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How do you perceive our democratic process works? It could be similar to this. Citizens choose MPs. They legislate on bills. Should a majority is obtained, the bills become law. Legislation is maintained by the courts. Simple as that. Yet, that was how it used to work. Not anymore.

The Advent of Offshore Arbitration Panels

In the modern era, foreign corporations, or the oligarchs behind them, are able to litigate against governments for the laws they pass, at private courts made up of commercial attorneys. The cases are conducted behind closed doors. Differing from national judiciaries, these bodies provide no opportunity to appeal or legal review. Ordinary citizens are barred from bringing a case to them, and neither can our government, including companies headquartered in this country. The door is open only to corporations operating from foreign soil.

If a tribunal rules that a legislative action may compromise the corporation’s anticipated profits, it can award compensation of hundreds of millions, even billions.

These sums represent not actual losses but compensation the panel members determine the company could potentially have made. The administration may have to rescind the measure. It is hesitant to passing future laws in that area, worried about facing litigation.

A Process Running Rampant

Historically high figures of legal actions are being initiated, as firms take cues from each other, and hedge funds fund legal actions in exchange for a share of the takings. The consequence? Democratic sovereignty and democratic governance are becoming unaffordable.

The process is known as “investor-state dispute settlement” (ISDS). The rationale it is permitted to supersede domestic law and the rulings made by elected bodies is that this clause has been inserted – absent public approval, and often in conditions of profound opacity – into bilateral investment treaties.

A Specific Instance: The UK Coal Mine

Twelve months ago, activists secured a significant win at the High Court. The judge determined that schemes to dig the first major coal mine in the UK for 30 years, in northwest England, were illegally sanctioned by the Conservative government, which had agreed to the extraordinary assertion that the mine would have had no consequence on our carbon budgets. The incoming administration subsequently revoked the licence the previous administration had approved. Today, this success could be compromised by an foreign court accountable to no one but the entities filing the suit.

During August, a corporate entity whose beneficial owners are located in the Cayman Islands filed a lawsuit against the UK government. Recently a arbitration panel in the United States was convened to consider the case.

The claimant is seeking compensation from the UK for the profits it could have earned if the mine had been permitted to commence operations. Citizens have no idea how much this might be. Who is representing it challenging the state? A sitting MP, and former attorney-general in the previous government, the self-proclaimed patriot Sir Geoffrey Cox. The government passes a law, the high court upholds it, then a foreign company contests it through an unaccountable arbitration panel, and a elected official acts on its behalf.

A Sanctions Case

On the same day that the court on the mining lawsuit was convened, it was revealed from a government response that the UK is also being sued under ISDS by a Russian billionaire, an oligarch. Details are scarce of the case to date, but it seems likely that he’ll use the arbitration process to contest the sanctions the UK enacted against him following the war in Ukraine. He has already filed a claim against a small nation for this reason, demanding sixteen billion dollars: equivalent to half of state's annual revenue. Among the counsel representing him there? a prominent lawyer, married to the previous PM.

Trade specialists contend that the EU’s delay in utilising seized Russian assets as collateral for its loan to Ukraine stems from apprehension in Brussels that it could be subject to litigation in the offshore corporate courts, under a trade agreement. This remarkable, secretive influence over sovereign states might be preventing the finance Ukraine critically depends on.

Misleading Claims and Mounting Risks

Politicians promised that these scenarios were not possible. Years ago, a former prime minister, championing the largest and riskiest of all investment pacts, stated: “We’ve signed trade deal after trade deal and there has not been a case in the past.” An expert on this issue labelled activists of “exaggeration … the fact is, ISDS has little impact on the UK much”. The prevailing narrative appeared to be that exclusively weaker states needed to fear such legal actions. Warnings that “when companies start to realise the authority they’ve been granted, they will turn their attention from the vulnerable countries to the strong ones” were dismissed with widespread derision.

That warning has now materialised. In the current period, fossil fuel and mining firms have initiated a historic level of claims against nations rich and poor, opposing – as in the case of the Cumbrian coalmine – official measures to stop climate breakdown. Firms have so far won vast sums by using ISDS, of which oil majors have secured the majority. That is equivalent to the combined GDP