The value of arbitration and ADR in resolving climate change related disputes: a view into the ICC Commission’s Report
In November 2019, the Commission on Arbitration and ADR of the International Chamber of Commerce (the “ICC”) published a report that examines the role for arbitration and ADR in the resolution of international disputes related to climate change (the “Report”).
Resolving climate change related disputes through arbitration has been an important point of discussion in the arbitration community for the past few years. Although the Report does not recommend any amendments to the current ICC arbitration framework, it does provide guidance and suggests sample wording for several scenarios. Interestingly, some of these recommendations are aligned and overlap with those contained in, for example, The Hague Rules on Business and Human Rights Arbitration launched in December 2019 (previously discussed here).
What are climate change related disputes?
In 2018, the United Nations’ Intergovernmental Panel on Climate Change (the “IPCC”) warned that significant changes would be required to avoid the worst effects of climate change. The Report predicts that these transitions will give rise both to new investments and new disputes. The Report’s definition of climate change related disputes is broad, encompassing 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. however, the Report did identify three distinct categories of climate change related disputes.
The first category refers to disputes arising from specific transition, adaptation or mitigation contracts entered into in order to meet specific climate change goals or commitments. An example would be a dispute between an owner and a contractor in relation to the construction of a solar panel field being built with the aim of achieving the emissions reduction targets under the Paris Agreement. The owner refuses payment, alleging that the output of the field does not meet regulatory specifications required for it to obtain final governmental approval.
The second category refers to disputes arising from contracts more generally where, for example, contractual performance has been impacted by the parties’ responses to changes in national laws and regulations; or the environmental impacts of climate change itself. An example in this category (although such cases could arise in any sector) would be a dispute between a car manufacturer who requires refrigerant gas of a particular specification to meet emissions regulations. Due to a natural disaster that affected the production capacity of its supplier, the manufacturer was supplied with gas that did not meet those specifications leading to the authorities forcing the manufacturer to suspend delivery of a large number of vehicles. The manufacturer, in turn, seeks compensation from its supplier.
The third category comprises disputes which the parties have agreed to submit to arbitration after the dispute has arisen. For example, a dispute between an indigenous population and an infrastructure corporation where the latter’s activities have had an environmental impact; and the parties agree to resolve this through arbitration (whilst numerous examples of claims being brought in national courts do exist – the recent Urgenda case against the Dutch Government being an example – not all national courts are well placed to resolve such disputes and so arbitration may provide a viable and convenient solution in such cases).
How can parties access arbitration in climate change related disputes?
In the case of climate change related disputes, as with any other dispute, an arbitration agreement is required amongst the parties. As arbitration is a popular method of resolving disputes in sectors that are likely to be affected by the implementation of climate change policies (such as energy, construction, industrial systems and infrastructure), arbitration clauses are often used in these sectors. In disputes where the parties have no pre-existing relationship (such as the example given in the third category above), an agreement after a dispute has emerged would be needed. These may become more common, especially as parties try to avoid costly parallel proceedings that may lead to conflicting decisions.
Current and potential use of arbitration in climate change related disputes
The Report highlights that disputes arising out of sectors expected to be impacted by climate change-driven transitions accounted for around 70% of all new ICC arbitration cases in 2018, with the construction, engineering and energy sectors alone accounting for over 40%. The Report also emphasizes that climate change related investments are rapidly surging and that systems transition of the scale proposed by the IPCC will recalibrate regulatory risk and investment strategy in sectors where arbitration and ADR are relevant and prevalent.
What are the advantages of arbitration for climate change related disputes?
The Report notes that, in addition to offering the advantage of a neutral forum, arbitration benefits from the New York Convention, which enables widespread cross-border recognition and enforcement of arbitral awards. Given the likely presence of States and state entities as parties, the neutrality of international arbitration enhances its suitability. The bulk of the Report focuses on how various specific procedural features of arbitration can be adapted to better suit climate change related disputes. Briefly, the six procedural features identified in the Report are the following.
- Access to appropriate scientific and other expertise
Ensuring the availability of appropriate expertise is arguably the most important feature of arbitrating climate change related disputes. This expertise can be provided through the appointment of arbitrators with relevant expertise, party-appointed experts, tribunal-appointed experts and via expert determination. The Report provides drafting guidance in relation to the relevant legal, scientific and technical expertise of the arbitrators and experts.
- Recourse to measures and procedures for the early or urgent resolution of disputes
In climate change related disputes, timeliness and the avoidance of delay are often of critical importance. In the ICC context, its new expedited procedure may help (although, where the amount in dispute exceeds US$ 2 million, the parties would need to agree to apply it). Other methods included in the Report relate to the use of emergency proceedings and of other interim measures of relief. In addition, the prompt and appropriate use of other case management techniques (see e.g. Appendix IV of the ICC Arbitration Rules) will be important.
- Opportunity for the application of climate change commitments and/or law
While it is true that arbitral tribunals are bound to resolve a dispute in accordance with the applicable governing law, the growing awareness and adoption of climate change commitment and policies by industry and regulatory authorities may see them becoming part of the body of ‘applicable law’ that may be relied upon by tribunals to resolve a dispute (an example in the investment treaty context being the 2018 Dutch Model Bilateral Investment Treaty which makes express mention of the importance of the Paris Agreement).
- Increased transparency
The public interest in climate change related disputes and the likely frequent involvement of States and state entities is likely to increase the push towards enhanced disclosure and transparency, even in commercial disputes. Arbitration provides the procedural flexibility to meet such demands. Transparency can be achieved mainly in two ways: by allowing public access to the proceedings (including submissions, procedural decisions and hearings), and by publishing the awards (even if partially redacted). In case the parties are wary about such disclosure, guidance from the tribunal may be sought in order to protect sensitive information.
- Possibility for the involvement of third parties
The nature and consequences of climate change may regularly lead to the question of whether other interested parties and stakeholders, such as affected citizens or populations, non-governmental and inter-governmental organizations should be allowed to participate to the arbitration. Naturally, clear and express consent of the relevant parties, due process and the importance of avoiding disrupting the proceedings remain paramount. In this respect, the Report addresses joinder of additional parties and consolidation of compatible proceedings. In addition, the submission of amicus curiae briefs – which is not uncommon, for example, in investment arbitration – is addressed.
- Flexibility in the allocation and management of costs
The Report also addresses the issue that climate change related and environmental disputes may involve parties with no or little access to financial resources to fund a protracted and complex legal proceedings and notes that arbitration rules often provide enough latitude and flexibility for parties to navigate the funding difficulties that they may face. For example, advance payments may be covered by only one party in the arbitration and the tribunal may fix such costs and allocate them, taking into account the specific traits of the dispute and the conduct and position of the parties.
The mechanisms and features described in the Report confirm that arbitration is a suitable and an accessible forum for the resolution of climate change related disputes, foreshadowing that arbitration will have an important role in this area.
