Investor-State Dispute Settlement (ISDS) Suits Become Favored Hedge Fund Investment

Yves here. Another example of rentier capitalism at work.

By Jomo Kwame Sundaram,  former UN Assistant Secretary General for Economic Development. Originally published at Inter Press Service and cross posted from Triple Crisis

Investor-state dispute settlement (ISDS) provisions in bilateral investment treaties (BITs) and free trade agreements (FTAs) have effectively created a powerful and privileged system of protections for foreign investors that undermines national law and institutions.

ISDS allows foreign corporations to sue host governments for supposedly causing them losses due to policy or regulatory changes that reduce the expected profitability of their investments. Very significantly, ISDS provisions have been and can be invoked, even when rules are non-discriminatory, or profits come from causing public harm. ISDS will thus strengthen perverse incentives for foreign investors at the expense of local businesses and the public interest.

New Opportunity for Speculation

In recent years, ISDS provisions of investment treaties, free trade and other agreements have increasingly provided an investment opportunity to make money by speculating on lawsuits, winning huge awards and forcing foreign governments, and taxpayers, to pay. Financial speculators have increasingly purchased corporations deemed capable of profitably bringing winnable ISDS claims, sometimes using ‘shell companies’.

Some hedge funds and private equity firms even finance ISDS cases as third parties, with ISDS itself the raison d’etre for such investments. Such ‘third-party funding’ of ISDS claims has been expanding quickly as financing such claims has proven to be very lucrative.

Third-party financing reduces litigation costs to the corporations themselves, making it easier, and thus encouraging them to sue. Foreign corporations typically do not have to declare receiving third-party funding for an ISDS case. Not surprisingly then, the ISDS claims-financing industry is booming as different types of investors have been attracted by and drawn into financing lawsuits, treating ISDS claims as speculative assets.

The International Council for Commercial Arbitration estimates that at least three fifths of those considering ISDS claims have inquired about possible third-party financing before pursuing them. Financing firms provide clients with litigation packages from the outset, advising on what treaties to exploit and which law firms to hire, even recommending arbitrators.

While bondholders do not actually develop productive capacities or sell services in a host country, they too can resort to ISDS arbitration to maximize returns to their debt purchases. Thus, bond-holders who have lost value can use the ISDS back door to sue countries for compensation, thus encouraging a new speculative investment option for ‘vultures’. Hence, ISDS allows investors with little connection to the ‘aggrieved’ initial investment to benefit financially as well.

Ripe for the Picking

ISDS advocates claim that case outcomes remain uncertain, with foreign corporations only winning about a quarter of the cases they initiate. But this proportion does not include settlements agreed to before arbitration proceedings are concluded when the foreign corporations secure huge gains. ISDS arbitration is very attractive, even tempting to foreign investors who would otherwise not pursue claims in national courts against host governments.

Recent ISDS arbitrations have seen much greater delegation of authority to arbitrators in interpreting and applying agreements, without any option to appeal or otherwise challenge the arbitrators’ decisions. There is no way to ensure that arbitration tribunals will interpret and apply treaty provisions in ways consistent with governments’ understandings of what treaty obligations imply.

Those investing in ISDS cases recognize that the most vulnerable governments for investors to sue are typically those already in some trouble. For example, when a country resorts to emergency economic measures to protect its citizens, investors can easily claim that these undermine earlier understandings of international agreements. Ensuing lawsuits typically hurt the country’s credit rating, raising capital costs and undermining its ability to attract investment.

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  1. Jesper

    I half-expected Obama to be sitting on a few ISDS arbitration cases as a judge. Not the one appointed by the investor though, he’s of course either neutral or the states representative…..
    Luckily the TTIP and TPP might yet be delayed, one might hope the delays is forever but the interests of the moneyed class is that they need special courts to maintain the illusion of rule of law

    1. Skip Intro

      Good question!

      Buzzfeed had a great 2-part article on the abuses of ISDS for fun and profit:

      The Court That Rules the World

      Imagine a private, global super court that empowers corporations to bend countries to their will.
      Say a nation tries to prosecute a corrupt CEO or ban dangerous pollution. Imagine that a company could turn to this super court and sue the whole country for daring to interfere with its profits, demanding hundreds of millions or even billions of dollars as retribution.

      Imagine that this court is so powerful that nations often must heed its rulings as if they came from their own supreme courts, with no meaningful way to appeal. That it operates unconstrained by precedent or any significant public oversight, often keeping its proceedings and sometimes even its decisions secret. That the people who decide its cases are largely elite Western corporate attorneys who have a vested interest in expanding the court’s authority because they profit from it directly, arguing cases one day and then sitting in judgment another. That some of them half-jokingly refer to themselves as “The Club” or “The Mafia.”

      And imagine that the penalties this court has imposed have been so crushing — and its decisions so unpredictable — that some nations dare not risk a trial, responding to the mere threat of a lawsuit by offering vast concessions, such as rolling back their own laws or even wiping away the punishments of convicted criminals.

      This system is already in place, operating behind closed doors in office buildings and conference rooms in cities around the world. Known as investor-state dispute settlement, or ISDS, it is written into a vast network of treaties that govern international trade and investment, including NAFTA and the Trans-Pacific Partnership, which Congress must soon decide whether to ratify.

      And Part 2:

      The Billion Dollar Ultimatum

      Known as investor-state dispute settlement, or ISDS, this legal system is written into a vast network of treaties that set the rules for international trade and investment. It is as striking for its power as for its secrecy, with its proceedings — and in many cases its decisions — kept from public view. Of all the ways in which ISDS is used, the most deeply hidden are the threats, uttered in private meetings or ominous letters, that invoke those courts. The threats are so powerful they often eliminate the need to actually bring a lawsuit. Just the knowledge that it could happen is enough.

      An 18-month BuzzFeed News investigation into ISDS for the first time casts a bright light on the use of these threats. Based on reporting from Asia, Africa, Central America, and the US; interviews with more than 200 people; and inspection of tens of thousands of pages of documents, many of which have never before been made public, the series has already exposed how executives accused or convicted of crimes have turned to ISDS to help them get off the hook. Stories later this week will show how some financial firms have used ISDS to protect their most controversial and speculative practices and how the US, a major booster of the system, is surprisingly vulnerable to ISDS suits. Today’s story reveals how corporations have turned the threat of ISDS legal action into a fearsome weapon, one that all but forces some of the countries where these corporations operate to give in to their demands.

  2. David Barrera

    A transnational system of private justice to please the most colorless capital. Good article

  3. sundayafternoon

    God almighty, in what universe does anyone imagine this is a good thing, or do the 0.01% believe they actually live on another planet from the rest of society

    1. Vatch

      Well, not quite another planet, but they are quite separate from the rest of us. They live in gated communities or expensive high rise condominiums with private security; they amuse themselves at exclusive country clubs, overpriced restaurants, and remote ski chalets. We of the polloi are excluded from associating with them, even if we live in the same country as they do. When the annual Davos or Bilderberg meetings take place, there are both private and government security people who keep out anyone who lacks wealth or power. The ultra rich of one country have more in common with the ultra rich of another country than with the middle or lower class people of their own country.

      1. justanotherprogressive

        Yep, when the pitchforks come out, I have a feeling it won’t be localized, but worldwide……sooooo…….the wealthy buying those islands or land in New Zealand may find they have no protection at all……
        Where it starts just depends on who gets fed up the fastest…..

        I must say I have to laugh every time I hear those wealthy Democrats complaining about the Russians, seeing as how they have more in common with those rich Russian oligarchs they are whining about than they do with us…..

      2. RBHoughton

        That nice Mr Paul Singer will appreciate this, peeling layer after layer off non-English speaking countries whose news seldom reaches the Anglosphere of New England.

        The key is to live in a vibrant city like NY where no-one knows or cares what their neighbor is doing and to venture cautiously into the public domain only in vehicles with dark-glass windows.

        Its a game. Since the destruction of society in urban life, the real pleasure is making more than the next chap. Need and utility are irrelevant. Its like the street beggar with a hoard of broken things.

    2. Ptolemy Philopater

      This is the chief reason that the Soviet Union banned millionaires, not that they didn’t have their own forms of corruption, but they pale in comparison. That mega rich lifestyle is so corrupting, so appealing that it corrupts everyone it touches. It is the lifestyle itself that needs to eliminated not just its practices.

  4. lyman alpha blob

    Corporations like Uber flout state laws daily. The state could do something about it although it mostly chooses not to.

    What’s to stop states from flouting these corporate decisions? I don’t immediately see how these decisions can be enforced. The schoolyard taunt “You and whose army?” comes to mind.

  5. Chauncey Gardiner

    Excellent post. I expect the corporatists will be resurrecting their so called “trade agreements” containing these deeply damaging provisions from legislative deep freeze soon enough.

  6. Susan the other

    It’s possible that the smallest and most vulnerable nations will not be the biggest victims of this for the same reason that big banks are registered in large tax bases. That’s where the money is if they need to be bailed out. The only remedy is not to do any treaties in the first place unless maybe ISDS rulings can be appealed ad infinitum. So some new legal mechanism is needed that automatically throws egregious decisions into an appeals process. And while everyone is waiting for the judgements to come down there’s plenty of time to create a network of complex derivatives and ISDS decision swaps… the whole routine. So, best not to sign any treaties at all. Nobody needs them anyway. Trade itself is mostly a scam.

  7. Ian

    Judging by some of the corporate winners I’ve heard about, the 1/4 win ratio strikes me as more indicative the number of patently absurd cases being put forth instead of, indicative of a measured and fair response within the tribunals.

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