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Corporations versus States: Arbitration Boards against Democracy
by Pia Eberhardt
Monday Apr 29th, 2013 4:25 AM
In 2012 Ecuador paid the largest compensation sum in history $1.76 billion to Occidental for cancelling its oil production contract. Germany is threatened with a compensation of 3.5 billion euro for turning off two nuclear reactors. International investment agreements are part of the new constitutionalism, political-legal structures that secure neoliberalism quasi constitutionally by limiting the possibilities of state intervention and democratic control.

by Pia Eberhardt

[This article published in April 2013 is translated abridged from the German on the Internet,]

After the nuclear catastrophe of Fukushima, the German government ordered a nuclear exodus. In the same year Uruguay and Australia printed drastic warnings on the health consequences of smoking on cigarette packages. Following a report on the environmental risks of unconventional gas production, the Canadian province of Quebec demanded a moratorium on the deep drilling technology known as fracking.

All these political decisions from 2011 have one thing in common. They are all subjects of corporate lawsuits before private international arbitration boards. The Swedish energy giant Vattenfall sues Germany. Marlboro manufacturer Philip Morris sues Uruguay and an oil- and gas corporation called Lone Pine sues the Canadian state for compensation.

The legal bases of these suits are international investment agreements. Over 3000 of these agreements are in effect; many of them are Bilateral Investment Treaties between two states (BITs). They enable foreign investors to sue states – and any political decision that threatens their property titles and planned profits from their investments, whether on account of health- and environmental protection conditions or social- and economic policy. Settled by international arbitration boards, national courts cannot influence these decisions. The arbitration boards are mostly composed of three private parties called disputing parties which act according to the rules of arbitrating institutions fixed in international agreements. At the end of 2011 there were at least 350 investor-state suits worldwide. The number of unreported cases is much higher because of the non-transparency of the system.


Fifteen years ago in 1998, the Multilateral Agreement on Investments (MAI) negotiated in the framework of the OECD ran aground. At that time France abandoned the discussions out of concern for its cultural and educational policy. A worldwide anti-MAI campaign against the “globalization of capital rule” [1] led the way.

Nevertheless an international investment regime formed in the last two decades. Since the turn of the millennium, the number of investor-state lawsuits has exploded. The increase was 250 percent since 2000 compared with the suits filed between the 1970s and the 1990s. Never before were more lawsuits filed than in 2011 and 2012 at the arbitration board of the World Bank, the International Center for Settlement of Investment Disputes (ICSID). The arbitration cases that rise by leaps and bounds show that international legal reinforcement of corporate rule is in full swing.

Capital-exporting states contributed to this development. In the 1990s they convinced countries of the global South to sign investment treaties. The first lawsuits in the context of the free trade agreement between Mexico, Canada and the US (North American Free Trade Agreement NAFTA) moved the system into business consciousness. The solicitor's offices profiting from this encourage their clients to initiate lawsuits.


The system dangers for public budgets and democratic policy are obvious. Investor-state lawsuits can entail indemnification payments in the billions. Profit losses of individual firms caused by political reforms are socialized in this way even when the regulations are necessary for protecting the public interest.

The costs for the states increase more and more. In 2012 the ICSID condemned Ecuador to the largest compensation sum in history of $1.76 billion. The US corporation Occidental filed suit – and was successful – because the country had unilaterally canceled the oil production contract with the company. Germany is also threatened with a compensation in the billions, In its 2012 proceedingVattenfall demands 3.5 billion euro for turning off the Kruemmel and Brunsbuttel nuclear reactors. The German government had taken both nuclear power plants offline before the nuclear exodus for security defects.

The legal costs alone for investor-state lawsuits could fleece the public budgets. According to the OECD, they amount to an average eight million dollars per suit. A state must also fork out its legal costs when it wins a judgment since arbitration boards make the parties bear their legal expenses themselves. [2] According to media reports, the Philippine government has to spend $58 million for defending against two lawsuits of the airport operating company Fraport – money that could have paid for 12,500 teachers or built two new airports.

The lion's share of the legal costs in investor-state disputes lands in the pockets of the solicitor's office. The arbitrators also pocket large sums. More lawsuits mean higher incomes for them since the most prominent – 15 decide 55 percent of the cases – earn their livelihood with this activity without receiving fixed salaries. In an asymmetrical legal system in which only the investors can sue, that is a strong incentive to keep the system plaintiff-friendly through investor-friendly arbitral awards and legal interpretations. For a long while, the investors won a third of the cases and gained settlements in another third in which compensation payments flowed.


The problem of the investment protection agreement is different. Often only the threat of a lawsuit is enough to strangle or dilute planned laws. This is called regulatory chill in the technical jargon. Five years after the enactment of the free trade agreement between Mexico, Canada and the US, a Canadian government official described its effects as follows: “With every new environmental measure, there were letters to the Canadian government from offices in New York and Washington. These involved chemical cleaning, medicines, pesticides and patent rights. Nearly every new initiative was targeted and most never saw the light of the world.” [3]

Therefore international investment agreements are rightly regarded as part of the new constitutionalism, that is political-legal structures that secure neoliberalism quasi constitutionally by limiting the possibilities of state intervention and democratic control. [4]

Businesses seem to use international investment law as a weapon in political conflicts over regulation than as a protective shield against state attacks...[5] [6]


More and more lawsuits are directed against democratic politics that occurs in the public interest and in harmony with national law, not against arbitrary expropriations or discrimination by foreign investors. These include lawsuits against the German nuclear exodus, health warnings on cigarette packages and the fracking moratorium in Canadian Quebec.

In the 1990s there were already lawsuits in the framework of the NAFTA free trade agreement between Mexico, Canada and the US. When the Canadian parliament prohibited the import and transport of a noxious gasoline additive for reasons of environmental- and health protection, US producer Ethyl filed suit for $201 million compensation referring to the NAFTA agreement. Canada agreed to a settlement payment of $13 million and disassociated from the trade restrictions.

The spectrum of political measures that can be attacked by investor-lawsuits is graphically described by the German solicitor's office – in a brochure with the alarming title “Help me, I am dispossessed!” published by the German government. “The possible variety of damaging state actions is practically unlimited” and could amount to an expropriation in their totality. For example, the state could introduce new taxes that make the continuance of a business economically absurd, pass environmental laws prohibiting manufactured products or lower state regulated pay scales in the electricity-, gas- or telecommunication sectors or with toll roads and thus destroy the financing of a project. [7]

That lawsuits against such measures have a prospect for success lies in the vaguely formulated but far-reaching rights guaranteed to investors in investment agreements. For example, the standard of “always fair and just treatment” was interpreted by arbitration boards so that states could act completely transparently and without contradictions and not disappoint the “legitimate expectations” of an investor as to the regulatory environment of an investment. In the ongoingcomplaint against GGermanyVattenfall probably argues that the German governmen violated this standard when it passed the nuclear exodus a few months after extending the running time of German nuclear power plants.

Ultimately investor-protection means cutting democracy down to size and setting the interests of investors above everyone else. “There are not only undesirable measures of governments in the scope of autocratic rule. Populism that democracies can require is often a catalysor for such measures.” [8] No wonder countries like Argentine, Venezuela and Ecuador withdrew privatizations and nationalized businesses after passionate social struggles and are among the countries that are most frequently dragged before investment arbitration boards.

Industrial countries are increasingly in the dock as the two Vattenfall lawsuits demonstrate. At least 18 had to defend themselves up to the end of 2011 against investor lawsuits besides 55 developing- and 16 threshold countries. The legal system with roots in the post-colonial era turns against its creator in times of changing capital streams when capital-exporting states protect their corporations abroad.


In some places this has led to turning away from the investment regime. In the spring of 2011, for example, Australia's social-democratic government announced it would not negotiate any free trade agreements any more that enable corporations to file direct lawsuits before international arbitration boards. Bolivia, Ecuador and Venezuela have canceledsome BITs and withdrawn from the ICSID arbitral court of the World Bank. Argentine refuses to pay compensations. In 2012 South Africa announced the current BITs agreements would not be extended.

[The numbers in brackets refer to footnotes in the original German.]


VIDEO: “The Corporation,” 2hr 24min

VIDEO: “Role of Corporations in the United States,” 1hr 28min, CSPAN3, April 12, 2013