Environmental Counterclaims in Investment Treaty Arbitration
Through the design of international investment agreements, foreign investors may bring international claims against the States in which they invest, challenging domestic executive and regulatory measures, including those related to the environment and sustainable development. In contrast, host States are usually limited to defending claims brought against them. The capacity for a host State to bring an independent counterclaim has been tested in only a handful of cases, some of which involved environmental considerations. This article considers those cases and the potential for counterclaims to help enforce national and international objectives related to the environment. It does so by setting out the legal framework for counterclaims by host States, analyzing how jurisdiction, admissibility and causes of action involving environmental obligations under domestic and international law may be satisfied, and the attendant consequences for liability and compensation. It then considers the implications of counterclaims for future investment disputes, given the rapid development of international and domestic environmental law and policy, especially in the context of corporate governance, climate change and the United Nations Sustainable Development Goals.
The Role for Arbitration in Environmental Claims
- Limits of national courts
Recourse to a national court or inter-state dispute settlement mechanism is not always feasible or desirable. For example, it may not be feasible where the claim is based on a legal instrument whose choice of forum clause precludes adjudication by the host State’s domestic courts. A similar situation was observed in Burlington, where parties entered into a separate agreement whereby Ecuadorian counterclaims could only be filed before the particular arbitration. Recourse to national courts may not be desirable if the host State wishes to avoid its own defective court system or to instil the proceedings with a strong sense of impartiality. Where this is the case, a host State may seek recourse through arbitration.
Judgments of national courts also have enforcement limits in comparison to an award obtained through arbitration. ICSID awards are subject to automatic recognition and receive the same value as a final judgment of a court of any Contracting State. Similarly, the New York Convention provides a safeguard against enforcement, except on seven limited grounds.46 A host State may elect to pursue arbitration rather than have recourse to its national court purely for the superior international enforcement prospects. The enforcement of awards concerning environmental concerns may be particularly pertinent due to public health and sustainability implications. Arbitration provides a significant advantage in this regard.
- Enforcement limits of multilateral environmental agreements
Many multilateral environmental agreements have attracted criticism for articulating “aspirational declarations” and soft goals, rather than explicitly binding states to obligations. Enforcement mechanisms for breach of environmental treaties tend to be vague or lacking entirely. The United Nations Framework Convention on Climate Change in 1992 provided that parties seek “a settlement of a dispute through negotiation or any other peaceful means of their own choice.” The 2016 Paris Agreement also fails to contain an enforcement mechanism. Failure to explicitly grant jurisdiction to a Court or tribunal creates difficulties for states wishing to enforce obligations.
While private actors have obligations under domestic law, there is no general rule that they are responsible for internationally wrongful acts. Private parties, including investors, are not thought to be bound by obligations in international law. MEAs typically assign obligations to states, not private actors. Only a small number of treaties contain liability of states for environmental harm in relation to particular activities. Furthermore, where the International Court of Justice (ICJ) is stipulated as the enforcement mechanism for a particular MEA, its jurisdiction only extends to states. It does not include applications from or against private entities. The enforcement prospects of international environmental law are limited.
The Admissibility of Environmental Claims
Tribunals are increasingly adjudicating investment disputes which are characterised by largely non-commercial features. Perenco and Burlington represent the first environmental counterclaims to be brought by a host State against an investor. They are welcomed developments in investment arbitration.
International Law Perspective
Investors may owe environmental obligations contained in the applicable international investment agreement. The scope and content of such protections vary from treaty to treaty, therefore a complete taxonomy of environmental provisions is impractical. To avoid unnecessary complexities, environmental protection can be incorporated into treaties in three broad, yet distinct ways. First, where environmental protection is an express objective in the preamble of treaty. Second, a treaty may oblige an investor to comply with environmental domestic law. Third, environmental obligations can be imposed directly upon investors by virtue of a treaty. These obligations may be positive, such as undertaking an environmental impact assessment, or negative, such as refraining from polluting or contaminating.
General principles of international law may also impose enforceable environmental obligations upon investors. Despite the traditional belief that only States owe obligations in international law, some argue that investors that operate internationally no longer enjoy immunity from international rules. Many environmental principles and norms are hard to characterize as legal obligations. They mostly serve as guiding principles to be elaborated upon by incorporation into domestic legislation.
Domestic Law Perspective
Environmental obligations can also be found in domestic law. Article 42(1) of the ICSID Convention allows a tribunal to rely on these sources. International investment agreement and investment contracts may also expressly confirm that investors are bound by particular domestic obligations. Environmental obligations may be contained in public, tort, regulatory or constitutional legal instruments. Where tort law provides stronger protections than a contractual obligation, the host State will likely elect to base its counterclaim upon domestic law.
Aside from connectivity issues, there may be alternative reasons against admitting environmental claims or counterclaims in investment arbitration. Domestic courts may be a more appropriate forum to hear such disputes. Environmental issues are often connected to various national interests, unique to each state.
Environmental harm is a vast concept: it can include the depletion of natural resources, contribution to climate change, depletion of fish stocks, pollution and the transfer of waste across boundaries.296 Many of the acts that cause these harms are perpetuated by economic entities, rather than the host State themselves. The impacts of environmental harm are felt beyond the parties; they implicate the rights held by individuals, classes and nationals of the host State, mitigating the adverse effects of pollution and environmentally harmful activities is expected of both host states and investors in pursuit of their development. The relationship between environmental concerns and public health is particularly critical.
The Way for Arbitration Proceeding
A new approach to the question of admissibility will present investment arbitration as a feasible and appropriate forum for host states to pursue environmental claims against investors. To avoid admissibility hurdles, there are three particular steps host states should consider.
- Host states should modify their international investment agreement to ensure that environmental protection and economic development are equal priorities.
- The scope of the arbitration clause should be sufficiently wide to permit host states to bring counterclaims.
- Host states should consider implementing the clauses elevating a breach of domestic environmental law to the status of a treaty breach.
For many host states, domestic tort law is most likely to provide the highest level of environmental protection. This kind of claim should not be precluded from adjudication for the reason it is not based upon the same legal instrument. Despite these kinds of claims being regulatory in character, as well as the consequences reaching individuals, this should not be a reason to exclusively reserve it to domestic court jurisdictions.
THE ADMISSIBILITY OF ENVIRONMENTAL COUNTERCLAIMS IN INVESTMENT ARBITRATION, Victoria University of Wellington Legal Research Papers Student and Alumni Paper Series, MOLLY ANNING.
Environmental Counterclaims in Investment Treaty Arbitration, ICSID Review – Foreign Investment Law Journal, Volume 36, Issue 2, Spring 2021, Pages 413–440.
Should Environmental Concerns be Considered in Investment Arbitration Rulings? The American Review of International Arbitration, Columbia Law School.
Division for Sustainable Development Goals, Department of Economic and Social Affairs Sustainable Development, United Nations.
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 The UN Sustainable Development Goals (SDGs) were developed in 2015 with the primary objective of eliminating poverty in all its dimensions and forms. Continuing the unfulfilled mission under the Millennium Development Goals (MDGs) and emphasizing balanced economic, social and environmental development. The SDGs development approach focuses on sustainable development in three dimensions that support and integrate development between dimensions.