Energy Buzz: mitigating political risk in energy and infrastructure projects

Contractual protections

Change in Law

Change in Law provisions directly address a contract’s exposure to the legal and regulatory environment by defining the rights and obligations of the parties when new laws or regulatory changes affect the project. 

Key considerations for the parties include: 

• Trigger events: A broadly drafted Change in Law clause can be triggered by a legal change of any kind, or the application of the provision can be limited to material changes, adverse changes, changes affecting specific sectors and/or changes affecting specific parties. 
• Taxation and duties: Where any of the parties benefit from exemptions from import duties or favourable rates of taxation, a change in rates might have a significant impact on project costs. The parties might agree to address the impact of this kind of quantifiable change differently from other changes in law. 
• Response mechanism: A change in law can trigger an obligation to negotiate in good faith, which might escalate to a right to terminate if the parties are unable to reach an agreement. The Parties should consider each escalation carefully, and whether these should be linked to the dispute resolution procedure under the contract. 

Well-drafted Change in Law provisions provide for commercial predictability and a structured response to legal and regulatory changes that might otherwise affect the development or operation of a project. 

Force Majeure

A contract can apply a definition of "Force Majeure" that incorporates circumstances or consequences of political instability. Where unforeseen circumstances beyond a party’s control affect its performance of its obligations under the contract, the Force Majeure provisions should set out an appropriate framework for relief. 

The parties should consider: 

• Definition of Force Majeure: As Force Majeure provisions traditionally apply to unforeseen circumstances, the parties should aim to limit the definition of “Force Majeure” or “Force Majeure Event” to circumstances that cannot be reasonably foreseen or avoided. 
• Duration: Parties are often permitted to terminate after a prolonged period of Force Majeure. This period should be fixed with the parties’ financial and operational needs in mind. 

Termination

If a party’s role in the development or operation of the project becomes unviable (including a result of a Change in Law or circumstances constituting Force Majeure), that party may wish to terminate the contract (or contracts) and exit the project. 

The parties must ensure that the termination provisions deal appropriately with the following: 

• Notice periods: The termination procedure must allow sufficient time for the parties to carry out any necessary transition, demobilisation, decommissioning and other processes, but these operational considerations must be addressed in compliance with any legal or regulatory restrictions applicable to the parties and/or the project. 
• Compensation on termination: Whether or not a party receives any compensation on termination following a political event should reflect the agreed allocation of political risk. The position on termination compensation might vary depending on any number of factors, including which party has exercised the termination right and where the project is in its lifecycle. 
• Transfer of ownership: The parties may agree that title to and operation of the project should be transferred to the state or to the end user on termination. The amount payable by the transferee may form part of the compensation payable on termination, depending on the circumstances. 

Additional considerations

Bespoke expropriation clauses: In higher-risk jurisdictions, it may be appropriate to include a specific expropriation clause setting out the consequences of any direct or indirect appropriation of assets by a sovereign state. 

Currency: Where currency instability is a concern, the parties might consider pegging amounts payable under the contract to another currency. Project entities can also address inconvertibility risk with state-backed guarantees and insurance coverage. 

Delay provisions: The Parties should consider their entitlements to claim for additional time and expenditure where supply chain delays, customs queues and other scheduling disruptions are likely to affect a project. 

Indemnities: If the indemnities granted by the parties in respect of the project (such as indemnities in relation to people, property and pollution) are not fault-based, contract parties should exclude the consequences of state actions from the scope of their liabilities. 

Relationship between provisions: Provisions addressing political risk should be clearly distinguished from one another. For example, there should be no duplication of reliefs across the Change in Law, Force Majeure and Abandonment provisions, or the Change in Control and Expropriation provisions. 

Relationship between contracts: Many infrastructure projects involve complex contractual chains—such as head contracts and subcontracts. A disruption affecting one party (e.g., a subcontractor’s Force Majeure) should entitle the other party (e.g., the main contractor) to equivalent relief under the next contract in the chain. This “back-to-back” approach ensures consistent risk allocation across related agreements, avoiding gaps in entitlement or liability. 

Mitigation: It might be appropriate for the parties to be required to mitigate the impacts of political or regulatory events before relying on the reliefs available under the Change in Law, Force Majeure or other provisions of the contract. The efforts required should be realistic and should be matters within the parties’ control (e.g., a party enforcing its rights under a concession agreement or government contract). 

Local law restrictions: In some jurisdictions, there are local law restrictions on currency provisions, changes of control and divestment from infrastructure and energy projects. It is essential to consider how these might affect the operation and enforceability of contract provisions. 

Alternative protections 

1. Political risk insurance 

Political risk insurance (PRI) can provide coverage for loss of income and additional costs where contractual protections fall short. Policies can cover risks such as expropriation, currency inconvertibility, political violence, and breach of contract by a host government. 

PRI policies commonly exclude economic risks (such as market downturns), war and known risks (such as pre-existing disputes). Parties should assess whether supplemental contingency coverage is appropriate for known risks identified during legal due diligence. 

1. Bilateral investment treaties 

Bilateral investment treaties (BITs) offer foreign investors an effective legal remedy against discriminatory treatment and unlawful expropriation. There are thousands of BITs in force between different states, but some common standards imposed by BITs include a fair and equitable treatment standard and protection against unlawful expropriation. 

Conclusion 

Well-drafted contractual protections and strategic use of other tools, such as political risk insurance and investment treaties, play a critical role in managing political risk in energy and infrastructure projects. 

Hogan Lovells can help sponsors, lenders and developers to tailor contract frameworks and dispute resolution strategies and to structure investments with key political risks in mind. We provide practical, cross-disciplinary support throughout the project lifecycle and our team has experience advising on projects in high-risk jurisdictions. 

If you have any questions, please do not hesitate to get in touch with any of the key contacts listed, your usual Hogan Lovells contact, or click here to get in touch with a member of the Hogan Lovells energy team. For more Energy content, visit our interactive Energy Hub.

Authored by Johari Adjei.