Authored By: BIYINZIKA JAEL KAKULIRA
Legal Issue: Whether stabilization clause in international investment agreements can be imposed in a way that secures investor protection and host state sovereignty?
State sovereignty is embedded in Article 2(1) of the United Nations Charter signifying full authority of a state over its premises and citizens.[1]
Stabilization clauses are terms contained in international investment agreements to safeguard the capital of the investors.[2]. This is due to the fact that changes in laws of the Host state is one of the foreseen risks by an investor and such steps are in place to prevent events of nationalization or expropriating assets belonging to the foreign investors and in case the events as stated happen this brings about the need for compensation for the aggrieved party.[3]
Renown categories of stabilization clauses include freezing clause, intangibility clause, rebalancing clause and the allocation of burden clause. The freezing clause puts an obligation on the Host state to make no changes of its laws and regulations in a way that disadvantages the investment for a specified period of time as per the contract.[4] It envisages that the way the laws of the host state should remain how they were when the agreement was first signed even when time outside the contract keeps running.
Intangibility clause is one that puts a standstill on the contract rather than the law of the Host state.[5] Main focus is on what was agreed in the contract and not the law. This provision directly be interpreted as that which can cannot be touched in the agreement. There is an invisible pause is put on what events were agreed on within in the agreement.
Rebalancing stabilization clause allows revision of provisions of the agreement after certain situations that are financially unfavourable to the investor.[6] It gives room for revision in favour of the investor of highlighted provisions in the agreement after financial loss occurs.
Allocation of burden stabilization clause this one moves the responsibility brought by the negative effects due to change in law or contract terms to the National Oil Company of the Host state.[7] The negative impact of variation in law is transferred to the National Oil Company of the host state relieving the investment of any responsibility in regards to such changes.
Stabilization clauses are found in Bilateral and Multilateral Investment treaties have stabilization clauses whose main goal is to safeguard the investments of the respective countries’ citizens against unlawful nationalization and expropriation of their property.[8] Example of a Bilateral treaty is one between the Government of Australia and the Government of Argentine Republic on the boosting and guarding of investments and Protocol and an example of a Multilateral Investment treaty is the African Continental Free Trade Agreement (AfCTA) with the goal of easy movement of goods and services in Africa. [9]
The involvement of the stabilization clause as a protective mechanism for investment can be seen through some of these decided cases.
In the case of BP Exploration Company (Libya) Ltd v. Government of the Libyan Arab Republic (1973) 53 I.L.R. 297[10], a concession which was originally granted to Nelson Bunker Hunt in 1957 but later assigned to BP Exploration Company (Libya) Ltd. The Libyan government eventually nationalized BP’s entire interests in the concession in 1971. Arbitration was requested where the International Court of Justice assigned an arbitrator. It was decided that by virtue of stabilization in the concession, Libya’s freewill regarding changes to the concession were restricted unless there was evidence of such changes having been for the national interest.
Libyan Government had breached the concession which meant that BP Exploration Company (Libya) Ltd. was entitled to compensation as the stabilization clause had created safety against the specific acts of the host state.
Another decided case is the case of Libyan Oil Co. (LIAMCO) v. Government of the Libyan Arab Republic[11], Libya nationalized the interests of the company which was acquired under a concession contract which also contained a stabilization clause. An arbitrator was assigned by LIAMCO’s demand. It was found that the concession was of legal effect on the parties and it would only be rightfully ended mutually by both parties to the agreement.
The prolonged existence of international investment regimes depends on a balance between investor protection and state sovereignty being achieved. Whereas the stabilization clause provides safety for the investors, their implementation may excessively burden state sovereignty. A balanced approach is necessary for co-existence of the two. One that acknowledges the host state’s duty to legislate for its citizens’ wellbeing and upholding contractual obligations.
Distinguished critics have an issue with the role of investment treaty provision stating that they have outlived their purpose of protecting property rights in exchange for foreign direct investment. Focusing on there being few expropriations of late.[12] There has to be a reason why these have reduced which can be linked to the right to regulate in respect of public interest.
Recent expropriation case is Vattenfall and others v Germany[13], where the revision to the German Atomic Energy Act in 2011 by the German Parliament with the aim of speeding up the surrender of nuclear energy usage by 2022 due to the effects of the Fukushima nuclear crisis. In May 2012, the Swedish energy company Vattenfall put in a demand for arbitration against Germany after the closure of the two of Vattenfall run nuclear plants. The basis of the claim was of indirect expropriation.
On March 22, 2019, demand of approximately EUR 6,095,521,000 without trial interest was calculated by Vattenfall. The German government made it known that she intended to settle investors affected by the closure of various nuclear plants in its premises. A settlement between Germany and Vattenfall was reached.[14]
Looking at the case above, Germany while applying its right to regulate to protect the health of the population and environment, was placed under arbitral proceedings which obligated her to compensate according.
The decided case emphasis the need for a balance between state sovereignty and protection of investment. What Germany did was an act to regulate for public interest and should not have been expected to part with its huge financial resources.
Building on the point of compensation, there is an absence of distinction in the method of calculating compensation depending on the lawfulness or wrongfulness of the expropriation poses an ethical problem.[15] It is unreasonable for a state that expropriates within the law to have to pay a compensation as that which carries out unlawful expropriation.
Adding to the compensation issue, there is want of a distinct approach of measuring compensation when it comes to expropriation done lawfully and that that is done wrongfully. A host state that takes over property of investors wrongfully should not be treated the same as the one that did the same action lawfully. These clauses need to be clear on the procedure of quantifying what is to be paid.
Furthermore, numerous agreements require prompt or lack of delay compensation without stating a specific date that it is to be cleared. Having in place a reasonable deadline for which payment should be made in given circumstances under the agreements.
Concerning, a provision of investment agreements that declares expropriation compensation to have an interest rate up to when payment is done.[16] Creating a balanced stabilization clause looks at a definite expropriation and the exact interest rate with a specific date on which the interest rate sets out to increase.[17]
Investors who desires to shield themselves from expropriation or nationalization can obtain insurance from the Multilateral Investment Guarantee Agency.[18] In case of the events occurring, then the investor will seek compensation from the above-mentioned agency as per the insurance policy. Sovereignty is preserved and investor protection as well, this clearly presents a situation where both parties are protected without a stabilization clause in the agreement.
Countries such as the United States of America focus on the protection of the right to regulate in her treaty regime.[19] She believes that for the public interest, regarding public health, the economy and other fields, these rights should be safeguarded and other countries are expected to protect this right as well.
Other countries such as South Africa and India have revised investment policies to create a middle ground between investment protection and their rights to regulate in regards to public interest. [20]
During discussions of the Transatlantic Trade & Investment Partnership (TTIP), the European Commission put emphasis on the right to regulate for public good.[21]
It is observed that the principle of permanent sovereignty over natural resources stabilization clauses cannot stop a Country from carrying out its sovereign power for public good.[22]
In the Methanex case, the tribunal under the North American Free Trade Agreement (NAFTA) had to assess the matter of the State’s right to regulate for the public good. Some observers have regarded it to be much anticipated award. [23]
The parties to the dispute were two developed members countries of NAFTA, in this case USA and Canada compared to most disputes that developing country is being investigated. In this case, Canada pursued liability by the U.S for legislative expropriation. The State of Carlifornia put an end to the utilisation of fuel additive, methyl tertiary-butyl ether (MTBE), washing money down the drain for Canada. California asserted that the ban was done for the public good because the above-mentioned element was used in production that was harmful to people, therefore effectively used its right to regulate with regard to public interest.[24]
The tribunal determined positively for U.S that no expropriation had happened and there was a legal regulation put in place from the perspective of International Law.[25] The developed countries and developing countries should both be able to enjoy the right to regulate.
In Saluka v Czech Republic, the tribunal concluded that it is currently set in place in international law that no liability passed to a State to compensate investors when carrying out regular legislative powers taken on in a non-segregation way but only interest of the public.[26]
Under the BTC Regime, the BTC Human Rights Undertaking document refrains from the compensation remedy in the HGA in circumstances of new regulations being put in place for human rights or environmental reasons.[27]
The SADC model Bilateral Investment Treaty, 2017 has provisions that provide for balanced stabilization clause and right to regulate. Article 6(1) of the Treaty is to the effect that a state party shall not directly or indirectly nationalize or expropriate assets in its premises and provides exceptions to the same which are in public interest, on a non-discriminatory basis, in accordance with due process of law and payment of fair and adequate compensation.[28]
Article 6 really shows how investor protection and state sovereignty can exist and other parties to treaties should get some takeaways as they enter into agreements of the same kind.[29]
Article 20(1) of the same treaty is to the effect that a Host state has the right to take regulatory steps to foster development and growth in its premises is in line with the goals of sustainable development. Clause 3 of Article 20 provides that there has been no breach of the agreement where a state party complying with international law takes measures which are non-discriminatory.[30]
SADC model Bilateral Investment Treaty, 2017 honours the right to regulate in public interest without removing provisions that protects investor development which evidently reaffirms the possibility of balance between the protection investors and state sovereignty.
Foreign Direct investment is enhanced by balanced stabilization clauses. Framing of stabilization clauses to favour protect one party is out of style, there should be focus on sustainable investment governance.[31]
The stabilization clause regime has changed over the years from just freezing approach to more current commercial trends. Now there is more concern for the effect of such clauses on the state.[32]
As earlier mentioned, the prolonged existence of international investment regimes depends on a balance between investor protection and state sovereignty being achieved. Whereas the stabilization clause provides safety for the investors, their implementation may excessively burden state sovereignty. A balanced approach is necessary for co-existence of the two. One that acknowledges the host state’s duty to legislate for its citizens’ wellbeing and upholding contractual obligations.
Inconclusion, a balanced approach creates an environment that supports sustainable foreign direct investment, even as encouraging the State to keep its sovereignty and ensuring effective protection of investors. This fairness promotes legal clarity, encourages on going growth for both host states and foreign investors. should be taken on since many countries growth and development lies in investment and sovereignty is preserved and investor protection as well.
BIBLIOGRAPHY
Libyan Oil Co. (LIAMCO) v. Government of the Libyan Arab Republic, 12 Apr 1977
Vattenfall and others v Germany (ICSID Case No.ARB /12/12)
BP Exploration Company (Libya) Ltd. v Government of the Libyan Arab Republic [1973] 53 I.L.R 297
The United Nations Charter, 1945
SADC model Bilateral Investment Treaty, 2017 with commentary
Veronika Lucia Minnemann ‘Vattenall v Federal Republic of Germany: a report of a long story and an outlook on the future of investment arbitration under ECT’
Suzy H.Nikiema, ‘Compensation for Expropriation Best Practices Series’ [2013]
Dr. Emejuru Adiele-chi, Dr. Nzeribe Abangwu and Osondu Ajuzie Chizoba, ‘Stabilisation Clauses and their Effects on Energy Sustainability’ [2025] Vol.18, No.1
Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
Libyan Oil Co. (LIAMCO) v. Government of the Libyan Arab Republic, 12 Apr 1977
Vattenfall and others v Germany (ICSID Case No.ARB /12/12)
BP Exploration Company (Libya) Ltd. v Government of the Libyan Arab Republic [1973] 53 I.L.R 297
Katja Gehne & Romulo Brillo, ‘Stabilisation Clauses in International Investment Law: Beyond Balancing and Fair and Equitable Treatment’ (2017) <https://icsid.worldbank.org/sites/default/files/parties_publications/C6106/2021.01.08%20Parties%27%20Post%20Hearing%20Briefs/Claimants%27%20Post%20Hearing%20Submission/Legal%20Authorities/CL-0281.pdf >
World Bank Group, < https://www.worldbank.org/en/about/annual-report/miga >
David Gaukrodger, ‘The balance between the investor protection and the right to regulate in investment treaties’ < https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/02/the-balance-between-investor-protection-and-the-right-to-regulate-in-investment-treaties_03028151/82786801-en.pdf >
European Union, ‘The Transatlantic Trade and Investment Partnership (TTIP explained)’ < https://www.europarl.europa.eu/meetdocs/2014_2019/documents/deea/dv/23_160125_/23_160125_en.pdf >
[1] The United Nations Charter, 1945
[2] Katja Gehne & Romulo Brillo, ‘Stabilisation Clauses in International Investment Law: Beyond Balancing and Fair and Equitable Treatment’ (2017) <https://icsid.worldbank.org/sites/default/files/parties_publications/C6106/2021.01.08%20Parties%27%20Post%20Hearing%20Briefs/Claimants%27%20Post%20Hearing%20Submission/Legal%20Authorities/CL-0281.pdf > accessed 6 November 2025
[3] Dr. Emejuru Adiele-chi, Dr. Nzeribe Abangwu and Osondu Ajuzie Chizoba, ‘Stabilisation Clauses and their Effects on Energy Sustainability’ [2025] Vol.18, No.1
[4] Dr. Emejuru Adiele-chi, Dr. Nzeribe Abangwu and Osondu Ajuzie Chizoba, ‘Stabilisation Clauses and their Effects on Energy Sustainability’ [2025] Vol.18, No.1
[5] Ibid
[6]Dr. Emejuru Adiele-chi, Dr. Nzeribe Abangwu and Osondu Ajuzie Chizoba, ‘Stabilisation Clauses and their Effects on Energy Sustainability’ [2025] Vol.18, No.1
[7] Ibid
[8] Ibid
[9] Dr. Emejuru Adiele-chi, Dr. Nzeribe Abangwu and Osondu Ajuzie Chizoba, ‘Stabilisation Clauses and their Effects on Energy Sustainability’ [2025] Vol.18, No.1
[10] BP Exploration Company (Libya) Ltd. v Government of the Libyan Arab Republic [1973] 53 I.L.R 297
[11] Libyan Oil Co. (LIAMCO) v. Government of the Libyan Arab Republic, 12 Apr 1977
[12] David Gaukrodger, ‘The balance between the investor protection and the right to regulate in investment treaties’ < https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/02/the-balance-between-investor-protection-and-the-right-to-regulate-in-investment-treaties_03028151/82786801-en.pdf > accessed 11 November 2025
[13] Vattenfall and others v Germany (ICSID Case No.ARB /12/12)
[14] Veronika Lucia Minnemann ‘Vattenall v Federal Republic of Germany: a report of a long story and an outlook on the future of investment arbitration under ECT’
[15] Suzy H.Nikiema, ‘Compensation for Expropriation Best Practices Series’ [2013]
[16] Suzy H.Nikiema, ‘Compensation for Expropriation Best Practices Series’ [2013]
[17] Suzy H.Nikiema, ‘Compensation for Expropriation Best Practices Series’ [2013]
[18] World Bank Group, < https://www.worldbank.org/en/about/annual-report/miga > accessed 11 November 2025
[19] David Gaukrodger, ‘The balance between the investor protection and the right to regulate in investment treaties’ < https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/02/the-balance-between-investor-protection-and-the-right-to-regulate-in-investment-treaties_03028151/82786801-en.pdf > accessed 11 November 2025
[20] David Gaukrodger, ‘The balance between the investor protection and the right to regulate in investment treaties’ < https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/02/the-balance-between-investor-protection-and-the-right-to-regulate-in-investment-treaties_03028151/82786801-en.pdf > accessed 11 November 2025
[21] European Union, ‘The Transatlantic Trade and Investment Partnership (TTIP explained)’ < https://www.europarl.europa.eu/meetdocs/2014_2019/documents/deea/dv/23_160125_/23_160125_en.pdf > accessed 11 November 2025
[22] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
[23] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
[24] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
[25] Ibid
[26] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
[27] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
[28] SADC model Bilateral Investment Treaty, 2017 with commentary
[29] SADC model Bilateral Investment Treaty, 2017 with commentary
[30] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
[31] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
[32] Prof. A.F.F. Maniruzzaman, ‘Journal of World Energy Law & Business’, ‘[2008] Vol 1, No.2
