United Kingdom

Commercial Arbitration and Climate Change

Introduction

Alongside an increasing number of climate laws and policies around the world, [1] environmental and climate-related disputes are increasingly being submitted to international commercial arbitration. The International Chamber of Commerce (ICC) predicts that climate change-related disputes will further increase.[2] As a popular forum for dispute resolution, international commercial arbitration offers certain benefits that make it an effective option for dealing with climate-related disputes. However, common challenges regarding the procedure and substance of commercial arbitration may make advancing climate aims more difficult. A forthcoming Atlas section on investment arbitration will cover further topics in this area.

How climate change is impacting commercial arbitration

Following landmark international climate agreements such as the Kyoto Protocol and the Paris Agreement, there has been a wave of pledges and action that has increased investments, contracts, and disputes that may be resolved through arbitration.[3]

Different types of climate-related disputes

In its November 2019 report ‘Resolving Climate Change Related Disputes through Arbitration and ADR,’ the ICC defines climate-related disputes as “any dispute arising out of or in relation to the effect of climate change and climate change policy, the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement.”[4] It further suggests three categories of climate-related disputes that may arise: i) claims relating to specific transition, adaptation or mitigation contracts (or ‘direct disputes’[5]); ii) contracts not specifically related to transition, adaptation or mitigation (or ‘indirect dispute’[6]); and iii) submission agreements.

Direct disputes may arise from projects with clear climate change issues at their core.[7] Such disputes may involve contracts or contractual terms relating to the implementation of energy or ‘other systems transition, mitigation or adaptation’ in accordance with the Paris Agreement commitments.[8] Some contracts may expressly be related to the UNFCCC, for instance, the Green Climate Fund (GCF) agreements on “low-emission (mitigation) and climate-resilient (adaptation) projects and programmes developed by the public and private sectors to contribute to countries’ climate change priorities,”[9] as well as emission trading system agreements.[10] The ICC Commission report provides a useful hypothetical example of a technical dispute concerning a wind farm project in which the owner claims that the output would fail to meet with the technical economic indicators based on energy efficiency, output and emission targets to ensure definitive acceptance by the financing authorities.[11]

The second category is far more wide-ranging and can potentially cover contracts involving any human activity across a wide range of sectors.[12] Indeed, such contracts may not even include any climate change-related provisions and may predate the Paris Agreement.[13] Nevertheless, contractual performance may be impacted by parties’ responses to, among others, changes in regulation, voluntary climate and sustainability commitments by respective industries, and relevant climate change action in courts.[14] The ICC cites a hypothetical case of a harbour construction where a contractor claims that rise in sea levels may have potentially affected the salinity of fresh water, “albeit that other contributing factors may exist.” In this example, the contractor, facing delays and additional costs, may utilize an indirect dispute to increase the time to complete the work and for the “additional costs incurred in the importation of sand from a more remote location” to combat the salinity.

The third category captures instances where parties voluntarily agree to submit to arbitration after a dispute has already arisen or crystalised, including in instances where no underlying contract existed.[15] Such instances may be rare, but nevertheless arise in cases where other dispute resolution mechanisms such as courts may be inadequate, unattractive or lack jurisdiction. For instance, a local group or population directly impacted by an investment could initiate such a dispute mechanism. The ICC provides an example of a solar power panel installation or a wind farm, which may be affecting fisheries and arable land, causing concern to the local population. In this case, a submission agreement could be used to avoid multiple multi-jurisdictional court proceedings with potentially inconsistent outcomes, uncertainty, and enforceability issues.[16] However, the parties may have their own strategic objectives and not agree to submit to arbitration which is partly why almost all international commercial arbitrations rely on a pre-existing arbitration clause.[17]

Sectors most impacted by climate change claims

The energy and construction sectors, which tend to have a preference for arbitration, are highly impacted by climate-related disputes.[18] As the climate crisis deepens and new risks manifest, more disputes may arise in new industries including renewable technologies, carbon capture or electricity storage technologies.[19] Disputes may also involve fossil fuels, resource extraction, and land use.[20] Such increases are already visible from the case dockets of major arbitration institutions. For example, Goldman Sachs launched an international arbitration against Mexico’s state electric utility to recover US$400 million that arose under a gas purchase agreement following a storm in Texas which led to a surge in natural gas prices.[21]

The London Court of International Arbitration (LCIA) reported that in 2018, 29% of its arbitrations were related to banking and finance, 19% energy and resources, while construction disputes rose from 7% in 2017 to 10% in 2018.[22] The ICC anticipates that all of these sectors will be impacted by systems transitions.[23] The Permanent Court of Arbitration (PCA) had 17 ongoing environmental and energy-related private commercial contracts disputes by July 2018.[24]  In 2018, almost 50% of ICC arbitration cases involved construction, energy, or transport. [25]

How commercial arbitration may help to address climate change

Commercial arbitration may have several benefits in climate-related disputes. Arbitration is an inherently flexible mechanism that offers an effective and neutral forum for dispute resolution with parties from across the globe. It further provides access to various experts who may also serve as arbitrators,[26] and can offer a possibility of engaging third parties. Furthermore, arbitration has already been used in disputes arising from the Kyoto Protocol and the UNFCCC’s GCF.[27] Importantly, awards are enforceable under the New York Convention – which stands in contrast to many broader climate-focused international obligations.

 While scholars do predict that commercial arbitration will be a popular dispute resolution mechanism among parties dealing with climate change disputes, the Norton Rose Fulbright ‘International Arbitration Report’ notes recent trends to the contrary.[28] The authors explain that only the Netherlands and the Solomon Islands have recognised arbitration as a dispute resolution mechanism under the UNFCCC.

Transparency

Transparency remains a major concern, owing to international commercial arbitration proceedings being confidential. Some argue that this may hinder efforts to develop an effective and coherent climate governance regime and obstruct the public accountability of parties for climate-related harms.[29] In England and Wales, there is a presumption of confidentiality which has been described as creating a ‘curtain of secrecy.’[30] The 1996 Arbitration Act is silent on the issue of confidentiality. As such, the Court of Appeal in Ali Shipping Corporation v Shipyard Trogir (1997), as well as Emmott v Michael Wilson Partnership (2008), confirmed that there is a presumption of confidentiality.[31] Conversely, the courts in Australia, the US and Sweden have been reluctant to recognise implied confidentiality.[32] Aside from implied confidentiality concerns, some arbitration institutions provide for express blanket confidentiality. Article 30 of the LCIA Arbitration Rules states that all proceedings are entirely confidential, and any part of the award cannot be published without the parties’ prior consent. The only exception is disclosures under a legal duty that may be mandated by a state court or similar (Art. 30(1)). 

The ICC Commission report considered two key ways to increase transparency: “(i) opening the proceedings to the public, including in the publication of submissions, procedural decisions and hearing; and (ii) publication (or even redacted publication) of awards.”[33] The PCA Environmental Rules contain certain provisions that allow for greater transparency including allowing the tribunal to determine which information is to be deemed confidential and which persons can be disclosed said information.[34] Greater transparency in commercial arbitration may buttress climate disclosure rules, which are now binding on organisations in many jurisdictions.[35]

Third party participation

Due to the significant and dispersed implications of environmental problems, climate-related disputes may impact third parties lacking privity but whose interests or grievances should nevertheless be considered when appropriate. Third parties can participate in the proceedings if the parties agree to a joinder. However, as has been pointed out, it is hard to imagine main parties considering it in their interest to provide such consent-absent legislative or policy changes, as many parties who have chosen to arbitrate do so for the benefit of having confidential proceedings.[36] The ICC proposed rules that would allow third parties to i) submit amicus curiae; ii) apply for observer status as a non-party; and iii) have an option of site visits. Amicus submissions can be quite powerful and have been used effectively in the past particularly in ICSID investment arbitrations.[37] In the context of climate disputes, they may give a voice to local communities that are most directly impacted by environmental issues.[38] However, more clarity is needed, for instance on whether such submissions can be made in the absence of party agreement.[39]

Experts

Technical expertise is often crucial to climate-related disputes. Making sure that decision makers have the necessary climate change expertise can ensure that disputes are adjudicated efficiently and parties have confidence in the outcome of the dispute.[40] The PCA Environmental Rules provide for a specialised list of experts and arbitrators with climate change-related expertise.[41] The ICC recommends ensuring arbitrators have relevant expertise, that there are party as well as tribunal-appointed experts, and expert determination.[42] Article 14(1) of the ICC Arbitration Rules further states that arbitrators can be challenged on the basis of “alleged lack of impartiality or independence, or otherwise.” The ICC Task Force has taken “otherwise” to mean that lack of requisite qualification could be a basis for a challenge.[43]

Timelines

Delays and lack of timeliness can be particularly detrimental to a meaningful resolution of climate-related disputes as environmental harms can be irreversible and time sensitive.[44] On the other hand, such disputes can be highly complex, which may require appropriate time to be allocated to its resolution. Nevertheless, various solutions may be adopted to ensure prompt resolution. The ICC Commission report proposes that parties and arbitral tribunals “adopt certain case management techniques to facilitate prompt resolution of climate change related disputes,”[45] employ special expedited procedure rules,[46] or use other tools including those analogous to ICC Arbitration Rules on escalating dispute resolution to avoid arbitration, emergency arbitration, interim and conservatory measures, or other cost management and time techniques.[47] Specialised rules for arbitration have further been suggested to ensure flexible procedural mechanisms which would allow early resolution of dispositive issues, for instance, jurisdiction, attribution or causation.[48]

Carbon footprint of arbitration  

A study conducted by the Greener Arbitrations Steering Committee together with Dechert found that travel, in particular air travel, accounted for over 93% of emissions in a major USD 30-50 million international arbitration.[49] A case study by Herbert Smith Freehills found that the carbon footprint of virtual hearings was on average 19 times smaller, while the hearings were also 6% less expensive.[50] Considering a ‘green’ scenario, the Greener Arbitration Steering Committee found that reducing the amount of travel, eliminating paper bundles and motorbike couriers in favour of alternative e-bundles, and video-conferencing could save over 51 thousand kgCo2e and lead to a reduction in disbursement costs of up to 40%.[51]

The Campaign for Greener Arbitrations was launched in 2018 and has subsequently attracted over 500 signatories for its Green Pledge and its recent addition of the Green Protocols has been further endorsed. The protocols call for a reduction in the carbon footprint of international arbitrations by putting emphasis on flying less and eliminating hard copy bundles.[52] The Chancery Lane Project has further introduced model clauses for low carbon arbitration hearings.[53] Clauses address multiple aspects of sustainability including avoiding excessive paperwork in dispute resolution,[54] green litigation and arbitration protocols,[55] and a ‘Choice of Green Governing Law’ clause that requires the governing law to be interpreted consistently with the objectives of the Paris Agreement and the UNFCCC.[56]

[1] Lucy Greenwood, ‘The Canary Is Dead: Arbitration and Climate Change’, in Maxi Scherer (ed), Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2021, Volume 38 Issue 3) pp. 316.

[2] ICC Commission report 2019, para 3.9

[3] Ibid.

[4] Resolving Climate Change Related Disputes through Arbitration and ADR Online at www.iccwbo.org/climate-change-disputes-report ICC publication 999 ENG  ISBN: 978-92-842-0554-7 Publication date: November 2019; para 2.1

[5] Laurent Gouiffès & Melissa Ordonez (2022) Climate change in international arbitration, the next big thing?, Journal of Energy & Natural Resources Law,40:2, 203-224, DOI: 10.1080/02646811.2021.1959158, pp. 212.

[6] Laurent Gouiffès & Melissa Ordonez (2022), pp. 212.

[7] Laurent Gouiffès & Melissa Ordonez (2022), pp. 212.

[8] ICC Commission report 2019, para 2.4

[9] The Green Climate Fund proposal toolkit (2017), pp. 3.

[10] ICC Commission report 2019, para 2.4

[11] Ibid.

[12] Laurent Gouiffès & Melissa Ordonez (2022), pp. 213

[13] ICC Commission report 2019, para 2.5

[14] Ibid.

[15] Ibid., para 2.6

[16] Ibid.

[17] Laurent Gouiffès & Melissa Ordonez (2022), pp. 213

[18] Laurent Gouiffès & Melissa Ordonez (2022), pp. 212

[19] Lucy Greenwood, ‘The Canary Is Dead: Arbitration and Climate Change,’ in Maxi Scherer (ed), Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2021, Volume 38 Issue 3) pp. 318.

[20] ICC Commission report 2019, paras 25-74

[21] Global Arbitration Review, ‘Goldman Sachs brings claim against Mexican state utility’ (19 May 2021) https://globalarbitrationreview.com/article/goldman-sachs-brings-claim-against-mexican-state-utility#:~:text=US%20investment%20bank%20Goldman%20Sachs,rise%20in%20natural%20gas%20prices. Accessed 24 October 2022.

[22] ICC Commission report 2019, para 22

[23] Ibid.

[24] ICC Commission report 2019, para 18

[25] ICC Commission report 2019, para 17

[26] Stephanie Balsys, Mishcon de Reya LLP, “Climate change: forecast for arbitration and current trends”, 2021, pp. 12.

[27] ICC Commission report 2019, para 4.1

[28] Martin J Valasek and Carolin Bélair, International Arbitration and Climate Change, Norton Rose Fulbright International Arbitration Report Issue 20, May 2023. https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/publications/international-arbitration-report-issue-20.pdf?revision=1eb03007-24d5-4d37-a854-db4991a7840d&revision=5249886851577387904.

[29] Stephanie Balsys, Mishcon de Reya LLP, “Climate change: forecast for arbitration and current trends”, 2021, pp. 12.

[30] Constantine Partasides and Simon Maynard, ‘Raising the Curtain on English Arbitration’ (2017) 33(2) Arbitration International 197;  pp. 197.

[31] Lawrence Collins LJ, Emmott v Michael Wilson Partnership [2017].

[32] Constantine Partasides and Simon Maynard, ‘Raising the Curtain on English Arbitration’ (2017) 33(2) Arbitration International 197;  pp. 198-200.

[33] ICC Commission report 2019, para 5.70

[34] ICC Commission report 2019, para 5.78

[35] Felipe Caldas Veras, ‘Commercial arbitration and the fight against climate change: what role can it actually play?’, LSE Law Review, 2022.

[36] Stephanie Balsys, Mishcon de Reya LLP, “Climate change: forecast for arbitration and current trends”, 2021, pp. 12.

[37] For example The International Institute for Sustainable Development, Communities for a Better Environment, The Bluewater Network of Earth Island Institute, The Centre for International Environmental Law, Earthworks and Earth Justice have all submitted amicus curae briefs concerning environmental matters in ICSID administered arbitrations (see: Glamis Gold Ltd v USA (UNCITRAL); Biwater Guaff v Tanzania (ICSID Case ARB/05/22); Suez/Vivendi v Argentina (ICSID Case No ARB/03/19); Methanex Corporation v USA (UNCITRAL); Pac Rim v Republic of El Salvador (ICSID Case No ARB/09/12)). See Stephanie Balsys, Mishcon de Reya 2021 for a further discussion.

[38]

[39] Laurent Gouiffès & Melissa Ordonez (2022), pp. 215.

[40] David W. Rivkin and Catherine Amirfar, ‘Climate Disputes and Sustainable Development in the Energy Sector’ in Maxi Scherer (ed), International Arbitration in the Energy Sector (Oxford University Press 2018) para 18.38  https://olrl-ouplaw-com.ezp.lib.cam.ac.uk/view/10.1093/law/9780198805786.001.0001/law-9780198805786-chapter-18#law-9780198805786-chapter-18-div1-85.  

[41] Ibid.

[42] ICC Commission report 2019, para 5.7

[43] Laurent Gouiffès & Melissa Ordonez (2022), pp. 214.

[44] ICC Commission report 2019, para 5.34

[45] Ibid. 5.35

[46] Ibid. 5.36

[47] Ibid. 5.37

[48] David W. Rivkin and Catherine Amirfar, 2018, para 18.37

[49] Lucy Greenwood, ‘The Canary Is Dead: Arbitration and Climate Change’, in Maxi Scherer (ed), Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2021, Volume 38 Issue 3) pp. 320.

[50] See Inside Arbitration: Whether virtual or physical, we can do more to make arbitration hearings sustainable.

[51] Lucy Greenwood, 2021, pp. 320

[52] Ibid. 323

[53] See https://chancerylaneproject.org/climate-clauses/low-carbon-arbitration-hearings/.

[54] See https://chancerylaneproject.org/climate-clauses/avoidance-of-excessive-paperwork-in-dispute-resolution/.

[55] See https://chancerylaneproject.org/climate-clauses/green-litigation-and-arbitration-protocols/.

[56] See
https://chancerylaneproject.org/climate-clauses/choice-of-green-governing-law-clause/.