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What is your reckon our democratic process operates? It could be similar to this. Citizens choose MPs. They debate and pass bills. Should a majority is obtained, the bills pass into law. Legislation is upheld by the courts. That's it. Well, that’s how it operated in the past. No longer.

The Rise of Shadow Arbitration Panels

In the modern era, international firms, and the oligarchs who own them, have the power to sue nation states for the regulations they pass, at private courts made up of business advocates. Such disputes take place away from public scrutiny. Unlike our courts, these panels provide no right of appeal or oversight by judges. You or I cannot take a case to them, just as our government, including companies headquartered in this country. Access is granted exclusively to businesses operating from foreign soil.

If a tribunal determines that a legislative action might diminish the corporation’s anticipated profits, it has the power to grant damages of vast sums, running into billions.

These sums constitute not real financial harm but funds the panel members determine the company would perhaps have made. The administration could be forced to abandon its policy. It becomes discouraged from passing future laws in that area, for fear of being sued.

A Mechanism Spiralling Out of Control

Historically high figures of disputes are being filed, as firms learn from each other, and hedge funds bankroll lawsuits in return for a cut of the settlements. The result? Democratic sovereignty and democratic governance are becoming unaffordable.

The process is referred to as “investor-state dispute settlement” (ISDS). The reason it is allowed to trump national legislation and the rulings taken by parliaments is that this clause has been incorporated – without democratic mandate, and frequently under conditions of total confidentiality – into international trade agreements.

A Real-World Case: The Cumbrian Coalmine

A year ago, environmental campaigners achieved a major legal triumph at the High Court. The judge found that plans to open the first deep coalmine in the UK for three decades, in Cumbria, were illegally sanctioned by the Conservative government, which had accepted the questionable argument that the mine would have had zero effect on national carbon targets. The new government subsequently revoked the licence the previous administration had approved. Today, this victory could be compromised by an secret arbitration panel answering to exclusively the corporations filing the suit.

In August, a corporate entity whose final controllers reside in the offshore financial centre filed a lawsuit against the UK government. Last week a dispute settlement body in the US capital was convened to adjudicate on it.

The company is seeking compensation from the UK for the profits it might have made if the mine had been permitted to go ahead. We have little idea how much this could amount to. What legal team is representing it challenging the state? A member of parliament, and ex-law officer in the outgoing administration, that great patriot the MP. The administration enacts a policy, the high court supports it, then a foreign company disputes it through an undemocratic offshore tribunal, and a sitting MP acts on its behalf.

An Oligarch's Challenge

Concurrently that the tribunal on the coal mine dispute was established, information emerged from a government response that the UK is subject to further litigation under ISDS by a Russian billionaire, Mikhail Fridman. We know little of the case at present, but it seems likely that he will utilise the ISDS mechanism to contest the sanctions the UK enacted against him after the Russian aggression. He has already filed a claim against Luxembourg with similar intent, demanding $16bn: half that government’s yearly income. Part of the legal team representing him there? the wife of a former prime minister, spouse of the ex-UK leader.

International law scholars contend that the EU’s hesitation in leveraging immobilised state funds as collateral for its aid for Ukraine is due to Belgium’s fear that it could be sued in the ISDS tribunals, under a bilateral investment treaty. This remarkable, unaccountable authority over democratic administrations might be preventing the finance Ukraine desperately needs.

False Assurances and Mounting Costs

We were assured that these scenarios were not possible. Previously, a senior politician, promoting the largest and riskiest of all such treaties, told us: “The UK has signed trade deal after trade deal and there has never been a issue in the past.” An adviser on this matter accused critics of “alarmism … the truth is, ISDS barely touches the UK much”. The overall message was crafted to be that exclusively weaker states needed to fear such legal actions. Warnings that “once firms start to realise the influence bestowed upon them, they will redirect their efforts from the vulnerable countries to the strong ones” were greeted by general mockery.

That threat has come to pass. This year, oil and gas and extraction companies have lodged a unprecedented number of suits against nations rich and poor, contesting – similar to the Whitehaven project – state efforts to halt climate breakdown. Corporations have thus far won one hundred and fourteen billion dollars by using ISDS, of which oil majors have secured eighty-four billion dollars. That equates to the combined GDP