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Clinic: Centre for Trade and Investment Law (CTIL), National Law University, Jodhpur, India, Fall 2021

Beneficiary: The International Centre For Alternative Dispute Resolution (ICADR), Hyderabad

Executive Summary

Read the full report here.

It is clear that the WTO’s Dispute Settlement Mechanism affords international trading security, predictability and legitimacy. The WTO AB has been an essential bulwark to correct errors in Panel reports and maintain WTO Members’ faith and confidence. However, the AB is currently experiencing a crisis unprecedented in its history. The United States of America [“USA/US”] has been blocking attempts to fill the AB’s vacancies since July 2017. Two of the remaining three Members finished their four-year terms on December 10, 2019, leaving only one Member instead of the normal seven. As a result of the absence of quorum, the AB is unable to function. This has resulted in ‘appeal to the void,’ or WTO Members’ incapacity to challenge the Panel’s ruling. In the backdrop of the defunct AB, the Report analyses the viability of the arbitration mechanism as a solution to the AB crisis.

The Report initially delves deep into the role the DSU has played as the central pillar to the multilateral trading system. It delineates the process of the DSU which consists of procedural stages such as that of the consultations stage, the Panel Stage, and the Appellate Review. The lattermost stage, has been rendered ineffective due to the USA blocking appointments to the AB and the Report thus undertakes an analysis on options that could serve as an alternative to functioning of the AB, beginning with taking recourse to options under Article 5 and Article 25, of the DSU.

The former solution enlists three alternatives, namely, good offices, mediation and conciliation. While these mechanisms have their advantages, the Report brings out various deficiencies in these procedures such as, inter alia, the role given to the Director General [“DG”], biasness, the lack of a second review system, etc. These issues coupled with the stark under-utilisation of these modes to solve disputes at the WTO mean that these procedures cannot serve as a viable solution to the AB crisis alone. Similarly, the Report finds that arbitration under Article 25 acts only as a ‘theoretically viable alternative to the crisis’ since it could lead to numerous hindrances including the possibility of coercing the developing nations to agree to a certain set of rules, neglecting the wealth of expertise of the AB, the lack of a unified framework for WTO Members etc. Further, the Report finds that isolated bilateral agreements between countries, where parties agree to resort to arbitration or to not appeal Panel reports, fail to establish a uniform system of dispute resolution and take away security and predictability from the WTO regime. Owing to the limitations of the viability of Article 5 and Article 25 respectively, the Report suggests that the AB crisis would be better addressed by a uniform, comprehensive and binding agreement, such as the MPIA.

MPIA is an initiative led by the EU which aims at providing an appeal mechanism until the AB starts functioning again. To achieve the same, MPIA uses the arbitration procedure of Article 25 which would mirror the AB’s substantive and procedural aspects. Further, in order to address the US concerns about the AB’s functioning including the inability of AB to meet the 90 days’ deadline and the engagement of AB into advisory opinions not relevant for the resolution of dispute, the MPIA has introduced certain reformative elements as well. To ensure that arbitrators are able to complete the appellate review within the 90 days deadline, arbitrators under the MPIA regime have the discretion to adopt adequate organizational measures such as placing a limit on the page number, time, or fixing the frequency and duration of hearing to be able to adhere to the deadline. In addition to this, arbitrators may even encourage for omission of claims which are “based on the alleged lack of an objective assessment of the facts to Article 11 of the DSU”. Moreover, the arbitrators are required to confine themselves only to those issues which are fundamental for the settlement of disputes.

However, concerns have been raised that MPIA might impinge upon the WTO’s multilateral trading regime. Nonetheless, the Report suggests that the WTO’s aim of ensuring multilateralism in international trade is in peril due its own working mechanism which is based on the consensus-based approach. In fact, MPIA aids in promoting multilateralism in the WTO, detailed arguments to prove this are provided in Chapter 7 of the Report. The MPIA is introduced with an aim to maintain the appellate function within the multilateralism dispute mechanism which is in consonance with the WTO’s two-tiered dispute adjudication mechanism. Further, the arrangement is also drafted in a manner which ensures that it will become non-operational as and when the AB becomes operational again. Therefore, the MPIA’s structure gives priority to reforming the AB thereby promoting the spirit of multilateralism.

Further, it is to be noted that the MPIA awards are based on WTO agreements and are not adopted by consensus since the award, although notified is not adopted by the DSB. Thereby, the MPIA affords arbitrators the flexibility to diverge from reasonings adopted in the past. However, the Report suggests that the objective of the MPIA is essentially basing its decision on sound legal reasoning and based on the facts of that particular case, thus only referring to the WTO agreements without any reference to AB rulings leaves MPIA Panels devoid of important resources. Thus, while MPIA arbitral Panels are free to adopt legal reasoning, in practice MPIA arbitrators would look at previous AB decisions and MPIA cases.

The Report also makes an attempt to compare the functioning of the MPIA vis-à-vis the International Centre for Settlement of Investment Disputes [“ICSID”]. The international investment arbitration system established under ISCID has been successfully thriving for more than five decades. Albeit, despite the comprehensive design of the ICSID procedural clauses, ICSID is grappled with a number of problems which cast doubt on the finality of its award and the enforcement mechanism of its arbitration proceedings. Further, a few countries have also denounced ICSID and concerns have been raised on its exit mechanism. Consequently, this raises apprehension about the arbitration proceedings and the exit mechanism of the MPIA regime, owing to the similarity between the both these forums. However, the Report suggests that the procedural aspects of MPIA and ICSID vary considerably in aspects of denunciation, appointment of arbitrators, enforcement mechanism, etc. This makes it unlikely that the MPIA will meet the similar fate.

Lastly, the Report makes an attempt to address the apprehensions/concerns which some countries have with respect to the MPIA. Some of these concerns are inadequate representation of arbitrators, the uncertainty around the financing of MPIA’s operation, potential bias against the developing countries interests, the possibility of rendering the already defunct AB into permanent abandonment and other political concerns such as hampering trade relations with the USA. It is thus suggested that though the MPIA is only an interim solution to the AB crisis, the practice followed by the arbitrators under the auspices of the MPIA might consequently lead to a resurrection of the AB in general since it has the potential of addressing certain criticisms of the USA and it will provide a fertile ground for Members to suggest other reformative measures for enhancing the efficiency of AB.

Read the full report here.

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