Advisory Board
SCOTT C. BILLINGS Hewlett-Packard Houston, Texas
GREGORY A. BROTHERS Senior Vice President & Chief Financial Officer South Texas College of Law Houston, Texas
JOHN P. COGAN, JR. Cogan & Partners, LLP Houston, Texas
PAUL N. KATZ
King & Spalding, LLP Houston, Texas
JOHN L. KEFFER
King & Spalding, LLP London, UK
JAY D. KELLEY Jay D. Kelley, PC Houston, Texas
E. DOUGLAS MCLEOD, L.L.M. The Moody Foundation Galveston, Texas
M.A. (TONY) NUNES Cogan & Partners, LLP Houston, Texas
Contents 3 The Level of "Uniformity" Created by the Convention on Contracts for the International Sale of Goods
Garry Trillet
9 The Proliferation of Free Trade Areas: A Threat to Multilateralism? Saloni Khanderia Yadav
17 Alternative Corporate Finance: Attracting Capital Through Self-Financing and Corporate Social Reporting
Eric Engle
28 The Protection of China's Investment in Africa Under the International Investment Law Qingtao Xie
41 Colliding Worlds: E-Discovery Cutting Across All Levels of Litigation, Can International and Domestic Laws Work Together?
Matthew Steinfeld
56 Dissecting the Public Stockholding Provision: Evaluating the Benefits of an Otherwise Problematic Pillar of the WTO Bali Agreement
Ambreen Dharani
DORIS RODRIGUEZ Andrews Kurth LLP Houston, Texas
JAMES W. SKELTON, JR. The Stinemetz Law Firm Houston, Texas
Currents Summer 2014
Letter From The Editor
Currents
Dear Reader, On behalf of the Editorial Board and Members of CURRENTS: INTERNATIONAL TRADE LAW JOURNAL, it is our pleasure to present to you the Volume 22, Number 2 Edition. CURRENTS is a student-run scholarly journal committed to emphasizing timely and practiceoriented articles on international trade and economic issues. To this end, this edition features a diverse selection of works from domestic and international scholars and law students. This publication begins with an in-depth discussion of the interpretative principles of Article 7 of the CISG as it aims to further reinforce uniform interpretations and applications across all official versions of the CISG. Then we turn our focus to a critical analysis of the wave proliferation of regional trade agreements in light of the WTO’s enactment, and what those agreements mean for the multilateral process of liberalizing trade as a whole. After that, we highlight alternative corporate financing strategies, paying particular attention to employee participation, corporate accounting, and corporate accountability measures that help reduce corruption and prevent future collapses of the U.S. capital markets. Following that discussion, we shift our attention to China’s investment activities in Africa—the political and economic motivations for investing so heavily there, the mechanisms that are in place to protect China’s capital, and a survey of the Most-Favored Nation and National Treatment clauses present in BITs that China has in place with various African countries. We then consider the growing world of E-Discovery and the costs thereof that international businesses could potentially incur when facing a lawsuit, as well as providing a solution to resolve cross-border conflicts of laws and privacy concerns. Finally, we close with an analysis of the WTO’s recent Bali Package, focusing primarily on the trade facilitation and public stockholding provisions that allow Member States some flexibility in implementing programs to help establish food security and development. On behalf of the Editorial Board and Members, we would like to thank the authors who continue to provide CURRENTS with material that furthers the academic discourse and improves the work of practitioners. We would also like to thank the South Texas College of Law administration, faculty, and staff members who continue to be a source of support and advice to the Journal—in particular our Academic Advisors Associate Dean Elizabeth Dennis and Professor Cherie Taylor. We appreciate your patronage and hope you enjoy this edition of CURRENTS.
Sincerely,
CURRENTS is published Summer and Winter by South Texas College of Law.
Please cite CURRENTS as CURRENTS: INT’L TRADE L.J., Summer 2014. Please direct inquiries and correspondence to: Editorial Board
CURRENTS South Texas College of Law 1303 San Jacinto Street, Suite 219 Houston, Texas 77002-7006 E-mail: currents@stcl.edu
Copyright 2015. CURRENTS: International Trade Law Journal All rights reserved. Volume XXII, Number 2
Editorial Board Fall 2014 Editor-in-Chief Alejandra Hamilton Managing Editor Joseph Collins Articles/Notes Editors Samin Hessami Mathew Steinfeld Jennifer Whittington
Members Stephanie Clem Andrea De La Rosa Susan Frutiger Kaitlyn Garcia Patrick Harrison Ian Holcomb Levinia Lara Shelby McKechnie Erica Reyes Heather Winkles
Spring 2015 Editor-in-Chief Joseph Collins Managing Editor Samin Hessami Articles/Notes Editors Ian Holcomb Matthew Steinfeld Jennifer Whittington
Members Stephanie Clem Analisa Del Pozo Susan Frutiger Kaitlyn Garcia Patrick Harrison Erica Reyes Eric Utermohlen Heather Winkles Levinia Lara
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The Level of "Uniformity" Created by the Convention on Contracts for the International Sale of Goods G A R RY
—————————————————
I. Introduction
————————————————— It can be reasonably considered that Article 7 of the United Nations Convention on Contracts for the International Sale of Goods (CISG) is its cornerstone as it 2
encompasses the interpretative principles of the Convention.3 This article’s supreme aim is to further the underlying principle of uniformity in the CISG’s application and interpretation. Therefore, its success or failure and its duration in practice discharges
T R I L L E T
Garry Trillet (LL.M.) graduated from the CEIPI (Centre d’Études Internationales de la Propriété Intellectuelle),UniversityofStrasbourg, France, in 2013 and obtained his LL.M. in European and international Intellectual Property Law. In 2012, he graduated from the TILT (Tilburg Institute for Law, Technology and Society), University of Tilburg, The Netherlands, and obtained his LL.M. in Law and Technology. His main areas of interest are intellectual property law and legal issues brought by new technologies. —————————————————
from the respect and accurate application
II. What is Uniformity?
of the Art. 7 by the national courts and
—————————————————
tribunals of the contracting parties.4 In
Before assessing its level, it is relevant to
this perspective, the interpretation of the
know how to define uniformity.10 Pursuant to
Convention’s ambiguities is a fundamental
the wording of paragraph 1, it is argued that
question as Art. 7 immediately impacts on
the use of “regard” and “promote” by the
the accomplishment of the CISG’s purpose
drafters of the Convention show they did not
expressed in the Preamble.5
have an absolute uniformity of application
As Schwenzer said, “one of the first and
of the provisions in mind.11 The absolute
main criticisms has always been the problem
uniformity seems rather to be an idealistic
of uniform interpretation of the CISG.”6
or even a utopian aim.12 This argument is
The level of uniformity can be assessed in
also shared by Flechtner, as for him the
a positive way, but also in a negative one, by
Convention is not a uniform instrument and
showing the obstacles of this principle.7 It
because the uniformity principle is only one
is worth pointing out that the CISG was not
interpretative principle among the various
destined to form a codified system,8 but was
others enclosed in Art. 7(1).13 Therefore, the
designed to regulate the main issues of the
question of uniformity can be reworded: has
international sale of goods.9
the CISG been successful in its attempt to achieve the widest level of uniformity in its
application? —————————————————
III. Central Concept of Article 7(1)
————————————————— Honnold held that the above all essential principle of Art. 7 was that “interpretation shall respond to the Convention’s international character and to the need to promote uniformity in its application.”14 1. INTERNATIONAL CHARACTER: AN AUTONOMOUS INTERPRETATION
Global uniform law “does not want to identify itself with any legal system, because it wants to conjugate with all.”15 To keep this spirit, the duty to give regard to the international character of the Convention means that, in case of ambiguities,16 it has to be interpreted in an autonomous manner,17 i.e., independently of peculiar concepts in a peculiar legal system, with the idea of creating a common legal language.18 Otherwise, the ultimate aim of the Convention19 would be jeopardized. Art. 7(1) exhorts the courts to transcend of their national system of interpretation.20 However, Art. 7(1) does not provide a methodology, but rather defines its goals.21 Accordingly, one of the most habitual misapplications of the Convention
3
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representing the most colossal threat 22
the legislative history of the Convention.37
take into account what has already been done
to an autonomous interpretation and a
However, its value should not be taken as an
by others.45
uniform application resides in the fact
important source of interpretation as it does
There is a duty to consult foreign
that interpreters opt for an ethnocentric
not automatically mirror the actual meaning
jurisprudence46 and many courts used it,
approach,24 instead of adopting the requested
given to the Convention.38
e.g. citing respectively 3547 and 4048 foreign
23
holistic 25 one in interpreting peculiar
As shown supra, the goal of the CISG,
rulings. Nevertheless, what value should
provisions. Indeed, Honnold argued that
as well as its Art. 7, has not been entirely
foreign cases have? This point is still debated,
interpreters have “a natural tendency to read
understood. The source of the two issues
but many tribunals acknowledge them as
the international text through the lenses of
mentioned is that some tribunals and courts
merely persuasive,49 while having undoubtedly
domestic law.”27
have not yet realized that the Convention
no binding force. This represents, therefore,
However, this homeward trend has to be
has to be studied as an ensemble, “within its
another obstacle regarding the degree of
avoided at all costs, and many academics
four corners,” with due regard to its general
uniformity.50
agree.28 Otherwise, it would, firstly, produce
principles which are simply neglected, as the
outcomes that are inconsistent with the
whole treaty is “a cross-reference” to Art. 7.
26
39
40
The restrictive nature of the precedent
41
is arguable. Indeed, it is thought that if the
intended purpose of the CISG. Secondly,
Why is such uniformity hard to reach?
prior cases keep their persuasive character,
it would nourish the development of
The flexibility of the text, which is the
they would not foster the uniformity of the
divergent national interpretations within
reason why it has a large acceptance, is also
UN Treaty.51 Yet this would compensate the
the different legal systems 30 and be an
one of its faults.42 As Honnold said, lawyers
lack of mechanism to amend the Convention
encouragement to a detrimental “forum
are obliged to work with words, which are
where no legislative evolution is foreseen.52
shopping.”31 Consequently, both annihilate
equivocal by nature and unreliable tools, so
Consequently, the sole development of
the expected effects and realized efforts of
uniform results in their interpretation cannot
the agreement will reside in the judicial
uniformization.
be realistically guaranteed.43 Subsequently,
interpretation. This is why a harmonious
The best example of a wrong application
he also affirmed that uniform words do not
interpretation is again required.
in the case law to demonstrate the
always secure uniform results, especially as
—————————————————
aforementioned issue is a 2004’s case: Raw
the CISG is in force all over the contracting
Materials Inc v Manfred Forberich GmbH, which
states with entirely dissimilar economic,
was elected as the worst CISG decision in
social and cultural standards.44
twenty-five years.33 It may be summarized
—————————————————
by this sole statement: “not one word of the
The flexibility of the text, which is the reason why it has a large acceptance, is also one of its faults.
—————————————————
—————————————————
simple fashion, using a simple and forthright
29
32
courts discussion would have to be changed if [Uniform Commercial Code] Article 2 had actually been the applicable law.”35 The second most common misapplication is that individual articles are applied in an isolated fashion, without taking into account
2. NECESSITY TO PROMOTE UNIFORMITY: THE ROLE OF THE GLOBAL
the spirit and the general principles of the
JURISPRUDENCE
IV. Obstacles to Uniformity: Numerous Rationales Leading to Discrepancies in Interpretation
The primary source of conflicts in uniform laws is certainly the language used.53 The drafters attempted to set up the rules in a language. 54 The draftsmen intentionally designed the words used in the Convention to be as neutral as possible, in order to deprive
CISG.35 Additionally, Schlechtriem advocated
The uniformity goal is closely related to
such words of any domestic connotation
that the articles have to be interpreted
the international character requirement.
and therefore making them “universal” and
“teleologically,” taking into account the
Indeed, consistency in the application of a
then to achieve a common understanding.55
Convention’s unifying goal.36 In this regard,
global treaty cannot be reached without a
Efforts of devising words capable of being
the doctrine advises to take into account
uniform interpretation: the interpreters must
applied and interpreted uniformly on the
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international scene was accomplished with
In the aim of striving for uniformity, and
Indeed, one “former” important barrier
the aspiration of creating legal certainty,
what is currently a harsh weakness, it can
to apply foreign case law was their relative
consistency and predictability in international
be argued that one plausible key answer is
accessibility due to the language issue and
56
trade, common will of any legal instrument.
to build an international court for coping
the availability of international practices.75
In the same perspective, many issues
with questions of interpretation of the
To complement this system, the UNCITRAL
came from the text itself as it is not an
treaty when divergences and pitfalls occur
Digest of Case Law on the U.N. CISG
exhaustive and unique document. Indeed,
under the CISG and ultimately providing
was conceived.76 With objectivity, it can
the uniformity’s issues begin with its six
conclusive interpretations. That instance
be affirmed that CLOUT undoubtedly
equally authentic official versions. But the
could be composed of specialized persons,
promoted the uniform application and
different translations gave birth to disparities,
such as academics, commentators of the
interpretation of the CISG and the Digest
to doubts of interpretations, constituting an
Convention, and judges who often settle
will continue to encourage this promotion.77
involuntary effect. For instance, Flechtner
CISG’s disputes. 69 Such a court would
To assess the heaviness78 to be assigned
held that “the nature of language and
offer the benefit of a centralized judicial
to the overseas case law, a graduated system,
translation makes such an ideal impossible
mechanism where interpretation issues
which might be applied by a domestic
to achieve.”59 In fact, Art. 7 is by itself open
would be negated.
instance or referee, would certainly be a
to different interpretations.60 Indeed, when
—————————————————
huge step forward to increase the uniformity
comparing the wording of the French,
of the CISG.79 However, Andersen urges
the other hand, the English version utilizes
[I]t can be argued that one plausible key answer is to build an international court for coping with questions of interpretation of the treaty when divergences and pitfalls occur under the CISG and ultimately providing conclusive interpretations.
the verb “to promote” both times.65
—————————————————
Convention’s creation, there is clearly no
The second major obstacle comes from
Nonetheless, a more affordable aid
argument that can be held not to espouse
the ambiguities of the text, which has to be
for achieving uniformity is currently the
a global application.82 Since the advent of
interpreted following the above-mentioned
work of United Nations Commission on
the Internet, UNCITRAL's efforts have
two directives. What is more, another pitfall
International Trade Law (UNICITRAL),
been consolidated into an online database
to uniform application is that Art. 6 allow the
which devised a case law compendium
by PACE, which became the first website
parties to a trade contract regulated by the
(CLOUT). 70 Indeed, it has adopted 71 a
employed as a source of law for a global
Convention to derogate from it.
procedure for grouping information on
context.84 All these as well as the creation of
—————————————————
court’s decisions and arbitral awards relating
the International Sales Advisory Council85
to the CISG.72 This information is accessible
contribute to uniformity. Therefore, to carry
—————————————————
to anyone interested through summaries and
out global research is today more and more
As a result of what is stated above, it can
translations in official languages.73 The goal
at interpreters and practitioners fingertips.
be correctly and sensibly said that the issues
of this system was to give the opportunity
Nowadays, an important challenge to take up
of interpretation are the most enormous
to the persons who have to interpret the
is the hesitancy of judges to use international
barriers to uniformity, which inevitably
Convention to fulfill effectively their Art.
law to solve conflicts.86
impact on the CISG’s uniform application.68
7 duties to account for foreign case law.74
57
58
Spanish and English versions, divergences can be noticed bringing some obscurity springing from the “lexical choice” of Art. 7.61 The French and Spanish texts employ the verb “to promote”62 to refer to the principle of uniformity whereas “to assure” is chosen 63
to designate the principle of good faith. On 64
66
67
V. Perspectives
practitioners not to “weigh foreign precedents.”80 Finally, it has to be bear in mind that only consistent interpretation and application of the treaty at an international scale will ensure its aim and could then perform as a “total conflict avoidance device.”81 After more than thirty years of the
5
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—————————————————
VI. Conclusion
tool to move towards such unification. As
to the benefit of a truly uniform application
explained above, a uniform interpretation
of the CISG.
—————————————————
of the CISG is vital to achieve an identical
An international jurisprudence is crucial to
use among diverse nations.
89
The CISG is certainly the most successful global convention.91 In conclusion, it is
manage uniformity in the area of international
However, for an effective examination of
challenging to evaluate accurately the level of
trade. However, a perfect uniformity in
the foreign case law, the best way is to create
uniformity achieved until now. Nevertheless,
interpreting and applying the Convention is
a global jurisconsultorium, where international
it can be reasonably argued that the CISG
an impossible and idealist goal. However, it
interpreters collaborate and share their
reached a moderate level of uniformity,
constitutes an ideal towards which the actors
minds. In order to achieve this, judges
which can dramatically be improved by taking
of the international interpretation must be
and lawyers have to be more internationally
care of the issues mentioned throughout
attracted, where the CISG is a remarkable
open-minded, losing their domestic lenses
this essay.
87
88
90
End Notes 1. United Nations Convention on Contracts for the International Sale of Goods art. 7, April 11, 1980, 1489 U.N.T.S. 3 (entered into force Jan. 1, 1988) [hereinafter CISG], available at http://www.uncitral. org/pdf/english/texts/sales/cisg/ V1056997-CISG-e-book.pdf. 2. J o h n F e l e m e g a s , A n International Approach to the U nited N ations C onvention o n C o n t r a ct s f o r t h e International Sale of Goods (1980) as Uniform Sales Law, at 7 (2007). It constitutes the greatest accomplishment of UNCITRAL. Joseph Lookofsky, Digesting CISG Law: How Much Regard Should We Have?, 8 Vindobona J. Int’l Com. L. & Arb. 181 (2004), available at http://www.cisg.law.pace.edu/ cisg/biblio/lookofsky9.html. The rationale for its creation was to provide a uniform text of law for the international sales of goods, leading then to the paramount purpose of the unification of the law supervising the international sale of goods, among countries of different legal, social and economic systems. U niform C ommercial Law in the Twenty-first Century: Proceedings of the Congress of the United Nations Commission on I nternational T rade L aw , New York, 18-22 May 1992, at 17, U.N. Sales No. E.94.V.14 (1995) available at http://www.uncitral. org/pdf/english/texts/general/ Unifor m_Commercial_Law_ Congress_1992_e.pdf. It appears as being the latest endeavor to unify the sales laws, bringing life to a uniform law for the international sale of goods (explicitly declared in
the preamble of the Convention). United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG), U nited N ations C onvention on C ontracts for the I nt ’ l S ale of G oods [UNCITRAL], h t t p : / / w w w. u n c i t r a l . o r g / uncitral/en/uncitral_texts/ sale_goods/1980CISG.html (last visited Nov. 19, 2014) [hereinafter UNCITRAL Summary]; CISG, supra note 1, pmbl. It aims to fight against conflicts of laws and legal uncertainty created by the existence of different legal systems worldwide and national discrepancies regarding the law of sales, which all constitutes harmful barriers for the growth of the international trade. Id. 3. Phanesh Koneru, The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles, 6 Minn. J. Global Trade 105, 106 (1997), available at http:// cisgw3.law.pace.edu/cisg/biblio/ koneru.html. 4. Felemegas, supra note 3, at 6 n.19. “The parties to the CISG have agreed upon the Convention, being of the opinion that the adoption of uniform rules which would govern contracts for the international sale of goods and take into account the different social, economic and legal systems, would contribute to the removal of legal barriers in international trade and promote its development.” CISG, supra note 1, pmbl. 5. Ingeborg Schwenzer & Pascal Hachem, The CISG—Sucesses and Pitfalls, 57 Am. J. Comp. L. 457, 467
(2009). 6. This work will attempt to cover both approaches. 7. Bruno Zeller, The Challenge of a Uniform Application of the CISG— Common Problems and their Solutions, 3 M acquarie J. B us . L. 309, 310 (2006), available at http:// www.austlii.edu.au/au/journals/ MqJlBLaw/2006/14.html. 8. UNCITRAL Summary, supra note 2. 9. Shani Salama, Pragmatic Responses to Interpretive Impediments: Article 7 of the CISG, An Inter-American Application, 38 U. Miami Inter-Am. L. Rev. 225, 232 (2006), available at http://www.cisg.law.pace. edu/cisg/biblio/salama.html#iv. Recognized as principal aim by the doctrine. Id. 10. Id. 11. Bruno Zeller, CISG and the Unification of International Trade Law 36 (2007). 12. Harry M. Flechtner, The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and other Challenges to the Uniformity Principle in Article 7(1), 17 J.L. & Com . 187, 18788 (1998), available at http:// www.cisg.law.pace.edu/cisg/text/ flechtnerauthentic.html. 13. J ohn O. H onnold , U niform L aw for I nternational S ales under the 1980 United Nations Convention 15 (1999), available at http://www.cisg.law.pace.edu/ cisg/biblio/honnold.html. 14. Franco Ferrari, Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing, 15 J.L. & Com. 1, 11 (1995), (quoting Giuseppe Benedetti, Commento 6
Currents Summer 2014
all’art.
Vienna
4
della
Convenzione
di
sui contratti di vneidta
internazionale di beni mobili ,
Nuove Leggi civili commentate 9, 9 (1989).), available at http://www.cisg. law.pace.edu/cisg/biblio/2ferrari. html. 15. Martin Gebauer, Uniform Law, General Principles and Autonomous Interpretation, 5 Uniform L. Rev. 683, 686 (2000), available at http://www.cisg.law.pace. edu/cisg/biblio/gebauer.html (Clear text—unambiguous language—does not need interpretation.). 16. Id. at 686-88. Article 7 does not permit the utilization of national laws to interpret a contract if the matter is regulated by the Convention. Id. 687-88. Therefore, it is not a mistake to use merely national law and case law to fill in a gap. Id. 17. Id. at 686. A ‘lingua franca’ as suggested by Honnold. John Honnold, The Sales Convention in Action–Uniform International Words: Uniform Application?, 8 J.L. & Com. 207, 211 (1988), available at http:// www.cisg.law.pace.edu/cisg/biblio/ honnold-sales.html. 18. Helen Elizabeth Hartnell, Rousing the Sleeping Dog: The Validity Exception to the Convention on Contracts for the International Sale of Goods 18 Yale J. Int’l L. 1, 6 (1993), available at http:// cisgw3.law.pace.edu/cisg/biblio/ hartnell.html. Re: ensuring a uniform interpretation and application. Id. 19. Id. at 6–7. 20. Franco Ferrari, Uniform Interpretation of The 1980 Uniform Sales Law, 24 Ga. J. Int’l & Comp. L. 183, 200 (1994), available at http://www.cisg.law.pace. edu/cisg/biblio/franco.html. 21. See Hartnell, supra note 18, at 46; Michael J. Bonell, Ar ticle
7 , i n C o m m e n t a ry o n t h e International Sales Law: The 1980 Vienna Sales Convention 65 (1987), available at http://www. cisg.law.pace.edu/cisg/biblio/ bonell-bb7.html. 22. Hartnell, supra note 18, at 23–24. Interpreters that are principally judges, arbitrators and counsels. Id. 23. Felemegas, supra note 2, at 12. A nationalistic approach, involving the use of domestic instruments to interpret the CISG. Id. 24. Zeller, supra note 7, at 314. I.e., an international, global approach. Id. 25. Id. 26. Honnold, supra note 17, at 208. 27. See Felemegas, supra note 2, at 12; Hartnell, supra note 18, at 17–18; Honnold, supra note 17, at 208; Zeller, supra note 7, at 310. 28. Felemegas, supra note 2, at 23. 29. Id. at 12. 30. Id. at 10-11. 31. Raw Materials Inc. v. Manfred Forberich GmbH & Co., KG, No. 03 C 1154, 2004 WL 1535839, at *1, *3 (N.D. of Ill. July 7, 2004). 32. Joseph Lookofsky & Har r y Flechtner, Nominating Manfred Forberich: The Worst CISG Decision in 25 Years?, 9 V i n d o b o n a J.Int’l Com. L. & Arb. 199, 200 (2005) available at http://www. cisg.law.pace.edu/cisg/biblio/ lookofsky13.html. 33. Id. at 204. 34. Zeller, supra note 7, at 309. 35. Hartnell, supra note 18, at 48 (quoting Peter Schlechtriem, Unification of the Law for the International Sale of Goods, in XIIth International Congress of Comparative Law (German National Report) 121, 127 (1987)). See also J acob S. Ziegel & Claude Samson, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods, (1981), available at http://www.cisg.law.pace.edu/ cisg/wais/db/articles/english2. html (mentioning that the first interpretation rule adopted by Art. 7 is the reference to the finality of the text and to the spirit of the subject matter). 36. Ziegel & Samson, supra note 35, ¶¶ 1-2. 37. J. Bauerreis, Les lacunes de la Convention de Vienne, Seminar on Private Int’l Bus. L., 12 (2003), available at http://www.docstoc. com/docs/164575981/II-leslacunes-internes-de-la-CVIM. 38. Zeller, supra note 7, at 309. 39. Id. 40. A l e x a n d e r S . K o m a r o v, Inter nationality, Uniformity and Obser vance of Good Faith as Criteria in Interpretation of CISG:
Some Remarks on Article 7(1), 25 J. L. & Com. 75, 76-77 (2005). 41. See Flechtner, supra note 12, at 20506. 42. Honnold, supra note 17, at 207. 43. C a m i l l a B a a s ch A n d e r s e n , Furthering the Uniform Application of the CISG: Sources of Law on the Internet, 10 Pace Int’l L. Rev. 403, 404 (citing John Honnold, The 1980 Sales Convention: Can Uniform Words Give Us Uniform Results? 2 Juridisk Tidsskrift 3, 3-14 (1990).). 44. Honnold, supra note 13, at 1516. This work only assesses the issue of employing the foreign jurisprudence. But there are two other instruments to address the potential threats to divergent interpretation: the use of the doctrine (academic writings) and the legislative history (‘travaux préparatoires’). See generally id. (discussing the use of scholaraly articles and legislative history for inter pretation); Franco Ferrari, Interprétation Uniforme de la Convention de Vienne de 1980 sur la Vente Internationale, R. Int’l Droit Comparé 813, at 829-30, 833-36 (1996), available at http://www. persee.fr/web/revues/home/ prescript/ar ticle/ridc_00353337_1996_num_48_4_5312 (discussing the use of scholarly articles and legislative history for interpretation). 45. Gyula Eörsi, General Provisions, International Sales: The United Nations Convention on Contracts for the International Sale of Goods 2-1, 2-5 (Matthew Bender ed., 1984), available at http://www.cisg.law.pace.edu/ cisg/biblio/eorsi1.html. 46. Franco Ferrari, International Sales Law and the Inevitability of Forum Shopping: A Comment on Tribunale di Rimini, 23 J. L. & Com., 169, 172 (2004). See generally Tribunale Di Rimini 26 Nov. 2002, Al Palazzo S.R.L. v. Bernardaud Di Limoges S.A. Case, 23 J. L. & Com. 193 (2004) (translating the case). 47. Franco Ferrari, Recent Italian Court Decisions on the CISG, 2001 Int’l Bus. L. J. 2, 224, 224-25 (2001). See Trib. di Vigevano, 12 July 2000, UNCITRAL, CLOUT Case 378, Giur. it. 2000, I, 280 (It.); Ferrari, supra note 46, at 172; Tribunale Di Rimini 26 Nov. 2002, Al Palazzo S.R.L. v. Bernardaud Di Limoges S.A. Case, 23 J.L. & Com. 193, 195 (2003). 48. Ferrari, supra note 46, at 174. 49. See Loookofsky, supra note 2, at 183-89. 50. Id. at 185-86. 51. Troy Keily, Good Faith & the Vienna Convention on Contracts for the
International Sale of Goods (CISG), 3 Vindobona J. Int’l Com. L & Arb. 15, 33 (1999). 52. Amy H. Kastely, Unification and Community: A Rhetorical Analysis of the United Nations Sales Convention, 8 Nw. J. Int’l L. & Bus. 574, 592-93 (1988). 53. Bonell, C ommentary on the International Sales Law: The 1980 Vienna Sales Convention, at 17 (C.M. Bianca & Michael J. Bonell eds., 1987). 54. Bonell, supra note 21, at 74. 55. Zeller, supra note 7, at 311. 56. Franco Ferrari, Inter prétation Unifor me de la Convention de Vienne de 1980 de 1980 sur la vente Internationale, 48 R.I.D.C. 813, 814 (1996), available at http://www. persee.fr/web/revues/home/ prescript/ar ticle/ridc_00353337_1996_num_48_4_5312. 57. Kastely, supra note 52, at 592. The official versions are: English, French, Spanish, Chinese, Russian and Arabic texts. Id. 58. Flechtner, supra note 12, at 206. 59. See CISG, supra note 1, art. 7(2). 60. Salama, supra note 9, at 234. 61. I d . a t 2 3 5 . T r a n s l a t i o n : “promouvoir” – “promover.” Id. 62. Id. Translation: “assurer” – “asegurar.” Id. 63. Id. 64. Id. The importance of such differences will eventually be judged by the courts. Michael F. Sturley, International Uniform Law in National Courts: The Influence of Domestic Law in Conflicts of Interpretation, 27 Va. J. Int’l L. 729, 731-32 (1987). 65. Bauerreis, supra note 37, at 11-13. 66. Salama, supra note 9, at 240. 67. Id. 68. Id. 69. Search CLOUT Cases, UNCITRAL, h t t p : / / w w w. u n c i t r a l . o r g / clout/showSearchDocument. do?lf=898&lng=en (last visited Nov. 1, 2014) [hereinafter Search CLOUT]. 70. Report of the U.N. Commission on Int’l Trade Law, 21st Sess. April 11- April 20, 1988, ¶¶ 98-109 U.N. Doc. A/43/17 (June 27, 1988), available at http://www.uncitral. org/pdf/english/yearbooks/yb1988-e/vol19-p3-18-e.pdf. In its 21st session. Id. 71. Digests, UNCITRAL, http:// www.uncitral.org/uncitral/en/ case_law/digests.html (last visited Nov. 1, 2014). 72. UNICTRAL, http://www.uncitral. org (last visited Nov. 1, 2014). 73. Camilla Baasch Andersen, Furthering the Uniform Application of the CISG: Sources of Law on the Internet, 10 Pace Int’l L. Rev. 403, 406 (1998).
74. Id. at 405-06. 75. Search CLOUT, supra note 69. 76. Komarov, supra note 40, at 80. 77. Salama, supra note 9, at 237. Precedential value. Id. 78. Id. at 239. 79. Camilla Baasch Andersen & Francesco G. Mazzotta, The Nature of CISG Case Law: The Key to Uniformity and Many Persuasive Examples for Counsel to Draw from, in A Practitioner’s Guide to the CISG xvii, at xxi (Francesco G. Mazzotta ed., 2010). 80. Clive M. Schmitthoff, Conflict Avoidance in Practice and Theory, 21 L aw & C o n t e m p . P ro b s . 429, 452 (1956), available a t h t t p : / / s c h o l a r s h i p. l a w. d u ke. e d u / c g i / v i e wc o n t e n t . cgi?article=2684&context=lcp. Nevertheless, it could be argue that without a rule considering a divergent interpretation as an offence, no body of law can really operate as a total conflict avoidance. Id. at 454. 81. Zeller, supra note 7, at 309. 82. Albert H. Kritzer, Institute of Inter national Commercial Law, P ace L aw S ch . I nst . of I nt ’ l Commercial Law, http://www. cisg.law.pace.edu/ (last updated Oct. 2, 2014). Notably, there are ‘mirror sites’ where it is also possible to access decisions in the original language (two main languages other than English): German CISG database at http:// www.jura.uni-freiburg.de/ipr1/ cisg and the CISG-France database at http://www.jura.uni-sb.de/FB/ LS/witz/cisg.htm. 83. Andersen, supra note 73, at 407. 84. Loukas Mistelis, CISG-AC Publishes First Opinions, Pace Law Sch. Inst. of Int’l Commercial Law, http:// www.cisg.law.pace.edu/cisg/ CISG-AC.html#1 (last updated Mar. 26, 2008). This body issues valuable interpretations of several CISG’s provisions. Id. 85. Andersen & Mazzotta, supra note 79. 86. Zeller, supra note 11, at 28. 87. Peter J. Mazzacano, Harmonizing Values, Not Laws: The CISG and the Benefits of a Neo-Realist Perspective, 2008 Nordic J. of Com. L. 1, 3 (2008), available at http://www.njcl. utu.fi/index.php?issue=1_2008. 88. See John Felemegas, The United Nations Convention on Contracts for the International Sale of Goods: Article 7 and Uniform Interpretation, in Review of the Convention on Contracts for the International Sale of Goods (CISG) 115, 115265 (2002), available at http:// cisgw3.law.pace.edu/cisg/biblio/ felemegas.html.
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Currents Summer 2014
89. Vikki M. Rogers & Albert H. Kritzer, A Uniform International Sales Law Terminology, in Fetschrift fßr Peter Schlechtriem zum 70. G etburtstag 223, 228 (2003), available at http://www.cisg.law. pace.edu/cisg/biblio/rogers2. html. 90. CISG: Table of Contracting States, P ace L aw S ch . I nst . of I nt ’ l Commercial Law, http://www. cisg.law.pace.edu/cisg/countries/ cntries.html (last updated Oct. 2, 2014). As of 7 July 2010, UNCITRAL reports that 76 States have adopted the CISG, representing two thirds of the global trade, including significant economic powers. Id. However, the UK is not a contracting party. Id. 91. See Andersen, supra note 43, at 405.
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The Proliferation of Free Trade Areas: A Threat to Multilateralism? S A L O N I
K H A N D E R I A
YA D AV
—————————————————
Introduction
————————————————— The wave of regional trade agreements
————————————————— S a l o n i K h a n d e r i a -Ya d a v i s a Postdoctoral Fellow in International Commercial Law at the University of Johannesburg, South Africa.
may be traced to the establishment of
Regionalism In The Era Of Multilateralism
————————————————— To begin with, the burgeoning of regional
the World Trade Organization (WTO) 1
formation of either a customs union or a
trade agreements in the form of free
in 1995, accompanied by a surge in the
free trade area is permitted after successfully
trade areas has raised several implications
negotiation of such agreements. Contrary
satisfying the criteria laid down in Article
concerning the functionality of the
to general perceptions, these agreements
XXIV,10 and aims at further liberalizing
multilateral trading system. 15 For most,
are not limited to countries falling within
“substantially all trade” between the members
this concern revolves around whether this
the same geographical region. Hence, they
belonging to such areas. Furthermore, it is
sudden proliferation of free trade areas is
are negotiated between countries having
interesting to note that while the principle
a threat to multilateralism, mainly because
the same objective of reducing barriers
of non-discrimination in the form of the
they operate as an exception to the vital
to trade between members of such an
most-favoured nation as laid down in Article
principle of the most-favoured nation
agreement. Today, countries do not limit
I of the GATT remains the cornerstone of
treatment, causing nations within such
such regionalism to simply removing barriers
the multilateral trading system as regulated
areas to provide preferential treatment to
between members to such agreements but
by the WTO, it permits exceptions to the
other members within the area.16 To this
focus more upon deeper integration among
rule against preferential treatment when
end, where regionalism may be defined as
the members to such an agreement.
it comes to regional trade agreements.12
preferential treatment provided to nations
Albeit trade on a multilateral basis
In other words, when nations negotiate a
not necessarily within the same geographical
dominated in the era prior to the 1990’s;
4
regional trade agreement by forming either
area, by means of reducing trade barriers;17
this trend seemed to have changed drastically
a free trade area or a customs union, they are
multilateralism, on the other extreme, is
post 1990.5 Thereafter, nations began to
permitted to provide preferential treatment
the reduction of trade barriers on a non-
rapidly negotiate regional trade agreements
to other members of the area, beyond
discriminatory basis to all the members of
after the establishment of the WTO. The
what may be afforded by the schedule of
the trading system as regulated by the WTO.18
General Agreement on Tariffs and Trade
concession.13 To this end, while regional
Hence, regionalism is often perceived as
(GATT), which now forms part of the
trade agreements may either be in the form
an antithesis of multilateralism for reasons
WTO has encouraged the formation of
of a customs union or a free trade area,
that it permits discrimination in favor
regional trade agreements in the form of
regionalism in the form of the latter seems
of members belonging to such regional
a customs union or a free trade area vide
to be more prominent.14
trading groups.19 However, it is important
2
3
6
7
11
Article XXIV.8 The WTO had received
to note that such discrimination by means
approximately 585 notifications for regional
of a regional trading agreement is permitted
trade agreements on July 31, 2013.9 The
within the ambit of Article XXIV of the 9
Currents Summer 2014
GATT.20 In other words, the said Article
tariffs, but they also aim to harmonize the
whole against countries which are not party
operates as an exemption to the corner-
laws, regulations and policies pertaining to
to such agreements.38 Hence, barriers to trade
stone principle of the most-favoured nation
commerce.31 However, the most common
or in other words, external tariffs levied by
treatment in the GATT.
form of regionalism appears to be that of
the members of such regional trading blocs
In particular, Article I of the GATT, 1947
a customs union and free trade areas, and is
must not, “on the whole,” be higher than they
pertains to the treatment of most-favoured
regulated by the WTO within the scope and
were before the formation of such blocs.39
nation treatment.22 Therefore, no Member
ambit of Article XXIV.32 While both customs
However, various intricacies seem to have
is permitted to provide to another Member,
union and free trade areas endeavour to
arisen concerning the regulation of regional
treatment which is less favorable than that
eliminate tariffs and restrictive regulations
trade agreements by the GATT. For most,
provided to other Members. Hence, all
of commerce among its members, a customs
despite the fact that the GATT explicitly
foreign Member-nations must be given equal
union is different from a free trade area.33
lays down an obligation that duties and other
treatment. Nevertheless, a vital exemption
Hence, while a customs union eliminates
restrictive regulations of commerce must not
to this cornerstone principle of the GATT,
tariffs among its members, it additionally
be higher than they were for non-Members
1947 is the operation of regional trade
commits members to bind a common
to such customs unions and free trade areas,
agreements operating within the scope of
external tariff for non-members; a free trade
prior to the formation of the later; the same
Article XXIV of the GATT, 1947.24
area does not impose any such obligation.35
does not seem to be practical enough.40 This
Albeit the fact that Article XXIV merely
In other words, members of a free trade area
is mainly due to the reason that tariffs will
deals with the formation of customs union
are free to negotiate the tariffs with external
most likely be higher for non-Members after
and free trade areas as a means to negotiate
members/non-members individually.
the formation of any type of regional trading
21
23
34
36
regional trade agreements, there exist other
The formation of such customs areas and
blocs; because in practice nations tend to
forms of regional integration as well.26 For
free trade agreements operate as exemptions
bind the external tariffs for these (non)
instance, regionalism may be in the form
to the principle of most-favored nation
Members based upon the average tariffs of
of a preferential trade agreement which
treatment because they permit Members that
the Members of the customs union or free
provides preferential access to the goods
are party to such (customs) unions or (free
trade area, as the case may be.41 Therefore,
of the members of the union by lowering
trade) areas to “eliminate duties and other
while the formation of a customs union or
the tariffs for the members of the union :
restrictive regulations of commerce” with
free trade area would eliminate tariffs for
hence the tariffs would be lower than they
respect to “substantially all trade” between its
trade among the Member nations, it would
are for non-Members. On the other hand,
Members. In addition, while Article XXIV
generally increase the tariff rates for non-
regionalism may be more “refined” when
of the GATT, 1947 permits more favorable
Members.42 In particular, difficulties have
nations agree to negotiate agreements for
—————————————————
arisen due to a lack of understanding on
a common market or an economic union.
a precise definition of the elimination of
regulations and policies pertaining to
T h e fo r m a t i o n o f s u c h customs areas and free trade agreements operate as exemptions to the principle of most-favored nation treatment... .
trade and commerce. 30 Consequently,
—————————————————
constitution of the bloc is not clear.44 These
common markets and economic unions
treatment to Members of such regional
pertinent omissions of definitions and a lack
are characterized as a “step forward” and
trading blocs, it warns that such elimination
of clear jurisprudence in these vital areas
are more refined in the sense that they do
of barriers between the Members of these
concerning regional trading agreements
not merely aim at reducing or eliminating
blocs do not increase protectionism on the
have raised several doubts regarding the
25
27
28
The European Economic Union is a classic example of this form of regionalism. 29 Therefore, in this form of regionalism, member-nations agree to harmonize laws,
37
10
Currents Summer 2014
trade barriers with respect to substantially all trade between the Members.43 In addition, the necessary ingredients that constitute trade barriers being “on the whole” higher for non-Members than they were before the
governance and functionality of regional
the same line, promoting closer ties and
interests against the failure of the multilateral
trading blocs; and their consequent threat to
peaceful relations with members of the
trade regime.59 Moreover, this is against the
the effectiveness of the multilateral trading
FTA have been additional motivating factors
backdrop that nations resort to this type of
system as governed by the WTO.
to negotiate such FTAs.
Furthermore,
regional integration when negotiations in the
—————————————————
Richardson elaborates that when nations
multilateral trade regime become arduous.60
are politically empowered, they are in a
Staiger states that this is especially the case
position to engage in tariff protection
with smaller economies which must buffer
strategies. However, when nations enter
their interests in the international trading
into any form of Regional Trade Agreement
community and can best be achieved by way
—————————————————
(RTA), their political power is likely to
of regional integration.61
The last couple of years have witnessed an
be reduced.54 As a result, their ability to
Accordingly, one of the peculiar reasons
increasing trend on the part of nations to
engage in tariff protection is likely to be
behind the burgeoning of FTAs is that nations
enter into regional trading agreements in the
simultaneously diminished. This reduction
are motivated and somehow politically
form of free trade areas. In other words,
of political power is essentially diminished,
compelled to regionally integrate when other
the international community has preferred
as Richardson explains, with the conception
nations are already regionally integrated.62
the formation of free trade areas over
of trade integration between the members of
In other words, when nations regionally
customs unions.46 This sudden proliferation
the RTA.56 In such circumstances, members
reorganize themselves, they also undertake
of regional trading agreements in the
no longer remain purely independent but
to engage in trading relations with each other
form of FTAs has raised several concerns
become mutually inter-dependant; thus
on a preferential basis.63 When this happens,
regarding their effect on the functionality and
reducing political power and promoting
trade is diverted from those nations which
effectiveness of multilateral trade regulation
peace and security among the members of
are not parties to the agreement to those
as regulated by the WTO. In this context, it is
the RTA.57
countries that are parties to the agreement.64
pertinent to understand the reasons behind
—————————————————
In such circumstances, the countries which
this sudden proliferation of regional trade
are not parties to this agreement and thus
added trade concessions by other members
[O]ne of the peculiar reasons behind the burgeoning of FTAs is that nations are motivated and somehow politically compelled to regionally integrate when other nations are already regionally integrated.
of the FTA. 49 Hence, members would
—————————————————
certain other factors that compel nations
attain preferential access over one another’s
Additionally, a vast body of literature
to enter into FTAs. 67 He provides the
markets.50 In addition, nations also tend
throws light upon the fact that nations
example of MERCOSUR and states that
to prefer FTAs as they assist them in
tend to rely upon FTAs as they assist the
the member countries of MERCOSUR were
the fortification of diplomatic ties with
members of such FTAs to mould their
motivated to regionally organize themselves
members of the FTA.51 Moreover, because
bargaining power vis-à-vis other members
when requested by the United States to do
members of the FTA are closely knit due
of the international trading community.58 In
so before filing bilateral applications for
to being smaller in number, it assists in the
particular, Whalley elaborates this notion by
forming FTAs before the United States’
greater reinforcement of diplomatic ties
stating that RTAs in general assist nations
Trade Representative.68
than in a multilateral trade regime. Along
in buffering their economic and political
Motivating Factors Behind The Sudden Proliferation Of Free Trade Agreements (FTAs)
45
agreements in general and FTAs in particular. To begin, FTAs are mostly motivated by political reasons;47 nevertheless, this may not always be the case.48 However, the most compelling reason for nations to enter into a free trade area has been the advantage to
52
53
55
having trade diverted away from them tend to reorganize themselves on a regional basis.65 The tendency of nations to engage in FTAs due to the fear of being left out and having trade diverted away from them is defined by Baldwin as the “domino effect of regionalism.”66 Baldwin also identifies
Another factor prompting countries
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Currents Summer 2014
to enter into FTAs has been underlined
form of consensus amongst Members over
Despite the fact that FTAs have been
by Bhagwati and Panagariya along with
certain issues such as agriculture, trade,
successful in bringing about closer trading
Mansfield,
which is the tendency of
and competition policy, and investment
relations between members to the group;80
countries to foster their trade relations with
policy, to name a few.78 Hence, nations have
it has been felt by crusaders of the WTO
one another especially before multilateral
begun to perceive regionalism as an easier
that the existence of FTAs are a serious
trade negotiations in the WTO.71 Doing
alternative when compared to multilateral
threat on the functionality of the former.81
so enables countries that are parties to the
trade negotiations under the ambit of the
For most, they (the promoters of the
FTA to strengthen their relations vis-à-vis
WTO. This perception among nations of
WTO) perceive FTAs to have caused trade
one another and thereby improve their
the multilateral trading system is further
diversion.82 The concept of trade diversion
bargaining position during multilateral trade
strengthened by the fact that consensus is
as an impediment to the goals of free trade
negotiations.72 Along the same line, Finger
much easier to reach when nations reorganize
was first underscored by Viner in 1950.83 In
demonstrates the bargaining position of
themselves on a regional basis. Consequently,
particular, Viner drew attention to the fact
countries like Uruguay and Paraguay among
the membership is smaller and development
that FTAs are capable of trade diversion
others in comparison to countries like India,
levels are more closely alligned, as compared
and thus harmful to the cause of multilateral
South Africa, and Australia.73 They state
to a multilateral basis.
trading system because their existence
that the former group of countries were in
—————————————————
influences the members of the FTA to switch
a better position to represent their interests
[N]ations have begun to perceive regionalism as an easier alternative when compared to multilateral trade negotiations under the ambit of the WTO.
from more efficient members outside the
Along the same line, there has been an
—————————————————
this respect, the concept of FTAs appears to
observation that FTA participation improves
Furthermore, while several motivating
be detrimental to the interests of multilateral
the member-nations’ “standing,” especially
factors contribute to the likelihood that
trade policy as regulated by the WTO
during multilateral trade disputes.75 This
countries of the international community
because while the WTO aims at creating
is because of the additional ability of the
will engage in regional talks, the above
and promoting free trade, FTAs have the
FTA to increase the member-nations’
mentioned are some of the most prominent
tendency to divert trade away from the non-
market-power as compared to nations who
factors influencing nations to reorganize
members of the group, to members of the
are non-parties to the FTA. With this in
themselves on a regional basis. However,
FTA.86 Nevertheless, Viner draws attention
mind Staiger explains that in the event a
the sudden proliferation of FTAs has raised
to the fact that a FTA enhances the ability to
dispute arises between Members of the
several eyebrows among the advocates of the
create trade when the Members of the FTA
WTO in which one of the Members to
multilateral trading community because the
begin to divert trade from less efficient non-
the dispute is also a member of an FTA,
former diverts attention away from the latter.
members to more efficient Members of the
the FTA membership directly increases the
—————————————————
FTA.87 In such circumstances, FTAs instead
69
70
during the Uruguay Round of negotiations leading to the formation of the WTO than the latter group of countries because the former group was actively involved in FTAs.74
76
79
group to less efficient members within the FTA.84 In other words, the members of the FTA begin to monopolize the importation and exportation of products and services from and to the members of the FTA.85 In
of diverting trade are able to create trade
of stagnation that the Members of the WTO
Do FTAs Operate as an Imediment to the Functioning of the Multilateral Trading Regime?
currently face, given the failure to reach any
—————————————————
concept of trade diversion caused by
leveraging power of such Member in the existing WTO dispute.77 However, one of the most prominent reasons for countries to become parties to FTAs has been the level
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Currents Summer 2014
because of their ability to improve welfare gains.88 In this context, a FTA generally has the ability to divert as well as create trade. In a similar context, Viner’s prominent
FTAs has been supported by Bhagwati and
of various rules and regulations governing
markets of developed countries in order to
Panagriya who echo the view that in most
FTAs.
resist pressure from the latter.104
cases concerning FTAs, trade diversion is
cornerstone aspect of transparency in the
more likely the dominant effect rather than
multilateral trading regime.
99
This is bound to impede the
Despite the common perception that the recent proliferation of FTAs has had
trade creation.89 Another vital aspect of trade
As a result of this tangle of FTAs,
serious implications on the functionality of
diversion on free trade is the capability of such
promoters of the multilateral trading
the multilateral trading regime in general,
trade diversion caused by FTAs to be able to
regime have expressed a deep concern
and that of free trade in particular; the
90
significantly impact trade in intermediates.
over the sudden proliferation of FTAs that
proliferation of FTAs has also been able
Because trade is so fine-sliced by nature
threaten the purpose of free trade under
to benefit the cause of free trade in some
and because nations in the international
multilateralism.
This is due to the fact that
instances.105 Primarily, the birth of FTAs
community are so mutually dependant on
—————————————————
has led to deeper integration among the
each other, they often rely on each other
members of the FTAs. 106 Hence, even
the regional agreement rely only on other
As a result of this tangle of FTAs, promoters of the multilateral trading regime have expressed a deep concern over the sudden proliferation of FTAs that threaten the purpose of free trade under multilateralism.
members for the supply of intermediates or
—————————————————
For instance, issues such as investment,
inputs.93 As Krishna points out, the members
the multilateral trade regime appears to be
intellectual property and competition policy
of the FTA qualify for the preferences only
in great crisis, exemplifued by the series
have been successfully addressed under the
when they adhere to the rules of origin of
of impasses after the Doha Round of
auspices of various FTAs.108 Referring to the
that agreement.94 In other words, members
multilateral trade negotiations.101 In addition,
multilateral trading regime under the auspices
must even purchase intermediates or inputs
the burgeoning of FTAs have led to a type
of the WTO, the above-mentioned issues
from other members to such FTA in order
of snowballing effect wherein nations are
have either been difficult to negotiate upon:
to be able to receive the benefits of the
either actively pursuing to join a FTA in view
given the diverging interests of the developed
FTA. Analogously, FTAs have often been
of the increasing threats of trade diversion
and developing nations; or have derived their
perceived to have a substantial impact on
away from their jurisdictions; or forming
“normative” value from FTAs.109 It is with
the prices of exports.96 When members of
their own FTA with nations undergoing the
this in mind that FTAs are considered to
the FTA begin to divert trade away from
similar pressure of being left out from the
reinforce a better climate for international
non-members to members of such a FTA,
FTA driven by the fear of trade diversion.102
trade. In addition, FTAs are easier and less
the export prices of the excluded members
In agreement, Baldwin elaborates this
cumbersome to conclude given that they
will most likely rise.
phenomenon by pointing out that nations,
involve the interests of a lesser number of
Another effect has been that FTAs have led
and particularly developing nations, face
trade partners.110
to the operation of simultaneous regulatory
some form of compulsion to join FTAs
In agreement, Summers corroborates the
regimes.98 In such circumstances, there is
with developed countries in order to prevent
aspect that FTAs can often be beneficial
bound to be some form of overlapping
losing out access to the markets of the latter
to the cause of free trade; and states that,
in the regulation of FTAs with a plethora
countries.
If joining seems difficult, then
"Economists should maintain a strong, but
of rules and regulations in place; leading
developing nations tend to form their own
rebuttable presumption in favour of all lateral
to a “spaghetti bowl” impact with a mix
FTA with nations who lose out on access on
reductions in trade barriers; whether they be
for supplying intermediates or inputs in the production of the final product. When 91
trade is multilateral, countries party to the multilateral trade regime would rely on each other for the supply of inputs.92 However, when trade becomes regional, members of
95
97
100
103
though FTAs have allegedly led to some form of trade diversion away from the members of the international community to the members of such FTA, they have, at the same time been able to successfully address the issues and areas which have reached a log jam under the auspices of the WTO.107
13
Currents Summer 2014
multi-, uni-, bi-, tri-, plurilateral. Global
it is not true that FTAs are completely
of the international trade community, and as
liberalization may be best, but regional
impeding the benefits of the multilateral
such, either persuit becoming a member of
liberalization is very likely to be good." In
trade regime, but in fact have a mixed
a certain FTA, or forming a FTA with the
addition, Barfield refers to this aspect pointed
impact on the latter. For most members,
remaining countries in order to prevent a
out by Summers, and states that
the benefits of FTAs greatly outweigh the
loss of access to a certain country’s market,
tradeoffs because of the creation of deeper
thereby leading to this snow-ball effect. For
integration, the ease of negotiations and
most, this recent surge has been due to the
also the fact that FTAs serve as a pedestal
frustration caused among various countries
to multilateral trade negotiations on certain
by the multilateral trade regime regulated by
issues like investment, competition, and
the WTO. As a result, while countries have
the environment. In addition, while it is
been unsuccessful at reaching any form of
true that FTAs create multiple regulatory
consensus on a plethora of issues under the
regimes which often clash with one another,
WTO, they prefer to opt for the formation
and in this sense negate the benefits of
of a FTA which is able to address such issues
coherent system of rules and regulations
easily. Against this backdrop, FTAs have
under the dispute settlement procedures of
been a more viable option for a majority of
the WTO, the former is able to successfully
countries of the international trade regime,
complement and supplement the goals of
of-late. Thus, despite the fact that the
the WTO (i.e. free trade).
formation of FTAs carry with them a maze of
—————————————————
tribulations, such as the persistent allegations
For most members, the benefits of FTAs greatly out weigh the tradeoffs because of the creation of deeper integration, the ease of negotiations and also the fact that FTAs serve as a pedestal to multilateral trade negotiations on certain issues like investment, competition, and the environment.
of trade diversion and multiple regulatory
—————————————————
moving forward; while the WTO seems to
—————————————————
be at a crossroads.115 Therefore, even though
111
Summers
and
other
proponents of regionalism base their case on a belief that total trade creation will outweigh trade diversion in most cases, that the multilateral process is too slow to produce substantial progress toward further trade liberalization; and that regional free trade ar rang ements will allow some nations to speed up liberalization and ultimately produce a self-reinforcing process toward more open markets.112 Consequently, despite the common perception that FTAs tend to hamper the goals of multilateral trade;113 this may not really be the case given the current scenario with respect to multilateralism under the ambit of the WTO, which seems to be at a crossroads. Hence, with nations finding it difficult to reach some form of consensus within the WTO, FTAs are certainly the next best option. Furthermore, even though FTAs do have their trade-offs and do, in some respects, lend themselves to trade diversion towards the members of the group by their very nature; it must be acknowledged that they certainly lead to deeper integration and are able to offer consensus on issues in which the multilateral trade regime currently finds difficult to agree.114 In other words,
Concluding Remarks
that countries have as long as consensus amongst members continues to be arduous under the ambit of the multilateral trade regime. It is under this framework that FTAs must be viewed as being complementary and supplementary to the WTO rather than a threat to multilateralism. This is because FTAs have in the recent past kept international trade and trade-related issues,
the views on the FTAs have clearly been
—————————————————
diverse, it must be understood that they are
The recent wave of FTAs have raised several
undoubtedly here to stay.
doubts about the efficacy of the multilateral trading regime under the auspices of the WTO. While this sudden proliferation has been mainly driven by “inclusion pressures” of countries that do not want to be left out 14
Currents Summer 2014
regimes, they are in fact the only solution
End Notes 1. Marrakesh Agreement Establishing the Worlsd Trade Organization, Apr. 15, 1994, 1867 U.N.T.S 154 [hereinafter Mar rakesh Agreement]; see Parthapratim Pal, Regional Trade Agreements in a Multilateral Trade Regime: An Over view 1 (Int’l. Dev. Econ. Assocs., Working Paper No. 03/2008), available at http:// www.networkideas.org/feathm/ may2004/survey_paper_rta.pdf. 2. Pal, supra note 1. 3. Lawrence Summers, Regionalism and the World Trading System, Fed. Res. Bank of Kansas City Econ. Symp. 295, 299 (1991), available at http:// www.kansascityfed.org/publicat/ sympos/1991/S91summe.pdf. 4. Pal, supra note 1. 5. Id. 6. Id. 7. Marrakesh Agreement, supra note 1. 8. Id. ¶ 1. 9. Regional Trade Agreements, World T r a d e O rg [WTO], http:// www.wto.org/english/tratop_e/ region_e/region_e.htm (last visited Oct. 3, 2014). 10. Marrakesh Agreement, supra note 1, ¶ 1. 11. General Agreement on Tariffs and Trade art. XXIV:8(a)(i), Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194 [hereinafter GATT]. 12. Id. at art. I. 13. Id. art. I:2. 14. Roberto V. Fiorentio et al., T he C hanging L andscape of R egional T rade A greements : 2006 Update 5 (WTO Secretariat Discussion Paper No. 12, 2007), available at http://www.wto. org/english/res_e/booksp_e/ discussion_papers12a_e.pdf. 15. Pal, supra note 1. 16. GATT, supra note 11, art. XIV. 17. J ohn H. J ackson , T he W orld Trading System: Law and Policy of I nternational E conomic Relations 158-159 (2nd ed., 1997). Jackson defines multilateralism as an approach to international trade law, which in recognizing the interaction of a large number of nations, also recognizes the dangers implicit in dealing with nations on a bilateral basis. Id. at 158. Against this backdrop, the treatment of most-favourednation ensures a standard of equal treatment to other Member nations in the international trading relations. Id. 18. Id. 19. Pal, supra note 1, at 2.
20. Jagdish Bhagwati, Regionalism and Multilateralism: An Overview, in N ew D imensions in R egional I ntegration 22, 25 (Jaime De Melo & Arvind Panagariya eds., 1995). 21. Id. 22. GATT, supra note 11, art. I. 23. Id. 24. Regional Trade Agreements – The WTO’s Rules, WTO, http:// www.wto.org/english/tratop_e/ region_e/regrul_e.htm (last visited Nov. 21, 2014). 25. See GATT, supra note 11, art. XXIV. 26. Pal, supra note 1, at 2. 27. Regional Trade Agreements and Preferential Trade Agreements, WTO, http://www.wto.org/english/ tratop_e/region_e/rta_pta_e.htm (last visited Nov. 23, 2014). 28. Pal, supra note 1, at 2. 29. Id. 30. Id. 31. Id. 32. Id. at 3. 33. See id. at 2. 34. Id. 35. Id. at 2. 36. See GATT, supra note 11, art. XXIV:8. 37. Id. 38. Caroline Freund & Emanuel Ornelas, Regional Trade Agreements 40 (Ctr. for Econ. Performance, Discussion Paper No. 961, 2009), available at http://cep.lse.ac.uk/ pubs/download/dp0961.pdf. 39. G AT T, s u p r a n o t e 1 1 , a r t . XXIV:5(a) (“… duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect to trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more trade restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement…”). 40. Edward D. Mansfield & Helen V. Milner, The New Wave of Regionalism, 53 Int’l Org. 589, 613 (1999), available at http://web.stanford. edu/class/polisci243b/readings/ v0002093.pdf. 41. Id. at 593. 42. Id. at 592. 43. Rémi Lang, Renegotiating GATT Article XXIV – a Priority for AfricanCountries Engaged in NorthSouth Trade Agreements 4 (African Trade Policy Ctr., Working Paper No. 33, 2006), available at http://
www.uneca.org/sites/default/ files/publications/atpc33.pdf. 44. Mansfield & Milner, supra note 40, at 607. 45. Soamiely Andriamananjara, Customs Unions, in Preferential Trade Agreement Policies for Development: A Handbook 111, 111-12 (Jean-Pierre Chauffour & Jean-Christophe Mau eds., 2011). 46. See id. To date there are about twenty customs unions that are in force [with four in the pipeline]. Id. at 112 tbl. 5.1. On the other hand, a whooping 585 notifications have been received by the WTO’s Committee on Regional Trade Agreements. Regional Trade Agreements, supra note 6. However, this number [585 notifications] does not represent the real number as many FTA’s remain in force but are not currently notified to the WTO Committee on RTAs. Id. Hence, the actual number of existing FTAs is much more. Id. Hence the list of FTA would be non-exhaustive. Id. Interestingly, the figures would not be very reliable given the fact that some FTAs would not be in force anymore. Nevertheless, on the whole, the number of FTAs in force is still more than the number of customs unions in force. Id. 47. Andriamananjara, supra note 45, at 111. 48. Id. 49. Bhagwati, supra note 20, at 545. 50. Id.; See Raquel Fernandez & Jonathan Por tes, Retur ns to Regionalism: An Analysis of NonTraditional Gains from Regional Trade Agr eements, 12 W o r l d Bank Econ. Rev. 197, 197-220 (1998), available at http://wwwwds.worldbank.org/external/ default/WDSContentSer ver/ IW3P/IB/2000/02/23/00 0178830_98111703545037/ Rendered/PDF/multi_page.pdf; Paul Krugman, Regionalism Versus Multilateralism: Analytical Notes, in N ew D imensions in R egional Integration 58, 58-79 (Jamie de Melo & Arvind Panagriya eds., 1993); Edward D. Mansfield, The Proliferation of Preferential Trading Arrangements, 42 J. Conflict Resol. 523, 523-43 (1998); and John Whalley, Why Do Countries Seek Regional Trade Agreements?, in The Regionalization of the World Economy 63-83 (Jeffrey A. Frankel ed., 1998); for discussions of how preferential access to other member’s markets has been a
motivating factor to negotiate RTA’s. 51. J ayat i G h o s h , R e g i o n a l i s m , Foreign Investment and C ontrol : T he N ew R ules of the G ame O utside the WTO 11 (2004), available at http:// www.networkideas.org/feathm/ feb2004/Jayati_Ghosh_Paper.pdf. 52. Martin Richardson, Endogenous Protection and Trade Diversion, 34 J. Int’l Econ 309, 319 (1993). 53. Id. 54. Id. at 310. 55. Id. 56. Id. at 310, 319. 57. See id. at 319 58. See, e.g., Whalley, supra note 50, at 72. 59. See id. at 71. 60. Id. at 73-74, 82. 61. See generally Kyle Bagwell & Robert W. Staiger, Reciprocity, Non-Discrimination and Preferential Agreements in the Multilateral Trading System, 17 Eur. J. Pol. Econ. 281, 281-325 (Feb. 1997), available at http://www.nber.org/papers/ w5932 (discussing that nations will regionally integrate to accomplish their interests). 62. See generally Richard Baldwin, A Domino Theory of Regionalism (Nat'l Bureau of Econ. Res. Working Paper No. 4465, 1993), available at http://www.nber.org/papers/ w4465 (discussing the domino effect of regional integration created by political motivations). 63. Id. at 2. 64. Id. 65. See id. at 1-2. 66. Id. 67. Id. 68. See id. 69. Jagdish N. Bhagwati & Arvind Panagariya, Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes?, in T he E conomics of Preferential Trade Agreements 28 (Jagadish Bhagwati & Arvind Panagarvias eds.1996), available at http://academiccommons. columbia.edu/catalog/ ac%3A100250. 70. Mansfield, supra note 50, at 527. 71. Id.; Bhagwati & Panagaria, supra note 69. 72. Masahiro Kawai & Ganeshan Wignaraja, Asian FTAs: Trends, Prospects, and Challenges 5 (Asian Dev. Bank Working Paper No. 226, 2010), available at http:// w w w. u n . o r g / e s a / f f d / m s c / regionalcooperation/ADB_WPs. pdf. 73. See generally J. Michael Finger et al.,
15
Currents Summer 2014
The World Bank, The Uruguay R ound : S tatistics on T ariff Concessions Given and Received (1996), available at http://wwwwds.worldbank.org/external/ default/WDSContentSer ver/ IW3P/IB/1996/08/01/000009 265_3961219092819/Rendered/ PDF/multi0page.pdf (providing measures of reductions, bindings, and levels of most-favorednation customs tariff rates to show bargaining position). 74. See id. 75. Whalley, supra note 50, at 72. 76. Id. 77. See generally Kyle Bagwell & Robert W. Staiger, The WTO: Theory and Practice (Nat'l Bureau of Econ. Res. Working Paper No. 15445, 2009), available at http://www.nber.org/ papers/w15445 (discussing the bargaining position created by the dispute settlement system of the WTO); see also Robert E. Hudec, Enforcing International Trade L aw : T he E volution of the M odern GATT L egal S ystem (1993) (discussing the evolution of the WTO’s dispute settlement system); Press Release, WTO Director General Mike Moore, The WTO’s Unique System of Settling Disputes Nears 200 Cases in 2000 (June 5, 2000), http://www.wto.org/english/ news_e/pres00_e/pr180_e.htm. (expressing confidence in the ability of the WTO’s dispute settlement system). 78. See Bryan Mercurio, The WTO and its Institutional Impediments, 8 Melb. J. Int’l L. 198, at 203, 205, 221 (2007), available at http://138.25.65.17/au/journals/ UNSWLRS/2007/46.html. 79. Pal, supra note 1, at 7. 80. Dep’t of Foreign Affairs and T r a d e , A s i a -P ac i f i c E c o n . Coop., An Australia-USA Free Trade Agreement: Issues and Implications 1 (2001), available at http://www.sice.oas.org/TPD/ USA_AUS/Studies/MonashU_e. pdf. 81. WTO, 2007 WTO Public Forum: “H ow C a n T h e WTO H e lp H arness G lobalisation ?” 130 (2008), http://www.wto.org/ english/res_e/booksp_e/public_ forum07_e.pdf. 82. Id. at 131-32. 83. Bhagwati & Panagariya, supra note 69, at 4-5 (citing Jacob Viner, The Customs Union Issue (1950)). 84. Id. 85. Id. at 22-27. 86. See Arvind Panagariya, Preferential Trade Liberalization: The Traditional Theory and New Developments, 38 J. E con . L iterature 287, 287-
to complement and supplement the multilateral trading regime. Id. 109. Id. 110. Id. 111. Summers, supra note 3, at 296. 112. T. N. Srinivasan, Regionalism and the World Trade Organization: Is Nondiscrimination Passé?, in The WTO as an International Organization 329, 336-337 (Anne O. Kruger ed., 1998), available at http:// www.econ.yale.edu/growth_pdf/ cdp767.pdf (quoting Claude Barfield, Regionalism and U.S. Trade Policy, in The Economics of Preferential Trade Agreements 136 (Jagdish Bhagwati & Arvind Panagaryiya eds., 1996)). 113. Bhagwati & Panagariya, supra note 69, at 4-5. 114. Srinivasan, supra note 113, at 341. 115. Pascal Lamy, Dir.-Gen., WTO, Address to Humboldt-Viadrina School of Governance in Berlin (June 26, 2012), available at http:// www.wto.org/english/news_e/ sppl_e/sppl239_e.htm.
331 (2000), available at http:// www.columbia.edu/~ap2231/ technical%20papers/SURVEY4with-Figures.pdf. 87. Pravin Krishna, Preferential Trade Agreements and the World Trade System: A Multilateralist View, in G lobalization in an A ge of Crisis: Multilateral Economic C ooperation in the T wenty First Century 131, 139 (Robert C. Feenstra & Alan M. Taylor eds., 2014). 88. Id. 89. Bhagwati & Panagariya, supra note 69, at 7. 90. Krishna, supra note 88, at 143. 91. Id. 92. OECD, Directorate for Food, Agric. and Fisheries & Trade Directorate, Agricultural Policies in OECD Countries: A Positive Reform agenda ¶ 41, OECD Doc. COM/ AGR/TD/WP(2002)19/FINAL (Nov. 6, 2002), available at http:// www.oecd.org/officialdocuments/ publicdisplaydocumentpdf/?docl anguage=en&cote=com/agr/td/ wp(2002)19/final. 93. Krishna, supra note 88, at 143. 94. Id. 95. Id. 96. Id. 97. Id. at 143-44 (citing Won Chang & L. Alan Winters, How Regional Trade Blocs Affect Excluded Countries: The Price Effects of MERCOSUR, 92 Am. Econ. R. 889, 889-904 (2002)). 98. Richard Baldwin, Multilaterilising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade 33 (Nat’l Bureau of Econ. Research, Working Paper No. 12545, 2006), available at http:// www.nber.org/papers/w12545. pdf. 99. Id. 100. Id. at 1. 101. Krishna, supra note 88, at 156. 102. Richard E. Baldwin, The Causes of Regionalism, 7 W orld E con . 865, 877-878 (1997), available at http://graduateinstitute.ch/ files/live/sites/iheid/files/ sites/ctei/shared/CTEI/ Baldwin/Publications/Chapters/ Regionalism/Causes_of_Reg_ WE97.pdf. 103. Id. at 870-71. 104. See, e.g., id. at 870-71, 878. 105. Summers, supra note 3, at 299. 106. Id. at 297. 107. Id. at 299-301. 108. Pascal Lamy, Dir.-Gen, WTO, Address to the Confederation of Indian Industries in Bangalore, India (Jan. 17, 2007), available at http://www.wto.org/english/ news_e/sppl_e/sppl53_e.htm. Mr. Pascal Lamy additionally highlights the fact that RTA’s have been able 16
Currents Summer 2014
Alternative Corporate Finance: Attracting Capital Through Self-Financing and Corporate Social Reporting E R I C
E N G L E*
Eric Engle, Dr. Jur., J.D., D.E.A., LL.M., is a freelance legal researcher and legal translator; he has worked for Harvard Law School, and has taught law at the University of Tartu, Estonia and at the University of Bremen, Germany. “You know a cultural movement is real when the money men get on board. In just the past year a broad swath of financiers - venture capitalists, hedge funds, investment banks, public pension funds, and even stodgy insurers - have begun sinking billions of dollars into producers of ethanol, fuel cell superbatteries, microscopic bugs that turn glucose into plastic, environmentally friendly pesticides, anything that might tap into the green craze. Saving the planet, protecting America, doing God’s work, cynically exploiting a feel-good trend - call it what you will. Wall Street sees money to be made. —Emily Thornton & Adam Aston, Wall Street’s New Love Affair, Businessweek (Aug. 13, 2006), http://www.businessweek.com/ stories/2006-08-13/wall-streets-new-loveaffair. —————————————————
Introduction
————————————————— Systematic cor r uption and financial accounting fraud1 via special purpose entities2 caused a collapse of the United States (U.S.)
Source: CSR Experts, Auch Triple-Bottom-Line-Ansatz genannt, http:// www.csr-experts.at/dreisaulenmodel.htm (last visited May, 21 2015).
capital market in 20023 and again in 20084
employee participation, alternative theories
due to a combination of war-debt and broad
of corporate accounting, and corporate
ranging, if not systematic corruption (Enron,
accountability oriented around a stakeholder
WorldCom, Madoff, Halliburton/KBR no-
theory of the corporation to try to address the
bid contracts, Bear-Stearns, AIG, Lehman
problems of capitalization of corporations
etc) and accounting fraud. Corruption on
on the U.S. market. Employee participation
capital markets caused a drop in demand
may also have a desired secondary effect of
for securities resulting in a lack of capital for
introducing co-determination, and improved
business, which in turn entailed economic
supervision within the U.S. corporation,
recession.6 Thus, capital in the form of
improving the internal governance of the
credit, usually as bank loans, is currently
U.S. corporation. Co-determination does
somewhat difficult to obtain. This article
not exist currently in U.S. corporation law.8
5
7
looks at methods of alternative financing via 17
Currents Summer 2014
—————————————————
understanding of capital markets15 and the
open market;27 entrenched management
tax system.16 Employees also had possibly
discourages takeovers, denying shareholders
—————————————————
rational or accurate, but certainly pessimistic
the potential takeover premium from proxy
The principle form of self-financing this
views of the risks of ESOPs to their own
contests and tender offers. 28 However,
article examines is the Employee Stock
savings and of their ability to participate
from a German point of view, managerial
Ownership Plan (Aktienbelegschaften) in
in or profit from ESOPs.17 Interestingly,
entrenchment itself is not a problem. 29
U.S. law.
employees felt themselves able to grasp
First, on the German market there are fewer
the ESOP concept itself, even though it
hostile takeovers30 and shareholders are
1. EMPLOYEE STOCK OWNERSHIP PLANS
seems evident from their assessment of
concentrated, not dispersed, alleviating the
(AKTIENBELEGSCHAFTEN)
their own potential and the market that
agency problem.31 In fact, from a German
employee understanding of capital markets
perspective, managerial entrenchment can
generally is somewhat limited. Employee’s
be good because entrenchment enables
lack of concern about the tax advantages
management to focus on producing higher
of ESOPs may be justified: while ESOPs
quality goods at lower prices and selling
do enjoy favorable tax treatment, the tax
those products to a larger and larger client
credit or deduction is generally small.20 The
base rather than on transaction costs of
most important tax advantage of ESOPs
take-over or be taken-over.32 ESOPs have
is deferred taxation, a concept which is
been used in the U.S. as a successful anti-
generally too complex or remote for most
takeover defense.33 ESOPs are also used
workers to understand or care about.21
as alternatives to pension plans,34 and offer
I. Alternative Financing
18
Employee stock ownership plans (ESOPs) (Belegschaftsaktien) 9 are an instrument in the U.S. capital market, which can and should be used to attain co-determination and to improve the corporation’s access to capital. ESOPs are a defined contribution plan (hereinafter referred to as pension plan) which invest primarily or exclusively in qualifying employer securities. ESOPs 10
provide advantages to the corporation both from a tax perspective and from a capital formation perspective. Employee ownership of the shares of the company may improve corporate governance through greater worker input about business practices, supervision and feedback.11 A survey of employees found the most significant attractions of owning their employer’s stock through ESOPs are profit sharing and strengthening the link of employer and employee interest;
12
employment retention (keeping one’s own job) was also very attractive reason for employees to want to invest in or be partially paid for by ESOP shares.13 Employees are less concerned about whether the ESOP might boost productivity and were unconcerned with the tax or retirement advantages.
14
Those priorities are consistent with the usual employee’s honest but unsophisticated
19
To a German ordo-liberal or corporatist perspective, the strength of ESOPs is that
While workers do not regard the tax
they overcome the worker-capital conflict,
incentives as worthwhile, ESOPs in fact
aligning the interests of capital and labor
present real advantages to the corporation
together to achieve the common business
from a tax and corporate finance perspective.
purpose of production and distribution of
ESOPs are interesting as a method to defer
high quality low cost goods.22 ESOPs are thus
employee compensation. ESOPs can be
thought to increase productivity, to empower
adopted as a pension plan (ERISA), which
workers, and to improve the economy.
defers taxation until such time as the pension
23
ESOPs definitely offer tax advantages
starts to pay out.35 ESOPs can also be used
of deferred taxation and tax deductions to
as security to obtain bank loans: leverage.36
the corporation (not the shareholder) on
Furthermore, a good argument can be
distribution.24 Furthermore, ESOPs do in
made that ESOP distributions represent
fact link worker and management interests
a (long-term) capital gain: they are stock
together. However, the key motive for
distributions, not interest (they may carry
management to provide ESOPs has been
dividends, depending on the corporation).37
the use of the ESOP to avoid hostile take-
ESOPs are thus a true instance of human
overs and entrench management.26 From
capital. Payments by the corporations into
an American perspective, managerial
the ESOP pension plan are tax deductible
entrenchment is bad, because it reduces
by the corporation: “The firm may deduct
the value of the corporation on the
contributions, up to twenty-five percent of
25
18
Currents Summer 2014
particular advantages for raising capital.
all compensation paid to a plan’s participants,
Payouts of corporation dividends into an
portfolio is most obviously illustrated with the
from its taxable income. Moreover, income
ESOP may be deducted by the corporation
Enron corporate fraud scandal. When Enron
generated by the pension plan is tax deferred
under Internal Revenue Code (IRC) §
was exposed as fraudulent and collapsed in
and is only taxed on distribution, and then
404(k); However, IRC § 162(k) disallows
2001, employees’ pension plans, which had
only after realization – the sale of the stock,
deductions for costs in connection with
been entirely or nearly entirely invested in
i.e. its liquidation into cash.39
redemptions,50 and IRC 404(k)(5)(A) allows
Enron stock, were also wiped out.57 ESOPs
ESOP pension plans are also interesting
the Secretary of the Treasury to disallow
“concentrate an even larger portion of each
from a corporate finance perspective.
deductions for dividends which are in
participant’s retirement savings in employer
ESOP shares placed in a pension plan trust
substance, an avoidance or evasion of
stock. There are roughly six times as many
may then be used as security against which
taxation.
Likely, the Internal Revenue
401(k) participants as ESOP participants,
money may be borrowed from a bank.40
Service (IRS) is considering the case where
but the ESOP participants have about
Thereto, payments of interest on loans
the corporation pays dividends on its stock,
three times as much money invested in
are considered an ordinary and necessary
and the ESOP then uses the dividend
employer stock.”58 Although ESOPs do
business expense and thus may be deducted
payment to purchase more stock from the
increase worker ownership and potentially
from the corporation’s taxable income.
corporation.
could be used to emulate co-determination,
”38
41
49
51
Thus, ESOP pension plans present
Although the ESOP is not the only type
ESOPs also create an agency problem where
real advantages in terms of taxation and
of pension plan which may hold employer
corporate insiders can “advance their own
corporate finance. ESOPs result in greater
securities, it is the only plan which may
interests at the expense of the workers.”59
worker ownership of the corporation and
borrow funds to do so and becomes thereby
United Airlines is another example of
42
increase the corporation’s access to capital.
a leveraged ESOP. Of course, if employees
a non-diversified employee pension plan
This results in the desired conjunction
can be persuaded to co-sign loans, that is to
collapsing. When United Airlines went
of worker and management interests and
be responsible for a surety (Burgschaft) on
bankrupt, 2 billion dollars of employee
potentially even co-determination.
bank loans secured by the ESOP, that may
shareholder net present value invested in
be advantageous for securing bank credit on
United shares of stock was lost.60 Foster
the basis of the ESOP.
& Gallagher, Inc. is another example
43
Corporate buybacks of ESOP stock may however face recharacterization by the tax
52
authority as a hidden dividend. When the
Despite their potential advantages to
where an undiversified ESOP pension plan
corporation buys back its shares from the
workers and management both from tax
collapsed leaving the employees with no
employee that is clearly a realization of
and corporate finance perspectives, ESOPs,
retirement benefits.61 While ESOPs can
income to the employee who has sold their
especially leveraged pension plan ESOPs,
be a tool to emulate co-determination and
stock and is a taxable event. However, the
are sometimes understandably criticized as
attain self-financing through equity or as
recharacterization of this realized income as
risking the employee’s pension in a non-
security to debt financing, these examples
a hidden dividend and thus as income instead
diversified investment.53 The risk of investing
of pension fraud show that the ESOP does
of capital is questionable. Long-term capital
into a leveraged ESOP pension plan is that
not immunize the U.S. corporation from
gains in the U.S. enjoy a reduced tax rate
the pension plan is not diversified. Prudent
the problem any prudent German investor
under U.S. law. Thus, recharacterizing the
stock market investors hold diversified
in the U.S. capital market must consider.
stock buyback as a hidden dividend basically
portfolios – that is, they own several different
Caveat emptor!
doubles the tax the employee must pay.
types of stock in different businesses and
Whether such a payment is a hidden dividend
markets. 55 Diversification protects the
(ordinary income) or (long-term) capital gain
investor if one of the stocks in which they
will depend on the actual facts of the case
are invested goes bad.56
44
45
46
47
and even on the court one is in.48
54
The problem with an undiversified pension
2. STOCK OPTIONS
Another possible way to obtain financing and compensate workers while aligning
19
Currents Summer 2014
worker and managerial interests is the use of stock options. An option is the right 62
to purchase a given product at a given price during a given time. Stock options 63
are often used by start-ups to incentivize highly talented but low-paid personnel to perform. Their advantage is deferral of 64
taxation until the option is exercised and the stock thereafter sold.65 The granting of an option is not a realization of income
Regular and gains Capital Regular and capital tax ratesGains for 2013Tax Rates for 2013: Single Taxpayer
Married Filing Jointly
tax treatment of dividend income is the
Capital Gain Tax Rate
result of a Bush era tax reform that was set
$0 - $36,250
$0 - $72,500
0%
to expire in 2013 but was in fact extended
$36,250 - $200,000
$72,500 - $250,000
15%
$200,000 - $400,000
$250,000 - $450,000
15%
(keyword: “fiscal cliff ”).82
$400,001+
$450,001+
20%
Add to this the fact that interest paid on loans is considered an ordinary and necessary
Capital Gains Tax Rate Increases in 2013, Asset Preservation Incorporated, http://apiexchange. com/index_main.php?id=8&idz=236 (last visited Dec. 22, 2014).
business expense and thus deductible from gross income83 and the result is that U.S.
TaxRates Rates Unmarried Individuals: Tax onon Unmarried Individuals:
law strongly favours debt financing over
$0 to $8,925
10%
equity financing and disfavors dividend
and so is not taxable. The exercise of the
$8,926 to $36,250
15%
distributions, which distorts the U.S. capital
option to purchase the corporation’s stock is
$36,251 to $87,850
25%
market.84
a realization event to the issuing company,67
$87,851 to $183,250
28%
—————————————————
but is not a taxable event to the buyer. It is
$183,251 to $398,350
33%
only when the employee both exercises his
$398,351 to $400,000
35%
66
68
or her option and sells his or her stock that he or she realizes income and is subject to taxation.
69
3. TAXATION AND DEBT/EQUITY (LOANS VERSUS STOCKS)
II. Alternative Accounting: The Triple Bottom Line:85 Corporate Social Reporting
>$400,000 39.6% Isaac M. O’Bannon, 2013 Federal Income Tax Tables Released, CPA Practice Advisor (Jan. 15, 2013), http://www.cpapracticeadvisor.com/ news/10853734/2013-federal-income-tax-tablesreleased.
————————————————— A major factor in the U.S. stock market crashes
Another significant distortion of the U.S. capital market is the fact that U.S. corporate
of 2002 and 2008 was fraudulent accounting: “cooking the books.”86 We can thus justifiably
dividends are subject to double taxation,
consider whether alternatives or supplements
The U.S. tax structure somewhat distorts
first as income to the corporation and
to the usual generally accepted accounting
the U.S. capital market; European investors
then as income to the taxpayer. President
principles (GAAP) are necessary or desirable.
and managers need to know about these
Bush introduced a law in 2003 to allow a
Attempts to develop a stakeholder approach
distortions. The U.S., like Germany and
tax credit for dividend payouts to cure the
to corporate accounting center on the idea
France, treats long-term capital gains
problem of double taxation.76 IRC § 243
of sustainable business measured by a
favorably in tax terms.70 The logic is that
provides that a corporation may apply a
“triple bottom line” accounting (“driefacher
favorable taxation of long-term capital gains
tax deduction to offset dividend income to
Bilanz”) 87 and sustainability reporting
encourages capital formation and longer
it from another corporation.77 70% of the
(“Nachhaltigkeitsberichterstattung”).88
term investment.71 The qualifying period for
dividend is deducted if the corporation owns
The idea of sustainable development
a “long-term” capital gain in the U.S. is only a
less than 20% of the corporation paying
star ted as a United Nations (U.N.)
year.72 Furthermore, favoring passive income
out the dividend.78 80% of the dividend is
initiative. 89 “Sustainable development
as “capital gains” over ordinary income of
deducted if the corporation owns 20 to 80%
seeks to attain environmental protection,
active labor (workers) is regressive taxation.73
of the stock of the corporation paying the
economic growth and poverty reduction,
Another effect of favouring capital gains is
dividend.79 If the corporation owns more
as well as social development.” 90 These
to cause businesses to seek to recharacterize
than 80% of the shares of the corporation
goals are to be attained by way of open,
gains from income as long-term capital
paying the dividend then it is granted a 100%
transparent and participative governance.91
gains,74 which also distorts the market. The
tax deduction for the dividend.80
Sustainable development is also linked to
75
tax schedule is produced below and shows
Payments of dividends by corporations to
the idea of intergenerational responsibility.92
that long-term capital gains enjoy significant
individuals in the U.S. are currently taxed at
Sustainability entails “meeting the needs
but unfairly advantageous tax treatment:
the same rate as capital gains.81 The favorable
of the present without compromising the
20
Currents Summer 2014
ability of future generations to meet their
by marketing considerations, which lead
to maximize shareholder profit, even at
own needs.”
businesses to self-regulate.
The rise of
the expense of other stakeholders such as
This seems to be the root of what has
ethical investing is also a factor which gives
workers, banks, suppliers, customers, the
since emerged as the “triple bottom line”
incentives to companies to provide corporate
public and the environment.120 “Proponents
accounting, (“people, planet, profit”).94 The
responsibility reports.103
of social responsibility claim that social
93
102
“triple bottom line” dates from 1994 and
The problem with triple bottom line
responsibility signals increased ethical
considers safety, health and the environment,
accounting is that there is little established
behavior by managers which, in turn,
including human rights and diversity. “Triple
accounting methodology to implement it.
may have a positive influence on a firm’s
95
104
bottom line reporting aims to highlight the
One searches in vain for GAAP standards,
105
reputation.” 121 However, it is uncertain
view that a company’s consideration of
actual balance sheets,106 or even sketches or
whether in fact social responsibility influences
only financial matters as an indicator of its
outlines of proposed methodologies to take
economic value of the corporation’s shares
success is inadequate.” The corporation’s
into account qualitative information which
of stock.122 In the case of the Enron scandal,
annual report should somehow account for
affects profitability but is not expressed
social responsibility did not mitigate the
intangibles in human resources (“people”
or able to be expressed as monetized
negative market returns to Arthur Anderson
i.e. workers and their communities) and the
quanta in dollars or euros.
One can
clients following the exposure of the fact
environment (“planet”)97 as contributing
however find social reports of at least
that Arthur Anderson’s auditing practices did
to a more accurate understanding of the
some companies, although the reports108
not expose the fraud committed by Enron’s
company’s market profile and providing
are definitely not following a GAAP or
managers.123 However, despite this cautionary
context for the final bottom line, profitability.98
government mandated methodology. 109
fact, there is an intuitively powerful idea that
The objective of triple bottom line reporting
Most sustainable development tools are for
people are more committed to and work
“is to foster transparency and establish a
macroeconomic policy analysis by political
harder for organizations which align with
baseline for future information sharing with
entities rather than for microeconomic actors
their own internal values.124 Yet that is an
stakeholders.”99
such as businesses.110 For example, social
intangible factor which may not be able to be
audits as practiced in India
directly or even objectively measured.
96
For example, a company with a terrible
111
107
are generally
environmental record might look highly
efforts by the government to track and verify
profitable on a balance sheet yet face
distribution and impact of social programs112
potential tort liability and cleanup costs
(and are fairly well developed there) as part
making the enterprise unsustainable both
of the anti-corruption struggle113 and to
economically and ecologically. Such a
attain greater transparency.114 In contrast,
problem is intangible due to the uncertainty
in Europe115 and North America116 social
of liability and would not show up in the
audit may be thought to be an (intangible)
usual double-entry accounting. However,
audit of a company’s social policies (e.g.
even though intangible and uncertain, the
the company’s diversity/gender policies
environmental liability here is material
positions and actions).117 Still, some intangible
because the consequence of the problem
accounting indicators are working their way
would be a monetary liability, whether in
into corporate annual reports 118 and as
tort or for the cleanup costs. Complete
templates for use by businesses issued from
disclosure100 is the answer.
government administrative agencies.119
Triple bottom line reporting in practice101
Another problem with sustainable business
has resulted from increased government
practices is that they may be unprofitable
regulations requiring reporting as well as
and thus conflict with the duty of directors
1. ENVIRONMENTAL ACCOUNTING AND DISCLOSURE
Environmental Accounting is thus an emerging discipline, which seeks to account for all factors which effect the environment.125 Environmental liabilities such as polluting activities may well be economically relevant due to the fact that governments regularly impose clean up costs on companies that pollute, as well as the potential liability in tort.126 U.S. federal securities laws require publicly traded companies to disclose environmental and other regulatory compliance and liabilities publicly in registration statements and annual reports filed with the Securities
21
Currents Summer 2014
and Exchange Commission (SEC).127 This
basic standards for enterprises in fields such
disclosure must be complete and accurate;
as child labor and human trafficking.
otherwise it entails liability for the false or
social disclosure,
misleading statements of material fact.
Prudent businesses want healthy employees.
As to
Compliance serves both as a preventive
listing statements, proxy
mechanism, to prevent wrongdoing in the
solicitations and annual reports often require
first place, and as a defense by the corporation
Environmental reporting ought to
disclosure of materially relevant information,
against wrongdoing, as affirmative evidence
provide an ecological environmental impact
and voluntary disclosure of information
that the corporation was not in fact tainted
statement, information about any recycling
must also be factually accurate.
by a culture of corruption.
and renewable energy programs including
are relevant which will influence investors’
a monetary accounting assessment of any
investment decisions. 138 Disclosure and
economies in production, distribution,
transparency are themes of contemporary
or sales as well as any synergies thereby
corporate law.139 Thus, the Sarbanes-Oxley
The social audit should also include
obtained as to enterprise goodwill (tangible
Act of 2002 (the Act) requires, e.g., publically
information on customer relations and
client list), intellectual property (patents,
traded companies to disclose whether they
after sales service care, any fair trade143 or
trade-marks, certifications) and networking
have a code of good conduct to govern
organic144 certifications and the certifying
with other market actors. The environmental
financial auditors.140
agency or agencies and compliance with
128
136
135
137
Facts
report should indicate any environmental certifications129 and the certifying agency or
B. Marketing
anti-corruption standards. A. Diversity
agencies. These are all tangible, verifiable
The problem with sustainability is a question of economics: its answer will
facts which have economic consequences and
In a globalized marketplace clients and
also be market-based. Customers may
for which metrics and reporting standards
employees will necessarily come from diverse
well be socially irresponsible. “As long
could be developed. Extent of depletable
racial, religious, ethnic, gender and age
as customers continued to care more
resources, depletion thereof in the year
groups. Any business wants good relations
about cost, brightness, and strength of
accounted for and expenditures to renew
among its employees and the ability to market
their paper than about the pulp mills’
the depleted resource could also readily and
products as widely as possible. Diversity
chlorinated organic numbers, most mills used
justifiably figure into corporations reporting
may also be increasingly represented in the
regulatory requirements as their chief guide
and disclosure. However, standardization
corporate boardroom,
though there is a
to environmental performance.”145 While
of what to report, when, how and to
de facto “glass ceiling.”142 In any event, for
companies wish to maintain goodwill, an
whom largely do not yet exist: there is as
reasons of employee relations and marketing
intangible asset reflected in client lists and
yet no GAAP standard for environmental
diversity, training regularly features in
repeat business, protection of “reputational
reporting.
corporations and should be seen as part of
capital,” is generally seen defensively, as a
the corporation’s social audit.
matter of maintaining market share.146 If
130
2. SOCIAL AUDIT (PEOPLE: WORKERS, COMMUNITY)
Social audits of the business’s activities and environment 131 “require a firm to evaluate the societal impact of its decisions on stakeholders and others”132 including “an assessment of a firm’s social performance and how the fir m makes responsible corporate governance decisions.”133 Social Accountability 8000 (SA8000)134 presents
141
As far as the social audit goes, the company
entrepreneurs are unable to take advantage of
should report on its labor relations policies
a diverse marketplace interested in fair-trade,
and standards: trainings offered and required
sustainable products, let alone economize
to employees on safety, workplace accidents
on energy efficiency and recycling to reduce
and rates of accidents, work schedules (hours
waste costs, then other entrepreneurs will
and times of employment), availability of
displace those “dinosaurs.” That is, we
flex time, over-time pay, possibilities of
can adapt the Boston Consulting Group
telecommuting, child-care arrangements on or near work-site, and availability of health insurance and psychological counselling. 22
Currents Summer 2014
company matrix to sustainability:
Sustainable
Adaptable Apples(star) Inadaptable Amish (cash cow) Source: Author
Unsustainable Sunflowers (question mark) Dinosaur (dog)
Adapting the BCG Matrix:
goals which are vague or even unattainable
Applying the SWOT Matrix to sustainability
also reduces commitment.153
Strengths Weaknesses Opportunities Threats
Existing infrastructure, Developed Technology Non-Renewable Synthetic oil, Solar, Wind, Fracking, Tar Sands Alternative Energy, Nuclear, Terrorism, War
Source: Author
in the petroleum industry: 3. HOW TO IMPLEMENT THE TRIPLE BOTTOM LINE
The methodology of triple bottom line reporting and accounting is as yet undeveloped.147 Strategies to implement a triple bottom line methodology have centered on corporate social responsibility, rankings and checklists, shareholder activism, social audits, social investment funds and voluntary codes of conduct.148 Here, we briefly examine some of the existing methods for implementation of the sensible idea that employees, customers, the community and the environment are all relevant business considerations and are to be cared for by a prudent sustainable business. A. Setting Learning Goals
One difficulty with implementing triple bottom line accounting is that the task will be unfamiliar, frequently difficult to measure and may be uncomfortable to those who are not adaptive.149 Management’s imposition of (vague? attainable?) goals from above may result in change - but also may lead to resistance.150 While profit is tangible, gender diversity awareness in employee relations and marketing is difficult to measure, for a concrete example.151 Being forced to undertake complex tasks such as gender diversity awareness reduces goal commitment.152 Likewise, being tasked with
T h u s, t o p - d o w n i m p o s i t i o n o f
gearing-up framework.”159 C. Check Boxes
sustainability may not be the best method to make the business more profitable through
One of the problems with triple bottom
improved employee relations, ecological
line accounting is that the measured goods
economization, innovation and marketing
are intangibles, which makes setting goals
opportunities. Instead, setting learning goals
and measuring performance difficult. One
as opposed to performance goals is much
solution to this problem is to use a “check-
more effective: “Empirical research in both
box” approach to auditing with lists of
education and organizational behavior has
tasks and performance measures.160 This is,
found that mastery/learning goals are usually
however, only a partial solution.161
superior to performance goals in complex tasks.”154 Goals such as “Make the business
D. Amnesty Box
more energy efficient and report how you did that” are better than “Reduce expenditures
Another innovative method is to provide
by 5%” because they enable the employee
employees an “amnesty box” where they can
to act creatively and do not compel the
deposit contraband, complaints or any other
employee to lie.
thing they wish to anonymously express. The understanding is that amnestied items
B. "Gearing" a Sustainable-Business Plan
will not result in employer sanctions of the person who submits them. Amnesties seek
Another way to implement sustainability is to “gear” the business plan. In the
to expose and solve the problem rather than to punish or blame.
first stage, the company confirms its compliance with legal standards for labour
E. The Right Mix
and environmental practices imposed by the state.155 This obtained, the business
A mix of learning goals, non-balance
then moves on to improve its practices to
methods (surveys, check boxes, training
become more ecologically efficient (less
feedback) and SA-8000 can be used together
waste, more recycling).
Having complied
to implement the triple bottom line and
with the law and reduced expenditures
“can lead to increased goal commitment
by economizing ecologically, in the next
and effective organizational commitment”162
phase the business seeks to partner with
resulting in greater “customer satisfaction,
government as well as private actors to
productivity, profit, employee retention, and
innovate new sustainable solutions.157 The
employee safety.”163 Although many social
business then seeks to integrate sustainability
and environmental factors are intangible and/
principles into strategy and processes to
or indirect, they nevertheless can have market
obtain competitive advantage and to create
consequences for the businesses either
value for its stakeholders.
For an example
as opportunities for economization (e.g.,
in practice, Nike “explicitly follows the
recycling, renewables) or in marketing (e.g.,
156
158
23
Currents Summer 2014
diversity). The challenge is to develop methods
reporting requirements as well as in corporate
Developing standards and methods for
and rules which are objective and able to be
financing.
corporate social reporting is in corporation’s
implemented to improve business practices.
A U.S. corporation could be structured to
self-interest. Technological innovation and
—————————————————
emulate the German two-tier board structure
globalization will inevitably lift the planet out
with strong co-determination, notably by
of cyclical recession. Capitalism is a process
—————————————————
taking advantage of Employee Stock Option
of “creative destruction.” The question is
Due to systematic corruption, the U.S.
Plans as a tool for self-financing (capital)
how to restructure corporate and financial
federal budget and U.S. capital markets
and obtaining outside-financing (loans).
relations so as to prevent another recession
were devastated by the worst recession since
Efficiencies in employee relations, economies
as well as how to take advantage of the
1929.
Restructuring a global economy on
in production, as well as investment and
opportunities the recession created. This
a firmer foundation requires innovations
sales opportunities can all be discovered
work has suggested some ideas thereto.
in corporate governance and corporate
through diligent corporate accounting.
III. Conclusion
164
End Notes 1. Lauren J. Aste, Reforming French Corporate Governance: A Return to the Two-Tier Board, 32 Geo. Wash. J. Int’l L. & Econ. 1, 33 (1999) (“One of the major problems facing corporate governance today is directors’ use of accounting methods that, although not wholly illegal, are intended to mislead shareholders into believing that corporate value is greater than it actually is.”). 2. Cherie J. Owen, Board Games: Germany’s Monopoly on the Two-tier System of Corporate Governance and Why the Post-Enron United States would Benefit form its Adoption, 22 Penn St. Int’l L. Rev. 167, 169 (2003). Special purpose entities “financed Enron’s activities, shifted debt from Enron’s books, and hid Enron’s credit risk. These SPEs were used in many different ways to disguise risk and debt, and to create the appearance of liquidity and profitability.” Id. 3. Id. at 170-71 (WorldCom announced in June, 2002, that it had overstated earnings by over $3.8 billion in the five previous quarters. This overstatement was in part due to a strategy of treating operating costs as capital investments.... WorldCom’s market capitalization fell from over $115 billion to less than $1 billion. ... In the spring of 2002, Adelphia Communications admitted that it had guaranteed loans of $2.3 billion to family members of its controlling shareholders. In June, 2002, Adelphia filed for protection under Chapter 11 bankruptcy laws, causing its stock to fall from a high of nearly $28 per share to a low of $0.01 per share... In 2002, the
former CEO of Tyco International was indicted on charges of state sales tax evasion. The indictment, coupled with concerns about the use of corporate funds for the personal benefit of the CEO and general counsel of the corporation, caused Tyco International’s market capitalization to fall by $100 billion... Global Crossing Ltd. filed for bankruptcy, the former chairman and founder of the corporation was questioned regarding sales of over $700 million of his stock in the corporation in 1999. At the time of the sale, the stock had reached a high of $60 per share. However, by the end of 2001, the company filed for bankruptcy following allegations that the corporations’s revenues were inflated due to exchanges that were without economic substance.”). 4. Id. at 169. 5. See id. at 169-71; Michael Mandel, Madoff and the Global Economy, B usinessweek (Dec. 14, 2009), http://www.businessweek.com/ stories/2008-12-14/madoff-andthe-global-economybusinessweekbusiness-news-stock-market-andfinancial-advice; John H. Cochrane & Luigi Zingales, Lehamn and the Financial Crisis, Wall St. J., http:// online.wsj.com/articles/SB10001 424052970203440104574403144 004792338 (last updated Sept. 15, 2009, 9:44 AM); Tony Capaccio, KBR to Get $568 Million Army Order as Federal Agency Alleges Kickbacks, Bloomberg (May 5, 2010, 11:01PM); Joseph E. Stiglitz & Linda J. Bilmes, The True Cost of the Iraq War: $3 Trillion and Beyond, W ashington Post (Sept. 5, 2010), http://www.
washingtonpost.com/w p-dyn/ content/ar ticle/2010/09/03/ AR2010090302200.html. 6. Owen, supra note 2, at 167-68. 7. Karen E. Klein, Funding a New Small Business? Don’t Bother With Banks, B usinessweek (Feb. 13, 2014), http://www.businessweek.com/ articles/2014-02-13/funding-a-newsmall-business-dont-bother-withbanks. 8. Alan Dignam & Michael Galanis, The Globalization of Corporate Governance 412 (2009). 9. Svenja Deich, Aktienoptionen, Ottoschmidt 1, 3 (2004), available a t h t t p : / / w e b. a r c h i v e . o r g / web/20050115170156/http:// www.aus-innovativ.de/media/ Aktienoptionen.pdf (“Die Vergabe von Belegschaftsaktien ist die traditionelle Methode der Mitarbeiterbeteiligung. Dabei erwirbt das Unternehmen eigene Aktien über die Börse/im Freiverkehr, schafft genehmigtes Kapital oder erhöht sein Kapital bedingt und bietet den Mitarbeitern an, Aktien des eigenen Unternehmens zu Sonderkonditionen zu erwerben. Dabei werden in der Regel Rabatte zwischen 20 % und 40 % gewährt, wobei ab dem Jahr 2002 bis zu 154 Euro Rabatt jährlich steuer- und sozialversicherungsfrei sind, § 19 a Abs. 1 EStG (bis dahin DM 300.-). Zumeist werden bestimmte Zeiträume oder Stichtage zum Verkauf der Belegschaftsaktien vorgesehen.”). 10. Steven J. Arsenault, Aesop and the ESOP: A New Fable about Dividends and Redemptions, 31 Va. Tax Rev. 545, 548 (2012). 24
Currents Summer 2014
11. Sean M. Anderson, Risky Retirement Business: How ESOPs Harm the Workers they are Supposed to Help, 41 Loy. U. Chi. L.J. 1, 5 (1999) (“The first type of argument, once common but currently rare, asserts that ESOPs promote ‘democratic capitalism’ by turning the great mass of workers into owners of capital and reducing wealth and income disparities. The second, more current argument is that ESOPs empower worker-participants with a greater sense of ownership and commitment with respect to their employers and their work. In turn, the argument goes, this changed attitude leads to increases in worker satisfaction and productivity, which enable employers to keep workers employed for longer and to compensate them better.”). 12. Id. 13. Id. 14. Id. 15. Michelle Brown et al., Employee Participation in Employee Shar e Ownership Plans: The Law, Company Objectives and Employee Motives, 25 Austl. J. Lab. L. 1, 4 (2012) (“Ninety seven per cent of respondents either agreed or strongly agreed that the company sought to show its employees that they were valued by the company. Other common objectives were: sharing financial success with employees (95.5%); aligning employee interests with shareholders interests (94.9%); retaining employees (92%); and attracting employees (81.8%). The seventh most popular objective was encouraging increased productivity (76%). The four least common
objectives for having the employee share plan were: utilising the tax concession advantage (32.6%); facilitating additional savings by employees for retirement (31.1%); raising capital (6.7%); and inhibiting takeovers (2.2%).”). 16. Id. 17. Id. at 13 (“In relation to commonly perceived disadvantag es of employee share ownership, respondents most frequently agreed with the statement ‘if your company does badly, [ESOPs] put your savings at risk’ (48.2%), followed by ‘hard work cannot affect share price’ (41.3%), ‘it takes too long before gaining from [participation]’ (29.4%) and ‘it’s too hard to find the money to participate’ (24.0%) ...Only a minority felt that ESOPs ‘are very difficult to understand’ (19.3%), ‘give a better deal to the company than the workers’ (16.8%), ‘tie you down to one employer’ (9.7%) and ‘weaken trade unions in the company’ (5.6%).”). 18. Id. 19. Id. 20. Id. at 21-22. 21. See id. at 14-15. 22. See Agustin J. Ros, Profits for A ll ?: T he C ost and benefits of the Employee Ownership 91 (2001). See also Sebastian Dullien & Ulrike Guérot, The Long Shadow of Ordoliberalism, European Council on Foreign Relations (July 27, 2012), http://www.ecfr.eu/article/ commentary_the_long_shadow_ of_ordoliberalism. (discussing ordoliberalism). 23. Brown et al., supra note 15, at 20 (“There is a large body of literature which has proposed rationales for employee share ownership. Some of these rationales include improving workplace productivity (as a result of employees feeling that they have a direct interest in the performance of the company and/ or through lowering monitoring costs by aligning employee interests with those of the company); promoting workplace cooperation and harmony through reducing the ‘them’ and ‘us’ mentality between employers and employees; enhancing industrial democracy through bringing employees into corporate governance; increasing employees’ understanding of how the economy is run; providing employers and employees with greater flexibility in determining the nature and mix of remuneration packages; contributing to national s av i n g s t h r o u g h p r ov i d i n g employees with an additional avenue for savings and investment;
promoting innovation, particularly in small and medium unlisted companies and sunrise industries; and facilitating succession planning in small businesses through enabling employee buyouts.”). 24. Myron S. Scholes & Mark A. Wolfson, Employee Stock Ownership Plans and Corporate Restructuring: Myths and Realities 7 (Nat’l Bureau of Econ. Research, Working Paper No. 3094, 1989), available at http:// www.nber.org/papers/w3094.pdf. 25. Id. at 11. 26. Id. at 3 (“There is a large body of literature which has proposed rationales for employee share ow n e r s h i p. S o m e o f t h e s e rationales include improving workplace productivity (as a result of employees feeling that they have a direct interest in the performance of the company and/or through lowering monitoring costs by aligning employee interests with those of the company); promoting workplace cooperation and harmony through reducing the ‘them’ and ‘us’ mentality between employers and employees; enhancing industrial democracy through bringing employees into corporate governance; increasing employees’ understanding of how the economy is run; providing employers and employees with greater flexibility in determining the nature and mix of remuneration packages; contributing to national s av i n g s t h r o u g h p r ov i d i n g employees with an additional avenue for savings and investment; promoting innovation, particularly in small and medium unlisted companies and sunrise industries; and facilitating succession planning in small businesses through enabling employee buyouts.”). 27. Randall Morck et al., Management Ownership and Market Valuation: An Empirical Analysis, 20 J. Fin. Econ. 293, 311-12 (1988), available at http://scholar.harvard.edu/files/ shleifer/files/mgt-own-mkt-val. pdf. 28. Id. at 301, 313. 29. Owen, supra note 2, at 184-85. 30. F ranklin A llen & D ouglas G ates , C omparing F inancial Systems 100 (2001). 31. See Owen, supra note 2, at 179. 32. Dalida Kadyrzhanova, A Theory of Preemptive Entrenchment 1 (Jan. 2007) (unpublished working paper), http://www.rhsmith.umd. edu/files/Documents/Centers/ CFP/PreemptiveEntrenchment. pdf. 33. Scholes & Wolfson, supra note 24, at 3 (“Polaroid won an important decision in the Delaware Chancery
Court, which upheld Polaroid’s issuance of 14% of its stock to an ESOP. Prior to the initiation of a hostile tender offer by Shamrock Holdings. The ESOP helped Polaroid’s management defeat Shamrock’s bid for its stock because employees voted their Polaroid shares with management. Delaware law requires that a firm wait three years after it acquires a 15% interest in a target before it can merge with the target unless it can secure an 85% vote of the target’s shareholders. The waiting period can impose substantial costs on the acquiring firm if it had plans to use the assets of the target as collateral for interim or longerterm loans to finance a leveraged buyout. Firm management might establish an ESOP because they believe that employee shareholders are more likely to vote with them than are outside shareholders. As a result, Polaroid’s use of an ESOP as a successful takeover defense stimulated considerable interest in ESOPs.”). 34. Id. at 7. 35. Robert Hockett, W hy (Only) ESOPs?, 12 Stan. J.L. Bus. & Fin. 84, 93-94 (2006). 36. Scholes & Wolfson, supra note 24, at 2. 37. Id. 38. Hockett, supra note 35, at 92-93. 39. Id. at 93-94. 40. Id. at 88-89 (“[T]he employing firm adopts an ESOP as a sponsored ERISA plan — a defined contribution plan. Like other ERISA plans, the ESOP takes the legal form of a trust. ...the trust borrows funds from a bank or some other commercial lender. It uses those funds to purchase stock issued by the sponsoring/ employing firm at fair market value. The loan proceeds accordingly pass through the ESOP to the sponsoring/employing firm itself — they finance it, we shall see — and the stock is then held in trust on behalf of the employees. The firm guarantees repayment of the loan by the ESOP to the lender, and the stock held in the ESOP is itself pledged as security. Now over time, the sponsoring/employing firm makes cash contributions to the ESOP, just as it would do in connection with any defined contribution plan. In this case the contributions are used by the ESOP to amortize the loan originally used to purchase the sponsoring/employing firm’s shares. As the loan is paid down, stock held by the trust is gradually released from its loan-securing
role to individual accounts maintained severally on behalf of the employee/beneficiaries.”). 41. Id. at 92-93. 42. Id. at 91-92. 43. Id. at 94-95. 44. Arsenault, supra note 10, at 554. 45. Id. (“Under [Internal Revenue] Code Sections 162(k) and 404(k) (5) D. When a participant or beneficiary receives plan benefits in the form of a distribution of employer stock under an ESOP, the employer corporation often repurchases the shares of stock distributed to the participant from the ESOP. From a tax perspective, this repurchase of shares is treated as a redemption of stock, which has significant tax consequences to the participant. When a corporation redeems its own stock, the transaction is treated one of two ways for federal income tax purposes. If the transaction meets the requirements of one of four situations specified in Code section 302(b), then the redemption would be treated a sale or exchange of the stock, resulting in capital gains tax treatment for the selling participant. However, if none of the four Code section 302(b) situations apply, then the redemption is treated for tax purposes as a dividend, which does not receive preferential tax treatment, but instead is taxed as part of the taxpayer’s gross income under Code section 301(c)(1).”). 46. Id. 47. Id. at 554-55. 48. Id. at 560-61. 49. I.R.C. § 404(k) (2012). 50. I.R.C. § 162(k); Arsenault, supra note 10, at 555. 51. I.R.C. § 404(k)(5)(A); Arsenault, supra note 10, at 547. 52. Arsenault, supra note 10, at 54950 (“In a leveraged ESOP, the ESOP may borrow the funds to acquire employer securities directly from the lender (normally with a guarantee from the employer), or the employer may borrow the funds from the lender followed by a loan from the employer to the ESOP. This latter structure is typically known as a ‘mirror loan’ because the terms of the loan between the ESOP and the employer mirror the terms of the loan between the lender and the employer.”). 53. Anderson, supra note 11, at 6. 54. Id. at 3. 55. Id. at 8. 56. Id. 57. Id. at 3. 58. Id. 59. Id. at 4.
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60. Id. at 6. 61. Id. at 7. 62. Aswath Damadoran, Employee Stock Options (ESOPs) and Restricted Stock: Valuation Effects and Consequences, Stern Sch. of Bus. 1 (September 2005), http://people.stern.nyu. edu/adamodar/pdfiles/papers/ esops.pdf. 63. 17A Am. Jur. 2d Contracts § 53 (2014). 64. Megan Casserly, Understanding Employee Equity: Every Startup’s Secret Weapon, F o r b e s , (Mar. 8, 2013, 5:30 PM), http:// w w w. f o r b e s . c o m / s i t e s / meghancasserly/2013/03/08/ understanding-employee-equitybill-harris-sxsw/. 65. Id. 66. I.R.C § 83 (2012). 67. I.R.C. § 421(a)(2). 68. I.R.C. § 421(a)(1). 69. I.R.C. § 421(b). 70. Mihir A. Desai & William M. G e n t r y, T h e C h a r a c t e r a n d Determinants of Corporate Capital Gains 8 (Nat’l Bureau of Econ. Research, Working Paper No. 10153, 2003), available at http:// www.nber.org/papers/w10153. pdf. 71. Congressional Budget Office, Effects of Lower Capital Gains Taxes on Economic Growth 1-3 (1990), available at http://www. cbo.gov/sites/default/files/90cbo-033.pdf. 72. I.R.C. § 1222 (1) (2012). 73. Tax Treatment of Capital Gains and Stock Trades Receives Attention as Congress Considers Tax Reform, Ctr. for Effective Gov’t (Sept. 25, 2012), http://www.foreffectivegov. org/cap-g ains-stock-tradesreceive-attention-in-tax-reform. 74. U.S. D ep ’ t of the T reasury , T r e a s u ry C o n f e r e n c e o n Business Taxation and Global Competitiveness 2 (2007). 75. Id. 76. Floyd Norris, Bush’s Plan Taxes Certain Dividends, Fine Print Reveals, N.Y. Times (Jan. 9, 2003), http:// www.nytimes.com/2003/01/09/ business/09PLAC.html. 77. I.R.C. § 243(a) (2012). 78. I.R.C. § 243(a)(1). 79. I.R.C. § 243(c). 80. I.R.C. § 243(a)(3). 81. Glenn Ruffenach, Navigating the Dividend Storm, Wall St. J. (Jan. 10, 2013, 11:50 AM), http://online. wsj.com/news/articles/SB10001 424127887323689604578219952 168695148. 82. 26 U.S.C. §320 (2013). 83. I.R.C. § 163 (2013). 84. J u s t i n e N o l a n , C o r p o r a t e Accountability and Triple Line Reporting: Determining the Material
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Issues for Disclosure, 2 (Univ. of New South Wales Law, Research Paper No. 2007-15, 2007), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=975414. 85. See Idea: Triple Bottom Line, E c o n o m i s t (Nov. 17, 2009), http://www.economist.com/ node/14301663. 86. Owen, supra note 2, at 169. 87. Ronald Kröker, Ansätze zur Implementierung von RSE (CSR)
103. Id. 104. Timothy Slater, The Triple Bottom Line: What Is It and How Does It Work?, 86 Ind. Bus. Rev., no. 1, 2011, at 4, 4, available at http:// www.ibrc.indiana.edu/ibr/2011/ spring/pdfs/article2.pdf. 105. See M ark W. M c K leroy & J o M.L. van Engelen, Corporate Sustainability Management: The Art and Science of Managing N on -F inancial P erformance 70-71 (2012). 106. See id. 107. See id. 108. List of Social Reports, S ocial A udit N etwork , http://www. socialauditnetwork.org.uk/gettingstarted/social-reports/ (last visited Nov. 11, 2014). 109. Rob Gray et al., Environmental and Social Accounting and Reporting, in Financial Reporting Today: Current Trends and Emerging I s s u e s 1998 179, 183 (Paul Bircher et al. eds., 1997), available at https://www.st-andrews.ac.uk/ media/csear/discussion-papers/ CSEAR_dps-socenv-socacc.pdf. 110. See J o h n T a l b e r t h e t a l ., Redefining Progress, The G enuine P rogress I ndicator 28 (2007), available at http:// www.environmental-expert.com/ Files/24200/articles/12128/ GPI202006.pdf; H e r m a n E. Daly et al., For the Common Good: Redirecting the Economy T o wa r d s C o m m u n i t y , t h e Environment, and a Sustainable Future (1994). 111. Poor na Hedg e et al., Social Financial Reporting in India: A Case, 32 I nt ’ l J. of A cct . 155, 165 (1997) (“Social disclosures in Indian company annual reports are largely derived from the country‘s socialistic philosophy of economic development. The public sector undertaking, SAIL [Steel Authority of India Limited], espouses social gain rather than profit maximization, and in conformity with this objective, publishes social balance sheets and income statements, value added statements, and human resources accounts. However, since these reports are not audited, their verifiability can be questioned. Positive social disclosures act as favorable public relations for the government.”). 112. Lydia Polg reen, Indian State Empowers Poor to Fight Corruption, N.Y. Times (Dec 10, 2010), http:// www.nytimes.com/2010/12/03/ world/asia/03india. html?pagewanted=all&_r=0. 113. I n t e r n a t i o n a l B u d g e t Partnership, Social Audits as
in einem lateinamerikanischen
Entwicklungsland 60 (2010). 88. See generally S ilvia S chein , D ie Nachhaltigkeitsberichterstat -tung (Sustainability Reporting) (2008) (discussing sustainability reporting). 89. G.A. Res. 38/61, ¶ 8, U.N. Doc. A/ RES/38/161 (Nov. 2, 2014). 90. Luke Danielson & Patricio Leyton, Sustainable Development: Emerging Concepts of Governance in the Minerals Industries 2001 Rocky Mtn. Min. L. Inst., no. 3, 2001, at 9-1, 9-2, available at http:// w w w. s d s g. o r g / w p - c o n t e n t / uploads/2010/02/EmergingConcepts-of-Governance-in-theMinerals-Industry.pdf. 91. Id. 92. Risako Morimoto et al., Corporate Social Responsibility Audit: From Theory to Practice 8 (Judge Inst. of Mgmt., Univ. of Cambridge, Working Paper No. 14/2004, 2 0 0 4 ) , a va i l a bl e a t h t t p : / / papers.ssrn.com/sol3/papers. cfm?abstract_id=670144. 93. Judd F. Sneirson, Green Is Good: Sustainability, Profitability, and a New Paradigm for Corporate Governance, 94 Iowa L. Rev. 987, 991 (2009), available at http://www.uiowa. edu/~ilr/issues/ILR_94-3_ Sneirson.pdf. 94. Id. at 991. 95. Kw e s i A m p o n s a h - Ta w a i h , Occupational Health and Safety and Sustainable Development in Ghana, 4 Int’l J. Bus. Admin., no. 2, 2013, at 74, 76-77, available at http:// sciedu.ca/journal/index.php/ijba/ article/viewFile/2584/1450. 96. Nolan, supra note 84, at 2. 97. Sneirson, supra note 93, at 991. 98. Hasan Fauzi et al.,“Triple Bottom Line” as “Sustainable Cor porate Performance”: A Proposition for the Future, 2 Sustainability 1345, 1354 (2010), available at http://www. mdpi.com/2071-1050/2/5/1345. 99. Nolan, supra note 84, at 2. 100. Id. at 5. 101. See 2010 Social & Environmental Assessment Report, Ben & Jerry’s (June 28, 2011), http://www. benjerry.com/about-us/searreports/2010-sear-report. 102. Nolan, supra note 84, at 2. 26
B udget M onitoring T ool 2 (2012), available at http:// internationalbudget.org/w pcontent/uploads/Social-Auditsas-a-Budget-Monitoring-Tool.pdf. 114. The Right to Information Act, 2005, No. 22, Acts of Parliament, 2005 (India), available at http://rti. gov.in/webactrti.htm. 115. Priti Patanik, Social Audits in India – a Slow but Sure Way to Fight Cor r uption, G ua r d i a n , (Ja n . 13, 2012, 11:00 AM ) http://www.theguardian.com/ global-development/povertymatters/2012/jan/13/indiasocial-audits-fight-corruption. 116. Achon Fung, Making Social Markets: Dispersed Governance and Corporate Accountability, in Market-Based G ov e r n a n c e : S uppl y S i d e , Demand Side, Upside, and D ownside 145, 153 (John D. Donahue & Joseph S. Nye, Jr. eds., 2002). 117. Id. 118. See Cascade Engineering, Triple Bottom Line Report: Cascade Engineering Fiscal Year 2009 (S ocial E nvironmental E conomic ) (2009) [hereinafter TBL 2009], available at http://www. cascadeng.com/sites/default/ files/TBL_2009.pdf. 119. The Sustainable Bus. Network & the Ministry for the Env’t, N.Z., Enterprise3- Your Business and the T riple B ottom L ine : E c o n o m i c , E n v i ro n m e n ta l , S o c i a l P e r f o r m a n c e (2003) [hereinafter Enterprise], available at http://www.mfe.g ovt.nz/ publications/sus-dev/enterprise3triple-bottom-line-guide-jun03. pdf. 120. Sneirson, supra note 93, at 989, 995. 121. Cheryl Linthicum et al., Social Responsibility and Cor porate Reputation: The Case of the Arthur Andersen Enron Audit Failure, 29 J. Acct. & Pub. Pol’y 160, 161 (2010). 122. Id. (“Prior social responsibility research finds mixed results regarding the influence of social responsibility on firm value.”). 123. Id. at 162 (“Our results suggest that social responsibility did not burnish firms’ reputation in a time of crises, as proponents of social responsibility claim.”). 124. Roger Stace, Triple-Bottom-Line Goals in a Management Control System: Experimental Effects on Commitment and Trust 5-6 (Aug. 20, 2012) (working paper), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2133135. 125. Environmental Accounting, Austl. I nst . of E nvtl . A ccounting , http://environmentalaccounting. a
org.au/?page_id=19 (last visited Sept. 20, 2014). 126. Kris Maher, West Virginia Chemical Spill Sets Off a Waste Dispute, Wall St. J. (July 6, 2014, 10:29 PM), http://www.wsj.com/articles/ west-virginia-chemical-spill-setsoff-a-waste-dispute-1404700192. 127. D a v i d W. C a s e , C o r p o r a t e Environmental Reporting as Informational Regulation: A Law and Economics Perspective, 76 U. Colo. L. Rev. 379, 392 (2005). 128. Id. at 392-93. 129. See, e.g., Leadership in Energy and Environmental Design, U.S. Green B ldg . C ouncil , http://www. usgbc.org/leed (last visited Sept. 20, 2014). 130. Gray et al., supra note 109, at 181. 131. Morimoto et al., supra note 92, at 6. 132. Z. Jill Barclift, Too Big to Fail, Too Big Not to Know: Financial Firms and Corporate Social Responsibility, 25 J. C.R. & Econ. Dev. 449, 479 (2011). 133. Id. 134. S A 8 0 0 0 ® S t a n d a r d , S o c i a l Accountability International, h t t p : / / w w w. s a - i n t l . o r g / index.cfm?fuseaction=Pag e. ViewPage&PageID=937 (last visited Sept. 20, 2014). See Social Accountability International, S ocial A ccountability 8000 (2008), available at http://www.saintl.org/_data/n_0001/resources/ live/2008StdEnglishFinal.pdf, for the SA 8000 norms. 135. Danielson & Leyton, supra note 90, at 9-22. 136. Barclift, supra note 132, at 479. 137. Id. at 479-81. 138. Nolan, supra note 84, at 3. 139. Id. at 4. 140. Joshua A. Newberg, Corporate Codes of Ethics, Mandatory Disclosure, and the Market for Ethical Conduct, 29 Vt. L. Rev. 253, 253 (2005). 141. Paul L. Davies & Klaus J. Hopt, Boards in Europe—Accountability and Convergence, 61 Am. J. Comp. L. 301, 326-27 (2013). 142. Id. 143. See, e.g., Certification and Your Business, Fair Trade USA, http:// www.fairtradeusa.org/certification (last visited Sept. 20, 2014). 144. Organic Agriculture, U.S. Dept. of A gric ., http://www.usda.gov/ wps/portal/usda/usdahome?con tentidonly=true&contentid=org anic-agriculture.html (last visited Sept. 20, 2014). 145. Hope M. Babcock, Cor porate Environmental Social Responsibility: Cor porate “Greenwashing” or a Corporate Culture Game Changer?, 21 Fordham Envtl. L. Rev. 1, 13 (2010).
146. Id. at 14. 147. Roda Mushkat, Corporate Social Responsibility, International Law, and Business Economics: Convergences and Divergences, 12 Or. Rev. Int’l L. 55, 55, 74-75 (2010). 148. Id. at 67. 149. Stace, supra note 124, at 1. 150. Id. at 3-4. 151. Id. 152. Id. at 4. 153. Id. 154. Id. Moreover, task complexity is thereby reduced. “[T]he explicit message of learning goals is ‘learn new processes, even if they don’t all work’, whereas the implicit message of a 5 performance goal is ‘use your existing knowledge to somehow get results.’” Id. at 4-5. 155. Sneirson, supra note 93, at 993. 156. Id. 157. Id. 158. Id. 159. Id. at 994. 160. Morimoto et al., supra note 92, at 10. 161. Id. (“The ‘tick-box’ approach to auditing attracted several criticisms during the interviews. Specific comments included the lack of explanatory power inherent in such a system. Some interviewees favored an assessment incorporating a mixture of quantitative and qualitative methods page.”). 162. Stace, supra note 124, at 12. 163. Id. 164. Aste, supra note 1, at 33; Bob Willis, U.S. Recession Worst Since Great Depression, Revised Data Show, Bloomberg (Aug. 1, 2009, 12:00 PM), http://www.bloomberg. com/apps/news?pid=newsarchiv e&sid=aNivTjr852TI.
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The Protection of China's Investment in Africa Under the International Investment Law QINGTAO XIE
—————————————————
I. Introduction
———————————————— China is one of the largest host countries for foreign direct investment (FDI).1 Recently, China has started transitioning to become a leading capital exporting country as well.
2
For various political and economic reasons, Africa has become an important investment destination for China. China and Africa have formed a curious union of political and economic relationships. The protection 3
of their respective interests with regard to investment relies highly on the sustainability of their union. If the union is weakened or there is a vital conflict of interests, Chinese investors’ investments could be put at risk. This paper will first discuss the current trend of China’s investment activities in Africa, and the economic and political reasons behind them. Second, it evaluates the strengths and weaknesses of mechanisms that can protect China’s investment in Africa. The last part will scrutinize the jurisdictional clauses, Most-Favored-Nation (MFN) clauses and National Treatment (NT) clauses in China’s Bilateral Investment Treaties (BITs) with African countries to demonstrate the necessity of updating some of these clauses in order to improve the level of protection
Qingtao Xie, LL.B, LL.M, is a Research Assistant at the Chinese University of Hong Kong. He received his Bachelor's and Master's of Law degrees from the Chinese University of Hong Kong, and also has a Master's Degree in International Legal Studies from American University.
Therefore, it can be observed that the forms of China’s FDI in Africa are mainly in extractive industries, infrastructure, and manufacturing and assembly. There are economic and political reasons for China and Africa to strengthen their
for Chinese investors’ investments in Africa. —————————————————
II. Investment between China and Africa
Despite the fact that Africa only accounts for 4.1% of China’s total outward FDI,
economic relationship. It is generally accepted that international trade and investment can promote the world’s welfare by enhancing the comparative advantages
———————————————— 4
the economic relationship between China and Africa has become closer and closer, especially after the 2008 Financial Crisis.5 Africa is now China’s major import source,6 second largest overseas construction project contract market,7 and the fourth largest investment destination. 8 Besides, China has become Africa’s largest trade partner.9 China’s FDI stock in Africa recorded US$ 21.23 billion by the end of 2012, which is more than double the figure from 2009.10 The subsidiaries or branches set up by Chinese enterprises cover 51 out of 60 African countries.11 China’s FDI stock in Africa by the end of 2011 mainly focused on mining (30.6%), finance (19.5%), building industry 28
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(16.4%) and manufacturing (15.3%). 12
of individual countries, and eventually, lead to the advancement of the individual’s welfare.13 However, it is also widely accepted that countries do not automatically enjoy the benefits of trade and investment. 14 Therefore, proper regulations are needed to avoid the negative effects of FDI, such as the misallocation of resources, environmental degradation, and erosions of cultural and indigenous rights.15 China has strong economic incentives to invest in Africa. First, Africa is rich in natural resources, such as oil, cobalt, copper, iron ore, manganese, and uranium, which can meet China’s huge demand for natural resources to sustain its high economic growth.16 Such investment in Africa can ensure China’s continuous access to those natural resources as well as agricultural
products.17 Second, Africa has the potential
diplomatic relations with Taiwan in 2013,
recently, African countries’ performance in
to become a huge market for Chinese
Swaziland, Burkina Faso, and the Democratic
attracting FDI is still unsatisfactory.35 For the
exports. Africa has a population of over one
Republic of Sao Tome and Principe became
period of 2008-2012, Africa’s performance
billion, and it is expected to grow larger in
the only African countries that still recognize
in attracting FDI was far worse than Latin
the future.18 Due to the improved economic
Taiwan as a country.27
America and the Caribbean, and Asia.36
policies and favorable global environment,
—————————————————
Africa has recorded growth in gross domestic
benefits for both China and African countries
slowed down recently because of the global
Apart from economic incentives, China also has strong political motivations to invest in Africa.
recession and instability in the region.19 The
—————————————————
Chinese investors should be more and more
combination of a huge population and strong
As for Africa, the paramount reason for
concerned about the level of protection for
purchase power makes Africa a promising
accepting investment from China is for
FDI in the continent.
market for Chinese manufacturers. Lastly,
economic benefits. Generally, the benefits for
—————————————————
China’s “Go Global” policy and industrial
FDI recipients at the macroeconomic level
upgrades motivate Chinese enterprises to
are that FDI can bring new investment capital,
invest in Africa by moving part of their
contribute to the balance of payments, add
III. Mechanisms for Chinese Investors to Protect Their Investment in Africa
manufacturing industries to Africa. China
to the country’s capital stock, and potentially
————————————————
regards its investment in Africa to be a
add to future economic growth. At the
There are various mechanisms to protect
win-win. However, David Shinn argued
microeconomic level, FDI can contribute to
Chinese investors’ investments in Africa,
that the relationship is actually a “win-win-
higher productivity through new investment
including legal proceedings in the host
win,” one win for Africa and two for China
in physical and human capital, increased
country, diplomatic protection, World Trade
because the grant aid provided by China to
employment, enhanced management, and the
Organization (WTO) dispute settlements,
African countries is usually spent on major
transfer of technology. There can also be
and international arbitrations. Though
infrastructures constructed by Chinese
spillover effects on the local firms through
the focus is on the mechanisms under
companies, which tends to use significant
supply and distribution chains, trading, and
international investment law (IIL), this
amounts of Chinese materials and laborers.22
out sourcing.30 Apart from the benefits above,
part will start with a brief discussion on
Besides, African countries usually repay their
African countries have special economic
domestic proceedings in African countries,
loans with oil or minerals. Therefore, the
incentives to attract FDI from China.
which can lay down a solid foundation for
loans made to African countries mostly flow
First, African countries’ level of economic
further discussion of other international
back to China, and China can obtain reliable
development is still very low and thus they
mechanisms.
sources of energy supply at the same time.
are in great need of capital to support their
—————————————————
Apart from economic incentives, China
economic development.31 Thirty-four out
also has strong political motivations to
of forty-nine Least Developed Countries
invest in Africa. First, China seeks to obtain
(LDCs) in the world are located in Africa.32
political support from African countries
The total GDP of Sub-Saharan Africa only
As for Africa, the paramount reason for accepting investment from China is for ecoomic benefits.
on international affairs.24 China has long
accounts for 2.1% of the world GDP.33 The
—————————————————
regarded African countries to be its allies
exports and imports of all African countries
in the international arena. Second, China
only account for 3.424% of the global
wants to end Taiwan’s diplomatic presence
volume.34 Second, despite the substantial
Africa has over fifty countries.37 They all
in Africa.
liberalization of the environment for FDI
have distinct legal systems, which at most
product (GDP) during 2004-2008 to be around six percent per annum, though it
20
21
23
25
26
After Gambia terminated
28
29
Considering the economic and political discussed above, it is foreseeable that China will invest more and more in Africa. With the increasing stocks of investment in Africa,
A. DOMESTIC LEGAL PROCEEDINGS
29
Currents Summer 2014
can be categorized as a family of systems
courts’ jurisdiction over investment disputes
and to properties or property rights.55 The
sharing no traceable common pattern.38
may be limited by the laws of the host
measure under diplomatic protection is
However, they do have certain similarities
countries. Even if the court has jurisdiction
usually called espousal.56 The effect of the
in procedures, principles, institutions and
over the investment dispute, it may be partial
espousal is that the national’s international
techniques.39 Therefore, this paper does
against foreign investors, especially when the
claim is assigned to its home country, which
not attempt to discuss the domestic legal
challenge is made against the host country.48
will take up the claim against the host
proceedings in any particular African
Experiences have demonstrated that host
country.57
country, but rather will discuss their common
countries may either use national interest to
The diplomatic protection provided by
merits and limitations on handling China’s
jeopardize the indispensable objectivity and
the Chinese government currently focuses
investors’ investment claims against their
impartiality of the national court or challenge
on the protection of personal safety.58 There
governments.
the decision through legislative means.49
is no formal, public procedure for Chinese
Despite the difference in legal traditions,
Second, the corruption problem casts some
nationals or enterprises to initiate diplomatic
cultures, and practices between China and
doubts on the authority of national courts
protection against foreign investment. 59
African countries, Chinese investors should
in Africa. According to the Transparency
Under international law, the government
always consider the option of protecting
International’s Corruption Perceptions Index
is not obliged to vindicate the rights of its
their investments through domestic legal
2013, most African countries have serious
nationals and will generally take into account
proceedings. As a general rule, domestic law
corruption problems.50 Third, national courts
its political goals in deciding whether or not
shall be the first point of redress for foreign
may be constrained by their domestic legal
to take up the claim.60 Most major Chinese
investors in all cases.40 There are at least
systems due to the lack of legal expertise
corporations that invest in Africa are state-
five benefits of domestic legal proceedings.
and experience in applying international law
owned enterprises, which have very close
First, the national court is arguably the
in the domestic context.51 Last but not least,
relationships with the Chinese government.61
most convenient forum to adjudicate the
the regional politics are instable. Internal
In theory, they should possess strong lobbying
case. Second, compared to international
conflicts, civil wars and even declarations
powers with the Chinese government and the
arbitration, domestic legal proceedings
of independence are not unusual in the
same economic interests as the government.
are arguably more cost effective. Third,
region. It is hard for countries involved
However, as discussed in Part II, in addition
investors can initiate legal proceedings
in conflicts to protect foreign investment
to the economic interests, China also has
themselves and control the process 43 Fourth,
through their public authorities and domestic
major political interests in Africa, which may
the exhaustion of local remedies may be
courts. Therefore, it is necessary to impose
make the Chinese government reluctant to
a precondition for invoking diplomatic
state responsibility through IIL to provide
take such an approach. The fact that China
protection and a prerequisite for submitting
remedies for investors suffering losses during
has never sought diplomatic protection
to international tribunal under some BITs.44
the internal conflict.
for its overseas investment evidences
41
42
47
52
53
China’s caution on the matter.62 Therefore,
Last but not least, investors may need to rely on the national court to enforce a foreign
B. DIPLOMATIC PROTECTION
diplomatic protection may not be a practical option for the Chinese investors for the
judgment or an international arbitral award, Diplomatic protection is the “protection
moment. Nonetheless, according to the
afforded by a government to its nationals,”
Third General Conference of the Central
Despite the benefits discussed above,
who are injured by some action or inaction
Committee of the Communist Party of
domestic proceedings also have some
contrary to international law by the foreign
China, improving diplomatic protection for
problems. First, the domestic legal systems
country, “from whom they have been unable
Chinese foreign investment is within the
in Africa may not be suitable to settle
to obtain satisfactions through the ordinary
scope of China’s economic reforms of the
international investment disputes. A local
channels.” It covers both injuries to persons
current government.63 Considering China’s
especially when the respondent does not have any assets outside the host country.
45
46
54
30
Currents Summer 2014
transition from a capital receiving country
were inconsistent with national treatment
Honduras challenged Australia’s laws and
to a capital exporting country, it is possible
under Article III:4 GATT, the Appellate
regulations that restrict the use of trademark
that the Chinese government will eventually
Body considered it unnecessary to consider
on tobacco products and packaging under
be more active in espousing its national’s
TRIMs. However, after the case Canada–
various provisions of TRIPs.78 Though the
foreign investment when the economic
Renewable Energy,71 the panel may need to
panel has not decided the case, the cause of
benefits outweigh the political considerations
commence its analysis on TRIMs before
action gives us an idea how WTO member
and China is sufficiently confident in utilizing
Article III:4 GATT 1994 if the measures fall
may protect its investment in the form of
such a right under the international law.
within the illustrative list of TRIMs, because
intellectual property rights in other WTO
it “deals specifically, and in detail, with the
member through the TRIPs.
C. WORLD TRADE ORGANIZATION (WTO)
70
measures at issue.”72
DISPUTE SETTLEMENT
3. The Limitations of WTO 2. Other Agreements
Apart from the limitations of the WTO
The attempt to develop broader investment disciplines within the WTO failed in 2004
WTO members are bound to provide
agreements, the WTO dispute settlement
when the General Council decided to drop
market access and national treatment to
mechanism also has certain limitations in
investment from the Doha work program.64
other WTO members in accordance with
handling international investment disputes.
Therefore, in the near future, it is unlikely for
the Schedules of Specific Commitments
First, WTO dispute settlement is only
WTO to be more involved in the regulation
they undertake under General Agreement
available to WTO members, which means
of the foreign investment.65 Nonetheless,
on Trade in Services (GATS). Mode 3
that private investors cannot initiate the
some WTO agreements still can provide
commitments are about services providers
case on their own.79 Second, even if the
some protection on the international
of one member providing services by
Chinese government is ready to bring a claim
investment. This part will evaluate these
establishing a commercial presence in
for its nationals, it can only claim against
WTO agreements’ effectiveness in protecting
the territory of any other member.74 The
other WTO members.80 In the context of
the foreign investment.
commitment under GATS is made in
Africa, only 42 African countries are WTO
an asymmetric way.
Therefore, foreign
members.81 Countries like Algeria, Ethiopia
1. Agreement on Trade-Related Investment
investors may enjoy the market access and
and Equatorial Guinea, where China has high
Measures
national treatment in particular sectors of
FDI stock,82 are not WTO members.83 Third,
service to the extent as specified by that
the remedies provided by the WTO are not
country under the Schedule of Commitments.
desirable or adequate for investors.84 Under
There has only been one WTO case dispute
WTO framework, after finding the measures
on Mode 3.
inconsistent with the WTO obligations, the
TRIMs forbid WTO Members to impose a local content requirement (LCR) or an exportation and importation requirement on enterprises.66 To invoke TRIMs, the measure in question must be an investment measure related to trade in goods.67 As of the time this essay was written, there were forty cases citing TRIMs in requests for consultations.68 However, among those cases entered into panel decisions, the TRIMs issues were often avoided by the panels. For example, in IndiaAutos,69 after finding the measures imposing LCRs and trade balance requirements
73
75
76
Trade-Related Aspects of Intellectual
primary objective is to encourage the member
Property Rights (TRIPs) protects intellectual
to bring the measures into conformity with
property rights, which are generally
its obligations under the relevant WTO
recognized as a form of investment in
agreement.85 When the defaulting party fails
many BITs. 77 When foreign investors
to implement the recommendation or ruling
establish a business in a foreign country,
of the Dispute Settlement Body (“DSB”)
they often also acquire various intellectual
within a reasonable period of time, the
property rights, such as trademarks, patents,
challenging member may seek authorization
industrial designs etc. For example, in
from the DSB to request compensation
Australia — Tobacco Plain Packaging (Honduras),
from the breaching member or suspend
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Currents Summer 2014
concessions or other obligations towards
in the Section (A). Besides, international
uncertainty and inconsistency of ISA
the breaching member. Considering the
tribunals consist of experts in the field,
proceedings that may deter investors from
relatively small volume of exports from
who are arguably more competent than
initiating cases or countries from submitting
African countries to China, the deterrent
the domestic court judges in adjudicating
to the international arbitration. Second,
effect of such punishment is limited. Besides,
complex international investment disputes.97
the existence of different international
the WTO remedy provides no monetary
Third, the “governing law” in ISA is the IIAs,
tribunals and the absence of stare decisis
compensation to the suffering investors.
whose provisions usually provide a wider
also contribute to the unpredictability,
scope and higher standards of protection on
uncertainty and inconsistency of the ISA.
the foreign investment. Part V will further
The inconsistent standards among tribunals
elaborate this point by discussing the key
may encourage the forum shopping. Third,
ISA is arguably the most powerful weapon
clauses. Last but not least, when investors
the cost of ISA has been criticized for being
for investors under modern IIL. ISA has
win the case they will be awarded monetary
extremely high.103 It de facto excludes the
brought a fundamental change to the
compensation, which is more desirable than
right to ISA for small or medium investors.
86
87
88
98
D. INVESTOR-STATE ARBITRATION (ISA)
traditional approach of the enforcement of
99
the remedy under the WTO mechanisms.
In addition, ISA in the context of China-
international law, which generally only allows
Besides, the recognition and enforcement of
Africa investment presents the following
state to state claims. The dispute settlement
an ISA award is arguably easier than foreign
drawbacks. First, Chinese investors may
provisions in the International Investment
judicial decisions.100 The Convention on the
only bring an ISA proceeding against
Agreements (IIAs) usually provide the
Recognition and Enforcement of Foreign
those sixteen countries that have BITs with
legal basis and define the scope of the ISA
Arbitral Awards (also known as New York
China.104 Countries like Zambia, Angola,
proceeding.90 This following will evaluate the
Arbitration Convention) provides that
Democratic Republic of Congo, Tanzania
general advantages and drawbacks of ISA.
contracting states of the convention are
and Republic of Congo, where China has
ISA has mainly four advantages. First,
obliged to recognize foreign arbitral awards
high FDI stock,105 do not have BITs with
ISA allows investors to make direct claims
made in the territory of the contracting
China.106 Theoretically, there can still be ISA
against the host country.91 When the country
states as binding and enforce them subject
in the absence of a BIT provision, provided
has the final say on whether or not to bring
to the exceptions under Article V of the
the country gives consent to the arbitration.107
a case for its nationals, it usually takes into
Convention.101
However, it is unlikely for countries to give
account a wide range of considerations.
—————————————————
consent to entertain foreign investors’ claims outside their legal systems, especially when
availability of ISA depends on the terms
ISA also draws heavy criticisms from both host countries and foreign investors.
of the BITs between the investor’s home
—————————————————
On the one hand, Ethiopia, Cape Verde,
country and the host country, instead of
Nevertheless, ISA also draws heavy
Sudan and Equatorial Guinea are not
the mercy of the investors’ home country.94
criticisms from both host countries and
contracting countries to the New York
Second, ISA is handled by an international
foreign investors. First, the nature of ISA,
Arbitration Convention.109 Therefore, the
arbitration tribunal, which is independent
as a form of arbitration, limits its level of
national court in these countries may not
95
from the judicial system of the host country.
transparency because the arbitration awards
recognize or enforce arbitral awards. On
Investors generally consider the international
are generally not obliged to be public and it will
the other hand, even for those countries
arbitration tribunals to be a more neutral
102
only become public with parties’ consent.
which are New York Arbitration Convention
adjudicative platform. ISA may avoid the
The lack of transparency may undermine
contracting countries, the enforcement may
problems of domestic litigation discussed
the system because it creates unpredictability,
still encounter the difficulties in the domestic
89
92
Where there is a conflict of interest between the investor and the country, the latter will generally prevail.
93
By contrast, the
96
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Currents Summer 2014
they are under no international obligation to do so. Second, the enforcement of the arbitral awards may be difficult in Africa.108
court as discussed above.
A. JURISDICTIONAL CLAUSES
—————————————————
IV. Some Observations of the Clauses in the BITs Between China and African Countries
territory of the other Contracting Party.”121 The scope of the China-Nigeria version
The first obstacle for initiating ISA is
is quite certain, as it covers all disputes.122
whether the investors have the locus
However, jurisprudence seems to be divided
standi before the international arbitration
on the interpretation of the word “involving”
tribunal.111 The answer to this question
in the China-Sudan version. 123 A recent
————————————————
depends on three key clauses, namely the
ICSID case, Tza Yap Shum v The Republic
As discussed in Part III, ISA is a powerful
clauses of dispute settlement, definition of
of Peru, took a broad interpretation. 124
weapon to protect the interests of foreign
investor and investment.112
The key article of the case is Article
investors and may deter host countries from harming foreign investors’ interests.
8.3 of China-Peru BIT, which provides: 1. Dispute Settlement Clauses
However, whether or not ISA is available and to what extent it can protect investors’ interests greatly depend on the provisions of the BITs between the host country and the investors’ home country. BITs between China and African countries generally provide the following substantive protection: the market access clause, the armed-conflict clause that deals with the protection during conflicts, the expropriation clause that protects foreign investment from national expropriation, the transfer clauses that guarantee the inward and outward flow of capital relating to the foreign investment, etc.
110
Though these substantive protection
clauses are also very important, the existence of MFN clauses extends them beyond their context. This paper will concentrate on the evaluation of three key types of clauses in sixteen BITs between China and African countries, including jurisdiction clauses, MFN clauses and NT clauses. They are the three pillars of a BIT, which can determine whether the investors can bring a claim against the host country as well as the scope and standards of the protection.
“If a dispute involving the amount of compensation for expropriation…”
The consent of both parties is a prerequisite to the establishment of international arbitration.113 Countries are not obliged to give such consent.114 Therefore, it is crucial to check whether the dispute settlement clauses provide such consent from the host country’s side. China’s BITs have two versions of the dispute settlement clauses. Both versions can be represented by the China-Sudan BIT115 and the China-Nigeria BIT.116 Theses BITs share some common characteristics. First, they require the investors to firstly resolve the dispute with the host country through negotiation.117 Only when the dispute cannot be resolved within six months through negotiation are the investors entitled to initiate ISA.118 Second, once the investors choose either domestic court or international arbitration, they are barred from switching to the other mode of dispute settlement.119 The striking difference of the dispute settlement clause between the China-Sudan BIT and the China-Nigeria BIT is that the former only covers “a dispute involving the amount of compensation for expropriation” (emphasis added),120 while the latter covers “any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the
(emphasis added).125 By emphasizing the words “amount of compensation,” the Peruvian government took a restrictive approach, which “would only include disputes related to the determination of the value of the investment.”126 The consequence of such interpretation will preclude matters listed in Article 4 of the BIT, such as “whether expropriation has taken place or whether any compensation must be paid, among other potentially important matters” from the jurisdiction of the tribunal. 127 The tribunal rejected such an approach by agreeing with the claimant’s suggestion and holding that the phrase “includes not only the mere determination of the amount but also any other issues normally inherent to an expropriation, including whether the property was actually expropriated in accordance with the BIT provisions and requirements, as well as the determination of the amount of compensation due, if any.”128 It is apparent that such vague wording will cause some problems for both the investors and the host country. It is in both China’s and Africa’s interests to specify clearly whether the availability of ISA is restricted only to certain disputes in their future drafting of BITs.
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Currents Summer 2014
Canadian nationality according to Italian
whether it also refers to the place where
nationality law.
According to Article 3
the company’s management resides. Both
The fundamental requirement of ISA
and Article 9 of the Nationality Law of
levels make no reference to shareholders
under a BIT is that the investor, whether a
The Peoples ‘Republic of China, China
of the company, similar to the provision in
natural person or a legal person, is covered
does not recognize dual nationality, and
the North American Free Trade Agreement
by the definition of said BIT.129
once the Chinese national acquires a foreign
(NAFTA), which allows parties to the
nationality, he or she will automatically lose
agreement to deny the benefits provided by
differs from one to another. For example,
137
his or her Chinese nationality automatically.
NAFTA “if investors of a non-Party own
in the China-Nigeria BIT, the definition is,
Therefore, it is unlikely for a Chinese investor
or control the enterprise and the enterprise
“with regards to either Contracting Party,
who subsequently acquires the nationality of
has no substantial business activities.”141
natural persons having the nationality of that
another country to claim the benefits under
The legal implication is that companies
Contracting Party.”130 In the China-Algeria
China’s BITs.
might benefit from China’s BIT even if the
BIT, the definition is, “natural persons who
—————————————————
major shareholders are actually foreigners. The approach was confirmed in the case
law for nationality.132 However, because
The fundamental requirement of ISA under a BIT is that the investor, whether a natural person or a legal person, is covered by the definition of said BIT.
there are no principles of international
—————————————————
of its management.143 The tribunal refused
law in this area, the determination of the
As for the definition of legal person,
to “pierce the corporate veil” because they
nationality of an individual solely relies on
despite minor textual differences, China’s
found “the only relevant consideration is
the nationality law of that country.133 It is
BITs with African countries can generally
whether the Claimant is established under
likely the governing law will still depend
be divided into two groups, which have
the laws of Lithuania.”144
on the national law of the country that the
different levels and requirements. The first
Considering the current level of economic
investor claims to have nationality.
level establishes a low threshold, which only
development in China, it is in China’s interest
requires that the company be incorporated
to require legal persons to carry on more
not expressly preclude investors with dual
or established under the laws of China.
138
substantial business activities in China before
nationality, Chinese investors need to be
Such scope is so broad that it may allow shell
they can benefit from China’s BIT. It is also
aware of that if they acquire the nationality
companies that are incorporated in China
beneficial for African countries to preclude
of a third country, they will lose the benefits
(but carry on little or no business in China)
treaty-shopping companies who would seek
and protections of afforded under China’s
to benefit from the BITs. The second level
to benefit from such BITs with China.
BIT. 134 The issue was dealt with in the
further requires the company to be domiciled
recent ICSID case Hussein Nuaman Soufraki
in China, though the meaning of “domicile”
v The United Arab Emirates,
whereupon an
is somewhat uncertain since no case has ruled
investor who had both Italian and Canadian
on the term.139 The dictionary definition of
nationality was found to lack the necessary
the word is “the place at which a company
nationality required in the Italy-United Arab
or other body is registered, especially for
Emirates BIT, and thus the tribunal lacked
tax purposes.”140 Read in context, the term
jurisdiction over the case because he lost
may require more than just a registered
the his Italian nationality once he acquired
address of the company. It is unclear
2. Defnition of Investor
For natural persons, the definition slightly
have nationality of one Contracting Party in accordance with its laws.”131 The former clause does not expressly refer to the national law when determining nationality, which may create some uncertainties as to the governing
Besides, though these two clauses do
135
136
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Currents Summer 2014
of Tokios Tokeles v Ukraine,142 in which the claimant company was incorporated under Lithuanian law but ninety-nine percent (99%) of its shares were held by Ukrainian nationals and who also comprised two-thirds
3. Definition of Investment
To claim benefits under a particular BIT, qualified investors must demonstrate that their investments fit into the definition of investment provided for in that BIT.145 The definition is crucial for determining the scope and application of rights and obligations
under the BIT. 146 For example, Article
laws and regulations, although the listed
in the IIAs that the host country enters into
25(1) of the ICSID Convention provides
item shall be deemed to be qualified since
with other countries.162 Considering the huge
that its jurisdiction can only extend to legal
both parties expressly agree.156 Therefore,
amount of IIAs, the introduction of the
147
disputes that arise out of an investment.
investments that are beyond the list may
MFN clause into the field of IIL has arguably
However, the ICSID Convention does not
encounter barriers from the host country’s
established a semi-multilateral system for
provide a definition of “investment,” which
investment laws. Furthermore, it will be
international investments.163
leaves it open for countries to work out
more beneficial for Chinese investors to
Nonetheless, the scope of the MFN
and preserve its integrity and flexibility for
have a more detailed list for investments.
clause varies in every IIA. The text of the
progressive development of the term.
148
One of the major types of investment
MFN clause is important to ascertain its
Countries generally strike a balance between
China should have expressly added into the
scope of application.164 Countries may limit
the needs for protecting: the benefits of
list is “turnkey, construction, management,
the scope of the MFN clause so that it
the investor, the investments of capital-
production, concession, revenue-sharing,
only applies to certain provisions under the
exporting countries, and the needs of capital-
and other similar contracts.”
Other types
BIT.165 For instance, the US-Rwanda BIT
importing countries in order to identify the
of investment China may consider adding
specifically limits the scope to “investors
types of investments it wants to attract.
to the list include enterprises, franchise
[and investments] . . . with respect to the
rights, etc.
establishment, acquisition, expansion,
African countries is that their scopes are
—————————————————
management, conduct, operation, and sale
somewhat uncertain.
or other disposition of investments . . . .”
careful scrutiny of the article’s text in order
[T]he ICSID Convention does not provide a definition of "investment," which leaves it open for countries to work out and preserve its integrity and flexibility for progressive development of the term.
to ascertain the scope of the definition of
—————————————————
example, the Agreement between the United
investment, especially when the type of
Third, the majority of China’s BITs with
Kingdom and Albania for the Promotion
investment does not fall within the non-
African countries do not expressly include
and Protection of Investments expressly
exhaustive list.
indirect investments as in the China-Gabon
provides that the MFN clause treatment
outside the scope of the non-exhaustive list
BIT
159
extends to provisions on settlement of
require extra attention.
Some financial products, such as derivative
disputes.168 However, none of the BITs
financial products, may be precluded from
between China and African countries adopt
the protection of the BIT.160
the approach above. The MFN clauses in the
149
The first problem for China’s BITs with 150
They all adopt a
“hybrid list” for the definition of investment, which provides a broad definition of investment and a non-exhaustive list of different forms of investments. 151 The difficulty of the “hybrid list” is that it requires
152
Therefore, investments
Second, the scope of “investment” is too narrow.153 The chapeau of the definition
158
157
and the China-Morocco BIT.
contains a restriction, which requires the asset to be invested “in accordance with the laws and regulations of the other Contracting Party.”
154
The limitation is two-fold. First,
the investment must be made in the manner that is approved by the host country’s laws and regulations.
155
Second, the approval
requirement implies that the investment must first be recognized by the host country’s
and “to investments . . . with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.”166 Parties may also expressly include certain provisions in the scope of the MFN clause. 167 For
BITs between China and African countries B. MOST-FAVORED-NATION
The MFN clause allows investors to invoke better substantive protections afforded to other foreign investors by the host countries. 161 The existence of the MFN clause allows countries to “pull in” clauses
generally are drafted broadly.169 For instance, the China-Tunisia BIT provides that “[e]ach Contacting Party shall accord to investments and investors of the other Contracting Party treatment no less favorable than that accorded to investments and investors of any third State.”170 One of the most contentious issues
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Currents Summer 2014
with the broadly drafted MFN clause is its
China and African countries depend on the
clause in the China-Nigeria BIT starts with
applicability to the procedural provision in
text of each BIT. The China-Tunisia BIT has
the sentence, “[w]without prejudice to its
the BITs. Tribunals have taken opposing
very similar text to the MFN clause at issue
laws and regulations.”186 Therefore, any
positions on the matter; some allowed
in the Maffezini case above, which provides
NT afforded to foreign investors is subject
the MFN clause to extend to procedural
that, “investors . . . shall enjoy the most
to China’s domestic laws and regulations.
provisions, while others refused the
favored-nation treatment . . . in respect of all
Such a NT clause is more like a gesture of
extension.
the matters subject to this Agreement” (emphasis
welcoming foreign investment rather than a
former position is Maffezini v. the Kingdom of
added).
Therefore, the outcome in the
substantial and enforceable legal provision.187
Spain,172 where an Argentinean claimant was
Maffezini case is likely to affect disputes that
Therefore, it seems that Chinese investors
allowed to rely on the dispute settlement
arise out of the China-Tunisia BIT. Other
can hardly claim any benefits under the NT
clause in the Chile-Spain BIT by virtue of
BITs between China and African countries
clause since domestic law will always prevail.
the MFN clause in the Argentine-Spain BIT,
may not be affected by the outcome of the
China’s conservative approach to NT
which defined the scope of MFN clause
Maffezini case. For example, the China-South
clauses leaves the final say to the host
as, “all matters subject to this Agreement.”
173
Africa BIT provides that the MFN clause
country to avoid any unforeseeable risks.
The latter’s dispute settlement clause only
should apply to, “investments and activities
However, China should consider a liberal
allows access to international arbitration if
associated with investments of investors.”180
approach by allowing their domestic law to
the claim is first submitted to the courts of
In this case, the host country may distinguish
be challenged because its legal system has
the host State and no decision is rendered
the Maffezini case because the treaty does
greatly improved in the last three decades.
within eighteen months, while the former
not expressly extend the MFN clause to all
After surviving thirteen years in the WTO,188
BIT merely contains a cooling off period
matters subject to the BIT.181
China should be more experienced and
171
The milestone case for the
179
of six months without the requirement of
Considering the problems caused by the
confident in allowing foreign investors to
exhausting domestic remedies.174 The reason
uncertainty, China and the African countries
challenge its laws and regulations. In return,
given by the tribunal was that, though the
are advised to specify the scope of MFN
it can also better protect the investments of
disputes settlement clause is “not strictly a
clause, like the US-Rwanda BIT approach or
its investors overseas.
part of the material aspect of the trade and
the UK approach, which will help avoid any
—————————————————
investment policy pursued by treaties of
uncertainty in the future drafting of BITs.
commerce and navigation, [it was] essential for the adequate protection of the rights they sought to guarantee.”175 Thus, a more favored dispute settlement may be pulled through the MFN clause in the basic treaty, provided they are fully compatible with the ejusdemgeneris principle.176 To limit the impact of the decision, the tribunal stated that the MFN clause “should not be able to override public policy considerations that contracting parties might have envisaged as fundamental conditions for their acceptance of the agreement in question.”
177
The decision was
followed in four subsequent ISAs.
178
The effect of Maffezini on ISAs between
C. NATIONAL TREATMENT
Under international law, national treatment (NT) refers to the commitment made by a country to provide foreigners the same rights and protection that it grants its own nationals.182 China is traditionally extremely restrictive on granting NT. 183 Most of China’s early BITs with African countries do not contain a NT clause at all.184 The later BITs with African countries generally include the NT clause with a “domestic law” qualification.185 For example, the NT 36
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China's conservative approach to NT clauses leaves the final say to the host country to avoid any unforeseeable risks. ————————————————— —————————————————
V. Conclusion
———————————————— Though the existence of MFN clause in the BITs has arguably established a semimultilateral system in the international investment law regime by allowing a BIT to incorporate more favorable provisions from other BITs under certain circumstance, a worldwide multilateral investment dispute
settlement mechanism, akin to the WTO,
in protecting international investment,
countries are very likely to maintain their
is still missing. Under such background, the
which can improve China’s image as a
close economic and political relationship
protection on international investment still
responsible country. Therefore, China
in the near future. Consequently, China
greatly depends on the efforts of the home
should adopt a more liberal approach toward
should expedite its BIT negotiations with
country of investors. Considering China’s
international investment law. For diplomatic
the countries which have no BIT with it.
improving domestic legal environment and
protection, China should establish detailed
Meanwhile, China should re-negotiate its
increasing outward FDI, it is of China’s
and transparent guidelines and procedures.
existing BITs with African countries to better
economic benefits to promote higher level
For future BITs, China should avoid vague
suit the need of protection of its national’s
of protection on international investment. It
wording, which will create obstacles for its
investment in the region.
is also best for China’s political interests to
nationals to utilize those BITs to protect
take up more international responsibilities
their foreign investment. China and African
End Notes 1. Shang-Jin Wei, Foreign Direct Investment in China: Sources and Consequences, in 5 F inancial D eregulation and Integration in East Asia, NBEREASE 77, 77 (Takatoshi Ito & Anne O. Krueger eds., 1996), available at http://www.nber.org/chapters/ c8559.pdf. 2. UN Official: China’s Overseas Investment to Reach 60 bln USD by 2010, M inistry of C ommerce , C hina (Sept. 11, 2006, 4:45 AM), http:// english.mofcom.gov.cn/article/ newsrelease/counselorsoffice/ we s t e r n a s i a a n d a f r i c a r e p o r t / 200609/20060903115300. shtml. 3. W o n K i da n e , C h i n a -A f r i c a D ispute S ettlement : T he L aw , E c o n o m i c s a n d C ultu r e o f Arbitration 3 (2011). 4. Shiwei Hu & Charles van Marrewijk, An Empirical Analysis of the AfricaChina Trade Puzzle: The Role of China’s Trade Policies 25 (Eur. Trade Study Grp., Working Paper No. 234, 2013), available at http://www.etsg.org/ ETSG2013/Papers/234.pdf. 5. Id. 6. Info. Office of the State Council, China, China-A frica Economic and Trade Cooperation 3 (2013) [hereinafter IOSC White Paper], available at http://www.safpi.org/ sites/default/files/publications/ China-AfricaEconomicandTradeC ooperation.pdf. 7. Id. 8. Id. 9. Id. 10. Id. at 5. 11. Chinese Businesses in Africa urged to Create Local Jobs, X inhua (Mar. 18, 2013, 6:57 PM), http:// news.xinhuanet.com/english/ china/2013-03/18/c_132243261. htm. 12. IOSC White Paper, supra note 6, at
6. 13. Jeffrey Waincymer, Investor-State Arbitration: Finding the Elusive Balance Between Investor Protection and State Police Powers, 17 Int’l Trade & Bus. L. Rev. 261, 261 (2014). 14. Id. 15. Id. 16. Chris Alden & Ana Cristina Alves, China and Africa’s Natural Resources: The Challenges and Implications for Development and Governance, S. Afr. Inst. of Int’l AffairsOccasional P aper , no. 1, Sept. 2009, at 1, 6-7, available at http://www.saiia. org.za/occasional-papers/chinaand-africas-natural-resources-thechallenges-and-implications-fordevelopment-and-governance; Kent Hughes Butts & Brent Bankus, China and Natural Resource Competition, in U n d e r s ta n d i n g A f r i c a : A Geographic Approach 349, 349, 352-53 (Amy Richmond Krakowka& Laurel J. Hummel eds., 2009), available at http://www.westpoint. edu/gene/SiteAssets/SitePages/ Publications/Understanding%20 Africa.pdf. 17. David H. Shinn, Adjunct Professor, Elliot Sch. of Int’l Affairs, George Wash. Univ., Remarks at the Indiana University China in Africa Symposium: Comparing Engagement with Africa by China and the United States 1 (Mar. 6-7, 2009), available at https:// scholarworks.iu.edu/dspace/ bitstream/handle/2022/3466/ China+in+Africa+Symposium++the+good+one.pdf ?sequence=1. 18. Press Release, U.N. Dep’t of Econ. & Soc. Affairs, World Population Projected to Reach 9.6 Billion by 2050 with most Growth in Developing Regions, Especially Africa – Says UN, U.N. Press
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mofcom.g ov.cn/aar ticle/h/ aw/201002/20100206778964. html. 116. Agreement for the Reciprocal Promotion and Protection of Investments, China-Nigeria, art. 8.2, Aug. 27, 2001 [hereinafter ChinaNigeria BIT], available at http:// tfs.mofcom.gov.cn/article/h/ aw/201002/20100206795412. shtml. 117. Sudan-China BIT, supra note 115, art. 9.1; China-Nigeria BIT, supra note 116, art. 9.1. 118. Sudan-China BIT, supra note 115, art. 9.2; China-Nigeria BIT, supra note 116, art. 9.2. 119. Sudan-China BIT, supra note 115, art. 9.3; China-Nigeria BIT, supra note 116, art. 9.3. 120. Sudan-China BIT, supra note 115, art 9.3. 121. China-Nigeria BIT, supra note 116, art. 9.3. 122. Id. art. 9.1. 123. Tza Yap Shum v.The Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence of the Arbitral Tr i b u n a l , ¶ 1 7 4 ( Ju n e 1 9 , 2009), available at http://www. docstoc.com/docs/164543221/ Inter national-Centre-forS e t t l e m e n t - o f - I n ve s t m e n t Disputes. 124. Id. 125. Ag reement Concer ning the Encouragement and Reciprocal Protection of Investments, PeruChina, art.8.3, Sept. 6, 1994, 1901 U.N.T.S. 257, 278, available at https://treaties.un.org/doc/ Publication/UNTS/Volume%20 1901/v1901.pdf. 126. Tza Yap Shum, ICSID Case No.ARB/07/6, ¶ 150. 127. Id. 128. Id. ¶ 188. 129. Nick Gallus & Robert Wisner, Nationality Requirements in InvestorState Arbitration, 5 J. World Inv. & Trade 927, 927 (2004). 130. China-Nigeria BIT, supra note 116, art. 1.2(a). 131. Agreement on the Encouragement and Reciprocal Protection of Investments, China-Alg., art. 1.2(a), Oct. 17, 1996 [hereinafter ChinaAlgeria BIT], available at http:// tfs.mofcom.gov.cn/aarticle/h/ aw/201002/20100206778960. html. 132. China-Nigeria BIT, supra note 116, art. 1.2(a). 133. Engela C Schlemmer, Investment, Investor, Nationalitym and Shareholders, in T he O xford H andbook of International Investment 49, 71 (Peter Muchlinski, Federico Ortino & Christoph Schreuer eds., 2008). 134. Hussein Nuaman Soufraki v.The
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and Protection of Investments, China-Tunis., art. 3(2), June 21, 2004 [hereinafter ChinaTunisia BIT], available at http:// investmentpolicyhub.unctad.org/ IIA/country/213/treaty/983. 171. Elizabeth Whitsitt, Application of Most-Favoured-Nation Clauses to the Dispute Settlement Provisions of Bilateral Investment Treaties: An Assessment of the Jurisprudence, 27 J. Energy & Nat. Resources L. 527, 527 (2009). 172. Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Objection to Jurisdiction, ¶ 38 (Jan. 25, 2000), 5 ICSID Rep. 396 (2002), available at http://www. italaw.com/sites/default/files/ case-documents/ita0479.pdf. 173. Agreement on the Reciprocal Promotion and Protection of Investments, Arg.-Spain, art.IV(2), Oct. 3, 1991, 1699 U.N.T.S. 187. [hereinafter Arg.-Spain BIT], available at http://www.wipo.int/ wipolex/en/other_treaties/text. jsp?file_id=247353. 174. Maffezini, 5 ICSID Rep. at 399-400, 404. 175. Id. at 407-08. 176. Id. at 408. 177. Id. at 410. 178. National Grid plc v. Argentina Republic, Objection to Jurisdiction, (UNCITRAL Arb. 2006), http:// www.italaw.com/sites/default/ files/case-documents/ita0553. pdf; Suez, Sociedad General de Aguas de Barcelona S.A. v. Argentine Republic, ICSID Case No. ARB/03/17, Decision on Jurisdiction, (May 16 2006), http:// italaw.com/documents/SuezVivendiChallenge.pdf; Gas Natural SDG v. Argentina Republic, ICSID Case No.ARB/03/10, Decision on Jurisdiction, (June 17, 2005),http://www.italaw. com/sites/default/files/casedocuments/ita0354.pdf; Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, (Aug. 3, 2004), 12 ICSID Rep. 174, available at http://www.italaw.com/sites/ default/files/case-documents/ ita0788.pdf. 179. China-Tunisia BIT, supra note 170, art. 11. 180. China-S. Afr. BIT, supra note 154, art. 3. 181. Wei Shen, Leaning Towards a More Liberal Stance?An Evaluation of Substantive Protection Provisions Under the New ASEAN-China Investment Agreement in Light of Chinese BIT Jurisprudence, 26 J. London Ct. of Arb. Int’l 549, 568 (2010). 182. Evan Simpson, The Failure of National Treatment in the Dubai Ports
World Dispute, 4 D artmouth L.J. 6, 6 (2006). 183. Shen, supra note 181, at 556. 184. Ofodile, supra note 104, at 166–67. 185. Id. at 167. 186. China-Nigeria BIT, supra note 116, art. 3. 187. Shen, supra note 181, at 556. 188. China and the WTO, WTO, http:// www.wto.org/english/thewto_e/ countries_e/china_e.htm (last visited Nov. 18, 2014).
40
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Colliding Worlds: E-Discovery Cutting Across All Levels of Litigation, Can International and Domestic Laws Work Together? MATTHEW STEINFELD*
—————————————————
I. Introduction
Additionally, throughout each section, this
—————————————————
paper will examine possible solutions to
II. Cost of E-Discovery
————————————————
each problem, as well as the effectiveness
————————————————
The world is rapidly shrinking, not
of previously proposed solutions. Gordon
Discovery is part of the pretrial phase;6 the
literally, but in the sense that the ability
E. Moore (“Moore’s Law”) believed that
purpose of discovery requests is the attempt
to communicate and conduct business is
processor speed and storage technology will
to find evidence that would be admissible
becoming easier and faster. For example,
double every two years. This rapid rate of
in court, which is related to the contested
it is very easy for a company to have their
technological innovation is why e-discovery
claim.7 There are three primary costs with
corporate headquarters in Europe, their
and the statutes that govern e-discovery are
ESI related discovery.8 Generally, people are
manufacturing base in the U.S., and their
becoming increasingly important; they will
referring to these costs when saying that they
digital storage in Asia. Businesses are
only continue to increase in prevalence and
will drown you in paperwork and expenses
exploiting laws for their benefit, but they
importance to the litigation community, as
until the “little guy” cannot fight the lawsuit
are also exposing themselves to great risk.
well as to business managers as businesses
anymore.9 The three primary costs are: (1)
By spreading themselves all over the world,
become global entities. Further expanding
preservation; (2) production; and (3) review.10
they are creating a complicated network of
upon Moore’s Law, the rapid development of
offices, computer storage, and personnel.
technology, and how the world is adapting,
When a lawsuit is filed against them or
—————————————————
on their behalf, their global network is put under a microscope and the opposing
There are three primary costs with ESI related discovery.
party will make various discovery requests,
—————————————————
which could, and most likely will, require a
experts now believe that a little more than
business to incur massive costs before even
ninety percent (90%) of all documents are
reaching trial.
created digitally.2 As well, “only 30 percent
1
This note will examine three main ideas
are ever printed to paper.”3 In addition, the
that businesses operating on an international
increase in cloud storage4 and the continued
level must be aware of: (1) potential costs of
movement to a digital world5 makes it clear
discovery relating to electronically stored
ESI is not going away; it will only continue
information (ESI); (2) the differences
to persist and will require international
between international and domestic
cooperation.
A. PRESERVATION
Preservation of ESI discovery is the first major cost that companies face when responding to discovery requests.11 Preser vation is an expensive part of discovery because once there is a courtordered discovery request the business must slow down or stop their business operations in order to comply with the preservation of data and ESI order.12 Costs associated with preservation orders can include, but are certainly not limited to, purchasing additional technology hardware to store the electronically related material, creating
e-discovery rules; and (3) privacy concerns. 41
Currents Summer 2014
policies to prevent accidental deletion of
all their existing ESI in order to find the ESI
related material, and human-capital resources,
in compliance with the discovery request.20
by way of reassigning or creating additional
Production oftentimes inadvertently includes
responsibilities on top of pre-existing work
metadata, coding within the documents
Review is the last of the required steps
responsibilities for its employees.13 Fear of
subject to production that the creators,
in complying with an ESI-related discovery
violating a preservation order can yield two
editors, and users, never intended to send to
request. 28 The final step is also the most
major concerns: (1) massive data storage
the opposing party.21 The review of metadata
costly of the three because it requires
expenses; and (2) creating and purchasing
during the review phase and the subsequent
a comprehensive review of all the data
more servers and storage than is necessary
removal of such metadata can lead to
collected pertaining to the ESI discovery
for the “future/pending” litigation to comply
massive expenses, but if such measures
request for two things: (1) relevance and
with the preservation order, which essentially
are not taken, the metadata could provide
(2) privilege.29 IT World, a technology news
requires companies to attempt to predict
the opposing parties with information
website, estimates that eighty percent of a
the future.
that could be harmful to the producing
producing party’s expenses stem from the
party. Additionally, with the development
review step of discovery order compliance.30
of technology, electronic discovery is no
The sheer amount of time it takes to find all
longer confined to digital copies of Word
of the documents related to the discovery
documents, spreadsheets and emails, but
request and then to sift through all the search
more companies are storing voicemail in
results is an extremely expensive process;
digital form. Furthermore, some companies
in addition, reviewing all of the documents
are creating instant messaging intra-office
for relevance and privilege only adds to
communication systems.24 With the increased
the expense of production.31 Considering
use of digital storage and development of
preservation, production, and review, the
technology, more information will begin to
amount of time and cost associated with
fall under ESI and lead to increased costs
having employees review what could be
for clients.
hundreds of thousands, if not millions of
—————————————————
documents, could ultimately take weeks
The general presumption regarding discovery, including ESI, is that the producing party will pay for all the costs of producing the requested ESI.
or months to comply with one discovery
14
22
B. PRODUCTION
The second major cost associated with ESI discovery is the production of the requested material.15 Businesses have evolved from having a single room full of paper records for their entire business to having one room full of computers storing hundreds of times as much information in that same amount of space now because of the sheer physical space required to house documents.16 In today’s world, businesses can keep every single “sheet of paper” because they can keep everything in digital form in a fraction of the space.17 The general presumption regarding discovery, including ESI, is that the producing party will pay for all the costs of producing the requested ESI.18 This general presumption has resulted in extremely high costs for the producing party, depending on the discovery request. The consulting company, Deloitte, 19
found that many companies are not prepared for a massive ESI discovery request and that such requests could lead to massive and unexpected financial and time costs incurred by the producing party while sifting through
23
25
————————————————— The first two major costs, preservation and production, are closely related and if a company is unprepared for a discovery request, its preservation efforts can be woefully inadequate, which will lead to even higher production costs.26 The first two costs associated with discovery can be dwarfed by the last of the three major costs related to 42
Currents Summer 2014
discovery orders.27 C. REVIEW
request, it becomes clear how and why ESI discovery can become so expensive. D. COST-SHIFTING ABILITY
As a general rule, the producing party pays the costs of preserving, finding, and sending the ESI related discovery material to the requesting party.32 The United States Supreme Court stated that courts could shift some of the discovery related costs, but never articulated how courts should shift the costs or when cost-shifting was appropriate.33 However, the Supreme Court
provided limited guidance regarding when
to shift some of the costs when a discovery
to the discovery request.56 The main concerns
the institution cost-shifting measures should
request is not specifically tailored.45 The
for these factors are related to which party
be implemented to ensure some semblance
second factor is the availability of such
is in a better position to bear the costs and
of equality among the producing party and
information from other sources. The key
the total cost of the ESI discovery request.57
the requesting party, to avoid an “undue
to the second factor is availability; courts
The third factor, the most vital of the cost
burden or expense” on the producing party.34
will be more inclined to shift costs when the
factor group, requires the court to compare
In McPeek v. Ashcroft, the Court articulated
requested discovery materials are presently
the cost of production with the amount in
that cost-shifting may be more appropriate
accessible to the requesting party. The
controversy;58 the court is more prone to
in situations where the discovery request is
third factor is the total cost of production,
shift costs when the cost of production far
being considered in relation to both the cost
48
compared to the amount in controversy.
outweighs the amount being sought by the
and the likelihood of yielding related and
The fourth factor is the total cost of
claimant.59 The fourth factor looks to see
valuable discovery.35
production, compared to the resources
which party has superior means to deal with
available to each party. The fifth factor is
the high cost of production and/or has more
the Court developed a test for
the relative ability of each party to control
financial resources.60 The fifth factor, the
cost-shifting, also known as the Zubulake
costs and its incentive to do so.50 The last
least important of the three, analyzes which
2-step analysis.37 The first step requires the
two factors are the importance of the issues
party is in a better position to control costs
court to determine if the requested ESI was
at stake in the litigation and relative benefits
or has reason to be more cost-conscious.61
“accessible.”38 Data is defined as inaccessible
to the parties of obtaining the information.51
The last two factors are the least important
if it creates an undue burden or expense
—————————————————
of the seven factors.62 The sixth factor asks
for the producing party.39 Determining the
the court to examine what is at stake in the
determine inaccessibility.40 Various attempts
More recently in Zubulake v. UBS Warburg LLC., the Court developed a test for cost-shifting, also known as the Zubulake 2-step Analysis.
have led to some cost-shifting methods
—————————————————
in cases regarding intellectual property and
based on the ESI format or the total cost
These seven factors are divided into three
gender discrimination, because “such cases
of the production.41 Neither “Format nor
groups based on the importance of each
are not unique.”64 The last factor regards the
Total Cost” accessibility would provide the
factor in the court’s overall analysis, and
relative benefit of obtaining the information
producing party with cost-shifting and will
within each of the three groups the factors
and is considered the least important because
still require analysis of the second step of
are discussed in order of importance. The
clearly the requesting party has more to gain
the Zubulake Test.
first group, containing the first two most
than the producing party.65
More recently in Zubulake v. UBS Warburg LLC.,
36
data’s accessibility or lack thereof is critical to the two-step evaluation; however, there is no common definition or method to
42
46
47
49
52
litigation, and depending on the uniqueness of the claim will help to determine if costshifting measures should be implemented.63 This factor has developed into a neutral factor
The second step of the Zubulake Test
critical factors, belongs to the Marginal Utility
There are three possible outcomes from
requires the court to consider seven factors.43
Test.53 These two factors are considered the
the Zubulake analysis:66 (1) The court might
In Zubulake, the court outlines the seven
most important because when discovery
allow e-discovery at the producing party’s
factors; the first factor is the extent to which
request is more likely to provide relevant
expense, resulting in no cost-shifting;67 (2)
the request is specifically tailored to discover
support for either the claim or the defense,
the court might not allow e-discovery at
relevant information.44 The key to the first
the producing party should incur those
all;68and (3) the court could allow e-discovery
factor is the specificity of the discovery
costs.54
with some restrictions (i.e., requesting party
request; the court can conduct a sample
The next group of factors is referred to
may have to bear some of the costs incurred
search to better and more specifically tailor
as the Cost Factors. The third, fourth, and
by the producing party).69 Ultimately, the
the discovery request, and thus lead a court
fifth factors address the issue of cost related
court’s final decision should not be based
55
43
Currents Summer 2014
on a mathematical equation or formula, but
requests, which give the court an opportunity
to cost-shifting.85 The first advantage is
rather, it should be based upon “judgment
to determine if cost-shifting is applicable.77
to protect producing parties from unduly
and fairness.” Courts are more likely to
All of these estimations are done before
burdensome ESI discovery requests. 86
shift “production & preservation” costs
the producing party starts to produce the
Another advantage is the potential for access
than “review” costs because the producing
requested discovery. 78 There are three
to previously inaccessible documents due to
party has the most control over the “review”
disadvantages to cost-shifting.79 The first
cost—87 the two parties can, in theory, share
phase. 71 The scope of production and
—————————————————
the cost of complying with the discovery
preservation is determined by the requesting
order.88 The third advantage is parallel to
might shift review related costs is when the
Courts often allow parties to produce estimated costs relating to ESI discovery requests, which give the courts an opportunity to determine if cost-shifting is applicable.
requesting party is asking for information
—————————————————
is that they function as a deterrent to the
they already have or could obtain in a
concern is that cost-shifting will undermine
plaintiff using the threat of discovery
potentially less costly manner.73
the public policy of resolving lawsuits on
requests against a defendant to coerce the
their merits (becomes a war of attrition,
defendant to settle.90 A possible solution
financially speaking).80 Another concern
to the typical discovery issues would be
and disadvantage is that it might limit
to propose a Uniform Zubulake Test that
A possible solution to consider prior to
economically weaker or disadvantaged
applies universally regardless of international
tackling the concept of cost-shifting is that
plaintiffs from bringing claims and thus, limit
or domestic discovery, thereby providing a
before discovery requests and production
some plaintiffs overall access to the judicial
transparent roadmap to potential plaintiffs
are underway, the parties could agree upon
system.
The last disadvantage is more
and defendants with enough knowledge
the form in which ESI will be provided to
of a statement of distrust towards certain
to make informed decisions regarding
74
the requesting party. By pre-determining
defendants. Courts fear that cost-shifting
preservation of potential discoverable
the form in which the information will be
may lead to the creation of unnecessary costs
material. Conversely, parties are aware that
provided, parties will be able to prepare
and procedures by defendants that might
the use of discovery requests as weapons
their own systems to handle the potential
trigger the cost-shifting analysis and lead
to force favorable settlements will not be
large influx of information. In addition,
to delays (i.e., many hearings). As a result,
tolerated.
parties will have the opportunity to agree
cost-shifting may be, cost-prohibitive for
In 2006, the U.S. Congress proposed a
on the best format that allows both sides to
certain plaintiffs, effectively barring them
cost-shifting amendment to Fed. R. Civ.
actually review the production in hopes of
from bringing claims or forcing them to
P. 26 (FRCP 26), with the general intent
aiding in either their defenses or claims.
76
settle for significantly less than the potential
to harmonize all the different variations
This may allow for more attorneys to feel
worth of the claim because of the fear of
of the Zubulake analysis.91 The proposed
less threatened by the discovery process
running out of “money” during the “pre-
amendment to FRCP 26 is a good starting
as a consequence of not settling potential
trial” phase and thus never making it to trial.
point because it applies to inaccessible
claims and allows the attorneys to actually
The use of a third party mediator to settle
e-discovery sources, but it is limited in
use discovery for its intended purpose.
all pre-trial discovery disputes could resolve
application because of its specific and
these issues.
narrow language.92 More specifically, the
70
party and the court, and results in less cost control for those two steps for the producing party than the review step, which is almost completely determined by the producing party. An exception to when the court 72
E. POSSIBLE SOLUTIONS
75
Courts often allow parties to produce estimated costs relating to ESI discovery
81
82
83
84
There are four commonly noted advantages 44
Currents Summer 2014
the third disadvantage of cost-shifting—the threat of cost-shifting measures should limit parties from making overly broad discovery requests because of the possibility of having to bear some the costs of the discovery.89 Similarly, the last advantage to cost-shifting
proposed rule only applies to federal district
court conflicts93 and to ESI not located in
list.99 The comity analysis prescribed by the
However, this ends the party’s dilemma or
the US, as long as it is related to a case in
U.S. Supreme Court is conducted under the
decision-making process;107 now the party
the US.94 Although the limited application
Federal Rules of Civil Procedure (FRCP),100
might have to decide if they will comply with
is unfortunate, the proposed amendment
which is subject to a three-element test to
the discovery order, which might be in direct
to FRCP 26 provides some guidance to
determine if the court can use the discovery
conflict with a foreign blocking statute.108
potential parties with potential ESI discovery
procedures under the Hague Convention.101
Blocking statutes are statutes enacted by
requests.
—————————————————
countries to prevent disclosure of certain
The producing party must weigh a variety of consequences when faced with the decision of complying with an i nte r n at i o n a l d i s cove r y request that is in direct conflict with the foreign blocking statute.
types of information.109 The producing
parties make use of foreign blocking statutes
—————————————————
by raising them as a shield in the form of
Courts weigh three factors to determine if
a protective order against the discovery
the procedures under the Hague Convention
request. 112 An example of the possible
will be used: (1) the particular facts of the
criminal consequences of disregarding
case; (2) sovereign interests; (3) chance
foreign blocking statutes to comply with a
that using the procedures under the Hague
U.S. court’s discovery order is the case of In re
Convention will provide effective results. If
“Christopher X,” where a French attorney was
the procedures under the Hague Convention
prosecuted for violating a French blocking
are used, then the U.S. judge must request
statute.113 Adverse inference instructions
permission to sign a discovery order from
may be permitted where the trial judge
the country where the discovery is located.103
allows for adverse inferences due to the
This process can be notoriously slow and
lack of production of discovery requested
expensive.
In the U.S., the party seeking
material.114 The judge’s allowance of adverse
permission from the court bears the burden
inference instructions may result in a more
of proving the benefits of proceeding with
equitable trial, because the alternative could
the procedures under the Hague Convention
be as harsh as the judge granting a motion
instead of the “default” rules of the FRCP.105
to dismiss against the party that failed to
F. INTERNATIONAL DISCOVERY/COSTS/ COMITY ANALYSIS
The most basic issue that companies must plan for is whether or not a U.S. court will allow and order discovery, regardless of an applicable foreign law or international treaty that would block such discovery order.95 U.S. courts have adopted a fivefactor comity analysis to determine if they will ignore and disregard a foreign blocking statute or international treaty and order discovery for the case.96 The five factors for the comity analysis were developed by the U.S. Supreme Court and are based on five factors put forth by the drafters of the Restatement Third of Foreign Relations Law of the United States. The 97
U.S. Supreme Court uses the following five factors: (1) importance to the litigation of the documents or other information requested; (2) degree of specificity of the request; (3) whether the information originated in the U.S.; (4) availability of alternative means of securing the information; (5) extent to which noncompliance with the request would undermine important interests of the U.S. or compliance with request would undermine important interests of the state where the information is located.98 The factors described by the U.S. Supreme Court are the key concepts of the comity analysis, but are not meant to be an exhaustive or exclusive
102
104
party must weigh a variety of consequences when faced with the decision of complying with an international discovery request that is in direct conflict with the foreign blocking statute.110 Violations of a foreign blocking statute may result in fines or jail time imposed by U.S. court.111 Producing
produce the required discovery.115 The U.S. G. GAME THEORY (WEIGHING OF OPTIONS)
Supreme Court considers parties to have acted in bad faith when they purposefully
After the court has decided how the
hide discoverable information or place
discovery phase will proceed, whether under
documents in countries with notoriously
the Hague Convention procedures or the U.S.
strict privacy laws or foreign discovery
FRCP, the parties are faced with little choice
rules.116 The U.S. Supreme Court further
but to comply with the court’s order.106
explained that such purposeful behavior and
45
Currents Summer 2014
clear attempt to circumvent the jurisdiction
abide by a universal standard. A possible
the presumption to use the FRCP to govern
of the court may be rightfully met with a
standard may be an evolved version of the
discovery is rebutted and then the court may
granting of a motion to dismiss.
The only
Zubulake two-step test for cost-shifting
decide to pursue discovery under the Hague
concern that is raised by granting a motion to
that is based on the concept of total cost
Convention.124 The party asserting protection
dismiss for failure to comply with a discovery
analysis to determine an appropriate cost-
against court-ordered discovery relating to
request is the conflict with an individual’s
shifting formula. This approach would
ESI must prove that foreign laws actually
Fifth Amendment right–– “that no person
provide parties with the opportunity to
prevent or provide the alleged protection.125
shall be deprived of property without due
present their “expected costs” to the trial
Although the concept of privacy for each
process of law.”
court judge and the trial judge would have
American citizen will not be found codified
Furthermore, parties must also consider
the opportunity to assess the validity of the
by statute, it has become a right that is
the actual costs related to the discovery
claims and determine what cost-shifting
protected by the courts.126
production. These additional costs can
methods would be appropriate, if any at all,
be further broken down into translation
with a presumption that some cost-shifting
costs, data backup and preservation for
will occur. Although this hybrid approach
transportation, and loss prevention.
119
allows parties to consider the threat of
There are a wide range of views on
Another aspect the court should consider
discovery related costs, the parties should
privacy and how those views are enforced
when determining which discovery request
remain aware that the possibility of sharing
internationally.127 The European Union (EU)
procedure should be used are possible
the costs between the two sides lessens the
has two main pillars in place that directly
indirect costs, such as potential geopolitical
threat of a massive discovery request by the
deal with privacy-related issues, with one
costs associated with the discovery request,
opposing party.
being the EU Data Protection Directive
e.g., the subject matter of the litigation
—————————————————
which provides guidance regarding personal
may in some cases impact international
data.128 The second pillar regarding privacy
with blocking statutes that might result in
There are a wide range of views on privacy and how those views are enforced internationally.
fines or criminal prosecution if the party is
—————————————————
Rights and Fundamental Freedoms case-law
required to produce protected documents.
—————————————————
in applying the treaty, which have created a
117
118
relations.120 Also, parties should be mindful when storing their data in foreign countries
A. INTERNATIONAL STANDARDS
is the combination of the rights guaranteed by European Court of Human Rights and the Convention for Protection of Human
approach or formula to determine how to
III. International & Domestic E-Discovery Rules
cost-shift or even to determine the comity
————————————————
very broadly construed under this system,
analysis, but rather, each case must be
Courts must analyze tests and weigh factors
including workplace emails and providing
evaluated on its own merits using the factors
to determine which rules will apply to
a very large range of protected data. 130
and the subjective tests set forth by the case
the discovery phase of the trial. After
These two pillars provide the foundation
law. For example, the standards of the total
consideration of the factors and tests, the
for countries to make their own privacy
cost versus the accessibility approach when
court issues a discovery order and the court
statutes.131
determining if information is inaccessible
then must turn to the set of rules it chose
Blocking statutes, established to protect
or creates an undue burden vary between
to proceed under and enforce the discovery
individuals’ privacy, have created a roadblock
courts and countries.122 A possible approach
order within the confines of the selected
to discovery production. Several countries
to resolving these discrepancies is to create a
rule.
A U.S. federal court’s discovery order
have enacted blocking statutes;132 France,
uniform standard. However, accomplishing
will presumably be followed and enforced
Canada, and Germany have created some of
this uniformity will require all countries to
within the bounds of the FRCP 26, unless
the more notable blocking statutes.133 Many
There is no cookie-cutter balancing
121
123
46
Currents Summer 2014
strong protection relating to communication within the workplace.129 Personal data is
of the blocking statutes have been created
has used when making this decision is the
phone calls made at work or using work email
to specifically frustrate and prevent discovery
location of the parent company.
If the
addresses are not allowed to be monitored
production in the U.S.
An example of the
parent company is located in the U.S., then
due to the fact they may be personal in
consequences a company may face is shown
the application of secrecy laws are taken less
nature and protected as part of private life.152
in the German Data Protection Act, which
seriously as compared to a parent company
This sort of wide-ranging protection is a
makes it a criminal offense to violate the
domiciled in foreign country.145
demonstration of how different cultures view
134
144
privacy.153 Workplace privacy is an example
act, possibly resulting in fines or a prison sentence.135
of how cultural differences can influence
B. COMPARISON
and dictate the laws and rules governing
The next level of individual privacy protection can be found in secrecy laws,
Germany has enacted the German Data
discovery.154 For example, US companies
which provide the most wide-reaching
Protection Act, which works in concert with
and employees do not presume that anything
protection against discovery requests from
the EU Data Protection Directive.
United
related to an employee’s personal life or
U.S. courts because they are seen as only
States District Court of the District of
non-work related communications will be
created when a country believes the type of
Columbia agrees that prohibited discovery
privileged, protected, and immune from
law is important to their citizens.136 Generally,
would violate the foreign country’s laws
discovery, which is why discovery requests
U.S. courts honor secrecy laws and, as such,
unless two specific elements are met: (1)
that include electronic voice-mail, e-mails
do not require the production of protected
information is necessary to protect the
and digital instant communication are
documents and information because of the
public or the plaintiff ’s interests, and (2)
commonly requested. 155 However, EU
perceived value foreign nations place on
data subjects have no legitimate reason not
countries and their citizens maintain the
these items.
to disclose information.
Both are required
belief that almost everything is privileged and
However, U.S. courts do not treat all
for a U.S. court to ignore foreign protection
protected, and they hold a high expectation
secrecy laws the same.138 Secrecy laws are
laws.148 The court’s analysis suggests that it
of privacy.156 Another observation of cultural
generally based on the banking and financial
does not account for, nor does it consider,
differences is the belief that many of the
industry of that country and aim to protect
the potential consequences of blocking
blocking statutes were enacted specifically to
the customers of those institutions.
149
statutes or privacy laws in foreign nations.
shield against discovery requests stemming
example, Germany’s secrecy laws regarding
France and Germany are examples of
from US based litigation.157 Belgian and
privileged, bank-related information are
countries that severely limit the amount and
Japanese discovery laws prevent or at least
held by the individual and the individual can
scope of pre-trial discovery.
severely limit the ability of pre-trial discovery
make the ultimate decision to waive his/her
—————————————————
and, even upon a comity analysis, a U.S. court
privilege or to enforce his/her secrecy.
will override those foreign nation’s laws
that China’s privacy statute prevented
E U co u nt r i e s a n d t h e i r citizens maintain the belief that almost everything is privileged and protected, and they hold a high expectation of privacy.
discovery and held the Chinese company
—————————————————
in contempt of court for failure to produce
Violation of the German Data Protection
the discovery documents.142 U.S. courts have
Act is a criminal offense and can result in
taken a case-by-case approach in determining
jail time or monetary fines.151 France’s Court
whether or not to abide by secrecy laws.143
of Cassation and the European Court of
For example, one factor that a U.S. judge
Human Rights both found that emails and
137
139
For
140
There are personal or individual secrecy laws; there are also corporate secrecy laws.141 In Richmark Corp. v. Timber Falling Consultants, the Ninth Circuit overruled any consideration
146
147
150
and choose to follow U.S.’ FRCP discovery rules.158 C. CIVIL LAW V. COMMON LAW DISCOVERY RULES
Civil law jurisdictions base their legal system on statutory laws, which are applied equally with little deviation, thus helping to promote a very rigid system but yielding very few surprises or room for novel arguments.159 Many civil law jurisdictions do not allow any
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Currents Summer 2014
discovery outside of the necessary scope of
Legal Systems in common law jurisdictions
France and Germany are two
are based on legal precedent, or stare decisis,
examples of such systems, which greatly limit
which allows for a more fluid legal system
the amount of pre-trial discovery.
Each
and a more adaptable system, as compared
The Hague Evidence Convention provides
country has its own nuisances, but both make
to the rigid civil law system.172 The U.S.,
some guidance on discovery through Article
it clear that discovery will not be used as a
Canada and the United Kingdom (UK) are
23. 179 The Hague Evidence Convention
weapon to leverage settlement terms or even
common law countries and allow for the
attempted to create a simple, clear, and
intimidate a potential litigant.
broadest and potentially the most expensive
universal procedure to request discovery
discovery systems.
Parties can make
production when documents and requests
to records or production that would be
discovery requests for relevant information,
were going to be served by a party in one
admissible at trial.163 A judge supervises the
and they can additionally ask for discovery of
country against another party who either
164
document disclosure portion of discovery.
anything that may lead to information that is
resided in another country or the documents
The judge also has the power to determine a
admissible and relevant to the case, but was
subject to the request for production were
document’s relevance and the admissibility of
previously unknown without the discovery
located in another country, other than
the produced document.
request and production.
the country of the requesting party. 180
and laws governing the discovery process
—————————————————
This concept seems to offer the solution
are even stricter than the French Code
that everyone has been seeking: a simple
phase, the seeking party must obtain a court
[A] country is not supposed to ignore another country's formal court request for production, but a country can deny the request on the basis that honoring such a request could compromise or prejudice the country's sovereign security.
order to compel the production of the
—————————————————
out” of providing discovery requests from
document.169 When asking the court to order
UK parties must disclose three things:
foreign courts.182 Countries do not even have
production of the document, the party must
(1) documents on which they relied, (2)
to formally “opt-out”; a country can ignore
plead with specificity with regards to the
documents that adversely affect or support
a request for document production with
necessity of the document, such as stating
either party’s case, and (3) documents
little fear of repercussions or retribution.183
why the document is important and what the
required to produce by a practice direction.175
However, a country is not supposed to ignore
party hopes to prove by gaining possession
“Document” has an extremely broad
another country’s formal court request for
of the document.170 If a third-party is in
definition; the amount of disclosure of
production, but a country can deny the
possession of the document, the requesting
documents is more limited.
Canada
request on the basis that honoring such a
party must gain permission from the third-
requires that parties disclose and produce
request could compromise or prejudice the
party to gain access to the document or bring
“every document relating to any matter in
country’s sovereign security.184 Another way
legal action against the third-party to force
issue in an action that is or has been in the
for a country to deny such a production
production and disclosure.171 These are just
possession, control or power of a party to
request would be to assert the belief that
two examples of how difficult electronic
the action.”
Canada, unlike the UK, does
the country’s laws or privileges protect such
discovery can be in countries implemented
not require that parties produce or search for
discovery production. 185 Essentially, the
under civil code systems.
deleted or residual data.178
country that is faced with the request would
the conflict.
160
161
162
The French Code limits discovery requests
165
Germany’s rules
limits, depending on the attorney’s point of view.
166
Parties are not required to disclose
documents to the opposing party during the discovery phase.167 Parties are only required to produce the documents that will further their own claims or defenses. However, if a 168
party seeks a document during the discovery
173
174
177
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Currents Summer 2014
176
D. HAGUE CONVENTION
procedure that is generally accepted by the international community. However, the Hague Evidence Convention allowed for various exceptions and provisions that have all but become the rule rather than the original intent of being an exception.181 Ar ticle 23 of the Hague Evidence Convention allows for countries to “opt-
be enacting a “blocking” statute against such
to use the state secret or state welfare
currently split over various issues such as,
discovery requests.
exemption created by the Hague Evidence
when to ignore blocking statutes, when the
Convention.
The UK sits on the opposite
disagreement is between parties wanting to
by Hague Evidence Convention was the
end of the spectrum from China with
invoke the Hague Convention rules, when to
provision in Article 23 that allows for
regards to the invocation of the state secret
balance competing discovery laws, when to
a signing country to state they will not
provision. The UK allows for foreign
limit discovery requests or let parties reassess
accept or honor any letters of request, also
discovery as long as there is no express
their discovery requests and try to make
known as “letters rogatory,” that originate
prohibition against providing or aiding
them more specific and not violate foreign
during the pretrial phase of discovery in
in the specific type of foreign requested
nation’s laws.201 Even though U.S. federal
common law countries.187 Several countries,
discovery. 195 The UK decided to take a
courts are split on what rules will apply and
including France, Germany, Italy and Spain,
narrowly tailored approach to the use of
which rules and laws will govern, the FRCP,
have decided to take this position, and
blocking statutes; rather than expressly
in theory, should govern when the U.S. has
will not honor any letters of request from
denying all foreign discovery requests, the
jurisdiction over the case.202 The FRCP
common law countries. 188 This creates
UK allows for the government to react to
accords judges some degree of latitude by
tension between common law and civil law
the evolving needs of the country.196 This
giving judges the power to consider the
governed countries and their respective views
approach essentially allows the government
potential application and use of foreign rules
on pretrial discovery.
more flexibility to pick and choose the
and laws in the case at hand.203 However, if
Additionally, many countries have
situations in need of blocking statutes.197
a party decides to seek governance of the
instituted highly specific and more narrowly
Australia follows a similar decision-making
discovery phase under the procedures of
tailored blocking statutes.
For example,
process by specifically tailoring their blocking
the Hague Evidence Convention, in lieu
Switzerland has created a more narrowly
statutes to each situation as it arises.198 South
of the FRCP, then the moving party bears
tailored approach to blocking statutes by
Africa employs a similar process with regards
the burden of convincing the judge.204 One
specifically targeting financial institutions
to the use of blocking statutes and has
reason U.S. attorneys advocate to conduct
and their employees through the Swiss
chosen to take a more specific approach to
discovery under the FRCP is over concerns
Banking Act.
enacting them.
with the lack of timeliness of discovery
provides very clear instructions on the
—————————————————
under the Hague Evidence Convention.205
limitations of producing financially-related
U.S. attorneys believe that letters rogatory do
financial documents in relation to a pending
Federal courts are beginning to take a more complicated approach that emphasizes the importance of determining which rules and laws apply to the conflict at hand.
legal matter in a foreign country.192 However,
—————————————————
the overall lack of familiarity with the foreign
186
The single greatest obstacle created
documents.
191
190
189
The Swiss Banking Act
Also, the Swiss Banking Act
states the clear criminal charges, which will be pursued against anyone who chooses to aid a foreign person’s attempt to obtain
194
199
not require a foreign judge or government entity to respond in a timely manner and this could result in undue delays with no end in sight.206 Another concern of U.S. attorneys with regards to the topic of rule selection is laws and rules, more specifically, determining
Switzerland provides an exception, a slight sliver of hope for foreign litigants eager
E. PLAYING BY WHAT LAW? WHICH LAW
what precise information will be required
for document production from Swiss-
CONTROLS: HOME-COURT ADVANTAGE?
to allow a foreign judge to order discovery
based financial institutions with the use of a provision that allows for discovery and document production with judicial oversight.
193
China is an example of a country willing
Each country believes that if the litigation is brought in its court, then it should be reasonably assumed its court’s laws should govern and control. 200 U.S. courts are
production.207 Federal courts are beginning to take a more complicated approach that emphasizes the importance of determining which rules and laws apply to the conflict at hand. Several
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Currents Summer 2014
districts are adopting, on their own volition,
the level of accountability of each country by
their clients at extremely high hourly rates
local rules, which will dictate the rules and
removing the provision that allows a country
for the review of the massive amounts of
208
procedures regarding electronic discovery.
to “opt-out” or enact blocking statutes.
electronic discovery clients have an inherent
This approach does not pose a huge threat to
It is highly unlikely that each country will
interest in minimizing costs associated with
litigants; however, if this were to become the
simultaneously agree to actually enforce
discovery, and judges have their own interests
norm and not the exception, then clients and
these terms within each of their respective
to maintain a steady case docket.219 However,
attorneys would be faced with an additional
jurisdictions; however, that is the goal.
it is in the best interest for all parties, and
layer of issues to face when determining
The Judicial Conference Advisor y
it is of great importance to the future of
what rules to advocate for and what location
Committee on Civil Rules (“Conference”)
litigation in America, that everyone works
to attempt to try their case.
began to review the rules that were created
together.220
and put into practice several years ago.215
—————————————————
209
The Hague Evidence Convention was
and usefulness of the Civil Rules.216 Two
IV. Current Problem with a Short-Term and Long-Term Solution
intended to provide answers for any conflict
proposed solutions came forth from the
————————————————
between foreign courts; it was supposed to be
Conference: (1) create a national standard
One of the biggest problems the arena of
the guiding light in what was fast-becoming
for document and data preservation; and (2)
e-discovery faces is the technological literacy
a very murky and confusing electronic
create a set of rules to better assist judges
gap. Many attorneys do not adequately
discovery world.
in determining proportionality and case
comprehend what electronically-stored
willing to bring criminal charges against
management.
information is and, more importantly,
individuals and impose sanctions and fines
—————————————————
do not understand its purpose within the
against corporations for complying with a
context of their specific case and discovery
provision, the Hague Evidence Convention
In the U.S., a cour t may appoint a Special Master when: (1) the parties consent; (2) the type of discovery will require a substantial amount of time from the judge; as well as (3) to provide parties with an adequate response time to allow the pace of the trial and discovery to not be unnecessarily slowed.
has provided every country with the ability to
—————————————————
becoming more and more often, very difficult
ignore the rules and, therefore, is ineffective
The conclusion from this Conference
to retrieve from company’s vast digital
in the purpose of providing a single set of
was a focus away from placing blame on a
storage.224 Due to the complex nature of ESI,
rules for everyone to follow.214 In order to
particular group and instead a focus towards
a Special Master is appointed to preside over
affect change by attempting to clear away
forcing each group, whether the lawyers,
discovery, specifically electronic discovery,
the discovery rules and blocking statutes
clients or judges, to fix the litigation system
which provides many advantages.225
of each individual country, there needs to
in America.218 Each group has individualized
In the U.S., a court may appoint a Special
be a renewed effort to enforce the Hague
interests that are in conflict with each other,
Master when: (1) the parties consent; (2) the
Evidence Convention’s rules and to increase
lawyers have an incentive to continue to bill
type of discovery will require a substantial
The hope has been to review several years
F. POSSIBLE SOLUTIONS
of data and determine the effectiveness
210
But when countries are
foreign court’s request to produce discovery documents, then what should a lawyer do?211 The Hague Evidence Convention has no mechanism in place to enforce their rules.
212
In addition, the Hague Evidence Convention has provided every country with the “optout” provision, of which many countries have decided to invoke upon signing the agreement.
213
By including the “opt-out”
217
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Currents Summer 2014
request.221 Additionally, very few attorneys are not allocating time to properly educate themselves on this rapidly growing area of discovery.222 ESI is more than simply the end product, the printed document, or the email chain that can be physically read aloud in court to the jury or the witness.223 ESI is a bunch of electronic pulses that, when placed in the correct order, produces that email, which makes retrieving ESI sometimes, and
amount of time from the judge; as well
with technology woven into every aspect of
attorney would learn the new area of law to
as (3) to provide parties with an adequate
their life.
better serve the client; how is learning about
231
response time to allow the pace of the
For example, Twitter was born on March
ESI any different?238 Over time, the general
trial and discovery to not be unnecessarily
21, 2006. 232 That is roughly eight years
population of attorneys will change and the
slowed.226 Special Masters have taken on
ago, but since Twitter’s birth, nearly every
majority of the population will be literate
the role of bridging the gap between the
business has an account and there are
in ESI because they will have grown up in
attorneys that have taken the time to learn
more than 500 million daily users, and of
a digital world, but until that day, practicing
and understand the changing landscape
those daily users, more than seventy-seven
attorneys should take the time to learn and
of discovery and the attorneys who have
percent (77%) of those users reside outside
by doing so will be able to provide their
decided an acceptable response is: Your honor,
of the U.S.233 Twitter is a prime example of
clients with better service.239 This applies
I do not understand technology or computers.227
something that has quickly become a part of
globally; most attorneys will, sooner than
The role of Special Master is to help both
daily life and is only growing;
companies
later, be either faced with or will be making a
parties come to an understanding of what
have been created with the sole purpose of
discovery request to produce or receive ESI.
data is being requested, what data has been
monitoring Twitter and the social trends.
—————————————————
produced, and whether that data has been
—————————————————
altered or changed in any way that might hide
————————————————
knowledge to know what ESI they are
The EU believes that personal data is to be strictly protected and only gathered and collec ted for legitimate purposes.
seeking and conjunctively how to ask for their
—————————————————
with a renewed emphasis on protecting
desired ESI; (2) the producing party lacks the
If you ask a child in elementary school
personal information and data.340 The EU
technological skills to produce the requested
what a typewriter is, they may or may not
believes that personal data is to be strictly
information, does not know how to preserve
know what you are talking about, but ask
protected and only gathered and collected for
the requested information and therefore
them about an iPhone or an iPad or about
legitimate purposes.341 Anything that can be
cannot possibly produce the requested
Twitter and they will most likely know exactly
identified to an individual, including merely
information, or he/she simply lacks the
what are you talking about. As law schools
identifying an author of an email, would
required knowledge to properly search
continue to graduate students who have
be considered personal data and, therefore,
his/her vast digital storages and find the
spent their whole life in the digital world,
protected.342 The European Convention of
requested information; and (3) the producing
the problems that face attorneys regarding
Human Rights Article 8 provides individuals
party has the technological skills, but decides
digital literacy will slowly fade. However,
the right of privacy. 343 The EU’s Data
that he/she would rather withhold the
until then, practicing attorneys must take
Protection Directive is considered the base
information, feign incompetency, alter, or
the time to learn and become educated on
or minimum amount of privacy protection
even destroy the requested ESI.
the developing landscape of ESI.
At the
required by all members of the European
Examining paper documents requires
end of the day, lawyers are in the business of
Economic Area (“E.E.A.”);344 however, some
skills that have been developed and refined
client-service. Attorneys are only as valuable
individual member countries have chosen
throughout the life of an attorney.230 The
as their client determines they are to them
to enact statutes that create greater privacy
skills required to become “fluent” in ESI
and attorneys develop trust with the client
protections.345 The E.E.A. plus Norway,
is already becoming a skill developed by
by performing the required tasks of the
Iceland, and Liechtenstein are all members
many of the younger attorneys and will only
client.
If a client’s request requires his/
of the EU Data Protection Directive.346
continue to be developed as people grow up
her attorney to learn a new area of law, the
Data is processed and controlled, wherever
the original contents of the ESI.228 Three common problems Special Masters face in the U.S. are: (1) parties lack the
229
234
235
237
236
V. Privacy
The growing global trend is going away from placing national and commercial-business interests above all else, which includes personal privacy that is now being abandoned
51
Currents Summer 2014
the data is located, the physical location
operating in the EU cross-border economy
possibly based on the strictest country’s
determines which privacy laws govern, and if
are beginning to take operational steps
laws, or at least a universal coding system to
companies of non-E.E.A. member countries
to continue to protect their employee’s
help facilitate a faster production and review
sends data to an E.E.A. country then that
personal privacy, while maintaining a more
process of ESI.361 A third idea presented
data now falls under the privacy laws of that
organized electronic database.355 By taking
is the concept of setting up filters based
country.347 Cultural differences can lead to
a proactive approach to safeguard their
on each country’s individual privacy laws
divergent privacy policies.
employee’s privacy to comply with each
to prevent an inadvertent cross-border
In the EU, the default expectation is for
country’s various privacy laws, companies
transfer of private information, to continue
privacy and protection against discovery
are attempting to limit their potential legal
to streamline the production of requested
production of work emails.
U.S. laws
liability by inadvertently producing privileged
documents.362 However, as technology and
protect much less personal information (i.e.,
or protect information.356 Additionally, the
news has become available to the public
personal medical information) as compared
more organized a company’s electronic
at an increasing rate, American citizens are
to the EU, which would find medical
storage and databases are, the more likely
beginning to demand more privacy.363
information as part of the “personal sensitive
they can cooperate with a foreign discovery
U.S. courts have found that where a
data” category and this category requires an
order, which may lead to fewer conflicts
foreign company is the subsidiary of a U.S.-
even higher level of privacy and restrictions
between governments.357
based parent company, foreign statutes are
on collection and use of such data.350 For
—————————————————
afforded less consideration.364 Establishing
example, the U.S. Patriot Act is seen by some
personal jurisdiction over the producing
American lives (although that debate will not
U.S. courts have a general attitude toward ordering discovery for foreign documents that reflects a game of chicken.
be discussed in this paper), but individuals
—————————————————
The physical location of the documents
living within the EU would find this type of
For example, Eli Lilly and Company
subject to discovery is irrelevant in U.S.
government action as an intrusion into their
is attempting to limit their potential legal
federal court.367 Subsidiaries and affiliated
private lives and a violation of a fundamental
liability while operating in E.U. countries
companies are subject to a three-factor test to
right.351 Societe Internationale v. Rogers is a
by starting and continuing an open dialogue
determine control of the discovery material:
famous U.S. case regarding discovery of
with EU governments.
Based on these
(1) the parent company’s ownership stake
Swiss Bank customers’ information, which
conversations, Eli Lilly and Company has
of the subsidiary company; (2) whether or
was viewed as protected information.
352
set forth a few ideas on how companies
not the parent company and the subsidiary
The U.S. court believed that the U.S.’s
can limit their legal liabilities from foreign
company share management structure or
interest under the Trading with the Enemy
governments.359 One of the suggestions is
personal; and (3) the amount of control the
Act was at the time of greater importance
for companies to work with the EU and
parent company wields over the subsidiary
than the Swiss Bank laws that protected the
individual country government entities to
company.368 In the In re Uranium case, the
customer’s privacy; many other countries find
develop a training certificate program that
court outlines four examples of determining
this view unpersuasive.
will teach employees how to divide, separate,
and applying the previously mentioned
The EU countries are providing the
classify and properly store discoverable
factors to determine control of data.369
highest standard for privacy of personal
infor mation and documents that are
information and data, and do so by creating
privileged and protected.
Another idea
ordering discovery for foreign documents
the widest and broadest definitions of
would be to create a company-wide coding
that reflects a game of chicken. 370 U.S.
personal information and data.354 Companies
system for documents and information,
judges have a hard time acknowledging
348
349
Americans as an intrusion into individuals’ private lives and others believe it is a necessary tool for the government to protect
353
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Currents Summer 2014
358
360
party is a requirement.365 Possession, control, and/or custody are the important factors for a court to consider when determining if a court can order a discovery order.366
U.S. courts have a general attitude toward
foreign blocking statutes when the foreign
view and edit presentations with a coworker
they keep litigation costs down, although
nations have declined to enforce and actually
who is halfway around the world. This is the
this often requires a judge’s deft touch and
punish parties for disobeying the foreign
amazing part of the technology; the diffusion
guidance, the goal of keeping e-discovery
blocking statutes, which is why U.S. judges
of ideas is now easier than ever and will most
costs down can be accomplished. 274
have viewed foreign blocking statutes as
likely only continue to get easier.
Attorneys must be constantly aware of their
Even though a benefit of technology is
client’s data and aware of the implications
371
to make everyday tasks easier, this benefit
of where their clients are operating their
However, a recent French Blocking Statute
is frequently accompanied with more
business, so as to ensure the best legal
conviction upheld by France’s highest court
headaches and problems. Companies
advice possible. Additionally, the Sedona
should be considered by U.S. judges, because
who are conducting business globally are
Conference’s Framework for Analysis of
this decision demonstrates that France is
now required to be more vigilant in their
Cross-Border Discovery Conflicts, the 2008
willing to not only create blocking statutes,
preparation for litigation. While some
public comment version sets forth a list
but is also willing to enforce the penalties
companies may intentionally place digital
of factors that must be accounted when
against wrongdoers.
storage or offices in certain countries in
cross-border discovery presented.275 Many
—————————————————
attempts to avoid discovery production, their
of the factors have been discussed or at
intentions may still be thwarted by the use of
least touched upon in the above sections of
————————————————
foreign blocking statutes. Conversely, some
this paper, but one thing that stands out in
Emails, phone records, and presentations can
countries are fighting back and enforcing
the paper published for public comment is
be sent from Russia to China to the United
their blocking statutes.
the belief that all parties will act in good-
little concern when determining whether to order production of foreign documents.
372
VI. Conclusion
States, and then end up on a server in Canada,
This places attorneys in the middle of two
faith.276 Since there is no clear standard,
which stores the email for the company.273
countries that are attempting to assert their
attorneys are left to cobble together all these
The world is shrinking and people are able to
law as the dominant law. However, it has
individual statutes and treaties and case law,
share information across thousands of miles
been observed that where attorneys can agree
while hoping for a more clear and concise
in the blink of an eye or even simultaneously
or at least compromise and work together
discovery procedure in the future.
End Notes
* Candidate for Juris Doctor 2015, South Texas College of Law. The author would like to express his sincere gratitude for all of the support from his family and friends, especially Jordan. 1. Moore’s Law and Intel Innovation, Intel, http://www.intel.com/content/ www/us/en/histor y/museumgordon-moore-law.html (last visited Apr. 19, 2014). 2. Kenneth J. Withers & Monica Wiseman Latin, Living Daily with Weekley Homes, 51 The Advoc. (Tex.) 23, 23 (2010), available at http:// www.ccsb.com/pdf/Publications/ Business%20Litigation/Living_ Daily_With_Weekly_Homes.pdf. 3. Id. 4. John T. Yip, Addressing the Costs and Comity Concerns of International E-Discovery, 87 Wash. L. Rev. 595, 630 (2012). 5. Id.
6. Fed. R. Civ. P. 26(b)(1). 7. Id. 8. Yip, supra note 4, at 599. 9. Id. 10. Id. 11. Id. at 599-600. 12. Id. at 600. 13. Id. at 600-01. 14. Id. 15. Id. at 599. 16. Withers & Latin, supra note 2, at 23. 17. Id. 18. Yip, supra note 4, at 601; Rowe Entm’t Inc. v. William Morris Agency, Inc. 205 F.R.D. 421, 428 (S.D.N.Y. 2002). 19. Yip, supra note 4, at 601. 20. Id. at 602. 21. Withers & Latin, supra note 2, at 25. 22. Id. 23. Shawn Raymond, Tackling E-Discovery on a Budget, 51 The Advoc. (Tex.) 50, 50 (2010). 24. Id. 25. Withers & Latin, supra note 2, at 25.
26. Yip, supra note 4, at 600-01. 27. Id. at 603. 28. Id. 29. Id. 30. Id. See also Ursula Talley, Reduce Litigation Risk, Cut Costs with Proactive eDiscover y, IT W orld (Aug. 13, 2008), http://www.itworld.com/ tip/54250/reduce-litigation-risk-cutcosts-proactive-ediscovery (“Eighty percent of eDiscovery cost, according to some analysts, is incurred during the legal review process.”). 31. Yip, supra note 4, at 603. 32. Id. at 604. See also Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358 (1978). 33. Yip, supra note 4, at 604. 34. Id.; Fed. R. Civ. P. 26(c)(1) (“The court may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.”). 35. Yip, supra note 4, at 604; McPeek v.
Ashcroft, 202 F.R.D. 31, 34 (D.D.C. 2001). 36. Yip, supra note 4, at 597; Zubulake v. UBS Warburg LLC, 217 F.R.D. 309, 320-22 (S.D.N.Y. 2003). 37. Yip, supra note 4, at 597; Zubulake v. UBS Warburg LLC, 217 F.R.D. 309, 318 (S.D.N.Y. 2003). 38. Yip, supra note 4, at 605; Zubulake, 217 F.R.D. at 318; Fed. R. Civ. P. 26(b)(2) (B). 39. Yip, supra note 4, at 597; Zubulake, 217 F.R.D. at 318. 40. Yip, supra note 4, at 606; OpenTV v. Liberate Techs., 219 F.R.D. 474, 476 (N.D. Cal. 2003). 41. Yip, supra note 4, at 607. 42. Id. See Sundown Energy, L.P. v. Haller, No. 10-4354, 2011 WL 5079329, at *4 (E.D. La. Oct. 26, 2011) (demonstrating that cost alone is not sufficient); W.E. Aubuchon Co. v. BeneFirst, LLC, 245 F.R.D. 38, 43 (D. Mass. 2007); Peskoff v Faber 240 F.R.D. 26, 31 (D.D.C. 2007).
53
Currents Summer 2014
43. Zubulake, 217 F.R.D. at 324. 44. Yip, supra note 4, at 607; Zubulake, 217 F.R.D. at 322. 45. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 323. 46. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 322. 47. Yip, supra note 4, at 609; Zubulake, 217 F.R.D. at 323. 48. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 322. 49. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 322. 50. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 322. 51. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 322. 52. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 323. 53. Yip, supra note 4, at 608; Zubulake, 217 F.R.D. at 323. 54. Yip, supra note 4, at 608. 55. Yip, supra note 4, at 609; Zubulake, 217 F.R.D. at 323. 56. Yip, supra note 4, at 609; Zubulake, 217 F.R.D. at 323. 57. Yip, supra note 4, at 609; Zubulake, 217 F.R.D. at 323. 58. Yip, supra note 4, at 609-10; Zubulake, 217 F.R.D. at 323. 59. Yip, supra note 4, at 610; Zubulake, 217 F.R.D. at 322-23. 60. Yip, supra note 4, at 610; Zubulake, 217 F.R.D. at 323. 61. Yip, supra note 4, at 610; see Zubulake v. UBS Warburg LLC, 216 F.R.D. 280, 288 (S.D.N.Y. 2003). 62. Yip, supra note 4, at 610; Zubulake, 217 F.R.D. at 323. 63. Yip, supra note 4, at 610; Zubulake, 217 F.R.D. at 323. 64. Yip, supra note 4, at 610-11. 65. Id. at 611; Zubulake, 217 F.R.D. at 323. 66. Yip, supra note 4, at 597. 67. Id. at 611. 68. Id. 69. Id. 70. Id.; Zubulake v. UBS Warburg LLC, 216 F.R.D. 280, 289 (S.D.N.Y. 2003). 71. Yip, supra note 4, at 612. 72. Id. 73. Id. 74. Raymond, supra note 23, at 50. 75. See id. 76. See id. 77. Yip, supra note 4, at 613. 78. Id. 79. Id.; Zubulake v. UBS Warburg, LLC, 217 F.R.D. 309, 318 (S.D.N.Y. 2003); Rowe Entm’t, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 429 (S.D.N.Y. 2002); Semsroth v. City of Wichita, 239 F.R.D. 630, 635 (D. Kan. 2006). 80. Yip, supra note 4, at 613; Zubulake, 217 F.R.D. at 318. 81. Yip, supra note 4, at 613; Rowe, 205 F.R.D. at 429. 82. Yip, supra note 4, at 613; Semsroth,
Sedona Conference], available at https://thesedonaconference.org/ download-pub/67. 113. Id. at 21; Cour de Cassation [Cass.] [supreme court for judicial Matters] Paris, crim., Dec. 12, 2007, Bull. Crim., No. 07-83228 (Fr.). 114. Davila, supra note 102, ¶ 68; Societe Internationale Pour Participations Industrielles Et Commerciales v. Rogers, 357 U.S. 197, 213 (1958). 115. Davila, supra note 102 ¶¶ 66-68. 116. Davila, supra note 102, ¶ 66. 117. Id. 118. Id. 119. Yip, supra note 4, at 626. 120. Id. at 628. 121. Davila, supra note 102, ¶48. 122. Id. ¶ 49; Societe Internationale Pour Participations Industrielles Et Commerciales v. Rogers, 357 U.S. 197, 213 (1958). 123. Davila, supra note 102, ¶ 48. 124. Id. ¶49; Fed. R. Civ. P. 26. 125. Davila, supra note 102, ¶ 9; Alfadda v. Fenn, 149 F.R.D. 28, 34 (S.D.N.Y. 1993). 126. See generally Griswold v. Connecticut, 381 U.S. 470 (1965) (discussing various privacy rights granted to individuals). 127. Davila, supra note 102, ¶ 11. 128. Id. ¶¶ 10-13; Directive 95/46/EC, of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals with Regard to the Processing of Personal Data and on the Free Movement of Such Data, art. 7, 1995 O.J. (L281), available at http:// eur-lex.europa.edu/LexUriServ/ LexUriServ.do?uri=CELEX:3199 5l0046:en:HTML. 129. Davila, supra note 102, ¶ 11; Convention for the Protection of Human Rights and Fundamental Rights art. 8, 4 Nov. 1950, C.E.T.S. No. 005, available at http://www. conventions.coe.int/Treaty/en/ Treaties/Html/005.htm. 130. Davila, supra note 102, ¶ 12; Article 29 Data Protection Working Party (EC), No. 5062/01/EN/Final WP 48 of Sept. 13, 2001, 1, 24, available at http://ec.europa.eu/justice/ data-protection/ar ticle-29/ documentation/opinionrecommendation/files/2001/ wp48_en.pdf. 131. See Davila, supra note 102, ¶¶ 17-18. 132. Id. ¶ 20. 133. Id. ¶¶ 13, 20-21. 134. Id. ¶¶ 20-23. 135. Id. ¶ 13. 136. Id. ¶ 24. 137. Id. 138. Id. ¶¶ 25-26. 139. Id. ¶ 24. 140. Id. ¶ 26. 141. Id. ¶ 27. 142. Id. ¶ 27; Richmark Corp. v. Timber Falling Consultants, 959 F.2d 1468,
239 F.R.D. at 635. 83. Yip, supra note 4, at 603. 84. Id. at 614. 85. Id. 86. Id. 87. Id. 88. Id. 89. Id. 90. Id. 91. Id. at 605; See Fed. R. Civ. P. 26(b) (1). 92. See Yip, supra note 4, at 605; Fed. R. Civ. P. 26(b)(1). 93. Yip, supra note 4, at 614; Fed. R. Civ. P. 1. 94. Yip, supra note 4, at 614. 95. Id. at 615-16. 96. Id. at 616. 97. Y i p, s u p r a n o t e 4 , a t 6 1 6 ; Restatement (Third) of Foreign Relations Law of the United S tat e s §442 (1987); Societe Nationale Industrielle Aerospatiale v. United States Dist. Court for the S. Dist. of Iowa, 482 US 522, 543-544 (1987). 98. Yip, supra note 4, at 615. 99. Id. at 616; see also Societe Nationale, 482 US at 544 n.28; Restatement (Third) of Foreign Relations Law of the United States §437. 100. Yip, supra note 4, at 617. 101. Id. at 618; Societe Nationale, 482 US at 544. 102. Yip, supra note 4, at 617; Societe Nationale, 482 US at 544; Erica M. Davila, International E-Discovery: Navigating the Maze, 8 U. Pitt. J. Tech. L. & Pol’y 5, ¶ 34 (2008). 103. Yip, supra note 4, at 617; Convention on the Taking of Evidence Aboard in Civil or Commercial Matters, art. 2, Mar 18, 1970, 23 U.S.T. 2555. 104. Yip, supra note 4, at 617; Schindler Elevator Corp. v. Otis Elevator Corp., 657 F. Supp. 2d 525, 530 (D.N.J. 2009). 105. Davila, supra note 102, at ¶ 33; In re Vitamins Antitrust Litig., 120 F. Supp. 2d 45, 56-57 (D.D.C) amended in part by, No. 1285, 2000 WL 33142129 (D.D.C. 2000). 106. Davila, supra note 102, at ¶ 41. 107. Id. at ¶ 33. 108. See generally id. ¶18-21 (describing various blocking statutes). 109. Id. 110. Yip, supra note 4, at 618. 111. Id. at 619-20. 112. A P r o j e ct o f t h e S e d o n a C onference W orking G roup on I nternational E lectronic I n f o r m a t i o n M a n ag e m e n t , D i s c ov e ry , a n d D i s cl o s u r e (WG6), Framework for Analysis of C ross -B oarder D iscovery Conflicts: A Practical Guide to Navigating the Competing Currents of International Data P rivacy and E-D iscovery 21 (M. James Daley & Kenneth N. Rashbaum eds., 2008) [hereinafter 54
Currents Summer 2014
1478-79 (9th Cir. 1992). 143. See Davila, supra note 102, ¶ 28. 144. Id. 145. Id. 146. Id. ¶ 13. 147. Id.; In re Vitamins Antitr ust Litigation, 2001 U.S. Dist. Lexis 8904, 44-45, 49-50 (D.D.C. 2001). 148. Davila, supra note 102, ¶ 13; In re Vitamins Antitrust Litigation, 2001 U.S. Dist. Lexis at 44-45, 49-50 (D.D.C. 2001). 149. Davila, supra note 102, ¶ 19. 150. Sedona Conference, supra note 111, at 24-25. 151. Davila, supra note 102, ¶ 13; In re Vitamins Antitrust Litigation, 2001 U.S. Dist. Lexis at 46-47. 152. Davila, supra note 102, ¶¶ 17-18. 153. Id. ¶ 16. 154. Id. 155. Id. 156. Id. 157. Id. ¶ 20. 158. Id. ¶¶ 39-40; In re Vitamins Antitrust Litig., 120 F. Supp. 2d 45, 56-57 (D.D.C) amended in part by, No. 1285, 2000 WL 33142129 (D.D.C. 2000) (declining to apply both Japan’s and Belgium’s laws regarding pre-trial discovery). 159. Sedona Conference, supra note 112, at 14. 160. Id.; R estatement (T hird ) of Foreign Relations §442 cmt. a (1987). 161. Sedona Conference, supra note 112, at 16. 162. Id. at 20. 163. See generally id. at 16 (describing Germany’s and France’s discovery methods). 164. Id. 165. Id. 166. Id. 167. Id. 168. Id. 169. Id. 170. Id. 171. Id. 172. Id. at 14. 173. Id. 174. Id. at 15. 175. Id.; Standard Disclosure, 1998, CPR 31.6 (U.K.), available at http://www. justice.gov.uk/courts/procedurerules/civil/rules/part31#31.6. 176. Sedona Conference, supra note 112, at 15. 177. Id.; Rules of Civil Procedure, R.R.O. Reg. 194 (Can.), available at https://www.canlii.org/en/ on/laws/regu/rro-1990-reg-194/ latest/. 178. Sedona Conference, supra note 112, at 16. 179. Id. at 17. 180. Id. 181. Id. 182. Id. 183. Id. 184. Id.
185. Id. 186. Id. 187. Id. 188. Id. 189. Id. at 18. 190. Id. 191. Id. at 18-19. 192. Id. at 18. 193. Id. 194. Id. at 19. 195. Id. 196. Id. 197. Id. 198. Id. 199. Id. at 20. 200. S e d o n a C o n f e r e n c e , supra note 112, at 23-26. Heidberg v. Grosvenor Grain and Feed Co. ltd., [1993] I.L.Pr. 718 (Q.B.) at 730, (Eng.). 201. Sedona Conference, supra note 11, at 24-26. 202. Id. at 24. 203. Id. 204. Davila, supra note 102, at ¶ 46. 205. Id. ¶ 35. 206. Id. ¶ 37. 207. Id. ¶ 36. 208. Lee H. Rosenthal, Electr onic Discovery – Is the System Broken? Can it be Fixed?, 51 The Advoc. (Tex.) 8, 13 (2010). 209. Id. at 13. 210. Sedona Conference, supra note 112, at 24. 211. Id. at 25. 212. Id. at 17. 213. Id. 214. Id. 215. Rosenthal, supra note 208, at 13. 216. Id. at 13-14. 217. Id. at 14. 218. Id. 219. Id. 220. Id. 221. Craig Ball, E-Discovery: A Special Master’s Perspective, 51 The Advoc. (Tex.) 42, 42 (2010). 222. Id. at 42, 46. 223. Id. at 46-47. 224. Id. at 42. 225. Id. 226. Id.; Fed. R. Civ. P. 53(a). 227. See Ball, supra note 221, at 46-47. 228. See id. at 42. 229. Id. at 45. 230. Id. at 46. 231. See id. at 47. 232. Milestones, Twitter, https://about. twitter.com/milestones (last visited Nov. 2, 2014). 233. Company, Twitter, https://about. twitter.com/company (last visited Nov. 2, 2014). 234. Id. 235. Monitoring, Sprout Social, http:// sproutsocial.com/features/socialmedia-monitoring (last visited Nov. 2, 2014). 236. Ball, supra note 221, at 46-47. 237. Id. at 46.
238. Id. at 47. 239. Id. 240. Sedona Conference, supra note 112, at 27. 241. Protection of Personal Data, European Commission, http://ec.europa.eu/ justice/data-protection/index_ en.htm (last updated Apr. 9, 2014). 242. Sedona Conference, supra note 112, at 8. 243. Convention for the Protection of Human Rights and Fundamental Rights art. 8, 4 Nov. 1950, C.E.T.S. No. 005, available at http://www. conventions.coe.int/Treaty/en/ Treaties/Html/005.htm. 244. See S edona C onference , supra note 112, at 11. 245. Id. 246. Id. at 12. 247. Id. at 12-13. 248. Id. at 19. 249. Davila, supra note 102, ¶ 16. 250. Sedona Conference, supra note 112, at 8. 251. Id. at 9. 252. Id. at 25; Societe Internationale Pour Participations Industrielles Et Commerciales, S. A. v. Rogers, 357 U.S. 197, 199 (1958). 253. Davila, supra note 102, ¶ 25; Société Internationale, 357 U.S. at 205-06 (1958). 254. Sedona Conference, supra note 112, at 8. 255. Id. at 27. 256. Id. 257. Id. at 27-28. 258. Id. at 28. 259. Id. 260. Id. 261. Id. 262. Id. 263. Id. at 27. 264. Davila, supra note 102, ¶ 28; United States v. Vetco Inc., 691 F.2d 1281, 1289 (9th Cir. 1981). 265. Davila, supra note 102, ¶ 41; see generally International Shoe Co. v. State of Washington, 326 U.S. 310, 316 (1945) (describing requirement of personal jurisdiction). 266. Davila, supra note 102, ¶ 42; Fed. R. Civ. P. 34(a)(1). 267. Davila, supra note 102, ¶ 41; In re Grand Jury Subpoenas Duces Tecum Addressed to Canadian Int’l Paper Co., 72 F.Supp. 1013, 1020 (S.D.N.Y. 1947). 268. Davila, supra note 102, at ¶ 43; see also In re Uranium Antitrust Litigation, 480 F.Supp. 1138, 11441146 (N.D. Ill. 1979) (discussing the control factors). 269. Davila, supra note 102, ¶ 43; In re Uranium Antitrust Litigation, 480 F.Supp. at 1151-53. 270. See S edona C onference , supra note 112, at 27. 271. See id. 272. Id. at 21, 27.
273. See id. at 10. 274. Rosenthal, supra note 208, at 11. 275. Sedona Conference, supra note 112, at 29. 276. Id. at 30.
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Dissecting the Public Stockholding Provision: Evaluating the Benefits of an Otherwise Problematic Pillar of the WTO Bali Agreement A M B R E E N
Bali announced to the world that the WTO — and the multilateral system — are back in business. -Director-General Roberto Azevêdo
1
—————————————————
Introduction
D H A R A N I *
development” debate—trade facilitation
in light of an updated General
and public stockholding. More specifically,
Agreement on Tariffs and Trade
the developed world is a proponent of the
(GATT), this international effort to
former, claiming that streamlining would
put together a multilateral trading
remove extraneous costs, thus freeing
system was the byproduct of a series
—————————————————
up money to invest into other matters,
of successive negotiations following
During the conference held from
and thereby allowing countries to take
its failure to establish the original
December 3-7, 2013, Member States of the
control of their respective food security
International Trade Organization.5
World Trade Organization (WTO) achieved
issues. But for developing countries who
B. LDCs: Although the WTO does not
what representatives of over 150 countries,
grow tired of industrialized countries
have its own specific definition of
after numerous failed negotiations, could
dictating the decision-making process, public
LDCs, its evaluation of each such
not imagine—they reached an agreement.
stockholding and deregulation ultimately
country is based on the status defined
The Bali Package, signed in Bali, Indonesia,
become the more plausible options, for
through the UN’s Member list. 6
addresses the next steps in progressive
they offer an interim period during which
Thirty-four of the LDCs currently
trade, including granting Least Developed
all countries have to exercise restraint from
on the UN’s radar are members of
Countries (LDCs) the ability to tailor
complaining about another country’s food
the WTO.7
implementation options to their respective
program. Although thoroughly criticized,
C. Developing Countries: Countries
economies, as well as the beginning of
the Public Stockholding Provision (PSP)
are designated on the basis of “self-
modernized trade facilitation practices in
in the Bali Package is the necessary interim
selection” as there are no codified
transitioning economies. Other parts of
period developing countries currently need
WTO definitions of this category.8
the package, fueled largely by concerns
in order to figure out what does and does
TO Agreements provide developing
over food security, the streamline trade
not work. Despite the United States being
countries with longer transition
facilitation provision, and the public
one of the most vocal opponents of the
periods before they are required to
stockholding provision all came together
PSP, even it finally acknowledges the need
fully implement provisions of an
rather unexpectedly and disjointedly.
for a flexible program such as this; progress
agreement, and they may even receive
has been made.
technical assistance.9 Other Member
2
3
4
This note focuses not only on the decadelong journey that led to the milestone “Bali Agreement,” but also on two schools of thought considered to be on opposing sides of the “solution to food security and
—————————————————
countries may challenge a Member’s
—————————————————
to other developing countries. 10
I. The Players
A. WTO: Officially organized in 1995 56
Currents Summer 2014
use of specific provisions available Two-thirds of all WTO members are
“developing countries.” 11
meets four times a year.21 The CoA
tariff concessions affecting $10 billion worth
D. Developed Countries: Although the
allows Members the opportunity to
of trade.30 Although the primary focus of the
WTO does not have a definition of
consult on matters relating to the
GATT remained furthering tariff reduction,
a “developed” country, countries
implementation of commitments,
the need for global development expanded
that are currently members of the
including rule-based commitments.22
the scope of the agreement, incorporating
G-7 group are considered developed
In the case of the Doha Round,
elements such as anti-dumping provisions
under the UN (e.g. Japan, U.S., Canada,
the Committee also met in separate
during the Kennedy Round in the 1960s.31
Germany, Italy, U.K., France).13
“special sessions” to discuss specific
Further attempting to keep up with a
issues.
globalizing economy, countries engaged in
12
—————————————————
II. The Stage
23
—————————————————
a series of multilateral negotiations, known
DDA aims to make major reforms
III. World Trade Organization: A Platform for Multilateral Negotiations?
in the international trade system by
—————————————————
The GATT’s monstrous success, however,
utilizing lower trade barriers and
Serving as both a product of Member
also meant a mounting fall, and the need for
revised trade rules.14 The Doha Round
concerns and as a platform for Member
a significant remedy. As a series of economic
was officially launched at the WTO’s
disputes,
the WTO is Member-driven,
recessions set the stage for countries to fall
Fourth Ministerial Conference in
having jurisdiction over agreements that
back to familiar protectionist measures in the
2001, where it devised mandates
cover trade in goods, services, and intellectual
1970s and 1980s, countries began to rely on
for negotiations on issues such as
property.25 The WTO is responsible for
subsidies to maintain their hold in agricultural
agriculture and food security for
implementing, monitoring, and handling
trade.33 By then, trade policies had changed
developed and developing countries.15
disputes or enforcement issues that may
as well, which required that countries
After a series of failed attempts over
arise.
participate in the exchange of goods as
————————————————— A. Doha Development Agenda (DDA): Also known as the Doha Round, the
24
26
as trade rounds to create new packages of trade liberalization, which helped ignite high rates of world growth during the 1950s and 1960s.32
the course of the past decade, the
The original multilateral trading system
well as services to compete effectively34
Member States finally came to one
began in 1948—following the end of World
—a concern not yet dreamed of under the
agreement in December 2013.16
War II and the beginning of the modern
simplicity of the GATT. As more and more
B. Ministerial Conference (MC): The
era of “international cooperation.” The
holes within the now outdated GATT came
topmost decision-making body of the
rise of international trade agreements and
to light, it became clear to the international
WTO is the MC, which meets once
collaborative institutions over the next fifty
economic community that change was
every two years. Members consist of
years led to an increase in countries that
necessary.35 Developing, developed, and least
countries or customs unions, and the
wished to liberalize trade from under the
developed countries awoke to find a heavily
MC can make decisions on all matters
shadows of the protectionist economies.28
stagnated and complex world, setting the
17
27
under any of the multilateral trade
In the beginning, there was the GATT,
agreements.” The Bali Agreement
an agreement dedicated to the “substantial
After seven and a half years, 123 countries
constitutes the Ninth MC.
reduction of tariffs and other barriers to
participated in the Uruguay Round (UR),36
C. Committee on Agriculture (CoA):
trade and the elimination of discriminatory
signed the Marrakesh Agreement, and
The Ag reement on Ag riculture
treatment in international commerce.” 29
ultimately brought together what we now
(AoA), signed in 1995, established
Twenty-three members officially became
know as the WTO.37 Every GATT Article
the Committee that oversees the
founding members of the GATT through a
was reviewed, 38 a streamlined dispute
implementation of the AoA and
series of negotiations comprised of 45,000
resolution system was created,39 the United
18
19
20
stage for something new.
57
Currents Summer 2014
States (U.S.) and the European Union (E.U.)
quickly overshadowed by the multitude of
trade shocks in the food market ultimately
reached a successful conclusion despite
unlikely agreements the countries did reach,
led to what became known as the Food Crisis
multiple years of opposition, and a review
including: 1) streamlining trade facilitation;
of 2008 and crippled developing countries.56
system was created in which national trade
2) public stockholding for food security
From 2005 to 2008, prices and production
policies and practices of GATT members
and development in developing countries;
in crops such as wheat, rice, cereal, and
would undergo regular, periodic review.41
3) redefining tariff quotas as an instance of
grains became more unpredictable.57 As a
Despite the delays and pessimism during
“import licensing”; 4) increasing transparency
result, importers, such as those based in the
the UR, countries spurred into action two
in the trade-related issues surrounding
Philippines, engaged in panic-buying, adding
years after the Marrakesh Agreement was
cotton; 5) creating overall preferential rules
to the rising prices,58 which in turn led major
signed in 199442 —calling for a new round
of origin for LDCs; 6) preferential treatment
cereal and rice exporters to restrict or ban
with new issues to bring to the table.43 Since
to service suppliers of LDCs; 7) improving
exports due to poor harvests and rising
then, the WTO has continued its tradition of
access via duty free and quota free access for
domestic prices.59
negotiations and trade rounds.44
LDCs; and 8) implementing and monitoring
40
As the product of unrelenting negotiations,
treatment for LDCs.
Committed to market access and domestic help for agricultural needs under the AoA,60
51
the WTO recognizes how the world is
The fight, however, is not over. Now
the negotiations focused on measures that
changing and attempts to keep up within
codified as part of the Ministerial Decision
would make trade easier and less costly in
the rapidly morphing breadth of those
at the Ninth Ministerial Conference, the
order to promote development and growth.61
conversations;45 willingness to do anything
Bali Agreement is undergoing a series of
From this issue, two contentious schools of
less would retire it to the dusty corner of the
steps to prepare a work program to secure
thought arose—trade facilitation and public
shelf next to the GATT. Today, the WTO
the conclusion of the DDA. According
stockholding.62
holds steadfast to an overarching purpose: to
to Azevêdo, big outcomes will still need to
help trade flow as freely as possible—as long
come from the areas of agriculture, non-
as there are no undesirable side effects—
agricultural market access (i.e. industrial
because this is important for economic
goods), and services—for there to be a
52
A. Streamlining Trade Facilitation
First, trade facilitation has no direct role
development and wellbeing.
successful conclusion to the Doha Round.
53
in the context of agriculture or food security
—————————————————
—————————————————
specifically.63 The Trade Facilitation (TF)
46
IV. What is the Bali Agreement?
—————————————————
V. Agriculture and Food Security: Trade Facilitation and Public Stockholding
In December of 2013, the WTO made
—————————————————
allowing for customs clearance procedures
history, unveiling the first multilateral
When the AoA was signed in 1994, the
of goods to function with less delay. 64
agreement since its inception, marking the
idea was to protect the increasingly vocal
According to proponents of this proposal,
end of decade-long, arduous solicitations
developing and agriculturally dependent
streamlining would prospectively improve
that began in 2001. Only a month prior,
countries as they navigated through the
economic health and increase market access
Director-General Azevêdo stated, “we have
complexities of the global market. The
simply by cutting the cost, which was
to close this in the next few days…it is all or
package simultaneously provides for access,
estimated to cost one trillion USD in 2013.65
nothing now.”48
domestic support, and export competition,
Border-to-border trade, especially for
theoretically addressing the needs of
landlocked developing countries, typically
agricultural exporters and importers.
requires an average of eight to nine documents
47
Although the 160 Member countries49 could not come to agreement on export
54
55
proposal is an attempt to do away with red tape and simplify the movement of agricultural products in and out of countries,
subsidies or trade matters surrounding
As the global market became more
for both imports and exports,66 which can
cotton at that juncture,50 this failure was
imprecise and complex, rising oil prices and
mean costs exceeding two thousand dollars
58
Currents Summer 2014
to export or import a container for certain
When the TF proposal finally arrived
for example, is one of the thirty-five
countries in Eastern Europe and Central
in Bali, it was backed by industrialized
African countries that have heavier customs
Asia. In 2012, developing countries in Sub-
countries and led by the U.S. and the EU,
documentation requirements than the world
Saharan Africa paid an average of almost two
who boasted smoother trade flows, less
average,85 and its economy would benefit
thousand dollars while filing eight different
fees, no red tape, more investments, better
from the advantages of the TF Agreement.86
export documents—simply to export one
access, more competition, and a greater
Kenya, however, is also a country with a large
container and compete in the international
overall economic health.
According to
public stockholding program to support
market.
the Asia-Pacific Economic Cooperation
its poor small grain farmers.87 The target
The TF proposal aims at the current delay
(APEC), developing countries will save an
audience, therefore, is completely different.
in time and cost that will now be limited
estimated 1-2% off import prices in the
It is unlikely that small farmlands would feel
or ideally eliminated by creating a more
region.79 It is estimated that implementation
the streamlining effects from the border.
uniform process in which traders will avoid
will further result in a rise of 18 million jobs
By the time the Bali Agreement was
the extraneous eight documents they have
in developing countries. If the aim of the
signed, the WTO rightly determined that
historically had to file. With a streamlined
WTO is to increase access, competition,
the global economy is currently a confusing
process traders can essentially walk through
and prosperity,81 then the long-overdue Bali
mix of priorities, wants, and necessities.88
the customs process without problems or
Agreement would be deemed a blessing for
Food security is an urgent issue that requires
incurring extra expenditures, as opposed
many developing countries—economies
immediate remedies and short- and long-
to the current system that requires heavier
weakened due to the red-tape inefficiencies
term developments.89 Waiting for slow effects
documentation, which creates additional
and effectively barred from integration.
of theoretical calculations resulting from the
costs for producers and consumers.
Removal of administrative barriers will
implementation of trade facilitation measures
Leading up to the Bali Agreement, the TF
thus allow exporters based in developing
without the benefit of the immediate and
proposal was seen as an umbrella solution.70
countries, making up forty percent (40%) of
official PSP measures would have been
Although not specific to agriculture or
the manufactured goods market, to compete
disastrous and asymmetrical.
the prices of “essential food items,”
effectively.
67
68
69
71
78
80
82
which representatives noted has gone up
The question here is not whether trade
by over 250%, 72 removing the looming
facilitation is necessar y—regulator y
overhead advantage that trade facilitation
measures, both inland and overseas — have
Food programs themselves are typically
offers would theoretically benefit economic
become so convoluted that the costs of
worked out amongst individual countries
integration and market access as a whole.
exports, especially in African countries,
and local markets, allowing respective
For landlocked countries, many of which are
83
exceed the corresponding world average.
countries to aid farmers by domestically
developing countries or LDCs74 and bear the
Upon implementation of the most likely
distorting prices.90 Producers receive a fixed
cost of extraneous transport and customs
trade facilitation practices, even countries
price, typically above market price, for every
costs,75 signing up under the TF proposal
that currently exist in the low to lower-middle
kilogram or liter goods they sell into the
would remove a hefty load of their respective
income range will reap significant benefits,
program.91 Farmers are then incentivized
economic costs.76 The Organization for
with trade costs estimated to be reduced by
to continue producing a surplus that gets
Economic Co-operation and Development
approximately 11.7%.
dumped into the international markets.92
73
84
B. The Public Stockholding Provision
(OECD) further projected that if global
Rather, the concern that remains is
Food programs benefit public stockholding
trade costs were reduced by one percent, an
whether trade facilitation is an adequate
in that the accumulated stocks distribute to
average TF implementation, it would add
remedy given the unique needs of developing
sectors at a subsidy or below market prices.93
a worldwide income of $40 billion USD,
and least developed countries with complex
Traditionally, an Aggregate Measure of
mostly to developing countries.
and unique food security issues. Kenya,
Support (AMS) has been calculated by
77
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Currents Summer 2014
countries through subtracting a fixed external
without a set of clear regulatory protocols
provision on the other side of the table.
price from an applied administered price,
to make the process fairer.
The evolving drafts challenge this superficial
103
which is then multiplied by the quantity
Recognizing the changing agricultural
of eligible product. The result is then
and economic climate, repeated proposals
Under the PSP, Member States are: 1) held
divided by the annual value of production
to change the fixed external pricing in
to a “good faith” standard during which time
of the product to come up with the AMS
the AMS equation have been a point of
they promise not to distort trade or adversely
percentage of production value.
Since
contention, since more countries began to
effect food programs of other countries;
the AMS system was established, the fixed
use food programs and subsidy schemes
2) monitored if they choose to adopt food
external price has remained unchanged—
and other countries found ways around it.
programs under the guidelines provided; 3)
relying on the basic agricultural product unit
104
The G-33, a group of forty-six developing
offered some legal ‘wiggle-room’ so that
value for the year period of 1986 to 1988.96 If
countries,105 presented a variation in which
they cannot be dragged in front of a WTO
a country exceeds the de minimis threshold
the programs that were developed for food
Dispute Settlement Body due to a Member’s
for a particular product (ten percent (10%)
security purposes would be excluded from
complaint.114
of the value of production for most
AMS calculations and re-categorized under
countries), then the country is considered
green box measures, which would not count
A. Participation of Developing Member
to be conducting trade-distorting practices
toward the de minimis threshold.106 Seen as
Countries
for that year.97
an overhaul of the system, the change was
95
criticism.113
Under the current Food Stockholding
rejected in the Bali negotiations.107 The PSP
When a Member country decides to
Provision, eligible products under the
currently aims to find a permanent solution
participate in the PSP, it must not only file
prog ram involve only the, “primar y
by the Eleventh Ministerial Conference,
its prospective programs under the CoA
agricultural products that are predominant
scheduled for the year 2017, and until such
purview, but also remain in compliance
staples in the traditional diet of a developing
time will maintain an interim state.108
with obligations that date back to the AoA’s
country.” Since the predominant staples in
—————————————————
domestic support reduction commitments.115
98
country chooses to produce under the food
VI. Public Stockholding Provision: Members and Accountability
program—the price calculations for AMS are
—————————————————
level specified.116 Furthermore, consistent
also approached differently, depending on
Characterized as a aggressive attempt to
with the Annex 2 of the AoA, the volume
the product. Reference prices, for example,
provide, “social safety nets for hundreds of
and accumulation of the stocks shall relate,
are based on the state of the product when
millions of poor people,”
“solely to food security.”117
100
it is imported (i.e. milled rice or wheat).
criticisms regarding its lack of regulation,
Under the PSP, developing Members who
On the other hand, administered prices
and accountability, the PSP is now a
benefit from the provision are incidentally
are based on raw products, such as raw
documented and integrated part of the
also those at risk of breaching their AMS
wheat grain.
Differences in weight and
Ninth Ministerial Conference. Throughout
threshold.118 Therefore, the PSP requires
reductions in volume between processed
the process, the frequent noted critique was
that participating Members must maintain
and unprocessed products would have to be
that the PSP did not provide for adequate
transparency in order to benefit from the
accounted for using an extraction factor to
regulation or accountability measures on
underlying good faith implication of the
properly match the discrepancy and readjust
the Member States who sought benefits
provision. 119 Specifically, a developing
a reference price.102 Countries individually
from it.111 Drafts of the PSP, in fact, were
Member must: 1) notify the CoA that it is
interpret how to adjust the prices based on
deemed underdeveloped and irresponsible—
exceeding or is at risk of exceeding its total
the volume itself and how it is processed,
completely unlike the complex, tiered TF
AMS or de minimis level as a result of its
the traditional diet tend to vary from country to country—as does the amount that the
99
101
and despite the
110
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Currents Summer 2014
109
The current total AMS, dealing only with the traditional staple food items, must not exceed the corresponding annual commitment
food programs; 2) have fulfilled and continue
under the PSP, must not only initially
If the traditional dispute resolution system
to fulfill its domestic support notification
submit food security programs to the
under the WTO’s Dispute Settlement
requirements under the AoA; 3) provide
CoA, but are also required to continue to
Understanding does not apply, however,
per annum information for each public
provide additional information regarding the
what can the Member State do?
stockholding program that is maintained
programs annually.124
One of the most vocal outcries by
The submission and perpetual
opponents of the PSP dealt with the
120
maintenance process forces participating
alternative dispute resolution provision,
Finally, members seeking coverage for their
Members to live in a heightened state of self-
otherwise known as the “Peace Clause.”
programs shall ensure that stocks procured
awareness, maintain financial and operational
While this language has changed over the
do not, “distort trade or adversely affect the
transparency, and above all, promise that, at
course of the past year, becoming “tighter”
food security of other Members,” and, at the
any point, their programs shall not “distort
as a result of numerous negotiations and
same time, Members cannot use the program
trade or adversely affect the food security of
a recent reconciliation,131 it remains open-
to add to already existing support, subject to
other Members.”125
ended, worrying already skeptical WTO
for food security; and 4) provide any other relevant statistical information or updates.
the AMS or the de minimis limits provided to programs not under the provision.121
Structurally, in the long-term, not only is the system one-sided, but it is arguably
130
members about its practical and realistic applications.
Each developing Member, therefore, that
limited as well. The CoA and the WTO wield
Previously, under the Bali Agreement
wants to participate must follow a stringent
wide discretion regarding the compliance
and the Ninth MC, Members had the
list of requirements in order to create a
of the food programs at the outset and
responsibility to refrain from challenging
food security program, and it must bear the
during periodic checks.
However, due to
others in the legal arena of the WTO
absolute burden to prove to the CoA that
its interim status, the provision has outlined
dispute settlement system until the point
the prospective program complies with the
no legal recourse for developing members
at which a permanent solution could be
PSP paradigm.
struggling with compliance or countries with
found. 132 Although Members promised
non-compliant programs, nor is there any
to reach a resolution by the Eleventh MC
traditional dispute resolution mechanism for
in 2017, the provision’s language did not
any member wishing to challenge the effects
specify what would happen if no solution
Despite the fact that the most recent
of a specific food program protected under
is reached at that point, leading not only
revision has altered some of the language
the provision.127 Although the monitoring
to confusion about the future of food
in the PSP, the provision attempts to retain
and consulting aspects of the provision
stockpiling programs, but an impasse as
the collaborative spirit of the WTO. For
attempt to treat the issues developing
well.133 The stalemate that lasted from July
example, if a developing Member wishes for
countries may have in terms of creating and
31, 2014 to November 26, 2014 was ended
protection under the provision, the plan may
maintaining a food program, the lack of legal
by an agreement between India, frustrated
be scrutinized by the CoA and questioned by
dispute resolution intervention means that
with the focus on trade facilitation and the
other Members.122
there is less accountability.
lack of urgency to address the ambiguity
B. Monitoring of Food Programs
126
in the PSP, and the U.S.134 Members were
Furthermore, the PSP demands that if the developing Member requests benefits
C. Liability: No Opportunity to Challenge?
then allowed to put forth their proposals to resolve the vagueness of the PSP’s Peace
under the provision and the CoA requests a consultation with other Members regarding
Part of the WTO’s overall responsibility
Clause, hoping that doing so would lead to
the program, then the developing Member
as an international organization is to oversee
ratification of the TF provision and prevent a
shall hold a consultation with other Members
dispute settlement.
possible domino-effect collapse of the entire
on the operations of the program in
bring their disputes before the WTO if they
question. 123 Members, once approved
believe their rights are being infringed.129
128
Member States may
Bali Agreement.135 The most recent version of the clause
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Currents Summer 2014
more clearly lays out the current and future
it is forced to rely solely upon the scope
did not reflect the actual situation.145 India is
responsibilities amongst all Members. It
of the CoA to file notifications regarding
required to provide a more detailed response
indicates that, “until a permanent solution is
agricultural commitments; 2) to review new
at the next agricultural committee meeting.146
agreed and adopted, and provided that the
and continuing stockholding programs,
Both developed countries and proponents
conditions set out in paragraphs 3 to 6 of the
and 3)to manage possible indications of
of the PSP recognized that India’s food
Bali Decision [the Bali Agreement] are met,
infringement through investigations and
program in rice, totaling between eight to
Members shall not challenge through the
consultation. Whether such measures
nine million metric tons in 2012-2013, is
WTO Dispute Settlement Mechanism,”
136
are adequate to promote anything more
alarming.147 Exports of subsidized cereals
and if a permanent solution is not agreed
than minimal good faith remains tricky;
and sugar, also part of a food security plan to
and adopted by the Eleventh MC in 2017,
the uniqueness of the PSP under the
be implemented over the next two years, may
then the Peace Clause, “shall continue to be
Bali Agreement stems from the fact that
impact poorer countries.148 If the provision
in place until a permanent solution is agreed
it essentially grants a relief period to
requires that countries shall not distort trade
and adopted.”
Further, multiple timelines
participating developing countries during
or adversely affect the food security of
have been set via this proposal to ensure
which time countries can attempt to resolve
another country, but the country’s program
that the PSP is a priority. First, there is the
concerns through CoA meetings, but without
does in fact circumvent the provision, and if
original timeline set forth in the Bali Package,
committing to the Dispute Resolution Body
the dispute resolution system is absent, what
upon which Members have until the end of
and thus threatening legal ramifications to
options are available?
the Eleventh Ministerial conference to set
allegedly infringing Member countries.
137
139
While India’s example shows a risk of
out dispute resolution guidelines; second,
In order for the developing countries to
abuse, it also appears to promote a more
CoA Special Sessions will be held separately
reap the benefits of PSP and consequently
active role by the CoA, especially in light
from regular meetings so that Members
the Peace Clause’s temporarily abstained
of the Dispute Settlement Body’s absence.
may constructively work toward adopting a
WTO dispute settlement system, they must
When the AoA was signed in 1995, the
solution under public stockholding by the
first overcome hurdles of financial and
CoA was created as part of the General
end of December 2015 in efforts to reach
operational transparency as well as operate
Council’s decision to provide Members the
a solution more quickly; third, the General
within the AMS scheduling restrictions—
opportunity to consult on issues related to
Council shall regularly review the progress
protocols that many developing countries
the implementation of their commitments
of the dedicated sessions.138
already adopt.140 Public stockholding for
and to review how countries were complying
On the surface, these new additions
food security, after all, has been utilized
with their commitments.149 Furthermore,
address several of the grievances harbored
since the AoA was signed in 1995, and has
Members can use the CoA platfor m
by developing countries relying upon public
remained an uphill battle since then.
to raise concerns about developmental
141
stockholding measures. Not only does the
It is imperative to understand that
issues, such as transparency in Members’
new Peace Clause extend indefinitely until
food security issues are analyzed and
agricultural policies, which are vital to the
a permanent solution is reached, but it
understood best by each respective domestic
implementation of food security programs
makes the PSP a priority—allocating specific
government.
within the language of the PSP.150
resources and sessions dedicated toward
social environment, and economic conditions
reaching a resolution. Yet despite all of this
can all affect access to food.143 Shortly after
Possible Issues at the CoA: Delineation and
oversight, collaboration, and goodwill, the
the Bali Agreement was signed, developed
Notification
Peace Clause is, ultimately, an open-ended
countries asked India to explain the export
pause button. Since it cannot hold developing
sales of state-purchased wheat being sold
In the case of the Bali Agreement,
countries responsible via the traditional
abroad at forty percent (40%) below purchase
developing countries participating under the
WTO dispute resolution mechanism: 1)
cost, India’s response was that the statistics
PSP are monitored without specification by
142
Political stability, conflict,
144
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Currents Summer 2014
the overarching powers of the Committee.151
AMS schedule.160 A lapse in notifications
A regular meeting may be used to delineate
results in monitoring gaps and an inadequate
separate issues so that the Members can
understanding of each Member’s economy.
161
—————————————————
VII. Serious Look at the Opportunities of the Interim
focus their efforts on specific topics
However, involvement by the provision’s
—————————————————
during the special session.152 During the
proponents, such as Pakistan citing concerns
Public stockholding is not a notion
first CoA regular meeting following the
regarding India’s food program through the
of genius, but rather one that seems to
January 29, 2014 Agreement,
Committee,
shows that the international
have been gathered from the scraps of
countries addressed concerns regarding the
community will not sit back and wait for the
what the Uruguay Round left behind. The
Committee’s monitoring and implementation
dispute settlement system to become active
current international landscape bears little
process, stating that it should be “member-
again. At the March 21, 2014 CoA meeting,
resemblance to the negotiations from two
driven,” and that neither the Secretariat
India was harangued by Pakistan over its
decades past; developing countries—the
nor the Chairperson should be allowed
food program parameters, and by the United
target audience under the PSP—have
to determine how the process should be
States over its new food security bill.
The
evolved from having a solely agricultural or
handled or whether certain duties should be
CoA review process was designed to be
service-based economy, to now having a mix
directed to a special session without Member
informal and conversational,164 and therefore
of several trade sectors.167 The idea here is
approval.154 These issues stem from a lack of
the issue to watch for in the future is making
that countries seek to adapt and adjust along
clarity in terms of the interpretative scope of
sure the process maintains its fact-checking
with the changing environment.168 A country
the Bali Agreement’s language and what it
function rather than it becoming a forum
may now capitalize on a trade, building a
aims to cover; furthermore, working within
for complaint-adjudication. Although the
factory and conjunctively tending to the
the traditional CoA framework is already
CoA has some consultation powers and can
agricultural sector simultaneously. At the end
proving to be ill advised.155 In order to focus
address immediate disputes, anything further
of the day, the goal is to remain competitive
on the task at hand and avoid fighting over
extends beyond the scope of the committee
in the world economy.
who decides whether an issue is addressed
and the breaches the Peace Clause itself.
several
153
162
163
Cutting the red tape with the TF Provision
in a special session or a general meeting, it
Although developing countries’ varying
will, in theory, make the trade process easier
is necessary to modify the mechanism itself.
levels of socioeconomic needs demand some
for smaller enterprises to compete.169 At this
Increasing the frequency of general meetings
leeway be allowed, the “good faith” burden
point, economies with agricultural elements
held to follow up on the Agreement, for
on the developing Member country creates a
have far more complex needs; definitions
example, was one of the options set forth by
foundation upon which the WTO will not be
that steer the AMS external reference
the Trade Negotiations Committee.
able to stand upon for too long.
This is the
calculations and inflate pricing need to be
As mentioned earlier, if a developing
case for Members that participate under the
redefined, readdressed, and cleaned-up. Due
country chooses to participate under any
PSP and comply with the basic requirements.
to conflicting priorities, however, the CoA’s
part of the Bali Agreement’s PSP, it must
At the Ninth MC, the CoA was tasked with
current task to create a permanent solution
notify the CoA of its intentions to do
the responsibility of establishing a work
in place of the interim provision has proven
so.
Part of the issue with notification is
program that would create steps toward
to be arduous.170
backlog;158 according to the Secretariat’s
a permanent solution over the course of
recent report on the CoA, there are 765
the next three years, in time for the WTO’s
outstanding notifications for domestic
Eleventh MC.166
156
157
165
A.Cleaning Up: Outdated Fixed Reference Pricing
support, including public stockholding for food security programs.159 In these cases,
Developing countries, particularly those
Members typically have to submit annual
who are part of the G-33 proposal 171
commitment levels in accordance with their
and tend to rely upon food stockholding 63
Currents Summer 2014
programs, have been forced to utilize
food prices, and inflation.180 Simple re-basing
States have used the green box program
fixed reference prices from 1986-1988 to
to something more recent, however, is not
without limit.190 In 2010, the United States
determine whether they have exceeded their
a solution.181 In a few years, as administered
reportedly allocated $120.5 billion to green
amber box limit under the AoA. A criticism
prices continue to grow, the initial benefits
box subsidies. 191 As the United States
of the fixed reference price is that it forces
will be a distant memory.182 Like the living
increases its food security, other countries
the resulting production percentage to be
and breathing negotiations of the WTO, the
cannot help but wonder if there is distortion
higher than what is actually produced. So if
AMS equation itself must constantly evolve.
caused by the money funneled through the
the amber box de minimis limit threshold is
The truth remains that multiple developing
system.192 While recent conversations in the
ten percent (10%), current calculations result
countries with individual needs are seeking
first of a series of special CoA sessions to
in it surpassing the threshold.
to come to terms with a definable solution,
find an expedited permanent solution to
one that is unlikely as easy as “meeting in the
public stockholding brought the question of
middle” in mediation.
restructuring the green box back on the table,
172
173
174
The fact of the matter is that the current market does not operate in accordance with the fixed reference pricing from when the AoA was signed under the Uruguay Round
other non-G-33 members have referred to this option as an “unfair loophole.”193
B. Cleaning Up: Green Box Parameters
Agreement.175 The negotiations leading up
The underlying cause of increased interest
to the Bali Package made it abundantly clear
While developing countries have struggled
in food programs is a direct consequence
that, in order for developing countries to
under the weight of the AMS, developed
of a lack of food security and hikes in food
enact food stockholding programs without
countries have progressed, reducing their
prices.194 In other words, a greater need to
breaching the de minimis threshold, the
AMS schedule by double-digits into the green
address hunger has resulted in a steamrolling
AMS calculation algorithm will need to be
box. The green box system under the AoA
effort to redefine how countries look at
cleaned up.176
requires subsidies to not distort trade, or at
trade distorting practices, food programs,
According to a study conducted by
most, cause minimal distortion.184 Programs
and overall, whether currently green-boxed
the International Center for Trade and
include direct income support for farmers,
practices are as minimally distorting as they
Sustainable Development, in which
but they are not related to current production
claim.195
simulations were conducted using five
levels or prices, nor are they directed at
—————————————————
model countries, changing only one of
particular products.
the numbers (such as the reference prices)
support is independent of the economic
—————————————————
would have little effect.
state of the product, subsidies are allowed
The stage has been set to make progress
177
For example, if
reference prices were adjusted to the three-
183
185
Due to the fact that
without limits.
VIII. Conclusion
on both trade facilitation and food security
186
year rolling averaging system of import
Now, developed countries that have
issues. In late 1994, the WTO created and
prices, on their own, then they would be the
resources frequently create green box
put the Trade Facilitation Adjustment
most beneficial across multiple countries and
measures in order to avoid AMS restrictions.187
Facility (TFAF) into effect at the request
commodities.178 But in order to mimic the
In 2005, for example, South Korea abolished
of developing and LDC Member States to
economic market, multiple factors must be
its rice government procurement program
help them secure the benefits of the Trade
simultaneously redefined upon calculation,
and converted it into a public stockholding
Facilitation Agreement, and to make sure
including setting the production factor to an
program with green box characteristics; price
that they implement its provisions. As of
actual procurement volume.179
support for local producers was replaced
May 2015, the WTO has launched a website
An advantage of utilizing a more flexible
by decoupled income payments. 188 The
devoted to the TFAF which will serve as the
approach, such as the three-year average
decoupled nature of the money, however, is
focal point for members, donors, and others
system, means that it will more closely
189
more or less undefined and questionable.
seeking information on the TFAF. The
resemble the status of the world economy,
Over the years, countries such as the United
Member States of the WTO also continue
64
Currents Summer 2014
to work on a resolution to the PSP issue, and they are trying to resolve the issue regarding what to do about the Peace Clause by the end of 2015.
65
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End Notes
* Ju r i s D o c t o r, S o u t h Te x a s College of Law, 2014; B.A. in Anthropology & Minor in Global Health Culture and Society, Emory University, 2010. 1. Roberto Azevêdo, DirectorGeneral, World Trade Org. [WTO], Speech at the Confederation of Indian Industr y Partnership Summit (Jan. 28, 2014), available at http://www.wto.org/english/ news_e/spra_e/spra5_e.htm. 2. Bali Ministerial Declaration and Decisions, WTO, http://www.wto. org/english/thewto_e/minist_e/ mc9_e/balipackage_e.htm (last visited Sept. 19, 2014) [hereinafter Bali Ministerial Declaration and Decisions]. 3. Ninth WTO Ministerial Conference, WTO, https://mc9.wto.org (last visited Sept. 19, 2014). 4. Id. 5. WTO, World Trade Report 2007 xxx (2007), available at http://www. wto.org/english/res_e/booksp_e/ anrep_e/world_trade_report07_e. pdf. 6. Id. 7. Id. 8. Id. 9. Understanding the WTO: Developing Countries – Overview , WTO, http:// www.wto.org/english/thewto_e/ whatis_e/tif_e/dev1_e.htm (last visited Sept. 19, 2014) [hereinafter Understanding the WTO Overview]. 10. Special and Differential Treatment Provisions, WTO, http://www. w t o. o r g / e n g l i s h / t r a t o p _ e / devel_e/dev_special_differential_ provisions_e.htm (last visited Sept. 19, 2014). 11. Understanding the WTO Overview, supra note 9. 12. WORLD TRADE REPORT 2007, supra note 5. 13. U.N. Dep’t of Econ. and Soc. Affairs, Dev. Policy and Analysis Div., World Economic Situation and P rospects 2012, Statistical Annex, at 133 tbl.A, U.N. Sales No. E.12.II.C.2 (2012), available at http://unctad.org/en/Docs/ wesp2012_en.pdf. 14. The Doha Round, WTO, http:// www.wto.org/english/tratop_e/ dda_e/dda_e.htm (last visited Sept. 19, 2014) 15. Id. 16. Bali Ministerial Declaration and Decisions, supra note 2. 17. Ministerial Confer ences, WTO, http://www.wto.org/english/ thewto_e/minist_e/minist_e.htm (last visited Sept. 19, 2014). 18. Id.
19. Id. 20. Agriculture: Explanation – Introduction, WTO, http://www.wto.org/ english/tratop_e/agric_e/ag_ intro01_intro_e.htm#committee (last visited Sept. 19, 2014). 21. Id. 22. Id. 23. Id. 24. Understanding the WTO: W hat We Do, WTO, http://www.wto. org/english/thewto_e/whatis_e/ what_we_do_e.htm (last visited Oct. 19, 2014) [hereinafter What We Do]. 25. Id. 26. Id. 27. The GATT Years: From Havana to Marrakesh, WTO, http://www.wto. org/english/thewto_e/whatis_e/ tif_e/fact4_e.htm (last visited Sept. 23, 2014) [hereinafter The GATT Years]. 28. Id. 29. General Agreements on Tariffs and Trade, Oct. 30, 1947, 61 Stat A-11, 55 U.N.T.S. 194, 197 [hereinafter GATT]. supra note 27. 30. The GATT Years, supra note 28. 31. Id. 32. Id. 33. Id. 34. Id. 35. Id. 36. The GATT Years, supra note 27. 37. Id. 38. The Uruguay Round, WTO, http:// www.wto.org/english/thewto_e/ whatis_e/tif_e/fact5_e.htm (last visited Sept. 23, 2014). 39. Id. 40. Id. 41. Id. 42. Id. 43. Id. 44. See id. (listing negotiations and trade rounds from 1996 to 2005). 45. See W hat is the World Trade Or ganization?, WTO, http:// www.wto.org/english/thewto_e/ whatis_e/tif_e/fact1_e.htm (last visited Oct. 2, 2014) (explaining that the WTO is always conducting negotiations). 46. Understanding the WTO: W ho we are, WTO, http://www.wto. org/english/thewto_e/whatis_e/ who_we_are_e.htm (last visited Sept. 30, 2014). 47. What We Do, supra note 24. 48. Id. 49. Id. 50. Briefing Note: Cotton Negotiations – Commitment and Regret in Bali, WTO, http://www.wto.org/english/ thewto_e/minist_e/mc9_e/brief_ cotton_e.htm (last updated Nov.
22, 2013). 51. Bali Ministerial Declaration and Decisions, supra note 2. 52. Roberto Azevêdo, DirectorGeneral, WTO, Speech at “Back in business: the WTO after Bali and the future of the global trade agenda” Event (Apr. 8, 2014), available at http://www.wto.org/ english/news_e/spra_e/spra10_e. htm. 53. Id. 54. Agreement on Agriculture, Apr. 15, 1994, Marrkesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 410 [hereinafter AoA]. 55. Id. para. 3 56. Causes of the 2007-2008 Global Food Crisis Identified, Sci. for Env’t Policy: DG Env’t News Alert Serv. (European Comm’n), Jan. 20, 2011, available at http://ec.europa. eu/environment/integration/ research/newsalert/pdf/225na1. pdf [hereinafter Sci. for Env’t Policy: DG Env’t News Alert Serv]. 57. Id. 58. Id. 59. Id. 60. AoA, supra note 56, para. 4. 61. Differences Remain on Deadlines and Forums for Post-Bali Work on Agriculture, WTO (Sept.16, 2014), http://www.wto.org/ english/news_e/news14_e/ agcom_16sep14_e.htm. 62. Id. 63. See Roberto Bendini, Quick Policy Insight: WTO Back on Track After Bali, Parl. Eur. Doc. (PE 522.314) (Dec. 11, 2013), available at http://www.europarl.europa. eu/RegData/etudes/briefing_ note/join/2013/522314/EXPOINTA_SP(2013)522314_EN.pdf (stating that the trade facilitation reduces costs by improving the speed and efficiency of customs procedures). 64. Id. 65. Id. 66. United Nations Econ. Comm’n for A frica [UNECA], T rade Facilitation from an African Perspective 4 (2013) [hereinafter UNECA], available at http://www. uneca.org/sites/default/files/ publications/trade_facilitation_ eng.pdf. 67. Id. tbl. 1, at 4. 68. Id. 69. Id. at 7. 70. Ravi K. Devarakonda, Food Security, Trade Facilitation Clash in Bali, Inter Press Serv. News Agency 66
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(Dec. 4, 2013), http://ipsnews. net/2013/12/food-security-tradefacilitation-clash-bali/ (discussing the potential gains the trade facilitation agreement could help provide to developing countries). 71. Id. 72. Id. 73. Id. 74. Ramesh Chandra Paudel, Economic Growth in Developing Countries: Is Landlockedness Destiny? 2-3 (Austl. Nat’l Univ., Working Paper No. 2014/01, 2014), available at https:// c r aw f o r d . a nu . e d u . a u / a c d e / publications/publish/papers/ wp2014/wp_econ_2014_01.pdf. 75. UNECA, supra note 68, at 5. 76. Id. at 6. 77. Org. for Econ. Co-operation a n d D e v . [OECD], OECD Trade Facilitation Indicators: Transforming Border B o ttl e n e c k s i n t o G l o b a l Gateways 1 (May 2013), available at http://www.oecd.org/tad/ f a c i l i t a t i o n / O E C D _ Tr a d e _ Facilitation_Indicators_updatedflyer_May_2013.pdf. 78. Devarakonda, supra note 72. 79. Devarakonda, supra note 72. 80. ITC Business Guide on the New Trade Gacilitation Agreement, ICC B u s . W o r l d T r a d e A g e n da (Dec. 2013), http://www.icc.se/ referensgrupper/handelspolitik/ WTOtrade_facilitation_ agreement.pdf. 81. Id. 82. Id. 83. Id. 84. Trade and Agric. Directorate of the OECD, The WTO Trade F ac i l i t a t i o n A g r e e m e n t – Potential Impact on Trade Costs 1 (Feb. 2014), available at http:// www.oecd.org/trade/facilitation/ T he%20WTO%20Trade%20 Facilitation%20Agreement%20 %E2%80%93%20Potential%20 Impact%20on%20Trade%20 Costs.pdf. 85. UNECA, supra note 68, n.5, at 7. 86. Id. at 7. 87. Devarakonda, supra note 70. 88. Id.; Bendini, supra note 63, at 1, 3. 89. Devarakonda, supra note 70. 90. Raul Montemayor, An Evaluation of Possible Elements of a “Permanent” Solution to the Public Stockholding Issue, ICTSD P rogramme on A gric . T rade and S ustainable D ev ., Issue Paper No. 51, June 23, 2014, at 3, available at http://www.ictsd. org/sites/default/files/research/ Public%20Stockholding%20 for%20Food%20Security%20
Purposes%20Scenarios%20 and%20Options.pdf. 91. Id. at 3. 92. Id. 93. Id. 94. Id. at 7. 95. Id. 96. Id. 97. Id. 98. WTO, Ministerial Declaration of 7 December 2013, ¶ 2, at 1 & n. 1, WT/MIN(13)/38 (2013) [hereinafter Public Stockholding for Food Security Provision], available at http://wto.org/english/ thewto_e/minist_e/mc9_e/ balipackage_e.htm. 99. Montemayor, supra note 92, at 5. 100. Id. at 8. 101. Id. 102. Id. 103. Id. at 6. 104. Id. at 3. 105. Devarakonda, supra note 70. 106. Montemayor, supra note 90, at 4. 107. Id. 108. Id. at 5. 109. Devarakonda, supra note 70. 110. Public Stockholding for Food Security Provision, supra note 98. 111. Devarakonda, supra note 70. 112. Id. 113. Id. 114. Public Stockholding for Food Security Provision, supra note 98, ¶¶ 4, 6-7, at 2. 115. Id. ¶ 2, at 1. 116. Id. ¶ 3, at 1. 117. Id. ¶ 2, at 1; AoA, supra note 54, Annex 2, para. 3, at 58. 118. Public Stockholding for Food Security Provision, supra note 98, ¶¶ 3-5, at 1-2. 119. Id. ¶ 3, at 1. 120. Id. 121. Id. ¶¶ 4-5, at 2. 122. Id. 123. Id. ¶ 6, at 2. 124. Id. ¶ 3, at 1. 125. Id. ¶¶ 3-4, at 1-2. 126. Id. ¶ 7, at 2. 127. Id. ¶ 2, at 1. 128. What We Do, supra note 25. 129. Id. 130. See Azevêdo, supra note 1 (addressing concerns related to the interim solutions); The term “Peace Clause” is not novel. From 1995-2005 the EU and US were among the major subsidizers that were provided with a similar clause, preventing them from facing consequences to their farm subsidy programs via the Blair House Agreement of 1992. http://www. ipsnews.net/2014/07/publicstockholding-programmes-forfood-security-face-uphill-struggle 131. The Bali Decision on Stockholding for Food Security in Developing Countries, WTO, https://www.wto.org/
english/tratop_e/agric_e/ f a c t s h e e t _ a g n g _ e. h t m ( l a s t updated Nov. 27, 2014). 132. Id. 133. The Ninth MC regulations required that each Member ratify the TF provision, and sign it into official protocol by July 31, 2014 at the scheduled General Council meeting. India refused to ratify the TF provision if alterations were not made to the PSP. http://www. business-standard.com/article/ economy-policy/wto-standoffindia-may-lose-peace-clause-ifbali-pack-fails-114072800063_1. html. 134. Nayanima Basu, WTO Standoff: India may lose ‘Peace Clause’ if Bali Pack Fails, BUS. STANDARD (July 28, 2014, 12:50 AM), http://www. business-standard.com/article/ economy-policy/wto-standoffindia-may-lose-peace-clause-ifbali-pack-fails-114072800063_1. html. 135. Id. 136. World Trade Organization, General Council Decision of 27 November 2014, WT/L/939 (2014), available at https://www.wto.org/english/ thewto_e/minist_e/mc9_e/ nov14stockholding_e.htm [hereinafter Public Stockholding for Food Security Purposes]. 137. Id. 138. Id. 139. Id. 140. Id. 141. Id. 142. See Afsar Jafri, India (G-33) Proposal on Food Security: A Wrong Move Can Jeopardize India’s Food Security Forever, FOCUS ON THE GLOBAL SOUTH, http://focusweb.org/ content/india-g-33-proposalfood-security-wrong-move-canjeopardize-india%E2%80%99sfood-security-forever (last visited Oct. 12, 2014) (discussing India’s domestic needs regarding food security). 143. Emmy Simmons, Harvesting Peace: Food Security, Conflict, and Cooperation, NEW SECURITY BEAT (Sept. 3, 2013), http://www. newsecuritybeat.org/2013/09/ harvesting-peace-food-securityconflict-cooperation/. 144. Daniel Pruzin, U.S., Canada Press India on Lar ge W heat Exports Subsidized by Food Security Program, 31 INT’L TRADE REP. (BNA) No. 6, at 264 (Feb. 6, 2014). 145. Id. 146. Id. 147. Id. 148. Id. 149. The Agriculture Committee and Implementation of Commitments, WTO http://www.wto.org/
english/tratop_e/agric_e/ag_ work_e.htm (last visited Sep. 21, 2014) [hereinafter Agriculture Committee]. 150. Id. During the November 2014 CoA meeting, Russia, India, and Japan are facing questions about their long-term implementation s t a t i s t i c s a n d p r o j e c t i o n s, sustainability, and transparency. 151. Public Stockholding for Food Security Provision, supra note 98, at ¶ 7, at 2. 152. See Committee on Agriculture, Note by the Secretariat: Summary Report of the Meeting Held on 29 January 2014, G/AG/R/73 (Mar. 10, 2014) [hereinafter Summary Report], available at https://docs. wto.org/dol2fe/Pag es/FE_ Search/FE_S_S009-DP.aspx?lan guage=E&CatalogueIdList=1231 29,123162,123161,123104,123115 ,123043,122944,122871,122852,1 22663&CurrentCatalogueIdIndex =3&FullTextSearch= (listing the CoA meetings that followed the Bali Agreement, where members expressed the issues that could be dealt with during a CoA special session or just a CoA regular meeting). 153. Id. 154. Id. ¶¶ 2.32-2.34, at 7. 155. See Id. ¶¶ 2.26, 2.29, 2.33-2.34 (citing several countries needs for clarification in regards to what the Bali Agreement requires them to do). 156. Kanaga Raja, WTO DG Reports on Latest Round of Talks on Bali Issues, THIRD WORLD ECON. TRENDS & ANALYSIS, No. 554, Oct. 1-15, 2013, at 3, available at http://www.twnside.org.sg/title2/ twe/2013/pdf/twe554.pdf. 157. Public Stockholding for Food Security Provision, supra note 98, ¶ 3, at 1. 158. Committee on Agriculture, Note by Secretariat: Compliance with Notification Obligations (Revision), ¶1.13, at 6, G/AG/GEN/86/Rev.17 (Mar. 11, 2014) (Secreteriat noting the large number of notifications that are outstanding and need to be addressed). 159. Id. 160. Id. ¶1.12, at 6. 161. Farm Produce Stockholding Worries Members who Fear Impact on Trade and Incomes, WTO (Sept. 26, 2013), http://www.wto.org/ english/news_e/news13_e/ agcom_26sep13_e.htm. 162. Pruzin, supra note 144, at 264. 163. Committee on Ag riculture, Compilation of Questions for the Meeting on 21 March 2014: Points Raised by Members Under the Review Process, ¶ 1.8-1.9, G/AG/W/119
(Mar. 11, 2014). 164. See Roberto Azevêdo, DirectorGeneral, WTO, Address to the Trade Negotiations Committee (Feb. 6, 2014), available at http:// www.wto.org/english/news_e/ news14_e/tnc_infstat_06feb14_e. htm (describing the process as conversational and informal). 165. Christian Häberli, After Bali: WTO Rules Applying to Public Food Reserves 3 (FAO Commodity and Trade Policy Research Working Paper No. 46, 2014) [hereinafter HÄBERLI] available at http:// www.fao.org/3/a-i3820e.pdf. 166. Public Stockholding for Food Security Provision, supra note 98, at ¶ 1, at 1. 167. Bendini, supra note 66, at 3. 168. INT’L MONETARY FUND, CHANGING PATTERNS OF GLOBAL TRADE 4 (2011). 169. A R C H A N A J A T K A R & CHENAI MUKUMBA, U N PAC K I N G T H E BA L I PACKAGE A SNAPSHOT OF THE BALI MINISTERIAL DECISIONS OF THE WTO MEMBERS 4-6 (2014), available at http://www.cuts-citee.org/ pdf/Unpacking_the_Bali_ Package-A_Snapshot_of_the_ Bali_Ministerial_Decisions_ of_the_WTO_Members.pdf. 170. Id. at 8, 20. 171. The G-33 group is comprised of over 45 developing and leastdeveloping countries and called for updating of the external reference price to ensure sustainability of their public stockholding prog rams. Their effor ts are spearheaded by Indonesia, China, India, Pakistan, the Philippines, Kenya, Nigeria, and Zimbabwe, among others. http://www. ipsnews.net/2014/07/publicstockholding-programmes-forfood-security-face-uphill-struggle/ 172. Chair Updates on Farm Issues Proposed for Bali Meeting: Talks Continue on Key Differences, WTO (May 23, 2013), http://www.wto.org/ english/news_e/news13_e/ agng_23may13_e.htm. 173. Id. 174. Id. 175. Afsar Jafri, India (G-33) Proposal on Food Security: A Wrong Move Can Jeopardize India’s Food Security Forever, FOCUS ON THE GLOBAL SOUTH, http://focusweb.org/ content/india-g-33-proposalfood-security-wrong-move-canjeopardize-india%E2%80%99sfood-security-forever (last visited Oct. 12, 2014). 176. JATKAR & CHENAI, supra note 169, at 20; Montemayor, supra note 90, at 16-17.
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177. Montemayor, supra note 90, at 1. 178. Id. at 22. 179. Id. 180. See, e.g., Id. (In this study several simulations were conducted that concluded in possible solutions to some of the issues presented during the Ninth Ministerial Conference in Bali.). 181. Id. at 24. 182. Id. 183. See, e.g., Patrick Tsai, Negotiating Oppression: A Developed-Country Approach to Agricultural Trade, B E YO N D T H E FA R M BILL (Jan. 30, 2014), http:// www.beyondthefar mbill.org/ article/negotiating-oppressiondeveloped-country-approachagricultural-trade (showing that the United States’, a developed country, amber subsidies have steadily decreased, while its green box subsidies have had a spiked increased within in this past decade). 184. Phase 1: Domestic Support ¬– Amber, Blue, and Green boxes, WTO, http:// www.wto.org/english/tratop_e/ agric_e/negs_bkgrnd07_ domestic_e.htm (last updated Oct. 2, 2001). 185. Id. 186. Id. 187. Martin Khor, Pot Calling the Kettle Black!, THIRD WORLD ECON. TRENDS & ANALYSIS, no. 554, Oct. 1-15, 2013, at 5, available at http://www.twnside.org.sg/title2/ twe/2013/pdf/twe554.pdf. 188. Montemayor, supra note 90, at 34. 189. Tsai, supra note 183. 190. Id. 191. Id. 192. Id. 193. Id. 194. Food Security in South Asia, WORLD BANK (Oct. 22, 2012), http:// www.worldbank.org/en/news/ feature/2012/10/22/foodsecurity-south-asia. 195. See Tsai, supra note 183 (discussing how the need to address hunger has led to the distortion of international trade and why some of the existing mechanisms used by developed countries should be re-evaluated).
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