International disputes increasingly focus on environmental issues, particularly in arbitration, either as a result of regulations deemed too restrictive by foreign investors, or as a result of environmental degradation caused by economic players. This article looks at these trends with a view to anticipating their occurrence in practice.
Environmental protection as a source of litigation
87% of business leaders consider ESG (Environment, Social and Governance) standards to be “very to extremely important” for their companies,[1] and US companies currently spend $700,000 per year measuring and reducing their environmental impact.[2] This is in line with the development of private initiatives in certain economic sectors, aimed at implementing best practices when it comes to the environment, without waiting for binding measures to be applied.
In investment arbitration, opposing a host state and a foreign investor, the willingness of states to enhance environmental protection rules can have a negative impact on investors, despite the importance of this issue today. However, bilateral investment treaties (BITs), some of which are very old, can open the way to disputes for foreign investors – and therefore to the introduction of arbitration proceedings – when environmental regulations have a negative impact on their economic activities in the said state, constituting a violation of these BITs.
To hedge against this, states are beginning to modify the content of their BITs, allowing greater leeway or introducing certain exceptions, in order to achieve these environmental protection objectives (which are increasingly being imposed on them). For example, Canada has introduced several articles into its new model BIT,[3] providing for a principle of encouragement of environmental regulation, non-derogation and relaxation of these standards, or even the absence of indirect expropriation when a standard tends towards the goal of environmental protection. Other BITs, through the “reverse umbrella clause“, expressly refer to domestic law to justify the application of environmental standards to investors.[4]
Arbitrators have also anticipated this trend, by recognizing environmental protection as a part of a certain national public policy, so that it can be protected despite the silence of some BITs.[5] Numerous authors have also argued that environmental protection should enjoy the same protection as human rights.[6]
Admitting counterclaims in arbitration
Today, respondent states to an investment arbitration can introduce an action against foreign investors and thereby file counterclaims. Although this has been gradually introduced through case law, some BITs – albeit in a minority – expressly authorize it.[7]
Despite this, there has been a long delay between the admissibility of a claim for compensation lodged by the host state and the actual condemnation of the investor. Admitting these claims has had several beneficial effects, beyond the simple procedural aspect: it has made investors more responsible upstream, since they can now see their compensation reduced by the arbitral tribunal, or even be condemned for non-compliance with certain environmental standards. This reinforces the equality of arms between the parties to the arbitration (and therefore to the BIT) and, above all, helps to alleviate the sometimes cynical image of investment arbitration with regard to the protection of citizens and the environment. If environmental standards apply, they must be respected, and some arbitrators will be keen to give importance to this.
What’s more, case law and some arbitration rules[8] allows environmental protection associations to intervene in arbitral proceedings through amicus curiae. This enables to shed light, from a perspective outside the dispute, on the environmental impact of a measure (for example, in Methanex v. United States of America), the reality of environmental damage (in Biwater v. Tanzania, the amicus curiae made it possible to demonstrate how sustainable development and human rights conditioned the investor’s liability), and the efforts required to restore the damaged ecosystem.
Monetary assessment of compensation for environmental damage
In international litigation and arbitration, it is not always easy to quantify environmental damage or “ecological harm”. Although it is now well and truly recognized, [9] it needs to be defined before any monetary assessment can be made.
There are two methods used worldwide to delimit such damage: Anglo-Saxon and European.
The first consists in assessing the presence of pollutants; exceeding certain thresholds is the triggering event for the act of pollution. This simplistic method enables a rapid assessment of environmental degradation.
The second (particularly in France) aims to make an inventory of the environment before, during and after industrial operation of the site at the origin of the harm, in order to measure any changes. This European method enables a more pragmatic and comprehensive approach to any degradation, but requires the deployment of far greater resources throughout the project. In order to perfect this system, a nomenclature of ecological damage has been introduced (under the impetus of French Professors Neyret and Martin), and is being used more and more frequently by French courts.
Once ecological damage has been defined, it must be assessed in monetary terms. Because of its complexity, there is no “perfect” valuation. Thus, an empirical method is used to obtain the most realistic valuation possible. This involves, for example, assessing the cost of restoring the site, making an inventory of degraded sites or elements, measuring the impact on economic productivity or the importance of environmental quality in real estate prices, etc. The European Union advocates for the effective restoration of the site to its former state, regardless of the final cost to the liable company.[10]
The United States, on the other hand, favors a mix of these solutions, following the “Natural Resource Damage Assessment”, which defines the best means and methods for restoring a polluted site. If the party responsible for the ecological harm refuses to comply, the authorities can take legal action, with the heavy financial consequences this entails. Over the last thirty years, NOAA[11] has collected $10.7 billion in compensation from those responsible for pollution. This amount only covers the restoration of damaged ecosystems.
The monetary assessment of the environmental damage to be repaired also has the advantage of freeing from the need to compensate the moral or economic damage suffered by environmental associations. As this assessment is either symbolic, or deducted from the association’s operating costs, it has no direct link with the environmental degradation actually suffered.
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Nowadays, all the actors of international arbitration are paying increasing attention to environmental issues. It is to be hoped that treaty drafting and arbitral jurisprudence will enable to reconcile divergent interests, or at least find a common ground, so that arbitration can also contribute to resolving current and future environmental challenges.
[1] Ernest & Young, C-suite Insights: Sustainability and ESG Trends Index, 2023.
[2] ERM sustainability institute, Costs and Benefits of Climate – Related Disclosure Activities by Corporate Issuers and Institutional Investors, 17 May 2022.
[3] Articles 3, 4 and 9 of Canada’s 2021 Foreign Investment Promotion and Protection Agreement Model.
[4] e.g. Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organisation of the Islamic Conference (1981), Article 9 « The investor shall be bound by the laws and regulations in force in the host state and shall refrain from all acts that may disturb public order or morals or that may be prejudicial to the public interest. He is also to refrain from exercising restrictive practices and from trying to achieve gains through unlawful means. ») ; BIT India – Belarus (2018), Article 11(i) ; BIT Iran – Slovakia (2016), Article 14(3).
[5] e.g. Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award, 22 October 2018, §349, “The attempt by the Claimants to use Mr. Juma’s assistance to by-pass statutory requirements and obtain a purported mining licence within weeks of Mr. Juma being enlisted, despite such non-compliance, showed serious disrespect for the fundamental public policies of the host country in relation to the environment and resource development.” ; or also David R. Aven and others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Award, 18 September 2018, § 738, “This Tribunal shares the views of Urbaser Tribunal that it can no longer be admitted that investors operating internationally are immune from becoming subjects of international law. It is particularly convincing when it comes to rights and obligations that are the concern of all States, as it happens in the protection of the environment.”
[6] e.g. L. Low, Chapter 5: The duties and powers of judges and arbitrators in relation to public policy when faced with environmental and human rights issues, in Lauro Gama e Souza Jr., Patrick Thieffry, et al. (eds), ICC Dossier No. 21: Navigating the New Contents of International Public Policy: Compliance in Environment and Human Rights, pp. 138 – 181 « As the tribunal said in Phoenix Action, Ltd. v The Czech Republic, “nobody would suggest that ICSID protection should be granted to investments made in violation of the most fundamental rules of protection of human rights, like investments made in pursuance or torture or genocide or in support of slavery of trafficking of human organs”. A similar outcome might be appropriate with respect to environmental harm that seriously endangers human life or health or threatens to destroy a culture. » ; T. Gleason, Examining host-State counterclaims for environmental damage in investor-State dispute settlement from human rights and transnational public policy perspectives, International Environmental Agreements: Politics, Law and Economics 2021, 14 December 2020, pp. 427–444, « Where claims based on domestic environmental law are unavailable, the emerging human rights-based approach to host-State counterclaims for environmental damage may provide adequate grounds. »
[7] e.g. BIT Colombia – United Arab Emirates stipulating “In order to submit a claim to arbitration under this Section, non-judicial local administrative remedies shall be exhausted”, “with the Investor’s acceptance of the possibility of facing claims by the Respondent against them.” (ensuring a condition to introduce arbitration); BIT Iran – Slovakia stipulating “the Host State may pursue any defense, counterclaim, right of set off or other similar claim that the claimant has not fulfilled its obligations under this Agreement to comply with the Host State law or that it has not taken all reasonable steps to mitigate possible damages.”
[8] e.g. ICSID Arbitration Rules, Rule 67 – Submission of Non-Disputing Parties (2022)
[9] e.g. International Court of Justice, Certain Activities Carried Out by Nicaragua in the Border Area (Costa Rica v. Nicaragua), 2 February 2018, §42, “The Court is therefore of the view that damage to the environment, and the consequent impairment or loss of the ability of the environment to provide goods and services, is compensable under international law. Such compensation may include indemnification for the impairment or loss of environmental goods and services in the period prior to recovery and payment for the restoration of the damaged environment.”; Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on counterclaims, 7 February 2017, which sentenced the investor to compensate the State for 41 million dollars due of the environmental damage caused and the concomitant need to restore polluted sites.
[10] Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage.
[11] National Oceanic and Atmospheric Administration, a U.S. government agency responsible for the protection and study of the ocean and atmosphere.
