REUTERS | Alister Doyle

What role will arbitration have in future disputes involving climate change?

Climate change has emerged as a (if not “the”) relevant factor in a number of high-profile litigation disputes in recent years. Those disputes range from the commercial to the personal, to the public interest: from disputes arising out of option agreements for the trade of the old system of “emission reduction units”, to cases dealing with personal property damage caused by climate change related events; to claims urging governments to do more to prevent climate change. Most (if not all) of these claims are being dealt with in litigation (not arbitration), in the public domain. In the author’s view, however, arbitration, and in particular investment treaty arbitration, could well play an important role in future.

Recent examples of climate change related disputes

In Germany, in late 2015, a Peruvian famer (Mr Lliuya) filed claims in a German court requesting a declaratory judgment and damages against RWE, Germany’s largest electricity producer, for committing the tort of nuisance. Mr Lliuya alleged that RWE had knowingly contributed to climate change by emitting substantial volumes of greenhouse gases, in turn contributing to the melting of mountain glaciers near his home, increasing flood risk. The claim was initially rejected (in part, because there was no “linear causal chain”), but on appeal was found to be admissible by a higher court. The case is now in its evidentiary phase.

In Australia, in 2017, shareholders of the Commonwealth Bank of Australia (CBA) commenced proceedings against CBA. They alleged violations of the Corporations Act 2011 with the issuance of its 2016 annual report, which failed to disclose climate change related risks, and its management of those risks. The claim was ultimately discontinued because CBA’s subsequent annual report had both acknowledged the risk posed by climate change on the bank’s operations, and embodied a commitment to undertake climate change scenario analysis on its business risk in the upcoming year. (Notably, there are similar reporting provisions in the Companies Act 2006 in force in England and Wales, to those relied on by the claimants in the CBA case.)

Climate change litigation may also be a human rights issue. Although not litigation per se, the Commission on Human Rights of the Philippines is currently investigating whether Chevron and other carbon majors have violated the human rights of Filipinos (including the right to life, water and food) as a result of climate change related events. While the Commission cannot impose financial penalties or impose criminal liability, the inquiry could increase public pressure to cut emissions or move away from fossil fuels, and even lead to more stringent regulation.

Another example (this time pursued against a state-organ, but with business implications) was a constitutional claim brought in 2017 by Greenpeace against the Government of Norway. In that case, the claimants sought a declaratory judgment that Norway’s Ministry of Petroleum and Energy violated the Norwegian constitution (which codifies a “right to an environment that is conducive to health and to a natural environment whose productivity and diversity are maintained”) by issuing a block of oil and gas licences for deep-water extraction from sites in the Barents Sea. The claim was rejected by the Oslo District Court in January, and is now being appealed.

In England and Wales, there have been few examples of climate change litigation to date. This may change, however, not least because UK-headquartered parent companies can now be liable in the tort of negligence for acts committed overseas by their foreign subsidiaries where it is possible to establish a duty of care. This was the conclusion of the English Court of Appeal in late 2017 in the Lungowe v Vedanta case. There is, therefore, the potential for future negligence claims in circumstances where, for example, the parent company has taken direct responsibility for devising a climate change policy (the adequacy of which is the subject of the claim), or it controls the operations which give rise to the claim.

What about arbitration?

Disputes resolved in arbitration are more difficult to track because they are, generally (and especially in the commercial context) confidential. That said, the International Chamber of Commerce (ICC) has recently constituted a task force to explore the future role of arbitration in climate change related disputes. In commercial disputes, the case for arbitration may be obvious (not least, the attraction of having it dealt with privately). However, where the public interest is engaged, and with potentially multiple claimants and legal systems involved, a confidential system of dispute resolution may be harder to justify, particularly for an industry that is working hard openly to build a sense of shared endeavour (between businesses, communities, NGOs and policymakers) in tackling climate change. Transparency plays an important role in building those bridges; the relevant stakeholders may also feel it is an important part of any related dispute resolution procedure.

In the investment treaty claim context, climate change is likely to feature increasingly. Although investor-state dispute settlement (ISDS) has been subject to public disquiet over recent years, it can also offer a neutral and effective dispute resolution mechanism, including in the climate change context. For example, renewable energy investors have sought to rely on this mechanism in claims against Spain, Italy and the Czech Republic (among others) to challenge changes by those states to incentives regimes, which had been designed to attract renewable investments (and upon which those investment decisions were based).

Investor-state arbitration may even catalyse investors to give greater credence to climate change risk as part of their investment decision-making process. Indeed, in this post-Paris Agreement age (the contracting parties to which are required to take measures that will inevitably affect energy and extraction businesses), it is likely to be increasingly challenging for investors to argue that they invested in or funded projects without knowing or understanding the regulatory risk. Investors’ contributions to climate change related environmental disasters could even give rise to state counter claims in certain instances.

As the issue of climate change becomes ever more relevant in the dispute resolution context, the role of arbitration will certainly be an interesting area to watch.

Allen & Overy Stephanie Grace Hawes

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