An unending quest for legal stability in a host country through balancing an investor's legitimate expectation and enough policy space for a sovereign state to legislate and regulate the formers' activity (1) is endemic in the developing world. The zeal of foreign investors in exploring untapped reserves of host countries and the need for attracting foreign direct investment into potential economic sectors of the economy have forced both foreign investors and host countries to attempt to reach a consensus somewhere. The insertion of a stabilization clause (2) into an investment contract is where the consensus of both parties meets. (3) The once hotly-debated stabilization clause that could often be seen in state contracts between host states and foreign investors entered a long period of hibernation beginning in the 1980s. (4) Several factors--such as the end of a nationalization wave in the third world, the collapse of the Soviet Union, fierce competition for foreign investment, and tribunals' continuous supportive approach for its validity--might be considered decisive for this temporal pacific period. (5)
After almost twenty years of inaction, in the wake of resource nationalism, the stability clause has again emerged in investment arbitration. However, this time around the problem was not whether the stability clause had legally binding force against states' contractual undertakings, but rather, in defining the legitimate scope of states' discretionary powers vis-a-vis the foreign investor. This paper will argue that a stabilization clause has accomplished its investment protection task excellently. First and foremost, the host countries believed the stability clause to be an indispensable and persuasive tool for attracting necessary foreign investment in risky environments. Second, investors relied on the stabilization clause even more so due to the fact that investment tribunals in the twenty-first century have unanimously considered it valid and legally binding, with compensation necessary upon its breach. Though there are some open-ended questions, which remain to be answered, the stability clause contributed enormously to the "sustainable development" of host states (6) by stabilizing host states' legal regimes and giving confidence to foreign investors who are very vulnerable to political and legal risks. (7) Hence, there is a strong belief, which exists in host states, that legal stabilization tools have given significant contribution to the host state's economy. (8)
A correctly drafted state contract neither limits a state's bona fide public policy measures, nor does it put investors under the pressure of arbitrary actions of the host state. (9) In particular, this new type of stabilization clause, namely, an economic equilibrium clause or renegotiation clause ("EEC") leaves enough room for both parties to maneuver the stabilization clause according to its own needs. (10) Despite the fact that no known arbitral award intensively dealt with EEC to date, (11) recent cases have begun exploring this new type of stabilization clause. For instance, in a landmark case in 2012, an ICSID tribunal judged the obligatory nature of correction factors in EECs. (12) That investment arbitration jurisprudence has also strengthened EECs' role in mega-projects.
This paper is organized as follows. After a short introduction in Section II, Section II will present an overview of the stabilization clause, its rationale, validity, and effect, its long hibernation period, and what factors led it to end this phenomenon. Section III will deal with an emergence of a completely new generation of stabilization clauses, namely EECs in practice and also in investment arbitration. The paper will also explore its legal content, analyze two unprecedented empirical surveys on stabilization clauses, and some investment arbitration cases. Section IV will indicate other factors that widely strengthened acceptance of stabilization clauses briefly. By way of an example, the unique legal contribution of Latin American countries--their legal stability agreements, stabilization norms in a domestic law of host states, and international investment treaties' relevant substantive norms will also be surveyed. This paper will also show how investment tribunals abandoned discussing validity of stabilization clauses, moving surprisingly towards the examination of content of stabilization clauses and interpreted them in unprecedented depth. As a reminder, the author wishes to confess that since natural resource foreign investors often employ this tool, the absolute majority of past research related to the stabilization clause is also on natural resource foreign investment. Although the stabilization clause is also widely used in other fields of economic activity, (13) frequent referral to the natural resource sector is unavoidable.
TRADITIONAL STABILIZATION CLAUSES
In this section, the content of traditional stabilization clauses, their validity and effectiveness, and their historical trajectory is examined. The brief history covers issues like the scope of coverage of the stabilization clauses, the rationale behind host states' consent, and the main types of classical forms of a stabilization clause. (14) This section will briefly pay attention to the hotly debated legal issues surrounding the stabilization clause which center on its validity and effectiveness. Next, in subsections B and C, the factors resulting in a long hibernation are presented, followed by the end of hibernation.
As one of the techniques for stabilization of the contractual relationship, a stabilization clause indicates the contractual clauses in private contracts between foreign investors and host states that address the variety of issues with changes in law--from amendment of the host state's laws to changes of interpretation of laws by judicial bodies in the host state during the terms of the contract. (15) It may cover all areas of regulation or limited to certain types of issues. (16) It may take the shape of a special clause in a contract or it may be concluded as an entirely distinct agreement. Indeed, a recent investment treaty arbitration case defined it (in the context of Mongolia) as "an agreement between a State and an investor for the purpose of stabilizing (freezing), at least to a certain extent and for a certain period of time, the taxes payable by an investor and/or other legislative, regulatory or administrative measures affecting it." (17) The beginnings of the usage of a stabilization clause by Anglo-American lawyers (18) can be tracked to the 1930s in private contracts or concessions between U.S. firms operating in Latin America. (19) Nowadays, it is very widely used by foreign investors in not only the developing world, but in some Organization for Economic Co-operation and Development ("OECD") countries as well. (20)
A recent U.N. International Finance Corporation ("IFC") study of the stabilization clause argued that not many OECD countries consent to the adoption of stabilization clauses in their contracts with foreign investors because of their internal constitutional orders, which do not let a former government conclude the agreements that bind the next government. (21) For instance, developed market economies do not see themselves to be bound by contract with a foreign investor, since it is opposite from their constitutional framework. (22) Then why do developing and transitional countries widely consent to insertion of a stability clause in private contracts? Scholars enumerate several reasons, such as fragile and weak legal systems of most of the developing world; (23) high political risk; (24) investors' and lenders' concerns; (25) a relative weakness of developing countries in terms of bargaining power, (26) lack of financial resources or technological knowledge, (27) and competition for foreign investment. (28) In sum, Abdullah Faruque aptly notes the purpose of a stabilization clause is to seek to provide protection from political risk, (29) ensure legal certainty, and encourage foreign investment. (30)
By virtue of its name, a stabilization clause is an invention of investors to stabilize host state's actions, which have a negative impact on the economics of a project; however, its content and shape is no more constant, unified, and static. As state contracts are concluded in a quid pro quo basis, such typology is not absolute (31) and it is constantly evolving. When the states' political and legal regime has in the past been subject to frequent changes or volatility, then it is reasonable for such states to agree to stabilization clauses in order to attract foreign direct investment ("FDI"). (32) A stabilization clause would require the host state not to alter its general legal regime for the area addressed in the clause. (33) For instance, taxation, "the principal threat to contract stability," (34) is one of the most common areas and key issues that a stabilization clause will address. (35) Labor, free transferability, property, export-import provisions, or even far-reaching general legislative and contractual framework are other potential areas that may be covered by a stabilization clause. (36)
Turning to taxonomy of stabilization clauses, until the onset of hibernation of stabilization clauses, the types mentioned below were the most widespread forms.
Such clauses aim to neutralize the project from application of newly adopted laws to the contract. (37) They are the strictest (stabilization clause in Stricto Sensu) and once the most popular forms of stabilization clauses in investment projects. (38) The harshly criticized contract of Mittal Steel Holdings NV with Liberia included such a clause: (39)
For the avoidance of doubt, any amendments, additions, revisions, modifications or other changes to the Tax Corpus made after the Amendment Effective Date shall not be...
The end of hibernation of stabilization clause in investment arbitration: reassessing its contribution to sustainable development.
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COPYRIGHT GALE, Cengage Learning. All rights reserved.
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