Imposing Environmental Obligations in Investment Arbitration

*Umang Bhat Nair


Introduction


As things stand today, climate change poses a grave threat that we cannot turn a blind eye to any more. The acidification of oceans, melting of sea ice, and increase in average temperatures heralds bleak future if steps are not taken to actively combat climate change. Climate change is an issue that pervades across business sectors and impacts everyone. To go about one’s business without considering its impact on the environment is like littering the same park you run in till one day it’s impossible to run there anymore. Fortunately, businesses seem to be getting cognizant of the risks of climate change and we now see a rise in the number of companies putting environmental, social and governance [“ESG”] principles at the forefront of their businesses. The increase in usage of sustainable financing to further commercial ambitions while achieving ESG goals through the issue of bonds such as Green Bonds, Sustainability-Linked bonds and Impact bonds is another indicator of businesses moving in the right direction.


While businesses may be moving in the right direction, it is perceived that the international arbitration community has not yet moved similarly.[1] It is also perceived that it is only a few members of the community are fully informed and engaged with issues of climate change.[2] Arbitrations between States and foreign investors, in particular, are likely to be forced into submitting their attention to climate change as it continues to increasingly pose a grave threat to investments.[3] Changes in the Investment Treaty landscape such as States bringing counterclaims against investors violating domestic environmental laws and regulatory changes due to the Paris Agreement affecting investments are likely to be central causes for concern.


With this background, this Article shall endeavour to highlight the rise in prominence of environmental issues in investment arbitrations and then analyse how investment arbitral tribunals and States, today, may hold investors accountable for environment-related obligations within the framework of existing Bilateral Investment Treaties [“BIT”] that may contain only minimal or unclear language for such obligations. The Article is divided into 4 parts. First, it shall trace the upward trajectory of the attention given to environmental issues in treaty arbitration. Second, it shall briefly introduce the central concerns that hamper the development of a more vibrant approach to environment-related claims in treaty arbitration. Consequently, the author shall rely on the general rule of interpretation in international law found in Article 31 of the Vienna Convention on the Law of Treaties [“VCLT”] to argue that investors may be held liable for breaching environment-related obligations even where the relevant BITs do not explicitly impose the same. Finally, conclusions are drawn.


Environmental Issues in Treaty Arbitration – the rise in prominence


While policy considerations are not to be confused with the black letter of the law, they still form an integral part of international law.[4] Just as a reference to current norms and past decisions that influence the decisions of treaty arbitration tribunals, policy considerations also form a part of the extra-legal considerations involved in the legal process of decision-making.[5] In today’s changing BIT landscape, standards for environment-related obligations which were earlier merely voluntary and guidelines to be followed are now appearing as BIT provisions. These obligations mostly come under the ambit of corporate social responsibility [“CSR”] and can be seen in international instruments such as the OECD Guidelines for MNCs.[6] Today, certain BITs such as the Chile-Hong Kong BIT include provisions such as:


“The Parties reaffirm the importance of each Party encouraging enterprises operation within its area to voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party.”[7]


An increase in BITs containing such provisions shows a marked shift in the investment treaty landscape towards including environment-related obligations. If we were to look back at a tribunal’s decision in Metalclad,[8] it can be seen that the tribunal did not consider the environmental aspects of the challenged measures and assessed the claims strictly from the relevant treaty’s protection standards. Now, with an enhanced focus of State governments on protecting the environment and an increase in environmental investments (for e.g., renewable energy, waste management), we are seeing several treaties including provisions like the one highlighted above in the Chile-Hong Kong BIT. Today, there are BITs that require an investment to be contributing to the environment for validly claiming any substantive protections. For instance, the Moroccan Model BIT,[9] requires investments to contribute to sustainable development for qualifying as a protected investment. In addition, Model BITs of countries like South Africa and the Netherlands impose environmental obligations for investors. Finally, we also see tribunals actively including policy considerations in their decisions. For example, in the Final Award passed in the case of Philip Morris v. Uruguay,[10] while it was public health and not the environment that was considered by the tribunal, their approach shows an inclination to passing decisions that are mindful of policy considerations outside the four corners of the relevant BIT.


Even when we look at foreign investors, we see a rise in the invocation of the FET standard or claims of indirect expropriation due to a Host State’s failure to adopt or enforce environmental regulations.[11] Environmental concerns are also often seen in energy-related investment disputes where tribunals are tasked with balancing a State’s regulatory powers and protections afforded to foreign investors. In SD Myers v. Canada,[12] Canada relied on the foreign investor’s alleged non-compliance with state environmental norms to dismiss the claim. In Aven v. Costa Rica,[13] a defence of ‘unclean hands’ was made with reliance placed on a violation of environmental norms. In Copper Mesa Mining v. Ecuador,[14] a mitigation argument involving environment-related obligations was made. Environmental issues are being raised in the form of both a sword and a shield by either Party in treaty arbitrations. Hence, it can be reasonably concluded that environmental issues have carved out a certain space for themselves in the investment treaty law regime.


Contemporary Concerns


Having seen the rise in prominence of environmental issues in investment arbitration, it is time to turn to the plaguing issues in this line of jurisprudence.

A potentially major roadblock in the way of development of this area of law, which this paper shall attempt to address, is that while newer Model BITs have begun to introduce explicit obligations for foreign investors with respect to the environment, multiple existing treaties, both old and new, do not have any mention of such obligations. This will undeniably lead to violations against the environment committed by foreign investors going unchecked without any form of sanction. Through the following parts of this paper, the author shall attempt at positing a solution for this conundrum.


The second source of concern is the inherent imbalance and asymmetry between host states and foreign investors when it comes to the rights and obligations imposed on both. Investors have been vested with numerous rights and protections and the opportunity for opting for stable dispute settlement procedures in these traditional investment treaties. States, however, have merely given their assent to non-reciprocal obligations, an assent which severely hampers their policy space. It is true that contemporary BITs like the Model India BIT introduce greater equilibrium between foreign investors and host states when it comes to corresponding rights and obligations. Such Model BITs that place the doctrine of sustainable development as a central policy objective are few and far in between and the majority of existing BITs are silent on such aspects.[15]


Another concern relates to the fact that international investment treaties do not provide any sort of guidance on issues related to the environment.[16] This leads to tribunals adjudicating investor obligations on the basis of unclear and minimalist language in BITs.[17]


Proposing a framework for applying Article 31 of the Vienna Convention on the Law of Treaties to resolve existing issues for environmental obligations in existing BITs


There has been a steady shift toward States taking greater care of their residents, and a corresponding rise in investors being pulled up for violating environmental obligations. The Indian Model BIT is a representative example of this shift in treaty practice.[18] It achieves this by including expressly obligations related to the environment.


Historically, arbitral tribunals have been largely indifferent to environmental issues. This is evident from the Metalclad[19] case, where the tribunal ignored the environmental aspects of the disputed measures. A possible reason for this indifference may stem from the fact that public international law is ‘fragmented.’ Unlike national legislations, public international law is not formulated by central legislators. As a result, the various domains of international law have evolved mostly independently of each other. Thus, an investment arbitration tribunal is free to adjudicate upon a dispute by only following the text of the applicable investment treaty. Principally, the tribunal is barred from relying on other norms, such as environmental legal norms. While traditional contracts are limited by mandatory rules of public policy, there is no equal limitation on investment treaties outside international law’s standard peremptory norms. These peremptory norms do not substantially address environmental concerns and therefore, historically, there has been a lack of engagement with environmental concerns in investment arbitration.


This historical tendency to ignore environmental issues while adjudicating investment treaty disputes is argued to be outdated. Public international law cannot be seen as restricted to States as the only actors involved. Multinational corporations with going concerns in multiple jurisdictions have become actors as well.[20] Tribunals constituted in recent times have started to progressively shift their stance to including extra-legal considerations as factors to be taken into account during the adjudication of a dispute. In Philip Morris v. Uruguay,[21] the tribunal found a legitimate interest in an anti-smoking policy. The tribunal was swayed by considerations of public health and inserted a deliberate obiter dictum in its Award in this regard. If a tribunal could be swayed by considerations of public health that was not a part of the original intention of the treaty’s drafters, it may be argued that a tribunal could also be swayed by considerations related to environmental protection laws. Another example of tribunals including extra-legal norms in their assessment can be seen in the UPS v. Canada case.[22] In this case, the tribunal rejected a submission made by the Claimant by placing reliance on principles followed by the ‘international postal regime.’[23]Such reasoning may be applied to environment-related cases, with tribunals considering a State’s international obligations under the ‘international environmental laws regime.’ The tribunal in Mamidoil v. Albania,[24] included violations of environmental law for justifying the initial illegality of the foreign investor’s investment.


This final case of Mamidoil is an important one to consider when understanding the way forward for environmental obligations in investment arbitration. The illegality of investment directly affects the jurisdiction of an investment arbitration tribunal. If there is a change in the approach taken by tribunals on the lines of Mamidoil, i.e., testing the legality of an investor’s investment against environmental laws, it would impose a certain amount of responsibility onto investors assuming they may violate environmental laws while retaining all their rights under the concerned investment treaty.


Investors are not parties to investment treaties and thus are not explicitly fettered with obligations or duties. With the presence of provisions for investments to be publicly responsible, investor obligations could be inferred to arise from these provisions. An expanded definition for investments that makes it mandatory for investments to follow domestic legislation on areas such as environmental regulation would deter investors from violating said regulations. It would be feared that non-compliance could lead to nullifying the jurisdiction of any arbitral tribunal over a dispute regarding the investment.


With this context in mind, it is pointed out again that some of the newer BITs have begun to include progressive provisions that impose environmental obligations on investments. However, such developments do not give way for progressive solutions when it comes to issues arising from existing BITs that do not mention environmental obligations on investments. It is here that the author submits that Article 31 of the Vienna Convention on the Law of Treaties may be of some use.


Take into consideration the tribunal decisions in Von Pezold v. Zimbabwe,[25] Roussalis v. Romania,[26] and Urbaser v. The Argentine Republic.[27] There has been a marked shift in the approach on how to apply international law in general to investment disputes.


In Von Pezold, certain third parties had made an application to appear as amicus curiae. They argued that international human rights law on the rights of the indigenous would be applicable because of the relevant BIT’s mention of “international law.” However, the tribunal rejected this submission and held that general international law and its rules would not attract into it the entire gamut of international laws such as those on indigenous people rights. Rather, such a reference would be limited to attracting rules of international law associated with the content of the BIT, such as those on FET standards.


Comparing these decisions to that of the tribunal in Urbaser, reflects a clear change in the way tribunals approach references to the application of general international law. In Urbaser, Argentina filed a counterclaim amounting to close to USD 200 million. It was alleged that the foreign investors were in violation of their human rights obligations when it came to accessing water. While the counterclaim was dismissed on substantive grounds, the tribunal interpreted Article 10(1) of the Spain-Argentina BIT[28] “in good faith” to finally hold that disputes concerning foreign investor obligations would also be covered under the BIT. The Tribunal went further to hold that these obligations could be found in international law, inclusive of human rights norms.[29]


The shift from Von Pezold and Roussalis to Urbaser shows a change toward including international law norms in the assessment of obligation violations by foreign investors. It would, of course, be inaccurate to argue that this is a perception change across arbitrators worldwide. However, inspiration may be drawn from the Urbaser tribunal’s approach. In paragraph 1204, the tribunal relied on Article 31(3)(c) of the VCLT to hold that it would be apt to consider if other parts of international law might be relevant. Shifting from a mere textual analysis of investment treaties to imposing investor obligations by making applicable the relevant rules of general international law would push forward a more environmentally responsible dispute settlement procedure.


Conclusion


While treaty negotiators have tried their best to open up the doors for environmental counterclaims by states, the current state of affairs remains a patchwork of provisions that are confusing. New treaty provisions in the newer BITs do not necessarily imply that arbitrators would now change their outlook when it comes to interpreting the standards for allowing to hear a counterclaim.


In the hope of change, the author shall now make some recommendations for the stakeholders to consider for smoother dispute resolution that is environmentally conscious. States and foreign investors may consider negotiating their investment agreements with each other and cover in this discussion, environmental issues that may prop up during the lifetime of the investment.[30] One such state that solely accepts claims under investment agreements is Brazil.[31] Ecuador, a state with an emerging mining industry, recently pulled out of its investment treaties and removed legislation calling for negotiating investment contracts directly with foreign investors.[32] The terms of investment agreements would undeniably be a good way forward for all stakeholders given the predictability it would imbibe.


Another method to achieve progress would be for states to introduce sustainability goals in investment treaty preambles and require foreign investments to be set up and run in accordance with the host state’s laws.


In any event, it is hoped that the international arbitration community recognises the pressing need for imposing environmental obligations, either using the new BITs or Article 31 of the VCLT on older treaties to attract the application of international environmental law.

 

*Umang Bhat Nair is a 4th-year student of NALSAR University of Law, Hyderabad. [1] Lucy Greenwood, “The Canary is Dead: Arbitration and Climate Change”, in Maxi Scherer (ed), Journal of International Arbitration, Kluwer Law International, Vol. 38 Issue 3, 309-311 (2021). [2]“BVI: A Frontline Focus for Resolving Future Climate Change Related Disputes” (2019). [3] Valerie Volcovici, “UN Climate Chief urges investors to bolster global warming fight”, Reuters (16 January 2014) < https://www.reuters.com/article/us-un-climate-change/un-climate-chief-urges-investors-to-bolster-global-warming-fight-idUSBREA0E1KM20140115?edition-redirect=uk> accessed last 20 April 2022. [4] Higgins, “Integrations of Authority and Control,” 85. [5] Id. [6] OECD (2011), OECD Guidelines for Multinational Enterprises, OECD Publishing, available at <https://www.oecd-ilibrary.org/governance/oecd-guidelines-for-multinational-enterprises_9789264115415-en> last accessed 20 April 2022. [7] Chile-Hong Kong BIT, Article 16. [8] Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1. [9] Moroccan Model BIT of 2019, Article 14. [10] Philip Morris Brands v. Oriental Republic of Uruguay, ICSID ase No. ARB/10/7. [11] Yasmine Lahlou, Rainbow Willard and Meredith, “The Rise of Environmental Counterclaims in Mining Arbitration,” Global Arbitration Review (2019). [12] S.D. Myers Inc. v. Government of Canada, UNCITRAL (1976). [13] David R. Aven and others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3. [14] Copper Mesa Mining v. Republic of Ecuador, PCA No. 2012-2. [15] Sonal Kumar Singh, Anish Jaipuriar, and Sayantika Ganguly, “Environmental obligations in Investor-State Arbitration: The investor Perspective,” Mondaq (12 March 2021) < https://www.mondaq.com/india/environmental-law/1046270/environmental-obligations-in-investor-state-arbitrations-the-investor-perspective> accessed 20 April 2022. [16] Crina Baltag, “Human Rights and Environmental Disputes in International Arbitration,” Kluwer Arbitation Blog (24 July 2018) < http://arbitrationblog.kluwerarbitration.com/2018/07/24/human-rights-and-environmental-disputes-in-international-arbitration/> accessed 20 April 2022. [17] Maria Fanou, “Environmental Considerations in Investment Arbitration: A Report of a ‘Topical issues in ISDS’ Seminar’” Kluwer Arbitation Blog (22 May 2019) < http://arbitrationblog.kluwerarbitration.com/2019/05/22/environmental-considerations-in-investment-arbitration-a-report-of-a-topical-issues-in-isds-seminar/> accessed 20 April 2022. [18] Id. [19] Supra, at note 8. [20]Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award of 8 December 2016, para 1195. [21] Supra, at note 10. [22] United Parcel Service of America Inc. v. Government of Canada, ICSID Case No. UNCT/02/1. [23] Id., at paras 139-141 [24] Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No. ARB/11/24. [25] Bernhard von Pezold and others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Procedural Order No. 2 of 26 June 2012, paras 39, 57. [26] Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/01. [27] Supra, at note 20. [28] Article X (1) of the Argentine-Spain BIT of 1991: “Disputes arising between a Party and an investor of the other Party in connection with investments within the meaning of this Agreement shall, as far as possible, be settled amicably between the parties to the dispute.” [29] Supra, at note 20. [30] Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/05. As the only contemporary example of a state prevailing against a foreign investor in a counterclaim, the decision may push states to opt for investment agreements directly with foreign investors for counterclaim opportunities. [31] R Zabaglia and A Di Franco, “The International Arbitration Review, Brazil,” The Law Reviews (9th ed. 2018). [32] C Torres and A Hurtado-Larrea, “The International Comparative Legal Guide to: Investor-State Arbitration 2019, Ecaudor,” Global Legal Group Limited; London (1st ed., 2018) < https://iclg.com/practice-areas/investor-state-arbitration-laws-and-regulations/ecuador> last accessed 20 April 2022.

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