Commercial arbitration and the climate

Where are we now?

Camilla ter Haar and Ruth Keating, 39 Essex Chambers London

Overview

1. Climate change is one of — if not the — greatest challenges of our time. As the climate changes, it increases instability and, consequently, will give rise to disputes. There is therefore a clear relevance to the world of arbitration.

2. Definitions differ slightly as to the meaning of a ‘climate change dispute’ — however, across those definitions there is a consensus developing that climate change disputes are disagreements arising out of or in relation to the effects of climate change and climate change policy.¹

3. The scope for contractual claims interacting with climate change is broad.² The ICC’s breakdown of 2018 arbitration cases by economic sector emphasised that the vast majority of its cases (almost 50%) involve construction, energy and transportation.³ These are industries well known to be pivotal to the net zero transition.

4. In November 2019, the ICC released a report on “Resolving Climate Change Related Disputes through Arbitration and ADR”.⁴ That report referred to three categories of disputes.⁵ Those three categories were: (i) disputes arising out of specific transition, adaptation or mitigation contracts;⁶ (ii) disputes arising out of contracts which do not specifically relate to transition, adaptation or mitigation;⁷ and (iii) disputes where the parties have agreed to submit to arbitration after the dispute has arisen.⁸

5. These aforementioned categories of dispute reflect that although cases have traditionally been brought against States, they are increasingly being brought against corporates as well.⁹ Therefore, there is the potential for commercial arbitrations in two ways:

a. The effects of climate change themselves — for example extreme weather events — will give rise to commercial disputes referable to arbitration.

b. There will be increasing regulation emerging as states try to ensure their commitments under the Paris Agreement are met. As climate change policy develops and expands, one can see the potential for different commercial disputes arising out of these developing requirements, for example if a carbon tax is put on certain products or materials.

6. In respect of both categories of disputes, arbitration clauses¹⁰ are regularly found in contracts used by parties operating within the sectors which are directly impacted by climate change and related regulation (for example the energy and mining sectors). Therefore arbitration will increasingly involve climate change related disputes — whether solely climate related or involving aspects of the dispute relevant to the climate.

Relevant features of arbitration

7. Arbitration is well suited to adapt to climate change disputes given the scope for expertise and the cross-border nature of some of the disputes.¹¹ Both the UNFCCC and the Paris Agreement contain provisions providing for dispute resolution either by the International Court of Justice or by arbitration.¹² Nonetheless, the strong criticism made against commercial arbitration in particular is that the confidentiality afforded to commercial arbitration proceedings (as opposed to most investment treaty arbitrations) is wrong in the context of issues of such public importance. Further, the lack legal precedent is said to obstruct the public accountability of parties and the development of a coherent and effective global, climate-change regime.¹³

8. However, there are also benefits — including the flexibility that can be achieved, along with the speed at which proceedings can be conducted. The nature of many climate change related disputes — whether related to mitigation, adaptation and or transition risks — is that time is of the essence when it comes to their resolution. In terms of further benefits, the ability to appoint tribunals with specialist expertise (in climate science, policy and law) will be increasingly important. The importance of this expertise applies across the board — not only to arbitrators but also experts. Access to appropriate expertise in climate change science will for example be crucial as causation arguments are supported by attribution science.¹⁴

9. The purpose of summarising the potential issues with arbitration, as well as the benefits, in the specific context of climate change disputes is that these are tension points that the arbitral community must be mindful of as more disputes are referred to arbitration that have a ‘climate change’ element to them. By establishing accountability and providing remedies, these arbitral processes can, for instance, strengthen the effectiveness and credibility of climate change governance.

Arbitration is well-suited to climate-related disputes due to its flexibility, speed, and the ability to appoint experts in climate science and policy.”

Relevant types of dispute

10. In terms of the types of commercial dispute that one might expect to see in the coming years, as outlined above, climate change has the potential to impact disputes in many different and varied ways. Just two examples are picked for this article — damage caused by extreme weather events and force majeure arguments.

Damage caused by extreme weather events¹⁵

11. An example of a type of claim that would fit in this category of damage caused by extreme weather events is in Lliuya v RWE AG¹⁶. This case is being dealt with by the German courts but demonstrates the types of arguments that might be made in arbitrations.¹⁷

12. In November 2015, Saúl Luciano Lliuya — a Peruvian farmer who lives in Huaraz, Peru — filed claims for declaratory judgment and damages in the District Court Essen, against a German energy company (“RWE”). Mr Lliuya’s suit, supported by NGO Germanwatch, alleges that RWE, having knowingly contributed to climate change by emitting substantial volumes of greenhouse gases, bore some measure of responsibility for the melting of mountain glaciers near his town of Huaraz. Acknowledging that RWE was a contributor to the emissions responsible for climate change Mr Lliuya has asked the court to order RWE to reimburse him for a portion of the costs that he and the Huaraz authorities are expected to incur from setting up flood protections. The share calculated amounted to 0.47% of the total cost — the same percentage as RWE’s estimated contribution to global industrial greenhouse gas emissions since the beginning of industrialisation (from 1751 onwards).

13. A final decision is outstanding.¹⁸ However, in terms of future arbitrations one can see the potential for future similar ‘polluter pays’ type cases.

Force majeure arguments

14. It may that a party does not seek redress from harm arising as a result of climate change but that climate change is relevant to the underlying dispute. For instance, a party may allege that an extreme weather event or sea level rise constitutes a force majeure event that releases it from its previously negotiated contractual rights.¹⁹

15. In March 2020 the ICC updated its Force Majeure and Hardship clauses to help businesses draft contracts adaptable to unforeseen events such as the Covid-19 outbreak.²⁰ We are increasingly experiencing extreme, climate-change related, weather events which may — and already do — cause disruption in terms of physical (and immediate) disruption to commercial activities in terms of supply chain disruption and delays and damage to works on site. In addition to the physical disruption climate change may bring, Net Zero related policy and legislative changes (in terms of measures to adapt and to mitigate) could also increase as governments may step in to regulate or legislate with little notice, which could also disrupt a project.

16. The ICC’s suggested Force Majeure and Hardship clauses require that (1.b)) the Force Majeure Event could not reasonably have been foreseen at the time of the conclusion of the contract. One can anticipate the arguments that will be made in the future as to whether certain whether events could be foreseen or not at the time of contract formation. Further, a “natural disaster or extreme natural event” is listed under 3.e) as a “Presumed Force Majeure Event”, “[i]n the absence of proof to the contrary”. With extreme weather events increasing in frequency and severity, there may be scope to argue, with “proof” that a climate-change related extreme event does not fall within this requirement.

Extreme weather events, a direct consequence of climate change, are increasingly giving rise to commercial disputes and force majeure claims.”

Conclusion

17. As climate change continues to pose a significant global threat, the need for effective dispute resolution mechanisms becomes increasingly crucial. In many ways climate change is a conflict multiplier — it has the potential to exacerbate existing types of disputes and broaden the range of disputes. While arbitration offers a promising avenue for addressing climate change related disputes, it is not without its challenges. To fully realise the potential of arbitration in the context of climate change, it is essential to address these challenges through ongoing development and refinement of arbitration procedures and developing necessary expertise.