Harmonising Profit and Planet: Rethinking Environmental Counterclaims in Investor-State Arbitrations


With heightened global scrutiny pertaining to environmental issues and domestic policy reforms, environment-related counterclaims have been on the rise. This rise of environment-related counterclaims in international arbitration reflects a significant shift towards the need for a fairer framework in Investor-State Dispute Settlement (“ISDS”) mechanisms. Counterclaims emerge as a promising tool within the framework of international arbitration, having far-reaching consequences as compared to a defence on the merits. They constitute an independent cause of action, which implies that a counterclaim may be used by States to reach a favourable outcome beyond the mere dismissal of the primary claim. 

Counterclaims provide a means for the host-State to compel an investor to fulfil their duties and obligations. They are particularly critical in addressing the environmental crisis due to their potential to compel investors to fulfil their environmental responsibilities and hold them accountable for actions that can lead to environmental damage. However, within the realm of international investment law, the clarity around the availability of host-State counterclaims is sometimes lacking due to its highly fragmented nature. 

Enhancing the accessibility of counterclaims, specifically within the realm of environmental harm, has the potential to provide a more equitable and efficient system for ISDS. This would contribute to a better equilibrium between the rights of states and investors in the face of escalating global environmental concerns. This post explores the rising prominence of counterclaims, their implications in the Indian context through the 2016 Model Bilateral Investment Treaty (“BIT”), and the broader global implications for achieving a more balanced and just framework in ISDS.

Shifting the counterclaim paradigm through ICSID

ISDS mechanisms have remained a one-way street with states consistently assuming the role of respondents and only investors possessing the ability to initiate claims. Asymmetric mechanisms such as these have adopted a lop-sided approach to dispute resolution by imposing obligations on the State and leaving them vulnerable to environmental harm caused by investors. UNCTAD has recognized that investment dispute settlement mechanisms must be designed in a way that produces just outcomes which are reflective of key societal values. An impactful way for States to implement this is authorisation of counterclaims via treaty drafting practice.

Both the ICSID and the UNCITRAL Arbitration Rules, which are the primary procedural frameworks for ISDS, permit the submission of counterclaims, provided that they fall within the jurisdiction of the respective tribunal. The tribunal may assume jurisdiction over the counter-claim under three circumstances, i. Explicit mention within an agreement, ii. Implicit from the agreement, iii. Agreed upon arbitration rules. For instance, Art. 46 of the ICSID Convention expressly confers the right to a counterclaim. In addition to the aforementioned arbitration procedures, the ICC Rules, the LCIA Rules, and the UNCITRAL Rules, have provisions that allow the respondent to bring a counterclaim.

While international instruments invoked in International Investment Agreements (“IIAs”) place obligations on the State, the host States will only be allowed counterclaims if the existing instruments are interpreted to place obligations on the investor. The Urbaser award is significant within this particular framework due to its recognition of a counterclaim for environmental damage based on a violation of a human rights obligation. The Urbaser tribunal’s rationale was predicated on the recognition that corporations, being accorded rights within the framework of international law, may therefore bear corresponding obligations. This approach seeks to balance the asymmetric nature of the international framework and accord protection to host States as well. 

Another tribunal relied on the reasoning provided in Urbaser. The tribunal in Aven v. Costa Rica (“Aven”) drew upon the legal precedent set by Urbaser to assert that although the responsibility for enforcing environmental laws generally rests with States, it is untenable to argue that foreign investors are exempt from their international legal obligations in this domain. Further, in his partial dissenting opinion in Creek Mining v. Peru, Philippe Sands made reference to the Urbaser award to argue that while a Convention may not impose direct responsibilities on private party investors, it nonetheless holds legal implications for such investors. 

Therefore, what gives way to the legal basis for such counterclaims in the absence of any express provision is the broad meaning of the applicable treaties. Investment tribunals such as Aven have construed the notion of implicit agreement to arbitrate counterclaims by relying on ambiguous wording or expansive dispute resolution provisions found in investment treaties. The aforementioned tribunals have observed that some language expressions imply the permission to arbitrate counterclaims, either by explicitly excluding counterclaims in specific, defined situations, or by generally consenting to the arbitration of ‘any’ or ‘all’ issues. 

A much better scenario emerges where there is a clear and unambiguous clause under the IIAs with regards to counterclaims. The CTPP and the COMESA are examples of treaties that expressly empower the Respondent to put forth a counterclaim. The inclusion of counterclaims has the potential to optimise procedural efficiency and mitigate the necessity for conducting multiple proceedings across several forums. The tribunal in Aven seconded this view by noting that “the admission of counterclaims has several practical advantages on procedural economy and efficiency, for the benefit of both the host State and the foreign investor”.

States have devised strategies such as claiming that investors must comply with obligations established under customary international law or invoking breaches of domestic law to address the inherent deficiency of substantive obligations for investors in IIAs. However, it is crucial to adopt a comprehensive approach when undertaking reforms of International Investment Law and ISDS. 

The 2016 Model Indian BIT: addressing counterclaims and investor obligations

The inclusion of “promotion of sustainable development”, a non-economic goal in the preamble of the Model BIT follows the recent trend of “next generation treaties”. This may be used to interpret India’s intent to create obligations on foreign investors when tasked with determining whether environmental considerations remain excluded from an arbitral tribunal’s scope or not. However, the 2016 Model BIT provides scant guidance on whether counterclaims can be filed. Article 12 of the Model BIT states:

“Investors and their enterprises operating within its territory of each Party shall endeavour to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles may address issues such as labour, the environment, human rights, community relations and anti-corruption.”

While Art. 12 does not lay any specific environmental obligations on the investor, experts have argued that principles prescribed under Art. 12 may be used to bring counterclaims under Art. 46 of the ICSID Convention.

One may argue that investors, as private individuals, do not owe any obligations to the host State under customary international law. On this, the tribunal in Aven remarked that there existed no substantive reasons to exempt investors for breaching environmental obligations. Although the Aven tribunal declined the counterclaim, the perspective adopted by the arbitral tribunal underscores that investors cannot circumvent their international obligations.  Under the ICSID model, tribunals are precluded from ruling on counterclaims if the parties to the dispute expressly agree that the tribunal must not have the power to deal with them. The 2016 Model BIT, contains no such provision that expressly excludes or bars counterclaims. India may utilise this to its full advantage by carefully negotiating future IIAs and BITs. These agreements and treaties must negotiate specific obligations of the investors towards environmental protection. 

The challenges stemming from not having a specific clause in the BIT with regards to counterclaims are made evident in Roussalis v. Romania. The tribunal reiterated Art. 46 of the ICSID Convention along with Rule 48 of the ICSID Arbitration Rules 2022, which provides that:

“Unless the parties agree otherwise, a party may file an incidental or additional claim or a counterclaim (“ancillary claim”) arising directly out of the subject-matter of the dispute, provided that such ancillary claim is within the scope of the consent of the parties and the jurisdiction of the Centre”.

The tribunal in Roussalis emphasised that consent by both parties is an indispensable condition for the exercise of the Centre’s jurisdiction and that such consent be given in writing. In this case, counterclaims were dismissed based on the stipulation in the BIT which limited the tribunal’s jurisdiction to claims initiated by the investor concerning the obligations of the host State.

Art. 9 of the Greece- Romania BIT in Roussalis provided that:

Disputes between an investor of a Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement, in relation to an investment of the former, shall, if possible, be settled by the disputing parties in an amicable way…

If such disputes cannot be settled within six months from the date either party requested amicable settlement, the investor concerned may submit the dispute either to the competent courts of the Contracting Party in the territory of which the investment has been made or to international arbitration”.  

Accordingly, it was held that the BIT did not provide for counterclaims to be introduced by the host State in relation to the obligations of the investor.

This makes it imperative for India to engage in future negotiations and crafting of IIAs and BITs with meticulous consideration towards the inclusion of specific obligations owed by investors to the host State. Such a consideration is essential in instances where the issue of counterclaims is to be determined. India’s recent termination and renegotiation of its BITs signals the beginning of a new era where India negotiates from a position of economic strength. This sentiment was echoed in the ongoing India-UK FTA negotiations. There seems to exist a shift in India’s attitude where emphasis is laid towards prioritising the rights of the State over those of investors. 

In the environmental domain, this shift in current is substantiated by India’s inclusion of a Corporate Social Responsibility clause in the 2020 India-Brazil BIT. Article 12 of the India-Brazil BIT emphasises the role of investors and their investments in contributing towards environmental progress with the aim of achieving sustainable development. This underscores India’s commitment to promoting responsible investment practices and signifies a shift towards greater corporate accountability and environmental responsibility within the contours of international investment agreements.


While certain international instruments lack explicit provisions for counterclaims, the adaptable legal landscape allows for their incorporation through creative interpretations of investment treaties. In the Indian context, the 2016 Model BIT introduces corporate social responsibility principles that could potentially bolster counterclaims, emphasising the importance of aligning domestic legal frameworks with evolving global standards. However, challenges persist due to the absence of clear and unequivocal provisions on counterclaims in many bilateral investment treaties. The inclusion of a counterclaim mechanism in investment arbitration, thus, is a significant advancement that aims to establish a fair equilibrium between Respondent States and investors. This mechanism promotes principles of equality, democracy, and liberal values, which are upheld and safeguarded by public international law, serving as a catalyst for the promotion and implementation of a comprehensive system of global governance rooted in the principles of legality and justice.

Kritin Bahuguna and Lishika Sahni are presently third-year students at the National Law University, Lucknow, India.