Investor-State arbitration and sustainable development: environmental-related claims on the rise

Partner Carlos de los Santos and Senior Associate Markus Gómez Dabic, from Garrigues´ Litigation & Arbitration Practice

Disputes related to environmental matters are frequent in the context of investor-state arbitration and are likely to increase in years to come. Claims vary from alleged breaches by host states because of environmental permit denials to counterclaims from states for alleged breaches by investors of their environmental obligations.

Sustainable development requires structural economic changes, which can only be brought about through investment in new forms of energy production, transport, manufacturing and resource extraction[1]. Private investors, particularly foreign investors in developing countries, are keen to fill that gap. These investors will frequently resort to international arbitration as a dispute settlement mechanism to protect their investments against host state conduct.

It is in the context of these investor-state arbitration cases and their underlying instruments -whether multilateral investment agreements (MIAs), free trade agreements (FTAs) or bilateral investment treaties (BITs)- that the impact of sustainable development for investors comes to light, and shows how these instruments can contribute to mitigate the impact of climate change.

Environment-related claims in investor-state arbitration are frequent, and likely to increase[2]. Some examples relate to claims brought by investors against host states in (mainly) developing countries, after having seen their investments lost, values decreased or project brought to a standstill, frequently because of environmental permit denials, delays or because the necessary environmental-related licenses were lacking. Other examples involve legal reforms or changes in (e.g. renewable energy) policies or systems or project cancellations based on policy decisions, on human rights obligations (the right to water), or as a means of local/indigenous community protection.

There are various heads of claim under which environmental-related cases are brought: spanning from alleged breaches of the host state´s obligation to guarantee fair and equitable treatment (FET) to foreign investors, to resorting for protection against obstruction, or protection against nationalization, expropriation or any other discriminatory measures. On the other hand, counterclaims filed by host states evidence that there are environmental obligations for investors, too, and investors can be made accountable for breaches thereof.

As regards to the FET head of claim, arbitration case law shows that, for the host state to avoid breaching the FET obligation, it must act in a consistent manner, “free from ambiguity and totally transparent, so that the investor may know all the relevant rules and regulations and their respective goals before investing”. Investors, in turn, may seek to prove that the host state failed to meet its obligation to avoid the frustration of investors’ legitimate and reasonable expectations, e.g. by not being transparent on the environmental implications of the Investment. If the Investor can prove that during the permit denial procedure, there were significant elements of arbitrariness, lack of transparency and/or consistency, the investor could be successful.

With regard to more general “protection against obstruction” heads of claim, some investors have sought to scrutinize governmental actions (or inactions) before arbitration based on a breach to use its “best efforts” to allow a concessionaire to obtain a mandatory environmental permit, as an obstruction caused by an unjustified lack of cooperation. Having said this, “Best-efforts” obligations are hardly enforceable, since they tend to create obligations of conduct rather than of result[3].

Finally, as regards to “expropriation” claims in the context of environmental permits, it has been understood that excluding rare circumstances, non-discriminatory regulatory actions brought by a host state that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriation.

On the other hand, investors are accountable for breaches of human rights and environmental obligations: in the context of counterclaims tribunals have found that an investor´s breach of a human right (access to water of the population), or the lack of public consultation of local communities on the impact of a Project, are to be construed as positive obligations for which investors can be held accountable.

One common notion seems to prevail: the host state’s international environmental obligations “may well be relevant in the application of the full protection and security standards to particular circumstances”.

Finally, some new-generation instruments, such as the Netherlands draft model BIT, the EU–Singapore Economic Partnership Agreement (2018) or the EU–Canada Comprehensive Economic Trade Agreement (CETA, 2016) contain more specific obligations for host states to “ensure high levels of environmental and labor protection” thus adding value to effectively contribute to enforce climate-related policies and objectives. However, provisions remain drafted as “typically broad, non-binding “best endeavours” [4] and some instruments explicitly exclude disputes related to environment provisions from the main dispute settlement mechanism, arbitration.

Only time will tell as to how investor-state arbitration continues to play its role when it comes to balancing the need for investors to enforce their rights and for host states to adapt projects to Sustainable development objectives in a new “Green era”.

[1] Investment Treaties and why they matter to Sustainable Development: Questions & Answers, © 2012 International Institute for Sustainable Development, p.1, ISBN: 978-1-894784-47-4,

[2] Mark Baker a.o., Norton Rose Fullbright LLP, “Acclimatising to climate change”, Global Arbitration Review (GRA News), 19 November 2018.

[3] Eric De Brabandere, ‎Tarcisio Gazzini Foreign Investment in the Energy Sector: Balancing Private and Public Interests, Nijhoff International Investment Law Series, 2014, p. 183

[4] The Economist Intelligence Unit, Climate change and trade agreements: Friends or foes? p. 20, © The Economist Intelligence Unit Limited 2019.