The great challenge for dispute resolution in the free trade area of the Americas (FTAA)

Brazil
02/17/2006
Salvador J. Juncadella - Morgan Lewis, Miami, Florida, USA

One of the most fascinating aspects of the FTAA (Free Trade Area of the Americas) will be the Dispute Resolution System created by the draft of the FTAA Agreement (the “draft agreement” or the “agreement”). The reason is very obvious. With so many of the aspects of business contemplated by the draft agreement, all the trade, economic and legal implications or issues of an hemispheric free commerce will have necessarily to have an impact on the agreement. If there is not an excellent mechanism to resolve the disputes in a fair, transparent and efficient manner there will be a chaotic end to the objectives of the FTAA.

I. Introduction

One of the most fascinating aspects of the FTAA (Free Trade Area of the Americas) will be the Dispute Resolution System created by the draft of the FTAA Agreement (the “draft agreement” or the “agreement”). The reason is very obvious. With so many of the aspects of business contemplated by the draft agreement, all the trade, economic and legal implications or issues of an hemispheric free commerce will have necessarily to have an impact on the agreement. If there is not an excellent mechanism to resolve the disputes in a fair, transparent and efficient manner there will be a chaotic end to the objectives of the FTAA

II. FTAA objectives

The above-mentioned objectives under the draft agreement are: (a) trade liberalization with a view to generate economic growth and prosperity, contributing to the expansion of world trade; (b) to generate increasing levels of trade in goods and services, and investment, by means of market liberalization, through fair, clear, stable, and predictable rules; (c) to enhance competition and improve market access conditions for goods and services among the Parties, including in the area of government procurement; (d) to eliminate barriers, restrictions and/or unnecessary distortions to free trade among the Parties, including unfair trade practices, unjustified restrictions, domestic subsidies and aids to trade in goods and services, (e) to eliminate the barriers to the movement of capital and business persons among the Parties; (f) to foster the development of a hemisphere infrastructure that facilitates the circulation of goods, services and investment; and (g) to establish mechanisms that guarantee greater access to technology, through economic cooperation and technical assistance.

III. Dispute resolution in sub-regional agreements

Most of the sub-regional agreements on free commerce outstanding in our hemisphere have a dispute resolution system. As an example, Nafta and Mercosur have clear provisions on this matter. They have established with detail the structure, composition and functioning of the different bodies – either for consultation, mediation or arbitration – for the solving of disputes between the Parties. (The Parties are the States which belong to either Nafta or Mercosur).

In the case of Nafta, this agreement also makes references to Private Commercial Dispute Settlement in Article 2022 (Alternative Dispute Settlement). The recognition of Private Commercial Dispute Settlement is of great importance. I believe that a large percentage of international commercial conflicts in the hemisphere will be resolved through the system of arbitration recognized by the New York Convention of 1958 (Convention on the Recognition and Enforcement of Foreign Arbitral Awards) or by the Panama Convention of 1975 (Inter-American Convention on International Commercial Arbitration).

IV. Dispute resolution in the FTAA

Fortunately, as I said before, the FTAA draft agreement contemplates a Chapter on Dispute Resolution (Conciliation, Mediation, Arbitration), hereinafter in this Section IV mentioned as the Chapter.

Article 3 of the Chapter requires cooperation between the Parties (States). “The Parties shall at all times, endeavor through cooperation, to arrive at a prompt settlement of any dispute regarding the interpretation and application of this agreement and shall make every attempt in good faith to arrive at a mutually satisfactory resolution of any matter that might affect its operation.”

It is of special interest to be aware of the principles that should govern the resolution of disputes under the Chapter (Art. 4). “In addition to principles of international law, other principles shall apply of good faith, confidentiality, prompt resolution, procedural economy, effective access, special and differential treatment, as well as of maintaining a balance between rights and obligations of the parties.”

The Dispute Resolution under the FTAA Chapter (Art. 2) applies to the settlement of all disputes arising between the parties (States) regarding the interpretation or application of the FTAA agreement or when a party (State) considers that an actual or proposed measure of another party (State) is or would be inconsistent with the obligations of the FTAA agreement, or even if not inconsistent, could cause nullification or impairment of any benefit that a Party could reasonably have expected to accrue to it under the Agreement.

It is important to remind here that disputes or conflicts between the Parties could arise from any of the matters related to the Agreement. Some of the most important matters which are going to raise issues or conflicts between the Parties are in the areas of tariffs and non-tariff barriers affecting trade in goods and services; agriculture; subsidies; investment; intellectual property rights; government procurement; technical barriers to trade; safeguards; rules of origin; antidumping and countervailing duties; sanitary and phytosanitary standards and procedures and competition policy.

Although the matters that may be brought to the Dispute Resolution System under the draft agreement have to be brought by the State parties and not by private parties these should have the right to present their cases to the State of which they are citizens or residents (in the case of individuals) or in the case of entities or corporations in the State in which they are incorporated.

One important provision in the draft agreement is that Disputes arising between the Parties to a sub-regional integration agreement (like Nafta and Mercosur) on matters governed in such agreements and in the FTAA agreement shall be subject to the dispute settlement system of the sub-regional integration agreement to which they are party. Once a Party has initiated dispute settlement procedures under the FTAA agreement or a sub-regional agreement the forum selected shall be used to the exclusion of any other.

Since the FTAA draft agreement is covering so many aspects of free trade commerce in the Americas, as we have seen before, the potential conflicts that may arise between the Parties to the agreement are going to be in significant numbers. Dispute Resolution, either the process of conciliation, mediation or arbitration, is the only way to expedite and resolve the conflicts in a satisfactory manner, as long as there is fairness, transparency and effectiveness in the process.

As a consequence, the number of panelists (conciliators, mediators, arbitrators) are going to be many from different countries. They should have experience in the matters related to the conflicts that they should have to resolve. A Code of Conduct will be in order for such panelists and probably some training will be required. (The American Arbitration Association – AAA – can provide training in several countries and also other institutions).

V. Harmonization of laws

One of the matters which I consider of great importance in order to avoid or at least to minimize conflicts in the area of free commerce under the FTAA is the harmonization of laws. If the laws are different – competition, intellectual property – the results of actions and inactions may also be different and therefore more conflicts will generate. These disputes will be more difficult to be resolved by the Parties and by the Dispute Resolution System.

There has been some progress in the free area countries for harmonization of laws but still very insufficient for what should be done as a minimum. As an example of a uniform law is the Inter-American Convention Against Corruption which has been ratified by thirty-one (31) countries of the Hemisphere. Corruption is the worst enemy of democracy. The countries have assumed the commitment to combat corruption applying the Convention. Any discrepancy or conflict between the Parties to the FTAA Agreement on corruption matters will be easier to resolve because at least they have the same text of law.

Another example of a uniform law is the Inter-American Convention on the Law Applicable to International Contracts, approved at the Fifth Inter-American Specialized Conference on Private International Law. It is very interesting to note that Article 3 of the Convention indicates that “The provisions of this Convention shall be applied, with necessary and possible adaptations, to the new modalities of contracts used as a consequence of the development of international trade.” Therefore, the Convention looks into the future of international trade in our hemisphere. Also, the Convention establishes modern concepts of law in Article 10, mentioning that the “guidelines, customs, and principles of international commercial law as well as commercial usage and practices generally accepted shall apply in order to discharge the requirements of justice and equity in the particular case.”

I think that there is a great challenge ahead to intensify the efforts for harmonization of laws in the free trade area of the Americas which have to do with commerce and investment, like laws on competition, investment, intellectual property and credit instruments.

VI. Private international commercial arbitration within the FTAA

I have mentioned before the subject of international private commercial arbitration. The FTAA draft agreement establishes that each Party shall to the maximum extent possible, encourage and facilitate the use of arbitration and other means of alternative dispute resolution for the settlement of international commercial disputes between private parties.

As a result of the development of the FTAA Agreement more commercial and economic activities will develop in the free trade area and many conflicts may be resolved by Private International Commercial Arbitration under the New York Convention of 1958 or the Panama Convention of 1975. (The last one has been ratified by sixteen (16) countries and the New York Convention by twenty-four (24) countries of this Hemisphere).

It is also fair to say that many countries in the hemisphere have improved substantially local laws related to mediation and/or arbitration like Mexico, Peru, Uruguay, Brazil, Costa Rica and Venezuela. The improvements contribute significantly to a more expedited application of the above-mentioned New York and Panama Conventions and in particular to the enforcement of International Arbitration Awards. As a general rule, such awards are enforceable in the countries which have ratified any of the Conventions excepting cases such as lack of service of the arbitration proceedings, abuse of arbitrators in resolving issues which have not been submitted to arbitration, resolution of matters which cannot be resolved by arbitration in the country in which the recognition and execution of the award is requested, or if the award is in conflict with or in violation of a law of “public order” of the country in which the enforcement of the arbitration will be carried out.

International Commercial Arbitration under the above-mentioned Conventions may be used to resolve conflicts derived of commercial transactions or agreements, including: (a) International Sales; (b) agency, representation and distribution; (c) Technology; (d) trademarks/licenses/patents and (e) joint ventures.

In reference to point (b), agency, representation and distribution, there are some issues on the use of international arbitration. There are local laws in some countries of “public interest” which grant special protection to agents, distributors and representatives or to agents and representatives only and the choice of law and choice of forum provisions are prohibited in agreements executed between principals and distributors or agents. The following countries have protective legislation in place:

Brazil (Agents)
Colombia (Agents)
Costa Rica
Dominican Republic
El Salvador
Guatemala
Honduras
Paraguay

Puerto Rico

Different legal concepts for Agents, Distributors and Representatives are relevant in Brazil and Colombia, because the legislation only protects Agents and Representatives. In other countries referred-above, the legislation protects agents, distributors and representatives of foreign countries.
Agents and Representatives act on behalf of the principal (the exporter) to arrange and promote sales. They act as intermediaries between potential purchasers and the principal. Distributors buy products from the principal and resell such products assuming credit risks and other liabilities. Agents with Powers of Attorney granted by their principals, who are authorized to act on behalf of their principals, including for decisions related to prices and terms of delivery are considered employees of the principal and subject to local labor laws. Furthermore, the principals could be considered as doing business in the country of the Agent with legal and tax implications.

We have found that the protective legislation in the countries mentioned above have the following common grounds:

There must exist just legal reasons (as defined in the respective protective law) for the termination of an agency, distribution or representation contract.
Such reasons must be substantiated before the competent entities.
If such reasons do not exist, the principal or licensor must indemnify the representative or agent in the amount prescribed by law.
If manufactured abroad, merchandise may not be imported while payment of such indemnification is pending.
Upon termination of a contract without just cause, the principal or licensor shall take over the receivables and the stock of the licensee or agent, under the conditions set forth in the law.
In case of legal action or claim, the principal or licensor shall not appoint another agent or distributor until he has paid or deposited with the competent entity, the amount of the indemnification.

The rights granted by such laws may not be waived, although a settlement may be agreed upon before the competent entity.

Some lawyers have suggested that despite the restrictions for choice of law and forum the parties should have the right to appoint freely the law and forum that should govern the agreement. The argument is that the Panama Convention of 1975 permits the selection of the governing law and forum in arbitration if the agreements are between parties located in different countries which have ratified the Convention and that an international treaty like the Panama Convention should prevail over local law.

VII. The cooperation agreement between the American Arbitration Association (AAA) AND THE Inter-american Bar Association (IABA)

I think that Miami will become an International Center for Dispute Resolution, to resolve conflicts between States which are parties to the FTAA agreement and to find solutions for discrepancies between parties signatories of private international commercial agreements. We are all aware of the advantage that Miami offers as an ideal site for international arbitration in the Americas, because of its central geography, excellent air links and mulitiplicity of services and languages.

The above-mentioned was also recognized by the Inter-American Bar Association (IABA), the oldest and largest international organization of lawyers in this hemisphere, when in April of 2003 signed a Cooperation Agreement with the American Arbitration Association (AAA). The Agreement stipulates that the AAA and the IABA will cooperate in the promotion of arbitration, mediation and conciliation as a means of resolving international disputes. Also, that both institutions will cooperate in the promotion of Miami, Florida as a situs for international dispute resolution proceedings. Applicants from the IABA Membership have been presenting their credentials to the AAA in order to be certified as International Arbitrators and mediators of the AAA, once all the requirements are met to the standards of the AAA. This is a great achievement for international arbitration and for Miami as a center of international arbitration.

VIII. Conclusion

The Dispute Resolution Chapter in the draft agreement is a necessary one. I cannot think that a free trade area in the Americas can be maintained without an adequate system for the resolution of disputes between the States and also between private parties dealing with international transactions. The challenge ahead for Dispute Resolution is undoubtedly huge, but I am confident that with the expertise of well trained arbitrators, mediators and conciliators and having an appropriate system for the handling of disputes, the solution of controversies or conflicts will always be resolved with justice and equity for all the parties involved.