The novel enforcement of the Softwood Lumber Agreement reached between Canada and the United States through commercial arbitration and the recent use of mutually agreed solutions (MAS) to resolve important WTO trade disputes should lead to a profound evaluation of these instruments specifically provided for by the WTO Dispute Settlement Understanding (DSU). This article aims at furnishing a detailed framework of analysis of MAS under the DSU that allows the WTO dispute settlement system to adjudicate MAS-related disputes.
The article shows that MAS can create binding obligations and that, contrary to a long, well-accepted standpoint, MAS are WTO law, given the explicit reference to them in the DSU, their intimate relation with the WTO-covered agreements, and the requirement for compliance with these agreements. In addition, the article puts forward an interpretation of the DSU that permits panels and the Appellate Body to deem MAS as applicable law. This interpretation is offered in the view that there is no policy reason to argue that MAS-related controversies have to be resolved by an adjudication system different from that of the WTO.
The enforcement of MAS already took place once, as was mentioned. The United States and Canada reached a MAS (the Softwood Lumber MAS), about which they notified the Dispute Settlement Body (DSB) on 12 October 2006,Footnote 1 and by virtue of which several disputes before the WTO were ended.Footnote 2 Subsequently, the United States asserted that Canada had breached the MAS and sought its enforcement, albeit with the important difference that such enforcement took place outside the WTO dispute settlement system, by arbitration under the rules of the London Court of International Arbitration, pursuant to Article XIV of the Softwood Lumber MAS.Footnote 3
This unprecedented enforcement and the fact that other important disputes are recently being resolved through MAS, such as European Communities – Regime for the Importation, Sale and Distribution of Bananas,Footnote 4European Communities–Measures Affecting the Approval and Marketing of Biotech Products,Footnote 5 and Mexico – Measures Affecting Telecommunications Services,Footnote 6 raise the question of whether or not the time has arrived to carry out a detailed legal assessment of MAS, with a new perspective and in light of the recent developments. As De Mestral and Auerback-Ziogas have stated, the DSU is a work in progress,Footnote 7 and panels and the Appellate Body should adopt interpretations of this agreement that ensure that the WTO dispute settlement system is suited to the renovated use of MAS and to the innovative ways in which they start to be litigated. Differently put, a full legal assessment of MAS under the DSU is required to ensure that litigation about MAS needs not take place outside the WTO but fully within its dispute settlement system, its natural forum given the intimate connection that MAS usually have with the covered agreements.
To this end, this article is divided into five sections. The first section presents a legal assessment of MAS, in particular, their definition and requirements, and puts forward the reasons why MAS must be considered WTO law. The second section offers an interpretation of the DSU that supports the jurisdiction of the dispute settlement system to adjudicate MAS-related controversies and to apply MAS as a source of law. The third section shows the impact that the jurisdiction over MAS may have on certain dispute settlement procedures. The fourth section deals with a critical practical issue revealed by the Softwood Lumber MAS and arbitration – retrospective remedies clauses – and advances the proposition that such clauses are consistent with the DSU. Finally, the fifth section provides the conclusions of the paper.
Before starting, it is important to mention that MAS can take place before panel and appellate proceedings, as in Colombia – Customs Measures on Importation of Certain Goods from Panama,Footnote 8 or after such proceedings, as with the Softwood Lumber MAS, among others.Footnote 9 The latter possibility was also explicitly recognized by the Appellate Body in its Second Compliance report in EC–Bananas III,Footnote 10 on the basis of the text of Article 22.8 of the DSU.Footnote 11
1. Legal assessment of mutually agreed solutions under the Dispute Settlement UnderstandingFootnote 12
1.1 The notion of mutually agreed solutions under the Dispute Settlement Understanding
The DSU refers to MAS but does not define them. Article 3.7, third sentence, establishes that ‘[A] solution mutually acceptable to the parties to a dispute and consistent with the covered agreements is clearly to be preferred …’Footnote 13 However, this is not to say that this provision alludes to all settlements to international trade disputes or to all settlements to controversies that could have been framed under the covered agreements. The notion of MAS has a much narrower meaning under the DSU: it refers only to those that settle WTO disputes. So, for a MAS to exist under the DSU, there must be a previous WTO dispute before the WTO DSB, which has been resolved through a MAS. This means that if a trade controversy between States covered by, say, WTO law and also a regional trade agreement (RTA) is settled under the latter, the settlement is not a MAS under the DSU, even if the facts could fall under the WTO-covered agreements. The parties did not start proceedings before the DSB; consequently, there was no WTO dispute, and the settlement under the RTA is not a MAS under the DSU.
The narrower meaning of the term MAS in the DSU is based on a contextual interpretation of the third sentence of Article 3.7. In effect, it must be noted that Article 3.6 clearly links MAS to WTO dispute settlement proceedings, by providing that: ‘[M]utually agreed solutions to matters formally raised under the consultation and dispute settlement provisions of the covered agreements shall be notified to the DSB …’Footnote 14 The requirement of such a link is also supported by the context that the first sentence of Article 3.7 provides to the interpretation of the notion of MAS in the third sentence of the said provision. The opening phrase of Article 3.7 sets forth that: ‘[B]efore bringing a case a Member shall exercise its judgement as to whether action under these proceedings would be fruitful …’Footnote 15 Thus, the mention of MAS is included within a provision that specifically alludes to the formalization of WTO trade disputes before the competent WTO body. In sum, it can be said that MAS in the context of the DSU refer only to solutions to disputes that have been previously brought before the DSB.
1.2 Are mutually agreed solutions binding under the DSU?
The DSU is silent regarding the legal status of MAS. However, various provisions qualify MAS. For instance, as was just mentioned, Article 3.6 establishes that the Dispute Settlement Body [DSB] and the relevant WTO councils and committees must be notified of MAS.Footnote 16 In addition, Article 3.5 and Article 3.7, third sentence, establish that MAS must conform with the WTO-covered agreements.Footnote 17
However, none of the above-mentioned provisions expresses a view on whether MAS are binding or non-binding on parties to them. This silence could be understood to mean that the DSU leaves the decision up to WTO Members, which reveals a very convenient flexibility. Disputing Members may consider that a non-binding agreement may be enough to serve as a MAS. For instance, an agreement whose text calls for best efforts to carry or not to carry out certain acts may be agreed to and may lead in fact to the performance or absence of the acts in question by the given parties, to the point that the non-binding solution settles their dispute.Footnote 18 Or, on the contrary, Members can carve out MAS that contain precise and binding obligations for the parties involved. In sum, MAS are neither binding nor non-binding in general under the DSU. A determination depends on each MAS in particular, and, therefore, can only be made on a case-by-case basis and based on its particular text interpreted in accordance with the Vienna Convention on the Law of Treaties (VCLT).Footnote 19
The issue has not been addressed in detail by WTO panels so far. The panel in India–Measures Affecting the Automotive Sector simply left open the question regarding the binding character of MAS. However, in a brief statement, the panel did not discard the existence of MAS as providing for obligations, at least of a procedural nature.Footnote 20 Moreover, the Appellate Body admitted in its second compliance report in EC–Bananas III that MAS could create rights and obligations by expressing, regarding the Bananas Understandings, whose text explicitly called the Understandings a MAS:Footnote 21 ‘[T]he parties’ obligations must first and foremost be determined on the basis of the text of the Understandings...'Footnote 22 Moreover, the Appellate Body recognized in the above-mentioned report that parties to MAS could acquire the obligation under a MAS to not start compliance proceedings.Footnote 23
If it is accepted that MAS can limit rights of action under the DSU, such as those under Article 21.5 of the DSU, it also has to be admitted that MAS can create trade-related obligations. MAS may come as a package of exchange of trade-related obligations for limits on rights of action, and sometimes MAS may include both, as will be seen next.Footnote 24
Practice under the WTO supports the possibility of binding MAS. For instance, the MAS reached by India and the European Communities in India–Autos on 12 November 1997, created obligations for both parties that were to be subsequently performed over a period of several years. The Autos MAS provided:
Desiring to reach a satisfactory settlement of the difference regarding quantitative restrictions maintained by India on import of industrial, agricultural and textile products, as notified by India to the WTO … and for which the European Communities requested consultations with India under GATT Article XXII on 18 July 1997, India, on the understanding that nothing in this Agreement prejudices the respective rights and obligations of the European Communities and India under the WTO Agreement and that the European Communities will refrain from action under GATT Article XXII or Article XXIII as regards those restrictions during the phasing-out period as defined below, as long as India complies with its obligations under this exchange of letters, agrees as follows:
1. India will eliminate all quantitative restrictions on imports maintained by reference to GATT Article XVIII and notified to the WTO in Annex I, Part B of document WT/BOP/N/24 of 22 May, in accordance with the time schedules contained in Annex III of that document, as modified by the attached Annex. The modifications in the attached Annex concern the duration of each of the three phases of the period for the elimination of quantitative restrictions on imports imposed by India for balance-of-payments purposes and the shifting of certain products from Phase II to Phase I or Phase III to Phase I or II. This is without prejudice to India's rights and obligations under the WTO Agreement.Footnote 25
This is far from being the only example. For instance, Colombia and Panama agreed under the Customs MAS to launch a program of mutual assistance and cooperation aimed at preventing violations of their customs regulations. The parties also agreed to have periodic meetings to evaluate the effectiveness of the MAS.Footnote 26
1.3 Could only mutually agreed solutions that have been notified to the dispute settlement body be binding?
The next issue to consider is whether notification to the DSB under Article 3.6 of the DSUFootnote 27 is a precondition for the binding character of MAS. In other words, are rights and obligations provided for in MAS conditioned on their notification, meaning that there are none in their absence?
The issue of notification was relevant in EC–Bananas III (Article 21.5 – Ecuador II). There, the parties agreed on the Bananas Understanding, and the European Communities, the respondent in this case, informed the DSB that a MAS had been reached with Ecuador and the United States.Footnote 28 However, four days later, the United States, one of the complainants, communicated to the DSB that the understanding reached was not a MAS under Article 3.6 of the DSU,Footnote 29 and so did Ecuador, the other complainant, shortly after.Footnote 30
On the basis of Ecuador's prompt rejection of the European Communities' communication to the DSB regarding the Bananas Understanding's being a MAS, the panel expressed doubts that the Understanding was a MAS.Footnote 31 In addition, the panel attached great significance to notifications pursuant to Article 3.6:
[F]or the purposes of WTO dispute settlement, the reaching of an alleged mutually agreed solution between parties to a dispute needs to be complemented with notifying such agreement to all WTO Members. The indispensability of this latter, multilateral element of mutually agreed solutions is underscored by the requirement, under Article 3.6 of the DSU, of notifying mutually agreed solutions not only to one WTO body or to the WTO in general but to the ‘DSB and the relevant Councils and Committees’, and also by the explicit provision in Article 3.6 that in those bodies ‘any Member may raise any point relating thereto.’Footnote 32
Although the Appellate Body upheld the panel in considering that the Bananas Understanding was not a MAS,Footnote 33 the Appellate Body considered that contradictory statements before the DSB were not relevant for the assessment of whether the Understanding provided for obligations for the parties. For the Appellate Body, panels must look at the text of the settlement, and subsequent statements may only play a subsidiary role.Footnote 34 Although the Appellate Body did not pronounce on the legal relevance of notification of MAS under Article 3.6 of the DSU, in this finding it sent a clear indication that what mattered was the text of the MAS. It is there that the rights and obligations are laid down, and such rights and obligations will not be altered by subsequent disagreement about them, nor would they seem to be conditioned on the subsequent notification to the DSB.Footnote 35
1.4 The fundamental requirement of mutually agreed solutions: conformity with the WTO-covered agreements
MAS have to conform to the covered agreements, as evidenced by Article 3.7, third sentence, already quoted,Footnote 36 and by Article 3.5 of the DSU, which provides.
All solutions to matters formally raised under the consultation and dispute settlement provisions of the covered agreements, including arbitration awards, shall be consistent with those agreements and shall not nullify or impair benefits accruing to any Member under those agreements, nor impede the attainment of any objective of those agreements.Footnote 37
In its second compliance report in EC–Bananas III, the Appellate Body clearly affirmed this requirement of MAS. In its words, ‘Article 3.7 is not prescriptive as to the content of a mutually agreed solution, save that it must be consistent with the covered agreements.’Footnote 38 In addition, although the panel in EC–Bananas III (Article 21.5 – Ecuador II) did not deal with the enforcement of MAS, it was clear in highlighting the relevance of the requirements of the above-mentioned provision in particular. In the panel's words:
The fulfilment of these two basic requirements of Article 3.5 of the DSU is an indispensable multilateral element of ‘[a]ll solutions to matters formally raised under the consultation and dispute settlement provisions of the covered agreements’, including any alleged mutually agreed solution or legally binding agreement that is intended to provide a positive solution and effective settlement to a dispute…Footnote 39
A final point in this regard is that the possibility of partially inconsistent MAS should be recognized under certain circumstances. The fact that a part of a MAS is contrary to the covered agreements should not immediately lead to the conclusion that the whole MAS is void,Footnote 40 since other clauses may be valid, effective to resolve the dispute, and, therefore, fully applicable.Footnote 41
1.5 The legal status of mutually agreed solutions within WTO law
A critical issue regarding the conceptualization of MAS is that of determining whether they are part of WTO law or whether they must be considered as non-WTO law. To begin with, MAS are not part of the WTO-covered agreements, since they are not specifically referred to as such by the WTO Agreement or by any of the agreements in Annexes 1 and 2.Footnote 42 However, WTO law is a legal system that comprises much more than the covered agreements. For instance, interpretations and waivers, adopted by the WTO Ministerial Council or the General Council pursuant to Article IX.2 and Article IX.3 of the WTO Agreement, are not covered agreements, but they are WTO law.Footnote 43 Thus, the fact that MAS are not covered agreements does not irremediably make them non-WTO law.
There are three reasons why MAS must be regarded as part of the WTO law. First of all, they are specifically provided for by a covered agreement, the DSU. Second, MAS are closely linked to WTO rights and obligations, since they are agreed to by WTO Members to put an end to controversies brought before the DSB about such rights and obligations. And third, a final proof of MAS' being WTO law is that they have to be in conformity with the covered agreements, a requirement that would certainly not exist were MAS non-WTO law.
To be sure, MAS do not possess generality, and their scope is limited to the specific parties to the controversy. But this lack of generality does not mean that MAS are unrelated to the WTO legal system, which not only explicitly provides for them but also elevates them to the prominent status of the preferred solution to WTO trade controversies.
To place MAS alongside other international inter-state agreements outside of WTO law only because the former are not part of the covered agreements is to underscore the reality of MAS and their intimate connection with WTO rights and obligations. It is to adopt a very formalist position based on dubious premises that WTO law is only limited to the covered agreements or to general norms. In sum, and for the reasons mentioned in the previous paragraphs, it could be possible to say that MAS are WTO law.
2. The jurisdiction of the dispute settlement system to resolve disputes related to mutually agreed solutions
2.1 Why enforce mutually agreed solutions?
Both parties to MAS, the requesting or the requested Member in consultations or the complainant or the respondent in panel proceedings, may have valid reasons to seek to enforce a MAS whenever they believe that any of its provisions have been violated. First, it is possible that the requesting Member in consultations or the complainant Member in panel proceedings may wish to enforce the given MAS and seek a declaration that the measure at issue is contrary to the MAS and must be brought into conformity with it. The reason for this choice is that, although the measure in question can still be contrary to the covered agreements, recommendations and rulings adopted by the DSB leave respondent Members a certain latitude in implementing them once a panel or the Appellate Body finds a violation of any of such agreements.Footnote 44 On the contrary, a well-tailored MAS, and, more so, one reached after panel and Appellate Body reports, may narrow this latitude by prescribing a particular set of actions. When this is so, the complainant in panel proceedings may well seek to preserve its rights under the MAS, aiming at new recommendations and rulings directed at bringing the measure into conformity with the MASFootnote 45 instead of making the claim that the measure at issue is still in violation of the covered agreements.Footnote 46
However, it is also possible that the Member that acted as requested Member in consultations or as respondent in panel proceedings may also seek to enforce a MAS. Any of these Members may find that the enforcement of the MAS better serves their interests than does enacting measures similar to those that prompted either consultations or litigation under the original dispute that ended with the MAS. This was clearly the case with the Softwood Lumber MAS, where the United States, the respondent in litigation before the WTO, sought the enforcement of the MAS in the face of a violation thereof by Canada, the complainant in such litigation, instead of seeking redress for the violation of the MAS through the adoption of measures similar to those that have prompted litigation in this dispute.
Having shown that there may be MAS that create binding obligations and that there may also be reasons for seeking their enforcement, this paper will present the interpretation of the DSU that supports the proposition that the WTO dispute settlement system has jurisdiction to hear disputes related to alleged violations of obligations provided for in MAS.
2.2 Interpretation of the DSU supporting the jurisdiction of the dispute settlement system to resolve disputes related to mutually agreed solutions
Previous panels, such as the panel in India–Autos and the panel in EC–Bananas III (Article 21.5 – Ecuador II) did not address the issue of whether the dispute settlement system could deal with claims of violation of MAS.Footnote 47 The former stated:
[W]hat can be done if, despite the agreed solution, a subsequent disagreement emerges relating to the scope of the solution or to compliance with it … is not an issue expressly addressed in the DSU, nor has it been previously examined by another panel established under the DSU.Footnote 48
However, the panel in India–Autos did not view such jurisdiction as unthinkable, by stating:
In the absence of any express mechanism foreseen in the DSU for the consideration of such agreements [MAS], there would be a need to determine whether such a power can be implied from various provisions of the DSU. Alternatively, there may be an argument that a general principle such as estoppel may apply to WTO dispute settlement. These possibilities suggest that the issue cannot necessarily be resolved simply through an acknowledgement that an MAS is not a covered agreement as was argued by the EC. That argument simply is another way of noting that the DSU does not expressly give a panel a mandate to consider whether a ‘violation’ of such an agreement might exist as a distinct basis for a dispute under the DSU. ...Footnote 49
But if panels have been cautious in neither accepting nor rejecting jurisdiction regarding MAS-related disputes, some authors have explicitly rejected it. Pauwelyn is of this view. To him, a panel lacks ex ante jurisdiction under the DSU and could only have ad hoc jurisdiction if parties to a MAS agreed to resolve their MAS-related controversy through a panel. He says:
[T]he jurisdiction of WTO panels is limited to claims under the WTO covered agreements...
[D]SU Article 11 instructs panels to ‘make an objective assessment of … the application of and conformity with the relevant covered agreements …’ Consequently, no claims of violation of rules of international law other than those set out in WTO covered agreements can be brought before a WTO panel. Similarly, a WTO panel does not have jurisdiction to consider claims under WTO rules other than those included in WTO covered agreements (such as the ministerial decisions and declarations that are part of the Final Act, but not of the WTO Agreements; or rules set out in a mutually acceptable solution agreed upon in the context of a WTO dispute) … A WTO panel may only decide these other claims of the parties to the dispute in question grant it this jurisdiction ad hoc and by mutual consent …Footnote 50
While I agree with the argument that panels could have ad hoc jurisdiction when parties to MAS jointly decide to settle their MAS-related dispute through a panel, I am of the view that this common determination is not necessary to confer jurisdiction on a panel. In effect, the text of various provisions of the DSU interpreted in context and in light of the object and purpose of the said Agreement can ground the ex ante jurisdiction of the dispute settlement system to adjudicate a dispute related to a MAS. Although such jurisdiction is not explicitly contemplated, it can be derived from several provisions of the DSU.
Article 3.3 could be seen as the first source of jurisdiction for MAS-related controversies. It sets forth:
The prompt settlement of situations in which a Member considers that any benefits accruing to it directly or indirectly under the covered agreements are being impaired by measures taken by another Member is essential to the effective functioning of the WTO and the maintenance of a proper balance between the rights and obligations of Members.Footnote 51
Although MAS are not covered agreements, an agreement of this nature, the DSU,Footnote 52 explicitly provides for their existence, so any right or obligation that MAS may contain is accrued indirectly – by suggestion or implication – under the DSU.Footnote 53 But, in addition, it can be said that sometimes MAS can also provide for rights and obligations directly accrued under the covered agreements, when MAS are reached after the adoption of the panel and Appellate Body reports of the case. Under these circumstances, the given rights and obligations under MAS may be intimately associated with the provisions of the covered agreement interpreted and applied by the respective panel and the Appellate Body.Footnote 54
The third sentence of Article 3.7 renders contextual support for the jurisdiction of the system. As was mentioned, this provision establishes that MAS are the preferred solutions to settle disputes. A clear way to give meaning to this stated preference is by ensuring that the dispute settlement system is available to adjudicate disputes related to alleged violations of obligations included in MAS. Such jurisdiction creates further incentives to reach MAS, since there would be a way to enforce their obligations. On the contrary, it would be odd and not entirely consistent with this preference if the DSU were interpreted in a way that denied the WTO dispute settlement system jurisdiction to adjudicate disputes related to the preferred solutions to disputes, since such lack of jurisdiction may sometimes weaken the effectiveness of the rights and obligations included in MAS, because there would be no mechanisms to ensure compliance with them.Footnote 55
The jurisdiction of the system to adjudicate MAS-related controversies is also supported in the object and purpose of the DSU and, particularly, in the goal provided for in Article 3.6, second sentence, according to which, ‘The aim of the dispute settlement mechanism is to secure a positive solution to a dispute …’Footnote 56 Disputes about MAS are always related to rights and obligations indirectly derived from the DSU, and also sometimes directly rooted in other covered agreements, when the MAS has been reached after the adoption of the panel and Appellate Body reports of the controversy. The jurisdiction of the system to hear and adjudicate MAS-related disputes creates the conditions for their prompt settlement and contributes to the achievement of the said goal of the DSU.
In addition, the jurisdiction of the system over MAS-related disputes strengthens the central character of the dispute settlement system in providing security and predictability to the world trading system, one of its key features contemplated in Article 3.2 of the DSU. Parties seeking to ensure the enforcement of a MAS would not need to agree on arbitration clauses giving jurisdiction to resolve such controversies to adjudicative bodies outside the WTO dispute settlement. Instead, once the jurisdiction of the system over trade conflicts stemming from MAS is accepted, WTO Members party to them can seek the enforcement of the rights and obligations provided by them within the WTO dispute settlement system, thereby enhancing its central nature as a key provider of security and predictability to the functioning of the WTO and the multilateral trading system.
Finally, it is worth highlighting that, whenever WTO Members wished to exclude particular disputes from the jurisdiction of panels and the Appellate Body, they did so explicitly, as was the case with GATS Article XXII:3, which refers a particular type of controversy to binding arbitration.Footnote 57 No exclusion of this sort is provided for in the DSU regarding MAS-related controversies.
As a matter of procedure, there is a burden of proof to meet for a party to successfully allow the given panel to adjudicate the MAS-related dispute; this burden is based on the framework of analysis illustrated above in Section 1. First, the complainant must demonstrate the existence of the WTO dispute's having been brought formally before the DSB.Footnote 58 Second, the complainant has to show that the accord did in fact end the said dispute. If it does not, then the settlement is not a MAS and does not fall under the scope of Article 3.7 of the DSU, and its rights and obligations cannot be regarded as being indirectly accrued under a covered agreement, the DSU.
In sum, it can be said, on the basis of an interpretation of the text of relevant provisions, in their context and in light of the objective and purpose of the DSU, as mandated by Article 31 of the VCLT, that the dispute settlement system has jurisdiction to adjudicate disputes arising from MAS.Footnote 59 This also means that the relevant MAS becomes part of the applicable law in the given controversy,Footnote 60 the measure at issue is assessed in light of the MAS, and if the panel and the Appellate Body find a violation, the respondent must bring its measure into conformity with the MAS.Footnote 61
The jurisdiction of the WTO dispute settlement system to adjudicate MAS-related controversies should be seen as an additional result of its evolution in response to new events, such as the enforcement of the Softwood Lumber MAS. In addition, the DSU allows enough flexibility to carry out the fine-tuning of the system, since, as Clauss-Dieter Ehlermann, an original member of the Appellate Body, pointed out:
compared with substantive rights and obligations, procedural rights and obligations of WTO Members related to the dispute settlement procedure are less precisely defined. This lack of precision is hardly surprising in view of the historical evolution of the dispute settlement system. In interpreting the DSU, the AB had therefore to face more ambiguities and ‘gaps’ than in other areas of WTO law…Footnote 62
Three closing remarks are worthy of mention in order to narrow the scope of the conclusion. The first is that the jurisdiction of the dispute settlement system to adjudicate MAS-related disputes does not open the door for the adjudication of non-WTO law disputes, a path that the Appellate Body closed in Mexico–Tax Measures on Soft Drinks and Other Beverages.Footnote 63 As was seen above in Section 1.5, MAS are WTO law. Thus, such a risk does not exist, and the jurisdiction related to MAS leaves the findings and conclusions of the said report untouched. Consequently, the system lacks jurisdiction to resolve disputes about settlements reached under RTAs that could also have been framed under the WTO-covered agreement but that were not brought before the DSB.
The second topic is that jurisdiction regarding MAS-related disputes does not open the door for the enforcement of other bilateral agreements or practices WTO members may reach or develop. These agreements and practices may refer to WTO rights and obligations among two or more Members, but since the former agreements and practices have not taken place within the scope of dispute settlement proceedings, they do not qualify as MAS, and, therefore, the system lacks jurisdiction to assess them.
The third issue is that novel expansions of jurisdiction within the WTO dispute settlement system have already taken place in the past, thereby illustrating well the point Ehlermann made related to the flexibility of the DSU, quoted above.Footnote 64 In effect, the DSU does not expressly contemplate an appeal of compliance panel reports, and Article 22 of the DSU seems to suggest that, after the compliance panel stage, only arbitration regarding the permitted level of retaliation follows. However, a bilateral agreement between Brazil and Canada in the dispute in Brazil–Export Financing Program for Aircraft–Recourse by Canada to Article 21.5 of the DSU was enough for the Appellate Body to extend appellate review to compliance panels' reports pursuant to Article 21.5. The entire Appellate Body report in this case does not contain a single word regarding its jurisdiction to decide these appeals.Footnote 65 Has this novel jurisdiction of the Appellate Body had an adverse impact on the Appellate Body, in particular, or over the dispute settlement system in general? I know of no criticism of the Appellate Body for this decision either by Members or by commentators. On the contrary, this novel jurisdiction has been useful in ensuring that compliance disputes get to be assessed by the highest WTO adjudicator and has strengthened the system as a whole. A similar phenomenon would take place regarding the recognition of jurisdiction of the dispute settlement system to adjudicate MAS-related controversies.
2.3 Mutually agreed solutions under the DSU as applicable law
The jurisdiction that the WTO dispute settlement system has to resolve disputes related to rights and obligations contemplated by MAS implies that MAS can become applicable law. This is to say that panels and the AB can declare the existence of violations thereof,Footnote 66 so long as the given MAS is in conformity with the covered agreements and the claims of violation are part of the terms of reference of the dispute.Footnote 67 Indeed, MAS-related disputes are basically a debate about whether a party has complied with specific MAS provisions. Jurisdiction to adjudicate the controversy means looking at the facts to determine whether there is or not a violation of the MAS, and if so to declare it.
However, this is not to say that MAS become the only applicable law of thedispute. The reasons are twofold. First, if the MAS entered into force before panel and Appellate Body proceedings, as in India–Autos, the covered agreements would always be relevant in order to ensure that the alleged violated clauses of the MAS are in conformity with the former, and would prevail over such clauses if they were WTO-inconsistent. Second, if the MAS takes place after the adoption of the panel and Appellate Body reports, it is clear that the MAS may need to be interpreted and applied in light not only of the covered agreements, but also of the interpretations of them included in the adopted reports of the case as well as the relevance of the covered agreements to assess the consistency of the MAS clauses. These close interactions between MAS and the covered agreements would clearly illustrate that, when panels and the Appellate Body applied a MAS, they would not be applying precepts unrelated to WTO law.
In this regard, it is important to recall that, under the GATT, the arbitrator in Canada/European Communities Article XXVIII Rights established that the close connection between a bilateral agreement that was negotiated under the umbrella of a GATT provision, Article XXIV:6, allowed the agreement to serve as a basis for the Canadian complaint in this case. Refusing the argument invoked by the European Communities that the agreement was unrelated to the GATT, the arbitrator stated the following:
A strongly contested issue is the relationship between these Agreements and the GATT, and whether Canada may bring a claim based on a bilateral agreement under the multilateral procedures of the GATT …
There is … much evidence that these Agreements were negotiated in the context of the 1960–62 Article XXIV:6 negotiations … The EEC itself … linked the Agreement on Quality Wheat to the Article XXIV:6 negotiations …
In principle, a claim based on a bilateral agreement cannot be brought under the multinational dispute settlement procedures of the GATT. An exception is warranted in this case given the close connection of this particular bilateral agreement with the GATT …Footnote 68
Although the Agreement was not a MAS, the award still illustrates that, at least on this occasion, a bilateral agreement was regarded as part of the applicable law of a GATT dispute.
A final point is, who has the burden of proof of demonstrating that the MAS in question is or is not inconsistent with the covered agreements? The inconsistency could be raised as a defense within panel and Appellate Body proceedings; the respondent may argue that it is not complying with the pertinent obligation provided for in a MAS because it is contrary to the covered agreements. If the respondent succeeds in proving its case, then the panel has to apply Articles 3.4 and 3.7 of the DSU and cannot make recommendations and rulings aimed at compelling the respondent to bring its measure into conformity with the MAS. It is, then, through this defense that the requirements of Articles 3.4 and 3.7 of the DSU would be made effective.Footnote 69
A final point in this regard is that of responding to the point that the reiteration of the covered agreement as the applicable law in WTO disputes in several provisions of the DSU, such as Articles 4.2 on consultations, 7.2 on terms of reference of panels, 11 on the function of panels, Article 19.1 on panel and Appellate Body recommendations, 21.5 on compliance, among others, means that the said agreements are the only applicable norms. The logic of the panel in India–Autos may be helpful in responding to this argumentation:Footnote 70 such reiteration simply illustrates that MAS are not explicitly recognized as applicable law, but does not prevent in itself the existence of an implicit recognition of such character, and even less so since nowhere in the DSU is it provided that the covered agreements are the only applicable law. Further, as the Appellate Body stated in in Canada–Certain Measures Affecting the Automobile Industry, ‘omissions in different contexts may have different meanings, and omission, in and of itself, is not necessarily dispositive’.Footnote 71 Thus, omission to mention MAS as applicable law is not dispositive to prevent MAS from possessing such nature. It is always the context of the interpreted provision that determines the meaning of the silence. Here, an interpretation of the text of Article 3.3 of the DSU, interpreted in context and in light of the object and purposes of the DSU, has led to the conclusion that the dispute settlement system has jurisdiction regarding MAS-related disputes, and from this conclusion the applicability of MAS has been derived as a necessary consequence.
In response to the argument that MAS cannot be applicable law because they are not defined as covered agreements, we could recall what Benjamin Cardozo pointed out: ‘The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today …’Footnote 72 This was a statement made 93 years ago in reference to US contract law; it is fully pertinent today in relation to the WTO and its complex, vast, and sophisticated legal system.Footnote 73
In the wide context of the Appellate Body case-law introducing innovations to the WTO dispute settlement system, it could be said that the recognition of the jurisdiction of the system to adjudicate MAS-related controversies and the regarding of MAS as applicable law would not engender much controversy among WTO members in comparison with other past innovations. For instance, the introduction of amicus curiae briefs,Footnote 74 the possibility of adjudicating disputes related to the conformity with GATT Article XXIV of customs unions or free trade agreements,Footnote 75 or those associated with the justification of trade-restrictive measures taken for balance-of-payment purposes under GATT Article XVIII.BFootnote 76 implied the use of much more institutional capital by the Appellate Body. This is not the case here, and the reason is straightforward: while the latter decisions had economic or political costs for WTO Members or for WTO bodies,Footnote 77 the jurisdiction over MAS-related controversies does not generate costs of such nature for them, and, therefore, WTO Membership would not have serious objections to it.Footnote 78 In sum, the Appellate Body has gone much further in the past in adjusting the dispute settlement system and could do the same regarding MAS, given that serious opposition by Members would probably not arise.
2.3.1 Terms of reference in disputes arising from the violation of mutually agreed solutions
The existence of jurisdiction regarding notified MAS and their status as applicable law in dispute settlement proceedings also means that both the request for consultations and the request for establishment of panels must identify the clauses of the MAS in question allegedly violated by the measure at issue.Footnote 79 Thus, the standard terms of reference pursuant to Article 7.1 of the DSU, referring only the covered agreements as bases for complaints, do not apply. Consequently, special terms of reference must be drawn up.
The need for special terms of reference emerges as a result of the fact that they determine their jurisdiction, as the Appellate Body has repeatedly affirmed.Footnote 80 Thus, in order for a panel to rule on a claim of violation of a MAS, the complainant must ensure that the terms of reference of the dispute identify the specific clauses of the MAS that it regards as having been violated by the measure at issue, without prejudice of the inclusion of specific provisions of the covered agreement that may be relevant as part of the legal basis of the complaint, paramount among them the provisions of the DSU that explicitly allude to MAS (Articles 3.5 and 3.7 of the DSU, among others).
2.4 The dispute settlement body's jurisdiction on mutually agreed solutions and article 23 of the DSU
If the DSB has jurisdiction to deal with violations of MAS, the other side of the coin is that parties to them cannot unilaterally declare that the given MAS has been violated and act upon such declaration to seek redress for the respective transgression. Thus, parties to MAS could not do what Colombia did in Colombia–Indicative Prices and Restrictions on Ports of Entry, in which Colombia assumed that Panama was acting contrary to the Customs MASFootnote 81 and enacted trade-restrictive measures similar to those that had brought about the original dispute settled by the MAS.Footnote 82
In affect, Article 23 of the DSU provides:
Strengthening of the Multilateral System
1. When Members seek the redress of a violation of obligations or other nullification or 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 and procedures of this Understanding.
2. In such cases, Members shall:
(a) not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding …Footnote 83
At first sight, it seems that parties to MAS would not be covered by Article 23 of the DSU, since violations of MAS are not, strictly speaking, transgressions of a covered agreement. Such interpretation would be based on a reading of Article 23 that takes it in complete isolation from the rest of the provisions of the DSU, a method of interpretation that the Appellate Body has explicitly disfavoured. Such reading would go against the very purpose of the provision, strengthening the multilateral system, since it would allow Members to unilaterally declare the violations of MAS.
Article 23 is certainly susceptible to another interpretation by virtue of which Article 23 covers redress for violations of MAS. First, as the panel in United States–Sections 301–310 of the Trade Act of 1974 expressed, Article 23.1 contains obligations of a more general character. Said the panel:
Article 23.1 is not concerned only with specific instances of violation. It prescribes a general duty of a dual nature. First, it imposes on all Members to ‘have recourse to’ the multilateral process set out in the DSU when they seek the redress of a WTO inconsistency. In these circumstances, Members have to have recourse to the DSU dispute settlement system to the exclusion of any other system, in particular a system of unilateral enforcement of WTO rights and obligations. This, what one could call ‘exclusive dispute resolution clause’, is an important element of Members' rights and obligations under the DSU.Footnote 84
This argument of a general nature is also supported by an interpretation of Article 23.1 itself within the context provided by Article 3.3. As was seen, the latter defines the disputes that the DSU seeks to resolve promptly and includes among them those related to the nullification or impairment of benefits accruing to a WTO member indirectly by a covered agreement. There is no need to include within Article 23 disputes arising out of the violations of obligations accrued to Members indirectly by the covered agreements, since Article 3.3 has already included such violations as falling within the jurisdiction of the WTO dispute settlement system. Consequently, given that such violations create a dispute that falls under the dispute settlement system, it is for that system, not Members unilaterally, to determine whether there has been a violation of rights and obligations provided for in MAS.
3. Impact of mutually agreed solutions over dispute settlement proceduresFootnote 85
3.1 How mutually agreed solutions can affect future litigation under the original disputes
Two important issues that need to be addressed are how the original dispute – the one that led to a MAS – and subsequent MAS-related disputes interact, and whether or not MAS prevent future litigation under the original dispute.
To begin with, there is a particular situation in which the original controversy and the dispute arising from a MAS have very little connection. This is, for instance, the case when the requested Member in consultations or the respondent in the original dispute becomes the complainant in the MAS dispute, because the Member requesting consultations or the complainant in the original dispute is the one that has allegedly failed to comply with the given MAS. This was in fact the case with the United States regarding the Softwood Lumber MAS, although outside the WTO dispute settlement system. The United States turned from being respondent within the WTO dispute settlement system into complainant in arbitration proceedings. Under this kind of circumstance, the original dispute and the MAS-related dispute may have little connection; since the parties switch roles, the measures are not only different, but they are also adopted by a different party, and the applicable law becomes, most prominently, the MAS in question.
However, much stronger and more complex connections may sometimes exist when, as has happened in past MAS-related cases in the WTO, the Member requesting consultations or the complainant Member in the original panel proceedings that are party to a MAS starts or continues litigation under the original dispute against the requested Member or the respondent. Is this possible?
3.1.1 The state of the law regarding litigation under the original dispute after mutually agreed solutions are reached
In India–Autos, the panel dealt with India's argument that the Autos MAS – which was negotiated during the consultations process – prevented the European Communities from starting litigation claiming that the measure at issue was contrary to the covered agreements.Footnote 86 The panel was hesitant to determine whether a MAS could prevent such litigation.Footnote 87 The doubts of the panel were due to the facts that the status of MAS was not addressed by the DSU, and it was not clear whether the dispute settlement system would have jurisdiction to address claims of violations of a MAS.Footnote 88
However, the Appellate Body subsequently and explicitly declared in its second compliance report in EC–Bananas III that the complainant in dispute settlement proceedings and party to a MAS could start compliance proceedings if the measures taken to comply still violated the covered agreements,Footnote 89 save if such possibility had explicitly or by necessary implication been excluded in the MAS.Footnote 90
One of the fundamental reasons the Appellate Body adduced for this conclusion was that:
[N]othing in Article 3.7 establishes a condition under which a party would be prevented from initiating compliance proceedings or, indeed, dictates that the only kind of settlement envisaged in that provision is one that bars recourse to compliance proceedings under Article 21.5 … The only express limitation referred to in Article 3.7 is that ‘a Member shall exercise its judgement as to whether action under these procedures would be fruitful’. The Appellate Body has interpreted this phrase to indicate that a Member is ‘expected to be largely self-regulating in deciding whether any such action would be ‘fruitful’'. This is also borne out by Article 3.3, which provides that the prompt settlement of situations in which a Member, in its own judgement, considers that a benefit accruing to it under the covered agreements is being impaired by a measure taken by another Member is essential to the effective functioning of the WTO.Footnote 91
As can be seen, the Appellate Body also recognized that compliance proceedings can be started after a MAS when they have not been explicitly excluded by it. However, the Appellate Body has also accepted that MAS reached after the adoption of the panel and Appellate Body reports of the case can prevent these proceedings.Footnote 92 In sum, subsequent exercise of the right of action under Article 21.5 of the DSU after a MAS depends on the text of the MAS in question.Footnote 93
It is important, though, to bear in mind that these statements were made in the context of the India–Autos panel, or the Appellate Body's not having recognized that the dispute settlement system could adjudicate MAS-related controversies. However, the point to address is what litigation options, under the original dispute and under the MAS, requesting Members in consultations or complainant Members in panel proceedings have in a scenario in which the jurisdiction of the dispute settlement system to adjudicate MAS-related disputes is admitted and in light of the foregoing state of the law.Footnote 94
3.1.2 Litigation options for requesting members in consultations or complainants in panel proceedings when the jurisdiction of the dispute settlement system over MAS-related controversies is accepted
Let us start with the case of a MAS that has been agreed to after the adoption of the panel and Appellate Body reports of the case, in a situation in which the complainant alleged that the respondent was still adopting WTO-inconsistent measures. It can be said, on the basis of the WTO Members' wide latitude to initiate dispute settlement proceedings under the first sentence of Article 3.7, that Members could have several options available, depending on their goals.
First, the complainant in panel proceedings may seek to enforce the MAS. If so, it will have to start a new dispute on the basis of a violation of the MAS in order to obtain recommendations and rulings from the DSB aimed at compelling the respondent to bring its measure into conformity with the MAS.Footnote 95
However, and if the MAS does not explicitly prevent it, the complainant could also decide not to seek the enforcement of its rights under the MAS, if for any reason it perceives that such enforcement is no longer in its best interest, and start compliance proceedings under the original dispute by claiming that the measure was still inconsistent with the covered agreements, as interpreted in the adopted reports of the case. Such option would be available on the basis of the Appellate Body's statement in its second compliance report in EC–Bananas III.Footnote 96
The final issue to resolve is whether MAS clauses barring compliance proceedings will always and unavoidably prevent them. This question must be answered bearing in mind, first, the need to recognize the binding character of MAS when so desired by the parties to them and, second, the need to ensure the paramount requisite that MAS conform with the covered agreements.
The answer to the question then depends on whether the specific MAS obligation that the respondent has to comply with is consistent or not with the covered agreements. If it is, the clause barring compliance proceedings stands, and the complainant cannot obtain from a panel an assessment regarding whether the measure in question complies with the adopted reports of the case. The panel can only assess whether or not the measure conforms with the MAS.
However, if the MAS or the relevant obligation therein is WTO-inconsistent, the clause barring compliance proceedings cannot stand on its own, the complainant can proceed with them, and the panel has jurisdiction to determine whether the measure at issue complies with the recommendations and rulings of the DSB.
Finally, it is important to say that, to overcome the effects of the MAS clause barring compliance proceedings, it is for the complainant to demonstrate that the MAS is contrary to any of the covered agreements. In other words, proof of the inconsistency by the complainant is the precondition for the compliance panel's jurisdiction.
As can be seen, under the latter situation, the binding character of the MAS and its WTO consistency produce effects, and the integrity of the covered agreements is always protected, as ordered by Articles 3.4 and 3.7 of the DSU.
The bases set forth by the Appellate Body in its second compliance report in EC–Bananas III for MAS reached after the adoption of the panel and Appellate Body reports of the case and their impact on subsequent compliance proceedings can also be used in the situation in which the MAS is reached during the consultation phase of dispute settlement, and the requesting Member in consultations is dissatisfied with the new measure adopted by the requested Member.
The former has also several options. It can start a new dispute seeking to enforce the MAS but alleging that the measure in question is contrary to it. However, if the MAS does not explicitly bar it, the requesting Member can also decide not to seek the enforcement of the MAS and claim, instead, that the measure is inconsistent with the covered agreements. Finally, even if the MAS bars any dispute regarding the conformity with the covered agreement of the measures covered by the MAS, the above-mentioned Member can still succeed in this claim if it is able to prove that the MAS is inconsistent with the covered agreements and that, therefore, the measure must be assessed not in light of the MAS but directly in light of the said agreements.
As can be seen, the jurisdiction of the dispute settlement system to adjudicate controversies arising out of MAS complements the jurisdiction of the system to continue dealing with further controversies under the original dispute, if such course of action is not barred in the respective MAS or if the MAS is inconsistent with the covered agreements. By no means do MAS imply that parties to them end up waiving their rights of action under the DSU.
3.2 What are the enforcement mechanisms of mutually agreed solutions?
Once a violation of a MAS is found, and once it is established that the violated MAS obligation is not contrary to the covered agreements, the DSB has to adopt the reports of the case, and the respondent Member must bring its measure into conformity with the MAS.
Surveillance of the implementations of the recommendations and rulings of the reports in MAS-related controversies takes place under the same dispute settlement phases of Articles 21 and 22 of the DSU, that is through the calculation of the reasonable period of time for implementation under Article 21.3(c), compliance proceedings under Article 21.5, and suspension of concessions under Article 22 of the DSU. This conclusion is based on the fact that the texts of these two provisions do not provide the possibility of exceptions for the surveillance mechanisms regarding compliance with certain recommendations and rulings of the DSB. In other words, surveillance is conditioned on the adoption of the reports by the DSB, not on the particularities of the dispute that led to the said reports.
In addition, such conclusion can also be rooted by implication in Article 25.4 of the DSU, which provides that ‘[A]rticles 21 and 22 of this Understanding shall apply mutatis mutandi to arbitration awards.’Footnote 97 If surveillance mechanisms are even provided for in decisions outside panel and Appellate Body proceedings, such as arbitration, it is clear that they will always be available when the decisions are the result of panel and appeal proceedings, regardless of the specific circumstances of the controversy in question.
4. WTO consistency of clauses in mutually agreed solutions providing for retrospective remedies
The Softwood Lumber MAS and the arbitral award that was recently rendered under it – ordering the payment of compensation for breach of obligations pursuant to the Softwood Lumber MASFootnote 98 – raise the last important issue: do clauses in MAS providing for retrospective remedies in the case of violation go against the covered agreements, resulting in their not being applied by panels in the event of finding a violation of the MAS at issue?Footnote 99
It is a truism that prospective remedies are the ones usually applied in WTO disputes, pursuant to Article 22 of the DSU, although exceptions have occurred both during the GATT and WTO eras.Footnote 100 While this provision contemplates prospective remedies, it neither explicitly provides for nor bans the existence of retrospective remedies in MAS.Footnote 101 The text then is not in itself dispositive about the issue. The possibility of retrospective remedy clauses within MAS is supported by the object and purpose of the DSU, since it enhances the role of the dispute settlement system as a ‘central element in providing security and predictability to the multilateral trading system’ as contemplated in Article 3.2 of the DSU. As a result, Members do not have to go outside the system to get these clauses applied. In addition, the said possibility truly offers Members the flexibility to craft the best solutions to their disputes in terms of remedies, without impairing other Members' rights.Footnote 102 On the contrary, the central character of the system is eroded through interpretations of the DSU that lead Members to start resolving their disputes partially or totally outside the system in order to ensure the application of MAS clauses establishing retrospective remedies.Footnote 103
At the end of the day, prohibiting retrospective remedies within MAS does not create any benefit for the system. WTO Members that want to include such remedies in a MAS will do it anyway, and they will make sure that the relevant clause is applied by placing enforcement of the MAS outside the system and in the hands of other international adjudicators.Footnote 104 These adjudicators, as the arbitral tribunal in the Softwood Lumber MAS evidences, will not be constrained by the DSU and will apply the retrospective remedy clause without much difficulty.
5. Conclusion
The unprecedented enforcement of the Softwood Lumber MAS and the recent use of MAS to resolve important trade disputes should compel us to take a hard look at these dispute settlement instruments specifically provided for by the DSU. This article has sought to provide a detailed framework of analysis of MAS under the DSU that allows the WTO dispute settlement system to adjudicate MAS-related disputes. WTO Members should not go outside the system to enforce MAS.
The article has illustrated that MAS can create binding obligations and that, contrary to a long held view, MAS are WTO law, given the explicit reference to them in the DSU, their intimate relation with the WTO-covered agreements and the requirement for compliance with these agreements. In addition, the article has offered an interpretation of the DSU that allows panels and the Appellate Body to regard MAS as applicable law. This interpretation is offered in the view that there is no policy reason to sustain that these controversies – always fully related to WTO rights and obligations and framed under the corners of the covered agreements – have to be resolved by an adjudication system other than that of the WTO, the most sophisticated in international law today and the natural forum to resolve controversies related to WTO law. In general, the article has shown that the DSU possesses the flexibility to be interpreted in a way that the dispute settlement system is adjusted to accommodate the creative kinds of provisions that the Softwood Lumber MAS provided for and any other that, in conformity with the covered agreements, Members may craft in the future to end their controversies.
