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How do you reckon our democratic process operates? It could be similar to this. We elect MPs. They legislate on bills. When a majority is obtained, the bills become law. The law is maintained by the courts. Simple as that. Well, that used to be how it once functioned. No longer.

The Rise of Secret Arbitration Panels

Nowadays, overseas companies, or the billionaires behind them, are able to litigate against nation states for the laws they pass, at offshore tribunals composed of corporate lawyers. Such disputes are held away from public scrutiny. In contrast to domestic courts, these bodies allow no right of appeal or judicial review. You or I cannot take a case to them, just as our government, or even businesses operating from this country. Access is granted exclusively to businesses based overseas.

Should an arbitration panel rules that a legislative action could harm the corporation’s projected profits, it has the power to grant financial penalties of vast sums, potentially billions.

This compensation are based not on tangible damages but compensation the arbitrators decide the company could potentially have made. The government may have to abandon its policy. It is deterred from introducing similar legislation of a similar nature, due to the risk of facing litigation.

A System Growing Exponentially

Record numbers of disputes are being filed, as companies take cues from each other, and investment funds bankroll lawsuits for a share of a portion of the settlements. The outcome? Sovereignty and democratic governance are becoming prohibitively expensive.

This mechanism is called “investor-state dispute settlement” (ISDS). The rationale it can trump a country's own laws and the rulings made by elected bodies is that this clause has been incorporated – without democratic mandate, and frequently under a climate of profound opacity – inside international trade agreements.

A Real-World Case: The Cumbrian Coalmine

Twelve months ago, environmental campaigners won a great victory at the High Court. The judge ruled that plans to dig the first major coal mine in the UK for three decades, in Cumbria, were wrongly permitted by the outgoing administration, which had endorsed the bizarre claim that the mine could have no impact on our carbon budgets. The Labour government subsequently revoked the permission the previous administration had issued. Now, this victory faces being overturned by an foreign court accountable to exclusively the entities bringing the case.

In August, a company whose beneficial owners reside in the Cayman Islands lodged a claim versus the UK government. Recently a tribunal in the US capital was established to consider the case.

This firm is litigating against the UK for the profits it could have earned if the mine had been permitted to proceed. The public has no idea how much this could amount to. Which individual is serving as its counsel against the British government? A member of parliament, and former attorney-general in the Conservative government, the noted patriot Sir Geoffrey Cox. The state makes a decision, the national judiciary supports it, then a foreign company disputes it through an unaccountable arbitration panel, and a sitting MP represents its behalf.

A Sanctions Challenge

On the same day that the panel on the coal mine dispute was appointed, we learned from a parliamentary answer that the UK is subject to further litigation under ISDS by a Russian oligarch, a sanctioned individual. Details are little of the case to date, but it seems likely that he will utilise the ISDS mechanism to challenge the penalties the UK enacted against him subsequent to the war in Ukraine. He has initiated proceedings against another European state on these grounds, seeking a colossal sum: an amount representing half government’s yearly income. Among the legal team on his side? Cherie Blair, married to the former British prime minister.

Trade specialists believe that the EU’s hesitation in leveraging immobilised oligarchs' funds as security for its financial support package stems from concerns within Belgium that it could be subject to litigation in the secret arbitration panels, under a bilateral investment treaty. This remarkable, secretive influence over elected governments may be obstructing the finance Ukraine urgently requires.

Misleading Claims and Mounting Costs

We were assured that these scenarios could not occur. Previously, a former prime minister, advocating for the most significant and hazardous of all investment pacts, stated: “Britain has agreed to trade agreement upon trade deal and we have never seen a problem in the past.” An adviser on this topic accused critics of “alarmism … the truth is, ISDS does not affect the UK much”. The general impression seemed to be that exclusively weaker states needed to fear ISDS claims. Cautionary notes that “once firms begin to understand the power bestowed upon them, they will turn their attention from the weak nations to the wealthy nations” were dismissed with general mockery.

That prediction has come to pass. This year, energy and extraction companies have lodged a record number of suits against nations rich and poor, contesting – as in the case of the Cumbrian coalmine – state efforts to prevent environmental catastrophe. Companies have to date won one hundred and fourteen billion dollars through ISDS, of which energy giants have been awarded the majority. That is equivalent to the combined GDP