STABILIZATION CLAUSE IN FOREIGN DIRECT INVESTMENT
I. INTRODUCTION
I. INTRODUCTION
The
illusion of the benefits foreign investment has been the
dangling carrot for many developed and developing countries. It is based
on the
belief that foreign investments, particularly direct investments,
positively
impact the local economy and political stability. Consequently, host
countries attempt
to lure foreign direct investment by creating conducive investment
regimes by
showing both economic and political stability as well as other form of
incentives.
The
protection from expropriation and nationalization are the
key issues and the main focus that have been discussed by the
international
world. The fundamental of international law is the protection of foreign
property
in the host state for the life of the investments. For this reason; to
safeguard against potential risks national laws have been placed as a
barrier
against powerful state sovereignty. The laws also encompass elements of
sustainable development to promote termination against poverty,
realization of
human rights and environment sustainability utilizing foreign
investments as
the tool.
At
the bargaining table between national governments and
foreign investments, each has its own agenda and desired outcomes, with
the view
to reach a common ground that will benefit each party. From the
investors’
standpoint, they strive to ensure security from expropriation, access to
the
host state’s natural resources and fair and equitable treatment.
Alternately, the
host states’ primary objectives are to ensure the development of its
economy
and non-discrimination of its national workforce.
This
paper seeks to highlight the purposes of using
stabilization clauses in investment agreements and the effects of using
such
clauses.
II.
INVESTMENT AGREEMENT
The
procedures and processes of creating
international/foreign investment agreements can be a minefield, often
being
convoluted and problematic; each side negotiating to protect their own
interests to their advantage. The arrangements can be long term,
stretching
over many years. Therefore, it is imperative that the final agreements
must guarantee
the protection of the interests of both parties. For
this reason, legal arrangements play a
critical role, as they define the terms and conditions of foreign
investment. The fine print includes such
matters as how costs and benefits are shared and, ultimately, the extent
to
which foreign investments contribute to sustainable development goals.
The legal
outline of
each investment needs to be adjusted to the specifics and complexity of
each
investment.
Each party can exercise their equity and as to content and inclusions.
However, the outcome is rarely balanced,
which each side benefiting equally. In most cases investors have more
bargaining
power; hence often resulting in the investors walking away with the
greater
benefit, particularly with developing nations.
Not surprisingly, no
general pattern applicable to all situations has emerged in practice,
although
generalized contractual agreements typifying individual sectors of
economy have
evolved significantly in the past decades.
II.1
Types Of
Foreign
Investment Contracts
Concession
Agreement
In
the decades before 1945 the legal regime of oil and gas
projects by multinational companies determined in large part by
investment
agreements.
Contracts in this era were known as Concession Agreements. Typically,
within
these agreements the host government grants the project entity the right
to
develop the project in exchange for a stream of payment; commonly known
as
royalties.
Production-Sharing
Agreement
The
second generation of agreements of the 1960s and 1970s
were a turnaround. During this era, the
once weaker, developing nations who were forced to yield to the
authority of
dominant foreign investors -found themselves, thanks to their rich
natural
resources- becoming the almighty oil-producing nations and therefore
were able
to exerted their dominance. The legal agreement have shifted from
Concession
Agreement to a new form which known as ‘Production-sharing Agreements’,
pioneered
by PERTAMINA, the Indonesian oil agency. One of the most positive
outcomes from
Production-Sharing Agreement is the localized development of skills and
advancement of technologies.
Build
Operate And Owned Agreement
Progressing
from these earlier experiences, modern concepts
of these agreements have been established after the increasing demands
of
investment in areas such as infrastructure and utilities. Conceptualized
in the
early 1990s, the original agreements were set out in legal arrangement
called, ‘Build, Operate and Owned’ (BOO).
However, erstwhile
the concept required investors to terminate ownership within a certain
time frame and transfer the ownership of the projects to the host
countries,
also known as Built Operate and Transfer (BOT).
Joint
Venture Agreement
The
third agreement structure, the Joint Venture Agreement is
the most common form in foreign investment transactions. Most developing
countries stipulated in their national laws such a requirement as one of
its
prerequisites that foreign investors must fulfill before being granted
permission
to invest.
As
indicated by their name, the function of these provisions
is to ensure that the contract will not be altered, but remains
stabilized.
The
inclusion
of such clause is a common practice between investors and host states
in the international energy industry, originating from as far back as
the early
1930.
The parties of an agreement especially the foreign investors use such
clauses as
a risk mitigation tool and lenders such as World Bank and IFC often view
stabilization clauses as an essential element of the bank-ability of an
investment project. The contractual assurance then would be beneficial
for the
investors to ensure that the projects will move towards certainty and
maintain
the consistence of political and economical situation of the host state
to the
same condition when the contract was signed.
Stabilization
clauses come in all shapes and forms. Early
stabilization clauses committed the host state not to nationalize, and
or
required the consent of both contracting parties for contract
modifications.
More recent stabilization clauses have evolved into diverse and
sophisticated
tools to manage non-commercial risk associated with the investment
project.
The
use
of Stabilization clauses not only limited to specific matters such as
fiscal regime or tariff; but it also can be used for much broader scope
such as
terminating the host state power to pass new legislation that may harm
the
projects.
Stabilization
clauses can be classified into three different
categories; freezing clauses, economic equilibrium clauses and hybrid
clauses.
IV.1
The Legal value of Stabilization Clauses
The
legality of stabilization clauses under national law is
likely to vary across national legal system. The issues of legality of
such
clause has been taken into a
deep consideration; even though, under the international law such clause
is
recognized and valid; but it does not evade the issue, including
constitutional
principles on the separation of powers and on the competence of the
executive
to enter into commitments that prevail over legislation adopted by
parliament.
In Revere Copper v OPIC, this issue was discussed and the
arbitral
tribunal
held that under international law the commitments made in favor of
foreign
nationals are binding notwithstanding the power of parliament and other
governmental
organs under the domestic Constitution to override or nullify such
commitments.
In this case clearly that the arbitral tribunal answers the separation
of power
issues and the competence of executive to enter such commitment under
domestic
law, which mean that every investment contracts that has been agreed by
the
host state and the foreign investors shall be implemented with good
faith. In different case, the
issue of legality and binding nature of stabilization clauses was
upheld. In a case between Texaco v
Libya, where the arbitrator held that the right to nationalize
is
unquestionable
today; but that contractual commitments not to nationalize are a
manifestation
and exercise of sovereignty.
However, the legality and binding nature of stabilization clause
restricting
the right to regulate, and the consequences of regulatory changes not
amounting
to expropriations have not yet been properly tackled in publishing
arbitral
awards.
In
other case, Kuwait v AMINOIL, the concession agreement
contained a
stabilization clause that prevented Kuwait from unilaterally altering
the terms
of the agreement. There are two separate agreements, the first agreement
is
the concession agreement, which regulates the relationship between
parties
regarding the royalties that AMINOIL had to pay to Kuwait; but then the
first
concession agreement amended to regulate bigger portion of profit for
Kuwait. The second agreement known as the Abu Dhabi Formula, which is
agreed by the OPEC
countries and the principle contained is outside the concession
agreement between Kuwait
and AMINOIL. Kuwait adopt the Formula and demanded to further increase
its shares in the concession project; but the other party “AMINOIL did
not agree
to the arrangement, which then lead Kuwait to nationalize the concession
with fair
compensation. The presence of stabilization clause in the concession
agreement
between Kuwait and AMINOIL incapable in restraining the nationalization.
The Arbitral
tribunal held due to the changed circumstances and Kuwait’s development
as an
independent state, it enjoyed “special advantage’ in contractual
equilibrium.
IV.2
Legal Effect of Stabilization Clauses
The
main concern from the use of stabilization clause has arisen
in the context of human rights and environmental issues. Mainly, the
concern
arises because such clauses restrict the host states to implement its
international social and environmental obligations. In
addition, there is a two-part question
that needs to be answered at the outset; what needs to be stabilized
and what
may be left to the state to modify as appropriate during the life of the
agreement?
The first question will be answered based on the ability of each party
to
negotiate; basically, the stabilization clauses may be used to protect
and
stabilize the position of the investment projects in all aspects. The
second
part of the question typically comprises environmental, health and
safety
matters, but this broad category of host state responsibilities have
become a
source of growing difficulties for both sides.
From
the host states’ point of view it is necessary to protect its
environment and
social matters for the benefit of the citizen. Moreover, it is also
important to distinguish that
the standards for these two issues are changing due to the improvement
of
technologies emerging from many sectors of industry, which emphasizing
the needs
of government to use its controlling power and regulates new measures to
protect its national interests and reducing the impact of the projects
to
both, socially and environmentally. But, it may also be noted in some
context
the efforts of investors to stabilize environmental rules have perfect
reasonable grounds. In some states, the environmental laws may set the
standard
to be reached by a foreign investors at an unrealistically high level;
in
addition, the implicit goal may rather be to encourage non-compliance,
triggering the imposition of fines by the appropriate authorities, and
thereby
acting as a revenue collection mechanism.
As a result, the demand to use stabilization clauses in investment
agreements
by the foreign investors is not always aiming to freeze and restrict the
government in implementing its obligations to protect social and
environment;
but sometimes it is used to avoid the investment projects from states’
practice
using high standards of social and environment issues as a revenue
mechanism. The
debate on stabilization clauses and human rights began in
2003, when British Petroleum (BP) took the unusual step of publishing
the private investment
contracts underpinning a major cross border pipeline project (the
Baku-Tibilisi-Ceyhan pipeline crossing Azerbaijan, Georgia and Turkey)
on the
project’s Web site. A major criticism was that the contracts contained
“stabilization clauses”, which undermined the willingness and ability of
Turkey, Georgia, and Azerbaijan to fulfill their human rights duties
pursuant
to international human rights law, particularly in areas such as
nondiscrimination, health and safety, labor and employment rights, and
the
protection of cultural heritage and the environment.
Subsequently, BP responded the criticisms by amending the contract with
separate document called “The Human Rights Undertaking” to avoid the
potential
impact of the stabilization clauses on protection of human rights in the
host
states.
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