Relationship Between Investment Arbitration and Environmental Law -Case Analysis of Perenco v Ecuador

*Vaibhav Yadav

This article discusses the interrelationship between investment arbitration and environmental issues. The subject of environmental protection in arbitration has been overlooked. However, with time, it has become evident that examining the link between environmental protection and arbitration is significant. Initially, arbitral tribunals ignored environmental concerns in arbitration, but recently, tribunals have started considering these issues more seriously. Environmental matters in investment matters are raised either through a claim or a counterclaim. The integration of environmental concern into arbitration is complex and lacks flexibility. It is crucial that environmental issues are no longer ignored in matters related to investment arbitration. This article examines how arbitral tribunals address the integration of environmental concerns and investment arbitration, drawing on the landmark case of Perenco v. Ecuador. It emphasises the need to strike a balance between investment arbitration and environmental protection. It also explains how the tribunal awarded compensation to the investor while at the same time holding the investor accountable for environmental harm.

Introduction

The issue of investment arbitration and the environment is emerging as an important concern at the global level. Environmental concerns were ignored in most bilateral investment treaties which were signed before 2000. Most treaties from that period lack provisions for environmental protection. However, bilateral treaties signed after 2000 have included provisions for environmental protection, granting the host state the right to make the rules for protecting the environment. For example, the Morocco and Nigeria Bilateral Investment Treaty includes provisions for environmental preservation. The definition of investment now expressly includes sustainable development. Environmental principles are gradually becoming a responsibility for investors in bilateral investment treaties.[1]

For instance, the Brazil-Malawi Bilateral Investment Treaty imposes responsibilities on investors to protect the environment. Tribunals are increasingly prioritising sustainable development in cases where conflicts arise between investment arbitration and environmental concerns. For example, in the case of Chemtura v. Canada, the tribunal ruled that the investor must adhere to sustainability principles and avoid harming the host state's environmental resources. Perenco v. Ecuador is a landmark case which addresses the conflict between environmental protection and investment arbitration.[2]  

Background

Perenco, a French oil company, and Burlington, another foreign oil company, had contracts with Petroecuador, Ecuador's national oil company controlled by the Ecuadorian government. Perenco oil company operated two oil blocks and began earning substantial profits due to the oil prices. However, subsequently, Ecuador enacted Law No. 42, imposing a 99 per cent tax on Perenco earnings. Perenco initially paid the tax but later opposed it. The Ecuador Government terminated Perenco's contract and sought to negotiate a new one.  The Ecuadorian government wanted to formulate a new contract with Perenco. Petroeuador took control of the oil block previously operated by Perenco. The Ecuador Government also filed a case in a local court to recover taxes from Perenco.[3]

Main Issue

Perenco alleged that the Ecuadorian government had violated the France-Ecuador Bilateral Investment Treaty by imposing a disproportionate tax of 99 per cent on its earnings and committed illegal expropriation. Perenco had made allegations against Ecuador that it had committed illegal expropriation. Consequently, Perenco had filed a claim with ICSID for arbitration. Ecuador countered, alleging that Perenco caused environmental damage and polluted the oil block sites. Accordingly, Ecuador had filed a counterclaim against Perenco in ICSID for arbitration.[4]

Proceedings of  the Tribunal

An arbitral tribunal consisting of three arbitrators was established. The tribunal granted an interim measure to Perenco, directing Ecuador to halt the local court case against Perenco. In 2011, the tribunal confirmed its competence to hear the matter. In 2014, the tribunal determined that Ecuador was held liable for disproportionate treatment.[5] According to the Tribunal, Ecuador violated provisions of the bilateral investment treaty by imposing an unreasonable tax on Perenco's earnings. The Tribunal also found Ecuador liable for Expropriation due to the cancellation of the Perenco contract. The Arbitral Tribunal held Perenco liable for the environmental damage caused by its operations, which disturbed the natural resources of the Amazon region.[6]

Award by Arbitral Tribunal

Perenco had sought $ 1.5 billion in damages from the Ecuadorian government for breaching the bilateral investment treaty.  However, the tribunal awarded $ 449 million to Perenco for disproportionate treatment by the Ecuadorian government and illegal expropriation. An important factor for higher compensation was Ecuador's failure to adhere to the interim measures of the tribunal, and Ecuador had continued legal proceedings against Perenco in its local courts.[7]

The Tribunal awarded Ecuador $54 million for its counterclaim against Perenco. In the related Burlington case, Ecuador had already been awarded $ 39 million. The Burlington case is connected to the Perenco case, which is why the tribunal granted Ecuador an award of $54 million in the Perenco case.[8] Ecuador had also filed a counterclaim for damage to the oil block, but the tribunal denied it, stating that an award for damages to the oil block had already been granted in the Burlington case. The Burlington and Perenco cases are connected with each other because both companies operated similar oil blocks and faced similar issues.[9]

Appointment of Expert by the Tribunal

The Tribunal appointed an independent expert to determine environmental damages. The tribunal appointed an independent expert for a fair assessment of the environmental damages, without any prejudice or partiality. Both Perenco and the Ecuador government had appointed their expert for the assessment. The tribunal awarded environmental damages based on evidence provided by its appointed expert. The Tribunal also referenced Ecuador’s constitution and local law, which emphasised strict liability for environmental damage, highlighting the priority given to environmental conservation in Ecuador.[10] 

Counterclaim in ICSID

Article 46 of the ICSID Convention states that a counterclaim can be filed in a matter which is connected with a substantial issue of a case. It means that if parties agree to ICSID arbitration, then a counterclaim can be filed only if it is connected with a substantial issue of the case. In the case of Perenco v. Ecuador, the environmental counterclaim was allowed because it was directly related to the investment issues raised in the arbitration.[11]

A. Issue of Environmental Counterclaim in Perenco v. Ecuador

The case of Perenco v. Ecuador is unique for addressing an environmental counterclaim. This case is a rare example where an environmental counterclaim has been held in favour of the host state. The Tribunal has given various reasons for the imposition of environmental damage. The tribunal observed that states have significant freedom to formulate and amend environmental rules to conserve their environment.[12]

The Tribunal highlighted the impact of the 1992 Rio Declaration on Ecuador’s domestic environmental laws. In the Burlington case, the tribunal observed that there is a stronger environmental rule in the local law of Ecuador. In the Burlington case, the tribunal awarded $93 million for environmental damage and also granted damages for harm caused to the oil block sites. The Burlington and Perenco cases were interconnected to their issues and operations, resulting in awards of $ 54 million and $ 39 million, respectively, for environmental damages.[13]

B. Approach of the Tribunals Regarding Environmental Counterclaim

Tribunal adopted various approaches to deal with environmental counterclaims. In the Burlington case, the tribunal ordered an inspection of the damaged oil block areas to determine the impact of the oil company's operations on the soil and land. On the other hand, in the Perenco case, the tribunal was actively involved in environmental matters.[14]

In the case of David Aven et al v. Costa Rica, the issue of environmental counterclaim was raised. In this case Costa Rica had filed a counterclaim against the foreign investor's claim for damage caused to the environment. In this case, the tribunal refused to deal with the matter of the environmental counterclaim due to procedural errors and the counterclaim was not presented within a reasonable period of time. All the above cases prove that there has been an evolution of tribunals for dealing with matters of environmental counterclaims. Now, tribunals are imposing liability on foreign investors for causing damage to the environment and this can also deter foreign investors from causing damage to the environment.[15]

C. Environmental Restoration Fund

When the tribunal awarded Ecuador damages for environmental harm, Perenco suggested the creation of an environmental restoration fund to restore the damaged Amazon sites. Ecuador agreed to the suggestion of Perenco. The tribunal had not agreed to the suggestion and said that it is competent only to award environmental damage. The tribunal said it is not competent to give direction for the creation of the environmental restoration fund.[16]

Although both parties agreed to the creation of an environmental redemption fund, the tribunal should have considered issuing an order for the establishment of an environmental restoration fund. If there is a proper check of the tribunal, then it could ensure that an environmental restoration fund could be effectively used for the restoration of damaged Amazon sites. Without oversight, awarded damages may not be used for restoring damaged Amazon sites. It would be commendable that tribunals award environmental damages and provide further guidance on their enforcement and utilisation in order to enhance their effectiveness.[17]

Conclusion

The determination of Perenco v. Ecuador exhibits that environmental issues are significant to investment arbitration. Previously, when issues were related to environmental damage, the tribunals generally ruled in favour of the foreign investor. But the recent approach of tribunals is showing that they are increasing support for host states when environmental damage is caused. The Perenco case emphasised that there can be a complex interplay between investment arbitration and environmental protection. Bilateral investment treaties should expressly include sustainability provisions, such as environmental impact assessment, responsibility of the investor for the protection of the environment etc. Provisions related to sustainability should be favourable for the host state and the foreign investor. Foreign investors should be actively involved in discussions about sustainability rules to be included in treaties.[18]  

The Tribunals should adopt a uniform approach in connection with matters related to environmental counterclaims. There should not be contradictory approaches of tribunals while dealing with matters of environmental counterclaim. The tribunals should address environmental damage in investment arbitration after properly examining the evidence provided by the parties to the case.[19]

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*Vaibhav Yadav is an LLM student at NLU Delhi.

[1] Nikolaos Voutyrakos ‘Investment Arbitration and Environmental Protection: A Critical Look?’’ Arbitration Academy

[2] Id.,

[3] Jason Rudall, ‘The Tribunal with a Toolbox: On Perenco v. Ecuador, Black Gold and Shades of Green’(2020) 11 Journal of International Dispute Settlement 485-500.

[4] Id.,

[5] Id.,

[6] Id,

[7] Id.,

[8] Id.,

[9] Id.,

[10] Id.,

[11] ICSID Convention, art 46.

[12] Id.,

[13] Id.,

[14] Supra at 13.

[15] Id.,

[16] Id.,

[17] Id.,

[18] Id.,

[19] Kirtin Bahaguna and Likshika Sahni, ‘Harmonising Profit and Planet:Rethinking Environmental Counterclaims in Investor- State Arbitrations’ (Cambridge International law Journal, November 23, 2023).