Investor protection versus State permanent sovereignty

Developing countries frequently partner with private international investors on capital intensive projects such as petroleum and gas exploration projects with a view to receiving capital, technology and expertise. These developing states may not be well capacitated to execute projects of such magnitude hence the inclusion of private actors.

However, in doing so concern is always raised as to whether these host states surrender their permanent sovereignty and become equals with private transnational companies.

Over the years, breach of investment agreements has seen states being dragged to arbitration instead of their own home courts. In these arbitration tribunals host states are subjected to international law instead of their domestic laws.

Conversely, a different school of thought has always argued that in signing these host-government agreements with private transnational actors, host states actually express their permanent sovereignty and freedom of contract.

Besides, bilateral treaties usually contain Umbrella Clauses which provide that any violation of a host-government agreement by a host state shall be treated as a treaty violation.

Therefore, even where the host-government agreement does not provide for arbitration, the bilateral or multilateral treaties between the states at international level “internationalise” the host government agreement.

Investor protection can also be rendered through Treaty Protection Clauses such as the National Treatment Clause, Most Favoured Nation Clause and the Fair and Equitable Treatment Clause, all of which are not the subject of the present discussion.

Further, it has also been argued that the provision of arbitration or applicable law clauses in these host-government agreements also serves to “internationalise” the agreements.

This has the effect of removing disputes emanating from these host-government agreements from the jurisdiction of the local courts and conferring such jurisdiction on arbitration bodies such as ICSID.

When states are dragged before such bodies by private transnational actors, as they frequently are, it seemingly disenfranchises them of their permanent sovereignty.

However, the field of international investment law has always been fraught with nationalisation of investments, direct and indirect expropriation.

All these occurrences resulted in investors losing out on their legitimate expectations.

The investors plough in their capital in the reasonable expectation of profits while the host states expect to receive some form of revenue from levying taxes. Instead of using direct expropriation or nationalisation, some states have employed “creeping” mechanisms in terms of which they exercise their sovereign powers to make laws which allow them to eat into the profit of the investor while increasing their initially agreed share. This phenomenon is known as obsolescing bargain.

Having realised this mischief, the host-government agreements now contain stabilisation clauses which seek to prevent this unfair balance. The stabilisation clauses generally exist in four types.

The Freezing clause

As seen in the Amoco International Finance Corporation vs the government of the Islamic Republic of Iran & Ors award, the freezing clause exists for the purpose of freezing the provisions of a national system of law chosen as the law of the contract as of the date of the contract, in order to prevent the application to the contract of any future alterations of this system.

Therefore, a state that binds itself to a freezing clause is contractually barred from making any legislative or regulatory amendments to the undertaken laws. The stabilisation clause can be either comprehensive in scope in that it absolutely protects the contracting investor from any alteration in the law of the host state or it can be limited to a stated scope of law, for instance labour, health or taxation laws. Some model production sharing contracts like the 1989 Tunisian model contained such clauses.

The Intangibility clause

The intangibility stabilisation clause restricts the host state from either modifying or terminating the contract unilaterally. Any unilateral modification of the contract is a violation of this clause. Hence, the state should consult the private transnational investor before any modification of the contract; and get the consent of that investor before any changes are made.

An example of the intangible clause can be gleaned from the 1948 Concession Agreement between the Government of the State of Kuwait and American Independent Oil Co.

iii. The hybrid clause

The hybrid clause seeks to merge the freezing clause and the intangibility clause. It attempts to restrict a host state from effecting changes in the host-government agreement through a freezing provision while at the same time allowing an opportunity to negotiate the legislative environment of the investment via a consent provision. In so doing such a clause protects the transnational investor’s investment by bringing stability through prohibiting unilateral actions by states and preserves the permanent sovereignty of a host state.

The economic equilibrium clause

This is a famous clause in modern day host state agreements. There are weaknesses which are associated with the protection offered by the above-mentioned types of stabilisation mechanisms hence the need for this one.

This type of clause seeks to strike a balance between a transnational investor’s financial returns and the sovereign rights of host states.

The key aspect of this clause is that in the event of disruption of the status quo, the parties (state and investor) are obliged to negotiate in good faith to restore the original balance.

Therefore, it permits the states to amend or modify their laws as they please in exercise of their sovereignty, yet proffering renegotiation of the contract as a protective measure in favour of the investor to achieve equilibrium.

In other words, upon remodification that impinges on the investor’s legitimately expected profits there should be renegotiation to re-establish the status quo. This clause can be seen in the BTC pipeline agreement.

Parties are free to include whatever protective clauses they desire in their contracts. However, stabilising clauses serve to “stabilise” the agreements and bring about equilibrium in a game that naturally has no equality.

The above clauses as discussed function together with the arbitration clauses and applicable law clauses to confer investor protection.

However, the debate still continuous as to whether these clauses violate state permanent sovereignty or actually constitute evidence of state permanent sovereignty.-herald.cl.zw