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STABILIZATION CLAUSES IN NATURAL RESOURCE
EXTRACTION CONTRACTS: LEGAL, ECONOMIC AND
SOCIAL IMPLICATIONS FOR DEVELOPING COUNTRIES
Evaristus Oshionebo*
Developing
I. INTRODUCTION
countries endowed with natural mineral resources have
a number of common features. These countries often lack the
technological expertise and the financial power necessary for the
exploitation of natural resources. Thus, for the most part, developing
countries rely on foreign companies, usually transnational corporations
(TNCs), for the exploration and exploitation of their mineral resources. In
addition, many of these countries are politically unstable, ruled in the
main by autocratic and unresponsive governments. Furthermore, the
legal and judicial processes in many of these countries are deficient.
These conditions pose certain investment risks for foreign investors in
the extractive industries, including the risk that the legal and fiscal
regimes governing a resource extraction project could be amended or
changed by the host government mid-way through the life circle of the
project. There is also the risk of expropriation and nationalization of
investment projects. Investments in the extractive industries are
particularly prone to these risks because of the long period of time it
takes to accomplish natural resource extraction projects.
To forestall these risks, foreign investors in the extractive

industries usually require host developing countries to issue guarantees
on the stability of the legal and fiscal regimes governing investment
projects. This objective may be achieved either by enshrining such
guarantees in natural resource concession contracts or by enacting
statutes containing such guarantees. Known commonly as "stabilization
clauses", these contractual and statutory guarantees are aimed at
preserving "the law of the host country as it applies to the investment at
the time the State contract is concluded" and ensuring that "future
changes to the law of the host country are inapplicable to the foreign
*Assistant Professor; University of Manitoba LL.B. (Ife, Nigeria), LL.M. (Lagos,

Nigeria), LL.M. (Alberta), Ph.D. (Osgoode).
2 ASPER REVIEW [Vol. X
investment contract."' The idea is to insulate foreign investors in the

extractive industries from future changes to the host country's laws. 2
While stabilization clauses may be beneficial to investors in the

sense that they assure, at least on paper, a stable and predictable
investment climate, there are questions as to whether these clauses are
of any benefit to developing countries. As argued in this paper,
stabilization clauses may be counter-productive to the development
aspirations of developing countries because they constrain the fiscal
policy options available to host developing countries. In addition,
stabilization clauses have the potential to impede the capacity of the host
country to regulate the activities of foreign corporations particularly as
they relate to human rights and environmental protection.
II. NATURE OF STABILIZATION CLAUSES
Early variants of stabilization clauses were intended to 'freeze', in

whole or in part, the legal and fiscal regimes governing extractive
projects. This objective was attained by inserting clauses in resource
extraction contracts that provided that the law governing the project
shall be the law of the host country as of the date of execution of the
contract. The 'freezing' stabilization clause, as this type of clause is often
referred to, may enjoin the host State from amending or changing
unilaterally the legal and fiscal regimes governing the project. 3 For
example, the erstwhile Petroleum Concession agreement between the
government of Libya and the Libyan American Oil Company provided
that:
The Government of Libya ... will take all steps necessary to

ensure that the Company enjoys all the rights conferred by this
Concession. The contractual rights expressly created by this
1 United Nations Conference on Trade and Development, State Contracts:

UNCTAD Series on Issues in InternationalInvestment Agreements (New York &
Geneva: United Nations, 2004) at 26, online: UNCTAD
<http://www.unctad.org/en/docs/iteiit2004 1en.pdf>.
2 Roland Brown, "The Relationship Between the State and the Multinational
Corporation in the Exploitation of Resources" (1984) 33 I.C.L.Q. 218 at 222-223.
3 See Peter D. Cameron, "Stabilisation in Investment Contracts and Changes of
Rules in Host Countries: Tools for Oil & Gas Investors" at 28 (Final Report 5 July
2006, prepared for the Association of International Petroleum Negotiators),
online: <http://www.lba.legis.state.ak.us/sga/doclog/2006-07-
05_aipn-stabilization-Cameron final.pdf>; Christopher T. Curtis, "The Legal
Security of Economic Development Agreements" (1988) 29 Harv. Intl L.J. 317 at
346.
2010] Stabilization Clauses in NaturalResource Extraction Contracts 3
Concession shall not be altered except by mutual consent of

the parties.
(2) This Concession shall throughout the period of its validity
be construed in accordance with the Petroleum Law and the
Regulations in force on the date of execution of the Agreement
of Amendment by which this paragraph (2) was incorporated
into this Concession Agreement. Any amendment to or repeal
of such Regulations shall not affect the contractual rights of
4
the Company without its consent.
Although freezing stabilization clauses were common in the 1960s

and 1970s, they are infrequently inserted in modem concession
contracts because of the recognition that these clauses are of limited
utility. As argued below, while they attempt to prevent host States from
making changes to the legal and fiscal regimes governing a project,
freezing stabilization clauses cannot, in law, prevent host States from
amending or changing their legal and fiscal regimes. However, freezing
stabilization clauses remain prominent in the extractive industries
particularly in Africa, Asia and southern Europe. 5 For example,
Mauritania's model production sharing contract provides:
The Contractor shall not be subject to any legislative provision

which would give rise to an aggravation, whether directly or
indirectly, in the charges and obligations arising from this
Contract and from the legislation and regulations in force on
the date of signing this Contract, unless as mutually agreed
upon by the Parties.6
In some instances, a stabilization clause may provide "partial

stability" in the sense that it freezes certain aspects of the host country's
legal and fiscal regimes such as taxes and royalties.7 For example, the
Mineral Development Agreement between Liberia and Mittal Steel
provides that:
The GOVERNMENT hereby undertakes and affirms that at no

time shall the rights (and the full and peaceful enjoyment
4 See Libyan American Oil Co. (LIAMCO) v. The Government of the Libyan Arab
Republic, 20 I.L.M. 1 at 31 (1981).
5 See Andrea Shemberg, "Stabilization Clauses and Human Rights" (11 March
2008) at 17, online: <http://www.ifc-srsg-stabilization final[1].pdf>.
6 See Islamic Republic of Mauritania, ProductionSharing Contract 1994, art. 27.3
[unofficial English translation], online:
<http://resources.revenuewatch.org/sites/default/files/MauritaniaContracttype
Angl.pdf>.
7 Cameron, supra note 3 at 30.
thereof) granted by it under Article 19 (Income Taxation),
Article 20 (Royalty) and Article 22 (Other Payments to the
GOVERNMENT) of this Agreement be derogated from or
otherwise prejudiced by any Law or the action or inaction of
the GOVERNMENT, or any official thereof, or any other Person
whose actions or inactions are subject to the control of the
GOVERNMENT... 8
Similarly, erstwhile Development Agreements between the government of

Zambia and several mining TNCs provided in identical terms that, the
government "undertakes that it will not for the Stability Period: (a)
increase corporate income tax or withholding tax rates applicable to the
Company ... from those prevailing at the date hereof ... ; (b) otherwise
amend the [Value Added Tax] and corporate Tax regimes applicable to
the Company ... ; (c) impose new taxes or fiscal imposts" on the company;
increase the rates of royalty, import duty and export from the levels set
out in the agreement.9 As well, Bolivia's Model Production Sharing
Contract provides that "the system of royalties and permits [applicable]
to this Contract shall remain fixed throughout its term".10
However, the nature of contractual stabilization clauses has

evolved in the last few decades, culminating in a variant of stabilization
clauses that attempts to maintain economic equilibrium between the
parties. Unlike the 'freezing' stabilization clause, the 'economic
equilibrium clause' does not prohibit changes to the legal and fiscal
regimes governing a project. Rather, it envisages that where such
changes occur, the contracting parties shall be restored to the position
they occupied prior to the changes. For example, the Model Production
Sharing Contract recently issued by the autonomous Kurdistan Region of
Iraq provides that:
8 An Act Ratifying the Amendment to the MineralDevelopment Agreement (MDA)

Dated August 17, 2005 Between the Government of the Republic of Liberia (The
Government) and Mittal Steel Holding A.G. and Mittal Steel (Liberia)Holdings
Limited (The Concessionaire),art. 16(E), online:
<http://www.leiti.org.1r/doc/ms.pdf>.
9 See The Government of the Republic of Zambia and Mopani Copper Mines Plc:
Mufulira Mine, Smelter and Refinery and Nkana Mines, Concentratorand Colbalt
PlantDevelopment Agreement, (31 March 2000) art. 16, online:
<http://www.minewatchzambia.com/reports/MOPANI.pdf> [Mopani Copper
Mines Development Agreement]; The Government of the Republic of Zambia and
Konkola Copper Mines Plc: Amended and Restated Development Agreement, art.
15, online: <http://www.minewatchzambia.com/reports/KCM2004.pdf>
[Konkola CopperMines Development Agreement].
10 Model ProductionSharing Contract [Bolivia] 1997, Article 12, cited in Cameron,
supra note 3 at 30.
2010] StabilizationClauses in Natural Resource Extraction Contracts 5
The obligations of the CONTRACTOR in respect of this Contract

shall not be changed by the GOVERNMENT and the general
and overall equilibrium between the Parties under this
Contract shall not be affected in a substantial and lasting
manner.
The GOVERNMENT guarantees to the CONTRACTOR, for the

entire duration of this Contract, that it will maintain the
stability of the legal, fiscal and economic conditions of this
Contract, as they result from this Contract and as they result
from the laws and regulations in force on the date of signature
of this Contract. The CONTRACTOR has entered into this
Contract on the basis of the legal, fiscal and economic
framework prevailing at the Effective date. If, at any time after
the Effective Date, there is any change in the legal, fiscal and/or
economic framework under the Kurdistan Region Law or other
Law applicablein or to the Kurdistan Region which detrimentally
affects the CONTRACTOR, the CONTRACTOR Entities or any
other Person entitled to benefits under this Contract, the terms
and conditions of the Contract shall be altered so as to restore
the CONTRACTOR, the CONTRACTOR Entities and any other
Person entitled to benefits under this Contract to the same
overall economic position (taking into account home country
taxes) as that which such Person would have been in, had no
such change in the legal, fiscal and/or economic framework
occurred.11
Similarly, the West African Gas Pipeline Agreement provides that the
contracting parties shall "endeavour in good faith to negotiate a solution
which restores the Company and/or its shareholders to the same or an
economically equivalent position it was or they were in prior to" a change
to the legal and fiscal regimes governing the project.12
A stabilization clause could maintain economic equilibrium by

providing that the host State shall pay compensation to the resource
extraction company in the event that changes to the host State's laws or
fiscal regimes adversely affect the economic interests of the company.
11 The Kurdistan Regional Government of Iraq, Model ProductionSharing

Contract, arts. 43.2, 43.3, online:
<http://www.krg.org/uploads/documents/KRG%20Model%20PSC_2007_09_06
h14m3s46.pdf> [emphasis added] [Kurdistan, Model Production Sharing Contract].
12 West African Gas Pipeline Agreement: InternationalProjectAgreement, 22 May
2003, Clause 36.2(a), cited in Cameron, supra note 3 at 44-45.
6 ASPER REVIEw [Vol. X
However, economic equilibrium may not involve direct payment of
monetary sums to the company. Economic equilibrium could be achieved
by defraying the costs of complying with the changes to the legal and/or
fiscal regimes, or by adjusting the tariffs payable by the company, or
through an extension of the lifespan of the concession or by reducing the
taxes and royalties payable by the company to the host country.' 3
Economic equilibrium may also be achieved by requiring the parties to
the contract to negotiate in good faith an amendment to the contract in a
manner that restores the economic equilibrium envisaged in the resource
concession contract. For example, Article XIX of the model Concession
Agreement for gas and crude oil exploration and exploitation in Egypt
provides in part that:
In case of changes in existing legislation or regulations

applicable to the conduct of Exploration, Development and
production of Petroleum, which take place after the Effective
Date, and which significantly affect the economic interest of
this Agreement to the detriment of CONTRACTOR or which
imposes on CONTRACTOR an obligation to remit to the A.R.E.
[Arab Republic of Egypt] the proceeds from sales of
CONTRACTOR's Petroleum, CONTRACTOR shall notify EGPC
[Egypt General Petroleum Corporation] of the subject legislative
or regulatory measure and also the consequent effects upon
issuing legislation or regulation which impact on the
stabilization. In such case, the Parties shall negotiate possible
modifications to this Agreement designed to restore the
economic balance thereof which existed on the Effective Date.
The Parties shall use their best efforts to agree on amendments
to this Agreement within ninety (90) days from aforesaid
notice. 14
Where the parties are unable to agree on the measures that could restore
the economic equilibrium, the matter may be referred to arbitration in
accordance with the provisions of the concession contract. 15
Finally, some stabilization clauses are hybrid in the sense that they
encompass features of the 'freezing' clause and the 'economic
13 Shemberg, supra note 5 at 6; Cameron, supranote 3 at 31.

14 Egypt, Model ConcessionAgreement for Petroleum Exploration and Exploitation,
online: <http://www.egpc.com.eg/2006/AgreementN.pdf>. See also The
Kurdistan Regional Government of Iraq, Model Production Sharing Contract,supra
note 11, art. 43.4.
15 See Kurdistan, Model Production Sharing Contract, ibid. art. 43.4; Egypt, Model
Concession Agreement for PetroleumExplorationand Exploitation, ibid., art. XIX.
2010] StabilizationClauses in NaturalResource Extraction Contracts 7
equilibrium' clause.16 The hybrid clause may attempt to freeze the legal
regimes governing a project, while also providing for the restoration of
the economic equilibrium or the payment of compensation in the event
that a change to the legal regimes adversely affects the economic
interests of the resource extraction company.1 7
Although early stabilization clauses were, for the most part,

contract-based, a number of developing countries now provide statutory
backing or authorization for stabilization clauses. Statutory
authorization is achieved in a number of ways. First, some countries
adopt the direct approach by enshrining stabilization provisions in
statutory enactments. For example, the statute establishing the Nigeria
Liquefied Natural Gas Project (LNG Project) provides in part that:
Without prejudice to any other provision contained herein,

neither the company not its shareholders in their capacity as
shareholders in the company shall in any way be subject to
new laws, regulation and taxes, duties, imports or charges of
whatever nature which are not applicable generally to
companies incorporated in Nigeria or to shareholders in
companies incorporated in Nigeria respectively."' 8
"The Government shall take such executive, legislative and

other actions as may be necessary so as to effectively grant,
fulfill, and perfect the guarantees, assurances and
undertakings contained herein. In order to afford the degrees of
security required to enable the company's investment to be
made, the government further agrees to ensure that the said
guarantees, assurances and undertakings shall not be
suspended, modified or revoked during the life of the venture
except with the mutual agreement of the government and the
shareholders of the company.' 9
Other countries, such as Ghana and South Africa, have adopted what
one might call the indirect approach by enacting legislation authorizing
designated government officials to enter into resource concession
contracts that contain stabilization clauses. In Ghana, for example, the
16 Shemberg, supra note 5 at 9. 'Hybrid' stabilization clauses are envisaged under

section 14 of South Africa's Mineral and Petroleum Resources Royalty Act, 2008,
which is discussed below.
17 Shemberg, ibid.
18 Nigeria LNG (FiscalIncentives, Guaranteesand Assurances)Act No. 39 of 1990,
Second Schedule, para. 3 (as amended by the NigeriaLNG (FiscalIncentives,
Guaranteesand Assurances) (Amendment)Act No. 113 of 1993) [Nigeria LNGJ.
19 Ibid. at Second Schedule, para. 6. .
Minister of Mines is authorized to enter into "stability agreements" for the
purpose of ensuring that:
"the holder of the mining lease will not, for a period not
exceeding fifteen years from the date of the agreement,
(a) be adversely affected by a new enactment, order,
instrument or other action made under a new enactment or
changes to an enactment, order, instrument that existed at the
time of the stability agreement, or other action taken under
these that have the effect or purport to have the effect of
imposing obligations upon the holder or applicant of the
mining lease. 20
Stability agreements in Ghana may also contain provisions designed to

ensure that mining companies are not adversely affected by subsequent
changes to royalty, tax and import duty regimes. 2 1 Similarly, South
Africa's Minister of Finance is statutorily empowered to enter into
'stabilization agreements' that could freeze the royalty regime prescribed
in the Mineral and PetroleumResources Royalty Act, 2008 "for as long as
the [resource] extractor holds the right (and for all participating interests
subsequently held by the extractor in respect of the right)."22
III. THE VALIDITY OF STABILIZATION CLAUSES
Stabilization clauses that freeze the legal and fiscal regimes

applicable to an investment project appear to constrain the sovereignty of
host States. The constraining impact of freezing stabilization clauses on
State sovereignty raises questions as to the validity of such clauses
under both international law and domestic law. In terms of international
law, some commentators argue that 'freezing' stabilization clauses are
invalid and unenforceable because they fetter the sovereign power of host
States to make laws. 2 3 They are equally said to offend the international
doctrine of Permanent Sovereignty over Natural Resources, which
recognizes "the inalienable right of all States freely to dispose of their
natural wealth and resources in accordance with their national
20 Minerals and Mining Act 2006, s. 48(1)(a).

21 Minerals and Mining Act 2006, s. 48(l)(b).
22 Mineral and PetroleumResources Royalty Act, 2008 (Act No. 28, 2008), s.
13.(l).
23See Thomas W. Waelde & George Ndi, "Stabilizing International Investment
Commitments: International Law Versus Contract Interpretation" (1996) 31 Tex.
Intl L.J. 215; Yinka Omorogbe, "Law and Investor Protection in the Nigerian
Natural Gas Industry" (1996) 14 Journal of Energy & Natural Resources Law
179.
2010] Stabilization Clauses in Natural Resource Extraction Contracts 9
interests."2 4 According to critics, because the host State's right to natural

resources is permanent and inalienable, the State cannot cede or
alienate, by contractual clauses or statutory provisions, its right to
natural resources. In the words of a former President of the International
Court of Justice, the concept of permanent sovereignty "signifies that the
territorial State never loses its legal capacity to change the status or the
method of exploitation of [natural] resources, regardless of any
arrangements that may have been made for their exploitation and
administration." 25 Thus, critics argue, a stabilization clause that
purports to alienate the State's legislative power is null, void, and
unenforceable.
However, proponents of stabilization clauses argue that

stabilization clauses do not fetter a State's sovereignty and that a State
cannot rely on the doctrine of sovereignty as justification for its unilateral
repudiation of a stabilization clause. 26 For example, Leo Kisamm and
Edmond Leach argue that "[t]here is no legal or moral justification for a
State, after solemnly committing itself to a contract with a foreign
national, seeking to avoid its responsibilities thereunder on some
outworn theory that sovereignty embraces privileges only, without
correlative obligations."2 7 According to these authors, "[n]othing inherent
in sovereignty prevents the performance of contracts and the granting of
irrevocable rights." 28 This view has, in fact, been received favourably by
some arbitral tribunals. In Texaco Overseas Petroleum Company /
California Asiatic Oil Company v. Government of the Libyan Arab
Republic, 29 the tribunal ruled that stabilization provisions in a
concession agreement, and in particular, provisions against
24 Permanent Sovereignty over NaturalResources, G.A. Res. 1803 (XVII), 17 U.N.

GAOR Supp. (No.17) at 15, U.N. Doc. A/5217 (1962) at Preamble. See also,
Charterof Economic Rights and Duties of States, G.A. Res. 3281, 29 U.N. GAOR,
29th Sess., Supp. (No. 31) 50, U.N. Doc. A/9631 (1974), art. 2.
25 Eduardo Jimenez de Arechaga, "State Responsibility for the Nationalization of
Foreign Owned Property" (1978) 11 N.Y.U.J. Intl L. & Pol. 179 at 179-180. See
also Robin C.A. White, "Expropriation of the Libyan Oil Concessions - Two
Conflicting International Arbitrations" (1981) 30 I.C.L.Q. 1 at 11-12 ("... the
combined effect of General Assembly resolutions concerning natural resources
and of the concept of sovereignty is to establish the competence of a State to
exercise its sovereignty in respect of its natural resources at any time. ...
international law will not recognise the fettering of sovereignty save perhaps
under a treaty between States.")
26 See Leo T. Kissam & Edmond K. Leach, "Sovereign Expropriation of Property
and Abrogation of Concession Contracts" (1959) 28 Fordham L Rev. 177 at 204.
27 Ibid.
28 Ibid.
29 Texaco Overseas Petroleum Company / CaliforniaAsiatic Oil Company v.
Government of the Libyan Arab Republic, (1978) 17 I.L.M. 1 [Texaco v. Libya].
nationalization of investment, do not offend the host State's permanent

sovereignty over natural resources because, while these provisions may
limit the State's exercise of its sovereignty, they do not prevent the State
from enjoying its right to permanent sovereignty. 30 According to the
tribunal,
As regards the question of permanent sovereignty, a well-

known distinction should be made as to enjoyment and
exercise. The State granting the concession retains the
permanent enjoyment of its sovereign rights; it cannot be
deprived of the right in any way whatsoever; the contract which
it entered into with a private company cannot be viewed as an
alienation of such sovereignty but as a limitation, partial and
limited in time, of the exercise of sovereignty. Accordingly, the
State retains, within the areas which it has reserved, authority
over the operations conducted by the concession holder, and
the continuance of the exercise of its sovereignty is manifested,
for example, by the various obligations imposed on its
contracting party, which is in particular subjected to fiscal
obligations that express unquestionably the sovereignty of the
contracting State.31
Contractual limitations on the exercise of a State's sovereignty are

juridically possible if the limitations are "expressly stipulated for, and ...
within the regulations governing the conclusion of State contracts", and
"cover only a relatively limited period."3 2 Moreover, because a
stabilization clause protects only the contracting party from the host
State's unilateral alteration of the legal and fiscal regimes, and because a
stabilization clause does not prevent the State from altering its legal and
fiscal regimes applicable to other investors, a stabilization clause cannot
be said to fetter the legislative sovereignty of the State.3 3 That being so,
"a State cannot invoke its sovereignty to disregard commitments freely
undertaken through the exercise of this same sovereignty and cannot,
through measures belonging to its internal order, make null and void the
rights of the contracting party which has performed its various
obligations under the contract." 34
30 Ibid. at 26.
31 Ibid. at 26 para. 77.
32 Kuwait v. American Independent Oil Company (Aminoil), (1982) 21 I.L.M. 976 at
1023 para. 95 [Kuwait v. Aminoil].
33 Agip Company v. PopularRepublic of the Congo, (1982) 21 I.L.M. 726 at 735-
736 para. 86 [Agip v. Congo].
34 Texaco v. Libya, supra note 29 at 24 para. 68.
20101 Stabilization Clauses in Natural Resource ExtractionContracts 11
The argument that stabilization clauses are incompatible with

State sovereignty appears weak, particularly in situations where the
stabilization clauses are authorized expressly by statutory enactments,
or where the stabilization provisions are contained in a statute validly
enacted by the host State. Host States can, in exercise of their
sovereignty, sign contractual provisions or enact legislative provisions
which limit, for a specified period, the exercise of their sovereignty over
specific natural resource projects. As noted earlier, developing countries
such as South Africa and Ghana have enacted statutes authorizing
designated agencies and officials to enter into stabilization agreements.
These statutory enactments neither alienate the sovereignty of these
countries nor deprive them of the right to enjoy their sovereignty over
natural resources. To the contrary, the statutes are expressions of the
sovereign will of host States. That said, stabilization clauses have certain
negative impacts on the host State's ability to exercise its sovereignty
over natural resources because, as will be noted shortly, such clauses
limit the royalty and tax policy options available to the legislature.3 5
Although stabilization clauses are not incompatible with State

sovereignty, and while a preponderance of academic and arbitral opinion
holds that stabilization clauses are valid under international law, 36 the
validity of 'freezing' stabilization clauses under the domestic laws of host
developing countries is at least questionable. The Constitutions of some
developing countries vest in the national legislature the power to make
laws. For example, the Constitution of the Republic of South Africa vests
in the National Assembly (that is, the legislature) the legislative authority
of the national government including the power "to pass legislation with
regard to any matter" on which the National Assembly has legislative
competence. 37 Similarly, in Nigeria the National Assembly has power to
make laws "with respect to any matter" falling within the areas listed in
both the exclusive legislative list and the concurrent legislative list.38
Arguably, a contractual or statutory stabilization clause is void and
unconstitutional if it purports to limit the power of the legislature to
make laws that change or amend the legal regimes governing an
35 International Monetary Fund, Guide on Resource Revenue Transparency(2007)

at 24, online: International Monetary Fund
<http://www.imf.org/external/np/pp/2007/eng/051507g.pdf> [Guide on
Resource Revenue Transparency].
36 See, e.g., Kissam & Leach, supra note 26 at 204; Texaco v. Libya, supra note
29; Agip v. Congo, supranote 33 at 735-736 para. 86.
37 Constitution of the Republic of South Africa, 1996, ss. 43-44.
38 Constitution of the Federal Republic of Nigeria, 1999, s. 4. See also the
Constitution of the Republic of Ghana, s. 93(2) ("the legislative power of Ghana
shall be vested in Parliament and shall be exercised in accordance with this
Constitution").
investment project. This position was judicially validated in Nigeria

recently when the Federal High Court held that the Second Schedule to
the Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Act
[hereafter "NigeriaLNG Act'], which freezes the law applicable to the LNG
Project, is unconstitutional because it fettered the power of the
legislature to make laws. In addition, the court held that the stabilization
provision is contrary to the tenets of the rule of law not only because it is
"very wide", but also because it is inconsistent with the Nigerian
Constitution, which empowers the legislature to make laws for the good
of all Nigerians. 39
The invalidity of statutory stabilization provisions under domestic

law can impact negatively on the effectiveness of stabilization clauses
entered pursuant to the invalid statutory provisions. If the domestic law
authorizing a stabilization clause is unconstitutional and void because it
fetters the power of the legislature, it follows that a stabilization clause
signed by the government under the unconstitutional statute is itself
void under domestic law. Similarly, a contractual stabilization clause is
invalid under the domestic law of the host country if the clause is
inconsistent with such domestic law. Peter Cameron argues this point
persuasively when he notes that a stabilization provision "given by the
host country government must be given in a form that is consistent with
the country's legal and constitutional framework." 40
III. LEGAL EFFECT AND UTILITY OF STABILIZATION CLAUSES
Assuming, for purposes of argument, that stabilization clauses

are valid under international law and under domestic law, there is a
further question as to the legal effect or utility of stabilization clauses
that attempt to freeze the legal and fiscal regimes applicable to a project.
In other words, are stabilization clauses effective in practice as to prevent
host States from changing or amending the legal and fiscal regimes
prescribed in the resource concession contract? This question has been
the subject of a heated academic debate, particularly as it relates to
international law. Although a consensus has yet to emerge, two opposing
views are discernable. There is the view that stabilization clauses are
effective in international law because "states can bind themselves by
39 Niger Delta Development Commission v. Nigeria Liquefied Natural Gas Company

Limited (Suit Number FHC/PH/CS/313/2005, unreported judgment dated 11
July 2007) at 32. For analysis of this case, see Bayo Adaralegbe, "Stabilizing
Fiscal Regimes in Long-Term Contracts: Recent Developments from Nigeria"
(2008) 1:3 Journal of World Energy Law & Business 239.
means of stabilized international contracts".4 1 To paraphrase one arbitral

tribunal, a stabilization clause binds the host State irrevocably. 4 2 More
specifically, this view, which relies heavily on the doctrine of sanctity of
contracts, that is, pacta sunt servanda,43 holds that because stabilization
clauses are binding on host States, they prevent host States from
amending unilaterally the fiscal regimes envisaged in the concession
agreement. Thus, in Libyan American Oil Co. (LIAMCO) v. The Government
of the Libyan Arab Republic, 44 the tribunal held that a stabilization clause
which provided that the "contractual rights expressly created by this
Concession shall not be altered except by mutual consent of the parties"
prevented the State of Libya from cancelling or modifying unilaterally the
contents of the agreement. 4 5 According to the tribunal, Libya could not
terminate or alter the concession unless it did so with the "[miutual
consent of the contracting parties, in compliance with the said principle
of the sanctity of contracts and particularly with the explicit terms" of the
stabilization clause.46
However, a subsequent arbitral decision casts doubt on the legal

effect of stabilization clauses. In Kuwait v. American Independent Oil
Company (Aminoil),47 the arbitral tribunal ruled that a stabilization
clause which provided that the host State "shall not by general or special
legislation or by administrative measures or by any other act whatever
annul this Agreement", could not legally prevent Kuwait from enacting a
subsequent statute which terminated and nationalized the concession
granted to Aminoil. Although the majority of the tribunal members based
their ruling partly on the fact that the stabilization clause did not, in
their view, expressly prohibit nationalization of the concession, 4 8 and
while the tribunal relied on "a change in the nature of the contract itself,
41 Curtis, supranote 3 at 350. See also Paul E. Comeaux & N. Stephen Kinsella,
"Reducing Political Risk in Developing Countries: Bilateral Investment Treaties,
Stabilization Clauses, and MIGA & OPIC Investment Insurance" (1994) 15 N.Y.L.
Sch. J. Intl & Comp. L. 1 at 25 ("International law upholds both the validity of
stabilization clauses and the right of a sovereign nation to bind itself through the
use of such clauses.")
42 Saudi Arabia v. Arabian American Oil Company (Aramco), (1963) 27
International Law Reports 117 at 168 [Saudi Arabia v. Aramco]
43 See Kissam & Leach, supra note 26 at 207.
44 LIAMCO v. Libya, supranote 4.
4s Ibid. at 55. See also Saudi Arabia v. Aramco, supranote 42.
46 LIAMCO v. Libya, supranote 4 at 62.
47 Kuwait v. Aminoil, supra note 32. For insight on this case, see Martin Hunter &
Anthony C. Sinclair, "Aminoil Revisited: Reflections on a Story of Changing
Circumstances" in Todd Weiler, ed., InternationalInvestment Law and Arbitration:
Leading Casesfrom the ICSID, NAFTA, Bilateral Treaties and Customary
InternationalLaw (London: Cameron May, 2005) 347-381.
48 Kuwait v. Aminoil, ibid. at 1023 para. 94.
brought about by time, and the acquiescence or conduct of the parties", 49

nonetheless their refusal to interpret this stabilization clause as fettering
the legislative power of Kuwait is a telling commentary on the effect of
stabilization clauses in international law. In specific terms the
stabilization clause prohibited the government of Kuwait from enacting
laws or taking administrative measures which could have the effect of
terminating the concession granted to Aminoil. 5 0 The law enacted by
Kuwait had this exact effect, yet the majority refused to give full legal
effect to the stabilization clause. Had they done so, they would have
concluded that the stabilization clause prevented Kuwait from enacting
the law in question.
The refusal by the majority of arbitrators in Kuwait v. American

Independent Oil Company (Aminoil) to give effect to a stabilization clause
which prohibited the nationalization of the concession bolsters the
position of critics who argue that, a stabilization clause is ineffective
under international law (as well as under domestic law) to prevent a
State from amending the legal and fiscal regimes prescribed in the
resource concession agreement. 5 ' For example, Thomas Wealde and
George Ndi argue very persuasively that, even in cases where the host
country validly grants a stabilization clause, the legislature of the host
country retains the right to alter the legal and fiscal regimes governing
the project, subject to the payment of compensation for breach of the
stabilization clause.5 2 According to these authors, "the notion of
sovereignty under municipal law means that the legislator can take what
he has given" and "nothing would prevent the national legislature from
retroactively canceling and revoking rights awarded, possibly subject to
constitutional and other legal consequences (e.g., the duty to pay
compensation under national law)." 5 3 Similarly, Yinka Omorogbe argues
that stabilization clauses are at best "useless" and "legally valueless"
because they "cannot bind the legislative body from enacting any other
law which in any way alters or amends the terms contained therein."5 4
This view had earlier been projected by F.A. Mann when he argued that
"the express exemption from the effects of future legislation is
49 Kuwait v. Aminoil, ibid. at 1024 para. 101.

50 See the dissenting opinion of Sir Gerald Fitzmaurice in Kuwait v. Aminoil, ibid.
at 1051 para. 24 (stating that the stabilization clause in this case is concerned
with "any measure terminating the Concession before its time" and that the law
enacted by Kuwait "was essentially an act of termination of the Concession".)
51 See Waelde & Ndi, supranote 23 at 238-240; Omorogbe, supra note 23 at 189.
52 Waelde & Ndi, ibid.
53 Waelde & Ndi, ibid. at 239. See also Cameron, supra note 3 at 13 ("... in every
country the sovereign retains the power - in spite of any laws or contracts to the
contrary - to enact laws that legally will 'trump' previous laws (and contracts)").
.54 Omorogbe, supra note 23 at 189.
redundant" because "[s]uch exemption cannot and ought not to preclude

the genuine exercise of the state's police power."5 5
In fact, notwithstanding a stabilization clause host States may

amend the legal and fiscal regimes prescribed in resource concession
contracts where the amendment is required in the public interest. In BP
56
Exploration Co. (Libya) Ltd. v. Government of the Libyan Arab Republic,
for example, the arbitral tribunal recognized that although the
stabilization clause in that case limited Libya's freedom to alter or amend
unilaterally the terms of the concession, nonetheless Libya could do so if
the amendment was in the public interest.5 7 This position finds support
in the fact that a statute enacted by the host State remains valid even if
the statute contravenes the stabilization measures prescribed in prior
concession agreements signed by the State.
Some authors argue that the legal effect of a stabilization clause

depends on the scope and duration of the clause. Subrata Chowdhury
argues, for example, that a stabilization clause is ineffective if it "ties the
hands of the host State for a very long period".5 8 Chowdhury's assertion
finds support in Kuwait v. American Independent Oil Company (Aminoil),5 9
where the arbitral tribunal refused to read a stabilization clause as
preventing the State of Kuwait from nationalizing a concession for "an
especially long" period of 60 years. 60 If this view is correct, then it is
arguable that contractual stabilization clauses and statutory stabilization
provisions in some developing countries are at least ineffectual, given
their wide scope and their unnecessarily long duration. For example, in
South Africa a stabilization clause lasts "for as long the extractor holds
the [mineral resource] right" to which the clause relates. 6 1 Similarly, the
stabilization clauses under the Nigeria LNG Act are intended to be in
force "so long as the Company or any successor thereto, is in existence
and carrying on the business of liquefying and selling liquefied natural
gas and natural gas liquids within and/or outside" Nigeria. 62 In fact, the
stabilization provisions under the Nigeria LNG Act "shall not be
55 F.A. Mann, "State Contracts and State Responsibility" (1960) 54 Am. J. Intl L.
572 at 587-588.
56 (1979) 53 International Law Reports 297.
571bid. at 318-321, 324, 327.
58 Subrata Roy Chowdhury, "Permanent Sovereignty Over Natural Resources:
Substratum of the Seoul Declaration" in Paul de Waart, Paul Peters & Erik
Denters, eds., InternationalLaw and Development (The Hague: Martinus Nijhoff
Publishers, 1988) 59 at 81.
5 Kuwait v. Aminoil, supra note 32.
60 Ibid. at 1023 para. 95.
61 Mineral and PetroleumResources Royalty Act, 2008, supranote 22, s. 13.(1).
62 Nigeria LNG, supra note 18, Second Schedule, s. 4(a)).
suspended, modified or revoked during the life of the venture". 63 These

provisions effectively tie the hands of the Nigerian government for the
entire duration of the LNG Project.
While a 'freezing' stabilization clause may not prevent a host State
from altering the legal and fiscal regimes stipulated in the concession
agreement, in practice such a clause is functionally useful to foreign
investors because its breach by the host government can create a cause
of action for damages. 6 4 According to one author, stabilization clauses
"reinforce the traditional rule that full compensation must be made for
property rights taken by the state." 65 The amount of compensation
payable by host States for breach of a stabilization clause depends
primarily on two factors: the type of stabilization clause and the nature
of the breach. Where the stabilization clause protects against
expropriation and where the nature of the breach is such that it amounts
to expropriation or 'regulatory taking' of the concession holder's property
rights, compensation is determined on the basis of "all the circumstances
relevant to the particular concrete case." 66 These circumstances include
the "loss suffered" by the concession holder 67 and "the value of the
[expropriated] corporeal property, including all assets, installations, and
various expenses incurred" as a result of the breach. 68 In addition,
arbitral tribunals may take into account the value of the mineral rights
expropriated by the State. 6 9 And, depending on the terms of the contract
and the applicable law, the legitimate expectations of the parties, 70 the
anticipated profits from the mineral concession,7 1 and the loss of profits
resulting from the breach of contract by the host State may be taken into
account in determining the amount of compensation. 72
The amount of compensation may also be influenced by factors

such as "the costs incurred by the investor because of the violation" of
the stabilization clause by the host State and "the investor's legitimate
63 Ibid.
64 See R. Doak Bishop, Sashe D. Dimitroff & Graig S. Miles, "Strategic Options
Available when Catastrophe Strikes the Major International Energy Project"
(2001) 36 Tex. Int'l L.J. 635 at 642. See also Comeaux & Kinsella, supranote 41
at 25.
65 Curtis, supra note 3 at 349.
66 Kuwait v. Aminoil, supra note 32 at para. 144.
67 Agip v. Congo, supra note 33 at 737 para. 98.
68 LIAMCO v. Libya, supra note 4 at 67. See also Kuwait v. Aminoil, supra note 33
at 1038 para. 164.
69 LIAMCO v. Libya, ibid. at 8 1.
70 Kuwait v. Aminoil, supra note 33 at 1034 para. 148..
71 Ibid. at 1034-5 para. 152-153.
72 Agip v. Congo, supra note 33 at 737 para. 98..
expectations generated by the presence of a stabilization clause."7 3 For

example, in Kuwait v. Aminoil the arbitral tribunal held that stabilization
clauses which "prohibited any measures that would have had a
confiscatory character ... created for the concessionaire a legitimate
expectation" not only "as to the strength of the respect due to the
contractual equilibrium", but also the expectation that the
concessionaire would "obtain a reasonable rate of return" on its
investment. 74 Thus, where an amendment to the host State's laws
imposes additional or new regulatory obligations on a resource extraction
company that is signatory to a prior stabilization clause, the host State
may be liable to reimburse the company for the costs incurred in
complying with the additional or new regulation. For economic
equilibrium clauses, however, compensation is usually the restoration of
the affected party to their position prior to the breach of contract by the
host State. As mentioned earlier, economic equilibrium clauses usually
provide a mechanism for restoring the status quo ante. Some clauses
may require the mutual negotiation of compensation, while others may
require the adoption of a formula that ensures that the amount of
compensation is equal to the costs incurred by the company in
complying with the new regulatory regime imposed by the host State. For
example, in South Africa,
[i]f the State fails to comply with the terms of an agreement

contemplated in section 13.(1) and the failure has a material
adverse economic impact on the determination of the royalty
payable by the extractor that is party to that agreement, the
extractor is entitled to compensation in respect of the increase
in the royalty caused by the failure (and interest at the
prescribed rate calculated on the compensation from the date
of the failure) or to an alternative remedy that eliminates the
full impact of the failure. 75
V. ECONOMIC AND SOCIAL IMPLICATIONS OF

STABILIZATION CLAUSES
As noted above, certain stabilization clauses in resource extraction

contracts are intended to freeze the legal and fiscal regimes applicable to
resource extraction projects. The freezing of legal and fiscal regimes
73 Lorenzo Cotula, "Reconciling Regulatory Stability and Evolution of

Environmental Standards in Investment Contracts: Towards a Rethink of
Stabilization Clauses" (2008) 1(2) J.W.E.L. & B. 158 at 166.
74 Kuwait v. Aminoil, supra note 33 at 1037 para. 159-160.
75 Mineral and Petroleum Resources Royalty Act, 2008, supranote 22, s. 14.(2).
governing extractive projects has economic and social implications for

host countries. In the economic sense, stabilization clauses may lead to
loss of revenues for host States. Zambia is a case in point. In the course
of privatization of Zambia's mining industry in the 1990s, the Zambian
government signed numerous Development Agreements with mining
TNCs that not only granted very liberal and generous terms in favour of
the TNCs, 76 but also prohibited the government from altering the fiscal
regimes prescribed in the agreements. The Development Agreements
fixed the royalty rate for copper at 0.6 percent of the gross revenues of
the companies,7 7 far below the statutory royalty rate of 3 percent of a
company's gross revenues under the now repealed Mines and Minerals
Act of 1995.78 More significantly, the Development Agreements froze the
fiscal regimes specified under the Agreements for 15 to 20 years.7 9
Although there was a boom in copper price on the international market,
the boom did not yield appreciable revenues for Zambia because of the
low rate of royalty prescribed under the Development Agreements.8 0 In
fact, Zambia "incurred [financial] losses in tax revenues through the
subsidies given to the private mining companies' under the 'Development
Agreements.8 1 Zambia realized a royalty of US$20 million from the
combined gross proceeds of US$3.4 billion in 2007 because of the low
royalty rate of 0.6 percent stipulated in the Development Agreements. 82
Apart from their adverse impacts on resource revenues,

stabilization clauses could limit the fiscal and tax policy options available
to host States. 83 This is particularly so in countries where stabilization
clauses are granted indiscriminately. In Zambia, the power to enter into
76 Christopher Adam & Anthony M. Simpasa, "Harnessing Resource Revenues for

Prosperity in Zambia" (OxCarre Research Paper 36, Revised Draft) at 25-27,
online:
<http: / /www. oxcarre. ox. ac.uk/ images/stories/ papers/ RevenueWatch/ oxcarrerp
201036.pdf>. Some of these Development Agreements are available at
<http: / /www.minewatchzambia.com/agreements.html>.
77 See, for example, Mopani Copper Mines Development Agreement, supra note 9,
art. 16 read together with Schedule 8; Konkola CopperMines Development
Agreement, supranote 9, art. 15 read together with Schedule 6,.
78 John Lungu, "Copper Mining Agreements in Zambia: Renegotiation or Law
Reform?" (2008) 117 Review of African Political Economy 403 at 407.
79 See Mopani Copper Mines Development Agreement, supranote 9, art. 16 read
together with art. 1.
80 See Adam & Simpasa, supra note 76 at 35-37.
81 Lungu, supra note 78 at 409.
82 Adam & Simpasa, supra note 76 at 36 (n. 27).
83 See Thomas Baunsgaard, "APrimer on Mineral Taxation" (IMF Working Paper
WP/01/139) at 18, online:
<http://papers.ssrn.com/sol3/papers.cfm?abstract-id=879929>; Guide on
Resource Revenue Transparency,supranote 35 at 24.
'Development Agreements' was indiscriminately exercised by government

officials in the 1990s such that, prior the recent termination of the
'Development Agreements', the government had signed about eleven
'Development Agreements' with mining companies. 84 Under these
Development Agreements, the Zambian government undertook that it will
not, for periods ranging from 15 to 20 years, increase corporate income
tax or withholding tax rates applicable to resource extraction companies,
or otherwise amend the Value Added Tax and corporate tax regimes, or
impose new taxes or fiscal imposts, including new import or export
duties or other new duties or new royalties that could have a material
adverse effect on the company's distributable profits or dividends. 85 In
addition, the agreements prohibited the government from increasing the
royalty rates and the import duty rates applicable to resource extraction
companies. 86 Given that the operations of most major mining companies
in Zambia were governed by Development Agreements until recently,
Zambia's ability to determine its tax and royalty policies was effectively
constrained and limited by these agreements.
The adverse economic impacts of stabilization clauses in the host

States are particularly acute because of the broad language and long
duration of stabilization clauses. For example, the agreement relating to
the West African Gas Pipeline Project contains stabilization clauses that
"'extend well beyond the fiscal regime" governing the project, including
the freezing of "exchange controls, foreign investment rules and
regulatory control over the pipeline".8 7 And in Ghana, a 'stability
agreement' can freeze a wide range of issues, including taxes, royalties,
fees, exchange control, importation of goods and equipment, transfer of
capital, and remittance of dividends.8 8 In terms of duration, the recently-
terminated Development Agreements between the government of Zambia
and mining TNCs contained stabilization clauses which provided that,
the fiscal regimes under the agreements shall be in force for periods
ranging between 15 and 20 years.8 9 A similar situation is found in Ghana
where a 'stability agreement' can freeze the law applicable to a mining
project for a period of 15 years.9 0 Worse still, stabilization agreements in
South Africa have effect "for as long the extractor holds the [mineral
resource] right" to which the agreement relates. 9 ' Similarly, the
84 See Adam & Simpasa, supranote 76 at 40.

85 See, for example, Mopani CopperMines Development Agreement, supra note 9,
art. 16; Konkola CopperDevelopment Agreement, supra note 9, art. 15.
86 See ibid.
88 Minerals and Mining Act 2006, supra note 20, s. 48.
89 Adam & Simpasa, supra note 76 at 26.
90 Minerals and Mining Act 2006, supra note 20, s. 48.
91 Mineral and Petroleum Resources Royalty Act, 2008 supranote 22, s. 13.(1).
guarantees and assurances granted under the Nigeria LNG Act have
effect "so long as the Company or any successor thereto, is in existence
and carrying on the business of liquefying and selling liquefied natural
gas and natural gas liquids within and/or outside" Nigeria. 92 In other
words, the Nigerian government binds itself not to introduce changes to
the legal and fiscal regimes governing the LNG Project for as long as the
companies involved in the project are implementing the project.
Proponents of stabilization clauses may argue that these clauses

are not so pervasive that they could negatively impact economic
development in developing countries. This argument may hold true in
countries where stabilization clauses are not rampant. The mere fact that
a country has granted stabilization clauses to a few companies may not
attract adverse economic consequences. The problem, however, is that
stabilization clauses are often rampant in developing countries. TNCs
often exert pressure on host developing countries to issue contractual
and statutory guarantees on the fiscal regimes governing the extraction
of natural resources. This is particularly so in Sub-Saharan Africa where
freezing stabilization clauses are said to be most prevalent.9 3 Where a
country grants stabilization clauses in an indiscriminate manner, the
adverse economic and social impacts associated with such clauses tend
to magnify.9 4 As noted earlier, such was the case in Zambia until very
recently when the government unilaterally cancelled the Development
Agreements.
On the social front, the freezing of the legal regimes governing

resource extraction projects may have adverse consequences for human
rights and environmental protection in the host country. This is because
freezing stabilization clauses could restrict the State's ability to regulate
the human rights and environmental practices of resource extractors. By
freezing the legal regimes applicable to resource extraction projects
stabilization clauses hinder the effective regulation of the social and
environmental practices of resource extraction companies in developing
countries. Regulatory authorities are, in effect, precluded from enforcing
new laws and regulations against companies that are signatories to prior
concession contracts containing stabilization clauses. Thus, stabilization
clauses could promote social irresponsibility on the part of the
companies. Amnesty International argues, for example, that stabilization
clauses disregard human rights by holding back host governments from
taking steps to improve human rights protection; by encouraging host
governments to ignore their human rights obligations in relation to
92 NigeriaLNG, supranote 18, Second Schedule, s. 4(a)).

93 Shemberg, supra note 5 at 22.
94 Baunsgaard, supra note 83 at 18.
resource extraction; and by affording petroleum and mining companies

an opportunity to frustrate efforts of the host States to fulfill their legal
obligations to protect human rights.9 5
In fact, by entering into resource concession contracts that

stipulate that the law governing a project shall be the law in force at the
date of signing of the contract, host States may lose "the flexibility to
introduce new regulations to promote and protect human rights", labour
rights and the environment, at least in relation to the project.9 6 This may
be particularly so in countries where stabilization clauses are couched in
broad language. For example, in Ghana the Minister of Mines could grant
a development agreement that contains provisions "relating to
environmental issues and obligations of the holder to safeguard the
environment in accordance with this Act or another enactment".9 7
Similarly, the erstwhile Development Agreement between Zambia and
Konkola Copper Mines Plc prohibited the government of Zambia from
effecting "any changes" to "legislation or regulations governing the terms
and conditions of employment within Zambia" if the changes would
prevent the company from:
a) operating on a seven (7) days a week, twenty-four (24) hours a

day, three hundred and sixty five (365) days a year basis; or
b) negotiating with employees or relevant unions or engaging
employees or terminating their contracts of employment in
such a manner which would be likely to have a Material
Adverse Economic Effect, individually or cumulatively.9 8
While this clause did not prevent the Zambian government from
making changes to its labour law, those changes would be inapplicable
to the Konkola Copper Mines plc if they adversely affect the smooth
operations of the company. Conceivably, changes relating to work week,
hours of work, workplace health and safety and termination of
employment could adversely affect the operations of the company and
hence, would be inapplicable to Konkola Copper Mines Plc.
95 Amnesty International, Contracting Out of Human Rights: The Chad-Cameroon

Pipeline Project(September 2003) at 11-12, online:
<http://www.amnesty.org/en/library/asset/POL34/012/2005/en/76f5b921-
d4bf-1 ldd-8a23-d58a49cOd652/pol340122005en.pdf>.
96 United Nations, Economic and Social Council, Human Rights, Trade and
Investment Report of the High Commissionfor Human Rights, at 20 para. 3 1(d),
online: UNESC
<http://www.unhchr.ch/Huridocda/Huridoc.nsf/(Symbol)/E.CN.4.Sub.2.2003.9
.En?Opendocument> [Report of the High Commissionfor Human Rights].
97 Minerals and Mining Act 2006, supra note 20, s. 49(2)(d).
98 Konkola CopperMines Development Agreement, supra note 9, Arts. 13.1.4.
More significantly, freezing stabilization clauses essentially
insulate resource extraction companies from complying with future
changes to the human rights, labour rights and environmental protection
regimes in host countries. For example, the original version of the
Mineral Development Agreement between the Government of Liberia and
Mittal Steel contained a stabilization that provided that:
... any modifications that could be made in the future to the

Law as in effect on the Effective Date shall not apply to the
CONCESSIONAIRE and its Associates without their prior
written consent, but the CONCESSIONAIRE and its Associates
may at any time elect to be governed by the legal and
regulatory provisions resulting from changes made at any time
in the Law as in effect on the Effective Date.9 9
This provision not only shielded Mittal Steel from future changes to
Liberian laws including laws relating to human rights and environmental
protection, but also it allowed the company "to choose which new laws it
will comply with."100 This clause was particularly detrimental to social
rights (that is, human rights, labour rights and environmental rights) in
Liberia because it served as an incentive for Mittal Steel, a financially
powerful TNC, to exert pressure on the Liberian government to enact
laws that attenuated the environmental obligations of companies
operating in Liberia. Happily, this stabilization clause was renegotiated
and replaced with a new clause in 2007.101
Although freezing stabilization clauses could have negative

impacts on human rights, labour rights and environmental protection,
these impacts may be attenuated and, in some cases, eliminated by the
legal and political dispensation in developing host countries. For
example, the constitutions of many developing countries provide
expressly that the constitution is supreme and that any statute or policy
of government which is inconsistent with the constitution shall be null
and void to the extent of the inconsistency. Because under these
99Global Witness, Heavy Mittal? A State Within a State: The InequitableMineral

Development Agreement Between the Government of Liberia and Mittal Steel
Holdings NV, at 31, online:
<http://www.globalwitness.org/medialibrary-detail.php/ 156/en/heavy-mittal>
[Heavy Mittal?].
100 Ibid.
101 See An Act Ratifying the Amendment to the Mineral Development Agreement
(MDA) Dated August 17, 2005 Between the Government of the FederalRepublic of
Liberia (The Government) and Mittal Steel Holding A.G. and Mittal Steel (Liberia)
Holdings Limited (The Concessionaire),art. 16(E), online:
<http://www.leiti.org.lr/doc/ms.pdf>.
constitutions the legislature is vested with power to make law, it is

arguable that freezing stabilization clauses are void to the extent that
they prohibit or restrain the host country's legislature from changing the
legal regimes governing a project. As noted earlier, this position was
upheld recently by Nigeria's Federal High Court when it held that the
fiscal stabilization provisions in the Nigeria LNG Act are unconstitutional
because they fettered the power of Nigerian legislators to make law. 102
In addition, regional and international human rights instruments impose
obligations on State parties to protect the human rights and
environmental rights of their citizens. For example, the African Charter
on Human and Peoples Rights (hereafter African Charter)obliges African
states to "promote and protect human and people's rights and freedoms"
including the rights to life and integrity of the human person; right to
liberty and security; and the right to enjoy the best attainable state of
physical and mental health.103 In fact, the African Charter imposes an
obligation on States not only to "recognize the rights, duties and
freedoms enshrined in this Charter", but also to "undertake to adopt
legislative or other measures to give effect to" the rights enshrined in the
Charter. 104
Other international institutions have taken a similar position on the duty

of States to protect human rights. For example, the UN High
Commissioner for Human Rights has noted that a State's obligation to
respect the human rights of its citizens requires the State to prevent
human rights violations by third parties; while the obligation to fulfill
human rights requires the State "to take appropriate legislative,
administrative, budgetary, judicial and other measures towards the full
realization of' human rights.105 The African Commission on Human and
Peoples Rights has also held that the human rights obligations under the
African Charteroblige African governments "to protect their citizens, not
only through appropriate legislation and effective enforcement but also
by protecting them from damaging acts that may be perpetrated by
private parties." 0 6 Similarly, the European Court of Human Rights has
102 Niger Delta Development Commission v. Nigeria Liquefied Natural Gas Company
Limited, Suit Number FHC/PH/CS/313/2005, unreported judgment dated 11
July 2007.
103 African Charteron Human and Peoples' Rights, O.A.U. Doc.
CAB/LEG/67/3/Rev.5, arts.4, 6, 16, reprinted in (1982) 21 I.L.M. 58 [African
Charter].
104 Ibid., art. 1.
105 Report of the High Commissionfor Human Rights, supra note 96 at 18.
106 The Social and Economic Rights Action Center & Centerfor Economic and Social
Rights v. Nigeria, Communication No. 155/96, African Commission on Human
and Peoples' Rights, at para. 57, online:
24 ASPER REVIEw [Vol. X
held that a government that fails to regulate the activities of third parties
breaches their human rights obligations under the European Convention
on Human Rights where the third parties' activities interfere with the
rights guaranteed under the Convention.107 This being so, a stabilization
clause that inhibits the ability of host States to prevent third parties, in
this case, resource extraction companies, from infringing the human
rights of others violates the State's human rights obligations under both
domestic and international law. Likewise, a stabilization clause that
prevents the host State from taking appropriate legislative or
administrative measures towards the full realization of human rights
contravenes the human rights obligations of the State.
Although as argued earlier stabilization clauses do not prevent

host States from changing or amending the legal regimes governing
resource extraction projects, they can dissuade host States from
changing their legal regimes because such a change or amendment could
amount to a breach of the stabilization clause which, in turn, attracts
compensation. This is particularly so where the stabilization clause
prohibits the government from amending or changing its laws or
regulations in a manner that amounts to expropriation or nationalization
of the company's investment. Given the broad and liberal interpretation
of contractual and treaty provisions on "expropriation" by some arbitral
tribunals, the enforcement of new laws or new regulations against a
company that is signatory to a prior contract containing a stabilization
clause may be viewed by arbitral tribunals as an indirect expropriation
where the new law or regulation has a material adverse impact on the
company's investment. For example, in interpreting the expropriation
provisions in Article 1110 of the North American Free Trade Agreement
(NAFTA), a tribunal has held that expropriation means
[n]ot only open, deliberate and acknowledged takings of

property, such as outright seizure or formal or obligatory
transfer of title in favour of the host State, but also covert or
incidental interference with the use of property which has the
effect of depriving the owner, in whole or in significant part, of
the use or reasonably-to-be-expected economic benefit of
property even if not necessarily to the obvious benefit of the
host State. 0 8
<http://wwwl.umn.edu/humanrts/africa/comcases/ 155-96b.html> [SERAC &

CESR v. Nigeria].
107 See, for example, Hatton v. United Kingdom, ECHR, 2 October 2001; Lopez
Ostra v. Spain, ECHR, 9 December, 1994.
108 Metalclad Corporationand the United Mexican States, Case No. ARB(AF)/97/1
(2000) at para.103.
Applying the logic of the NAFTA tribunal, a new law or regulation

that imposes compliance costs on a company that is the beneficiary of a
prior stabilization clause may amount to "incidental interference with the
use' of the company's property. This is particularly so where the
compliance costs associated with the new law or regulation diminish the
company's profits or where they deprive the company of a "reasonably
expected economic benefit" whether in whole or in part. In effect then, a
host State that breaches a stabilization clause by way of the enactment
of a law that changes the legal regimes governing an extractive project
may in fact be guilty of expropriation where the law incidentally
interferes with a company's reasonably expected economic benefits.
Because the breach of a stabilization clause may amount to
expropriation and, because the host State is liable to pay compensation
for such expropriation, the host State may not want to enact or enforce
new laws or regulations. Even in cases where the new law or regulation
does not amount to expropriation, the host State may, nonetheless,
refrain from enforcing the law against the company in order not to trigger
the arbitration and compensation provisions in the contract. As noted
earlier, modern concession contracts contain economic equilibrium
clauses that enjoin host States to restore resource extraction companies
to the position they occupied prior to the new laws or new regulations.
Such restoration is usually achieved by payment of compensation or by
granting other financial incentives to the companies.
VI. STABILIZATION CLAUSES IN THE CONTEXT OF

BILATERAL INVESTMENT TREATIES
The significance of stabilization clauses in natural resource

extraction contracts may be enhanced where there is a Bilateral
Investment Treaty (BIT) between the host State and the home country of
the resource extraction company. BITs often contain provisions on the
mutual obligation of parties to provide "full protection and security" and
to ensure "fair and equitable treatment" of investments. These provisions
may confer treaty status on the stabilization clauses in an investment
contract.109 Thus a breach of the stabilization clauses may amount to a
breach of the BIT.
109Thomas J. Pate, "Evaluating Stabilization Clauses in Venezuela's Strategic

Association Agreements for Heavy-Crude Extraction in the Orinoco Belt: The
Return of a Forgotten Contractual Risk Reduction Mechanism for the Petroleum
Industry" (2009) 40 U. Miami Inter-Am. L. Rev. 347 at 363-364.
Although a consensus has yet to emerge on the meaning of "full

protection and security" of investments, two lines of interpretation have
been adopted by arbitral tribunals. The conventional view is that "full
protection and security" imposes an obligation on States to exercise due
diligence to protect against physical damage or physical injury to foreign
investment projects.o10 Other tribunals have taken a more expansive view
by holding that the phrase 'full protection and security' imposes an
obligation on States to protect foreign investors against both physical
injury and non-physical injury including protection from legal and
administrative measures capable of depriving investors of their
investments. The 'full protection and security' clause under a BIT,
according to one tribunal, implies that State parties to the BIT guarantee
the stability of investment "in a secure environment, both physical,
commercial and legal".1 1 ' Thus the "host State is obligated to ensure that
neither by amendment of its laws nor by actions of its administrative
bodies is the agreed and approved security and protection of the foreign
investor's investment withdrawn or devalued". 1 12 If this latter view is
correct, the host State's amendment of the legal regimes governing an
extractive project would amount to a breach of the BIT where the
amendment changes in some material respects the legal regimes
prescribed in the resource extraction contract.
More significantly, such amendment could infringe on the 'fair and

equitable treatment' clause under the BIT. Although the meaning or
scope of the 'fair and equitable treatment' principle has been the subject
of intense debate in international investment law,113 it is generally
110 See Suez v. Argentine Republic (ICSID Case No. ARB/03/17), Decision on
Liability (30 July 2010) at paras. 167 & 173; Saluka Investments B.V. v. Czech
Republic (UNCITRAL), Partial Award (17 March 2006) at para. 484. See also
Lauder v. Czech Republic (UNCITRAL), Final Award (3 September 2001) at para.
308.
111 Biwater Gauff (Tanzania)Ltd. v. United Republic of Tanzania (ICSID Case No.
ARB/05.22), Award (24 July 2008) at para. 729.
112 CME Czech Republic BV (The Netherlands)v. Czech Republic (UNCITRAL),
Partial Award (13 September 2001) at para. 613. See also Azurix Corp. v.
Argentine Republic (ICSID Case No. ARB/01/ 12), Award (14 July 2006) at paras.
406-408.
113 See Peter Muchlinski, "Caveat Investor?: The Relevance of the Conduct of the
Investor Under the Fair and Equitable Treatment Standard" (2006) 55 Intl &
Comp. L.Q. 527 at 530 ("[tlhe fair and equitable treatment standard is still
shrouded with considerable uncertainty"); Graham Mayeda, "International
Investment Agreements Between Developed and Developing Countries: Dancing
with the Devil? Case Comment on the Vivendi, Sempra and Enron Awards (2008)
McGill Intl J. Sust. Dev. L. & Pol'y 189 at 215 ("ICSID tribunals are unable to
articulate a precise meaning of the principle of fair and equitable treatment");
Mark Kantor, "Fair and Equitable Treatment: Echoes of FDR's Court-Packing
thought that the principle enjoins host States to protect the reasonable
expectations of foreign investors arising primarily from the terms of the
State contract including "the conditions offered by the host State at the
time of the investment". 114 As noted earlier, such conditions usually
include contractual provisions guaranteeing the stability of the legal and
fiscal regimes governing the investment. Thus, where the host State
grants a stabilization clause relating to the legal regimes governing the
investment project and the State subsequently amends the legal regimes,
such an amendment not only breaches the stabilization clause but more
importantly, it also breaches the 'fair and equitable treatment' principle
under the BIT.11s This is because the reasonable expectations of the
investor include a stable legal regime having regards to the stabilization
clause granted by the host State at the commencement of the
investment. 1 16 In effect, the principle of fair and equitable treatment
imposes an obligation on States "not to alter the legal and business
environment in which the investment has been made." 17 It protects
foreign investors against subsequent changes to the host State's laws to
the extent that "the investor has relied on the laws at the time of the
investment."1 8 Thus in Suez v. Argentine Republic, the tribunal held that
failure to implement the legal framework prescribed in a Concession
contract amounted to a breach of the fair and equitable treatment
Plan in the International Law Approach Towards Regulatory Expropriation"

(2006) 5 Law & Prac. Intl Cts. & Tribunals 231 at 238 ("arbitral awards do not
demonstrate a consistent approach towards the scope of the [fair and equitable
treatment] obligation"). See also Alireza Falsafi, "The International Minimum
Standard of Treatment of Foreign Investors' Property: A Contingent Standard"
(2007) 30 Suffolk Transnatl L. Rev. 317 at 337.
"4 LG&E Energy Corp. et al v. Argentine Republic (ICSID Case No. ARB/02/ 1),
Decision on Liability (3 October 2006) at para. 130.
115 See LG&E Energy Corp. et al v. Argentine Republic, ibid. at para. 124 (the
"stability of the legal and business framework is an essential element of fair and
equitable treatment"). See also Occidental Exploration and Production Company v.
Republic of Ecuador(London Court of Intl Arb., Case No. UN. 3467) (1 July 2004)
at para. 183.
116 Duke Energy Electroquil Partners& Electroquil S.A. v. Republic of Ecuador
(ICSID Case No. ARB/ 19), Award (18 August 2008) at para. 340 ("The stability of
the legal and business environment is directly linked to the investor's justified
expectations. ... such expectations are an important element of fair and equitable
treatment"); LG&E Energy Corp. et al v. Argentine Republic, supranote 114 at
para. 131 (fair and equitable treatment "involves the obligation to grant and
maintain a stable and predictable legal framework necessary to fulfill the justified
expectations of the foreign investor").
117 OccidentalExplorationand ProductionCompany v. Republic of Ecuador,supra
note 115 at para. 191.
118 "Fair and Equitable Treatment in International Law", Remarks by Rudolf
Dolzer (2006) 100 Am. Soc'y Intl L. Proc. 69 at 72.
principle under the Argentina-France BIT and the Argentina-Spain BIT

because it deprived the claimants of their "legitimate expectation that the
Argentine authorities would exercise [their] regulatory authority and
discretion within the rules of the detailed legal framework that [had been]
established for the Concession"." 9
The breach of the "full protection and security" and the "fair and
equitable treatment" provisions under a BIT could have serious financial
and legal consequences for host developing countries. Host developing
countries are liable to pay damages for such breach. The amount of
damages payable by host States may depend on the losses suffered by
the investor as a result of the breach. 120 In appropriate cases, the fair
market value of the investment may be adopted as the standard for
determining the loss suffered by the investor. 12 1 The host State may be
liable to pay damages for the breach of a BIT even where the legal or
administrative action constituting the breach is legitimately undertaken
by the State, unless of course the State is able to prove the defence of
'necessity' under international law. In the legal sense, because the
principle of fair and equitable treatment of investment protects the
reasonable expectations of investors arising from the Concession
contract including the expectation that the legal regimes prescribed in
the Concession contract would not be amended or changed, it could
"limit the host state's ability to take legislative action promoting its
sustainable development goals". 122
Stabilization clauses and BITs are inimical to the interests of

developing host countries in another sense. They diminish the host
State's power and authority over foreign investors and in fact redistribute
the host State's power and authority among several international
investment participants including foreign investors and international
arbitral tribunals. 123 Tai-Heng Cheng articulates this point when he
argues that
[a]lthough states are the loci of power and authority in classical
international law, international investment law transfers some
of this power and authority to other decision-makers, including
119 Suez v. Argentine Republic, supranote 110 at paras. 213-218, particularly at

para. 217. See also LG&E Energy Corp. et al v. Argentine Republic, supra note 114
at paras. 134-138.
120 Sempra Energy Internationalv. Argentine Republic (ICSID Case No.
ARB/02/16), Award (28 September 2007) at para. 401.
121 Sempra Energy Internationalv. Argentine Republic, ibid. at para. 404; Azurix
Corp. v. Argentine Republic, supranote 112 at para. 424.
122 Mayeda, supra note 113 at 212.
123Tai-Heng Cheng, "Power, Authority and International Investment Law" (2005)
20 Am.U.Int'l L.Rev. 465 at 466-495.
investors, arbitral tribunals and foreign courts. Investment

treaties and contracts contain express investment protections
... [that] often demand compliance by host states even if these
norms intrude upon areas of sovereign control, such as
monetary policies or the exploitation of resources. If host states
ignore these demands for compliance, control mechanisms are
triggered. Arbitral tribunals may be constituted pursuant to
dispute resolution provisions in investment agreements to
restore the norms from which the host state deviated.
International investment law then calls on foreign courts to
enforce these arbitral decisions. When such control
mechanisms are successful, participants adjust their behavior
to avoid or minimize the costs of non-compliance .... 124
The host State's adjustment of behaviour may include a refusal to

enact new laws and regulations governing an investment project that is
subject to a stabilization clause or a BIT. Where the State enacts new
laws and regulations it may refuse to implement the laws for fear that
their implementation could trigger the arbitration or compensation
provisions under the resource concession contract and under the BIT. In
sum, because host States are desirous of avoiding payment of
compensation for breach of a stabilization clause, they may become
reluctant to exercise their legislative or regulatory power over an
investment project. While this shift in power and authority may promote
certainty in international investment law, the downside is that it erodes
the host State's power and authority to regulate the activities of foreign
investors even where such activities run counter to the development
aspirations of the host State. 125
The negative impacts of stabilization clauses and BITs have

prompted some developing countries to rethink their position on foreign
investment. For example, Ecuador's National Assembly has reportedly
approved the government's plan to terminate its BITs with Germany, the
United Kingdom, and Northern Ireland, 126 while Georgia has amended its
foreign investment law by deleting the provisions on international
arbitration and legal stabilization. 1 2 7
124 Ibid. at 466-7.

125 Mayeda, supranote 113; Cheng, ibid.. at 481.
126 See "Ecuador Assembly Agrees to End International Investment Pacts", The
Wall Street Journal, September 15, 2010,
online:<http://online.wsj.com/article/BT-CO-20100915-712932.html
127 See "Georgia Amends Foreign Investment Law so as to Remove International
Arbitration and Legal Stabilization; One Claim is Pending Under the Law",
online:<http://www.iareporter.com/articles/20100711.
VII. TOWARDS AN EQUITABLE REGIME OF STABILIZATION
CLAUSES
As noted above, stabilization clauses are often included in natural

resource contracts and in statutory enactments because of the perceived
need to protect foreign investors from the economic and political risks
involved in the exploitation of natural resources in developing countries.
However, the prevalence of stabilization clauses in resource extraction
contracts is equally attributable to the power imbalance between foreign
investors (usually TNCs) and host developing countries. TNCs in the
extractive industries wield enormous power over developing countries not
only because of the financial strength of the TNCs, but also because of
their technological expertise. To the contrary, many developing countries
do not possess the requisite financial and technological expertise to
exploit their natural resources. The power and influence of extractive
TNCs is particularly effective in those developing countries that rely on
the extractive industries for their economic sustenance.
Interestingly, as noted above international investment law

entrenches and promotes this power imbalance through certain
investment protection mechanisms. As Cheng rightly argues,
international investment law "transfers power and authority from states
to investors" through investment mechanisms such as multilateral and
bilateral investment treaties and international development
agreements.1 2 8 Given these domestic and international realities,
stabilization clauses are likely to continue to be included in resource
extraction contracts between TNCs and developing countries. However,
as noted above stabilization clauses have adverse economic and social
consequences for developing countries. Stabilization clauses could lead
to loss of revenues for the host States and hinder the protection of
human rights and environmental rights in developing countries. How
then do we ensure that stabilization clauses in investment contracts do
not lead to unintended adverse impacts in developing countries?
Stabilization clauses ought to take into account the interests of

both investors and the host country. While it is no doubt appropriate for
foreign investors to seek the protection of their investments through
stabilization clauses and other mechanisms, the protection of investment
ought not to be at the economic expense of developing host countries.
Rather, the interests of investors should be protected in a manner that
takes into account the economic and social development aspirations of
the host countries.
128 Cheng, supranote 123 at 492.

It has been suggested that the adverse impacts of stabilization

clauses on human rights and environmental protection may be
ameliorated by limiting, whether explicitly or implicitly, the scope of
stabilization clauses. Lorenzo Cotula argues, for example, that a "human
rights exception" should be built into stabilization clauses such that, the
"host state regulation to promote the full realization of human rights is
outside the scope of the stabilization clause". 12 9 That is, stabilization
clauses should not operate to prevent or prohibit the host State from
enacting new laws or regulations designed to discharge the State's
obligations under international law. Thus, developing countries should
ensure that stabilization clauses are not open-ended. Rather,
stabilization clauses should contain express provisions excepting human
rights and environmental protection from the ambit of the stabilization
clauses. However, it is unlikely that resource extraction companies would
agree to such limitation on the ambit of stabilization clauses. This is
because modern stabilization clauses are designed not only to protect
against investment risks, but also to protect the investor's profits.
Corporate profits would likely be diminished by the imposition of post-
contract regulatory burdens or compliance costs on resource extraction
companies. Besides, resource extraction companies may view such
express human rights exception as an attempt to impose human rights
obligations on companies, a position that would be contrary to extant
international law. Regrettably, conventional international law refuses to
impose human rights obligation on companies for the reason that they
are not subjects of international law. 130
A complementary strategy is to limit the duration of stabilization

clauses to a relatively short period, say five years. For example, a
stabilization clause may provide that changes to the host State's legal
regimes are inapplicable to a resource extraction company that is
signatory to the contract containing the stabilization clause for a period
of five years. Such a provision would afford these companies enough time
to adapt to the new legal regimes. However, the stabilization clause may
be mutually renegotiated after the initial five years. 13 1 Even then, the
renegotiated clause should aim at maintaining economic equilibrium
between the host State and the resource extraction company, rather than
freezing the legal regimes governing the resource extraction project. As I
have argued elsewhere, the advantage in negotiating a stabilization
Cotula, supra note 73 at 172.

129
See Evaristus Oshionebo, Regulating TransnationalCorporationsin Domestic
130
and InternationalRegimes: An African Case Study (Toronto: University of Toronto
Press, 2009) at 115-116.
131 On the need for re-negotiation of stabilization clauses, see Samuel K.B.
Asante, "Stability of Contractual Relations in the Transnational Investment

Process" (1979) 28 I.C.L.Q. 401 at 412-418.
clause after the initial five year period is that the host State would have
access to requisite information, such as the density and quality of
natural resources discovered during the exploration stage. 132 Thus, the
host State is better able to negotiate the terms of the stabilization clause.
In fact, the density and quality of resources discovered during the initial
five year period may be such that the entire agreement is rendered
"patently inequitable" to one party. 13 3 And, where a significant reserve of
natural resources is discovered within the initial five year period, the
host country may choose not to "provide commitments on contract
stability at all". 13 4
Although the strategies suggested above cater to future natural

resource investments, they do not address extant stabilization clauses in
the extractive industries. In this regard, arbitral tribunals have been
urged to adopt a "sustainable development" approach in interpreting
extant investment contracts by striking a balance between the economic
interests of investors and overall interest of host countries.1 3 5 According
to Graham Mayeda, the sustainable development approach "would
require [arbitral tribunals] to see promoting investment not as an end in
itself, but as part of a country's approach to important social issues,
including promoting human rights, protecting the environment, and
improving social welfare".1 36 There is a clear need to promote foreign
investments in developing countries given the lack of economic
development in these countries. However, economic development may
not be attained in the absence of social and political development. Hence,
the protection of foreign investment ought to be pursued in a manner
that takes into account the mutually reinforcing link between economic
development and social development.
Adopting this expansive view, arbitral tribunals ought to interpret

extant stabilization clauses as invalid to the extent that they limit or
freeze the human rights obligations of States. Otherwise States would
literally 'contract out' of their human rights obligations by inserting
stabilization clauses into contractual agreements that freeze or prohibit
the application of new laws and regulations to companies that are
signatories to the contracts. More specifically, arbitral tribunals should
refuse to grant compensation for breach of a stabilization clause where
132 Evaristus Oshionebo, "Fiscal Regimes for Natural Resource Extraction:

Implications for Africa's Development" in Francis Botchway ed., Natural Resource
Investment and Africa's Development (Cheltenham, U.K.: Edward Elgar
Publishing, forthcoming).
133 Asante, supra note 131 at 412.
135 Mayeda, supra note 113 at 199.
136 Ibid. at 199.
the action of the host State alleged to constitute the breach was taken in
order to fulfill the domestic or international legal obligation of the State
to protect human rights or the environment. For example, an African
State that enacts human rights law or environmental protection
measures should not be held liable in compensation to a resource
extraction company for breach of a stabilization clause where the law is
intended to meet the State's human rights or environmental protection
obligations under the African Charter.13 7 This is because the right to a
clean environment under the African Charter imposes clear obligations
on African governments "to take reasonable and other measures to
prevent pollution and ecological degradation, to promote conservation,
and to secure an ecologically sustainable development and use of natural
resources." 138
VIII. CONCLUSION
The practice of inserting stabilization clauses in international

investment contracts is likely to continue because of the perceived utility
of stabilization clauses. They offer functional stability of investment in
the sense that their breach invites monetary compensation or the
restoration of the economic equilibrium envisaged under the investment
contract. However, stabilization clauses have certain adverse
consequences for developing countries. As argued in this paper,
stabilization clauses could lead to loss of revenues in host countries. As
well, stabilization clauses could have adverse impacts on human rights
and environmental protection because they could dissuade host
countries from regulating the social and environmental practices of
resource extraction companies. Given these realities, developing
countries ought to exercise caution in granting stabilization clauses. As
suggested in this paper, such caution could involve limiting the duration
of stabilization clauses to a specified period, as opposed to the current
practice of granting stabilization clauses for an inordinately long period.
Even then, stabilization clauses should be constantly renegotiated to
cater to changing economic and social realities in developing countries.
137 See, for example, African Charter,supranote 103, art. 24.

138 SERAC & CESR v. Nigeria, supra note 106 at para. 54.

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Bluebook 21st ed.

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To forestall these risks, foreign investors in the extractive

*Assistant Professor; University of Manitoba LL.B. (Ife, Nigeria), LL.M. (Lagos,

investment contract."' The idea is to insulate foreign investors in the

While stabilization clauses may be beneficial to investors in the

II. NATURE OF STABILIZATION CLAUSES

Early variants of stabilization clauses were intended to 'freeze', in

The Government of Libya ... will take all steps necessary to

1 United Nations Conference on Trade and Development, State Contracts:

Concession shall not be altered except by mutual consent of

Although freezing stabilization clauses were common in the 1960s

The Contractor shall not be subject to any legislative provision

In some instances, a stabilization clause may provide "partial

The GOVERNMENT hereby undertakes and affirms that at no

Similarly, erstwhile Development Agreements between the government of

However, the nature of contractual stabilization clauses has

8 An Act Ratifying the Amendment to the MineralDevelopment Agreement (MDA)

The obligations of the CONTRACTOR in respect of this Contract

The GOVERNMENT guarantees to the CONTRACTOR, for the

A stabilization clause could maintain economic equilibrium by

11 The Kurdistan Regional Government of Iraq, Model ProductionSharing

In case of changes in existing legislation or regulations

13 Shemberg, supra note 5 at 6; Cameron, supranote 3 at 31.

Although early stabilization clauses were, for the most part,

Without prejudice to any other provision contained herein,

"The Government shall take such executive, legislative and

16 Shemberg, supra note 5 at 9. 'Hybrid' stabilization clauses are envisaged under

Stability agreements in Ghana may also contain provisions designed to

III. THE VALIDITY OF STABILIZATION CLAUSES

Stabilization clauses that freeze the legal and fiscal regimes

20 Minerals and Mining Act 2006, s. 48(1)(a).

interests."2 4 According to critics, because the host State's right to natural

However, proponents of stabilization clauses argue that

24 Permanent Sovereignty over NaturalResources, G.A. Res. 1803 (XVII), 17 U.N.

nationalization of investment, do not offend the host State's permanent

As regards the question of permanent sovereignty, a well-

Contractual limitations on the exercise of a State's sovereignty are

The argument that stabilization clauses are incompatible with

Although stabilization clauses are not incompatible with State

35 International Monetary Fund, Guide on Resource Revenue Transparency(2007)

investment project. This position was judicially validated in Nigeria

The invalidity of statutory stabilization provisions under domestic

III. LEGAL EFFECT AND UTILITY OF STABILIZATION CLAUSES

Assuming, for purposes of argument, that stabilization clauses

39 Niger Delta Development Commission v. Nigeria Liquefied Natural Gas Company

means of stabilized international contracts".4 1 To paraphrase one arbitral

However, a subsequent arbitral decision casts doubt on the legal

brought about by time, and the acquiescence or conduct of the parties", 49

The refusal by the majority of arbitrators in Kuwait v. American

49 Kuwait v. Aminoil, ibid. at 1024 para. 101.