05.03.2018
05.03.2018
New developments regarding environmental damages in international litigation
Last month, the International Court of Justice (ICJ) rendered its first-ever judgment awarding compensation for environmental damages in the case Certain Activities carried out by Nicaragua in the Border Area (Costa Rica v. Nicaragua). It followed an earlier judgment of 2015, in which the ICJ had already unanimously established Nicaragua’s liability for material damages caused to the environment on Costa Rican territory, inter alia by digging channels and felling trees. Litigation involving issues of environmental law has generally gained more and more prominence over the last few years. In early 2017, an ICSID tribunal in the case of Burlington v. Ecuadorordered an investor to pay almost USD 40 million in response to a counter-claim by the state with regard to environmental harm. Interestingly, also the Inter-American Court of Human Rights released an Advisory Opinion only a few days after the ICJ’s judgment which recognizes the importance of the human right to a healthy environment and highlights the corresponding obligation for states not to cause transboundary harm.
The international legal principles applicable to compensation for environmental harm
In its recent judgment, the ICJ was for the first time called upon to set out the legal principles applicable to compensation for environmental harm. It recalled that, since the Chorzów Factory case, it was well-established that the breach of international law triggers an obligation of adequate reparation. In its Pulp Mills judgment of 2010, the Court had already found that compensation may be an appropriate form of reparation, particularly when restitution is materially impossible or unduly burdensome, as long as it is not punitive or exemplary in character.
To assess Costa Rica’s claims for compensation, the ICJ applied the same standard as it used regarding human rights violations in its 2012 Diallo compensation judgment, namely “whether there is a sufficiently direct and certain causal nexus between the wrongful act … and the injury suffered by the Applicant”. The ICJ acknowledged that claims relating to environmental harm may be difficult to assess because of scientific uncertainty or because the alleged damage may be due to several concurrent causes. According to the Court, these were difficulties to be addressed as and when they arise in light of the facts of the relevant case and the evidence presented. The Court, however, did not specify its approach further in this regard. It merely recalled that “that the absence of adequate evidence as to the extent of material damage will not, in all situations, preclude an award of compensation for that damage”. Yet, contrary to the approach of the tribunal in the Trail Smelter arbitration in 1947 and of the ICJ itself in Diallo, it did ultimately not rely on equitable considerations.
No specific valuation method prescribed under international law
Both parties before the Court agreed that damage to the environment and consequential damage is compensable under international law. Yet, they disagreed as to their valuation. While Costa Rica had argued that there was no single method for the valuation of environmental damage, it urged the Court to apply what it termed the “ecosystem services approach”. According to the ecosystem services approach, the value of an environment is comprised of goods and services that may or may not be traded on the market. Goods and services that are traded on the market (such as timber) have a “direct use value” whereas those that are not (such as flood prevention or gas regulation) have an “indirect use value”. Nicaragua, in turn, argued Costa Rica was only entitled to compensation to replace the environmental services that either had been or may have been lost prior to recovery of the impacted area – the “ecosystem service replacement costs”. According to Nicaragua, the proper method for calculating this value is by reference to the price that would have to be paid to preserve an equivalent area until the services provided by the impacted area have recovered. The Court acknowledged that these two methods were not “devoid of relevance to the task at hand”. It, however, also found that international law did not prescribe any specific method of valuation for the purposes of compensation for environmental damage. Rather, it was necessary to take into account case-specific circumstances and characteristics. Employing an astonishing degree of flexibility, the ICJ then held that “[w]herever certain elements of either method offer a reasonable basis for valuation, the Court will nonetheless take them into account.”
Costa Rica had claimed damages in excess of USD 6 million for both the environmental harm as well as costs and expenses incurred in relation to Nicaragua’s unlawful conduct, e.g. salaries of state employees for supervisory tasks and the construction of a dyke to prevent further environmental harm. Both categories of damages involved multiple heads of damages. The ICJ assessed Costa Rica’s claims meticulously. It dismissed certain claims or awarded only a certain amount of the compensation requested on the basis that they were insufficiently substantiated. Ultimately, it only granted USD 236,032.16, which appears surprisingly little against the overall sum claimed.
Interest, in view of the ICJ, is not an “autonomous form of reparation”
As a last note on interest, Costa Rica had submitted that full reparation could not have been achieved without payment of both pre-judgment and post-judgment interest at a rate of 6%. The ICJ, however, found that “in the practice of international courts and tribunals, pre-judgment interest may be awarded if full reparation for injury caused by an internationally wrongful act so requires. Nevertheless, interest is not an autonomous form of reparation, nor is it a necessary part of compensation in every case”. In the Court’s view, it had taken full account of the impairment or loss of environmental goods and services in the period prior to recovery when it valued the overall environmental damage. Therefore, Costa Rica was not entitled to pre-judgment interest on the amount of compensation for environmental damage. With regard to the costs and expenses incurred by Costa Rica, however, the ICJ awarded Costa Rica pre-judgment interest at a rate of at 4 % accruing from the date on which the judgment on the merits was delivered until delivery of the compensation judgment. Although it assumed it had “every reason to expect timely payment by Nicaragua”, the Court also decided to award post-judgment interest at a rate of 6 %, should a delay in payment occur.
Relevance of the decision and outlook
The ICJ’s judgment is a landmark ruling in terms of compensation for environmental damages under international law. It will surely influence the way in which international environmental law cases or cases involving an element of environmental law are being litigated. The very case-specific judgment, however, also leaves certain questions of methodology open. The above-mentioned ICSID tribunal in the Burlington case, for instance, conducted site visits and the tribunal in the parallel Perenco case employed an independent environmental expert to assess the extent of environmental harm. The ICJ’s ruling, to the contrary and despite its reference to potential scientific problems, leaves its readers in the dark with regard to the exact reasons that motivated the Court’s computation of damages. For future inter-state compensation claims or compensation claims with regard to environmental harm, the rejection by the Court of certain of Costa Rica’s claims as insufficiently substantiated might also lead to much more detailed evidentiary submissions in inter-state proceedings. At the same time, the ICJ’s ruling reminds litigants, for instance parties in investment disputes, to ensure their claims always comply with the degree of substantiation common in the relevant forum.
 | Dr. Richard Happ |
 | Sebastian Wuschka, LL.M. (Geneva MIDS) |
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