4. Corporate courts
wanted to convince the public that international trade agreements are a way to let multinational
companies get rich at the
expense of ordinary people, this is what you would do: give foreign firms a special right to apply to a
secretive tribunal of highly paid corporate lawyers for compensation whenever a government passes a law
to, say, discourage smoking, protect the environment or prevent a nuclear catastrophe.”
The Economist, October 201443
In the days leading up to Christmas 2001, Argentina was engulfed by one of the worst crises in its history. A decade of economic liberalisation had seen poverty soar in the country.44 Large parts of Argentina’s public sector – water, energy, telecommunications – had been privatised on terms which were great for the international corporations that took over the utilities, but terrible for the people relying on the services.45
As a debt crisis grew bigger, deep cuts to government spending were announced, businesses closed, banks capped what savers could withdraw, and protests toppled the government.46 The president resigned and was airlifted out of his palace, which had been besieged by protestors. In less than two weeks Argentina went through five presidents, defaulted on its debt and then devalued its currency to help put the country on a long path to recovery.
Part of this recovery involved protecting Argentinians’ access to basic services. The government froze the price of water and energy. But big business howled in protest that this broke their privatisation contracts, which promised payments would be linked to dollars – something that would have seen prices skyrocket because of the devaluation of Argentina’s currency. So the corporations attacked. They claimed they’d been treated unfairly, and sued Argentina in secret arbitration panels made possible under the terms of investment treaties the country had signed.
Over 50 cases were lodged altogether, claiming an astronomical $80 billion from the government.47 British company Anglian Water was a party to one of the claims. Having been part of a consortium that took over the Buenos Aires water system – and despite claims of atrocious service, lack of investment and a rise in waterborne diseases – Anglian and its partners claimed the price freeze breached their ‘rights’. Argentina claimed that the human rights of its citizens should surely be the paramount concern, but the tribunal decided human rights should not override investor rights and found in favour of Anglian, which was awarded £13 million out of a total £251 million award.48
What does this have to do with a US trade deal? Well, the same mechanism that saw Argentina hauled over the coals by big business is likely to be included in the deal, leaving future British governments exposed to cases brought by US‑based multinationals in secret courts, challenging their ability to take action in the public interest.
Investor‑State Dispute Settlement (ISDS)49 – or what we call the ‘corporate courts’ system – was invented back in the 1950s, when it started to be inserted in investment deals, particularly reflecting western countries’ suspicion of how their corporations would be treated in newly independent countries in the global south. But it’s really the last 20 years that they have become a major obstacle to the ability of countries to enact measures that protect citizens and the environment.
Britain already has many ISDS agreements with countries around the world, but while corporate courts have been a huge problem for those countries, for the most part Britain is the more powerful partner in these agreements. These agreements should be rescinded as quickly as possible because of the damage they have done to others. But establishing an ISDS agreement with the US would put the boot on the other foot: it would suddenly open Britain up to challenge by tens of thousands of US‑based multinational corporations, and we would be challenged very rapidly.
ISDS has recently often been included in the ‘investment chapter’ of modern trade deals. These chapters give foreign investors – which usually means big business or big financial firms – special privileges that protect them from government action. Investment chapters were invented to protect investors from having their assets seized by a foreign government, to ensure that contracts they signed with governments would be upheld, and to prevent discrimination in favour of domestic investors. In reality, there are many legitimate reasons why a government might want to give preference to domestic investors, not least it can help stimulate the local economy and make government debt easier to manage. But even leaving this aside, modern ‘investor protection’ goes well beyond preventing discrimination or enforcing the terms of contracts. It gives foreign investors more rights than domestic investors and many more rights than ordinary citizens, and hands them huge powers to bully elected governments.
Corporate courts allow foreign investors to sue governments in special tribunals when they believe their ‘rights’ have been infringed. The basis for such cases has been expanded to an almost ludicrous degree by big legal firms eager to make money from the system. A foreign investor today might claim pretty much any government action that damages their future profits is ‘unfair’ or ‘expropriation’, even though the rest of us might regard the measure as a reasonable response to the harm a corporation is causing. Putting cigarettes in plain packaging, forcing toxic mines to put better environmental standards in place, or the controlling of water prices might well damage a corporation’s profits, but the idea that they have infringed some fundamental right directly threatens a government’s ability to enact important regulation. Yet these are all real ISDS cases where corporations have used corporate courts to try to discipline governments.
Although ISDS systems can be different, they usually contain the following elements:
- ISDS is only ever open to foreign investors or corporations. These ‘courts’ are not open to citizens or even domestic investors. Neither can governments challenge investors. It’s a one‑way system.
- In most cases, an investor doesn’t need to use the national court system – something which they always have a right to do just like everyone else. ISDS gives them their own special legal system.
- ISDS cases are usually only concerned with investment law and arbitrators don’t have to consider the balance between public and private interest, or take account of human rights or environmental law, let alone give precedence to them.
- There are no formal ‘judges’. Only a small number of corporate lawyers can hear these highly technical cases, giving those involved an interest in perpetuating the system.
- Governments lack the right of appeal and sometimes can’t even reclaim their legal costs. Thus it’s difficult for a government to ever ‘win’ – they can lose, or lose worse.
- Investors can often bring cases even if they have no real economic base in the country whose investment chapter they are using. For example, a Canadian mining company registered in Jersey is using a British‑Romanian treaty to sue Romania.50
- They often contain ‘sunset clauses’ for as long as 20 years, meaning governments struggle to get out of such treaties. Even if a government rescinds an agreement containing ISDS, as some have, it could still face cases for two decades afterwards.
In recent years there have been attempts to reform this system, though to date these efforts have made no difference to how the system works. Reforms can’t deal with the fundamental problem: these are one‑sided systems for big business to bully governments.
ISDS cases are expensive to bring. It’s no surprise then that the beneficiaries of this system are the super-rich. Research shows that giant corporations (over $1 billion in annual revenue) and super‑rich individuals (over $100 million wealth) get 95% of all compensation awarded in corporate‑court cases.51
Another big winner is the corporate legal industry, which has made well over $1 billion from such cases – not surprising, given legal costs for such ISDS cases average over $8 million, exceeding $30 million in some cases.52 In a dangerous new development, hedge funds have started speculating on such cases – providing funds which can help cases last longer and make it more likely they will wear down governments facing challenge.53
The coronavirus pandemic has opened up endless potential for corporations to use ISDS. As governments scramble to introduce emergency measures to save lives, corporate law firms claim these measures might fall foul of investment chapters. As one law firm put it: “Governments have responded to COVID-19 with a panoply of measures, including travel restrictions, limitations on business operations, and tax benefits... For companies with foreign investments, investment agreements could be a powerful tool to recover or prevent loss resulting from COVID-19 related government actions.”54
Investor protection, public harm
ISDS is part of a much bigger problem with trade rules. Corporate courts seem just plain wrong to most people, but decision‑makers justify the rules on the basis that they encourage investment. In free market theory, investment will flow to those parts of the world where returns can be generated, helping the poorest countries to develop. Unfortunately, in practice, these flows can do as much harm as they can good.
While investment can play a useful role in development, it is only likely to do so if governments have the rights to control, regulate and tax investors.55 But investor protection chapters hinder the ability of governments to do this. So although investment might be more likely to flow into a country, it can just as easily flow out again when it has extracted the resources it came to exploit, leaving no benefit for the country concerned. This fuels speculation, unpayable levels of debt, and environmental and human rights abuses.
Globalisation has not only increased the flow of goods and services around the world but also, and in many ways more importantly, massively increased the flow of money. The creation of an integrated global financial system marks a sharp break with the post‑war period, when there was a greater understanding that finance should not be an end in itself, and that its power, therefore, needed to be constrained by governments. From the 1970s onwards, finance was ‘let off the lead’: financial markets were deregulated, and capital started to flow across borders like never before.56 The impact on societies around the world has been profound. The financial logic of short-term profit maximisation has become dominant throughout the global economy, with costs thrown onto workers, the public sector, future generations and the environment. It has skewed the economy towards speculation and rent, and has fuelled massive inequality.57
At first glance, trade rules might seem irrelevant to these era-defining developments. But as we’ve seen, trade rules today go well beyond what have previously been thought of as trade issues, and they have played an important role in fuelling this wave of ‘financialisation’. UN agency UNCTAD described it like this:58
“talk of free trade provided a useful cover for the unhindered movement of capital and an accompanying set of rules… that disciplined government spending and kept the costs of doing business in check… hyperglobalization has as much to do with profits and mobile capital as with prices and mobile phones, and is governed by large firms that have established increasingly dominant market positions and operate under ‘free trade’ agreements that have been subject to intense corporate lobbying and all too frequently enacted with minimal public scrutiny.”
What the trade papers say
Both sides in the talks want investment to be included in the trade deal, with the US calling for “rules that reduce or eliminate barriers to US investment in all sectors in the UK”. There is no direct mention of ISDS in the US objectives, but Trump’s ‘America first’ view is reflected in its objective to “Secure for US investors in the UK important rights consistent with US legal principles and practice, while ensuring that UK investors in the United States are not accorded greater substantive rights than domestic investors.” This sounds like a one‑sided ISDS system, which would normally be unthinkable, except the US has already achieved a partially one‑sided ISDS with Mexico in its negotiation of NAFTA.
Britain’s objectives more clearly speak to their desire for ISDS, saying they want to ensure: “UK investors investing in the US the same types of rights and protections they receive in the UK, including non‑discriminatory treatment and ensuring that their assets are not expropriated without due process and fair compensation.” British ministers have also made clear their support for ISDS in parliament.59 Moreover, the leaked US‑UK papers highlight the US’s opposition to the EU’s proposal for a reformed ISDS system, known as Multilateral Investment Court. In the words of British officials, the US negotiators were “particularly robust on the opposition to the EU’s proposed Multilateral Investment Court” and “were clear that the ‘traditional ad hoc tribunal’ approach is their favoured method”. The US “would be very concerned at any indication that the UK was in favour of a MIC”, so much so that “they were clear that this would undermine the ability of the US to work with the UK in other forums”. So only the fullest, most pro‑big‑business ISDS system would be acceptable – anything else seems a deal‑breaker.
Sadly this is one area where a Biden presidency might be worse. While Trump was somewhat hostile to corporate courts in so far as they could be applied to the US, Biden might take a more traditional US approach of full support for ISDS.
What it could mean for Britain
Uniper v the Netherlands
The Dutch government has been threatened with an ISDS case by energy company Uniper, which runs coal‑ fired power plants in the country. Uniper is unhappy at the Netherlands climate policy to ban coal‑based power generation by 2030, a policy which would force Uniper to switch energy sources or close its plants. What’s interesting is that Uniper’s plant is fairly new, so the company can hardly claim it wasn’t aware of the growing movement to phase out coal power. In fact, Uniper’s strategy appears to be to carry on as usual62and claim compensation from governments when the inevitable phase‑outs happen. ISDS is becoming a business model in itself – removing pressure for corporations to take environmental measures, safe in the knowledge they will effectively be bailed out for bad decisions. The publicity with which Uniper has threatened the case is likely also to have a ‘chilling’ effect, intimidating other governments. Germany is planning to phase out coal power and is now offering billions in compensation to energy firms.
Construction companies v Britain?
As part of the response to the Covid‑19 pandemic, the Scottish government and the Mayor of London both ordered construction sites to temporarily close. The Westminster government, however, did not. That difference could be construed as posing unnecessary or unfair impediments to business, even though many believe strong action was far more conducive to halting the spread of coronavirus. Lawyers have already been publicly discussing63 the high likelihood of such a case being brought over the closing of Crossrail construction sites in London.
Energy companies v Britain?
In 2019, Britain approached a general election in which the Labour Party promised to take parts of the country’s energy and water networks back into public ownership if it won. The policy enjoyed support from a majority of the population.64 Alarmed, two energy corporations that would have been affected, National Grid and SSE, created overseas holdings companies, hoping that they could sue the government if they didn’t receive the price they demanded for their assets. If Labour had won the election and begun to carry out its manifesto, these energy corporations could have spent years making the policy unworkable. Such cases would proliferate under a US trade deal that included ISDS.
‘The arbitration game’, Economist, 11 Oct 2014
‘Argentina’s debt crisis’, Jubilee Debt Campaign, May 2020
‘Crisis, Emergency Measures and the Failure of the ISDS System: The Case of Argentina’, South Centre, Jul 2015
‘Timeline: Argentina’s economic crisis’, Guardian, 20 Dec 2001
See note 45
ISDS Files: Anglian Water v Argentina, Global Justice Now, Jan 2019
The Zombie ISDS, Corporate Europe Observatory, 17 Feb 2016
‘UK Prime Minister Cameron told: stop Jersey-registered shell company suing Romania in “corporate court”’, Tax Justice Network, 14 Aug 2015
‘Who Has Benefited Financially from Investment Treaty Arbitration? An Evaluation of the Size and Wealth of Claimants’, Van Harten and Malysheuski, 11 Jan 2016
Lawyers subverting the public interest, Friends of the Earth Europe, Apr 2015
‘Dispute Settlement Becomes Speculative Financial Asset’, Jomo Kwame Sundaram, 19 Apr 2017
‘Cashing in on the pandemic’, Transnational Institute, 19 May 2020
‘The Metamorphosis of Financial Globalization’, Policy Center for the New South, 15 Sep 2017
Capital in the Twenty-First Century, Thomas Piketty, Harvard University Press 2014
See note 2
‘Netherlands faces ISDS threat after decision to ban coal-based power generation by 2030’, ISDS Platform, 16 Sep 2019
‘Legal opinion on Uniper’s legally misconceived ISDS threat to Dutch coal phase-out’, ClientEarth, 21 Nov 2019
‘Will German Uniper power plant be hauled over the coals?’, Deutsche Welle, 14 Jan 2020
‘The coming wave of COVID-19 arbitration – looking ahead’, Alston & Bird webinar, 29 Apr 2020
‘Public ownership is popular’, We Own It