Shemberg - Stabilization Clauses and Human Rights

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Shemberg, A., Stabilization Clauses and Human Rights, A Research Paper Conducted for the IFC and the United Nations Special Representative of the Secretary-General on Business and Human Rights, May 27, 2009

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This paper examines whether stabilization clauses, in its application, may affect the duty of a state in implementing its international human rights obligations. The aim is to examine whether stabilization clauses can limit the application of new social and environmental laws and regulations (relating to non-discrimination, health and safety, labour and employment rights, and the protection of environment and cultural heritage) over investment activities or to obtain compensation from the host states for complying with such new laws.

In this study, 83 percent of full freezing clauses are in the extractive sector (all are mining projects).

BP example:

'The debate on stabilization clauses and human rights began in earnest in 2003 when the oil
company BP took the unusual step of publishing the private investment contracts underpinning a
major cross-border pipeline project (the Baku-Tbilisi-Ceyhan pipeline crossing Azerbaijan,
Georgia, and Turkey) on the project’s Web site. Subsequently, some civil society groups criticized
BP, as the largest shareholder, for aspects of the contracts that they viewed as unfavorable to the
promotion and protection of human rights in the host states.

In an unprecedented move, BP responded to the criticisms by amending the contracts—via a
document called the “Human Rights Undertaking”—to, in part, avoid the alleged potential impact
of the stabilization clauses on protection of human rights in host states.6 BP similarly amended the
contracts underpinning the South Caucuses Pipeline (SCP) in 2005.'

The paper utilizes several current investment contracts as well as model contracts that cut across many industries as the source of the research. This also extends to opinions from private firms, academics and NGOs on stabilization clauses used in their fields of experience. The paper discusses the different types of stabilization clauses i.e. freezing, economic equilibrium and hybrid clauses and notes the disparities between the application of these clauses in the OECD and non-OECD countries. The paper in this regard finds that majority of stabilization clauses from countries outside the OECD were drafted in a way that can either protect investors from implementing new environmental and social laws or with the rights to be compensated for implementing such laws. On the other hand, none of the contracts from the OECD countries offer such exemption from new laws and rarely give investors the opportunity for compensation for complying with the laws as is the case in non-OECD countries.

In conclusion, the paper finds that based on available data, there is evidence to suggest that stabilization clauses may be used, in varying degrees, to limit the ability of a state to implement new social and environmental legislations; but that the exact effects of these clauses on human rights are not well known. The paper in addition suggests that contracts originating from OECD countries, BP’s Human Rights Undertakings, Extractive Industries Transparency Initiatives and IFC’s Sustainability Policies are examples of good contract and transparency practices on the subject.

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