ISDS: how imperialism wages lawfare on the poor
Morning Star | 16 March 2021
ISDS: how imperialism wages lawfare on the poor
IN 1902, Britain, Germany and Italy imposed a naval blockade on Venezuela after president Cipriano Castro refused to honour debts and pay damages incurred by European companies and citizens during the civil wars that followed the Republic’s independence from Spain.
Violent intervention is still employed by Western governments nowadays when they consider it necessary — but more often as not their commercial interests are protected by international trade treaties and investment agreements.
Of these, more than 2,750 bilateral investment treaties, multilateral investment treaties and free trade agreements contain what are known as Investor State Dispute Settlement (ISDS) mechanisms whereby foreign investors can sue host countries for discriminatory practices that affect their future profitability.
ISDS claims are not heard by domestic courts but by supposedly independent arbitrators at a number of institutions including the World Bank’s International Centre for Settlement of Investor Disputes (ICSID), where the majority of claims are heard, the London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC).
Each side appoints an arbitrator and then agrees on a third arbitrator to judge the claim. In practice, the protagonists come from a small pool of commercial lawyers who, at various junctures, can represent either claimants or defendants — or be the judge. Needless to say, whichever role they perform, their fees can run to thousands of dollars per hour thus making it an extremely lucrative business.
The majority of the treaties provide foreign investors with substantive legal protection with access to ISDS for redress against host states for any breaches of the terms of agreement. These include the right to “fair and equitable treatment,” “full protection and security,” “free transfer of means” and the right not to be directly or indirectly expropriated without full compensation.
Many of the standards are framed in extremely vague terms, thus allowing arbitrators considerable discretion in their interpretation and application.
Because corporate investors are not party to the treaties, they cannot themselves be sued under ISDS and critics have pointed out the potential for bias in the conflict of interests engendered by arbitrators being richly rewarded, regardless of who wins and being paid on a case by case basis.
The Economist magazine, not known for its radical views, succinctly summed up the inherent contradictions of the ISDS regime in this extract from a 2014 article:
“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.”
Figures published in the 2020 United Nations Conference on Trade and Development (UNCTAD) annual report show that since ISDS fully emerged in the 1970s, around 1,023 claims had been made, though the actual figure will be higher because some are kept confidential.
As in previous years, the majority (80 per cent) of the 55 new claims were made against countries in the global South by investors from the global North (70 per cent), the top two being the US and Britain with seven each. In 2019, ISDS tribunals made 71 substantive decisions but only 39 were made public.
Latin America has suffered disproportionately from ISDS settlements, not least because of ill-advised investment treaties and trade agreements entered into by right-wing governments at the end of the last century. According to research undertaken by the Transnational Institute out of 42 Latin American and Caribbean states, 22 have occasioned financial loss as result of claims brought against them.
Between 1996 and 2006, 91 claims were made but between 2009 and 2019, the figure had risen to 165, an 81 per cent increase. The six worst-affected countries are Argentina, Venezuela, Mexico, Ecuador, Bolivia and Peru with 206 cases or 73 per cent of the regional total. Argentina alone has had 62 claims made against it, including one from BG, a company spun out of British Gas that was part of a consortium providing energy to consumers in Buenos Aires.
It sued the government of president Kirchner for lost revenue when energy prices were frozen following the 2001 economic crash. If out of court settlements are added to tribunal defeats, 89 per cent of Argentine rulings have been made in favour of the investor at a cost of $9.226 billion. One case alone, brought by Spanish oil company Repsol, cost Argentina $5 billion or, put another way, five times the country’s 2019 health budget.
In Venezuela, 33 settled cases made them pay $18.024 billion in compensation, the largest award being U$8.4 billion to the ConocoPhillips company. Eighty-six per cent of claims against Latin American recipients came from the US, Canada and Europe and 23 per cent of those were related to mining, gas and oil extraction.
The EU has been a staunch advocate of including ISDS in its free trade agreements with third parties, but is less enthusiastic about member states’ companies bringing cases against other member states.
Twenty-three of them have signed an agreement for the termination of intra-EU bilateral investment treaties after the European Court held that a €22 million award made against the Slovak Republic in response to a claim lodged by Dutch insurance firm Achmea, under the auspices of the Netherlands-Slovakia investment treaty, was incompatible with EU law.
The ruling could effectively end the existing 196 intra-EU investment treaties but it does not affect ISDS clauses within the Energy Charter Treaty (ECT) that has been ratified by most European states.
In February of this year, German energy company RWE announced that it was suing the Netherlands for €2 billion worth of potential lost revenue under the ECT after the latter announced that it was phasing out coal production.
The claim has caused outrage among climate activists and has served to highlight the incompatibility of measures introduced to alleviate the effects of global warming with the rent seeking activities of corporate energy suppliers.
In 2007, Spain implemented a number of regulatory measures to incentivise investment in renewable energy but following the economic collapse of 2008 retracted some of them in 2010 to avoid being in breach of EU debt ratio requirements.
This prompted 40 ECT arbitration claims to be brought against the Spanish state by companies saying that their “legitimate expectations” would not be met, some of whom had been advised to invest there in the full knowledge that the removal of subsidies would enable them to make money from litigation.
By definition, the signing of international trade agreements invokes, to a degree, a loss of sovereignty — but the inclusion of ISDS has a chilling effect in that it limits and sometimes removes the ability of governments to implement change for the benefit of their citizens.
The oft-quoted justification for including it in EU free trade agreements is that the legal systems of “developing” countries are not sophisticated enough to deal with complex commercial claims rather than it being a mechanism to protect European corporate interests. In response to growing criticism of ISDS, investment agreements concluded in 2019 have included modifications and limitations or, in some instances, omitted it altogether.
Nevertheless, its continued existence in numerous treaties is a testament to the enormous influence and power wielded by transnational capital over governments the world over. ISDS is just one more weapon in a corporate armoury designed to maintain a neocolonial system of exploitation that ensures the flow of goods and capital from the poor to the rich — just as it did in 1902.
