Yasmine Lahlou, Rainbow Willard and Meredith Craven, Chaffetz Lindsey
This is an extract from the first edition of GAR’s The Guide to Mining Arbitrations. The whole publication is available here.
Increased foreign direct investment by multinational mining companies has given rise to a growing number of international arbitration claims, both contract- and investment treaty-based. Many of these have at least some connection to the environment. Investors regularly invoke violations of the fair and equitable treatment standard or claim an indirect expropriation on the basis of a state’s adoption or enforcement of environmental regulations. Meanwhile, in a number of recent investment arbitrations – including in at least two mining disputes – states, too, have asserted counterclaims alleging environmental damage associated with an investment. This seems to be indicative of a broader trend of states asserting counterclaims more frequently in investment arbitration and negotiating new treaties that may be more amenable to both counterclaims and environmental interests.
This chapter addresses state-asserted counterclaims in the investment treaty context. In particular, we examine the potential for environmental counterclaims in mining arbitrations asserted under an investment treaty. We do not address counterclaims asserted in the commercial context or pursuant to investment agreements. Nor do we address claims initiated by states pursuant to investment treaties.
While states often allege environmental violations as a defence in the mining context, very few have used these same environmental violations as a basis for a counterclaim. Nonetheless, in recent years, state-asserted counterclaims have been asserted with increased frequency in investment treaty arbitrations overall. Very few of these counterclaims have succeeded. More often than not, they are rejected on jurisdictional or admissibility grounds. Tribunals have struggled to find consent to arbitrate counterclaims in investment treaty language, particularly in the case of counterclaims that are not directly related to the investor’s claims. The very few counterclaims that proceed on the merits usually are rejected because the particular treaty does not create a substantive cause of action for a state.
As treaties are often silent regarding the assertion of counterclaims, the customary practice of investment arbitration tribunals has provided the parameters for state-asserted counterclaims. There are three preliminary requirements for a counterclaim to be entertained on the merits. First, the investment instrument – whether an investment treaty or an investment agreement negotiated directly between the investor and the state – must provide consent to arbitrate counterclaims. Second, the investment instrument must provide a cause of action for the relevant counterclaim. Third, the claim must meet other procedural and substantive requirements, often arising from the governing arbitration rules.
State negotiators are actively engaged in drafting free trade agreements, bilateral investment treaties (BITs), and other investment instruments that may change these tribunal-constructed parameters and make environmental counterclaims a strategic reality for states. Some new treaties squarely address counterclaims. And many of them acknowledge states’ right to regulate in the public interest, as well as the potential for environmental and social impact arising from foreign direct investment. Many of these treaties have yet to enter into force so no case law interpreting them exists as yet. As a result, it is impossible to predict whether these new treaties will give rise to a higher number of environmental counterclaims in the mining context and whether states rich with mining resources will seek to renegotiate existing treaties to include these provisions. It also remains to be seen whether these new treaty provisions will permit state-asserted counterclaims to meet jurisdictional and admissibility requirements, whether more environmental counterclaims will proceed on the merits, and whether any could lead to a state recovering damages on its counterclaim.
A changing panorama: from implied to express consent
In most investment disputes, the scope of the parties’ consent for purposes of jurisdiction – including whether the parties have consented to arbitrate counterclaims – is determined by the host state’s offer to arbitrate (usually contained in a treaty). While some tribunals have interpreted an investor’s submission of a dispute to ICSID or under the UNCITRAL Rules as sufficient to determine consent to state-asserted counterclaims, in this section we focus solely on how tribunals have analysed consent that arises from the investment treaty and how treaty negotiators are addressing consent to arbitrate counterclaims in a new breed of treaties.
When an investor files an investment dispute against a host state, the investor accepts the state’s standing offer to arbitrate on the same terms contained in the offer. As a result, states unilaterally control the scope of consent. If the state offers its consent to arbitrate disputes including counterclaims, then the investor through its acceptance also consents to arbitrate counterclaims.
Despite state control of the scope of consent, it has historically been the most significant barrier to counterclaim jurisdiction in investment arbitration. This is because investment treaties have historically focused on giving investors the right to seek a remedy in an international forum, so consent to counterclaims was not expressly contemplated. Under these treaties, consent to arbitrate counterclaims exists implicitly or not at all. Some newly negotiated treaties now include express consent to counterclaims. This express consent is, however, often limited in scope. We will discuss treaty language from which tribunals have interpreted implied consent in the past, and then new investment treaties and free trade agreements that expressly include consent to arbitrate state-asserted counterclaims.
Implied consent to arbitrate counterclaims
Investment tribunals historically have interpreted implied consent to arbitrate counterclaims on the basis of vague language or broad dispute resolution clauses in investment treaties. These tribunals have noted that a number of linguistic formulations provide implicit consent to arbitrate counterclaims, either because they exclude counterclaims under particular, defined circumstances, or because they broadly consent to arbitration of ‘any’ or ‘all’ disputes.
Implied consent to arbitrate some counterclaims by excluding others
Many treaties, while not expressly permitting the assertion of counterclaims, do appear to envision them generally by excluding counterclaims in specific circumstances. A common provision in investment treaties and free trade agreements prohibits counterclaims in one very limited situation: where a state attempts to invoke an investor’s ability to receive indemnification or compensation for a claim under an insurance policy or guarantee contract. Based on basic canons of treaty construction, the exclusion of this single type of counterclaim would appear to allow for all other types of counterclaims.
This was the case in Aven v. Costa Rica, where ‘the only provision [of the DR-CAFTA] referring to “counterclaims”’ provided:
A respondent may not assert as a defense, counterclaim, right of set-off, or for any other reason that the claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract.
The Aven tribunal found that this language meant that counterclaims were in principle contemplated by the DR-CAFTA and were therefore within the scope of the parties’ consent:
It follows that, except for a counterclaim by a respondent State alleging that ‘claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract,’ Respondent’s right to counterclaim under the Treaty is contemplated and falls within the scope of jurisdiction of a tribunal constituted under the Treaty.
Such provisions prohibiting state defences or counterclaims based upon insurance or guarantee contracts have been around since at least the early 1990s. For example, similar language appears in NAFTA, and was included in treaties concluded throughout the 1990s.
Perhaps using past treaties as models, treaty negotiators continue to insert similar or identical provisions in current investment treaties. For example, the Argentina–Japan BIT, signed in 2018, includes nearly identical language to the DR-CAFTA. Interestingly, the Kuwait–Singapore BIT contains the same prohibition, but articulates it in a more permissive sense, noting that:
[i]n any proceeding under this Article, any counterclaim or right of set-off may not be based on the fact that the investor concerned has received or will receive, pursuant to an insurance contract, indemnification or other compensation for all or part of its alleged damages from any third party whomsoever, whether public or private, including such other Contract Party and its subdivisions, agencies or instrumentalities.
This provision appears to permit any counterclaim or right of set-off to be asserted, provided that it is not based on the investor’s right to receive indemnification under an insurance contract or otherwise. Provisions including this broad language may provide an even clearer path to a state-asserted counterclaim than the language of DR-CAFTA that paved the way for consent in Aven.
Consent to arbitrate ‘any’ or ‘all’ disputes
Meanwhile, many investment treaties provide broadly for arbitration of ‘all’ or ‘any’ investment disputes, without distinguishing between claims and counterclaims. Absent other limitations in these clauses, tribunals frequently find that they implicitly permit counterclaims. For example, in Saluka v. Czech Republic, the tribunal found that Article 8 of the Czech–Netherlands BIT, consenting to arbitrate ‘all disputes . . . concerning an investment’, authorised arbitration of counterclaims in principle. However, without more, this language often leads to confusion as to whether treaty drafters intended to include consent to state-asserted counterclaims.
No consent to arbitrate counterclaims
Many tribunals have interpreted certain treaty language that imposes limitations on the scope of arbitral disputes as prohibiting counterclaims entirely. For example, some seemingly broad clauses that permit the submission of ‘any’ or ‘all’ disputes to arbitration only contemplate submission by an investor. The Canada–Venezuela BIT provides for arbitration of ‘any dispute’, but provides that ‘an investor may submit a dispute’ to arbitration. The tribunal in Rusoro v. Venezuela interpreted this language as providing standing to investors only – i.e., it did not permit a state to assert a counterclaim. Similarly, in Karkey v. Pakistan, the tribunal found that the Pakistan–Turkey BIT contemplated only the investor submitting a dispute to arbitration and choosing the relevant arbitral institution. As a result, the tribunal found no consent to arbitrate counterclaims submitted by the host state.
One very clear example of a prohibition on counterclaims was found recently in Anglo-American PLC v. Bolivarian Republic of Venezuela. There, the UK–Venezuela BIT provided:
[t]he jurisdiction of the arbitral tribunal shall be limited to determining whether there has been a breach by the Contracting Party concerned of any of its obligations under this Agreement, whether such breach of its obligations has caused damage to the national or company concerned, and, if such is the case, the amount of compensation.
The tribunal found that this language imposed clear limitations on the tribunal’s jurisdiction and excluded the possibility of counterclaims.
What’s new? Express consent to arbitrate counterclaims
Burlington v. Ecuador, although it did not arise in the mining context, is the only public award in which a tribunal has analysed an express agreement to arbitrate a state-asserted counterclaim. The consent was based on a post-dispute agreement between the parties, however, not on the language of an investment treaty. In some new investment treaties, drafters and negotiators have incorporated consent to arbitrate state-asserted counterclaims. However, to our knowledge, no reported decision has yet considered an investment treaty provision that expressly permits counterclaims.
Providing for express consent
Several new investment treaties and free trade agreements expressly permit state-asserted counterclaims. Some examples are the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Investment Agreement for the COMESA Common Investment Area, the Argentina–UAE BIT and the Slovak Republic–Iran BIT. Each of these expressly envisions, and permits, the assertion of counterclaims. For example, the Argentina–UAE BIT provides that ‘the respondent may submit a counter-claim directly related with the dispute.’ Similarly, the Slovak Republic–Iran BIT notes that the respondent ‘may . . . assert . . . [a] counterclaim’. And the CPTPP provides that ‘the respondent may make a counterclaim. . . .’Evidently, at least in terms of consent, these treaties provide a much clearer path for a state to assert a counterclaim.
Limiting the consent
Notably, while these treaties clearly allow counterclaims, they limit their subject matter. The limitations take two broad forms: (1) in some treaties, the counterclaim must be directly related with the dispute raised by the investor, and (2) in others, the counterclaim must be based on an investor’s failure to comply with the investment treaty, including a failure to comply with host state laws.
Incorporating a connectedness requirement
Both the CPTPP and the Argentina–UAE BIT incorporate a ‘connectedness’ requirement into the consent to a counterclaim. The Argentina–UAE BIT only permits a counterclaim that is ‘directly related with the dispute’. Ultimately, this language will lead to several treaty interpretation issues. What does ‘directly related’ mean? How ‘direct’ must the relation be? And if an investor has employed creative pleading to block a state from asserting a counterclaim, can the standard be relaxed?
The CPTPP incorporates a more permissive ‘connectedness’ requirement. Article 9.19.2 establishes that, in response to certain investor claims, ‘the respondent may make a counterclaim in connection with the factual and legal basis of the claim . . .’ Again, this provision may give rise to several treaty interpretation issues. What does ‘in connection with’ mean? Is this a lower standard than ‘directly’ connected? And does the counterclaim have to have a factual and legal connection to a claim, or could it be one or the other?
Limiting counterclaims to violations of host state law
The Slovak Republic–Iran BIT also limits the subject matter of counterclaims, by establishing that ‘[t]he respondent may assert as a defense, counterclaim, right of set off or other similar claim that the claimant has not fulfilled its obligations under this Agreement to comply with Host State law or that it has not taken all reasonable steps to mitigate possible damages.’ This language, which permits the assertion of a counterclaim for any violation of host state law that also constitutes a breach of the BIT, could give rise to a broader range of counterclaims than the language in the Argentina–UAE BIT. The Slovak Republic–Iran BIT appears to allow a state to assert a counterclaim on the basis of a failure to comply with environmental laws or regulations, even if an investor’s claims have no connection to environmental issues. But how this limitation will be interpreted in the context of the governing arbitration rules and tribunal practice remains to be seen.
The next step: creating a cause of action
Even where a tribunal finds that a treaty provides consent to state-asserted counterclaims, the respondent cannot prevail unless the treaty also provides a cause of action for the particular counterclaim. Few tribunals have found that a cause of action exists for counterclaims under an investment treaty. This is because investment treaties traditionally protected the rights of investors by imposing international obligations on states; they did not historically impose reciprocal obligations on investors. However, in several recent arbitrations, tribunals found that the treaty incorporated domestic and international law obligations to provide a cause of action. Moreover, treaty negotiators have taken steps to reference such domestic and international law obligations in the text of investment treaties, perhaps in the hope of incorporating them as treaty obligations incumbent on foreign investors.
Next we will discuss counterclaims based on violations of host state law, and the support for these causes of action in newer treaties. Then, we discuss counterclaims based on international obligations, and how these obligations are being incorporated into treaties.
Breach of domestic law
Incorporating domestic law into investment treaties
In the context of state-asserted counterclaims, tribunals have historically found that they can only adjudicate causes of action arising under the treaty in question. For example, in Rusoro v. Venezuela, Venezuela counterclaimed that Rusoro Mining had breached its mining plan for the gold mine it operated, resulting in damage to Venezuelan resources and increased costs for future operation of the mine by the state. The tribunal found that if Rusoro had any obligation to comply with the mine plan, the obligation arose pursuant to Venezuelan law and not under the Canada–Venezuela BIT. And nothing in the BIT gave the tribunal authority to adjudicate a cause of action arising under Venezuelan law.
As a result, the traditional thinking has been that ‘the arbitration agreement should refer to disputes that can also be brought under domestic law for counterclaims to be within the tribunal’s jurisdiction.’ Multiple tribunals have suggested that a state could only assert a counterclaim based upon domestic law if the treaty incorporated some sort of umbrella clause raising an investor’s breaches of contractual or domestic law obligations to the level of international law obligations.
From a state’s perspective, language in newer treaties may solve the problem that Venezuela faced in Rusoro. For example, the Slovak Republic–Iran BIT, discussed above, expressly permits a state to assert a counterclaim based on a violation of the investor’s ‘obligations under this Agreement to comply with Host State law’. Thus, while this treaty does not impose express obligations on an investor, its counterclaim consent provision could create a potential cause of action for a violation of host state law.
Acknowledging a state’s right to regulate
Nonetheless, in at least one instance, a tribunal found treaty language supported a counterclaim based on a violation of host state law. In Aven v. Costa Rica, the tribunal found that language protecting the state’s right to regulate and enforce measures in the interest of the environment imposed treaty obligations on investors. The DR-CAFTA investment chapter at issue in Aven provides:
Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
The Aven tribunal interpreted this language to incorporate the state’s domestic environmental measures into the treaty. The tribunal found that any investor who ignored or breached the state’s environmental measures would violate ‘both domestic and international law’. As a result, while the DR-CAFTA did not impose any express affirmative obligation on investors to protect the ecology of the host state, the tribunal found it could elevate breach of domestic environmental regulations to a treaty breach, forming the cause of action for a counterclaim.
Although the standard may differ slightly, many new investment treaties include the same, or similar, language. For example, the Comprehensive Economic Partnership Agreement between the EFTA States and the Republic of Ecuador provides that ‘nothing in this Chapter shall be construed to prevent a Party from imposing maintaining or enforcing measures . . . necessary to protect human, animal or plant life or health.’ The Chile–Hong Kong BIT includes similar language.
However, the award in Aven suggests that a state could likely make a convincing argument that asserting a counterclaim based on the violation of an environmental measure is one way of ‘enforcing’ that measure. Of course, there are also convincing arguments to the contrary. These arguments will centre around treaty interpretation issues. What did the treaty drafters mean by ‘enforcing’ a measure? Does the assertion of a counterclaim based on a violation of the ‘measure’ constitute ‘enforcing’ it? If the state has other means (and is employing them) to enforce the measure, is it also permissible to assert a counterclaim in international arbitration on the same basis? And ultimately, did treaty drafters intend to give states a substantive cause of action by including this provision? Given the variations in the treaty landscape, tribunals likely will need to examine these questions anew.
Similar to domestic law, international obligations arising under international instruments external to the investment treaty cannot provide a cause of action against an investor, unless they are incorporated into the applicable treaty explicitly or by reference. However, the majority of international law instruments applicable to corporations are non-binding and voluntary. As the tribunal in Urbaser v. Argentina noted, the voluntary nature of these instruments makes it difficult to point to affirmative obligations that can serve as a basis for a treaty-based counterclaim. Analysing a counterclaim alleging that Urbaser denied Argentine citizens the human right to water by failing to adequately furnish drinking water and sewage services, the Urbaser tribunal noted that instruments such as the 1948 Universal Declaration of Human Rights and the 1966 International Covenant on Economic Social and Cultural Rights recognise human rights to water and sanitation as a matter of customary international law. But even as these instruments recognise that people have certain rights, they do not impose affirmative obligations on private parties to promote or implement those rights. At most, these instruments impose a prohibition ‘not to engage in activity aimed at destroying such rights’. Even when a state party assumes an obligation under international law to protect and promote environmental or human rights, that obligation is not transferred to foreign investors operating in that state by virtue of an investment treaty.
However, in the changing treaty landscape, these voluntary standards and guidelines are now appearing in investment treaty provisions. These provisions mostly fall within the rubric of corporate social responsibility (CSR). Generally, CSR provisions are understood to include internationally recognised guidelines for business and investment that address the environment, human rights, community relations and labour issues, and are embodied in instruments like the OECD Guidelines for Multinational Enterprises. In the mining context, CSR instruments set out guidelines for businesses that are aimed at protecting and managing the environment and undertaking sustainable development.
For example, the Chile–Hong Kong BIT provides that:
The Parties reaffirm the importance of each Party encouraging enterprises operation within its area to voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party.
The Benin–Canada BIT (based on the Canadian model BIT) has similar language. All of these treaties stop short of imposing direct obligations on investors. They recognise the importance of CSR by agreeing to ‘encourage’ businesses to adopt these principles. And adoption is voluntary. Commentators have noted that these provisions, on their own, may be unenforceable. Stated in aspirational language, they lack the mandatory nature of many treaty provisions. Nonetheless, in the mining context, they may create a cause of action for states asserting environmental counterclaims.
There are several ways in which a state may impose CSR standards on a mining project. A state may incorporate these standards as regulations, or could expressly add them to a mining licence. Indeed, many investors themselves may voluntarily include CSR standards in documents they submit to a state to gain approval for exploration or production. Another possible way these provisions may be incorporated is through concessions or other agreements with state entities.
The ‘double incorporation’ of these standards could give rise to a counterclaim. If these CSR standards are echoed (in more mandatory terms) in a licence, or an internal regulation, then a state may choose to assert a counterclaim on the basis of an investor’s failure to comply with these standards. While the treaty language is only aspirational, a tribunal is unlikely to ignore the fact that the treaty drafters expressly included these CSR provisions. This situation is far different than the one in Urbaser where the treaty was entirely silent as to these issues. It remains to be seen how tribunals will interpret these aspirational provisions – and whether they may create a cause of action that permits a state-asserted counterclaim to succeed on the merits.
Incorporating other substantive and procedural requirements in investment treaties
Finally, for a tribunal to entertain a counterclaim, the counterclaim must comply with other substantive and procedural requirements, often arising from the relevant arbitration rules. Both ICSID and non-ICSID arbitration regimes provide a pathway to admit counterclaims, so long as they fall within the scope of the parties’ consent and are connected to the primary claim or investment. Nonetheless, counterclaims are frequently rejected for failure to meet the pleading requirements of the relevant arbitration rules, or because the state is not the damaged party and therefore lacks proper standing to raise the counterclaim. We address each of these issues briefly below and outline how treaty negotiators appear to take them into account in new treaty language. We will first analyse how treaties address what has historically been seen as an admissibility requirement, then we discuss counterclaim pleading requirements and how treaties incorporate them. Finally, we discuss standing requirements for the assertion of counterclaims, and options provided in new treaties.
Admissibility of counterclaims
Under the ICSID regime, both the ICSID Convention and the Arbitration Rules provide a pathway for counterclaims, so long as they arise ‘directly out of the subject matter of the dispute provided that they are within the scope of consent of the parties and are otherwise within the jurisdiction of the Centre’. Meanwhile, the UNCITRAL Rules acknowledge the possibility of counterclaims, provided they ‘arise out of the same contract’ as the primary claim.
As a result, regardless of which institutional rules apply, there typically must be a direct nexus between the counterclaim and the investor’s primary claims (the ‘subject matter of the dispute’). Historically, this has been interpreted by tribunals as an admissibility requirement.
As discussed above, many of the treaties that now include express consent to counterclaims also incorporate a connectedness requirement into that consent. The Argentina–UAE BIT, for example, only permits a counterclaim that is ‘directly related with the dispute’. The inclusion of an express requirement that a counterclaim be directly related to the investor’s claims could elevate the ‘connectedness’ requirement to an issue of consent under the investment treaty – and therefore a question of jurisdiction – rather than one of admissibility. In some situations, this theoretically could create a higher hurdle for a state than if the requirement were simply one of admissibility.
On a number of occasions, tribunals have found that a counterclaim that otherwise falls within their jurisdiction is inadmissible because it fails to meet the pleading requirements of the relevant arbitration rules. In Aven v. Costa Rica, the tribunal found that the dispute resolution language in the DR-CAFTA was broad enough to permit adjudication of counterclaims in principle, but the state lost its ability to raise them because it failed to comply with the pleading requirements of Articles 20.2 and 20.4 of the UNCITRAL Rules (2010). The tribunal in Hamester v. Ghana reached a similar conclusion under the ICSID Rules, finding that although the treaty provided consent in principle to counterclaims, the respondent failed to adequately particularise its counterclaims.
At least one new treaty appears to address this issue, expressly incorporating a pleading standard. The Argentina–UAE BIT requires that ‘the disputing party shall specify precisely the basis for the counter-claim.’ However, without further clarification, the extent to which this clause raises the pleading standard is unclear. When faced with arguments relating to provisions like this one, tribunals will need to answer several treaty interpretation questions. Does this standard differ from the pleading standards in arbitration rules, and if so, how? What exactly does it mean to ‘specify precisely the basis’ for a claim? And in any given situation, has the respondent satisfied this standard?
Finally, another common question is whether the state is the correct party to assert a counterclaim, particularly counterclaims relating to human rights and environmental protections. Most notably, the tribunal in Chevron v. Ecuador II rejected environmental counterclaims raised by Ecuador on the basis that the proper parties to bring those claims were the individuals who suffered harm as a result of the environmental damage. Newer treaties do not address this issue, as it typically must be analysed in the context of a particular dispute.
Despite the efforts of some treaty negotiators to make environmental counterclaims expressly available to states, the treaty landscape continues to be a patchwork of provisions that will leave the many players involved in investor–state dispute settlement guessing. It is unclear if these new treaty provisions will change tribunal practice in interpreting the requirements for the assertion of a counterclaim. While treaties that expressly permit counterclaims address consent head on, they often leave open important issues – like the creation of a cause of action.
For greater clarity, states and investors may find it helpful to negotiate investment agreements directly with investors that address the issues that may arise in the event of a dispute. Indeed, for better or worse, many countries now are opting for regimes that solely recognise international arbitration claims brought under investment agreements. Brazil, a country rich in mining resources, has long done so. And Ecuador, with a nascent mining sector, has recently withdrawn from its investment treaties and passed a law encouraging the negotiation of investment contracts for foreign direct investment projects. Given the experience of Burlington, some investors may be wary to enter into such agreements. But as the treaty landscape changes, they may nonetheless find some comfort in the predictability of the terms of an investment agreement.
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