International investment regimes, Part 2: Risk mitigation clauses
We previously wrote about the international investment treaty regime and its protections for mining sector investors (see the April CMJ). In this article, we describe another important protective mechanism – contractual risk mitigation clauses. Several types are commonly incorporated into mining agreements with states and state-owned entities to mitigate the risk of state intervention and/or political and economic stability.
Stabilization clauses
Stabilization clauses are widely used in the mining sector, and seek to preserve the deal between the host state and mining project participants for the life of the project by: (a) mitigating or managing the political risks associated with the project; (b) restoring economic equilibrium between parties should it be affected by a change in law, tax or otherwise; and (c) restricting the state’s legislative and administrative powers.
The most common stabilization clauses in the mining sector are freezing clauses and economic equilibrium clauses.
Freezing clauses seek contractually to “freeze” the national laws that apply to the contract as of the date of the contract for the term of the project. These clauses have proved controversial as some argue they infringe on states’ sovereignty. As a result, subcategories have developed ranging from full freezing clauses, which seek to fix all laws, to limited freezing clauses, which fix only certain laws. “Inviolability” clauses are another moderate form which restrict any unilateral modification of the contract by the state using whatever inherent power it might otherwise have to do so, unless the parties consent. The effect is to freeze the contract rather than the law.
Economic equilibrium clauses require the parties to renegotiate the contract in response to a formal change in law or broader change in the application of existing law (such as through the adoption of a new interpretation), or a change in economic circumstances. The type of protection offered can vary from monetary compensation to compensatory revision of the contract.
So-called ‘hybrid’ clauses combine the features of more than one type of stabilization clause and generally: (1) define the changes in circumstance that will trigger renegotiation; (2) set out the effect of the change on the contract; (3) outline the objective and procedure of the renegotiation; and (4) provide for a solution where the renegotiation fails.
Sovereign immunity waivers
The principle that a state cannot be sued in a foreign court without its consent is well recognized and respected internationally. A waiver of sovereign immunity clause is therefore critical when a state is a party to the contract. Sovereign immunity clauses typically include express waivers of immunity from jurisdiction and enforcement/execution against state assets, as well as in respect of interim relief. To ensure that these waivers are enforceable, it is important to confirm that the state has capacity or authority under its local laws to waive its sovereign immunity, as well as that any such waiver is enforceable in those jurisdictions where a judgment or award may need to be enforced.
Governing law and arbitration clauses
Governing law clauses establish the law that governs the contract, which is important as this determines the parties’ contractual rights and obligations, and remedies available. The governing law should be one that offers the maximum protection and stability for the investor. English law is commonly selected in extractive sector contracts because it offers certainty as well as incorporating customary international law principles into its domestic law, including the principles requiring just compensation for the taking of contractual rights by a state.
It is also critical that the investor has access to a neutral forum for the resolution of disputes. Commonly, the national courts of the host state are not acceptable to foreign investors due to a perceived risk of state influence or corruption. Yet states are generally unwilling to appear before foreign courts. International arbitration offers a compromise. An arbitration clause designates a neutral seat for proceedings before an independent and unbiased arbitral tribunal, and stipulates rules providing for a fair procedure and equal treatment of the parties. To facilitate enforcement of the resulting award, the seat should be in a state that is party to the New York Convention on the Enforcement of Foreign Arbitral Awards, has a pro-arbitration judiciary, and a restrictive approach to sovereign immunity.
Key takeaways
In mining, disputes between foreign investors and host states are common, even in developed countries. Foreign investors should seek to incorporate every available protective mechanism against state intervention and political and economic risk.
MARTIN VALASEK is Norton Rose Fulbright Canada LLP’s head of International Arbitration, ALISON FITZGERALD is Of Counsel, International Arbitration and CARA DOWLING is director, Global Disputes. Lindsey Wilson also contributed to this article.
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