International trade disputes
July 2013 | TALKINGPOINT | LITIGATION & DISPUTE RESOLUTION
FW moderates a discussion on international trade disputes between Jonathan S. Kallmer, counsel at Crowell & Moring, Matthew R. Nicely, a partner at Hughes, Hubbard & Reed LLP, and Sean Upson, a partner at Stewarts Law LLP.
FW: Could you provide a brief overview of current trends in investment arbitration and trade disputes? Have any recent cases caught your eye?
Kallmer: Companies and other parties are increasingly seeing the opportunities to use dispute resolution mechanisms under international trade and investment agreements to enforce their rights and protect their commercial interests. As a result, dispute settlement mechanisms under the World Trade Organisation (WTO) and bilateral or regional trade and investment agreements are becoming more complex and 'innovative'. In the trade context, there is a recent line of WTO cases challenging Australia’s 'plain packaging' law for tobacco products as inappropriately interfering with the intellectual property rights (IPR) of foreign tobacco companies. Notwithstanding the valid public health considerations, these cases raise genuine questions about whether Australia, in regulating to protect public health, nevertheless did so in a manner inconsistent with its international obligations concerning IPR. On the investment side, the ongoing dispute Abaclat v. Argentina involves some 60,000 Italian bondholders challenging Argentina’s debt restructurings following its 2001-2002 financial crisis and international default. Abaclat is a good test case for the possibility of 'mass claims' in international investment arbitration, where thousands of investors have essentially identical claims against a government under an investment treaty.
Nicely: As an international trade lawyer, my focus is on trade disputes. Trade disputes take a variety of forms, including trade remedy cases brought under a country’s own national laws – with oversight via the relevant WTO Agreements – and disputes before an international body like the WTO over whether a country has breached its trade agreement obligations. National trade remedy proceedings are essentially private rights of action, allowing domestic industries to petition their government to impose measures to offset the effects of unfair trade activity or a surge in imports. Dispute settlement at the WTO, on the other hand, is an action taken by a government challenging the actions of another government. The bulk of WTO dispute settlement cases have always, and continue to this day, to involve challenges to a member government’s use of its trade remedy laws. This continued trend is itself noteworthy, in that there are so many other more interesting disputes that could be the subject of dispute settlement – for example, non-tariff barriers that are blocking foreign market access, or lax enforcement of intellectual property rights. Part of the reason for this phenomenon is that countries are very defensive about their use of their trade remedy laws, and therefore are not inclined to halt their use without a fight. Disputes involving other kinds of trade agreement violations can often be resolved via informal or formal consultations, prior to resort to dispute settlement proceedings before a WTO panel and, if appealed, the Appellate Body. This reflects an important distinction in trade disputes as compared with investment arbitration: because WTO dispute settlement is government to government, it retains an element of diplomacy that cannot exist in investment arbitration where private litigants are involved.
Upson: Predictably, with the state of the Western economies, there has been a significant rise in non-performance disputes, false claims of discrepant goods and, on the trade finance side, failures to honour payment and guarantee terms. We have particularly seen a number of promissory notes provided by way of payment security by significant trading houses which have then been dishonoured. In terms of investment arbitration, Abaclat v. Argentina is a particularly important case, even at this stage of the proceedings. It supports an interesting trend, and, indeed, not one confined to the arbitral sphere, of large numbers – 60,000 – of bondholders bringing proceedings as a managed group. We have seen a very significant rise in such investor claims being brought in managed claims and we currently act on several such claims where the values in question are measured in the hundreds of millions.
FW: What types of trade disputes appear to be arising most frequently, and what are the underlying causes?
Nicely: In the first several years of the WTO’s existence, it was common to see large economies challenging one another – Japan v. US, US v. EU, India v. EU, Brazil v. US, and so on. Today, it is becoming more and more common to see developing countries challenging one another, such as Panama v. Colombia, Costa Rica v. Dominican Republic, as well as challenging developed countries, for instance Antigua and Barbuda v. US, and Vietnam v. US. Further, as mentioned, the most common disputes in the WTO context involve trade remedies. What has changed in recent years is that a greater number of countries are using their trade remedy laws more frequently – and not doing so very well. So, while the US continues to be the favourite target of disputes over its use of trade remedies – in part because of its stubborn use of the 'zeroing' methodology in dumping cases and its application of the countervailing duty laws to non-market economies – other countries like China are now also being challenged for their poorly administered trade remedy laws. Unfortunately, I think this reflects a view by many countries that they can apply these laws sloppily and not be forced to fix them until well after two or more years have passed. This is because there is no injunctive relief to stop the application of trade remedy measures; and, while the WTO’s dispute settlement system has teeth – allowing trade retaliation when a country does not comply – it takes a long time to reach the point where a country has to pay for its sins. In the meantime, import relief remains in place. The lack of a rule of law mentality among members to the WTO arguably undermines the important principles on which the organisation is based.
Upson: The two big themes, which are linked, are trade finance disputes – dishonour of financial instruments – and false claims that discrepant goods have been presented. Both arise from the difficult economic conditions. Two recent examples illustrate the point. First, a large and previously solvent trading house resorting to promissory notes to guarantee steel contracts and dishonouring those notes when presented. Second, claims that a £50m contract made on a recorded telephone line either was not made or that the seller breached warranties upon delivery. The arguments deployed to justify the default showed a level of desperation and economic stress.
Kallmer: It is still the case that many trade disputes relate to traditional international trade matters, such as the application by national governments of anti-dumping or countervailing duty laws to combat excessively cheap or subsidised imports. However, there is an increasing number of disputes involving newer forms of alleged protectionism, including local content requirements for goods or services, infringements of IPR – such as trademarks - and food safety restrictions. These kinds of disputes reflect the fact that global economic regulation is becoming less about tariffs and other 'at-the-border' measures and more about countries’ regulatory choices and the implications of those choices for cross-border commerce.
FW: How has the legal environment for international trade and foreign investment changed in recent years? Are foreign investors now more willing to pursue claims of alleged expropriation or discriminatory behaviour?
Upson: There has certainly been a rise in BIT arbitrations particularly involving expropriation claims against Latin American and South American states and claims against Cyprus and Greece arising from the 'credit crunch'. The recent actions of Latin American states such as Ecuador, Bolivia and Venezuela in withdrawing, or threatening to withdraw, from the ICSID Convention and certain BITs could dramatically change the risk profile of future investments in the region. While more claims are being pursued, we do not think that this can be characterised as a willingness of foreign investors to pursue claims as opposed to a necessity to do so because the trade default, expropriation or discrimination in question has been brought on by economic pressures. Indeed, the numerous BIT claims against Argentina in the wake of its economic crisis continue to be pursued despite the low probability of any resulting awards ever being satisfied.
Kallmer: One of the most significant changes concerns the nature of the barriers that internationally engaged companies are facing. Traditional trade and investment barriers such as tariffs, customs procedures, and foreign equity limitations are still important, but the most significant barriers are less identifiable and, arguably, more insidious. They fall into roughly four categories. First, there are barriers arising from governments’ regulatory practices, for instance, where government regulatory practices regarding, for example, food or product safety are actually disguised barriers to trade and investment. Second, there are 'forced localisation' measures, requirements that firms locate investments or operations, consume goods or services, or carry out other activities within a country’s territory as a condition of doing business there. Third, there are distortions arising out of government influence and control, for example where state-owned enterprises and related entities receive financial or regulatory advantages from the government. Finally, there are IPR-related barriers, such as forced technology transfer, 'indigenous innovation’ requirements, and compulsory licensing of patented products, among others.
Nicely: In the trade context, I think because WTO dispute settlement is a government-to-government process, private stakeholders do not take advantage of it like they can in investor-state arbitration. The need to lobby one’s government is a disincentive for many companies and industries that face market barriers. This is perhaps changing, but very slowly. It is usually the large companies with very large amounts of money at stake that get actively involved in this area of international law. This may be happening in part because of a perception that national governments are not interested in pursuing smaller cases. Meanwhile, private stakeholders may be less interested in pursuing WTO dispute settlement when they learn that they are not entitled damages and that any changes that are achieved from the process are likely to apply only prospectively. Despite these disincentives, in order for the free trade principles of the WTO to take hold throughout the world, the principles must be enforced, which will only occur if private stakeholders pursue these cases with the help of their governments. When they are pressed, these disputes are often successful – the WTO, after all, is known as a plaintiffs’ court – and can create significant advantages for future business.
FW: What general advice would you offer to investors or other parties involved in a trade dispute? What key steps should be taken in the immediate days and weeks of a dispute arising?
Kallmer: The most important piece of advice is to understand that trade and investment disputes are about much more than just legal rules, and that investors need to be able to deploy a range of legal, policy, and government relations tools to address them in a manner that best protects their business interests. Of course, it is important for companies to fully evaluate the legal rights they may have under bilateral investment treaties (BITs), free trade agreements (FTAs), and domestic laws and regulations. At the same time, it is usually in companies’ commercial interests to seek to use these rights as leverage with governments in order to achieve amicable negotiated resolutions of their disputes. Doing so allows companies to avoid the time and expense of pursuing international litigation or arbitration, while maintaining the possibility of continuing to do business in the country concerned. Consistent with this advice, when disputes arise companies should immediately assess their legal rights and explore opportunities for engaging governments in pragmatic, constructive processes for resolving those disputes.
Nicely: I advise patience. Trade disputes require governments to balance a variety of diplomatic considerations that may have nothing to do with a private stakeholder’s specific interests but everything to do with the likely success of the dispute. Because of this, private stakeholders will no doubt find the process frustratingly slow, but if this is the only method of breaking down trade barriers that interfere with future business plans, it is worth the wait.
Upson: The key is to ascertain the client’s position and their rights and remedies swiftly and act decisively. Trade disputes can lend themselves to rapid solutions. At a minimum, the way in which rights are asserted at the outset can provide significant advantages in the ultimate resolution of the dispute. Two examples stand out. The first, arising in late June, involved averted injunctive proceedings by the swift application of a lien over large copper supplies. The second involved an arbitration for a multi-national Korean entity where the ultimate success for the client arose in the way that the dispute over the relevant bills of lading was framed at the outset. In both cases, it was the action taken in the opening phases which counted.
FW: What are the benefits of using alternative dispute resolution for international trade disputes? What unique challenges, if any, do they pose in this context?
Nicely: I find in the trade dispute context that formal alternative dispute resolution (ADR), as we normally think of that concept, is rarely an option. That said, it could be said that seeking to resolve the problem via local remedies – rather than via international law – is a form of ADR for what could grow into formal international dispute settlement. Indeed, exhausting local remedies is always a good option, if it is available, as it eliminates the need to challenge a country’s sovereignty. When this does not work, allowing one’s government to engage in informal consultations with the other government is the next best approach to resolving a dispute, prior to triggering formal dispute settlement proceedings.
Upson: ADR is particularly suited for international trade disputes since often the problem at the heart of the dispute or the path to its resolution relates to cultural issues which cannot be bridged by ad hoc methods. ADR is particularly suited to this cross-border context, and the flexible solutions and approach offered by mediation, for example, can both bridge the cultural divide and preserve commercial relationships more effectively than a dispute resolution method which focuses only on the rights and wrongs of the particular dispute rather than the wider commercial context. We see two main challenges in successfully pursuing ADR. First, whilst ADR is well-developed in some jurisdictions – such as England and the US – there is a lack of familiarity with it elsewhere. Second, lack of familiarity can feed into distrust of the process. For example, we acted in a £100m dispute with an English supplier and a Scandinavian customer. The mediation became almost unworkable because one party insisted on a mediator who was neither English, from a common law state, Scandinavian, Northern European, but otherwise had to be someone who understood the very esoteric nuances of the particular cross-border trade in question.
Kallmer: ADR means a variety of things, depending on context. In the international trade and investment context, international arbitration of disputes is a normal method of dispute settlement. Whether through government-to-government proceedings under FTAs or investor-to-government proceedings under BITs, arbitration has the benefits of being fair, independent, binding, and – usually – enforceable. At the same time, international trade or investment arbitration is becoming increasingly costly and time-consuming for parties, which increases the appeal of genuine ADR, such as mediation, conciliation, or informal negotiation. Again, recognising that trade and investment disputes are frequently about much more than the law, globally engaged companies may be better able to protect their commercial interests by pursuing these less adversarial forms of dispute resolution, at least initially.
FW: What considerations should parties make with respect to the location and seat of arbitration, when using this method to resolve a dispute?
Upson: Of these two factors, the seat is the more important, as it will determine which jurisdiction’s procedural rules will govern the arbitration, subject to any applicable institutional rules which may vary those national rules); which national courts will have supervisory jurisdiction over the proceedings and any challenge to an award; and even, following the recent English cases of Sulamérica and Arsanovia, which law will govern the arbitration agreement itself, for example in determining whether it is valid and binding. The location of the proceedings, assuming the seat has been selected, is unlikely to have any material impact on the dispute, except to say that a convenient – and often neutral – location may help to avoid unnecessary controversy. That said, care should also be taken when considering the location in which the arbitration will take place. For example, in the 2011 Indian case of Videocon Industries v. India, where the location of the arbitration proceedings was moved from Kuala Lumpur to London in the wake of the SARS epidemic, a lack of clarity over the significance of the change of location led to protracted litigation as to whether the juridical seat of the arbitration had also moved.
Kallmer: Companies and other parties should bear in mind several important considerations relating to the physical location and legal 'seat' of an international arbitration, of which two broad considerations dominate. First, the physical location of an arbitration may have significant practical implications for the ease and expense of conducting the proceedings. It is advisable to choose a physical location that is either the same as, or convenient to, the location of fact witnesses, expert witnesses, documents, and other factual material. Second, the legal place or seat of arbitration usually provides the procedural rules governing the conduct of an arbitration. If parties do not want to be bound by the UK’s arbitration rules and procedures, they should not choose London as the seat of their arbitration. It is important to bear in mind that the physical location and legal seat of an arbitration need not be the same, and therefore parties should independently consider the above considerations when making these important choices about their arbitration proceedings.
FW: In your opinion, what role do political issues play in the resolution of international trade disputes? How can such challenges be managed and mitigated?
Kallmer: Political issues are usually important and may be decisive in both the emergence and resolution of international trade and investment disputes, which is why companies must be equipped with a variety of legal, policy, and government relations tools for addressing them. Governments frequently impose trade barriers or discriminate against foreign companies to achieve political objectives, for example, to shield domestic industries or technologies, protect jobs, or simply respond to nationalist sentiment. The intelligent resolution of disputes may also depend on how well companies harness political considerations. Where, for example, companies can demonstrate important employment, technology, or community benefits arising from their operations or investments in a given country, they may be better able to negotiate favourable resolutions of disputes. Similarly, where companies can couple their development of a legal case with an understanding of the political dynamics – and pressure points – within a government, they may be better able to constructively engage with government officials to settle their disputes.
Nicely: As discussed, politics are a huge factor in trade disputes. Indeed, despite an obvious violation, a country may choose not to challenge another country either because doing so puts certain security or other interests at risk, or because challenging another country’s offending practice sheds light on the country’s own policies that may likewise be inconsistent with trade agreement obligations. Governments, after all, are rarely pure. This is a reality of engaging in global business. Fortunately, the ability under the WTO to impose retaliatory measures in order to convince a country’s government to comply with its trade obligations is a significant weapon that can be and is used despite diplomatic or political sensitivities. The WTO exists because of the interdependence of the world’s economies, which will prevent the organisation from ever becoming irrelevant, in my view. This is not necessarily the case with the BITs that allow for investor-state arbitration. There is talk of some countries simply walking away from their BITs, and examples of countries ignoring the awards that result from arbitration, both of which imperil the utility of investor state arbitration. So, although politics also play a role in trade disputes, they don’t necessarily place the entire system at risk.
Upson: Depending on the dispute political issues can play a very significant role and to advise fully a lawyer needs to be able to analyse the dispute on the factual and legal level, and in terms of the political currents and larger forces affecting that dispute. It involves a whole new skill-set. Three examples illustrate the point. First, we currently act for a group of investors in claims against a semi-nationalised entity which is likely to be de-nationalised in due course. The size of our clients’ claims will interfere with that de-nationalisation and are therefore factored into our approach to the proceedings. Second, I acted in a long-running arbitration involving a state corporation of a small Asian state where the ultimate settlement became a political 'football' and crafting the relevant settlement required thought about the different 'levels' of influence over the dispute. Third, last year we acted in a dispute involving a semi-privatised state entity where the state amended its relevant domestic laws to assist the entity. This outcome was predicted but we had to have a strategy based on the law as it stood and the law as it was likely to be.
FW: Do you believe that businesses and investors pay sufficient attention to dispute resolution clauses when drawing up a contract? What issues should firms consider when drafting such clauses?
Upson: Businesses and investors – and even some firms – unfortunately, and absolutely, do not pay enough attention. Dispute resolution clauses are often an after-thought or negotiated at the end of a long transaction and yet the choice of process and forum can make a critical difference to any dispute which then arises. Ambiguity over those clauses can also add to enormously expensive jurisdictional battles. A good illustration is Apple Corps Ltd v. Apple Computer Inc – where a lack of jurisdiction clause led to extensive satellite litigation – or, presently, a case where we have concurrent English and Illinois jurisdiction challenges, as well as an LCIA arbitration, because the relevant arbitration clause was not clearly incorporated into the parties’ transaction and, if it was, its scope is unclear. The lack of clarity has added enormously to the costs of the dispute. The key issues to consider include weighing up the relative advantages and disadvantages of arbitration or court proceedings; and, where any determination, judgment or award is likely to be enforced, and against whom – these factors will often inform not only any choice of national court jurisdiction, but also what method of dispute resolution the parties should select. Firms must also put thought into choosing the jurisdiction and being clear about that choice and whether it is exclusive or non-exclusive; whether they want to have a preliminary reference to ADR and whether it should it be a binding or a non-binding reference; and whether they have properly incorporated the clause, and if it binds all the relevant parties.
Kallmer: No, I do not believe they pay enough attention. Almost by definition, contracts involve situations where two or more parties are aligning their interests in pursuit of one or more mutually beneficial objectives. Planning for disputes or breakdowns in their relationships is often furthest from their minds. Unfortunately, however, disputes happen, and it is critical that companies take the time and make the investment at the front end to negotiate dispute resolution clauses that protect their commercial interests. Just as companies should evaluate the business and political risks of entering a foreign market before they actually break ground, so too should they carefully consider the legal and regulatory frameworks under which they may resolve disputes, whether with other private parties or with government authorities. Among other issues, parties should specifically consider whether they would want to resolve disputes through domestic courts or international arbitration, what substantive law they wish to govern, and choices about the physical and legal place of dispute settlement.
Jonathan S. Kallmer is counsel in Crowell & Moring's International Trade and International Dispute Resolution Groups and is based in the firm's Washington, D.C. office. Mr Kallmer’s practice focuses on international agreements, principally in the area of cross-border investment. Experienced in the regulatory, policy, and geopolitical issues that companies face when investing overseas, he plays a leading role in the firm's global investment strategy practice and assists clients in developing international investment strategies and in using international agreements and other legal and policy tools to pursue business solutions. Mr Kallmer can be contacted on +1 (202) 624 2978 or by email: email@example.com.
Matthew R. Nicely is a partner in the International Trade and Customs practice group of Hughes, Hubbard & Reed LLP. His practice covers the full range of the US trade regulatory regime, including trade remedies, customs, export controls, economic sanctions, anti-boycott and anti-corruption laws. He also advises clients on opportunities and risks presented by international obligations under bilateral, regional, and multilateral trade agreements, including the World Trade Organisation. Mr Nicely received his undergraduate degree from Oberlin College and his J.D. from American University, Washington College of Law. He can be contacted on +1 202 721 4750 or by email: firstname.lastname@example.org.
Sean Upson is a partner in the Commercial Litigation Department and the International Arbitration Department of Stewarts Law LLP. Mr Upson has a wide-ranging domestic and international litigation, arbitration and dispute resolution practice, specialising in complex, commercial contract and tort disputes and all aspects of international trade and commerce, insolvency, property and banking disputes. He is recommended by The Legal 500 for commercial litigation where it is reported that "clients consider him to be outstanding" and "he is highly praised for the quality of his work on high value matters". Mr Upson can be contacted on +44 (0)20 7822 8187 or by email: email@example.com.
© Financier Worldwide
Jonathan S. Kallmer
Crowell & Moring
Matthew R. Nicely
Hughes, Hubbard & Reed LLP
Stewarts Law LLP