Australia-United States Free Trade Agreement - Guide to the Agreement
21. Institutional Arrangements and Dispute Settlement
1. Purpose and structure
The Chapter on institutional arrangements and dispute settlement consists of 15 Articles and 1 Annex. It establishes a fair, transparent, timely and effective procedure for settling disputes arising under the Agreement. Importantly, it does not allow private investors to directly challenge government decisions under the Agreement, provides high standards of openness and transparency in the resolution of disputes between the Australian and United States Governments, and provides for flexible compensation arrangements for resolving disputes.
2. Can private investors directly challenge decisions of the Australian Government under the Agreement?
In recognition of the Parties' open economic environments and shared legal traditions, and the confidence of investors in the fairness and integrity of their respective legal systems, the Investment Chapter does not establish an investor-state dispute settlement mechanism (see Investment Chapter).
Of course, individual investors are able to raise concerns about their treatment by the United States with the Australian Government (or vice versa), which is able to pursue these issues through traditional state-to-state dispute settlement in Sections 4-9 below.
3. Joint Committee (Article 21.1)
The Joint Committee is central to the ongoing evolution of this Agreement and the early identification and settlement of disputes through consultation. At its annual meetings, it will review the current functioning of the Agreement, consider any improvements or amendments that either country may wish to propose and, where further clarity is required, issue interpretations of the Agreement.
This last function is particularly important as it clearly reserves the power to interpret the Agreement to the Australian and United States governments operating together.
4. Scope of Application and Dispute Settlement Proceedings (Article 21.2)
A dispute can be initiated by either Party to resolve a disagreement about the interpretation or application of the Agreement or where:
- the actions of either government violate the Agreement;
- either government has failed to carry out an obligation under the Agreement; or
- either government has acted in a manner which, while complying with the strict letter of the Agreement, goes against the spirit of the Agreement and the expectations of the other government (a so-called 'nullification and impairment' case).
Importantly, it is only possible to bring nullification and impairment cases with regard to the commitments made in six named chapters.
5. Consultations (Article 21.5)
The Agreement emphasises settlement of disputes through consultation and gives the predominant role to the Parties in interpreting the Agreement.
At the same time, the Article notes the continuing importance of soliciting and considering the views of members of the public on matters under dispute.
6. Establishment of Panel (Article 21.7)
Where consultations are not effective in resolving a dispute, the Agreement provides for an arbitral panel to consider the matter. The panel mechanism adopted by the Agreement builds on the model for dispute settlement in the World Trade Organisation, with a range of significant improvements.
Innovative elements of Panel selection include:
- the use of strict timelines and a contingent list of panellists to overcome delays in agreeing the composition of dispute panels; and
- the use of panellists with specific expertise in disputes regarding the Labour and Environment Chapters.
7. Rules of Procedure (Article 21.8)
This Article sets high standards of openness and transparency through open public hearings, public release of legal submissions by both governments and opportunities for interested third parties to submit written views to the panel.
8. Panel Report (Article 21.9)
Consistent with the Agreement's commitment to maintaining the prominence of the two governments in resolving disputes between them, this Article:
- restricts panels to making findings of fact and determinations regarding consistency of a government's action with the Agreement. Panels may only make recommendations for the resolution of disputes where specifically requested to do so by the two governments; and
- panels must base their report only on the relevant provisions of the Agreement and the submissions and arguments of the Parties
9. Compensation for a breach of the Agreement
(Articles 21.10 - 21.14)
These Articles provide a range of solutions where Australia or the United States is found to have breached the Agreement.
For breaches of trade obligations, the agreement requires:
- the breach to be corrected (Article 21.10); or
- trade compensation to be provided to the other country elsewhere in the Agreement by accelerating reduction in other tariffs, or by the other country suspending tariff reductions under the Agreement (Article 21.11).
An innovation introduced through this Agreement is the capacity of a government to choose to pay a monetary assessment in lieu of providing trade compensation (Article 21.11.5). This may prove a preferable policy option where:
- a breach cannot be rectified - where, for example, a state government measure is at fault and the Commonwealth has no constitutional capacity to intervene, and
- the Government does not consider it appropriate that traders in the broader economy should bear the burden of such a breach.
Such a monetary assessment will be set at fifty percent of the value of suspended benefits determined by the panel unless agreed otherwise by the governments (Article 21.11.5). The Joint Committee can agree that this monetary assessment be paid into a joint fund and expended on initiatives to facilitate trade between the United States and Australia (Article 21.11.6).
Where a Party is found to be in breach of its core commitment (not to fail to enforce effectively the Party's own laws) under the Environment or Labour Chapters (see Chapters 18 and 19), a dispute panel can impose an annual monetary fine, not exceeding US$15 million, to be paid into a fund established under the Agreement for expenditure on appropriate labour and environment initiatives in the territory of the country that violated the Agreement, in a manner consistent with its law.
The Agreement makes specific provision for a review of the effectiveness of these compensation arrangements within the first five years, or following compensation being provided with regard to five separate complaints, whichever comes first (Article 21.14).
March 6, 2004