Stabilization Clause | Practical Law

Stabilization Clause | Practical Law

Stabilization Clause

Stabilization Clause

Practical Law Glossary Item 1-501-6477 (Approx. 3 pages)

Glossary

Stabilization Clause

A method for a foreign investor to mitigate or manage political risks associated with its investments, this clause is often included in a host government agreement (HGA) or other international investment agreement and addresses how changes in law following the execution of the HGA or other agreement are to be treated and the extent to which these changes modify the rights and obligations of the foreign investors.
The most common types of stabilization clauses are:
  • Freezing clauses: these clauses fix or freeze for the term of the investment domestic legislation or regulations affecting the investment to those in effect as of the date of the HGA or other investment agreement. Under these clauses, legislation adopted after the date of the HGA do not apply to the foreign investors or the project unless the investors agree.
  • Economic equilibrium clauses: under these clauses, which are intended to preserve the economics of the project, changes in law occurring after the execution of the HGA or other agreement apply to the investment and its foreign investors except that the host government must indemnify the investors for and against the costs of complying with the new laws. For example, the host government may impose new emissions standards concerning a power plant, but the costs of modifying the plant's design or re-fitting the plant are borne by the government. The scope of the host government's indemnification obligation depends on the negotiating strength of the parties and the host government's need for the proposed investment.
  • Hybrid clauses: a combination of the freezing and economic equilibrium clauses, under these clauses, foreign investors are not automatically exempted from the application of new laws. Rather, these clauses provide that the investors may be granted an exemption. Hybrid clauses may also require compensation for certain specified changes in law as opposed to all laws that may affect the project and its foreign investors.
Although stabilization clauses are beneficial to foreign investors and are perceived as helping host governments attract foreign investment, they can prevent host governments from taking the actions necessary to protect their citizens' rights and enforce national laws that apply elsewhere in the country. Domestic investors generally do not like these clauses because foreign investors may receive better terms than they do.
Stabilization clauses have also been criticized by international human rights organization Amnesty International as placing a price tag on human rights because they may exempt either explicitly (through the freezing clauses) or implicitly (through economic equilibrium clauses by making it expensive for the government) foreign investors and their projects from complying with human rights laws.
For more information on stabilization clauses, see Practice Note, Understanding Stabilization Clauses in International Investment Agreements.