We need to stop the financialisation of justice

02 May 2017, by Paul Keenlyside Guest in International

The campaigns against TTIP and CETA – EU trade deals with the US and Canada – have raised public awareness of the dangers of the Investor-State Dispute Settlement (ISDS) system. ISDS is a corporate court system contained in trade deals which allows international companies to sue governments for threats to their future profits.

However, where unions and civil society groups see a threat to democracy, financial institutions from hedge funds to insurers have spotted an opportunity. By offering to cover the upfront legal costs of ISDS challenges, often in the tens of millions, funders are able to secure a large share of eventual awards, which can run to hundreds of millions and even billions. As ISDS cases are always directed against governments, it is the taxpayer that picks up the tab.

This is known as ‘third party funding’, referred to by one prominent international arbitrator as a ‘gambler’s nirvana’. And the explosion of this speculative, secretive industry in which the UK is a major global hub – ballooning over 700% between 2009 and 2015 – spells a whole manner of trouble for the public interest, the public purse, and the rule of law.

Third party funding enables companies to launch ISDS claims at low or no risk, and thereby more credibly wield the threat of an ISDS claim against governments unless they get their way. To see what this means in practice, look to the case of UK oil company Rockhopper which announced this March that it was using ISDS to sue Italy over its ban on oil exploration within 12 miles of its coast – a decision taken by Italy to avoid a Deepwater Horizon style disaster on its shores. Rockhopper is receiving third party funding to cover its legal costs.

From Costa Rica to Colombia to Bolivia, third party funding has underwritten ISDS claims related to mining ‘investments’ associated with tremendous environmental damage and workers’ rights abuses, roundly rejected by local communities and governments.

But the deep pockets of third party funders are not mirrored in the budgets of developing country governments, which bear the brunt of ISDS claims in which legal fees average $8 million. This creates the risk that cash-strapped governments may simply cave in to company demands and drop public interest policies rather than risk the time and expense of a legal fight.

Meanwhile, those governments that do defend their policies face an ever growing number of ISDS claims against them. Given the low probability of a massive payout (the average award is $76 million, skewed upward by a few very large awards) third party funders have an incentive to inflate the number of cases in which they have a stake in order to effectively spread their bets. It is not accidental that the boom in ISDS cases – almost double the number were launched in the last five years compared to the five years before – correlates with the boom in third party financing.

Alarmingly, a stake in an ISDS claim is increasingly being treated as a derivative that can be marketised like any other – bought, sold or packaged with others. Industry expectations are that ISDS claims will soon be traded on an industrial scale, as part of a sophisticated secondary market in claims.

It should come as no surprise that lawyers are asking if third party funding is ‘the best thing since sliced bread’.

But the Trade Justice Movement – a coalition of civil society groups and trade unions –answer this with a resounding ‘no’.

We are campaigning for ISDS and all its variants – like the Investment Court System in the EU-Canada deal – to be written out of existing and future international agreements. As a first step, MPs must urgently review the UK’s role in the third party funding of ISDS cases.

Only this will prevent international investors from profiteering from a system that undermines workers’ rights, the environment and democracy.