7. Panel's right to seek information in respect of defences Canada has not made

9.79 In introductory comments to its 21 December 1998 response to questions from the Panel, Canada expressed the "concern" that "the Panel has requested the production of evidence in respect of defences Canada has not made." Canada asserts that "this method of proceeding ignores the principle of judicial economy." Consistent with the principle of judicial economy, Canada submits that the Panel should address only those issues which must be addressed in order to resolve the matter in issue in the dispute. By way of example, Canada argues that it is not necessary for this Panel to determine whether impugned programmes, activities or transactions are "subsidies", if it finds that they are not "contingent ... on export performance", and vice versa.

9.80 Brazil has expressly endorsed Canada's views on the principle of judicial economy generally. However, Brazil has not expressly endorsed Canada's view that the principle of judicial economy should necessarily prevent the Panel from asking a party questions on issues in respect of which it has not adduced defences.

9.81 We note that, according to Canada, Brazil must demonstrate two distinct and necessary elements in order to pursue its claims in the present case. First, Brazil must demonstrate the existence of a subsidy. Second, Brazil must demonstrate that the subsidy is contingent on export performance. Canada effectively submits that it has the option of choosing whether to defend itself on both these elements, or only one of them. In principle, we agree with Canada in this regard.

9.82 Canada asserts, however, that if Canada chooses to defend on only one element, then the Panel is precluded from seeking information on the other element in respect of which Canada has not raised a defence. We do not accept this argument.

9.83 With regard to certain measures before the Panel, Canada chose to defend itself on the issue of export contingency. Thus, Canada does not advance detailed arguments on the question of subsidization. Despite the absence of any defence on the issue of subsidization, Canada states expressly that it does not admit that the relevant measures constituted subsidies. Canada defends itself on the issue of export contingency, because it believes that the Panel will reject Brazil's claim on export contingency. However, Canada has ignored the possibility that the Panel could find in favour of Brazil on the question of export contingency. If the Panel were to find against Canada on the question of export contingency, the Panel would then be required to make findings on the subsidy issue, particularly given Canada's express statement that it does not admit that the relevant measures constitute subsidies.⁵²⁹ If the Panel were prevented from seeking information on the subsidy issue because of Canada's decision not to defend itself on that issue, the basis for the Panel's findings on subsidization would be weak at best. It is for these reasons that we reject Canada's argument that a party's decision not to put in a defence on a particular issue, when that party denies or refuses to admit elements of the claim, should prevent the Panel from seeking information on that issue.

8. Panel's right to seek information in the absence of a preliminary ruling on the establishment of a prima facie case

9.84 In introductory comments to its 21 December 1998 response to our questions, Canada expressed the "concern" that "the Panel has requested the production of evidence in respect of matters where in Canada's view Brazil has clearly not made out a prima facie case." Canada also notes that "the Panel has not ruled on whether Brazil has made out a prima facie case on any of the impugned programmes, activities or transactions." With regard to the latter consideration, Canada noted at the second substantive meeting with the Panel that "the fact that the Panel has not ruled on what Canada considers to be an essential preliminary issue, that is, whether Brazil has made out a prima facie case, makes it difficult for Canada to defend itself."

9.85 Brazil characterized Canada's concern as "illogical", noting that "[n]either of the Parties will know what the Panel thinks of the case until a point in this proceeding at which neither will be able to present new evidence."

9.86 We understand that there are two elements to the "concern" raised by Canada. First, Canada appears to argue that a panel should rule on whether the complaining party has established a prima facie case as a preliminary matter. Second, Canada appears to argue that a panel should only seek information on matters with respect to which it has ruled as a preliminary matter that a prima facie case has been established. We do not accept Canada's argument.

9.87 We note that there is nothing in the DSU that requires a panel to rule on the establishment of a prima facie case as a preliminary matter. Indeed, the DSU makes no provision for any form of preliminary or interim ruling. Furthermore, we are not aware of any WTO panels that have made preliminary rulings on whether the complaining party has established a prima facie case. Whereas a critical decision for panels in every case is whether or not a prima facie case has been established, and whether or not the respondent has rebutted any such prima facie case, in practice these decisions are made in light of all the evidence adduced by the parties, including both written and oral submissions. Such decisions are, therefore, necessarily made in the latter stages of the panel process.

9.88 We recall Canada's assertion that it had experienced difficulty in defending itself as a result of the Panel's failure to issue a preliminary ruling on whether Brazil had established a prima facie case. Without expressing any opinion on Canada's assertion that it experienced difficulty in defending itself in the present case, we consider that Canada could defend itself fully during the Panel proceedings simply by assuming that Brazil had, or would, establish a prima facie case in respect of all its claims.

9.89 Furthermore, a panel's right to seek information is governed by Article 13.1 of the DSU. There is nothing in Article 13.1 to suggest that a panel's right to seek information is restricted to matters in respect of which the complaining party has been deemed (as a preliminary matter) to have established a prima facie case. The only express restriction on a panel's right to seek information is the Article 13.1 obligation for a panel to "inform the authorities" of a Member before seeking information or advice from any individual or body within the jurisdiction of that Member. In our opinion, any requirement that panels should provide preliminary rulings on whether the complaining party has established a prima facie case before seeking information or advice under Article 13.1 could render that provision ineffective. This is because in certain circumstances a panel may consider it appropriate to seek information or advice precisely in order to determine whether the complaining party has established a prima facie case. Canada's approach to a panel's right to seek information would preclude this possibility, and therefore render Article 13.1 ineffective in such circumstances.

9.90 For these reasons, we reject Canada's criticism of the Panel for having requested information on matters in respect of which there had not been a preliminary ruling on whether or not Brazil had established a prima facie case.

9. Panel's right to seek information in the absence of an allegation by the complaining party

9.91 Canada objects that the Panel has requested the production of evidence in respect of transactions where Brazil has not made an allegation.

9.92 Brazil does not comment on Canada's objection.

9.93 We note that Canada has raised this objection in respect of questions asked by the Panel concerning: contributions made under the SDI programme generally; specific SDI contributions under the Aerospace Industry Development Fund; the EDC debt financing to ASA; and the Subsidiary Agreement assistance to Rolls Royce and Lamines CTEK.

9.94 We recall that Brazil presented very broad allegations effectively covering all assistance granted to the Canadian civil aircraft industry under the various programmes identified in its request for establishment. Accordingly, any assistance provided to the civil aircraft industry under the relevant programmes was effectively covered by the scope of Brazil's allegations. Thus, to the extent that the Panel sought information under Article 13.1 with regard to specific instances of assistance (provided under the relevant programmes) identified in the record, the Panel necessarily only sought information in respect of assistance covered by Brazil's allegations.

9.95 We note, however, that in its submission dated 4 December 1998, Brazil stated that it was not making any specific allegation against the Subsidiary Agreement assistance to Rolls Royce or Lamines CTEK identified in the record, since such assistance did not concern the regional aircraft industry. On the basis of this statement, the Panel ultimately decided not to take these two transactions into account when reviewing Brazil's claim concerning Subsidiary Agreement assistance to the regional aircraft industry.⁵³⁰ In normal circumstances, the Panel would not have sought additional information regarding these transactions under Article 13.1 of the DSU. However, the request for information on these transactions was sent to Canada on 10 December 1998. At the time the request was sent, the Panel had not had sufficient time to reach a final decision on the full implications of Brazil's 4 December 1998 statement concerning these transactions. Accordingly, it was considered appropriate to request detailed information concerning these transactions, to cover the possibility that this information might be relevant to the Panel's deliberations at a future date. Consistent with the Panel's finding that these transactions were not covered by Brazil's allegations concerning Subsidiary Agreement assistance to the Canadian regional aircraft industry, the requested information ultimately did not become relevant to the Panel's deliberations.

C. Definition of "Subsidy" Within the Meaning of Article 1 of the SCM Agreement

9.96 A critical issue in this case concerns the definition of "subsidy" within the meaning of Article 1 of the SCM Agreement. Leaving aside the issue of "income or price support[s]" (Article 1.1(a)(2)), Article 1 of the SCM Agreement provides that a "subsidy" exists when there is a "financial contribution" by a "government or any public body within the territory of a Member" (Article 1.1(a)(1)) that confers a "benefit" (Article 1.1(b)).

9.97 The parties do not disagree on the notion of a "financial contribution" by a "government" or "public body". However, there is significant disagreement between the parties on the meaning of the term "benefit" in Article 1.1(b) of the SCM Agreement. This disagreement influences much of the parties' argumentation before the Panel. Therefore, before proceeding with our analysis of Brazil's claims, we shall first provide our interpretation of "benefit".

1. Arguments of the parties

9.98 Canada asserts that a "benefit" is conferred when a public financial contribution by a public body (i) imposes a cost on the government, and (ii) results in an advantage above and beyond what the market could provide. Canada claims that this interpretation of the term "benefit" is based on the ordinary meaning of "benefit", the context in which it is found, and the object and purpose of the SCM Agreement read as a whole.⁵³¹

9.99 According to Canada, the ordinary meaning of "benefit" is "an advantage". However, in the context of the SCM Agreement, Canada argues that this ordinary meaning is overly broad, since it could include "normal commercial activity", such as a commercial contract (entered into by a government) that accords an advantage to a firm relative to its competitors. For this reason, Canada interprets "benefit" in light of Annex IV amd Article 14 of the SCM Agreement, which it relies on as relevant context for the interpretation of Article 1.

9.100 Canada notes that Article 14 of the SCM Agreement applies commercial benchmarks as guidelines for the 'benefit to recipient method' of calculating the amount of a subsidy.⁵³² For this reason, Canada accepts that commercial benchmarks are relevant in determining the existence of "benefit" within the meaning of Article 1. However, Canada also refers to Annex IV of the SCM Agreement as relevant context. Annex IV concerns the calculation of the total ad valorem subsidization with regard to the presumption of "serious prejudice" under Article 6.1(a). Paragraph 1 of Annex IV provides that [a]ny calculation of the amount of a subsidy for the purpose of paragraph 1(a) of Article 6 shall be done in terms of the cost to the granting government". Canada asserts that if "benefit" is defined exclusively in terms of commercial benchmarks (i.e., without any reference to net cost to government), a subsidy might be deemed to exist under Article 1 because it was on below-market terms, but it might nonetheless have no value within the meaning of Article 6.1(a) if it does not involve any net cost to the government. By applying Annex IV as context for the interpretation of Article 1 of the SCM Agreement, Canada asserts that net cost to the government should be a condition for establishing "benefit" within the meaning of Article 1 of the SCM Agreement.

9.101 With regard to government credit, Canada asserts that item (k) of the Illustrative List of Export Subsidies of Annex I of the SCM Agreement provides specific contextual guidance as to what constitutes a "subsidy" within the meaning of Article 1 of the SCM Agreement. On the basis of this specific contextual guidance, Canada submits that there are two elements in determining whether particular credit terms are subsidies: (1) does a government provide credit at rates below those which it has to pay for the funds so employed, and (2) does such credit secure a material advantage in the field of export credit terms? Canada emphasised, however, that neither item (k), nor other items in the Illustrative List, identify a contrario what would not constitute a "subsidy" within the meaning of Article 1. For Canada, such an a contrario reading would turn the Illustrative List into an exclusive list.

9.102 With regard to the object and purpose of the SCM Agreement, Canada states that "the 'mischief' that the Agreement seeks to discipline are measures that distort the market by (i) imposing a cost on the treasury of the providing Member, and (ii) conferring an advantage to the recipient above and beyond the market".

9.103 For Brazil, neither the ordinary meaning of Article 1.1, nor its context, nor the object and purpose of the Subsidies Agreement, nor Canada itself, outside the confines of these proceedings, suggest, much less require, a "net cost to government" test. Brazil argues that the proper test is evident from the ordinary meaning of Article 1.1: a subsidy exists where a government contributes something, and in so doing grants an aid, which gives help or support, or an advantage, thereby improving the recipient's condition above and beyond the market.

9.104 Brazil notes that Canada agrees that demonstrating a "benefit to the recipient" is one part of the "benefit" test. Brazil argues, however, that Canada invents a second, additional requirement - that the government, in making its contribution, realize a "net cost." Brazil rejects each of Canada's reasons for this additional asserted requirement. First, Brazil disputes Canada's argument that applying the ordinary meaning of the term "benefit" - which in Brazil's view means "advantage" or "aid" - would not "adequately narrow the term". Brazil argues that no provision of the Vienna Convention requires that the ordinary meaning of a term be narrowed in order for it to be valid. Brazil notes Canada's statement that a broad definition of "benefit" could mean that a "commercial contract" could possibly be considered a "subsidy," but argues that such a contract is not, without something more, a subsidy prohibited by the terms of the Subsidies Agreement.

9.105 Second, Brazil disagrees with Canada's view that paragraph (a) of Article 6.1 of the SCM Agreement provides contextual support for its net cost argument. Brazil disagrees with Canada that if "benefit" under Article 1.1 means "benefit to the recipient," a government contribution identified under Article 1.1 as a "subsidy" could have a value of zero under Article 6.1 and Annex IV. Brazil asserts that valuation is only one of several ways to establish "serious prejudice" under Article 6.1 of the Subsidies Agreement. Moreover, for Brazil, Article 6.1 is not relevant to an export subsidy, which need not be quantified or subject to specific valuation in order to trigger the prohibition of Article 3.

9.106 Furthermore, Brazil also disagrees that item (k) of Annex I to the Subsidies Agreement offers "context" supporting Canada's proposed test. According to Brazil, Annex I does not speak to whether government activity constitutes a subsidy, but rather to whether government activity constitutes a prohibited export subsidy. Brazil submits that a measure may constitute a subsidy, but not be on the Illustrative List of Export Subsidies included in Annex I.

9.107 Third, concerning the object and purpose of the SCM Agreement, Brazil finds incomprehensible Canada's implication that the type of benefit estimated by Brazil for TPC's $87 million contribution to Bombardier is not, consistent with the object and purpose of the Subsidies Agreement, "trade distortive."

9.108 Furthermore, with regard to Canada's own administrative practice, Brazil notes that Revenue Canada's Special Import Measures Act Handbook states that while the determination of "benefit" on a government loan is generally related to whether the government recovers its costs, such a test will not always capture the true effect of the subsidy. According to Brazil, the Handbook states that:

9.109 Furthermore, according to Brazil, in defining a "subsidy," the Canadian Handbook states that a "benefit" can be direct or indirect:

9.110 For Brazil, therefore, Canada's position concerning the definition of "subsidy" and "benefit" before this Panel is irreconcilable with that adopted in its own law.

To continue with Interpretation by the Panel

⁵²⁹ Canada states that it is not necessary for this Panel to determine whether impugned programmes, activities or transactions are "subsidies", if it finds that they are not "contingent ... on export performance", and vice versa. A contrario, we understand Canada to argue that it is necessary for the Panel to determine whether impugned programmes etc. are subsidies if it finds that they are contingent on export.

⁵³⁰ See para. 9.259 above.

⁵³¹ The Panel notes that Canada therefore purports to interpret the term "benefit" consistent with Article 31.1 of the Vienna Convention on the Law of Treaties.

⁵³² The Panel notes that Article 14(a) provides, for example, that "government provision of equity capital shall not be considered as conferring a benefit, unless the investment decision can be regarded as inconsistent with the usual investment practice ... of private investors ...".