Legal weapon that gives corporations the edge on governments
The investor state dispute mechanism, increasingly being deployed against developing countries, could be used against Greece if it defaults on its debts
By Bibi van der Zee
4 November 2011
Swedish energy giant Vattenfall will take advantage of an "extraordinarily powerful legal tool" now available to the world’s corporations to sue the German government for phasing out nuclear power, it was confirmed this week.
Vattenfall will demand compensation for the millions it says it has invested in factories in Germany that will be lost with the phase-out of nuclear power. If Vattenfall wins, the German government may have to pay up to €700m (£601m).
The investor state dispute mechanism (ISDM) is also being used by Philip Morris to sue the Australian government over its plans to discourage smoking. And it could be used by investors in the event of a default by Greece on its sovereign debt.
There is growing concern among legal experts and the countries hit by these legal cases that the investment regime, made up of a patchwork of bilateral investment treaties and multilateral agreements, favours corporations over the public interest, puts sovereignty at stake, is chronically lacking in transparency and accountability and has been mis-sold to many developing countries that only realise exactly what they have signed up for when they get sued.
The amounts involved can be gigantic, and must come out of the taxpayer’s pocket, even though the case may be heard in secret and the award never publicly disclosed. Dr Lauge Poulsen of the London School of Economics says a case brought against the Czech Republic led to more than $350m (£219m) in damages, "which was equal to the entire health budget of the Czech government and effectively doubled the public sector deficit for that year. It is an extraordinarily powerful legal mechanism."
"It’s safe to say the main object of these treaties is to protect investors, and so there is a bias in favour of the investor and against the regulating state," says Cambridge law professor Lorand Bartels.
Stories are rife of developing countries that have signed bilateral investment treaties (BITs) containing the ISDM with no idea of the potential legal implications, though most cases are brought by corporations in the developed world against governments in the developing world. When Société Générale de Surveillance announced plans to sue Pakistan, for example, the attorney general was so unfamiliar with the ISDM he had to look it up on the internet.
Randall Williams of the South African trade department talks candidly of taking up his position and reading the BIT with increasing horror. "The BIT places all the obligations on the host state and it gives all the rights to the investor," he told an LSE audience in May. "This highlights a problem in developing countries, that negotiators are not properly informed or capacitated to deal with such specialised agreements. In many instances I have come across negotiators who negotiate these agreements without the presence of a lawyer." In the last 15 years multinational corporations have increasingly recognised the potential of the ISDM, and this area of law – in which lawyers and arbitrators can command fees of $500 an hour and more – has seen a rapid expansion. A UN report in 2010 noted that 57% of all known cases have been brought in the last five years, with growing numbers of law firms opening large, dedicated sections.
Now governments are increasingly concerned about the leverage the ISDM gives corporations public policy. In recent years cases have been brought against governments when they banned certain chemicals, revised their energy policy or tried to bring in more effective anti-smoking policies – and even against countries that defaulted on their debt. Corporations that have pursued this legal path include Philip Morris, Enron Creditors, Total, Mobil, Shell, Dow Chemical, Chevron, Siemens and Cargill.
Australian politicians, due to vote next week on their plain packaging bill, have had to debate the bill under threat of a multimillion-dollar lawsuit from Philip Morris, for example. They announced earlier this year that they would no longer sign agreements containing the ISDM.
In Greece, parallels have been drawn between the eurozone crisis and the Argentine default in 2001-2 where bondholders used the ISDM to bring $4bn claims against the Argentine government after it defaulted. It is thought by some that similar action may follow if if Greece defaults.
Caroline Lucas, Green MP for Brighton Pavilion, has long been a critic of the BIT system. She told the Guardian; "In many cases, bilateral investment treaties seem to exist solely to protect and promote the private interests of multinational corporations over the public interest in host states – and as such, represent a significant threat to national sovereignty.
"It is scandalous that companies can make deals behind closed doors to undermine multilateral trade rules and secure the right to sue governments if they feel that regulations to safeguard the environment, workers’ rights or social provisions in any way inhibit their activities."
But Charles Brower, the judge described by one American law magazine as the world’s "busiest arbitrator", argues that companies have a right, when a country has signed a BIT, to hold them to their legal obligations. He believes the system is a good one, "although there have been some notoriously horrible decisions," and adds that "no one is going to go into less developed countries without having certain legal protections."
"You know what offends me the most?" says van Harten. "It’s that the whole system is based on the premise of getting taxpayers in developing countries to fork over huge amounts of money that they can’t afford to big companies. Without that premise none of this would exist."