Protecting Investments Under State Contracts: Some Legal And Ethical Issues

Abstract

During the course of this century sovereign states became active in areas of trade and commerce that were once the province of entrepreneurs and privately owned corporations. That trend has been reversed somewhat in recent years, through increased privatization of companies, resulting in a lower representation of state parties in arbitrations, especially since the dismanding of the Soviet bloc. Nevertheless, states have continued to feature (either on their own account or through state corporations and other agencies) as owners and operators of airlines, merchant shipping fleets, industrial plants and power stations, as well as active participants in the world of banking, investment and international trade. And nowhere has such state involvement been more prominent than in the exploration and exploitation of natural resources such as oil, gas and mineral deposits. A typical example of such activity, albeit with a newer geographical slant, might be where an oil-producing state in the former Soviet Union enters into a production contract with an American or European contractor. The state ‘owns’ the crude oil located in its own territory, but requires the expertise – and finance – of other parties in exploiting the product and earning much needed foreign currency. The expression of a state's right to control such activities is firmly rooted in the notion of its permanent sovereignty over natural resources located within its territorial boundaries. But the particular form of a state's involvement will vary. A wide diversity of pressures, cultural and political as well as economic, come into play. The circumstances in which the contract is performed can vary dramatically, dictated, for example, by a change of government or ruler. Private parties contracting with state enterprises, especially in long-term projects, must be constantly vigilant about the political backdrop against which the contract is negotiated and will be performed. Such considerations …