National Security, Investment Screening and Arbitration: After the Investment Is Made

This post is adapted from remarks by Csaba Rusznak delivered at the 16th Annual Investment Treaty Arbitration Conference in Prague, organized by the Ministry of Finance of the Czech Republic.  

Much of the discussion about investment and national security focuses on screening mechanisms, which in the large majority of cases operate before an investment is made. But sometimes states take measures that affect the investment after it is made. We refer to these as "post-establishment" restrictions. This post looks at what these restrictions are, the four types of claims investors are most likely to bring, and some practical guidance for States that are designing and implementing them.

What Are Post-Establishment Restrictions?

These are measures such as export controls, technology restrictions, protection of important infrastructure, critical minerals policies, and rules affecting defense-adjacent industries. They arise when an investment has already been made—that is, goods or services are already being produced in the host State—and the State then imposes restrictions for national security reasons that affect the investor's ability to sell what it produces.

A few examples:

•       A company builds a manufacturing facility for sensitive technology. The host State later designates that technology as an important national security advantage and restricts the markets to which the products can be exported.

•       An investor develops and begins operating a rare earth mine. A supply shock prompts the host State to reconsider its liberal policy on exporting those minerals.

•       An investment that has existed in the host State for years becomes problematic because the investor is found to have close ties to a foreign State that has become a strategic competitor, and the investment sits in a highly sensitive industry.

The key question is how international law, and investment arbitration in particular, will approach these cases:  what claims might these measures generate, and how might tribunals evaluate them? Four themes stand out, with naturally some overlap: legitimate expectations, reasonableness and proportionality, due process, and discrimination.

1. Legitimate Expectations

An investor will readily argue that a post-establishment restriction violates the expectations it held when it invested. Being able to sell its products and services without undue interference was, after all, a key assumption behind the investment. The argument is strengthened where there is evidence of written commitments from the State at the time of establishment. Targeted restrictions can upset that balance.

But parties and tribunals will increasingly have to reckon with the third-State behavior that motivates restrictive measures in the first place, and how that dynamic shapes the legitimate expectations analysis. Can an investor legitimately expect that the outbreak of war in the host State's region will leave the conditions of its investment untouched? Can it expect that evolving geopolitical and military rivalries will play no role in the host State's trade and investment policy?

2. Reasonableness, Rationality, and Proportionality

When restrictions are introduced, what do they look like? Are they rational, proportionate, and reasonable, or are they judged to be politically motivated, overly cautious, and focused on perceived security interests at the investor's expense?

In the fog of war, whether kinetic or economic, it is understandable that a State might over-calibrate and take an unduly cautious approach. But what happens when the threat that justified the measure changes or becomes less acute, yet the restriction remains? What if the measure evolves into one that protects local industry rather than an essential security interest? Does the latitude afforded to States stay constant as conditions change? Tribunals may not think so.

There is also the question of third-State pressure. Suppose another country wants the host State to adopt a measure that the host State does not itself consider necessary. Does the host State's desire to remain in the good graces of an important political, economic, or diplomatic partner matter? Or must each country's policies stand on their own?

3. Process

What should the process look like for introducing these measures? One can imagine restrictions in sensitive industries being conceived and implemented with little or no public input, bypassing traditional rulemaking. A State might also forgo broad-based policy in favor of restrictions aimed at individual companies, with greater exposure to the sensitive technology or industry driving the concern.

Does the State need to consult affected companies in advance? Is failing to do so a violation of the investor's rights? Or is access to administrative remedies before the host State's courts sufficient? And how has the State defined the danger it perceives, and the extent to which the restriction is immediately necessary?

4. Discrimination

When post-establishment measures target investors from a particular country, how does that affect the analysis? Can the host State credibly argue that the targeted investor and others in the same industry are not similarly situated? If they are similarly situated, how can discrimination on the basis of national origin be justified?

Is it enough to say that the investor is from a certain country? Is State ownership required, or is closeness to the government sufficient? What must be shown about the danger the investor's home State poses? Is it enough that the two States are geopolitical competitors, or must the State particularize a more direct threat?

Practical Guidance for States

There are no easy answers, and as with investment claims generally, each case will turn on its facts. But a few guidelines can help States keep the room to protect legitimate security concerns while also preserving the reputation of their investment climates, which are themselves an important component of national security and stability.

1.     Define the danger. Formulate the restriction to address a concern that is defined as specifically as possible.

2.     Work within your administrative and legal system. A restriction upheld by national courts is harder to challenge than one taken unilaterally by a ministry.

3.     Aim for broad applicability. Restrictions should not rest mainly on investor’s nationality.

4.     Remember that investment itself supports security. A robust and healthy foreign direct investment environment is an important pillar of economic and national security.

A Closing Thought

Today's increasingly protectionist environment should not blind us to that last point. The past half-century of global development has brought incredible advances for humanity, and investment has played a critical role. We should take care not to foreclose that path in the future.