In the present
series, we will understand the meaning of ‘Stabilization Clause’ and its
utility in PPP (Public-Private Partnership) Projects. The present article in this
series will only discuss the basics relating to Stabilization Clauses in
International Investment Law. In the subsequent posts, we will talk about
negative and positive features of stabilization clauses and the effects that it
could entail upon the implementation and efficiency of the PPP Projects.
Stabilization Clause
What is a Stabilization Clause?
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. And if that is
not the case, the Stabilization Clause also mentions the permissible or
impermissible changes in law subsequent to the Treaty or Agreement and the
extent to which those changes are to become operative.[1]
What is the main purpose of a Stabilization Clause?
According to Chiati, the main purpose is
to “preclude the application to an agreement of any subsequent legislative
(statutory) or administrative (regulatory) act issued by the government . . .
that modifies the legal situation of the investor.”[2]
Thus, we observe that one of the most important
aspect of the Stabilization Clause is the exclusion of the government’s right
to one-sidedly modify the investor’s rights by changing its Municipal Law.[3]
Types of Stabilization Clauses[4]
1. Freezing Clause – Such clauses fix or
freeze the applicable laws affecting the project during the term of the
project. Under such clauses, the laws adopted after the date of the Agreement
do not apply to the project unless the investor agrees.
2. Economic Equilibrium Clause – Under
such clauses, changes in law occur after the implementation of the project has
started and the host country usually indemnifies the investors from the costs
of ensuring compliance with the new laws.
3. Hybrid Clauses – Such clauses are a
combination of the Freezing Clauses and Economic Equilibrium Clauses. Under
this clause, the investors are not exempted from the application of new laws.
Instead, a clause exists in the agreement that the investor may be granted such
an exemption. Such clauses also talk about the quantum of compensation that is
to be awarded.
In the next post, we will read about validity of Stabilization
Clauses in International Law.
International Investment Law Notes
4. Expropriation Clause, Stabilization Clause and Public-Private Partnership
5. The Darker Side of Stabilization Clause in Investment Agreements
5. The Darker Side of Stabilization Clause in Investment Agreements
[1] Fernando R. Tesón, State
Contracts and Oil Expropriations: The Aminoil-Kuwait Arbitration, 24 VA. J.
INT'L L. 323 (1984)
[2] A. Z. El Chiati, Protection
of Investment in the Context of Petroleum Agreements, 4 Recueil Des Cours
D’Academie De Droit International [R.C.A.D.I.] (Collected Courses of the Hague
Academy of International Law) 9, 158 et seq. (1987).
[3] Id.
[4] See http://us.practicallaw.com/1-501-6477
(visited as on 25th September, 2014)
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