Revealed: secret courts that allow energy firms to sue for billions accused of ‘bias’ as governments exit – The Guardian

by | Nov 14, 2022 | Energy

Revealed: secret courts that allow energy firms to sue for billions accused of ‘bias’ as governments exitSecret court set up under energy charter treaty accused of conflicts of interest, self-regulation issues and institutional bias Demonstrators protesting against the energy charter treaty near the European Commission in Brussels earlier this year. Photograph: Anadolu Agency/Getty ImagesDemonstrators protesting against the energy charter treaty near the European Commission in Brussels earlier this year. Photograph: Anadolu Agency/Getty ImagesA secret court system that allows fossil fuel investors to sue governments for vast amounts of money has been accused of institutional bias, self-regulation issues and perceived conflicts of interest, as the drumbeat of EU countries leaving threatens to turn into a samba march.On Wednesday, the EU will be meeting to discuss reform of the energy charter treaty (ECT) but at the end of last week, Germany became the latest European country to announce its intention to leave the treaty. Slovenia exited earlier in the week, after similar moves by France, the Netherlands, Spain and Poland. The UK is now one of the last large economies to remain in the ECT.The ECT’s investment arbitration courts were set up in 1998 to protect energy firms operating in former Soviet Union countries from government expropriation and regulation. They gave the companies the right to seek compensation if legislation or policies were enacted that could be seen as hostile, using the investor-state dispute mechanism that stirred up much public controversy during the negotiation of the Transatlantic Trade and Investment Partnership (TTIP).The treaty has since been signed by more than 52 countries across Europe and central Asia, with oil, gas and coal firms being awarded more than $100bn by the ECT tribunals. The UK oil firm Rockhopper was recently awarded $190m in a case it brought against Italy, which is contesting the decision. As countries have sought to curb their emissions in line with the Paris climate agreement after 2015, the number of claims being brought has exploded. Renewables companies have also brought a number of cases.As its signatories prepare for a crunch meeting in Mongolia on 22 November, the ECT is facing what one critic has called a “crisis of legitimacy” for several reasons, including how the tribunals are composed, feeding growing concerns over perceived conflicts of interest.The ECT’s tribunals can proceed under several systems, but the World Bank’s International Centre for Settlement of International Disputes (ICSID) rules are most commonly used. The system is different to most national legal systems, which employ a publicly appointed and independent judiciary. ICSID’s courts work with independent arbitrators appointed by the parties, but who may work in different roles for employers with conflicting interests within the system.Each case is decided by a panel of three arbitrators: one appointed by the state, one by the investor, and a third who acts as president or chair and is selected by the other two arbitrators. The case is then argued before the panel by lawyers acting as counsel for each party. Cases are held behind closed doors, and there is no obligation to release the outcome. A choice of arbitrator can be challenged if a party disagrees, but there is no guarantee it will succeed.“Double hatting” occurs when a lawyer takes more than one role across different cases – for example – sometimes acting as counsel for an investor, other times acting as a president, who is supposed to adjudicate independently.An analysis of the cases brought so far under the ECT – carried out by the Guardian, the Transnational Institute and Powershift – has found that in a significant number of cases, an individual who had previously acted as an arbitrator appointed by an investor in one case was appointed to act as counsel (or advocate) for a party in another similar case.Without full disclosure – which is one of the main reasons to challenge an arbitrator – there can be no guarantee that arbitrators have not had links to the law firm (or lawyers) acting as counsel in cases they are adjudicating, or that they have not acted as counsel in similar cases, leading to the risk of them prejudging the issues in play. Indeed, their reputations in this regard may lead some clients to seek them out.Of the 191 arbitrators that have been nominated to sit in ECT hearings, just 37 elite lawyers – about 18% of the pool – have heard half of all the ECT’s cases. Seventeen members of this group have acted in the role of arbitrator and legal counsel, in the ECT and other investment courts.Sixteen of the 17 arbitrators sat in fossil fuel cases – most were chosen by investors – and only three of the 37 have not sat in a fossil fuel-related arbitration panel.Of the cases in which “double hatters” took part as arbitrators, 58% were won by investors, according to the analysis.Under ICSID rules, arbitrators should be “persons of high moral character and recognised competence in the fields of law, commerce, industry or finance, who may be relied on to exercise independent judgment”.However, these rules are self-regulated by the arbitrators – critics say they are unenforceable – and the successful removal of arbitrators is rare. In Spain, for example, just one proposed ECT arbitrator has been blocked, out of 19 challenges.Many arbitrators believe they can separate the different roles they may play in different cases. Klaus Sachs, an ECT-focused arbitrator based in Munich, said that “as in every profession, excellence is a way to success and among those arbitrators who are in high demand, you have very qualified people. They are very good lawyers.”There was, he added, “a lot of new talent coming in and so the market is changing as a new generation enters the field”.However, critics argue this is a recent and overstated trend. They say that allowing parties to appoint arbitrators who have acted as counsel in similar cases opens up what Lucía Bárcena, of the Transnational Institute, called “a Pandora’s box of conflicts of interest”.It has also caused “long-running and heated debate within the international commercial arbitration community”, according to a 2017 study. In it, the international legal expert Philippe Sands asked whether a lawyer could impartially wear the hat of an arbitrator in the morning an …

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