Advanced Contract Law and Negotiation: Investor State Contracts Report

This report provides an in-depth analysis of investor state contracts, a crucial area of advanced contract law and negotiation. It begins with an introduction to contract law, emphasizing the essentials of a valid contract and the remedies available for breach. The report then delves into the specifics of foreign investment and the role of investor state contracts (ISCs) in protecting foreign investors. It examines the sources of international law governing these contracts, including general principles, treaties, and customs. The main body critically analyzes two key clauses within ISCs: the dispute settlement clause, particularly the use of arbitration, and the stabilization clause, which addresses regulatory changes. The analysis covers the efficiency of these clauses in safeguarding foreign investments, considering the risks faced by investors and the protection offered by each clause. The report highlights the significance of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and discusses the practical implications of these clauses. The conclusion summarizes the key findings and reinforces the importance of these clauses in the context of international investment law.

Advanced Contract
Law and Negotiation

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
CONCLUSION.........................................................................................................................................10
REFERENCES..........................................................................................................................................11
BIBLIOGRAPHY.....................................................................................................................................12

INTRODUCTION
The contract law is the branch of civil law which deals with the agreements and contracts
that are being entered into by the parties. There are many essentials to the valid contract which
includes an offer which is made by one party, its acceptance by the other party, intention to
create legal relations and the amount of consideration. The presence of these elements makes the
valid contract and in case any party breaches the contract, the other may claim the remedies
which are embodied in the legislations. These remedies help the aggrieved party to come to same
situation as it was before the contract was being framed1. This law is designed to help the people
to enter into the oral or written contract so that their rights are protected and no party is at loss.
Every business gets involved in several transactions which can be completed with the help of
contract so that there is no loss to any party in case the other breaches the contract. This report
shall cover the investor state contracts and critical analyses of two clauses in terms of their
efficiency in order to protect the foreign investments.
MAIN BODY
There is a de facto rule which is emerging in the law of international investment which
prioritizes and emphasizes on stability for the foreign investors. One of the most common entry
modes for the foreign direct investment is by making the foreign investment contract with state.
The main issue of the state contracts as it relates to the agreement of investment agreements
which concerns many specific matters2.
Foreign investment generally refers to investment in the domestic companies and the
assets of another country by the foreign investor. It mainly involves the transfer of intangible or
tangible asset from one state to another for the aim of its use in that country which generates
wealth under the partial or total control of owner asset. It is important to govern these investment
1 'THE COURTS EVALUATION OF THE REASONABLENESS AND GOOD FAITH ACTIONS OF THE
INVESTOR WHEN CONCLUDING THE CONTRACT OF BANK DEPOSIT' [2017] Courier of the Kutafin
Moscow State Law University
2 Sherman J, 'Heading Off Disputes By Paying Attention To Human Rights In Foreign Investor/Host State Contract
Negotiations' (2017) 111 Proceedings of the ASIL Annual Meeting

through a contract and these types of contracts are divided mainly into two broad ways which
includes firstly the foreign investor which is entered into between the private commercial
partners within host state territory and the second is foreign investor, host state as the
commercial and the regulatory partner which is called the investor state contracts (ISC)3.
The contracts pertaining to foreign investment is governed by the international law as it
involves the contract between two nations or between private individual or company and host
country. The sources of international law include firstly the general principles of the law,
treaties, customs and the judicial decisions. General principle of law is the residual and general
source which comprises of the general principles which are recognized by the civilized nations
and it binds all the states. The principle of pacta sunt servanda is commonly used in the
investment arbitrations. The literal meaning of this is that the agreements must be kept. This
principle makes the agreements or contracts binding and without this principle, no agreement can
have the binding effect. Second is customs which means a practice of the certain conduct and
through the period of time and the conduct is legally binding. In context to foreign investment,
the common example of the customary law may be the duty of host country to pay adequate
compensation to foreign investor in case its investment is expropriated. Third is treaties which
are the international agreements in the written form and they are mainly contracted between the
states are binding on the state only which are party to the treaty4.
The concept of foreign investment under the international law is mainly because the
capital exporting state has been concerned with expansion of foreign investment in the treaties in
order to protect firstly the physical property of foreign investor, secondly to extend the protection
to the intangible goods like intellectual property and many types of portfolio investment. It also
offers many administrative rights which are granted to investment by host state that are essential
to run business such as licenses.
3 Dumberry P, A Guide To State Succession In International Investment Law (2009)
4 Dubajic D, 'Foreign Investment Contract Status During The Renegotiation Of Host State And Foreign Investor'
[2017] Pravni zapisi

The mapping of the foreign investment protection includes three things; the first is
general principles of international law, the bilateral international treaty and the investor state
contracts.
The contracts which govern the foreign investment are mainly formed with the purpose to
protect the foreign investor who is being investing its money into the host state. It comprises of
many terms or clauses of contract which specifies many specific matters. The concession
agreements or the production sharing agreements are designed to protect long term nature of the
investment. There are many clauses which are embodied in the investor state contracts which
specify many matters. Some of them includes the following but this is not exhaustive, in includes
many clauses where first is the arbitration clause which helps in avoiding the jurisdiction of the
national courts, second is the choice of law clause which avoids application of the national law,
third is the force majeure clause which helps in preventing the unwanted events that alter the
economic equilibrium that are agreed in investor state contracts. Under this clause, the obligation
of parties other than obligation to make the payment of money must be suspended during the
force majeure period and term of the agreement must be extended for the time period which is
equivalent to force majeure period situation5. The parties under this clause are under obligation
to provide notice of such suspension of obligation and resume performance of obligations as
soon as the period of force majeure is removed.
There are many risks which are faced by the foreign investor when the performance of
investor state contract is done which includes firstly that any change which is done in the
political scenario of the host state shall be risky for the investor as it may lead to either peace or
revolution. The change in political scenario may involve change in policies or laws that can
affect the terms of the contract, thereby leading the investor to heavy risk. Another is change in
the contract which is made with state. As the variation is done in the investor state contract, it
may result in exposing the investor into the heavy risk by any of the term which is not in favor of
it6. Thirdly, the change in legal or regulatory framework such as change in health standards or
the nationalization of sector which can lead to loss may expose the foreign investor to risk as
these laws may or may not be in favor of the investment made by foreign investor. There are
5 Miller D, and Reisel N, 'Do Country-Level Investor Protections Impact Security-Level Contract Design? Evidence
From Foreign Bond Covenants' [2017] SSRN Electronic Journal
6 Lew J, and Cremades Román B, Parallel State And Arbitral Procedures In International Arbitration (2018)

many other conditions also which can expose the foreign investor in the risk and affect its
investment and rights. So there are many clauses being enumerated in the contract so that it can
protect the rights of the investor while any foreign investment is made in other country7.
The clauses in the investor state contracts are pertaining to protect the investor as well as
the host country. Now discussion is made on two of the clauses which are discussed in context to
the protection of foreign investments.
The first clause is the dispute settlement. When there is a contract being entered between
the parties who are of different nationality. So the contract must contain the clause which
specifies the law which shall govern the contract as well as the jurisdiction of the court where the
dispute must be taken. Investor state contract which is entered into by the foreign investor and
the host country is required to contain the clause which provides for the jurisdiction which shall
govern their dispute. It is true that when there is a contract of such nature, there is probability
that there may be chances of any dispute between them so the clause of arbitration shall help the
parties to avoid the jurisdiction of the national courts. It shall be unfair that only one party’s
national court shall prevail so this clause brings efficiency in the contract as it provides for
neutral solution to bring the arbitration in case of any dispute between the parties. The peculiarity
of the investor state contract is that it must have the clause of arbitration so that the foreign
investor is allowed to initiate the arbitration proceeding against host state for the breach of
contract terms. There are different types of arbitration which includes firstly the ad hoc
arbitrations which are institute by the contract that includes the composition of the arbitral
tribunal and its procedures. The second type of arbitration is the institutional arbitrations which
are instituted by the international treaties or in accordance with the national laws. They provide
the set of rules which involves also the composition of tribunal and the procedure of arbitration8.
Under arbitration, it is the alternate dispute resolution which is distinct from the judicial
courts. It involves appointing the independent and unbiased arbitrator who shall examine the
evidence and facts of the case and provide the arbitral award which is the decision. It has the
7 Horn H, 'Investor-State Vs. State-State Dispute Settlement' [2018] SSRN Electronic Journal
8 Cotula L, 'Human Rights And Investor Obligations In Investor-State Arbitration' [2016] The Journal of World
Investment & Trade

binding effect on the parties. It offers flexibility to the parties as to decide the time, place and the
arbitrator. They are free to decide the law which shall govern their contract9.
On looking from the perspective of judicial courts, arbitration involves more flexible
procedure as compared to courts and it provides speedier disposal of cases. This clause offers
protection to the foreigner investor in context to investor state contracts as in case of any dispute
between the foreign investor and host country, this clause will help to seek the remedy which is
essential for the investor. The New York convention on Recognition and Enforcement of Foreign
arbitral awards, 1958 provide in its Article III that each of the contracting state must recognize
the arbitral award as the binding and also enforce it in accordance with rules of the procedure of
such territory where the award is to be relied upon and under such conditions which are provided
in the said Article. By virtue of this article, it is prima facie that the arbitral awards have right to
recognition and enforcement by the contracting states. The Article III have granted the
contracting states with the freedom to apply its own national rules for the recognition and
enforcements stage so courts have the power to apply this Article in accordance with the policy
of convention.
The international arbitration mainly takes place inside the closed doors and in case there
is a investment treaty obligation, the investor can only bring the claim of breach of such
obligations while in case of commercial arbitration, the government and the investor can bring
the claim for the breach of contractual obligation10.
The next is the stabilization clause in the investor state contract. It accommodates the
risk of the regulatory changes for the investors. It is aimed to safeguard the interest of the
investor as it may cause tensions with the regulation of the interfering state in the public interest
which includes protection of human rights and is aimed to work towards the sustainable
development. On one hand, there are rights of the investors and on other there is legitimate
public interest so it is important to make the balance between the two. This clause is aimed to
bring harmony between the two. The investor seek to includes such clause which protect them
9 Hobe S, and Scheu J, Evolution, Evaluation And Future Developments In International Investment Law (Nomos
Verlagsgesellschaft 2021)
10 Yackee J, 'The First Investor-State Arbitration' [2017] SSRN Electronic Journal

directly from the changes of law and helps in managing the non- commercial risk such as
expropriation of the project of foreign investment through the governmental action11.
It mainly restricts the host country to not alter the framework of regulation which governs
the project either by legislation or any other means and that too without the consent of the
contracting party and if it does so, in order to restore economic equilibrium of project or to pay
the amount of compensation. In many cases or scenarios, this clause is reinforced through the
provision of the bilateral investment treaty through the umbrella clause. In case of breach of such
stabilization clause, it would lead to the breach of Bilateral investment treaty which results in
ensuring the monetary compensation is awarded to the party and too that high rates.
The states include the stabilization clause due to the lack of confidence of the investors in
the legal system of the country and their desire is to attract as much foreign investment it can.
This clause strengthens the confidence of the investor as any amendment in the laws shall not
affect the project for which the foreign investor has already invested. This clause is also
associated with use of financing techniques where the credit worthiness and the debt security is
based upon and not on the overall asset of the investor but on revenue which is expected to be
generated by investment project. It helps in minimizing the risk and distributes the revenue
among the entities which are involved in investment project12.
In the case of Texaco (TOPCO) v. Libya13, the Libya government has after the socialist
revolution have nationalized properties and the operations of TOPCO. The stabilization clause
contained that the government of Libya is required to take the essential steps in order to ensure
that the organization enjoys the rights which are conferred by the concession. The rights
embodied in contract must be created expressly by this concession will not be altered except
through the mutual consent of parties. The contract provides in the stabilization clause that the
concession must in its whole period of the validity be construed according to the petroleum law
and regulations which are in the force on date of the execution. Any changes or amendment or
11 Cotula L, 'Human Rights And Investor Obligations In Investor-State Arbitration' [2016] The Journal of World
Investment & Trade
12 Malik M, Fair And Equitable Treatment (International Institute for Sustainable Development 2018)
13Texaco Overseas Petroleum Company v. The Government of the Libyan Arab Republic, AD HOC AWARD OF
JANUARY 19, 1977

the repeal of the regulation will not affect the rights of company without the consent of
contracting party.
In another case of Sapphire v. NIOC14, the sapphire was not able to obtain the
reimbursement of the expenses by NIOC from the agreed operations. It refused for continuance
of the drilling operations. NIOC have repudiated the concession contract which was based on
refusal of Sapphire so it initiated the arbitration. The investor state contract have the clause
relating to choice of law where both parties agreed to carry out its provisions according to the
principle of good will and good faith. The stabilization clause in the investor state contract was
that the agreement shall not be cancelled or affected or any change in the provisions shall not be
accepted by any statutory or general enactment or by any administrative measure which is taken
by government or its authority in Iran including the NIOC. Also the its performance shall not be
hindered. And many amendment, cancellation or modification in the provisions can take place
only with the agreement between the two parties.
Hence, any changes in the legal or the regulatory framework may have the probability of
infringing the rights of the investor so that stabilization clause is aimed to protect the foreign
investors from any kind of infringement from the changes in law which may affect their
investment and its return. The investor while investing in any state has the lack of confidence in
the regulations of the government. So in order to give boost to its confidence, this clause is
mainly enumerated in the low or middle income countries who are eager to attract the foreign
investment. The stabilization clause provides confidence and trust to the investor to invest in the
host country and on other side; it helps the government of that host country to attract foreign
investments
Thus, it is important to have the invest state contract so that the terms of the contract can
give clarity to both investor and state to work on the basis of these terms only. The arbitration
clause provides strength to the investor to refer its dispute to arbitration instead o going to
national courts and following the national law. This clause helps to protect their right from any
breach of contractual terms while the stabilization clause helps in minimizing their risk to invest
14 Sapphire international Petroleum Ltd v. National Iranian Oil Company, Arbitral Award. March 15, 1963. (Cavin,
Sole Arbitrator).

in host state. The risk is mainly associated with the change in any policy or regulation that can
affect the return on investment.
CONCLUSION
It is concluded from the above essay that the contract involves four essential elements
which includes consideration, offer, acceptance and intent to create the legal relations. The
investor state contract is one such contract which is made for the foreign investment and is done
between the foreign investor and the host country. This contract helps in giving clarity to the
parties about their contractual obligations. It involves many clauses such as settlement of dispute
clause, concession agreements, choice of law clause and many others. There are many risk
associated with the investor’s rights so it is important to have such clauses which helps in
protecting their rights. One such is the dispute settlement clause where the parties normally
choose the arbitration as their dispute resolution mechanism as it offers binding arbitral award
and the speedy disposal. Another clause is stabilization clause which is aimed to minimize the
risk of foreign investor and helps in boosting its confidence in regards to investing in foreign
country as this clause specifies that the amendments in the legal and regulatory framework shall
not affect on going projects and it can take effect when there is mutual consent of parties. Hence,
both clauses help in protecting the rights of the investor.

REFERENCES
Books and Journals
Cotula L, 'Human Rights And Investor Obligations In Investor-State Arbitration' [2016] The
Journal of World Investment & Trade
Cotula L, 'Human Rights And Investor Obligations In Investor-State Arbitration' [2016] The
Journal of World Investment & Trade
Dubajic D, 'Foreign Investment Contract Status During The Renegotiation Of Host State And
Foreign Investor' [2017] Pravni zapisi
Dumberry P, A Guide To State Succession In International Investment Law (2009)
Hobe S, and Scheu J, Evolution, Evaluation And Future Developments In International
Investment Law (Nomos Verlagsgesellschaft 2021)
Horn H, 'Investor-State Vs. State-State Dispute Settlement' [2018] SSRN Electronic Journal
Lew J, and Cremades Román B, Parallel State And Arbitral Procedures In International
Arbitration (2018)
Malik M, Fair And Equitable Treatment (International Institute for Sustainable Development
2018)
Miller D, and Reisel N, 'Do Country-Level Investor Protections Impact Security-Level Contract
Design? Evidence From Foreign Bond Covenants' [2017] SSRN Electronic Journal
Sherman J, 'Heading Off Disputes By Paying Attention To Human Rights In Foreign
Investor/Host State Contract Negotiations' (2017) 111 Proceedings of the ASIL Annual Meeting
'THE COURTS EVALUATION OF THE REASONABLENESS AND GOOD FAITH
ACTIONS OF THE INVESTOR WHEN CONCLUDING THE CONTRACT OF BANK
DEPOSIT' [2017] Courier of the Kutafin Moscow State Law University
Yackee J, 'The First Investor-State Arbitration' [2017] SSRN Electronic Journal

BIBLIOGRAPHY
Primary source
 The New York convention on Recognition and Enforcement of Foreign arbitral awards,
1958
 Sapphire international Petroleum Ltd v. National Iranian Oil Company, Arbitral Award.
March 15, 1963. (Cavin, Sole Arbitrator).
 Texaco Overseas Petroleum Company v. The Government of the Libyan Arab Republic,
AD HOC AWARD OF JANUARY 19, 1977
Secondary source
Books and Journals
 'THE COURTS EVALUATION OF THE REASONABLENESS AND GOOD FAITH
ACTIONS OF THE INVESTOR WHEN CONCLUDING THE CONTRACT OF BANK
DEPOSIT' [2017] Courier of the Kutafin Moscow State Law University
 'Heading Off Disputes By Paying Attention To Human Rights In Foreign Investor/Host
State Contract Negotiations' (2017) 111 Proceedings of the ASIL Annual Meeting by
Sherman J,
 A Guide To State Succession In International Investment Law (2009) by Dumberry P.
 'Foreign Investment Contract Status During The Renegotiation Of Host State And
Foreign Investor' [2017] Pravni zapisi by Dubajic D.
 'Do Country-Level Investor Protections Impact Security-Level Contract Design?
Evidence From Foreign Bond Covenants' [2017] SSRN Electronic Journal by Miller D,
and Reisel N.
 Parallel State And Arbitral Procedures In International Arbitration (2018) by Lew J, and
Cremades Román B.
 'Investor-State Vs. State-State Dispute Settlement' [2018] SSRN Electronic Journal by
Horn H.
 Evolution, Evaluation And Future Developments In International Investment
Law (Nomos Verlagsgesellschaft 2021 by Hobe S, and Scheu J.