Foreign Investment, Insights

Benefits of Stabilization Clause and The Whittling Effect of Defence of Sovereign Immunity

One of the indices of a developing or a developed country is the absence or presence of foreign direct investment and foreign portfolio investment in the country. For developing countries, there will be a need to create a viable environment that will attract investments and in turn, bring substantial development to the host State. The parties to such investments are usually the government of the host State and foreign investors.

These parties enter into and execute international investment agreements such as concession agreements, product-sharing contracts and others. The elements of such investments are that they bring substantial development to the host State, they are usually capital intensive, the investment is usually for an extended period of time, the assumption of risks (which can be political, economic or operational risk) and the critical motivation for the international investor is usually the returns expected on the investment.

To hedge against these potential risks especially insulating against vagaries of political considerations which could cause creeping expropriation, it has become supremely fashionable to include in these international investment agreements stabilization clauses. These clauses protect the investment of the investor in the host State against future actions of the government or any laws made by the host State which may affect the terms of the contract agreement (especially fiscal legislations that may affect the interest of the investor).

An investor can seek relief of compensation whenever the stabilization clause is breached with concomitant effect of enforcing the remedy against assets of the host State. However, there appears to be a magic wand capable of minimizing or indeed diminishing the gains of stabilization clause such that the remedy of compensation may suffer enforcement deficit. This is the defence of sovereign immunity often easily deployed by host States…



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