Alphabet soup: explaining the different arbitration mechanisms proposed by the UK Government for resolving UK-EU disputes

Posted in Dispute resolution and litigation International arbitration WTO and international trade

On August 23, the UK Government published a negotiating paper setting out various options for the dispute resolution mechanisms in (and the enforcement of) future bilateral agreements with the EU, including the Withdrawal Agreement and other agreements framing the UK-EU future relationship (see our post here). In this blog post, we consider those dispute resolution models in more detail, in particular analysing the models that the UK collectively categorised as arbitration.

The intention of presenting different models was to address the varied nature of potential disputes that may arise from bilateral agreements between the UK and EU. Concerning the arbitration models, the paper focused on those contained in free trade agreements (FTA) or economic cooperation agreements such as the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the EU-Singapore FTA (EUSFTA), EU-Vietnam FTA (EUVFTA), the New Zealand–South Korea FTA (NZSKFTA), and in the World Trade Organisation (WTO) dispute settlement mechanism.

The FTA model – CETA, EUSFTA, EUVFTA and more

The first arbitration models presented in the UK’s paper are those found in the EU’s FTAs with third countries. Dispute resolution regimes in FTAs have developed over the years and most of the EU’s trade agreements contain provisions for state-state dispute resolution which consist of first notification and consultation (and often also a mediation option), followed by adjudication by an arbitration panel (a 3 member tribunal of independent arbitrators appointed by the parties). States also retain the right to take action within the WTO framework, including WTO dispute settlement proceedings (discussed below), though there are restrictions on bringing parallel proceedings in both fora. There is also the option for mediation.

At the enforcement stage, state-state arbitration relies ultimately on voluntary compliance by the sovereign defendant with the obligations it has agreed to under the specific treaty in play. Enforcement is then often more a question of “resolution” under the threat of reputational, political, economic or even military consequences of non-compliance. Access to World Bank and IMF funding may be hindered by failure to meet ICSID Convention awards, for example. Action might also be more direct. In 2012, for example, the US intervened to suspend trade concessions to Argentina over its failure to pay an arbitration award to US investors.

Another component of  later EU FTAs, separate but no less significant, is that states have obligations in respect of the treatment of foreign investors and foreign investors have direct rights against host states (i.e. the state where they made their investment), including the right to bring proceedings directly against the state for breach of those obligations. These treaty rights and obligations are parallel to (and in some instances exceed) the rights afforded under domestic law. The investor-state dispute settlement (ISDS) regime frequently used is similar to the state-state model, i.e. international arbitration in a neutral forum before a tribunal of party-appointed arbitrators. Interestingly, the UK’s paper has not addressed rights of foreign investors or ISDS directly. It provides only that where UK-EU agreements are intended to give rights to individuals and businesses operating in the EU (and vice versa) then those rights should, “where appropriate”, be given effect in domestic law and enforced by and through domestic courts. However, rights of parties operating in a jurisdiction are often different to rights afforded to foreign investors under bilateral investment treaties or trade treaties containing investment provisions.

CETA and EUSFTA, are examples of FTAs containing the state-state and investor-state provisions discussed above. CETA contains an arbitration panel model for state-state disputes. However, as part of the EU’s initiative to reform ISDS, CETA’s investor-state dispute regime has been overhauled to move away from international arbitration towards an investment court system (ICS). Whereas ISDS is characterised by the private adjudication of disputes by a panel of party-appointed arbitrators, the ICS provisions in CETA envisage the creation of a permanent tribunal with fixed numbers of members appointed from the EU, Canada and neutral countries. Hearings would be conducted in public with the possibility of appeals to an appellate tribunal. This new ICS model is not without its opponents. The ICS provisions have been excluded from CETA’s provisional application and will be the subject of a referral to the CJEU to determine compatibility with EU law. For further details of the EU’s proposed reform of ISDS, please refer to our article here.

EUSFTA is also not without controversy. A recent CJEU opinion determined that the EUSFTA provisions on ISDS and state-to-state dispute settlement relating to provisions regarding portfolio investment and ISDS, amongst others, were outside the exclusive competence of the EU, meaning that each EU Member State will need to ratify the FTA before it can come into force. For further details on the CJEU’s opinion, please see our article here. This ruling was a major blow to the ability of the EU to swiftly conclude trade agreements which include Investor-State dispute-resolution provisions with third countries and will surely impact the application of such provisions to future agreements between the EU and the UK.

In light of these controversies and legal wrangling, it is interesting that the UK put forward arbitration models like the one contained in CETA as potential models to be applied to future agreements between the UK and the EU.

The WTO model

The UK also highlights the WTO’s dispute settlement mechanism  as a potential model for future agreements. This mechanism, the backbone of the multilateral trading system, sets a structured proceeding of rules, remedies and deadlines for resolving disputes, including consultations between the parties, the establishment of a panel by the Dispute Settlement Body, the issuing and adoption of the panel’s report and procedures for the revision of the case by the Appellate Body. A WTO member found at fault has to redress the measures to put them into conformity with the WTO agreements or should offer compensation to the injured party to the dispute. If no agreement on compensation is reached between those parties, the injured party can request the right to “retaliate” (for example temporarily suspending concessions or raising import duties in order to compel compliance).

The WTO’s dispute settlement mechanism applies to disputes over measures covered by any WTO agreement and it is of compulsory nature. All WTO members are subject to it. This means that regardless of the kind of agreement to be concluded between the UK and the EU after Brexit, both the EU and UK (once it reassumes its individual membership in the WTO), can resolve disputes between them and with any other WTO member under that mechanism.

Also important to note is that the WTO’s mechanism excludes unilateral trade actions and precludes the use of other fora for the resolution of WTO related disputes. As noted above, some FTAs (such CETA) contain dispute settlement mechanisms - applicable to all issues – with choice of forum provisions. Parties can seek recourse through the FTA mechanism without prejudice to recourse to the WTO mechanism, although parties cannot seek resolution of the same issue in both fora.

Choice of forum in FTAs or economic partnerships can generate challenges related to an overlap of jurisdiction or forum shopping and have already been the subject of some WTO and bilateral disputes. A future dispute mechanism to be agreed between the UK and the EU in the context of the new partnership might need to consider those issues. In any event, what is clear is that are various options, each giving rise to a number of legal issues and potential complications. Reaching workable agreement will not be straightforward. And the clock is ticking.

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