2.1 The United States’ Block of Appellate Body Appointments

The current administration in the United States has made no secret of its dissatisfaction with the WTO, and in particular with its dispute settlement system. In February 2018, after announcing one of the many rounds of tariffs applied to Chinese products to pressure China into accepting demands for changes in its economic system, President Donald Trump labelled the WTO a ‘disaster’ for the United States.¹⁰ A few months earlier, the US Trade Representative (USTR), Robert Lighthizer, had expressed a preference for the non-binding dispute settlement system that existed between 1947 and 1994, under the General Agreement on Tariffs and Trade (GATT 1947),¹¹ stating that, in order ‘to have [the WTO] work’, its binding dispute settlement system would have to change.¹²

This administration’s views are not entirely new. Despite the fact that it was the United States that pressured for the creation of binding and enforceable dispute settlement at the Uruguay Round negotiations,¹³ securing approval of the US Senate for the WTO Agreements was a major undertaking, precisely due to the novelty of having an independent adjudicator review the legality of US measures without the possibility of a US block.¹⁴ While the Senate ultimately approved the agreements, the testimonial of John Jackson concerning the constraints imposed by WTO law on US sovereignty is revealing. Jackson stated:

Once the United States deems it necessary to take certain measures or actions to safeguard its significant national interests, it is empowered to escape from the binding of international rules and norms, to breach its international obligation undertaken in the light of international treaties, and to go in its own way. When necessary, the United States does not even hesitate to withdraw from the international treaties that it deems would restrain it from free action. Such power is the U.S. sovereignty, the sovereignty that the United States persistently retains in hand in the process of the international ‘allocation of power’.¹⁵

What Jackson, and perhaps many who negotiated the WTO Agreements, may not have foreseen was the possibility that this sovereign power could be exercised not outside the WTO system but within it, to prevent the appointment of ABMs. Under DSU rules, any Member has the procedural power to block the appointment of an ABM. Appointments are made by the Dispute Settlement Body (DSB),¹⁶ the sole WTO organ for which the WTO Agreements not only provide specifically that its decisions under the DSU are to be made by consensus¹⁷ but specifically define consensus as situations in which ‘no Member, present at the meeting of the DSB when the decision is taken, formally objects to the proposed decision’.¹⁸ Although some have proposed interpretative solutions that would allow the WTO political organs to overcome a block (discussed in Section 3.1 below), so far no WTO Member has advanced anything other than a textual interpretation of these provisions read in combination: that, as long as a WTO Member is ‘present’ at a DSB meeting and ‘formally objects’ to the appointment of an ABM, no appointment can take place. In fact, under the WTO’s consensus-based procedural practice, even the decision to initiate a selection process for a future appointment can be blocked by a single recalcitrant Member.¹⁹

Although the consensus requirement necessarily implies that WTO Members can veto nominees to the Appellate Body at the stage of the selection process, the first time a formal block was announced was in 2016. The United States, still under the Barack Obama administration, took the then unprecedented move of blocking the re-appointment of ABM Seung Wha Chang for a second four-year term. Arguing that his ‘performance did not reflect the role assigned to the Appellate Body by Members in the DSU’, the United States stated that its block was needed to prevent the emergence of ‘a system where WTO adjudicators overstepped the boundaries agreed by WTO Members in the DSU and the WTO Agreement’.²⁰ The crisis was eventually solved with the joint appointment, in November 2016, of Hong Zhao and Hyun Chong Kim.²¹

Then, in early 2017, disagreement between the United States and the European Union (EU) – the latter requested that the DSB conduct a joint procedure for the replacement of Ricardo Ramírez-Hernandez, whose term would end on 30 June, and Peter van den Bossche, whose term would end in December – meant that no selection process was initiated for the replacement of Mr Ramírez.²² When, in August 2017, Hyun Chong Kim resigned from the Appellate Body to assume the position of Trade Minister in Korea,²³ the United States criticized before the DSB the fact that former ABMs still appeared as signatories of reports (one Appellate Body report, circulated on 5 September, was signed by former ABMS Kim and Ramírez),²⁴ expressed concerns that Appellate Body reports were being signed by persons who were no longer ABMs, and blocked Mexico’s proposal to initiate three selection processes simultaneously.²⁵

Negotiations continued, but the United States made it increasingly clear that it would not accept new Appellate Body appointments until its concerns were addressed. In August 2018, when the first term of ABM Shree Baboo Chekitan Servansing was about to end, the Chairman of the DSB raised the issue of his re-appointment. The United States then specified that it would block his reappointment not due to any objection to his conduct as an individual but due to the Appellate Body’s ‘abus[ing] the authority it had been given within the dispute settlement system’.²⁶ Pointing to a ‘persistent overreaching’ by the Appellate Body, the United States stated that it would continue to block the appointment of new ABMs until this issue was addressed by the Membership.²⁷

2.2 The United States’ Objections to the Appellate Body’s Conduct

One reason invoked by the United States for blocking Appellate Body appointments is its objection to Rule 15 of the Appellate Body Working Procedures,²⁸ which allows former ABMs to continue to serve on appeals to which they are assigned during their terms. While, pursuant to the DSU, the Working Procedures are to be drawn up by the Appellate Body itself,²⁹ the United States contends that Rule 15 contradicts the four-year term limit imposed on ABMs by Article 17.9 DSU and participation in appeals of former ABMs should require express authorization from the DSB. In January 2018, the United States stated that it would block future appointment until WTO Members ‘resolve[d] that issue’.³⁰

To this objection to the conduct of the Appellate Body the United States adds a second objection. Pursuant to DSU Article 17.5, ‘[i]n no case shall [appellate] proceedings exceed 90 days’, counted from the date a party notifies its decision to appeal to the date the Appellate Body circulates its report. The combination of a heavy workload, a number of highly complex cases,³¹ the obligation to ‘address each of the issues raised’ by the parties,³² and long translation delays as reports get longer, means that Appellate Body reports are now regularly issued more than 90 days after the appeal.³³ The United States takes issue with this practice, and in particular with the fact that, in 2011, the Appellate Body abandoned a ‘long-established practice of consulting and obtaining the parties’ consent where it had considered it could not meet the 90-day requirement’.³⁴ In these cases, the United States argues, the report should ‘no longer qualif[y] as an Appellate Body report for purposes of the exceptional negative consensus adoption procedure’.³⁵ In other words, if the Appellate Body exceeds the 90-day limit set in the DSU, its reports would be subject to adoption by positive consensus at the DSB. This would allow any WTO Member, including the losing party in a dispute, to block the adoption of the report, leaving the dispute unresolved.

2.3 Consequences of a Non-Operational Appellate Body

Since 1 October 2018, every appeal brought to the Appellate Body must be heard by the same three sitting members. Pursuant to Article 17.1 DSU, the Appellate Body is composed of seven Members, ‘three of whom shall serve in any case’. This will in principle allow the Appellate Body to continue to operate until 10 December 2019 and, pursuant to Rule 15, to complete any appeals for which a division has been composed until that day.³⁶ Even if all three sitting Members agree to continue to hear these appeals, however, some appeals may already be compromised due to rules on conflict of interest. Contrary to what takes place in other international adjudicatory bodies, in the Appellate Body rules for conflict of interest currently operate invisibly, during the composition of divisions.³⁷ With only three ABMs in office, any conflict of interest of one of the three sitting ABMs will prevent the formation of a division to hear appeals.

A non-operational Appellate Body does not mean that panel reports will become binding as issued. The obligation of WTO Members to comply with the findings contained in panel and Appellate Body reports only arises once reports are adopted and their findings become rulings of the DSB.³⁸ Pursuant to DSU Article 16.4, once a party to a dispute notifies the DSB of its ‘decision to appeal’ a panel report, the report is not ‘considered for adoption by the DSB until after completion of the appeal’. Without completion of the appeal, panel reports will remain in limbo. They will not produce the effects of an adopted DSB report, such as triggering an obligation of implementation, initiating a reasonable period of time for compliance, or permitting the adoption of trade retaliation in case of non-compliance. While one could compare them to unadopted reports of the GATT era, in fact they will be less authoritative than these reports. GATT-era panel reports represented the final non-partisan assessment of the matter available within the GATT system. Even if not adopted, they did produce much of the political effect of a final assessment. WTO panel reports appealed into limbo, on the other hand, will remain provisional, perpetually subject to a potential reversal or modification of their conclusions by the Appellate Body, if it is recomposed one day.³⁹

Unless there is a solution to the crisis, most disputes now at the panel stage will already be subject to the appeal-block of the panel report by any party. Even excluding the exceptionally long cases of the Tobacco – Plain Packaging dispute and the Large Civil Aircraft disputes, it generally takes between 700 and 1000 days for a party that requests consultations to obtain a panel report assessing the challenged measures. If this average is maintained and the block continues, chances are that panel reports on disputes initiated in 2018 will be issued after December 2019. This in turn means that, absent an agreement on alternative procedures for appeal, any party will be able to appeal the report to a non-operational Appellate Body. And, unless and until the Appellate Body is recomposed, pursuant to DSU Article 16.4 this appeal will prevent the DSB from adopting any reports on the dispute.

3.1 The Failure of Negotiated Solutions

The preferred choice to preserve the multilateral trading system is a negotiated multilateral solution leading to the recomposition of the Appellate Body. In its 2018 Trade Agenda, the United States stated that it supported ‘an agreed upon multinational system to resolve trade disputes’ but was concerned that ‘international bureaucrats improperly set the terms of trade for Americans’, establishing ‘new obligations to which the United States and its elected officials never agreed’.⁴⁰ In late 2018, WTO Members put forward a set of proposals for WTO reform, establishing conditions for former ABMS to complete appeals started, clarifying the powers of the Appellate Body to examine domestic law, and establishing a time limit for Appellate Body reports.⁴¹ At the General Council, the United States rejected these proposals, arguing that they constituted ‘revisions to the text of the Dispute Settlement Understanding to permit what is now prohibited’, and that the objective of the United States was ‘to ensure that the system adheres to WTO rules as written’.⁴² To the extent that this implies rolling back en bloc what other Members understand has become the body of WTO law clarified in dispute settlement as opposed to specific instances of stark disagreement, and perhaps limit the very ability of WTO Members to resort to dispute settlement itself, it is difficult to foresee how the impasse can be resolved.⁴³

Unless a negotiated solution is found for the Appellate Body crisis, WTO Members that wish to preserve the compulsory dispute settlement system have three sets of options. First, they may seek to preserve the operation of the Appellate Body ‘multilaterally’, by overcoming the US block through a procedural manoeuver that would allow a majority of Members to appoint ABMs, or would allow the Appellate Body to continue to issue reports even without sufficient ABMs to hear an appeal. Second, they may enter into bilateral ad hoc agreements allowing specific disputes to be adjudicated without the prospect of an appeal-block by the defendant. Third, they may seek an alternative, ‘plurilateral’ solution allowing compulsory dispute settlement to take place among consenting Members, keeping it open for willing WTO Members to adhere to in the future.⁴⁴

3.2 A Multilateral Re-Establishment of Compulsory Dispute Settlement: Strengthening or Weakening the WTO?

Two ‘procedural solutions’ have been proposed to circumvent the US block and allow the continuation of compulsory WTO dispute settlement after 11 December 2019. Under one type of proposal, Members would seek to vote on appointments to the Appellate Body. The second type of solution would involve the Appellate Body itself changing its procedural rules to allow the continuation of binding dispute settlement after it is rendered non-operational.

Among proponents of a ‘Member-driven’ solution, Pieter Jan Kuijper argues that the WTO Agreement, which permits voting by the General Council and Ministerial Conference ‘where a decision cannot be arrived at by consensus’,⁴⁵ is hierarchically superior to the DSU. On grounds that ‘[t]imes of emergency justify emergency measures’, he proposes an exceptional ‘[d]irect appointment of [Appellate Body] members by the General Council applying majority vote’.⁴⁶ Jennifer Hillman suggests that there is an ‘ugly’ solution to the Appellate Body crisis: interpreting the DSU in such a way that it allows the appointment of ABMs without consensus. Her argument is that, while DSU Article 2.4 establishes consensus as the sole means for the DSB to make a ‘decision’, Article 17.2 involves not a decision but an ‘appointment’ – a different kind of determination.⁴⁷ Ernst-Ulrich Petersmann goes the furthest, arguing that voting would be not an exceptional measure but an entitlement and even a duty of the Membership in the face of ‘illegal’ blocking of appointments: ‘WTO members are legally required (“shall”) to overcome illegal “blocking” of the filling of [Appellate Body] vacancies’.⁴⁸

These solutions are fragile because they appear to contradict the clear terms set out in the DSU for decisions of the DSB. As a rule, the WTO Agreements favor consensus decision-making while featuring fallback voting procedures to allow a majority of Members to overcome resistance by holdout Members.⁴⁹ The making of decisions by the DSB, and in particular the appointment of persons to the Appellate Body, appears to be the key exception to this rule. Like every non-dispute-related decision of the DSB, the appointment of persons to the Appellate Body must be made by positive consensus.⁵⁰ The DSU specifies that consensus is only achieved when ‘no Member, present at the meeting of the DSB when the decision is taken, formally objects to the proposed decision’.⁵¹ As long as the United States remains a Member of the WTO and is present at the meeting of the DSB when a proposed appointment is discussed, under the DSU it has the power to withhold support for consensus.

One could consider revising the DSU to change the possibility of consensus-blocking. However, the Agreement Establishing the WTO (AEWTO) is clear that: (i) amending the DSU requires consensus among all the Members;⁵² (ii) amending the AEWTO’s provisions on amendment also requires ‘acceptance by all the Members’;⁵³ and (iii) collective interpretations, which can be made by majority, ‘shall not be used in a manner that would undermine the amendment provisions’.⁵⁴ In short, amending the WTO Agreements to overcome the consensus requirement for the appointment of ABMs would itself appear to require the consensus of the Membership.

The second type of solution is for the Appellate Body to use its power to modify its Working Procedures to allow the continuation of WTO dispute settlement after the Appellate Body itself becomes non-operational. Steve Charnovitz has suggested a procedural rule providing that, in case of a non-operational Appellate Body, any appealed panel report is upheld ‘as is’: ‘the “completion of the appeal” will occur automatically the same day the appeal is lodged’.⁵⁵ While the Appellate Body would remain non-operational, the dispute settlement system would continue to produce final reports.

This second type of solution is as problematic as the first one from a textual standpoint, overlooking the obligations of the Appellate Body to ‘hear appeals’⁵⁶ and ‘address each of the issues raised’ by the parties.⁵⁷ It is difficult for those seeking to enforce the DSB’s obligation to fill vacancies in the Appellate Body ‘as they arise’⁵⁸ to do so at the expense of other obligations established in the DSU.

Arguably, WTO Members have an obligation to cooperate in good faith to ensure the continued operation of the dispute settlement system. However, the failure by one Member to engage in this cooperation would not necessarily allow other Members to overrule the procedural requirement of consensus. As far back as 1950, the International Court of Justice (ICJ) established the principle that, absent specific rules in this regard, the violation of the obligation to compose an international adjudicator does not create for other Members or for the bodies that administer dispute settlement a right to proceed to this composition without the consent of the blocking Member. As the ICJ put it, ‘[t]he failure of machinery for settling disputes … is one thing; international responsibility is another’.⁵⁹ WTO Members that feel aggrieved could thus bring a dispute against the United States, but not override legal provisions in the DSU and appoint ABMs. And the rationale that emerges from an assessment of the WTO rules governing ABM appointments is that: (a) any WTO Member can prevent the appointment or re-appointment of an ABM; and (b) depriving individual WTO Members of this power requires consensus among the Membership.

Besides any legal impediments, other Members would likely consider the political implications of submitting a matter to majority decision-making, and not just ‘consensus minus one’⁶⁰ but rule by simple majority.⁶¹ Were they to impose a change of rules on one WTO Member, no matter how unreasonable its actions may seem, the WTO Members pressing for majority rule would risk becoming the overruled WTO Member the next time.

Setting aside the consensus rule would break simultaneously two delicate balances. The first is the balance of political decision-making in the WTO, including the balance between the handful of ‘large’ WTO Members that account for most of international trade⁶² and the vast majority of Members whose trade amounts to less than 1% of global trade, as well as the balance among the large Members. If Members were suddenly able to mobilize WTO voting procedures against each other, there would be little stopping them from turning this kind of emergency action into a habit. Rather than leading to ever more constraining trade rules, it is likely that regular outvoting of the economically largest Members would make the whole of WTO law into ever more unrealistic declarations of intentions, drastically affecting the relevance of the organization for the determination of the rules that in fact govern trade relations between its Members.⁶³

More broadly, the WTO regime is founded on a second delicate balance. Each WTO Member has agreed to submit existing commitments to adjudication on the condition that it retains full control, through the consensus principle, over the evolution of these obligations. Majority decisions may allow temporary waivers or authoritative interpretations but may not lead to the imposition of new rules on unwilling Members.⁶⁴ Creative procedural solutions are problematic not only in that they undermine the very commitment to rules-based dispute settlement that they seek to preserve but also in that they disrupt this broader balance between the acceptance by WTO Members of strong enforcement of their WTO obligations and the preservation by Members of control over changes to these obligations.

3.3 The Bilateral Level: In-Dispute Agreements to Not Appeal or Arbitrate

If a solution at the multilateral level cannot be found, Members willing to ensure that their disputes will be settled with finality may enter into bilateral agreements to ensure that disputes do not take place under the shadow of an appeal-block. Since Article 23.1 DSU requires Members seeking to settle WTO disputes to ‘have recourse to, and abide by, the rules and procedures of this Understanding’, WTO Members may not simply resort to ad hoc arbitration or adjudication before another court. Rather, they must resort to one of the ‘in-regime’ options permissible under the DSU.

Possible in-regime agreements include, first, agreements not to appeal from the panel report, such as those included in the sequencing agreements in Indonesia – Safeguard on Certain Iron or Steel Products (examined below).⁶⁵ Additionally, Members may agree to resort to arbitration under Article 25 DSU. While the wording of Article 25 (analyzed below) suggests that arbitration was originally conceived of as a means of replacing the entire ‘substantive’ WTO dispute settlement procedure, its text is flexible enough to support an arbitration that replaces, and reproduces the features of, appellate proceedings. Two such ‘appeal arbitration’ agreements, almost identically worded, have now been entered into between Canada and the EU and between the EU and Norway, although in the seemingly weaker form of ‘arrangements’ (Appeal Arbitration Arrangements, examined below).⁶⁶

In principle, agreements not to appeal or to arbitrate are both valid and in line with the spirit of the DSU if taken within the framework of an existing dispute. While Articles 16.4 and 17.4 of the DSU provide that parties may appeal from a panel report,⁶⁷ in Peru – Agricultural Products the Appellate Body concluded that Members may relinquish their procedural rights under the DSU through ‘actions taken in relation to, or within the context of, the rules and procedures of the DSU’.⁶⁸ In Australia – Automotive Leather, the United States and Australia agreed that there would be no appeal from the compliance panel’s report. They complied with the agreement even after the panel reached the so far unique conclusion that compliance required repayment of the illegal subsidy by its beneficiary,⁶⁹ something Members at the DSB Meeting stated ‘raised very serious systemic concerns’⁷⁰ and constituted ‘a one-time aberration of no precedential value’.⁷¹

Agreements not to appeal were entered into between Indonesia and the complainants in Indonesia – Safeguard on Iron or Steel Products. In the ‘sequencing agreement’ usually signed by parties to solve the temporal incongruence between Articles 21.5 and 22.2 of the DSU,⁷² the parties inserted a paragraph stating as follows:

The parties agree that if, on the date of the circulation of the panel report under Article 21.5 of the DSU, the Appellate Body is composed of fewer than three Members available to serve on a division in an appeal in these proceedings, they will not appeal that report under Articles 16.4 and 17 of the DSU.⁷³

Similar paragraphs may be inserted in other bilateral agreements, possibly accounting for other reasons for the Appellate Body’s inability to adjudicate, such as conflicts of interest. At the same time, it should be noted that these agreements were signed at the compliance stage of the dispute, in which the ‘sequencing problem’ creates for both parties, and in particular for the respondent, an incentive to cooperate in securing a positive solution to the dispute. At this stage, absent such an agreement, the complainant may proceed directly to requesting an authorization to retaliate under DSU Article 22.2.⁷⁴ The complainant can therefore secure agreement from the respondent by threatening to proceed directly to retaliation in case the respondent does not agree to a procedure capable of securing a final resolution of the compliance dispute.⁷⁵

On the other hand, if one of the parties fails to abide by the agreement not to appeal, this might create systemic problems for the DSB. Pursuant to the second sentence of DSU Article 16.4, ‘[i]f a party has notified its decision to appeal, the report by the panel shall not be considered for adoption by the DSB until after completion of the appeal’. If the DSB is required to make a substantive decision to apply the agreement between the parties rather than the DSU, this decision (like all DSB decisions) must be made by consensus, and is therefore subject to a block by any WTO Member present at the meeting. While in principle WTO Members comply with in-dispute agreements, the lack of enforceability may produce significant legal hurdles if the question arises before the DSB.

A safer alternative is to resort to arbitration under DSU Article 25. This provision allows WTO Members to resort to ‘[e]xpeditious arbitration within the WTO as an alternative means of dispute settlement’ to ‘facilitate the solution of certain disputes that concern issues that are clearly defined by both parties’.⁷⁶ Article 25.2 provides:

resort to arbitration shall be subject to mutual agreement of the parties which shall agree on the procedures to be followed. Agreements to resort to arbitration shall be notified to all Members sufficiently in advance of the actual commencement of the arbitration process.

Article 25.2 thus offers Members broad freedom with respect to the scope of arbitration. The requirements it imposes are: (i) mutual agreement between the parties to the dispute to resort to arbitration; (ii) mutual agreement on the procedures to be followed; and (iii) notification to all Members in advance of the arbitration process. The only Article 25 Arbitration to have taken place so far is evidence of this freedom. This arbitration took place in US – Copyright, a dispute brought by the EU against the United States. It concerned not the conformity of a Member’s measures with WTO obligations (an adopted panel report had concluded that the US measures were WTO-inconsistent)⁷⁷ but the level of nullification or impairment caused by these measures. Thus, the United States and the EU used Article 25 as a replacement not for ‘substantive’ dispute settlement proceedings but for the Article 22.6 arbitration concerning the level of nullification or impairment of benefits.

Article 25 arbitrations are ‘WTO solutions’, in the sense that resorting to Article 25 does not breach the obligation to have recourse exclusively to DSU procedures to settle WTO disputes.⁷⁸ Additionally, pursuant to DSU Article 25.4, an Article 25 arbitral award produces all the legal effects of an adopted panel or Appellate Body report under DSU Articles 21 and 22. It triggers a prompt compliance obligation for the violator, initiates a reasonable period of time for compliance, and allows complainants to resort to retaliation in case of persistent non-compliance.⁷⁹

At the same time, Article 25 arbitration is subject to the requirement, under DSU Article 3.5, that ‘[a]ll solutions’ to WTO disputes, ‘including arbitration awards’, be consistent with the WTO Agreements, and ‘not nullify or impair benefits accruing to any Member under those agreements, nor impede the attainment of any objective of those agreements’. This makes Article 25 arbitration distinct from other arbitration mechanisms in which parties would have full autonomy to determine the applicable law. While arbitral Awards are not subject to adoption by the DSB, WTO Members are in principle unable to request an Article 25 Arbitrator to issue an Award contradicting their WTO obligations, a limitation that the Arbitrator itself is arguably required to enforce. The requirement for Article 25 Arbitrators to control the conformity of the arbitral agreement with both the letter and the spirit of the DSU was acknowledged by the Article 25 Arbitrator in US – Copyright, who noted that ‘the absence of a multilateral control over recourse to [Article 25]’ made it ‘incumbent on the Arbitrators themselves to ensure that it is applied in accordance with the rules and principles governing the WTO system’.⁸⁰

The relative flexibility offered by Article 25 means that Members may agree to use arbitration under Article 25 as a replacement not for the whole dispute settlement process but exclusively for the appeal stage. This alternative, promoted by a number of practitioners⁸¹ and enshrined in the Appeal Arbitration Arrangements, would allow the dispute settlement system to continue to operate as usual, with the panel remaining responsible for the ‘heavy lifting’ in terms of gathering evidence and making findings of fact, while the appeal Arbitrator is tasked with reviewing issues of law.

If individuals are appointed as appeal Arbitrators on a case-by-case basis by the parties, Members might wonder why they do not simply appoint the same individuals to serve as panelists, saving themselves the time and cost of an additional procedural step. One could argue that review is per se a good thing in that it allows reflection over a previous decision. At the same time, practical considerations make it unlikely that governments and private parties would be willing to fund an additional procedure when they would be unable to draw from it any additional benefits in terms of security, predictability and broader authority over the development of WTO rules that they obtain from the panel report. Only if the appeal Arbitrator can produce these effects would its addition to the system be justified.

The Canada-EU and EU-Norway Appeal Arbitration Arrangements avowedly aim ‘to replicate as closely as possible all substantive and procedural aspects as well as the practice of Appellate Review pursuant to Article 17 of the DSU’.⁸² They do so by establishing an ex ante commitment (or rather ‘intention’) by the two parties ‘to resort to arbitration under Article 25 of the DSU as an interim appeal arbitration procedure … if the Appellate Body is not able to hear appeals of panel reports in any future dispute between [the parties] due to an insufficient number of its members’.⁸³ Besides including a draft agreement to be filed with a panel once the latter is established,⁸⁴ the Appeal Arbitration Arrangements incorporate some of the specific authority of the Appellate Body by requiring those serving as appeal Arbitrators to be former ABMs.⁸⁵

At the same time, by avoiding the title of ‘agreement’ and establishing an ‘intention’ rather than a legal commitment,⁸⁶ the Appeal Arbitration Arrangements appear to leave the door open for a defendant to reject the applicability of the arrangement to a specific dispute. The arrangements, and future similar documents, may thus provide a solution for parties that agree to engage in binding dispute settlement with regard to a specific dispute, avoiding the prospect of an appeal-block. However, they do not reestablish a system of compulsory dispute resolution. As the original drafters of the appeal arbitration proposal noted, ad hoc agreements require the consent of parties to the dispute once the dispute has been initiated.⁸⁷ This empowers the defendant to refuse to consent after knowing the terms of the dispute, which in turn creates an incentive for the defendant to establish conditions for granting this consent, including with respect to the arbitrators appointed and to the scope of the dispute.⁸⁸

Restoring compulsory dispute settlement, even among willing WTO Members, requires that these Members go beyond ad hoc agreements within specific disputes or arrangements that, like the ones between Canada and the EU and between the EU and Norway, leave the door open for a respondent to refuse consent. It requires an ex ante agreement establishing a mechanism for compulsory dispute settlement alternative to the WTO’s ordinary dispute settlement mechanism, pre-empting the possibility of withdrawal of consent or appeal-block by the complainant. In order to be effective, this agreement must also go beyond two or a handful of parties and involve a critical mass of willing WTO Members.

4.1 Ex Ante Agreements and the Limits of Party Flexibility Under the DSU

This section discusses how WTO Members may go beyond bilateral agreements to arbitrate or not to appeal and set up a ‘plurilateral’ agreement, signed among willing Members prior to any particular disputes (i.e., ex ante), to ensure the continuation of compulsory dispute settlement among these Members in the absence of a functioning Appellate Body. In principle, this can be done through an agreement not to appeal, through an agreement to arbitrate under Article 25, and through an appeal arbitration agreement under Article 25. However, it is submitted that the agreement not to appeal could lead to enforceability issues, and the ex ante agreement to arbitrate could conflict with the object and purpose of Article 25. On the other hand, an appropriately designed appeal Arbitrator could ensure binding compulsory dispute settlement and hold a degree of authority over the interpretation of WTO commitments that a regular arbitrator would not hold.

The key legal obstacle to ex ante agreements establishing alternatives to the DSU’s compulsory dispute settlement procedures is the centrality of the ordinary DSU dispute settlement procedure to the DSU objectives of ‘provid[ing] security and predictability to the multilateral trading system’ and ‘preserv[ing] the rights and obligations of Members under the [WTO] agreements’,⁸⁹ and the corresponding resistance to allowing Members to deviate from this procedure. In US/Canada – Continued Suspension, the Appellate Body noted that the compulsory dispute settlement procedure is the one that ‘must be followed when parties do not avail themselves of the consensual and alternative means of dispute resolution provided in the DSU’.⁹⁰ And the Article 25 Arbitrator in US – Copyright referred to the ‘alternative’ character of the arbitration procedure, noting that recourse to arbitration had to be ‘consistent with the object and purpose of the DSU’.⁹¹

Resort to these alternative means of dispute resolution is itself limited. DSU Article 3.5 precludes their use to undercut WTO rules:

All solutions to matters formally raised under the consultation and dispute settlement provisions of the covered agreements, including arbitration awards, shall be consistent with those agreements and shall not nullify or impair benefits accruing to any Member under those agreements, nor impede the attainment of any objective of those agreements.

While parties to a dispute may relinquish their procedural rights,⁹² in Peru – Agricultural Products the Appellate Body restricted this possibility to ‘actions taken in relation to, or within the context of, the rules and procedures of the DSU’.⁹³ An ex ante agreement to relinquish procedural rights under the DSU would seem to contravene not only DSU Article 3.5 (which arguably applies only once a matter is ‘formally raised’ before the DSB), but also DSU Article 3.7, which only permits mutually agreed solutions to disputes that are ‘consistent with the [WTO] agreements’.

With regard to an ex ante agreement not to appeal, even prior to questions of enforceability there is the question whether any such agreements are permissible.⁹⁴ Article 17(4) of the DSU provides that ‘parties to the dispute … may appeal a panel report’. A recalcitrant WTO Member might plausibly argue that this provision establishes a procedural right to appeal and that, once it notifies the DSB of ‘its decision to appeal’, under Article 16.4, the DSB is precluded from even considering the panel report for adoption until the appeal is completed.⁹⁵ Open-ended ex ante agreements not to appeal, therefore, seem both legally questionable and difficult to enforce against a recalcitrant defendant.

Similar issues may arise with respect to an open-ended ex ante agreement among Members to resort to Article 25 instead of panel proceedings. On the one hand, in Mexico – Soft Drinks, the Appellate Body found that a WTO Member ‘is entitled to a ruling by a WTO panel’.⁹⁶ This would allow a complainant to resort to a regular WTO panel even if arbitration had been agreed to. More importantly, the logic set out in Article 3.5 would seem to prevent the use of Article 25 to undermine the WTO’s compulsory dispute settlement system. In US – Copyright, the arbitrator took upon itself to examine the compatibility with DSU rules of the arbitration agreement providing it with jurisdiction, and suggested that an agreement to resort to Article 25 would be void if it were used to ‘circumvent the provisions’ of the DSU.⁹⁷

This principle is reflected in DSU Article 25.1, which provides that arbitration exists to assist in ‘the solution of certain disputes that concern issues that are clearly defined by both parties’ (emphases added). This wording casts doubt on whether Members can enter into ex ante agreements to arbitrate yet uncertain disputes concerning yet undefined issues. If the panel procedure is available and operational, agreeing to settle an indefinite number of disputes through a parallel adjudication system rather than through recourse to WTO panels would seem to ‘circumvent’ the WTO’s compulsory dispute settlement system.

On the other hand, an ex ante agreement by certain WTO Members to have an arbitrator hear appeals in case of a non-operational Appellate Body arguably conforms to both the spirit and the letter of Article 25. The Arbitrator in US – Copyright concluded that the agreement that established it was lawful because it did not undermine but fulfil the purpose of WTO dispute settlement. Its decision, it pondered, was likely to contribute to the prompt settlement of the dispute between the parties; did not affect the rights and obligations of other Members; and (despite the expectation that the award would be used to determine the amount of monetary compensation rather than to achieve immediate compliance) was compatible with the object and purpose of WTO dispute settlement, in that the arbitration could ‘pave the way to implementation without suspension of concessions or other obligations’.⁹⁸

Following this reasoning, Members agreeing ex ante to resort to Article 25 for appeals, in case the Appellate Body is non-operational, would be acting to ensure the effectiveness of the dispute settlement system. It is the eclipsing of compulsory dispute settlement, caused by a non-operational Appellate Body, that prevents the WTO dispute settlement system from being able to address nullification or impairment of benefits accruing to Members and preserve the rights and obligations of Members under the WTO Agreements.

4.2 The Design of the Ex Ante Agreement to Arbitrate: Authority and Legitimacy

Article 25 is flexible with respect to the types of disputes that parties may bring before an arbitrator.⁹⁹ The requirement that Article 25 arbitration concern ‘issues that are clearly defined’¹⁰⁰ can be fulfilled by clarifying, in the ex ante agreement, that the issues to be dealt with by the appeal Arbitrator are the issues of law covered in the appealed panel report and the legal interpretations developed by the panel that one or both of the parties dispute.¹⁰¹ The disputes subject to arbitration would thus not be uncertain but would concern a specific set of facts, as identified in the appealed panel report, and the correctness of the legal findings and interpretations made by the panel, which would be ‘defined’ by the parties when appealing the report.

Tasking the arbitrator solely with revising legal interpretations has both legal and practical advantages. It preserves the procedural right of parties to a dispute before a WTO panel to appeal from the panel report.¹⁰² It also avoids the difficulties of the fact-finding aspects particular to the panel procedure. Finally, entrusting an appeal Arbitrator with appeals has the advantage that the party dissatisfied with the panel report has an incentive not to undermine the agreed mechanism but to use it to reverse the negative results at the panel stage, thus operating within the agreed system.

In order to prevent the ex ante agreement from constituting a means to circumvent the dispute settlement provisions of the DSU, this agreement should only operate in situations in which the Appellate Body is unable to perform its functions. These could include situations in which, besides formally having three or more sitting members, the Appellate Body cannot form a division to hear an appeal due to conflict of interest by one or more ABMs. This would ensure that the Article 25 arbitration serves to preserve the rights and obligations of the parties under the WTO Agreements, including its compulsory dispute settlement system, rather than to circumvent them.

The Appeal Arbitration Arrangements go some way towards achieving this objective. They ostensibly apply to ‘any future disputes’ in which ‘the Appellate Body is not able to hear appeals of panel reports’, replacing the appeal under Article 17 of the DSU with an appeal arbitration procedure.¹⁰³ Arbitrators are to be selected by the WTO Director-General among former ABMS, to review ‘issues of law covered by the panel report and legal interpretations developed by the panel’.¹⁰⁴ They also provide that the arrangement will ‘cease to apply as soon as the Appellate Body is again fully composed’, ensuring that it will not replace an operational compulsory WTO dispute settlement system.¹⁰⁵ What remains missing is an agreement that, indeed, binds Members to resorting to appeal arbitration, making it compulsory and self-enforcing rather than an ‘intention’, and that is plurilateral in character, involving a significant number of willing Members and being open to accession by other Members.

To be clear, a multi-party agreement to arbitrate is neither a multilateral nor a plurilateral WTO Agreement, both of which require a decision by a WTO organ.¹⁰⁶ By contrast, a ‘plurilateral’ agreement to arbitrate under Article 25.2 does not require a collective decision by the Membership, but only that the Members concerned enter into an agreement to resort to arbitration and notify their agreement to all Members ‘sufficiently in advance of the actual commencement of the arbitration process’. As long as it is notified to all Members, an ex ante agreement to appeal arbitration may be entered into by some WTO Members only, without a decision by any WTO organs.

Entering into such an agreement would allow the Members parties to this agreement to continue to subject their relations to compulsory dispute settlement. At the same time, parties to such an agreement should be conscious that, in the absence of an operational Appellate Body, decisions of appeal arbitrators may have an impact on the broader development of WTO law, affecting the set of mutual expectations that constitute the trade regime. These decisions will be all the more relevant if a dispute involves not only parties to the ex ante agreement (which can proceed to an appeal arbitration) but also non-parties, i.e. Members that did not sign up to the agreement to arbitrate. These Members may be legitimately concerned that arbitrators will be making decisions that affect their interests – both their trade interests and their systemic interest in the interpretation of WTO rules – without input from them.

The Appeal Arbitration Arrangements formally endow awards issued under their aegis with interpretative authority, providing that, as long as arbitrators are constituted by former ABMs, ‘awards of other arbitrators under similar appeal arbitration procedures shall be deemed to constitute Appellate Body reports adopted by the DSB for the purposes of interpretation of the covered agreements’.¹⁰⁷ This is interesting especially given that the WTO Agreements themselves do not grant broad interpretative authority to panel or Appellate Body reports. Indeed, the AEWTO endows the WTO Ministerial Conference and General Council with ‘exclusive authority to adopt interpretations’ of the WTO Agreements.¹⁰⁸ In one of its early reports, the Appellate Body found that this provision was ‘reason enough to conclude that such authority does not exist by implication or by inadvertence elsewhere’.¹⁰⁹

It was only in the 2008 report in US – Stainless Steel (Mexico) that the Appellate Body decided to respond to a panel’s open disagreement with one of its interpretations by stating not only that interpretations contained in adopted panel and Appellate Body reports ‘become part and parcel of the acquis of the WTO dispute settlement system’, influencing future interpretations, but also that the DSU establishes a ‘hierarchical structure’ between panels and the Appellate Body which implies that the ‘relevance of clarification contained in adopted Appellate Body reports is not limited to the application of a particular provision in a specific case’.¹¹⁰

Setting aside the appropriateness of these specific statements, there is a degree of inevitability in the interpretative authority of adjudicatory decisions. The entire field of international investment law has been shaped by arbitral awards without any formal authority over subsequent tribunals.¹¹¹ In the WTO, besides citing adjudicators outside the framework of the organization,¹¹² the Appellate Body has referred to decisions by the ad hoc Arbitrator established by the Doha Waiver on Bananas.¹¹³ Whether or not the ex ante multi-party agreement acknowledges this, arbitral proceedings that are used will inevitably lead to decisions whose authority extends beyond the specific dispute before the appeal Arbitrator.

To ensure that arbitrators carry a corresponding degree of legitimacy, three aspects may be relevant. First, who makes the decisions; second, to what extent proceedings are open to non-parties to the dispute; and third, how non-parties to the agreement can accede to it, in such a way that they cannot engender a permanent downgrading of the WTO compulsory dispute settlement system into an optional system that Members can resort to only when convenient, withdrawing from it once they lose immediate interest – which would amount to circumventing the WTO’s dispute settlement provisions.

With respect to the individuals that should act as arbitrators, one way to infuse legitimacy in the process is to have sitting and former ABMs act as arbitrators, with the possible addition of those who have been proposed officially until the point at which the Appellate Body became non-operational. In order to select the arbitrators that will hear a particular appeal, the appointing authority could be the WTO Director-General. The Appellate Body Secretariat itself or one of the WTO legal divisions could be primarily tasked with assisting arbitrators, in the same way that they assist in other DSU arbitrations, thus ensuring that decisions are technically sound and take into account the larger body of WTO practice and jurisprudence. With the exception of opening the system for proposed ABMs (which would provide the alternative system with a broader array of arbitrators), the Appeal Arbitration Arrangements incorporates all of these elements.¹¹⁴

With regard to the openness of proceedings, DSU Article 25.3 allows parties to an arbitration agreement to determine whether other WTO Members may become parties to the arbitration proceedings, possibly determining not only whether other Members may join as co-complainants (or respondents) but also whether they may intervene as third parties.¹¹⁵ The parties entering into an ex ante agreement may be tempted to restrict third party rights to Members that join the agreement. In doing so, however, they would diminish the legitimacy of the arbitrator’s decisions. A non-signing Member prevented from submitting its views and contributing to the decision would feel legitimately entitled to disregard the decision. By opening the arbitration to input from all WTO Members, signatories would increase the authority of the appeal Arbitrator to guide the development of WTO law.¹¹⁶ This element is incorporated in the Appeal Arbitration Arrangements as well, through the provision that third parties to the panel proceedings ‘may make written submissions to, and shall be given an opportunity to be heard by, the [appeal] arbitrator’.¹¹⁷

To be fully operational, the ex ante multi-party agreement should seek to prevent non-signatories from adhering to it à la carte, engaging in ad hoc arbitral appeals when it suits them while retaining the ability to appeal-block the adoption of panel reports in other cases. The agreement may, for example, set up a long survival clause for Members that withdraw from it or provide that, once a critical mass of Members become signatories or have recourse to the agreement, parties should propose to the Ministerial Conference its universalization as an amendment to the WTO Agreements (whether as a plurilateral or a multilateral agreement). While Members’ consent remains a requirement, the agreement should ensure that those that adhere to it strive to restore the core commitment to compulsory and binding dispute settlement that characterizes the WTO regime.

This final element of bindingness and compulsoriness, which would require providing the alternative agreement with full enforceability by not requiring an additional expression of consent within the context of each individual dispute, is, together with the broader ‘plurilateral’ element, absent from the Appeal Arbitration Arrangements. This makes the arrangements a good starting point for negotiations of a multi-party agreement, but one that falls short of providing a binding and compulsory alternative to the WTO dispute settlement system once – as seems all but certain at the time of publication – the Appellate Body ceases to be operational.