Stabilization Clauses in Investment Contracts in Developing Countries

Abstract

Stabilization clause is a contractual clause commonly found in investment contracts such as concession agreements wherein the host country grants a concession i.e. a right to develop certain project to the investor. Stabilization clause is a contractual risk management tool that aims to maintain legal and economic equilibrium of the investment project by preventing unilateral actions of the host country in exercising its sovereign functions. However, when the host country is a developing one then stabilization clauses may adversely affect the development of human rights, labour and environmental laws. This paper argues that removal of stabilization clause is not an appropriate solution for a developing country seeking economic development through foreign investment. Instead, during negotiations host developing countries should narrow the scope and restrict the duration of stabilization clauses.

Keywords: Investment, BIT, Stabilization Clause, Change in Law