SETTLEMENT OF DISPUTES IN GATT/WTO

DISPUTE SETTLEMENT IN THE GATT

At its inception, the GATT contained few provisions addressing dispute settlement. When the
GATT was negotiated, the Contracting Parties anticipated that the more detailed provisions
on dispute settlement under the International Trade Organization (ITO) would soon apply.
Because these other rules were expected to govern, it was not considered necessary to
develop additional dispute rules specific to the GATT. As a result, when the efforts to create
the ITO failed, the GATT was left without a detailed dispute mechanism. Instead, the very
brief provisions of Articles XXII and XXIII of the GATT provided the foundation of its
dispute settlement system.

(Consult class notes)

DISPUTE SETTLEMENT IN THE WTO

Introduction

The establishment of the WTO significantly reshaped the world trading system, not only by
expanding upon the topical coverage of the GATT, but also by creating a system of
compulsory, binding and enforceable dispute settlement. The primary legal framework for
this system is set out in the Understanding on Rules and Procedures Governing the Settlement
of Disputes (‘Dispute Settlement Understanding’ or ‘DSU’).

Article 2.1 of the DSU establishes the Dispute Settlement Body (DSB) to administer the
DSU’s rules and procedures. In essence, the DSB is all the WTO Members acting together.
The DSB has the authority to establish dispute settlement panels, adopt panel and Appellate
Body reports, maintain surveillance of implementation rulings, and, if necessary, to authorise
Members to suspend concessions and other obligations. According to Article 2.3 of the DSU,
the DSB meets ‘as often as necessary to carry out its functions’. In practice, the DSB
regularly meets monthly. Decisions at the meetings are taken by consensus.

Two of the most important changes from the GATT era are the following. First, the WTO
created a standing Appellate Body to review panels’legal decisions, partly in response to the
concern with the uneven quality of GATT panel reports. Secondly, the DSB automatically
adopts, that is, gives legal effect to, panel and Appellate Body reports unless it decides by
consensus not to adopt the report. This shift to ‘reverse consensus’ eliminates the ability of
one Member to block adoption of a panel/Appellate Body report and means adoption is a
virtual certainty because, in order for a report not to be adopted, every Member— including
the ‘winning’ party—would have to object.

Basic Overview

The DSU process consists of a number of procedural stages: consultations, panel, appellate
review, implementation, compliance and compensation/retaliation.

(a) Consultations
As per Article 4.6, the WTO dispute settlement process formally begins when a Member
requests consultations with another Member regarding a perceived ‘nullification or
impairment’ of benefits, usually resulting from an alleged violation of the substantive rules.
The consultations phase is intended to provide an opportunity for the parties to discuss the
dispute and negotiate a resolution of the matter. In furtherance of this goal, consultations are
confidential, and without prejudice to the rights of any Member in any further proceedings.

Parties are given great scope in carrying out the consultations, as the DSU does not provide
any guidance on how the consultations are to be conducted. Therefore, the manner and form
in which the parties discuss the dispute, interpret the facts and reveal legal arguments is left
almost entirely to them.

Consultations may be either ‘multilateral’ or ‘bilateral’, at the designation of the complainant.

Multilateral consultations are open to other Members with a ‘substantial trade interest’. Such
Members may request to join in the consultations. By contrast, bilateral consultations are
‘private’, that is, only the complaining and responding Members may participate.

(b) Panels

If consultations fail to resolve the dispute, the complaining party may request the DSB to
establish a panel. To do so, the complainant simply puts its request on the agenda of a DSB
meeting. A panel will be convened at the latest at the second meeting of the DSB where the
request is heard unless the DSB decides by consensus not to establish one.

Panels are composed on an ad hoc basis of three (or if the parties agree, five) well-qualified
individuals: generally academics, private lawyers or, quite often, present or former Members
of government delegations to the WTO who are not parties to the dispute. Panelists serve in
their individual capacity.

The parties to the dispute can, by mutual agreement, select the panelists themselves, based on
suggestions made by the Secretariat. Parties can oppose the suggestions for ‘compelling
reasons’. If the parties cannot agree on the composition of the panel within 20 days following
the establishment of the panel, either of the parties can request that the Director-General
determine its composition.

Once the composition of the panel is determined, the panel process can begin. Article 7
provides the standard terms of reference for panels, which essentially states that the panel
should examine the complaint as set out in the panel request and ‘make such findings as will
assist the DSB in making the recommendations or in giving the rulings provided for in
that/those agreement(s)’.

The panel process is similar to that used under the GATT and in most domestic courts. The
panel evaluates the factual and legal aspects of the dispute through written submissions from
the parties, meetings with the parties, and the power to seek additional information and expert
opinions. The panel then makes an ‘objective assessment’ of the matter by examining the
facts of the case and the relevant WTO agreements.
Based on the evidence presented, the panel reaches conclusions on the legal claims. It then
issues an ‘interim’ report to the parties (the interim report is another new element introduced
by the DSU and is intended to improve the quality of panel reports). The parties can (and
often do) comment on the findings contained in this report.

After the interim review process is complete, the panel issues the final report to the parties,
taking into account the interim review comments. After issuance to the parties, the report is
translated into the other official WTO languages which were not used in the proceedings
(English, 20 21 French and Spanish are the three) and then circulated to the full WTO
membership and to the public.

The DSU provides that, in most circumstances, the panel process is to last for no more than
six months, and that in no case should the period from the establishment of the panel to the
circulation of the report to the Members exceed nine months.

After circulation, the panel report can either be appealed by any party to the dispute or
adopted by the DSB. If there is an appeal, the appellate review process begins. If no appeal is
filed, the panel report is considered for adoption. Upon adoption, the panel’s findings have
legal force, and thus any findings of violation must be implemented by the responding party
(the implementation process is discussed below). Unless the DSB decides by consensus not to
adopt the report—meaning all parties, including the ‘winning’ party, decide to block adoption
of the report—the report is automatically adopted.

(c) Appellate Review

Appeals of panel reports are made to the Appellate Body. The Appellate Body is a standing
body composed of seven persons with demonstrated expertise in law, international trade and
the WTO agreements. Appellate Body members serve a four-year term, and may be
reappointed once for a further four-year term. The DSU requires that Appellate Body
members be broadly representative of membership in the WTO. While the Appellate Body is
composed of seven members, only three members serve on any one case.

Appeals are limited to issues of law covered in the panel report and legal interpretations and
conclusions developed by the panel. The Appellate Body has the authority to uphold, modify
or reverse the legal findings and conclusions of the panel. Therefore, it is not the role of the
Appellate Body to engage in fact-finding or evaluation of the evidence, and findings of fact
are, in principle, not subject to Appellate Body review.

Like with panels, Appellate Body proceedings are confidential and the opinions expressed
anonymous. Where consensus cannot be reached, decisions are taken by a majority vote. The
DSU provides that appellate proceedings are generally to last no more than 60 days following
the notification of appeal. When the Appellate Body considers that it cannot provide its report
within 60 days, it informs the DSB in writing of the reasons for delay and estimates the date
when it will submit its report. According to the DSU, ‘in no case shall the proceedings exceed
90 days’.
After the Appellate Body report is circulated, this report—along with the panel report as
upheld, modified or reversed by the Appellate Body report—is placed on the agenda of a
DSB meeting and is automatically adopted unless the DSB decides otherwise by consensus.

(d) Implementation

According to Article 3.7 of the DSU, the primary objective of dispute settlement is to secure
the modification or withdrawal of the offending measure. Thus, when panels and the
Appellate Body make the standard recommendation under Article 19.1 of the DSU, that a
Member found to be in violation ‘bring the measure into conformity with’ WTO rules, the
hope is that the implementing Member will withdraw the measure or modify it so that it is
consistent. Once adopted, these recommendations become the ‘recommendations and rulings’
of the DSB.

In terms of the timing of compliance, Article 21.1 of the DSU states that ‘prompt
compliance’ is ‘essential’. However, the DSU also recognises that immediate compliance
may be ‘impracticable’ in certain circumstances and, in such circumstances, allows the
Member concerned a ‘reasonable period of time’ to comply.

Article 21.3 outlines three ways of determining a reasonable period of time: (1) the Member
concerned proposes a period and the DSB approves (by consensus) the nominated timeline;
(2) the complaining party and implementing Member agree on an implementation period
within 45 days following adoption of the ruling; or (3) if neither of the first two methods
occur, the period can be set by binding arbitration (to be completed within 90 days following
adoption of the report).

In this arbitration, the parties make written submissions to the arbitrator, who is normally a
past or present Appellate Body Member. The arbitrator holds a hearing in which the parties
present and explain their arguments and respective positions. The arbitrator(s) then make(s) a
decision as to the reasonable period, with Article 21.3(c) offering the ‘guideline’ that the
reasonable period should not exceed 15 months from the date the ruling was adopted.
However, it ‘may be shorter or longer, depending upon the particular circumstances’ of the
dispute.

In addition to the timing and means of compliance issues, the DSU provides for monitoring
of the implementation process. Article 21.6 of the DSU requires the DSB to keep the losing
party ‘under surveillance’ from the onset of the ‘reasonable period’ until the issue is resolved.
More specifically, this provision says that the losing member must provide regular ‘status
reports’ beginning six months into each implementation period and continuing through
subsequent DSB meetings.

(e) Compliance Review

If a complainant is of the view that the Member complained against failed to implement the
DSB’s recommendations and rulings within the reasonable period, it may request
authorisation from the DSB to suspend concessions or other obligations under the covered
agreements with respect to the offending Member.
Article 21.5 provides, ‘where there is disagreement as to the existence or consistency with a
covered agreement of measures taken to comply with the recommendations and rulings such
dispute shall be decided through recourse to these dispute settlement procedures, including
wherever possible resort to the original panel.’ Article 21.5 also directs the panel to circulate
its report within 90 days after the date of referral of the matter.

The claims, arguments and factual circumstances raised in the Article 21.5 compliance
review may not necessarily be the same as those that were pertinent or relevant in the original
dispute, although there might be some overlap. For instance, the Article 21.5 compliance
panel can sometimes make findings even when the provisions of the covered agreements with
which violations are alleged were not included in the original case.

In Australia—Salmon, Australia claimed that one of the measures at issue in the Article 21.5
proceeding was a new measure governing the matter, not a ‘measure taken to comply’ with
the ruling of the DSB, and thus should not be within the terms of reference of the DSU
Article 21.5 panel. The panel rejected the argument, holding that measures enacted by a
Member (or, in this case, an authority in the territory of a Member) subsequent to the original
dispute that are in the ‘category of’ or ‘closely related’ to the measures identified in the panel
request, namely ‘measures to comply with the recommendations and rulings of the DSB’ that
‘Australia has taken or does take’, are within the panel’s terms of reference.

(f) Compensation and the Suspension of Concessions or Other Obligations If compliance is

not achieved, there are two possibilities for resolution of the dispute: (1) compensation
offered by the party who failed to implement; or (2) suspension of concessions or other
obligations by the complainant.

(i) Compensation

If the implementing Member fails to comply fully with the rulings and recommendations of
the DSB by the end of the reasonable period of time, Article 22.2 requires that, if so
requested, the Member enter into consultations with the complaining party with a view to
mutually agreeing on compensation. Compensation, as the term is used in the DSU, does not
necessarily mean monetary payment or other remuneration. Instead, the respondent Member
will provide additional trade benefits to the complaining Member, often in the form of a
reduction of the tariff rate on other products, or greater market access for certain goods of the
complaining Member, equivalent to the benefit the respondent Member has nullified or
impaired through the ongoing application of its measure.

In the negotiations, the parties must be mindful of the Article 22.1 mandate requiring the
parties to reach an agreement on compensation in a manner which is consistent with the
covered agreements.

In the Turkey—Textiles dispute, a mutually satisfactory solution involving trade

compensation was notified in July 2001. Turkey agreed to tariff reductions on 15 categories
of chemicals by way of trade compensation. There is no indication that these tariffs were
reduced only in respect of chemicals from the complaining Member (India). The trade
compensation appears therefore to have been granted on an MFN basis.

(ii) Suspension of Concessions or Other Obligations

If the Member complained against fails to implement the WTO ruling, and a compensatory
agreement cannot be reached within 20 days after the expiration of the ‘reasonable period’,
the complaining Member may, pursuant to Article 22.2 of the DSU, request authorisation
from the DSB to suspend the application to the Member complained against of concessions or
other obligations under the covered agreements. Article 22.6 further states that in this
situation: ‘the DSB, upon request, shall grant authorisation to suspend concessions or other
obligations within 30 days of the expiry of the reasonable period’, unless there is consensus
otherwise or the losing party refers the requested suspension amount to arbitration. The
suspension of concessions or other obligations is commonly referred to as ‘retaliation’.

As a general rule, Article 22.3(a) of the DSU provides that complaining parties should first
seek to suspend concessions or other obligations with respect to the same sector(s) as that in
which the panel or Appellate Body has found a violation or other nullification or impairment.
If the same is not practicable or effective, it may seek to suspend concessions or other
obligations in other sectors under the same agreement.

Finally, if the complaining party does not consider it practicable or effective to suspend
concessions or other obligations with respect to other sectors under the same agreement, and
the circumstances are serious enough, Article 22.3(c) of the DSU allows the complaining
party to suspend concessions or other obligations under another covered agreement. The use
of retaliatory measures against a different agreement is commonly referred to as ‘cross-
retaliation’.

The Arbitrators in EC—Bananas (Ecuador) clarified the circumstances in which a

complaining Member may request the suspension of concessions with respect to a different
agreement. In this case, Ecuador requested the suspension of concessions of TRIPS
obligations, as opposed to the suspension of obligations under the GATT and/or in service
sectors under the GATS other than distribution services (the sectors at issue in the dispute)
because it considered that it would not be practicable or effective in the meaning of Article
22.3(b) and (c) of the DSU, and that circumstances in Ecuador’s bananas trade sector and the
economy on the whole were serious enough to justify suspension under another agreement. In
response, the EC argued that in making its request, Ecuador did not follow the principles and
procedures set forth in subparagraphs (b) and (c). Overall, the Arbitrators concluded that
Ecuador had acted in accordance with Article 22.3.