With globalisation, trade has grown beyond boundaries over the course of time. In a bid to keep up with the need to attract further growth and development, States have generally been keen on attracting foreign investors and investment.
In keeping with the shifting societal and political perception of duties and obligations of any State towards its inhabitants, an inclination towards enforcing environmental obligations against investors has been witnessed in the recent past. The plethora of disputes in this regard that have arisen are majorly a result of dynamic environmental policies. This shift has the potential of giving birth to several disputes in the future against investors who fail to comply with the environmental obligations of the host States.
The present piece takes the initiative of highlighting the environmental obligations that an investor might be required to comply with. While there does not exist any straitjacket formula to ascertain a common set of obligations given the lack of a clear delineation by any State, an attempt has been made to create a narrative through existing Bilateral Investment Treaties (BITs), international law obligations and precedents.
II. Colouring it green: Environmental obligations of investors
Defining the environmental obligations of investors is very intricately tied to the source of these obligations. Ascertaining the source of investor obligations is also crucial from the perspective of deciding the claims of the parties. To establish the distinct sources, the existing precedents may be divided accordingly:
Bilateral Investment Treaties ("BITs") as the source of environmental obligations
While traditionally not many BITs carried environmental obligations, the scenario has transformed over the past years.1 BITs that do have an environmental protection clause might have distinct ways of framing such obligations. Some BITs that list out environmental obligations may do so in the form of a general exception clause modelled in the fashion of Article XX (General Exceptions) of the General Agreement on Tariffs and Trade ("GATT").2 Such general exception clauses provide liberty to the States to carve out liabilities without having to extensively define all such obligations for investors at the initial negotiation stage. Several other BITs have specific clauses devoted to addressing State objectives. For instance, the Canada-Republic of Moldova BIT under its Article 15 lists Health, Safety and Environmental Measures as being important for both States, and further iterates that no measure must be taken in derogation of such objectives. Another category of BITs list out objectives those are crucial for them in the preamble itself, for instance, the Australia-Uruguay Treaty.3 Despite States generally showing a shift towards inclusion of environmental obligations, the obligations upon an investor remains unclear. The issue arising from such generic clauses is the lack of lucidity on the specific standards to be adopted by an investor in compliance with the environmental obligation under a BIT.
Taking the instance of the 2012 US Model BIT, the Preamble states, "Desiring to achieve these objectives in a manner consistent with the protection of health, safety, and the environment." Given that such clauses do list out that environmental protection is an area of concern for the parties, the lack of provision of adequate standards clarifying the precise expectations against an investor might be a birthing ground for several disputes in the future.
GATT Rulings as the source of environmental obligations
Where several BITs have adopted the language as postulated under Article XX of the GATT, a brief analysis of existing precedents with respect to measures taken to uphold environmental obligations by States under Article XX of GATT may prove of some assistance. It is pertinent to note that arbitral tribunals in investment disputes have afforded recognition to interpretation of the general exceptions clauses as contained in various trade law agreements by WTO panels.4 While the same may not be binding on tribunals in investment disputes, persuasive value of the judgments by WTO panels cannot be ignored. In the ICSID case of Methanex Corporation v. United States5, the tribunal observed that, 'whilst interpretations given in the context of the GATT are not binding precedent, the Tribunal may remain open to persuasion based on legal reasoning developed in GATT and WTO jurisprudence, if relevant.' This and several other observations by tribunals on similar lines provide enough foreground for us to delve into some precedents by WTO panels to try and ascertain the environmental obligations of investors.
In the celebrated WTO decision in the Shrimp-Turtle6 case, the Dispute Settlement Body had held that the measure by United States that required foreign shrimp trawlers to use 'turtle excluder' devices in their own countries as a requirement under the United States Endangered Species Act of 1773 was discriminatory in nature. However, the measure itself was not held to be inconsistent under Article XX, but the way in which the measure impacted different countries in an adverse manner was held to be discriminatory in nature. The Appellate Body did make a fundamental observation that trade restrictions can be based upon process and production methods undertaken by trading partners in another country. If a similar analogy is applied to the foreign investments, it might mean that investors indulging in practices within their domestic jurisdictions that do not sit well with the laws, regulations and environmental ideals of the host State may be held inconsistent with the investor obligations.
In 1990, in the case of US-Gasoline7, while the application of differing baseline standards for domestic refiners and foreign refiners was held to be discriminatory in nature, the measure itself was observed to have been aimed towards conservation of exhaustible natural resources, i.e., clean air. Importing a similar analogy it can be stated that foreign investors cannot be obligated to comply with distinct standards as against the local investors for upholding environmental obligations in the host State, since most investment agreements implore parties to comply with basic principles of non-discrimination.
There have been several other similar cases where measures taken by States to enforce their environmental obligations have been adjudged by WTO Panels. Despite the existence of various similar cases, the fact remains that the decision in each such case would be intricately tied to the measures taken by the host State against the investor/investor's practices. However, one common thread that can be extracted from previous GATT rulings is that each such measure taken by a host State would be held valid under the General Exceptions clause if it does not constitute an arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade8. In reality, all States have a wide base to enact measures in compliance with its goals. As stated in the US-Gasoline case, 'WTO Members have a large measure of autonomy to determine their own policies on the environment (including its relationship with trade), their environmental objectives and the environmental legislation they enact and implement.' In light of the same, there is really no restriction on a State to impose measures consistent with its environmental policy and while certain factual analogies may be drawn from the WTO rulings, the same does not serve as a comprehensive guide. Apart from the vast number of factual possibilities in environmental claims, a primary factor in investment arbitrations is the narrow interpretation afforded by tribunals to general exception clauses due to the narrow regulatory flexibility that such clauses create as against BITs or agreements that don't have such clauses.9 However, the fact remains that environmental rulings under the GATT regime may play a fundamental role in deciding investor claims and obligations in future disputes, especially where the BITs use General Exception clauses.
Precedents in Investment Arbitrations as source of environmental obligations
Reliance may be placed on previous rulings in investment arbitrations revolving around environmental claims. However, most such rulings vary in their approach. While certain rulings have relied upon the motive of the host States in imposing a particular measure,10 others have emphasised on the effect that such measure would have on the investors.11 In the 2018 case of David Aven v. Costa Rica12 ("David Aven"), the investor was held liable to comply with domestic as well as international environmental obligations. The tribunal observed that Costa Rica had a right to protect its environment and Article 10.1 of the DR-CAFTA Free Trade Agreement mandates investment activities to be undertaken in a manner sensitive to the environment. In David Aven, the claimants had obtained all necessary approvals and requisite environmental clearances, however, on further inspections being conducted, the presence of wetlands and forest areas in the vicinity was confirmed and the activities were halted by Costa Rica. It was observed that it was the duty and the responsibility of the Claimants to ensure that constructions were not being carried out on wetlands.
Domestic law as source of environmental obligations
Given that not all investment treaties have dedicated environmental clauses, the question arises whether investor obligations can be sourced through other alternatives.
One such dispute where the BIT did not expressly provide for environmental obligations is the long-standing dispute in Perenco Ecuador Ltd. v. Republic of Ecuador13 and Burlington Resources Inc. v. Republic of Ecuador14 where the concerned tribunals held Perenco and Burlington were liable to compensate Ecuador for the environmental harm that they had caused. The obligation of the investor was held to arise from the domestic law of Ecuador. The tribunal observed that Perenco's failure to document the environmental conditions, to conduct appropriate audits, and failure to report environmental damage was incidental in deciding the claim against it. Hence, an investor is obligated to comply with the requisite domestic environmental laws and regulations while undertaking projects in the host States.
Obligations under international law
In a very significant decision by the International Court of Justice ("ICJ") in Gabcíkovo-Nagymaros,15 the ICJ held the no-harm principle of customary international law that mandates States to prevent, reduce, and control the risk of environmental harm to other States to be applicable to a dispute between Hungary and Slovakia where Slovakia's operations in building a dam in Hungary was causing environmental damage. The principle may be held to be applicable in State-State investment disputes. Thus, State investors may be held liable under customary international law as well.
Tribunals may also draw reference to obligations under the Energy Charter Treaty or other documents such as The Declaration of Rio on the Environmental Rule of Law16 in adjudging claims.
III. Environmental Obligations under the Indian Legal Regime
The existing jurisprudence in India has traditionally displayed an inclination towards upholding environmental obligations and sustainable development. Article 48A of the Constitution of India provides, 'The State shall endeavour to protect and improve the environment and to safeguard the forests and wildlife of the country'. Several laws in India serve to regulate and protect the environment.17 Foreign investors hoping to get involved in any project in India must necessarily go through all such relevant laws. Additionally, courts in India have also displayed a very proactive approach in adjudicating environmental disputes. In India, all projects that involve any form of environmental impact have to compulsorily undergo an Environmental Impact Assessment ("EIA"). However, the draft EIA notification that was released in 2020 amends some environmental compliances that existed earlier. For instance, the notification plans to remove the requirement of EIA for certain sectors mentioned in the B2 category. This category includes hydroelectric projects up to 25 MW, less than 5 hectares of mining lease area, etc.
While India has not been a party to any international environmental disputes, there have been several domestic disputes revolving around environmental claims. For instance, in the case of Lafarge Umiam Mining Private Limited v. Union of India18, the Supreme Court allowed mining operations to resume where it was found that environmental clearances were granted several years back and the project had resulted in significant gains to the local community. In a series of public interest litigations filed by Mr. M.C. Mehta, the Supreme Court has ordered the closure of tanneries that discharge effluents into the river Ganga without proper treatment of the discharge. In the case of Rural Litigation and Entitlement Kendra v. State of U.P.19, the Supreme Court ordered the closure of limestone quarries which were creating environmental havoc. India also has a specialised National Green Tribunal for expeditious disposal of environmental matters.
Due to the infinite number of legal regulations that States enact coupled with the endless permutation of factual situations that may arise, it is almost impossible to ascertain and fix specific obligations that investors must follow. However, much guidance on the applicable principles and general obligations may be culled out from the existing set of precedents and legal documents at the international level. From the investor perspective, firstly, it may be crucial to conduct an in-depth analysis of national laws and regulations by engaging local counsels and experts in the host State, and secondly, it is important to conduct adequate environmental due diligence to ensure that the project would not have any long term deleterious environmental impacts.
1. Organisation for Economic Cooperation and Development, 'Environmental Concerns in International Investment Agreement', OECD Working Papers on International Investment 2011/01, https://www.oecd.org/investment/internationalinvestmentagreements/WP-2011_1.pdf. (A survey conducted by the Organisation for Economic Cooperation and Development in 2011 observed that while most BITs have not traditionally set out the environmental concerns of parties, it has become more common in recent BITs.)
2. Article 10, Canada-Peru BIT, (2007).
3. RECOGNISING their inherent right to regulate and resolving to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals.
4. Gabriele Gagliani, 'The Interpretation of General Exceptions in International Trade and Investment Law: Is a Sustainable Development Interpretive Approach Possible?', Denv. JILP, 43, (2020), 575-582.
5. (2005) 44 ILM 1345.
6. United States-Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/RW.
7. United States-Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R.
9. Supra Note 4.
10. S.D. Myers Inc. v. Canada, (UNCITRAL, Nov. 13, 2000).
11. Tecnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2.
12. David Aven v. Costa Rica, ICSID Case No. UNCT/15/3.
13. Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6.
14. Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5.
15. Gabcíkovo-Nagymaros, 1997 ICJ 7.
16. Principle 1 provides that "Each State, public or private entity, and individual has the obligation to care for and promote the well-being of nature, regardless of its worth to humans, and to place limits on its use and exploitation."
17. Environment Protection Act, 1986; The Air (Prevention and Control of Pollution) Act, 1981; The Water (Prevention and Control of Pollution) Act, 1974; The Hazardous Waste Management Regulations, etc.
18. Lafarge Umiam Mining Private Limited v. Union of India, 2011 (7) SCALE 242.
19. Rural Litigation and Entitlement Kendra v. State of U.P., 1985 AIR 652.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.