousse (2019), para 27. 60 Cassel (2020), para 5. 61 Sayre (1929), pp. 75–77. Note, that despite the use of the term “international” they were a mixed court. 62 Chiasson (2019), para 1. 63 This was the case for British, French, Italian and Danish subjects according to Sayre (1929), p. 76.

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the area.64 It therefore used “Russian laws under Chinese control” and had Chinese judges but they were assisted by Russian counsellors and advisers. Russian lawyers were also allowed to continue to plead.65 The CSDC’s operations appear to have been quite successful, but they ended rather abruptly with the Japanese invasion of Manchuria in 1932.66 The Siamese International Court model over time was extended to the whole of Siam and foreign judges and advisers were added. It thus became a fully integrated mixed court.67

2.2.2

Integrated Mixed Court

By far the most numerous mixed courts were the integrated mixed courts. These mixed courts were a full part of the local national judiciary and were not restricted to only a certain special zone; they were nation-wide. These mixed courts largely had jurisdiction for all civil and commercial mixed cases, i.e. involving foreigners of different nationalities and for cases pitching locals against foreigners. Most criminal matters involving foreigners were often dealt with elsewhere, such as in consular courts, which often continued to exist alongside these mixed courts. Within this category, it is possible to again define two subcategories: Self-Standing Mixed Court These mixed courts were fully integrated into the national justice system and were often the most important court system of the country. The most famous examples here are the mixed courts of Egypt and of Ethiopia. The mixed courts of Egypt were established at the request of Egypt itself to modernise the Egyptian legal system and to rein in the consular jurisdiction that had gotten out of hand, amounting to a degree of lawlessness for foreigners.68 The Egyptian mixed courts were largely modelled on the French judicial and legal system.69 In general, they had jurisdiction in civil and commercial matters of “mixed” cases, and to a limited extent also for some criminal matters and for suits between foreigners and the government.70 They were composed of a single court of appeal seated in Alexandria and three district courts (of which the locations altered over time), as well as their own mixed prosecution service. The district courts in fact were comprised of different sub-courts, one of those sub-courts being a commercial court.71 In such commercial cases both local and foreign assessors from the business

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Chiasson (2019), paras 6–7. Chiasson (2019), para 7 & paras 16–19. 66 Chiasson (2019), para 28. 67 Sayre (1929), p. 78 ff. 68 Brown (1997), p. 60; Erpelding (2020b), paras 6–7. 69 Erpelding (2020b), para 25. 70 Erpelding (2020b), paras 42–59. 71 For the full overview see: Erpelding (2020b), paras 32–41. 65

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community aided the judges.72 The official languages before the courts were French, Arabic and Italian (& later English). Advocates of all nationalities who had a minimum of five years of legal practice, a legal degree, good character and who were based in Egypt, were allowed to plea before these courts, oddly resembling the current day rules for being allowed to plea before for example the Dubai and Singapore ICCs.73 These Egyptian mixed courts were abolished in 1949 with the unification of the Egyptian court system, but the established case law and principles partially live on in the 1949 Egyptian Civil Code. The Egyptian Civil Code itself acted as the blueprint for most other Arab Civil Codes, including those of Qatar and the United Arab Emirates (UAE), the birthplaces of the ICCs.74 The mixed courts of Ethiopia consisted of two distinct phases and are in a way similar to those of Siam. The first phase saw the establishment in 1922 of the special court of Ethiopia, which had jurisdiction over mixed cases and had Ethiopian judges aided by a foreign consul. It was based in Addis Ababa but also had three provincial seats. The applicable law to these cases was the law of the country of the defendant, though often local customs and laws played an important role too. Western influence appears to have been limited in this special court.75 This court ended with the Italian invasion in 1935. During World War II a new system was set up: all matters involving foreigners were to be handled by the Ethiopian High Court, of which some members were British. It mostly applied British law to foreigners. The last British judges only left Ethiopia in the mid 1960’s.76 Single Issue Temporary Mixed Court These mixed courts were established in order to deal with a single problem or issue.77 They were therefore merely a temporal phenomenon; as soon as the issue was solved they were shuttered. The Franco-Siamese Mixed Court for example was established to deal with a single criminal trial related to the Franco-Siamese war of 1893.78 This Mixed Court has some similarities with modern day international criminal law hybrid courts.79 Another example is the Mixed Land Registration Court of Tunisia, which was established to implement the land reforms of 1885, which had as their aim to facilitate the establishment of European settlers in the

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Hoyle (1985), p. 341. Brinton (1968), pp. 144–146; Yip (2019), para 3.3.3; DIFC Academy, Guidelines for Registration of Practitioners, https://www.draacademy.ae/services/registration-practitioners/guidelines-registra tion-practitioners/. 74 Bechor (2007). 75 Feyissa (2018), paras 2–22. 76 Feyissa (2018), paras 23–39. 77 Erpelding (2020a), para 23. 78 The Case of Kieng Chek Kham Muon before the Franco-Siamese Mixed Court: Constitution of the Mixed Court and rules of procedure, 1894, Bangkok, https://archive.org/details/ caseofkiengchekk00franrich/page/n9/mode/2up. 79 Erpelding (2020a), para 41. 73

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French protectorate of Tunisia and was established by the French ResidentGeneral.80

2.3

Enduring Legacy

Most major mixed courts were only dissolved after World War II or in the 1950s, largely coinciding with the establishment of the UN-system and the decolonisation era. Their “civilising mission” had ended.81 The emergence of contemporary international economic law and its key characteristics such as international arbitration or BITs largely coincides with this withdrawal.82 This is not a mere coincidence. Via the principle of extraterritoriality foreign investors were protected in non-colonised countries by their own or western-dominated laws, courts and/or judges, especially in the case of the mixed courts. When this was no longer the case, international arbitration had its breakthrough moment and the courts and arbitration centres of London and New York were established as the “legal hubs” for international dispute resolution.83 Leboulanger interestingly states that even international arbitration and mixed courts show some similarities and that the discussion whether international arbitration threatens sovereignty is reminiscent of similar debates about mixed courts.84 The link between the two is sometimes explicitly put forward: “before the entry into force of the Egyptian Arbitration Law on May 22, 1994, some critics raised serious concerns that the international arbitration system would be a return to the Ottoman regime of Capitulations and the Mixed Courts.”85 In some areas, colonial era mixed and consular courts continued to exist deep into the twentieth century. The last colonial mixed court, the Joint Court of the New Hebrides only ceased its operations in 1980 with the independence of Vanuatu.86 Certain consular courts held out in the Gulf region until the late 1960’s/early 1970’s.87 In Qatar a specific separate local court for foreigners, the Adlia court, was in place until 2003.88 Such age-old institutions and principles of course left a mark on the legal systems of the nations that hosted them; they can be seen as the 80

Erpelding (2020a), para 13; Ben Achour (2007). Erpelding (2020a), para 38. 82 Charnovitz (2014). 83 Roberts (2021), p. 1. 84 Leboulanger (2016). 85 Leboulanger (2016), p. 26. 86 BBC News, Vanuatu Country Profile, 11 June 2018, https://www.bbc.com/news/world-asia-1642 6193. 87 Al-Muhairi (1996), p. 126. 88 Deehring (2020), p. 221. More research on this court—established in 1971—is necessary in order to categorise this court as its composition is unclear, but most likely it did involve judges from other Arab countries such as Egypt and Iraq and as such could be deemed to be a hybrid court (see Sect. 3). 81

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transition to their current day legal systems. Late mixed courts had been established exactly to prepare for the full withdrawal of extraterritoriality; such as the Siamese International Courts (second generation).89 The Mixed Courts of Egypt perhaps played the biggest role of all, as discussed earlier. Egyptian laws and jurists were exported to many other Arab nations, including the Gulf Cooperation Council (GCC) states, where the very idea of ICCs first emerged. The GCC states in fact employed and still employ Egyptian judges in their own national courts.90 Besides these lingering influences in many national jurisdictions, the impact of certain (colonial) mixed legal institutions on our current day international and European legal order should not be underestimated. It is especially in the cities with various different legal communities and in the mixed courts, that the first “mixing” and working together of various different European and local legal cultures and nations took place continuously and on a large scale. Many of the negotiators involved with the establishment of the Permanent Court of Arbitration in 1899 unsurprisingly had a direct connection with institutions such as the then widespread consular and mixed courts.91 There are also striking personal linkages between these institutions and the Council of Europe and the Court of Justice of the European Union (CJEU). Certain early CJEU judges had been involved at mixed or consular courts.92 The first political director of the Council of Europe, Arnold Struycken, had been a judge at the Mixed Courts of Egypt.93 Moreover, other mixed legal institutions such as the MATs and the Arbitral Tribunal for Upper Silesia show remarkable similarities with the CJEU.94 Some present international tribunals/courts, such as the Iran-US Claims Tribunal, still explicitly refer to old caselaw of the MATs.95 This is unsurprising as it can be seen as a (partial) successor to the MATs and the Mixed Claims Commissions.96 These personal linkages might even shed some new insights to some of “groundbreaking” principles of European law. Take for example the concept of precedence of European Union law. Already in 1876 we can find the Egyptian Mixed Court of Appeals refusing to apply an Egyptian decree postponing the payment of the Egyptian Khedive Isma’il’s debts to foreign creditors, as the decree went against the prevailing laws and the judicial charter of the courts (which was a treaty).97 Something similar happened before the Mixed Court of Tangier in 1930 when it

89

Sayre (1929), p. 84. Mednicoff (2019). 91 Such as for example Ernest Mason Satow, Friederich Martens and Paul Henri Balluet d’Estournelles de Constant. See Theus (2021), under Sect. 2.1. 92 Erpelding (2020c), pp. 460–465. 93 Brinton (1950), p. 303. 94 Erpelding (2020c). 95 Iran-US Claims Tribunal, Award of 10 March 2020 (case No. A15 (II:A)), para 139. 96 Selby and Stewart (1984), pp. 215–216. 97 Erpelding (2020b), paras 10 & 56–57. The judicial charter of the Mixed Courts was considered to be a treaty; the laws they applied were also based on a treaty. 90

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declared a law unconstitutional as it went against the Tangerine Treaties.98 Further case law in this direction was developed in both Egypt and Tangier.99 One of the CJEU judges in the famous Costa v Enel case, which established the precedence of EU law over national law, was the Italian judge Rino Rossi.100 Rossi had been a judge at the Italian consular court in Cairo from 1936 to 1940 and must have therefore been somewhat aware of the Egyptian legal system, including the mixed courts.101 Likewise, the first president of the CJEU, Massimo Pilotti, had been involved in a project to reform the statute of the Tangier Mixed Court.102 The limited other caselaw currently available from Egypt and Tangier seems to point to an already well-developed system of non-discrimination on the basis of nationality and on “economic equality” between the different nations based on the most favoured nation principle, but more research on this is necessary.103 It remains unclear to what extent this caselaw and caselaw from other international courts and tribunals played a role in the establishment of many key EU principles. It is however clear that many principles and early judges and official already had some history. A wider contextualisation is thus required as already argued by Erpelding and Spiermann.104 For this reason alone mixed courts deserve more attention. Besides this general enduring legacy, the specific lessons of the mixed courts of the colonial era for international economic law will be discussed in further detail in Sect. 4.3.

3 Hybrid Courts: The Mixed Courts of the Present? The very concept of national courts with a foreign element or international participation has never disappeared, although the terminology has changed, as has the context of their establishment and operations. Today, the terms “hybrid” or “internationalised” courts are mostly used instead of the term mixed courts.105

98 Moreale v Stewens, Mixed Court of Appeal of Tangier (20 June 1930) - AF 12 A-2 (Belgian Diplomatic Archives). 99 Erpelding (2020b), paras 56–57; Erpelding (2020a) paras 20–21; Association Professionnelle des Dentistes v Nordlund, Mixed Court of Tangier (20 December 1948) – AF 12 A-2 (Belgian Diplomatic Archives). 100 CJEU Case 6/64, Costa v. ENEL, 15 July 1964, ECLI:EU:C:1964:66. 101 Erpelding (2020c), p. 461; Court of Justice of the European Union, Former Members of the Court of Justice, https://curia.europa.eu/jcms/jcms/p1_217426/en/. 102 Erpelding (2020c), p. 461. 103 Association Professionnelle des Dentistes v Nordlund, Mixed Court of Tangier (20 December 1948) – AF 12 A-2 (Belgian Diplomatic Archives); Hoyle (1986), pp. 445–446. 104 Erpelding (2020a) and Spiermann (1999). 105 Dixon and Jackson (2019), pp. 286–288; The Max Planck Encyclopedias of International Law does still use the term mixed court (hence the use of the term mixed court of the colonial era for the other entries). See: Winklemann (2006).

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From here on, I thus use the term hybrid court; the use of the term mixed court should be limited to the colonial era as the framework has changed. The term hybrid court is linked with contemporary international criminal law and the United Nations (UN) system. Unique judicial bodies such as the Extraordinary Chambers of Cambodia have a mixed bench (and prosecutors) and use a mixture of local and international law.106 Yet hybrid courts are not limited to international criminal law.107 Certain small Pacific island nations for example continue to employ foreign judges (mostly from Australia or New Zealand) to apply a mixture of legal traditions to solve cases.108 Likewise, the Special Administrative Region (SAR) of Hong Kong famously has “extraordinary”, i.e. foreign (mostly British) judges in its courts.109 This is also the case for the SAR Macau that continues to employ foreign (mostly Portuguese) judges.110 A similar situation exists in Gibraltar and certain other British overseas departments or crown dependencies.111 A unique court also exists for the Caribbean isles that are part of the Kingdom of the Netherlands,112 comprising of Dutch and local Antilles judges.113 As mentioned earlier, many of the GCC states likewise still employ Egyptian and other Arab judges.114 The continued existence of such courts and the presence of foreign judges point to an enduring legacy of the colonial era and the legal system of the colonising power. Hybrid courts must however not be viewed as a uniquely colonial remnant and therefore as a continuation of the mixed courts. Certain European microstates, such as Liechtenstein, Andorra and Monaco, employ foreign judges in their higher courts and look to their larger neighbours laws and recruit judges from their neighbouring 106

Baaz (2020), paras 13–22. Dixon and Jackson (2019), pp. 286–288. 108 Dziedzic (2018). 109 Article 92 of the Basic Law of Hong Kong of 4 April 1990, https://www.basiclaw.gov.hk/en/ basiclawtext/index.html. 110 Article 87 of the Lei Básica da Região Administrativa Especial de Macau da República Popular da China of 31 March 1999, https://bo.io.gov.mo/bo/i/1999/leibasica/index.asp. 111 For example for the Court of Appeal of the Bailiwick of Jersey: 107

The Judges of the Court of Appeal shall be the Bailiff, the Deputy Bailiff and such persons as may be appointed by Her Majesty to be ordinary judges of the Court of Appeal, being persons who – (a) hold or have held judicial office in the Commonwealth; (b) have been at least 10 years in practice at the Bar in Jersey, whether as a Law Officer of the Crown or otherwise; or (c) have been at least 10 years in practice at the Bar in England and Wales, Scotland, Northern Ireland, Guernsey or the Isle of Man. (see Part 1, Article 2 Court of Appeal (Jersey) Law, 161 (revised edition), https://www.jerseylaw.je/laws/revised/Pages/07.245.aspx. 112 Aruba, Curacao & Sint-Maarten are countries within the Kingdom, whereas Bonaire, SintEustatius and Saba are an integral part of the Netherlands (though they have a special status). 113 Het Gemeenschappelijk Hof van Justitie van Aruba, Curaçao, Sint Maarten en van Bonaire, Sint Eustatius en Saba, Jaarverslag 2019, https://indd.adobe.com/view/0b091ce2-d1b7-4e26-90c8-1a2 f3cc0c264, p. 8. 114 Mednicoff (2019).

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countries as they are simply too small to recruit enough local specialised judges.115 Other countries have established a regional Court of Appeal that also acts as their highest court, such as the Caribbean Court of Justice.116 Other examples are plenty; in fact many jurisdictions have foreign judges serving on their Constitutional Courts.117 Foreign judges clearly have certain advantages, such as their expertise, but also some serious disadvantages as is thoroughly explored in the work of Dixon & Rosalind on Hybrid Constitutional Courts.118 Some of these present-day hybrid courts and their experiences therefore hold interesting lessons for ICCs. Especially those hybrid courts that handle many commercial cases such as Hong Kong invite comparisons with ICCs. The independence of the Hong Kong judiciary and the presence of foreign judges is however under pressure after the adoption of the controversial National Security Law in 2020.119 This seems to already affect the trust and confidence that foreign businesses have in the special region, with some already moving out.120 Only against this complex background of hybridity and a deep historical legacy can ICCs be fully understood.

4 International Commercial Courts 4.1

What Is an International Commercial Court?

ICCs are in essence newly founded English-language domestic courts that focus on international commercial disputes. ICCs go by many different names (“International Business Court”, “International Financial Centre Court”, “International Chamber”, “Global Market Court” or “International Court”). They are not a uniform phenomenon with many different set-ups existing.121 Yet all share the same common goal: to provide a smooth English-speaking and modern legal procedure—mostly via easy jurisdictional opt-ins—for solving international commercial disputes.122 ICCs play an important role in the competition for legal services by states. They also embrace new technologies; the Dubai International Financial Centre (DIFC) courts for

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Garoupa (2018); Smith (2013), p. 332. Caribbean Court of Justice, About the CCJ, https://www.ccj.org/about-the-ccj/. 117 Dixon and Jackson (2019). 118 Dixon and Jackson (2019). 119 Dziedzic (2020). 120 Kihara T, Finance leads Hong Kong’s first business exodus in 11 years, Nikei Asia, 5 December 2020, https://asia.nikkei.com/Business/Finance/Finance-leads-Hong-Kong-s-first-business-exo dus-in-11-years. 121 Kramer and Sorabji (2019), Wong (2014) and Bookman (2020a). 122 Bookman (2020a), pp. 261–264. 116

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example aim to launch the first Blockchain powered court system.123 Similarly, Abu Dhabi’s ICC (the Abu Dhabi Global Market Court), claims to be the world’s first “fully digital court” as already mentioned in the introduction.124 Many ICCs are still very novel and some are quite untested. By way of example, the Abu Dhabi Global Market Courts (ADGM) only heard their first case in January 2018, despite having been established 2 years earlier.125 The most notable and widely known are the 2004 DIFC, the 2009 Qatar International Court and Dispute Resolution Centre (QICDRC), and the 2015 Singapore International Commercial Court (SICC). They have been joined by numerous initiatives in jurisdictions ranging from Abu Dhabi, the Netherlands, Germany, France, Bahrain, China to Kazakhstan. There were attempts to create such a court in Belgium126 and Delaware.127 I will only categorise those already functioning in what follows. Before categorising the different types of ICCs, four important remarks must first be made. First is the fact that ICCs are closely related to, yet still somewhat different from regular commercial courts. Regular commercial courts find their origin in and mostly still focus on national disputes, although certain regular commercial courts such as the Tribunal de Commerce de Paris, the London Commercial Court and the Hong Kong High Court do indeed attract and adjudicate numerous high-profile international commercial cases.128 The line between the two is therefore not always easy to draw; indeed many ICCs are in fact modelled or inspired by the London Commercial Court.129 Many commercial courts from various jurisdictions, including various ICCs, are even a member of the same platform: the Standing International Forum of Commercial Courts (SIFoCC), in which they exchange ideas.130 There are however some minor differences I would like to point out. ICCs are thoroughly modern institutions as they were only established in the twenty-first century, unlike many regular commercial courts which were established in the nineteenth and twentieth centuries.131 ICCs’ outlook are also nearly exclusively on

DIFC, DIFC Courts and Smart Dubai launch joint taskforce for world’s first Court of the Blockchain, https://www.difc.ae/newsroom/news/difc-courts-and-smart-dubai-launch-jointtaskforce-worlds-first-court-blockchain/. 124 ADGM Courts, Digital Approach, https://www.adgm.com/adgm-courts/digital-approach. 125 Lambert J, The Abu Dhabi Global Market Courts hear their First Case, 13 January 2018, http:// nipc-gulf.blogspot.com/2018/01/the-abu-dhabi-global-market-courts-hear.html. 126 Van Calster G, The Brussels International Business Court – Council of State continues to resist, 21 March 2019, https://gavclaw.com/2018/11/14/the-brussels-international-business-court-councilof-state-continues-to-resist/. 127 Bookman (2020b), pp. 22–25. 128 Blair (2019), p. 216. 129 Requejo Isidro (2019), pp. 1–2. 130 Standing International Forum of Commercial Courts, About Us, https://sifocc.org/about-us/. 131 The London Commercial Court for example was founded in 1895. See: Courts of the Queen’s Bench Division, Commercial Court, About Us – The History of the Court, https://www.judiciary. uk/you-and-the-judiciary/going-to-court/high-court/queens-bench-division/courts-of-the-queensbench-division/commercial-court/about-us/. 123

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cases with an international element: they are not established to handle purely local or national commercial disputes as many regular commercial courts were and still are as already mentioned.132 ICCs therefore have an explicit international element automatically engrained in them (for example by using English in a non-English speaking country, having foreign judges or only having jurisdiction when there is an international element), unlike regular commercial courts. Moreover, ICCs compete and share certain characteristics with international commercial arbitration, which is not the case for regular commercial courts.133 The second remark relates to that link with international commercial arbitration: the distinction between the procedure before ICCs and arbitration has become blurred in some areas, leading to some authors to label certain ICCs as “arbitral” or “hybrid” court-tribunals.134 Added to this is the fact that certain ICCs themselves have a connected regular arbitration centre—this is the so-called “free zone arbitration”.135 Third, numerous ICCs are in fact hybrid courts. ICCs that employ foreign judges fully fit in the above-mentioned definition of hybrid courts or internationalised national courts.136 However, many hybrid courts often don’t focus commercial cases and not all ICCs employ foreign judges, so ICCs in general remain distinct from hybrid courts. The fourth and perhaps most important remark is that much as the earlier mixed courts, ICCs are not a uniform development. The different categories and subtypes of ICCs on the basis of territorial jurisdiction that are presented below show some striking similarities with my categorisation of the mixed courts. The two main categories, the “special zone court” and “integrated court” re-emerge. However, it must be stressed that territorial jurisdiction is not as important as it was in the era of the mixed courts. Party autonomy (and legal competition) was mostly unheard of in the era of the mixed courts; it only became commonly accepted over the course of the twentieth century.137 Practically, it is also hard to see much benefit for two late nineteenth century Argentinian companies to litigate in London, taking into account the transport and communication links of that time. This is of course completely different today. Indeed, ICCs target precisely such international commercial cases

132 See for example in India: Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (https://prsindia.org/files/bills_acts/bills_parliament/2015/ Commercial_courts_bill_2015_dec_0.pdf). Also note that some ICCs do have a system for “local” affairs, such as the DIFC Small Claims court. 133 Ruckteschler and Stooss (2019). 134 Hybrid in a sense of mixing litigation and arbitral practices; not the hybrid courts as discussed above in Sect. 3. Bookman (2020b); Chaisse J and Tanwar A, New Courts, New Perspectives: Hybrid International commercial courts, 21 May 2020, https://asialawportal.com/2020/05/21/newcourts-new-perspectives-hybrid-international-commercial-courts/#_ftn3. 135 Blanke (2019). 136 The hybrid Hong Kong High Court and hybrid ICCs are thus similar, with the only differences being their original outlook, procedure and date of establishment. 137 Mills (2018), p. 3.

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and much can be done virtually. Even so, a categorisation of ICCs on the basis of their territorial jurisdiction remains useful as it clearly shows where and how they are “embedded” in the national judiciary. Such a categorisation shows similarities with the one set forth by Georgios Dimitropoulos in his recent article, which is based around their relationship with Special Economic Zones (SEZs).138 However, other categorisations are also possible, such as those of Pamela Bookman, which are based on the reason behind their establishment such as the desire to attract foreign investment.139

4.2 4.2.1

ICC Categories Special Economic Zone ICC

The ICC of a special zone acts as the main court of a special jurisdiction, which often takes the form of an autonomous (international) free trade or SEZ, hence the choice for the term SEZ ICC. SEZs are defined by the United Nations Conference on Trade and Development (UNCTAD) as “geographically delimited areas within which governments facilitate industrial activity through fiscal and regulatory incentives and infrastructure support.”140 SEZs can have various different names and set-ups.141 The focus here will solely be on those SEZs that are quasi self-governing entities and that have their own court (all also have their own financial system). Such SEZ’s are the Dubai International Financial Centre, the Abu Dhabi Global Market, the Astana International Financial Centre and the Qatar Financial Centre. These SEZ are regulated by independent oversight bodies, which are modelled on international best practices. These initiatives, in other words, create a new limited self-governing region within a state, with their own governance, tax, financial and legal system, whilst remaining an integral part of the country that founded and “hosts” it. The host state retains all criminal competencies and most legislative power. Note that these zones need not be “physical”. For example: the laws of the Qatar Financial Centre (QFC) (incl. QICDRC jurisdiction), are not limited to the geographical boundaries of the zone, as QFC registered entities are allowed to operate anywhere in the State of Qatar.142 These zones have adopted as their applicable law a modified version of the common law of England and Wales. The courts of these SEZ are ICCs, as they explicitly focus on international commercial disputes by way of easy opt-in jurisdiction clauses and their rules of 138

Dimitropoulos (2021), pp. 5–8. Bookman (2020a), pp. 239–257. 140 UNCTAD’s World Investment Report 2019, https://unctad.org/system/files/official-document/ wir2019_en.pdf, p. 128. 141 The distinction between free zones and SEZ’s also needs to be made. For more on this discussion see Bost (2019), pp. 142–143. 142 Dimitropoulos (2021), p. 5. 139

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procedure are partially modelled on the London Commercial Court.143 They are, however, the main court of the SEZ and thus, also handle purely “local” SEZ cases, i.e. cases between companies based in the SEZ as well as cases against the SEZ authorities.144 To further their ambitions, many of these new courts have recruited foreign judges—especially those with a common law background—to serve on the benches of their new courts. Likewise, they can hear pleas directly from foreign lawyers, who can also be called to their bars.145 It is remarkable that these developments have taken place in countries belonging to the (hybrid) civil law tradition, effectively leading to the creation of “Common Law islands in a Civil Law Ocean” to quote the words of DIFC Chief Justice Michael Hwang.146 There is, however, no real unity in how they use the English common law and how the ICCs relate to the other national courts of the hosting state. For example: the ADGM has adopted an “evergreen” version of English common law as opposed to the more codified versions used by the DIFC and QICDRC.147 Qatar, with its establishment of the Qatar Financial Centre and the QICDRC, opted for a separate parallel legal zone utilizing mostly—though not exclusively—English common law, thus making it possible for the court to also draw on (Qatari) civil law principles, as well as Shari’a provisions.148 Its judgments require no special procedure to be enforced in Qatar as it is an onshore court, unlike the DIFC and ADGM courts for example.149 These SEZs and their ICCs are very much at the forefront of legal experimentation.150 Besides their ICCs, these SEZs have also established specialised arbitration institutions and enacted special zone-specific arbitration legislation—the earlier mentioned “free zone arbitration”.151 These new arbitration centres often have some ties with the ICCs; sometimes they share officials. For example: the Registrar of the AIFC court and Chief Executive of the Astana International Arbitration Centre is the same person at the time of writing.152 Of course, these arbitration institutes do remain a separate legal personality, but there is clearly some limited overlap.

143

Sharar and Al Khulaifi (2016), pp. 537–542; Campbell (2012), pp. 12–18. Dimitropoulos (2021), pp. 5–6. 145 DIFC Academy, Guidelines for Registration of Practitioners, https://www.draacademy.ae/ services/registration-practitioners/guidelines-registration-practitioners/. 146 Hwang M, The Courts of the Dubai International Finance Centre — A Common Law island in a Civil Law ocean, 1 November 2008, https://www.difccourts.ae/2008/11/01/the-courts-of-thedubai-international-finance-centre-a-common-law-island-in-a-civil-law-ocean/. 147 Application of English Law Regulations 2015, as amended, adopted by the ADGM Board of Directors, 3 March 2015, https://en.adgm.thomsonreuters.com/rulebook/application-english-lawregulations-2015-0. Yet this “export” must be nuanced, see Reynolds (2017), pp. 184–186. 148 Qatar Financial Centre Authority v Silver Leaf Capital Partners LLC, case no: 0001/2009, paras 33 & 35; Dahlan and El-Sherif (2008). 149 Sharar and Al Khulaifi (2016), pp. 546–547. 150 Bookman and Erie (2021). 151 See for example: the ADGM Arbitration Centre (ADGMAC) and the connected ADGM Arbitration Regulations 2015. 152 See: Woolf (2019), p. 19. 144

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The conclusion then has to be that these SEZs with their legal institutions are indeed aiming to become or have already become “new legal hubs” and one-stop shops as defined by Matthew S. Erie.153 These SEZs are also crucial with regard- to their host states’/cities’ aspiration to establish a “global city”, i.e. to become not only legal hubs, but also cultural, educational, etc. hubs.154 This is very much parallel to the Shanghai International Settlement and to a lesser extent the Tangier International Zone, which both acted as hubs for their respective regions back in the day.155 The main difference of course being that these were truly international zones. They were a carved out jurisdiction/territory granted to foreign powers by the host state and in these zones the foreign powers together had nearly full control (for example also having criminal jurisdiction). The current carve-out of such SEZs is much less far-reaching and purely national; no foreign state is formally involved.156

4.2.2

Integrated ICC

These ICCs are completely embedded in the already existing judiciary and jurisdictions (or in a level hereof); they do not create any special zone. We can distinguish here between a (i) specialised chamber in an existing commercial court or (ii) a selfstanding ICC or (iii) a blended court-tribunal.157 All these integrated ICCs apply their host countries laws as the default applicable law, unlike the SEZs that have their own legal system. In general, they also allow for a specialised appeal. International Chamber The well-established civil law jurisdictions France (Paris),158 Germany (Frankfurt,159 Hamburg,160 Stuttgart and Mannheim161) and the Netherlands (Amsterdam—the Netherlands Commercial Court (NCC))162 have recently opted to set up specialised international chambers within some of their already existing commercial courts, despite the use of the term commercial court in the case of the Netherlands.

153

Erie (2019). Sassen (2004). 155 Erpelding (2020a), para 39. 156 Although all these SEZ use English Common Law to some extent, there does not appear to be any clear UK diplomatic involvement. 157 I have opted for this concept so as not to confuse with the more general arbitral court. 158 Jeuland (2016). 159 Landgericht Frankfurt am Mein, Chamber for International Commercial Disputes, https:// ordentliche-gerichtsbarkeit.hessen.de/ordentliche-gerichte/lgb-frankfurt-am-main/lg-frankfurt-ammain/chamber-international. 160 Hamburger Justiz, English-Speaking Civil Division and Commercial Division at the Regional Court of Hamburg, https://justiz.hamburg.de/landgericht-hamburg/zustaendigkeit/. 161 Reguejo Isidro M, New Courts for International Commercial Disputes in Germany, 23 November 2020, https://eapil.org/2020/11/23/new-courts-for-international-commercial-disputes-in-germany/. 162 Oranje (2016) and Ernste and Vermeulen (2016). 154

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The cases must fall within the jurisdiction of the original commercial court, be it by forum clause or by default and parties must explicitly agree to the jurisdiction of these English-speaking chambers,163 although the Stuttgart and Mannheim courts appear to be more flexible as all cases that fall within their jurisdiction can be conducted in English if requested.164 Parties have a large degree of autonomy so far as applicable law is concerned and there are some limited exceptions to regular national procedural rules. English is allowed for the proceedings. However the verdicts of both the German and French chambers for example still have to be in German and French respectively. All courts also have English-speaking appeal options available. These ICCs are clearly not quite as novel as the other ICCs.165 None for example have foreign judges. Perhaps the strongest advantage of these European ICCs is that their judgments can very easily be enforced throughout the European Economic Area via EU-instruments, something not possible for the judgments of other ICCs. Still, the European ICCs clearly lag behind. Perhaps an EU-wide ICC could kickstart some legal innovation once more?166 Self-Standing ICC Singapore and China (CICC) have likewise established ICCs, which both can be categorised as “self-standing” ICCs. Both have already extensively been discussed and compared and I therefore limit myself to the bare essentials of each court.167 The Singapore International Commercial Court (SICC) was established in 2015 as a division of the High Court of Singapore. Its focus is on international commercial disputes and it therefore has different procedural rules and international judges.168 The SICC bench is comprised of domestic judges, namely from the Singapore Supreme Court, the Court of Appeal and the High Court and international judges, who are drawn from both the common and civil law world.169 Foreign lawyers can also practice before the SICC.170 Its jurisdiction is broad and easily assumed, and it can have cases referred to it as mentioned earlier.171 The CICC was established in 2018 as part of the Supreme People’s Court of the People’s Republic of China. The CICC’s establishment must be viewed from the lens of the Belt and Road Initiative (BRI).172 It aims to be a one-stop shop, by 163

For the NCC for example see: NCC, Jurisdiction and NCC agreement, https://www.rechtspraak. nl/English/NCC/Pages/jurisdiction-and-agreement.aspx. 164 Commercial Court Stuttgart & Mannheim, FAQ - what language is used, https://www. commercial-court.de/en/faq. 165 Rühl (2021), pp. 10–15. 166 Rühl (2021), pp. 15–16. 167 Huo and Yip (2019), Godwin et al. (2017), Yip (2016, 2019) and Sun (2020). 168 See Section 18A, Supreme Court of Judicature Act (Cap 322). 169 SICC, Judges, https://www.sicc.gov.sg/about-the-sicc/judges. 170 Yip (2019), para 3.3.3. 171 Yip (2019), para 3.1. 172 Sun (2020), pp. 46–48.

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offering an integrated arbitration and mediation option to parties.173 Unlike the SICC, it does not have any foreign judges serving, but it does have an international expert committee to advise the judges. Foreign lawyers likewise cannot directly appear before the CICC.174 The CICC’s jurisdiction is also more limited and complex: like the SICC, it can assume jurisdiction based on the mutual consent of both parties or by referral to it. However, a certain link with China is seemingly required for large cases and the requirement of an international element sometimes conflicts with the CICC’s goal of resolving BRI conflicts.175 The CICC also does not offer any appeal option.176 The SICC is the more innovative of the two; the CICC has rightfully been dubbed as “conservative innovation.”177 Both are closely related to an already existing court and thus, at first sight appear to be but a specialised chamber like for example the NCC. Yet, they are in my view a distinct category due to the fact that they have some international element in their court structure and because their jurisdiction is selfstanding, unlike the European ICCs, where the hosting court must have jurisdiction and both parties must agree to conduct the proceedings in English. If parties do not agree to conduct the proceedings in English, the regular host court will handle the case. This is not the case for the SICC and CICC. Both the SICC and CICC can in fact get cases referred to them. They are therefore self-standing; i.e. a step up from a mere international chamber. Blended Court-Tribunal ICC Another unique type of international commercial court that has mostly been overlooked can be found elsewhere in the Gulf region: the Bahrain Chamber for Dispute Resolution (the BCDR-AAA or “BCDR”).178 The BCDR is a fully integrated court-arbitration tribunal: it can act as an arbitration institute or as a court. Or to put it in the institution’s own words: “The BCDR is a unique mechanism that combines both an arbitration center and a specialized banking and international trade court, with one member of the panel a specialist in the field of the dispute rather than a judge”179 The BCDR thus has two distinct and separate components: a specialized court (the BCDR Court) and an international arbitration centre (BCDRAAA). They do share a secretariat, officials and offices, as well as a Board of Trustees and a Chief Executive.180

173

Sun (2020), p. 49. Chaisse and Qian (2021), pp. 20–21. 175 Chaisse and Qian (2021), pp. 18–19. 176 CICC, A Brief Introduction of China International Commercial Court, 28 June 2018, http://cicc. court.gov.cn/html/1/219/193/195/index.html. 177 Chaisse and Qian (2021), p. 17. 178 Legislative Decree No. (30) for the year 2009 with respect to the Bahrain Chamber for Economic, Financial and Investment Dispute Resolution (“BCDR Decree”) as amended by Legislative Decree No. (64) of 2014. Only two early articles mention the BCDR as an ICC: KarrarLewsley (2011) and Mainwaring-Taylor (2010). 179 SIFoCC, Bahrain, https://sifocc.org/countries/bahrain/. 180 Chapter 1 BCDR Decree. 174

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The BCDR court was established in 2009 to relieve the pressure on the local courts in handling large and complex commercial and financial cases. It has jurisdiction over (i) disputes falling originally within the jurisdiction of the Bahraini courts, where the claim exceeds 500,000 Bahrain Dinars (~ US$ 1.3 million) and at least one party is a Bahraini licensed financial institution, or in (ii) international commercial disputes.181 A dispute is considered as an international commercial dispute “if the location of one of the disputant parties or the place where a substantial part of the obligations of the commercial relationship is to be performed, or the location most closely connected with the dispute is outside the Kingdom.”182 The chambers handling cases are composed of three members. Two are judges from the highest Bahraini courts and a third is a lay judge, which is chosen from the BCDR roster of neutrals (mostly an expert or a lawyer which can also be a foreigner).183 In theory, the language can be freely chosen,184 although in practice English or Arabic seem to be preferred. The laws applied are regular Bahraini laws, unless agreed otherwise or if these go against Bahraini public order.185 The procedure is largely based on regular Bahraini procedural law, although it does appear to be more flexible.186 The BCDR court issues awards, yet, these awards are deemed to be judgments of a regular Bahraini court and enforceable as such.187 Appeals are restricted to cassation cases.188 The BCDR court as such appears to be a pure arbitral tribunal and to be very close to “statutory arbitration”.189 By September 30 2020, it already handled 225 cases, with a combined value of some 3,92 USD Billion.190 The BCDR does seem to especially put the spotlight on its arbitration side, the BCDR-AAA, which operates in partnership with the American Arbitration Association (AAA). A discussion of the BCDR’s arbitration largely falls out of the scope of this article but two interesting points can be made. First, the BCDR AAA seems to specifically target the French-speaking business world as its website as well as arbitration and mediation rules are available in French.191 This is unique in the Gulf region. Second, and perhaps the most innovative is that Bahrain also operates a “free arbitration zone”, which is not to be confused with the “free zone arbitration”

181

Art. 9 BCDR Decree. Art. 9 BCDR Decree. 183 Art. 1 BCDR Decree. 184 Art. 12 BCDR Decree. 185 Art. 11 BCDR Decree. 186 Art. 26 BCDR Decree. 187 Art 15 BCDR Decree. 188 Art. 13 BCDR Decree. 189 Karrar-Lewsley (2011), p. 85. 190 BCDRA AAA, The Bahrain Chamber for Dispute Resolution and the Bahrain Association of Banks Inaugural Seminar, 25 November 2018, https://www.bcdr-aaa.org/the-bahrain-chamber-fordispute-resolution-and-the-bahrain-association-of-banks-inaugural-seminar. More recent numbers could not be found as they are not split in the annual report of 2019. 191 BCDR, Informations générales, https://www.bcdr-aaa.org/fr/. 182

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of the aforementioned SEZ. The free arbitration zone finds its origin in Article 25 of the BCDR decree: (..) the dispute shall not be entitled to challenge on nullity base against the award issued by the Dispute Resolution Tribunal in accordance with Article (24) of this law, if the parties have agreed in writing to choose a foreign law concerning the dispute, and they shall not be entitled to challenge the award before Bahrain’s Courts, and that the challenge against the award shall be before the competent authority in another state.

This free arbitration zone entails that parties can safely conduct an arbitration with BCDR as its seat without any risk that Bahraini courts will interfere or annul the award once rendered if there is no link with Bahrain, provided that the parties follow Article 25.192 Only limited oversight remains. This free arbitration zone has recently undergone some slight changes.193 Belgium’s withdrawn plan to establish the Brussels International Business Court (BIBC) could arguably have been placed within this category too, as it shared many characteristics with the BCDR and arbitration, such as only allowing for a Cassation ground of appeal, a flexible procedure and the possibility of having foreign experts as judges.194 The link with Belgium is even further amplified as Belgium once also had such an arbitration free zone, but it was repealed after 15 years.195

4.3

ICCs in the Footsteps of the Mixed Courts: An Alternative to International Arbitration?

The establishment of ICCs seemingly points towards a “de-internationalisation” or “nationalisation” of international commercial dispute resolution.196 Certain states clearly want to claw back some of the lost “public” ground to “(semi-) private” international arbitration. Yet, at the same time they do not want a full take-over nor are they against internationalisation.197 They rather point to a different vision on International Economic Law. Both international arbitration and ICCs can undoubtedly continue to exist in parallel, with arbitration still offering more confidentiality and flexibility than ICCs. The question is if ICCs can truly become an alternative for

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Karrar-Lewsley (2011), pp. 86–89. Townsend and Bedrosyan (2017). 194 Wetsontwerp houdende oprichting van het Brussels International Business Court, 10 December 2018 (DOC 54 3072/011), https://www.dekamer.be/doc/flwb/pdf/54/3072/54k3072011.pdf, Arts. 7, 22, 37 & 60. 195 Karrar-Lewsley (2011), p. 87. 196 Dimitropoulos (2021), pp. 10–13. 197 DIFC Courts, DIFC Courts launches new Arbitration Working Group, 4 October 2020, https://www.difccourts.ae/media-centre/newsroom/difc-courts-launches-new-arbitration-work ing-group-1. 193

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investor-state disputes and sensitive international commercial disputes? A look at the experiences of the mixed courts can be enlightening here. As mentioned earlier (see Sect. 2.3), international commercial arbitration and international economic law as we now know it came into being after World War II. Its rise was at least partially linked to the withdrawal of extraterritorial rights. These rights were the legal basis for the mixed courts. Yet, mixed courts were also established to better deal with complex international commerce cases. Such complex cases had always existed, but due to the explosion of global trade in the late nineteenth and early twentieth century, a more standing solution was required: the mixed courts.198 Certain mixed courts fulfilled a key role in protecting western businesses and investments in their host states. They did however not automatically favour foreigners or allow themselves jurisdiction over all state affairs. For example, in the Tutankhamen case, a District Court of the Mixed Courts of Egypt had to rule on who had control over visitors to the recently discovered splendid tomb of Tutankhamen. The Egyptian government had revoked the permit for the site and thus Howard Carter filed a suit against the Egyptian government. The District Court held that it did have jurisdiction. The Court of Appeal refuted this and held that it had been a governmental administrative act and that the Mixed Courts therefore had no jurisdiction.199 Numerous other similar cases where handled by the Egyptian mixed courts, some of which caused great controversy.200 Such cases, coupled with their inbuilt discrimination—they could not handle pure local cases—led to the mixed courts to often being questioned by certain foreign and local actors in the host states themselves and by some western international lawyers.201 Yet, despite their colonial background and working, mixed courts were often more transparent and accessible than current day international (investment and commercial) arbitration. Van Harten observes that: “most investment arbitration is designed such that the filing of disputes is public knowledge yet the actual process of arbitration and its outcomes arise under various degrees of secrecy.”202 Similar things can be said of international commercial arbitration.203 This was not the case for mixed court cases, where all cases were dealt with at a public court hearings. Their decisions were made (semi-) publicly available and they were often actively discussed in the local newspapers and in legal literature.204 Likewise, mixed courts existed to protect all “privileged” (and in some cases all) foreigners and foreign companies and not only the major companies as is too often the case now.205 They

198

Jupille et al. (2013), pp. 129–131. Brinton (1930), pp. 230–231. 200 Erpelding (2020b), paras 56–57. 201 Erpelding (2020a), paras 33–37. 202 Hafner-Burton and Victor (2016). 203 Bungenberg and Alvarado Garzón (2019). 204 Erpelding (2020a), para 41. 205 Van Harten (2020), pp. 1–11. 199

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were seemingly easily accessible to locals and local business who could start and win cases against those same privileged foreigners and against major foreign companies.206 Crucial to this whole undertaking was the mixed judiciary of the mixed courts. By having judges of multiple nations, as well as local judges, the mixed courts mostly seem to have been balanced, professional and trusted institutions, despite their inherent discriminatory jurisdiction and set-up.207 The experiences of how mixed courts managed to work in a transparent manner with such a diverse set-up and in multiple languages, and how they gained and maintained such trust from both the local population and could likely help better inform our contemporary approaches to these ever-prevalent questions.208 By explicitly focussing on accessibility and transparency and by using the international business language that is English and/or the nomination of foreign judges, ICCs are following into the footsteps of mixed courts. It therefore seems likely that some of the controversial questions that surrounded mixed courts will most likely reappear. The position of the foreign judges for example could be questioned, as still happens with hybrid courts, as for example in Hong Kong now.209 Likewise, the questions of impartiality of and (dis)trust in the “foreign” judiciary, which also surrounded and surrounds the mixed and hybrid courts, are a global and recurring phenomenon: they are once again at the forefront of numerous discussions within the European Union following the Achmea judgment.210 ICCs will need to gain and hold the trust of foreign businesses by being able to independently rule and enforce decisions against their host states and major local companies. If ICCs manage to do so, then ICCs could change the face of international economic law. Numerous large international commercial and investment disputes could then be pulled back into “state” control. This of course remains to be seen due to the

206

See for example Azana Aleme v Singer Sewing Machine Co. Ltd, Supreme Imperial Court (Div 7) Civil Appeal No. 1240/56 (21 June 1964), Journal of Ethiopian Law, Vol. II, No.2, 220–227. In this case a Ethiopian businessman, Azana Aleme, who owned the Sheba Sewing Centre in appeal won a trademark case against the large international Singer Sewing Company. Such cases are difficult today due to the high costs involved with international commercial/investment arbitration. According to a Chartered Institute of Arbitrators (CIArb) 2011 survey of 254 arbitrations conducted between 1991 and 2010, the overall average cost of international arbitration was approximately GBP 1,580,000 for claimants, and approximately 12% less for respondents. See: CIArb, CIArb Costs of International Arbitration Survey 2011, https://www.international-arbitration-attorney.com/ wp-content/uploads/2017/01/CIArb-Cost-of-International-Arbitration-Survey.pdf, p. 13. 207 Hoyle (1987), p. 166. 208 For example: how to effectively balance the different nationalities of the judges so that there is no dominating power or danger for foreign interference? In this sense it is interesting that many mixed courts employed judges from smaller European States such as Belgium, the Netherlands, Switzerland and Portugal to combat exactly that. All mixed courts worked in multiple languages, something which today is quite rare in courts throughout the globe despite the fact that there are many more technological tools in existence. 209 Dziedzic (2020). 210 Kochenov and Lavranos (2021).

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novelty of ICCs, but an early example does seem to point to such a possible evolution on the long term. Dubai World, a Dubai government-owned company, was in dire financial problems as a result of the financial crisis of 2008.211 Therefore a special Tribunal was set up in 2009 by the Ruler of Dubai “to handle various matters pertaining to the settlement of the financial position of Dubai World and its subsidiaries.”212 The Tribunal is composed of three members, who are all foreign judges of the DIFC. The Tribunal itself was established in the DIFC, although it was explicitly not made a part of the DIFC court system, since the American experts involved in the establishment of the Tribunal “did not believe that English law adequately protected debtor companies, such as Dubai World.”213 It therefore finds it basis in a special decree.214 It uniquely applies regular (civil) UAE law, but is a common law court.215 Whilst this unique tribunal was established for a single problem (thereby drawing comparisons to the single issue mixed courts), it does point towards a model wherein foreign judges rule on sensitive state-related matters when foreign creditors and investors are involved.

5 Conclusion: A New Frontier in International Commercial Dispute Resolution? It might not be a coincidence that the GCC region was the region that gave birth to the concept of ICCs. As mentioned earlier, the legal system of the GCC is of course characterised by Islamic law (a key concept of which is personal jurisdiction), but also by the Egyptian legal system and profession, which itself was largely born from the practices and exchanges that took place in the Mixed Courts of Egypt. The GCC thus had operating hybrid courts well before the establishment of their ICCs, as mentioned earlier. It is also in the GCC that extraterritoriality and the English influence lingered on into the 1970’s, with the UAE and Qatar only gaining independence from the UK in 1971. In Qatar the aforementioned Adlia court continued to exist until 2003.216 The first move towards the establishment of the DIFC was in 2004.217 Many legal professionals in the region were and are trained in

211 Carney J, Even Dubai Says It Won’t Bail Out Dubai World, Business Insider, 30 November 2009, https://www.businessinsider.com/even-dubai-says-it-wont-bail-out-dubai-world-2009-11? r¼US&IR¼T. 212 Special Tribunal Related to Dubai World, About the Tribunal, https://www.dubaiworldtribunal. ae/about-the-tribunal/. 213 Krishnan and Koster (2016), p. 401. 214 Krishnan and Koster (2016), pp. 400–402. 215 Krishnan and Koster (2016), pp. 412–413. 216 Deehring (2020), p. 221. 217 Krishnan (2018), p. 1.

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the UK or hail from Egypt. The GCCs states were thus undoubtedly still familiar with the old dual system when the ruling family of the emirate of Dubai stated in 1998 that they wanted to make Dubai into one of the world’s leading financial centres. They sought advice from two top English law firms and by 2004 the law that eventually gave rise to the DIFC and the DIFC courts was promulgated.218 The extent to which the drafters were aware of historical precedents is unknown. A book dedicated solely to the establishment of the DIFC fails to mention any of this legal historical background.219 Regardless, this chapter has argued that ICCs are certainly not a completely novel concept. ICCs are but the most recent manifestation of the age-old idea of specialised legal institutions to deal with foreign merchants. The context in which they are being established is of course completely different, yet there seems to be a persistence of the same problems: (i) the unfamiliarity of and distrust towards foreign jurisdictions held by many foreigners and foreign companies and (ii) the inadequacy or unattractiveness of many local courts to efficiently handle complex international (commercial) cases. Much as French and the French legal system were the dominating language and legal system in previous centuries, English and English common law are the dominating language and legal system for our age. It is therefore no surprise that ICCs now all operate in English and that many are clearly influenced by or use English common law. Even the more innovative concepts such as the blend of arbitration and litigation—the “arbitral courts”—are in fact not completely novel, as can be seen in the working of the Mixed Arbitral Tribunals and the ad-hoc mixed consular courts before. The SEZs and their ICCs as discussed in the preceding sections have less power than the international zones of the past. Yet, ICCs are very much a bottom-up development: they are not forced upon the host states as was the case of many of the colonial mixed courts and international zones. There is seemingly no direct interference by foreign governments as in the past. They likewise do not flow from the principle of extraterritoriality, nor is their jurisdiction inherently discriminatory such as was the case for the mixed courts. It is certain states themselves that are actively establishing ICCs with broad jurisdiction in order to attract “legal business” and to become new hubs. ICCs are driven by the commercialisation of justice and competition between courts.220 These are both novel developments, as party autonomy was only accepted as a principle over the course of the twentieth century.221 Interestingly, certain ICCs are even conducting “judicial diplomacy” with each other and they sign memoranda of understanding in order for a smoother mutual recognition and enforcement of judgments.222 ICCs are

218

Krishnan (2018), p. 1. Krishnan (2018). 220 Wagner (2013) and Themeli (2018). 221 Mills (2018), p. 3. 222 DIFC Courts, Protocols & Memoranda, https://www.difccourts.ae/about/protocols-memoranda (last accessed 30 January 2021). 219

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thus a rapidly developing field. If ICCs can establish themselves as robust and independent courts, then foreign investors might opt to start investor-state proceedings or other delicate cases before an ICC. Examples such as the Dubai World Tribunal point to such a possibility. To conclude, these developments in general point towards an international legal system in which the centrality of states and international organisations will be ever more questioned. Perhaps we will see a return towards a more individual and system of international law once more?

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Mednicoff D (2019) Legal actors and sociopolitical change in the Arab Gulf. In: Lenze N, Schriwer C (eds) Participation culture in the Gulf: networks, politics and identity. Routledge, Abingdon Mills A (2018) Party autonomy in private international law. Cambridge University Press, Cambridge Morrison FL (2006) Condominium and Coimperium. Max Planck Encyclopedia of Public International Law Muslu Z (2014) Les tribunaux mixtes dans l ’Empire ottoman. In: Lauranson-Rosaz C, Deroussin D (eds) Mélanges en l’honneur du Professeur Nicole Dockès. Éditions La Mémoire du Droit, Paris, pp 641–652 Norwich JJ (1983) A history of Venice. Penguin Books, London Oranje DJ (2016) The coming into being of the Netherlands Commercial Court. TCR 4:122–126 Özsu U (2016) The Ottoman Empire, the origins of extraterritoriality, and international legal theory. In: Orford A, Hoffman F (eds) Oxford handbook of the theory of international law. Oxford University Press, Oxford, pp 124–137 Petricca F (2012) Filling the void: Shari’a in Mixed Courts in Egypt: jurisprudence (1876-1949). J Econ Soc Hist Orient 55:718–745 Requejo Isidro M (2019) International Commercial Courts in the litigation market, Max Planck Institute Luxembourg for Procedural Law, Research Paper Series No. 2019 (2) Requejo Isidro M, Hess B (2019) International adjudication of private rights: the Mixed Arbitral Tribunals in the Peace Treaties of 1919–1922. In: Michel Erpelding M, Hess B, Ruiz Fabri H (eds) Peace through law: the Versailles Peace Treaty and dispute settlement after World War I. Nomos, Baden Baden, pp 239–276 Reynolds B (2017) The Abu Dhabi global market - legislative framework, approach and methodology. JIBLR 32(5):181–199 Roberts A (2021) Introduction to the symposium on global labs of international commercial dispute resolution. AJIL Unbound 115:1–4 Ruckteschler D, Stooss T (2019) International Commercial Courts: a superior alternative to arbitration? J Int Arbitr 36(4):431–449 Rühl G (2021) The resolution of international commercial disputes – what role (if any) for continental Europe? AJIL Unbound 115:11–16 Sassen S (2004) The Global City: introducing a concept. Brown J World Aff 11(2):27–43 Sayre FB (1929) The passing of extraterritoriality in Siam. Am J Int Law 22(1):70–88 Schwietzke (2008) Tangier. Max Planck Encyclopedia of Public International Law Scolnicov A (2006) Religious law, religious courts and human rights within Israeli constitutional structure. Int J Const Law 4:732–740 Selby J, Stewart D (1984) Practical aspects of arbitrating claims before the Iran-United States Claims Tribunal. Int Lawyer 18(2):211–244 Sharar AA, Al Khulaifi M (2016) The courts in Qatar Financial Centre and Dubai International Financial Centre: a comparative analysis. Hong Kong Law J 46:529–556 Smith SE (2013) The way we do things back home: do expatriate judges preferentially cite the jurisprudence of their home countries? Oxford Univ Commonwealth Law J 13(2):331–345 Sohier A (1938) Droit de procédure du Congo belge. Larcier, Bruxelles Spiermann O (1999) The other side of the story: an unpopular essay on the making of the European Community legal order. Eur J Int Law 10(4):763–789 Stephens TB (1992) Order and discipline in China: the Shanghai Mixed Court, 1911-27. Washington University Press, Seattle Stevens K (2017) The law of the New Hebrides is the protector of their lawlessness: justice, race and colonial rivalry in the early Anglo-French Condominium. Law Hist Rev 35(3):595–620 Stuart GH (1955) The International City of Tangier. Stanford University Press, Redwood City Sun X (2020) A Chinese approach to international commercial dispute resolution: the China International Commercial Court. Chin J Comp Law 8(1):45–54 Themeli E (2018) The civil justice system competition in the European Union: great race of courts. Eleven International Publishing, Utrecht

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Theus W (2021) There and back again: from Consular Courts through Mixed Arbitral Tribunals to International Commercial Courts. In: Mixed Arbitral Tribunals, 1919–1930: an experiment in the international adjudication of private rights (forthcoming - Max Planck Institute for International, European and Regulatory Procedural Law) Townsend JM, Bedrosyan A (2017) Place of the arbitration, jurisdiction and applicable law: support for Bahrain’s free arbitration zone and current best practices. BCDR Int Arbitr Rev 4(2): 347–356 Van den Boogert MH (2005) Capitulations and the Ottoman legal system: qadis, consuls, and beratlıs in the 18th century. Brill, Leiden Van Harten G (2020) Fortifying inequality in the trouble with foreign investor protection. OUP, Oxford Vanderlinden J (1966) Civil law and common law influences on the developing law of Ethiopia. Buffalo Law Rev 16(1):250–266 Wagner BG (2013) Dispute resolution as a product: competition between civil justice systems. In: Eidenmüller H (ed) Regulatory competition in contract law and dispute resolution. Hart, Oxford, pp 349–435 Winklemann (2006) Mixed Courts, other (national courts with international participation). Max Planck Encyclopedia of Public International Law Wong DH (2014) The rise of the international commercial court: what is it and will it work? Civ Justice Q 33(2):205–227 Woolf CH (2019) A vision of the AIFC Court. In: Campbell-Holt C (ed) AIFC Court. Nur-Sultan Yip M (2016) The resolution of disputes before the Singapore International Commercial Court. Int Comp Law Q 65(2):439–473 Yip M (2019) The Singapore International Commercial Court: the future of litigation? Erasmus Law Rev 1:82–97

Willem Theus is a PhD Candidate and Teaching Assistant at the Institute for Private International Law at the KU Leuven. He holds a master degree in Middle Eastern Studies and one in Law from the KU Leuven. His PhD project focuses on the colonial-era international zones and their mixed courts and the current-day Special Economic Zones and their International Commercial Courts.

The Dejudicialization of International Economic Law Relja Radović

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Judicial Character . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Judicial Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Judicial Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Constrained Powers and the Judicial Character . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Regulation of Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Determination of Legal Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Interpretation of the Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract Over the past decades, the phenomenon of the “judicialization” and “proliferation of international courts and tribunals” has dominated international legal scholarship. This trend has also affected international economic law, and scholarship continues to pay significant attention to the continued proliferation of dispute settlement mechanisms, primarily in the investment and trade sectors. It is questionable, however, whether every third-party dispute resolution means should be deemed judicial. New dispute resolution mechanisms in the investment and trade sectors face constraints on their powers, for instance regarding the regulation of procedure, the determination of standing to be sued, and the interpretation of the applicable law. This chapter inquires whether the promotion of such constrains impairs the judicial character of these dispute settlement bodies. The chapter first reviews several basic notions behind the judicial character, namely the settlement of disputes, clarification and development of the law, independence, impartiality, and adversariality. It then assesses the promoted limits on the powers of courts and tribunals in the investment and trade sectors. The chapter concludes that the The views expressed in this chapter are strictly personal. R. Radović (*) BDK Advokati, Belgrade, Serbia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 309–334, https://doi.org/10.1007/8165_2021_71, Published online: 26 February 2022

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advancement of certain constraints on judicial powers in the field of international economic law marks a departure from the promotion of the judicial towards more administrative dispute settlement means.

1 Introduction The growing number of international courts and tribunals (ICTs) in the past few decades prompted the discussion about the “judicialization” of international law and “proliferation” of ICTs. The discussion involved several major topics. The first one was the increased willingness of states to allow for adjudication of international relations.1 The second topic addressed various differences among international judicial bodies and their specific attributes, such as different degrees of institutionalization and accessibility.2 The third topic concerned the ability of the international judiciary to deal with such increased submission to international adjudication, from both the procedural and substantive points of view.3 There were signs, however, that the process of judicialization should not be taken for granted.4 The history of international adjudication has witnessed various means of resistance of states towards ICTs, although they often failed to clearly distinguish between dissatisfactions with outcomes in specific cases or overall case records, on the one hand, and with the role of the judiciary in the international community, on the other.5 Scholars have noted that some questions of international relations have been removed from the competence of ICTs and started talking about possible “dejudicialization” of international politics.6 Still, the number of international judicial mechanisms has continued to increase, followed by more extensive regulation of their institutional and jurisdictional settings, which has encouraged legal scholarship to focus on the judicialization as a continuing process.7 Recent years have witnessed the continued proliferation of dispute settlement bodies in international economic law, specifically in the international investment and trade sectors, mainly through the conclusion of the so-called mega-regionals. The

1

See, for example, Alter (2014) and Helfer and Slaughter (2005). See, for example, Romano et al. (2014) and Keohane et al. (2000). 3 Procedurally, jurisdictions of multiple international courts and tribunals may overlap. Substantively, multiple international courts and tribunals can interpret and apply the same law. See, among many others, Bennouna (2012); Brown (2007), pp. 29–32; Dupuy and Viñuales (2014). 4 Alter et al. (2019), p. 458, state that ‘judicialization is not a one-way phenomenon’. 5 See, for example, Madsen et al. (2018). 6 Abebe and Ginsburg (2019). 7 See, for example, Follesdal and Ulfstein (2018). 2

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European Union (EU) has promoted an “investment court system” with several states,8 while other important new treaties have kept the arbitration system for the settlement of investor-state disputes.9 Mega-regionals have also increased the number of mechanisms for the settlement of inter-state trade disputes outside the World Trade Organization (WTO) framework, mainly by the means of arbitration.10 A leitmotif of these developments is an extended and more sophisticated regulation of dispute settlement mechanisms, in response to the questions appearing in previous judicial practices that states have found challenging. The scholarly focus on the number of ICTs and the varieties of international relations under their competence often ignores the question what it means to be “judicial”. The question is important given that not every third-party dispute settlement means is necessarily judicial. It is therefore necessary to dissect the judicial character in general and to assess whether specific dispute settlement mechanisms possess the general characteristics of a judicial body. New dispute settlement mechanisms in the investment and trade sectors, which are usually labelled “courts” and “tribunals”, face several constraints on their powers. The main examples relate to the regulation of procedure, the determination of standing to be sued, and the interpretation of the applicable law. This chapter examines possible repercussions of such constraints on the judicial character of these dispute settlement mechanisms. It first dissects the general meaning of the judicial character in international law, examining the major notions behind the judicial function and process, namely dispute settlement, clarification and development of the law, independence, impartiality, and adversariality. The chapter then examines, against these attributes, the constraints on judicial powers appearing in several regimes for the settlement of investment and trade disputes. It focuses on the three mentioned constraints and offers examples of their promotion in recent treaty regimes, which are notable on the global scale, however it does not aspire to conduct an exhaustive analysis of all treaties concluded within a defined period of time. The chapter sets the thesis that what makes a dispute settlement body “judicial” is not the function of settling disputes as such, but of doing so in a judicial process, allowing for an independent,

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Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, c. 8, s. F; EU-Singapore Investment Protection Agreement, 19 October 2018, not in force, c. 3; EU-Vietnam Investment Protection Agreement, 30 June 2019, not in force, c. 3. 9 Comprehensive and Progressive Agreement for Trans-Pacific Partnership, 8 March 2018, in force 30 December 2018, c. 9, s. B; Agreement Between the United States of America, the United Mexican States, and Canada, 30 November 2018 and 10 December 2019, in force 1 July 2020, annex 14-D. 10 Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, c. 29; EU-Singapore Free Trade Agreement, 19 October 2018, in force 21 November 2019, c. 14; EU-Vietnam Free Trade Agreement, 30 June 2019, in force 1 August 2020, c. 15 (all referring to an “arbitration panel”). See also Comprehensive and Progressive Agreement for Trans-Pacific Partnership, 8 March 2018, in force 30 December 2018, c. 28; Agreement Between the United States of America, the United Mexican States, and Canada, 30 November 2018 and 10 December 2019, in force 1 July 2020, c. 31 (both referring to a “panel”).

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impartial, and adversarial resolution of the entire dispute falling under the judicial competence, as well as for the judicial clarification and development of the law. The chapter concludes that the advancement of certain constraints on judicial powers in the field of international economic law marks a departure from the promotion of the judicial towards more administrative dispute settlement means. Section 2 dissects the judicial character and discusses the elements of the judicial function and process, searching for the general meaning of the judicial character in international law. Section 3 discusses the constraints on judicial powers appearing in recent regulation of investment and trade dispute settlement mechanisms, relating to the regulation of procedure, the determination of legal standing, and the interpretation of the applicable law. Section 4 concludes.

2 Judicial Character The notion of “judicial character”, despite the apparent abstraction and ambiguity, has produced tangible effects in the practice of ICTs. One can find it, for example, in the 1953 judgment of the International Court of Justice (ICJ) in the Nottebohm case, where the Court linked its power to rule on its own jurisdiction to this concept.11 The judicial character of specific dispute settlement bodies has been examined by the Court of Justice of the European Union (CJEU) (occasionally in respect of international bodies),12 and the European Court of Human Rights (ECtHR) (regularly in respect of domestic bodies).13 The notion of “judicial character” therefore has a substantive meaning in international law. This section dissects that meaning by discussing the main elements of the judicial function (Sect. 2.1) and judicial process (Sect. 2.2).

2.1

Judicial Function

It is not controversial that the central function of ICTs is to settle disputes (Sect. 2.1.1). In addition, they have another incidental but important function and that is the clarification and development of the law (Sect. 2.1.2).

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Nottebohm Case (Liechtenstein v. Guatemala) (Preliminary Objection) [1953] ICJ Reports 111, p. 120. 12 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, paras. 189–204. 13 See, for example, Stephens v. Malta (No. 1), App. No. 11956/07 (ECtHR, 21 April 2009), para. 95.

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Dispute Settlement

ICTs are mandated by disputing parties to settle their disputes. This is their direct and primary function. The ICJ has characterised the signature of an arbitration agreement as a definition of “the task of settling a dispute”.14 Older international legal scholarship has recognised the settlement of disputes as the primary function of the international judiciary.15 Needless to say, the judicial function of ICTs focuses on the settlement of disputes on the basis of the law, although in theory they can be mandated to apply non-legal principles.16 The attitude has persisted over time, and despite the discoveries of other judicial functions,17 ICTs repeat from time to time that they are not mandated to exercise other tasks, such as to make law. The ICJ has thus maintained that it is not mandated to legislate and that it can exercise only a “normal judicial function of ascertaining the existence or otherwise of legal principles and rules”, even in the non-contentious context.18 The Tribunal in the Romak v. Uzbekistan, an investment arbitration, made a bolder statement: Ultimately, the Arbitral Tribunal has not been entrusted, by the Parties or otherwise, with a mission to ensure the coherence or development of “arbitral jurisprudence.” The Arbitral Tribunal’s mission is more mundane, but no less important: to resolve the present dispute between the Parties in a reasoned and persuasive manner, irrespective of the unintended consequences that this Arbitral Tribunal’s analysis might have on future disputes in general. It is for the legal doctrine as reflected in articles and books, and not for arbitrators in their awards, to set forth, promote or criticize general views regarding trends in, and the desired evolution of, investment law.19

In contrast, the WTO Appellate Body is well-known for promoting the law-making effect of adopted reports, although without considering them formally binding.20 Early in that endeavour, the Appellate Body acknowledged the primacy of the dispute settlement function over judicial law-making, by noting that adopted

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Arbitral Award of 31 July 1989 (Guinea-Bissau v. Senegal) (Judgment) [1991] ICJ Reports 53, para. 49. 15 Lauterpacht (1958), pp. 3–5; Scobbie (1997), pp. 277–278. 16 It is well-known that disputing parties can empower the ICJ to decide a case ex aequo et bono. Statute of the International Court of Justice, 26 June 1945, in force 24 October 1945, 3 Bevans 1153, art. 38(2). See also Amerasinghe (2015), pp. 687–689. 17 See, for example, von Bogdandy and Venzke (2013). 18 Legality of the Threat or Use of Nuclear Weapons (Advisory Opinion) [1996] ICJ Reports 226, para. 18. 19 Romak S.A. (Switzerland) v. The Republic of Uzbekistan, PCA Case No. AA280, Award (26 November 2009), para. 171. 20 See, for example, Appellate Body Report, United States – Final Anti-dumping Measures on Stainless Steel from Mexico, WT/DS344/AB/R, adopted 20 May 2008, AB-2008-1, paras. 158–162.

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reports “are not binding, except with respect to resolving the particular dispute between the parties to that dispute”,21 and that attitude has been maintained.22 The judicial function to settle disputes involves several implications securing its proper exercise. The most important one is that ICTs cannot resolve fictitious disputes. ICTs have several legal concepts and rules at their disposal safeguarding their judicial function from being compromised in this respect. First and foremost, ICTs have the power to rule on the legal standing of disputing parties. International legal scholarship usually observes this concept narrowly, as a one-sided notion concerning the ability of a party to make a claim.23 However, a broad view on legal standing as a two-sided concept, involving both the standing to sue and to be sued, is more fruitful, especially by analogy to the civil law concept of “active and passive legitimation”.24 In fact, the issue of the standing to be sued appeared before the ICJ in the Monetary Gold case. Although the respondents were named in accordance with the underlying jurisdictional instrument, the Court found that Italy’s claim concerned the lawfulness of conduct (specifically legislation) towards Italy of a third state (Albania).25 The Court held that “[t]o go into the merits of such questions would be to decide a dispute between Italy and Albania”.26 On the one hand, the Court linked this issue to the consensual basis of its jurisdiction, holding that it could not rule on the lawfulness of a third state’s conduct, forming the subject-matter of the dispute, without its consent.27 This is a straightforward point, although authors have challenged it on the ground that it contradicts the Court’s duty towards the consenting parties.28 On the other hand, the principle that an improper naming of the respondent impedes adjudication also relates to the broader issue of legal standing of disputing parties. This was the crux of the Declaration of Sir Arnold McNair:

21 Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/ R, and WT/DS11/AB/R, adopted 1 November 1996, AB-1996-2, p. 14. 22 Appellate Body Report, United States – Final Anti-dumping Measures on Stainless Steel from Mexico, WT/DS344/AB/R, adopted 20 May 2008, AB-2008-1, para. 158. 23 For example, Tams (2005), pp. 25–40; Gaja (2018). 24 Although active/passive legitimation pertains to the substance of claims, it has procedural effects such as on the naming of parties. See Maritimo de Madeira – Futebol SAD v. Desportivo Brasil Participacoes LTDA, CAS Case No. 2013/A/3278, Award (2 June 2014), paras. 54–63. See also, for the link to “direct, personal and actual interest”, Paolo Barelli v. Fédération Internationale de Natation, CAS Case Nos. 2016/A/4924 and 2017/A/4943, Arbitral Award on the Issue of Standing (28 June 2017), paras. 85–105. 25 Monetary Gold Removed from Rome in 1943 (Italy v. France, UK, and USA) (Preliminary Question) (Judgment) [1954] ICJ Reports 19, pp. 30–33. 26 Monetary Gold Removed from Rome in 1943 (Italy v. France, UK, and USA) (Preliminary Question) (Judgment) [1954] ICJ Reports 19, p. 32. 27 Monetary Gold Removed from Rome in 1943 (Italy v. France, UK, and USA) (Preliminary Question) (Judgment) [1954] ICJ Reports 19, pp. 32–33; East Timor (Portugal v. Australia) (Judgment) [1995] ICJ Reports 90, paras. 28–29, 34. 28 See in this respect Mollengarden and Zamir (2021).

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The Court is asked to adjudicate upon an Italian claim against Albania arising out of an Albanian law of January 13th, 1945. Albania is therefore an essential respondent. But these proceedings are not brought against Albania, nor does the Application name Albania as a respondent, although there is nothing in the Washington Statement which could preclude the Italian Government from making Albania a respondent. I cannot see how State A, desiring the Court to adjudicate upon its claim against State B, can validly seise the Court of that claim unless it makes State B a respondent to the proceedings—however many other States may be respondents.29

Legal standing concerns the substance of claims, specifically the holders of the rights and obligations engaged by the alleged facts, and therefore logically belongs to the merits, but it also has procedural repercussions.30 In the international judicial context, it has fallen in a shadow of party consent as an appealing issue specific to international law.31 The centrality of consent in the formulation of the Monetary Gold principle has even prompted the argument that the extent of application of this principle varies among ICTs given their different perception of the importance of consent.32 My view is that the Monetary Gold principle, as formulated by the ICJ, constitutes a procedural articulation of a meta principle requiring the true parties to the dispute to be named,33 which could be articulated differently in a non-consensual jurisdictional setting.34 In fact, legal standing is framed as an issue of admissibility of claims before the ICJ itself when party consent is undisputed.35 One investment tribunal has convincingly dissected the Monetary Gold principle into three elements, namely consent, indispensability, and due process rights of a

29 Monetary Gold Removed from Rome in 1943 (Italy v. France, UK, and USA) (Preliminary Question) (Declaration of Sir Arnold McNair) [1954] ICJ Reports 19, p. 35. 30 The ICJ has referred to the “antecedent character” of legal standing. See South West Africa (Ethiopia v. South Africa; Liberia v. South Africa) (Second Phase) (Judgment) [1966] ICJ Reports 6, paras. 4–6. 31 Certain Phosphate Lands in Nauru (Nauru v. Australia) (Preliminary Objections) [1992] ICJ Reports 240, paras. 48–55 (dismissing the objection that the nature of responsibility required joint respondents and stating that the issue of joint and several liability belonged to the merits, and then focusing on the consent-related issues). 32 Paparinskis (2020), pp. 76–79. 33 See also Rosenne (2006), p. 546 (“The existence of this limitation on the Court’s jurisdiction following from the absence from the litigation of essential parties, as a principle of general international law and as a feature of the law of international judicial procedure, is not open to question.”); and Crawford (2013), p. 663 (the Monetary Gold principle and the concept of indispensable parties are in practice closely related). 34 Certain Phosphate Lands in Nauru (Nauru v. Australia) (Preliminary Objections) [1992] ICJ Reports 240, para. 53 (“National courts, for their part, have more often than not the necessary power to order proprio motu the joinder of third parties who may be affected by the decision to be rendered; that solution makes it possible to settle a dispute in the presence of all the parties concerned. But on the international plane the Court has no such power. Its jurisdiction depends on the consent of States and, consequently, the Court may not compel a State to appear before it, even by way of intervention.”). 35 Questions relating to the Obligation to Prosecute or Extradite (Belgium v. Senegal) (Judgment) [2012] ICJ Reports 422, paras. 64–70.

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third party.36 It is the second element, the indispensability of a party, which reveals the ability of ICTs to look into the substance of claims and the issues of legal standing. This is not only an ability but also necessity, as ICTs are often required to determine whether a third party is indispensable in a dispute. The ICJ and one WTO panel, for example, have denied the existence of the concepts of “indispensable” or “essential” parties in the written law, but effectively applied them to the facts.37 The alleged absence of the requirement for participation of all essential parties in the written law38 is not decisive, because the central question is whose dispute the court is asked to resolve in substance, which renders an overly reliance on procedural rules redundant. Instead, determination of standing requires an inquiry into a variety of legal and factual factors.39 It would therefore be naïve to believe that ICTs cannot see at a preliminary stage behind the formalities of consent into the structure of claims, the intensity of the engaged interests, and the indispensability of certain parties. The principle is that discretionary naming of the respondent, or for that matter of any party, is not permissible. The ICJ’s Oil Platforms test serves the same aim in its own way. It instructs ICTs to ensure at the jurisdictional stage that the alleged facts are capable of triggering an obligation binding the disputing parties.40 It therefore avoids the resolution of fictitious disputes by setting out the requirement that disputes must have a sufficient legal and factual connection between parties. The test has been widely followed, including by investment arbitral tribunals.41 Other general rules safeguarding the integrity of the ICTs’ dispute settlement function exist, such as that they should not

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Chevron Corporation and Texaco Petroleum Company v. The Republic of Ecuador, PCA Case No. 2009-23, Third Interim Award on Jurisdiction and Admissibility (27 February 2012), paras. 4.61–3. 37 Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. United States of America) (Jurisdiction and Admissibility) [1984] ICJ Reports 392, para. 88 (finding that no other state was truly indispensable in the process); Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/R, adopted 19 November 1999, 99-2081, para. 9.11 (finding that the European Communities were not an essential party). 38 Crawford (2013), p. 662. 39 See, for example, Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, AB-1997-3, paras. 132–138. 40 Oil Platforms (Islamic Republic of Iran v. United States of America) (Preliminary Objection) (Judgment) [1996] ICJ Reports 803, para. 16; Oil Platforms (Islamic Republic of Iran v. United States of America) (Preliminary Objection) (Separate Opinion of Judge Higgins) [1996] ICJ Reports 847, para. 33. 41 See, for example, SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 January 2004), para. 26.

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examine moot disputes42 and abusive claims.43 Some ICTs have gone even beyond preliminary inspections of claims and asserted the power to change their substance if the alleged facts correspond better with uninvoked legal obligations.44 All these rules, although involving different factual specificities surrounding claims, are permeated by one crucial principle, namely that ICTs can adjudicate only genuine disputes, involving true disagreements between true parties.45 The judicial dispute settlement function stands at the crux of the concept of inherent powers of ICTs.46 The power to determine the genuine dispute and its true parties, and to take appropriate procedural measures, is one such inherent power.47 Another inherent power relevant for this discussion is the power of ICTs to regulate their procedure.48 Judge Shahabudeen put it in bold terms, when holding that there is the inherent competence of a judicial body, whether civil or criminal, to regulate its own procedure in the event of silence in the written rules, so as to assure the exercise of such jurisdiction as it has, and to fulfil itself, properly and effectively, as a court of law. Without that residual competence, no court can function completely.49

The inherent power of ICTs to regulate their own procedure has been endorsed by investment arbitral tribunals50 and played a crucial role in the establishment of the WTO Appellate Body’s independent authority.51 Of course, such regulation is possible only when the given procedural rules raise the need for further regulation. Another important limitation is that ICTs cannot regulate their own procedure by

42 Case concerning the Northern Cameroons (Cameroon v. United Kingdom) (Preliminary Objections) (Judgment) [1963] ICJ Reports 15, p. 38; Nuclear Tests (Australia v. France) (Judgment) [1974] ICJ Reports 253, paras. 55–62. 43 Immunities and Criminal Proceedings (Equatorial Guinea v. France) (Preliminary Objections) (Judgment) [2018] ICJ Reports 292, para. 150. 44 Şerife Yiğit v. Turkey, App. No. 3976/05 (ECtHR, 2 November 2010), para. 52. 45 See also Nuclear Tests (Australia v. France) (Judgment) [1974] ICJ Reports 253, para. 57 (“. . . the Court can exercise its jurisdiction in contentious proceedings only when a dispute genuinely exists between the parties. In refraining from further action in this case the Court is therefore merely acting in accordance with the proper interpretation of its judicial function.”). 46 Brown (2006), pp. 228–229. 47 See, in general, Case concerning the Northern Cameroons (Cameroon v. United Kingdom) (Preliminary Objections) (Judgment) [1963] ICJ Reports 15, p. 29; Nuclear Tests (Australia v. France) (Judgment) [1974] ICJ Reports 253, para. 23. 48 Brown (2006), pp. 215–217. 49 Joseph Kanyabashi v. Prosecutor, ICTR-96-15-A, Decision on the Defence Motion for Interlocutory Appeal on the Jurisdiction of Trial Chamber I, Dissenting Opinion of Judge Shahabuddeen (3 June 1999), p. 17 (references omitted). 50 Abaclat and others v. The Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (4 August 2011), para. 521; United Parcel Service of America Inc v. Government of Canada, UNCITRAL ad hoc arbitration, Decision of the Tribunal on Petitions for Intervention and Participation as Amici Curiae (17 October 2001), para. 38. 51 Ruiz Fabri (2016).

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virtue of an inherent power if this possibility is expressly excluded or if it would be inconsistent with their constitutive instruments and thereby defined procedures.52

2.1.2

Clarification and Development of the Law

The secondary, but still important, function of ICTs is the clarification and development of the law. This function has been recognised from early times of international adjudication,53 and much has been written about it over the years, touching upon literally every corner of international law. Today, some authors see law development as a crucial function of ICTs under public international law, in opposition to the dispute settlement focus under private international law.54 A strict distinction between dispute settlement and law development seems artificial for several reasons. On the one hand, clarification and development of the law requires disputes to discover regulatory unclarities and gaps, as well as claims to trigger judicial action. On the other, it is hard to imagine that disputing parties would confer the power to adjudicate on a tribunal without any expectation that its decision could clarify/develop the law. In the end, whether a decision successfully settles a dispute or clarifies/develops the law, or both, pertains to ex post usages of the same product by two different groups (disputing parties and the legal community, respectively). It therefore seems more likely that dispute resolution and law development are not competing but complementary functions of ICTs.55 In short, the settlement of disputes constitutes their primary and explicit task, while the clarification and development of the law constitutes their secondary and implicit task. Given these considerations, the law development function of ICTs can be implied and does not need an explicit mandate.56 But formalisation of the function is possible. The WTO system did so, although with a caveat regarding the scope of obligations: The Members recognize that [the WTO dispute settlement mechanism] serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rulings of the [Dispute Settlement Body] cannot add to or diminish the rights and obligations provided in the covered agreements.57

A semi-formal law-making effect of the WTO bodies extends even outside the WTO, insofar as newer treaties oblige arbitration panels, notably in both trade and

52

Brown (2006), pp. 239–242. Lauterpacht (1958), pp. 5–6. 54 Roberts (2013), pp. 61–62. 55 See also Grant Cohen et al. (2018), pp. 15–16. 56 Shany (2014), p. 19. 57 Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 to the Agreement Establishing the World Trade Organization, 15 April 1994, in force 1 January 1995, 1869 UNTS 401, art. 3(2) (emphasis added). 53

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inter-state investment fields, to observe interpretations made by panels and the Appellate Body in adopted reports.58 In contrast, investor-state arbitration has not faced similar rules producing a quasi-binding effect of previous decisions. This is indeed less possible due to its dispersed regulation, but it is notable that similar provisions are equally absent in newer treaties institutionalizing investor-state dispute settlement. Putting on one side the debate about the desirability of following previous decisions in either ad hoc or institutionalized contexts,59 at the end of the day the law development function of ICTs is a question of fact, not prescription, simply because the use of precedents is inevitable regardless of the system in question.60

2.2

Judicial Process

What makes a judicial process is a broad topic. This section discusses only three of its crucial features, namely independence (Sect. 2.2.1), impartiality (Sect. 2.2.2), and adversariality (Sect. 2.2.3).

2.2.1

Independence

Scholars regard independence as one of the key marks of judicialization in international law.61 ICTs have gone further and qualified independence as a key element of the judicial character. According to the CJEU, “[t]he requirement of independence is, for its part, inherent in the task of adjudication”,62 while the ECtHR considers

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Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 29.17; EU-Vietnam Investment Protection Agreement, 30 June 2019, not in force, art. 3.21; EU-Vietnam Free Trade Agreement, 30 June 2019, in force 1 August 2020, art. 15.21; EU-Singapore Investment Protection Agreement, 19 October 2018, not in force, art. 3.42; EU-Singapore Free Trade Agreement, 19 October 2018, in force 21 November 2019, art. 14.18. 59 Some authors argue that the law-making function of ICTs is better achieved through competition in persuasiveness rather than accepting previous decisions as settled rules. Sourgens (2014), pp. 223–245. 60 Thomas (2005), pp. 141–144. Although it can be theorised that the development of international law and the use of precedents are different topics, they are inherently related in practice, insofar as precedents serve as a sort of a vehicle for the development of international law. See Shahabuddeen (1996), pp. 67–96. 61 Alter et al. (2019), p. 451; Romano (2011), pp. 253–254; Amerasinghe (2015), p. 689. But cf., for the argument that dependent tribunals are more successful, Posner and Yoo (2005), and for its rebuttal, Helfer and Slaughter (2005). 62 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, para. 202.

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judicial independence implicit in the term “court” (French “tribunal”) under the European Convention on Human Rights (ECHR).63 Independence is often equated with formal independence, in the sense that adjudicators “do not officially represent states and must apply preexisting rules and procedures to the disputes that arise”.64 But a less formal view is necessary, because judicial independence concerns the integrity of the decision-making process and the “ability to develop opinions independent of the preferences of other political actors”,65 which is also labelled “judicial autonomy”.66 The CJEU put it in the following terms: The first aspect [of the requirement of independence], which is external in nature, presupposes that the body concerned exercises its functions wholly autonomously, without being subject to any hierarchical constraint or subordinated to any other body and without taking orders or instructions from any source whatsoever, thus being protected against external interventions or pressure liable to impair the independent judgment of its members and to influence their decisions.67

It is therefore settled that independence protects adjudication against external influences on decision-making. In this respect, independence requires a set of guarantees for adjudicators, such as against removal from office and of a decent remuneration.68 What should be accepted more generally is that independence also protects adjudication against internal influences. It is intrinsic to the arbitration context to see independence as pertaining to actual or objective (as opposed to subjective) relationships with disputing parties or someone related to them.69 A combined view on independence which takes into account both external and internal objective influences is important, because states usually appear in a double capacity in the context of international economic law adjudication. First, as treaty parties, states can be interested in influencing the adjudicative mechanisms resolving disputes under their treaties. Second, as disputing parties, states can be interested in influencing the adjudicative mechanisms resolving disputes in which they are parties.

63

Ali Osman Özmen v. Turkey, App. No. 42969/04 (ECtHR, 5 July 2016), paras. 85, 87. Alter et al. (2019), p. 451. See also Romano (2011), pp. 254, 261–263. 65 Staton and Moore (2011), p. 559. 66 See also Brinks and Blass (2017), pp. 299, 306–311; and, for the establishment of independence of the WTO Appellate Body, Howse (2016). 67 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, para. 202. 68 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, para. 202. 69 Cleis (2017), pp. 20–21. 64

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Impartiality

The requirements of independence and impartiality are usually considered interlinked. On the one hand, scholarship considers that the aim of independence is to provide conditions for impartiality, because “the more judges are free from dependence on or control by any single individual, institution or interest, the more likely they are to be impartial”.70 It is also said that impartiality and independence have common goals to secure the equality of arms and fair process.71 On the other hand, ICTs have considered the two notions as, either separate or integrated, implied judicial requirements. The ECtHR regards the requirement of impartiality as implicit in the term “court” (French “tribunal”) under the ECHR, next to independence.72 According to the CJEU, impartiality is the second aspect of the requirement of independence, and therefore also inherent in the judicial process: The second aspect, which is internal in nature, is linked to impartiality and seeks to ensure that an equal distance is maintained from the parties to the proceedings and their respective interests with regard to the subject matter of those proceedings. That aspect requires objectivity and the absence of any interest in the outcome of the proceedings apart from the strict application of the rule of law . . .73

In contrast to independence as defined above, which protects adjudication against internal influences based on objective relationships, impartiality targets internal influences based on subjective relationships. When it comes to investor-state arbitration specifically, impartiality has been defined as “the absence of a subjective, internal predisposition towards one of the parties and their argument”.74 Maintaining an equal distance from the parties is particularly important in this context, because different capacities of disputing parties (state and private person) can trigger different interests and predispositions on the part of adjudicators. An adjudicator might have sympathies towards private litigants, for either noble or ignoble reasons, but also towards states, again for whatever reasons, especially considering that states are the ultimate employers of permanently sitting judges. Admittedly, to what extent such subjective factors are able or likely to affect judicial decision-making is difficult to assess, for which reason the test of impartiality is usually objectivised by requiring the appearance of bias, and not the actual bias, for disqualification.75 But if objective factors are taken into account as indicators of subjective interests and 70

Brinks and Blass (2017), p. 308. Cleis (2017), p. 22. 72 Ali Osman Özmen v. Turkey, App. No. 42969/04 (ECtHR, 5 July 2016), paras. 85, 87. 73 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, para. 203. 74 Cleis (2017), p. 21. 75 See Blue Bank International & Trust (Barbados) Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/20, Decision on the Parties’ Proposals to Disqualify a Majority of the Tribunal (12 November 2013). paras. 59–60 (“Articles 57 and 14(1) of the ICSID Convention do not require proof of actual dependence or bias; rather it is sufficient to establish the appearance of dependence 71

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predispositions, framework regulations should not tie adjudicators to serving the interests of a category of parties, even if those are states in their capacity as treatymakers.

2.2.3

Adversariality

The comparison between adversarial and inquisitorial judicial proceedings is usually made in the context of domestic criminal laws.76 Thus, the ECtHR considers that the “judicial character” of domestic bodies reviewing the lawfulness of deprivation of liberty requires adversarial proceedings and ensuring the equality of arms.77 However, adversariality also finds relevance in civil and international law contexts. The CJEU has considered it as a marker of the exercise of the judicial function.78 The principle essentially instructs that two disputing parties compete against each other to prove the facts and persuade the adjudicator to apply their view on the law. Adversariality is said to characterise judicial and arbitral proceedings, in contrast to the mechanisms that resolve disputes by reliance on party consent.79 Specifically, in investor-state arbitration adversariality is related to the questions of the equality of arms between disputing parties of different capacities.80 The equality of arms and the ability of disputing parties to present their case is also guaranteed by legal frameworks governing arbitrations,81 threatening the awards made in violation of these guarantees with non-recognition or invalidity.82

or bias. . . . The applicable legal standard is an “objective standard based on a reasonable evaluation of the evidence by a third party”.” [references omitted]). 76 See, for example, Corrado (2009). 77 A and others v. The United Kingdom, App. No. 3455/05 (ECtHR, 19 February 2009), paras. 203–204; Reinprecht v. Austria, App. No. 67175/01 (ECtHR, 15 November 2005), para. 31(b)–(c). 78 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, para. 197. 79 Rajah SC (2017). 80 Wälde (2010a, b). 81 UNCITRAL Model Law on International Commercial Arbitration of 1985, with amendments as adopted in 2006, art. 18, https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/ uncitral/en/19-09955_e_ebook.pdf (last accessed 15 August 2021) (“The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case.”). 82 Through the grounds for non-recognition/enforcement and setting aside/annulment. See Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, in force 7 June 1959, 330 UNTS 38, art. V(1)(b); UNCITRAL Model Law on International Commercial Arbitration of 1985, with amendments as adopted in 2006, art. 34(2)(a)(ii), https://uncitral.un.org/sites/ uncitral.un.org/files/media-documents/uncitral/en/19-09955_e_ebook.pdf (last accessed 15 August 2021); Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, 18 March 1965, in force 14 October 1966, 575 UNTS 159, art. 52(1)(d) (“that there has been a serious departure from a fundamental rule of procedure”).

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Of course, no judicial system is absolutely adversarial or absolutely inquisitorial.83 What is important is the contradiction in the judicial process, meaning that arguments and allegations of disputing parties are confronted and that nothing is taken into consideration without giving the opportunity to the opposing party to respond. While some authors find the principle of contradiction in both types of systems either implicitly (in common law adversarial systems) or explicitly (in continental inquisitorial systems after certain reforms),84 others equate contradiction with adversariality.85 Surely the exact boundary between the adversarial and the inquisitorial is hard to determine, primarily due to the trends towards the immixture of the two systems. However, their basic sketches remain, and it would be difficult to argue that the standard international judicial and arbitral process is not adversarial in terms of requiring disputing parties to confront and compete for persuasion of the adjudicators.

3 Constrained Powers and the Judicial Character This section discusses three types of constraints on judicial powers promoted in newer treaties concerning the settlement of investment and trade disputes, specifically regarding the regulation of procedure (Sect. 3.1), the determination of legal standing (Sect. 3.2), and the interpretation of the applicable law (Sect. 3.3). The discussed constraints are trending, in the sense that they are increasingly accepted in leading treaty regimes around the globe, however that does not mean that they are necessarily innovative. Again, this is not an exhaustive analysis of recently concluded treaties, but an overview of notable examples.

3.1

Regulation of Procedure

International economic law witnesses a trend of limiting the power of ICTs to regulate their own procedure. The Comprehensive Economic and Trade Agreement Between Canada and the European Union (CETA) empowers the Committee on Services and Investment to “adopt and amend rules supplementing the applicable dispute settlement rules, and amend the applicable rules on transparency” with binding force on an investment tribunal.86 It also empowers the CETA Joint Committee to adopt rules on the functioning of the Appellate Tribunal, which

83

Jolowicz (2003). Jolowicz (2003), p. 295. 85 Mrčela (2017), p. 18. 86 Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.44(3)(b). 84

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power the CETA Joint Committee has already exercised.87 Similar provisions exist in the EU-Singapore Investment Protection Agreement (IPA)88 and the EU-Vietnam IPA.89 The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) establishes the right of a commission to establish and amend the rules of procedure for trade disputes.90 The United States–Mexico–Canada Agreement (USMCA) empowers a commission generally to “adopt and update the Rules of Procedure and Code of Conduct applicable to dispute settlement proceedings”.91 The empowerment of treaty bodies to regulate judicial procedure restricts the inherent power of ICTs to regulate their own procedure which stems from their dispute settlement function. It is true that this inherent power should be exercised by courts and tribunals only when facing a regulatory gap in the existing procedural rules. However, the prevailing paradigm in international law has so far been that pre-defined procedures are not controlled at the level of states parties to constitutive treaties but at a level closer to adjudicators.92 An exception is the International Criminal Court, which conditions the adoption of the Rules of Procedure and Evidence with a qualified two-thirds majority of the members of the Assembly of States Parties.93 Given the specific nature of that court and its procedures, the deviation from the general paradigm is understandable, but even in that context judges are given the opportunity to fill procedural gaps in the event of emergency.94 In the economic law context, such deviation is not justified. Raising the regulation of

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Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.28(7); Joint Committee Decision of 29 January 2021, https:// trade.ec.europa.eu/doclib/press/index.cfm?id¼2240 (last accessed 15 August 2021). 88 EU-Singapore Investment Protection Agreement, 19 October 2018, not in force, art. 4.1(4)(g). 89 EU-Vietnam Investment Protection Agreement, 30 June 2019, not in force, art. 4.1(5)(b). 90 Comprehensive and Progressive Agreement for Trans-Pacific Partnership, 8 March 2018, in force 30 December 2018, art. 27.2(1)(f). 91 Agreement Between the United States of America, the United Mexican States, and Canada, 30 November 2018 and 10 December 2019, in force 1 July 2020, art 30.2(1)(e). 92 Statute of the International Court of Justice, 26 June 1945, in force 24 October 1945, 3 Bevans 1153, art. 30(1); Convention for the Protection of Human Rights and Fundamental Freedoms, as Amended by Protocols Nos. 11 and 14, 4 November 1950, in force 3 September 1953, Protocol No. 11 in force 1 November 1998, Protocol No. 14 in force 1 June 2010, 213 UNTS 222, art. 25(d). In the ICSID context, the Arbitration Rules are adopted by the Administrative Council which is composed of the representatives of states, but in this scenario the choice of disputing parties is controlling: Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, 18 March 1965, in force 14 October 1966, 575 UNTS 159, arts. 6(1)(c), 44. WTO panels should follow pre-defined procedural rules “unless the panel decides otherwise after consulting the parties to the dispute”, while the Appellate Body draws up its own working procedures: Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 to the Agreement Establishing the World Trade Organization, 15 April 1994, in force 1 January 1995, 1869 UNTS 401, arts. 12(1) and 17(9). 93 Rome Statute of the International Criminal Court, 17 July 1998, in force 1 July 2002, 2187 UNTS 90, art. 51(1). 94 Rome Statute of the International Criminal Court, 17 July 1998, in force 1 July 2002, 2187 UNTS 90, art. 51(3).

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procedure closer to states parties signals that the inherent power of procedural selfregulation is incompatible with broader legislative frameworks, or in any event should be exercised with restraint. Furthermore, the EU’s approach empowering committees to supplement “dispute settlement rules”, as opposed to “arbitration” or “procedural” rules,95 can open a way for different interpretations, some of them possibly blurring the distinction between the procedural and the jurisdictional, and possibly affecting jurisdictional rules, which are inextricably related to (disputing) party consent.96 There is no such practice so far,97 and this suspicion cannot be verified. What can be predicted is that an issue that appears with interpretive statements will be relevant here too, namely that an action by states parties or a treaty committee cannot amount to an amendment of the treaty text outside adequate procedures.98

3.2

Determination of Legal Standing

Treaties concluded by the EU in particular promote the limitation of the judicial power to rule on legal standing and the introduction of the administrative determination of respondents in the field of investment disputes. As seen in Sect. 2.1.1 above, the questions of legal standing, more specifically the standing to be sued, and disputing party status are closely linked. The CETA provides that the EU shall determine whether the EU itself or one of its Member States should be the respondent in a dispute based on the measure identified in a notice issued by the investor.99 Most importantly, “[t]he Tribunal shall be bound by th[is] determination”.100 In the

95 Cf. Canada Model BIT (2004), art. 27(2), https://investmentpolicy.unctad.org/internationalinvestment-agreements/treaty-files/2820/download (last accessed 15 August 2021) (empowering a commission to supplement arbitral rules). 96 For example, investment arbitral tribunals have been willing to qualify certain jurisdictional rules, such prior negotiation and litigation requirements, as “procedural” and as pertaining to the admissibility of claims, not jurisdiction. 97 The EU and Canada as CETA parties have so far agreed on the code of conduct for adjudicators, the rules on mediation, and the rules on the functioning of the Appellatte Tribunal; available at https://trade.ec.europa.eu/doclib/press/index.cfm?id¼2240 (last accessed 15 August 2021). 98 Pope & Talbot Inc v. Government of Canada, UNCITRAL ad hoc arbitration, Award in Respect of Damages (31 May 2002), para. 47 (an interpretation of the NAFTA resembling an amendment). Note that this question is more relevant in multilateral contexts, because in a bilateral relation any agreement between the two sides could amend their treaty. 99 Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.21(1)–(3). 100 Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.21(7).

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event that the EU fails to make such a determination within 50 days, the treaty gives some guidelines for determining the respondent,101 whose application (presumably by the investor in the submission of claim) equally binds the Tribunal.102 A similar system exists in the EU-Singapore IPA103 and the EU-Vietnam IPA.104 The rationale for these provisions is that the EU does not want ICTs to interpret its law, which has been confirmed by the CJEU.105 The concept of the autonomy of EU law, which stands behind these attitudes, can be justified from an internal EU perspective.106 Notably, however, the EU has introduced these constraints on judicial powers only recently despite its long-lasting awareness of its legal order’s autonomy in relation to investment tribunals.107 It is therefore not surprising that some commentators have qualified the EU’s action as politically motivated, not resulting from a nuanced analysis of the existing system.108

101

Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.21(4) (“(a) if the measures identified in the notice are exclusively measures of a Member State of the European Union, the Member State shall be the respondent; (b) if the measures identified in the notice include measures of the European Union, the European Union shall be the respondent.”). 102 Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.21(7). 103 EU-Singapore Investment Protection Agreement, 19 October 2018, not in force, art. 3.5(2)–(4). 104 EU-Vietnam Investment Protection Agreement, 30 June 2019, not in force, art. 3.32(2)–(6). 105 CJEU, Case C-284/16, Slowakische Republik v. Achmea BV, ECLI:EU:C:2018:158, paras. 39–60; CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI: EU:C:2019:341, para. 132. See also CJEU, Opinion 2/13, Accession of the European Union to the European Convention for the Protection of Human Rights and Fundamental Freedoms, ECLI:EU: C:2014:2454. 106 CJEU, Case C-284/16, Slowakische Republik v. Achmea BV, ECLI:EU:C:2018:158, paras. 33, 35 (“. . . the autonomy of EU law with respect both to the law of the Member States and to international law is justified by the essential characteristics of the EU and its law, relating in particular to the constitutional structure of the EU and the very nature of that law. EU law is characterised by the fact that it stems from an independent source of law, the Treaties, by its primacy over the laws of the Member States, and by the direct effect of a whole series of provisions which are applicable to their nationals and to the Member States themselves. Those characteristics have given rise to a structured network of principles, rules and mutually interdependent legal relations binding the EU and its Member States reciprocally and binding its Member States to each other . . . In order to ensure that the specific characteristics and the autonomy of the EU legal order are preserved, the Treaties have established a judicial system intended to ensure consistency and uniformity in the interpretation of EU law . . .”). For the intra-EU context, see Bjorge (2017). 107 Cf. Statement Submitted by the European Communities to the Secretariat of the Energy Charter Pursuant to Article 26(3)(b)(ii) of the Energy Charter Treaty, fn. 1, https://eur-lex.europa.eu/legalcontent/EN/TXT/HTML/?uri¼CELEX:31998D0181&from¼EN (last accessed 15 August 2021) (stating, “The Communities and the Member States will, if necessary, determine among them who is the respondent party to arbitration proceedings initiated by an Investor of another Contracting Party”, but “[t]his is without prejudice to the right of the investor to initiate proceedings against both the Communities and their Member States”). 108 Bernardini (2017), p. 44.

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The introduction of the administrative determination of respondents has destructive effects on the judicial character of ICTs. First, the administrative determination of respondents breaches the dispute settlement function of ICTs. This primary task of the international judiciary requires its power to rule on legal standing. Jan Paulsson was right in concluding that the biggest advantage of “arbitration without privity” is that it allows true claimants to meet their true respondents.109 That advantage has been lost by virtue of the administrative determination of respondents. Forcing a tribunal to accept an administratively-determined respondent, eliminates the tribunal’s ability to assess the respondent’s standing to be sued and its being a true party to the dispute. Without the power to decide on the standing to be sued, the adjudicative role of an investment tribunal remains only a façade, insofar as it would not be able to abstain from resolving fictitious disputes, i.e. those that do not involve true parties. Second, the administrative determination of respondents breaches the requirement of independence, because it transfers a part of the judicial task to a non-judicial body which is also an interested party. Third, it diminishes adversariality, because it does not allow for discussing important aspects of disputes in a contradictory context.110 In addition to these features of the judicial function and process, the administrative determination of respondents defeats the logic of every, domestic and international, litigation. In normal circumstances, the claimant must indicate a respondent in its claim, and the dismissal of the claim for the lack of standing to be sued is its own failure.

3.3

Interpretation of the Applicable Law

A trend towards reasserting state control over the interpretation of the applicable law exists. The North American Free Trade Agreement (NAFTA) was the first one to empower a commission to issue interpretations binding on tribunals.111 This is now provided for, regarding both investment and trade matters, in the CETA,112 the 109

Paulsson (1995), p. 256. See Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.21(6) (“If the European Union or a Member State of the European Union is the respondent, pursuant to paragraph 3 or 4, neither the European Union, nor the Member State of the European Union may assert the inadmissibility of the claim, lack of jurisdiction of the Tribunal or otherwise object to the claim or award on the ground that the respondent was not properly determined pursuant to paragraph 3 or identified on the basis of the application of paragraph 4.”). 111 North American Free Trade Agreement, 17 December 1992, in force 1 January 1994, 32 ILM 289, art. 2001 (establishing the Free Trade Commission); and art. 1131(2) (“An interpretation by the Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section.”). 112 Comprehensive Economic and Trade Agreement Between Canada and the European Union, 30 October 2016, not in force, art. 8.31(3) (investment disputes); and art. 26.1(5)(e) (investment and trade disputes). 110

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EU-Singapore treaties,113 the EU-Vietnam treaties,114 the CPTPP,115 and the USMCA.116 The CPTPP and USMCA also require investment tribunals in some circumstances to seek binding interpretations from treaty commissions.117 India has advanced a sharp interpretative proposal regarding its bilateral investment treaties (BITs), according to which tribunals should be bound by “[a]ny interpretation of th[e] Agreement [at stake], including any interpretation contained in these Notes”, as well as by “subsequent agreement and practice manifested through submissions made to tribunals”.118 India has also followed the trend of establishing the binding force of joint interpretations on tribunals.119 Of course, other and earlier examples of empowering committees of states parties to interpret treaties exist.120 This is a wellknown approach of the North American states,121 spreading further around the world.122 The departure point for the introduction of binding interpretations is that states are masters of their treaties. However, the power of authentic interpretation can be used to significantly modify treaty terms. An early example was the exchange of letters 113 EU-Singapore Investment Protection Agreement, 19 October 2018, not in force, art. 3.13(3); EU-Singapore Free Trade Agreement, 19 October 2018, in force 21 November 2019, art. 16.1(4) (d). 114 EU-Vietnam Investment Protection Agreement, 30 June 2019, not in force, art. 3.42(5); EU-Vietnam Free Trade Agreement, 30 June 2019, in force 1 August 2020, art. 17.1(4)(d). 115 Comprehensive and Progressive Agreement for Trans-Pacific Partnership, 8 March 2018, in force 30 December 2018, art. 9.25(3) (investment disputes); and art. 27.2(2)(f) (in general). 116 Agreement Between the United States of America, the United Mexican States, and Canada, 30 November 2018 and 10 December 2019, in force 1 July 2020, art. 14.D.9(2) (investment disputes); and art. 30.2(2)(f) (investment and trade disputes). 117 Comprehensive and Progressive Agreement for Trans-Pacific Partnership, 8 March 2018, in force 30 December 2018, art. 9.26; Agreement Between the United States of America, the United Mexican States, and Canada, 30 November 2018 and 10 December 2019, in force 1 July 2020, art. 14.D.10 (both regarding non-conforming measures). 118 Government of India, Office Memorandum of 8 February 2016, para. 12(3) (on file with author). Cf. India Model BIT (2015), art. 24, https://investmentpolicy.unctad.org/international-investmentagreements/treaty-files/3560/download (last accessed 15 August 2021) (providing that tribunals may take into account individual interpretations in the event of a failure to reach a joint interpretation). 119 India Model BIT (2015), art. 24.1, https://investmentpolicy.unctad.org/international-investmentagreements/treaty-files/3560/download (last accessed 15 August 2021). 120 For an overview, see Kaufmann-Kohler (2011), pp. 176–180. 121 US Model BIT (2004), art. 30(3), https://investmentpolicy.unctad.org/international-investmentagreements/treaty-files/2872/download (last accessed 15 August 2021); US Model BIT (2012), art. 30(3), https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2870/ download (last accessed 15 August 2021); Canada Model BIT (2004), art. 40(2), https:// investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2820/download (last accessed 15 August 2021). See further Vandevelde (2009), pp. 195–196 (on the entry of such provision from the NAFTA to the 2004 US Model BIT). 122 ASEAN Comprehensive Investment Agreement, 26 February 2009, in force 24 February 2012, art. 40(3); Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area, 27 February 2009, in force 1 January 2010, 2672 UNTS 3, c. 11, art. 27(3).

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between Argentina and Panama stating that they never intended to allow the application of the most-favoured nation (MFN) clause to the dispute settlement clause in their BIT, in the aftermath of the Siemens v Argentina award which allowed such a conjunction.123 After a tribunal found that the China-Laos BIT was applicable to Macau Special Administrative Region, the two governments exchanged letters to the contrary effect, which were then used in an attempt to set aside the arbitral award.124 India has suggested an interpretive statement to its investment treaty partners which, among others, adopts the arbitrator-made objective standards in the definition of “investment”, sends the investor relying on an umbrella clause to contractually agreed or local forums, excludes the applicability of MFN clauses to dispute resolution clauses, and introduces the standard of “ripeness” of claims as a condition for the submission to arbitration (which is basically meant to keep investors longer before local judicial or administrative organs).125 The empowerment to make authoritative interpretations has the potential to contribute to the rule of law if it satisfies standards such as clarity, non-retroactivity, and respect for due process.126 Its legitimacy is reinforced considering that states are the principal law-makers and treaty-masters.127 However, what can be problematic is the possibility for states to benefit in concrete cases from their double role as committee members and disputing parties.128 First, as seen above, states have been willing to advance interpretations in response to developments in practice. They did so using retroactive narratives, thus failing to contribute to the rule of law,129 and arguably aiming to amend treaties.130 Second, authoritative interpretations can be advanced in the middle of pending disputes, which raises a serious question whether tribunals in such cases should pay any attention to them.131 The

123 Noted in National Grid plc v. The Argentine Republic, UNCITRAL ad hoc arbitration, Decision on Jurisdiction (20 June 2006), para. 85. 124 Government of the Lao People’s Democratic Republic v. Sanum Investments Ltd [2015] SGHC 15, paras. 39–40. 125 Government of India, Office Memorandum of 8 February 2016, paras. 4(3), 8(3), 9(2)(b), 12(1) (c) (on file with author). 126 Kaufmann-Kohler (2011), p. 194. 127 Methymaki and Tzanakopoulos (2016), pp. 160–161; Roberts (2010), p. 182. 128 Cf. Methymaki and Tzanakopoulos (2016), p. 180 (arguing that due process rights of investors cannot take priority over the fact that states are treaty-masters). 129 See text to notes 123–124 above. 130 Particularly in the Indian example, although such action could be permissible in a bilateral context; see text to note 125 above. See also Pope & Talbot Inc v. Government of Canada, UNCITRAL ad hoc arbitration, Award in Respect of Damages (31 May 2002), para. 47 (“For these reasons, were the Tribunal required to make a determination whether the Commission’s action is an interpretation or an amendment, it would choose the latter.” [reference omitted]). 131 Sanum Investments Ltd v. Government of the Lao People’s Democratic Republic [2016] SGCA 57, paras. 101–112 (using the critical date doctrine to reject the reliance on a post-award exchange of interpretive letters); and para. 116 (not allowing a de facto retroactive amendment of the treaty). See also Pope & Talbot Inc v. Government of Canada, UNCITRAL ad hoc arbitration, Award in Respect of Damages (31 May 2002), paras. 48–51; Brower II (2001), pp. 56–57, fn. 71 (not

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last danger is particularly relevant in the CETA context, given the rule allowing CETA parties to refer a matter for interpretation to the Committee on Services and Investment, “including if it has serious concerns related to a specific measure for which a request for consultations has been submitted . . . by an investor of the other Party claiming that such measure breaches an obligation under Chapter Eight (Investment) of the Agreement”.132 The introduction of binding interpretations diminishes the judicial character of tribunals and panels. First, it limits their activity to “dry” dispute settlement, because it shrinks the space for judicial clarification and development of the law. The CETA framework goes even further and also violates the dispute settlement function of ICTs, because it allows that “interpretations may inter alia address the question of whether and under which conditions a certain type of measure is to be considered as compatible with Chapter Eight (Investment) of the Agreement”.133 Besides diminishing the judicial character, the latter development is also problematic insofar as combined judicial and diplomatic dispute settlement means have proved unsuccessful in the past.134 Second, binding interpretations decrease the independence of tribunals and panels, insofar as they allow for external influence, but also internal influence given that states parties appear as disputing parties, on decision-making. The CJEU disagreed with this view in the context of the investment court system, holding that under international law treaty parties can subsequently clarify treaty terms, which is supported by the Vienna Convention on the Law of Treaties.135 Such interpretations would not infringe the independence of the tribunal, provided that they could not affect previous and already pending cases.136 But in such an environment adjudicators are forced to decide cases under the permanent threat that their interpretation of the applicable law could face resistance of treaty parties and be immediately displaced by a stand-by body issuing a binding interpretation. A recent decision within the CETA framework even confirms that the parties “are committed applicable in pending disputes because no one can be judge in his own cause). Cf. Ewing-Chow and Losari (2015), p. 108 (in pending disputes the non-disputing state party safeguards against abuse); Ishikawa (2015), p. 145 (suggesting an inter-state dialogue on the interpretation of treaty provisions after a dispute arises but before the initiation of arbitration). 132 Annex to the Rules of Procedure of the CETA Joint Committee as set out in Decision 001/2018 of the CETA Joint Committee of 26 September 2018, para. 1, https://trade.ec.europa.eu/doclib/ press/index.cfm?id¼2240 (last accessed 15 August 2021). 133 Annex to the Rules of Procedure of the CETA Joint Committee as set out in Decision 001/2018 of the CETA Joint Committee of 26 September 2018, para. 3, https://trade.ec.europa.eu/doclib/ press/index.cfm?id¼2240 (last accessed 15 August 2021). 134 See, for the experience of the European Free Trade Association, Fahner (2021). 135 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, paras. 233–234. 136 CJEU, Opinion 1/17, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA), ECLI:EU: C:2019:341, paras. 236–237.

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to using these provisions [on binding interpretations] to avoid and correct any misinterpretation of the Agreement by the Tribunals”.137 This setting forces adjudicators to anticipate acceptable interpretations and shrinks their freedom of action. Furthermore, the alleged inapplicability of binding interpretations to pending cases is an oversimplification. Consider the situation in which a treaty committee adopts a binding interpretation addressing a question of the applicable law in a pending case. Even if such interpretation would not be formally applicable, it would be hard to imagine that the tribunal would ignore it and adopt a different interpretation. Third, binding interpretations decrease the level of adversariality by eliminating the possibility of discussing the points of law (and as seen above in the CETA context, even the points of facts) in a contradictory context. The contradictory context is particularly important when the other disputing party is a non-state actor and its absence eliminates the possibility of a proper observance of non-state interests. Treaty parties are fully capable of anticipating future cases against them and adjusting the desired interpretation before an investor seizes the forum.

4 Conclusion Certain developments in international economic law treaty practice demonstrate a departure from the promotion of the judicial towards more administrative dispute settlement means. This is the effect of the advancement of constraints on the powers of ICTs in the international investment and trade sectors. In short, the judicial character of a dispute settlement body assumes the functions of settling disputes and clarification and development of the law in an independent, impartial, and adversarial judicial process. The promoted constraints on the powers of ICTs, relating to the regulation of procedure, the determination of legal standing, and the interpretation of the applicable law, contradict these features of the judicial character. The shift from the standard judicial function and process towards more administrative means of dispute settlement is an important development in the field of international economic law. International legal scholarship has so far focused on the quantitative aspects of the international judiciary, be it the number of dispute settlement bodies or the extent of their competences. This is an invitation to pay more attention to its qualitative aspects, addressing the question of what it means to be “judicial” in the first place.

137 Para. 6 (emphasis added) of the preamble of the Decision of 29 January 2021 adopting the Annex to the Rules of Procedure of the CETA Joint Committee as set out in Decision 001/2018 of the CETA Joint Committee of 26 September 2018, https://trade.ec.europa.eu/doclib/press/index.cfm? id¼2240 (last accessed 15 August 2021).

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Relja Radović is an attorney at law qualified in Serbia. He holds a PhD from the University of Luxembourg, an LLM (Adv) from Leiden University, an LLM and an LLB (Hons) from the University of Novi Sad. His research focus is international adjudication and investment treaty arbitration.

Enter the Dialogue: Reference Mechanisms in Dispute Resolution Clauses Sebastian Lukic

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Reference Mechanisms in Dispute Resolution Clauses: A Categorisation . . . . . . . . . . . . . . . . 3 The Reference Mechanism Embodied in the Withdrawal Agreement . . . . . . . . . . . . . . . . . . . . . 3.1 The Dispute Settlement Mechanism of the Withdrawal Agreement . . . . . . . . . . . . . . . . . 3.2 The Basic Architecture of the Arbitration Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Particulars of the Reference Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Reference Mechanisms in Dispute Resolution Clauses: Mere Pragmatism or a Future Model? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Reference Mechanisms in the Context of the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Reference Mechanisms Beyond the EU Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract If a dispute on the interpretation of the Withdrawal Agreement arises and no solution can be reached following political consultation within the Joint Committee, either the EU or the UK may resort to arbitration. The dispute shall be heard by a five-member tribunal and shall be administered by the Permanent Court of Arbitration. The particulars of the arbitration clause embodied in the Withdrawal Agreement would not give much reason for discussion. However, the arbitration panel is not the exclusive arbiter for disputes between the EU and UK under the Withdrawal Agreement. As a dispute under the Withdrawal Agreement may give rise to questions on the interpretation of Union law, a reference mechanism is built into the Withdrawal Agreement. The arbitration panel shall not decide on issues of Union law. Rather, it must request the Court of Justice of the EU to give a ruling on the respective Union law issues; the CJEU’s ruling shall then be binding on the I wish to thank Dr Elizaveta Samoilova, Konstantinos Giorkas, and Cihan Mercan for their insightful comments on earlier drafts. The responsibility for any errors or omissions rests with me. All views articulated herein are solely my own. S. Lukic (*) Schönherr Rechtsanwälte GmbH, Vienna, Austria e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 335–352, https://doi.org/10.1007/8165_2021_73, Published online: 2 November 2021

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arbitration panel. Direct judicial dialogue between two international judicial fora in the form of a reference mechanism is a rare feature in international treaties and mostly untested where it exists. The present chapter reflects on reference mechanisms in dispute resolution clauses, placing a specific focus on the arbitration clause in the Withdrawal Agreement.

1 Introduction The Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (Withdrawal Agreement) devises a distinct and intricate mechanism for the resolution of disputes over the interpretation or application of the Withdrawal Agreement. Indeed, the dispute settlement mechanism applicable after the end of the transition period (i.e. 31 December 2020) brings to fore a dispute resolution clause with remarkable traits. The mechanism for resolving disputes between the European Union (EU) and the United Kingdom of Great Britain and Northern Ireland (UK) is set out in Title III of Part Six of the Withdrawal Agreement. In large measure, the core elements of Title III of Part Six of the Withdrawal Agreement mirrors common characteristics of arbitration clauses. If a dispute on the interpretation of the Withdrawal Agreement arises and no solution can be reached following political consultation within the Joint Committee (a body which oversees UK and EU implementation, application and interpretation of the Withdrawal Agreement), either party may commence arbitration proceedings, heard by a five-member tribunal, and administered by the Permanent Court of Arbitration (PCA). The particulars of the arbitration clause alone would not give much reason for discussion. Yet, the arbitration panel is not the exclusive arbiter for disputes between the EU and UK under the Withdrawal Agreement. As a dispute under the Withdrawal Agreement may give rise to questions on the interpretation of Union law, a reference mechanism is built into the Withdrawal Agreement. The arbitration panel shall not decide on issues of Union law. Rather, it must request the Court of Justice of the EU (CJEU) to give a ruling on the respective Union law issues; the CJEU’s ruling shall then be binding on the arbitration panel. Direct judicial dialogue between two international judicial fora in the form of a reference mechanism is a rare feature in international treaties and mostly untested where it exists. The present chapter reflects on reference mechanisms in dispute resolution clauses, placing a specific focus on the arbitration clause in the Withdrawal Agreement. Section 2 starts with categorising the concept of a reference mechanism in dispute resolution clauses and considering extant reference mechanisms in dispute resolution clauses. Following a brief overview of the basic architecture of the arbitration clause in the Withdrawal Agreement, Sect. 3 examines the key elements of the reference mechanism built into the arbitration clause. Section 4 discusses the legal considerations informing the EU Commission’s insistence on

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introducing a reference mechanism and considers whether such reference mechanisms are an alternative model for future dispute resolution clauses in international treaties, including trade and investment agreements of the EU. Section 5 sets out the conclusions.

2 Reference Mechanisms in Dispute Resolution Clauses: A Categorisation It is perhaps trite to observe that the second half of the twentieth century witnessed, as Judge Guillaume put it, a proliferation of international judicial bodies.1 The implications of a diverse landscape of international judicial bodies have been analysed in great detail and have generated a comprehensive body of academic authority. This holds particularly true for issues like forum shopping, overlapping jurisdiction, or lis pendens. Likewise, judicial dialogue as a means to halt inconsistencies and a fragmentation of international law has attracted considerable attention over the past decades.2 Judicial dialogue is commonly defined as the engagement by one court with a decision of another court “through cross-citation, discussion, acceptance or rejection of the position of the other court in the text of a judgment”.3 Judicial dialogue may come in various guises and broadly falls into three categories: horizontal judicial dialogue, vertical judicial dialogue, and mixed vertical-horizontal dialogue.4 Whereas vertical judicial dialogue refers to the dialogue between a court of first instance and an appeals court, horizontal judicial dialogue takes place between courts that operate at the same level, or have the same status.5 Mixed verticalhorizontal dialogue, in turn, “occurs when a supranational body, such as the ECtHR, serves as a conduit for the dissemination of national legal practices”.6 This chapter does not discuss judicial dialogue at vertical level, nor does it concern horizontal dialogue by way of cross-citation. Instead, it seeks to analyse a specific category of judicial dialogue, i.e. judicial dialogue which involves a process of “sharing of jurisdiction”7 between an international arbitral tribunal and a permanent international court taking the form of a reference mechanism. Thus, this type of

1

The Proliferation of International Judicial Bodies: The Outlook for the International Legal Order— Speech by His Excellency Judge Gilbert Guillaume, President of the International Court of Justice, to the Sixth Committee of the General Assembly of the United Nations, 27 Oct 2000. 2 Kassoti (2015), pp. 22 ff. 3 Tzanakopoulos (2014), p. 6. 4 Slaughter (1994), p. 103; Kassoti (2015), p. 36. 5 Slaughter (1994), pp. 103 ff; Kassoti (2015), p. 36. 6 Kassoti (2015), p. 36. 7 Jacobs (2003), p. 548.

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direct judicial dialogue draws on the allocation of judicial tasks among two judicial bodies. Reference mechanisms embodied in international agreements exhibit three core characteristics. First, an arbitral tribunal or panel is the primary body to resolve the dispute between the parties. Yet, the arbitral tribunal is not the sole judicial body involved in the adjudication process. Rather, it shares jurisdiction with a permanent court. This permanent court is empowered to give authoritative interpretations of a particular legal provision the proper construction of which is material to the outcome of the dispute pending before the arbitral tribunal. Secondly, the permanent court does not operate as a court of appeal which determines the outcome in the main proceedings before the referring arbitral tribunal. Rather, the judicial role of the permanent court is confined to giving authoritative interpretation on a particular legal provision. Indeed, the permanent court makes no judgment on the facts in the main proceedings, nor on the application of the law it interprets. Instead, the referring arbitral tribunal assumes the judicial role of applying the law to the facts of the case in the main proceedings. Thirdly, the ruling of the permanent court is binding for the referring arbitral tribunal only and it is only the arbitral tribunal’s subsequent ruling which can be enforced against the parties. Needless to say, these three characteristics are inherent to the judicial dialogue between courts of EU Member States and the CJEU under the preliminary reference procedure (Article 267 TFEU).8 Indeed, it is in the context of international agreements concluded by the EU that the Article 267 TFEU model of judicial dialogue has been imported into international law. The textbook example for reference mechanisms in international treaties are EU Association Agreements. For instance, the EU-Ukraine Association Agreement provides for a dispute resolution mechanism which is mostly modelled on the WTO Dispute Settlement Understanding (DSU).9 If the parties fail to resolve a dispute by recourse to consultations, the complaining party may request the establishment of an arbitration panel. In case of a dispute concerning the interpretation and application of the provisions relating to regulatory approximation (Ukraine undertook to apply, implement or incorporate in its domestic legislation a pre-determined set of EU laws), the arbitration panel shall not decide the question. Rather, the arbitration panel is required to request the CJEU to give a ruling on the question.10 Other association agreements concluded by the EU also provide for such reference mechanisms (see, for instance, the EU-Moldova Association Agreement).11

8

See Schima (2019), pp. 1823 ff, concerning the key characteristics of the preliminary reference procedure pursuant to Article 267 TFEU. 9 Rudyuk (2017), p. 41. 10 Article 322 of the Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part. 11 Article 403 of the Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and the Republic of Moldova, of the other part.

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Whilst direct judicial dialogue in the form of reference mechanisms predominantly exists in international agreements concluded by the EU, they also exist outside the immediate EU context. The United Nations Convention on the Law of the Sea 1982 (LOSC) contains a comprehensive system of dispute settlement which primarily governs disputes between states parties relating to the interpretation and application of the LOSC. In Section 5 of Part XI, the LOSC devises a specific dispute settlement system for disputes concerning the International Seabed Area.12 Unlike the general dispute settlement system set out in Part XV, the system for settling disputes relating to mining in the Area applies not only to disputes concerning the LOSC but also to disputes over the interpretation and application of various other instruments, such as the regulations and contracts entered into by the International Seabed Authority.13 The Seabed Disputes Chamber of the International Tribunal of the Law of the Sea is the central judicial body with jurisdiction to decide disputes over the mining of minerals in the International Seabed Area. However, disputes arising from a contract or a plan of work, if such a contract is between the Authority or the Enterprise on one side, and States parties, state enterprises, and/or natural or juridical persons on the other, may be submitted to commercial arbitration in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules. The arbitral tribunal has no jurisdiction to decide any question of interpretation of the LOSC. Rather, in any case where the tribunal in question is of the opinion that its decision in the case at hand depends on such a ruling, that question must be referred to the Seabed Disputes Chamber for a binding ruling (Article 188(2)(b) LOSC). The UNCITRAL tribunal may seek a ruling from the Seabed Disputes Chamber at the request of either party or propriu motu.14 Like the reference mechanisms in EU association agreements, the mechanism encapsulated in Article 188(2)(b) LOSC “evokes images of a very rudimentary mechanism of preliminary rulings akin to [Article] 267 of the [TFEU].”15 As is readily discernible from this brief overview, reference mechanisms are rare features in international treaties, mostly untested where they exist, and have attracted comparatively little attention in academic discourse. The reference mechanism encapsulated in the Withdrawal Agreement, discussed in the following Sect. 3, may well change this (at least in part), and will certainly be the most prominent example of a reference mechanism.

12

Churchill (2017), pp. 216 f. Notably, parties to such disputes include not just states; instead, parties may also be non-state actors, including state enterprises, or other natural and legal persons; see Churchill (2017), p. 216. 14 Article 188(2)(b) LOSC. 15 Burke (2017), p. 1266. 13

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3 The Reference Mechanism Embodied in the Withdrawal Agreement 3.1

The Dispute Settlement Mechanism of the Withdrawal Agreement

Title III of Part Six of the Withdrawal Agreement sets out the dispute settlement mechanism between the EU and the UK. Its opening provision requires the EU and UK to make every attempt, through cooperation and consultations, to arrive at a mutually satisfactory resolution of any matter that might affect its operation.16 Article 169(1) of the Withdrawal Agreement provides that the EU and UK shall endeavour to resolve any dispute regarding the interpretation and application of the provisions of this Agreement by entering into consultations in the Joint Committee17 in good faith, with the aim of reaching a mutually agreed solution. Disputes between the EU and the UK which are not resolved by means of consultations with the Joint Committee shall be exclusively settled in arbitration.18 The arbitration mechanism is encapsulated in Articles 170–181 of the Withdrawal Agreement and became effective after the end of the transition period, on 31 December 2020.19 The arbitration mechanism shares characteristics with that of the DSU.20 However, there are very many critical differences between the arbitration mechanism and the DSU. Three illustrative examples: first, unlike the DSU process, the Withdrawal Agreement’s arbitration mechanism is no quasi-judicial mechanism. The arbitration panel issues rulings rather than reports.21 Any ruling of the arbitration panel shall be binding on the EU and the UK; there is no requirement that the Joint Committee adopts the decisions the arbitration panel renders.22 Secondly, unlike the DSU, the Withdrawal Agreement’s arbitration mechanism contains no appeal facility. Thirdly, the

16

Article 167 of the Withdrawal Agreement. Dashwood (2020), pp. 4 f. 18 Article 168 of the Withdrawal Agreement. There is no single dispute settlement process embodied in the Withdrawal Agreement. Instead, the provisions on dispute settlement “are scattered throughout the text” of the Withdrawal Agreement; see Peers (2020), p. 60. In addition to proceedings pending at the end of the transition period, or events which occurred before that date, the CJEU has “continued jurisdiction” over particular cases arising after that date. For a period of 8 years from the end of the transition period, the CJEU retains jurisdiction over financial issues set forth in Part Five of the Withdrawal Agreement. Further, the CJEU jurisdiction after the transition period extends to cases concerning parts of the Irish border protocol. Finally, the CJEU retains jurisdiction over the entire Protocol on the Sovereign Base Areas in Cyprus. See Peers (2020), pp. 60 ff. 19 Article 185(4) Withdrawal Agreement. 20 Peers (2020), p. 10. To give two illustrative examples: (1) the parties may resort to arbitration after a period of consultations (compare Article 170(1) of the Withdrawal Agreement with Article 6 of the DSU); (2) the procedure is subject to a comparatively stringent time-frame (compare Article 173 of the Withdrawal Agreement with Article 12(8) and (9) of the DSU). 21 Compare Article 173 of the Withdrawal Agreement with Article 12(7) of the DSU. 22 See, by contrast, Article 16 of the DSU. 17

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Withdrawal Agreement’s arbitration mechanism differs from the DSU process precisely because the arbitration panel shares jurisdiction with a second judicial body, the CJEU.

3.2

The Basic Architecture of the Arbitration Mechanism

The EU or the UK may initiate an arbitration procedure if no mutually agreed solution has been reached within 3 months after a written notice has been provided to the Joint Committee under Article 169(1) of the Withdrawal Agreement. The request that an arbitration panel be established shall be made in writing to the other party and to the International Bureau of the PCA, shall identify the subject matter of the dispute to be brought before the arbitration panel, and provide a summary of the legal arguments in support of the request.23 Panels hearing disputes under the Withdrawal Agreement shall be composed of five arbitrators selected from a list of twenty-five persons established by the Joint Committee.24 The members of an arbitration panel (1) shall be independent, (2) shall serve in their individual capacity, (3) shall not take instructions from any organisation or government, and (4) shall comply with the Code of Conduct set out in Part B of Annex IX. The EU and UK will each nominate two panel members from the Joint Committee list. The panel’s chair shall be selected by consensus by the members of the panel from the persons jointly nominated by the Union and the UK to serve as a chairperson.25 In case of any disagreement between the members of the panel, the EU or the UK may request the Secretary-General of the PCA to select the chairperson by lot from among the persons jointly proposed by the EU and the UK to act as chairperson.26 In the event of failure to establish an arbitration panel within 3 months from the date of the request made pursuant to Article 170 of the Withdrawal

23

Article 170(1) of the Withdrawal Agreement. Article 171(3) of the Withdrawal Agreement. The EU and the UK shall each propose ten persons; further, they shall jointly propose five persons to act as chairperson of the arbitration panel. Arbitrators on the list must be persons whose independence is beyond doubt, who possess the qualifications required for appointment to the highest judicial office in their respective countries or who are jurisconsults of recognised competence. Moreover, arbitrators must “possess specialised knowledge or experience of Union law and public international law”. Arbitrators must not be members, officials or other servants of the EU Institutions, of the Government of a Member State, or of the Government of the UK. The arbitrators on the Withdrawal Agreement Panel are listed in the Decision No 7/2020 of the joint committee established by the agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Union Atomic Energy Community, which is signed by the co-chairs of the committee, UK politician Michael Gove and the Vice-president of the European Commission for Interinstitutional Relations, Maroš Šefčovič. The Decision No 7/2020 was approved on 17 December and made public by the EU on 28 December 2020. 25 Article 171(5) of the Withdrawal Agreement. 26 Article 171(5) of the Withdrawal Agreement. 24

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Agreement, the Secretary-General of the PCA shall, upon request by either the EU or the UK, within 15 days of such request, after consultation with the EU and the UK, appoint persons who fulfil the requirements set forth in Article 171(2) of the Withdrawal Agreement to constitute the arbitration panel.27 Arbitration procedures under Title III of Part Six of the Withdrawal Agreement shall be governed by the rules of procedure set out in Part A of Annex IX (Rules of Procedure). The arbitration panel shall notify its ruling to the EU, the UK and the Joint Committee within 12 months from the date of establishment of the arbitration panel. Where the arbitration panel considers that it cannot comply with this time limit, its chairperson shall notify the EU and the UK in writing, stating the reasons for the delay and the date on which the panel intends to conclude its work.28 While as a matter of principle, the arbitration panel should operate on the basis of consensus, if a decision is impossible to reach in this way, the panel shall decide by majority vote.29 No dissenting opinions shall be published.30 The arbitration panel ruling shall be binding on the EU and the UK.31 The ruling shall set out the findings of fact, the applicability of the relevant provisions of this Agreement, and the reasoning behind any findings and conclusions. The EU and the UK shall make the arbitration panel rulings and decisions publicly available in their entirety, subject to the protection of confidential information.32 The EU and the UK shall take any measures necessary to comply in good faith with the arbitration panel ruling and shall endeavour to agree on the period of time to comply with the ruling in accordance with the procedure in Article 176.33 Within 30 days after the notification of the arbitration panel ruling, the respondent shall, if the panel has ruled in favour of the complainant, notify the complainant of the time it considers it will require for compliance.34 If the EU and UK cannot agree on this period, the complainant may, within 40 days of this information, ask the arbitration panel to rule on what the reasonable period of time should be (the panel must rule on this issue within 40 days).35 If the complainant considers that the respondent has not fully complied with the panel ruling, it may request the original panel to rule on the issue; the arbitral panel 27

Article 171(9) of the Withdrawal Agreement. Within 10 days of the establishment of the arbitration panel the EU or the United Kingdom may submit a reasoned request to the effect that the case is urgent. In that case, the arbitration panel shall give a ruling on the urgency within 15 days from the receipt of such request. If it has determined the urgency of the case, the arbitration panel shall make every effort to notify its ruling to the EU and the UK within 6 months from the date of its establishment; see Article 173(2) of the Withdrawal Agreement. 29 Article 180(1) of the Withdrawal Agreement. 30 Article 180(1) of the Withdrawal Agreement. 31 Article 180(2) of the Withdrawal Agreement. 32 Article 180(2) of the Withdrawal Agreement. 33 Article 180(1) of the Withdrawal Agreement. 34 Article 176(1) of the Withdrawal Agreement. 35 Article 176(2) of the Withdrawal Agreement. 28

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shall decide within 90 days.36 If the panel confirms that the respondent has failed to comply with the original ruling by the deadline to comply with it, it may impose a lump sum or penalty payment upon that party, if the complainant requests it.37 To determine the size of that payment, the panel must take into account the seriousness of the non-compliance and underlying breach of obligation.38 If the respondent fails to pay the fine imposed upon it after 1 month, or if it still fails to comply with the original ruling 6 months after the ruling that it has failed to comply with it, the complainant may either suspend its obligations resulting from the Withdrawal Agreement except for the citizens’ rights provisions, or parts of another treaty between the UK and the EU, under the conditions set out in that agreement.39

3.3

The Particulars of the Reference Mechanism

The arbitration panel is not the exclusive arbiter for disputes between the EU and UK under the Withdrawal Agreement. Article 174 of the Withdrawal Agreement requires the arbitration panel to refer a question of Union law to the CJEU for a binding ruling.40 A reference to the CJEU may take place either during the main proceedings or during the compliance proceedings. The scope of Article 174 of the Withdrawal Agreement is exceedingly broad. The questions which the arbitration panel shall refer to the CJEU fall into three categories. First, the arbitration panel may refer questions “of interpretation of a concept of Union law”. Secondly, the arbitration panel may refer questions “of interpretation of a provision of Union law referred to” in the Withdrawal Agreement. This category reflects the fact that “[o]ne of the drafting techniques employed in the Agreement is the incorporation into its provisions by reference of certain elements of an EU legal instrument.”41 Thirdly, the arbitration panel may make a reference where “a question of whether the UK has complied with its obligations under” Article 89(2) of the Withdrawal Agreement arises.42 The first two categories are likely of more practical relevance than the third category. “Union law” is defined in Article 4(1) of the Withdrawal Agreement as encompassing, inter alia, (1) the Treaty on the European Union, (2) the Treaty on the

36

Article 177(2) of the Withdrawal Agreement. Article 178(1) of the Withdrawal Agreement. 38 Article 178(1) of the Withdrawal Agreement. 39 Article 178(2) of the Withdrawal Agreement. 40 This article does not discuss whether, from the perspective of Union law, the CJEU has jurisdiction over issues referred to it by an arbitration panel, which is established in an international agreement concluded by the EU. 41 Dashwood (2020), p. 184. 42 Article 89(2) of the Withdrawal Agreement concerns the UK’s compliance with judgements issued by the CJEU before the end of the transition period. 37

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Functioning of the European Union, (3) the Charter of Fundamental Rights of the European Union, (4) the general principles of Union law, (5) the acts adopted by the institutions, bodies, offices or agencies of the Union, (6) the international agreements to which the Union is a party and the international agreements concluded by the Member States acting on behalf of the Union, or (7) the declarations made in the context of intergovernmental conferences which adopted the Treaties. While the term “Union law” is defined, the Withdrawal Agreement does not define the notion of “concepts of Union law”. Given that Article 174 of the Withdrawal Agreement distinguishes between questions concerning a “concept of Union law” and questions “of interpretation of a provision of Union law”, it is reasonable to assume that concepts of Union law encompass all cases where the Withdrawal Agreement refers to Union law without identifying a particular provision of Union law.43 The arbitral panel has a duty to make a reference to the CJEU. However, the obligation to make a reference only arises in case of a question of the interpretation of Union law. It is reasonable to assume that, consistent with the CILFIT principles developed by the CJEU in the context of Article 267(3) TFEU, the arbitration panel will not be obliged to request a CJEU ruling where (1) the provision or concept of Union law in question has already been interpreted by the CJEU, or (2) the correct application of EU law is so obvious as to leave no scope for any reasonable doubt.44 The arbitration panel shall make the request to the CJEU after having heard the parties. Further, under Article 174(2) of the Withdrawal Agreement, the parties may make submissions requesting that the arbitration panel refers a question to the CJEU. In such case, the arbitration panel shall submit the request in accordance with paragraph 1 unless the question raised does not fall under one of the three categories set out above. The arbitration panel shall provide reasons for its assessment.45 Within 10 days following the assessment, either party may request the arbitration panel to review its assessment, and a hearing shall be organised within 15 days of the request for the parties to be heard on the matter. The arbitration panel shall provide reasons for its assessment.46 Article 174 of the Withdrawal Agreement does not determine at which point of the arbitration procedure a reference to the CJEU may take place. Arguably, references to the CJEU are possible as long as proceedings are pending. From the perspective of efficient case management, it would likely be best to identify the potential Union law issues at an early stage of the proceedings. The time limits laid down in Article 173 of the Withdrawal Agreement shall be suspended until the CJEU has given its ruling. The arbitration panel shall not be required to give its ruling less than 60 days from the date on which the CJEU has given its ruling.47 As for the procedure before the CJEU, it follows from Article 174(4) of the Withdrawal

43

Peers (2020), pp. 23 f. CJEU, Case C-283/81, CILFIT and others, EU:C:1982:335, para. 21. 45 Article 174(2) of the Withdrawal Agreement. 46 Article 174(2) of the Withdrawal Agreement. 47 Article 174(3) of the Withdrawal Agreement. 44

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Agreement that the provisions of Union law governing procedures brought before the CJEU in accordance with Article 267 TFEU shall apply mutatis mutandis to requests for a ruling of the CJEU under Article 174 of the Withdrawal Agreement. The essential content of such decisions is today, however, regulated by Article 94 of the Rules of Procedure of the CJEU. The CJEU’s rulings are binding on the arbitral panel as to the interpretation of the provisions or concept of Union law in question.

4 Reference Mechanisms in Dispute Resolution Clauses: Mere Pragmatism or a Future Model? A comparative analysis of available judicial means of dispute resolution methods in international law almost invariably draws a firm line between arbitration and judicial settlement. From a historical perspective, permanent international courts largely evolved from arbitral experience.48 It is therefore no surprise that arbitration and judicial settlement have many characteristics in common.49 And yet, for all the shared characteristics, States, the EU and judicial institutions perceive arbitration and judicial settlement as “two very different creatures”.50 Reference mechanisms merge these two “creatures” into one integrated proceeding. Reference mechanisms, such as the one embodied in Title III of Part Six of the Withdrawal Agreement, may well appear as an idiosyncratic outlier; an exception to the classic bifurcation between arbitration and judicial settlement. The immediate question, though, is whether a merger of arbitration and judicial settlement, a direct judicial dialogue in the form of a reference mechanism, produces the best of all possible worlds and, as such, is a welcome alternative to the orthodox distinction between arbitration and judicial settlement. In other words, it raises the question whether reference mechanisms similar to that in the Withdrawal Agreement may be a future model for future dispute resolution clauses in international treaties. As set out in the following two subsections, the response will only exceptionally be in the affirmative.

4.1

Reference Mechanisms in the Context of the EU

In the context of international treaties concluded by the EU, reference mechanism will mostly serve as a method for reconciling countervailing interests. The contracting parties will resort to a reference mechanism if, legally or politically, no alternatives are readily available. Indeed, it perhaps does not take much to identify 48

Crawford (2019), p. 693. Brosseau (2018), p. 94. 50 Veeder (2016), p. 160. 49

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the reference mechanism in the Withdrawal Agreement as a compromise solution between the EU’s and UK’s preferred methods of dispute resolution. It is hardly more than the result of pragmatically reconciling contrasting interests. The EU’s perspective was strongly informed by the niceties of the EU legal order. It is wellestablished case law of the CJEU that “the competence of the European Union in the field of international relations and its capacity to conclude international agreements necessarily entail the power to submit to the decisions of a court that is created or designated by such agreements as regards the interpretation and application of their provisions.”51 However, the EU must pay heed not to call into question “the indispensable conditions for safeguarding the essential character of those powers are satisfied and, consequently, there is no adverse effect on the autonomy of the EU legal order”.52 The debate on how to reconcile the autonomy of the EU legal order (including the CJEU’s prerogative to interpret EU law) with the jurisdiction of international courts and tribunals has a long heritage, and has generated long-divided views. The CJEU’s jurisprudence thus far has been, to put it mildly, short of legal clarity. The continued proliferation of academic contributions on the issue and new cases on the CJEU’s docket confirm as much.53 The common view, however, appears to be that a dispute resolution mechanism embodied in an international agreement does not adversely affect the autonomy of the EU legal order, if the court or tribunal established by the respective international agreement has no jurisdiction to interpret or apply EU law. Indeed, the CJEU’s analysis in Opinion 1/17 regarding the mechanism for the resolution of disputes between investors and States embodied in the Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part (CETA) is contingent upon the governing law provision in Article 8.31 of CETA. Unlike Article 42(1) of the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, the law of the Contracting State party to the dispute must not be applied by the CETA tribunal.54 To the contrary, CETA tribunals shall consider EU and national law as a matter of fact. In the CJEU’s view, such “examination cannot

51

CJEU, Opinion 1/17, ECLI:EU:C:2019:341, para. 106. CJEU, Opinion 1/17, ECLI:EU:C:2019:341, para. 107. 53 See, for instance, CJEU, Case C-109/20, PL Holdings. This case raises the question whether “an arbitration agreement is invalid if it has been concluded between a Member State and an investor — where an investment agreement contains an arbitration clause that is invalid as a result of the fact that the contract was concluded between two Member States — [despite the fact that] the Member State, after arbitration proceedings were commenced by the investor, refrains, by the free will of the State, from raising objections as to jurisdiction.” Moreover, on 3 December 2020, Belgium advised that it will submit a request to the CJEU for an opinion on the compatibility of the intra-European application of the arbitration provisions of the future modernised Energy Charter Treaty with Union law; see https://diplomatie.belgium.be/en/newsroom/news/2020/belgium_ requests_opinion_intra_european_application_arbitration_provisions (last accessed on 31 January 2021). 54 Riffel (2019), pp. 515 f. 52

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be classified as equivalent to an interpretation”.55 The CJEU emphasized that the powers of interpretation of CETA tribunals were confined to the provisions of the CETA in the light of the rules and principles of international law. Based on this understanding—i.e. that considering EU law as a matter of fact cannot be classified as equivalent to an interpretation of Union law—the CJEU concluded that the CETA’s mechanism for the resolution of disputes between investors and States were compatible with Union law.56 Ensuring the autonomy of the EU legal order based on the applicable law an international court or tribunal may be apt for trade and investment agreements like CETA. The Withdrawal Agreement, by contrast, does not allow for such solution— it is full of references to Union law. Inevitably, a quandary for the EU Commission during the negotiations of the Withdrawal Agreement must have been to devise a dispute resolution mechanism that does not call into question the CJEU’s prerogative under the EU treaties to interpret EU law and the EU’s autonomy.57 The most straightforward option would have been to confer jurisdiction on the CJEU. Indeed, this was the approach adopted under the first draft of the Withdrawal Agreement. But entrusting the CJEU with full and exclusive jurisdiction was no option for the UK. After all, terminating the CJEU’s jurisdiction has persistently been among the key priorities under the “taking back control” theme commonly invoked by UK politicians.58 As such, agreeing to the CJEU’s sole and exclusive jurisdiction perhaps would have been hard to sell to the UK electorate. Thus, on the one hand, the reference mechanism allays the EU Commission’s legal concerns of agreeing to a mechanism which is irreconcilable with Union law. On the other hand, the reference mechanism serves to soothe the UK’s political concerns. Unless specific circumstances akin to the UK’s exit from the EU exist, and outside the context of EU Association Agreements, extra-EU contracting states will be loath to accept the CJEU’s involvement, even if only via a reference mechanism. After all, a reference mechanism involving the CJEU necessarily creates asymmetry among the contracting parties. It is for this reason, too, that the reference mechanism envisaged in the Draft EU-Switzerland Institutional Agreement is increasingly mired in controversy.59 By contrast, this risk of asymmetry would not exist for dispute resolution clauses applicable to intra-EU disputes, including most notably disputes arising from cross-border investments in the EU. Much has been

55

CJEU, Opinion 1/17, ECLI:EU:C:2019:341, para. 131. CJEU, Opinion 1/17, ECLI:EU:C:2019:341, paras. 131 ff. 57 Indeed, paragraph 17 of the Council’s 22 May 2017 Directives for the negotiation of the Withdrawal Agreement states that any dispute settlement mechanism shall “fully respect the autonomy of the Union and of its legal order, including the role of the Court of Justice of the European Union”. 58 Fowler, Red line crossed? The Withdrawal Agreement’s arbitration clause (2018), https://www. 4newsquare.com/publications/red-line-crossed-the-withdrawal-agreements-arbitration-clause/ (last accessed on 31 January 2021). 59 Baudenbacher, Back to Start? Switzerland, Great Britain and the Ukraine Mechanism (2020), https://verfassungsblog.de/back-to-start/ (last accessed on 31 January 2021). 56

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written on the potential ramifications of the Member States’ decision to sign an Agreement for the Termination of all Intra-EU Bilateral Investment Treaties (“Agreement”).60 Many intra-EU investors have serious qualms about the quality of the judicial system of many Member States and do not trust that domestic courts will uphold due process rights if and when a dispute over host State measures arises in the future. The orthodox response for many investors may be to restructure the investment so as to benefit from the substantive and procedural protections of an extra-EU BIT.61 For some intra-EU investments, though, restructuring does not work as nimbly as for others. Yet, intra-EU investors falling into this category shall not be left in the cold, corralled into domestic law systems. The EU Commission and many Member States appear to accept that it is critical to provide intra-EU investors with substantive and procedural investment protection against the vagaries of host States. This, to maintain a level playing field vis-à-vis investors from third countries whose investments are protected either by EU trade and investment agreements or by extra-EU BITs (which continue to be in force). Indeed, it is the need to avoid asymmetry between extra-EU and intra-EU investment protection that caused the EU Commission to launch an initiative to improve intra-EU investment protection. To this end, the EU Commission contemplates adopting a proposal for a new “investment protection and facilitation framework”. To satisfy the overriding objective of putting intra-EU investors on an equal footing with extra-EU investors, the EU Commission’s ‘investment protection and facilitation framework’ will need to devise a binding and enforceable investment dispute settlement mechanism beyond domestic court systems. The EU Commission has many options to devise an effective procedural mechanism. However, one such option would be to create a system modelled on the reference mechanism of the Withdrawal Agreement—a specialised investment court or tribunal with the power to make a preliminary reference to the CJEU.

60 Duque (2020), pp. 797 ff. Investment tribunals assess the legal effects of the Agreement based on well-settled public international law principles. The Agreement does not take effect retroactively; a tribunal’s jurisdiction is determined at the time of the institution of proceedings. Thus, if the tribunal had jurisdiction on that date, this will remain so regardless of subsequent events, including the termination of a BIT. See Muszynianka Spółka z Ograniczoną Odpowiedzialnością v. The Slovak Republic, PCA CASE No. 2017-08, Award (7 October 2020), para. 263. 61 Pursuant to Article 3(1)(e) TFEU, the European Union has exclusive competence with respect to the common commercial policy. At the time of the Treaty of Lisbon entered into force, Member States maintained a great number of bilateral investment agreements with third countries. The TFEU does not set forth transitional provisions for such bilateral investment agreements. Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries provides that bilateral investment agreements that specify and guarantee the conditions of investment should be maintained in force and progressively replaced by investment agreements of the EU.

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Reference Mechanisms Beyond the EU Context

At first blush, reference mechanisms, like the one embodied in the Withdrawal Agreement, appear novel and innovative. However, they are not (see Sect. 2 above). This holds true not only for the EU. Even beyond the immediate EU context, adopting a reference mechanism would not necessarily be a novel proposition. Indeed, requests by courts or tribunals for an advisory opinion of the ICJ regarding issues of international law (modelled on the preliminary reference procedure in the EU) were contemplated in the last two decades of the past century, mostly as a response to the increasing number of regional and international courts and tribunals and risk of a fragmented body of international law. Perhaps most prominently, the former President of the ICJ, Judge Guillaume, advocated for a reference mechanism. Addressing the Sixth Committee of the General Assembly on the proliferation of international judicial bodies, Judge Guillaume noted: In order to reduce the risks of conflicting interpretations of international law, should we not encourage other international courts to seek the opinion of the Court on doubtful or important points of general international law raised in cases before them? Such a procedure exists in European Community law under Article 234 of the Treaty of Rome (the former Article 177). It enables national courts of member States of the European Union to refer preliminary questions to the European Court of Justice, and sometimes requires them to do so. Thus the unity of Community law is assured. Comparable procedures could be used in general international law.62

In a similar fashion, discussing the “creation of specialized international tribunals”, Judge Schwebel noted in an Address to the Plenary Session of the General Assembly of the United Nations: in order to minimize [. . .] significant conflicting interpretations of international law, there might be virtue in enabling other international tribunals to request advisory opinions of the International Court of Justice on issues of international law that arise in cases before those tribunals that are of importance to the unity of international law.63

It is true that inconsistent findings of multiple court or tribunals can produce inconsistent legal standards that make it difficult for the law to guide a State’s behaviour. Inconsistent judgments or awards are liable to undermine the rule of law as they generate incongruence between the law as promulgated in a particular treaty and the law as applied. A reference mechanism at international level, including in investment treaties, may well have the attraction of reducing the risks of conflicting interpretations. Consistency and safeguarding the unity of international law are certainly laudable objectives. However, for all the commendable virtues a

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The Proliferation of International Judicial Bodies: The Outlook for the International Legal Order—Speech by His Excellency Judge Gilbert Guillaume, President of the International Court of Justice, to the Sixth Committee of the General Assembly of the United Nations, 27 Oct 2000. 63 Address to the Plenary Session of the General Assembly of the United Nations by Judge Stephen M Schwebel, President of the International Court of Justice, 26 Oct 1999, A/54/PV 39.

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reference mechanism may entail, it is unlikely to be a true alternative for dispute resolution clauses in international treaties. First, historically, States chose to ensure the autonomy of arbitral proceedings and dismissed proposals which would have allowed the ICJ to review arbitral awards, or otherwise intervene in the arbitration process.64 Moreover, the multiplication of courts and tribunals has long been “a feature of the international legal order” and “the result of a consistent choice”.65 Indeed, Article 95 of the UN Charter states that “[n]othing the present Charter shall prevent Members of the United Nations from entrusting the solution of their differences to other tribunals by virtue of agreements already in existence or which may be concluded in the future.” From a mere practical perspective, thus, States will likely keep with the ordinary dispute resolution methods, including in particular the orthodox distinction between arbitration and judicial settlement. Secondly, the key benefit of a reference mechanism—enhanced consistency and the coherence of the international legal order—proceeds on the premise that a proliferation of international courts and tribunals necessarily implicates conflicting interpretations of international law and so undermines the unity of the international legal order. Yet, this claim is too routinely advanced. For one, the interpretations adopted by court and tribunals are laid down in a specific setting, namely in the setting of a particular treaty, which must be construed in its own context. For another, there is an exceedingly low number of examples of inconsistent case law. In the investment law context, the various views tribunals adopted in respect to the application of MFN clauses to issues of admissibility or jurisdiction often serves as evidence for the proposition that the Investor-State Dispute Settlement (ISDS) system produces inconsistencies.66 Another example frequently advanced is the treatment of umbrella clauses in the SGS cases.67 Outside the investment law context, the issue of different control tests applied by the International Criminal Tribunal for the former Yugoslavia (ICTY) and the International Court of Justice (ICJ) are often invoked as examples of such discrepancy and disorder; however, as Boisson aptly notes, “these few examples have not been significant enough to challenge either the coherence or legitimacy of international dispute settlement”.68

64

Boisson de Chazournes (2017), p. 13. United Nations Committee of Jurists, Report on Draft of Statute of Statute of an International Court of Justice Referred to in Chapter VII of the Dumbarton Oaks Proposals (1945), p. 821; Boisson de Chazournes (2017), p. 24. 66 Compare Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction (25 January 2004) with Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction (8 February 2005). 67 Compare SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction (6 August 2003) with SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 January 2004). 68 Boisson de Chazournes (2017), pp. 32 f. 65

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Thirdly, whilst legally not required, international courts and tribunals engage with each other, including by way of cross-referencing. As Judge Greenwood put it, international law is “a single, unified system of law and each international court can, and should, draw on the jurisprudence of other courts and tribunals”.69 Indirect judicial dialogue of this ilk holds the entire structure together and guarantees its continued acceptability and endurance for all parties. All the while, it does not add to the costs and length of the proceedings. By contrast, a reference mechanism is wellnigh bound to increase the costs and length of proceedings.

5 Conclusion States and the EU continue attaching great importance to the distinction between arbitration and judicial settlement.70 A merger of these two dispute resolution methods into one integrated proceeding in the form of a reference mechanism will very likely remain the exception. True, it may offer a pragmatic solution in very specific circumstances. In this sense, the reference mechanism embodied in the Withdrawal Agreement serves as a compromise solution between the EU’s and UK’s preferred methods of dispute resolution. However, apart from such specific circumstances, reference mechanisms will remain an outlier in the international dispute resolution landscape, if only because its potential benefits are outweighed by countervailing factors such as the increased costs and length a reference mechanism invariably implicates.

References Boisson de Chazournes L (2017) Plurality in the fabric of international courts and tribunals: the threads of a managerial approach. Eur J Int Law 28(1):13–72 Brosseau J (2018) The distinction between arbitration and judicial settlement in international law: three characteristics and why they matter for reforms. In: Biondi A, Sangiuolo G (eds) Beyond TTIP: a new season for EU FTAs? Working papers 2018/3. King’s College, London, pp 93–105 Burke C (2017) Article 188 UNCLOS. In: Proells A (ed) United Nations Convention on the Law of the Sea: UNCLOS – a commentary. C.H. Beck, pp 1261–1266 Churchill R (2017) The General Dispute Settlement System of the UN Convention on the law of the sea: overview, context, and use. Ocean Dev Int Law 48:216–238 Crawford J (2019) Third party settlement of international disputes. In: Crawford J (ed) Brownlie’s principles of public international law. Oxford University Press, pp 692–716 Dashwood A (2020) The Withdrawal Agreement: common provisions, governance and dispute settlement. Eur Law Rev 45(2):183–192

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Declaration by Judge Greenwood in Ahmadou Sadio Diallo, Judgement (18 June 2012), ICJ Reports 2012, p 391, para 8. 70 Brosseau (2018), p. 95.

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Duque G (2020) The termination agreement of Intra-EU Bilateral Investment Treaties: a spaghettibowl with fewer ingredients and more questions. J Int Arbitr 37(6):797–826 Jacobs FG (2003) Judicial dialogue and the cross-fertilization of legal systems: the European Court of Justice. Tex Int Law J 38(3):547–556 Kassoti E (2015) Fragmentation and inter-judicial dialogue: the CJEU and the ICJ at the interface. Eur J Leg Stud 8(2):21–49 Peers S (2020) The end - or a new beginning? The EU/UK Withdrawal Agreement. Yearbook of European law, vol 38. Oxford University Press, pp 1–77 Riffel C (2019) The CETA opinion of the European Court of Justice and its implications—not that selfish after all. J Int Econ Law 22(3):503–521 Rudyuk Y (2017) How the trade disputes between EU and Ukraine will be settled under the EU Ukraine Association Agreement. Lex Portus 4:37–50 Schima B (2019) Article 267 TFEU. In: Kellerbauer M, Klamert M, Tomkin J (eds) The EU Treaties and the Charter of Fundamental Rights – a commentary. Oxford University Press, pp 1822–1840 Slaughter AM (1994) A typology of transjudicial communication. Univ Richmond Law Rev 29 (1):113–139 Tzanakopoulos A (2014) Judicial dialogue as a means of interpretation. https://ssrn.com/ abstract¼2497519 Veeder J (2016) What matters – about arbitration. Int J Arbitr Mediation Dispute Manag 82 (2):153–161

Sebastian Lukic has been an associate at Schoenherr since 2016. Sebastian’s main areas of practice are commercial and investment arbitration. Sebastian graduated from the University of Graz as first-ranked graduate. In recognition of his academic achievements, he was awarded the Honorary Award (State Award) of the Austrian Federal Ministry of Science, Research and Economy for the best diploma and master’s degrees in Austria (Würdigungspreis). Sebastian passed the Bar Exam with distinction. In 2020, he graduated from the University of Oxford (MJur). He was awarded the Winter Williams Prize in International Economic Law, and the Clifford Chance Award (Proxime Accessit) for the Second Best Performance in the MJur. Before joining Schoenherr, Sebastian was a teaching and research assistant at the Department of European Law (2012–2015) and, in parallel, the Department of Civil Law (2013–2015) of the University of Graz.

Part II

Current Challenges, Development and Events in European and International Economic Law

A Booster Shot for Reserves: Overview of the IMF’s $650 Billion Allocation of SDRs Anjum Rosha and Clara Thiemann

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Background and Use of the SDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Paper Gold or Paper Tiger: What Is the SDR? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Using the SDR: An Unconditional Asset in a Closed System . . . . . . . . . . . . . . . . . . . . . . . 3 Framework for a General SDR Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 “Long-Term Global Need to Supplement Reserve Assets” . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Broad Support Among the Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Procedure for an SDR Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Challenges of a General Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract In August 2021, the International Monetary Fund (IMF) created and allocated to its 190 members the equivalent of about USD 650 billion in Special Drawing Rights (SDRs), a reserve asset designed to supplement members’ reserves. This general allocation of SDRs is a historic event—both for the IMF and its membership. It is only the fourth general allocation since the SDR was created in 1969, and it is the largest allocation by far, bringing the total SDRs created by the Fund till date to about USD 1 trillion. Responding to the pressures the Covid-19 crisis has placed on official reserves, the SDR allocation provides IMF member countries with an unprecedented level of unconditional liquidity for urgent spending needs or as reserve buffer. Despite extensive writings on the SDR by the media and academics, for many, the SDR remains difficult to understand. This paper thus

Anjum Rosha and Clara Thiemann work at the Legal Department of the International Monetary Fund. The views expressed are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board or management. The authors would like to express their gratitude to Mr. Hoang Pham, Mr. Bernhard Steinki, Mr. Camilo Tovar, Ms. Misa Takebe, Ms. Zuzana Murgasova, and Ms. Jane Mburu for their valuable inputs. A. Rosha and C. Thiemann (*) International Monetary Fund, Washington, DC, USA e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Bäumler et al. (eds.), European Yearbook of International Economic Law 2021, European Yearbook of International Economic Law (2022) 12: 355–370, https://doi.org/10.1007/8165_2021_79, Published online: 28 May 2022

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provides an overview of the background and use of the SDR, the requirements to effect a general allocation, and concludes by explaining some of the challenges and outlook to the implementation of the 2021 general allocation of SDRs. This paper is intended for a broad audience, offering a brief glimpse into the dynamics of a rulesbased international organization and multilateral cooperation in a time of crisis.

1 Introduction In August 2021, the International Monetary Fund (IMF)1 created and allocated to its 190 members2 the equivalent of about USD 650 billion in Special Drawing Rights (SDRs), a reserve asset designed to supplement members’ reserves.3 This 2021 general allocation of SDRs is a historic event—both for the IMF and its membership. It is only the fourth general allocation since the SDR was created in 1969, and it is the largest allocation ever by far, providing IMF member countries with an unprecedented level of unconditional liquidity and bringing the total SDRs allocated by the Fund till date to about USD 1 trillion. To optimists, the SDR allocation also signals a resurgence of multilateralism in the wake of one of the worst crises in present times. As this paper explains, an allocation of SDRs by the IMF requires a near consensus among member countries as the adoption of an SDR allocation is subject to a positive vote by the IMF’s Board of Governors by a supermajority of 85 percent of the total voting power. An SDR allocation implies that members could be called upon in certain circumstances to exchange another member’s SDRs for their own reserve currencies. The successful SDR allocation and the further work underway at the IMF on the use of the newly allocated SDRs for the benefit of low- and middle-income countries appears to underscore the sentiment of global cooperation. As much of the world entered the Great Lockdown in March 2020 prompted by the spread of the Covid-19 virus, pandemic response measures were swiftly instated by the IMF.4 The IMF provided record levels of emergency financing to eightyseven member countries during 2020–2021.5 Early discussions on an SDR

1

The International Monetary Fund is an international organization that was established in 1944. Its membership is near universal with 190 countries. More information about the IMF, its mandate and its work can be found on www.imf.org. 2 SDRs are only allocated to IMF members who are participants in the SDR Department (see further below). Since all 190 IMF members are currently participants in the SDR Department, the terms “member” and “participant” are used interchangeably in this paper. 3 See the IMF’s topic page on Special Drawing Rights, https://www.imf.org/en/Topics/specialdrawing-right. 4 For details on the IMF’s pandemic response measures, see https://www.imf.org/en/Topics/imfand-covid19. 5 https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker.

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allocation received support from much of the IMF’s membership, but the US administration at the time remained skeptical.6 Since the majority required to secure an SDR allocation needed an affirmative vote by the US, discussions stalled. As the pandemic dragged on and its severe economic impact became clearer, calls for a general allocation of SDRs intensified, in particular among the IMF’s 50+ African member countries,7 and eventually garnered sufficient support from member countries, including the US. In April 2021, the International Financial and Monetary Committee (IMFC)8 called on the IMF to make “a comprehensive proposal on a new SDR general allocation of US$650 billion to help meet the long-term global need to supplement reserves”. The IMF Managing Director, Kristalina Georgieva, made the ambitious proposal, and the process was completed just a few months later with the broad support of the IMF membership. Despite extensive writings on the SDR by the media and academics, for many, the SDR remains difficult to understand. This paper thus provides an overview of the background and use of the SDR (Sect. 2), the requirements to effect a general allocation (Sect. 3), and concludes by explaining some of the challenges and outlook to maximizing the impact of the 2021 general allocation (Sect. 4). This paper is intended for a broad audience, offering a brief glimpse into the dynamics of a rulesbased international organization and unprecedented multi-lateral cooperation in a time of crisis.

2 Background and Use of the SDR 2.1

Paper Gold or Paper Tiger: What Is the SDR?

The SDR is a reserve asset that the IMF has the ability to create under certain circumstances. In a world familiar with virtual currencies, it is easy to wonder if the SDR is a virtual currency. It is not, for a number of reasons explained below. First, the SDR is not a currency, nor is it a claim on the IMF. It draws its value from the willingness of IMF members to exchange it for currencies. Since SDRs can be quickly exchanged for reserve currencies between members and are assets readily

6

See e.g., Shalal, A, U.S. opposes massive liquidity IMF boost: Mnuchin. Reuters, 16 April 2020, https://www.reuters.com/article/us-imf-worldbank-usa/u-s-opposes-massive-liquidity-imf-boostmnuchin-idUSKCN21Y1QU. 7 UN ECA, Africa’s Finance Ministers call for a bold response from international financial institutions on Special Drawing Rights, 25 March 2021, https://www.uneca.org/stories/africa%E2%80% 99s-finance-ministers-call-for-a-bold-response-from-international-financial. 8 The IMFC has 24 members who are central bank governors, ministers, or others of comparable rank and who are usually drawn from the governors of the IMF’s 190 member countries.

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available to the monetary authorities in unconditional form, the SDR itself is also regarded as a reserve asset.9 Second, only certain official entities can hold and use SDRs. This includes the IMF itself, its members (all of whom are countries), and certain “prescribed holders” such as regional central banks, inter-governmental monetary entities or multilateral development banks, specified by the IMF.10 Individuals and private parties cannot hold or use SDRs. This is because the SDR was created to provide unconditional liquidity to IMF member countries and this continues to remain its primary purpose. That said, private use of the SDR has been suggested and discussed by those seeking to expand the role of the SDR and enhance its use. However, this would require a rethinking of the design of the SDR Department and far-reaching amendments to the IMF’s Articles of Agreement (the Articles) including possibly a redesigning of the criteria for the creation of SDRs, SDR valuation, transactions, and recording of SDR holdings.11 Third, the value of the SDR is calculated daily by the IMF based on a predetermined currency basket.12 The IMF also calculates an SDR interest rate, determined weekly based on yields on short-term government securities issued in the five currencies of the SDR basket.13 Finally, the IMF and some other International Financial Institutions (IFIs) use the SDR as a unit of account. For instance, the IMF financial statements as well as IMF financing is denominated in SDR.

9

IMF (2009) Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6), p. 113, para. 6.77. Reserve assets are defined as those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate, and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing). Id., p. 111, para. 6.64. 10 Currently there are 15 prescribed holders: four central banks (European Central Bank, Bank of Central African States, Central Bank of West African States, and Eastern Caribbean Central Bank); three intergovernmental monetary institutions (Bank for International Settlements, Latin American Reserve Fund, and Arab Monetary Fund); and eight development institutions (African Development Bank, African Development Fund, Asian Development Bank, International Bank for Reconstruction and Development and the International Development Association, Islamic Development Bank, Nordic Investment Bank, and International Fund for Agricultural Development). 11 It is possible for entities other than the IMF, including private entities to issue SDR-denominated financial instruments or derivatives. For more discussion on this see IMF (2018) Considerations on the Role of the SDR, https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/04/11/pp030 618consideration-of-the-role-the-sdr. 12 For daily exchange rate, see https://www.imf.org/external/np/fin/data/rms_sdrv.aspx. The value of the SDR is based on a basket of major currencies (the US dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi). The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years. The next review is scheduled to take place in 2022. 13 For the SDR interest rate, see https://www.imf.org/external/np/fin/data/sdr_ir.aspx.

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Much has been written about the history of the SDR.14 In a nutshell, the SDR was created in 1969 as an international reserve asset for countries in supplement to the existing official reserve assets such as gold or foreign currency. Although it was introduced to support the Bretton Woods system of fixed exchange rates, the SDR survived the collapse of that system fifty years ago. The SDR Department was established at the same time to conduct all transactions in SDRs. The SDR Department is kept strictly separate from the General Resources Account through which non-concessional financing by the IMF takes place. A member’s participation in the SDR Department is voluntary and currently, all 190 IMF members are participants in the SDR Department.15 In the early days of the SDR, it was envisaged that the SDR would become the principal reserve asset in the international monetary system. While this ambitious goal has not materialized yet, the SDR remains a useful supplemental reserve asset. At the outset in 1970, and in three subsequent general allocations in 1978, 2009 and 2021 respectively, as well as in one special allocation (discussed below), SDRs were “created” and distributed to the participants in the SDR Department (see Fig. 1).

2.2

Using the SDR: An Unconditional Asset in a Closed System

SDR holders can make use of the SDRs in several ways, which all express the nature of the SDR as unconditional reserve asset and source of liquidity. As explained above, all operations and transactions involving SDRs are conducted through the SDR Department16 and can take place only between SDR holders, namely: the IMF, the participants in the SDR Department and prescribed holders. Members can choose to retain the SDRs in their official reserves to increase their international reserves buffer. Members earn interest on their holdings of SDRs and pay interest on their cumulative allocations, both at the SDR interest rate. This means that the interest earned and the interest charged cancel out as long as the cumulative SDR holdings are equal to the cumulative SDR allocations. Therefore, holding on to the allocation itself has no net cost for the member, save a small administrative fee to cover the expenses of conducting the business of the SDR Department.17 Members may also choose to exchange their SDRs for freely usable currencies held by other members, which brings down their SDR holdings and the interest

14

See e.g., Gold (1969), Cameron (1981) and Wilkie (2012). For more detail, see IMF (2018) IMF Financial Operations, https://www.elibrary.imf.org/view/ books/071/24764-9781484330876-en/24764-9781484330876-en-book.xml?result¼1&rskey¼2 XSyRr. 16 Article XVI, Section 1. 17 Article XVI, Section 2. 15

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Fig. 1 SDR allocations: general and special (in billions of SDRs). Source: IMF Finance Department

earned on those holdings. If SDR holdings fall below the cumulative allocation, the member has to pay net interest on the shortfall at the SDR interest rate. Conversely, if a member provides freely usable currencies in exchange for SDRs, it gets paid interest on the net surplus in its SDR holdings. At the moment, the SDR interest rate is at a historical low making the cost of using SDRs quite low, but it could increase over time.18 Since 1987, exchanges of SDRs for currency have mainly taken place through Voluntary Trading Arrangements or VTAs. Under the VTAs facilitated by the IMF, members volunteer to buy or sell SDRs to meet the demand. Members can also exchange SDRs bilaterally with other members or with prescribed holders. In the unlikely event that a transaction cannot be completed through the VTAs or through a bilateral arrangement, the IMF can call upon members with strong external positions to buy SDRs from members that have a balance of payment need. This is known as the “designation mechanism” and it ensures members can use their SDRs, if needed.19 The designation mechanism has not been activated in over three decades since 1987, but it remains critical to the smooth functioning of and confidence in the

18 19

For the SDR interest rate, see https://www.imf.org/external/np/fin/data/sdr_ir.aspx. Article XIX, Section 5.

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SDR Department as it ensures that, in case of a balance of payments need, members can use SDRs to obtain freely usable currencies. Further, under the Articles, the Fund prescribes operations in which SDR Department participants and prescribed holders may engage. The terms and conditions that are consistent with the effective functioning of the SDR Department and proper use of the SDR are also specified.20 Under this framework, the Fund has adopted a number of decisions authorizing certain uses of SDRs such as loans, donations, pledges, transfers as security for the performance of financial obligations, swap operations or forwards. Participants must notify the Fund of their use of SDRs, which are recorded in the SDR Department of the IMF.21 Members with strong external positions may use their SDR holdings to contribute to the financing of low-income countries, for instance by lending SDRs to the IMF’s Poverty Reduction and Growth Trust. In the context of the 2021 general allocation, a number of proposals were put forward on how members could voluntarily redirect their newly allocated SDRs to countries in greater need and to specific efforts in response to the Covid-19 pandemic. Some of these are discussed below. Lastly, members can use their SDRs directly in transactions with the IMF to pay interest or principal on IMF financing or to pay for quota increases.

3 Framework for a General SDR Allocation The IMF’s Articles of Agreement lay out the considerations for an allocation and these have remained largely unchanged since the SDR was created.22 The Managing Director may make a proposal for an allocation when (i) there is a “long-term global need” to supplement existing reserve assets; and (ii) there is broad support among members who are participants in the SDR Department for the allocation.23 Allocations of SDRs are only made to members, not to the IMF itself or to prescribed holders.

20

Article XIX, Section 2(c). To expand the use of SDRs for transactions not covered under current decisions the Fund would need to adopt a decision by a seventy percent majority of the total voting power. 21 Article XVI, Section 3. 22 Article XVII, Section 1(a) reads: “In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.” 23 Article XVIII, Section 4(b).

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“Long-Term Global Need to Supplement Reserve Assets”

Any proposal for a general allocation of SDR is guided by the finding of a “longterm global need to supplement existing reserve assets”. The Articles do not specify what “long-term global need” means or how it is assessed, so the experience from past allocations guides the assessment. The practice has generally followed a two-step process: first, the long-term global need for reserve assets is projected; second, an analysis is conducted on whether this need could and should be met through an allocation of SDRs. In quantifying the need for international reserves, the IMF uses standard indicators of reserve adequacy and it is important to note a few additional elements to the understanding of the global and the long-term need. A global need does not require all or even most IMF members to experience an inadequacy of reserves, but rather reflects a broad assessment that the projected level of global reserves, in the absence of supplementation, would be inadequate or result in a suboptimal performance of the global economy. This can occur when even just a group of countries facing the need accounts for a significant share of the world economy. Further, an assessment for the long term implies that SDR allocations are not intended to respond to, or deliberately seek to ameliorate, cyclical or short-term economic fluctuations. Previous assessments have applied a five-year horizon, yet current conditions may influence the long-term need projection by providing the starting point (e.g., the current level of reserves).24 In line with this, the 2021 general allocation proposal saw evidence of such longterm global need for reserve assets by observing the level of reserves in 2020 and projecting what would be an adequate level of reserves for 2025, estimating the gap to be in the range of USD 1.1 to 1.9 trillion.25 This estimate took into account the impact of the Covid-19 crisis that substantially weakened external positions in many countries, raised external financing needs, exacerbated debt vulnerabilities, and

The five-year horizon also derives from the IMF’s review cycle. Under the framework for SDR allocations (particularly Article XVIII, Sections 2(a) and 4(c)), notwithstanding any circumstantial need for additional reserves arising at any given time, the IMF reviews every five years—within what is called Basic Periods—whether there is a case for an allocation or cancellation of SDRs for the next five-year period. The 2021 allocation proposal coincided with the review for the Basic Period 2022–2026. Given the large allocation of USD 650 billion, no further case was made for yet another allocation at this review. See IMF (2021) Report of the Managing Director to the Board of Governors and to the Executive Board Pursuant to Article XVIII, Section 4(c), https://www.imf. org/en/Publications/Policy-Papers/Issues/2021/07/12/Report-of-the-Managing-Director-to-theBoard-of-Governors-and-to-the-Executive-Board-461917. 25 In 2016, global demand for reserves over the period 2017–2021 was estimated at a range of SDR 0.4 to 1.4 trillion (about USD 0.6 to 2 trillion). At the time, the then Managing Director Christine Lagarde, decided not to make a proposal for an SDR allocation as such a proposal would be premature in light of pending further work on the reform of the international monetary system. IMF (2016) Report of the Managing Director to the Board of Governors and to the Executive Board Pursuant to Article XVIII, Section 4(c), available at https://www.imf.org/external/np/pp/eng/2016/0 62916.pdf. 24

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deepened poverty. The finding recognized that the outlook remained uncertain, but that the adjustment process would be expected to persist over time and to be truly global. Having identified the magnitude of additional reserve needs, the proposal then looked at supplementing it with an SDR allocation. SDR allocations can be deemed appropriate even if there are alternative ways to supplement reserve assets, such as borrowing from the market. This is because, for one, other sources of funding may only cover part of the need, and further, the SDR offers some advantages over other sources. As explained above, the SDR allocation is free of cost to the member and using the SDR may provide a lower interest rate for many economies than other financing sources like market borrowing. In addition, a general allocation of SDRs benefits all members, thereby bolstering the global financial safety net.26 The proposal thus concluded that an SDR allocation equivalent to USD 650 billion would cover about 30 to 60 percent of the estimated global need for reserves.27 The previous three general allocations similarly applied this concept. The first allocation—SDR 9.3 billion, allocated in broadly equal installments on January 1, 1970, 1971, and 1972—followed the establishment of the SDR mechanism and was based on the marked decline in world reserves (gold and US dollars) in absolute terms and relative to world trade since the mid-1960s. Other factors included the heavier reliance on trade restrictions, growing recourse to International Financial Institutions to finance payments deficits, and increased use of capital controls. The second SDR allocation—SDR 12.1 billion allocated in three similar annual installments on January 1, 1979, 1980, and 1981—considered the major changes in the international monetary system since the inception of the SDR, such as the emergence of international capital markets and more flexible exchange rates. The assessment of the long-term global need took into account that the demand for reserves had increased with the level of international transactions and was expected to continue to do so even with greater exchange rate flexibility. The third SDR allocation—SDR 183 billion, allocated in one single tranche effective on August 28, 2009—took place in the context of the global financial crisis, characterized by a sharp economic contraction and projected slow recovery from a deep recession, resulting in sudden declines in capital flows and trade, which particularly affected reserve levels of emerging markets and developing countries.28 Arriving at the amount of any SDR allocation involves considerable judgment. It entails the technical discussions detailed above on members’ need for additional reserves, and it also takes into account the constraints of Realpolitik. The latter On the global financial safety net, see IMF (2016) Adequacy of the Global Financial Safety Net, https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Adequacy-of-the-GlobalFinancial-Safety-Net-PP5025. 27 IMF (2021) Proposal for a General Allocation of Special Drawing Rights, https://www.imf.org/ en/Publications/Policy-Papers/Issues/2021/07/12/Proposal-For-a-General-Allocation-of-SpecialDrawing-Rights-461907. 28 IMF (2009) Proposal for a General Allocation of Special Drawing Rights, https://www.imf.org/ external/np/pp/eng/2009/060909.pdf. 26

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include, among other considerations, the willingness of members to stand ready to exchange large amounts of SDRs for currencies, and domestic legal processes of the membership that could constrain the speed with which the allocation can be concluded. For example, in the US, the process for consenting to an allocation varies depending on its size. If the US share of a new allocation of SDRs is less than the size of the US quota, the US Treasury consults with leaders of the House and Senate authorizing committees at least 90 days prior to the vote; however, a larger allocation would require congressional approval. When looking at the size of past SDR allocations, the latest 2021 allocation in an amount equivalent to USD 650 billion (approximately SDR 453 billion) is unprecedented in size, responding to the pressures the Covid-19 crisis has placed on official reserves of many countries. This allocation was also distributed in its entirety in a single tranche instead of staggered allocations over yearly intervals, as was done in the first and second general allocation. The Articles provide flexibility in this regard,29 and circumstances this time called for such one-step approach given the large output gap and immediate need for liquidity.

3.2

Broad Support Among the Membership

The other key requirement for a general allocation of SDR is that any such proposal garner broad support by the IMF membership. The IMF Managing Director, after having satisfied herself (or himself) that a long-term global need for supplementing reserves exists, needs to conduct consultations with the membership to ascertain whether there is broad support for the proposal. The Managing Director can use any modality s/he sees fit to ascertain support. This provision in the Articles recognizes that the creation and allocation of SDRs places additional obligations on members who may be required to convert them into currencies, and thus no proposal can be made without detailed discussions with the membership. Certainly, this is a unique provision in the IMF’s Articles, and seems to highlight that allocations are an exercise in multilateralism and require near-universal consensus from the membership.30 The Managing Director’s proposal needs to be concurred in by a simple majority of votes cast of the IMF Executive Board. Finally, the adoption of an SDR allocation is subject to a positive vote by the IMF’s Board of Governors by a supermajority of 85 percent of the total voting power.31 It is worth noting that the United States alone, with the largest voting share of 16.5 percent would be able to block any proposal for

29

According to Article XVIII, Section 2(a) and (c)(ii), allocations shall take place at yearly intervals, yet the Fund may provide that allocations take place at other than yearly intervals. 30 Gold (1970), p. 20. 31 Article XVIII, Section 4(d).

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an allocation, thus making support by the United States essential to any SDR allocation proposal.32 For the 2021 allocation, the Managing Director ensured that broad support existed ahead of the formal voting by the Board of Governors. Early discussions on the SDR in 2020 failed to find traction with the previous administration in the United States and in the 2020 IMFC. No work on a proposal could begin in the absence of US support that was necessary to the success of any allocation proposal. A year later, as the pandemic continued to batter economies, the United States under the new Biden administration came to support the allocation. Informal discussions at the Executive Board level indicated broad support for the allocation.33 Broad support was also evidenced by the IMFC’s call for a general allocation of USD 650 billion in April 2021.

3.3

The Procedure for an SDR Allocation

Once the Managing Director has determined that conditions are met for a general allocation as described above, the Managing Director issues a report with the formal proposal to the Executive Board. If the Executive Board concurs with this report by a majority of votes cast, the report is sent to the IMF’s Board of Governors.34 The Governors of the IMF are then requested to vote on the resolution adopting the allocation, which requires affirmative votes from 85 percent of the total voting power to become effective.35 For the fourth general allocation, the Board of Governors Resolution was adopted on August 2, 2021 with the requisite majority and the implementation of the allocation was completed by August 23, 2021.36

32 On decision-making at the IMF, see https://www.imf.org/en/About/Factsheets/Sheets/2016/07/2 7/15/24/How-the-IMF-Makes-Decisions. Decisions are usually made by a majority of votes cast, unless otherwise specified in the Articles of Agreement. Thus, the US does not generally have power to block every decision. 33 IMF Executive Directors discuss a new SDR allocation of US$ 650 billion to boost reserves, help global recovery from COVID-19, IMF Press Release, 23 March 2021, https://www.imf.org/en/ News/Articles/2021/03/23/pr2177-imf-execdir-discuss-new-sdr-allocation-us-650b-boostreserves-help-global-recovery-covid19. 34 Article XVIII, Section 4(a). 35 For more details on how the IMF makes decisions, please see: https://www.imf.org/en/About/ Factsheets/Sheets/2016/07/27/15/24/How-the-IMF-Makes-Decisions. 36 IMF (2021) Report of the Managing Director to the Board of Governors and to the Executive Board Pursuant to Article XVIII, Section 4(c), https://www.imf.org/en/Publications/Policy-Papers/ Issues/2021/07/12/Report-of-the-Managing-Director-to-the-Board-of-Governors-and-to-the-Execu tive-Board-461917; IMF Governors Approve a Historic US$ 650 Billion SDR Allocation of Special Drawing Rights. IMF Press Release, 2 August 2021, https://www.imf.org/en/News/Articles/2021/0 7/30/pr21235-imf-governors-approve-a-historic-us-650-billion-sdr-allocation-of-special-drawingrights.

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SDR allocations are distributed to members in proportion to their quota share at the IMF,37 which reflects their relative standing in the world economy. For example, Japan has a quota share of 6.47 percent and thus receives 6.47 percent of the allocation, while Nigeria receives 0.52 percent of the allocation, in line with its quota. The Articles also require that any member wishing to opt out of an SDR allocation do so unequivocally. A member can opt out of the allocation if the respective Governor does not vote in favour of the allocation, and in addition, that member notifies the IMF in writing prior to the allocation that it does not wish to receive its share.38 This enables all members to benefit from the allocation, even if they are hindered from casting their votes for any reason, for instance, when they happen to be temporarily unrepresented at the Board of Governors.39 The IMF’s SDR Department records the allocation and any subsequent changes in SDR holdings of each member (e.g., if a member uses its SDRs in operations such as a loan, or exchanges SDRs for currencies), with members required to report all operations and transactions in SDR to the IMF. Any changes in holdings are published on each member’s IMF financial information page and the financial data page online, and it is updated monthly.40 In the recent allocation, several measures were adopted to enhance transparency in the reporting and use of SDRs by members. For instance, on a quarterly basis, the IMF will provide changes in SDR holdings of members broken down into IMF-related operations and SDR trades. The IMF will also start publishing annual updates on the status of the SDR Trading Operations. Enhanced transparency and accountability in the reporting and use of SDRs can further strengthen the effective functioning of the SDR Department and help ensure that SDRs contribute to macroeconomic stability. Yet, the new measures also aim to strike a balance between providing additional information about SDR use while preserving the nature of the SDR as an unconditional reserve asset and promoting the smooth functioning of the voluntary trading market.

37

Article XVIII, Section 2(b). Article XVIII, Section 2(e). 39 See for example, IMF (2021) Proposal for a General Allocation of Special Drawing Rights, p. 20, fn. 37: “In the event that there is lack of recognition, or lack of clarity regarding the recognition of a member’s government, that member would not vote on the Board of Governors resolution but would receive its share of the proposed SDR allocation. The government would continue to not be able to use SDRs (including the newly allocated SDRs) pending resolution of the recognition issue. A similar approach was followed in the 2009 allocation for the two members with government recognition issues as of that time.” 40 See https://www.imf.org/external/np/fin/tad/exfin1.aspx. 38

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4 Challenges of a General Allocation Not everyone is convinced of SDR’s raison d’etre: some believe it is an anachronism in today’s world and question whether it is a “monetary dodo”.41 The economic relevance and role of the SDR is outside the scope of this paper. However, there are some key challenges that arise in connection with general allocations that warrant discussion. An oft-cited challenge is the issue of distribution of the newly created SDRs among the IMF’s membership. Although all IMF members who are participants in the SDR Department are eligible to receive their shares in the general allocation in proportion to their quotas,42 this may not reflect individual members’ reserve needs. More specifically, low-income countries with small quotas may have a greater need to supplement reserve needs than high income member countries. Of the USD 650 billion SDR allocation, SDRs equivalent to about USD 275 billion are allocated to emerging economies and low-income countries, and low-income countries received the equivalent of about USD 21 billion. Thus, many argue for a more targeted allocation of SDRs, i.e., a special allocation. However, for such a special SDR allocation to be possible, an amendment to the IMF’s Articles would be required, which is typically a difficult and time-consuming endeavour. Historically, there has been only one special allocation of SDRs that was not distributed in proportion to quota. More than one-fifth of the Fund’s membership, including a large number of transition economies and newly independent African states, had joined the Fund after 1981 and had never been allocated SDRs. Thus, in 1997, it was proposed to allow members that joined the Fund after the previous general SDR allocations to participate equitably in the SDR system. As explained above, this required amending the IMF’s Articles for the fourth time since their original establishment. This Fourth Amendment provided for two important processes: making a special one-time SDR allocation to certain members to ensure all members had SDR allocations in the same uniform ratio in terms of their quota,43 and introduction of a mechanism under which future new members could be allocated SDRs upon joining the Fund. The amendment did not affect the provisions of the Articles relating to general allocations. The Fourth Amendment only became effective 12 years later in 2009 after the required US congressional assent was obtained which took over a decade to secure. While special allocations of SDRs can take place through an amendment to the Articles, they could be extraordinarily complicated to engineer. The only special

41

See for example Lissakers (2006). Article XVIII, Section 2(b) and (e). 43 Each member that participated in the SDR Department at the time received a special one-time allocation that would raise its net cumulative allocation to a uniform 29.315788813 percent of its quota as of September 17, 1997. The special allocation thus allowed the Fund’s newer members to “catch up” to those who previously received general allocations by enabling larger allocations to new participants in order to meet the uniform ratio of quotas. 42

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allocation to date was not distributed in proportion to quotas, but it did aim to bring allocations of all members to the same level relative to quotas. A number of details would need to be ironed out if another special allocation were to be considered—for example, what would be the criteria for determining members’ eligibility for the special allocation? What would be the appropriate distribution ratio if quotas were not used as the basis for distribution? Would the special allocation be a one-time allocation, or create a recurring mechanism for allocations outside of general allocations? And from a pragmatic perspective, how quickly could the amendment to the Articles be adopted and the special allocation take place? To address the issue of directing SDRs to countries that most need them, considerable thought has gone into the idea of voluntary redistribution of SDRs (sometimes called “channelling”) by members themselves. Members are able, under current IMF rules, to lend or to donate their SDRs to each other. Members are also able to make loans to the Poverty Reduction and Growth Trust (PRGT), of which the IMF is the Trustee, and which provides concessional loans to low-income IMF member countries. Now that the allocation has taken place, the issue of voluntary redistribution is at the forefront of the discussion with the membership. A separate “moral hazard” concern has also been raised with regard to the use of SDRs. The SDR allocation may temporarily ease financing pressures on individual members. This in turn could mean that members delay needed structural reforms or delay requesting IMF financing. To mitigate this concern, the IMF, within the frame of its regular activities of economic surveillance and financial assistance, provides advice to each member to help make the best use of the SDRs. The guiding principle is that any use of the SDR allocation should be consistent with macroeconomic sustainability, and at this time, provide scope for pandemic related crisis response.44 The use of SDRs should not delay macroeconomic adjustment, reforms, and debt restructurings where needed.

5 Conclusion The general allocation will boost the reserves, including of many emerging and low-income economies facing liquidity needs. Even for members with small quotas at the IMF, the allocation increases the holdings of SDRs significantly, and the unconditional nature of the allocation provides financial space. General allocations of SDRs, as explained in this article, are not intended to meet the present need for liquidity entirely and at once, but supplement existing reserve assets based on the projected long-term global need. In the context of the current crisis, this represents not a one-off solution, but one element in the multifaceted efforts of the ongoing

44

IMF (2021) Guidance Note for Fund Staff on the Treatment and Use of SDR Allocations, https:// www.imf.org/en/Publications/Policy-Papers/Issues/2021/08/19/Guidance-Note-for-Fund-Staff-onthe-Treatment-and-Use-of-SDR-Allocations-464319, p. 13.

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international crisis response. The next steps for the SDR will include the voluntary redistribution (or channelling) of SDRs among the membership on which work is ongoing. It is important to note that the SDR allocation adds to members’ reserves, but it does not in any way increase the IMF’s own resources, which are used to provide financing to member countries to meet balance of payment needs, as and when such needs arise. The discussion on the appropriate size of the IMF resource envelope have begun in the context of the Sixteenth General Quota Review scheduled to be completed by December 2023. SDR allocations are different from IMF financing: the latter provides members with temporary financing to address balance of payment needs. IMF financing aims to help members correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. A well-resourced IMF thus remains critical to the global financial safety net. For now, the SDR allocation sends a powerful signal of a cooperative multilateral environment. The increased public interest in this allocation opens opportunities to continue the discussion about how to make the best use of SDRs, including through voluntary redistribution by members (or channeling) of the SDRs to specific purposes or recipients.

References Cameron D (1981) Special Drawing Rights. Int J 36(4):713–731 Gold J (1969) Legal technique in the creation of a new international reserve asset: Special Drawing Rights and the amendment of the Articles of Agreement of the International Monetary Fund. Case West Reserve J Int Law 1(2):105–123 Gold J (1970) Special Drawing Rights, character and use. Second edition, Pamphlet Series No. 13. International Monetary Fund, Washington D.C. Lissakers K (2006) Is the SDR a monetary dodo? This bird may still fly. In: Truman E (ed) Reforming the IMF for the 21st century. Peterson Institute for International Economics, Washington DC, pp 483–492 Wilkie C (2012) Special Drawing Rights (SDRs): the first international money. Oxford University Press, Oxford, New York

Anjum Rosha is Senior Counsel at the Legal Department of the International Monetary Fund. She has a B.A. LL.B. (Hons.) from the National Law School of India, Bangalore and an LL.M. from the University of Pennsylvania Law School, Philadelphia. Clara Thiemann is Research Officer at the Legal Department of the International Monetary Fund. She completed her First Legal State Exam (mag. iur.) at the University of Bonn, Germany, her Second Legal State Exam at the Higher Regional Court of Frankfurt, Germany, and she holds an LL.M. from Columbia University in the City of New York.