STABILIZATION CLAUSE IN INTERNATIONAL INVESTMENT AGREEMENTS(IIA’s)

Stabilization clause present in IIA’s provides for stable laws to regulate the investments. This
clause serves to protect the contract from subsequent changes in the law of the host State. In
other words, by including the stabilization clause in the investment agreement the State party to
the contract “undertakes neither to annul the agreement nor to modify its terms, either by
legislative or administrative measures”.1 In this way the parties may stabilize their relationship
by incorporating the law as of a certain date.2 Some common types of stabilization clauses are3-
i. Freezing Clauses- These clauses fix the specific date and the applicable domestic
laws and regulations of the host country for effect to the terms of the contract. Others
laws and regulations that come after the specific date are not applicable to the contact
unless agreed by the parties.
ii. Economic equilibrium Clauses- as per these clauses, changes on the laws are
applicable to the terms of the contract except that the host country must bear the cost
of complying with the new laws. These clauses are intended to preserve the
economics of the project. The scope of the host government's indemnification
obligation depends on the negotiating strength of the parties and the host
government's need for the proposed investment.
iii. Hybrid Clauses- The inclusion of both freezing and economic equilibrium clauses.
Under, this clause the a foreign investor may be exempted from new laws or granted
indemnification for a particular specific new law as opposed to all laws that may
affect the project and its foreign investors.
The debate on stabilisation clauses “began in earnest in 2003” following the publication of
agreements governing a cross-border pipeline investment.4 These clauses favor the investors

1
Brownlie, I., Principles Of Public International Law, 5th Ed., Oxford Clarendon Press (1998), Pg. 554

2
Broches, A., The Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other
States, 136 Recueil Des Cours 331 (1972-II), Pg. 389
3
Thomson Reuters, Practical Law, Stabilisation Clause.
4
Schemberg, Andrea, Stabilization Clauses And Human Rights – A Research Project Conducted For The IFC And
The UN Special Representative To The Secretary General On Business And Human Rights, March 11 2008, P. 1.

On The Issue Of The BP Oil Cross-Border Pipeline Investment.

interest however, in certain cases they may create conflicts in certain laws and regulations of
public interest and public policy of the host state. In cases, of regulations based on human rights,
environmental safety, climate change, human rights, etc. such clauses become a block to host
states compliance with public international law. On this posed issue, the first comprehensive
research was done by the UN in its report on Stabilisation Clause and Human Rights.5 The
report found out that “of the stabilization clauses examined, a majority of them from countries
outside the Organisation for Economic Cooperation and Development (OECD) were drafted in a
way that can either insulate investors from having to implement new environmental and social
laws or to provide investors with an opportunity to be compensated for compliance with such
laws. None of the contracts in the study from OECD countries offer exemptions from new laws,
and they only rarely offer an opportunity for compensation for compliance with the same breadth
of social and environmental laws as in non-OECD countries.” The negotiation with the investor
and the host state could be a means to bring public interest laws. The public outcry also has made
investors to adapt with public interest laws in the case for the Mittal Steel’s Mineral
Development Agreement, which it had originally negotiated with Liberia under the state’s shaky
post-conflict transitional government.6

Some cases in regard to stabilisation clauses are-

i. TOPCO v. Libya7 (stabilization clause valid and binding under international law)
On September 1, 1973 and February 11, 1974, Libya issued decrees nationalizing all of the
rights, interests, and property of the Texaco Overseas Petroleum Company (TOPCO) and
California Asiatic Oil Company (CAOC) in Libya that had been granted to them jointly by the
Libyan government under 14 deeds of concession. The sole arbitrator appointed by the

5
UN Report On Stabilization Clause And Human Rights, Available At
Https://Www.Ifc.Org/Wps/Wcm/Connect/9feb5b00488555eab8c4fa6a6515bb18/Stabilization%2bpaper.Pdf?MOD=
AJPERES

6
Annalise Nelson (Associate Editor), Investments In The Deep Freeze? Stabilization Clauses In Investment
Contracts, November 9, 2011.

7
Texaco Overseas Petroleum Co. V. Libya Arbitration By Professor Rene-Jean Dupuy
104 J. Droit Int’l 350 (1977).
International Court of Justice by discussing the relationship of the stabilization clause contained
in the parties’ agreement to the host State’ sovereign right to legislate, stated that the inclusion of
stabilisation clause in the agreement is the commitment of the state that is taken freely and
therefore this clause is valid and binding and these new laws do not affect the international
agreement.8
ii. AGIP v. Congo9 (breach of a stabilization clause leads to unlawfulness of
nationalization)

After the reestablishment of the government in Republic of Congo, the government of Congo has
nationalized the AGIP without compensating (Azienda Generale Italiana Petroli—General
Italian Oil Company) and retained all the AGIP’s documents. The tribunal discussed the
nationalization of the company and also the effect of the stabilisation clause present in the
agreement. It stated that as the stabilization clauses were freely entered by the government, they
have limited themselves of the modifications of the legislative and regulatory provisions as
provided in the contract.10

The stabilization clause is a curb of state sovereignty. It is for the host state to decide if they
really want to include stabilization clauses. Though it is a means to attract investors however,
several conflicts are likely to arise from it in the course of the contract. Negotiation between the
contracting parties is a way to solve the conflict. Other means maybe to approach the tribunal
complying with the agreement. Stabilisation clauses have their own legal standing in
international investment law even though it is not widely discussed topic of international
investment law.

By-Karishma Ramchiary
Email-karishma83736@gmail.com

8
Taida Begic,Applicable Law In International Investment Dispute, Pg. 85-86.

9
AGIP v. Congo, Award, 30 November 1979, 1 ICSID Reports 321.
10
Taida Begic,Applicable Law In International Investment Dispute, Pg.92.