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How do you reckon our system of government works? Maybe something like this. We elect MPs. They debate and pass bills. When a majority is obtained, the bills pass into law. The law is upheld by the courts. Simple as that. Yet, that used to be how it operated in the past. Not anymore.

The Emergence of Offshore Arbitration Panels

Nowadays, foreign corporations, or the wealthy individuals who own them, are able to litigate against nation states for the policies they pass, at secret arbitration panels composed of business advocates. Such disputes are conducted behind closed doors. Unlike our courts, these panels allow no right of appeal or judicial review. The general public are unable to file a case to them, and neither can our government, including businesses based in this country. Access is granted only to corporations registered abroad.

If a tribunal rules that a government measure could harm the corporation’s anticipated profits, it may order financial penalties of vast sums, even billions.

These sums constitute not tangible damages but money the panel members determine the company might otherwise have made. The state could be forced to rescind the measure. It is discouraged from enacting future policies along the same lines, due to the risk of being sued.

A Mechanism Growing Exponentially

Historically high figures of legal actions are being initiated, as corporations take cues from each other, and hedge funds fund legal actions in exchange for a portion of the settlements. The consequence? Sovereignty and popular rule are becoming unaffordable.

The process is known as “investor-state dispute settlement” (ISDS). The explanation it is allowed to supersede a country's own laws and the choices taken by parliaments is that this provision has been incorporated – without democratic mandate, and frequently under an atmosphere of total confidentiality – inside bilateral investment treaties.

A Real-World Case: The Whitehaven Coal Mine

Twelve months ago, activists won a great victory at the senior court. The judge ruled that schemes to open the first new deep coal mine in the UK for three decades, at Whitehaven in Cumbria, had been illegally sanctioned by the outgoing administration, which had endorsed the extraordinary assertion that the mine would have had no consequence on national carbon targets. The incoming administration subsequently revoked the licence the Tories had approved. Currently, this legal outcome faces being overturned by an offshore tribunal reporting to only the entities filing the suit.

During August, a firm whose ultimate owners are located in the tax haven filed a lawsuit challenging the UK government. Recently a arbitration panel in the United States was established to consider the case.

The company is suing the UK for the profits it might have made if the mine had received permission to go ahead. We have no idea how much this might be. Who is acting on its behalf against the British government? A sitting MP, and previous senior legal advisor in the outgoing administration, the self-proclaimed patriot Sir Geoffrey Cox. The government makes a decision, the national judiciary validates it, then a international entity challenges it through an unaccountable offshore tribunal, and a sitting MP acts on its behalf.

An Oligarch's Case

On the same day that the court on the coalmine case was established, information emerged from a parliamentary answer that the UK is subject to further litigation under ISDS by a Russian oligarch, an oligarch. We know scarce of the case so far, but it is highly possible that he may employ the ISDS mechanism to challenge the restrictions the UK levied against him following the war in Ukraine. He has already initiated proceedings against another European state on these grounds, claiming a colossal sum: equivalent to half of government’s annual revenue. Among the counsel acting for him in that case? a prominent lawyer, wife of the former British prime minister.

Legal experts believe that the EU’s procrastination in leveraging immobilised Russian assets as collateral for its loan to Ukraine is due to apprehension in Brussels that it could be subject to litigation in the offshore corporate courts, under a investment pact. This extraordinary, unaccountable authority over sovereign states may be obstructing the finance Ukraine desperately needs.

Misleading Claims and Escalating Risks

Politicians promised that such things could not occur. Years ago, a senior politician, championing the largest and riskiest of all such treaties, declared: “We’ve signed investment treaty upon trade deal and there has not been a case in the past.” An adviser on this topic described critics of “exaggeration … the fact is, ISDS has little impact on the UK much”. The overall message seemed to be that only poorer nations should be concerned by such legal actions. Warnings that “once firms start to realise the influence bestowed upon them, they will shift their focus from the vulnerable countries to the strong ones” were dismissed with scepticism.

That prediction has come to pass. In the current period, energy and extraction companies have initiated a record number of suits against nations both wealthy and developing, challenging – similar to the Cumbrian coalmine – official measures to prevent environmental catastrophe. Corporations have thus far won $114bn via ISDS, of which energy giants have obtained $84bn. That represents the combined GDP