23/06/2006- Comparative Dispute Resolution Procedures and Mechanisms within the Free Trade Zones and Common Markets in the Western Hemisphere
I. Introduction
Economic liberalization by opening markets, creating free trade zones, customs unions and common markets is a worldwide movement. In almost all types of common markets in the world of which the author is aware, the trend is to create, by economic integration, a new political body with supranational characteristics.
The economic integration of countries, depending upon the situation, may be an attempt to achieve political and economic ends, as in the case of Mercosur or the Andean Pact Agreement, or it may be only for economic ends, as in the case of the North America Free Trade Agreement.
Therefore, the judicial aspects of the integration agreements are very significant. The long-term success or failure of any economic integration agreement depends in large part on the effectiveness of its dispute settlement system. In the highly politicized world of international trade law, a system that can resolve disputes and promote compliance with legal obligations will go far in advancing the goals of an economic integration process.
A weak or under-utilized system, on the other hand, is likely to undermine the common market's legitimacy and inhibit further progress toward integration. Generally, member-states involved in a dispute may seek a solution by submitting the dispute to a pre-constituted international tribunal composed of independent judges whose task is to settle claims on the basis of international law and render decisions which are binding upon the parties.
This method is generally referred to as judicial decision or judicial settlement. In the case of free trade zones or common markets, parties may also agree to submit all, or special categories of, future disputes to binding arbitration.
Such commitment may be made in multilateral or bilateral treaties devoted to the peaceful settlement of disputes. The power to render binding decisions is, therefore, a characteristic which arbitration may share with judicial decisions. For this reason, binding arbitration and judicial Settlement are referred to in this analysis as compulsory means of dispute resolution.
Arbitral tribunals, however, are basically of an ad hoc nature; and are composed of "judges" selected on the basis of parity by the parties to a dispute, who also determine the procedural rules and the applicable law. International Courts, by contrast, are pre-constituted, inasmuch as they are permanent judicial organs whose composition, jurisdiction, and procedural rules are pre-determined by their constitutive treaties. There are various types of dispute resolution mechanisms adopted by the common markets in the Western Hemisphere.
Most refer all matters regarding the interpretation and application of the agreement in question to ad hoc tribunals, instead of forming a supranational judicial system, such as the International Court of the Andean Pact. The mechanisms of dispute resolution in the integration agreements for the Western Hemisphere have some common characteristics, and several of them are limited to the resolution of controversies arising between contracting States. Although controversies regarding the interpretation and application of an agreement may affect the interests of corporations or associations (and individuals in general), the dispute resolution system does not always give them standing before the tribunals or the ad hoc courts.
However, it is important to note that in several of the systems, legal persons may see an espousal of their position by their government when one of the rights conceded within the treaty is violated. In the Western Hemisphere, there are only two international tribunals provided for by common market agreements: the Andean Pact, and the Central American Integration System. Both the Tribunal of the Andean Pact and the Central American Court of Justice were created by their integration treaties to settle and to judge problems regarding the interpretation and application of the respective integration agreements.
The other common market agreements in the Hemisphere resolve their problems regarding economic integration through ad hoc tribunals or arbitration. This paper analyzes the different types of dispute settlement procedures and mechanisms in the emerging common markets in the Western Hemisphere.
The paper is organized into six independent parts. The first and most extensive part discusses NAFTA and its different types of dispute resolution procedures. Part Two analyzes the Tribunal of Justice of the Andean Pact and its three types of cases. The Third part covers the legal framework of Mercosur and the dispute settlement procedures contained in the Brasilia Protocol. Part Four explores the Central American Common Market and the Central American Court of Justice. Finally, parts Five and Six analyze, respectively, the CARICOM and The Eastern Caribbean Common Market Agreements.
II. Dispute Resolution Procedures and Mechanisms within the Free Trade Zones and Common Markets in the Western Hemisphere
A. Dispute Resolution Procedures and Mechanisms under NAFTA.
1. Background.
NAFTA was established on December 17, 1992, with the signing of the North American Free Trade Agreement by Canada, Mexico and the USA. The Agreement came into effect on January 1, 1994, after its ratification by the contracting parties. The purpose of the Agreement is to create a zone of free-trade and to dismantle or reduce customs barriers on the North American Continent within 10 years.
NAFTA provides for preferential treatment by the parties of Canadian, Mexican and U.S. goods and services, and it calls for phased elimination of customs duties and most non-tariff barriers to trade by the year 2003. Even though NAFTA only has economic aims, the Agreement goes further than mere tariff elimination.
It contains, for example, chapters on investment liberalization and protection, liberalization of cross-border trade in energy and services, enforcement of intellectual property rights, and environmental protection. Two institutions were created by NAFTA to assist in settling disputes regarding its interpretation and application: the Free Trade Commission and the Secretariat.
2. Institutional Framework of NAFTA.
a. The Free Trade Commission.
NAFTA created a Free Trade Commission which will regularly review trade relations among the three member countries and which will meet to discuss specific problems. The Free Trade Commission must create bilateral or trilateral panels, as appropriate, of private sector experts to hear disputes involving interpretation or application of NAFTA. The Commission is the NAFTA's central institution. It is composed of cabinet-level representatives from each NAFTA Party, the Trade Representative for each country. The Commission is responsible for supervising the implementation of NAFTA and for overseeing further elaboration of the Agreement through the resolution of disputes that may arise regarding NAFTA's interpretation. The Commission also supervises the work of all NAFTA committees and working groups. The Agreement provides that all Commission decisions are to be by consensus.
b. The Secretariat.
The primary charge of the Secretariat is to provide assistance to the Commission and administrative support to the dispute resolution panels established under NAFTA. The Secretariat is also responsible for supporting the work of the other committees and the working groups established under NAFTA, and for otherwise facilitating the operation of the Agreement.
3. NAFTA General Dispute Settlement Procedure – Chapter 20.
NAFTA creates no permanent judicial institutions. However, it has several procedures to settle disputes involving the application or interpretation of the Agreement. Chapter 20 of NAFTA sets forth the basic dispute resolution procedure for matters among Parties to the Agreement. Chapter 20, Article 2021 also states that no Party will provide for a right of action under its domestic law against any other party on the ground that a measure of another Party is inconsistent with the Agreement, and Article 2022 officially encourages the private sector to apply for arbitration and any other method of alternative dispute resolution in commercial transactions.
Special NAFTA dispute resolution provisions concerning environmental and health issues, investments, antidumping and countervailing duty investigations and commercial disputes are discussed elsewhere in this paper. Parties may invoke the Chapter 20 procedures to resolve disputes concerning the interpretation or application of NAFTA or to challenge an action taken by another Party which it considers to be inconsistent with NAFTA's aims.
The dispute settlement procedures laid out in Chapter 20 are solely for disputes between governments, except in antidumping and countervailing duties cases. There are three levels of NAFTA dispute resolution procedures for governmental matters:
1) consultation;
2) conciliation, mediation and good offices; and
3) panel proceedings.
a. Consultation.
If any Party considers that any action of another Party is inconsistent with the Free Trade Zone arrangement, it is obligated to first request consultations with the other Party.
This first step requires governmental meetings in order to exchange information and to attempt to settle the problem. b. Conciliation, Mediation, Good Offices. If the consulting parties fail to resolve the matter by amicable meetings, any such Member State may request a meeting of the Free Trade Commission.
Once a meeting has been requested, the Commission must meet within 10 days of its receipt of the request. The Commission may make recommendations to settle the problem and it may call such technical advisers as it deems necessary, or it may use conciliation, mediation, and good offices. One limitation on the Commission is that it has only 30 days to conciliate the dispute (unless the parties agree to a longer period). After the expiration of the 30-day conciliation period, if no settlement has been reached, either party may request the establishment of an arbitral panel.
The arbitral panel is to be selected from a roster of up to 30 individuals who shall be independent and impartial and shall have expert experience in law, international trade or other matters covered by NAFTA. A panel is composed of five members. The disputing parties must choose the chairman of the panel within 15 days. The panelists may not be affiliated with, or take instructions from, any Party. Thereafter, each disputing Party must, within 15 days, choose two panelists who are citizens of the other disputing Party.
The purpose of this procedure is to assure some level of public acceptance of the objectivity of the panelists. It is interesting to note that NAFTA does not prescribe in detail the arbitral panel procedure, that is the function of the Commission. However, NAFTA places some limitations on the panel procedures. For example, NAFTA Article 2012, a and b requires that panel rules assure "a right to at least one hearing before the panel," the opportunity to file briefs, and that all proceedings must be carried out in confidence. Once a panel is formed, the panel prepares and presents an initial report containing its findings of facts, its determinations, and its recommendations. Any disputing party, within 14 days of the presentation of the initial report, may submit written comments.
Thirty days after it presents its initial report, the panel must provide a final report to the Commission. The panel's final report binds the disputing parties. If the panel's final report determines that the measure taken by a Party is inconsistent with any provisions of NAFTA, the Party complained of must follow the panel's report. However, if the Party complained of does not follow the panel's recommendation, the complaining party may suspend benefits under NAFTA until such time as the two Parties have reached a solution for the matter.
The term "benefits" is not explicitly defined in NAFTA, but in this context, it obviously means that the complaining government can withdraw a trade concession previously agreed to under NAFTA. This retaliation, according to NAFTA Articles 2019,a and b, should seek to suspend benefits in the same sector as that affected by the measure that the panel has found to be inconsistent with NAFTA obligations. But, if the complaining Party considers that it is not practicable or effective to suspend benefits only in the same sector, it may suspend benefits in other sectors.
3.1. The Private Sector and the Arbitral Panel.
Due to the fact that only governments can initiate the Chapter 20 NAFTA dispute settlement proceedings, if private entities are to be heard, their respective governments must create a procedure that allows them to petition their governments to proceed under the NAFTA dispute settlement process. In the case of the USA, there is a mechanism, commonly called "Section 301 action", though which interested parties may file a petition with the U.S. Trade Representative ("USTR") requesting that the USTR take action against a country that is denying the rights of the USA under any trade agreement. However, a similar procedure was not found by the author in Canadian or Mexican law.
1. NAFTA Investment Dispute Resolution Procedures.
The NAFTA investment obligations, which require non- discriminatory treatment between the NAFTA countries, are set forth in Chapter 11, Section A. Chapter 11, Section B, contains the settlement procedures for any dispute that may arise under the Investment Chapter. Chapter 11, Section A, is solidly based on two principles: the principle of National Treatment and the principle of Most Favored Nation Treatment.
The principle of National Treatment requires that each Party to the Agreement must give to any investor of another Party, treatment no less favorable than that it accords, in like circumstances, to its own investors. This principle protects U.S. and Canadian investment in Mexico as well as Mexican investment in the USA and in Canada, etc. The principle of Most Favored Nation Treatment requires that each Party give to the investors of another Party, treatment no less favorable than that it accords, in like circumstances, to investors of a non-party to NAFTA. Section B of Chapter 11 establishes a separate mechanism for the settlement of investment disputes between a Party and an investor of another Party. These procedures are, for the most part, independent of the dispute settlement procedures under Chapter 20, which apply to governmental disputes under NAFTA (except antidumping and countervailing duty cases). The dispute settlement procedures under Chapter 11, Section B, permit an investor located in a NAFTA member State to submit to arbitration a claim that a NAFTA Party has breached a provision of NAFTA's Investment Chapter, thereby causing the investor to incur loss or damage.
The investor who allegedly suffered the damage or loss has three years from the date of the alleged breach to submit a claim. Under NAFTA Article 1122, Paragraph 1, each NAFTA Party consents to submit eventual claims regarding investment matters to arbitration in accordance with the procedures set out in Article 1120 of the Agreement. Article 1120 states that claims regarding NAFTA's Investment Chapter must be submitted to arbitration under the rules of:
a) the International Center for Settlement of Investment Disputes ("ICSID");
b) the Additional Facility Rules of ICSID; or, c) the United Nations Commission on International Trade Law ("UNCITRAL").
The applicable arbitration rules will then govern the arbitration with certain exceptions. Article 1136 (4) states that each NAFTA Party must provide for the enforcement of an arbitral award in its territory. The Arbitral Tribunal may award a disputing party monetary damages plus interest or the restitution of property.
Punitive damages are not allowed. Article 1135 (1) allows the Tribunal to award costs in accordance with the applicable arbitration rules and, even though it does not mention attorneys' fees, I believe that such expenditures may be allowed as "costs of the claim" as usually is done in international arbitration. The connection between Chapters 11 and 20 occurs when a disputing party, within three months after the final award, fails to comply with the award. In such a case, a complaining Party may request pursuant to Article 1136 (5) that a panel be established under Chapter 20 to determine whether the failure to comply is inconsistent with the respondent Party's NAFTA obligations.
The Free Trade Commission, upon receipt of a request by a Party whose investor is a party in the arbitration, must establish a panel under Article 2008 (Request for an Arbitral Panel). If that Panel, after going through all of the Chapter 20 procedures, agrees with the arbitration award, the complaining Party may suspend benefits of equivalent effect (as discussed above) against the Party that breached the NAFTA provision. A disputing Party may also seek enforcement of the arbitration award under the ICSID Convention, the New York Convention, or the Inter-American Convention on International Commercial Arbitration (the "Panama Convention"), regardless of whether proceedings have been taken under Article 1136 (5) – Chapter 20 Arbitral Panels. The Chapter 11 dispute settlement procedures provide significant protection to NAFTA investors.
For example, in the past, Mexico insisted that all foreign investors adhere to the so-called "Calvo Clause", thereby restricting investors to Mexico's local courts for the resolution of investment disputes and prohibiting them from seeking the assistance of their governments. Now, however, in Article 1122, Paragraph 1, Mexico has agreed not to require foreign investors to submit claims before local courts, and it has officially consented to submit claims regarding the investment Chapter (Chapter 11) to international arbitration under either the ICSID or the UNCITRAL. Rules.
5. NAFTA Dispute Settlement in Financial Services – Chapter 14.
NAFTA contains an entire chapter on trade and investment in financial services: Chapter 14. Chapter 14 covers banking, securities, insurance and other non-bank financial services, such as finance companies, warehousing and bonding companies, foreign exchange houses, mutual fund management companies, and leasing companies. Under NAFTA, each Party has made specific commitments to liberalize its financial services markets over a transition period. Each member country also has listed its reservations to the application of Chapter 14.
NAFTA provides that each country must accord national and most-favored-nation treatment to financial service providers and to financial institutions from the other two NAFTA countries.
It also permits, with some restrictions, U.S. and Canadian banks or other financial institutions to establish or acquire wholly owned banking, insurance and securities subsidiaries in Mexico, reversing a 50-year Mexican policy of prohibiting foreign bank ownership. Chapter 14 provides for the establishment of a Financial Services Committee made up of representatives from each member country to supervise the implementation of the Chapter, to consider issues regarding financial services referred to the Committee, and to participate in dispute settlement procedures.
The Financial Services Committee is required to meet annually. The Parties are also required to maintain a roster of 15 individuals with expertise in financial services law or practice who would be available to serve as panelists in any NAFTA financial services dispute. The Dispute Resolution Procedure of Chapter 20 applies to the Investment Dispute Settlement Chapter 14, as modified by Article 1414, Paragraphs 4 and 5 (Panel selection and the suspension of benefits provisions).
For example, Paragraph 4 of Article 1414 provides that the members on the roster must have expertise or experience in financial services and law, and Paragraph 5 states that if benefits are suspended regarding a matter under Chapter 14, only financial services benefits may be suspended in retaliation.
It is important to note that Article 1413 provides that consultations may occur between the financial institution and the Member State before one of them applies for the Dispute Settlement Procedures of Chapter 14. 6. Correlations Between The Investment Chapter and The Financial Chapter (Chapters 11 and 14). NAFTA obliges each member country to guarantee the right of establishment of the other Parties' financial institutions in its territory. However, Article 1410 states several exceptions to Chapter 14.
For example, Article 1410 allows each NAFTA Party "to adopt or maintain reasonable measures for prudential reasons" in its financial sector. Therefore, an interesting situation is visualized when one investor from a NAFTA Party, working in the territory of another NAFTA Party, is confronted with a matter regarding the application or interpretation of the NAFTA Financial Chapter, and the investor submits its claim against the NAFTA Party to arbitration (under Articles 1116 and 1117 of Section B of Chapter 11 – Investment). In such a case, the complained of NAFTA Party may invoke Tribunal Article 1410 before the Arbitral Tribunal – which allows each NAFTA Party "to adopt or maintain reasonable measures for prudential reasons" – and allege that its actions were taken in order to protect national entities as investors, depositors, institutions or to protect that Party's financial system.
Upon receipt of an Article 1410 claim, the Arbitral Tribunal cannot proceed with the arbitration, and it must refer the matter to the Financial Services Committee for decision. The Financial Services Committee must then decide whether and to what extent Article 1410 is applicable to the situation. The Committee's decision is binding on the Tribunal. If the Financial Services Committee does not decide the matter within 60 days of receipt of an Article 1410 claim, the complainant or the complained of NAFTA Party may request an ad hoc arbitral panel under Article 2008 of Chapter 20 (Request for an Arbitral Panel).
Finally, if no request for the establishment of an ad-hoc panel has been made within 10 days of the expiration of that 60-day period, the Arbitral Tribunal may proceed to decide the matter under Chapter 14. 7. Dispute Settlement in Antidumping and Countervailing Duties Matters Canada, Mexico and the United States were able to negotiate and conclude a free-trade "area agreement in part because tariffs on imports into the largest market, the United States, were already quite low, and the countries otherwise were in general agreement with respect to the elimination of non-tariff barriers. Perhaps the most frequent disputes that arise between these countries concern the application of antidumping duties or countervailing duties ("AD/CVD") to imports found to be engaged in unfair trade practices.
To deal with the trade friction created by one country's imposition of these duties on the goods of another country, the Parties established NAFTA Chapter 19. Under Chapter 20, institutional arrangements are provided for resolution of "any matter" between NAFTA Parties. Chapter 19 (AD/CVD matters) provides more elaborate procedures for dispute resolution of matters concerning the imposition of AD/CVD.
a. Chapter 19 Panels. Generally, NAFTA allows each Party to retain and, subject to certain conditions, modify its domestic antidumping and countervailing duty laws, but Chapter 19's central feature is a novel mechanism whereby domestic judicial review of a final AD/CVD determinition made by administrative authorities may be replaced with binational panel review (hereinafter "Chapter 19 Panels").
Chapter 19 Panels replace domestic judicial review if any involved Party seeks Chapter 19 panel review of a determination either on its own initiative or based on a request by a person entitled to judicial review of the determination under the domestic law of the importing country. All this formality attempts to preserve the State-to-State nature of the dispute resolution procedure adopted in Chapter 19, by not allowing individuals to begin, by themselves, this type of lawsuit. Chapter 19 Panels consist of five persons drawn from a roster to be maintained by the three Parties. Unlike the Canada-USA Free Trade Agreement, NAFTA encourages the use of judges and former judges rather than trade practitioners as panelists in order to reduce the potential for conflicts of interest and to diminish the possibility that panels and courts will develop distinct bodies of domestic law.
All candidates for the roster must be citizens of Canada, Mexico or the USA. The Panel effectively takes the place of the national judiciary, applying the standard of review and general legal principles that a national court otherwise would apply. In reviewing an importing Party's AD/CVD determination, a Chapter 19 Panel must apply the domestic law of the importing country (which NAFTA defines as relevant statutes, legislative history, regulation, administrative practice and judicial precedents).
In other words, the Chapter 19 Panel is also required to apply the same standard of review and general legal principles to the determination as would a court of the importing Party.
The decision of a Chapter 19 Panel is binding on the Parties involved only with respect to the particular matter at issue. No Party may provide in its domestic legislation for an appeal from a Chapter 19 Panel decision to its domestic courts.
b. The Extraordinary Challenge Procedure.
As discussed above, NAFTA Chapter 19 Panel decisions are binding and cannot be appealed. However, Article 1904 (13) sets out extraordinary challenge procedures, which are basically the only way to obtain review of a Chapter 19 Panel's decision. The extraordinary challenge procedure set forth in NAFTA Article 1904 (13), and in NAFTA Annex Article 1094 (13), is the only means of effectively "appealing" a AD/CVD panel decision. It may be employed only in limited circumstances.
Access to this procedure is restricted to a Member State, which may request the establishment of an extraordinary challenge committee which will decide whether:
(a) a member of the panel was guilty of gross misconduct, bias, or a serious conflict of interest;
(b) the panel seriously departed from a fundamental rule of procedure; or
(c) the panel manifestly exceeded its powers, authority, or jurisdiction.
When such an allegation has been filed, a three member committee, composed of judges or former judges, will examine "the legal and factual analysis underlining the findings and conclusions of the panel's decision" and issue a decision as to the validity of the allegations.
If the findings are affirmative, the committee will either vacate the original panel decision or remand the matter to the original panel for action not inconsistent with its decision. If the original decision is vacated, a new panel will be established.
c. Safeguarding the Panel Review System.
Chapter 19 includes an additional State-to-State dispute settlement mechanism designed to safeguard the functioning of the binational review system. In the event that any Party's domestic law interferes with the proper functioning of the panel system – by preventing the establishment of a panel, interfering with the panel decision-making process, or preventing the implementation of a panel decision – another Party may request consultations and eventually the establishment of a "special committee" to address the matter.
This special committee is composed of three former or sitting judges. It is authorized to conduct hearings and to issue a formal decision with respect to the allegations. If the committee makes an affirmative finding, and the Parties are unable to resolve the dispute within sixty days, the complaining Party may:
(a) suspend the operation of article 1904 (Review of Final Antidumping and Countervailing Duty Determinations) with respect to the Party complained against; or
(b) suspend the application to the Party complained against of such benefits under the NAFTA Agreement as may be appropriate under the circumstances.
d. Review of Statutory Amendments on the AD/CVD Domestic Law Chapter 19 also provides for binational review of statutory amendments to national AD/CVD laws.
If a Party considers that an amendment of another Party's domestic law is inconsistent with certain provisions of the World Trade Organization ("W.T.O."), or the "object of purpose" of NAFTA, it may request a binational Panel to review the amendment and to issue a declaratory opinion.
If the panel recommends modifications of the amending statute to remedy a non-conformity, the Parties must immediately engage in another series of consultations to resolve the matter. If there has been no corrective legislation or other solution to the matter within one year after the panel's final decision, the Party that requested the panel may either respond with comparable legislative or executive action or terminate NAFTA with regard to the amending Party.
8. Other Dispute Settlement Procedures Under NAFTA – Labor and Environmental Matters.
The NAFTA side agreements on labor and the environment generally do not create additional substantive regional rules. Rather, focusing on the standards and duties under NAFTA, the side agreements basically create enforcement mechanisms. The side agreements commit each country to the creation of environmental and labor commissions that monitor compliance with the adequacy and the enforcement of domestic law. These commissions are empowered to review complaints made by a Party, by any non-governmental organization, or by an individual. In any matter related to labor or environment under NAFTA, negotiations to resolve the complaint would first occur.
Absent solution, an arbitral panel of experts from the three nations would be convened to evaluate the complaint. If the Panel found the complaint to be valid, the offending government would have to properly enforce its environmental or labor law. If it did not, the Panel must determine whether or not the Party complained against is fully implementing the Panel's recommendation, and the Panel may impose a