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After thousands of people protested about rising energy bills during the Argentinian financial crisis, the government responded by freezing prices. Democracy in action, you might think, but the government was hit by over 40 lawsuits from international utility companies like CMS Energy (US) and Suez and Vivendi (France), using shadowy offshore secret courts, resulting in a compensation bill that reached over $1 billion (£609 million) by the end of 2008.

In many parts of the world, secretive panels of elite lawyers already have the power to overrule the decisions of governments. The ability of big business to sue governments that stand in its way is having a chilling effect on democracy in many countries, and rules included in a new treaty between the EU and US mean international corporations could soon do to the UK what they did to Argentina.

In Australia, tobacco giant Philip Morris is currently suing the government over a new law making plain packaging mandatory for cigarettes. The law came in after long parliamentary debates and was upheld by Australia’s Supreme Court. Philip Morris Asia argued that removing its trademarks from tobacco packaging will cut its profits, and used rules that are part of a trade agreement between Australia and Hong Kong to sue the government. The company is demanding that an offshore tribunal award it a large sum in compensation.

There have now been more than 500 cases worldwide in which 95 governments have been sued by corporations using dispute resolution rules within trade agreements and investment treaties. Cases are judged by lawyers, known as investment arbitrators, who often have ties to the corporate world, and their decisions can’t be appealed

against. “These rules allow large companies to challenge laws and policies that they dislike

and can argue are unfair and may harm their profits or future profits,” says Olivier Hoedeman, research

and campaigns co-ordinator at the Corporate Europe Observatory, which examines big business’ role in policy making.

“Many of these cases, if not most of them, are challenging environmental health protections of

different kinds, and they are very often successful,” Hoedeman says, adding that the large amounts

of compensation states are forced to pay to corporations come from taxpayers’ money.

Known as investor-state dispute settlement (ISDS), the rules are intended to resolve

conflict and protect investors in countries with undeveloped judicial systems, but

critics say they are now being routinely abused by large corporations.

“Over the last 15 years we’ve seen an explosion in the use of ISDS by corporations

challenging public interest policies that affect their interests,” says Thomas

McDonagh. project co-ordinator at the Democracy Center and author of the report Unfair, Unsustainable and Under the Radar: How Corporations Use Global Investment Rules to Undermine a Sustainable Future.

“The system is being used by mining corporations in El Salvador and Costa Rica to undermine court decisions and national legislation restricting mining projects that threaten fresh water sources. It’s being

Countries that try to introduce laws protecting the environment or improve public health are increasingly facing legal challenges from big business fearful that its profits will be harmed. The disputes are resolved behind closed doors by lawyers with no accountability to the public. And under a new EU-US treaty the British government itself could be sued if corporations don’t have their way. Clare Speak reports

Court in a trap

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THREAT TO LABOUR FLAGSHIP POLICYLabour leader Ed Miliband’s proposed energy price freeze could land a future Labour government in legal trouble under the EU-US trade treaty currently being negotiated, the Corporate Europe Observatory research group has warned.

The expected inclusion of investor-state dispute settlement (ISDS) provisions in the new Transatlantic Trade and Investment Partnership (TTIP) means “a future British government could face a legal challenge over a freeze on energy prices”, says Olivier Hoedeman, research and campaigns co-ordinator at the

Corporate Europe Observatory.The multinational energy companies that successfully

sued the Argentinian government when it froze energy prices after the 1998-2002 financial crisis did so under

ISDS rules.According to the Corporate Europe Observatory,

ISDS rules within the new transatlantic treaty would work in the same way as in existing

treaties around the world.Miliband promised in September

that if Labour wins the 2015 election he will freeze energy prices for 20

months, saying that energy firms had been overcharging “for too long”.

It is widely expected that the new trade deal rules will come into force before the end of 2015. The proposed freeze has already been heavily criticised by energy firm bosses, who claimed the policy could lead to power shortages and put investment and jobs at risk.

“Labour Euro MPs do not support ISDS provisions being included in EU investment agreements,” Arlene McCarthy, Labour MEP for the North West, told The Big Issue in the North. “The UK government and EU member states have requested that ISDS provisions are included.”

McCarthy declined to comment on the risk of international companies taking legal action if a future Labour government were to freeze energy prices.

“Private companies shouldn’t use these provisions as a means of circumventing national laws in fundamental areas such as consumer rights, environment, social or health laws that have been passed in the public interest,” McCarthy said. “ISDS and the lack of transparency that has traditionally surrounded it have given far too much power to corporations.”

She added that the rules are not needed in the transatlantic treaty as investors can pursue claims “through the normal legal channels” and that the rules “give more rights to foreign investors than domestic investors”.

“We continue to oppose the inclusion of ISDS in any trade or investment agreement and Labour MEPs will continue to campaign for the reform of ISDS practice as a minimum,” she said.

An Early Day Motion expressing concern about ISDS has been sponsored by Green MP Caroline Lucas and attracted 26 signatures from MPs. It calls for TTIP talks to be frozen immediately.

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Tobacco giant Philip Morris is suing the Australian government over plain packaging laws

used by tobacco corporations to challenge public health laws on tobacco consumption in Uruguay and Australia. The expansion

of the system in the proposed transatlantic treaty opens the door to many dispute cases against EU governments.”

Negotiations about an EU-US free trade agreement, the Transatlantic Trade and Investment Partnership (TTIP), began in July last year. The European Commission says the treaty will promote economic growth and create jobs – a claim that the Corporate Europe Observatory has called “hot air” and “propaganda”.

Both the US and European Commission are pushing for ISDS rules to be included within the treaty. Proponents say this is needed because national courts are not sufficiently neutral to protect the interests of foreign investors.

The ISDS rules were described as a “comparatively minor element” of “an astonishingly good deal for the UK economy” in an article written for the Guardian by long-serving Conservative minister Ken Clarke, who has formerly taken non-executive directorships with companies including British American Tobacco and Alliance Unichem.

“Investor protection is a standard part of free-trade agreements – it was designed to support businesses investing in countries where the rule of law is unpredictable, to say the least,” he wrote. “Clearly

the US falls in a somewhat different category and those clauses will need to be negotiated carefully to avoid any pitfalls.”

McDonagh says the justice systems in the US and EU states are “among the most robust in the world”, adding: “However, they have to balance the interests of investors with the broader public interest. Corporate investors would much prefer a system where this is not the case, and where unaccountable investment lawyers working on a for-profit basis can hear their cases.”

Court in a trap

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In December, nearly 200 environmental, consumer and labour groups signed a petition urging EU and US officials not to include an ISDS mechanism in the deal, expressing concern about the impact this could have on environmental regulations, food standards, data protection and other issues in Europe.

“Both the EU and US are proposing that ISDS would function here just as it is functioning elsewhere, so it would follow the same very secretive, biased model we know from other agreements,” says Hoedeman.

Panels of investment arbitrators rule on each case behind closed doors. These panels are not accountable to any electorate, and their members are mostly corporate lawyers who often switch between suing governments on behalf of corporations and acting as judges in such cases. The picture painted by campaign groups of the arbitration world is of a very small, closed, close-knit group of mainly pro-business males from richer countries.

“This is a very small number of lawyers from a narrow circle – all arbitrators know each other,” says Hoedeman. “They’re working for large law firms for whom this

whole investor-state dispute business has become a major source of income.”

The Corporate Europe Observatory points out that, unlike judges, arbitrators have no flat salary and no cap on financial remuneration, and often charge fees of up to $700 per hour. “They’re supposed to be assessing the same companies they have as clients,” says Hoedeman. “I’d say this system is rigged.”

Juan Fernández-Armesto, an investment arbitrator from Spain, says: “When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all.

“Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.”

Professor Surya Subedi, professor of international law at Leeds University and author of International Investment Law: Reconciling Policy and Principle tells The Big Issue in the North that the system of international investment arbitration is in need of a major overhaul.

“Many of these arbitration panels lack accountability and transparency,” he says. “Arbitrators from a purely commercial background may not necessarily possess the qualifications needed to judge complex cases involving matters of public interest, such as environmental protection, human rights and right to public health.”

Under existing laws, Subedi explains, citizens and governments have no corresponding rights, and decisions made in international courts can’t be challenged or appealed against.

RECENT INVESTOR-STATE DISPUTE CASESFracking in Quebec The Quebec regional government’s fracking ban is coming under pressure as affected oil and gas corporations threaten to bring legal action. One corporation, Lone Pine Resources, is using the investor rights chapter in the North American Free Trade Agreement (NAFTA) to challenge the Quebec ban and demand the equivalent of £152 million in compensation. The company claims that the ban is an “arbitrary, capricious, and illegal revocation of [its] valuable right to mine for oil and gas”.

Occidental Petroleum vs Ecuador Occidental Petroleum faces a range of allegations in Ecuador of abuses of the country’s human rights, social and environmental laws. The corporation’s contract was cancelled after it was found to have breached terms and conditions, and Occidental immediately retaliated with a billion dollar lawsuit. In October 2012 Ecuador was ordered to pay the equivalent of £1 billion plus interest in compensation. This is the equivalent of 15 years’ worth of social security payments for the country.

Cargill vs Mexico When the Mexican government attempted to protect local sugar producers by taxing imports of high-fructose corn syrup, the American corporation Cargill struck back with a lawsuit for the equivalent of £47 million, under NAFTA investment protections. Mexico’s government is now under orders to pay the £47 million plus interest and legal fees to one of the world’s biggest multinational food corporations.

(Source: Democracy Center)

“These rules allow large companies to challenge laws and policies that they dislike.”

Protest in Ecuador against Occidental over alleged human rights and environmental abuses. But the company has been awarded £1 billion. Photo: AP Photo/Dolores Ochoa

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“This is just more evidence, if any was needed, of the clear asymmetry that exists in international law,” says McDonagh. “Corporations have access to cast-iron protections for their investments, while governments and civil society groups trying to hold corporations accountable for the impact of their operations on human rights, the environment and labour standards have access to only non-binding, ‘soft law’ mechanisms.”

There is some hope that the treaty could go ahead without the ISDS rules included.

“There is actually a new trend in this direction,” Subedi says, explaining that following campaigning by civil society organisations, a similar treaty between Australia and the US was introduced without giving foreign investors the right to sue host governments.

India is also reassessing its policy and may follow suit, he says. “India lost some cases with foreign investors and the government seems to be worried that the number of cases may go up if a review of its policy on foreign investment protection was not carried out.”

A new bilateral investment treaty between India and Nepal also does not make international investment arbitration mandatory, he adds.

Many developing countries have said that they would exclude such provisions in future trade agreements, according to Subedi. Foreign investors would then have to sue the

host government through that country’s domestic courts.Subedi does not believe ISDS rules are necessary

in treaties between democracies with an independent judiciary, as national courts are “capable of dispensing justice”.

McDonagh adds that there may well be a role for an international dispute system but one that “not only gives legal security to investors but also holds them accountable for the impact of their operations on human rights, the environment and labour standards, not only in their home countries but in countries where they have operations overseas”.

However, Hoedeman says that even without the ISDS rules, there is no proven benefit to the treaty itself.

“There have already been a number of critical

assessments of the numbers the European Commission uses to back up their claims of economic growth, and it turns out to be hot air,” he says.

“It’s not based on any serious in-depth economic analysis of what the consequences will be.”

As controversy around the treaty and ISDS starts to grow, the European Commission has indicated that it will start to make the process more transparent, Hoedeman says. But he remains unconvinced.

“This is quite unlikely to really happen. They are also very unlikely to make any adjustments to the ISDS. I think at this stage that’s just an empty promise.”

WHO ARE THE ARBITRATORS?Investment-treaty arbitrators are lawyers and may have a background in law, academia or government. Of the three arbitrators on most panels, one is selected by each of the parties. The third, the president, is usually chosen by the two appointed arbitrators. Thousands of lawyers want to become arbitrators but very few make it. Just 15 lawyers take 55 per cent of all arbitration cases, and the top three by number of known arbitration cases judged as of 2012 are:

Brigitte Stern (France)39 cases (8.7%) of 450The favoured choice of governments, Stern has been appointed as arbitrator by the government side in 79 per cent of her investment-treaty cases. She has an academic background and is one of the two arbitrators who account for two-thirds of all cases taken by women. Only four per cent of all arbitrators are female. She has criticised conduct in the international arbitration system but denies that there’s a systematic problem with investment treaty arbitration. Charles Brower (US)33 cases (7.3%) of 450Described as “the reigning king of international arbitrators” by the American Lawyer magazine, he is a favourite of investors, having been appointed as arbitrator by companies in 94 per cent of the known investment treaty cases with which he has been involved. Brower has almost 40 years’ experience, most of which has been at top law firm White & Case, and is an ardent defender of international arbitration. Francisco Orrego Vicuña (Chile)33 cases (6.7%) of 450He was appointed by investors or as president in 33 per cent and 57 per cent of known cases respectively. He held several official positions during the Pinochet dictatorship, most prominently as Chile’s ambassador to the UK between 1983 and 1985, and is an ardent defender of investment arbitration.

(Source: Corporate Europe Onservatory)

ONE-SIDED PARTNERSHIPNegotiations on the Transatlantic Trade and Investment Partnership (TTIP) began in July 2013. An information request by the Corporate Europe Observatory found that while preparing for the negotiations the European Commission held 127 “meetings with stakeholders” behind closed doors. Of these, 93 per cent were with corporations and their lobby groups. The remainder were with trade unions and NGOs.

“It never ceases to amaze me that sovereign states have agreed to the rules.”

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