Daily RC Article 17

Foreign Investors


Paragraph 1

Governments of developing countries occasionally enter into economic development agreements with foreign investors who provide capital and technological expertise that may not be readily available in such countries.

Besides the normal economic risk that accompanies such enterprises, investors face the additional risk that the host government may attempt unilaterally to change in its favor the terms of the agreement or even to terminate the agreement altogether and appropriate the project for itself.

In order to make economic development agreements more attractive to investors, some developing countries have attempted to strengthen the security of such agreements with clauses specifying that the agreements will be governed by “general principles of law recognized by civilized nations”—a set of legal principles or rules shared by the world’s major legal systems.

However, advocates of governments’ freedom to modify or terminate such agreements argue that these agreements fall within a special class of contracts known as administrative contracts, a concept that originated in French law.

They assert that under the theory of administrative contracts, a government retains inherent power to modify or terminate its own contract, and that this power indeed constitutes a general principle of law. However, their argument is flawed on at least two counts.

Paragraph 2

First, in French law not all government contracts are treated as administrative contracts. Some contracts are designated as administrative by specific statute, in which case the contractor is made aware of the applicable legal rules upon entering into agreement with the government. Alternatively, the contracting government agency can itself designate a contract as administrative by including certain terms not found in private civil contracts.

Moreover, even in the case of administrative contracts, French law requires that in the event that the government unilaterally modifies the terms of the contract, it must compensate the contractor for any increased burden resulting from the government’s action. In effect, the government is thus prevented from modifying those contractual terms that define the financial balance of the contract.

Paragraph 3

Second, the French law of administrative contracts, although adopted by several countries, is not so universally accepted that it can be embraced as a general principle of law. In both the United States and the United Kingdom, government contracts are governed by the ordinary law of contracts, with the result that the government can reserve the power to modify or terminate a contract unilaterally only by writing such power into the contract as a specific provision.

Indeed, the very fact that termination and modification clauses are commonly found in government contracts suggests that a government’s capacity to modify or terminate agreements unilaterally derives from specific contract provisions, not from inherent state power.

Topic and Scope:

The concept of administrative contracts; specifically, flaws in the argument of those who hold that the concept of administrative contracts allows governments to alter contracts unilaterally.  

Purpose and Main Idea:

The author’s purpose is to point out holes in the argument of those who believe that the concept of administrative contracts gives governments the right to alter contracts unilaterally.

The author’s specific main idea is that, contrary to the opinion of some legal theorists, the concept of administrative contracts does not give governments that right and this particular concept does not qualify as a “general principle of law.”  

Paragraph Structure:

 Paragraph 1 begins with a lot of details about contracts between the governments of developing countries and foreign investors. Not until line 19 does the passage get down to specifics. Lines 19-27 indicate that some legal theorists hold that

(1) governments have the right to change the terms of such contracts unilaterally and

(2) this right constitutes a “general principle of law.”

In lines “However, their argument is flawed on at least two counts.”, the author’s voice finally enters the picture: he argues that this view is flawed on two counts.  Based on this line, it’s predictable that  Paragraphs 2 and 3 will discuss these flaws in some depth. That’s precisely what happens.  

Paragraph 2 essentially says that the concept of administrative contracts doesn’t give governments the right to change contracts to their benefit whenever they feel like it.  

Paragraph 3, on the other hand, notes that the concept of administrative contracts isn’t a “general principle of law.” In the United States and Great Britain, for example, if the government wants the right to alter a contract unilaterally, a provision to this effect must be written into the contract itself.  

The Big Picture:  

  • A passage like this one is not a good place to begin work on test day. Why? The author’s purpose isn’t evident until lines ”However, their argument is flawed on at least two counts.”—i.e., until half-way through the text. On test day, start with a passage where topic, scope, and purpose are clear early on, certainly by the end of the first 1/3 of the text.  
  • This passage is a prime example of one in which it’s vital to know what the author’s thinking and doing rather than what the text is saying. Don’t worry about assimilating all of the details—that’s not important. What is important is realizing that an argument is outlined ; that the author disagrees with this argument for two reasons ; and that these two reasons are then described in  Paragraph s 2 and 3, respectively.

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