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How do you reckon our political system functions? Perhaps something like this. Citizens choose MPs. They debate and pass bills. If a majority is secured, the bills become law. Legislation are enforced by the courts. Simple as that. Well, that used to be how it once functioned. Those days are over.

The Emergence of Offshore Arbitration Panels

Nowadays, overseas companies, and the wealthy individuals who own them, can sue governments for the regulations they pass, at secret arbitration panels made up of corporate lawyers. The cases are held in secret. In contrast to domestic courts, these panels provide no right of appeal or legal review. You or I cannot take a case to them, and neither can our government, or even enterprises headquartered in this country. Access is granted solely for corporations registered abroad.

If a tribunal rules that a government measure could harm the corporation’s expected profits, it may order financial penalties of hundreds of millions, even billions.

This compensation constitute not real financial harm but funds the arbitrators determine the company might otherwise have made. The state might be compelled to rescind the measure. It is deterred from passing future laws of a similar nature, for fear of incurring a lawsuit.

A Process Growing Exponentially

Historically high figures of legal actions are being initiated, as firms take cues from each other, and private equity finance suits in exchange for a cut of the takings. The consequence? National sovereignty and democratic governance are now too costly.

The system is called “investor-state dispute settlement” (ISDS). The rationale it can supersede a country's own laws and the decisions taken by legislatures is that this provision has been inserted – absent public approval, and typically amid an atmosphere of extreme secrecy – inside trade treaties.

A Specific Instance: The Cumbrian Coal Mine

A year ago, a conservation group achieved a major legal triumph at the high court. The judge found that schemes to excavate the first deep coalmine in the UK for a generation, in Cumbria, were illegally sanctioned by the outgoing administration, which had accepted the extraordinary assertion that the mine could have no consequence on our carbon budgets. The new government then withdrew the consent the former government had issued. Today, this victory is under threat by an secret arbitration panel reporting to only the companies bringing the case.

During August, a company whose beneficial owners are located in the offshore financial centre initiated proceedings against the UK government. The previous week a tribunal in the United States was established to adjudicate on it.

This firm is suing the UK for the money it would have generated if the mine had been allowed to commence operations. Citizens have no idea how much this could amount to. Who is representing it challenging the state? A sitting MP, and previous senior legal advisor in the outgoing administration, the self-proclaimed patriot Sir Geoffrey Cox. The state enacts a policy, the high court validates it, then a foreign company challenges it through an undemocratic private court, and a elected official works for its behalf.

An Oligarch's Challenge

Concurrently that the tribunal on the coalmine case was appointed, information emerged from a government response that the UK is subject to further litigation under ISDS by a wealthy Russian individual, Mikhail Fridman. We know little of the case at present, but it is highly possible that he will utilise the ISDS mechanism to contest the restrictions the UK imposed on him following the invasion of Ukraine. He has already started suing another European state for this reason, claiming $16bn: half that nation's yearly budget. Included in the counsel on his side? the wife of a former prime minister, married to the previous PM.

Trade specialists argue that the EU’s procrastination in using frozen Russian assets as collateral for its loan to Ukraine stems from Belgium’s fear that it could be taken to court in the ISDS tribunals, under a bilateral investment treaty. This remarkable, secretive influence over democratic administrations could be blocking the money Ukraine critically depends on.

Misleading Claims and Growing Costs

The public was told that these scenarios could not occur. Years ago, a government leader, promoting the biggest and most dangerous of all these agreements, stated: “The UK has signed investment treaty after trade deal and there has not been a case in the past.” An expert on this issue described critics of “scaremongering … the fact is, ISDS does not affect the UK much”. The overall message seemed to be that solely developing countries needed to fear such legal actions. Predictions that “when companies start to realise the power they’ve been granted, they will redirect their efforts from the poorer states to the wealthy nations” were met with general mockery.

That threat is now a reality. Recently, oil and gas and resource corporations have initiated a historic level of cases against nations rich and poor, opposing – like the example of the UK mine – official measures to prevent environmental catastrophe. Companies have so far won $114bn by using ISDS, of which oil majors have been awarded eighty-four billion dollars. That equates to the combined GDP