Introduction

‘Stabilisation clauses’ are a common feature of long-term investment contracts between foreign investors and host States, particularly in the developing world. Following the execution of the contract, which will typically be governed by the domestic law of the host State, changed political and economic circumstances may lead the government to change the law. The change in law may amount to bona fide law reform, but the government may also change the law in a capricious or opportunistic way. The essential purpose of stabilisation clauses is to impose some constraints on the host government's ability to amend domestic law in a way which affects the investment contract, including by providing that the investor shall be compensated if detrimental changes in law occur. In one sense, stabilisation clauses can be seen as straightforward contractual devices which allocate the risk of a change in law to the party best placed to avoid it. In another sense, and to the extent that stabilisation clauses attempt to address the special risks created by the State's capacity to exercise sovereign powers to affect its contractual relationship with the investor, they are properly seen as a creature of international investment law.

The use of stabilisation clauses to deter host States from amending domestic law has led to allegations that they represent an obstacle to sustainable development. In particular, it has been suggested that stabilisation clauses may discourage governments from introducing or enforcing laws relating to the protection of human rights, and environmental conservation. Criticism of stabilisation clauses has mainly been targeted at projects in the energy and natural resources sectors, where the potential for negative impacts on human rights and the environment is often considerable. These are also sectors in which investors are exposed to significant political and economic risks. Their upfront capital investment – often measured in hundreds of millions or even billions of dollars – may only be recovered over the (very) long term. The stability and predictability of the legal and regulatory framework is fundamentally important for investors who are risking capital in host States that have a ‘volatile legal and institutional system . . . which the foreign company (often quite legitimately) does not trust’.