Dispute Settlement Mechanisms in U.S. FTAs with Korea, Panama, Peru and Colombia: Basic Designs, Key Characteristics and Implications

The United States’ free trade agreements (FTAs) with Korea,

The U.S.-Korea Free Trade Agreement was agreed upon on April 30, 2007 and went into effect on March 15, 2012. For the chronological history of the negotiations and conclusion, see Ministry of Foreign Affairs, Republic of Korea, FTA Status of Korea: Korea-U.S. FTA, available athttp://www.mofat.go.kr/ENG/policy/fta/status/effect/us/index.jsp?menu=m_20_80_10&tabmenu=t_2&submenu=s_8 (last visited Jun. 10, 2014).

This essay aims to present an overview of these three types of dispute settlement mechanisms included in the four free trade agreements of the United States. The mechanisms of the four agreements arguably present the template of the U.S. FTAs when it comes to dispute settlement proceedings of free trade agreements. The same template also appears in the most recent free trade agreements that the United States have negotiated such as the Trans-Pacific Partnership (TPP),

The Trans-Pacific Partnership was signed by 12 participating states on February 4, 2016. It has yet to secure ratifications from the legislature of respective countries before it goes into effect. See Office of the United States Trade Representative (USTR) website available athttps://ustr.gov/tpp (last visited Jul. 8, 2016).

At the global level, the SSDS of free trade agreements has rarely been utilized. For example, there have been only five panel reports for U.S.-Canada FTA (based on Chapter 18) and only three for North American Free Trade Agreement (NAFTA) (based on Chapter 20) for the past 20-plus years.

See NAFTA Secretariat website available athttp://www.nafta-sec-alena.org/en/DecisionsAndReports.aspx?x=312 (last visited Jun. 6, 2016).

In any event, SSDS of the free trade agreements concluded by many states largely follows the WTO’s DSM as codified in the Dispute Settlement Understanding, which is arguably the most successful and robust international dispute settlement mechanism at the moment. The case number at the WTO DSM docket has now reached 507 just in 21years since its inception in 1995.

See World Trade Organization, Chronological List of Disputes Cases available athttps://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm (last visited Jul. 8, 2016).

There are also some key differences between the WTO’s DSM and the FTA’s SSDS. For instance, the FTA’s DSM does not have an appellate mechanism as the WTO’s DSM does. Nor does it have such a detailed text to oversee and regulate dispute settlement proceeding as the Dispute Settlement Understanding of the WTO. Much of the operation of the FTA’s SSDS is left to the discretion and consensus of the two contracting parties in the future. These general characteristics of FTA’s SSDS equally apply to the four agreements concluded by the United States, discussed in this essay.

As much as FTAs’ SSDS follows the basic features of the WTO’s DSM, the strengths and limitations of the latter similarly appear in the context of the former. At the same time, new experiments are taking place in recent free trade agreements to address some of the problems of the existing WTO’s DSM in an innovative manner - such as adopting a special dispute settlement proceeding to deal with non-tariff barrier disputes.

See U.S.-Korea Free Trade Agreement, supra note 1, annex 14-A.

With this in mind, the SSDS of the four free trade agreements have the following characteristics. First, any recommendation or ruling by a dispute settlement panel applies only in a prospective manner.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 22.4; U.S.-Peru Trade Promotion Agreement, supra note 2, art. 21.2; U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 21.2; U.S.-Panama Trade Promotion Agreement, supra note 4, art. 20.2.

One peculiar aspect of the remedy scheme of the four free trade agreements is the possibility of a losing party’s offering to pay a fine to the prevailing party in lieu of bringing the measure at issue into conformity with the agreement.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 22.13.5; U.S.-Peru Trade Promotion Agreement, supra note 2, art. 21.16.6; U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 21.16.6; U.S.-Panama Trade Promotion Agreement, supra note 4, art. 20.15.6.

In particular, these four free trade agreements were directly affected by the bipartisan agreement on trade policy between the U.S. Congress and the U.S. administration reached in May 2007.

See U.S. Congress House Ways & Means Committee, Summary of the May 10 Agreement, available athttp://waysandmeans.house.gov/Media/pdf/110/05%2014%2007/05%2014%2007.pdf; Jeanne G. Grimmett, Dispute Settlement Under the U.S.-Peru Trade Promotion Agreement: An Overview, Congressional Research Service (Aug. 12, 2011), at summary.

Once a dispute settlement proceeding is completed, a prevailing party may impose trade sanctions on a losing party for any failure to abide by its terms.

Id.

Investment arbitration proceedings - the ISDS - are another type of dispute settlement mechanism that appears in the four free trade agreements. This is a mechanism that introduces investment arbitration for disputes initiated by an investor against the government of a host state. Unlike SSDS, this particular mechanism has attracted a great deal of attention from both the general public and opinion leaders of the five countries at issue. As a matter of fact, sensitivity associated with the ISDS proceedings of the four free trade agreements is not confined to these agreements. Rather this phenomenon is a reflection of the global trend whereby (i) the level of attention on investment arbitration has been increasing continuously and rapidly in many countries; and (ii) the legal complexities and political sensitivities associated with investment arbitration have given both foreign investors and sovereign states acute difficulties in resolving controversial international disputes. In a sense, it has become a ‘hot potato’ for many governments, but at the same time it has become a fixture of a free trade agreement. As such, the four agreements also incorporate ISDS proceedings. On balance, they adopt a rather standard format of ISDS proceedings while the specific elements of the proceedings slightly vary among the four free trade agreements. These differences are relatively minor and logistical in nature.

When an investment dispute cannot be resolved through consultation and negotiation, the claimant may submit the dispute to arbitration on its own behalf or on behalf of an enterprise that the claimant owns or controls, directly or indirectly. All four free trade agreements require the notice of intent submitted to the respondent at least 90 days prior to submitting any claim to arbitration.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 11.16.2; U.S.-Peru Trade Promotion Agreement, supra note 2, art. 10.16.2; U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 10.16.2; U.S.-Panama Trade Promotion Agreement, supra note 4, art. 10.16.2.

The four free trade agreements also adopt robust transparency provisions reflecting a recent trend of international investment arbitration spearheaded by United Nations Commission on International Trade Law (UNCITRAL) Transparency Rules

See UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, available athttp://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2014Transparency.html (last visited Jul. 8, 2016).

In terms of awards of arbitration, the four free trade agreements prohibit an investment arbitration tribunal from providing punitive damages to a claimant.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 11.26.4; U.S.-Peru Trade Promotion Agreement, supra note 2, art. 10.26.3; U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 10.26.3; U.S.-Panama Trade Promotion Agreement, supra note 4, art. 10.26.3.

Another noteworthy feature of the four U.S. FTAs is the enhanced authority of the Joint Committees. When an issue arises during an investment arbitration that requires interpretation of an important provision of the investment chapter of the free trade agreement, a responding party or the government of a claimant (investor)’s nationality can refer the issue to the Joint Committee for interpretation.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 22.2.3 (d); U.S.-Peru Trade Promotion Agreement, supra note 2, art. 20.1.3(c); U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 20.1.3(c); U.S.-Panama Trade Promotion Agreement, supra note 4, art. 19.1.3(c).

Concerning the conduct of investment arbitration, the Korea-U.S. FTA includes unique provisions regarding official languages and location of arbitration. Unlike the other three free trade agreements where official languages of arbitration are not specifically mentioned, the Korea-U.S. FTA has a provision that recognizes both English and Korean as official languages.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 11.20.3.

When it comes to ISDS proceedings, the United States has placed emphasis on the possible introduction of an appellate mechanism. This is an interesting development, not paralleled in SSDS proceedings where an appellate mechanism might equally be contemplated. It can be said that the United States has been pushing for the introduction of an appellate mechanism for investment arbitration, as noted most notably in the TPP.

See The Trans-Pacific Partnership, art. 9.23.11.

The four FTAs’ effort to positively consider an appellate mechanism is largely in line with the global effort to introduce the mechanism in investment arbitration. If anything, the fact that investment arbitration is conducted according to a bilateral treaty and on a one-time basis has, by its nature, caused and facilitated fragmentation of arbitral awards over the years. This phenomenon has reached the point where clear jurisprudence and reliable guidelines are sometimes lacking for governments negotiating and applying BITs and FTAs. It is against this backdrop that discussions on appeals in international investment arbitration are taking place. Introducing an appeal mechanism should help to alleviate or address some concerns raised by participants in these proceedings. But, at the same time, it should be borne in mind that an appellate mechanism, if not properly introduced or managed, may run the risk of fuelling further concerns and imposing additional burdens on the disputing parties. So the question is not necessarily whether an appellate system is necessary for the global community. Rather, the real question is what kind of an appellate mechanism is appropriate for investment arbitrations.

As the four U.S. FTAs do not provide details of an appellate mechanism, it is difficult to predict what specific features of appellate facilities these five countries have in mind. So far, they have only established the basic principles that an appellate mechanism is worthwhile and that they will continue to discuss them when a proper opportunity arises.

The third dispute settlement mechanism contained in the four U.S. FTAs is the Joint Committees. The Joint Committee is a consultative body composed of high ranking officials of the contracting parties. This is a body that can issue a ‘binding interpretation’ on the specific terms of the free trade agreement, at the request of either the contracting parties or the tribunal. As the interpretation issued by the Joint Committee binds the tribunal, this seems to be an effective way of exerting control over the investment arbitration proceeding on the part of the contracting parties. This mechanism will certainly provide peace of mind for the states.

By way of example, the Korea-U.S. FTA establishes a Joint Committee in Article 22.2 of the Agreement. Compared with the other three agreements, the U.S. FTA with Korea has detailed provisions on the role of the Joint Committee. In short, the provision sets out two categories of authority of the Joint Committee, one directive (using the term “shall”) and the other permissive (using the term “may”). The provision stipulates in pertinent part that:

This Joint Committee is tasked with two important mandates. The first one is the authority to make a binding decision on the appropriateness of the designation by one party as protected information so as to avoid the disclosure obligation. Article 11.21 (Transparency of Arbitral Proceedings) provides in pertinent part that:

At the same time, the Joint Committee is authorized to issue an interpretation of the provisions in the investment chapter that will bind reviewing investment tribunals. In the governing law provision of Article 11.22, the Agreement provides:

As the above provision shows, the Joint Committee makes important decisions that directly affect the administration of dispute settlement proceedings of free trade agreements. In particular, it is specifically stipulated that an interpretation of the Joint Committee binds the tribunal. Furthermore, the way it is stated indicates that the Joint Committee may even override any decision of the tribunal insofar as there is conflict between its own interpretation and the tribunal’s decision or award. The other three agreements also include provisions that respective Joint Committees can issue binding interpretations.

See U.S.-Peru Trade Promotion Agreement, supra note 2, art. 10.22.3; U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 10.22.3; U.S.-Panama Trade Promotion Agreement, supra note 4, art. 10.22.3.

The Joint Committees also deal with administrative issues relating to dispute settlement proceedings. For instance, apart from the U.S.-Panama FTA, other three U.S. FTAs oblige the Joint Committee to manage the remuneration and expenses to be paid to panelists.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 22.2.2 (e); U.S.-Peru Trade Promotion Agreement, supra note 2, art. 20.1.2 (e); U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 20.1.2 (e).

The four U.S. FTAs insist on consensus of the parties for every decision of the Joint Committees and other bodies established under the agreements, unless agreed upon otherwise.

See U.S.-Korea Free Trade Agreement, supra note 1, art. 22.2.7; U.S.-Peru Trade Promotion Agreement, supra note 2, art. 20.1.6; U.S.-Colombia Trade Promotion Agreement, supra note 3, art. 20.1.6; U.S.-Panama Trade Promotion Agreement, supra note 4, art. 19.1.5.

At the same time, this new attempt of four free trade agreements also raises new questions, both in terms of policy and legal aspects. First, with respect to the policy aspect, the new system may end up restraining the otherwise legitimate authority of the adjudicative body. A concern is that the Joint Committee may issue a compromised interpretation which is not supported by the “ordinary meaning” principle as clarified by the 1969 Vienna Convention on the Law of Treaties (Vienna Convention). An argument can then be made about whether this will further ‘politicize’ the investment arbitration proceedings. As to the legal aspect, the scope and meaning of “binding interpretation” are not entirely clear. For instance, controversies may arise as to whether the Joint Committee can simply issue interpretation of the words contained in the text based on ordinary meaning or whether it can also purport to pronounce interpretation of the terms that already carry certain legal implications in and of themselves in the investment agreement context - such as the terms “investor” or “investment” - which may ultimately dispose of the legal claims at issue. Needless to say, any interpretation of treaty terms is subject to the general rules of treaty interpretation as pronounced in the Vienna Convention. In that respect, the same rules of interpretation apply to both categories of interpretation. Nonetheless, interpretation in the latter category is arguably directly related to resolution of key legal issues of investment disputes. Disposition of these legal issues should be left to adjudicators, namely tribunal, and arguably would not be amenable to ex post facto decisions of the contracting parties. The first category of interpretation, on the other hand, can be regarded as clarification or elaboration by contracting parties, which may indeed help arbitrators and tribunal in a dispute. This is another task left to the further elaboration of Joint Committee’s operation by the five contracting parties in the future.

The United States concluded free trade agreements with Korea, Peru, Panama and Colombia in late 2000s and brought these agreements into force in late 2000s or early 2010s. Diverse reasons spanning over economic rationale and geopolitical considerations have prompted the U.S. government to push ahead with these preferential trade agreements with these four countries. Since the four agreements were negotiated and concluded largely contemporaneously, key traits and characteristics of the agreements are similarly formulated. In light of this, the dispute settlement mechanisms of the four agreements also share commonalities. Needless to say, there are state-specific variations in the four agreements, but they are generally minor adjustments rather than fundamental differences.

In summary, SSDS proceedings, ISDS proceedings and Joint Committees are the three main schemes for addressing disputes arising from the implementation of the four free trade agreements. SSDS proceedings are supposed to deal with alleged violation of provisions of free trade agreements, following the general contours of the WTO’s DSM, although in a shortened timeframe and except for an appellate mechanism. ISDS proceedings are going to deal with investment arbitration that is receiving increasing attention globally these days due to the sensitivity relating to the regulatory authority of a government. Some new ideas are included in the four free trade agreements to address the concern of the respondent governments, but they are generally minor and logistical. Joint Committees are non-binding consultative bodies that also play an important role in settling bilateral disputes. As detailed provisions of dispute settlement proceedings are introduced in the four free trade agreements, they are ready to be utilized by state parties to the agreements. Issues under the free trade agreements have arguably not been ripe for the constitution of dispute settlement mechanisms under the agreements at the moment, but sooner or later they are likely to end up in the dockets of the mechanisms.

The key elements of the four FTAs’ DSM are also adopted in other free trade agreements that the United States have concluded afterwards including most recently the TPP, since these elements are reflective of the general scheme of the United States in their free trade agreements. The TPP, a 12-state mega-FTA signed in February 2016, adopts dispute settlement mechanisms that are similar, in all material respects, to the four agreements with Korea, Peru, Colombia and Panama.

What remains to be seen is how the general scheme of dispute settlement mechanisms can be applied and implemented in actual settings when the free trade agreements produce increasing disputes. In particular, the marked disparity in human and financial resources between the United States and the four FTA’s parties may impose disproportionate burdens on the latter in utilizing and participating in the new mechanisms of the agreements. WTO’s DSM may have seen a similar phenomenon, but the advent of multiple mechanisms in addition to the WTO’s DSM may arguable exacerbate the inherent limitations of developing states even further. Continued attention needs to be paid to the development concerning implementation of the four free trade agreements.