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How do you reckon our democratic process functions? It could be similar to this. Citizens choose MPs. They debate and pass bills. When a majority is secured, the bills are enacted as law. Statutes are enforced by the courts. End of story. Yet, that used to be how it operated in the past. Not anymore.

The Advent of Offshore Courts

Nowadays, foreign corporations, and the wealthy individuals behind them, can sue nation states for the laws they pass, at private courts made up of commercial attorneys. Such disputes are conducted away from public scrutiny. In contrast to domestic courts, these tribunals grant no avenue for appeal or oversight by judges. The general public cannot take a case to them, and neither can our government, or even businesses based in this country. They are open solely for corporations based overseas.

Should an arbitration panel finds that a law or policy might diminish the corporation’s projected profits, it may order financial penalties of hundreds of millions of pounds, potentially 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 abandon its policy. It will be discouraged from passing future laws along the same lines, for fear of facing litigation.

A Mechanism Growing Exponentially

Unprecedented levels of legal actions are being filed, as corporations take cues from each other, and private equity fund legal actions in exchange for a portion of the settlements. The result? Sovereignty and democratic governance are turning into prohibitively expensive.

The process is called “investor-state dispute settlement” (ISDS). The rationale it is allowed to trump national legislation and the decisions enacted by legislatures is that this clause has been inserted – absent public approval, and typically amid conditions of total confidentiality – inside trade treaties.

A Concrete Case: The UK Coal Mine

A year ago, a conservation group won a great victory at the senior court. The justice ruled that proposals to open the first deep coalmine in the UK for a generation, at Whitehaven in Cumbria, had been wrongly permitted by the outgoing administration, which had accepted the questionable argument that the mine would have no consequence on climate commitments. The Labour government then withdrew the consent the Tories had issued. Currently, this success is under threat by an foreign court accountable to exclusively the entities bringing the case.

Last August, a firm whose beneficial owners reside in the Cayman Islands lodged a claim versus the UK government. The previous week a arbitration panel in the United States was established to hear it.

This firm is seeking compensation from the UK for the money it might have made if the mine had been permitted to go ahead. Citizens have no idea how much this might be. What legal team is serving as its counsel in opposition to the British government? An elected representative, and previous senior legal advisor in the Conservative government, the noted patriot the MP. The state passes a law, the national judiciary supports it, then a overseas corporation contests it through an secretive offshore tribunal, and a member of our parliament acts on its behalf.

A Sanctions Challenge

Simultaneously that the panel on the mining lawsuit was appointed, we learned from a parliamentary answer that the UK faces another lawsuit under ISDS by a Russian oligarch, Mikhail Fridman. The public knows scarce of the case so far, but it appears probable that he may employ the ISDS mechanism to fight the restrictions the UK enacted against him following the war in Ukraine. He has started suing Luxembourg with similar intent, seeking a colossal sum: half that state's annual revenue. Among the legal team acting for him in that case? the wife of a former prime minister, married to the ex-UK leader.

Legal experts argue that the EU’s procrastination in using frozen state funds as guarantee for its financial support package 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 might be preventing the funds Ukraine critically depends on.

Misleading Claims and Mounting Costs

Politicians promised that these scenarios could not occur. Years ago, a government leader, championing the largest and riskiest of all such treaties, stated: “The UK has signed investment treaty after trade deal and there has never been a issue in the past.” An expert on this issue labelled activists of “exaggeration … the truth is, ISDS does not affect the UK much”. The prevailing narrative was crafted to be that solely developing countries should be concerned by such legal actions. Cautionary notes that “when companies start to realise the influence bestowed upon them, they will turn their attention from the poorer states to the developed economies” were met with general mockery.

That threat has now materialised. In the current period, energy and extraction companies have filed a unprecedented number of suits against nations across the economic spectrum, contesting – similar to the UK mine – official measures to prevent climate breakdown. Firms have so far won one hundred and fourteen billion dollars by using ISDS, of which oil majors have been awarded eighty-four billion dollars. That is equivalent to the combined GDP