#Column: Reciprocal Quantum of Solace

M Rishi Kumar

India is on the verge of undergoing a massive transformation if the new Model Text for India’s Bilateral Investment Treaty (BIT) is anything to go by. India is in the process of re-negotiating existing 83 standalone BITs and harmonising provisions of standalone BITs with investment chapters of Foreign Trade Agreement’s (FTA).

While much has already been written, criticised and a gloomy picture been painted, on India’s BIT practice. This article instead would attempt to initiate a debate, on how synergy can be created between India as a host State with its investors and to project its ability to attract investment.

Currently, India is not the only country reviewing its BIT regime. A number of developing countries are questioning the rationale of investment agreements as these are neither necessary nor sufficient to attract foreign investment. In early 2014, Indonesia announced its plan to re-examine more than 60 bilateral investment treaties. Like India, Indonesia is also preparing a new template for its future bilateral investment treaties. 

South Africa terminated its treaties with Germany, Switzerland and Spain based on a three-year review and decided to replace its BIT regime with a new domestic legislation which aims to protect investor rights while safeguarding domestic policy space.

India’s new Model Text for BIT does not contain stabilization clauses.  It would be essential if India could re-consider including this clause, since a stabilisation clause signals intention of host State and investors that the agreement they have entered into shall have a long life.  

What are ‘Stabilisation clauses’?

From the point of view of the foreign investor who are risking huge capital, the stability and predictability of the legal and regulatory framework of a host State is fundamentally important especially host States who have a volatile legal and institutional system which the foreign investor does not trust.

Stabilisation clauses are a common feature of long-term investment contracts between foreign investors and host States, particularly in the developing world.  The essential purpose of stabilisation clauses is to impose some constraints on the host government’s ability to amend domestic law in a way which affects the investment contract, including by providing that the investor shall be compensated if detrimental changes in law occur.

This clause essentially provide that in the event of a ‘change in law’ affecting the investors returns, the host State is required to take steps to restore the original economic equilibrium of the contract.  These clauses occasionally provide that additional costs incurred by the investor as a result of the change in law will be borne by the State in a stipulated manner or in some cases it may trigger an obligation on the host State to enter into negotiation with the investor.  If however the issue has to be referred to arbitration, the stabilisation clause has failed to achieve its primary purpose.

Enforceability of Stabilisation clauses

Regarding enforceability of stabilisation clauses, few available awards and much of academic commentary suggest that they enhance the remedies available to the investor in the event of unilateral host State conduct in breach of the clause.  The apparent absence of arbitral awards dealing with these clauses leads to the conclusion that stabilisation clauses are primarily relied upon to force governments to the negotiating table when they might otherwise simply terminate the contract.

Criticism of stabilisation clauses has mainly been targeted at projects in the energy and natural resources sectors, where the potential for negative impacts on human rights and environment is often considerable.  From a legal standpoint however, till date it has neither been proved that stabilisation clauses have had this effect in practice nor there appears to be any evidence that they are actually used to deter legitimate law reform.

While drafting a stabilisation clause these observations the tribunal in the case of Parkerings-Compagniet AS. Vs. Lithuania (ICSID Case No.ARB/05/8, Award of September 11, 2007 para 332) may well be kept in mind as it sums-up the intent of this clause:

“…it is each state’s undeniable right and privilege to exercise its sovereign legislative power.  A sate has the right to enact, modify or cancel a law at its own discretion.  Save for the existence of an agreement, in the form of a stabilisation clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment.  As a matter of fact, any businessman or investor knows that laws will evolve over time.  What is prohibited however is for a Sate to act unfairly, unreasonable or inequality in the exercise of its legislative power…”

Conclusion

“When the other person not only makes you feel insecure but actually seems to want to destroy you, it’s obviously the end.  The quantum of solace stands at zero.  You’ve got to get away to save yourself” these are James Bond’s words in Ian Flemings original story Quantum of Solace.  

Quantum of solace refers to the common humanity required between two people in a relationship to survive.  This analogy can be drawn by host States and foreign investors when conduct of either party erodes the trust and confidence between them, which is necessary for a successful and mutually beneficial foreign investment relationship.  This stormy relationship between foreign investors and host States requires a quantum of solace.  However, like any relationship the quantum of solace is reciprocal and this may well be kept in mind for the host State and the investors to have a mutually beneficial foreign investment relationship.

About the author: M Rishi Kumar is an advocate practising at the Madras High Court.