Anticipating the Legal and Business Implications of the Military Coup in Myanmar

February 8, 2021, Covington Alert

On February 1, 2021, the Myanmar military seized control of the government, detaining senior civilian leaders including State Counsellor Aung San Suu Kyi and President Win Myint. The UN Security Council, G7, and multiple governments condemned the coup and called for the release of civilian leaders. The United States determined that the military’s actions constituted a coup d’état, triggering a suspension of foreign aid to the government and a review of possible economic sanctions. The EU and the UK also are considering possible sanctions.

These developments raise the prospect of an extended period of political instability and the possibility of substantial changes in the trade and investment climate. The military government’s approach to foreign businesses may depart from that of the former government, including as a result of: responses to any foreign sanctions; realignment of Myanmar’s diplomatic orientation; and policies aimed at deterring or suppressing internal dissent. Sustained instability may also result in government interference in commercial operations; disruptions and delays impacting infrastructure and energy project owners, contractors, and suppliers; supply chain disruptions; and other impediments to contractual performance.

Companies doing business in Myanmar—and companies with supply chains running through the country—should evaluate contractual, treaty-based, and diplomatic options for protecting their operations and investments. They also should consider broader implications of the coup, including under their ethics and business and human rights goals and policies.

Contractual Measures 

Companies impacted by (or which may be impacted by) the military coup should review carefully and promptly the contractual protections or defenses that may be available to them, or that may be invoked by an impacted counterparty. These measures include force majeure provisions and material adverse change clauses. Project contractors, operators, and suppliers should consider whether relief is available for schedule delays, work disruption, and/or increased cost of performance. Legal defenses including impossibility of performance and frustration of purpose also may be available.

Active monitoring and documentation of performance issues is key to preserving contractual rights and legal defenses. For example, force majeure, schedule extension, and change order provisions may include strict timing and notice requirements.

Companies also should think through the strategic effects of the contractual or legal protections they pursue. In some jurisdictions, invoking a force majeure clause may lead to the temporary suspension of obligations, while asserting the defense of frustration of purpose may lead to the rescission or termination of the entire contract.

In addition to assessing relevant contracts, firms also should review their corporate insurance policies for possible coverage for losses arising out of the coup.

Treaty-Based Measures

Myanmar has established a network of bilateral and multi-lateral investment treaties with many of its major investment partners, which protect investments made by nationals of those partners. The treaties generally provide for the resolution of investment disputes before neutral, international arbitral tribunals. They include the Korea-Myanmar bilateral investment treaty (“BIT”), the China-Myanmar BIT, and the Japan-Myanmar BIT, as well as the Association of Southeast Asian Nations (“ASEAN”) Comprehensive Investment Agreement. While Myanmar’s BIT with Singapore is not yet in effect, Singaporean investors may be able to make use of the ASEAN agreement.

Foreign investors in Myanmar also benefit from substantive protections under Myanmar’s own laws, including the 2016 Investment Law. These domestic legal protections may be enforceable under so-called “umbrella” provisions of investment treaties (which are so named because they can incorporate guarantees and protections in other instruments within the “umbrella” of an investment treaty’s dispute resolution process).

Depending on how the situation in Myanmar unfolds, relevant provisions in Myanmar’s investment treaties include those: protecting against expropriation of assets; guarding against arbitrary, discriminatory and non-transparent changes in government policy; protecting the free transfer of payments relating to an investment; and safeguarding the free movement of foreign managers and staff who operate an investment. Certain of Myanmar’s investment treaties also address losses arising from a state of national emergency, insurrection, riot, or other similar situation.

Possible U.S. Sanctions

President Biden campaigned on a platform that promised heightened support for democracy and human rights in countries where these values are under assault. The coup in Myanmar therefore serves as an early test of how the new U.S. administration will translate these ideals into practice.

The United States promptly declared the military takeover a coup, which triggered a provision of U.S. law requiring the suspension of most U.S. foreign assistance to the country. President Biden issued a statement noting that: “The United States removed sanctions on Burma over the past decade based on progress toward democracy. The reversal of that progress will necessitate an immediate review of our sanction laws and authorities, followed by appropriate action.”

The State Department announced it was reviewing possible sanctions, including on military leaders deemed to be responsible for the coup (some of whom already were the target of U.S. sanctions based on prior actions against religious minorities). Beyond threatening sanctions against designated individuals in Myanmar—presumably by blocking their assets subject to U.S. jurisdiction and preventing them from traveling to the United States—President Biden’s statement suggests that the U.S. administration will consider re-imposing sanctions that had been applied during the last period of military rule, and then lifted in response to the transition to civilian rule. Among the sanctions previously applied to Myanmar by the United States were prohibitions on:

• All imports into the United States from Myanmar;
• New U.S. investment in Myanmar;
• The export of U.S. financial services to Myanmar by or involving U.S. persons;
• Targeted asset-blocking measures against certain officials in Myanmar; and
• Importation into the United States of jadeite and rubies originating from Myanmar, and any jewelry containing them.

These prohibitions were progressively lifted as the transition to civilian rule proceeded in Myanmar, and it therefore is possible that, if the coup is not reversed, the Biden Administration will choose to re-impose some or all of them in a progressive manner.

Notably, the U.S. sanctions did not, as a general matter, encompass traditional "secondary" sanctions of the sort the United States applies to (non-U.S.) third parties transacting certain forms of business with Iran and Russia. Some of the U.S. sanctions authorities targeting designated individuals or entities in Myanmar included authority to penalize third parties that provided financial or "material support" to the designated individuals or entities, but typically those measures targeted support for whatever conduct triggered the underlying sanctions designation.

Reaction of Other Countries

Europe: EU members were quick to condemn the military takeover and the EU is reportedly exploring responses that could include rolling back preferential tariffs and imposing or re-imposing sanctions on top generals and coup leaders. The United Kingdom (current chair of the G7 and UN Security Council) also condemned the coup and stated that it is “pursuing all levers to ensure a peaceful return to democracy.” As recently as December 2020, the United Kingdom imposed targeted sanctions on individual military leaders in Myanmar under its EU Exit sanctions regime. 

ASEAN: Within the region, the response has been limited thus far. In keeping with the organization’s emphasis on consensus and non-interference, ASEAN stopped short of condemning the coup. ASEAN states are unlikely to support strong economic measures or other sanctions in response to the coup.

China: Some press reports suggest that Myanmar’s coup may lead to a turn toward China, but the diplomatic situation is complex. Myanmar’s previous military government initiated the country’s return to civilian rule in part to reduce dependence on China, and Aung San Suu Kyi had increasingly looked to China for diplomatic protection in the face of Western criticism of Myanmar’s treatment of the Rohingya minority. China’s foreign ministry said Beijing had “noted” the coup, but later joined other UN Security Council members in a statement expressing “deep concern”, stressing “the need to uphold democratic institutions and processes”, and calling for the release of detained civilian leaders.

Firms that have invested in Myanmar may be able to work with foreign governments to discourage the government from adopting measures that harm foreign investment and that undermine the country’s economic future.

Additional Considerations

The developments in Myanmar pose complex ethics and compliance challenges for global firms. Among other measures, foreign investors should consider assessing whether their operations in Myanmar comply with their business and human rights goals and policies, evaluating in particular any links between their local operations and members of the military leadership. Such an assessment will also be useful in preparing for potential economic sanctions and trade controls.

How Covington Can Help

Covington’s International Arbitration and Litigation teams can help clients navigate business interruptions arising out of the Myanmar coup, from evaluating available claims and defenses to developing a comprehensive dispute resolution strategy. Our disputes lawyers form part of our Global Problem Solving team, which includes International Trade, Cross-Border Investment and National Security, and Trade Controls experts, and can develop integrated strategies for protecting foreign investments and preparing for any eventual trade control measures.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our International Arbitration, Public Policy, and Trade Controls practices.