Mapping the Hidden Continent of Environmental Disputes

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The English High Court recently denied enforcement of a foreign judgment ordering a London-based insurer to pay reparation for an oil spill.  The reason was that the insurance contract referred all disputes to an independent arbitrator, at the exclusion of the courts.  The decision is a stark reminder that many high-impact disputes about the environment end up being resolved in private, commercial arbitration, rather than through public litigation. 

Last October, the English High Court issued the latest judgment in Spain’s long-running legal battle against the insurers of the Prestige, an oil tanker that sank in the Bay of Biscay in 2002, causing extensive pollution to the Spanish and French coastlines (The London Steam-ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain [2023] EWHC 2473 (Comm)).  The judgment concerned an application to enforce a Spanish court order requiring the London-based insurers to pay Spain the sum of €855 million under the vessel owners’ insurance contract.  The case involved complex questions of European law and a reference to the European Court of Justice.  In the end, however, the High Court denied enforcement for a simple reason: the relevant contract referred all disputes to arbitration, and the insurers had duly obtained an arbitral award declaring that they were not liable to indemnify Spain under the insurance club rules. 

The ruling is a stark reminder that legal disputes concerning serious environmental impacts are not always subject to litigation in the public courts but may instead fall to be decided behind closed doors: in private, commercial arbitration.  Yet this important forum has been mostly overlooked in the environmental litigation debate.  For example, the widely used climate litigation database maintained by the Sabin Center at Columbia University covers proceedings before national and international courts, as well as investment treaty arbitrations (also known as “investor-state dispute settlement” cases), but omits the much larger field of commercial arbitration.

As a result, an entire continent of environmental disputes remains unmapped.  Commercial arbitrations are typically confidential and only enter the public domain if there is subsequent litigation in the courts to challenge or enforce an award, or sometimes under securities disclosure regimes.  Many arbitral awards never reach that stage.  It is impossible, therefore, to know the exact scale of the hidden continent of environmental arbitrations.  But caseload statistics published by the main arbitral institutions suggest it must be significant.  Every year, around 4,000 new cases are filed with the thirteen main arbitration institutions worldwide, according to research by FTI Consulting.  A large share of these cases arises from economic sectors that can have serious environmental impacts, such as energy, mining, construction, and transport.  These industries made up over half of new cases filed with the London Court of International Arbitration in 2022.  Arbitration is, therefore, likely to be the forum of choice for many disputes where there may be significant environmental impacts.  On any view, it is an arena that cannot be ignored.

What types of environmental dispute, then, have typically ended up in arbitration?  To answer this question, I have focused on recent reported cases that involved environmental protection or damage as a material issue of fact or law.  This is consistent with the Sabin Center’s methodology, except that it widens the scope from climate change to any form of environmental impact.  Six recurring types of dispute emerged from the review.   

1. Post-M&A disputes

Post-M&A disputes concerning environmental warranties have been the subject of arbitrations since the 1990s (Jolivet et al., 2011: 91).  In a typical scenario, pollution is discovered at the target company’s site after its transfer to the buyers, leading to administrative fines or remediation orders.  The buyers then sue the sellers to compensate them for the resulting loss of share value.  In most cases, the buyers seek to rely on a warranty in the share purchase agreement representing – in various, similar formulations – that the target company complied with all applicable environmental laws at the time of sale (e.g. Solvay Specialty Polymers Italy v. Edison S.p.A., ICC Case No. 18666/FM/MHM/GFG, Partial Award, 22 June 2021; see: Swiss Federal Court, 1st civil chamber, Judgment of 18 January 2022, Case no. 4A_418/2021).  As a result of this reference to applicable laws, arbitrators in these cases have applied the relevant jurisdictions’ statutory regimes for environmental protection.  The arbitrators hence step into the shoes of national judges to determine whether the target company’s conduct at the time of the sale violated the relevant regime, and therefore whether the contractual warranty was breached.   

2. Breach of industry standard

Two recent awards that have surfaced in the public domain concern alleged breaches of environmental safety standards in the oil industry.  In these cases, the tribunals were not called upon to apply any statutory environmental law regime.  Instead, they were asked to interpret contractual standards of care that referred to best practices in the oil industry itself. 

The first award concerns an action brought by the State of Yemen against the former operators of a large oil field in the country (Ministry of Oil and Minerals of the Republic of Yemen v Canadian Nexen Petroleum Yemen & Ors, ICC Case. No. 19869/MCP/DDA, Final Award, 4 February 2020).  Yemen claimed that the operators had handed over the production facilities to their successor (a publicly owned company) in a state of disrepair, causing poorly insulated oil wells to leak into the groundwater.  Yemen also claimed that the operators had failed to carry out an environmental impact assessment (EIA) before handing over the sites.  Yemen argued that these failures breached the operators’ obligations under the production-sharing agreement to maintain the facilities “in good working order” and operate in accordance with “generally accepted standards of the petroleum industry”.  Although the majority of Yemen’s claims were found to be inadmissible, the tribunal held that the leaks in certain oil wells and the failure to conduct an EIA indeed fell short of the contractual standard and awarded damages accordingly.

The second case concerned a long-term contract for the storage of crude oil in the U.S. Virgin Islands (Limetree Bay Terminals LLC v UNIPEC America Inc., ICDR Case No. 01-20-0014-7261, Final Award, 14 September 2022).  The customer (Unipec, a subsidiary of the Chinese national oil company, Sinopec) sought to terminate the contract on the grounds that the storage terminal was operated in an unsafe manner, putting Unipec’s oil and the environment at risk.  The alleged safety failures included filling the storage tanks beyond their carrying capacity, poor maintenance, and inadequate operating procedures evidenced by a series of small spills.  Unipec argued that this conduct breached the operator’s contractual obligation to “operate the Terminal to the highest industry standards, and at a very minimum equal to those of other comparable first-class operators of terminal facilities”.  The tribunal, however, dismissed Unipec’s claims, notably because Unipec failed to establish that the operator’s conduct was substandard compared to its peers.  Contrary to Yemen’s successful use of expert testimony to give meaning to the relevant industry standard in that case, Unipec failed to provide appropriate evidence of best practices that were being applied at comparable storage terminals.

3. Decommissioning liabilities

Another recurring type of environmental dispute in the oil industry which can end up being resolved in commercial arbitration concerns the de-commissioning of production facilities at the end of their lifecycle.  This type of dispute usually arises between a private operator and the State.  For example, the Austrian oil major OMV obtained two separate awards against Romania in arbitrations arising from the privatisation of the former State-owned oil company, Petrom.  The tribunals ordered the State to compensate OMV for the cost of remediating the sites of closed oil wells that it had inherited from Petrom.  By contrast, in an undisclosed arbitration between an oil major and an African State, the parties were ordered to share the de-commissioning costs of an offshore production platform (Clay, 2003: 10).  As the relevant agreement and local legislation were silent on the matter, the tribunal relied on international law to hold the parties liable in equal shares.  On the one hand, the tribunal relied on the 1982 Montego Bay Convention that obliged coastal states to remove unused installations from the sea.  On the other hand, the tribunal held that customary international law placed a precautionary duty on private operators, which required them to decommission production facilities at the end of their useful life.

4. Breach of environmental specifications for a construction project

A recurrent subject of dispute in construction arbitrations is the contractor’s compliance with environmental specifications in the construction contract, and the consequent liability for rectification.  In some cases, the specifications refer simply to the applicable environmental regulations (undisclosed parties, ICC Case No. 11082, Final Award, 2003; see: Jolivet, 2011: 3).  In other cases, the contract may set out specific site quality criteria.  For example, a tribunal held that a land reclamation project had failed to meet the contractual site quality criteria so long as noxious gases continued to escape from the backfill (undisclosed parties, ICC Case No. 12727, Final Award 2004; see: Jolivet, 2011:5).

5. Insurance arbitration

Incidents of environmental damage often lead to insurance claims, which are frequently referred to arbitration.  The Prestige case discussed above is a notable example. Another recent case concerns the Ituango hydroelectric dam project in Northern Colombia.   In 2018, severe flooding occurred downstream of the dam’s construction site, allegedly due to a blockage in a tunnel designed to divert the river.  The project employer (Empresas Públicas de Medellín) filed a request for arbitration against its insurer (Mapfre) and the matter subsequently settled.

6. Tort claims submitted to arbitration

The final type of environmental dispute concerns tort claims submitted to arbitration by the parties’ consent.    The iconic example, made world famous by the film “Erin Brockovich”, is the class action brought by residents of Hinkley, California, against the utility Pacific Gas & Electric (PG&E).  The residents alleged that the company was dumping toxic process water from a gas pumping station in the town’s vicinity, contaminating the groundwater and causing the spread of cancer and other diseases in the population.  Although the case started in court, it was referred to arbitration by agreement of the parties.  An award in 1993 found PG&E liable to pay damages of around US$ 130 million to 39 residents and paved the way for settlements with hundreds of other claimants. 

More recently, between 2016 and 2018, residents of the Dutch province of Groningen whose homes had been damaged by earthquakes caused by gas extraction in the area, were able to submit claims for compensation against the operating company (NAM, a joint venture between Shell, ExxonMobil and the Dutch State) to an independent arbitrator.  This year, a Dutch parliamentary inquiry reported that arbitration had given “the people of Groningen access to an easy way of settling a dispute” and expressed regret that this forum had been replaced by a more long-winded, State-administered procedure. 

Conclusion

The cases discussed above can only provide a glimpse of the hidden continent of environmental arbitration.  The task ahead is to systematically map this little-known territory.  This can only be achieved with greater transparency.  A good place to start would be for the arbitral institutions to record environmental disputes as a separate category in their caseload statistics.  Users of commercial arbitration and their counsel should also consider agreeing to the publication of awards (if necessary in redacted form) that are relevant to issues of environmental protection.  This would permit arbitral jurisprudence about the environment to emerge more clearly from the shadows.    

Clémence Taudou Mespoulhé and Emma Jing contributed to the research for this article.

Citations

  1. Clay, Thomas, 2003, “Arbitrage et environnement”, in: Gazette du Palais, no. 149, 29 May, p. 10 and fn 18.
  2. Jolivet, Emmanuel; Marquis, Laurence, 2011, “Chambre de commerce internationale”, in: Cahiers de l’arbitrage, no. 1, 1 January, p. 91.
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