Source: https://www.herbertsmithfreehills.com/latest-thinking/inside-arbitration-david-aven-v-costa-rica-key-takeaways-for-foreign-investors-to
Timestamp: 2019-04-23 18:39:02+00:00

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Despite the historical perception of the role of environmental regulation, the past six years have seen a wave of over sixty cases involving environmental issues being filed.2 These cases have coincided with ever-increasing global focus on the environment and the blossoming of international, regional and national regulatory regimes aimed at responding to the challenges of environmental protection and climate change. The outcome of these cases and the evolution of investment tribunals' reasoning on the balance between investment protection and environmental protection are of significance for international law practitioners, but also for investors considering whether to bring a claim under an investment treaty.
The recent decision in David Aven v Costa Rica3 contributes to this debate as it (i) recognized – as a matter of international law – a state's right to apply and enforce its environmental protection laws against foreign investors; and (ii) admitted jurisdiction to entertain Costa Rica's counterclaim for environmental harm. This latter point is of particular note given the number of cases involving counterclaims for environmental harm are rare and those in which a tribunal has accepted jurisdiction over them are even more limited. The Latin American team of Herbert Smith Freehills' New York office successfully represented Costa Rica in this significant case, which constitutes a major milestone for Costa Rica's traditional and strong policy for the protection of the environment.
The Claimants – citizens of the United States of America – brought claims under Chapter Ten, titled "Investment", of the Dominican Republic-Central America Free Trade Agreement ("DR-CAFTA") against Costa Rica. The dispute arose from investments comprising several parcels of land and a concession site in Esterillos Oeste on Costa Rica's Pacific coast in 2002 to develop a real estate project, the "Las Olas Project".
In response, Costa Rica argued that the protection of the environment is a key governmental policy acknowledged under the DR-CAFTA, that the rights of investment protection granted to investors under the treaty may be subordinated to the protection of the environment, and that it had acted in accordance with its environmental laws to prevent further environmental harm to its protected ecosystems. Costa Rica also filed a counterclaim against the Claimants for breach of mandatory rules of environmental protection based on Article 10.16 of the treaty,5 and reasons of procedural economy and efficiency.
The Tribunal concluded that Costa Rica's actions were neither arbitrary nor in breach of the DR-CAFTA. A wetland had been damaged by the Claimants' development activities and the state's measures to protect the wetland were taken in accordance with domestic laws and international law. The Tribunal also found that DR-CAFTA could provide jurisdiction to hear counterclaims by Contracting States against investors for breach of the treaty's environmental and other obligations but rejected Costa Rica's counterclaim for environmental damage for procedural reasons.
"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."
In interpreting this provision, the Tribunal recognized that the express terms of the DR-CAFTA subordinate the rights of investors to the rights of states to ensure investments are carried out "in a manner sensitive to environmental concerns".11 However, the Tribunal held that this did not give Costa Rica an "absolute right" to implement its environmental laws as it desired but that it must do so in a fair, non-discriminatory fashion, following principles of due process.
After setting this standard, the Tribunal went on to analyse whether Costa Rica's conduct vis-à-vis the Claimants had been compliant with the DR-CAFTA and customary international law. After conducting a heavily fact-based assessment, the Tribunal concluded that Costa Rica's conduct was not in breach of the DR-CAFTA.
For the first time, an investment tribunal has ruled that counterclaims by respondent states are admissible under Chapter 10 of DR-CAFTA.
The Tribunal distinguished Burlington from the case before it, since in that case the parties had reached an agreement expressing their consent to resolve counterclaims arising out of the investments through arbitration, thus there was no challenge to the tribunal's jurisdiction. In addition, the tribunal in Burlington relied on Article 46 of the ICSID Convention, which empowers ICSID tribunals to decide "counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Center."
Finally, the Tribunal considered issues of procedural economy and efficiency by referring to Prof Reisman's 2011 Dissenting Opinion in Spyridon Roussalis v Romania,21 noting that Article 46 of the ICSID Convention worked to the benefit of the respondent state and the investor.
The award in David Aven v Costa Rica is highly significant. It contributes to the development of the jurisprudence regarding the interaction between a state's right to apply and enforce its environmental protection laws and the protection of investments. Aven is also only the second publicly known case to recognize that states may bring counterclaims against investors.
Given Costa Rica's focus on environmental protection and tackling environmental issues,22 this award is of considerable importance to that country. It affirms Costa Rica's right to protect its environment, finding that the measures taken to protect wetlands and forests were not arbitrary or in breach of the trade agreement.
The award also alerts investors of the limits to the development of their investments within Costa Rica (and DR-CAFTA Contracting States more widely): investments must be carried out “in a manner sensitive to environmental concerns”,23 and in accordance with the environmental laws of the host state.
The wider impact of this award has not yet been felt. However, the Tribunal's reasoning confirms that the Aven case can be seen within the context of a wider trend in investment treaty jurisprudence of holding investors accountable as subjects of international law. For instance, for investors, compliance with domestic and international environmental obligations might now be critical before considering bringing a treaty claim.
The possibility of counterclaims is also a fascinating development and one that we will all, no doubt, be watching with interest. This is yet another issue for careful consideration by investors, who might now have to include the possibility of facing a counterclaim in any risk assessment they conduct prior to pursuing international law avenues. Then again, respondent states would certainly embrace this decision as a useful precedent for future defences from claims where compliance with environmental law might be part of the issues in dispute.
1. Martin Wagner, J., “International Investment, Expropriation and Environmental Protection”, 29 Golden Gate U. L. Rev., 1999, pp. 465-466; Sundararajan, A., “Environmental Counterclaims: Enforcing International Environmental Law Through Investor-State Arbitration”, Salzburg Global.
2. Parlett, K. and Ewad, S., “Protection of the environment in investment arbitration – a double edged sword”, 20 Essex Street Bulletin, September 2017; Viñuales, J. E., Foreign Investment and The Environment In International Law, Cambridge University Press, pp. 17-18 (explaining that only four investment disputes with environmental components occurred prior to the year 2000).
3. David R. Aven and others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Award, 18 September 2018 (hereinafter David Aven v. Costa Rica).
5. DR-CAFTA, Article 10.16: Submission of a Claim to Arbitration: “1. In the event that a disputing party considers that an investment dispute cannot be settled by consultation and negotiation: (a) the claimant, on its own behalf, may submit to arbitration under this Section a claim (i) that the respondent has breached (A) an obligation under Section A, (B) an investment authorization, or (C) an investment agreement; and (ii) that the claimant has incurred loss or damage by reason of, or arising out of, that breach; and (b) the claimant, on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls directly or indirectly, may submit to arbitration under this Section a claim (i) that the respondent has breached (A) an obligation under Section A, (B) an investment authorization, or (C) an investment agreement; and (ii) that the enterprise has incurred loss or damage by reason of, or arising out of, that breach. […].” (Emphasis added).
6. For example, US Model BITs (2004 and 2012), United States-Georgia BIT (1994), United States-Trinidad and Tobago BIT (1994), United States-Uzbekistan BIT (1994); Mexico-Costa Rica FTA (1994), Articles 11.04, 13-15. Belgium/Luxembourg BITs contain language on the environment in addition to provisions confirming the state's right to legislate to protect the environment and excluding environmental measures from the scope of the dispute settlement mechanism. See for example, Belgium/ Luxembourg-Libya BIT (2004), Article 5 “Environment” and Belgium/ Luxembourg-Colombia BIT (2009), Article VII, “Environment”.
8. See for example, China-Canada BIT (2012), Canada-Slovak Republic BIT (2010), MexicoBolivia FTA (1994), Mexico-Costa Rica FTA (1994), United States-Georgia BIT (1994), United States-Trinidad and Tobago BIT (1994), United States-Uzbekistan BIT (1994); see also, Zhan, J., “Investment policies for sustainable development: addressing policy challenges in a new investment landscape,” in Echandi, R., and Sauvé, P., eds., Prospects in International Investment Law and Policy, Cambridge University Press, 2013, p. 26 and UNCTAD, World Investment Report: Investing in a Low-Carbon Economy, 2010.
9. See, Canada-Benin BIT (2013) and Brazil-Mozambique BIT (2015). The Dutch 2018 Model BIT includes reference to the G20 Guiding Principles for Global Investment Policymaking.
11. David Aven v. Costa Rica, paras. 733-734.
13. David Aven v. Costa Rica, Award, para. 735.
14. Burlington Resources Inc v. The Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims, 7 February 2017 (hereinafter Burlington v. Ecuador).
15. Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award, 8 December 2016 (hereinafter Urbaser v. Argentina).
16. Id., paras. 1118, 1151.
17. David Aven v. Costa Rica, Award, para. 738 citing Urbaser v. Argentina, Award, para. 1195.
18. International Court of Justice, Barcelona Traction, Light and Power Company, Limited, Report, 1970, para. 33 cited in David Aven v. Costa Rica, Award, para. 738.
19. David Aven v. Costa Rica, Award, para. 737.
21. Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award, 7 December 2011.
22. See David Aven v. Costa Rica, paras. 417-420.
23. Id., paras. 733, 739.
Daniela is an Associate in our New York office specialising in dispute resolution in the fields of oil and gas, mining and infrastructure.

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