Why shouldn’t companies sue governments?

Trade deals are always controversial and increasingly excite populist rage on left and right alike. The negotiations of the TTIP (between Europe and the US) and the TPP (between the US and East Asia) have attracted an even greater level of hostility than normal, with people who should (and do) know better jumping on the anti-trade bandwagon.

Admittedly, some of the criticism is well deserved. It is not necessary or wise to have conducted the negotiations in secrecy, with details being leaked incrementally. Increased protection for intellectual property may prove problematic. And both deals are regional as opposed to global deals that add to the growing spaghetti bowl network of exclusive deals, adding to complexity and undermining efforts at comprehensive and uniform global liberalisation.

However, the greatest ire magnet is the provision for facilitating investor-state dispute settlement (ISDS). Essentially this allows foreign companies to claim against governments who cause them to lose profits. Pressure has already caused ISDS to be dropped from the TTIP proposals, although it is likely to be brought back, given the US favour it and the EU’s mooted alternative of an investment court system has been held to be illegal by the German Association of Magistrates.

Although ISDS already exists and has been part of most trade agreements, the idea of corporations being able to sue governments is anathema to many people. Surely allowing multi-nationals to sue whenever their profits are curtailed is an attack on democracy, consumer protection, egalitarianism, and the environment?

Equally, though, governments should not have the power to act arbitrarily. Investors and businesses require a predictable environment that does not change at a bureaucrat’s whim. If, for instance, a country shuts down its nuclear power plants unexpectedly and without good reason, the owners of the plants are not being unreasonable in seeking compensation, given that they invested on the reasonable assumption that this would not happen.

Whilst companies act out of self-interest, this can produce good results. It may be popular for a country to, say, pass laws against smoking. A tobacco company seeking compensation may only be interested in its own bottom line. But the effect of this threat can be to prevent an incursion into the lives of individuals who should decide for themselves whether to take risks like smoking.

The biggest fear is that TTIP will force privatisation of state assets. This is mostly incoherent nonsense. It is true that companies who are victim to nationalisation of their assets will be able to sue for recovery of lost profits, hence the popular meme that, ‘privatisation of OURNHSTM could never be reversed’.  This is a distortion. 

ISDS does not give investors the power to change government policy, and allowing other providers to compete with OURNHSTM has been expressly ruled out. All that would be required is compensation of companies losing out from re-nationalisation, which is eminently fair. Also, privatisation would actually need to happen in the first place, which is highly unlikely, given the quasi-religious fervour surrounding OURNHSTM.

Execution of government policy is regularly challenged through judicial review. Suing for lost profits, and even loss of prospective profit, is a standard remedy in contract law and tort. The fact that ISDS is arbitrated through confidential international tribunals is necessary given the international nature of the disputes and often positive given it is governed by institutions like the London Court of International Arbitration, which more reliable than many national courts. Not to mention that all arbitration is confidential and much of it is conducted internationally anyway. 

Nothing about ISDS is especially radical.