Appellate Body Discussion of The Legal Effects of Mutually Agreed Solutions under WTO Law The EC – Bananas III (Article 21.5) Appellate Body Reports of November 2008 EC –Bananas III (Second Recourse to Article 21.5 of the DSU by Ecuador) WT/DS27/AB/RW2/ECU EC –Bananas III (Recourse to Article 21.5 of the DSU by the United States) WT/DS27/AB/RW/USA Hunter Nottage BIICL Annual WTO Conference Panel 4: View from the Bench and Roundtable May 2009

The Appellate Body's Discussion of Mutually Agreed Solutions ("MAS") in EC – Bananas III (Article 21.5) Significant: - MAS are common instruments in WTO dispute settlement practice: Officially notified to the DSB pursuant to Article 3.6 of the DSU in approximately 15% of all disputes. - Article 3.7 of the DSU recognises that: "A solution mutually acceptable to the parties to the dispute and consistent with the covered agreements is clearly to be preferred." Practical Relevance – a roadmap for trade diplomats and lawyers advising governments on the legal implications of future MAS that may be negotiated. Systemic Interest – the Appellate Body conclusion that a MAS may, in certain circumstances, operate as a bar to a party bringing further WTO dispute settlement proceedings raises a number of unanswered questions: Question:On what legal basis can a MAS bar further dispute settlement proceedings? (Is it a covered agreement"? Is it through the operation of some principle law – e.g. estoppel?) Question: Has the Appellate Body jurisprudence opened the door for other similar instruments to have the same legal effects? (E.g. RTA Exclusion Clauses?) Question:Does the Appellate Body jurisprudence result in a good policy outcome?

EC – Bananas III (Article 21.5) 2008 within the Bananas WTO Litigation Landscape These reports were issued in the context of DSU Article 21.5 compliance proceedings: - On 1 January 2006 the EC introduced a new import regime for bananas (EC Regulation 1964/2005) providing preferential tariff treatment to ACP bananas (a zero-duty tariff quota up to 775,000 tonnes) while maintaining a MFN tariff of 176€/tonne. -Ecuador and the US initiated Article 21.5 compliance proceedings claiming that the new EC import regime was a measure "taken to comply" with DSB recommendations and rulings in the earlier 1997 dispute EC – Bananas III. -Substantively, Ecuador and the US had strong legal claims. Historically, preferential tariff treatment granted to ACP bananas under the EC banana regime, otherwise inconsistent with the MFN obligation in Article I of the GATT, had been justified through GATT Article I waivers. However, the latest waiver, granted by the Doha Ministerial Conference in 2001, had expired on 1 January The EC argued as a preliminary issue that Ecuador and the US were barred from bringing compliance proceedings because, in 2001, they had entered into MAS in the form of the Bananas Understandings: -The EC pointed to the text of the Understandings that provided: "The EC and Ecuador consider that this Understanding constitutes a mutually agreed solution to the bananas dispute." (Para. G) -The EC therefore contended that the complaints should be "dismissed in their entirety" as "the Bananas Understandings bar [Ecuador and the US] from bringing compliance challenges." (Para. 7.54)

The issue whether a MAS could operate as a bar to WTO dispute settlement proceedings was discussed in India – Autos (WT/DS146/R & WT/DS175/R), 2001 India argued that the 1997 MAS reached between India and the EC in their earlier dispute on India's quantitative restrictions prevented the EC from bringing a complaint. (Para ) "This question raises an important systemic issue. On the one hand,... the right for any WTO Member to bring a dispute to the DSB is one of the fundamental tenets of the DSU... On the other,... it could not be lightly assumed that drafters intended [MAS], expressly promoted by the DSU, to have no meaningful legal effect in subsequent proceedings." (Para 7.115) The Panel did not resolve this question. Noting that the 1997 MAS did not relate to the same matter: "the Panel does not intend to rule on the legal question as to whether a [MAS] can ever operate as a bar to a panel's express mandate from the DSB". (Para 7.134)

The issue was heavily litigated in EC – Bananas III (Article 21.5) Ecuador and the United States argued on two levels: Textually - The Bananas Understandings did not constitute a mutually agreed "solution": - Its terms only provided for a series of future steps that were a "means by which the long- standing dispute can be resolved". ("Its terms… were not adhered to by the EC" as the EC had not complied with the last phase of introducing a tariff-only regime for bananas. (Para. 7.39)) Legally - As a legal proposition a MAS can never bar the right to bring WTO dispute settlement proceedings: -US: A MAS is not a "covered agreement" and "there is no bar to proceeding with dispute settlement even in the face of a mutually agreed solution." (Para. 7.28). -Ecuador: "There is no provision in the DSU that precludes bringing a complaint under Article 21.5 simply on the basis that the challenged measure complied… with a mutually agreed solution." (Para. 7.47)

Panel Stage  The Panel again did not address the legal question whether a MAS can bar DSU proceedings. It stated that it would first look at the "language" of the Understandings to determine whether textually the parties had given up their DSU rights.  It found that the terms of the Understandings, interpreted in accordance with the customary rules of interpretation set out in Articles 31 and 32 of the Vienna Convention, did not prevent Ecuador/US from bringing the Article 21.5 disputes.  For this reason, the Panel did "not consider it necessary for the purposes of the resolution of this dispute to assess the more systemic issue of whether or not mutually agreed solutions or legally binding agreements... may prevent parties to such instruments from bringing compliance disputes." (Para. 7.61)

The Appellate Body was more bold:  The Appellate Body confirmed the legal proposition that a MAS could bar a complainant from bringing further DSU proceedings: "A mutually agreed solution pursuant to Article 3.7 may encompass an agreement to forego the right to initiate compliance proceedings." (Para. 212) "We consider that the complainants could be precluded from initiating Article 21.5 proceedings by means of these Understandings. … if the parties had, either explicitly or by necessary implication, agreed to waive their right." (Para 217)  However – these potential legal effects will depend on the text of the MAS: "We do not consider that the mere agreement to a 'solution' necessarily implies that parties waive their right to have recourse to the dispute settlement system..." (Para. 212) Signatories to a MAS will be precluded from DSU proceedings "only if the parties had, either explicitly or by necessary implication, agreed to waive their right....[T]he relinquishment of rights granted by the DSU cannot be lightly assumed." (Para. 217)

The Appellate Body then examined the Understandings' text  It found that the terms of the Understandings did not relinquish the parties' rights to have recourse to DSU Article 21.5 proceedings: The Understandings were not a solution to the dispute in themselves but provided the means, i.e. a series of future steps, for possible resolution in the future. The Understandings provided "the means by which the long-standing dispute... can be resolved" (para A.) and "the word 'can' expresses a possibility, but not the finality, of a resolution to a dispute." (Para. 219) Note:  "We wish to clarify that an agreement that requires future performance does not for that reason alone indicate that the parties have not relinquished their rights to have recourse to Article 21.5 proceedings. However, this particular agreement does." (Para. 220)  Where the text of the MAS is clear, subsequent statements by the parties will "have limited relevance, if any, for the purpose of interpreting the Understandings." (Para. 216) (Referring to the subsequent conflicting communications to the DSB by the EC, Ecuador and the US as to the legal effects of the Understandings.)

Practical guidance on the legal effects of MAS from the Appellate Body  A MAS may bar parties from bringing further WTO dispute settlement proceedings where the terms of the solution, either explicitly or by necessary implication, reflect an agreement to waive DSU rights. -Negotiators should be careful when they enter, and draft, future MAS. -Consider the practice of some Members to include the phrase "this agreement is without prejudice to the WTO rights and obligations of the parties under the WTO Agreement" vs. the practice of others "this MAS shall constitute the termination of DSXXX proceedings".  A MAS will be interpreted in accordance with the VCLT. Its legal effects will depend on the terms of the solution. Where the text is clear, subsequent statements by the parties will be of limited relevance.  Even if a MAS envisages a series of future steps it may nonetheless preclude further WTO dispute settlement proceedings if the parties' relinquishment of DSU rights is explicit. - Consider the practice of some Members to adopt two-stages to the notification of a MAS to the DSB. First, notification of a "Memorandum of Understanding" containing future steps; second, notification of a "Mutually Agreed Solution" once the future steps have been undertaken.

Questions for Discussion Q1: On what legal basis did the Appellate Body conclude that a MAS can bar further WTO dispute settlement proceedings? -The US argument that a MAS is not a "covered agreement" has merit. They are not listed in Appendix 1 of the DSU and the panel in India – Autos found that "the MAS is not a covered agreement". (Para ) -If a MAS is not a "covered agreement" it must bar proceedings on some other legal basis... Q2: Does a MAS bar further DSU proceedings through principles of law - e.g. estoppel? -Panel in India – Autos stated that "there may be an argument that a general principle such as estoppel may apply to WTO dispute settlement. [This] suggests that the issue cannot necessarily be resolved simply through an acknowledgement that an MAS is not a covered agreement" (fn 364). -The principle of estoppel provides that where one party makes a clear and unambiguous representation (e.g. a complainant agreeing to not bring further DS proceedings) upon which the other party relies (e.g. a defendant complying with the terms of the MAS), the party making the representation is "estopped" from going back on its representation (i.e. reviving the dispute). -Estoppel has been raised on a number of occasions in WTO dispute settlement. However, the Appellate Body has never applied the principle arguing that its conditions have not been fulfilled on the facts. E.g. EC – Export Subsidies on Sugar "it is far from clear that the estoppel principle applies in the context of WTO dispute settlement. … even assuming arguendo that the principle could apply in the WTO … we are not persuaded, in the circumstances of this case, that the Parties would be estopped." (Paras )

Q3: If a MAS, that is not a "covered agreement", can bar DSU proceedings could other similar instruments have the same effect? - What about an RTA Exclusion Clause? Bilateral agreement between the parties; Their text contains an explicit, clear and unambiguous representation that the Parties have relinquished their rights to WTO dispute settlement; RTAs are not "covered agreements" but are notified to the WTO (Article XXIV). E.g. NAFTA Article "Once dispute settlement procedures have been initiated under Article 2007 or dispute settlement proceedings have been initiated under the GATT, the forum selected shall be used to the exclusion of the other..." In Mexico – Softdrinks the Appellate Body stated: "We do not express any view on whether a legal impediment to the exercise of a panel's jurisdiction would exist in the event that [an exclusion clause] were present." (Para. 54) US – Sale of Tuna and Tuna Products (WT/DS381): Mexico requested a WTO Panel in March At the DSB meeting of 20 April 2009 the US argued that Mexico is barred from initiating the WTO dispute as the US has invoked the NAFTA Article 2005(4) Exclusion Clause. The clause provides that in disputes concerning a technical measure to protect health or the environment "where the responding Party [US] requests that the matter be considered under [NAFTA] the complaining Party [Mexico] may… have recourse to dispute settlement procedures solely under this Agreement [NAFTA]." (Article 2005(5) "on receipt of such request, the complaining Party shall promptly withdraw from participation in [WTO] proceedings.")

Q4: The Appellate Body limited its legal conclusions to a MAS barring a party bringing further DSU compliance proceedings (Article 21.5). Should the Appellate Body's reasoning apply equally to barring other DSU proceedings (e.g. a new panel examining the same matter as argued in India – Autos)? "An additional and more general consideration of whether Ecuador is barred by the Bananas Understandings from bringing any dispute under the WTO dispute settlement system, including a non-compliance dispute, would be unnecessary for the resolution of this dispute" (Panel, para. 7.50)

Q5: Does the Appellate Body's interpretation of MAS lead to the best policy outcome? Compare: - "It could not be lightly assumed that drafters intended [MAS], expressly promoted by the DSU, to have no meaningful legal effect in subsequent proceedings." (India – Autos, Panel 7.115) - "The WTO Agreements do not provide such a rule, and it would be bad policy and bad law to try and contrive one." "The DSU drafters were wise not to provide that a mutually agreed solution limits any DSU rights, for any such limitation would be a disincentive for parties to try to negotiate solutions. It would make... complaining parties, reluctant ever to enter into a mutually agreed solution, since that would cost them their WTO rights." (Ecuador's Response to Panel Question 40, at para. 7.47)

Conclusion Statements barring further WTO dispute settlement proceedings that are clear, even in instruments other than covered agreements, may be relevant in WTO dispute settlement. So be careful.