LawFlash

Ukraine Conflict: Investment Protection and Armed Conflict

February 24, 2022

While international humanitarian law (ius in bello) also protects personal property, it is only enforceable on a State-to-State level. International investment law, however, provides for direct recourse by the investor against the host State and can therefore be a powerful and effective means of protecting investments during and after armed conflicts.

Investment treaties protect against expropriation, physical aggression (full protection and security), discrimination, and unfair treatment.

Investment treaties apply during armed conflict

As every treaty, investment treaties apply irrespective of armed conflicts.

However, certain protections do not apply in full force. Several treaties contain “war clauses” limiting investment protection during armed conflicts to non-discrimination. Others contain more extended clauses. Article 12(2) of the multilateral Energy Charter Treaty, for example, provides that losses of foreign investors resulting from requisitioning or destruction during armed conflict shall be compensated promptly, adequately, and effectively.

Investment treaties may also protect against occupant powers

Traditionally, investment treaties apply against the host State—that is, the State in which the investor originally invested. However, if an armed conflict leads to a change of de facto control over a territory, there is precedent that the control-taking State must apply its existing treaty obligations also to investors in the acquired territory.

This was confirmed in several arbitrations initiated by Ukrainian nationals against the Russian Federation regarding investments in Crimea. In Ukrnafta et al., the tribunal affirmed jurisdiction over Ukrainian investments in Crimea under the Russia-Ukraine Bilateral Investment Treaty (BIT). The Swiss Federal Supreme Court rejected Russia’s set-aside application and confirmed that Ukrainian investments in Crimea became protected under the Russia-Ukraine BIT through the change of de facto control. In addition, there are several unpublished decisions affirming jurisdiction in arbitrations against Russia over Ukrainian investments in Crimea under the Russia-Ukraine BIT in the cases Belbek Airport, Privatbank, Everest Estate, and Lugzor.

Potential patterns for investment claims

After a State acquires de facto control over a territory, it must treat investors of foreign nationality in accordance with its own treaty obligations. As confirmed in the Crimea cases mentioned above, the territorial application of the investment treaties of the occupant State is extended to the occupied territory irrespective of the illegality of the occupation under the Charter of the United Nations.

An argument can also be made that the occupant State becomes bound by the investment treaty obligations of the occupied State towards investors of third States (de facto succession into treaties). This could apply, for example, with regard to the Energy Charter Treaty that Ukraine is a member of.

An open question is whether the change of de facto control itself can already be regarded as a measure—for example, if that change leads to the investor being exposed to sanctions such as on the SWIFT. Another open question is also whether, after control was established, investors can raise claims for measures adopted before control was established.

Investment treaties and sanctions

Arbitration under an investment treaty can also be used to challenge the legality of sanctions.

UKRAINE CONFLICT: HOW TO MAINTAIN GLOBAL BUSINESS CONTINUITY

Our lawyers have long been trusted advisers to clients navigating the complex and quickly changing global framework of international sanctions. Because companies must closely monitor evolving government guidance to understand what changes need to be made to their global operations to maintain business continuity, we offer this centralized portal to share our insights and analyses. To receive the latest updates, subscribe to our Ukraine Conflict: How to Maintain Global Business Continuity mailing list.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Task Force
Giovanna M. Cinelli
Joanna Christoforou
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Georgia M. Quenby
Christina Renner
Melanie Ryan
Vasilisa Strizh
Carl A. Valenstein
Alexey Chertov
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Nicola Kelly
Christian Kozlowski
Maximilian Pika
Daniel Lopez Rus
Charles C. Rush
Eli Rymland-Kelly