🔗 Share this article

How do you perceive our political system functions? Perhaps along the lines of this. The public votes for MPs. They legislate on bills. If a majority is obtained, the bills become law. Legislation is maintained by the courts. End of story. However, that was how it used to work. Not anymore.

The Advent of Offshore Arbitration Panels

Nowadays, overseas companies, or the oligarchs behind them, have the power to sue nation states for the regulations they pass, at offshore tribunals composed of corporate lawyers. Such disputes take place in secret. In contrast to domestic courts, these bodies grant no avenue for appeal or legal review. You or I are unable to file a case to them, and neither can our government, including enterprises operating from this country. They are open exclusively to corporations registered abroad.

When a secret court rules that a legislative action may compromise the corporation’s anticipated profits, it may order financial penalties of vast sums, potentially billions.

These sums are based not on real financial harm but funds the panel members conclude the company could potentially have made. The administration might be compelled to abandon its policy. It becomes deterred from passing future laws of a similar nature, due to the risk of facing litigation.

A System Growing Exponentially

Record numbers of cases are being filed, as firms take cues from each other, and private equity bankroll lawsuits in return for a cut of the awards. The result? Democratic sovereignty and popular rule are turning into too costly.

This mechanism is known as “investor-state dispute settlement” (ISDS). The reason it is permitted to supersede national legislation and the rulings enacted by elected bodies is that this provision has been inserted – without democratic mandate, and often in a climate of extreme secrecy – into bilateral investment treaties.

A Specific Example: The Whitehaven Coalmine

Last year, a conservation group achieved a major legal triumph at the senior court. The justice found that proposals to dig the first new deep coal mine in the UK for a generation, in northwest England, were unlawfully approved by the previous government, which had endorsed the bizarre claim that the mine would have zero effect on climate commitments. The incoming administration later cancelled the consent the former government had approved. Currently, this legal outcome could be compromised by an foreign court accountable to only the entities petitioning it.

Last August, a firm whose beneficial owners are based in the tax haven initiated proceedings versus the UK government. The previous week a arbitration panel in the US capital was established to hear it.

The company is seeking compensation from the UK for the profits it could have earned if the mine had received permission to commence operations. The public has no clear indication how much this might be. Who is acting on its behalf challenging the state? A sitting MP, and ex-law officer in the previous government, that great patriot the MP. The administration passes a law, the national judiciary supports it, then a foreign company disputes it through an undemocratic arbitration panel, and a member of our parliament represents its behalf.

A Sanctions Challenge

Concurrently that the panel on the coalmine case was established, we learned from a ministerial statement that the UK is subject to further litigation under ISDS by a Russian billionaire, Mikhail Fridman. Details are little of the case so far, but it is highly possible that he may employ the arbitration process to contest the sanctions the UK enacted against him subsequent to the invasion of Ukraine. He has initiated proceedings against a small nation on these grounds, demanding $16bn: equivalent to half of nation's yearly income. Part of the lawyers acting for him in that case? the wife of a former prime minister, married to the former British prime minister.

Trade specialists argue that the EU’s hesitation in utilising seized state funds as guarantee for its aid for Ukraine stems from concerns within Belgium that it could be taken to court in the offshore corporate courts, under a investment pact. This remarkable, undemocratic power over sovereign states might be preventing the finance Ukraine urgently requires.

False Assurances and Escalating Risks

The public was told that such things were not possible. Years ago, a government leader, promoting the biggest and most dangerous of all such treaties, declared: “Britain has agreed to trade agreement after trade deal and there has never been a case in the past.” An adviser on this matter described activists of “scaremongering … in reality, ISDS has little impact on the UK much”. The prevailing narrative was crafted to be that only poorer nations should be concerned by such legal actions. Warnings that “when companies grasp the power bestowed upon them, they will redirect their efforts from the poorer states to the wealthy nations” were greeted by widespread derision.

That threat has now materialised. Recently, energy and mining firms have filed a unprecedented number of cases against nations both wealthy and developing, opposing – like the example of the Whitehaven project – government attempts to stop climate breakdown. Firms have thus far won $114bn by using ISDS, of which oil majors have obtained eighty-four billion dollars. That represents the combined GDP