Reconciling regulatory stability and evolution of environmental standards in investment contracts: Towards a rethink of stabilization clauses

Abstract

Regulatory stability is widely considered to be important to promote investment in general and to attract foreign investment in particular. This is particularly the case in energy, natural resource and infrastructure projects “where investment is long-term, capital intensive and highly dependent on the exercise of government’s regulatory powers”.1 In these cases, once the bulk of the investment is made, the investor is a ‘hostage’ of the host state. On the one hand, the financial viability of the investment project depends on the investor’s ability to capture projected cash flows, while, on the other hand, the investor is vulnerable to host government action that may undermine such financial viability or even expropriate the investor’s assets altogether.2 As a result of this situation, contractual arrangements have been developed whereby the host state commits itself to provide stability of the regulatory framework governing the investment (stabilization clauses). These arrangements respond to the investor’s need for stability on the regulatory framework, on which the commercial viability of investment projects depends; but they may also constrain the ability of the host state to adopt ‘socially desirable’ regulation in areas like human rights and environmental protection, if such regulation negatively affects an investment project (‘regulatory chill’).

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