Regardless of severity of an economic downturn, States are bound to perform contracts with foreign investors

01.15.2018 [0]

Ivars Mēkons,
SUCCESSSpecialized Advisory Services


Frequently, we hear of States halting, cancelling or substantially changing the rules for high stake joint venture projects, conceived before the 2008 or the current global economic downturn, with foreign investors. Alleged objective ground – fundamental change of an economic situation and the need to lower the financial burden of the people - seems plausible. But - is such an approach indeed fair and in line with international law, and what effect has it on the companies established in the State in respect of their operations in other States? In other words, can Statesin such casesuse their public privileges, or invoke impossibility, hardship, or similar tools to exit the contract unilaterally?

Since the Lena Goldfields arbitration award, international law requires a State to perform the contract with a foreign investor as agreed, despite what the State`s national law or other applicable rules, apart from international law, would provide. This is because States are sovereign and equal, and that one State`sdirecteconomic dealing with other State`s national is,in effect, dealing with that other State – international law, by itself is a system of rules between States, all other subjects entering the scene only with the permission of States. Sovereignty is the ultimate power, meaning also ultimateresponsibility– including, responsibility to respect the partner`s objective economic expectations.

Consequently, even the State`s other international obligations, for instance, under the European Union law, will still require the State to compensate the investor`s damages in case of deviation from the contract. To avoid this, States shall include in a contract with foreign investor a special clause that removes the contract from express or implied submission to international law. Apart from such clause, only conditions independent of the State`s internal or international behavior would allow departing from the contract – what is known in national laws by a Latin name of “force majeure”.

On diplomacy side, how a State deals with foreign investors sends a signal of what itcould fairly expectfrom other States in their treatment of companies established in the State.

Short-term action of departing from the contract will cost tremendously in a long-term – lost international arbitration proceedings, huge monetary compensations and attorney expenses; damaged reputation; high risk of other States taking similar actions with respect of companies established in the State.

There is a simple and elegant solution: negotiate carefully at the outset, instead of falling into the trap of an illusion!

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