Investor-State Dispute Settlements

Recently the Inside Climate News website has reported a corporate trend pushing ISDS (Investor-State Dispute Settlements) to their limits. Rather than sticking to their original goal of protecting businesses from corrupt governments, ISDS’s are increasingly being used by corporations targeting laws and regulations legitimate governments have put in place to protect their citizens, particularly environmental regulations.

As ICN reports, in 2022, when a foreign mining company decided to sue Greenland, the government’s lead lawyer, Paw Fruerlund, thought he had things under control. He had handled cases like this before and was confident both facts and the law were on his side.

But his confidence was shaken the moment he walked into one of the first hearings. Sitting across from him were 12 lawyers from two big-name firms, all representing Greenland Minerals, an Australian company. They took up two whole rows, while Fruerlund’s team of three suddenly felt very small. Worse still, he couldn’t help but worry about how this legal fight might stretch Greenland’s relatively small national litigtion budget. Greenland is a small, semi-autonomous nation, home mostly to Indigenous Inuit people, and doesn’t have the deep pockets needed to challenge enormous multi-national corporations.

Frustration quickly set in. Greenland Minerals’ lawyers started dragging out the process, challenging even simple things, like what language emails should be written in. A big reason they could afford to play these sorts of games, was the company wasn’t even footing the legal bill themselves. Extraordinarily, they’d struck a deal with Burford Capital, a massive litigation finance company, to pay for their lawyers.

Litigation funding has become a booming industry worth billions. Companies like Burford have been throwing money at cases where foreign investors take on governments, using arbitration panels under something called investor-state dispute settlement (ISDS). This system, built into thousands of international treaties, was originally meant to give foreign businesses protections against unfair treatment by governments, like having their assets confiscated.

These days, though, ISDS cases often go far beyond this original intention, with some even challenging democratically made laws. Whilst third-party funding in these cases is widespread, details are hard to come by because such deals are rarely disclosed, as another feature of the ISDS is their confidentiality.

Foreign investors have the right to sue states under investment treaties, but states cannot initiate lawsuits against foreign investors, as only states are parties to these treaties. Consequently, only states can be held liable for damages resulting from a treaty breach. Therefore, if a decision favors the state, it means the state is not required to pay compensation, not that the state will receive compensation from the investor (although the investor may be required to cover litigation costs). If a state wants to take legal action against a foreign investor, it must do so through its domestic courts.

As the Economist, hardly a bastion of left-wing environmentalism points out: ‘If you wanted to convince the public that international trade agreements are a way to let multinational companies get rich at the expense of ordinary people, this is what you would do: give foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever a government passes a law to, say, discourage smoking, protect the environment or prevent a nuclear catastrophe. Yet that is precisely what thousands of trade and investment treaties over the past half century have done, through a process known as ‘investor-state dispute settlement’, or, ISDS.’