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How do you perceive our democratic process functions? Maybe something like this. Citizens choose MPs. They vote on bills. If a majority is achieved, the bills pass into law. Statutes is upheld by the courts. End of story. Well, that’s how it once functioned. Not anymore.

The Rise of Shadow Courts

Today, overseas companies, or the wealthy individuals who own them, can sue nation states for the laws they pass, at secret arbitration panels made up of commercial attorneys. The cases take place in secret. Unlike our courts, these bodies grant no avenue for appeal or oversight by judges. You or I cannot take a case to them, nor can our government, or even businesses operating from this country. The door is open only to entities registered abroad.

If a tribunal rules that a law or policy might diminish the corporation’s anticipated profits, it can award financial penalties of vast sums, potentially billions.

These awards constitute not real financial harm but money the panel members conclude the company might otherwise have made. The government may have to abandon its policy. It is deterred from passing future laws of a similar nature, worried about incurring a lawsuit.

A Process Running Rampant

Unprecedented levels of cases are being initiated, as corporations learn from each other, and hedge funds fund legal actions in exchange for a share of the settlements. The result? National sovereignty and democracy are becoming unaffordable.

The process is known as “investor-state dispute settlement” (ISDS). The rationale it can trump domestic law and the choices enacted by legislatures is that this provision has been inserted – without public consent, and frequently under an atmosphere of total confidentiality – inside international trade agreements.

A Concrete Example: The UK Coal Mine

Last year, a conservation group secured a significant win at the senior court. The presiding officer ruled that schemes to dig the first major coal mine in the UK for 30 years, in Cumbria, had been wrongly permitted by the outgoing administration, which had endorsed the questionable argument that the mine would have no impact on climate commitments. The incoming administration then withdrew the consent the previous administration had granted. Currently, this victory could be compromised by an foreign court reporting to only the companies filing the suit.

During August, a firm whose beneficial owners are located in the Cayman Islands lodged a claim versus the UK government. Last week a arbitration panel in the United States was established to adjudicate on it.

The claimant is litigating against the UK for the revenue it would have generated if the mine had been permitted to go ahead. The public has no idea how much this could amount to. Who is serving as its counsel in opposition to the state? A sitting MP, and ex-law officer in the outgoing administration, that great patriot the MP. The government makes a decision, the high court supports it, then a foreign company contests it through an secretive private court, and a elected official works for its behalf.

A Sanctions Challenge

On the same day that the tribunal on the coalmine case was appointed, we learned from a parliamentary answer that the UK faces another lawsuit under ISDS by a wealthy Russian individual, an oligarch. The public knows little of the case to date, but it is highly possible that he will utilise the arbitration process to challenge the restrictions the UK enacted against him following the invasion of Ukraine. He has already filed a claim against a small nation for this reason, claiming a colossal sum: an amount representing half government’s yearly income. Part of the legal team acting for him in that case? Cherie Blair, married to the previous PM.

Trade specialists believe that the EU’s procrastination in leveraging immobilised oligarchs' funds as security for its loan to Ukraine arises from apprehension in Brussels that it could be taken to court in the ISDS tribunals, under a investment pact. This remarkable, undemocratic power over sovereign states may be obstructing the finance Ukraine desperately needs.

False Assurances and Escalating Threats

Politicians promised that these events could not occur. Years ago, a former prime minister, promoting the largest and riskiest of all such treaties, told us: “Britain has agreed to trade agreement after trade deal and we have never seen a case in the past.” A consultant on this issue accused activists of “exaggeration … in reality, ISDS does not affect the UK much”. The overall message was crafted to be that only poorer nations had to worry about these lawsuits. Warnings that “once firms grasp the influence they now possess, they will shift their focus from the poorer states to the developed economies” were dismissed with widespread derision.

That warning has now materialised. In the current period, fossil fuel and extraction companies have initiated a record number of claims against nations across the economic spectrum, opposing – like the example of the UK mine – government attempts to halt environmental catastrophe. Companies have thus far won $114bn through ISDS, of which energy giants have obtained $84bn. That represents the combined GDP