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Can you perceive our system of government functions? Perhaps similar to this. We elect MPs. They debate and pass bills. When a majority is achieved, the bills pass into law. Statutes is upheld by the courts. Simple as that. Yet, that’s how it once functioned. Not anymore.

The Advent of Shadow Arbitration Panels

Nowadays, overseas companies, or the wealthy individuals that control them, have the power to sue governments for the laws they pass, at secret arbitration panels staffed by business advocates. The cases are held behind closed doors. In contrast to domestic courts, these tribunals grant no avenue for appeal or judicial review. You or I cannot take a case to them, nor can our government, including businesses based in this country. They are open only to businesses registered abroad.

If a tribunal finds that a legislative action may compromise the corporation’s expected profits, it can award financial penalties of hundreds of millions of pounds, even billions.

These awards are based not on actual losses but funds the arbitrators decide the company could potentially have made. The government may have to abandon its policy. It will be discouraged from passing future laws of a similar nature, due to the risk of incurring a lawsuit.

A Mechanism Growing Exponentially

Unprecedented levels of legal actions are being filed, as corporations learn from each other, and private equity bankroll lawsuits in exchange for a portion of the settlements. The consequence? National sovereignty and democratic governance are now too costly.

This mechanism is referred to as “investor-state dispute settlement” (ISDS). The reason it is permitted to supersede domestic law and the choices made by legislatures is that this clause has been inserted – absent public approval, and typically amid conditions of profound opacity – within international trade agreements.

A Concrete Case: The UK Coalmine

Twelve months ago, a conservation group achieved a major legal triumph at the high court. The justice determined that plans to dig the first new deep coal mine in the UK for 30 years, in Cumbria, were wrongly permitted by the previous government, which had accepted the extraordinary assertion that the mine would have had no consequence on national carbon targets. The incoming administration later cancelled the consent the previous administration had issued. Now, this legal outcome faces being overturned by an secret arbitration panel accountable to only the corporations petitioning it.

During August, a firm whose ultimate owners reside in the tax haven lodged a claim versus the UK government. Last week a dispute settlement body in the US capital was set up to adjudicate on it.

The claimant is litigating against the UK for the revenue it would have generated if the mine had received permission to commence operations. We have little idea how much this sum represents. Who is representing it in opposition to the state? An elected representative, and previous senior legal advisor in the Conservative government, the self-proclaimed patriot Sir Geoffrey Cox. The government enacts a policy, the domestic court supports it, then a overseas corporation contests it through an secretive arbitration panel, and a member of our parliament works for its behalf.

A Sanctions Case

Concurrently that the tribunal on the coalmine case was established, it was revealed from a parliamentary answer that the UK is subject to further litigation under ISDS by a Russian billionaire, Mikhail Fridman. The public knows little of the case to date, but it seems likely that he will utilise the ISDS mechanism to challenge the restrictions the UK imposed on him after the war in Ukraine. He has already filed a claim against another European state for this reason, claiming sixteen billion dollars: an amount representing half government’s annual revenue. Part of the lawyers acting for him in that case? a prominent lawyer, married to the previous PM.

International law scholars argue that the EU’s procrastination in using frozen Russian assets as collateral for its financial support package is due to Belgium’s fear that it could be taken to court in the secret arbitration panels, under a investment pact. This extraordinary, secretive influence over sovereign states might be preventing the money Ukraine critically depends on.

Empty Promises and Escalating Costs

Politicians promised that these scenarios wouldn’t happen. Previously, a senior politician, championing the most significant and hazardous of all such treaties, declared: “The UK has signed trade deal after trade deal and there has never been a case in the past.” An adviser on this issue accused activists of “exaggeration … in reality, ISDS barely touches the UK much”. The prevailing narrative was crafted to be that only poorer nations needed to fear these lawsuits. Cautionary notes that “as corporations grasp the authority they now possess, they will turn their attention from the weak nations to the strong ones” were greeted by general mockery.

That warning has now materialised. This year, energy and extraction companies have lodged a unprecedented number of suits against nations across the economic spectrum, contesting – like the example of the UK mine – government attempts to halt climate breakdown. Firms have thus far won vast sums by using ISDS, of which fossil fuel companies have obtained eighty-four billion dollars. That represents the combined GDP