Dispute Settlement Mechanisms in Free Trade Agreements: Strengths, Weaknesses And Best Practices

Executive Summary

(Full report can be read here)

This paper addresses the current need for effective and efficient dispute settlement mechanisms (“DSMs”) in Free Trade Agreements (FTAs).* Canada is a party to several FTAs that include DSM chapters but rarely resorts to those DSMs to resolve trade disputes. This experience is not specific to Canada; in fact, most FTA DSMs have never been used. One reason for this may be that the World Trade Organization (“WTO”) has thus far offered an effective and efficient means of resolving trade disputes with FTA partners, so FTA DSMs did not need to be used. This may not hold true going forward, however. Although trade disputes continue to be brought before WTO panels, the suspension of the WTO Appellate Body has undermined the WTO’s ability to issue final, binding decisions. In light of these developments, the reticence to use FTA DSMs may change as parties explore alternate ways to peacefully resolve disputes. If FTA DSMs are to provide a viable option, however, those mechanisms must ensure both effective and efficient resolution of disputes.

This memorandum examines several DSMs with a view to determining whether their designs lend themselves to effective and efficient dispute settlement. We focus in particular on four elements of those mechanisms that are key to the effective and efficient functioning of FTA DSMs: 1) panel selection, 2) parties’ written submissions, 3) secretariat or assistant support to panelists, and 4) implementation.

Each of these plays an important role in maintaining the effective and efficient functioning of a DSM. First, panel selection is without doubt an extremely important element in dispute settlement; after all, parties want to ensure that those who will render the decisions are well suited to do so, especially given the considerable impact that challenged trade measures can have on the domestic economy or industry. Thus, taking the appropriate time to select ad hoc panelists is understandable. However, other considerations might come into play in the panel selection process that can affect efficiency. For example, parties may try to delay or avoid appointing panelists altogether in order to put off or escape the consequences of a panel report impugning their measure(s), as well as the time and costs associated with the dispute settlement process. The panel selection procedure in the DSM should seek to address such tactics.

Second, the logistics around filing written submissions can also have an impact on DSM efficiency and effectiveness. Submission deadlines that are too generous will naturally lead to delays in securing a resolution to the dispute. By the same token, timelines that are too short will not ensure effective dispute settlement because disputing parties will not be able to prepare and respond adequately to the legal arguments of their opponents, perhaps leading to ill-considered decisions. Moreover, procedures that permit unnecessarily lengthy written submissions, can impose a significant burden on a panel and, as a consequence, delay decision-making. DSMs should seek to strike an appropriate balance.

Third, providing support to panelists can have an impact on both efficiency and effectiveness, but not all DSMs include provision for a secretariat to assist with dispute settlement. Administrative assistance with document management, travel arrangements, locating a hearing room, and even securing translation services, can be burdensome if left to chairpersons or panelists, especially when they are working in different locations across the globe. A central secretariat might offer efficient support with such tasks, but FTA parties may differ in terms of whether and how to fund them. In addition, some panelists may find it useful to hire individuals to assist with legal research and even legal drafting, or to have a secretariat offering such support, but FTA parties may have concerns about permitting non-panelists to exercise such roles. DSMs should address assistance to panelists bearing in mind budgeting issues as well as the role the FTA parties want secretariats and panel assistants to play (or not play).

Fourth, effective implementation is essential because the overall value of a dispute settlement system will depend upon whether adopted panel or tribunal reports are duly implemented in a timely manner. An effective dispute settlement system includes mechanisms encouraging prompt compliance as well as effective remedies in case of non-compliance.

Our analysis revealed a number of best practices for achieving effective and efficient dispute settlement under FTAs. First, some degree of automaticity is advisable to maintain an efficient panel selection process. The form of automaticity can vary, however; examples include using an independent appointing authority to select one or more panelists or using selection by lot. In terms of written submissions, we suggest that short timelines for parties’ written submissions are best; however, flexibility should be provided to extend timelines where necessary. Regarding secretariat assistance for panelists, we conclude that function and budget should be clearly set out in the relevant agreement. For example, an agreement could stipulate that secretariat functions shall include registrar, administrative, and logistical support for the panelists and shall be provided by the Permanent Court of Arbitration, and each disputing party shall cover one half of the costs incurred for secretariat services and one half of the fees charged by the panelists. Lastly, to address non-compliance and slow compliance, we suggest including in the DSM a mechanism for regular surveillance through which the responding party would be required to provide regular, publicly available reports to a third party (such as a committee of trade ministers) describing the measures it has taken to comply with the panel rulings. Delays in implementation could be addressed by adding an incentive rewarding speedier compliance.

*Throughout this agreement we use ‘free trade agreement’ (FTA) as an umbrella term to include bilateral, regional and multilateral trade agreements.

​Full report can be read here.