Allowing foreign firms to sue governments for lost profits is legal terrorism – it must end

Investor–state dispute settlements don’t just mean growing debt burdens for countries: they are also a barrier to action on the climate crisis

Donald Trump has thrown a hand grenade into the global economic architecture, destroying some things that are working well. But amid the devastation, some things seem to be surviving that really should be taken down. Among the most notable of these is an arcane set of international agreements by which private investors can sue governments, known as ISDS: investor-state dispute settlement. These disputes are litigated not in public courts with impartial judges but in private arbitration – behind closed doors, and rife with conflicts of interest.

Early on, when they were snuck into many trade agreements, no one paid much attention. For instance, these provisions in Nafta, the so-called free trade agreement between the US, Mexico, and Canada, never got a discussion within the cabinet while I served in the Council of Economic Advisers under President Clinton when Nafta got adopted.

The provisions were sold as protecting property rights from expropriation – but that was nonsense: few expropriations occur today, and the World Bank and governments around the world provide insurance against expropriation. They were sold, too, as encouraging investment – but in the decades since they began to be a feature of international agreements, there is little evidence that they make much or any difference, which is why today some countries that have signed such agreements have given notice that they are terminating them.

What the agreements do is provide companies with opportunity to sue for compensation when there is a change in regulation which they claim might impair their future profits. That compensation is not based only on what they lost – say their investment, that is no longer so profitable – but on what they might have received in profits: an entirely nebulous amount. In my view it has become a form of legal terrorism, that rich companies use to discourage countries from addressing the needs of their citizens and protecting the global environment.

Uruguay was sued when it proposed requiring cigarette companies to disclose that cigarettes are dangerous to one’s health – a disclosure that most advanced countries require. The labelling would, admittedly, discourage smoking – that was the point – and that in turn would hurt these companies’ profits. Fossil fuel companies around the world have sued as governments have undertaken actions to curtail emissions. As one of the lawyers specialising in these disputes said of the provisions: “It wouldn’t matter if a substance was liquid plutonium destined for a child’s breakfast cereal. If the government bans a product and a … company loses profits, the company can claim damages.”

Claim damages – and win them – they have. Because of the secrecy in which much of these actions are cloaked, it has been hard to assess the magnitude. Investigative reporting by the Guardian has given us a glimpse into exactly how large and consequential these suits have become, showing more than $120bn (£94bn) of public money has been awarded to private investors since 1975, $84bn to the fossil fuel industry alone.

The world faces a debt and development crisis, and many countries have burdens of debt so high that they are encroaching into expenditures on health, education, climate, and development itself. These payouts are adding massively to this debt burden – and risk doing so even more. Globally, they are an impediment to climate action: countries are afraid if they pass a carbon tax or a carbon regulation they will be sued. Even if they eventually win, they will be tied up in courts for years. The deep pockets of the suing corporations have been enriched further by a new industry: investors in these litigations, who see these suits as just another gamble from which they might win. The fiscal heft of the suers often outweighs that of a poor developing country. The trading and financing of these suits by hedge funds may have fundamentally changed their nature: from a judicial way of compensating someone for a particular class of harm, to just another gambling instrument.

These are not the only inequities: US courts have consistently ruled that one does not have to pay compensation for a change in a regulation that adversely affects the profits of a company – good regulations are part of the fundamental rights and obligations of the government. But with these agreements, foreign companies can sue the US government: they are given more rights than American companies!

It’s time to end this travesty on justice. We need an overarching international agreement ending ISDS. In the meanwhile, individual countries should give notice that they are exiting such agreements and leaving ICSID, the International Centre for Settlement of Investment Disputes.

Ending this system is imperative: if we don’t, we’ll face a whole new set of barriers to preventing climate change; and developing countries and emerging markets will face ever-growing debt burdens– from increasing payouts to companies that ruin the health of citizens and the sustainability of the planet.

Cover photo:  ISDS cases are not litigated in public courts but in private arbitration … behind closed doors. Photograph: François Lenoir/Reuters