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Business-Managed Democracy

“Business-managed democracies are those in which the political and cultural arrangements are managed in the interests of business”

Sharon Beder

Business-Managed Government

Investor State Dispute Settlement

Increasingly bilateral and multilateral trade agreements include provision for corporations to sue governments, using Investor State Dispute Settlement (ISDS) arrangements.

These provisions enable foreign investors to challenge a government's health, environmental and other regulations and policies in international tribunals just because they interfere with investor expectation of future profits. ISDS provisions contain no reciprocal right for governments (or individuals) to sue corporations.

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Arbitration clauses were originally included in treaties to deal with the nationalization of a company's assets. Now arbitrators hear claims for lost business or costs stemming from public-health laws and environmental regulation and financial policies, with billions of dollars at stake.

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Free trade agreements often give foreign investors "the 'right' to a regulatory framework that conforms to a corporation's 'expectations'. This 'right' has been interpreted to mean that governments should make no changes to regulatory policies once a foreign investment has been established." But as has been argued in one investor-state case, "if States were prohibited from regulating in any manner that frustrated expectations – or had to compensate for any diminution in profit – they would lose the power to regulate." Yet this seems to be what transnational investors want.

Escalating Investment Treaty Arbitrations (Known Cases)

Source:  IIA Issues Note on the Recent Developments in Investor-state Dispute Settlement, UN Conference on Trade and Development (UNCTAD), Geneva, September 2012.
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Over 500 investor-state disputes have been launched, 90% of them since 2000, and the numbers are likely to balloon once agreements currently being negotiated, such as the recently agreed Trans-Pacific Partnership (TPP), are finalised. "Investors won 70 percent of known cases [in 2012], according to the UN. Since 1987, states have won 42 percent of the time, and investors 31 percent, with the rest settled."

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ISDS provisions in trade agreements have resulted in over $3 billion dollars being paid by governments to corporations in investor-state disputes under U.S. trade and investment agreements – "over 85 percent of this related to oil, mining, gas, and other environmental and natural resource disputes". There are another $15 billion in claims pending, mostly relating to environmental, public health and transport policies rather than strictly trade policies.

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the regime has birthed an entire industry of lawyers, tribunalists and specialized equity funds that finance what has proved to be a very lucrative business of raiding government treasuries.

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Even the threat of a lawsuit can have a chilling effect on a government (prompting it not to fight the case but give in to investor demands) because of the large sums involved in defending a case. The tribunal panel gets paid by the hour and has little incentive to expedite the cases. It costs, on average, $8 million to defend a case and has been up to $50 million. If a government loses the case, there is no limit on the amount the tribunal can order it to pay.

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One Canadian government official, speaking about the [chilling effect of] rules introduced by the North American Free Trade Agreement, remarked: "I've seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years. They involved dry-cleaning chemicals, pharmaceuticals, pesticides, patent law. Virtually all of the new initiatives were targeted and most of them never saw the light of day." Democracy, as a meaningful proposition, is impossible under these circumstances.

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Tribunals

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Comprised of three private attorneys, the extrajudicial tribunals are authorized to order unlimited sums of taxpayer compensation for health, environmental, financial and other public interest policies seen as undermining the corporations' "expected future profits." There is no outside appeal. Many of these attorneys rotate between acting as tribunal "judges" and as the lawyers launching cases against the government on behalf of the corporations. Under this system, foreign corporations are provided greater rights than domestic firms.

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The tribunals are usually conducted under the auspices of the International Center for Settlement ISDS posterof Investment Disputes (ICSID - affiliated with the World Bank) or the United Nations Commission on International Trade Law. Each side chooses one panel member and the two chosen, in turn choose a third who acts as chair. Panel members are almost always private sector investment lawyers and tend to be concerned with assessing potential damage to investments rather than protection of public interest. They can be paid over $3000 a day plus expenses.

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In this "club" of international investment arbitrators, there are fifteen lawyers who have been involved in 55 percent of the total international investment cases known today. The tribunals operate behind closed doors, and there are no meaningful conflict of interest rules with respect to arbitrators' relationships with, or investments in, the corporations whose cases they are deciding.

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These fifteen lawyers, mainly from North America or Europe, are referred to as the "inner Mafia". Just three law firms, Freshfields (GB), White & Case (US) and King & Spalding (US), "handled 130
investment disputes in 2011". Several of the most used arbitrators are also on the boards of transnational corporations: "Belief in the unconditional protection of private profit- and property united nearly all of them".

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These private tribunals have the power to overrule parliaments and supreme courts without citizens or communities affected by their rulings being able to have a say.

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Case Studies

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graphMany of the ISDS cases have been brought by mining, oil and gas companies against developing nations which are trying to protect their environments. For example Canadian mining company Pacific Rim is suing El Salvador: "The company's United States subsidiary has alleged that the Salvadoran government's refusal to issue key permits to mine for gold in the northern province of Cabañas violated investor protections under the Central America Free Trade Agreement. Arbitration is ongoing." The company was planning to use cyanide ore processing but never completed the feasibililty study necessary to obtain the permit.

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In 2011 the giant Swedish energy company Vattenfall sued the German government, under the Energy Charter Treaty, an international trade and investment agreement, claiming $3.7 billion in compensation for the decision to phase-out nuclear power following the Fukushima nuclear disaster. "In 2009, Vattenfall sued the [German] federal government over stricter environmental regulations on its coal-fired power plant in Hamburg-Moorburg, seeking €1.4 billion plus interest in damages. The parties settled out of court in August 2010."

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When the US-based Renco Group bought a metal smelter in La Oroya, Peru it agreed to install sulphur removal plants by 2007. Peru gave the company two extensions to that date but when it refused a third extension Renco threatened to sue Peru for $800 million under the terms of the US-Peru Free Trade Agreement. This threat was enough to pressure the Peruvian government to allow Renco to recommence operations despite its lack of environmental compliance. The Notice of Intent to take legal action in the international sphere also enabled Renco to stop a US state court action against Renco on behalf of La Oroya children with severe lead poisoning.

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pollution in Equador: Photograph by Teun VoetenAfter Chevron "dumped more than 16 billion gallons of toxic water into streams and rivers used by local inhabitants for drinking water" in the Amazon, an Ecuadorian court ordered Chevron to pay $18 billion for clean up and damages to the 30,000 indigenous people who had been harmed. This decision was affirmed in an appeals court in 2012. Nevertheless "an ad hoc 'investor-state' tribunal" under the U.S.-Ecuador Bilateral Investment Treaty ordered Ecuador not to enforce the ruling. This was even though the Treaty came into effect years after the pollution occurred and Chevron had left Ecuador.

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During its financial crisis, and in response to public anger over rocketing charges, Argentina imposed a freeze on people's energy and water bills (does this sound familiar?). It was sued by the international utility companies whose vast bills had prompted the government to act. For this and other such crimes, it has been forced to pay out over a billion dollars in compensation.

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Veolia, a French transnational company, had a waste disposal contract in Alexandria which it abandoned in 2011. It has since sued Egypt claiming its profits were harmed by "the National Wage Council's efforts to keep private and public sector salaries in line with inflation". reference

An investor-state tribunal ordered Canada to pay US waste treatment company, S.D. Myers, due to a temporary ban Canada placed on PCB exports, although that ban "complied with a multilateral environmental treaty on toxic-waste trade".

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cigarette plain packageAustralia's 'plain' cigarette packaging laws were challenged in 2011 by tobacco company Philip Morris under a little-known 1993 investment treaty between Hong Kong and Australia. After losing its case against plain packaging in the Australian High Court, Philip Morris moved some of its assets to Hong Kong so it could bring the case as a Hong Kong investor outside of Austalia's legal jurisdiction. It took over four years before Australia won the case against Philip Morris.

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Even before the case was decided the Australian government agreed to ISDS provisions in the Trans-Pacific Partnership (TPP) agreement in return for US market access to agricultural products, particularly sugar.

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North American Free Trade Agreement (NAFTA) Cases

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Lone Pine protestIn 2013 Lone Pine, a US-chartered mining company, sued the Canadian government $250 million for a ban on fracking in Quebec on the St. Lawrence River. It claimed the ban was "arbitrary, capricious and illegal revocation of the [company's] valuable right to mine for oil and gas". The government claimed the ban was in response to an environmental assessment that showed the fracking was dangerous as well as public concern.

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US-based Ethyl sued Canada for $250 million for banning MMT, a toxic petrol additive. The ban was based on the public health and environmental risks posed by MMT, which is not used in most other countries and even banned in the US in reformulated petrol. The case was settled for a lesser sum and Canada withdrew its ban on MMT.

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Mexico was ordered to pay the U.S. Metalclad Corporation $15.6 million after a Mexican municipality refused to grant the firm a construction permit for a toxic waste facility unless it cleaned up existing toxic waste problems. The facility had been closed when it was owned by a Mexican firm, from which Metalclad acquired the facility in a transaction that specifically noted the clean up condition for obtaining a permit.

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Straterra pillsEli Lilly is suing the Canadian government for $100 million for invalidating its patent for Strattera, a drug used to treat attention deficit hyperactivity disorder (ADHD), after a federal court found the company had failed to demonstrate the drug would deliver the benefits promised in the patent application. Eli Lilly claimed this was an expropriation of property and that it was not given the minimum standard of treatment guaranteed to foreign investors by NAFTA.

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It challenged Canada's whole system of patent validation and if successful would enable it and other companies to bring many more investor-state cases against Canada for other invalidated patents: "It presumes to declare what Canada's standard of patentability policy should be – that Canada must issue a patent and allow a drug firm to charge monopoly prices if an invention simply claims utility without demonstrating it."

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In 2016 the fossil fuel company TransCanada gave notice that it would sue the US government over the presidential decision to deny permission for it to build a tar sands oil pipeline through the US, claiming $15 billion in damages. The US State Department had rejected the pipeline over "concerns about the [pipeline’s] impact on local communities, water supplies, and cultural heritage sites” and “would significantly undermine our ability to continue leading the world in combatting climate change.”

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