Environmental Dispute Resolution: The Dispute Board Solution

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Environmental Dispute Resolution: The Dispute Board Solution

By François Baillon and Baptiste Rigaudeau*

 

Environmental dispute resolution issues are currently at the forefront of discussions within the international law community.  The reason is stated in the clearest terms by the report released by the International Bar Association (IBA) Climate Change Justice and Human Rights Task Force, entitled “Achieving Justice and Human Rights in an Era of Climate Disruption”: “[a]lthough a multitude of litigation claims and strategies have been proposed to seek redress for climate harms against individuals, thus far none have had particular success because international and domestic laws do not provide effective and consistent standards due to the diffuse, non-specific, unpredictable, and non-causative harms caused by climate change.”1 The IBA Task Force also lists a few suggested preferred dispute resolution mechanisms for international environmental disputes including arbitration,2 a special international environment court,3 or national courts and specialized judges.  The purpose of this article is to add to the current discussion and suggest an alternative to arbitration, the Dispute Board (DB) mechanism, most often used in construction contracts.

 

Thus, first, two examples of issues in relation to environmental disputes dealt with by arbitration tribunals will be analysed. Second, the specific features of the DB model will be described. And third, a proposal for an Environmental DB will be formulated. 

I.                Issues with Using Arbitration in Disputes Involving Environmental Aspects

Arbitration tribunals are often faced with cases involving environmental aspects (either peripheral or central to the dispute). These cases can be brought either under a contract’s arbitration clause, or under an international treaty providing for an investor-state arbitration. Given that most contract-based arbitrations remain confidential, examples of environment-related cases can be more easily found within the sphere of investor-state dispute settlement (ISDS).

                                                                                        

The first notable example relates to the Chevron v. Ecuador case. This still-ongoing dispute involves environmental damages claims concerning the operation of a concession granted to US oil company Texaco in 1964.  The concession was to explore and extract oil in North-East Ecuador (the Oriente region, South of the Colombian boarder). The dispute stemmed from a series of agreements entered into between 1995 and 1998 by Ecuador, the Ecuadorian national oil company, Petroecuador, and Texaco. Under these agreements, Texaco (which was acquired by Chevron in 2001) was inter alia released from its environmental obligations under the concession agreement. Yet, in May 2003, several Ecuadorian citizens sued Texaco in Ecuadorian courts for pollution caused by the exploration of the Lagro Agrio oilfields. In 2011, the Ecuadorian courts held Chevron liable for USD 18 billion for the environmental and social harm suffered by the Ecuadorian plaintiffs, a sanction Ecuador’s Supreme Court reduced to USD 9.51 billion in November 2013. Meanwhile, in 2009, Chevron filed an international arbitration claim against Ecuador, under the US-Ecuador Bilateral Investment Treaty (BIT). In these still-ongoing proceedings, Chevron is seeking (i) a declaration that Ecuador is solely liable for environmental pollution in the Oriente region; and (ii) that it has been denied justice by the Ecuador courts.  In a 2014 award, the tribunal upheld the release of liability for oil pollution included in the 1995 and 1998 agreements with respect to claims brought by States or state entities. But it did not uphold the release concerning claims brought by Ecuadorian individuals for personal damages. The dispute has also sparked many court actions in the US and the Netherlands about both the arbitration and the Ecuador court proceedings.

 

A second illustration of the inadequacy of arbitration as the sole means to resolve environment-related disputes is the Perenco v. Ecuador dispute.  This dispute arose out of taxation measures implemented by Ecuador which allegedly impacted French oil company Perenco. Perenco filed an ISDS claim in 2008, two years after Ecuador implemented Law 42, a 50% tax on “extraordinary revenues” generated by foreign oil companies.  This 50% tax was then increased by decree to 99% in 2007. This claim was brought under both the France-Ecuador BIT and the two relevant production blocks’ participation contracts. In 2011 and 2014, the tribunal rendered two decisions upholding its jurisdiction and in 2014, holding that, inter alia, the 99 per cent tax breached the France-Ecuador BIT. Meanwhile, Ecuador had lodged a USD 2.5 billion counterclaim in 2011 alleging that Perenco’s operations had violated contractual provisions and Ecuadorian law setting out obligations of environmental protection. On 11 August 2015, the tribunal upheld jurisdiction over Ecuador’s counterclaim and ruled that Perenco would likely be held liable for some contamination. Yet, conflicting and biased expert evidence did not allow the tribunal to decide on the amount of damages to be paid by Perenco.4 The tribunal thus took the radical decision to appoint an expert “solely answerable to the Tribunal”, with “the costs involved in this exercise […] initially […] borne by the Parties in equal shares […].”5

 

These cases arguably show that in environmental cases, arbitration might not be the most adequate dispute resolution mechanism. Why? Because, first, the inherent a posteriori character of international arbitration tribunals’ review of environment-related events and claims mechanically reduces the effectiveness of the enforcement of environmental norms.  So, although the Perenco tribunal recognized the applicability of the environment protection provisions of the Ecuadorian Constitution to Perenco’s activities, it could only rule in favor Perenco’s mandatory compliance with these norms after the damage had been done.6 In short, arbitral tribunals cannot ensure that irreversible or quasi-irreversible environmental damage is not inflicted. Second, the costs of arbitrations like Perenco or Chevron are an indisputable issue undermining its place as a preferred mechanism to resolve environmental disputes. Despite arbitration’s stakeholders’ laudable efforts to tackle this issue, arbitration still often involves large expenses for legal representation and expert evidence, coupled with arbitrators’ fees, which make it inevitably an expensive choice.

 

The question is: had an Environmental DB been in place at the time, would a quick, efficient and less costly review of the parties’ compliance with their environmental obligations have been undertaken in a simpler and quicker manner? 

II.              The DB Mechanism in the Construction Sector

DBs7 are put in place according to contractual provisions included in constructions contracts. They can be composed of one or three members (usually two technical experts and a lawyer chairing), and can be standing throughout the duration of the project’s contract or set up on an ad hoc basis (i.e. to deal with a specific dispute escalated to them by one or both parties). Once the DB has rendered a decision, model contracts typically provide either party may issue a notice of dissatisfaction against the decision, thereby escalating the dispute to an arbitration tribunal.  But, construction contracts often include obligations for the parties to comply with DB decisions until the decision is reversed by an arbitration tribunal.The decision can then either be confirmed or reversed by the arbitral tribunal, making it the ultimate enforcement tool for the contract’s parties.9 


Importantly, DBs formed under most rules must render a decision on the parties’ dispute in a relatively short time period, i.e. within 84 days of the receipt of the claim in the World Bank model and within 90 days of the commencement of the proceedings in the ICC model. Lastly, costs of DBs proceedings are much lower than arbitration, notably, due to the relative absence of teams of counsel and the stringent time limits applicable in DB proceedings.

III.            The Environmental DB proposal

The first element of the Environmental DB must be longevity, i.e. the Environmental DB must be standing throughout the duration of the relevant Contract.  It must be able to rule on any dispute with the benefit of understanding the whole project’s life (from the construction contract’s inception to its end).  Hence, regular site visits for DB members must be organized.  Those visits must be used to gain technical knowledge on the project and its specific environmental issues, while meeting with local communities to assess their needs and interests. 


Second, the Environmental DB must be included in a contract providing for strong and precise environmental obligations of the parties. Without these, this dispute resolution mechanism will lack a crucial environmental element. The strictness and effectiveness of these obligations will be enhanced if their inclusion into the contract becomes a compulsory requirement for a construction authorization to be granted by the State or for the contract to be awarded by the State, for example.  Third, the rules running an Environmental DB should be based on existing best practices in the construction industry (e.g., FIDIC or ICC rules).


Fourth, the responsibility to identify local communities impacted by a potential project should rest on the State’s shoulders. Indeed, at the bidding or authorization stage, the State should identify the relevant communities or social actors impacted by the future project (through a public certification to act as “communities”, following trade unions or NGOs examples). Then, the State, in the bidding documentation, would include an Environmental DB clause specifying which communities should be involved in the DB process, with corresponding responsible representatives etc. States or private actors could also follow models of existing Community Development Agreements (CDA). In short, CDAs are agreements entered in relation to extractive projects between States, private actors and local communities to ensure the latter’s involvement in the management of the project from its planning phase through to its exploration.10  CDAs have used innovative means to identify and involve local communities in the development and monitoring of large construction projects (like, for example, a yearly review of the social landscape to verify the continuing relevance of “communities” identified at the project’s outset).


But should States be the only driving force behind an Environmental DB proposal, or should private operators also proactively seek to implement this proposal in their construction contracts? Here again, the CDA example is relevant. Indeed, CDAs have been entered into, following the State’s initiative or not, between well-known private operators and State entities standing for local communities or local communities themselves, with private actors understanding the benefits of working directly with local communities and actors in the implementation of large projects.11 Practically, the representation of local communities within the Environmental DB process could take several forms. For example, the standing DB could include a “communities” representative as member, with another member being designated by the project’s owner (public or private), and the DB’s president being chosen by the two. Or compulsory consultation of communities identified in the project contract could be provided for, during the DB’s regular site visits for example.  And, in case of a dispute, identified communities and their representatives could make submissions if necessary and even initiate Environmental DB proceedings (which would necessarily require them to be a full party to the underlying project contract). To avoid undue delays caused by these processes, strict procedural time limits, just like those provided for in traditional DB rules, would need to be enforced.


Fifth, and lastly, the issue of the DB’s financing will be crucial. Indeed, the traditional financing model of DBs expects each contracting party to contribute to the budget of the DB. In the case of an Environmental DB, different options are open, from contribution in equal shares between all the parties (including local communities) to the State taking care of the local communities’ share, for example. Regardless, the main goal must be to keep the financial independence of the DB members from any party to the contract. Any appearance to the contrary, by having the private companies bear most of the financial burden, for example, would risk ruining the Parties’ trust in the process.

 


 

[1] IBA Climate Change Justice and Human Rights Task Force Report, “Achieving Justice and Human Rights in an Era of Climate Disruption”, page 11.  To resolve this issue, the IBA Task Force proposes “the creation of an IBA Working Group on Climate Change Justice to draft a Model Statute on Legal Remedies for Climate Change”.

[2] In this regard, see for example the Permanent Court of Arbitration’s “Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment” adopted in 2001.  According to the PCA, these rules provide “the most comprehensive set of environmentally tailored dispute resolution procedural rules presently available”.  These rules include, inter alia, a specialized list of arbitrators recognized for their expertise in the field and a list of scientific and technical experts in the field.

[3] IBA Climate Change Justice and Human Rights Task Force Report, “Achieving Justice and Human Rights in an Era of Climate Disruption”, p. 85 or Stuart Bruce, “The Project of a World Environment Court”, in Christian Tomuschat (ed), The OSCE Court of Conciliation and Arbitration (Brill, 2016).

[4] Perenco v. Ecuador, Interim Decision on the Environmental Counterclaim, 11 August 2015, ¶ 581. The tribunal’s chosen terms are unequivocal in this respect: “It seems [...] that each [expert] was attempting to achieve the best result for the party by whom they were instructed, and that they crossed the boundary between professional objective analysis and party representation.”

[5] Perenco v. Ecuador, Interim Decision on the Environmental Counterclaim, 11 August 2015, ¶ 588.

[6] Perenco v. Ecuador, Interim Decision on the Environmental Counterclaim, 11 August 2015, ¶ 582 “the Tribunal is satisfied that there is some contamination in the Blocks for which it is likely that Perenco will be held liable” (emphasis added).

[7] Nowadays, rules to set DBs up are proposed inter alia by the International Chamber of Commerce (ICC) in its 2015 Dispute Board Rules, by the World Bank or by the Fédération Internationale Des Ingénieurs Conseils (FIDIC) model contracts.  In fact, FIDIC has recently published new model contracts (the Red, Yellow and Silver Books) providing for a “Dispute Avoidance/Adjudication Board (DAAB)” focusing on dispute avoidance.

[8] See J. Jenkins, International Construction Arbitration Law (Kluwer Law International, 2014) p. 115.

[9] For a clear explanation of arbitrators’ review power: see C. Seppälä, How Not to Interpret the FIDIC Disputes Clause: The Singapore Court of Appeal Judgment in the Persero Case, April 2012 (White &Case publication).

[10] See J. Loutit, J. Mandelbaum, S. Szoke-Burke, Emerging Practices in Community Development Agreements, February 2016, Columbia Center on Sustainable Investment.

[11] See for example, successfully carried out projects like the Raglan Agreement, signed in relation to a Quebec mining project in 1995 by the private operator (Société Minière Raglan du Quebec Ltd) and several bodies standing for the interests of different Inuit communities; or, the Papua New Guinea LNG Project Umbrella Benefits Sharing Agreement signed in 2009 about a LNG project to be developed in Papua New Guinea. This agreement was entered by the State of Papua New Guinea, the Project companies, several central and local governmental entities, and project landowners named in the agreement.  


[*] François Baillon is a former commercial director of FIDIC, current Executive Director of IHIP (International Humanitarian Infrastructure Platform) and Treasurer of the Business and Climate Summit. He is an engineer and holds a PhD in Environmental Science. Baptiste Rigaudeau is an attorney at LALIVE SA in Geneva. He focuses his practice on international dispute resolution in the natural resources, tourism and construction fields. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of LALIVE SA.

 

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Geneva,
Tuesday, April 24, 2018
Environmental Law / Protected Species, Alternative Dispute Resolution