Litigation Terrorism – How Fossil Fuel Companies Use ISDS To Bully Foreign Countries

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Arthur Neslen, a freelance journalist who writes about the environment for The Guardian, has written an article about how the Investor State Dispute Settlements system — ISDS for short — is a legal and often hush-hush process that allows fossil fuel and other companies to extort billions of dollars from foreign countries that dare interfere in their profitmaking ventures. ISDS is a form of economic colonialism that overrides local environmental policy considerations — such as how to meet the climate goals established in Paris in 2015 — in favor of private interests.

The ISDS system operates in the shadows where the vast majority of the Earth’s citizens are totally unaware of its existence. Joseph Stiglitz, the Nobel Prize-winning economist and former chief economist for the World Bank, calls it “litigation terrorism.” ISDS is a corporate tribunal system in which a panel of unelected lawyers decides whether a company is owed compensation if the actions of national governments leave its assets “stranded.” In hearings that do not have to be made public, regardless of any public interest considerations. They are often held behind closed doors, shielding the claims, documents presented, awards, and settlements from public scrutiny.

Last month, The Guardian revealed how Odyssey Marine Exploration, a US-based undersea mineral extraction company used an ISDS panel to sue Mexico for $2.36 billion after the Mexican government tried to prevent it dredging off the Pacific coast. Odyssey Marine had obtained a 50-year concession that allowed it to mine phosphate from the sea floor in an area off Baja California Sur. The area is a pristine breeding ground for giant grey whales and is also home to endangered sea turtles, octopus and the abalone mollusk. Odyssey said that its dredging would take place in a small area, with protection for sea creatures and measures to help “regenerate” the sea floor afterwards. But deep-sea phosphate mining entails risks of pollution, radiation, and biodiversity loss, as well as damage to coastal livelihoods and communities.

When Odyssey Marine applied for a permit to be mining the area, the government of Mexico turned it down the permit in 2016 and again in 2018, saying Odyssey “sought to uninterruptedly dredge the sea floor” of a place “that constitutes a natural treasure and of utmost importance for Mexico and the world.” The company took the matter to an ISDS arbitration tribunal, arguing it was owed compensation for lost revenue.

According to the Transnational Institute, there have been 1,383 known ISDS cases to date. These tribunals hand out the highest average claims for damages and the highest average awards of any legal system in the world. The panels are composed of three lawyers — one appointed by the investor, one by the state, and a president agreed to by both. They are mostly white, male, business-friendly investment lawyers from the global north.

This is similar to the arbitration model used to resolve many business conflicts without the expense and delay of traditional litigation. That’s the theory. In reality, the arbitrators often are specialists who become professional arbitrators. Because their income depends on being selected, they are careful not to offend the companies who use arbitration on a regular basis. There are critics of the arbitration model who point out the self-interest of arbitrators means some parties who do not participate in arbitration on a regular basis — like customers who get into a dispute with a large financial corporation — may be at a disadvantage.

Neslen says the three ISDS panelists often play more than one role within the ISDS system. So-called “revolving door” and “double-hatting” practices allow lawyers to work as arbitrators, presidents, or experts for both investors and states — sometimes at the same time. This creates boundary issues when, for example, a lawyer acts as counsel for a fossil fuel investor in one ISDS case and acts as a “neutral” arbitrator in another ISDS case at the same time.

Allowing foreign investors to help shape these panels creates “obvious risks of bias, conflicts of interest, potential misconduct and other abuses of power,” warned David Boyd, the UN special rapporteur on human rights, in a report in October last year.

The ISDS System Was Created 60 Years Ago

The ISDS system was created in the 1960s after several South American countries nationalized oil and gas facilities owned by foreign investors, primarily major oil companies. Those investors argue that ISDS protects them from arbitrary, discriminatory, or unpredictable treatment in countries that might lack independent or competent judiciaries. It safeguards their “legitimate expectation” of regulatory certainty, proportionality, and profit.

Of course, whether a country has an independent or competent judiciary is often a value judgment impacted by the extent to which the judicial system protects the interests of foreign investors. In some cases, investors have used ISDS tribunals to preclude states “from taking action to address climate change, despite these actions being necessary and foreseeable for decades,” the UN report said.

The sums involved can be staggering. One Singapore-based company, Zeph Investments, is suing Australia for AU$300 billion (US$200 billion) because the Australian government turned down a proposed mining project. The company argues Australia breached free trade treaty obligations that it relied on. In another case, Avima Iron Ore is seeking $27 billion from the Democratic Republic of the Congo.

Faced with such claims, governments often “just capitulate,” Boyd said. The result is a regulatory chill in which fossil fuel companies may “block national legislation aimed at phasing out the use of their assets,” as the UN’s Intergovernmental Panel on Climate Change has noted.

New Zealand backed off cancelling existing offshore oil permits due to ISDS fears in 2018. Denmark chose 2050 rather than an earlier date for its oil and gas production phaseout deadline due to fears of “incredibly expensive” ISDS claims. In 2017, France diluted plans to phase out fossil fuel extraction by 2040 after threats of ISDS litigation from Vermilion, a Canadian multinational, according to the UN report. There are many other examples. The “fundamental incompatibility” between ISDS and climate imperatives poses a “daunting obstacle” to effective and timely climate action, the UN report said.

What is clear, Neslen wrote, is that “ISDS is a colonial zombie apparatus whose useful time, if it had one, has passed. And therein lies the rub. We simply cannot extract any more fossil fuel and still prevent catastrophic global heating. Our remaining carbon budget will not allow it. Yet, by design, ISDS empowers oil, coal and gas barons to barricade progress until they have been paid off. Estimates of the eventual bill payable to hyper-wealthy are more than $1 trillion, but no one really knows.”

In the Odyssey Marine case, a ruling could come later this year, but ISDS watchdogs are not optimistic about the result. Manuel Pérez-Rocha, an associate fellow at the Institute of Policy Studies in Washington, said that panel decisions until now had been “leaning in favor of the company.” Helionor De Anzizu, a lawyer at the Center for International Environmental Law, added that a court finding for Odyssey could trigger a free-for-all from other deep sea investors looking to cash in via ISDS claims. Given that Mexico has already paid out $296 million in ISDS suits, with 27 cases still pending according to the Transnational Institute, any associated regulatory chill could be severe.

ISDS “grew up riding legal shotgun against bids to suborn fossil fuel capitalism to social, national, environmental or human rights concerns. Now its legal guns are turned on any government seeking to meet the Paris climate agreement’s 1.5C target without first paying a multi-billion dollar ransom,” Neslen says. “The thing is, we don’t have the time or resources for this any longer. We can maintain a livable planet, or we can continue to allow the wealthiest, most antisocial financiers to hold the world to ransom. We cannot do both.”

The Takeaway

Profits Over People could be the motto of the ISDS system. How is it possible that nations have subordinated their sovereignty to foreign corporations? After all, the system only works if the countries have contractually agreed to honor it. In many instances, they have done so out of a desire to encourage foreign investment during times when pressure on their economies was high. National leaders who agreed to such outrageous rules have long since left the scene, leaving their successors to clean up their mess.

In law, there is a doctrine that says contracts that are so one-sided that they violate public policy will not be enforced by courts. It should be intuitively obvious to the most casual observer that a contract which forces a country to delay or forego actions needed to reduce carbon emissions is, ipso facto, void as contrary to public policy. The takeaway here is that greed takes priority over keeping the Earth habitable for humans. Isn’t it time to end such a ridiculous state of affairs?