Riding with stabilisers: using stabilisation clauses to hedge sovereign risk

Where an investment involves a long-term contract with a state or state-owned counter-party, the investor is exposed to the risk that the state has the power at any time to change the legal regime applicable to the contract. How can an investor protect against that risk?

One answer is stabilisation clauses: contractual terms that seek to stabilise (or fix) the fact or effect of the legal and regulatory regime applicable to the subject matter of the contract at the time the contract is entered into. Such clauses can be of great value to participants in long-term contracts, such as production sharing contracts, power purchase agreements or, as in a recently reported case, mining concessions.

Somilo v Mali

The dispute in this case concerned a gold mine situated in south-eastern Mali. The mining venture was governed by an establishment agreement entered into in 1993 between Société des Mines de Loulo S.A. (Somilo), which operated the mine, and the Republic of Mali. The establishment agreement provided for a special fiscal regime and contained a stabilisation clause under which Mali undertook not to alter the fiscal regime. In consequence of the stabilisation clause, Somilo and Mali agreed that, under the terms of the establishment agreement, Malian law as it stood in 1993 was the governing law of the dispute.

In 2008, Mali’s tax authority deemed that Somilo’s tax bill should be “adjusted”, on the basis that Somilo’s past fiscal dues had been underestimated. This was principally due to underpayment of value added tax (VAT) and tax on profits (IBIC), both of which (so Mali argued) Somilo was obliged to collect on behalf of non-resident providers of goods and services, and remit to Mali’s tax authority. Together with penalties, Mali’s tax authority asked Somilo to disburse what, at the time, represented around EUR 5.7 million. In 2011, following a further “adjustment”, Mali’s tax authority demanded a further EUR 66 million from Somilo.

In respect of VAT, Somilo argued that Malian law had only provided for collection for non-resident suppliers since 1999, and that the power to apply penalties in respect of the “adjustment” had only come into force that year. As to the IBIC, Somilo noted (which Mali did not dispute) that, under the terms of the establishment agreement, Somilo was exempt from the IBIC from 2005 and 2010. Accordingly, Somilo concluded, any attempt to collect VAT or IBIC due by foreign providers from Somilo must violate the stabilisation commitment in the establishment agreement, as must the penalties Somilo purported to charge thereon.

In relation to VAT, Somilo was unsuccessful. The tribunal observed that the establishment agreement provided for the investor to pay VAT for its own activities and that it did collect VAT on behalf of Mali from resident suppliers. While the tribunal recognised that Malian law had only provided for collection from non-resident suppliers since 1999, for the tribunal this did not mean that Mali had introduced a new tax distinct from the VAT, the application of which to Somilo would breach the state’s stabilisation commitment. Instead, this amounted only to a different mode of collection of the VAT, which was not inconsistent with the stabilised fiscal regime set out in the establishment agreement.

However, the tribunal agreed with the investor in relation both to the penalties Mali sought to apply to its adjustment of Somilo’s VAT dues, and in respect of the IBIC. In relation to the former, the tribunal considered that the penalties were taxes distinct from the VAT and that, given that Mali had only acquired the power to levy such penalties in 1999, their application was inconsistent with the stabilisation clause in the establishment agreement. As to the IBIC, the tribunal was unconvinced by Mali’s argument that the IBIC was not a tax due by Somilo, which merely acted as a collector of the IBIC owed by others. The tribunal noted that the very point of a stabilisation clause is to create “security and legal certainty” for investors and that, if a tax was not explicitly provided for in the establishment agreement, then Somilo was exempted from it. Accordingly, to the extent that Somilo was exempted from the IBIC until 2010, Mali simply could not collect it from the investor.

On this basis, the tribunal awarded Somilo approximately US $29 million in damages, together with compound interest thereon, and directed that Mali should pay 70% of the parties’ legal costs and the costs of the arbitration. The tribunal also ordered that, going forward, Mali should not seek to collect VAT or IBIC in a manner inconsistent with the establishment agreement.


Disputes concerning stabilisation clauses are seldom publicly reported. As this case shows, such clauses can provide investors in projects involving long-term contracts with states or state-owned entities with a powerful protection against sovereign risk, protecting not just against changes in law but potentially even against changes in the application of an existing law.

The stabilisation clause in this instance appears to have been a “freezing clause”, that is, a provision which freezes the host state’s national system of law as at the date of the contract. Typically, stabilisation clauses now take more flexible forms, such as “economic equilibrium clauses” and “allocation of burden clauses”.

Rather than freezing the legal regime applicable to a contract, these clauses instead aim to deal with the consequences of a change in law, either by providing for the negotiation of amendments to the contract to reinstate the initial economic balance of the contract, or by providing that the state or a state entity will indemnify the foreign investor for any loss or damage resulting from a change in legislation.

To maximise the benefit of such clauses, they need to be properly worded and twinned with a binding arbitration clause, ideally providing for a neutral seat of arbitration outside of the host state. When done so, they can provide a highly effective route to international recourse.

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