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Issue #1727      April 20, 2016

Companies sue developing states through Western Europe

Regional free trade agreements such as the Trans Pacific Partnership and the US-EU Transatlantic Trade and Investment Partnership have acquired notoriety because they will, among other things, enable corporations from the contracting countries to sue governments. What is perhaps more scandalous is that some of the corporations involved may be so-called “mailbox companies” that may not even have organic links with the contracting country in which they are supposed to be based. Frank Mulder highlights the mechanism in such free trade agreements – investor-state dispute settlement or ISDS – and the seamy arbitral process which make such abuse possible.

Many Europeans fear the proposed US-EU Transatlantic Trade and Investment Partnership (TTIP) because it could enable American companies to file claims against their states. The strange thing, however, is that Western Europe is becoming a big hub in this mechanism, called investor-state dispute settlement (ISDS), leading to billion-dollar claims against poorer countries.

Imagine this: a country is in the middle of the worst economic crisis in decades. One in four people is unemployed. Tens of thousands are homeless. Four presidents have been replaced in two weeks. To halt the downward spiral, the government decides to nationalise previously privatised sectors and companies. In response, dozens of companies sue the government, because they feel disadvantaged by the new policy. The government is forced to pay hundreds of millions in financial compensation in the years after.

Surreal? It happened to Argentina after the economic crisis early this millennium. Argentina had signed dozens of bilateral investment treaties (BITs) meant to attract foreign direct investment (FDI). The treaties gave investors the right to sue the Argentine government in case of a conflict. Argentina became easy prey. With 56 claims to date, it is the most sued country in the world.

ISDS is a mechanism by which a company can sue a state without actually going to court. The investor can bring his dispute before a panel of arbitrators, which acts as a kind of privatised court. The hearings often take place at the World Bank. Both parties appoint one arbitrator each, and these two appoint a third one, the chairman. They are usually investment lawyers. The trio then will decide if the state treated the investor unfairly and, if so, what it has to pay. There is no possibility to appeal.

The world of investment arbitration is very un-transparent. After a few months’ research, journalists working for the Dutch magazines Oneworld and De Groene Amsterdammer have published a number of stories about the hidden world of ISDS. The stories are accompanied by an interactive map showing all ISDS claims ever filed against a state. The database behind this map contains information about the disputes, the awards and the members of the tribunals.

What is remarkable is the rise in the popularity of ISDS. Whereas in 2000 just 15 claims were filed, in 2014 alone nearly 70 new claims came up. By 2014, there were a total of 629 ISDS cases filed. This may turn out to be even more, because not all cases are made public. The number of billion-dollar claims is growing.

Canada, the US and Mexico are on the top list of most sued states. The reason is NAFTA (North American Free Trade Agreement), the trade agreement of which they are the members and which contains ISDS provisions. However, the US has never lost a case. If we exclude the cases won by the state, a completely different picture emerges: Argentina, Venezuela, India, Mexico, Bolivia. In other words, developing and emerging countries. Many of these countries have now come to the conclusion that this arbitration system is unfair, or even neo-colonial.

Where do the claims originate from? In the list of home countries of investors, the US is still number one, but in the last few years they have been surpassed by Western Europe. In 2014, more than half of all claims were filed by Western European investors. Claimant country number one is the Netherlands, with more claims than the United States.

However, a closer look at the companies involved shows that more than two-thirds of all Dutch claims have actually been filed by so-called mailbox companies. They choose to settle in the Netherlands for its attractive network of investment treaties, 95 in total, which are deemed investor-friendly.

“This is known as the Dutch sandwich,” says George Kahale, a top American lawyer who defends states in large investment cases. “You put a Dutch holding in between, and you can call yourself Dutch. This is how the system is misused.”

In 88% of the cases, the researchers found the names of the arbitrators involved. From this a picture emerges of a highly select club of men – and two women – who are assigned time and again to judge. The top 15 arbitrators have been involved in a striking 63% of all cases. In 22% of the cases, two members of the top 15 were involved, which means that they have been able to make or break the case.

“This is not strange,” says Bernard Hanotiau, a Belgian arbitrator who is one of the top 15. That a few arbitrators dominate the scene, he says, is just because they are the best ones. “If you look for lung cancer specialists in Belgium, you also end up with a small group. We are specialists.”

Yet this is problematic. After all, the arbitrators are not judges who have sworn an oath and have been appointed publicly. Most of them are commercial lawyers, who even continue to act as counsel next to their work as arbitrators. It is possible for a state to be condemned by a judge whose law firm partner is a lawyer for an investor in a comparable case.

According to Kahale, this leads to too many legal “mistakes”. “Their business background shines through in their decisions. Their background is commercial arbitration. The aim there is not to create correct legal precedents, but to get parties back to business again as soon as possible. Which is very bad. This is not about some little disputes, this is about multi-billion-dollar claims, about principles that are crucial for countries, many of which have just a small GDP.”

Criticism against the current system of investment arbitration is rising, as a growing number of countries decide to terminate the investment treaties behind ISDS. Not only countries like Venezuela, but also Indonesia, South Africa, Ecuador and India. Brazil is working on a model in which only states can file a claim on behalf of an investor.

Even the European countries, in their TTIP negotiations with the United States, have now decided to plead for an independent investment court, in which investment cases are handled by former judges.

Third World Resurgence

Next article – Subversion in the suburbs

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