Introduction to International Trade Law
Note 3 of 13 Notes
Dispute Settlement
Universiti Kebangsaan Malaysia
Faculty of Law
Pursuing PHD Program in Law
P58462
Musbri Mohamed
DIL; ADIL ( ITM )
MBL ( UKM )
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Introduction
Modern economy and international trade
is based on contracts agreed by the
parties. Such contracts are in turn based
on trust that the other party will carry
out the contracts as agreed. Should a
dispute arise, it is possible to take legal
action against a offending party.
Commercial disputes may range from
small to large ones.
It is generally accepted that a large
number of disputes never get anywhere
near lawyers in an international context.
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In international trade it is now common for
enterprises or commercial entities to evaluate risks
and develop mechanisms for early dispute
evaluation and prevention.
In such circumstances, the parties assess whether it
would be advantageous to implement a solution
reflecting elements such as fairness, maintenance
of long-term relationships and which of them will
feel less pain in taking a hit.
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A. THE SETTLEMENT OF DISPUTES
1. Disputes may be settled
a. By diplomacy
b. By litigation
1) States or intergovernmental organizations v. states or
intergovernmental organizations - in:
a) International courts (such as the International Court of Justice)
b) International arbitration tribunals (usually ad hoc tribunals)
c) Municipal courts (rarely)
2) Private persons v. private persons, states, or
intergovernmental organizations
a) International arbitration tribunals (such as International Center
for the Settlement of Investment Disputes tribunals)
b) Municipal courts
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B. SETTLEMENT OF DISPUTES THROUGH
DIPLOMACY
1. Diplomacy: The process of reconciling the parties to a
disagreement by negotiation, mediation, or inquiry.
a. Negotiation: The process of reaching an agreement by
discussion.
b. Mediation: The use of a third party who transmits and
interprets the proposals of the principal parties, and
sometimes, advances independent proposals.
c. Inquiry: The determination of a disputed fact or facts by an
independent third party.
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C. INTERNATIONAL COURT OF JUSTICE
1. Jurisdiction of the ICJ
a. Contentious Jurisdiction: power of court to hear disputes between states.
1) Prerequisite: states parties must recognize the Court's jurisdiction.
a) Most commonly done on an ad hoc basis.
b) Sometimes these agreements are made permanent by:
1] Inclusion in a bilateral treaty.
2] Unilateral declarations made by each of the parties (called "optional clause" or Art.
36(2) declaration).
a] Rule of Reciprocity: Art. 36(2) of the Court's Statute only requires that a state
respond to a suit brought against it if the state bringing the suit has also accepted the
jurisdiction of the Court.
(1) Where both states have limited the jurisdiction that they will recognize, the ICJ
only has power to decide a case to the extent that both states have agreed to the same
sort of matters.
b] Self-judging Clauses (or "Connally Reservations"): allow a state to exclude from
its acceptance of optional clause jurisdiction any matter which it later determines is
within its own domestic jurisdiction.
(1) Validity of self-judging clauses is questionable.
Case 3-1. Case Concerning Military and Paramilitary Activities in and Against
Nicaragua (Jurisdiction and Admissibility) (Dissenting Opinion)
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b. Advisory Jurisdiction: power of ICJ to give opinions about issues of
international law at the request of the UN or its specialized agencies.
1) Cases will be rejected if they have the effect of making a state a party
to a dispute without its consent.
c. Judgments
1) Decision of ICJ is binding between the parties and with respect to the
particular case only.
a) Stare decisis does not apply
b) Judgment is final and without appeal.
1] ICJ will interpret a judgment,
2] ICJ may revise a judgment within 10 years if a request is made within
6 months of the discovery of some new relevant fact.
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2) Compliance with ICJ judgments
1) Theoretically: Security Council may take "measures to give effect to the
judgment."
2) Practically: there is no way to force a state to comply with a judgment.
3) Usually: judgments are complied with voluntarily.
D. WORLD TRADE ORGANIZATION DISPUTE SETTLEMENT
PROCEDURES
1. The World Trade Organization (WTO) implements and enforces international
agreements regulating international trade.
a. Regulatory agreements include:
1) General Agreements on Tariffs and Trade
2) General Agreement on Trade in Services
3) Agreement on Trade-Related Aspects of Intellectual Property Rights
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b. WTO dispute settlement process is governed by:
1) Understanding on Rules and Procedures Governing the Settlement of
Disputes (Dispute Settlement Understanding or DSU)
2. DSU procedures
a. WTO member states are encouraged to resolve disputes by
consultation.
b. If consultation fails, a member may ask the WTO to establish a
Dispute Settlement Panel.
c. Both during consultation and after a Panel has been established, the
disputing member states may seek the assistance of third party states in
the form of good offices, conciliation, or mediation.
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3. DSU organs
a. Dispute Settlement Body is responsible for:
1) Establishing Panels.
2) Adopting reports of the Panels and the Appellate Body.
3) Monitoring the implementation of rulings and recommendations.
4) Authorizing the suspension of trade concessions and other WTO
obligations.
b. Dispute Settlement Panel is responsible for making findings of fact
and rulings and recommendations to resolves a dispute.
c. Appellate Body may, if a Panel decision is appealed, uphold, modify,
or affirm the Panel's findings and conclusions.
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4. Enforcement
a. Dispute Settlement Body may ask a noncomplying
party to pay compensation or allow an injured party to
retaliate.
b. The decisions of the Panels and the Appellate Body
establish legal precedent.
1) Caveat: this precedent is very flexible -- subsequent
Panels and the Appellate Body are free to deviate form
earlier rulings as they believe it is necessary to do so.
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E. INTERNATIONAL CENTER FOR THE
SETTLEMENT OF INVESTMENT DISPUTES (ICSID)
1. In 1965 World Bank sponsored Convention on the
Settlement of Investment Disputes between States and
Nationals of Other States (the Washington Convention).
a. Purpose of ICSID: To encourage private investment in
underdeveloped countries by providing a reliable mechanism
for impartially resolving disputes between an investor and the
country of investment.
b. Signatories: Three-quarters of the countries of the world.
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2. Constituting an ICSID Arbitration Tribunal
a. Requirements:
1) The state where the investment is being made (the host
state) and the state of which the investor is a national (the
home state) must both be parties to the Washington
Convention.
2) The host state must have notified ICSID of the class or
classes of disputes that it considers arbitrable.
a) The dispute must be a legal dispute arising out of on an
investment.
3) The investor and the host state must both consent to
ICSID jurisdiction.
a) Investor must be a "national of another contracting state."
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b. Unilateral withdrawal is ineffective.
c. Effect of consenting to ICSID arbitration: the litigants
agree to exclude all other remedies.
1) The case cannot be tried in a municipal or another
international tribunal.
2) The investor may not ask its home state for diplomatic
protection.
a) The host state can require that all local remedies be
exhausted before the dispute can be taken to ICSID.
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3. Awards
a. ICSID awards are binding and contracting states agree to
comply with them.
1) Any review of the award by the courts of the state party
to a particular dispute is considered to be in noncompliance
with the award.
b. The tribunal itself can review an award either to interpret
it or to revise it.
c. Appeal is allowed to an ad hoc committee which has the
power to annul an award.
Case 3-4. AMCO Asia Corp. et al. (United States) v.
Indonesia (Provisional Measures)
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In Phillipe Gruslin v Malaysia the dispute involved portfolio
investment in Malaysian securities through a Luxembourg mutual
fund. The claimant, a Belgium national, based his claim on the rights
set out in the BIT between Malaysia and Belgium . The outcome of
the dispute turned on the proviso to the definition 'investment' in this
BIT, which states 'provided that such assets when invested ... are
invested in a project classified as an 'approved project' by the
appropriate Ministry in Malaysia'. Malaysia successfully argued that
since portfolio investment was not subject to approval, this
investment activity was not covered by the Belgium-Malaysia BIT.
Since consent to ICSID was contained in the Belgium-Malaysia
BIT, and the said Treaty did not cover portfolio investment, the
Tribunal held that the Treaty did not satisfy the jurisdictional
requirement for consent.
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F. SETTLEMENT OF DISPUTES IN MUNICIPAL COURTS
1. Introduction
a. Jurisdiction: the competence of a municipal (or national) court to
exercise the power to try a case.
b. Immunity: The ability of a party (usually a state) to escape the
jurisdiction of a court - such as:
1) Sovereign Immunity
2) Act of State (or non-justiciability)
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2. Jurisdiction in Criminal Cases
a. Grounds (or justifications) given by municipal courts for
assuming jurisdiction over international crimes:
1) Territoriality principle: A court has jurisdiction if the crime
was committed within the forum state's territory.
2) Nationality principle: A court has jurisdiction if the crime was
committed by a national of the forum state.
3) Protective principle: A court has jurisdiction if a national
interest of the forum state was injured by the offender.
4) Universality principle: A court has jurisdiction if is has custody
of the person who committed the crime.
5) Passive personality principle: A court has jurisdiction if the
person injured was a national of the forum state.
Case 3-5. Attorney-General of the Government of Israel v.
Eichmann
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3. Jurisdiction in Civil Cases
a. Jurisdiction over Persons
1) In personam jurisdiction exists when an individual or juridical
person is physically present within the forum state.
a) Individuals subject to in personam jurisdiction include:
1] Nationals of the forum state (whether physically present or not).
2] Natural persons physically present within the state.
3] Natural persons domiciled in the state.
4] Natural persons who consent to a court's jurisdiction.
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b) Juridical persons (e.g., business entities and foreign
governments) which are subject to the in personam jurisdiction
of a municipal court include:
1] Domestic entities (e.g., companies incorporated or formed
within the forum state).
2] Foreign entities if they both:
a] are recognized as juridical entities by the forum state.
Case 3-6. Bumper Development Corp., Ltd v. Commissioner of
Police of the Metropolis and Others (Union of India and Others,
Claimants)
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c) Individual and juridical person may give their consent to the
jurisdiction of a court:
1] Expressly by:
a] Appearing in court after a suit has commenced.
b] Appointing an agent within a state to receive service of
process.
c] Agreeing to the personal jurisdiction of a particular court in a
forum selection clause contained in a contract.
2] Impliedly by:
a] Having "minimum" business contacts with the forum state.
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b. Jurisdiction over Property
1) In rem jurisdiction: The power of a municipal court to determine the
ownership rights of persons as to property located within the territory of
the forum state.
Case 3-7. Shell v. R. W. Sturge, Ltd.
G. IMMUNITIES OF STATES FROM THE JURISDICTION OF
MUNICIPAL COURTS
1. Sovereign or State Immunity
a. Defined: Doctrine that domestic courts must decline to hear cases
against foreign sovereigns out of deference to their roles as sovereigns.
b. Foreign sovereigns today include all of the officials of a government.
Case 3-8. Sanders v. Veridiano II
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c. Scope of sovereign immunity.
1) Absolute sovereign immunity (not followed anywhere
today)
2) Restrictive Sovereign Immunity doctrine
a) A state is immune from suit in cases involving injuries that
are the result of its governmental actions (juri imperii).
b) A state is not immune when the injuries result from a purely
commercial or nongovernmental activity (jure gestionis)
d. A state may waive its immunity if it does so knowingly
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2. Act of State Doctrine (or non-justiciability)
a. Defined: A municipal court will decline to exercise
jurisdiction over a foreign state when that state:
1) Performed an act that was an expression of its sovereign
powers; and
2) Carried out that act within in its own territory.
Case 3-9. Regina v. Bartle and the Commissioner of Police for
the Metropolis and Others (Ex parte Pinochet)
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H. CHOOSING THE GOVERNING LAW
1. Municipal Courts Apply the Laws of Other States
because this the fair thing to do.
a. Rationale: To have a court in another country apply
different laws would discourage international exchanges
of all kinds.
2. Choosing the Law
a. Courts use "choice of law" or "conflict of law" rules
to determine if they should apply their own laws or the
laws of another state in settling civil disputes.
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b. This involves a two-step procedure:
1) If the parties to a dispute have agreed to the application of
the laws of a particular country, the court will apply those
laws.
2) If the parties have not agreed as to which laws should apply
(either expressly or impliedly), then the court (depending on
the state it is located in) will determine for itself which laws it
should apply by:
a) Following statutory dictates,
b) Using the "most significant relationship" test.
c) Using the "governmental interest" test.
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3. Statutory Choice of Law Provisions
a. Commonly found in civil law countries in:
1) Statutory codes (usually).
2) International treaties (occasionally).
b. Common basis of these provisions: Vesting of rights
doctrine.
1) Defined: A court is to apply the law of the state
where the rights of the parties to a suit vested (i.e.,
where they legally became effective).
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c. Rules for determining vesting.
1) The general case: The law of the place where the act
occurred shall govern.
2) For example, for a dispute involving the interpretation of a
contract:
a) The law of the place where the contract was made governs
questions of validity
b) The law of the place where the contract was to be
performed governs questions of performance.
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4. Most Significant Relationship
a. Defined: A court is to apply the law of the state which has the most "contacts"
with the parties and their transaction.
1) General factors that a court will consider in all cases are (in essence):
a) Which law best promotes the needs of the international system?
b) Which state's law will be furthered the most by applying it to the case at hand?
c) Which law will best promote the underlying policies of the legal subject-
matter area involved?
2) Specific factors which a court considers depends on the kind of case that is
before it.
Case 3-10. Bank of India v. Gobindram Naraindas Sadhwani and Others
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5. Governmental Interest
a. If asked to make a choice of law, a court using this test will look to see which
state has a legitimate interest in determining the outcome of the dispute.
1) If only the forum state has an interest: the court will apply the forum state's law.
2) If both the forum state and another state or states have some legitimate interest:
then the forum's laws should be applied, as the court obviously understands those
interests better.
3) If only one other state has an interest: the court will apply that state's law.
4) If two states other than the forum state have legitimate interests, then the court
may:
a) Dismiss the case if the state in which the court is located can use the doctrine of
forum non conveniens (discussed below).
b) Apply whichever law it feels is the sounder.
c) Apply the law that is most like that of the forum state.
Case 3-11. Reyno v Piper Aircraft Company (Trial Court Decision)
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I. REFUSAL TO EXERCISE JURISDICTION
1. Forum Non Conveniens Doctrine
a. Defined: A court may refuse to exercise its power to hear a
case when it believes that it would be fairer and more
convenient for the case to be decided elsewhere.
1) Factors the court will consider are:
a) Private interests of the parties (e.g., the ease and cost of
access to documents and witnesses).
b) Public interest factors (e.g., the interests of the forum
state, the burden on the courts, and the notion of judicial
comity).
Case 3-12. Reyno v Piper Aircraft Company (Supreme Court
Decision)
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J. PROVING FOREIGN LAW
1. Presumptions
a. Courts are held to know the law that applies in their own state.
b. Courts are held to know the rules of international law.
c. Courts are assumed not to know the law of foreign states.
1) The parties must prove foreign law as a fact.
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K. RECOGNITION OF FOREIGN
JUDGMENTS
1. Foreign court judgments: a hearing will be
held by a court asked to convert a foreign
judgment into a local judgment.
a. Common consideration: Did the foreign court
have jurisdiction before handing down its
judgment?
b. Other considerations depend on the country.
2. Foreign arbitral awards:
a. Treated like domestic judgments in courts in
states that are parties to the United Nations
Convention on the Recognition and Enforcement
of Foreign Arbitral Awards.
b. Otherwise, must be converted into a foreign
judgment in the state where the arbitration takes
place, and then that judgment is treated like any
other foreign court judgment.
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Advantages of ADR
There is general agreement among legal and public procurement officials
that ADR has many advantages over traditional litigation :
.. The parties to the dispute define the issues.
.. The process is consensual.
.. The process is controlled.
.. The process is private.
.. The dispute can be resolved expeditiously.
.. The business relationship can be preserved.
.. The government’s rights are protected.
.. The results of litigation cannot be predicted.
.. The costs of litigation are avoided.
.. The government’s management and technical resources are conserved.
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While it has many advantages, there are important
disadvantages which should be noted:
.. Case law and legal precedent are avoided.
.. The process may create a two tier system of justice.
.. The process requires commitment.
.. The process may not work with multiple complex
issues.
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ADR adoption by public procurement agencies is a global best
practice, easily transferable across international borders. Many
international resources exist such as the International Arbitration
Rules of the American Arbitration Association, the International
Chamber of Commerce, the Center for Public Resources Institute
for Dispute Resolution, and the International Arbitration Institute
in Paris.
When public procurement decisions are challenged in a court, be
it in New York or Paris, the procurement process is paralyzed
until the case is heard by a judge and perhaps a jury and this can
take months and cost precious public dollars. Litigation in the
courtroom over public procurement policy decisions may
become a dinosaur in the international society of the twenty-first
century as public procurement professionals embrace and
institutionalize the use of Alternative Dispute Resolution.
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Mustill LJ concludes ;
“Arbitration has come to occupy an
influential position in the conduct of
international trade. It has a great deal more
to contribute, and it can and should grasp the
opportunities which stand before it. But there
is no room for complacency.”
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And before that Lord Mustilll in his Foreword to D Mark Cato made the
point for arbitration when he said:
“The great advantage of arbitration is that it combines strength with
flexibility. Strength because it yields enforceable decisions, and is backed
by a judicial framework which, in the last resort, can call upon the coercive
powers of the state. Flexible because it allows the contestants to choose
procedures which fit the nature of the dispute and the business context in
which it occurs. A system of law which comes anywhere close to
achieving these aims is likely to be intellectually difficult and hard to pin
down in practical terms.”
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Global businesses have taken a serious look at ADR
as an effective means of resolving cross border
contract disputes. The International Institute for
Conflict Prevention & Resolution (CPR) has
developed “THE PLEDGE” , and more than 4000
companies around the world have committed to the
Corporate Policy Statement on Alternatives to
Litigation, including 400 of the 500 largest firms in
the U.S.
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The corporate pledge states that:
“We recognize that for many disputes there is a less expensive, more
effective method of resolution than the traditional lawsuit. Alternative
dispute resolution (ADR) procedures involve collaborative techniques
which can often spare business the high cost of litigation. In recognition
of the foregoing, we subscribe to the following statements of principle
on behalf of (company name) and its domestic subsidiaries:
In the event of a business dispute between our company and another
company which has made or will then make a similar statement, we are
prepared to explore with that other party resolution of the dispute
through negotiation or ADR techniques before pursuing full-scale
litigation. If either party believes that the dispute is not suitable for ADR
techniques, or if such techniques do not produce results satisfactory to
the disputants, either party may proceed with litigation.”
Feb. 2011…….Continue to Part 4……………..
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