WORLD TRADE
ORGANIZATIONWT/WGTI/W/139
11 September 2002
(02-4798)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 9 September 2002, has been received from the
Permanent Mission of Japan.
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CONSULTATION AND THE SETTLEMENT OF DISPUTES BETWEEN MEMBERS
I. INTRODUCTION
1. This paper is not intended to propose any particular mechanism of dispute settlement in
relation to a possible future WTO agreement on investment.  Rather, the purpose is to raise certain
number of points which could merit special consideration in relation to a set of rules on investment.
2. Most international agreements have mechanisms to deal with disputes arising from differing
interpretations of the provisions or violation of obligations set out in the agreements.  The WTO has
developed a detailed mechanism under the DSU (Understanding on Rules and Procedures Governing
the Settlement of Disputes) which covers all the WTO agreements, and bilateral investment
treaties(BITs) and regional trade agreements(RTAs) have also introduced certain mechanisms to deal
with disputes relating to the agreements.
3. Disputes arising from the interpretation or application of a possible future WTO agreement on
investment should also be covered by the exis ting WTO dispute settlement mechanism.  This is
important for securing effectiveness of the future agreement, increasing objectivity and fairness,
ensuring legal stability, improving predictability, among others.  Application of the existing dispute
settlement mechanism will provide all WTO Members with an opportunity to seek an objective and
fair judgement on issues related to the interpretation or application of the future investment
agreement.
II. EXISTING DISPUTE SETTLEMENT MECHANISMS
A. WTO
4. Based on the recognition that a well-designed dispute settlement mechanism is indispensable
for maintaining the security and predictability of the multilateral trading system, the current dispute
settlement mechanism under the DSU has on the whole, served its initial purpose to establish a systemof prompt settlement of disputes.
5. The basic mechanisms set out by the DSU are as follows.  First, consultations among
concerned Members will take place.  Good offices, conciliation and mediation are available as
voluntary procedures.  If not resolved amicably, a panel will be established.  After the panel issues a
report indicating whether the measure in question nullifies or impairs a Member’s benefit accruingWT/WGTI/W/139
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from the WTO agreements, the Dispute Settlement Body (DSB) will adopt the panel report by a
“negative consensus.”  Issues of laws covered in the panel report and legal interpretations developed
by the panel could be appealed.
6. The DSB may recommend the Member concerned to bring the measure in question into
conformity with the agreement.  When the compliance panel ( §21.5) finds that the recommendations
are not complied by that Member, the DSB may authorize the suspension of concessions or other
obligations by the complaining Member(s).  As a general principle, suspension of concessions or
other obligations should be carried out in the same sector where the violation or other nullification or
impairment was found.  However, when that is not pr acticable or effective, suspension of concessions
or other obligations under another WTO agreement may be authorized.
7. Several characteristics deserve special mentioning.  First, the dispute settlement mechanism
covers all provisions in the WTO agreements.  Second, any matter affecting the operation of theagreements, or leading to nullification or impairment of a Member’s benefits may be settled through
the dispute settlement mechanism.  Third, only disputes which could not be resolved through
consultations can be brought to the panel.  Fourth, the DSB can issue recommendations, which are
legally binding, to bring the measure into conformity but has no measures to enforce them.  Fifth, the
primary goal of the current dispute settlement is not to seek compensation of damages but is toremove measures inconsistent with the agreement.
B. BIT
S AND RTA S
8. Most BITs and RTAs also have provisions on dispute settlement although often they do not
set out the procedures in detail.  In many cases, BITs and RTAs rely on arbitral tribunal for the
resolution of disputes, instead of a panel as in the WTO, and the rules and procedures of the arbitraltribunal are not predetermined in detail.  The arbitral tribunals are conducted, for instance, in
accordance with the UNCITRAL Arbitration Rules
1 or any other agreed rules and procedures between
the contracting parties.  In some of the recent agreements such as the Japan-Singapore Economic
Partnership Agreement, the rules and procedures for arbitration are set out in detail.  Usually, all
provisions of the agreement are subject to arbitral tribunal.
9. Some BITs and RTAs such as Japan-Korea Investment Treaty or NAFTA have introduced an
investor-to-state dispute settlement mechanism.  This is a mechanism that allows investors of a Party
to submit a claim to an arbitral tribunal that another Party has breached an obligation and caused
losses to them.  It is a major departure from the intergovernmental mechanism under the WTO where
only Members are qualified to resort to the dispute settlement mechanism.
III. POSSIBLE MECHANISMS IN THE FUTURE WTO AGREEMENT ON
INVESTMENT
10. The existing WTO dispute settlement mechanism in principle should be applied to disputes
relating to the possible future WTO agreement on investment.  If disputes relating to commercial
presence in the services sector and those relating to foreign direct investment in the manufacturing
sector were to go through different mechanisms, it would be hard to justify.  If the investment
agreement adopted a new mechanism, it would be more costly, and, moreover, it would raise someconcerns that reaching rational solutions would be difficult with regard to disputes related to the
investment agreement and other WTO agreements.  Therefore, it makes most sense to apply the
                                                     
1 UNCITRAL Arbitration rules were adopted in the United Nations Commission on International Trade
Law in 1976.  They were drawn up wit the intention to be used in international commercial arbitrations whichdeals with international transaction disputes.WT/WGTI/W/139
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existing WTO mechanism to disputes in investment.  Also, the intergovernmental nature of the WTO
system should be preserved.
11. The existing dispute settlement mechanism covers all agreements of the WTO, and there
seems to be no reason to exclude specific provisions of the future agreement on investment since
disputes can arise from any agreement.  Theore tically, all provisions of the future investment
agreement should be subject to the dispute settlement mechanism.  It also needs to be stressed that the
role of consultation under the WTO dispute settl ement mechanism needs to be maintained and if
possible strengthened.  As in all other fields, an amicable solution is desirable for disputes on
investment.
12. The current dispute settlement mechanism stipulates special procedures for disputes involving
least-developed country Members.  Members are required to “exercise due restraint”  in raising
matters or asking for compensation or measures of retaliation when disputes involve least-developedcountry Members.  Moreover, good offices, conciliation and mediation are to be offered, by the
Director-General or the Chairman of the Dispute Settlement Body, to least-developed country
Members, under certain conditions and upon requests.  These special procedures are important in
assisting the least-developed country Members and w ould play an important role for disputes in the
future WTO agreement on investment.
13. Some issues, however, need to be given carefu l consideration due to the special nature of
investment.  When investment disputes are undertaken by the panel, the issue of how to ensure
compliance with the recommendations or rulings needs to be further explored.   Suspension of
concessions by the complaining Member is a very important element of the dispute settlement
mechanism to force the Members concerned to bring the measure into conformity with the agreement,
and it can be justified as long as the level of the suspension does not exceed the level of nullification
or impairment.  The difficulty we face in the field of investment is how to determine the level of
nullification or impairment, especially if pre-establishment phase is to be included in the future
agreement on investment.  For example, if the futu re rule on investment includes provisions for pre-
establishment commitments, and if an investor was denied admission/establishment in a certain sector
where a Member had committed to liberalize, the determination of the level of nullification or
impairment of benefits caused by the denial will be a complex task.
14. However, under the current WTO dispute settlement mechanism, the level of damages caused
by disputes on establishing commercial presence in the services sector (under mode 3 of GATS) are to
be determined by the arbitrators(DSU §22-7), and there is no reason to believe that the arbitrators
will be required to do a more difficult task under the future agreement on investment.  Suspension of
concessions will continue to play an important role as the last resort in the dispute settlementmechanism to exert pressure on the concerned Member to bring the measure into conformity.
15. The second issue is on the protection of investments and adequate compensation for
expropriation.  These issues are important elements for developing a favorable environment for
investment, and are stipulated in many BITs and RTAs.  If these elements are included in the scope of
a future WTO investment agreement, it would pose the question of how the WTO dispute settlementmechanism should deal with disputes in those fields. The existing dispute settlement mechanism does
not have any mechanisms to provide compensation di rectly to the investor who have losses incurred
from the expropriation.  This is because WTO agreements stipulates trade rules between countries,
and the purpose of the WTO dispute settlement mechanism is not to provide remedies for losses but to
bring the WTO inconsistent measures into conform ity with the WTO agreements.  Therefore, foreign
investors should seek resolution through the domestic judicial procedures.  When sufficient settlement
is not provided through the domestic judicial procedures, Members may seek correction through the
WTO dispute settlement mechanism in order to br ing the measure into conformity but not for the
purpose of obtaining compensation to the investors.WT/WGTI/W/139
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16. Some BITs and RTAs contain investor-to-state dispute settlement mechanisms to protect
investors.  However, given the inter-governmental nature of the WTO, the WTO dispute settlement
mechanism should only deal with disputes between Members.
17. Lastly, Members may wish to consider the issue of “forum-shopping.” Depending on the
scope of the future WTO investment agreement, certain disputing measures may be covered by boththe investment agreement and other BITs or RTAs.  Whether “forum-shopping” between WTO and
BITs/RTAs should be allowed or not needs to be further considered.
IV. CONCLUSIONS
18. The existing WTO dispute settlement mechanism should be applied to the future WTO
investment agreement.  The special character of investment may require some further consideration
for some issues, although it needs to be stressed that the difference between dispute settlement
mechanism for investment and that of other WTO agr eements (notably the GATS), should be as little
as possible.  All provisions of the investment agreement should be subject to the dispute settlement
mechanism and special treatment of least-developed countries under the current system needs to be
applied as well, in order to introduce flexibility.  These should serve all Members benefit.
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