So only the leader of the territory would be able to block attacks from neighbouring states? That could work. I'm all for it.
As for what happens to the losers, I'd suggest the following:
1) The country may choose to surrender. If so, it's land and resources are given to the conqueror. All residents become citizens of the occupying country.
2) Some/all residents may choose to flee. If this is the case, they can take a limited amount of resources and move into a nieghbouring state (with that state's permission, of course). They could also use Stalin's 'Scorched Earth' policy, whereby all resources in the region are destroyed, and thus cannot be used by the invading army.
3) The invader has the right to do as he sees fit with the region. He can destroy settlements, construct new ones and kill/imprison residents.
EDIT: Just had a thought. Could we have a rule specifying the minimum size of an invading nation? For example, only nations with an equal or larger population than their neighbour would be able to attack. A rule like this would encourage development for the purpose of expansion, rather than allow people to conquer the world at will.
