Importance of Stabilization Clause in International Investment Agreements and its Validity in International Law

In the last post, we understood the basics relating to stabilization clauses in International Investment Agreements or Treaties. A Stabilization Clause is a clause in an International Investment Treaty or Agreement that makes sure that the law in force in the Host State at a given point of time is the law that will apply to supplement the terms of the contract, regardless of future legislation or decrees issued. Now let us read about the validity of stabilization clauses in International Law and the case laws relating to it.

In the case of Texaco v. Libyan Arab Republic^[1], it was stated that:

“Nothing can prevent a State, in the exercise of its sovereignty, from binding itself irrevocably by the provisions of a concession and from granting to the concessionaire irretractable rights….  In entering into concession contracts with the plaintiffs, the Libyan State did not alienate but exercised its sovereignty.”

Thus, we see that a Stabilization Clause is clearly a valid and effective principle under the International Law. However, there is no unanimity as to the consequences that arise from violation of such a clause. One of the most important judgments that throws some light on this aspect is LIAMCO v. Libya^[2]. In this matter, the arbitrators did not order Specific Performance of a Concession Agreement even when the agreement contained a Stabilization Clause. The arbitrators usually show a degree of respect towards the State Sovereignty. However, the utility of a Stabilization Clause lies in the fact that its presence in a treaty or agreement is likely to affect the amount of damages awarded or on the certainty of the awarding of damages.^[3]

It is also to be observed that while computing the damages, the courts or the tribunals do not award lucrum cessans (lost profits)^[4]. Hence, most of the times, the investors are not fully compensated of what was taken. However, we must not forget that a Stabilization Clause does play a major role in convincing the court to grant a remedy and the award of “equitable compensation”.^[5]

It is also important to note that acts of the state like nationalization are sovereign acts and it is impossible to read such acts implicitly within a Stabilization Clause. Any limitation on a state’s right to nationalize is a direct constraint on the exercise of its sovereignty. Hence, forgoing the right to nationalize is a clause that must be expressly mentioned in the Stabilization Clause or within the agreement itself.^[6] Apart from “equitable compensation”, “appropriate compensation” is also used as a parameter while computing the damages to be awarded.^[7]

Thus we see that a Stabilization Clause surely helps in increasing the likelihood of the damages being awarded. There are several international agreements that assist in the enforcement of foreign arbitral awards. One of the most important agreements in this respect is Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958.^[8] This Convention has provisions for transnational enforcement as well.

Many a times, parties keep the Damages Clause as well along with the Stabilization Clause in the agreement in order to increase the likelihood of higher damages in case of a breach. Such a Damages Clause usually provides that if the State expropriates investor’s property, the state is liable to compensate the investor for the full value. Sometimes, ‘full value’ (damnum emergens) includes ‘lost profits’ (lucrum cessans) as well. However, caution needs to be exercised while negotiating such a clause in an agreement. Sometimes, ‘full value’ and ‘lost profits’ might mean different things. Hence, appropriate method of valuation and accounting must be mentioned in the Damages Clause itself.

Thus we see that the Stabilization Clause, if framed properly under right circumstances benefits the investors immensely and it does pass the test of validity on the anvil of International Law. It also keeps a check on the illegal exercise of the power to expropriate the investor’s property. It would also ensure an award of damages which compensates the investor for the full value of the property^[9].

International Investment Law Notes

1. Definition of Stabilization Clause

2. Importance of Stabilization Clause in Investment Agreements

3. Investment Disputes in Public-Private Partnerships (PPPs)

4. Expropriation Clause, Stabilization Clause and Public-Private Partnership
5. The Darker Side of Stabilization Clause in Investment Agreements

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[1] Texaco Overseas Petroleum Company and California Asiatic Oil Company v. The Government of the Libyan Arab Republic, 53 I.L.R. at 474.

[2] Libyan American Oil Company (LIAMCO) v. Government of the Libyan Arab Republic, Award of 12 April 1977, 62 I.L.R. 140, 170 (1980); 20 I.L.M. 1 (1981).

[3] See M. N. Shaw, International Law, 516-21 (1991).

[4] Supra note 4.

[5] Id. This concept was also discussed in the LIAMCO case.

[6] This reasoning was endorsed in the matter of Government of Kuwait v. American Independent Oil Company (Aminoil), 66 I.L.R. 519, 519-31 (1984).

[7] Permanent Sovereignty over Natural Resources, para. 4, G.A. Res. 1803.

[8] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 38, 1959.

[9] Paul E. Comeaux and N. Stephan Kinsella, Reducing Political Risk in Developing Countries: Bilateral Investment Treaties, Stabilization Clauses, And MIGA & OPIC Investment Insurance, 15 N.Y.L. Sch. J. Int'l & Comp. L. 1.