freezing clause

USA

A type of stabilization clause contained in a host government agreement (HGA) or other international investment agreement between a local or host government and a foreign investor concerning a project or other investment which fixes or freezes for the term of the project domestic legislation or regulations affecting the foreign investor and the project or other investment to those in effect as of the date of the HGA or other agreement. As a result, the foreign investor is not be required to comply with, or abide by, any subsequent legislation or regulation the host government may adopt. There are two types of freezing clauses:

• Full freezing clauses: These clauses fix all laws concerning the project.

• Limited freezing clauses: These clauses fix only certain laws.

Freezing clauses have been widely criticized by human rights organizations because they exempt certain investors from complying with valid laws intended to protect the rights of a country's citizens. As a result, freezing clauses have fallen out of favor and have mostly been replaced by economic stabilization clauses (economic equilibrium clause) which do not freeze applicable legislation but could impose significant costs on the host government.

According to a report, issued March 11, 2008, and prepared for the International Finance Corporation and the United Nations Special Representative to the Secretary General on Business and Human Rights, freezing clauses are more likely (and continue) to be used in poorer countries such as Sub-Saharan African countries and for mining projects.

For more information on stabilization clauses, see Practice Note, Understanding Stabilization Clauses in International Investment Agreements (www.practicallaw.com/1-501-7863).

See also stabilization clause