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How do you reckon our system of government functions? Perhaps something like this. We elect MPs. They debate and pass bills. If a majority is secured, the bills are enacted as law. The law is upheld by the courts. Simple as that. However, that used to be how it used to work. Those days are over.

The Rise of Shadow Tribunals

Today, international firms, along with the wealthy individuals that control them, can sue governments for the policies they pass, at private courts composed of corporate lawyers. The cases are conducted away from public scrutiny. Unlike our courts, these tribunals allow no right of appeal or oversight by judges. The general public are unable to file a case to them, just as our government, or even enterprises operating from this country. Access is granted solely for businesses operating from foreign soil.

When a secret court determines that a government measure might diminish the corporation’s expected profits, it may order compensation of hundreds of millions of pounds, even billions.

These sums are based not on tangible damages but compensation the arbitrators conclude the company might otherwise have made. The state may have to drop the legislation. It is hesitant to introducing similar legislation of a similar nature, worried about being sued.

A Process Growing Exponentially

Record numbers of disputes are being initiated, as firms observe each other, and hedge funds finance suits for a share of a share of the awards. The outcome? National sovereignty and democratic governance are becoming prohibitively expensive.

The system is called “investor-state dispute settlement” (ISDS). The reason it can supersede domestic law and the choices taken by legislatures is that this clause has been written – absent public approval, and typically amid conditions of total confidentiality – inside bilateral investment treaties.

A Concrete Example: The Cumbrian Coalmine

Twelve months ago, a conservation group won a great victory at the senior court. The justice ruled that schemes to dig the first major coal mine in the UK for 30 years, in northwest England, were illegally sanctioned by the previous government, which had agreed to the questionable argument that the mine would have had no impact on national carbon targets. The incoming administration later cancelled the licence the former government had issued. Now, this victory could be compromised by an secret arbitration panel answering to no one but the companies petitioning it.

In August, a company whose beneficial owners are located in the tax haven initiated proceedings challenging the UK government. Recently a dispute settlement body in the US capital was convened to consider the case.

The claimant is litigating against the UK for the revenue it could have earned if the mine had received permission to proceed. We have no idea how much this might be. What legal team is representing it against the British government? An elected representative, and previous senior legal advisor in the previous government, the self-proclaimed patriot Geoffrey Cox. The administration makes a decision, the high court validates it, then a overseas corporation contests it through an secretive offshore tribunal, and a member of our parliament represents its behalf.

An Oligarch's Challenge

On the same day that the tribunal on the coal mine dispute was convened, we learned from a parliamentary answer that the UK is also being sued under ISDS by a Russian oligarch, a sanctioned individual. We know nothing of the case so far, but it seems likely that he may employ the tribunal to challenge the penalties the UK levied against him subsequent to the war in Ukraine. He has filed a claim against a small nation with similar intent, seeking sixteen billion dollars: half that nation's annual revenue. Among the lawyers on his side? a prominent lawyer, married to the former British prime minister.

Legal experts argue that the EU’s hesitation in using frozen oligarchs' funds as collateral for its financial support package is due to concerns within Belgium that it could be subject to litigation in the offshore corporate courts, under a investment pact. This remarkable, secretive influence over democratic administrations might be preventing the money Ukraine critically depends on.

False Assurances and Mounting Costs

Politicians promised that these events wouldn’t happen. Previously, a government leader, promoting the largest and riskiest of all investment pacts, declared: “Britain has agreed to trade agreement after trade deal and there has never been a problem in the past.” An adviser on this issue accused activists of “scaremongering … in reality, ISDS does not affect the UK much”. The overall message seemed to be that only poorer nations should be concerned by ISDS claims. Warnings that “when companies begin to understand the authority they now possess, they will redirect their efforts from the vulnerable countries to the strong ones” were met with scepticism.

That prediction has come to pass. This year, energy and extraction companies have initiated a historic level of claims against nations rich and poor, challenging – like the example of the UK mine – state efforts to stop global warming. Companies have so far won $114bn through ISDS, of which energy giants have secured the majority. That equates to the combined GDP