Stabilization Clauses and Indian Contract Practice

Reflecting international practice, a large variety of concessions agreements in India contain stabilization clauses — or, more specifically, a ​‘change in law’ clause which (in the version generally used in India) entitles a concessionaire impacted adversely by a ​‘change in law’ event to be recompensed to a point of economic equilibrium i.e. restitution to a position of profitability projected at the time of entering into the concession. Not surprisingly, these powerful clauses (with the ability ​‘to stop time’) have been debated extensively for their legality, enforceability, and impact on sovereign regulatory rights. On the other hand, they are perceived as essential for workable long-term investments in high-risk geographies — often in the developing world. In the Indian context, such clauses have become increasingly prominent in recent infrastructure disputes.

For instance, in the power generation sector, in a dispute over the monetary impact of a 2013 alteration to the coal distribution policy in India (in response to changed benchmark costs of Indonesian coal), the Supreme Court found that the altered coal policy amounted to a compensable ​‘change in law’ — described in broad terms in the relevant Power-PurchaseAgreement as ​‘the enactment, coming into effect, adoption, promulgation, amendment, modification or repeal … of any Law, including rules and regulations framed pursuant to such Law’ or a ​‘change in the interpretation or application of any Law by any Indian Governmental Instrumentality having the legal power to interpret or apply such Law, or any Competent Court of Law’. While the Supreme Court found that a change in Indonesian regulations would not be covered as a ​‘change in law’, any changes in Indian laws (even if in response to a change in foreign law) would be covered (see, Energy Watchdog v. CERC 2017 INSC 338)