News – 07.03.2024

Climate Change Arbitration – The New Normal?

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Written by

Olivia Salonen

Associate

+358 40 8338 023

What are climate change disputes?

Climate change related disputes have increased significantly. In fact, the International Chamber of Commerce (ICC) has reported that 70 % of all new cases in 2018 that were resolved in arbitration under the ICC were climate change disputes. Similar growth has been reported by other arbitral institutions as well. It is anticipated that climate change disputes will continue to increase in the future.

Climate change disputes can be briefly divided into direct and indirect climate change disputes. Direct climate change disputes arise directly from the impacts and causes of climate change or climate change in general. On the other hand, indirect climate change disputes do not necessarily have a direct connection to climate change. Climate change disputes could, for example, arise from extreme weather events that affect a party’s commercial operations, green energy transition contracts or from complying with climate change obligations.

Generally, a brief element of an environmental matter is enough for a dispute to constitute a climate change dispute. Hence, the field of climate change disputes is broad stretching all the way from disputes related to energy and construction to infrastructural and industrial disputes.

Climate change arbitration

A valid and binding arbitration agreement between the parties is a prerequisite for resolving a climate change dispute in arbitration. Arbitration is an efficient dispute resolution method especially for indirect climate change disputes as these disputes generally arise from already existing contractual relationships. Therefore, it is likely that the parties have entered into an arbitration agreement. Alternatively, a code of conduct or a corporate governance model could include a unilateral offer to arbitrate a dispute.

In general, there are no existing relationships between the parties in a direct climate change dispute. In this case, it is likely that there is no valid and binding arbitration agreement between the parties, and hence the prerequisite for arbitration is not fulfilled. However, direct climate change disputes could be resolved in arbitration if the parties, for instance, enter a submission agreement after the dispute has arisen.

There are many advantages in resolving climate change disputes in commercial arbitration. First, the New York Convention provides for the global enforceability and recognition of arbitral awards. Second, arbitration provides for a neutral dispute resolution setting. Third, arbitration provides for flexibility and hence the proceedings can be modified to meet the needs of different kinds of climate change disputes. Finally, arbitration provides for rapid proceedings which is an asset for the efficient resolution of climate change disputes.

Three tips to take into consideration when resolving climate change disputes:
  1. Appointing an expert arbitrator or arbitrators. Climate change disputes are commonly complex and multidimensional. Consequently, it is recommended to appoint arbitrators that have specific legal, technical, or scientific expertise in climate change. The parties should, however, be mindful of not setting too strict requirements for the arbitrators as these requirements can lead to challenges in finding suitable arbitrators.

  2. Paying attention to the transparency of the proceedings. It is recommended to agree beforehand or during the proceedings on the level of confidentiality applied in said arbitral proceedings. The International Bar Association (IBA) has, among others, expressed its concern on the lack of transparency and confidentiality of climate change related decisions. The level of transparency can be agreed on a case-by-case basis by carefully balancing transparency and the considerations of the parties.

  3. Acknowledging climate change related matters in commercial contracts. Extreme weather conditions are one of the effects of climate change. Due to these climate change related extreme weather conditions, the possibilities when a party can rely on a force majeure clause are increased. Therefore, the effects of climate change should be considered when drafting a force majeure clause. In addition, the parties could, for example, consider if specific climate targets or allocation of carbon risk would be necessary additions to their contracts.

Related professionals

  • Ulla von Weissenberg

    Partner, Attorney at Law

    +358 40 8205 732

  • Asta Siponen

    Partner, Attorney at Law

    +358 50 0407 446

  • Olivia Salonen

    Associate

    +358 40 8338 023

Dispute Resolution

We help our clients manage risks and solve business problems, avoiding proceedings unless necessary. When litigation is unavoidable, we assist in weighing client’s business objectives against legal, commercial, mental, and reputational risk to determine the best path to go forward – where settlement might be the one.

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