I can now safely say that my crystal ball was clear when I began working on a thesis as to why the Article 25 Arbitration system under the Dispute Settlement Understanding (DSU) of the World Trade Organization (WTO) would provide a better alternative to the blockade at the WTO Appellate Body (AB).[1] I however must disclose that I am not the only person neither am I the first to think about this idea,[2] as it had been mooted in talks and roundtables in Geneva as early as the end of 2017, many had dismissed it as academic.[3]

This idea was brought about by the situation at the AB of the WTO. This had arisen from a decision by the United States not to support new appointments to the court. As a result, the activity of the seven-member Appellate is frozen and at a standstill.[4] It began with the resignation of one judge[5], and the expiration of the terms of two others. This left the court with only four members to deal with a growing number of international trade disputes, and three judges required to hear each appeal. Even at full strength the AB found it hard to stick to the required time-tables,[6] so it was only a matter of time before the AB declared its inability to operate. AB membership dipped to 3 in September 2018 and to 1 in December, 2019. The result was an Appellate Body rendered inoperable as it became increasingly impracticable to adopt decisions.

For some of us,[7] the Arbitration system under Article 25 of the DSU was the best solution out and it seems like our ideas have finally been accepted. Last week at the economic forum in Davos, Switzerland, Ministers of 17 states including the European Union gave a statement to the effect that they believed that a functioning dispute settlement of the WTO is of the utmost importance for a rule based trading system, and that an independent and impartial appeal stage must continue to be one of its essential features.[8] To this effect the Ministers resolved that they would work towards putting in place contingency measures that would, allow for appeals of WTO panel reports in disputes among themselves, in the form of a multi-party interim appeal arrangement based on Article 25 of the WTO Dispute Settlement Understanding, and which would be in place only and until a reformed WTO Appellate Body becomes fully operational and that this arrangement would be open to any WTO Member willing to join it.[9]

The Dispute Settlement System of the WTO

Articles 4 to 20 of the DSU set out in great detail the 'mainstream procedures' which rest on consultations, the possibility of establishing a panel, and recourse to the Appellate Body. However, parties to a dispute can agree to resort to other means of dispute settlement, of a more diplomatic nature, such as good offices, conciliation, and mediation.[10] Parties can also resort to arbitration.

The Arbitration Process

Among the alternative means to the WTO mainstream dispute settlement procedures, arbitration is worth taking into account.[11] lndeed, it stands as a judicial 'alternative means of dispute settlement'.[12] In the context of the DSU, arbitration appears as a stand-alone procedure through Article 25. It can also be seen as a procedure complementing WTO mainstream dispute settlement procedures with respect to specific issues (DSU Articles 21.3 and 22.6).

As an alternative to adjudication by panels and the Appellate Body, the parties to a dispute can resort to arbitration.[13] The parties must agree on the arbitration as well as the procedures to be followed.[14] The parties to the dispute are thus free to depart from the standard procedures of the DSU and to agree on the rules and procedures they deem appropriate for the arbitration, including the selection of the arbitrators. The parties must also clearly define the issues in dispute.[15]

Before the beginning of any arbitration, the parties must notify their agreement to resort to arbitration to all (WTO) Members. Other Members may become party to an arbitration only with the agreement of the parties engaged in the arbitration. The parties to the arbitration must agree to abide by the arbitration award, which, once issued, must be notified to the DSB and the relevant Councils and Committees overseeing the agreement(s) in question.[16] The provisions of Articles 21 and 22 of the DSU on remedies and on the surveillance of implementation of a decision apply to any arbitration award.[17]

Practice

Hitherto, in only one dispute, have the parties resorted to arbitration under Article 25 of the DSU.[18] This case involved an EC complaint that the US Copyright Act failed to protect the exclusive copyrights of EC right holders of music, thus causing a loss of royalties. Ultimately, the Appellate Body found that section 110(5) of the US Copyright Act breached article 13 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (‘TRIPS’). Arbitration was used to calculate the level of EC benefits that had been nullified or impaired.

The procedure was not used as an alternative to the panel and Appellate Body procedure, but at the stage of implementation, when the panel report had already been adopted. The parties asked the arbitrators to determine the level of nullification or impairment of benefits caused by the violation established in the panel report. Under the standard procedures of the DSU, parties can obtain a binding determination of the level of nullification or impairment by recourse to arbitration under Article 22.6 of the DSU. A prerequisite for such arbitration is that the complainant has requested the DSB’s authorization for the suspension of obligations and that the respondent disagrees with the proposed level of retaliation. In the case where the parties resorted to arbitration under Article 25 of the DSU, they agreed that the award of the arbitrators would be final. Recourse to Articles 21 and 22 of the DSU is available to implement and enforce the conclusions of these arbitration awards.

Way Forward

My view has been that the States could agree to three “arbitrators” selected randomly from an agreed roster of individuals comprising current and previous Appellate Body members, with membership of the roster being broadly representative of WTO membership. The parties would likely compose the roster in consultation with the Appellate Body Secretariat, to ensure the availability of the individuals and the representativeness of the roster.

As a proposition the states could adopt the decision-making process set out in Article 17.11 of the DSU and Rule 3.2 of the Working Procedures. To ensure consistency and coherence, the parties could agree that the three arbitrators on an appeal-arbitration shall “exchange views” with four other individuals, applying Rule 4 of the Working Procedures by extension; these four other individuals could be selected randomly from the agreed roster, in accordance with the principles applicable to division selection under Rule 6.2 of the Working Procedures.

The parties would agree to appeal arbitration, setting out the terms of the appellate process (Article 25.2 of the DSU). The parties could agree to have an appeal-arbitration which would be initiated by either party within 60 days of the issuance of a panel report to the parties - an appeal-arbitration would be initiated through a notice of appeal, following Rule 20 of the Working Procedures (making appropriate adjustments for terminology12); and, - another appeal-arbitration would be initiated through a notice of other appeal, following Rule 23 of the Working Procedures.

Finally Staffing and money should not be a problem. Andersen et. al. have noted, “past practice in WTO dispute settlement confirms that Article 25 arbitrations could be readily serviced by the staff of the Appellate Body Secretariat.”[19]

Enforceability

There has been considerable criticisms as regards enforcement. The New York Convention does not apply to any decisions of the DSB, even where the parties made use of “arbitration” procedures. Moving to a traditional international arbitration system in the WTO could theoretically “resolve” this situation. Typically, sovereign immunity laws would prevent a state party from being forced into a foreign court. However, foreign sovereign immunity can be waived.[20]

U.S. courts have typically been unwilling to find the agreement to arbitrate alone to be an implicit waiver of foreign sovereign immunity.[21]  However, combined with a treaty providing for court enforcement of arbitration agreements and awards, such as the New York Convention, courts have found such a waiver to have been made.[22]

So, it is conceivable that converting to a traditional international arbitration scheme would transform WTO rulings from a system where compliance is effectively voluntary to a large degree, to one where enforcement is simply a matter of bringing an enforcement proceeding in the courts of the offending member state and invoking the New York Convention.

This may however be the case of the tail wagging the dog. One might question whether the WTO would ever have been formed if it involved such a serious affront to sovereignty. Indeed, the WTO is extremely respectful of national sovereignty. For example, unlike the United Nations decision-making at the WTO is by consensus.[23]

If enforcement is viewed in a vacuum as a universal good, traditional arbitration appears to offer a substantial improvement to the current system. But when the correlated trade-offs in respect of national sovereignty is added to the equation, international arbitration, with its New York Convention-powered enforcement mechanism, loses a great deal of its appeal—potentially enough to lead to a mass exodus of signatories to the treaty unwilling to cede so much sovereignty to the jurisdiction of the courts of other nations.

Conclusion

It is a step forward that the member states of the WTO have finally admitted that push has come to shove, and there could be no ways out. Article 25 Appellate Arbitrations are the best option available as of now. Voting, while technically possible, would have severe consequences, and is also, probably, “unfair” – for lack of a better word. At a time when no agreed procedure has been put in place to replace AB members whose terms have expired, and in view of the Appellate Body’s increased workload, use of Article 25 would provide Members with an alternative avenue for providing security and predictability to the multilateral trading system, in the manner intended by the drafters of the DSU. The Terra incognita is just about to become the modus operandi!