REUTERS | Goran Tomasevic

Arbitration frees WTO from appeals deadlock

Since 11 December 2019, the World Trade Organization’s (WTO) appellate body has been at a standstill. Due to an insufficient number of members, the appellate body has been unable to hear appeals.

WTO appellate body cannot function until new members are appointed

The appellate body normally comprises seven members. In 2016, the US began to veto the appointment of new appellate body members, objecting to the appellate body’s use of its powers. Notably, the US raised concerns over procedural infractions, such as allowing appellate body members to continue serving after their term had expired or taking longer than the 90 days prescribed by the dispute settlement understanding (DSU) to issue reports. The US did not view the high volume, as well as the complexity, of appeals before the appellate body as adequate justifications for this. In the same year, the US went on to block the reappointment of one member of the appellate body, Mr Seung Wha Chang, raising concerns that he had addressed issues and arguments beyond the scope of the relevant appeals. The US alleged that Chang was creating jurisprudence and turning the appellate body into a law-making organ, which amounted to judicial overreach and did not have a mandate for this from WTO members.

While some saw the US’s actions as politically motivated, given Chang’s participation in numerous decisions that went against it, the US has held its line. Vacancies on the appellate body have not been filled and, by late 2019, the appellate body was left with only three members, the minimum permissible to continue functioning. Two further members’ mandates expired on 10 December 2019. This left the appellate body with a single member and, therefore, inquorate. The US continues to withhold its consent for new appellate body members, leaving the WTO’s appeals system in a deadlock.

A number of WTO members temporarily create arbitration alternative to appellate body

In order for the WTO’s multilateral rules-based trading system to function, it is critical that there is some form of efficient dispute settlement mechanism, which includes a functional, independent and impartial appellate stage. At present, this does not exist.

Acting under article 25 of the DSU (the main WTO agreement on settling disputes), almost 20 WTO member states, as well as the EU, have, therefore, approved an alternative dispute resolution system. This will allow them to resolve trade disputes among themselves. Dubbed the multi-party interim appeal arbitration arrangement (the MPIA), this system will use arbitration to fulfil the appellate body’s functions of providing binding resolutions for trade disputes, as well as independent and impartial reviews by an appellate body of panel reports.

The MPIA is therefore a temporary and pragmatic measure, intended to facilitate dispute resolution until normal appellate body functions can resume. It provides the participating members with an alternative to the appellate body, until the membership of that entity can be increased to functional levels.

Following its approval on 27 March 2020 by the Council of the EU, the following are participating in the MPIA: Australia, Brazil, Canada, China, Chile, Chinese Taipei, Colombia, Costa Rica, the EU, Guatemala, Hong Kong, Iceland, Mexico, New Zealand, Norway, Pakistan, Singapore, Switzerland, Ukraine and Uruguay. Any WTO member may join, or indeed leave, the MPIA at any time, although appeal arbitration agreements entered into while a member was participating in the MPIA will remain in effect. In other words, a member cannot seek to end an appeal that it sees going against it by leaving the MPIA. Furthermore, pending arbitration appeals under the MPIA will continue even when the appellate body resumes its full functions, unless the parties agree otherwise. This will avoid the newly restored appellate body being immediately overwhelmed.

In order to replicate, as far as possible, the elements of the formal appellate body, the procedure for conducting appeals through arbitration under MPIA is based on the appellate review rules. Naturally, this includes a requirement for judicial independence and impartiality. However, parties to a specific dispute may mutually agree to depart from the procedures set out in the appeal arbitration agreement.

The participating members have set out how parties are to initiate an appeal by arbitration, the timelines for the procedure, the process for selecting arbitrators and how the arbitrators should reach their decisions.

Only parties may initiate arbitration and only if appellate body unavailable

A party may initiate an arbitration if the appellate body cannot hear the appeal when the dispute’s final panel report is issued to the parties, that is, if at that time there are fewer than the minimum of three appellate body members. Arbitration cannot be initiated if the appellate body is available to hear the appeal, demonstrating the MPIA parties’ commitment simply to provide a solution while the appellate body is indisposed. Only parties to the dispute, not third parties, are permitted to initiate an arbitration. Third parties with substantial interest in the matter may, however, make written submissions to the arbitrators, and shall be given an opportunity to be heard by them.

At any time during the arbitration, an appellant may withdraw its appeal by notifying the arbitrators, the panel and third parties. If no appeal remains, the notification shall be deemed to constitute a joint request by the parties to resume the panel proceeding. If another appeal remains pending, the arbitration shall continue.

Timelines for appeal arbitrations set with efficiency in mind

The parties will be notified by the WTO panel of the date on which they will receive the final panel report at least 45 days in advance. Having received the final panel report, the parties may ask for a 12 month panel proceedings suspension, so that an appeal by arbitration may be initiated (this request must be made at least ten days before the final panel report’s circulation to the general membership).

When this suspension has taken effect, the parties have 20 days to initiate arbitration by filing a notice of appeal with the WTO secretariat, attaching the final panel report. The notice of appeal must simultaneously be notified to all other parties in the panel proceedings.

The arbitrators must issue the award within 90 days following the filing of the notice of appeal, though they may propose to extend this period. They may also adjust the proceedings for organisational efficiency, using decisions on page limits, time limits and deadlines as well as on the length and number of hearings required. In the interests of efficiency, the arbitrators are also permitted to propose substantive measures to the parties, such as an exclusion of claims based on the alleged lack of an objective assessment of the facts.

Arbitrators are selected from a panel ensuring their expertise and independence

Arbitrators will be selected from a pool of arbitrators for a specific dispute, applying the same principles and methods that are used to form a division of the appellate body.

Three arbitrators will be selected from a pool of ten standing appeal arbitrators, with parties to the dispute being allowed to request that arbitrators who are not nationals of a participating member be excluded from selection. Two nationals of the same member state are not permitted to serve on the same case. Once the WTO’s dispute settlement body (DSB) has been notified of the arbitration arrangement, each participating member will have 30 days to nominate one arbitrator candidate. A pre-selection committee of leading WTO officials will then screen these arbitrators to ensure they have the appropriate expertise in law, international trade and the subject matter of the covered agreements. They will also ensure the arbitrators are unaffiliated with any government and have no conflict of interest. This process is expected to take around one month.

The participating members will then form a pool of arbitrators by consensus, aiming for overall balance. The members aim to notify the DSB of the completed pool by the end of June 2020.

The pool of arbitrators may be modified at any time if participating members agree. The above procedures will be used to replace arbitrators that withdraw from the pool for any reason, and to re-compose the pool partially every two years if the arbitration lasts longer than intended.

Arbitrators’ decisions are strictly limited to finding challenge in the appeal

Appeals are expressly limited to the issues of law covered by the panel report. The arbitrators may uphold, modify or reverse the legal findings of the panel (including recommendations where applicable), but those findings of the panel that are not appealed are deemed to form an integral part of the arbitration award. Additionally, the arbitrators shall only address those issues that are necessary for the resolution of the dispute and those issues that have been raised by the parties, without prejudice to their obligation to rule on jurisdictional issues.

The arbitrators are required to discuss their appeal decisions with all other members of the pool of arbitrators. Members of the pool of arbitrators must, therefore, be aware of ongoing WTO dispute settlement activities and will receive the papers relating to all appeal arbitration proceedings under the MPIA.

The arbitration shall be governed by the traditional rules applicable to appellate review (set out in article 17.1 of the DSU and rule 6(2) of the working procedures for appellate review) and the timetable for appeals, which the arbitrators may adapt after consulting the parties.

The parties agree to abide by the arbitration award, which shall be final. However, the award is not legally binding: it is up to the parties concerned to agree with the proposed substantive measures. Parties disagreeing with the award shall not prejudice the consideration of the case or the rights of the parties.

Conclusion

The MPIA’s emergence highlights arbitration’s importance to the justice system: flexible yet fair, it can keep the wheels of justice turning when traditionally established courts cannot.

Notably, however, less than one eighth of the WTO’s members are MPIA signatories: when the MPIA will gain traction, and the duration of the ongoing standstill, remain to be seen.

The authors would like to thank Katherine Poston, a trainee in our Paris arbitration team, for her contributions to this piece. 

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