As wider negotiations on the issues of trade and investment continues and possibilities of broadening the scope of the relationship under multilateral trade rules increase, it is important to highlight the issue of inconsistency in dispute settlement remedies between what can be broadly defined as the “international investment framework” and the WTO framework for investment.   This issue paper attempts to address the concern and provides a possible solution towards consistency.    

The current framework for investment and dispute settlement in the WTO can be found in the following agreements: The Agreement on Trade Related Investment Measures (TRIMS) prohibits investment measures related to trade in goods that are inconsistent with the basic requirements of the General Agreement on Trade and Tariffs (the GATT).  In this regard, TRIMS contains provisions dealing with notification, transparency, non-discrimination, and balance-of-payment provisions.  The General Agreement on Trade in Services (GATS) addresses foreign investment in that it includes “commercial presence” as one of four modes of supply of services, as such introducing Foreign Direct Investment (FDI) into the WTO.  The Agreement on Trade-Related Aspects of Intellectual Property Rights provides for the protection of intellectual property rights as it relates to trade.  It relates to investment in that it regulates transfer of technology through FDI, a subject that is of particular interest to developing countries trying to be at the receiving end of technology transfer.  Finally, the Uruguay Round Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) governs the dispute settlement of investment issues as each of the above agreements are subject to the DSU.

While the multilateral trading system has provided for dispute settlement in the area of trade, more extensive provision for dispute settlement in investment is found primarily in the form of bilateral investment treaties (BITs). These are binding international agreements that regulate foreign investment.  Over the last decade the number of BITs has grown exponentially and they are signed mostly between developed and developing countries.  More recently regional trade agreements such as the North-American Free Trade Agremment (NAFTA) has provided for extensive investment arrangements, including dispute settlement.

It is important to distinguish the goals of dispute settlement and the treatment thereof in the trade and investment regimes respectively.  The goal of the dispute settlement system within the WTO is to bring a country member in compliance with its obligations vis-à-vis other members under the WTO agreements.  The WTO makes no provision for private actors, as the system is set up to govern relationships between and amongst states.  Whilst government-to-government disputes may arise, in contrast to trade agreements, at the root of investment disputes are private actors and the point of dispute settlement under an investment agreement is usually to provide relief for the investor.  As a result bilateral investment treaties and even some regional treaties are structured in ways that will accommodate investor-to-state procedures, thus enabling private actors to bring an action against a state in an international forum.  The foundations for these types of provisions stem from the principles of public international law that provides for state responsibility for injury to aliens, or injury to the property of aliens.

Whilst trade disputes are resolved by the WTO’s Dispute Settlement Body, BITs typically provide for the resolution of investment disputes by way of arbitration in an international forum such as the International Centre for the Settlement of Investment Disputes (ICSID) in the World Bank Group or arbitration centres such as the International Court of Arbitration of the International Chamber of Commerce.  More importantly is the fact that there is also a significant difference in the form of relief provided.

The type of retrospective remedies awarded in arbitration awards in investment disputes typically provides for prospective relief in the form of a compensation award.  This position stems from the so-called Hull formula that has evolved into an accepted standard in Treaty Law, providing that prompt, adequate and effective compensation is the most appropriate form of relief in an investment dispute.  Developing countries have also been willing to sign on to BITs providing for compensation, because BITs offer an opportunity to negotiate and offer concessions to a potential investor in competition to and hopefully, at the exclusion of other potential hosts.  Most BITs also requires that state-to-state disputes be settled by consultations, failing which it is submitted for arbitration.  The arbiter renders a decision, which may include a compensation award.

Under the WTO agreements, however, the emphasis is on obliging a country member to bring its practices into compliance with the agreement, without requiring retrospective relief.  To the extent that compensation is provided for, it is as a way to ensure compliance and on a voluntary basis only.  Moreover the TRIMs agreement as a non- comprehensive investment agreement, is void of a provision for the repatriation of capital expropriation and compensation issues.  Thus, currently the WTO framework and particularly, the dispute settlement framework, is at odds with the standards that has been developed in international law for the settling of investment disputes.

In terms of Article 3.7 of the DSU the primary objective of the dispute settlement mechanism is to secure the withdrawal of measures found to be inconsistent with the WTO agreements.  Compensation is available as a temporary measure and only if the immediate withdrawal of the measure is impracticable.  Article 3.7 explicitly provides preference for compensation over the suspension of concessions.  However, the system is set up in such a way that compensation is not always a viable option, while suspension of concessions often is.  According to Article 22.2, members have to enter into negotiations with the other party with a view to “develop mutually acceptable compensation”.  Not only is the possibility of reaching a mutually agreed decision on compensation considerably low, the DSU provides for only 20 days after the expiry of the reasonable period of time to end negotiations.

The result is that retaliation becomes the optimal remedy dispute settlement.  However, retaliation does not necessarily work in favour of developing countries, especially in the case of retaliation by a developing country against a developed country where the developed country can afford to continue violation despite the retaliation.  In addition, it could be economically self-defeating for a developing country to suspend concessions and in the process lock out vital imports.  Moreover, retaliatory measures may in fact provoke counter retaliation measures in non-trade related fields such as development aid.

The recommended measure therefore is to enhance and improve the current provision in the DSU dealing with compensation.  One way of doing it would be to provide that the panel makes a recommendation on the level of nullification or impairment at the time of issuing its report.  In determining the level of nullification and impairment the complaining member will have to provide sufficient information to enable the panel to make an objective assessment.  If there is a failure to bring the inconsistent measure into compliance within the reasonable time period determined the recommended level of nullification or impairment is treated as a compensation award and comes into effect.  The complaining member should then have the option of invoking the compensation award or request authorisation from the DSB to suspend concessions.

The recommendation diverges from the current agreement in two major respects.  First, compensation is not negotiated by the members that are party to the dispute, but is a remedy that is decided upon by an adjudicating third party. This strengthens the provision and bring the WTO framework closer to conformity with the international investment framework.  Second, it loses its nature as a voluntary option for the member in violation of the agreement and provides the complaining member for whom retaliation is an unrealistic option with an alternative tool to ensure compliance and restore the imbalance created by the inconsistent measure.

The most appropriate remedy within the WTO framework should still be for a member to bring its measures into compliance with the WTO agreements.  A stronger compensation mechanism though would not only encourage compliance over all, but also serve to improve developing countries’ position in the dispute settlement process.
 

Comments by: Kevin Gray

1. In the 2nd paragraph on the first page, it states that TRIMS prohibits investment measures related to trade in goods inconsistent with basic GATT requirements.   I think a member can also bring include violations of the TRIMS Agreement as well. 

2. On the 2nd page, it states that the dispute settlement framework is at odds the international law on settling investment disputes.  I am not sure this is correct.  WTO law does not provide a different or contradictory  standard nor would there ever be a conflict since private parties would never be awarded insufficient compensation under a WTO panel or appellate body decision.  The WTO requirements relate only to providing MFN and National Treatment but the type of treatment is not prescribed.  If it was, and customary international legal standards were applied, this could put domestic investors in a worse situation since national standards for them may not be as protective as what is given to foreign investors. 

3. On page 3, the second paragraph refers to the "optimal remedy dispute settlement"....this does not make sense and perhaps is a grammatical or syntax error.

4. In the last paragraph on page 4, it states that compensation is decided by n adjudicating third party.  This is confusing for various reasons: one, the third party I think you are referring to is the panel or appellate body which is not the same as a third party in a dispute (being a WTO member). Also, any award on compensation must be mutually acceptable and therefore is a process of negotiation, not a figure imposed by an independent body. 

5.  In the next sentence, you state the by awarding compensation, it brings the WTO framework closer to conformity with the international investment framework....do you mean BITS....I would argue that the international investment framework is a patchwork of various BITs, regional trade agreements and federal-state arrangements.   

6.  On the last page, the last paragraph refers to the most appropriate remedy-bringing a party into compliance.  The next sentence states that a compensation mechanism would encourage compliance and improve a developing country's position.  It seems that you are now putting compensation as a remedy within the large remedy of brining a measure into compliance.  This is confusing.    

Comments by:Peter Muchlinski

One comment: at p.2 para.3. the reference to the Hull formula is relevant only to cases of expropriation. That needs to be clarified.  

Comments by Peter M Holmes

One point was unclear to me.  "The recommendation diverges from the current agreement in   two major respects.  First, compensation is not negotiated   by the members that are party to the dispute, but is a   remedy that is decided upon by an adjudicating third   party.** This strengthens the provision and bring the WTO   framework closer to conformity with the international   investment framework.  Second, it loses its nature as a   voluntary option for the member in violation of the agreement and provides the complaining member for whom   retaliation is an unrealistic option with an alternative tool*** to ensure compliance and restore the imbalance   created by the inconsistent measure."
But I thought that ** the level of "compensation" is now set by an arbitration panel.  *** The EU is discussing ideas for tariff reductions instead of increases as  better forms of compensation. I am not sure this paper has any specific better ideas -  and it does not address the key problem that *only* retaliation is something that can be generated unilaterally by the winning party.