The recent award in Aguaytía Energy, LLC v. Republic of Peru28 underscores the continuing importance of stability guarantees as tools for the promotion and protection of foreign investment. Stability guarantees have long been used in emerging markets to counter the risk faced by foreign investors of future changes in the legal framework applicable to their investments. Many States have responded by granting foreign investors certain stability guarantees by contract, including freezing clauses (aimed at freezing the applicable law of the host state for a certain period of time), and economic equilibrium clauses (providing for economic compensation in cases of changes in legislation).
The Aguaytía case, brought before the International Centre for the Settlement of Investment Disputes (“ICSID”), was premised on an alleged breach of such a contractual stability guarantee. Aguaytía Energy, LLC, a US investor, claimed that Peru had breached a legal stability agreement (convenio de estabilidad jurídica) executed between the claimant and the State within the framework of Peru’s legal stability regime. This regulated regime, implemented in the 1990s as part of a comprehensive economic and legal reform program, allows the Peruvian State to enter into legal stability agreements with foreign or domestic investors to guarantee the stability of certain legal regimes for a limited period of time.
Peruvian stability agreements “freeze” specific legal regimes, for a specific investment, for a specific period of time. The contractual right to stability granted by these agreements is defined by law as the “ultra-activity” of the stabilized laws, that is, the applicability of those laws beyond their actual term of effectiveness, regardless of whether such laws are subsequently modified or repealed, or whether any amendments are more or less favorable to the affected investors.29 In the case of foreign investors, the laws that may be stabilized relate to tax, availability of foreign currency, free remittance of profits and capital, exchange rates and non-discrimination.
In the Aguaytía case, the claimant alleged that Peru had breached its contractual obligation to guarantee the stability of the right to non-discrimination, arguing that this stability guarantee implied a promise by Peru that it would in fact not discriminate against it. In other words, the claimant argued that the legal stability agreement granted not only the right to stability of the right to non-discrimination, but also a free-standing, substantive right to non-discrimination. The tribunal rejected this interpretation:
The conclusion from the plain wording of the Agreement and the various legal texts referred to in the Agreement, and underlying the juridical stability regime of Peru, can only be that the legal framework in the crucial various fields enumerated in the Agreement will not be modified, either in favor of or to the detriment of the foreign investor, Aguaytía, during the ten years duration of the Agreement. Nowhere, however, are any individual, substantive rights created or guaranteed. What is guaranteed is the stability of the legislative framework as it existed on [the date of execution of the Agreement].30
As Aguaytía asserted no claim based on a change of the stabilized legal framework, the tribunal dismissed the case in its entirety.31
The Aguaytía award confirms the importance of stability agreements as tools for risk management. Noting that “it is beyond doubt that stability undertakings … are of undoubted importance for investors,” the tribunal commented specifically on the importance of an agreement granting the stability of the right to non-discrimination:
[T]he “stability of the right to non-discrimination” itself is of obvious importance for a foreign investor. It freezes the laws, rules and regulations applicable to it, as they were in existence at the time the Agreement was concluded. This means that no new law may be passed which would state that certain rules regarding non-discrimination would no longer apply to the Claimant.32
The Aguaytía award demonstrates that stability agreements allow investors to plan their investments with the assurance that certain key rules of the game will not be changed. This is an important benefit for investors investing in emerging markets, where political cycles favoring or disfavoring foreign investment often may be accompanied by significant changes in the host State’s law.