International arbitration of business, human rights and environmental disputes

In the latest episode of Freshfields’ international arbitration podcast, Will Thomas, Natalie Sheehan and Amanda Neil discuss business and its interface with human rights and the environment in the context of international arbitration. This post highlights some of the key points discussed in the podcast.

Human rights and environmental obligations in new generation investment treaties

Investment treaties, which are designed to encourage foreign direct investment by placing obligations on States to respect those investments and providing foreign investors with rights that can be enforced directly against the host State through arbitration, typically do not reference human rights.  Recently, however, there has  been a move towards a so-called “rebalancing” of the rights and obligations between foreign investors and host States in newly negotiated and new model investment treaties.

One example is the new Dutch Model Bilateral Investment Treaty. In 2018, the Dutch Government announced its intention to renegotiate its bilateral investment treaties with non-European Union States based on a new model that narrows the protections offered to foreign investors and reflects a sustainable investment policy.

One of the most progressive aspects of the new Dutch model is that an arbitral tribunal may take into account investor behaviour when deciding the amount of compensation to award the foreign investor in the event of breach by the host State. In particular, damages could be reduced if the foreign investor is found not to have complied with its commitments under the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. See further here.

Environmental obligations are also making their way into investment treaties. One of the most interesting developments is the proposal by the European Union for the modernisation of the Energy Charter Treaty (ECT), which is a multi-lateral agreement for trade and investment in the energy sector. The ECT is one of the most frequently invoked investment treaties in investment arbitration and has been criticised for hampering the ability of the contracting parties, which include the European Union, to meet their climate targets under the Paris Agreement.

In May 2020, the European Commission released its latest proposal for the modernisation of the ECT, which is directed at introducing sustainable development obligations into the ECT. The key proposed changes include giving States an express right to regulate to achieve policy objectives relating to environmental protection and combatting climate change, a provision aimed at preventing claims based on changes to renewable subsidy regimes and a new expropriation annex which clarifies that non-discriminatory measures designed and applied to protect legitimate policy objectives, such as protection of the environment and combatting climate change, will not constitute indirect expropriation unless manifestly excessive. See further here.

Human rights and environmental issues in international arbitration

Arguments relating to human rights and the environment are increasingly arising in international arbitration, most notably in investment arbitration where they are invoked by host States as a “shield”, that is a defence, to claims brought by foreign investors.

They are also emerging as a basis for counterclaims by host States against foreign investors, with a prominent example being Urbaser v Argentina, which was the first investment arbitration in which an arbitral tribunal accepted jurisdiction over a human rights counterclaim. See further here.

Another example is Bear Creek v Peru, in which the arbitral tribunal found that, while a mining project had been expropriated by State action in revoking a licence, the foreign investor was penalised at the damages stage because it had failed to obtain a “social licence to operate”, namely de facto consent to the project by the local population.

Indeed, many new generation investment treaties contain provisions which specifically recognise that host States may bring counterclaims against foreign investors, such as the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership.

There has been some discussion as to whether human rights and environmental obligations in investment treaties could be used by host States as a “sword” against foreign investors rather than just as a “shield”, that is to found a cause of action against foreign investors rather than merely as defences and counterclaims. It is possible that the law will develop in this direction - it is now broadly recognised that economic development at all costs is no longer appropriate and instead sustainable development should be the goal. For this reason, critics of investment arbitration argue that the rights of foreign investors under investment treaties should come with responsibilities, in particular relating to human rights and the environment.

Enforcement of human rights and environmental obligations 

Arbitration is increasingly being used as a tool to resolve disputes relating to business and human rights. A notable example is the arbitrations commenced under the Bangladesh Accord on Fire and Building Safety by trade unions against two global fashion brands, which were administered by the Permanent Court of Arbitration in The Hague. See further here. More recently, The Hague Rules on Business and Human Rights Arbitration, which were published at the end of 2019, pave the way for arbitral proceedings specifically tailored to the resolution of business and human rights disputes.

Arbitral institutions are also considering how arbitration can be used as a tool to resolve environmental disputes. For example, the International Chamber of Commerce set up a task force to consider arbitration’s role in resolving climate change related disputes, resulting in a report which was published in November 2019. The report identifies which disputes should be classified as climate change related disputes, considers whether arbitration requires any special features to resolve these disputes and reviews the ICC arbitration rules in light of the task force’s findings. The report identifies a number of features of arbitration which could be improved to increase the effectiveness of arbitration in resolving climate change related disputes, including enhancing access to appropriate experts, increasing the responsiveness and transparency of arbitral proceedings and allowing third party participation where appropriate. See further here.

These initiatives demonstrate that arbitration has an important role to play in resolving disputes involving business, human rights and environmental issues, which are likely to become more frequent as sustainability is increasingly a priority for businesses and governments alike.  

For more on the latest thinking from the Freshfields international arbitration group, see here. The Freshfields risk and compliance podcast series is available here.