Author: Galo Márquez *
Shareholders have an interest—sometimes a duty—to ensure the long-term financial stability of a company. As global regulators grow their interest in employing transnational environmental, social, and governance (“ESG”) directives over companies, shareholder disputes become substantively more complex. To shed light on some of the future hurdles when disputing ESG shareholder claims, this post will address some of the complications that shareholders may face when attempting to trigger an arbitration clause in their corporate agreements.
COMPLICATIONS PERTAINING TO SHAREHOLDERS’ ESG CLAIMS
Claims pertaining to breaches of sustainable disclosure obligations, human rights endangerment in the supply chain, or non-compliance with the OECD Guidelines for Multinational Enterprises, will increase before commercial courts worldwide. Parties may agree to employ commercial arbitration to extract these subjects from the public eye. It is not unlikely for shareholders to add arbitration clauses to the by-laws of a company or the shareholders’ agreements. However, disputes arising from an ESG claim may be followed by a myriad of contractual complications.
First, the subject matter of the dispute might not be fit for resolution outside of a public forum. As transparency is usually the norm in arbitration, the principles and values behind ESG regulation might be incompatible. Let us consider the 2021 Global ESG Disclosure Standards for Investment Products by the CFA Institute, where an “investment manager” shall manage an ESG statement in cases where, inter alia, “a significant error is found after the [original] ESG disclosure statement is made available to investors.” An arbitration may then be triggered if a disagreement exists between the shareholders on the scope and meaning of a “significant error.” It would be objectionable for a significant error not to be disclosed in a timely manner because commercial arbitration is pending.
Second, the issue of the interplay between arbitration clauses and shareholders’ goals increases when third-party interests are considered. Some ESG standards acknowledge that shareholders should have deference to an “independent third party” who shall assure the disclosure statement that the company shall make. This control mechanism permits the review of potentially relevant events to be disclosed, free from conflict of interest. Yet arbitration may restrict this. If the dispute among shareholders consists of whether they should submit the potentially relevant event to a third party for review, an arbitration clause may restrict access to the third party by filing a request for arbitration. However, both proceedings (arbitration and third-party deference) may be conducted in parallel, without necessarily existing overlap between the adjudicators.
An opposite view would be that arbitration benefits these types of claims, as they allow for a more expeditious resolution of the process. Commercial arbitrations would rarely take longer than litigation before state courts, except for investor-state dispute settlement (“ISDS”). Unlike traditional legal proceedings, an arbitral tribunal may issue partial awards, by bifurcating the proceedings at different stages. This provision is endorsed by the International Chamber of Commerce Arbitration Rules, the London Court of International Arbitration Rules, and the American Arbitration Association Commercial Arbitration Rules, to name a few. Then, an arbitral tribunal may bifurcate the proceedings to first resolve any emergency ESG issues and then determine the contractual consequences derived from a potential ESG breach, should one exist in the first place. Retaking the initial cases, an LCIA tribunal would be empowered to remit the dispute to an independent third party, who shall determine if an event constitutes a “significant error” on the initial ESG disclosure, which requires subsequent amendment. If the error is identified, the arbitration may proceed to a quantum or damages stage to determine any liability for failing to adequately disclose the ESG event without depriving public investors of knowing the event.
Third, it could be criticized if the current procedural framework is appropriate for ESG disputes. Most binding ESG provisions oblige states and foreign investors in the ISDS system. This is because a new generation of bilateral investment treaties (“BITs”) has incorporated ESG provisions. For example, the 2019 Dutch Model BIT states the following:
Art. 6.6. Within the scope and application of this Agreement, the Contracting Parties reaffirm their obligations under the multilateral agreements in the field of environmental protection, labor standards, and the protection of human rights to which they are party, such as the Paris Agreement, the fundamental ILO Conventions and the Universal Declaration of Human Rights. Furthermore, each Contracting Party shall continue to make sustained efforts towards ratifying the fundamental ILO Conventions that it has not yet ratified.
These types of investment standards may indirectly shape corporate governance. In the ISDS system, some states have taken the view that BITs allow them to counterclaim foreign investors in investment arbitrations for the company’s ESG breaches based on ESG clauses contained in treaties. In Urbaser v. Argentina, the investor was a shareholder in a concessionaire in charge of the supply of water and sewerage services. While Argentina’s financial crises cornered Urbaser to insolvency, the sovereign state counterclaimed, alleging that Urbaser failed to make the necessary investments in their supply of services, which triggered a violation of the human right to water. Surprisingly, the tribunal accepted its jurisdiction over Argentina’s counterclaim. Yet, there is no defined rule, and different tribunals may arrive at different conclusions on whether they have jurisdiction over human rights counterclaims against corporate groups. Nevertheless, companies are increasingly facing exposure to legal attribution in the international sphere for breach of ESG obligations. As such, the reform to the ISDS system may, at some point, concern the degree of liability for shareholders when operating in foreign jurisdictions.
Fourth and finally, shareholders may expose themselves to counterclaims and potential conflicts of interest when incorporating ESG provisions into their agreements. A few ISDS cases have demonstrated this hurdle, including the current decision in Vulcan v. Mexico, where the state claims that the tribunal has jurisdiction over its counterclaims for breaches of national and international environmental norms. Quoting the tribunal in Iberdrola Energia S.A. v. República de Guatemala II, “The jurisdiction of an Arbitral Tribunal over a State party counterclaim under an investment treaty depends upon the terms of the dispute resolution provisions of the treaty, the nature of the counterclaim, and the relationship of the counterclaims with the claims in the arbitration.” A few arbitral institutions have implemented or issued sector-specific rules to address a growing demand for ESG-related disputes. From the Hague, the Permanent Court of Arbitration is spearing this new wave with its Optional Rules for Arbitration of Disputes Relating to Environmental and Natural Resources. The Optional Rules contain a specialized list of arbitrations with expertise in this area and a list of scientific and technical experts. Although inappropriate for shareholder disputes, the Optional Rules may serve as a backbone to new rules that commercial institutions will probably issue in the following rules.
With keen interests in corporate governance, more than 220 global apparel brands and retailers spanning over 20 countries concluded the Accord on Fire and Building Safety in Bangladesh (the “Bangladesh Acord”) in recent years. This Agreement was a direct consequence of the collapse of the Rana Plaza in Dhaka, which killed 1,134 people and critically injured over 2,000 more. The Bangladesh Accord allows labor unions to bring claims against signatory corporations for failing to meet safe and non-hazardous working conditions. Building on the corporate success of the Bangladesh Accord, a separate set of rules defined as the Hague Rules on Business and Human Rights Arbitration was developed, which allow for i) victims of corporate human rights abuses to confront multinational enterprises legally and ii) to address intra-business contracts between corporate partners.
The main hurdle for any new or old arbitration rules to fit ESG-corporate disputes would be to achieve consent. Without it, arbitration becomes virtually useless as no party can be forced to arbitration without previously approving its submission. New shareholders integrating themselves into a company may struggle to identify the appropriate forum for their dispute if the articles of incorporation already provided for an arbitration clause. Since an arbitration clause is considered a separate agreement, shareholders’ consent to the by-laws might not be extensive to the arbitration clause. Then, in case of a dispute, the shareholder may weigh down if it is convenient or appropriate to apply to arbitration for each specific ESG dispute.
In conclusion, it would be safe to predict that a future point of contention for shareholders’ liability for breaching their ESG obligations would be the interplay between the substantive obligations and the appropriate dispute forum. However, stakeholders should pay attention to ensure that arbitration does not impede ESG dispute resolution. Even when arbitration provides for an assortment of procedural benefits for companies, its current structure may require adaptation to cover more complex ESG claims. Further, as ESG-related provisions find their place in BITs, indirect control and a certain degree of corporate governance may be exercised over companies through international investment law.
* Galo Márquez is a Professor of Business Law at Tec de Monterrey University and a Member of the Academic Forum at UNCITRAL Working Group III. He is an Associate at Creel, García-Cuéllar, Aiza y Enríquez in Mexico City and a member of its International Arbitration Practice. Currently, Galo is the General Coordinator 2023–2025 of the CAM/CANACO Young Arbitrators Forum.
 Joseph Lee. Intra-Corporate Dispute Arbitration and Minority Shareholder Protection: A Corporate Governance Perspective. (2017) 83 Arbitration, Issue 1 © 2017 Chartered Institute of Arbitrators, p. 86 (“In business associations, the company is regarded as the nexus of contractual relationships between shareholders and between the shareholders and the company. The essence of such party autonomy-based corporate dispute resolution is to treat the company’s constitution, which contains an arbitration clause, as a binding agreement between the shareholders and the company and among the shareholders inter se.”)
 See Global ESG Disclosure Standards for Investment Products (2021), p. 3.
 See Global ESG Disclosure Standards for Investment Products (2021), p. vii. (“An investment manager may choose to have an independent third party provide assurance for one or more of its ESG Disclosure Statements.”)
 Parties in arbitrations have expressed their interest in imposing restrictions on the length of submissions to promote celerity in resolving the dispute. See 2021 International Arbitration Survey: Adapting arbitration to a changing world, Queen Mary University of London, School of International Arbitration (2021), p. 13. (“With a clear margin of more than 20% over other options, the first choice was ‘unlimited length of written submissions’ (61%) [. . .]”)
 See Appendix IV, “Case Management Techniques,” in the 2021 ICC Arbitration Rules. (“The following are examples of case management techniques that can be used by the arbitral tribunal and the parties for controlling time and cost. Appropriate control of time and cost is important in all cases. In cases of low complexity and low value, it is particularly important to ensure that time and costs are proportionate to what is at stake in the dispute. a) Bifurcating the proceedings or rendering one or more partial awards on key issues, when doing so may genuinely be expected to result in a more efficient resolution of the case.”)
 See Arts. 23.1 and 23.4 of the LCIA Arbitration Rules as effective on 1 October 2020 (“Article 23. Jurisdiction and Authority. 23.1 The Arbitral Tribunal shall have the power to rule upon its own jurisdiction and authority, including any objection to the initial or continuing existence, validity, effectiveness or scope of the Arbitration Agreement. […] 23.4 The Arbitral Tribunal may decide the objection to its jurisdiction or authority in an award as to jurisdiction or authority or later in an award on the merits, as it considers appropriate in the circumstances.”)
 See R-46 of the AAA Commercial Arbitration Rules (“(b) In addition to a final award, the arbitrator may make other decisions, including interim, interlocutory, or partial rulings, orders, and awards. In any interim, interlocutory, or partial award, the arbitrator may assess and apportion the fees, expenses, and compensation related to such award as the arbitrator determines is appropriate.”)
 Final Award (8 December 2016). Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, pp. 1110-1156.
 Respondent’s Counter-Memorial on the Ancillary Claim (19 December 2022). Legacy Vulcan LLC v. United Mexican States, ICSID Case No. ARB/19/1; also see Award (27 September 2019). Perenco Ecuador Limited v. República del Ecuador, ICSID Case No. ARB-08-6, ¶ 34, 889, 899 y 1023 (“[I]f a legal relationship between an investor and a State permits the submission of a claim by the State for environmental damage caused by the investor’s activities, and such claim is well-founded, the State is entitled to full compensation for the damage in accordance with the requirements of applicable law.” compensation for the damage in accordance with the requirements of the applicable law”).
 Final Award (24 August 2020). Iberdrola Energía, S.A. v. The Republic of Guatemala (II), PCA Case No. 2017-41.
 William W. Park. Non-signatories and international contracts: an arbitrator0s dilemma. Multiple parties in international arbitration (Oxford 2009), p.2 (“[c]onsent (even implied from circumstances) remains the cornerstone of arbitration, at least by arbitrators who value intellectual rigor and analytic integrity”).