Originally from the American Review of International Arbitration (ARIA)

ABSTRACT

The current study examines the validity of traditional stabilization clauses and their use in reducing host states’ political risk. This article relies on previous studies, analyses of arbitral awards, and domestic court decisions to suggest that the time may have come for the parties in investor-state contracts (the foreign investor and host state) to reconsider the viability of traditional stabilization clauses. Their value has become a “functional value” just like the function of the penalty clause in private contracts. Consequently, modern stabilization clauses (e.g., Economic Equilibrium Clauses (EEC)), renegotiation clauses, and the clause that determines the value of compensation when the state breaches the contract would seem to be more effective and adequate than traditional stabilization clauses.

[…] SCs can render nationalization an unlawful act and thereby affect the amount of compensation that the arbitral tribunal might grant.  Based thereon, the current trend in stabilization practice is that SCs cannot prevent a host government from altering the law applicable to the investment contract,  because arbitral tribunals have often seen pecuniary compensation as “the appropriate remedy” for the breach of SC.  The value of SCs, therefore, operates as a “functional value” just like the function of penalty clauses in private contracts. Such controversy between scholars and arbitral tribunals regarding the validity and legal effect of SCs raises a logical question regarding the viability of such provisions for developing countries and calls into question why some developing countries still agree to the traditional SCs in investment contracts, as including SCs in the state contracts may grant better compensation to foreign investors. The main objective of this article is thus to assess the value of traditional SCs and their legal effects on the developing countries. The article urges developing countries that still include traditional SCs in the investment contracts to replace these clauses with other appropriate legal safeguards. Such legal safeguard clauses include, inter alia, Economic Equilibrium Clause (EEC), renegotiation clauses, and clauses that determine the value of compensation when the host state breaches the contract.