December 7, 2004
The Honorable Robert Zoellick
United States Trade Representative
600 17th St. NW
Washington, DC 20508
Dear Ambassador Zoellick:
We are writing to express our views regarding the proposed appellate mechanism for the Investment Chapter of the Dominican Republic and Central America Free Trade Agreement (CAFTA). We believe that an inappropriately designed appellate mechanism could lead to greater incoherence in investment rulings by international arbitral tribunals, could further weaken appropriate domestic oversight over those decisions, and could fail to assure the protection of public interest objectives and democratic principles.
It is vital to emphasize at the outset that the introduction of an appellate mechanism fails to address the significant underlying problems with both the substantive and procedural provisions in the investment chapter of CAFTA that we have commented on elsewhere. A series of challenges by private investors using similar provisions in the investment chapter of NAFTA and other investment agreements continue to threaten environmental, health and safety laws in the U.S. and abroad. The continuing expansion of these challenges suggests that the investment provisions of CAFTA will entrench a misguided set of rules that cannot be salvaged with the establishment of a flawed appellate mechanism. Yet, even if these underlying deficiencies in the investment rules were addressed, the proposed appellate mechanism must itself avoid taking a significant step in the wrong direction.
We are also disappointed that the development of this appellate proposal has been delayed, despite the Congressional mandate that was clearly established more than two years ago in the Trade Act of 2002. The lack of timely attention to this matter may lead to the development of a detrimental proposal that would be a significant step backward. We therefore present the following comments with a view to avoiding such a result.
Domestic Court Review
First, we wish to express our strong opposition to any provisions in an appellate mechanism that would eliminate domestic legal review of relevant arbitral decisions. The elimination of domestic court review would be
a striking departure from current U.S. law and would remove a potentially effective mechanism for review of investor-state arbitral decisions. Under current law, some arbitral decisions can be reviewed by the U.S. federal courts, including for consistency with U.S. “public policy.” Without such a process, the United States will lose judicial oversight and would have no protection against arbitral decisions that are corrupt, contradict fundamental U.S. values, or misapply the U.S. Constitution.
Indeed, instead of removing this limited backstop for misguided arbitral decisions, the scope of domestic court review should be expanded to ensure that arbitral decisions do not, for example, contravene the mandate established
in the Trade Act of 2002 requiring that foreign investors receive “no greater substantive rights” than are accorded to U.S. citizens under U.S. law. The need for domestic legal review is particularly acute given the lack of any explicit requirement in the current U.S. investment model that investors exhaust their domestic legal remedies before bringing an international claim under the investment provisions.
Standing Appellate Tribunal
Regarding the appellate process itself, a system of ad hoc arbitral tribunals for appeals, rather than a standing body, would be bad policy and fail to fulfill the mandate established in the Trade Act of 2002. Indeed, a second layer of ad hoc arbitration would fail to “provide by the Trade Act, and would actually exacerbate the incoherence among decisions and interpretations. In addition, adopting a completely separate ad hoc appellate mechanism for each trade and investment agreement by the United States would lead to an unwieldy and incoherent proliferation of appellate decisions and opinions.
The appellate system proposed for investment rules in the context of the CAFTA agreement thus would fail to achieve any of the value that the Appellate Body of the World Trade Organization (WTO) has achieved in providing some degree of consistency among trade law decisions in that institution.
Broad Expertise of Appellate Tribunal Members
With respect to the composition of an appellate mechanism, the system for selecting its members must assure that those panelists will have appropriate legal expertise in a broad range of public international law. Given the wide scope of matters that have recently come before international arbitral tribunals, it would be inappropriate to single out expertise in areas of law such as international investment or commercial law as a criterion for nominating or selecting appellate panelists, without also specifying expertise in other critical areas of law such as environmental law.
Standard of Review
With regard to the standard of review for the proposed appellate mechanism, it would be inappropriate to limit appellate review to “clearly erroneous” interpretations of law, instead of using a de novo standard of review. Appellate review is intended to ensure correct and consistent interpretations of legal standards. Under a “clearly erroneous” standard, however, an appellate mechanism could not achieve this goal because appellate panels would often be required to defer to differing legal interpretations in separate arbitral cases.
Moreover, applying a “clearly erroneous” standard could prevent appellate panels from addressing important legal issues fundamental to investment disputes, such as whether the claim was appropriately within the jurisdiction of the original arbitral panel. The absence of a strong protection against awards outside the jurisdiction of the panel would undermine the legitimacy of the entire system.
To address these concerns, appellate panels must be allowed to review legal conclusions de novo. This would give the appellate mechanism the full authority to apply its legal judgment equally to each question of law presented, ensure the development of a consistent body of law under the investment chapter, and be consistent with the U.S. judicial system. While a preference for speed and finality over accuracy and consistency might be appropriate in purely commercial arbitrations, it is not acceptable in the arbitrations at issue here, which often involve critical public policy issues.
Further, a de novo review of legal issues should also encompass issues involving the interpretation or application of domestic law. For example, in recent investment treaty cases, key legal issues of the disputes have hinged on the interpretation and application of domestic law, including legal questions concerning the nationality of an investor and hence whether the complainant is entitled to the benefit of the investment agreement involved. Under early 20th century international law doctrines associated with the espousal of claims and exhaustion of domestic remedies, domestic law issues were treated as questions of fact. In the contemporary investment regime, however, where arbitral panels are interpreting and applying domestic law in order to decide treaty-based disputes, it is essential that an appellate mechanism be empowered to exercise de novo review of such critical legal findings.
It is also essential that appellate panels have the authority to correct clearly erroneous findings of fact. One important function of appellate review is to guarantee that egregious errors do not corrupt the adjudicatory process. It cannot fulfill this function if appellate panels are precluded from considering factual errors. In this respect, a “clearly erroneous” standard would be sufficiently strict to avoid the danger of an appellate panel second-guessing factual determinations. In addition, precluding appellate panels from correcting erroneous findings of fact jeopardizes the development of a correct and consistent body of legal standards because panels may misinterpret the relevant law to avoid unjust outcomes that would result from patently erroneous findings of find that they are powerless to address. Appellate panels must be authorized to correct clearly erroneous findings of fact.
Enabling Developing Country Participation
Finally, an appellate mechanism must assure that cost and other requirements do not prevent the Central American Parties to CAFTA – and potentially other developing countries – from participating in appellate proceedings. At a minimum, the mechanism must include: sufficient time to prepare and argue a case; a funding mechanism to cover litigation costs; a requirement that claimants post a bond to cover the responding State’s litigation costs should it prevail; training and capacity-building programs on international arbitration; and provisions limiting security requirements to stay awards during appeals.
We look forward to further discussions with you concerning the proposed
appellate mechanism.
| Thea Lee Assistant Director for Public Policy AFL-CIO |
Jake Caldwell Program Manager, Trade and Environment National Wildlife Federation |
| Marcos Orellana Senior Attorney Center for International Environmental Law |
Stephanie Weinberg Trade Policy Advisor Oxfam America |
| Carroll Muffett Director of International Programs Defenders of Wildlife |
Mary Bottari Director, Harmonization Project Public Citizen’s Global Trade Watch |
| Martin Wagner Director of International Programs Earthjustice |
Margrete Strand Rangnes Senior Representative, Responsible Trade Program Sierra Club |
| David Waskow Director, International Program Friends of the Earth – United States |
| cc: | The Honorable Peter Allgeier, Deputy United States Trade Representative The Honorable Alan Larson, Under Secretary of State for Economic, Business and Agricultural Affairs The Honorable Mike Leavitt, Administrator, Environmental Protection Agency The Honorable Charles Grassley The Honorable Max Baucus The Honorable Bill Thomas The Honorable Charles Rangel James Mendenhall, USTR Wesley Scholz, Department of State Joseph Ferrante, EPA |
To see the final language for the investment chapter, click here.
For more information, please contact Marcos Orellana.