ISDS enables making more money from losses

Jomo Kwame Sundaram

KUALA LUMPUR: With the Covid-19 contagion from late 2019 spreading internationally this year, governments have responded, often desperately. Meanwhile, predatory international law firms are encouraging multimillion-dollar investor-state dispute settlement (ISDS) lawsuits citing Covid-19 containment, relief and recovery measures.

Sharing the pain

Most governments failed to introduce sufficient precautionary measures early enough to prevent Covid-19 contagions from spreading. And when they did act, they often believed they had little choice but to impose nationwide ‘stay in shelter’ lockdowns to enforce preventive physical distancing.

To enable businesses and households to survive the adverse effects of such lockdowns, governments have provided relief measures, for at least some of those believed to have been adversely affected, especially for businesses better able to lobby effectively. 

Meanwhile, there are already thousands of mainly bilateral investment treaties as well as bilateral and plurilateral trade agreements worldwide, enabling foreign investors to sue governments before private arbitration tribunals to profit from their wide-ranging treaty rights.

Transnational corporations (TNCs) can claim staggering sums in damages for alleged investment losses, for either alleged expropriation, or more typically, indirect ‘damage’ caused by regulatory changes, in this case, Covid-19 government response measures. 

As some such measures try to share the burden of the crisis, e.g., with asset owners and other contracting parties, the international law firm Shearman & Sterling advises financial firms, “While helping debtors, these measures would inevitably impact creditors by causing loss of income”, referring to debt relief and restructuring efforts among others. Foreign registered real estate or property companies can also sue governments that protect lessees or tenants who cannot make their lease or rent payments as contractually scheduled after their operations are shut down or disrupted by emergency regulations imposed. 

Pharmaceutical and medical supplies companies can also appeal to such arbitration tribunals to claim losses due to price controls and ‘violated’ intellectual property rights for Covid-19 tests, treatments, medical and protective equipment as well as vaccines.  Lucrative ISDS lawsuits

In recent months, international law firms have been encouraging ISDS lawsuits citing government measures to check contagion and mitigate their economic consequences, urging clients to invoke investment and trade agreements to claim for allegedly lost income or additional losses or costs due to new government policy measures.

Another firm Ropes & Gray advises: “Governments have responded to COVID-19 with a panoply of measures, including…limitations on business operations, and tax benefits. Notwithstanding their legitimacy, these measures can negatively impact businesses by reducing profitability, delaying operations or being excluded from government benefits…For companies with foreign investments, investment agreements could be a powerful tool to recover or prevent loss resulting from COVID-19 related government actions.” [my italics] 

Shearman & Sterling advises, “Some interventions will be protectionist—they will seek to support or benefit domestic enterprises (strategic or otherwise) but not foreign investors”, without mentioning their generally far lower tax contributions and generous investment incentives enjoyed. Profiting from the pandemic 

After advising clients to look out for discriminatory measures which could become the bases for such claims, law firm Sidley warns governments that proceedings can be very costly as “it is not only the actually invested amounts that can be considered recoverable damages, but also lost future profits”. 

Such law firms remind their clientele that many of the more than thousand ISDS lawsuits filed worldwide have arisen during political or economic crises. Covid-19 pandemic response measures are now being widely studied as possible pretexts for another round of lawsuits. 

These corporate lawsuits can impose massive fiscal burdens on governments. As Pia Eberhardtshows, legal costs average well over US$6 million per party, but can be much higher. Hence, such suits can drain government fiscal resources. 

Although it becomes much more expensive if governments lose, they still have to cover their own legal expenses even if they do not lose. As of 2018, governments had been ordered to pay US$88 billion for settlements made public.  There is considerable scope for such cases given the still growing, broad range of government Covid-19 measures, e.g., foreign-owned water supply companies can sue governments for insisting that more public water supply sources be provided, or household water supplies remain uninterrupted, even if water bills are not settled, to enable more regular hand washing.  ISDS undemocratic, illegitimate

International investment law is generally independent of national legislatures and biased toward TNC interests. Investment agreements prescribe foreign investor rights and privileges very broadly, but their duties and obligations, usually rather minimally. 

Sovereign national societies, parliaments and governments have considerable scope for discretion in addressing complex political issues involving diverse social and economic interests. Also, national courts generally do not award damages for lost future profits as these are considered completely conjectural. 

But ISDS provides much more favourable treatment to powerful TNCs. Also, international arbitration tribunals ignore and undermine the legitimate scope for national courts, law-making and democratic government decision-making.  The typically transnational arbitration tribunals that interpret such law generally ignore recent legal developments, which take more account of the rights and responsibilities of various other stakeholders in national societies. Thus, arbitration awards tend to be much more lucrative, for both TNCs and their lawyers, than ordinary national court decisions.

A South Centre Southview urges considering various measures in response to the threat such as terminating or suspending investment treaties, withdrawing consent to arbitration, statutorily prohibiting recourse to arbitration and appealing to TNCs’ corporate moral responsibility

Already, there are growing appeals for an immediate moratorium on ISDS lawsuits and to end ISDS proceedings involving Covid-19 emergency measures, while some countries, e.g., India, South Africa and Indonesia, had scrapped some of their bilateral investment treaties even before the crisis. 

The Southview opinion also chides the United Nations Commission on International Trade Law (UNCITRAL) for trifling with marginal reforms, instead of radically reconsidering the very illegitimacy of international investment arbitration itself.

New free book: Vulnerable: The law, policy and ethics of Covid-19

The contents of this 649-page book ’confronts the vulnerabilities that have been revealed by the pandemic and its consequences.

It examines vulnerabilities for people who have been harmed or will be harmed by the virus directly and those harmed by measures taken to slow its relentless march; vulnerabilities exposed in our institutions, governance, and legal structures; and vulnerabilities in other countries and at the global level where persistent injustices affect us all.

Covid-19 has forced us to not only reflect on how we govern and how we set policy priorities, but also to ensure that pandemic preparedness, precautions, and recovery include all individuals, not just some.’

Most of its contents are focused on Canada. However, there are articles about other places, with the last 100 pages on “Global health and governance”. 

https://ruor.uottawa.ca/handle/10393/40726

The Best Law Capital Can Buy

Jomo Kwame Sundaram KUALA LUMPUR, Malaysia, Jun 25 (IPS)  - Katharina Pistor's recent book, The Code of Capital: How the law creates wealth and inequality shows how law has been crucial to the creation of capital, and how capital continues to survive, evolve and enhance its ability to ‘make money', or secure wealth legally, i.e., through the law.

Legal coding makes capital

In her magnum opus, the Columbia Law School professor explains how legal systems create capital and how law enables wealth creation through what she terms ‘legal coding'. Notions of property and property rights have changed over the ages, reflecting and redefining social and economic relations more generally. Pistor sees ‘legal coding' -- e.g., via collateral, trust, corporate governance, bankruptcy, contracts and other property laws -- as means for assets to become capital, creating wealth for their holders. When "coded in law", even "dirt" can become a valuable asset, capable of enriching its owners. For her, institutions of private law privilege those with capital by ensuring: priority, against competing claims; durability, enabling capital to grow in value; convertibility, ‘locking in' earlier gains; and universality, ensuring that such privileges extend transnationally. With the emergence and growing significance of new financial products and services, intellectual property and data access in the early 21st century, the evolution of capital increasingly involves new, especially intangible assets, including debt. New combinations and prioritization of property rights and contracts have created complex debt products, including collateralized debt obligations and credit debt swaps, the bases for much contemporary ‘financialization'. Private interests' flexible use of such legal institutions has been crucial to capital accumulation, but Pistor notes that the increasing private use of law also undermines its role and legitimacy as a public good, and hence, the very ‘rule of law' itself. Legal coding is therefore not only about how assets become capital, but also about how capital creates wealth, and laws enable such transformations involving property, ownership and entitlements. As "capital is created behind closed doors in the offices of private attorneys", codifying capital in law worsens inequality between capital and others, especially labour. Role of states State sanctioned judicial processes transform assets into capital. Legal coding thus "owes its power to law…backed and enforced by a state". The state has thus been crucial to legally coding assets as capital, using existing as well as new laws and judicial precedents so crucial to common law. States and other relevant legal institutions also redefine the law -- e.g., through the legislative process, catering to the evolving nature and needs of capital, especially its most successful lobbyists -- by amending existing laws and creating new laws. The state and other social institutions ensure the legitimacy of the ‘rule of law' by mitigating and managing its adverse effects, as well as by resolving problematic ambiguities and uncertainties. The legal profession has been the main agency of legal coding, ‘making' the law. Lawyers contribute to its evolution -- by drafting and thus determining the nature, scope and impact of law -- and defend the law by legitimizing it, even when challenging, criticizing and reforming the law. Despite relying on the authority of law, common or legislated, many lawyers go to great lengths to avoid taking disputes to courts, the traditional guardians of the law, instead preferring or even insisting on private settlements or arbitration. Crossing borders The accumulation of capital has long been transnational, closely interlinked with the globalization of recent decades. However, legal coding is primarily national, within the realms of particular states. Hence, the legal reach of capital does not extend to other jurisdictions except when provided for by imperial or colonial jurisdiction, and by international treaty, convention and coercion, including the use of military force, in the post-colonial era. With globalization, private interests can increasingly choose legal systems to suit their needs, i.e., engage in jurisdiction or ‘forum shopping'. Limiting the ability to opt in and out of legal systems is hence vital for state legitimacy and societal capacity for collective self-governance. Inter-state collaboration, among ‘independent' central banks not beholden to national governments, or through multilateral institutions -- such as the World Trade Organization, trade agreements, investment and other treaties -- have thus become crucial means for extending legal coding beyond national jurisdictions. As national judicial decisions are not typically considered extraterritorial in scope, the legal community has extended arbitration transnationally while trying to ensure -- through convention as much as legislation -- that national laws and courts recognize, uphold and enforce the outcomes of such private arrangements. With new technology, capital is trying to protect and extend its privileges without conventional legal coding, e.g., new blockchain applications suggest that some digital innovations can provide attributes required by capital. Pistor observes that ‘digital coders' -- those who develop digital code -- have set their own rules, transcending national boundaries, without recourse to the law. Until now, however, digital code is still far from an adequate substitute for legal code, with digital ownership, rights and conflict resolution still based on existing laws. Law as history Pistor's own academic background in comparative law appears crucial to her appreciation of how various societies have coped with different challenges, including the normative or ethical choices involved. Her legal history of capital considers different perspectives and influences. While legal coding has been mis-used by asset owners, lawyers and states, it can also help address such abuses. The future of capital rests on evolving complex relations and interlinkages among laws, the stakeholders involved as well as related ideologies and perspectives. Professor Pistor has greatly advanced our shared dialectical understanding of how legal codes -- essentially ideological constructs -- consolidate, define and transform social relations in order to advance, extend and accelerate capital accumulation, in other words, make history. Visit this story at http://ipsnews.net/2020/06/best-law-capital-can-buy