Oil and Gas Law

Document Type:Essay

Subject Area:Law

Document 1

However, most host countries lack capital and expertise that are required for the extraction of petroleum. In order for the host countries to improve their level of petroleum production, they get into foreign investment contracts. To ensure that there is harmony between host countries and oil companies, oil and gas laws have stability and renegotiation clauses that ensure that agreements are met and both parties do not exploit each other. Since the investments are long term, they are exposed to a lot of risks during their period. The projects are faced with different interests from the parties involved. For the project to succeed throughout these long periods, the parties must get along. Hence, it common practice for foreign investors to seek legal stability. At the same time, the host governments seek to retain their sovereign power over their own resources. The doctrine of pacta sunt servanda is an important principle of these oil and gas laws that help to ensure legal stability. The principle is widely used in international agreements and it is held as a minimum standard of protection to foreign investors; it can be traced back to the 1920s. The principle was used to fight against the nationalist and socialist who revoked long-term investments agreements. It was at this point the doctrine emerged. The international principle is not only applicable to treaties but also to investment contracts between states and foreign investors. The doctrine is now commonly used to ensure that all signatories of an agreement keep their end of the bargain in a given contract; According to this principle, a valid contract binds all parties and it can only be changed or terminated if the parties agree to the changes or if the state’s law provides so.

Sign up to view the full document!

It is important to note that, this principle is based on good faith. The act of good faith in the principle ensures that the international contract laws are taken seriously. Moreover, the doctrine only applies to the parties that are in the agreement; it does not take effect where a third party is involved. However, this principle of sanctity has exceptions but only in the principle of hardship. Pacta sunt servanda principle is considered as the foundation of international law; in fact, judges use this principle in some private law and oblige parties to obey the law in good faith. In the ICC award case number 5485 of 1987 the arbitrator ruled that; The rule of pacta sunt servanda states that the contract becomes the law of the signatories which they have agreed to obey in order to regulate their relationship.

Sign up to view the full document!

During these long periods, the clauses protect investors from any actions and change of laws by the host government which may affect the initial terms of an agreement. Stabilization clauses strengthen the relationship between host state and investors. The clauses are included in petroleum contracts entered by host states who are usually the owners of the resources and foreign investors to ensure that neither of the parties takes independent decisions which may alter or terminate the contract. Stabilization clauses act as mitigation tools to protect foreign investors from different kind of risks. In the case of Gas Transmission against Argentina, it was argued that the use of stabilization clauses is important to protect investors and in maintaining contractual stability. It requires the host country reinstate the foreign company to its former position before the law was changed.

Sign up to view the full document!

Just like the previous laws, it is divided into limited hybrid clause and full hybrid clause. Full hybrid clauses ensure that foreign investors are protected from financial implications and fully compensated. A limited hybrid clause on the other hand, shields investors from any financial problems that may come up due to limited change of law. However, the validity of the stabilization clauses which are supported by the doctrine of pacta sunt servanda is really questionable. In the case of Texaco Overseas Petroleum Company against the Libyan Arab Republic, the judge clearly defined that if a contract is internationalized then the state places itself under international law and therefore the state prevents itself from taking nationalized measures. Moreover, in the case of Lena Goldfields against USSR, it was held that an agreement between a private party and a sovereign state should not be overseen by the domestic law of that country but it should be internationalized.

Sign up to view the full document!

Nevertheless, pacta sunt servanda principle has played a huge role in international law’s history. Despite its role, contracts that are made under this principle are in constant tension to the changing circumstances and the passing time. Hence there has been a huge debate about the stability and change in circumstances. It is important to note that the principle of rebus sic stantibus only applies where change is fundamental. The change in circumstances has to jeopardize host state’s survival. For example, a simple loss of economic gain or currency reforms is not grounds for change. In the Fisheries Jurisdiction case, the international court declared that changes must be vital and that they have to be unforeseeable. Fluctuations cannot be used as a basis for renegotiation. Without understanding the circumstances under laying renegotiation clauses one can easily disregard the principle of rebus sec stantibus.

Sign up to view the full document!

However international courts understand that the two principles should work for hand in hand and judge cases depending on the circumstances surrounding a case. This is evident in the case of Saudi Arabia against Arabian American Oil Company. In this case, there was a disagreement because the government had granted the right for transporting oil to the oil firm and later an agreement of transportation was given to Saudi Arabian Maritime Makers Ltd. The Judge rules that the state held sovereignty power which provided it with legal power but this did not allow it to breach the contract till termination of the period. These kind of clauses have provisions that mention factors that are supposed to be taken into consideration during renegotiation. Hardship clauses are much broader than the limited renegotiation.

Sign up to view the full document!

In these kinds of clauses, the triggering events are not specifically defined. Hence there are no instructions or guidelines of which contractual terms are liable to change and how they can change. Wide renegotiation clauses, on the other hand, are broader in scope; the triggering event is not described at all. Contracts cannot rely on the principle of rebus sec stantibus while le they cannot rely on the principle of pacta sunt servanda. Since petroleum contracts are influenced by many dynamic factors such as political climate, price change social and economic conditions, it hard for parties to rely wholly on the doctrine of pacta sum servanda. At times the stabilization clause are not enforceable, they constraint the constitutional and legal framework of the host government. Moreover, the government still retains their sovereignty and so the renegotiation clauses are important.

Sign up to view the full document!

Therefore, in conclusion, for a contract to be effective it should uphold both the pacta sum servanda and the doctrine of rebus sec stantibus. The Government of the Libyan Arab Republic, YCA [1979], at 177 et seq. trans-lex. org/261700/_/texaco-overseas-petroleum-company-v-the-government-of-the-libyan-arab-republic-yca-1979-at-177-et-seq-/> Walde Thomas W. CEPMLP/Dundee. The “umbella”(or sanctity of contract/pacta sunt servanda)clause in investment Arbitration.

Sign up to view the full document!

From $10 to earn access

Only on Studyloop

Original template

Downloadable