Legal Analyses written by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com.

Legal Analyses written by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com.

1999 International Law Update, Volume 5, Number 6 (June).

  

AVIATION

In dispute over damages recoverable for cargo lost en route by air to Taiwan, Ninth Circuit holds that China's accession to Warsaw Convention did not bind Taiwan

Gemtronics Corp. shipped a package of computer chips from Taipei, Taiwan, to San Jose, California, by United Parcel Service (UPS). The package never arrived, and the insurer of the package, Mingtai Fire & Marine Insurance Co., sued UPS under the Convention for the Unification of Certain Rules Relating to International Transportation by Air [October 12, 1929, 49 Stat. 3000, T.S. No. 876 (1934), reprinted in note following 49 U.S.C.A. Section 40105] ("Warsaw Convention").

The lost computer chips were allegedly worth $83,454.80, but the air waybill limited the release value to $100. Since Taiwan is not as such a party to the Warsaw Convention, Mingtai creatively argued that Taiwan is in fact a party to the Convention by virtue of China's accession. China (PRC) had signed the Convention with a declaration that it "shall of course apply to the entire Chinese territory including Taiwan." The U.S. recognition of China (and the de-recognition of Taiwan) would arguably require the court to honor China's declaration.

The district court disagreed and held that Taiwan is not bound by China's accession to the Convention, and entered judgment in favor of Mingtai for $100. Mingtai ap­pealed.

The U.S. Court of Appeals for the Ninth Circuit concludes that China's accession does not necessarily bind Taiwan. “The determination of whether China's adherence to the Convention binds Taiwan conflates two distinct areas of foreign relations: the effects of foreign sovereign recognition, and the status of treaties. It is axiomatic that ‘the conduct of foreign relations is committed by the Constitution to the political departments of the Federal Government; [and] that the propriety of the exercise of that power is not open to judicial review. ..."

"[T]he Supreme Court has repeatedly held that the Constitution commits to the Executive Branch alone the authority to recognize, and to withdraw recognition from, foreign regimes. ... Thus, whether China is the sovereign, de jure or de facto, of a territory is not a judicial, but a political question." [Slip op. 4-5]

The Court points to several acts of the political branches that show that Taiwan is an entity separate from China. The State Department lists treaties with China and treaties with Taiwan separately. When the U.S. President announced the recognition of China in 1979, he directed that existing international agreements remain in force [President's Memorandum for All Departments and Agencies: Relations With the People of Taiwan, reprinted in 1979 U.S.C.C.A.N. 36, 76]. Congress formalized that relationship with the Taiwan Relations Act [22 U.S.C. Sections 3301-3316].

The Court cautions, however, that it is not making an independent determination of Taiwan's status. It is merely deferring to the political departments' position that China's adherence to the Warsaw Convention does not bind Taiwan.

Citation: Mingtai Fire & Marine Ins. Co., Ltd. v. United Parcel Service, No. 98-15088 (9th Cir. May 25, 1999).

BILLS OF LADING

Australia's highest court rules that owner of damaged cargo who fails to show that vessel's crew negligently stowed cargo or navigated ship carelessly in major storm is subject to "perils of the sea" defense under Hague Rules on bills of lading

In 1989, Great China Metal Industries Co. Ltd. (GCM) contracted with the Malaysian International Shipping Corporation (MISC) to carry a cargo of 40 cases of aluminum coils weighing five tons each from Sydney, Australia to Keelung, Taiwan in the "MV Bunga Seroja."

Three bills of lading embodied the contract and each of them incorporated the Hague Rules [International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading, 51 Stat. 233, TS 931, implemented in Australia by the Sea-Carriage of Goods Act of 1924. See the Carriage of Goods by Sea Act (COGSA) of 1936 that adopted the Hague Rules for the United States].

Because there is no land mass between the southern coast of Australia and Antarctica, storms in the "Roaring Forties" commonly build up mountainous swells, high seas and strong and variable winds. The Southern Ocean in the vicinity of the Great Australian Bight is one such stretch of sea, long known to navigators.

The Burnie to Fremantle leg of the Bunga Seroja's voyage crossed the Bight along the southern coast. Not surprisingly, the vessel ran into a series of violent storms of sub-hurricane force that damaged the coils and even swept some over the side.

GCM then sued MISC in Admiralty in the Supreme Court of New South Wales, claiming damages for breach of the carriage contract and negligence. The trial judge exonerated the master and crew from negligence in handling or stowing the cargo. He also upheld MISC's defense that "perils of the sea" had caused the cargo damage. The New South Wales Court of Appeal dismissed GCM's subsequent appeal.

On further appeal to the High Court of Australia, GCM argued that the lower courts erred in upholding MISC's defense. In its view, the master had received advance notice of impending bad weather and had failed to take reasonable methods to guard against cargo damage.

The High Court disagrees and unanimously dismisses the appeal. Of the six justices, three agreed on one "plurality" opinion and three others wrote separate opinions, stressing various aspects of the complex situation.

The plurality opinion first points out that the courts of maritime states should read the Hague Rules as a whole and in the light of their long history. By international agreement, the nations fashioned the Rules for use in transnational contracts where two or more legal regimes might apply. This being so, the courts of the several nations, including Australia, should strive to interpret the Hague Rules in harmony with the judicial rulings of other trading countries.

While there was damage to GCM's cargo, the court of first instance had found that the vessel was seaworthy and that the damage did not stem from stowage or navigation that was careless under the circumstances but from extraordinarily violent seas. The foresee­ability of bad weather may be relevant to the seaworthiness question or to the existence of negligence in the handling of the ship or cargo but does not rule out the "perils of the sea" defense. If cargo damage takes place in the absence of any default in seamanship or in cargo stowage, it is unavoidable to find that dangers of the sea was the cause of it.

Citation: Great China Metal Industries Co. Ltd. v. Malaysian International Shipping Corp. Berhad, 158 A.L.R. 1 (High Ct. 1998).

JUDGMENTS

Fifth Circuit finds reversible error in Texas federal court's failure to enforce Mexican judgment though interest on underlying loan far exceeded that allowed under Texas usury law

Darrel and Mary Jane Hargrove (the Hargroves) are nationals of the United States and officers of Southwest Livestock & Trucking Co., Inc. (SLT). SLT engages in the buying and selling of livestock.

In 1998, SLT borrowed $400,000 from Reginaldo Ramon (Ramon), a citizen of the Republic of Mexico. According to the arrangement, SLT would execute a Mexican promissory note, a "pagare," each month.

After a series of regular payments, SLT defaulted in October 1994. The notes did not recite an interest rate but it turned out to be between 48% and 52%.

Ramon sued SLT in a Mexican court to collect on the last pagare. The court of first instance ruled for Ramon and ordered SLT to pay its debt at 48% interest. SLT appealed, claiming lack of personal jurisdiction over it. The Mexican court disagreed and affirmed.

After Ramon had filed his Mexican suit but before judgment, SLT sued Ramon in a Texas federal court for a judgment declaring that the loan arrangement violated Texas usury laws. Both sides moved for summary judgment. When the Mexican judgment came down, Ramon sought its recognition under principles of collateral estoppel and res judicata that would bar SLT's lawsuit.

Citing the Texas version of the Uniform Foreign Money Judgments Recognition Act ("TRA"), the district court gave summary judgment to SLT. The court applied Texas law, ruling that the Mexican judgment violated Texas public policy against usurious interest rates. After a hearing, the court awarded SLT $5,766,000 plus interest. Ramon appealed.

On appeal, Ramon claimed error in the application of Texas law. He pointed out that the pagares designated Mexico as the place of payment and argued that Mexico has "the most significant relationship" to the loan transaction, apparently invoking the Restatement of Conflicts (Second). The U.S. Court of Appeals for the Fifth Circuit vacates and remands.

The Court first considers the refusal of the lower court to enforce the Mexican judgment. Applying the TRA, the Court notes that its plain language allows a court not to recognize a foreign country judgment if "the cause of action on which the judgment is based is repugnant to the public policy" of Texas. Here, a routine suit upon an unpaid promissory note does not raise public policy concerns. That the judgment might contravene Texas public policy against usury is irrelevant.

Urging the Court to go beyond a literal reading of the TRA, SLT contended that enforcement of the Mexican judgment would oblige SLT to pay 48% interest to Ramon, many times more than Texas public policy allows.

"We are especially reluctant to conclude that recognizing the Mexican judgment offends Texas public policy under the circumstances of this case. The purpose behind Texas usury laws is to protect unsophisticated borrowers from unscrupulous lenders. (cit.) This case, however, does not involve the victimizing of a naive consumer."

"Southwest Livestock is managed by sophisticated and knowledgeable people with experience in business. Additionally, the evidence in the record does not suggest that Ramon misled or deceived Southwest Livestock. Southwest Livestock and Ramon negotiated the loan in good faith and at arms length. In short, both parties fully appreciated the nature of the loan transaction and their respective contractual obligations." [323]

Citation: Southwest Livestock and Trucking Company, Inc. v. Ramon, 169 F.3d 317 (5th Cir. 1999).

JURISDICTION (BANKRUPTCY)

In action by professional tennis players against insolvent Taiwanese company for its failure to perform sponsorship contracts, D.C. Circuit affirms as case of first impression that U.S. bankruptcy law Section 304 does not require presence of debtor's assets in U.S. for bankruptcy court to exercise jurisdiction

Paul Haarhuis and eight other professional tennis players (jointly Haarhuis) brought an action in U.S. district court against Kunnan Enterprises, an insolvent Taiwanese sporting goods manufacturer, over its failure to pay on their sponsorship contracts. Meanwhile, the Kunnan reorganizers appointed by the Taichung district court, Taiwan, pursuant to Taiwanese insolvency laws, sued in U.S. Bankruptcy Court to enjoin Haarhuis from pursuing the breach of contract claim.

The reorganizers sought the injunction under 11 U.S.C. Section 304, which allows a representative of a foreign bankruptcy or reorganization to petition a U.S. bankruptcy court to "enjoin the commencement or continuation of any action against a debtor with respect to property involved in such foreign proceedings." 11 U.S.C. Section 304(b)(1)(A)(i).

At the trial in the U.S. Bankruptcy Court, Haarhuis argued that the court lacked jurisdiction because Kunnan owned no assets in the U.S. The district court found that its Section 304 jurisdiction did not depend on the presence or absence of foreign-owned assets in the U.S., and enjoined Haarhuis' breach-of-contract action. Noting that the issue is one of first impression, the U.S. Court of Appeals for the District of Columbia Circuit affirms.

Section 304(b)(1)(A)(i) provides for the enjoining of an action against a debtor — not property — with respect to property involved in a foreign bankruptcy or reorganization proceeding. That extends to property tied up in the foreign proceeding, and not necessarily present in the U.S. This is precisely the case here. Therefore, the statutory language does not limit application of Section 304 to cases where assets are present in the U.S.

Haarhuis also argued that the Bankruptcy Court had failed to consider "comity," which is one of the Section 304(c) factors in deciding whether to grant relief under Section 304(b). In addition, he pointed to a provision of Taiwan's Bankruptcy Law that provided that foreign adjudications of bankruptcy would not affect the debtor's assets within Taiwan.

The reorganizers' expert witness testified that this provision applies only to bank­ruptcy, not to reorganization as is the case here. Haarhuis did not present any expert to rebut this opinion. Therefore, the Bankruptcy Court did not err in relying on that expert testimony.

Haarhuis also challenged the Bankruptcy Court's admission of attested Taiwanese documents from the Taichung district court having to do with Kunnan's reorganization because the documents lacked a final consular certification. Federal Rule of Civil Procedure 44(a)(2), however, allows the admission of an attested copy, for example when, as here, there is no U.S. consular service in the foreign country. Here, the Bankruptcy Court did not abuse its discretion in letting the documents in because Haarhuis had an ample chance to investigate their authenticity.

Citation: Haarhuis v. Kunnan Enterprises, Ltd., No 98-7175 (D.C. Cir. May 28, 1999).

PUBLIC HEALTH

Where U.K. government revoked Upjohn's authority to sell Triazolam (Halcion), European Court of Justice rules that EC Directives do not preclude Member States from doing so to safeguard public health without awaiting opinion of EC Committee

Under Article 11 of EC Directive 65/65, the responsibility for suspending or revoking marketing authority for proprietary medicines belongs to the competent authorities of the Member States. The U.K. divides that responsibility between the Licensing Authority (LA) and the Medicines Control Agency (MCA). According to U.K. law, if the LA decides to revoke a marketing authorization, the holder thereof could challenge that ruling in the High Court.

Article 14 of Directive 75/319 provides that, where a Member State suspends or revokes an authorization, the holder could refer the matter to the Committee for Proprietary Medicinal Products (CPMP), an EC entity. The latter has 60 days in which to issue an Opinion.

Upjohn Ltd. is the U.K. operating company of the Upjohn Company of Kalamazoo, Michigan. For some time, Upjohn has been lawfully marketing Triazolam tablets in the U.K. (under its brand name of Halcion) to relieve insomnia. After the press reported that a woman under the influence of Triazo­lam had killed her mother, however, the MCA notified Upjohn that it was provisionally revoking all marketing authorizations for the drug. At about the same time, two Member States opposed to revocation referred the Triazolam issue to the CPMP. That agency issued an opinion against total revocation but asked for further research into the drug.

When the results came in, the CPMP solicited additional comments from Member States and from the current holders of marketing authority. In the midst of all this, the LA told Upjohn that it was immediately revoking Upjohn's permission to sell in the U.K.

Upjohn then went to the High Court and asked it to quash the LA's decision. The company also argued that the Court ought to ask the European Court of Justice under Article 177 for advice as to how Community Law requires national courts to deal with cases like this one. The High Court, however, rejected the request for an Article 177 reference.

The English Court of Appeal, however, disagreed. It stayed U.K. proceedings and, in October 1995, preliminarily referred several EC law questions to the ECJ. The Court first asked the ECJ whether EC law required the Member States to set up a procedure for judicial review of national rulings that revoked permission to sell medicines. If so, it inquired whether the national courts could substitute their own assessment of the facts and scientific evidence for that of the national agencies.

In response to the reference, the ECJ makes several points. First, it reads Directive 65/65 as merely requiring that decisions on marketing authorizations for medicines be open to challenge by some form of legal proceedings. It is up to each Member State to designate the reviewing courts and to specify appropriate procedural rules to safeguard legal rights arising under EC law.

Of course, these rules must not be less favorable than those applicable to analogous domestic proceedings nor may they make the exercise of EC rights excessively difficult. To achieve these goals, it is not necessary in the medico-pharmacological field to authorize the national courts to substitute their evaluation of the facts and scientific evidence cited by an agency to support a revocation decision.

Nor does EC law require national courts to take into account relevant scientific material that comes to light after the contested agency decision. Finally, the Opinions of the CPMP are not binding. The main goal of Directive 65/65 was to safeguard the public health. Accordingly, Article 14 of Second Council Directive 75/319 does not demand that Member States wait until they get the decision of that Committee before withdrawing a medicinal product that might injure the health of the public.

Citation: Upjohn Ltd. v The Licensing Authority Established by the Medicines Act 1968 (Case C‑120/97), [1999] 1 C.M.L.R. 825.

SERVICE OF PROCESS

Fifth Circuit upholds personal jurisdiction of Mexican court over Texas company based on service through consular channels pursuant to Inter-American Convention on Letters Rogatory

[For the preliminary facts, see JUDGMENTS above.]

SLT alternatively argued that the Mexican court had lacked personal jurisdiction over it, thus making the judgment unenforceable under the TRA. The company maintained that Ramon had failed to comply with the Inter-American Convention on Letters Rogatory, Sen. Treaty Doc. No 27, 98th Cong., 2d Sess. (1984). The Fifth Circuit sees no merit in this point.

"Ramon served Southwest Livestock through letters rogatory that were transmitted by the Mexican Consul in Del Rio, Texas. Southwest Livestock contends that service of process under the Convention requires active participation by the Central Authority of the destination state, in this case the United States Department of Justice. We disagree. As the magistrate judge explained, Article 13 of the Convention permits service of process through consular channels. Ramon, therefore, effected proper service of process." [id.]

Citation: Southwest Livestock and Trucking Company, Inc. v. Ramon, 169 F.3d 317 (5th Cir. 1999).

SOVEREIGN IMMUNITY

Fourth Circuit finds that child support payments cannot be garnished from foreign employer for lack of subject matter jurisdiction under FSIA despite alleged "implicit waiver"

In 1992, Abdulaziz Tamimi (Abdulaziz) left his wife Sharon and their two children in the U.S., filed for bankruptcy, and returned to Saudi Arabia. Abdulaziz had been working for Saudi Arabian Airlines Corporation (Saudi) in Saudi Arabia and in the U.S. since 1990. Saudi is wholly owned by Saudi Arabia and therefore a "foreign state" within the meaning of the FSIA.

Sharon brought an action in Virginia Circuit Court against Abdulaziz for divorce, custody of the children, and support payments. She received custody and an award of $448 per month in support payments. While the divorce proceedings were still pending, Abdulaziz divorced Sharon under Saudi Arabian laws without notice to Sharon.

Abdulaziz was arrested in the U.S. in January 1996. His support payments were $21,000 in arrears at that point. Shortly thereafter, Saudi sent a letter to Sharon, stating that Abdulaziz had "irrevocably authorized and directed Saudi Arabian Airlines to deduct from his salary up to $500 (Five Hundred Dollars) per month for child support payments..." Saudi also stated that it would follow these instructions for as long as Abdulaziz worked for Saudi.

Abdulaziz did not appear for a hearing in the Domestic Relations Court in April, 1997, and an arrest warrant was issued. The Court adjusted the child support to $967.86 per month and issued a garnishment summons to Saudi and Abdulaziz. Sharon then sought to garnish Abdulaziz's salary. Saudi, as the garnishee, removed the case to the U.S. District Court for the Eastern District of Virginia, and then moved to dismiss because it is a "foreign state" within the meaning of Section 1603 of the Foreign Sovereign Immunities Act (FSIA) [28 U.S.C. Section 1602] and entitled to sovereign immunity.

The district court held that Saudi had waived its immunity by virtue of the 1996 letter and, alternatively, that Saudi was engaged in a "“commercial activity" and therefore not entitled to immunity. Saudi appealed.

The U.S. Court of Appeals for the Fourth Circuit remands to the district court to dismiss for lack of subject matter jurisdiction under the FSIA.

Waiver under the FSIA is rarely accomplished by implication. The examples of implicit waivers specified by Congress in the legislative history are:

(1) a foreign state has agreed to arbitration in another country,

(2) a foreign state has agreed that a contract is governed by the law of a particular country, or

(3) a foreign state has filed a responsive pleading in a case without raising the defense of sovereign immunity.

Courts have consistently refused to find an implicit waiver where the circumstances are not similarly unambiguous. In this case, Saudi's letter does not constitute an implicit waiver.

"Under the case law and legislative history, this court can only find that the Letter constituted an implicit waiver of sovereign immunity under the FSIA if we find that the Letter is strong, unmistakable evidence that Saudi intended to waive its sovereign immunity. ... Unlike the district court, we do not believe the Letter meets such a standard. The Letter, by its own terms, is meant simply to notify Sharon that Abdulaziz had "irrevocably authorized and directed Saudi Arabian Airlines' to deduct child support payments from his salary in the future ... [T]he situation here bears no resemblance to any of the three types of situations to which courts have generally limited findings of implicit waiver." [Slip op. 11-12].

Neither does the FSIA's "commercial activity" exception apply, which generally requires a connection between the plaintiff's cause of action and the commercial acts of the foreign sovereign. The garnishment action is at best "related to" Saudi's commercial activity in the U.S. The mere fact that Abdulaziz is an employee of Saudi does not alter the result, otherwise the court would eviscerate sovereign immunity under the FSIA.

Citation: Tamimi v. Saudi Arabian Airlines Corp., No. 98-1423 (4th Cir. May 21, 1999).

TERRORISM

Seven years after bombing of Israeli Embassy in Argentina, Argentine Supreme Court opines that there is insufficient evidence against initial Pakistani suspects, and instead finds that Islamic Jihad was involved

Seven years after the explosion of a car bomb at the Israeli Embassy in Buenos Aires, the Argentine Supreme Court held that the Islamic Jihad, which is related to the Hizbol­lah, was involved in it. [Editorial Note: "Hezbollah" is also spelled "Hizbullah" or "Hezbullah." According to a statement of the CIA cited in the Court opinion, the Islamic Jihad is a branch of the Lebanese Hizbollah. According to an FBI statement, Islamic Jihad is one of the names used by the Hizbollah.]

In the early afternoon of March 17, 1992, a car bomb exploded at an intersection in Buenos Aires, very near the Israeli Embassy. The explosion killed 29 people and largely destroyed the Embassy.

Argentine police quickly found several witnesses. One witness had noticed several suspicious persons nearby shortly before the explosion, and later identified one of them. In addition, a taxi driver had picked up two "Middle-Eastern individuals with only carry-on luggage" who behaved strangely at the airport and did not speak Spanish. He told police the address where he had dropped off his passengers.

Based on the testimony, Argentine police arrested four Pakistani individuals at the address given by the taxi driver. Israeli and U.S. officers who took part in the investigation found traces of explosives inside the apartment.

It turns out, however, that the Pakistani individuals were not involved in the bombing. In an opinion by seven justices issued on May 10, 1999, the Argentine Supreme Court concludes that the evidence against the Pakistani suspects falls short of what is required. Instead, the evidence shows that the Islamic Jihad had a hand in the bombing.

Some of the evidence included, for example, several cables received from the Argentine Embassy in Lebanon between February and May of 1992. The then-Ambassador of Argentina in Lebanon, Juan Angel Faraldo, authenticated the cables. The cables stated that (1) the Hizbollah was in a state of unrest after the death of its secretary-general, Abbas El-Mousawi (also spelled Moussaui or Musawi) at the hands of Israeli military forces, (2) Hizbollah's spiritual leader, Sheikh Fadlallah, had stated at El-Mousawi's funeral that "Israel would not escape revenge," and (3) according to the Lebanese newspaper An Nahar, the Islamic Jihad took responsibility for the attack.

Moreover, the Interpol Office in Islamabad, Pakistan, reported that none of the four Pakistani suspects turned up in their files (Paragraphs 22 & 23 of the Opinion). The record also lacks any proof that linked defendants to Iranian diplomats.

As a result, the Court concludes that the evidence failed to support the involvement of Pakistani terrorist groups.

A supplemental statement by two Justices declared that the evidence against the four defendants did not meet the standard for conviction in Article 366 of the Criminal Procedure Code. Without prejudice to a continuing investigation, the Court provisionally releases the four suspects from the current proceedings (pursuant to Article 435, 2nd indent, of the Criminal Procedure Code, Codigo de Procedimientos en Materia Penal).

Citation: [Argentine] Corte Suprema de Justicia de la Nacion [Supreme Court], Decision of May 10, 1999. [International Law Update received copies of the Opinion and the Court's additional statement in Spanish as a courtesy from the Embassy of Argentina in Washington, D.C.; Israel welcomes ruling by Argentine Supreme Court, see Information release of the Israeli Consulate, Los Angeles (11 May 1999)].

TRADE

In U.S. challenge to Australia's subsidies for automotive leather, WTO Panel rules that government grants do not conform to WTO Agreement on Subsidies and Countervailing Measures

A WTO Panel has accepted U.S. arguments challenging Australia's subsidies to Howe and Company Proprietary Ltd. (Howe), its only exporter of automotive leather. Australia had intended to provide an ad valorem export incentive to Howe through mid-2000, amounting to about 5% of the value of the exported goods.

The planned incentives totaled A$30 million in direct grants, plus a A$25 million loan on very favorable terms. The intent was to make up for the exclusion of automotive leather from the Australian Textiles, Clothing and Footwear Import Credit Scheme, and the Export Facilitation Scheme for Automotive Products.

The WTO Panel concludes that the Australian government's loan to Howe is not a subsidy that is contingent upon export performance within the meaning of Article 3.1(a) of the WTO Agreement on Subsidies and Countervailing Measures (SCM). On the other hand, the grants do amount to subsidies within the meaning of Article 1 of the SCM Agreement. They are contingent upon export performance within the meaning of Article 3.1(a) of SCM. The Panel recommends that Australia withdraw these grants within 90 days.

This Panel Report also sets an interesting WTO precedent for the protection of confidential business documents. At the outset of the proceedings, the Panel established rules for the treatment of such confidential information so that only "approved persons," had access. This group comprised Panel members, representatives, Secretariat employees and members of the Permanent Group of Experts.

Citation: WTO Dispute Settlement Panel, Australia - Subsidies Provided to Producers and Exporters of Automotive Leather (WT/DS126/R, 25 May 1999). [Opinion available on WTO website www.wto.org; U.S. Trade Representative press release 99-45 (May 25, 1999)].

TRADE

WTO Panel finds Canadian measures for milk imports and dairy products exports inconsistent with WTO Agreement on Agriculture and GATT 1994 rules

In a consolidated case brought by the U.S. and New Zealand over Canada's milk regime, a WTO Dispute Settlement Panel has sided largely with the complainants. The U.S. essentially claimed that Canada provides milk for export to processors at lower prices than milk for the domestic Canadian market.

Several Canadian laws establish a comprehensive system for the production and distribution of milk and milk products. These include the Canadian Dairy Commission Act, the National Milk Marketing Plan, and Canada's administration of its tariff-rate quota on fluid milk and cream.

Canada divides milk production into two categories: "fluid milk" (for table milk and cream) and "industrial milk" (for processing into cheese, butter, and so forth). In general, fluid milk is for local consumption while industrial milk products move across provincial borders and to foreign countries.

Canada also set up "Special Milk Classes" (sub-classes of Class 5 milk in the Canadian common classification system). These include 5(a) cheese ingredients, 5(b) all other dairy products for further processing, 5(c) confectionary for import and export, 5(d) specific negotiated exports including cheese under quota destined for U.S. and UK markets, and milk powder, 5(e) surplus removal.

The exports generated through Classes 5(d) and (e) exceeded Canada's export quantity commitment level for the years 1995-1998. The Canadian Dairy Commission negotiates the prices for these milk classes with the processors and exporters on a case-by-case basis.

The U.S. made two basic charges. First, it complained that Canada is providing improper export subsidies on dairy products through its national and provincial pricing arrangements. In particular, the U.S. objected to Canada's system of special milk classes through which it maintains high domestic prices, promotes import substitution, and provides export subsidies.

Secondly, while Canada allows the import of 64,500 tonnes of fluid milk and cream under the WTO Agreement, the U.S. argued that it administers the tariff quota in a manner that denies market access. Thus, Canada's alleged practices distort the markets for dairy products and adversely affect U.S. sales of dairy products. New Zealand's claims mainly focused on the "special milk classes" set up by Canada for export subsidies.

The Panel held first that Special Milk Classes 5(d) and (e) are inconsistent with Canada's obligations under Articles 3.3 and 8 of the WTO Agreement on Agriculture by providing export subsidies in excess of the quantity commitment levels in Canada's Schedule.

The Panel also ruled that Canada acted inconsistently with Article II:1(b) of GATT 1994 when it limited access to the tariff-rate quota for fluid milk to:

(a) consumer-packaged milk for personal use, and

(b) entries valued at less than C$20.

Citation: WTO Dispute Settlement Panel, Canada- Measures Affecting the Importation of Milk and the Exportation of Dairy Products (WT/DS103/R & WT/DS113/R, 17 May 1999), available on the WTO website www.wto.org.

TRADE

WTO Panel finds that India's quantitative restrictions violate WTO trading rules and cannot be justified for balance-of-payment reasons to maintain foreign exchange reserves

A Dispute Settlement Panel of the WTO held in a Panel Report published on April 6, 1999, that India's quantitative restrictions on imports of agricultural, textile and industrial products violate WTO trading rules and cannot be justified for balance-of-payments reasons (that is, to maintain foreign exchange reserves). The U.S. had brought this complaint on July 15, 1997, alleging that 2,714 tariff lines are inconsistent with Articles XI:1 and XVIII:11 of GATT 1994, as well as Article 4.2 of the Agreement on Agriculture and Article 3 of the Agreement on Import Licensing Procedures. [These 2,714 restrictive tariff lines were published in Annex I, Part B of WTO document WT/BOP/N/24 of 22 May 1999].

The U.S. claimed that India has an unduly restrictive import regime which largely excludes foreign agriculture and consumer products from its domestic market. In particular, the U.S. claimed that India maintains a "Negative List" of products whose imports are prohibited unless an importer receives a license. This "Negative List" includes almost all consumer goods, including food, clothing and household appliances. Furthermore, India channels imports of some agricultural products through state trading monopolies or "canalizing agencies." Finally, the requirement that imports must be by "actual users," bars any imports for resale purposes.

The Panel rejects India's argument that balance-of-payment measures are immune from WTO review, and largely agrees with the U.S. that India's import restrictions are in fact inconsistent with India's WTO obligations. In particular, the Panel held that:

(1) India's import restrictions violate Articles XI:1 and XVIII:11 of GATT 1994, and are not justified under Article XVIII:B.

(2) The restrictions on agricultural products subject to the WTO Agreement on Agriculture violate Article 4.2 of the Agreement.

(3) The restrictions nullify or impair the benefits of the U.S. under GATT 1994 and the Agreement on Agriculture.

The Panel also added a few "Suggestions for Implementation," which provides instructions to India on how to implement the Panel's recommendations. The Panel notes that India's trade restrictions do not have to be removed immediately. The WTO Dispute Settlement Understanding (DSU) expects "prompt compliance" with Panel recommendations, which may mean "a reasonable period of time in which to do so" (Article 21.3 of the DSU). Here, the Panel hints that a "reasonable period" in this case may be longer than 15 months.

[In a related matter, India issued a new Export-Import Policy on March 31, 1999, which is published in the new Easy Reference Customs Tariff 1999-2000. It addresses some of the problems in Indian trade caused by economic liberalization. You may receive a copy via the Indian Academy of Business Studies in New Delhi, Phone: (91)(11) 328-1314, Email: arung@nda.vsnl.net.in.]

Citation: WTO Dispute Settlement Panel, India - Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products (WT/DS90/R) (6 April 1999), available on the WTO website www.wto.org; U.S. Trade Representative press release 99-33 (April 7, 1999).

TREATIES

European Court of Justice holds that continued fighting in former Yugoslavia fundamentally undermined 1980 preferential customs agreement with Serbia that justified EC Council in suspending it under international law principle of rebus sic stantibus

Between November 1990 and April 1992, A. Racke GmbH & Co., a German firm, had imported wines into Germany from Serbia and had cleared them with customs for storage in its private customs warehouse. When the wines went into circulation in May 1992, Racke invoked the program of preferential customs rates set up by a 1980 Co‑operation Agreement between the Member States of the European Community and the Socialist Federal Republic of Yugoslavia (the "Agreement"). By Regulation 314/83, the EC had also approved it.

The German customs authorities, however, called upon Racke to pay the difference between the third country rate and the lower rate under the Agreement. They contended that the trade concessions on which Racke tried to rely no longer applied since Regulation 3300/91 (the Regulation) had suspended the Agreement in November 1991.

The recitals to the Regulation explained that, despite an appeal by the EC and its Member States for obedience to the Hague cease‑fire agreement of October 4, 1991, the parties kept on fighting.

Racke brought suit against the customs agency, challenging its denial of preferential treatment under the Agreement. As to any wine Racke had imported after November 1991, the court dismissed the action.

Racke appealed to the German federal court. It argued that the international law doctrine of rebus sic stantibus or "fundamental change of circumstances" as formulated in Article 62(1) of the Vienna Convention on the Law of Treaties [May 23, 1969, U.N. Doc. A/CONF.39/27] did not justify the unilateral suspension of the Agreement.

The German federal court, however, ruled that the disintegration of Yugoslavia into several new states plus the violent hostilities that followed could amount to a fundamental change. On the other hand, this did not, in the court's view, radically alter the extent of the parties' obligations towards each other under Article 62(1). The court then referred the question of the Article 177.

The ECJ first upholds its jurisdiction to respond to the reference. The Court has the power to review all challenges to the validity of EC measures including those based on incompatibility with international law. The EC has to respect international law when it exercises its powers under the Rome Treaty, as amended. This clearly includes the present challenge to the Regulation.

The Court then points out that the Vienna Convention on Treaties does not itself bind the EC or all of its Member States. [Editorial Note: As of November 1998, France, Ireland, Luxembourg and Portugal were not parties]. Article 62, however, does embody a binding rule of customary international law on suspension of treaties. Hence the principle of rebus sic stantibus binds EC institutions as part of the Community legal order.

The next question was whether this provision of a treaty, although with a non-member state, is directly applicable within the EC legal order. In other words, may an EC citizen bring a private lawsuit in a Member State court based on rights conferred by the treaty provision?

This in turn depends on whether the treaty sets forth a clear and concise duty that was not contingent on the adoption of any subsequent measure. Article 22(4) of the Agreement required the EC to precisely compute custom duties pursuant to detailed rules with no discretion involved. Hence the Agreement was directly applicable.

On preliminary reference, the test for validating a regulation as against rules of customary international law, is whether the Council made clear errors of assessment as to the conditions for applying those rules. Article 62 sets forth two essentials.

The first is whether the prevailing circumstances at the time of the Agreement constituted an essential basis for the parties' assent. The Agreement declared that it aimed to contribute to the economic and social development of former Yugoslavia. The failure to keep the cease-fire agreement and the continued warfare made it impossible to meet this condition.

The second condition is whether the change had radically altered the parties' obligations. When the Council recited in the Regulation that the continued pursuit of hostilities had undermined the observance of the Agreement, it did not make a manifest error of assessment.

Citation: A. Racke GmbH & Co. v Hauptzoll­amt Mainz (Case C‑162/96) (E.C.J.), 3 C.M.L.R. 219 (1998). [Editorial Note: As of November 1998, 85 countries, not including the United States, have ratified the Vienna Convention].

EU amends Product Liability Directive to include agricultural products. The EU Directive on products liability (85/374/EEC) generally provides for compensation to consumers for injuries caused by defective products. It was adopted in 1985 to harmonize national require­ments on product liability, and combines "strict liability," traditional "causation requirements," and appropriate defenses (such as the "state of the art" defense). The definition of "product" in Article 2 of the original  Directive, however, did not include agricultural products. In light of recent problems and disputes regarding the safety of these products (such as the "Mad Cow" disease problem in the UK or the U.S.-EU dispute over hormones in beef), the EU has inserted a more general "product" definition into the Directive. It now encompasses agricultural products (even though it does not mention the word "agricultural" in the new definition). The new definition of "product" in the Directive now reads: "... 'product' means all movables even if incorporated into another movable or into an immovable. 'Product' includes electricity." [The trigger of this amendment appears to have been the "Mad Cow" disease (BSE) in the UK. Please note the potential impact on the U.S.-EU dispute over hormones in beef.] Citation: Directive 1999/34/EC ..., 1999 O.J. of the European Communities (L 141) 20, 4 June 1999.

City of Moscow imposes sales tax on domestic and foreign entities. Effective July 1, 1999, the City of Moscow will impose a broad sales tax on goods and services. The amount of the tax will be 2% until December 31, 1999, and 4% from January 1, 2000, on. The law exempts a few items such as books, periodicals, and some basic consumer goods, such as tea, from the tax. The tax applies to sales by Russian legal entities, individual entrepreneurs, and foreign entities, and the sellers must make quarterly reports to the tax authorities. The Moscow State Tax Inspectorate will issue detailed instructions on the sales tax. Citation: Law Concerning Implementation of Law No. 14 of City of Moscow of March 17, 1999, Concerning Sales Tax in Moscow. [The Moscow office of Ernst & Young, Moscow, provided a summary and the U.S. Department of Commerce's Business Service for the Newly Independent States (BISNIS) distributed it. [Tel. (202) 482-4644. BISNIS reported the Moscow City law and the other tax changes on April 12, 1999.]

China signs agreement to open its markets to U.S. agricultural products. On April 10, 1999, the U.S. and China signed an Agreement on U.S.-China Agricultural Cooperation, which lifts long-standing phytosanitary prohibitions against U.S. exports of U.S. citrus, grain, beef and poultry to China. For example, China had banned U.S. citrus because of fruit flies. Under the new Agreement, it will be lawful to sell citrus fruits from U.S. counties that are free of fruit flies. Over an interim period of two years, the Agreement phases in sales of citrus from all U.S. counties. Furthermore, China agrees to accept U.S. certifications for meat and poultry. Finally, China will allow the importation of U.S. grain that contains TCK smut at or below 30,000 spores per 50 grams. Citation: U.S. Trade Representative press release 99-36 (April 10, 1999).

During WTO negotiations, China makes trade concessions to U.S. on information technology. China has granted trade concessions resulting from the WTO accession negotiations, most of which are based on WTO agreements such as the Information Technology Agreement. Some concessions particularly favor the U.S. For example, the U.S. will maintain its current antidumping methodology regarding China, that is, China is treated as a "non-market" economy. In addition, the Chinese State Council has directed all Government entities to use only licensed computer software. (According to the U.S. Trade Representative, Paraguay, Thailand, Turkey, the Philippines, Korea and Jordan have issued similar decrees in recent months.) Citation: U.S.T.R. press releases 99-34 (April 8, 1999) [WTO concessions] & 99-32 (April 7, 1999) [software piracy].

New rule of Russian Central Bank requires importers who make pre-payments to deposit them into Russian accounts until customs clearance. On March 22, 1999, the Russian Central Bank issued Central Bank Letter No. 519 that changes buying procedures for Russian importers. It requires all Russian entities that import goods from overseas on a pre-payment basis to deposit the Russian Ruble equivalent in a Russian bank until the goods have cleared customs. This requirement does not apply to foreign or off-shore companies. The purpose is to prevent illegal transfers of hard currency from Russia. The government suspects that many Russian companies transfer funds overseas for alleged purchases that never occur. According to the U.S. Department of Commerce, this requirement will affect mostly small Russian companies and those whose primary business is not importing. Major Russian importers and those with long-standing trade relationships usually do not pre-pay for the goods. This ruling may complicate market entry for new U.S. companies, however, since their Russian customers would have to deposit the pre-payment for the goods according to these requirements. Citation: Central Bank Letter No. 519 (March 22, 1999). [An English summary of the Letter was distributed by the U.S. Department of Commerce, Business Information Service for the Newly Independent States, Phone: (202) 482-4644.]

U.S. Treasury amends Iranian Transaction Regulations. The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) has amended the Iranian Transaction Regulations (31 C.F.R. 560) in light of Executive Order 13059 (62 Federal Register 44531). Section 560.204 now bans any exportation, re-exportation, sale or supply of goods to Iran from the U.S. or by a U.S. person. Section 560.205, bars non-U.S. persons from re-exporting U.S. goods to Iran if those goods are subject to U.S. license requirements, unless the U.S. origin goods have become a substantially foreign-made product. The regulations also forbid related activities such as brokering services. The effective date was April 26, 1999. Citation: 64 Federal Register 20168 (April 26, 1999).

U.S. and China expand mutual commercial air services. The U.S. and China have signed a Commercial Aviation Agreement that will significantly expand commercial air services between the two countries. For example, it will gradually double the number of permissible flights for each country's carriers (from 27 to 54 per week). U.S. carriers will be able to freely choose the city of origin for their flights to China. By April 1, 2002, they will be able to serve 20 more Chinese cities (in addition to Beijing, Shanghai and Guangzhou). Citation: U.S. Department of State Press Statement (April 9, 1999).

U.S. relaxes rules for sales of food and related items to Cuba. As part of the major U.S. policy shift towards Cuba to promote the Cuban transition to democracy that President Clinton announced on January 5, 1999, the U.S. Department of Commerce, Bureau of Export Administration, has issued a final rule to permit exports of food and certain agricultural commodities such as pesticides and fertilizer to Cuba (see 15 C.F.R. Part 746). The final rule permits sales to independent non-governmental entities, including restaurants and religious groups, on a case-by-case basis. The effective Date was May 10, 1999. Citation: 64 Federal Register 25807 (May 13, 1999); [see also Reuters report of May 11, 1999].

U.S. Department of Commerce imposes antidum­ping duties on Japanese hot-rolled steel products. The U.S. Department of Commerce has announced its Final Determination in the antidumping investigation on hot-rolled steel products from Japan. The Department imposed antidumping margins on Japanese imports of such products from 17.86% to 67.14%, but is still reviewing whether these imports cause injury to U.S. industry. Until it has made this determination, importers of such products must post a bond or cash deposit on all imports of such products. The Department is currently also investigating hot-rolled steel products from Russia and Brazil, which will be completed in July. Citation: U.S. Department of Commerce, International Trade Administration (ITA) Newsbytes Update, April 29, 1999 [Related information is available on ITA's website www.ita.doc.gov].

EU postpones application of "hushkit" requirements for one year. To reduce noise from aircraft, the EU has issued several directives, the most important one being Directive 92/14/EEC (1992). On March 9, 1999, the EC Commission proposed a directive which would require the use of so-called "hushkits" (engine noise reduction systems) for re-certification of aircraft [the EC Commission published the proposal as Commission document COM(1998)98 final]. This will affect numerous U.S. carriers with destinations in Europe. On April 29, 1999, however, the EU decided to postpone the application of the requirements for one year. The U.S. has announced that it would promote multilateral noise standards within the framework of the International Civil Aviation Organization (ICAO) in the meantime. Citation: U.S. Department of Commerce News (April 29, 1999).

U. S. Bureau of Export Administration issues rules on export licenses to Serbia, China and Macau. The U.S. Department of Commerce, Bureau of Export Administration, has recently issued several regulations that affect export licenses to different countries. First, in response to the Serbian government's ethnic cleansing in its Kosovo province, the Bureau imposed license requirements for exports and re-exports to Serbia of all items subject to the Export Administration Regulations (EAR). [The regulations already contained restrictions regarding the former Republic of Yugoslavia (see 15 C.F.R.. Part 746)]. Second, the Bureau added five more entries to the list of Chinese entities to which it is unlawful to export U.S. products without a license. There are indications that these entities, such as the Beijing Aerospace Automatic Control Institute, may be taking part in the proliferation of missile technology. Third, the Bureau has designated the Portuguese colony of Macau as a separate destination on the Commerce Country Chart for export licensing purposes in preparation for Macau's return to China on December 20, 1999. Citation: 64 Federal Register 24018 (May 4, 1999) [Serbia]; 28909 (May 28, 1999) [Chinese entities]; 28907 (May 28, 1999) [Macau].

International Court of Justice to review legality of use of force in Yugoslavia in the context of Kosovo conflict. On May 10-12, 1999, the International Court of Justice (ICJ) held hearings in the case of Legality of Use of Force that Yugoslavia had filed on April 29, 1999 against Belgium, Canada, France, Germany, Italy, the Netherlands, Portugal, Spain, the United Kingdom, and the United States. Yugoslavia claims that their bombing of Yugoslav territory violates their obligation not to use force against another state. On June 2, 1999, the ICJ rejected Yugoslavia's request for provisional measures to "cease immediately [their] acts of use of force" and to "refrain from any act of threat or use of force" against Yugoslavia. The ICJ stated that it lacked prima facie jurisdiction to impose provisional measures.  Citation: International Court of Justice press communiques Nos. 99/19 through 99/33. [This information is available on the ICJ's website www.icj-cij.org].

EU amends list of barred Yugoslav individuals. The EU recently issued a list of Yugoslav individuals who are barred from entry into the EU as a consequence of the Kosovo conflict. The barred individuals include the President of Yugoslavia, Slobodan Milosevic, his immediate family, and numerous government officials. See 1999 Int'l Law Update 51. With Council Decision 1999/357/CFSP, the EU has amended that list substantially. — In a related matter, the EU has issued a list of European competent government authorities in the Member States that may authorize the sale, supply or export of petroleum and petroleum products to Yugoslavia. For example, in the UK the Export Policy Unit of the Department of Trade and Industry may grant such authorization. Citation: 1999 O.J. of the European Communities (L 140) 1, 3 June 1999 [barred individuals] & (L 131) 29, 27 May 1999 [competent authorities].

U.S. and Japan issue status report on their initiative to further deregulation and competition policy in Japan. On May 3, 1999, the U.S. and Japanese governments issued the Second Joint Status Report on the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy (the first Report was issued on May 15, 1998). This Initiative is part of the U.S.-Japan Framework for a New Economic Partnership, and has the goal of reducing regulatory and competition obstacles that put foreign goods and services at a disadvantage in the Japanese market. The Initiative consists of high-level meetings of government officials and six expert groups (telecommunications, housing, medical devices and pharmaceuti­cals, financial services, energy, and structural issues such as competition and distribution). The Report states in detail the various measures that the Japanese Government has taken to open the market to foreign competition, such as reduction of interconnection rates for telephones, acceptance of U.S. building materials, and a prior classification information system for customs/imports by email. Citation: The Report is available on the website of the Ministry of Foreign Affairs of Japan at www.mofa.go.jp.