conference proceedings - Faculdade de Direito da Universidade

 CONFERENCE PROCEEDINGS
September 19-20 | Lisbon, Portugal
TABLE OF CONTENTS
Foreword ........................................................................................................................... 2
The Polysemy of Independent Directors..................................................................... 4
YUEH-PING (ALEX) YANG
Globalization in International Tax Law – A Spotlight on the OECD’s BEPS
Project..............................................................................................................................44
DIANA OSWALD
Global Financial Governance and Regulation: Challenges and Opportunities
Ahead ...............................................................................................................................67
KELLY CHEN
The Judicial Reception of Competition Soft Law in the Netherlands and the
UK.................................................................................................................................... 87
ZLATINA GEORGIEVA
The Global Governance Reflex of International Judicial Bodies ........................117
HALIL GÖKSAN
Convergence and Divergence in the EU’s Judicial Cooperation in Civil
Matters: Pleading for a Consolidation through a Uniform European
Conflict’s Codification ................................................................................................175
DENISE WIEDEMANN
Is «Legal Globalization» the Solution for the Disorientation of Health and
Safety at the Workplace Law? ....................................................................................200
ANA RIBEIRO COSTA
1
European Criminal Law as a “Last Obstacle” in the Globalization of Law
Within the European Union ......................................................................................220
PETR ZARIVNIJ
Authors ..........................................................................................................................236
2
FOREWORD
The first edition of the Graduate Legal Research Conference by the
Católica Research Centre for the Future of Law was held on 19-20
September 2014 at Universidade Católica Portuguesa in Lisbon, Portugal.
These Proceedings bring to public knowledge some of the contributions
written to support the presentations therein.
At the event, 23 young legal scholars pursuing doctorates and postdoctorates at some of the most prestigious universities in the world ―
including Cornell, the EUI, Harvard, Leiden, Tel Aviv, Tilburg, Sciences-Po,
Stockholm and others ― presented papers based on their work in progress
on a wide range of topics located in an astonishing variety of fields of legal
research, such as jurisprudence, comparative law, legal sociology, corporate
law, international law, alternative dispute resolution, criminal justice, civil
procedure, EU Law and tax law. Two days of intense and lively intellectual
exchange exhibiting all of the cardinal qualities of the research program that
the Centre was built to foster: diverse, ambitious, cosmopolitan,
interdisciplinary, collaborative, and forward-looking.
We are grateful to the authors for giving us permission to publish
their work in progress and wish them the very best for the larger research
projects in which they have been involved. Gratitude is due as well to the
sponsor of the event, the law firm Rogério Alves & Associados, and to our
predecessors in the coordination of the Lisbon section of the Research
Centre for the Future of Law, José Lobo Moutinho and his support team
comprising Ana Taveira da Fonseca, Pedro Garcia Marques and Tito
Rendas, under whose mandate the Graduate Conference was planned and
took place. A special acknowledgement is due to Tito for conceiving this
initiative and for doing much of the heavy lifting of organization. Our task as
coordinators is to keep alive and nurture this wonderful project, beginning
with the second edition in 2015.
Elsa Vaz de Sequeira
Gonçalo de Almeida Ribeiro
3
4
THE POLYSEMY OF INDEPENDENT DIRECTORS
Yueh-Ping (Alex) Yang ∗
Harvard Law School
ABSTRACT
In this paper, I explore the worldwide convergence toward
independent directors and its current state. By drawing reference from the
independent director regime as implemented in the United States, United
Kingdom, France, Italy, Germany, Japan, Taiwan and China, I display the
polysemy of independent directors. Despite the debate about its merits, I
make a case for independent director based on the agency theory. I then
discuss how to improve this very regime, focusing specifically on how to
define independent directors and compose an independent board, depending
on a company’s ownership structure. Specifically, I propose a process-based
approach for defining independent directors. Instead of examining if an
independent director maintains any ties with the agent calling for supervision
(i.e. management in dispersed companies or controlling shareholders in
concentrated companies), I suggest examining if his/her nomination and
election are dominated by these agents. This approach, however, requires
reforms of nomination and election process to secure representation of the
principal (i.e. shareholders in dispersed companies or minority shareholders
in concentrated companies), in which strengthening the independence of
nominating committee is in center. I finally discuss how to design board
composition to balance independent directors’ role with others’. Based on
shareholder primacy norm, I argue that a majority independent board is
preferred for dispersed companies. For concentrated companies, however,
this is less the case; what matters more is rather the independence of related
board sub-committees.
Overall, the worldwide convergence toward
independent directors accompanied with such polysemy resembles an
epitome of comparative corporate governance.
∗
Harvard Law School S.J.D. candidate. National Taiwan University LL.B (2005),
LL.M (2010), and Harvard Law School LL.M (2012). The author can be reached via
[email protected]. The author would like to appreciate all the efforts done by the
team of Catolica Research Centre for the Future of Law who held the 2014 Catolica
Graduate Legal Research Conference and made the publication of conference proceedings
come true. The author would further like to express his gratitude to his S.J.D. supervisor
Reinier Kraakman for his kind support and insightful instruction, as well as Professor
Fátima Gomes for her inspiring comments on and suggestions to this work during the
conference.
5
I. INTRODUCTION
The worldwide convergence of corporate governance can be best
illustrated by the globalized fever for independent directors. While “the end
of the corporate law” featured by the ultimate global convergence to a
shareholder-oriented model 1 has not arrived yet, a considerable level of
convergence do take place in the past decade. 2 In the area of board
composition, one of the most crucial areas of corporate governance, since
the start of 21st century we witness a global fever for independent directors.
Most countries have adopted the independent director regime through
different forms, and more and more countries have required or
recommended the board (or at least specific board committees) to be
comprised of majority independent directors.3 The outbreak of the Global
Financial Crisis in 2008-2009 somehow affects the convergence process;
other attributes of the board, in particular the board’s expertise and diversity,
gradually receive more attention in the post-crisis reforms.4 Nevertheless, in
plenty of post-crisis reform proposals we still find the importance of board
independence being appreciated.5 It appears that the well-established global
fever for independent directors is not going to fade away in the near future.
1 See generally Henry Hansmann & Reinier Kraakman, The End of History for Corporate
Law, 89 GEO. L. J. 439 (2001). For similar observation, see e.g., Ronald J. Gilson, Globalizing
Corporate Governance: Convergence of Form or Function, in CONVERGENCE AND PERSISTENCE IN
CORPORATE GOVERNANCE 128 (Jeffrey N. Gordon & Mark J. Roe eds., 2004); Ronald J.
Gilson et al., Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S., and
the EU, 63 STANFORD L. REV. 475 (2011). For observations claiming that convergence does
not arrive (and probably will never arrive), see e.g., Lucian Arye Bebchuk & Mark J. Roe, A
Theory of Path Dependence in Corporate Ownership and Governance, in CONVERGENCE AND
PERSISTENCE IN CORPORATE GOVERNANCE, id. at 69; Reinhard H. Schmidt & Gerald
Spindler, Path Dependence and Complementarity in Corporate Governance, in CONVERGENCE AND
PERSISTENCE IN CORPORATE GOVERNANCE, id. at 114; Adam Winkler, Corporate Law or the
Law of Business?: Stakeholders and Corporate Governance at the End of History, 67 L. & CONT.
PROBLEMS 109 (2004); Michael H. Lubetsky, Cultural Difference and Corporate Governance, 17
TRANSNATIONAL L. & CONT. PROBLEMS 187 (2008); Franklin A. Gevurtz, The Globalization
of Corporate Law: The End of History or a Never-ending History, 86 WASH. L. REV. 475 (2011).
2 See generally Henry Hansmann & Reinier Kraakman, Reflections on The End of History
for Corporate Law, in CONVERGENCE OF CORPORATE GOVERNANCE: PROMISE AND
PROSPECTS 32 (Abdul Rasheed & Toru Yoshikawa eds., 2012).
3 See Part II of this paper.
4 See e.g., OECD, CORPORATE GOVERNANCE AND THE FINANCIAL CRISIS: KEY
FINDINGS AND MAIN MESSAGES 44-46 (2009); OECD, CORPORATE GOVERNANCE AND
FINANCIAL CRISIS: CONCLUSIONS AND EMERGING GOOD PRACTICES TO ENHANCE
IMPLEMENTATION OF THE PRINCIPLES 19-21 (2010).
5 For instance, the United States enhances the independence requirement of
compensation committee in order to address the executive compensation issue, an issue
considered one of the main attributes to the Financial Crisis. The United Kingdom in its
Walker Report and the European Union in its Green Paper 2011 remains emphasizing the
importance of independence. Japan also takes a further step in introducing independent
directors in its latest reforms of corporate laws. For a summary, see Wolf-Georg Ringe,
Independent Directors: After the Crisis, 14 EUR. BUS. ORG. L. REV. 401, 405-07 (2013).
6
Like it or not, independent directors might continue playing a crucial rule in
most countries’ corporate governance reforms.
Convergence, however, does not mean unification, as cautioned by
Professor Hansmann and Kraakman, the pioneers leading the convergence
scholarship.6 In regards of independent directors, while more and more
countries adopt independent directors, it has been repeatedly noted that the
implementation of independent directors in different jurisdictions varies,
depending on the ownership structure, type of agency problem, existing
board structure and political reality, etc.7 In the United States, related listing
rules, in accordance with the SEC’s order as mandated by the SarbanesOxley Act and Dodd-Frank Act, not only require listing companies’ boards
to be comprised of majority independent directors, but also mandate their
audit committee, nominating committee and compensation committee to be
comprised entirely of independent directors. In the United Kingdom, in
contrast, independent directors are merely recommended instead of
mandated; companies may choose not to adopt independent boards or
independent committees as long as they provide explanations to the market.
Independent directors in Continental European countries, the latecomers
who accept it due mainly to the pressure caused by the globalized capital
market, present another different picture. Most countries introduce
independent directors through the “comply-or-explain” model similar to that
in the United Kingdom, but the recommended level of independence is
lower: France recommends only one-third of board members to be
independent, Italy recommends only two members, and Germany defers to
the company’s judgment. Such latecomers’ reluctance is also found in East
Asia: China requires one-third independent board members, Taiwan requires
one-fifth, and Japan sets no mandatory requirement. In sum, the worldwide
implementation of independent directors remains divergent, suggesting the
polysemy of independent directors.
In this paper, I focus on explaining and, to some extent, justifying
this polysemy from a functional perspective centering on ownership
structure. Employing the agency theory and the shareholder primacy norm,
I illustrate how different type of ownership structure calls for different
meaning of independent director. To make my point, I will structure this
paper in the following manner. In Part II of this paper, I conduct some
6 Hansmann & Kraakman, supra note 2, at 44. (clarifying that there is a level of
detail at which one sees convergence, and “there will probably never be perfect
homogeneity.”)
7 For recent comparative studies of independent directors, see e.g., REINEIR
KRAAKMAN, THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL
APPROACH 55-100 (2009); Maria Gutierrez & Maribel Saez, Deconstructing Independent Directors,
13 J. CORP. L. STUD. 63 (2013); Suzanne Le Mire & George Gilligan, Independence and
Independent Company Directors, 13:2 J. CORP. L. STUD. 443 (2013); Guido Ferrarini & Marilena
Filippelli, Independent Directors and Controlling Shareholders around the World (Eur. Corp.
Governance Inst. – Law, Working Paper No. 258/2014, 2014); Roberta S. Karmel, Is the
Independent Director Model Broken?, 37 SEATTLE U. L. REV. 775 (2014).
7
comparative study of current implementation of independent directors in
different countries, ranging from Anglo-Saxon (the United States and the
United Kingdom), Continental Europe (France, Italy and Germany) to East
Asia (Japan, Taiwan and China). In Part III I then revisit the functional
rationale behind the worldwide fever for independent directors, which helps
to clarify why worldwide legislators adopt independent directors and what
merits they anticipate from independent directors. In Part IV I then discuss
the problems associated with current independent director regimes, focusing
on how to ensure the board’s true independence. Instead of adopting the
current concept-based approach, I suggest a process-based approach, taking
into account different ownership structure, for observing and enhancing the
degree of board independence. I also discuss the preferred board
composition principles to maintain balance-of-power between the principal
(be it shareholders or minority shareholders) and agent (be it managers or
the controlling shareholder). I finally conclude this paper in Part V.
Through the analysis of this paper, I anticipate to decoding the worldwide
polysemy of independent directors and suggesting some humble perspectives
for future observations and reforms.
II. THE POLYSEMY OF INDEPENDENT DIRECTORS IN THE CURRENT
STATE
While the idea of independent directors has received wide
recognition in most countries, the way each country implements this idea
diverges. In this part I will present such divergence, in particular focusing on
the definition of independence, the appointment process of independent
directors and the weight of independent directors on the board and subcommittees.
A.
Anglo-Saxon Approach: Majority-based and AgainstManagement
Anglo-Saxon’s two main powers, the United States and the United
Kingdom, are the major drivers gearing the worldwide convergence to
independent directors. 8 Admittedly, in many dimensions of corporate
governance structure these two countries display plenty of differences.
Nevertheless, for this paper’s interest, companies in these two countries
share some similarities in two crucial aspects. First, they share similar
ownership structure: dispersed ownership, plagued by the shareholders-vis-àvis-managers agency problem (the so-called Type I Agency Problem).9 Second,
they share similar board structure: the “one-tier board system,” that is, a
company has only one board as its decision-making body which consists of
8
9
KRAAKMAN, id. at 69. See also Ringe, supra note 5, at 403.
KRAAKMAN, id. at 36.
8
both executive and non-executive directors.10 These common backgrounds
render their respective independent director regime similar to each other.
However, there remain some divergences.
a.
United States: Strong-form Implementation
The global fever for independent directors is generally conceived as
originated from the United States. 11 The current state of independent
directors in the United States is mainly maintained by listing rules.12 After
the outbreak of numerous corporate scandals such as Enron in the early
2000s, the Sarbanes-Oxley Act invokes the Securities and Exchange
Commission’s (“SEC’s”) rule-making authority and mandates securities
exchanges to impose majority independent board requirement. Related
listing rules, e.g., New York Stock Exchanges (“NYSE”) Listed Company
Manual, thus require listed companies’ boards to be comprised of majority
independent directors. 13 They also require listing companies’ audit
committee, nominating committee and compensation committee to be
composed entirely of independent directors.14 After the Financial Crisis, the
Dodd-Frank Act further targets at the compensation committee and orders
the SEC to direct securities exchanges to require listed companies to have
full independent members on the compensation committee.15 According to
a recent survey, large U.S. companies’ boards now comprise about 80%-90%
of independent directors.16
Independence in the U.S. context specifically focuses on the financial
and family ties of independent directors with the company (and its
management). NYSE, for example, defines independence as directors
having “no material relationship with the listed company (either directly or as
a partner, shareholder or officer of an organization that has a relationship
with the company).” Related listing rules further append a negative list of
enumerated instances disqualifying a person from serving an independent
director.17 One important feature behind this definition is that the tie of
independent directors with the company’s controlling shareholders is omitted.
For the United States, a country whose corporate ownership structure is
Id. at 56.
Id. at 65.
12 For an introduction of the evolution of independent director system in the
United States, see generally Jeffrey N. Gordon, The Rise of Independent Directors in the United States,
1950-2005: Of Shareholder Value and Stock Market Prices, 59 STAN. L. REV. 1465 (2007). See also
Karmel, supra note 7, at 778-88; Nicola Faith Sharpe, Process over Structure: An Organizational
Behavior Approach to Improving Corporate Boards, 85 S. C. L. REV. 261, 274-280 (2012).
13 See e.g., NYSE LISTED COMPANY MANUAL §303A.01.
14 Id. §§303A.04, 303A.05 and 303A.06.
15 Dodd-Frank Act, §952.
16 Ferrarini & Filippelli, supra note 7, at 6.
17 See e.g., NYSE LISTED COMPANY MANUAL §303A.02.
10
11
9
commonly disperse, what concerns related listing rules is the directors’
independence of the management, while that of the controlling shareholder
is less an issue.18 In fact, related listing rules do not apply the independence
requirement to concentrated companies.19
Despite the independence requirement, the merits of independent
directors in the United States remain empirically controversial. 20 Critics
often point the finger at the nomination and election process for
independent directors. The nomination and election of independent
directors in the United States is long criticized as captured by the
management (in particular the CEO). Legally speaking, all directorate
candidates, including independent directors, are nominated by the company’s
board, and in most cases, the independent nominating committee. In
practice, however, the board or the nominating committee tends to nominate
candidates suggested by the company’s management (especially the CEOs),
or at least the CEOs effectively have the veto power.21 Captured by the
CEO, one can hardly expect the slate of candidates nominated by the
company to be adequately independent. Although unsatisfied shareholders
can propose their own slate of candidates as well, they rarely do so because
initiating a proxy contest is too costly while the benefits derived from a
proxy contest, if any, is not cost-efficient. For one thing, in the United
States there remain a number of obstacles precluding shareholders from
nominating their own directorate candidates to compete with the companynominated candidates. For instance, since the proxy access reform proposed
by the SEC in 2010 was rejected by the D.C. Circuit court in 2011,
shareholders in the United States still lack the access to put their nominated
directorate candidates in the company’s proxy.22 Plagued by the time and
Ferrarini & Filippelli, supra note 7, at 6.
According to the NYSE Rule, for instance, if a company’s single shareholder or a
group of shareholders holds more than 50% or its voting shares, the independence
requirement does not apply. See e.g., NYSE LISTED COMPANY MANUAL §303A.00.
20 For a summary of the mixed result, see Lisa M. Fairfax, The Uneasy Case for the
Inside Director, 96 IOWA L. REV. 127 (2010).
21 See generally Richard Clune et al., The Nominating Committee Process: A Qualitative
Examination of Board Independence and Formalization, 31:3 CONTEMP. ACCT. RES. 748 (2014);
For an account of the evolution and status quo of nominating committees in the United
States, see generally Michael E. Murphy, The Nominating Process for Corporate Boards of Directors: A
Decision-Making Analysis, 5:2 BERKELEY BUS. L. J. 131, 144-51 (2008).
22 The proxy access reform aims to amend Section 14(a) of the Securities Exchange
Act of 1934 and expressly authorizes the Securities and Exchange Commission (SEC) to
adopt rules for shareholders to nominate directors to the boards of reporting companies. See
Dodd-Frank Act, §971. SEC promulgated the implementing regulation Rule 14a-11 in 2010,
permitting a shareholder or group of shareholders that hold at least 3% of the voting power
for over three years to nominate a maximum of 25% of the board. The D.C. Circuit,
however, invalidated Rule 14a-11 in 2011, rendering the proxy access reform into a deadlock.
Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011). For related account of the
evolution of proxy access reforms in the United States, see generally Murphy, id. at 138-44. For
related discussion, see generally James D. Cox & Benjamin J.C. Baucom, The Emperor Has No
Clothes: Confronting the D.C. Circuit’s Usurpation of SEC Rulemaking Authority, 90 TEX. L. REV.
18
19
10 cost to launch proxy contest on their own expenses, in most cases
shareholders in the United States can only passively vote on the candidates
who are effectively nominated by the management. In the absence of a
competed slate, coupled with the commonly-adopted plurality voting system
in the United States, according to which the nominees who received the
most votes were elected even if none of them has a majority,23 shareholders
even have no chance to vote out these candidates. In this way, companies’
management essentially captures the whole nomination and election process
and determines the list of independent directors.24
b.
United Kingdom: Soft-law Implementation
After the efforts made in the Cadbury Report in 1992 and the Higgs
Report in 2003, the United Kingdom eventually followed the United States’
track and introduced independent directors after the outbreak of Enron.
Unlike the United States which mandated independent directors through
related listing rules, the United Kingdom adopted a softer “best practice
standard” method.25 That is, the United Kingdom only “recommends” a set
of best practice standard in its Corporate Governance Code, which is
unbinding upon companies. Individual company, however, shall report in its
annual financial report how it implements the Code’s principles and, if failing
to comply with so, shall explain its rationale for the non-compliance (the socalled “comply-or-explain” approach).26
The current UK Corporate Governance Code recommends the
board to be comprised of majority independent directors.27 It recommends
majority independent directors on the nominating committee and at least
1811 (2012); Joseph A. Grundfest, The SEC’s Proposed Proxy Access Rules: Politics, Economics,
and the Law, 65:2 BUS. LAW. 361 (2010); Lucian A. Bebchuk & Scott Hirst, Private Ordering
and the Proxy Access Debate, 65:2 BUS. LAW. 329 (2010).
23 MELVIN ARON EISENBERG & JAMES D. COX, CORPORATIONS AND OTHER
BUSINESS ORGANIZATIONS: CASES AND MATERIALS 239 (10th ed., 2011). Nevertheless,
recently more and more firms shift to the majority voting system, under which no directors
can be elected unless he/she receives more votes in favor of him/her than against or
withhold. Michael K. Molitor, The Crucial Role of the Nominating Committee: Re-inventing
Nominating Committees in the Aftermath of Shareholder Access to the Proxy, 11 UC DAVIS BUS. L. J.
98, 120-21 (2010).
24 For a detailed description of the nominating and appointment process in the
United States, see Molitor, id. at 100-08. Recently, however, it is found that due to the
enhanced power of nominating committees, the nomination process is less captured by the
management. It is reported that in 2008, 60% of director nominations came from outside
search firms and 21% came from independent directors. Only 9% of candidates came from
the recommendation by CEOs. Molitor, id. at 111.
25 This method is in fact adopted throughout the Europe due to the Directive
2006/46/EC of the European Parliament and of the Council of 14 June 2006, O.J. L. 224/1
(Aug. 16, 2006), Art. 46a(1)(a) and (b).
26 United Kingdom Listing Authority Listing Rules, §9.8.6(5) and (6).
27 2012 UK Corporate Governance Code, Principle B.1.2.
11
three independent directors on the audit committee and remuneration
committee. 28 Independence here refers to independent in character and
judgment and absence of relationships or circumstances which are likely to
affect the director’s judgment. Illustrated instances mostly examine a
director’s family and business ties with the corporation, which is similar to
that of the United States, except that they assess as well if a director represents
any significant shareholders.29 Most importantly, one major difference between
the United Kingdom Model and the United States Model is: while in the
United States the final say of a director’s independence belongs to related
securities exchanges, in the United Kingdom such power is vested with the
board.30 Overall speaking, the United Kingdom maintains a less stringent
independence requirement.31
B.
Continental European Approach: Minority-based and AgainstControlling Shareholder
In contrast with the United States and United Kingdom, companies
in most Continental European countries are featured by concentrated
ownership and typically have a controlling shareholder. Thus, what plagues
the corporate governance in these countries is rather the controlling
shareholder-vis-à-vis-minority shareholders agency problem (the so-called
Type II Agency Problem), such as potential expropriation of minority
shareholders by the controlling shareholders through tunneling and related
party transactions.32 Independent directors originated in Anglo-Saxon for
addressing Type I Agency Problem thus requires some adjustment here, in
particular when the board structure that a country or company adopts is a
“two-tier board,” i.e. the decision-making body is separated into
management board and supervisory board.33
Id. Principle B.2.1, C.3.1, D.2.1.
Id. Principle B.1.1. Similarly noted by Ringe, supra note 5, at 410-11.
30 Id. Principle B.1.1. Patrick C. Leyens, Corporate Governance in Europe: Foundations,
Developments and Perspectives, in RESEARCH HANDBOOK ON THE ECONOMICS OF EUROPEAN
UNION LAW 183, 188 (Thomas Eger & Hans-Bernd Schafer eds., 2012).
31 It is true in particular after the Financial Crisis, independence requirement to
some degree loses its favor in the United Kingdom. Both the Walker Review of 2009 and
the amended Code instead focus more on the directors’ expertise and knowledge as
opposed to independence. For instance, the Code now recommends the board to be shaped
in a way that “ha[s] the appropriate balance of skills, experience, independence and
knowledge of the company,” indicating its growing emphasis on capacity. Id. Principle B.1.
However, the Walker Review still highlights “independence of mind” as more relevant than
“formal independence,” suggesting that independence remains crucial even after the
Financial Crisis. Ringe, supra note 5, at 405.
32 KRAAKMAN, supra note 7, at 36. See also Gutierrez & Saez, supra note 7, at 71-72.
33 For a brief introduction and comparison of the one-tier and two-tier board, see
Paul L. Davies & Klaus J. Hopt, Corporate Boards in Europe – Accountability and Convergence, 61
AM. J. COMP. L 301, 310-17 (2013).
28
29
12 Despite the different ownership structure, independent directors are
introduced into Continental Europe. The European Commission has issued
recommendation related to independent directors, 34 which recommends
“sufficient number” of independent directors on the board without
specifying an exact number.35 On the other hand, it recommends at least
majority members of audit, nominating and compensation committee to be
independent.36 Independence here is defined as “free of any business, family
or other relationship with the company, its controlling shareholder or the
management of either, that creates a conflict of interest such as to impair its
judgment” with specific criteria listed in the Recommendation’s Annex II.37
Whether a given director satisfies the independence requirement, however, is
subject to the final say of the board (or the supervisory board in the two-tier
board structure).38
In implementing the recommendation, there presents some variation
among Continental European Countries.39 Below I briefly introduce three
major countries in Continental Europe: France, Italy and Germany. In
general, Continental European countries appear reluctant in introducing
independent directors.40
a.
France: The Typical Continental European Model
France maintains a choice of board structure under which companies
may choose between the one-tier and two-tier structure.41 In regards of
independent directors, the French Corporate Governance Code, subject to
the comply-or-explain rule similar to that in the United Kingdom, 42
recommends a majority independent board for widely-held companies while
at least a third independent directors for companies with controlling
shareholder.43 It also recommends at least two thirds of the audit committee
members to be independent and a majority for nominating and
compensation committees.44 Independence here is defined as absence of
34 European Commission, Recommendation of 15 February 2005 on the Role of
Non-executive or Supervisory Directors of Listed Companies and on the Committees of the
(Supervisory) Board, O.J. L.52/51 (Feb. 25, 2005).
35 Id. Art. 4.
36 Id. Annex I, Art. 2.1, 3.1.2, 4.1
37 Id. Art. 13.1.
38 Id. Art. 13.2.
39 For a summary of such divergence, see Ferrarini & Filippelli, supra note 7, at 16.
40 For a discussion of such reluctance, see Davies & Hopt, supra note 33, at 325.
41 French Corporate Governance Code of Listed Corporations [hereinafter French
Code], Principle 3.1. It is documented that only 13% of the top listed companies in France
choose the two-tier structure. Davies & Hopt, id. at 316.
42 It is found that about 15% of independent directors in France do not fulfill the
independence requirement. Ferrarini & Filippelli, supra note 7, at 17.
43 French Corporate Governance Code, Principle 8.2.
44 Id. Principles 14.1, 15.1 and 16.1.
13
relationship of any kind whatsoever with the corporation, its group or the
management of either, that is such as to colour his or her judgment,
combined with illustrated instances. 45 The board, however, owns wide
discretion in determining the independence of a given director; it may even
consider a director failing to satisfy the specific criteria as independent.46 In
particular, since it is the shareholders’ general meetings that elect board
members, including independent directors, while the controlling shareholder
controls majority voting shares, the controlling shareholder effectively
dominates the board elections and thereby elects independent directors.
b.
Italy: Special Appointment Process for Minority Shareholders
Italy also maintains a choice of board structure regime,47 non-binding
corporate governance code and comply-or-explain method for introducing
independent directors.
The Italian Corporate Governance Code
recommends listed companies to appoint no less than two independent
directors to their boards. 48
Furthermore, nominating committee,
remuneration committee and control and risk management committee are all
recommended to be comprised of at least majority independent directors.49
Italy also maintains a similar “independence-in-fact” analysis for determining
the directors’ independence.50
The most characteristic part of Italian’s independent director system
is its appointment process. While it is similar to France to the extent that
shareholders’ general meetings elect the board members (including
independent directors), Italy adopts a “mandatory slate voting system,”
under which listed companies shall reserve at least one seat of board member
to the slate winning the highest number of votes amongst those submitted
by minority shareholders.51 Accordingly, the controlling shareholder cannot
control all seats of directors despite its dominant voting power, and the
Id. Principles 8.1 and 8.4.
That is, France adopts an “independence-in-fact” analysis. Ferrarini & Filippelli,
supra note 7, at 16. For instance, in determining if a director is independent of the majority
shareholder, directors representing major shareholders of the company can be considered
independent as long as these major shareholders do not engage in controlling the company.
French Corporate Governance Code, Principle 8.5.
47 According to the 2003 reforms, Italian companies have three options: (1) a twotier board similar to that in Germany; (2) a one-tier board with the traditional board of
supervisors; and (3) a one-tier board without supervisors but a mandatory audit committee.
It is documented that about 96% of listed companies remain choosing the traditional type
(2) structure. Davies & Hopt, supra note 33, at 316.
48 Italian Corporate Governance Code, Principle 3.C.3. For star segment’s listed
companies, their independent directors shall be no less than one third of all directors.
49 Id. Principles 5.P.1, 6.P.3, 7.P.4. And if the company is controlled by another
listing company, the control and risk management committee should be composed entirely
of independent directors.
50 Id. Principles 3.P.1, 3.P.2, 3.C.1.
51 Consolidated Financial Services Act, Art. 147-ter (3).
45
46
14 director elected therefrom could be more accountable to minority
shareholders.
c.
Germany: A Reluctant Receiver
Unlike France and Italy, Germany provides no choice of board
structure option but mandates the two-tier board structure.52 In regards of
independent directors, Germany is probably the most reluctant countries in
Europe in adopting it largely due to its long tradition in maintaining a twotier board system. German Corporate Governance Code does not specify an
exact proportion of independent directors on the supervisory board; rather,
it merely recommends companies to include “what it considers an adequate
number of independent members.”53 In regards of board sub-committees, it
recommends only one independent member on the audit committee (i.e. the
committee chairman) 54 and makes no specific recommendation for
nominating committee.55 In practice, independent directors merely stand for
5% of directors in Germany.56
C.
The East Asian Approach
Observing corporate governance in East Asia presents some
interesting insight. East Asian countries are mainly civil law countries
adopting the Continental European-style corporate laws at the very
beginning. Due to the globalization and Americanization of capital markets
in this region, however, their corporate laws largely converge toward AngloSaxon model and therefore present a mix. In regards of board structure,
East Asian countries such as Japan, Taiwan and China still maintain the twotier board structure separating the management body (i.e. the board of
directors) and the supervisory body (i.e. supervisors or the board of
supervisors). The supervisory body, however, typically has no power to elect
or remove members of the management body; such power rests on the
shareholders’ general meetings. This design results in a weakened
supervisory body and the controlling shareholder’s simultaneous control of
both the management and the supervisory body. The introduction of
independent directors in East Asia is somehow considered a prescription for
improving the weak supervisory role of the supervisory board.
52 Companies in Germany, however, may still adopt the one-tier structure if they
incorporate in the form of “European Company” as provided by European Union. Davies
& Hopt, supra note 33, at 315.
53 German Corporate Governance Code, Principle 5.4.2.
54 Id. Principle 5.3.2.
55 Id. Principles 5.3.3. In fact, the German Corporate Governance Code even
recommends the nominating committee to be comprised entirely of shareholder
representatives.
56 Ferrarini & Filippelli, supra note 7, at 19.
15
a.
Japan: A Resistant Latecomer
Ownership structure in Japan is interestingly complicated. At a first
glance, Japan has a dispersed ownership structure, in some way even more
dispersed than the United States.57 Nevertheless, due to the widespread
cross-shareholding practice in Japan, the ownership status in most Japanese
companies is largely steady, and change of control is rarely seen. In any
event, Japan is similarly plagued by the strong-manager-weak-shareholders
Type I Agency Problem.58
Compared with other East Asian countries, Japan appears slow and
reluctant in introducing independent directors. Before the reforms of
Companies Act in 2014, statutes in Japan did not mandatorily require
independent directors. Companies may choose between traditional two-tier
board and the new one-tier board structure, while most companies go for the
former. 59 For companies choosing the two-tier board, there is no
requirement of independent directors at all; the only relevant requirement is
that such companies must have more than three statutory supervisors, while
at least half of them must be “outside” statutory supervisors. For companies
choosing the one-tier board, their boards must establish audit committee,
nominating committee and compensation committee. Each committee must
have at least three members, and the majority must be “outside” directors
(note that the definition of “outside” is different with that of
“independent”).60 Due to this requirement, this type of company must have
at least two “outside” directors. The real regulation of independent directors
in Japan appears in the parallel Tokyo Stock Exchange’s Security Listing
Regulation. It requires all listed companies to appoint either one
independent director or one independent statutory supervisor. In practice,
most Japanese companies opt for independent statutory supervisors,
rendering independent directors rarely seen in Japan. Even for companies
adopting independent directors, the seats are relatively limited.61
The Reform Act of Companies Act in 2014 imposes additional
requirements. Firstly, it revises the definition of “outside directors” and
57 See generally Clifford G. Holderness, The Myth of Diffuse Ownership in the United States,
22:4 REV. FIN. STUDIES 1377 (2009).
58 KRAAKMAN, supra note 7, at 86.
59 It is reported that less than 3% of companies choose the new model. For a
introduction of Japanese independent directors, see generally Chien-Chung Lin, The Japanese
Independent Directors Mechanism Revisited: The Corporate Law Setting, Current Status and Its
Explanations, 24 TEMPLE INT’L & COMP. L. J. 65 (2010).
60 The definition of “outside” directors here refers to directors who have not
served as executives, officers, supervisors or employees of the company and have not
provided any service or been major client or trading partner in the company. Such definition
merely focuses on the directors’ absence of business ties with the company, without any
regard to the ties with shareholders or management. Ferrarini & Filippelli, supra note 7, at 18.
61 Ferrarini & Filippelli, supra note 7, at 21.
16 aligns it with the global standard definition of “independent directors.”
Most importantly, it adopts a soft law “comply-or -explain” approach to
introduce independent directors. All listed companies, regardless adopting
one-tier or two-tier board, who fail to have one outside (which is equivalent
to independent) director on their board must disclose in their annual report
why appointing an outside director is unreasonable for that company. This
appears to be a very modest reform, considering that independent directors
remain merely recommended and the recommended number of independent
director is merely one.
b.
Taiwan: A Slow Latecomer
Ownership structure in Taiwan is mainly concentrated. The principal
agency problem thus is the Type II Agency Problem featured by the minority
shareholders vis-à-vis controlling shareholder conflict. In 2006, Taiwan
introduced independent directors in a progressive manner: only designated
public companies designated by the competent authority (such as financial
firms or leading companies) are required to have independent directors.62
Independence here refers to the possession of professional knowledge as
well as absence of direct or indirect interest in the company.63 For those
designated companies, the number of independent directors should be no
less than one-fifth of board seats.64 Starting from 2014, however, Taiwan’s
Securities and Futures Bureau expanded the application scope and
designated all listed and over-the-counter companies to be subject to this
one-fifth rule. Independent directors thus become a must for public
companies in Taiwan.65
Taiwan also has unique rules governing the related board subcommittees. For audit committees, only financial companies and companies
with more than specified capital are required to establish audit committees
comprised entirely of independent directors. 66
For compensation
committees, since 2011 all listed and over-the-counter companies are
required to establish compensation committees.67 The committee members
must satisfy the standard independence requirement, but, interestingly, these
Taiwanese Securities Exchange Act, Art. 14-2(1).
Id. Art. 14-2.
64 Id.
65 Some preliminary empirical studies have found that independent directors
correlate to a better corporate performance. See generally Tsai-Yuan Lin & Min-Yen Chang,
Impact of an Independent Director System on a Board of Directors and the System’s Relation to Corporate
Performance: Case Study of Listed Companies in Taiwan, 11:1 INVESTMENT MGMT. & FIN.
INNOVATIONS 56 (2014); Chin-Jung Luan & Ming-Je Tang, Where is Independent Director
Efficacy?, 15:4 CORP. GOVERNANCE: AN INT’L REV. 636 (2007).
66 Taiwanese Securities Exchange Act, Art. 14-4.
67 Id. Art. 14-6.
62
63
17
members need not be board members.68 For nominating committees, on the
other hand, so far no statutes in Taiwan mandate its establishment and its
independence.
c.
China: A Masked Latecomer
Ownership structure in China is featured by state ownership in the
sense that the state is the dominant shareholder in many listing companies.69
The agency problem thus becomes more complicated. Public companies are
not only plagued by the Type II agency problem caused by the presence of
controlling shareholder; moreover, such controlling shareholder is the state
whose primary concern is not necessarily the financial returns, but rather the
implementation of other state policies, social policies, or political initiatives.70
China has introduced independent directors as part of its corporate
governance reform. 71 Its Company Law mandates listing companies to
establish independent directors without specifying further details. 72 The
detailed regulations are mainly stipulated in the Guidelines for Introducing
Independent Directors to the Board of Directors of Listed Companies
issued by the Chinese Securities Regulatory Commission (the “CSRC”) in
2001 (the “2001 Guideline”). According to the 2011 Guideline, the board of
listing companies in China shall have at least a third of independent
members. 73 Independence is defined by reference to family, social or
financial connections with the corporation and its large shareholders
(referring to shareholders holding 1% or more shares).74 In addition, China
also adopts the European “comply-or-explain” approach for adopting
independent directors, and according to its Listing Companies Corporate
Governance Code, audit committee, nominating committee and
compensation committee are all recommended to have majority independent
directors.75 The board of directors, board of supervisors and shareholder(s)
owning 1% or more of the company’s shares may nominate candidates of
independent directors for the shareholders’ meeting’s election, subject to the
68 Regulations Governing the Appointment and Exercise of Powers by the
Remuneration Committee of a Company Whose Stock is Listed on the Stock Exchange or
Traded Over the Counter, Arts. 5 and 6.
69 Kan Zhang, Corporate Governance in China: How does the State Influence its Own
Enterprises, 9 INT’L L. & MNG’T REV. 112, 121 (2013). It is reported that over 260 companies
controlled by the central enterprises have their stock listed as A-shares in Shanghai or
Shenzhen with market capitalization of 56% of the A-share market.
70 Karmel, supra note 7, at 802-03, 805-09.
71 For an introduction, see generally Chien-Chung Lin, The Chinese Independent Director
Mechanism under Changing Macro-Economic Settings: A Review of Its First Decade and Two Possible
Models for the Future, 1:2 AM. U. BUS. L. REV. 263 (2012).
72 Chinese Company Law, Art. 123.
73 2001 Guideline, Art. 1(3).
74 Id. Arts. 2 and 3.
75 Chinese Listing Companies Corporate Governance Code, Art. 52.
18 CSRC’s scrutiny of eligibility.76 In reality, however, independent directors are
often selected by controlling shareholders, instead of self-elected or selected
through the board.77
D.
Summary
The above comparison demonstrates the polysemy of independent
directors in the current state. On the one hand, succumbed to the pressure
of globalization, most countries learn from the United States and United
Kingdom and introduce independent directors to signal their determination
in improving corporate governance. On the other hand, in these latecomer
countries, independent directors are implemented in a different manner (for
instance, most of them omit the majority requirement), resulting in the
current polysemy of independent directors.78
III. REVISITING THE RATIONALE BEHIND THE FEVER FOR
INDEPENDENT DIRECTORS
A.
Debate about Board Independence Requirement
Many empirical and critical studies have indicated that the effect of
independent directors on improving companies’ performance is unclear.
Some studies found merits of independent directors79 while some deny that.80
How to interpret these mixed findings remains unsettled yet. Critics of
independent directors argue that independence requirement in fact brings
negative implications to the board due to several reasons.81 The first thing is
Id. Art. 4(1) and (3).
Lin, supra note 71, at 291.
78 Some commentators explain such convergence and divergence in independent
directors as caused by inefficient convergence which is not based on efficiency but on fads
and fashions. See Gevurtz, supra note 1, at 496-500.
79 See e.g., Jay Dahya et al., Dominant Shareholders, Corporate Boards, and Corporate Value:
A Cross-country Analysis, 87 J. FIN. ECON. 73 (2008); Jay Dahya & John J. McConnell, Board
Composition, Corporate Performance, and the Cadbury Committee Recommendation, 42:3 J. FIN. &
QUANTITATIVE ANALYSIS 535 (2007); Hatice Uzun et al., Board Composition and Corporate
Fraud, 60:3 FIN. ANALYSIS J. 33 (2004).
80 The most frequently cited study was made by Bhagat and Black in 2002, which
found no correlation between board independence and firms’ long-term performance. See
generally Sanjai Bhagat & Bernard Black, The Non-Correlation between Board Independence and Longterm Firm Performance, 27 J. Corp. L. 231, 233 (2002). See also Jill E. Fisch, The New Federal
Regulation of Corporate Governance, 28 HARV. J. L. & PUB. POL’Y 39, 41 (2004); Sanjai Bhagat et
al., The Promise and Peril of Corporate Governance Indices, 108 COLUM. L. REV. 1803 (2008).
81 For a summary of critics of independent directors, see generally Stephen M.
Bainbridge, A Critique of the NYSE’s Director Independence Listing Standards (UCLA School of
Law, Research Paper No. 02-15, 2002). See also Usha Rodrigues, The Fetishization of
76
77
19
about capacity: independence requirement makes it difficult for companies to
select directors having sufficient expertise and knowledge.82 The second
thing is about information. Independence implicates a lower information level:
most independent directors perform their missions on a part-time basis and
lacks company-specific knowledge and information; therefore the more
independent the directors are, the more dependent they are on the executives
for the data and information, which narrows the board’s source of
information and places the CEO in a position to manipulate the board.83
The third thing is about incentive. Except some reputational and moral
constraints, independent directors are barely incentivized to faithfully
perform its task. Therefore, independent directors often offer only limited
dedication in their missions and are less incentivized to perform their jobs
seriously.84 The fourth thing is about chemistry. The board is not just about
supervision; it also serves to work with the management on many crucial
matters collegially. The presence of independent directors perceived to be a
supervisor might harm the trust between board and management and lead to
adversarial relation.85 The final thing is about structural bias. It is observed
that once an independent director is selected into a board, he/she tends to
adapt to the board culture rather than challenge it in shareholders’ interest.86
In the critics’ opinion, independence is a doubled-edged blade; but overall
speaking, this blade cuts off what matters more for a board member.
The typical response made by proponents of independent directors is
that such negative finding is caused instead by inadequate or ill-designed
Independence, 33:2 J. CORP. L. 447, 458-63 (2008); Sharpe, supra note 12, at 285-91; Fairfax,
supra note 20, at 145-74.
82 See e.g., Grant Kirkpatrick, The Corporate Governance Lessons from the Financial Crisis,
2009:1 FIN. MARKET TRENDS 1, 21-23 (2009); Klaus J. Hopt, Better Governance of Financial
Institutions, 30, 60 (Eur. Corp. Governance Inst. – Law, Working Paper No. 207, 2013);
Renee Adams, Governance and the Financial Crisis, 12:1 INT’L REV. FIN. 7, 34 (2012); Monika
Marcinkowska, Corporate Governance in Banks: Problems and Remedies, 2 FIN. ASSETS &
INVESTING 47, 51 (2012); Renee B. Adams & Hamid Mehran, Bank Board Structure and
Performance: Evidence for Large Bank Holding Companies, 21(2) J. FIN. INTERMEDIATION 243
(2012) (finding empirical evidence that board independence is unrelated to banks’
performance).
83 Fairfax, supra note 20, at 161-64; Leyens, supra note 30, at 190; Jaap Winter, The
Financial Crisis: Does Good Corporate Governance Matter and How to Achieve It?, 7 (Duisenberg
School Fin. Pol’y, Paper No. 4, 2011); Michael E. Murphy, Assuring Responsible Risk
Management in Banking: The Corporate Governance Dimension, 36 DEL. J. CORP. L. 121, 145 (2011).
Sharpe thus highlights the importance for the board to have independent information
channels in order to perform its task. Sharpe, supra note 12, at 307-311.
84 It is argued that rules or codes fail to ensure that independent directors have the
motivation to monitor the management effectively. Clarke, Three Concepts of the Independent
Director, 32 DEL. J. CORP. L. 73, 94 (2007). See also Ringe, supra note 5, at 417-18; Fairfax, id.
at 149.
85 Bainbridge, supra note 81, at 21-22.
86 See Fairfax, supra note 20, at 161.
20 independence requirement. 87 For instance, it is argued that current
independence requirement is incomplete since it merely focuses on family
and business relationship but neglects other social ties.88 In addition, the
appointment process of independent directors is often under the
management’s or controlling shareholder’s capture, rendering it incapable of
ensuring true independence.89 For these proponents, it is not the idea of
independence requirement per se that goes wrong, but the implementation of
this very idea turns wrong.
Despite these controversies, independent directors are widelyimplemented in most major countries. Such fever appears fading after the
outbreak of global financial crisis, at least for financial institutions.90 The
European Union, for instance, has gradually shifted its focus away from
independence to capacity, and the rationale behind is that independence
requirement makes it difficult for companies to select directors having
sufficient expertise and knowledge. 91 Admittedly, there is a growing
consensus that independent directors are not the panacea; other attributes of
corporate boards, such as expertise, diversity, access to information, decision
procedures, etc., are of equal importance. Nevertheless, the increased focus
on those other attributes does not necessarily dilute the importance of
independence. This can be at least implied by the continued efforts to
enhance the compensation committee’s independence requirement in the
United States and the European Union.92 Accordingly, a more balanced
observation of the post-crisis development should be: the new focus on
other attributes (among them expertise is the most salient one) goes together
See e.g., Donald C. Langevoort, The Human Nature of Corporate Boards: Law, Norms,
and the Unintended Consequences of Independence and Accountability, 89 GEO. L.J. 797, 799 (2001);
Charles M. Elson, Enron and the Necessity of the Objective Proximate Monitor, 89 CORNELL L. REV.
496, 502 (2004).
88 See e.g., Federick Tung, The Puzzle of Independent Directors: New Learning, 91 BOS. U.
L. REV. 1175, 1178- 85 (2011). It is found, for instance, that the existence of common
backgrounds between CEOs and their nominally independent directors may affect directors’
monitoring. See generally Byoung-Hyoun Hwang & Seoyoung Kim, It Pays to Have Friends, 93 J.
FIN. ECON. 138 (2009). It is also found that a powerful independent board which is more
socially-networked correlates with higher shareholder valuations, indicating that a more
socially independent board might be able to better serve the independent directors’
monitoring role. See generally Kathy Fogel et al., Powerful Independent Directors (Eur. Corp.
Governance Inst. – Fin., Working Paper No. 404/2014, 2014).
89 Davies & Hopt, supra note 33, at 322; Molitor, supra note 23, at 104-08.
90 Davies & Hopt, id. at 322-23, 326.
91 The EU Green Paper 2011, for instance does not touch upon independence as a
discussion topic. Instead, independence is at the equal significance with other characteristics,
such as merit, professional qualifications, experience, personal qualities, diversity, etc. EU
Commission, Green Paper, 2011 COM (2011) 164, p.5 [hereinafter EU Green Paper 2011].
92 For the United States, Dodd Frank Act requires listing companies’ compensation
committees to be comprised entirely of independent directors; see Dodd-Frank Act, §952.
Similarly, the European Commission also adopted the Capital Requirements Directive IV,
entering into effect on July 17, 2013, which provides for the requirement of an independent
remuneration committee in its article 95.
87
21
with the conventional attention to independence.
Independence
requirement of the board remains a critical issue in practice.93 The question
then is: how should we design the independence requirement in order to
formulate a better board practice?
B.
a.
Decoding the Concept of Independence
The Board’s Supervisory and Advisory Role and Independent Directors
Before commenting on independent directors, perhaps a critical
question should be asked first: what should “independence” here mean?
Most crucially, does the current independence requirement implemented in
many countries meet its normative expectation? To answer these questions,
the rationale behind independent directors should be firstly clarified. For the
purpose of analysis, I will start with the Anglo-Saxon model for a moment
considering that it is the origin of independent directors.
Notwithstanding the debate between director primacy and
shareholders empowerment movement,94 the greatest common divisor is that
the board should act in the interest of the company, in particular the longterm interest of the company.95 To perform this mission, the board generally
undertakes two main functions: a supervisory one and an advisory one.96 In
regards of the supervisory function, although in most countries the board is
statutorily assigned the supreme managerial authority to operate companies,
in practice such managerial role is largely delegated to the management team
(often times due to the impracticability to hold frequent board meeting).
Thus, it is the management that possesses real authority to handle companies’
daily operational affairs, while the board is left with limited managerial role
In fact, some scholars believe its importance even increases after the Financial
Crisis. Ringe, supra note 5, at 405.
94 For arguments against shareholder empowerment, see e.g., Leo E. Strine, Jr., Can
We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of
Corporate Law, 114 COLUM. L. REV. 449 (2014); Leo E. Strine, Jr., One Fundamental Corporate
Governance Question We Face: Can Corporations be Managed for the Long Term Unless Their Powerful
Electorates Also Act and Think Long Term, 66 BUS. LAW. 1 (2010). For counter-arguments, see
e.g., Lucian A. Bebchuk, The Myth that Insulating Boards Serves Long-term Value, 113 COLUM. L.
REV. 1637 (2013); Mark J. Roe, Corporate Short-Termism – In the Boardroom and in the Courtroom
(Eur. Corp. Governance Inst. – Law, Working Paper No. 210/2013, 2013).
95 Even proponents of director primacy admit that shareholder primacy should
dominate the end of firms; see e.g., Stephen M. Bainbridge, Director Primacy: The Means and
Ends of Corporate Governance, 57 NW. U. L. REV. 547 (2003).
96 In addition to these two main functions, the board also undertakes certain other
functions. Another major function often mentioned is the networking function. Other
functions include some managerial functions: the board indeed retains some managerial
functions, in particular related to companies’ material changes such as mergers and
acquisition. For a summary of the account of board’s supervisory role, advisory role and
networking role, see generally Sharpe, supra note 12, at 269-74.
93
22 except for high-level strategic affairs.97 The board, however, preserves the
power to supervise managerial performance, in particular through its power
to appoint and remove them and decide their compensation. In this context,
the board is not a company’s operator in effect; rather, it is a company’s
supervisor that monitors the performance of companies’ de facto operator (i.e.
the management).98 To accommodate with this reality, corporate theories
have gradually modified their understanding of the board’s role and
reconsidered it as companies’ supervisor of the firm’s financial affairs and
other managerial conflict-of-interest affairs (such as nomination,
compensation, litigation, etc.).99
Another important role of the board nowadays is the advisory one.
Instead of supervising managers, which is potentially confrontational, the
board’s advisory role focuses on a harmonized aspect. Managements could
be plagued by group tendency; thus it might tend to recruit people with
similar background, value, culture and thinking. Such group behavior might
result in group thinking and thus make the management lack of selfreflection capacity and unable to accommodate itself to the world’s changes.
To reduce this tendency, the board can serve as an advisor to the
management and bring in diversified thinking. Therefore, in addition to
monitoring the performance of management, the board also provides
different input into the managerial decision-making process, which is
positive for a company’s overall performance.
Independence requirement should be more associated with the
board’s supervisory role than the advisory one. To provide meaningful
advice to the management so as to prevent group thinking trap, the required
key qualities are diversity, expertise and trust, while independence is not a
must. As long as the board has capacity to provide different input for the
management, it does not matter if the members maintain close tie with the
management or not.100 To the contrary, the affinity between the board and
the management team might somehow facilitate the board’s advisory role.
To break up the group thinking of the management needs the latter’s trust.
An independent board having less connection with the management might
result in the latter’s less comfort in taking the former’s advice, which is
unhelpful for establishing smooth communication between the two for
Even for these strategic affairs, it is generally the case that the senior
management prepares the draft proposals for the board’s confirmation. Davies & Hopt,
supra note 33, at 314.
98 This is in particular the case for one-tier board, in which case the board’s primary
role is to monitor the management. Id. at 311.
99 According to Ferrarini and Filippelli, the emphasis on the board’s supervisory
role is largely affected by Professor Eisenberg’s book in 1976 which identified the board’s
main function as monitoring of corporate management. Ferrarini & Filippelli, supra note 7,
at 5. See also MELVIN A. EISENBERG, THE STRUCTURE OF THE CORPORATION: A LEGAL
ANALYSIS (1976).
100 In addition, the company might do better if it simply hires consultants or other
experts. Clarke, supra note 84, at 81.
97
23
formulating considered decisions. Accordingly, independent directors
should do less with the advisory function. In contrast, if instead focusing on
the board’s supervisory function, requiring independence is logically
reasonable. After all, to establish a meaningful supervision, the players
should certainly be prevented from acting as the referee at the same time.
Accordingly, it is the board’s supervisory role based on the agency theory
that awards justification to independent directors.101
Critics often denounce independent directors by arguing that an
over-emphasis of the board’s supervisory role compromises its advisory role
and results in confrontation between the board and management, which in
the end retards efficient decision-making process.102 This argument certainly
deserves some merits,103 but it also risks over-deemphasizing the board’s
supervisory role. It is a dangerous move to argue to the extreme that the
management team needs no supervision at all. After all, the major focus of
corporate laws is to control the agency problem caused by the separation of
ownership and management and the potential abuse of managerial power
arisen therefrom.104 It is one thing to assert that imposing such control
could incur some costs, which thus justifies a lower degree of control in
order to achieve optimal balance after a cost-and-benefit analysis.105 Arguing
that the management needs no meaningful supervision from the board,
however, is another. Absent solid empirical data supporting that a firm
performs better when its management is subject to no board’s supervision,
board’s supervision of the management is still needed.106 As long as such
101 Professor Gordon also supports this view and has elaborated on the correlation
between the rise of independent directors and the shift to the monitoring board. Gordon,
supra note 12. For literatures stressing independent directors’ monitoring role, see also Clarke,
supra note 84, at 84; Gutierrez & Saez, supra note 7, at 68; Fairfax, supra note 20, at 138.
102 For instance, it is indicated that if independent directors repeatedly challenge the
judgments of a CEO, the CEO will lose his authority which could be important for the
CEO to undertake the leadership in the company. Karmel, supra note 7, at 790.
103 In particular for some cases where companies incur less severe agency problems
due to, for example, strong capital or product market competition, strong internal and
external market for managerial services, strong market for corporate control, functioning
incentive compensation systems, etc., which reduces the need for the board’s supervisory
role. See Bainbridge, supra note 88, at 22-24.
104 KRAAKMAN, supra note 7, at 35-37. (stating that “the normative goal of
advancing aggregate social welfare is generally equivalent to searching for optimal solutions
to the corporation’s agency problems, in the sense of finding solutions that maximize the
aggregate welfare of the parties involved”)
105 Michael Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency
Costs, and Ownership Structure, in A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS,
AND ORGANIZATIONAL FORMS 83, 106 (Michael C. Jensen, 2003).
106 In fact, Hwang and Kim did find that the existence of social ties between the
management and the independent directors weakens the monitoring role of independent
directors but does not help enhancing the firm’s performance. They found that a socially
dependent board is associated with excess compensation, while excess compensation has a
negative correlation with subsequent operating performance, which suggests that a
dependent board is weak in monitoring the management’s compensation while fails to
24 supervision remains needed, some form of independence requirement is
necessary in order to ensure the separation of supervisee from the supervisor.
Accordingly, the needs of independent directors should be presumed, and
the real question is how to harmonize independent directors’ supervisory
role with the board’s remaining functions through other devices or
designs.107
b.
Redefining Independence Requirement from a Supervision-based Perspective
From the above clarification, it appears clear that independent
directors are to serve the supervisory need of firms. In particular,
independence requirement aims to cut the tie between the board and a
company’s operators in order to ensure meaningful supervision. This
naturally leads to a very general definition of independence, that is,
independent directors should be independent of a company’s operators.
To further substantiate this general definition requires a clarification
of who this “supervisee” exactly is. It should largely depend on a company’s
ownership structure.108 For firms whose ownership structure is dispersed
(i.e., absent a dominant shareholder), the operator is typically the managers.
In such case, the agency problem incurred is the Type I agency problem
featured by conflicts between shareholder and managers. The principal that
independent directors should represent is shareholders, and of whom
independent directors should be independent is the management. In contrast,
for firms whose ownership structure is concentrated (i.e. with a controlling
shareholder), the operator is instead the controlling shareholder itself, while
managers are subject to the controlling shareholder’s designation and
removal and thus not the de facto operator. In such case, the agency
problem incurred is the Type II agency problem featured by conflicts
between minority shareholder and the controlling shareholder. The principal
that independent directors should represent now is the minority shareholders,
and of whom independent directors should be independent is the controlling
shareholder. 109 Accordingly, depending on the ownership structure of a
improve the firm performance. Hwang & Kim, supra note 88. Duchin et al., also found that
it is generally the directors’ independence, rather than expertise, that affects the firm
performance, suggesting that independent directors’ monitoring role could be more
important than the advisory role. Ran Danchin et al., When are Outside Directors Effective?, 96 J.
FIN. ECON. 195 (2010).
107 And this leads to the issue of how to design a board composition rule, which
will be addressed in Section IV of this paper.
108 For similar observation, see generally Ringe, supra note 5, at 413-15; Gutierrez &
Saez, supra note 7.
109 As a supplementary note, regardless of which ownership structure it is,
independent directors should be independent of their company itself as well since the
company is under the operator’s control (be it under the manager’s or the controlling
shareholder’s) and could be employed by the operator as a vehicle to create tie with the
independent directors.
25
company, the target that independent directors should be independent of
differs. This justifies the polysemy of independent directors.
IV. EFFORTS TO BE MADE FOR REFORMING CURRENT INDEPENDENT
DIRECTOR REGIME
A.
Incomplete Independence Requirement in its Current State
Although the above definition appears simple, many countries fail to
follow this guideline.110 As having been noticed, independence requirement
in the real world fails to guarantee truly independent directors. What current
laws, rules or codes maintained in different countries typically focus on are
business ties, financial ties and family ties of the independent directors with
the firm and the supervisee; they, however, fail to address other ties such as
personal ties or social ties. The implication is that most independence
requirement can be easily circumvented. For instance, a director who is the
college best friend with the CEO but has no family relation and business
connection with the firm, the management team and the controlling
shareholder can satisfy the independence requirement. Another director
who co-hosts the alumni foundation with the controlling shareholder can
also meet the independence requirement if he has no family, business or
financial tie with the supervisee. While most jurisdictions’ statutes do
provide a general definition of “independence” which intends to serve a
catch-all clause covering other instances, it turns out that these vaguelydefined independence requirements are not applied strictly in reality.111 In
practice, accordingly, firms tend to appoint these “de jure” independent
candidates who have “de facto” close tie with the firm to serve independent
directors so as to have someone “communicable” to serve the supervisory
role. To be fair, the motive behind such practice is not completely evil: what
the supervisee pursues could be simply a smooth and harmonized
supervisor-supervisee relationship in order to reduce confrontation and
enhance decisional efficiency. Such practice caused by the statutory
loophole, however, does compromise the board’s check-and-balance role
which is required under the agency theory.
110 For instance, as mentioned above, independence requirement in the United
States only focuses on the ties of independent directors with the company and its managers
but neglects that with the controlling shareholder. This leaves those concentrated
companies in the United States, though with fewer numbers, subject to no independent
directors requirement and leaves these companies’ minority shareholders less protected.
111 For instance, in the United Kingdom and Continental Europe, whether a
director is independent is determined by the board, while we can hardly expect the board
itself to adopt a stringent criterion. In the United States, the Delaware Supreme Court even
explicitly declares that the presence of social ties is generally insufficient to discredit a
director’s independence. See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart,
845 A.2d 1040, 1051-52 (Del. 2004).
26 Two possible reasons might explain this widespread incompleteness.
The first reason relates to a functional one. It could be argued that,
functionally speaking, it is unnecessary to cut off all ties between the
supervisee and independent directors. As having been raised, the board’s
complete independence of the supervisee may increase the costs of
supervisor- supervisee communication and thereby cause the firm’s decisionmaking process inefficient. Independence requirement also compromises
the board’s expertise and capacity.
Accordingly, a comprehensive
independence requirement cutting off all ties between independent directors
and supervisees is not a cost-efficient approach. The second reason relates
to a practical one. It could be argued that, in modern society, each individual
connects with others in so many-fold and in so complicated ways, rendering
it impossible to exhaust all types of ties between independent directors and
the supervisee and prohibit them.
Therefore, enumerating some
representative type of ties instead of exhausting it is a reasonable
compromise; it is not perfect, but an optimal second-best.112
The functional reason appears less appealing. Again, if it is taken
that the agency problem internal to companies needs to be controlled, and if
it is taken that the supervision by a group of directors disconnected with the
firm’s operator is a logical way to control such agency problem, the
independence requirement should be designed in a complete manner that is
able to guarantee such disconnection. In other words, unless the board’s
supervision of the operator is proved unnecessary, the supervisory role of
the board (which is the board’s major role) should not be comprised.
Harmony cannot water down the necessary independence requirement. So
are the case of expertise and capacity. While these qualities are important for
formulating an effective board, independence matters as well. The way to
address the potential conflict between expertise and independence is to think
about a balanced board composition rule, which is now under contemplation
by the post-crisis reform in Europe.113 However, as long as independence
still plays a part in corporate governance, laws and codes should pursue true
independence.
The practical reason, on the other hand, makes some sense. The
difficulty to define all types of ties between independent directors and the
supervisee is well taken. It is expectable that once legislators add a new
prohibitive tie, the supervisee will spot the loophole and circumvent it.
Nevertheless, such legislative limits could be due to the wrong legislative
112 Tung, for instance, believes that there are limits to our capacity to operationalize
independence ex ante. Tung, supra note 88, at 1185. The alternative could be an ex post
approach, see e.g., Tung, id. at 1185; See also Clarke, supra note 84, at 108-11. For a
comprehensive analysis of a potential ex post approach, see generally Rodrigues, supra note 81.
113 As mentioned above, in Europe, the corporate governance reform after the
Financial Crisis starts to pay increasing emphasis on directors’ expertise and capacity.
However, the independence requirement is not significantly compromised.
27
techniques that legislators employ for defining independence. 114 That
independence is difficult to be defined conceptually does not mean that the
very idea of independence cannot be specified in other manners. That the
ties between independent directors and the supervisee are in many
dimensions does not mean that these ties cannot be cut off altogether.
B.
Ensuring the Independence through a Process-based Approach
Here I propose an approach to define the tie between independent
directors and supervisees, which is a process-based approach rather than a
concept-based approach. As mentioned above, independent directors are to
control modern companies’ agency problems: they represent the principal’s
interest of the principal (be it shareholders’ or minority shareholders’) and
supervise the agent’s behaviors (be it managers’ or the controlling
shareholder’s). Following this rationale, the most appropriate party entitled
to appoint independent directors should be the principal. The principal
should be granted full authority to nominate and elect candidates they trust
to serve independent directors and represent their interests. In addition, the
process so designed should be able to prevent the agent (i.e. the supervisee)
from interfering in the principal’s nomination and election of independent
directors in order to prevent the players from designating the referee.
Through such process, it guarantees the principal’s endorsement awarded to
the appointed independent directors, and the independent directors so
appointed, regardless their profile or connection with the supervisee, obtain
legitimacy to supervise the agent. This approach could also improve
independent directors’ accountability to the principals. 115 Under this
approach, what warrants the independence of independent directors is not
the enumerated qualification requirements imposed upon the candidates, but
the appointment process itself.
Mysteriously, independent director regime in most countries goes in
the completely opposite direction.
a.
The Overlooked Nomination and Election Process in Its Current State
In the United States and United Kingdom, where dispersed
ownership is common, the election of independent directors is subject to
shareholders’ votes. In its appearance, such election process allows the
principal (i.e. shareholders) to select and appoint their representatives to
For instance, it has been noted that the concept-based approach as adopted by
most countries for defining independence on the basis of a negative list cannot ensure that
independent actions will be followed. Le Mire & Gilligan, supra note 7, at 450-52.
115 Increasing literatures have emphasized the important role of independent
directors’ accountability in improving the board’s monitoring function. See e.g., Ronald J.
Gilson & Reinier Kraakman, Reinventing the Outside Director: An Agenda for Institutional Investors,
43:4 STAN. L. REV. 863 (1991); Gutierrez & Saez, supra note 7, at 87-90; Ringe, supra note 5,
at 421-24.
114
28 supervise the agent (i.e. managers), which meets the purpose of having
independent directors. In practice, however, it turns out to be only laws on
the book. The devil hidden in the details here is the nomination process, which
dictates the candidates that dispersed shareholders can elect. Taking the
United States for instance, nomination of directors (including independent
directors) generally belongs to the authority of nominating committee which
is now required to be comprised entirely of independent directors.
Nevertheless, absent a complete enough definition of independent directors
in the first place, independent directors in the United States nowadays are
not necessarily independent; thus the nominating committee is not
necessarily independent as well. It therefore turns out to be that the
management captures the nomination of directors. Shareholders’ right to
elect directors, including independent directors, thus is merely a nominal one.
Despite the presence of qualification requirement for independent directors,
the nomination and election process can hardly produce a group of
independent directors who are free from the management’s capture and truly
represent the interest of shareholders.
In Continental Europe, where concentrated ownership is more
common, situation is worse because both the election and nomination
process encounter some failures. In regards of the election process, in most
countries the right to elect independent directors belongs to all shareholders,
including the controlling shareholder. Since the controlling shareholder
owns more shares of the company and thus more votes, its votes
unsurprisingly outnumber minority shareholders’ votes and thereby
dominate the final directorate election result.116 Such election process in the
first place fails to guarantee the independence of independent directors.
Moreover, the nomination process fails to guarantee independence as well.
Worse than that in the United States, the nomination of directorate
candidates in most Continental European countries is not exclusive to the
nominating committee.
Even though the European Commission
recommends the establishment of nominating committee, in practice the
nominating committee is merely in charge of “recommending” directorate
candidates to the board. In other words, the nominating committee merely
plays a preparatory and advisory role, and it is the board (effectively
controlled by the controlling shareholder) that has the final say over the list
of candidates. 117 Several drawbacks exist in this process: First, the
nominating committee itself is not necessarily independent in the first place.
Some countries, like Germany, do not impose independence requirement on
the nominating committee’s members; even if such requirement is present,
the committee’s degree of independence remains questionable since the
controlling shareholder controls the election result of independent directors.
Second, effectively it remains the board (under the control of the controlling
shareholder) rather than the nominating committee that decides the final list
116
117
Ferrarini & Filippelli, supra note 7, at 18.
Id. at 25.
29
of directorate candidates. In most cases, the nominating committee,
captured by the controlling shareholder, only submits to the board names of
candidates suggested by the controlling shareholder. 118 Under such
nomination and election process, minority shareholders can hardly have a
group of independent directors truly representing their interests.
One qualification should be added here. In either Anglo-Saxon
countries or Continental European countries, related corporate laws do not
eliminate the principal’s opportunity to nominate and elect their own group
of independent directors. In most countries, shareholders (or at least
qualified minority shareholders) preserve their rights to nominate directorate
candidates for competing with the slate nominated by the board. 119 If
dispersed shareholders or minority shareholders are large and determined
enough, they are possible to outvote the company’s slate and make their
preferred candidates to the board. Such opportunity, however, is normally
too costly. Dispersed shareholders or minority shareholders are typically
plagued by the collective action problem, which is exactly why there is
agency problem in modern corporations and why independent directors
system needs to step in. Independent directors aim to address this problem
by statutorily guaranteeing the seats for someone who presumably represents
the principal’s interest. Permitting the agent’s interference in the election
and nomination process, however, compromises this very idea.
b.
Proposing a Process-based Approach for Supplementing the Current Conceptbased Approach
To improve current independence requirements, I propose that the
directorate nomination and election process needs to undergo some reforms.
Specifically, my general idea is that in order to ensure true independence, the
nomination and election process should be designed in a manner that
precludes the supervisee’s interference as possible.
i.
Dispersed Companies: A Nominating Committee-Centered Reform
is Warranted
For companies with dispersed ownership, I propose that what needs
to be improved is the nomination process, in particular the function of
nominating committees. Admittedly, some countries do have required or
recommended nominating committees to be comprised of at least majority
independent directors. Such majority requirement, however, is built on the
incomplete definition of independence; the management remains capturing
the nomination of independent directors, which allows it capable of
nominating candidates who are nominally independent but tied closely with
the management. In the absence of candidates other than those nominated
118
119
Id. at 26.
KRAAKMAN, supra note 7, at 64.
30 by the management, the “independent” directors so appointed remain
captured by the management. The nominating committee so composed can
hardly be expected to nominate candidates who are less captured by the
management.120 In the end it becomes a vicious circle.
To address this dilemma, the nomination process needs reforms.
The reform should start with the understanding that the collective action
problems among dispersed shareholders retard them from forming allies to
nominate and elect their preferred candidates on the board. To reduce this
collective action problem, one thing that laws can do is to facilitate
shareholders’ nomination of their candidates. The nominating committee
can serve the central pivot in this process. Specifically, if in finalizing its list
of directorate candidates, the nominating committee can be free from the
management’s influence and more responsive to shareholders, the
directorate candidates (including the independent director candidates) to be
nominated and so elected will contain more “truly” independent directors.
Nominating their candidates through this nominating committee process is
also less costly for shareholders than going through the whole proxy access
and proxy contest process.
To achieve this ideal scenario, the nominating committee should be
subject to enhanced scrutiny. A number of proposals have noticed the
importance of reforming the nominating committee in improving the
board’s independence as well as protecting shareholders’ interests. Murphy,
for instance, proposes to mandatorily require a shareholder representative on
the nominating committee, under which a costly proxy contest can be
prevented while the nominating committee can serve a vehicle for
shareholder participation on the board. 121 Molitor, on the other hand,
focuses on reforms of the process governing the interaction between the
committee and nominating shareholders in the United States, including
defining the shareholders’ eligibility to propose candidates for the
committee’s consideration, obliging the nominating shareholder to disclose
related information to the committee and obliging the nominating committee
to explain to the nomination shareholder of its rejection of the nominee,
etc. 122 These are all proposals worth considered for reforming the
nomination process.
In addition to these proposals, improving the disclosure of
nominating committees’ decision-making process should be useful as well.123
120 Kaczmarek et al., have demonstrated that the presence of CEO in the
nominating committee has influence on the overall level of diversity on a board. See generally
Szymon Kaczmarek et al., Antecedents of Board Composition: The Role of Nomination Committees,
20(5) CORP. GOV.: AN INT’L REV. 474 (2012).
121 Murphy, supra note 21, at 184-88. In fact, Murphy also proposes to reserve some
shareholder seats on the board, which resembles the Italian model. Murphy, id. at 181-83.
122 Molitor, supra note 23, at 161-76.
123 The U.S. SEC, for instance, has adopted disclosure rules related to nominating
committees. See generally Disclosure Regarding Nominating Committee Functions, Exchange
Act Release No. 48825 (Nov. 24, 2003).
31
For instance, to make the nomination process more transparent, requiring
the nominating committee to disclose to shareholders the recommender or
sources of each nominee might be worth considered. Shareholders should
have a solid ground to claim that they are entitled to this piece of
information and know if a given nominee comes from the management’s
recommendation, the nominating committee’s own recruitment, or other
shareholders’ endorsement in order to make informed voting decisions.124
This disclosure requirement should help shareholders, as voters, to
understand the representativeness of each nominee, in particular for whose
interest each nominee might stand for. It can further impose some mental
pressure (not a legal one) on the nominating committee: to demonstrate its
objectivity and impartiality, the nominating committee might be indirectly
incentivized to consider shareholder-nominees and thus become less
captured by the management.
These nomination-related proposals could be subject to a going-toofar critic. One can argue that these proposals might render the nominating
committee excessively captured by shareholders, thereby compromising the
committee’s neutrality, objectivity and profession. To explain why this is a
concern somehow involves the debate between director primacy and
shareholder empowerment.
One related point is a reminder that
shareholders are heterogeneous rather than homogenous.125 For instance,
shareholders may have different investment horizon, rendering some of
them short-termist and some long-termist. Different shareholders may have
different agenda as well: some might focus on financial returns, some on
acquisition of the company, and some on other social issues. Moreover,
shareholders do not bear fiduciary duty to the interest of the company and
other shareholders; therefore no legal rules are available to prevent one
shareholder from pursuing its own interest in sacrifice of other shareholders’
interest. Considering the difference among shareholders, it could be argued
that no individual shareholder is representative enough; instead, the board of
directors, and the nominating committee as entrusted by the board, is at a
better position to represent the interest of the company in collective. In light
of this, nominees recommended and elected by individual shareholders do
not necessarily stand for the interest of shareholders in collective. The board
and the nominating committee should remain free in exercising its own
judgment when deciding the directorate candidates to be nominated, rather
than being captured by individual shareholder.126 Subjecting the nominating
committee to the above mandatory rules or disclosure rules, however, may
impose undue pressure on the nominating committee to nominate
Id. at Part II.A.2.
For a description of different types of conflicts among heterogeneous
shareholders, see Molitor, supra note 23, at 144-49. See also Paul Rose, Common Agency and the
Public Corporation, 63 VAND. L. REV. 1355 (2010); William W. Bratton & Michael L. Wachter,
Shareholders and Social Welfare, 36 SEATTLE U. L. REV. 489 (2013).
126 This is somehow Molitor’s position. See id. at 157. See also Karmel, supra note 7,
at 793-95.
124
125
32 candidates recommended by individual shareholders beyond the needed
number. The list of candidates so created might not be the most proper one.
Nevertheless, such counter-argument sounds less persuasive for at
least two reasons. First, this board-centric argument could be effectively a
mask of managerialism. Note that the board is not a self-existing organ.
Board members either come from the management (as the current practice)
or shareholders. Freeing the nomination process from shareholders’
influence is essentially equivalent to advocating the management’s capture of
the nomination process. If captured by either of the two is its fate, the board
is better to be captured by shareholders considering that the board
undertakes supervisory role and should represent the interest of shareholders.
Second, the above reform proposals do not fundamentally negate the spirit
of director primacy. None of them denies that the nominating committee
should be the one in charge of nomination. The task of nomination remains
the board’s authority (as exercised by the board’s sub-committee) as opposed
to shareholders’. This committee might contain more shareholdernominated committee members, but its inherent authority remains wellpreserved. Most importantly, it remains free to recruit directorate candidates
as it considers appropriate; to the extent that the self-recruiting nominees do
not come from the management’s instruction, they should face less scrutiny.
Accordingly, I do not anticipate that director primacy advocates would resist
the above nominating committee-centered reform proposals.
As a final remark, with a robust nomination process, it is worth
considered how to redefine independence based on a process-based
approach. Instead of looking exclusively at the enumerated negative list, a
process-based approach assesses the independence of a nominee by
additionally examining if the management effectively dominates his/her
nomination and election. To ensure independent directors’ accountability
shareholders, one might argue that independent directors should refer
exclusively to those directors nominated by a shareholder.127 However, if the
independence and neutrality of the nominating committee can be ensured,
one can also consider expanding the scope of independent directors a bit,
which includes as well those directors recruited by the nominating
committee on its own initiative as long as the management does not involve
in the selection process. The bottom line is: directorate candidates who
come from a nomination process dominated by the management should not
be qualified as independent directors.
ii.
Concentrated Companies: Additional Election Reforms are Needed
For companies with concentrated ownership, the reform of
nomination process as mentioned above is similarly needed, except that the
127 This suggestion finds the support from Molitor, who proposes that the
nominating committee should be comprised of directors nominated by a shareholder.
Molitor, supra note 23, at 174.
33
principal that deserves protection is now the minority shareholders. To
improve the nominating committee’s independence, one should consider
mandating minority shareholder representative on the committee, enhancing
the nominating committee’s responsiveness and accountability to nominating
minority shareholders and requiring disclosure of the information related to
the recommenders of each directorate nominee. Future reforms should aim
at reducing the controlling shareholder’s influence in the nomination process
to the minimum while incentivizing minority shareholders’ participation in
the nomination process.
However, the needed reform is more than that. In concentrated
companies, the controlling shareholder, i.e. the supervisee in this context,
not only controls the nomination of independent directors but also the
election process. In the first place, even if related reforms of the nominating
committee are successful in producing a list with adequate number of
independent nominees, the controlling shareholder possesses dominant
voting power to vote them out.128 Moreover, the controlling shareholder’s
dominant voting power also poses a threat to the nominating committee
members: these members require the controlling shareholder’s support in
order to stay in their directorate seats. To secure their positions, they might
have to more or less obey the controlling shareholder’s instruction, which
therefore compromises the independence of nominating committees.
Accordingly, for concentrated companies, reforming only the nomination
process is an incomplete proposal; the directorate election process needs
reforms as well in order to prevent the controlling shareholder from
blocking candidates representing the interest of minority shareholders.
An old-school way to reform the election process within
concentrated companies is to implement the cumulative voting system.
Cumulative voting system refers to a voting system where a shareholder can
distribute among his/her nominees, in any way he/she pleases, a number of
votes equal to the number of her shares times the number of directors to be
elected.129 Under the cumulative voting system, the controlling shareholder’s
voting power decreases as the proportion of its shareholding decreases; thus
minority shareholders at least retains the opportunity to elect some minority
seats of board members.130 It has been cautioned, however, that cumulative
voting might only work in companies with concentrated minority
shareholders. For dispersed minority shareholders, they still suffer from the
collective action problems and thus are unable to group their individual
128 For instance, the controlling shareholder can nominate other candidates to
compete with ones nominated by the nominating committee and use its dominant voting
power in the shareholders’ meeting to vote out those that it disfavors. In the majority voting
system, the controlling shareholder can further exercise its “withhold” option to force them
out.
129 EISENBERG & COX, supra note 23, at 236.
130 For similar observation, see KRAAKMAN, supra note 7, at 90. For a discussion of
other potential ways, such as voting caps, limits of shareholders’ voting rights in excess of
their economic stakes, see KRAAKMAN, id. at 91-92.
34 votes together. In that case they are unable to formulate a competing voting
power in order to benefit from the cumulative voting system.131 Not to
mention that in many countries, the cumulative voting system is merely a
default rule which can be voted out, and in practice most companies’
charters do opt it out.132
Another way to reform the election process is to mandate some
guaranteed seats for independent directors (also known as minority
directors) 133 over whom the controlling shareholder has no voting right.
This approach is rarely adopted so far.134 As mentioned above, however,
Italy recently adopts this rule, which guarantees at least one seat for the
directorate candidate receiving the highest vote from minority shareholders.
It is further mentioned by the EU Green Paper 2011 as a good example of
making the board more accountable to minority shareholders.135 How this
special election rule functions in Italy in practice certainly deserves our
attention. One might further contemplate on if the guaranteed seats for
minority shareholders should be increased to more than one in order to
strengthen the independence of board.136
The counter argument against this proposal could be that the
controlling shareholder, as a shareholder, should deserve equal treatment
with other shareholders, including the voting right. In particular, the
controlling shareholder who pays the most for acquiring the company’s
shares should not be unentitled to voting the board members; otherwise it
will pay without obtaining the control of the company. Critics can also
invoke the Delaware Supreme Court’s holding137 and argue that the inquiry
should focus more on a director’s behaviors rather than on the
circumstances of election. 138 Two arguments, however, may defend this
Italian approach. First, reserving some board seats for minority shareholders
does not conflict with the principle of equal treatment. As long as the
controlling shareholder remains entitled to the number of seats proportional
to its shareholding, it is not yet discriminated. Therefore, the real question is
the number of seats to be reserved to minority shareholders representatives
Clarke, supra note 84, at 80.
KRAAKMAN, supra note 7, at 91.
133 Gutierrez & Saez, supra note 7, at 86.
134 KRAAKMAN, supra note 7, at 90-91.
135 EU Green Paper 2011, supra note 91, at 16.
136 Gutierrez and Saez, for instance, consider this Italian minority director model a
second-best option. Gutierrez & Saez, supra note 7, at 91. At the same time, they also
consider the option which designs independent directors as a “public gatekeeper for the
regulator” who is nominated by the regulator or the stock exchange and the option which
designs independent director as a “surrogates of the minority.” See id. at 92-94.
137 Aronson, v. Lewis, 473 A.2d 805, 815 (Del. 1984), holding that “it is the care,
attention and sense of individual responsibility to the performance of one’s duties, not the
method of election, that generally touches on independence.”
138 Rodrigues, supra note 81, at 472.
131
132
35
(which will be discussed in the next Part), not whether to reserve itself.139
Second, saying that the election process itself does not influence
independence of directors is naive. It does; particularly, it affects the interest
that directors represent. To the extent that minority shareholders need to
find representation on the board to control Type II Agency Problem, the
Italian approach which guarantees such representation at a minimum level
should be justified.
iii.
Summary
In sum, future efforts to ensure true independence should be divided
into different directions. For dispersed companies, the focus should be on
reforming the nomination process: the nominating committee in particular
requires considerable reforms in order to reduce the management’s influence
in nomination. For concentrated companies, on the other hand, things are
more complicated. Not only should the nomination process, but also should
the election process, undergo considerable reforms in order to constrain the
controlling shareholder’s dominance in both process.
Here again
demonstrates the polysemy, which is unsurprising at all.
C.
Board Composition and Independent Directors
The other issue that this paper concerns is how much weight and
influence should be awarded to independent directors (as defined by the
above process-based approach). As mentioned above, critics of independent
directors typically make a one-size-does-not-fit-all argument. They argue
that different firms need different chemistry within its board: while some
firms might incur serious agency problems and thus need the supervision
associated with independent directors, others might have less this problem
and in contrast prefer a less confrontational and more collegial board with
harmonized atmosphere. On which type of board that better works for an
individual firm, legislators have no greater knowledge than the parties
internal to the firm. Therefore, how to compose a board, including how
many independent directors are needed, should be left to the firm’s own
internal decision negotiated between shareholders, management and even
other stakeholders. A mandatory independence requirement built on the
“one-size-fit-all” rationale might risk compromising the efficiency of certain
firms.140
Such observation is certainly true in many aspects. Independence
requirement does facilitate the supervisory role of the board, but the board is
This defense resembles the rationale behind the proposal to limit shareholders’
voting rights to their economic stakes.
140 See e.g., Rodrigues, supra note 81; Clarke, supra note 84.
139
36 not merely about supervision.141 As mentioned above, the board is also
about advising the management, coordinating with different stakeholders,
deciding the firm’s high-level strategy, etc.; in some firms the board is even
in charge of daily operational affairs. Supervision matters, but it does not
represent the whole picture of the board’s missions. And to harmonize the
board’s supervisory role with other missions, the key should lie in board
composition. For this paper’s interest, the key is how many independent
directors should be required on the board. The discussion, again, needs to
distinguish between different ownership structures, and the central idea
leading the discussion is the shareholder primacy norm.
a.
Dispersed Ownership: Majority Independent Director is Preferred
In companies with dispersed ownership, independent directors (here
referring to directors not recommended by the management) should stand at
least the majority of the board. This general principle is in fact in accordance
with the rules and practices in many countries whose ownership type is
typically dispersed, such as the United States and United Kingdom (but not
the case in Japan). I argue that this arrangement is more in alignment with
the shareholder primacy norm.
Shareholder primacy norm advocates that companies should be
operated primarily in the interest of shareholders, which awards shareholders’
interest the primary concern when considering the board composition.
Admittedly, whether shareholder primacy norm has won the ultimate battle
between different norms concerning corporate ends is still on its debate.
Other norms such as the stakeholder theory or other revised version
continue challenging or at least reshaping the shareholder primacy norm.142
Nevertheless, the greatest common divisor between all different theories is
that shareholders’ interest serves at least the “primary” purpose of modern
corporations if not the “sole” purpose.143 Even if companies should take
141 In fact, some argues that supervision in the sense of conflict management only
takes a small proportion of the board’s tasks. Rodrigues, id. at 487.
142 For literatures supporting shareholder primacy, see e.g., Milton Friedman, The
Social Responsibility of Business Is to Increase Its Profits, THE NEW YORK TIMES (Sep. 13, 1970);
RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 435-37 (2003); FRANK H.
EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW
35-39 (1992); Ryan J. York, Visages of Janus: The Heavy Burden of Other Constituency Anti-takeover
Statutes on Shareholders and the Efficient Market for Corporate Control, 38 WILLAMETTE L. REV.
187, 197-98 (2002); Hansmann & Kraakman, supra note 1, at 441; KRAAKMAN, supra note 7,
at 28. For literatures arguing against the shareholder primacy norm, see generally Einer
Elhauge, Sacrificing Corporate Profit in the Public Interest, 80:3 N.Y.U. L. REV. 733 (2005). To be
fair, shareholder primacy norm is not as popularly perceived elsewhere as in AngloAmericans. For instance, Germany appears to favor an employee-oriented norm while
France, Japan and China appear to favor a state-oriented norm. However, it is observed that
the global corporate law is converging toward shareholder primacy norm. Hansmann &
Kraakman, supra note 2.
143 See Molitor, supra note 23, at 156.
37
other stakeholders’ interest into due account, meaning that shareholders’
interest does not necessarily triumph over that of other stakeholders,
shareholders’ interest at least warrants a primary concern. Furthermore, if
narrowing down our comparison to a simple shareholders vis-à-vis
management dichotomy, shareholders’ interest should generally take
precedence considering that the former is the principal while the latter is the
agent. Based on the agency theory, therefore, shareholders should have
primary representation in a company’s decision-making process.
The design of board composition, in particular the seats of
independent directors in the board, is in fact a balance of power between
shareholders and management. Independent directors appointed following
the above proposed process represent the interest of shareholders, while
other directors might either take a neutral position or be captured by the
management. Between these two camps, independent directors representing
shareholders’ interest should be more dominant in the process of composing
the board in order to allow shareholders an upper hand, so that the board
can put “primary” concern on shareholders’ interest, monitor the
management, and thereby control the Type I agency cost. If a board is
comprised majorly of directors recommended by management, the voice of
other minority independent directors can easily be turned down by the
majority. Such board can hardly be expected to represent shareholders’
interest and undertake its supervisory role reliably. 144 In this sense,
shareholder primacy norm should well justify the requirement of majority
independent board.
A possible critic of this majority rule is that a board captured by
shareholders does not necessarily better serve the interest of companies and
shareholders. The reason can be two-fold. The first one could again derive
from the debate between shareholders empowerment and director primacy.
For director primacy proponents, while the primacy of shareholders’ interest
is taken, it remains arguable if shareholders themselves better represent their
own interest as mentioned above. It could be argued that shareholders are
subject to plenty of problems such as short-termism, opportunism,
informational asymmetry, collective action problems, etc., rendering
shareholders empowerment not the best way for pursuing shareholders’
interest. Instead, the board of directors might be at a better position,
considering that directors are more knowledgeable, capable, equipped with
access to corporate resources and corporate information, etc. Empowering
the board rather than shareholders also better prevents the potential
confrontation between shareholders and management and thereby creates a
As Leyens well analyzed, when the independent directors are in the minority,
incentives for management to share information with the independent directors are low
because the majority can simply mute them by outvoting them. But when independent
directors are in the majority, the management needs to share the inside information in order
to seek their support. Leyens, supra note 30, at 190.
144
38 more efficient decision-making environment.145 Having the board composed
majorly by independent directors representing shareholders’ interest might
act to the contrary, increase the confrontation, and allow the board to be
captured by short-termist shareholders. The second reason against the
majority rule could, on the other hand, derive from the debate between
shareholders primacy norm and stakeholders theory. For stakeholder
theorists, they could argue that the board majorly comprised of independent
directors could tilt toward shareholders’ interest too much and thereby
jeopardize the voice of other stakeholders in the board’s decision-making
process. Accordingly, even though the merit of independent directors is
admitted, it does not necessarily justify the majority independent directors.
In this paper I do not wish to discuss and hold position in the
shareholders empowerment versus director primacy and/or shareholders
primacy versus stakeholder theories debate. All concerns are well taken.
Nevertheless, it will be a mistake to simply equate independent directors with
part of shareholders empowerment or shareholders primacy movement.
First and foremost, independent directors are not shareholders per se, and
granting more power to independent directors is not equivalent with
empowering shareholders. The independence requirement simply aims to
free directors (and accordingly the board) from capture of management; after
such release independent directors can make their own informed decisions
and choose the best way to serve a company’s overall interest. Independent
directors remain acting in their capacity as directors, only in a manner less
captured by the management. In fact, in dispersed companies, even if
adopting the process-based definition as suggested in this paper, in most
cases it will be the nominating committee that effectively picks and selects
independent directors unless there is a proxy contest initiated by
shareholders. Therefore, shareholders only have indirect influence in
recommending candidates for the nominating committee’s consideration.
The nominating committee, a sub-committee subordinated to the board, still
retains plenty of discretion in composing the board. Put it in different words,
the reforms as suggested in this paper merely aim to reduce the
management’s capture of the board so as to ensure an “independent” board
who reaches its own decision independently without descending to the
rubber stamp of the management. The advantages that director primacy
proponents pursue are in fact better preserved by the proposal of this paper.
Neither should stakeholder theorists be troubled by the majority rule
146
here.
Even stakeholder theorists do not disagree that shareholders’
interest remains the primary; their concern is only that other stakeholders’
interest should be taken into due account. Logically, the majority
145 For a brief summary of different theories supporting the director primacy norm,
see Karmel, supra note 7, at 795-97.
146 Ferrarini and Filippelli also suggest not to over-emphasize the dichotomy of
shareholder/stakeholder theories, considering that this distinction is sometimes formal than
real and that the boundaries are often blurred. Ferrarini & Filippelli, supra note 7, at 13.
39
requirement does not conflict with other stakeholders’ interest. For one
thing, stakeholders do not necessarily need the board representation to
defend their interests; other vehicles such as contracts can do as well. Even
though board representation matters, the majority requirement still preserves
some minority seats for stakeholders to having their own representatives in
the board. What majority requirement does is merely reducing the
management’s capture of the board and enhancing the board independence.
Moreover, logically speaking, management-appointed directors and
independent directors should have equal opportunity to voice other
stakeholders’ interest. Unless it can be well proved that management better
stands for other stakeholders’ interest than independent directors, having a
board captured by the management is not necessarily a better way to
represent stakeholders’ interest. 147 Accordingly, the majority requirement
should not be incompatible with stakeholder theorists’ concern.148
b.
Concentrated Ownership: Proportional Independent Director Requirement
For companies with concentrated ownership, board composition is a
more complex issue. Unlike the supervisee in dispersed companies (i.e. the
management) whose shareholding is limited, here the supervisee is the
controlling shareholder who holds majority or dominant voting shares.
Requiring the board to be majorly comprised of independent directors
whom the controlling shareholder has no voting power in regard of
according to the above proposal will deprive the controlling shareholder of
its control over the company, which is against its intention to acquire a
company’s controlling shares. Furthermore, the controlling shareholder is
also a “shareholder.”
Its interests, together with other minority
shareholders’, form the collective “shareholders’ interest”, which together
deserves primary concern under the shareholder primacy norm. To the
extent that the controlling shareholder shares equal treatment with other
minority shareholders, as the party investing in the most capital in the
company, it deserves the control over the board. 149 The majority
requirement in this context therefore becomes not only impracticable, but
also unreasonable.
It remains unclear why management is a better proxy for other stakeholders’
interest. See generally Lucian Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675,
729-31 (2007). Some empirical literatures even suggest that companies with fewer agency
problems tend to have higher CSR ratings. See generally Allen Ferrell et al., Socially Responsible
Firms (Eur. Corp. Governance Inst. – Fin. Working Paper No. 432/2014, 2014).
148 In fact, some early commentators even believe that independent directors can
be a way to better pursue corporate social responsibility because a board with more
independent mind will better concern and balance different interests. See generally Prashanth
Beleya et al., Independent Directors and Stakeholders Protection: A Case of Sime Darby, 2:4 INT’L J.
ACAD. RES. BUS. SOC. SCI. 422 (2012). Contra Victor Brudney, The Independent Director –
Heavenly City or Potemkin Village?, 95 HARV. L. REV. 597 (1982).
149 For some analysis of the importance of equal treatment in concentrated
companies, see KRAAKMAN, supra note 7, at 96-99.
147
40 Having said so, allowing the controlling shareholder to have major
representation in the board does not negate that some presence of
independent directors in the board is needed. To control the Type II agency
cost, that is, to prevent the controlling shareholder from unduly predating
minority shareholders’ interest, minority shareholders need their
representatives on the board to play this supervisory role. Although
independent directors in such context are merely the minority in the board,
and in most cases they can hardly influence the board’s resolution, their role
is still significant. After all, these minority independent directors, compared
with minority shareholders themselves, have better access to the company’s
resources and information and therefore are in a better position in
monitoring the controlling shareholder’s behaviors. Even though they are
unable to directly vote out the controlling shareholders’ initiatives, they can
affect the passing of these initiatives through indirect ways such as
publicizing or threatening to publicize the controlling shareholder’s abuse of
power.150 For instance, in Taiwan, the Securities Exchange Act requires the
company to disclose independent directors’ opposition votes,151 which may
serve a signal to the market that the controlling shareholder is engaging in
some suspicious behaviors. It indirectly forces the controlling shareholder to
think twice if it should insist on passing the initiatives unsupported by
independent directors. Accordingly, minority independent directors, though
less powerful, can still play some role in controlling the Type II agency cost.
The independence requirement in the board’s sub-committees can
further enhance independent directors’ influence.152 Even though the board
does not require majority independent directors, in some sub-committees in
charge of affairs typically involving the controlling shareholder’s conflicted
interest, independent directors should at least take the majority seats (if not
entire seats). Typical examples include the audit committees, nominating
committees and compensation committees.153 Audit committees supervise a
company’s financial reports, internal control, etc.; in some countries they also
approve related-party transactions. These affairs are typically the core items
related to the board’s supervisory role. Independent directors should play
150 Clarke, supra note 84, at 80. It is also noted that minority shareholders, through
having representation in the board, benefit from better access to information and the
opportunity to form coalition with independent directors. KRAAKMAN, supra note 7, at 90.
Gutierrez and Saez, on the other hand, cautions that independent directors’ threats to
publicly disclose the controlling shareholder’s suspected transactions could hurt minority
shareholders as well to the extent that the stock price goes down and future financing
becomes more expensive. In their view, the real merits of having minority independent
directors on the board relates to that it induces minority shareholders to take legal action
against the controlling shareholder, which is however with limits as well. Gutierrez & Saez,
supra note 7, at 78-83.
151 See Taiwanese Securities Exchange Act, Art. 14-3.
152 Leyens, for instance, also holds the same view. Leyens, supra note 30, at 190-91.
153 Other examples may include litigation committees, related-party transaction
committee, etc. For a review of independent director’s role in vetting of related party
transactions, see Ferrarini & Filippelli, supra note 7, at 28-30.
41
the dominant role here in order to ensure steady flow of information, access
to the company’s resources necessary to monitor the financial statements
and impartial selection of outside auditors.154 Nominating committees, as
mentioned above, recommend and nominate directorate candidates for
shareholders’ election; thus it plays a critical role in balancing the power
between principal (i.e. minority shareholders) and agent (i.e. the controlling
shareholder). Independent directors therefore should definitely play a major
role here in order to prevent the controlling shareholder from excluding truly
independent directors. Compensation committees, on the other hand,
determine the compensation of directors, while compensation in itself is a
related-party transaction and thus requires independent decisions. 155
Accordingly, although the controlling shareholder takes majority seats in the
board and therefore controls the company, on matters involving its
conflicted interest and requiring special committee’s approval, these special
committees should be comprised of majority independent directors in order
to achieve meaningful supervision. In this sense, for concentrated
companies, the real battlefield is rather in these special committees.156
Id. at 22-23.
Id. at 26.
156 State-owned companies, however, is a special type of concentrated companies
that should require separate discussion. This position is also supported by Ferrarini and
Filippelli, see id. at 11. Unlike ordinary private shareholder whose concerns are typically the
maximization of financial returns, the state’s concern is rather the maximization of social
returns or public welfare. In this sense, the state shareholder has a higher tendency than
ordinary controlling shareholder to sacrifice the interest of minority shareholders.
Independent directors in the context of state-owned companies should refer to directors
independent of not only the management but also the state shareholder. Karmel, for
instance, has also noted this aspect. See Karmel, supra note 7, at 802-03. I would tentatively
define independent directors in this context as directors elected by other private minority
shareholders. These private directors, however, better represents shareholders’ interest than
the state shareholder; in contrast, the state typically stands for interest other than
shareholders’ interest. Accordingly, I would tentatively believe that the board of state-owned
companies is better comprised of majority independent directors representing private
minority shareholders’ interest, because this board composition rule better places
shareholders’ interest as its primary concern. While the public or social interest as pursued
by the state matters as well, the state may voice it to the board through its minority
representation, which should be powerful enough to force the majority independent
directors to take into serious account considering the state’s dominant position. However, it
should be qualified here that the state-owned companies here should be limited to those
companies that do not perform any state policy. For those companies bearing state policy
(the so-called “government corporations” in the United States), they resemble public
agencies and thus should not be considered private companies, and the shareholder primacy
norm should not apply. The state, therefore, is justified to hold absolute control of such
government corporations. 154
155
42 V. CONCLUSION
The worldwide fever for independent directors during the last decade
affirms the observation of convergence in comparative corporate
governance. A closer examination of this convergence, however, reveals the
polysemy of independent directors around the world and thereby displays
considerable divergence, which suggests that a worldwide convergence in the
area of independent directors might be too early to tell. In this paper I
approach the polysemy from the perspective of different ownership
structure. Due to different agency problems associated, companies with
different ownership structure should require different independent director
regime. Specifically, in this paper I specify the direction of reforms to be
made in the future in two main areas: one focuses on the definition of
independence, which entails the way to ensure independent directors’
independence in order to achieve their functional goal, i.e. the supervisory
role. The other focuses on board composition, which entails how to balance
independent directors’ role with other objectives to be pursued. To improve
our current independent director regime is not an easy task: many factors in
political terms remain in the way and preclude meaningful reforms.
Nevertheless, before the cloud of politics is cleared, at least in functional
terms we should strive to have some answers prepared in advance!
43
44 GLOBALIZATION IN INTERNATIONAL TAX LAW – A
SPOTLIGHT ON THE OECD’S BEPS PROJECT
Diana Oswald ∗
University of Fribourg
ABSTRACT
The OECD’s BEPS Project strives to better align taxation of
business income with value creation. This article shows that while the project
offers a number of good ideas, it remains strongly fixated on the principle
that taxation must follow legal forms and constructs, such as residence,
permanent establishments, or legal ownership. This article argues that such a
system of taxation is no longer adequate to apprehend value creation in the
21st century for the ends of taxation. In addition, it argues in favor of a
source-based, globally agreed-upon system of taxation of business profits
which relies on exclusive and formulary apportionment of business income,
using real assets and payroll as determining factors for apportionment. This
approach is favored for simplicity’s sake, over a complicated set of rules such
as we know them from today’s transfer pricing guidelines. Furthermore, the
article discusses questions of legitimacy of international standards when
democratic procedures within the OECD and member countries are not
respected.
∗
Cf. also Diana Oswald, Die Begrenzung der Privatautonomie der
Wirtschaftsakteure durch die Bestrebungen der OECD zur Verhinderung der “Double Non
Taxation”, in: Nueber Michael/Przlowska Dominika/Zwirchmayer Michael (Hrsg.),
Tagungsband zum 15. Graduiertentreffen im internationalen Wirtschaftsrecht, Wien 2015
(forthcoming on January 30, 2015), which also outlines the 15 actions of the BEPS project,
but focuses more on aspects of autonomy of private sector actors within the tax framework.
Many thanks go to Mairead Chammartin for reviewing my manuscript. I would also like to
thank João Taborda da Gama, panel commentator, as well as Filipe Cerqueira Alves, co-panelist,
for valuable comments and discussion.
45
I. INTRODUCTION
There is hardly an area of the law in which the movement towards
global law, albeit in the form of legally non-binding international standards,
has been as apparent during the last decade as in the field of international tax
law. The focus of the international community has been first and foremost
on increasing transparency and exchange of information across borders for
the last decade. The results are quite well known:
Firstly, article 26 of the OECD Model Tax Convention
(OECD MTC)1 has been revised to ensure the exchange of financial
account information.2 The OECD Commentary3 on this article has
also been rewritten to provide guidance on distinguishing
information requests pertaining to groups of persons not individually
identified (but identifiable) from fishing expeditions.4
Secondly, a growing number of countries have since entered
into Tax Information Exchange Agreements based on the OECD
Model for Tax Information Exchange Agreements (OECD TIEA).5
An even larger number of countries have in one way or another
adhered to the American Foreign Account Tax Compliance Act
program (FATCA program) as well as the FATCA-inspired Standard
for Automatic Exchange of Information. 6 A noteworthy
development is also the revival of the Multilateral Convention on
Mutual Administrative Assistance in Tax Matters.7 This convention,
after lying dormant since 1988, was revised in 2010 and has since
been signed by nearly 70 countries.
1 OECD, Model Tax Convention on Income and on Capital – Condensed Version
(2014), available at: http://www.oecd-ilibrary.org/taxation/model-tax-convention-onincome-and-on-capital-condensed-version-2014_mtc_cond-2014-en [8.12.2014]. Hereafter:
OECD MTC.
2 Article 26 para 5 OECD MTC.
3 OECD, Model Tax Convention on Income and on Capital – Condensed Version
(2014), available at: http://www.oecd-ilibrary.org/taxation/model-tax-convention-onincome-and-on-capital-condensed-version-2014_mtc_cond-2014-en [8.12.2014]. Hereafter:
OECD Commentary.
4 OECD Commentary, article 26 para 5.2.
5 OECD, Agreement on Exchange of Information on Tax Matters (2002), available
at: http://www.oecd-ilibrary.org/taxation/agreement-on-exchange-of-information-in-taxmatters_9789264034853-en [8.12.2014].
6 OECD, Standard for Automatic Exchange of Financial Account Information in
Tax
Matters
(2014),
available
at:
http://www.oecdilibrary.org/docserver/download/2314131e.pdf?expires=1407161743&id
=id&accname=ocid177451&checksum=22A5D6AC04022DB046ED3A41F1D68373
[8.12.2014].
7 OECD, Multilateral Convention on Mutual Administrative Assistance in Tax
Matters, Amended by the 2010 Protocol (2011), available at: http://www.oecdilibrary.org/taxation/the-multilateral-convention-on-mutual-administrative-assistance-in-taxmatters_9789264115606-en [8.12.2014].
46 After a whirlwind of changes to the international standards on
transparency and exchange of information in tax matters, countries are now
scrambling to implement and consolidate the agreed upon principles.
Meanwhile, the international community is shifting its focus back to the
taxation of multinational enterprises (MNEs). Taxing these corporate entities
operating on a global scale poses a multitude of unique problems that the
OECD’s project on base erosion and profit shifting (BEPS Project8) aims to
address. I have chosen to shine a spotlight on the BEPS Project in this
contribution because it is perhaps the most current example of how tax law
is shaped today.
II. HOW IS THE BEPS PROJECT AN EXAMPLE OF LEGAL
GLOBALIZATION?
As will become clear in outlining the actions proposed within the
framework of the BEPS Project, this project does not aim to enact global,
international law per se, but rather to make changes to Soft Law, to
recommend countries adhere to certain “best practices”, knowing that
instruments such as the OECD MTC are politically, if not legally, binding.9
An argument is to be made for the OECD’s “Soft Law” in tax matters
actually being illegitimate hard law.10 The reasoning is as follows: The OECD
Council could, by unanimous vote, adopt rules that would be binding on its
member states.11 Indeed, it seems that the only reason why the OECD does
not attempt to adopt such binding rules is that it could not expect to obtain
the unanimity needed for their adoption.12 In the presence of a set of rules
governing the adoption of binding rules by the OECD, however, it seems
illegitimate to not only circumvent democratic procedures in member
countries by taking important policy decisions within the OECD,13 but also
to circumvent procedures set forth within the OECD itself for the adoption
Cf. http://www.oecd.org/ctp/beps.htm [8.12.2014].
Cf. e.g. Caterina Innamorato, Expeditious Amendments to Double Tax Treaties
based on the OECD Model, in: Intertax 2008, p. 98 ff., p. 105 ff.; or Hugh Ault, Reflections
on the Role of the OECD in Developing International Tax Norms, in: Brooklyn Journal of
International
Law
2009,
p.
758,
available
at
http://www.brooklaw.edu/~/media/PDF/LawJournals/BJI_PDF/bji_vol34iii.ashx
[9.12.2014], wo speaks of a «strong political commitment of a country to follow the
Recommendation in its domestic policy».
10 Innamorato, Intertax 2008, p. 107, seems to go in the same direction when she
raises concern about national parliaments being circumvented when pressure is exerted on
countries to comply with OECD recommendations.
11 Cf. OECD, Convention on the Organisation for Economic Co-operation and
Development
of
December
14
1960,
available
at:
http://www.oecd.org/general/conventionontheorganisationforeconomicco-operation
anddevelopment.htm [9.12.2014], article 6 para 1. Hereafter: OECD Charter.
12 Cf. e.g. Ault, p. 757 ff.
13 Cf. also chapter V.1. hereafter on the lack of democratic legitimization.
8
9
47
of binding rules, by simply asking for unanimity on non-binding rules, which
are afterwards considered to be politically binding.
The OECD consists of Committees, Working Groups and Expert
Groups, with the Committee on Fiscal Affairs (CFA) being the most
important sub-entity of the OECD where tax matters are concerned.14 This
committee can count on the assistance of the Centre for Tax Policy and
Administration (CTPA). Instruments such as the OECD MTC are generally
drafted by the Committee on Fiscal Affairs, which is comprised of
representatives of the member countries’ tax authorities (plus a
representative of the European Union), or its subcommittees.15 They rise to
become international standards when the OECD Council approves them as
recommendations, which it can do by unanimous vote. Abstentions do not
have a blocking effect.16
The BEPS Project is made up of 15 Actions, and follows a time
frame which is available for consultation in Appendix A of the BEPS Action
Plan.17 Working Groups within the CFA deal with each of the 15 actions.
After initial work, the CFA releases public requests for input on specific
actions, before elaborating and publishing discussion drafts containing
proposals for changes e.g. to the OECD MTC or for recommendations to
the member countries regarding their internal law. Comments are then
invited on these discussion drafts.18
This may be symptomatic of the way in which global law is shaped in
the 21st century – not by national parliaments or international delegates
vested with democratic legitimization, but rather by bureaucrats appointed
by their respective governments to positions in international organizations.
As has already been pointed out, this raises the question of legitimacy, which
shall be addressed at the end of this paper.19 This new approach to lawmaking may be made more palatable by the fact that, at least in theory, any
group or individual wishing to voice an opinion on a new set of rules can be
heard by the persons responsible for drafting such new rules. However, due
to the very tight time schedule the OECD has given itself, the deadlines for
comments are generally quite short. This, in combination with the
complexity of the issues dealt with, does raise some concern about whether
the consultation process may not, effectively, exclude anyone but experts in
international taxation from the discussion.20
Cf. Ault, BJIL 2009, p. 760 ff.
Cf. Ault, BJIL 2009, p. 760.
16 Cf. OECD Charter, article 6 para 1.
17 Cf. OECD, Action Plan on Base Erosion and Profit Shifting (2013), available at:
http://dx.doi.org/10.1787/9789264202719-en [9.12.2014].
18 For a quick overview visit http://www.oecd.org/tax/beps-news.htm [9.12.2014].
19 Cf. below, chapter V.1.
20 Cf. also below, chapter V.1.
14
15
48 III. THE PROBLEM AT HAND: COUNTRIES‘ FISCAL SOVEREIGNTY IN A
GLOBAL ECONOMY WITH MULTINATIONAL ENTERPRISES
1. Countries’ Fiscal Sovereignty in a Globalized Economy
Clearly, every country may decide freely on the nature, level, objects
and subjects of tax on its territory, so long as it has not entered into binding
agreements (such as double taxation conventions [DTCs]) with other
sovereign countries restricting this latitude.21 Of course, though this seems
self-evident, the taxing country must be able to avail itself of a genuine link
to the subject and/or object of tax.22 For the purposes of taxation, a genuine
link allowing a country to tax is currently accepted if either the subject of tax
(the taxpayer) is resident in the territory of the taxing country or the object
of tax is situated or originated therein. 23 Taxation based solely on the
nationality of a taxpayer is not widely accepted, and rightly so. International
public law only accepts nationality as creating a personal nexus (a genuine
link) between an individual or entity and a country if the nationality is
effective. This means that there must be a sufficiently tight bond between
the individual or entity and the country whose nationality is being claimed.24
However, since the United States appear to be the only developed country
that attempts to levy tax on all of its nationals regardless of residence,25 this
issue will not be treated in any more depth.
Obviously, in a world where tax may, in accordance with
international public law, legitimately be levied by the country of source or
situs of the object of tax as well as by the country of residence of the subject
of tax, there is an inherent risk of double taxation. Since it is universally
acknowledged that double taxation has negative effects on the exchange of
21 Cf. for example Madeleine Simonek, Steuersouveränität – Relikt oder Zukunft,
ZSR I 2010, p. 551 ff., 554 ff. Cf. also on the issue of tax sovereignty Diana Oswald, Die
Begrenzung der Privatautonomie der Wirtschaftsakteure durch die Bestrebungen der OECD
zur Verhinderung der “Double Non Taxation”, in: Nueber Michael/Przlowska
Dominika/Zwirchmayer Michael (Hrsg.), Tagungsband zum 15. Graduiertentreffen im
internationalen Wirtschaftsrecht, Wien 2015 (forthcoming on January 30, 2015).
22 Cf. OECD, BEPS Report, p. 28 (OECD, Adressing Base Erosion and Profit
Shifting (2013), available at: http://dx.doi.org/10.1787/9789264192744-en [9.12.2014]);
Andrea Claudio Caroni, Finanzsanktionen der Schweiz im Staats- und Völkerrecht: dargestellt
am Beispiel der Sperrung von Geldern, thesis Zurich 2008, p. 151; Knut Ipsen, Völkerrecht,
5th edition, Munich 2004, § 23 N 88; Michael Lang, Introduction to the Law of Double
Taxation Conventions, Vienna 2013, N 1.
23 Cf. For example the OECD MTC, articles 6–21, which assigns income and
assets to source and residence countries.
24 Cf. Volker Epping, Der Staat als “Normalperson“ des Völkerrechts, in: Knut
Ipsen (Ed.), Völkerrecht, 6th edition, Munich 2014, § 5 N 83 ff., with numerous references.
25 Cf. for example the U.S. observation on article 24 of the OECD MTC, OECD
Commentary 2014 article 24 para 83.
49
goods and services as well as the movements of capital, technology and
persons,26 there is general agreement that it is to be avoided. However, there
is no agreement on whether dual or multiple taxation must be avoided
altogether, or whether it is merely more than single payment (of the tax
levied in the highest-taxing country involved) that must be avoided.27 In an
increasingly globalized world, agreements by which countries voluntarily
limit their tax sovereignty in order to avoid double taxation are paramount.
Today, DTCs certainly still play a role in avoiding double taxation, though
this role has been greatly reduced by the adoption of clauses in the internal
tax codes of most countries either exempting foreign source business income
or providing foreign tax credit. 28 Thus, today, as far as the taxation of
business profits is concerned, DTCs mainly serve the purpose of assigning
business income to residence jurisdictions for taxation, at the expense of
source jurisdiction. The legitimacy of this has been called into question, and
rightly so.29 Either way, countries’ latitude for rule-making or negotiation of
treaties is constricted considerably by sets of international Soft Law
standards negotiated within international organizations such as the OECD,
which member countries are subsequently expected to translate into their
national law and international treaties.30
2. Multinational Enterprises – breaking down the Global Value Chain
Multinational Enterprises (MNEs) operate on a global scale, with
complex legal structures, usually involving a parent company (often a holding
company) as well as numerous fully- or majority-owned subsidiaries in a
number of countries. Their global value chain will generally be spread out
through multiple countries, with increments of value creation such as the
sourcing of raw materials, production and activities (like marketing and legal
services or presentation and sales) taking place in various jurisdictions.31
OECD Commentary 2014, Introduction, para 1.
Which is also the reason why the OECD MTC provides, alternatively, for the
use of the exemption or the credit method in articles 23 A and 23 B OECD MTC 2014.
28 Cf. also Reuven S. Avi-Yonah/Oz Halabi, Double or Nothing: A Tax Treaty for the
21st Century, University of Michigan Law School, Law & Economics Working Papers,
November 1 2012, available at http://repository.law.umich.edu/law_econ_current/66/
[12.12.2014], p. 2.
29 Cf. Avi-Yonah/Halabi, p. 2.
30 Cf. for example David A. Ward et al., The Interpretation of Income Tax Treaties
with Particular Reference to the Commentaries on the OECD Model, Ontario 2005, p. 38 f.;
Pasquale Pistone, General Report, in: Michael Lang/Pascquale Pistone/Josef Schuch/Claus
Staringer (Eds.), The Impact of the OECD and UN Model Conventions on Bilateral Tax
Treaties, Cambridge 2012, p. 1.
31 Cf. also OECD, BEPS Report 26. Naturally, each of these steps may also be
„outsourced“ in the way that e.g. the MNE does not source its own raw materials, but rather
buy it from a non-associated third company, or sell their product to wholesalers who will
then take care of presentation and distribution. In these cases, obviously, the GVC of the
26
27
50 Taxation of such global value chains can, in principle, follow one of two
general ideas or be a mix of both, the basic ideas being to either tax profits at
the source of their creation or at the residence of their recipient.
2.1. Taxation at Residence on Worldwide Income
2.1.1. The Principle
Taxation at residence, in its pure form, calls for each tax subject to be
taxed exclusively at his or her residence and on the entirety of his or her
assets and/or income, regardless of source or situs. In theory, double
taxation is avoided if each tax subject only has one place of residence. In
practice however, this is often not the case. 32 Residence-based taxation
seems, at first glance, to make sense. It assures capital export neutrality as
well as treating business profits earned by individuals or entities resident in
the same jurisdiction equally, regardless of where they choose to invest. An
argument often made in favor of residence-based taxation is that it allows
countries to implement tax systems with an underlying principle of solidarity,
and progressive tax rates.
2.1.2. Problems
This approach to taxation obviously relies very strongly on legal
constructs such as residence, despite the fact that these constructs are known
to be extremely prone to abuse.33 As will be detailed below, the often cited
goal of a tax system with progressive rates based on solidarity may also be
achieved in a system of source-based taxation.34 Of course, the point made in
favor of progressive taxation is of doubtful validity at any rate when it comes
to taxation of business profits, as many countries only have one or two
corporate tax rates, not progressive scales with numerous increments as is
usually the case for the taxation of individuals. It is also important to note
that a system of residence-based taxation is likely to distort international
investment activity insofar as a country with a high level of insecurity (legal,
geopolitical or monetary) or a low level of government service and/or
infrastructure, that might, in a system of source-based taxation, choose to
apply lower tax rates in order to nonetheless be attractive for investment,35
MNE concerned will end at the last step of value creation assumed by the MNE itself, nonassociated companies being themselves taxable as separate entities.
32 Cf. also article 4 para 2 OECD MTC, which deals with the resolution of conflicts
that arise when, under the definition provided by article 3 para 1 letter g) OECD MTC, an
individual is considered a resident of more than one country.
33 Cf. for example OECD Commentary 2014 article 1 para 8.
34 Cf. chapters III.2.2. and IV.8. below.
35 Cf. also Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal
Crisis of the Welfare State, Harvard Law Review, 2000, p. 16627.
51
does not have this possibility in a system of residence-based taxation.36 This
would seem to inherently bias investment towards countries with large
government sectors.
2.2. Taxation at Source
2.2.1. The Principle
The second possibility is of a system where income and assets are
taxed exclusively at source or situs, respectively. This method can boast of
achieving capital import neutrality, since an investment, for example in
Australia, which produces Australian-source income, will always only be
taxed in Australia. This system is particularly favorable to less developed
countries. 37 Source is also harder to manipulate without actually shifting
value creating activities, in which case the shift of taxation rights is justified,
since tax is compensation for the source country providing things such as
infrastructure and a suitable business environment in general. 38 It is
sometimes argued that progressive taxation based on global net worth and
earning capacity may only be realized within a system of residence-based
taxation. However, this argument may, with the advent of the BEPS Project,
lose much of its persuasiveness. Action 13 of the BEPS Project proposes to
report global income to every tax authority concerned. Such reporting would
allow tax authorities to consider global income in determining a tax rate
applicable to items of income generated or situated within their jurisdiction,
without giving them an excuse to tax income generated in other jurisdictions.
2.2.2. The Difficulty of Assigning Parts of the GVC to Countries for
Taxation
Taxation at source, while it may seem quite simple and intuitive at
first, is not entirely so in practice. The splitting up of the global value chain,
as well as the attribution of certain processes of value creation, may not
always be as straightforward as mining coal in Germany, packaging it in
Poland and selling it in Switzerland, but may instead raise a series of
questions. This is evident in the example of high frequency trading, in which
places of value creation can be made out to be the place where the algorithm
36 This dilemma, which concerns mostly developing and emerging economies, is
also discussed by Pistone, General Report, p. 30; as well as Lang, Introduction, N 451, the
latter explaining that the goal of boosting investment into developing economies demands
that a lower or inexistent effective rate of tax must benefit the investor, not the investor’s
country of residence (by way of residual taxation of the profits).
37 Cf. Pistone, General Report, p. 30; as well as Lang, Introduction, N 451.
38 Cf. Reuven S. Avi-Yonah, Tax Competition, Tax Arbitrage, and the Internation
Tax Regime, University of Michigan Law School, Law and Economics Working Papers,
2007, available at http://repository.law.umich.edu/law_econ_archive/art67 [14.12.2014], p.
22 f.
52 employed is designed, the place where computers and servers are located, as
well as the place where humans and machines work together to supervise the
working of the algorithm.39 Firstly, all of these value creating activities are
highly mobile, and therefore it may not always be easy to determine where
the value creating activities take place to begin with. Secondly, even when the
exact place of value creation has been located (or more likely fixed by
common accord), it will still be necessary to assign a precise portion of
ultimate gains or losses (e.g. in the case of high frequency trading most likely
exchange profits) to each place of value creation that has contributed to the
end result. This, obviously, is a very delicate task, as there is no truly
objective way of doing this. If every country were left to locate and assign
profits to places of value creation in its own way, double taxation and double
non taxation would be just as likely to ensue as in a system of residencebased taxation. It follows that there is a need for global coordination. This
coordination could be achieved by adopting a complicated set of ever
evolving rules, such as we have come to know the OECD’s Transfer Pricing
Guidelines to be. On the other hand, coordination could also be achieved by
agreeing on a method of formulary apportionment, though the OECD quite
vocally opposes formulary apportionment as a concept,40 and it is forseeable
that there might be considerable issues in determining the factors to be
considered in a formula. Specifically, some US scholars have been proposing
formulary apportionment based on sales for quite some time,41 which is
clearly biased in favor of high tax countries with a trade balance deficit such
as the US.42 In the view tendered here, if formulary apportionment is to
become a method to be seriously considered for assigning business profits
for taxation, then the formula chosen must reflect the factors of value
creation which ultimately lead to the business profits that are to be taxed.
39 Cf. OECD, Compilation of Comments Received in Response to Request for
Input on Tax Challenges of the Digital Economy (2014), available at:
http://www.oecd.org/ctp/comments-received-tax-challenges-digital-economy.pdf
[12.12.2014]), p. 33 f. (commentary by Deloitte).
40 Cf. OECD, BEPS Action Plan, p. 14. In particular, the OECD is concerned
about “the behavioral changes companies might adopt in response to the use of a formula”,
which the OECD is not convinced would “lead to investment decisions that are more
efficient and tax-neutral than under a separate entity approach”.
41 Cf. e.g. Avi-Yonah/Clausing, p. 2. The argument offered by these authors (cf. p. 5,
13) for formulary apportionment of worldwide income of MNEs based on sales in a
jurisdiction hinges on the difficulty of assigning profits to individual countries and the
minimal responsiveness of sales to tax differences across markets, since customers are far
less mobile than business income as such, which can be quite easily shifted across
jurisdictions. It is, in the opinion offered here, not a convincing argument, since taxation
may not be based on a factor that creates no genuine link between business income taxed
and the taxing jurisdiction, merely because the factor is one that is easily apprehended and
shifted only with great difficulty.
42 Which Avi-Yonah/Clausing themselves, p. 21, 36 seem to admit. They also
acknowledge the conceptual advantage of three-factor formulas considering sales, payroll,
and assets, since such a formula would not focus lopsidedly on the demand side of business,
but also take into account the supply side (p. 15).
53
These are, basically, assets and human work. Sales understood as a result, not
as the process of selling, are a result of business activity, not part of the value
creation process.43 A tax based on sales would be a consumption tax, the
likes of which most countries levy already. It would certainly not be justified
to base taxation of business profits on sales into a certain jurisdiction, since
the jurisdiction of consumption cannot automatically boast of a genuine link
to the value creation that leads to business profits, since it provides neither
infrastructure nor business environment. 44 Thus, a formula by which to
apportion business profits should, in my opinion, be based on real assets and
wages. I would reduce the consideration of assets to real assets, since
intangible assets such as intellectual property are often impossibly difficult to
locate reliably, but generally quite well reflected in payroll (knowledge
workers generally earn fairly high salaries, so the jurisdiction where they
work and earn their salaries may be a more reliable indicator of where a
MNE’s intellectual property is located than legal ownership of it, which may
easily be transferred from one jurisdiction to another without any
consequences for the value creation process).
2.3. Mix of the Aforementioned
In practice, today’s global tax environment strongly favors residencebased taxation of profits, whilst making allowances for taxation by countries
of source or situs in certain cases. These exceptions, where profits are
submitted to source-based taxation, usually center very strongly around the
notion of “permanent establishment” set forth in article 5 of the OECD
MTC.
3. Opportunities for Legal Arbitrage
Globally, opportunities for legal arbitrage between tax systems are
numerous. The multitude of tax systems (since each country is inclined to
implement its own unique mix of source- and residence-based taxation45)
create many such opportunities. The presence of exclusive attribution rules
in DTCs creates even more possibilities for arbitrage. Presented in quite a
simplified manner, double non taxation may arise in the following three
cases:
The process of selling, on the other hand, certainly contributes to value creation.
However, in my opinion, this process must be considered to take place e.g. where people
create and run an online shop, package goods and prepare them for shipping, not where the
customer browses and orders the goods.
44 Cf. also below, chapter IV.1.
45 Cf. OECD, BEPS Report, p. 34: “In a majority of countries, neither the
worldwide nor the territorial system is employed in a pure form and no two tax systems are
exactly the same”.
43
54 3.1. The Good: Tax Competition
Double non taxation may arise when two or more countries,
genuinely linked to a potentially taxable object or subject, choose not to
exercise their right to tax in their internal law or when DTCs assign tax
jurisdiction exclusively to a country that chooses not to exercise its right to
tax in its internal law. In such situations, double non taxation is the result of
different countries exercising their sovereign right to design their own tax
system, in which taxing certain objects or subjects may not make sense.
Hence, this kind of double non taxation is to be accepted, except where
countries have included so-called “subject to tax clauses” in their DTCs, that
explicitly state that relief from double taxation shall be granted only for items
of income or for assets that have, effectively, already been taxed in the other
country.46
3.2. The Bad: Unintended double non taxation
Conflicts of qualification may arise regardless of DTCs. This may, for
example, be the case where Country A qualifies a partnership on its territory
as transparent and taxes partners if they are resident on its territory, while
Country B treats partnerships operating on its territory as taxable entities,
and not the individual partner. This would result in neither the partnership
nor the partners paying tax on profits realized in the partnership. Conflicts
of qualification may also arise because of DTCs. This may be the case where
Country A qualifies an item of income as income from business activity
taxable exclusively in the country of residence B pursuant to a DTC, whereas
Country B qualifies the same item of income as income derived from
immovable property, taxable exclusively in the country of situs A. Structures
that typically give rise to such conflicts of qualification are called hybrids.47
These situations of double non taxation are unintended and countries will
generally wish to take steps to avoid them. Where the conflict is rooted in a
divergence between two national laws, this will only be possible through
horizontal harmonization. In the case of conflict arising out of divergent
interpretation of DTCs, it is generally considered admissible for the resident
country to follow the interpretation of the source country. This leads to
resident-country taxation despite the fact that this country, on its own, would
have interpreted the DTC in question in a way that would have precluded it
46 Cf. also Robert J. Danon/Hugues Salomé, Avoidance of Double Non-Taxation in
Switzerland, in: Michael Lang (Ed.), Avoidance of Double Non-Taxation, Vienna 2003, p.
381 ff., 409 ff. Such “subject to tax” clauses are increasingly included in DTCs today.
47 Cf. for example OECD, BEPS Report, p. 40 f. Apparently, hybrid financial
instruments that allow the debtor to generate deductible interest payments, while being
considered dividend income in the country of residence of the lender are particularly
popular.
55
from taxation.48 Alternatively, countries may wish to negotiate agreement on
the qualification of certain items of income or assets under their respective
DTCs and create legal certainty by stating their agreement in additional
protocols to their DTCs.
3.3. And the Downright Ugly: Abuse
Finally, double non taxation can also result where MNEs claim the
benefits of divergent tax systems and/or DTCs in abusive ways, for example
by using conduit companies or otherwise only perfunctorily locating tax
subjects or objects to the territory of no- or low-tax countries. Generally
speaking, there is abuse each time a legal construct is created and maintained
exclusively for tax purposes without there being any real transfer of value
creating activities or other legitimate business reason for the particular
construct.49 Though there are already a number of rules allowing countries to
refuse treaty benefits in the case of such abusive behavior (namely national
laws), tax administrations may often find themselves at a loss to apprehend
such machinations, as they may not be able to access the information that
would allow them to deduce that such structures are being used. There is
hope, however, that this may be remedied at least to some extent with the
templates the OECD proposes in Action 13 of its BEPS project.50 Also,
more transparency is being created with the global implementation of the
OECD Standard on the Automatic Exchange of Information.51
IV. THE PROPOSED SOLUTION: THE OECD’S BEPS PROJECT –
OVERVIEW AND CRITIQUE OF THE 15 ACTIONS
At the beginning of 2013, the OECD published its BEPS Report, in
which it identified areas of international taxation in which MNEs, because of
their internationality, are able to achieve taxation that is more favorable than
single taxation in a certain country. As a whole, the BEPS Project offers the
idea of devising or modifying instruments to allow countries to assure
taxation at the place of economic activities and value creation.52 In order to
achieve this, the BEPS Action Plan outlines 15 actions to be taken that will
result in reports, changes to the OECD MTC and the OECD Commentary,
recommendations and changes to the OECD Transfer Pricing Guidelines.
Countries are then expected to speedily implement these modified
international standards into their national law and international treaties. To
48
49
OECD Commentary 2014, article 23 para 32.6.
Cf. also OECD, BEPS Report, p. 41; OECD Commentary 2014 article 1 para 13
ff.
Cf. below, chapter IV.8.
Cf. above, chapter I.
52 OECD, BEPS Report, p. 8.
50
51
56 facilitate the adaptation of DTCs to comply with modifications in
international standards in particular, the OECD proposes a multilateral
instrument which shall allow signatory countries to amend existing DTCs
with all other signatory countries simultaneously.53
1. Action 1: Digital Economy
Today’s global tax system focuses mostly on residence-based
taxation, with the key exception of permanent establishments, whose profits
are generally taxed in the source country. As regards the digital economy, the
OECD is now proposing that taxation of profits should take place in the
country of consumption or the country where a substantial internet presence
is upheld. This seem to be quite a strange idea at face value, and it is only
when reading the comments that it becomes clear that the idea behind this
proposition is that of a consumer led digital economy54. The OECD seems
to anticipate consumers themselves will increasingly be bound into the value
creation process, of which they become a vital part.55
This seems highly unorthodox, because the switch to a consumer led
digital economy has not yet taken place. It would be highly problematic to
assign taxing jurisdiction to the place where the consumer is located or
where there is a substantial internet presence, so long as it is not established
that value creation truly takes place there. As long as this is not established, a
genuine link between the potentially taxing country and the potentially
taxable value creation is lacking. This would make such taxation appear as an
inadmissible intrusion into the affairs of the countries to whose territory
such a genuine link, and thus jurisdiction to tax, is established. Even if it
were established that the consumer is involved in value creation, there would
need to be attribution of the share of value created. This share would, in all
likelihood, be fairly low, since it will mainly be algorithms that create value,
the consumer being degraded to a mere provider of data to feed into an
algorithm. I would also question whether assigning taxing power to the
consumer jurisdiction is the way to go, or if it wouldn’t be more coherent to
assume a wage (that may not be paid to the consumer as such, but may take
other forms such as price reductions or store credit linked to participation in
a customer fidelity program that allows a company to accumulate massive
amounts of customer data), tax this wage, and then, via formulary
apportionment, tax a corresponding part of business profits where the earner
of the (fictitious) wage is located.
Cf. OECD, BEPS Action Plan, Appendix A.
A consumer led digital economy is understood to be a digital economy in which
customer behavior, customer input and customer data are collected and analyzed so as to be
useful to the value creation process. Amazon’s announced “anticipatory shipping” policy
might be cited as a forerunner of this, cf. http://www.spiegel.de/netzwelt/web/neuespatent-amazon-will-schon-vor-der-bestellung-liefern-a-944252.html [14.12.2014].
55 Cf. OECD, Comments Digital Economy, p. 29.
53
54
57
It follows that, while the OECD correctly identifies a topic that will
necessitate global solutions in the near future, the way in which it proposes
to solve the problem (through the fiction of digital permanent
establishments at the situs of consumers) creates more problems and
potential for conflict than it solves. As is often the case within the BEPS
Project, basically sound ideas are not taken far enough, here in that the
OECD stays fixed on the outdated56 paradigm of residence-based taxation
and the very legalistic concept of permanent establishment rather than
suggesting a switch to a more source-based global system of taxation in
general.57
2. Action 2: Hybrids
Action 2 focuses on the tax effects of hybrid entities and
instruments. By creating a new set of standards to be implemented in
national legislation and proposing amendments to the OECD MTC, the
OECD hopes to minimize unwanted double non taxation58 resulting from
differences in qualification.59
3. Action 3: CFC-Rules
Regarding the OECD’s new-found approval of controlled foreign
corporation rules, pursuant to which, when enterprises take up residence in
low- or no-tax jurisdictions, the profits of these enterprises may continue to
be taxed by the controlling entity,60 it should be noted that this appears to
clash with article 7 of the OECD MTC, except in cases where the place of
residence is chosen abusively and is, in fact, not truly a place of effective
residence.61 It must be emphasized that, once more, a remedy (in this case
CFC-rules) is applied to fix a basic problem created by an outdated fixation
on residence and legal constructs in the taxation of enterprises, naturally
offering possibilities for abuse.62 Also, there seems to be some conflict with
Action 5, which proposes a move towards a stronger focus on substantial
activity, which seems diametrically opposed to taxation based on an assumed
At least as regards enterprises – the same may not hold true for natural persons,
in regard to whom taxation at residence may, in fact, continue to make sense.
57 Cf. also strongly in favor of a switch to a source-based system of taxation
Simonek, ZSR 2010 I, p. 561 ff.
58 Cf. chapter 3.3.2. above.
59 OECD, BEPS Action Plan, p. 15 f.; cf. also the discussion drafts on Action 2,
available
at
http://www.oecd.org/tax/discussion-drafts-action-2-hybrid-mismatcharrangements.htm [14.12.2014].
60 OECD, BEPS Action Plan, p. 16.
61 Cf. also the official Swiss position on this matter, OECD Commentary 2014
article 1 para 27.9.
62 Cf. also strongly in favor of a switch to a source-based system of taxation
Simonek, ZSR 2010 I, p. 561 ff.
56
58 place of residence, such as proposed by the CFC-rules. In the opinion
tendered here, CFC-rules are inherently wrong in a system of source-based
taxation, such as it is advocated here.
4. Action 4: Interest Deductions
Action 4 proposes to limit base erosion by limiting the deductibility
of interest payments and other financial payments. This is geared at divesting
financial machinations aimed solely at reducing tax burdens without any
other legitimate business reason to speak for them of their effectiveness for
tax purposes.63
5. Action 5: Harmful Tax Practices
Action 5 is dedicated to combatting harmful tax practices. While the
OECD’s quest to better align economic substance with taxation and achieve
greater transparency in international tax matters may be justified, its
sublimated crusade against tax competition in general certainly is not. There
is a consensus today that there is such a thing as harmful tax competition.
When countries impede on other countries’ sovereignty in tax matters, this
may result in a “race to the bottom” (towards zero-taxation).64 There is no
consensus that tax competition as such is a bad thing and must be
eliminated. That being said, the distinction between harmful tax competition,
healthy tax competition and tax cartels is not an easy one.
The view tendered here is the following: Since countries are
sovereign in tax matters, actions by other countries that prevent them from
freely devising and implementing a certain tax system regarding tax subjects
or objects on their territory may constitute interferences into their internal
affairs. This would be inadmissible pursuant to public international law.65
Such would be the case where Country A explicitly offers preferential tax
treatment to the production operations of foreign-based entities on its
territory, which is not available to entities resident in its own jurisdiction.
Such a ring-fenced regime would clearly constitute harmful tax competition
because there is certainly no legitimate internal policy reason for offering
preferential treatment only to taxpayers resident outside its own jurisdiction.
However, where Country A offers preferential treatment for certain types of
income across the board, applies a low effective tax rate, or does not tax
certain items of income at all, there will likely be legitimate reasons for this in
their internal policy. Country A is merely making use of its own tax
OECD, BEPS Action Plan, p. 16 f.
Cf. for example also OECD, BEPS Action Plan, p. 17.
65 Cf. article 2 para 7 UN-Charter (Charter of the United Nations of June 26 1945,
available at http://www.un.org/en/documents/charter/index.shtml [14.12.2014]); cf. e.g.
also Andreas R. Ziegler, Einführung in das Völkerrecht, 2nd edition, Bern 2011, para 620 f.;
Epping, Der Staat, § 5 para 258 f.
63
64
59
sovereignty, and not impeding on the tax sovereignty of Country B by
competing with it for a (more or less mobile) tax base.66 This should be
considered as a normal, healthy tax competition at play, though, for practical
reasons, we may need to treat highly mobile and difficult to locate elements
of income differently from others. The OECD, however, in its BEPS
Project, implies that not only classical “ring fenced” regimes (which have, at
any rate, all but disappeared) are problematic, but also the practice of taxing
certain types of income at preferential rates or all profits at generally low or
even nominal rates.67 The exclusion of foreign earned income from taxation
in the country of residence is also criticized without further explanation.68
This is unacceptable, since one country’s tax sovereignty must be limited by
every other country’s equal tax sovereignty. It is thus inadmissible to limit
only low- or no-tax jurisdictions’ tax sovereignty in favor of high- or
prohibitive-tax jurisdictions’ tax sovereignty. A compromise must be made,
and the compromise should be such that each country may adopt whatever
preferential tax rules it likes to certain items of income, so long as this
preferential treatment is available to all taxpayers in equal measure and so
long as it is not explicitly geared at eroding another country’s tax base.
Obviously, no country must devise its tax system such that mere pro forma
constructs may allow an enterprise to profit from a preferential regime
without either effectively realizing its profits there (assuming a source-based
system). Of course, preferential regimes are problematic where it is
practically impossible to check up on where value creation actually takes
place, as may be the case with many highly mobile and intangible assets such
as intellectual property. This problem may be addressed by choosing to
implement a method of formulary apportionment which bases only on
payroll and real assets, and considers intangible assets to be represented in
payroll.69 So long as the very basic principle of taxation at actual (not legal
construct-based) source is enforced, there should be less risk of a “race to
the bottom”, because in order to truly attract business activities, countries
must not only be able to offer competitive tax rates, but also a certain
(varying, depending on the needs of the enterprise in question) degree of
stability, infrastructure, qualified personnel, etc. Since all this costs money,
countries can be expected to think twice before lowering their tax rates so
low that a race toward zero-taxation would ensue, especially in countries
where voters, who would have to pick up the tab for expenditures
66 Cf. also Reuven S. Avi-Yonah, Globalization and Tax Competition: Implications
for Developing Countries, The University of Michigan Law School, Law Quadrangle Notes,
2001, p. 60 ff., 65. This author rightly argues, that, while voters in a democratic society
should be able to determine the size of the public sector through by demanding tax
increases of tax reduction, they should not be allowed to provide windfalls for foreign
investors.
67 OECD, BEPS Action Plan 17.
68 OECD, BEPS Report 17 f.
69 Cf. above, chapter III.2.2.
60 benefitting enterprises not being taxed, have a strong say in fiscal policy
(such as is the case in Switzerland).
Again, though, it must be reiterated that the true problem here is
allowing taxation to follow residence, since the concept of residence is so
easily and readily abused. This is yet another reason why residence-based
taxation should, in my opinion, be abolished altogether where companies are
concerned, in favor of a source-based system of taxation.70 As has been
discussed, a source-based system could be based on a regime similar to the
one we know from transfer pricing, or could be more geared towards a
formulary apportionment approach.71
6. Action 6: Treaty Abuse
Action 6 is geared towards combatting treaty abuse, namely treaty
shopping, and wishes to ensure that each part of a global value chain is,
indeed, taxed, so that no part may fall between the cracks in different
national tax systems. The OECD hopes, in particular, that in many cases,
working towards this common goal will enable source taxation. 72 For
example, the OECD has proposed including a lengthy article on the
entitlement to benefits (or rather the limitations to such entitlement) in the
OECD MTC. 73 However, once again, the real problem that should be
addressed is the inherent ease with which tax rules and treaties focusing on
artificial legal constructs such as residence or permanent establishments may
be circumvented by MNEs. In my opinion, the remedy in the fight against
treaty abuse should not be sought after in ever more extensive and
complicated anti-abuse provisions (which, quite frankly, one must hire a
specialized lawyer to fully understand and comply with), but instead in a
move toward a system of source-based taxation.74
7. Action 7: Permanent Establishments
The OECD’s intentions concerning permanent establishments are
mainly geared at preventing abuse and taxing value creation where it takes
place. 75 The problem here seems to be one of having a too formalistic
approach that will (even after the most recent revisions of the OECD Model
70 Cf. also strongly in favor of a switch to a source-based system of taxation
Simonek, ZSR 2010 I, p. 561 ff.
71 Cf. above, chapter III.2.2.2.
72 OECD, BEPS Action Plan, p. 18 f.
73 OECD, Public Discussion Draft, BEPS Action 6: Preventing the Granting of
Treaty
Benefits
in
Inappropriate
Circumstances
(2014),
available
at
http://www.oecd.org/ctp/treaties/treaty-abuse-discussion-draft-march-2014.pdf
[14.12.2014], p. 5 ff.
74 Cf. also strongly in favor of a switch to a source-based system of taxation
Simonek, ZSR 2010 I, p. 561 ff.
75 OECD, BEPS Action Plan, p. 19 f.
61
Tax Convention and its Commentary as well as after the revisions to be
proposed in September 2015 as a result of the BEPS Project) most likely be
all too easy to circumvent. The OECD’s approach consists in broadening the
notion of permanent establishment, rather than addressing the real issue,
which is that concepts such as residence or permanent establishment may
not be suited to apprehending and apportioning the value creation processes
of the 21st century for purposes of taxation. As has been argued above,
though formulary apportionment may have its weak points, it may be best
suited to dividing up the income of MNEs in a way that is less prone to
abuse.76 Though a system of formulary apportionment is a very simplified
system, it may well be that the gain in simplicity would strongly outweigh the
likely very marginal potential for more fairness of complex systems, since
these more complex systems always also offer an abundance of possibilities
for evasion.
8. Actions 8-10 and 13: Transfer Pricing
As regards transfer pricing, the OECD is not proposing any major
changes to the existing system, but prefers to tweak this system as laid out in
the Transfer Pricing Guidelines77 (last revised in 2010).78
The only noteworthy innovation proposed is quite a huge one
though – the OECD has proposed that MNE should, in the future, be
obligated to fill out a form to be submitted to all tax authorities involved,
and in which they would have to to disclose how resources, profits and
income are distributed across the globe.79 Such an approach, though it does
raise questions of legality, as many countries forbid a private person to act
This holds true, even though it is also true that e.g. a method based on real assets
and payroll may provide incentives to locate production and personnel in low-tax
jurisdictions, cf. Reuven S. Avi-Yonah/Kimberly Clausing, A Proposal to Adopt Formulary
Apportionment for Corporate Income Taxation: The Hamilton Project, University of
Michigan Law School, Law & Economics Working Papers, 2007, available at
http://repository.law.umich.edu/law_econ_archive/art70/ [12.12.2014], p. 12. However,
this is normal competition, not abuse, as long as these factors are actually transferred to this
other jurisdiction. Also, obviously, relocation of assets and personnel will never depend only
on tax factors – e.g., highly qualified personnel will not want to work on a pacific island with
no schools for their children or other infrastructure.
77 OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and
Tax Administrations (2010), available at: http://www.oecd-ilibrary.org/taxation/oecdtransfer-pricing-guidelines-for-multinational-enter
prises-and-tax-administrations-2010_tpg-2010-en [14.12.2014].
78 OECD, BEPS Action Plan, p. 20 f.
79 OECD, BEPS Action Plan, p. 22 f; cf. also Raoul Stocker, Base Erosion and Profit
Shifting (BEPS) – Abriss und mögliche Auswirkungen auf die schweizerische
Steuerrechtspraxis, IFF 2013, 302, 309, who admonishes that such transfer of information
directly to foreign tax authorities may necessitate authorization by the competent authorities
(this would most likely be the case in Switzerland pursuant to article 271 of the Swiss
Criminal Code, available in an official, but not legally binding English version at:
http://www.admin.ch/opc/en/classified-compilation/19370083/index.html [14.12.2014]).
76
62 for a foreign country,80 would at least make source-based taxation compatible
with countries’ wishes to tax progressively.81
9. Action 11: Data Collection and Analysis
Action 11 calls for the development of methods by which to collect
and analyze data in order to establish the extent and effect of BEPS.82 This
appears quite strange, since BEPS was already a topic of discussion around
the turn of the century. It could have been expected that between then and
now, such data could have been collected and analyzed before implementing
a number of actions whose effect is uncertain, and, quite frankly (since the
real problem of an outdated system of strongly form-based taxation is not
addressed) may be considered doubtful.
10. Action 12: Aggressive Tax Planning
Action 12 proposes that, in the future, enterprises should be made to
disclose their “aggressive tax planning arrangements” to tax authorities.83
What this means exactly is unclear, especially since what constitutes an
aggressive tax planning arrangement and what is merely an accepted way of
tax planning would appear to be very subjective. There is also the
unanswered question of what would happen in the case of non-compliance
with this obligation to disclose. Where tax planning arrangements, if deemed
to be inadmissible, may give rise to criminal prosecution, it would seem that
the principle of nemo tenetur set out in article 6 para 2 ECHR84 as well as
article 14 para 3 letter g ICCPR85 would prohibit sanctioning an enterprise in
any way for not contributing to its own incrimination86 by disclosing its tax
planning activities.
Cf. previous footnote.
Cf. also III.2.2.1. above.
82 OECD, BEPS Action Plan, p. 21 f.
83 OECD, BEPS Action Plan, p. 22.
84 European Convention for the Protection of Human Rights and Fundamental
Freedoms
of
November
4
1950,
available
at:
http://www.echr.coe.int/Documents/Convention_ENG.pdf [14.12.2014].
85 International Covenant on Civil and Political Rights of December 16 1966,
available
at:
http://www.ohchr.org/EN/ProfessionalInterest/Pages/CCPR.aspx
[14.12.2014].
86 In particular, no persuasive argument can be drawn from the fact that the
structures and activities of MNEs are often complex and thus hard for tax authorities to
understand, especially since the ECHR has ruled, in its judgment 19187/91 (Saunders
v/United Kingdom), para 74, that complexity does not justify a limitation to the principle of
nemo tenetur. Cf. also Marcel Alexander Niggli/Stefan Maeder, Verwaltungsstrafrecht,
Strafrecht und Strafprozessrecht – Grundprobleme, in: Eicker (Ed.), Aktuelle
Herausforderungen für die Praxis im Verwaltungsstrafverfahren, Bern 2013, p. 27 ff., 51;
Marcel Alexander Niggli/Christof Riedo, Verwaltungsstrafrecht, Teil 2: Eine Lösung, viele
Probleme, einige Beispiele und kein Märchen, in: Isabelle Häner/Bernhard Waldmann
80
81
63
11. Action 14: Effective Dispute Resolution Mechanisms
Action 14 proposes more effective dispute resolutions mechanisms.
This, of course, is to be applauded since it may contribute to more effective
elimination of double taxation as well as unintended double non taxation.
12. Action 15: Multilateral Instrument
Finally, the OECD plans to propose a multilateral instrument to its
member countries for signature as an alternative to implementing the new
standards (that will result from the BEPS Project) by revising all of their
existing DTCs individually. 87 While this makes sense from a practical
standpoint, considerable concern is warranted about the OECD
overstepping the boundaries of its authority, which, though encompassing
the setting of standards for DTCs in order to facilitate their conclusion, does
not extend to materially uniformizing national laws.88 This should not pose
much of a problem as long as the OECD (and the G20) limits itself to
proposing possible uniform principles and standards. It becomes a problem,
however, when pressure is applied to adhere to these standards, as is to be
expected.
V. PROBLEMS EVIDENCED BY THE OECD’S BEPS PROJECT
1. Lack of Democratic Legitimization
There is a trend in today’s global law evidenced beautifully in the
OECD’s BEPS Project. A handful of “specialists” are being entrusted with
designing a set of international standards, submitting their work only for a
fairly limited review by other specialists. 89 The proposed international
(Eds.),
Verwaltungsstrafrecht
und
sanktionierendes
Verwaltungsrecht,
Zurich/Basel/Geneva 2010, p. 51 ff., 62 f; Stefan Trechsel, Bankgeheimnis –
Steuerstrafverfahren – Menschenrechte: Nemo tenetur bei Steuerhinterziehung, ZStrR 2005,
p. 256 ff., 266.
87 OECD, BEPS Action Plan, p. 23 f.
88 Cf. article 1 letter d OECD-Charter.
89 For, truthfully, though officially there is a great deal of “public consultation”
taking place, it is hardly realistic that anyone other than a very few very specialized tax
planners and lawyers will ever be able to make time to study the mountain of paper
produced in relation to the BEPS Project thoroughly enough to wish to submit comments.
Thus, it may be said that widespread discussion within a democratic framework has not
taken place. I suspect this is not wholly unintended by the OECD, which, indeed, has taken
great care not to keep at least the basic principles simple and easily comprehensible, but
instead has chosen to keep things extremely technical, thus effectively excluding anyone but
experts in international taxation of business income from the “public” discussion.
64 standards are then endorsed by their superiors (politicians) 90 as “best
practices” that national lawmakers must abide by. This is problematic not
only because ordinary democratic procedures in the individual countries are
circumvented, but also because it entails a growing, and often unnecessary,
complexity in global law that begs the question of whether the old adage of
“ignorantia iuris nocet” is, in fact, still warranted. Does it seem right that
taxpayers must hire specialized lawyers to assist them with even
understanding what their tax obligations are? And, I might add, is this
increase in complexity simply the bane of our time, or is it accelerated by the
move towards global standards, which allow little room for previous practice
and legal culture in individual countries, thus creating the need for more
precise rules, since there is no possibility of drawing on common legal
traditions and principles? The question stands.
2. Too little too late?
Another problem of global law is that, too often, and perhaps even
more often than on a national level, discussions on much needed change
remain vague and noncommittal until the need for change becomes truly
urgent, as the alternative is uncoordinated action by countries. This, sadly,
often seems to mean that problems are tackled only after considerable
damage has already been done, and that the changes implemented merely
aim to avoid a repetition of whatever crisis has just come to pass. This is
either because this is all everyone can agree on, or because the foresight
necessary to identify and prevent foreseeable future problems is lacking. This
has become exceedingly apparent while presenting the BEPS Project. It
seems glaringly obvious that a number of the issues the BEPS Project aims
to fix could be avoided altogether if our global system of taxation was not
one of residence-based taxation, but rather of exclusive source-based
taxation. However, nowhere in the BEPS Project is this mentioned,
presumably because such a change may not be in the best interests of the
more powerful capital exporting nations who make up most of the members
of the OECD. This, then, brings us to our last criticism:
3. The Old Problem of Might vs. Right
As expected, international law (which, here, is meant to include
international soft law) remains very much a question of power. As such, it
may inherently disadvantage smaller, less powerful or less developed
countries. This is evidenced by the predominance today of residence-based
taxation which, indisputably, disadvantages developing and emerging
countries. But it is also apparent in the OECD’s tendency to want to move
towards taxation of business profits at consumer situs, which calls for the
90
In the case of the OECD this would be the OECD Council.
65
same criticism as has been voiced concerning formulary apportionment
based on sales.91
91
Cf. above, chapter III.2.2.2. 66 67
GLOBAL FINANCIAL GOVERNANCE AND REGULATION:
CHALLENGES AND OPPORTUNITIES AHEAD
Kelly Chen ∗
Stockholm University, Faculty of Law
ABSTRACT
The reality of modern finance is that unprecedented large capital
flows and financial institutes can now easily move across nation borders. The
regulation and supervision of them have, however and unfortunately, not
been globalized at an equal pace. They remain to be defined and confined by
traditional territorial and jurisdictional constraints. In the pursue of achieving
global financial regulatory convergence, and in conjunction with the absence
of legal instruments recognized under international law, soft law has come to
dominate international finance. This paper seeks to shed some lights on the
evolution of the current soft law governing and regulatory structure. The
latest financial crisis served as the trigger point for a number of reforms at
the global level. The current structure has come to resemble a legal system
that challenges out traditional perception of international rule- and
lawmaking.
Doctoral Candidate, Stockholm Centre for Commercial Law (SCCL), Faculty of
Law, Stockholm University, Sweden. Email: [email protected].
∗
68 I. INTRODUCTION
Modern finance has been shaped by financial globalization – the
integration of local financial systems with the international markets and
institutions – over the past four decades. Local markets are now deeply
interdependent and interlocked, for the rogue market participants, the whole
world has become their playground. The integrated markets have called for a
regulatory regime that can better factor in its global and mobile
characteristics.
There is thus an urgent need for global convergence in laws and
regulations that can raise, inter alia, stability and soundness in cross-border
financial flows. This is, however a difficult, and perhaps even impossible
task. It is not an understatement to claim that the latest financial crisis shone
a sharp light on the (mal)functioning of financial regulations in some of the
world’s most leading economies. It also ignited a closer scrutiny of the global
financial regulatory framework, which was first introduced in the wake of
another crisis of global impact – the Asian financial crisis in the late nineties.
This framework was constituted by both informal political bodies such as the
G20, transnational regulatory networks (TRNs) best known by the Basel
Committee on Banking Supervision (BCBS) and the International
Organization of Securities Commissioners (IOSCO), and formal financial
institutions such as the International Monetary Fund (IMF) and the World
Bank. This was, however, a rather fragmented regulatory landscape, high in
ambition but lacked of much real impact. Entailed by the latest financial
crisis, there have been a number of efforts to address the shortcomings,
which has resulted in a more tightened structure that now resembles a
regulatory system.
In the epicenter of this system, there are the standards produced by
the TRNs, which are composed by technocrats and experts within their
respective field. The standards are produced by multinational teams in order
to tackle the demands of the international markets. However, TRNs are
international groups that are founded on informal bylaws, charters and
articles of accession without binding international obligations. The standards
are therefore depended on national implementations and domestic
enforcement mechanisms. This step is also taken on an informal basis,
namely through commitments by the member states of the G20 and TRNs.
Due to the lack of formal state arrangements, the system is best defined as
soft law.
The paper starts with a useful contextual in order to point out the
driving force and determining factor of global financial governance and
regulation, i.e. the expansion of cross-border financial activities. It gives a
detailed account of the main components in order to emphasis on the fact
that despite it resembles a legal system, it can still not constitute as a formal
public international law configuration Instead, the system has become a
model for alternative paths in the governance of global matters in the
twenty-first century. The paper is concluded by an investigation in the notion
69
that, if fully complied to and functioning, this soft law system could be a
demonstration of how finance at the global level can be regulated and
governed in almost absence of international law, resulting in a regulatory
structure that challenges our traditional perception of rule- and law making.
II. THE GLOBAL FINANCIAL REGULATORY SYSTEM
Unlike adjacent areas such as international trade, monetary affairs
and investments, international finance is not coordinated through formal
international organizations; neither is states cooperating by entering into
binding multilateral, pluri-lateral or bilateral treaties. It is in this absence of
public international law instruments that the current financial governance
and regulatory system has been identified as international soft law.1
In regards of setting the direction of the standards in the
international financial markets, there has been and still evolving shift from
the hegemonic dominance of the United States in order to include the rising
Global South. Economic multipolarity has, among others, demanded for
more interstate cooperation. However, a true multilateral political response is
still not a reality. There has been a significant interest in the academia to
theorize the subject area and the approaches may differ from the disciplines
of political science to law. 2 Albeit the disciplinary debate, the issue remains
the same, namely that the international financial governance, at the moment,
is being controlled by only a few. There is a power struggle that needs to be
sorted out before achieving, or perhaps determining whether international
finance should be governed by the many. The long-drawn-out Doha Round
has weakened multilateralism. States have been forced to find other means
such as plurilateral and bilateral agreements on trade in services and
investments, to cooperate. Moreover, before reaching equilibrium, the
absence of a more forceful legal regime has also given the powerful states the
opportunity to act unilaterally.
One undisputed factor is, however, that the trigger points in the
shaping of global financial governance and regulation have been crisis and
turbulences. After all, a serious crisis should never go to “waste”. 3 The
1 In regards of hard and soft law in international governance, see Abbott, Kenneth
W. and Snidal, Duncan, Hard and Soft Law in International Governance, International
Organization, Vol. 54, p. 421, 2000.
2 See for example, Wade, Robert H., Emerging World Order? From Multipolarity
to Multilateralism in the G20, the World and IMF, Political & Societ, Vol. 39, No. 3, p. 365,
2011, Brummer, Chris, Minilateralism: How Trade Alliances, Soft Law and Financial Engineering
Are Redefining Economic Statecraft, Cambridge University Press, Cambridge, 2014, and Armour,
John and Awrey, Dan and Davies, Paul L. and Gordon, Jeffrey N. and Mayer, Colin and
Payne, Jennifer, Principles of Financial Regulation (forthcoming), Oxford University Press,
oxford, 2015.
3 It became somewhat fashionable to quote the US Chief of Staff, Rahm Emanuel,
in the immediate period after the crisis. Some have viewed it as an expression of the
70 contour of today’s system was first drawn in the wake of the Asian financial
crisis. International finance during the 1990s prospered due to liberalization
of domestic financial markets for foreign participation, capital account,
deregulation and removal of capital restrictions. Both domestic and
international regulation, on the other hand, had not been developed to
handle the issues entailed by these liberalization policies. The Asian financial
crisis expanded across South East Asia and eventually caused turbulences in
other emerging economies, predominantly Russia and Brazil.4 It instigated
enough concerns that the Group of 7 (G7) took the initial steps to found a
new international financial architecture to ensure financial stability in the
globalized markets.5
The response to the crisis laid the foundation for a system centered
on agenda and standard settings. Since then, GFR has been dominated by
the TRNs. 6 The system is characterized by the following levels. First,
consensus based state-to-state agenda setting through the various Gformations. Second, standard setting by informal international organization
of national authorities and experts of technocratic nature. Third, domestic
implementation of the standards as a voluntary measure. Fourth, monitoring
the implementations through the International Monetary Fund (IMF) and
the World Bank Financial Sector Assessment Program (FSAP).7
The system is a demonstration of the functioning of soft law. The
subject matter itself is much debated. Many times, soft law is a better
reflection of reality but lacks some of the most defining features of law. The
permanent trait of soft law is its uncertainty, it remains to be secondary and
complementary to its opposite, hard law. In the absence of formal state
arrangements, there has been a necessity for national regulators and market
participants to fill this regulatory vacuum, the Bretton Woods System, which
politicians’ opportunistic behavior, and some have seen it has a recognition of the urgent
need of financial regulation.
4 Avgouleas, Emilios, Governance of global financial markets: the law, the economics, the
politics, Cambridge University Press, Cambridge, 2012, pp. 72-74.
5 Arner, Douglas W. and Buckley, Ross P., Redesigning the Architecture of the
Global Financial System , Melbourne Journal of International Law, Vol. 11, No. 2, 2010, pp. 1718.
6 The term has a political science root and derives from the regulatory network
theory, see for example Slaughter, AM., A New World Order, Princeton University Press,
Princeton, UK, 2004. In the legal literature, these organizations have been referred to as,
inter alia, TRNs by Avgouleas, Emilio [hereafter Avgouleas, 2013], Rationales and Designs to
Implement an Institutional Big Bang in the Governance of Global Finance, Seattle University
Law Review IV Berle Symposium Vol 36, 2013, pp. 321-390. As international regulatory financial
regulatory organizations by Zaring, D. (1998). International Law by Other Means: The Twilight
Existence of International Financial Regulatory Organizations. Texas International Law Journal,
33281, and as international regulatory committees by Black, J., Restructuring global and EU
financial regulation: character, capacities and learning In: Wymeersch, Eddy and Hopt,
Klaus J. and Ferrarini, Guido, (eds.) [hereafter Wymeersch, 2012] Financial Regulation and
Supervision: a Post-Crisis Analysis. Oxford University Press, Oxford, UK, 2012.
7 Avgouleas, 2013, p. 330.
71
aimed to limit cross-border capital flows and dedicated to the domestic
financial markets, were never intended to govern international finance,
neither was the objectives of the World Trade Organization to secure
financial stability in the world markets. The current system has evolved
organically by major political initiatives, market integration and turbulences.
The major players in TRNs are national regulators (but not state
representatives), technocrats and industry representatives.
However, due to the soft law domination, this governance and
regulatory model has been dismissed, at least by the legal traditionalist, too
quickly. Rather, it is in the international relations literature that many legal
scholars have found the theoretical framework to evaluate the evolution and
conclude the future of these informal but influential norm setters. 8
Considering the expansion of soft law, penetrating almost all areas of law in
both domestic and international context, it has gained much prominence in
the legal scholarship. Alike other scholars in the field, the author believes
that the subject area should be examined based on its own premises and not
approached from the well-established institution of international (hard) law
perspective.
The following sections offer a bird’s-eye view of the major
organizational changes within and between the G20, FSB and the major
TRNs. The author has tried to point out not only the legal but also political
and market changes that have endorsed the developments in the
international system.
One of the earliest theories is regime theory, see for example Zaring, David
[hereafter Zaring, 1998a] International Law by Other Means: The Twilight Existence of
International Financial Regulatory Organizations, Texas International Law Journal, 1998, Vol.
33 Issue 2, pp. 281-330. For the theory of transnational (transgovernmental) regulatory
networks, see Verdier, Pierre-Hugues [hereafter Verdier, 2009], Transnational Regulatory
Networks and Their Limits, Yale Journal of International Law, 2009, Vol. 34 No 1, pp. 113-172,
and Slaughter, Anne-Marie, A New World Order, Princeton University Press, Princeton, 2004.
In general, Brummer, Chris [hereafter Brummer, 2011b], How International Financial Law
Works (and How it Doesn't), Georgetown Law Journal, Vol. 99, 2011; Georgetown Law
and Economics Research Paper No. 11-15; Georgetown Public Law Research Paper No. 11112.
8
72 The Global Financial Regulatory System
Level 1
Agenda Setting: G20
Coordination: Financial Stability Board (FSB)
Level 2
Standard Setting: Transnational Regulatory Networks (TRNs)
Level 3
National implementation: G20 and FSB member states and beyond
Level 4
Compliance Monitoring: International Monetary Fund (IMF) and World
Bank Financial Stability Assessment Program (FSAP)
FSB and TRN in-house peer review and monitoring systems
1. Agenda Setting
When it comes to international financial governance, the driving
forces have, at least not at all times, been to ensure stability, investor and
consumer protection, but other economic and political aspirations such as
striking a balance between the most powerful nation states. Earlier, it was
mostly a transatlantic dialogue between the US and the European countries,
and now also with the powerful emerging markets such as China, which
arguably has replaced Japan as the leading representative for Asia. One of the
advantages with this informal system is the possibility to keep the
negotiations behind closed doors. Under international law, the decisionmaking process would need to be open and subject to public scrutiny.
One of the driving forces, and reason for the states to commit to
implementation, is the realization of the policymakers that inadequate
regulation in one jurisdiction might have negative spill-over effect in others,
and even globally if it reaches a certain degree. The sub-prime crisis in the
US for example, came to expand into a crisis of global impact.
73
1.1. The Group of Twenty
The Asia/Russia/Brazil crisis of 1997-1999 did not only cause severe
turbulence in the markets, it also prompted enough concerns amongst the
politicians that financial stability became the top priority for the G7. It
resulted in the inclusion of the major emerging markets. Thus, the G20 was
born in 1999.9 In 2008, in the wake of the latest crisis, the first G20 Leaders
Summit was held and the group became the leading agenda setting body in
global financial regulation and governance. In order to reach better
coordination amongst nation states and international financial institutions,
the IMF managing director, the Chair of IMF International Monetary and
Financial Committee and Development Committee, the President of the
World Bank, became ex officio members of the G20. The Organization for
Economic Cooperation and Development (OECD), but not the WTO, is
also involved. 10 The EU is represented by the EU Presidency and the
European Central Bank (ECB) at the leader’s level and the rotating
presidency of the EU Council and ECB at the bank governor’s level.
The origin of the G-formations dates back to a series of meetings
between the finance ministers of France, Japan, the UK, the US and West
Germany. During the turbulent years in the 1970s, including the collapse of
the Bretton Woods System, oil crisis and inflation in several developed
economies, it became evident that greater coordination of economic and
financial policy at the highest level was much required. The expansion of
group in the following was a question of managing the transatlantic balance
between the US and the European countries. Even the expansion to G20,
which officially was based on the invitees’ gross domestic product and
population, was essentially also driven by the US intention to bring in more
of its allies in order to counter the Europeans. This was a part of a broader
agenda to de-Europeanize the governing of other major international
financial institutions such as the IMF and the World Bank.11
A major concern is the geopolitics and inclusiveness of this elite club
of 19 countries and the EU. The inclusion of major emerging markets such
as the Brazil, Russia, India, China and South Africa (BRICS) is a major step
towards the expansion of the geopolitical base and forces driving GFR
forward.12 Today, the G20 is quick to boast with some impressive numbers,
9 The G20 members are Argentina, Australia, Brazil, Canada, China, France,
Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia,
South Africa, Turkey, the United Kingdom, the United States and the European Union,
https://www.g20.org/about_g20/g20_members.
10 Avgouleas, 2013, p. 346.
11 Wade, Robert H., Emerging World Order? From Multipolarity to Multilateralism
in the G20, the World Bank, and the IMF, Politics & Society , September 2011 vol. 39 no. 3
347-378.
12 Currently, the membership includes half of the MINT countries (Mexico,
Indonesia, Nigeria and Turkey), which is a part of the so-called Next Eleven countries
74 the membership represent about two-thirds of the world’s population, 85 per
cent of global gross domestic product and over 75 per cent of global trade.
However, when taking a closer look at the member map, it raises the
question if GFR should continue to be an exclusive subject matter for the
countries with the most advanced or emerging markets, or should the
developing countries in Africa, Central Asia, and Asia. As a
counterargument, the scope of the G20 could be regarded as extended by
the participation of the chairs of political, economic and trade organizations
and unions. Each year, the Chair of the Association of Southeast Asian
Nations (ASEAN), the Chair of the African Union and a representative of
the New Partnership for Africa’s Development (NEPAD) are invited to
participate in the leader’s summit.13
In the wake of the latest financial crisis, the G20 proved to be the
prime body in international financial governance. A task that could not be
performed by TRNs due to their lack of power and capacity to coordinate
international crisis management initiatives. However, it is essential to
remember that G20 is not an international organization with a formal set of
agenda. It is therefore questionable whether the group can resume a more
permanent leadership role in international finance. 14 Indeed, GFR has
become pivotal, the focus of the G20 is not, and neither will it be, solely
dedicated to international financial governance.
1.2. Financial Stability Board
The role of a more permanent coordination body in international
finance has perhaps instead landed on the Financial Stability Board (FSB). In
2008, the G20 leaders decided to broaden the board’s mandate, which
consisted of coordination of the standards setting processes and oversight of
the TRNs. The reconstruction of the FSF to FSB serves as an effort to
amend the short-comings in the previous model. In comparison, the FSB has
widened its membership to include the G20 countries and beyond (although
still narrow), international financial organizations and major TRNs. Unlike
the TRNs, the FSB member states are represented by both bank governors
and finance ministers. The EU us represented by the EU Commission and
the ECB.15 The board, unlike the G20, has been equipped with a permanent
secretariat at the Bank for International Settlements (BIS).
(Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey,
South Korea and Vietnam) of growing economies as the “ new” BRIC countries.
13 Other countries include Spain (a permanent invitee) and a country or countries
usually from the same region as the country holding the rotating G20 Presidency. .
14 Avgouleas, 2013, pp. 346-347.
15 The members are Argentina, Australia, Brazil, Canada, China, France, Germany,
Hong Kong, India, Indonesia, Italy, Japan, Mexico, Netherlands, Russia, Saudi Arabia,
Singapore, South Africa, South Korea, Spain, Switzerland, Turkey, UK and US.
75
The leadership concept of the FSB is “Leading by example”, the
credibility of the board to ensure stability in all countries and jurisdictions is
augmented by the members’ commitments to the TRN international
standards and compliance mechanisms. The members have committed to
implement the 12 key International Standards and Codes promulgated by the
major TRNs, the IMF and World Bank, to undergo assessment under the
IMF-World Bank Financial Sector Assessment Program (FSAP) every five
years, to disclose their degree of adherence by publishing detailed
assessments by the IMF and World Bank as a basis for the Reports on the
Observance of Standards and Codes (ROSCs) and to undergo periodic peer
reviews. These commitments, if fully complied, would serve to tighten the
international financial system described above.
However, alike its predecessor the Financial Stability Forum (FSF), it
lacks of any international standing. At this point, the position of the board as
a permanent coordinative force in international finance is still uncertain.
Brummer has referred to the board as the G20’s “technocratic counterpart”.
However, in many cases, the member states are represented by their finance
ministers – politicians and not technical experts. According to Black, one of
the challenges the FSB has ahead is to balance the many political forces. The
board has assumed the role as an arm to the G20 and Black has questioned
the board’s prospect to become the “head of global”. She argues that the
board might tie its legitimation to G20, and it is perhaps useful today but
might also hamper its possibility to act independently in the future.16 As for
the legitimacy discussion, Brummer argues that since the informal bodies,
networks and institutions act in a web of interconnected and overlapping
systems and strategies, a macro level conception of legitimacy should
therefore be required. The reconstructions since the latest financial crisis
have resulted in a more vertically regulated system with the G20 and FSB at
the top. International financial regulation and supervision have been
periodically addressed by the G20 at the leader’s level. As a result, TRNs are
now reporting, at least on an indirect basis to heads of states and a more
institutional nested system where the expertise of standard setters is
combined with more politically accountable authority represented by the
head of states and finance ministers. The G20 and FSB are therefore
functioning as a kind of democracy-enhancing mechanism.17
2. Standard Setting
The second level is standard setting by TRNs. These organizations
are often founded on informal bylaws, charters and articles of accession
without binding international obligations. The TRNs can crudely, based on
their memberships, be divided into two categories, the ones consisting of
private actors, often experts in their respective fields and the ones of national
16
17
Wymeersch, 2012, p. 28.
Brummer, 2014, pp. 192-193.
76 supervisory authorities. Some of the most influential standards-setting bodies
of the first category are, for example, the International Accounting Standards
Board (IASB) and the Committee on Payment and Settlement Systems
(CPSS).18
The three of the most well-known TRNs are the sectorial ones,
namely the Basel Committee on Banking Supervision (BCBS) in banking, the
International Organization of Securities Commissions (IOSCO) in securities
and the International Association of Insurance Supervisors (IAIS) in
insurance. In order to provide some inter-sectorial coordination, there is the
Joint Forum, which is comprised by an equal numbers of representatives
from each regulatory supervisory constituency. In much of the literature on
international financial law, the focus is directed on the Basel Committee on
Banking Supervision (BCBS) and the Basel Accords. Admittedly, this paper
is not an exemption. The author would, however, like to emphases on the
fact there are a number other very influential TRNs such as IAASB and
FATF.
These entities operate independently from state arrangements and
thereby form a web of intergovernmental regulatory network. Here, the
TRNs of national regulators could be viewed as a manifestation of global
administrative law in international finance. The networks are thus
horizontally connected as well as vertically through memberships. The G20
countries, IMF and World Bank are members of the TRNs. All of them and
the major TRNs are also members of the FSB, which has granted the
mandate to oversee and coordinate the standard setting processes. It is then
mandatory for the FSB member states to implement the main TRN
standards. In this way, they are all members of each other on a cross-cross
basis and form an intricate web of network. Moreover, they have also
managed to connect self-regulatory and industry associations into the system
by accepting them as, though also non-voting, members.
2.1. The Basel Committee on Banking Supervision
The BCBS was the first of the sectorial organizations to be founded
in the international financial markets. The initial era of the global financial
system, due to the rapid development of euro-currency market, began in the
early 1960s. This market of free and international market caused enough
concern amongst the central bank Governors that the first international
committee, which paved the way for the BCBS, was set up to analyze its
18 Others include the International Auditing and Assurance Standards Board
(IAASB) and the International Association of Deposit Insurers (IADI), and the intergovernmental body of the Financial Action Task Force (FATF), whose standards have been
adopted by the FSB as key standards for sound financial systems,
http://www.financialstabilityboard.org/cos/key_standards.htm (last viewed 5 August 2014).
For a discussion on their influence on the global harmonization of their standards see Part
II.
77
macro-economic and international implications.19 In the turmoil times of the
1970s, increased oil prices and exchange rate volatility, banks started to
accelerate their investment activities abroad. Soon enough, it was evident
that the existing system had major structural faults. It all was uncovered
when a small, although of rather major position in the foreign exchange
markets, Herstatt Bank (origin of the Herstatt risk), closed for business
before its foreign exchange positions in New York were settled, leaving the
local counterparties fully exposed.20 This could be seen as the first major
international payment crisis, and surely put enough pressure on the central
bank governors to establish a committee of central bank governors and
banking regulators of the G10 countries – the BCBS was born. The most
notable productions are the Core Principle on Effective Banking Supervision
and the Accords on Capital Adequacy (Basel 1, 2, 2.5 and 3 or Basel
Accords).21
According to Goodhart, whilst the banking had become more
international, the scope of the regulation remained national and confined by
the traditional territorial and jurisdictional restraints. This contrast caused a
number of issues such as inefficient competition, supervision of international
banks and the allocation of burden between home and host regulators. In the
absence of regulation based on treaty and treaty based international
organization, the BCBS came to ease the tension between the need for
international harmonization and domestic regulation.22
From the very beginning, the BCBS was focused on cross-border
supervision of international banks (originally of the members) and capital
adequacy. The first attempt to allocate the supervisory authority between the
home and host regulator in case of international banks was the Basel
Concordat of 1975. It proved, however, to be much too inadequate to
manage the problems emerged in the increasing complex international
19 Today, the Committee on the Global Financial System (CGFS), the Committee
has a mandate to identify and assess potential sources of stress in global financial markets, to
further the understanding of the structural underpinnings of financial markets, and to
promote improvements to the functioning and stability of these markets. The CGFS,
formerly known as the Euro-currency Standing Committee, was established in 1971 with a
mandate to monitor international banking markets. Its initial focus was on the monetary
policy implications of the rapid growth of off-shore deposit and lending markets, but
attention increasingly shifted to financial stability questions and to broader issues related to
structural change in the financial system. [http://www.bis.org/cgfs/ (last viewed 6 august
2014)].
20 Brummer has argued that this was the origins of modern soft law system of
financial regulation sprung from this failure. Brummer, 2014, p. 99.
21 Avgouleas, 2013, pp. 328-329, Brummer, Chris [hereafter Brummer 2011a], Soft
Law and the Global Financial System [e-book]: Rule Making in the 21st Century, Cambridge
University Press, Cambridge, 2011, p. 75-77, and Goodhart C. [hereafter Goodhart, 2011],
The Basel Committee On Banking Supervision : A History Of The Early Years, 1974 - 1997 [e-book].
Cambridge, 2011, p. 4. Arner D, Buckley R. Redesigning the Architecture of the Global
Financial System, Melbourne Journal Of International Law, no 2, 2010, p 14.
22 Goodhart, 2011, p. 5.
78 markets and was effectively replaced. Today, its legacy can be found in the
Core Principles for Effective Banking Supervision, last revised in 2006, and
included in the FSB key standards for sound financial systems.
The best known production of the committee is the Basel Accords.
The mandate to develop capital adequacy requirements, resulted in Basel 1,
accepted by multiple nation states changed the character of the committee
fundamentally. Previously, the BCBS had operated on a consensus based
manner in the production of best practice in order to advice their respective
governors to recommend national implementations. In the matter of capital
adequacy on the other hand, there were fundamental differences between
several major member states that the work progress was pushed towards
reaching compromise solutions. The BCBS had thus developed from a body
providing recommendations to their respective governors, to becoming a
body that formulated standards with international reach. The BCBS came to
fill the political, economic and legal vacuum between the increasing
international nature of banking and the domestic focus of financial
regulation and supervision. Political directions were asserted when there
were disturbances in the international markets; the technocratic nature of the
committee was otherwise left enacted.
In order to level the playing field between banks internationally,
Basel I introduced the requirement of banks to maintain an 8 per cent
minimum capital ratio. The assets’ risk-weighing, which later proved to be
much too crude, was calculated based on whether the counterparties were
member or non-members of the OECD and their organizational, legal or
economic nature, without any assessments of their credit-worthiness. It was,
however, successfully adopted both by the developed and developing
countries.
By the end of the 1990s, extensive negotiations started and Basel II
was issued in 2004. The new accord, despite the fact that credit rating was
absent in Europe, introduced the use of credit ratings for risk calculation. It
also the most sophisticated banks the substantial discretion to adopt internal
rating-based approaches to assess the credit risk. Such discretion was
severely criticized due to the latest financial crisis. In addition, the Basel II
did not have any measures against systematic risk. Consequently, the focus of
Basel III is to lay the foundation for a new generation capital requirements,
identification of systematically important financial institutions and
determination of the best compensation and governance practices in order to
strengthen financial stability.23 Moreover, the new set of rules provides for a
countercyclical than the procyclical buffer in Basel II.
2.2. The International Organization of Securities Commissions
The motivation for international coordination in the securities
markets was not market failures or cross-border crises, but to ensure more
23
Brummer, 2011a, p. 77.
79
robust and common approaches to securities regulation and adequate
cooperation to enforce national laws. This has later developed to include
developing standards to ensure financial stability when these mobile firms
proved to be sources of systematic risk.24
The scope of the IOSCO was not global from the beginning; it was
originated in North America and later to include Latin America. The main
driving force was the US, which sought to introduce bilateral memoranda of
understandings (MOUs) in order to provide a framework for cooperation
and information exchange among regulators in different jurisdictions.
Mostly, it worked in one direction, where the US required the information,
due to the resistance the authority had met in its assertive extraterritorial
regulatory actions. Instead of pushing for more forceful offshore
enforcement efforts, the US found more persuasive ways to obtain its
means, namely by endorsing the IOSCO MOUs.25
Today, the IOSCO membership covers more than 90 per cent of the
securities regulators in the world. As for the MOUs, they are non-binding,
soft-law agreements that are not enforceable in international law. Their reach
is thus defined and limited by domestic laws. A major change, as response
to the 9/11, was the introduction of multilateral agreements, the Multilateral
Memorandum of Understanding Concerning Consultation and Cooperation
and the Exchange of Information (MMOU). This was a significant step
towards expanding its international reach in securities cooperation. In order
to gain effective result, the members agreed to either sign or commit to
signing by 2010. Acceptance of signatory was based on the demonstration of
a jurisdiction’s legal authority to provide the necessary legal assistance within
the MMOU framework. This step is vital since the MMOUs are soft law
instruments and by commitments from the legislators of the signatories and
not only the regulatory authorities, the MMOUs obtained a quasi-binding
legal status. By 2012, the MMOUs had coverage of 95 per cent of the
world’s securities markets. In several cases, the signatories had to push for
changes in the domestic legislation in order to attain the authority to assist
foreign counterparts in enforcement procedures. This process, the hardening
of soft law, took place before the eruption of the latest financial crisis and
demonstrates the ways that TRNs can successfully push national legislators
working towards international convergence.26
As for being a standard setter, the IOSCO assumed the role in the
after-match of the Asian financial crisis and released the Objectives and
Principles of Securities Regulation in 1998. This was the departure point for
the organization to become the top sectorial standard setter in international
finance. The document has been included in the FSB key standards and
principles for found financial systems. Since the latest crisis, with the support
of the G20, the IOSCO has accelerated its standard setting operation and
Brummer, 2011a, p. 77.
Jordan, 2014, p. 34.
26 Wymeersch, 2012, p. 401.
24
25
80 promulgated a number of guidelines and principles in financial activities
related to the securities sector, including the field of shadow banking and
code of conduct for credit-rating agencies.
From an international convergence perspective, the widening of the
membership has contributed to closing the gap between regulators of the
developed countries and the emerging economies by providing a forum for
discussion and training sessions. Through the IOSCO, the creation of a
common language of securities regulations in English has been introduced
on a worldwide basis. Naturally, the standards produced would also not only
consider the developments and characteristics of the most advanced
economies. The membership is three-tiered where the ordinary members are
equipped with full voting rights. The membership includes national
supervisory authorities and international formal organizations. In addition,
since self-regulation has, and perhaps continues, to be an important
component of the financial markets, stock exchanges, and industry
associations and self-regulatory organizations.
2.3. The International Association of Insurance Supervisors
The newest of the sectorial standard setters is the International
Association of Insurance Supervisors (IAIS). The association is the result of
active lobbying of then banking and securities regulators. It was not until the
early 1990s, when the insurance companies started to engage in complex
financial transactions and reinsurance business that the IAIS was established
in 1994. The regulators in the US and elsewhere realized the potential danger
of the industry becoming a systematic risk.
There are several similarities between the association and the
IOSCO, the wide membership for one and the membership of formal
international organizations and private experts groups as members and
observers. Its main standard setting production is the Insurance Core
Principles that provide a globally accepted framework for the supervision of
the insurance sector. Last amended in 2013, it is included in the FSB key
standards for sound financial systems. In 2007, the association drew up
MMOUs on cooperation and information exchange amongst its members. The
failure of the insurance giant AIG, in the midst of the latest financial crisis,
was a trigger for the IAIS to ramp up its standard setting operation and adopt a
more comprehensive approach towards consolidating regulation of insurance
companies with international affiliates. In comparison to the IOSCO and
BCBS, this organization is still at an infantry stage and a larger volume of
standards is expected.
3. National Implementation
Since any legal measure, in order to be effective, needs the
acquiescence of the regulated, a key step in the system is therefore the
national implementation of the international soft law standards. This process
81
is often recognized as the hardening of soft law. One of the most essential
motivations behind the implementations is the realization of the policymakers that regulatory insufficiencies in one jurisdiction can have negative
spill-over effects in another. Yet, in some cases, this motivation is not
enough, legislation is a costly business. For countries that need to engage in
major legislative changes in order to reach the high global standards, it is a
trade-off that the states must take into consideration.
Therefore, a certain degree of disciplinary mechanism is required to
ensure the efficiency of this TRN centered model. All the commitments and
standards are based on soft law, and the absence of an international court in
finance, other tools have evolved along the way. Brummer accounts a
number of applicable and effective means, which include, inter alia, the power
of reputation, market disciplines, and name and shame lists. Although not
recognized as legal actions, they seem to able to compel the states to
commit.27
In one way, the implementation of the TRN standards should be a
rather uncomplicated story.
After all, for the implementing country, the international standards
have been, directly or indirectly, mandated by the own political leaders via
the G20. The government authority has through TRNs such as the IOSCO
or IAIS been involved in developing the standards. This course of action is,
however, in reality not such a straight forward process. It is in the domestic
implementation procedures that differences may occur. The standards are
often broad in scope and remain to be at a minimum level. Different
countries have different premises. This general scope allows the
implementing country to incorporate its own techniques, customs and
tradition. The final products, national laws, become thus international in
nature but adjusted to fit the domestic context.
4. Compliance Monitoring
Considering the difficulties the regulators have encountered when
trying to regulate the international financial markets by traditional regulatory
techniques, it might not seem as a surprise that states have chosen to
improve the existing compliance monitoring mechanisms. The major
changes since the latest financial crisis include, commitments of the G20,
FSB and IMF members to undergo FSAP assessments, TRNs such as
IOSCO and FSB have also launched in-house monitoring and peer review
systems.
The FSAP program was also a product of the Asian financial crisis.
Previous to that, the Bretton Woods institutions played limited parts in GFR.
Under Article VI of the IMF Articles of Agreement, members were required
27 Brummer, C., [hereafter Brummer, 2014], Minilateralism, How trade alliances, soft law
and financial engineering are redefining economic statecraft, Cambridge University Press, New York,
US, 2014, pp. 109-123.
82 to collaborate with the fund in forms of orderly exchange arrangements and
to promote a stable system of exchange rate. An extensive interpretation of
the article resulted in the Article VI examinations to include members’
financial stability. The FSAP was born. However, previous to the latest
financial crisis, the targets of the assessments were unevenly conducted from
a global perspective. The codes and standards (by among others, the BCBS,
IOSCO, IAIS, CPSS and OECD) assessed under the program were routinely
incorporated in the aid programs. As a result, countries in need of a World
Bank loan or IMF assistance in a balance-of-payments crisis were compelled
to implement the standards. For the developed countries, on the other, the
assessments took place on a voluntary basis. Unsurprisingly, many countries
did not subject themselves to the program. The US, for example, was not
assessed until after the latest financial crisis.28
In 2010, the IMF Executive Board agreed to make it mandatory for
25 jurisdictions with systematically important financial sectors to undergo the
assessment under the FSAP as part of the legally binding bilateral
surveillance under Article VI.29 However, this drastic step towards enhancing
the FSAP lacked of legal mandate. Again, it was solved through an expansive
interpretation of the IMF mandate. The FASP is only formal international
law part of the international financial regulatory system. However, the
lawfulness of the mandatory assessments, considering the limitation of its
original mandates and the creative interpretation the fund has engaged in,
should be questioned. A broadened array of jurisdictions to be assessed
creates a more even distribution of the hard law reach of the IMF.
As for the FSB in-house reviews, which are modelled after the FSAP,
they could come to develop into assessments alike the WTO trade reviews.
The TRNs, in many cases but not all, function in an international
organization alike manner, the missing factor is of course the legality of the
obligations. The interesting part of the practice lies in the prospect of being a
potential institutional foundation for dispute resolution bodies, which is a
much more realistic option than an international court of finance.30
Brummer, 2014, p. 103.
The jurisdictions are Australia, Austria, Belgium, Brazil, Canada, China, France,
Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the
Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States. This group of countries covers almost 90 percent of
the global financial system and 80 percent of global economic activity. It includes 15 of the
Group of 20 member countries, and a majority of members of the Financial Stability Board,
which has been working with the IMF on monitoring compliance with international banking
regulations and standards. Each country on this list will have a mandatory financial stability
assessment every five years. (https://www.imf.org/external/np/sec/pr/2010/pr10357.htm).
30 Brummer, 2014, pp. 124-126.
28
29
83
III. A NEW LAWMAKING PROCESS?
Notwithstanding all the imperfections of this soft law system, the
author would like to point out three means that this model has contributed
to international governance. It has broken and challenged out our traditional
perception of rule- and lawmaking in the following ways. First, the system
has created a structure for the hardening of soft law by connecting the
opposite poles of soft and hard law. Indeed, all the TRN standards are
informal and lack of any binding status in national or international law, but
after the implementations, the “hardening” process, the international soft
law has transformed to national hard law. The national legislations are
characterized by their inherited international nature, since they have written
by TRN multinational teams. In this way, it has contributed to addressing the
national law/global market issue by harmonization across globe, which is
achieved without conventional formal international treaties.
Second, it has expanded scope of international enforcement
cooperation between national authorities through quasi-binding instruments.
The most comprehensive framework can be found in the securities market.
The IOSCO MMOU covers now more than 90 per cent of the securities
regulators in the world. In order to be accepted, a MMOU signatory, which
is a national authority and not a state representative, must demonstrate that it
has the legal authority to assist the foreign counterparty in cross-border
enforcement procedure. In several cases, the national authority had to push
for changes in the domestic law in order to attain the authority. Again, it
demonstrates how domestic law is being transformed by the TRNs, resulting
in the national authorities, alike the mobile market participants, to reach
beyond the nation border.
Third, the system has also brought the gap between private
rulemaking and public lawmaking even closer. An important part of the
norms in international finance is the institute of lex mercatoria, the law of
merchants – a body of customs and practices in international commerce that
dates back for centuries. The lex mercatoria of finance could be conceptualized
as so-called lex financeria. In finance, lex mercatoria in the sense of establishing
sets of norms and procedural principles in the relative absence of state
interventions, has been a dominating feature of modern finance. The
passiveness of the regulators previous to the recent reforms has allowed the
market participants to engage in self-regulation and form their own standard
contracts, rules and best practices. The current wave of regulations
originating from the international system has perhaps weakened the
dominance of self-regulation. It could, however, never, erase the tradition of
traders and other private market actors to establish customs and norms with
the focus on effectiveness, risk allocation and the recognition of multiple
perspectives, mechanisms and forms of normativity.
84 Instead, the current system has incorporated the lex mercatoria
institute into the standard setting process.31 The most prominent industry
associations are often members of the TRNs. The work of the industry
associations is recognized in the standard setting procedure and there have
been frequent collaborations between the industry and the regulatory
networks. In this way, the TRNs have provided a meeting point for the
private norm setters to follow the regulators’ latest developments, and the
regulators to incorporate the customs and practices formed by private
parties. The making of financial regulation is neither completely top down or
bottom up, but mutually shaped by private and public rule and lawmakers.
IV. CONCLUSION
Due to its soft law dominance, international financial law remains to
be an unchartered part in the international law scholarship. It could be
questioned whether this soft law system has arisen due to the absence of
formal state arrangements or shaped organically, by being the most
appropriate approach, by market developments and political initiatives. One
of the foundations of international economy was the Bretton Woods System,
which was focused on domestic financial markets and restricting capital
flows. International finance was not on the agenda at all. Since then, the
liberalization policies that have enabled cross-border financial activities have
been introduced unilaterally without much international coordination.
Indeed, liberalization of the financial services sector falls under the scope of
GATS and the WTO is a hard law international organization with a dispute
settlement body. However, the issue here is that the liberalization policies
were not balanced with proper regulation on stability and supervision, which
are not the target of the WTO agreements at all.
The secondary and complementary nature of soft law should also be
emphasized, essentially, the system stands on very shaky grounds. The whole
system could be dismissed the moment the states decide to enter into formal
agreements. Treaties are, however, both time consuming and expensive.
Neither do they have the qualities that can best facilitate the dynamic nature
of finance. Therefore, the technical regulations should perhaps stay with the
soft law. Formal arrangements could perhaps be a more efficient tool to
ensure the states’ commitments to the TRN standards. At the moment, the
countries are collaborating on the voluntary basis, but implementing
minimum standards is not the same as tighten regulations on some of the
most advanced parts in the shadow banking. For example, in the case of EU
31 For example, one of the IOSCO’s six principles on the regulation of hedge
funds is “Regulators should encourage and take account of the development,
implementation and convergence of industry good practices, where appropriate”, Hedge
Funds Oversight: Final Report, Technical Committee of the International Organization of
Securities Commissions, June 2009.
85
regulations on over-the-counter derivatives and alternative investments, they
were influenced and even altered due to bilateral discussions with the US.
The author believes that further regulation would perhaps require more
assertiveness in forms of bilateral or even multilateral agreements to ensure
the states’ commitments to implementation.
Another weakness of the system is the quality of the TRN standards.
At the moment, there are no quality controls of the TRNs or the standards
they produce. This could perhaps fall under the scope of the FSB mandate
but it is questionable whether the board has the institutional and operative
capacity to handle such a task. Lessons from the past have taught us that the
TRN standards do not always work in a satisfactory manner, both the Basel I
and II proved to have severe errors. Consequently, the implementation of
the current accord, Basel III, has been granted with a much longer
timeframe.
It remains unknown whether this soft law system is a temporary fix
or a more permanent solution. Either way, it has contributed and can
potentially do more for international convergences in financial regulation.
However, every coin has two sides, the same features that can be viewed as
advantages of soft law can also become equally problematic. It seems that
soft law structures have a tendency to last once they have been established.
One the explanations is that building new systems and institutions from
grounds up would be much too costly. Much remains to be explored in
regards of developing a sustainable model to govern and regulate the global
financial markets. Albeit the responses to the Asian financial crisis proved to
be inadequate, the events of the latest crisis have indicated further
augmentation between and within the TRNs. Therefore, the author believes
that even in the case of future formal arrangements, the legacies of the TRNs
could and should be incorporated. Hopefully, they would continue to
operate in autonomy and maintain their technocratic nature.
86 87
THE JUDICIAL RECEPTION OF COMPETITION SOFT LAW IN
THE NETHERLANDS AND THE UK
Zlatina Georgieva
Tilburg University
ABSTRACT
Ten years ago, EU Competition law transitioned from a system of
centralized enforcement managed by the European Commission to a
decentralized domain regulated by multiple institutional actors situated at
both national and supranational level. With this development, the need for
usage of non-conventional regulatory instruments grew. This is where soft
law presented itself as an opportunity to fill the substantive core of the
regulatory domain. This development does not only reflect the impossibility
for creating hard and fast legal rules between multiple actors; in the EU
Competition law domain – the field which regulates business behavior within
the EU– there is also inherent uncertainty about how markets will react to
regulation in the form of hard legal rules. Thus, soft law in its non-binding
and flexible nature offered a convenient solution; however, it also presented
the enforcement regime with a significant obstacle. Since soft law is nonlegally binding, the provisions of those instruments cannot be relied upon in
courts of law. Thus, when a competition law dispute reaches a national court
of an EU Member State the odds are high that parties would not be able to
assert their rights since their claims are highly likely to be based on soft law
instruments. This paper therefore takes an empirical look at the judicial
handling of competition claims relying on competition soft law in the UK
and the Netherlands and makes some preliminary conclusions on the
manner in which the field develops in that regard.
88 I. INTRODUCTION – SETTING THE SCENE
The goal of the current work is to delineate and – as far as possible –
explain national judicial responses to Commission-issued competition soft
law within two EU jurisdictions – the UK and the Netherlands. For this
purpose, a comparative methodology is adopted and – in terms of theory –
several hypotheses of possible judicial attitudes coined in a previous work are
brought together under the term national ‘judicial recognition’ of
supranational competition soft law. 1 The term ‘recognition’ was chosen,
because it has a positive connotation, which signals the author’s discord with
the predominant doctrinal scholarly view2 that soft law should be seen as a
danger to democratic rule of law principles and thus become (solely) an
object of judicial resistance.3 It is argued that, to the contrary, competition
soft law could and should become ‘positively recognized’ by courts of law
since that would enhance legal certainty – the normative starting point for
this study.4
The positive overtone in the choice of terminology, however, does
not mean that the possibility for courts to adopt a skeptical stance with
regard to soft law – explicit rejection or neglect – is discounted. Those
scenarios feature prominently in the theoretical model adopted by this work
and are referred to as ‘negative recognition’.
Overall, it is hypothesized that courts can exhibit either a resistant
attitude to soft law (negative recognition – neglect or explicit rejection),
which would imply they adopt a doctrinal, positivist view to sources for legal
interpretation, or they can conversely be open to interpretation of soft law
(positive recognition), in which case they will explicitly engage with the
content of the said instruments in their discourse. The latter attitude implies
1 In setting up this theoretical model, the author controls for the fact that soft law
is difficult to study empirically by combining a desk study of judicial discourse with, where
necessary, interviews of relevant stakeholders. For the limitations of research into
supranational soft law, see F.Terpan and S. Saurugger (note 2), The same authors propose a
theoretical framework to explain national resistance to soft law (a similar attempt but with
respect to hard law is made by Damian Chalmers – note 14 below). Insofar as the aim of the
current study is to suggest the opposite idea – ‘recognition of soft law’ instead of ‘resistance’
to it, it needs to be pointed out that Terpan/Saurugger take a generalist and too skeptical a
stance when it comes to the effects of soft law at national level. It is the conviction of the
current author that the existence and effects of soft law at national level should not be
subject to a general study, but instead be approached per policy field, since some domains of
EU policy, such as competition, are a lot more intrusive into national legal systems than
others. This fact will undoubtedly impact reception of (or resistance to) soft law in the field.
2 See F.Terpan and S. Saurugger, ‘Resistance to EU soft law. A typology of
instruments’ (2013) Paper Prepared for the EUSA Bi-annual Convention, Baltimore. There
are many more scholars cautioning against or simply acknowledging the dangers soft law
could pose for the classical model of democratic legal order. See, among others, the
international law literature produced by Klabbers, Borchardt/Wellens, and Chinkin.
3 For a discussion on the reasons for this discord, see Z.R. Georgieva, ‘Soft Law in
EU Competition Law and its Judicial Reception in Member States – a Theoretical
Perspective’ TILEC Discussion Paper 2014 -035.
4 For further elaboration of this argument, see Part I.A.
89
a flexible judicial approach to sources for legal interpretation. Finally, it is
possible that courts do not explicitly mention soft law sources in their
judgments, but the reasoning therein coincides with the logic of the latter
instruments. In this case, the theoretical framework adopted detects a
‘persuaded judiciary’ scenario, 5 which also signals a flexible judicial
approach to sources for legal interpretation.6
A. Setting the Scene - The Comparative Approach in a Competition
Law Setting
In order to analyze and provide reasons for the nature of the
empirical results found, the latter are approached in a comparative legal
framework. Unlike many comparative studies, which choose classical
functionalism as their methodological basis for analysis,7 the approach taken
here is different because classical functionalism, despite being the most
advanced approach of traditional comparative law, 8 cannot address core
issues that the current study is preoccupied with. Insofar as the current
project does not have its focus only on outcomes, but predominantly on the
processes (legal reasoning) leading to those outcomes, functionalism and its
‘black box’ methodology as described by one of its creators9 is not a suitable
analytical tool. Thus, the current study opts for a method called ‘moderate
functionalism’ (a concept introduced by Husa)10 that dispenses with three
5 The idea for the latter scenario is explained (although in different terms) in
Frederick Schauer, Thinking Like a Lawyer (HUP 2009), 72. In particular, the author
purports the interesting thesis that, ‘We can now see that a common use of an optional
authority is not one in which the judge is persuaded by the substance of what an optional
source says, but instead is one in which she is persuaded that the source is more likely right
than she would be if she made her own decision.’ In line with this reasoning, and having in
mind the highly detailed and technical content of Commission-issued competition soft law,
it could be expected that national judges would engage with the latter instruments on the
basis of ‘persuasion’ as Schauer conceptualizes it. For the Dutch context, this intuition is
confirmed in the writings of Eliantonio on ‘network soft law’ produced within the ECN
(European Competition Network). See Eliantonio, ‘Effectieve Rechtsbescherming en
Netwerken: een Problematische Verhouding’ 3 SEW (2011).
6 For further elaboration on the theoretical underpinnings of this work, see Z.R.
Georgieva (ibid.)
7 Classical functionalism is understood to be the method for comparative analysis
introduced by Zweigert and Kotz in their seminal work ‘An Introduction to Comparative
Law’ as translated by Tony Weir (1998).
8 Van Hoecke/Warrington ‘Legal Cultures, Legal Paradigms and Legal Doctrine:
Towards a New Model for Comparative Law’. International and Comparative Law Quarterly 47
(1998) 495-536, at 495.
9 See Kotz as translated in Dannemann (n 24), 393.
10 Ibid. Although Husa heavily criticizes the aspects of functionalism that he later
dispenses with in his ‘moderate’ version, the author is a believer in functionalism as the only
method allowing for orderly and systematic comparative analysis. See Jaakko Husa, ‘About
the Methodology of Comparative Law – Some Comments Concerning the Wonderland’
University of Maastricht Working Paper Series 2007-5, 8.
90 important building blocks of classical functionalism: the presumption of
similarity, causal explanations for similarity and the notion of neutral
framework in comparative law. The comparison under moderate
functionalism is thus performed under the assumptions of ‘strict
comparability’ and focuses the attention of the researcher on analysis of
both11 similarities and differences between systems with the aim to – firstly –
gain better understanding of the object of study12 and – secondly – offer
tentative explanations for descriptive results by linking them as far as
possible to their causes.13 Insofar as this project aims at both delineating and
explaining judicial reception of Commission-issued competition soft law,
such a methodological setup is deemed to be suitable.
A caveat to be kept in mind, however, is that according to moderate
functionalism, the comparative method can help suggest causation, but not
prove it. 14 As Husa points out, ‘To tackle comparability does not
automatically include the idea of causal explanations. However, this does not
exclude or prevent efforts to somehow give rational and argumentative
explanations for similarities and differences appearing in the study.’15 Such
argumentative explanations within the realm of law, thus, form the
conceptual limit of output for this work.
The last observation is also prompted by the fact that to establish a
causal link with scientific certainty, one has to go beyond law, or as Reitz
testifies, to the ‘law and….’ disciplines. 16 – a task difficult to perform
without an interdisciplinary team of researchers that is not available for this
project. Therefore, although the study intends to descriptively outline nonlegal factors that might influence the main object of analysis, the latter are
not going to be subjected to analysis in a comparative framework. Such an
endeavor would also be beyond the limits of moderate functionalism in
comparative law as Husa himself ascertains.17
Within the-above delineated comparative setup, the following steps
marking the outline of this paper will be taken:18 the current section will
continue by tackling two main comparative methodological issues – choice
of basis for comparison and choice of jurisdictions for analysis; the last part
11 Notwithstanding the scholarly debates among comparatists on whether one
should focus on similarities or differences between systems in order to achieve better quality
of comparison, we agree with Husa who dispenses with the debate by simply stating
‘similarity or difference is rather the end-result of the study than a certain method.’ See Husa
(n 11).
12 Dannemann, 406.
13 See Dannemann, 397-399.
14 Dannemann, 398.
15 Husa (n 10) 433.
16 J. Reitz, ‘How to do Comparative Law’ 46 American Journal of Comparative
Law (1998), 627.
17 Ibid.
18 The steps are suggested in Dannemann 407-420.
91
of this section will in turn discuss the theoretical underpinnings of the
research project. Section II will engage in a comparative description of –
firstly – the national legal setting surrounding the object of analysis and –
secondly – the object of analysis itself (Commission-issued competition soft
law as treated by the national judiciary). Lastly, Section III will present an
analysis of the results found in Section II through a comparative lens. In
order to facilitate the explanatory objective of the final section, several
hypotheses addressing possible correlations between rules and outcomes will
be formed under Section II and then tested in Section III.19
B. Setting the Scene - Methodological Considerations: Basis for
Comparison, Choice of jurisdictions, Data Gathering Method
For the current study, a conscious choice was made for concentrating
on the national, rather than the supranational level, since for the already ten
years of existence of the decentralized competition enforcement regime, no
consistent message has been conveyed as to the downstream functioning of
the ‘new’ system. The time is ripe, thus, to have a critical look into the ‘black
box’ of national competition law enforcement. The current research is going
to focus on national judicial recognition of Commission-issued competition
soft law in both civil and administrative competition law disputes – in other
words, the limbs of both private and public competition enforcement are
going to be taken into consideration. Courts were chosen as object of
analysis due to their constitutional function as ultimate instances of
normative ordering in a democratic polity. The areas of EU Competition
Policy under study are Articles 101 and 102 TFEU (dealing with abuse of
dominance and anti-competitive agreements, respectively). 20 The reason for
not opting for inclusion of the related domains of mergers, state aid and
sectorial regulation lies in the fact that their enforcement structure is quite
different from that of Article 101 and 102 competition law, due to the
former’s focus on prospective (ex ante) as opposed to retrospective (ex post)
enforcement.
Yet again, the instruments that could be subsumed under the term
‘Commission-issued competition soft law’ are of considerable quantity, even
if one looks only at the enforcement framework of Articles 101 and 102
TFEU. For practical reasons, the current paper is going to tackle the issue of
national judicial recognition of only a select few of the numerous notices,
guidelines and communications extant in the domain. The soft legislative
instruments selected are the primary notices and guidelines clarifying the
rules for application of Articles 101 and 102 TFEU according to the
The need for hypotheses in explanatory comparative research has been stressed
in É. Orucu, ‘Methodology of Comparative Law’ in Elgar Encyclopedia of Comparative
Law (Cheltenham, 2006).
20 The specific soft law instruments subject of the research are going to be outlined
in Section 2.
19
92 European Commission.21
Those therefore form the basis for comparison (tertium comparationis)
of the current study. Since all the soft law instruments in the field are drafted
supranationally, they are essentially the same for all the Member States; thus,
the methodological comparative requirement for similarity in bases for
comparison (similia similibus) is more than fulfilled.22 However, it should be
kept in mind that some Member States (notably the UK) also have national
soft law equivalents based on the supranational original. Those also form
part of the basis for comparison.23 What is excluded are soft instruments that
do not conceptually originate from the Commission. For instance, national
notices on Leniency24 and Fines,25 although much scrutinized judicially,26 are
excluded because they are based on national analytical frameworks with
different goals from the ones of the Commission in those fields.
A word is also needed on the considerations behind the selection of
the jurisdictions for the current empirical study. It should firstly be remarked
that this work is part of a broader (doctoral) study aiming at delineation and
explanation of judicial responses to Commission-issued competition soft law
in four EU Member States – Germany, France, the Netherlands, and the
UK. In this sense, this paper is intended to form a coherent whole with a
forthcoming comparison between the systems of France and Germany with
regard to the same issue. After examining works on system selection for the
purpose of comparative analysis,27 the four jurisdictions mentioned above
Among others, the selection includes Communication from the Commission —
Guidance on the Commission's enforcement priorities in applying Article [102] of the EC
Treaty to abusive exclusionary conduct by dominant undertakings [2009] OJ C45;
Communication from the Commission - Notice - Guidelines on the application of Article
[101(3)] of the Treaty [2004] OJ C101 p.97 (Guidelines on Article 101.3); Communication
from the Commission - Guidelines on the applicability of Article 101 of the Treaty on the
Functioning of the European Union to vertical agreements [2010] OJ C130 p.1;
Communication from the Commission - Guidelines on the applicability of Article 101 of the
Treaty on the Functioning of the European Union to horizontal co-operation agreements
[2011] OJ C11 p.1; Notice on agreements of minor importance which do not appreciably
restrict competition under Article 101(1) of the Treaty on the Functioning of the European
Union (De Minimis Notice) O.J. 2014 C 4136.
22 On the importance of the tertium being similar between jurisdictions, see, among
others, Orucu (n 18) 442-443, 448.
23 These nationally-implemented rules (whether in the form of soft or hard law) are
especially conducive to harmonious competition enforcement across Member States, which,
in turn, contributes to enhancing pan-EU legal certainty on matters of competition. To that
effect, see Jose Maria Beneyto, ‘Transforming Competition Law through Subsisdiarity?’5(1)
Collected Courses of the Academy of European Law (Kluwer, 1996), 289.
24 Ref to last Leniency notice needed.
25 Ref to Notice on fines needed.
26 Oana Stefan, ‘Soft Law in Court: Competition Law, State Aid and the Court of Justice of
the European Union’ (2012) Chapter 3.
27 Oderkerk, ‘Selecting Legal Systems’ NILR (2001); John S. Bell, ‘Comparative
Administrative Law’ in Mathias Reimann and Reinhard Zimmermann (eds.) The Oxford
Handbook of Comparative Law (OUP 2006) 1261-1286.
21
93
were chosen for reasons related to the topic and the objective of the current
project. Additionally, the final selection was guided by a principle of
moderate functionalism which teaches that comparative results are richer
when the researcher opts for systems between which differences and
similarities exist in equal measure.
In particular, on the one hand, the idea of using soft law as an
instrument of EU competition enforcement is borrowed from the US28 – a
jurisdiction part of the Anglo-American legal family, within which the UK is
a ‘parent’ jurisdiction; 29 this fact prompts the need to select the UK. On the
other hand, the less structured way in which the British legal system copes
with non-legally binding instruments is to be contrasted with the highly
elaborate and compartmentalized approach evinced by both Germany and
the Netherlands. 30 Germany, being the jurisdiction that provided the
conceptual origins of EU Competition Law, is in its turn opposed to the
Netherlands, which only recently adopted a competition code aligned with
the modern goals of EU competition enforcement. Finally, France enters the
picture because its legal system has nourished a soft law category (ministerial
directives) very similar to the supranational equivalent of competition
guidelines, notices, and the like – a fact that makes the jurisdiction a unique
entry with regard to competition soft law. When it comes to non-legal
factors that influence the selection, it could be mentioned that the above
countries are in (approximate) geographic vicinity to each other, which
suggests similar socio-economic and political environments 31 that may
nevertheless be ground for quite diverging results.
Insofar as the primary objective of this study is descriptive (to
delineate),32 the explanatory value that comparison is going to add is going to
be greater if just as many differences as similarities are found.33 With the
current selection of systems, this final outcome is explicitly attempted, also
because France and Germany, despite both belonging to the civil law
tradition, are themselves considered ‘parent’ jurisdictions for the Roman and
Germanic legal families, respectively. Differences between these two are thus
Gerber, ‘The US-European Conflict Over the Globalization of Antitrust Law: A
Legal Experience Perspective’(1999) 34 New England Law Review 123.
29 ‘Parent’ systems/jurisdictions is a term introduced by the ‘founding fathers’ of
modern comparative law – Zweigert and Kotz. On a more current view with regard to the
term ‘legal families’, see Jaakko Husa, ‘Legal Families’ in Elgar Encyclopedia of Comparative
Law (Cheltenham, 2006).
30 Broring/Geertjes, ‘Bestuursrechterlijke Soft Law in Nederland, Duitsland en
Engeland’ NTB 2013/12.
31 Ibid., 299.
32 Having a descriptive research objective also allows for a vast range of choice of
jurisdictions to study. This is acknowledged in both the writings of Oderkerk (312) and
Dannemann (411)
33 For support of this argument, see G.Dannemann, ‘Comparative Law: Study of
Similarities or Differences?’ in Reimann/Zimmermann (eds.), The Oxford Handbook of
Comparative Law (Oxford, 2012) 391-393.
28
94 expected and should contribute to a variety of end results in need of much
and intricate explanation. 34
Finally, the judicial decisions for empirical analysis are selected
through a search through national 35 and EU36 case law databases. Search
terms coincide with the relevant (translated in the target language) titles of
the above-enumerated soft law instruments under study. For cases falling
under the hypothesized ‘persuaded judiciary’ scenario (where no direct
judicial reference to soft instruments can be expected), a sample of novel key
terms specific only to post-Modernization soft law vocabulary is used as
search terms. Where those terms are detected in national judgments, the
technique of discourse analysis 37 helps identify whether the reference is
indeed a disguised reference to the contents of a Commission-issued
competition soft instrument. Finally, for the hypothesized ‘rejection’ and
‘neglect’ scenarios, only scholarly accounts pointing to failed opportunities to
reflect on soft law can be relied upon.
C. Setting the Scene – Theoretical Setup
Hereby the idea is developed that national judicial recognition of soft
law depends on several variables that will be addressed in the sections to
follow.
An important first element to recognition is soft law’s internal
‘nature’, which encompasses, among others, the detail and persuasiveness of
its content (wording).38 This internal nature, it is claimed,39 influences the
way actors in the competition enforcement regime (businesses, NCAs, and
courts) perceive soft law.40 Insofar as the latter is seen as persuasive, it is
likely that it is also adhered to in practice (i.e. it is externally legitimized).41
34 Ibid. It also needs to be remembered that competition policy, as a domain
instrumental to the achievement of the main goal of the EU – an integrated internal market,
was one of the first fields in which a core of distinctively supranational administrative law
developed. In this sense, the enforcement system available under Regulation 1/2003, is one
of the most sophisticated ones at supranational level, providing for a fully-fledged system of
supranational procedural and substantive guarantees for consistency in enforcement.
35 UK: Bailii; Westlaw UK. For NL: Kluwer, Rechtspraak.
36 N-lex; JuriFast; Dec.Nat.
37 Wilson Huhn, The Five Types of Legal Argument (2008) Carolina Academic
Press.
38 A more detailed account on the other elements constituting the ‘nature’ of soft
law can be found in ZR Georgieva, ‘Soft Law in EU Competition Law and its Judicial
Reception in Member States – a Theoretical Perspective’ TILEC Discussion Paper 2014 –
035.
39 Ibid.
40 In the words of F. Schauer: ‘the more there is an expectation of reliance on a
certain kind of technically optional authority, the more an authority passes from optional to
mandatory.’ See Frederick Schauer, ‘Thinking Like a Lawyer’ (2009), 82.
41 The term ‘legal legitimacy’ is used to talk about the normative aspect of soft law
by Finnemore/Toope. Referring to the same phenomenon, Damian Chalmers talks about
‘normativity’. See, respectively, Martha Finnemore and Stephen Toope, Alternatives to
95
For courts, that would mean that pressure mounts for positive judicial
recognition of soft instruments. For instance, soft law can be given ‘face’ in
judicial discourse through the use of general principles of law, 42 but it can
also be that soft law is interpreted judicially via hard law instruments to
which it pertains and which it clarifies.43 It should be kept in mind, however,
that for a positive recognition scenario to materialize, a court has to exhibit a
flexible attitude to sources for legal interpretation (also known as ‘legal
pluralism’ in scholarly literature).44 According to this theoretical construct,
‘The law cannot be perceived as a harmonic organized system but rather is
characterized by variations,’ which allows the classical law/non-law debate of
formalists to shift to a debate about ‘the extent to which a certain association
perceives itself to be obliged to follow certain norms, rather than the norm’s
formal [legal] status.’45 Insofar as pluralistic theory originates in comparative
studies to further the understanding of foreign laws (in the context of
colonialism), 46 it is also a particularly suitable explanatory tool for this – also
comparative – analysis.
Although it is pluralistic conceptions of the law that can further
positive judicial recognition of soft law that this work deems important for
purposes of legal certainty (see next paragraph), it must also be
acknowledged that a formalist judicial stance rejecting or neglecting soft law
is also an important perspective with the potential to inform the results of
the current study. The formalist (or positivist) theory regards as sources of
law only those norms that have acquired their legal validity through
constitutionally endorsed (lawmaking) processes; this conception allows
drawing a clear boundary between law and non-law, soft law pertaining to
the latter category. Thus, should judicial attitude be informed by the
formalist tradition, even if pressure is mounting for positive recognition of
soft law, judicial rejection or neglect would follow since formalist
interpretation teaches that lack of legal validity prevents soft norms from
being interpreted in courts of law. Besides judicial attitudes and soft law’s
internal nature, national judicial recognition thereof also depends on the
particular national legal (institutional, substantive and procedural) and nonlegal settings, delineated in Section II below.
The thus presented theoretical picture is built on a normative
aspiration for achievement of legal certainty in the system of EU
Legalization: Richer Views of Law and Politics, 55 (3) International Organization 743, 749 (2001).
Damian Chalmers, ‘The Positioning of EU judicial politics within the United Kingdom’
23(4) West European Politics (2000) 185.
42 Ibid. See also O.Stefan, Soft Law in Court: Competition law, State aid and the Court of
Justice of the European Union (2012).
43 See Linda Senden, Soft Law in European Community Law (its Relationship to
Legislation) (2004). This latter option was readily used in Dutch judicial discourse as will be
shown in Section 3 below.
44 Jessica van der Sluijs, ‘Soft Law – an International Concept in a National
Context’58 Scandinavian Studies in Law (2013) 285.
45 Ibid., 299,301.
46 Ibid. 300.
96 competition enforcement. The term legal certainty defined in its classical
form as ‘those subject to the law must know what the law is so as to be able
to plan their actions accordingly,’ 47 needs to be hereby qualified by an
important caveat – to serve this definition, law shall not necessarily be
immutable.48 Indeed, it has been shown by Braithwaite that in complex and
constantly changing regulatory settings (he gives telecommunications as an
example) exactly the opposite is true – ‘With complex actions in changing
environments where large economic interests are at stake principles are more
likely to enable legal certainty than rules.’ 49 In particular, in a flexible
technical or economic environment, principles are more likely to offer the
predictability that firms need in order to plan their future behavior on the
market. Reasoning by analogy with Braithwaite, one could argue that a
choice of ‘soft and moldable’ over ‘hard and fast’ norms of regulation can
better achieve certainty (understood as predictability) in the complex
regulatory domain of competition. 50 It is to this understanding of ‘legal
certainty’ that the current study adheres, with the realization that it could sit
uncomfortably with courts of law operating within positivist tradition. 51
Finally, it should be pointed out that insofar as competition enforcement
strives to enhance not only the wellbeing of the individual consumer/firm
but to also further the pan-European public good of free competition, it is
necessary to add to the normative theoretical framework an additional
concern – a concern for the observance of the principle of consistent
interpretation of national and EU law. So long as the national and
supranational legal systems work in harmony, competition in the internal
market is secured through pan-EU uniformity of competitive conditions.
However, several factors in both the national and supranational handling of
competition soft law discussed in the section to follow might militate against
Takis Tridimas, The General Principles of EC Law 163 (1999
This argument, in the context of international lex mercatoria, is also made by J.
Dalhuizen, ‘Legal Orders and Their Manifestation’ 24 Berkley Journal of International Law
(2006).
49 J. Braithwaite, ‘Rules and Principles: A Theory of Legal Certainty’ 27 Australian
Journal of Legal Philosophy (2002).
50 In that regard, see Sarmiento, who argues ‘[…] the process of taking EU soft law
into account does not serve the goal of legality, but of coherence and consensus in the law:
the final decision will not be correct in terms of conformity with the law, but in terms of
coherence with the total array of authoritative interpretations recognized by the legal system’.
Daniel Sarmiento, ‘European Soft Law and National Authorities: Incorporation,
Enforcement and Interference’ in Ilianopoulos-Strangas/Flauss (eds.) The Soft Law of
European Organizations (SIPE, 2012).
51 This inverted definition of legal certainty however sits well with both classical
and moderate comparative functional thought, which advocates learning about rules from
the perspective not of the rule-maker, but of the rule-applier [See Adams/Griffiths, ‘Against
Comparative Method: Explaining Similarities and Differences’ in Adams/Bomhoff (eds.)
Practice and Theory in Comparative Law (CUP, 2012)]. Insofar as soft rules are a lot closer to the
rule-applier than to the rule-maker, their study in a comparative framework may open up
avenues for fruitful integration of social science in legal comparative analysis.
47
48
97
both the more overarching principle of consistent interpretation and the
more individually working principle of legal certainty (predictability).
II.
COMMISSION-ISSUED COMPETITION SOFT LAW AND THE
NATIONAL JUDICIARY IN THE UK AND THE NETHERLANDS
A.
Competition soft law at the national level – The UK and the
Netherlands
Before discussing the procedural and substantive national legal
peculiarities that might influence national judicial reception of supranational
competition soft law, it is necessary to briefly delineate the function the latter
instruments are supposed to perform in the legal systems of individual
Member States and the problem(s) for legal certainty and consistent
interpretation that might arise thereof.
The current increased importance of soft law in (both national and
supranational) EU competition law enforcement is intimately connected to
the process of decentralization, whereby the entry into force of Regulation
1/2003 on May 1st 2004 abolished the regime of Commission-controlled
exemptions to anti-competitive conduct under Article 101.3. With the
granting of direct effect to the latter article, national competition authorities
and courts acquired full powers over EU competition law enforcement,
concurrent with those of the Commission. At the same time, the subjects of
the enforcement regime, businesses, lost the opportunity to ask the
Commission for official individual exemptions under Article 101.3; they were
instead required to self-assess their conduct and decide on their own risk
whether or not it could be in breach of competition principles. To do so,
firms were provided with a vast array of Commission-issued soft instruments
that had as an aim to summarize and thus clarify the already existing
decisional practice of the supranational competition enforcer (the
Commission) and the supranational courts – the GC and CJEU. In other
words, the latter instruments had to be used as interpretative aids to the
already extant and, in the Commission’s view, substantial amount of
competition hard law in the form of supranational administrative and judicial
decisions. In this sense, Commission-issued competition soft instruments
represent a perfectly legitimate interpretative and decisional soft law form. 52
In this regulatory setting, the challenge to consistency and certainty
that national enforcement regimes could experience owes itself to the
important explanatory and interpretative function of competition soft law
mixed with its soft nature, on the one hand, and the state of substantive flux
the hard supranational regime currently experiences, on the other. It is no
52 For a detailed account
on the factors that need be considered before
proclaiming competition soft law legitimate soft law, see Chapter 6 in Senden, ‘Soft Law in
European Community Law: Its Relationship to Legislation’ (Wolf Legal Publishers, 2003).
98 secret in the epistemic community that in the recent past, different
permutations and combinations of substantive disagreement on competition
matters between the main supranational players have manifested
themselves 53 – sometimes it was the Commission against the Courts,
sometimes the GC against the CJEU – a debate that in the last few years
transferred to the national domain in the below-discussed Dutch OPTA case
where a national court stood up to both the Commission and the National
Competition Authority (NCA). 54 In such a fluid substantive setting, it is
difficult for non-binding instruments (no matter how persuasive) to further
the needed national certainty and secure enforcement consistency across
Member States.
This supranational struggle significantly complicates the picture for
the national judiciary, since, on the one hand, national courts are bound by
the principle of supremacy to follow CJEU case law; on the other,
Regulation 1/2003 provides that they should not deviate from Commission
decisional practice.55 The supranational legal setting puts national courts in
an uncomfortable maneuvering position between conflicting binding
supranational judicial and administrative decisions in a domain legislatively
governed by soft law. In these circumstances, soft instruments in the hands
of national courts can either prove to be an opportunity or a further
complication. They can be an opportunity (if judicially endorsed) 56 for
aligning national judicial discourse with the position of the European
Commission and, by implication, NCAs, which could eventually stir the
supranational judiciary in the same direction.57 Alternatively, supranational
competition soft law can prove to be a complication if judicially rejected or
not engaged with at all, since it is an important substantive instrument of
enforcement, capable of sufficiently informing all actors what current
53 This stride is especially evident in the ambit ‘abuse of dominant position’ (Art.
102 TFEU). See to this effect, A.C.Witt,’The Commission’s Guidance Paper on Abusive
Exclusionary Conduct – More Radical Than it Appears?’ 35(2) European Law Review, 314235 and Liza Lovdahl Gormsen, ‘Why the European Commission’s Enforcement Priorities
on Article 82 EC Should Be Withdrawn?’ 31(2) European Competition Law Review (2010)
45-51. Also, in their conclusion, van den Brink/ van Dam (note 19) lament this
phenomenon in general (not with regard to a specific policy domain).
54 The possibility that national courts and NCAs might issue divergent decisions is
foreseen by several scholars. See, ot that effect, M. Siragusa ‘A Critical Review of the White
Papers on the Reform of the EC Competition Law Enforcement Rules’ 23 Fordham
International Law Journal (1999-2000) 1100; Manganelli et al., ‘The Institutional Design of
European Competition Policy’EUI Working Paper RCAS 2010/79 (2010) 6; Cassinis and
Gerber, ‘The "Modernization" of European Community Competition Law: Achieving
Consistency in Enforcement: Part 1’ (2006) 27(1) European Competition Law Review , 11.
55 Art. 16 of Regulation 1/2003 (note 2).
56 Endorsement would encompass that part of the above-provided definition of
‘judicial recognition’ where the court either explicitly agrees with and discusses supranational
competition soft law or comes to a result not inconsistents with its provisions in a
roundabout manner.
57 This is, of course, assuming that bottom-up (and not only top-down) alignments
of judicial discourse are possible.
99
practice in the field is.58 In light of the important role the national judiciary
assumes with regard to securing the aims of certainty and consistency in
competition enforcement, it is necessary not only to delineate, but as far as
possible to also explain its attitude to Commission-issued competition soft
law. In that regard and as explained above, the method of moderate
functionalism is employed in the Sections that follow.
1.
Legal Institutions and Rules
The first step in the methodology of moderate functionalism is a
study into the institutional setup of the legal systems under comparative
observation. 59 It is therefore the institutional dimensions of competition
enforcement in the UK and the Netherlands that we hereby turn to.
In the UK, the administrative body responsible for public
enforcement of both national and EU competition law is the Competition
and Markets Authority (CMA) – a merged entity-successor to the former
Office of Fair Trading and the Competition Commission. Its decisions can
be appealed on first instance to the Competition Appeals Tribunal (CAT)
and subsequently to the Court of Appeals of England and Wales.60 With
regard to private enforcement, aggrieved parties within the UK can enforce
their rights in the Chancery Division of the High Court of England and
Wales for stand-alone claims,61 while follow-on damages claims are to be
filed with the CAT.62 The ultimate appellate instance under both public and
private enforcement cases is the Supreme Court of the United Kingdom.63
The institutional setup of the Dutch competition enforcement
regime is simpler – the administrative authority dealing with public
enforcement is the ACM (Consumers and Markets Authority), which
decisions are reviewable on appeal by a specialized division of the Rechtbank
Rotterdam (District Court of Rotterdam).64 The ultimate appellate instance in
58 In this regard, Gerber/Cassinis (note …32) stipulate that ‘In sum, the new
system emphasizes a general expectation of systemic consistency with the decisional practice
of the Commission as well as with its competition policy guidelines. The MS authorities play
an important role in establishing these guidelines.’
59 As Bell testifies, ‘It is not possible to understand the law from the legal norms
without also considering the organizational setting and procedures’. See Bell (n …).,
60 C. Graham, ‘Judicial Review of the Decisions of the Competition Authorities
and the Economic Regulators in the UK’ in National Courts and the Standard of Review in
Competition Law and Economic Regulation, 250.
61 Section 30.8 of the Civil Procedural Rules (as amended in January 2004).
62 Section 47A of the Enterprise Act 2002, amending the Competition Act 1998 .
63 The Supreme Court is final court of appeal for all United Kingdom civil cases
(which also includes stand-alone and follow-on competition claims for damages) and also
hears appeals from the Court of Appeal, Civil Division (the one that, in turn, hears appeals
from the CAT in public enforcement competition cases).
64 The Rotterdam District Court is designated as a competition review court under
Article 89.c) 3 of the Dutch Competition Act, which serves as lex specialis to the general
provision of Article 8:7 of the Dutch General Administrative Law Act.
100 public enforcement cases is the College van Beroep voor het Bedrijfsleven (Trade
and Industry Appeals Tribunal) – an appellate court of last instance on
economic matters.65 When it comes to private claims for damages, those
must be brought before civil courts66 according to the rules of the Dutch
Civil Procedural Act and the Judiciary System Act.67
2.
Legal Context
Building upon the information on the national institutional setup of
competition enforcement, it is hereby necessary to delineate aspects of the
national legal setting that could influence the recognition of Commissionissued competition soft law by the national judiciary.68 The discussion in this
sub-section and the ones to follow is performed on the basis of a notion
suggested by the Italian comparatist Sacco – namely, that the way each legal
system resolves a particular (legal) issue is determined by the interaction
between the so-called ‘legal formants’ that exist within that system. Legal
formants are understood to comprise of statute, doctrine and case law, and
the interpretations given to those by judges, parliamentarians and scholars.69
Hidden legal formants called ‘cryptotypes’ are also a relevant factor in
Sacco’s analysis, insofar as they form ‘patterns which are implicit but have
outward effects.’ 70 Cryptotypes may be anything – from social, to
ethical/moral, to legal rules. In our case study, possible cryptotypes are going
to be mentioned in Section II.A.3, but not analyzed comparatively. The
reason for this methodological choice was explained in Section I.B above.
The interaction between statutes, scholarship and case law, on the other
hand, is going to be captured here and in Section II.B. The issue of statute
and its interaction with scholarship is hereby presented by firstly outlining
national procedural particularities, followed by a discussion of relevant
substantive legal elements.
65 Title III Chapter I Article 18 of the Dutch Competition Act.
66 Article 6 a) and e) of the Dutch Code of Civil Procedure (Wetboek van
Burgerlijke Rechtsvordering).
67 The relevant rules are the following: Art.93 Wet Burgerlijke Rechtsvordering
(Civil Procedural Act) governs small claims; in all other cases, the leading provision is Art.42
Wet Rechterlijke Organsatie (Judiciary Sytem Act). As to second and third appeals, the
leading provisions are Art. 60.1 and Art. 78 (cassation) of the latter code, respectively.
68 For the importance of national procedural rules, see, among others, Damian
Chalmers (note …14) 195. ‘Legal structures will determine who and what appears before the
court and when. Legal structures will also determine the triangular relationship between the
court and the parties during litigation, and finally the outcome will have to be expressed and
reasoned in legal terms.’
69 Within the case law itself we have reasons for the judgment and conclusions as
separate formants. See Sacco, ‘Legal Formants: a Dynamic Approach to Comparative Law
(Installment I)’ 39 American Journal of Comparative Law (1991).
70 Sacco, ‘Legal Formants: a Dynamic Approach to Comparative Law (Installment
II)’ 39 American Journal of Comparative Law (1991).
101
a) Procedural Considerations
When it comes to procedure and the way it could influence the
perception of the judiciary with regard to soft law, it is important to know
whether the decisions of NCAs are binding on national civil courts for the
purposes of private enforcement (civil damages claims). In case they are
binding, it could be expected that there would be more judicial references to
Commission-issued soft law in civil claims for damages, but the latter
references are not going to be controlling for judicial attitudes since they are
only ‘secondary’ references – made on the basis of existing soft law reference
in the administrative decision in question in the specific proceedings. It is
going to be interesting to see, however, what would happen if administrative
decisions are not binding for civil courts and parties to proceedings need to
adduce arguments de novo in order to assert their claim. In such a situation,
examination of ‘primary’ references to Commission-issued soft law in
national civil courts, if any, will be intriguing in light of the central research
question of the current work.
It is also important to know whether the national judiciary, in its
judgments, is allowed by national rules of procedure to adduce points of law
that were not mentioned by the parties in their submissions before the court;
in other words, it is important to know whether the judge can act sua sponte in
this regard. If the answer is in the affirmative, this would mean that the judge
is free to not only add arguments of law, but also possibly of Commissionissued competition soft law. This supposition is not inconsistent with EUcase law on the matter,71 which provides that where, by virtue of national
rules of procedure, courts are allowed to raise of their own motion points of
law based on binding domestic rules, the same should be true for binding
rules stemming from EU law. Of course, since Commission-issued
competition soft law is not binding law, national courts are under no
obligation to put its substance forward in their reasoning. However, in
jurisdictions where national procedural rules are more permissive, it could be
that judges are more likely to act sua sponte even with regard to EU soft law.
When it comes to the question of binding force of competition
administrative decisions on the national judiciary in civil proceedings, the
UK and Dutch contexts exhibit divergent approaches. While in the UK the
Competition Act of 1998 provides for binding force of CMA decisions on
civil courts, 72 the Dutch Civil Procedure Act gears in the opposite direction.
In the Netherlands, thus, national civil courts are not bound by competition
administrative decisions in subsequent claims for damages.73 Therefore, it is
expected that there are going to be more ‘primary’ references to
supranational competition soft law instruments in Dutch civil courts.
With regard to the issue of whether judges sitting on competition
cases can adduce points of law sua sponte in their judgments, it merits
Case C-430 and C-431/93 Van Schijndel and Van Veen v. SPF [1995] ECR I-4705.
Section 58 of the Competition Act 1998.
73 Art. 142.2 of the Civil Procedure Act (Wetboek van Burgerlijke Rechtsvorming).
71
72
102 observing that the UK has a slightly more permissive approach than the
Netherlands when it comes to public competition enforcement. In the UK,
both the Competition Appeals Tribunal and subsequent judicial review
instances74 of administrative decisions have the right to examine cases not
only on points of law, but also on their merits; therefore, the judge can fully
amend or add to the arguments submitted by the parties to the dispute.
However, scholars submit that, in practice, ‘a UK court will not make a
decision on the merits of a case, that is, whether or not the decision is right
or wrong. It will always maintain that it is making a decision on legality.’75 In
the Netherlands, while the administrative judge can add points of law to the
dispute that were not mentioned by the parties, he is not advised to delve
into (i.e. reexamine) the merits of the dispute. 76 This is not to say, however,
that he is absolutely precluded from doing so. Indeed, it has been pointed
out in scholarly accounts that in the field of competition law (especially in
the domain of Articles 101 and 102 TFEU), Dutch courts review
administrative decisions intensively, ‘sometimes leading to a substitution of
the [ACM’s] opinion by the courts’.’77 Insofar as this study is interested in the
ability of courts to fill in the legal (as opposed to the factual) grounds of a
decision, it could be concluded that – as far as public competition
enforcement is concerned – both Dutch and British judges are equally
(highly) likely to add points of law on their own initiative.
When it comes to private competition enforcement, civil courts are
more circumscribed in their ability to act sua sponte than administrative courts
due to the principle of party autonomy that exists in both jurisdictions.
Additionally, the adversarial nature (and culture) of civil proceedings in the
UK,78 makes it less likely that the judge will step in and add arguments to the
dispute sua sponte.79 By contrast, the Dutch inquisitorial system allows for
74 The governing rules as to the scope of judicial review of the CAT are Articles
46-47 of the Competition Act 1998 and Schedule 8 thereof; the controlling act for the Court
of Appeal of England and Wales are the Civil Procedure Rules [CPR] and, in particular, Rule
3.1.m) thereof.
75 C. Graham, ‘Judicial Review of the Decisions of the Competition Authorities
and the Economic Regulators in the UK’ in National Courts and the Standard of Review in
Competition Law and Economic Regulation. (note 55)
76 The controlling provision for both instances of appeal is Art.8:69 of the General
Administrative Law Act (Algemene Wet Bestuursrecht - AwB). See also Saskia Lavrijssen
‘More Intensive Judicial Review in Competition Law and Economic Regulation in the
Netherlands: Vice or Virtue’ in National Courts and the Standard of Review in Competition
Law and Economic Regulation, 178/179.
77 Lavrijssen (note 70), 189.
78 Holland/Webb, Learning Legal Rules (2005), Chapter 1.
79 Although the provision governing judicial discretion for private claims is the
same as the one for public enforcement, namely, Section 3.1.m) of the CPR, its broad
wording allows for reading both for and against broad judicial discretion. In particular, when
it comes to matters of the public interest, the latter may demand interventionist attitude;
conversely, when party autonomy is the leading principle, the opposite conclusion is
warranted.
103
greater interventionism by the judge in civil disputes.80 In particular, leading
case law stipulates that, although the judge cannot go so far as to deduce
facts that are not made explicit by the parties in the case file, he has to fill in
points of law as part of his judicial responsibilities.81 In this sense, it could be
expected that, in civil disputes (private competition enforcement), the Dutch
judge will be more willing (and able) to adduce points of law (including soft
law)82 on his own initiative.
b) Substantive Considerations
When it comes to substantive concerns, it is important to establish
whether, at the national level, there might be an obligation (stemming from
law or otherwise) to approximate national and EU competition soft law as
much as possible. Insofar as this is the case, higher amount of references to
Commission-issued soft law could be expected in national judicial discourse.
Secondly (and even more fundamentally), it should be established whether
and – if so – which of the selected by this study soft law instruments have
nationally-drafted equivalents. In particular, it is important to know what the
legal effects of such ‘transposition’83 might be and, in this regard, whether
the act of ‘transposition’ affects judicial attitudes to soft law. As Senden
stipulates, ‘[…] depending on the national follow-up given to soft law acts,
rights and obligations ensuing therefrom may vary from one MS to another.
This is problematic […] from the viewpoint of effectiveness, in particular
uniform application […],’84 which is also the normative starting point of the
current study.
With regard to the first question, both the UK and the Netherlands
have committed, on their own initiative, to align the enforcement of national
provisions of competition law with the corresponding EU-provisions. For
the UK, this obligation is expressed in S.60 (1) of the Competition Act 1998,
which stipulates that
The purpose of this section is to ensure that so far as is
possible (having regard to any relevant differences
80 In civil disputes, the controlling provision is Art.25 of the Civil Procedure Act
(Wetboek van Burgerlijke Rechtsvorming).
81HR 24 juni 2005, LJN AT5466, Dimopoulos/erven Van Mierlo (para. 28)., read
together with Art. 25 of the Dutch Civil Procedure Act.
82 Stein, Bewijsrecht (2013) Van Cooth Advocatuur, Section 1.1. mentions that the
legal grounds that can be adduced are not only limited to the material law, but extend to all
types of soft law too.
83 The author is aware that the term ‘transposition’ is a formal concept used with
regard to a hard EU legal instrument – the European Directive, but it is nevertheless used
here because it provides a useful device for conceptualization of what happens with EU soft
law in the national domain.
84 Senden, ‘Soft Law in European Community Law: Its Relationship to Legislation’
(Wolf Legal Publishers, 2003), 26.
104 between the provisions concerned), questions arising
under this Part in relation to competition within the
United Kingdom are dealt with in a manner which is
consistent with the treatment of corresponding questions
arising in Community law in relation to competition
within the Community.85
A similar, although more terse, formulation of the said obligation can
be found in Section 1, Part 1 of the Explanatory Memorandum to the Dutch
Competition Act, which states
Dit voorstel van wet strekt ertoe de Wet economische
mededinging te vervangen door een mededingingswet,
die zoveel mogelijk aansluit bij de mededingingsregels van
de Europese Gemeenschap.86
On the basis of these self-imposed 87 obligations it could be
hypothesized that convergence will be quite high between both Dutch and
UK competition law, on the one hand, and EU competition law, on the
other. This outcome will also be in line with the general convergence tone of
Regulation 1/2003.
As to the question of legal existence of Commission-issued
competition soft law in the national domain, several techniques of
‘transposition’ stand out. Before outlining them, it needs to be remarked
that, in contrast with other types of EU soft law,88 a specific duty of national
transposition is not contained in the text of Commission-issued competition
soft law. In this sense, both the Dutch and British approaches to the issue of
transposition are completely voluntary.
In particular, in the UK there is a visible tendency by the national
administrative enforcer to incorporate a summary of the content of
Commission-issued competition soft law in own guidelines in the domain of
competition. The latter provide quite a condensed version of the
supranational provision(s), sometimes incorporating the content of more
than one EU guideline. 89 Other British soft instruments 90 also contain
Ref Comp Act 1998 UK.
A rough translation would be: ‘This proposal for a law aims at replacing the
[previous law] by a Competition Act, which reflects the competition rules of the European
Communities as far as possible.’
87 By self-imposed it is meant that the measures in question were not required by
EU law.
88 For a listing of EU soft law instruments that do contain in-text transposition
obligations,see Korea-Aho, ‘EU Soft Law in Domestic Legal Systems: Flexibility and
Diversity Guaranteed?’16(3) Masstricht Journal of European and Comparative Law (2009),
280-282.
89 See, for instance, OFT 401 (guidelines on agreements and concerted practices),
which refer to both the Commission horizontal and vertical agreements guidelines. Also,
85
86
105
nationally-specific conceptual categories that add to existing supranational
provisions. The provisions of the national dominance guidelines,91 however,
are even quite inconsistent with their supranational equivalent. This fact
might be partly due to the later publication of the latter, but it is also very
likely that the general discord of the scholarly community (and the
supranational courts) with the contents of the new Commission Guidance
paper on dominance have dissuaded the UK CMA from changing its
enforcement line.
If one has to divine the effects these ‘transposition’ examples would
have on the legal status of supranational soft law in the national context, a
single word comes to mind – mixed. On the one hand (and with the notable
exception of the dominance guidelines), the fact that the nationally-produced
competition guidelines never fail to mention that they apply in parallel with
similar EU soft law and strive to take utmost account thereof, speaks of
strong endorsement and is likely to increase the value of supranational
competition soft law before the national judiciary. On the other hand, unlike
the Dutch (and German) systems, which have established systematic
frameworks for assessment of the legal effects of different types of soft law,
the British common law lacks clear distinctions between frameworks,
guidelines, codes, and the like.92 This fact introduces a level of confusion as
to how precisely courts should go about national and/or supranational soft
law.
In contrast, the Dutch national legal context possesses a wellstructured system for evaluating the legal effects of national soft law,
whereby three principal types of administrative guidance with different
degrees of bindingness can be detected.93 In particular, supranational soft
law could be categorized as coming from a ‘third-party source’ (the
Commission) and be thus expected to have limited legal effects since it
occupies the bottom of the bindingness pyramid as envisioned by Broring.94
However, the author also stipulates that a certain movement up the hierarchy
of bindingness is possible and depends on conscious administrative action.
In this sense, while some of the hereby studied Commission guidelines
(those on horizontal and vertical agreements) are not explicitly mentioned in
the national legal setting and thus apply by implication, other supranational
notices (the 101.3 guidelines) are consciously ‘transposed’ 95 by means of
OFT 419 (guidelines on vertical agreements) refers to both the Commission 101.3 guidelines
and the Commission vertical agreements guidelines.
90 OFT 419 (ibid).
91 OFT 402 (abuse of dominant position).
92 Holland/Webb, Learning Legal Rules (2005), Chapter 1.
93 Broring, ‘Bestuursrechterlijke “Soft Law”’ in Schlossels (ed.), In de regel : over
kenmerken, structuur en samenhang van geschreven en ongeschreven regels in het bestuursrecht (Kluwer,
2012), 168.
94 Ibid., 172.
95
These
are
the
transposed
101.3
guidelines:
http://wetten.overheid.nl/BWBR0033029/geldigheidsdatum_01-09-2014.
106 reference and can thus be assumed to stand higher up in the pyramid of
bidnigness envisioned by Dutch law. Whether this assumption also holds up
with regard to the judiciary remains to be empirically tested in Section II.B of
the current work.
c) Hypotheses
Taking a cumulative view on the national legal settings of the
Netherlands and the UK, some general expectations-hypotheses could be
formed with regard to respective national judicial attitudes to Commissionissued competition soft law.
The Dutch system, in the case of guidelines that are directly
transposed (such as the 101.3 guidelines) and because of the nonbindingness of administrative decisions on civil courts, is more likely to
generate ‘primary’ judicial references to (transposed) supranational
competition soft law in civil litigation. This expectation is further
strengthened by the fact that Dutch competition law contains an obligation
for substantive convergence between national and EU law in the field.
The UK, by contrast, is more likely to produce references to
supranational competition soft law in public enforcement cases since there
the judge has a broad discretion to add points of law sua sponte; this
probability will be enhanced in cases where national competition guidance is
particularly laconic and thus a necessity for reference to EU soft law
materializes (such could be the case under the OFT 401 guidelines).The
observation with regard to the convergence obligation made in the context
of the Netherlands is also valid here.
All in all, before embarking on an empirical comparative study into
the discourse of Dutch and British judges, it can be said that it is expected
that more references to supranational competition soft law are made in civil
courts for the Netherlands and in administrative courts for the UK.
3. Non-Legal Context
The general openness of a legal system to outside influences is also a
factor that might tilt the scales of national judicial acceptance of
supranational competition soft law.
In the UK, local authors observe that ‘There is no evidence that the
judiciary is concerned to protect particular central spheres of British political
and legal life from EU intrusion.’96 However, it is also noted that direct use
of EU legal instruments in private disputes is limited, and that the majority
of cases involving supranational law concern litigation against the state’s
exercise of, among others, administrative powers.97 This suggests that UK
administrative courts – dealing with the public dimension of national
96
97
Damian Chalmers (note 16).
Ibid. 173,181, 190.
107
competition enforcement – are more likely to invoke EU competition soft
law than civil courts (in contrast with our conclusions for the Netherlands).
This supposition is supported by the following testimony, ‘Competition law,
as an area, cuts across private contracts by rendering them unenforceable. It
diminishes the steering capacity of the institution of contract and had a
correspondingly low rate of being successfully invoked [in private disputes
that is].’98
The Netherlands, by contrast, has been described by local authors as
‘[…] classically very open towards outside influences. Outside influence by
European law indeed is generally accepted by national courts as nonproblematic, as can be learned from the fact that the Netherlands’ judiciary
seems to be one of the only European judiciaries to accept the European
concept of supremacy without question.’99 However, recent research on the
responses of the national judiciary to Commission soft law in the subsidies
domain shows significant resistance on the side of both the District Court of
Rotterdam and the Trade and Industry Appeals Tribunal,100 suggesting that
judicial reception of supranational soft law is policy-specific and countrywide generalizations have no explanatory value in that regard.
B. Judicial recognition of Commission-issued soft instruments in the
UK and the Netherlands
This section takes an empirical look at the judicial handling
(‘recognition’ or ‘rejection’) of competition claims involving Commissionissued competition soft law in the UK and the Netherlands and makes some
comparative preliminary conclusions in that regard. As established in Section
I, the concept ‘recognition’ of Commission-issued competition soft law by
the national judiciary contains the following hypotheses:
‐
National courts can engage with soft law if they are
‘persuaded’ of its value by endorsing its contents in a roundabout way – not
98 Ibid., 198. However, the research on which this article is based was done in the
year 1998, when the UK Competition Act 1998 was just adopted. Now, more than 15 years
later, the supranational legal framework on private competition enforcement is changing and
this will surely impact the UK setting. See, to that effect, the recently adopted in Parliament
Directive on certain rules governing actions for damages under national law for infringements of the
competition law provisions of the Member States and of the European Union <
http://ec.europa.eu/competition/antitrust/actionsdamages/documents.html >.
99 Gerbrandy (note 20).
100 J.C.A. van Dam, ‘De doorwerking van Europese administratieve soft law: in
strijd
met
Nederlandse
legaliteit?’, NALL 2013,
januari-maart,
DOI:
10.5553/NALL/.000009.
108 explicitly mentioning the instrument proper, but reaching a conclusion not
inconsistent with its provisions.101
‐
National courts can also engage with soft law by either
explicitly accepting or explicitly rejecting/neglecting its substantive contents.
The former type of engagement can happen either on the basis of general
principles of law, the intermediation of which can lead to soft law producing
legal effects,102 or, alternatively, on the basis of hard law (legislation and case
law) which soft instruments usually ‘supplement’.103 It should be also reemphasized that the latter option (explicit rejection or neglect), although less
desirable from the theoretical standpoint of the current work, is nevertheless
consistent with legally positivist reasoning and could thus be more readily
used in judicial discourse.
To briefly illustrate this latter scenario with a current example, a
relatively recent Dutch case in the related to competition policy
telecommunications sector, will be hereby discussed. In august 2011, the
decision of OPTA (the Dutch Telecom Regulator) to abide by an EU
recommendation (soft law) 104 on call termination rates was quashed on
appeal by the Dutch Trade and Industry Appeals Tribunal (CBb).105 Since
the Tribunal is a last appellate instance in the Netherlands, its decision to
quash the OPTA reasoning was final, and OPTA had no choice but to abide
by it. The judgment did raise some scholarly criticism though, in particular it
101
For an endorsement and further explanation of this hyptothesis, see Schauer
(note 19).
See Stefan, (note 17).
‘Supplement’ is the term used in the Grimaldi judgment to explain that soft
instruments might produce legal effects, especially in the case where they ‘cast light on the
interpretation of national measures adopted in order to implement them or where they are
designed to supplement binding Community provisions.’ See Case 322/88, Salvatore Grimaldi
v. Fonds Des Maladies Professionnelles, 1989 E.C.R. 04407. To illustrate the point, in the realm of
competition law, for instance, the Block Exemption Regulation on vertical agreements (a
hard law instrument) can give teeth to the guidance on vertical agreements (a soft law
instrument).
104 Commission Recommendation of 7 May 2009 on the regulatory treatment of
fixed and mobile termination rates in the EU. Scholars claim that this recommendation
should be taken into account by National Regulatory Authorities and ‘they may deviate from
this recommendation if this is justified by national market conditions and approved by the
European Commission […]’ Lavrijssen (note 70). While the ‘taking into account’ reasoning
is in line with the Grimaldi criteria established by the CJEU with regard to recommendations,
the approval of deviation criterion appears rather stringent and speaks of a higher level of
bindingness than simple ‘non-bindingness’. It goes even beyond what Grimaldi requires – i.e.
– proper justification of deviation provided by the deviating authority (no explicit
authorization thereof by a higher administrative instance – i.e. the Commission – was
required in Grimaldi or suggested elsewhere in case law).
105 http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:CBB:2011:BR61
95&keyword=ECLI%3aNL%3aCBB%3a2011%3aBR6195. See, in particular, paragraph
4.8.3.6 thereof.
102
103
109
was held that it might be in stride with the principle of loyal cooperation
between Member States and the Union enshrined in Article 4.3 TEU.106 The
European Commission also did not miss the opportunity to strike with
issuing a Recommendation to OPTA urging the authority to comply with the
EU-suggested framework, in direct opposition to what the Tribunal’s
judgment held. 107 OPTA was thus put in an uncomfortable position,
whereby it had to choose between a binding national judicial decision and a
non-binding but imperative document issued by the European Commission.
OPTA did not respond to the Commission within the envisioned
deadlines,108 so it could be assumed the authority chose to follow the binding
Tribunal judgment. While there were no further developments in this case, it
is important to remark that this cleavage between Commission and OPTA
could have been prevented had the judiciary been more accepting of the
approach to call termination rates suggested by the Commission, be it in soft
law. This acceptance could have happened on the basis of general principles
of law – indeed – loyal cooperation could have been particularly helpful in
that regard,109 or, alternatively, on the basis of the hard law instrument the
recommendation was based on – namely, the Directive on Common
Regulatory Framework for Electronic Communications Networks and
Services.110
Mindful of the OPTA ‘saga’, and the detrimental effects for legal
certainty it may have, the current work proceeds with more in-depth
106 J.F.A. Doeleman, OPTA: Klem Tussen CBb en Commissie? Over Regulering,
Onmacht en Overmacht 5 Nederlands Tijdschrift voor Europees Recht (2012). <
http://www.bjutijdschriften.nl/tijdschrift/tijdschrifteuropeesrecht/2012/5/NtER_13824120_2012_018_005_004/fullscreen>. See also Laura Parret in her annotation to the Media
Forum in 2012-5.
107 Commission Recommendation of 13 June 2012 in accordance with Article 7a of
Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on
a common regulatory framework for electronic communications networks and services
("Framework Directive") in Case NL/2012/1284: call termination on individual public
telephone networks provided at a fixed location in the Netherlands and in Case
NL/2012/1285: voice call termination on individual mobile networks in the Netherlands.
108 JFA Doeleman, (note 81).
109 Although some scholars (Senden, Stefan) believe that loyal cooperation is too
weak a prinicple for giving legal effects to soft law on its own, it is also possible to imagine it
working together with other principles of law (such as good faith and legitimate
expectations) in order to achieve the same aim. See Z.R, Georgieva, ‘Soft Law in EU
Competition Law and its Judicial Reception in Member States – a Theoretical Perspective’
TILEC Discussion Paper 2014 -035. .
110 Directive 2002/21/EC of the European Parliament and of the Council of 7
March 2002 on a common
regulatory framework for electronic communications networks and services
(Framework Directive), OJ
L 108, 24.4.2002, p. 33, as amended by Directive 2009/140/EC, OJ L 337,
18.12.2009, p. 37, and
Regulation (EC) No 544/2009, OJ L 167, 29.6.2009, p. 12.
110 examination of Dutch and subsequently British national competition cases.
Those cases were identified by key term searches111 in relevant databases112
for the Netherlands and the UK, respectively. For clarity purposes, this work
divides the detected judgments in case law under public and under private
enforcement.
1.
Judicial Recognition or Rejection in the Netherlands?
Public Enforcement Cases
The above-discussed possibility that the judiciary may engage with
soft law provided that the latter be accompanied with hard law pertinent to it
is well illustrated by the content of paragraph 76 of the Anonymous Plaintiffs v
ACM case,113 where the Notice on Cooperation between the network of
competition authorities was mentioned in the context of Regulation 1/2003
and the principle of community loyalty. The fact that the judiciary is less
cautious to mention soft law when it can ground its reasoning in pertinent
hard law is also evident in the case Varkensslachterijen/ U-Vlees B.V. v
NMA,114 where the Rotterdam District Court essentially reasoned on the
basis of Regulation 1/2003, but did nevertheless mention the invoked by the
plaintiffs Notice on Cooperation between the Commission and NCAs, just
to make the point that the latter was not binding. A bit different, but still in
this line of thought, is the reasoning in case Vodafone Libertel B.V/Unipart
Group Ltd. v DG-NMa,115 where the Guidelines on vertical agreements were
cited in the context of the controlling hard law – namely, Regulation
2790/1999 on the application of Article 101(3) to vertical agreements. In
this context, the guidelines were claimed to provide useful ‘aid’ (‘steun’) for
the conclusion the court had already envisioned on the basis of hard law. It
is also interesting to see, however, what happens with judicial discourse
when the national court cannot rely on a superior source of law backing up
soft law.
111 The terms used for the Netherlands were ‘soft law, mededeling, beleidsregel,
richtsnoeren’ and their counterparts in the UK were ‘soft law, communication, notices,
guidelines,
112 For the Netherlands: rechtspraak.nl and Kluwer Navigator; for the UK:
Westlaw UK, Bailii.
113
http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBROT:2014:2045&keywo
rd=RBROT%3a2014%3a2045.
114
http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBROT:2001:AD9026&ke
yword=00%2f933.
115
http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBROT:2002:AF0065&key
word=ECLI%3aNL%3aRBROT%3a2002%3aAF0065.
111
In a 2006 appeal from an ACM decision against a cross-border cartel
in the fisheries sector (shrimp wholesale), the District Court of Rotterdam
cited Commission-issued soft law quite briskly, almost as if making a ‘by the
way’ remark of its existence. The Guidelines on the effect on trade concept116
were mentioned in the passing and in the form of an in-text reference in
order to lend support to a certain conclusion that the court had already
reached, but which it did not want to explicitly justify as being based on soft
law (which it essentially was). 117 This approach could be subsumed under the
category ‘roundabout treatment’ of soft law by the national judiciary, since
the substantive line of reasoning suggested by the guidelines was followed,
but this was definitely not done in an explicit, well-motivated manner.
In a separate appeal by a German co-conspirator in the above cartel,
the District Court of Rotterdam held that the Commission Notice on Cooperation
within the Network of Competition Authorities 118 invoked by the appellant cannot
be relied on as a definitive source for a conclusion on lack of jurisdiction on
the side of ACM in matters spanning several geographic markets. 119
Although the German appellant had detrimentally relied on the Notice, the
Dutch judiciary briskly stated that the latter merely contains criteria for the
separation of tasks between NCAs that cannot be definitive as to NCAs
actual powers for application of competition rules. 120 This situation is a
perfect example of what we call judicial rejection of soft law and is a nice
illustration of the hypothetical scenario envisioned in Section 2.A above,
where a business adjusted its behavior with regard to Commission-issued
competition soft law only to later find out that its reliance had no meaning in
a court of law. It was stipulated above that such a scenario is problematic
form a rule of law perspective and the principle of legal certainty in
particular. This is what is hereby maintained as well.
Private Enforcement Cases
In the procedurally complicated case BP EUROPA SE v.
Anonymous – a contractual dispute over a clause restrictive of competition –
the issue of Commission-issued competition soft law surfaces several times
at different levels of the appeal process. In the judgment of the Dutch
Supreme Court (Hoge Raad),121 for instance, the Commission Guidelines on
116
OJ C 101/81.
117
http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBROT:2006:AY4888&key
word=Richtsnoeren+betreffende
118 OJ C 101/43.
119
http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBROT:2006:AX9223&key
word=Richtsnoeren+betreffende
120 See section 2.5.4, last sentence.
121
http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:HR:2013:2123&keyword=
ECLI%3aNL%3aHR%3a2013%3a2123.
112 Vertical Restraints are mentioned only in passing, and for no other reason
but because they were used in the judgment of the lower-instance court. The
Supreme court, however, shields itself from directly engaging with the
contents of the guidelines by only addressing (but endorsing) the reasoning
of the lower court, which is in any case based on the soft instrument in
question. It is thus interesting to observe what the lower court – the
Amsterdam Court (Gerechtshof Amsterdam) 122 – had to say about the
Guidelines on Vertical Restraints and how it said it. It is surprising that this
court had no problem whatsoever to explicitly engage the Guidelines in its
discourse in order to analyze the anti-competitive effects of a vertical
agreement – even a citation to a part of the soft instruments’ contents is
provided. However, what is even more surprising is that the judgment offers
no explanation as to why the judiciary chose to so readily engage with the
guidelines – no general principles of law or other hard law to which the soft
instrument pertains are mentioned. This example of explicit judicial
recognition of supranational soft law could be taken to confirm the abovehypothesis that Dutch civil courts are likely to be prone to engaging with
Commission-issued competition soft law. It also endorses an observation of
van Dam/van den Brink that higher appellate instances are more resistant to
soft law interpretation than lower ones.123
2.
Judicial Recognition or Rejection in the United Kingdom?
Public Enforcement Cases
The bulk of UK cases detected through the method described in the
beginning of this Section concern appeals to decisions of the British
Competition Authority (CMA). Most of them exhibit the tendency of
competition courts to recognize soft law in the context of a hard law
instrument to which it pertains or to case law which it refers to. Also, since
the UK has the tradition to ‘transpose’ Community soft law verbatim in
nationally-issued soft instruments, it is possible that the latter two are cited
together, the EU instrument usually mentioned as supporting to the national
one, the latter taken as controlling. In all those cases, Commission-issued
competition soft law is mentioned in passing. To illustrate, in the case
Genzyme Limited v OFT,124 the EU Telecom guidelines were treated in the
following way,
‘Secondly, the OFT submits that the OFT and EC
Commission guidelines in the telecommunications sector,
122
http://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:GHAMS:2012:BX0258&ke
yword=104.004.188.
123 See van den Brink/van Dam (note 19).
124 Case No 1016/1/1/03 (Genzyme Ltd v OFT).
113
referred to in paragraphs 365 to 367 of the decision, are
not sector specific: see, in particular, paragraph 6 of the
EC Commission’s guidelines.’
A further instance demonstrating the above-described approach to
soft law is a series of margin squeeze cases in the UK water regulation
sector,125 where the Commission Telecom Notice and the Guidelines on
Article 101.3 were treated in passing through reference to, among others,
case law they were pertinent to. With regard to the Telecom Notice, the
decision of the CMA which formed the basis of the appeal was criticized
because of its non-conformity with EU (both hard and soft) law, and with
national soft law (the OFT guidelines incorporating the Commission
Telecom Notice in UK law). It was namely held that,
The Director’s approach to the issue of margin squeeze
in the Decision was contrary to the Guidance issued by
the OFT, the Telecommunications Notice issued by the
European Commission, the decision of the European
Commission in Deutsche Telekom, and the Authority’s
own publication MD 163. In particular, the approach in
the Decision did not identify separately the costs of the
transportation service requested, and did not put the
incumbent and the entrant on an equal footing.126
With regard to the Guidelines on Article 101.3, the content of the
latter was endorsed in passing and in the context of a judgment of the
CJEU,127
‘This principle [enunciated in the CJEU case Société
Technique Minière] has been incorporated as follows into
the Commission’s Guidelines on the application of
Article 81(3): “The assessment of whether an agreement
is restrictive of competition must be made within the
actual context in which competition would occur in the
absence of the agreement with the alleged restrictions.”’
Supranational competition soft law, however, is not only subject to
endorsement by the UK judiciary. Sometimes it can be rather bluntly
disregarded. For instance, in a case dealing with a contractual clause
challenged as anti-competitive, the content of the relevant Commission
Case No 1046/2/4/04 (Albion Water Ltd. v Water Authority); Case No:
1035/1/1/04
and 1041/2/1/04 (Albion II).
126 Albion Water Ltd. v Water Authority (n 125); A similar reasoning was also
present in the related Albion II judgment (n 125).
127 Albion II (n 125).
125
114 guidelines on vertical agreements was simply overlooked,128 although it was
explicitly mentioned as relevant by one of the parties to the proceedings.
This failure to engage can be seen as quite strange, especially in light of the
fact that the said guidelines could be interpreted in light of the hard-law
Block Exemption Regulation, with which they should in principle be read
together. The court, unfortunately, does not give an explanation as to why it
failed to address the guidelines in a setting so probable to lead to judicial
recognition.
Private Enforcement Cases
No cases on private enforcement of supranational competition soft
law were detected up to this moment.
III. ACKNOWLEDGING AND EXPLAINING DIFFERENCES AND
SIMILARITIES BETWEEN THE UK AND THE NETHERLANDS –
CONCLUSIONS
Coming back to the hypotheses formulated in Section II, and in light
of the fact that no private enforcement cases referring to competition soft
law were detected in the UK, it can be concluded that the hypothesis
expecting higher ‘public enforcement’ activity in the UK stands. What
explains this phenomenon, on top of the above-hypothesized reasons, is the
possibility that damages claims are rather settled than litigated and that
British judges feel inexperienced in matters of (in particular) quantification of
harm for the purposes of a civil claim for damages.129 With regard to the
hypothesis expecting references of Dutch courts to nationally ‘transposed’
supranational guidelines, especially in civil (private enforcement) disputes, no
supporting evidence could be found empirically. The guidelines most
endorsed judicially were the ones on vertical agreements, which are not
explicitly transposed in the Netherlands. An explanation for the falsification
of this hypothesis might lie in the fact that where guidelines are used as an
interpretative source for hard law, it does not matter what their official status
within the national domain is (transposed or not transposed).
With regard to the theoretical framework for case analysis, several
conclusions could be drawn. Firstly, it is evident from both the findings in
the UK and the Netherlands, that courts are a lot more likely to engage
with/recognize soft law when it is used together with either pertinent hard
or case law. Less evidence was found to support the hypothesis that general
principles of law can give effect to soft law (only one Dutch case). Another
Dutch case hints to the fact that a roundabout/implicit interpretation of soft
law is also not unimaginable in practice. Proof was also found for the
128
129
Case No 1087/2/3/07 (Independent Media Support Ltd v OFT).
Ashurst Study on the conditions of claims for damages, Chapter UK (2004).
115
supposition of likely judicial rejection of competition soft law (although not
to such a great extent as expected). Finally, the observation made previously
by other scholars 130 that the Dutch last instance judiciary in commercial
matters is a lot more stringent toward soft law than lower judicial instances is
also endorsed by this research.
This work’s ultimate aim was to delineate the attitudes of the Dutch
and British national judiciaries toward Commission-issued competition soft
law – in particular, it was initially stipulated that courts could either
‘recognize’ or ‘reject’ the said soft instruments. The ‘recognition’ hypothesis
also included several sub-assumptions – explicit recognition (on the basis of
general principles of law or hard law), or roundabout recognition. After the
empirical part of the research was performed, it was discovered that most (if
not all) of the above-stipulated hypotheses actually worked in practice. Soft
law is indeed being invoked in an array of different (and sometimes
inconsistent) manners by different courts and jurisdictions, which bodes ill
for the achievement of legal certainty in a national EU competition
enforcement setting.
Van Dam/van den Brink (note 19). Indeed, most of the Dutch judgments
found are from a lower court – the District Court of Rotterdam – and the only one from the
higher instance court – the CBb (the OPTA ‘saga’, which is not even a 101/102 case) –
explicitly rejected soft law.
130
116 117
THE GLOBAL GOVERNANCE REFLEX OF INTERNATIONAL
JUDICIAL BODIES
Halil Göksan
University of Geneva, Faculty of Law
ABSTRACT
Globalization is mostly described as posing new challenges to
international law and legal theory. These challenges are the question of soft
law, global law, non-state actors’ role in international law, private mechanisms
of law making at global level, judicial fragmentation of international law etc.
As a response, international lawyers tended to their long-standing
approaches and constitutionalism became international constitutionalism and
legal pluralism became global legal pluralism. In other words, old approaches,
old machines, old tools were to rescue international law from the diseases of
globalization with their ill-adapted global versions. In addition, these old
approaches could not work out how to approach to soft law and related soft
challenges such as non-state actors, private mechanisms of law making, global
governance legal regimes etc. because they only knew hard law. Therefore,
they focused on hard challenges such as the fragmentation of international law
and related questions of overlapping jurisdictions, conflicting interpretations,
forum shopping etc. and ignored or undermined soft challenges of international
law.
In this regard, it seems to us that these hard and soft challenges of
international law require a different approach and a global governance
approach to international law might be a solution as it worked in the
discipline of international relations. Our work will demonstrate that there is a
“global governance reflex” among international judges and this reflex offers
much better solutions to the fragmentation of international law than
international constitutionalism or global legal pluralism.
In the light of the above, this paper will first sketch a distinctive
understanding of global governance. Secondly it will treat the fragmentation
of international law as a hard challenge of international law. In other words, it
will demonstrate that the anxieties about the fragmentation issue are a bit
exaggerated and things are not as dramatic as described. It will exemplify this
point by analyzing the jurisprudence of main international judicial bodies in
order to better grasp feasibility, frequency and risks of overlapping
jurisdictions, conflicting interpretations etc. This will show how far the idea
of a global governance approach to international judicial bodies is feasible. In
the literature, a good number of scholars already mentioned and produced
118 ideas such as comity, judicial community, dialogue of courts etc. This work
will attempt to take these propositions to the next step. A rethinking of these
proposals within the concept of global governance will be proposed. And it
will be concluded that there is a “global governance reflex” among
international judges and a global governance approach to international
judicial bodies is the cure to the fragmentation of international law and it
actually might be a path towards the idea of global law.
119
I. UNDERSTANDING GLOBAL GOVERNANCE
A. Preliminary remarks
This section is entitled as “Understanding Global Governance”. This
choice aims to underline the difficulty in grasping what global governance
happens to be. In order to better clarify global governance, it is necessary to
emphasize on some preliminary remarks. First of all, it is highly important to
understand that global governance is a concept. Concepts are one of the
most important tools for a social scientist while conducting research.1 As it
has been remarked; “the core function of concepts lies in ordering and
structuring our observations and experiences in order to allow for general
propositions”.2 Without concepts, it would be a huge struggle to conduct
even basic researches in the social sciences. Secondly, it is crucial to focus on
the significance of the concept rather than to the words that compose it.
Let’s take the example of the “Cold War”. The Cold War is a concept that
indicates the state of world politics from 1945 to 1990. It means that there
was a rivalry between two block countries represented respectively by the
Union of Soviet Socialist Republic (USSR) and United States (US). This
conflict was cold because actual close arms combat never occurred between
these two parties. However, if one tries to explain the concept of the Cold
War with a literal explanation, the conclusion would be a war that happened
during the winter or a cruel or brutal war. This interpretation of the concept
of the Cold War is as much incorrect as using a literal analysis to explain
concepts. For sure, every word that composes a concept has a contextual
meaning. However, as long as they are used in a conceptual context, their
own meanings and contextual significance change. Henceforward, the
composition of these words signifies only the meaning of the concept. If one
wants to avoid the ambiguity on understanding the concept of global
governance, he/she should not miss the idea of “conceptual interpretation”.
In this regard, Klaus Dingwerth and Philipp Pattberg believe that, “different
ideas about what global governance refers to derive from disagreement about
the meaning of both global and governance”.3 Finally, it is important for a
concept to define the characteristics of itself once it is applied. This makes
understanding the concept and its use easier by the general public and by
academics. In this regard, the concept of “Arab spring” is another good
example. Once one has learned the significance of Arab spring, the
connotation shaped in his/her mind is the process of democratization and
the end of dictatorships in most Arab countries. Especially, the choice of the
word “spring” also remind us the revolutions of 1848. The latter, also known
1 K. Dingwerth and P. Pattberg ‘Global governance as a perspective on world
politics’ (2006) 12.2 Global governance: a review of multilateralism and international organizations 185,
at 186.
2 Ibid.
3 Ibid., at 188.
120 as “spring of nations” or “springtime of the peoples”, was a series of
political turmoils throughout Europe for democracy and end of aristocracy
and royalty. Basically, demands for democracy and end of dictatorships in
Arab countries since 2011 is quite similar to what happened in Europe in
1850s. Therefore, the use of the word “spring” makes sense in order to
conceptualize developments in Arab countries.
B. Emergence of the concept of global governance
With the end of the Cold War, a time of change has arrived in the
scene of world politics.4 The Commission on Global Governance5 described
this transformation by noting that “never before has change come so rapidly,
on such a global scale, and with such global visibility”.6 Change in world
politics put an end to the Cold War and changed our observations. A new
concept that lies in “ordering and structuring our new observations and
experiences,” in order to create new general propositions, was more than
necessary.7 One of the first concepts that described the world of affairs after
the Cold War was the concept of post-Cold War. Even though it is widely
used in literature; it does not meet the aforementioned three criteria. It does
not reflect changes in world politics and it only defines new concepts by
referring to its predecessor. Furthermore, it does not shape at all in the
picture of world politics after 1990. For these reasons, it would not become
the concept to describe the period after the Cold War. Another suggestion
was the concept of “new world order” as proclaimed by George H.W. Bush.8
Even though this concept had some multilateralist perspectives, it was not
well received because “the institutions and understandings of multilateralism
as they existed at the end of the Cold War have proven inadequate to address
and understand the issues and challenges of the post-Cold War”.9 As far as
realists and liberal-institutionalists of the 70s and 80s are concerned, it was
impossible for them to come up with a concept for an epoch of postrevolution, which they did not expect.10
4 James N. Rosenau ‘Governance, order, and change in world politics’ in James N.
Rosenau and Ernst-Otto Czempiel (eds.), Governance without government: order and change in world
politics (Vol.20 Cambridge University Press 1992), 1.
5 Commission on Global Governance ‘Our global neighborhood: The report of the
Commission on global governance’ (1995).
6 Ibid.
7 Dingwerth and Pattberg ‘Global governance’ supra note 1, at 188.
8 George Bush. Toward a new world order. US Department of State, Bureau of Public
Affairs, Office of Public Communication, 1990.
9 Charlotte Ku and Thomas G. Weiss, ‘Preface’ in Charlotte Ku and Thomas G.
Weiss (eds.), Toward Understanding Global Governance – The international law and international
relations toolbox (2009), at viii.
10 Thomas G. Weiss, ‘Governance, good governance and global governance:
conceptual and actual challenges’, Third world quarterly 21.5 (2000): 795, at 796.
121
As soon as the concept of global governance is introduced, it is
relatively easy to notice that it meets three requirements and also has a
deserved and interesting charm.11 Global governance is a concept; the words
that compose it generate a “conceptual meaning” which creates intentionally
intended uses. Initially, the concept of global governance was first
recognized in the works of James N. Rosenau in 1992 even though he
originally named it as “governance without government”. 12 In his article
though, he never used the term “global governance”. Yet, his idea was to
find a concept to grasp the current conditions of world politics. He
explained that the goal of “governance without government” was to “clarify
the nature of global order and the process through which governance occurs
on a worldwide scale”.13 He listed some important changes in the world that
required new concepts such as the decline of hegemons, disappearance of
boundaries, increase of social movements, weakening of military alliances,
globalization of economies, shortening of political distances with
technologies, and mushrooming of global interdependencies. 14 The
Commission on Global Governance has made similar remarks by
underlining that the world of today is so much different than the time when
the United Nation system was created.15 The concept became termed with
the establishment of the Commission on Global Governance in 1993. With
the publication of the Commission’s report Our Global Neighborhood16 in 1995
and with the appearance of first issue of the Journal Global Governance during
the same year, the concept “global governance” became famous. Since then,
many people use it in order to describe world affairs after 1990.
The question remains, what is global governance? For Rosenau “to
anticipate the prospects of global governance” was considered a difficult
challenge or even impossible according to “one's appreciation of nuance and
one's tolerance of ambiguity”.17 The commission attempted to define it as
vaguely as possible so as to include basically every management of affairs.18
For Larry Finkelstein, it appeared to be virtually anything in 1995.19 By 2009,
Thomas J. Biersteker was saying that, “global governance is a permissive
concept in the sense that it gives one license to speak or write about many
11 Thomas G. Weiss and Ramesh Thakur, Global governance and the UN: an unfinished
journey Indiana University Press, 2010, at 29.
12 Rosenau, ‘Governance, order and change’ supra note 4.
13 Ibid at 1.
14 Rosenau, ‘Governance, order and change’ supra note 3, at 1.
15 Commission on global governance supra note 5 at 2.
16 Commission on global governance supra note 5.
17 James N. Rosenau, ‘Governance in the Twenty-first Century’ (1995) 1 Global
Governance 13 at13.
18 Commission on global governance supra note 5 at 2.
19 Lawrence S. Finkelstein, ‘What is global governance’ (1995) 1 Global
Governance 367, at 367.
122 different things”.20 Twenty years of works and research on global governance
has still not been enough to create a precise and widely agreed upon
definition. Yet, the term has become so popular not only in academic
writings, but also in the media and among the general public. This is because
global governance is the best term to explain what is going on in world
politics. The general situation in world politics is as ambiguous as the
concept of global governance. While the balance of world politics changes
from day to day, global governance evolves accordingly. Contrary to this
growing interest to the concept of global governance among international
relations’ specialists, international lawyers did not give much thought about
possible solutions of this approach to challenges of international law in 21st
century. In this regard, a good number of methods and approaches to
international law have been developed.21Critical legal studies, legal pluralism,
and constitutionalism might be mentioned among them. However, a global
governance approach to international law is inexistent. We believe that this
approach, that proved its relevance in the discipline of international relations,
also offers effective solutions to challenges of international law. Following
chapters will mainly focus on the usefulness of the concept of global
governance to international law.
C. Misunderstanding about the concept of global governance
One of the main misunderstandings about the concept of global
governance is due to the difference between “global governance lata” and “global
governance feranda”. While global governance lata frames the actual state of it, global
governance feranda indicates how it should be. As there is an important
difference between them and every day the former is approaching to the
latter, one must update their understanding of global governance over time.
For example, at the time that the Commission’s report was published, the
International Criminal Court was part of global governance feranda.22 But today,
it is in the framework of global governance lata. Similarly today’s global
governance is entirely different than that global governance before the subprime crisis. This categorization also resonates with the differentiation made
by Klaus Dingwerth and Philipp Pattberg. They similarly differ the use of
global governance as “an analytical concept attempts to capture the reality of
contemporary world politics” than its use as “an hegemonic discourse”.23
Ulrich Brand also underlined the importance of this distinction as the
following:
20 Thomas J. Biersteker, ‘Global Governance’ in Myriam Dunn Cavelty and Victor
Mauer (eds.) Routledge Companion to Security, New York and London: Routledge Publishers,
(2008).
21 Annie-Marie Slaughter and Steven R. Ratner, “Appraising the methods of
international law: A prospectus for readers” Am. J. Int'l L. 93 (1999): 291, at 296ss.
22
23
Commission on global governance supra note 5.
Dingwerth and Pattberg ‘Global governance’ supra note 1 at 189.
123
“There is an important difference, however, between the
largely analytical use of the concept by Rosenau and the
normative meaning of Global Governance in many other
contributions. The analytical version uses the concept in
order to understand the changing political structures and
processes, whereas the normative contributions intend to
sketch out the possibilities for desirable developments
without taking into account systematically the limits”.24
Consequently, it is highly important to identify which kind of global
governance we are talking about before making any analysis on the concept
of global governance. In the framework of this article, we will focus
primarily on “how things are” rather that “how they should be”.
Consequently, the global governance that will be cited in this article will only
signify global governance lata.
D. Global governance and international law’s challenges
Globalization is mostly described as posing new challenges to
international law and to legal theory. 25 It has its repercussions in every
aspects of human life, as it has on international law. Therefore, it requires
some changes to make international law up to date. It has two main but quite
opposite impacts on international law. First, one is the horizontal/vertical
inter-connectedness and relatedness between different actors/situations that
is handled more and more ineffectively by an international legal system. The
second one is the specialization and autonomization of the parts of a whole,
which has been defined as “functional differentiation” by sociologists.26 Let’s
take and enrich the example of the “transport of hazardous chemicals at sea”
of Koskenniemi.27 As he illustrated:
“This can be conceptualized at least through half a dozen
vocabularies accompanied by the same number of forms
of expertise and types of preference: law of trade, law of
Ulrich Brand, ‘Order and regulation: Global Governance as a hegemonic
discourse of international politics?’ Review of International Political Economy 12.1 (2005): 155176, at 159.
25 Gralf-Peter Callies, and Moritz Renner, “Between law and social norms: The
evolution of global governance” Ratio Juris 22.2 (2009): 260-280, at 260; Roger Cotterrell,
“Transnational communities and the concept of law”, Ratio Juris 21.1 (2008): 1-18 at 1.
26 International Law Commission, Fragmentation of International Law. Problems caused by
the Diversification and Expansion of International Law, (Report of the Study Group of the
International Law Commission, finalised by Martti Koskenniemi) UN Doc A/CN4/L682
(13 April 2006), at 11.
27 Martti Koskenniemi, ‘The politics of international law–20 years later’ European
Journal of International Law 20.1 (2009): 7, at 11.
24
124 transport, law of the environment, law of the sea,
‘chemical law’, and the law of human rights”.28
Actually, the evaluation that gave birth to this consequence is not just
only some new vocabularies in different and specific new areas of
international law. The International Court of Justice is no longer the only
international tribunal where an international case such as the transportation
of hazardous chemicals can be brought. Individuals might pursue human
right courts if there have been some violations of human rights during the
transportation. International Tribunal for Law of the Sea might also hear the
case. It can even go to the dispute settlement mechanism of World Trade
Organization if there have been some issues regarding tariffs, services or
intellectual property. A possibility to bring the case before an arbitral tribunal
goes without saying. This means that not only every field of international law
has more and more of their own vocabularies and principles but they have
also their own tribunals that deal with international law from their
perspectives. In other words, the risk to have; two or more tribunals that
have competing jurisdiction in the same dispute, different interpretations
from tribunals for the same principle of international law, contradictory
judgments, forum shopping even situations of self-contained regimes, are
high and it causes anxieties and fear about the fragmentation of international
law.
This only demonstrates the problematical situations of international
law in the ambit of hard law, and it doesn’t end there. No one would be
shocked to hear the existence of an Association of Transporters of Chemical
Materials that regulates relations among its member concerning these kinds of
issues through rules and principles adopted by the General Assembly of the
Association. This association might even offer an appropriate dispute
settlement system to its member concerning conflicts among them. This is
the part of the problem in the context of soft law. Can these rules and
principles be considered as “law”? Where to put the “case law” produced by
the dispute settlement mechanism of this kind? Similarly to the fear and
anxieties about the unity of international law described above, the problem
here is about to answer the famous question of “what is law”. Is there a need
to reconsider “what is law” in the 21st century? “Is it necessary to
conceptualize law in new ways because of changes in the conditions and
forms of regulation brought about by processes associated with
globalization?” 29 This situation also creates fear and anxieties about legal
theory, international legal order, global law etc.
In this regard, it seems to us that the concept and the theory of
global governance might be quite useful. Global governance is usually treated
within the disciplines of international relations. “Almost any process or
Ibid.
Roger Cotterrell, “Transnational communities and the concept of law”, Ratio
Juris 21.1 (2008): 1-18 at 1.
28
29
125
structure of politics beyond the State – regardless of scope, content, or
context – has within the last few years been declared part of a general idea of
global governance”.30 For this reason, the concept of global governance also
has repercussion on international law, international trade and finance,
international courts and tribunals, as well as transnational movements.
However, even the “legalization” of global governance, for example, is
discussed by political scientists rather than academic lawyers”.31 Gralf-Peter
Calliess and Moritz Renner underline this lack of interest of academic
lawyers regarding to global governance as following:
“Globalization’s challenges, however, go to the very core
of legal discipline. On the one hand, it seems that in the
ambit of global governance there is a trend towards nonlegal forms of regulation. … On the other hand, however,
we can witness the evolution of supposedly legal and semilegal forms of regulation beyond the nation-state, which
are often referred to as “private regimes” or “hybrid
regimes”. While both these developments are readily
conceptualized by economics- and political science-based
approaches that are labelled as “governance without
government” or “economic governance”, legal theory has
largely failed to grasp the intricate relationship between
law and social norms in the context of global governance
regimes that might even necessitate a reconsideration of
the concept of law itself.32
In this respect, we believe that global governance theory may offer
suitable solutions to the fragmentation of international law and to the
difficulties about the reconceptualization of law in times of globalization. We
should name the former situation as hard challenges of international law and the
latter one as soft challenges of international law. While economic theories use
global governance to better focus on efficiency with an actor-based
perspective33 or political theories present global governance to explain what
is going on in world affairs, we, as international lawyers, will take advantage
of it in order to look for answers to our hard and soft challenges of international
law by taking effectively into account “law’s own rationality” and its other
idiosyncratic characteristics.34 Thus, the concept of global governance might
end up being a bridge between disciplines or a common denominator of
Dingwerth and Pattberg ‘Global governance’ supra note 1 at 185.
Gralf-Peter Callies, and Moritz Renner, “Between law and social norms: The
evolution of global governance” Ratio Juris 22.2 (2009): 260-280, at 260; Abbott, Kenneth
W., et al, “The concept of legalization” International organization 54.3 (2000): 401-420.
32 Gralf-Peter Callies, and Moritz Renner, “Between law and social norms” at 261.
33 Ibid. at 260.
34 Ibid.
30
31
126 disciplines.35
E. Clarification about the terminology
Before starting to analyze any question related to the topic of this
work, it seems indispensable to enlighten the significance of some terms that
will be often used. First of all, as Cesare P.R. Romano has explored it in
detail, there is no common understanding about the meaning of the terms
“International Courts”, “International Tribunals”, “International Courts and
Tribunals”.36Following his extensive explanations, this article will also use the
term “international judicial bodies” as synonyms of “international judicial
institutions” and “international judicial organs”. 37 Secondly, as two
prominent international judges have underlined, “the multiplication of
specialized tribunals is, by itself, a healthy phenomenon. Its description by
the term “proliferation,” with its negative connotations, is misleading”.38
Inspired by these words and thoughts, the term “multiplication of
international judicial bodies” will be used in the framework of this article to
refer to the increasing number of international judicial bodies during the last
two decades. Thirdly, terms such as “fragmentation of international law”,
“fragmentation of international legal system” and “fragmentation issue” are
often used to refer to this falling-apart of international law. In this work, all
these terms share the same connotation and refer to the very exact problems.
II. FRAGMENTATION AND INTERNATIONAL JUDICIAL BODIES
A. Preliminary remarks
One can describe the last two decades as globalization’s epoch.
During this epoch, one of the developments that concern international law
the most is the rapid increase in the number of judicial organs operating at
international level. The Project on International Courts and Tribunals
(PICT) identified that more than 125 “international judicial bodies” and
“quasi-judicial, implementation control and other dispute settlement bodies”
have been created since 1868 (when the first American-Mexican Claims
35 Kees van Kersbergen, and Frans van Waarden. ‘Governance as a bridge between
disciplines: Cross disciplinary inspiration regarding shifts in governance and problems of
governability, accountability and legitimacy’ (2004) 43.2 European journal of political
research 143.
36 Cesare PR. Romano, ‘The Proliferation of International Judicial Bodies: The
Pieces of the Puzzle’ NYUJ Int'l L. & Pol. 31 (1998): 709, at 712.
37 Ibid at 713.
38 Georges Abi-Saab, ‘Fragmentation or unification: Some concluding remarks’
NYUJ Int'l L. & Pol. 31 (1998): 919, at 925; Rosalyn Higgins, ‘Plenary Address’ Am. Soc'y
Int'l L. Proc. 100 (2006): 387, at 390.
127
Commission was created).39 Additionally, as a result of these extraordinary
developments, International Law Commission decided to examine the
fragmentation of international law and published their report in 2006.40 “The
ILC, however, did not take up the institutional dimensions of fragmentation
of international law, having excluded that topic from the beginning”. 41
Nevertheless, the issues of the relationship between these judicial institutions
as well as the conflicting jurisdictions were actually the most critical points of
these developments. A rich literature is available on these points, as it will be
analyzed throughout the following sections. We consider this issue of
fragmentation/unity of international law as a hard challenge of international law,
because all newly established international judicial bodies have created
according to the existing (classical) understanding of international law.
Therefore, the problem that this situation is directly causing is a hard law
problem and it is a hard challenge of international law. In this regard, this work
will simply attempt to reconsider existing propositions to this challenge
through the glass of global governance and will try to show how some of the
existing standpoints fit perfectly in global governance’s perspective. It seems
that a “global governance reflex” exists among most of the international
judges and this reflex might be the solution to this hard challenge of international
law.
B. Typology of fragmentations
A good number of causes are listed among the reasons of the
fragmentation of international law. The multiplication of international
judicial bodies is only one of them. In this regard, the scope of this work will
be limited to the effects of this multiplication to the fragmentation issue.
This chapter will survey the most important international judicial bodies and
their relationship with each other from the perspective of three fragmentatio.
An international treaty or a statute, which establishes an international judicial
body, also determines its jurisdiction. When rights or obligations are
available under more than one treaty or statute, a competing jurisdiction
situation is at stake. This level of conflict is classified as a fragmentatio stricto
sensu. This is the simplest fragmentation. Secondly, even though jurisdictions
of some tribunals do not overlap, these tribunals could have different
interpretation for the same principles of international law. As there is no
supreme tribunal at international level, which can determine which one is
right and which is wrong, these different interpretations might fragment
Suzannah Linton and Firew Kebede Tiba, “The International Judge in an Age of
Multiple International Courts and Tribunals, Chi. J. Int'l L. 9 (2008): 407, at 408-409; See
Project on International Courts and Tribunals, The International Judiciary in Context,
available online at <http://www.pict-pcti.org/publications/synoptic-chart/synop-c4.pdf>
(visited January 5, 2014).
40 International Law Commission, Fragmentation of International Law, supra note 26.
41 Suzannah Linton and Firew Kebede Tiba, “The International Judge in an Age of
Multiple International Courts and Tribunals, Chi. J. Int'l L. 9 (2008): 407, at 410-411.
39
128 international law. These situations of conflicting interpretation are named as
fragmentatio lato sensu. The last level of the fragmentation of international law
is the notion named “self-contained regimes”.42 Accordingly, specialized area
of international law such as international trade law, international human
rights law, international criminal law, by developing their own principles
through their own tribunals, they will separate themselves from general
principle of international law. In the classification, this situation of selfcontained regimes is entitled as fragmentatio amplo sensu. In the following
paragraphs, these fragmentatio will be treated in the framework of main
international judicial bodies. However, all type of fragmentatio are not relevant
for all tribunals. For example International Criminal Court’s jurisdiction does
not compete with any other jurisdiction. For this reason, under the subchapter of Criminal Courts, only fragmentatio lato sensu and fragmentatio amplo
sensu will be analyzed. It goes for other sub-chapters.
C. International Court of Justice (ICJ)
As soon as competing jurisdiction issues are at stake, ICJ has two
kinds of jurisdiction, namely, contentious and advisory jurisdiction,
according to respective article 36 and article 65 of its statute. 43 In the
framework of its contentious jurisdiction,44 the ICJ is entitled to exercise its
jurisdiction on any international legal dispute without any subject matter
limit. 45 As soon as its personal jurisdiction is concerned, there are three
options in order to bring a case before the ICJ. First, according to article 36,
paragraph 1 of its statute; the ICJ has jurisdiction if States refer to it by a
special agreement. Secondly, parties to a treaty/convention can appoint the ICJ
to decide on any dispute between them arising from the treaty or
convention. Thirdly, under the optional clause of article 36 paragraphs 2-5,
States can unilaterally accept the compulsory jurisdiction of the ICJ.
In the case of a special agreement, as the agreement is concluded
between parties in order to bring the case before the ICJ, States would not
have concluded an agreement if they had had the intention to look for other
international judicial bodies. In other words, the only way to have a
conflicting jurisdiction in this situation is if parties decide to go in front of
the ICJ to avoid another Court, which would have been competent.
Therefore, there is a tiny chance that a conflicting jurisdiction occurs
between the ICJ and an international judicial body in the case of a special
agreement. Secondly, in the situation where a treaty or a convention refer to
Bruno Simma, ‘Self-contained regimes’ Netherlands Yearbook of International
Law 16.1 (1985): 111.
43 Statute of the International Court of Justice, United Nations Charter, 26 June
1945, 1 UNTS XVI, Annex I.
44 ICJ’s advisory jurisdiction does not have binding effects. Therefore, advisory
jurisdiction is outside of this work.
45 Ibid art. 36 (1).
42
129
the ICJ as the Court to decide on any disagreement between parties, a
conflicting jurisdiction may occur according to the text of that treaty or
convention. There will not be a conflicting jurisdiction if the ICJ is the only
court nominated by treaty or convention. If fork in road method – which is
more commonly used in the framework of investment treaties46 – is opted in
the treaty or convention, there will not be a problem as well. However, if the
treaty or convention provides more than one means for the settlement of the
dispute as in the case of the United Nations Convention on the Law of the
Sea (UNCLOS) article 287 47 , a jurisdictional conflict may occur among
international judicial bodies as happened in the MOX plant case between ICJ
and International Tribunal for Law of the Sea (ITLOS) as well as European
Court of Justice (ECJ).48
Thirdly, in the situation under the optional clause, the multiplication
of international judicial bodies does not create conflicting jurisdiction
between ICJ and other international judicial bodies in practical terms. First
of all there are only 69 countries that recognize the jurisdiction of the Court
as compulsory49. Moreover this is for the situation where a dispute arises
among these 69 countries not with the remaining 124 countries, entitled as
“networks of engagements”, 50 which statistically diminish the number of
cases that can be brought before the ICJ. 51 In addition, as the States’
consents to the ICJ’s jurisdiction are unilateral declarations under the article
36(2), the Court might need to establish that there is a consensual bond
between two declarations.52 This situation also decreases the number of cases
before ICJ. Furthermore, 21 among these 69 countries are European Union
(EU) Member States. Apart the famous Continental Shelf Case53 and recent
Jurisdictional Immunities of the State Case54 intra-EU disputes before the ICJ are
46 Christoph Schreuer, ‘Travelling the BIT route: of waiting periods, umbrella
clauses and forks in the road’, (2004) 5 J World Investment & Trade 231, at 239.
47 United Nations Convention on the Law of the Sea (UNCLOS), 21 (1982) ILM
1261.
48 See infra note 64 and 66.
49 ‘Declarations recognizing the jurisdiction of the Court as compulsory’
http://www.icj-cij.org/jurisdiction/index.php?p1=5&p2=1&p3=3 accessed on October 28,
2013
50 ICJ, Case of Military and Paramilitary Activities in and against Nicaragua (Nicaragua v.
the United States), Jurisdiction and Admissibility, Judgment, ICJ Reports 1984, at 392 and 418.
51 Stanimir A. Alexandrov, ‘The Compulsory Jurisdiction of the International Court
of Justice: How Compulsory Is It?’ Chinese journal of international law 5.1 (2006): 29-38, at 33.
52 ICJ, Fisheries Jurisdiction Case (Spain v. Canada), Jurisdiction, Judgment, ICJ Reports
1998, at para. 46.
53 ICJ, North Sea Continental Shelf Cases (Federal Republic of Germany v. Denmark; Federal
Republic of Germany v. the Netherlands), ICJ Reports 1969.
54 ICJ, Jurisdictional Immunities of the State (Germany v. Italy: Greece Intervening),
Judgment, ICJ Reports 2012.
130 the exception.55 In both of these cases, any EU dimension was not involved
which therefore excludes an eventual conflicting jurisdiction.56 As it will be
explained in the following section, article 344 of the Treaty on the
Functioning of European Union (TFEU)57 prohibits EU Member States to
take cases, which involve Community Law to other dispute settlement
mechanisms.58
Among the remaining 48 countries, there are a good number of small
States and smallest States, which either would not normally have an affair at
ICJ or would not afford it. 59 Moreover, some of these States made
reservations while consenting and there is no tendency among States to
greater adherence for political reasons.60 In addition, approximately 90% of
the ICJ’s work consists on the cases about aerial incidents, border disputes,
diplomatic relations, use of force and property.61 ICJ has become some sort
of international tribunal of “Statehood” during the last decades and the
multiplication of international bodies did not produce another international
judicial body that has a jurisdiction on these questions. Thus, it is quite rare
that ICJ’s jurisdiction would overlap with other international judicial bodies
under its optional clause of article 36, paragraph 2-5 of its statute.
In conclusion, the genuine situation of fragmentio stricto sensu for the
ICJ is when a treaty provides to contracting parties more than one dispute
settlement means; among them one is the ICJ. Actually this is quite selfevident and until now there was not a spoiled child among the States who
asked for all. Concerning a situation of fragmentio lato sensu in the framework
of the IJC, it will be analyzed below under the section F on criminal courts.
D. European Court of Justice (ECJ)
Articles 273 and 344 of TFEU regulate disputes among its Member
States. Accordingly, the European Court of Justice has jurisdiction in any
dispute between Member States of the EU, which relates to the subject
matter of EU Treaties. Member States undertake not to submit these
disputes to any other methods of settlement other than those provided for
therein. These dispositions clearly establish an exclusive jurisdiction for the
Frank Hoffmeister, ‘The European Union and the Peaceful Settlement of
International Disputes’ Chinese Journal of International Law 11.1 (2012): 77, at 84.
56 ICJ, Press Release No. 2008/44 of 23 December 2008.
57 Consolidated version of the Treaty on the Functioning of European Union
[2010] OJ C83/47.
58 See infra note 64 and 66.
59 Among others, one can mention, Barbados, Botswana, Djibouti, Guinea-Bissau,
Lesotho, Malawi, Mauritius and Togo.
60 Aloysius P. Llamzon, ‘Jurisdiction and Compliance in Recent Decisions of the
International Court of Justice’ European Journal of International Law 18.5 (2007): 815-852, at
817.
61 Eric Posner, ‘The Decline of the International Court of Justice’ U Chicago Law &
Economics, Olin Working Paper 233 (2004), at 3.
55
131
ECJ and for intra-EU Members disputes. For this reason, as far as intra-EU
Member States disputes are concerned, a conflicting jurisdiction between the
ECJ and the ICJ becomes theoretically impossible. In the framework of
WTO, the EU is a member with a single customs union and a single trade
policy and tariff. Therefore an intra-EU dispute at WTO is out of the
question. However, there is a good number ECJ’s decision on the possibility
of WTO dispositions’ direct effect in European legal system.62 Even if these
cases are important for the legal relationship between WTO and the EU as it
is outside of this inquiry and here is no need to go any further. Another
conflicting jurisdiction theoretically possible is between an Arbitral Tribunal
established under the UNCLOS and ECJ, which was represented and settled
through the Mox Plant63 case. In that situation, following Ireland’s action to
take the case before the UNCLOS Arbitral Tribunal, the European
Commission brought the case before ECJ, for a violation of the Article 344
TFUE (art. 292 EC). ECJ decided that as the EU had signed UNCLOS as a
mixed agreement, it was a part of community legal order and community law
was largely justified.64 Consequently, ECJ declared its exclusive jurisdiction
and the UNCLOS Arbitral Tribunal retired.65
It can be concluded that the possibility of having a fragmentatio is
negligible between a tribunal that has general regional adjudication and other
international tribunals that have specific adjudication. If it happens, it might
easily be resolved.
E. Dispute Settlement Bodies on Trade Law: WTO, NAFTA and
MERCOSUR
1. WTO
The World Trade Organization does not have a court of justice.
Especially, before 1994 in the framework of the General Agreement on
Trade and Tariffs system (GATT), every Panel decision was supposed to be
adopted by a Dispute Settlement Body (DSB) in order to have judicial
effects.66 To give an administrative body the last word on judicial decision is
not compatible with the independence of a judicial body. Having this in
62 John Errico, ‘ The WTO in the EU: Unwinding the Knot’ Cornell Int'l LJ 44
(2011): 179.
63 ECJ, Commission of the European Communities v Ireland (MOX plant case) (C459/03) [2006] E. C. R. I-4635.
64 Nikolaos Lavranos, ‘Concurrence of Jurisdiction between the ECJ and other
International Courts and Tribunals’ (2005): 57, at 74.
65 International Tribunal for the Law of the Sea (ITLOS), The Mox Plant case
(Ireland v. United Kingdom), Suspension of proceedings on jurisdiction and merits, and
request for further provisional measures, 42 (2003) ILM 1187 at para. 28.
66 ‘Historic development of the WTO
dispute settlement system’, <
http://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c2s1p1_e.htm>
accessed on 30 October 2013.
132 mind, negotiators agreed to increase the independence of DSB’s judicial
decisions at the Uruguay Round.67 Instead of changing the whole system and
creating a WTO Court of Justice, the Marrakesh Agreement only replaced
the idea of positive consensus with a negative one.68 This meant that, in
GATT’s dispute settlement system, the respondent party was able to block
the adoption of a Panel Report because its consent was also required in
order to adopt the report.69 However, with negative consensus, a report is
automatically adopted if all contracting parties do not agree to not adopt the
report in 30 days.70 For this reason, DSB is most of the time referred to as a
quasi-judicial system.71
Contrary to ICJ, DSB does not have a general adjudication. Its
jurisdiction is limited to the covered agreements, which are listed in the
Appendix 1 of the DSU.72 Another difference is that WTO Member States
may not escape DSB’s adjudication while UN Member States can avoid ICJ’s
jurisdiction. While WTO Member States are entitled to bring a WTO related
case before ICJ (as all these agreements are concluded according to the
international law), only WTO related disputes could be brought before DSB.
In addition, article 23 of the DSU provides an exclusive jurisdiction of WTO
DSB for all disputes arising under the WTO covered agreements such as the
following:
“When Members seek the redress of a violation of
obligations or other nullification or impairment of benefits
under the covered agreements or an impediment to the
attainment of any objective of the covered agreements,
they shall have recourse to, and abide by, the rules and
procedures of this Understanding.”
This article establishes that when members “seek the redress of a
violation” of a WTO-covered agreement the WTO DSB is compulsory.73
However, in conformity with article 23.2(a) of DSU, there is not an
67
‘Major
changes
in
the
Uruguay
round’,
<
http://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c2s2p1_e.htm#fnt
1> accessed on 30 October 2013.
68 WTO, Understanding on Rules and Procedures Governing the Settlements of Disputes,
Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 15 April 1994, 33
(1994) ILM 1226 [hereinafter DSU].
69 See supra note 67.
70 DSU, Article 17.14 supra note 68.
71 Claus-Dieter Ehlermann, ’Experiences from the WTO Appellate Body’. Tex. Int'l
LJ 38 (2003): 469, p. 479
72 DSU supra note 68.
73 Tim Graewert, ‘Conflicting Laws and Jurisdictions in the Dispute Settlement
Process of Regional Trade Agreement and the WTO’ Contemp. Asia Arb. J. 1 (2008): 287, at
294.
133
exclusivity of jurisdiction about the “interpretation” of covered agreements.74
In addition, WTO DSB offers more procedural advantage to specified
parties than ICJ. Time-consuming oral and written proceedings as well as
deliberation of more than 15 judges are considered inefficient and render ICJ
unattractive to Member States.75 Speedy dispute settlement procedures with
the possibility of an appellate review make WTO DSB a clearly better
adjudication option than ICJ.76 In light of these arguments, it would not be a
logical choice for States to opt ICJ over WTO DSB. However, it would be
highly unusual to have an identical case before ICJ and DSB at the same
time.
An actual fragmentio stricto sensu occurred though between UNCLOS
and WTO in the Swordfish dispute between the EU and Chile. On one side
the EU was invoking article V of the GATT in order to get docking access
for its vessels in Chilean ports. This was before the WTO DSB and any
appellate panel was established.77 On the other side, Chile was relying on the
UNCLOS agreement while prohibiting the access of EU vessels to its ports
and decided to bring the case before ITLOS.78 However, shortly after, EU
and Chile agreed to suspend legal proceedings, which assured the happy
ending of this disagreement.79
In consequence, taking into account its specific structure and its
determined field, it is rare to have fragmentatio between the WTO DSB and
other international judicial bodies. However, fragmentatio are more relevant
about the relationship between the dispute settlement mechanisms of FreeTrade Agreements (FTA) and WTO DSB.
2. NAFTA and MERCOSUR
Article 23 of the DSU establishes an exclusive jurisdiction of DSB
74 Yuval Shany, The competing jurisdictions of international courts and tribunals. Oxford:
Oxford University Press, 2003 at 184.
75 Ernst-Ulrich Petersmann, “Constitutionalism and International Organizations”
Nw. J. Int'l L. & Bus. 17 (1996): 398, at 462.
76 Ernst-Ulrich Petersmann, The GATT/WTO Dispute Settlement System: International
Law, International Organizations and Dispute Settlement. Vol. 23. Martinus Nijhoff Publishers,
1997, at 240-44.
77 WTO, ‘Chile – Measures Affecting the Transit and Importation of Swordfish’
WT/DS193/2, Request for the Establishment of a Panel by the European Communities, 6
November 2000.
78 ITLOS, ‘Case Concerning the Conservation and Sustainable Exploitation of Swordfish
Stocks in the South-Eastern Pacific Ocean’, Order 2000/3, 20 December 2000, Constitution of
Chamber,
available
at
http://www.un.org/Depts/los/ITLOS/SWORDFISH_STOCKS.htm.
79 See for a more detailed analyses, Marcos A. Orellana, ‘The Swordfish Dispute
between the EU and Chile at the ITLOS and the WTO’ Nordic Journal of International
Law 71.1 (2002): 55-81, at 65.
134 for violations of WTO-covered agreements.80 However, similar dispositions
to WTO agreements exist also in FTAs concluded between WTO members,
as in the example article 301 of the North Atlantic Free-Trade Agreement81
(NAFTA).82 This means that for the same violation, a judicial remedy is
available by two different jurisdictions. However, Article 23 of the DSU
cannot prevent NAFTA Member States from addressing NAFTA’s dispute
settlement mechanism because “in this context, the NAFTA panels do not
determine whether WTO obligations between the NAFTA members have
been violated; since those provisions are incorporated into the NAFTA, they
solely decide upon obligations under the NAFTA”.83 Nevertheless, as it has
been underlined:
“Even if it may not be practical or useful for a NAFTA
party to duplicate in the WTO a dispute that should be
handled in NAFTA, there does not seem to be any legal
impediment against such a possibility, since, legally
speaking, the NAFTA and WTO panels would be
considering different "matters" under different "applicable
law," providing for different remedies and offering a
different implementation and retaliation mechanisms”.84
In this regard, two cases have been brought to the DSB, one
concerning NAFTA and the other concerning the Southern Common
Market (MERCOSUR).85 In the Mexican Soft Drinks case86, the position of
Mexico was to exclude DSB in favor of the NAFTA. As a last resort the
Appellate Body upheld the decision of the Panel that “under the DSU, it
ha[d] no discretion to decline to exercise its jurisdiction in the case that ha[d]
been brought before it”.87 In other words, AB established its supremacy
80 Which is different than the exclusive jurisdiction of ECJ. See Tim Graewert,
‘Conflicting Laws and Jurisdictions in the Dispute Settlement Process of Regional Trade
Agreement and the WTO’ Contemp. Asia Arb. J. 1 (2008): 287.
81 North American Free Trade Agreement (NAFTA), 32 ILM 289, 605 (1993)
[hereinafter NAFTA].
82 Kwak, Kyung, and Gabrielle Marceau, ‘Overlaps and conflicts of jurisdiction
between the World Trade Organization and regional trade agreements’ Can. YB Int'l L. 41
(2003): 83.
83 Tim Graewert, ‘Conflicting Laws and Jurisdictions in the Dispute Settlement
Process of Regional Trade Agreement and the WTO’ Contemp. Asia Arb. J. 1 (2008): 287, at
294-295.
84 Ibid, at 89.
85 Mercado Comùn de Sur (MERCOSUR), Treaty establishing a common market
between the Argentine Republic, the Federative Republic of Brazil, the Republic of Paraguay
and the Eastern Republic of Uruguay (also known as the Treaty of Asuncion), 30 (1991)
ILM 1044.
86 WTO, Appellate Body Report, Mexico – Tax measures on soft drinks and other
beverages, WT/DS308/AB/R, 6 March 2006.
87 Ibid at para. 57.
135
indirectly by not saying that other dispute settlement mechanisms were
inferior to DSB, but instead by giving the message that it would not
renounce its jurisdiction just because a similar case was pending, decided, or
had been covered by a dispute settlement mechanism under a FTA.
AB made its opinion clearer in the following Brazilian Tyres dispute.88
A dispute between Uruguay and Brazil ended with a MERCOSUR decision,
which obliged Brazil to change its legislation.89 The EU did not welcome the
new text and they ended up before the DSB basically for the validity of
“MERCOSUR exemption”. A WTO panel decided that the judgment of the
MERCOSUR Arbitral Tribunal was justified under Article XXIV GATT.90
However, AB did not follow this reasoning. It considered that
“MERCOSUR exemption” constituted arbitrary or unjustifiable
discrimination under the chapeau of Article XX GATT.91
By reviewing MERCOSUR’s decision, a WTO Appellate Body
established clearly its superiority over any FTA dispute settlement
mechanisms. Nikolaos Lavranos concluded that “other dispute settlement
bodies must issue their decisions in conformity with WTO law and Appellate
Body jurisprudence, or otherwise face the possibility of being reviewed and
revised by the WTO Appellate Body”.92
In this regard, Lavranos also argued that this attitude of supremacy
exercised by the WTO Appellate Body was probably not the best solution
for jurisdictional conflicts between FTAs’ dispute settlement mechanisms
and WTO DSB.93 However, the attitude of AB seems logical when one sees
the bigger picture. First of all, statistics show that the number of cases
brought to a WTO Dispute Settlement system and reporting panel or an AB
is slightly decreasing. However, there are still approximately 20 cases a year
initiated at WTO.94 Moreover, due to the complexity of disputes in terms of
the number of claims, the number of agreements, and the number of parties
involved, “the Appellate Body has requested the DSB to extend timeframes
WTO, Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres,
WT/DS322/AB/R, 3 December 2007.
89 MERCOSUR Tribunal, Uruguay v. Brazil (Remoulded Tyres) 9 January 2002,
available
at:
http://www.mercosur.int/msweb/portal%20intermediario/pt/controversias/VI%20LAUD
O.pdf.
90 WTO, Panel Report, Brazil – Measures Affecting Imports of Retreaded Tyres,
WT/DS322/R, 12 June 2007.
91 WTO, Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres
WT/DS322/AB/R, 3 December 2007.
92 Nikolaos Lavranos, ‘The Solange-Method as a Tool for Regulating Competing
Jurisdictions among International Courts and Tribunals’ Loy. LA Int'l & Comp. L. Rev. 30
(2008): 275.
93 Ibid.
94 Horn, Henrik, Louise Johannesson, and Petros Mavroidis, ‘The WTO Dispute
Settlement System 1995-2010: Some Descriptive Statistics’ (2011) IFN Working Paper No.
891 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2094281 accessed October 28,
2013.
88
136 by delaying adoption or the start of an appeal of a panel report under Article
16.4 of the DSU”.95 Being obliged to accomplish their report under such a
limited timeframe, the WTO Panel or AB would not mind having a FTA
dispute settlement mechanism to settle a case in conformity with WTO law.
Secondly, it does not appear to be a great idea to define the dominant
attitude of AB as a non-cooperative solution. Supremacy of a universal
mechanism over regional mechanisms is not only logical but also an end to
the ambiguity about the conflicts of jurisdiction. Therefore, it is noticeable
that this strategy of AB has a possible future. Furthermore, a similar attitude
of ECJ worked very well in its relationship with national constitutional
courts. In this regard, the evolution of the attitude of German Constitutional
Court from the Solange I96 to Solange IV97 proves this reality as Lavranos
demonstrated.98 When German Court held the Solange I case in 1974, ECJ
was not (yet) guaranteeing protection for fundamental human rights
equivalent to German Constitution. Consequently, German Court decided
that as long as 99 ECJ did not offer adequate protection for fundamental
human rights, it would continue to review the validity of EC regulations with
respect to German Constitution. However, German Court reserved its
attitude towards European Court and concluded in Solange IV that as long as
ECJ ensured the minimum level of protection for fundamental rights, it
would not review EC laws. In conclusion, WTO Appellate Body put an end
to eventual jurisdictional crises in international trade law by its jurisprudence,
which responded to all anxieties about a fragmentatio stricto sensu between
WTO DSB and other international tribunals.
The stand point of WTO jurisprudence is no different on the other
two levels of fragmentatio. First of all, a situation of fragmentatio lato sensu did
not occurred between WTO DSB and another international judicial body.
Furthermore, Gabrielle Marceau explained very clearly that these issues
could be easily tackled. 100 She provided useful answers for an eventual
situation of fragmentatio lato sensu by examining the example of international
human rights within the framework of WTO. She pointed out that good
Debra Stegber, ‘1. Strengthening the Wto dispute settlement system:
Establishment of a dispute tribunal’ in Ricardo Meléndez-Ortiz, Christophe Bellmann and
Miguel Rodriguez Mendoza (eds.), The Future and the WTO: Confronting the Challenges (2012),
112.
96
Entscheidungen des Bundesverfassungsgericht [BVerfGE] [Federal
Constitutional Court] May 29, 1974, 37, 271 (F.R.G.) [hereinafter Solange I].
97
Entscheidungen des Bundesverfassungsgericht [BVerfGE] [Federal
Constitutional Court] June 7, 2000, 102 147 (F.R.G.). [hereinafter Solange IV].
98 Nikolaos Lavranos, ‘On the Need to Regulate Competing Jurisdictions between
International Courts and Tribunals’, EUI Working Papers, Max Weber Programme,
2009/14, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1418518, accessed on
October 29, 2013, at 50.
99 Which means Solange in German.
100 Gabrielle Marceau, ‘WTO dispute settlement and human rights’ European Journal
of International Law 13.4 (2002): 753-814.
95
137
interpretations of WTO’s Panels and Appellate Body would ensure to avoid
conflicts between international human rights and WTO-covered
agreements.101 In this regard, article 3.2 of the DSU offers the necessary legal
basis for such good interpretations. It refers to itself as the customary rules
of interpretation of public international law for the sake of the interpretation
of WTO agreements. 102 Accordingly, article 31(3)(c) of the Vienna
Convention on Law of Treaties 103 required the AB to take into account
relevant human rights laws where applicable in the relationship between
parties while interpreting WTO covered agreements.104 Thus, this strategy in
accordance with WTO covered agreements allowed avoiding possible
fragmentatio.
Secondly, in one of its first cases, AB made it clear that GATT could
not be read in clinical isolation from public international law.105 It would be
odd to even think about this option. After all, WTO agreements are nothing
more than another multilateral treaty in the system of international law. For
example, WTO agreements do not have disposition on questions such as
burden of proof, representation before Panel, retroactive application of
treaties etc.106 Therefore it is not possible to define WTO law as a selfcontained regime and consider it outside the system of international law.107
F. Courts of Human Rights
The European Convention of Human Rights (ECHR) 108 was a
leading example for the conclusion of similar conventions among American
States and African States. Both the American Convention of Human Rights
(ACHR) 109 and the African Charter on Human and Peoples' Rights
Ibid, at 779.
Joost Pauwelyn, ‘The Role of Public International Law in the WTO: How far
can we go?’ American Journal of International Law (2001): 535-578.
103 Vienna Convention on Law of Treaties, January 27, 1989, 1155 U.N.T.S 331;
Article 31 (3) (c) of the Vienna Convention: “There shall be taken into account, together
with the context: any relevant rules of international law applicable in the relations between
the parties”.
104 Gabrielle Marceau, ‘WTO dispute settlement and human rights’ supra note 100,
at 785.
105 WTO, Appellate Body Report, United States-Standards for Reformulated and
Conventional Gasoline, WT/DS2/AB/R, 20 March 1996 at para. 17.
106 Joost Pauwelyn, ‘How to Win a WTO Dispute Based on Non-WTO Law?
Questions of Jurisdiction and Merits’ Journal of World Trade, Vol. 37, No. 6, 2003,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=478021 accessed on 28 October
2013.
107 Joost Pauwelyn, ‘Bridging Fragmentation and Unity: International Law as a
Universe of Inter-Connected Islands’ Mich. J. Int'l L. 25 (2003): 903.
108 Convention for the Protection of Human Rights and Fundamental Freedoms, 4
November 1950, ETS No. 5; 213 U.N.T.S 221.
109 American Convention on Human Rights (also known as the Pact of San José),
22 November 1969, 9 (1969) ILM 99.
101
102
138 (ACHPR) 110 have similar disposition to ECHR about their respective
jurisdiction, which is limited on a regional basis. For this reason, it is not
conceivable to have a situation of fragmentatio stricto sensu among the tribunal
that these conventions establish. However, it is possible that these human
right courts might interpret or understand the same fundamental right
differently, consequently creating a situation of fragmentio lato sensu. In this
regard, as far as the African Court on Human and People’s Rights (ACtPHR)
is concerned, this came into force only in 2004 and it is still too early to talk
about the existence of this kind of fragmentation. In the case of the InterAmerican Court of Human Rights (IACHR), without going to details,
Kerstine Blome has shown “the actual existence of a common judicial
enterprise in the area of human rights with mutual recognition and equal
value placed” between IACHR and European Court of Human Rights
(ECtHR).111 The increasing number of references from ECtHR to IACHR,
the use of IACHR’s decision in the proceedings before ECtHR shows this
reality as well.112 She concluded the following:
“Self-awareness of the judges involved, willingness to
recognize each other as participants in a common judicial
enterprise, and consistent jurisprudence in certain areas
through cooperation and mutual recognition of each
other’s jurisprudence [indicate that] an international
judicial human rights system is emerging”.113
Thus, it is possible to argue that a fragmentatio is not present among
international judicial bodies in the area of human rights. However, the
relationship between ECtHR and ECJ is worthy of analyzing in order to see
how these two regional judicial bodies have tackled different issues of
conflicting jurisdiction and conflicting interpretation.
In the Internationale Handelsgesellschaft 114 case, the ECJ preceded a
judgment on fundamental human rights’ binding effects on the European
Economic Community.115 Following this, more and more new cases have
been brought before the Court invoking incompatibility of the Community’s
legislation with certain human rights. The corner stone of jurisprudence of
110 African Charter on Human and Peoples' Rights (ACHPR), 1520 UNTS 217; 21
ILM 58 (1982).
111 Kerstin Blome, ‘Wallflower or Essential Constituent? The Inter-American Court
of Human Rights’ Role in an Emerging International Judicial Human Rights System’
available at < http://www.stockholm.sgir.eu/uploads/SGIR_2010_Blome.pdf > accessed
on 30 October 2013.
112 Ibid., at 16 ss.
113 Ibid., at 31.
114 ECJ, Internationale Handelsgesellschaft (Case 11/70) [1970] ECR 1125.
115 Sionaidh Douglas-Scott, ‘A tale of two courts: Luxembourg, Strasbourg and the
growing European human rights acquis’ Common Market Law Review 43.3 (2006): 629-665, at
629.
139
ECtHR was the Bosphorus 116 case, which cleared most of the conflict of
jurisdiction between Strasbourg and Luxembourg. After having referred to
its position on the fact that EC Member States cannot circumvent their
human rights obligation by attributing their competence to an international
organization, 117 the Court concluded with a presumption that there was
sufficient fundamental rights protection mechanism in the framework of the
Community and if this protection was not “manifestly deficient” in some
specific cases, the Court would refuse its jurisdiction.118 This is one of the
best examples of how to resolve conflicting jurisdiction issues between
international judicial bodies. Admittedly, this is not the end of the discussion
and it is more than likely that new problems will surface.119 However, as it
has been done in the Bosphorus case, upcoming jurisprudences of Strasbourg
and Luxembourg will resolve every jurisdictional question between them step
by step. Nevertheless, it does not mean that every international judicial body
would follow this logic of “mutual respect” and that there would be no more
fragmentatio. But, this case does prove that the best way to deal with different
fragmentatio problems between different international judicial bodies is
through jurisprudence. That’s why; neither international judges nor
international lawyer should expect governments to resolve their pure juridical
problems by making new international rules or treaties.
G. Criminal Courts
The history of international criminal tribunals is quite different than
other international judicial bodies. Starting with the Nuremberg trials, until
the end of the 20th century, all criminal courts were established after mass
atrocity crimes such as the Holocaust, Rwanda, Ex-Yugoslavia, Bosnia,
Kosovo. After the ratification of the Rome Statute 120 by 60 States, the
International Criminal Court (ICC) took its place among international
judicial bodies and currently presides over 122 Member States. 121 As its
jurisdiction is only over individual accused of genocide, war crimes and
crimes against humanity,122 there is not a problem of competing jurisdiction
ECJ, Bosphorus Hava Yollari Turizm ve Ticaret AS v. Minister for Transp., Energy &
Communications (Case C-84/95) 1996 E.C.R. 1-3953.
117 ECtHR, Matthews v UK 18 February 1999.
118 ECtHR, Bosphorus, supra note 116 para. 156.
119 Tobias Lock, ‘Beyond Bosphorus: The European Court of Human Rights’ Case
Law on the Responsibility of Member States of International Organisations under the
European Convention on Human Rights’ Human Rights Law Review10.3 (2010): 529, at 531.
120 Rome Statute of The International Criminal Court, 37 ILM 1002 (1998).
121
Establishment
of
the
court,
<
http://www.icccpi.int/en_menus/icc/about%20the%20court/icc%20at%20a%20glance/Pages/establishm
ent%20of%20the%20court.aspx> accessed on 30 October 2013.
122 Rome Statute Art. 5 (1), supra note 120.
116
140 between ICC and another international judicial bodies.123 Moreover, ICC did
not yet make a definitive judgment until today. However, in one situation, a
fragmentatio lato sensu was raised between the International Criminal Tribunal
for Ex-Yugoslavia (ICTY) and the ICJ following a conflicting interpretation
of the famous issue of “control”.
The issue at stake was to deal “with the question of the legal
conditions required for individuals to be considered as acting on behalf of a
State, i.e., as de facto State officials”. 124 In this regard, ICJ established a high
degree of control citing precedence in the Nicaragua case of 1986.125 The
Court decided that:
“The Court has taken the view that United States
participation, even if preponderant or decisive, in the
financing, organizing, training, supplying and equipping of
the contras, the selection of its military or paramilitary
targets, and the planning of the whole of its operation, is
still insufficient in itself, for the purpose of attributing to
the United States the acts committed by the contras in the
course of their military or paramilitary operations in
Nicaragua. All the forms of United States participation
mentioned above, and even the general control by the
respondent State over a force with a high degree of
dependency on it, would not in themselves mean, that the
United States directed or enforced the perpetration of the
acts contrary to human rights and humanitarian law
alleged by the applicant State”.126
It is important to note that influence of the Cold War was still
looming during the Nicaragua case. It would not be plausible to hope that
the ICJ would follow “the ‘cat’s paw strategies of de facto participation in
conflicts without formal accountability”.127 In other words, the concept of
“effective control” was very well established and properly applied as far as
the situation in Nicaragua is concerned. However, lots of things regarding
the respect of human rights have changed between the Nicaragua case and
However, there is a competing jurisdiction situation with national courts. In this
regard, I will add a whole section about national courts and their decisions and attitudes on
international cases before them. I will touch to this relationship between ICC and national
courts on this section.
124 ICTY, The Prosecutor v. Duko Tadic, Judgement, Case No. IT-94-1-A, A. Ch. 15
July 1999, at para. 99.
125 Ibid.
126 ICJ, Military and Paramilitary Activities in and against Nicaragua (Nicaragua v.
United States of America) Merits, ICJ Reports 1986, para. 115.
127 Martti Koskenniemi and Päivi Leino, ‘Fragmentation of international law?
Postmodern anxieties’ Leiden Journal of International Law 15.03 (2002): 553, at 566.
123
141
the Tadic128 case. As it is clearly and undoubtedly shown by the case law and
State practice cited by the Appeals Chamber, the Nicaragua test was not – at
least anymore – consonant with the law of State responsibility.129
It is an exaggeration to say that the Tadic case is an ultra vires
jurisdiction rather than a conflicting jurisdiction.130 The Appeal Chambers
could not make a finding that the standards applied by the ICJ in the
Nicaragua Case was tenable because the Nicaragua test was not even
compatible with the logic of the law of State Responsibility at that time. In
this regard the following citation from the Youmans case of the United StatesMexico General Claims Commission, is quite relevant:
“If international law were not to impute to a State
wrongful acts committed by its officials outside their
competence or contrary to instructions, “it would follow
that no wrongful acts committed by an official could be
considered as acts for which his Government could be
held liable”.131
It is not plausible and logical according to law of State Responsibility,
to expect that the perpetration of the acts contrary to human rights and
humanitarian law should be directed or enforced by the United States. If this
were the case, there would be nothing left to prove. That’s why the intention
of the Appeals Chamber was to proclaim this oddity out loudly, which it has
done quite openly. However, if the story were finished at this stage, it would
not be plausible to talk about the fragmentation of international law by
making reference to these two cases alone. Things changed with ICJ’s
genocide case in 2007.132 After this case, it was observed that two tribunals
could have distinct views on two points. On the one hand, according to ICJ,
it was not indispensable for the Appeal Chamber to rule on State
responsibility for the exercise of its jurisdiction.133 ICJ added that it might
well be possible that the “overall control” is suitable to decide whether an
armed conflict is international or not.134 However, ICJ did not enter into this
ICTY, The Prosecutor v. Duko Tadic, supra note 124.
Ibid., at paras.116 ss.
130 Karin Oellers-Frahm, ‘Multiplication of International Courts and Tribunals and
Conflicting Jurisdiction Problems and Possible Solutions’ Max Planck Yearbook of United
Nations Law 5 (2001): 67, at 80.
131 Permanent Court of Arbitration, Thomas H. Youmans (U.S.A.) v. United Mexican
States Decision of 23 November 1926, Reports of International Arbitral Awards, vol. IV, at
116.
132 ICJ, Application of the Convention on the Prevention and Punishment of the
Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro), Judgment, ICJ
Reports 2007.
133 Ibid. at para. 403.
134 Ibid. at para. 404.
128
129
142 question, as it is not indispensable for its judgment at that time.135 It looks
quite impossible for ICTY to not take a position on State responsibility in
the Tadic case. When there is an armed conflict inside of a State’s territory it
must be decided if it constitutes international representation. A court has to
rule whether or not an armed group’s activities are attributable to another
state based on that State’s rules of responsibility. If the proceeding is not
found then it is difficult to blame ICTY. On the other hand, In its decision,
without giving satisfactory arguments, ICJ briefly stated that; “the “overall
control” test is unsuitable, for it stretches too far, almost to breaking point,
the connection which must exist between the conduct of a State’s organs and
its international responsibility”.136 Admittedly, two courts found each other’s
views on the question of control as unpersuasive. But this kind of difference
may also exist in national level between criminal, civil or administrative
courts. Therefore, the conclusion would be as Rosalyn Higgins has
underlined: “Thus some differences of perception between the ICJ and the
ICTY do remain on this control test for purposes of responsibility, but given
the different relevant contexts, they hardly constitute a drama”.137
H. Arbitration
ICSID 138 is an international institution created within the
International Convention on the Settlement of Investment Disputes.
Approximately 150 States ratified the ICSID Convention.139 ICSID is not a
tribunal or a dispute settlement body. It is only a framework in order to
provide a mechanism of arbitration between States and investment
companies. According to Article 25 (1), “the jurisdiction of the Centre shall
extend to any legal dispute arising directly out of an investment, between a
Contracting State and a national of another Contracting State, which the
parties to the dispute consent in writing to submit to the Centre”. Meaning
that, this facility of arbitration in the framework of ICSID is only available
for investment disputes. Article 64 of the ICSID Convention deals with the
situation where a dispute arises between two contracting States. In that
situation, parties can transfer the dispute to ICJ. However, this procedure
Ibid.
Ibid. at 406.
137 Rosalyn Higgins, ‘A babel of judicial voices? Ruminations from the bench’
International and Comparative Law Quarterly 55.4 (2006): 791, at 795;
138 Convention on the Settlement of Investment Disputes Between States and
Nationals of Other States (ICSID), (also known as Washington Convention), 17 UST 1270,
TIAS 6090, 575 UNTS 159 [Hereinafter, ICSID].
139
Member
States,
<https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=Sho
wHome&pageName=MemberStates_Home> accessed on 01.11.2013.
135
136
143
has never been used until now.140 Consequently, this article eliminates any
possible conflicting jurisdiction between ICJ and ICSID arbitrations.
As soon as fragmentatio lato sensu is at stake, it would be difficult to say
that ICSID arbitrations are doing well. In their highly regarded article,
Spoorenberg and Vinuales create a great survey about the conflicting
decision among ICSID arbitral tribunals. 141 After having clarified seven
different reasons for these conflicting decisions, they provide to arbitrators a
toolbox in order to handle conflicting decisions arising on investment
disputes in a more harmonious way. After this survey, it was concluded, “the
mechanisms and techniques currently available to deal with conflicting
decisions deserve equal if not more attention than the potential solutions still
to be designed and/or implemented”. 142 They correctly pointed out that
jurisprudence was a metaphorical magic wand that would resolve all these
problems.
III. APPROACHES TO THE HARD CHALLENGES OF INTERNATIONAL LAW
A. Constitutionalist approach
International constitutionalism was actually a dream in 1930s and we
have been in a déjàvu situation since the 1990s.143 A constitution is the
highest law in a society. In the words of Hermann Mosler, “It transforms a
society into a community governed by law. It provides for the necessary
organization and for the division of competence of organs established under
fixed procedural rules”.144 He also adds that even though the international
community does not have a general constitution it has many constitutional
elements.145 Some developments after the end of the socialist bloc created
the need for more constitutional elements and a better international legal
order. First of all, these needs were coming from the famous fragmentation
of international law, which was causing a strong feeling of anxiety about its
unity. International constitutionalism was considered the best antidote and
Gauthier Vannieuwenhuyse, ‘Bringing a Dispute Concerning ICSID Cases and
the ICSID Convention Before the International Court of Justice." The Law and Practice of
International Courts and Tribunals 8.1 (2009): 115, at 118.
141 Frank Spoorenberg and Jorge E. Vinuales, ‘Conflicting Decisions in
International Arbitration’ The Law and Practice of International Courts and Tribunals 8.1 (2009):
91-113.
142 Ibid at 113.
143
Samantha Besson, ‘Whose Constitution (s)? International Law,
Constitutionalism and Democracy’ in Jeffrey Dunoff and Joel Trachtman (eds.), Ruling the
World? Constitutionalism, International Law and Global Governance, Cambridge University Press,
Cambridge, 2009, 381.
144 Hermann Mosler, The international society as a Legal Community, 140 Recueil des
Cours 1 (1974)
145 Ibid.
140
144 knee-jerk solution to these anxieties.146 Secondly, constitutionalism was also
about having mechanisms in place to keep politics in check within domestic
orders.147 However, globalization has also led to de-constitutionalization on
the national level, which has resulted in the transfer of typical national
functions to a “higher level” including NGOs. International
constitutionalization was therefore the best option in order to “compensate”
for what would have been lost at the national level.148 Thirdly, international
organizations that were recovering States’ functions were not under the
sword of “a universal constitution” which is considered necessary in a
perfect democratic and accountable order. 149
These anxieties spread quickly among international scholars and as
such they developed the constitutional approach to international law. The
subsequent paragraphs will try to analyze the main ingredients of this
approach and its regard to the fragmentation issue. The following ingredients
are extracted from the recipe “the mechanisms of constitutionalization”
prepared by Jeffrey L. Dunoff and Joel L. Trachtman.150
1. Creation of governance institutions and allocation of authority
Allocation authority is basically about splitting the power between
legislative, executive, and judicial bodies. However, a concrete constitution is
lacking at the international level and constitutionalist say that they do not
intend to create such a document or to institute a centralized government.
This is a correct point of view because a constitution is the normative
expression of a single sovereign community and because the international
community is based on the presentation of distinct States’ sovereignties. This
is perhaps the reason why international constitutionalism is about advocating
constitutionalist principles in international legal order.151 It is then plausible
to examine the current structure of international legal order according to this
approach in order to identify how close it is to a constitutional system and
Jeffrey Dunoff and Joel Trachtman, ‘A Functional Approach to Global
Constitutionalism’ in Jeffrey Dunoff and Joel Trachtman (eds.), Ruling the World?
Constitutionalism, International Law and Global Governance, Cambridge University Press,
Cambridge, 2009, at 6; Jan Klabbers, ‘Constitutionalism Lite’ Int'l Org. L. Rev. 1 (2004) at 49.
147 Jan Klabbers, Setting the scene: The Constitutionalization of International Law,
Oxford University Press, Oxford, 2009, at 19.
148 Anne Peters, The Constitutionalization of International Law, Oxford University Press,
Oxford, 2009, at 347; Anne Peters, ‘Compensatory constitutionalism: the function and
potential of fundamental international norms and structures’ Leiden Journal of International
Law 19.3 (2006): p.579-610.
149 Klabbers, ‘Constitutionalism Lite’ supra note 146, at 32.
150 Dunoff, Trachtman, ‘A Functional Approach to Global Constitutionalism’ supra
note 146, at 18.
151 Anne Peters, ‘The Merits of Global Constitutionalism’ Indiana Journal of Global
Legal Studies 16.2 (2009): 397, at 397.
146
145
how far it might go to in order to satisfy the proponents of international
constitutionalism.
In this respect, the unique document to allocate authority would be
the “imaginary constitutional reflection of the international community of
States”. In this pre-constitutional order, States would conclude treaties
(legislative). Each State would implement these rules under their defined
administrative area (executive) or they would create some international
administrative bodies to implement laws for them. There would also be
various international judicial bodies (judiciary) to resolve any problems
arising from the treaties. If this is meant by creating governance institutions
to allocate authority, it seems that the international legal order has already
reached its aim. However, to ask it to grow, to develop, to be coherent, to be
universal in such a divers world, and doing that within the parameters of
“diplomatic law way”152 is not a reachable aim. If you chase two rabbits, you
will not catch either one. One may clearly observe a reflection of
constitutional principle of the separation of power on the schema described
above. By taking into account the existent international political will, hoping
more than this is far beyond the utopia.
Let’s examine this point through the Charter of United Nations. The
Charter was adopted after World War II with the exclusive objective to
maintain international peace and security (art.1 para.1) with two main
principles, namely, non-interference (art.2 para.1) and equal sovereignty
(art.2 para.7). For this reason, governance institutions and allocations of
authorities have been done according to this aim and these principles. This is
also the reason why, among its principal organs, only the Security Council
can issue compulsory resolutions while organs such as General Assembly
and Economic and Social Council are only entitled to adopt
“recommendations”. Even this brief and basic explanation is enough to
comprehend the fact that the UN’s charter does not have constitutionalist
principles.
To give another example, one might refer to the G20. In that case,
let’s assume the reflection or the idea represented by the G20 as an
imaginary constitution. At the end of their meeting, leaders of the G20
publish a declaration, which has no juridical value. One of these declarations
included a regulation about the prohibition of tax havens.153 Consequently,
G20 Member States took necessary measures at the national level for an
appropriate implementation of the declaration. In order to ensure the
effectiveness of these measures, compliance from the rest of the
international community was also necessary. Economical consequences
however, resulted in some non-compliance, all other States, willingly or
152 Martti Koskenniemi, ‘Constitutionalism as mindset: Reflections on Kantian
themes about international law and globalization’ Theoretical Inquiries in Law 8.1 (2007): 9;
Koskenniemi, ‘Postmodern anxieties’ supra note 127.
153 Mark Malloch Brown, The unfinished global revolution: The pursuit of a new international
politics Penguin Press, 2011, at 209.
146 unwillingly, modified their regulations to avoid being blacklisted. It would be
an exaggeration to consider the prohibition of tax havens as a “constitutional
principle” of the international community. However, all the members of the
international community promptly accomplished necessary arrangements to
ensure this prohibition as if they were respecting a constitutional principle
even though the G20’s declaration had no juridical value. The former did not
arise from the goodness of the principle. It rests on the decisiveness of the
G20 leaders. This is to say “a constitution’s authority – its status as a
fundamental law – ultimately rests not on textual provisions but on ‘the
constitution’s acceptance as an authoritative document’.154 This is the line
that differentiates a constitution from a paper tiger155 and there is not enough
of this kind of principle to initiate a discussion about constitutional bias at
the global level. In addition, if one takes into account the critics of countries
such as Switzerland, Singapore, Denmark or other Members States of the
global governance group or the fact that the G20 made use of some
economical coercion in order to ensure their compliance with a principle,
then it makes sense156 to reveal that how hard it is to obtain a consensus
within such a diverse world. A constitution is appropriate for “a
community.” However, the world that we are living in is not “a community”,
it is rather “a community of communities.” Therefore, a constitution or
constitutional principles for the international community as a whole would
not be suitable a solution.
2. Supremacy
The idea of supremacy at the international level is about having
constitutional norms hierarchically superior to other international norms. In
this regard, international law provides only two candidates to be superior to
ordinary international norms, namely, jus cogens and article 103 of the UN
Charter. As far as the former is concerned, according to the Vienna
Convention,157 the international community of States as a whole establishes
them. A general accepted list of these negative principles158 includes genocide
and torture, and some additional basic rules of international humanitarian
law etc. However, as Koskenniemi outlined “outlawing the use of force or
genocide does not a constitution make”.159 It is only about “the need to take
154 Dunoff, Trachtman, ‘A Functional Approach to Global Constitutionalism’ supra
note 146, at 22; Alexander, Larry, and Frederick Schauer, ‘Defending Judicial Supremacy: A
Reply’ Const. Comment. 17 (2000): 455, at 460.
155 Anne Peters, ‘The Merits’ supra note 151, at 400.
156 It would not be logical for a State to oppose to receive taxes. That’s why this is a
principle that makes sense.
157 Vienna Convention, supra note 103.
158 Andreas L. Paulus, ‘The international legal system as a constitution’ in Jeffrey
Dunoff and Joel Trachtman (eds.), Ruling the World? Constitutionalism, International Law and
Global Governance, Cambridge University Press, Cambridge, 2009, at 88.
159 Ibid at 89.
147
seriously what, in fact, was serious, but could not be expressed in a legal rule
with a determined content”. 160 From the same perspective, as Paulus
emphasized, “these jus cogens limit state sovereignty only insofar as any legal
regime worthy of this name would do”.161 Therefore, jus cogens are not able to
provide the unity of international law as hoped for by constitutional
approach.
When article 103 of the UN Charter is cited in the discussion of
supremacy, the subject is to consider whether or not the UN Charter is listed
as a constitution of the international community.162 Supremacy means that all
law derives its forces from a Constitution and that it is also subject to its
control because it arises from a single sovereignty.163 However, as it has been
mentioned above, international legal order has been designed to guarantee
the equal existence of several sovereignties and therefore currently, “neither
is all international law subject to the UN, nor is the Charter the legal sources
of international law”.164 Furthermore, much of the “constitutional bylaws”165
of the international community has been developed in parallel to the
Charter.166 Nevertheless, “States have constantly and consistently affirmed
the unique place of the Charter in the present structure of international
law”.167 However, this expression would hardly push to use the supremacy of
the Charter and its famous article 103 in order to uphold a Security Council’s
decision over human rights treaties168 In this regard, the Kadi169 case of ECJ
is an inspiring example and can be considered the “great white” hope for
human rights. As a consequence though, it is evident that there is some
similarity between the ideal type of constitution and the UN Charter. But to
believe that these similarities are strong enough to consider the Charter as a
Koskenniemi, ‘Postmodern anxieties’ supra note 127, at 558.
Paulus, ‘The international legal system as a constitution’ supra note 158, at 89.
162 Bardo Fassbender, ‘The United Nations Charter As Constitution of the
International Community’ Colum. J. Transnat'l L. 36 (1998): 529; Bardo Fassbender,
‘Rediscovering a forgotten constitution: Notes on the place of the UN Charter in the
international legal order’ in Jeffrey Dunoff and Joel Trachtman (eds.), Ruling the World?
Constitutionalism, International Law and Global Governance, Cambridge University Press,
Cambridge, 2009, 621.
163 In re Pharm. Mfrs. Ass’n of S.A. 2000 (3) BCLR 241 (CC) at para. 44.
164 Michael Doyle, ‘The UN Charter: A Global Constitution’ in Jeffrey Dunoff and
Joel Trachtman (eds.), Ruling the World? Constitutionalism, International Law and Global
Governance, Cambridge University Press, Cambridge, 2009, 114.
165 Fassbender, ‘The United Nations Charter’ supra note 162, at 529; Fassbender,
‘Rediscovering’ supra note 162.
166 Doyle, ‘The UN Charter’ supra note 164 at 114.
167 Fassbender, ‘Rediscovering’ supra note 162, at 143.
168 Koskenniemi, ‘Postmodern anxieties’ supra note 127, at 559.
169 ECJ, Yassin Abdullah Kadi and Al Barakaat International Foundation v Council
of the European Union and Commission of the European Communities (Joined Cases C402 and C-415/05P) [2008] ECR I-6351.
160
161
148 constitution seems too good to be true.170 How well it is said; all that glitters
is not gold.
3. Stability
Stability is the idea of having constitutional norms being procedurally
more difficult to modify than ordinary international law. From the point of
view of international constitutionalism, this requirement is entirely fulfilled.
Once signed and ratified, international treaties are highly stable and there is
no need to mention that it is almost impossible to modify jus cogens and the
UN charter. There is just article 64 of VCLT that reserves though the
situation of emergence of a new peremptory norm of general international
law. As it has been explained earlier, promoting international
constitutionalism through jus cogens and the UN charter cannot be the best
option that we have at our disposition, if only for the sake of the unity of
international law. Once upon a time, the UN was the symbol of unity and
because of the de facto impossibility to reactivate this role; the UN is partially
responsible for having fragmented international legal order. Thus, it is
important that constitutional norms should not be modified from one day to
the next but should instead neither oblige to look the other way or to do
what needs to be done. Thus, constitutional norms require “positive
stability” that help it and not “negative stability” that harm it.
4. Fundamental rights
Fundamental rights listed in domestic constitutional law and in
international human rights treaties perform “the basic function of stating
limits on what governments may do to the people within their
jurisdiction”.171 The difference between these two systems of protection rests
on the methods of enforcement. While domestic constitutional courts’
power of juridical review is growing, international human rights courts are
happy to exist without review power (with the exception of ECtHR).172
Ironically there have been positive developments in domestic constitutional
courts and “negative stability” in international human rights courts due to
globalization and other phenomenon. States’ constitutions have lost their
power in favor of a “higher level” with which the solution of “compensatory
constitutionalism” has been proposed.173 Here again we see a strategical error
of international constitutionalism. It does not look like a good idea to
promote international human rights as stuck in a “negative stability”. It seem
Paulus, ‘The international legal system as a constitution’ supra note 158 at 78.
Stephen Gardbaum, ‘Human Rights and International Constitutionalism’ in
Jeffrey Dunoff and Joel Trachtman (eds.), Ruling the World? Constitutionalism, International Law
and Global Governance, Cambridge University Press, Cambridge, 2009, ar 234.
172 Ibid at 236.
173 Anne Peters, ‘Compensatory constitutionalism’ supra note 148.
170
171
149
more plausible to encourage domestic constitutional courts to compensate
whatever they lost on their-own. In this regard, the Kadi174 case of ECJ can
be a good example for domestic constitutional courts. They can use the Kadi
method to ensure the respect of fundamental human rights by international
organizations’ regulation. This is the same logic pursued by German
Constitutional Courts about its relationship with ECtHR. Until the Solange
IV 175 , German judges did not accept the idea that ECJ was there to
compensate what had been lost in domestic constitutional review even
though ECJ proved long ago its quality about the protection of fundamental
human rights. The situation was also similar between ECtHR and ECJ until
the Bosphorus176 case where ECtHR explicitly applied the Solange-method.177
These cases are sample situations that show how to handle the problem of
competing jurisdiction related to the fragmentation of international law. In
the end, it all worked out well. Thus, it is plausible to use this solution as it
has proven its effectiveness rather than to create a solution from zero as in
the “compensatory constitutionalism” method.
5. Review
Constitutional review is about to “test the legal compatibility of laws
and other act of governance with the entrenched norms and fundamental
rights expressed in the constitution”. 178 However, in the world’s current
state, it is too utopian to hope for this kind of body who would cover all acts
of States, international organizations, and other international institutions. As
far as ICJ is concerned, it is impossible for them to play this role and has
been tremendously reluctant to even review the legality of UN acts.
Regardless of this, scholars have proposed to use the preliminary reference
method of ECJ.179 ECJ has played an undeniable role on the development of
European law through its jurisprudence especially by its doctrine on the
concepts of supremacy and direct effect. This would be impossible without
the procedural help of the concept of preliminary reference. A proposed
solution to the fragmentation problem of international law is to use this
similar model and let the ICJ perform its tasks through its advisory opinion
procedure. According to the method of preliminary reference, national
courts in the EU were obliged to consult the ECJ concerning the
174 ECJ, Yassin Abdullah Kadi and Al Barakaat International Foundation v Council
of the European Union and Commission of the European Communities (Joined Cases C402 and C-415/05P) [2008] ECR I-6351.
175 Solange IV, supra note 97.
176 ECtHR, Bosphorus, supra note 116.
177 Lavranos, ‘The Solange-Method’ supra note 92, at 314.
178 Dunoff, Trachtman, ‘A Functional Approach to Global Constitutionalism’ supra
note 154, at 20.
179 Alicia Farrell Miller, ‘The Preliminary Reference Procedure of the Court of
Justice of the European Communities: A Model for the ICJ’ Hastings Int'l & Comp. L. Rev. 32
(2009): 669; Koskenniemi, ‘Postmodern anxieties’ supra note 127.
150 interpretation of EU laws. Similarly, it is proposed that all international
judicial bodies that have a jurisdiction on a specific area of international law
should be obliged to address the ICJ about the interpretation of general
principle of international law in a preliminary manner. As former ICJ
President Rosalyn Higgins put it, the preliminary reference cannot be the
answer to the famous fragmentation of international law.180
First of all, the situation between ECJ and ICJ is completely
different. ECJ played through its case law an important role in establishing a
new concept of law, namely, European law. Additionally, this European law
created its own juridical instance in order to better its understanding and
interpretation. Therefore, from the very beginning of its existence, ECJ has
been endowed with the power to rule on European law, which was not
possible for national courts. However the ICJ has been appointed to settle
legal disputes submitted to it by States and to provide an advisory opinion on
legal questions according to the rules of international law. Any other
international courts and tribunals established, according to international law,
can rule on international law. Therefore, as the relation between general
international law and international trade law is quite different than the
relation between Italian law and European law, the method of preliminary
reference would not work as expected. Moreover, the implementation this
method at the global level is impossible. First, it requires modifying each
international treaty that establishes an international judicial body. Secondly,
why those States that does not recognize the jurisdiction of the ICJ would
change their choices all of a sudden?
In sum, it is possible to notice that constitutional approach promotes
“de jure solutions” to resolve the fragmentation of international law and to
ensure the coherence among the international judicial bodies. However, this
“de jure approach” does not provide enough materials to admit the existence of
a constitutional order at the global level. Furthermore, constitutionalist
propositions to the question of fragmentation, in the case of international
judicial bodies, cannot be described as reachable aims. Even though the UN
Charter has some constitutional elements, it can barely play the role of a
global constitution. To consider ICJ as a global constitutional court is too
farfetched. Therefore, it must be concluded that constitutional approach
does not provide effective and realizable answers to the question of
fragmentation within the international judicial bodies.
B. Legal Pluralist approach
When I started to read and learn about legal pluralism, I felt like a
child in a limitless playground with numerous kinds of toys. Even the
researches and researchers in the area of pluralism are quite plural. You have
legal anthropologists, sociologists, legal theorists, in addition to international
180 Rosalyn Higgins, ‘The ICJ, the ECJ, and the Integrity of International Law’
International and Comparative Law Quarterly 52.1 (2003): 1, at 20.
151
lawyers and international relation specialists. That’s the reason why we have
countless types of pluralism developed and proposed. This made me agree
entirely with Guenther Teubner when I read the first phase of one of his
articles on pluralism: “Postmodern jurist loves legal pluralism.”181 They really
do. Tamanaha identified that legal pluralism is irresistible despite the fact that
it has irresolvable conceptual problems.182. The idea of pluralism may have
some responses to the different challenges of legal problems but these
responses need to be well developed, proved, and its conceptual problems
need to be resolved. In order to see where we are in the case of
fragmentation of the international legal system and pluralism, it is plausible
to see briefly with a historical perspective how the idea of pluralism has
become famous and has conquered the hearts of postmodern jurists.
To understand legal pluralism and its implications on the legal
thoughts and international legal system, it is first necessary to understand
legal centralism. According to one of the its best-known oppositionists, legal
centralism is
“ [As] an important part of the ideological heritage of the
bourgeois revolutions and liberal hegemony of the last few
centuries…law is and should be the law of the State,
uniform for all persons, exclusive of all other law, and
administered by a single set of State institutions”.183
After this definition it is possible to define more clearly legal
pluralism:
“On entend généralement par ‘pluralisme juridique’
l’orientation de pensée qui s’oppose de la façon la plus
explicite et la plus intransigeante à l’étatisme juridique”.184
It was this idea to oppose legal centralism in the beginning of 20th
century that united authors like Eugen Ehrlich185 and George Gurvitch186
around the concept of legal pluralism. Later, especially in the 1970s and
1980s other important contribution were made to the sociology of law by
authors such as Pospisil, Smith, Moore, and later examined and developed by
181 Gunther Teubner, ‘The Two Faces of Janus: Rethinking Legal Pluralism’
Cardozo L. Rev. 13 (1991): 1443 at 1443.
182 Brian Z. Tamanaha, ‘Understanding legal pluralism: past to present, local to
global’ Sydney L. Rev. 30 (2008): 375, at 396.
183 John Griffiths, ‘What is legal pluralism’ J. Legal Pluralism & Unofficial L. 24
(1986): 1, pp. 2-3.
184 Renato Treves, ‘La sociologie du droit de Georges Gurvitch’ Cahiers
internationaux de sociologie 45 (1968): 51, at 52.
185 Eugen Ehrlich, Fundamental principles of the sociology of law, Vol. 5. Transaction
Books, 1936.
186 Georges Gurvitch, Sociology of law. Transaction Books, 2001.
152 John Griffiths187. In his turn, Gordon R. Woodman also analyzed the works
of John Glissen188, Jacques Vanderlinden189, Barry Hooker190, Sally Engle
Merry191 as well as Griffith’s contributions.192 Other important contributions
have been made in this line concurrently as the theme has become
popular.193
While these discussions were in progress about legal pluralism, in the
beginning of 1990s, the popularity of legal pluralism spread among
international lawyers. Influenced by this rich, growing and charming
literature of legal pluralism, international lawyers proposed pluralist solutions
to the increasing legal problems of the 21st century’s international legal
system. Only among international lawyers, can one easily notice numerous
concepts and types of legal pluralism such as transnational legal pluralism194,
global legal pluralism195, constitutional legal pluralism196, internal and external
legal pluralism197, and normative pluralism198.
First, as soon as the topic of legal pluralism entered the literature, the
next issue was about how to determine what is “law” from a pluralist
approach.199 Early scholars of legal pluralism provided a rich discussion on
that issue.200 This subject also matters from an international perspective while
we consider the old discussion whether international law is “law” and the
growing discussions about how to characterize norms, regulations, rules,
customs produced by international organizations, private companies,
Griffiths, ‘What is legal pluralism’ supra note 183.
John Glissen, Le pluralisme juridique. Editions de l'Université de Bruxelles, 1971.
189 Jacques Vanderlinden, ‘Le pluralisme juridique: essai de synthèse’ Le pluralisme
juridique (1972): 19.
190 Michael Barry Hooker, Legal pluralism: An introduction to colonial and neocolonial laws, Oxford: Clarendon Press, 1975.
191 Sally Engle Merry, ‘Legal pluralism.’ Law & Soc'y Rev. 22 (1988): 869.
192 Gordon R Woodman, ‘Ideological Combat and Social Observation-Recent
Debate about Legal Pluralism’ J. Legal Pluralism & Unofficial L. 42 (1998): 21.
193 Among others; Teubner, ‘Rethinking Legal Pluralism’ supra note 181;
Tamanaha,‘Understanding legal pluralism’ supra note 182.
194 Peer Zumbansen, ‘Transnational Legal Pluralism’ Transnational Legal Theory 1.2
(2010): 141.
195 Paul Schiff Berman, Global legal pluralism: a jurisprudence of law beyond
borders, Cambridge University Press, 2012.
196 Neil Walker, ‘The idea of constitutional pluralism’ The Modern Law Review 65.3
(2002): 317.
197 Andre Nollkaemper, ‘Inside or Out: Two Types of International Legal
Pluralism’ in Jan Klabbers, Touko Piiparinen (eds.) Normative Pluralism And International Law:
Exploring Global Governance Cambridge University Press, 2013.
198 Jan Klabbers, Touko Piiparinen (eds.) Normative Pluralism And International Law:
Exploring Global Governance Cambridge University Press, 2013.
199 Tamanaha,‘Understanding legal pluralism’ supra note 182, pp.391-392.
200 Woodman, ‘Ideological Combat’ supra note 192; Griffiths, ‘What is legal
pluralism’ supra note 183.
187
188
153
transnational religious groups, global communities, and non-governmental
organizations.201 In this regard, it is plausible to avoid as Berman outlines
that “fruitless debate about what constitutes law” and to adopt a “descriptive
inquiry concerning which social norms are recognized as authoritative
sources of obligation and by whom”.202 In the same line, it has been cleverly
explained “as a microscope does not explain anything about microbes, legal
pluralism does not explain the subject of its concern”.203 This question is also
important concerning the worry about the fragmentation of the international
legal system. Accordingly, the idea to remove the red line around article 38(3)
of the statute of ICJ and to enlarge it with aforementioned rules, regulation,
norms is the very reason of fragmentation and we should avoid it at
whatever cost in order to keep the system coherent and united. This view
however has some contradiction and creates a strange feeling of déjàvu in
the sense that it reminds us of the endless discussion between legal
centralists and legal pluralists.
Concerning this feeling of déjàvu, when Griffith was opposed to
legal centralism, he was insisting on the argument that “legal pluralism is the
fact and legal centralism is a myth, an ideal, a claim, an illusion”. 204
Nowadays, concerning the international legal system, Berman argues that:
“Legal fragmentation and the contest among plural
sources of norms are not realities that a hierarchically
situated actor can choose to permit or reject; pluralism is
simply a fact because multiple communities assert norms
that have impact. Thus, regardless of what international
law proponents say, there will always be resistance to
universal norms because there are multiple communities
with different normative commitments. As a result,
although harmonization regimes are certainly important
and influential, they will never occupy the entire field.”.205
Thus, nothing has changed. Secondly, the argument of a legal
centralist point of view on the causality between plural centers of
international norm development and fragmentation of the international legal
system created contradictions. They bemoan about these non-classical ways
of international norm production by which they indirectly recognize that
201 Paul Schiff Berman, ‘Global Legal Pluralism’ S. Cal. L. Rev. 80 (2006): 1155,
pp.1177-1178.
202 Ibid at 1178.
203 Ihsan Yilmaz, Muslim Laws, Politics and Society in Modern Nation States:
Dynamic Legal Pluralisms in England, Turkey and Pakistan Burlington, VT: Ashgate, 2005,
at 10.
204 Griffiths, ‘What is legal pluralism’ supra note 183, at 4.
205 Paul Berman, ‘The new legal pluralism’ Annual Review of Law and Social Science 5
(2009): 225, at 238.
154 pluralism is a fact. However they desperately deny their relevance because
their recognition means pluralism as well as the end of the inter-State
architecture of the international legal system. In this respect, it is clear that
determining the line between the “law” and social life is more difficult to
find than the Holy Grail.206 Moreover, as Tamanaha mentioned:
“Law is a 'folk concept', that is, law is what people within
social groups have come to see and label as 'law'. It could
not be formulated in terms of a single scientific category
because over time and in different places people have seen
law in different terms”.207
Especially after the fact Griffith change his mind on that issue; this
consideration on the concept of law in sociology has become one of the
most plausible.208 As a consequence, this descriptive understanding of law is
crucial not only at the national level or for the considerations of colonial law,
but also for the theory formation of the international legal system.
Another important issue about legal pluralism is the causality
between globalization and pluralist trends in the international legal system.
Here, another path may create fruitless discussion and should also be
avoided. Again, globalization also affects the international legal system in
numerous ways. For this reason, it seems more plausible to provide answers
to these effects rather than to discuss the cause or the causality. The effect of
globalization that is primarily relevant is the multiplication of international
judicial bodies. From the perspective of legal pluralism, this is how things
should be in a diverse world such as ours. That’s why; this is not the main
point of discussion from the standpoint of legal pluralism.
The discussion is tenser concerning other effects of globalization and
the views of legal pluralism. In this regard, the effects of globalization that
are interesting are, on the one hand, having States losing their powers,
controls, and monopoly on many issues which benefit a myriad of official
and non-official, public-private, private, sub-national or supra-national
normative structures; on the other hand, having these normative structures
develop more and more rules, regulations, customs perceived as binding and
respecting by increasingly growing the number of people and entities. In this
regard, Tamanaha drew attention to a very important point: “One must
avoid falling into either of two opposite errors: the first error is to think that
State law matters above all else; the second error is to think that other legal
or normative systems are parallel to State law”.209 Actually, it seems that there
is a kind of supply-demand equilibrium between the effects of legal pluralism
and legal centralism. It might just happen that such an increase or decrease
Yilmaz, ‘Dynamic Legal Pluralisms’ supra note 203, at 10.
Tamanaha,‘Understanding legal pluralism’ supra note 182, at 396.
208 Ibid pp. 394-396.
209 Tamanaha,‘Understanding legal pluralism’ supra note 182, at 410.
206
207
155
could occur on both sides following some structural changes in the world,
such as the increase of legal centralism with nation-State movement during
the 19th century or the increase of legal pluralism through myriad effects
during the last decades of globalization.
In conclusion, the pluralist approach includes “de facto” characteristics
in regard to the question of fragmentation and multiplication of international
judicial bodies. As this is a natural consequence of the evolution of the
international legal system, neither international law will fall apart, nor will
multiplication of international judicial bodies cause noteworthy dramas.
Basically, “de facto solutions” will emerge when the international legal system
needs them. However, in this schema, States will not be out of the game, as a
strong pluralist would suggest. States are necessary in order to ensure
coherence and inter-connectedness among all pieces of the puzzle. Thus, it
can be concluded that an updated understanding of weak legal pluralism “de
facto” offers solutions to the question of fragmentation within the
international judicial bodies.
IV. GLOBAL GOVERNANCE WITHIN THE INTERNATIONAL JUDICIAL
BODIES
A. Preliminary remarks
Experts of international relations frequently refer to the global
governance approach. It is one of many famous theories that provide a
standing explanation of world affairs in this globalized 21st century. In the
case of international judicial bodies, this approach is relevant because it
offers a plausible explanation to the attitudes among international lawyers
towards the effects of globalization. It seems that even in the specific case of
multiplication of international judicial bodies/fragmentation of international
law the majority reaction of people involved such as judges, lawyers or
scholars was quite similar to the reaction of experts of international relations
that study and endorse the global governance approach. It can be assumed
that this is caused by the interconnected of globalization. For this reason, it
seems sufficient to unite different solutions proposed by international
lawyers to tackle the problem of fragmentation of international law under the
umbrella of the global governance approach.
156 B. Global governance as an umbrella approach for international
judicial bodies
This idea of having global governance within the international
judicial bodies is more or less classified under the sociologic/jurisprudential
approach of Cesare P.R. Romano.210 He defines it as the following:
“[A call] for judges of international as well as national
courts and tribunals to reach across divides and, in the
absence of clear-cut norms and principles that can frame
their relations, spontaneously build a sort of informal
judicial system. …The sociologic/jurisprudential approach
is grassroots and bottom-up”.211
One of the main concepts that advocates of this approach refer to is
the idea of the comity. Originally, the concept of comity was used in the
context of private international law. Even in that context however, it is not
clear at all if it is an “absolute obligation” or a “mere courtesy and good
will”.212 In the case of international law, things are blurrier and there is no
proof for an international custom or justification on the basis of
international law.213 Yuval Shany provides the following definition of comity:
“According to this principle, which is found in many
countries (mostly from common law systems) courts in
one jurisdiction should respect and demonstrate a degree
of deference to the law of other jurisdictions, including the
decisions of judicial bodies operating in the
jurisdictions”.214
In this regard, Professor Lavranos defends the idea that comity is a
legal obligation and that all international judicial bodies are bound to apply in
order to deliver justice.215 However, he mentions that the concept of comity
had originally been used more as a ‘gentlemen’s agreement’ rather than being a
strict legal principle.216 It seems more plausible to keep it that way rather than
210 Cesare PR Romano ‘The Shift from the Consensual to the Compulsory
Paradigm in International Adjudication: Elements for a Theory of Consent’ NYUJ Int'l L. &
Pol. 39 (2006): 791-872, at 849.
211 Ibid.
212 Joel R. Paul, ‘Comity in International Law’ Harv. Int'l. LJ 32 (1991): 1-79, at 77.
See also, Hilton v. Guyot, 159 U.S. 113 (1895).
213 Yuval Shany, The competing jurisdictions of international courts and tribunals,
Oxford, Oxford University Press, 2003, at 262.
214 Ibid at 260.
215 Lavranos, ‘The Solange-Method’ supra note 92, pp. 325-329.
216 Ibid at 325.
157
to oblige judges to apply comity by saying that it is their inherent
obligation.217 If it were so, would it mean that those judges that did not apply
comity did not do their job correctly? In addition, it would be an impossible
mission to create a common understanding of “preserving the uniform and
effective application of international law” among countless judges from very
diverse backgrounds, exercising in different environments and delivering
justice under quite specialized international treaties.218 Therefore, it seems
more coherent to ascribe political signification rather than a juridical one to
comity. In this respect, the following definition of William Thomas Worster
is quite handful: “a bridge meant to expand the role of public policy, public
law, and international politics in the judiciary”.219 The policy choice is to
highlight the unity and integrity of international law and the international
legal system. “If one does not see a coherent whole, but rather, independent,
competing legal actors, a system mostly of erratic blocks and elements as
well as different partial systems, what kind of comity should be exercised?”220
Moreover, there is also a true application of this concept of comity by an
international judicial body. The Arbitral Tribunal noted in the Mox Plant case
that:
“In the circumstances, and bearing in mind considerations
of mutual respect and comity which should prevail
between judicial institutions both of which may be called
upon to determine rights and obligations as between two
States, the Tribunal considers that it would be
inappropriate for it to proceed further with hearing the
Parties on the merits of the dispute in the absence of a
resolution of the problems referred to. Moreover, a
procedure that might result in two conflicting decisions on
the same issue would not be helpful to the resolution of
the dispute between the Parties”.221
Anne-Marie Slaughter also shared the same approach by entitling it
as “judicial comity”; which consists of a transnational cooperation among
judges of the global community.222 One of her examples is the relationship
between ECJ and national courts. There, she concluded:
Ibid at 328.
Ibid at 327.
219 William Worster, ‘Competition and Comity in the Fragmentation of
International Law’ Brooklyn Journal of International Law 34 (2008), 119-149, at 123.
220 Ibid at 124.
221 ITLOS, The Mox Plant case, supra note 65, at 28.
222Anne-Marie Slaughter, ‘Judicial globalization’ Va. J. Int'l L. 40 (1999): 1103-1124,
p.1114.
217
218
158 “Within this community [of States in Europe], each court
is a check on the other, but not a decisive one, asserting
their respective claims through dialogue of incremental
decisions signaling opposition or cooperation. It is a
dialogue of constitutionalism within a nationalsupranational framework that is potentially adoptable and
adaptable by courts around the world”.223
In others examples, she also illustrated that constitutional courts all
around the world should reverse decision and modify their own precedent by
referring to jurisprudence of ECtHR or IACtHR.224 According to her, these
cross-fertilizations among courts and face-to-face meetings of judges are also
proof of judicial globalization.225
At the conclusion of his courses at The Hague Academy of
International law, Jonathan I. Charney also noted, that multiplication of
international courts and tribunals is not jeopardizing the international legal
system and this would help to the development of the international law.226
One of his examples is the close relationship between ICJ and ad hoc
tribunals on international maritime boundary cases, which helped develop
jurisprudence in that field.227
Ruti Teitel and Robert Howse approved of this informal and
bottom-up approach by referring to some specific cases of international
judicial bodies. They reach the conclusion that international judges basically
prefer to cross-judge rather than to use formal mechanisms of legal
interpretation.228 Accordingly:
“International legal order will resemble the messy, porous,
multiple-value, and constituency politics of democratic
pluralism, which is nevertheless underpinned by a more
absolutist baseline commitment to the preservation of the
human. This may still be fragmentation in a sense, but in
mirroring non- or anti-hierarchical democratic pluralism
this kind of fragmentation enhances rather than menaces
international law's claim to legitimacy”.229
ibid at 1108.
Ibid at 1110.
225 Ibid at 1106.
226 Jonathan I. Charney, ‘Introduction’ Is international law threatened by multiple
international tribunals? Collected Courses of the Hague Academy of International Law
271. Martinus Nijhoff Publishers, 1998. Martinus Nijhoff Online
227 Ibid.
228 Ruti Teitel and Robert Howse ‘Cross-judging: tribunalization in a fragmented
but interconnected global order’ NYUJ Int'l L. & Pol. 41 (2008): 959-990, pp. 988-989.
229 Ibid at 990.
223
224
159
Eval Benvenisti also affirmed the fact that international judicial
bodies created a social network to assure a judicial dialogue among them as a
response to the fragmentation of international law and in the end it all
worked out. 230 Ernst-Ulrich Petersmann also appreciates this optimistic
approach as follows:
“To the extent that conflicts of jurisdiction and conflicting
judgments cannot be prevented by means of exclusive
jurisdictions and hierarchical rules, international courts
should follow the example of national civil and
commercial courts and European courts and resolve
conflicts through judicial cooperation and ‘judicial
dialogues’ based on principles of judicial comity and
judicial protection of constitutional principles (like due
process of law, res judicata, human rights) underlying
modern international law. The cooperation among
national and international courts with overlapping
jurisdictions for the protection of constitutional rights in
Europe reflects the constitutional duty of judges to protect
‘constitutional justice’; it should serve as a model for
similar cooperation among national and international
courts with overlapping jurisdictions in other fields of
international law”.231
It is also possible to find out important similarities between this
sociological/jurisprudential approach and legal pluralism. As it has been mentioned
above in the previous chapter on the legal pluralist approach, the latter was
quite popular among sociologists of law. In this regard, this similarity makes
sense. William W. Burke-White in his article on international legal pluralism
arrived at the following conclusion, which shares almost all of the
characteristics of this approach. Accordingly:
“The pluralist conception of the international legal system
recognizes-and possibly thrives on-the diversity of the
system. A wide range of courts will interpret, apply, and
develop the corpus of international law. States will face
differing sets of obligations that may even be interpreted
differently by various tribunals and may at times conflict.
Possibly most significantly, national and international legal
processes will interact and influence one another, resulting
in new hybrid procedures, rules, and courts. Yet, these
Eyal Benvenisti and George W. Downs, ‘Court Cooperation, Executive
Accountability, and Global Governance’ NYUJ Int'l L. & Pol. 41 (2008): 931-958, at 934.
231 Ernst-Ulrich Petersmann, ‘Human rights, international economic law and
constitutional justice’ European Journal of International Law 19.4 (2008): 769-798, at 791.
230
160 developments will occur within a common system of
international law engaged in a constructive and selfreferential dialogue that consciously seeks to maintain the
coherence of the overall system”.232
It should also be noted that the view of international judges, the
most important actors of international judicial bodies is highly important.
Rosalyn Higgins, former president of the International Court of Justice,
while acknowledging impressive efforts to tackle the issue of fragmentation
among international lawyers believed in the idea of “bottom-up integration
and application of the jurisprudence of the various courts and tribunals”,
which is more and more present in the international arena and a practice that
is being increasingly applied by international judges.233 She also explained
that during her presidency she established some informal mechanisms
among international courts and tribunals because she believed that “the
challenges of multiple courts pronouncing on the same substantive areas of
law could be mitigated by the formation of cordial relationships among the
courts, the regular exchange of information, and the commitment to reading
each other's decisions”.234
In sum, this idea of bottom-up and an informal judicial system is
promoted by an important number of specialists of international judicial
bodies. They all cover different ways that help to prevent the fragmentation
of international law. Some believe in the idea of “comity” either as an
international and formal obligation or as an informal and common practice
among international judges. Other scholars outlined the importance of the
“judicial community” or “dialogue of courts” as a sort of solidarity among
judges in order to keep the international legal system more or less intact.
This is an interesting point giving the fact that most international judges have
worked for more than one international judicial body, and that most of them
personally know each other either from their educational or professional
life.235 In this respect, others also emphasize the significance of face-to-face
meetings among these judges either at formal encounters or at informal
occasions. By the same token, others draw attention to follow, read, refer
and cross-judge each other’s jurisprudence in order to endorse, empower,
and create a global jurisprudence. Hopefully this will allow leveling up from
the international judicial networks to a veritable global judicial system.236
232 William Burke-White, ‘International legal pluralism.’ Mich. J. Int'l L. 25 (2003):
963-980, at 978.
233 Rosalyn Higgins, ‘Plenary Address’ supra note 38, at 392.
234 Rosalyn Higgins, ‘International Courts and Tribunals-The Challenges Ahead:
Conference Opening Speech’ Law & Prac. Int'l Cts. & Tribunals 7 (2008): 261-264, at 62.
235 See generally, Terris, Daniel, Cesare PR Romano, and Leigh Swigart. The
international judge: an introduction to the men and women who decide the world's cases. UPNE, 2007.
236 Cesare PR Romano, ‘Can You Hear Me Now: The Case for Extending the
International Judicial Network’ Chi. J. Int'l L. 10 (2009): 233-273, at 272.
161
However, a social-constructivist theory is not enough to talk about
the creation of a global jurisprudence. From a legal point of view, the issue
of fragmentation is important for law’s predictability and for the question of
forum shopping. Let’s explain this with the discussion about the requirement of
an “overall control” or an “effective control” to decide on the State
responsibility. It is now predictable that if a question rises about this point
before IJC, they will decide according to the principle of “overall control”. If
it were before ICTY, they would probably stick to their Tadic case and to the
principle of “effective control”. But, how other international judicial bodies
would react on this point? What would ICC do? Could we say that its
decision is predictable? Don’t you think that while the State that its
responsibility is questioned would prefer to be judged by ICJ, the other
would select another international judicial body in order to take its chances?
International judges are aware of this situation as much as we are and it’s
their duty to ensure the predictability of law. Therefore, all aforementioned
examples about comity, dialogue of courts, cross-judging etc. demonstrate a
shared understanding of judicial function among international judges.
What is also remarkable is the fact that when one analyzes
aforementioned solutions to the fragmentation of international law with an
inclusive method and extracts their fundamental features, they notice that
these features are more or less identical to the characteristics of global
governance. This is about, for example, opting for informal mechanisms
rather than formal ones, giving weight to bottom-up solutions but not to
top-down methods, preferring the diversity of key-actors rather than to
hierarchize them, counting on an extended and evolving change in time
rather than a punctual and one-time-for-all modification, trusting to the
common sense and good faith of concerned people rather than putting the
“sword of Damocles” up to them.237 Neither this list of similarities nor
proposed or endorsed solutions are exhaustive. However, it looks like there
is enough to prove that a global governance approach is present among the
specialists of international judicial bodies as a response to allegations about
the fragmentation of international law through the multiplication of
international judicial bodies.
CONCLUSION
The aim of this work was to propose a cure inspired by the global
governance theory of international relations to heal the anxieties about the
fragmentation of international law/multiplication of international judicial
bodies. The increase in the number of actors, the inter-connectedness of
issues, technologies, conflicting interests, and complicated political reasons
237 See generally Hooghe, Liesbet, and Gary Marks, ‘Unraveling the Central State,
But How? Types of Multi-Level Governance’ IHS Political Science Series: 2003, No. 87.
(2003): 38.
162 have become the very obstacle before States to achieve a compromise on an
“international legal system 2.0”. Nevertheless, the creation of WTO and its
DSB, the establishment of a permanent international criminal court after
numerous ad hoc criminal courts, the increasing human rights protections at
regional levels were an effective legal response of States to globalization.
With these initiatives, States are trying to ensure to their people their belief
on justice by reinforcing international legal systems through the
multiplication of international judicial bodies. However, their continuing
Westphalian impulses prevented them from making some final efforts in
order to create a perfect international legal order. Because the former would
mean to lay down arms before international law, and States are politically
reluctant. In other words, States have resisted in completing the puzzle of
international legal order.
This unfinished puzzle has caused anxieties and fears about the
fragmentation of international law. As a reaction, international lawyers have
developed solutions in order to ensure the unity of international law.
However, most of their solutions are either inspired from a constitutional
approach or have arisen from pluralist approaches that could not be more
than “paper tigers” or “dead letters”. This is not because these propositions
were not good enough. Rather, it was the unfortunate result of the lacking
willpower of States.
At the same time, more and more cases were brought before these
existing or newly established international judicial bodies. Even though it
might be possible to better finalize some of these cases, it would be an
exaggeration to say that they harmed the international legal order. On the
contrary, most of the time, international judges were able to fill the gaps that
were left by States through their jurisprudences. Furthermore, their attitudes
in conformity with the understanding of an informal judicial comity and a
dialogue of courts, their commitments to read, refer and cross-judge each
other’s jurisprudence demonstrates obviously the global approach of
international judges. It is clear that this approach resonates perfectly with the
global governance approach of international relations. In this regard, it seems
that this approach inspired from international relations might be the
response that international lawyers and scholars were looking to use in order
to appease their fears and anxieties about the fragmentation of international
law.
163
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Solange I, Entscheidungen des Bundesverfassungsgericht [BVerfGE] [Federal
Constitutional Court] May 29, 1974, 37, 271 (F.R.G.)
Solange IV, Entscheidungen des Bundesverfassungsgericht [BVerfGE]
[Federal Constitutional Court] June 7, 2000, 102 147 (F.R.G.)
Republic of South Africa
In re Pharm. Mfrs. Ass’n of S.A. 2000 (3) BCLR 241 (CC).
United States
Hilton v. Guyot, 159 U.S. 113 (1895).
TABLE OF LEGAL INSTRUMENTS AND DOCUMENTS
•
African Charter on Human and Peoples' Rights (ACHPR), 1520
UNTS 217; 21 ILM 58 (1982).
•
American Convention on Human Rights (also known as the Pact of
San José), 22 November 1969, 9 (1969) ILM 99.
•
Convention for the Protection of Human Rights and Fundamental
Freedoms, 4 November 1950, ETS No. 5; 213 U.N.T.S 221.
•
Convention on the Settlement of Investment Disputes Between
States and Nationals of Other States (ICSID), (also known as Washington
Convention), 17 UST 1270, TIAS 6090, 575 UNTS 159.
•
Hague Convention IV (1907), Respecting the Laws and Customs of War on
Land and its Annex: Regulation concerning the Laws and Customs of War on Land,
187 CTS 227; 1 Bevans 631.
•
Mercado Comùn de Sur (MERCOSUR), Treaty establishing a common
market between the Argentine Republic, the Federative Republic of Brazil,
the Republic of Paraguay and the Eastern Republic of Uruguay (also known
as the Treaty of Asuncion), 30 (1991) ILM 1044.
173
•
North American Free Trade Agreement (NAFTA), 32 ILM 289, 605
(1993).
•
Rome Statute of The International Criminal Court, 37 ILM 1002
(1998).
•
Statute of the International Court of Justice, United Nations Charter,
26 June 1945, 1 UNTS XVI, Annex I.
•
Treaty on the Functioning of the European Union (TFEU) OJ C
83/47, 30.3.2010.
•
United Nations Convention on the Law of the Sea (UNCLOS), 21
(1982) ILM 1261.
•
Vienna Convention on the Law of Treaties (VCLT), 23 May 1969, 8
(1969) ILM 679.
•
WTO, Understanding on Rules and Procedures Governing the Settlements of
Disputes, Marrakesh Agreement Establishing the World Trade Organization, Annex 2,
15 April 1994, 33 (1994) ILM 1226.
174 175
CONVERGENCE AND DIVERGENCE IN THE EU’S JUDICIAL
COOPERATION IN CIVIL MATTERS: PLEADING FOR A
CONSOLIDATION THROUGH A UNIFORM EUROPEAN
CONFLICT’S CODIFICATION
Denise Wiedemann
University of Leipzig
ABSTRACT
Since the entering into force of the Treaty of Amsterdam, the EU
massively made use of its competence in the area of judicial cooperation in
civil matters, mainly, through introducing regulations. All these regulations
involved a great convergence of the Member States’ national laws on private
international law and international civil procedural law. But at the same time,
they constitute a massive body of provisions which, especially for
practitioners such as lawyers and judges as well as interested parties, is
difficult to survey. And ironically, the more unification of the Member
States’ law is achieved, the more incoherencies between the regulations at the
EU level occur. The different regulations give different answers on the same
questions and they overlap. The first part of this essay tries to explain the
incoherencies within two groups: systematic incoherencies and conceptual
incoherencies. The second part discusses and scribes the consolidation of the
existing EU regulations in civil matters within one uniform codification.
176 A. INTRODUCTION
I. Overview on European Private International and Procedural Law
within the EU
Within the EU, private international law and international procedural
law are no longer within the hands of national legislators. Since the entering
into force of the Treaty of Amsterdam1, the EU massively made use of its
competence in the area of judicial cooperation in civil matters (now: Art 81
TFEU), mainly, through introducing regulations (Art 288 TFEU).2 For a
brief overview which demonstrates the degree of unification within the EU,
it is wise to divide the existing regulations into four different categories. The
first category of regulations is the oldest one: It contains regulations on
international jurisdiction, recognition and enforcement of foreign judgments.
The rules on enforcement, however, do not concern the actual enforcement
proceeding but merely the enforceability of a judgment abroad. Hence, these
regulations have the function of coordinating judicial proceedings with
cross-border implications. The second category concerns procedural law in
the form of cooperation in judicial administration. And the third category
still concerns procedural law, but the actual civil procedure and not merely
the coordination of civil procedures. Regulations under this category create
genuine EU procedures, albeit within a limited field. And finally, the fourth
category contains regulations on private international law. These regulations
determine the applicable law.
1. International Jurisdiction, Recognition and Enforceability
Within the first category, there are first of all the regulations Brussels
I 3 and Brussels IIbis 4 . Both regulations contain rules on international
jurisdiction, recognition and enforceability of judgments in the EU. While
Brussels I applies to ordinary civil and commercial proceedings, Brussels
IIbis applies to certain family matters, namely divorce and parental
1 Treaty of Amsterdam, 2.10.1999, BGBl. 1998 II 387, amended BGBl. 1999 II 416,
OJ EC 1997 C 340/1, in force since 1.5.1999, BGBl. 1999 II 296.
2 Vékás, Der Weg zur Vergemeinschaftung des Internationalen Privat- und
Verfahrensrechts – eine Skizze, in: Festschrift Sarcevic (Erauw/Tomljenovic/Volken), 2006,
171, 183 et seq.; Freudenthal/van der Velden, La Base Juridique du Droit Processuel Européen,
in: Essays in Honour of K. Kerameus (National and Kapodistrian University of Athens,
Faculty of Law), 2009, 1495 et seq.
3 Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and
the recognition and enforcement of judgments in civil and commercial matters, OJ EU 2001
L 12/1.
4 Council Regulation (EC) No. 2201/2003 of 27 November 2003 concerning
jurisdiction and the recognition and enforcement of judgments in matrimonial matters and
the matters of parental responsibility, repealing Regulation (EC) No. 1347/2000, OJ EU
2003 L 338/1.
177
responsibility. Brussels I was recently replaced by the recast-regulation
Brussels Ibis5, which will apply from January 10, 2015.
Furthermore, the Regulation establishing a European Enforcement Order6
belongs to this category. This regulation creates an exception from the
necessity of a declaration of enforceability (exequatur procedure) which was
indispensable to enforce a title from one Member State in another Member
State under Brussels I.7 A judgment concerning an uncontested claim may be
certified as a European Enforcement Order in the Member State of its origin
and then be enforceable without the necessity of a declaration of
enforceability. The abolition of any checks in the Member State of
enforcement is inextricably linked to and dependent upon the existence of a
sufficient guarantee of observance of the rights of defense in the Member
State of origin. Therefore, the regulation contains minimum standards for
the procedure in the Member State of origin to ensure that the debtor is
sufficiently informed.8
2. Judicial Administration
Within the second category, the Evidence Regulation 9 and the
Service Regulation10 facilitate the administration of civil proceedings with
cross-border implications. The Evidence Regulation contains rules on taking
of evidence in another Member State. The Service Regulation regulates the
service of documents in civil proceedings from one Member State into
another Member State.
5 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council
of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in
civil and commercial matters (recast), OJ EU 2012 L 351/1.
6 Regulation (EC) No. 805/2004 of the European Parliament and of the Council of
21 April 2004 creating a European Enforcement Order for uncontested claims, OJ EU 2004
L 143/15.
7 However, Art 39 Brussels Ibis abolishes the exequatur procedure: „A judgment
given in a Member State which is enforceable in that Member State shall be enforceable in the other Member
States without any declaration of enforceability being required.“
8 Art 6, 12 et seq. Regulation No. 805/2004; for more details see Rauscher/Pabst
EUZPR/EUIPR (2014) Einl EG-VollstrTitelVO Rn. 53 et seq.
9 Council Regulation (EC) No. 1206/2001 of 28 May 2001 on cooperation between
the courts of the Member States in the taking of evidence in civil or commercial matters, OJ
EU 2001 L 174/1.
10 Regulation (EC) No. 1393/2007 of the European Parliament and of the Council
of 13 November 2007 on the service in the Member States of judicial and extrajudicial
documents in civil or commercial matters (service of documents), and repealing Council
Regulation (EC) No 1348/2000, OJ EU 2007 L 324/79.
178 3. Civil Procedure
With the Regulations creating a European Payment Procedure11 and
the Regulation creating a European Small Claims Procedure 12 , the EU
legislator established genuine European summary procedures which lead to
genuine European titles. These instruments are also described as secondgeneration-instruments, because they do not merely coordinate and support
national proceedings but create self-standing EU proceedings.13 The recently
adopted Regulation creating a European Account Preservation Order 14 ,
established a European preliminary procedure which leads to a European
title but, simultaneously and for the first time in the EU’s legislative history
also regulates parts of the actual enforcement proceeding15, albeit restricted
to the preliminary enforcement.
4. Applicable Law
The regulations Rome I16, Rome II17 and Rome III18 determine solely
the applicable law. Rome I applies to contractual obligations, Rome II to
non-contractual obligations and Rome III to matters of divorce. But already
Rome III was initially intended to contain not only rules on the applicable
law but also rules on international jurisdiction, recognition and
enforceability, since it was planned as recast of Regulation Brussels IIbis.
However, the recast failed because of the resistance of certain Member
States, particularly Sweden which has a comparatively liberal divorce law, as
well as the UK. Rome III therefore entered into force as enhanced
11 Regulation (EC) No. 1896/2006 of the European Parliament and of the Council
of 12 December 2006 creating a European order for Payment Procedure, OJ EU 2006 L
399/1.
12 Regulation (EC) No. 861/2007 of the European Parliament and of the Council
of 11 July 2007 establishing a European Small Claims Procedure, OJ EU 2007 L 199/1.
13 Hess, Europäisches Zivilprozessrecht (2010), 692.
14 Regulation (EU) No. 655/2014 of the European Parliament and of the Council
of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate
cross-border debt recovery in civil and commercial matters, OJ EU 2014 L 189/59.
15 The final regulation is, however, restricted to the mere coordination of national
enforcement proceedings, see Rauscher/Rauscher/Wiedemann, EuZPR/EuIPR (4. edition
2015), Art. 1 EU-KPfVO Rn. 7.
16 Regulation (EC) No. 593/2008 of the European Parliament and of the Council
of 17 June 2008 on the law applicable to contractual obligations (Rome I), OJ EU 2008 L
177/6.
17 Regulation (EC) No. 864/2007 of the European Parliament and of the Council
of 11 July 2007 on the law applicable to non-contractual obligations (Rome II), OJ EU 2007
L 199/40.
18 Council Regulation (EU) No. 1259/2010 of 20 December 2010 implementing
enhanced cooperation in the area of the law applicable to divorce and legal separation, OJ
EU 2010 L 343/10.
179
cooperation (Art 20 TEU) between certain Member States and only contains
rules on the applicable law.
The EU-legislator is nevertheless attracted by grouping provisions on
international jurisdiction, recognition and enforceability together with
provisions on the applicable law. Doubtlessly, this grouping reduces the
number of regulations and at the same time creates a certain, albeit delusory
feeling of order. Thus, the Maintenance Regulation 19 contains rules on
international jurisdiction, recognition and enforceability. In respect of the
applicable law, it refers to the 2007 Hague Protocol on Maintenance
obligations.20 Likewise, the Rome IV-Regulation21, which applies to matters
of succession, combines procedural provisions and choice-of-law provisions.
The proposed regulations on matrimonial property regimes22 and property
regimes of registered partnerships 23 also take this line, but have not yet
entered into force. The main issue during negotiations on these proposals
was that registered partnership or marriage is not likewise available for same
sex couples in all Member States.24 Therefore, discussions on a choice-oflaw-option for registered partnerships 25 and on the resistance of some
Member States against the institute of a registered partnership as such
continue.26
The Insolvency Regulation27 remains outside of these categories since
it does not apply to the ordinary civil procedure. It contains rules on
Council Regulation (EC) No. 4/2009 of 18 December 2008 on jurisdiction,
applicable law, recognition and enforcement of decisions and cooperation in matters relating
to maintenance obligations, OJ EU 2009 L 7/1.
20 Hague Protocol of 23 November 2007 on the law applicable to maintenance
obligations.
21 Regulation (EU) No. 650/2012 of the European Parliament and of the Council
of 4 July 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and
acceptance and enforcement of authentic instruments in matters of succession and on the
creation of a European Certificate of Succession, OJ EU 2012 L 201/107.
22 European Commission, Proposal for a Council Regulation on jurisdiction, applicable
law and the recognition and enforcement of decisions in matters of matrimonial property
regimes, 16.3.2011, COM (2011) 126.
23 European Commission, Proposal for a Council Regulation on jurisdiction, applicable
law and the recognition and enforcement of decisions regarding the property consequences
of registered partnerships, 16.3.2011, COM (2011) 127.
24 European Parliament, legislative resolution, 10.9.2013, P7_TA(2013)0337,
amendment 2 and 3; Wagner, Aktuelle Entwicklungen in der justiziellen Zusammenarbeit in
Zivilsachen, NJW 2014, 1862, 1863.
25 Thein, Commitee on Legal Affairs, European Parliament, 20.8.2014, A7-0254/2013, p.
78.
26 European Parliament, Legislative Resolution, 10.9.2013, P7_TA(2013)0337, Nr. 2
and 3; Wagner, Aktuelle Entwicklungen in der justiziellen Zusammenarbeit in Zivilsachen,
NJW 2014, 1862, 1863; Kohler/Pintens, Entwicklungen im europäischen Personen- und
Familienrecht, FamRZ 2014, 1498, 1499.
27 Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency
proceedings, OJ EU 2000 L 160/1.
19
180 international jurisdiction for main and secondary insolvency proceedings, the
applicable law as well as the recognition of foreign insolvency proceedings. It
will therefore not be subject of this paper, though the interweavement
between insolvency proceedings and ordinary civil proceedings plays an
important role when it comes to exceptions from the material scope of
application of the above mentioned regulations.28
II. Incoherencies
All these regulations involved a great convergence of the Member
States’ national laws on private international law and international civil
procedural law. But at the same time, they constitute a massive body of
provisions which, especially for practitioners such as lawyers and judges as
well as interested parties, is difficult to survey.29 And ironically, the more
unification of the Member States’ law is achieved, the more incoherencies
between the regulations at the EU level occur. The different regulations give
different answers on the same questions and they overlap. The European
Private International and Procedural Law was therefore figuratively
described as a “mountain of regulations without a system”30, a “rag rug”31, “many trees
which do not resemble a forest” 32 or a “jungle” 33, whereas other description’s
(“mosaic”34) are more optimistic. These pictures do certainly not match with
the requirement of Art 7 TFEU, according to which “[t]he Union shall ensure
consistency between its policies and activities, taking all of its objectives into account and in
accordance with the principle of conferral of powers.”
The first part of this essay tries to explain the incoherencies within
two groups: systematic incoherencies and conceptual incoherencies; even
See for example article 1 sec. 1 lit. b Brussels Ibis-Regulation (Regulation No.
1215/2012) and in contrast article 2 sec. 2 lit. c Regulation No. 655/2014.
29 Pocar, Révision de Bruxelles I et ordre juridique international: quelle approche
uniforme?, Riv dir int priv proc 2011, 591 „un corps imposant d’actes normatifs, susceptible de
conduire à l’adoption d’un véritable code européen de droit international privé“.
30 Rauscher/Rauscher, EUZPR/EUIPR (2010), Einf EG-ErbVO-E Rn. 9 (own
translation).
31 Mansel/Thorn/Wagner, Europäisches Kollisionsrecht 2012: Voranschreiten des
Kodifikationsprozesses - Flickenteppich des Einheitsrechts, IPRax 2013, 1; Koch,
Einführung in das europäische Zivilprozessrecht, JuS 2003, 105, 110: „Flickenteppich“ (own
translation).
32 Basedow, Kodifizierung des Europäischen Internationalen Privatrechts?, RabelsZ
75 (2011) 671: „…eine Vielzahl von Bäumen gepflanzt haben, die aber keinen Wald
ergeben…“ (own translation).
33 Adolphsen, Konsoldierung des Europäischen Zivilverfahrensrechts, in: Festschrift
Kaissis (Geimer/Schütze), 2012, 1, 8 „Dschungel“ (own translation).
34 Mac Eleavy Fiorini, Qu’y a-t-il en un nom?, in: Quelle architecture pour un code
européen de droit international privé? (Fallon/Lagarde/Poilot-Peruzzetto), 2011, 27.
28
181
though many of the given examples are interweaved and the examples are, of
course, not concluding.35
The already proposed solutions to these incoherencies are numerous:
They range from item-centered views to comprehensive ideas such as the
creation of a code of European procedural law36, a Code Européen de Droit
International Privé37, a European regulation on minimal procedural standards38,
a Rome 0-Regulation on basic questions of private international law39, or the
introduction of principles as model for the development of national laws40.
For 2014, the European Commission announced a legislative proposal aimed
at improving the consistency of the existing Union legislation in the field of
civil procedural law 41 , which is still awaited. The European Parliament
encouraged the Commission to develop a comprehensive concept for private
international law and, particularly, “considers that the general aim should be a legal
framework which is consistently structured and easily accessible […] [and] that for this
purpose, the terminology in all subject-matters and all the concepts and requirements for
similar rules in all subject-matters should be unified and harmonised (e.g. lis pendens,
jurisdiction clauses, etc.) and the final aim might be a comprehensive codification of private
international law”.42 The second part of this paper discusses and scribes the
consolidation of the existing EU regulations in civil matters within one
uniform codification.
See for example on incoherencies emanating from multilinguism Ajani,
Coherence of European Private Law and Multilingualism: Two Opposing Principles?, Int'l
Bus. L.J. 2007, 493.
36 Kramer, Cross-Border Enforcement in the EU: Mutual Trust versus Fair Trial?
Towards Principles of
European Civil Procedure, IJPL 2011, 202 et seq.; Kramer, Abolition of exequatur
under the Brussels I Regulation: effecting and protecting rights in the European judicial area,
NIPR 2011, 633 et seq.; Bohnet, L'unification de la procédure civile suisse, un modèle pour
l'Union européenne?, in: La justice civile européenne en marche (DouchyOudot/Guinchard), 2012, 187.
37 Nourrisat, La codification de l’espace judiciaire civil européen, in: La justice civile
européenne en marche (Douchy-Oudot/Guinchard), 2012, 175, 182 et. seq.
38 Stürner Principles of European civil procedure or a European model code? Some
considerations on the joint ELI–Unidroit project, Unif. L. Rev. 2014, 1 ff.
39
Wilke, Einführung, in: Brauchen wir eine Rom 0-Verordnung?
(Leible/Unberath), 2013, 24 et seq.
40 Stadler, Principles of Transnational Civil Procedure – Auch ein Modellgesetz für
Europa?, in: Essays in Honour of K. Kerameus (National and Kapodistrian University of
Athens, Faculty of Law), 2009, 1355.
41 European Commission, 20.4.2010, COM (2010) 171, 23.
42 European Parliament, 7.9.2011, OJ EU 2011 C 308 E/36 No 1.
35
182 B. SOURCES OF INCOHERENCY
I. Systematic Incoherencies
In the late nineties, the European Commission wisely recognized that
“Superimposing two competing schemes would have obvious disadvantages in practice,
primarily for users (the judiciary, advocates, etc.), who are already reasonably familiar on
the whole with the general scheme of the Brussels Convention and would face acute
problems of interpretation in relation to hybrid judgments.”43 This insight quickly
disappeared with the new competences conferred by the Treaty of
Amsterdam44 and the powerful command of mutual recognition introduced
by the European Council of Tampere45. The Commission proposed more
and more regulations which made their way through the legislative process
and compete with each other.
1. International Procedural Law
First of all, there are a number of incoherencies in the EU’s
international procedural law. The creditor may choose between a colorful
bouquet of procedural possibilities (a.). The provisions for central procedural
elements such as the cross-border service of documents (b.), cross-border
enforceability (c.) and minimal procedural standards (d.) do overlap or
contain baseless differences.
a. Alternative Procedures
Especially in respect of small and uncontested claims of ordinary
civil or commercial nature, creditors have a barely manageable number of
possibilities, initially, to obtain a title and, subsequently, to enforce the title.46
First of all, the creditor may use the preliminary, summary or
ordinary procedures of the Member States’ national procedural laws to
obtain a title. Brussels I/Ibis determines the international jurisdiction. To
enforce this title in another Member State, the creditor has three possibilities:
He may obtain a declaration of enforceability under Brussels I and then use
the Member States’ national means of enforcement. However, under the
reformed Brussels Ibis-Regulation, a declaration of enforceability is no
Commission of the European Communities, 26.11.1997, COM (1997) 609, p 11 no 18.
Treaty of Amsterdam, 2.10.1999, BGBl 1998 II 387, amended BGBl 1999 II 416,
OJ EC 1997 C 340/1, in force since 1.5.1999, BGBl 1999 II 296.
45 European Council (Tampere), 15./16.10.1999, Presidency Conclusions, NJW 2000,
1925.
46 Adolphsen, Konsolidierung des Europäischen Zivilverfahrensrechts, in: Festschrift
Kaissis (Geimer/Schütze), 2012, 1, 8.
43
44
183
longer necessary47: Titles from one Member State, which are enforceable
there, are also enforceable in all other Member States. If the title is
uncontested and concerns a monetary claim, the creditor may also obtain a
confirmation of this title as European Enforcement Order and enforce it in
all Member States with the national means of enforcement and without the
necessity of a declaration of enforceability.48 And lastly, the title may also
serve as basis for a European Bank Account Preservation Order.49 With the
recently adopted regulation, the EU entered the field of actual enforcement
of judgments, albeit only with limited rules on enforcement. The regulation
mainly gives a structure for the cross-border enforcement and, for the rest,
refers to the national law of the Member State where the enforcement takes
place. The Account Preservation Order prevents the subsequent
enforcement of the creditor’s claim from being jeopardized through the
transfer or withdrawal of bank funds up to the amount specified in the
order. It is only of preliminary nature, because a satisfaction of the creditor’s
claim with secured bank funds is not intended. Therefore, the creditor would
subsequently have to use national means of enforcement, if the debtor does
not pay the claim voluntarily.
Secondly, EU-law offers certain self-standing procedures to obtain a
title. In cross-border-cases, there exist a European Payment Procedure
concerning uncontested pecuniary claims as well as a European Small Claims
Procedure for claims up to 2000 €. Titles obtained through one of those two
procedures are deemed automatically enforceable without the necessity of a
declaration of enforceability. The creditor therefore has direct access to the
national means of enforcement. Besides, he may use the European Account
Preservation Order for the preliminary preservation of a bank account. With
the reform of the Brussels I-Regulation and the abolition of the exequatur
procedure, these European Procedures do not lose their advantage: Firstly,
they still offer a uniform EU-procedure to obtain a title. And secondly, even
if Brussels Ibis abolishes the exequatur proceeding, it adheres to the grounds
of refusal of recognition (e.g. public policy) which, both, the European
Payment Procedure and the Small Claims Procedure, did away with.
Lastly, the European Account Preservation Order is not merely
available, if the creditor already obtained a title, but also offers a preliminary
proceeding where the creditor has to submit sufficient evidence to satisfy
that he is likely to succeed on the substance of his claim against the debtor.
This preliminary procedure is necessarily connected to the preliminary
enforcement of the claim through the attachment of a bank account. It
therefore does not serve as self-standing preliminary procedure to obtain an
enforceable title, but still adds a further procedural alternative.
47 The Brussels Ibis-Regulation applies only to legal proceedings instituted, to
authentic instruments formally drawn up or registered and to court settlements approved or
concluded on or after 10 January 2015 (Art 66 Sec 1 Brussels Ibis)
48 Regulation No. 805/2004.
49 Art. 5 No 2 Regulation No. 655/2014.
184 b. Cross-Border Service of Documents
The Service Regulation No. 1393/2007 contains extensive rules on
the service of documents between Member States. Where other regulations
in the field of judicial cooperation in civil matters concern the service of
documents, a reference to Regulation 1393/2007 would seem obvious. Many
regulations nevertheless include their own rules on the service of documents
whose application in relationship with Regulation 1393/2007 raises lots of
questions.50
The Regulation creating a European Enforcement Order contains
own rules on the service of documents, which deviate from the rules of
Regulation No. 1393/2007. They serve as minimum standards in the
Member State of origin: Only if the judgment has been submitted to the
debtor in accordance with these rules, a European enforcement order may
be issued.
Likewise, the Regulations establishing a Small Claims Procedure, the
Regulation Creating a European Payment Order and the Maintenance
Regulation contain own rules on the service of documents. These rules also
serve as minimum standards. All the above mentioned regulations abolished
the exequatur procedure 51 together with the debtor’s remedies in the
Member State of enforcement. As a compensation, they contain stricter rules
on the service of documents in the Member State of origin (i.e. minimum
standards) which should guarantee that the debtor has been able to defend
himself and, therefore, shall guarantee the debtor’s right to be heard. Above
that and to a different extent, they leave space for the application of the
Service Regulation No 1393/2007.52
The new Regulation creating a European Account Preservation
Order includes an own system on the service of documents as well. The allencompassing appearance, however, is delusory. The system is very much
alike to the Regulation No 1393/2007’s system, though it carves out several
question, like the healing of wrong services and the refusal of non-translated
documents. It therefore silently leaves considerable space for the application
of the Service Regulation.53
50 Adolphsen, Konsolidierung des Europäischen Zivilverfahrensrechts, in: Festschrift
Kaissis (Geimer/Schütze), 2012, 1, 5; Rauscher/Heiderhoff, EUZPR/EUIPR (2014) Einl
EG-ZustVO n. 18 et seq.
51 Albeit, the Maintenance Regulation abolished the exequatur procedure only for
decisions given in a Member State bound by the 2007 Hague Protocol (Art. 16 Regulation
No 4/2009).
52 Rauscher/Heiderhoff EuZPR/EuIPR (2014) Einl EG-ZustVO 2007 n. 18, 19.
53 Rauscher/Rauscher/Wiedemann EuZPR/EuIPR (4. edition 2015) Art. 29 EUKPfVO n. 1 et seq.
185
c. Cross-Border Enforceability
In ancient time, a creditor who aimed at enforcing a judgment in
another state, firstly, had to obtain a declaration of enforceability (i.e.
exequatur) and, only in a second step, could proceed with the actual
enforcement of the judgment. With this declaration of enforceability the
territorial restricted enforcement order of a judgment is extended to another
Member State. At the same time, the exequatur proceeding served as
intermediate procedural stage for the examination of grounds of refusal of
recognition of a judgments’ material content. The EU Regulations firstly
unified and later also modified this system, albeit in different ways. Looking
to their overall concept of enforceability, there are three different structures.
The first group consists of the “old” Brussels I-Regulation, the
Succession Regulation, basically the Brussels IIbis-Regulation, and, to small
part – namely only for decisions emanating from the UK and Denmark - the
Maintenance Regulation. These regulations only unify and simplify the
exequatur proceeding and adhere to the grounds of refusal of recognition.
Apart from the system under Brussels IIbis, there is no examination of the
grounds of refusal within the exequatur proceeding, but merely if the debtor
files a remedy.
The Regulations within the second group abolished any intermediate
exequatur proceeding as well as the grounds for refusal of recognition. This
system applies to decisions on rights of access and the return of a child
under Brussels IIbis-Regulation54, decisions from all Member States apart
from Denmark and the UK under the Maintenance Regulation 55 , the
European Enforcement Order 56, the European Payment Order 57 and the
European Small Claims Procedure. 58 However, the systems are not
completely alike: Whereas Brussels IIbis-Regulation includes no grounds for
refusal of recognition, the other regulations allow for a refusal of enforcement in case
of an irreconcilable judgment, but again under slightly different conditions.
The Brussels Ibis-Regulation, the recast of Brussels I, introduces a
third system which will only apply to judgments given in a legal proceeding
instituted after January 9, 2015. 59 Brussels Ibis abolishes the exequatur
proceeding but adheres to the grounds for refusal of recognition. The debtor
may raise the grounds for refusal of recognition no longer, as under Brussels
I, within the exequatur proceeding but rather within the actual enforcement
proceedings.
Art. 41, 42 Regulation No. 2201/2003.
Art. 17 Regulation No. 4/2009.
56 Art. 5 Regulation No. 805/2004.
57 Art. 19 Regulation No. 1896/2006.
58 Art. 20 Regulation No. 861/2007.
59 Art. 66 Regulation No. 1215/2012.
54
55
186 d. Minimal Procedural Standards
The Commission acknowledged that an abolition of the grounds for
refusal of recognition and therewith the abolition of entry controls in the
Member State of enforcement has to go hand in hand with minimum
procedural standards in the Member State of the judgment’s origin.60 The
abolition of the grounds of refusal of recognition means that judgments are
mutually recognized as they are. Mutual recognition, the powerful political
principle introduced by the European Council (Tampere)61, requires mutual
trust in the equality of procedural standards, particularly the observance of
the defendant’s right to be heard. Union-wide minimal standards aim at
encouraging the trust of the Member States in the others’ legal systems.
Literally, this would mean that the grounds for refusal of recognition
should be recreated as minimal standards in the Member State of origin. And
to be effective, the court of first instance would not only be obliged to
examine these minimum standards but the defendant would also be able to
contest the judgment in case of a violation of minimum standards. However,
the regulations which abolished the exequatur procedure and a review of the
grounds for recognition in the Member State of enforcement, guarantee
minimum standards merely in a fragmentary way.
For instance, the violation of certain important rules of international
jurisdiction constitute a ground for refusal of recognition within the Brussel
Ibis-scheme: A judgment emanating from another Member State is not
recognized in the Member State of enforcement, if it does not comply with
the jurisdictional rules which protect the defendant in insurance, consumer
or employment cases or if it disregards an exclusive jurisdiction. 62 The
Regulation creating a European Enforcement Order, which abolished any
grounds of refusal of recognition in the Member State of enforcement,
nearly recreates this jurisdictional control in the Member State of origin. A
judgment may only be certified as a European Enforcement Order in the
Member State of origin if the judgment does not conflict with the rules on
jurisdiction for insurance contracts and rules on exclusive jurisdiction. 63
Besides, the regulation contains an own provision on consumer protection,
which is, albeit, broader than the one in Brussels-Ibis. Furthermore, the
defendant may challenge the Enforcement Order if the issuing authority did
not comply with these prerequisites. 64 In contrast, a control of the
European Commission, 24.10.2010, COM (2010) 171, p. 4, 9; see further on the
necessity of minimum standards: Hess, EMRK, Grundrechte-Charta und europäisches
Zivilverfahrensrecht, in: Festschrift Jayme (Mansel/Pfeiffer/Kronke/Kohler/Hausmann),
2004, 341, 355.
61 European Council (Tampere), 15./16.10.1999, Presidency Conclusions, NJW 2000,
1925.
62 Art. 45 sec. 1 lit. e Regulation No. 1215/2012.
63 Art. 6 sec. 1 lit. b Regulation No. 806/2004.
64 Art 10 sec. 1 lit. b Regulation No. 806/2004.
60
187
jurisdictional protection of employees is not included. 65 The rules on
international jurisdiction under Brussels Ibis, including protective and
exclusive jurisdictions, also apply within the European Small Claims
Procedure as well as the European Payment Procedure. However, only the
European Payment Procedure includes a mandatory remedy (objection)66 for
the defendant whereas it depends on the law of the Member States whether a
remedy is available within the Small Claims Procedure.67
2. Private International Law
All the regulations on the applicable law contain not only special
provisions on the applicable law (e.g. Art 21 Succession Regulation: “…the
law applicable to the succession as a whole shall be the law of the State in which the
deceased had his habitual residence at the time of death.”) but also general conflictof-law provisions. Many times, all the regulations repeat the same general
provision or differ just slightly with respect to wording. Deviations between
the regulations, in contrast, are not always the result of objective reasons but
also the result of the political power structure within the Council and
corrections of shortcomings of earlier regulations. For example, the
Regulations Rome I, Rome II and Rome III exclude a renvoi. Thus, the
application of the law of any country means the application of the rules of
law in force in that country other than its rules of private international law.68
In contrast, the Regulation Rome IV for reasons of an efficient and
internationally uniform regulation of succession cases69, allows a renvoi from a
third state towards a Member State or towards another third state which
accepts the renvoi.70 Similarly, the regulations found different solutions for the
reference to a state with multiple legal systems as well as the prerequisites of
choice-of-law clauses.71 A coherent system should answer general question of
private international law in a uniform way, and, only where objectively
necessary, provide for exception for individual areas of law.
65 This control, however, also under the Brussels I-scheme, was only introduced
with the recast.
66 Art. 16 Regulation No. 1896/2006.
67 Art. 17 Regulation No. 861/2007.
68 Art. 20 Rome I, Art. 24 Rome II, Art. 11 Rome III, though, Art. 20 Rome I
leaves space for exceptions, see von Hein, Der Renvoi im europäischen Kollisionsrecht, in:
Brauchen wir eine Rom 0-Verordnung (Leible/Unberath), 2013, 341, 367.
69 MPI, Comments on the European Commission’s Proposal for a Regulation of
the European Parliament and of the Council on jurisdiction, applicable law, recognition and
enforcement of decisions and authentic instruments in matters of succession and the
creation of a European Certificate of Succession, RabelsZ 74 (2010) 522, 660.
70 Art. 34 sec. 1 Rome IV.
71 Jayme, Kodifikation und allgemeiner Teil im IPR, in: Brauchen wir eine Rom 0Verordnung (Leible/Unberath), 2013, 33, 36 et seq.
188 II. Conceptual Incoherencies
For an ideal coherent system of judicial cooperation two conceptual
parameters seem almost self-evident: Firstly, if the regulations phrase legal
terms in the same manner, these terms are interpreted in the same manner.
And secondly, if regulations phrase or describe legal terms in a different way,
we could suspect that there is sufficient reason for a different interpretation.
The EU’s system of judicial cooperation in civil matters is far away from
such a perfection. The following examples will highlight the conceptual
problem.
1. Habitual Residence
The notion of habitual residence became popular in the EU. It wipes
away the apparently old-fashioned notion of nationality which is considered
to be less integrative in view of the increasing mobility of citizens and
suspected to discriminate against non-nationals. This is not the place to
reopen this discussion, but rather to survey the interpretation of habitual
residence.
One the one hand, the regulations use the term “habitual residence”
as a factor to establish a Member State’s international jurisdiction. The first
regulation, where habitual residence was used as jurisdictional criteria, was
Brussels IIbis: In matters relating to divorce, jurisdiction lies, alternatively
amongst others, with the courts of the Member State in whose territory the
spouses are habitually resident.72 And the courts of a Member State have
jurisdiction in matters of parental responsibility over a child which is
habitually resident in that Member State. 73 Under the Maintenance
Regulation, jurisdiction lies, alternatively amongst others, with the court for
the place where the defendant is habitually resident or the court for the place
where the creditor is habitually resident. 74 And lastly, in matters of
succession, the courts of the Member State where the deceased had his
habitual residence at the time of his death have jurisdiction to rule on the
succession, for example to issue a certificate of inheritance or to decide on a
compulsory portion (e.g. Pflichtteil, légitima).75
But the habitual residence of a person is not merely used as
jurisdictional criteria, but, on the other hand, as well as a criteria to determine
the applicable law. Under Rome I, a contract is governed by the law of the
country where the party required to effect the characteristic performance of
the contract has his habitual residence. 76 And the law applicable to a
Art. 3 sec. 1 lit. a Regulation No. 2201/2003.
Art. 8 sec. 1 Regulation No. 2201/2003.
74 Art. 3 lit. a, b Regulation No. 4/2009.
75 Art. 4 Regulation No. 650/2012.
76 Art. 4 sec. 1, 2 Regulation No. 593/2008 (Rome I).
72
73
189
consumer contract is governed by the law of the country of the consumer’s
habitual residence. 77 According to Regulation Rome II, the law of the
country, where the person claimed to be liable and the person sustaining
damage both have their habitual residence, applies.78 In the absence of a
choice, divorce and legal separation under Rome III are first of all subject to
the law of the State where the spouses are habitually resident at the time the
court is seized.79 And the law applicable to the succession is the law of the
State where the deceased had his habitual residence at the time of death.80
The illusion, that the notion of habitual residence could be
interpreted in the same manner81 in all these contexts rapidly lapsed. Most of
the commentators at least advocate for a different interpretation between
habitual residence as a jurisdictional criteria and habitual residence as a factor
to determine the applicable law.82 Others also differentiate between material
areas, because the personal statute of a person would require more stability83
then other areas such as the law of obligations. The European Court of
Justice itself, which only had the opportunity to rule on the interpretation of
habitual residence in the context of jurisdiction of courts for matters of
parental responsibility over a child, expressly merely ruled on the
interpretation “…within the meaning of Article 8 (1) [Brussels IIbis]” and
therewith left space for a different interpretation in other contexts.84 And
recital 23 of the Rome IV-Regulation demands a determination of the
habitual residence taking into account the specific aims of the Regulation.
The reason for the trend towards a differenced interpretation of the
notion of habitual residence is obvious: Its use within the different
regulations serves different purposes: The jurisdiction rules in Article 8
Brussels IIbis or Article 4 of the Maintenance Regulation which offer a
forum in the Member State of the child’s or the dependent’s habitual
Art. 6 Regulation No. 593/2008 (Rome I).
Art. 4 sec. 2 Regulation No. 864/2007 (Rome II).
79 Art. 8 lit. a Regulation No. 1259/2010 (Rome III).
80 Art. 21 sec. 1 Regulation No. 650/2012 (Rome IV).
81 Münchener Kommentar/Sonnenberger, 5. edition 2010, Einl IPR n. 721; Kindler,
Vom Staatsangehörigkeits- zum Domizilprinzip: das künftige internationale Erbrecht der
Europäischen Union, IPRax 2010, 44, 46.
82 Spellenberg, Internationale Zuständigkeit kraft Wohnsitzes oder gewöhnlichen
Aufenthalts, in: Essays in Honour of K. Kerameus (National and Kapodistrian University of
Athens, Faculty of Law), 2009, p. 1307, 1318; Geimer/Schütze/Dilger (Erg-Lfg 45) Vorbem.
Art. 3 Brüssel IIa-VO Rn. 20; Helms, Reform des internationalen Scheidungsrechts durch die
Rom III-Verordnung, FamRZ 2011, 1765, 1769; Gottwald, Scheidungen im neuen “Raum
der Freiheit, der Sicherheit und des Rechts”, in: Festschrift für Daphne-Ariane Simotta
(2012) 187, 189 f; Richez-Pons, Commentaire, Cour d'appel d'Aix-en-Provence – 18
novembre 2004 – Moore c/ Mc Lean, Clunet 132 (2005), 803, 813.
83 Neuhaus, Die Grundbegriffe des Internationalen Privatrechts, 1962, p. 153;
Kropholler, Internationales Privatrecht, 6. edition 2006, p. 258 et seq.
84 ECJ, 2.4.2009 – C-523/07 – A, ECR 2009 I-2805 n 37; similarly: ECJ,
22.12.2010 – C‑497/10 PPU – Barbara Mercredi/Richard Chaffe, ECR 2010 I-14309.
77
78
190 residence protect the interests of the child or the dependent. Jurisdiction
shall lie with the Member State where the child lives, because these courts
are in the best position to act in the interest of the child. And the dependent
should not be obliged to file his maintenance claim in a Member States far
away from his home. Objective criteria are appropriate to serve these
purposes and to determine habitual residence as jurisdictional criterion. But
if the habitual residence has to answer the Savignyian question, ”What binds
an individual person on a state?”85, i.e. which law applies to a natural person?, the
connection to a state has to be sufficiently established. Thus, the different
purposes are the reason for the grade of persistence of the definitions. In
some cases (e.g. applicable succession law) the link to a Member State has to
be sufficiently stable – comparable to the stability of the English domicile or
the continental European notion of nationality. In other cases (e.g.
jurisdiction) less stability is necessary.
2. Consumer Protection
To protect consumers as the potentially weak party, the EU’s
jurisdictional as well as private international rules are particularly favorable to
consumers. Within this context, the regulations Brussels I/Ibis and Rome I
as well as the Regulations creating a European Enforcement Order, a
European Payment Procedure and a European Account Preservation Order
refer to a “consumer contract”. However, the definitions differ.
Art. 15 sec. 1 Brussels I-Regulation/Art. 17 Brussels Ibis-Regulation,
first of all, gives a basic definition. Accordingly, the jurisdictional consumer
protection applies to “…a contract concluded by a person, the consumer, for a purpose
which can be regarded as being outside his trade or profession…”. Additionally,
Brussels I/Ibis sets requirements with regard to the contract’s content or
with regard to the conclusion of the contract. The contract either has to be
of a special type, namely “a contract for the sale of goods on instalment credit terms; or
[…] a contract for a loan repayable by instalments, or for any other form of credit, made to
finance the sale of goods”. To contracts with a different content, the consumer
protection does only apply, if “the contract has been concluded with a person who
pursues commercial or professional activities in the Member State of the consumer’s
domicile or, by any means, directs such activities to that Member State or to several States
including that Member State, and the contract falls within the scope of such activities.”
The wording of Brussels I’s basic definition would actually also
include consumer-to-consumer contracts. However, the literature restricted
the scope to consumer-to-business contracts because otherwise, there would
be no imbalance and no need of consumer protection.86 The ECJ recently
confirmed this view in an obiter dictum.87
Savigny, System des heutigen römischen Rechts, Band VIII, 3. Edition 1961
(reprint), p. 40: „Wodurch wird die einzelne Person mit ihrem Rechtszustand an das Land
gebunden?“ (own translation).
86 Advocate General Capotorti, 31.5.1978 – 150/77 – Bertrand/Paul Ott, ECR 1978,
1447, 1450; Gaudemet-Tallon, Compétence et exéctution des jugements en Europe (4. edition
85
191
Art. 6 sec. 1 Rome I-Regulation improved the Brussels I’s
incomplete wording. According to the basic definition, consumer protection
applies to “…a contract concluded by a natural person for a purpose which can be
regarded as being outside his trade or profession (the consumer) with another person acting
in the exercise of his trade or profession (the professional)”. Additionally, the
consumer protection only applies if certain situational criteria with respect to
the conclusion of the contract are met. The professional either has to “pursue
[…] his commercial or professional activities in the country where the consumer has his
habitual residence, or […] direct […] such activities to that country or to several countries
including that country, and the contract falls within the scope of such activities.”.
In contrast, the Regulation creating a European Enforcement Order,
adheres to the Brussels I’s incomplete basic definition but contains no
further requirement on the content of the contract or the situation of the
contract’s conclusion. Accordingly, a consumer contract is “a contract concluded
by a person, the consumer, for a purpose which can be regarded as being outside his trade or
profession; and the debtor is the consumer.” 88 It was therefore controversially
discussed whether consumer protection is available to consumer-toconsumer-contracts.89 The ECJ, however, decided that this definition refers
to a person who concludes a contract for a purpose which can be regarded
as being outside his trade or profession with a person who is acting in the
exercise of his trade or profession, and thus, merely consumer-to-businesscontracts. 90 In its reasoning, the ECJ particularly referred to the
interpretation of Art 15 Brussels I and the, albeit different, wording of Art 6
Rome I “in order to ensure compliance with the objectives pursued by the European
legislature in the sphere of consumer contracts, and the consistency of European Union
law…”.91 Thus, the different definitions are nevertheless interpreted in the
same manner.
The Regulation creating a European Payment Procedure contains the
same definition as the Regulation establishing a European Enforcement
Order. Art. 6 sec. 2 Regulation No. 1896/2006 requires “a contract concluded by
a person, the consumer, for a purpose which can be regarded as being outside his trade or
profession, and if the defendant is the consumer”. The same wording should entail an
interpretation in line with the ECJ’s recent decision,92 particularly, because
already the wording (“the debtor is the consumer”/”the defendant is the consumer”)
indicates that only one party to the contract is a consumer. In contrast, the
new Regulation creating a European Account Preservation Order phrases
2010) p. 288; Magnus/Mankowski/Nielsen, Brussels I Regulation (2. edition 2012) Art. 15 n.
20; Münchener Kommentar ZPO/Gottwald (4. edition 2013) Art. 15 EUGVVO n. 8.
87 ECJ, 5.12.2013 – C-508/12 – Walter Vapenik/Josef Thurner, NJW 2014, 841 n. 34.
88 Art. 6 sec. 1 lit. d Regulation No. 805/2004.
89 Geimer/Schütze/Hilbig,
Internationaler Rechtsverkehr in Zivil- und
Handelssachen (46. edition 2013) Art. 6 EuVTVO n. 43 with further references.
90 ECJ, 5.12.2013 – C-508/12 – Walter Vapenik/Josef Thurner, NJW 2014, 841 n. 38.
91 ECJ, 5.12.2013 – C-508/12 – Walter Vapenik/Josef Thurner, NJW 2014, 841 n. 25.
92 Sujecki, Anmerkung ECJ, 5.12.2013 – C-508/12, EuZW 2014, 149, 150.
192 the definition more openly. Accordingly, consumer protection applies “where
the debtor is a consumer who has concluded a contract with the creditor for a purpose which
can be regarded as being outside the debtor’s trade or profession”.93 It remains open,
whether the ECJ’s interpretation is transferable in this context.94
3. Means of Evidence
The Evidence Regulation No. 1206/2001 applies to the cross-border
taking of evidence. The notion “taking of evidence” is autonomously and
quite broadly interpreted. It includes any measure to search for information
that serve to establish the judge’s opinion. 95 The Regulation creating a
European Account Preservation Order also contains a rule on the taking of
evidence (Art. 9 sec. 1 s. 1): “The court shall take its decision by means of a written
procedure on the basis of the information and evidence provided by the creditor in or with
his application.” It, nevertheless, keeps secret which means of evidence are
available for the creditor. Certainly, the Evidence Regulation’s interpretation
is too broad because the court issues the European Account Preservation
Order within a written procedure. Furthermore, reference to national law
instead of an autonomous interpretation would impair with the Regulation’s
objective to create an autonomous procedure. Consequently, a new
interpretation for the same term is necessary.96
C. A EUROPEAN CONFLICTS CODE?
The above overview illustrated the shortcomings of the EU’s judicial
cooperation in civil matters. There are different procedures that overlap and
whose interconnection is not always clear. The regulations introduced
different and sometimes inconstant approaches regarding general notions of
private international law (e.g. renvoi). And lastly, the definitions and
interpretations of general concepts bear many ambiguities. The solution,
sounds as easy as powerful: According to the Commission “…the instruments
adopted should be grouped together in a code of judicial cooperation in civil matters to
facilitate their implementation.”97 Likewise the European Parliament dreams of “a
Community Conflicts Code bringing together in one instrument all the regulations adopted
in this area by the Community legislator by 2013 to mark the 45th anniversary of the
Art. 6 sec. 2 Regulation No. 655/2014.
Rauscher/Rauscher/Wiedemann, EUZPR/EUIPR (4. edition 2015), Art. 6 EUKPfVO n. 13.
95 Rauscher/von Hein, EUZPR/EUIPR (2014) Art. 1 EG-BewVO n. 14.
96
For an autonomous definition see Rauscher/Rauscher/Wiedemann,
EUZPR/EUIPR (4. edition 2015) Art. 9 EU-KPfVO n. 5 et seq.
97 European Commission, 10.6.2009, COM (2009) 262, 10.
93
94
193
Brussels Convention, the conclusion of which was a milestone in private international
law”.98
A European conflicts code as a solution? Codification always
attracted the European Union. However, the field of private international
law and international procedural law never had such a strong political
attention as for example the Common European Sales Law99. Within the area
of private international and procedural law, a new codification should
definitely not lead to the implementation of ever new rules, e.g. the
implementation of an encompassing European Code of Civil Procedure. In
the 90s, the Working Group for the Approximation of the Civil Procedure
Law (Storme Group) created a compilation of European rules of civil
procedure.100 The project which was originally intended to serve as a basis
for a European directive, however, ceased in the late nineties due to critiques
regarding method and content because of the vast differences between
Member States’ national procedural laws.101
What is rather feasible, is a consolidation and – where necessary –
reform of the “acquis”, i.e. the existing rules on private international and
international procedural law. In contrast, a pure compilation would only
facilitate the accessibility but would not solve the incoherencies.102
I. Codification as Fossilization of Law?
The objection against this idea of a European conflicts code is
obvious: A codification impairs with the dynamics of judicial cooperation in
civil matters 103 , merely pleases the continental European obsession with
codifications and ignores the English “codiphobia”104. The judicial branch,
namely the ECJ, however, only serves as a restricted solution to solve the
existing incoherencies.105 First of all, its power to decide a question depends
on the submission of a question from a national court (Art. 267 TFEU). And
European Parliament, 25.11.2009, P7_TA(2009)0090, n 95.
European Commission, 11.10.2011, COM (2011) 635.
100 Working Group for the Approximation of the Civil Procedure Law (Storme Group), ZZP
1996, 345.
101 Stadler, Das Europäische Zivilprozessrecht – Wieviel Beschleunigung verträgt
Europa?, IPRax 2004, 2, 4 with further references.
102 Mac Eleavy Fiorini, Qu’y a-t-il en un nom?, in: Quelle architecture pour un code
européen de droit international privé? (Fallon/Lagarde/Poilot-Peruzzetto), 2011, 27, 31.
103 Müller-Graf, Kodifikationsgewinn durch Inkorporation des Inhalts von
Schuldrechtsrichtlinien der EG in das BGB?, GPR 2009, 106, 110; Hess, Europäisches
Zivilprozessrecht (2010) 694 with further references.
104 Mac Eleavy Fiorini, Qu’y a-t-il en un nom?, in: Quelle architecture pour un code
européen de droit international privé? (Fallon/Lagarde/Poilot-Peruzzetto), 2011, 27, 45.
105 See for example the decision C-585/08, C-144/09 – Peter Pammer/Reederei Karl
Schlüter and Hotel Alpenhof/Oliver Heller, ECR 2010 I-12527 n. 39 et seq., where the ECJ
interpreted the term „contract of transport“ in art. 15 Brussels I-Regulation in light of art. 6
of Regulation No. 593/2008 (Rome I).
98
99
194 secondly, the willingness of the European Court of Justice to create an
overall system is barely visible in the area of civil cooperation. For instance,
its answer concerning the interpretation of “habitual residence” was
restricted to the submitted case and did not take other regulations into
account. Thirdly, the ECJ is bound by the text of the regulations. And if the
regulations themselves include incoherencies, the ECJ is not in the position
to resolve them. The ECJ, therefore, may only serve as an interpreter of the
existing regulations but not as a creator of an overall system.106
Besides the weaknesses of the EU’s judicial branch, there is a second
point, which strongly argues for a comprehensive code: The idea of
codifications introduced in the period of Enlightenment in the 19. Century in
Europe is intrinsically linked to the individual’s freedom. Only where the
relevant legal provisions are easily accessible, people are able to enforce their
rights which protect their individual freedom. In light of the present
systematic incoherencies, particularly the number of procedural options
spread through numerous regulation, the right to access to justice as the
procedural part of the creditors’ individual freedom turned out to be a
chimera.
II. Private International Law vs. International Procedural Law
Above all, the notion of private international law has a different
meaning within the Member States. In France, droit international privé includes
international jurisdiction (competence judicaire), choice-of-law (conflit de lois), free
circulation of judgments (circulation des jugements)107 and, as well but without
relevance in this context, nationality (nationalité). Though, there is no uniform
code de droit international privé in France. The provisions are spread throughout
the code civil (e.g. Art 3 cc: “Les lois concernant l’état et la capacité des personnes
régissent les Francais, même résidant en pays étrangers”), the code de procedure civil (e.g.
Art 509 reconnaissance transfrontalière) and other codes. In Germany, private
international law only determines the applicable law. The introductory law to
the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch –
EGBGB) contains choice-of-law rules. Provisions on international
procedural law are spread through the German code of civil procedure
(Zivilprozessordnung – ZPO) and other special laws.
In the light of these national differences, the EU should feel free to
adopt its own approach which is at the best position to resolve the existing
incoherencies. At first glance, a combination of private international law
stricto sensu and international procedural law within one conflict’s code might
106 Wilke, Einführung, in: Brauchen wir eine Rom 0-Verordnung (Leible/Unberath),
2013, p. 23, 25.
107 Muir Watt, La nécessité de la division tripartite – Conflit de lois, de juridiction,
règles de reconnaissance et d’exécution?, in: Quelle architecture pour un code européen de
droit international privé? (Fallon/Lagarde/Poilot-Peruzzetto), 2011, 213.
195
interfere with their different objectives: 108 The objective of private
international law is first of all to determine the seat of a legal relationship,
and secondly, increasingly also includes a materialization through the
protection of weaker parties (e.g. consumers). International procedural law
aims at coordinating procedures while at the same time protecting the
parties’ right to fair trial as well as protecting the weaker party (e.g.
consumers).
Notwithstanding these different objectives, the above highlighted
incoherencies are not restricted to one of the two branches but they are
comprehensive. Furthermore, the EU legislator already started to match
private international and procedural provisions in the Maintenance
Regulation and in the Rome IV-Regulation (succession). And lastly, the
compilation of all regulations, which also would simplify the access of the
interested parties to the provisions, does not imply an interference with the
different objectives of different branches. Moreover, the different objectives
may be observed in different sections of the code. Thus, a combination of
private international law stricto sensu and international procedural law seems
feasible.
III. Technical Questions
The idea of a systematization of all existing regulations on
jurisdiction, recognition, enforcement, judicial administration and the
applicable law within one code of private international law, however, bears
some technical problems.
Firstly, the existing regulations are not equally applicable in all
Member States. 109 According to Protocol No 22, Denmark does not
participate in measures within the policy area of freedom, security and justice
and has no possibility to opt- in.110 Thus, Denmark would also not take part
in a consolidated code. The case with the UK and Ireland is more
complicated. The UK and Ireland do not take part in measures within the
area of freedom, security and justice unless they do not notify that they wish
to take part (opt-in).111 For some of the regulations, the UK and/or Ireland
opted-in (e.g. Brussels I/Ibis112) and for others they did not (e.g. Regulation
Rom IV113). Because Protocol No 21 does not allow a partial opt-in, they
108
McGuire, Kodifikation des Europäischen Zivilprozessrechts, exolex 2011, 218,
220.
109 Wagner, Das rechtspolitische Umfeld für eine Rom 0-Verordnung, in: Brauchen
wir eine Rom 0-Verordnung (Leible/Unberath), 2013, 51, 69 et seq.
110 Protocol 22 OJ EU (2010) C 83/299, however, since the entering into force of
the Lisbon Treaty, Denmark has the possibility to notify the other Member States that, Part
I of the protocol shall consist of the provisions in the Annex I, which resemble the UK’s
and Ireland’s possibility to opt-in (Art. 8 of Protocol 22).
111 Protocol 21 OJ EU (2010) C 83/295.
112 Recital 40 Regulation No. 1215/2012.
113 Recital 82 Regulation No. 650/2012.
196 would either have to completely apply a comprehensive code or not take
part. A possible solution would be the opt-in of UK and Ireland for the
whole code and a spatial restriction of some of its provisions where the UK
and/or Ireland do not wish to take part.
A comparable problem exists for the provisions of the Rome IIIRegulation on the applicable law in divorce cases: The Rome III-Regulation
was adopted as enhanced cooperation, where not all of the Member States
take part.114
Furthermore, the legislative process for the adoption of measures in
the area of judicial cooperation in civil matters is split: Basically, measures are
adopted by the European Parliament and the Council, acting in accordance
with the ordinary legislative procedure (Art 294 TFEU). The ordinary
legislative procedure is a co-decision procedure where the Council and the
European Parliament act jointly. It merely requires a qualified majority within
the Council. However, measures concerning family law (e.g. divorce law,
parental responsibility) are established by the Council, acting in accordance
with a special legislative procedure. The Council acts unanimously after
consulting the European Parliament. There is no provision in the TFEU
which stipulates the legislative framework, if a measure, such as a potential
European conflicts code, includes ordinary civil matters as well as family
matters. It seems nevertheless feasible to combine the ordinary and the
special legislative procedure.115
D. CONCLUSION: THE GENERAL AND THE SPECIAL
The first goal of a consolidation is to reduce the number of
provisions. In order to avoid the repetition of rules, it is necessary to
structure the code into general parts and special parts.116 The general parts
aim at combining existing equal provisions. The code would generally apply
to civil matters and to all Member States with an exception for Denmark.
Exclusions or specifications in special sections of the code will supplement
this general rule on the scope of application. Moreover, the creation of the
code should be the occasion to rethink differently framed concepts and
definitions. For example, a basic definition of consumer matters in the first
general section of the code should apply in any other section (procedural law
and applicable law) unless the code provides otherwise.
114 As from May 22, 2014 Regulation Rom III also applies to Lithuania (European
Commission, 21.11.2012, OJ EU 2012 L 323/18) and, therewith, to 15 Member States
(Belgium, Bulgaria, Germany, Spain, France, Italy, Latvia, Luxembourg, Hungary, Malta,
Austria, Portugal, Romania, Slovenia and Lithuania).
115 Rauscher/Rauscher/Wiedemann, EUZPR/EUIPR (4. edition 2015), Art. 1 n. 15;
for further options see Wagner, Das rechtspolitische Umfeld für eine Rom 0-Verordnung, in:
Brauchen wir eine Rom 0-Verordnung (Leible/Unberath), 2013, 51, 67 et seq.
116 Desdevises, Le général et le spécial en procédure civile, in: Mélanges Héron
(Cadiet/Callé/Le Bars/Mayer), 2008, 213.
197
Secondly, the creditor should be able to clearly identify his
procedural weapons. It is therefore advisable to structure the chapter on
procedural law as with respect to provisions applicable to national
proceedings and provisions for EU proceedings. An annexed draft
compilation illustrates the ideas.
Finally, if the European conflicts code shall not merely remain a
compilation of the existing regulations but resolve the existing difficulties
and incoherencies, it’s creation is not a task for one afternoon, but a long
path which will involve immense consultation. It is however worth to
venture this path in order to come closer to the EU’s goal to ensure
consistency between its activities (Art. 7 TFEU).
ANNEX: EUROPEAN CONFLICTS CODE (OVERVIEW)
I. Chapter. General Provisions
1. Material Scope (civil and commercial matters)
2. Spatial Scope
3. Definitions
II. Chapter. International Procedural Law
1. Section. General Provisions for national and EU proceedings
a. Cross-border service of documents
b. Cross-border taking of evidence
2. Section. International Jurisdiction, Recognition and Enforceability
within national proceedings
a. Subsection. Ordinary Civil and Commercial Matters
i. Exclusions from the scope (status or legal capacity of natural
persons, rights in property arising out of a matrimonial
relationship or out of a relationship deemed by the law
applicable to such relationship to have comparable effects to
marriage; bankruptcy, social security; arbitration; maintenance
obligations arising from a family relationship, parentage,
marriage or affinity; wills and succession, including
maintenance obligations arising by reason of death)
ii. Jurisdiction
iii. Recognition and Enforcement
• Ordinary Procedure
• European Enforcement Order
b. Subsection. Divorce and Parental Responsibility
i. Restriction of the scope (this section does only apply to
divorce and parental responsibility)
ii. Jurisdiction
iii. Recognition, Enforcement
198 c. Maintenance
i. Restriction of the scope (This subsection does only apply to
maintenance obligations)
ii. Jurisdiction
iii. Recognition, Enforcement
d. Succession
3. Section: Special Procedures
a. Subsection: General Provisions
b. Subsection. European Payment Procedure
c. Subsection. European Small Claims Procedure
d. Subsection. European Account Preservation Order
e. Subsection. European Certificate of Succession
III. Chapter. Applicable Law
1. Section. General Provisions (e.g. universal application, Ordre-public,
renvoi)
2. Section. Applicable Law
a. Subsection. Contractual Obligations (Rome I
b. Subsection. Non-Contractual Obligations (Rome II)
c. Subsection. Divorce (Rome III)
d. Subsection. Succession (Rome IV)
199
200 IS «LEGAL GLOBALIZATION» THE SOLUTION FOR THE
DISORIENTATION OF HEALTH AND SAFETY AT THE
WORKPLACE LAW?
Ana Cristina Ribeiro Costa
Universidade Católica Portuguesa, Faculdade de Direito
ABSTRACT
Occupational health and safety Law is a field of Law where the
stagnation of European Social Law is most being felt. The European Union
Strategic Framework on Health and Safety at Work 2014-2020 was approved
in june 2014, and the fear of a throwback that dominated the legal doctrine
was confirmed, as the paradigm of the adaptation of the work to the worker
seems to be changing into the worker’s adaptation to the work.
Moreover, new challenges are presented to the field of
Occupational Health and Safety, due to emerging risk factors that create new
occupational risks, such as psychosocial risks, nanomaterial risks, aalcohol
and drug dependence, among others.
In the meanwhile, the European Union is challenged to present
instruments that guide the Members States in these issues and that offer
concrete solutions to the problems that arise in each Member State.
The answer might be global, as the broader concept of health
adopted by the World Health Organization seems to be most suitable to
solve the worker’s problems, as well as the International Labor
Organization’s Conventions.
But is it possible to transcend the European legal boarders and seek
for answers in those international organizations?
In any case, is it preferable, in this matter, to have a legislative or
hard law model, or, on the contrary, a self-regulation or soft law model?
201
I. HISTORICAL FRAMEWORK OF OCCUPATIONAL HEALTH AND SAFETY
LAW
The lack of attention to this field of Labour Law does not honor its
origin, which had its grounds in the improvement of working conditions and
of the working environment, in the mid-nineteenth century, with the
development of the industrialization. The Occupational Safety and Health
Law emerges with the recognition of the need to effectively regulate working
conditions, which often brought situations of misery for workers and their
families, and destroyed the workforce, essential for the economic
development1. Therefore, it was essential to ensure the survival of victims of
occupational contingencies. Bismarks’s Law of Social Insurance of 1884
would include this issue in the context of social security, which would cover,
among other eventualities, the loss of earning capacity resulting from the
professional contingency2.
This theme has been subject of attention from the International
Labour Organization (ILO) almost since its beginning, with the approval of
several Conventions, being the Convention nr. 155 from 1981 one of the
most important, demanding from the States the implementation of a national
policy of occupational health and safety 3 . Besides the Conventions and
Recommendations, ILO also organizes several Codes of Best practices and
action plans.
In what concerns European Union (EU) Law, some legal doctrine
describes the historical evolution of Occupational health and safety Law in
four stages4, while others define it in two or three phases5.
At first, the EU legislation referred to the protection of
occupational health and safety only as an instrumental goal, as the priority
were economic purposes. At this stage, the only activities pursued were
studies and statistics. The legislative instruments were reduced to
Recommendations on a list of occupational diseases, on the conditions for
1 MANUEL M. ROXO, Direito da Segurança e Saúde no Trabalho. Da Prescrição do
Seguro à Definição do Desempenho, uma Transição na Regulação, Almedina, Coimbra, 2011, p. 15.
2 We’ll refer to “professional contingencies” as a concept that comprehends both
work-related accidents and occupational diseases.
3 On the importance of ILO’s Conventions to the theme of occupational health
and safety, cfr. ANTONIO OJEDA AVILÉS, Derecho Transnacional del Trabajo, Tirant lo
Blanch, Valencia, 2013, p. 128.
4 AAVV, Lecciones de Derecho Social de la Unión Europea, coord. Magdalena
Nogueira Guastavino, Olga Fotinopoulou Basurko, José María Miranda Boto, Tirant lo
Blanch, Valencia, 2012, p. 366.
5 The two phases would be one until the Framework Directive, and the other
from that moment on, even though some legal doctrine considers that the first phase ends
in 1987, with the entry into force of the Single European Act. Cfr. AAVV, Manual de Derecho
Social de la Unión Europea, coord. Antonio Costa Reyes, Tecnos, 2011, p. 365. The scholars
that define three phases divide them into the periods of 1971 until 1978 (first phase), 1978
until 1984 (second phase), and from this year on (third phase). BRUNO CARUSO;
SILVANA SCIARRA; Il lavoro subordinato, G. Giappichelli Editorem, Turim, 2009, pp. 78-82.
202 compensation of victims of occupational diseases and on the medical
surveillance of workers exposed to particular risks6.
A second phase began as politicians reached the conclusion that
social progress was not possible if only sustained in economic integration. A
program of social action was created to improve working conditions and to
encourage progressive elimination of physical and psychological
constrictions of jobs.
Several directives on specific issues such as chemical, physical and
biological agents, among others, were approved. The European Foundation
for the Improvement of Living and Working Conditions was created. In
1978, the first program of action of the European Communities on safety
and health at work (78-82) is created, and the second program (84-88) insists
on the same goals7.
The idea that the social partners should be involved in these
matters was encouraged.
On a third phase, the Single European Act of 1986 brings the
article (art.) 118-A, now art. 153 on the Treaty on the Functioning of EU
(TFEU), which states that “ With a view to achieving the objectives of Article 151,
the Union shall support and complement the activities of the Member States in the
following fields: (a) improvement in particular of the working environment to protect
workers' health and safety; (b) working conditions; (c) social security and social protection
of workers; (…) (i) equality between men and women with regard to labour market
opportunities and treatment at work; (…) 2. To this end, the European Parliament and
the Council: (a) may adopt measures designed to encourage cooperation between Member
States through initiatives aimed at improving knowledge, developing exchanges of
information and best practices, promoting innovative approaches and evaluating
experiences, excluding any harmonisation of the laws and regulations of the Member
States; (b) may adopt, in the fields referred to in paragraph 1(a) to (i), by means of
directives, minimum requirements for gradual implementation, having regard to the
conditions and technical rules obtaining in each of the Member States. Such directives shall
avoid imposing administrative, financial and legal constraints in a way which would hold
back the creation and development of small and medium-sized undertakings. (…)”. This
provision seemed to allow flexibility in the decision-making procedure on
this matter, as the qualified majority was enough to legislate, and no longer
unanimity was demanded8.
Common minimum requirements that all Member States (MS)
should follow were defined. The third program of social action harmonized
various areas such as safety and ergonomics in the workplace, training for
managers and workers, among others. Several Resolutions of the European
Parliament were approved, in which it invited the Commission to create
specific Directives on these matters.
AAVV, Lecciones de Derecho Social…, cit., p. 367.
Ibidem, p. 367. We will follow these authors in the next few paragraphs,
corresponding to pp. 367- 375.
8 ANTONIO OJEDA AVILÉS, op. cit., p. 202.
6
7
203
At least, we arrive the fourth phase, of the consolidation of legal
rules and stimulation of social agents and collective bargaining. We shall
recall that the art. 156 of the TFEU states that, to achieve the objectives of
art. 151 of the TFEU, the Commission shall have a strengthened role and
shall encourage consultation with social partners and adopt all necessary
dialogue between them, cooperation between Member States and
coordination of their actions9.
At this point, the Framework Directive (Directive nr. 89/391/CEE,
hereinafter only referred to as Framework Directive) was approved, followed
by its specific directives.
The Framework Directive would set the minimum standards that
shall be followed by the Member States10, the general principles and rules
that have to be incorporated in each national legislation and practices. The
main ideas of the Framework Directive are the universality of its application
and the harmonization of national legislation11.
The specific Directives would regulate the workplace, the working
equipments, and individual protection equipments, specific risks, specific
activities, and specific groups of workers (young people, pregnant women,
workers in temporary working companies, among others).
At the same time, the issuing of the Community Charter of
Fundamental Social Rights (1989) would boost European social policy and
was an important element in the development of an European soft law in
this subject12.
The fourth program of social action (94-2000) was developed,
training was encouraged and priority was given to small and medium
entreprises (SME’s).
Another community program was approved for the period between
1996-2000 and the Community Strategy on Health and Safety at Work 20022006 was issued, establishing goals of physical, moral and social well-being at
9 VICENTE LAFUENTE PASTOR; RUTH VALLEJO DACOSTA, Marco
jurídico de la seguridad y salud en el trabajo, Prensas Universitarias de Zaragoza, Zaragoza, 2010, p.
65.
10 SANTIAGO GONZÁLEZ ORTEGA stresses that the Framework Directive
leaves such a broad margin to the Member States that one can hardly advocate that it has
direct effect. «La aplicación en España de las Directivas Comunitarias en materia de salud
laboral», Temas Laborales, nr. 27, 1993, p. 18.
11 As states BRIAN BERCUSSON, “the provision of the Framework Directive (…)
demonstrate how health and safety law has been «Europeanised» by EU Law” - European Labour Law,
Cambridge University Press, Cambridge, 2009, p. 346. In fact, this “comunitarization” of the
national systems in the field of occupational health and safety is based on the convergence
that is intended by the EU legislation. Cfr. AAVV, Manual de Derecho Social de la Unión
Europea, coord. Antonio Costa Reyes, Tecnos, 2011, p. 369.
In fact, in Portugal we depend so much of the EU instruments that we have no
Occupational Health and Safety Strategy for the years of 2013-2014, as the previous ended
in 2012 and the next one will be issued for the period of 2015-2020.
12 This idea is developed by SARA BRIMO, L’État et la protection de la santé des
travailleurs, Lextenso Éditions, Paris, 2012, pp. 160-163.
204 work, supporting best practices, social dialogue and corporate social
responsibility. The idea that the well-being should not only be achieved by
the absence of accidents or illnesses, but also through complementary
measures, such as reducing such professional contingencies, preventing
them, taking into account the aging of the population and the protection of
young people at work, considering new forms of work organization and
meeting the particular problems of SME’s. It was then determined that
Community law was necessary for the improvement of working conditions,
and guides for the application of the Directives were created.
Later comes the Community strategy on health and safety at work
for 2007-201213, with the aim of improving the quality and productivity of
work, intending to reduce accidents, and supporting the idea that health at
work improves public health in general, increases the viability of social
security systems, as it decreases work accidents and occupational diseases,
but also improves the productivity and competitiveness of enterprises,
reducing costs14. The six key issues were: creating modern and effective
legislation, adapted to the evolution of the labour market; creating national
strategies and coordinating occupational health policies with public health
policies; promoting behavior changes through training and encouraging
companies by reducing contributions or insurance payments; considering the
emerging risks, such as depression, promoting health at work, preventing
violence, moral harassment and stress; collecting statistical data; and, finally,
promoting safety and health at the international level by strengthening
cooperation with third countries and international organizations.
Due to the principle of subsidiarity, there are shared powers
between the Member States and the EU, and it is up to the Member States to
implement certain goals, and up to the EU to intervene when they are not
sufficiently achieved. However, the diversity of social systems and the fear of
Member States to give up on their sovereignty in the social issues have
hindered the development of this field. There is, therefore, an intervention
of the European Parliament and the European Council at a normative level,
but also with non legislative instruments, aiming cooperation, development
of exchanges of information and best practices, studies, statistics, initiatives
for guidance and directions, and exchange of practices.
But the legal doctrine understands that the EU’s legislation should
be simplified in order for its contents to be better identified, interpreted and
European Parliament Resolution of 15-01-2008 on the Community strategy
2007-2012 on health and safety at work (2007/2146 (INI)), published in the Official Journal C
41E/03 of 19-02-2009.
14 MARÍA DEL MAR ALARCÓN CASTELLANOS, «Marco general de la
estrategia comunitaria de salud y seguridad en el trabajo (2007-2012) y su protección en
España», Cuestiones actuales sobre Derecho Social Comunitario, Ediciones Laborum, Murcia, 2009,
p. 301. On the costs of occupational health standards and damages to the countries’
economies, cfr. Jean-Michel SERVAIS, International Labour Law, Wolters Kluwer, Alphen
aan den Rijn, 2011, pp. 219 and 220.
13
205
uniformly applied by the Member States, and better adapted to the changing
the labour world, of forms of work organization and technical progress15.
At a national level, until the decade of 1990, the legislation excluded
significant parts of the population (civil servants, agricultural workers,
seafarers, craft work or independent workers) and was aimed at certain
sectors or certain specific risk factors. Moreover, not all risks were identified,
the differences between individuals were not considered (sex, age,
physiological or psychosocial characteristics), the interactions between
different risk factors were not recognized, and emerging risk factors were not
foreseen16.
The regulation focused on the reparation, and only later on it
focused on prevention and on the elimination or reduction of risk factors,
influenced by international legal instruments.
It should be noted that, in what concerns work-related accidents, in
Portugal, the employers are obliged to assign an insurance for each worker,
which is a particularity of our professional contingencies system, that does
not exist in many other European legal systems. Respecting occupational
diseases, the compensation is guaranteed by the Social Security System.
Exception to the civil servants, who are protected by the Social Security
System in both professional contingencies, as the insurances are not
mandatory to the public entities17. It shall be noted that the countries which
transferred responsibility to the Social Security system seemed to have earlier
recognized the costs of insecurity, which encouraged a positive action,
focused on the prevention of accidents, avoiding its consequences and
restoring the working capacity, in case the accident still occurs.
Nowadays, we have several legal diplomas regulating this issue, but
the legislation is changed at the same pace (or a litter later, actually) as the
EU legislates on this issue. Neither new legislative projects are foreseen,
neither the non-legislative instruments are implemented by the national
authorities or signed by national collective entities such as employers’
associations and trade unions.
II. EU STRATEGIC FRAMEWORK ON HEALTH AND SAFETY AT WORK
2014-2020
Occupational Health and Safety is a field of Law where the
stagnation of European Social Law is most being felt, even though it is a
substantial part of the social dimension of the Internal Market18.
AAVV, Lecciones de Derecho Social…, cit., p. 409.
MANUEL M. ROXO, op. cit., p. 37.
17 Cfr. ours «Segurança e saúde no trabalho – particularidades e problemas no
âmbito da Administração Pública», in Estudos em Homenagem ao Professor Jorge Leite, Coimbra
Editora, Coimbra, 2014, 283-306, in press.
18 Occupational health and safety is one of the most important aspects of the
European social policy. AAVV, Lecciones de Derecho Social…, cit., p. 409.
15
16
206 With the end of the programme of the Community strategy for
2007-2012 on health and safety at work, a new community Strategy was
expected.
The European Health and Safety Strategy for the period of 20132020 was approved with delay – and, therefore, named EU Strategic
Framework on Health and Safety at Work 2014-2020 –, as the priority was
given to solving the economic and financial crisis. In fact, Portugal has one
of the highest rates within the EU member states of expectations of major or
some deterioration of health and safety, along with Latvia, Slovenia, Greece,
Estonia and Sweden19.
Finally, the EU Strategic Framework on Health and Safety at Work
2014-2020 was approved in june 2014, and the fear of a throwback that
dominated the legal doctrine was confirmed, as the paradigm of the
adaptation of the work to the worker 20 seems to be changing into the
worker’s adaptation to the work.
The approach is now on the art. 145 of the TFEU, as the work
force must adapt to the companies’ needs. The occupational health and
safety policies were at first diluted on the Strategy of Lisbon and its goals of
growth and competitivity of companies21 and later on positioned at a second
place by the Strategy Europe 2020, that was given priority.
Nevertheless, the Strategy, presented on june 2014, concentrates on
the concept of “healthy and safe working environment” and defines the
following goals: further consolidate the national strategies; facilitate the
compliance with occupational safety and health legislation, particularly by
micro and small enterprises; encourage a better enforcement of occupational
safety and health legislation by Member States; simplify existing legislation;
address the ageing of the workforce, emerging new risks, prevention of
work-related and occupational diseases; improve statistical data collection
and develop the information base; and better coordinate EU and
international efforts to address occupational safety and health and engage
with international organizations.
Cfr. «Workers’ health and safety exposed to crisis», available in
http://www.google.pt/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CFgQFjA
F&url=http%3A%2F%2Fwww.etui.org%2Fcontent%2Fdownload%2F13835%2F113961%
2Ffile%2FChapter%2B6%2BBenchmarking%2B2014.pdf&ei=w6z7U5j3EOzy7Ab74oH4D
A&usg=AFQjCNGZarGsS_5KlhISZk-MdYa42sj5lg&sig2=chX7Pa1GRk0zFcqBRNVJw&bvm=bv.73612305,d.bGQ&cad=rja, consulted 25-08-2014.
20 According to MATTHIEU BABIN, the logic underneath the principles of
occupational health and safety is the adaptation of the work to the worker, understood as
the protection of the health in the center of the work organization. Santé et sécurité au travail,
Éditions Lamy, Rueil-Malmaison Cedex, 2011, p. 31.
21 Cfr. PATRIZIA TULLINI, «La sicurezza sul lavoro tra diritto comunitario e
diritto interno», in AAVV, Diritto privato comunitario, coord. Pietro Perlingieri e Lucia Ruggeri,
vol. II, Edizioni Scientifiche Italiane, Napoli, 2008, p. 242.
19
207
III. EMERGING RISKS
Charles Chaplin’s “Modern Times”, a movie from 1936, pointed
out the risks that a worker, Little Tramp – played by the own Charles
Chaplin – faces in an industrialized world. At a certain point, besides the
physical consequences of his monotonous and repetitive work, he suffers a
nervous breakdown and runs through the factory, driving it into chaos. Back
then he probably didn’t realize it, but Charles Chaplin couldn’t be more
accurate when defining the occupational risks.
The factors that may influence the emergence of new occupational
risks are related to the physical environment, derived from the working
conditions and organization (including the intensification of work, repetition
and monotony, flexible working arrangements, remuneration, new forms of
contracting and precarious contracts), factors related to the interaction of
particular working demands with aspects not associated to work, social
factors (such as the aging of the population, the existence or absence of
social support and economic conditions), factors related to environmental or
geographical working conditions, dynamic and not structural factors,
personal factors (such as the articulation of professional life and family life
and biological factors) and, finally, the factors related to gender.
In fact, due to these and other emerging risk factors, new
occupational risks arise, such as psychosocial risks22, nanomaterial risks23,
aalcohol and drug dependence, among others.
22 The existence of objective labour circumstances as the fragile economic
situation of the company, a negative performance evaluation, work in shifts, among other
risk factors, may cause psychosocial risks with the potential to cause physical, social or
psychological damages in workers. Some of these are burn out, mobbing or moral
harassment, karoshi, syndrome of post-traumatic stress, work addiction, tecnostress, or
"mere" work stress.
23 “(…) Many organisations coincide in their definition of nanomaterials on the fact that they
are materials containing particles with one or more external dimensions between 1-100 nanometres (nm). Up
to 10 000 times smaller than a human hair, nanomaterials are at a size comparable to atoms or molecules
and take their name from their minute structures (a nanometre is 10–9 of one metre). Not only because of
their tiny size but also because of other physical or chemical characteristics that include, amongst others, their
shape and surface area, nanomaterials differ in their properties from the same materials at larger scale.
Because of these differences nanomaterials offer new and exciting opportunities in areas such as
engineering, information and communication technology, medicine and pharmaceuticals, to name but a few.
However, these same characteristics that confer their unique properties to nanomaterials are also responsible
for their effects on human health and the environment. (…) What are the health and safety concerns
associated with nanomaterials? There are significant concerns regarding the health effects of nanomaterials.
The Scientific Committee on Emerging and Newly Identified Health Risks (SCENIHR) found that there
were proven health hazards associated with a number of manufactured nanomaterials. Not all nanomaterials
necessarily have a toxic effect, however, and a case-by-case approach is necessary while ongoing research
continues. The most important effects of nanomaterials have been found in the lungs and include among others
inflammation and tissue damage, fibrosis and tumour generation. The cardiovascular system may also be
affected. Some types of carbon nanotubes can lead to asbestos-like effects. As well as the lungs, nanomaterials
have been found to reach other organs and tissues including the liver, kidneys, heart, brain, skeleton and soft
tissues. As a result of their small size and large surface area, particulate nanomaterials in powder form may
present risks of explosion, whereas their respective coarse materials may not. (…)
208 The EU Strategic framework for 2014-2020 defines these emerging
risks as a challenge and states that “The industrial application of new technologies
leads to new products and processes, which need to be sufficiently tested and checked in
order to ensure that they are safe and do not represent major hazards for consumers and
workers. Nanomaterials are one example, as they may possess unique properties which
may require new toxicity testing methods and risk prediction tools from the product
development phase onwards, to properly consider safety aspects. Other emerging risks
linked to the development of biotechnologies and green technologies need to be addressed
too.”
In what concerns psychosocial risks, it shall be noted that, at a time
when the economic component is widely debated, job dissatisfaction and the
resulting costs have a severe impact on employers and on workers – directly
(on their health) and indirectly (on their productivity and the well-being of
colleagues and family24). Example of this are the high rates of absenteeism25,
demands for changing current working conditions, early retirements26, lower
levels of productivity and performance, deterioration and greater hostility at
the workplace and negative behaviours towards health and safety issues, all
factors contributing to higher accident rates and higher costs for the health
and safety management system27.
Exposure may therefore occur in a variety of occupational settings where nanomaterials are used,
handled or processed and consequently become airborne and can be inhaled, or come into contact with the
skin; for example, in contexts from healthcare or laboratory work, to maintenance or construction work.
(…)”. Available in https://osha.europa.eu/en/topics/nanomaterials/index_html, consulted
in 30-08-2014.
24 On the consequences of workers’ suicide, see ALBERTO VALDÉS
ALONSO, «Informe sobre la valoración de los comportamientos autolesivos y el suicidio
como accidente de trabajo», Gabinete Jurídico de UGT, Convenio de asesoramiento entre la
Confederación de la UGT y la UCM, january 2008, p. 2, available in
http://www.ugtcantabria.org/saludlaboral/informe_comportamiento.pdf, consulted 31-102010. The cost for the relatives may be called as “préjudice par ricochet”, cfr. ANNESOPHIE GINON and FREDERIC GUIOMARD, «Le suicide peut-il constituer un risque
professionnel?», Le Droit Ouvrier, july 2008, p. 367.
25 According to the Portuguese Public Institution for the Working Conditions
(Autoridade para as Condições do Trabalho), psychosocial risks will be the main cause for
absenteeism in 2014. Cfr. http://www.ionline.pt/portugal/stress-violencia-assedio-seraoprincipais-fatores-absentismo-laboral-partir-2014?quicktabs_sidebar_tabs=1, consult. 12-032012.
26 A study concluded in Portugal in 2004 in the banking sector found that the
main consequences of mobbing on workers were: long-term illnesses (11,8%), early
retirement (17,6%), disability pensions (5,9%), change of company (23,5%) and work-related
stress (5,9 %). PAULO PEREIRA DE ALMEIDA, «Assédio Moral no Trabalho.
Resultados de um Estudo», Dirigir, nr. 98, april-may.june 2007, Lisboa, p. 45.
27 M.ª CARMEN DÍAZ DESCALZO, «Los riesgos psicosociales en el trabajo: el
estrés laboral, el síndrome del quemado y el acoso laboral. Su consideración como accidente
de trabajo», Revista de Derecho Social, nr. 17, 2002, p. 184. The World Health Organization
estimates that by 2020, depression will be the main cause of disability at work. García Viña,
«El Moobing [sic] en las Relaciones Laborales en España», Tribuna Social – Revista de Seguridad
Social y Laboral, nr. 223, 2009, p. 15.
209
Among us, Portuguese Health authorities changed the National
Mental Health Programme for 2007-201628, as they figured that the number
of mental diseases and suicides would increase with the financial crises that
the country is facing. Therefore, the Plan envisages the need for
coordination between different institutions on prevention and promotion
initiatives, mostly “employment policies and the promotion of mental health
care in the workplace, in order to reduce and manage the stressors related to
work and unemployment, and leave due to psychological illnesses”,
increasing “awareness and information in various areas, such as (…) the
workplace”.
In 2012, the Portuguese Public Institution for the Working
Conditions (Autoridade para as Condições do Trabalho) concluded the European
Survey on psychosocial risks at the workplace, which allowed us to have
some reports and numbers on these emerging risks. However, the
phenomenon tends to hide within the walls of the companies, and the
workers do not seem to be coping with these risks.
In fact, as happens with other European jurisdictions, the
Portuguese law sanctions moral harassment, one of the most debated
psychosocial risk, in the context of the labour law, and provides the worker a
right to be compensated in the civil terms, for the pecuniary and moral
damages suffered. However, the injuries that cause a disability for work due
to a phenomenon of mobbing in the workplace are not yet considered as
pathologies compensated in the same terms as occupational contingencies
(workplace accidents or occupational diseases). Indeed, although the
Portuguese legal doctrine has been studying the phenomenon of mobbing
for the past years, the case law is still unwilling to accept the compensation
and sanction of these conducts in the same terms as the other EU
jurisdictions have been allowing.
Moreover, besides mobbing, there are different events that the legal
doctrine considers to be psychosocial risks in the workplace, such as stress,
burn out and violence, but the case law is not always willing to recognize
them and compensate their damages to the worker, as a legal framework is
still missing. In the author’s opinion, the Portuguese legal system has
adequate instruments to align itself to other EU countries and compensate
for the consequences of psychosocial risks. However, an examination of case
law shows that some resistance still exists in this matter, and Portugal still
struggles to keep up with the rest of Europe.
Therefore, new challenges are presented to the field of
Occupational Health and Safety, especially in what concerns emerging risks
such as psychosocial risks, as the case law shall decide whether they will look
at the concrete case and decide regardless of the legal framework, or if this is
mandatory. In the meanwhile, the EU is challenged to present instruments
28 Resolution of the Ministers Counsel nr. 49/2008, published on the Diário da
República, 1st series, nr. 47, from 06-03.
210 that guide the Members States in these issues and that offer concrete
solutions to these problems that arise in each Member State.
In what concerns emerging risks, the Strategic Framework for
2014-2020 was a disappointment (for those who still expected some good
news).
It referred to the prevention of emerging risks as a challenge,
stating that “While many new technologies and innovations in work organisation have
substantially improved well-being at work and working conditions, effective prevention of
work-related diseases requires anticipating potential negative effects of new technologies on
workers’ health and safety. (…) Changes in work organisation brought about by
information technology developments, in particular those that allow for constant
connectivity, open up enormous possibilities for flexible and interactive work processes.
There is also increasing workforce diversity, as reflected in new atypical contractual
arrangements and work patterns, and a higher job turnover associated with shorter job
assignments, especially for younger workers. However, according to a recent Eurobarometer
survey, workers consider stress to be one of the main occupational risks (53%), followed by
ergonomic risks (repetitive movements or tiring or painful positions (28%)) and lifting
carrying or moving loads on a daily basis (24%). Specific attention should be given to
addressing the impact of changes in work organisation in terms of physical and mental
health. (…)”.
But when it comes to setting goals to react to these challenges, the
document defines the following “changing technologies, new products and the
marketing of new chemicals make it necessary to gather and evaluate sound scientific
evidence, to identify how emerging new risks can best be addressed. The EU institutions,
particularly the Commission, should mobilise the highest quality expertise available to
work on this. (…) The assessment of new emerging risks, based on scientific evidence, and
dissemination of the results will be crucial parts of the ex post evaluation of current OSH
legislation”.
In what concerns the concrete actions that will be executed, it
predicts, among others, the establishment of “a network of OSH professionals
and scientists and ascertain the need to set up an independent scientific consultation body
that would channel their recommendations into the work of the Commission Commission;
support the dissemination of the findings of the European Risk Observatory among the
relevant actors → Commission in cooperation with EU-OSHA; (…) identify and
disseminate good practice on preventing mental health problems at work → EU-OSHA”.
Therefore, even though studies are predicted, what seems to fail is
the execution of the conclusions which are reached in the meanwhile, the
prediction of plans of action, the creation of legislation or other instruments
that encompass the conclusions that are reached. In fact, in our opinion,
even though it is a very important step in order to eliminate the problem, it is
not sufficient to recognize it, identify its sources and causes and share the
findings which were reached.
211
IV. BROADER CONCEPTS
At first, the concept of “health” was defined as the state of the
person whose functions are in normal state or undisturbed by any disease;
the condition of person who is sound, or the absence of disease; the
individual's ability to carry out its normal functions29.
However, nowadays, there was a redefinition of the term, which has
a much broader meaning.
In fact, the World Health Organisation defines “health” as a state
of complete physical, mental and social well-being30.
The ILO Convention nr. 155 defines it not only as the absence of
disease, but also refers to physical and mental elements that may affect health
and are directly related to safety and hygiene at work (art. 3. subp. e)).
Therefore, “occupational health” not only includes the medical surveillance,
targeting the absence of disease or infirmity, but also includes promoting and
maintaining the highest degree of physical, mental and social well-being31 of
workers in all occupations.
The International Pact on economic, social and cultural rights,
adopted in December 16th 1966 by the UN, recognises at art. 12 the right of
every person to benefit from the best state of physic and mental health that
is possible.
GONZALEZ ORTEGA states that the concept has a dynamic
character, complex and comprehensive, encompassing the safeguard of life
and physical and moral integrity of the worker32.
The broader concepts of health adopted by the World Health
Organization, as well as the ILO’s Conventions, seem to be most suitable to
solve the worker’s problems and enables a wider comprehension of
occupational health and safety.
In fact, nowadays, new concepts are presented, such as “working
environment”33, “decent work”34, “healthy working environment”35, concepts
29 MARÍA TERESA IGARTÚA MIRÓ, Sistema de Prevención de Riesgos Laborales, 2ª
ed., Tecnos, Madrid, 2011.
30 Cfr. the World Health Organization report “The World health report 2001.
Mental Health: new understanding, new hope”, published october 4th 2001, available in
http://www.who.int/whr/2001/en/whr01_po.pdf, consulted 15-12-2014.
31 Stressing the importance of protection of the worker’s well-being in the
productive environment, cfr. PATRIZIA TULLINI, op. cit., p. 246.
32 SANTIAGO GONZÁLEZ ORTEGA, «Seguridad y salud en el trabajo», in El
Estatuto de los trabajadores veinte años después, Edición especial del número 100 de Revista
Española de Derecho del Trabajo, Civitas - Revista Española de Derecho del Trabajo, 2000, 555573.
33 As happens in the EU Strategic Framework on Health and Safety at Work
2014-2020, presented by the Communication from the European commission to the
European Parliament to the European Council and to the European Economic and Social
Committee and the Committee of the Regions.
34 Which, as states MARÍA AMPARO BALLESTER PASTOR, is a less
complete concept than the one of “dignified work” («La política de la OIT y de la Unión
212 that were primarily presented by the ILO Convention nr. 155, but were
accepted by the EU Framework Directive36 and recently renewed by the EU
Strategic Framework on Health and Safety at the workplace 2014-2010.
The European Court of Justice (ECJ) case law is clear stating that
the concepts of “working conditions”, “safety” and “health” should not be
construed narrowly. In the case C-84/94, United Kingdom of Great Britain
and Northern Ireland vs Council of the EU, the Court concluded that “There
is nothing in the wording of Article 118a to indicate that the concepts of "working
environment", "safety" and "health" as used in that provision should, in the absence of
other indications, be interpreted restrictively, and not as embracing all factors, physical or
otherwise, capable of affecting the health and safety of the worker in his working
environment, including in particular certain aspects of the organization of working time.
On the contrary, the words "especially in the working environment" militate in favour of a
broad interpretation of the powers which Article 118a confers upon the Council for the
protection of the health and safety of workers. Moreover, such an interpretation of the
words "safety" and "health" derives support in particular from the preamble to the
Constitution of the World Health Organization to which all the Member States belong.
Health is there defined as a state of complete physical, mental and social well-being that
does not consist only in the absence of illness or infirmity”37. According to NICOLE
MAGGI-GERMAIN, this broad concept that results from the EU case law
is transversal, and may be used in several thematic areas38.
In fact, the concept of “working environment” might be nowadays
close to the concept as it is foreseen in Danish law, as encompassing not
only “classic measures relating to safety and health at work in the strict sense, but also
measures concerning working hours, psychological factors, the way worked is performed,
training in hygiene and safety, and the protection of young workers and worker
representation with regard to security against dismissal or any other attempt to undermine
their working conditions. The concept of «working environment» is not immutable, but
reflects the social and technical evolution of society”39. The Advocate General in the
Europea sobre salud y riesgos psicosociales», in AAVV, Violencia, riesgospsicosociales y salud en el
trabajo. Estudios desde el derecho internacional y comparado, dir. Lourdes Mella Méndez, Adapt,
2014, p. 330).
35 Cfr. ILO Convention nr. 187 concerning the Promotional Framework for
Occupational Safety and Health, adopted in 2006.
36 Cfr. SUSANA DE LA CASA QUESADA; MANUEL GARCÍA JIMENEZ;
CRISTÓBAL MOLINA NAVARRETE, Regulación de los riesgos psicosociales en los ambientes de
trabajo: panorama comparado de modelos y experiencias en Europa y América, Editorial Bomarzo,
Albacete, 2011, p. 166.
37 All ECJ decisions referred to hereinafter may be consulted in www.curia.eu.
38 NICOLE MAGGI-GERMAIN, «Travail et santé: le point de vue d’une
juriste», Droit Social, nr. 5, may 2002, p. 488.
39 Advocate General in the case C-84/94, United Kingdom vs Council of the EU,
apud ROGER BLANPAIN, European Labour Law, Kluwer Law International, The Hague,
2006, p. 577.
213
case C-84/94, United Kingdom vs Council of the EU, states that the terms
“safety and health” shall, in consequence, be given a broad interpretation40.
In what concerns the concept of “risks”, the ECJ already clarified
that the obligations under the Framework Directive are not fulfilled when
the national legislation does not establish the obligation of the employer to
assess all risks in the workplace. On the case C-49/2000, Commission vs
Italy, the ECJ concluded that “It must be noted, at the outset, that it follows both
from the purpose of the directive, which, according to the 15th recital, applies to all risks,
and from the wording of Article 6(3)(a) thereof, that employers are obliged to evaluate all
risks to the safety and health of workers. (…) It should also be noted that the occupational
risks which are to be evaluated by employers are not fixed once and for all, but are
continually changing in relation, particularly, to the progressive development of working
conditions and scientific research concerning such risks”.
Especially in what concerns psychosocial risks, “suffering at
work”41 or “mental health at work”42 are considered by the legal doctrine to
be more appropriate to define this phenomenon.
The truth is that the difficulty to categorize brings problems to
legislate, as it is hard to regulate a phenomenon that one cannot define and
which borders are not precise43.
This problem is not new in the field of occupational health and
safety. In fact, many national systems are mixed in what concerns
occupational diseases: some diseases are listed in a legally prescribed and
periodically reviewed table (at this point, in Portugal, the Regulamentar Decree
nr. 6/2001, 05-05, republished by the Regulamentar Decree nr. 76/2007, 1707), where a presumption of causation works (between catching the disease
and the nature of the work), and shall be referred to as typical occupational
diseases, while those not listed shall be entitled work diseases or atypical
occupational diseases, and are the ones which are proven to have a causal
link – exclusive, in the case of the Portuguese legislation – to the working
activity (in Portugal, para. 2 of art. 94th of the Law nr. 98/2009, 04-09, that
regulates the regime for the compensation of the work-related accidents and
occupational diseases and para. 3 of art. 283rd of the Labour Code). This
means that the national legislators recognise that not all occupational
diseases may be predicted, and that there shall exist a broader concept that
may embrace pathologies that were not predicted by the legislator.
Thus, it seems that in this field of Law the interpretation of the
concepts must be broad, in order to embrace all (unpredictable) changes in
the labour world.
Ibidem.
According to PIERRE-YVES VERKINDT, the suffering at work is the
worker’s individual situation placed in working conditions (material, psychological and
relational) that cause him a permanent degradation of his self-image. «Un nouveau droit des
conditions de travail», Droit Social, nr. 6, june 2008, p. 642.
42 LOÏC LEROUGE, «Les "risques psychosociaux" en droit: retour sur un terme
controversé», Droit social, nr. 2, february 2014, p. 155.
43 Ibidem, p. 156.
40
41
214 V. LEGISLATIVE OR HARD LAW MODEL OR A SELF-REGULATION OR
SOFT LAW MODEL?
Art. 156 of the TFEU encourages cooperation and coordination of
the Member States’ policies in what concerns social security, working
conditions, safety at work, protection against accidents at work and
occupational diseases. It demands a proactive role of the Commission and a
shared competence between the EU and the Member States, hence, the
application of the principle of subsidiarity. As the initiatives are supposed to
be completed by the Member States, it is an expression of soft law, an open
method of coordination44.
In any case, is it preferable, in this matter, to have a legislative or
hard law model, or, on the contrary, a self-regulation or soft law model45?
While Venezuela, Colombia, Chile 46 , Sweden, Finland, Belgium,
France and Canada rely on specific legislation to the development of
prevention and reparation of the psychosocial risks, and on the contrary, EU
(with the specifications already referred) and Australia are based on selfregulation (codes of conduct, formative policies, no tolerance compromises,
among others), and Argentina and Brasil have decentralized regulation,
varying according to each territory, as a global national consensus could not
be reached47.
Even though the risks have emerged at the same time in most of
the referred countries, and although they have a generic common legislative
system, nationally they have different occupational risks management
policies, especially in what concerns psychosocial risks. While in some case
the regulation is specific (especially regarding moral harassment), in others it
is quite generic (especially referring to other psychosocial risks); moreover,
on one hand, some regulation focuses on prevention, whilst other
emphasizes the reparation48.
The discussion is on how specific legislation is capable of
adaptation to the new risks and risk factors, or whether a model of auto 44 AAVV, Tratado de Lisboa. Anotado e comentado, coord. Manuel Lopes Porto,
Gonçalo Anastácio, Almedina, 2012, p 679.
45 About both the models on the subject of psychosocial risks, see SUSANA DE
LA CASA QUESADA; MANUEL GARCÍA JIMENEZ; CRISTÓBAL MOLINA
NAVARRETE, op. cit., pp. 127 a 140.
46 It shall be pointed out that there is an agreement named “Iberoamerican
Strategy of health and safety at work” for the period of 2010-2013, that applies not only to
the Latin America and Caribbean countries, but also to Spain and Portugal. Cfr. JOAQUÍN
NIETO SÁINZ, «La salud y seguridad en el trabajo desde la perspectiva de la OIT», in
AAVV, Salud en el trabajo y riesgos laborales emergentes, coord. María del Carmen Grau Pineda,
Editorial Bomarzo, Albacete, 2013, p. 174.
47 SUSANA DE LA CASA QUESADA; MANUEL GARCÍA JIMENEZ;
CRISTÓBAL MOLINA NAVARRETE, op. cit., p. 8.
48 Ibidem, pp. 8 and 9.
215
regulation, based in the regulation and management through the social
actors, is more favorable to that adaptation, corresponding to the pretended
model of “flexisecurity”. We shall recognize that the labour relationships are
usually open to instruments of self-regulation (in this case, regulation by the
actors to the labour relationship: employer and employee), which are
inclusively highly encouraged by the national Constitutional legislator. In
fact, collective bargaining instruments allow a better updating and
adjustment of preventive measures to the changes in the production system,
technology innovations and emergence of new risks, as well as a more
efficient adaptation to the particularities of the specific business activity or
the concrete company49.
As one may assume, the collective bargaining is an important way
of regulating labour relationships, even though in Portugal its importance has
been decreasing recently50, and has never had an important relevance in what
concerns occupational health and safety51. In any case, it is important to
debate the role of collective and individual bargaining, discussing whether we
are facing a phase of evolution for a system of Codes of conduct and Best
Practice Codes system52, or the prediction of general duties of care. In any
case, this system could be mitigated by the definition of minimum national
standards and limits.
In fact, in what concerns emerging risks, there are already some
expressions in the European instruments: the European framework
agreement on work-related stress, of October 8th 2004, signed by the social
partners (trade unions and employers), defining work related stress and with
the aim “to increase awareness and understanding of work-related stress amongst
employers, workers and their representatives” 53 , and the European framework
agreement on harassment and violence at work, of april 26th 2007, suggesting
that companies should stipulate the procedures to follow in case there is one
of such hypotheses, and determining what principles should underlie those
procedures.
However, there was no follow up from the EU to those
agreements, and most of the Member States did not implement them
MANUEL ROXO, op. Cit., pp. 135 and 136.
Cfr. the opinion of Professor JORGE LEITE available in
http://www.ionline.pt/artigos/portugal/jorge-leite-considera-alteracoes-ao-codigotrabalho-nao-respeitam-constituicao, consulted 01-09-2014.
51 PAULO MARQUES ALVES, LUÍS GONÇALVES; «A negociação colectiva
e a regulação das matérias relativas à segurança e saúde no trabalho (SST)», in IV
Conferência Investigação e Intervenção em Recursos Humanos – os novos contextos da
Gestão de Recursos Humanos, Escola Superior de Ciências Empresariais do Instituto
Politécnico de Setúbal, january 28-29th 2013, p. 5, available in https://repositorio.iscteiul.pt/bitstream/10071/5338/1/Com_Paulo_Marques_Alves_A_negociacao_colectiva_e_a
_regula%c3%a7%c3%a3o_da_SST.pdf, consulted in 13-09-2014.
52 CLAUDE-EMMANUELTRIOMPHE, «I paradossi dell’Europa sociale
attraverso la regolazione dei rischi psico-sociali», Lavoro e Diritto, XXVI, nr. 2, 2012, p. 197.
53 ROGER BLANPAIN, op. cit., p. 585.
49
50
216 nationally, either by a legislative way or by a collective bargaining
instrument54.
Furthermore, it is not possible to assess whether the EU has not
regulated, as it had predicted 55 , because it was not possible to reach a
consensus, or as a deliberate option not to legislate.
Besides that, the courts tend to refuse to applicate any instruments
that are not legally binding and concepts that are not sufficiently defined.
The EU Strategic Framework on Health and Safety at Work 20142020 defines as a strategic goal the simplification of the existing legislation,
eliminating unnecessary administrative burden, especially for micro and small
enterprises. However, even though the paperwork and administrative demands
may be loosened and the financial duties may be lighter, that does not mean
that the requirements for health and safety are less demanding (art. 9, parag.
2 Framework Directive). The ECJ case law already determined that the
Member States may adopt different rules for the different enterprises, but
may not exempt them from the documentation obligation – cfr. Case C5/00, European Commission vs Germany. The same happened in the case
C-428/04, between the Commission and Austria, as the ECJ stated that the
exemption of companies with less than five workers from the obligation of
designating a worker responsible for first aid, fire-fighting and evacuation of
workers. The Court clarified that the measures can be adapted to the
dimension of the company, but the designation of a worker is mandatory
(art. 8 nrs 1 and 2 of the Framework Directive).
Therefore, the example given by this case law clarifies that the
challenge is to conclude whether the simplification of the legislation will
bring a higher level of protection – because it will encompass non predicted
situations – or if it will, on the contrary, lead to a feeling of absence of
regulation and impunity, and therefore, to different regulations in each
Member States, as it corresponds to an absence of regulation and supervision
by the EU and, therefore, a reflex of the crisis of the Social State56.
54 ANTONIO OJEDA AVILÉS states that the effort that the companies would
have to do to implement those agreements may have hazarded their support from the
community authorities. Op. cit., p. 213.
55 At a certain point, the discussion was on the extension of the Framework
Directive to the phenomenons like harassment, or the creation of a new Framework
Directive. Cfr. BIANCA MARIA ORCIANI, «La tutela della salute e della sicurezza nei
luoghi di lavoro: uno sguardo di genere alle fonti dell’UE», Rivista Italiana di Diritto del Lavoro,
LXIV, 2013, I, p. 450.
56 SUSANA DE LA CASA QUESADA; MANUEL GARCÍA JIMENEZ;
CRISTÓBAL MOLINA NAVARRETE, op. cit., p. 128.
217
VI. CONCLUSION: IS «LEGAL GLOBALIZATION» THE SOLUTION FOR THE
DISORIENTATION OF OCCUPATIONAL HEALTH AND SAFETY LAW?
Even though the broader concepts of the ILO’s Conventions shall
be adopted, and although the international organizations such as the EU
have followed paths of soft law, which could help us conclude that the
answer to the disorientation of occupational health and safety law might be
global, there are yet some points to analyze and doubts to clarify.
In fact, even though there are common legislative instruments in
what concerns professional risks, the legal doctrine wonders why there are so
many differences among the different countries in the regulation and
execution of the health and safety issues, especially in what concerns
emerging occupational risks57.
The problems which we have been referring to have yet no solution
pointed by the legal doctrine or defined by the political authorities and
legislators. The truth is that the EU’s strategy of creating a Framework
Directive and subsequent specific Directives has not been able to create an
unique model to face the emerging risks, and specially to applicate and
execute the national plans and strategies.
Therefore, a transnational model that was intended to be a guide, an
orientation with the indication of the common principles that were supposed
to be accomplished and implemented by the Member States, has been
constantly challenged and not yet been executed, as the ECJ’s case law may
evidence.
The central point is the following: to take a step forward won’t we
have to take a step back? Ie, even though the existing legislation seems
sufficient in what concerns prevention, the legislative forecast – or, at least,
its interpretation by the executors of law - does not seem to be satisfactory in
what refers to execution of the prevention measures and reparation.
And the "step back" we appeal to is in fact a return to the historical
origins of the law of occupational health and safety: the specific regulation,
the regulation under the perspective of repairing the consequences of the
occupational risks to the ability to work and gain of the workers, the
prevision of concrete sanctions in case of breach.
Our work will continue to try to answer the following questions: is
the national legal framework sufficient to protect emerging occupational
risks? If so, does it protect them properly and sufficiently? Does it meet the
transnational demands in this regard? Have the courts and social partners
been able to meet the challenges that are being placed in this area? Is it
possible and desirable to continue to rely on transnational regulation? Is it
necessary to transcend the European legal boarders and seek for answers in
the international organizations such as ILO?
The EU Strategic Framework on Health and Safety at Work 20142020 defines the better coordination of EU and international efforts to address
57
Ibidem, p. 7.
218 occupational safety and health and engage with international organisations as a strategic
goal. This document refers to “cooperation with the competent international bodies”,
and development of bilateral cooperation, recognising ILO’s role, such as
the Organisation for Economic Cooperation and Development and the
World Health Organisation’s.
However, we seem to be witnessing a transformation that leads to a
certain leadership of the society and companies58 to the detriment of the role
of the State and the EU59, institutions which are resigning from their role as
guarantors of occupational health and safety.
Therefore, are we facing a certain convergence of both systems into
a system of limited autoregulation or social autoregulation, ie, a system where
the autoregulation is limited by the transnational legal principles, which
permits the desired adaptation and flexibility that is demanded by
economical rationality, and the minimum social standards required by the
society as a whole, represented by the legislator, as a manifestation of the
ethical rationality (expression of social values of justice) and the social
rationality (compromise with traditions and daily needs)60? Or do we need a
third model, one that legal doctrine denominates as “promotional regulative
model”61, as a recognition that the mere indication of general principles is
not sufficient, but the technical and specific procedures must be defined by
the private parties?
In any case, the author’s opinion is that legal globalization – at least
as it has been implemented – is not the solution for the disorientation of
Occupational Health and Safety Law, as the concept of global law is still
unable to encompass the national singularities.
Actually, this seemed to be the path followed by Robbens in the Report he
wrote in 1972 that would be the basis for Health and Safety at Work Act, of 1974 and as well
to some EU such as the Framework Directive. Cfr. FERRÁN CAMAS RODA, La normativa
internacional y comunitária de seguridad y salud en el trabajo, Tirant lo Blanch, Valencia, 2003, p. 58.
59 Cfr. the criticism of CLAUDE-EMMANUELTRIOMPHE, stating that soft law
presents limitations and, therefore, the project of a Directive regulating ergonomy and stress
could bring an important contribute, as well as European Strategy for occupational health
and safety 2013-2017. Vd. «I paradossi…», cit., p. 197.
60 SUSANA DE LA CASA QUESADA; MANUEL GARCÍA JIMENEZ;
CRISTÓBAL MOLINA NAVARRETE, op. cit., p. 132.
61 Ibidem, pp. 179 e ss’.
58
219
220 EUROPEAN CRIMINAL LAW AS A “LAST OBSTACLE” IN THE
GLOBALIZATION OF LAW WITHIN THE EUROPEAN UNION
Petr Zarivnij
Masaryk University, Faculty of Law
ABSTRACT
The article is focused on the issue of “European criminal law” as an
area that is not too favourable to the process of globalization of law within
the European Union.
The number of European legal acts, which directly or indirectly
influence different legal areas in Member States, is constantly increasing. Very
strong influence of European law is evident for example within the areas of
administrative, financial or environmental law. However, there are also legal
areas where the powers remain in the hands of the Member States as much as
possible. Criminal law occupies a specific position, which makes it clear that
the influence of national standards by external elements has its limits.
Moreover, the right to punish criminal offences is derived from the
sovereignty over a territory and it belongs to the sovereign – which has
traditionally been the sovereign state and not an entity with delegated powers.
However, national criminal law cannot completely avoid exposure of
European law.
The aim of the article is to demonstrate that although there is a strong
process of globalization of law within the European Union, there are still
legal areas that resist this “trend”. Nevertheless, Member States cannot be
completely immune to the exposure of European criminal law. Therefore
specific areas with interaction of national and European criminal law are
discussed as well, particularly in the area of frauds with financial funds of the
EU.
221
I. INTRODUCTION
The article should answer the question arising already from the title
itself – is it? Is the European criminal law really the “last obstacle” in the
globalization of law within the European Union?
Contemporary world is witnessing the globalization of law. And since
this article is focused on the issues that arise within the EU, the term
“globalization” will be replaced by “Europeanization”, which is from my
point of view kind of the globalization of law, only limited in the area of the
European Union.
European Union is a specific environment. And as such, it has to deal
with specific problems. For example free movement of persons also means
increased mobility of serious crime. However, one of the most important
objectives for the EU is to guarantee the security and safety to its citizens.
Therefore the EU had to develop the area of law with specific options how
to punish offenders who commit cross-border crime.
EU criminal law could be considered as one of the fastest growing
areas of EU law. On the other hand, the existence of European criminal law
is conditioned by quite a significant weakening of state sovereignty of
individual countries in favour of the Union. The development of the EU
criminal law has also a significant impact on the protection of fundamental
rights. And these are just some of the obstacles that the European criminal
law has to deal with.
The article is primarily focused on the nature of the European
criminal law. In particular, it will be examined whether the area of criminal
law can still be seen as the one that resist to the Europeanization of law. The
whole concept of Europeanization of law in general and Europeanization of
criminal law in particular, as well as the development of European criminal
law, will be briefly introduced for better understanding of what is currently
going on within the legal framework in the EU.
It will also be discussed if the sovereignty of the Member States still
means the “privileged position”, or if it is nowadays just an empty concept.
In relation with the character of European criminal law, the issue of human
rights, which represents one of the cornerstones of the Europeanization of
criminal law, will be mentioned as well.
The article does not forget to reflect current developments in the area
of European criminal law, as well as the harmonization of criminal offences
and sanctions under the scope introduced by the Treaty of Lisbon.
The last part of the article is devoted to the issue of protection of the
financial interests of the EU and the possibility of the establishment of the
European Public Prosecutor’s Office, which could be seen as the means for
significant harmonization of criminal law within the Member States of the
EU.
222 II. EUROPEANIZATION OF LAW
The European Union comprises countries with strong political,
economic and cultural identities, as well as legal traditions. It was not always
easy to combine these diverse elements together. But as time went on, the
EU itself has developed into a legal order sui generis, with its own
constitutional framework, which also has implications within the area of
criminal law. Just to remember, European law has been created by
transferring powers from Member States to the EU.
The concept of Europeanization could be seen as a process, when
specific subject is transformed (or just strongly influenced) from “national”
to “European”.1 It means that the term Europeanization has replaced the
term “globalization” in a European environment.
With its specific formation and degree of complexity,
Europeanization could be considered as the most important feature
connecting legal systems of EU Member States. In fact, it represents an
integration of European legal thinking into the development of the national
legal systems.2
However, there are significant differences between the areas of law,
where a portion of powers have been delegated to EU bodies. For example
administrative, financial or environmental law can be considered as highly
influenced. On the other hand, there are also areas where Member States still
hold their sovereignty, such as criminal law.
III. EUROPEANIZATION OF CRIMINAL LAW
The creation of economically integrated Europe, based on free
movement across open borders, has also stimulated growth of transnational
crime. Nowadays it is considered that there is free movement of goods,
persons, services and capital, but also crime and criminals.
So if the Europeanization could be seen as a process, when specific
subject is influenced by European law, then Europeanization of criminal law
is a process of harmonization of national criminal standards of European
countries. Such a harmonization is primarily the outcome of joint actions
taken by Member States. As a result, rules of European criminal law are then
those that EU Member States share in order to better fight crime in general,
and organized crime in particular.
The structure of criminal law system at the EU level is inspired by the
model of the national criminal justice systems. This could be explained by the
fact that EU has developed upon the legal traditions of the Member States.
For the purposes of this article, these specific subjects are the rules of criminal
legal systems of EU Member States.
2 Tomášek, M. et al: Czech Law Between Europeanization and Globalization. Prague:
Karolinum, 2010, p. 207.
1
223
At the same time, part of the norms of the national criminal justice system is
affected by EU legislation.
The globalization (or Europeanization) of criminal activities is
important factor for further cooperation amongst police and judicial
authorities. Although for example the creation of something like a “European
criminal law code” will be almost impossible. Such an approach suggests
extensive harmonization of national substantial and procedural criminal law
systems. And that will be probably quite unpopular amongst the Member
States, because it will directly influence one of the last privileged positions of
the Member States – the sovereignty.
It means that any decision, taken by the EU institutions, towards
Europeanization of any of the aspects of criminal law is immediately exposed
to the suspicion of limiting national sovereignty. Therefore, in relation to
criminal law, European lawmakers must constantly hide their efforts behind
unquestionable values such as the rule of law, democratic decision-making
process or the protection of fundamental rights and freedoms. Only due to
these principles, it was able to achieve at least minimum harmonization in the
field of criminal law in recent years, which would be otherwise very difficult.
Nevertheless, significant progress has occurred with the Treaty of
Lisbon, when law enforcement cooperation in criminal matters became an
area of shared competences of the EU and the Member States.3
IV. DEVELOPMENT OF EUROPEAN CRIMINAL LAW
The question that appears in connection with the term “European
Criminal law” is, whether such discipline or category exists at all. The terms
“European Criminal Law” and “Europeanization of Criminal Law” have long
been rather vague and clear definition and explanation of both terms was
difficult to find. Nevertheless for the purposes of this paper (and how I see
that), European criminal law is a reality. Especially, taken into account the
progress in this area during the last decade (when a significant amount of
national legal rules have been “Europeanized”). The Europeanization was
present in many cases within substantial as well as procedural law – European
integration in criminal matters ran via the establishment of bodies, offices
and agencies such as Eurojust, Europol or European Judicial Network; EU
databases that are used by police and justice authorities were established;
European Arrest Warrant is also commonly used... There is no longer the
possibility to close the eyes before European criminal law – it is a reality and
its importance is increasing.
It is not necessary, nor is the aim of the contribution, to recall all the
steps that have led to the formation of EU criminal law. Nevertheless, I
To be more accurate, the Treaty of Lisbon was not the first legislation
providing the possibility to harmonise criminal law. It was for example already the Treaty of
Amsterdam (although only the substantial harmonization was possible, as well as only in the
areas of terrorism, organised crime and illicit drug trafficking).
3
224 would like to briefly summarize that from the seventies to the end of nineties,
the development of criminal law within the European Community was based
on procedural mechanisms, such as improving the cooperation of judicial and
police authorities across the Member States. This effort was encouraged with
the idea of effective combating terrorism and organized crime. The need to
affect criminal law by European rules was originally meant as the expression of the common
will that some types of conduct should be criminalized in the legal systems of all EU
Member States.4 At a later stage of the development, there was a progressive
move towards minimum harmonization (in order to introduce the mutual
recognition of judicial decisions).5
The European Union experienced four major revisions (and several
minor ones) to its constitutional text in two decades. Specifically the
Maastricht Treaty (1992), the Amsterdam Treaty (1997), the Nice Treaty
(2001), and the Treaty of Lisbon (2007). Above that, accompanying
development has seen the adoption of additional programmes that
contributed to its “area of freedom, security and justice” – Tampere, the
Hague, Stockholm and recently the “Post-Stockholm” programme.
With the Treaty of Lisbon, the three former pillars were merged into
one. Therefore criminal law issues were transferred from the former Third
Pillar to the First Pillar – or rather the one and only remaining.6 The Treaty of
Lisbon changed the EU constitutional framework by not only abolishing the
pillar structure, but also by “supranationalising” new areas. It could be said
that with its Articles 82 and 83, the Treaty on the Functioning of the
European Union (TFEU) opened up a new chapter in the history of
Europeanization of EU criminal law.7
So since the entry into force of the Treaty of Lisbon, the EU has new
competences to adopt legislation in the field of substantive criminal law.
Based on the Article 83 of the TFEU, European Parliament and the Council
are able to establish minimum rules concerning the definition of offences and sanctions in
the areas of particularly serious crime with a cross-border dimension resulting from the
nature or impact of such offences or from a special need to combat them on a common basis.
Article 83 (1) of the Treaty itself lists the following areas of crime: terrorism,
trafficking in human beings and sexual exploitation of women and children,
illicit drug trafficking, illicit arms trafficking, money laundering, corruption,
counterfeiting of means of payment, computer crime and organised crime. In
See Tomášek, M. et al: Czech Law Between Europeanization and Globalization.
Prague: Karolinum, 2010, p. 240.
5 More on the development of European criminal law during the last decades:
Nilsson, H., G: 25 Years of Criminal Justice in Europe. European Criminal Law Review, Vol. 2,
Number 2, 2012, p. 106.
6 For more about the challenges for the future development of criminal law
brought by abolition of the three-pillar structure: Asp, P: European Criminal Law –
Challenges for the Future. In: Bergström, M., Cornell, A. J: European Police and Criminal Law
Co-operation. Oxford: Hart Publishing, 2014, p. 53.
7 See for example Herlin-Karnell, E: The Development of EU Precautionary
Criminalisation. European Criminal Law Review, Vol. 1, Number 2, 2011, p. 150.
4
225
addition, the list may be extended by the Council “on the basis of developments in
crime”. Member States are subsequently required to criminalise such offences.
Increasing importance of European criminal legislation can be also
seen in the form of legal acts. Before Lisbon, criminal justice legislation
usually took the form of Framework Decisions (agreed by unanimity in the
Council, with a duty to consult with European Parliament) and there was no
sanction at EU level on a Member State that failed to implement a
Framework Decision. But the Treaty of Lisbon changed this situation.
Criminal justice legislation now takes the form of Directives (agreed by
qualified majority voting in the Council and co-decision with the European
Parliament), which are binding in all Member States.8
V. “SPECIFIC CHARACTER” OF CRIMINAL LAW – QUESTION
OF SOVEREIGNTY
Criminal law can be considered as an extremely sensitive part of
national law, not only because it involves ultimate power of the state, such as
to arrest and punish individuals. But at the same time, crimes have become
international, when criminals use the open borders for their own criminal
activities. Therefore, the Member States are forced to cooperate in efficient
fighting crime.
European criminal law is nowadays probably the fastest-growing area
of EU law – both as to the legislative acts and case-law. On the other hand, it
also presents a challenge to State sovereignty and brings new constitutional
challenges. This situation raises questions about the relationship between the
state and the individual, the role of the Court of Justice of the EU as well as
the role of the EU itself. In fact, European criminal law is significantly
reconfiguring the relationship between the Member States and the EU.
As mentioned for example by Mitsilegas, a number of recurring
themes always accompany the discussion about the development and content
of EU criminal law. And one of these themes, permeating all aspects of the
evolution of criminal law at Union level, is the question of sovereignty.9,10
So both the Europeanization and internationalization of criminal law have led
to the weakening of traditional principles of criminal law, such as the
territoriality and sovereignty of national legislatures. In fact, the whole
existence of European criminal law is conditioned by quite a significant
weakening of state sovereignty of individual countries in favour of a common
“European state”. And although national criminal law of EU Member States
cannot be immune to the impact of European law, according to some of
8 Nowell-Smith, H: Behind the Scenes in the Negotiation of EU Criminal Justice
Legislation. New Journal of European Criminal Law, Vol. 3, Issue 3-4, 2012, p. 382.
9 Mitsilegas, V: EU Criminal Law. Oxford: Hart Publishing, 2009, p. 321.
10 Other major themes of EU criminal law are for example territoriality,
accountability, security and the protection of fundamental rights.
226 desires, criminal law should remain within the sovereign power of the
Member States.
It is necessary to take into account that the right to punish criminal
offences is derived from the sovereignty over a territory and it belongs to the
sovereign – traditionally the state. Nevertheless, the existence of the EU is
dependent whether the Member States delegate some of their powers in
favour of the EU.
However, the growth of EU measures in the field of criminal law is
the reality that will continue, although the full impact on domestic and Union
criminal law is still not clear, because the transformation is ongoing.
VI. EUROPEAN CRIMINAL LAW AND HUMAN RIGHTS
In the course of time, the human individual has become a recognised
subject of international law, possessing certain fundamental rights. And one
of the most important objectives for the EU should be to guarantee the
security and safety, as well as a protection to its citizens. Nevertheless, for a
long period of time, European law was mostly concerned with economic
issues whereas the quality of protection of fundamental human rights in
European law was not developed like the level of protection guaranteed by
constitutions of EU Member States.
Actually, the European Communities were originally created to
achieve the objectives of an economic nature. Later, however, there has been
expansion of competencies of their bodies, with a greater connection
between the economic interests with the interests of individuals. The
European Court of Justice therefore began in its decision making process
address the issue of human rights. Later, the concept of human rights was
incorporated into the “establishing treaties”, with the impact on the overall
development of European criminal law.
So nowadays, very important element of the development of public
law is the improvement and expansion of the catalogue of human rights and
freedoms. Such a catalogue is usually derived from the international
obligations of the state. This fact clearly contributes to the approximation of
public law systems within the EU Member States, especially when
considering the approximation in the field of criminal law. The protection of the
rights of the individual in criminal proceedings is a fundamental value of EU law and
essential in order to maintain mutual recognition between Member States’ practices and
public confidence in the EU.11 Therefore human rights should be taken seriously
11 Konstadinides, T., O’Meara, N: Fundamental Rights and Judicial Protection.
In: Arcarazo, D. A., Murphy, C., C: EU Security and Justice Law : After Lisbon and Stockholm.
Oxford: Hart Publishing, 2014, p. 85.
227
simply because the subjects of criminal law are potentially vulnerable human
beings.12
Human rights, in the European context, are an expression of
democratic governance and the rule of law. And as regards to the
Europeanization of criminal law, fundamental rights and freedoms have
created important background of such process. It could be even said that the
area of human rights represents one of the cornerstones of the
Europeanization of criminal law. Moreover, fundamental rights, as
guaranteed in the EU Charter of Fundamental Rights and in the European
Convention on the Protection on Human Rights and Fundamental Freedoms, must be
respected in any policy field of the Union.13
The whole system of human rights protection presupposes the
protection of individuals against abuses of state power. So because European
criminal law has a significant impact on the protection of fundamental rights,
as well as on the relationship between the individuals and Member States, the
areas of criminal law and human rights are complementary and new criminal
legislation cannot occur without prior assessment of the impact on human
rights.
VII. CURRENT DEVELOPMENTS IN THE AREA OF EUROPEAN CRIMINAL
LAW
In 2011, the European Commission published the Communication
“Towards an EU Criminal Policy: Ensuring the effective implementation of EU policies
through criminal law”. As a “communication”, it has no legal significance. On
the other hand, the Communication contains highly important guidelines in
relation to the role of criminal law in a European context, especially in the
future. It highlights great importance of criminal policy decision at the EU
level.14 And also emphasizes that rules of criminal law (both national and
European) are able to have a significant impact on individuals. And it is one
of the main reasons, why criminal law must always remain a measure of last
resort. At the same time, there should be a general subsidiarity requirement for
EU legislation – the EU can only legislate if the goal cannot be reached more
effectively by measures at national level, but can be better achieved at Union
level.15
12 Banach-Gutierrez, J., B., Harding, C: Fundamental Rights in European Criminal
Justice: An Axiological Perspective. European Journal of Crime, Criminal Law and Criminal
Justice 20, 2012, p. 241.
13 COM(2011) 573 final, pp. 6 – 7.
14 See The Communication from the Commission to the European Parliament,
the Council, the European Economic and Social Committee and the Committee of the
Regions: “Towards an EU Criminal Policy: Ensuring the effective implementation of EU
policies through criminal law”. COM(2011) 573 final. European Criminal Law Review,
Volume 1, Number 3, 2011, pp. 311 – 318.
15 COM(2011) 573 final, pp. 6 – 7.
228 As already mentioned above, since the entry into the force of the
Treaty of Lisbon, the legislator has the power to criminalise certain forms of
conduct. The question is how this power will be used... Just the fact that
Article 83 of the Treaty of Lisbon provides a legal basis for such a procedure
does not necessarily mean that all forms of pathological behaviour should be
criminalized. 16 For example Mitsilegas describes that EU competence to
criminalise can be justified in a twofold manner: upon the need for the Union
to address security threats (securitised criminalisation – Article 83(1) TFEU)
and upon the need for the Union to use criminal law in order to ensure the
effectiveness of Union law (functional criminalisation – Article 83(2)
TFEU).17
The reason for harmonization in certain areas of crime is that
common minimum rules are essential to enhance the mutual trust between
Member States and the national judiciaries, which is necessary for
cooperation among the authorities in different Member States. For example
the instrument of mutual recognition presupposes trust in each other’s justice
system and such trust presupposes a minimum level of common standards.
That will be impossible without at least a minimum level of harmonization.18
When Banach-Gutierrez discusses the principle of mutual recognition, she
describes criminal justice system in the EU as “increasingly globalised”. But it
wouldn’t be “increasingly globalised” without the prior and essential element
of mutual recognition – harmonization of rules within the national legal
systems.19
Nevertheless, the question of pivotal importance is whether the
criminal law is the most effective way to address security threats. TFEU also
contains a number of possibilities to limit criminalisation. That may be
carried out by placing limits to the EU competence to harmonise substantive
criminal law. Such a process results largely from Member States’ concerns
regarding the impact of supranational criminal law on their sovereignty, as
well as the integrity of national criminal justice systems.20 And taken into
For more about the rationales for criminalising the conduct at the EU level and
their compliance with the national principle of “last resort”, see Ouwerkerk, J., W:
Criminalisation as a Last Resort: A National Principle under the Pressure of Europeanization? New
Journal of European Criminal Law, Vol. 3, Issue 3-4, 2012, p. 229.
17 Mitsilegas, V: EU Criminal Law Competence after Lisbon: From Securitised to
Functional Criminalisation. In: Arcarazo, D. A., Murphy, C., C: EU Security and Justice Law :
After Lisbon and Stockholm. Oxford: Hart Publishing, 2014, p. 110.
18 See Bárd, K: The Impact of the Lisbon Reform Treaty in the Field of Criminal Procedural
Law. New Journal of European Criminal Law, Vol. 2, Issue 1, 2011, p. 13.
19 See Banach-Gutierrez, J., B: Globalised Criminal Justice in the European Union
Context. How Theory Meets Practice. New Journal of European Criminal Law, Vol. 4, Issue 1 – 2,
2013, p. 154.
20 Mitsilegas, V: EU Criminal Law Competence after Lisbon: From Securitised to
Functional Criminalisation. In: Arcarazo, D. A., Murphy, C., C: EU Security and Justice Law :
After Lisbon and Stockholm. Oxford: Hart Publishing, 2014, p. 121.
16
229
account one of the fundamental requirements for criminal law – the ultima
ratio principle – other options than criminal tools must also be considered.21
The process of decriminalisation at national level may arise from the
combination of criminal and administrative law, especially when Member
States have the possibility to adopt both the criminal and administrative
sanctions. Obviously, criminal law is a sensitive policy field with differences
amongst the national systems. Such differences may relate to types of
sanctions, as well as to the classification of certain conduct as an
administrative or criminal offence.
Sometimes, administrative sanctions may be sufficient or even more
effective than criminal sanctions. Administrative sanctions should be
especially considered in the areas where the offence is not particularly severe,
or occurs in large numbers. It could also be considered in other areas, where
administrative sanctions and procedures are more suitable and effective – for
example in cases of liability of legal entities. Administrative law is sometimes
also able to provide broader range of possible sanctions, more suitable to the
specific situation.22
As to the usage of criminal or administrative sanctions, the
seriousness and character of the breach of law must be taken into account.
The reason is that for certain unlawful acts (usually which are considered
particularly grave), an administrative sanction may be not sufficient. Not as a
response to unlawful behaviour, nor as a signal for other possible
perpetrators. Another reason could be that criminal proceedings often
provide stronger protection of the rights of accused. Anyway, the type of
sanction should be considered as the most appropriate to reach the global
objective of being effective, proportionate and dissuasive.23
While earlier the European criminal law was created through the
establishment of institutions such as Eurojust or European Judicial Network,
and harmonization efforts have been focused almost exclusively on
substantive criminal law, approximation (minimum harmonization) of
criminal procedural law of the Member States was not a priority for a long
time. But procedural rights are able to help in getting the balance with
measures aimed at facilitating prosecution.
So nowadays, legal basis for harmonization of procedural law under
the Treaty of Lisbon can be found in Article 82 (2) TFEU. The minimum
rules shall concern: a) mutual admissibility of evidence between Member
States; b) the rights of individuals in criminal procedure; c) the rights of
victims of crime; d) any other specific aspects of criminal procedure which
More about the principle of ultima ratio and the principle of proportionality as
the conditions for legislative procedure see: Wetter, A: Conditions for the Legislative
Procedure in the Area of Criminal Law – Before and After the Lisbon Treaty. In: Bergström,
M., Cornell, A. J: European Police and Criminal Law Co-operation. Oxford: Hart Publishing, 2014,
p. 37.
22 COM(2011) 573 final, p. 11.
23 COM(2011) 573 final, p. 11.
21
230 the Council has identified in advance by a decision. On this basis, new
Directives have been adopted24 and others are discussed25.
Although harmonization in the area of substantive criminal law
continues26, today’s efforts are intensively focused on the approximation of
procedural rules. In fact, this whole process creates a complex area of law –
true European criminal law, which is expanding and strengthening its
position.27
VIII. PROTECTION OF THE FINANCIAL INTERESTS OF THE EU –
ESTABLISHMENT OF THE EUROPEAN PUBLIC PROSECUTOR’S OFFICE
Apart from Article 83 TFEU, Article 325 (4) of the Treaty28 enables
specific possibility to take measures in the field of the prevention of and fight
against fraud affecting the financial interests of the Union.
As stated in the Communication “Better protection of the Union’s financial
interests”, the existing national-level and Union-level efforts fail to address properly the
problem of fraud against the Union’s financial interest.29 But according to Article 325
(1) TFEU both the Union and the Member States have a duty to counter fraud
and any other illegal activities affecting the financial interests of the Union, as well as
afford effective protection to those interests. Despite this obligation, the Union’s
financial interests remain insufficiently protected, when frauds, corruption
and other offences affecting the Union’s budget are the reality.
For example Directive 2010/64/EU on the right to interpretation and
translation in criminal proceedings; Directive 2012/13/EU on the right to information in
criminal proceedings; Directive 2013/48/EU on the right to access to a lawyer in criminal
proceedings and in European arrest warrant proceedings, and on the right to have a third
party informed upon deprivation of liberty and to communicate with third persons and with
consular authorities while deprived of liberty.
25 For example Proposal for a Directive on the strengthening of certain aspects of
the presumption of innocence and of the right to be present at trial in criminal proceedings;
Proposal for a Directive on procedural safeguards for children suspected or accused in
criminal proceedings; Proposal for a Directive on provisional legal aid for suspects or
accused persons deprived of liberty and legal aid in European arrest warrant proceedings.
26 See for example Proposal for a Directive of the European Parliament and of
the Council on the fight against fraud to the Union’s financial interests by means of criminal
law. COM(2012) 363 final, Brussels 11. 7. 2012.
27 For more about recent initiatives in the area of procedural criminal law see:
Herlin-Karnell, E: Recent Developments in the Field of Substantive and Procedural EU
Criminal Law – Challenges and Opportunities. In: Bergström, M., Cornell, A. J: European
Police and Criminal Law Co-operation. Oxford: Hart Publishing, 2014, p. 26.
28 Article 325 (4) TFEU: The European Parliament and the Council, acting in accordance
with the ordinary legislative procedure, after consulting the Court of Auditors, shall adopt the necessary
measures in the fields of the prevention of and fight against fraud affecting the financial interests of the Union
with a view to affording effective and equivalent protection in the Member States and in all the Union's
institutions, bodies, offices and agencies.
29 COM(2013) 532 final, 17. 7. 2013, p. 3.
24
231
One of the problems is that the EU has no power to intervene in
cases of criminal conduct affecting its funds. Criminal investigation and
prosecution is still under the exclusive competence of the Member States.
Such a “complication” should be resolved by the establishment of the
European Public Prosecutor’s Office (EPPO).
It was in the late nineties, when the European Communities
developed the idea of setting up the institution that will be responsible for
exercising effective protection of Union’s financial interests. By establishing
the EPPO, it should be possible to introduce an entity with the powers and
necessary resources for investigation, prosecution and bringing cases to
courts (no matter whether the cases are national or cross-border). So the
main purpose was to overcome the functional limitations of the existing EU
bodies and agencies (OLAF, Eurojust, and Europol). Moreover, the EU will
be considered as one single legal area in which the EPPO will be able to act
without the need to use instruments of mutual legal assistance.
However, such an approach will be undoubtedly significant
intervention into national criminal law systems of Member States, affecting
their sovereignty in criminal matters.
After introducing the Proposal on the establishment of the EPPO30, some of
the Member States (their Parliaments) raised objections because according to
their opinion, the proposal was not in accordance with the principles of
subsidiarity and proportionality. The number of reasoned opinions was
sufficient for “yellow card procedure”.31 Therefore the Commission has to
review the Proposal and decide whether to maintain, amend or withdraw the
Proposal.32
It is not necessary to point out all circumstances that relates to the
EPPO and Commission’s efforts to establish this institution. For the
purposes of this article is more interesting to mention what was the
Commission’s argumentation that accompanied the Proposal for the
establishment of the EPPO. Except the arguments such as improving of
prosecution; enhancing the deterrent effect of criminal prosecutions; or
conducting fraud investigations and prosecutions in accordance with the Rule
of Law; the Commission many times stressed out that the Member States are
not able to provide effective protection of the financial interests of the EU –
or let say EU taxpayers, who are funding the EU budget and who expect
effective measures against illegal activities targeting EU public finances.33
At these days, the argumentation based on financial crisis, is very
strong. Certain similarity could be found in the process of adoption of anti Proposal for a Council Regulation on the establishment of the European
Public Prosecutor’s Office. COM(2013) 534 final, 17. 7. 2013.
31 Yellow Card Procedure on the EPPO Proposal. In: Eucrim 4/2013, pp. 117 –
118.
32 COM(2013) 851 final.
33 COM(2011) 573 final, p. 6.
30
232 terrorism legislation in the era after 9/11. Obviously, the Commission is
aware of what people want to hear.
Disapproving attitude of many Member States is quite logical. The
establishment and subsequent functioning of the EPPO would require
harmonization of criminal offences, harmonization of sanctions, 34
strengthening of mutual trust among judicial authorities etc. As a result, it
would be significant delegation of powers from the Member States to the
EU. Of course, the EPPO is meant to investigate and prosecute just the
frauds with financial interests of the EU, but once there will be such
institution, it will be possible to enhance its powers to other offences...
IX. CONCLUDING REMARKS
Nowadays, the globalization of law is present even in the areas that
were known for their autonomy. And criminal law can be such an example.
To answer the question, whether the European criminal law is the “last
obstacle” in the globalization of law within the European Union, I must
hesitate. On one hand, it was described that the influence of Europeanization
is strong and the Member States have problems to resist (even sometimes it is
not clear if they want), on the other, the objections from the Member States
in the case of establishing the EPPO could be seen as an example that there
are still areas which try to remain “national”.
The whole concept of sovereignty does not cease to exist globally, but
the essential element for the creation of the EU was the delegation of powers
from the Member States to the EU. So it is quite logical that if the EU wants
to protect the citizens by means of criminal law, it needs criminal powers.
Therefore the Member States have to delegate them in favour of the EU. The
sovereignty in the area of criminal law is still present, but its position is
continuously weaker.
According to Nilsson, in the long term, the Union will have to make a
choice on where to go – formed a United States of Europe, with federal
crimes coexisting with “local crimes”, or towards maintaining the 30 different
legal systems we have with a careful and cautious fragmented approximation
on a step-by-step basis... The latter approach will probably prevail, but as a
consequence, there will be further fragmentation, more opt-ins and opt-outs,
and more complexity for law enforcement and judges to the detriment of
fighting serious, organised, and cross-border crime.35
The Treaty of Lisbon has a significant impact on European criminal
and subsequent development – especially the Articles 82 and 83 TFEU.
34 Proposal for a Directive of the European Parliament and of the Council on the
fight against fraud to the Union’s financial interests by means of criminal law. COM(2012)
363 final, 11. 7. 2012.
35 Nilsson, H., G: Where Should the European Union Go in Developments Its Criminal
Policy in the Future? Eucrim 1/2014, p. 21.
233
However, as mentioned by Herlin-Karnell, Articles 82 and 83 should be read
in the light of Chapter I Title V of the TFEU, more specifically of the Article
67 TFEU. According to the Article 67 (1) TFEU, the Union shall constitute an
area of freedom, security and justice with respect for fundamental rights and the different
legal systems and traditions of the Member States. Therefore the project of EU
criminal law is a part of establishing an Area of Freedom, Security and
Justice.36
I will borrow the question from other authors – whose area of freedom, security
and justice is it?37 As far as I am concerned (and as well as mentioned authors
are) the answer should be the citizens of the EU.
And as mentioned in the beginning, one of the most important
objectives for the EU is to guarantee the security and safety to its citizens.
Therefore, an EU criminal policy should have as overall goal to strengthen
the confidence of citizens that they live in a Europe of freedom, security and
justice. At the same time, the EU should continue to give added value to
Member States’ cooperation in the area of justice in the Union, as well as to
the fundamental rights and the different legal systems and traditions of the
Member States. European criminal law should be an important tool to better
fight crime, not a means to destroy national values.
REFERENCES
1. Asp, P: European Criminal Law – Challenges for the Future. In:
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236 AUTHORS
Ana Cristina Ribeiro Costa is a Doctoral student and invited teacher at
Universidade Católica Portuguesa, Escola de Direito do Porto, teaching the
courses of Health and Safety at the Workplace Law and the Work Related
Accidents Seminar, both in the Masters in Labor Law. She collaborates with
Católica Research Centre for the Future of Law in its protocol with the
Group CaixaSeguros. She is a lawyer at Gama Lobo Xavier, Luís Teixeira e
Melo e Associados, Sociedade de Advogados, R.L. She is a Member of the
Editorial Board of the Review Questões Laborais. She is also Vice-president
of the Associação de Jovens Juslaboralistas.
Denise Wiedemann is research and teaching assistant at the Institute for
Foreign and European Private and Procedural Law in Leipzig. Besides, she
has a teaching assignment at the University of Applied Sciences in Meißen,
where she mainly teaches civil law, European law and private international
law. Currently, she is a visiting researcher at IDC (institut de droit comparé)
and CRDI (centre de recherche de droit international privé et du commerce
international) of l’Université Panthéon-Assas (Paris II). She earned the First
State Exam (2013) and the State Exam for the administration of justice
(2008) in Germany (each with rank number one in Saxony) as well as a
master degree (LL.M., 2011) from Universidade Católica Portuguesa, Global
School of Law. In 2013, she attended the summer program in private
international law of The Hague Academy of International Law including a
colloquium for doctoral students. For her Ph.D. Project in the area of
European Law of Civil Procedure she received a fellowship from the
Studienstiftung des Deutschen Volkes.
Diana Oswald holds a Ph.D., a Master of Laws (summa cum laude, 2011,
bilingual German/French), and an M.A. in Management (cum laude, 2014,
bilingual English/German), all from the University of Fribourg
(Switzerland). She is currently working as a graduate research and teaching
assistant at the University of Fribourg. In the past, she has worked at a major
law firm in Zurich and interned at a smaller law firm and an appellate court.
Halil Göksan, Turkish national, has completed his Bachelor Degree in Law
at the University of Lausanne in 2010. Then, he obtained his Master Degree
in International and European Law at the University of Geneva, in 2012. He
is now a Ph.D. candidate at the University of Geneva and works on a thesis
about “Challenges of International law”. He works also as Teaching
Assistant for Geneva Summer School on Understanding Global Governance
237
and He is the Main Representative at UN in Geneva of Journalists and
Writers Foundation, an NGO holding a General Consultative Status with
ECOSOC.
Kelly Chen is a doctoral candidate at Stockholm Centre for Commercial
Law, the Faculty of Law at Stockholm University, Sweden. Her dissertation
addresses the regulation of the global financial markets, especially the case of
multinational financial institutions in the EU and China. In her research, she
is particularly interested in interdisciplinary approaches towards political and
legal issues in the integrated financial markets. She studied law at Stockholm
University and is fluent in Swedish, English, Chinese and French.
Furthermore, she is affiliated with the Stockholm University Graduate
School of International Studies, a research school dedicated to global and
interdisciplinary studies.
Petr Zarivnij is a Ph.D. student at the Department of Criminal Law,
Faculty of Law, Masaryk University Brno, Czech Republic. He has work
experience that he gained during his internships at Eurojust (Den Haag), the
Supreme Court, the Supreme Administrative Court, the Office of the
Ombudsman and the Public Prosecutor’s Office. He is currently working on
his dissertation entitled Investigation of frauds with financial funds of the
EU. In connection with this, he is dealing with the issue of European
criminal law and its impact on the legal systems of the Member States.
Yueh-Ping (Alex) Yang, from Taiwan, is an S.J.D. candidate at Harvard
Law School, pursuing the study with Professor Reinier Kraakman. He had
his LL.B (2005) and LL.M degrees (2010) at National Taiwan University and
the other LL.M degree (2012) at Harvard Law School. His research interests
include corporate governance, financial regulation and international
economic laws, and his S.J.D. dissertation focuses on the corporate
governance of Chinese state-owned banks. His publications, among others,
include “Corporate Governance and Corporate Social Responsibility: The
Protection of Shareholders, Creditors, Employees, and Investors in Mergers
and Acquisitions” (Angle Publisher, 2011) (in Chinese).
Zlatina Georgieva is a second-year Ph.D. researcher at the Law School of
Tilburg University, the Netherlands. She is affiliated more specifically with
the Tilburg Centre for Law and Economics (TILEC). Her research interests
lie in the study of soft law and its development/shaping through courts of
law in the domain of EU economic regulation and EU Competition law in
particular.
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Católica Global School of Law
Portuguesa – Faculdade de
Direito
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www.catolicalaw.fd.lisboa.ucp.pt
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Católica Research Centre for the
Future of Law
[email protected]
Tel.: (+351) 21 721 41 79