978-0132718974 Chapter 3 Solution Manual Part 1

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Dispute Selement

I. Text Materials

Settlement of Disputes Through Diplomacy

Diplomacy is the process of getting parties to a disagreement to an understanding through

negotiation, mediation, or inquiry. The word “diplomacy” is formally applied only to disputes

between states, but the same processes can be applied to disputes involving institutions and

individuals as well, where it is often referred to as alternative dispute resolution.

Negotiation – Negotiation is the process of reaching an agreement through discussion between

two parties to a dispute. It is used not merely to resolve disputes but also to prevent them from

arising in the first place. Negotiation can also lay the groundwork for other forms of dispute

settlement.

Negotiations between states are most commonly conducted on an ad hoc basis, but sometimes the

procedure is more formal, such as, negotiation through normal diplomatic channels, through the

use of competent authorities, through the establishment of mixed or joint commissions, or even

through summit meetings.

Mediation – Mediation involves the use of a third party who transmits and interprets the

proposals of the principal parties and sometimes advances independent proposals. When

mediators provide a channel of communications only, it is said that they are offering their good

offices. When they make a formal investigation and present a formal proposal, they are involved

in a conciliation.

The process of mediation can start with a request from one or more of the parties, but not

infrequently, an outsider offers to serve as a mediator. Mediation can occur only if all the parties

to a dispute consent to it. The mediator, in particular, must be acceptable to both parties.

Inquiry – An inquiry is a process used to determine a disputed fact or set of facts. An inquiry

focuses only on a particular incident.

Settlement of Disputes in International Tribunals

If a dispute is between states or intergovernmental organizations (IGOs), they may be able to take

their case to an international tribunal, such as the International Court of Justice (ICJ) or a dispute

resolution panel of the World Trade Organization, or, in the alternative, to arbitration. If a dispute

is between private persons or between a private person and a state or between a private person

and an IGO, the dispute will normally end up in arbitration or in a municipal court.

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Arbitration between private persons and states, and between persons and persons, is commonly

arranged through a permanent arbitration tribunal (or facility) such as the International Center for

the Settlement of Investment Disputes.

International Court of Justice – The ICJ is the principal judicial organ of the United Nations. It

began work in 1946, when it replaced the Permanent Court of International Justice, which had

functioned in the Peace Palace since 1922.

Functions

The ICJ has a dual role: to settle in accordance with international law the legal disputes submitted

to it by states, and to give advisory opinions on legal questions referred to it by duly authorized

international organs and agencies.

Composition

The ICJ is composed of 15 judges elected to nine-year terms of office by the United Nations

General Assembly and Security Council sitting independently of each other. The members of the

Court do not represent their governments but are independent magistrates. The United Nations

Charter declares that all the member states of the United Nations are automatically parties to the

Statute of the International Court of Justice, which is included as an annex to the charter.

Nonmembers may adhere to the statute after agreeing to respect the Court’s decisions and to help

cover the court’s expenses.

The ICJ has the jurisdiction to hear two kinds of cases: (1) those between states (based on the

court’s contentious jurisdiction) and (2) those requested by organs or specialized agencies of the

United Nations (based on the Court’s advisory jurisdiction). The ICJ has no authority to hear

cases involving individuals or entities other than those just mentioned.

Contentious Jurisdiction: Before the ICJ can hear a contentious case, all of the states parties to the

proceeding must have recognized the court’s contentious jurisdiction. This is most commonly

done on an ad hoc basis.

Sometimes these agreements are made permanent by being included in a bilateral treaty (Article

36(1)). A less common and more controversial means by which the court can acquire jurisdiction

is through unilateral declarations made by each of the parties.

Optional Clause Jurisdiction: Article 36(2) of the Statute of the Court—known as the Optional

Clause—allows states to make a unilateral declaration recognizing “as compulsory ipso facto and

without special agreement, in relation to any other state accepting the same obligation, the

jurisdiction of the Court in all legal disputes.”

Many states have recognized the Court’s jurisdiction under the Optional Clause. A few have put

no restrictions on the kinds of cases they will respond to. Most states have added a wide variety

of restrictions on the kinds of suits they are willing to let the Court hear without a special

arrangement.

Article 36(2) requires that a state respond to a suit brought against it only if the state bringing the

suit has also accepted the jurisdiction of the Court. This is known as the rule of reciprocity. When

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both states have limited the jurisdiction that they will recognize, the ICJ has power to decide a

case only to the extent that both states have agreed to the same sort of matters.

Self-Judging Reservations: Also known as Connally Reservation, the clause allows a state to

exclude from its acceptance of Optional Clause jurisdiction any matter that it later determines is

within its own domestic jurisdiction. This can be a double-edged sword because the principle of

reciprocity allows would-be defendants to invoke the plaintiff’s self-judging reservation.

The validity of self-judging reservations seems to violate Article 36(6) of the Statute of the Court,

which says that “in the event of a dispute as to whether the Court has jurisdiction, the matter shall

be settled by the decision of the Court.”

The ICJ seldom decides cases that have direct commercial implications, though from time to time

the Court has settled border disputes, investment disputes, and disputes over fishing grounds.

Advisory Jurisdiction

The ICJ’s advisory jurisdiction exists so that the Court may give opinions about issues of

international law at the request of the United Nations or one of its specialized agencies. But the

Court will reject a request for such an opinion, if it has the effect of making a state a party to a

dispute without that state’s consent.

Judgments

A case can be concluded in one of three ways: (1) If the parties tell the Court that they have

reached a settlement, the Court will issue an order removing the case from its list; (2) if the

applicant state withdraws its suit, the Court will order the case to be removed from its list; or (3)

the Court will deliver a judgment.

Effects of Judgments: Article 59 states that “the decision of the Court has no binding force except

between the parties and in respect of that particular case.” The doctrine of stare decisis does not

apply. Article 60 states that “the judgment is final and without appeal.”

Compliance with ICJ Judgments: Most states have voluntarily complied with the judgments

handed down by the Court, although there have been exceptions. There is no way to force a state

to comply with a judgment. The United Nations Charter says that if a party refuses to comply

with a judgment, “the other party may have recourse to the Security Council, which may, if it

deems necessary, make recommendations or decide upon measures to give effect to the

judgment.”

International Criminal Court – The International Criminal Court (ICC) is an independent,

permanent court of last resort that tries persons accused of the most serious crimes affecting the

international community. It will not act if a municipal judicial system is investigating or

prosecuting the case.

The court may exercise jurisdiction over individuals accused of genocide, crimes against

humanity, and war crimes, as well as those assisting in the commission of these crimes. But the

court’s jurisdiction is not universal: (1) the accused must be a national of a state party or a state

otherwise accepting the jurisdiction of the court, (2) the crime took place on the territory of a state

party or a state otherwise accepting the jurisdiction of the court, or (3) the United Nations

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Security Council has referred the situation to the prosecutor, irrespective of the nationality of the

accused or the location of the crime.

The court’s jurisdiction is limited to events taking place since July 1, 2002. Finally, a case will be

inadmissible if it has been or is being investigated or prosecuted by a state with jurisdiction.

However, a case may be admissible if the investigating or prosecuting state is unwilling or unable

to carry out the investigation or prosecution.

World Trade Organization Dispute Settlement Procedures (WTO) – The WTO is responsible

for implementing and enforcing the rules of international trade between nations. The rules

themselves are found in a wide-ranging collection of WTO agreements, including the General

Agreement on Tariffs and Trade, the General Agreement on Trade in Services, and the Agreement

on Trade-Related Aspects of Intellectual Property Rights.

The WTO’s dispute settlement process itself is governed by an agreement known as the

Understanding on Rules and Procedures Governing the Settlement of Disputes (the Dispute

Settlement Understanding, or DSU). This is a unified process that applies to all disputes arising

under the WTO agreements.

Consultation and Third-Party Participation

The DSU encourages member states to resolve disputes through consultation with each other. If a

member fails to respond or consult within a stipulated time period, the requesting member can

seek the establishment of a WTO Dispute Settlement Panel. The complaining party can also ask

for the establishment of a panel if the consultation is not productive.

Besides consulting, the parties to a dispute may, if each of them agrees, seek the assistance (good

offices, conciliation, or mediation) of third parties in resolving their differences. If the parties

agree, such assistance may continue while a Dispute Settlement Panel is considering a complaint.

Dispute Settlement Organs

The organs charged with administering and carrying out the DSU are (1) the Dispute Settlement

Body, (2) the Dispute Settlement Panels, and (3) the Appellate Body.

Dispute Settlement Body (DSB): The DSB is actually the WTO General Council convened under

its own chairman and following its own rules of procedure. It is responsible for establishing

panels, adopting their reports and those of the Appellate Body, monitoring implementation of

rulings and recommendations, and authorizing the suspension of concessions and other

obligations in appropriate cases.

Dispute Settlement Panel: It is made up three panelists unless the parties agree within 10 days of

its establishment that it should consist of five panelists. The WTO Secretariat will nominate

individuals to be panelists, and the parties must have “compelling reasons” to object to their

appointment.

If no agreement is reached within 20 days on the makeup of a panel, the WTO director-general, in

consultation with the chairman of the DSB and the relevant council or committee, will appoint the

panelists, keeping in mind, after consulting with the parties, any special or additional

considerations relevant to the particular case.

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Panelists serve in their individual capacities and not as representatives of any government or

organization. The function of a Dispute Settlement Panel is to assist the DSB by making an

objective assessment of the matter referred to it, including the facts of the case, the applicability

of and conformity with the pertinent WTO agreements, and by making findings that will help the

DSB to make recommendations and rulings to resolve the dispute.

A panel report is adopted automatically by the DSB within 60 days after it has been circulated,

even if a special meeting has to be convened for the purpose, unless (1) one of the parties to the

dispute notifies the DSB that it is going to appeal or (2) the DSB decides by consensus not to

adopt the report.

Appellate Body: The Appellate Body is an appeals board made up of seven persons of recognized

authority and with demonstrated expertise in law, international trade, and the subject matter of the

WTO Agreement and its annexes. A panel decision may be appealed to the Appellate Body only

by parties directly involved in a dispute.

The proceedings of the Appellate Body are confidential, and the opinions expressed by its

individual members in the report are anonymous. The Appellate Body may uphold, modify, or

reverse a panel’s findings and conclusions, and its report will automatically be adopted by the

DSB unless the DSB decides by consensus not to do so.

Enforcement

Panel and Appellate Body reports adopted by the DSB are enforced by the DSB.

Precedential Effect of Panel and Appellate Body Rulings: The concept of legal precedent does

apply to the new WTO dispute settlement system, but it is the flexible system of precedent that is

used in international tribunals and not the rigid system of British or even American common law.

That is, both the panels and the Appellate Body may rely on their own earlier legal rulings, but

they are also free to deviate from those rulings as they think necessary.

Case 3-1: Japan—Taxes on Alcoholic Beverages

Facts: The EC, Canada, and the U.S. complained that Japan’s application of its Liquor Tax Law

Issue: Must the panel reports adopted by the GATT 1947 Contracting Parties be treated as

precedents?

Holding: No.

Law/Explanation: The Vienna Convention on the Law of Treaties, Art. 31(3)(b) states that “any

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Order: The Panel erred in its conclusion.

International Center for the Settlement of Investment Disputes – The International Center for

the Settlement of Investment Disputes (ICSID) was created in 1965 at a conference in

Washington, D.C., sponsored by the International Bank for Reconstruction and Development

(popularly known as the World Bank). The purpose of ICSID is to encourage private investment

in underdeveloped countries. It has been created to provide a reliable mechanism for impartially

resolving disputes between an investor and the country of investment.

The ICSID Organization

The ICSID, headquartered at the World Bank’s office in Washington, D.C., has an Administrative

Council, a Secretariat, and two panels of experts. The council is made up of representatives of the

states parties to the Washington Convention and is chaired by the president of the World Bank

(Article 5).

The Secretariat, made up of a secretary-general (elected by the Council for a six-year term) and

an administrative staff, serves as the ICSID’s registrar (Articles 9 and 11). The council chooses

the Panel of Arbitrators and the Panel of Conciliators from nominees submitted by states parties.

ICSID Rules

The Administrative Council has enacted rules that regulate how conciliations and arbitrations are

begun (called Institutional Rules) and rules for conducting conciliations (Conciliation Rules) as

well as arbitral hearings (Arbitration Rules).

The litigants (i.e., the investor or private party and the host state or state party) may agree to the

rules of law governing a particular arbitration. If they cannot agree, then both international law

and the state party’s law (including the state party’s rules for deciding conflicts about the

applicability of particular laws) are to apply (Article 42).

Constituting an ICSID Arbitration Tribunal

Before ICSID can set up a tribunal to resolve a particular dispute, two preliminary steps must be

taken. First, the state wherein the investment is being made (the host state) and the state of which

the investor is a national (the home state) must both be parties to the Washington Convention.

Second, the investor and the host state must both consent to ICSID jurisdiction.

Both steps are vital to establishing the jurisdiction of ICSID to resolve a dispute. Neither can be

waived. The ICSID arbitration agreement should be included in every contractual arrangement

between the investor and the host state.

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Defining Investment: ICSID Convention Article 25 does not define investment. Article 25(1)

provides that “jurisdiction of the Centre shall extend to any legal dispute arising directly out of an

investment.”

Unilateral Withdrawal Is Ineffective: Article 25 says that if proper consent has been given to

establish an ICSID tribunal, then the tribunal can be set up even when the host state or the

investor refuses to participate. Also, once consent has been given, it cannot be unilaterally

withdrawn. According to Article 72, a state party cannot withdraw by filing a later reservation to

the convention or even by denouncing the convention.

Selecting the Arbitrators: The Washington Convention offers a wide range of choices in the

selection of arbitrators. The litigants may agree to any number, but if they want more than one,

the number must be odd. The arbitrators may be any persons agreeable to the litigants; however,

the majority must be nationals of states other than the state party to the dispute.

Place of Arbitration: Arbitration proceedings are normally held at ICSID’s headquarters in

Washington, D.C. By agreement, the litigants can elect to have the arbitration held at the offices

of any institution with which ICSID has made arrangements. Articles 62 and 63 specify that after

consulting with ICSID’s secretary-general and with the permission of the arbitration tribunal, the

litigants can agree to have the proceedings held at any other location.

Exclusive Remedy: Giving consent to ICSID arbitration is deemed to exclude all other remedies.

The case cannot be tried in a municipal or another international tribunal, nor can the investor turn

to the home state for diplomatic protection (Article 27).

According to Article 41, any dispute about the power of an ICSID tribunal to hear a matter is for

the tribunal itself to decide.

Jurisdiction: An ICSID tribunal must have jurisdiction both over the parties involved and over the

subject matter of the dispute.

Personal Jurisdiction: In order for a tribunal to have personal jurisdiction, the parties appearing

before it must be a state party and a national of another contracting state.

A state party includes the state itself, its agencies, and its subdivisions. A national of another

contracting state can be either a natural or a juridical person. A natural person is a human being

who has the nationality of a home state. A juridical person is a legal entity, other than a natural

person, that has sufficient existence in the eyes of the law to function legally, sue and be sued, and

make decisions through agents.

Subject Matter Jurisdiction: ICSID arbitration tribunals can only decide matters that are (1)

disputes that (2) arise out of an investment. The requirement that there be a dispute means that

ICSID tribunals will not decide collusive actions (i.e., test cases) or give advisory opinions.

The parties can limit the subject matter of a dispute by adding restrictions in their agreement to

arbitrate. Additionally, the tribunal will only consider matters raised in the claim brought by the

party initiating the arbitration proceeding (Article 25) or raised in a counterclaim (Article 46).

ICSID and the North American Free Trade Agreement: Chapter 11 of the North American Free

Trade Agreement (NAFTA) contains provisions designed to protect cross-border investors and

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facilitate the settlement of investment disputes. Several important Article 11 NAFTA arbitrations

have taken place under ICSID rules.

Case 3-2: In the Matter of the Loewen Group Inc. and Raymond L. Loewen, Claimants/Investors

Facts: A Mississippi, U.S. businessman sued Canada-based funeral conglomerate The Loewen

Issue: Did the Mississippi court proceedings violate U.S. obligations under NAFTA Article 11?

Holding: No.

Law: NAFTA Article 1105(1) provides: “Each party shall accord to investments of investors of

Explanation: The three-member tribunal stated that “the whole trial and … verdict were clearly

Order: Loewen’s claim is denied.

Provisional Measures and Awards: An ICSID tribunal has the power to recommend provisional

Enforcement: ICSID awards are binding on the parties to an arbitration, and the states parties to

Other Arbitration Tribunals – Arbitration between private parties is not normally done on a

purely ad hoc basis, with the parties appointing arbitrators and devising procedures and rules for

the conduct of a proceeding on their own. More often, the parties agree in advance to resolve their

disputes using existing guidelines set up by one of several international arbitration organizations.

The most prominent of these organizations are the American Arbitration Association, the London

Court of International Arbitration, the International Chamber of Commerce, and the United

Nations Commission on International Trade Law (UNCITRAL).

Settlement of Disputes in Municipal Courts

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Municipal courts (also known as the “domestic” courts of various nation-states) are often called

upon to settle international disputes—typically, those disputes between individuals and

corporations from different nation-states, and sometimes even disputes involving sovereign states.

The competence or ability of a municipal court to exercise the power to try a case is known as

jurisdiction. Under international law, the jurisdiction of municipal courts to try an international

dispute is limited.

The ability of a defendant to escape the jurisdiction of a court is known as immunity. Natural and

juridical persons have few (if any) immunities from the powers of a municipal court. Foreign

states traditionally have had complete immunity, but this situation has changed substantially. State

agencies that carry out commercial activities are commonly treated as having no immunity.

Jurisdiction in Criminal Cases – Criminal prosecutions are conducted in accordance with

international law principles where there is some connection, or “nexus,” between the regulating

nation (the forum) and the crime or criminal.

Four nexuses have been invoked by courts to justify their exercise of jurisdiction. (1) The

territoriality nexus holds that the place where an offense is committed—in whole or in part—

determines jurisdiction. (2) The nationality nexus looks to the nationality or national character of

the person committing the offense to establish jurisdiction. (3) The protective nexus provides for

jurisdiction when a national or international interest of the forum is injured by the offender. (4)

The universality nexus holds that a court has jurisdiction over certain offenses that are recognized

by the community of nations as being of universal concern, including piracy, the slave trade,

attacks on or the hijacking of aircraft, genocide, war crimes, and crimes against humanity.

Exercise of jurisdiction must be reasonable, in light of the factors that: (1) The criminal activity

must have a substantial effect on the forum. (2) The accused or the victim must have a genuine

link with the forum. (3) The forum must have an interest in the regulated activity. (4) Justified

expectation must be protected by the forum’s regulation. (5) Other countries’ interests must not be

harmed. (6) The interests of the international community must be served. (7)The forum’s

regulation must be consistent with the international community’s traditions.

Jurisdiction in Civil Cases – In civil suits, municipal courts can extend their jurisdiction over

disputes between parties who appear within the territory of the forum state. Such jurisdiction is

based on either in personam or in rem principles.

Jurisdiction over Persons – In personam jurisdiction is the power of a court to decide matters

relating to a natural or juridical person physically present within the forum state. Natural persons

subject to in personam jurisdiction include nationals of the forum state, individuals physically

present within the state, individuals domiciled in the state, and individuals who consent to such

jurisdiction.

Juridical persons (or persona ficta) are entities, other than natural persons, that have sufficient

existence in the eyes of the law to function legally, sue and be sued, and make decisions through

agents.

Juridical persons are subject to the in personam jurisdiction of a municipal court in much the

same way that individuals are. Thus, legal entities created within a state are nationals of that state

—they are called domestic entities—and they may sue or be sued there. Foreign entities, however,

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are amenable to the jurisdiction of another state’s municipal courts only if (1) they are recognized

in law as juridical persons and (2) they give their consent.

Case 3-3: Bumper Development Corp. Ltd. v. Commissioner of Police of the Metropolis and

Others (Union of India and Others, Claimants)

Facts: A stone Hindu religious artifact had been wrongfully removed from India. Bumper

Issues: (1) Should the temple and the idol be recognized as parties? (2) Do they have legal

identity?

Holding: (1) Yes. (2) Yes.

Law/Explanation: Although in England institutions do not have separate personalities (e.g., the

Order: The temple (and the idol) is a proper party to the proceeding.

As is the case for natural persons, a juridical person’s consent to the jurisdiction of a foreign court

may be given expressly or it may be implied. An example of express consent is a forum selection

clause, that is, a clause in a contract that names the court or arbitration tribunal the parties want to

have to resolve any disputes relating to the contract. Consent will be implied if there are enough

contacts between the juridical person and the foreign state.

In determining if there are enough contacts, courts have to consider (1) whether the company has

performed acts that relate to the forum state, (2) whether the suit is based on those acts, and (3)

whether the company has indicated by its conduct that it intended to rely on the benefits (such as

doing business) of the forum state.

Case 3-4: Shell v. R. W. Sturge, Ltd

Facts: Investors in Lloyd’s of London had signed forum selection clauses that gave exclusive

Issue: Is a forum selection clause enforceable?

Holding: Yes.

Law: According to the U.S. Supreme Court, a forum selection clause in an international

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Explanation: Forum selection clauses are presumed to be valid because they provide for

Order: Affirmed.

A forum selection clause is often accompanied by a choice of law clause. It is not always true that

a forum will apply its own substantive law to a dispute. Courts often have reasons to apply the

law of a different state or nation-state. Even if there is no forum selection clause, the contract may

have a choice of law clause.

Jurisdiction over Property

In rem jurisdiction is the power of a court to determine the ownership rights of all persons with

respect to particular property located within the territory of the forum state.