Enforceability of Stabilization clauses in Oil and Gas contracts

Abstract

Stabilization clauses refer to the clauses in the investment contract that provide that any future changes of the host state’s law that are detrimental to the investor will not be applied to the concerned contract. Despite the actuality of stabilization clauses, the sovereignty of states enables states to put in place needed laws and applies in all sectors and activities. Economically, sovereignty enables a state to control its national economic life. In 1950s, there arose the principle of permanent sovereignty of states over their natural resources and basing on that principle, many developing countries to started contesting the validity of concession agreements which their governments had entered into with foreign investors. This research is concerned with examining that discrepancy in oil and gas contracts. Even if the sovereignty of host states has been regarded as a justification of not enforcing stabilization clauses, under international investment law, it is provided that the agreement of the parties to an investment contract prevails, to the extent that the applicable law that they choose is the one to be referred to by the tribunal in case of dispute settlement. In the same vein, the principle of freedom of the contract allows the parties to determine the law that they want to govern their contract. This is the reason why stabilization clauses should be enforced in accordance with the principle of freedom of the contract as they are concerned with the law that governs the investment contract during its life. However, a certain host state may be in the situation where it is requested to put in place laws to comply with international obligations especially those related to human rights and environment protection. Consequently, instead of preventing a certain state to manage its internal affairs through needed and relevant laws, stabilization clauses that are concerned with providing for the compensation in case of a host state action that is prejudicial to the investment project, are recommended.