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Australia-China FTA Conference in Shenzhen

28-29 June 2006

Day 2: Dispute Settlement Procedure, Business Law and Enforcement

Settlement of Disputes within Free Trade Agreements: Implications for a proposed China/Australia FTA

Professor Jeff Waincymer, Monash University

Introduction

A topic of this nature encompasses a number of themes. At the most fundamental level, there needs to be some consideration of the essential nature and role of dispute settlement obligations and processes within inter-governmental agreements. This is a subset of a broader question as to the role of and utility of law in the international arena. That utility is often questioned because of the lack of any effective enforcement mechanisms that are akin to those applicable within domestic political systems.

Assuming that some dispute settlement processes are considered appropriate, the next question is what form they should take and what persons should be utilised as neutral facilitators.

The next aspect involves consideration of the stages of dispute settlement, particularly the important role of consultation and perhaps mediation. Where formal adjudication is concerned, attention is given to possible processes and also to the central tasks of interpretation and fact finding. Consideration is then given to the core concepts that are likely to be included in any Free Trade Agreement (FTA), particularly non-discrimination and minimum standards protective devices. This analysis includes an examination of the way these concepts have been interpreted through dispute settlement processes in other international fora. In this way, insights may be provided as to the optimal articulation of such concepts within the agreement establishing the FTA and the optimal dispute settlement processes that should be employed.

At this early stage of the negotiations, this analysis has limitations in that assumptions need to be made about the likely topics for inclusion. The nature and role of any dispute settlement processes within the proposed FTA will obviously be affected to a significant degree by the nature of the commitments that might ultimately be made. Thus only brief comments will be made in respect of this issue. Nevertheless, the existence of other FTAs and the trend of governments to utilise similar models for differing treaties helps justify some preliminary analysis. Australia has recently concluded a number of different FTAs and the dispute settlement models have varied to a significant degree. Thus even from Australia's end alone, there is a policy question as to which of these models to use as the basis for negotiations.

It is then necessary to consider the particular problems thrown up by some of the substantive commitments that may be made. From a dispute settlement perspective, particular attention is given to special challenges in the fields of anti-dumping, and intellectual property. The paper then considers the unique field of Investor/State dispute settlement which is incorporated into some FTAs. The most significant of these is the determination of whether to give private individuals and corporations direct rights to challenge foreign governmental behaviour.

Finally, attention needs to be given to the way various legal instruments impact upon one another. Significant problems can arise through the interaction of a range of legal norms, from contract rights, national laws, international agreements (including the potential FTA being discussed in this conference), general principles of public international law dealing with host country obligations, whether emanating from treaty or custom and other recognized principles of law such as sovereign immunity, where limits are imposed on the ability of individuals to challenge governmental behaviour within domestic court structures.

This reminds us of the need to integrate the analysis into a broader perspective. There is a need to consider how dispute settlement rights and obligations under a particular FTA relate to or are affected by rights and obligations under related contracts, other FTAs or multilateral agreements, in particular the WTO agreements. From a theoretical perspective there is also a need for some comparative analysis of the different mechanisms in order to devise an optimal model.

Nature of international economic law

Legal rules and institutions are part of the essential infrastructure required to enhance mutually beneficial trade and investment activities. These activities are seen as a necessary means of enhancing world and individual welfare. Legal infrastructure stands alongside other necessary elements such as finance, insurance and transport. Mutually beneficial exchanges would be significantly reduced without the legal elements that we take for granted at the domestic level. Trade and investment build on principles of contract, property and corporate law among others, supported by a court system and some alternative dispute resolution mechanisms. The range of dispute settlement mechanisms aim to prevent and resolve disputes about the rights and obligations of the parties to the commercial transaction.

Where domestic commerce is concerned, both the substantive and procedural building blocks are established as part of the normal fabric of society. They may over time be tailored to meet the needs of international commerce but their operation is much broader. In addition, some of the dispute settlement processes are automatic. The courts have automatic jurisdiction over disputes, except where parties have validly agreed to alternative dispute settlement procedures. In both cases there are strong enforcement mechanisms.

At the international level, none of the building bocks arise in this way, as there is no comprehensive legal order. On the contrary, individual governments establish domestic regimes and have traditionally sought to apply these automatically to international commerce. There are a number of problems with this approach. The first is that if all of the governments seek to resolve an international dispute under local systems and principles, there are likely to be conflicts between these approaches that are wasteful and not easy to resolve. Each government may deny the territorial reach of the other and take a different view as to the way the issue should be resolved. The second is that at times gaps might appear, with no domestic system accepting oversight of a particular dispute. Finally, rules developed for domestic systems will not necessarily be desirable for international relations and transactions.

The last 50 years has thus seen a significant development in the number of international institutions and instruments to try and provide the needed legal infrastructure. This encompassed the United Nations and the International Court of Justice, the Permanent Court of Arbitration, the IMF and World Bank, the WTO, WIPO, UNCITRAL, UNIDROIT, the Hague Conference, the unsuccessful OECD initiative in relation to a multilateral agreement on investment and the burgeoning web of regional trade and investment agreements. These institutions and treaties look to the development of desirable substantive norms, such as trade liberalisation and investment protection, but also need to be equally concerned with process norms, including dispute prevention and settlement.

The nature and role of dispute settlement under FTAs, WTO and international law

Legalist versus pragmatist perspectives

A discussion of dispute settlement and prevention raises conceptual questions about the nature of international treaties and the rights and obligations of parties to those treaties. At this level, one debate is often between those who advocate a legalist approach and those who prefer international organisations to behave in a more pragmatic manner. Different countries have tended to take different views about this issue over the history of the GATT/WTO system where formal adjudicatory dispute settlement has been particularly active. The GATT/WTO experiences provide a rich body of data for the competing schools of thought upon which to build their cases and provide a useful frame of reference for negotiators of an FTA.

That debate may be of particular interest to China with its traditional cultural attitudes to the avoidance of conflict and the promotion of social harmony. In the past, this has led to the promotion of dispute resolution by means other than third party rights based adjudication, particularly through the use of mediation.

Where process norms are concerned, the gateway issue is to consider what if any dispute settlement mechanisms should be added to an FTA. Here there is a clear policy choice between agreements such as ANZCERTA which contains no dispute settlement mechanisms and most others which provide elaborate ones.

Problems in negotiating dispute settlement norms

While there remain legitimate differences of view about the nature of the rule of law in different cultures and the extent to which it should apply in any cross-cultural FTA, an analysis of present dispute settlement systems in other FTAs as well as the WTO shows that the trend has been towards an increasingly legalist perspective under a model that is seeking to be part of and consistent with general principles of public international law.

Thus it has been common to give greater attention to these issues when there are new inter-governmental initiatives in the fields of trade and investment. Nevertheless, there are a number of reasons why the process side, particularly dispute settlement, tends to be handled less comprehensively than the substantive side during multilateral and bilateral negotiations. First, the majority of negotiators are generally more concerned with the substantive agenda. They are often not lawyers and may have had little experience with dispute settlement problems. Dispute settlement is often segmented out as a discrete topic, handled by expert governmental lawyers on a discrete basis.

Secondly, it is difficult to get true consensus on optimal dispute settlement models as there are a range of legal families and cultures in the world and no natural points of compromise. Conversely, compromises on substantive issues in the form of reciprocal concessions are a natural part of trade and investment negotiations. Even if attainable, compromises on legal procedures cannot be presumed to have any efficiency value and are more likely than not to be inefficient.

Thirdly, those negotiating any agreement that is intended to be mutually beneficial, are often loath to spend time thinking about the particular types of disputes that may arise as this may be seen as unduly negative.

As a result, dispute settlement provisions tend to be general in nature, leaving much to be resolved on an ad hoc basis as disputes inevitably arise. While this may be largely unavoidable, the costs may be significant, particularly if this systemic problem is not understood and non-lawyers are then unduly critical of the gap-filling that occurs in this way.

These problems may be overcome with greater integration of legal analysis into the negotiating process and a better understanding of the positive value of efficient dispute settlement norms. Where concerns of negativity are involved, prospective disputes should not be seen in this way. They are the natural product of human interaction and are often a healthy sign that the level of that interaction is significant. Optimal preparation of participants for mutually beneficial exchanges should thus involve sufficient preparation on dispute settlement, both as to the details of the processes but also preparing for emotional comfort with any ensuing disputes.

Attention needs to be given to the value of dispute settlement, optimal drafting of the norms and the procedures for formal and informal resolution of disputes. These are not mutually exclusive. Where drafting is concerned it is important to understand that substantive and procedural law are not separate social mechanisms. They are integral. Those negotiating should consider how best to express the chosen policy norms so that they provide sufficient clarity and support consistent and reasonable interpretations and applications.

The stages of dispute settlement

An important issue often overlooked by lawyers and non-lawyers alike is that formal adjudication is only one element of any legal system's dispute settlement mechanisms. Formal adjudication is simply the most visible. It generally operates as a zero sum game with winners and losers. It often involves politically sensitive industries and regulatory activities. Scholars read and analyse cases and at times case statistics. Diplomats and governments look for systemic implications of the decisions reached. External interest groups such as NGOs also keep a close watch on the results. More and more they are seen to be challenging the processes on the basis of alleged democratic deficit and separation of powers, particularly when gaps are filled in arguably unintended or unapproved ways.

While these are important questions for debate, it is even more important not to lose sight of the other stages of the processes. Most importantly, any effective rule system will operate to minimise disputes that arise, so the first aspiration of any system is dispute prevention rather than settlement. This is best achieved through the realisation of true consensus on the norms and their articulation with sufficient clarity.

Where disputes inevitably arise, the next and preferable stage is to seek to resolve the dispute through consultation. This is the norm within the WTO and virtually all FTAs. Indeed most disputes are resolved amicably in this way. This can occur at the outset or at any stage of a formal process. One important question is whether to include some express guidance on a possible mediation and conciliation process in the event that the dispute cannot be resolved bilaterally. Historically, international treaties have merely stated that this is a requirement before any formal adjudication process. Most simply state a minimum time period for the consultation phase. Thought could be given to whether a more elaborate model such as the UNCITRAL Conciliation rules could be a basis for an agreed format. Thought could also be given to the  establishment of a mediation panel of respected persons, although it could also be left to ad hoc utilisation.

It is only if these stages are unsuccessful, that formal adjudication becomes important. Even then, it is desirable that such processes optimise the opportunity for mutually agreeable settlements while the formal processes are continued. Here one issue in a China/Australia FTA would be the desirability or otherwise of allowing an adjudicator to directly assist in achieving a settlement. Chinese arbitration strongly supports the role of mediator/arbitrator while Western traditions tend to raise concerns as to the potential conflicts of interest or claims of bias whenever the adjudicator must make a formal ruling after receiving confidential information under an unsuccessful mediation process. It ought to be possible to identify compromise procedures that minimise the latter concern.

The final stage that is too easily lost sight of in any legal system, is enforcement. Where international law is concerned, the lack of natural enforcement mechanisms is obvious, but the key issue is how to promote optimal surveillance and implementation norms within the constraints imposed by the international system. The balance of this section looks first at the issues within the adjudication stage and then looks at the implementation question.

Adjudicatory bodies and personnel

The form of dispute settlement, if one is adopted, will significantly affect the implications of the initiative. One reason is that different dispute settlement models have different personnel, procedures and cultures depending on the norms and purposes of the organisation involved. For example, where the WTO is concerned, it is significant that in the normal case, panellists are government officials, often not lawyers who act on a voluntary basis to settle the disputes between fellow members of the WTO. This provides significant scope for influence by legal secretariat officers. The same would not be the case with ad hoc arbitral tribunals under an FTA.

There would also be a significant difference between ad hoc arbitral panels under international arbitral models on the one hand and a permanent panel on the other.

Procedure

A number of general principles of law relate to the procedural conduct of litigation rather than to substantive norms. Where the WTO is concerned, the bulk of these procedures are already incorporated expressly or implicitly into the DSU and other provisions. These include equality of parties before the arbitration tribunal, natural justice, equity, due process and abuse of rights, the requirement that no one must be a judge in their own case, and the principle that a State is responsible for the acts of its agents. While FTAs rarely adopt such models, customary principles of international law would lead to similar outcomes on core issues. They would not deal with some contentious issues such as the use of amicus curiae briefs.

One question is whether the FTA should leave procedure to be determined on an ad hoc basis or should instead provide a model. The latter approach is more time consuming at the outset but can prevent wasteful and aggravating disputes at a later stage. An FTA could refer to or modify the WTO DSU or look to one of the arbitral models such as under the Permanent Court of Arbitration, UNCITRAL or ICSID.

Standing

It is generally the case that formal dispute settlement under public international law only allows for standing by governments. Private parties are not entitled to appear as participants in public international dispute settlement processes. Exceptions are commonly provided in the field of investor protection which is discussed separately below. Nevertheless, where trade treaties are concerned, adjudicatory bodies such as WTO and FTA Panels are generally entitled to seek evidence from a broad range of persons and organisations. One question that has arisen is the extent to which they should do so and how they should deal with unsolicited submissions from private parties and non-government organisations (NGOs). One approach is to treat them as amicus curiae briefs, that is, as submissions of friends of the court providing assistance to the adjudicator.

In US – Shrimp the Appellate Body decided to accept briefs from NGOs on the basis that it could accept information at any stage regardless of whether the information flowed from a request by it. The Appellate Body considered that it was authorised to accept the submissions but was not bound to do so. This decision proved to be particularly contentious with a majority of developing country Members. Some FTAs expressly allow for such submissions.

Appeals

Another issue with dispute settlement is whether there should be any form of appeal right. Traditional arbitral and international models provide for very limited rights of appeal. While appeals are generally antithetical to the notion of arbitration, where the disputes deal with complex governmental regulatory powers, the lack of any kind of review or constraint mechanism is at least of significance. Here it should be noted that the WTO has an Appellate Body that hears appeals from Panel decisions. This is not suggested as a model for the FTA. The point is simply that either approach has benefits and costs. A one stage process is quicker and cheaper but might allow more erroneous results. An appeal process leads to the converse but also raises integration issues.

Drafting, adjudication and interpretation

It is important for non-lawyers, particularly treaty negotiators, to understand the nature and challenges in legal adjudication. This raises both the need for care in drafting norms and also the need for caution against expecting high levels of precision that prevent disputes arising.

While it is important to try and optimise precision in drafting, one should not expect any norms to be able to be drafted with sufficient clarity so that they ensure particular adjudicatory outcomes in all cases. This is so for a number of reasons. First, language is not mathematics. While the core substantive outcomes in an FTA negotiation are often able to be represented mathematically, such as zero tariffs and increased quotas, non-tariff measures are invariably described using general language. There can be a range of ordinary meanings for many words. In addition, words may sometimes have technical or specialist meanings. Meaning can also be affected by context or by the purpose behind the words selected. Each negotiating party, in good faith, may have attached different meanings to a particular agreed provision. A situation may have arisen which simply was not thought about when drafting the specifics of the agreement. There may have been contextual gaps and ambiguities in the drafting.

At times general language and concepts are used simply because that is the only proper way to articulate a norm. Examples might include most favoured nation and national treatment non-discrimination norms and investment protection requirements for no expropriation without just compensation and "fair and equitable" treatment. At other times, general language merely hides a failure to agree on more concrete rights and obligations. In either circumstance, it is often left to adjudication to give greater clarity to the norms selected. Such development of norms through clarification of general terminology will arise even in the absence of any doctrine of precedent as applies in common law legal systems.

When one looks at non-discrimination norms, it is also necessary to consider whether the norm will be applied formalistically or whether it will look to some economic standard. The WTO jurisprudence looks to measures which alter the conditions of competition. A similar principle has been included in SAFTA services chapter, Article 4.3. This raises issues as to the ability of adjudicators who are usually not economists, making such judgments, the assumptions underlying their deliberations and the evidence utilised.

Drafting and adjudicatory problems are also now more difficult than ever because of the need to integrate trade and where appropriate, investment norms with other policy areas. In the early years of intergovernmental economic relations, legal obligations were primarily about proscribing quantitative restrictions and promoting tariff liberalisation, neither of which had direct implications for domestic national and sub-national regulatory practices. Since the Tokyo Round of GATT Negotiations, however, international trade rules have considered the way trade regulatory rights and obligations are properly integrated with other policy areas. This has been central to the core constitutive documents of the European Union and has also been a politically contentious aspect of NAFTA given the high profile of some investor state disputes. The crucial point is that where trade and investment promoting agreements inevitably come into conflict with other regulatory norms, such as those within the fields of environment, health, labour relations, natural resource consumption, consumer protection and technology transfer, there will always be difficult drafting, interpretation and adjudicatory decisions to be made at the margin.

A related problem when the two fields of rights and obligations are put together is the tension between general and specific norms. For example, an adjudicatory panel might be asked to consider broad notions of national treatment and expropriation on the one hand, against very specific environmental measures on the other.

A further drafting and interpretation issue is to understand that seemingly innocuous differences to non-lawyers, can have fundamentally different effects on the ambit of the agreement. For example, if an FTA with differing dispute settlement provisions for trade and investment disputes has the investment protection provisions drawn broadly and, like NAFTA, indicates that it covers measures that "relate to" investment, many breaches of trade law obligations may be converted into investment claims and come within the purview of the investment dispute processes.

Interpretation methods in public international law

If we cannot expect drafting with such precision that it would obviate the need for interpretation, we might at least wish to see interpretative methods that themselves are clear, consistent and predictable. Yet there is no simple methodology that guarantees consistent outcomes. This is a factor in all legal systems that must also be understood by non-legal negotiators. FTAs, like the WTO Agreement, are international treaties subject to methods of interpretation under international law. Article 3.2 of the DSU of the WTO refers to a requirement that Panels utilise the customary rules of interpretation of public international law. The Appellate Body has considered that this includes the principles contained in the Vienna Convention on the Law of International Treaties. FTAs would also be interpreted utilising these principles.

Article 31 of the Vienna Convention calls for a treaty to be interpreted ‘in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose'. Subsequent agreements and practices can also be taken into account. Article 32 allows for consideration of the background materials, (the travaux preparatoire), where ambiguity remains. When taken together, these provisions ensure that significant discretion is vested in adjudicators. This reduces the certainty and transparency of adjudicatory methodology. This is not a criticism of such methods. It is another example of the inevitable tensions between flexibility and certainty and between intended and plain meaning in legal adjudication.

These legal techniques have to be considered within the political and cultural environment. For example, WTO Members are also very concerned that Panel decisions do not make new law and as a result, the interpretative approach tends to be positivist and conservative in nature, relying on plain meaning, dictionary definitions and ironically, decisions in earlier cases, as it looks much less activist to follow an earlier line of reasoning than adopt a new one. NAFTA arbitral panels have been different in approach, although not consistently so.

Hierarchy of norms and the role of exceptions

One significant interpretative challenge is to consider whether there is a hierarchy of norms in the event that they conflict. The same question arises with application of express exceptions to the substantive obligations. Should they be interpreted narrowly, equally or as dominant?

In the WTO context, the environmental and health exceptions in Article XX of GATT 1994 and in other instruments such as the SPS Agreement, tend to be construed narrowly so as not to unduly interfere with the trade liberalising norms. To assert that this is the tendency of WTO dispute settlement is itself a controversial proposition. The important point is that any such biases, if evident, will impact significantly upon state rights to regulate in the face of FTA obligations. If the negotiators are silent on this question, adjudicators inevitably will make determinations on this issue as it is the only way to resolve the conflict between otherwise binding norms. It is difficult to establish a mechanism for this purpose that does not at least appear to be biased towards one end of the spectrum or the other, either pro-trade and investment or pro-governmental restrictions. Where that choice is made by adjudicators, it becomes particularly contentious, especially when the decisions are in the high profile political fields of environment and health regulation.

It is important to also consider dispute prevention as a priority. For example, concerns with transparency and inconsistency of regulatory behaviour might best be dealt with through commitments to openness and clarification of a regulatory hierarchy rather than leaving it to the dispute settlement phase.

Substance versus form interpretation

Uncertainty is also caused by a need to consider both substance and form interpretation. The demand for protection does not dissipate just because a government enters into binding commitments. Governments may also change their attitudes to the value of the commitments over time. The broader the coverage of the FTA, the more that domestic regulations might be considered which might offend against the spirit of the rules. For example, if an FTA covers investment, an import ban can be argued to constitute a de facto performance requirement if it can be said to commercially force corporations that have established investments to buy local substitutes, even though this was not expressly required. The argument is that it is in substance a purchasing requirement if not in form. NAFTA Article 1106 performance requirements have led to challenges that outright bans or the imposition of standards constitute illegal performance requirements. Arbitrators can always differ on these issues. The Myers NAFTA tribunal split on whether there was a breach of Article 1106, the majority holding in the negative because the measure did not expressly require one of the prohibited elements. The dissenting arbitrator considered that this was the practical effect of the export ban.

Once again there is no easy solution. An unduly formalistic approach encourages the search for loopholes. A search for the spirit of the law that conflicts with the plain meaning leads to criticisms that the Tribunal has imposed its own value judgments. Interpretative rules cannot readily constrain adjudicators from favouring one approach over another or varying their approach from case to case.

Adjudication versus interpretation powers

The foregoing discussion has raised the fact that legal interpretation commonly shapes the law. In a constitutional sense, it is generally desirable that the norms be predominantly shaped by negotiators rather than adjudicators. If the latter produce decisions that are not welcomed by the participating States, they can in theory amend the agreement to override the adjudicatory determination. Another approach is to provide a mechanism for authoritative interpretations.  Comparative models may be found in the WTO and NAFTA, the latter also which allows the Free Trade Commission to make binding determinations as to interpretation issues. The difference may be minimal in a bilateral agreement where each model may be equally likely or not to reach consensus.

The evidentiary aspect of adjudication

There are important policy and practical questions as to the way facts are found and evaluated within public international dispute settlement. There are also questions as to the evidentiary roles and responsibilities of each of the participants in the process. These issues rarely mattered in the earliest trade agreements as these concentrated on reciprocal tariff commitments.

Current disputes now deal with complex evidentiary issues. Border barriers, including tariffs and tariff rate quotas, raise issues that include application of rules of origin, accounting calculations and questions such as "likeness" in goods and circumstances. Customs and licensing procedures raise questions of procedural regularity, transparency and fair treatment. Standards and quarantine issues raise questions as to the evidentiary basis of governmental regulation. Intellectual property rights protection raises questions as to the adequacy of administrative and enforcement mechanisms. General questions as to the business environment and legal framework deal with a whole range of measures including transparency, uncertainty, consistency and discrimination. Investment-related issues, if applicable, raise similar questions and include general concerns with the concept of expropriation and related questions as to "conditions of competition". Exempting provisions raise questions as to the "reasonableness" or otherwise of health and environment safeguards. Residual protective mechanisms raise issues such as "causation" analysis in anti-dumping and countervailing disputes. Examples in the WTO context of contentious cases that built upon important factual determinations include India-Patent protection, Australia-Salmon, EC-Hormones and EC-Asbestos. In each case, the losing party was likely to have disagreed with the factual processes and findings of the adjudicatory bodies.

There is a drafting and negotiating problem as well as an evidentiary one. One difficulty in dealing with many of these issues in an FTA is that it is hard to deal with internal barriers on a bilateral basis. The concept of preferential treatment within an FTA naturally fits with the notion of a tariff. It looks more problematic to be seeking preferential treatment in terms of fairness of administrative practices. A particularly difficult area would be to deal with subsidies and other general governmental incentives.

Returning to the evidentiary issues, at present, the need for some sophisticated evidentiary analysis in many disputes is ahead of the development of equally sophisticated and agreed evidentiary processes and methods.

There are understandable reasons for this. Most sophisticated legal systems give each party the right to fully present its case. The adjudicator may be given some independent fact finding power. The task of any adjudicatory body is then to identify relevant evidence, evaluate it and weigh it against conflicting evidence. Yet there are many conceptual choices bound up in these general principles. Legal systems help resolve these questions with rules or principles as to burden and standard of proof and as to the admissibility and weight of evidence. Such rules provide a methodology for the adjudicator to try and determine the truth in the face of conflicting claims by the parties. Yet the processes by which truth is sought to be determined in a legal system are not absolutes. In setting the rules on evidence and burden of proof, legal systems choose between conflicting values. These include the pursuit of the correct outcome, the need to reduce time and costs, the need to compare probative and prejudicial aspects of potential evidence and even libertarian issues as to the obligation to provide information of use to an adversary. As a result, any system will display certain compromises and biases.

Because there is no absolute methodology of determining truth and no consensus as to the way these trade-offs should be determined, the policy choices have not been exercised in the same manner by different legal families. Hence it would be particularly difficult to reach a consensus on the way evidentiary matters ought to be considered by an international adjudicatory body. Even the GATT/WTO system, with its long years of operation, like other international organisations, has not developed a substantial body of rules dealing with methods of proof, fact finding and admissibility and weight of evidence. Nor would we expect trade negotiators to devote significant time to debating these notions.

Once again, if consensus is not sought or reached on such rules and principles via direct negotiation, a definitive position will inevitably be reached simply because an adjudicator must resolve some of these questions when approaching the task of fact finding in actual disputes. The way adjudicators choose to exercise any such discretion can have an immense impact upon the outcome of particular disputes.

Surveillance, review of implementation and remedies

Any legal system needs to give particular attention to issues of remedies and implementation otherwise legal rights may end up being illusory. Implementation and compliance issues are even more important with international legal systems as they do not have direct enforcement mechanisms. WTO experience suggests that some improvements could be sought in this area.

Retrospective remedies

The general principle in public international law is that a party in breach of international obligations must make full reparation in relation to any damage. That can be modified by treaty and as a result, is not the normal situation in the WTO. The GATT/WTO system is generally limited to orders for specific performance and termination of the unlawful measures. The question is not fully settled and, at the very least, is qualified in relation to prohibited subsidy disputes. An FTA needs to consider what approach to take to this policy issue.

Once again such questions are rarely considered in negotiations. In the WTO context, Panels and the Appellate Body have had to deal with a fundamental policy issue without the clearest of guidance provided by the negotiators. The most contentious political aspect of this question to date relates to anti-dumping and countervailing duty decisions, both of great interest to China. Two GATT 1947 Panel reports had recommended that anti-dumping or countervailing duties be repaid if they were imposed in violation of GATT obligations. This is not a clearly accepted view.

The situation is different where prohibited subsidies are concerned. Article 4.7 of the SCM Agreement indicates that if a measure is found to be a prohibited subsidy the Panel shall recommend that it be withdrawn without delay. In Australia – Automotive Leather, the Panel resolved that ‘withdrawal of a subsidy' contemplates repayment of the subsidy amount. The Appellate Body was not asked to rule on this issue. The parties had agreed in advance not to appeal the Panel's findings. While the Panel's view is arguable, it seems extremely unlikely that the negotiators during the Uruguay Round would have intended to have a niche area of retroactive remedies as part of a generally prospective system.

Compensation and suspension of concessions

A significant problem facing the WTO which should be uppermost in the minds of FTA negotiators is the lack of consensus as to the exact obligation on a losing party.

One of the most contentious issues is whether a Member found to be in violation has a clear obligation to remove the offending measure or whether it has a discretion to allow for retaliation instead. There are different views among Members flowing from a compromise set of words in the DSU. The system is better served by a proposition that there is no such discretion, otherwise advanced and large economies may ignore Panel recommendations. Retaliation is inefficient, harmful to small and developing economies and is philosophically suspect as it involves the aggrieved State choosing to harm its own importers and end users of the products targeted for retaliation.

Application of commitments in federal systems and dispute settlement issues

Because modern international economic law regimes deal with a range of other regulatory obligations, particular difficulties are felt by federal legal systems such as Australia. In many cases, federal systems leave some of these fields within the regulatory purview of sub-national governments. Yet the intergovernmental commitments are made at the national level. Because international trade agreements invariably affect the rights and obligations of national and sub-national governments where international trade and investment is concerned, they effectively perform a quasi-constitutional function, at least in a practical sense.

In addition, national governments are at times made responsible for the behaviour of sub-national governments. This will be particularly important for Australia as a federal system and also for China because of the many decentralised agencies and regional governmental structures that can impact upon trade and investment. While the WTO Agreement is an intergovernmental agreement that cannot directly bind sub-national governments, signatories promise to take all appropriate action to ensure that sub-national governments will comply. The same is commonly the case with FTAs. While the central government may feel concerned if it loses a case on the basis of the behaviour of a regional government, this may over time assist the central administration to have its policies fully implemented at the regional level.

Whether a particular State could be accused of failing to honour this commitment would in part depend on its own constitutional structure and powers. A State that constitutionally has the capability to force its will on sub-national governments could more easily be challenged under such norms. This and other customary principles of international law have been effectively codified in the Vienna Convention on the Law of Treaties. For example,  Article 27 of the Vienna Convention indicates that a party may not invoke the provisions of its internal law to justify a failure to perform a treaty.

At this stage it is simply worth making the added point that interpretation of such mechanisms, given their often vague nature, raises a major policy question that may colour adjudicatory approaches to interpretation. That is, in considering the proper application of international law within federations, there is a tension between, on the one hand, not imposing obligations on a democratically elected sub-national government without its consent and on the other hand, treating all national states equally and not providing lesser obligations on federal states simply because they argue they do not have the mechanisms to bind state authorities.

WTO and FTAs

Integration issues

An important issue with any FTA is how it will interact with other international treaties. This primarily involves consideration of the WTO, but also involves a consideration of how different FTAs interact, even when they do not have common membership. Where the WTO is concerned, in its first ten years of operation, it has received 130 notifications of Regional Trade Agreements, so the importance of integration issues has grown significantly.  It is not only the number that is significant but also the coverage. These agreements cover many issues that are already dealt with by WTO agreements.  This applies to both substantive overlap as well as overlap of dispute settlement procedures. In some cases they go beyond WTO commitments, arguably aiming to be models for WTO developments as well as bilateral commitments in their own right.

In terms of the WTO, the first question is whether the FTA is compliant with WTO provisions, in particular, Article XXIV of GATT 1947. This goes to the legal validity of the FTA as a whole. In practice, however, the WTO has not sought to systematically test the validity of FTAs even though that is contemplated in its norms.

The next question is whether any provisions are themselves inconsistent with WTO norms and if so, what is the hierarchy of norms and which adjudicatory body can make that determination. There is simply no clear answer to this question which is discussed further below in the context of jurisdiction. A related concern that negotiators should be mindful of is that if FTAs cover similar ground to the WTO, any slight differences in language provide inspiration for legal arguments that the norms have been intentionally changed.

The third and related question is how dispute settlement systems of each are to be properly integrated. This is discussed further in the following section. This goes both to processes and also to jurisprudence, as the differing adjudicatory bodies may say different things about the meaning of key obligations.

Where other FTAs are concerned, the key question relates to the way differing provisions may clash. While this is generally unlikely, the major question involves MFN obligations. If each FTA promises reciprocal MFN treatment, it is open for either party to examine treatment offered under other FTAs entered into by the other party, and argue for equal treatment where the other treaty is seen as providing greater benefits. MFN builds upon very broad notions of "like goods" and "like circumstances." It must inevitably consider cases where formally identical treatment is still argued to be discriminatory because of an adverse impact upon conditions of competition. Because of this, it can at least be predicted that the vast increase in use of FTAs will make such MFN claims of some significance in the foreseeable future.

Choice of forum

The more central issue for this paper flows from the fact that it is possible for disputes to be brought concurrently before FTAs, the WTO and domestic courts unless there are any express prohibitions. Where the WTO is concerned, Members have direct rights under its Dispute Settlement Understanding that could not be pre-empted by any side agreement, at least where third party Members of the WTO are concerned. If there was an agreement between two members of an FTA not to pursue a dispute at the WTO level, that could be seen as acceptable as an agreed settlement of a particular dispute. That could also be treated as an agreement to use DSU arbitration provisions as an alternative to the Panel process.

One important element found within those FTAs involving the US is the use of choice-of-forum provisions. The party bringing the complaint is allowed to choose the forum if more than one breach is alleged to arise under more than one agreement. On the one hand, this may be defended as merely being a corollary of the complaining country having both sets of rights. In the absence of such a clause, they may well have been entitled to choose in any event, as the two treaties independently set up those rights unless one is expressed to be subordinate. Expressing the choice also removes the uncertainty in that regard. Without such a provision, whichever avenue is chosen, the defendant might argue that the treaty language requires resort to the other forum, either through its own words or through the provisions of the Vienna Convention on the Law of Treaties which has provisions for reconciling conflicts between treaties. Such a choice could be seen as a prior exercise of the right under the DSU to choose arbitration rather than a Panel procedure.

The converse view is that this kind of clause may unduly undermine the centrality of WTO dispute settlement and minimize the ability of weaker states to benefit from third party involvement or DSB control in WTO cases. It is also not the usual form of choice of DSU arbitration as that would be expected to arise after the dispute and only where both parties agree that this is a preferable avenue. To provide for the alternative mechanism in an FTA by way of a choice of forum clause, favours the complaining country over the defendant.

Whatever the view on the policy merits, uncertainty as to forum is itself an undesirable feature, so some express rule should be considered. The contrary approach is to expressly say that WTO dispute settlement prevails. This is the EU preferred provision in its recent FTAs. This would still allow the parties to select DSU arbitration in any event.

Exhaustion of local remedies

In some circumstances, treaties require exhaustion of local remedies before an international dispute can be pursued. Common areas for such provisions include anti-dumping and countervailing disputes where there are usually domestic avenues for challenge by interested parties. There do not appear to be strong arguments in favour of such provisions at a general level and it would depend on the parties, the nature of the domestic avenues, the likely number of disputes and the attitudes to dispute settlement at the inter-governmental level.

Even if there is no obligation to exhaust local remedies, this can impact upon other claims. For example, NAFTA tribunal in Loewen considered that there is no violation of the obligation to provide "fair and equitable treatment" in terms of a claim of denial of natural justice where local remedies had not been fully pursued.

Jurisdiction of adjudicators

Whichever forum is chosen, one issue that has already arisen in the WTO is whether adjudicators of a WTO dispute are either allowed or required to consider other treaties besides WTO provisions. The argument against is that they only have jurisdiction under the WTO for the purposes of WTO dispute settlement. They have no general jurisdiction under international law, unlike the International Court of Justice. The contrary argument is that no branch of international law should operate in a vacuum. If there truly are a range of treaties applicable between the parties or which are relevant to their individual actions, an adjudicator must consider these. At times it is not a question of jurisdiction  but merely a question of evidence.

WTO adjudicators have proceeded cautiously towards a broader consideration of treaties in cases such as EC-Bananas and Turkey-Textiles. It is the better view from an efficiency perspective, although the possibility of dual fora taking different approaches is hard to fully remove. If this was considered important enough, it could be dealt with in the drafting.

Jurisprudence and acquis

A related question is the degree of influence of interpretative decisions of one forum on adjudicators in another. In a technical sense, no-one is bound by such decisions but the possibility of influence and inconsistency are unavoidable. A real difficulty would arise if the loser in an FTA dispute argued that the result was inconsistent with WTO or other obligations and hence should not be complied with. Once again, there are a range of methods to ensure that whichever forum is chosen, the opportunity for such problems is minimised.

Specific disputes

While this paper does not intend to deal with substantive issues, some comments are appropriate in relation to the dispute settlement policy issues that arise with particular areas. The four areas touched upon are the administered protection mechanisms under anti-dumping, countervailing and safeguards regimes, intellectual property protection, integration of exempting provisions and investment protection to the extent that the latter might become a topic for consideration in the negotiations.

Anti-dumping, countervailing and safeguards disputes and administrative review generally

Attention needs to be given as to whether special rules should be included for such disputes, either as alternatives to domestic or intergovernmental disputes or as additional mechanisms. For example, Chapter 19 of the NAFTA provides for national review panels as an alternative to challenges in domestic courts. There is also an appeal mechanism to an extraordinary challenge committee but only on certain specified and limited legal grounds. The Chapter 19 process has dominated the field and very few parties resort to domestic courts. Consideration might be given to whether the volume of trade warrants consideration of such mechanisms. Even if the volume is not high, the potential for dissatisfaction with regimes that work awkwardly with transitional and post-transitional economies is high and tailor made provisions may thus have additional benefits. On the other hand, there are legal questions as to the extent to which special rules may be utilised in FTAs to cover such issues. Some assert that the FTA exception under GATT is for tariff preferences alone.

Where dispute resolution mechanisms deal with issues such as anti-dumping and countervailing, they become elements of an administrative review system. This would also apply to challenges to tender processes, licensing and the adequacy or otherwise of intellectual property protections. Because WTO Agreements include numerous transparency and notification obligations, it is also possible that the matter in dispute is the extent to which a Member has notified certain developments as required. Here it is important to consider questions of the appropriate standards of review and the evidentiary basis upon which complaints should legitimately be brought.

More and more WTO cases now aim at challenging domestic administrative behaviour. In recent times there have been many cases that have successfully challenged bureaucratic decisions in jurisdictions such as the US, particularly in relation to anti-dumping, countervailing and safeguards findings. The same issues flow inevitably from FTA developments.

These procedural and administrative issues are particularly important for China. The ability to challenge such behaviour will benefit China's exports that have long felt the brunt of such domestic measures in key jurisdictions. At the same time, such challenges will be possible if other parties are dissatisfied with Chinese bureaucratic decisions. In particular, China's WTO Accession Protocol provides for a number of specific obligations in relation to decision-making infrastructure, administration and adjudication. The Protocol is itself an integral part of the WTO Agreement. Hence disputes can be brought about alleged breaches of the Protocol itself. These commitments will have major implications for the shape of future reforms in China. As indicated above, it is open to debate as to the way this and other external instruments would be utilised in an FTA dispute.

Standard of review

Consideration of administrative review raises a key question as to the appropriate standards to apply in adjudicatory processes. There has been some scholarly debate as to the proper standard of review to be adopted by WTO adjudicators.

The WTO provisions specify clear obligations on Members and their bureaucracies in terms of evidence gathering, evidence submission, ambit of relevant factors for consideration and levels of proof before some domestic trade restricting decision can be taken.  WTO jurisprudence provides a further guide, indicating that when a Panel reviews factual determinations by domestic bureaucrats:

an objective assessment would entail an examination of whether (i) the [national authority] had examined all the relevant facts before it (including facts which might detract from an affirmative determination ...), (ii) whether adequate explanation had been provided of how the facts as a whole supported the determination made, and, consequently, (iii) whether the determination made was consistent with the international obligations of the [Member concerned].

The question would be whether similar standards are articulated in any FTA or the parties are left to WTO rights.

Intellectual property

Intellectual property rights aim to give creators and inventors certain exclusive exploitation rights in order to support creative endeavours. Because of the problem of free-riders, a failure to give a creator or inventor some monopoly protection would be a disincentive to innovation. Nevertheless, there can be significant debates about the optimal extent of protection, the range of property that ought to be covered, philosophical issues as to technology transfer in favour of developing countries and even the justification for including such domestic standards in international treaties. These substantive issues, which are beyond this paper, go hand in hand with some challenging dispute settlement issues as well.

The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) included as part of the agreement establishing the World Trade Organisation, has brought all WTO members into the system of intellectual property protections covering patents, trademarks and copyright. The first question is whether each particular country has introduced appropriate statutes to provide for the required protections. The next question is whether such legislation is effectively and uniformly administered. This raises related questions as to uniformity of interpretation, the way intellectual property rights are employed in civil law as well as common law countries, the sophistication or otherwise of the administrative structure and the enforcement mechanisms available in the event of breach of intellectual property rights.

While China has developed a comprehensive legal regime for the protection of intellectual property, the biggest problem is with enforcement. There is a need for optimal coordination between the state intellectual property organisation and national provincial and local administrative agencies. In addition, while the WTO TRIPS Agreement requires fines to be at a sufficient level to act as a deterrent, fines to date in China have been low. An added problem is the difficulty in gaining injunctive relief. These issues leave open the scope for sensitive disputes along the lines of the WTO case of India-Patent protection.

General exceptions and adjudicatory processes

A number of the provisions typically found within international economic treaties contain general exceptions to the core liberalising norms. Greatest concern is with limited exceptions that depend upon certain criteria being satisfied. The most important ones relate to health and environment exceptions. Not only are there problems in interpreting the words of the exceptions, but also in factually determining when they may apply.

WTO experience shows that key issues could be addressed directly under the non-discrimination norm, or via the exceptions or both. For example in the EC-Asbestos case the Panel considered that there was a violation of a GATT provision but it was acceptable under Article XX as a health exception. The Appellate Body considered that there was no discrimination in the first place because the asbestos product was not a like product to the domestic product because of the differential health properties.

Investment protection and investor state disputes

If some form of investment protection will be agreed, the issue to consider is how these provisions are to be drafted, what dispute settlement processes should be employed and what the outcomes are likely to be. It is beyond the scope of this paper to determine whether such provisions are warranted or not. The only general point to make is that comprehensive rules covering modern commercial arrangements would not leave any significant field out given that trade and investment are highly interrelated. Since the failure of the OECD to successfully promote the adoption of a Multilateral Agreement on Investment, protective devices have been experimented with in bilateral investment treaties (BITs) and within broad FTAs.

From the adjudicatory perspective, it is important to understand that BITs and comprehensive FTAs generally give rights to foreign citizens over and above those normally provided to citizens of the host country. While on the one hand this may look to be unequal treatment, on the other hand it may be a sensible response to dealing with the differences between local and foreign investors. Local investors at least theoretically have a role to play in the development of public policy and also an ability to challenge their governments politically when they disagree with measures taken. This is not the case with foreign investors who require greater levels of protection.

It is important to understand the way customary international law applies to issues of investor protection. This is so for two main reasons. The first is to determine whether the obligations provided for under FTAs are broader than is currently the case under customary international law. If not, their inclusion is less contentious. The second reason is to see if there is sufficient clarity in its principles to make it desirable to expressly indicate that the norms seek to enshrine customary international law notions, as is the case under some FTAs or side-letters.

The classical approach of international law to investment and commercial issues looks for a compromise between two potentially conflicting principles; on the one hand, territorial sovereignty which allows a state to exercise full and exclusive jurisdiction over its territory, and on the other hand, the principle of nationality which confirms a state's right to protect the interests of its nationals abroad.

Under notions of territorial sovereignty, sovereign nations were free to choose whether to allow aliens to invest locally and if so, on what terms. The power to take the property of private individuals for public purposes is also accepted. Set against this principle is the right of each state to protect its nationals and their property abroad. This in turn leads to principles of state responsibility for injuries to aliens and to their property. Two broad principles were fair dealing and no expropriation without just compensation. Customary international law does not look to the intent behind the government action. This is because it is concerned with compensation for takings and not with seeking to prevent the public policy aspirations of government.

Because the exact nature and scope of customary international law is often uncertain and because there is a fundamental tension between the views of capital exporting countries and capital importing countries on the nature of expropriation and the proper degree of compensation, it is not easy to state with any certainty the elements of the law on this issue. This in turn makes it difficult to determine whether express provisions in bilateral agreements merely codify customary international law or go beyond it.

Customary international law does not provide for many of the protections within investment treaties such as MFN, national treatment, repatriation rights or limitations on performance requirements. A further difference is that customary international law does not allow for individual rights of standing.

Private rights and investor state dispute settlement

Most disputes flowing from a bilateral agreement made between sovereign nation states are concerned only with the rights and obligations of those states alone, although the process and outcomes will inevitably have external effects on markets and market participants. Historically, under traditional notions of public international law, individuals needed to rely on the government taking action on their behalf.

Exceptions have at times been made under FTAs with investment protection norms. Given that a treaty-based dispute settlement system is an alternative to domestic litigation, its desirability or otherwise depends on how adequate the domestic processes are seen to be. Relevant factors include the quality of the legal system, the constitutional and other domestic protections over property and asset rights, the costs and timeframes, ability for foreigners to be equally represented, principles of sovereign immunity that would apply to the host country as a party to the litigation and available remedies.

Nevertheless, there are some general arguments in favour of providing for investor state dispute settlement. The first is that real or imagined bias of host country judges would be a disincentive to wealth enhancing investment or would add to its cost. The second benefit is to remove the need to have the host government agree to take an action under international law. A further argument in support is that providing for equivalent protection to that provided in other international treaties, puts prospective investments on the same footing. Generally speaking it is preferable that those contemplating investment make decisions based on commercial criteria and not based on differences in legal infrastructure.

One concern with investor protection is with the potential for private parties to seek very broad notions of rights and obligations such as expropriation by indirect means. At the extreme, this has allowed some private corporations to challenge what appear to be normal governmental policy initiatives in fields such as environment, health and safety. Technically, this is not an argument against investor state dispute settlement mechanisms per se, but rather an argument for more carefully prescribed substantive norms, although the practical reality is that private corporations and their lawyers might push the limits of interpretation in ways which would not have been contemplated by the states themselves.

There is also the related question of whether a large number of costly and unmeritorious challenges are likely to be brought. While the likelihood of success is important, from a political perspective, even unsuccessful claims can be politically damaging and costly. Uncertainty can easily deter governments from undertaking desired policy measures for fear of legal claims by foreign investors. While NAFTA analysis suggests that there may be some cause for concern, US experiences would not be a good predictor of the likely behaviour of Chinese and Australian entities.

Another important difference between private party rights and inter-state actions is that the latter tend to merely call for changes to the offending measure rather than monetary compensation, although the latter may also be included in an FTA. Nevertheless, private party rights lead to retrospective damages for the offending behaviour in nearly all cases.

Non-tariff and protective norms in FTA and investor protection agreements

This section looks briefly at some of the key norms that might be included in any FTA. It only seeks to do so in terms of the challenges they pose for legal adjudication. FTAs, particularly those including provisions on investment protection, include a range of common norms, although there can be important differences in terminology, and some agreements only incorporate a minority of these norms. An analysis of jurisprudence in a range of fora dealing with these, shows the inevitable uncertainty when seeking to interpret and apply such broad concepts. In turn this suggests the need for care in drafting and proper comparison between competing texts.

MFN and national treatment

MFN, or most favoured nation treatment requires governmental measures and practices to not discriminate between different foreign countries and their nationals and investors. National treatment requires foreign investors and investments to be treated no less favourably than locals. Each are norms of non-discrimination.

As discussed above in relation to interpretation, MFN and national treatment are relative standards expressed broadly. They require a range of interpretative and evidentiary questions to be considered. Because non-discrimination is a relative concept, there is then a need to consider who to compare to whom and what differences constitute proscribed behaviour. WTO jurisprudence has shown that there is a difficulty with the notion of "like products" when considering whether there has been unreasonable discrimination in relation to trade in goods. The notion of "like circumstances" between domestic and foreign service providers and investments is even more problematic. There is a very rich WTO jurisprudence that would certainly be brought to the attention of any arbitrator under an FTA dispute, even if it is not binding upon it. A particularly important issue is whether equal treatment is to be judged substantively or formally. SAFTA services provisions enshrine a WTO principle that discrimination can arise through measures applying to all parties, where they alter the conditions of competition in favour of locals. Such an approach makes the norm more far reaching and the disputes more uncertain and complex but more economically defensible. At one extreme, it is often easy to see when discrimination is wholly unjustifiable. At the other extreme, considerations of likeness go to the heart of acceptable policy making.

In spite of WTO experiences, there is little in the way of jurisprudence that indicates the extent to which environmental, geographical, cultural and social issues can be accepted as differentiating circumstances. For example, if an adjudicator considers that different environmental policies are differing circumstances, it is open to the adjudicator to hold that there is no breach of the MFN or national treatment obligation in the first place. If the adjudicator takes a different view on this issue, it is then open to the responding party to seek to justify the measure under the exception. As indicated above, WTO jurisprudence in cases like EC-Asbestos showed differences in approach on this issue between the Panel and the Appellate Body.

As discussed above, uncertainty can also be caused by the need to consider the interaction of different treaty obligations. For example, this could allow a broader expropriation norm in a BIT being incorporated into other agreements through MFN. Such an application of an MFN obligation might also impose constraints on the party's ability to adopt interpretative statements limiting the ambit of expropriation norms.

Investments, measures and linkage

The breadth of the definition of the term "investment" in any agreement covering this field has implications as to the factual circumstances that would be affected and which could come within the purview of dispute settlement provisions. There is a common drafting problem in seeking to be broad enough to cover all appropriate things, but not be so broad as to catch unintended things. The broader the definition of investment, the more that investment protection norms can also cover trade in goods and services. The definition of measure and the linkage to the definition of investment can also lead to regulations and practices dealing with trade in goods and services, becoming part of investment disputes.

While the definition of investment is typically broad, it will sometimes be important to determine the scope of the investment under consideration. This is particularly so if the expropriation norm requires a substantial interference with the economic value. A measure that interferes with a small but significant part of a business comprising a range of property rights would not be a substantial deprivation if the entire business was being considered. The converse conclusion would be possible if the separate elements could each be analysed. Certainly claimants should not be able to improve their chances of success simply by drawing pleadings that opt for a narrow identification of the relevant investment. On the other hand, large investors should not be penalised simply because they have multifaceted businesses. The key point is that the drafting of the agreement cannot circumscribe the way particular adjudicators will make factual determinations on such issues.

Where the concept of a measure is concerned, at times the real issue with a foreign investor will be a contract dispute rather than a challenge to some governmental regulatory behaviour. This will commonly be the case where the process of gaining a permit to invest has involved complex negotiations and documentary representations and agreements and where the final investment is via a contract with a governmental agency. Experience with ICSID and BIT dispute resolution has shown there to be complex issues in determining jurisdiction and applicable law  and whether there is truly a treaty claim or instead a contract claim.

Another issue is the type of measure that is to be subject to the norms. NAFTA Chapter 11 looks at measures that "relate to" investment. Such an approach significantly increases the potential ambit of the protections. As previously indicated, a measure can relate to investment, when it is not itself an investment measure. The potential exists for a range of trade laws and other laws to be seen as such because they have an economic impact on investment.

There is a drafting and interpretation problem either way. If the required connecting link is too narrow, there will be inevitable debates about governmental practices that try and avoid the policy aims. If the connecting test is too broad, the provisions may sweep up many practices that were never intended. Any drafting that tries to balance these conflicting concerns is likely to be general and leave much to adjudicators.

Expropriation

Virtually all BITs ensure that expropriation must be for a public purpose, be non-discriminatory, follow principles of due process and be accompanied by appropriate compensation. The latter is the most contentious element with different views about the standard to be applied.

One problem with the expropriation norm is that a broad concept is asked to cover a range of reasonably distinct government measures. These range from complete takings of property, removal of fundamental licences, discriminatory regulations that favour locals over foreign investors, lack of adequate protections for such things as intellectual property rights and outwardly non-discriminatory measures that nevertheless impact more seriously on foreign investors. Each of these regulations can be further divided into those that seek to consciously impact upon foreign investors and alternatively, those that do so without the government having that intent. An indirect expropriation norm will vary significantly depending on whether it is based on an intent test or an economic effect test. The jurisprudence has displayed inconsistent approaches to this question.

If there is to be such a norm in an FTA, there is a need to consider how it might be drafted and adjudicated upon so as to make appropriate distinctions between compensatable expropriations and fully acceptable regulatory behaviour. Relevant issues in distinguishing between expropriation and acceptable regulatory behaviour would include considerations of due process, discrimination, intent, good faith and reasonableness both in terms of the regulatory aim and the proportionality of the interference with commercial interests. There are no clearly accepted models that show how each of the above factors are to be treated.

Fair dealing

Investment protections often contain fair dealing obligations of a similar nature to that required under customary international law. These are also described as minimum standards of treatment. While fair dealing is an absolute standard, its content may vary depending upon notions of fairness and evolving norms of customary international law. Minimum standard of treatment have both a substantive element and also encompass procedural issues such as due process and rights of appeal.

The NAFTA Metalclad case showed how minimal international standards obligations allow for successful challenges based on bureaucratic behaviour. Mexican processes were seen as being insufficiently transparent, lacking in an orderly process, untimely and provided conflicting assurances. Australia's experiences in the WTO in the Salmon case, where quarantine practices were challenged, is a comparable experience. This obviously has implications for governments at all levels. Drafting cannot ensure that bureaucratic behaviour is always consistent and reasonable. The key question is what is the obligation on governments to ensure that there is no failure to provide adequate advice or no contradictory comments made by officials? This raises the question of standard of review as discussed above.

Conclusions

Dispute settlement should be seen as an inevitable aspect of complex interactions between economies and should be seen as contentious acts. Informal consultation and mediation should always be the preferred initial responses to problems. Adjudication should be available where these processes are unsuccessful.

Adjudication, while necessary, has inevitable challenges that need to be understood. A consensus-based international rule-making system with divergent interests and which builds on reciprocal commitments, is never likely to present an adjudicator with optimal drafting of norms. Secondly, the very nature of language and rules requires an adjudicatory system. Such a system must present well-reasoned and respectable conclusions even where there are competing tenable positions that can be reached about the proper interpretation of the rules or the application of them to contentious factual situations.

Thirdly, international negotiators cannot be expected to establish a comprehensive and elaborate procedural model along the lines of those found in the most advanced domestic systems. Yet in the absence of any such model, adjudicators must deal with exactly the same contentious questions without sufficient guidance from negotiators. In doing so, adjudicators will tend to follow broad principles of fairness and efficiency, particularly through concepts such as reasonableness and due process.

Participants should accept that the increasing role of law and legalist perspectives is appropriate if the system is to operate to promote compliance in the face of protectionist pressures. A proper understanding of the difficulties of such a legalist model should hopefully assist in keeping legitimate and ongoing evaluation and criticism within appropriate and reasonable bounds.

While the rights and obligations in an FTA are of course reciprocal, there are particular challenges where China is concerned that need special and ongoing consideration by prospective FTA partners and all WTO Members. Because obligations within the WTO Agreement and China's Protocol of Accession and similar FTA principles cover procedural, adjudicative, transparency and decision making aspects as well as substantive trade law concerns, there is a potential for any dispute settlement system to be asked to analyse a range of developments in China's governance, economic and legal systems.

Chinese governmental officials, bureaucrats and business leaders need to be aware of the extent to which treaty obligations will impact upon Chinese practices and be aware of the potential for significant involvement in dispute settlement activities. Others will need to have realistic views about the pace at which China can be reasonably expected to meet its emerging commitments. This requires a clear understanding of its history, culture and practices.

In spite of these potential difficulties, there will be many reciprocal benefits both substantive and procedural from any ensuing FTA and China's engagement and insights. Continuous analysis, exposition, research and training will ensure that both parties will be able to optimise the benefits and reduce to a minimum, any problems and challenges.