War’s economic costs from unlawful force often fall on host States and investors, not the responsible State.
Recent military exchanges involving Israel, Iran and the United States (US) have once again revived debates about the legality of the use of force under international law. While much of this discussion focuses on whether such actions comply with Article 2 (4) of the United Nations (UN) Charter, far less attention is paid to an equally important question: who bears the economic consequences of unlawful force? This reveals a structural gap in the current legal framework. While the prohibition on the use of force is well established, the financial losses that follow, particularly those suffered by foreign investors, are rarely attributed to the responsible State. Instead, they are addressed by host States and private actors primarily through bilateral investment treaties (BITs), where such losses are treated as political or war-related risks, rather than harm attributable to a specific State. This approach, where conflict-related losses are treated as the responsibility of the host State, rather than the State that actually caused harm, appears in many BITs. These treaties often include provisions dealing with losses during armed conflict, referred to as “war clauses”. For example, Article 4 of the United Kingdom Model BIT states that investors who suffer losses because of war, armed conflict, revolution or civil disturbance should receive treatment no less favourable than that accorded to nationals or investors of any third state. However, the practical value of such provisions is limited. They primarily regulate the obligations of the host State rather than determining responsibility for damage caused by external military force. Consequently, they do not address situations where harm is inflicted by a third State acting outside the investment treaty framework.
While the prohibition on the use of force is well established, the financial losses that follow, particularly those suffered by foreign investors, are rarely attributed to the responsible State.
This shift has real-world consequences. Recent tensions in West Asia have revived familiar questions about sovereignty, intervention, and compliance with the UN Charter. The economic effects, however, are borne by foreign investors. They face disrupted contracts, regulatory uncertainty, and unforeseen losses that international law continues to treat as incidental fallout rather than consequences engaging State responsibility.
Under Article 2(4) of the Charter, the use of force is prohibited except in narrowly defined circumstances, such as self-defence or when authorised by the UN Security Council. If this provision is breached, the use of force is unlawful and the state concerned may incur responsibility. In practice, however, compensation for such violations is rare and usually depends on political negotiation rather than constituting a clear legal entitlement for affected parties.
As a result, a gap emerges between the illegality of the act and responsibility for the harm it causes. Under general international law, the State that uses unlawful force is responsible for the resulting losses. In contrast, investors typically bring a claim against the host State through the applicable BIT. In practice, this means that the host State becomes the immediate respondent for losses incurred during a conflict, even though the underlying harm arises from the military action of a third country.
Ongoing instability in Libya illustrates that investments remain vulnerable to conflict and political fragmentation. It is highly dependent on the stability of the State. Although Libya is a party to many BITs, the treaties offer little guidance in situations where losses arise in the aftermath of conflict rather than host State conduct. Consequently, investors are often left to seek claims from the host State, even where the underlying harm is caused by general conflict dynamics. This pattern reflects a deeper conceptual weakness in the international legal order, where some of international law’s strongest substantive prohibitions coexist with strikingly weak enforcement mechanisms. In practice, the financial consequences of unlawful force are shifted onto private actors rather than the State responsible. International investment law offers little by way of correction, focusing instead on host state conduct under BITs.
Investors are often left to seek claims from the host State, even where the underlying harm is caused by general conflict dynamics.
Scholarship has noted that although BITs may continue to apply during armed conflict, they offer limited guidance where losses stem from conduct attributable to third states rather than the host state. In such situations, it becomes unclear who should ultimately bear the losses.
Arbitral tribunals have rarely dealt with investment losses arising from armed conflict. One example is Asian Agricultural Products Ltd v Sri Lanka (AAPL), where the tribunal considered the destruction of an investment during counterinsurgency operations and examined the host state’s responsibility under the applicable BIT. Nevertheless, cases of this kind typically concern conduct attributable to the host State itself. Where investor losses stem from armed action attributable to third States, the responsibility for such losses becomes significantly less clear.
Investment treaties are designed to bind host States, rather than intervening States. Consequently, doctrines such as force majeure or necessity may further complicate matters. Where instability is externally induced, host States may invoke these doctrines to justify deviations from treaty obligations. While this may protect the host State from liability, it does not shift responsibility to the State that actually caused the harm. The result is a legal void in which investors are left without any effective remedy: the host State avoids responsibility, and the intervening State remains outside the scope of the BIT.
International law has not been entirely silent on the relationship between serious wrongdoing and individual loss. Over time, legal mechanisms have recognised that grave State conduct can generate injuries that are not solely diplomatic or political in character. However, this recognition remains limited when economic loss arises from unlawful external force. In such cases, the costs of illegality are subtly transferred to private actors, responsibility is dispersed, and remedies remain indirect.
This outcome does not align with some of the basic principles of international law. In the Chorzów Factory case (a landmark decision of the Permanent Court of International Justice concerning the unlawful expropriation by Poland of a nitrate factory partly owned by German interests), it was established that a breach of international law entails an obligation to make full reparation. The same reasoning should apply to economic losses caused by unlawful uses of force. In practice, however, this principle operates primarily at the inter-State level. For private actors harmed by unlawful uses of force, remedies remain indirect and are usually dependent on diplomatic protection or political will.
In the Chorzów Factory case (a landmark decision of the Permanent Court of International Justice concerning the unlawful expropriation by Poland of a nitrate factory partly owned by German interests), it was established that a breach of international law entails an obligation to make full reparation.
Under the framework of State responsibility, the economic consequences of unlawful force should fall on the intervening State. In practice, however, they are borne by the host State and private actors. Although international law recognises, notably in cases of environmental damage, that serious breaches may entail reparation for foreseeable economic injury, effective mechanisms to deliver such compensation remain absent.
The deeper problem revealed by unlawful uses of force is therefore not merely economic, but conceptual. When the economic consequences of unlawful force are framed as market risk rather than legal injury, responsibility is systematically deflected from the wrongdoer. The prohibition on the use of force endures in formal terms, but its consequences are marginalised in practice.
Addressing this issue doesn’t require major changes to international law, but it does demand a clearer understanding of how different legal regimes interact. At a minimum, it requires recognising that the economic consequences of unlawful force are not merely incidental, but constitute part of the harm that international law should address. One possible response to this is the use of diplomatic protection, enabling States to bring claims on behalf of investors against the States responsible for the harm. Another, more structured approach lies in the creation of post-conflict compensation mechanisms. For instance, the United Nations Compensation Commission, established after Iraq invades Kuwait, demonstrates that large-scale economic losses resulting from unlawful force can be addressed through institutional frameworks that directly attribute responsibility to the wrongdoing State, rather than shifting the burden onto host States or private investors. More broadly, this may mean rethinking how investment law and general international law operate together, especially in serious situations. Otherwise, the costs of unlawful force will continue to fall on private actors and host States, leaving the link between breach and responsibility incomplete. Ultimately, this is not only about clarifying responsibility; it is also about maintaining the credibility of international law.
Jyoti Singh is a Delhi-based advocate and researcher. She has worked as a legal consultant to the Government of India and has been actively involved in several investment treaty negotiations.
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Jyoti Singh is a Delhi-based advocate and researcher. She has worked as a legal consultant to the Government of India and has been actively involved ...
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