The most controversial aspect of the the Transatlantic Trade and Investment Partnership (TTIP) agreement, which is currently being negotiated behind closed doors between the US and EU, is the plan to allow foreign companies to sue entire nations in special tribunals for the alleged expropriation of future profits through changes in laws or regulations. This is not an entirely new approach—these secret tribunals have been included in hundreds of other smaller-scale trade agreements over the years—but its inclusion here would have profound impacts on both the EU and US.

Opponents of the idea see these secret tribunals as undermining a government's sovereign ability to implement democratic decisions through new legislation. Those in favour of this investor-state dispute settlement (ISDS) mechanism insist that it's just a normal part of trade agreements, and nothing to worry about.

The UK government's public stance on ISDS is typical: "Since 1975 the UK has negotiated 94 Bilateral Investment Treaties (BITs) almost all of which include ISDS provisions," one of its information leaflets says. And yet the government also claims: "No ISDS challenge has ever succeeded against the UK. Despite the large number of treaties in force with ISDS clauses, there have been only two ISDS challenges brought against us."

Unfortunately for the UK government—and for the argument that ISDS won't have any negative consequences for EU citizens—the first half of that statement is no longer true.

It turns out that one of those two ISDS challenges has resulted in an award being made. War on Want gives some details: "the company Eurotunnel has revealed that the UK and French governments were required by a private arbitration tribunal to pay out nearly €24 million [£17 million] for failing to provide adequate security around the entrance to the Channel Tunnel between 1999 and 2002."

The second ISDS challenge against the UK "has been shrouded in even greater secrecy," so it's not possible to say with certainty what is happening—perhaps the UK government will be forced to pay up there, too.

In any case, the UK's change of luck under ISDS is not a one-off. In the last few years there have been an increasing number of claims and awards made against EU countries, many of which have hitherto been able to regard ISDS as something that their local companies can use against other countries without worrying about it being used by foreign companies against them.

The hidden cost

A report from the Friends of the Earth Europe entitled "The Hidden Cost of EU Trade Deals" revealed that even before the UK and France were hit with penalties, other EU countries had been forced to pay out hundreds of millions of euros, and were facing claims for many billions more. A total of 127 cases have been brought against 20 EU member states since 1994. Details were only available for 62 of them—many ISDS cases take place in secret, with no information ever being released—and the total compensation claimed in those cases was €30 billion (£21 billion). ISDS tribunals certainly won't grant that full amount, but we do know that €3.5 billion (£2.3 billion) in fines have already been imposed on EU governments—monies that ultimately must be paid by EU taxpayers.

Another striking statistic is that 97 of the 127 cases were taken against new member states that acceded to the EU between 2004 and 2007. These were all countries that had been in the orbit of the Soviet Union, and were generally less-developed economically than existing EU states. For example, there have been no less than 26 ISDS claims against the Czech Republic. This probably explains the view in some quarters that ISDS was not a problem for the EU: in fact it was, but only among "smaller" nations that Western European media rather condescendingly tend to ignore as being unimportant places where nothing much happens.

Despite that patronising view, the cases from Eastern Europe are extremely important for the light they shed on the problems and potential impact of ISDS. For example, when Poland decided to reverse the privatisation of some insurance services, a Dutch company was able to use a bilateral investment treaty between the Netherlands and Poland to sue the latter for future losses it would allegedly suffer as a result. The ISDS tribunal sided with the company and made an award of over €2 billion (£1.4 billion). The same Dutch company sued the Slovak Republic when its government decided to reverse the privatisation of health insurance services, and won yet more "compensation" for indirect expropriation.

In another curious case involving the Czech Republic, two foreign investors in a private TV broadcaster sought damages on the grounds that alleged interference from a government media body had harmed their investments. Even though the facts in both cases were the same, one tribunal awarded $270 million (£180 million) worth of damages, while the other tribunal dismissed the case. This emphasises how arbitrary the decisions of ISDS tribunals can be, because they are not guided by case law in the same way that English or US courts are. This leads to great capriciousness in the awards that are made.

Another huge problem with ISDS is evident in a major case against Romania involving manufacturing businesses in the north-west of the country. Initially, foreign investors were offered incentives to put their money into the companies, but then they were withdrawn for an interesting reason: the Romanian government was obliged to do so as part of its accession to the European Union in 2007. Despite that fact, an ISDS tribunal found Romania in breach of an investment treaty between that country and Sweden, which is where the investors were based, and obliged Romania to pay more than $250 million (£166 million) in damages.

That was bad enough... but it gets worse. In March 2015, the European Commission came to the conclusion that paying fines imposed by a ISDS tribunal breached EU rules on state aid to companies. It therefore ordered Romania to "recover incompatible state aid granted in compensation for abolished investment aid scheme." There was little hope of it being able to do that, and even if it did, it would then run the risk of being punished by the ISDS tribunal—for example, by having its assets seized abroad. The case is a perfect demonstration of how ISDS tribunals regard themselves above not just national law, but EU rules too.

Listing image by LEEROY.ca