Softwood Lumber Goes to LCIA Arbitration

The Softwood Lumber Agreement (SLA) signed between Canada and the United States in October 2006 is headed to arbitration. As reported in a USTR press release, U.S. Trade Representative Susan Schwab said that “It is truly regrettable that, just ten months after the Agreement entered into force, the United States has no choice but to initiate arbitration proceedings to compel Canada to live up to its SLA obligations relating to export volume caps, proper application of the import surge mechanism, and anti-circumvention. ” If you are interested in the substance of the dispute you can read details in the press releases from the United States here, Canada here, and the U.S. lumber coalition here.

I want to focus on the dispute resolution provision chosen by the United States and Canada to resolve this dispute. Article XIV of the SLA is over four pages long and is incredibly complex. Essentially, it provides for a two-step process in which the parties first agree to consult with one another to arrive at a satisfactory resolution. If consultations are unsuccessful, either party may “refer the matter to arbitration by delivering a written Request for Arbitration to the Registrar of the LCIA Court. The arbitration shall be conducted under the LCIA Arbitration Rules in effect on the date the SLA 2006 was signed….The legal place of arbitration shall be London, United Kingdom.”

Why is this significant? To the best of my knowledge, it is the first time in history that two states have agreed to arbitrate their differences using the arbitration rules of the London Court of International Arbitration. The LCIA is one of the premier arbitration institutions in the world for resolving private commercial arbitration disputes. But it has no experience with purely state-to-state arbitration. In recent decades states typically have relied on international tribunals, special bilateral commissions (e.g., the Eritrea-Ethiopia Claims Commission) or ad hoc arbitration (such as the Eritrea-Yemen arbitration) to resolve their differences. Even more frequently, they have de-politicized interstate disputes through bilateral investments treaties (BITs) that authorize private investors to directly pursue claims against the host state using UNCITRAL or ICSID arbitraton rules. But softwood lumber is different. It is public international arbitration using a private dispute settlement mechanism.

I would love to know the negotiating history that led Canada and the United States to opt for LCIA arbitration. Two states are agreeing to submit to binding international arbitration using rules that were designed almost exclusively with private parties in mind. The place of arbitration is London, which means English law will be the lex fori and that the two states have agreed to a degree of supervision by the English courts in the event the arbitration goes awry.

In some respects this is reminiscent of the early 20th century era in which bilateral arbitration between states using the Permanent Court of Arbitration was the favored mechanism for the peaceful resolution of interstate disputes. If this arbitration is successful, perhaps we will see more instances of states opting for this approach.