the role of dispute settlement mechanisms in the
TRANSCRIPT
THE ROLE OF DISPUTE SETTLEMENT MECHANISMS IN THE CONSTITUTIONALIZATION OF REGIONAL
TRADE AGREEMENTS
BY
THERESA JENSEN
A THESIS SUBMITTED IN CONFORMITY WITH THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS
GRADUATE DEPARTMENT OF LAWUNIVERSITY OF TORONTO
©Copyright by Theresa Jensen 2011
II
THE ROLE OF DISPUTE SETTLEMENT MECHANISMS IN THE CONSTITUTIONALIZATION OF REGIONAL TRADE AGREEMENTS
THERESA JENSEN
MASTER OF LAWS
GRADUATE DEPARTMENT, FACULTY OF LAWUNIVERSITY OF TORONTO
2011
ABSTRACT
This paper discusses the role played by Dispute Resolution Mechanisms in the European Union and the
North American Free Trade Agreement (NAFTA), and the way in which they potentially contribute to
the constitutionalization of such Regional Trade Agreements. The European Court of Justice has played
a major role in the constitutionalization of the European Union due to the preliminary reference
procedure, as well as the principles of direct effect and supremacy. The lack of availability to NAFTA
Dispute Resolution Mechanisms of the principles which are so influential with the European Court of
Justice mean that NAFTA’s Dispute Resolution Mechanisms are unable to drive constitutionalization in
a manner similar to the ECJ. Chapter 11 of NAFTA however has the potential to act as a agent of
constitutionalization within the scope of international investment law, but not of NAFTA itself.
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Table of Contents
...................................................................................................................................................INTRODUCTION 1
...............................PART I: THEORETICAL APPROACHES TO REGIONAL TRADE AGREEMENTS 8
................................................................................................................PART II: THE EUROPEAN UNION 16THE BACKGROUND ................................................................................................................................................ 16THE STRUCTURE..................................................................................................................................................... 22THE PRINCIPLES OF THE EUROPEAN COURT OF JUSTICE ................................................................................... 25IMPLICATIONS FOR THE EU TREATIES.................................................................................................................. 35
.......................................PART III: CHAPTER 20 OF NAFTA (GENERAL DISPUTE SETTLEMENT) 37THE BACKGROUND ................................................................................................................................................ 37THE STRUCTURE..................................................................................................................................................... 41THE MAIN PRINCIPLES ........................................................................................................................................... 44IMPLICATIONS FOR ..................................................................................................................................NAFTA 47
.............PART IV: CHAPTER 19 OF NAFTA (ANTIDUMPING AND COUNTERVAILING DUTY) 50
........................................PART V: CHAPTER 11 OF NAFTA (INVESTOR-STATE ARBITRATION) 54OVERVIEW OF INVESTOR-STATE ARBITRATION ................................................................................................. 55GENERAL INVESTMENT PROTECTION PRINCIPLES............................................................................................... 58IMPLICATIONS FOR NAFTA’S MEMBER STATES ................................................................................................. 60
......................................................................................................................................................CONCLUSION 63
..................................................................................................................................................BIBLIOGRAPHY 66
Theresa Jensen
Introduction
The difficulty of pursuing trade negotiations at the multilateral level, for example within the parameters
of the World Trade Organization (WTO), has led to a trend in recent years of an increasing
regionalization of trade treaties.1 Rather than focusing on negotiations through the WTO’s large-scale
multilateralism, which is perceived as having become too cumbersome, there has been an increase in
the creation of new, as well as further development of existing, regional trading blocks.2
The parties to a regional trade agreement (RTA) may choose to create a variety of institutions which
will facilitate that treaty’s functioning and ensure its proper application. This paper will focus on the
importance of the dispute resolution mechanisms (DRM’s) which the parties to an RTA set up within
their treaty, and which those parties endow with the power and authority to enforce the obligations that
they have undertaken. This selection is significant to the potential of the RTA to result in a
constitutionalizing process because of the DRM’s impact on the interpretation of the terms of the treaty,
and through this, potentially on the level of inter-state economic integration and cooperation which
results from the RTA. Thus the central interpretive role played by the DRM in applying the terms of an
RTA arises as a result of the fact that, regardless of whether a DRM is judicial or arbitral in nature, it
has the potential to operate as a tool for the furtherance of integration within the scope of an RTA.3 The
nature of the DRM of a particular RTA is dependent on the choice of the parties to that treaty. However,
1
1 Viet D. Do & William Watson, “Economic Analysis of Regional Trade Agreements” in Bartels, Lorand & Federico Ortino, Regional Trade Agreements and the WTO Legal System, (Oxford: Oxford University Press, 2006) 7 at 7-8 [Watson, “Economic Analysis”].
2 Ibid at 9-10.
3 R. Daniel Kelemen, Foundations of Judicial Independence in the European Union, (Boston: Paper prepared for presentation at the European Union Studies Association Biennial Convention 2011) online at <http://www.euce.org/eusa/2011/papers/5b_kelemen.pdf> [Kelemen, “Foundations”].
it will be argued here that the DRM ultimately selected by those parties will be one of the primary
mechanisms by which further integration, both political and economic, between the member states is
either driven or obstructed.
The capacity of the DRM to act as a means of integration between states, derives from the role that
DRM’s play as both interpreters and the enforcers of such treaties.4 The way in which a treaty’s DRM
ascertains and understands the respective obligations of the member states will be seen, to a great
extent, to determine the levels of economic and political integration which result from a specific RTA.
In this way, the courts of the European Union (EU) and the arbitral tribunals of the North American
Free Trade Agreement (NAFTA) play unique roles as determinative features of their respective treaties.
They can be understood, to a large degree, as the engines that drive the system.5
As will be argued in this paper, depending on the view that the European Court of Justice, or a NAFTA
tribunal takes on the interpretation of the member states’ respective obligations under their RTA
provisions, these DRM’s may be responsible for either weakening, maintaining, or deepening
integration between member states.
Given the significance of the interpretive and enforcement role of the DRM in regional trade
agreements, this paper will seek to contrast the legal institutions of the European Union (EU) and the
North American Free Trade Agreement (NAFTA). It will examine and evaluate the way in which these
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4 David Robertson, The Court of Justice of the European Union, Lecture (2009) online at <http://web.me.com/davidrobertson1946/David_Robertson_DPIR_OXFORD/Downloads.html> [Robertson, “Court of Justice”].
5 Keleman, “Foundations”, supra note 3 at 1-2.
legal institutions are both determined by and yet also determinative of the level of integration provided
for in their respective RTA’s. This evaluation will be based on the structure of the ECJ and of NAFTA’s
DRM’s, as well as the provisions which form the basis of their authority, and on a consideration of the
objectives which the two regional trade agreements were intended to accomplish. The primary
assessment will be of the constitutional nature and capacity of the respective legal institutions and the
sovereignty implications which arise as a result of both RTA’s.
An attempt will be made to contrast the experience of the constitutionalization at the EU level with the
more contractual style of NAFTA. Neither NAFTA’s general DRM (Chapter 20), nor its specialized
DRM on Anti-dumping and Countervailing duties (Chapter 19) appear to have the capacity to result in
a process of constitutionalization. Specific attention will be paid to Chapter 11 of NAFTA, which deals
with investor-state arbitration, and which may be susceptible to such claims. It will also be necessary
to consider the judicial nature of the DRM’s, specifically as regards their independence and
impartiality. This not only refers to independence and impartiality as between the parties to the treaty,
but also as between the treaty’s own governing institutions and the member states who empower those
institutions. This is particularly relevant with regard to the European experience.
To this end, this paper will examine the structure and jurisprudence of the European Court of Justice
(ECJ), and its role in the constitutionalization of the EU. This will be done primarily with reference to
the issues of supremacy, and direct effect, as well as the preliminary reference procedure in Art 234 EC.
These doctrines have been used to establish the ECJ’s primacy over the national legal systems of its
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member states, and are therefore fundamental to the EU’s constitutional project.6 This paper will then
look at the DRM provided for in Chapter 20 of NAFTA, with regard to its structure and the decision-
making process, and at Chapter 19 of NAFTA which deals with a specialized DRM for anti-dumping
and countervailing duties.7
Particular consideration will be given to NAFTA’s provisions on investor-state arbitration, as elaborated
in Chapter 11 of NAFTA. The investment provisions of Chapter 11 raise the possibility of being used a
tool for the constitutionalization of NAFTA and its objectives because of the arbitral procedure’s
independence from member state control.8 Although much consideration has already been given to the
similarities of, and distinctions between, NAFTA and the EU, with the coming into force of the Lisbon
Treaty, which is intended to serve as a Constitution for the EU, as well as with increasing concern that
Chapter 11 of NAFTA is itself a mechanism for the creation of supra-constitutionalism in North
America, it is relevant at this point to re-examine the nature and impact of the DRM’s in the EU and
NAFTA.9
In relation to the legal institutions which will be examined, this paper will compare the doctrines and
principles which allow the DRM’s to constrain the sovereign rights of member states, and to potentially
pursue a project of constitutionalization. This will entail a comparison of the ways in which the DRM’s
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6 Jean-Yves Pitarakis & George Tridimas, “Joint Dynamics of Legal and Economic Integration in the European Union” (2006) European Journal of Law and Economics 17, online at <http://ssrn.com/abstract=416560> at 4-5[Pitarakis, “Joint Dynamics”].
7 North American Free Trade Agreement (NAFTA), (1 January 1994), online at <http://www.nafta-sec-alena.org/en/view.aspx?conID=590> (entered into force 1 January 1994), Chapter 19 Article 1903, 1904 [NAFTA].
8 Ibid, Article 1115
9 Stepan Wood & Stephen Clarkson, NAFTA Chapter 11 as Supraconstitution, (CLPE Research Paper No. 43, 2009) online at <http://ssrn.com/abstract=1500564> at 4-5 [Wood, “Supraconstitution”].
are able to work in combination with the national courts in order to give effect to their provisions. The
issue of compliance with treaty obligations will be considered as a secondary issue, one which
reinforces the discussion of the nature, as it emphasizes the level of obligation or compulsion exercised
over member states by virtue of the relevant treaty, and therefore relates to their nature as being either
constitutional or traditional international treaties.10
For the purposes of this paper, dispute resolution mechanism (DRM) will be used generally to refer to
any RTA’s judicial or arbitral mechanism, which is empowered to interpret and apply the terms of that
treaty, but which is not formally a constituent part of a national judicial system. For these purposes, the
ECJ will also be referred to as a DRM because, while it now has established formal primacy over
national legal systems, it does not form a fully integrated part of those national legal systems.11 Rather,
the ECJ’s position was superimposed by an international treaty.12
‘Constitutionalization’ will refer to the process by which a treaty which is originally a traditional,
international agreement, which is essentially a quasi-contractual agreement between sovereign nations,
is transformed and takes on the characteristics of a constitutional legal order.13 This assessment will be
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10 J.H.H. Weiler & Ulrich R. Haltern, The Autonomy of the Community Legal Order --Through the Looking Glass, online at <http://centers.law.nyu.edu/jeanmonnet/papers/96/9610-II-2.html> [Weiler, “Autonomy”] (on the constitutional vs international distinction. on the contractual nature of international treaties).
11 Ibid
12 Ibid, (on Handelsgesellschaft: German Constitutional Court, judgment of May 29, 1974, BVerfGE 37, 271, translated in English in 1 Decisions of the Bundesverfassungsgericht -Federal Constitutional court - Federal Republic of Germany: International Law and the Law of the European Communities 1952 - 1989 (pt. I) 270, 274 (1992), held that "[t]his Court - in this respect in agreement with the law developed by the European Court of Justice - adheres to its settled view that Community law is neither a component part of the national legal system nor international law, but forms an independent system of law flowing from an autonomous legal source."
13 Ibid, (“The Court talks first of a "New Legal Order of International Law” and then of a "New Legal Order" simpliciter. The "newness" of the legal order is characterized as "constitutional" and the process as "constitutionalization." The subjects of the new order are said to be not only states, but also individuals.”).
based largely on the nature of the evolution of the EU and of NAFTA, as well as the operation of their
DRM’s.
This paper will argue that the DRMs provided for under the terms of NAFTA (as comprised of Chapter
20, Chapter 19, and Chapter 11’s investor-state arbitration provisions) do not have the same capacity
for constitutionalization as the EU’s judicial apparatus, insofar as NAFTA’s DRMs operate on a
traditional international, as opposed to constitutional, basis.14 While the judicial system that has
developed under EU law is more comprehensive than that of NAFTA, the EU’s high level of economic
integration was always intended to lead to deeper political integration.15 The deepening of both
economic and political integration at the EU level, and the comprehensive scope of the EU Treaties
ultimately necessitated a process of constitutionalization in order to maintain its legitimacy.16 In
contrast, the quasi-contractual nature of NAFTA (which is traditional in international treaties more
generally) means that NAFTA’s DRM’s do not have the jurisdictional scope or capacity to act as agents
in a process of constitutionalization. Therefore it is questionable whether NAFTA has the capacity to
genuinely achieve this sort of constitutionalization. As NAFTA’s DRMs are structured so as to
maximize member state control over treaty obligations, there appears to be no desire on the part of
members states to follow the EU path. With regard to Chapter 11 of NAFTA, its provisions may lead to
a more direct harmonization process, as a result of member states moving so as to bring their domestic
laws into conformity with international standards. However this does not constitutionalize NAFTA and
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14 Ibid.
15 Schuman Declaration (Declaration of 9 May 1950, online at <http://europa.eu/abc/symbols/9-may/decl_en.htm> [Schuman].
16 Stefan Collignon, 2006. "Democracy and Europe’s Crisis of Legitimacy," (2006) 3:1 European Journal of Economics and Economic Policies 75 at 81, online at <www.stefancollignon.de/PDF/Europes%20legitimacy%20crisis.pdf> [Collignon, “Democracy”]
its DRM’s, but rather of those international standards themselves, which operate within the
international investment treaty system. Such potential supra-constitutionalization would therefore be
occurring at a different level, even if under the purview of NAFTA.
Much consideration has been given to these two trade agreements, however, with the constitutional
developments which have recently occurred in the European Union, as well as the issues relating to
whether NAFTA itself is a constitution-like text, (which have resulted from the investor-state dispute
resolution provisions of Chapter 11 of NAFTA), it seems relevant to re-examine the two RTA’s in the
context of their DRMs. This paper will first discuss, in Part I, the contrasting theoretical approaches to
international trade treaties which are exemplified by the European Union and the North American Free
Trade Agreement respectively. It will then look, in Part II, at the background of the EU Treaties, which
culminated in the Lisbon Treaty (which created the Treaty on the Functioning of the European Union)
in 2009. This paper will then examine the structure and doctrines of the European Court of Justice,
which have allowed it to act as an engine of integration. Part III will discuss the background to
NAFTA, and the design of its general DRM as set out in Chapter 20 NAFTA. Part IV will discuss the
more frequently used Chapter 19 DSM on countervailing duties and anti-dumping provisions, and Part
V will look specifically at Chapter 11 of NAFTA on investor-state dispute resolution, and the purported
imposition of international minimum standards as a form of constitutionalization. Part VI of this paper
will then conclude by discussing the implications of these NAFTA DRM’s with regard to the process of
constitutionalization, and contrast this with the EU experience.
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PART I: Theoretical Approaches to Regional Trade Agreements
When negotiating an RTA, the member states must determine which provisions and institutions will
allow them to achieve the level of economic integration that they desire. The focus in selection is, as
Bowman notes, on “internal economic integration and cooperation.”17 Understood in this way, regional
or ‘preferential’ trade agreements allow countries to select and limit the number of trading partners to
whom they will extend trade concessions or benefits.18 Regional trade agreements are therefore
inherently “preferential, protectionist organizations.”19 These organizations must set up mechanisms by
which their concessions and benefits will be recognized, and allowed to take effect, in order to generate
this economic integration.
There can be significant variation in the level of economic integration which is provided for by an
RTA. Integration may range from a basic free trade area, as exemplified by NAFTA, which involves
internal trade liberalization between member states, to Customs Unions (Such as the South African
Customs Union) which incorporate internal trade liberalization with harmonized external tariffs which
are common to all member states.20 An integrated common market, as the European Economic
Community was at its outset, goes beyond simple internal trade liberalization and encompasses the
“elimination of internal trade barriers.”21
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17 Gregory Bowman, “The Domestic and International Policy Implications of “Deep” Versus “Broad” Preferential Trade Agreements” (2008) 19:3 Ind Int’l & Comp L Rev 498 at 500 [Bowman, “Implications”].
18 Ibid at 500.
19 Ibid at 500.
20 Ibid at 500.
21 Ibid at 500.
Other RTA’s may go beyond this, and attempt to set up deeper economic integration in the form of a
monetary union, with the aim of being able to “coordinate monetary policy, or share a single
currency.”22 The Single European Act 1986, which created the Euro currency as well as the European
Central Bank exemplifies this aspect of the EU. The deepest level of economic integration, complete
economic integration, requires the RTA’s member states to undertake political integration, with a view
to furthering economic integration through the coordination of policy decisions.23 With the ratification
of the Lisbon Treaty, and the creation of a President of the EU to coordinate the EU’s three pillars, as
well as to make policy decisions in his own right, the EU appears to have taken a further step towards
this deepest form of integration.24
Not all RTA’s will share the aim of such deep economic and political integration. An alternative
approach to preferential trade agreements is open regionalism. This is the approach preferred by trade
organizations such as the Asia-Pacific Economic Cooperation Forum (APEC).25 Open regionalism
organizations act as forums for discussion, less along the lines of a judicial or arbitral enforcement
mechanism and more, as Bowman puts it, like “a matrix that allows and encourages the formation of
formal and informal international networks.”26 In this way, organizations structured on the idea of open
regionalism operate in a less restrictive, less intrusive manner, and work towards the “harmonization of
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22 Ibid at 501.
23 Ibid at 501.
24 Treaty of Lisbon, (13 December 2007), [2007] OJ C 360/01 at 28, Article 1:33(a)(b) online at <http://eur-lex.europa.eu/JOHtml.do?uri=OJ:C:2007:306:SOM:EN:HTML> (entered into force 1 December 2009) [Lisbon].
25 Bowman, “Implications”, supra note 21 at 503.
26 Ibid.
domestic regulatory regimes in order to promote greater regional trade and integration.”27 They thus
appear to operate on a principle of multilateralism, more akin to that of the WTO than to the tightly
restricted membership of preferential trade agreements.28 As can be seen, the objectives of various
RTA’s with regards to economic integration is highly variable, and this will necessarily affect the
member states’ decisions as to the nature of the treaty’s DRM.
Aside from the level of integration which the member states must decide upon, a choice also must be
made regarding the breadth and the depth of the parties to the treaty. Countries engaging regional trade
agreements must determine the desired level of integration, whether economic or political. In doing so
the member states must choose to either “deepen their existing economic relationships”29 so as to
promote freer trade and more integrated economies, or to broaden the membership of their agreements
so as to bring in other countries or regions. This broadening of RTA membership to include less
integrated economies “results in less direct economic benefit ... can be beneficial from a policy
perspective.”30
The European experience is a classic example of this dilemma.31 There was disagreement between
member states as to whether more progress would be made by bringing in new countries, or by
allowing the (then) current members to further deepen their existing trade commitments, and even as to
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27 Ibid.
28 Ibid.
29 Ibid at 497.
30 Ibid at 512-513.
31 Jacques Delors, Europe needs an Avant-Garde, but..." (Centre for European Reform bulletin 14: 2000) online at <http://www.cer.org.uk/articles/issue14_delors.html> [Delors, “Avant-Garde”].
certain policy objectives.32 As a result of this disagreement, the European Union found it necessary to
develop a system of “differentiated integration,”33 which would allow those who wished to deepen
trade relations to do so, while at the same time providing for the entry of new members into the EU at a
more shallow level of integration which would then be deepened over time.34 It goes to the
constitutional nature of the EU that this could be achieved, as it appears that the obligations of the
member states are owed primarily to the EU itself and not to the other Member States directly, as it
would otherwise be difficult to pursue integration of such depth which lacked reciprocity in certain
areas.
This “broad vs deep” distinction will be significant in examining the distinct ways in which the EU and
NAFTA have evolved. It will also be central to the discussion of the constitutionalization of the EU,
and to any accusations that NAFTA may be an attempt to impose a supra-constitution on North
America. As will be discussed, it is dubious whether NAFTA (Chapter 11 aside) could evolve into a
supra-constitution, given that it lacks the significant features of the EU’s constitutional legal system, or
the deep political integration necessary for complete economic integration.
The EU and NAFTA are clearly two distinct RTA’s, and are pursuing two very different projects. Their
objectives differ in respect of both the depth and breadth of integration, as well as with regard to their
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32 Bowman, “Implications”, supra at 513-517.
33 David Král, Multi–speed Europe and the Lisbon Treaty - threat or opportunity? (EUROPEUM Institute for European Policy, 2008) online at <http://www.europeum.org/doc/pdf/895.pdf> [Kral, “Multi-speed”].(“the mechanism of enhanced co-operation, for the first time introduced in the EU framework by the Amsterdam Treaty of 1997. If an agreement to adopt certain measures by the EU cannot be found among all the member states, this is to give leeway to do so in the EU framework, using the community institutions and procedures”).
34 Bowman, “Implications”, supra note 21 at 513-517; Kral, “Multi-speed”, supra note 37.
economic and political aims. Patrick Glenn summarizes their differences as resulting from the fact that
they are “based on different legal and political premises,”35 and as such are obviously not intended to
achieve the same result. This is relevant to the discussion of potential constitutionalization, as Glenn
contrasts the NAFTA concept of harmonizing, in the sense of reducing obstacles to trade, to the
European sense of harmonizing by eliminating differences through a constitutional legal system.36
What is clear from this is that the DRM selection by the member states will subsequently impact the
level of integration, and also whether an agenda of constitutionalization can eventually be pursued by
the treaty’s own institutions. It is important to note that the determination as to the DRM selected by
the member states is intended by them to fulfill a certain role in the life of that treaty. Thus the Member
States of the EU specifically intended to create, and did create, a strong and relatively independent
DRM that was modeled on the structure and form of a traditional legal system. The discussion of the
constitutionalizing aspect of the ECJ must therefore be seen in light of the fact that the ECJ is permitted
by Member States to act as it does. The ECJ’s constitutional nature is a product of the choices made by
the Member States themselves, choices involving a trade-off between their desire for economic
integration on the one hand, and the retention of sovereignty on the other.
A related choice that also arises in DRM selection in the treaty negotiation process concerns the depth
of the treaty obligations versus the mandatory nature or binding power of the DSM. Pauwelyn
examines this issue in the context of the development of the GATT/WTO, and looks at the way in
which the WTO’s political dynamic was able to shift from majority voting to consensus voting.37 He
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35 Patrick Glenn, “Conflicting Laws in a Common Market? The NAFTA Experiment” 76 Chi-Kent L Rev 1789 at 1789 [Glenn, “Conflicting”].
36 Ibid at 1790-1792.
37 Joost Pauwelyn, “The Transformation of World Trade” 104 Michigan Law Review 1 at 4. [Pauwelyn, “Transformation”].
phrases the perceived trade-off that parties to a trade treaty make in terms of Hirshman’s notion of
‘exit’,38 which is:
“characterized by the lack of law or discipline or the thickness of a system’s legal-normative structure, which offers easy options to defect from the cooperative regime...Closure of exit options (more law or discipline) leads to higher demands for voice (more politics or participation). Conversely, higher levels of voice (more politics) are an absolute requirement for enabling and sustaining the closure of exit (more law).”39
Pauwelyn thus explains that there is an ‘“institutional paradox’ between the WTO’s consensus-based,
inefficient rulemaking procedures and its highly efficient, automatic dispute settlement system.”40 The
existence of the strong DRM at the WTO level is enabled by the high level of voice given to Member
States at the decision-making level. This is analogous to the experience at the EU level, which
combines a high level of Member State input, and a strong DRM. The EU’s Member States, via the
Council of Europe, and their relations with the other EU Institutions (European Parliament, European
Commission, and the European Court of Justice) have a very high level of voice, and thus the ECJ and
the EU legal system leaves them little room for ‘exit’. The development of the European Parliament’s
powers in terms of participation in the legislative process, as will be discussed below, may be seen as a
response to the closure of exit options and hence to the need for more voice.
The same cannot be said of NAFTA, which is more comparable to the early stages of the DRM under
the GATT 1947. NAFTA’s DRMs involved, as did the WTO’s early DRM, in Pauwelyn’s words, “low
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38 Ibid at 5.
39 Ibid at 5.
40 Ibid at 5.
discipline and low participation.”41 The NAFTA treaty combines clear, well-defined treaty obligations
(and therefore a low level of voice in terms of further amendment of the treaty) with a low-level
strenght of enforcement. NAFTA obligations were therefore able to be strengthened based on the
increased availability of exit options for Member States.
A further theoretical decision in the negotiation of RTAs is to whom the treaty’s DRM will extend
standing. This is the matter of whether enforcement will be public, and confined exclusively to the
treaty’s member states, or private, extending causes of action to individuals. As will be discussed, the
ECJ with its strong enforcement mechanisms and lack of exit options, granted individuals standing to
vindicate their rights under EU law. Under NAFTA, outside of the investor-state arbitration provisions
of Chapter 11, individuals have no such enforcement rights. This decision is made at the time the treaty
is negotiated, and ties directly into the strength of enforcement. As Sykes argues, where foreign
investment is concerned, “the most effective mechanism for such risk reduction is a private right of
action for compensatory damages.”42 However, for international trade agreements more generally, such
as NAFTA, Sykes argues that it is more effective for governments to refuse to extend standing to
individuals as this allows them to “interpose themselves as ‘political filters’ to exclude certain
enforcement actions that private actors might otherwise wish to bring,”43 thereby keeping individuals
from interfering in what is essentially political diplomacy.
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41 Ibid at 18.
42 Alan Sykes, “Public vs. Private Enforcement of International Economic Law: Of Standing and Remedy” John M. Olin Law & Economics Working Paper No. 235 (2d Series), online at The Chicago Working Paper Series Index <http://www.law.uchicago.edu/Lawecon/index.html> at 3. [Sykes, “Enforcement”].
43 Ibid.
The impact such policy choices can have on the constitutionalizing capacity of a DRM is clear. The
EU, through its principle of direct effect, allows individuals to ensure that both Member States and
other individuals respect their rights under EU law. This creates a powerful enforcement mechanism,
given that the individual is not reliant on his own government (and therefore subject to the vagaries of
political diplomacy) to vindicate his rights. Engagement of individuals in this way was essential to the
EU project, and allowing EU citizens to rely on their EU rights in national courts was a fundamental
part of the process of constitutionalization, driven by the ECJ. NAFTA, on the other hand, does not
give individuals standing, except in highly specialized circumstances. The general DRM of NAFTA is
dependent on political diplomacy and granting individuals standing would interfere with this interplay.
This inhibits NAFTA’s DRM from acting as an agent of constitutionalization, as it cannot ensure that
individuals rights are protected other than at the behest of the Member State governments.
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PART II: The European Union
The Background
Given these different theoretical approaches to RTA’s, it is necessary to first consider the context in
which the modern European Union has its origins. At the end of World War II, it was recognized that at
least within Europe, states were themselves not capable of providing reliable “international institutions
that could guarantee Pareto improvements over the Hobbesian state of nature.”44 It was widely believed
that an organization which could bind the states of Europe together politically and economically was
required, so that it would become implausible to go to war.45 Josselin argues that the European project
has always been an explicitly political one, “led by the governments of member states.”46 However
disagreements as to the objectives and methods of integration or cooperation meant that the early
attempts to pursue overt politicization collapsed, with the rejection of the European Political
Community (EPC) and the European Defence Community (EDC) in 1954.47 Those two European
organizations would have been the early steps in creating a political federation. Instead, the European
project was pursued through the European Coal and Steel Community, and also subsequently through
the European Economic Community, treaties which were focused on economic integration and the
eventual creation of the common market.
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44 Jean-Michel Josselin & Alain Marciano, How the Court Made a Federation of the EU, (2007) 2 Rev Int Org 59 at 60 [Josselin, “Federation”].
45 Schuman, supra note 15.
46 Josselin, “Federation”, supra note 41 at 60.
47 Gregoire Mallard & Martial Foucault, The Fractal Process of European Integration: A Formal Theory of Recursivity in the Field of European Security (Roberta Buffet Center for International and Comparative Studies Working Paper Series No. 10-006, 2010) online at <http://ssrn.com/abstract=1719329> [Mallard, “Recursivity”].
While it is clear that the EU was, at its outset, a primarily economic organization, it must be understood
that it was also driven by a consistent goal of transforming it into an entity that would be both
politically and economically unified.48 To this end, the EU has undergone a series permutations, most
recently culminating in the Lisbon Treaty, which amends the founding EU Treaties, renaming the
Treaty of Rome as the Treaty on the Functioning of the European Union.49
The modern EU Treaties are the latest iteration of a network of treaties which began in 1951 with the
European Coal and Steel Community (ECSC). The ECSC was a union of six countries, these being
France Germany, Italy, Belgium, Netherlands and Luxembourg.50 Building on the success of the ECSC
(which formally expired in 2002), these six countries intended to expand their economic integration
beyond a trade agreement which focused specifically on the harmonization and the regulation of coal
and steel, into an RTA of more general scope. This goal was achieved in 1957 with the signing of the
Treaties of Rome. These treaties were the Treaty establishing a European Economic Community (EEC)
and the Treaty establishing the European Atomic Energy Agency (EURATOM). Under the provisions
of the Treaties of Rome, the ECSC’s Court of Justice which had been established in 1951 by the Treaty
of Paris was replaced with the European Court of Justice (ECJ). The ECJ was to serve as the court for
all of the treaties which together comprised the EU.51 The Treaty of Rome, apart from establishing the
EU’s DRM as a juridical system, also established a common market between Member states, the basis
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48 Schuman, supra note 15.
49 Lisbon, supra note 28 1, Article 1:1.
50 Treaty Establishing the European Coal and Steel Community, (18 April 1951), online at<http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:11951K000:EN:HTML> (entered into force 24 July 1952), Preamble; Article 1 [ECSC].
51 Treaty Establishing a European Economic Community, (25 March 1957) online at <http://ec.europa.eu/economy_finance/emu_history/documents/treaties/rometreaty2.pdf> (entered into force 1 January 1958) [Treaty of Rome], Articles 164-188 (on the Court of Justice)
of which was the four economic freedoms, the free movement of people, goods, services and capital.52
The ECJ was endowed from the beginning with a juridical nature, something that stands in contrast to
the arbitral tribunals established by NAFTA’s DRM’s.
The Treaty of Rome was followed by the Single European Act (SEA) in 1987 which gave member
states the objective of creating the common market, and the mandate to do so.53 Following this, the next
advance came in 1992, with the Maastricht Treaty (Treaty on the European Union), which replaced the
European Economic Community with the European Community. 54 Further to this, The Maastricht
Treaty created a new structure for the European Union, under which there were three pillars, these
being the European Communities, Common Foreign and Security Policy, and Police and Judicial
Cooperation in Criminal Matters.55 The ECSC (until 2002) and the EURATOM formed part of the first
pillar, the European Communities. The three pillars are both political and economic, and the and
overarching structure became known as the EU.56 Under Maastricht, the European Court of Justice
remained as the court for all three pillars of the EU.57 Along with ensuring that Member states uphold
their obligations under the treaties, the ECJ also ensures that the various EU institutions do the same.58
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52 Ibid, Part II - Foundations of the Community, Articles 9-84.
53 Single European Act (17 February 1986) online at <http://ec.europa.eu/economy_finance/emu_history/documents/treaties/singleuropeanact.pdf> (entered into force 1 July 1987), [SEA] Article 1.
54 Treaty on European Union / Maastricht Treaty (7 February 1992) online at <http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.html> (entered into force 1 November 1993) [TEU, Maastricht], Article A.
55 Ibid, Article J-J.11; Article K-K.9
56 Ibid, Article A
57 Ibid, Article E
58 Ibid, Article E.
By this point in time the EU was beginning to face accusations that it was lacking in the democratic
legitimacy necessary to legislate, the so-called ‘democratic deficit’ problem.59 In response to this, the
Treaty of Amsterdam was signed in 1997, in an attempt to improve the democratic nature of the EU by
increasing the powers of the relatively weak European Parliament.60 The co-decision procedure
formally split the ability to legislate between the Commission and Parliament was a particular response
to the concerns of citizens.61 The Treaty of Amsterdam also undertook political reforms, introducing a
high representative for EU Foreign Policy to work with the Presidents of the Council and European
Commission.62 The Treaty of Amsterdam took further steps towards political integration, and instituted
Community powers with regard to common foreign and security policy (CFSP).63 As will be discussed,
many of these reforms were necessary given the ECJ’s role in increasing the scope of the EU’s
jurisdiction.
The Treaty of Nice in 2001 undertook further reforms to the institutions of the EU, along the same lines
as those of Maastricht. The Treaty on the EU (Maastricht) and the Treaty on the EC (Rome) were
merged into a single consolidated version, however the pillar structure of the EU was maintained. The
Treaty of Nice also created subsidiary courts to operate below the ECJ and the Court of First Instance
which would be able to deal with specific areas of European law, further expanding the juridical nature
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59 Collignon, “Democracy” , supra note 16 at 6.
60 Treaty of Amsterdam amending the Treaty of the European Union, the Treaties establishing the European Communities and certain related acts, (2 October 1997), online at <http://eur-lex.europa.eu/en/treaties/dat/11997D/htm/11997D.html> (entered into force 1 May 1999), [Amsterdam] Article 2:44 (amendment to Article 189b)
61 Collignon, “Democracy” , supra note 16 at 6.
62 Amsterdam, supra at note 57, Article 1:10 (amendment to Article J.16)
63 Ibid, Article 1:10 (amendment to Article J.1)
of the EU’s DRM.64 In an attempt to reduce the growing institutional complexities of the EU and its
three pillar system, the member states negotiated a Treaty establishing a Constitution for Europe. It
would have united the three pillars, and worked toward furthering political and economic integration,
as well as responding to legitimacy concerns.65 However, the Treaty was rejected by French and Dutch
voters in referendums in 2005.66 The constitutional project which the Treaty establishing a Constitution
for Europe undertook provides a clearer understanding of the EU’s self-perception, not as an RTA
integrating trade and economic goals, but as a constitutional state with political, social and economic
jurisdiction. The ECJ, as an institution of the EU, will be seen to reflect this self-perception.
The most recent iteration of the EU Treaties is the Treaty of Lisbon. That treaty was finally ratified by
all EU Member States in 2009, after attempts to ratify it in Ireland had repeatedly failed referendums,
and had stalled politically in the Czech Republic.67 The Lisbon Treaty does what the Treaty establishing
a Constitution for Europe (which failed at the ratification stage) attempted to do by giving the EU a
comprehensive structure.68 It avoided the need for all member states to hold referendums by being
structured as an amendment to the existing EU Treaties. The Lisbon Treaty is therefore not an
autonomous treaty in and of itself. Rather, it amends the Maastricht Treaty (Treaty on the European
Union) and the Treaty of Rome (Treaty Establishing the European Community). The Treaty of Rome
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64 Treaty of Nice amending the Treaty on European Union, the Treaties establishing the European Communities and certain related acts (26 February 2001) online at <http://eur-lex.europa.eu/en/treaties/dat/12001C/pdf/12001C_EN.pdf> (entered into force 1 February 2003) [Nice], Article 2:26-31 (amendments to Articles 220-225 of the Treaty on the EU)
65 Treaty establishing a Constitution For Europe, (29 October 2004), online at <http://eur-lex.europa.eu/JOHtml.do?uri=OJ:C:2004:310:SOM:en:HTML> (unratified), [TCE] Article IV-437; Article IV-438
66 Conseil Constitutionnel Proclamation des résultats du référendum du 29 mai 2005, online at <http://www.conseil-constitutionnel.fr/conseil-constitutionnel/root/bank/download/cccc20050601pdf> [Proclamation].
67 Timeline: The Road to Lisbon, BBC News Europe, 3/11/2009, online at <http://news.bbc.co.uk/2/hi/europe/8337791.stm>.
68 Lisbon, supra note 28.
became the Treaty on the Functioning of the European Union (TFEU), and the EU’s Charter of
Fundamental Rights was annexed to the to the TEU. Thus following the Treaty of Lisbon, the Treaty on
the European Union (Maastricht), the Treaty on the Functioning of the European Union (formerly
Rome), as well as the new Charter of Fundamental Rights form the basis of law within the European
Union.
The European Court of Justice which, since the Treaty of Rome has been the court of the European
Union has now became one of three constituent courts (along with the General Court - formerly the
Court of First Instance - and the Civil Service Tribunal) which comprise of the Court of Justice of the
European Union. The ECJ is now known as the Court of Justice, and it is still the highest court in the
EU legal system.69
Thus, it is clear that the European Union was consistently moving towards existence as a highly
integrated economic and political organization, if not necessarily as a project of supra-
constitutionalism. It was clearly intended by it’s member states and it’s own institutional actors to go
further than simply being a regional free trade area. It is evident that from its inception the EU was
intended to evolve into a political as well as economic organization along the lines of a quasi-federal
state. An essential component of this project is the EU court system, which has frequently and
accurately been described as the engine of integration.70 The inclusion of the judicial system, and the
ECJ’s subsequent development of European law was an effective means of imposing uniformity on
member states and thereby furthering integration between them. In considering the process of
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69 Ibid.
70 Kelemen, “Foundations”, supra note 3 at 1.
constitutionalization which occurred at the EU level, and the sovereignty issues which developed as a
result, it will be necessary to consider how these origins, and the different EU Treaty iterations have
allowed the ECJ (now Court of Justice) to build on its original claim that the EU was a new
constitutional legal order.71
The Structure
Prior to the Treaty of Lisbon, there were legally three European Communities, the ECSC, the EC, and
the EAEC (which became defunct in 2002). Within the European Communities, there are “four
principle organs,”72 these are the Council of Ministers (which is run by members of the governments of
Member States, the European Commission, the European Parliament, and the Court of Justice.
The Council and Commission are the main decision-making bodies of the EU meaning that Member
States are situated within the structure, as both subjects and as primary actors within the EU Treaties.
The European Parliament was originally a relatively weak institution, which did not have much
strength in the legislative process. However, issues of democratic accountability plagued the EU and as
a result the European Parliament was progressively strengthened so that it now plays a part in the
legislative co-decision procedure.73 The Parliament now has increased participation in the EU
legislative process, but it may still lacks the right of legislative initiative.74
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71 Costa v. Enel Case 6/64, [1964] Court of Justice of the European Communities [Costa v Enel]; Van Gend en Loos, supra note 17.
72 Henry Schermers, “The European Court of Justice: Promoter of European Integration”,1974 22:3 American Journal of Comparative Law 444 at 444 [Schermers, “Promoter”].
73 Consolidated Version of the Treaty on European Union (2002) OJ C325/5, at 15, Article 14 (1) [TEU]; Consolidated Version of the Treaty on the Functioning of the European Union (2010) OJ C83/47 at 172, Article 289(1) (on the ‘ordinary legislative procedure’) [TFEU].
74 Ibid.
The Court of Justice of the European Union is comprised, as discussed above, of the European Court of
Justice (to be called formally the Court of Justice), the General Court (which was formerly the Court of
First Instance) and the Civil Service Tribunal. The Treaty of Lisbon strengthened the institutional
structure of the EU judicial system, something had to do in order to address concerns that the ECJ was
only obliged to protect economic freedoms. The substantive law of the European Union focuses on the
four economic freedoms, and so it was necessary in the Treaty of Lisbon to provide for protection of
fundamental freedoms as well (in the Charter of Fundamental Freedoms). The Court of Justice is now
tasked with the interpretation and the application of the EU Treaties.75 This involves ensuring that EU
Member states observe their Treaty obligations, reviewing the acts of the EU’s own institutions for
compatibility with the treaty principles.
The Court of Justice is also required to give interpretations of EU law in response to preliminary
reference requests under Article 234 EC (now Article 267 TFEU). Reference requests are sent to the
ECJ from the national courts of member states in order to ensure that they have properly interpreted the
provisions of the EU treaties, as the ECJ is required to “ensure that the law is observed”76 in the
interpretation and the application of the EU treaties. and is provided for in the EEC Treaty Article 164
(now Article 220 TFEU). The court’s jurisdiction, however, is not all-encompassing, and is still
restricted to four distinct bases:
“The court has jurisdiction in four categories of disputes: 1) as an international court on the question whether or not a State has violated its Treaty obligations, 2) as an administrative court on the
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75 TEU, supra note 70 at 17, Article 19(1).
76 Schermers, “Promoter”, supra note 96 at 446.
question whether or not decisions of the Community have been validly taken, 3) as a civil or administrative court on suits for damages against the Communities, 4) as an internal administrative tribunal on cases concerning civil servants of the Communities”77
In order to carry out these functions, it is insufficient for the Court of Justice to operate on its own, as
the institutions of the EU do not have the enforcement capability necessary to render it’s legal decisions
binding within member states. To this end, the Court of Justice has relied heavily on the cooperation of
both the member states and their domestic national courts, and has made “the national courts partners
in the field of European integration.”78 Thus the Court relies heavily on the cooperation and deference
of the national member state courts in order to impose its own uniform interpretation of EU law, and to
thereby harmonize the application of EU law within the member states’ national legal systems. The
participation of domestic courts, particularly final courts of appeal, is crucial to the EU project. In order
to:
“secure uniform application of Community law in all Member States, the EEC Treaty provides that the national supreme courts are obliged (and the lower courts allowed) to request a preliminary ruling of the Court of Justice whenever the interpretation or validity of a rule of Community law comes before them (EEC art 177).”79
Therefore, the preliminary reference procedure of Art 234 EC, as will be discussed, has proven to be a
crucial implementing measure of the ECJ, and is in fact the primary legal method by which the ECJ
harmonizes the laws of member states.80 This preliminary reference procedure is assisted in this by
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77 Ibid at 447.
78 Ibid at 447.
79 Ibid at 447.
80 Pitarakis, “Joint Dynamics”, supra note 6 at 4-5.
two doctrines of the ECJ, that of direct effect (as set out in Van Gend en Loos) and also the doctrine of
supremacy.
The Principles of the European Court of Justice
With the failure of attempts at increased political integration via the European Political Community and
the European Defence Community, the European project turned to economic integration through the
Treaties of Rome and the European Economic Community. To this end, the ECJ has used its position as
the interpreter of the EU Treaties so as to become a major force for centralization and integration
within the EU.81 This has been done through legal channels, rather than through overt attempts at
political integration, but this does not mean that the decisions which the court must take are purely
legal, “judges and courts are granted the right to make political decisions,”82 whose implementation
may “convey quasi-constitutional consequences.”83 Thus, through a series of legal decisions in its
capacity as a judicial body, the EU as a juridical institution was able to participate in the EU project of
harmonization and integration, and it “contributed to the progressive transformation of the political
structure of the Union.”84 Josselin stresses that:
“economic integration is viewed by the EU as only an intermediate objective, or a means to advance political objectives, as in indicated in the preamble of this Economic treaty (EEC) which is considered as entirely political. Economic unification, as promoted by the Treaty of rome is thus utilized as a means to bring about political integration.”85
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81 Josselin, “Federation”, supra note 41 at 60.
82 Ibid at 60.
83 Ibid.
84 Ibid.
85 Ibid at 68.
Early on in its creation, the ECJ was very active in the EU project, and was “a driving force towards the
federalization and centralization of Europe.”86 Legal integration in Europe was not guaranteed to
become reality, however, and “in practice, legal integration became possible upon establishing the two
legal doctrines of direct effect and supremacy of EC law”87 These doctrines, which are now
fundamental to the functioning of the ECJ and the implementation of EU law were “proclaimed and
developed”88 by the ECJ itself and, together with the use of the preliminary reference procedure, have
been largely responsible for the success of the ECJ’s objectives.89
Taking a neo-functionalist view of institutional action, the ECJ has been accused of pursuing “a pro-
integration agenda and acting against the interests of the governments of the member states.”90 The
ECJ, on this view, is seen as being capable of acting independently in its own self interest, and is
“considered as possessing sufficient discretionary power to serve faithfully the interests of an emerging
transnational society.”91 The ECJ is perceived by neo-functionalists as having a vested interest in the
constitutionalization of Europe and the success of the European project because of its own central roles
within the EU.
Although the ECJ’s ability to determine its own jurisdiction allows it the possibility to act
independently, in so acting the ECJ must not overstep the bounds of what Member States will accept.
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86 Ibid.
87 Pitarakis, “Joint Dynamics”, supra note 6 at 2.
88 Ibid.
89 Ibid.
90 Ibid.
91 Ibid.
The ECJ, due to its objective of interpreting and applying EU law in all Member States, must balance
this dichotomy. It can be said that the ECJ “enjoys considerable autonomy from Member State
interference and has its own agenda of applying EC law uniformly across Member States,”92 yet at the
same time, the ECJ must also be attuned to Member State interests and intentions since the
accomplishment of this objective is contingent on ensuring that “Member States accept its rulings and
incorporate them into their laws and administrative practices.”93 If Member States disagree too strongly
with the ECJ’s rulings, the Council may amend EU law, or any of the EU Treaties, thereby
circumventing the ECJ and reducing its efficiency in applying EU law.94
On such a neo-functionalist approach, the ECJ is seen as holding a highly autonomous position within
the institutions of the EU. Therefore, while the court pursues its objective of interpreting and applying
the EU Treaties, it is significant that “the Court’s judgments interpreting the foundational treaties of
European integration cannot be reversed absent unanimity of Member State governments.”95 This,
combined with the discretionary interpretive room left in the EU Treaties, allows for what Shapiro has
referred to as the ECJ’s “semi-autonomous decisional space,”96 within which it operates. However,
Halberstam suggests that rather than the ECJ acting solely in the interest of self-promotion, there is
another factor at play. He describes this as the ability of the individual institutional actors (the judges of
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92 Andreas Obermaier, “Models of Judicial Politics Revisited: The ECJ’s Judicial Activism and Self-Restraint” Paper for ECPR Conference, 25-27 September 2008, Riga, online at: >http://www.jhubc.it/ecpr-riga/virtualpaperroom/043.pdf> at 2 [Obermaier, “Judicial Politics”].
93 Ibid.
94 Ibid.
95 Daniel Halberstam, “The Bride of Messina: Constitutionalism and Democracy in Europe” (2005) 30 EL Rev 775 at 780.
96 Ibid at 780, quoting Shaprioshaprio in Martin Shapiro, “The European Court of Justice” in Craig & de Burca (eds.), The Evolution of EU Law (Oxford University Press, Oxford 1999), at pp.321, 327.
the ECJ) to make normative decisions within the context of their institutional capacity.97 This means
that within the scope of interpretation available to ECJ judges, “they may also bring to bear their
personal and professional commitments to important values like democracy, equality, and
transparency.”98 However, leaving aside the normative manner in which individual judges choose to
exercise their interpretive function, “the nature of judging enables the judiciary to become an important
interlocutor in a dialogue with the constituted political branches and the public over the meaning of a
foundational text,”99 in the ECJ’s case, these are the EU Treaties.
This is significant, given what Pierre Pescatore referred to as the ECJ’s judges having “une certaine
idee de l’Europe,”100 a conceptualization of the EU which Halberstam describes as “based not on “legal
technicalities” but on the individual as the normative subject of European integration”101 Whether one
sees the institutional actors of the EU as using their discretion in interpreting EU law, or as neo-
functionalists do, as exploiting “institutional slack”102 is a distinction largely based on the perception as
to the normative way in which those individual actors exercise their discretion. On either view, the ECJ
is not unconstrained in its exercise of its functions, however that constraint involves a complex and
lengthy process on the part of Member States, the Council, the Commission, and the European
Parliament. This problem does not arise under NAFTA, as the NAFTA tribunals do not have the
authority to issue formally binding decisions, but rather are one step of a process in which the Member
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97 Ibid at 781.
98 Ibid.
99 Ibid.
100 Ibid at 783.
101 Ibid.
102 Ibid at 788.
States themselves arrive at a decision. This, and the fact that NAFTA tribunal decisions never bind
parties other than those involved in the action, means that there is no genuine sphere of discretion
within which they could potentially pursue an independent agenda of integration.
a) Preliminary Reference Procedure
The preliminary reference procedure plays an “instrumental role...in achieving legal integration.”103 In
their analysis, The Joint Dynamics of Legal and Economic Integration in the European Union, Pitarakis
and Tridimas examine a theory of legal integration in the EU, based on which they find that “a rising
level of transnational transactions in the European Union activates a supranational system of dispute
resolutions which are decided by the European Court of Justice.”104 Their research finds that the
primary mechanism through which this occurs is the Art 234 reference for preliminary rulings, which
are referred up to the ECJ from the national courts of the Member States.105 Thus the preliminary
reference procedure enables the ECJ to carry out its obligation under Article 220 of Amsterdam Treaty,
to ensure that “the law is observed”106 in the interpretation and application of the EU Treaties. To this
end, the preliminary reference procedure of Art 234 holds a “fundamental role in harmonization with
the the common market.”107
The preliminary reference procedure is the mechanism by which a court of a domestic legal system
may make “requests to interpret vague aspects of EC law and rules on conflicts between EC law and
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103 Pitikaris Ibid at 3.
104 Ibid at 1.
105 Ibid.
106 Ibid at 4.
107 Ibid.
the national law of the member state.”108 Based on the way in which the preliminary reference
procedure brings national courts into conformity with the ECJ and thereby establishes unity throughout
the EU on legal issues, Pitarakis and Tridimas claim that “Art 234 is the most important procedural rule
of the Treaty.”109 The preliminary reference procedure is ultimately the nexus between national courts
and Community law. It allows the ECJ to issue authoritative and binding interpretations of Community
law to twenty eight member states, and it also serves as a mechanism that “facilitates dialogue between
the national courts and the ECJ and provides the meeting point between Community and national
law.”110 The preliminary reference procedure is able to accomplish this facilitation of dialogue in three
ways:
“i) It ensures the uniform interpretation of Community law... ii) it ensures the unity of the Community legal order and the coherence of the system of judicial remedies established by the Treaty... iii) it facilitates access to justice”111
Use of the preliminary reference procedure, along with the doctrine of direct effect, which will be
discussed, facilitates the access of individuals to their rights under the EU Treaties. It functions to
provide a mechanism “for the interpretation of EC law and examination of the compatibility of national
laws with the former.”112 Thus where an individual’s rights under EU are in question, a national court
may, if it must interpret EU law itself, refer the question to the ECJ which will interpret the issue and
remit the answer back to that court.113 On the other hand, when a high court is faced with an issue of
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108 Ibid.
109 Ibid.
110 Ibid.
111 Ibid.
112 Ibid.
113 Ibid at 5.
interpretation of EU law, it is obliged to refer the question to the ECJ, an obligation which ensures that
EU law is of uniform application at the highest national levels.114 Similarly, if a high court must
determine whether a national law is compatible with a Commission directive, which is binding under
EU law, it may choose to refer the issue to the ECJ, so as to avoid conflicts with EU law.115 Thus the
preliminary reference procedure is fundamental to the ECJ’s effectiveness and position as a higher-
level court, as it allows the court to impose uniformity across the EU and also expedites the resolutions
of conflicting interpretations of EU law by member states’ national courts which would inevitably
arise.
b) Supremacy
The doctrine of Supremacy is one of the central points of the ECJ’s jurisprudence. It is through the
doctrine of supremacy that the ECJ has been able to establish itself as the primary court of Europe, over
and above the high courts of member states. The court set out its position in Van Gend en Loos (1963),
in which the ECJ held that the Treaty of Rome had established the European Community as a “new
legal order of international law for the benefit of which the states have limited their sovereign rights
albeit within limited fields."116 This spontaneous declaration, that the EC Treaty was fundamentally
different from all other international treaties and had created a new legal order (probably due in large
part to the judicial nature of it’s dispute resolution mechanism), placed the ECJ itself at the heart of the
EU’s developing legal order. Hence the need to establish the supremacy of EU law, so that in it is seen
as superior to domestic law, in the sense that it has primacy and takes precedence over domestic law.
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114 Ibid.
115 Ibid.
116 Van Gend en Loos, supra note 17.
Where a conflict arises between the provisions of EC law and a member state’s domestic laws, the
domestic law must be dis-applied not only by the ECJ, but by the national courts of the member states
(this will be further discussed under direct effect). This was decided in Costa v ENEL in which an
Italian national law was dis-applied at the behest of the ECJ because it was found to conflict with the
relevant EC Directive.117
By signing onto the EU treaties, there can therefore be no doubt that the EU’s member states have
relinquished a part of their sovereignty and that EC law is of primacy.118 The Member States’ domestic
laws cannot conflict with EC law and must be brought into conformity with the principles of EC law, as
it is interpreted by the ECJ.119 This is something which requires more than simply not passing laws
which conflict with EU law it also requires positive action on the part of national courts as it requires
them to interpret national law in accordance with EU law, even if this leads to a strained interpretation
of the provisions of the national law.120 Therefore the fundamental principle of the doctrine of
supremacy is that “national courts must ensure that EC law is applied over conflicting national
laws.”121 The ECJ has further enforced harmonization (through conformity) of laws between its
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117 Costa v ENEL, supra note 68 (“It follows from all these observations that the law stemming from the Treaty, an independent source of law, could not, because of its special and original nature, be overridden by domestic legal provisions, however framed, without being deprived of its character as Community law and without the legal basis of the Community itself being called into question. The transfer by the States from their domestic legal system to the Community legal system of the rights and obligations arising under the Treaty carries with it a permanent limitation of their sovereign rights, against which a subsequent unilateral act incompatible with the concept of the Community cannot prevail”).
118 Ibid.
119 Ibid.
120 Von Colson v Land Nordrhein-Westfalen, Case 14/83 [1984] ECR 1891 [Von Colson]; Public Prosecutor v Kolpinghuis Nijmegen BF, Case 80/86 [Kolpinghuis] (“on the applying its national legislation a court of a Member State is required to interpret that legislation in the light of the wording and the purpose of the directive”).
121 Pitarakis, “Joint Dynamics”, supra note 6 at 5.
member states and has gone so far as to impose an obligation on the judges of member states to change
their traditional interpretations, by dictating that all member state laws must be interpreted so as to
conform with the EU treaties, the general principles of European law and with the ECJ’s interpretation
of those various provisions and principles.122
c) Direct Effect
The principle of direct effect is one of the main mechanisms by which the ECJ drives integration. It is,
as described, complimented by the doctrine of supremacy and the preliminary reference procedure of
Article 234 EC. The principle of the direct effect of EU law means that national courts are bound by
EU law and must enforce it at the domestic level.123 The necessary corollary of this is that national
courts must not make decisions which conflict with the principles of EU law. The ECJ’s decisions,
according to the principle of direct effect, must be followed in national courts.124 This is how the
harmonization of the domestic laws of member states is to be accomplished.
There are two sub-species of direct effect. The first, vertical direct effect, is not a contentious issue in
EU law. It means that, as described above, EU law applies and is enforceable in and by national courts.
Vertical direct effect is necessary to give unity to EU law, and is reinforced by the preliminary
reference procedure which allows a national court tasked with enforcing EU law to refer questions of
interpretation to the ECJ.
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122 Von Colson, supra note 106.
123 Van Gend en Loos, supra note 17.
124 Ibid.
The second form of direct effect is known as horizontal direct effect. Under this principle, EU citizens
can actually enforce their rights under EU law as against one another, not just as against a member
state.125 EU law thus has drastic implications for the citizens of member states, and it is this in part
which necessitated democratic reforms at the EU level. It also gives the EU more of a constitutional
flavour, as citizens are granted rights of action against member states and against each other, something
not usual in international treaties.126 Direct effect is thus demonstrative of the pervasiveness and of the
constitutional nature of the EU legal order.
Under the ECJ’s jurisprudence, the EU Treaties, general principles of EU law and EU regulations have
both vertical and horizontal direct effect.127 They may be enforced against either a member state or a
private citizen. Directives, on the other hand, which are issued by the European Council or
Commission, have only vertical direct effect as they are addressed directly to member states, without
reference to citizens. Directives generally address the implementation of EU laws and leave sufficient
discretion to member states that there is no room for a private cause of action. Thus the principle of
direct effect “states that EC law creates legally enforceable rights for individuals, so that they can
challenge the policy of the government of a member state in a national court for not conforming to EC
law.”128
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125 Defrenne v. SABENA (Case 2/74) [1974] ECR 631 [Defrenne].
126 Weiler, “Autonomy”, supra note 10 (on the constitutional vs international treaty distinction).
127 Defrenne, supra note 111.
128 Pitarakis, “Joint Dynamics”, supra note 6 at 5.
As is evident, due to the direct effect of EU law, enforcement of EU law in member states is not a
significant issue for the ECJ. The requirement that national courts apply EU law, and that citizens be
entitled to have their EU rights vindicated in national courts may be perceived as making the EU a
much stronger trade agreement than other international treaties, because a claimant whose economic
freedoms have been violated can be assured of being able to enforce the ECJ’s decision at a national
level. Further to this, the ECJ may order the payment of damages or specific performance and may fine
any Member state which does not bring its laws into conformity with EU law.
Implications for the EU Treaties
Based on the combination of the preliminary reference procedure, the principle of direct effect, and the
doctrine of supremacy, the ECJ has been able to drive both economic and political integration within
the European Union. These principles of EU law have allowed the EU judiciary to play a central role in
the EU project through its position as the interpreter of the EU Treaties. The ECJ acts as one of the
primary mechanisms in the EU that drives economic and political integration, and it has played a
significant role in the constitutionalization of the EU. It is through the principles of supremacy, and
direct effect that the ECJ has established itself, and the EU Treaties which it enforces, as a
constitutional level of law within the EU’s member states. This furthers the objective of economic
integration as the EU Treaties are centered around the four principles of free movement of goods,
services, workers and capital. While the ECJ can be said to be independent and impartial with regard to
national states, as a constituent part of the EU, it can be argued that the ECJ is concerned to protect and
expand its own jurisdiction, something that raises the question of independence and impartiality at a
higher level, namely between the Member States and the EU institutions. The EU’s deeper integration
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avoids bias as between members, but sets up a bias between the ECJ, and the need of the EU’s
institutions to be self-perpetuating on the one hand, and national states on the other hand. The problems
are set at a higher level, making them harder to deal with
The EU Treaties have thus resulted in a quasi-federal, politically integrated region that is moving
toward even deeper integration based on a constitutional structure. The EU appears concerned to
simultaneously deepen integration while also expanding the breadth of its membership. The judicial
system of the EU provides a high measure of independence and impartiality from the influence of the
member states. However, because the ECJ must be concerned to maintain, or expand upon, its own
jurisdiction, it is not sufficiently independent from the interests of the EU itself. There is a significant
sacrifice of sovereignty by the EU member states in order to participate in the EU system. As the EU
gains more and more of a constitutional character, it is apparent that there is no way out of the
obligations imposed by the treaty, unless negotiated at the same time as the treaty. This means that
violations by member states must be stopped, otherwise ongoing penalties can be imposed on the
Member State in violation.
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PART III: Chapter 20 of NAFTA (General Dispute Settlement)
The Background
NAFTA was a progression on the Free Trade Agreement between Canada, the United States and
Mexico.129 NAFTA is a free trade zone, which attempts to liberalize trade restrictions, such as duties
and tariffs, amongst its member states.130 There is, in the construction of NAFTA, a clear desire on the
part of the member states to not pursue the genre of political integration exemplified by the European
Union. The emphasis in NAFTA is primarily on increasing economic integration between three
countries which were already highly intertwined economically.131 This is emphasized not only by the
institutional structure of NAFTA, but also by the way it’s DRM provisions are structured. The member
states focused on political and diplomatic negotiation, rather than constructing a juridical system.132
As will be seen, under Chapter 20 of NAFTA, the treaty’s main DRM, control over disputes is focused
more on diplomatic negotiations than on juridical mechanisms. This serves to emphasize the more
contractual nature of NAFTA, as opposed to the constitutional nature of the European Union, in that in
form NAFTA follows a traditional international treaty format, meaning that it is a contract between the
treaty’s member states, and control over compliance with those treaty obligations rests with those same
members. Under the provisions of Chapter 20, individuals have no standing to bring claims on the basis
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129 NAFTA, supra note 7, Articles 101-102.
130 Ibid, Article 102.
131 Armand de Mestral, “NAFTA Dispute Settlement: Creative Experiment or Confusion”, online at <www.acp-eu-trade.org/.../Mestral-de-Armand_EN_062005_NAFTA-Dispute-Settlement-Creative-Experminet-or-Confusion.pdf> at 5-6 [Mestral, “Creative Experiment”].
132 NAFTA, supra note 7, Chapter 20, Chapter 19, Chapter 11
of NAFTA provisions, either in their national courts or before a NAFTA tribunal.133 The NAFTA
tribunals, as will be discussed, are not given either the authority to determine their own jurisdiction, or
the ability to bind member states, but are subject to the control of the FTC and member states.134 This is
not to say that there has been no indirect harmonization of domestic laws, by way of national courts
attempting to bring their interpretations of national laws into accordance with NAFTA decisions, but
since those tribunal decisions must ultimately be approved, or used as a basis for negotiation, by
member states, any such harmonization comes only at the impetus of national governments and not
because a NAFTA tribunal requires conformity.
This makes NAFTA a more appealing method of economic integration from a sovereignty standpoint,
because it enables the member state governments to maintain control over their economic policy, and to
choose whether or not they will comply with their treaty obligations (the cost of non-compliance being
to ‘buy-out’ the claimant). NAFTA’s Chapter 20 DRM also forecloses to a great extend the option of
further political integration that is not driven by the member states themselves, as they and not the
tribunal, have the final say in the dispute resolution process.135
Much like the EU was at its commencement, NAFTA is a free trade zone which attempts to liberalize
trade restrictions, such as duties and tariffs, amongst its member states.136 However, unlike the EU,
NAFTA has not progressed into the realm of political integration. Part of the reason for this is the state-
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133 Ibid, at Article 2021 - (“No Party may provide for a right of action under its domestic law against any other Party on the ground that a measure of another Party is inconsistent with this Agreement.”).
134 Ibid, at Article 2018 (on implementation of final report; Article 2019 on non-implementation).
135 Ibid, at Articles 2018 -2019
136 Ibid, at Articles 101-102
centric nature of NAFTA’s general DSM, as set out in Chapter 20. The NAFTA Treaty sets up rules on
the liberalization of trade to be enforced among member states, however because of the “ad hoc and
temporary”137 nature of the Chapter 20 tribunals, the decisions of these tribunals lack the direct effect
and indirect effect, as well as the supremacy, which characterize EU law. All those characteristics come
at the expense of member state sovereignty, something the members of NAFTA were not as willing to
relinquish. North America, while eager to create a free trade zone, was not as amenable to deep
integration as Europe. Therefore, it can be said that, “NAFTA is not a lesser, weaker form of
regionalization than that of the European Union, but rather a different type, based on different legal and
political premises...”138
The free trade area set up by NAFTA is focused on removing obstacles to the movement of goods,
rather than on the harmonization of domestic laws. This means that the effect of NAFTA on inter-state
trade is “...primarily intraregional...removing or restraining tariff and non-tariff barriers to trade in
goods between the member countries.”139 This stands in clear contrast to the highly structured legal
system of the European Union, whose treaties create “an entire set of institutions to ensure
uniformization or harmonization of national European laws.”140 Further to this, NAFTA does not create
strong treaty-based institutions which are capable of independently implementing the NAFTA treaty in
the same way that those of the EU can. Instead, implementation of tribunal decisions remains
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137 Glenn, “Conflicting”, supra note 39 at 1798.
138 Ibid.
139 Ibid.
140 Ibid at 1790.
dependent on the member states’ governments. It has been argued that one reason NAFTA has not
followed the EU path is that:
“NAFTA is characterized by an institutional meagerness which leaves the regulation of activities within the NAFTA territory to the discretion of the legal institutions and process of each of the member states.”141
This is evident in the mandate of the primary administrative institution created by NAFTA, the Free
Trade Commission, which is composed of and run by members of the governments of NAFTA’s
member states.142 As Glenn has noted, NAFTA is unique among RTA’s in that “all three member states
are federal or confederal in character.”143 He interprets this as meaning that rather than NAFTA being
characterized by ‘institutional meagreness’ and the implied ineffectiveness which that conveys,
NAFTA’s lack of strong centralizing institutions is instead indicative of the member states’ belief that
their federal structures combined with informal harmonization will be sufficient to achieve economic
integration. The ‘institutional meagreness’ is therefore not to be interpreted as evidence of “hostility or
indifference to NAFTA objectives.”144 This theoretical approach to NAFTA makes “a central policy of
uniformization or harmonization of laws,”145 as was required at the EU level, unnecessary to the
functioning and implementation of NAFTA. Rather than pursuing, in the European manner, complete
harmonization and direct implementation of treaty law:
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141 Ibid at 1791.
142 NAFTA, supra note 7, at Article 2001
143 Glenn, “Conflicting”, supra note 39 at 1791.
144 Ibid at 1792.
145 Ibid.
“The law of the NAFTA countries would be thus characterized by two broad phenomena: (1) an informal process of harmonization, as national institutions adjust to the increase in transborder flow brought about by NAFTA, and (2) ongoing unilateralism, particularity, or protection that in some measure is subject to existing federal limits or controls”146
Therefore in the context of NAFTA, this informal harmonization occurs not because NAFTA
institutions and tribunals seek to alter, or have the power to alter, national law, but rather because,
“NAFTA has changed the context in which national laws function.”147
The Structure
As mentioned above, NAFTA created the Free Trade Commission (FTC) which is the treaty’s
administrative body.148 The FTC is comprised of representatives of the governments of Member
states.149 The FTC also participates directly in NAFTA’s Chapter 20 DRM, meaning that “although its
functions are predominantly politico-administrative, given the role it has in administrating the
Agreement, it also participates in the dispute settlement process.”150 This leaves both the FTC and the
Chapter 20 DRM open to the accusation that they “lack the objectivity and the independence necessary
to the jurisdictional function.”151
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146 Ibid.
147 Ibid at 1793.
148 NAFTA, supra note 7, at Chapter 20, Article 2001.
149 Glen, “Conflicting”, supra note 39 at 1793.
150 Vibysoun Loungnarath & Celine Stehly, “The General Dispute Settlement Mechanism in the North American Free Trade Agreement and the World Trade Organization System” (2000) 34:1 Journal of World Trade 39 at 44 [Loungnarath, “General Dispute Settlement”].
151 Ibid at 44.
The Chapter 20 DRM provides for a three stage approach to dispute settlement between member
states.152 In the first stage, any party (meaning any one of the parties to the treaty as individuals do not
have ius standi under CHapter 20), may “request consultations with any other party”153 in order to
negotiate a resolution. If this fails, the second stage is for the complaining party, after 45 days, to
“formally request a meeting of the Commission.”154 After 30 days, if no solution has been reached, the
parties may request the establishment of an arbitral panel under Article 2008 of NAFTA.155
The requirement that the parties to the dispute have recourse to the FTC before the arbitral process
emphasizes that, the “intent is to clearly resolve matters through government to government
negotiation...to avoid expensive and time-consuming litigation.”156 Once the matter is remitted to the
arbitral panel, the panel has 90 days in which to present an initial report to the Commission.157 The
parties to the dispute may then respond to the initial report and the issue is remitted to the panel for a
final report.158 After the panel’s final report has been issued, the parties themselves must “agree on the
resolution of the dispute, which normally shall conform with the determinations and recommendations
of the panel”159
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152 NAFTA, supra note 7, at Articles 2003-2019.
153 Gilbert Winham, “Dispute Settlement in NAFTA and the FTA” in Globerman & Walker, Assessing NAFTA: a Trinational Analysis, (Fraser Institute: Vancouver, 1993) at 257 [Winham, “Dispute Settlement].
154 Ibid at 257.
155 NAFTA, supra note 7 at Article 2008.
156 Winham, “Dispute Settlement”, supra note 139 at 257.
157 Ibid.
158 Ibid.
159 Ibid; NAFTA , supra note 7, at Article 2018
It is clear that dispute resolution under Chapter 20 of NAFTA is not intended to be of a juridical nature,
but rather is more “geared toward facilitating a negotiated settlement than to settling the dispute in a
truly jurisdictional manner.”160 This emphasis on negotiations between the parties is reinforced by the
provisions on standing under Chapter 20. Individuals have no standing to bring a claim for a breach of
a NAFTA provision, and must rely on their government to act on their behalf, as “the mechanism in
Chapter 20 is exclusively reserved for States.”161 The result of these restrictive rules on standing
“increases the weight of inter-governmental diplomacy in the dispute settlement process.”162 Again, it
is only after the failure of bilateral consultation that the Chapter 20 DRM may be triggered by one of
the parties and thus require the FTC’s intervention.163 Further to this, it is only once the FTC fails to
reach a consensus that an arbitral panel is convened.164 Thus Lounghnarath and Stehly have observed
that “the presence, the nature as well as the functions of this institution [the Commission] reveal that
the Chapter 20 mechanism is more a consensual system than a jurisdictional one..” This marks a
significant difference from the EU’s DRM, which is modeled on the characteristics of a juridical legal
system.
The non-definitive nature of the arbitral panel’s reports further emphasizes the non-judicial nature of
NAFTA’s Chapter 20 DRM.165 The final arbitral panel report is neither a final nor a legally binding
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160 Loungnarath, “General Dispute Settlement” , supra note 136 at 43.
161 Ibid.
162 Ibid.
163 Ibid at 44; NAFTA, supra note 7, at Article 2007.
164 NAFTA, supra note 7 at Article 2008.
165 Loungnarath, “General Dispute Settlement”, supra note 136 at 45.
decision, but is in fact “subsequently renegotiated by the Parties to the dispute,”166 these parties being
the Member States themselves. Thus it is up to the parties, with the guidance of both the FTC and the
arbitral panel decision to come to an agreement on how to resolve their dispute. The Chapter 20 arbitral
panels are not meaningless however, and the parties’ final agreement agreement, as mentioned above,
usually accords with the Panel’s recommendations. In fact, it has been noted that “In practice the
parties use the Panel’s report as a basis for negotiations,”167 and thus the Panel report is “the beginning
of new negotiations rather than the end of the dispute.” 168 The use of the FTC’s decision as a launch-
point for negotiations means that the FTC plays no role in the final decision of the parties, and this
serves to emphasize the state-centric logic behind NAFTA’s Chapter 20 DRM.
The Main Principles
There are no principles of interpretation or application of treaty provisions in NAFTA which would
correspond to those of the ECJ. There was originally a question as to whether NAFTA would be
capable of having direct effect in the domestic jurisdictions of its member states, as was the case with
EU law. However, given the quasi-political nature of arbitration under NAFTA, it was highly unlikely
that NAFTA panels could ever follow the EU courts down the path which resulted in the ECJ declaring
the EU to be a new constitutional legal order.169
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166 Ibid.
167 Ibid.
168 Ibid.
169 Van Gend en Loos, supra note 17.
Any potential for the terms of NAFTA to have direct effect through the decisions of NAFTA panels has
been definitively precluded by the United States. When Congress ratified the NAFTA treaty, it also
included a provision which prohibited NAFTA’s terms or panel decision having direct effect or giving
rise to a cause of action before an American court.170 Similarly, in Canada the terms of the NAFTA
treaty do not give rise to a private cause of action in Canadian courts.171 Mexico is the exception, as
NAFTA’s provisions may have direct effect in that jurisdiction.172 However the utility of direct effect
lies in its ability to harmonize the laws of multiple jurisdictions, something that is not possible under
NAFTA.
Even if this potential for direct effect were not prohibited under American law, NAFTA arbitral
decisions would still be unable to develop their own body of jurisprudence along the same lines of the
Court of Justice for two reasons. First, because of “the ad hoc and temporary character of the Arbitral
Panels, as well as their almost exclusively national composition.”173 Secondly, because the member
states’ domestic legal systems are not required to conform to a NAFTA Panel’s decision, meaning that
they are also not bound by “the principles of law developed in support thereof nor by the negotiated
solution of the disputing parties.”174 This, combined with the fact that NAFTA panel decisions under
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170 Armand de Mestral & Jan Winter, “Giving Direct Effect to NAFTA”, (2004) 2:6 The Art of the State 35 at 60 [Mestral, “Direct Effect”].
171 Ibid.
172 Ibid at 59-60.
173 Loungnarath, “General Dispute Settlement”, supra note 136 at 46.
174 Ibid.
Chapter 20 are not binding on the parties means that “these recommendations have only a slight
bearing, if any, on the domestic law of the parties”175
Further to this, the United States has gone so far as to pass laws prohibiting NAFTA decisions from
having any direct effect.176 This inhibits NAFTA from developing along the same lines as the EU
because it lacks the two essential characteristics of direct effect and supremacy which, along with the
preliminary reference procedure, allowed the ECJ to operate as an engine of integration. The concepts
of direct effect and supremacy would be problematic under NAFTA, given that NAFTA tribunals under
the general Chapter 20 procedure are simply a launching point for further negotiations between the
parties.
Enforcement under NAFTA emphasizes the contractual nature of that agreement. Non-performance by
one party entitles the other part to refuse to extend similar trade concessions to the first party,
essentially to refuse to perform the contract.177 Whereas under the EU system, because of its
constitutional nature, non-performance of EU obligations by one member state does not entitle another
member state to similarly refuse to perform or to withdraw concessions. The relevant legal relationship
in EU law is between the member state and the EU itself, whereas under NAFTA the relevant
relationship is directly between the three member states. Thus implementation in NAFTA “normally
consists of removing a measure that does not conform to the Agreement.”178 If this is not done, then the
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175 Ibid.
176 Mestral, “Direct Effect” , supra 156 at 59-60.
177 NAFTA, supra note 7, at Article 2019.
178 Winham, “Dispute Settlement”, supra note 139 at 258.
other member state is entitled to retaliate and may “withdraw equivalent benefits from the offending
party.”179 This is a resolution which fits with the “NAFTA philosophy of resolving disputes at the
ground level.”180 Thus unlike the EU where the member state may be fined, but all obligations must be
performed by other members, where a violation of NAFTA terms occurs, there will be no “orders of
compensation or performance of obligations”181 instead, the violation “will rather open the possibility
of retaliatory measures.”182
Implications for NAFTA
Enforcement under NAFTA differs from enforcement under the EU treaties in that the DRM tribunal
does not hand down decisions to the national courts of member states for implementation, but rather
focuses on helping the member states reach a solution through diplomatic negotiation:
“rather than impose a single top down procedure, the negotiators of NAFTA grafted different solutions to a text which can legitimately be described as reflecting a range of “bottom up” solutions.”183
In contrast with the EU’s public or administrative law style of constitutional development and
enforcement of the EU Treaties, under NAFTA the “onus of economic integration is very much upon
the private sector, which has always been the driving force for integration.”184 Not only did the member
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179 Ibid.
180 Ibid at 261.
181 Glenn Patrick, Conflicting Laws in a Common Market? The NAFTA Experiment, 76 Chi-Kent L Rev 1789 at 1816
182 Ibid at 1816
183 Mestral, “Creative Experiment” , supra note 117 at 5-6.
184 Ibid at 5-6.
states give limited power to NAFTA’s DRMs, but the NAFTA parties have also limited the
governmental role in trade liberalization to “removing obstacles to economic integration.”185 Further to
this, less government intervention was required under NAFTA than at the EU level because the three
member states had already highly integrated, and in fact “the integration of many enterprises had
already achieved levels exceeding ...the European Community.”186 This means that NAFTA, as
described by ALC de Mestral, is a much more structured agreement, and therefore leaves little room for
any of the “extensive common regulatory activity which has been characteristic of the EU.”187 Such
government or institutional activity is not necessary to deepen the economic integration of NAFTA’s
member states, and there is no room left in NAFTA’s provisions on Chapter 20 arbitral panels which
would allow them to pursue an agenda of constitutionalization in this context.
Again, unlike the European Union, there has been no need to create rights of action for individuals
under the Chapter 20 provisions of NAFTA, or to give individuals standing. As NAFTA tribunal are not
the final arbiters of decisions under NAFTA, there is not the same level of ‘democratic deficit’ to deal
with as there was in the EU, especially given that the Free Trade Commission is composed of members
of the governments of the member states. The provisions of NAFTA, and compliance with its
obligations, are under the control of the member states’ national governments. As NAFTA’s member
states remain the controlling actors under the terms of NAFTA, NAFTA tribunals do not require a
democratic mandate, as the institutions of the EU do. It is sufficient that as the controlling actors, the
member state governments themselves possess a democratic mandate.
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185 Ibid.
186 Ibid.
187 Ibid.
The structure of NAFTA indicates that it is a traditional contractual treaty. NAFTA creates obligations
as between its member states, and those obligations are limited. The Chapter 20 DRM does not extend
any rights of actions to individuals and their temporal transience means that tribunals convened under
Chapter 20 are unable to attempt to mimic a constitutional order. This allows NAFTA to deliver
economic trade liberalization without a significant reduction in state sovereignty, and without the host
of institutions and bureaucracy that accompanies the EU project. Its general dispute resolution
mechanism can accurately be said to be highly politicized and dependent on diplomatic maneuvering,
however NAFTA simultaneously avoids the pitfall of having a court (i.e. the ECJ) acting as an engine
for integration and in that sense being biased as between maintaining its own jurisdiction, driving
political integration, and attempting to act as an impartial tribunal.
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PART IV: Chapter 19 of NAFTA (Antidumping and Countervailing Duty)
Chapter 19 of NAFTA is of more practical relevance to this analysis than Chapter 20’s DSM, given that
the majority of disputes under NAFTA have been brought under Chapter 19, “This procedure is by far
the most widely used of the NAFTA dispute settlement processes.” 188 Chapter 19 provides a
specialized dispute resolution mechanism for anti-dumping and countervailing duty disputes.189
Armand has referred to Chapter 19 as “probably the most innovative of the dispute settlement
procedures to be found in NAFTA.”190
Under the DRM in Chapter 19, national laws on anti-dumping and countervailing duties, as based on
the WTO commitments that were ratified by all three member states in the Agreement on Subsidies and
Countervailing Duties and the Agreement on the Implementation of Article VI of the GATT 1994 are
subject to a system of judicial review.191 Those WTO agreements provide a process by which it can be
determined whether subsidies and dumping have occurred, and importantly, “the degree to which they
have or will cause serious injury to the production of like goods by the domestic industry.”192 This
review on the existence and effects of dumping and subsidies is undertaken by a binational panel of
experts “who are authorized to hear and adjudicate upon complaints that the domestic administrative or
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188 Ibid at 12 (“As of April 2005 there had been seventy-one cases completed before bi-national panels.”).
189 Ibid at 11.
190 Ibid.
191 Ibid at 12-13.
192 Ibid.
quasi-judicial decision has not been adopted according to the domestic law of the state where the
complaint has been heard.”193
As these binational panels are thus empowered to review the manner in which domestic legislation is
applied by domestic administrative bodies, it appears that Chapter 19 panels may have the scope to act
as constitutionalizing agents within NAFTA. However, the powers of these binational panels are
heavily constrained, and their purpose is not to supersede domestic jurisdiction or laws, but to “ensure
that the domestic law has been properly applied and has not been interpreted and applied in a manner
designed to give protection to the domestic industry.”194 To this end, the standard of review applicable
by binational panels is the relevant “standard of administrative law review applicable in the country
where the litigation takes place”195 There is no independent NAFTA standard of review which would be
capable of replacing the local domestic standard of review, something that would be more likely to
indicate a basis for possible constitutionalization of NAFTA. Armand notes that in carrying out this
review function:
“the central policy is to respect the choices made by the administrators and quasi-judicial agencies charged with making determinations and decisions under their respective laws and only to upset these decisions in limited circumstances where the decision maker has exceeded their authority or fundamental procedural principles of administrative law have been violated.”196
While the standard of review is the local domestic standard, that domestic standard does differ
according to each party’s jurisdiction, “the standard of review is a complex matter which is driven by
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193 Ibid.
194 Ibid at 14
195 Ibid.
196 Ibid.
legislative fiat, fundamental principles of law, the exercise of judicial discretion and the facts of each
case.”197 Once the decision has been taken by the binational panel, it is sent back to the original
administrative body, possibly with directions on how the decision is to be implemented. At this stage,
the binational panel plays a supervisory role, so as to ensure “the adequacy of response.”198 If the
administrator's response is inadequate, or does not properly implement the binational panel’s decision,
then “in the event of a blatant refusal of the administrative body to respond appropriately, can decide
the case.”199
Unlike Chapter 20, Chapter 19 of NAFTA does give standing to private parties to bring a complaint.200
Where the panel makes a decision, based on the local standard of review, that decision is then remitted
back to the relevant administrative authority. The panel’s specific decision has no wider application and
is not capable of setting domestic precedent since “the decisions of a bi-national panel do not constitute
res judicata in other proceedings in the domestic legal order.”201 However, in the particular case, the
binational panel’s decision does have the force of law, and it is legally binding both “on the domestic
regulatory authorities and the private parties involved”202 Further to this, if a party elects to bring a
claim before a binational panel, that decision is binding on the party and a claim cannot subsequently
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197 Ibid at 15-16
198 Ibid.
199 Ibid.
200 Ibid at 5.
201 Ibid at 12-13.
202 Ibid.
be brought again before the domestic courts, as it is the domestic courts which would “normally
exercise judicial review.”203
In situations where a member state government feels that the binational panel’s decision has
overstepped its jurisdiction, Art 1904:13 sets up the Extraordinary Challenge Procedure (ECP).204 This
allows the government to bring a challenge against the bi-national panel decision. However, the EPC
“can only be invoked by a government and not by the private parties who here invoked the bi-national
panel procedure of Article 1904:1 in the first place.”205 This is another example of the way in which the
member states constrain the ability of NAFTA panels to expand their own jurisdiction. The ability of
member states to raise objections to panel decisions reinforces their position within NAFTA as the
controlling actors.
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203 Ibid.
204 NAFTA, supra note 7, at Article 1904:1
205 Mestral, “Creative Experiment” , supra note 117 at 12-13.
PART V: Chapter 11 of NAFTA (Investor-State Arbitration)
The investor-state arbitration provisions of NAFTA’s Chapter 11 provide a mechanism by which
individuals may have recourse to an arbitral tribunal for investment-related disputes. Chapter 11 is
currently the most contentious of NAFTA’s DRMs, due to its relation to the international standards
which have come to characterize the law on international investment (primarily through the Bilateral
Investment Treaty system).206 The concern is that through a process by which international norms
become imposed on domestic legal regimes, Chapter 11 may form part of a process of a “contemporary
supraconstitutional project.”207 The aim of this project being to protect economic interests from
political fluctuations, a goal which is accomplished by restricting the ability of democratic governments
to alter policy decisions.
The reason for this concern stems from the legal structure of Chapter 11 arbitral tribunals. Unlike
NAFTA’s other tribunals, as discussed above, Chapter 11 is not merely a starting point based on which
the Member States may undertake further negotiations to resolve disputes. The decision of a Chapter 11
arbitral tribunal is legally binding, and enforceable in each of NAFTA’s Member States. Further to this,
the nature of the investment provisions of NAFTA means that the Member States have granted
individuals standing, and have given general consent to arbitration. As Wood and Clarkson argue,
Chapter 11 investment disputes, “are heard by international arbitral panels that operate under rules
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206 M Sornarajah, The International Law on Foreign Investment, 3d ed (New York: Cambridge University Press, 2010) at 125 [Sornarajah, “Foreign Investment”].
207 Wood, “Supraconstitution”, supra note 9 at 1
designed for the settlement of international commercial disputes.”208 He notes three features present in
Chapter 11 of NAFTA, which support the claim that it operates in a supraconstitutional manner:
“it is intended to constrain the exercise of public authority by government actors, it is effective and enforceable in host states’ legal systems even in the face of contrary legislation, and it is difficult to change.”209
Overview of Investor-State Arbitration
The traditional form of nation-state espousal of claims, which was necessitated by governmental
actions which affect foreign investment, left investors to rely on their governments to bring any claims
regarding the expropriation of or interference with their investments, and on the foreign government to
consent to arbitration.210 A government is unlikely to grant such consent after a claim arises, making it
difficult for investors to secure their investments. Investor-state arbitration solves this problem by
allowing the investor to bring a claim directly against a state.
In general, investment treaties may contain a provision on investor-state arbitration, which serves as
general consent to arbitration by the state.211 In NAFTA, this consent to investor-state arbitration is
provided by Chapter 11.212 This allows an investor to bring its claim against the state before a neutral
arbitral forum, and avoids the uncertainty over whether a state would consent to arbitration should a
dispute arise in the future. Further to this, the arbitral tribunals are empowered to interpret the
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208 Ibid at 4-5
209 Ibid at 5
210 Sornarajah, “Foreign Investment” supra note 206 at 125.
211 Ibid at 307.
212 NAFTA, supra note 7, at Article 1122.
substantive provisions of investment treaties which means that these treaties “are made more powerful
in protecting investments due to progressive interpretation by international arbitral tribunals.”213 In this
way, the availability of recourse to arbitration makes the substantive provisions of investment treaties
meaningful to investors.
A primary reason for the international standards of investor-state arbitration treaty provisions is distrust
of local legal systems by foreign investors and their home governments. Even though Canada, the
United States, and Mexico may be closely integrated economically, there is always the risk to an
investor that local legal systems may or may not uphold the rule of law and natural justice
requirements, or may be xenophobic.214 Investor-state arbitration allows investors to circumvent these
local courts, as they are given “ius standi to take disputes to international tribunals directly,”215 thereby
avoiding such potential pitfalls. By allowing foreign investors to opt out of the local legal system, and
rely on international standards, BITs improve the local conditions for investment. This benefits both
countries that want to stimulate foreign direct investment, and also foreign investors, who gain a higher
level of protection and security for their investments than is provided for by local law.
These international standards conflict with an alternative view, the Calvo Doctrine, which rejects the
notion that foreign investors are entitled to better treatment than nationals, who do not receive the
protection (with regards to compensation) extended to foreign investors.216 Calvo clauses to the effect
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213 Anne van Aaken, “Perils of Success? The Case of International Investment Protection” (2008) 9 EBOR 1 at 3 [Aaken, “Investment Protection”].
214 Loewen v United States, ICSID Case No ARB(AF)/98/3, IIC254 (2003), at para 4 [Lowen].
215 Aaken, “Investment Protection”, supra note 196 at 7.
216 Sornarajah, “Foreign Investment”, supra note 192 at 37.
that local law is to prevail over any other, or that the investor is not entitled to recourse to other law
may, be included in concession contracts or even constitutions.217 Such clauses conflict with any
investment treaty provisions on investor-state arbitration that may be in force. The effect is that the
traditional “presumption of respect for, and deference to, local remedies is supplanted.”218 This means
that investment treaties such as NAFTA’s Chapter 11 operate so as to “limit the obligation of investors
to exhaust local remedies”219 and in doing this, they allow investment-state arbitration to function as a
neutral and independent system that is “available to investors, regardless of the reliability of the
respondent state’s own legal system.”220
Recourse to Chapter 11 investor-state arbitration under NAFTA ensures that investors can effectively
enforce the substantive provisions of NAFTA against the government of another member state directly
by bringing a claim before an arbitral tribunal in binding arbitration. Given the obvious conflict
between the Calvo doctrine and the dominant approach, a primary source of contention in the
investment treaty regime is the fact that investor-state dispute provisions authorize “international
claims by foreign investors against the state in disputes arising from the state’s exercise of public
authority and without any requirement for claims to be filtered by the investor’s home state.”221 The
consent given by the member states in Chapter 11 is general, and “authorizes the initiation of
compulsory arbitration by any member of an indeterminate class of potential claimants in relation to a
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217 Ecuadorian Constitution Article 177; Venezuelan Constitution Article 108
218 Gus Van Harten, “Investment Treaty Arbitration as a Species of Global Administrative Law” (2006) 17:1 EJIL 121 at 130 [Van Harten, “Global Administrative Law”]
219 Ibid.
220 Ibid.
221 Ibid at 127-128.
very wide range of disputes.”222 This means that an investor need only to structure itself so as to fall
within the provisions of Chapter 11, and thereby bring itself within that ‘indeterminate class’.
The purpose of investment-state arbitration, such as Chapter 11 provides, was to increase the levels of
foreign direct investment into member state countries to spur economic growth.223 In exchange for this
purported increase in foreign direct investment, investment treaties acted as a guarantee that “a state
promises not to infringe on the property rights of foreign direct investors.”224 A major aim of the
United States in promoting investment treaties along the same lines as Chapter 11 was to protect its
investors abroad from political and economic upheaval in foreign countries, or in those countries with
untrustworthy legal and political regimes.225 This was accomplished in part by establishing
international standards of treatment for foreign investors. Thus the investment treaty regime can be
seen in a positive light as “a mechanism for overcoming commitment problems between the investor
and the host State in order to generate mutual benefits,”226 through a compromise between the interests
of foreign investors and countries.
General Investment Protection Principles
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222 Ibid.
223 Tokios Tokeles v Ukraine, ICSID Case No ARB/02/18; IIC 258, President Prospero Weil in Dissent, at para 30 on the Report of the Executive Directors of ICISD para 9 [Tokios Tokeles].
224 Aaken, “Investment Protection”, supra note 196 at 3.
225 Kenneth J. Vandevelde, “The BIT Program: A Fifteen-Year Appraisal” (1992) 86 ASIL Proceedings 532 at 534 [Vandevelde, “The BIT Program”].
226 Aaken, “Investment Protection”, supra note 196 at 3.
Under most investment treaties, including Chapter 11, foreign investors are protected by a number of
international standards not available to nationals, such as provisions on national treatment, most-
favoured nation clauses, a higher standard of compensation for expropriation, and recourse to investor-
state arbitration. A national treatment clause provides that a foreign investor is entitled to the same
standard of treatment as a national, and cannot be discriminated against based on nationality.227 Most
Favoured Nation clauses ensure that investors are able to rely on any other treaty with better terms than
their own, and this can sometimes mean that investors are able to rely on more favourable arbitration
clauses.228 The Hull Standard on expropriation is usually more advantageous to the foreign investor
than national standards, as it requires prompt, adequate and effective compensation.229 The investor is
thus better protected from the whims of local governments. Each of these standards is important for the
protection and security of the investments of foreign investors. However, it is the provision for recourse
to investor-state arbitration which adds the dimension of protection that gives these standards effective
force.
Most-Favoured Nation clauses provide that investors are able to rely on any other treaty with more
advantageous terms than their own. On expropriation, the minimum standard of international law, as
contained in the Hull standard, requires prompt, adequate and effective compensation. The Hull
Standard applies not only to outright taking, but also to regulatory takings and takings which are
tantamount to expropriation. The provisions on far and equitable treatment protects the investors’
legitimate expectations, requiring the investor to be compensated where “reasonable investment-backed
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227 Sornarajah, “Foreign Investment”, supra note 192 at 337.
228 Maffezini v Spain, ICSID Case No ARB/97/7, IIC 85 (2000) at para 64 (the Maffezini Exception) [Maffezini].
229 Sornarajah, “Foreign Investment”, supra note 192 at 17.
expectations have been upset.”230 Fair and equitable treatment is one of the more constraining
provisions as it does not require outright expropriation, but encompasses ‘regulatory takings’.
These standards are given genuine force because NAFTA’s Chapter 11, like most investment treaties,
includes provisions for recourse to investor-state arbitration. The inclusion of such a provision implies
a general consent on the part of the state to submit to binding arbitration before a neutral forum. The
foreign investor is thus protected from any changes in the politics of local governments, and from local
domestic courts. However, the assurance of the availability of arbitration and the general nature of the
state’s consent to arbitration, while providing genuine protection from local legal systems for investors,
are also at the root of complaints that such investment treaties, through the constitutionalization of the
above international standards, are a serious inhibition of the legitimate policy choices available states
who have signed on to be bound by them.
Implications for NAFTA’s Member States
The investor-state arbitration provisions of NAFTA are essential in order to give investors protection
from local political issues, and to give NAFTA’s substantive provisions effective force. However, these
international standards also inhibit the changes to policy that a state may make. As the World
Development Report 2005 stated, “entering an international obligation on a particular issue increases
the costs of policy reversal,”231 and while the tradeoff for this is a more credible policy, the result for
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230 David Schneiderman, “Promoting Equality, Black Economic Empowerment, and the Future of Investment Rules” online <http://works.bepress.com/david_schneiderman/2> at 19 [Schneiderman “Investment Rules”].
231 World Bank Development Report 2005, Chapter 9, online at <siteresources.worldbank.org/INTWDR2005/.../complete_report.pdf> at 175 [World Bank Development Report 2005].
states is “foregone policy flexibility on the issue in question.”232 The promises made to investors,
whether through concession contracts, or through regulatory licenses, may mean that any decision to
alter an economic policy, or to bring in stricter regulations to protect public health or the environment,
will be curtailed. It is in this sense that Chapter 11 of NAFTA can be accused of constitutionalizing a
system of international law, because the investment treaty system has normalized certain international
minimum standards. Thus the Report questions whether it is sensible for states to take on binding
commitments on policy issues other than expropriation.
It is not merely the obligation to uphold the substantive provisions of the BIT that prevent governments
from effecting policy changes, but also the threat of arbitration claims by foreign investors. This threat
to a government’s ability to regulate is recognized in the World Development Report 2005, which
formulates the concern as being “that the provisions might be interpreted to restrict legitimate
regulatory action by host governments, or that even the potential for such claims might induce a
‘regulatory chill’.”233 Arbitration is highly costly, and may have the effect of making it prohibitively
expensive for any country that has signed on to a BIT to effect a change in policy. This would interfere
with the country’s attempts to use regulation and legislation to alter regulations for the public good
where doing so would negatively impact on a foreign investor’s property.
As regards NAFTA Chapter 11, the investor-state dispute process has become quite streamlined and,
with the signing of the New York Convention on the Enforcement of Foreign Arbitral Awards which
has been ratified by many states, the discrepancy between enforcement capabilities is much less than
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232 Ibid.
233 Ibid at 180.
before. Still, enforcement of the judgments of arbitral tribunals is heavily dependent on national
legislation for implementation by national courts, and can also be subject to judicial review, depending
on the jurisdiction.
Chapter 11, more than any of NAFTA’s other provisions has raised serious concerns about the
infringement of state sovereignty. However, the quasi-contractual nature of NAFTA means that should
a member state not wish to uphold the standards promised to a foreign investor because of some
conflict with public policy, while the state will be bound to arbitration and to pay compensation, the
state is free to decide whether or not it will uphold the international standard. If not, the state will be
able to ‘buy out’ the investor, at a price determined by the arbitral tribunal, where the state does not feel
that it is in its interest to comply. In this sense, Chapter 11 of NAFTA is not following a path of
constitutionalization because the member states are able to violate the treaty by refusing to uphold their
obligations, providing that they pay the cost of doing so. If a state do not wish to live up its obligation,
then the price, as determined by the arbitral process, must be paid, however unlike the EU system,
ongoing compensation until national policy is changed will not be imposed by the tribunal.
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Conclusion
The European Court of Justice, as the DRM of the European Union, was fundamental to the process of
constitutionalization at the EU level. The creation of an EU judicial system, tasked with implementing
the EU treaties allowed for the development of principles, such as direct effect and supremacy that, in
conjunction with the preliminary reference procedure, enabled the ECJ to drive EU integration beyond
the primarily economic and into the political. In contrast to this, the DRM’s set up under the NAFTA
treaty are designed so as to be subject to NAFTA’s member states. They are not capable of carrying out
functions similar to the ECJ because there is no system of precedent, and no direct effect. This explains
the preference for the more political, less formal DSM approach which is more contractual in nature, as
opposed to the creation of more constitutional systems.
While NAFTA may raise some democratic issues with regards to CH 11 investor-state arbitration, these
issues arise at a substantively different level than those under the EU. CH 11 is concerned namely with
whether nations (and therefore citizens) should have to bear the cost of a failure to live up to treaty
obligations. At the EU level, the issue is at a more fundamental level, even though advances have been
made with regard to the creation of the European Parliament and the participation of individuals as
well of state, it is still not possible to overlook the fact that there never was a democratic vote to
institute the EU constitutional system or the judicial system. This is a clear demonstration of the
difference between the two. Under NAFTA the parties can be seen as having sacrificed a full judicial
system with the higher level of independence and political disaffiliation, in order to preserve state
sovereignty and democratic principles. Whereas the EU, on this view, is a constitutional approach
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which entailed the sacrifice of sovereignty so as to create an economic trade area and thereby further
the political objective of full integration.
This of course does not deal with the general DSM of NAFTA which is still a highly politicized
process, which is heavily reliant on diplomacy. However this only serves to further emphasize the main
differences between the two treaties. NAFTA is concerned to preserve the sovereignty of its member
states, and thus the general DSM emphasizes diplomatic resolutions as between the parties, aided in
part by the decision rendered by an arbitral tribunal, a decision from which the member states may
diverge if they choose. The EU on the other hand, in seeking to construct a constitutional system, is
concerned to represent itself as a jurisdictional court, one which is apprised of all the independence and
impartiality that would normally be present in a legal system. However, the ECJ cannot, unlike national
domestic courts, be said to be genuinely independent or impartial. It may be impartial as between
member states, but as it is tasked with furthering EU integration through its interpretation and
application of the EU Treaties, it sets up this discrimination at a higher level, namely as between the
member states and the EC Council/Commission.
The EU’s process of constitutionalization which culminated in the Lisbon Treaty in 2009. through
direct and indirect harmonization, do not operate to the same degree under NAFTA. The Lisbon Treaty
has expanded the European Union’s powers and has essentially constitutionalized the treaty obligations
of member states.234 In contrast, NAFTA liberalizes trade relations between its member states, but it
does so for the most part without significantly reducing state sovereignty (Chapter 11 considerations
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234 Europa, The Treaty at a Glance, online at <http://europa.eu/lisbon_treaty/glance/index_en.htm> (Summary on the Changes of the Treaty of Lisbon).
aside).235 NAFTA’s DRMs allow more flexibility on the part of states than the ECJ and its
jurisprudence. This is due in large part to the high level of political controls exercised by the parties to
NAFTA in its DRM system, and also in large part to NAFTA’s more traditional, contractual nature,
both of which deprive the NAFTA DRMs of the capability to pursue constitutionalization in the manner
of the ECJ.236
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235 NAFTA, supra at note 7, Preamble.
236 Ibid.
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