Investor-State Contract: Stabilization Clauses and Umbrella Clauses

This article discusses the importance of stabilization clauses and umbrella clauses in investor-state contracts. It explores how these clauses protect investors from undue advantage taken by the host government. The article also examines the features of stabilization clauses and their rationale and practice. Additionally, it discusses the role of stabilization clauses in foreign investment.

Running Head: Investor-State Contract
INVESTOR-STATE CONTRACTS
STABILIZATION CLAUSES AND UMBRELLA CLAUSES
System04128

Investor-State Contract
Table of Contents
Introduction................................................................................................................................2
Investor –State Contracts...........................................................................................................2
Foreign Investment.................................................................................................................3
Stabilization Clauses..............................................................................................................3
Features of stabilization clauses.........................................................................................4
Stabilization Clauses: Rationale and Practice....................................................................6
Umbrella Clauses...................................................................................................................8
Conclusion................................................................................................................................10
Bibliography.............................................................................................................................12
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Investor-State Contract
Introduction
In investor-state contracts, the state has more advantages from investors because the laws will
be in favor of state parties. Equilibrate of this ingredient of power given to the state is itself in
a contract among investors and the host government. It embraces stabilization clauses and
umbrella clauses that ask to safeguard the laws of the nation since it is applicable to the
venture until the agreement comes to an end. These clauses make sure that the long term
alteration to the laws of nation are unsuitable to outside venture contract; selection of law
provisions, could seek advice from an international system of law, like multinational law,
general standards of law or perhaps law of nations, in this manner the contract on the far side
the host country’s law. In this article, there will be a discussion on contract between investors
and government and importance of stabilization and umbrella clauses in the protection of
investors from undue advantage taken by the host government.
Investor–State Contracts
It is generally up to capitalist of foreign countries, a piece of the arranging technique. This
has come about inside the advancement and utilization of written agreement provisions that
ask to shield the rights of investors of other countries against whimsical or unauthorized
trespass. An investment that includes a large amount of money is regularly administered by
advanced de jure binding contracts straightforwardly went into between investors from other
countries and local governments. Other than treaties that are recognized internationally,
conventions and local are 'investor-state contracts’. They play a vital role in protective
foreign investment1.
Investor-State Dispute Settlement (ISDS) is a normal element of worldwide venture
understandings (IIAs). The current body of arrangements and arbitral choices, the two of
which have developed significantly over the previous years, give sufficient material to
breaking down nations' ways to deal with ISDS crosswise over various IIAs also, the use of
the pertinent standards in arbitral practice. By making a framework for the settlement of
1 Bajar Scharaw, ‘Investor-State Contracts’ (Springer Link, 08 November 2017)
<https://link.springer.com/chapter/10.1007/978-3-319-66089-9_4>
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debate among speculators and host governments, nations had looked for to make an impartial
gathering that offers the likelihood of a reasonable hearing before a council unhampered by
local political contemplations. Notwithstanding filling in as a de-politicized gathering for
settling the question, the global intervention was normal to offer different focal points, for
example, conceivably swifter, less expensive, what's more, more adaptable than other
question settlement components. What's more, arbitral honors are promptly enforceable in
most locales under worldwide arrangements.
Foreign Investment
When any foreign organization or a person do investment or take stakes in a company that is
based outside its territory. Foreign investment is once a company or a person who is from
another country gives assets into investment or ownership stakes. As business has globalized,
it clothed to be common for large organizations to search out and place profit organizations
placed in several nations. These companies would possibly open up new collection industries
and force into less costly work and fewer charges in another country. They will build a
foreign interest in another firm outside of their nation because the company being acquired
has specific ideas, products, or consent to additional purchasers that the firm is buying
desires. Foreign investment could be a tight sign that frequently prompts the enhancement of
working industries and pay. As increasingly remote speculation comes into a country, it will
prompt way additional noteworthy ventures since outsiders see the nation as monetarily
steady2.
To protect foreign investment there are common clauses which, are added by parties to the
agreement-
1. Stabilization Clauses
2. Umbrella Clauses
2 ‘what is foreign investment?’ (study.com) <https://study.com/academy/lesson/what-is-a-foreign-investment-
definition-examples.html> accessed on 23 March 2019
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Stabilization Clauses
Stabilization clauses are said to be those clauses through which the host country and the
investors make sure the credibility of the obligation of the contract. Not every agreement
related to investment incorporates stabilization clauses; however, stabilization clauses are
normal in agreements, which have broad scope worldwide3. Stabilization clauses are
generally merged with revised conditions in venture understandings to accommodate changes
in conditions influencing the premiums of the financial specialist and the local government.
Foreign investors and host countries use investment agreements to frame some portion of the
standard procedures whereupon the speculators work the task; direct casual merchandising
and official exchanges among gatherings to understanding; and fill in as insurance of
authorized act if a debate ought to emerge. The proviso may likewise give the financial
specialist a lawful premise to oppose consistency with new laws regardless of whether have
government experts can't or reluctant to screen the speculator's consistency and no formal
question emerges. The global case law to a great extent underpins the suggestions that (1)
adjustment provisions are legitimate and lawfully authoritative under worldwide law and (2)
parties treat adjustment statements as official.
Features of stabilization clauses
Access of information on investor-state agreements is very hard as they are mostly private
agreements. There was a study in 2008 by Special Representative of the Secretary-General
for Business and Human Rights (SRSG) and the International Finance Corporation (IFC) and
they examined the importance of stabilization clauses4. According to the study, stabilization
clauses are clauses for specific a period of time in confidential agreements between state and
investor which deal with the main issue of alternation of law in the host country till the time
the contract has its life5. In the current regime, there are three kinds of stabilization clauses-
3 ‘Shemberg’ Transnational Contracts: Application Law & Settlement of Disputes: Law and Practice (July 1983)
4 Titi, Journal du Droit Internaional (2014)
5 Shemberg, Stabilization Clauses and Human Rights, IFC/SRSG Research Paper, (27 May 2009)
<https://www.ifc.org/wps/wcm/connect/9feb5b00488555eab8c4fa6a6515bb18/Stabilization%2BPaper.pdf?
MOD=AJPERES>
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Investor-State Contract
1. Freezing Clauses- Freezing clauses protects the agreement from the light of new laws
that can interfere in it. It freezes the law of the host country either partially or wholly.
2. Equilibrium Clauses- Equilibrium clauses are those, which compensate the investor
for loss due to a change in the law of the host country.
3. Hybrid Clauses- Hybrid clauses are those clauses that are mixed and a combination of
freezing and equilibrium clauses. They work simultaneously to give extra protection
to the contract and its working6.
Freezing clauses are the ‘classic approach’ to agreements for the steadiness of investors. The
law is in freezing conditions till the time contract is enforced7. The law, which can impose
higher tax rates, must not apply to the corporate. Freezing clauses conjointly accepts the court
decision which is still existing. Freezing clause responsibilities shows the agreement will
apply like lex specialis over recent authoritative establishments just they are not violating the
terms of investment contracts. Freezing clauses solidify the best possible of the local
government to oversee predictable with the venture contract among them and financial
specialists and by this flip any unfavorable state activity extrajudicial, these conditions still
not give any certification against the state's activity of sovereign expert inside the open
intrigue.
The advanced option in contrast to freezing clauses is equilibrium clauses. An excellent range
of those embraces consultation clauses, typically unconditional with a plan of action to an
outsider to work out adjustment once exchanges fall flat. A few conditions conjointly leave
space for adaptability, similar to edge money related misfortunes, confinement to prejudicial
approaches, the duty of the entrepreneur is to moderate consistency amount, task of provision
inside speculators' and furthermore the host nation' support, for example with host nation
sharing edges in instances of unexpected increase in benefits. From a legitimate scenario,
“economic equilibrium clauses don't appear to cause vital issues, as they are not stopping host
state regulation farewell because the economic equilibrium is restored ", and freezing clauses
restrict the autonomy and switch ill- gotten unfavorable state activity.
6 Maniruzzaman, Journal of World Energy Law & Business, (2008)
7 Dolzer/Schreuer, Principles of International Investment Law
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Investor-State Contract
Nonetheless, from a ministerial purpose, though accommodating adaptability and initially
looking less meddling with reference to the nation's power, economic equilibrium clauses
could demonstrate pricey for the nation. Reestablishing the economic equilibrium may prompt
a lot of comprehensive guarantee for harms and a bigger inclusion of the cases than pay for
the rupture of freezing clauses. Besides freezing provisions economic equilibrium is, in any
case, exclusively activated wherever a standard edge is met – specifically it has its influence
where the agreement which has economic equilibrium. A usually referred standpoint on
economic equilibrium clauses is the willingness to soundness of relationship between
investor and the state. Generally readjusting of economic equilibrium clause and exchange
tools may create an arrangement climate once generally, the strain between host states'
prohibitive advantages and desires for the speculators would have added up to struggle and
rupture of composed understanding. That is the reason some ascribe to exchange provisions
the generally preferred standpoint of exertion the "state's power a ton of flawless" and of
"securing the entrepreneur against the progressions inside the law”8. Others see the supposed
good impact of economic equilibrium clauses and re-exchange conditions a ton of basically,
information to the way that they leave. A disrupted lawful situation opens which re-exchange
might not be as struggle anticipating on the grounds that it shows up. Arrangement and
planning for other peopke may put in understanding. Reliable with certain analysts, this
preferably hampers over advances the agreement's security in light of the fact that the extent
of adjustment statements is generally almost no predefined and leaves the zone for
elucidation.
Stabilization Clauses: Rationale and Practice
The standard of stabilization clauses is managing of the risks of ventures. Stabilization clauses
to a great extent encased in contracts that identify with capital-serious come, as extractive
trade, foundation or open administration services and include Concession Agreements (CA),
Production Sharing Agreements (PSA), and Build-Operate and Transfer Agreements (BOT).
They sometimes need giant beginning capital speculations and become gainful after some
time. Creditors read stabilization clauses as important so monetary risks can be relieved;
significantly, for "nonrecourse financing" once the compensation is completely connected
8 Berger, Klaus Peter, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of
contract Drafters and Arbitrators’ (2003)
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with the venture's execution. Huge tasks accompany longer periods to recuperate the expenses
and produce benefits, similar to framework speculations, acquire ensures that consistently
changing venture circumstances do not hurt money saving equilibrium of the venture. Pre-
venture money saving advantage estimations could likewise be impressively mutilated by
later natural and social enactment, for example, related to new innovation measures or
retirement, work and medicinal services guidelines. Host states concede adjustment
conditions to oblige financial specialists' interests and pull in the future ventures by giving an
abnormal state of affirmation. Their utilization is encouraged by their consideration in model
understandings that set a particular ordinary of assurance for explicit segments or enterprises.
Most of the companies support the international framework, which promotes fair business
activities. The United Nation framework has issued 10 guiding principles for good business
practice9. The results of structure was authorization by Human Rights Council of Guiding
Principles on Business and Human Rights, embracing as well as directing the usage of famous
3 projection system (i) "states' obligation is to safeguard human rights, (ii) duty of the
business to follow human rights, and (iii) solution for "investigate, penalize and ask for
redress for abuses”. The system was the result of a complete shareholder method that sped up
acknowledgment and took into account famous acknowledgment.
In AES v. Hungry10, an arbitral award was given by concluding that legal framework
according to the definition is which is changeable because it adjusts to new situations every
day11. In Feldman v. Mexico12 the court held “Governments should be liberated to act within
the broader public interest through protection of the environment, new or changed tax
regimes, the granting or withdrawal of presidency subsidies, reductions or will increase in
tariff levels, imposition of sectionalization restrictions and therefore the like. Affordable
governmental regulation of this kind cannot be achieved if any business that is adversely
9 The Ten Principles of the UN Global Compact, (United Nations Global Compact, 2019) <
https://www.unglobalcompact.org/what-is-gc/mission/principles>
10 AES v Hungary, ISCID Case No ARB/7/22
11 AES v. Hungary, (Investment Policy Hub, 2007) < https://investmentpolicyhub.unctad.org/ISDS/Details/279>
12 Marvin Roy Feldman Karpa v. United Mexican, ISCID Case No ARB(AF)/99/1
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affected might look for compensation, and it's safe to mention that customary jurisprudence
acknowledges this13.”
The court in AGIP v. Congo14 wanted to include stabilization clauses into law, and the court in
LETCO v. Liberia15 determined that these kinds of clauses should be revered. In CMS v.
Argentina16, the court noted that stabilization clauses are common in law, and decided that
these clauses are acting as a guarantee for the investor to invoke.
Umbrella Clauses
An expanding variety of venture pact discretions include not solely the conventions
settlements themselves anyway furthermore speculator national agreements. The degree of
material (rationae materiae) award is not according to Bilateral Investment Treaties (BITs). A
few Bilateral Investment Treaties cowl solely debate identifying to associate degree
“obligation underneath this agreement”, for example just for cases of BIT infringement.
Others stretch out the locale to "any dispute regarding investments”. Others produce a global
law commitment that a bunch of states, for instance, “observe any obligation it is going to
have entered to”; “constantly guarantee the observance of the commitments it is entered into”;
“observe any obligation it is assumed”. These arrangements are usually known as “umbrella
clauses”, albeit different plans have furthermore been utilized: "mirror effect”, “elevator”,
“sanctity of contract”, “respect clause” and “pacta sunt servanda”. Provisions of this type are
else to supply extra insurance to speculators and are aimed at covering venture understandings
that have nations oft finish up with remote financial specialists.
13 Feldman Karpa v. Mexico, ICSID Case No ARB(AF)/99/1; IIC 157 (2002); (2003) 18 ICSID Rev—FILJ 488;
(2003) 42 ILM 625, 16 December 2002., para. 103
14 AGIP v People's Republic of the Congo, ICSID Case No. ARB/77/1
15 Liberian Eastern Timber Corporation v. Republic of Liberia, ICSID Case No. ARB/83/2
16 CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8
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The first time Umbrella Clause17 was used in 1956-1959 Abs Draft International Convention
for Mutual Protection of Private Property Rights in Foreign Countries18 (the Abs draft) Article
4 as,
“As high treatment which is secure to foreign citizens than local citizens either below
governmental or different contractor or representative of contracting parties, who include
Most Favored Nation (MFN) clause, these kind of guarantees should include.
This mechanism was reconsidered in 1959 Article II of Abs-Shawcross Draft Convention on
Foreign Investment19 as “Each party should ensure the custom of any undertaking which it
might have given in connection to speculations made by nationals of some other gathering.
At present, there are more than 2500 BITs between countries and nearby forty percent
contains umbrella clause20.
As stated above, the umbrella clause has been a debatable topic of between jurists for a few
years. The main case of the International Centre for Settlement of Investment Dispute
(ICSID) that came with the concept of umbrella clause came up in 1998: Fedax NV v.
Republic of Venezuela21 supported Bilateral Investment Treaty between the Netherlands and
the Republic of Venezuela. During the case, the court was not aware of the fact that the
umbrella clause was present, and failed to perform any deep observance of the clause and its
application. It was revealed that Venezuela was underneath with requirement to “honor
exactly the terms and conditions governing such investment, ordered down principally in
Article three of the Agreement, as well as to honor the precise payments established within
the commitment notes issued”. Parties settled case among themselves. The court in Joy
17 A.C. Sinclair: “The Origins of the Umbrella Clause in the International Law of Investment
Protection”,Arbitration International 2004, Vol. 20, No. 4, pp. 411-434
18 Arthur S. Miller, Protection of Private Foreign Investment by Multilateral Convention (The American Journal
of International Law, 1959)
19 Abs-Shawcross Draft Convention on Foreign Investment 1959, Article 4
20 Gill, Gearing and Birt, Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the
SGS Cases (2004)
21 Fedax N.V. v The Republic of Venezuela, ICSID Case No. Arb/96/3
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Mining Machinery, Ltd. v The Arabic Republic of Egypt22 took “umbrella clause” in very
manner kind of like the SGS v. Pakistan23, i.e. that the disputes in question, that associated
with the discharge of guarantees provided by banks. Industrial and written agreement disputes
can be resolved via the mechanism set by agreement.
In Metropolis Energy International Company v. Argentine Republic24, the court disallowed
the arguments by Metropolis, which might have a permissible written agreement which can
lead to contravention of Bilateral Investment Treaty between the United States and Argentina.
Umbrella clause says that “each Party shall observe any obligation it should have entered into
with relevance investments”
There is a classification within means of umbrella clauses that are developed among investor-
state understandings. Due to this decent variety, the correct elucidation of the provision relies
upon the exact expressing of the real accord, its typical importance, setting, the thing and
motivation behind the understanding also on arranging history or elective signs of the
gatherings' purpose. The survey of the language of this provision enclosed during sampling of
arrangements demonstrate that, in spite of the fact that there are a few differences, the
standard methods for “ any responsibilities/commitments” seem to reason towards complete,
wide elucidation which would cowl all commitments expected/went into by the obtaining
States, just as contracts, except if generally unequivocal . The special phrasing, for example,
“must give surety for the inspection or “shall maintain a legal framework apt to guarantee the
continuity of legal treatment” would possibly cause a smaller elucidation. Contrary to it,
some provisions that explicitly avoid the ward of the arrangement based arbitrational
judicature for body council or a court, by defensive the particular regional request for the
current contracts.
Conclusion
In perspective on the case laws referenced above including stabilization clauses, one ought to
reason that, regardless of the insufficiency of public accessible decrees dealing with the
22 Joy Mining Machinery Limited v. Arab Republic of Egypt, ICSID Case No. ARB/03/11
23 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13
24 El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15
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difficulty and of the various methodologies embraced by mediators. On the whole 3 classes of
choices, their legitimacy has dependably been verifiably or explicitly perceived, offering to
ascend to, in any event, the correct to pay, paying little mind to the existent character of the
alteration in law and accordingly the open reason for the inspiration driving the revision. This
may grasp wellbeing and ecological gauges yet as parts of human rights' insurance. In any
case, its esteem taking note of that to date the decisions that managed adjustment provisions
(third classification) pivoted tax assessment issues and levy correction. Judges were not
moon-looked with a ton of troublesome cases contacting upon adjustment provisos inside the
setting of human rights or natural guideline. In any case, the council's decisions prescribe that
adjustment provisos can fix the speculators' situation to no adaptability and nil hazard. This
changes the character of the legitimate connection between the entrepreneur and the state.
The vast majority of the arbitral courts, managing umbrella proviso, for example, one written
in wide and thorough terms, give off an impression of being embracing a predictable
understanding that covers state commitments which legally binding also. At the
indistinguishable period, judiciousness needs to perceive that no ends will be drawn with
respect to the elucidation of the statement since the statute is persistently advancing.
Individual thought that can shed further lightweight can still be involved. Also, further
translations by governments that are gatherings to speculation understandings incorporating
Associate in nursing umbrella condition, with respect to his or her goal identifying with this
proviso, too in light of the fact that the addition of transparent language in the latest
settlements, will be accepted with much required improvement.
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Bibliography
Primary Sources
Cases
AES v Hungary, [2007] ISCID Case No ARB/7/22
Marvin Roy Feldman Karpa v. United Mexican, [1999] ISCID Case No ARB (AF)/99/1
AGIP v People's Republic of the Congo, [1977] ICSID Case No. ARB/77/1
Liberian Eastern Timber Corporation v. Republic of Liberia, [1983] ICSID Case No.
ARB/83/2
CMS Gas Transmission Company v. The Republic of Argentina, [2001] ICSID Case No.
ARB/01/8
Fedax N.V. v The Republic of Venezuela, [1996] ICSID Case No. ARB/96/3
Joy Mining Machinery Limited v. Arab Republic of Egypt, [2003] ICSID Case No.
ARB/03/11
SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, [2001] ICSID
Case No. ARB/01/13
El Paso Energy International Company v. The Argentine Republic, [2003] ICSID Case No.
ARB/03/15
Secondary Sources
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Books
Shemberg, Transnational Contracts: Application Law and Settlement of Disputes: Law and
Practice (July 1983)
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2013)
Berger, Klaus Peter, Renegotiation and Adaptation of International Investment Contracts:
The Role of contract Drafters and Arbitrators (2003)
Cotula and Lorenzo, Briefing 4: Foreign Investment Contracts, International Institute for
Environmental and Development, Sustainable Markets Investment Briefings (2007)
A.C. Sinclair, “The Origins of the Umbrella Clause in the International Law of Investment
Protection”, Arbitration International (Vol. 20, No. 4, pp. 411-434, 2004)
Gill, Gearing and Birt, Contractual Claims and Bilateral Investment Treaties: A Comparative
Review of the SGS Cases (2004)
Journal Articles
Titi, Journal du Droit Internaional (2014)
Maniruzzaman, Journal of World Energy Law & Business (2008)
Arthur S. Miller, Protection of Private Foreign Investment by Multilateral Convention, The
American Journal of International Law (1959)
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Websites
Bajar Scharaw, ‘Investor-State Contracts’ (Springer Link, 08 November 2017)
<https://link.springer.com/chapter/10.1007/978-3-319-66089-9_4> accessed on 25 March
2019
‘what is foreign investment?’ (study.com, 2019) <https://study.com/academy/lesson/what-is-
a-foreign-investment-definition-examples.html> accessed on 23 March 2019
Shemberg, ‘Stabilization Clauses and Human Rights’, (IFC/SRSG Research Paper, 27 May
2009) <https://www.ifc.org/wps/wcm/connect/9feb5b00488555eab8c4fa6a6515bb18/
Stabilization%2BPaper.pdf?MOD=AJPERES>
‘AES v. Hungary’, (Investment Policy Hub, 2007)
<https://investmentpolicyhub.unctad.org/ISDS/Details/279>
The Ten Principles of the UN Global Compact, (United Nations Global Compact, 2019) <
https://www.unglobalcompact.org/what-is-gc/mission/principles>
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