jwelb stabilization article july 2008 final final final

The pursuit of stability in international energyinvestment contracts: A critical appraisalof the emerging trendsProf. A.F.M. Maniruzzaman*

1. IntroductionInternational energy contracts, like any other long-term international investment con-tracts, between a foreign investor and the host State are often exposed to various politicaland economic risks, especially in developing countries. The recent events of governmentalinterference with international energy operations in some Latin American countries, viz,Venezuela, Bolivia and Ecuador, and elsewhere in the face of ever-increasing energy pricesare reminiscent of the 1970s events of nationalization and expropriation of investments ofInternational Oil Companies (IOCs) in many host countries. To address this concern toprotect foreign investment, various stabilization techniques and mechanisms have beendeveloped and adopted in related legal instruments such as international investment con-tracts, international investment treaties and also in national legislation. Besides, specialstability regimes have also been introduced in some developing countries to attractforeign investment.1

The purpose of this paper is to examine the emerging trends of stabilization in view ofthe current state of international law in the field. The theme of the paper is approachedfrom three broad perspectives. First, a brief review of the classic stabilization techniqueswill be offered, followed by an appraisal of the modern ones (which are yet to attract seri-ous scholarly attention and arbitral scrutiny) in international energy contracts with spe-cial reference to the emerging innovative pursuit of stability in the cross-border pipelineindustry. Although the focus of the present paper is on the energy industry, the discussionwill also be relevant to the broader area of international investment. Second, thefunctional value of stabilization techniques will be examined in light of the arbitraljurisprudence and juristic views. Third, the emerging conceptual perimeter of the norma-tive standards of treaty stabilization of foreign investors’ contractual rights will be criti-cally explored. And, finally some concluding remarks will be made.

* Professor of International and Business Law, University of Portsmouth, England; Honorary Fellow, Centre for Energy,Petroleum and Mineral Law and Policy, University of Dundee, Scotland; Member, ILA’s International Committee onInternational Commercial Arbitration, London; Council Member (elected), ICC Institute of World Business Law, Paris;Member, Chartered Institute of Arbitrators, London; Member, Association of International Petroleum Negotiators (AIPN);and Founding Member, THE IDR GROUP�, London. [email protected] for this paper was carried out with a grant from AIPN. The author expresses his gratitude to the Board of Directors ofthe AIPN for awarding him the grant. The paper was completed when the author was a Visiting Professor at the Faculty of Law,University of Western Ontario, Canada (2007–08). The author is also thankful to Professor Ian Holloway, Dean of the Facultyof Law, and his colleagues for their hospitality during his sojourn at Western.

1 See generally, AFM Maniruzzaman, ‘National laws providing for stability of international investment contracts: A comparative

perspective’ (April 2007) JWIT 1.

Journal of World Energy Law & Business, 2008, Vol. 1, No. 2 121

� The Author 2008. Published by Oxford University Press on behalf of the AIPN. All rights reserved.

doi:10.1093/jwelb/jwn012 Advance Access Publication 24 June 2008

2. Stabilizing the contractual relationship – The classic approachThe parties to international petroleum contracts (especially foreign investors being anx-ious about the legal security of their investment) adopt various techniques for stabiliza-tion of the contractual relationship. In the following analysis such techniques that areusually found in contractual practice will be briefly examined.2

The parties may include provisions in the contract intending to insulate the contractualrelationship from any subsequent governmental legislative or administrative measures thatmay have the effect of annulling or altering such relationship. The purpose of such deviceis to keep the investor’s rights unaffected by subsequent enactments or other governmentalmeasures.3 Another legal technique is often used by which the contract itself is promul-gated as a special law, ie to accord supremacy to the contract as lex specialis over currentor subsequent legislative enactments.4 In Azerbaijan and some Middle Eastern countries

2 There is already a plethora of writing on the subject. See, eg, Thomas Walde and G Ndi, ‘Stabilizing international investmentcommitments: International law versus contract interpretation’ (1996) 31 Tex Int’l L J 215; Esa Paasivirta, ‘Internationalisationand stabilisation of contracts versus state sovereignty’ (1989) 60 BYIL 315; Bertrand Montembault, ‘The stabilisation of statecontracts using the example of oil contracts – A return of the gods of olympia’ (2003) 6 RDAI/IBLJ 593; M Coale, ‘Stabilisationclauses in international petroleum transactions’ (2002) 30 Denv J Int’l L & Pol’y 218; C Curtis, ‘The legal security of economicdevelopment agreements’ (1988) 29 Harv Int’l L J 317; W Peter, Arbitration and Renegotiation of International Agreements (KLI,London 1995) 214; W Peter, ‘Stabilisation clauses in state contracts’ (1998) 7 RDAI/IBLJ 875; C Chatterjee, ‘The stabilisationclause myth in investment agreements’ (1988) 5 J Int’l Arb 97; P Comeaux and N Kinsella, ‘Reducing political risks indeveloping countries: Bilateral investment treaties, stabilisation clauses, and MIGA & OPIC investment insurance’ (1994) 15 NY Sch J Int’l & Comp L 1; F Garcia-Amador, ‘State responsibility in case of stabilisation clauses’ (1993) 2 J Transnat’l L & Pol’y23; P Weil, ‘Les clauses de stabilisation ou d’intangibilite inserees dans les accords de developpement economique’ in Melangesofferts a Charles Rousseau (Paris 1974) 301; P Leboulanger, Les Contrats entre Estate et Enterprises (Paris 1985) 91; Nagla Nassar,Sanctity of Contracts Revisited: A Study in the Theory and Practice of Long-term Commercial Transactions (Martinus Nijhoff,Dordrecht/London 1995) 121; AFM Maniruzzaman, ‘Some reflections on stabilisation techniques in international petroleum,gas and mineral agreements’ (2005) IELTR 96.

3 For example, art 17 of the Oil Concession Agreement between Shaikh of Kuwait and American Independent Oil Company(Aminoil): ‘‘ . . . The Sheikh shall not by general or special legislation or by administrative measures or by any other actwhatever annul this agreement except as provided in art 11. No alteration shall be made in the terms of this Agreement by eitherthe Shaikh or the Company except in the event of the Sheikh and the Company jointly agreeing that it is desirable in theinterest of both parties to make certain alterations, deletions or additions to this Agreement’’ [emphasis added], 21 ILM (1982).

4 An Azeri Agreement of 1999 is in point which reads as follows:

Upon approval by the Parliament of the Azerbaijan Republic of this Agreement, this Agreement shall constitute a law of theAzerbaijan Republic and shall take precedence over any other current or future law, decree or administrative order (or partthereof) of the Azerbaijan Republic which is inconsistent with or conflicts with this Agreement except as specifically other-wise provided in this Agreement.

Art 24.1, Agreement on the Exploration Development and Production sharing for the Block including the Padar Area and theAdjacent Prospective Structures in the Azerbaijan Republic between the State Oil Co of Azerbaijan and Kura Valley Develop-ment Co Ltd And Socar Oil Affiliate (dated 19 April 1999).See also art 22.6 of the Agreement on the Exploration, Development and Production Sharing for the Shakh Deniz ProspectiveArea in the Azerbaijan Sector of the Caspian Sea between the State Oil Co of the Azerbaijan Republic and SOCAR CommercialAffiliate, BP Exploration (Azerbaijan) Ltd, Elf Petroleum Azerbaijan BV, Lukoil International Ltd, Oil Industries Engineeringand Construction, Statoil Azerbaijan AS and Turkish Petroleum Overseas Co Ltd <http://www.bp.com/genericarticle.do?categoryId=9006654&contentId=7013493>.Art 22.6 Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep WaterPortion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea among the State Oil Co of the Azerbaijan Republicand Amoco Caspian Sea Petroleum Ltd, BP Exploration (Caspian Sea) Ltd, Delta Nimir Khazar Ltd, Den Norske Stats Olje-selskap AS, Lukoil Joint Stock Co, Mcdermott Azerbaijan, Inc, Pennzoil Caspian Corp, Ramco Hazar Energy Ltd, TurkiyePetrolleri AO, Unocal Khazar, Ltd <http://www.bp.com/genericarticle.do?categoryId=9006654&contentId=7013493>.Concession Agreement of 2002 for Petroleum Exploration and Exploitation between Egypt & Egyptian General PetroleumCorp and Dover Investments Ltd (East Wadi Araba Gulf of Suez), Barrows [art XXIV(h)].

122 Journal of World Energy Law & Business, 2008, Vol. 1, No. 2

such as Egypt5 and Syria,6 it is indeed a legal requirement for any international petroleumagreement to be operative.7 The advantage of this method is that it is not always easy for alegislative body, let alone the governmental authorities, to interfere with the contractstraightaway as there are various formalities to go through before it can happen. Attemptshave also been made to insulate the contractual relationship by providing in the contractthat any contrary or inconsistent legislation enacted by the host State subsequent to theagreement to be inapplicable to the contract itself.8 In other words, the agreement will pre-vail over the contrary or inconsistent legislation of the State. Such freezing terms mayapply to both current and future laws, and may also apply to any governmental acts incon-sistent with the contract.9 However, the technique may even go to the extent of insulatingthe contractual relationship from any material adverse effect (MAE) of an existing or asubsequent law that may have potentially inconsistent outcome.10

In pursuit of stability parties often provide that the governing law of the contract shallbe that of the contracting State at the time the contract is executed, thereby excluding theapplication of subsequent changes in law.11 This approach may also exclude court deci-sions having the force of law issued subsequent to the given date.

5 See Ahmed S El-Kosheri, ‘The particularity of the conflict avoidance methods pertaining to petroleum agreements’ (Spring1996) 11 ICSID Rev-FILJ 271, 276.

6 See, for example, art 30, Dublin Tishrine Development Contract (dated 2004) For Development and Production Of PetroleumAmong The Government Of Syria and Syrian Petroleum Co And Dublin International Petroleum (Damascus) Ltd (Tishrineand Sheikh Mansour Fields); art 30.1 ‘‘This Contract shall not be binding upon any of the Parties hereto unless and until aLegislative Text is published in the Official Gazette of the SAR approving and ratifying the Contract and giving it full force andeffect of law notwithstanding any countervailing governmental enactment in the SAR’’.

7 See AZ El Chiati, ‘Protection of investment in the context of petroleum agreements’ (1988) 204 Recueil des Cours (vol IV, 1987)1, 87–9; MW Ballantyne, ‘The constitutions of the Gulf States: A comparative study’ (February 1984) ALQ 758.

8 Dublin Tishrine Development Contract Dated 2004 For Development and Production Of Petroleum Among The GovernmentOf Syria and Syrian Petroleum Co and Dublin International Petroleum (Damascus) Ltd (Tishrine and Sheikh Mansour Fields),Barrows. Art 18.1 of the agreement provides that:

CONTRACTOR and the Operating Company shall be subject to all laws and regulations of local application in force in theS.A.R. (Syrian Arab Republic) provided that CONTRACTOR or the Operating Company shall not be subject to any laws,regulations or modifications thereof which are contrary to or inconsistent with the provisions of this Contract and which are ineffect at any time from the Effective Date and throughout the Term of this Contract. [Emphasis added.]

See also for similar provisions in the Contract for the Exploration, Development and Production of Petroleum (entered intoforce 21 August 1985) Between Syrian Arab Republic–Syrian Petroleum Co–Pecten Ash Sham Co–Syrian Shell PetroleumDevelopment BV–Deminex Petroleum Syria GMBH (1987) [art XVIII(1)] 26 ILM 1186, 1208; Concession Agreement of2002 for Petroleum Exploration and Exploration between Egypt & the Egyptian General Petroleum Corp and Dover Invest-ments Ltd (East Wadi Araba Area Gulf of Suez) [art XVIII(a)].

9 See art 14(c) of the Ertsberg Agreement between Indonesia and Freeport Indonesia, Inc of 7 April 1967.10 For example, art 44 of the Selebi Phikwe Agreement between the Republic of Botswana and Bamangwato Concession Ltd and

Botswana RST Ltd and BCL Sales Ltd of 7 March 1972.11 For example, art 36 of the Model Production Sharing Contract (PSC) (2005) of Saharawi Arab Democratic Republic which

provides that:

This Contract is executed between the Parties in accordance with the laws and regulations in force at the date of its signingand on the basis of the provisions of said laws and regulations, as regards, inter alia, the economic, fiscal and financial pro-visions of this Contract.

Similarly, another example may be found somewhat in the following words: ‘‘The concessionary bind themselves especially tothe oil and mining laws, the provisions of which, as they are in force at the time of signature of this contract, are understood tobe incorporated in the same and shall rule the operations between the parties in every aspect that has not been expressly agreedupon’’. Art 23.1 of The 2002 Ecuadorian Model PSC thus provides similarly that ‘‘(t)his Contract shall be exclusively governedby the Ecuadorian legislation. The laws in force at the time of its executing are understood to be incorporated herein’’.

A.F.M. Maniruzzaman • The pursuit of stability in international energy investment contracts 123

It has to be acknowledged, however, that from the host government’s perspective, thestabilization of its domestic law by incorporating it as of a specific date may lead to prac-tical difficulties as to its application. Governments may thus be cautious in respect of suchstabilization mechanism. This is understandable, if a government concludes internationaldevelopment agreements, including oil and gas contracts, containing legal stabilizationclauses at different points in time, then it has to apply to each project the law existingat the time of concluding the contract. The administrative processing, say, of permitsbecomes considerably complicated if the authorities have to consider that for each inves-tor a particular or customized legal regime applies. This regime has to be reconstructedboth from the contract and the old law it declares to be applicable. The issue could beparticularly more complicated in respect of tax stabilization. Thus, what the authors ofa recent World Bank study12 observed on the issue in the context of the mining industryis equally applicable to the oil and gas industry:

If taxes are stabilized for various mines, an administrative challenge can arise overtime. As the underlying tax laws change, each stabilized mine will have a tax regimedating to the time the stabilization arrangement was entered into. This means that atany one point in time, different mines will be subjected to different tax regimes, andthe government agency charged with tax administration will face an increasinglycomplicated situation of monitoring and enforcing each regime.13

As is obvious, the purpose of the technique of freezing the law of the host State as of agiven date in the investment contract is to ‘seek(s) to create an enclave status’ of thatlaw.14 Some jurists15 classify such a clause as ‘stabilization clause stricto sensu’, and theclause devised to avert the effect of the exercise by the State of its public authority inrespect of contractual matters as ‘intangibilite clause’.16 The stabilization clauses men-tioned so far in the foregoing discussion are described in the present paper as the freezingclauses (because of their freezing effect). They are often known in the literature as theclassic stabilization clauses.

Stabilization of contractual relationship is often sought by providing for internationallaw or the general principles of law as the governing law in the contract. Such a governinglaw clause is not, however, a stabilization clause per se. The idea is that international lawensures more security for foreign investment than national law that is susceptible tochange at the whim of the host government.17 As the governing law of the contract

12 James Otto et al, Mining Royalties: A Global Study of their Impact on Investors, Government, and Civil Society (The World Bank,

2006).13 Ibid p 212.14 R Brown, ‘Choice of law provisions in concession and related contracts’ (1976) 39 MLR 625, 628.15 Prosper Weil, ‘Les Clauses de stabilisation ou d’intangibilite inserees dans les accords de developpement economique’ in

Melanges Offerts a Charles Rousseau (1974) 301, 307–8.16 See AFM Maniruzzaman, ‘Some reflections on stabilisation techniques in international petroleum, gas and mineral agreements’

[2005] IELTR 96; Abdullah Faruque, ‘Validity and efficacy of stabilization clauses: Legal protection v functional value’ (2006)

23 J Int’l Arb 317, 318–20.17 See generally, AFM Maniruzzaman, ‘State contracts in contemporary international law: Monist versus Dualist Controversies’

(2001) 12 EJIL 309.


international law is thus considered to ensure the stability of the contractual relationshipduring the life of the project concerned. It is commonly perceived that international arbi-tral tribunals would consider that it is not only the provision for international law butalso any other a-national applicable law provision (eg, the general principles of law, lexmercatoria, etc) in a contract that makes it delocalized and insulates it from the impactof the national law of the host State.18 It has been observed that ‘‘these stipulations aredesigned to function as indirect or disguised stabilization clause’’.19 Often an elementof international law in the governing law clause may be considered to do the trick. Inter-national or a-national governing law may be found prescribed in different forms andcombinations. Though international law could be rarely found as the only governinglaw in an international petroleum contract,20 international law coupled with the law ofthe host State seems to be often the case for which the inspiration might come fromthe International Centre for Settlement of Investment Disputes (ICSID) practice.21 Thereare also other variants of combination where common principles are sought between twoor more legal systems and in the absence of such common principles references are oftenmade to various standards such as (i) ‘principles of law’ normally recognized by civilizedstates in general, including those which have been applied by international tribunals,22 or(ii) the law of a third country that is well developed in dealing with the particular trans-action concerned.23 Often the reference to ‘good will’ and ‘good faith’ in a choice-of-lawclause or elsewhere in the contract is interpreted as a clear indication of the intention ofthe parties to submit the contract to the general principles of law.24

18 See generally, AFM Maniruzzaman, ‘The Lex Mercatoria and international contracts: A challenge for international commercial

arbitration?’ (1999) 14(3) Am U Int’l L Rev (USA) 657–734.19 E Jimenez De Arechaga, ‘State responsibility for the nationalization of foreign owned property’ (1978) 2 NYUJ Int’l Law and

Pol 179, 192.20 The Vietnamese contract of 1962, Basic Oil and Concession Contracts (Asia and Australia), Barrows.21 The Convention on International Centre for the Settlement of Investment Disputes between States and Nationals of Other

States (the ICSID Convention), (18 March 1965) 575 UNTS 159, art 42(1). For example, The Model Contract of Ghana (2000),

art 26.1, Barrows; the Model Production Sharing Agreement of Mozambique (Bid Round 2000), art 34, Barrows; Model PSC

(1999), art 31, Barrows.22 A Kuwaiti Concession Contract of 1967.23 Agreement dated 19 April 1999 on the Exploration Development and Production sharing for the Block including the Padar

Area and the Adjacent Prospective Structures in the Azerbaijan Republic between the State Oil Co of Azerbaijan and Kura

Valley Development Co Ltd and Socar Oil Affiliate (Azerbaijan), Barrows (art 24.1).

See also art 23.1 of Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep

Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea among the State Oil Co of the Azerbaijan

Republic and Amoco Caspian Sea Petroleum Ltd, BP Exploration (Caspian Sea) Ltd, Delta Nimir Khazar Ltd, Den Norske Stats

Oljeselskap AS, Lukoil Joint Stock Co, Mcdermott Azerbaijan, Inc, Pennzoil Caspian Corp, Ramco Hazar Energy Ltd, Turkiye

Petrolleri AO, Unocal Khazar, Ltd, <http://www.bp.com/genericarticle.do?categoryId=9006654&contentId=7013493>; art 23.1

of the Agreement on the Exploration, Development and Production Sharing for the Shakh Deniz Prospective Area in

the Azerbaijan Sector of the Caspian Sea between the State Oil Co of the Azerbaijan Republic and SOCAR Commercial Affiliate,

BP Exploration (Azerbaijan) Ltd, Elf Petroleum Azerbaijan BV, Lukoil International Ltd, Oil Industries Engineering

and Construction, Statoil Azerbaijan AS and Turkish Petroleum Overseas Co Ltd, <http://www.bp.com/

genericarticle.do?categoryId=9006654&contentId=7013493>.24 See the award of 3 September 1930 in the Lena Goldfields case in 36 Cornell LQ 31, 36 and 47–53 (1950); Mann, ‘The proper

law of contracts concluded by international persons’ (1959) 35 BYBIL 34, 55; ‘Ruler of Qatar Award’ (1953) 18 ILR 534; See also

in ‘Amoco Finance Corp v Iran et al where the Claimant contended as such’ (1987-II) 15 Iran–U.S. CTR 240.

Some arbitral tribunals have interpreted good faith provisions as choice-of-law provisions, evidencing the intention of the

parties to submit the agreement to a non-national body of governing law. See eg Abu Dhabi award, 18 ILR 149; Sapphire award,

35 ILR 172–3.


It has to be underscored that only the application of international law or a-nationalprinciples will not bring to bear on the parties’ expectation for stability in the contract,there is also a need to provide for international arbitration and international ora-national procedural law that governs such arbitration to give effect to such expectation.As Montembault rightly notes,

(t)he submission to arbitration in oil contract therefore constitutes an essential toolin the stabilization of the legal framework surrounding oil operations, not onlybecause it neutralizes the jurisdictional power of the host State but also because sucha clause effects and determines the law applicable to the contract.25

As will be discussed later, the freezing or classic stabilization clauses cannot be a guar-antee against the State’s exercise of sovereign authority in the public interest. Such clausescan, however, entitle the aggrieved party to a higher amount of compensation for its vio-lation than in the case where such a clause is absent.26

3. The flight from the classic to modern stabilization techniquesAs the exercise of the sovereign authority by the State party to a contract cannot be com-pletely restrained by virtue of a classic stabilization clause, certain techniques have beenrecently developed in a way that respects this reality and at the same time protects theeconomic equilibrium of the contract. This modern technique is known as economic bal-ancing provision or economic stabilization clause. As opposed to the classic stabilizationapproach, the modern one ensures a balance of the interests of the parties concerned. Inthe modern approach the State’s exercise of sovereign authority is not contractuallybarred, rather such action is counterbalanced by the provision that the economic equilib-rium of the contract as of the effective date of the contract will be maintained during thelifetime of the contract. The reason for the increasing tendency of IOCs to favour eco-nomic balancing provision lies in the fact that if the State’s unilateral acts adversely affectthe contract the available remedies could be more favourable than under the freezingclauses. Thus, the breach of a freezing clause itself may result in only lump sum damageswhich could be far below what the IOC would consider would be necessary to ‘keep itwhole’, whereas in economic balancing clauses the provision for ‘Government Pays’,‘Government Indemnifies’ is designed to ‘keep whole’ the IOC on an ongoing basis.

In contractual practice classic/freezing and economic balancing provisions (any of thealternative variants described below) are often employed together27 and sometimes indi-vidually, ie, one or the other. In some cases, where they are employed together, the eco-nomic balancing provision lays down the outcome of the host country’s breach of the

25 Bertrand Montembault, ‘The stabilisation of state contracts using the example of oil contracts – A return of the Gods of

Olympia’, (2003) 6 RDAI/IBLJ 593, 603. See also Rosalyn Higgins, ‘Legal preconditions of foreign investment’ Proceedings of the

International Bar Assoc Seminar on Energy Law’ 86, p 232.26 See generally, AFM Maniruzzaman, ‘Damages for breach of stabilisation clauses in international investment law: Where do we

stand today?’ [2007] IELTR 246.27 See Andrea Shemberg, ‘Stabilization Clauses and Human Rights’ IFC/SRSG Research Paper (11 March 2008) 19–20.


promise contained in the freezing clause that it makes to the contracting partner. In thissense, the economic balancing provision component provides an additional layer of pro-tection for stability of the contract.

Economic stabilization clauses – Different types

Different types of economic balancing provisions can be found in recent internationalpetroleum contracts (usually in production-sharing contracts) to deal with the changedcircumstances brought about by the unilateral acts of the State, ie legislative or regulatory,exercised in the sovereign capacity after the effective date of the contract. According totheir modus operandi, economic balancing provisions have been broadly divided intothree categories,28 viz, (i) Stipulated Economic Balancing (SEB), (ii) Non-specified Eco-nomic Balancing (NSEB) and (iii) Negotiated Economic Balancing (NEB).29 These var-ious categories (as opposed to the classic stabilization clauses), while endorsing theunilateral acts of the State, prescribe different ways of re-establishing the economic equi-librium of the contract as described on the effective date of the contract.

The first category, ie SEB, provides for automatic amendment of the contract in a stip-ulated fashion (eg, by way of readjustment of ‘profit petroleum split’ in the case of a Pro-duction Sharing Contract (PSC)). Thus, the Ecuadorian Model Contract provides asfollows:

In case of modifications to the tax regime, including the creation of new taxes, or thelabor participation, or its interpretation, that have consequences on the economics ofthis Contract, a corresponding factor will be included in the production share percent-ages to absorb the increase or decrease in the tax burden or in the labor participationof the previously indicated contractor. This correction factor will be calculated betweenthe Parties and approved by the Ministry of Energy and Mines.30

The second category, ie NSEB, while providing for automatic amendment, does notstipulate the nature of such amendment, nor does it require the mutual agreement ofthe parties concerned for such amendment. Thus, an Azeri production-sharing contractprovides that:

In the event that any Governmental Authority invokes any present or future law,treaty, intergovernmental agreement, decree or administrative order which contra-venes the provisions of this Agreement or adversely or positively affects the rightsor interests of Contractor hereunder, including, but not limited to, any changes intax legislation, regulations, or administrative practice, the terms of this Agreement shallbe adjusted to re-establish the economic equilibrium of the Parties, and if the rights or

28 See Frank C Alexander, Jr, ‘The Three Pillars of Security of Investment Under PSCs and Other Host Government Contracts’,

ch 7, Institute for Energy Law of the Centre for American and International Law’s Fifty-Fourth Annual Institute on Oil and Gas

Law (Publication 640, Release 54), Lexis Nexis Mathew Bender (2003), s 7.03[1].29 This third category is often known as ‘stabilization-by-renegotiation clause’ or ‘re-balancing-by-renegotiation clause’.30 [Emphasis added] (art 11.7), Model PSC of October 2002 for the Exploration of Hydrocarbons & the Exploration of Crude Oil

(Ecuador), Barrows.


interests of Contractor have been adversely affected, then SOCAR shall indemnify theContractor (and its assignees) for any disbenefit, deterioration in economic circum-stances, loss or damages that ensue therefrom. SOCAR shall within the limits of itsauthority use its reasonable lawful endeavors to ensure that the appropriate Governmen-tal Authorities will take appropriate measures to resolve promptly in accordance with theforegoing principles any conflict or anomaly between all such treaty, intergovernmentalagreement, law, decree or administrative order and this Agreement.31

The third category, ie NEB, requires the parties to meet to negotiate amendments tothe contract. Thus, the Current Indian Model PSC includes the following provision:

If any change in or to any Indian law, rule or regulation imposed by any central, stateor local authority dealing with income tax or any other corporate tax, export/importtax, customs duty or tax imposed on petroleum or dependent upon the value ofpetroleum results in a material change to the economic benefits accruing to any ofthe Parties after the Effective Date, the Parties to this Contract shall consult promptlyto make necessary revisions and adjustments to the Contract in order to maintain suchexpected economic benefits to each of the Parties as of Effective Date.32

The foregoing categories are often, respectively, found coupled with freezing clauses.33

Many drafting variations are even found in the same category. Different formulae are alsoemployed for economic balancing for the stability of contractual relationship.34 It is note-worthy that in some economic balancing provisions the IOC’s interest in the changed cir-cumstances is the primary concern for readjustment, while in others, eg, the IndianModel PSC, the interests of any of the parties involved and not only that of the IOC

31 Agreement dated 19 April 1999 on the Exploration Development and Production sharing for the Block including the Padar

Area and the Adjacent Prospective Structures in the Azerbaijan Republic between the State Oil Co of Azerbaijan and Kura

Valley Development Co Ltd and Socar Oil Affiliate (Azerbaijan), Barrows (art 24.2).32 [Emphasis added] (undated), art 16.7. See also Concession Agreement of 2002 for Petroleum Exploration and Exploitation

between Egypt & Egyptian General Petroleum Corp and Dover Investments Ltd (East Wadi Araba Area Gulf of Suez) (art XIX),

Barrows.33 For example, Agreement dated 19 April 1999 on the Exploration Development and Production sharing for the Block including

the Padar Area and the Adjacent Prospective Structures in the Azerbaijan Republic between the State Oil Co of Azerbaijan and

Kura Valley Development Co Ltd and Socar Oil Affiliate (Azerbaijan), Barrows (art 24.2).34 Ibid; PSCs of 1989 between Total/Amoco/Marathon/Texaco and Government (Block 1), (Kenya), Barrows (art 40.2); Model

Production Sharing Agreement (Bid Round 2000) (Mozambique), Barrows (art 13.10); Model PSC 1999 (Turkmenistan),

Barrows (art 17.6); Fina (Petrofina) Production Sharing Agreement of March 1991 Between the Government of Uganda and

Fina Exploration Uganda bv, Barrows (art 32.2); Chevron Offshore Bahrain Exploration and Production Sharing Agreement

(EPSA) (1998) (Bahrain), Barrows (art 23.3); Shell Petroleum Contract dated 9 August 1996 Between China National

Petroleum Corp and Shell Exploration (China) Ltd (Deep Horizon Qingshui Block, Bohai Bay Basin, Barrows (art 28.2); 1997

Model Exploration and Production Sharing Agreement (EPSA) between the Government of Qatar and Contractor (Block 11),

Barrows (art 30.3); Arco Group Exploration and Production Agreement (EPSA) dated January 1997 Between Qatar and

Atlantic Richfield Co (Qatar) Inc, Gulfstream Resources Ltd, British Gas Exploration and Production Ltd, Wintershall

Aktiengesellschaft and Preussag Energie Gmbh (Offshore Block 11), Barrows (art 30.6); Vietnam Model PSC (April 2005)

[art 18.1.3].


are taken care of in the readjustment formula.35 Such a provision ensures the equality oftreatment of both parties in respect of economic balance of the contract. This arrange-ment may not be faced with any problem when both contracting parties are on an equalfooting, ie when an IOC enters into contract with a privatized State enterprise which isdetached from the State as a commercial entity with the separate legal status. It is advis-able that the parties provide in their contract that no economic equilibrium of the con-tract can be invoked by the party whose act or omission disturbs it. Regarding this matteragain the question might arise - whose act or omission is it? Thus, when a State enterpriseinvokes force majeure for the disturbance caused by the sovereign or regulatory act of theState, and the status of the former vis-a-vis the latter is opaque, some attendantapproaches such as whether the ‘corporate veil’ needs be pierced or not could bedeterminative.36

Various exceptions to the invocation of economic equilibrium are, however, oftenfound in modern petroleum contracts37 and also in relevant national legislation.38 Forexample, economic equilibrium of the contract cannot be expected to be re-establishedwhen the new law or decree, which may even cause a MAE on the contractor’s fiscal posi-tion, is enacted: (i) in response to a breach or lack of compliance by the contractor withany provision of the agreement concerned; or (ii) with the intent of protecting health,safety, environment or security.39

It should be mentioned that in very few contracts the trigger of economic rebalancingis specifically defined. The simple use of the terms such as ‘material change’ (as in theIndian Model PSC), ‘adversely affected’ (as in the Azeri PSC), ‘significantly affect’,40

‘materially affect’,41 ‘materially adverse affect’,42 ‘Profound Changes in Circumstances’,‘material adverse change’ (MAC) or ‘MAE’ in an economic balancing provision maybe prone to conflicting interpretations in different contexts. This may be especially thecase when the matter is left to the discretion of the tribunal concerned in the absenceof the parties’ choice of law governing it or detailed contractual provisions to deal withit. Often, in contracts some broad definition of some of the aforementioned terms couldbe found which may again generate further issues in specific situations while interpreting

35 Art 16.7, the current Model PSC of India (undated, see also the Government of India, National Highway Authority Concession

Agreements, Jaipur–Kishangarh Highway, <http://www.nhai.org/fvb.pdf>; arts 36.1, 36.2. As far as renegotiation of the

contract is concerned, the Indian model concession allows a two-way traffic. It thus allows for the company to negotiate new

terms where a change in law leads to a rise in costs – but equally for the government to seek amendments where new laws

reduce the concessionaire’s expenses.36 See generally, Karl H Bockstiegel, Arbitration and State Enterprise (Kluwer Law and Tax Pub, 1984); AFM Maniruzzaman, ‘The

relevance of public international law in arbitrations concerning international economic development agreements: An appraisal

of some fundamental aspects’, (2005) 6(2) J World Invest Trade 263, 272–86.37 For example, art 30.3 of the Model EPSA between the Government of Qatar and Contractor (Block 11) [1997].38 Kazakhstan: Law of 8 July 2005 Concerning Production Sharing Agreements (Contracts) When Conducting Offshore

Petroleum Operations.39 See n 37.40 See art XIX, Concession Agreement of 2002 for Petroleum Exploration and Exploitation between Egypt & Egyptian General

Petroleum Corp and Dover Investments Ltd (East Wadi Araba Area Gulf of Suez), Barrows.41 Art 47, The Government of Ghana and Shell Exploration and Production Company of Ghana Ltd (1974).42 Art 40.2, AGIP/British Petroleum/Etal-Kazakhstan ‘Khasgan’ PSA (1997), requires parties to take action to restore the ‘overall

economic benefit’ of the PSA should any change in the laws of Kazakhstan (including judicial or administrative interpretation

and application of existing laws) have ‘a materially adverse affect’ on the economic benefits accruing to the investor.


them. It is noteworthy that in the wake of global economic downturn over the last fewyears and most recently global credit crunch, MAC and MAE clauses in various transac-tional documents including merger and acquisition contracts, commercial loan agree-ments, takeover or tender offer documents and project-financing agreements havecome to spotlight in the media as they have been attempted by contending parties asan ‘escape hatch’ to walk away from deals and contractual arrangements, or used as aleverage to renegotiate them.43 Despite the grave importance of the clauses in such uncer-tain time of the global economy there are a relatively few judicial decisions on the inter-pretation of the clauses in the United States,44 let alone in other jurisdictions. This limitednumber of decisions is, however, instructive not only to the dealmakers or other inter-ested quarters in the United States but also to those elsewhere. The emphasis that thedecisions place is on the careful drafting of the MAC/MAE clauses in a contract or trans-action document with detailed provisions for situations to be counted as ‘material’ withappropriate carve-outs, etc, so that there is no ambiguity left.45 Such lesson is equallyvaluable in the context of international energy contracts including oil and gas contracts.

It should be pointed out that since the nature of the change in law or of the effect ofsuch change may be brought to bear on the issue of economic equilibrium of the contractas a trigger for readjustment, it is advisable that the parties clearly define this matter intheir contract. Otherwise, the issue could be subject, as appropriate, to interpretation in

43 See Richard Toder and Wendy Walker, ‘MAC Clauses in Commercial Loan Documents – Are They Effective?’, Morgan Lewis

(business and finance/restructuring/fall 2006 newsletter), p 1, <http://www.morganlewis.com>; Kenneth Wolff and Cason

Moore, ‘In the Wake of the Crunch: Credit Market Turmoil and the Potential Effects on MAC Provisions’ (November/

December 2007) 11(10) The M&A Lawyer 7; David Sands et al, ‘The Global Credit Crunch: A MAC?’, The Deal (14 November

2007), The Deal.com; Patrick Lord, ‘MAC and MAE Clauses: Uncertain Provisions in Uncertain Times?’ (09/01/2008), <http://

www.dechert.com>; ‘Roiling Credit Markets Render Navigating The MAE/MAC Minefield Even More Challenging’ Weil

Briefing: MAC/MAE Provisions (14 November 2007), Weil, Gotshal & Manges LLP, <http://www.weil.com>.44 See, for example, Frontier Oil Corp v Holly Corp, No 20502, 2005 WL 1039027 (Del Ch, 29 April 2005); IBP Inc v Tyson Foods

Inc, 2001 WL 6753330 (Del Ch, 18 June 2001); Esplanade Oil & Gas, Inc v Templeton Energy Income Corp, 889 F.2d 621 (5th Cir

1989); Pan Am Corp v Delta Air Lines Inc, 175 BR 438, 514 (SDNY, 1994); Katz v NVF Co, 100 AD 2d. 470 (1st Dept 1984);

Raskin v Birmingham Steel Corp, 1990 WL 193326 (Del Ch, 1990).

For some commentaries on the cases, see, ‘MAE Clauses Might not Avert a Bad Deal’ (Monday 7 November 2005) The

National Law Journal; Sandy K Feldman, ‘Is It a Material Adverse Effect?’ (January 2006) The Metropolitan Corporate Counsel

23; Dennis Block and Jonathan Hoff, ‘IBP, Inc v Tyson Foods, Inc: Material Adverse Change Provisions in Merger Agreements’,

3 Counsellor [Cadwalader, Wickersham & Taft] (issue no 4, August–September 2001), pp 1–2, 17–20 <http://www.cadwalader.

com>; Gregory Bishop, ‘Changed Circumstances or Buyer’s Remore?’ (March/April 2002) 11(4) ABA Section of Business Law;

Herbert Kozlov and Jonathan Moyer, ‘Deal Termination Litigation: The ‘Material Adverse Change Clause’ and Other Escape

Clauses in a Tightening Deal Market’ Client Bulletin (08-002), ReedSmith (January 2008), <http://www.reedsmith.com>.45 Jeffrey Rothchild and Abigail Reed, ‘Drafting material adverse change clauses in light of delaware case law’ (November/

December 2007) Inside M&A [McDermott, Will & Emery], p 1; Kenneth Adams, ‘Revisiting materiality – the ambiguity at the

heart of a fundamental contract concept’(Thursday 16 August 2007) NYLJ (GC New York) <http://www.almreprints.com>;

Kenneth Adams, ‘A legal-usage analysis of ‘‘Material Adverse Change’’ provisions’ (2004) X Fordham J Corp Fin Law 9;

Kenneth Adams, ‘Rethinking ‘‘Material’’ and ‘‘Material Adverse Change’’ (26 February 2007), and ‘The Concept of ‘‘Tested’’

Contract Language’ (12 June 2006) available at: Adams Drafting – <http://adamsdrafting.com/system>. See also discussions

and comments on recent SLM Corp v JC Flowers II, CA 3279-VCS [known as the ‘Sallie Mae case’] (especially comments by the

Vice Chancellor, Leo E Strine Jr, of the Delaware Court of Chancery on the case) in Beth Bar, ‘Sallie Mae Litigation Raises Issue

of Deal ‘‘Adverse Effect’’ ’ (14 November 2007) NYLJ, <http://www.inhousecounsel.com>.


light of comparative law and international legal practice46 where the requirements of thedoctrine of changed circumstances to invoke the economic equilibrium of the contractcould vary from what the parties might have, in fact, intended in their contract. It isbeyond the scope of this paper to engage in an analysis of the issue of economic equilib-rium of the contract vis-a-vis the change in law.47 However, as will be discussed below, inthe emerging practice of economic balancing in the cross-border pipeline industry thenotion of ‘change in law’ is specifically defined as a yardstick against which the pre-deter-mined notion of ‘economic equilibrium’ is measured. In this sense the practice in thecross-border pipeline industry is more sophisticated and result-oriented than in the en-ergy industry generally.

Some economic stabilization clauses incorporate some kind of indemnification provi-sion such as ‘Government Pays’, ‘Government Indemnifies’ or ‘National Oil Company(NOC) Indemnifies’.48 The outcome of the rebalancing aimed at in some economic sta-bilization clause is either readjustment of the contract or indemnification to the affectedparty on a continuing basis, while in others it is both.49 However, a caveat needs to bemade here that an arbitral tribunal might be willing to exempt the State from payingcompensation to the foreign investor if the actions of the former that adversely affectedthe interests of the latter were taken in a state of necessity.50

In economic balancing provisions various prescriptions for effecting the balance areprovided. Thus, the Pakistani Model PSC provides for the adjustment of the governmentholdings’ share of profit oil and profit gas,51 while the Ecuadorian Model PSC for theinclusion of a correction factor in the production share percentages to absorb the increaseor decrease in the tax burden or in the labour participation of the previously indicatedcontractor.52 In different industries, however, different prescriptions for economic bal-ancing are stipulated.53

46 See the UNIDROIT Principles of International Commercial Contracts (1994), The European Principles of Contract Law. See

generally, Michael Bonell, The UNIDROIT Principles in Practice, International Case Law and Bibliography on the UNIDROIT

Principles of International Commercial Contracts (2nd edn Transnational Publishers, Inc Irvington, NY 2006); AFM

Maniruzzaman, ‘State contracts with Aliens: The question of unilateral change by the state in contemporary international law’

(December 1992) 9 J Int’l Arb 141.47 See Thomas W Walde, ‘Renegotiating acquired rights in the oil and gas industries: Industry and political cycles meet the rule of

law’ (2008) 1 JWELB 55, 79–80.48 See the Azeri, Ecuadorian and Azeri provisions.49 See the Azeri contract.50 See LG&E Energy Corp, LG&E Capital Corp, and LG&E International Inc v Argentine Republic (ICSID Case No ARB/02/1)

(3 October 2006), paras 201–66, 67 (d&e). Cf CMS Gas Transmission Co and the Argentine Republic (ICSID Case No

ARB/01/08), 12 May 2005 paras 383–94.51 Art XXXI of the Current Model Offshore Production Sharing Agreement of Pakistan (undated) (on the author’s file).52 The Ecuador Model PSC (1993) provides in the following words: ‘‘In the event of modification in the tax system, including

labor profit sharing, that may have consequences for the economy of the Contract, a correction factor shall be included in the

production sharing percentages to absorb the increase or decrease of the tax burden’’ (art 11.9).53 For example, a construction concession agreement provided that the concession would at all times be maintained in financial

equilibrium, referred to as economic-financial equilibrium (EFE). The EFE implied that the concessionaire (‘Aucoven’) was

able to cover its costs and obtain fair and equitable remuneration by collecting the tolls. Fair and equitable remuneration

referred to an internal rate of return of 15.21% on Aucoven’s investment. As a matter of the balancing factor the agreement

stipulated that Venezuela shall compensate the concessionaire through the Direct Payment System and/or the Rate Increase

System. (These systems are described in Annex A to the Concession Agreement.) see Autopista Concesionada de Venezuela, CA

(Aucoven) v Bolivarian Republic of Venezuela (Venezuela), ICAID Case No ARB/00/5 (23 September 2003).


Occasionally, economic stabilization clauses may be found to provide time schedulewithin which no adjustment or modification of the contract is allowed.54

The arbitrator to readjust the contract when the parties fail

Petroleum contracts often expressly provide for arbitration to settle any dispute that mayarise in case the readjustment or review efforts of the parties concerned fail within a givenperiod. This is to be expected in the recent widening practice of arbitration.55 Arbitrationprovisions can operate as a ‘safety-net-clause’ when the dispute regarding renegotiationspins out of control. In difficult moments the threat of arbitration could save the day,ie it could be deployed ‘‘as a means to gain leverage towards a negotiated settlement’’.56

As a recent study notes that in two cases ‘‘the threat of arbitration (the Philippines’ Casec-nan) or actual arbitral decision (Tanzania’s IPTL – Independent Power Tanzania Ltd) waspart of broader negotiation in which the project remained viable but was adjusted to clar-ify key terms for both parties’’.57

It should be noted that in case the parties fail to agree on the matters, some contractualprovision refers the dispute to arbitration, but it does not give any express authority to thearbitrator as to what to do in the circumstances, eg whether the arbitrator can amend thecontract for the parties or not.58 Other contractual provisions, on the other hand, expresslyempower the arbitral Tribunal to deal with the situation that even extends to the modifi-cation of the contract.59 In practice, the latter approach is preferable to the former.60

54 For example, see s 47 of the On-shore (Voltaian basin) Petroleum Production Agreement of 1974 between the Government of

Ghana and Shell Exploration and Production Company (Ghana) Ltd which provides that: ‘‘It is hereby agreed that if during the

term of this agreement there should occur such changes in the financial and economic circumstances relating to the petroleum

industry, operating conditions in Ghana and marketing conditions generally as to materially affect the fundamental economic

and financial basis of this Agreement, then the provisions of this Agreement may be reviewed or renegotiated with a view to

making such adjustments and modifications as may be reasonable having regard to the Operator’s capital employed and the

risks incurred by him, always provided that no such adjustments or modifications shall be made within 5 years after the

commencement of production of petroleum in commercial quantities from the production area and that they shall have no

retroactive effect’’. [Emphasis added], quoted in Thomas W Walde and G Ndi, ‘Stabilizing international investment

commitments: international law versus contract interpretation’ (1996) 31 Tex Int’l L J 215, 266 (fn 209).55 Klaus Peter Berger, ‘Renegotiation and adaptation of international investment contracts: The role of contract drafters and

arbitrators’ (2003) 36 Vanderbilt J Transnatl L 1347, 1375–7.56 Erik J Woodhouse, ‘The obsolescing bargain redux? Foreign investment in the electric power sector in developing countries’

(2006) 38(3) NYJInt’l & Policy 121, 184.57 Ibid 182.58 For example, PSCs of 1989 between Total/Amoco/Marathon/Texaco and Government (Block 1), (Kenya), Barrows (art 40.2);

See also The Nigerian Model Contract of 1993 [art 20.2]; Concession Agreement of 2002 for Petroleum Exploration and

Exploitation between Egypt & Egyptian General Petroleum Corp and Dover Investments Ltd (East Wadi Araba Area Gulf of

Suez), Barrows (art XIX).59 But see, Klaus Peter Berger, ‘Power of arbitrators to fill gaps and revise contracts to make sense’ (2001) 17(1) Arb Intl 1.60 For various legal issues that may arise, see Piero Bernardini, ‘The renegotiation of the investment contract’ (1998) 13 ICSID

Rev-FILJ 411, 418–25.


International oil companies should be aware of the legal restrictions on international arbi-tration in some countries.61

The question arises as to whether the disagreement between the parties on the subjectmatter of renegotiation can attract ICSID jurisdiction since such disagreement may notqualify as a ‘legal dispute’ under Art 25(1) of the ICSID Convention.62 The Report ofthe Executive Directors of the World Bank states in the commentary on Art 25(1) ofthe ICSID Convention that:

. . . The expression ‘‘legal dispute’’ has been used to make clear that while conflicts ofrights are within the jurisdiction of the Centre, mere conflicts of interest are not. Thedispute must concern the existence or scope of a legal right or obligation, or the nat-ure or extent of the reparation to be made for breach of a legal obligation.63

There is a prevailing view that the differences of views of the parties on readjustment ofthe contract are merely conflicts of interest and do not qualify as ‘legal disputes’ underArt 25(1) of the ICSID Convention.64 However, if one party violates the requirementof good faith to renegotiate the contract for adaptation thereby giving rise to the legalright of the aggrieved party to enforce it,65 there cannot be any reason why this is not

61 For example, in Saudi and Iraninan law international arbitration is subject to certain conditions.

Saudi Law: [Arbitration Regulations issued by the Royal Decree M/46 on 12/7/1403 H., corresponding to 24 April 1983 and the

Implementing Regulations No M/7/2021, issued by the Regulation of the Council of Ministers on 8/9/1405, corresponding to 27 May

1985]

• Saudi government agencies are prohibited from agreeing to arbitration without specific permission of the Council of

Ministers.• The Arbitrator can be a Saudi citizen or a foreigner who is a Muslim.• The Chairman of the arbitration panel must be an expert in Shari’a or Saudi commercial law.

On Iranian Law: see Hamid G Gharabi, ‘Update, thoughts and perspectives on Iran’s international arbitration regime’

(2001) 4 Swiss Arb Bull 722: art 139 of the Iranian Constitution states:

The settlement of claims relating to public and state property or the referral thereof to arbitration is in every case dependent on

the approval of the Council of Ministers, and the Assembly must be informed of these matters. In cases where one party to the

dispute is a foreigner, as well as in important cases that are purely domestic, the approval of the Assembly must also be obtained.

Investors wishing to settle disputes arising out of contracts entered into with the Iranian State by arbitration must

therefore obtain the Iranian Parliament’s approval.62 See KP Berger, ‘Renegotiation and adaptation of international investment contracts: The role of contract drafters and

arbitrators’ (October 2004) 1(4) Transnat’l Dis Manage 23–8, <http://www.transnational-dispute-management.com>.63 ‘Report of the executive directors on the convention on the settlement of investment disputes’ (1965) ILM 524 (para 26).64 ICSID Doc SID/LC/SR/4 of 21 December 1964, p 3; G Delaume, (no 2, 1984) J Int’l Arb 110, 117; P Bernardini, ‘The

renegotiation of the investment contract’ (1998) 13 ICSID Rev-FILJ 420–5.65 On the duty to negotiate, the tribunal in the case of Government of the State of Kuwait v Aminoil stated: ‘‘An obligation to

negotiate is not an obligation to agree. Yet the obligation to negotiate is not devoid of content, and when it exists within a well-

defined juridical framework it can well involve fairly precise requirements. In some cases the failure of the negotiations can be

attributed to the conduct of one of the parties, and if so, the matter becomes transformed onto the plane of responsibility, and

must find its solution there’’ (21 ILM 976 (1982), at 1004).

See also generally, Doak R Bishop, ‘The duty to negotiate in good faith and the enforceability of short-form natural gas clause in

production sharing agreements’ (September 2007) 4(5) Transnat’l Dis Manage <http://www.transnational-dispute-management.

com>; Leonie Flynn, ‘What does ‘‘Negotiate in Good Faith’’ mean for the grantee party in a right to negotiate process?’ (1999) 18

Australian Mining & Petroleum LJ 153; Cameron Hutchinson, ‘The duty to negotiate international environmental disputes in

good faith’ (2006) 2 McGill Int’l J Sust Dev L & Pol’y 117.


a so-called ‘legal dispute’ falling within the jurisdiction of the ICSID if the claim is pre-sented in legal terms.66

4. Economic balancing practice in the cross-border pipeline industry –A new dimension in stabilizationStabilization by way of economic balancing in changed circumstances appears to be anemerging practice lately in the legal regimes of the cross-border pipeline industry suchas the Baku–Tbilisi–Ceyhan (BTC) Main Export Pipeline project67 and the West AfricanGas Pipeline (WAGP) project.68 The two Model Agreements on Cross-Border Pipelines69

designed in 2003 (the first edition) by the Energy Charter Conference also represent suchpractice.

The respective BTC Host Government Agreements (HGA)70 include both stabilizationclauses of the freezing genre and of the economic balancing categories.71 And in the con-text of the latter provisions72 the State Authorities are to take all actions available to themto restore the economic equilibrium73 established under the Project Agreements if and tothe extent the economic equilibrium is disrupted or negatively affected, directly or indi-rectly, as a result of any change (whether the change is specific to the Project or of generalapplication) in the host government’s law (including taxes, health, safety and the environ-ment),74 including changes resulting from:

66 See generally, CH Schreuer, ‘What is a Legal Dispute?’ (Provisional Issue, December 2007) Transnat’l Disp Manage, <http://

www.transnational-dispute-management.com>.67 The documents are now available on the project website: <http://www.caspiandevelopmentandexport.com>.

The relationship between BTC Co and each host government is documented in four core documents [ie IGA (1) + HGAs (3)],

together with a number of ancillary documents.

The intergovernmental agreement (IGA) entered into between Azerbaijan, Georgia and Turkey is the foundation of the legal

structure. Annexed to the IGA are, amongst other documents, the texts of three separate HGAs between BTC Co and each host

government. The IGA was entered into in November 1999 and each HGA was entered into in October 2000.68 The Treaty on the West African Gas Pipeline Project (between the Republic of Benin, The Republic of Ghana, The Federal

Republic of Nigeria and the Republic of Togo) (31 January 2003) [hereinafter the WAGP Treaty]; West African Gas Pipeline

Project – International Project Agreement (between the Republic of Benin, the Republic of Ghana, the Federal Republic of

Nigeria and the Republic of Togo, and West African Gas Pipeline Co Ltd) (22 May 2003) [hereinafter the WAGP IGA].69 (i) A Model Inter-Governmental Model Agreement (IGA) for state-to-state agreements, and (ii) and a Model Host-

Government Model Agreement (HGA) for agreements between an individual state and the project investors <http://

www.encharter.org/index.php?id=38>.

In 2004 the Model Agreements helped to provide a basis for negotiations between Kazakhstan and Azerbaijan on the trans-

Caspian Aktau–Baku transport system, which would provide an additional export route for Kazakh energy resources through

the Baku–Tbilisi–Cayhan pipeline.70 That is between the BTC Co and the respective host governments of Azerbaijan, Georgia and Trukey.71 Art 7.2(x), The Georgian HGA; art 7.2(xi), The Turkish HGA; art 7.2(x), The Azeri HGA.72 Ibid.73 ‘Economic Equilibrium’ has been defined in almost identical terms in all the BTCHGAs as follows:

‘‘Economic Equilibrium’’ means the economic value to the Project Participants of the relative balance established under the

Project Agreements at the applicable date between the rights, interests, exemptions, privileges, protections and other similar

benefits provided or granted to such Person and the concomitant burdens, costs, obligations, restrictions, conditions and

limitations agreed to be borne by such Person. [See The Georgian HGA; App 1, The Turkish HGA; App 1, The AzeriHGA.]

The ECT Model HGA also includes an indentical provision – ie art 1(8).74 Cf the BTC Human Rights Undertaking (2003) in which the BTC Co undertook not to invoke the compensation clauses in the

HGA in the event of new laws being introduced for human rights or environmental reasons, <http://

www.caspiandevelopmentandexport.com>.


• the amendment, repeal, withdrawal, termination or expiration of the host govern-ment’s law;

• the enactment, promulgation or issuance of the host government’s law;• the interpretation or application of the host government’s law (whether by the courts,

the executive or legislative authorities, or administrative or regulatory bodies);• the decisions, policies or other similar actions of judicial bodies, tribunals and courts,

the State Authorities;• jurisdictional alterations, and• the failure or refusal of judicial bodies, Tribunals and courts, and/or the State

Authorities to take action, exercise authority or enforce the host government’s law(a ‘change in law’).

The foregoing obligation to take all actions available to restore the economic equilib-rium is to include the obligation to take all appropriate measures to resolve promptly bywhatever means may be necessary, including by way of exemption, legislation, decreeand/or other authoritative acts, any conflict or anomaly between any Project Agreementand the host government’s law.

The BTC HGAs, respectively, define ‘Change in Law’ in the following identical terms:

If any domestic or international agreement or treaty; any legislation, promulgation,enactment, decree, accession or allowance; or any other form of commitment, policyor pronouncement or permission has the effect of impairing, conflicting or interfer-ing with the implementation of the Project, or limiting, abridging or adversely affect-ing the value of the Project or any of the rights, privileges, exemptions, waivers,indemnifications or protections granted or arising under this Agreement or any otherProject Agreement, it shall be deemed a Change in Law under Art 7.2 (x).75

The Energy Charter Treaty (ECT) Model HGA also includes the above provisions inidentical terms.76

The BTC HGAs provide in identical terms the remedies (ie monetary compensation)available to any project participant for any failure by the State Authorities, whether as aresult of action or inaction, to maintain economic equilibrium established under the Pro-ject Agreements. Thus, the Government concerned is to provide prompt, adequate andeffective compensation for the loss or damage incurred by the project participants.77

The ECT Model HGA, on the other hand, makes the provision that at the option of aproject investor economic equilibrium can be achieved by a reduction in the amountsof tax otherwise payable by it.78

The BTC HGA economic equilibrium provision is detailed and complex. The definitionof ‘change in law’ is encompassing. The stabilization clause covers not only legislative

75 Art 7.2(vi), The Georgian HGA; art 7.2(vi), The Turkish HGA; art 7.2(vi), The Azeri HGA.76 Art 31(2)–(4).77 Arts 9.1, 9.2, The Georgian HGA; arts 10.1 & 10.2, The Turkish HGA; arts 9.1, 9.2, The Azeri HGA.78 Art 31.4.


actions or inactions of the host State, but it also extends to those of the courts, the judicialbodies, the executive, administrative or regulatory bodies of the host State. It is apparentthat any act of the State Authorities concerned that affects the economic equilibrium estab-lished under the Project Agreements would give rise to an obligation to pay compensationto the aggrieved party. This is the case irrespective of whether the act amounts to expropri-ation or even creeping expropriation/regulatory taking. Thus, the BTC HGA prescriptiongoes beyond the traditional international law ‘expropriation–compensation’ model, ie ‘noexpropriation, no compensation’. As Lawson-Remer notes,

The agreement conflates property and contract law, replacing the rationality that gen-erally governs expropriations jurisprudence with the doctrine underlying contracts.By requiring the host governments to ‘‘restore the economic equilibrium establishedunder the Project Agreements’’ or pay compensation, the HGAs protect BTC Co’sright to expected future profits. This idea of expectation damages is common to con-tract law – courts generally award expectancy damages in order to give parties incen-tives to breach only when breach would be socially efficient – but is not an establishedprinciple of international takings jurisprudence.79

Above all, the BTC legal regime constrains the State parties’ sovereign authority to reg-ulate to a great extent. Such authority may be exercised, albeit at a price. Thus, the State ismade to bear the burden of political risk to the economic equilibrium of the contract.

It is noticeable that the BTC HGAs have short-circuited the need to engage the BTC Coand the State party concerned in a renegotiation process to reobtain the economic bal-ance of the contract (as under recent production-sharing agreements) once it is disruptedor negatively affected as a result of any change in the host State’s law. Rather, the HGAsimpose the obligation on the State Authorities to restore the economic equilibrium estab-lished under the Project Regimes. There is thus little scope for renegotiation between theparties as entertained in economic stabilization provisions of many modern production-sharing agreements discussed above.

In the West African Gas Pipeline (WAGP) project legal framework the stabilizationprovisions are also extensive and complex. The legal framework establishes an AgreedRegime80 that also includes an Agreed Fiscal Regime.81 The Agreed Regime covers thewhole legal framework that governs the WAGP project, and it also extends to the anti-trust and foreign exchange regimes of the State parties concerned. Both the WAGP treatyand the International Project Agreement mutually reinforce the stabilization of theAgreed Regime. In the stabilization provisions both the freezing and economic balancingelements are present. All the State parties concerned promise to maintain a harmonizedlegal regime across their jurisdictions at all times during the life of the project.82 And the

79 Terre-Eve Lawson-Remer, ‘A Role for the IFC in Integrating Environmental & Human Rights Standards into Core Project

Covenants: Case Study of the BTC Oil Pipeline Project’ (Global Law Working Paper 01/05), NYU School of Law, New York.80 Art VII, 2(1), The WAGP Treaty; art 7, The WAGP IGA.81 The WAGP IGA, art 29.82 Art VII. 2(2), the WAGP Treaty; art 8.3, The WAGP IGA.


States are required to have the prior written approval of the WAGP company to agree orto propose changes to the Enabling Legislation.83 The States make various treaty promisesto one another to respect the Agreed Regime.84 The International Project Agreementmakes provisions to deal with the failure of the Agreed Regime. It defines ‘regime fail-ure’85 and delineates the consequences of the regime failure.86

The regime failure enumerates the following matters, inter alia, that adversely affect theAgreed Regime such as: (i) a decision of a court or Tribunal; (ii) act or omission of a Stateor a State authority; (iii) enactment of any law by a State; (iv) the entering by a State intoany international agreement or similar other commitment, and (v) the levying of any taxin a State during the initial fiscal term. In case a regime failure occurs, which has a MAEon the WAGP Company, various remedial measures are suggested among which ‘eco-nomic balancing’ is one, ie NEB method as discussed earlier. It requires the parties con-cerned to meet and ‘‘endeavour in good faith to negotiate a solution which restores theCompany and/or the Shareholders to the same or an economically equivalent position itwas or they were in prior to such change . . .’’87 The failure of the State or the States con-cerned to comply with this measure will entitle the Company to prompt, adequate andeffective compensation,88 which should, however, exclude consequential or incidentalloss.89 The obligation of the State to compensate is a continuing one. The Agreement alsoincludes a review clause with respect to future amendment to it.90 The parties arerequired to meet every five years to consider such possibility. The requirement of goodfaith in the process applies and there is no obligation for any party to agree to any amend-ment to this Agreement.91

It is noteworthy that the important characteristic of both the BTC and WAGP legalregimes is that the State contracts are directly linked to the international treaty enteredinto by the States involved in respect of the pipeline concerned. This would mean thatthe contractual stability measures are elevated to the level of treaty protection directly.Any violation of a stabilization clause would be tantamount to the breach of internationalobligation of the violating State (ie State responsibility) and thereby it will incur interna-tional liability. Furthermore, the State contracts under both the regimes have includeddetailed provisions for international arbitration for settlement of disputes.92 Especially,in BTC-HGAs detailed provisions are made for waiver of sovereign immunity of the Stateparty both from jurisdiction and enforcement.93

83 Art 8.4, the WAGP Treaty.84 Art VII(3), the WAGP Treaty.85 Art 36.1, the WAGP IGA.86 Art 36.2, the WAGP IGA.87 Art 36.2(a), the WAGP IGA.88 Art 36.4, the WAGP IGA.89 Art 36.5, the WAGP IGA.90 Art 53, the WAGP IGA.91 Ibid.92 Art 42, the WAGP IGA; art 17, Azerbaijan HGA; art 18, Turkey HGA; art 17, Georgia HGA.93 Ibid.


5. The status of stabilization clauses in international lawOn the issue of the status of stabilization clauses in customary international law, juristsare divided,94 so is the arbitral jurisprudence on the matter. It is not always the case thatstabilization clauses are provided in the contract to be governed by international law orsome other non-national law. Often, stabilization clauses are found to be governed by thelaw of the host State.95 In the latter case the foreign investor’s interest could be at stake asthe State party can change its law reducing the effect of the stabilization clause, especiallywhen it is a freezing clause and it stands alone.96 The main purpose of stabilizationclauses is to protect the foreign investor’s interest against the host State’s unilateralaction, either legislative or regulatory, that may affect the contract. No matter whatlaw governs the contract, either the law of the host State or international law or any othernon-national law, the State’s exercise of sovereign authority in the public interest cannotbe denied either in the context of classic stabilization clauses (ie freezing clauses) or mod-ern stabilization clauses. The consequences of such exercise of the State’s authority in theface of stabilization clauses will again depend on their type, as discussed earlier, and alsothe applicable law will bear on the issue. Further, if the stabilization clause is invalidunder the law of the host State, international law may not come to its rescue.97

Internationalists have, however, attempted in both the doctrinal debate and arbitraljurisprudence to place a special status on stabilization clause as an ingredient of interna-tionalization of contract. In their view, the clause is an independent obligation rooted ininternational law, regardless of the governing law of the contract as a whole.98 As Weil hasgone to the extent to state that: ‘‘the legal relationship arising out of an investment and

94 FV Garcia-Amador, ‘State responsibility in case of ‘‘Stabilization’’ clauses’ (1993) 2 J Transnat’l L & Pol’y 23; P Weil, ‘Les

Clauses de Stabilisation ou d’Intangibilite Inserees dans les Accords de Developpement Economique in Melanges Offerts a

Charles Rousseau (1974); P Weil, ‘Problemes Relatifs aux Contrats Passes entre un Etat et un Particulier’ 128 Hague Recueil des

cours (1969-III) 101; Esa Paasivirta, ‘Internationalization and stabilization of contracts versus state sovereignty’ (1989) 60

BYBIL 315.95 See, for example, Model PSC of October 2002 for the Exploration of Hydrocarbons & the Exploration of Crude Oil, Barrows

[art 23.1]; Chevron Offshore Bahrain EPSA dated February 1998, Barrows [art 23.1]; PSC of 1989 between Total/Amoco/

Marathon/Texaco and Government (Block 1), Barrows [art 40.1]; Model License Contract of 2000 for Exploration and

Exploitation of Hydrocarbons between Perupetro SA and Contractor, Barrows [art 21.1]; 1997 Model EPSA between the

Government of Qatar and Contractor (Block 11), Barrows [art 30.1]; Arco Group Exploration and Production Agreement

(EPSA) dated January 1997 Between Qatar and Atlantic Richfield Co (Qatar) Inc, Gulfstream Resources Ltd, British Gas

Exploration and Production Ltd, Wintershall Aktiengesellschaft, and Preussag Energie GmbH (Offshore Block 11), Barrows [art

30.4]; Operating Agreement (dated 29 July 1997) between Corpoven, SA, Compania General De Combustibles SA, and

Carmanah Resources (Venezuela) Ltd, (Onado Area) (Venezuela), Barrows (art XXII).

See also older contracts – Guinea-Bissau, 1982 Offshore Model Contract for Agreements between PETROMINAS (a state

company), and Foreign Private Companies art 30.1 (Guinea-Bissau law governs) art 31.1 (stabilization), Somali Democratic

Republic, 1982 Model Concession Agreement art 28 (Somali law governs) art 31 (stabilization) reprinted in Barrow’s Basic Oil

Laws and Concession Contracts: South and Central Africa (supp 72) at 36 (1983).96 F Garcia-Amador, ‘The Changing Law of International Claims’ (1984) 393–4; Teson, ‘State Contracts and Oil Expropriation:

The Aminoil–Kuwait Arbitration’ (1984) 24 Va J Int’l Law 323, 339–40.97 See Thomas Walde and G Ndi, ‘Stabilizing international investment commitments: International law versus contract

interpretation’ (1996) 31 Tex Int’l L J 215, 242.98 DP O’Connell, ‘International Law 990 (2nd edn 1970); Garcia-Amador, L Sohn and H Baxter, Recent Codification of the Law of

State Responsibility for Injuries to Aliens (1974), p 67.


the law governing the relationship are matters within the international legal order’’.99

This would suggest that the stabilization clause will be governed by international law,even though the clause was initially agreed upon by the parties to be governed by thelaw of the host State. Brownlie notes, ‘‘(i)f the position is taken that state contractsare, in categorical terms, valid on the plane of public international law . . ., then it followsthat a breach of such a clause is unlawful and to be compensated as a form of expropri-ation’’.100 Some limited support for this view can be found in case law though.101 It can-not, however, be conclusive from this limited support that stabilization clauses haveindependent international legal status from the rest of the contract.

6. Enforcement of stabilization clauses in general international lawIn this section, we shall examine the functional value of stabilization clauses in interna-tional law with two purposes in mind. First, as there does not seem to be any known arbi-tral award intensively dealing with modern stabilization clauses, the effect of classicstabilization clauses in international law in respect of nationalization or expropriationwill be briefly examined with a view to shedding some light for the purpose of interpre-tation of the modern types. Such an approach may be more relevant where classic andmodern stabilization clauses are provided side by side in the same contract. Second,the right to regulate the foreign investor’s activities in the host State is a manifestationof that State’s sovereignty, and the functional value of modern stabilization clauses in faceof the State’s regulatory powers will be examined in light of both juristic views and arbi-tral jurisprudence for a better understanding of their relationship.

Stabilization clauses v nationalization/expropriation

In the 1970s and 1980s the controversial oil arbitration cases, eg, the Libyan nationaliza-tion cases and the Aminoil case, were concerned with classic stabilization clauses.Although all-out nationalization or expropriation scenarios are not in vogue now-a-days,the principles established in the context of classic stabilization clauses are still relevanttoday and can help develop principles and rules concerning the modern types of stabil-ization clauses, ie economic equilibrium clauses. It merits a quick glance at the positionsthat different arbitral tribunals have taken in the context of the classic stabilization andnationalization/expropriation scenario.

99 Prosper Weil, ‘The State, the Foreign Investor, and the International Law: The No Longer Stormy Relationship of a Menage �ATrois’ (no 2, Fall 2000) 15 ICSID Rev-FILJ 401, 406; P Weil, ‘Les Clauses de Stabilisation ou d’Intangibilite Inserees dans les

Accords de Developpement Economique’, in Melanges Offerts a Charles Rousseau (1974); Weil, ‘Problemes ‘‘Relatifs aux

Contrats Passes entre un Etat et un Particulier’’ ’ (1969-III) 128 Hague Recueil des cours 101; Weil, ‘Droit international et

contrats d’Etat’ in Le droit international: unite et diversite Melanges offerts a Paul Reuter, (1981) 549; See also Texaco v Libya, 53

ILR 389, pp 447–8; ‘‘[C]ontracts between States and private persons can, under certain conditions, come within the ambit of a

particular and a new branch of international law: the law international law of contracts’’. See generally, AFM Maniruzzaman,

‘State contracts in contemporary international law: Monist versus Dualist Controversies’ (2001) 12 EJIL 309.100 Ian Brownlie, Principles of Public International Law (5th edn OUP, 1998) 554.101 See Texaco v Libya, 53 ILR, 389, 494–5; The Revere Award, 56 ILR 258; AGIP Co v Popular Republic of the Congo reprinted

(1982) 21 ILM 726, 727.


In the Texaco award102 Sole Arbitrator held that the presence of a stabilization clausedoes not permit a State to exercise its sovereign powers that may affect the contractualrights of a concessionaire, hence any such exercise including nationalization is unlawful.It, however, begs the question – whether stabilization clauses can preclude all adverselyimpacting sovereign powers, in all circumstances, even if exercised in good faith. In theLiamco award103 the tribunal viewed that the stabilization clause is a guarantee againstthe possibility not of the exercise of lawful sovereign powers impliedly retained, but ofthe arbitrary alteration or abrogation by the State of its contractual obligation. Thus,nationalization that complies with the public policy is non-discriminatory and accompa-nied by the payment of adequate compensation is not a wrongful breach of the stabilizationclause. Rather, it constitutes a ‘source of liability to compensate’ the foreign investor.104 Inthe Aminoil case105 the majority of the tribunal found that where a stabilization clause didnot expressly provide against nationalization, subsequent nationalization by the State wasnot unlawful.106 In justifying their majority view as to why they did not regard the stabil-ization clause as a prohibition on nationalization, the tribunal reasoned: first, any limita-tion on a State’s right to nationalize ‘‘would be a particularly serious undertaking (anundertaking not to nationalize for 60 years in the present case) which would have to beexpressly stipulated for’’.107 Secondly, the limitation as such would be expected to ‘‘coveronly a relatively limited period’’.108 Moreover, in conformity with its findings on the draft-ers’ intent, the tribunal held that stabilization clauses implicitly required that nationaliza-tion should not have a confiscatory character. In the tribunal’s view there was no wrongfulbreach of the stabilization clause as Kuwait’s act of nationalization was not confiscatory.

The Aminoil tribunal introduced an innovation in the interpretation of the stabiliza-tion clause that requires to take into account different factors and surrounding circum-stances that may have an impact on such a clause. In the face of different factors peculiarto the case concerned, the tribunal did not accord any plain meaning to the stabilizationclause. The Tribunal had found that the contract between the parties had undergone sig-nificant changes over its terms that had ‘‘brought about a metamorphosis in the wholecharacter of the concession’’.109 And this ‘metamorphosis in the whole character of theconcession’ seemed to carry the most weight with the majority of the tribunal in not giv-ing a literally restrictive construction of the stabilization clause concerned. The tribunal’sdecision in favour of nationalization against a stabilization clause attracted support byother tribunals. As the ICSID tribunal said in the Letco case:

. . . a Stabilization Clause is commonly found in long term development contractsand, . . . is meant to avoid the arbitrary actions of the contracting government. This

102 53 ILR (1979) 389.103 20 ILM at 61.104 Liamco v Libya 20 ILM at 61.105 Kuwait v Aminoil 21 ILM at 1023.106 Ibid 1022.107 21 ILM 1023, para 95.108 Ibid.109 Aminoil, ibid 1023.


clause must be respected especially in this type of agreement. Otherwise, the contract-ing State may easily avoid its contractual obligations by legislation. Such legislativeaction could only be justified by nationalization.110

In AGIP v the Government of Madagascar111 the claimant did not object, in principle,to the State’s right of nationalization as it is an inalienable right of the State. The claim-ant’s demands were restricted to compensation as the tribunal was apparently averse tothe objection to the State’s right to nationalize in the face of the stabilization clause.

In the above-mentioned cases the act of nationalization was held lawful112 even in theface of a stabilization clause that operated only to ensure compensation. Stabilizationclauses are not thus a guarantee against lawful nationalization and for that matter lawfulexpropriation.113 They impose on the State an obligation to act in good faith and give riseto an obligation to compensate in case of their breach.114

Sovereign regulatory challenge, economic stabilization and indirect

expropriation: The missing link

The State exercises its sovereign authority in regulating various matters within its juris-diction such as the environment, tax, fixing the pricing levels, production controls, labourissues, public health, safety and all other matters falling within its eminent domain andpolice powers. The principal issues that arise are whether the State’s regulatory actionscan be tantamount to indirect expropriation or regulatory taking, and if not whether suchactions in violation of a relevant stabilization clause would be so. The role that the sta-bilization clause may play in such situations also merits examination in light of the recentarbitral jurisprudence.

It cannot be denied that a State has certain exceptional prerogative powers to exercisefor the public good and in the public interest that are generally recognized as inalienable.In particular, in the context of the exploration and exploitation of natural resources suchpowers are well recognized by the principle of permanent sovereignty of the State overnatural resources.115 It is considered that in the face of the principle of permanent sov-ereignty over natural resources stabilization clauses, being contractual provisions, cannotprevent a State from exercising its sovereign powers for the public good.116 However, the

110 26 ILM 666–7.111 21 ILM (1976); 66 ILR (1981) 518.112 Rosalyn Higgins, ‘Legal preconditions of foreign investment’ Proceedings of the International Bar Assoc Seminar on Energy Law

86 p 232.113 Cf Texaco and BP Awards, ibid.114 See generally, AFM Maniruzzaman, ‘Damages for breach of stabilisation clauses in international investment law: Where do we

stand today?’ [2007] IELTR 246.115 See UN GA Res 1803, 17 UN GAOR 17th Session, Supp No 17, at 15, UN Doc A/5217 (1962). See also 57 AM J INT’L L 710

(1963); UN GA Res 3171, UN GAOR 28th Session, Supp No 30, at 52, UN Doc A/9030 (1973), reprinted in 13 ILM 238 (1974);

Resolution on Permanent Sovereignty over Natural Resources, GA Res 3201, UN GAOR, Session 28, Supp No 1, at 3, UN Doc

A/9559 (1974), reprinted in 13 ILM 715 (1974); GA Res 3281, UN GAOR, 29th Session, Supp No 31, at 50, UN Doc A/9631

(1974), reprinted in 14 ILM 251 (1975). See also Resolution 88 (XIII) of (19 October 1972), UNCTAD Doc, TD/B/421; The

OPEC Resolution XVI 90 Declaratory Statement of Petroleum Policy in Member Countries (1968) 7 ILM 1183.116 See K Hossain and SR Chowdhury (eds), Permanent Sovereignty over Natural Resources in International Law (1984) xviii.


functional value of stabilization clauses cannot be discounted. We shall shortly turn tothis matter.

Although the distinction between a compensable taking or indirect expropriation anda non-compensable regulation still remains murky in customary international law, recentState practice provides guidance as to what regulatory exercises of the State may notamount to indirect expropriation. For example, the 2004 US Model Bilateral InvestmentProtection Treaty includes the following provision:

Except in rare circumstances, non-discriminatory regulatory actions by a Party thatare designed and applied to protect legitimate public welfare objectives, such as pub-lic health, safety and the environment, do not constitute indirect expropriations.117

Similarly, the American Law Institute’s Restatement (Third) of the Foreign RelationsLaw of the United State also endorses the position as follows:

A state is not responsible for loss of property or for other economic disadvantageresulting from bona fide general taxation, regulation, forfeiture for crime, or otheraction of the kind that is commonly accepted as within the police power of the states,if it is not discriminatory . . .118

Art 20 (8) the Investment Agreement for the COMESA Common Investment Area,2007119 provides in similar terms that:

Consistent with the right of states to regulate and the customary international lawprinciples on police powers, bona fide regulatory measures taken by a Member Statethat are designed and applied to protect or enhance legitimate public welfare objec-tives, such as public health, safety and the environment, shall not constitute an indi-rect expropriation under this Article.120

Art 12 of the Draft Norway Model BIT (2008) includes the following provision underthe heading ‘Right to Regulate’ that:

Nothing in this Agreement shall be construed to prevent a Party from adopting,maintaining or enforcing any measure otherwise consistent with the Agreement that

117 United States Model Bilateral Investment Treaty, 2004, Annex B, <http://www.state.gov/documents/organization/38710.pdf>;

See also art 15(1) of the United States–Singapore Free Trade Agreement (6 May 2003) where the provision is found in

similar wordings derived from para 4(b) of exchange of letters on expropriation between United States Trade Representative

Robert B Zoellick and Singapore Minister for Trade and Industry George Yeo, <http://www.naftaclaims.com/files/

US-Singapore_Expropriation_Letter.pdf>.118 Vol 1, 1987, s 712, Comment 8.119 Not yet in force. Member States of the Common Market for Eastern and Southern Africa (COMESA) are: The Governments of

Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi,

Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.120 Investment Agreement for the COMESA Common Investment Area, 2007 (not yet in force), <http://www.comesa.int/

investment/regimes/investment_area/Folder.2007-11-06.4315/Multilanguage_content.2007-11-07.1023/en>.


it considers appropriate to ensure that investment activity is undertaken in a mannersensitive to health, safety or environmental concerns.121

In State-investor contracting practice often the State’s sovereign exercise of authority isreserved in specific terms as follows:

Without prejudice to the Government’s prerogative of sovereign powers the mutual con-sent of the parties hereto shall be required to annul, amend or modify the provisionsof this Agreement.122

Thus, there seems to be a recent tendency (though it cannot be said for sure at themoment if it is fizzle or not) to endorse the bona fide provisions123 as mentioned above.It is found not only in developed countries’ practice124 but also in developing countries’.It is anticipated that more countries, especially the emerging economies, will follow suitwith the increasing cross-border business transactions in the wake of the present movetowards globalization. International case law in the field also seems to respond to thisState practice by articulating the relevant principles.

In the Methanex case125 the tribunal under the North American Free Trade Agreement(NAFTA) had to test the issues of the State’s right to regulate for the public good. Somecommentators have considered it ‘a long-awaited award’.126 It is interesting that the caseconcerned two developed member countries of the NAFTA (ie USA and Canada) unlikemost investment disputes where a developing country’s regulatory behaviour is ques-tioned. In the Methanex case a Canadian company sought to hold the US liable for reg-ulatory expropriation because the State of California had destroyed a profitable businessby banning the use of a certain fuel additive, methyl tertiary-butyl ether (MTBE). Indefence, the US argued that the Californian ban was a legitimate exercise of regulatorypower to prohibit the marketing of a production which was dangerous to public health.The tribunal decided in favour of the US that ‘‘from the standpoint of international law,it was a lawful regulation and not an expropriation’’.127 The tribunal observed that theban was ‘‘motivated by the honest belief, held in good faith and on reasonable scientificgrounds, and the MTBE (the disputed additive) contaminated groundwater and was

121 See the English version of the Draft Norway Model BIT (Draft version: 191207), <http://www.regjeringen.no/upload/NHD/

Vedlegg/hoeringer/Utkast%20til%20modellavtale2.doc>.122 [Emphasis added] EPSA between the State and Qatar Petroleum Co (16 February 1986) art XXVI.123 But see C Knahr, ‘Indirect expropriation in recent investment arbitration’ (December 2007) Transnat’l Dis Manage, <http://

www.transnational-dispute-management.com>.124 See also Canada, Model Foreign Investment Protection Agreement, Annex B 13(1) at <http://www.international.gc.ca/assets/

trade-agreements-accords-commerciaux/pdfs/2004-FIPA-model-en.pdf>.125 Methanex Corp v United States of America, Award of 5 August 2005.126 Jan Paulsson, ‘Indirect expropriation: Is the right to regulate at risk?’ (April 2006) 3(2) TDM. But see for critiques on the case:

Todd Weiler, ‘Methanex Corp v USA: Turning the page on NAFTA chapter eleven?’ (2005) JWIT 903; Howard Mann, ‘The final

decisions in Methanex v United States: Some new wine in some new bottles’ (August 2005), <http://www.iisd.org>.127 Ibid Part IV, ch D, para 15.


difficult and expensive to clean up’’.128 In Saluka v Czech Republic129 the tribunal said, ‘‘Itis now established in international law that States are not liable to pay compensation to aforeign investor when, in the normal exercise of their regulatory powers, they adopt in anon-discriminatory manner bona fide regulations that are aimed at the generalwelfare’’.130

In the Sedco case the Iran–United States Claims Tribunal also noted that it is ‘anaccepted principle of international law that a State is not liable for economic injury whichis a consequence of a bona fide ‘‘regulation’’ within the accepted police power ofStates’.131 In the SD Myers case132 the tribunal held Canada liable for expropriation forits regulatory restriction which was not, in fact, according to the tribunal, motivatedby genuine environmental concerns, but was rather a stratagem to protect national busi-ness interest.

Thus, the emphasis on the exercise of the State’s police power or regulatory power isthat it be bona fide in order for it not to amount to indirect expropriation. Bona fide,indeed, it needs to be. There, however, exists little guidance in international case lawas to what regulatory exercises are bona fide and what are not. The question might arisewhether any distinction should be made between the State’s intention in its regulatoryexercise and its ulterior motive that can be served through such regulatory exercise. Athief may intend to steal, which intention is bad in itself, but his ulterior motive for suchstealing could be to help the poor with the stolen money or objects. In a similar situationwith the State what is then the wrong end of the stick not to point to the bona fide natureof its regulatory exercise? Should the State’s action be judged by its regulatory intentionor the ulterior motive that the regulation is aimed to serve?133 Other attendant issues thatmay be relevant in context of the consideration of the bona fide nature of regulation are:to what extent the social function of property should be responsive to the State’s regula-tory exercise without giving rise to any compensation, or to what extent good faith maybe found in the case where the investor instead of the whole society has to bear the costfor the State’s welfare spirited regulation. In determining the legitimacy of regulatory pur-poses the question has been raised why not international practice equally acceptable toboth developed and developing countries should be taken into account instead of thecurrent standard of reasonably acceptable behaviour of the society concerned.134

128 Ibid Part III, ch A, para 102.129 Saluka Investments BV (The Netherlands) v The Czech Republic, Partial Award, 17 March 2006, <http://www.investmentclaims.

com/>.130 Ibid para 255.131 Sedco, ‘Inc v National Iranian Oil Co’ (1985) 9 Iran–US Claims Trib Rep 248, 275.132 SD Myers Inc v Canada, Partial Award, 13 November 2000.133 See on a different tack, Phelps Dodge Corp v Islamic Rep of Iran, 10 Iran–USCTR (1986), p 121, para 22, at p 130; Tippetts,

Abbot, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran, Iran–USCTR (1984), pp 219, 225–6 [cases dealing with

intent v effect of the government measures]. See also Aldrich, ‘What constitutes a compensable taking of property? The decisions

of the Iran–United States Claims Tribunal’ (1994) 88 AJIL 585; R Dolzer, ‘Indirect expropriations: New developments?’ (2002)

11 NYU Env LJ 64, 78.134 See Allen S Weiner, ‘Indirect expropriations: The need for a taxonomy of ‘‘Legitimate’’ regulatory purposes’ (2003) 5 Int’lL

Forum, 166, 171–4.


International arbitral tribunals will have to grapple with these issues, not to mention theirimportance in the context of stabilization clauses, in the years to come.135

The test or the requirement that the State’s exercise of its regulatory power be bona fidemay be brought to bear on softening the effect of a stabilization clause that may otherwisestand in its way. This means that the stabilization clause and the State’s bona fide regula-tory exercise of authority are not mutually exclusive, rather the stabilization clause puts arider on such exercise which is an assertion of good faith in a contractual relationship. Therole of the stabilization clause could thus be the guardian of good faith in and good gov-ernance of the contractual relationship of the parties, the violation of which can give rise tocompensation to the aggrieved party. In EnCana v Republic of Ecuador the tribunal heldthat ‘‘In the absence of a specific commitment from the host Sate, the foreign investorhas neither the right nor any legitimate expectation that the tax regime will not change,perhaps to its disadvantage, during the period of the investment’’.136 It also noted, ‘‘Evenif there were such a commitment (eg to a tax freeze or ‘tax holiday’), this would not con-vert a breach of contract or the denial of a legitimate expectation into an expropria-tion’’.137 Thus, the legitimate expectation of the foreign investor may becounterbalanced by the State’s bona fide exercise of sovereign regulatory powers.138

The Saluka tribunal noted with approval the observation of the Methenex tribunalthat: ‘‘[i]t is a principle of customary international law that, where economic injuryresults from a bona fide regulation within the police powers of a State, compensationis not required’’.139 But the role of the stabilization clause is to assure compensation insuch situations. As the Methanex tribunal held that:

. . . as a matter of general international law, a non-discriminatory regulation for apublic purpose, which is enacted in accordance with due process and, which affects,inter alios, a foreign investor or investment is not deemed expropriatory and compen-sable unless specific commitments had been given by the regulating government to thethen putative foreign investor contemplating investment that the government wouldrefrain from such regulation.140

The ICSID tribunal in its recent decision in Parkerings v Lithuania also held in similarterms that:

It is each State’s undeniable right and privilege to exercise its sovereign legislativepower. A State has the right to enact, modify or cancel a law at its own discretion.

135 See for insightful analysis of some relevant issues by the Supreme Court of the United States in United States v Winstar Corp

et al (116 SCt 2432 (1996)).136 EnCana Corp v Republic of Ecuador (LCIA Award, 3 February 2006), para 173.137 Ibid 50 (fn 120 in the award itself).138 See Saluka v Czech Republic (2006), para 66. See also generally, Francisco Orrego Vicuna, ‘Regulatory authority and legitimate

expectation: Balancing the rights of state and the individual under international law in a Global Society’ (2003) 5/3 Int’lL

Forum 188.139 Saluka v Czech Republic (2006), para 262.140 [Emphasis added], Methanex Corp v United States of America, Award of 5 August 2005 (at Part IV, ch D, para 7).


Save for the existence of an agreement, in the form of a stabilisation clause or otherwise,there is nothing objectionable about the amendment brought to the regulatoryframework existing at the time an investor made its investment. As a matter of fact,any businessman or investor knows that laws will evolve over time. What is prohib-ited however is for a State to act unfairly, unreasonably or inequitably in the exerciseof its legislative power.141

It thus follows from the above arbitral jurisprudence that a simple regulation cannotamount to indirect expropriation, hence not compensable. The presence of a stabilizationclause can make such action compensable. In such a situation, as will be examined later,the principle that provides the missing link between the State’s exercise of the regulatorypower and the obligation to pay compensation is the fair and equitable treatment stan-dard. The role of the standard is to operate as the foundation stone of good faith and toserve justice. As the tribunal in Sempra Energy International and Argentine Republic142

noted about the fair and equitable standard that:

. . . it ensures that even where there is no clear justification for making a finding ofexpropriation . . ., there is still a standard which serves the purpose of justice and canof itself redress damage that is unlawful and that would otherwise pass unattended.Whether this result is achieved by the application of one or several standards is adetermination to be made in the light of the facts of each dispute.143

The tribunal also added that:

It must be kept in mind that on occasion the line separating the breach of the fair andequitable treatment standard from an indirect expropriation can be very thin, partic-ularly if the breach of the former standard is massive and long-lasting. In case ofdoubt, however, judicial prudence and deference to State functions are better servedby opting for a determination in the light of the fair and equitable treatment stan-dard. This also explains why the compensation granted to redress the wrong donemight not be too different on either side of the line.144

Over the last few decades the ever-increasing case law on the subject has contributed tothe clarification of various tests that may be applied depending upon the particular cir-cumstances of the case concerned to determine when the State’s regulatory exercise is notmerely as such but amounts to indirect or creeping expropriation. It is beyond the scope

141 [Emphasis added.] Parkerings-Compagniet v Lithuania, Award, 11 September 2007, ICSID Case No ARB/05/8, para 332.142 (Case No ARB/02/16) [28 September 2007].143 Ibid para 300.144 Ibid para 301.


of this paper to examine this matter.145 However, it is noteworthy that to limit the scopeof the fair and equitable treatment standard in respect of indirect expropriation the threeNAFTA parties (the United States, Canada and Mexico) issued a joint statement which isexpected to guide their practice amongst themselves and beyond. In the context of indi-rect expropriation the statement stresses primarily on ‘a case-by-case, fact-based inquiry’into a specific fact situation for the determination of whether an action or series ofactions by a Party (ie NAFTA Party) constitutes an indirect expropriation. It pointsout four objective factors to consider, amongst others, viz (i) the economic impact ofthe government action, (ii) the extent of the resultant inference of the government actionwith distinct, reasonable investment-backed expectations, (iii) the character of the gov-ernment action and (iv) the legitimate public welfare objectives of the Party taking reg-ulatory actions.146

7. Emerging normative standards of treaty stabilization?Recently, in an increasing number of investment treaty arbitration cases certain notionshave been polished to give effect to the stability of contractual relationship between thehost State and a foreign investor. Among them, the most prominent ones are: (i) fair andequitable treatment; (ii) legitimate expectation; and (iii) umbrella clauses. They have afunctional value as they are geared to the protection of foreign investment. The generaltendency of these notions is to contain the stability of contract between the host State anda foreign investor irrespective of a stabilization clause in it, but more so when its presencein it operates as a booster. We shall now examine them in turn in light of the recent caselaw in the field.

Contract stability as part of fair and equitable treatment

It has to be acknowledged that the content of the notion of fair and equitable treatment isstill evolving in case law. On the conceptual terrain, it is still a legal prism that causes aspectrum of meanings and operates often as a gapfiller in the context of other standardsof treatment of foreign investment. In the arbitral jurisprudence the notion is often found

145 There is already a vast literature on the subject, eg Thomas Walde and Abba Kolo, ‘Environmental regulation, investment

protection and ‘‘Regulatory Taking’’ in international law’ (2001) 50 ICLQ 811; Andrew Newcombe, ‘The boundaries of

regulatory expropriation in international law’ (2005) 20 ICSID Rev-FILJ 1; WM Reisman and RD Slone, ‘Indirect

expropriation and its valuation in the BIT generation’ (2003) 74 BYBIL 115; L Yves Fortier and Stephen L Drymer, ‘Indirect

expropriation in the law of international investment: I know it when I see it, or Caveat investor’ (2004) 19 ICSID Rev-FILJ 293;

Christoph H Schreuer, ‘The Concept of Expropriation under ECT and Other Investment Protection Treaties’ in Clarisse

Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (2006) 108; Jan Paulsson and Zachary Douglas, ‘Indirect

Expropriation in Investment Treaty Arbitration’ in N Horn and S Kroll (eds), Arbitrating Foreign Investment Disputes:

Procedural and Substantive Legal Aspects (2004) 145; C Knahr, ‘Indirect expropriation in recent investment arbitration’

(December 2007) Transnat’l Dis Manage, <http://www.transnational-dispute-management.com>; V Heiskanen, ‘The doctrine

of indirect expropriation in light of the practice of the Iran–United States claims tribunal’ (October 2006) Transnat’l Dis

Manage, <http://www.transnational-dispute-management.com>; ‘Indirect Expropriation’ and the ‘Right to Regulate’ in

International Investment Law (OECD study, September 2004); R Dolzer, ‘Indirect expropriations: New developments?’ (2002)

11 ELJ 64.146 Howard Mann, ‘International investment agreements, business and human rights: Key issues and opportunities’ (February

2008) 24, <http://www.iisd.org>.


linked to other standards (as being part of them) such as good faith,147 transparency,148

minimum international standard,149 legality,150 due process151 and denial of justice,152

due diligence,153 reasonableness and proportionality,154 legitimate expectation,155 non-arbitrary156 and non-discriminatory treatment,157 stability and predictability of legaland business framework,158 and so on.159 It has also been asserted that, ‘‘A treatment thatis not fair and equitable automatically entails an absence of full protection and security ofthe investment’’.160 As Judge Higgins notes, ‘the key terms ‘‘fair and equitable treat-ment’’ . . . are legal terms of art well known in the field of overseas investmentprotection . . .’161

Be that as it may, in a number of recent cases it has been reiterated by arbitral tribunalsthat the notion of the stability of the legal regime under which the foreign investor shouldoperate is part of ‘fair and equitable treatment of investment’. In OEPC v Ecuador thetribunal held that ‘‘[t]he stability of the legal and business framework is thus an essentialelement of fair and equitable treatment’’.162 The tribunal concluded on the basis of thefacts that the law in Ecuador was altered, after the claimant had invested ‘in an importantmanner’, and that the relevant ‘‘tax law was changed without providing any clarity about

147 Tecnicas Medioambientales TECMED SA v United Mexican States, ICSID Case ARB (AF)/00/2 (29 May 2003), 43 ILM 133

(2004), para 153, <http://www.investmentclaims.com>.148 Metalclad Corp v United Mexican States, ICSID Case No ARB (AF)/97/1, Award of 30 August 2000, para 99, but see on the

transparency issue the decision of the Supreme Court of British Columbia, in United Mexican States v Metalclad Corp, 2001

BCSC 644, <http://www.investmentclaims.com>.149 Azurix Corp v Argentina (ICSID Case No ARB/01/12) (14 July 2006), para 364, <http://www.investmentclaims.com>; ADF

Group, Inc v United States (9 January 2003), ibid; 18 ICSID Rev 195, 228, 276.150 Metalclad Corp v United Mexican States, ICSID Case No ARB (AF)/97/1, Award of 30 August 2000, para 93, <http://

ita.law.uvic.ca/index.htm>; Pope & Talbot, Inc v The Government of Canada, UNCITRAL, Award on the Merits of Phase 2 of 10

April 2001, paras 174 et seq, <http://ita.law.uvic.ca/index.htm>.151 ADC Affiliate Ltd and ADC & ADMC Management Ltd v The Republic of Hungary (ICSID Award, 2 October 2006), paras 379,

476(d), <http://ita.law.uvic.ca/index.htm>.152 West Management, Inc v United Mexican States, ICSID Case No ARB (AF)/00/3 (30 April 2004), 43 ILM 967 (2004).153 Lauder v Czech Republic, 3 September 2001 (Final Award); MTD Equity Sdn Bhd v Republic of Chile, ICSID Case No ARB/01/7

(25 May 2004), <http://ita.law.uvic.ca/links.htm>.154 Pope & Talbot v Canada, paras 123, 125, 128, 155; Saluka v Czech Republic, paras 304 et seq; Tecmed v Mexico, para 122.155 Tecnicas Medioambientales TECMED SA v United Mexican States, ICSID Case ARB (AF)/00/2 (29 May 2003) 43 ILM 133

(2004) para 154; International Thunderbird Gaming Corp v United Mexican States (NAFTA) (26 January 2006), <http://

ita.law.uvic.ca/index.htm>.156 Elettronica Sicula SpA (ELSI) (United States of America v Italy), Judgment of 20 July 1989, ICJ Reports 1989, p 15 para 128;

Waste Management v Mexico (2004, ICSID) para 98; Alex Genin v Estonia (2001, ICSID) para 371; Noble Ventures v Romania

(2005) para 176.157 Loewen Group, Inc and Raymond L. Loewen v United States (2003, ICSID), para 135.158 LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc v Argentine Republic (ICSID Award, 3 October 2006), paras

121–39, <http://ita.law.uvic.ca/index.htm>.

Azurix Corp v The Argentine Republic (ICSID Award, 14 July 2006) para 360, <http://ita.law.uvic.ca/index.htm>; Petrobart Ltd v

The Kyrgyz Republic (Arbitration Institute of the Stockholm Chamber of Commerce, 29 March 2005), pp 25–7, <http://

ita.law.uvic.ca/index.htm>; OEPC v Ecuador (25 May 2004), para 183, <http://ita.law.uvic.ca/index.htm>.159 See the OECD Study on Fair and Equitable Treatment in International Investment Law (September 2004). See also Stephan W

Schill, ‘Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law’ (IILJ Working Paper

2006/6, NYU Law School).160 OEPC v Ecuador, para 187.161 Oil Platform (Iran v United States) 1996, ICJ 803 (Preliminary Objections), per Judge Higgins (Separate Opinion).162 Occidental Exploration and Production Company v The Republic of Ecuador, LCIA Case No UN3467, Final Award of 1 July 2004,

at para 183.


its meaning and extent and the practice and regulations were also inconsistent with suchchanges’’.163 In Sempra Energy International v The Argentine Republic164 the tribunalunderscored the significance of the fair and equitable treatment in the following words:‘‘What counts is that in the end the stability of the law and the observance of legal obli-gations are assured, thereby safeguarding the very object and purpose of the protectionsought by the treaty’’.165 In recent arbitral awards the notion of fair and equitable treat-ment standard has thus been consistently interpreted in terms, amongst others, of stabil-ity, predictability and consistency of the host State’s legal framework. The tribunal inTechmed described ‘fair and equitable treatment’ as requiring:

the Contracting Parties to provide to international investment treatment that doesnot affect the basic expectations that were taken into account by the foreign investorto make the investment. The foreign investor expects the host State to act in a con-sistent manner, free from ambiguity and totally transparently in its relations with theforeign investor, so that it may know beforehand any and all rules and regulationsthat will govern its investments, as well as the goals of the relevant policies andadministrative practices or directives, to be able to plan its investment and complywith such regulations.166

It should be appreciated that the contour and the content of the notion of fair andequitable treatment is now gradually emerging in the recent arbitral jurisprudence. Theexpansive notion of fair and equitable treatment167 may be circumscribed by the notionof ‘investor conduct’ reflected in various duties owed by the investor such as (i) the dutyto refrain from unconscionable conduct, (ii) the duty to invest with adequate knowledgeof risk and (iii) the duty to conduct business in a reasonable manner.168 It has been sug-gested that the emerging new limit that is being developed to the fair and equitable treat-ment standard in the recent arbitral jurisprudence can be encapsulated in the phrase‘Caveat Investor’.169 This indicates that the investor needs to exercise certain cautionsas a matter of duty before being able to claim the fair and equitable standard of treatment.

Thus, it follows that although the treaty standard of fair and equitable treatment,which is often equated with the international minimum standard of customary

163 At para 184. In CMS Gas Transmission Co v The Argentine Republic (2005) the tribunal affirmed that ‘‘a stable legal and

business environment is an essential element of fair and equitable treatment’’ (ibid at para 274). The relevant US–Argentine

investment treaty also provided, like many others, in the preamble that ‘‘fair and equitable treatment of investment is desirable

in order to maintain a stable framework for investment and maximum effective utilization of economic resources’’.164 Sempra Energy International v Argentine Republic (Case No ARB/02/16) 28 September 2007.165 Ibid para 300.166 Tecnicas Medioambientales TECMED SA v United Mexican States, ICSID Case ARB (AF)/00/2 (29 May 2003) 43 ILM 133

(2004) para 154.167 Sempra Energy International v Argentine Republic (28 September 2007) para 302: ‘‘ . . . The very fact that recent interpretations

of investment treaties have purported to change the meaning or extent of the standard only confirms that, those specific

instruments aside, the standard is or might be a broader one’’.168 See Peter Muchlinski, ‘ ‘‘Caveat Investor?’’ The relevance of the conduct of the investor under the fair and equitable standard’

(July 2006) 55 ICLQ 527, 530–56.169 Ibid 530.


international law,170 represents a hallmark of stability of contractual relationship betweenthe parties, the operation of the notion cannot be a blanket proposition, rather it may becircumscribed by various factors.

Stability as legitimate expectation of the investor

As the concept of legitimate expectation is considered part and parcel of the fair and equi-table treatment standard, as indicated above, and is intricately linked to the idea of stabilityof State-alien contractual relationship, it merits separate treatment here. Different arbitraltribunals have given different degrees of emphasis on the link between these two. Forinstance, the tribunal in Saluka v Czech Republic referred to the concept of legitimateexpectations as the dominant element of the standard of fair and equitable treatment.171

In the separate opinion in International Thunderbird Gaming Corp v Mexico172 the concepthas been suggested as a ‘self-standing subcategory and independent basis’ for a claim underthe ‘fair and equitable standard’.173 However, the determination of the content of the con-cept itself may often be a subjective exercise. A better approach may be to consider the con-tent of the concept from a negative perspective as to what are not legitimate expectationsthat do not guarantee stability. Such an approach may be discerned in the recent arbitraljurisprudence where the concept has been circumscribed by various exceptions in the con-text of the varied particular circumstances of some cases.

In the separate opinion in Thunderbird it was indicated that there should not only bean ‘expectation’, but it also should be a ‘legitimate’ one.174 The tribunal in Parkerings-Compagniet v Republic of Lithuania175 observed that:

The expectation is legitimate if the investor received an explicit promise or guarantyfrom the host State, or if implicitly, the host State made assurances or representationthat the investor took into account in making the investment. . . . in the situationwhere the host State made no assurance or representation, the circumstances sur-rounding the conclusion of the agreement are decisive to determine if the expectationof the investor was legitimate. In order to determine the legitimate expectation of aninvestor, it is also necessary to analyse the conduct of the State at the time of theinvestment.176

170 See OPEC v Ecuador para 188, <http://ita.law.uvic.ca/index.htm>; Azurix Corp v The Argentine Republic, paras 189–90, 364,

ibid; Glamis Gold Ltd v United States of America, NAFTA arbitration, the Counter-Memorial dated 19 September 2006, <http://

ita.law.uvic.ca/index.htm>; CMS Gas Transmission Co v the Argentine Republic (ICSID Case No ARB/01/08), 12 May 2005, para

284, <http://ita.law.uvic.ca/index.htm>. Cf Sempra Energy International v Argentine Republic (28 September 2007) para 302.

See generally, CH Schreuer, ‘Fair and equitable treatment (FET): Interactions with other standards’ (September 2007) 4 TDM 26:

‘‘Under the NAFTA and under some BITs it is established that they (ie FET standard and international minimum standard) are the

same’’. See also the Second Opinion of Prof. Sir Robert Jennings on the meaning of art 1105(1) of the NAFTA Agreement (dated 6

September 2001) in the Methanex case, <http://ita.law.uvic.ca/documents/MethanexResubAmendStateClaimAppend.pdf>;

M Orellana, ‘International law on investment: The minimum standard of treatment (MST)’ (February 2004) 2 TDM.171 Partial Award of 17 March 2006 at para 301, <http://ita.law.uvic.ca/index.htm>.172 Award (NAFTA) of 26 January 2006, <http://ita.law.uvic.ca/index.htm>.173 Ibid para 37 (Separate Opinion of Thomas Walde).174 Ibid para 112; Saluka v Czech Republic para 304, <http://ita.law.uvic.ca/index.htm>.175 ICSID Arbitration Case No ARB/05/8 (11 September 2007), <http://ita.law.uvic.ca/index.htm>.176 Ibid para 331.


In Eureko v Poland the Tribunal suggested that the breach of a basic expectation wasnot a violation of fair and equitable treatment if good reasons existed to the contrary.177

In Saluka v Czech Republic the tribunal was against the idea of taking the investor’s expec-tation too literally since this would ‘impose upon host States’ obligations which would beinappropriate and unrealistic’.

Since the concept of legitimate expectations is not an elastic one and has its limits, theinvestor’s expectation for stable and predictable legal and business framework may belimited by the duty of due diligence on their part. Due to the lack of exercise of due dili-gence by the foreign investor, the claim for legitimate expectation may lose its ground forthe benefit of fair and equitable treatment. The crucial question is whether the legitimateexpectation was created in a particular case for the foreign investor. If, at the time of theinvestment, the investor is negligent in making himself adequately informed of the appro-priate rules, regulations and relevant practices in the host country concerning his invest-ment and accordingly bases his decision to invest on a false assumption of the things, hecannot be taken to rely on the actual practice of the host country that contradicts hisassumption.178 This would mean that no legitimate expectation was created for the inves-tor for the right that was available to him since he misunderstood the basis of his decisionto invest, or relied on the false assumption of his right. The onus of proof is on the inves-tor himself.179 As the tribunal in MTD Equity v Chile concluded that:

The BITs are not an insurance against business risk and the Tribunal considers thatthe Claimants should bear the consequences of their own actions as experienced busi-nessmen. Their choice of partner, the acceptance of a land valuation based on futureassumptions without protecting themselves contractually in case the assumptionswould not materialize, including the issuance of the required development permits,are risks that the Claimants took irrespective of Chile’s actions.180

The legitimate expectation of the investor may be found absent in the cases where theinvestor lacks in sound and strategic business decision while making the investment thatleads to the failure of business,181 and where the investor takes business decisions care-lessly, unprofessionally182 and imprudently183 and thereby incurs losses. Thus, if aninvestor takes armchair decisions without making proper investigation into all the rele-vant facts and laws what a prudent investor should do, his fate could render him

177 Partial Award of 19 August 2005, para 232.178 See MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile (Award of 25 May 2004, ICSID) paras 168–78, <http://

ita.law.uvic.ca/index.htm>.179 Ibid. But see International Thunderbird Gaming Corp v United Mexican States (NAFTA) (26 January 2006). (Separate Opinion of

Thomas Walde.)180 MTD Equity Sdn Bhd v Republic of Chile, ICSID Case No ARB/01/7 (25 May 2004) para 178, <http://ita.law.uvic.ca/links.htm>.181 Waste Management Inc v Mexico (ICSID, 2004) para 57.182 Genin v Estonia (ICSID, 2001) paras 343–5.183 Olguin v Paraguay (ICSID, 2001) para 65(b): ‘‘. . . but it is not reasonable for him (Mr Olguin) to seek compensation for the

losses he suffered on making a speculative, or at best, not very prudent, investment’’.


legitimate disappointment rather than legitimate expectation.184 The absence of legiti-mate expectation thus cannot guarantee the stability of the legal regime on which theinvestor might rely in the first place.

Umbrella clause and treaty stabilization

Many investment treaties include an umbrella clause.185 The main purpose of the stan-dard umbrella clause is to guarantee the observance of obligations or contractual commit-ments entered into, respectively, by the State parties with the nationals of the other, ieforeign investors.186 Such a treaty clause is considered to provide the protective umbrellaover the State’s contractual commitment to the foreign investor, hence the expression‘umbrella clause’187 (often called an ‘observance-of-undertaking clause’188). In the arbi-tral jurisprudence and scholarly writing there appears to be a great diversity in the inter-pretation of umbrella clauses that may be attributed to the diversity in the formulation ofsuch clauses as well as to the schools of thought that provide such interpretation.189 Thereis thus not a single concept of ‘the umbrella clause’, rather there are umbrella clauses. Ithas been noted, ‘. . . the proper interpretation of the clause depends on the specific word-ing of the particular treaty, its ordinary meaning, context, the object and purpose of thetreaty as well as on negotiating history or other indications of the parties’ intent’.190

While interpreting such a clause individual schools of thought tend to make their ownimpressions. Crawford thus identifies four such schools or camps191 which I would rathername, according to their characteristics, respectively, as follows: (i) the restrictionist (ii)the sovereign-centric, (iii) the internationalist and (iv) the integrationist schools. The roleof an umbrella clause as the treaty stabilization of the State’s contractual commitment, orthe impact of such a clause on the contractual stabilization clause, may be understood inthe context of these four schools of thought.

184 See the decision of the Swiss Supreme Court: Swiss Investor v Bulgarian Privatisation Agency (10 July 2006), available at the

website of the Swiss Supreme Court: < http://www.bger.ch>.185 See the recent OECD study ‘Interpretation of the Umbrella Clause in Investment Agreements’ (October 2006). [Working

Papers on International Investment, no 2006/3], <http://www.oecd.org/investment>: the study notes that of the 2,500 or more

BITs currently in existence approximately 40% contain an umbrella clause. Ibid 5.186 For example, art 10 of the Energy Charter Treaty reads: ‘‘ . . . Each Contracting Party shall observe any obligations it has

entered into with an Investor or an Investment of an Investor of any other Contracting Party’’. See for many other examples,

the recent OECD study ‘Interpretation of the Umbrella Clause in Investment Agreements’ (October 2006). [Working Papers on

International Investment, no 2006/3], <http://www.oecd.org/investment>.187 See Anthony Sinclair, ‘The origins of umbrella clause in the international law of investment protection’ 20 Arb Intl 411, 414–18.

See also Eureko BV v Republic of Poland (Partial Award, 19 August 2005) para 251, <http://ita.law.uvic.ca/index.htm>.188 El Paso Energy International Co v The Argentine Republic (27 April 2006) para 70, <http://ita.law.uvic.ca/index.htm>.189 See generally, HJ Schramke, ‘The interpretation of umbrella clauses in bilateral investment treaties’ TDM (provisional issue,

May 2007), <http://www.transnational-dispute-management.com>; Zolia ‘Effect and purpose of ‘‘Umbrella Clauses’’ in

bilateral investment treaties: Unresolved issues’ (2005) (2/5) TDM 31.190 The OECD Study on Umbrella Clause (October 2006), at p 22, <http://www.oecd.org/investment>. The ad hoc Committee in

CMS v Argentina (Annulment) inquired of the CMS tribunal’s interpretation of the umbrella clause and observed that ‘‘There is

no discussion in the award of the travaux of the BIT on this point, or of the prior understandings of the proponents of the

umbrella clause as to its function’’, para 95(f) [Annulment decision dated 25 September 2007] (ICSID Case No ARB/01/8)

(Annulment Proceeding), <http://ita.law.uvic.ca/documents/CMSAnnulmentDecision.pdf>.191 James Crawford, ‘Treaty and Contracts in Investment Arbitration’ (The 22nd Freshfields Lecture on International Arbitration,

London, 29 November 2007), pp 18–19 (copy on the author’s file).


Thus, again turning to Crawford’s classification192 we could recast it for the conve-nience of our discussion as follows:

The restrictionist school ‘‘adopts an extremely narrow interpretation of umbrellaclauses, holding that they are operative only where it is possible to discern a shared intentof the parties that any breach of contract is a breach of the BIT’’.193

The sovereign-centric school ‘‘seeks to limit umbrella clauses to breaches of contractcommitted by the host State in the exercise of sovereign authority’’.194

The integrationist school views that ‘‘an umbrella clause is operative and may form thebasis for a substantive treaty claim, but it does not convert a contractual claim into atreaty claim. . . . The umbrella clause does not change the proper law of the contractor its legal incidents, including its provisions for dispute settlement . . . The umbrellaclause is an extra mechanism for the enforcement of claims, but the basis of the transac-tion remains the same’’.195

The internationalist school entertains that ‘‘the effect of umbrella clauses is to interna-tionalise investment contracts, thereby transforming contractual claims into treaty claimsdirectly subject to treaty rules’’.196

As far as the first three schools are concerned, the umbrella clause is considered to beconservative in scope in the sense that the clause itself is not the treaty equivalent of thecontractual stabilization clause. As far as the sovereign-centric and integrationist schoolsare concerned, the umbrella clause operates as an additional layer of protection to theinvestment contract that comes under it leaving the contract on its own axis. The stabil-ization clause in the contract operates as its reinforcer. As the tribunal in El Paso EnergyInternational Company v The Argentine Republic197 noted, ‘‘. . . the umbrella clause . . .will not extend the Treaty protection to breaches of an ordinary commercial contractentered into by the State or a State-owned entity, but will cover additional investmentprotections contractually agreed by the State as a sovereign – such as stabilization clause– inserted in an investment agreement’’.198 The tribunal in CMS Gas Transmission Co. vThe Argentine Republic concluded that ‘‘the obligation under the umbrella clause . . . hasnot been observed by the Respondent to the extent that legal and contractual obligationspertinent to the investment have been breached and have resulted in the violation of thestandards of protection under the Treaty’’.199 The important consideration that led tothis conclusion can be attributed to the following fact as the tribunal mentioned that:

(T)here are in particular two stabilization clauses contained in the License that have sig-nificant effect when it comes to the protection extended to them under the umbrellaclause. The first is the obligation undertaken not to freeze the tariff regime or subject

192 Ibid 18–19.193 SGS v Pakistan (2003); Joy Mining Machinery Ltd v Egypt (2004), <http://ita.law.uvic.ca/index.htm>.194 Pan American Energy v Argentina; El Paso Energy v Argentina, <http://ita.law.uvic.ca/index.htm>.195 Crawford, see n 191, pp 18, 21.196 Fedax v Venezuela; Eureka v Republic of Poland; Noble Ventures v Romania (<http://ita.law.uvic.ca/index.htm>). See Prosper

Weil in Recueil des CoursIII 1969 p 132 et seq.197 <http://ita.law.uvic.ca/index.htm>.198 Para 81.199 Para 303.


it to price controls. The second is the obligation not to alter the basic rules governingthe License without TGN’s written consent.200

In LG&E & others v The Argentine Republic201 the tribunal applied the umbrella clausevis-a-vis the various guarantees made to the investors in the Gas Law and its implement-ing regulations. Among such guarantees were the promises of reasonable return oninvestment, protections against currency exchange and inflation, adjustment of rates pur-suant to international indexes, no unilateral changes and no price controls withoutindemnification.202 The crucial issue before the tribunal was whether the obligations(in the form of guarantees) set forth in municipal law rather than in the contract betweenthe State and the investor can activate the umbrella clause. In upholding the umbrellaclause the tribunal considered that:

In order to determine the applicability of the umbrella clause, the tribunal shouldestablish if by virtue of the provisions of the Gas Law and its regulations, the Argen-tine State has assumed international obligations with respect to LG&E and its invest-ment. To this end, it is necessary to remember that the provisions of the Gas Law andits regulation fixed and regulated the tariff scheme ensuring the value of Claimants’investment; that the purpose of Claimants’ investment was to increase the value of itsshares in the Licensees through a fragile balanced management of profits and costs,represented by the tariffs fixed by Argentina in light of the already mentioned GasLaw and its regulation.203

The tribunal then went on to conclude that:

(T)hese provisions (ie in the Gas Law and its regulations) were not legal obligations of ageneral nature. On the contrary, they were very specific in relation to LG&E’s investmentin Argentina, so that their abrogation would be a violation of the umbrella clause.204

Thus, it follows from the above cases that since the stabilization clauses either in thecontract or in the municipal law and regulations made specific commitments in relationto the investment contracts concerned, their violation was tantamount to that of the

200 [Emphasis added], para 302 (footnotes omitted). But see the decision of the ad hoc Committee in CMS v Argentina

(Annulment)[ 25 September 2007], where this general line of reasoning concerning the interaction between the treaty umbrella

clause and the stabilization clauses in the License was not questioned; rather, it was the modus operandi of the umbrella clause

that was in issue, ie whether CMS, the minority shareholder, not being the obligee itself under the License, could invoke the

obligations of Argentina owed to TGN (the company of which CMS is a shareholder) by virtue of the umbrella clause. In the ad

hoc Committee’s view ‘‘Under that law (ie Argentine law), the obligations of Argentina under the License are obligations to

TGN, not to CMS, and CMS has no right to enforce them’’, para 90. The ad hoc Committee found a significant lacuna in the

reasoning of the CMS Tribunal on how it arrived at its conclusion that CMS could enforce the obligations of Argentina owed to

TGN. Thus, for the failure of the CMS Tribunal to state reasons on this matter the ad hoc Committee annulled its finding on

the umbrella clause (ie art II(2)(c) of the BIT concerned), see paras 89–97.201 ICSID Case No ARB/02/1 (Award of 3 October 2006), <http://ita.law.uvic.ca/index.htm>.202 Ibid paras 119, 165.203 Ibid para 174.204 [Emphasis added], ibid.


umbrella clause that directly applied to them. The presence of the stabilization clauseappears to trigger the activation of the umbrella clause that relates to it. The LG&ETribunal thus stressed its views in the following terms:

These laws and regulations (ie the Gas Law and its regulations) became obligationswithin the meaning of Art II(2)(c) (ie the umbrella clause in the investment treaty),by virtue of targeting foreign investors and applying specifically to their investments,that gave rise to liability under the umbrella clause.205

In the absence of express stabilization clauses, perhaps the LG&E Tribunal would nothave gone that far to ascertain the effect of the umbrella clause. As Crawford, the advocateof the integrationist school, observed that:

(I)t is a confusion to equate a State law or regulation with an obligation entered intoby the State, or to regard an umbrella clause as implicitly freezing the laws of the Stateas at the date of admission of an investment. The enactment of a law by a State,whether it is specific or general, is not the entry by the State into an obligation dis-tinct from the law itself. No doubt a State is obliged by its own laws, but only for solong as they are in force. In the absence of express stabilization, investors take the riskthat the obligations of the host State under its own law may change, and the umbrellaclause makes no difference to this basic proposition.206

As far as the internationalist school is concerned, the danger is that the umbrella clauseis assigned to have a far-reaching role. The clause itself can operate as the treaty equiv-alent of contractual stabilization. This means that even if the contractual stabilizationclause is agreed by the parties to be governed by the national law of the host State, inter-national law will take over and the contracting parties’ original intention will have noeffect. The clause may also lead to substitute the parties’ agreed-upon jurisdiction clausein the contract for the dispute settlement clause of the treaty concerned.207 According toProsper Weil, ‘‘an investment treaty would transform a mere contractual obligationbetween State and investor into an international law obligation, in particular if the treatyincluded a clause obliging the state to respect such contract’’.208 One may wonder if theumbrella clause is to perform such a far-reaching role, there does not seem to be any needfor a stabilization clause, let alone the jurisdiction clause,209 in the contract. As the tribu-nal in El Paso Energy International Company v The Argentine Republic210 went on to saythat the broad interpretation of the so-called umbrella clauses would have ‘‘far reachingconsequences, quite destructive of the distinction between national legal orders and the inter-national legal orders’’.211

205 Ibid para 175.206 [Emphasis added.] Crawford, see n 191 (2007) at p 20.207 SGS v Pakistan, para 165.208 See Recueil des Cours III (1969) pp 132 et seq.209 CMS v Argentina (Annulment) (25 September 2007) para 95(e).210 ICSID (27 April 2006).211 Para 82, p 28, <http://ita.law.uvic.ca/chronological_list.htm>.


8. Stabilization clauses v protection of human rights and theenvironment212 – The challenge aheadAs noted earlier, in the context of economic stabilization clauses (especially, in the prac-tice of the cross-border pipeline regimes) that such provisions are often so encompassingthat they reduce the ability of the host State in respect of its legislative power, adminis-trative acts, judicial decision of its courts and other governmental acts to such an extentthat it becomes very difficult for the state to regulate matters in the public interest.213 Anyexercise of the regulatory power of the State that adversely affects the economic equilib-rium of the contract established in it will incur the obligation to pay compensation.Besides, such economic stabilization clauses, let alone freezing clauses and mixed stabil-ization clauses, constrain the ability of the host State to implement international treatyobligations concerning human rights and the protection of the environment, etc.214

The issues have been raised lately in various forums as to whether a State can surrenderits aforementioned international treaty obligations by way of stabilization clauses to IOCsor international pipeline companies215 and also whether such companies have any obli-gation to protect human rights when such obligation, in fact, lies with the State in tradi-tional international law.216 The source of all problem lies with international law whichimposes international obligations, including that concerning human rights, the environ-ment, labour, etc, only on States and not on private entities like transnational corpora-tions.217 The question has been raised whether international financial institutionsshould sponsor such projects that stand, by means of stabilization clauses, in the wayof the host State’s fulfilment of its international obligations for the protection of humanrights, the environment, or health and safety.218 Recently, under pressure from variouscorners, the BTC Co in the context of the BTC regime, as discussed above, published adocument entitled ‘the BTC Human Rights Undertaking’219 in which it undertook notto invoke the compensation clauses in the HGA in the event of new laws being introducedfor human rights or environmental reasons.220 However, this undertaking is subject to a

212 It is noteworthy that a recent study used ‘‘social and environment laws (such as non-discrimination, health and safety, laborand employment rights, and the protection of the environment and cultural heritage) as a surrogate for human rightsobligations, because these domestic laws are some of the most common means of implementing international human rightsobligations in regulating business activity’’. Andrea Shemberg, ‘Stabilization Clauses and Human Rights’ IFC/SRSG ResearchPaper, 11 March 2008 pv.

213 See generally, Shemberg, see nn 27, 212. See also n 146; Lorenzo Cotula, ‘Stabilization clauses and the evolution ofenvironmental standards in foreign investment contracts’ (2006) 17 Yb Int’l Env L; Kyla Tienhaara, ‘Unilateral commitments toinvestment protection: Does the promise of stability restrict environmental policy development?’ (2006) 17 Yb Int’l Env L.

214 Ibid.215 See the Amnesty International’s reports: Human Rights on the Line: The BTC Pipeline Project (May 2003); Contracting Out of

Human Rights: the Chad–Cameroon Pipeline Project (September 2005); Human Rights, Trade and Investment Matters (May2006), both <http://www.amnesty.org.uk>; Steve G Forsyth and Vianney Boiteau, ‘Chad–Cameroon Development and PipelineProject Legal Issues’ Int Energy Law Tax Rev (2004) 112–23.

216 See generally, John Gerard Ruggie, ‘Business and Human Rights: The Evolving International Agenda’ John F Kennedy School ofGovernment, Harvard University, Working Paper Number: RWP07-029, <http://ksgnotes1.harvard.edu/Research/wpaper.nsf/pubwzAuthor?OpenForm&Start=1&Count=1700&Expand=79&Seq=1>.

217 See Mann, see nn 24, 126, 146.218 Lawson-Remer, see n 79.219 The BTC Human Rights Undertaking, <http://subsites.bp.com/caspian/Human%20Rights%20Undertaking.pdf>. See also:

<http://www.caspiandevelopmentandexport.com>.220 See for another example of exception that concerns international environmental standards in AGIP/British Petroleum/Etal-

Kazakhstan ‘Kashagan’ PSA (1997).


proviso that it will not apply where the legislation introduced by the three governments ismore stringent than EU standards, World Bank Group standards and existing interna-tional and human rights treaty obligations.221 Thus, the challenge remains ahead for IOCsand other foreign investors where the State’s international obligations concerning humanrights and environment clash with stabilization clauses.222

9. Concluding remarksThe practice of stabilization of IOC’s contractual rights has progressed over the decadesfrom the traditional freezing approach to a more modern and sophisticated economic bal-ancing one where the State’s right to exercise its sovereign authority is balanced by the pro-tection of the foreign investor’s interest. In the modern approach the risk has been shiftedmainly from the foreign investor to the State. Along with this development internationalarbitral machinery has also sharpened and polished various normative standards of inter-national law to provide protection to the foreign investor’s interest. But the question stillremains - to what extent can the State forgo its international treaty commitments for humanrights and the environment in the face of stabilization clauses? The concerned stakeholders,eg international financial institutions, States and non-governmental organizations, etc,could be pondering over the matter in the days ahead, and IOCs and other foreign investorsmight need to reinvent their wheels. A recent empirical study concluded from its represen-tative samples that ‘‘contracts from non-OECD countries are more likely than those fromOECD countries to insulate the investor from new social and environmental laws or to pro-vide compensation to the investor for compliance with new social and environmentallaws’’.223 This may be attributed to the putative high risk factors in developing countries.However, such practice may have a significant negative impact on social and environmentalpolicy making in those countries when they may need it most in times for their self-preservation as a country.224 It may remind one of an anecdote from the life of Oscar Wilde.Legend has it that shortly before he died, Oscar Wilde called for champagne and, when it wasbrought to him, said cheerfully: ‘‘I am dying beyond my means’’.225

Editor’s note: This article was developed from a research paper which was funded by agrant from the Association of International Petroleum Negotiators. Two research paperson energy stabilization were commissioned. The other paper, Cameron, ‘‘Stabilization inInvestment Contracts and Changes of Rules in Host Countries: Tools for Oil and GasInvestors’’, can be found on the AIPN website at <http://www.aipn.org/modelagreements/research.asp>.

221 Ibid para 2(a). See also arts 4.3, 17.4, Consortium-Chad Convention for the Development of Oil Fields; art 13, COTCO-Cameroon Convention (1997).

222 See generally, Sheldon Leader, ‘Human rights, risks, and new strategies for global investment’ (2006) 9 JIEL 657.223 Shemberg, nn 27, 212 at p xi, also pp 24–5.224 See the Report of the Special Representative (John Ruggie) of the UN Secretary-General to the Human Rights Council

(A/HRC/8/5, 7 April 2008) on the issue of human rights and transnational corporations and other business enterprises:‘‘Promotion and Protection of All Human Rights, Civil, Political, Economic, Social and Cultural Rights, including the Right toDevelopment: Protect, Respect and Remedy: a Framework for Business and Human Rights’’ (paras 12, 35, 36), <http://www.reports-and-materials.org/Ruggie-report-7-Apr-2008.pdf>. See also Piero Foresti, Laura De Carli and others v Republic ofSouth Africa (ICSID Case No ARB (AF)/07/1), <http://www.elawnet.co.za/elawnetdata/publications/public000079_publ.pdf>.

225 Javier Marias, Written Lives (Canongate, Edinburgh, 2006) at p 128.
