Autor: Gabriel Moran.
With two major conflicts happening in Europe and Gaza, the world is seeing an unprecedented level of conflict. As the loss of life mounts, the economic impacts of these conflicts continue to be felt. Humanitarian concerns rightly take center stage with these events, however, some may also wonder about firms whose investments and operations are located in these regions. With the bombing of cities, the loss of capital and disruptions to trade beg the question: How do firms protect investments from armed conflict abroad?
Firms use what is known as the war clause to protect their investments. War clauses, also known as a “compensation for losses clause” live within what is known as a Bilateral Investment Treaty (BIT).[1] These treaties are rather simple and do little except provide for most favored nation clauses and “generous treatment of neutral shipping in time of war.” The specification for generous treatment of neutral shipping in time of war denotes the original purpose for BIT’s and most favored nation clauses which was simply to protect non-military goods and civilian aid during conflict.[2]
The first BIT was signed between Germany and Pakistan in 1959. In it lived the first type of war clause discussed, the non-discriminatory war clause. This is the most basic war clause and it is very different from the other types in that it does not require the state to compensate an investor for any losses accrued during conflict unless the state has compensated other businesses. In short, the state cannot discriminate against who receives compensation by national origin.
The second and third types of war clause are the extended war clause and strict liability war clause. Both of which require the state to compensate investors for losses given certain conditions. The extended war clause states that if during armed conflict, the host state destroys the property of a foreign investor, the state is responsible for compensating the investor for up to fair market value of the destroyed property. One key detail is that the claimant holds the burden of proof that the host state itself destroyed the property. The strict liability war clause is the most aggressive. It states that if property is destroyed in the host nation during armed conflict, the host state is required to compensate the investor, yet there is no burden of proof in this case.
In addition to these three, there are other types of security clauses. However, all of these clauses are often thought of as inadequate to ease investor fears about armed conflict affecting their investments. The most common type, the non-discriminatory war clause, does not guarantee compensation, only that there is no discrimination in who receives compensation. Furthermore, none offer security to the investor for damages caused by the aggressor state.[3]
In conclusion, there are a variety of ways in which investors protect their investment abroad from armed conflict. These methods are part of what is known as a bilateral investment treaty. However, these provisions are difficult to interpret, enforce and are oftentimes unused.
[1] Inside arbitration: The war in Ukraine – implications for investments and contracts | Herbert Smith Freehills | Global Law Firm. Herbet Smith Freehills. (2022, July 11). https://www.herbertsmithfreehills.com/insights/2022-07/inside-arbitration-the-war-in-ukraine-%E2%80%93-implications-for-investments-and-contracts
[2] Léa Deroche, War Clauses In International Investment Law – A Need For Clarity, 2020-2021 7 McGill Journal of Dispute Resolution 36, 2020 CanLIIDocs 3865, <https://canlii.ca/t/ts28>, retrieved on 2024-07-03,
[3] Schreuer, C. (2022). Investment Protection in Times of Armed Conflict. Journal of World Investment & Trade, 23(5–6), 701–715. https://doi.org/10.1163/22119000-12340266
