Dispute Resolution in Flexible Mechanism Contracts By Dane
Dispute Resolution in Flexible Mechanism Contracts By Dane Ratliff Legal Counsel Permanent Court of Arbitration
Potential for Disputes within the Climate Change Regime • Parties: investor - State Party disputes, other non State entity - State Party disputes, State Party to State Party disputes • Emissions Trading • Clean Development Mechanism • Joint Implementation
Examples of Disputes within the Climate Change Regime (cont’d) • Estimated reductions are not actually attained by the project • Ownership / Title to ERUs or CERs and underlying verified ERs • Payment • Delivery (including evidence of delivery) • Brokering agreements • Auditing, Monitoring, and Verification • Expropriation of a project or its benefits • Issuance and transfer or ERUs
Parties and Issues • State – State Dispute: UNFCCC/KP Procedures • Private – State Dispute: sovereign risk for private party – mitigated by arbitration clause. Issues of regulatory uncertainty – i. e. how does the State define an emissions “right” or “allowance” (related issues of title, taxation, etc), and what domestic legal remedies are available in case of disputes (question of applicable law)? • A BIT between host and investor state may create a right of arbitration not only for the Parties to the BIT, but also private investors.
Other forms of ADR • Some contracts may “tier” an arbitration, requiring negotiation, mediation, or expert-determination before arbitration is initiated. • Non-binding ADR and may lead to a final settlement of the dispute where the parties are amicably disposed, • However, ADR settlements are generally more difficult to enforce than an arbitral award, even where the agreement is stipulated to be binding on the parties. • As noted above, parties should consider making arbitration a contractual option, when ADR fails.
Benefits of Arbitration Clauses in Flex-Mech Contracts • Mitigates sovereign and other risks associated with flexmechs. Claims of sovereign immunity from jurisdiction and execution have been ruled to have been waived by accepting arbitration. • The mere existence of an arbitration clause in agreements can often serve to prevent disputes before they arise. • Enforceability: under certain conditions, the 1958 New York Convention (NYC), or other regional enforcement agreement might be relied upon to ensure that an award is enforced. • An arbitral tribunal composed of party-appointed neutrals offers assurance of impartiality both for claimant and respondent who might not wish to have the dispute settled under the jurisdiction of the opposing party’s domestic courts.
Benefits (cont’d) Arbitration proceedings: • provide for more predictability than litigation in a domestic setting where the law on emissions trading may not yet be developed, and the dispute is clearly international in scope • balance the interests of all potentially involved parties (states and stakeholders) • lead to a more rapid and efficient settlement of the dispute than domestic courts, which will not have jurisdiction over foreign sovereign
Costs • Costs are in many ways in parties’ hands • Sole arbitrator might be better for disputes where amount is low • Speed of arbitration can be controlled by parties • Arbitration could be papers-only, etc. • Institutional arbitration before the PCA, or other, can help control costs, as the institution does some of the work of the arbitrator, and usually bills at a much lower rate
Definition Arbitration Agreement An international arbitration agreement is: An agreement in which two or more parties agree that a dispute which has arisen or which may arise between them, and which has an international character, shall be resolved by one or more arbitrators.
Elements of Arbitration Agreement • The intent of the parties to resolve any and all disputes between or among them in connection with the contract by arbitration • The number of arbitrators • Place of arbitration • Procedural rules • Method of appointing arbitrators and/or appointing authority (important for getting expertise on tribunal needed in ET disputes) • Language • Applicable law
Enforcement of Arbitral Award • Arbitral Award is final and binding • If a party resists enforcement of the award, the other party may seek enforcement at the place of arbitration or in another country where opposing party has assets. Domestic court decisions are more difficult to enforce in foreign jur. • 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards may be relied upon, and/or any bilateral or regional enforcement agreements.
Enforcement (cont’d) • Enforcement under the NYC may be resisted on 5 grounds: invalidity of agreement, lack of due process, jurisdictional issues, improper constitution of tribunal, award has been set aside in place where it was rendered. Parties may make reservations to the NYC including one that restricts its application to commercial activity. • Emissions trading is considered a commercial activity in the US and other jurisdictions. • Thus, the “commercial reservation” is unlikely to be a barrier to enforcement. • Even States may have difficulty resisting enforcement and execution of a validly rendered arbitral award.
Issues of EC Law and Enforcement • Parties should be aware of whether ‘fundamental rights’ are at issue in a given dispute • Eco Swiss v. Bennetton: Arbitrators must apply, ex officio, EC law where an EU mbr. St. law is the lex contractus, and issues concern EC public policy such as competition (Art. 81 ECT) • Arbitration award could be set aside where its solution runs counter to EC public policy
Confidentiality and the EAT Directive • Arbitral proceedings may be made confidential • However, the duty to publish in the EAT Directive might require the outcome of arbitral proceedings to be disclosed where the award affects the number of ER’s held.
Forms of Arbitration Clauses • In CDM or JI ERPA, or private emissions trading contract: – Any dispute, controversy, or claim arising under, out of, or relating to the interpretation, application, or performance of this agreement, including its existence, validity, or termination, shall be settled by final and binding arbitration in accordance with [insert proc. Rules (UNCITRAL, PCA, etc)] as in effect [insert date of agreement or commencement of arbitration]. The number of arbitrators shall be [insert one or three]. The place of arbitration shall be [insert place]. The language of arbitration shall be [insert language]. The appointing authority shall be the Secretary General of the PCA [or insert other].
PCF Legal Instrument Arbitration Clause • Any dispute between the Trustee [the Bank] and a Participant arising out of or relating to this Instrument or such Participant’s Participation Agreement, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force. The number of arbitrators shall be 3. The appointing authority shall be the Secretary General of the PCA in the Hague.
Existing Mechanisms within the Climate Change Regime • Dispute resolution procedures within the UNFCCC – Article 14(1): In the event of a dispute between any two or more Parties concerning the interpretation or application of the Convention, the Parties concerned shall seek a settlement of the dispute through negotiation or any other peaceful means of their own choice.
Existing Mechanisms within the UNFCCC (Cont’d) • Article 14(2): When ratifying, accepting, approving or acceding to the Convention, or at any time thereafter, a Party which is not a regional economic integration organization may declare in a written instrument submitted to the Depositary that, in respect of any dispute concerning the interpretation or application of the Convention, it recognizes as compulsory ipso facto and without special agreement, in relation to any Party accepting the same obligation: (a) Submission of the dispute to the International Court of Justice, and/or • (b) Arbitration in accordance with procedures to be adopted by the Conference of the Parties as soon as practicable, in an annex on arbitration.
Existing Mechanisms within the UNFCCC (Cont’d) • Article 14(5) – 14(8): These articles provide for compulsory conciliation of a dispute between Parties after one year from notification of the dispute by one party to the other has elapsed.
Relationship Between Compliance Branch and Dispute Settlement • Decision 24/CP. 7 of The COP 7 Marrakesh Accords set out the procedures and mechanisms relating to compliance. • Section XVI sets out that the procedures and mechanisms relating to compliance are without prejudice to Article 19 of the Protocol on Dispute Settlement. • Article 19 of the Protocol refers back to Article 14, the Dispute Settlement Procedures of the Convention. • The decisions of the compliance branch will therefore not affect the outcome of dispute settlement under the Convention or Protocol, and such proceedings may operate concurrently. • Although the appeal process for a decision of the enforcement branch goes through the COP, in highly contentious cases, Parties may prefer to submit the dispute to a judicial body under Article 19. Doing so might also relieve the COP and enforcement branch of having to make quasi-judicial decisions.
Dispute Settlement in CDM Projects • In CDM transactions, before a project has been registered with the Exec. Board, the Letter of Approval (Lo. A) is all the investing State (and private project participant) has to go on, and there is at this point a legal vacuum. There is no right of recourse in case damages occur from the Lo. A up to the point of registration. • DNAs are presently considering clauses ceding all rights to resultant CERs, and/or arbitration clauses in Lo. A.
Typical BIT Protections • “National treatment (foreign investments must receive equal treatment to [or treatment better than] domestic investments); • ‘Most favored nation’ treatment (investments from one country may not be treated worse than the best treatment afforded to the investment of any third country); • General standards of ‘fair and equitable’ treatment; • ‘Full protection and security’, no investments by arbitrary and discriminatory measures, and observance of specific investment undertakings; • No expropriation without prompt, adequate and effective compensation and; The right to transfer investment-related funds into and out of the host state. ” (source: Blackaby and Paradell)
BIT / CDM Potential Conflicts • Protocol requires discrimination in order to ensure equity (Common But Differentiated Responsibilities) that might violate nondiscrimination clauses of BITs in at least three direct ways. • Party v. Non-party – Investors from Nonparties to the Protocol could be hindered from investing in CDM.
BIT / CDM Potential Conflicts • Complying v. Non-complying Party – Complying host could refuse investment from non-compliant party • Annex I v. Non-annex I Investors – Non-Annex I investors could be discriminated against. • Conclusion: Exercise caution when relying on BIT arbitration provisions
Conclusions • Involvement of diverse actors from public and private sectors in flex-mech contracts will bring together diverse legal systems • Confluence of legal systems and approaches to performance of contract could lead to disputes over contract interpretation • Arbitration can mitigate risk and act as a bridge between legal systems and cultures
Questions?
For further information contact: The Permanent Court of Arbitration Peace Palace The Hague – The Netherlands Dane Ratliff, Legal Counsel Tel: +31 70 302 4196 / 4165 Fax: +31 70 302 4167 dratliff@pca-cpa. org www. pca-cpa. org
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