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A study of the legal problems of state contracts

par Odilon Evrard NGOUNDOU
Institute of International Law of Wuhan University
Traductions: Original: fr Source:

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Section 1- The stabilization clause

The issue that we are tackling is in the field of international investment law and we must be aware that any investor who wants to explore and produce oil in any host country always looks for "legal" formulas that will minimize the risks that may be happened in the case of the breach of contract by the State. The host country is a sovereign state and holds legislative powers which enable it to amend the law to any event or affect any law of contract or of the property right within its territory. We have also know that every host state which wants to attract foreign investors should provide to the petroleum companies some stable conditions for development and in this case, the clause which is often referred is the stabilization clause. That's the reason we can ask ourself the question to know what is a stabilization clause used for and what is a stabilization clause?

It's very important for us to know that «a stabilization clause aim at freezing the law of the a host state and thus preventing a State from using its legislative power to modify the contract in its own favor», otherwise talking, «the aim of the stabilization clause is to ensure that future changes in the legislation of the home state do not vary the terms of contract on the basis of which entry was made». This definition simply means that the stabilization clause in the petroleum contracts is a kind of clause which is used for the interest of petroleum companies to begin or to continue the petroleum operations, or even their petroleum activities in a host country with the guarantee of maintaining certain existing basic

conditions at the moment of the conclusion of contract. This clause aims a certain number of areas well determined and relating to the profitability of this investment, it is about the: tax law, company law, exchange controls, and more particularly in the framework of repatriation of capital. This provision can lead the State to the formal commitment to not expropriate or not impair the private foreign investor (i.e. the foreign petroleum company). A stabilization clause in an investment agreement is generally seen as an insurance against the risk of investment. Like any other contract or agreement which, according to the contracting parties, aims to stabilize the investment thank maybe to this clause called stabilization clause. A stabilization clause is used to prevent the State from any new legislation that may come into effect in order to alter the terms of the contract34. Here are some examples of stabilization clauses negotiated in the petroleum contracts at the signing of some contracts of investment in the framework of state contract:

* In a petroleum concession contract and in its original version called "Aminoil Concession»» of 1948 and in its Article 17, it's stated that «The Shaikh shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement as provided in the Article 11. No alteration shall be made in the terms of this Agreement by either the Shaikh or the company except in the event of the Shaikh and the company jointly agreeing that it is desirable to in the interest of both parties to make certain alterations, deletions or additions to this Agreement»35. It is really important thus to acknowledge here that this clause of concession had somewhat its limits or exceptions. According to Article 11 of this clause, the Kuwaiti law could repeal this concession, which however could be expired after the stipulated period 60 years, if only the following events could arrive: «-failure by the company to perform its obligations in respect of geological or geophysical exploration or drilling; -failure by the company to make any of the payments due (under Article 3) ; and - default of the company under the arbitration provisions of Article 18»». This clause could also be flexible i.e. that both contracting parties had the possibility to re-negotiate the terms of the concession from a mutual agreement;

* In Article 11 of the investment agreement36 between the former Popular Republic of the Congo, now known as the Republic of Congo, and Italian petroleum company AGIP, the government had promised «to take certain measures to ensure the petroleum company that no future amendments to company rights could be applied to impair the structure and composition of the company». Article 4 of the same agreement also shows us that «the former Congolese government had promised to not apply certain laws or decrees as well as any other subsequent law or decree which will aim to change the status of the company as an LLC (Limited Liability Corporation) in private law».

34 (According Paul E. Commeaux & N. Stephan Kinsella in their article « Political Risk and Petroleum Investment in Russia », there are many other considerations that must be taken in account when negociating agreements with States, which are beyond the scope of this article. See generally Detlev F.Vagts `Dispute-Resolution Mechanism in international Business', 3................... ).

35 Journal of International Arbitration, Vol. 5. 1988, "the stabilisation clause in Investment Agreements Myth," SK Chatter Jee.

36 «AGIP and the Popular Republic of the Congo (1982)»

* In a petroleum contract called of concession between Iran and the Anglo-Iranian Oil Company (1933), its Article 21 states that: «Concession shall not be annulled by the Government and the terms therein contained shall not be altered either by general or special legislation in the future or by administrative measures or any other acts whatever of the executive authorities»37.

Apart from the expression of the stabilization clause that we know well now, there is also «a national stabilized law». This expression is often in the majority in several petroleum contracts. This will involve:

- The combination of state law with the principles of international law; - The general principles of law or Pacta Sunt Servanda;

- The transnational law upheld by a big network of BITs and IMI.

This subsection will be examined further in the third part of our work.

We can note through these two examples of petroleum investment agreements signed in the petroleum contracts, that one of the characteristics of the stabilization clauses is to freeze the law of the host State at the time of coming into force of the investment, and to cool down the law, the law that controls foreign investment. How about the arbitration clause?

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