Investment Agreements and Human Rights: The Effects of Stabilization Clauses

The purpose of this study was to examine whether stabilization clauses, a widely used risk-management device in investment contracts, may affect a state’s action to implement its international human rights obligations. Specifically, this study examined whether stabilization clauses can limit the application of new social and environmental regulations to investment activities over the life of the investment, or to obtain compensation from host states for the costs of compliance with such new laws. This study used social and environmental laws (such as nondiscrimination, health and safety, labor and employment rights, and the protection of the environment and cultural heritage) as a surrogate for human rights obligations, because these domestic laws are some of the most common means of implementing international human rights obligations in regulating business activity.

The contract data used in this research come from a sample of current investment contracts and model contracts. (The contracts represent actual agreements between government parties and investors. The models represent government starting places for negotiation and may change significantly before actual agreements are reached.) 1 These contracts and models came principally from private international law firms that responded to a request from IFC to participate in the study. These law firms provided a sample of contracts from the last 10 years, spanning a broad range of industries and regions of the world. The firms provided the following data from each contract: the region, the industry, the decade in which the contract became effective, the stabilization clauses, the governing-law clause, and the dispute-resolution clauses. Research for this project included a literature review on stabilization clauses and relevant international arbitration decisions, as well as interviews with lawyers who represent investors and host states (negotiating investment contracts or litigating contract disputes) and with industry lawyers. The study did not interview government officials. It did conduct additional interviews with academics who have been involved in the negotiation of host-government agreements, and with nongovernmental organizations (NGOs) that have conducted research on host-government agreements and human rights. The study focused more on the drafting of stabilization clauses than on the enforcement of such clauses.

This study found that stabilization clauses are sometimes drafted so as to insulate investors from having to implement new environmental and social laws, or to provide investors with an opportunity to be compensated for compliance with such laws. The sample of contracts gathered for this study showed that this was more likely to be the case in the contracts from countries outside the Organisation for Economic Co-operation and Development than in OECD country contracts.