"How does a responsible business address the need for stability when investing in or funding long-term projects, where the inclusion of ‘stabilisation clauses' in investment contracts can discourage host states from applying higher human rights standards?"

Protecting long-term investments from arbitrary changes in law

In a globalising world multi-national companies (MNCs) increasingly need to make major investments all over the world in order to ensure their continued access to natural resources and raw materials – and to access new markets and technology. Companies making such long-term, high value investments need to achieve the highest possible degree of legal predictability and investment stability before they are willing to fully commit themselves to operating contexts that could otherwise see arbitrary changes in law and regulation that compromise their investments.

As investments are subject to a host government's jurisdiction, there is potential for arbitrary state interference at a time when the balance of negotiating power shifts away from investors to states. Once funds are committed and a project starts generating revenue, this risk is essentially out of investors' control. Although not unique in posing such risks to investors, developing countries are nevertheless seen by investors as offering less certainty in this respect.

Incidents of expropriations in the past, which have occurred in many different regions, have prompted companies to take proactive steps to protect themselves against unforeseen eventualities. More recently, the focus of companies has shifted from outright expropriations to more latent forms of expropriation, so called ‘indirect expropriations' (i.e. in acknowledgement that the value of investments can be gradually undermined by other measures other than an outright expropriation action). For example, the imposition of a combination of taxes, fees and other charges and devices on an investment project by new laws may amount to ‘indirect expropriation' where:

• They significantly reduce the value of investment (and thus have an expropriatory effect)
• The only reason for imposing these new laws to the project is to increase the host government's share of project profits

In such circumstances, companies may choose to protect themselves in the following ways:

• By relying on the protection provided by International Investment Agreements (IIAs), particularly Bilateral Investment Treaties (BITs) between the home state of companies and the investment host state. These usually include clauses covering such indirect forms of expropriation or guarantee ‘fair and equitable treatment' of investors by host states
• By procuring political risk insurance to cover against indirect expropriations as a result of certain changes in law by a host state

Another way is to incorporate stabilisation clauses into investment contracts made with host states. These are aimed at ‘insulating' companies from changes in law – or the consequences of such changes – even where the value of their investment has not been significantly undermined and where expropriation has thus not taken place. Thus, even where such clauses fail to prevent the risk of changes in law, they may be able to limit the scale of investors' losses that result from such changes.

Stabilisation clauses – types and main concerns

There are four broad categories of stabilisation clauses, depending on the way in which they aim to protect the investor. These are:

• Freezing clauses' that are designed to make new laws or changes to agreed standards inapplicable to the investment. Alternatively, they may allow for the application of these laws and standards – but only with the prior consent of the investors

• ‘Economic equilibrium' (or ‘balancing') clauses that require investors to comply with new laws, but which also require that the investor be compensated for the cost of compliance
• ‘Hybrid clauses' that contain features of both ‘freezing' and ‘economic equilibrium' categories. They require the state to restore the investor to the same position it had prior to changes in law. This includes retrospectively exempting investors from compliance with such laws
• ‘Allocation clauses' that seek to allocate the costs of a unilateral change in law – for example to state companies. Unlike ‘economic equilibrium' clauses, they do not envisage any re-balancing of the rights and duties of the parties in light of changed circumstances (for further details, see Background to the dilemma below)

These different types of stabilisation clauses are not mutually exclusive and may be combined, as will be illustrated by real-world examples below.

Although not all investment agreements and contracts have stabilisation clauses, they are more common for long-term investments in the extractive industries and in contracts for public infrastructure and essential services.

These clauses may be designed to insulate investors from changes to local laws aimed at enhancing human rights standards – particularly where this entails additional project costs. As a result, different human rights can potentially be compromised – including labour rights, as well as the rights to life, property, access to water, freedom of expression and assembly, etc. (for further details see Background to the dilemma below). As a result, the use of stabilisation clauses has raised concerns over their impact on developing countries' commitment to protect human rights.

In a 2003 report entitled ‘Human Rights, Trade and Investment' the Office of the High Commissioner for Human Rights (OHCHR) expressed concern that the protection of investors' rights in investment contracts and agreements by insulating them from new regulations is not being balanced with companies' responsibility to respect human rights. In addition, restricting states' ability to pass laws to regulate corporate behaviour can lead to states breaching their duty to take positive actions to promote and protect human rights.

John Ruggie, UN SRSG on Business and Human rights, emphasises in the UN's ‘Protect, Respect and Remedy'policy framework, that the incorporation of stabilisation clauses into investment contracts is particularly problematic when the hosts are developing states. This is so because:

• These states often rely on external funding for improving their infrastructure. As a result, their negotiating power when agreeing a loan or foreign investment may be weaker than that of investors and related financial institutions
• These states' legal human rights frameworks are rarely as developed as they should be, and states may need to pass new laws to bring the frameworks into full compliance with international standards
• In many cases, these states may have tight budgets, which will be unduly affected by the duty to pay compensation to investors who have been required to comply with new and more costly standards
• The long-term nature of projects that are subject to stabilisation clauses makes it imperative that the host state retains regulatory flexibility to protect the population in line with international human rights standards – particularly as they evolve over time

Hence, the incorporation of stabilisation clauses may have a deterrent effect on the regulatory powers of states and show itself in the following ways:

• States may be unwilling to pass laws implementing higher human rights and labour standards (i.e. based on international standards) – or to apply such laws to investment projects in order not to pay investors compensation. This will sometimes require states to enter reservations to international treaties exempting specific projects from new standards
• States may favour ways to pass into law and impose less effective human rights and other standards on projects in order to ensure lower costs for business

Stabilisation clauses increase the prospect of compensation

Companies have shown themselves willing to take states to arbitration over the payment of compensation – including for state action aimed at protecting the general public interest that has impacted on their commercial interests. However, there are only a few known examples of arbitral awards on stabilisation clauses in international investment agreements. Until very recently, the only awards that tested contractual stabilisation clauses were the ones that resulted from unilateral state actions in breach of clauses. The more flexible – ‘economic equilibrium', ‘balancing' or ‘adaptation' clauses have not yet been the subject of review by arbitral tribunals. Several cases involving such clauses are pending before international tribunals however.

This being said, it is necessary to emphasise that arbitral tribunals have found the presence of stabilisation clauses to be an influential factor when considering the following questions (on each of these findings a state was required to compensate investors for the damage done to their investment):

• Whether state action was ‘expropriatory and compensable'
• Whether state action amounted to a breach of the standard of ‘fair and equitable treatment' of investors as guaranteed under BITs. This standard protects the legitimate expectation of investors that a state keeps its promise, including its pledge to refrain from changing its regulatory framework
• Whether state action amounts to a breach of an ‘umbrella clause' in BITs. An ‘umbrella clause' is a general clause that commits one state party to a BIT to honour additional investment protections contractually agreed with nationals of the other state party.

Stabilisation clauses lower compensation payment thresholds and lead to increased compensation

State concerns over the payment of compensation may be heightened. This is because stabilisation clauses in investment contracts can potentially lower the threshold beyond which arbitration tribunals will find compensation is payable.

As mentioned above, arbitration tribunals will in some cases assess whether changes to law amount – in effect – to indirect expropriation. In order to establish whether changes in law are expropriatory (and thus compensable) tribunals will examine whether changes in law have significantly reduced the value of the investment. In contrast, for compensation to be due under a stabilisation clause, it will arguably be sufficient to show that:

• Investors have complied with new standards
• This compliance has had a negative effect on project economics

In addition, where investment contracts include a stabilisation clause addressing ‘changes in law' without defining exactly what this means, the term may be defined in line with recent arbitral awards. In one case, at least, the arbitration tribunal has found that the scope of stabilisation clauses may not only cover alterations to laws, but it may also cover changes in the interpretation and application of existing regulations by administrative or judicial bodies.

Furthermore, the inclusion of stabilisation clauses in investment contracts can potentially impact the standard of compensation by increasing amounts payable by states for breaches of these clauses. This is the case where changes in law (in breach of stabilisation clauses) significantly affect the value of investors' property rights. As explained above, arbitral tribunals might recognise this as an act of indirect expropriation.

In its turn, international law draws a distinction between lawful and unlawful expropriation for the purposes of calculating the amount of compensation. Thus, ‘unlawful' expropriation may lead an arbitral tribunal to award payment of lost future profits on top of the net book value of an expropriated asset. In contrast, ‘lawful' expropriation may not normally require the payment of unrealised profits.

It has been suggested that (indirect) expropriation that breaches stabilisation clauses in contracts is unlawful. This is because (as explained above), the existence of stabilisation clauses may support the legitimate expectations of investors that the laws or standards applicable to the project will not change.

Implications of disputes going to arbitration rather than national courts

Stabilisation clauses are normally supported by a requirement to submit any dispute under the investment contract to international arbitration rather than national courts. By ‘internationalising' the contract in this way, businesses tend to ensure that states won't affect the process and outcome of dispute settlement through their own judicial system.

However, the following points should be noted with respect to the arbitration process:

• Arbitration is a commercial dispute resolution mechanism that resolves disputes by enforcing the contract, which is based on the private autonomy of the parties. Thus, arbitration does not defend the general interest of the society
• Human rights law, in contrast, can restrict private autonomy for the sake of the general interest. Thus, the issue of human rights violations is not that easily accommodated within the decision of an arbitral tribunal
• The enforcement of stabilisation clauses can have general consequences for the rights of third parties. For example, clauses may prevent project employees from benefiting from higher levels of labour protection offered under new laws

Where an arbitration tribunal finds that a company has suffered losses as a result of a stabilisation clause being breached, full compensation of all proved losses (where required under the clause) will most probably be awarded. In contrast, a human rights tribunal, such as the European Court of Human Rights, might limit the amount of compensation payable under similar conditions – or rule that no compensation is due at all.

Stabilisation clauses may offer companies leverage over host states

Even when not enforced in arbitration, stabilisation clauses can still enhance the leverage investors hold in their relationships with host states. As a result, there may be a situation where investors are – in principle – willing to comply with a new set of standards (or forego compensation for such compliance) without going to arbitration. Nonetheless, they may insist on following standards that are less stringent than the host state would otherwise desire.

Scope of the Dilemma

The dilemma for a responsible business is how to ensure investment stability, while not undermining the regulatory powers of host states to legislate in the public interest and to improve their standards of human rights protection equally for all.

The scope of the dilemma covers both the drafting and enforcement of stabilisation clauses. Enforcement will be considered to the extent necessary to illustrate the legal and reputational implications of those clauses for businesses. The dilemma is concerned with changes in human rights legislation, including changes to the interpretation and application of existing human rights regulation. Social and environmental laws are additional areas of legislation through which states implement human rights obligations that govern business activity. Considering this, changes in social and environmental laws also fall under the coverage of this dilemma.

A range of actors other than investors can influence whether stabilisation clauses are incorporated in investment contracts – as well as their impact on the regulatory powers of states. These actors include:

• Project finance (PF) lenders: PF can potentially create incentives for the inclusion of stabilisation clauses in investment/loan agreements that guarantee higher levels of regulatory stability. As PF debt repayment essentially depends on project revenue (rather than the assets of the sponsoring companies), it becomes very important to manage regulatory risks that can impact on revenue stream. As a result, investors may feel the need to include such stabilisation clauses to improve their ability to attract PF
• Rating agencies: The inclusion of stabilisation clauses in investment contracts is likely to be considered positively by rating agencies when evaluating a project debt. This will help influence banks when deciding whether to provide a loan to a project and/or what terms and conditions need to be attached to the loan
• Political risk insurers: Political risk insurance (PRI) providers may be able to insure against the risk that the contract, especially the stabilisation clause, is repudiated or abrogated, via arbitral award default coverage. Arbitral award default coverage is designed to ensure that the insured party preserves the benefits of an agreement containing international arbitration clauses. In particular, it provides assurance where non-payment of compensation for losses arising from new laws results in an arbitral award against the host government. If the government then fails to pay the arbitral award, the policy will be triggered, thus ensuring the insured party still receives a sum to compensate it for its losses. The PRI provider will usually hold subrogation rights against the host government and may have a significant leverage against it (particularly with respect to export credit agencies, for example). As a result, where stabilisation clauses do not prevent governments from changing laws applicable to the project, the export credit guarantors may put additional pressure on the government to reimburse investors for losses

In addition to project investors, this dilemma will only focus on the role of PF lenders. This is because whilst both rating agencies and insurers can potentially exacerbate the negative impact of stabilisation clauses on states, they have little say as to whether they are included in investment/loan agreements in the first place.

Other mechanisms exist that may contribute to the overall stability of a long-term investment, either on their own or by enforcing stabilisation clauses. The examples include:

• In Latin America there are special contracts in certain countries that are designed solely for the purpose of providing stabilisation. These are known as legal stabilisation agreements or contraltos de estabilidad
• Legislative support for the stability provisions of a contract. For instance, an Azeri-Chirag-Guneshly Production Sharing Agreement (ACG PSA) (discussed in detail below) was passed into law by the Azerbaijani parliament. The parliament of the country also recognised the prevalence of the terms of ACG PSA over any conflicting domestic law, both existing and future
• Incorporation of specific stabilisation guarantees for investment contracts in domestic law. The Nigeria LNG (liquefied natural gas) Act of 1990 and the Azerbaijan Investment Activity Law of 1995 are good examples of this practice

Although the mechanisms listed above may exacerbate the potential impact of stabilisation clauses on the regulatory freedom of host states, they are out of the scope of this dilemma.

See Stabilisation Clauses case studies

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Both developed and developing countries have been known to pose a risk of change in law to investors. However, academic literature suggests that developing-country governments are perceived by investors as more likely to change laws unexpectedly, to impose unforeseen regulatory changes, to breach contracts or even to expropriate property and offer inadequate compensation.

There are states that do not offer stabilisation guarantees at all. The latter include the UK, Brazil, Colombia, Libya, Norway and Saudi Arabia. However, there are also states that tend to offer stabilisation guarantees to assure investors that some terms and conditions of investment will remain unchanged. For instance, developing-country governments have been found to be more likely to agree to refrain from changing their laws with regard to investments, including human rights, social and environmental laws, or to fully compensate investors if changes in law negatively impact investors' profits.The results of a research project conducted for the International Finance Corporation (IFC) and the UN Special Representative of the Secretary General (SRSG) on Business and Human Rights entitled ‘Stabilisation Clauses and Human Rights' (‘the UN/IFC Study') suggest that there are key differences between stabilisation terms agreed with OECD states compared to non-OECD states. For example, contracts and models in OECD countries appear to be based on the principle of ‘risk allocation', which significantly limit the scope of stabilisation clauses. In contrast, contracts in non-OECD countries frequently attempt to impose more general restrictions on the ability of states to change laws applicable to the project – and sometimes even exclude foreseeable changes in law.

The UN/IFC Study also found that non-OECD countries are much more likely to agree on the inclusion of social and environmental laws within the scope of stabilisation agreements. This even includes laws of general application on issues such as the minimum wage, labour conditions, health and safety, etc. This is despite the fact that it is often these same countries where the need to improve levels of human rights protection is strongest.

As the UN/IFC Study suggests, extreme differences between clauses used in projects in some OECD and non-OECD countries in Sub-Saharan Africa might be partly explained by perceptions of country credit risk. However, the reasons are less clear with regard to non-OECD countries outside of Sub-Saharan Africa. This is because their ratings are often quite mixed and some may have already achieved investment grade. Furthermore, differences in country risk do not necessarily explain the wide variations in the type and breadth of stabilisation clauses found outside the OECD.

The UN/IFC Study suggests other possible reasons behind these differences. These include the following:

• The investor's experience or the lack thereof in the host state
• Different levels of sophistication and training in contract drafting
• Length of investment
• Market conditions
• Distinct industry practices

Whatever the reason, companies may face the following dilemma scenarios when incorporating stabilisation clauses in investment contracts with developing countries:

Unfair commercial outcomes

The very nature of the bargaining process prior to contract conclusion may lead to one party getting a better deal compared to the other. Although this is a normal part of contracting, the process is subject to certain conditions – for example the need for ‘freeness and fairness' in the contracting process – and its outcomes.

In extreme circumstances, investment contracts that include stabilisation clauses can be perceived to fail this requirement. For example, host countries often depend on foreign investment to complete large infrastructure projects because of a dearth of local funds/expertise. In such cases, investors typically have greater bargaining power due to the multitude of opportunities in which they can invest. The same dynamic exists where the pool of suitable investors for a particular project is limited and there is no competitive bidding process.

In addition, the capital intensive nature of many projects means investors may need to attract both corporate and project finance loans. Where stability is one of the loan conditions, companies will insist on the inclusion of stabilisation clauses in investment contracts with states to make the project ‘bankable'.

Stabilisation clauses aimed at guaranteeing regulatory stability may be negotiated in the context of long-term projects, sometimes lasting for over 40 years. As a result, where stabilisation clauses prevent states from imposing stricter environmental laws on such projects, the environmental degradation that ensues could result in very large clean-up costs – for which the government is ultimately liable. This can significantly reduce the value received by states from the project as compared with investors.

In addition, stabilisation clauses are expressly asymmetrical in character. They tend to insulate investors from changes in law that adversely affecting their profits. However, when changes in laws are favourable to business, the benefits are in most cases passed on to investors automatically.

National human rights, social and environmental standards are normally passed to promote the legitimate public interest, often through democratic process. Costs of compliance with such standards are usually factored into general project expenses from the start. As a result, it can be difficult to justify insulation of investors from or sharing in the costs of new standards with host states, especially if the increased costs do not compromise the viability of the project. It has also been suggested that stabilisation for foreseeable changes in law may go against the principle of ‘good faith'.

In extreme circumstances, where it is established that investors and lenders have persuaded the host state that the stabilisation clause they insist on including is a general business practice and no other alternatives exist, this factor may further compromise the standard of freeness and fairness in contract negotiation and conclusion.

Respecting the implementation of evolving international law by host states

As members of different international organisations, such as the UN and the Council of Europe (CoE), and parties to various international agreements, states may be required to take domestic legal measures to comply with evolving international law.

The very nature of many of the rights recognised under the International Covenant on Economic, Social and Cultural Rights (ICESCR) is such that their full realisation is to be achieved over time. Nonetheless, the Limburg Principles on the Implementation of ICESR, state that "under no circumstances shall the progressivity principle be interpreted as implying for States the right to defer indefinitely efforts to ensure full realisation of economic, social and cultural rights." As a result, where a freezing stabilisation clause defers the full realisation of labour rights until the end of an investment project, this may violate international human rights law.

Likewise, stricter and more costly human rights standards may emerge as a result of the evolving interpretation of human rights obligations. This may arise, for example, as a result of the following:

• Authoritative ‘General Comments' of the Committees established under each of the two Covenants – International Covenant on Civil and Political Rights (ICCPR) and ICESRC
• Case-law of tribunals established to look into individual complaints under particular treaties. The European Court of Human Rights (ECtHR) is an example under ECHR – may impose stricter standards on states

As a result, where the use of stabilisation clauses causes states to default on their international human rights obligations, the question could arise as to the legality and legitimacy of imposing such clauses by companies.

Equal protection of the law within the host state

Stabilisation clauses may create a ‘separate' legal framework for specific investment projects. This framework will apply to individuals involved in the project (such as employees) and impacted by the project (such as local communities). This is particularly the case when ‘freezing' clauses specify which laws are applicable to the project, and which are not.

As noted, an ‘economic equilibrium' clause may permit states to apply the same standards to the project that it applies elsewhere, subject to compensation. Where states are unable to pay such compensation, however, an ‘economic equilibrium' clause would become, in effect, a ‘freezing' clause. As a result, disparate standards will continue to apply to different stakeholders.

International human rights law applies to states in all their activities and imposes a duty on them to ensure that all individuals subject to their jurisdiction receive equal protection with no discrimination. Where states are forced to differentiate between different categories of stakeholders as a result of stabilisation clause requirements, investors may find themselves in the firing line of aggrieved individuals and other concerned stakeholders.

See Stabilisation Clauses case studies

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Real-world examples

The following examples present a small number of real projects where stabilisation clauses raised concerns as to their potential and actual impact on the human rights of those affected by project operations.

Azeri-Chirag-Guneshly (ACG) Offshore Oil Field Development Project - Contracting out of the application of more advanced standards

The ACG Project is a 30-year initiative to develop oil and associated gas reserves in the largest oil field in the Azerbaijani sector of the Caspian Sea. The parties to the project include BP, Statoil, McDermott, Pennzoil, Unocal and the State Oil Company of the Republic of Azerbaijan (SOCAR), among others. The Azerbaijani government, while not a party to the contract, guaranteed all the undertakings of SOCAR under the project.

Stabilisation clauses were incorporated in a project agreement – the ACG Production Sharing Agreement (PSA). The ACG PSA is a good example of an investor-host state agreement that uses several different methods of stabilisation.

For example, the PSA ‘freezes' the regulatory framework of the project with regard to public health, safety and protection, as well as restoration of the environment, by tying it to the international petroleum industry standards and practices prevailing in 1994. The government of Azerbaijan is precluded from entering into treaties, intergovernmental agreements or any other arrangements that impact on the rights of investors in a negative way. Alternatively, the government must qualify its new international commitments by including express recognition that investor rights under the project remain intact. The PSA prohibits unilateral changes to terms and conditions of the project by requiring the consent of both parties before any changes will be effective.

The economic stabilisation clause of the ACG PSA is a good example of a clause that ensures investors benefit from all favourable changes in law, whilst securing them against all legal changes adversely affecting their profits. Where a subsequent state measure has a positive or a negative impact on investors' rights and obligations, the PSA requires automatic adjustment of the terms of the PSA. This is necessary to re-establish the economic equilibrium of the parties to the project. However, the PSA is also designed to protect the contracting parties (except for SOCAR) from the adverse financial implications of all legal changes that might apply to the project. It does so by requiring SOCAR to compensate the other parties for any loss due to unilateral actions, including changes in law, by the government or other Azerbaijani authorities. As a way of indemnification, SOCAR is expected to use lawful reasonable efforts to ensure that the government resolves the conflict between new law and the terms and conditions of the PSA.

The PSA explicitly provides that the requirement to compensate the investors for losses applies also in cases where any regional or multi-governmental authority with jurisdiction enacts or promulgates stricter environmental standards. The obligation is a broad one, and is not limited to changes in tax legislation, regulations and administrative practice. Likewise, the clause does not require investors to incur a certain amount of loss before compensation is due. The stabilisation clause in the PSA will stay in force for the whole duration of the ACG project.

In the event of a dispute between SOCAR and another contracting party, the PSA requires them to attempt to resolve it to their mutual satisfaction, before they can turn to arbitration. However, it emphasizes that such settlement shall be by reference to the terms of the PSA. In turn, no provision was made in the PSA for the parties to enter into a negotiating process with a view to discussing the role of investors in sharing the financial burden of new state measures.

As a result, the terms of the PSA effectively shield the parties from the need to apply stricter standards arising as a result of changes in legislation, regulations or administrative practice. The parties shall only be guided by "international petroleum industry standards and practices" prevailing in 1994 (and particularly those expressly referred to in the PSA), for the lifetime of the investment. Where stricter (and thus more costly) standards may be imposed by the host state, the PSA guarantees that investors will be indemnified for the extra costs of following new standards.

Chad-Cameroon Pipeline Project Agreements – potential impact on national human rights performance

A September 2005 Amnesty International report entitled ‘Contracting out of Human Rights: The Chad-Cameroon pipeline project' highlighted potential challenges posed by stabilisation clauses around a pipeline project transporting oil from the Doba oilfields in southern Chad to Cameroon's Atlantic coast. The lifetime of the project is anticipated to be as long as 60 or 70 years.

The project has been developed and is operated by a consortium led by ExxonMobil, and includes Chevron and Malaysian state oil company Petronas.

The Chad-Cameroon Pipeline project's legal regime is comprised of four project agreements:

• A 1988 agreement between the consortium and the government of Chad
• A 2004 agreement between the consortium and the government of Chad
• A 1997 Convention of Establishment between the Cameroon Oil Transportation Company (COTCO) and the government of Cameroon
• A 1998 Convention of Establishment between the Chad Oil Transportation Company (TOTCO) and the government of Chad

COTCO is a special-purpose company incorporated in Cameroon as a joint-venture between the consortium and the government of Cameroon, which owns and operates the sections of the pipeline in Cameroon. TOTCO is a special purpose company incorporated in Chad as a joint–venture between the consortium and the government of Chad, which owns and operates the sections of the pipeline in Chad.

Amnesty International has expressed concern that these agreements, each of which includes a stabilisation clause, could be used by states to justify their failure to fulfil their human rights obligations. These clauses aim to insulate COTCO and TOTCO from the adverse impact of any governmental act, without exception.

According to the agreements, the governments of Chad and Cameroon need to seek prior consent from the consortium if they plan to change the regulatory framework of the project. In the case of one agreement, the consortium has the right to request that changes in law do not apply to the project. In another, where the government decides to implement the changes without the prior agreement of the consortium, the government and the consortium shall agree on necessary modifications to ensure that the consortium achieves the same outcomes. This includes the same financial terms, duties and obligations, as well as the same rights and economic benefits as existed before such changes were made. Where the consortium believes its rights are adversely impacted, including by new regulation, it may resort to an arbitral compensation award.

The stabilisation clauses not only cover changes to legislation, but also the interpretation of legislation. As a result, where changes in law or its interpretation can impose higher human rights standards (and thus result in higher project costs), the consortium has the contractual right to insist on exemption or demand compensation.

Under the project agreements, investors are expressly required to apply ‘the international technical and safety standards that prevail in the petroleum industry'. According to one published view, this could be a potential point of entry for more advanced standards over time. There is still a risk, however, that companies might choose to follow industry best practices that are less exacting than the standards established by international law. This is due to the following factors:

• Ambiguity of the definition ‘petroleum industry standards and practices'
• Existence of many industry guidelines of varying detail and sophistication
• Difficulty of establishing which standards and practices are prevailing at a given time
• Difference in standards and practices recommended by different industry associations of which a company could be a member
• Lack of industry guidelines in some areas

See Stabilisation Clauses case studies

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Legal risks - risk of non-enforcement

In general, MNCs are not prevented from seeking and enjoying exemptions from some statutory or regulatory requirements which can be in line with legitimate public policy. As noted above, the only exceptions to this general rule are where the fundamentals of contract negotiating procedure have been compromised. For instance, English contract law, which may be specified as a governing law of an investment contract, provides for the following exceptions:

• The bargaining process falls short of societal standards of freeness and fairness – for example due to duress or where one party benefits from the other party's lack of understanding of the terms
• A particular term is expressly or impliedly prohibited under applicable laws, both domestic and international. For example, bonded labour is prohibited under almost all countries' national laws and international law
• A particular concession offends fundamental principles of order or morality. For example, transactions inducing breach of contracts with third parties may be considered immoral

In these rare cases, the contract or its disputed provision will not be given full effect

In general stabilisation clauses are usually included on the basis of mutual agreement between two ‘mature' parties and do not explicitly authorise a forbidden action or inaction. As a result, they are unlikely to be considered void.

Despite this, in some cases these clauses may be found to be unenforceable by national courts. One published view is that freezing clauses generally are not enforceable under the domestic law of common law countries, and they may be difficult to enforce in civil law systems. Lawyers interviewed for the UN/IFC Study also generally agreed that freezing clauses may not be formally enforceable under the domestic law of many host states – not just common law jurisdictions such as England and Wales, and the United States.

There is also a (very small) risk that where stabilisation clauses in investment contracts lead to overwhelmingly inequitable results for host states, courts or tribunals might be willing to find the bargain under stabilisation clauses ‘unconscionable' as a matter of equity. This could be the case where:

• The courts or tribunals that have jurisdiction to look into a dispute over the clauses follow the English common law tradition; and
• The stability terms of the contract operate harshly against the weaker party and are imposed in a morally reprehensible manner

That being said, it remains to be seen whether courts or arbitral tribunals will ever be willing to adopt this approach.

Legal risks - liability for the resultant violations

In addition to the risk of unenforceability, there might be a risk of direct liability on the part of investors for resultant human rights violations by host states (though again, this is relatively unlikely).This might arguably be the case where preventable human rights violations take place in an area where legal protections have been demonstrably weakened by a stabilisation clause.

For example, the threat of having to pay compensation to investors may ‘force' poor states to forego stricter environmental standards where this entails additional costs. Where investors threaten the state with enforcement of the stabilisation clause to prevent the imposition of higher standards, and this results in an environmental disaster with human losses, this may help to substantiate claims against companies.

This might also be true of lenders, where such stabilisation clauses were incorporated into a loan/investment agreement as a condition for financial support and non-enforcement of stronger standards was insisted on by lenders. The literature seems to suggest that the greater the degree of control lenders have over the disputed situation and/or the potential ‘abuser', the more likely they are to be found liable.

That being said, there are no known judicial or arbitral cases that have considered the issue of direct liability on the part of investors or lenders for human rights violations resulting from the enforcement of stabilisation clauses. It remains to be seen whether courts or arbitral tribunals will be willing to follow the mentioned principles of imposing liability.

Risk of de-legitimisation of an investment contract

There is growing evidence of the increased willingness of investors to turn to arbitration under BITs and other IIAs to obtain compensation from host governments for regulatory interventions. In turn, this practice has led to considerable resistance by states. States are now more often than ever attempting to challenge the investment regime, by insisting on the renegotiation of investment guarantees, in particular. In Latin America, for instance, the changing character of state action has shown itself most conspicuously.

By failing to address host states' international human rights obligations, investors are in effect lending credence to the attempts of states and civil society to delegitimise investment contracts and to call for renegotiation.

Reputational risks

Even where companies/lenders do not face legal risks, they can still face a range of reputational risks where stabilisation clauses have a negative impact on the level of human rights protection in a given country. This can include:

• Negative press and activist campaigns resulting in brand erosion
• Loss of social licence to operate resulting in community animosity and higher costs
• Loss of political licence to operate resulting in non-cooperation by the government
• Diminished future business opportunities

For companies headquartered in OECD countries, the inclusion of stabilisation clauses that result in such impacts may be considered a deviation from good practice under the OECD Guidelines for Multinational Enterprises (‘the OECD Guidelines'). A negative record of a company in terms of following OECD Guidelines may negatively impact its prospects as to getting export credit guaranties. The Guidelines call on adhering states to encourage companies operating or having headquarters within their territory to "respect the human rights of those affected by their activities, consistent with the host government's international obligations and commitments". In particular, there is explicit recognition of the principle that MNCs should refrain from "seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to environmental, health, safety, labour, taxation, financial incentives, or other issues."

The Commentary to the Guidelines suggests that this principle is not meant to infringe on an enterprise's right to seek changes in the statutory or regulatory environment in general. It further states that some exemptions from laws or other policies can be consistent with these laws for legitimate public policy reasons. However, the exemptions from health, safety, or core labour standards are unlikely to meet the test of legitimacy.

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The UN ‘Protect, Respect and Remedy' Framework for Business and Human Rights provides guidance on how to protect individuals and communities from corporate related human rights harm.

The framework is comprised of three key principles:

• Protect: The state duty to protect against human rights abuses by third parties, including business;
• Respect: The corporate responsibility to respect human rights; and
• Remedy: Greater access by victims to effective remedy, both judicial and non-judicial.

The framework states that in addition to complying with national laws businesses have a responsibility, in the context of the countries where they operate, to respect human rights through their own business activities and through their relationships with third parties – such as business partners and entities in their supply chains. To meet this responsibility, the framework notes that businesses should engage in human rights due diligence and specifies the main components of the process:

Policies: Including a human rights policy containing broad commitments, supported by more detailed guidance in specific functional areas

Impact assessment: Including assessments that explicitly reference internationally recognised human rights and are used by companies to avoid potential negative human rights impacts on an ongoing basis

Integration: Including the embedding of respect for human rights throughout a company

Tracking performance: Including regular updates of human rights impact and performance

The Guiding Principles for the Implementation of the UN "Protect, Respect and Remedy" Framework aim to provide "concrete and practical recommendations" about how businesses can operationalise their responsibility to respect human rights. According to the Guiding Principles, the responsibility to respect human rights requires responsible companies to:

• Implement a human rights policy
• Apply human rights due diligence
• Provide for remediation

The UNGPs apply to all States and to all business enterprises, both transnational and others, regardless of their size, sector, location, ownership and structure.

The UNGPs have experienced widespread uptake and support from both the public and private sectors, and numerous companies have publicly stated their commitment to the Guiding Principles. The UN Guiding Principles Reporting Framework is also used by companies to report on how they respect human rights.

Companies can seek specific guidance on this and other issues relating to international labour standards from the ILO Helpdesk. This aims to help company managers and workers understand the ILO approach to socially responsible labour practices and to assist in the development of good industrial relations.

The UN/IFC Study provides some recommendations geared towards reducing the potentially negative human rights impact of stabilisation clauses. The Secretariat of the Energy Charter, a multilateral framework for energy cooperation, has also prepared Model Agreements to guide the industry on different terms and conditions of intergovernmental and host governmental agreements, including stabilisation clauses. In a 2006 study entitled ‘Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil and Gas Investors', the Association of International Petroleum Negotiators (AIPN) also looked at ways to accommodate bona fide legislation in such areas as labour, health, safety, security, the environment and others that could impact on human rights.

The following good practice suggestions are built around principles that are believed to mitigate the negative effect on human rights of different categories of stabilisation clauses.

The types of clauses that may be effective in specific contexts to guarantee investment stability, while not impeding states in fulfilling their human rights obligations, remain underexplored. More clarity will be offered once there are more court and arbitral precedents testing modern types of stabilisation clauses and mechanisms to mitigate their negative impact on human rights. That being said, the recommendations below attempt to provide guidance as to the choice of a type of stabilisation clause and propose an accompanying human rights risk mitigation technique.

Good practice will, to some degree, depend on which category a business falls under (investors or lenders) or the authority within companies (CSR managers, legal consultants, etc.). This can ensure that a potential negative impact of stabilisation clauses is addressed at different levels of business decision-making.

Specific suggestions

To ensure that the terms and conditions of a new investment do not have a negative impact on the rights of people who may be impacted in the process, responsible businesses might consider the following actions:

1. Adopting a forward-looking human rights compliance policy

As a basic requirement, companies operating in emerging economies could adopt a general human rights policy. The policy may commit the company to the following:

• Abide by relevant national laws and regulations that further human rights protection, as they change from time to time
• Comply with relevant international human rights standards, as they change from time to time, where there are no relevant national laws and regulations to address a particular human rights situation
• Where national laws and regulations with regards to human rights protection are below international standards, to follow higher international standards as they develop over time

Additional forward-looking human rights compliance commitments could be reflected in such policies. These may commit the company to not seek or accept exemptions from human rights standards that may be applicable to businesses (for further details see ‘Operationalising higher human rights standards' below).

Lenders may commit themselves to adjust their lending conditions, where necessary, to always allow companies to respect their commitments under a forward-looking human rights policy.

2. Adopting a policy with regards to the scope of investment stability

In addition to a forward-looking human rights policy, or by way of incorporating additional clauses into the existing human rights policy, responsible business might consider committing itself to the following:

• Benchmarking higher (international or local) human rights standards when testing the feasibility of different projects and implementing them. By doing so, business will be able to consider potential changes in local laws at the outset and factor them into expected project expenses. This will lessen the need to apply new regulations to the investment over time
• Allowing periodic (or host state-initiated) renegotiation of the scope of stabilisation to ensure that it does not negatively impact the human rights of those who may be affected in the process of investment activity by, for example, including renegotiation clauses in investment contracts
• Making terms and conditions with regards to investment stability (where they may impact third parties) as transparent as possible. This will allow third parties to raise their concerns over such terms and conditions earlier on in the planning process of an investment project. It will also help companies mitigate the risk of community opposition and social unrest. Ideally, interested stakeholders would be provided with opportunities to comment on terms and conditions that may impact them before negotiations (or renegotiations) are finalised
• Regularly reviewing the policy and supporting procedures as prompted by new human rights concerns

PF lenders might also consider adopting a policy to commit themselves to the following:

• Adjusting lending conditions so that host governments have the ability to make regulatory changes aimed at meeting their international human rights, social and environmental obligations as they change over time. In certain cases, this policy may be extended to cover reasonable local human rights standards that go beyond international standards (for further details see ‘Operationalising higher human rights standards' below)

• The IFC Policy on Environmental and Social Sustainability supports engagement with stakeholders and requires that investors disclose project information, including certain key terms of agreements, especially when those can have broader implications for the public at large and which may affect third parties. See:
• IFC Sustainability Policy (Global)
• Please contribute your commentary or suggestions to our online discussion forum:
  Stabilisation clauses online discussion forum

3. Operationalising higher human rights standards

The following could be considered by companies to ensure that higher human rights standards are successfully enforced during project implementation:

• Allowing disbursements to cover relevant costs associated with the application of international human rights standards (whether implemented through local law or not) as they evolve over time
• Allowing disbursements (on a case by case basis) to cover relevant costs associated with the application of local human rights standards that go beyond international human rights standards. For example, this commitment may cover only those higher human rights standards that are reasonably legislated by states in good faith in the public interest, with regard to due process and which are non-discriminatory. ‘Reasonableness' may depend, for example, on the practices of other states
• Incorporating a notification mechanism into the investment contract. This would require host states to give advance notice to investors of the applicability of proposed changes in national legislation to their business enterprises. This will give investors more certainty about legal changes at an early stage and allow them to discuss their ultimate impact on project viability
• Sharing in the costs with the local client of the project (e.g. the host state or a relevant state company), when taking into account higher human rights standards would radically increase project costs and push it to the edge of commercial feasibility. To make it less burdensome for these states to share these higher human rights costs, companies may consider accepting alternative concessions that have less impact on states' ability to protect citizens' human rights. Concessions may include, for example, longer terms of contract, exemption from some taxes, lower import tariffs on project equipment or reduced fees for using some state infrastructure for a certain period of time
• Establishing a threshold of losses incurred by an investor, above which the host state will share the economic burden of compliance. The threshold could be calculated as a certain proportion of expected revenues (or reasonable rate of return) from a project instead of a fixed value in the contract. This form of calculation will pre-empt potential calls for re-negotiation of companies' share of costs by governments due to changes in commercial circumstances
• Agreeing on the use of services of an independent expert to verify the costs involved in the implementation of new standards and/or costs incurred by investors in meeting those standards. This would safeguard against a deterioration of the host state-investor relationship, which may otherwise be prompted by disagreement over the amount of costs or losses

In turn, lenders may consider the following actions to ensure that their lending conditions assist investors in enforcing higher human rights standards on projects financed with a project finance loan:

• Requiring reserve funds in projects to provide for the appropriate costs of states complying with international human rights and other social and environmental standards, as they evolve over time and become applicable to the project. This might require adapting rules on allowed disbursements from such funds
• Allowing disbursements from the reserve funds (on a case by case basis) to cover relevant costs associated with the application of local human rights standards that go beyond international human rights standards. For example, this commitment may cover only those higher human rights standards that are reasonably legislated by states in good faith in the public interest, with regard to due process and which are non-discriminatory. ‘Reasonableness' may depend, for example, on the practices of other states
• Requiring investors (as project sponsors) to continue loan repayments where the project is no longer able to meet both the higher costs that result from changes in national law, and to meet its normal loan repayments

4. Assessing the context of an investment project

For a company to ensure that the provisions of its investment contract with a host state do not put an unreasonable strain on states' powers to improve human rights standards applicable to business activities, it should first assess the following:

• The country context in which their business activities are to take place: This would highlight the level of human rights protection in the country at the time of investment. This would also signal whether the country may need to pass new laws in order to be in line with its international human rights obligations
• The potential human rights impact of planned business activities within that context: This would bring to light the types of human rights that may be impacted in the course of a project. In its turn, this would allow companies to screen different types of stabilisation clauses (e.g. freezing clauses, economic equilibrium clauses or hybrid clauses) with respect to their impact on those rights
• The potential negative impact business might have on human rights through their relationships with business partners, suppliers or sub-contractors. This would highlight the risk culture of the partners and whether they may follow lower standards to cut corners on the project. This can happen even where investors themselves may not wish to take advantage of the broad scope of the stabilisation clause to dispute more costly human rights standards

Companies can address these issues by reviewing the following:

• Relevant laws, regulations and policies of a country where the investment project is planned. This is in order to see how applicable local standards on human rights protection differ from international standards. In its turn, this will help companies to recognise which changes in law may be foreseeable
• Credible human rights reports on the host country, which can highlight the trend of human rights protection over time. Topics to focus on include: 1) whether a country is progressing towards the implementation of higher human rights standards; 2) the extent to which government favours a preventive approach to human rights problems; and 3) the way the host state makes changes to law (i.e. the degree to which due process is followed and implementation is handled in a non-discriminatory way)
• (Where available) factual evidence of a business partner (e.g. subcontractor or a local partner in a joint venture) having benefited from a loophole in applicable laws to follow lower and less costly human rights standards. For example, relevant media reports could identify such incidents by a business partner

In designing such an assessment, a company may wish to consult existing guidance documents, such as the International Finance Corporation, UN Global Compact and International Business Leaders Forum's Guide to Human Rights Impact Assessment and Management. This Guide provides companies with a "process to assess their business risks, enhance their due diligence procedures and effectively manage their human rights challenges." It is further supported by their online guide, which guides users through different stages of the impact assessment process, including Preparation, Identification, Engagement, Assessment, Mitigation, Management and Evaluation.

5. Agreeing on the principles of re-negotiation of stabilisation clauses

Companies might agree with host states on the obligation to re-negotiate stabilisation clauses under an investment contract.

To guarantee flexibility and clarity during re-negotiation of stabilisation clauses, companies might consider drafting re-negotiation clauses to include, among other things, the following:

Definition of an event that will trigger the duty to re-negotiate

A host state's request to re-negotiate the scope of stabilisation clauses could serve as a trigger factor, where:

• New state measures improving human rights standards with relevance to business have been passed
• The limited economic equilibrium clause makes the imposition of new standards subject to cost sharing, and
• Compensating investors for the imposition of such standards on a project, result in a significant increase of a host country's financial burden. To test the significance of the impact of such measures on a host country's budget, changes in the general economic situation in the host state could be taken into account

Specifying the content of the contractual obligation to negotiate

Companies could agree with host states that they both will enter into negotiations:

• In good faith
• With an awareness of the interests and an understanding of the reasons of the other party
• With a view to reaching a compromise that is acceptable to both parties
• Ready to sustain negotiations over a period appropriate to the circumstances

The re-negotiation clause can be combined with a mediation or an arbitration agreement. By adopting this approach, companies can ensure the involvement of an independent third party if they are unable to reach an agreement.

Where companies wish an arbitral tribunal to adapt the contract to new circumstances, an express allocation to the arbitral tribunal of such competence will be required.

6. Using mediation to resolve disputes to mutual satisfaction

Prior to turning to confrontational modes of settling a stabilisation clause dispute (e.g. litigation or arbitration) companies may consider first turning to mediation by expressly specifying the use of this procedure in the investment contract. Mediation could also be sought as a mechanism for re-negotiating the clauses.

The distinctive feature of mediation as compared with litigation or arbitration is that a neutral, non-adjudicating person chosen by both parties can help them in reaching a mutually acceptable settlement. In this sense, mediation can help to maintain a commercial relationship rather than allowing confrontation between the parties to escalate. In addition, mediation is claimed to be more cost- and time-effective as compared with litigation or arbitration.

Mediation assistance can, among other things, take the following forms:

• Shuttling between the parties to discuss acceptable compromises
• Designing a package where each party gets what it needs while respecting the needs of the other party
• Preparing a binding or non-binding recommendation using expert knowledge of the matter

To ensure greater transparency and competition, companies may consider agreeing with the host government that a tendering procedure will be used to select a mediator. Factoring payments based on a successful result of mediation (a ‘success fee') can serve as an incentive for a mediator to reach a mutually acceptable settlement in shorter time.

Companies may specify that mediation will attempt to reach a mutually acceptable solution by reference to public international law, in addition to the terms of the contract.

7. Ensure transparency of stabilisation terms

Companies might consider making the terms and conditions of investment contracts publicly accessible as early as possible – ideally during the planning phase. This is especially the case when these investment contracts may have an impact on the public at large and on the human rights standards to be relied on during the process of project implementation.

This will help ensure that impacted stakeholders (e.g. workers and local communities etc.) can voice their concerns early enough in the process for companies to factor them into the final investment contract. By doing so, companies can mitigate the risk of protests against the project by those who may be impacted by business activities. This can also pre-empt the need to revisit the terms and conditions of investment later, when business activities may already be in progress and so more costly to delay.

Making investment contracts publicly available can also ensure that affected stakeholders have an informed understanding of the human rights standards and guidelines that the project will follow project. This will guard against the risk of speculation around a project's human rights impact that may be negative and which could otherwise tarnish investors' reputation. This will also pre-empt the need for additional CSR campaigns (and thus additional expenses) at a later stage to clarify the terms and conditions of investment, and thus alleviate any stakeholder concerns.

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Definition

The term ‘stabilisation clauses' refers to the clauses in private contracts between investors and host states that address changes in a regulatory framework of an investment project during its lifetime and mitigate their effect on the rights and interests of project investors as agreed at the outset.

The UN/IFC Study divides stabilisation clauses into three broad categories, based on how they are drafted to protect the investor. Each of the categories is then divided into two further subcategories. These are as follows:

Freezing clauses: These are designed to make new laws inapplicable to the investment. Thus, they aim to ‘freeze' the law of the host state with respect to an investment project at the time of signing an investment contract.

• Full freezing clauses aim to freeze both fiscal and non-fiscal issues, usually for the duration of the project
• Limited freezing clauses aim to protect the investor from a more limited set of legislative actions, such as tax or customs issues

Freezing clauses may also guarantee that the standards agreed between the host state and the investor will not change for the lifetime of the project. The standards agreed may be different from those provided under national law.

Professor Cameron has added another sub-category to the freezing variety of clauses, which is an ‘intangibility clause'. This clause makes changes to the investment agreement subject to mutual consent of both parties, thus ‘freezing' unilateral changes by host states. The ‘intangibility clause' aims to ‘freeze' the contract, rather than the law.

Economic equilibrium clauses: These require that investors comply with new laws but that they be compensated for the cost of complying with them. Compensation can take such forms as adjusted tariffs, extension of the concession, tax reductions, monetary compensation, or otherwise.

• Full economic equilibrium clauses protect against the financial implications of all changes of law. They may specify the threshold of losses that need to be incurred before compensation is payable to investors by requiring that the costs to investors be ‘material'. They may also require that the parties negotiate to restore the economic equilibrium to the extent ‘reasonably possible'. They can apply to all new laws and can be interpreted to require full compensation to the investor for compliance with them
• Limited economic equilibrium clauses protect against the financial implications of changes of law to a certain extent. For example, some may require that the investor incurs a certain threshold of financial loss – which is explicitly quantified – before compensation becomes due. They may also exclude certain areas of law (e.g. laws protecting health, the environment, individual safety, or security) from the scope of stability

In similar vein, ‘balancing clauses', as defined by Professor Cameron, aim to address the economic impact of subsequent state measures, rather than seeking to prevent a change in law as such. They may require automatic adjustments so that the economic balance struck between the parties on the effective date of the contract is re-established. Alternatively, they may specify a manner in which the adjustment is to be achieved. A third approach is to make an express provision for the parties to the contract to enter into re-negotiating process to agree on the amendments.

These clauses tend to be more concerned with adverse legal changes. However, it is possible that a unilateral action by the host government has the effect of improving the economic benefits flowing to project investors. In some cases, a stabilisation clause may be designed so that an automatic re-balancing is triggered when investors' positions are improved by a subsequent state measure.

The aim of ‘balancing clauses', as defined by Professor Cameron, is similar to that of ‘economic equilibrium clauses'. However, a distinction is made between a re-balancing of an ‘economic equilibrium' as compared with a re-balancing of the ‘economic benefits' awarded to the parties to a project. In the first case, there is a sharing of the burden between the parties based on the relative take (both rights and duties) at the start. In the second case, re-negotiation of the terms of the contract would be aimed at reaching a level of economic benefit based on what was expected at the start.

Hybrid Clauses: These share some aspects of both of the other categories and require the state to restore the investor to the same position it was in prior to any changes in law – including by exemption from new laws.

• Full hybrid clauses apply to all changes in law
• Limited hybrid clauses apply to only some (i.e. pre-identified) changes in law

The results of the UN/IFC Study suggest that full and limited freezing clauses can insulate investors from new social and environmental laws. This is so because the text of the clause supports a reasonable interpretation that compliance with new laws is not required.

The impact of hybrid and economic equilibrium clauses on host government's ability to implement new social and environmental laws on the investor depends on the following factors:

• Whether exemptions are requested by investors
• Whether exemptions are agreed on by host states under hybrid clauses and
• How compensation for compliance with new laws is designed

Human rights impact of stabilisation clauses

Among the rights that can potentially be impacted by stabilisation clauses are the following:

Right to be free from discrimination and equal protection of the law (UDHR, Article 7; ICCPR, Article 26; ICESCR, Article 2(2)): Stabilisation clauses may ‘carve out' an area in which those involved in the project will not enjoy the same level of protection that others have (under domestic law) elsewhere in the host country. This is particularly the case when freezing clauses prevent the application of new human rights standards to the project. Economic equilibrium clauses may have the same effect. This is the case when a requirement to pay compensation serves as a disincentive for states to impose new standards on the project

Labour rights (UDHR, Articles 5, 23; 24, 25; ICCPR, Articles 8; ICESCR, Articles 6, 7, 8, 9, 10(2), 12): Stabilisation clauses may impact on labour standards applied to project employees. These include standards related to collective bargaining and freedom of association, minimum wages, health and safety conditions in the workplace and employee benefits (e.g. maternity provision, sick-pay, severance pay, pensions and annual leave). Many of these standards are subject to regular review and revision by the state. This includes minimum wage levels, which need regular updating in order to reflect changes in basic needs and inflation. Stabilisation clauses may prevent the imposition of a higher minimum wage. Where this is the case, employees involved in an investment activity may continue receiving the minimum wage effective on the date of signing of an investment contract for the lifetime of the project

• The rights to freedom of expression and freedom of assembly (UDHR, Articles 19 and 20; ICCPR, Articles 19 and 21): There is potential that stabilisation clauses may be relied on by host states to claim justification for stifling even peaceful demonstrations. This is the case, where demonstration may negatively impact the progress of project activities (and thus have financial implications for investors). This could equally affect the right of employees to take industrial action, protected under the ILO Conventions and ICESCR

• The right to be free from arbitrary arrest and detention and freedom from ill-treatment (UDHR, Articles 9 and 5; ICCPR, Articles 7 and 9): Maintaining the security of project property and personnel in emerging economies is sometimes entrusted to public security forces. In some instances, such forces can be used to violently suppress all forms of protest, in many cases detaining peaceful demonstrators and further subjecting them to torture or ill treatment. As a result, it is important that clauses in investment contracts do not insulate public security forces from the need to respect international human rights standards when carrying out their duties
• Right to property (UDHR, Article 17): The host state may be prevented from improving compensation or local consultation requirements applicable to land requisition and re-settlement if this might result in additional cost to investors. Where stabilisation clauses restrict the ability of states to impose new and more costly standards, this may result, for example, in the payment of inadequate compensation to landowners and local communities
• Right to life (UDHR, Article 3; ICCPR, Article 6): Investment contracts may allow states to intervene with project activities only when an "imminent, material threat to public security, health safety of the environment" exists. Freezing stabilisation clauses would effectively prevent the imposition of a stricter standard. In its turn, an international human rights tribunal may specify a new lower threshold in which states may be required to take reasonable precautionary health and safety measures to protect the right to life. For instance, existing case law under the European Convention on Human Rights requires taking such measures even where there is no imminent material danger. Where this the case, and the state is prevented from interfering with the project activities to implement required health and safety measures, the violation of the right to life may become an issue
• Right of access to water: Judicial decisions may increase the amount of water a person is entitled to on a daily basis to live a dignified life. This can impact business activities. For example, in order to respect the right of people living in the vicinity of a project to water, supplies of water in the project area would need to be rationed in such a way that the water needs of adjacent communities are met. Sometimes, the amounts of water may be insufficient to meet the needs of adjacent communities and to support business activities. Where this is the case, businesses may need to build additional infrastructure or meet logistical expenses for water to be supplied from elsewhere. This can add to the costs of the project. Where the stabilisation clause insulates the project from stricter standards people living near the project may find they do not have adequate water supplies
• Right to an effective remedy (UDHR, Article 8; ICCPR, Article 2): Stabilisation clauses can undermine the rights of third parties to an effective remedy in tort claims against investors. This is because national courts, in assessment of company's actions/inactions, would be guided by the standards for liability applicable to the project. Thus, national courts may not be able to rely on higher standards imposed by new laws that may impose more stringent standards on liability. At the same time, and regardless of the fact that third parties may be impacted by such clauses, these third parties cannot dispute the clauses via arbitration. The arbitration process has limited power to provide an effective remedy to people who may have suffered the damage. This so because, as explained above, an arbitral tribunal is restricted as to the public interests arguments it may take into account

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