Farrer & Co | 15 November 2022
Armed conflict and investment treaty arbitration
This article summarises the legal protections which may be available to investors in times of armed conflict under investment treaty arbitration. This can be a direct and powerful means of protecting investments both during and after conflict.
Investment treaty arbitration
Investment treaty arbitration is a mechanism by which foreign investors can pursue a claim directly against a host state for breaches of that state’s obligations under an investment treaty. Such treaties may be "bi-lateral" (ie between two states), or "multi-lateral" (involving multiple states). The Energy Charter Treaty (the ECT), for example, has more than 50 signatories globally.
While each investment treaty is bespoke, it will typically require the "host state" to treat investments made in its territory in accordance with certain minimum standards, prohibiting discriminatory expropriation and requiring that investors from other contracting states are treated at least as favourably as other foreign investors. If an investor considers the host state to have fallen below those standards (by interfering with its investment without justification, for example) then the treaty grants the investor the right to bring a claim in arbitration, and thereby access to impartial arbitrators who will adjudicate the dispute independently.
Thus, one significant benefit of investment treaty arbitration is that it is not necessarily defeated by the non-cooperation of the host state. A state’s refusal to participate in arbitral proceedings (which is not uncommon) is little obstacle to proceedings continuing in its absence. Furthermore, if the host state subsequently refuses to comply with an award against it, the investor can seek to enforce that award against assets located outside the host state. Indeed, investment treaty awards are frequently enforced in this way (including against the Russian Federation: see below).
Armed conflict takes many forms, and ranges in brutality from all-out war (declared or undeclared) between states, to internal civil conflicts amongst non-state actors (and / or the state), to the annexation of foreign territory.
International treaties regularly contain so-called "war clauses" which are intended to suspend or qualify investment protections in times of "war". Such provisions can range from "non-discrimination" clauses which limit a state’s obligations to the equal treatment of losses necessitated by the conflict, to "extended" obligations which mandate the payment of compensation to investors (as under the ECT). In each case, it will rarely be cut-and-dry whether the state was indeed at "war" (ie, whether the clause is triggered), whether the interference was indeed "necessitated" by the conflict, whether the investor was subsequently treated in accordance with the relevant treaty provisions, and so forth. Such questions are often complex and highly contested.
International investment treaties may likewise be engaged by state sanctions provoked by war. The Russian Federation, as the most immediate example, has imposed and threatened to impose a whole raft of countersanctions against "unfriendly" nations. These measures include the cancellation of existing contracts, the requiring of foreign states to pay for gas and (re-)pay debt in RUB, the nationalisation of aircraft and the permitting of domestic companies to use foreign intellectual property without compensation. (For more information, please see our recent explainer “Russian sanctions: what you need to know”.) Affected foreign companies and individuals may seek redress in the more than 60 investment treaties to which the Russian Federation is currently signatory, including the ECT. Again, each investment treaty is bespoke and claims against the Russian Federation in investment treaty arbitration remain subject to current febrile geopolitical contexts.
Finally, what if the host state has invaded another state, such that its conduct has impacted property situated "outside" its territory? A series of arbitrations involving investments in occupied Crimea have confirmed that when the Russian Federation took effective control of Crimea, Ukrainian investments in that territory became protected by the Russian-Ukrainian bilateral investment treaty. In other words, where a conflict involves the de facto change of control over a territory, the invading power is expected to treat investments in the occupant state in accordance with applicable investment treaties. Investment treaty arbitration is therefore a potentially powerful tool for investors with investments in occupied states.