GRADUATION THESIS STABILIZATION CLAUSES IN INTERNATIONAL INVESTMENT AND ITS IMPACTS ON THE PROTECTION OF THE ENVIRONMENT IN SUSTAINABLE DEVELOPMENT GOALS HO CHI MINH CITY, 04/2023...
The reason for choosing the topic
Vietnam has experienced a consistent increase in foreign investment over the years, maintaining its appeal even amid the challenges posed by the COVID-19 pandemic According to Deloitte’s Report, "Doing Business In Viet Nam 2022-2023," the country remains a top choice for international investors The significance of foreign direct investment lies in its ability to expedite market expansion and alleviate capital burdens for substantial projects In response, the Vietnamese government has introduced various policies and solutions, including stabilization clauses, to foster a secure and attractive investment environment.
Stabilization clauses in international investment law serve as commitments from host countries to maintain the terms of contracts without legislative or administrative alterations, unless agreed upon by foreign investors These clauses are crucial for safeguarding the interests of foreign investors and minimizing potential disputes between involved parties.
Stabilization clauses are prevalent in international investment contracts, particularly in developing countries seeking to attract foreign investment In Vietnam, these clauses are incorporated in the Law on Investment 2020 and the Law on Investment under Public Private Partnership mode 2020 However, such provisions may hinder the regulatory rights of host countries, potentially compromising their ability to pursue sustainable development goals, including essential environmental protection measures.
The author has chosen to focus on "Stabilization Clauses in International Investment and Their Impact on Environmental Protection within Sustainable Development Goals" for their thesis This topic examines the intersection of legal frameworks and environmental sustainability in the context of international investments.
Research status of the topic
Currently, there is a lack of comprehensive studies in Vietnam specifically addressing the stabilization clause and its effects on sustainable development Existing literature primarily focuses on the broader impacts of international investment on environmental and human rights issues Notable contributions include Tran Thang Long's (2019) examination of environmental exceptions in international investment law and Nguyen Duc Vinh's (2020) analysis of human rights protection in investment disputes.
In contrast to Vietnam, numerous global studies have explored the stabilization clause from various economic and legal perspectives, offering a comprehensive overview of its provisions and impacts However, there is a notable gap in research regarding its effects on environmental protection, a critical component of sustainable development in developing countries.
The research explores various foreign studies on stabilization clauses in international investment law, including Gjuzi's (2018) sustainable development approach, Cotula's (2007) examination of environmental standards in investment contracts, and Gehne and Brillo's (2017) analysis of the implications beyond balancing and fair treatment These studies provide essential principles, characteristics, and effects of stabilization clauses, which the author applies to the Vietnamese context in this thesis.
Research purpose, object, limitation of the research scope
This research aims to examine the implementation of stabilization clauses in international investments and their effects on environmental protection within the framework of sustainable development goals It will assess existing Vietnamese regulations concerning these clauses and suggest improvements to enhance the legal framework, ultimately minimizing the adverse impacts of stabilization clauses on environmental protection efforts in Vietnam.
- Research object: The overview, regulation, and practice of stabilization clauses in international investment and its impacts on environmental protection of sustainable development of developing countries, including Vietnam
- Scope of the research: Regulations, practices, and effects of stabilization clauses in investment contracts in Vietnam and some countries worldwide, in recent decades.
Research methods
To conduct effective and accurate research, the writer has utilized a combination of research methods, including comparative analysis and case studies from various countries, drawing from diverse sources such as textbooks, theses, journal articles, law reports, legislation, and online resources Additionally, the analysis of stabilization clauses and their effects has been informed by empirical studies, reports from international organizations, and regulations in Vietnam and other nations, employing deductive reasoning to formulate conclusions.
Scientific significance and application value of the topic
This thesis explores the application of stabilization clauses and their implications for environmental protection within the context of international investment law, a topic that remains under-examined in Vietnam It serves as a foundation for further research on stability commitments in related fields, ultimately providing valuable insights for Vietnam in formulating stabilization clauses that align with national development goals.
The layout of the thesis
Chapter I: The overview of stabilization clauses and the protection of the environment in sustainable development goals
Chapter II: The application of stabilization clauses and its impacts on the protection of the environment in the world
Chapter III: The application of stabilization clauses in Vietnam and some recommendations
THE OVERVIEW OF STABILIZATION CLAUSES AND THE
The overview of stabilization clauses in international investment
1.1.1 The definition of stabilization clauses
Stabilization clauses, created in the 1930s to safeguard foreign investors from nationalization and expropriation, have gained popularity since the 1990s as a valuable investment tool These provisions offer protection to investors in developing countries and certain OECD nations against negative impacts arising from changes in the host state's laws.
Stabilization clauses are designed to maintain the terms and conditions of investment projects, effectively managing non-commercial risks such as fiscal and regulatory changes These clauses ensure that host states commit to not altering the regulatory framework governing the project, except under specific circumstances like mutual consent, restoration of economic equilibrium, or compensation Essentially, these provisions protect investors by limiting the ability of host states to make unilateral changes to the project's regulatory environment.
The OECD comprises member countries including Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the UK, and the USA For more details, refer to the OECD Guidelines on Corporate Governance of State-owned Enterprises, available through the International Finance Corporation in Vietnam.
2 Frank, S (2015), “Stabilization Clauses and Foreign Direct Investment: Presumptions versus Realities”, The
Journal of World Investment & Trade, 16(1), 88-121 Cernic, Jernej Letnar, “Corporate Human Rights Obligations
Under Stabilization Clauses”, German Law Journal, Vol: 11, No: 2, 2010, pp 210-214;
Tatar, S (2022) ‘The Stabilization Clause Of The Baku-Tbilisi-Ceyhan Pipeline Agreements: A Legal Review Necmettin Erbakan ĩniversitesi Hukuk Fakỹltesi Dergisi, 5(2), 465-481
3 Cotula, L (2008), “Reconciling regulatory stability and evolution of environmental standards in investment contracts: Towards a rethink of stabilization clauses”, Journal of World Energy Law & Business, 2008, Vol 1, No
2, 157-179 unilateral right to change national law and affirm that investors’ consent is required before any legal changes affect them 4
1.1.2 The scope of stabilization clauses
Stabilization provisions can be categorized as either full or limited Full clauses safeguard foreign investors from any alterations in host state regulations, encompassing both fiscal matters, such as taxes and royalties, and non-fiscal areas, including environmental, labor, and health regulations In contrast, limited stabilization clauses provide protection solely against changes to specific laws outlined in the agreement, typically focusing on aspects that directly impact the fiscal regime, such as tax legislation.
Jarrod Wong and Abdallah Abuelfutuh Ali categorize stabilization clauses based on their source, identifying two primary types: contractual stabilization clauses (CSCs) and legislative stabilization clauses (LSCs), the latter being stability provisions found within domestic law Information on these clauses is often scarce in contractual practice, as investor-state agreements are typically not publicly accessible Consequently, the authors concentrate their analysis on issues pertaining to legislative stabilization clauses (LSCs) within their thesis.
Based on LSCs’ structural form and utility, LSCs are divided into three basic categories: Aspirational LSCs, Standard LSCs and Contractual LSCs 8
4 Claudio Dordi and Nguyen Thanh Tam (2017), Textbook On International Investment Law, Youth Publishing
7 Gehne, K., & Brillo, R (2017), Stabilization clauses in international investment law: beyond balancing and fair and equitable treatment, Institute of Economic Law, Transnational Economic Law Research Center (TELC),
School of Law, Martin Luther University Halle-Wittenberg, 6
8 Wong, J., & Abuelfutuh Ali, A (2022), “The Legislative Stabilization Clause”, NYU Journal of International
(i) Aspirational LSCs: contain encouraging language about, or ostensibly authorize states to grant, stability guarantee, but do not commit states to provide them 9
Standard LSCs ensure the stabilization of investment-related laws for a fixed duration from the establishment date, applicable to specific sectors such as mining and energy, or legal areas including commercial, tax, labor, and environmental law.
(iii) Contractual LSCs: guarantee investors stability through investment contracts, which must be approved by states, conditional on meeting specific profile criteria 11
1.1.4 The classification of stabilization clauses
Stabilization clauses, while categorized by sources by a limited number of commentators, exhibit significant variability and lack standardization in international practice Nonetheless, the primary purpose of these clauses remains consistent: to safeguard the fundamental investment terms agreed upon at the signing date from any changes throughout the duration of the agreement.
Depending on the point of view and research purpose, commentators classified stabilization clauses in many different ways 15 Within the scope of the thesis, the author
9 Wong, J., & Abuelfutuh Ali, A (2022), ibid, 6 For example, Article 6 of Madagascar’s Investment Law (Law
The state is committed to fostering a favorable investment climate by implementing a straightforward, equitable, and growth-oriented tax system for investors, as outlined in Act No 2007-036 of 2008 This approach aims to support the successful execution of investment projects, promoting economic development and attracting investment opportunities.
In "Stabilization Clauses: Do They Have a Future?" (Cameron, 2020), the author discusses the implications of stabilization clauses in investment law Notably, Article 15 of the Georgia Law on Investment Activity Promotion and Guarantees (Law No 473-10 of 1996) stipulates that any new legislative act that negatively impacts investment conditions will not affect existing investments for a period of ten years from its enactment This provision highlights the importance of stability in investment environments and the protection of investors' rights For further insights, refer to Wong and Abuelfutuh Ali (2022), which elaborates on these themes.
According to Articles 7 and 8 of the Chile Foreign Investment Statute (Decree Law 600), contracts with stabilization clauses are established after relevant investments receive approval from the Foreign Investment Committee (FIC) This process ensures that investments are protected under a Contractual LSC, promoting a stable investment environment in Chile (Wong & Abuelfutuh Ali, 2022).
12 Jarrod Wong and Abdallah Abuelfutuh Ali See ibid
14 Nalule, V R (2022), “What is the Problem with Stabilization Clauses in Petroleum Agreements?” Journal of
Sustainable Development Law and Policy (The), 13(1), 85-102
Peter D Cameron identified five types of stabilization clauses in the international petroleum industry: (i) Freezing, (ii) Inviolability, (iii) Adjustment, (iv) Allocation of burden, and (v) Asymmetry In contrast, Victoria R Nalule's research outlines eight types of stabilization clauses, including (i) Freezing clauses and (ii) Economic equilibrium/Economic stabilization clauses Nalule categorizes these clauses into three groups based on their methods of maintaining stability.
(i) Freezing clauses – the “classic approach.” 17
Freezing clauses are essential in investment contracts as they ensure that the laws in effect at the time of signing remain unchanged for the investor, protecting them from any adverse legal amendments by the host state This means that investors are shielded from alterations in the host state's laws, including shifts in their interpretation or application An example of this is found in the Mineral Development Agreement between Liberia and Mittal Steel, which explicitly states that any future modifications to the law will not apply to the Concessionaire.
While these provisions seem to limit the host country's regulatory authority over investment contracts and protect against unlawful state actions, they do not ensure that the state can exercise its sovereign powers in the public interest In particular, if host states breach these commitments, the clauses do not hinder potential alterations to the agreements.
Rebalancing of benefits; (iv) Hybrid clauses; (v) Allocation of burden clauses (vi) Prohibition on unilateral changes; (vii) Good will clauses; (viii) Combined stabilization clauses See Nalule, V R (2022), ibid, 85-102
16 This is also the way many commentators commonly used in their studies, such as AFM Maniruzzaman, Frank Sotonye, Lorenzo Cotula, Andrea Shemberg, Katja Gehne & Romulo Brillo See: Maniruzzaman, A F M (2007),
“Damages for breach of stabilization clauses in international investment law: where do we stand today?”,
International Energy Law and Taxation Review, (11), 246; Frank, S (2014), Stabilization clauses and sustainable development in developing countries, PhD thesis, University of Nottingham, 45; Frank, S (2015), ibid, 88-121;
Cotula, L (2008), ibid, 157-179; Shemberg, A (2009), Stabilization Clauses and Human Rights–a research project conducted for the IFC and the UN Special Representative to the Secretary General on Business and Human Rights,
International Finance Corporation, 7-8; Gehne, K., & Brillo, R (2017), ibid, 10
17 Kriebaum, U., Dolzer, R., & Schreuer, C (2022), Principles of international investment law, Oxford University Press, 75; Wong, J., & Abuelfutuh Ali, A (2022), ibid, 30
19 Art XIX s 9 Mineral Development Agreement between the Government of Liberia and Mittal Steel Holdings AG and Mittal Steel (Liberia) Holdings Limited (17 August 2005) See Ibid
Examples of significant agreements include the COTCO Company and the Government of Cameroon in 1998, as well as the Model Production Sharing Contract (PSC) of Tunisia from 1989, specifically Article 24.1 For further reading, refer to Frank, S (2014), page 20; Cotula, L (2007), in the Yearbook of International Environmental Law, 17(1), page 111; and Claudio Dordi and Nguyen Thanh Tam (2017), page 266.
In the article "The Pursuit of Stability in International Energy Investment Contracts," Maniruzzaman (2008) critically examines emerging trends in energy investment agreements, highlighting that specific legal provisions can lead to increased compensation for breaches Wong and Abuelfutuh Ali (2022) further discuss these implications, emphasizing the importance of contractual stability in fostering investor confidence within the energy sector.
(ii) Economic equilibrium clauses – a type of modern stabilization clause
The overview of the environmental protection area in sustainable
1.2.1 The sustainable development in international law and policy
Sustainable development has gained significant attention in recent years, yet it remains an "ambiguous" concept without a universally accepted definition, even in the context of major international treaties.
The Brundtland Report, recognized as a landmark document, established sustainable development as a key objective for the international community It emphasizes the importance of fulfilling current needs while ensuring that future generations can also meet their own needs.
The UN Sustainable Development Summit introduced the 2030 Agenda, which encompasses 17 sustainable development goals (SDGs) It emphasized the importance of maintaining specific commitments made by host states, ensuring that investment laws remain unchanged if they negatively impact investors during the investment period However, as noted by Hirsch, fair and equitable treatment (FET) clauses are not recognized by current investment jurisprudence as yielding the same protections as stabilization provisions, indicating that mere legislative or regulatory changes do not trigger compensation obligations for foreign investors Consequently, these clauses remain crucial, and no provisions in Bilateral Investment Treaties (BITs) can fully replace their significance.
(2017), ibid, 20; Umirdinov, A (2015), ibid, 455-487; Hirsch, M (2011), “Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and Regulatory Change in International Investment Law”, The
Journal of World Investment & Trade, 12(6), vii, 806
The CMS Gas Transmissions v Argentina case highlighted the significance of international investment treaties' umbrella clauses in enforcing contractual commitments between states and investors These provisions aim to elevate such commitments to the level of international treaty protection, thereby broadening their enforcement under international law The interpretation of these umbrella clauses is crucial, as it relies heavily on their specific wording and context, which can be understood as extending protections to contractual agreements.
R (2017), ibid, 13, 23-24; Kriebaum, U., Dolzer, R., & Schreuer, C (2022), ibid, 153
37 In the scientific and political discourse as well as in the states and international organizations’ practice Gjuzi, J
(2018), Stabilization Clauses in International Investment Law A Sustainable Development Approach, Springer Nature Switzerland AG, 109
39 World Commission on Environment and Development (WCED) (1987), Brundtland Report Our common future,
40 The post-2015 development agenda named “Transforming our world: The 2030 agenda for sustainable development” See: UN General Assembly Resolution (2015), Resolution No A/RES/70/1, adopted on 21 Oct
The 2030 Agenda for Sustainable Development emphasizes the integration and balance of three key pillars: economic, social, and environmental Although this document is not legally binding, it plays a crucial role in guiding nations and international institutions in establishing frameworks to achieve the Sustainable Development Goals (SDGs).
1.2.2 The protection of the environment in sustainable development goals
Analyzing the effects of stabilization clauses on the Sustainable Development Goals (SDGs) necessitates a thorough examination of the intricate relationships among the three pillars of sustainability This thesis specifically concentrates on the environmental protection aspect of sustainable development, exploring how stabilization provisions influence this critical area within the broader framework of SDGs.
Environmental protection is a crucial aspect of sustainable development, which consists of three key dimensions Additionally, sustainable development law incorporates significant elements of international environmental law, highlighting its importance in promoting ecological sustainability.
Numerous international agreements, including the Johannesburg Declaration and the Rio+20 Conference, emphasize the necessity of balancing the pillars of sustainable development Analyzing the impact of stabilization clauses on sustainable development must consider their effects on all pillars; otherwise, it undermines the fundamental principle of sustainability.
We Want, Resolution No A/RES/66/288 of 11 September 2012, adopted on 27 July 2012
See more: Gehne, K., & Brillo, R (2017), ibid, 34-35; Gjuzi, J (2018), ibid, 121; Frank, S (2014), ibid, 194
42 The Sustainable Development Agenda, , accessed on April 1, 2023
Sustainable development is recognized as a key goal by the international community, and countries have both the right and the responsibility to integrate Sustainable Development Goals (SDGs) into their national policies and legislation This obligation arises from their participation in international treaties that promote these goals.
The Charter for the Environment in the French Constitution (2005) emphasizes that sustainable development must meet current needs without compromising future generations' ability to meet theirs Similarly, Article 22 of the Maldives Constitution (2008) mandates that public policies must foster sustainable development by balancing environmental protection with economic growth and social advancement.
Constitution of Ethiopia 1994: “The Peoples of Ethiopia as a whole, and each Nation, Nationality and People in
Ethiopia in particular have the right to improved living standards and to sustainable development.”
See more: Frank, S (2014), ibid, 175; Gjuzi, J (2018), ibid, 116
45 Frank, S (2014), ibid, 194 binding environmental international treaty is The Paris Agreement, in which parties who adopted, must take action to reduce their greenhouse gas emissions to combat climate change 46
In 2022, the UN Human Rights Council (Resolution A/HRC/RES/48/13) and the UN General Assembly (Resolution A/RES/76/300) officially recognized a clean, healthy, and sustainable environment as a universal human right This significant acknowledgment marks the first time the UN General Assembly has granted such recognition, as previous environmental issues were only addressed in recommended documents and resolutions from 2012 to 2021 The advancement of this right is largely attributed to the efforts of the Human Rights Council's special procedures focused on environmental rights.
In 2022, the UN General Assembly acknowledged the right to a healthy environment as a fundamental human right To ensure its effectiveness, it is crucial to establish an enforcement monitoring mechanism and create binding international agreements that uphold this obligation.
The Paris Agreement, adopted during the 46th UN Climate Change Conference (COP21) on December 12, 2015, has been actively implemented by the Vietnamese Government since its approval in 2016 The government has developed a comprehensive implementation plan to fulfill its commitments under the Agreement, demonstrating its dedication to addressing climate change For more information, visit the Embassy of the Socialist Republic of Vietnam in Japan's website.
47 UN Human Rights Council (2021), Resolution No A/HRC/RES/48/13, The human right to a clean, healthy and sustainable environment, adopted on 8 October 2021 (Resolution A/HRC/RES/48/13)
48 UN General Assembly (2022), Resolution No A/RES/76/300, The human right to a clean, healthy and sustainable environment, adopted on 28 July 2022 (Resolution A/RES/76/300)
49 The right to an environment of a specific quality was mentioned internationally at the first time by the UN Conference on the Human Environment (Stockholm Declaration 1972, principle 1)
The UN Conference on the Human Environment, held in Stockholm from June 5-16, 1972, resulted in the Stockholm Declaration, which highlights the interconnectedness of human rights and environmental protection Notable works, such as Dinah Shelton's 2004 study on the links between international human rights guarantees and environmental safeguards, emphasize the importance of integrating these two areas Additionally, G Bailetti Frayssinet's 2008 analysis explores whether stabilization clauses can effectively protect mining investments amid changing environmental regulations.
Mineral Law and Policy, University of Dundee, 11
50 See more the list of Human Rights Council’s resolutions from 2012 to 2021 in
, accessed on April 1, 2023
At the national level, many countries have legally protected this right through international agreements, their national constitutions, legislation, laws or policies 51
The Sustainable Development Goals (SDGs) are fundamentally connected to the right to a clean, healthy, and sustainable environment, while also addressing broader issues such as poverty, health, and education Each SDG includes objectives that directly relate to this essential right However, the achievement of these goals is currently threatened by a series of compounding crises, including the impacts of COVID-19.
The use of stabilization clauses in some countries
2.1.1 Empirical studies on modern stabilization practice
While there is extensive qualitative research on stabilization provisions, empirical studies on their contemporary application remain scarce due to the confidentiality surrounding most investment contracts To date, only two successful empirical studies focusing on these clauses have been identified.
In 2010, Mustafa Erkan conducted research examining how contractual instruments, particularly stabilization clauses, support energy investors in safeguarding their project interests This study was grounded in a comprehensive literature review and insights gathered from interviews with expert attorneys in the energy sector.
The IFC-SRDG, researched by Andrea Shemberg in collaboration with the International Finance Corporation (IFC) and the UN Special Representative, examines 76 contracts and 12 model contracts from various sources The study primarily focuses on the analysis of stabilization clauses, utilizing the findings from the IFC-SRDG as a key resource.
Currently, there is no centralized public repository for private contracts, limiting access for practitioners, host countries, investors, civil society, and academics to analyze contemporary practices across various fields Consequently, the majority of references in this thesis are qualitative studies that emphasize case analyses of stabilization clauses found in model contracts and legislation.
58 Erkan, M (2011) ibid, 219, 199 See more: Umirdinov, A (2015), ibid 455-487
This article draws on insights from various sources, including international law firms, negotiations with lenders and lawyers specializing in agreements with stabilization clauses, as well as interviews with members of Non-Governmental Organizations who have researched these provisions and their implications in arbitration disputes.
Shemberg, A (2009), ibid, 27 See more: Umirdinov, A (2015), ibid, 455-487
The study highlights the limited evidence surrounding stabilization provisions, noting that contract details between foreign investors and host states are typically confidential, accessible only through legal proceedings or discreet interviews This secrecy may lead to a skewed understanding of the broader investment landscape Furthermore, while Mustafa Erkan's research focused solely on the energy sector, the IFC-SRDG examined contracts across various regions and industries, benefiting from significant financial and logistical support from the IFC, which enhanced its empirical research capabilities on stabilization provisions.
2.1.2 The use of stabilization clauses’ type
Stabilization provisions are commonly included in contracts for primary natural resource, energy, and infrastructure investments due to the substantial capital required and the lengthy timeframes before achieving profitability This trend reflects the heightened political risks associated with these projects compared to private sector public service initiatives such as power, telecommunications, or healthcare services.
Host states generally grant stabilization clauses, mostly from developing and transition economies, to accommodate interests of foreign investors and entice future FDI by providing a high level of guarantee 66
Freezing clauses play a significant role in mining investment contracts, with the IFC-SRDG reporting that 67 full and limited freezing clauses are present in half of the extractive agreements However, these clauses are less common in investment treaties, and stabilization provisions remain relatively unknown This lack of familiarity is why the author chooses not to elaborate on these connections within the thesis.
The regions covered in this analysis encompass Sub-Saharan Africa, East Asia and the Pacific, the Middle East and North Africa, Eastern Europe, Southern Europe and Central Asia, South Asia, Latin America, the Caribbean, as well as OECD countries.
62 Like infrastructure, extractive industries, telecommunication, and health care services Shemberg, A (2009), ibid, 11 See more: Gehne, K., & Brillo, R (2017), 11
63 According to Halabi, S F., the IFC-SRDG is “a unique opportunity” to study investment contracting behavior See: Halabi, S F (2011), ibid, 261
64 Claudio Dordi and Nguyen Thanh Tam (2017), ibid, 265; Halabi, S F (2011), ibid, 261
The incorporation of model contracts, such as the Energy Charter Model HGA on Cross-Border Pipelines, promotes the use of stabilization provisions that ensure specific protection for various industries However, these provisions have sparked social protests related to certain projects, leading to modifications in the HGA model.
See: Energy Charter Model HGA See more: Maniruzzaman, A F (2008), ibid, 121-157
67 In detail, five of the six mining contracts whose high asset specificity, had full freezing provisions See: Shemberg, A (2009), ibid, 55-58, 15-16 See more: Halabi, S F (2011), ibid, 261
Nine out of eighteen extractive contracts include freezing clauses, a common feature in public service project agreements These clauses are prevalent in modern investment contract practices, particularly in developing countries However, such provisions are typically absent in agreements with OECD countries.
In contracts within OECD countries, economic equilibrium clauses primarily address specific regulatory risks, focusing mainly on discriminatory regulations while often excluding areas related to safety, security, and public concerns like environmental or social legislation In contrast, contracts with non-OECD countries typically feature comprehensive economic equilibrium clauses that encompass all regulatory changes, regardless of their discriminatory impact or underlying intentions.
Hybrid clauses were present in only six of the contracts analyzed in the IFC-SRDG, primarily governing oil and gas investments in specific regions One notable agreement acknowledged the national duty to adhere to international standards and to advance scientific and technological progress through legislation; however, it failed to guarantee the stability of those laws.
2.1.3 Some reasons behind the use of stabilization clauses in some countries
Regarding the frequency of application, IFC-SRSG argued that in contrast to the developing countries, not many OECD states agree to adopt stabilization provisions 75
In the low asset specificity sector, freezing provisions were included in only one contract each for power, transportation, and infrastructure, while they were absent in agreements related to railroads, roads, water, telecom, and healthcare.
70 Maniruzzaman, A F (2008), ibid, 121-157; Gehne, K., & Brillo, R (2017), ibid, 11
71 Shemberg, A (2009), ibid, 26, 85 See more: Gehne, K., & Brillo, R (2017), ibid, 11
72 For example, contracts are related to the power, water, transportation, infrastructure, and extractive industry See: Shemberg, A (2009), ibid, 26, 85; Gehne, K., & Brillo, R (2017), ibid, 11
73 Including Eastern Europe, Southern Europe, the Middle East, and Central Asian regions
One key stabilization provision in this study mandates that the state must compensate investors for any changes to labor and employment regulations, even if these changes align with EU standards, until the end of 2016 or until the host state becomes a candidate for EU membership.
Implications of stabilization clauses on environment protection
While some stabilization provisions may align with environmental protection goals, their detrimental effects often outweigh the benefits, as they hinder host states from fulfilling their regulatory responsibilities Consequently, this thesis emphasizes the adverse impacts of these provisions on states' efforts to achieve environmental objectives and uphold the right to a clean, healthy, and sustainable environment.
(i) Slow or stall environmental policy development
Developing countries face budget constraints that drive them to aggressively attract foreign direct investment (FDI) through investment guarantees and incentives Stabilization clauses play a crucial role in safeguarding capital-intensive projects, particularly in highly regulated sectors like energy, by aligning with investors' interests and enhancing the appeal of these investments Such clauses are essential for protecting long-term investments that require time to become operational.
Petroleum Negotiators., 19; Burnett, H G., & Bret, L A (2017), Arbitration of International Mining Disputes: Law and Practice, Oxford University Press, 260; Tomic, K (2020), Stabilization Clauses in Energy
Sector, Harmonius: J Legal & Soc Stud Se Eur., 258-272; Faruque, A (2006), Validity and Efficacy of Stabilisation Clauses: Legal Protection vs Functional Value, J Int'l Arb., 23, 317
83 Shemberg, A (2009), ibid, 33 See more: Gehne, K., & Brillo, R (2017), ibid, 11
84 Shemberg, A (2009), ibid, 11 See more: Gehne, K., & Brillo, R (2017, ibid, 16
Commentators such as Gehne and Brillo, along with Gjuzi, highlight the detrimental effects of stabilization clauses on environmental protection These provisions typically fail to support environmental goals, with positive outcomes occurring only in rare instances Such instances arise when states neglect to enforce their legislative powers to amend existing environmental standards included in these clauses, or when foreign investors opt not to exercise their rights due to concerns about their reputation.
International investment agreements often prioritize investors' rights over environmental and human rights, leading to inadequate environmental protections These agreements typically include stabilization clauses that can penalize host states for implementing stricter environmental standards, resulting in potential compensation payments or costly dispute settlements This financial burden can damage the reputation of host states, as evidenced by over 230 fossil fuel arbitration cases where investors have won approximately 75% of the time, compelling states to pay an average of $600 million in compensation.
86 See UN, Inter-Agency Task Force on Financing for Development, Financing for Sustainable Development Report 2022 (New York, 2022), see also Report A/77/284, para 62
To determine the necessity of compensation, it is essential to evaluate the "effects" doctrine, which distinguishes between expropriatory actions—where host states have the right to seize investors' property and must provide compensation—and bona fide regulatory measures that fall within government policy powers and do not require compensation However, there is a lack of consistency in practice, as some Tribunals and Bilateral Investment Treaties (BITs) consider the motivations behind regulatory measures and establish environmental exceptions Nonetheless, these exceptions are not absolute and typically only apply under "rare circumstances" or when new environmental laws result in a "confiscatory effect."
S (2005), International investment, political risk and dispute resolution: a practitioner’s guide, Oceana TM, 6
See more: Bailetti Frayssinet, G (2008), ibid, 20-27; Cotula, L (2007), ibid, 111
The author argues that host states often face challenges in avoiding compensation to investors when they raise environmental standards, as it can be difficult to distinguish between legitimate regulatory measures and exceptions for environmental reasons.
Investment arbitration, a widely used dispute resolution process, presents significant challenges for developing countries A key issue is the lack of transparency in international investment agreements and mechanisms like ICSID, ICC, and UNCITRAL, which do not require investors to publicly announce their intent to initiate disputes This opacity hinders the accurate assessment of the number and nature of cases, leading to an information imbalance that disadvantages developing nations, whose legal teams often lack the resources to effectively navigate these complexities.
The lack of financial resources often results in developing countries relying on scattered and incomplete sources, hindering their ability to effectively defend their interests in investor-state arbitrations Furthermore, the high costs associated with arbitration, with tribunals averaging over $400,000 and additional legal fees ranging from $1-2 million, can be a significant deterrent for developing countries Additionally, the technical capacity and litigation experience of lawyers from developing countries may be limited, exacerbating the challenges they face in these proceedings.
See: Gjuzi, J (2018), 99; Tienhaara, K (2006), “What you don't know can hurt you: investor-state disputes and the protection of the environment in developing countries”, Global Environmental Politics, 6(4), 73-100
89 See: Gjuzi, J (2018), ibid, 99; Report A/77/284, para 62
The consequences of regulatory chill discourage host states from modifying environmental regulations, leading to non-fulfillment of climate commitments under the Paris Agreement Concerns over potential liability for substantial future dispute settlements, particularly affect developing countries with limited financial resources or debt burdens To mitigate these risks, these states may opt to retract, amend, or neglect the enforcement of environmental standards.
The failure of nations to uphold the right to a clean, healthy, and sustainable environment undermines their obligations to establish and maintain non-regressive environmental standards that protect human rights This creates a troubling contradiction between the Sustainable Development Goals (SDGs) and investment agreements that include stabilization clauses, ultimately exacerbating the climate crisis and resulting in human rights violations.
The chilling effect of legal provisions is evident in various cases, such as an Israeli Supreme Court ruling regarding stabilization provisions that highlighted their detrimental impact on compensatory duties Similarly, an Indonesian case demonstrated this chilling effect, where the threat of arbitration influenced the government's decision to permit open-cast mining in protected forest areas, as outlined in Forestry Law no 41 of 1999.
The connection between debt burdens and the climate crisis underscores the necessity of debt relief for effective climate action in vulnerable nations In 2021, 34 of the world's poorest countries allocated five times more towards debt payments than what is required to safeguard their populations from climate change impacts.
The BTC stabilization clause has been widely criticized for its detrimental effects on environmental protection and human rights in Turkey This clause grants the BTC Consortium extensive protections against changes in Turkish law, conflicting with OECD and UNCITRAL standards Scholars argue that it creates a chilling effect on Turkey's ability to meet its human rights obligations, particularly those outlined by the European Convention on Human Rights Additionally, concerns over potential compensation obligations under this clause may hinder the development of Turkish environmental law in alignment with EU Directives, as the Turkish Government could become hesitant to harmonize national laws with international standards.
EU and international laws as well
See: Hildyard, N., & Muttitt, G (2006), “Turbo-charging investor sovereignty: Investment agreements and corporate colonialism”, London: The Corner House See more: Tatar, S (2022), ibid, 465-481
The principles of prevention and non-regression assert that once established, states are prohibited from disregarding or diminishing environmental regulations without substantial justification This regression contradicts their duty to promote the progressive enhancement of the right to a clean, healthy, and sustainable environment, as outlined in Report A/77/284, paragraphs 38-39.
States may leverage stabilization clauses as a rationale for preserving the current environmental conditions, effectively using them as a form of "political cover." This approach allows governments to justify their contentious political stances by claiming they are constrained in their actions, presenting an "our hands are tied" argument.
(ii) Reduced coherence, effectiveness, or efficiency of policies
THE APPLICATION OF STABILIZATION CLAUSES IN
Some provisions on the stabilization clause in the international investment
3.1 Some provisions on the stabilization clause in the international investment in Vietnam
Under Article 13 of the Investment Law 2020, investors are protected by a guarantee for their business investments in the event of legal changes If a new law introduces lower investment incentives than those previously granted, investors are allowed to retain the benefits of the earlier law for the remainder of their project's incentive period.
Notably, certain exceptions apply to this provision, including amendments to legal documents made for reasons of national defense, security, social order and safety, social ethics, public health, and environmental protection In such cases, investors are no longer eligible to continue applying investment incentives and must submit written requests to confirm the changes.
Three years after the effective date of the new legal documents, various measures will be implemented to address issues, including: (i) deducting actual losses incurred by investors from their taxable income, (ii) adjusting the operational objectives of the investment project, and (iii) providing support to investors in managing their losses.
Article 101 of the 2020 Law on Investment establishes effective enforcement for public-private partnerships, allowing project contracts signed prior to the law's enactment to continue being executed in accordance with their original terms and the regulations in place at the time of signing.
107 Article 13 of Investment Law 2020 guided by Article 4 of Decree 31/2021/ND-CP of the Government dated March 26, 2021, detailing and guiding the implementation of a number of articles of the Investment Law
According to Article 101.4, project contracts that were signed prior to the enactment of this Law may still be executed in alignment with their original terms Additionally, Article 101.5 specifies that the transfer of a project under construction, utilizing the Build-Transfer (BT) contract model, will proceed as stipulated in the signed contract.
Thirdly, Article 3 of Decree 33/2013/ND-CP of the Government, dated April 22,
In 2013, the Model Contract of Petroleum PSA was enacted, stating that it does not apply to contracts signed prior to its effective date For oil and gas blocks approved by the Prime Minister before this date, negotiations and signings will proceed in accordance with the previously established Model Contract of Petroleum PSA.
No 139/2005/ND-CP dated November 11, 2005 of the Government.”
Decree 33/2013/ND-CP introduces the Model Contract for Petroleum PSA, specifically addressing the implications of legal changes in Article 18.1.3 This article mandates that if any laws affecting tax rights and obligations are amended or revoked after the Effective Date, the Parties must promptly discuss necessary amendments to protect the CONTRACTOR's rights and interests This includes safeguarding the CONTRACTOR's share of Oil or Gas Interests and ensuring that any income or revenue remains unaffected by legal alterations Furthermore, the project implementation must continue in accordance with the provisions of the signed BT contract and existing laws at the time of signing.
109 National database of legal documents, Database of the Ministry of Industry and Trade, Model Contract of Petroleum Product Sharing Agreement (promulgated together with Decree 33/2013/ND-CP)
, accessed on January 13, 2023.
Some comments about the stabilization clauses in the international
In Vietnam, stabilization clauses in legal documents typically fall under Standard LSCs, encompassing both freezing and economic equilibrium types Unlike direct monetary compensation, the economic equilibrium approach focuses on adjusting tariffs owed by the company or encouraging parties to negotiate in good faith to amend contracts, thereby restoring the anticipated economic balance Essentially, these clauses prioritize negotiation and dialogue over immediate financial restitution.
This article examines stabilization clauses in international investment in Vietnam, focusing on standard LSCs and those specific to petroleum agreements It addresses the importance of accountability and public scrutiny in the implementation of these clauses, while also exploring the need to balance stability with evolving environmental standards The analysis includes comparisons with regulations from other countries to highlight best practices and potential improvements in Vietnam's investment framework.
Standard LSCs are prevalent in the investment laws of several developing countries, including Vietnam, Armenia, Bosnia and Herzegovina, Cuba, Georgia, Kazakhstan, and Kyrgyzstan This highlights Vietnam's recognition of Standard LSCs as crucial for attracting foreign direct investment (FDI), safeguarding against political risks, and maintaining legal certainty and project stability.
111 Article 18.1.3 of Model Contract of Petroleum PSA in Decree 33/2013/ND-CP
112 See: infra Appendix, pt II, Wong, J., & Abuelfutuh Ali, A (2022), ibid, 44
There are conflicting views on the enforceability of Standard LSCs, largely due to their unilateral nature Research by J Wong and A Abuelfutuh Ali indicates that the feasibility of a Standard LSC hinges on the certainty, clarity, and scope of the stability commitment within existing law A host country should only implement the Standard LSC if it positively influences foreign direct investment (FDI) inflows However, the impact of Standard LSC on FDI remains uncertain, as it may restrict the state's regulatory authority in environmental protection and expose the state to legal liabilities for any negative consequences on foreign investments arising from environmental regulations.
For the above reasons, the author believes that the Standard LSC is potentially a poor deal for the host developing country, including Vietnam
3.2.2 Stabilization clauses in petroleum agreements
Due to the intricate nature of petroleum projects, Vietnam and several developing countries, including Egypt, Liberia, Angola, Ghana, and Tanzania, incorporate stabilization clauses in their petroleum agreements These stabilization mechanisms can take various forms to ensure project viability and investment security.
According to Neuhaus, J E., standard Legal Stability Clauses (LSCs) should be enforceable due to the clarity and firmness of the stability assurances provided in relevant legislation The rationale for enforcing Contractual Stability Clauses (CSCs) should also be supported by tribunal decisions that validate the enforcement of LSCs Notably, tribunals have affirmed that investors can reasonably rely on these assurances in LSCs, as demonstrated in cases such as AES Corporation and Taupower B.V v Kazakhstan and Rumeli Telekom AS v Kazakhstan.
In "The Enforceability of Legislative Stabilization Clauses," Neuhaus (2015) explores the implications of such clauses within international arbitration, highlighting significant cases like The AES Corporation and TAU Power B.V v Kazakhstan (ICSID Case No ARB/10/16) and Rumeli Telekom AS & Telsim Mobil Telekomunikasyon Hizmetleri AS v Kazakhstan (ICSID Case No ARB/05/16) These cases illustrate the complexities and enforceability issues surrounding legislative stabilization clauses, contributing to the ongoing discourse in international law and arbitration practices.
333 (July.29, 2008) See more: Wong, J., & Abuelfutuh Ali, A (2022), ibid, 30
According to Thomas Wọlde and George Ndi, as well as the tribunal in Charanne v Spain, a stabilization promise that exists solely in legislation cannot be considered an explicit, formal, and binding stabilization agreement This perspective highlights the importance of clear contractual commitments in international investment law.
In the case of Charanne B.V and Construction Investments S.A.R.L v Kingdom of Spain (SCC Case No 062/2012), the award was issued on January 21, 2016, and can be found on pages 478-9 and 487 Additionally, the Masdar Solar & Wind Cooperatief U.A v Spain case (ICSID Case No ARB/14/1) resulted in an award on May 16, 2018, with relevant details in paragraphs 507-508 For further insights, refer to Wong and Abuelfutuh Ali's 2022 publication.
116 J Wong and A Abuelfutuh Ali also noted that: “Otherwise, without the quid pro quo, the investor is a free-rider at the host state’s expense.” See Wong, J., & Abuelfutuh Ali, A (2022), ibid, 32
Foreign investment laws often regulate various sectors, including petroleum agreements In many cases, these agreements can be formalized through legislation that references the specific petroleum contracts, similar to practices observed in Vietnam and other countries.
Except for Liberia, which has a stabilization clause that involves freezing, the remaining countries similar to Vietnam incorporate economic equilibrium stabilization clauses However, some commentators argue that these provisions may foster uncertainty and weaken the ability to enforce changes in contractual relationships The absence of a clear compensation obligation and a defined formula for calculating compensation means that parties are not required to agree on restoring economic balance.
Any changes to the Tax Corpus or applicable laws affecting the CONCESSIONAIRE after the Amendment Effective Date that impose additional taxes, duties, customs, royalties, or similar charges will not be applicable to the CONCESSIONAIRE.
121 Article 38.2 of the Angolan PSA Model 2004 and Article 30155 of the PSA 2004 entered into between Tanzania Government and ABC Oil Company See ibid
Ghana initially implemented both freezing clauses and economic equilibrium clauses before its significant commercial oil discovery in 2007 However, as the potential of its oil reserves became clearer within the petroleum sector, the country shifted exclusively to utilizing economic equilibrium clauses.
Balancing Act: The Trajectory of Stabilization Clauses in Ghana’s Petroleum Agreements Oil, Gas & Energy
Law, 17(2) See more: Mendes, T A (2021), Mozambique petroleum legal framework: comparative assessment of Mozambique stabilization clauses, Católica Global School of Law, 40-41
Article XIX of Egypt Model Concession Agreement for Petroleum Exploration and Exploitation 2006:“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 … 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” See more: Oshionebo, E (2010), ibid, 66
122 Branco, Miguel (2021), “Production Sharing agreements – legal blessing or curse for developing countries?”,
International Energy Law Review, 2021, 3 See more: Mendes, T A (2021), ibid, 44-45
The stabilization clause in Vietnam's Model Contract of Petroleum PSA, established by Decree 33/2013/ND-CP, permits renegotiation to restore equilibrium without addressing compensation obligations This approach, similar to regulations in Angola, Egypt, and Tanzania, has been criticized by Mendes T A for lacking effective risk mitigation tools and failing to adequately address expropriation risks, making it less appealing to investors In contrast, Ghana's Model Petroleum Agreement of 2020 explicitly states that host state actions may violate investor rights, leading to compensation, thereby offering a more attractive framework for investment.
Recommendations
Vietnam should reassess the Standard LSC, which may impose significant stability obligations without effectively attracting foreign direct investment (FDI) Instead, it would be beneficial for Vietnam to explore the Contractual LSC model, drawing insights from the investment case studies of Colombia, Chile, and Peru This approach could lead to improved regulations surrounding stabilization clauses and international investment There are several compelling reasons for Vietnam to favor the Contractual LSC over the Standard LSC, as it may provide a more favorable legal framework for attracting FDI.
Contractual LSC establishes a binding agreement that, when combined with legislation, offers greater enforceability compared to purely legislative Standard LSC or independent stability contracts This enhanced stability effectively attracts investors and provides significant benefits for the host state.
The Constitution of Vietnam 2013 guarantees citizens various rights, including freedom of speech, press, access to information, and the right to assemble and demonstrate, with the exercise of these rights regulated by law Additionally, it emphasizes citizens' involvement in state and social management, allowing them to engage in discussions and provide recommendations to state agencies on local and national issues The government is responsible for ensuring conditions that promote public participation and transparency in addressing citizens' opinions and suggestions.
Article 17 of the 2016 Law on Access to Information mandates the public disclosure of specific information, including international agreements involving Vietnam, details about public investment projects and programs, and updates on their implementation status, as well as information pertaining to community welfare and health.
The Law on Environmental Protection 2020 in Vietnam ensures the right to access justice in environmental matters, encompassing the right to access information and the right to engage in environmental protection activities For a deeper understanding of the legal framework surrounding this right, refer to Phan Thy Tuong Vy's article, “Improving legal framework to implement the right to access to justice in environmental matters in Vietnam,” published in the VNUHCM Journal of Science and Technology Development.
The administrative system established by a host country for approving stability contracts under the Contractual LSC enables closer monitoring of foreign investments, ensuring compliance with stabilization obligations This oversight allows the state to evaluate the LSC's value in real time and make necessary amendments, such as environmental protections However, managing the approval process for these contracts can be complex Therefore, Vietnam must develop a comprehensive implementation mechanism and a strategic resource allocation plan to effectively oversee the approval of Contractual LSCs and monitor foreign investments.
To effectively limit the scope of stabilization clauses in Vietnam, it is essential to establish benchmarks for environmental regulations based on international conventions, scientific publications, and other recognized standards Specifically, the Investment Law 2020 should explicitly state that stabilization provisions are not applicable when laws are amended for environmental protection, in alignment with the obligations outlined in the Law on Environmental Protection 2020 and the Paris Agreement.
Vietnam should implement a transparency and accountability policy for contracts, emphasizing environmental considerations in stabilization provisions This policy must include transparent negotiations and be open to public scrutiny to ensure accountability and promote sustainable practices.
146 J Wong and A Abuelfutuh Ali, through investment case studies of Columbia, Chile and Peru, they explained:
The success of a Local Service Contract (LSC) can vary throughout its lifetime due to changes in the investment landscape Instead of solely focusing on overall Foreign Direct Investment (FDI) levels, which may not accurately reflect the contributions of the LSC, host states can obtain more reliable data by analyzing investments made under a Contractual LSC through the relevant administrative approval system.
In the 2022 Survey of Sustainability Reporting, John Ditty, Sponsoring Partner of ESG services at KPMG in Vietnam and Cambodia, highlighted that the lack of a mandatory reporting framework in Vietnam leads to inconsistent quality in corporate disclosures He emphasized the urgent need for Vietnamese companies to adopt comprehensive sustainability reporting practices that align with international standards, thereby addressing the expectations of stakeholders both domestically and globally.
Vietnam should prioritize joining the Extractive Industries Transparency Initiative (EITI) to enhance contract transparency in the extractive sector This initiative will necessitate clear negotiations regarding stabilization clauses in contracts, promoting greater accountability and openness in the industry.
If and when Vietnam joins and complies with the EITI, Vietnam can set up the regulations like the Liberia EITI Act, 150 to serve the purpose of maximizing the
Since 2015, the Vietnam Chamber of Commerce and Industry (VCCI) has highlighted in its report that Vietnam has yet to officially commit to the Extractive Industries Transparency Initiative (EITI), despite considering it since 2005 Unlike Vietnam, several Southeast Asian nations, including Indonesia, the Philippines, Myanmar, and East Timor, have adopted EITI The report emphasizes that technical challenges are not the primary obstacle for Vietnam; rather, EITI should be viewed as a vital tool for enhancing management, improving statistical systems, and advancing reforms in the mining sector By joining EITI, Vietnam could establish a transparent monitoring mechanism to strengthen legal policy enforcement, create a comprehensive database for the mineral sector, enhance information sharing among ministries, and support the development of effective strategies and policies for extractive industry reform.
See: VCCI (2015), The Report: Implementing EITI to reform the mining industry in Vietnam,
The implementation of the Extractive Industries Transparency Initiative (EITI) in Vietnam plays a crucial role in enhancing transparency and accountability within the extractive sector According to Nguyen Ngoc Quang and Duong Van Tho (2019), EITI fosters improved governance by ensuring that revenues from natural resources are reported and made accessible to the public This initiative not only promotes responsible management of resources but also encourages stakeholder engagement, ultimately contributing to sustainable development in Vietnam's extractive industries.
The EITI, as of March 2023, includes 57 implementing countries, many of which are low- and middle-income nations reliant on natural resources Participation in the EITI is voluntary, but the EITI 2019 Standard mandates that governments and extractive companies disclose information regarding corporate beneficiary ownership, contracts, licenses, and financial transactions related to the extractive industries Countries are evaluated on their adherence to the EITI Standard through a process called Validation, which ensures quality assurance Comprehensive data on the production, revenue, and management of the extractive industry is accessible on dedicated country pages.
According to Vietnamese law, the protection of state secrets is governed by the Law on Protection of State Secrets (2018) and Decision 1660/QD-TTg, which outlines the list of state secrets in the resources and environment sector This list includes documents related to undisclosed minerals or those not approved by authorities (Article 2.5 of Decision 1660/QD-TTg) In contrast, the Extractive Industries Transparency Initiative (EITI) mandates the disclosure of information pertaining to active mineral operations, such as licensing, production volumes, business activities, revenue, and budget allocations from mining Therefore, EITI's requirements do not infringe upon state secrets in the mineral sector.
150 Regarding the proposed EITI implementation model for Vietnam, the author proposes a model has: