‘Corporate courts’ in trade deals are the fossil fuel industry’s secret weapon against climate action: so why does the UK government demand them?

Secretive “corporate courts” (ISDS) in investment and trade treaties are the weapon of choice for a fossil fuel industry seeking to block climate policy implementation globally. Yet the UK continues to press for their inclusion in trade negotiations. Will this change now that the UK government is being sued for implementing the Climate Change Act?

It finally happened. The UK is being sued in a secretive “corporate court” after a high court ruling overturned the decision by the then Minister for Levelling Up, Michael Gove to approve the proposal by West Cumbria Mining to proceed with Britain’s first deep coal mine in 30 years. The high court ruled that Gove had acted unlawfully in accepting WCM’s claim that the mine would be net zero and not undermine the UK’s ability to achieve its commitments under the Climate Change Act 2008. This ruling means that the mine cannot go ahead - a win for environmentalists - but it has resulted in an ISDS (investor-state dispute settlement) case against the UK government. The case has been brought jointly by West Cumbria Mining and the Singapore-based Woodhouse Investment Pte. Ltd (represented by former Attorney-General, Geoffrey Cox KC of Withers, London) under an ISDS clause in a 1975 trade agreement between the UK and Singapore.

This is the first time such a case has been brought against the UK government as a result of climate policy. Campaigners had been warning that it was a matter of time given fossil fuel firms’ previous use of ISDS clauses in trade deals to discourage climate policy implementation. This was apparent from earlier cases brought against European governments (e.g. The Netherlands) under the Energy Charter Treaty (ECT). A 2023 UN report found that governments of Denmark, France, Spain and New Zealand had all limited their climate policies, or slowed the pace of transition, for fear of ISDS cases being brought against them. Although the UK and EU have now withdrawn from the ECT (whose raison d’être is over-protection of the fossil fuel industry), they may yet become ensnared in ISDS cases under its sunset clauses. Yet successive UK governments have failed to address the conflict between climate policies and trade deals with “teeth” - in the form of ISDS clauses - that invariably trump climate treaty obligations. The British state continues to regard ISDS as doing what it was originally designed to do - tilt the playing field in favour of Western businesses - rather than as a weapon that could be deployed against the UK. This continuity of practice was unaffected by the election, last year, of a Labour government which, despite its decarbonisation mandate, proceeded to press for an ISDS clause in the new UK-India trade deal.

“A Magna Carta for investors”

ISDS was conceived 70 years ago as a mechanism to protect corporate interests in former colonies. The idea emerged from discussions between oil companies and European banks in the 1950s and was heralded, apparently without irony, as a “Magna Carta for investors.” ISDS was adopted by the World Bank in 1964 as a mechanism that would “help the world’s poorer countries attract foreign capital” - despite the overwhelming opposition of countries in the Global South - and institutionalised in its International Centre for Settlement of Investment Disputes (ICSID). ISDS, then, was a mechanism effectively imposed on newly independent states to limit their sovereignty. Since then it has undergone mission creep far beyond its initial - questionable - purpose of preventing nationalisation of assets to become the go-to mechanism for corporations seeking to block progressive laws and policies. This has had a severe chilling effect on the implementation of social and environmental protections that could conceivably affect “expected future profits.”

Even the word “court” is misleading. Cases are heard in arbitration centres (like the ICSID) not courts. Only investors can sue states - not the reverse. (The best a government can hope for is to not lose, while claimants can win damages that run into millions.) There is no judge. Tribunals are composed of three arbitrators - one selected by the investors, one by the state, the third by agreement of the two parties. All three arbitrators are corporate lawyers who rotate between the roles in different cases. And as the opening paragraph notes, there is a lack of transparency - cases are heard in secret and rulings are often not published.

There have been a series of attempts to embed ISDS in a comprehensive international trading system: first within the failed OECD Multilateral Agreement on Investment (MAI) negotiations between 1995 and 1998, which saw the birth of the citizens’ anti-globalisation movement that went on to oppose its incorporation into the WTO (leading to the ‘battle of Seattle’ in 1999); then later, after the WTO Doha round reached a stalemate in the mid 2000s, in “mega” trade deals such as the abandoned Transatlantic Trade and Investment Partnership (TTIP) and the recently ratified Transpacific Partnership (CPTPP). In the absence of a functioning international trading regime, ISDS has spread globally through thousands of bilateral investment treaties (BITs) and free trade agreements (FTAs). While extensive this dense coverage could still unravel, as individual treaties reach their expiry date and parties to them seek renegotiation (for example, the Government of Colombia is currently in negotiations with the UK over the removal of ISDS from their bilateral treaty). Meanwhile Bolivia, Ecuador and Venezuela have withdrawn from the ISCID and are working to establish an alternative, regional centre for dispute settlement under UNASUR.

Still, today there are over 3000 international trade and investment treaties that incorporate ISDS clauses. This global “spaghetti bowl” of treaties enables corporations to go “venue shopping” for favourable jurisdictions from which to launch ISDS cases. There have been at least 1000 ISDS cases to date, and the number increases each year. The largest ISDS award to date was in 2012 when a tribunal ordered the Government of Ecuador to pay Occidental Petroleum $1.77 billion. This was despite the tribunal finding in Ecuador’s favour (that the company had indeed been in breach of contract). Nevertheless they concluded that the government's termination of the contract - following a national court ruling over environmental damage - had been “disproportionate”. Another well known ISDS case was Philip Morris v. Australia over plain packaging of cigarettes. In this case the company’s practice of venue shopping - restructuring the business to launch the case from Hong Kong under a Hong Kong-Australia treaty - was a little too blatant for the arbitration panel.

Financialising ISDS

So who are the winners from ISDS? Obviously, the transnational corporations that are the main users of a system that overwhelmingly advantages them are big winners, but they are not alone. Behind the scenes in this secretive system are the corporate law firms (such as Withers, Cox’s second employer, in the opening example) that command handsome fees for their services. Another significant player is a relatively new entrant into the ISDS field. While in the past ISDS involved two parties, today there is a third party - the third party funder (TPF). Research by Florence Dafe and Zoe Williams reveals how the arrival of TPFs has tipped the balance even further, not only in favour of investors, but in favour of larger corporations. TPFs are only interested in providing finance to claimants (investors) as they are the only party that can “win” and secure an award. And while the argument is sometimes made that availability of finance widens access to ISDS, in practice this is not the case. As funders get a share of any award, they are only interested in large claims, which tend to be made by larger (not smaller) firms.

The effect of TPFs on the ISDS “market” goes beyond merely intensifying the inequality built into the ISDS system since its inception - it is changing the nature of ISDS in fundamental ways. At the time of Dafe and Williams’ research, the TPF market was valued at $10 billion, and growing fast. That’s quite something for a market that did not exist - in fact was illegal - before 2005. This changed with legal precedents in domestic (common) law, first in Australia, then in England, leading to London becoming the global centre for litigation funding. This prompted changes in US law so their law firms could compete in an emerging, highly lucrative market. Hong Kong and Singapore are in competition to be the TPF hub in Asia. Since then, the growth in the TPF market has been dramatic. This is not due to demand, however, but to the supply of capital. After the 2008 global financial crisis TPF became even more attractive to investors in search of high returns without risks associated with other assets. Today TPF is viewed as a “proven asset class” that attracts banks and hedge funds; accelerating the growth of an ISDS market driven more by financial logics than by the merits (however questionable) of the cases themselves. Meanwhile the relationship between TPFs and corporate law firms that litigate the cases has become increasingly symbiotic as while “one keeps funds flowing, the other keeps cases flowing.”

Time to democratise trade policy

In November 2023 a UN report “slammed” ISDS as “Unjust, undemocratic and dysfunctional”. Indeed, it can be hard to locate someone willing to make a reasoned argument in favour of ISDS. Nevertheless, its deployment continues to grow with the ever widening ecosystem of actors - investors/corporations, law firms and TPFs - that benefit from and lobby for its continued existence. Given this trend it was encouraging to see the previous UK government sign FTAs with Australia (in 2021) and with New Zealand (in 2022) that did not include ISDS clauses. UK campaigners have therefore been dismayed to find Labour politicians previously critical of ISDS become its advocates as part of a government that prioritises the maintenance of an investor-friendly status quo.

Could the West Cumbria Mining case be a turning point that brings home the reality that the UK can be a victim as well as an enforcer of ISDS? Can campaigners use this moment to open up trade policy to wider debate and scrutiny - addressing head on conflicts and tradeoffs with other policy areas, including climate policy (drawing on tools such as those outlined in this publication) - and challenge the archaic tradition under which trade deals are a matter of “royal prerogative” in which parliament has no say? Ultimately, “corporate courts” are a raw expression of corporate power over elected governments which is why they are its preferred weapon against climate action.