Posted by on Jun 29, 2015

Our last blog post addressed GATT jurisprudence.   We noted concerns about the growth of the non-violation nullification and impairment (“NVNI”) option in dispute settlement which were highlighted in the first WTO case on NVNI –  Japan – Measures Affecting Consumer Photographic Film and Paper [WT/DS44]:

This suggests that both the GATT contracting parties and WTO Members have approached this remedy with caution and, indeed, have treated it as an exceptional instrument of dispute settlement. We note in this regard that both the European Communities and the United States in the EEC — Oilseeds case, and the two parties in this case, have confirmed that the non-violation nullification or impairment remedy should be approached with caution and treated as an exceptional concept. The reason for this caution is straightforward. Members negotiate the rules that they agree to follow and only exceptionally would expect to be challenged for actions not in contravention of those rules.

The Uruguay Round negotiations provided an important opportunity to review the dispute settlement process under the WTO.  In spite of concerns about the inherent unpredictability and the wider discretion for dispute settlement panels, WTO members decided to maintain the NVNI option.  Article 26 of the WTO Dispute Settlement Understanding (DSU) provided additional clarity and required that NVNI claimants provide a “detailed justification” for their claim. It established that a WTO member is under no obligation to withdraw a measure that merely nullifies or impairs benefits where there is no associated violation of a WTO treaty commitment.  Instead, the offending party must make a “mutually satisfactory adjustment which compensates the aggrieved party for the loss.  Article 26 also provides for arbitration on the level of nullification or impairment and sets the benchmark for permissible retaliation.  Ultimately the aggrieved has the right to retaliate by suspending its own concessions if a negotiated settlement cannot be reached.

The first of three WTO Panels that dealt with NVNI claims was the Japan Film case noted above. This was a U.S. complaint that a wide range of measures taken by the Japanese Government had the overall effect of preventing U.S. manufacturers of photographic film from competing successfully in the Japanese market. These measures included various rules regarding foreign investment, and certain restrictive marketing policies.  The Panel ruled that the United States had failed to meet its burden of proving that the “measures” at issue were responsible for the inability of U.S. exporters to penetrate the Japanese market.   The Panel stressed that in an NVNI claim, the burden is on the claimant to demonstrate:

  1. the application of a “measure”;
  2. of a “benefit” owing to the complainant under some WTO agreement; and
  3. that the measure has nullified or impaired that benefit.

The Panel also addressed the issue of competitive balance and stated that:

[I]t must be demonstrated that the competitive position of the imported products subject to and benefitting from a relevant market access (tariff) concession is being upset by (‘nullified or impaired…as the result of’) the application of a measure not reasonably anticipated. The equation of ‘nullification or impairment’ with ‘upsetting the competitive relationship’ established between domestic and imported products as a result of tariff concessions has been consistently used by GATT panels examining non-violation complaints. For example, the EEC — Oilseeds panel, in describing its findings, stated that it had ‘found…that the subsidies concerned had impaired the tariff concession because they upset the competitive relationship between domestic and imported oilseeds, not because of any effect on trade flows’..

In European Communities – Measures Affecting Asbestos and Asbestos-Containing Products [W T/DS135], Canada challenged a 1996 French prohibition on the sale (and importation) of asbestos and asbestos-containing goods. The ban was enacted as a health measure but Canada argued that its exports of chrysotile asbestos for use in construction was safe according to international standards and that it had obtained tariff concessions on asbestos and asbestos-containing products dating back to 1947 as part of the Uruguay Round.  The Panel and Appellate Body both noted that NVNI claims should be “approached with caution and treated as an exceptional instrument of dispute settlement.” They ruled that Canada had failed to meet its burden of proof with respect to its legitimate expectations as at the time of the Uruguay Round negotiations when there was extensive medical evidence regarding the carcinogenic properties of asbestos.  Canada could not have reasonably expected that WTO members would not act to ban asbestos products in the future.  At the same time the Panel noted that:

By creating the right to invoke exceptions in certain circumstances, Members have recognized a priori the possibility that the benefits they derive from certain concessions may eventually be nullified or impaired at some future time for reasons recognized as being of overriding importance. This situation is different from that in which a Member takes a measure of a commercial or economic nature such as, for example, a subsidy or a decision organizing a sector of its economy, from which it expects a purely economic benefit. In this latter case, the measure remains within the field of international trade ….

The third NVNI case, Korea – Government Procurement. Korea – Measures Affecting Government Procurement [WT/DS163], involved a U.S. claim pursuant to the WTO Government Procurement Agreement (GPA) under which signatories commit to open government procurement to foreign sellers of goods and services. The procurement activities to be governed by the GPA are identified by the government agency listed as “covered.”   Article XXII of the GPA provides for the potential application of nullification or impairment due to “any measure” in the proper circumstances.  In this case, the United States complained that Korean restrictions on the participation of foreign suppliers with respect to a new airport amounted to non-violation nullification or impairment as it had been misled by Korea as to the scope of its commitments and the entities that would be responsible for procurement in the airport project.  The Panel ruled that such a claim was possible in principle but ruled that the United States had failed to prove its non-violation claim as it had constructive knowledge through written notice of the Korean legislation.

It is significant that the Panel made a direct reference to the “good faith” obligation under customary international law, in the context of the role of NVNI claims with respect to measures that violate the “spirit” rather than the “letter” of treaty commitments.

In our view, the non-violation remedy as it has developed in GATT/WTO jurisprudence should not be viewed in isolation from general principles of customary international law. As noted above, the basic premise is that Members should not take actions, even those consistent with the letter of the treaty, which might serve to undermine the reasonable expectations of negotiating partners. This has traditionally arisen in the context of actions which might serve to undermine the reasonable expectations of negotiating partners. This has traditionally arisen in the context of actions which might undermine the value of negotiated tariff concessions. In our view, this is a further development of the principle of pacta sunt servanda…The principle of pacta sunt servanda is expressed in Article 26 of the Vienna Convention in the following manner: “Every treaty in force is binding upon the parties to it and must be performed by them in good faith”…

The Panel clarified that a non-violation complaint does not require evidence of improper behavior:

[W]e do not mean to introduce here a new requirement that a complainant affirmatively prove actual bad faith on the part of another Member. It is fairly clear from the history of disputes prior to the conclusion of the Uruguay Round that such a requirement was never established and there is no evidence in the current treaty text that such a requirement was newly imposed. Rather, the affirmative proof should be that measures have been taken that frustrate the object and purpose of the treaty and the reasonably expected benefits that flow therefrom.

The option of a  NVNI claim arguably makes the scope of the WTO dispute settlement system broader than that of other international dispute settlement systems which are confined to adjudicating only violations of the agreement itself.   In our final article we will review the applicable NAFTA provisions and look at the implications for the future use of the NVNI remedy.