CURRENTS Vol. XXII, No. 2 | 2014

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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

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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

Faculty Advisors Assistant Dean Elizabeth A. Dennis Professor C. O’Neal Taylor Executive Editor Joseph Collins Publications Coordinator Jacob Hubble

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Ian Holcomb Co-Editor-in-Chief

Currents Summer 2014

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The Level of "Uniformity" Created by the Convention on Contracts for the International Sale of Goods G A R RY

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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

4

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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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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

12

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

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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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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

Release (June 13, 2013), http://esa. un.org/wpp/documentation/pdf/ wpp2012_press_release.pdf. 19. Benedicte Vibe Christensen, China in Africa: A Macroeconomic Perspective 1 (Ctr. for Global Dev., Working Paper No. 230, 2010), available at http:// www.cgdev.org/files/1424567_ file_Christensen_China_in_Africa_ FINAL.pdf. 20. U.N. Conference on Trade & Dev. [UNCTAD], World Investment R e p o r t 2013: G l o ba l V a lu e C hains : I nvestment and T rade for Development, at 5, U.N. Sales No. E.13.II.D.5 (2013) [hereinafter UNCTAD 2013 Report], available at http://unctad.org/en/ PublicationsLibrar y/wir2013_ en.pdf; see also Ken Davies, China Investment Policy: An Update 34 (Org. for Econ. Coop. & Dev., Working Paper No. 2013/01, 2013), available at http://www.oecd.org/china/WP2013_1.pdf(discussing the impact of China’s “Go Global” policy). 21. Shinn, supra note 17, at 5. 22. Id. 23. Id. 24. Id. at 1. 25. F o r u m o n C h i n a - A f r i c a Cooperation, Beijing Declaration of the Fifth Ministerial Conference of the Forum on China-Africa Cooperation paras. 4-5 (July 23, 2012), http://www.focac.org/eng/ ltda/dwjbzjjhys/hywj/t954245.htm [hereinafter FOCAC]. 26. Shinn, supra note 17, at 1. 27. Diplomatic Allies, M i n i s t ry o f Foreign Affairs Taiwan, http:// www.mofa.gov.tw/en/AlliesIndex. aspx?n=DF6F8F246049F8D6&sms =A76B7230ADF29736 (last visited Aug. 27, 2014). 28. Todd J. Moss et al., Is Africa’s Skepticism of Foreign Capital Justified?

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WTO, http://www.wto.org/ english/tratop_e/dispu_e/find_ dispu_cases_e.htm?year=none&s ubject=none&agreement=A25& member1=none&member2=non e&complainant1=true&complain ant2=true&respondent1=true&r espondent2=true&thirdparty1=fal se&thirdparty2=false#results (last visited Oct. 19, 2014). 69. Appellate Body Report, India— Measur es Af f ecting Trade and Investment in the Motor Vehicle Sector, WT/DS146/AB/R, (Mar. 19, 2002). 70. Id. ¶ 5. 71. Appellate Body Report, Canada— Certain Measur es Affecting the Renewable Energy Generation Sector, WT/DS412/AB/R, (May 6, 2013). 72. Id. ¶ 6. 73. General Agreement on Trade in Ser vicesar t. xx, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, 1869 U.N.T.S. 183, 33 I.L.M. 1167 (1994) [hereinafter GATS]. 74. GATS art. I:2(c). 75. Id. 76. Panel Report, China—Certain Measures Affecting Electronic Payment Services, WT/DS413/10 (Aug. 21, 2013). 77. UNCTAD, Intellectual Property Provisions in Inter national Investment Arrangements, at 2, U.N. Doc, UNCTAD/WEB/ ITE/IIA/2007/1 (2007), available at http://unctad.org/en/Docs/ webiteiia20071_en.pdf; Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299 [hereinafter TRIPS]. 78. Panel Report, Australia—Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requir ements Applicable to Tobacco Products and Packaging, WT/DS435/19 (Oct. 14, 2014). 79. Understanding the WTO: Settling Disputes, WTO, http://www.wto. org/english/thewto_e/whatis_e/ tif_e/disp1_e.htm (last visited Oct. 25, 2014). 80. Id. 81. Groups in the WTO, WTO, http:// www.wto.org/english/tratop_e/ dda_e/negotiating_groups_e. pdf (last updated Sept. 10, 2014) [hereinafter Groups in the WTO]. 82. Mary-Françoise Renard, China’s Trade and FDI in Africa 18-19 (African Dev. Bank Grp., Working Paper No. 126, 2011), available at http://www.afdb.org/fileadmin/ uploads/afdb/Documents/ 38

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Publications/Working%20126. pdf. 83. Groups in the WTO, supra note 81. 84. Jordan Shepherd et al., Effective Compliance in the DSU: The Mechanics of Monetary Compensation as a Form of Reparation, G raduate I nst . G eneva , 49 (2012), available at http://graduateinstitute.ch/files/ live/sites/iheid/files/sites/ctei/ shared/CTEI/Law%20Clinic/ memoranda2012/Final%20 Memo%20-%20DSU%20 Review%20-%2008062012.pdf. 85. Understanding on Rules and P r o c e d u r e s G ove r n i n g t h e Settlement of Disputes art. 22.1, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401 [hereinafter DSU]. 86. Id. at art. 22.6. 87. IOSC White Paper, supra note 6, at 4 fig. 1. 88. Shepherd et al., supra note 84, at 57. 89. S t e p h a n W. S c h i ll , T h e M ult i l a t e r a l i z a t i o n o f International Investment Law 248-49 (2009). 90. Id. at 249. 91. Id. 92. Id. at 250-52. 93. The Facts on Investor-State Dispute Settlement: Safeguarding the Public Interest and Protecting Investors, Off. of the U.S. Trade Representative, (Mar. 27, 2014, 9:00 AM), http:// www.ustr.gov/about-us/pressoffice/blog/2014/March/ Facts-Investor-State%20DisputeSettlement-Safeguarding-PublicInterest-Protecting-Investors. 94. Id. 95. Id. 96. Id. 97. Stephan W. Schill, Deference in Investment Treaty Arbitration: REConceptualizing the Standard of Review Through Comparative Public Law 23 (Soc’y of Int’l Econ. Law, Working Paper No. 2012/33, 2012). 98. Bryan Mercurio, Inter national Investment Agreements and Public Health: Neutralizing a Threat Through Treaty Drafting, 92 Bull. World Health Org. 520, 522 (2014). 99. David Gaukrodger & Kathryn Gordon, Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community 10 (Org. for Econ. Co-operation and Dev., Working Paper No. 2012/03, 2012). 100. See generally European Commission, F actsheet on I nvestor -S tate D i s put e S e ttl e m e n t (2013), available at http://trade.ec.europa. eu/doclib/docs/2013/october/ tradoc_151791.pdf (discussing the benefits of Investor-State Dispute Settlement).


101. Convention on the Recognition and Enforcement of Foreign Arbitral Awards art.I, III, V, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38. 102. Ling Ling He & Razeen Sappideen, Investor-State Arbitration under Bilateral Trade and Investment Agreements: Finding Rhythm in Inconsistent Drumbeats, 47 J. World Trade 215, 226 (2013). 103. Id. at 226-27. 104. Uche Ewelukwa Ofodile, AfricaChina Bilateral Investment Treaties: A Critique, 35 Mich. J. Int'l L. 131, 138 (2013). 105. Renard, supra note 82, at 18-19. 106. UNCTAD, Full List of Bilateral Investment Agreements Concluded, 1 June 2013 (Jan. 6, 2013) http:// unctad.org/Sections/dite_pcbb/ docs/bits_china.pdf. 107. Hernando Otero & Omar GarciaBolivar, Update: Inter national Arbitration between Foreign Investors and Host States (Investor-State Arbitration), G loba L ex (Apr. 2014), http://www.nyulawglobal. org/globalex/International_ Arbitration_Foreign_Investors_ Host_States1.htm. 108. Nigel Blackaby et al., Guide to ICSID Arbitration 51 (2d ed. 2010). 109. New York Convention Countries, N.Y. A rb .C onvention , http:// w w w. n e w y o r k c o n v e n t i o n . org/contracting-states/list-ofcontracting-states (last visited Oct. 11, 2014). 110. See Ofodile, supra note 104, at 15977. 111. Alessandra Asteritti & Christal J. Tams, Transparency and Representation of the Public Interest in Investment Treaty Arbitration, in International Investment Law and Comparative Public Law 787, 798-99 (Stephan W. Schill, ed. 2011). 112. OECD, International Investment Law: Understanding Concepts and T racking I nnovations 9, 75 (2008) [hereinafter OECD I n v e s t m e n t L aw ] , a va i l a bl e at http://www.oecd.org/daf/ inv/inter nationalinvestment agreements/40471468.pdf. 113. UNCTAD, Course on Dispute Settlement – Module 2.3 ICSID: Consent to Arbitration, at 5, U.N. Doc. UNCTAD/EDM/Misc.232/ Add.2 (Nov. 6, 2005), available at http://unctad.org/en/Docs/ edmmisc232add2_en.pdf. 114. Id. 115. Ag reement Concer ning the Encouragement and Reciprocal Protection of Investments,SudanChina, art.8.2, May 30, 1997 [hereinafter Sudan-China BIT], available at http://tfs.

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

United Arab Emirates, ICSID Case No. ARB/02/7, Award, (July 7, 2004), 12 ICSID Rep. 158 (2007), available at http://www. italaw.com/sites/default/files/ case-documents/ita0799.pdf. 135. Id. ¶ 47. 136. Id. ¶¶ 84-86. 137. Zhōnghuá Rénmín Gònghéguó guójí fǎ (中华人民共和国国 籍法) [Nationality Law of the People’s Republic of China] (promulgated by the Standing Comm. Nat’l People’s Cong., effective Sept. 10, 1980) art. 3, 9 (China), http://www.npc.gov.cn/ englishnpc/Law/2007-12/13/ content_1384056.htm. 138. China-Nigeria BIT, supra note 116, art. 1.2(b). 139. Ag reement Concer ning the Encouragement and Reciprocal Protection of Investments, China-Egypt, art.1.2(b), Apr. 21, 1994, 1998 U.N.T.S. 125, 142 (1997), available at http:// investmentpolicyhub.unctad.org/ Download/TreatyFile/730. 140. Definition of Domicile, O xford D i ct i o n a r i e s , http://www. ox f o r d d i c t i o n a r i e s. co m / definition/english/domicile (last visited Oct. 23, 2014). 141. North American Free Trade Agreement, U.S.-Can.-Mex., art. 1113(2), Dec. 17, 1992, 32 I.L.M. 289 (1993), available at https:// www.nafta-sec-alena.org/Default. aspx?tabid=97&language=en-US. 142. Tokios Tokeles v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, (Apr. 29, 2004), 11 ICSID Rep. 313 (2007), available at http://www.italaw.com/sites/ default/files/case-documents/ ita0863.pdf. 143. Id. at 318. 144. Id. at 322. 145. OECD I nvestment L aw , supra note 112, at 9. 146. Id. 147. Convention on the Settlement of Investment Disputes Between States and Nationals of Other States art.25(1), Mar. 18, 1965, 575 U.N.T.S. 159 (1966), available at http://www.jus.uio.no/lm/icsid. settlement.of.disputes.between. states.and.nationals.of.other.states. convention.washington.1965/ landscape.pdf. 148. Mihaly International Corporation v. The Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2, Award, ¶ 33 (Mar. 15, 2002), 41 I.L.M. 867 (2002), available at http://www. italaw.com/cases/documents/703. 149. Ofodile, supra note 104, at 186-202. 150. See id. at 177, 180-81. 151. Id. at 162.

152. Schlemmer, supra note 133, at 58. 153. Qi Huan, The Definition of Investment and Its Development: For the Reference of the Future BIT between China and Canada, 45 R.J.T. n . s . 541, 554 (2011). 154. Agreement for the Reciprocal Promotion and Protection of Investments, China-S. Afr., art 1.1, Dec. 30, 1997, 2567 U.N.T.S. 295 [hereinafter China-S. Afr. BIT]. 155. Huan, supra note 1543 at 553. 156. Id. 157. Id. 158. Ag reement Concer ning the Encouragement and Reciprocal Protection of Investments, China-Gabon, art.1.1, May 9, 1997, available at http://tfs. mofcom.g ov.cn/aar ticle/h/ aw/201002/20100206778962. html. 159. Ag reement Concer ning the Encouragement and Reciprocal Protection of Investments, ChinaMorocco, art. 1.1, Mar. 27, 1995, available at http://www.google. com/url?sa=t&rct=j&q=&esr c=s&source=web&cd=4&ved =0CDEQFjAD&url=http%3 A%2F%2Fwww.aseanbriefing. com%2Fuserfiles%2Fresourcespdfs%2FChina%2FBIT%2FAsia_ BIT_Morocco_China.pdf&ei=dB ppVIruGcW5oQSl7oGgAg&usg= AFQjCNF7c9Pknd-v2Cgxc_TG JLl2fkbJkQ&sig2=EVlcbjOhltPg oznM4MnPVw&bvm=bv.799081 30,d.cGU. 160. Huan, supra note 153, at 554. 161. Nartnirun Junngam, An MFN Clause and BIT Dispute Settlement: A Host State’s Implied Consent to Arbitration by Reference, 15 UCLA J. Int’l L. Foreign Aff. 399, 403-09 (2010). 162. Id. at 408-09. 163. Id. at 409. 164. Id. at 524-25. 165. Id. 166. T r e a t y C o n c e r n i n g t h e Encouragements and Reciprocal Protection of Investment, USRwanda, art. 4, Feb. 19, 2008, S. T r e at y D o c . N o . 110-23 [hereinafter US-Rwanda BIT], available at http://tcc.export.gov/ Trade_Agreements/All_Trade_ Agreements/pdf-agreements/ RwandaBIT.pdf. 167. Junngam, supra note 161, at 415. 168. Agreement for the Promotion and Protection of Investments, UK-Alb., art. 3, 9, Mar. 30, 1994, 1919 U.N.T.S. 15 [hereinafter UKAlbania BIT], available at http:// w w w. w i p o. i n t / w i p o l e x / e n / treaties/text.jsp?file_id=246235. 169. Ofodile, supra note 104, at 166–67. 170. Ag reement Concer ning the Re c i p r o c a l E n c o u r a g e m e n t

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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).

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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

47

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

49

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

50

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

52

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

59

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

60

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

62

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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