Imagine that instead of politicians or judges making decisions regarding millions in tax revenue, it was three lawyers. Behind closed doors and without any public supervision to speak of.

Last year, without even the intervention of a magistrate, Ecuador was ordered to pay $1.7bn (€1.3bn) to a US oil company. This happens dozens of times every year and is made possible by investment treaties between countries, which stipulate that in the event of a dispute companies can invoke arbitration outside the regular judicial process.

The European Union is now planning to adopt such a form of supranational arbitration in a free trade treaty with the United States. Negotiations regarding this treaty were resumed on November 11, after an initial round in June. Hundreds of issues obstructing trade are being discussed. It is arbitration, though, that is currently causing particular concern in Brussels.

Power behind closed doors

“We’re throwing away our sovereignty,” says Monique Goyens, director of the European consumer organisation BEUC. “It’s unacceptable that companies should be able to wield this kind of power behind closed doors,” argues British Labour MEP David Martin. “We have to ask ourselves if this is really what we need,” says his liberal colleague, Marietje Schaake (Dutch party D66, member of European ALDE).

A senior EU official close to the negotiations confirmed that arbitration is on the agenda this week, but that “nothing has yet been decided.” The European Commission is worried about the rumour: the ACTA fiasco, prompted by an international treaty aimed at fighting online piracy, is still fresh in everyone’s memories. It was rejected last year by the European Parliament after citizens concerned about piracy law signed a protest.

The Netherlands, a key player

The concept of investor-state dispute settlement (ISDS), the name for arbitration launched on the grounds an investment treaty, is nothing new: at the time, it was developed for investments in risky countries, as an insurance against revolutions and expropriation.

The Netherlands is a key player in this system, as it has a lot (98) of bilateral investment treaties. As a result, any country in the world can evoke such treaties by setting up a brass-plate company in the Netherlands. [[Between 1993 and 2012, there were more than 500 arbitration cases between companies and countries]], most of them over the past 10 years. There were 60 new cases last year alone.

Criticism is growing, as the fines are increasing all the time. According to political scientist Cecilia Olivet – who works for the Transnational Institute, a left-wing think tank, and who has studied the mechanism – arbitration has become a way for exerting pressure on states wishing to tighten up their laws to either abandon the idea or fork out compensation.

Intimidating mechanism

When Germany decided in 2011 to call a halt to nuclear energy after the Fukishima disaster, it was issued with a writ for €700m by Swedish energy company Vattenfall, on the basis of a bilateral investment treaty. Australia has to answer to an arbitral tribunal for its stricter tobacco legislation.

“This mechanism is intimidating, and can stifle consumer protection,” says Goyens of BEUC. Regulations concerning the environment and public health, he explains, are often based on progressive insight, on new scientific proof. Should companies be compensated for that? Last month, BEUC demanded that arbitration be scrapped from the negotiations between the EU and US.

An increasing number of countries in the rest of the world are turning against this mechanism: last month, South Africa cancelled three investment treaties it had entered into with the Netherlands, Germany and Switzerland. Australia wants to revoke certain treaties.

So why is Europe discussing the issue? “Without the guarantees this mechanism provides, you will not get any investors,” says a spokesman from the European Commission. “This mechanism has proved to be effective. After all, you don’t remove traffic lights because there are fewer accidents.”

EU and US are not banana republics

In a recent memorandum, the commission did admit that you have to beware of abuse: lawyers work for both states and companies; [[it is a specialist world, in which everyone knows one another]]. Brussels is therefore calling for a “far-reaching code of conduct.”

Lawyers have to pro-actively disclose any threat of a conflict of interests. Hearings have to be public. Olivet has doubts that this is enough. “A code of conduct is only of any use if it’s binding, with fines and sanctions. What’s more, it remains to be seen whether the US will agree to all this.”

MEP Marietje Schaake is not against arbitration. In this case, however, she doubts its efficacy: The US and the EU are not banana republics; they have the best legal systems in the world and are already, without arbitration, each other’s major trading partners.

The response of the employers’ organisation VNO-NCW was that Brussels has little choice. Later this month, they also begin negotiations on a trade agreement with China – where investments are less safe. Omitting the mechanism in one treaty and not in the other could be interpreted by the Chinese as insulting.