Thanks, Simon, for drawing our attention, in your previous post, to the Peru – Agricultural Products case. I have been following this dispute for a while (although I was not in any way involved in it) as it raises fascinating, systemic issues of the relation between WTO and non-WTO agreements (most of which were, however, as you noted, left open by the Panel in its actual findings …).
Case Background
In 2011, Guatemala explicitly agrees in an FTA with Peru that “Peru may maintain its Price Range System” at least with respect to some products (FTA, Annex 2.3, para. 9). Yet, in 2013, Guatemala turns its back and challenges the exact same Price Range System (PRS) as a violation of Peru’s WTO commitments. Even more strangely, in late 2013 and early 2014, as the WTO Panel is proceeding, the Guatemalan Congress approves the FTA and the Guatemalan President formally ratifies it. In the meantime, Peru, who is understandably confused as to what Guatemala is doing and how serious it is about its FTA commitments, delays ratification of the FTA.
So when the WTO Panel decided last week, the FTA was not in force …
This scenario raises two issues. First, given the text in the FTA, does Guatemala still have “a right to a WTO panel”? Second, even if the PRS violates the WTO treaty (in casu, Art. 4.2 of the Agreement on Agriculture) does the FTA provision excuse Peru’s breach? The first is a preliminary matter of admissibility. The second is a substantive matter that goes to the merits. The WTO Panel addressed the first issue in paras. 7.66 – 7.96; the second issue in paras. 7.525 – 528 (in your post, you only quoted the latter).
Admissibility: Waiving the Right to a WTO Panel in an FTA
As to admissibility, the AB has previously held that complainants “could be precluded from initiating [DSU] proceedings by means of … Understandings … if the parties to these Understandings had, either explicitly or by necessary implication, agreed to waive their right to have recourse to [the DSU]” (EC – Bananas III (Article 21.5 – Ecuador II), para. 217).
In that case, the EU-US-Ecuador “understandings” were concluded following the original Bananas proceedings. In the Peru case here, the “understandings” took the form of an FTA. Neither “understanding” is part of WTO covered agreements (listed in DSU Appendix 1) so the difference between a DSU understanding and an FTA is one of degree, not type. Note, however, that the US is willing to accept waivers expressed in DSU understandings, but not in FTAs (see para. 7.520). The EU and, interestingly, also Brazil, in contrast, explicitly open the door for FTAs to impact WTO rights even in WTO dispute settlement (see paras. 7.66 and 7.522 and paras. 7.62 and 7.518, respectively).
The fact that WTO members can waive their DSU right to a panel is confirmed in Art. 45 of the ILC Articles on State Responsibility (entitled “Loss of the Right to Invoke Responsibility”): “The responsibility of a State [here, Peru] may not be invoked if … the injured State [here, Guatemala] has validly waived the claim”.
Interestingly, neither party/third party nor the WTO panel referred to this provision. Instead, they all sought rescue behind an explicit DSU provision, in casu: DSU Art. 3.10 stating that “all Members will engage in these procedures in good faith”. This, somewhat unfortunately, translates the rather neutral, factual question of whether Guatemala waived its right to a WTO panel into a far more contentious, subjective question of whether Guatemala engaged the DSU “in good faith”. Yet, at para. 7.55, even Guatemala agreed that “it can … be found that a Member engaged in a procedure in a manner contrary to good faith if, before initiating the dispute, the Member in question clearly expressed its waiver of the right to challenge the measure in question”.
Largely based on how Peru argued the case, the Panel hinged its conclusion that Guatemala did not engage the DSU here contrary to its good faith obligation in Art. 3.10 on the fact that the FTA was not in force (Peru’s invocation of VCLT Art. 18 was to no avail). More to the point perhaps, as a factual matter, when Guatemala agreed in the FTA that “Peru may maintain its Price Range System” it seems hard to conclude that Guatemala thereby waived its procedural right to a WTO panel in respect of the PRS.
Merits: Consenting to WTO Breach in an FTA
The issue is different when it comes to the merits. Guatemala may not have waived its (procedural) right to a WTO panel but it did (substantively) agree in the FTA that “Peru may maintain its Price Range System” for at least some products.
Yet, Peru argued this issue as a matter of treaty law: in its view, the FTA “modified” the WTO treaty as between the two parties, pursuant to Art. 41 of the Vienna Convention (and Art. 1.3.2 of the FTA which explicitly states that the FTA prevails over the WTO). Not surprisingly, the Panel, once again largely based on how Peru argued the matter, rejected Peru’s argument on the ground that the FTA was not in force. Still, this leaves a bitter aftertaste: Guatemala did formally ratify the FTA; it was Peru that halted the entry into force of the FTA …
A better approach could have been to rely on the ILC Articles on State Responsibility (instead of the VCLT). Chapter V therein lists a number of “circumstances precluding wrongfulness”. Art. 20 states: “Valid consent by a State [here, Guatemala] to the commission of a given act by another State [here, Peru] precludes the wrongfulness of that act in relation to the former State to the extent that the act remains within the limits of that consent”.
The issue then becomes a largely factual question of whether Guatemala, by means of adopting the FTA, “consented” to the keeping in place by Peru of the PRS; it no longer is a legal question then of whether the FTA as a treaty modifies the WTO agreement.
Reading para. 9, Annex 2.3 of the FTA there can be little doubt that Guatemala “consented” that “Peru may maintain its Price Range System” at least with respect to some products. That the FTA did not enter into force is, in this assessment, not necessarily a game-stopper. Through its unilateral conduct Guatemala may as a matter of fact have “consented” to (at least part of) Peru’s PRS: it signed the text of the FTA in 2011 and both the Guatemalan Congress and President formally ratified this “consent”. Admittedly, a fine and somewhat uneasy line would then need to be drawn between the FTA not being in force yet (so no obligation on Guatemala yet to lift e.g. tariffs v-à-v Peru) and Guatemala having (unilaterally/factually) consented to the PRS based on a holistic assessment of all relevant conduct.
If parties or WTO panels want a formal, legal hook within the WTO to allow for such reference to an FTA (the way they looked for one in DSU Art. 3.10), GATT Article XXIV, GATS Article V and the Enabling Clause provide such hook.
Some parties in the Peru case also made a big fuss about Art. 41 VCLT not being available since the WTO has its own procedures on amendment, waiver etc. (see Guatemala argument, para. 5.712 and US argument, para. 5.720).
The AB in Clove (paras. 262-7) and later Tuna II (paras. 371-2) rejected this view: although Art. IX:2 of the WTO Agreement explicitly provides for authoritative interpretations, this does not preclude operation of VCLT Art. 31.3(a), i.e., still allows members to conclude “subsequent agreements” on the interpretation or application of WTO law, in those cases, by means of the Doha Ministerial Declaration or a TBT Committee decision, neither of which referred to Art. IX:2, nor are these instruments strictly “legally binding” or part of the WTO "covered agreements". This confirms that “consent” can be expressed even in instruments that are not as such legally binding. Similarly, the fact that the WTO Agreement has provisions on amendment or waiver does not stop the operation of Arts. 30, 31 or 41 of the VCLT nor of Art. 20 or 45 of the Articles on State Responsibility.
What’s Next?
This is still not the case where a WTO panel is faced with a clear FTA provision taking away the right to a WTO panel. We still do not know whether a WTO panel would declare a claim inadmissible on this ground. Similarly, we still do not know whether a WTO panel would be willing to justify WTO breach with reference to consent/waiver or a conflicting provision in another treaty. At the same time, this Panel report and the parties’ and third parties’ arguments therein provide interesting (albeit sometimes conflicting) avenues on how one could answer these questions.
WTO members can and do sometimes waive WTO rights in FTAs and, if the circumstances are ripe, a WTO panel should, in my view, take cognizance of this if (i) such waiver/consent can be firmly established and is legal/valid, and (ii) it does not affect the rights of third parties (VCLT Art. 34). In this case, for example, the fact that Guatemala may have agreed that Peru can keep its PRS in place does not prevent other WTO members e.g. the US, EU or Brazil from successfully challenging the PRS. Some argue that allowing for such waiver of WTO rights in FTAs would allow powerful countries to coerce weaker ones into giving up their WTO rights (see Guatemala, paras. 7.60 and 7.517). Genuine error, fraud or coercion are all reason to declare the FTA (provision) invalid (VCLT Arts. 48-52). Other than that, however, the argument is a paternalistic one: states are sovereign and can decide for themselves what to agree on, in their best interest. For a WTO panel to neglect such consent would go against state sovereignty.
It is unclear whether Peru will appeal. Imagine, however, that Peru, in the meantime, ratifies the FTA so that it does enter into force: would that (at least partly) implement the Panel ruling or would the AB even before that be willing to take this new development into account?
