A clause in a contract between an investor and a host state that addresses changes in law in the host state during the life of the project. There are three broad categories of stabilization clauses:
- Freezing clauses ― that specify that the law that is in effect on the day that a contract is signed will apply to the project for the life of the project notwithstanding any subsequent changes in law.
- Economic equilibrium clauses that require an investor to comply with new laws, but to be compensated by the host state for doing so. Compensation can be in the form of rebates, adjusted tariffs, an extension of the term of the project, or tax reductions, for example.
- Hybrid clauses which are a combination of freezing clauses and economic equilibrium clauses (IFC Study).
Stabilization clauses are widely used across industries and regions of the world.
The purpose of a stabilization clause is to offer investors – and their lenders – some assurance that the investment will not be subject to unpredictable and costly changes in law – for example, in relation to the level of taxation applicable to a project. However, they may also have negative impacts on the host country by, for example, reducing its ability to maintain flexibility to changing economic and political circumstances. Stabilization clauses should therefore be narrowly drafted and limited in scope and time, particularly in relation to major revenue streams such as royalties, taxes, duties, and major fees. Stabilization clauses should also not freeze environmental, labor or other similar rules.
For more information on Stabilization Clauses, see the Natural Resource Charter's level 3 explanation of its Precept 4: Fiscal Regulation and Contract terms under heading 6: "Stabilization, Renegotiation and Fiscal Modeling".
See also the IFC’s study on Stabilization Clauses and Human Rights (2009).