The Fighting's Done, Now Pay Me: Investment Treaties, War, and State Liability.

TABLE OF CONTENTS I. INTRODUCTION 996 11. BILATERAL INVESTMENT TREATY TERMS AND INVESTOR WAR LOSSES 1000 A. Full Protection and Security Clauses 1002 1. Scope of Protection 1003 2. The Standard of Protection 1004 B. War-Loss Clauses 1005 1. Basic War-Loss Clauses: General and Measures-Linked 1005 2. General War-Loss Clauses as Lex Specialis 1009 3. "Advanced" War-Loss Clauses 1010 III. ARBITRAL JURISPRUDENCE ON WAR-LOSS CLAUSES 1011 A. The Historical Trajectory of War-Loss Clauses: Sri Lanka and Argentina 1013 1. AAPL v. Sri Lanka 1013 2. The Argentine Tribunals 1015 3. A Brief Reprieve: L.E.S.I. [upsilon]. Algeria 1018 B. The Modern Application of War-Loss Clauses: Libya 1019 1. Libyan Liability for Investors' War Losses 1020 a. Strabag v. Libya 1021 b. Cengiz v. Libya 1023 IV. STRIKING THE BALANCE: INVESTOR RIGHTS AND STATE SOVEREIGNTY IN WARTIME 1027 A. An Interpretive Solution: Arbitral and Scholastic Recognition of a Lex Specialis War-Loss Compensation Regime 1029 1. The Ordinary Meaning of the Terms 1030 2. The Context of the Provisions 1031 3. Lex Specialis as a Relevant Rule of International Law 1032 4. Benefits and Drawbacks of the Interpretive Solution 1033 B. Future Treaty Approaches: Piecemeal and Multilateral 1034 1. The Improved General War-Loss Clause 1034 2. The Individual Treaty Approach 1035 3. The Multilateral Approach 1036 V. CONCLUSION 1037 I. INTRODUCTION

The West cheered in the early 2010s as the Arab Spring bloomed and anachronistic strongman regimes fell like dominoes to youth-led movements calling for democratic reform. At least one interest, however, was muted in its jubilation--foreigners who had invested heavily in the petrochemical-rich region. Armed conflicts are messy, chaotic affairs in which destruction is rarely limited to the military alone. Foreign enterprises, conspicuous targets for theft and destruction, are often especially affected. In Libya, where the potential for disaster was particularly acute, foreigners had invested billions in the period preceding the bloody civil war that has now drawn on for nearly a decade.

States like Libya, engulfed in armed conflict, are often faced with the most dire of circumstances. Governments approach collapse, economic disaster looms, control of territory is lost, and the ability to protect citizens or control armed militias evaporates. In crises of this magnitude, states are forced to grapple with difficult decisions. These decisions not only affect compliance with international obligations, but may determine a state's very survival. At the same time, states have accepted duties to foreign investors under investment treaties in order to induce foreign investment domestically or to protect their own investors' ventures abroad.

Balancing state sovereignty and investor rights in wartime is a delicate line which, thus far, the international investment regime has been ill-suited to walk. Part of this stems from the nature of the international investment system. International investment is primarily governed by a fragmented system of bilateral investment treaties (BITs) negotiated between individual states, each with its own quirks and differences. Arbitrators who hear cases arising under these treaties are not obligated to follow the precedent of previous tribunals when rendering decisions. The international investment regime thus creates a substantial degree of uncertainty for states at war, problematic for their ability to make informed decisions in the heat of conflict. For example, a state's duty to send military forces to protect a foreign construction site suffering damage and theft at the hands of militia groups may depend on the nationality of the investment's owner. (1)

BITs and other investment agreements have given investors standing to bring claims to recover damages for their losses directly against host states. For losses incurred during an armed conflict, investors typically claim breach of a host state's duty to provide an investment with adequate protection under a BIT's full protection and security (FPS) clause. (2) Defending against these claims, host states have often argued that they have no duty to compensate for breaches of FPS clauses because a BIT's war-loss clauses (3) create a lex specialis regime governing investor compensation in the context of armed conflict. A typical war-loss clause states that investors are only to be compensated for losses incurred during wartime on a national treatment or most-favored-nation basis, meaning that a duty for a state to compensate an investor under the treaty arises only when it has provided compensation to domestic investors or other foreign investors. (4) The lex specialis cannon of treaty interpretation holds that specifically applicable treaty terms displace general terms when the terms conflict. (5) In relation to FPS and war-loss clauses, this means that a state's duty to compensate investors for the breach of "general" FPS clauses is displaced by the compensation regime set forth in war-loss clauses, which specifically apply in times of armed conflict. (6) Because states rarely compensate investors for losses in these contexts, a lex specialis regime based on war-loss clauses provides a solution to the difficult problem of limiting exorbitant state liability to investors for war losses.

Whether war-loss clauses in fact create such a regime is controversial and unsettled in international investment law, (7) but this was not always the case. The first investor state dispute settlement (ISDS) tribunal to render a decision based on a BIT grappled with this very question and seemed to implicitly answer in the affirmative. (8) As time has gone on, however, treatment has varied. In addition to the fragmented nature of the international investment regime, this uneven treatment partly stems from the proliferation of a modified version of the war-loss clause, which, rather than limiting all compensation for investor losses sustained in armed conflict on a national treatement or most-favored-nation basis, (9) applies the limitation only to "measures [the state] adopts in relation to such losses." (10) This weakens the lex specialis argument and has the effect of imposing on states liability for failing to provide full protection and security to foreign investors, a difficult endeavor in the heat of armed conflict. (11) Troublingly, arbitral tribunals have largely failed to distinguish between the two distinct types of war-loss clauses and have rejected lex specialis arguments regarding both iterations. They have instead typically imposed an FPS duty on states during armed conflicts, creating additional burdens and uncertainty for regimes in already dire circumstances. (12) The various arbitral awards resulting from damage to investments incurred during the Libyan civil war exemplify this problematic situation.

In the absence of a special compensation regime for war losses, arbitrators and treaty terms often swing too far towards imposing heavy liability on states for damage caused by the various actors in an armed conflict. Arbitrators also engage in dubious post-hoc analyses of a states' military decisions. (13) Despite having no obligation to follow precedent, arbitrators often rely on previous decisions in order to avoid engaging in substantive analysis of treaty terms and states' defenses, as seen in their treatment of war-loss clauses. (14) Another concern under the current treaty regime is that arbitrators could theoretically move too far in the opposite direction, totally abrogating states' duties to protect investors which could discourage foreign investment important for economic development. It is critical that the international investment regime correct itself in order to balance these two interests, while also striving to create legal certainty in order to aid state decision-making in wartime.

This Note aims to show that the prevailing arbitral interpretation of war-loss clauses harms states by creating excessive liability and uncertainty, how these harms can be avoided through proper interpretation of current BITs or the negotiation of new treaties, and why a proper balance between investor and sovereign rights is critical in the context of armed conflict. Part II will discuss BITs generally, the various iterations of war-loss clauses, and the more standardized full protection and security clause. Part III explores arbitral tribunals' treatment of the interplay between war-loss and full protection and security clauses by discussing several classic decisions before turning to the modern doctrine as applied in the context of the Libyan civil war. Part IV will discuss three potential solutions: first, an interpretive solution that encourages arbitrators and scholars to recognize the lex specialis compensation regime created by certain war-loss clauses contained in treaties currently in force; second, a piecemeal solution that adopts more balanced iterations of war-loss clauses into new BITs; and third, a new multilateral instrument for the treatment of investments in armed conflict that would supersede BITs in extreme circumstances while still leaving room for investors to make claims when they have suffered intentional harm at the hands of host states.

2. BILATERAL INVESTMENT TREATY TERMS AND INVESTOR WAR LOSSES

   Bilateral Investment Treaties (BITs) have exploded in number since first being created in the mid-twentieth century, with approximately 2,342 in force today according to the United Nations Commission on Trade and Development (UNCTAD). (15) BITs are agreements between two states wherein each state agrees to give a certain level of protection and treatment to investors of the other state. (16) The substance of these standards is contained in the treaty's terms. Critically, BITs nearly always afford individual investors or companies the ability to bring a claim directly against host states when they feel a state has breached its treaty...