STABILISATION CLAUSES
SADC Law Association Conference
MARTIN KUDNIG –ASHURST LLP
22-23 August 2014
Victoria Falls, Zimbabwe
AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE)
ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN
UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA
Presentation by:
Martin Kudnig, Partner (Solicitor, Victoria, Australia), ERI – London
Direct line: +44 (0)20 7859 1679
Mobile: +44 (0)7825 277167
Email: [email protected]
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Tel: +44 (0)20 7638 1111
Fax: +44 (0)20 7638 1112
www.ashurst.com
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Overview
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Introduction
Stabilisation and Political Risk
Types of Clauses
Legal Effect
Enforcement
Investment Treaties, Political Risk Insurance, ECAs
Trends
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Introduction
Rising demand for natural resources has led to many oil
and gas and mining companies pursuing opportunities in
emerging markets
Mining projects characterised by long terms and high
levels of investment
Stabilisation clauses in investment agreements are
designed to “fix” life of mine costs
Challenge for developing countries is to establish a
political and regulatory regime that is attractive to
foreign investors but ensures sufficient benefits flow
back to local economy
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Stabilisation and Political Risk
What is it?
• Risk that political and/or financial instability in host
state or government action may adversely impact the
continued existence of the project or its capacity to
generate revenue
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How is the Risk manifested?
• Expropriation or nationalisation
• Failure/refusal of Government to grant permits etc.
• Increases in taxes and royalties or removal of
concessions
• Impositions of exchange controls
• Changes in law relating to health and safety,
environment, local content etc.
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Types of Clauses
Freezing Clauses
Balancing Clauses
Designed to freeze the laws that
apply to the relevant project to
those applicable at the time initial
investment agreement is executed
Permit new laws to apply to
project but investor to be
compensated for costs of
complying with new laws
Hybrid Clauses
Contains elements of both
freezing and balancing clauses
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Freezing Clauses
• Full freezing clauses provide that all laws, both fiscal
and non-fiscal, are frozen, usually for the duration of
the project
• Limited freezing clauses are designed to protect
investor from changes to specific areas, usually fiscal
changes (royalties often excluded)
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Example of a Freezing Clause
“The Investor and its Direct Sub-Contractors shall not be
subject, in relation to the Project Activities, to any Tax
(including, for the avoidance of doubt, export duties and
taxes, VAT and capital gains taxes), which is not expressly
provided for in this Agreement.
By virtue of this Agreement, the Investor and its Direct
Sub-Contractors shall benefit in relation to the Project
Activities, from the stabilisation of the Fiscal and Customs
Regime in force on the date of execution of the Agreement
(including the provisions of this Agreement) throughout the
term of this Agreement.” *
* Agreement between the Republic of Guinea and Global Alumina
Corporation in relation to the Sangaredi Alumina Refinery, 2004
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Balancing Clauses
• Permit host State to change its laws (including those
applicable to the project) but for such changes to
trigger a “rebalancing” of the agreement to restore
the (economic) equilibrium of the original deal
• Full vs. limited balancing clauses
• Usually provide for the parties to negotiate changes
required to restore the agreement’s original economic
equilibrium
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Hybrid Clauses
• Combination of freezing and balancing clauses
• Parties to negotiate a basis to relieve the investor
from negative effects
• Pay compensation or agree that changes in law do not
apply to particular project
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Other Sample Stabilisation
Clauses*
Example 1:
(a)
“Stability Period” means that period of time beginning on the Effective Date and
ending on the [ ] anniversary of the [Date of Commencement of Commercial
Production] [production of the quantity of commercial Minerals identified in the
Feasibility Study] [date of termination of this Agreement] [date of recovery of
capital costs plus a rate of return identified in the Financing Plan].
(b)
During the Stability Period, the provisions of this Agreement shall control.
(c)
If, during the Stability Period, a provision of the Tax Law in existence at the date
of the State’s signature on this Agreement is changed or repealed, or new or
increased fiscal impositions in the nature of a Tax or duty on the Company or a
royalty or Tax on Minerals or on the production of Minerals are made by the State,
except for changes expressly provided for in this Agreement, and as a result the
Company is adversely and significantly financially affected or its liabilities are
materially increased, the Parties must agree on a fair and reasonable method to
compensate the Company for those changes or new fiscal impositions.
(d)
The State shall reimburse the Company as soon as is practicable (or at the State’s
option, make offsetting changes in any law, statute, regulation or enactment
applicable to the Company) to ensure the Company is fully and fairly compensated
for any losses, costs or other adverse effects incurred by the Company by reason
of a failure by the State to comply with the foregoing provision.
* From the IBA Model Mine Development Agreement
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Other Sample Stabilisation Clauses
cont’d
Example 2:
(a)
In the event of changes in any Law, the provisions of which are more favourable to
the Company, then such provisions shall apply to the Company if the Company so
requests.
(b)
In the event there occurs any change in the legislation of the Government or local
legislation (including provisions relating to imposts, duties, fees, charges,
penalties, and tax related legislation) after the date of this Agreement, and if in the
Company’s sole and good faith opinion such change would have the effect of
divesting, decreasing, or in any way limiting any rights or benefits accruing to the
Company under this Agreement or under current legislation, then the Parties shall,
in good faith, negotiate to modify this Agreement so as to restore the Company’s
economic rights and benefits to a level equivalent to what they would have been if
such change had not occurred.
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Other Sample Stabilisation Clauses
cont’d
Example 3:
The Government hereby undertakes and affirms that at no time shall the rights (and the
full and peaceful enjoyment thereof) granted by it under Article [X] (Income Taxation),
Article [X] (Royalty), and Article [X] (Other Payments to the Government) of this
Agreement be derogated from or otherwise prejudiced by any Law or the action or
inaction of the Government, or any official thereof, or any other Person whose actions or
inactions are subject to the control of the Government. To the extent there is
inconsistency between the [Tax Law] as defined in Article [X] (Taxation), the Agreement
shall govern.
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Legal Effect of Stabilisation Clauses
•
Sovereign powers
and expropriation
–
restrict the
administrative power of
the State
–
but very sovereignty of
the State gives it the
power to grant rights
which it is prohibited
from breaching
•
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–
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Under international
law, States may
expropriate property
provided it is
legitimate to do so
public purpose
non-discriminatory
due process
adequate compensation
•
–
–
–
Human Rights
key concern = use of
stabilisation clauses
have the potential to
negatively impact on the
progress of human
rights and
environmental laws,
particularly in
developing nations
these concerns have
contributed a move
away from full freezing
clauses
international standards
(e.g. Equator Principles)
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Enforcement
• State itself should be bound by stabilisation clause
– use of State entities as party to investment agreement (e.g.
PSC in oil and gas industry) may not bind State
• Local law requirements
– host State to comply with laws and regulations of that State to
ensure the investment agreement (and hence stabilisation
clause) is binding on it
• Preferable for agreement containing the stabilisation clause
to be ratified by an Act of Parliament so it has the force of
law
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Enforcement cont’d
• Governing law
– importance of international law
• Dispute resolution
– international arbitration is fundamental
– commercial vs. legal disputes
• Waiver of sovereign immunity
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Investment Treaties
• Provide investor with protection against risks such as
– discrimination on basis of nationality
– expropriation without compensation
– explicit requirement on State to comply with investment
agreement
• Investors will look to establish a company in a State that
has a favourable investment treaty with the host State
and accepts incorporation as the basis for corporate
nationality and thus obtaining benefits of the treaty
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Political Risk Insurance
• Can mitigate risks involved in exploration and
development in unstable jurisdictions:
 expropriation or confiscation of assets
 frustration or repudiation of contracts
 failure to pay arbitral award
• Can be expensive
• Not always available
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Multi-lateral Agencies, ECAs
• Government owned entities which provide funding to
private sector to further the economic development of
developing countries
– loans
– guarantees
– insurance
• Guarantees and insurance generally cover many of
the political risks lenders and investors seek to
protect against through stabilisation provisions
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Trends
•
Investors previously sought to implement full freezing
clauses to prevent any change in law whatsoever
 while initially agreeing to such clauses, some host
countries may not have honoured them as it
became clear they needed to amend some laws
•
Stabilisation clauses have moved away from full freezing
clauses to more narrow fiscal freezing clauses and
balancing clauses
•
Becoming more acceptable to financiers and investors
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Sources/Further Reading
•
Texaco v. Libya 17 ILM 1
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AGIP Co v. Congo 21 ILM 726
•
J Emeka, Anchoring Stabilisation Clauses in International Petroleum
Contracts, 2 International Law 1317 (2008)
•
Peter Wilkes, Protecting Investors’ Interests – Stabilisation clauses – Are
they worth it? AMPLA Law Journal (2013)
•
Martin Kudnig, The Mining Contract Process, presentation at the African
Community of Practice for Managing for Development Results conference,
Tunis (2014)
•
Deloitte Tracking Trends (2013)
•
Model Mine Development Agreement, MMDA 1.0, IBA
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STABILISATION CLAUSES
SADC Law Association Conference
MARTIN KUDNIG –ASHURST LLP
22-23 August 2014
Victoria Falls, Zimbabwe
36899966
AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE)
ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN
UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA
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2014-08-18 STABLISATION CLAUSES