Calculation of Compensation and Damages in International Investment Law [2 ed.] 9780198749936

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KluwerArbitration

General Editor's Preface

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This series of monographs is dedicated to specific issues in international arbitration law and practice, and gives authors the opportunity and the challenge of a more in-depth treatment than is possible in leading generalist works. It also provides an international forum for the profound exploration of important practical and theoretical matters and will further the development of arbitration as a self-luminous academic discipline and major international legal practice area.

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Calculation of Compensation and Damages in International Investment Law (Second Edition)

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'General Editor's Preface', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. v - vi

This book is the first in the series to have a second edition. It was originally published in 2009 and the research was completed in 2008. It was one of the first books in English specifically dedicated to the calculation of compensation and damages in international investment law. Since its publication, the topic has gathered more attention through a series of significant cases, such as the various cases of Yukos shareholders against the Russian Federation or the cases at the aftermath of Desert Lines v Yemen which address moral damages and perhaps made the picture a bit more colourful. With the jurisprudential developments in international investment law and arbitration it was essential and indeed timely to have a second edition. This new edition is a fully revised and updated monograph and addresses all cases since 2008 and also contains a new section in Chapter 3 on immaterial (moral) damages. The new edition also contains very useful appendices. In other words this book, which was well received when published eight years ago, sets out with this new edition to be the standard authoritative text on damages in international investment law arbitration. Professor Marboe provides a wealth of research, academic thoroughness, an accessible writing style, and an unbiased authoritative analysis. We very much welcome this second edition of the book. LM P v London, 13 January 2017

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General Editor's Preface for the First Edition

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The evolution of international investment arbitration over the last thirty years has signalled a development of international investment law, well beyond its traditional cloth as law of treaties and treaty interpretation. The existence of a remarkable volume of awards provided additional areas of research, study and analysis. Several issues require specific attention. For example, in all arbitration proceedings, commercial or investment, it is critical that the prevailing party has an adequate remedy and ultimately the ability to enforce the award without any delay or legal complications. However, the average student of investment arbitration awards will be confused trying to ascertain what the generally accepted principles for the calculation of damages in awards for compensation. Such establishment of general principles would require a profound understanding of the legal and economic parameters relevant to both international investors and sovereign states. Inevitably experts assume a significant role.

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Calculation of Compensation and Damages in International Investment Law (Second Edition)

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'General Editor's Preface for the First Edition', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. vii - viii

The importance and topicality of calculation of damages and award of compensation has nevertheless received limited scholarly attention and the focus has been on international commercial arbitration where we now have a number of very good publications. This monograph by Professor Irmgard Marboe is dedicated to the most important remedy of damages and the calculation of compensation in investment treaty arbitration and international investment law, a hitherto unchartered territory. Professor Christoph Schreuer originally suggested to Irmgard Marboe that she explores this pertinent topic. Her original study resulted in her Habilitation submitted to the University of Vienna in 2007. She has since worked on an English manuscript and enhanced and expanded the research. The author of this book assumed a very challenging task and succeeded in its delivery. The book provides a comprehensive and accessible account of the current state of affairs relating to the calculation of damages and compensation in international investment law. After a short introduction and a discussion in Chapter 2 of the function of compensation and damages, the author presents a number of substantive chapters. First, in Chapter 3 she analyses the main valuation standards and criteria and continues in Chapter 4 with bases of value and international valuation standards from an economic perspective. Second, she explores methods of valuation in international practice in P viii Chapter 5, in synthesizing the approaches taken in Chapters 3 and 4 and exploring relevant practice in international jurisprudence. Finally, she turns her attention to interest in Chapter 6 and discusses pre-award and post-award interest. The author and the book succeed in distilling from substantive and procedural principles pertaining to damages in investment treaty arbitration. This is the result of profound research and critical analysis of awards and treaties and the consequence of manifesting the relevance of general public international law. Traditionally, losses were underestimated (by tribunals or claimants) with a marked change in recent years with awards of damages which seem to exceed claimants' expectations. The author concludes that a hierarchy of valuation standards and methods has emerged and is applied by international tribunals. This book is of the highest academic calibre and of major practical relevance and fits perfectly in the series. This series is dedicated to specific and specialized issues in international arbitration law and practice and give authors the opportunity and the challenge of a more in-depth treatment than possible in leading generalist works. It also provides an international forum for the profound exploration of important practical and theoretical matters and will further the development of arbitration as an academic discipline and international legal practice area. I am very pleased to welcome and present this third book of the Oxford International Arbitration Series. Loukas Mistelis P viii London, 3 July 2009

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Preface

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The rich jurisprudence of international investment tribunals is witness to the importance of awards of compensation and damages in investor–state disputes. While in other areas of international law the clarification of the legal question or the identification of an unlawful act is paramount—the International Court of Justice has only twice in its history awarded damages, the same as the International Tribunal for the Law of the Sea—the financial outcomes of the proceedings are greatly relevant in investment disputes. They are essential for the functioning of the economy and for future investment decisions. A legal framework for the protection of international investment is only useful if it can keep its promise to redress unexpected or wrongful behaviour of the actors involved.

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Calculation of Compensation and Damages in International Investment Law (Second Edition)

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International investment law, in additional to international trade law, has developed into an important area of international economic law, complemented by a system of dispute settlement and remedies. In international trade law, financial retaliations may be substantial and affect an entire economy. International investment law, by contrast, is less state-centric, and private companies are the key actors. In this respect, the appropriateness of an amount of compensation or damages contributes—or not—to the authority and legitimacy of the legal protection of international investment, including its dispute settlement mechanism and remedies.

'Preface', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. ix - x

While the first edition of this book in 2009 entered rather unchartered territory, the situation has changed quite significantly since then. There have been numerous new publications, and also the quantity of awards has multiplied. The large number of cases worked through showed, however, that the jurisprudence on compensation and damages is not always consistent and the level of detail and the depth of reasoning, as well as the stringency of the arguments, vary. As appeals mechanisms in international investment law are absent so far, and ICSID annulment proceedings or challenges of arbitral awards before national courts rather contribute to heterogeneity than to uniformity, academic literature may be helpful to identify generally recognized principles and to point out open questions. I am greatly indebted to Oxford University Press for having proposed this second edition which enabled me to develop my research project from a one-time event to a continuing project. It involves the challenge and chance to keep up with new developments and to analyse whether previous hypotheses and conclusions are still valid. In order to illustrate P x the richness and abundance of new jurisprudence, this second edition is complemented by an analytical presentation of investment arbitration cases since 2008 in the form of tables in four Annexes. I am very grateful to Loukas Mistelis and the Editorial Board, who accepted this book to be published in the highly respected Oxford International Arbitration Series, as well as to the kind and helpful staff of Oxford University Press. In the collection and preparation of cases and literature I was assisted by Karin Traunmüller, Sarah Mansour Fallah, and Susanne Gstöttner from the Department of European Law, International Law and Comparative Law of the University of Vienna. With my colleagues and professors at the same Department, August Reinisch, Ursula Binder, Manfred Nowak, Christina Binder, and Stephan Wittich, I enjoyed the pleasure of constructive cooperation and inspiring conversations. Special thanks I owe to Professor Christoph Schreuer for his initial suggestion for my research on this subject which led me to numerous interesting new projects and encounters. I thank Rory Walck and Craig Miles for their wonderful cooperation as co-editors in chief of The Journal of Damages in International Arbitration, and Mark Kantor and José Alberro for their advice and sharing of ideas. My family, in particular my husband Peter, has supported this new exercise again heroically. Without their continuous support and endless patience this book would not have been possible. Px

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Table of Cases

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EUROPEAN COURT OF HUMAN RIGHTS

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Aka v Turkey, ECHR No. 19638/92, ECHR 1998-VI 6.281, 6.291

Calculation of Compensation and Damages in International Investment Law (Second Edition)

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Akkus v Turkey, ECHR No. 9263/92, ECHR 1997-IV 3.156, 6.281, 6.291 Belvedere Alberghiera Srl v Italy, ECHR No. 31524/96, ECHR 2000-VI 3.156, 3.290 Belvedere Alberghiera Srl v Italy (satisfaction equitable), ECHR No. 31524/96, 30 October 2003 3.109, 6.281, 6.291 Breyeler v Italy (just satisfaction), ECHR No. 33202/96, 28 February 2002 6.281 Broniowski v Poland, ECHR No. 31443/96, 22 June 2004 3.50

'Table of Cases', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. xix - xxxiv

Brumarescu v Romania (just satisfaction), ECHR No. 28342/95, ECHR 2001-I 3.109, 3.156, 6.281, 6.291 Brumaresu v Romania, ECHR No. 28342/95, ECHR 1999-VII 3.56, 3.291 Carbonara and Ventura v Italy (just satisfaction) ECHR No. 24638/94, 11 December 2003 3.292 Dedda and Fragassi v Italy, ECHR No. 19403/03, 12 April 2011 3.302, 5.369, 6.291 Former King of Greece v Greece, ECHR No. 25701/94, 23 November 2000 3.50 Guiso-Gallisay v Italy, ECHR No. 58858/00, 22 December 2009 3.300–3.301, 3.303–3.304, 5.368, 6.291 Holy Monasteries v Greece, ECHR Nos 13092/87; 13984/88, 9 December 1994 3.50 Iatridis v Greece (just satisfaction), ECHR No. 31107/96, ECHR 2000-XI 3.109, 3.156, 6.281, 6.291 Jahn and others v Germany, ECHR Nos 46720/99, 72203/01 and 72552/01, 30 June 2005 3.50 James et al v United Kingdom, ECHR Ser A, No. 98, 1 February 1986 2.44, 5.06 Kartal Makina Sanayi Ve Ticaret Koll Sti v Turkey (No. 2), ECHR No. 50011/99, 7 October 2004 3.156, 6.281, 6.291 Kliafas et al v Greece, ECHR No. 66810/01, 8 July 2004 3.109, 6.291 Lithgow et al v United Kingdom, ECHR Ser A, No. 102, 8 July 1986 2.44, 3.50, 3.280, 5.06 Motais de Narbonne v France (just satisfaction), ECHR No. 48161/99, 27 May 2003 3.109, 3.156, 5.48, 6.281, 6.291 Motais de Narbonne v France, ECHR No. 48161/99, 2 July 2002 3.156, 3.291 Papamichalopoulos et al v Greece (just satisfaction), ECHR Ser A, No. 330-B, Judgment of 31 October 1995 2.78, 3.109, 3.155–3.156, 3.289, 3.294, 3.296, 3.300, 3.303 Papastavrou et al v Greece (just satisfaction), ECHR No. 46372/99, 18 November 2004 3.109, 5.48, 6.281, 6.291 Pasculli v Italy (just satisfaction) ECHR No. 36818/97, 4 December 2007 3.292 Pine Valley Developments Ltd et al v Ireland (just satisfaction), ECHR Ser A, No. 246-B, Judgment of 9 February 1993 6.280 Scordino v Italy (just satisfaction) ECHR Ser A, No. 43662/98, 6 March 2007 3.292 Sporrong & Lönnroth v Sweden, ECHR Ser A, No. 52, 23 September 1982 2.44, 3.50 Stran Greek Refineries et al v Greece, ECHR Ser A, No. 301-B, 9 December 1994 3.156 Terazzi SRL v Italy (satisfaction equitable), ECHR No. 27265/95, 26 October 2004 3.109, 3.156, 3.291, 6.281, 6.291 Ugur et al v Turkey, ECHR No. 49690/99, 7 October 2004 6.281, 6.291 P xx Vasilescu v Romania, ECHR No. 27053/95, ECHR 1998-III 3.109, 3.156, 6.281, 6.291

COURT OF JUSTICE OF THE EUROPEAN UNION Cases 27/59 and 39/59, Campolongo v Hohe Behörde [1960] ECR 821 6.40 Case 5/71, Zuckerfabrik Schöppenstedt v Council [1971] ECR 975, 984, para 1 1.06 Cases C-6 and 9/90, Francovich and Bonifaci v Italy [1991] ECR I- 5357 1.06 Case C-282/90, Vreugdenhil v Commission (Vreugdenhil II), [1992] ECR I- 1937, 1958 1.06 Cases C-46/93 and C-48/93, Brasserie du Pecheur SA v Federal Republic of Germany; R v Secretary of State for Transport, ex parte Factortame Ltd (No. 4) [1996] ECR I- 1029 1.06 Case C-352/98, Laboratoires Pharmaceutiques Bergaderm and Goupil v Commission,

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Judgment of 4 July 2000 1.06

ICSID TRIBUNALS Abengoa v Mexico, ICSID Case No. ARB(AF)/09/2, Award of 18 April 2013 3.298, 5.73, 5.78, 5.80, 5.116, 5.197, 6.156, 6.192, 6.254 ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary, ICSID Case No. ARB/03/16, Award of 2 October 2006 2.16, 3.110, 3.155, 3.293, 3.343, 5.73, 5.79, 5.109, 5.115, 5.162, 5.327, 5.339, 6.272 AGIP SpA v People's Republic of Congo, Award of 30 November 1979, (1982) 21 ILM 740, (1993) 1 ICSID Reports 306 2.13, 3.74–3.75, 3.138, 3.182, 5.09, 5.194, 6.190 AIG Capital Partnersv Kazakhstan, ICISD Case No. ARB/01/6, Award of 7 October 2003 3.244, 3.255 Alpha Projektholding v Ukraine, ICSID Case No. ARB 07/16, Award of 8 November 2010 3.316, 5.155, 5.166, 5.286, 6.41, 6.123, 6.127, 6.247 Amco Asia Corp et al v Republic of Indonesia (Amco I), Award of 20 November 1984, (1985) 24 ILM 1022, (1993) 1 ICSID Reports 413 2.85, 2.92, 3.139, 3.326, 3.330, 3.356, 5.73, 5.97, 6.22, 6.63, 6.195, 6.266 Amco Asia Corp et al v Republic of Indonesia (Amco II), Award of 5 June 1990, (1993) 1 ICSID Reports 569 3.139, 3.185, 3.199, 3.236, 3.238–3.264, 3.326, 3.330, 5.73, 5.79, 5.83, 5.97, 5.152, 5.183, 5.195 American Manufacturing & Trading Inc (AMT) v Republic of Zaire, ICSID Case No. ARB/93/1, Award of 21 February 1997, (1997) 36 ILM 1531 1553 3.148, 3.216, 5.192, 5.195, 5.282 Antoine Abou Lahoud and Leila Bounafeh- Abou Lahoud v Democratic Republic of the Congo, ICSID Case No. ARB/10/4, Award of 7 February 2014 3.343, 5.260, 5.286, 5.347, 5.358, 6.148, 6.185, 6.254 Antoine Goetz et al v Republic of Burundi, Award of 10 February 1999, (2000) 15 ICSID Rev.FILJ 457 2.75, 3.44, 3.140, 3.160, 3.244, 3.344, 6.169, 6.179, 6.247, 6.267 Arif (Franck Charles) v Moldova, ICSID Case No. ARB/11/23, Award of 8 April 2013 5.80, 5.197, 5.249, 5.347, 5.356, 5.358, 6.151, 6.255 Asian Agricultural Products Ltd (AAPL) v Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award of 27 June 1990, (1991) 6 ICSID Rev 533 3.216, 5.66, 5.191, 5.194, 5.209, 5.220, 5.314, 5.320, 6.170, 6.184, 6.196, 6.267 Atlantic Triton Company Limited v People's Revolutionary Republic of Guinea, Award of 21

P xxi April 1986, (1995) 3 ICSID Reports 13 3.236, 5.251, 5.364, 6.152, 6.195, 6.220, 6.238

Autopista Concesionada de Venezuela, CA v Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award of 23 September 2003 3.215–3.216, 3.220–3.221, 3.230, 3.337, 5.129, 5.202, 5.292, 5.335, 6.51, 6.72, 6.219, 6.249, 6.267 Azurix Corp v Argentina, ICSID Case No. ARB/01/12, Award of 14 July 2006 3.170–3.171, 3.246, 4.58, 5.28, 5.295, 6.122, 6.136 Benvenuti & Bonfant SARL v People's Republic of Congo, Award of 8 August 1980, (1993) 1 ICSID Reports 330 3.138, 3.344, 4.148, 5.71, 5.190, 5.194, 5.280, 5.342, 5.362, 6.76 Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case No. ARB/05/22, (2007) 22 ICSID Rev 149 5.352 CDC Group v Seychelles, ICSID Case No. ARB/02/14, Award of 29 June 2005 6.73 Cementownia 'Nowa Huta' v Turkey, ICSID Case No. ARB(AF)/06/2, Award of 17 September 2009 5.352 Ceskoslovenska Obchodni Banka, as (CSOB) v Slovak Republic, ICSID Case No. ARB/97/4, Award of 29 December 2004 5.327, 5.338, 6.03, 6.130, 6.154, 6.255, 6.267 CMS Gas Transmissions Company v Argentine Republic, ICSID Case No. ARB/01/8, Award of 12 May 2005, (2005) 44 ILM 1205 1.12, 3.169, 3.173, 3.330, 3.364–3.366, 3.369, 4.70, 4.166, 5.10, 5.73, 5.78, 5.85, 5.131, 5.142, 5.144–5.146, 5.163, 5.295, 6.22, 6.122, 6.136, 6.185, 6.252, 6.278, 6.290, 6.295 CMS Gas Transmissions Company v Argentine Republic, Decision on the application for Annulment of 25 September 2007 3.366, 3.369 Compañía de Aguas del Aconquija SA and Vivendi Universal v Argentine Republic, ICSID Case No. ARB/97/3, Award of 20 August 2007, (2001) 40 ILM 426 3.113, 3.296, 4.59–4.60, 5.80, 5.240, 5.295, 6.05, 6.167, 6.247 Compañía del Desarrollo de Santa Elena SA v Republic of Costa Rica, ICSID Case No. ARB/96/1, Award of 17 February 2000, (2000) 15 ICSID Rev.-FILJ 169, (2002) 5 ICSID Reports 157, (2000) 39 ILM 317 3.28, 3.43, 3.276, 4.164, 5.363, 6.01, 6.31, 6.164–6.165, 6.175, 6.224– 6.225, 6.239, 6.249, 6.264, 6.275, 6.286, 6.298 Conoco Phillips and others v Venezuela, ICSID Case No. ARB/07/30, Award of 3 September

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2013 3.114 Continental Casualty v Argentina, ICSID Case No. ARB/03/9, Award of 5 September 2008 3.369, 6.148, 6.247 Crystallex v Venezuela, ICSID Case No. ARB(AF)/11/2, Award of 4 April 2016 3.172, 3.299, 3.330, 5.19, 5.208, 6.150, 6.247 Desert Line Projects LLC v The Republic of Yemen, ICSID Case No. ARB/05/17, Award of 6 February 2008 5.298, 5.301, 5.316, 5.340, 5.342, 5.346–5.348, 5.353, 5.363, 6.168, 6.251 Deutsche Bank v Sri Lanka, ICSID Case No. ARB/09/2, Award of 31 October 2012 5.295, 6.150 Duke Energy v Ecuador, ICSID Case No. ARB/04/19, Award of 18 August 2018 5.286, 5.295, 6.210, 6.250 EDF, Saur and Leon v Argentina, ICSID Case No. ARB/03/23, Award of 11 June 2011 3.170– 3.171, 3.244, 5.73, 5.167, 5.295, 6.103, 6.123, 6.136, 6.247 El Paso v Argentina, ICSID Case No. ARB/03/15, Award of 31 October 2011 3.170, 3.330, 4.166, 5.73, 5.295, 6.22, 6.148, 6.247 Emilio Agustín Maffezini v Kingdom of Spain, Award of 13 November 2000, (rectified on 31 January 2001), (2001) 16 ICSID Rev.-FILJ 248, (2002) 5 ICSID Reports 419, (2003) 124 ILR 35 3.246, 6.146, 6.185, 6.241, 6.279, 6.288, 6.295 Enron Corporation and Ponderosa Assets, LP v Argentine Republic, ICSID Case No. ARB/01/3, Award of 22 May 2007 3.170, 3.173, 3.369, 4.166, 5.11, 5.42, 5.52, 5.73–5.74, 5.78, P xxii 5.86, 5.108, 5.147, 5.164, 5.184–5.185, 5.197, 5.295, 6.38, 6.148, 6.247, 6.263 Fedax NV v Republic of Venezuela, ICSID Case No. ARB/96/3, Award of 9 March 1998, (1998) 37 ILM 1391 6.74, 6.267 No. Flughafen Zürich v Venezuela, ICSID Case No. ARB/10/19, Award of 18 November 2014 3.298, 5.73, 5.78, 5.81, 5.110, 5.176, 5.295, 6.149, 6.179, 6.247 Funnekotter v Zimbabwe, ICSID Case No. ARB/05/6, Award of 22 April 2009 2.19, 3.09, 3.11, 3.115, 3.296, 3.357, 5.49–5.50, 5.347, 5.366, 6.150, 6.247 Gemplus v Mexico, ICSID Case No. ARB(AF)/04/3, Award of 16 June 2010 3.211, 3.343, 5.197, 5.204, 5.311, 6.123, 6.247 Generation Ukraine v Ukraine, CSID Case No. ARB/00/9, Award of 16 September 2003 5.347 Gold Reserve v Venezuela, ICSID Case No. ARB(AF)/09/1, Award of 22 September 2014 3.170, 3.172, 3.356, 5.73, 5.81, 5.176–5.178, 5.295, 6.03, 6.110, 6.122, 6.136, 6.247, 6.289 Hassan Awdi v Romania, ICSID Case No. ARB/10/13, Award of 2 March 2015 5.80, 5.197, 5.250, 5.295, 6.151, 6.247 Hrvatska Elektroprivreda v Slovenia, ICSID Case No. ARB/05/24, Award of 17 December 2015 6.151, 6.247 Iberdrola v Guatemala, ICSID Case No. ARB/09/5, Award of 17 August 2012 5.352 Impregilo v Argentina, ICSID Case No. ARB/07/17, Award of 21 June 2011 3.355, 5.80, 5.197, 5.199, 5.248, 5.295, 6.168, 6.185, 6.247 Inmaris Perestroika v Ukraine, ICSID Case No. ARB/08/8, Award of 1 March 2012 5.347, 5.353 Joseph Charles Lemire v Ukraine, ICSID Case No. ARB/06/18, Award of 28 March 2011 2.112, 3.356, 5.73, 5.79, 5.347, 5.351, 5.355, 5.358, 6.143, 6.148, 6.246, 6.247, 6.271, 6.278 Kardassopoulos and Fuchs v Georgia, ICSID Case No. ARB/05/18, Award of 3 March 2010 3.114, 3.296, 5.52–5.53, 5.77, 6.01, 6.41, 6.149, 6.247 Klöckner Industrieanlagen GmbH et al v United Republic of Cameroon and Société Camerounaise des Engrais, Award of 21 October 1983, (1994) 2 ICSID Reports 2 3.344 Klöckner Industrieanlagen GmbH et al v United Republic of Cameroon and Société Camerounaise des Engrais, Decision on Annulment of 3 May 1985, (1994) 2 ICSID Reports 95 4.160 Liberian Eastern Timber Corporation (LETCO) v Government of the Republic of Liberia, ICSID Case No. ARB/83/2, Award of 31 March 1986, Rectification of 14 May 1986, (1994) 2 ICSID Reports 343; (1987) 26 ILM 647 2.92, 3.78, 3.185, 3.191, 3.236, 3.336, 5.137, 5.153, 6.22, 6.22, 6.41, 6.272, 6.287 LG&E Energy Corp, LG&E Capital Corp, LG&E International Inc v Argentine Republic, Decision on Liability of 3 October 2003, (2006) 21 ICSID Rev.-FILJ 203; [Spanish original] (2006) 21 ICSID Rev.-FILJ 269 3.367–3.369, 4.70 LG&E Energy Corp, LG&E Capital Corp, LG&E International Inc v Argentine Republic, ICSID Case No. ARB-02-1, Award of 25 July 2007 1.12, 2.17, 3.151, 5.12, 5.73, 5.79, 5.87, 5.108, 5.143, 5.150, 6.122, 6.136, 6.246, 6.247, 6.278, 6.290 Maritime International Nominees Establishment (MINE) v People's Revolutionary Republic of Guinea, ICSID Case No. ARB/84/4, Award of 6 January 1988, (1997) 4 ICSID

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Reports 61 3.236 Marvin Roy Feldman Karpa v United Mexican States (ICSID Additional Facility), Award of 16 December 2002, (2003) 42 ILM 625, (2003) 18 ICSID Rev.-FILJ 488 6.41, 6.195, 6.272, 6.284 Meerapfel v Central African Republic, ICSID Case No. ARB/07/10, Award of 21 May 2011

P xxiii 5.80, 5.197, 5.199, 5.241, 5.347, 5.351, 6.151, 6.255

Micula v Romania, ICSID Case No. ARB/05/20, Award of 11 December 2013 3.225, 5.286, 6.155, 6.193, 6.200, 6.247, 6.265 Middle East Cement Shipping and Handling Co SA v Arab Republic of Egypt, Award of 12 April 2002, (2003) 18 ICSID Rev.-FILJ 602 3.160, 3.167, 3.236, 3.244, 3.255, 3.263, 5.34, 5.262, 5.266, 5.306, 5.322, 5.352, 6.62, 6.167, 6.244, 6.277, 6.286 Mobil Cerro Negro v Venezuela, ICSID Case No. ARB/07/27, Award of 9 October 2014 3.31, 3.47, 3.95, 3.114, 3.271, 3.282, 5.73, 5.75, 5.78, 5.170–5.171, 5.175, 5.295, 6.89, 6.179, 6.247, 6.264 MTD Equity Sdn Bhd and MTD Chile SA v Chile, ICSID Case No. ARB/01/7, Award of 25 May 2004, (2005) 44 ILM 91 3.149, 3.244, 3.247–3.248, 3.253–3.254, 5.246, 6.66, 6.147, 6.185, 6.245, 6.267 MTD Equity v Chile, Decision on Annulment of 21 March 2007 3.250, 3.253 Occidental v Ecuador, ICSID Case No. ARB/06/11, Award of 5 October 2012 3.244, 3.249– 3.250, 3.253, 5.51, 5.73, 6.122, 6.136, 6.247, 6.250, 6.289, 6.296 OI European Group v Venezuela, ICSID Case No. ARB/11/25, Award of 10 March 2015 3.48, 3.298, 5.73, 5.81, 5.180, 5.347, 5.356, 6.149, 6.179, 6.247 Pey Casado v Chile, ICSID Case No. ARB/98/2, Award of 8 May 2008 5.347, 5.351 Pey Casado v Chile, Decision on the Application for Annulment of 18 December 2012 3.344, 4.160, 5.286 Pluspetrol v Perupetro, ICSID Case No. ARB/12/28, Award of 21 May 2015 5.295, 6.41, 6.75, 6.89, 6.250 PSEG Global Inc and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v Republic of Turkey, ICSID Case No. ARB/02/5, Award of 19 January 2007 5.252, 5.293, 5.322, 6.102, 6.148, 6.247 Quiborax v Venezuela, ICSID Case No. ARB/06/2, Award of 16 September 2015 2.17, 3.114, 3.296, 3.299, 5.73, 5.79, 5.347, 5.358, 6.148, 6.247 Railroad Development v Guatemala, ICSID Case No. ARB/07/23, Award of 29 June 2012 3.198, 5.80, 5.155, 5.199, 5.287, 5.295, 6.110, 6.148, 6.246–6.247 Rompetrol v Romania, ICSID Case No. ARB/06/3, Award of 6 May 2013 5.347, 5.352 Rumeli Telekom AS and Telsim Mobil Telekomunikasyon Hizmetleri AS v Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award of 29 July 2008 (2010) IIC 420 3.115, 3.318, 3.343–3.344, 4.17, 4.160, 6.148, 6.247 Rumeli v Kazakhstan, Decision on the Application for Annulment of 25 March 2010 4.160 Rusoro Mining v Venezuela, ICSID Case No. ARB(AF)/12/5, Award of 22 August 2016 3.49, 3.298, 5.19, 5.100, 5.111, 5.187, 5.210 SAIPEM SpA v The People's Republic of Bangladesh, ICSID Case No. ARB/05/7, Award of 20 June 2009, (2009) 48 ILM 996 3.56, 3.114, 3.296, 3.298, 5.299, 6.251 SAUR v Argentina, ICSID Case No. ARB/04/4, Award of 22 May 2014 5.295, 6.247 Sempra Energy International v Argentine Republic, ICSID Case No. ARB/02/16, Award of 28 September 2007 3.170, 3.369, 4.166, 5.73, 5.78, 5.108, 5.148, 5.165, 6.38, 6.148, 6.247, 6.263 Sempra v Argentina, Decision on the Application for Annulment of 29 June 2010 3.369 SGS Société Générale de Surveillance v Paraguay, ICSID Case No. ARB/07/29, Award of 10 February 2012 5.295, 6.19, 6.150, 6.251 Siag v Egypt, ICSID Case No. ARB/05/15, Award of 1 June 2009 3.101, 3.114, 3.211, 3.296, 5.54, 5.80, 5.197, 5.294, 5.326, 5.336, 5.343, 5.347, 5.355, 6.62, 6.96, 6.141, 6.150, 6.247, 6.278 Siemens AG v Argentine Republic, ICSID CASE No. ARB/02/8, Award of 6 February 2007 3.112, 3.296, 5.80, 5.199, 5.221, 5.229, 5.240, 5.285, 5.321, 6.122, 6.136, 6.191, 6.247 Societé Ouest Africaine des Bétons Industriels (SOABI) v Senegal, ICSID Case No. ARB/82/1, Award of 25 February 1988, (1994) 2 ICSID Reports 164 3.228–3.230, 3.236, 5.318– 5.319, 5.364, 6.65 Southern Pacific Properties (Middle East) Ltd (SSP) v Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award of 20 May 1992, (1995) 3 ICSID Reports 189 2.14, 3.29, 3.42, 3.95, 3.243, 3.264, 3.277, 3.356, 5.38–5.39, 5.193, 5.195, 5.281, 5.322, 5.334, 5.337, 6.56–6.63, 6.176, 6.264, P xxiv 6.275, 6.285 Suez v Argentina, ICSID Case No. ARB/03/19, Award of 9 April 2015 5.73, 5.295, 6.136, 6.194, 6.247

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Swisslion v Macedonia, ICSID Case No. ARB/09/16, Award of 6 July 2012 3.355–3.356, 5.337, 5.367, 6.104, 6.142, 6.150, 6.185, 6.247 Técnicas Medioambientales, Tecmed SA v United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of 29 May 2003, (2004) 19 ICSID Rev.-FILJ 158, (2004) 43 ILM 133 3.160, 3.167, 3.173, 3.353, 4.17, 5.27, 5.196, 5.203, 5.206, 5.284, 5.347, 6.167, 6.185, 6.244, 6.267 TECO v Guatemala, ICSID Case No. ARB/10/23, Award of 19 December 2013 5.73, 5.79, 5.151, 6.89, 6.105, 6.247 Tenaris v Venezuela, ICSID Case No. ARB/11/26, Award of 29 January 2016 3.172, 5.80, 5.199, 5.208, 5.215, 5.267, 6.133, 6.172, 6.247 Tidewater v Venezuela, ICSID Case No. ARB/81/1, Award of 13 March 2015 3.31, 3.49, 3.95, 3.114, 3.271, 3.283, 3.296, 3.299, 4.17, 5.73, 5.78, 5.170, 5.173, 5.295, 6.95, 6.247, 6.264 Total v Argentina, ICSID Case No. ARB/04/1, Decision on Liability, Award of 27 December 2010 3.246 Transglobal Green Energy v Panama, ICSID Case No. ARB/13/28, Award of 2 June 2016 5.352 Tza Yap Shum v Peru, ICSID Case No. ARB/07/6, Award of 7 July 2011 3.114, 5.64, 5.80, 5.197, 5.230, 5.347, 5.356, 6.136, 6.247 Unglaube (Marion and Reinhard) v Costa Rica, ICSID Case No. ARB/09/20, Award of 16 May 2012 3.115, 3.296, 3.317, 3.355, 5.73, 6.03, 6.41, 6.136, 6.247 Walter Bau v Thailand, Award of 1 July 2009, IIC 429 (2009) 5.75, 5.79, 6.151, 6.247 Waste Management, Inc and United Mexican States (ICSID Additional Facility), ICSID Case No. ARB(AF)/00/3, Award of 30 April 2004, (2004) 43 ILM 967 3.232, 3.246 Wena Hotels Ltd v Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award of 8 December 2000, (2002) 41 ILM 896 3.160, 3.166, 4.17, 5.67, 5.80, 5.195, 5.202, 5.210, 5.239, 6.01, 6.62, 6.124, 6.131, 6.242, 6.249, 6.278, 6.284 Wena Hotels v Egypt, Decision on the Application for Annulment of 5 February 2002 6.124

INTER-AMERICAN COURT OF HUMAN RIGHTS Gutiérrez- Soler v Colombia, Inter- Am. C.H.R. Ser C, No. 132 5.360 Velasquez- Rodriguez, Inter- Am. C.H.R. Ser C, No. 4, 26–7, 30–1 2.78, 2.94

INTERNATIONAL COURT OF JUSTICE, PERMANENT COURT OF INT ERNATIONAL JUSTICE Anglo Iranian Oil Company (United Kingdom v Iran), Judgment of 22 July 1952, ICJ Reports 1952 2.83, 3.71 Barcelona Traction Light and Power Company (Belgium v Spain), Judgment of 5 February 1970, ICJ Reports 1970, 3 5.05, 5.71 Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) Judgment of 30 November 2010, ICJ Reports 2010, 637 3.136, 5.346, 5.360 Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) Compensation owed by the Democratic Republic of Congo to the Republic of P xxv Guinea, Judgment of 19 June 2012, ICJ Reports 322 3.136, 6.20 Case Concerning the Factory at Chorzów (Germany v Poland) Claim for Indemnity (Merits), Judgment of 13 September 1928, PCIJ 1928 Ser A, No. 17, 4 2.21, 2.33, 2.56, 2.73, 2.90, 2.103, 2.105, 3.54, 3.81, 3.85–3.86, 3.88, 3.91, 3.104–3.108, 3.112, 3.126–3.127, 3.136, 3.141, 3.145, 3.155, 3.157, 3.163, 3.238, 3.286–3.287, 3.289, 3.293–3.294, 3.296, 3.317, 3.324, 3.330, 3.341, 5.42, 5.89, 5.246, 5.299–5.301, 5.314, 7.01, 7.09–7.11, 7.14 Case of the SS Wimbledon (Great Britain, France, Italy, Japan v Germany), Judgment of 17 August 1923, PCIJ 1923 Ser A, No. 1, 15 3.67, 3.135, 3.263, 6.20, 6.29, 6.132, 6.166, 6.269–6.270, 6.281, 6.283 Certain German Interests in Polish Upper Silesia (Germany v Poland) (The Merits), Judgment of 25 May 1926, PCIJ 1926 Ser A, No. 7, 3 3.05 Certain Norwegian Loans (France v Norway), Judgment of 6 July 1957, ICJ Reports 1957 2.83 Corfu Channel Case (United Kingdom v Albania), (Assessment of the Amount of Damages), Judgment of 15 December 1949, ICJ Reports 1949, 243 3.136, 3.346, 5.253, 6.20 Corfu Channel Case (United Kingdom v Albania), (Merits), Judgment of 9 April 1949, ICJ Reports 1949, 4 5.253, 5.350 Electricity Company of Sofia Case (Belgium v Bulgaria), Judgment of 4 April 1939, PCIJ 1939 Ser C, No. 88, 9 2.83 Gabćikovo- Nagymaros Project (Hungary v Slovakia), Judgment of 25 September 1997, ICJ Reports 1997, 7 3.255

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Judgments of the Administrative Tribunal of the ILO upon Complaints Made against Unesco, Advisory Opinion of 23 October 1956, ICJ Reports 1956 3.346 Losinger & Co (Switzerland v Kingdom of Serbs, Croats and Slovenes), Judgment of 27 June and 14 December 1936, PCIJ 1936 Ser C, No. 78, 7 2.83 Mavrommatis Jerusalem Concessions (Greece v Great Britain), Judgment of 26 March 1925, PCIJ 1925 Ser A, No. 5, 6 2.19–2.20 North Sea Continental Shelf Cases (Federal Republic of Germany v Denmark, Federal Republic of Germany v the Netherlands), Judgment of 20 February 1969, ICJ Reports 1969, 3 3.345

INTERNATIONAL TRIBUNAL FOR THE LAW OF THE SEA The M/V Saiga (No. 2) Case (Saint Vincent and the Grenadines v Guinea), Judgment of 1 July 1999 (1999) 38 ILM 1323 2.78, 3.137, 5.360 The M/V Virginia G (No. 19) Case (Panama v Guinea-Bissau), Judgment of 14 April 2014 (2014) 53 ILM 1161 3.137

IRAN–UNITED STATES CLAIMS TRIBUNAL American Bell International v Iran, Interlocutory Award, 6 Iran-US CTR (1984) 74 6.206 American Bell International v Iran, Final Award, 12 Iran-US CTR (1986) 170 6.206, 6.209 American International Group v The Islamic Republic of Iran, 4 Iran-US CTR (1983) 96 3.26, P xxvi 3.38, 3.161–3.162, 3.271, 3.273, 3.275, 3.354, 5.08, 5.118, 5.189, 5.218, 6.162, 6.175

Amoco International Finance Corporation v The Government of the Islamic Republic of Iran, 15 Iran-US CTR (1987) 189 2.15, 2.29, 2.63, 2.68, 3.27–3.28, 3.39–3.41, 3.77, 3.86–3.88, 3.91, 3.104–3.105, 3.142, 3.310, 3.312, 3.350, 5.02, 5.67, 5.71, 5.82, 5.91–5.92, 5.200, 5.219, 5.278, 5.314, Amoco International Finance Corporation v The Government of the Islamic Republic of Iran, Award on Agreed Terms, 25 Iran-US CTR (1990) 314 5.92, 5.278 Anaconda-Iran, Inc v Iran, Interlocutory Award, 13 Iran-US CTR (1988) 199 6.70, 6.86, 6.225– 6.226 Anaconda-Iran, Inc v Iran, Final Award, 28 Iran-US CTR (1992) 320 6.70, 6.86 Aryeh, Moussa v The Islamic Republic of Iran, 33 Iran-US CTR (1997) 368 5.46 Aryeh, Vera-Jo Miller, Laura and J M v The Islamic Republic of Iran, 33 Iran-US CTR (1997) 272 3.163, 3.308, 5.218, 6.121 Avco Corporation v Iran, 19 Iran-US CTR (1988) 200 6.265 Bechtel, Inc v Iran, 14 Iran-US CTR (1987) 149 6.206, 6.208 Birnbaum, Harold v The Islamic Republic of Iran, 29 Iran-US CTR (1993) 260 3.172, 5.228, 5.262, 5.270, 6.171 Blount Brothers v Ministry of Housing and Urban Development, 3 Iran-US CTR (1983) 225 3.184, 3.217, 3.236, 6.43, 6.218 Buckamier v Islamic Republic of Iran, 28 Iran-US CTR (1992) 53 3.184, 3.222–3.224, 3.236 CBS Inc v The Government of the Islamic Republic of Iran et al, 25 Iran-US CTR (1990) 131 5.91, 5.120, 5.189 Computer Sciences Corporation v The Government of the Islamic Republic of Iran, 10 IranUS CTR (1986) 269 3.56, 3.236, 5.224, 6.121 Dadras International and Per-Am Construction Corporation v The Islamic Republic of Iran and Tehran Development, 31 Iran-US CTR (1995) 127 3.214, 3.236 Dames and Moore v The Islamic Republic of Iran, 4 Iran-US CTR (1983) 212 3.56, 5.224, 6.43 Davidson, George v The Government of the Islamic Republic of Iran, 34 Iran-US CTR (1998) 3 3.163, 5.46, 6.121 Eastman Kodak Company v The Government of Iran, Final Award, 27 Iran-US CTR (1991) 3 5.225, 6.74 Ebrahimi, Shahine Shaine v The Government of the Islamic Republic of Iran, 30 Iran-US CTR (1994) 170 3.91–3.92, 3.117, 3.163, 4.166, 5.91, 5.228, 6.171 Economy Forms Corporation v The Government of the Islamic Republic of Iran, 3 Iran-US CTR (1983) 42 3.258 Endo Laboratories, Inc v The Islamic Republic of Iran, 17 Iran-US CTR (1987) 114 3.258 Exxon Research and Engineering Co v National Iranian Oil Company, 15 Iran-US CTR (1987) 3 3.217, 3.236, 6.203, 6.207, 6.218 Foremost Tehran, Inc et al v The Islamic Republic of Iran, 10 Iran-US CTR (1986) 228 3.153, 3.308

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General Electric Company v The Government of the Islamic Republic of Iran, 26 Iran-US CTR (1994) 148 5.325 Ghaffari, Fereydoon v The Islamic Republic of Iran, 31 Iran-US CTR (1995) 60 3.172, 5.262, 5.270, 5.309 Gould Marketing v Ministry of Defence of the Islamic Republic of Iran, 6 Iran-US CTR (1984) 272 3.184, 3.236, 5.22, 6.43 Gruen Assocs, Inc v Iran Housing Company, Ministry of Health and Social Welfare, Government of the Islamic Republic of Iran, 3 Iran-US CTR (1983) 97 3.236 Hakim, Kamran v The Government of the Islamic Republic of Iran, 34 Iran-US CTR (1998) 67 3.164, 5.46, 5.262, 5.270 Howard, Needles, Tammen & Bergendoff v Iran, 11 Iran-US CTR (1986) 302 6.69, 6.71 INA Corporation v The Government of the Islamic Republic of Iran, 8 Iran-US CTR (1985) 373 2.91, 3.10, 3.11, 3.26, 3.37–3.38, 3.139, 3.161–3.162, 3.238, 3.275, 5.08, 5.24, 5.213, 6.162, P xxvii 6.175, 6.264 International Technical Products Corp v The Government of the Islamic Republic of Iran, 9 Iran-US CTR (1985) 206 3.307 Intrend International, Inc v Iranian Air Force, 3 Iran-US CTR (1983) 110 6.191, 6.203 Islamic Republic of Iran v United States of America, 16 Iran-US CTR (1988) 285 6.04 Khosrowshahi, Faith Lita v The Government of the Islamic Republic of Iran, 30 Iran-US CTR (1994) 76 3.26, 3.163, 3.275, 5.08, 5.91, 5.122 Kiaie v The Government of the Islamic Republic of Iran, 32 Iran-US CTR (1996) 42 5.270 Lauth, Theodore v The Islamic Republic of Iran, 11 Iran-US CTR (1986) 150 3.217, 3.236 Levitt, William J v The Government of the Islamic Republic of Iran, The Housing Organization of the Islamic Republic of Iran, Bank Melli, 14 Iran-US CTR (1987) 191 3.213, 3.236 Malek v Iran, 28 Iran– US CTR (1992) 246 3.308 McCollough & Co Inc v Ministry of Post, Telegraph and Telephone, 11 Iran-US CTR (1986) 3 5.326, 6.09, 6.24, 6.43, 6.45, 6.171 Mohtadi v The Islamic Republic of Iran, 32 Iran-US CTR (1996) 124 3.154, 5.46–5.47 Morrison-Knudsen Pacific Ltd v Ministry of Roads and Transportation, 7 Iran-US CTR (1984) 54 6.43 Motorola Inc v Iran Airlines Corporation and The Government of the Islamic Republic of Iran, 19 Iran-US CTR (1988) 73 3.163, 3.219, 3.236, 5.91, 5.219 Nasser Espahanian v Bank Tejarat, 2 Iran– US CTR (1983) 157 6.43 Oil Fields of Texas, Inc v The Government of the Islamic Republic of Iran and NIOC, 12 Iran-US CTR (1986) 308 3.56, 3.163, 3.219, 5.256, 5.306, 6.121 Payne, Thomas Earl v The Government of the Islamic Republic of Iran, 12 Iran-US CTR (1986) 3 3.40, 3.117, 3.161, 3.163, 3.275, 3.354, 5.57, 5.119, 5.218 Per-Am Construction Corporation v Iran, 31 Iran– US CTR (1995) 127 3.236 Pereira, William L Associates v The Islamic Republic of Iran, 5 Iran-US CTR (1984) 198 3.56, 3.236, 5.224, 6.43, 6.69, 6.71 Petrolane Inc v The Government of the Islamic Republic of Iran, 27 Iran-US CTR (1991) 64 3.56, 3.117, 3.163, 3.260, 5.256, 5.258, 6.171 Phelps Dodge Corporation and Overseas Private Investments Corporation v The Islamic Republic of Iran, 10 Iran-US CTR (1986) 121 3.40, 3.117, 3.161, 3.163, 3.172, 3.275, 3.308, 5.23, 5.57, 5.67, 5.91, 5.121, 5.194, 5.236, 5.306 Phibro Corp v Iran, 26 Iran-US CTR (1989) 320 6.220 Phillips Petroleum and ConocoPhillips v PDVSA, Award of 17 September 2012 6.25, 6.41, 6.106–6.107 Phillips Petroleum Company Iran v The Islamic Republic of Iran and the National Iranian Oil Company, 21 Iran-US CTR (1989) 79 2.69, 3.91–92, 3.106, 3.108, 3.117, 3.163, 3.288, 3.308, 5.73, 5.82–5.83, 5.100, 5.103, 5.112, 5.128, 5.182, 5.254 Pomeroy Corporation v The Government of the Islamic Republic of Iran, 2 Iran-US CTR (1983) 372 3.184, 3.224, 3.236 RayGo Wagner Equipment Company v Star Line Iran Company, 1 Iran-US CTR (1982) 411 6.265 Reading & Bates Drilling Company v Iran, 18 Iran– US CTR (1988) 164 6.71 RJ Reynolds Tobacco Co v Iran, Interlocutory Award, 7 Iran-US CTR (1984) 181 6.32, 6.69,

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6.71, 6.202, 6.204, 6.225 RJ Reynolds Tobacco Co v Iran, Final Award, 8 Iran-US CTR (1985) 55 6.204 Saghi, James M et al v The Islamic Republic of Iran, 29 Iran-US CTR (1993) 20 3.117, 3.163, 5.24, 5.31–5.32, 6.171 Sedco, Inc v Iran Marine Industrial Company (IMICO), 21 Iran-US CTR (1989) 31 3.163, 5.227,

P xxviii 5.262, 5.272

Sedco, Inc v National Iranian Oil Company (NIOC), First Interlocutory Award, 9 Iran-US CTR (1985) 248 3.266, 3.309, 5.271 Sedco, Inc v National Iranian Oil Company (NIOC), Second Interlocutory Award, 10 Iran-US CTR (1986) 180 3.41, 3.60, 3.82, 3.91, 3.97–3.98, 3.117, 3.142, 3.160, 3.161, 3.163, 3.172, 5.262, 5.271, 5.279 Sedco Inc v NIOC, Final Award, 15 Iran– US CTR (1987) 23 3.161–3.163, 5.45, 5.224, 5.226– 5.227, 5.271, 5.279, 5.306, 6.209 Seismograph Service Corporation et al v National Iranian Oil Company, Islamic Republic of Iran, 22 Iran-US CTR (1989) 3 3.154, 3.236, 3.259 Sola Tiles, Inc v The Government of the Islamic Republic of Iran, 14 Iran-US CTR (1985) 223 3.56, 3.163, 3.275, 5.33, 5.91, 5.121, 5.194, 5.262, 5.264, 6.121 Starrett Housing Corporations, Starrett Systems Inc, and Starrett Housing International Inc v The Government of the Islamic Republic of Iran, Interlocutory Award, 4 Iran-US CTR (1983) 122 3.91, 3.308 Starrett Housing Corporations, Starrett Systems Inc, and Starrett Housing International Inc v The Government of the Islamic Republic of Iran, Final Award, 16 Iran-US CTR (1987) 112 3.91, 3.117, 3.163, 3.308, 4.166, 5.41, 5.73, 5.83, 5.99, 5.104, 5.219, 6.179, 6.225, 6.227–6.228, 6.243 Sylvana Technical Systems v The Government of the Islamic Republic of Iran, 8 Iran-US CTR (1985) 298 3.219, 5.325, 6.42–6.44, 6.79, 6.83, 6.85, 6.188, 6.115, 6.120–6.121, 6.225, 6.231, 6.265 Tavakoli v The Government of the Islamic Republic of Iran, 33 Iran-US CTR (1997) 206 3.163, 5.228, 5.262, 5.265, 5.270 Telecommunications Co of Iran v United States, 23 Iran-US CTR (1989) 320 6.207, 6.265 Tippetts, Abbett, McCarthy, Stratton v TAMSA–AFFA Consulting Engineers of Iran, 6 Iran-US CTR (1984) 219 3.309, 5.228, 5.262, 5.269–5.270, 6.179 Uiterwyk Corp v Iran, 19 Iran– US CTR (1988) 107 5.325 Ultrasystems Inc v The Islamic Republic of Iran, Information Systems Iran, 2 Iran-US CTR (1983) 100 3.218, 3.236, 5.325 United Painting Company, Inc v The Islamic Republic of Iran, 23 Iran-US CTR (1989) 351 3.219, 3.236, 5.33, 5.224 Watkins-Johnson Co et al v Iran, 22 Iran– US CTR (1989) 218 5.325

NAFTA TRIBUNALS Archer Daniels Midland Company and Tate Lyle Ingredients Americas, Inc. v United Mexican States, ICSID Case No. ARB(AF)/04/05, Award of 21 November 2007 2.18, 5.76, 5.79, 6.110, 6.136, 6.253 Cargill, Inc. v United Mexican States, ICSID Case No. ARB(AF)/05/2), Award of 18 September 2009 5.76, 6.89 Feldman, Marvin Roy Karpa v United Mexican States, ICSID Case No. ARB(AF)/99/1, Award of 16 December 2002, (2003) 42 ILM 625, (2003) 18 ICSID Rev.-FILJ 488 3.147, 6.125 Metalclad Corporation v United Mexican States, ICSID Case No. ARB(AF)/ 97/1, Award of 30 August 2000, (2001) 40 ILM 36, (2002) 5 ICSID Reports 212, (2001) 16 ICSID Rev.-FILJ 168, (2002) 119 ILR 618 3.141, 3.168, 5.67, 5.194–5.195, 5.238, 5.310, 6.167, 6.186, 6.239, 6.242, 6.278, 6.286, 6.289, 6.295 Mobil Investments Canada Inc. and Murphy Oil Corporation v Canada, ICSID Case No. ARB(AF)/07/4, Decision on Liability and on Principles of Quantum of 22 May 2012 5.151 Mobil Investments Canada Inc. and Murphy Oil v Canada, ICSID Case No. ARB(AF)/07/4, P xxix Award of 20 February 2015 6.149, 6.247

Mondev International Ltd v United States of America, ICSID Case No. ARB(AF)/99/2, Award of 11 October 2002 2.18, 3.45 Pope & Talbot Inc and Government of Canada, UNCITRAL, Interim Award of 26 June 2000, (2005) 7 ICSID Reports 69 5.245, 5.326, 5.335 Pope & Talbot Inc and Government of Canada, UNCITRAL, Award in Respect of Damages of 31 May 2002, (2005) 7 ICSID Reports 148; (2002) 41 ILM 1347 3.146, 5.80, 5.245, 5.326, 5.335,

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6.41, 6.66, 6.195, 6.272 SD Myers, Inc v Government of Canada, UNCITRAL, First Partial Award on the Merits of 13 November 2000, (2005) 8 ICSID Reports 18 3.143, 3.147, 5.94 SD Myers, Inc v Government of Canada, UNCITRAL, Second Partial Award on Damages of 21 October 2002, (2005) 8 ICSID Reports 124 3.329–3.330, 5.76, 5.79, 5.94–5.107, 6.22, 6.88, 6.195, 6.267

OTHER INTERNATIONAL ARBITRAL TRIBUNALS OR CLAIMS COMMISSIONS Administrative Decision No. II, Mixed Claims Commission, Decision of 1 November 1923, 7 RIAA, 29 5.316 Administrative Decision No. III, 11 December 1923, 7 RIAA, 64 6.20 Alabama (United States v United Kingdom), Arbitral Tribunal, Award of 14 September 1872, reprinted in J B Moore (ed), Digest of International Arbitrations of which the United States has been a Party, vol. 1 (Washington: GPO, 1898) 495 5.314 Al-Bahloul v Tajikistan, SCC, Final Award of 8 June 2010 5.51, 5.80, 5.197, 5.199 Al-Kharafi & Sons Co v Libya, Final Arbitral Award, 22 March 2013, Cairo Arab Investment Court, 374 et seq 5.133, 5.342 Anatolie Stati v Kazakhstan, SCC, Award of 19 December 2013 5.77, 5.347, 5.353, 6.136, 6.247 Arbitrations of which the United States has been a Party, vol 1 (Washington: GPO, 1898) 495 3.128 American Independent Oil Company (Aminoil) v The Government of Kuwait, Arbitral Tribunal, Award of 24 March 1982, (1982) 21 ILM 976 3.10, 3.14, 3.25, 3.34, 3.36, 3.76–3.77, 3.78, 3.95, 3.271, 3.278, 3.346, 3.352–3.353, 5.90, 5.92, 5.125, 5.127, 5.130, 5.217, 5.254, 5.277, 6.01, 6.59, 6.163, 6.175, 6.237, 6.239, 6.264 Arabian American Oil Company (Aramco) v Saudi Arabia, Arbitral Tribunal, Award of 23 August 1958, (1963) 27 ILR 117 2.27, 3.67 Biloune and Marine Drive Complex Ltd v Ghana Investments Centre v The Government of Ghana (Jurisdiction, Liability), Arbitral Tribunal, Award of 27 October 1989, (1994) 95 ILR 183 3.142, 3.165, 3.211, 5.237, 5.347 Biloune and Marine Drive Complex Ltd v Ghana Investments Centre v The Government of Ghana (Damages and Costs), Arbitral Tribunal, Award of 30 June 1990, (1994) 95 ILR 211 5.237, 6.41, 6.145, 6.179 BP Exploration Company (Libya) Ltd v Government of the Libyan Arab Republic, Sole Arbitrator (Lagergren), Award/Decision of 10 October 1973, (1979) 53 ILR 297 3.05, 3.36, 3.64– 3.65, 3.73 Bridas SAPIC v Government of Turkmenistan, Partial Award of 25 June 1999, excerpts in RD Bishop, J Crawford and WM Reisman, Foreign Investment Disputes. Cases, Materials and Commentary (The Hague: Kluwer Law International, 2005) 1270 et seq 3.207, 3.256, 4.71, 5.75, 5.136 Charterers and Crew of the Kate (United States v Great Britain), Arbitral Tribunal, Award of

P xxx 9 December 1921, 6 RIAA, 77 3.134

Chemin des Fer Zeltweg-Wolfsberg und Unterdrauberg-Woellan (Austria v Yugoslavia), Arbitral Tribunal, Award of 1938, 3 RIAA, 1795 6.225, 6.239 Chevron and Texaco v Ecuador, UNCITRAL, PCA Case No. 34877, Award of 31 August 2011 5.295, 6.41 CME Czech Republic BV (The Netherlands) v Czech Republic, UNCITRAL, Partial Award on the Merits of 13 September 2001, (2006) 9 ICSID Reports 121 6.188 CME Czech Republic BV (The Netherlands) v Czech Republic, UNCITRAL, Final Award on Damages of 14 March 2003, (2006) 9 ICSID Reports 246 3.12, 3.14, 3.245, 3.255, 4.65, 5.13, 5.24–5.26, 5.40, 5.58–5.59, 5.69, 5.81, 5.84, 5.98, 5.105–5.106, 5.108, 5.113–5.114, 5.138, 5.154, 5.159–5.161, 5.207, 6.64, 6.153, 6.188, 6.195, 6.197, 6.256, 6.267 CME v Czech Republic, UNCITRAL, Separate Opinion Brownlie on the Issues at the Quantum Phase of 14 March 2003 (2006) 9 ICSID Reports 412 1.12, 3.12, 3.14, 3.363, 5.25, 5.70, 5.154 Costa Rica Packet (Great Britain v Netherlands), Arbitral Tribunal, Award of 13 (25) February 1897 [sic] in J B Moore (ed), History and Digest of the International Arbitrations of which the United States has been a Party, vol V (Washington: GPO, 1898) 4948 3.256 De Sabla, (United States v Panama), Mixed Claims Commission, Decision of 29 June 1933, 6 RIAA, 358 3.32, 3.133, 5.23 Delagoa Bay and East African Railway Company (United States v Portugal), Arbitral Tribunal, Award of 30 May 1900 in M Whiteman, Damages in International Law, vol III (Washington: Government Printing Office, 1943), 1694; H La Fontaine (ed), Pasicrisie

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internationale 1794–1900 (Bern: Stämpfli, 1902) 398 2.03, 2.77, 3.175, 3.230, 3.235, 3.335, 5.04, 5.72, 5.288 Dr Marion Cheek (United States v Siam), Arbitral Tribunal, Award of 21 March 1898 in M Whiteman, Damages in International Law, Vol III (Washington: Government Printing Office, 1943) 1646 5.333 Eisenbach Brothers and Company (United States v Germany), Mixed Claims Commission, Decision of 20 April 1925, 7 RIAA, 199 3.242 Fabiani (France v Venezuela), Award of 30 December 1896, reported in M Whiteman, Damages in International Law, Vol III (Washington: Government Printing Office, 1943) 1785 5.363, 6.225, 6.239 Goldenberg (Romania v Germany), Sole Arbitrator (Fazy), Award of 27 September 1928, 2 RIAA, 903 2.27, 3.32 Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), UNCITRAL, Final Award of 4 May 1999, (2000) 25 YB Com Arb 13 2.92, 3.185, 3.192–3.193, 3.195, 3.204, 3.261, 3.346, 3.353, 3.356, 3.361, 5.75, 5.79, 5.130 Illinois Central Railroad Co (United States v Mexico), Mixed Claims Commission, Decision of 6 December 1926, 4 RIAA, 134 6.20 Italia Ukraina v Naftogaz, SCC Arbitration V 007/2008, Award of 19 December 2012 5.295 Iurii Bogdanov, Agurdino- Invest Ltd and Agurdino-Chimia JSC v Moldova, SCC Award of 22 September 2005 3.244, 5.347 Bogdanov v Moldova, SCC Case, Award of 30 May 2010 5.347 Karaha Bodas Company LLC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara, (Pertamina), and PT PLN (Persero), UNCITRAL, Preliminary Award of 30 September 1999 3.12 Karaha Bodas Company LLC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina) and PT PLN (Persero), Arbitral Tribunal, UNCITRAL, Final Award of 18 December 2000, summarized in pertinent part in Karaha Bodas Co v Perusahaan Pertambangan Minyak dan Gas Bumi Negara, 364 F.3d 274, 282-85 (5th Cir 2004) 3.196– P xxxi 3.197, 3.230, 3.261, 5.75, 5.79 Khan Resources v Mongolia, PCA Case No. 2011-09, Award of 2 March 2015 4.50, 5.35, 5.80, 5.199, 6.110, 6.148, 6.247 Lena Goldfields v the Russian Soviet Government, Arbitral Tribunal, Award of 2 September 1930, The Times, 3 September 1930, 7; (1950) 36 Cornell Law Quarterly 42 3.175, 3.191, 3.235, 5.289–5.290 Libyan American Oil Company (LIAMCO) v Government of the Libyan Arab Republic, Sole Arbitrator (Mahmassani), Award of 12 April 1977, (1982) 62 ILR 140; (1981) 20 ILM 1 2.29, 2.63, 3.03, 3.25, 3.36, 3.64, 3.71–3.73, 3.76, 3.94, 3.191, 3.234, 3.279, 3.350–3.351, 5.103, 5.217, 5.276, 6.177, 6.271, 6.286 Lighthouses Arbitration (France v Greece), Permanent Court (Ständiger Schiedshof), Judgment of 24 July 1956, (1956) 23 ILR 298 3.235, 5.291 Loughlin McLean–The Favourite (Great Britain v United States), Arbitral Tribunal, Award of 9 December 1921, 6 RIAA, 82 3.134 Mobil Cerro Negro v PDVSA, ICC, Award of 23 December 2011 6.89 National Grid v Argentina, UNCITRAL, Award of 3 November 2008 4.166, 5.43, 5.75, 6.41, 6.94, 6.148, 6.288 Naulilaa (Portugal v Germany) (Damages), Arbitral Tribunal, Award of 30 June 1930, 2 RIAA, 1035 5.314 New Zealand v France (Rainbow Warrier), Award of 30 April 1990 2.94, 5.350 Nordzucker AG v Poland, ad hoc Arbitration, UNCITRAL, Second Partial Award of 28 January 2009, para. 95; Third Partial Award of 23 November 2009 3.202 Norwegian Shipowners' Claim (Norway v United States), PCA, Award of 13 October 1922, 1 RIAA, 307 3.02, 3.24–3.25, 3.54, 3.235, 5.233 Occidental Exploration and Production Company and Republic of Ecuador, Arbitral Tribunal, Award of 1 July 2004, (2006) 45 ILM 246 3.152 Opinion in the Lusitania Case (United States v Germany), Mixed Claims Commission, Decision of 1 November 1923, 7 RIAA, 32 2.32, 2.74, 2.95, 3.98, 5.344–5.345, 5.355, 5.357, 5.359, 5.363 Owners of the Horace B Parker (United States v Great Britain), Arbitral Tribunal, Award of 6 November 1925, 6 RIAA, 153 3.134 Owners of the Sarah B Putnam (United States v Great Britain), Arbitral Tribunal, Award of 6 November 1925, 6 RIAA, 156 3.134

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Owners of the Tattler (United States v Great Britain), Arbitral Tribunal, Award of 18 December 1920, 6 RIAA, 48 3.134 Owners of the Thomas Bayard (United States v Great Britain), Arbitral Tribunal, Award of 6 November 1925, 6 RIAA, 154 3.134 Owners, Officers and Men of the Wanderer (Great Britain v United States), Arbitral Tribunal, Award of 9 December 1921, 6 RIAA, 68 3.134 Putegnat's Heirs (United States v Mexico), Arbitral Tribunal, Award of 1871 in J B Moore (ed), Digest of International Arbitrations of which the United States has been a Party, vol IV (Washington: GPO, 1898) 3720 2.26 Quasar de Valores v Russia, SCC, Award of 20 July 2012 3.30, 3.114, 3.253, 3.298, 3.319, 5.16– 5.17, 6.125, 6.179, 6.247, 6.267 Reineccius et al v Bank for International Settlements, PCA, Partial Award on the Lawfulness of the recall of the privately held shares on 8 January 2001 and the applicable standards for valuation of those shares of 22 November 2002 3.29, 5.05, 5.222 Robert H. May (United States v Guatemala), Arbitral Tribunal, Award of 16 November 1900 in M Whiteman, Damages in International Law, vol III (Washington: Government Printing Office, 1943) 1704 3.185, 5.332, 5.365 Rosinvest v Russia, SCC, Final Award of 21 September 2010 3.253, 3.298, 3.320, 5.14–5.15, 6.150, 6.257, 6.276 Russian Indemnities (Russia v Turkey), Award of 11 November 1912, 11 RIAA, 431 3.360, 6.53, 6.181, 6.212 P xxxii Sedelmayer v The Russian Federation, SCC, Award of 7 July 1998 5.283, 6.264

SPP (Middle East) Ltd, Southern Pacific Properties Ltd v The Arab Republic of Egypt, The Egyptian General Company For Tourism and Hotels, ICC, Decision of 11 March 1983, (1983) 22 ILM 752 5.201, 6.72 Sapphire International Petroleums Ltd v National Iranian Oil Company, Sole Arbitrator (Cavin), Arbitral Award of 15 March 1963, (1967) 35 ILR 136 2.92, 3.67, 3.191, 3.194, 3.202, 3.205, 3.225, 3.235, 3.238, 3.349, 5.52, 6.165 Shufeldt Claim (United States v Guatemala), Sole Arbitrator (Sisnett), Award of 2 November 1929, 2 RIAA, 1079 3.185, 3.191, 3.199, 3.233, 3.235, 5.136, 5.333, 5.365 Texaco Overseas Petroleum Company/California Calasiatic Oil Company v Government of the Libyan Arab Republic, Sole Arbitrator (Dupuy), Award of 19 January 1977, (1978) 17 ILM 1, (1979) 53 ILR 389 3.34, 3.36, 3.64–3.66, 3.69–3.70, 3.73, 3.142 Trail Smelter (United States v Canada), Arbitral Tribunal, Award of 16 April 1938, 3 RIAA, 1911 5.314 Upton Case (United States v Venezuela), Mixed Claims Commission, Decision of 31 December 1903, 9 RIAA, 234 3.32 Walter Fletcher Smith (United States v Cuba), Sole Arbitrator (Hale), Award of 2 May 1929, 2 RIAA, 915 3.131–3.132 War Risk Insurance Premium Claims (United States v Germany), Claims Commission, Decision of 1 November 1923, 7 RIAA, 44 5.315 White Industries v India, UNCITRAL, Award of 30 November 2011 5.300–5.301 Winthrop Neilson (United States v Germany), Arbitral Tribunal, Award of 21 April 1926, 7 RIAA, 308 3.243 Yukos Universal Limited (Isle of Man) v The Russian Federation, Hulley Enterprises Limited (Cyprus) v The Russian Federation, Veteran Petroleum Limited (Cyprus) v The Russian Federation, PCA Cases No. AA 226, 227, 228, Award of 18 July 2014 3.114, 3.244, 3.251–3.253, 3.297–3.298, 3.319–3.320, 5.18, 5.51, 5.60, 5.63, 6.41, 6.110, 6.123–6.124, 6.257, 6.272, 6.278, 6.29

NATIONAL CASES Australia State Bank of New South Wales Ltd v Federal Commissioner of Taxation, Federal Court, Judgment of 9 November 1995, 95 ATC 4734 6.33

Canada United Mexican States v Metalclad Corporation, Supreme Court of British Columbia, Vancouver, Judgment of 2 May 2001 6.186

France Code de l'expropriation pour cause d'utilité publique, version of 1 January 2015 according

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to Ordonnance No 2014-1345 of 6 November 2014 2.43 Art L.321-1 2.43

Germany P xxxiii BGH of 17 January 1973 IV ZR 142/70, DB 1973, 563 4.79

Netherlands Russian Federation v Veteran Petroleum Limited, Yukos Universal Limited, and Hulley Enterprises Limited, The Hague District Court, Chamber of Commercial Affairs, Judgment of 20 April 2016 5.60

United Kingdom Al-Jedda v United Kingdom [2011] All ER (D) 92 (Jul) 5.360 Golden Victory, The [2007] UKHL 12 (HL) 3.338 Horn v Sunderland Corporation [1941] 2 KB 26 2.43 Johnson v Agnew [1979] 2 WRL 487(HL) 499 3.338 Robinson v Harman (1848) 1 Exch. 850 2.85 Stebbing v Metropolitan Board of Works [1870] LR 6 QB 37 2.43 Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents) v Her Majesty's Commissioners of Inland Revenue and another (Appellants), House of Lords, Judgment of 18 July 2007, [2007] UKHL 34 6.33

United States Olsen v United States, 292 US 246, 255 (1934) 2.40 United States v 50 Acres of Land, 469 US 24 (1984) 2.40 United States v Commodities Trading Corp, 339 US 121, 123 (1950) 2.40 P xxxiii United States v Cors, 337 US 325, 332 (1949) 2.40

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Table of Legislation and Instruments

Document information

European Instruments

Publication

Council Regulation (EC) No. 2533/98 of 23 November 1998 concerning the collection of statistical information by the European Central Bank [1998] OJ L318/8 6.112

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

Council Regulation (EU) No. 1072/2013 of the European Central Bank of 24 September 2013 concerning statistics on interest rates applied by monetary financial institutions (recast) (ECB/ 2013/14) [2013] OJ L297/51 6.112 Directive 2011/7/EU of the European Parliament and of the Council on combating late payment in commercial transactions of 16 February 2011, [2011] OJ L200/35 6.57, 6.261 Art 2(6) 6.6261

'Table of Legislation and Instruments', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. xxxv xxxviii

Art 2(7) 6.657

National Legislation Austria Civil Code (Allgemeines Bürgerliches Gesetzbuch) 2.243 Art 1323 2.43

Equador Civil Code 6.250 Art 2140 6.250 Constitution 6.250 Art 244 6.250

Germany Grundgesetz (Basic Law of Germany) 2.241 Art 14 2.41 Art 14(3) 2.241

Iran Insurance Nationalization Act 1979 3.37 Art 1 3.37 Oil Industry Act 1951 3.40 Single Article Act 1980 3.39, 3.40

Kuwait Decree Law No. 124, 'Terminating the Agreement between the Kuwait Government and Aminoil', on 19 September 1977 3.36 Arts 3, 4 3.36

Libya Civil Code 6.271 Petroleum Law 1955 3.64 Petroleum Law 1965 3.64

Mexico Constitution 3.23 Art 27 3.23

Switzerland Article 26 Bundesverfassung 2.43 Article 19 Enteignungsgesetz 2.43

United States of America Constitution 2.40 Fifth Amendment 2.40

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Foreign Relations Law of the United States (Third) 1987 2.48 Foreign Sovereign Immunities Act, 28 USC § 1606 3.99 Restatement on Contracts (Second) 2.285 Section 344 2.85 Uniform Commercial Code 2.85 Section 1–106 (1) 2.285

Venezuela Civil Code 6.72 Article 1.746 6.72 Decree Law 2007 3.47 P xxxvi Hydrocarbons Law 2001 3.47

Reserve Law 2009 3.49

Trade Agreements Agreement between the Government of the United Kingdom and the Government of the USSR for the Promotion and Reciprocal Protection of Investments, 6 April 1989 6.150, 6.275 Art 5(1) 6.6150, 6.275 Agreement between the Macedonian Government and the Swiss Federal Council on the Promotion and Reciprocal Protection of Investments, 26 September 1996 6.142 Art 5(1) 6.6142 Agreement for the Promotion and Protection of Investments between the Republic of Italy and the Arab Republic of Egypt, 2 March 1989 6.141 Art 5(iv) 6.6141 Argentina–El Salvador BIT 1996 3.16 Art 7 3.16 Austria–Bangladesh BIT 2001 3.15 Art 5(1)(d) 3.315 Austria–Croatia BIT 1991 3.17 Art 4 3.17, 3.23 Austria–Hungary BIT 1991 3.17 Art 4 3.17 Austria–Slovak Federal Republic BIT 1991 3.17 Art 4 3.17 Austrian–Slovenian BIT 2001 3.15 Art 5(1)(d) 3.315 Bangladesh–Italy BIT 1990 5.299 Art 5 5.299 Brazil–The Netherlands BIT 1998 3.16 Art 6 3.16 Canada–Venezuela BIT 1996 3.49, 5.177 Art 2 5.177 Art 7(1) 3.349 Canadian Model BIT 2004 2.51, 3.20, 6.273 Art 13 2.51, 3.15 Art 13(2) 3.318, 3.20, 3.22 Art 13(3) 6.614, 6.15, 6.275 Czech Republic–The Netherlands BIT 1991 3.12 Denmark–Russia BIT 1993 5.14 Art 8 5.14 Egypt–France BIT 1975 3.16

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Art 6 3.16 Ethiopia–Sudan BIT 2000 3.16 Art 4 3.16 EU–Canada Comprehensive Economic and Trade Agreement (CETA), signed 30 October 2016 2.47, 3.22, 5.308 Art 8.12 5.308 Art 8.12(1) 3.315 Art 8.12(2) 3.322 German Model BIT 2008 2.51, 6.08 Art 4 2.51, 3.17, 3.21 Art 4(2) 6.608, 6.14 Germany–Bosnia–Herzegovina BIT 2001 3.21 Art 4 3.21 Germany–Venezuela BIT 1996 3.21 Art 4 3.21 India–Indonesia BIT 1999 3.16 Art 5 3.16 Indonesia–Jordan BIT 1999 3.16 Art 4 3.16 Italy–Egypt BIT 1989 5.294, 6.141 Art 5 6.141 Latvia–The Netherlands BIT 1994 3.16 Art 6 3.16 Luxemburg–Belgium and Egypt Treaty of 1977 2.47 Art V 2.47 Luxemburg–Belgium and the Republic of Korea Treaty of 1974 2.47 Art 5 2.47 Macedonia–Switzerland BIT 1996 6.142 Art 5 6.142 Malaysia–Chile BIT 1992 5.246 Art 4(c) 5.5246 Mexico–France BIT 1998 5.311 Netherlands–Venezuela BIT 1991 3.47, 3.49 Art 6 3.49, 3.282 Art 6(c) 3.347 North American Free Trade Agreement 1994 (NAFTA) 2.218, 2.47, 2.51, 2.72, 3.05, 3.17, 3.23, 3.143, 3.168, 6.07, 6.14, 6.125, 6.275 Chapter 11 3.143 Art 1102 3.147, 6.125 Art 1105 3.168, 5.94, 5.245 Art 1105(1) 3.317 Art 1106 5.151 Art 1110 2.51, 3.17–3.18, 3.22–3.23, 3.45, 3.59, 3.143, 3.147, 3.168, 3.270, 5.308, 6.14–6.15, 6.275 Art 1110(1)(d) 3.345 Art 1110(3), (4) 6.614 Art 1110(5) 6.615 Art 1135(1) 6.607 P xxxvii Oman–Yemen BIT 1998 5.298

Art 3 5.298 Russia–Turkey BIT 1997 3.16

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Art 4 3.16 UK–Argentina BIT 1990 3.15 Art 5 3.15, 3.21 UK–Croatia BIT 1997 3.15 Art 5 3.15, 3.21 UK–Soviet BIT 1997 5.14, 6.150 Art 3 5.14 Art 5(1) 6.6150 Art 8 5.14 United States–Australian Free Trade Agreement 2005 2.51, 3.16 Art 11.7 2.51, 3.16 United States–Model BIT 2012 2.49, 3.19, 3.59 Art 5(1), (3) 2.249 Art 6 2.49 Art 6(1)(c) 3.315 Art 6(2) 2.250, 3.19 Art 6(2)(a) 6.614 Art 6(3) 6.608, 6.15, 6.275 Art 6(4) 6.616 Annex B 3.59 United States/Argentina BIT 1991 2.49, 3.330, 3.365 Art 4 2.49 Art 25 3.365 United States/Russian Federation BIT 1992 2.49 Art 3 2.49 United States/Ukraine BIT 1994 6.142 Art 3 6.142 Art 3(1) 6.6143 United States – Chilean Free Trade Agreement 2004 2.51, 3.16 Art 10.9 2.51, 3.16 Venezuela–Barbados BIT 1994 5.173–5.174, 6.95 Art 5 6.95

Treaties and Conventions Convention establishing the Multilateral Investment Guarantee Agency (MIGA), entered into force 12 April 1988, 1508 UNTS 99 4.18, 4.19, 4.20, 5.302, 5.306 Preamble 4.18 Art 11(a)(ii), (iii) 4.418 Art 16 4.19, 4.20, 5.302 Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR), signed on 4 November 1950, entered into force, 3 September 1953, 213 UNTS 221 1.18, 2.44, 3.50, 6.03 Art 4(2) 3.3112 Art 6 3.81 Art 41 5.368–5.269 Art 42 2.07 Protocol 1 1.18, 2.44, 3.50, 5.06 Art 1 1.18, 2.44, 3.50, 5.06 Convention on International Liability for Damage Caused by Space Objects (1972) 2.223 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), adopted 18 March 1965, entered into force, 14 October 1966, 575 UNTS 159 3.255, 5.327, 6.08, 6.60, 6.65

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Art 42 3.255, 6.60, 6.65 Art 46 6.08 Art 61(2) 5.5327 Draft Articles on Prevention of Transboundary Harm from Hazardous Activities (2001), Official Records of the General Assembly, Supplement No. 10, UN- Doc. A/56/10 2.23 Draft Articles on the Responsibility of States for Internationally Wrongful Acts, adopted 10 August 2001,UN GA Resolution No. 56/83 of 12 December 2001 1.12, 2.07, 2.76, 2.112–2.113, 3.70, 3.103, 3.121–3.124, 3.145, 3.242 3.365, 3.369, 5.17, 5.316, 5.343, 6.04, 6.18–6.19, 6.22, 6.30, 6.165, 6.180, 6.183, 6.189, 7.01, 7.08 Art 14(3) 6.6189 Art 15 3.314, 5.17 Art 15(1) 3.3314, 3.315 Art 25 1.12, 3.365–3.366, 3.369–3.370 Art 31 2.21, 2.76, 3.122, 5.343, 7.07–7.09 Art 31(2) 2.277, 5.316 Art 34 3.123, 3.323 Art 35 3.70 Art 36 2.07, 2.77, 2.113, 3.102, 3.123–3.124, 3.323, 3.330, 7.07–7.08 Art 36(2) 2.2112–2.113 Art 38 6.18, 6.21, 6.30, 6.165, 6.180, 6.183 Art 38(1) 6.604, 6.18 Art 38(2) 6.6180 Art 39 3.242 P Annex 3.121, 3.365 xxxviii

Energy Charter Treaty, signed December 17 1994, entered into force April 16 1996, 2080 UNTS 95 (ECT) 2.247, 2.51, 2.72, 3.05, 3.15, 3.54, 3.270, 3.297, 5.60, 6.07, 6.14, 6.275 Art 13 2.51, 3.15, 3.270, 3.297, 6.14, 6.275 Art 13(1) 6.614 Art 26(8) 6.607 Japanese Peace Treaty 1945 3.363 Statute of the International Court of Justice, signed on 26 June 1945, entered into force, 24 October 1945 2.35, 3.350 Art 38 2.35, 3.351 Art 38(1) 3.3351 Art 38(2) 3.3350–3.351 Treaty between the United States of America and Ukraine concerning the Encouragement and Reciprocal Protection of Investment of 4 March 1994, entered into force on 16 November 1996 6.143 Art III 6.143 Art III(1) 6.6143 Treaty on European Union (Consolidated), Official Journal of the EU (26 October 2012), C 326/13, (TEU) 2.247 Treaty on the Functioning of the European Union (TFEU), signed on 13 December 2007, 2012/C 326/01 1.06 Art 340(2) 1.106 UNIDROIT Convention on International Financial Leasing, adopted 28 May 1988, entered into force 1 May 1995, 2321 UNTS 195 3.255 Art 13 3.255 UN Convention on Contracts for the International Sale of Goods, adopted 4 October 1980, entered into force 1 January 1988, 1489 UNTS 3 (CISG) 2.209, 2.86, 3.176, 3.183, 3.209, 3.255, 3.339, 6.26, 6.33, 6.217, 7.07 Art 74 2.19, 2.86, 3.183, 3.339, 6.26 Art 77 3.255 Art 78 6.26, 6.33, 6.217

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Art 79(1) 3.3183 Vienna Convention on Civil Liability for Nuclear Damage, signed 21 May 1963, entered into force 12 November 1977, 1063 UNTS 265 2.23 Vienna Convention on the Law of Treaties (VCLT), signed 23 May 1969, entered into force, 27 January 1980, 1155 UNTS 331 3.178, 3.371 Art 31 3.371 Art 73 3.178

UN Instruments UNCITRAL (United Nations Commission on International Trade Law) Model Law on International Commercial Arbitration (1985) (United Nations Document A/40/17, Annex I) (UNCITRAL Model Law) 6.6117 UNCITRAL (United Nations Commission on International Trade Law) Arbitration Rules 1.18, 5.300, 5.327 Art 40(1), (2) 5.5327 UNIDROIT Principles of International Commercial Contracts 2010 (PICC) 2.208, 2.21, 3.176, 3.183, 3.209, 3.255, 3.340, 6.26–6.27, 6.33, 6.81, 7.07 Art 7.1.7 3.183 Art 7.4.2 2.87, 3.340 Art 7.4.2(1) 2.208, 2.21 Art 7.4.9 6.27, 6.33 Art 7.4.9(1) 6.6216 Art 7.4.9(2) 6.626, 6.81 Art 7.4.21 3.183 Art 7.5.8 3.255 Principles of European Contract Law (PECL) 2.210, 2.88, 3.176, 3.183, 6.26–6.27, 6.33, 7.07 Art 8:108 2.10, 3.183 Art 9:501(1) 2.210 Art 9:502 2.88, 3.183 Art 9:504 3.255 Art 9:509 6.33, 6.217 Art 9:509(1) 6.626, 6.80 P Art 9:509(2) 6.627 xxxviii

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List of Abbreviations

Document information

Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

'List of Abbreviations', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. xxxix - xlii

ABA

American Bar Association

ABV

Adjusted Book Value

AICPA

American Institute of Certified Public Accountants

AJIL

American Journal of International Law

ASIL

American Society of International Law

BIT

Bilateral Investment Treaty

BP

British Petroleum

BYIL

British Yearbook of International Law

CIL

Customary International Law

CISG

United Nations Convention on Contracts for the International Sale of Goods

CJEU

Court of Justice of the EU

Co

Company

Corp

Corporation

DCF

Discounted Cash Flow

Doc.

Document

DoL

Decision on Liability

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization

EC

European Community/European Communities

ECB

European Central Bank

ECHR

European Convention on Human Rights

ECtHR

European Court of Human Rights

EJIL

European Journal of International Law

EU

European Union

EURIBOR

European Interbank Offered Rate

FET

Fair and equitable treatment

FPS

Full protection and security

FTA

Free Trade Agreement

GA

General Assembly

GAAP

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GYIL

German Yearbook of International Law

IAS

International Accounting Standards

ibid.

ibidem (at the same place)

ICC

International Chamber of Commerce

ICJ

International Court of Justice

ICLQ

International and Comparative Law Quarterly

ICSID

International Centre for Settlement of Investment Disputes

ICSID Convention

Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (March 1965)

ICSID Rev.-FILJ

ICSID Review—Foreign Investment Law Journal

idem

idem (the same)

i.e.

id est (that is)

IECL

International Encyclopedia of Comparative Law

IFRS

International Financial Reporting Standards

IJIL

Indian Journal of International Law

ILA

International Law Association

ILC

International Law Commission

P xl

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ILC Articles

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ILO

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ILR

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IMF

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IOM

International Organization for Migration

Iran–US CTR

Iran–US Claims Tribunal Reports

ITLOS

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IVS

International Valuation Standards

IVSC

International Valuation Standards Council

JBl

Juristische Blätter

JWIT

The Journal of World Investment and Trade

LIBOR

London Interbank Offered Rate

MPEPIL

Max Planck Encyclopedia of Public International Law

MFN

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MIGA

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NAFTA

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NBV

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NGO

Non-Governmental Organization

NYU

New York University

OECD

Organization for Economic Cooperation and Development

OPEC

Organization of Petroleum Exporting Countries

ÖZöR

Österreichische Zeitschrift für öffentliches Recht und Völkerrecht

para.

paragraph

paras

paragraphs

PCA

Permanent Court of Arbitration

PCIJ

Permanent Court of International Justice

PDVSA

Petróleos de Venezuela S.A.

PECL

Principles of European Contract Law

RdC

Recueil des Cours de l'Académie de droit international

RDI

Revue de droit international et de legislation comparé

Res.

Resolution

RIAA

Reports of International Arbitral Awards

SEC

Securities Exchange Commission

SFAC

Statements on Financial Accounting Concepts

SFAS

Statements of Financial Accounting Standards

SMT

Statement on Appraisal Standards

TDM

Transnational Dispute Management

P xli Texaco

Texas Oil Company

UN

United Nations

UNCC

United Nations Compensation Commission

UNCITRAL

United Nations Commission on International Trade Law

UNCTAD

United Nations Conference on Trade and Development

UNIDO

United Nations Industrial Development Organization

UNIDROIT

Institut international pour l'unification du droit privé

UNTS

United Nations Treaty Series

US

United States of America

US $

United States Dollar

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P xli

USPAP

Uniform Standards of Professional Appraisal Practice

vol.(s)

volume(s)

WTO

World Trade Organization

YCA

Yearbook of Commercial Arbitration

ZaöRV

Zeitschrift für ausländisches öffentliches Recht und Völkerrecht

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1. Introduction

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1.01 For a long time, the issue of calculation has attracted relatively little attention in legal writing and practice. (1) The main interest of juridical analysis concentrated on the legal foundations of claims but less on the question of the concrete amount that would be awarded in the end. This seems to reflect a certain tradition in the wrongful interpretation of the Latin verdict of iudex non calculat. (2)

Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

1.02 In the past ten years, however, there has been a remarkable increase in awareness of the importance of valuation in international investment disputes. Not only has the P 2 number of academic writings on this issue grown, (3) but also tribunals have dedicated more attention to calculation and valuation issues in their awards, where the explanations on quantum not infrequently cover dozens of pages of detailed reasoning. (4)

'1. Introduction', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 1 - 8

1.03 There is now a better understanding that the traditional scepticism concerning numbers among lawyers is no longer acceptable. Claimants are not predominantly interested in the legal foundations of their claim but are above all concerned with the question of how much they can expect to receive after a possibly long-lasting and uncomfortable legal procedure. (5) A fairly precise estimate of the amount of money to be expected is of the greatest importance to evaluate the risks of such a costly undertaking as international judicial proceedings. 1.04 The difficulties of calculating compensation and damages in investor–state disputes are also rooted in the multifaceted nature of international investment law. On the one hand, it forms part of public international law, as the legal framework is shaped by international treaties and customary international law. On the other hand, some authors have argued that international investment law should be understood as constituting a species of global constitutional and administrative law. (6) Others have highlighted the contractual nature of international investment law with its various types of bilateral P 3 agreements between states, and between investors and states. (7) In addition, there are similarities, but also divergences between international investment arbitration and international commercial arbitration. (8) 1.05 In the light of the above, the calculation of compensation and damages continues to present a particular challenge. Which rules and principles are to be followed? Compensation and damages are concepts that are used and applied in all of the abovementioned legal frameworks, but in rather different ways. How can international investment arbitration reconcile these different approaches? 1.06 With respect to administrative law, the right of individuals to receive compensation or damages from the state is subject to many contingencies. While in cases of direct expropriation, the rules are more or less settled, the matter is much more complicated in the area of state liability for wrongful state acts. European law refers to the 'common principles of law' with respect to its liability for damage caused by unlawful acts of its institutions or servants. (9) Yet, there is considerable jurisprudence (10) and academic writing (11) that such 'common principles' are not easy to detect. One of the few common principles is that the liability for damages of the state towards individuals is more P 4 limited than in the relationship between individuals themselves. (12) In addition, liability for legislative acts is accepted only in a rather restrictive way so as not to interfere unduly with the state's regulatory power. (13) 1.07 In the area of contract law, other principles prevail. According to what has been described as 'rectificatory' or 'corrective' justice, after Aristotle's Nicomachean Ethics, what one has gained, the other has lost and must be compensated in order to equalize injustice. (14) The equilibrium of contractual rights and duties should be safeguarded, if possible, with respect to the time of the agreement. (15) 1.08 Economic considerations play an important role for general preventive reasons. The financial consequences of certain behaviour should be assessable beforehand. Only then can jurisprudence fulfil its task of upholding and securing the rule of law. (16) If the amounts do not turn out in a comprehensive and consistent manner, this chance is lost. 1.09 This is especially relevant in the international context. In the area of international investment disputes, numerous different tribunals are dealing with the quantification of compensation or damages and they apply a large variety of valuation approaches. It is often not clear beforehand which tribunal will apply which approach and why. The lack of a more uniform practice and more foreseeable criteria leads to uncertainty. As a consequence, claimants may be tempted to overstate their claims, anticipating that a tribunal might decide just to 'split the baby'. (17) 1.10 Even though the calculation in the concrete case is only directly relevant for the P 5 parties, it has its external effects. The calculation of the respective individual claims

also contributes—or not—to legal certainty. The better an award on compensation and

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damages is reasoned and explained, the more chance it has of being considered legally and morally acceptable, not only to the state party to the dispute but also to the outside world. (18) Economically adequate and comprehensive calculation certainly serves a useful public policy purpose. (19) 1.11 Environmental organizations and other non-governmental organizations (NGOs) have been warning of the so-called 'chilling effect' of high compensation or damages awards in investment disputes. (20) Out of fear of being confronted with astronomical claims from financially powerful investors, some states have refrained from utilizing useful and desirable measures in the common interest such as environmental or employment regulations. This has the effect of hampering social development in these countries. 1.12 Economic difficulties and crises of host states also have played a role in the investor– state arbitration. (21) While the first awards against Argentina have tended to reject the justifications for the emergency measures taken, the subsequent successful annulment proceedings and a few other awards did not follow this tendency. The difference between the non-precluded measure (NPM) provisions contained in many investment protection treaties and the customary international law rule on the state of emergency as a 'ground for precluding wrongfulness' with its strict conditions formulated in Article 25 of the Articles on State Responsibility (22) appears now to have gained more ground. It will be discussed how this affects the quantum aspects in investment arbitration cases. 1.13 On the other hand, the size of the amounts awarded in investment arbitration has P 6 increased over the past years. (23) This is connected to the size of the projects under

dispute, but in the absence of an upper limit in the scale of foreign investment, the awards of compensation or damages may continue to result in 'astonishing amounts'. (24) 1.14 Finally, it is important to consider the time factor. The period of time between the event giving rise to the claim and the assessment or payment of the amount of compensation or damages has an important influence on their value, which can be taken into account through an award of interest. However, the rate and the period of interest as well as the question of whether interest should be compounded are often not appropriately considered, although in this respect too, considerable progress can be observed in the past few years. 1.15 The role of experts regarding questions of evaluation and calculation also needs to be highlighted. Usually, the parties present their own expert reports. More rarely, experts are also appointed by the tribunal. However, the decision about the amount of compensation or damages must not be delegated to the experts. (25) In order to assess the figures submitted by experts, an understanding of the methods and a willingness to consider them are important. (26) 1.16 In international investment arbitration, expropriations, violations of treatment standards contained in international investment protection treaties, and breaches of contract are at issue, when disputes arise between foreign investors and host states. The dual character of the state as a sovereign on the one hand and as an actor in the private business sector on the other poses several problems. While the state's sovereignty and responsibilities for public welfare must be safeguarded, the state must also comply with legal obligations entered into for the promotion and protection of foreign investment. Generally, it is in the interest of the host state to create and maintain a reliable legal framework for foreign investors. In the developing and in the developed worlds, private foreign investment is regarded as an essential means for economic prosperity and development. 1.17 The following chapters will analyse how modern international investment tribunals P 6 have dealt with this dilemma. Some important older decisions of claims or arbitral commissions will also be analysed insofar as they are still influential for the question of calculating compensation or damages. Furthermore, the International Court of Justice and its predecessor, the Permanent Court of International Justice, have made important pronouncements on the duties of states concerning foreigners and on state responsibility. Their judgments will also briefly be reflected. 1.18 As regards investor–state arbitration, the focus will be on arbitrations initiated under the auspices of the International Centre for Settlement of Investment Disputes (ICSID), but will also include arbitrations under the UNCITRAL rules and other ad hoc arbitrations. Furthermore, the jurisprudence of the Iran–US Claims Tribunal will be analysed, as it had to deal with the specific financial aspects of the investor–state relationship on many occasions. Some thought is also given to the practice of the UN Compensation Commission which had to assess, inter alia, business losses of private individuals as a consequence of Iraq's invasion of Kuwait in 1990. Finally, the practice of the European Court of Human Rights (ECtHR) is occasionally referred to as far as it contains identifiable guidelines for the assessment of damages after violations by states of their international obligations. This is the case in particular with the right to property as contained in Article 1 of the First Protocol of the European Convention on Human Rights (ECHR). 1.19 As a starting point, Chapter 2 will analyse the concept of compensation and damages on the basis of legal rules applicable in international investment disputes. Chapter 3 is dedicated to the most important valuation standards and criteria which can be identified on this basis. Chapter 4 will then introduce some of the internationally

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recognized valuation standards and approaches from the economic perspective. The scope of Chapter 5 will be to combine the two approaches and assess whether and how the different valuation methods used in economic practice are reflected and applied in international jurisprudence. Chapter 6 will then deal with the issue of interest and address both pre-award and post-award interest. Some concluding remarks will be outlined in Chapter 7. The four Annexes contain analytical tables of cases, which were significant in terms of calculation of compensation and damages in investor–state arbitration since 2008. (27)

References 1)

2)

3)

4)

5)

The notable exceptions include R Lillich (ed.), Valuation of Nationalized Property in International Law, vols 1–4 (Charlottesville: University Press of Virginia, 1972–87). A few articles appeared on specific aspects of the issue of valuation, such as M Ball, 'Assessing Damages in Claims by Investors Against States' (2001) 16 ICSID Rev.-FILJ 408; P Friedland and E Wong, 'Measuring Damages for Deprivation of IncomeProducing Assets: ICSID Case Studies' (1991) 6 ICSID Rev.-FILJ 400; W Lieblich, 'Determination by International Tribunals of the Economic Value of Expropriated Enterprises' (1990) 7 Journal of International Arbitration 37; W Lieblich, 'Determining the Economic Value of Expropriated Income-Producing Property in International Arbitrations' (1991) 8 Journal of International Arbitration 59; S Khalilian, 'The Place of Discounted Cash Flow in International Commercial Arbitration: Awards by Iran–U.S. Claims Tribunal' (1991) 8 Journal of International Arbitration 31; C F Amerasinghe, 'Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice' (1992) 41 ICLQ 22. A few books appeared in German, such as R Hefele, Ermittlung der Entschädigung bei Enteignung von Direktinvestitionen im Ausland nach modernem Völkerrecht (Munich: Herbert Utz Publishers, 1991); H Bergmann, Die völkerrechtliche Entschädigung im Falle vertragsrechtlicher Positionen (Baden-Baden: Nomos, 1997); M Schäfer, Entschädigungsstandard und Unternehmens bewertung bei Enteignungen im allgemeinen Völkerrecht (Heidelberg: Verlag Recht und Wirtschaft, 1997); and in French, such as J Ortscheidt, La réparation du dommage dans l'arbitrage commercial international (Paris: Dalloz, 2001); on the valuation practice of the European Court of Human Rights (ECtHR) see, in particular, G Dannemann, Schadensersatz bei Verletzung der Europäischen Menschenrechtskonvention (Cologne et al: Heymanns, 1994). Usually ascribed to Macer, Dig 49, 8, 1 para. 2; see A Murillo Villar, 'La motivación de la sentencia en el proceso civil romano' (1995) 2 Cuadernos de Historia de Derecho 11, 28. Waelde and Sabahi note that the question of compensation and damages is often 'the poor cousin' when the battle royal rages first about jurisdiction and then about the merits. T Waelde and B Sabahi, 'Compensation, Damages, and Valuation' in P Muchlinski et al (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 1049, 1051. See, e.g., Y Derains and R Kreindler (eds), Evaluation of Damages in International Arbitration (Paris: International Chamber of Commerce, 2006); T Waelde and B Sabahi, above, n. 2; S Ripinsky and K Williams, Damages in International Investment Law (London: British Institute of International and Comparative Law, 2008); M Kantor, Valuation for Arbitration (Alphen aan den Rijn: Kluwer Law International, 2008); A Bjorklund, I Laird, and S Ripinsky (eds), Investment Treaty Law. Current Issues III (London: BIICL, 2009); H Wöss, A San Román Rivera, P Spiller, and S Dellepiane, Damages in International Arbitration Under Complex Long-Term Contracts (Oxford: Oxford University Press, 2014). In 2014, the Journal of Damages in International Arbitration was founded which aims 'to provide a forum for the free exchange of ideas concerning the calculation of damages, the difficulties and the challenges therein'. See J Gotanda and R Walck, 'Editors' Note' (2014) 1 Journal of Damages in International Arbitration v. Numerous articles published in this Journal are referred to in this book. In M Bungenberg, J Griebel, S Hobe, and A Reinisch (ed), International Investment Law (Baden-Baden et al: Nomos et al, 2015), the chapter on 'Restitution, Damages and Compensation' encompasses more than 120 pages in nine subchapters. A study by PWC in 2015 analysing ninety-five awards between 1990 and 2015 shows that the number of pages dedicated to explaining the basis for the quantification of damages has risen from eight in pre-2000 to thirty-four pages in 2011–15. Tribunals are also addressing more complex valuation issues. See PricewaterhouseCoopers, 2015—International Arbitration Damages Research—Closing the Gap between Claimants and Respondents, available at ; reprinted in ( 2016) 3 Journal of Damages in International Arbitration 99, 104. Gotanda notes that 'what is of primary concern to the aggrieved parties most often is not the issue concerning jurisdiction and the merits of the various substantive claims, around which lawyers build sophisticated legal arguments, but the result, typically measured by the amount of money recovered'. J Gotanda, 'Damages in Private International Law' 326 RdC (2007) 73, 83.

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6) G Van Harten and M Loughlin, 'Investment Treaty Arbitration as a Species of Global

7)

8) 9)

10)

11)

12)

13)

14) 15) 16)

17)

18)

19) 20)

Administrative Law' (2006) 17 EJIL 121; S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010); S Montt, State Liability in Investment Treaty Arbitration. Global Constitutional and Administrative Law in the BIT Generation (Oxford: Hart Publishing, 2009). A van Aaken, 'International Investment Law between Commitment and Flexibility: A Contract Theory Analysis' (2009) 12 Journal of International Economic Law 507; J Salacuse, The Three Laws of International Investment. National, Contractual, and International Frameworks for Foreign Capital (Oxford: Oxford University Press, 2013). C Knahr, C Koller, W Rechberger, and A Reinisch (eds), Investment and Commercial Arbitration—Similarities and Divergences (Utrecht: Eleven, 2010). See Article 340(2) of the Treaty on the Functioning of the European Union (TFEU) which provides: 'In the case of non-contractual liability, the Union shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by its institutions or by its servants in the performance of their duties.' The Court of Justice of the European Union has in its well-known judgments in Francovich and Brasserie U Pecheur/Factortame elaborated general principles of state liability for breaches of European law which are designed after this model, thus also based on the general principles common to the laws of the member states. This case law has developed over time, but the condition that the breach must be 'sufficiently serious' to trigger liability has been criticized repeatedly. Out of the numerous cases dealing with principles of the liability of the EU and its member states see, in particular, Case 5/71, Zuckerfabrik Schöppenstedt v Council [1971] ECR 975, 984, para. 11; Cases C-6 and 9/90, Francovich and Bonifaci v Italy [1991] ECR I-5357; Brasserie du Pecheur SA v Federal Republic of Germany; R. v Secretary of State for Transport, ex parte Factortame Ltd (No. 4) [1996] ECR I-1029; Laboratoires Pharmaceutiques Bergaderm and Goupil v Commission, Judgment of 4 July 2000, Case C-352/98. A Bradley and J Bell, 'Governmental Liability: A Preliminary Assessment' in J Bell and A Bradley (eds), Governmental Liability: A Comparative Study (London: BIICL, 1991) 1–2; F Fines, 'A General Analytical Perspective on Community Liability' in Tom Heukels and Alison McDonnell (eds), The Action for Damages in Community Law (The Hague: Kluwer Law, 1997) 11; M Andenas and D Fairgrieve, 'Misfeasance, Governmental Liability and European Influences' in D Fairgrieve, M Andenas, and J Bell (eds), Tort Liablity of Public Authorities in a Comparative Perspective (London: BIICL, 2002) 183; D Fairgrieve, State Liability in Tort. A Comparative Law Study (Oxford: Oxford University Press, 2003); C Booth, The Negligence Liability of Public Authorities (New York: Oxford University Press, 2006); I Marboe, 'Principles of State Liability and their Applicability in Investment Arbitration' in M Kantor (ed.), Ten Years of Transnational Dispute Management, TDM 4 (2013) . In this respect, the fear of 'opening the flood gates' is frequently raised. See I Marboe, 'State Responsibility and Comparative State Liability for Administrative and Legislative Harm to Economic Interests' in S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010) 377, 409. See the argument of G A Darmon in Vreugdenhil II: 'In many, if not all, Member States the conditions for liability for legislative action are appreciably different from those concerning administrative action.' Case C-282/90, Vreugdenhil v Commission (Vreugdenhil II), [1992] ECR I-1937, 1958; see also A Arnull, 'Liability for Legislative Acts Under Article 215(2) EC [now: 340 (2) TFEU]' in T Heukels and A McDonnell (eds), The Action for Damages in Community Law (The Hague: Kluwer Law, 1997) 129; I Marboe, above, n. 12. Aristotle, Nicomachean Ethics, translated by W D Ross (Stilwell: Digireads, 2005) Book V, 4; this argument is expanded in more detail by H Wöss et al, above, n. 3, 13–14. A van Aaken, above, n. 7, 508 et seq. Waelde notes that the compensation payable adds to the 'signalling effect of a tribunal award'. T Waelde, 'The Specific Nature of Investment Arbitration' in P Kahn and T Waelde (eds), New Aspects of International Investment Law (The Hague: Martinus Nijhoff Publishers, 2007) ch. 2. PWC analysed in its 2015 study whether the concern that tribunals tend to 'split the baby', i.e. award an amount in between the two amounts presented by claimants and respondents, was supported by evidence. The study showed that in only 18% of cases did tribunals award an amount between 40 and 60% of the amount claimed. There were significantly more cases where the tribunals' position on damages was much closer to one party's position (typically the respondent) than the middle ground. On average the amount awarded represented 37% of the amounts claimed. See PWC, above, n. 4, 102–3. See the analysis by J Branson, 'Damages in Investment Arbitration—A Revolutionary Remedy or Reward for Rich Corporations at the Expense of the World's Poor? A Fundamental Examination of Chorzów's Children' (2016) 3 Journal of Damages in International Arbitration (forthcoming). This has also been emphasized by M Reisman and R Sloane, 'Indirect Expropriation and its Valuation in the BIT Generation' (2003) 75 BYIL 115, 137. N Bernasconi-Osterwalder, 'Who Wins and Who Loses in Investment Arbitration? Are Investors and Host States on a Level Playing Field?' (2005) 6 JWIT 69 et seq.

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21) That very high amounts could pose a problem for the economy of smaller states has

22)

23)

24)

25)

26)

27)

been robustly argued by Arbitrator Brownlie in his Separate Opinion in CME v Czech Republic. See Separate Opinion on the Issues at the Quantum Phase of: CME v Czech Republic by Ian Brownlie of 14 March 2003, paras 74 et seq. Similar issues have been raised in the context of the ICSID proceedings against Argentina. See, in particular, CMS Gas Transmissions Company v Argentine Republic, Award of 12 May 2005, 44 ILM (2005) 1205 and LG&E Energy Corp et al v Argentine Republic, Award of 25 July 2007. For further details of the discussion see Chapter 3, Section D(2), paras 3.326 et seq. See the critique on the practice of the early awards decided against Argentina by W Burke-White and A von Staden, 'Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties' (2008) 48 Virginia Journal of International Law 307. The PWC study in 2015 showed that 100% of the awards until 2000 amounted to less than US$100 million. Between 2006 and 2010, 81%, and between 2011 and 2015, 79% of the amounts were less than US$100 million. These results demonstrate the tendency towards larger awards. Yet, the research also shows that the overwhelming majority of awards continue to be for amounts below US$100 million. Only three of the awards reviewed in the last five years were for amounts in excess of US$1 billion, and five for amounts greater than US$100 million but less than US$1 billion. See PWC, above, n. 4, 109. See Mark Kantor, 'Fifty Billion Dollars; The Yukos Damages Awards' (2015) 2 Journal of Damages in International Arbitration 91: 'What does it mean for the presentation and evaluation of damages evidence when an arbitral tribunal orders the losing respondent to pay the astonishing amount of more than US$50 billion?' N Ulmer, 'Assessing Damages—Are Arbitrators Good at It? Should They Be Assisted by Experts? Should They Be Entitled to Decide ex aequo et bono?' (2005) 6 JWIT 11; R Walck, 'Logic and Ethics in the Practice of Expert Witness Services' (2016) 3 Journal of Damages in International Arbitration 149. This may also serve to emphasize the acceptance and enforceability of a tribunal award. See W Lieblich, 'Determining the Economic Value of Expropriated IncomeProducing Property in International Arbitrations' (1991) 8 Journal of International Arbitration 59, 74. The book by Ripinsky and Willians contains tables of relevant cases until 2007. See Ripinsky and Willians, above, n. 3, 405–505. It therefore seemed useful to continue this chronology from the year 2008.

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2. The Function of Compensation and Damages

Document information

2.01 Compensation and damages are pecuniary remedies which shall, as far as money can do, repair harm or loss sustained. They have an important function for doing justice, and for proving the existence of law as such: ubi remedium ibi ius (where there is a remedy, there is law). (1) The assessment of the amount due has the role of transforming legal claims into concrete amounts of money. In order to fulfil this task adequately, the scope and purpose of the legal claims must be well understood. A closer look at the legal rules applicable in the various contexts is therefore essential.

Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

'2. The Function of Compensation and Damages', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 9 - 42

2.02 Different legal systems have developed different approaches on the function of compensation and damages which are also the result of historical traditions. (2) At the international level, one must also take into account that the legal terms might have P 11 different meanings in different languages and legal systems. The following analysis will identify the function of compensation and damages in the context of international investment disputes and shall serve as a basis for the development of criteria for the assessement of quantum by international investment tribunals. It will also be a point of reference for the choice of an appropriate valuation method.

A. Distinct Functions of Compensation and Damages 2.03 In international investment law, the obligation to pay compensation or damages may be based on different legal claims. Three causes of action can generally be identified: expropriation, breaches of international law, and breaches of contracts. (3) The difficulty of identifying the purpose of the respective monetary remedy has already been reflected in the arbitral award in Delagoa Bay in 1900: La 'compensation' doit-elle représenter la réparation d'un dommage causé sans droit? ou bien doit-elle former l'équivalent d'un engagement contractuel? ou bien encore les demandeurs ont-ils simplement droit au remboursement d'une valeur dont le Portugal, s'il ne la restituait pas, se trouverait illégitimement enrichi? (4) 2.04 The concepts of 'compensation' and 'damages' may be different in the national and international legal rules applicable in international investment disputes. In addition, linguistic particularities and translation problems have to be taken into account. The amount a state has to pay in case of an expropriation is usually called 'compensation'. (5) By contrast, the amount due after a violation of a legal obligation is generally referred to as 'damages'. (6) 2.05 Nevertheless, this distinction is not consistently respected. Black's Law Dictionary explains the term 'compensation' as '[p]ayment of damages, or any other act that a court orders to be done by a person who has caused injury to another. In theory, compensation makes the injured person whole.' (7) The explanation of the term 'damages' reads as follows: 'Money claimed by, or ordered to be paid to, a person as compensation for loss or injury'. (8) The two terms are thus used interchangeably and as mutually explaining each other. Yet, some distinction was made in one of the earlier editions of the Dictionary: Damages is amends exacted from a wrong-doer for a tort. Compensation is amends for something which was taken without the owner's choice, yet without commission of a tort. Thus, one should say … compensation for land taken for a railway; damages for a trespass. But such distinctions are not uniform. (9) 2.06 In the Oxford Dictionary of Law 'compensation' is defined as '[m]onetary payment to compensate for loss or damage'. (10) The term 'damages' is explained as '[a] sum of money awarded by a court as compensation for a tort or a breach of contract. Damages are usually a lump sum award … The general principle is that the claimant is entitled to full compensation (restitutio in integrum) for his losses.' (11) 2.07 These examples show that there are some differences between the terms 'compensation' and 'damages', but that these differences are not always clear and are not uniform. The two terms are frequently used interchangeably or for mutually explaining each other. Also the International Law Commission (ILC), in its Articles on the Responsibility of States for Internationally Wrongful Acts, (12) chose the term 'compensation' and not 'damages' for describing the consequences of an unlawful act of a state under international law. Article 36 is entitled 'Compensation' and contains the responsible state's obligation to compensate for the damage caused by the wrongful act. The French text speaks of 'indemnization' (13) and the Spanish one of 'indemnización'. (14) The Commentary points out that the function of the respective Article 36 'is purely P 12 compensatory, as its title indicates' and emphasizes that compensation must address the actual losses incurred and not punish the responsible state or have an expressive or exemplary character. (15) The more neutral term 'compensation' arguably better disperses states' concerns not to be 'punished' by a pecuniary award against them. By contrast, the German translation uses the word 'Schadenersatz', corresponding to the term used in tort and contract law. (16)

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2.08 Some international codifications of contract law also use the term 'compensation' in connection with the consequences of violations of legal norms, and thus in the sense of 'damages'. For example, Article 7.4.2(1) of the UNIDROIT Principles on International Commercial Contracts reads: 'The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance.' (17) 2.09 By contrast, the UN Convention on Contracts for the International Sale of Goods (CISG) uses the term 'damages' for defining the consequences of a breach of contract: 'Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach.' (18) 2.10 The same is true for Article 9:501(1) of the Principles of European Contract Law which states: 'The aggrieved party is entitled to damages for loss caused by the other party's non-performance which is not excused under Article 8:108.' (19) 2.11 These examples show that the terms 'compensation' and 'damages' are not coherently differentiated from each other in international codifications. Nevertheless, several legal scholars point to the need for distinction. Amerasinghe, for example, emphasized it in his analysis of compensation for the taking of alien property under international law:

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It is important in all cases to distinguish between unlawful takings of property and lawful takings. In the former what is due is damages. In the latter the alien must be compensated. There is clearly a distinction between the two cases, damages being naturally usually heavier than compensation. (20) 2.12 Bowett also advocates a clear differentiation and suggests that 'it may be best to refer to compensation as the remedy for a lawful taking or termination of contract and damages as the remedy for an unlawful taking or termination'. (21) 2.13 Several international arbitral awards have also underlined the importance of a clear delimitation of the two concepts. For example, the ICSID Tribunal in AGIP v Congo pointed out: The Tribunal notes that it is seized not only of a claim for compensation for the consequences to AGIP of the nationalization of the Company but also of a claim for damages for the losses resulting from all the violations of the contractual obligations of which the Government is impugned. (22) 2.14 Similarly, the ICSID Tribunal in Southern Pacific Properties v Egypt emphasized the difference between compensation and damages: Thus, the claimants are seeking 'compensation' for a lawful expropriation, and not 'reparation' for an injury caused by an illegal act such as a breach of contract…. [T]he Claimants are entitled to receive fair compensation for what was expropriated rather than damages for breach of contract. (23) 2.15 The Iran–US Claims Tribunal in Amoco International Finance v Iran (24) rejected explicitly 'the contention that compensation for a lawful expropriation and damages for an unlawful one are one and the same thing'. (25) 2.16 The ICSID Tribunal in ADC v Hungary (26) underlined the difference between the two notions in the following way: The BIT only stipulates the standard of compensation that is payable in the case of a lawful expropriation, and these cannot be used to determine the issue of damages payable in the case of an unlawful expropriation since this would be to conflate compensation of a lawful expropriation with damages for an unlawful expropriation. (27)

2.17 The ICSID Tribunal in LG&E v Argentina (28) also alluded to the possibility of different meanings of the two notions stating that 'there may be a difference between “compensation” as the consequence of a legal act and “damages” as the consequence P 14 of the committing of a wrongful act'. (29) In Quiborax v Venezuela, the ICSID Tribunal distinguished between lawful and unlawful expropriations and found that 'compensatory damages' needed to be awarded in the latter case. (30) 2.18 The tribunal in Mondev v United States, in assessing an alleged violation of Article 1110(1) of the North American Free Trade Agreement (NAFTA), highlighted that '[t]here is a distinction between compensation offered or provided for a lawful taking of property and damages for the wrongful seizure of property'. (31) 2.19 In French the concept of 'compensation' is usually referred to as 'indemnization' or 'indemnité'. (32) The term 'damages' is generally translated as 'dommages-intérêts'. (33) However, this is not consistently so. The judgments of the International Court of Justice (ICJ) and its predecessor, the Permanent Court of International Justice (PCIJ), which are published in English as well as in French, contain illustrative examples in this respect. The comparison of the two language versions shows that the terms are not translated uniformly, as shown, for example, by the following passages taken from the judgment of the PCIJ in Mavrommatis Concessions:

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The Greek Government's main contention is that expropriation has already taken place and that the compensation due therefore has not been paid to M. Mavrommatis. It is this compensation which constitutes the principal claim…. [T]his clause has not in fact either led to the expropriation or annulment of M. Mavrommatis' concessions, or caused him any loss which might justify a claim on his behalf for compensation in the present proceedings. (34) 2.20 The French version reads:

P 15

Le Gouvernement héllenique s'est principalement placé au point de vue que, déjà, il y a eu expropriation sans que l'indemnité due à ce sujet ait été payé à M. Mavrommatis; c'est cette indemnité que, en premier lieu, il réclame…. [C]ette clause n'a, en fait, ni entraîné une expropriation ou une annulation des concessions de M. Mavrommatis, ni causé à celui-ci un préjudice quelconque qui puisse donner lieu à son profit à des dommages-intérêts dans le présent procès. (35) 2.21 The English term 'compensation' is sometimes translated into French by the word 'réparation'. (36) However, this term is also used to translate the English term 'reparation'. (37) 2.22 Despite these inconsistencies in terminology and translation, the insight that claims for amounts of money can have different reasons is important. With regard to the issue of calculation it seems indispensable that the different functions of compensation and damages in international investment law are clearly identified.

(1) Compensation 2.23 'Compensation' generally has a broader meaning than 'damages'. It can denote the payment of a sum of money to balance any kind of disadvantage, be it material or immaterial damage, and without any reference to a specific legal obligation. It is sometimes even left open on purpose, if there is a legal obligation to pay at all. (38) Furthermore, the term 'compensation' is also used to denote the extent of liability for damage caused by lawful acts. (39) The concept of 'compensation' appears to be the more neutral term in comparison to the concept of 'damages' which is usually connected to the allegation of the violation of a legal obligation. 2.24 In the context of expropriation, 'compensation' has a particular function. A state's right to expropriate is generally recognized as part of its sovereignty. (40) Compensation P 16 in this context shall balance the right of the individual to private property and the right of the state to take measures in the public interest and for the benefit of its nationals as a whole. (41) 2.25 The act of the state, in this case, is not regarded as unlawful, as a breach of an international obligation but, on the contrary, as a legitimate exercise of state sovereignty. (42) The state may be obliged to pay compensation, in particular when foreign nationals are concerned, but not damages. 2.26 There are different theoretical foundations and legal justifications for the obligation to pay compensation upon expropriation. Some regard it as an application of the principle of equality which should prevent enrichment of the general public to the detriment of the individual. (43) The affected individual who loses his or her rights for the benefit of the general public should not bear an unfair burden and be forced to make a special sacrifice. The Mexican–American Claims Commission emphasized these considerations in the case Putegnat's Heirs and held that '[t]he public has received the value of the property … and is bound to make just compensation. It can never be just that the loss should fall exclusively on one man where the property has been lawfully used or destroyed for the benefit of all.' (44) 2.27 Another dogmatic foundation can be found in the concept of 'acquired rights' according to which the rights of aliens acquired in good faith are not subject to the exclusive authority of the state but are internationally protected. (45) In this view, the protection of acquired rights is part of the international minimum standard of aliens P 18 accepted under customary international law. 2.28 Some states, however, are only ready to accord aliens the same level of protection available for their own nationals. The principle of equal treatment of foreigners and nationals in the understanding of the so-called Calvo-Doctrine (46) has, however, not prevailed at the international level. (47) 2.29 Furthermore, the principle of unjust enrichment has been discussed in connection with the legal justification for the obligation of states to pay compensation upon expropriation. (48) According to this principle, nobody should benefit from the financial disadvantage of somebody else without a legal justification. (49) It can be found in a large number of legal systems, so that it is sometimes denoted as a general principle of law which is applicable also in international law. (50) It has to be pointed out, however, that in a case of expropriation the change of possession has a clearly defined legal basis. Denying a legal ground in this context would be equivalent to an outright denial of the

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right of states to expropriate. (51) 2.30 The different theoretical and dogmatic considerations have developed in the course of the twentieth century in the face of ideological differences. International judicial and arbitral practice has, however, remained remarkably unaffected by these political debates. The decisions on calculation of damages and compensation do not confirm the validity of one theory or the other in an unequivocal way. (52) 2.31 For the purpose of the present study it suffices to note that compensation in the context of expropriation is not the consequence of an unlawful act but that it is related to the legitimate exercise of a state's sovereignty. Prima facie, therefore, different criteria should be applied in comparison to the calculation of damages after an illegal act. This is necessary as a matter of legal policy and for special and general preventive reasons.

(2) Damages 2.32 The obligation to pay an amount of money to make good the damage caused by an unlawful act is regarded as a general principle of law which stems from general considerations of justice contained in the general ethical principles of all peoples. (53) In 1923, the German–American Claims Commission held in the Lusitania case: It is a general rule of both the civil and the common law that every invasion of a private right imports an injury and that for every such injury the law gives a remedy. Speaking generally, that remedy must be commensurate with the injury received. It is variously expressed as 'compensation', 'reparation', 'indemnity', 'recompense', and is measured by pecuniary standards, because, says Grotius, 'money is the common measure of valuable things'. (54) 2.33 The PCIJ confirmed this principle in its judgment in the case Factory at Chorzów and held that 'it is a principle of international law, and even a general conception of law, that any breach of an engagement involves an obligation to make reparation'. (55) 2.34 Under national law, the obligation to pay damages results from an infringement of a legal norm. The norm is usually contained in a law or in a contract. Damages, therefore, represent the remedy for tort or contract violations. (56) 2.35 Under international law, the legal norm the violation of which may entail the state's responsibility stems from a treaty, customary international law, or general principles of P 20 law, thus, from the sources of (primary) international legal norms as enshrined in Article 38 of the ICJ Statute. In addition, states can conclude contracts with private individuals. (57) In such cases, it is not the state's international responsibility that is at stake but rather the state's obligations as a partner of the contract. 2.36 These different types of legal obligations of states, in particular the difference between treaty violations and contract violations, may create confusion with regard to the applicable principles concerning the remedies of the injured party. The following section shall shed some light on this problem.

B. The Functions in Detail 2.37 To go into more detail of the general preventive aspects of distinguishing financial consequences of lawful and unlawful behaviour, the specific functions of compensation and damages in the legal framework of international investments will now be analysed.

(1) The Function of Compensation upon Expropriation under International Law 2.38 Whether and how much compensation has to be paid in case of expropriation is a matter of policy which is underpinned by considerations of the role of private property for the individual and for society as a whole. Based on an overview of approaches taken under national law, consideration will be given to the function of compensation for expropriation under international law. (a) Full Reparation? 2.39 It can be argued that expropriation is an infringement of private property rights and therefore needs to be remedied in full. Yet, it is equally possible to submit that private property is a right that entails also obligations, and that every person does not only have rights but also responsibilities towards society as a whole and must accept certain sacrifices. National legal systems have found different answers to these questions and shaped their rules on expropriation compensation accordingly. (58) 2.40 In the United States, the Fifth Amendment of the Constitution provides that private property shall not be taken 'for public use, without just compensation'. (59) In jurisprudence this is regarded as a standard of 'fairness' which does not entail strict rules. The Supreme Court held in this respect: 'The political ethics reflected in the Fifth Amendment reject confiscation as a matter of justice. But the Amendment does not contain any definite standard of fairness by which the measure of “just compensation” is to be determined.' (60) In general, the standard of 'fair market value' has been recognized as a 'just standard' in expropriation cases. (61) The goal is the restoration of the economic value of the property. Any other losses which the former owner incurred are

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not included in just compensation. It follows that an obligation of 'full reparation' is not part of US constitutional law. (62) If compensation is less than just, the former owner may bring an action to recover the difference. (63) Yet, additional damages are generally barred by the sovereign immunity doctrine. (64) 2.41 In Germany, determining the amount of compensation upon expropriation involves not only taking into consideration the loss of the former owner but also the interests of the general public. The constitutional basis for expropriation is Article 14 Grundgesetz (Basic Law of Germany). It provides in its paragraph 3: Expropriation shall only be permissible for the public good. It may only be ordered by or pursuant to a law that determines the nature and extent of compensation. Such compensation shall be determined by establishing an equitable balance between the public interest and the interests of those affected. In case of dispute concerning the amount of compensation, recourse may be had to the ordinary courts. (65) 2.42 It follows that expropriation in Germany must be based upon a law that provides for compensation. Yet, the amount of compensation is not based on the hypothetical financial situation the person concerned would be in without the expropriation. Rather, P 21 the state must find an 'equitable balance' between the public interest and the interests of those affected, reflecting the doctrine of the so-called 'Sozialbindung des Eigentums' (social function of property). (66) The balance of values may be 'symbolic' and not necessarily concrete and real. The claim for compensation upon expropriation is thus clearly distinguished from a claim for damages. (67) In order to assess the actual 'value taken', (68) the current market value of the property is generally used as a point of reference. (69) 2.43 Other countries, by contrast, are concerned with putting the former owner in the same financial situation he or she would be in without the expropriation. In France, the recently reformed Expropriation Code (70) provides, as its previous version, (71) that compensation must cover the integrity of the direct, material, and certain loss caused by the expropriation. (72) French courts also seem to be rather generous as regards the acceptance of different types of damages, in case of unlawful acts. (73) Also, in England, (74) expropriation, which is denoted as 'compulsory purchase', has to be accompanied by compensation calculated on the basis of the actual and concrete loss incurred. (75) The situation is similar in Switzerland. (76) In Austria, the legal rules on expropriation point to the equality of compensation and damages in terms of their function, namely to wipe out all the financial consequences of the act of the state. (77) In all these countries, the principle of full reparation must be respected in calculating the amount of compensation P 22 in expropriation cases. 2.44 The existing differences in the principles for the assessment of compensation in cases of expropriation in a limited number of national legal systems already make clear that general principles of law are not discernible. (78) They are not even balanced out by the norms on the protection of property in the European Convention on Human Rights (ECHR), because the member states enjoy a relatively large margin of appreciation with regard to the amount of 'adequate' compensation required under Article 1 of the First Additional Protocol. (79) 2.45 The absence of general principles of law with regard to expropriation compensation does not automatically rule out the possibility that the principle of full reparation does exist with regard to the expropriation of foreign nationals in international law. Such a principle could be contained in international treaties or in international customary law because it is precisely in the area of expropriation that different rules may be applicable for nationals and non-nationals of states. 2.46 An important point of reference in this respect could be the well-known Hull formula. It is noteworthy that the famous note of Secretary of State Cordel Hull to the Mexican ambassador did not refer to 'full compensation' as is often contended. Instead, he formulated: The Government of the United States readily recognizes the right of a sovereign state to expropriate property for public purposes. This view has been stated in a number of communications addressed to your Government … On each occasion, however, it has been stated with equal emphasis that the right to expropriate property is coupled with and conditioned on the obligation to make adequate, effective and prompt compensation. (80) 2.47 The Hull formula has sometimes been referred to as the standard of 'full compensation'. (81) However, the wording of the diplomatic note of Cordell Hull does not P 24 contain the word 'full' nor does more recent state practice use it. (82) Yet, even 'full compensation' would not be identical to the principle of 'full reparation' as a closer analysis of state practice shows. 2.48 The development of the position of the United States as the spearhead of the interests of the industrialized states, which naturally favour a high level of protection of investors abroad, shows no indication to equalize 'compensation for expropriation' of foreign-owned property and 'full reparation'. The Third Restatement of the Foreign

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Relations Law of the United States (Third) in 1987 reflects this clearly: 'A state is responsible under international law for injury resulting from (1) a taking by the state of the property of a national of another state that … is not accompanied by provision for just compensation'. (83) The meaning of 'just compensation' in this context is explained as follows: The elements constituting just compensation are not fixed or precise, but, in the absence of exceptional circumstances, compensation to be just must be equivalent to the value of the property taken and must be paid at the time of the taking or with interest from that date and in an economically useful form. (84) 2.49 The United States has also concluded a number of bilateral investment treaties (BITs) with other countries which do not require 'full compensation' but instead 'prompt, adequate and effective compensation'. (85) The most recent Model BIT of the United States of 2012, in its Article 6 on 'Expropriation and Compensation' reads accordingly: 1. Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization ('expropriation'), except: (a) for a public purpose; (b) in a nondiscriminatory manner; (c) on payment of prompt, adequate and effective compensation; and (d) in accordance with due process of law, and Article 5 [Minimum Standard of Treatment] (1) through (3). (86) 2.50 The term 'adequate' is further explained in the following way. It must: '(a) be paid without delay; (b) be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“the date of expropriation”)…' (87) 2.51 Similarly, other modern model BITs of industrialized countries (88) and recently concluded BITs and free trade agreements (89) contain the obligation to pay compensation in case of expropriation without, however, using the adjective 'full' or referring in other ways to the principle of 'reparation'. The same is true for NAFTA in its Article 1110, and Article 13 of the Energy Charter Treaty. (90) 2.52 In all these documents dealing with the question of the amount of compensation in case of expropriation of foreign nationals, no allegation of the function of compensation as a means of full reparation can be found. Terms like 'reparation' or 'restoration' do not appear. This is particularly noteworthy because investment protection treaties are drafted to improve the legal protection of foreign investment and, therefore, reflect the state parties' interest to ensure a high level of protection. 2.53 The damage actually incurred by the fomer owner obviously is not decisive for the calculation of compensation. References to 'damage', 'injury', or 'loss' incurred are not contained in the above-mentioned treaty norms on expropriation. The combination of the words 'full' and 'compensation' cannot be found either. It follows that, contrary to the widespread general view, the required standard under international law is not 'full compensation' in the meaning of 'full reparation'. 2.54 The absence of the function of full reparation, however, does not automatically lead to only 'partial' compensation. This would foil the intentions of states concluding treaties for the reciprocal promotion and protection of investments. So the duty to pay compensation upon expropriation must serve a different but equally important function under international law. (b) Restitution of Value 2.55 The provisions on expropriation in national and international legal instruments mentioned above indicate that the damage or loss actually incurred by the former owner is not the benchmark for evaluating compensation. Rather, the value of the expropriated P 25 property is decisive. The function of compensation upon expropriation under international law could, therefore, be the replacement of the value of the expropriated property. 2.56 The importance of the value of the expropriated property for the amount of compensation has already been established by the PCIJ in its judgment in Factory at Chorzów with regard to lawful expropriations, in contrast to unlawful expropriations: It follows that the compensation due to the German Government is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment. This limitation would only be admissible if the Polish Government had had the right to expropriate. (91) 2.57 In addition, numerous provisions contained in international bilateral and multilateral treaties—as mentioned above (92) —refer to the value of the object, be it in the form of the 'fair market value', the 'genuine value', the 'actual value', or simply 'the value'. 2.58 Value, however, is not an objective quality of things. It always depends on a specific relationship between the particular object and a subject. As Immanuel Kant pointed out,

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value may only be understood as appreciation by persons. (93) Without the needs and affections of people, things would not have any value. 'Value' is a relative concept. 2.59 This is also reflected in business valuation practice. The US Appraisal Foundation, for example, defines 'value' in its Uniform Standards of Professional Appraisal Practices (USPAP) in the following way: [T]he monetary relationship between properties and those who buy, sell, or use properties […] Value expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property at a given time with a specific definition of value. (94) 2.60 Some formulate it in a simpler way, such as: 'Value, like beauty, is in the eye of the beholder' (95) or 'One man's trash is another man's treasure'. The assessment of the value P 26 of an object, therefore, requires that different perspectives are taken into account. 2.61 In the case of expropriation, the asset in question can be valued from three possible perspectives: 1. 2. 3.

The value of the asset from the perspective of the expropriated owner. The value of the asset from the perspective of the expropriating state. The value of the asset from the perspective of an independent third person.

2.62 The first alternative refers to the concrete loss of the expropriated owner. This perspective concentrates on his or her actual and individual financial situation before and after the expropriation. This includes also the value of the property as a part of and in relation to the owner's financial situation in general as well as his or her plans and possibilities of use of the property. This approach would be in accordance with the principle of 'full reparation'. (96) 2.63 The second alternative relates to the value that the property has for the expropriating state. This means that the enrichment of the state would be the decisive indicator for the amount of compensation. Such an approach has been advocated primarily by developing states. (97) It has, however, not been broadly accepted in international law for its disadvantageous implications for the expropriated owner. (98) In addition, it is difficult to argue from a dogmatic point of view because the concept of unjust enrichment hinges on financial advantage without a legal basis which is not applicable in this case. (99) 2.64 According to the third alternative, the value of the expropriated object should be assessed by independent third parties. This approach considers the value which is given to the object by the market as the decisive criterion for the amount of compensation. It refers to the price the expropriated owner would get, if he or she had offered and sold the property on the market. 2.65 In the absence of a readily available market for the object to be evaluated, one might refer to the more abstract concept of 'fair market value'. The concept of fair market P 27 value is widely used in practice and valuation is usually defined as: the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under an obligation to buy or sell and when both have reasonable knowledge of the relevant facts. (100) 2.66 It is, therefore, important to identify the price a 'hypothetical willing buyer' would pay to a 'hypothetical willing seller', if both are not compelled to buy or sell. Such a reference to the market can be regarded as 'objective' or 'abstract' value, even if it represents only a rough approximation of such a value. (101) It refers to the value that the object has from the perspective of a large number of not clearly specified individuals. (102) 2.67 The advantages of such an approach are evident. The marketplace balances the various subjective perspectives of value by a large number of buyers and sellers. As market values represent the result of a number of different subjective valuations, they are easier to ascertain and to communicate. 2.68 The assessment of a 'hypothetical price' requires a number of assumptions about the preferences, expectations, and possibilities of the market participants. For this reason, one might be sceptical about the practicability of the concept of 'market value' in the absence of a market for the valuation object. The arbitral tribunal in Amoco International Finance v Iran expressed its scepticism and found that a 'pyramid of hypotheses' would have to be undertaken. Such an approach could, therefore, not represent a reliable basis for a fair calculation of compensation: Market value, on the other hand, is an ambiguous concept, to say the least (it might be more accurate to term it misleading), when an open market does not exist for the expropriated asset or for goods identical or comparable to it. A situation of this kind can be observed in the case of transactions of such a magnitude that they are relatively rare, always individualized, and prompted

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by special circumstances and motives, like transactions relating to large corporations the shares of which are not traded on stock exchanges. In such circumstances, referring to market value for the purpose of determining compensation in case of expropriation inevitably leads to a pyramid of hypotheses, since it is necessary to conjecture as to the price on which a hypothetical willing buyer and a hypothetical willing seller negotiating at arms length would eventually agree. Such a conjecture is more especially artificial as the owner of the expropriated asset usually is not a willing seller. (103)

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2.69 The scepticism of the Iran–US Claims Tribunal expressed in this passage, however, represents only a minority view. (104) The tribunal in Phillips Petroleum v Iran, for example, had no problem basing the valuation on it, even though a market for the company did not exist: In the absence of an active and free market for comparable assets at the date of taking, a tribunal must, of necessity, resort to various analytical methods to assist it in deciding the price a reasonable buyer could be expected to have been willing to pay for the asset in a free market transaction … (105) 2.70 Generally, the advantages of the standard of 'fair market value' are broadly appreciated so that it has gained increasing support for the measure of compensation upon expropriation. This is also the result of an empirical study on the treatment of foreign investment conducted by the World Bank in the 1990s. (106) The analysis of numerous national investment laws, bilateral and multilateral treaties, and respective jurisprudence provided, among other things, an overview on the status of international law on the issue of expropriation and compensation at the time. On the basis of this study the World Bank developed 'Guidelines on the Treatment of Foreign Direct Investment'. (107) They aim to complement and explain the existing legal instruments and attempt to identify and formulate general principles which may represent a basis for further development of customary international law in this area. (108) In addition, they could serve as a point of reference for the formulation of laws and treaties on dealing with the issue. 2.71 The World Bank Guidelines point out that the traditional controversy on the standard of compensation, whether it should be 'prompt, adequate, and effective' or only 'just' or 'appropriate', is not actually important when it comes to the concrete calculation of the P 29 amount of compensation. The Guidelines prefer to choose a 'practical approach'. (109) Under Title IV, 'Expropriation and Unilateral Alterations or Termination of Contracts', they summarize the pertinent rules as follows: 1.

2. 3.

A State may not expropriate or otherwise take in whole or in part a foreign private investment in its territory, or take measures which have similar effects, except where this is done in accordance with applicable legal procedures, in pursuance in good faith of a public purpose, without discrimination on the basis of nationality and against the payment of appropriate compensation. Compensation for a specific investment taken by the State will, according to the details provided below, be deemed 'appropriate' if it is adequate, effective and prompt. Compensation will be deemed 'adequate' if it is based on the fair market value of the taken asset as such value is determined immediately before the time at which the taking occurred or the decision to take the asset became publicly known. (110)

2.72 It is not necessary here to make a final determination as to whether this represents the current status of customary international law, due to the large number of investment treaties that address this issue in detail. While in 1994 only about 700 bilateral investment treaties existed, this number has increased to approximately 2,500. (111) In addition, a number of free trade agreements and multilateral instruments, such as the NAFTA and the Energy Charter Treaty, have been concluded. Many of those treaties have chosen the 'fair market value' as the standard of compensation. If other types of value are referred to, such as 'value', 'genuine value', or 'true value', (112) treaty interpretation will show, whether this choice is deliberate and explained in more detail, and which consequences should follow.

(2) The Function of Damages (a) Reparation 2.73 The function of damages is to repair the harm caused by an unlawful act. The payment of a sum of money shall ideally put the injured person in the financial situation he or she would be in, if the act had not been committed. This general rule is so widespread in national legal orders that it can be regarded as a general principle of law. The leading international case in this connection is the judgment of the PCIJ in the Factory at Chorzów case: The essential principle contained in the actual notion of an illegal act—a principle which seems to be established by international practice and in P 30

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P 30

particular by decisions of arbitral tribunals—is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. (113) 2.74 A few years earlier, the German–American Claims Commission explained in the Lusitania decision: 'The fundamental concept of “damages” is satisfaction, reparation for a loss suffered; a judicially ascertained compensation for wrong. The remedy should be commensurate with the loss, so that the injured party may be made whole.' (114) 2.75 Reparation of damage by financial means should generally try to come as closely as possible to restitutio in integrum. (115) Restitution should serve as a guideline and orientation, but also as a limitation. Claims for damages in the form of amounts of money shall not have the effect that the injured person is placed in a better financial position than he or she would have be in without the damaging event. This limiting role of the function of reparation is broadly recognized in scholarly writing, (116) but nevertheless sometimes disregarded in practice. 2.76 (i) Violations of International Law The ILC Articles on State Responsibility deal with reparation of damage in the framework of the overall heading of 'Reparation'. (117) According to Article 31, the responsible state is obliged 'to make full reparation for the injury caused by the internationally wrongful act'.

2.77 'Injury' in this context denotes any damage caused by the internationally wrongful act. (118) According to Article 36, the State is obliged to make good any damage, as far as this is not done by restitution. (119) The calculation shall follow merely compensatory P 31 criteria. (120) It is important in all cases that no enrichment of the injured person occurs. The damage actually incurred represents the upper limit of the amount of damages. The tribunal in Delagoa Bay has already stressed this important aspect: Or, s'il est juste, d'un côté, de restituer à la Compagnie concessionaire, à titre d' indemnité, tous les bénéfices dont elle a été réellement privée par la rescision, il serait en revanche contraire à l'équité la plus élémentaire de faire de cette mesure une source d'enrichissement pour elle et de lui attribuer de ce chef les sommes qui, sans la rescision, eussent profité, non pas à elle, mais à des tiers prêteurs quelconques. (121) 2.78 The principle of full reparation has been recognized in international judicial practice not only in the context of international investment but also in cases of other violations of international law. (122) 2.79 Sometimes it is argued that the calculation of damages on the basis of merely compensatory criteria also serves the purpose of estimating beforehand the 'cost' of a breach of an obligation. This includes, in particular, breaches of contract and expropriations. In his economic analysis of law, Posner, referring to Holmes, argues that 'it is not the policy of the law to compel adherence to contracts but only to require each party to choose between performing in accordance with the contract and compensating the other party for any injury resulting from a failure to perform'. (123) 2.80 The underlying idea is that it is not desirable to exact compliance with uneconomic contracts. An 'efficient breach' is a breach of a contract which from an economic point of view makes no sense (any more). (124) Similar arguments are raised in connection with expropriations. Wells, for example, suggests so-called 'involuntary' or 'efficient' takings, if compliance with obligations undertaken is, from the economic perspective of the state, no longer sensible. (125) 2.81 From the perspective of economic analysts and experts, this view might be comprehensible. However, from the perspective of the rule of law, the arguments in P 32 favour of 'efficient breaches' probably go too far. It seems questionable whether methods of calculating damages should serve the purpose of making breaches more 'calculable' beforehand. 2.82 (ii) Breaches of Contract The legal relations between states and foreign investors are not only determined by international law and by treaties between the home state of the investor and the host state but also by direct contracts between individual, usually rather large, enterprises and states. Such contracts can be traced back over centuries. (126) The particularity of this relationship is characterized by the genuine inequality of the contracting parties which renders the classification of the applicable legal regime difficult. This is true above all for the consequences of a breach. 2.83 According to the prevailing view in academic writing and arbitral practice, the mere breach of a contract by a state does not constitute a violation of international law and, thus, does not entail state responsibility. (127) A violation of contractual obligations is rather subject to the applicable contract law. However, choice of law clauses can point to different laws, including international law, (128) to the effect that the respective criteria still remain rather unclear. 2.84 Where the applicable law provides no further guidance, general principles of law might be considered. A comparative analysis of national contract laws and international codification initiatives show that, generally, the purpose of a damages claim is to remedy

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the financial loss caused by the breach of contract. 2.85 The ICSID Tribunal in Amco Asia v Indonesia, for example, undertook such a comparative law analysis. With regard to English law, it observed that 'where a party P 33 sustains a loss by reason of breach of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages, as if the contract had been performed'. (129) It referred also to US jurisprudence which also pursued the aim 'to put the injured party in as good a position as he would have been in if the contract had been performed'. (130) 2.86 International codifications of contract law also contain the principle of full reparation with regard to the assessment of damages. For example, Article 74 of the Convention on Contracts for the International Sales of Goods (CISG) reads: Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen … (131) 2.87 Article 7.4.2 of the UNIDROIT Principles of International Commercial Contracts also emphasizes the principles of full reparation: '(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the nonperformance'. (132) 2.88 The same is true for Article 9:502 of the Principles of European Contract Law: 'General Measure of Damages: The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed'. (133) 2.89 This analogy of contract law and the law of state responsibility concerning the principle of 'full reparation' (134) is perhaps the reason why international judicial practice has sometimes found it unimportant whether the claim for damages was based on a breach of contract or on a violation of international law. Claggett observes in his analysis of the jurisprudence of the Iran–US Claims Tribunal:

P 34

For the purpose of measuring damages under customary international law, it has mattered little whether a taking of rights has been characterized as a breach of contract or as an unlawful expropriation. The goal of contract damages has been to restore the injured party to the financial position he would have enjoyed absent the breach. The goal of compensation has been to restore to the expropriated investor the value of his lost property right. (135) 2.90 The same result is achieved, if one considers a breach of contract as being equal to an 'illegal act' in the wider sense. Then, the calculation of damages after a breach of contract could also follow the principle of 'full reparation' as formulated by the PCIJ in Factory at Chorzów which means wiping out all the consequences of the illegal act and reestablishing as far as possible the situation that would have existed, if that act had not been committed. (136) 2.91 The relevance of the principle of restitutio in integrum also in cases of breach of contract has been addressed by Arbitrator Ameli in INA v Iran before the Iran–US Claims Tribunal. He noted there that 'where the conduct of a party is held to be unlawful, in terms of its contractual obligations, then the concept of restitutio in integrum may perhaps properly be invoked'. (137) 2.92 One may therefore conclude that the function of damages in contract cases is also the full reparation of the actual and concrete damage incurred. This confirms the conclusion of Arbitrator Cavin in Sapphire International v NIOC which has been quoted by numerous arbitral tribunals and can thus be regarded as the leading case in regard to the calculation of contract damages in the context of international investment disputes: (138) According to the generally held view the object of damages is to place the party to whom they are awarded in the same pecuniary position that they would have been if the contract had been performed in the manner provided for by the parties at the time of conclusion. (139) (b) Punishment?

2.93 With regard to the 'general' and 'special' preventive function of the law, including the law on damages, it can be discussed to what extent the function of damages is not only the reparation of injury, but also the punishment of the perpetrator and the P 35 deterrent effect of such punishment. The concept of 'punitive damages' has developed in the United States, where punitive or 'exemplary' damages are available as an additional remedy. (140) In most other states, transgressors of the law are punished in criminal or administrative proceedings, but not in civil litigation. In many countries awards of punitive damages are not enforceable. (141) 2.94 Due to the absence of criminal sanctions in public international law, the acceptance of 'punitive' or 'exemplary' damages has sometimes been considered in academic debates. (142) The theoretical considerations have, however, not found support in international practice. (143) Instead of 'punishment', the law on state responsibility

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entails the concept of 'satisfaction' as part of the obligation to make full reparation. This is particularly important when the damage caused by the wrongful international act cannot adequately be redressed by financial compensation. There is the possibility of awarding an amount of money, unrelated to material damage, (144) but more importantly other ways and means (such as a public apology, the bringing to court of the perpetrator, the creation of a fund for individual damages, etc). The reason is that the states would not be ready to accept the 'criminalization' of the law on state responsibility. (145) 2.95 It seems, therefore, that the dictum of the German–American Claims Commission in Lusitania still represents the prevailing view in international law, namely that the P 36 'superimposing of a penalty in addition to full compensation and naming it damages, with the qualifying word exemplary, vindictive, or punitive, is a hopeless confusion of terms, inevitably leading to confusion of thought'. (146) 2.96 Nevertheless, as will be shown, so-called 'moral damages' are increasingly claimed and awarded by international investment tribunals. These are, however, not presented as 'punitive damages', but as damages for immaterial harm. (147)

C. Consequences for the Calculation 2.97 To what extent should the different functions of compensation and damages influence the ways and means of calculation in international investment disputes? The analysis so far has shown that the function of compensation is primarily the replacement of the value of the expropriated property, while the function of damages is full reparation of the damage incurred. It remains to be seen whether and to what extent these differences result in different approaches as far as the valuation is concerned.

(1) Objective–abstract Valuation 2.98 The assessment of compensation in the context of expropriation should primarily serve the determination of the economic value of the property concerned. However, the 'value' of an object always depends on the specific relationship to a subject. (148) 2.99 In the absence of an 'objective' value, one might find the best approximation of an impersonal appreciation of things in the marketplace. Here, numerous potential buyers and sellers come together which makes it possible to prescind the various subjective values. (149) Due to the large number of market participants, the different perceptions on the value of an object are balanced. It is, therefore, not surprising that the 'fair market value' has prevailed as the most widespread standard of compensation upon expropriation. Not only is it contained in many international treaties and other legal texts, but also numerous international investment tribunals have referred to it in the context of expropriations. 2.100 The 'abstract' valuation can represent an advantage or a disadvantage to the individual concerned depending on his or her concrete needs and competences being better or worse than average. An important advantage of the abstract valuation is that evidence can relatively easily be presented and assessed. Even if there are differences in P 37 expert opinions, they can be explained and discussed. The use of market data, historical and comparative evidence, and even forecasts for the future can be done with reference to the market. 2.101 The disadvantage of such an objective or abstract valuation is that it frequently leads to an amount of compensation that is less than the actual loss suffered by the expropriated owner. This is, however, accepted as a compromise in public international law after many years of discussion about the standard of compensation in the context of diverging political and economic circumstances. The compromise is that expropriating state shall replace the 'value' of the expropriated object independently of whether such compensation also represents the actual financial loss the individual concerned has suffered. In addition, the objective value can also serve as a starting point for the assessment of damages because it represents prima facie the loss or damage actually incurred.

(2) Subjective–concrete Valuation 2.102 For the calculation of the amount to be paid after an unlawful act, it is important to assess the financial situation the injured person would be in if the unlawful act had not been committed. In this case a method should be applied that allows evaluating the loss actually incurred by the individual affected. 2.103 The PCIJ explained the principles of calculation in case of violations of international law in Factory at Chorzów in the following way: Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it—such are the principles which should serve to determine the amount of compensation due for an act contrary to international law. (150)

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2.104 The starting point of the analysis is, therefore, restitution in kind. If restitution is not possible, the financial equivalent of this restitution should be paid. This restitution approach implies the subjective and concrete valuation. In addition, there might be loss sustained which would not be covered by restitution in kind or payment in place of it. 2.105 The important question then is what kind of damage or loss can be successfully claimed in addition to the restitution value? (151) As the concrete financial situation of the injured party must be considered, a number of disadvantages may be relevant that affect his or her financial situation as a whole. This includes, in particular, consequential P 38 damages. One must take into account additional costs incurred, such as costs for transportation and storage or for a necessary loan but also costs for remedying the breach, negotiating, mitigation of damages, and pursuing the claims. (152) Furthermore, depreciation of other assets, lost synergies and lost opportunities can have negative effects on the overall financial situation of the victim. 2.106 It is necessary to create a hypothesis as to how the financial situation of the injured party 'in all probability' would be in the absence of the unlawful act. Then this hypothetical situation must be compared with his or her actual situation. The subjective or concrete valuation seems to be most appropriate to implement the principle of full reparation. It essentially consists of a comparison between the actual situation and the hypothetical situation. 2.107 This method was developed in the nineteenth century by Mommsen and is called 'differential method' (Differenzmethode). In his 'Lehre von dem Interesse' (The Doctrine of Interest), Mommsen wrote in 1855: The expression 'id quod interest' alludes to a comparison, and such [a comparison] is the basis of the concept of interest. By interest, in its technical meaning, we understand the difference between the value of the property of a person, how the same is at a given point of time, and the value the property would have without the interference of the particular damaging event at the point of time in question. (153) 2.108 As regards the relevant point of time, Mommsen notes that the relevant point of time should be the date of the judgment: Today, the rule generally prevails that the time of the judgment, this means the time at which the valuation of the interest is carried out, shall be determinative. As we will see further below, this is also the single determination of time, which truly corresponds to the nature of interest. We can therefore, insofar as we look at contemporary law, define interest more precisely as the difference between the present wealth of a person, as the same presents itself after the damaging event, and the value which the wealth would represent without the interferences of that event. (154) 2.109 Mommsen differentiates between 'Sachwert' (objective value) and 'Interesse'. The objective value is the value an object has in commerce, which, in particular with respect to fungible things, is usually called 'market price'. (155) The objective value is the value which an object has for anybody, because the value can be achieved by selling the object, also by those, who are not in a position to take particular benefits from it. In contrast, the interest of an object is determined by the particular value that object has for the owner. This value can be the same as the objective value, if the individual qualities of the object are irrelevant and if it can be easily replaced by object of the P 39 same kind. This is, according to Mommsen, however only a coincidence. Most frequently, the valuation of the interest will lead to a different result, usually higher than the objective value. (156) 2.110 The reason for considering all these additional aspects is that the illegal act has caused a financial loss to the injured party, and that the injured party does not have to bear the financial consequences of this illegal act, not even in part. If the principle of full reparation is taken seriously, the damage caused must be repaired in its entirety. 2.111 The term 'subjective' in this context does not mean that psychological or emotional preferences should be taken into account. It is only the financial aspect of this individual relationship between the owner and the object which has to be considered. In this connection, the position of the assets within the entire property of the owner and his specific competences, needs, synergies and plans should be counted as far as they have a financially assessable value. 2.112 The tribunal in Lemire v Ukraine expressed this in relation to the valuation of damages after a breach of fair and equitable treatment in the following way: The aim of compensation is the elimination of all negative consequences of the wrongful act, through the payment to the injured party of an amount sufficient to cover 'any financially assessable damage including loss of profits insofar as it is established' (Article 36.2 ILC Articles) … But this is only a theoretical definition of a general standard; the actual calculation of damages cannot be made in the abstract, it must be case specific: it requires the definition of a financial methodology for the determination of a sum of money

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which, delivered to the investor, produces the equivalent economic value which, in all probability, the investor would enjoy, 'but for' the State's breach. (157) 2.113 The ILC Articles on State Responsibility confirm the importance of the concrete damage incurred. While the obligation of restitution remains intact, the claim for compensation, according to Article 36(1), encompasses the damage caused by the act, 'insofar as this damage is not made good by restitution'. This means, the restitution value is only the lower limit. Paragraph (2) adds that the higher amount also includes 'loss of profits insofar as it is established'. (158) 2.114 In cases of breach of contract, the application of the differential method with regard to the hypothetical situation is also necessary, since the principle of full reparation applies here, too. It would be inadequate to reimburse only the expenses left or the decrease of asset values. In such a case, the injured party would only be put in the P 40 position he or she would have been in, if the contract had never been concluded. By contrast, it is necessary to put him or her into the position he or she would have been in, if the contract had been duly performed. 2.115 The concrete valuation approach also allows for considerations of damage mitigation or contributory negligence. If the injured party has failed to mitigate the damage, the principle of full reparation allows the taking into account of this failure in the process of calculation. (159) In case of contributory negligence, the amount of damages can be reduced to the extent of the contribution of the victim of the unlawful act. (160) 2.116 Finally, the different valuation approaches—the abstract and the concrete valuation —can be used to mutually verify and correct the outcomes. On the one hand, the abstract valuation can serve as a point of departure and as a control mechanism. This becomes particularly relevant when evidence is scarce. It is also possible that the injured party bases his or her claim on an objective valuation for practical reasons. If a concrete valuation is due, certain individual elements may then be added or deducted. 2.117 On the other hand, a concrete valuation can be useful in the absence of a market for the object and when a hypothetical or 'fair' market value is not possible to assess. It is then arguable that the concrete damage incurred serves as a proxy for the objective– abstract value. (161)

(3) Selection of a Valuation Method 2.118 For the selection of an appropriate valuation method, the different functions of compensation and damages in international investment law may provide some guidance. It has to be borne in mind, however, that neither the standard of fair market value nor the principle of full reparation imply or mandate a specific valuation method. There are, however, preferable methods for one or the other approach, depending on the circumstances of the case. 2.119 For an objective-abstract of valuation, it seems appropriate to choose the 'Market Value Basis of Valuation'. (162) This will help to find a method which is based on the perspectives of a greater number of unspecified persons, the market participants. The market value basis generalizes the perceptions of chances and risks of a large number of people. To this extent it can be used for a generalized and abstract valuation. (163) The P 41 methods implementing and applying those aspects are, for example, stock prices, comparative methods, multiples, or the discounted cash flow (DCF) method. (164) 2.120 The subjective-concrete valuation, as a matter of principle, requires methods reflecting the concrete loss incurred by the person concerned. This means that the valuation method should not primarily be oriented towards the market and market mechanisms. In order to take the financial situation of the individual appropriately into consideration, bases 'other than market value' should be considered. (165) This would facilitate the application of a variety of asset-oriented or income-oriented valuation methods. (166) In addition, and not necessarily connected to any valuation method, consequential damage should be taken into account. (167) These may include lost synergies or lost commercial opportunities, loss of credit conditions or other benefits, if this is necessary to put the injured person in the same financial position he or she would P 41 be in, if the illegal act had never been committed.

References 1)

A van Aaken, 'Primary and Secondary Remedies in International Investment Law and National State Liability: A Functional and Comparative View' in S Schill (ed.), International Investment Law and Public Law (Oxford: Oxford University Press, 2010) 721–54, 722.

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2)

3) 4)

5)

6) 7) 8) 9) 10) 11) 12) 13)

14)

15) 16)

17) 18) 19) 20) 21) 22) 23) 24) 25)

See the comparative analysis on the function of damages in different national legal systems in N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Oxford: Hart Publishing, 2005); S Lindenbergh, 'Damages (in Tort)' in J Smits (ed.), Elgar Encyclopedia of Comparative Law (2nd edn, Cheltenham: Edward Elgar, 2012) 286. See also S Ripinsky and K Williams, Damages in International Investment Law (London: BIICL, 2008) 13. Delagoa Bay and East African Railway Company, Award of 30 May 1900, in La Fontaine, Pasicrisie internationale 398, 399 (Bern: Stämpfli, 1902). See the English translation in M Whiteman, Damages in International Law, vol. III (Washington: Government Printing Office, 1943) 1694, 1697: 'Is the “compensation” to represent reparation for an injury done unlawfully? Or must it make up an interest the claimants would have had in carrying out of a contractual arrangement? Or else again are the claimants merely entitled to have a sum by which Portugal, unless it returned it, would be unlawfully enriched returned to them?' See, e.g., C F Amerasinghe, 'Some Aspects of the Quantum of Compensation Payable upon Expropriation' (1993) 87 ASIL Proceedings 459; P Gann, 'Compensation Standard for Expropriation' (1985) 23 Columbia Journal of Transnational Law 615; D Lapres, 'Principles of Compensation for Nationalized Property' (1977) 26 ICLQ 97; M Mendelson, 'Compensation for Expropriation: The Case Law' (1985) 79 AJIL 414; O Schachter, 'Editorial Comment: Compensation for Expropriation' (1984) 78 AJIL 121; O Schachter, 'Compensation Cases—Leading and Misleading' (1985) 79 AJIL 420. See, e.g., the multi-volume issue by M Whiteman, Damages in International Law, vols I–III (Washington: Government Printing Office, 1937–46) which deals with remedies for damage caused by violations of international law by states. B Garner (ed.), Black's Law Dictionary (10th edn, St Paul, MN: Thomson Reuters, 2014) 343. Ibid, at 471. H C Black, The LawDictionary. Featuring Black's Law Dictionary Free Online Dictionary, 2nd edn (1910), . J Law and E Martin (eds), A Dictionary of Law (8th edn, Oxford: Oxford University Press, 2015) 127. Ibid, at 169. Articles on the Responsibility of States for Internationally Wrongful Acts, UN GA Resolution No. 56/83 of 12 December 2001, Annex. See the French Version of the ILC Articles on State Responsibility, . The term 'indemnization' is also used in the context of expropriation of foreigners. See, e.g., C Yannaca-Small, 'L' “expropriation indirecte” et le “droit de réglementer” dans le droit international de l'investissement' in Organisation de Coopération et Développement Economique (ed.), Droit international de l'investissement. Un domaine en mouvement (Paris: OCDE, 2005) 47. See the Spanish Version of the ILC Articles on State Responsibility, . The same term is also used in the context of expropriation. F López-Nieto y Mallo, Manual de expropriación y otros supuestos indemnizatorios (3rd edn, Madrid: Wolters Kluwer, 2007) 52 et seq. Furthermore, 'indemnización adecuada' is the Spanish translation of 'just satisfaction' in Article 42 ECHR. J Crawford, The International Law Commission's Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge: Cambridge University Press, 2002) 219. , 24. See G Hafner and S Wittich, 'Das völkerrechtliche Unrecht und seine Folgen' in A Reinisch (ed.), Österreichisches Handbuch des Völkerrechts (Vienna: Manz, 2013) paras 2493 et seq; Ipsen, however, uses the terms 'Wertersatz' and 'Entschädigung' also in the context of the obligation of reparation after a violation of international law. H Ipsen, Völkerrecht (Munich: Beck, 2004) section 41, paras 66, 68. UNIDROIT, Principles of International Commercial Contracts (Rome: UNIDROIT, 2010) 266. United Nations Convention on Contracts for the International Sale of Goods (CISG) (1980) 19 ILM 668. O Lando and H Beale (eds), Principles of European Contract Law, Parts I and II (The Hague: Kluwer Law International, 2000). C F Amerasinghe, 'Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice' (1992) 41 ICLQ 22, 37–8. D Bowett, 'Claims between States and Private Entities: The Twilight Zone of International Law' (1986) 35 Catholic University Law Review 929, 938. AGIP SpA. v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306, para. 95. Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992 (1995) 3 ICSID Reports 189, para. 183. Amoco International Finance Corp v Iran, 15 Iran–US CTR (1987) 189. Ibid, para. 247.

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26) 27) 28) 29) 30)

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34) 35) 36)

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43)

44)

ADC Affiliates Limited et al v Hungary, Award of 2 October 2006. Ibid, para. 481. LG&E Energy Corp et al v Argentina, Award of 25 July 2007. Ibid, para. 38, with reference to I Marboe, 'Compensation and Damages in International Law. The Limits of “Fair Market Value”' (2006) 7 JWIT 723, 726. Quiborax v Venezuela, Award of 16 September 2015, paras 308, 325 et seq, 386. However, it has to be pointed out that this distinction in terminology is certainly not uniform amongst ICSID tribunals. The tribunal in Funnekotter v Zimbabwe formulated that 'compuation of damages for lawful expropriation from computation of damages for unlawful expropriation are not here in issue'. Funnekotter v Zimbabwe, Award of 22 April 2009, para. 112. Mondev v United States, Award of 11 October 2002, ICSID Case No. ARB(AF)/99/2, para. 71. Also the NAFTA tribunal in Archer Daniels v Mexico distinguished between 'compensation' for expropriation and 'damages' for other breaches of international law. Archer Daniels v Mexico, Award of 21 November 2007, para. 283. See above, n. 13. See Article 74 of the Convention on the International Sales of Goods in the French version, according to which 'les dommages-intérêts pour une contravention au contrat commise par une partie sont égaux à la perte subie et au gain manqué par l'autre partie par suite de la contravention'. In English, it says, as already mentioned, 'compensation'. The Mavrommatis Jerusalem Concessions, PCIJ 1925 Ser A, No. 5, 40, 45 (emphasis added). Ibid (emphasis added). See, e.g., Article 7.4.2(1) of the UNIDROIT Principles of International Commercial Contracts: 'Le créancier a le droit à la réparation intégrale du préjudice qu'il a subi du fait de l'inéxecution'. In the English text, as already mentioned above, it says 'compensation'. See, e.g., the French version of the judgment in the Chorzów Factory case: '[L]a réparation doit, autant que possible, effacer toutes les conséquences de l'acte illicite et rétablir l'état qui aurait vraisemblablement existé si ledit acte n'avait pas été commis'. Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 47; see also the French version of Article 31 of the ILC Articles on State Responsibility, which are dedicated to 'réparation'. See, e.g., with regard to the issue of indemnification for forced labour in the Third Reich, A Randelzhofer, and O Dörr, Entschädigung für Zwangsarbeit? Studien und Gutachten aus dem Institut für Staatslehre, Staats- und Verwaltungsrecht der Freien Universität Berlin (Berlin: Duncker & Humblot, 1994); D Majer, 'Die Fragen der Entschädigung für ehemalige NS-Zwangsarbeiter in völkerrechtlicher Sicht' (1991) 29 Archiv des Völkerrechts 1; H Winkler, 'Entschädigung für Sklaven-und Zwangsarbeit im Dritten Reich—Das österreichische Modell' in A Khol, G Ofner, S Karner, and D Halper (eds), Österreichisches Jahrbuch für Politik (Vienna: Böhlau, 2000) 96. See, e.g., liability for damage caused by space objects or other dangerous activities, codified in the UN Convention on International Liability for Damage Caused by Space Objects (1972) or the Vienna Convention on Civil Liability for Nuclear Damage (1963). See, furthermore, the ILC's works on the international liability for injurious consequences arising out of acts not prohibited by international law (prevention of transboundary damage from hazardous activities). A preliminary result are the Draft Articles on Prevention of Transboundary Harm from Hazardous Activities (2001), Official Records of the General Assembly, Supplement No 10, UN-Doc. A/56/10, ch. V.E.1. See, e.g., M Shaw, International Law (7th edn, Cambridge: Cambridge University Press, 2014) 602; R Dolzer and C Schreuer, Principles of International Investment Law (2nd edn, Oxford: Oxford University Press, 2012) 98 et seq; R Higgins, 'The Taking of Property by the State' (1982) 176 RdC 259; J Salacuse, The Law of Investment Treaties (Oxford: Oxford University Press, 2010) 288. As regards the theoretical foundation of this right, see below, paras 2.26 et seq. R Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Berlin: Springer, 1985) 182; see also D Bowett, 'State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach' (1988) 59 BYIL 49, 61; C F Amerasinghe, 'Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice' (1992) 41 ICLQ 22, 37–8. This has already been argued, e.g., by B Cheng, General Principles of Law as Applied by International Courts and Tribunals (London: Stevens and Sons Ltd, 1953) 46 et seq; see also I Seidl-Hohenveldern, 'L'évaluation des dommages dans les arbitrages transnationaux' (1987) 33 Annuaire français de droit international 7, 8. Putegnat's Heirs (United States v Mexico), Award of 2 August 1871, in J Moore (ed.), History and Digest of International Arbitrations of which the United States has been a Party, vol. IV (Washington: GPO, 1898) 3718, 3720.

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45) Goldenberg (Romania v Germany), Award of 27 September 1928, 2 RIAA, 903, 906;

Aramco v Saudi Arabia, Award of 23 August 1958 (1963) 27 ILR 117, 168; see also P Lalive, 'The Doctrine of Acquired Rights' in M Bender (ed.), Rights and Duties of Private Investors Abroad (New York: International and Comparative Law Center, 1965) 145 et seq; S Friedmann, Expropriation in International Law (London: Stevens & Sons Ltd, 1955) 120 et seq; C F Amerasinghe, State Responsibility for Injuries to Aliens (Oxford: Clarendon Press, 1967) 145 et seq; F V García-Amador, The Changing Law of International Claims (New York: Oceana Publications, 1984) 263 et seq. 46) This doctrine was formulated as early as 1885 but did not play an important role in practice at that time. The Latin-American states rediscovered it later in the wake of decolonialization in the twentieth century. Also, the Soviet Union promoted it from 1917 onwards. See R Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Berlin: Springer, 1985) 19–20; S Montt, State Liability in Investment Treaty Arbitration. Global Constitutional and Administrative Law in the BIT Generation (Oxford: Hart Publishing, 2009) 35 et seq; J Crawford, Brownlie's Principles of Public International Law (Oxford: Oxford University Press, 2012) 613. 47) See, e.g., R Dolzer, 'New Foundations of the Law of Expropriation of Alien Property'

(1981) 75 AJIL 553, 557 et seq; see also Chapter 3, Section B(1).

48) See, e.g., E Jimenez de Arechaga, 'International Law in the Past Third of a Century'

(1978) 159 RdC 297, 299–300.

49) The roots of this principle go back to Roman law, according to which it was also

50)

51)

52) 53)

54) 55)

56) 57) 58)

59)

applicable in ius gentium, thus in international contexts. See D Dicke, 'Unjust Enrichment and Compensation' in D Dicke (ed.), Foreign Investment in the Present and A New International Economic Order (Fribourg: University Press, 1987) 268, with reference to Marcianus' dictum 'Nam iure gentium condici puto posse res ab his, qui non ex iusta causa possident'. Lord McNair, 'The General Principles of Law Recognized by Civilized Nations' (1957) 33 BYIL 1, 11–16; A Verdross, Die Quellen des universellen Völkerrechts (Fribourg: Rombach, 1973) 132; D Dicke, Unjust Enrichment and Compensation (Fribourg: University Press, 1987) 280; C Fombad, 'The Principle of Unjust Enrichment in International Law' (1997) 2 CILJ of Southern Africa 120; see also Arbitrator Mahmassani's considerations in LIAMCO v Libya, Award of 12 April 1977, (1982) 62 ILR 141, 176. C F Amerasinghe argued along these lines; see, e.g., State Responsibility for Injuries to Aliens (Oxford: Clarendon Press, 1967) 148–9; C F Amerasinghe, 'The Quantum of Compensation for Nationalized Property' in R Lillich (ed.), The Valuation of Nationalized Property in International Law, vol. 3 (Charlottesville: University Press of Virginia, 1975) 91 et seq; similar arguments were raised in Amoco International Finance Corp v Iran, 15 Iran–US CTR (1987) 189, para. 259. See, e.g., the controversy between M Mendelson, 'Compensation for Expropriation: The Case Law' (1985) 79 AJIL 414 and O Schachter, 'Compensation Cases—Leading and Misleading' (1985) 79 AJIL 420. B Cheng, General Principles of Law as Applied by International Courts and Tribunals (London: Stevens and Sons Ltd, 1953) 233. Kelsen, in contrast, formulated some doubts with regard to the existence of this principle in international law. He maintained that the concept of damages stemmed from private law and was not absorbed into customary international law. Consequently, a duty to pay damages must be based on specific agreement by the parties. This view was, however, not widely shared in international practice and scholarly writing. H Kelsen, 'Unrecht und Unrechtsfolge im Völkerrecht' (1932) 12 ZÖR 481, 556. Lusitania (United States v Germany), Award of 1 November 1923, 7 RIAA 32, 35 with reference to H Grotius, De iure bellis ac pacis, 2 vol., ch. 17, 22. Case Concerning Factory at Chorzów (Merits), PCIJ 1928 Ser A, No. 17, 29. The seminal importance of this judgment even today has been repeatedly reflected on, e.g., by R Higgins, 'Issues of State Responsibility before the International Court of Justice' in M Fitzmaurice and D Sarooshi (eds), Issues of State Responsibility before International Judicial Institutions (Oxford: Hart Publishing, 2004) 1. For a comparative analysis, see H Koziol and B Steininger (eds), European Tort Law 2002 (Vienna: Springer Press, 2003); N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Oxford: Hart Publishing, 2005). See G Van Hecke, 'Contracts between States and Foreign Private Law Persons' (1992) I EPIL 814. For a short comparative analysis of the rules on compensation upon expropriation in the US, Germany, and France as well as of the jurisprudence of the European Court of Human Rights (ECtHR) and the Inter-American Court of Human Rights, see B Sabahi and N Birch, 'Comparative Compensation for Expropriation' in S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010) 755; see also, including the UK, Switzerland, Austria, and Japan, H Bergmann, Die völkerrechtliche Entschädigung im Falle der Enteignung vertragsrechtlicher Positionen (Baden-Baden: Nomos, 1997) 75 et seq. The requirement of 'due process' entails also the rights to life and liberty, as it emanated from the context: '…nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation'.

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60) United States v Cors, 337 U.S. 325, 332 (1949) as quoted by the Reporters' Notes in

American Law Institute, Restatement, Third, Foreign Relations Law of the United States, vol. 2 (St. Paul, MN: American Law Institute Publishers, 1987) § 712, 207.

61) See, e.g., United States v Commodities Trading Corp, 339 U.S. 121, 123 (1950): 'This

62) 63) 64)

65) 66) 67) 68) 69) 70) 71) 72) 73) 74) 75)

76)

77)

78)

79)

80) 81)

Court has never attempted to prescribe a rigid rule for determining just compensation under all circumstances in all cases. Fair market value has normally been accepted as a just standard.' See also Olsen v United States, 292 U.S. 246, 255 (1934); United States v 50 Acres of Land, 469 U.S. 24 (1984); see also American Law Institute, above, n. 60, 207–8. See also B Sabahi and N Birch, above, n. 58, 780. See ibid, at 779. See the comparative overview on principles of state liability by I Marboe, 'State Responsibility and Comparative State Liability for Administrative and Legislative Harm to Economic Interests' in S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010) 377, 391 et seq. Official English translation by the Bundesministerium für Justiz und Verbraucherschutz, see . P Rummel and J Schlager, Enteignungsentschädigung (Vienna: Signum, 1981) 63 with further references to the jurisprudence of the German Bundesgerichtshof. H Bergmann, Die völkerrechtliche Entschädigung im Falle der Enteignung vertragsrechtlicher Positionen (Baden-Baden: Nomos, 1997) 96 et seq. M Aust and R Jacobs, Die Enteignungsentschädigung (Berlin–New York: DeGruyter, 1980) 36; K Gelzer and F Busse, Der Umfang der Enteignungsentschädigung (Munich: Beck, 1980) 5. See also B Sabahi and N Birch, above, n. 58, 782. Code de l'expropriation pour cause d'utilité publique, version of 1 January 2015 according to Ordonnance No 2014-1345 of 6 November 2014. See the discussion by B Sabahi and N Birch, above, n. 58, 783. See Article L. 321-1: 'Les indemnités allouées couvrent l'intégralité du préjudice direct, matériel et certain causé par l'expropriation.' R Chapus, Droit Administrative Général (15th edn, 2001) para. 1462; see also I Marboe, above, n. 64, 382 et seq. Lord Hailsham of St Marylebone, Halsbury's Law of England, vol. 8 (London: Butterworths, 1996) para. 233. '[Compensation] is the right to be put, so far as money can do it, in the same position as if his land had not been taken from him.' Horn v Sunderland Corporation [1941] 2 KB 26, at 42. Compensation must represent the value to the owner, not the value to the public authority acquiring the land. Stebbing v Metropolitan Board of Works [1870] LR 6 QB 37. Article 26 Bundesverfassung and Article 19 Enteignungsgesetz (1930); R Merker, Der Grundsatz der 'vollen Entschädigung' im Enteignungsrecht (Zurich: Schulthess, 1975); H Bergmann, Die völkerrechtliche Entschädigung im Falle der Enteignung vertragsrechtlicher Positionen (Baden-Baden: Nomos, 1997) 164 et seq. This becomes evident in a number of explicit references in the rules on expropriation to the Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch) on damages in contract and tort cases, such as Article 1323 of the Allgemeines Bürgerliches Gesetzbuch (General Civil Code). See P Rummel and J Schlager, Enteignungsentschädigung (Vienna: Signum, 1981) 65; J Aicher, Verfassungsrechtlicher Eigentumsschutz und Enteignung (Vienna: Manz, 1985) 72 et seq. C F Amerasinghe, 'Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice' (1992) 41 ICLQ 22, 31; I Seidl-Hohenveldern, 'L'évaluation des dommages dans les arbitrages transnationaux' (1987) 33 Annuaire français de droit international 8: 'Or, si le droit interne de tous les pays du monde reconnaît à l'Etat le droit de priver un particulier de sa propriété si le bien public l'exige, on est loin d'une telle uniformité en ce qui concerne les règles liant l'exercise de ce droit à un dédommagement de l'ex-propriétaire'. See the consistent practice of the ECtHR in this respect with regard to the amount of compensation since the judgments in Sporrong & Lönnroth v Sweden, 23 September 1982, ECHR Ser A, No. 52; James et al v United Kingdom, 21 February 1986, ECtHR Ser A, No. 98, and Lithgow et al v United Kingdom, 8 July 1986, ECtHR Ser A, No. 102. M Whiteman, Digest of International Law, vol. 8 (Washington: Government Printing Office, 1967) 1020 (emphasis added). M Herdegen, Principles of International Economic Law (Oxford: Oxford University Press, 2013) 366; M Sornarajah, The International Law on Foreign Investment (3rd edn, Cambridge: Cambridge University Press, 2010) 445–50.

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82) Hardly any bilateral investment treaty contains the standard of 'full compensation'.

83)

84) 85) 86) 87) 88) 89) 90) 91) 92) 93) 94)

95) 96) 97)

98)

99) 100)

101)

102)

Some treaties did, but were ultimately terminated, for example, the treaty between Luxembourg/Belgium and Egypt of 1977 (Article V; terminated and replace by the bilateral treaty of 1999) and the treaty between Luxembourg/Belgium and the Republic of Korea of 1974 (Article 5; terminated and replaced by the bilateral treaty of 2006). The treaty between Kenya and Slovakia of 2011 is not yet in force (Article 5 contains the obligation to 'prompt and full compensation'). Most bilateral investment treaties, model treaties, the NAFTA, the ECT, or the CETA, use the Hull formula or only 'compensation' with more speficied criteria for its determination. See the more detailed analysis further below. American Law Institute (ed.), Restatement (Third) of the Law of Foreign Relations Law of the United States, vol. 2 (St. Paul, MN: American Law Institute Publishers, 1987) § 712, 196–7. In this context it was emphasized that the US had always maintained that compensation upon expropriation under international law must be 'prompt, adequate and effective'. Ibid, at 198. See also O Schachter, 'Compensation for Expropriation' (1984) 78 AJIL 121 et seq. American Law Institute, above, n. 83, 198. See, e.g., Article 4 of the BIT between the United States and Argentina (1991); Article 3 of the BIT between the United States and the Russian Federation (1992). 2012 U.S. Model Bilateral Investment Treaty, see (emphasis added). Article 6 (2) 2012 U.S. Model Bilateral Investment Treaty. See, e.g., Article 13 of the Canadian Model BIT (2004). Article 4 of the German Model BIT (2008) only speaks of 'Entschädigung' (compensation) without any further qualification. See in more detail Chapter 3, Section A(1)(b). See Article 11.7 of the US–Australian Free Trade Agreement and Article 10.9 of the US–Chilean Free Trade Agreement which concordantly speak of 'prompt, adequate, and effective compensation'. See further Chapter 3, Section A(1)(b). Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 47. See Section B(1)(b). I Kant, Kritik der praktischen Vernunft. Grundlegung zur Metaphysik der Sitten, vol. 7 (Frankfurt: Theodor Valentiner, 1968) 60. Appraisal Standards Board (ed.), Uniform Standards of Professional Appraisal Practices (USPAP) 2016–17, 'Definitions'; available at 4– 5. See also Fédération Européenne des Experts Comptables (ed.), Guide for Carrying out Business Valuations (Brussels, 2001) 10. S Pratt and A Nicolita, The Lawyer's Business Valuation Handbook (2nd edn, Chicago: ABA Publishing, 2010) 1. So, e.g., the legal situation in Austria. See para. 2.42. C F Amerasinghe, 'The Quantum of Compensation for Nationalized Property' in R Lillich (ed.), The Valuation of Nationalized Property in International Law, vol. III (Charlottesville: University Press of Virginia, 1975) 91, 95–6; N Girvan, 'Expropriating the Expropriators: Compensation Criteria from a Third World Viewpoint' in ibid, at 149, 166 et seq. See also the Iranian position concerning the calculation of compensation in Amoco International Finance Corp v Iran, 15 Iran–US CTR (1987) 189, para. 190. See also the consideration of Arbitrator Mahmassani in LIAMCO, who rejected the calculation of compensation on the basis of the investments made because 'they do not take into consideration the great initial expenses and risks taken by LIAMCO in their pioneer works and subsequent activities' LIAMCO v Libya, Award of 12 April 1977, (1982) 62 ILR 140, 213. This conclusion was also drawn by C F Amerasinghe, State Responsibility for Injuries to Aliens (Oxford: Clarendon Press, 1967) 148–9. International Glossary of Business Valuation Terms, in AICPA (ed.), Statement of Standards on Valuation Services (New York: American Institute for Certified Public Accountants, Inc, 2015) 33. See also S Gabehart and R Brinkley, The Business Valuation Book (New York et al: Amacom, 2002) 23; S Pratt and A Niculita, Valuing a Business. The Analysis and Appraisal of Closely Held Companies (5th edn, New York: McGraw-Hill, 2008) 21. The terms 'objective', or 'objectified', but also 'abstract' in connection with valuation or calculation must be used with great care. This is not only important with regard to economic aspects which will be dealt with in the next chapter but also in the legal context because different legal systems interpret them differently. See, e.g., the various ways the 'abstract' valuation of damage incurred is made in the German and in the Austrian legal systems. C Huber, Fragen der Schadensberechnung (Vienna: Springer Press, 1995) 30. This corresponds to the older German term 'gemeiner Wert' in the sense of 'common value'. See P Rummel and J Schlager, Enteignungsentschädigung (Vienna: Signum, 1981) 105.

103) Amoco International Finance Corp v Iran, 15 Iran–US CTR (1987) 189, para. 219

(emphasis in original).

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104) In many other decisions of the Iran–US Claims Tribunal the fair market value was

105) 106) 107)

108) 109) 110) 111) 112) 113)

114) 115) 116)

117) 118)

119) 120)

121)

122)

123) 124) 125) 126)

regarded as the applicable standard, or at least as the starting point for the valuation. M Pellonpää and M Fitzmaurice, 'Taking of Property in the Practice of the Iran–US Claims Tribunal' (1988) 19 Netherlands Yearbook of International Law 53, 131 et seq. See further detail in Chapter 3, Section B(1)(b). Phillips Petroleum Co Iran v Iran, 21 CTR (1989) 79, para. 111. World Bank, Legal Framework for the Treatment of Foreign Investment, Vol. 1, Survey of Existing Instruments (Washington: World Bank Group, 1992). The question of compensation is dealt with in particular at 24 et seq and 41 et seq. World Bank, Legal Framework for the Treatment of Foreign Investment, Vol. 2, Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment (Washington: World Bank Group, 1992); also (1992) 31 ILM 1363, (hereinafter: World Bank, 'Guidelines on the Treatment of Foreign Direct Investment'). World Bank, 'Guidelines on the Treatment of Foreign Direct Investment' 1370. Ibid, at 1375. Ibid, at 1383 (emphasis added). The UNCTAD homepage indicates 2,954 BITs in total, and 2,319 BITs in force. See UNCTAD, Investment Policy Hub, available at . As to the different wordings in expropriation provisions in investment treaties, see further at paras 3.15 et seq. Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 47. See thereto J Crawford, The International Law Commission's Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge: Cambridge University Press, 2002) 202. Opinion in the Lusitania Case, 1 November 1923, 7 RIAA, 32, 39 (emphasis in original, footnotes omitted). Restitution is rarely granted in international disputes between individuals and states. See, e.g., Antoine Goetz et al v Burundi, Award of 10 February 1999, (2000) 15 ICSID Rev.-FILJ 457, 516 et seq. See, e.g., B Cheng, General Principles of Law as Applied by International Courts and Tribunals (London: Stevens and Sons Ltd, 1953) 233 et seq; G Schwarzenberger, International Law as Applied by International Court and Tribunals (London: Stevens and Sons Ltd, 1957) 664; I Brownlie, State Responsibility, Part I (Oxford: Oxford University Press, 1983) 222 et seq. See in more detail below, paras 3.120 et seq. Article 31(2) of the Articles on the Responsibility of States for Internationally Wrongful Acts. See also J Crawford, above, n. 113, 202. See, however, also the critical analysis of the incoherent use of the term 'injury' in the ILC Articles by S Wittich, Non-material Damage and its Reparation in International Law (Vienna: Jur Diss, 2001) 5 et seq. See below, para. 3.123. J Crawford, above, n. 113, 220. This clarifies that there is no other purpose, such as punishment by way of 'punitive damages'. Crawford explained in this respect: '[i]n other words, the function of article 36 is purely compensatory, as its title indicates'. Ibid, at 219. 'Delagoa Bay and East African Railway Company, Award of 30 May 1890' in H Fontaine (ed.), Pasicrisie Internationale (Bern: Stämpfli, 1902) 398, 406. (This passage is not contained in the summary published by M Whiteman, Damages in International Law, vol. 3 (Washington: Government Printing Office, 1943) 1694. According to Cheng, this represents an authoritative formulation as to the extent of the obligation to reparation. B Cheng, General Principles of Law as Applied by International Courts and Tribunals (London: Stevens and Sons Ltd, 1953) 236. See, e.g., the judgment of the International Tribunal for the Law of the Sea in MV Saiga (Nr 2) (St Vincent and the Grenadines v Guinea), Judgment of 1 July 1999, para. 170; other courts and tribunals had similar considerations as, e.g., in Papamichalopoulos v Greece, 31 October 1995, ECHR Ser A, No. 330-B, para. 36; Velasquez-Rodriguez, Inter-Am.C.H.R., Ser C, No. 4, 26–7, 30–1. R Posner, Economic Analysis of Law (New York: Aspen Publishers, 1998) 131. See also L Kaplow and S Shavell, 'Accuracy in the Assessment of Damages' (1996) 39 J. L. & Economics 191. See M Marella and I Marboe, ' “Efficient Breach” and Economic Analysis of International Investment Law' (2007) 4 Transnational Dispute Management, available at . L Wells, 'Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Kahara Bodas Company in Indonesia' (2003) 19 Arbitration International 471, 478. See the analysis of such international contracts since 1492 by P Fischer, Die internationale Konzession (Vienna et al: Springer, 1974) 461 et seq; see also the collection of historic concessions, consisting by P Fischer (ed.), A Collection of International Concessions and Related Instruments (New York: Oceana Publishers, 1976–88) and the contemporary series by P Fischer and T Waelde (eds), A Collection of International Concessions and Related Instruments. Contemporary Series (New York: Oceana Publishers, 1981–8).

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127) F A Mann, 'State Contracts and State Responsibility' (1960) 54 AJIL 572, 575; C F

128) 129) 130) 131) 132)

133) 134) 135) 136) 137) 138)

139) 140) 141)

142)

143)

144)

Amerasinghe, 'State Breaches of Contracts with Aliens and International Law' (1964) 58 AJIL 881, 912; O Schachter, 'International Law in Theory and Practice' (1982) 178 RdC 9, 309; I Marboe and A Reinisch, 'Contracts between States and Foreign Private Law Persons' in Rüdiger Wolfrum (ed.), Max Planck Encyclopedia of Public International Law (Oxford: Oxford University Press, 2012), vol. II, 758, paras 28–31. This view is, however, not undisputed. See, for a different opinion, e.g., R Jennings, 'State Contracts in International Law' (1961) 37 BYIL 156, 165 or the arguments put forward by Switzerland in Losinger & Co, PCIJ 1936 Ser C, No. 78, 32; similarly the Belgian representatives in Electricity Company of Sofia Case, PCIJ 1939 Ser C, No. 88, 54; similarly the French representatives in Certain Norwegian Loans, ICJ-Pleadings 1957, 61 and 181–2; similarly the English representative in Iranian Oil Company, ICJPleadings 1951, 84. None of these cases, however, were decided on the merits. See the insightful discussion of these cases by C F Amerasinghe, State Responsibility for Injuries to Aliens (Oxford: Clarendon Press, 1967) 71 et seq. J Salacuse, The Three Laws of International Investment (Oxford: Oxford University Press, 2013) 319–20. Robinson v Harman (1848) 1 Exch. 850, 855, quoted in Amco Asia Corp v Indonesia (Amco I), Award of 20 November 1984 (1993) 1 ICSID Reports 413, para. 266. Restatement, Second on Contracts, Section 344; similarly, Uniform Commercial Code, section 1–106 (1); see Amco Asia Corp v Indonesia, above, n. 129, para. 266. United Nations Convention on Contracts for the International Sale of Goods (CISG), (1980) 19 ILM 668. With regard to the use of the term 'damages' in this context see above, para. 2.09. UNIDROIT, Principles of International Commercial Contracts (Rome: UNIDROIT, 1994, 2004, 2010); see the commentary by S Vogenauer and J Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (Oxford: Oxford University Press, 2009). See O Lando and H Beale (eds), Principles of European Contract Law: Parts I and II Combined and Revised (The Hague: Kluwer Law International, 2000). See Section B(2)(a). B Claggett, 'Just Compensation in International Law—The Issues before the Iran–US Claims Tribunal' in R Lillich (ed.), Valuation of Nationalized Property in International Law, vol. 4 (Charlottesville: University Press of Virginia, 1987) 31, 50. Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 47. INA Corporation v Iran, Separate Opinion Ameli, 8 Iran–US CTR (1985) 373, 411. See, e.g., Amco Asia Corp v Indonesia, Award of 20 November 1984 (1993) 1 ICSID Reports 413, para. 184; Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 371; Himpurnia California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Award of 4 May 1999 (2000) 25 YCA 13, para. 275; see also Y Gotanda, 'Recovering Lost Profits in International Disputes' (2004) 36 Georgetown Journal of International Law 61, 88 et seq with further references. Sapphire International Petroleum Ltd v NIOC, Award of 15 March 1963 (1967) 35 ILR 136, 185–6. See the comparative law analysis by H Stoll, 'Consequences of Liability: Remedies' IECL (1983) vol. XI/8–103. R Brand, 'Punitive Damages and the Recognition of Judgements' (1996) 43 Netherlands International Law Review 143; H Bungert, 'Vollstreckbarkeit USamerikanischer Schadensersatzurteile in exorbitanter Höhe' (1992) Zeitschrift für Wirtschaftsrecht 170; J Gotanda, 'Awarding Punitive Damages in International Commercial Arbitrations in the Wake of Mastrobuono v Shearson Lehmann Hutto, Inc.' (1997) 38 Harvard ILJ 59; J Gotanda, 'Charting Developments Concerning Punitive Damages: Is the Tide Changing?' (2007) 45 Columbia Journal of Transnational Law 507. See, e.g., the proposals by the Special Rapporteur of the ILC, Arangio-Ruiz, in the Second Report on State Responsibility, UN Doc. A/CN.4/425, 33–4; R Jennings and A Watts (eds), Oppenheims International Law (London et al: Longman, 1996) § 156. Brower's Concurring Opinion in Sedco Inc v NIOC (Final Award), 15 Iran–US CTR (1987) 23, 205 also points in the same direction. The Inter-American Court of Human Rights pointed out that public international law does not include the concept of punitive or exemplary damages. Velasquez Rodriguez v Honduras (1989) 7 Inter-Am.Ct.H.R. Ser C (Compensatory Damages) 52. The few international cases which are usually referred to in this context cannot be regarded as evidence that the concept is already part of international law. See S Wittich, 'Awe of the Gods and Fear of the Priests: Punitive Damages and the Law of State Responsibility' (1998) 3 Austrian Review of International and European Law 101, 118. See New Zealand v France (Rainbow Warrier), Award of 30 April 1990, para. 115.

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145) See also G Cottereau, 'Système juridique et notion de responsabilité' in Société

146) 147) 148) 149) 150) 151)

152) 153) 154) 155) 156) 157) 158)

159) 160) 161) 162) 163) 164) 165) 166) 167)

Française de Droit International (ed.), La responsabilité dans le système international (Paris: Pédone, 1991) 62; F A Mann, 'The Consequences of an International Wrong in International and Municipal Law' (1977) 48 BYIL 1. The rejection is also reflected by the removal of the term 'international crime' from the Articles and the insertion of the term 'serious breach of obligation under preemptory norms of general international law' in the last reading of the Articles. See J Crawford, above, n. 113, 35– 8. Opinion in the Lusitania Case, 1 November 1923, 7 RIAA, 32, 39. See further Chapter 5, Section F. See above Section B(1)(b), paras 2.55 et seq. Ibid. Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 47. Crawford explains the well-known dictum of the PCIJ in Factory at Chorzów in the following way: 'In the first sentence, the Court gave a general definition of reparation, emphasizing that its function was the re-establishment of the situation affected by the breach. In the second sentence it dealt with that aspect of reparation encompassed by “compensation” for an unlawful act—that is restitution or its value, and in addition damages for loss sustained as a result of the wrongful act.' See J Crawford, above, n. 113, 202 (emphasis added). See further Chapter 5, Section E. F Mommsen, Zur Lehre von dem Interesse (Braunschweig: Schwetschke, 1855) 3 (translation from the original). Ibid, at 3–4. Ibid, at 16. Ibid, at 17. Joseph Charles Lemire v Ukraine, Award of 28 March 2011, ICSID Case No. ARB/06/18, paras 151–2. Crawford shows in his Commentary to Article 36 that international practice frequently refers to the fair market value also in the context of state responsibility. In addition, however, lost profits and other damage are also taken into account. J Crawford, above, n. 113, 225 et seq. See, e.g., A Komarov, 'Mitigation of Damages' in Y Derains and R Kreindler (eds), Evaluation of Damages in International Arbitration (Paris: International Chamber of Commerce, 2006) 37; Y Taniguchi, 'The Obligation to Mitigate Damages' in ibid, at 79. See Chapter 3, Section B(4), paras 3.235 et seq. e.g. the 'investment value' can serve as a proxy for market value. See J Fishman, S Pratt, and W Morrison, Standards of Value (2nd edn, Hoboken, New Jersey: Wiley, 2013) 24. See Chapter 4, Section B(a). Ibid. See Chapter 5, Sections A, B, and C. See Chapter 4, Section B(b). See, in particular, Chapter 5, Sections B and C. See Chapter 5, Section E.

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3. Valuation Standards and Criteria

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3.01 The following chapter will outline the most important criteria for the calculation of compensation and damages. With regard to the standard of compensation upon expropriation under international law it analyses the difference between lawful and P 44 unlawful expropriations. It then continues by examining valuation criteria in cases of state responsibility and breaches of contract. Furthermore, the selection of an appropriate valuation date as well as the issue of contributory negligence and the duty to mitigate damages will be addressed. Finally, it will be discussed to what extent equitable considerations and the respondent state's economic situation can play a role for the quantification of compensation or damages.

Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

A. Compensation upon Expropriation

'3. Valuation Standards and Criteria', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 43 - 162

3.02 Even though the issue of expropriation is frequently discussed in connection with state responsibility, (1) it is important to note that expropriation of foreign owned property is not an internationally wrongful act per se. Rather, it is a recognized right of a state stemming from its territorial sovereignty. (2) It places the state in a position to regulate its internal social and economic order and to comply with its public duties and responsibilities. (3) 3.03 'Expropriation' generally describes the taking of property by the state. (4) Entire industries or categories of property rights may be affected by so-called 'large-scale nationalizations'. (5) Yet, also acts and omissions of a state that leave the legal position P 45 of the owner formally intact may be regarded as expropriations, if they have the same effect. (6) 3.04 After decades of discussion on the conditions for the exercise of the state's sovereign right to expropriate and controversial political and legal debates at the international level, (7) it is now generally accepted that expropriation of foreigners is a matter of international law and not of national law, and that international law prescribes a number of conditions which have to be fulfilled in cases of expropriation of foreigners. Only if a state does not fulfil these conditions, does it violate international law and commit an internationally wrongful act which entails state responsibility. 3.05 According to international law, expropriation of foreign property must be in the public interest, (8) non-discriminatory, (9) and in accordance with due process of law (10) as well as accompanied by payment of compensation. The last condition is the most controversial, not only for the standard of compensation but also as regards its relevance for the lawfulness or unlawfulness of the expropriation itself. Does the non-payment of compensation render an expropriation unlawful per se, or is it possible to consider the expropriation to be lawful, if the other conditions—public interest, non-discrimination, due process of law—are met? What difference does it make whether an expropriation is P 46 regarded as lawful or unlawful?

(1) The Standard of Compensation 3.06 The standard of compensation under international law—whether 'prompt, adequate, and effective' under the Hull formula or less—has been regarded as the most important question for the determination of the amount to be paid to foreign nationals in the second half of the past century. (11) Nowadays, the divergences of opinions on this matter have lost much of their importance as the applicable standard of compensation in case of expropriation is contained in a large number of bilateral and multilateral treaties on the protection of foreign investment. The more interesting question today, therefore, concerns the determination of the most appropriate valuation method. Nevertheless, the international standard of compensation is still important in order to identify the legal basis upon which the valuation has to be carried out. (a) Customary International Law 3.07 The standard of compensation according to customary international law has long been debated, in particular after the decolonialization process and in connection with the efforts to establish a New International Economic Order. (12) The UN General Assembly Resolution No 1803 relating to the 'Permanent Sovereignty over Natural Resources' of 13 December 1962 can be regarded as the last expression of a common opinio iuris of the international community on this question. (13) In Article 4, it provides for the obligation to pay 'appropriate compensation' which, in accordance with international law, must also be assessable by an international judicial body, thus an international court or arbitral tribunal. (14) 3.08 This formulation was, however, a compromise and allowed both an interpretation in the General Assembly, in particular those relating to the 'New International Economic Order', (15) also accepted less compensation or left the payment of compensation dependent on the possibilities of the expropriating state, without reference to international law or international judicial review. In this vein, the 'Charter of Economic Rights and Duties of States' established:

P 47 terms of the Hull formula and of a lesser standard. Later resolutions of

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Each State has the right … [to] nationalize, expropriate or transfer ownership of foreign property in which case appropriate compensation should be paid by the State adopting such measures taking into account its relevant laws and regulations and all circumstances that a State considers pertinent. (16) 3.09 The consideration of 'all circumstances' should lead to a more just distribution of wealth in the relationship between poor developing countries and financially powerful multinational corporations of capital exporting countries. (17) The references to internal law and circumstances could even be interpreted in such a way that no compensation at all would be due. Such a view was expressed, for example, after the nationalizations of foreign property in Chile by Allende in 1970, where the Government contended that, because of 'excess profits' of foreign companies in the past, no compensation was due and that, on the contrary, the companies had remaining financial obligations to pay to the country. (18) 3.10 A summary of the opinions prevailing about the customary international law standard of compensation in the 1980s is contained in the case INA v Iran of 1985 before the Iran–US Claims Tribunal. (19) The case itself hardly represented an adequate reason for such a heated debate because it related to US$ 285,000, which was only a little above P 48 the lower limit of the jurisdiction of the Iran–US Claims Tribunal set at US$ 250,000. The award itself is only nine pages long, while the debate is reflected in the Separate Opinions of Judges Lagergren and Holtzmann as well as in the more than forty-page Dissenting Opinion of Judge Ameli. The reason was that the tribunal had held, after having awarded compensation in the amount of 'the full equivalent … equal to the fair market value of its shares', as an obiter dictum: In the event of such large-scale nationalisations of a lawful character, international law has undergone a gradual reappraisal, the effect of which may be to undermine the doctrinal value of any 'full' or 'adequate' (when used as identical to 'full') compensation standard as proposed in this case. (20) 3.11 The arguments in favour of partial compensation were primarily based on the situation of many newly independent states not being in the financial position, in particular in the context of large-scale nationalizations, (21) to fully compensate the foreign proprietors. They would, therefore, be prevented from exercising their right to territorial sovereignty and remain in their disadvantaged position as victims of colonialism. (22) 3.12 Also today, the amount of compensation is sometimes discussed with regard to the financial situation of host states. Brownlie, as an arbitrator, expressed his understanding for the financial problems that a high award could pose for a relatively small country. (23) P 50 The actions of states in situations of economic crises in South East Asia (24) or in Latin America (25) affecting foreign investors have revived criticism on high amounts awarded against host states. (26) 3.13 Furthermore, some authors argue that the use of the Hull formula in cases of indirect expropriations could lead to a limitation of a state's sovereignty to regulate the use of property, for example, with regard to environmental or social standards. (27) If the regulations are regarded as indirect expropriations the state could find itself confronted with high claims for compensation. (28) 3.14 It is important to note that the discussions about the customary international law standard of compensation mainly concerned the protection of the state's right to territorial sovereignty, including its right to make political and economic choices, as well as its financial independence. The same arguments are not necessarily valid for discrete and individual expropriations, let alone unlawful expropriations. The international law standard of compensation for lawful expropriations cannot serve as a limitation of responsibility, if a state commits an internationally wrongful act. This difference is often not taken into account appropriately. (29) (b) International Treaty Law 3.15 Numerous international treaties concluded since the 1990s dealing with the protection of foreign investment contain rather detailed provisions on compensation in case of expropriation. They all aim at a rather high level of protection of foreign investment, but the formulations vary in the different texts. Many bilateral treaties contain the well-known Hull formula of 'prompt, adequate and effective compensation'. (30) But multilateral treaties have adopted it too, for example, the Energy Charter Treaty in its Article 13: 1. Investments of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as 'Expropriation') except where such Expropriation is: (a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation. Such compensation shall amount to the fair market value of the Investment … (31)

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3.16 It is not surprising that one can find this standard also in a number of free trade agreements (FTAs) concluded by the United States. (32) One would, however, not necessarily expect this standard also to figure prominently in BITs of Latin American countries (33) and developing countries (34) concluded between themselves. Numerous BITs of the Russian Federation also contain this compensation standard. (35) Only a few BITs provide merely for 'just compensation' (36) or 'fair and equitable compensation'. (37) 3.17 In some BITs, the term 'compensation' is not qualified by an adjective but stands alone, such as in German (38) or some middle European BITs. (39) Also NAFTA Article 1110 P 51 does not qualify the term 'compensation' as such: (1) No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party … except: (a) for a public purpose; (b) on a nondiscriminatory basis; (c) in accordance with due process of law and Article 1105 (1); and (d) on payment of compensation in accordance with paragraphs 2 through 6. (40) 3.18 Further details regarding the calculation of compensation are then provided more specifically in the subsequent paragraphs, such as in NAFTA Article 1110: (2) Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place ('date of expropriation'), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. (41) 3.19 The standard of 'fair market value' as the basis for calculating the amount of compensation appears in many BITs and model BITs. In particular, the United States relies on it consistently, as its most recent model BIT of 2012 explains: 'The compensation referred to in paragraph 1 (c) shall: (a) be paid without delay; (b) be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place …'. (42) 3.20 The same is true for the Canadian model BIT of 2004 which reads: Such compensation shall be equivalent to the fair market value of the expropriated investment before the expropriation took place ('date of expropriation') and shall not reflect any change in value occurring because the intended expropriation became known earlier. (43) 3.21 Some treaties refer to other values, such as the 'genuine value' of some of the BITs of the United Kingdom. (44) German BITs usually point to the 'value of the expropriated investment'. (45) 3.22 The interesting question is whether these distinct formulations and definitions of value may actually lead to different results. To what extent do they imply different financial outcomes? Some treaties attempt to be more precise and give more detailed guidelines for the valuation. For example, NAFTA Article 1110 mentions some of the possible valuation methods to determine the fair market value: (2) P 52

(3)

… Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value. Compensation shall be paid without delay and be fully realizable. (46)

3.23 Other treaties refer, for example, to the capital invested, replacement value, appreciation, current returns, goodwill, and other relevant factors. (47) This enumeration of different possible valuation methods does, however, not necessarily lead to more clarity. It is even doubtful whether some of the proposed valuation criteria such as 'asset value' or 'declared tax value', are actually pertinent for arriving at 'fair market value'. (48) Tribunals will have to select an appropriate valuation method depending on the circumstances of the case and the information available. Most importantly it will be necessary to carry out the calculation with respect to the function of compensation in the specific case. (c) International Jurisprudence 3.24 International jurisprudence concerned with lawful takings and the valuation of compensation is quite unanimous in applying 'fair market value' or a similar objective standard. The arbitral tribunal in Norwegian Shipowners' Claims decided after the seizure of 437 steel vessels under construction by the US Government for a bona fide public use that 'the compensation hereinafter awarded is the fair market value of the claimants' property'. (49) The decisive valuation was the loss incurred by the shipowners 'as compared with other owners of similar property'. (50) 3.25 Also in cases of expropriation of oil concessions which were found to be lawful

P 53 tribunals decided that compensation should be equivalent to the objective–abstract

value of the property. For example, the arbitrator in LIAMCO v Libya referred to the 'market value' of the petroleum concession. (51) The tribunal in Aminoil v Kuwait emphasized that it was necessary to evaluate the 'reasonably appraised value of what

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constituted the object of the takeover'. (52) 3.26 Objective criteria were particularly relevant in the context of large-scale expropriations and nationalizations of entire industries. For example, the Iran–US Claims Tribunal came to the conclusion that the Treaty of Amity between the United States and Iran was applicable in cases of nationalization of the Iranian insurance industry and of the banking sector. (53) The Treaty contained the obligation to pay compensation in the amount of the 'full equivalent of the property taken' in cases of expropriation. (54) This was considered to be equivalent to the 'fair market value' which the arbitrators in INA v Iran defined in an often-quoted formulation: 'Fair market value' may be stated as the amount which a willing buyer would have paid to a willing seller for the shares of a going concern, disregarding any diminution of value due to the nationalisation itself or the anticipation thereof, and excluding consideration of events thereafter that might have increased or decreased the value of the shares. (55) 3.27 The tribunal in Amoco International Finance v Iran, by contrast, was sceptical with regard to the determination of a 'market value' in the absence of a 'market'. (56) Nevertheless, it also wanted to determinate an 'objective' value and noted that 'the truth is that in the absence of a market giving rise to the fixing of an objective market value compels recourse to alternative methods of valuation, as was implicitly recognized by the Claimant's expert'. (57) 3.28 The ICSID Tribunal in Companía del Desarollo de Santa Elena v Costa Rica also compensation after a lawful expropriation. (58) It noted that 'there is no dispute between the parties as to the applicability of the principle of full compensation for the fair market value of the Property, i.e., what a willing buyer would pay to a willing seller'. (59)

P 54 referred to the fair market value for the determination of the amount of

3.29 Similarly, in Southern Pacific Properties v Egypt, the ICSID Tribunal found that it was necessary to establish an objective value of the expropriated property because the claimant should 'receive fair compensation for what was expropriated'. (60) Also, the arbitral tribunal in Reineccius v Bank for International Settlements at the Permanent Court of Arbitration chose this standard, which was also in accordance with the submissions of the parties in this respect. (61) 3.30 The tribunal in Quasar des Valores v Russia, disregarding the lawfulness or not of the expropriation, because it had only jurisdiction on the calculation of compensation for a 'lawful' expropriation, decided that it had to assess the 'value' of the expropriated assets. (62) The tribunal accepted the claimants' contention that compensation should be 'consonant with the customary international law standard for recovery in the event of lawful expropriation and Article 6 of the BIT', (63) which would best be evaluated as the last reliable stock price. (64) 3.31 In Mobil Cerro Negro v Venezuela, the tribunal decided that the expropriation was lawful and that therefore 'just compensation' as required under the BIT should be awarded. (65) It applied a DCF method reflecting the expectations of the market participants on the value of the oil concessions. (66) Similarly, in Tidewater v Venezuela, another case of lawful expropriation, the tribunal applied 'the market value of the investment expropriated immediately before the expropriation' (67) pointing out that this was in accordance with the World Bank Guidelines on the Treatment of Foreign Investment (68) and customary international law, as noted by the International Law P 55 Commission (ILC). (69) It also chose to apply a DCF method. (70) The practice of international investment tribunals therefore confirms that in case of lawful expropriations the amount of compensation has to be determined by objective valuation methods.

(2) The Role of Compensation for the Lawfulness of the Expropriation 3.32 An important question in the context of expropriations is whether the payment of compensation is a prerequisite for lawful expropriations. The discussions in the past century have always been connected to the ideological differences about the concept of property and the state's internal economic order. (71) For a long time, expropriation has been considered lawful only if accompanied by payment of compensation. (72) A violation of the obligation to pay compensation was regarded as a violation of international law which entailed state responsibility. The tribunal in De Sabla held, for example, in 1933 that it was 'axiomatic that acts of a government in depriving an alien of his property without compensation impose international responsibility'. (73) 3.33 In the same vein, the US Secretary of State, Cordell Hull, emphasized in his note to the ambassador of Mexico in 1938 the importance of compensation for the lawfulness of the expropriation, pointing out that '[t]he legality of an expropriation is in fact dependent upon the observance of this requirement'. (74) 3.34 This understanding was challenged after the Second World War by the increasing number of communist states as well as the newly independent states. While communism denied the legitimacy of private property altogether, the newly independent states regarded their strenuously acquired freedom as endangered, if they could not exercise

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P 56

their right to territorial sovereignty due to their limited financial resources. The UN General Assembly's 'Resolution of the Permanent Sovereignty over Natural Resources' of 1962 requiring 'appropriate compensation' was a compromise between the two different viewpoints. (75) 3.35 This consensus in the UN General Assembly, however, did not remain unchallenged for long. In the context of the efforts to establish a New International Economic Order, a number of UN General Assembly Resolutions were adopted in the 1970s which qualified the importance of the compensation for lawful expropriations. (76) The resolutions suggested that compensation should no longer be a condition for lawfulness but rather the consequence of a lawful act which, furthermore, should depend on a number of factors, inter alia, the financial situation of the state and past profits of the company.

3.36 In accordance with this attitude, arbitral practice of the time regarded expropriation without payment of compensation as lawful on various occasions. In LIAMCO v Libya, the arbitrator came to the conclusion that the expropriation was not discriminatory (in contrast to that in the contemporary BP v Libya case) (77) and was therefore lawful. (78) The underlying expropriation laws contained provisions for the establishment of a committee to decide on the amount of compensation. (79) This committee, however, had never been established and LIAMCO had not been offered compensation. Similarly, the arbitral tribunal in Aminoil v Kuwait contended that a lawful P 57 expropriation had occurred, even though no compensation had been paid. (80) Also in this case, a committee should have decided upon the amount of compensation to be paid to the foreign company, but had not done so. (81) 3.37 A few years later, the Iran–US Claims Tribunal dealt with a number of cases resulting from the nationalization of the entire insurance industry in Iran. (82) The legal basis was a law of 1979 which provided for a commission to decide upon the amount of compensation. (83) Even though the companies had not received anything from the Government up to the time of the award, the Iran–US Claims Tribunal considered the expropriations as lawful. In INA v Iran it held: It has long been acknowledged that expropriations for a public purpose and subject to conditions provided by law—notably that category which can be characterised as 'nationalisations'—are not per se unlawful. A lawful nationalisation will, however, impose on the government concerned the obligation to pay compensation. (84) 3.38 The references of the Iranian Government to the committee and the efforts which had already been undertaken for its establishment (85) were, according to the tribunal, convincing enough to accept the lawfulness of the expropriation. The same was true in American International Group v Iran, where the valuation of another insurance company was at issue. (86) 3.39 By contrast, the legality of the expropriation in Amoco International Finance v Iran was very much debated. The arbitral tribunal found that the expropriation had occurred at the time of the Single Article Act of 1980, according to which: [a]ll oil agreements considered by a special commission appointed by the Minister of Oil to be contrary to the Nationalization of the Iranian Oil Industry Act shall be annulled and claims arising from conclusion and execution of such agreements shall be settled by the decision of said commission. (87) 3.40 The Iranian Oil Industry Act of 1951 provided the legal basis for the nationalizations. (88) The claimant and Arbitrator Brower were of the opinion that, before the formal P 58 expropriation, a de facto expropriation had already occurred without compensation, and that the 'expropriation of Amoco International's rights, interests and property under the Khemco Agreement was wrongful because no compensation has been paid for this taking'. (89) The majority, however, was of the opinion that, by establishment of the commission to decide on the amount of compensation in the Single Article Act of 1980, the Iranian Government had fulfilled its international obligations. (90) It emphasized that the relevant commission had already reached a number of successful solutions in various cases. (91) 3.41 In Sedco v NIOC before the Iran–US Claims Tribunal Judge Brower submitted his thoughts on this issue in his Separate Opinion: Likewise, I must express doubt as to whether, under customary international law, a State's mere failure, in the end, actually to have compensated in accordance with the international law standard set forth herein necessarily renders the underlying taking ipso facto wrongful. If, for example, contemporaneously with the taking the expropriating State provides a means for the determination of compensation which on its face appears calculated to result in the required compensation … it would appear appropriate not to find that the taking itself was unlawful but rather only to conclude that the independent obligation to compensate has not been satisfied. (92) 3.42 More recent practice did not consider the lack of payment of compensation as a

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sufficient reason for expropriations to be unlawful, either. The ICSID Tribunal in Southern Pacific Properties v Egypt was of the opinion that the Egyptian state had the right to withdraw the permission for the development of a hotel and tourism complex at the Pyramids area near Cairo, even though a contract with the Egyptian general organization for tourism and hotels in relation to the project had been concluded and construction work had already started. (93) The public interest in preventing potential damage to the archaeological treasures was sufficient for the lawfulness of the expropriation. The P 59 dispute about the amount of compensation, however, lasted for more than fourteen years, in particular because of a previous arbitration before the ICC in Paris. (94) The successful challenge by Egypt of this award and the non-payment of the US$ 12.5 million awarded did not alter the ICSID Tribunal's opinion on the matter. Obviously, it did not regard the payment of compensation as a prerequisite for the lawfulness of the expropriation. This was in conformity with the perspective of the claimant, who apparently did not challenge the lawfulness, either: SPP (ME) from the outset sought not to challenge the ARE's [Arab Republic of Egypt's] acts as wrongful or void, but sought compensation rather than physical restoration of its rights…. the claim here by SPP (ME) is not against the ARE for damages for breach of contract. It is for compensation on account of the losses occasioned to it by the ARE's exercise of its sovereign powers, which destroyed its property rights (including its contract rights). (95) 3.43 The ICSID Tribunal in Companía del Desarollo de Santa Elena v Costa Rica came to a similar conclusion. The dispute concerned the expropriation of land on the Pacific coast in the north-east of Costa Rica for the purpose of a nature reserve. (96) The tribunal emphasized the right of a state to expropriate foreign property on its territory in the public interest. (97) In this case, the proceedings relating to the amount of compensation had already lasted for more than twenty years, and Costa Rica finally consented to ICSID jurisdiction only because, due to the US Helms Amendment, (98) a loan from the InterAmerican Development Bank would not have been granted to it otherwise. (99) The payment of compensation, in this case too, was not considered as a prerequisite for the lawfulness of the expropriation. 3.44 The tribunal in Goetz v Burundi held that, while all other conditions for a lawful expropriation had been met, the fact that the contested decree (revoking the certificate P 60 of 'entreprise franche' from the claimants) did not contain a provision on compensation did not suffice to consider it internationally unlawful. (100) The tribunal noted that the applicable treaty required adequate and effective compensation but, in contrast to certain national expropriation laws, it did not require prior compensation. (101) The delay of almost four years between the decree and the arbitral tribunal's decision was not detrimental. The tribunal decided that the respondent could either pay compensation in the amount of the market value (or the 'real and objective' value, whichever was higher) at the time of the respective decree, or re-establish the certificate of 'entreprise franche'. (102) 3.45 In Mondev v United States, the tribunal deciding upon alleged violation of NAFTA Article 1110(1)(d) also pointed out that the time of paying compensation need not necessarily be prior or exactly at the same time as the taking. (103) It highlighted that the state's conceivable commitment or an offer to pay compensation would be sufficient: But for a taking to be lawful under Article 1110, at least the obligation to compensate must be recognised by the taking State at the time of the taking, or a procedure must exist at that time which the claimant may effectively and promptly invoke in order to ensure compensation. A 'taking' of property, not acknowledged as such by the government concerned and not accompanied by any offer of compensation, is not rendered conditionally lawful by the contingency that the aggrieved party may sue in the local courts for conversion or for breach of contract. (104) 3.46 In the cases against Venezuela in the wake of President Chavez's socialist policy between 1999 and 2013 entailing the nationalization of parts of the industry, tribunals have carefully examined whether the expropriations were lawful or not. While the public purpose was hardly ever in question, (105) the issue of due process and nondiscrimination played an important role. When these three requirements were met, the legality of the expropriation depended on the terms of the offer of compensation and the circumstances of the negotiations. 3.47 In Mobil Cerro Negro v Venezuela, the investors were expropriated on the basis of the 2001 Hydrocarbons Law and a 2007 Decree Law which requested all companies to turn into 'mixed companies' with PDVSA, the Venezuelan national oil company. After months of failed negotiations, Venezuela seized the investments. The ICSID Tribunal held:

P 62

It is not disputed that the Claimants did not receive compensation and that Venezuela did not fulfil its obligation to pay compensation in accordance with Article 6(c) of the BIT. However, the mere fact that an investor has not received compensation does not in itself render an expropriation unlawful. An offer of compensation may have been made to the investor and, in such a case, the

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legality of the expropriation will depend on the terms of that offer. In order to decide whether an expropriation is lawful or not in the absence of payment of compensation, a tribunal must consider the facts of the case. (106) 3.48 The tribunal noted that it had rather limited information about what exactly happened during the negotiations. Claimants had largely relied on press reports and public statements of politicians that the Government would only pay book value for the oil assets in the Orinoco Belt. The tribunal found that the claimants did not meet the burden of proof that the proposals made by Venezuela were incompatible with the requirement of 'just compensation' of the BIT. (107) As it was not disputed that negotiations took place and that Venezuela made proposals during those negotiations, the tribunal found that the expropriation was not unlawful. (108) 3.49 The ICSID Tribunal in Tidewater v Venezuela engaged in a detailed analysis whether the non-payment of compensation rendered the expropriation unlawful. (109) The claimants were suppliers of marine transportation services who had invested in a Venezuelan company to provide services to the Venezuelan national oil company. Following the enactment of the Reserve Law of 2009, the company's assets were seized. Claimants contended that the only compensation provided for under the Reserve Law was book value of the assets, expressly excluding lost profits. As this did not meet the standard of 'adequate and effective compensation' amounting to the 'market value' under the BIT, the expropriation should be considered unlawful. (110) The tribunal disagreed and found that the expropriation was lawful, because the state did not seek to expropriate the assets without compensation. Further, the BIT did not prescribe how the market value was to be determined so that the valuation, depending on the circumstances, could indeed be book value. (111) It held: The Tribunal concludes that a distinction has to be made between a lawful expropriation and an unlawful expropriation. An expropriation only wanting fair compensation has to be considered as a provisionally lawful expropriation, precisely because the tribunal dealing with the case will determine and award such compensation. (112) 3.50 The European Court of Human Rights (ECtHR) generally makes a global assessment of the actions and omissions of the state in order to examine whether an expropriation in violation of Article 1 of the First Protocol of the European Convention on Human Rights (ECHR) has occurred. It applies the principle of proportionality whereby compensation represents one of a number of different criteria. The ECtHR does not require the payment of compensation under a determined standard, or certain valuation techniques, but determines whether the balance between the protection of property and the requirements of public interest is proportionate. (113) It follows that expropriations without any compensation, despite in exceptional circumstances, represent disproportionate infringements of property rights and thus expropriations in violation of the Convention. (114) 3.51 Scholarly writing has so far not provided a clear answer to the question. Some authors are of the opinion that the non-payment of compensation does not ipso facto render the taking unlawful, but rather represents a violation by the expropriating state of an independent duty which applies equally to both unlawful and lawful takings. (115) Others found that the non-payment almost automatically renders an expropriation unlawful. (116) Brownlie argues that the lack of compensation does not automatically lead to a violation of international law. (117) He distinguishes unlawful expropriations per se and unlawful expropriations sub modo, that is, those which are unlawful, if at all, only P 63 if appropriate compensation was not provided for. According to Sornarajah, the nonpayment of compensation affects the legality of the expropriation. (118) Bowett was one of the first to suggest a compromise solution. Compensation should not be irrelevant for the lawfulness of the expropriation, but the mere non-payment of compensation should not render the expropriation unlawful, either. He distinguishes between whether the state actually accepts or rejects the obligation to pay compensation. In the first case, expropriation would be lawful, even if the amount paid or offered did not reach the full amount required under international law. Bowett had formulated as early as in 1988: Of course, there may well be a dispute over the adequacy of the compensation offered. But the fact that a tribunal awards compensation higher than a State was prepared to offer does not, per se, make the nationalization unlawful. The State's offer would have to be so low as to amount to a virtual rejection of the obligation to compensate. (119) 3.52 Ripinsky and Williams largely agree with this approach but point out that it is still not clear whether, to render an expropriation lawful, (a) (b) (c)

it is necessary that correct ('full', 'just', 'appropriate', etc) compensation be paid at the time of (or shortly after) the taking or it is sufficient that the expropriating State recognizes that it is under an obligation to pay compensation and takes steps for the payment of compensation or that it pays some compensation shortly after the taking. (120)

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They suggest giving the requirement of 'good faith' an important role in this context. A good faith offering of, or provision for, compensation (even if not in a sufficient amount, as long as not manifestly unreasonable) should render the expropriation lawful. By contrast, a 'general provision' for payment of compensation in the domestic law of the host state would not qualify as a recognition of a duty to pay compensation, as such a recognition would need to be expressed in relation to a specific expropriatory act. Furthermore, the state must take actual steps for payment of compensation within a reasonable time. A mere formal provision for payment would not be sufficient. (121) 3.53 It seems that the opinions on this issue have developed and slightly changed over the years. While earlier the mere 'promise' of a state to pay any sum at any time was not P 64 enough for the lawfulness of an expropriation, (122) today there seems to be increasing consensus that it is sufficient if a state, at the time of the expropriation, offers compensation or provides for the determination of compensation. That the issue of compensation is totally irrelevant or independent from the lawfulness of the expropriation seems not to be supported by the prevailing scholarly opinions and practice. 3.54 One may, therefore, conclude that according to arbitral practice and scholarly writing, the mere existence of a dispute about the amount of compensation does not render the expropriation unlawful. (123) The payment or non-payment of compensation still remains relevant for the lawfulness or unlawfulness of the expropriation. (124) If an international treaty prohibits expropriation, non-compliance with this prohibition necessarily leads to the unlawfulness of the expropriation regardless of the (non)payment of compensation. The PCIJ in its judgment in the case Factory at Chorzów emphasized the distinction between 'compensation' as a condition for a lawful expropriation and 'reparation' as a consequence of the expropriation in violation of the Geneva Convention between Poland and Germany: 'As the Court has expressly declared in Judgement No. 8, reparation is in this case the consequence not of the application of Articles 6 to 22 of the Geneva Convention, but of acts contrary to those articles'. (125) It is important to note that the Geneva Convention applicable in the Factory at Chorzów had prohibited the taking, in contrast to modern bilateral investment treaties. (126) 3.55 Generally, modern bilateral investment treaties allow expropriation under certain conditions. The respective provisions are not formulated as absolute prohibitions but establish conditions under which the host state may expropriate foreign investment, notably the obligation to pay compensation to the investor. (127) In view of the above it can be said that, if a state does not pay any compensation and does not even provide for a procedure for the payment of compensation, it violates its treaty obligations. It depends on the precise formulation of the respective treaty provisions, the terms of the P 65 compensation offer, and the circumstances of the case for determining whether the state has complied with its international obligation with respect to the provision of compensation or not.

(3) Can Indirect Expropriations ever be Lawful? 3.56 International courts and tribunals are frequently confronted with cases of so-called indirect expropriations. (128) Such indirect or de facto expropriations can occur in many different forms which is also reflected in the many different terms used, such as 'disguised', 'regulatory', 'creeping', or 'constructive' expropriations or takings. (129) The physical appropriation of foreign property by the state or entities attributable may constitute an indirect taking (130) as well as judgments of national courts, (131) or export restrictions. (132) As regards the combination of various acts and omissions by the state, often seemingly trivial or of nebulous legality or propriety, Reisman and Sloane have formulated in an often-quoted article:

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Consequential expropriations involve deprivations of the economic value of a foreign investment, which … must be deemed expropriatory because of their causal links to failures of the host state to fulfil its paramount obligations to establish and maintain an appropriate legal, administrative, and regulatory normative framework for foreign investment. (133) 3.57 Also UNCTAD has pointed out the growing concern about expropriations increasingly occurring in this form: Creeping expropriation may be defined as the incremental encroachment on one or more of the ownership rights of a foreign investor that eventually destroys (or nearly destroys) the value of his or her investment or deprives him or her of control over the investment. A series of separate State acts, usually taken within a limited time span, are then regarded as constituent parts of the unified treatment of the investor or investment. (134) 3.58 These 'indirect expropriations' which are comprised of a number of elements none of which—separately—constitutes the expropriation are particularly difficult to deal with and pose many complicated problems, such as the date of the expropriation. 3.59 Bilateral and multilateral investment protection treaties generally provide that the foreign investor should be protected from such expropriations in the same way as from

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direct expropriations. Usually this is done by equating expropriations to 'measures tantamount to nationalization or expropriation' and dealing with them under the same article and by the same legal provisions. (135) This also means that indirect expropriations and measures tantamount to expropriation must be in the public interest, non-discriminatory, in accordance with due process of law, and accompanied by the payment of compensation. (136) 3.60 However, it is almost in the nature of an indirect expropriation that some of these conditions are not met. In particular, it is hard to imagine that an indirect expropriation in the form mentioned above will be accompanied by the payment of compensation. Similarly, it will often be difficult to identify a proper legal procedure to challenge the state measures before a court in accordance with the principle of due process of law. This is particularly true in cases of creeping expropriations. It follows that indirect expropriations often have to be considered as unlawful. One may, therefore, agree with P 67 Judge Brower who writes in his Separate Opinion in Sedco v NIOC: [I]t is difficult to envision a de facto or 'creeping' expropriation ever being lawful, for the absence of a declared intention to expropriate almost certainly implies that no compensation has been made. Indeed, research reveals no international precedent finding such an expropriation to have been lawful. (137) 3.61 Reisman and Sloane also share this opinion and note that 'creeping expropriations, in practice if not by definition, almost without exception prove to be unlawful'. (138) The measures taken by a series of ostensibly valid acts collectively depriving an investor of its property rights could hardly be deemed to comport with the due process requirement for a lawful expropriation under most BITs. (139) Ripinsky and Williams agree with this view, because the expropriating state does not usually acknowledge the very fact of expropriation, and consequently does not provide for payment of compensation. (140) 3.62 This is, furthermore, in accordance with the jurisprudence of the ECtHR, according to which the proportionality principle prohibits expropriations without compensation, which is particularly relevant for indirect expropriations. (141) In conclusion, indirect expropriations will generally not fulfil the conditions prescribed by international law for the expropriation of foreign private property and, despite in exceptional circumstances, will be regarded as unlawful.

(4) Violation of Stabilization Clauses 3.63 To what extent the violation of stabilization clauses has an influence on the amount of compensation or damages in international investment disputes is still a rather unsettled question. (142) Stabilization clauses are frequently contained in concessions or other state contracts in order to protect the investor from changes in the national law of the host state. They should ensure that the investor can operate under relatively stable P 71 legal and economic conditions over a longer period of time. (143) The state commits itself either not to enact changes of the domestic law in the future, or, as this may raise legal and political problems at the national level, (144) to at least not to apply such changes to the investor. (145) 3.64 The effect of stabilization clauses on the amount of compensation or damages has been discussed particularly in the context of the nationalizations of the Libyan petroleum industry in the 1970s. Three almost contemporary arbitrations (146) dealt with identical stabilization clauses, (147) but came to quite different interpretations and results. 3.65 In BP v Libya, (148) Arbitrator Lagergreen hardly took any notice of the stabilization clause, as he considered the acts of the Libyan Government to be unlawful on the basis of their discriminatory and arbitrary character: The BP Nationalisation Law, and the actions taken thereunder by the Respondent, do constitute a fundamental breach of the BP Concession as they amount to a total repudiation of the agreement and the obligations of the Respondent thereunder, and, on the basis of rules of applicable systems of law too elementary and voluminous to require or permit citation, the Tribunal so holds. Further, the taking by the Respondent of the property, rights and interests of the Claimant clearly violates public international law as it was made for purely extraneous political reasons and was arbitrary and discriminatory in character. Nearly two years have now passed since the nationalisation, and the fact that no offer of compensation has been made indicates that the taking was also confiscatory. (149) The tribunal, therefore, awarded 'damages arising from the wrongful act of the Respondent, to be assessed by this Tribunal in subsequent proceedings'. (150) 3.66 In Texaco v Libya, (151) by contrast, Arbitrator Dupuy paid considerable attention to the stabilization clause. He thoroughly examined whether a state had the right to expropriate the concession rights of a foreign investor, if it had contractually agreed to warrant protection and legal security. After a detailed comparative law analysis

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regarding the principle pacta sunt servanda, the arbitrator stated: This principle applies not only to agreements concluded by private persons, but also to agreements entered into by the sovereign. Thus, under the Sharia, nobody, neither the sovereign nor any official, is exempted as a matter of privilege. If, in conformity with the siyasa doctrine, the sovereign has large discretionary powers as regards the promotion of public interest, he must nonetheless abide by the commands of the supreme law, and Ibn Qudama states that 'a breach of a commitment on the part of the Imam is more serious and more heinous than a breach committed by anybody else, because of its baneful consequences.' Now, it is accepted that this rule covers also agreements entered into with non-Muslims. (152) 3.67 In order to show that the principle of pacta sunt servanda was also applicable to contracts between states and private persons under international law, Dupuy referred to the PCIJ in the Wimbledon case according to which the ability of states to conclude contracts is an expression of the state's sovereignty and not a limitation of it. (153) The tribunals in Aramco (154) and Sapphire (155) had confirmed the binding nature of contractual obligations entered into by states and private enterprises. The former had pointed out that '[n]othing can prevent a State, in the exercise of its sovereignty, from binding itself irrevocably by the provision of a concession and from granting to the concessionaire irretractable rights'. (156) 3.68 The distinction of agreements with other states and those with private persons could not be based on the Resolution No. 1803 of the UN General Assembly, either, which stated that '[f]oreign investment agreements freely entered into by or between sovereign States shall be observed in good faith …'. (157) 3.69 Arbitrator Dupuy thus came to the conclusion that the respondent state could not rely on its sovereignty and expropriate the concession rights, even upon payment of compensation. (158) The expropriation was therefore regarded as invalid. The contractual rights continued to exist and had to be respected and complied with by the Libyan Government. (159) 3.70 This decision in Texaco v Libya which accords stabilization clauses such an important legal significance represents, however, only an exception. The claim to restitutio in integrum as the primary remedy is so far only recognized under the law of state responsibility, (160) but it has not yet been generally accepted as a remedy for breaches of contract between states and private parties. 3.71 This was already evident in the award in LIAMCO v Libya (161) which was decided only a few months later. The tribunal in this case came almost to the opposite conclusion. Confronted with nearly the same factual and legal background, Arbitrator Mahmassani emphasized that the existence of a stabilization clause could not impair the sovereign right of a state to expropriate a concession. Restitutio in integrum would be absolutely impossible. (162) The arbitrator referred, inter alia, to Friedman who wrote that 'it would seem impossible to compel a State to make restitutio in integrum…. To impose an obligation to make integral restitution would … constitute in fact an intolerable interference in the internal sovereignty of States.' (163) 3.72 The tribunal pointed out that 'there is no sufficient authority for the fact that nationalization in breach of a concession is an internationally unlawful act for which the remedy is restitution'. (164) 3.73 As a result, the expropriation was regarded as lawful. (165) It is notable that, in assessing almost the same facts, the first tribunal identified an obvious violation of international law (the BP tribunal), the second an unlawful and even invalid act (the Texaco tribunal), and the third a lawful expropriation (the LIAMCO tribunal). 3.74 The practice of subsequent tribunals shows that the effect of stabilization clauses is still not entirely settled. The ICSID Tribunal in AGIP v Congo was of the opinion that the stabilization clause could not invalidate the expropriation, but that its violation rendered the expropriation unlawful: The Tribunal believes that it must note that if the right of a State to nationalize is beyond doubt today by reason of concordant and constant international practice, it is nonetheless recognized by positive international law that by entering into an international agreement with a private person the State exercises a sovereign power, seeing that its consent is freely given. (166) 3.75 In the contract relating to the investment, the Government had committed itself 'to ensure that future modifications to the company laws with respect to the structure and composition of corporate bodies would not apply to the Company (Article 11)'. (167) According to the ICSID Tribunal, the violation of this clause by the subsequent nationalization entailed the responsibility of the Republic of Congo. (168) In view of the violation of the stabilization clause, the other conditions of a lawful expropriation, such as the alleged discrimination, were considered irrelevant and were not even examined by the tribunal. The respondent Government was ordered to compensate for the 'damage' caused. (169)

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3.76 The award of the tribunal in Aminoil v Kuwait can be regarded as an affirmation of the conclusions of Arbitrator Mahmassani in LIAMCO, as the violation of the stabilization clause in the concession contract between the company and Kuwait did not result in the unlawfulness of the expropriation. (170) Yet, the tribunal was of the opinion that a waiver of the right to expropriate would be legally possible, but it would need an explicit formulation. The general wording of the stabilization clause (171) would not allow the P 72 assumption of such a waiver. The clause could be regarded as an additional protection against confiscatory expropriations, but not against expropriations as such. (172) 3.77 This conclusion of the tribunal in Aminoil served as a guideline for the Iran–US Claims Tribunal in Amoco International Finance v Iran. The tribunal shared the opinion that a state, by entering into contractual obligations with a foreign enterprise, did not waive its right to nationalize because '[a]s a fundamental attribute of state sovereignty, this right, commonly used as an important tool of economic policy by many countries, both developed and developing, cannot easily be considered as surrendered'. (173) This would be particularly true for very long-term contracts. (174) In accordance with the conclusions in Aminoil, the breach of the contract did not even render the expropriation unlawful. (175) 3.78 Whether the ICSID Tribunal in LECTO v Liberia considered the breach of the stabilization clause relevant for the lawfulness or unlawfulness of the expropriation is not entirely clear in view of the very short obiter dictum in this regard. (176) The tribunal seemed to be of the opinion that an expropriation was always lawful if the conditions of public interest, non-discrimination, and compensation were fulfilled, (177) independent from a breach of a stabilization clause. The tribunal, however, eventually decided the case on the basis of the breach of the concession contract and did not enter into further details on the lawfulness or otherwise of the expropriation, which the respondent had not raised either. 3.79 This short overview of arbitral practice shows that the violation of a stabilization clause does not render an expropriation automatically unlawful. This is understandable insofar as otherwise compliance with stabilization clauses or other contractual P 73 obligations entered into by the state would be an additional condition for the lawfulness of the expropriation under international law. But there is not enough precedent in this direction, as scholarly writing largely agrees. (178) 3.80 This does not mean that such a violation is irrelevant for the remedy available to the affected investor. The violation of a stabilization clause represents a breach of the contract between the state and the foreign investor. It follows that the investor can claim damages because of this breach of contract, (179) which is not limited to 'appropriate compensation' but has to provide 'full reparation' of all the damage suffered. This is important not only with regard to a total deprivation of property rights—as was the case in the Libyan petroleum cases—but also for any other damage caused by a change of the legal conditions in the host state. In order to maintain the balance of interests of both the host state and the investor as well as the economic equilibrium of the contract over a long period of time, more attention needs to be paid to the formulation of stabilization clauses. This includes the possibility of including revision mechanisms as well as the predetermination of the calculation of damages in case of breach. (180)

(5) The Difference between Lawful and Unlawful Expropriations 3.81 If and how the lawfulness of the expropriation effects the amount of compensation has been debated vigorously in academia and practice in recent years. (181) As a matter of principle, such an effect appears to be necessary because the financial consequences of lawful and unlawful behaviour would otherwise be the same. This would not be in the interest of legal justice and run counter the general preventive function of law. The PCIJ, in its judgment in Factory at Chorzów, has emphasized the need to avoid the equalization of unlawful and lawful expropriations:

P 74

Such a consequence would not only be unjust, but also and above all incompatible with the aim of Article 6—that is to say, the prohibition, in principle, of the liquidation of the property—since it would be tantamount to rendering lawful liquidation and unlawful dispossession indistinguishable in so far as their financial results are concerned. (182) 3.82 Judge Brower, at the Iran–US Claims Tribunal, also spoke in favour of the distinction in his Separate Opinion in Sedco v NIOC, because otherwise 'the injured party would receive nothing additional for the enhanced wrong done it and the offending State would experience no disincentive to repetition of unlawful conduct'. (183) This opinion has also been advanced by Bowett who pointed out that 'it offends against all common sense to suggest that it makes no difference whether the taking is lawful or unlawful and that the financial consequences will be the same in both cases'. (184) 3.83 International practice and scholarly writing has, however, not provided a clear answer as to what the difference should be and how it should be calculated. In the following section, various proposals made so far shall be discussed. (a) Lucrum Cessans?

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3.84 Some authors argue that the difference between lawful and unlawful expropriations should be reflected in the compensability of lost profits (lucrum cessans). According to this view, lost profits must only be compensated in case of unlawful expropriations, while in case of lawful expropriations the state must only pay what the owner has lost (damnum emergens). The most prominent representative of this view was Brownlie who explained: The practical distinctions between expropriation unlawful sub modo and expropriation unlawful per se would seem to be these: the former involves a duty to pay compensation only for direct losses, that is, the value of the property, the latter involves liability for consequential loss (lucrum cessans). (185) 3.85 This view has often been based on the judgment of the PCIJ in Factory at Chorzów which made the following statement as regards the amount of compensation in case of unlawful expropriations:

P 75

It follows that the compensation due to the German Government is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment. This limitation would only be admissible if the Polish Government had had the right to expropriate, and if its wrongful act consisted merely in not having paid to the two Companies the just price of what was expropriated. (186) 3.86 The Iran–US Claims Tribunal in Amoco International Finance v Iran analysed the PCIJ's judgment in detail in respect of the above-mentioned issue. (187) It paid particular attention to the two questions which the PCIJ put to the valuation experts who should determine the amount of compensation. (188) The first question concerned the value of the undertaking on the date of the expropriation, including all the assets as well as supply and delivery contracts, goodwill, and future prospects. This value should be increased by the financial results (profits or losses) until the date of the judgment. The second question concerned the value of the undertaking on the date of the judgment, if it had remained in the hands of the former owners and had been developed on lines similar to those applied in the case of other undertakings of the same kind.

3.87 The Iran–US Claims Tribunal concluded from these questions that there was a substantial difference between 'future prospects' and 'lost profits'. While the former were part of the going concern value, the latter represented lucrum cessans and were not part of the value of the company. (189) Only the going concern value of the company should be P 77 regarded as damnum emergens. The tribunal held: 'Since, for the reasons set forth in the preceding paragraph, future prospects does not mean lost profits, we safely can say, using the traditional vocabulary of international arbitration, that all these components pertain to damnum emergens'. (190) The tribunal concluded that in cases of lawful expropriations only damnum emergens should be compensated, while lucrum cessans was excluded. (191) This should not mean, however, that the 'profitability' of the enterprise, which had been financially successful in the past and represented a going concern, (192) should not been taken into account. (193) 3.88 Judge Brower, however, was not entirely convinced by these conclusions of the tribunal. In his Concurring Opinion he distanced himself from the tribunal's considerations and its interpretation of the PCIJ's judgment in Factory at Chorzów. (194) He agreed with the tribunal that the value of a company could not adequately by assessed without evaluating its future prospects. (195) He disagreed, however, with the differentiation between 'future prospects' and 'lost profits' which he considered artificial and against economic common sense and practice. (196) 3.89 Economic valuation experts criticize the lack of consideration of future prospects in the determination of the value of a company in judicial practice. Lieblich emphasizes: [The value] must be assessed with reference to expectations regarding the revenues that the property would have generated in the future. To award the former owner anything less would, in effect, be to confiscate a portion of his property without compensation. (197) 3.90 It follows that the potential of a company to generate future income—or 'profits'— must not be confused with the concept of lucrum cessans. (198) 3.91 The jurisprudence of the Iran–US Claims Tribunal in its interpretation of the Chorzów judgment in Amoco International Finance v Iran is not consistent. The tribunal in Sedco v NIOC, for example, held: Claimant must receive compensation for the full value of its expropriated interest in SEDIRAN, as claimed, whether viewed as an application of the Treaty of Amity or, independently, of customary international law, and regardless of whether or not the expropriation was otherwise lawful. (199) In the end, the tribunal also awarded compensation for forgone income from rental of the expropriated oil rigs for a certain period of time. This represented, without further explanation, compensation for damnum emergens caused by the expropriation. (200)

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3.92 The tribunal in Starrett Housing v Iran and Phillips Petroleum v Iran took also the expected income into consideration when it assessed the value of the expropriated company, while not referring to the unlawfulness of the expropriation. (201) While the tribunal in Shahine Shaine Ebrahimi v Iran rhetorically followed the damnum emergens– lucrum cessans distinction, it also took into account the profitability of the expropriated enterprise, a construction firm, including its goodwill. (202) 3.93 The practice of international investment tribunals generally does not support the idea that the distinction between lawful and unlawful expropriations should consist of the entitlement to lost profits. This becomes particularly clear from the analysis of cases of lawful expropriations where the tribunals readily awarded compensation for lost future profitability. 3.94 Already the older cases of lawful expropriation resulted in compensation that also reflected future prospects. The arbitral tribunal in LIAMCO v Libya awarded a lump sum of US$ 66 million for the expropriation of concession number 20 (concerning the so-called Raguba Field). Even though Arbitrator Mahmassani had certain doubts about the entitlement to lost profits, (203) he was of the opinion that damnum emergens would not P 79 represent sufficiently the amount of compensation due. 3.95 The award in Aminoil v Kuwait accepted the application of the DCF method by the claimant as a matter of principle (204) rejecting only some of its assumptions. (205) The ICSID Tribunal in Southern Pacific Properties found that compensation must also reflect the 'lost opportunity of making a commercial success of the project'. (206) More recent jurisprudence on lawful expropriation, such as Mobil Cerro Negro v Venezuela and Tidewater v Venezuela, did no longer pay lip service to aspects of damnum/lucrum, but directly applied the standard contained in the applicable BIT, namely the 'fair market value'. (207) 3.96 The distinction between damnum emergens and lucrum cessans for the question of the amount of expropriation rightfully does not seem to be relevant any more. The practice of investment tribunals increasingly reflects more appropriately modern economic valuation methods according to which an enterprise is not evaluated on the basis of its fixed assets, but in view of its capacity to generate future income for the owner. (208) In earlier times recourse to the damnum/lucrum perhaps provided some comfort to the arbitrators helping them to balance the interests of investors and states better and arriving at figures perceived as equitable. (209) However, looked at more closely, it is a concept that stems from the law of damages which simply does not fit to the concepts relating to compensation for expropriation. Therefore, the dichotomy of damnum emergens and lucrum cessans should be abandoned altogether in this context. (b) Punitive Damages? 3.97 Another alternative to distinguish lawful from unlawful expropriations is arguably the award of punitive damages. Judge Brower, for example, in his Separate Opinion in Sedco v NIOC, pointed out that there must be a financial consequence for the unlawful behaviour and an incentive for the states to observe their international obligations: [W]here restitution is impracticable or otherwise inadvisable, that State is required to furnish only the same full compensation as it would need to provide had it acted entirely lawfully. Thus, the injured party would receive nothing additional for the enhanced wrong done it and the offending State would experience no disincentive to repetition of unlawful conduct. (210) 3.98 Brower stated that, in the absence of a different standard of compensation or a different valuation method, it would be in line with both the preventive and punitive functions of law to consider the awarding of punitive damages in cases of unlawful expropriations. He noted that '[e]ven in cases of unlawful takings, particularly where restitution is not possible, a difference in remedies potentially still could remain insofar as punitive or exemplary damages might be sought'. (211) 3.99 As this is already possible for national courts—as far as their jurisdiction is established and no state immunity comes into play (212) —it must be all the more possible for international tribunals established by mutual consent of the two states involved. Jennings and Watts also argue in favour of accepting 'penal damages' in international law. (213) 3.100 Reisman and Sloane have considered the awarding of lucrum cessans as a punitive element after unlawful expropriations. While they criticize the distinction between damnum emergens and lucrum cessans in connection with the valuation of compensation, they suggest using it in order to serve as a 'moral compass' in expropriation cases: 'Yet the distinction between damnum emergens and lucrum cessans, for all its anachronism, serves a useful policy purpose insofar as it permits international tribunals to penalize egregious expropriations and, hopefully, to deter them in the future'. (214) 3.101 It appears, however, that international practice so far has not supported these suggestions. (215) In the few cases where the amount of compensation exceeded the material loss incurred, the additional amount awarded was not regarded as punishment of the perpetrators but as compensation for moral damage. (216) There is a certain

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tendency to accept this as a possible remedy also in investor–state arbitration. (217) However, the underlying premise is reparation for immaterial damage suffered and not P 80 punishment. (c) Compensation versus Reparation 3.102 The decisive distinction between lawful and unlawful expropriations is the fact that the former is a lawful exercise of a state's right to territorial sovereignty and the latter is a violation of international law, thus an internationally wrongful act, which entails state responsibility. The ILC has emphasized this distinction in its discussion about the amount of compensation for internationally wrongful acts: [A] number of speakers stressed that … [n]ationalization was a lawful act, whereas article [36] dealt with internationally wrongful acts. The Special Rapporteur agreed and reiterated that it was not the Commission's function to develop the substantive distinction between lawful and unlawful takings or to specify the content of any primary obligation. (218) 3.103 This clarifies that the obligation to pay compensation is a primary obligation under international law. This obligation must be distinguished from the secondary international law obligations codified in the ILC Articles on State Responsibility. The essential difference between lawful and unlawful expropriations is, therefore, the difference between a primary and a secondary obligation under international law. The primary obligation is the payment of compensation, the secondary obligation is to provide full reparation for the damage incurred by a violation of international law. The principle of 'full reparation' is strongly connected to the issue of damages after unlawful acts or breaches of contract. It therefore seems appropriate to use the term 'compensation' for lawful expropriations, and 'reparation' or 'damages' for unlawful expropriations. (219) 3.104 Unfortunately, the distinction between primary and secondary obligations in the context of expropriations is not always recognized. This is so despite the fact that the arbitral tribunal in Amoco International Finance v Iran explained very clearly: According to the Court in Chorzów Factory, an obligation of reparation of all the damages sustained by the owner of expropriated property arises from an unlawful expropriation. The rules of international law relating to international responsibility of States apply in such a case. They provide for restitutio in integrum: restitution in kind or, if possible, its monetary equivalent. If need be, 'damages for loss sustained which would not be covered by restitution'. See Chorzów Factory, supra, at 47. On the other hand, a lawful expropriation must give rise to 'the payment of fair compensation', id. at 46 or of 'the just price of what was expropriated'. Id. at 47. Such an obligation is imposed by a specific rule of the international law of expropriation. (220) 3.105 The considerations of the PCIJ in Factory at Chorzów including the questions put to the experts, (221) have thus rightfully been interpreted in such a way that the value of the P 81 expropriated property at the time of the expropriation has to be compensated in case of lawful expropriations. In case of unlawful expropriations, by contrast, restitutio in integrum would be the first remedy. (222) If restitution is not possible or not claimed, an amount of money has to be paid which puts the former owner in the same financial position as physical restitution would do. Furthermore, additional damage which physical restitution would not remedy must be compensated in order to make him or her whole. 3.106 Also in this vein, the Iran–US Claims Tribunal held in Phillips Petroleum v Iran: The tribunal believes that the lawful/unlawful taking distinction, which in customary international law flows largely from the Case Concerning the Factory at Chorzów (Claim for Indemnity) (Merits), P.C.I.J. Judgement No. 13, Ser. A., No. 17 (28 September 1928), is relevant only to two possible issues: Whether restitution of the property can be awarded and whether compensation can be awarded for any increase in the value of the property between the date of taking and the date of the judicial or arbitral decision awarding compensation. (223) 3.107 One of the most important differences is, therefore, that an increase in value between the date of the expropriation and the date of the judgment or award should not be to the benefit of the expropriating state in cases of unlawful expropriations. Of course, the economic conditions may change in the meantime and it might not be clear which value is the higher one. This was the case in Factory at Chorzów, which was not explicitly mentioned and is often overlooked. (224) 3.108 It follows that it is necessary to compare the two values of the expropriated property and award the higher one in cases of unlawful expropriations. In the case of lawful expropriations the value at the date of the expropriation is the lower and the upper limit of the amount of compensation. It might only by increased by an award of interest in order to compensate for the delay in payment which should have been 'prompt'. (225) The conclusions of the considerations of the PCIJ in Factory at Chorzów are

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consequently: (226) 1. 2. P 84

Restitution in kind is only possible in cases of unlawful expropriations. In cases of lawful expropriations, only financial compensation is possible but not restitutio in integrum. An increase in value between the date of expropriation and the date of the judgment or award has to be taken into account only in cases of unlawful expropriations.

3.109 These principles are in accordance with the jurisprudence of the ECtHR which, since its judgment in Papamichalopoulos v Greece, has included an increase in value of unlawfully expropriated property in the amount of 'just satisfaction': The unlawfulness of such a dispossession inevitably affects the criteria to be used for determining the reparation owed by the respondent State, since the pecuniary consequences of a lawful expropriation cannot be assimilated to those of an unlawful dispossession. In this connection, international case-law, of courts or arbitration tribunals, affords the Court a precious source of inspiration; although that case-law concerns more particularly the expropriation of industrial and commercial undertakings, the principles identified in that field are valid for situations such as the one in the instant case. (227) 3.110 The practice of international investment tribunals has increasingly confirmed. Several tribunals have drawn the distinction between 'compensation' for lawful expropriation and 'damages' for unlawful expropriations. The ICSID Tribunal in ADC v Hungary was a pioneer in this direction: The BIT only stipulates the standard of compensation that is payable in the case of a lawful expropriation, and these cannot be used to determine the issue of damages payable in the case of an unlawful expropriation since this would conflate compensation for a lawful expropriation with damages for an unlawful expropriation. (228) 3.111 The tribunal pointed out that, in cases of unlawful expropriations, the standard of compensation contained in the applicable investment protection treaty was not decisive but, instead, customary international law should be applied: Since the BIT does not contain any lex specialis rules that govern the issue of the standard for assessing damages in the case of an unlawful expropriation, the Tribunal is required to apply the default standard contained in customary international law in the present case. (229) 3.112 In the following years, several tribunals followed this path. The ICSID Tribunal in Siemens v Argentina also emphasized the difference between compensation and damages in expropriation cases and clarified its importance: The key difference between compensation under the Draft Articles and the Factory at Chorzów case formula, and Article 4(2) of the Treaty is that under the former, compensation must take into account 'all financially assessable damage' or 'wipe out all the consequences of the illegal act' as opposed to compensation 'equivalent to the value of the expropriated investment' under the Treaty. (230) 3.113 A few months later, the ICSID award in Vivendi v Argentina took up this argument and emphasized: 'The Treaty thus mandates that compensation for lawful expropriation be based on the actual value of the investment. However, it does not purport to establish a lex specialis governing the standard of compensation for wrongful expropriations.' (231) 3.114 The relevance of the difference between lawful and unlawful expropriations for the determination of remedies and valuation has been confirmed in several subsequent investment arbitrations, such as Saipem v Bangladesh, (232) Siag and Vecchi v Egypt, (233) Kardassopoulos v Georgia, (234) Shum v Peru, (235) Quasar de Valores v Russia, (236) Yukos v Russia, (237) Conoco v Venezuela, (238) Mobil Cerro Negro v Venezuela, (239) Tidewater v Venezuela, (240) and Quiborax v Bolivia. (241) 3.115 The tribunals in Funnekotter v Zimbabwe (242) and Unglaube v Costa Rica (243) discussed the distinction but found that it would not be a practical issue in the case at hand. Only rarely has a tribunal rejected the relevance of the difference, such as in Rumeli v Kazahstan. (244) 3.116 It follows that the need for a distinction seems increasingly being recognized in arbitral practice. This is also reflected in academic writing. Ripinsky and Williams refer to Sornarajah and highlight that he has rightly pointed out that compensation of lawful and unlawful expropriation cannot be the same, 'for every legal system must necessarily make a distinction between damages arising from lawful and unlawful acts.' (245)

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Other authors, too, have supported the importance of the distinction. (246) Still others remain sceptical and reject the idea of the 'punitive element' or the 'windfall' that investors might receive. (247) 3.117 The distinction between lawful and unlawful expropriations might not be made by tribunals, when claimants do not raise this issue in their submssions. If the claimants themselves refer to 'compensation' and demand an objective valuation, the tribunals might not find it necessary to question or change this. In particular, claimants before the Iran–US Claims Tribunal frequently asked for compensation in the amount of the fair market value, even if they considered the expropriation unlawful. (248) 3.118 Furthermore, a state is less affected or offended, if it is ordered only to pay as much as it would have had to pay in case of an expropriation anyway. It then does not suffer being criticized and condemned for unlawful behaviour. While this can be helpful for the acceptance and implementation of the award, it should not blur the difference between the lawful and unlawful behaviour of states.

B. Reparation and Damages 3.119 In the context of international investment, the unlawfulness of the host state's behaviour can consist in the violation of its obligations under public international law or under a private law contract with the investor. In the first case, the state's international responsibility becomes engaged whilst in the second case, contract law is concerned. The following section analyses the consequences of these two different types of unlawful P 85 behaviour by a state as regards the calculation of damages. Cases where breaches of contract represent breaches of international law at the same time will be discussed at the end of this section.

(1) Violations of International Law 3.120 State responsibility for injuries to aliens has always been a rather contentious topic. The existence and extent of an international minimum standard for the treatment of aliens is one of the most controversial issues in this respect. (249) 3.121 The ILC tried for a long time without success (250) to balance the different positions, for example, by an improvement of the international standard of human rights protection. (251) It eventually renounced codifying 'primary' or 'substantive' norms of state responsibility, including those relating to injuries to foreign private persons. Eventually, the final text of the ILC which was presented to the UN General Assembly in December 2001 (252) only contained the legal consequences of international law violations, and thus the 'secondary' obligations of international law. (253) 3.122 The most important consequence of a violation of international law is the obligation to make reparation as codified in Article 31: 1. 2.

The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.

3.123 Article 34 then specifies that full reparation for the injury caused by the internationally wrongful act 'shall take the form of restitution, compensation and P 86 satisfaction, either singly or in combination, in accordance with the provisions of this Chapter'. One of the forms of reparation is thus the duty to pay 'compensation'. (254) The ILC has, after considerable debate, (255) refrained from determining more specific rules as regards the calculation of the amount to be paid. Amongst a number of other reasons, Special Rapporteur Crawford explained that this would almost inevitably reopen the discussion about primary obligations of international law, including the issue of compensation upon expropriation. (256) The ILC eventually agreed on a rather general formulation of Article 36: 1. 2.

The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution. The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.

3.124 This general formulation leaves room for interpretation and flexibility. Some details and examples are provided in the comprehensive commentary to the ILC Articles. (257) In essence, Article 36 determines that the damage must be 'financially assessable'. (258) This, however, represents only a very rough guideline, in particular because this provision does not only include material (259) but also immaterial damage, (260) which is certainly not financially assessable without difficulties. (261) 3.125 A definition of what has to be regarded as 'damage' hardly seems possible. (262) According to Grotius, the concept of damage stems from the Latin verb 'demere' (to take): 'Damnum forte a demendo dictum, est … cum quis minus habet suo, sive illud suum ipsi P 87 competit ex mera natura, sive accedente facto humano, puta dominio, aut pacto, sive ex lege'. It thus denotes 'what a person has less than would appertain to him from a previous

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human institute, such as property, contract, or the law'. (263) Grotius' definition contains natural damage ('mera natura'), thus without any connection to a legal order, and, in addition, legally protected interests, provided by a property right, a contract, or the law. It includes, therefore, material and immaterial injury as well as contractual and legal positions. 3.126 According to the PCIJ, the damage suffered by the individual is not 'identical in kind with that which will be suffered by a State; it can only afford a convenient scale for the calculation of the reparation due to the State'. (264) It held: The rules of law governing the reparation are the rules of international law in force between the two States concerned, and not the law governing relations between the State which has committed a wrongful act and the individual who has suffered damage. (265) 3.127 However, the damage caused to the individual by the wrongful act of the state represents an important indicator for the amount to be paid as reparation: It is a principle of international law that the reparation of a wrong may consist in an indemnity corresponding to the damage which the nationals of the injured State have suffered as a result of the act which is contrary to international law. (266) 3.128 The importance of the damage incurred to the individual had been spelled out even earlier in the Alabama arbitration of 1872, when the tribunal had held that, for the purpose of calculating damages, there should be no distinction between the damage incurred to a private individual and damage incurred to the state. (267) These classical decisions thus paved the way for modern international investment arbitration, where the damage suffered by the foreign investor is the decisive criterion for the calculation of the amount due under the title of reparation. 3.129 As already discussed above, the damage actually caused can best be evaluated by the differential method. (268) One must ask what the financial position of the injured person would in all probability be like if the unlawful act or omission by the state had not been committed. The difference between the hypothetical and the actual financial situation is equal to the damage caused which, according to the principle of full P 88 reparation, has to be compensated in its entirety. 3.130 The differential method warrants valuation from the subjective and concrete position of the injured party. (269) The following will analyse to what extent international practice has been consistent and in accordance with the above-mentioned principles. (a) Subjective–concrete Valuation 3.131 The concrete valuation approach is reflected in some early international cases. The tribunal in Walter Fletcher Smith identified the expropriation as unlawful and considered the possibility of restitution. (270) It then decided to award financial compensation which should also include the specific benefit of the property to the former owner, namely 'compensation for the value of the land, of the buildings and personal effects contained therein, also the deprivation of the use of the property and in consideration of his expenses in defending his rights …'. (271) 3.132 The right of the claimant to a free view to the sea was of particular relevance in this context. (272) The acceptance of costs and expenses for the enforcement of his right as an item of damage (273) is in conformity with the subjective and concrete valuation approach. 3.133 The arbitral commission in De Sabla v Panama also referred to the subjective situation of the former owner. (274) The Government of Panama accorded rights of use and passage to third persons over the private property of the American claimant without her consent. The land was originally one large contiguous area, and the partial expropriation had cut it into smaller parts. The commission did not only assess the value of the expropriated parcel of the land but also the decrease in value of the remaining land. (275) 3.134 A number of other early arbitrations used the differential method to measure the damage incurred by an unlawful act of a state. This was particularly true in a number of cases regarding wrongful seizure of ships. (276) The tribunals measured the damage P 89 incurred by the concrete loss of profits from freight. 3.135 The PCIJ and the ICJ, in the few cases in which they awarded damages for injuries to aliens, applied the subjective method. In Wimbledon, where Germany had unlawfully denied the free passage of ships through the Kiel Canal, the PCIJ measured the damage incurred by the additional costs for the deviation which took eleven days and also lost earnings from freight income during those days. (277) This represented the concrete and actual damage incurred by the shipowners caused by the unlawful behaviour of the respondent state. 3.136 Similarly, the ICJ in its first and for a long time only judgment of an amount of damages, the Corfu Channel Case, measured the damage incurred by the differential

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method. (278) The damage caused to the British destroyers was to be measured by the cost of reparation or replacement, whereby in case of the latter, the remaining value of the ship was to be deducted. (279) The second judgment of the ICJ awarding damages, the Diallo case between Guinea and the Democratic Republic of Congo, referred to the judgment of the PCIJ in Chorzów (280) and awarded US$ 10,000 for property loss and reparation for non-material damage in the amount of US$ 85,000, (281) another example of subjective and concrete damage. 3.137 The International Tribunal of the Law of the Sea in its judgment of the amount of damages after unlawful seizure and detention of a ship, in the M/V 'SAIGA' case, (282) also applied the differential method. It calculated the damage incurred by the costs necessary to repair the ship, lost profits from selling the freight and from chartering, as well as material and immaterial damage suffered by the crew. (283) 3.138 International investment arbitration has taken up the concrete valuation approach in cases a variety of regarding unlawful acts of the host state. Early ICSID cases, such as P 90 AGIP v Congo (284) and Benvenuti & Bonfant v Congo, (285) used a concrete valuation approach. In these cases, the unlawful acts of the states consisted in a combination of international law violations and contract breaches. (286) The evaluation of the concrete financial loss incurred to the private investor was, therefore, the most appropriate way of remedying the damage suffered. In AGIP v Congo, the tribunal awarded the value of the company's shares plus the amount of debts under the contract plus a symbolic amount of 3 FF for 'lost profits'. (287) In Benvenuti & Bonfant v Congo, the amount awarded reflected the sums invested plus a lump sum for lost business opportunities. (288) 3.139 In Amco Asia v Indonesia, the first tribunal was inclined to award contract damages, (289) while the second tribunal, after the annulment of the first award, applied international law criteria because it qualified the acts and omissions of the Indonesian Government as denial of justice. (290) Both tribunals based their calculations on the principle of full reparation. The second tribunal explicitly rejected the application of the 'fair market value' and made it clear that 'the measure of compensation ought to be such as to approximate as closely as possible in monetary terms the principle of restitutio in integrum …'. (291) 3.140 In Antoine Goetz v Burundi, the ICSID Tribunal decided not only that the privileged tax situation of the investor must be re-established in the status quo ante— thus awarding restitution in integrum—but also that the financial damage additionally caused by the wrongful act of the host state must be included in the calculation. (292) 3.141 In a number of cases, the award of the amount of investments actually undertaken

P 91 was regarded as the best way of achieving full reparation based on the notion of

restitutio in integrum. The NAFTA Tribunal in Metalclad v Mexico explained this in the following words: The award of Metalclad of the cost of its investment in the landfill is consistent with the principles set forth in Chorzów Factory (Claim for Indemnity) (Merits), Germany v Poland, P.C.I.J. Series A., No. 17 (1928) at p. 47, namely, that where the state has acted contrary to its obligations, any award to the claimant should, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would in all probability have existed if that act had not been committed (the status quo ante). (293) 3.142 Similarly, the tribunal in Biloune v Ghana (294) found that an award representing the investments undertaken and the costs incurred would restore the claimant in the position he would have enjoyed but for the expropriation. (295) According to the tribunal the 'value' of the expropriated project (296) would best be represented by the expenses actually undertaken by the investor. It thus applied a subjective and concrete valuation approach. 3.143 In S D Myers v Canada, the arbitral tribunal emphasized that the calculation of compensation on the basis of NAFTA Article 1110 should be different from the calculation of damages after a violation of NAFTA provisions and explained: Expropriations that take place in accordance with the framework of Article 1110—that is, expropriations that are conducted for a public purpose, on a non-discriminatory basis and in accordance with due process of law—are 'lawful' under Chapter 11 provided that compensation is paid in accordance with the … fair market value of the asset … formula. Under other provisions of Chapter 11, the liability of the host Party arises out of the fact that the government has done something that is contrary to the NAFTA and is 'unlawful' as between the disputing parties. (297) 3.144 According to the tribunal, assessing the 'fair market value' in this case would not appropriately reflect the damage actually incurred: The standard of compensation that an arbitral tribunal should apply may in some cases be influenced by the distinction between compensating for a lawful, as opposed to an unlawful, act. Fixing the fair market value of an asset that is diminished in value may not fairly address the harm done to the

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investor. (298) 3.145 It pointed out that 'the application of the fair market value standard is not a P 92 logical, appropriate or practicable measure of the compensation to be awarded'. (299)

While rejecting punitive damages, (300) it referred to the principle of full reparation as formulated by the PCIJ in Factory at Chorzów and reflected in the ILC Articles on State Responsibility. 3.146 The NAFTA Tribunal in Pope & Talbot v Canada also adopted a subjective and concrete valuation approach. In this case, this resulted in a rather limited amount of damages which only represented costs and expenses paid by the claimant for lawyers and experts in the defence of his rights. (301) 3.147 The tribunal in Feldman v Mexico is another example. It pointed out the fact that the text of the NAFTA only contained the standard of compensation for lawful expropriations and not for treaty violations. In this case, the national treatment obligation contained in Article 1102 NAFTA was violated by discriminating against the claimant in his tax status. The tribunal referred to S D Myers v Canada and Pope & Talbot v Canada and highlighted the 'loss or damage actually incurred': NAFTA provides no further guidance as to the proper measure of damages or compensation for situations that do not fall under Art. 1110 (expropriation); … It follows that, in case of discrimination that constitutes a breach of Article 1102, what is owed by the responding Party is the amount of loss or damage that is adequately connected to the breach…. Thus, if loss or damage is the requirement for the submission of a claim, it arguably follows that the Tribunal may direct compensation in the amount of the loss or damage actually incurred. (302)

3.148 In American Manufacturing and Trading v Zaire, (303) the respondent state's responsibility resulted from a violation of the applicable BIT, namely the obligation of full protection and security (304) and of the obligation to compensate for the damage suffered due to revolution, state of national emergency, revolt, insurrection, riot, or other acts of violence. (305) According to the tribunal, this could not be assimilated to expropriation (306) which meant that the expropriation standard was not directly P 93 applicable. Instead, the standard of restitutio in integrum was determinative. Even though the tribunal did 'not see any substantial difference in practice', (307) it found that the concrete conditions of Zaire and also the situation of the investor should be taken into account: Is it necessary to add on top of that also the current interest to the total sum of compensation from the date of each destruction occurring in the territory of Zaire? The answer of the Tribunal will have to take into account the existing conditions of the country and not by making abstraction based on a criterion for the assessment which does not correspond at all to the reality, nor to the current happenings in Zaire, nor indeed to the commercial and industrial activities of the Claimant. (308) Eventually, the tribunal ordered the expert to calculate 'damages and losses suffered by Société SINZA' (309) which corresponds to a subjective and concrete valuation approach. 3.149 The ICSID Tribunal in MTD v Chile, deciding on the consequences of a violation of the fair and equitable treatment standard, reflected about the applicable standard in the following way: [T]he Tribunal notes that the BIT provides for the standard of compensation applicable to expropriation, 'prompt, adequate and effective' … It does not provide what this standard should be in the case of compensation for breaches of the BIT on other grounds. (310) 3.150 The tribunal decided to award damages on the basis of the investments actually undertaken by the investor. (311) 3.151 In LG&E v Argentina, another ICSID arbitration, the tribunal explained that '[f]or the Tribunal, compensation in this case cannot be determined by the impact on the asset value; it does not reflect the actual damage incurred by Claimants. The measure of compensation must be different.' (312) The tribunal, therefore, aimed at identifying the 'actual loss' suffered by the investor 'as a result' of Argentina's conduct. (313) 3.152 The arbitral tribunal in Occidental v Ecuador identified a violation of fair and equitable treatment with regard to a denial of a tax refund and decided to calculate the amount to be awarded on the basis of the concrete damage. (314) The respondent state was ordered to pay exactly the sums of tax refund submitted by the claimant. (315) 3.153 The Iran–US Claims Tribunal, when confronted with the calculation of damages after measures affecting property rights' (316) calculated 'compensation for the loss of enjoyment of the property in question'. (317)

P 94 infringements of property rights other than expropriations, such as 'other

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3.154 Subjective considerations included, for example, the owner's concrete plans for the use of a piece of land. (318) In Seismograph Service v Iran, the tribunal explicitly rejected an 'abstract' valuation approach and held: The findings in this Case entitle the Claimant to compensation in damages for the Respondents' interference with the exercise of its contractual rights. The actual damage suffered by which the Claimant, and, consequently, the compensation for which Iran is liable, must not be measured in the abstract, but is limited to the extent that CFPS effectively intended to export its Property. (319) 3.155 It is remarkable that also the ECtHR tends to apply the principle of full reparation and the differential method, even though, according to Article 41 of the ECHR, only 'just satisfaction' is foreseen as a financial remedy to be awarded by the Court. For a long time, hardly any financial redress had been awarded for material damage after violations of Article 1 of the First Protocol. (320) This practice has however changed with Papamichalopoulos et al v Greece (321) where the Court explicitly referred to the principle of reparation as formulated by the PCIJ in Factory at Chorzów. (322) The valuation of a piece of land on the coast should follow this principle, taking into account that the value of this land had increased considerably since the date of the expropriation. As the hypothetical financial situation of the former owner at the date of the judgment was decisive, the increase in value had to be reflected in the amount of compensation. (323) 3.156 As regards the calculation of 'just satisfaction' in cases of indirect expropriations by national court judgments (324) or unlawful acts of administrative authorities, (325) the Court also relied on the principle of full reparation and applied a concrete valuation P 96 approach. These even included the correction of the amount of compensation actually paid to the expropriated owner by the respondent state, if it had not appropriately reflected increases in value (326) or inflation. (327) 3.157 It can be concluded that different international courts and tribunals have applied the principle of full reparation as formulated by the PCIJ in Factory at Chorzów in cases of state responsibility for injury to aliens. They calculated the amount of damages by way of the differential method, namely as the difference between the actual and the hypothetical financial situation of the injured person. This implies a subjective and concrete valuation approach because the valuation is based on the comparison of the actual financial situation of the victim with and without the unlawful act. (b) Objective–abstract Valuation 3.158 However, the above-mentioned approach is not consistently applied in international arbitral practice. Investment tribunals have also used objective valuation criteria, such as the 'fair market value', where the principle of full reparation. This concerned incidents of state responsibility as well as breaches of contract. In some cases, this was explained by the argumentum e maiore ad minus or by analogy, in other cases the tribunals relied on the submissions of the parties. 3.159 (i) Argumentum e maiore ad minus and Analogy The argumentum e maiore ad minus and analogy are legal techniques to fill gaps if a question is not regulated by law. Despite the lack of absence of rules as regards the question of calculation of damages in cases of state responsibility or of breaches of contract, these techniques have nevertheless been relatively widely used. 3.160 The alleged lack of rules led some tribunals to transfer the standard of expropriation to violations of international law or even to contract damages. Some tribunals explicitly referred to the standard of lawful expropriations when calculating the amount of damages after breaches of international law. (328) Others did not decide whether an expropriation was lawful or unlawful and simply applied the standard for lawful expropriations. This is particularly true for the Iran–US Claims Tribunal. (329) One prominent example is Sedco v NIOC where the tribunal held that 'full compensation should be awarded for the property taken. This is true whether or not the expropriation itself was otherwise lawful.' (330) 3.161 An explanation can be that the Iran–US Claims Tribunal over the years was confronted with heated debates with regard to the standard of compensation. (331) Tribunals consistently upheld that 'full' compensation and not 'partial' compensation was the standard under international law and under the Treaty of Amity between Iran and the United States. (332) As unlawful expropriations could not entail lower compensation than lawful expropriations, (333) the argumentum e maiore ad minus allowed for the application of the 'full' standard for all kinds of expropriation. (334) The tribunal in Sedco v NIOC had to calculate damages for a number of oil rigs seized and held: In determining the full value of tangible assets such as drilling rigs, our task is substantially to determine the fair market value of the properties, i.e. what a willing buyer and a willing seller would reasonably have agreed on as a fair price at the time of the taking in the absence of coercion on either party. (335) 3.162 It referred, amongst others, to the awards in INA v Iran and American International Group v Iran which, however, were decisions about lawful expropriations. (336) The

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tribunal highlighted the unlawfulness of the expropriations to explain and support the validity of the 'full' compensation standard: If, however, NIOC is considered to have acted in a purely private capacity, its conversion of SISA's rigs would be unsupported by the rights of sovereignty which may justify expropriation … and thus a fortiori would give rise to a duty to pay full value for wrongfully acquired property. Accordingly, we must award Claimant the full value of the appropriated assets. (337) 3.163 The argumentum ad minus a majore in front of the Iran–US Claims Tribunal was used to underline that reparation for unlawful acts cannot be lower than compensation for P 98 lawful expropriations. (338) Many tribunals thus referred to the 'fair market value', (339) or the 'market value'. (340) 3.164 The Iran–US Claims Tribunal applied the standard of expropriation also in some cases regarding 'other measures affecting property rights'. (341) Yet, the claimants often themselves claimed the standard of fair market value, and not restitution or the full reparation standard. (342) 3.165 The equalization of unlawful and lawful expropriations can also be observed in the practice of other arbitral tribunals. The tribunal in Biloune v Ghana, for example, explained that the failure to issue a building permit and the partial demolition of the building constituted an indirect ('constructive') expropriation. (343) The tribunal decided in its award on jurisdiction and liability that the valuation of damages should follow the customary law standard of expropriation. (344) The subsequent award on damages and costs, however, represented the damage actually incurred which, according to the tribunal, consisted in the investment undertaken and subsequent expenses. (345) 3.166 The ICSID Tribunal in Wena Hotels v Egypt, after having concluded that the respondent state had violated the BIT obligations to fair and equitable treatment and full protection and security, decided to determine the amount of damages on the basis of the standard of compensation upon expropriation. As the tribunal did not provide an explanation for this choice, one can only assume that it decided by way of analogy: Article 5 of the IIPA between Egypt and the United Kingdom provides that in the event of an expropriation, the private investor shall be entitled to 'prompt, adequate, and effective compensation' and 'such compensation shall amount to the market value of the investment immediately before the expropriation.' The Tribunal shall apply this standard to the determination of damages. (346) 3.167 The ICSID Tribunal in Técnicas Medioambientales v Mexico also relied on the standard of compensation by way of analogy after an unlawful withdrawal of a landfill concession, representing an indirect expropriation and a violation of the fair and equitable treatment standard of the BIT. (347) Similarly, the ICSID Tribunal in Middle East Cement v Egypt referred to the fair market value as the standard on compensation, (348) even though the import prohibition on cement was a violation of the BIT provision on expropriation and of the respective contract licence. 3.168 In the NAFTA arbitration Metalclad v Mexico, the tribunal was of the opinion that the denial of the construction permit for the landfill represented an indirect expropriation and a violation of fair and equitable treatment. (349) The tribunal concluded that there was no difference between compensation for expropriation and damages for the violation of the provisions of NAFTA in this case, as the claimant had lost its investment completely. (350) The tribunal considered that, in both cases, the fair market value of the investment must be compensated. It then found that the fair market value would best be arrived at by reference to Metalclad's actual investment made in the project. (351) However, this represented the investor's actual 'wasted costs' and not necessarily what a hypothetical willing buyer would have paid for the project. 3.169 The application of the BIT standard on expropriation compensation in cases unrelated to expropriation is also fairly frequent. The ICSID Tribunal in CMS v Argentina, P 99 for example, applied it after a violation of the obligation to fair and equitable treatment and the treaty's 'umbrella clause'. (352) It was persuaded that 'the cumulative nature of the breaches discussed here is best dealt with by resorting to the standard of fair market value'. (353) 3.170 Other tribunals, such as the ICSID Tribunals in Enron v Argentina, (354) Sempra v Argentina, (355) Azurix v Argentina, (356) El Paso v Argentina, (357) EDF v Argentina, (358) and Gold Reserve v Venezuela, (359) followed this approach and applied the fair market value standard after violations of fair and equitable treatment. 3.171 It can be concluded that there is some line of jurisprudence that refers to the objective valuation approach in cases of state responsibility by way of analogy. However, tribunals do not apply this standard strictly but also combine subjective and concrete elements in the calculation. This is the case, for example, when the sums actually invested by the claimant are taken as a reference, because these sums are not necessarily representative for the amount a hypothetical willing buyer would pay for the investment in question. (360)

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3.172 (ii) Submissions of the Parties The choice of an objective and abstract valuation approach in the practice of investment tribunals can sometimes be explained by the contentions of the parties. Quite frequently, claimants rely on the fair market value in their submissions in respect of the valuation issue. Arbitral tribunals then take these submissions as a basis for the calculation and as the upper limit of the amount to be awarded. (361) 3.173 Generally, the agreement of the parties on the issue of valuation has a strong

P 101 influence on the decisions of international investment tribunals. When the parties are

in agreement about the application of an objective standard, such as the fair market value, tribunals are generally inclined to accept it, even when concrete valuation and the full reparation standard were pertinent. (362)

(2) Breaches of Contract 3.174 Trying to find a single method of calculating damages after a breach of contract is certainly a 'chimera'. (363) The criteria for the calculation of contract damages depend on the specificities of the contract, the factual circumstances, as well as the law applicable. Frequently, contracts between states and foreign investors contain choice of law clauses. Otherwise, conflict of law rules of international private law will usually point to the law of the host state. (364) 3.175 Contracts could also provide for liquidated damages in case of early termination or breach of contract. Sometimes, this is connected to the use of a certain method of calculation, which is particularly advisable in long-term contracts. (365) 3.176 However, the choice of law clauses are often not entirely clear and may refer not only to one particular national law, but also to general principles of law and to international law. The implications of such references are not always evident. Furthermore, it is important to note that 'general principles' of contract law hardly exist. (366) In view of the differences between the various traditions of national contract law, including those between civil law and common law, they are difficult to identify. Initiatives of international contract law codification remain limited to certain categories of contracts, such as the UN Convention on Contracts for the International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts, (367) or to certain regions, such as the Principles of European Contract Law (PECL). (368) 3.177 Contracts relating to international investment projects are quite different from sales contracts in many respects, in addition to the fact that one of the contracting parties is a state or a state entity. The differences are connected to long duration of the contract, the risk the investor undertakes, the volume of the financial engagement at the beginning, the structures of ownership, and the frequent involvement of natural resources. The complexity is exacerbated when the contracts involve the operation of public services, such as the construction and operation of infrastructure, water and energy supply, or waste disposal. (369) Sir Robert Jennings highlighted these differences more than forty years ago in the following words: It is absurd therefore, to deal under the same heading as it were with an agreement between a state and an alien for the supply and purchase of a certain quantity of buttons and an agreement for the economic development of a great territory for a period of twenty years. (370) 3.178 The codification of treaty law in the Vienna Convention on the Law of Treaties cannot serve as a useful reference, either, because international treaties concluded between states are different from investment contracts in many respects, too. Furthermore, the Convention does not contain rules on the consequences for the breaches of treaties, including the issue of damages, as it refers, in its Article 73, to the law on state responsibility. (371) 3.179 It follows that the calculation of damages after a breach of a long-term investment contract involves unfamiliar issues. Despite the wide range of case-specific differences, certain principles and guidelines with regard to the calculation of damages after a breach of contract have crystallized in investment arbitration practice. (a) Damnum Emergens and Lucrum Cessans 3.180 Calculating damages after a breach of contract on the basis of damnum emergens and lucrum cessans has its origins in Roman law and has been adopted in many national legal systems where it is particularly important for synallagmatic legal relationships. (372) If one partner breaches his or her obligation, the other suffers damage in two forms: on the one hand, he or she has incurred expenses in order to fulfil his or her part of the obligations, such as buying material for producing goods. These expenses are a financial P 103 loss, if the other party does not pay the agreed price, and represent the damage actually incurred or damnum emergens. Additionally, the financial advantages expected from the deal are also forgone, which represent the profits lost or lucrum cessans. 3.181 The distinction between damnum emergens and lucrum cessans is particularly relevant in short-term sales and delivery contracts. If a salesman buys goods for the amount of $70, incurs expenses in the amount of $10, and sells them for $100, the

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difference between the two is clear: the lost profits amount to $20. But even in this simple case it is not clear how high the amount of damages should be in case of a breach of contract. Should the other party pay $20, $70, $80, or $100? Is the salesman obliged to deliver the goods? 3.182 In some national contract laws the amount of damages depends on the manner in which the contract has been breached and the reasons for the non-fulfilment. If one party has acted only slightly negligently, the other would only get the damnum emergens. (373) In the majority of countries, however, the principle of pacta sunt servanda is overriding and the reasons for non-fulfilment of the contract are less relevant. (374) It follows that, in case of breach of contract by one party, the other party gets fully compensated, and thus receives damnum emergens and lucrum cessans. 3.183 International codifications of contract law, such as the CISG, the UNIDROIT Principles, and the PECL, demand compensation or damages representing the full amount of what was agreed in the contract, regardless of the reasons for the breach of the contract and regardless of what was damnum emergens and lucrum cessans. (375) The only accepted exception for non-fulfilment is force majeure. (376) 3.184 In international practice, the calculation of lost profits often turns out to be rather complex, even in cases of short-term contracts. The Iran–US Claims Tribunal thus frequently awarded only damages on deliveries or services rendered in the past and rejected future lost profits. (377) 3.185 As regards mid- and long-term contracts, the situation gets even more difficult. Nevertheless, some older cases reflect the concept of damnum emergens and lucrum cessans and the calculation of future lost profits. (378) In Robert H. May, for example, the tribunal had to deal with a breach of a railway concession. (379) The tribunal found that, according to contract law, the damage incurred and the profit lost must be compensated: The law of Guatemala … establishes, like those of all civilized nations of the earth, that contracts produce reciprocal rights and obligations between the contracting parties and have the force of law in regard to those parties; that whoever concludes a contract is bound not only to fulfill it, but also to recoup or compensate (the other party) for damages and prejudice which result directly or indirectly from the nonfulfillment or infringement by default or fraud of the party concerned, and that such compensation includes both the damage suffered and the profits lost. (380) In this case, the remaining period of the contract was, however, only six months. The tribunal took the average profit of the past six months and used it for calculating the profits lost for the residual six months. (381) The situation is much more difficult, when the remaining contract duration is longer. 3.186 One of the main reasons for the difficulty in calculating damnum emergens and lucrum cessans in mid- and long-term contracts is that the investor makes investments at the beginning of the relationship the financial benefits of which are only received in the future. These investments are usually 'sunk', as they are highly specific to the project. They cannot be taken back again and sold to another buyer in a different location. (382) P 104 The income generated in the long-term contractual period cannot in principle be regarded as 'profits', as long as it does not exceed the amount of money initially invested. (383) 3.187 In addition, the time value of money has to be taken into account. (384) This means that the value of future income decreases with its distance in the future. Even without inflation, present money is worth more than money in the future because the former can be immediately used or invested. Furthermore, inflation and exchange rates have substantial effects in long-term contracts, much more than in short-term contracts. 3.188 Another important factor in long-term contracts is the involvement of risk. As the future is always uncertain, one must appropriately take into account that the calculation of lost future profits is connected to a certain risk. There are a number of economic tools to deal with the risk factor in valuation matters. (385) The risk is exacerbated by the fact that the contracting party in long-term investment contracts may be a state or a state entity. This implies that the risk may not only be economic but also political. Due to the potential of 'governmental opportunism', the investor would normally demand complex safeguards so as to avoid being exposed to 'opportunistic breach'. (386) These risks and the pertinent safeguards should also be appropriately incorporated in the calculation of damages in long-term investment contracts. 3.189 Finally, in contrast to normal sales contracts, the investor usually does not get back the expenses undertaken. The obligation of the state generally does not encompass refunding these expenses but rather ensuring the long-term possibility of the investor to generate income and possibly earn profits. It is important to note that even in the case of full compliance with the contract the investor would not get back his or her expenses from the state. On the contrary, the parties frequently agree that after a certain period of time the assets become the property of the host state upon payment of a small amount of money or even for free. The idea behind this is that, after a certain period of time, the investment is amortized.

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3.190 It follows that the application of the concepts of damnum emergens and lucrum cessans on long-term investment contracts can easily lead to double counting. (387) The P 105 calculation of lost profits, already difficult with regard to sales contracts, contains specific complexities with regard to multi-annual investment contracts. If the investor received back all the expenses undertaken as well as the expected income, he or she would receive double compensation of the financial loss incurred. The investor would be in a better position than without the breach of contract, if her or she were to receive the present value of the expected future income as well as the investment which was necessary to generate such income. 3.191 In international jurisprudence, this danger of double compensation is not always appropriately taken into account. The ICSID Tribunal in LETCO v Liberia, (388) for example, based its calculation of damages after the unlawful withdrawal of a timber concession by the host state on Liberian contract law. (389) It found that, in addition to the loss of tangible assets, lost profits must be awarded and referred to a number of international precedents. (390) The tribunal held 'that both according to international law and, more importantly, Liberian law, LETCO is entitled to compensation for damages for both its lost investments and its foregone future profits'. (391) On the other hand, the tribunal correctly denied compensation for certain expenses and investments in infrastructure, because they were necessary expenditures for the generation of profits. (392) 3.192 In Himpurna California v PLN, the problem of double counting was explicitly addressed. (393) The tribunal emphasized that the calculation of damages after breaches of contract must be different from the calculation of compensation after an expropriation. In the latter case, compensation could be limited to the 'expectancy interest' (lucrum cessans), while there is no legal basis for 'contractual reliance damages' P 107 (damnum emergens). (394) Even if the terminology used appears unusual, (395) the tribunal addressed an important point: An undertaking has been expropriated; the prejudice suffered by its former owner is simply the worth of the venture as a going concern. That worth is crystallised in an analysis which discounts the future revenue stream of the enterprise to establish its present value … there is no separate evaluation of sunk costs, whether or not represented by physical assets … Since those revenues are fully accounted for in the DCF going-concern evaluation, an award of lost investment as well would be an unacceptable double recovery. (396) 3.193 The difference between the assessment of an amount of compensation after an expropriation and the calculation of damages after a breach of contract becomes particularly relevant in respect of the asset valuation. As the tribunal Himpurna California v PLN rightfully pointed out: The value of the asset taken in an expropriation case may be higher or lower than the amounts the claimant expended in developing the asset…. In the case of a breach of contract, the wasted cost is what the claimant has spent in reliance on the agreement, without reference to how judicious or providential those expenditures turned out to be. (397) 3.194 The so-called 'wasted costs' need to be included in the calculation of contract damages as far as they actually incurred. Their reasonableness should not be questioned because the contractor undertook them in reliance on the validity of the contract and, therefore, at his own risk. If there had been no unlawful interference, nobody would have paid back these costs. (398) The only criterion should be the actual relationship with the project. (399) This should exclude costs of the contracting party incurred before the conclusion of the contract (pre-contract expenditures). As the tribunal in Sapphire v NIOC found, 'pre-Contract expenditures were made in reliance not upon promises yet to be given, but on unilateral expectations of commercial success. Those costs are to be amortised, if at all, in the only way the claimant could have expected: out of future profits.' (400) 3.195 The damnum emergens in Himpurna California v PLN consisted in the investments and expenditures undertaken by the claimant in view of compliance with the contract. (401) For the calculation of lucrum cessans, the tribunal rejected the DCF method and explained: 'To ask for the full amount of the future revenue stream when also claiming recoupment of all investments is wanting to have your cake and eat it too'. (402) The tribunal supported, in principle, the method applied by the claimant, namely to calculate the 'initial project value' on the basis of future cash flows and from this amount deduct the amount of investments undertaken. (403) However, in its own calculation it did not apply this method but awarded the amount of lost investments plus an amount for lost profits. (404) 3.196 In Karaha Bodas v Pertamina, the claimant had only conducted studies and some preparatory work but nevertheless asked for damnum emergens and lucrum cessans on the basis of the contract. (405) The ad hoc tribunal did not question the amount of expenses undertaken (406) and awarded them with interest. (407) Despite the fact that the power plant had not yet been built, it added an amount of US$ 110 million for lost profits which resulted in an award 2.5 times the amount of the investment undertaken.

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(408) 3.197 In his insightful analysis of the award, Wells notes that the result appears to an logical to award the investment plus lost profits. (410) Instead, in cases of breaches of long-term investment contracts, the following approach should be taken:

P 108 economist to be excessive. (409) According to him, it would not be economically

In sum, one could estimate FMV by starting with either the investment or the NPV [net present value] of expected cash flows, but they should not be added together. It appears from the award document that the arbitrators in this case double counted in determining the amounts owed by Pertamina and PLN by awarding the amount of the investment (with no adjustments of the kinds indicated above) plus the NPV of expected cash flows. (411) 3.198 Since these prominent cases, tribunals have been more aware of the danger of double counting in cases of long-term investment contracts. The ICSID Tribunal in Railroad Development v Guatemala needed to address alleged breaches of contracts between the claimant and the governmental railway agency to operate newly privatized rails for fifty years. (412) After a few years, the contracts were declared to be 'lesivo', that is, injurious to the state's interests so that the investment eventually came to a standstill. The claimant requested the fair market value of its investment plus consequential damages, and lost profits. (413) In reply of the respondent's argument concerning double counting, (414) the claimant submitted that its sunk costs should be amortized over the projected duration of the contracts. (415) The tribunal determined the claim for lost profits to be speculative and based its award on the total amounts invested. (416) However, it accepted damages for operating the railroad for another year after the lesivo declaration and the NPV of existing real estate leases measured over their remaining life, minus rents paid under such leases. (417) The tribunal thus tried to circumvent the problem of potential double counting by not awarding damnum emergens and lucrum cessans over a long period of time. (418) 3.199 In order to avoid possible double counting, international investment tribunals should either award amounts that represent the investment undertaken or compensate for the lost future income. This would ensure that the investor would be guaranteed as a minimum to receive his investment back. As tribunals have traditionally pointed out in cases of contract breaches, damnum emergens is always recoverable. (419) This is not P 109 necessarily equal to the fair market value because it is not certain that the amount invested is equal to the price a hypothetical willing buyer would be ready to pay. What counts is that the investor has taken the risk and incurred certain expenses in reliance on the contract and in hope of positive future prospects. This minimum should be guaranteed to him. The expenses should be adjusted by inflation in order to represent their value at the date of the award. (420) The circumstances of each case should indicate the optimal remedial approach taking into account the risks of under- and overcompensation. It should be the choice of the investor to opt for this first alternative. 3.200 The second alternative would be to calculate contract damages only on the basis of the expected future income lost as a consequence of the breach of contract. In this case, the investment undertaken is not to be paid back and future expenses necessary for the creation of these future profits must be deducted. This alternative is clearly more appropriate, if the future is promising and the investor would have wanted to continue with the contract. The calculation of such future profits can be based on modern valuation techniques. 3.201 The dichotomy of damnum emergens and lucrum cessans as known in Roman law and national contract laws must, therefore, be adapted in order to be helpful for the calculation of contract damages in international investment disputes. These adaptations would lead to the use of criteria that are more in conformity with the legal principles, in particular the prohibition on over-compensation, and with economic valuation principles. (b) Reliance Interest and Compliance Interest 3.202 The distinction between expenses undertaken and profits lost in the case of a breach of contract can also be represented by the concepts of reliance interest and compliance interest. (421) Sometimes, it is also referred to as 'positive' and 'negative' damages. (422) Reliance or negative interest is the financial harm suffered by the contracting party in the form of expenses undertaken in reliance on a contract. Such harm can also incur, when the contract does not materialize. (423) Recovering such losses P 110 can be described as damages for 'culpa in contrahendo' (negligence in contracting), a concept developed in civil law countries. (424) Compliance or positive interest, by contrast, represents the entire financial loss suffered by the contracting party as a consequence of the breach of the other party. If the injured party receives the reliance interest, he or she is placed in the financial position he or she would be in if the contract had never been concluded. 3.203 Reliance interest has the advantage of being more 'straightforward' (425) and 'safer'. (426) It can be based on verifiable evidence and reduces the risk of errors based on uncertain expectations. (427) In view of the difficulties and complex evidentiary

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challenges in the evaluation of future profits, reliance interest could represent an important point of reference as the minimum which has to be awarded for breaches of long-term investment contracts. 3.204 On the other hand, it should not be forgotten that investors take a certain risk when concluding contracts in relation to long-term projects. As the tribunal in Himpurna California v PLN pointed out, parties do not enter into contracts involving risk in order to be repaid their costs. (428) To limit the recovery of the victim of a breach to actual expenditures is 'to transform it into a lender, which is commercially intolerable when that party was at full risk for the amount of investments made on the strength of the contract'. (429) 3.205 The distinction between reliance and compliance interest, or positive and negative interest, is not substantially different from that between damnum emergens and lucrum cessans but it can better explain the different aspects of the damage in long-term investment contracts. This is so because usually damnum emergens and lucrum cessans are regarded as two items of damages to be awarded cumulatively in order to achieve 'full reparation'. By contrast, positive and negative interest are mutually exclusive of each other. A tribunal must award either the former or the latter, not both. It cannot place the injured party in the same position as if the contract had been fully performed and at the same time in the same position as if the contract had never be concluded. The arbitrator in Sapphire International v NIOC has therefore rightfully rejected certain expenses incurred in the preparation of the contract by explaining:

P 111

This claim cannot be allowed by way of positive damages (Erfüllungsinteresse), as claimed by the plaintiff. Their claim should put Sapphire International in the same pecuniary position as they would have been in if the contract had been performed. But the repayment of the expenses incurred in concluding the contract would tend to put them in the position they would be in if the contract had never be concluded (negative damages) … Adding positive and negative damages together is a contradiction and cannot be allowed. (430) 3.206 The Swiss sole arbitrator referred to the German term 'Erfüllungsinteresse' which means 'interest in compliance'. Also, under this premise a general evaluation of the financial situation with and without the breach is necessary. It appears obvious that the minimum should be the amount of money that re-establishes the financial situation that would exist if the contract had never been concluded. 3.207 Compliance interest is thus the equivalent of the principle of full reparation in contract cases. As such, it requires a subjective–concrete valuation approach. This is all the more evident as contractual relationships between two or more parties cannot be evaluated from the perspective of a 'hypothetical willing buyer' and a 'hypothetical willing seller'. Contractual relationships are concluded between specific and selected parties. The mutual rights and obligations are designed for the individual needs and competences of the parties. In case of investment contracts, the state or a state entity selects a specific investor and negotiates about the concrete obligations and rights on the basis of its needs and the competences of the investor. Investment contracts, therefore, are highly individualized and can hardly be transferred to an interested third person. It follows that the fair market value is usually not appropriate for the valuation of contract damages in respect of long-term investment contracts. The tribunal in Bridas v Turkmenistan explained this very clearly: Contract damages reflect the contractual context of parties. This may, or may not, mirror the market value when a bargain—the contractual asset—is lost, because the terms of the contract may give to a party more or less than the market will pay. In addition, a party may decide for its own reasons to persist in a contract which directly does not maximalize the available return on its investment, a crucial component of fair market value. (431) 3.208 In order to evaluate reliance interest it is necessary to analyse the concrete rights and obligations of the parties as specified in the contract. In addition, the specific circumstances at the time of the conclusion of the contract must be taken into account. (c) Rejection of Lost Profits

3.209 The reasons for the rejection of claims to lost profits are manifold. As Gotanda points out, different jurisdictions—in common law countries on the one hand and in civil law countries on the other—and international codifications of contract law (e.g. CISG, UNIDROIT Principles on Commercial Contracts) contain different conditions and P 113 limitations for awarding lost profits. (432) The criteria on foreseeability, standard of proof, and the relevance of the fault of the party have a direct influence on the claim to recover lost financial benefit. 3.210 In international investment cases, contract damages are frequently not based on one particular national contract law, but on general or common principles of law. Less than particular evidentiary criteria, causality plays an important role. The rejection of lost profits has mainly been based on the opinion of the tribunals that the realization of profits would have been very unlikely, even if the contract had not been breached. Other

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reasons, in particular put forward in the jurisprudence of the Iran–US Claims Tribunal, were implicit termination of contract or force majeure. 3.211 (i) Profits too Speculative International investment tribunals usually pay a lot of attention to the question of whether profits could or would have been earned if the contract had not been breached. Whiteman's observation is frequently quoted: In order to be allowable, prospective profits must not be too speculative, contingent, uncertain, and the like. There must be proof that they were reasonably anticipated; and that the profits anticipated were probable and not merely possible. (433) An important criterion is whether profits would have been earned 'with a sufficient degree of certainty'. (434) 3.212 In contrast to short-term commercial contracts, a breach of an investment contract by one party does not inevitably or automatically cause loss of profits to the other party. The reason is that investment contracts are often closely linked to large projects and are dependent on the economic, political, and social situation of the country and other factors. A causal link between the breach and a lost profit is, therefore, difficult to establish. Tribunals would not award 'speculative' profits and tend to reject profits on projects which were only in their early stages. 3.213 The Iran–US Claims Tribunal, for example, examined in Levitt v Iran whether the planned building project relating to 6,000 apartments could have been realized profitably. (435) The tribunal came to the conclusion that lost profits could not be awarded because the project was still in an early phase and it was uncertain if it would have been a commercial success. (436) It concluded that 'the claimant has not established with a sufficient degree of certainty that the project would have resulted in a profit'. (437) 3.214 Similarly, the tribunal in Dadras International and Per-Am Construction v Iran, (438) also a breach of contract case in connection with a building project, held that 'lost profits under the contract are unduly speculative, and … Per-Am has not established with a sufficient degree of certainty that the construction of the North Shahyad Development Project would have resulted in a profit for Per-Am'. (439) The tribunal referred to the general conditions at the time of the Islamic revolution in Iran, which would have hampered the construction works and increased their costs. (440) 3.215 The ICSID Tribunal in Autopista Concesionada v Venezuela also referred to the necessity to establish 'with a sufficient degree of certainty' (441) the existence and the amount of lost profits for which the claimant sought compensation. The project concerned the construction and operation of a highway system, the financial success of which was based on the tolls paid by the highway users. The respondent had, in violation of its contractual obligations, failed to raise the toll. As a consequence, the investor made use of its contractual right to terminate the contract. Venezuela argued that a raising of the toll would have caused major political problems which had already happened in the past. The tribunal did not accept this as a force majeure excuse for the breach of the contract (442) but it accepted it as a reason for rejecting lost profits. It concluded: In these circumstances, the Tribunal considers that Aucoven's claim for future profits does not rest on sufficiently certain economic projections and thus appears speculative. Hence, it does not meet the standards for an award of lost profits under Venezuelan law, nor would it meet these standards under international law, if the latter were applicable. (443) 3.216 The numbers and projections agreed upon in the contract were not sufficient for the calculation of lost profits. In order to support this conclusion, the tribunal referred to existing international practice. It noted that decisions issued by ICSID tribunals and by the Iran–US Claims Tribunal often dismissed claims for lost profits in cases of breach of contract 'on the ground that they were speculative and that the claimant had not proven with a sufficient degree of certainty that the project would have resulted in a profit'. (444) As a result, the tribunal only awarded an amount representing the out-of-pocket expenses incurred by the investor, such as negotiation costs, legal fees, costs for studies, P 114 and additional works. (445) Disputes about 'speculative' profits are diminished when contracts are covered by guarantees or side letters, as is increasingly common for longterm production and delivery agreements. (446) The tribunal's calculations are then guided and limited by the terms of the guarantee. (447) 3.217 (ii) Implicit Termination of Contract In some national contract laws, the entitlement to lost profits is excluded if the contract has been terminated, either by one party or by both parties. (448) This condition was also taken up by the Iran–US Claims Tribunal which rejected lost profits in some cases because of an alleged implicit termination of contract. In Blount Brothers v Iran, (449) for example, both claimants and respondent referred to force majeure or breach of contract in the alternative. (450) Yet the tribunal decided that there had been an implicit termination of contract: It appears that even though there was no formal termination, all of the parties

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considered Claimant's role to have terminated as of December 1978, before the Parandak Project was completed. In view of this, the Tribunal finds that Claimant cannot recover damages based on the full contract price. Although Claimant's responsibilities had been discharged, it is still entitled to compensation for performance already entered under the Management Contract. (451) 3.218 In Ultrasystems v Iran, the Iran–US Claims Tribunal stated similarly: In view of this and the fact that the Contract was terminated by mutual agreement and not on the basis of breach of contract on either side, the Tribunal holds that Ultrasystems is not entitled for profits it could have gained had the Contract not been terminated. (452) 3.219 The Iran–US Claims Tribunal thus rejected lost profits on the basis of an implicit mutual agreement to terminate, independently from the submissions of the parties. (453) The same was true in case of a unilateral termination, where such a right was foreseen in P 115 the contract. (454) It did not matter if the party had relied on it or justified the nonfulfilment of its obligations on force majeure, as was the case in Sylvana Technical Systems v Iran. (455) 3.220 By contrast, the ICSID Tribunal accepted in principle the claim for lost profits after the unilateral termination of the contract in Autopista Concesionada v Venezuela. (456) The purpose of the respective contractual provision was 'to make the claimant whole by putting the claimant in the position it would be in if the respondent had not breached the contract, but instead performed as agreed'. (457) 3.221 The tribunal emphasized that this would be 'a principle which is common to both Venezuelan and international law'. (458) The termination of a contract, implicitly or explicitly, does not generally bar a claim for lost profits in international jurisprudence. 3.222 (iii)Force Majeure In some cases, tribunals rejected lost profits because the continued performance of the contract was hindered by force majeure. In Buckamier v Iran, the Iran–US Claims Tribunal developed a set of criteria on how to address this issue. (459) After the tribunal had rejected the alleged expropriation, (460) it examined possible contractual claims against the Military Industries Organization, the Teheran Redevelopment Corporation, and Information Systems Iran: it differentiated between whether the non-fulfilment of the contract could be explained by the generally difficult economic situation in Iran at the time of the revolution, or whether in addition there was reproachable misconduct by either party. (461) In the first case, the services rendered had to be paid, not lost profits. The tribunal explained the decisive criterion in the following way:

P 117

Where Mr. Buckamier speaks of political upheaval, disruption, difficulties, delays and mismanagement, his pleading conveys the impression that what he actually describes is the adverse influence of the Iranian revolution on the parties' performance of the TRC contract. The Claimant has not evidenced any specific instance in which that influence does not qualify as force majeure within the parties' contractual relationship. Consequently, the Tribunal dismisses Mr. Buckamier's claims for lost profits under the TRC contract. (462) 3.223 By contrast, if a party to the contract had violated its obligation, the injured party was entitled to the contract damages in their entirety, thus including lost profits: Having breached its contractual obligations, causing the premature termination of the Contract, Isiran is liable to compensate the damages incurred by the Claimant as a result … The Claimant therefore is entitled to his share of the amount HNB has invested in the Contract and the profits it has lost. (463) 3.224 However, the amount of lost profits was again measured in the light of their certainty (464) which, in view of the political turmoil and social changes, led to a considerable reduction of the profits forecasted by the claimant. (465) (d) Damages for Lost Opportunities? 3.225 In view of the difficulty in determining long-term profits precisely, a number of arbitral tribunals awarded lump sums for the loss of profits or for the loss of 'opportunity' or loss of a 'chance'. This was, for example, the case in Sapphire International v NIOC (466) where the contractual relation was only at an early stage. The tribunal reflected on the question to what extent the loss of a chance to make a profit could or should be compensated. (467) It referred to the practice of international arbitral tribunals (468) as well as the jurisprudence in France, Great Britain, and the United States (469) and came to the conclusion that the chance of possible profits in the future must also be compensated, if it was sufficiently probable that such profits would have been made. (470) 3.226 However, there were no data on past performance which could have facilitated the calculation of lost profits. On the other hand, the tribunal found that the mere

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reimbursement of expenses made would not be appropriate either. (471) In order to assess the 'probability' of future profits was to analyse the behaviour of the two parties, in particular that of the respondent: Another factor to be considered is that NIOC, who certainly have an extensive documentation available and possess great experience, would not have made a concession of an area where they did not think that there was a serious chance of discovering oil. It is reasonable to suppose that they would not have required a minimum investment of $U.S. 8,000,000 from a company if they did not think that these investments had a serious possibility of being turned to a profit, of which they and the Iranian Government would take the largest share. (472) 3.227 The tribunal concluded that these indications were enough to show that the respondent also relied on the probability of future profits and awarded eventually US$ 650,875 in restitution of the sums invested and a lump sum of US$ 2 million for the loss of a chance. (473) 3.228 In the ICSID case, Société Ouest Africaine des Bétons Industriels (SOABI) v Senegal, the contract was also breached before the ten-year project had even started. (474) The respondent had terminated the contract on the basis of the alleged non-fulfilment of contractual obligations by the investor. The tribunal found that the contract was breached unlawfully and that the respondent for its part had not fulfilled its obligations. As regards the claim for damages, the tribunal found: In most cases, and particularly in a case such as this one which involves a construction project spanning ten years, it is impossible to calculate the profits that would have been made had the parties' relations not been terminated. What gives rise to the claim in damages is not the loss of profits itself, but rather the loss of opportunity, the value of which is set in the discretion of the judge or arbitrator, as the case may be. (475) 3.229 The tribunal, in the exercise of its discretion, eventually awarded 2.7 per cent of the amount claimed as lost profits. (476) The larger part of the damages award consisted in expenditures actually undertaken and investments for 'operational expenses and capital expenditures' as well as compensatory interest at a rate of 10 per cent. (477) 3.230 By contrast, the breach of contract at an early stage in Autopista Concesionada v in contrast to the one in SOABI v Senegal, placed considerable weight on the fact that the contract was breached before the construction of the bridge had started. The tribunal rejected the comparison with the awards in Delagoa Bay and Karaha Bodas put forward by the claimant, as in those cases a substantial part of the construction had already been completed: (478)

P 119 Venezuela did not lead to an award for the 'loss of a chance'. The ICSID Tribunal,

One further factor weighs heavily in the Tribunal's assessment of lost profits. The main purpose of the Agreement was the construction of the Bridge … As a matter of contractual interpretation, one cannot rely exclusively on the figures set forth in the original EFP without taking into account that the Bridge was never built. (479) 3.231 It seems, therefore, that between the rejection of awarding 'speculative' profits and lost profits which can be proved with sufficient certainty, there is a 'grey zone' where the 'probability' of profits would be enough. In those cases, lump sums have been awarded to account for the loss of a 'chance' or 'opportunity' to generate profits. This is, however, neither a widely accepted nor a very precise practice.

(3) Simultaneous Violation of International and Contractual Obligations 3.232 As international investment projects are often based on a contract, unlawful actions or omissions by the state can represent violations either of contractual or international obligations or both. That a breach of a contract alone is not equal to a violation of international law has long been recognized. (480) It is less clear to what extent so-called 'umbrella clauses' contained in numerous BITs have an influence on this situation. (481) 3.233 Furthermore, contractual rights also can be the object of an expropriation by the state under the conditions of international law. (482) As the tribunal in Norwegian Shipowners has already emphasized: 'The United States [the respondents] intended to “take” and have “taken” in fact, the contracts under which the fifteen hulls in question were being constructed by American Shipbuilders in 1917. These contracts were the property.' (483) 3.234 Similarly, Arbitrator Mahmassani noted in regard to the petroleum concession in LIAMCO v Libya: It is well known that property in its general meaning is of two kinds: corporeal and incorporeal … [I]ncorporeal property comprises all interest and rights which, though incapable of immediate composition, may produce corporeal

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things or may be eventuated in financial and economic terms. In other words, incorporeal property includes those rights that have a pecuniary or monetary value. Concession rights, as those of the present dispute, may be included under the class of incorporeal property. (484) 3.235 In such cases, international tribunals have often relied on the criteria applicable to contract damages, disregarding the expropriation aspect. Early examples include Delagoa Bay, (485) Shufeldt, (486) Lena Goldfields, (487) Lighthouses Arbitration, (488) and Sapphire International. (489) An exception was the award in Norwegian Shipowners' Claim where the expropriation standard was applied. (490) 3.236 Other investment tribunals have shown a preference for relying on the criteria of contract damages in their valuations. Some examples are Liberian Eastern Timber Corporation (LETCO) v Liberia, (491) Atlantic Triton v Guinea, (492) Société Ouest Africaine des Bétons Industriels (SOABI) v Senegal, (493) MINE v Guinea, (494) Middle East Cement v Egypt, (495) and Amco Asia v Indonesia (Amco II). (496) Commentators have sometimes analysed these valuations in the context of expropriation and other aspects of P 120 international law. (497) The Iran–US Claims Tribunal, by contrast, usually distinguished diligently between expropriations cases and breach of contract cases, (498) even if they formed part of one and the same proceeding. (499) 3.237 Contract damages have one important characteristic: the valuation is based on the actual damage incurred and follows a subjective and concrete approach in accordance with the principle of 'full reparation' under international law and contract law. (500) It thus actually does not matter whether the amount of damages is calculated on the basis of a breach of contract or on the basis of an international law violation. (501) 3.238 Both in the case of an unlawful expropriation and after a breach of contract the aim of damages is to arrive as closely as possible at the principle of restitution in order 'to establish the situation that would otherwise have existed, or, “if this is not possible, payment of a sum corresponding to the value which restitution in kind would bear” '. (502) 3.239 This means that both in contract cases and in cases of state responsibility the valuation should be based on the damage actually incurred and not on the value as determined by a 'hypothetical willing buyer'. 3.240 This does not imply that the tribunals should take the submissions of the injured party for granted without examining them further. On the contrary, they must thoroughly P 122 assess the evidence and the plausibility of the claims submitted, including future prospects or profits. This must, however, not be confused with an 'objective' valuation of the damage incurred.

(4) Reasons for Reducing the Amount of Damages 3.241 The amount of damages can be limited or reduced for certain reasons. (503) This is particularly the case if the injured party has himself or herself acted negligently. The most important grounds for the reduction of damages are contributory negligence and violation of the duty to mitigate damages. The difference between the two is that the former concerns the occurrence of damage in the first place, while the latter is related to the duty of the injured party to keep the damage as small as possible once it has incurred. (a) Contributory Negligence 3.242 It is consonant with the principle of full reparation that the conduct of the injured party should be taken into consideration in assessing the form and extent of reparation. (504) If the injured party has acted negligently and thereby contributed to the occurrence of damage, the obligation to pay damages can be reduced, or even offset. (505) This principle is enshrined in Article 39 of the ILC Articles on State Responsibility (506) and widely recognized in international arbitral practice. (507) 3.243 A mere contribution to causation is, however, not sufficient; the action or omission must represent negligent and reproachable behaviour. (508) Arbitral practice seems to apply this criterion rather restrictively. (509) 3.244 The tribunal in Yukos v Russia (510) highlighted that the concept of contributory fault must not be confused with the investor's duty to mitigate its losses, a duty that arises after a breach of an obligation has occurred. (511) Furthermore, the fault of investor may be unrelated to the wrongdoing of the state, but nevertheless reduce the latter's obligation to pay damages. (512) Finally, the victim may have contributed to or even provoked the state's wrongful conduct. (513) 3.245 'Contributory fault' is not always clearly separated from the question of causation or of 'bad business judgment'. (514) In CME v Czech Republic, the respondent state submitted that the claimant had substantially contributed, by certain actions and omissions, to the damage. (515) The tribunal, however, rejected a discussion on this question in the Final Award on damages, as it considered it as a question of causality that had already been discussed in the Partial Award. (516) 3.246 In Maffezini v Spain, the tribunal pointed out that BITs were not 'insurance policies

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against bad business judgments' and that they could not be deemed to relieve investors of the business risk inherent in any investment. (517) This was taken up by subsequent tribunals (518) in order to reduce the amount of damages. 3.247 One of the few cases where the amount of damages was reduced explicitly because of contributory fault was MTD v Chile, decided under the auspices of ICSID. (519) The arbitral tribunal found that the respondent state had violated its obligation to fair and equitable treatment as contained in the applicable BIT. The state had induced legitimate expectations of the foreign investor with regard to a construction project on its P 123 territory and then, at a later stage, not granted the necessary permissions. For the calculation of the amount of damages the tribunal considered, however, that the behaviour of the investor had not been that of a 'wise investor': They accepted to pay a price for the land with the Project without appropriate legal protection. A wise investor would not have paid full price up-front for land valued on the assumption of the realization of the Project; he would at least have staged future payments to project progress, including the issuance of the required development permits. (520) 3.248 The tribunal, therefore, decided that the amount of damages should be reduced by 50 per cent. (521) Furthermore, the investment had a residual value which had to be deducted, too. The Chilean partner of the claimant had offered to buy the shares of the foreign investor. The latter had rejected the offer because it was only partly in cash and the liquidity of the partner was uncertain. The tribunal found that the investor should have accepted the offer because he had chosen this partner and, therefore, also had to bear the risk of his illiquidity. (522) 3.249 In Occidental Petroleum v Ecuador, (523) the tribunal reduced the amount of damages by 25 per cent, because the claimants had not informed Ecuador timeously about the nature of the 'Farmount Agreement' that purported to transfer rights to a third party without obtaining ministerial authorization. (524) Even though the sanction of the respondent was disproportionate and a violation of international law, the tribunal found that the claimants had provoked the actions of the state. (525) It held: In the view of the Tribunal, the Claimants should pay a price for having committed an unlawful act which contributed in a material way to the prejudice which the subsequently suffered when the Caducidad Decree was issued … In other words, without the violation of the law by OEPC, Caducidad may not have happened. In this connection, the Tribunal recalls that the violation of the law by OEPC was invoked by Ecuador as the principal legal basis for the Decree. (526) 3.250 The decision to choose 25 per cent was not shared by one arbitrator who issued a the decision of the annulment committee in MTD v Chile, who had held that 'the role of the two parties contributing to the loss [is] … only with difficulty commensurable and the Tribunal [has] a corresponding margin of estimation.' (528)

P 124 Dissenting Opinion. (527) However, the tribunal defended its choice by referring to

3.251 The tribunal in Yukos v Russia also reduced the amount of damages by 25 per cent by explicit reference to 'contributory fault'. (529) The Russian Federation had listed twenty-eight instances of alleged 'illegal and bad faith conduct' by claimants starting from the privatization of Yukos in the mid-1990s until its liquidation. (530) The tribunal, after having rejected that the alleged 'unclean hands' of the claimants would prevent the arbitral proceeding from going on, noted that some of the alleged illegal and bad faith conduct complained of by the respondent could have an impact on the assessment of liability and damages. (531) It pointed out that not any contribution would trigger a finding on contributory fault but that the contribution must be 'material and significant'. (532) 3.252 Out of the twenty-eight actions or omissions put forward by the respondent, the tribunal identified only four instances of alleged wilful or negligent conduct by the claimants that could have potentially constituted fault that may have contributed to the destruction of Yukos. (533) Eventually, only two of them, namely Yukos' 'abuse of the lowtax regions by some of its trading entities' and its 'questionable use of the Cyprus–Russia DTA', stood out as having contributed in a material way to the prejudice subsequently suffered. (534) 3.253 In measuring the extent of such a contribution the tribunal also referred to the annulment committee in MTD v Chile. (535) It then decided, 'in the exercise of its wide discretion', (536) that the claimants had contributed to the extent of 25 per cent to the prejudice which they suffered as a result of the Russian Federation's destruction of Yukos. (537) This percentage is the same as the conclusions of the tribunal in Occidental Petroleum v Ecuador, (538) while in MTD v Chile it was 50 per cent. (539) By contrast, the P 125 tribunals in Rosinvest v Russia and in Quasar de Valores v Russia, confronted with the same facts as in the present case, did not apply the concept of 'contributory negligence'. (540) 3.254 It may be questioned whether the 'wide margin of discretion' applied by several tribunals in the wake of MTD v Chile is an appropriate way of assessing the effects of

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contributory fault. It rather seems to counteract the considerable efforts taken by tribunals in calculating the amount of damages in a comprehensible manner. There should be increased efforts to identify more exactly which acts contributed to the damage incurred. A possibility could be aligning the question of 'contribution' more closely with the concept of 'causation' which not in all cases, but generally could make calculations more reliable. (b) Mitigation of Damages 3.255 The duty to mitigate damages is generally recognized as a general principle of law. (541) It is contained in international contract law codifications (542) and frequently appears in international arbitration. (543) The tribunal in ME Cement v Egypt stated that, despite the fact that the duty to mitigate damages was not explicitly contained in the BIT, it was potentially applicable because 'this duty can be considered to be part of the General Principles of Law, which, in turn, are part of the rules of international law which are applicable in this dispute according to Art. 42 of the ICSID Convention'. (544) 3.256 The principle to mitigate damages implies that the injured party must take reasonable steps to reduce its losses. (545) It depends on the facts of the case which P 127 steps are reasonable in a given situation. (546) They may include selling products, stopping the delivery of services, trying to renegotiate contracts, or even giving up unprofitable projects. (547) 3.257 However, commentators have also warned not to apply this principle too strictly, (548) as this could favour the wrongdoer in an unjust manner. (549) The duty to mitigate should not exceed the standard of a 'reasonable family father' at the time of the breach: Le devoir d'une partie de minimiser son préjudice est bien établi dans le droit international et dans la plupart des droits internes, ainsi que dans celui de l'Etat. En examinant le comportement de la partie concernée, un tribunal n'impose pourtant pas à cette partie un test de résultat final effectué a posteriori. Le test est plus celui de la gestion, en bon père de famille, ou de savoir si la partie concernée a agi raisonnablement et équitablement d'un point de vue commercial et financier. (550) 3.258 In international practice, the duty to mitigate damages has primarily been applied in breaches of contract cases. The practice of the Iran–US Claims Tribunal may serve as an example. In Economy Forms v Iran it turned out that a number of custom-built concrete forms were unmarketable. Nevertheless, the tribunal determined that they had a 'residual value' which was deducted from the amount of damages. (551) In Endo Laboratories v Iran, the tribunal considered the obligation to find buyers for custommade products less strictly and applied criteria of economic reasonableness. (552) 3.259 In case of long-term service and rental contracts, the Iran–US Claims Tribunal decided that the duty to mitigate damages required that after the termination of the contract or its notification, no further services were to be rendered. In Seismograph Service v Iran, it held: The Claimant has not, however, substantiated that it sought to mitigate the expenses it incurred. Although this obligation is a 'best efforts' obligation and not an obligation of result, it at least places an obligation on the Claimant to evidence that it was bound to incur the expenses so claimed. The Claimant having failed to do so the Tribunal finds the claim in this part unsubstantiated. (553) 3.260 Similarly, the tribunal in Petrolane v Iran did not accept invoices about rentals of oil rigs after the respondent had notified the claimant that, because of a reduction in demand, fewer oil rigs were needed. (554) Generally, the Iran–US Claims Tribunal, was not particularly strict and found it sufficient that the claimant had undertaken appropriate attempts to mitigate the damage, while the burden of proof that such attempts were not made was for the respondent. (555) 3.261 In Himpurna California v PLN, the tribunal also reduced the amount of lost profits claimed on the basis that profits lost on investments not yet undertaken could not be the object of damages. (556) Even if the contract allowed for further investments at the discretion of the investor, the tribunal found that the investor should not have done so after it became obvious that the respondent state could not pay for it because this would be like 'stepping on the shoulders of a drowning man'. (557) The tribunal found that it would amount to an 'abuse of right' to do so. (558) This explanation was criticized by one arbitrator (559) and by commentators, (560) as the investor had not done something unlawful and should thus not be blamed. (561) The tribunal could perhaps have achieved P 128 the same result, if it had relied on the duty to mitigate damages. It could have argued that this general principle of law demands that a party keeps the damage as low as possible and prevents its increase. This could also serve as an explanation why lost profits are not to be awarded on investments not yet undertaken. 3.262 More generally, it can be argued that, based on the duty to mitigate damages, in case of long-term contracts profits should only be awarded for a limited period. For example, in ICC Award No. 7006, the tribunal only awarded lost profits for one year. After

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this time, it was assumed that the damage could be mitigated. (562) 3.263 In cases concerning violations of international law, the duty to mitigate damages has rarely been referred to. (563) Some cases can be found in the practice of the UNCC. (564) Recent investment arbitration appears to be rather reluctant. While the ICSID Tribunal in Middle East Cement v Egypt emphasized that the duty to mitigate was a general principle of law, (565) it did not consider it in its calculation of damages. The tribunal emphasized that the burden of proof for the violation of the duty to mitigate was upon the respondent who had failed to submit sufficient evidence to convince the tribunal that there had been reasonable or economically feasible alternative actions available. (566) 3.264 Similarly, the ICSID Tribunal in Amco Asia v Indonesia (Amco II) was of the opinion that the principle of mitigation of damages would be applicable, but that, in the case P 129 before it, the claimant had not violated the respective duty: It was said that both Indonesian and international law pointed to such a duty to mitigate damages. Amco did not contest that Indonesian law and international law both acknowledge the principle of mitigation, but claimed that there was no realistic prospect of it being able to mitigate its loss … The Tribunal finds that there was no failure on PT Amco's part to mitigate damages. (567) 3.265 This shows that investment tribunals are rather cautious in accepting a violation of the duty to mitigate damages. Nevertheless, the basic concept of this duty is widely accepted. It is also in conformity with the economic analysis of law which underlines its usefulness for the allocation of available resources and the avoidance of the production of unnecessary products and services. (568)

C. The Valuation Date 3.266 The valuation date plays an important role for the valuation of compensation and damages in international investment law. The value of an object changes constantly in the course of time. (569) Furthermore, economic, social, and political developments have a direct influence on it. Usually, a considerable amount of time passes between the event giving rise to the claims and the award of compensation or damages. This causes a number of problems for the correct choice of the valuation date in international investment disputes. 3.267 The choice of the valuation date is important both for the condition of the asset and for the information available and useable. One of the fundamental questions is to what extent developments which occurred or became known after the expropriation or the unlawful act may be included in the valuation. Can we make use of the benefit of hindsight and apply more recent and accurate data, or must we put ourselves into the shoes of a person at a certain valuation date in the past? 3.268 The answer to these questions depends primarily on the kind of event giving rise to the claim and on the law applicable. In the following these questions shall be discussed with regard to expropriations, violations of investment treaty provisions, and breaches of contract.

(1) The Valuation Date in Expropriation Cases 3.269 As the conditions for expropriation under international law include the payment of

P 131 compensation it appears to be obvious that the value of the asset should be assessed

as of the date of the expropriation. However, this date is only meant for lawful expropriations. Is it also correct for unlawful expropriations? Furthermore, even in cases of lawful expropriations, the date of the expropriation is not always easy to assess. Is it the date of the official decree, or some earlier or later date? How should we determine the valuation date in cases of indirect expropriations which are not carried out by one single act but by a series of actions and omissions by the state? In the following, these questions shall be discussed in consideration of the legal foundations and pertinent international practice. (a) Lawful Expropriations 3.270 According to the international law standard of compensation for lawful expropriations, the date of the expropriation is the valuation date. (570) However, information about the impending expropriation before this date can reduce the value significantly. Therefore, the decisive date under international law effectively must be before the expropriation or before the date at which the decision to expropriate became publicly known. The World Bank Guidelines on the Treatment of Foreign Direct Investment summarize this in Article IV(4): Compensation will be deemed adequate if it is based on the fair market value of the taken asset as such value is determined immediately before the time at which the taking occurred or the decision to take the asset became publicly known. (571)

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3.271 This helps to avoid the situation where a state can diminish the value of the asset before the expropriation and benefit from the decrease. (572) However, in the practice of international tribunals, the valuation date is frequently the same as the date of the respective state act. (573) Only if the expropriation becomes effective later, the date of the state act can be regarded as the date when the expropriation became known. (574) 3.272 Changes in the political, social, and economic environment occurring right up until the expropriation also have an important influence on the value of an asset. (575) Those changes would not have left the investment unaffected, but would most probably have influenced its prospects and thus its value even without the expropriation. The state is not obliged to guarantee a stable economy in all circumstances and cannot be held responsible for losses of income streams in the absence of an expropriation act. (576) It is thus necessary to determine the value of an enterprise immediately before its expropriation, but also appropriately reflect the fact that the company would have suffered from political change even in the absence of the expropriation. The situation where the expropriated owner is placed in a better position than he or she would be in if the expropriation had not occurred needs to be avoided. 3.273 The Iran–US Claims Tribunal has developed some guidelines for dealing with the determination of the value of a company under circumstances of political change. In American International Group v Iran it presented a formula on how to distinguish relevant from irrelevant factors: In ascertaining the going concern value of an enterprise at a previous point in time for purposes of establishing the appropriate quantum of compensation for nationalization, it is—as already stated—necessary to exclude the effects of actions taken by the nationalizing State in relation to the enterprise which actions may have depressed its value … On the other hand, prior changes in the general political, social and economic conditions which might have affected the enterprise's business prospects as of the date the enterprise was taken should be considered. Whether such changes are ephemeral or longterm will determine the overall impact upon the value of the enterprise's future prospects. (577) 3.274 According to this formula, it is necessary to distinguish the negative consequences on the value which were caused by the actions of the state from those negative consequences on the value caused by changes of the general political, social, and P 133 economic conditions. The former must be excluded from the valuation because otherwise the state would benefit from its own acts. The latter, however, are part of the business risk and must be excluded from the calculation of compensation. The valuation has to be effectuated as of the valuation date by taking into account development in demands and supply as well as a number of other relevant factors. This is in accordance with the objective valuation approach which corresponds to the standard of compensation applicable to lawful expropriations. 3.275 The criteria developed in American International Group v Iran are convincing, but their transformation into concrete numbers may turn out to be difficult in practice. (578) The award itself could only reach an 'approximation' and resulted a lump sum of US$ 10 million, 'taking into account all relevant circumstances in the case'. (579) Nevertheless, these criteria have repeatedly been confirmed in the jurisprudence of the Iran–US Claims Tribunal (580) and may also be useful for other international tribunals. 3.276 The ICSID Tribunal in Compañía del Desarrollo de Santa Elena v Costa Rica (581) had to decide on the amount of compensation after the expropriation of a coastal area for the purpose of a natural reserve. The claimant submitted that the valuation should not be made on the date of the expropriation decree of 5 May 1978 but on the date of the arbitral award in the year 2000. It explained that this was necessary in order to account for the long duration of the dispute about the amount of compensation which had lasted for more than twenty-two years and which was the fault of the expropriating state. (582) The tribunal, however, did not agree and determined that the date of the formal expropriation should be the valuation date, and that the value should reflect the possible use of the land for tourism and other commercial projects and not for a natural reserve. (583) The long period of time between the expropriation and the date of the award was accounted for by a respective award on interest. While the value of the expropriated assets was finally set at US$ 4.25 million, the total award amounted to US$ 16 million. (584) 3.277 The valuation date of the compensation for the Pyramid Oasis Project in Southern Pacific Properties v Egypt (585) was set by the ICSID Tribunal as 'May 1978'. (586) The respective state acts were, on the one hand, a ministerial decree of 27 May 1978 which declared the area as 'public property (Antiquity)', and, on the other hand, the withdrawal of the construction permission by the General Organisation of Investment of Arab Capital and Tax-Free Areas (GIA) on 28 May 1978. (587) According to the tribunal, this difference of one day did not have any affect on the value. 3.278 As regards the fixed assets of a company, the valuation date is important for the condition in which they have to be valued—in particular as regards diminution of value by use and abrasion. The tribunal in Aminoil v Kuwait addressed this question and found

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that 'it is necessary in all cases to consider the value of the assets as at the date of transfer, taking due account of the depreciation they have undergone by reason of wear and tear and obsolescence'. (588) 3.279 International practice has, however, also taken other options. In LIAMCO v Libya, the tribunal did not choose the date of Decree No. 66 containing the decision to expropriate the oil concessions, (589) but 1 January 1974 as 'roughly mid-way between 1 September 1973, the date of the first act of expropriation, and 10 February 1974, the date of the consummation of the complete take-over'. (590) In doing so, the tribunal related to the date where the expropriation came completely into effect, thus a rather late date. During the respective period of time, the value of the investment has probably decreased because of the public knowledge of the impending expropriation. 3.280 The ECtHR, too, occasionally chose a longer period of time, a so-called 'reference period', as the valuation date. In Lithgow et al v United Kingdom, (591) the legal basis of the expropriation was the Aircraft and Shipbuilding Industries Act 1977 which contained the following compensation criteria:

P 134

For securities listed on the London Stock Exchange, the 'base value' was, under section 37/1) the average of their weekly quotations during the six months between 1 September 1973 and 28 February 1974 (the 'Reference Period' …). For securities not so listed and issued before the end of the Reference Period, the 'base value' was 'such as may be determined by agreement between the Secretary of State and the stockholder's representative … to be the base value which the securities would have had under section 37 … if they had been listed' on the Stock Exchange throughout the Reference Period … (592) 3.281 The choice of a 'reference period', three years before the expropriation was due to the fact that the Labour Party, after its success at the elections in 1974, had already announced the expropriations. (593) The exclusion of the diminution in value by this announcement was in principle beneficial to the former owners. However, the values of the 'reference period' were not adjusted for inflation, and the subsequent rise in the stock market was not reflected either. (594) According to the claimants, this amounted to a grave violation of their internationally protected property rights. The Court did not agree and found that the selected method of calculation, including the valuation date, was still within the margin of discretion of the expropriating state. (595) It explicitly mentioned, however, that this conclusion was only valid for the specific case at hand which dealt with the expropriation of nationals and which was not necessarily in accordance with the 'general principles of international law' that have to be observed in cases of expropriation of foreigners. (596)

3.282 In Mobil Cerro Negro v Venezuela, the expropriation of the claimants' investments occurred on the basis of various laws. According to the 2001 Hydrocarbon Law, oil production activities were reserved to the state, and private parties were authorized to participate in those activities only through mixed enterprises in which the state owned more than 50 per cent of the shares. (597) However, the Orinoco Oil Belt Associations remained outside that legal framework. Only six years later, on 1 February 2007, the National Assembly adopted a law enabling the president to take measure to put an end to this special regime. The implementing Decree-Law 5200 gave the oil company four months, until 26 June 2007, to agree to participate in the new mixed companies. (598) After unsuccessful negotiations, Venezuela seized the investments on 27 June 2007, while the expropriation was formally ratified by a law dated 5 October 2007. (599) The expropriation thus had been carried out by various successive physical and legal acts. In its decision on the valuation date, the tribunal referred to Article 6 of the applicable BIT which provided that the investment should be valued 'immediately before the measures were taken or the impending measures became public knowledge, whichever is earlier'. (600) The tribunal found that this date should lie 'immediately after the failure of the negotiations between the Parties and before the expropriation, i.e., on 27 June 2007'. (601) P 135 It thereby applied none of the dates of the expropriating legal acts, but the date of the physical seizure of the investments. Even if that date represented the actual transfer of ownership, it is questionable whether this date should also be the valuation date in accordance with the BIT. Already on 1 February 2007, when the National Assembly enacted the Enabling Law, the measure became public knowledge and potentially diminished the value of the investment. 3.283 In Tidewater v Venezuela, the tribunal also referred to the applicable BIT and found that the date of the Reserve Law of 7 May 2009 should be the valuation date. (602) In this case, the assets of the company, its headquarters, and eleven vessels, were seized one day after the enactment of the law, thus on 8 May 2009. Four remaining vessels were seized on 12 July 2009. (603) The expropriating legal act was therefore before the factual seizure and transfer of ownership, so that the value of the investments was not affected by prior knowledge of the public. 3.284 International courts and tribunals tend to select the date of the expropriation as the valuation date. However, this is not necessarily in conformity with the World Bank Guidelines or the language of BITs. In order to avoid that the value gets diminished by the expropriatory act itself, it is necessary to identify more accurately when the public received knowledge of the impending expropriation. Any influence on the value due to

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information about the concrete expropriatory legal act should be excluded. Conversely, reductions in value due to general governmental politics or the economic situation in the host state cannot be disregarded, but need to be reflected in the amount of compensation. (b) Unlawful Expropriations 3.285 Unlawful expropriations are expropriations that do not comply with the conditions provided for the expropriation of foreigners in international law. While generally the mere non-payment of compensation does not render an expropriation unlawful per se, (604) the violation of other criteria, such as public purpose, non-discrimination, and due process, leads to the unlawfulness of the act of the state. As such it entails the state's responsibility to fully repair the financial harm done to the former owner. The applicable differential method requires assessing the difference between the actual financial situation of the person affected and the financial situation he or she would be in, if the expropriation had not taken place. This comparison can logically only be made on the day of the judgment or award. 3.286 The PCIJ discussed the valuation date in cases of unlawful expropriations in Factory integrum, the experts should ascertain the financial situation the enterprise would have been in as of the date of the judgment, if the expropriation had not taken place. (606) For this purpose, they should assess the value of the enterprise as of two different dates, namely, first, at the date of the expropriation, (607) and second, at the date of the judgment or the date of valuation. (608) This should ensure that a decrease in value would not be to the detriment of the former owner, but that he would benefit from an increase in value. (609)

P 136 at Chorzów. (605) In order to come as close as possible to restitutio in

3.287 Schwarzenberger, as noted above in his discussion of the Chorzów case, analysed the importance of the date of the judgment for valuation purposes in his analysis of the judgment in the following way: Much is to be said in favour of the date of the judgment as the operative date. It is the judgment or award which establishes between the parties with binding force that reparation is due from one party to the other. If restitution in kind were possible, it would have to take place as soon as possible after the judgment or award. It, therefore, appears appropriate that the amount of any monetary substitute for actual restitution should be related to the same date. (610) 3.288 The possibility of an increase in value and its relevance for the valuation depending on the lawfulness of the expropriation was also pointed out by the Iran–US Claims Tribunal in Phillips Petroleum v Iran. (611) In practice, however, in most cases before international investment tribunals, including those decided by the Iran–US Claims Tribunal, no subsequent increase of the value of the expropriated assets occurred. On the contrary, revolutionary events and other political turmoil usually diminished or even destroyed the value of the expropriated assets. The question of who should benefit from a subsequent increase in value has not been an issue for a long time. 3.289 In other contexts, however, international courts and tribunals were confronted with increases in value of expropriated property. It was particularly the ECtHR which dealt with this issue rather frequently. In Papamichalopoulos v Greece (612) it had to decide on the amount to be awarded to the successful claimants after the unlawful expropriation of a piece of land along the coast which had considerably increased in value since the time of expropriation. After a long reference to the judgment of the PCIJ in Factory at Chorzów P 137 (613) the Court held: In the present case the compensation to be awarded to the applicants is not limited to the value of their properties at the date on which the Navy occupied them … For that reason it requested the experts to estimate also the current value of the land in issue; that value does not depend on hypothetical conditions, as it would if the land was in the same state today as in 1967. It is clear from the expert report that since then the land and its immediate vicinity—which by virtue of its situation had potential for development for tourism—has undergone development in the form of buildings which serve as a leisure centre for naval officers and related infrastructure works. Nor does the Court overlook that the applicants had themselves at the time had a scheme for the economic development of their properties, on which work had already begun … (614) 3.290 The Court eventually decided that it was not the value at the time of expropriation in 1967 that should be decisive, but the value of the piece of land at the time of the judgment which was determined with the assistance of a valuation expert. Similarly, in Belvedere v Italy the Court accounted for the increase in value of the property after the expropriation: S'agissant du dommage matériel, la Cour estime par conséquent que l'indemnité à accorder à la requérante ne se limite pas à la valuer qu'avait sa propriété à la date de l'occupation. Pour cette raison, elle a invité l'expert à

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estimer aussi la valeur actuelle du terrain litigieux et les autres préjudices. (615) 3.291 The increase in value because of enhanced touristic use was also relevant in Motais de Narbonne (616) and Terazzi. (617) In Brumaresco v Greece, even the Grand Chamber confirmed that the value of unlawfully expropriated land at the time of the judgment was decisive and not as of the expropriation date. (618) In so doing, it explicitly referred to the obligations of the states resulting from violations of the Convention: The Court reiterates that a judgement in which it finds a breach imposes on the respondent State a legal obligation to put an end to the breach and make reparation for its consequences in such a way as to restore as far as possible the situation existing before the breach. (619) 3.292 According to the Court, the current value of the object must be paid, if restitution was not possible or not wanted: Failing such restitution by the respondent State within six months of the delivery of this judgement, the Court holds that the respondent State is to pay the applicant, for pecuniary damage, the current value of the house, from which the value of the property already returned to him will have to be deducted. (620) 3.293 More recently, investment tribunals have been increasingly confronted with the in ADC v Hungary decided that in such a case the valuation date must be the date of the award:

P 138 issue of increases in value of property after an expropriation. The ICSID Tribunal

[I]n the present, sui generis, type of case the application of the Chorzów Factory standard requires that the date of valuation should be the date of the Award and not the date of expropriation, since this is what is necessary to put the Claimants in the same position as if the expropriation had not been committed. (621) 3.294 The decision is not only remarkable for its detailed analysis of the Chorzów standard but also for taking explicitly into account the jurisprudence of the ECtHR. In its reasoning, the tribunal quotes in extenso the judgment in Papamichalopoulos and concludes: It is noteworthy that the European Court of Human Rights has applied the Chorzów Factory in circumstances comparable to the instant case to compensate the expropriated party the higher value the property enjoyed at the moment of the Court's judgment rather than the considerably lesser value at the earlier date of dispossession. (622) 3.295 This approach chosen by the tribunal was not entirely new, but it was the consequent application of a generally accepted principle in a new context. In this respect it was new in international investment disputes. By referring to both the PCIJ and the ECtHR, the tribunal also contributed to the development of a more coherent application of international law by different international courts and tribunals and to overcoming the often-lamented fragmentation of international law. 3.296 The valuation date has subsequently been discussed more thoroughly in international investment arbitration. Several tribunals have followed the Chorzów–Papamichalopoulos–ADC approach. (623) Others noted the importance of the different valuation dates in principle. (624) Even though not all tribunals, for various reasons, (625) chose the date of the award as the valuation date, the acceptance of the distinction of the valuation date for lawful and unlawful expropriations seems to become increasingly accepted. 3.297 One of the most prominent examples was the award on the three combined cases in the wake of the demise of the Russion oil company Yukos, Yukos v Russia in 2014, which resulted in an award of US$ 50 billion. (626) Had the tribunal taken the date of the expropriation, the much lower market value at the time when the company was P 140 expropriated would have been decisive. The tribunal explained: The text of Article 13 [of the ECT], after specifying that the four conditions that must be met to render an expropriation lawful, provides that for 'such' an expropriation, that is, for a lawful expropriation, damages shall be calculated as of the date of the taking. A contrario, the text of Article 13 may be read to import that damages for an unlawful taking need not be calculated as the date of taking. It follows that this Tribunal is not required by the terms of the ECT to assess damages as of the time of the expropriation. Moreover, conflating the measure of damages for a lawful taking with the measure of damages for an unlawful taking is, on its face, an unconvincing option. (627) 3.298 The tribunal in Quasar de Valores v Russia, dealing with a parallel case of minority shareholders in Yukos, noted the difference between lawful and unlawful expropriations, but applied the standard for lawful expropriation contained in the BIT due to its

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jurisdictional constraints. (628) The tribunal in Rosinvest v Russia, another parallel case in the Yukos affair, after having decided that the expropriation had been unlawful, held that the calculation of damages should be made as of 24 January 2007, (629) the date on which the so-called 'Participation Agreements' were terminated, (630) because only on this date was the 'economic risk … taken over by the claimant'. (631) The tribunal in Quasar de Valores v Russia found this choice 'somewhat difficult to follow'. (632) The three parallel arbitrations concerned with the demise of Yukos show how essential, but also how difficult it is to identify the correct valuation date. In addition, an important conclusion from the arbitral decisions in the Yukos v Russia case is that, in cases of unlawful expropriations, the claimant has the right to choose the valuation date. This choice can also lead to the date of the expropriation. Tribunals will usually not depart from such a choice or from an agreement on the valuation date by the parties. (633) 3.299 It is notable that, even if the valuation date was not set at the date of the award, the logic of this option seems to be increasingly convincing to tribunals. (634) In Quiborax v Bolivia, the tribunal chose the date of the award as the valuation date and explained it in the following way: Had the expropriation not occurred, the Claimants would still be in possession of their investment. Consequently, they would have collected cash flows for their mining activities until today, and would have had the right to continue collecting them until the depletion of the concessions … Past cash flows, i.e., cash flows that would have accrued from the date of the expropriation to 30 June 2013 (which is the date of Navigant's latest calculations) must be brought forward to present value through the application of an interest rate. By contrast, future cash flows must be discounted back to net present value through the application of a discount rate. (635) 3.300 In the meantime, however, the ECtHR deviated from its earlier jurisprudence. In Guiso-Gallisay v Italy, the Grand Chamber decided to change its Papamichalopoulos case law, because it found that the principle elaborated in that case could lead to anomalies. (636) This was mainly because, under its constant jurisprudence, the Court had not only evaluated the property at the time of the judgment, but also increased its value due to buildings erected thereon in the meantime. The Grand Chamber found that this could open the door to a margin of uncertainty and even arbitrary decisions. (637) It pointed out: [T]he Court considers that automatically assessing the losses sustained by the applicants as the equivalent of the gross value of the buildings erected by the State cannot be justified. Such a method could lead to disparities in the treatment of applicants, depending on the nature of the public works undertaken by the authorities, something that is not necessarily related to the land's original potential. In addition, such a compensation method assigns a punitive or dissuasive role to compensation for pecuniary damage vis-à-vis the respondent State, rather than a compensatory role vis-à-vis the applicants. (638) 3.301 It decided to adopt a new approach, namely to award the value at the time of the expropriation, minus the amount obtained at domestic level. This amount should then be converted to current value to offset the effects of inflation. (639) Moreover, interest would have to be paid on this amount so as to offset, at least in part, the long period for which the applicants had been deprived of the land. (640) Furthermore, 'loss of opportunities' sustained by the applicants needed to be assessed, which the Court would determine on an equitable basis. (641) In addition, non-pecuniary damage should be awarded to P 141 successful applicants, because 'the feelings of powerlessness and frustration arising from the unlawful dispossession of their property has caused the applicants considerable non-pecuniary damage that should be compensated in an appropriate manner'. (642) 3.302 With this change in case law, the ECtHR rectified an 'anomaly', namely the inclusion of buildings erected on the property in the valuation, usually with taxpayers' money. This could even be regarded as unjust enrichment of the former owners, which arguably should be corrected. It would probably have been sufficient to deviate from this 'anomaly' and just to evaluate the expropriated land without the buildings at the valuation date. Nevertheless, the Court decided to take a new approach and to go back to the expropriation date. However, it did so by counterbalancing this step by a few adjustments which are, if not an 'anomaly', at least remarkable: (1) the amount has to be adjusted for inflation in addition to interest (while usually interest shall repair the damage incurred for the temporary withholding of money, including inflation); (2) the applicants receive a lump sum for 'lost opportunities'; and (3) the applicants receive an amount of non-pecuniary damages for feelings of powerlessness and frustration they suffer arising from the unlawful dispossession of their property. (643) It follows that the additional items of damages, (644) which the Court awards on an equitable basis, are necessary to put the former owners in the financial position they would be in, if the unlawful act had not been committed. 3.303 In any case, the Court also reiterated in Guiso-Gallisay v Italy, that it was impossible to equate lawful expropriations and unlawful expropriations. (645) It distinguished

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Papamichalopoulos from later cases, which often concerned Italy's practice of 'constructive expropriation'. This perhaps less than perfect translation of the term 'occupazione aquisitiva' or 'accessione invertita' allows an expedited expropriation procedure to occupy a plot of land for public works under Italian national law. (646) Once a project has been declared to be in the public interest, the authorities may issue an expedited possession order and take physical possession of the land. A formal expropriation order must follow before the end of the authorized period of occupation. The authorized occupation of land creates an entitlement to compensation for occupation. (647) The Court distinguished these cases from Papamichalopoulos, where all of the national courts had recognized the applicant's title to the property, while the P 143 applicants in the Italian cases had lost ownership following the construction of public works according to national law. They would have had the right to apply to court for the restitution of the land, but they did not. (648) Thus the Court respected Italian national law which did not necessarily provide for restitutio in integrum in cases of unlawful expropriations. 3.304 Birch refers to the above-mentioned shift of the ECtHR in support of the view that the valuation date should be the date of the expropriation, if the expropriation is lawful but for the non-payment of compensation. (649) As it is suggested that the mere nonpayment of compensation does not render the expropriation unlawful, (650) the valuation date would be in the past anyway. But the ECtHR did not address an expropriation that would have been legitimate had adequate compensation been paid. On the contrary, the expropriation amounted to a seizure of the applicant's land by the state. (651) 3.305 It follows from the above that, despite the ECtHR's change in case law, there are a number of specificities in the legal protection of human rights which inform and explain it. These are not necessarily present in international investment law, including the prominence of 'equitable considerations' and non-pecuniary damages in the Court's assessment of 'just satisfaction', so that the consequences of this change for international investment arbitration may remain—and have so far remained—limited. (c) Indirect Expropriations 3.306 The determination of the valuation date is particularly difficult in cases of indirect expropriation. This is especially true if the deprivation of property does not occur in one instance but by a combination of acts and omissions over a longer period of time. In cases of such 'creeping' or 'consequential' expropriations the value of the property can get gradually reduced and, in the end, the state pays much less than it would have had to pay, if it had chosen to expropriate the property by decree and in one act. (652) 3.307 International practice has nevertheless sometimes identified the valuation date in such cases at a relatively late stage, when the deprivation of property rights had turned out to be irreversible. The Iran–US Claims Tribunal in this respect held in International Technical Products v Iran: Where the alleged expropriation is carried out by way of a series of interferences in the enjoyment of the property, the breach forming the cause of action is deemed to take place on the day when the interference has ripened into more or less irreversible deprivation of the property rather than on the beginning dates of the events. (653) 3.308 Even though the expropriating state, in this way, may reduce the value of the property by its own actions, a number of tribunals have agreed with this approach. (654) However, in other cases, where the appointment of 'temporary' managers by the state finally resulted in an expropriation, the date of their initial appointment was chosen as the expropriation date. (655) 3.309 In Sedco v NIOC, the tribunal decided that '[w]hen, as in the instant case, the seizure of control by appointment of “temporary” managers clearly ripens into an outright taking of title, the date of appointment presumptively should be regarded as the date of taking'. (656) This ensured that the forced institution of the management and its actions could not reduce the amount of compensation. (657) 3.310 In Amoco International Finance v Iran, (658) the claimant was of the opinion that before the formal expropriation by the Single Article Act of 8 January 1980, the company had already been indirectly expropriated. (659) The tribunal agreed, conceding that the expropriation had been a 'process': [T]he Tribunal finds that Amoco's rights and interests under the Khemco Agreement, including its shares in Khemco, were lawfully expropriated by Iran, through a process starting in April 1979 and completed by the decision of the Special Commission, notified by telex on 24 December 1980. (660) 3.311 The valuation date, according to the tribunal, should be 31 July 1979, a date before the formal expropriation. (661) The tribunal explained that, already from that date, the respondents no longer respected the common decisions taken in the joint venture P 145 company which led to the destruction of the claimant's rights:

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The Tribunal decides that this fact will be duly taken into account by determining that the date to be considered for the valuation of such compensation will be the date at which measures definitively took effect, rather than the date of the final decision of nationalization. (662) 3.312 Reisman and Sloane, commenting on this award, drew the conclusion that, in some cases, it would be necessary to distinguish the valuation date from the expropriation date. (663) In cases of creeping or consequential expropriations, the date of the expropriation should be chosen at the end of the chain of actions and omissions; (664) the valuation date, however, should be set at the beginning. (665) This would prevent the state being able, by gradual interference and obstruction, to reduce the value of the investment and, thus, the amount payable: The ironic, indeed, perverse, result of that theory would be to reward states for accomplishing expropriation tranche by tranche rather than d'un coup and to encourage states to accomplish expropriation furtively, either by a creeping or disguised series of regulatory acts and omissions of nebulous legality … (666) 3.313 Reisman and Sloane correctly consider such creeping or disguised expropriations as unlawful and reason their proposal, amongst others, by the principle that 'a delictor may not benefit from its own delict'. (667) 3.314 Furthermore, it has to be noted that creeping expropriations will in most cases be considered unlawful, (668) so that the international responsibility of the state becomes engaged. Article 15 of the ILC Articles on State Responsibility contains a solution as to the problem of the date of the wrongful act in cases of a 'Breach consisting of a composite act'. It distinguishes between the occurrence of the unlawful act (paragraph 1) and the duration of the breach (paragraph 2): 1.

2.

The breach of an international obligation by a State through a series of actions or omissions defined in aggregate as wrongful occurs when the action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act. In such a case, the breach extends over the entire period starting with the first of the actions or omissions of the series and lasts for as long as these actions or omissions are repeated and remain not in conformity with the international obligation. (669)

3.315 When a breach consists of a composite act, it is necessary to decide which action or omission is sufficient to constitute the wrongful act based on the precise facts of the case; this does not necessarily have to be the last in the series. (670) The wrongful act can be assumed to take place at the time of the first action or omission which, in combination with the others, constitutes the breach. (671) This applies also to creeping expropriations. In this way, the divergence of expropriation date and valuation date would not be necessary. 3.316 The tribunal in Alpha Projektholding v Ukraine (672) chose the date accordance with this proposal. The case concerned the indirect expropriation of the claimant's investment in a hotel project which consisted in a series of acts by the respondent, including a temporary suspension of payments under the renovation agreements, the transformation of the enterprise into a state-owned open joint stock company, the transfer of management of the hotel to the state, various domestic legal proceedings and related events. (673) The tribunal decided that the date of the expropriation should be the first day of the month after the claimant had received the last payment. While subsequent actions of the Government perpetuated the non-payment to the claimant, 'the expropriation (and other BIT violations) occurred at the time payment ceased, never to be resumed'. (674) 3.317 A solution of a later rather than an earlier date was chosen by the tribunal in Unglaube v Costa Rica. (675) Several attempts to expropriate had occurred, namely in 2003, 2004, and 2005. (676) However, at the date of the award, the claimants had still not been formally expropriated, but been burdened with the effects of the various ineffectual efforts to expropriate their property since 2003. (677) The tribunal decided that both under the Chorzów approach and the language of the BIT the applicable standard was the fair market value of the investment, but 'where property has been wrongfully expropriated, the aggrieved party may recover (1) the higher value that an investment may have acquired up to the date of the award and (2) incidental expenses'. (678) It decided that the valuation date should be 1 January 2006, six months before the market peak put forward by the claimants, to reflect 'normal fears and negative P 146 contingencies which are present in the minds of sellers and buyers making important investment decisions'. (679) According to the tribunal, this was 'fair and reasonable', (680) apparently reflecting a discretionary choice made by the arbitrators in view of the illegality of the expropriation. (681) 3.318 Other tribunals have relied on the last date of the actions which in their totality amounted to an indirect expropriation. In Rumeli v Kazakhstan, the indirect expropriation occurred through a series of court decisions which the tribunal determined as a 'creeping expropriation'. (682) With regard to the expropriation date, the tribunal

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found that it may be a matter of judgement rather than of direct and clear evidence. (683) The tribunal decided that the expropriation date should be set at a time of the last unappealable decision of 30 October 2003, because until that time the ownership remained in the hands of the claimants and they could not reasonably know that their investment was irrevocably lost. (684) In doing so, the tribunal followed the claimants' arguments. (685) 3.319 The tribunals concerned with the demise of Yukos in Russia also dealt with indirect expropriation as a result of a number of measures by the respondent over a longer period of time. In Yukos v Russia, the tribunal pointed out that both parties had agreed that the date of the expropriation should be 'the date on which the incriminated actions first lead to a deprivation of the investor's property that crossed the threshold and became tantamount to expropriation'. (686) The claimants had submitted that this was 21 November 2007, the day on which Yukos was struck off the Russian register of legal entities. (687) The respondent did not propose an alternative date but argued that claimants had lost effective control over their investment long before this date. (688) The tribunal agreed with the respondent that 'the threshold to the expropriation of Claimants' investment was crossed earlier than in November 2007' and held that 'a substantial and irreversible deprivation of Claimants' assets occurred on 19 December 2004, the date of the YNG auction [which was] Yukos' main production asset'. (689) The determination of 19 December 2004 as the date of the expropriation differs from the award in Quasar de Valores v Russia which had accepted the claimants' submissions that P 147 it was 23 November 2007, the day on which Yukos 'was removed from the Unified Register of Companies in the wake of the end of the bankruptcy proceedings as pronounced by the Moscow Arbitrazh Court'. (690) In its explanations, (691) the tribunal did not mention the different solution by the earlier tribunal, but made its own choice. 3.320 In Rosinvest v Russia, the tribunal did not discuss the expropriation date in detail. The claimant had submitted that the expropriation of Yukos' assets had commenced with the auction of YNG on 19 December 2004 and had been concluded with the Russian Federation's auction of the last of Yukos' assets during the final bankruptcy auction on 15 August 2007. The tribunal chose the valuation date in a different manner, namely the date on which the 'economic risk … taken over by the claimant'. (692) 3.321 The practice of investmemt tribunals shows that the determination of an expropriation date in cases of indirect expropriation is a challenging task and that various principles and a certain amount of discretion are applied. The date of the expropriation remains important also in cases of unlawful expropriation, because it represents the lower limit of the amount of damages. Both the claimant, who has a choice between the expropriation date and the date of the award, and the tribunal, need to know the value at the expropriation date in order to compare the two values and to decide which one is higher.

(2) The Valuation Date in Other Cases 3.322 The damage caused by an unlawful act consists in the difference between the actual financial situation of the injured person and the financial situation he or she would be in, if the unlawful act had not been committed. It will now be discussed what the principle of full reparation means for the choice of the valuation date in cases of violations of international law unrelated to expropriations and in cases of breach of contract. (a) Violations of International Law 3.323 According to the law of state responsibility, the amount of compensation payable after a violation of international law should reflect all financially assessable damage caused by the breach. (693) In order to assess this damage it is necessary to compare the P 149 actual financial situation of the victim with the hypothetical financial situation under the assumption that the breach had not occurred. An important point of reference is the principle of restitutio in integrum, which means integral re-establishment of the situation that would exist without the unlawful act. Under the law of state responsibility, 'restitution' is the primary remedy after a violation of international law, 'compensation' only payable as far as restitution is not possible or not sufficient. (694) 3.324 Under the premise of 'restitution' it seems logical that, as a matter of principle, the valuation date should be the date of the award. Schwarzenberger pointed this out in his analysis of the Chorzów factory case. (695) The choice of a valuation date as late as possible ensures that all information available until that date may and can be used in order to arrive as closely as possible at full reparation. 3.325 The time of the unlawful act itself or of the occurrence of damage is nevertheless important as point of reference for the construction of the alternative scenario. This is not only relevant in cases of unlawful expropriations, as outlined above, but also for violations of other BIT provisions and other international law obligations. 3.326 In Amco Asia v Indonesia, the respondent had breached a number of different duties vis-à-vis the foreign investor which had led to a total destruction of the investment project, the construction and operation of a hotel and office complex. (696) In order to assess the damage incurred, the tribunals did not see any reason why they should do this from the perspective of a businessman at the time of the wrongful acts. Instead, the

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second tribunal in Amco Asia v Indonesia (Amco II) held: If the purpose of compensation is to put Amco in the position it would have been in had it received the benefits of the Profit-Sharing Agreement, then there is no reason of logic that requires that to be done by reference only to data that would have been known to a prudent businessman in 1980. (697) 3.327 The calculation was divided into two phases, the first phase from the date of the unlawful act until the valuation date (the date of the award), and the second phase from the valuation date into the future. (698) As for the first phase, actual economic developments and dates, such as inflation, exchange rates, and taxes, were taken into consideration. (699) The division of the valuation period was applied by both the first and the second tribunal in order to approximate restitution as closely as possible: (700) It may, on one view, be the case that in a lawful taking, Amco would have been entitled to the fair market value value of the contract at the moment of dispossession. In making such a valuation, a Tribunal in 1990 would necessarily exclude factors subsequent to 1980. But if Amco is to be placed as if the contract had remained in effect, then subsequent known factors bearing on that performance are to be reflected in the valuation technique … (701) 3.328 The tribunal emphasized that later developments have to be taken into account in the valuation of damages due. Only the consequences following from the unlawful act itself must be disregarded: Foreseeability not only bears on causation rather than on quantum, but it would anyway be an inappropriate test for damages that approximate to restitutio in integrum. The only subsequent factors relevant to value which are not to be relied on are those attributable to the illegality itself. (702) 3.329 The tribunal in S D Myers v Canada also explicitly included subsequent developments in its damages valuation. (703) It did not assess the damage incurred during the Canadian export ban but made an assumption about the hypothetical development of the claimant's business operation up until the date of the award. (704) 3.330 The comparison of the 'pesification scenario' with the 'non-pesification scenario' by the ICSID Tribunal in CMS v Argentina also considered the development of profits from the perspective of the date of the award. (705) The tribunal in El Paso v Argentina decided on damages after a violaton of the fair and equitable treatment standard contained in the US–Argentina BIT held, after referring in detail to the above-mentioned cases Chorzów Factory, S D Myers, Amco Asia, and Article 36 of the ILC Articles on State Responsibility: [T]he value of the property should be determined with reference to a date subsequent to that of the internationally wrongful act, provided the damage is 'financially assessable', therefore not speculative. The Tribunal shares this position. (706) 3.331 The fact that subsequent events and developments are included in the valuation may also reduce the amount of damages. (707) This is the consequence of the principle of full reparation on the basis of the restitution approach. If subsequent events led to a P 150 diminution of value, the injured party would have suffered this also in the absence of the unlawful act. This part of the damage is, therefore, not causally linked to the violation. Only in expropriation cases, is the objective value at the time of the expropriation the guaranteed minimum to be received. In other cases of state responsibility there is no such lower limit. The only measure of damages is the comparison of the financial situations with and without the breach. 3.332 The consideration of developments and events after the unlawful act which lead to a decrease in expected damages is not in contradiction with the principle of foreseeability. According to this principle, only damage that was foreseeable at the time of the unlawful act should be compensated. This should exclude the obligation to compensate extraordinary damages and is thus meant as a limitation. It does not mean that the damage that was foreseeable at the time of the breach has to be compensated in any case. Foreseeability otherwise is an elusive concept, and its purpose could probably better be achieved by the principle of causation. The causal link between the damage and the act can be established with the benefit of hindsight and on the basis of reliable and known information. The alternative of putting the investor in the shoes of the injured person at the time of the breach leads to unnecessary complicated chains of hypotheses. (b) Breaches of Contract 3.333 The principle of full reparation also requires the consideration of subsequent events in cases of breach of contract. It does not matter that a 'reasonable businessman' in the past has foreseen certain profits. In order to calculate the amount of lost profits, a comparison has to be made between the profits that could have been earned with and without the breach. The valuation can be relatively free from uncertainty and 'speculation', if it is done as of the date of the award. This holds true for profits that could

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have been made in the past and those forgone in the future. It is only with regard to the latter that projection into the future and 'foreseeability' are necessary and relevant. 3.334 Damages should only be awarded for the loss of profits actually caused by the breach. In case of long-term investment contracts, profits may not only depend on the performance of the other party but also on other factors. It is necessary to distinguish between the different causes. Only the negative consequences connected to the breach have to be included in the calculation of damages. By contrast, other factors not related to the breach, such as economic, social, or political developments which would have reduced the amount of profits anyway must be excluded. Their detrimental effect on the profits cannot be blamed on the breaching party. The aim is to arrive as closely as possible at the situation the injured party would be in absent the breach. This means that all subsequent factors have to be taken into account for the calculation but only those connected to the breach are relevant for the measurement of lost profits. It must be recognized that the other events would have reduced—or increased—the profits also in P 151 absence of the breach. 3.335 The proceedings in Delagoa Bay were an early example of such a determination of lost profits. (708) At the time of the unlawful termination of the railway concession in 1889, the railroad had not yet been completed. The damage incurred at this time, therefore, consisted only in the expenses made for the construction work undertaken so far. (709) The tribunal calculated lost profits on the basis of the profits actually earned by the Portuguese Government after the completion of the railroad in 1895. (710) 3.336 In LETCO v Liberia, (711) after a unilaterally changed lumber concession, (712) the ICSID Tribunal in its valuation of lost profits considered the development of the business until the date of the award. (713) For profits that would be expected for the period after the award, the tribunal estimated them on the basis of the development of the prices until that date. (714) 3.337 In Autopista Concesionada v Venezuela, the ICSID Tribunal rejected the claim for lost profits because it was convinced that the investment of the claimant in a highway project in Venezuela would not have been profitable, even without the breach of the respondent. (715) This conclusion was drawn on the basis of expert opinions with the use of information about developments after the breach. (716) The tribunal emphasized that the scope and purpose of lost profits compensation under Venezuelan law is to indemnify the claimant for all, but not more than, the damage actually suffered. For the sake of completeness, the Tribunal adds that this solution is consistent with the practice of international tribunals. (717) 3.338 After a detailed comparative analysis of national contract laws, Wöss and others come to the conclusion that 'all rules of law analysed allow the calculation of damages at the moment of the judgment'. (718) While this is relatively straightforward in German and P 153 French law, (719) as well as in US law, (720) under English law, damages are usually assessed by reference to the time of the breach. (721) Nevertheless, the court may deviate from that date to assess damages by reference to the date that may be appropriate in the circumstances. (722) 3.339 Under the CISG, 'damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract'. (723) Looking back to the time of the breach or even back to the time of the conclusion of the contract in its limiting function shall ensure that the damages get not higher than the foreseeable damage. It is, however, not necessary to step into the shoes of that time in order to calculate the damages as of that date, because the primary function of damages is to arrive at a 'sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach'. (724) The foreseeability of the loss represents only the outer limit of the amount of damages, while not having necessarily a determinative function. Furthermore, the CISG is drafted as its title indicates for the 'sale of goods', thus for short-term contracts. It is not directly applicable to most investment contracts and is only relevant by way of analogy or as a general principle. 3.340 According to Article 7.4.2 of the PICC, the principle of full compensation shall mean that 'regard is to be had to any changes in the harm, including its expression in monetary terms, which may occur between the time of non-performance and that of the judgment'. (725) 3.341 Spiller notes a 'natural tendency to use the date of the breach, but contract or treaty disputes are often much more complicated'. (726) He points out that using expectations as of the date of the breach may under- or over-compensate the investor for losses which as of the date of the award are certain. He argues: Thus, an appropriate implication of the 'wiping out all the consequences' principle is that historical losses should be treated as they are, that is using hindsight, rather than as could have been expected as just prior to the date of the initial breach. (727)

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3.342 The choice of the valuation date represents one of the most significant distinctions between the subjective–concrete and the objective–abstract valuation approach. While compensation for expropriation has to reflect the objective value at the time of expropriation, the concrete valuation inherent in the principle of full reparation requires also considering developments after the unlawful act. This is necessary in order to come as closely as possible to restitutio in integrum. (728) The valuation date, therefore, should in principle be the date of the award in cases of state responsibility and in cases of breaches of international investment contracts. Only in cases of unlawful expropriations the value at the time of the expropriations represents the lower limit. In respect of contract cases this is important insofar as the acts of a host state may constitute an unlawful expropriation of an investment contract and not only a breach of contract. In this case, the value of the contract at the time of the expropriation represents the lower limit of the amount to be awarded.

D. The Exercise of Discretion and Equity Considerations 3.343 The valuation of assets always contains a certain amount of uncertainty and imprecision. As the tribunal in ADC v Hungary put it in an often-quoted formulation: '[T]he assessment of damages is not a science.' (729) Valuation is always connected with the exercise of judgement. The result will often only be an approximation. The leading valuation expert Damodaran emphasizes that '[v]aluation is neither the science that some of its proponents make it out to be nor the objective search for true value that idealists would like it to become'. (730) In view of this, international tribunals have sometimes explicitly referred to their discretion, (731) and sometimes used language which implies equitable considerations. (732) However, the exercise of discretion must not be confused with deciding on the basis of equity (ex aequo et bono) which needs P 154 authorization by both parties. 3.344 It is rather rare that international investment tribunals are authorized by the parties to decide ex aequo et bono. (733) In the absence of such an authorization they are not allowed to base their decisions on equity but must base them on legal norms. (734) In the framework of ICSID, the unauthorized application of equity can constitute a ground for annulment. (735) 3.345 Considerations of equity may, however, also play a role when the law is applied. The ICJ has explained this so-called 'internal' equity in the North Sea Continental Shelf cases as not 'applying equity simply as a matter of abstract justice, but of applying a rule of law which itself requires the application of equitable principles …'. (736) 3.346 It is not entirely clear to what extent these conclusions are relevant for the calculation of compensation and damages. The ICJ discussed this question in an Advisory Opinion regarding the judgments of the Administrative Tribunal of the ILO: [A]s the precise determination of the actual amount to be awarded could not be based on any specific rule of law, the tribunal fixed what the Court, in other circumstances, has described as the true measure of compensation and the reasonable figure of such compensation (Corfu Channel Case, Judgement of December 15th 1949, I.C.J. Reports 1949 p. 249). (737) 3.347 The reason for referring to equitable or 'reasonable' figures was that there was no 'specific rule of law' for the calculation of the respective claims. This is not the case in the P 155 present context of international investment law where the claims for compensation or damages are based on identifiable legal norms. In view of this, recourse to equity considerations does not appear appropriate. On the other hand, the assessment of compensation and damages always requires the exercise of discretion. The distinction between discretion, equitable considerations, and equity is certainly not easy to be drawn, but nevertheless important. A related issue concerns the relevance of the economic situation of the host country.

(1) Estimation and Equity 3.348 The practice of international investment tribunals shows that equitable considerations were invoked in cases where the amount of compensation or damages could—for various reasons—hardly be determined at all. 3.349 The sole arbitrator in Sapphire International Petroleum v NIOC was confronted with the problem that the breach of the concession agreement had occurred at a very early stage. (738) On the basis of the principle pacta sunt servanda the arbitrator was of the opinion that lost profits also had to be awarded. These were, however, very difficult to calculate without any data or record of the past. It was not even clear whether in the concession area petroleum reserves existed at all. Considering all relevant circumstances, in particular the behaviour of the respondent itself, (739) the arbitrator found that it would be 'reasonable and equitable to fix the amount of compensation for loss of profit at US$ 2,000,000'. (740) 3.350 In LIAMCO v Libya the situation was even more difficult as the arbitrator found that in view of the legality of the expropriation there was no need for full reparation. (741) He referred to 'equity' and explained that it could be applied as a general principle of law:

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One of these general principles of law is Equity, which is commonly und unanimously recognized as a supplementary source of law in Libyan law …, Islamic law … and international law [Article 38, para. 2, of the Statute of the International Court of Justice]. 3.351 This classification of 'equity' as a general principle of law, as defined in Article 38 paragraph 1 lit. c ICJ Statute, on the one hand, and the reference to Article 38 paragraph 2 on the other, appears to be inconsistent. In any case, the arbitrator made it clear that equity considerations played a role in the calculation of the amount of compensation. In particular, he referred to the high amount of expenses and the risk undertaken by the P 156 claimant so that it appeared inappropriate to base the calculation only on the value of the lost oil rigs. (742) The arbitrator could not calculate this amount exactly but estimated it 'applying the measure of “equitable compensation” hereabove adopted' and reached the conclusion 'that a lump sum of $66,000,000 (sixty six million American dollars) should be a reasonable equitable indemnification'. (743) 3.352 The tribunal in Aminoil v Kuwait also referred to equitable considerations in its valuation of the expropriated petroleum concessions. An often-quoted passage of the award holds: 'It is well known that any estimate in money terms of amounts intended to express the value of an asset, of an undertaking, of a contract, or of services rendered, must take equitable principles into account.' (744) Even though the former owner had already had a long period of successful operation of the petroleum concession, the calculation of the value of the concession appeared difficult. The tribunal asked for exact calculations from the experts. (745) In the end, however, it decided that the value was a sum 'estimated at $206.042.000' which represented the 'depreciated replacement value' of the assets, increased by the value of 'non-fixed assets, and taking into account the legitimate expectations of the concessionaire'. (746) The tribunal considered this to represent the 'reasonably appraised value of what constituted the object of the takeover'. (747) 3.353 Similarly, the ICSID Tribunal in Técnicas Medioambientales v Mexico (748) pointed out that it 'may consider equitable principles when setting the compensation owed to the Claimant, without thereby assuming the role of an arbitrator ex aequo et bono'. (749) The tribunal in this case awarded lost profits for two years after the expropriation, although in those two years no profits would have been expected because of the planned relocation of the landfill which had become necessary due to the growing community pressure. (750) This amount can thus be regarded as a lump sum to account for the investor's successful operation in the past. 3.354 The Iran–US Claims Tribunal, in order to explain inexact calculations or estimations, frequently referred to 'reasonableness' or the 'relevant circumstances'. In P 157 American International Group v Iran, for example, it held that 'in order to determine the value within these limits, to which value the compensation should be related, the tribunal will have to make an approximation of that value, taking into account all the relevant circumstances of the case'. (751) 3.355 More recent ICSID tribunals have also based their quantification on 'appropriate estimation' (752) and 'reasonable' probabilities. (753) 3.356 Several tribunals pointed to the difficulty of the exact calculation of the amount of damages and stated that it was impossible to establish damages as a matter of 'scientific certainty' but that this would not prevent them from awarding damages nevertheless. (754) The leading case in this respect is Southern Pacific Properties v Egypt which held that '[i]t is well settled that the fact that damages cannot be settled with certainty is no reason not to award damages when a loss has been incurred'. (755) 3.357 Another idea to reflect equitable principles in the quantification was brought up in Funekotter v Zimbabwe, reminding of the arguments made in the Chilean Copper nationalizations, namely that 'the profit resulting in the past from the investment' should be taken into account. (756) 3.358 Even though international tribunals are often confronted with considerable difficulties when it comes to the valuation of claims, equitable principles should be used cautiously, in particular without an express authorization by the parties to decide ex aequo et bono. (757) Sometimes it is necessary to engage in complex calculation and valuation procedures, and the help of experts is needed. Tribunals have shown that they can use this help and apply the respective parameters to the specific valuation issues of the case. 3.359 International courts and tribunals do have discretion, but it should not be used as modern valuation tools and techniques, including information on electronic resources, a lot of uncertainty and complexity can be built into generally accepted valuation methods.

P 161 an excuse for not conducting a calculation as precisely as possible. In view of

(2) Relevance of the Respondent's Economic Situation 3.360 The economic situation of the host state has traditionally been discussed in the context of the standard of compensation upon expropriations or nationalizations. (758) Under the law of state responsibility the question arises to what extent financial

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difficulties can represent a circumstance precluding the wrongfulness of an act of the state. (759) In addition, many bilateral investment treaties contain so-called 'NonProcluded Measures Provisions' (NPMs). (760) In order to ensure the long-term perspective of international investment law, it appears important to find a proper balance between the maintenance of a reliable legal and financial framework for investors and, on the other hand, to account for the financial difficulties of host states in certain cases. (761) Investment tribunals have addressed this issue in a number of cases. 3.361 The tribunal in Himpurna California v PLN tried to balance the provision of a contract which was very beneficial to the investor. As the host state was in a serious financial crisis it tried to limit the amount of damages for lost profits: In such circumstances, it strikes the Arbitral Tribunal as unacceptable to assess lost profits as though the claimant had an unfettered right to create ever-increasing losses for the State of Indonesia (and its people) by generating energy without any regard to whether or not PLN had any use for it. Even if such a right may be said to derive from explicit contractual terms, the Arbitral Tribunal cannot fail to be struck by the fact that the claimant is seeking to turn the ESC into an astonishing bargain in circumstances when performance of the Contract would be ruinous to the respondent. (762) 3.362 In order to account for this concern, the tribunal applied the principle of the prohibition of 'abuse of right' as a general principle of law. (763) This was, however, criticized by one arbitrator and by commentators. (764) 3.363 In CME v Czech Republic, the amount claimed by a financially strong foreign investor appeared to pose a considerable burden for the respondent state and its rather small emerging economy. Arbitrator Brownlie, in his Separate Opinion, wrote in favour of an appropriate consideration of the respondent state's financial situation. (765) He argued that not only in case of expropriations but also in cases of state responsibility the amounts awarded should take into account the financial abilities of the states involved. To support this argument he referred to cases where even reparations after wars and unlawful acts of aggression had reflected this aspect. He pointed, for example, to the ICJ's argument in the Gulf of Maine case that the legitimate approach lies in the avoidance of methods that were 'likely to entail catastrophic repercussions for the livelihood and economic well-being of the population of the countries concerned'. (766) Similarly, the Japanese Peace Treaty of 1945 had also 'recognized that the resources of Japan are not presently sufficient if it is to maintain a viable economy, to make complete reparation for all such damage and suffering and at the same time meet its obligations'. (767) The tribunal, however, did not follow these considerations and calculated the amount of damages solely on the basis of economic criteria, namely on the basis of the price paid by an interested investor and, as a confirmation, by the value of expected cash-flows (the DCF method). (768) 3.364 The relevance of the difficult financial situation of the host state has been particularly discussed in the cases against Argentina under the auspices of ICSID. The unilateral disengagement of a number of long-term investment contracts from their linkage to the dollar, the so-called 'pesification', was one of a number of measures taken by the Argentine Government in the major economic crises occurring between 2000 and 2002. In the award in CMS v Argentina, the first to decide the damages issue, the ICSID Tribunal put its dilemma in the following terms: The question for the Tribunal is then how does one weigh the significance of a legal guarantee in the context of a collapsing economic situation. It is certainly not an option to ignore the guarantee, as the Respondent has advocated and done, and neither is it an option to disregard the economic reality which underpinned the operation of the industry. (769) 3.365 The unlawful act of the respondent was considered to be a breach of the applicable BIT between Argentina and the United States. The tribunal, therefore, addressed the issue from the perspective of international law, in particular the law of state responsibility. In this context Article 25, which describes 'necessity' as a reason for precluding the wrongfulness of the act of the state, is of particular importance. Article 25 reads: Necessity. 1.

Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a)

2.

is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if:

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(a) (b)

the international obligation in question excludes the possibility of invoking necessity; or the State has contributed to the situation of necessity. (770)

3.366 In CMS v Argentina, the tribunal was of the opinion that the conditions were not fulfilled. (771) Also the emergency clause contained in the treaty itself was not applicable according to the tribunal: As stated above, the Tribunal is convinced that the Argentine crisis was severe but did not result in total economic and social collapse. When the Argentine crisis is compared to other contemporary crises affecting countries in different regions of the world it may be noted that such other crises have not led to the derogation of international contractual or treaty obligations. (772) 3.367 The ICSID Tribunal in LG&E v Argentina, in contrast, came to a different conclusion as regards the consequences of the difficult economic situation in Argentina. The claimants had been affected by the same measures by the Argentine Government which the tribunal, in this case, considered as justified by the state of necessity. It held: The essential interests of the Argentine State were threatened in December 2001. It faced an extremely serious threat to its existence, its political and economic survival, to the possibility of maintaining its essential services in operation, and to the preservation of its internal peace. There is no serious evidence on the record that Argentina contributed to the crisis resulting in the state of necessity. In this [sic] circumstances, an economic recovery package was the only means to respond to the crisis. (773) 3.368 It followed that, according to the tribunal, Argentina was not internationally responsible for the violation of its obligations during the state of necessity. It was not obliged to pay damages for this period. However, the Argentine Government should have re-established the original tariff regime as soon as the state of necessity was over. Argentina was, therefore, responsible for the violation of its obligations after this date: Based on the analysis of the state of necessity, the Tribunal concludes that, first, said state started on 1 December 2001 and ended on 26 April 2003; second, during that period Argentina is exempt of responsibility, and accordingly, the Claimants should bear the consequences of the measures taken by the host State; and finally, the Respondent should have restored the tariff regime on 27 April 2003, or should have compensated the Claimants, which did not occur: As a result, Argentina is liable as from that date to Claimants for damages. (774) 3.369 It is remarkable that the tribunal in LG&E v Argentina did not mention the award in CMS v Argentina which had been issued only fifteen months before and had been based on almost identical facts. (775) Yet, the difference of opinions on the relevance of the emergency situation in Argentina did not become smaller. In Continental Casualty v Argentina, the tribunal, similar to LG&E v Argentina, accepted Argentina's contention with respect to its emergency situation for the larger parts of the claim. (776) The tribunals in Sempra Energy v Argentina (777) and Enron v Argentina, (778) by contrast, did not accept the justification under Article 25 of the ILC Articles on State Responsibility and held Argentina liable to pay damages. However, these last two awards were annulled precisely because the ad hoc committees found that the tribunals had not applied the law and had manifestly exceeded their powers with respect to the measures and arguments raised by Argentina in the wake of the economic crisis. The ad hoc committee in Sempra v Argentina criticized the tribunal for not distinguishing between the treaty provision on NPM and the customary law standard of the ILC Articles, (779) thus between primary and secondary obligations international law. The ad hoc committee in Enron v Argentina found a different reason for annulment, namely the lack of reasoning why the measure was not the 'only measure' which could have been applied. (780) The decisions in the reP 162 submitted cases will show whether in the meantime some international consensus can be achieved in the future as regards the possibilities of host states in economically difficult situations. 3.370 The Argentinian crisis in 2001/2 and the various regulatory measures in response, brought the role and purpose of the previously hardly noticed NPMs in to focus. Such NPMs are contained in numerous BITs with slightly different formulations. If they apply, then no damages are to be paid. By contrast, the applicability of Article 25 does not preclude payment of compensation. 3.371 Burke-White and von Staden argue in their comprehensive analysis of the purpose and scope of NPMs, that the different wordings in the BITS have to be interpreted more accurately in accordance with the rules of treaty interpretation in Article 31 of the VCLT. They have to be distinsguished in particular as regards (1) the 'nexus' (in formulations such as 'necessary for', 'required to'…), (2) the permissible objectives, (3) the scope (applicable to all BIT provisions or only to some), and (4) deference ('self-judging' or not). (781) If these rules of interpretation were applied more accurately, the divergent outcomes after situations such as that arising in Argentinia could be avoided. The latest

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developments of arbitral tribunals and ICSID ad hoc committees point in this direction. 3.372 Several other tribunals in Argentina during the valuation stage of the proceedings addressed the difficult financial situation. In order to arrive at the amount to be awarded, they made a comparison between the scenario of the operation of the enterprise with and without the pesification. This meant that the diminished expectations and results from the business operation in the deteriorated economic environment were put into the calculation. The tribunals took, for example, into account that both the demand for gas and the prices for it would have suffered even without Argentina's unlawful acts. Notably, the tribunals did not rely on equitable considerations. 3.373 In conclusion one can observe that economic realities, including financial crises, generally are and should be reflected in the calculation of compensation and damages. For this purpose, it is not necessary to rely on equitable considerations. While in cases of temporary difficulty the deferral of payment or payment in instalments can be helpful, the appropriate application of the respective valuation methods may well reflect various kinds of macroeconomic fluctuations. A comparison with the hypothetical financial situation of the victim of the unlawful act could and should, for example, reflect the economic crises which would have reduced his or her financial situation anyway. Furthermore, an appropriate reflection of the risk is included in several economic valuation methods. The different approaches and their application by international P 162 tribunals will be analysed in the next chapter.

References 1)

2)

3)

4)

5)

6) 7)

See, e.g., F V Garcia-Amador, The Changing Law of International Claims (New York: Oceana Publications, 1984) 278 et seq; B H Weston, 'The New International Economic Order and the Deprivation of Foreign Proprietary Wealth: Reflections upon the Contemporary International Law Debate' in R Lillich (ed.), International Law of State Responsibility for Injuries to Aliens (Charlottesville: University Press of Virginia, 1983) 89 et seq; C F Amerasinghe, State Responsibility for Injuries to Aliens (Oxford: Clarendon Press, 1967) 121 et seq. See the case of Norwegian Shipowners, where the tribunal emphasized that both the American Constitution and international law recognize the 'power of eminent domain', namely, 'the power of a sovereign State to expropriate, take or authorise the taking of any property within its jurisdiction which may be required for the “public good” or for the “general welfare” '. Norwegian Shipowners' Claim (Norway v United States), Award of 13 October 1922, 2 RIAA, 307, 332. This is still recognized today. See R Dolzer and C Schreuer, Principles of International Investment Law (2nd edn, Oxford: Oxford University Press, 2012) 98 et seq. See, e.g., M Shaw, International Law (7th edn, Cambridge: Cambridge University Press, 2014) 602; R Jennings and A Watts, Oppenheim's International Law (London et al: Longman, 1992), vol. 1, 919 et seq; R Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Berlin et al: Springer, 1985) 2; G Schwarzenberger, International Law (London: Stevens and Sons Ltd, 1957) 184 et seq; B Cheng, General Principles of Law as Applied by International Courts and Tribunals (London: Stevens and Sons Ltd, 1953) 37. See A Reinisch, 'Expropriation' in P Muchlinski, F Ortino, and C Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 407, 408; M Herdegen, Principles of International Economic Law (Oxford: Oxford University Press, 2013) 360; R Higgins, 'The Taking of Property by the State' (1982) 176 RdC 263, 288–9; G Christie, 'What Constitutes a Taking of Property under International Law?' (1962) 38 BYIL 307, 309 et seq; B A Wortley, 'Some Early but Basic Theories of Expropriation' (1978) 20 GYIL 236, 239–40. See, e.g., the definition of the Institut de droit international of 1952: 'La nationalisation est le transfer à l'Etat, par mesure législative, dans un intérêt public, de biens ou droits privés ou de facultés d'une certaine catégorie, en vue de leur exploitation ou contrôle par l'Etat, ou d'une nouvelle destination qui leur sera donnée par celuici'. Institut de droit international (ed.), Annuaire (Basel: Institut de Droit international, 1952), vol. 2, 279–80. Arbitrator Mahmassani explicitly referred to this definition in LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 140, 185. See also A Ruzza, 'Expropriation and Nationalisation' in R Wolfrum (ed.), The Max Planck Encyclopedia of Public International Law (Oxford: Oxford University Press 2012), vol. IX, para. 24. As regards these 'indirect' expropriations, see further Section A(3). Herdegen, n. 4, 16 et seq; B H Weston, 'The New International Economic Order and the Deprivation of Foreign Proprietary Wealth: Reflections upon the Contemporary International Law Debate' in R Lillich (ed.), International Law of State Responsibility for Injuries to Aliens (Charlottesville: University Press of Virginia, 1983) 89 et seq, 124 et seq.

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8)

9)

10)

11)

12) 13)

See German Interests in Polish Upper Silesia (Merits), PCIJ 1926 Ser A, No. 7, 22: 'It follows from these same principles that the only measures prohibited are those which generally accepted international law does not sanction in respect of foreigners; expropriation for reasons of public utility, judicial liquidation and similar measures are not affected by the Convention'. This remained unchanged for a long time and was even confirmed in the UN GA Resolutions on the New International Economic Order in the 1970s, see below, n. 76. Otherwise, as is well known, there is no general prohibition of discrimination under international law. See, e.g., J Crawford, Brownlie's Principles of Public International Law (8th edn, Oxford: Oxford University Press, 2012) 612 et seq. Also in case of an expropriation, discrimination is only regarded as unlawful if it intentionally and egregiously—e.g. as an act of political repression—is directed against foreigners only. See, e.g., BP v Libya, Award of 10 October 1973 (1979) 53 ILR 297, 314 et seq; see also the Chilean expropriations in the 1970s. See in this regard A Lowenfeld, 'Chilean Copper Nationalization, Review by Courts of Third States' in R Wolfrum (ed.), The Max Planck Encyclopedia of Public International Law (Oxford: Oxford University Press, 2012), vol. II, 145; I Seidl-Hohenveldern, 'Chilean Copper Nationalization Cases before National Courts' (1975) 69 AJIL 110 et seq. On this condition, there is no general agreement in legal writing and practice. However, it is contained in many bilateral investment treaties (BITs), in the North American Free Trade Agreement (NAFTA), and in the Energy Charter Treaty. See C Schreuer, 'The Concept of Expropriation under the ECT and other Investment Protection Treaties' in C Ribeiro (ed.), Investment Arbitration and the Energy Charter Treaty (New York: JurisNet, 2006) 108 et seq. On this issue see, e.g., C F Amerasinghe, above, n. 1; C F Amerasinghe, 'Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice' (1992) 41 ICLQ 22 et seq; R Dolzer, 'New Foundations of the Law of Expropriation of Alien Property' (1981) 75 AJIL 553. See the historical overview in A Lowenfeld, International Economic Law (2nd edn, Oxford: Oxford University Press, 2008) 469 et seq; Herdegen, n. 4, 16 et seq. J Salacuse, The Law of Investment Treaties (Oxford: Oxford University Press, 2010) 70; P Norton, 'A Law of the Future or a Law of the Past? Modern Tribunals and the International Law of Expropriation' (1991) 85 AJIL 474, 479.

Article 4 reads: 'Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law. In any case where the question of compensation gives rise to a controversy, the national jurisdiction of the State taking such measures shall be exhausted. However, upon agreement by sovereign States and other parties concerned, settlement of the dispute should be made through arbitration or international adjudication.' UN GA Resolution on the Permanent Sovereignty over Natural Resources No. 1803 (XVII) of 14 December 1962. 15) UN GA Resolution adopting the Declaration on the Establishment of a New International Economic Order No. 3201 (S-VI) of 1 May 1974; UN GA Resolution on the Programme of Action on the Establishment of a New International Economic Order No. 3202 (S-VI) of 1 May 1974. 16) UN GA Resolution No. 3281 (XXIX) of 12 December 1974. 17) The above-mentioned resolutions served as a point of reference, as did the revision of the Restatement of Foreign Relations Law of United States which also contained exceptions to the full compensation standard. Schachter, among others, argued in favour of reduced compensation in certain cases. See O Schachter, 'Editorial Comment: Compensation for Expropriation' (1984) 78 AJIL 121 et seq; O Schachter, 'Compensation Cases—Leading and Misleading' (1985) 79 AJIL 420 et seq; for arguments against this, see D Robinson, 'Expropriation in the Restatement (Revised)' (1984) 78 AJIL 176 et seq; M Mendelson, 'Compensation for Expropriation: The Case Law' (1985) 79 AJIL 414 et seq. 18) See R Lillich, 'International Law and the Chilean Nationalizations: The Valuation of the Copper Companies' in R Lillich (ed.), Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1973) 120, 124–5; I Seidl-Hohenveldern, 'Chilean Copper Nationalization Cases before National Courts' (1975) 69 AJIL 110 et seq; Lowenfeld, n. 9, para. 6. In a recent case, the Government of Zimbabwe took up this argument and submitted that, with respect to the calculation of compensation, 'the profit resulting in the past from the investment' should be taken into account. Funnekotter and others v Zimbabwe, Award of 22 April 2009, para. 124. See also below, Section D(1). 19) INA Corporation v Iran, 8 Iran–US CTR (1985) 373–84. Also in Aminoil the standard of compensation was broadly discussed. The tribunal pointed out that the opinions about the appropriate standard are very diverse, ranging from no compensation at all to compensation that represents restitutio in integrum. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 1032–3. 20) INA Corporation v Iran, above, n. 19, 378. 14)

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21) 22)

23)

24)

25)

26)

27) 28)

29)

30)

31) 32) 33) 34) 35)

That large-scale nationalizations should give rise to discounting from the market value was more recently argued once again by the Government of Zimbabwe. Funnekotter and others v Zimbabwe, Award of 22 April 2009, para. 124. INA Corporation v Iran, Dissenting Opinion Ameli, 8 Iran–US CTR (1985) 403, 416–17. Furthermore, he argued that full compensation would be in contradiction to the idea of fairness as the foreign investors have frequently generated large profits over a long period of time and have contributed to and benefitted from the exploitation of natural resources. See also C Murphy, 'Limitations upon the Power of a State to Determine the Amount of Compensation Payable to an Alien Upon Nationalization' in R Lillich (ed.), The Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1975), vol. 3, 52. It was also argued that the amount of compensation must reflect the historic debts owed to the peoples of the Third World because of colonialism and include reparation for unpaid slave labour or underpayment, as well as for the denial of opportunity to acquire appropriate shares of land and natural resources. See N Girvan, 'Expropriating the Expropriators: Compensation Criteria from a Third World Viewpoint' in ibid, at 149, 154–7. CME Czech Republic BV (The Netherlands) v Czech Republic, Final Award on Damages of 14 March 2003. Brownlie explained, in his comprehensive Separate Opinion, the view that, in 1991, the year of the conclusion of the applicable BIT between the Czech Republic and The Netherlands, the customary law standard on expropriations was 'appropriate compensation'. CME Czech Republic BV(The Netherlands) v Czech Republic, Separate Opinion Brownlie on the Issues at the Quantum Phase of 14 March 2003, para. 26. He alleged that the concepts of 'reasonable returns' and 'legitimate expectations' should be considered in the calculation of compensation. He referred, amongst others, to Schachter who had held: 'Large-scale expropriation such as general land reform often raises questions as to the ability of the State to pay full compensation. In such cases, a good case can be made that less than full value would be just compensation when the State would otherwise have an overwhelming financial burden.' O Schachter, International Law in Theory and Practice (Dordrecht et al: Martinus Nijhoff Publishers, 1991) 324. Karaha Bodas Company LLC v Pertamina et al, Award of 30 September 1999, . See also the analysis of L Wells, 'Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Kahara Bodas Company in Indonesia' (2003) 19 Arbitration International 471. See, e.g., S Schill, 'International Investment Law and the Host State's Power to Handle Economic Crises' (2007) 24 Journal of International Arbitration 265; A van Aaken and J Kurtz, 'Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law' (2009) Journal of International Economic Law 1. Although the discussions were more concerned with justifications for breach of contract or breach of BIT obligations in case of economic emergency and did not actually question the standard of compensation for expropriation. See, on the relevance of the host state's financial situation further D.(2), paras 3.360 et seq. N Bernasconi-Osterwalder, 'Who Wins and Who Loses in Investment Arbitration? Are Investors and Host States on a Level Playing Field?' (2005) 6 JWIT 69 et seq. T Wälde and A Kolo, 'Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law' (2001) 50 International Comparative Law Quarterly 811; A Newcombe, 'The Boundaries of Regulatory Expropriation in International Law' (2005) 20 ICSID Rev.-FILJ 1; Merill proposes in this context a new concept of 'just compensation' which takes into account that regulatory takings leave the possession undisturbed, but reduce the value or profitability of the property. He suggests borrowing the solutions adopted in national expropriation laws for partial takings or for public utilities which provide for 'incomplete compensation'. T Merrill, 'Incomplete Compensation for Takings' (2002) 11 NYU Environmental Law Journal 110, 121–8; see also U Kriebaum, 'Regulatory Takings: Balancing the Interests of the Investor and the State' (2007) 8 JWIT 717. Brownlie, in his Separate Opinion in CME v Czech Republic, also referred, inter alia, to the award in Aminoil v Amoco which, however, dealt with lawful expropriation, while in CME v Czech Republic the tribunal found that an unlawful expropriation and simultaneously a violation of the applicable BIT had occurred. See CME v Czech Republic, Separate Opinion Brownlie on the Issues at the Quantum Phase of 14 March 2003 (2006) 9 ICSID Reports 412, paras 35 et seq. This is the case in almost all the BITs of the US. See also Article 6(1)(c) of the US Model BIT (2012); similarly Article 13 of the Canadian Model BIT (2004); see also Article 5 of the BIT between the UK and Argentina (1990); Article 5 of the BIT between the UK and Croatia (1997); Article 5(1)(d) of the Austrian–Slovenian BIT (2001) and Article 5 (1)(d) of the BIT between Austria and Bangladesh (2001). Emphasis added. See also Article 8.12 (1) CETA. See, e.g., Article 10.9 of the FTA between the US and Chile or Article 11.7 of the FTA between the US and Australia. See also Article 9.8 (1) TPP. See, e.g., Article 7 of the BIT between Argentina and El Salvador (1996). See, e.g., Article 4 of the BIT between Ethiopia and Sudan (2000); Article 4 of the BIT between Indonesia and Jordan (1999). See, e.g., Article 4 of the BIT between Russia and Turkey (1997).

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36) 37) 38) 39) 40) 41) 42) 43) 44) 45)

See Article 6 of the BIT between Brazil and The Netherlands (1998); Article 6 of the BIT between Latvia and The Netherlands; Article 4 of the BIT between Egypt and France (1975). Article 5 of the BIT between India and Indonesia (1999). See also Article 4 of the German Model BIT (2008). See, e.g., Article 4 of the BIT between Austria and the Slovak Federal Republic (1991); similarly Article 4 of the BIT with Croatia (1997) and Article 4 of the BIT with Hungary (1989). Paragraphs 4 to 6 contain further details on the calculation and the payment conditions. Article 13(2) of the Canadian Model BIT is identical with this formulation. Article 6(2) of the US Model BIT (2012) (emphasis added). Article 13(2) of the Canadian Model BIT (2004) (emphasis added). Article 5 of the UK–Argentina BIT (1990); Article 5 of the UK–Croatia BIT (1997); Article 5 of the Indian Model BIT (2003). See, e.g., Article 4 of the BIT between Germany and Bosnia-Herzegovina (2001) or Article 4 of the BIT between Germany and Venezuela (1996) in concordance with Article 4 of the German Model BIT (2004).

46) This enumeration is also contained in Article 13(2) of the Canadian Model BIT and

Article 8.12 (2) CETA.

47) See, e.g., Article 4 of the BIT between Austria and Croatia (1999). 48) The International Valuation Standards recommend a 'cost approach', if the income

49) 50)

51)

52) 53) 54) 55) 56) 57)

58) 59) 60) 61) 62) 63)

approach is not applicable, because 'asset value' is ambiguous as it can be determined in various ways (e.g. market value, liquidation value, replacement value). See further on this issue Chapter 4. The 'declared tax value' seems to have been included in the list of NAFTA Article 1110 because, under Article 27 of the Mexican Constitution, compensation for expropriation shall not exceed declared tax value. This may give rise to a conflict between national and international law, but otherwise Mexico could not have ratified NAFTA. See A Ramirez Martinez, 'The Mexican Constitutions and its Safeguards against Foreign Investment' (2009) Cornell Law School Inter-University Graduate Student Conference Papers. Paper 39; P del Luca, 'The Rule of Law: Mexico's Approach to Expropriation Disputes in the Face of Investment Globalization' (2003) 51 UCLA Law Review 35, 113–14. Norwegian Shipowners' Claim, Award of 13 October 1922, 1 RIAA, 307, 335, 338. The actual calculation was, however, difficult to comprehend. This eventually motivated the US Secretary of State to write a letter in which he strongly complained about the non-transparent method of calculation in this case: 'While purporting to award compensation on the basis of the fair market value of the property taken, the tribunal has seen fit to omit discussion of the particular circumstances of the different claims or of the methods of calculation applied, or of the reasons for determining upon the amounts awarded in each case. Indeed, any definite disclosure or specification of the particular grounds of the awards to respective claimants is so entirely lacking that the award gives to one who examines it no clue to the method of determining why one amount was awarded rather than another.' Ibid, at 340. The tribunal in LIAMCO v Libya explained this in the following way: '[T]he Arbitral Tribunal has reached the conclusion that the damnum emergens should represent the market value which the nationalized assets have at the said premature expiration of the concession …'. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 211–12. In addition, it awarded 'equitable compensation' for the value of the lost concession right of LIAMCO's interest in concession. No. 20, the Raguba field. Ibid, at 214. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 178. See, e.g., INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 380; American International Group v Iran, 4 Iran–US CTR (1983) 96, 106; Khosrowshahi v Iran, 30 Iran– US CTR (1994) 76, para. 34. INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 379. Ibid, at 380. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 219. Ibid, para. 220 (emphasis added). The reference to 'alternative methods of valuation' related to the claimant's proposal of using the DCF method, which the tribunal repudiated as too speculative. It accepted, however, that the going concern value of the expropriated petroleum company should be determinative for the amount of compensation. This value should not only reflect the value of the company's assets but also its future profitability. Ibid, para. 263. See further Chapter 5, Section B(2), paras 5.105 et seq. With regard to the lawfulness of the expropriation in this case see para. 3.43. Compañía del Desarrollo de Santa Elena SA v Costa Rica, Award of 17 February 2000, para. 73 (emphasis in original). Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992, para. 183. Reineccius et al v Bank for International Settlements, Award of 22 November 2002, paras 156 et seq, 183. Quasar de Valores v Russia, Award of 20 July 2012, paras 178, 186, 215. Ibid, para. 188.

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64) The tribunal agreed that the value of a portfolio investment is best given by the 65) 66) 67) 68) 69) 70) 71)

72)

73)

74) 75)

76)

77)

78)

79) 80) 81)

82) 83)

84) 85)

market. Ibid, para. 206. Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 307. Ibid, para. 367. Tidewater v Venezuela, Award of 13 March 2015, para. 151. See above, paras 2.70–1. Tidewater v Venezuela, Award of 13 March 2015, paras 152 et seq. Ibid, paras 165 et seq. See, as regards the historical development, P Friedman, Expropriation in International Law (London: Stevens & Sons Limited, 1955) 13 et seq; B Wortley, 'Some Early but Basic Theories of Expropriation' (1978) 20 GYIL 236, 242–3; F V GarciaAmador, The Changing Law of International Claims (New York: Oceana Publications, 1984) 293 et seq; R Lillich, 'The Current Status of the Law of State Responsibility for Injuries to Aliens' in R Lillich (ed.), International Law of State Responsibility for Injuries to Aliens (Charlottesville: University Press of Virginia, 1983) 1 et seq; P Comeaux and S Kinsella, Protecting Foreign Investment under International Law (New York: Oceana Publications, 1997) 57 et seq. See, e.g., I Seidl-Hohenveldern, Internationales Konfiskations- und Enteignungsrecht (Berlin: de Gruyter, 1952) 5 et seq, 173 et seq; see also A Reinisch, 'Legality of Expropriation' in A Reinisch (ed.), Standards of Investment Protection (Oxford: Oxford University Press, 2008) 171, 194. De Sabla (United States v Panama), Award of 29 June 1933, 6 RIAA 358, 366; similarly the much earlier case of Goldenberg (Romania v Germany), Award of 27 September 1928, 2 RIAA, 903, 909. See also the formulation of the US–Venezuelan Mixed Claims Commission: 'The right of the State, under the stress of necessity, to appropriate private property for public use is unquestioned, but always with the corresponding obligation to make just compensation'. Upton Case (United States v Venezuela), Award of 31 December 1903, 9 RIAA, 234, 236. M Whiteman, Digest of International Law (Washington: Government Printing Office, 1967), vol. 8, 1020. GA Res No. 1803 (XVII) of 14 December 1962 on the Permanent Sovereignty over Natural Resources. This resolution, because of its strong support by the states in the General Assembly, is regarded as an expression of customary international law. This conclusion, e.g., was drawn by Arbitrator Dupuy after a thorough analysis of the voting, in Texaco v Libya, Award of 19 January 1977 (1978) 17 ILM 1, para. 88; see also Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, paras 143 et seq. See, e.g., the 'Declaration' and the 'Action Programme' on the establishment of a New International Economic Order, see UN GA Res No. 3201 (S-VI) and Res No. 3202 (S-VI) of 1 May 1974. See also UN GA Res No. 3281 (XXIX) of 12 December 1974 and UN GA Res No. 3171 (XXVIII) of 17 December 1973. While in LIAMCO and Texaco the expropriations were part of large-scale nationalizations in Libya, the expropriation in BP was a retaliation against Great Britain which had done nothing against the invasion of some Arab islands by Iran on the last day of Britain's colonial power there, on 30 November 1971. See BP v Libya, Award of 10 October 1973 (1979) 53 ILR 297, 313. It is noteworthy that the tribunal did not even address the issue of public purpose further, as it was of the opinion that this was an issue of the state's sovereignty which would not be assessed by an international tribunal: 'It is the general opinion in international legal theory that the public utility principle is not a necessary prerequisite for the legality of a nationalization. This principle was mentioned by Grotius and other later publicists, but now there is no international authority, from a judicial or any other source, to support its application to nationalization. Motives are indifferent to international law, each State being free to judge for itself what it considers useful or necessary for the public good … The object pursued by it is of no concern to third parties.' LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 194. Arbitrator Mahmassani, in this regard, referred to P Friedman, Expropriation in International Law (London: Stevens & Sons Limited, 1953) 140 et seq, and G White, Nationalisation of Foreign Property (New York: Frederick A Praeger, 1961) 145. The laws in question were Law No. 66 of 1973 and No. 10 of 1974, see LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 162 et seq. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 115. The Government of Kuwait enacted the Decree Law No. 124, 'Terminating the Agreement between the Kuwait Government and Aminoil', on 19 September 1977, which contained in its Articles 3 and 4 the establishment of a Compensation Committee. See Aminoil v Kuwait, ibid, at 998. See, e.g., American International Group v Iran, 4 Iran–US CTR (1983) 96; INA Corporation v Iran, 8 Iran–US CTR (1985) 373. Article 1 of the Law read: 'To protect the rights of the insured, to expand the insurance industry and the entire State and to place it at the service of the people, from the date of this law, all insurance enterprises in Iran are proclaimed nationalised with acceptance of the principle of legitimate conditional ownership'. INA Corporation v Iran, above, n. 82, 375. Ibid, at 378. Ibid, at 376.

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86) 87) 88) 89) 90)

91) 92) 93)

94) 95) 96) 97) 98)

99) 100) 101) 102) 103) 104) 105) 106) 107) 108)

109) 110) 111)

American International Group v Iran, 4 Iran–US CTR (1983) 96, 106. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 72. Ibid. Ibid, para. 133. The tribunal, in this respect, shared the point of view of the respondent that only the Single Article Act and not the actions before, including the taking over of the management by the Government, led to the expropriation. In similar cases before the Iran–US Claims Tribunal, other tribunals have, however, regarded such state actions as indirect expropriations; see, e.g., Phelps Dodge Corporation & Overseas Private Investments Corporation v Iran, 10 Iran–US CTR (1986) 121, para. 22; Thomas Earl Payne v Iran, 12 Iran–US CTR (1986) 3, para. 20 with further references to earlier jurisprudence of the Iran–US Claims Tribunal. Amoco International Finance v Iran, above, n. 87, para. 138. Sedco Inc v NIOC, Separate Opinion Brower, 10 Iran–US CTR (1986) 189, 204. The tribunal explained this in the following way: 'Clearly, as a matter of international law, the Respondent was entitled to cancel a tourist development project situated on its own territory for the purpose of protecting antiquities. This prerogative is an unquestionable attribute of sovereignty. The decision to cancel the project constituted a lawful exercise of the right of eminent domain. The right was exercised for a public purpose, namely, the preservation and protection of antiquities in the area.' Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992 (1995) 3 ICSID Reports 189, para. 158. Southern Pacific Properties (Middle East) Limited, Southern Pacific Properties Limited v Arab Republic of Egypt, General Company for Tourism and Hotels, Award of 11 March 1983 (1983) 22 ILM 752 et seq. Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992 (1995) 3 ICSID Reports 189, para. 182. As regards this rather rare clear distinction between 'compensation' and 'damages', see above, Chapter 2, para. 2.14. Companía del Desarrollo de Santa Elena SA v Costa Rica, Award of 17 February 2000 (2000) 15 ICSID Rev.-FILJ 169, para. 94. Ibid, para. 71. The so-called 'Helms Amendment' of 1994 prohibited the award of US financial aid and the support of financial aid in international institutions to states which have expropriated the property of US nationals or enterprises with more than 50% US ownership, and which have not returned the property, have not provided adequate and effective compensation as required by international law, have not offered a domestic procedure providing prompt, adequate, and effective compensation in accordance with international law, or submitted the dispute to arbitration under the rules of the ICSID Convention or other mutually agreeable binding international arbitration procedure. See the relevant text for the reasons for accepting the jurisdiction of ICSID in Companía del Desarollo de Santa Elena SA v Costa Rica (2000) 3 ICSID Rev.-FILJ 169, para. 24. See further C Brower and J Wong, 'General Valuation Principles: The Case of Santa Elena' in T Weiler (ed.), International Investment Law and Arbitration (London: Cameron May, 2005) 747, 751 et seq. Antoine Goetz v Burundi, Award of 10 February 1999, para. 130. Ibid. Ibid, para. 135. Mondev v United States, Award of 11 October 2002, para. 71. Ibid, para. 71. Generally, one can observe a certain reluctance of tribunals to scrutinize states' decisions on measures in the public interest, albeit with several exceptions. See A Reinisch, above, n. 72, 171, 178 et seq. Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 301. Ibid, para. 305. Ibid. By contrast, the ICSID Tribunal in OI European Group v Venezuela found that the long and unsuccessful negotiations on the amount of compensation during more than four years represented a violation of the obligation to provide compensation 'without undue delay' as required under Article 6 of the BIT between the Netherlands and Venezuela. OI European Group v Venezuela, Award of 10 March 2015, para. 425. Tidewater v Venezuela, Award of 13 March 2015, paras 129–46. Ibid, para. 124. Ibid, paras 143–5.

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112) Ibid, para. 142. Yet, the ICSID Tribunal in Rusoro Mining v Venezuela found that the

mere offer, in the Nationalisation Decree of September 2011, to provide compensation limited to the net worth of the expropriated companies and ensuing six months of unsuccessful negotiations were not sufficient to comply with the conditions of Article VII (1) of the BIT between Canada and Venezuela and decided that—only for these reasons—the expropriation was unlawful. The tribunal held that '[t]he legality of an expropriation where the State has taken the investment but has failed to make any compensation payment, depends on whether a good faith offer for a reasonable amount of compensation was actually made', Rusoro Mining v Venezuela, Award of 22 August 2016, para. 407. The tribunal was, in particular, dissatisfied with the cap at the net worth ('valor en libros'), which was not foreseen neither in the BIT nor in domestic Venezuelan law. Ibid, para. 408.

113) Sporrong & Lönnroth v Sweden, 23 September 1982, ECtHR Ser A, No. 52, para. 69;

114)

115) 116) 117)

118)

119) 120) 121) 122) 123)

124)

125) 126)

127)

James et al v United Kingdom, 21 February 1986, ECtHR Ser A, No. 98, para. 54; Lithgow et al v United Kingdom, 8 July 1986, ECtHR Ser A, No. 102, paras 120–1 Holy Monasteries v Greece, ECtHR No. 13092/87; 13984/88, Judgment of 9 December 1994, paras 70–5. Former King of Greece v Greece, ECtHR No. 25701/94, Judgment of 23 November 2000, para. 99. The same is true for an extremely low compensation amount (2% of the compensation due under previous national law). See Broniowski v Poland, ECtHR No. 31443/96, Judgment of 22 June 2004, para. 186. However, in Jahn v Germany, the ECtHR held that the land reform which deprived various German citizens of their property without any compensation was not an infringement of the Convention because the reform was necessary after the German reunification and that 'in the unique context of German reunification, the lack of any compensation does not upset the “fair balance” that has to be struck between the protection of property and the requirements of the general interest.' Jahn and others v Germany, ECtHR Nos 46720/99, 72203/01 and 72552/01, Judgment of 30 June 2005, para. 117. M Mohebi, The International Law Character of the Iran-United States Claims Tribunal (Boston: Kluwer Law International, 1999) 289. See C Brower and J Brueschke, The Iran–US Claims Tribunal (The Hague: Martinus Nijhoff, 1999) 499, with reference to the jurisprudence of the Iran–US Claims Tribunal. 'Thus expropriation under (2) and (3) [= expropriations not in exercise of police power and defence measures in wartime] is unlawful, if at all, only sub modo, i.e. if appropriate compensation is not provided for.' This has remained unchanged in the recent edition written by Crawford, see J Crawford, above, n. 9, 624; see also A Reinisch, 'Legality of Expropriations' in A Reinisch (ed), Standards of Investment Protection (Oxford: Oxford University Press, 2008) 171, 199. M Sornarajah, The International Law of Foreign Investment (3rd edn, Cambridge: Cambridge University Press, 2010) 406. In the first edition, he wrote that nonsatisfaction of the duty to pay compensation did not affect the legality of the taking. See M Sornarajah, The International Law of Foreign Investment (Cambridge: Cambridge University Press, 1994) 315. D Bowett, 'State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach' (1988) 59 BYIL 49, 69–70. S Ripinsky and K Williams, Damages in International Investment Law (London: BIICL, 2008) 68 (emphasis in original). Ibid, 68–9. Seidl-Hohenvelndern, e.g., clearly rejected the notion that this would be sufficient in the 1950s. I Seidl-Hohenveldern, Internationales Konfiskations- und Enteignungsrecht (Berlin: de Gruyter, 1952) 173 et seq. See also Norwegian Shipowners where the readiness of the Government to submit the question of compensation to an international tribunal was seen as the recognition of the obligation to pay compensation by the state. Norwegian Shipowners' Claim (13 October 1922) 1 RIAA, 307, 309, 317. See Brownlie: '[I]t is significant that the right to compensation on whatever basis, is recognized in principle'. Crawford, above, n. 9, 543. By contrast, Sheppard maintains that the lawfulness of the expropriation has no influence on the amount of compensation. See A Sheppard, 'The Distinction between Lawful and Unlawful Expropriation' in C Ribeiro (ed.), Investment Arbitration and the Energy Charter Treaty (New York: JurisNet, 2006) 169, 198 et seq. Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 46. This is not always appropriately taken into account. See the detailed analysis in this respect by N Birch, 'Curing Uncompensated Expropriation under Chorzów' in B Sabahi, N Birch, I Laird, and J A Rivas (eds), Revolution in the International Rule of Law. Essays in Honour of Don Wallace, Jr (Huntington, New York: Juris, 2014) 475, 483 et seq; see also D Ziyaeva, 'Arbitral Tribunals Tend to Pay Lip Service to the Chorzów Factory Full Reparation Principle, Disregarding the Context and Full Implication of the Dictum' (2015) 2(2) The Journal of Damages in International Arbitration 121, 124 et seq. Sornarajah, above, n. 118, 410.

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128) G Christie, 'What Constitutes a Taking under International Law' (1962) 38 BYIL 307,

129)

130)

131) 132) 133) 134) 135)

136) 137) 138) 139) 140) 141) 142) 143)

310–11; R Higgins, above, n. 4, 322 et seq; R Dolzer, 'Indirect Expropriation of Alien Property' (1986) 1 ICSID Rev.-FILJ 40 et seq; M Pellonpää and M Fitzmaurice, 'Taking of Property in the Practice of the Iran–United States Claims Tribunal' (1988) 19 NYIL 53; A Mouri, The International Law of Expropriation as Reflected in the Work of the Iran–U.S. Claims Tribunal (Dordrecht: Martinus Nijhoff, 1994); M Brunetti, 'The Iran–US Claims Tribunal, NAFTA Chapter 11, and the Doctrine of Indirect Expropriation' (2001) 2 Chicago Journal of International Law 203 et seq; M Brunetti, 'Indirect Expropriation in International Law' (2003) 5 International Law Forum 150 et seq; Y Fortier and S Drymer, 'Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor?' (2004) 19 ICSID Rev.-FILJ 293; A K Hoffmann, 'Indirect Expropriations' in A Reinisch (ed.), Standards of Investment Protection (Oxford: Oxford University Press, 2008) 151; U Kriebaum and A Reinisch, 'Property, Right to, International Protection' in R Wolfrum (ed.), The Max Planck Encyclopedia of Public International Law (Oxford: Oxford University Press, 2012), vol. III, 522; U Kriebaum, 'Expropriation' in M Bungenberg, J Griebel, H Hobe, and A Reinisch (eds), International Investment Law (Baden-Baden: Nomos, 2015) 959. See already Christie, above, n. 128, 307, 310–11; B Weston, ' “Constructive Takings” under International Law: A Modest Foray into the Problem of Creeping Expropriation' (1975) 16 Virginia Journal of International Law 103, 106; Brower and Brueschke are critical of the incoherent use of the term by the Iran–US Claims Tribunal: C Brower and J Brueschke, The Iran– United States Claims Tribunal (The Hague et al: Martinus Nijhoff Publishers, 1998) 380; as regards the possibility of partial expropriation see U Kriebaum, 'Partial Expropriation' (2007) 8 The Journal of World Investment and Trade 69 et seq. See the formulation of the Iran–US Claims Tribunal in Dames & Moore: 'The unilateral taking of possession of property and the denial of its use to the rightful owners may amount to an expropriation even without a formal decree regarding the title to the property'. Dames & Moore v Iran, 4 Iran–US CTR (1983) 212, 223; see also William L Pereira v Iran, 5 Iran–US CTR (1984) 198, 226–7; Computer Sciences Corporation v Iran, 10 Iran–US CTR (1986) 269, 302–3; Sola Tiles Inc v Iran, 14 Iran–US CTR (1987) 223, 231–2. See, e.g., Oil Fields of Texas Inc v Iran, 12 Iran–US CTR (1986) 308, 318; Brumarescu v Romania, ECHR 1999-VII, para. 77; Saipem v Bangladesh, Award of 30 June 2009, para. 204. This was the case in Petrolane Inc v Iran. In Seismograph, however, the Iran–US Claims Tribunal did not consider this to be an expropriation. As to this obvious inconsistency see the critical analysis by Brower and Bruschke, above, n. 129, 388. See already M Reismann and R Sloane, 'Indirect Expropriation and its Valuation in the BIT Generation' (2003) 75 BYIL 115, 130. UNCTAD, Expropriation. UNCTAD Series on Issues in International Investment Agreements II (New York and Geneva: UNCITRAL, 2011) 11. See, e.g., Article 1110 NAFTA. But see Annex B of the US Model BIT (2012) which describes indirect expropriations in more detail and highlights that, except in rare circumstances, regulatory actions by a party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations. A K Hoffmann, 'Indirect Expropriations' in A Reinisch (ed.), Standards of Investment Protection (Oxford: Oxford University Press, 2008) 151, 152. Sedco Inc v NIOC, Separate Opinion Brower (1986) 10 Iran–US CTR 189, 206. M Reisman and R Sloane, 'Indirect Expropriation and its Valuation in the BIT Generation' (2003) 75 BYIL 115, 137. Ibid. S Ripinsky and K Williams, above, n. 120, 69; by contrast, Kriebaum argues that regulatory takings too could, under certain conditions, be lawful. See U Kriebaum, n. 28. See above, Section A(3). See also A F M Maniruzzaman, 'Damages for Breach of Stabilisation Clauses in International Investment Law: Where Do We Stand Today?' (2007) International Energy Law & Taxation Review 246. A F M Maniruzzaman, 'The Pursuit of Stability in International Energy Investment Contracts: A Critical Appraisal of the Emerging Trends' (2008) The Journal of World Energy Law & Business 121; A Al Faruque, 'Typologies, Efficacy and Political Economy of Stabilization Clauses: A Critical Appraisal' (2007) TDM vol. 4, issue 5; M Kantor, 'Stabilisation Clauses in Infrastrucuture Investment' (2005) TDM vol. 2, issue 1; these clauses are sometimes regarded as conflicting with or being obstacles to improvements of human rights and environmental protection standards, see A Shembert, Stabilization Clauses and Human Rights. A Research Project conducted for IFC and the United Nations Special Representative to the Secretary General on Business and Human Rights (Washington: International Finance Corporation, 2008); L Cotula, 'Reconciling Regulatory Stability and Evolution of Environmental Standards in Investment Contracts: Towards a Rethink of Stabilization Clauses' (2008) The Journal of World Energy Law & Business 158; J Ruggie, Stabilization Clauses and Human Rights (Washington: International Finance Corporation, 2009).

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144) In a decision on 27 March 2016, Israel's High Court rejected the 'stability clause' in a

145) 146)

147)

148) 149) 150) 151) 152) 153)

154) 155) 156) 157) 158) 159) 160)

161) 162) 163)

natural gas plan, in which the Government had undertaken not to legislate and to oppose any legislation against the plan's provisions for a decade. The Court found that the stability clause was in contrast to the general principles of administrative law and that the Government did not have the right to limit the next Government, whose composition and ideology could be different from the current one. See Israel News of 27 March 2016 . C Ohler, 'Concessions' in R Wolfrum (ed.), The Max Planck Encyclopedia of Public International Law (Oxford: Oxford University Press, 2012) vol. II, 546, para. 27. BP Exploration Company (Libya) Limited v Government of the Libyan Arab Republic, Award of 10 October 1973 (1979) 53 ILR 297; Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic, Award of 19 January 1977 (1978) 17 ILM 1; Libyan American Oil Company (LIAMCO) v Government of the Libyan Arab Republic, Award of 12 April 1977 (1982) 62 ILR 141. Clause No. 16, as contained in all the concessions, was the following: '1. The government of Libya will take all the steps necessary to ensure that the Company enjoys all the rights conferred by this Concession. The contractual rights expressly created by this concession shall not be altered except by mutual consent of the parties. 2. This Concession shall throughout the period of its validity be construed in accordance with the Petroleum Law and the Regulations in force on the date of execution of the Agreement … Any amendment to or repeal of such Regulations shall not affect the contractual rights of the Company without its consent.' These clauses were identical in all three cases as they were based on a model contract based on the Libyan Petroleum Laws of 1955 and 1965. See BP v Libya, Award of 10 October 1973 (1979) 53 ILR 297, 322; Texaco v Libya, Award of 19 January 1977 (1978) 17 ILM 1, 4; LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 170. BP v Libya, Award of 10 October 1973 (1979) 53 ILR 297. Ibid, at 329. Ibid, at 356. Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic, Award of 19 January 1977 (1978) 17 ILM 1. Ibid, at 23. 'No doubt any convention creating an obligation of this kind places a restriction upon the exercise of the sovereign rights of the State, in the sense that it requires them to be exercised in a certain way. But the right of entering into international engagements is an attribute of State sovereignty.' Case of the SS Wimbledon, PCIJ 1923 Ser A, No. 1, 25. Arabian American Oil Company v Saudi Arabia, Award of 23 August 1958 (1963) 27 ILR 117, 227. Sapphire International v NIOC, Award of 15 March 1963 (1967) 35 ILR 136, 181. Arabian American Oil Company v Saudi Arabia, Award of 23 August 1958 (1963) 27 ILR 117, 168. UN GA Resolution on the Permanent Sovereignty over Natural Resources No. 1803 (XVII) of 14 December 1962. See above, n. 14. Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic, Award of 19 January 1977 (1978) 17 ILM 1, 24. Ibid, at 37. See Article 35 on the International Responsibility of States for Internationally Wrongful Acts. UN-Doc A/Res/56/83, Annex. See J Crawford, The International Law Commission's Articles on State Responsibility (Cambridge: Cambridge University Press, 2002) 213 et seq. Libyan American Oil Company (LIAMCO v Libya) v Government of the Libyan Arab Republic, Award of 12 April 1977 (1982) 62 ILR 141. Ibid, at 198. S Friedman, Expropriation in International Law (London: Stevens & Sons, 1955) 214. Also the opinion of the ICJ in Anglo-Iranian Oil Company (United Kingdom v Iran), Judgment of 22 July 1952, ICJ Reports 1952, and of the Austrian Supreme Court of 22 December 1965 (note: 1 Ob 212/65) would confirm this view. See LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 198. The latter case, however, concerned the acceptance of an expropriation by the CSSR in Austria in view of the Act of State doctrine and not the legal consequences of an expropriation without compensation per se.

164) LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 198, referring to G White,

Nationalisation of Foreign Property (New York: Frederick A Praeger, 1961) 86 and 163. According to the tribunal, a nationalization would, furthermore, represent an Act of State, which would be immune and could not be examined by judicial organs. The reference to the Act of State doctrine, however, does not seem appropriate in this context, as it is only applicable for national courts assessing the actions of foreign states (par in parem non habet imperium). Before international tribunals, by contrast, the argument of immunity or Act of State cannot be made. 165) See above, para. 3.36. 166) AGIP SpA v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306, para. 81. 167) Ibid, para. 16.

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168) Ibid, para. 87. 169) 'It follows that the Government is obliged to compensate AGIP for the damage

suffered by it as a result of the nationalization.' Ibid, para. 88.

170) Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 89 et seq; see also

Maniruzzaman, above, n. 143, at 248.

171) The text of the stabilization clause read: 'The Shaikh shall not by general or special

172) 173) 174) 175)

176)

177) 178) 179) 180) 181)

182) 183) 184) 185)

186) 187)

legislation or by administrative measures or by any other act whatever annul this Agreement except as provided in Article 11. No alteration shall be made in the terms of the Agreement by either the Shaikh or the Company except in the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of both parties to make certain alterations, deletions or additions to this Agreement.' Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 88. However, Arbitrator Fitzmaurice in his Separate Opinion (1982) 21 ILM 1049 et seq, argued vigorously against this conclusion. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 179. 'In the present Case, the Khemco Agreement was concluded for a shorter period (35 years) than the concession in the AMINOIL case (60 years) but in economic and legal terms 35 years cannot be considered a “relatively limited period”.' Ibid, at 243. The contract clauses contained therein were not considered as stabilization clauses by the tribunal, as they were not concluded between the investor and the State and for other reasons. Ibid, paras 165 et seq. Judge Brower criticized this in his Concurring Opinion and maintained that because of the breach of the stabilization clause, and other reasons, the expropriation had been unlawful. Amoco International Finance v Iran, Concurring Opinion Brower, 15 Iran–US CTR (1987) 289, paras 9 et seq. The tribunal referred briefly to the existence of a stabilization clause in the concession and held: 'This clause must be respected, especially in this type of agreement. Otherwise, the contracting State may easily avoid its contractual obligations by legislation. Such legislative action could only be justified by nationalizations which meet the criteria described above.' LETCO v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 368. The tribunal referred to the UN GA Resolution No. 1803 (XVII) of 1962 and to the Aminoil v Kuwait case, as well as to R Higgins, above, n. 4, 305. Ibid, at 368. O Schachter, 'International Law in Theory and Practice' (1982) 178 RdC 9, 314. See also R Higgins, above, n. 4, 311, 320–1. Schachter reaches the same result, referring to Jiménez de Aréchaga who emphasizes in such a case the right to lucrum cessans. O Schachter, above, n. 178, 314. R. Higgins, above, n. 4, 311; Maniruzzaman, above, n. 143, 251; J Ruggie, above, n. 143, 38. T Nelson, 'A Factory in Chorzów: The Silesian Dispute that Continues to Influence International Law and Expropriation Damages Almost a Century Later' (2014) 1(1) The Journal of Damages in International Arbitration 77; N Birch, 'Curing Uncompensated Expropriation under Chorzów' in B Sabahi, N Birch, I Laird, and J A Rivas (eds), Revolution in the International Rule of Law. Essays in Honour of Don Wallace, Jr (Huntington, New York: Juris, 2014) 475; D Ziyaeva, 'Arbitral Tribunals Tend to Pay Lip Service to the Chorzów Factory Full Reparation Principle, Disregarding the Context and Full Implication of the Dictum' (2015) 2(2) The Journal of Damages in International Arbitration 121; R Alomar, 'Compensation in the Context of Unlawful Expropriations' (2016) 3(1) The Journal of Damages in International Investment Arbitration 31; C Beharry, 'Lawful Versus Unlawful Expropriations: Heads I Win, Tails You Lose' (2016) 3(1) The Journal of Damages in International Investment Arbitration 57; F Lavaud and G Recena Costa, 'Valuation Date in Investment Arbitration: A Fundmental Examination of Chorzów's Principles' (2016) 3(2) The Journal of Damages in International Arbitration 33. Case Concerning the Factory at Chorzów, PCIJ 1928, Ser A, No. 17, 47. Sedco Inc v NIOC, Second Interlocutory Award, Separate Opinion Brower, 10 Iran–US CTR (1986) 189, 205, in footnote 40. D Bowett, 'State Contracts with Aliens' (1988) 59 BYIL 47, 61; similarly, I SeidlHohenveldern, 'L'évaluation des dommages dans les arbitrages transnationaux' (1987) 33 Annuaire français de droit international 7, 12. J Crawford, above, n. 9, 625; see also R Jennings, 'State Contracts in International Law' (1961) 37 BYIL 156, 171–2; L Sohn and R Baxter, 'Responsibility of States for Injuries to the Economic Interests of Aliens' (1962) 56 AJIL 504–5; E Riedel, 'Damages' in R Bernhardt (ed.), Encyclopedia of Public International Law, vol. I (Amsterdam et al: North-Holland Publishing Company, 1992), vol. 1, 929, 931; D Bowett, above, n. 184, 61 et seq; J Wolf, 'Gibt es im Völkerrecht einen einheitlichen Schadensbegriff?' (1989) 49 ZaöRV 403, 427. Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 47. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 247, para. 195: 'The analysis of the Court was so thorough, however, and its comparisons with the reverse hypothesis so systematic, that the judgement is also illuminating in analyzing the lawful expropriation before us'.

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188) For the importance of the two questions as regards the different interpretations and

conclusions, they are reproduced here in their original wording: 'I.

— A.

189)

190) 191) 192) 193) 194) 195) 196) 197) 198)

What was the value, on July 3rd, 1922 … of the undertaking for the manufacture of nitrate products of which the factory was situated at Chorzów in Polish Upper Silesia, in the state in which that undertaking (including the lands, buildings, equipments, stocks and processes at its disposal, supply and delivery contracts, goodwill and future prospects) was, on the date indicated, in the hands of the Bayrische and Oberschlesische Stickstoffwerke? B. What would have been the financial results … (profits or losses) which would probably have been given by the undertaking thus constituted from July 3rd, 1922, to the date of the present judgement, if it had been in the hands of the said companies. II. —What would be the value at the date of the present judgement … of the same undertaking (Chorzów) if that undertaking (including lands, buildings, equipment, stocks, available processes, supply and delivery contracts, goodwill and future prospects) had remained in the hands of the Bayrische and Oberschlesische Stickstoffwerke, and had either remained substantially as it was in 1922 or had been developed proportionately on lines similar to those applied in the case of other undertakings of the same kind, controlled by the Bayrische, for instance, the undertaking of which the factory is situated in Piesteritz?' Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No 17, 51–2. 'This statement confirms the previous finding that, for the Court, lost profit (lucrum cessans) is not incorporated in the value of the undertaking, although this value includes “future prospects”. In other words, according to the Court, “future prospects” does not equal lost profit (lucrum cessans).' Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 203 (emphasis in original). Ibid, para. 201. Ibid, paras 196 and 203. See in respect of this concept below, Chapter 4, Section C(2)(b). Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 264. Amoco International Finance v Iran, Concurring Opinion Brower, 15 Iran–US CTR (1987) 300. Ibid, para. 17. Ibid, para. 23. W Lieblich, 'Determinations by International Tribunals of the Economic Value of Expropriated Enterprises' (1990) 7 Journal of International Arbitration 37, 47–8. See, in this regard, Lieblich's reflections in another article: '[T]he basic conceptual flaw in adopting the damnum emergens/lucrum cessans approach for determining the economic value of expropriated property is that it incorrectly assumes that the value is comprised of two separate and distinct elements, one corresponding to past expenses incurred and the other to future expected profits. Because the economic value of property is determined exclusively by the cash that it is expected to generate for its owner in the future, compensation for expropriated property is not a matter of reimbursing an owner for expenses previously incurred. Accordingly, the damnum emergens element is simply irrelevant to economic value. More importantly, any award that omits the lucrum cessans element will bear no relationship to economic value.' W Lieblich, 'Determining the Economic Value of Expropriated Income-Producing Property in International Arbitrations' (1991) 8 Journal of International Arbitration 59, 68–9.

199) Sedco Inc v NIOC, 10 Iran–US CTR (1986) 180, 189; see also Phillips Petroleum 200)

201) 202) 203)

204) 205)

Company v Iran, 21 Iran–US CTR (1989) 79, para. 109; in favour of a distinction, however, Ebrahimi v Iran, 30 Iran–US CTR (1994) 170, para. 96. 'Claimant labels this part of its claim as damages for “lost profits”. This loss appears, however, to be a direct loss resulting from the unavailability of the rigs to Claimant for use elsewhere and as such is damnum emergens.' Sedco Inc v NIOC and Iran, 10 Iran–US CTR (1986) 180, 182, in footnote 6. This is remarkable because the claimant did not have any contracts or other legal claims for the rental. It was only the loss of a 'chance'. Starrett Housing v Iran, Interlocutory Award, 4 Iran–US CTR (1983) 122, 156–7; Starrett Housing v Iran, Final Award, 16 Iran–US CTR (1987) 112, paras 3 et seq; Phillips Petroleum v Iran, 21 Iran–US CTR (1989) 79, para. 106. Shahine Shaine Ebrahimi v Iran, 30 Iran–US CTR (1994) 170, para. 96. 'But the question of whether or not the concessionaire may claim compensation for all the loss of future profits for the unexpired term is still a controversial point which has not been definitely settled.' LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 207. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 154; see also W Lieblich, 'Determination by International Tribunals of the Economic Value of Expropriated Enterprises' (1990) 7 Journal of International Arbitration 37, 53. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 153.

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206) Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992, para. 198. 207) Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 307; Tidewater v

Venezuela, Award of 13 March 2015, paras 138–46.

208) See further below, Chapter 5, paras 5.68 et seq. 209) S Ripinsky, 'Damnum Emergens and Lucrum Cessans in Investment Arbitration: 210) 211) 212) 213) 214) 215)

216)

217) 218) 219) 220) 221) 222)

223) 224) 225) 226) 227)

228) 229) 230) 231) 232) 233) 234) 235) 236)

237) 238) 239) 240)

Entering through the Back Door' in A Bjorklund, I Laird, and S Ripinsky (eds), Investment Treaty Law. Current Issues III (London: BIICL, 2009) 47, 54 et seq. Sedco Inc v NIOC, Second Interlocutory Award, Separate Opinion Brower, 10 Iran–US CTR (1986) 189, 205, in footnote 40. Ibid, at 205 (emphasis added). Brower referred, amongst others, to The Lusitania Case, Decision of 1 November 1923, 7 RIAA, 32, 39, where Umpire Parker discussed the issue of punitive damages but ultimately rejected them. Brower hereby referred to the US Foreign Sovereign Immunities Act, 28 USC § 1606. R Jennings and A Watts, Oppenheim's International Law (9th edn, London: Longman, 1996) § 156. M Reisman and R Sloane, above, n. 138. The ICSID Tribunal in Siag v Egypt, e.g., explicitly rejected the claimant's claim for punitive damages, as the BIT did not give rise to a right for punitive damages or for a treatment of compensation which introduced a punitive element. Siag v Egypt, Award of 1 June 2009, paras 544–6. See also J Crawford, above, n. 160, 219; S Wittich, 'Awe of the Gods and Fear of the Priests: Punitive Damages in the Law of State Responsibility' (1998) 3 Austrian Review of International and European Law 101 et seq; S Wittich, 'Punitive Damages' in J Crawford, A Pellet, and S Olleson (eds), The Law of International Responsibility (Oxford: Oxford University Press, 2010) 667, 668. See also Chapter 5, Section F. See on 'moral damages' below, Chapter 5, Section F. Report of the International Law Commission on the work of its fifty-second session. UN Doc A/55/10, Supplement No. 10, para. 196. See, e.g., U Kriebaum and A Reinisch, above, n. 128, para. 32. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 193. See the text of the questions above, n. 188. See Amoco International Finance v Iran, Concurring Opinion Brower, 15 Iran–US CTR (1987) 300, para. 18. But see, e.g., Bowett who does not consider this difference as being sufficient. D Bowett, 'State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach' (1988) 59 BYIL 49, 61. Phillips Petroleum Co v Iran, 21 Iran–US CTR (1989) 79, para. 110 (emphasis added). See, however, the clarification by Judge Rable in the case Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 66, 67. On the question of interest see in more detail below, Chapter 6. See Phillips Petroleum Company v Iran, 21 Iran–US CTR (1989) 79, para. 110; see also M Schäfer, Entschädigungsstandard und Unternehmensbewertung bei Enteignungen im allgemeinen Völkerrecht (Heidelberg: Recht und Wirtschaft, 1997) 162. Papamichalopoulos et al v Greece (just satisfaction) 31 October 1995, ECHR Ser A, No. 330-B, para. 36. See further Vasilescu v Romania, Judgment of 22 May 1998, ECHR Reports 1998-III, para. 61; Brumarescu v Romania (just satisfaction) [GC] Judgment of 23 January 2001, ECHR 2001-I, para. 19; Iatridis v Greece (just satisfaction) [GC] Judgment of 19 October 2000, ECHR 2000-XI, para. 32; Motais de Narbonne v France (just satisfaction) Judgment of 27 May 2003, ECHR No. 48161/99, para. 18; Kliafas v Greece, Judgment of 8 July 2004, ECHR No. 66810/01, para. 34; Belvedere Alberghiera v Italy (just satisfaction) Judgment of 30 October 2003, ECHR No. 31524/96, para. 28; Terazzi v Italy (just satisfaction) Judgment of 26 October 2004, ECHR No. 27265/95, para. 34; Papastavrou and others v Greece (just satisfaction) Judgment of 18 November 2004, ECHR No. 46372/99, para. 9. ADC v Hungary, Award of 2 October 2006, para. 481. Ibid, para. 483. Siemens v Argentina, Award of 6 February 2007, para. 352. Vivendi v Argentina, Award of 20 August 2007, para. 8.2.3 (emphasis in original). Saipem v Bangladesh, Award of 30 June 2009, para. 201. Siag and Vecchi v Egypt, Award of 1 July 2009, para. 539. Kardassopoulos v Georgia, Award of 3 March 2010, para. 514. Tza Yap Shum v Peru, Award of 7 July 2011, para. 253. Quasar de Valores v Russia, Award of 20 July 2012, para. 215. The tribunal emphasized, in the discussion about how 'to attach a number to the claim', that 'the claim is for simple uncompensated expropriation, not unlawful expropriation' (emphasis in original). This was mainly due to the limited jurisdiction of the tribunal to decide only on the amount of compensation. Claimants had also limited themselves to claim compensation only for a lawful expropriation. The presiding arbitrator, Charles N. Brower, noted in this respect 'that it is solely the Claimants' own insistence that we may not address the issue of whether the alleged expropriation of which they complain was lawful or unlawful that has precluded us from addressing such issue ….' Separate opinion of Charles N. Brower, para. 2. Yukos and others v Russia, Award of 18 July 2014, para. 1765. Conoco Phillips and others v Venezuela, Award of 3 September 2013, paras 342–3. Mobil Cerro Negro v Venezuela, Award of 9 October 2014, paras 288–9. Tidewater v Venezuela, Award of 13 March 2015, para. 142.

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241) 242) 243) 244) 245) 246)

247)

248)

249)

250)

251)

252) 253) 254) 255) 256) 257)

258) 259) 260) 261)

Quiborax v Bolivia, Award of 16 September 2015, para. 326. Funnekotter v Zimbabwe, Award of 22 April 2009, para. 112. Unglaube v Costa Rica, Award of 16 May 2012, paras 306–7. The tribunal in Rumeli v Kazakhstan found that the standard of compensation as stipulated in the BIT should be applied for lawful and unlawful expropriations alike. See Rumeli v Kazakhstan, Award of 29 July 2008, para. 793. S Ripinsky and K Williams, above, n. 120, 65, quoting M Sornarajah, The International Law on Foreign Investment (2nd edn, Cambridge: Cambridge University Press, 2004) 438. A Reinisch, above, n. 72, 200; U Kriebaum and A Reinisch, above, n. 128, para. 32; R Dolzer and C Schreuer, above, n. 2, 296; B Sabahi, Compensation and Restitution in Investor–State Arbitration (Oxford: Oxford University Press, 2011) 102; T Nelson, 'A Factory in Chorzów: The Silesian Dispute that Continues to Influence International Law and Expropriation Damages Almost a Century Later' (2014) 1 The Journal of Damages in International Arbitration 77, 101–2; R Alomar, 'Compensation in the Context of Unlawful Expropriations' (2016) 3 The Journal of Damages in International Investment Arbitration 31, 55–6. A Sheppard, 'The Distinction between Lawful and Unlawful Expropriation' in C Ribeiro (ed.), Investment Arbitration and the Energy Charter Treaty (New York: JurisNet, 2006) 169, 198–9; C Beharry, 'Lawful Versus Unlawful Expropriations: Heads I Win, Tails You Lose' (2016) 3 The Journal of Damages in International Investment Arbitration 57, 96–7; sceptical for cases where the mere non-payment of compensation would render the expropriation unlawful: Salacuse, Law of Investment Treaties, above, n. 13, 328; N Birch, above, n. 126, 495. See, e.g., Phelps Dodge Corporation v Iran, 10 Iran–US CTR (1986) 121, para. 30; Thomas Earl Payne v Iran, 12 Iran–US CTR (1986) 3, para. 30; Sedco Inc v NIOC, 15 Iran– US CTR (1987) 23, para. 31; Starrett Housing v Iran, 16 Iran–US CTR (1987) 112, para. 277; Phillips Petroleum Co v Iran, 21 Iran–US CTR (1989) 79, para. 111; Petrolane Inc v Iran, 27 Iran–US CTR (1991) 64, para. 108; James M Saghi v Iran, 29 Iran–US CTR (1993) 20, para. 79; Shahin Shaine Ebrahimi v Iran, 30 Iran–US CTR (1994) 170, para. 98. See, e.g., C Parry, 'Some Considerations upon the Protection of Individuals in International Law' (1956) 90 RdC vol. II, 660 et seq; C F Amerasinghe, above, n. 1, 278 et seq; R Lillich, 'The Current Status of the Law of State Responsibility for Injuries to Aliens' in R Lillich (ed.), International Law of State Responsibility for Injuries to Aliens (Charlottesville: University Press of Virginia, 1983) 1 et seq; F V García-Amador, The Changing Law of International Claims (New York: Oceana Publications, 1984) 289 et seq. As early as 1930, the codification conference of the League of Nations was unsuccessful in its attempt to put the topic of 'Responsibility for Injuries to Aliens' on its agenda. See G Hackworth, 'Responsibility of States for Damages Caused in their Territory to the Person or Property of Foreigners' (1930) 24 AJIL 500; E Borchard, ' “Responsibility of States” at the Hague Codification Conference' (1930) 24 AJIL 517. García-Amador, in his capacity as Special Rapporteur to the ILC, presented six reports in which he formulated proposals for the rules on state responsibility for injuries to aliens. See F V García-Amador, L Sohn, and R Baxter, Recent Codification of the Law of State Responsibility for Injuries to Aliens (New York: Oceana Publications, 1974). Lillich called this initiative 'the sine qua non of any successful attempt to restate the law governing the treatment of aliens. Because Garcia-Amador's innovative approach was too ahead of its time …'. R Lillich, above, n. 249, 26. Amerasinghe, however, was rather sceptical: C F Amerasinghe, above, n. 1, 278 et seq. Articles on the Responsibility of States for Internationally Wrongful Acts, UN GA No. 56/83 of 12 December 2001, Annex. See J Crawford, above, n. 160, 14 et seq. As regards the use of the term 'compensation', instead of 'damages', see above, Chapter 2. Report of the International Law Commission on the work of its fifty-second session, above, n. 218, paras 188–97. J Crawford, Third Report on State Responsibility, UN Doc A/CN.4/507/Add 1, paras 154 et seq. This was, according to Special Rapporteur Crawford, also the better place for it. See Report of the International Law Commission, above, n. 218, para. 197. The official Commentary of Article 36 of the ILC can be found on the homepage of the ILC . Paragraphs 243–63 to Article 36 are identical to the text in J Crawford, above, n. 160, 218–30. See the discussion on this item in the ILC, UN Doc. A/CN.4/507/Add 1, para. 193. This should mean 'damage to property or other interests of the State and its nationals which is assessable in financial terms'. See J Crawford, above, n. 160, 202. This is interpreted in the Commentary as meaning 'such things as individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one's home or private life'. Ibid. This problem was, in particular, raised by Hafner in the discussion. See Yearbook of the ILC (2000), vol. I, UN Doc A/CN.4/SER.A/2000, 193, para. 12.

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262) See, e.g., B Bollecker-Stern, Le préjudice dans la théorie de la responsabilité

263) 264) 265)

266) 267) 268) 269)

internationale (Paris: Editions A Pédone, 1973) 25 et seq; B Graefrath, 'Responsibility and Damages Caused: Relationship between Responsibility and Damages' (1984) 185 RdC 19, 90; J Wolf, 'Gibt es im Völkerrecht einen einheitlichen Schadensbegriff?' (1989) 49 ZaöRV 403 et seq; S Wittich, Non-material Damage and its Reparation in International Law (Vienna: Jur Diss, 2001) 5 et seq. H Grotius, De iure bellis ac pacis, vol. 2, 17, 2 (Washington: 1913, reproduction of the 1646 edition) (translation by the author). Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 28. Ibid, at 27. The measure of damage should, therefore, only be measured by international law. In this vein, the Commentary to Article 28 of the ILC Articles notes that the provisions on reparation are not applicable 'to the extent that these arise towards or are invoked by a person or entity other than a State'. See Commentary, above n. 257, and J Crawford, above, n. 160, 193. Case Concerning the Factory at Chorzów, above, n. 264, 26–7. Alabama (United States v United Kingdom) Award of 14 September 1872, in J Moore (ed.), Digest of International Arbitrations of which the United States has been a Party (Washington: GPO, 1898), vol. 1, 495, 590. See above, Chapter 2, Section C(2), paras 2.106 et seq. See also R Dolzer and C Schreuer, above, n. 2, 295, 297.

270) 'Therefore, the Arbitrator believes that it would not be inappropriate to find that, 271) 272) 273) 274) 275)

276)

277) 278) 279) 280) 281)

282) 283) 284) 285) 286)

287) 288)

according to law, the property should be restored to the claimant.' Walter Fletcher Smith (United States v Cuba) Award of 2 May 1929, 2 RIAA, 915, 918. Ibid, at 918 (emphasis added). Ibid, at 915, 918. Ibid, at 918. De Sabla (United States) v Panama, Award of 29 January 1933, 6 RIAA, 358 et seq. 'The Commission concludes that … the balance of Bernardino, amounting to 1,818 hectares, has been deprived of half its value by cultivators licenses and the resulting deforestation and denudation of soil and also by the destruction of continuity resulting from both the adjudications and the cultivators licenses.' De Sabla (United States) v Panama, ibid, at 368. Owners of the Tattler (United States) v Great Britain, Award of 18 December 1920, 6 RIAA, 48 et seq; Owners, Officers and Men of the Wanderer (Great Britain) v United States, Award of 9 December 1921, 6 RIAA, 68 et seq; Charterers and Crew of the Kate (Great Britain) v United States, Award of 9 December 1921, 6 RIAA, 77 et seq; Loughlin McLean (Great Britain) v United States—The Favourite Case, Award of 9 December 1921, 6 RIAA, 82 et seq; Owners of the Horace B Parker (United States) v Great Britain, Award of 6 November 1925, 6 RIAA, 153–4; Owners of the Thomas F Bayard (United States) v Great Britain, Award of 6 November 1925, 6 RIAA, 154; Owners of the Sarah B Putnam (United States) v Great Britain, Award of 6 November 1925, 6 RIAA, 156–7. Case of the SS Wimbledon (Great Britain, France, Italy, Japan v Germany), PCIJ 1923 Ser A, No. 1, 15, 31 the SS Wimbledon 2; see also C Gray, Judicial Remedies in International Law (Oxford: Oxford University Press, 1990) 77. The Corfu Channel Case (United Kingdom v Albania) Assessment of the Amount of Damages, ICJ Reports 1949, 243, 247 et seq. Ibid, at 249. Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) Judgment of 30 November 2010, ICJ Reports 2010, 637, para. 161. Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) Compensation owed by the Democratic Republic of Congo to the Republic of Guinea, Judgment of 19 June 2012, ICJ Reports 322, para. 25. The US$ 10,000 was a lump sum for alleged personal property lost 'on the basis of equitable considerations'. Ibid, para. 36. The M/V 'SAIGA' (No. 2) Case (Saint Vincent and the Grenadines v Guinea), ITLOS Judgment of 1 July 1999. Ibid, para. 175; in M/V 'VIRGINIA G', the Tribunal awarded costs of repairs of the vessel and the value of the confiscated gas oil. The M/V 'Virginia G' (No. 19) Case (Panama v Guinea-Bissau), ITLOS, Judgment of 14 April 2014, para 446. AGIP SpA v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306 et seq. SARL Benvenuti & Bonfant v Congo, Award of 8 August 1980 (1993) 1 ICSID Reports 330 et seq. The tribunal in AGIP v Congo noted: 'The Tribunal recognizes that the present case is not limited to an act of nationalization but comprises also a series of repudiations by the Government of its contractual obligations, which are independent from the nationalization …'. AGIP SpA v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306, para. 97. In Benvenuti & Bonfant, the tribunal was also called to examine a number of different claims, partly contractual and partly international (expropriation). Benvenuti & Bonfant v Congo, Award of 8 August 1980 (1993) 1 ICSID Reports 330, para. 4.8. AGIP SpA v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306, 328–9; see further below, Chapter 5, Section A(1). Benvenuti & Bonfant v Congo, Award of 8 August 1980 (1993) 1 ICSID Reports 330, para. 4.95.

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289) The tribunal in the first award in Amco v Indonesia held that the licence was a

290) 291) 292)

293) 294) 295)

296) 297) 298) 299) 300) 301) 302) 303) 304)

305)

306) 307) 308) 309) 310) 311) 312) 313) 314) 315) 316) 317) 318) 319) 320) 321) 322) 323)

'bilateral relationship creating obligation for both parties' and that the 'legal basis of calculation of damages will be set up according to the principles governing the matter, where the prejudice to be compensated results from the failure of a party to a contract to fulfill its obligations under the contract'. Amco Asia v Indonesia, Award of 20 November 1980 (Amco I) (1993) 1 ICSID Reports 413, paras 190–1 and 265. Amco Asia v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569, para. 137. Ibid, para. 185, quoting INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 385. This solution was selected by the respondent Government after the tribunal had made two alternative proposals for the calculation of damages. The other proposal, too, was based on the individual damage incurred to the affected investor. Antoine Goetz et al v Burundi, Award of 10 February 1999 (2000) 15 ICSID Rev.-FILJ 457, paras 135 et seq. Metalclad v Mexico, 30 August 2000 para. 122. Biloune and Marine Drive Complex Ltd v Ghana, Award on jurisdiction and liability of 27 October 1989 (1994) 95 ILR 183; Award on damages and costs of 30 June 1990 (1994) 95 ILR 211. Biloune and Marine Drive Complex Ltd v Ghana, Award on damages and costs, above, n. 294, 228. In this respect, the tribunal explicitly referred to the cases Texaco v Libya (1977) 17 ILM paras 40–105, Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180, 184–9, and Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, paras 183–209. Biloune and Marine Drive Complex Ltd v Ghana, Award on jurisdiction and liability, above, n. 294, 211. S D Myers v Canada, First Partial Award of 13 November 2000, para. 308 (emphasis in original). Ibid, para. 309. Ibid, para. 309. Ibid, para. 309, in footnote 53. Pope & Talbot v Canada, Award in Respect of Damages of 31 May 2002 , paras 86–7. Without explicitly referring to the applicable 'standard', the tribunal found that the 'damage' incurred must be repaired. Ibid, para. 73. Marvin Roy Feldman v Mexico, Award of 16 December 2002 , para. 194. American Manufacturing and Trading v Zaire, Award of 21 February 1997. The tribunal interpreted this in the following way: 'The obligation incumbent upon Zaire is an obligation of vigilance, in the sense that Zaire as the receiving State of investments made by AMT, an American company, shall take all measures necessary to ensure the full enjoyment of protection and security of its investments and should not be permitted to invoke its own legislation to detract from any such obligation. Zaire must show that it has taken all measure of precaution to protect the investment of AMT on its territory.' Ibid, para. 6.05. It did not matter whether the damaging acts had been committed by the military or rioting private individuals: '[I]t suffices to confirm once more the engagement of the responsibility of the State of Zaire for all the losses resulting “from riot or act of violence in the territory of such other Party”, in this case, Zaire. Such is the case without the Tribunal enquiring as to the identity of the author of the acts of violence committed in the Zairian territory. It is of little or no consequence whether it be a member of the Zairian armed forces or any burglar whatsoever.' Ibid, para. 6.13. Ibid, para. 7.03. Ibid, para. 7.13. Ibid. Ibid, para. 7.19. MTD Equity v Chile, Award of 25 May 2004, para. 238. Ibid, para. 238. LG&E v Argentina, Award of 25 July 2007, para. 35. Ibid, para. 45. Occidental v Ecuador, Award of 1 July 2004, para. 187. Ibid, paras 202 et seq. The tribunal had jurisdiction over them on the basis of Article II(1) of the Claims Settlement Declaration. See 1 Iran–US CTR (1981–82) 9. Foremost Tehran v Iran, 10 Iran–US CTR (1986) 228, 251. Mohtadi v Iran, 32 Iran–US CTR (1996) 124, paras 106 et seq. Seismograph Service Corporation et al v NIOC and Iran, 22 Iran–US CTR (1989) 3, para. 303. See G Dannemann, Schadensersatz bei Verletzung der Europäischen Menschenrechtskonvention (Cologne et al: Heymanns, 1994) 332 et seq. Papamichalopoulos et al v Greece (just satisfaction) ECtHR Ser A, No. 330-B, 31 October 1995. Ibid, para. 36. The ICSID Tribunal in ADC v Hungary explicitly referred to the jurisprudence of the ECtHR in its judgment in Papamichalopoulos v Greece, in its reasoning on the calculation of damages following the principle of full reparation. See ADC v Hungary, Award of 2 October 2006, , para. 497.

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324) See, e.g., Stran Greek Refinieries et al v Greece, 9 December 1994, ECtHR Ser A, No. 325)

326) 327) 328)

329) 330) 331) 332) 333)

334) 335) 336) 337) 338)

339)

340)

341)

342) 343) 344)

301-B; Vasilescu v Romania, ECtHR 1998-III; Brumaresco v Romania (just satisfaction), ECtHR 2001-I. Iatridis v Greece (just satisfaction) ECtHR 2000-XI; Belvedere Alberghiera Srl v Italy, ECtHR 2000-VI; Terazzi S.R.L. v Italy (satisfaction equitable) ECtHR No. 27265/95, 26 October 2004; Papastavrou and Others v Greece (just satisfaction) ECtHR No. 46372/99, 18 November 2004. Montais de Narbonne, 2 July 2002, ECtHR No. 48161/99; Montais de Narbonne (satisfaction équitable) ECtHR No. 48161/99, 27 May 2003. Akkus v Turkey, ECtHR 1997-IV; Aka v Turkey, ECtHR 1998-VI; Kartal Makina Sanayi Ve Ticaret Koll Sti v Turkey, 7 October 2004, ECtHR No. 50011/99; Ugur et al v Turkey, 7 October 2004, ECtHR No. 49690/99. Explicit references to the BIT standard in the context of indirect expropriations are, e.g., Antoine Goetz et al v Burundi, Award of 29 January 1999, paras 124, 135; Wena Hotels Ltd v Egypt, Award of 8 December 2000, para. 118; Middle East Cement v Egypt, Award of 12 April 2002, para. 107; Técnicas Medioambientales v Mexico, Award of 29 May 2003, para. 187. See above, para. 3.117 with reference to the respective cases. Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180, 187. See above, para. 3.10. As regards the obiter dictum of the Iran–US Claims Tribunal in INA Corporation v Iran regarding a possible 'gradual reappraisal' of the standard see above, para. 3.10. The tribunal in Sedco v NIOC relied on the submission of the claimant according to which 'unlawful takings are subject to the strictest compensation requirements'. Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180, 183; see also Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 31; Phelps Dodge Corporation et al v Iran, 10 Iran–US CTR (1986) 121, para. 28; Thomas Earl Payne v Iran, 12 Iran–US CTR (1986) 3, para. 30. See also D Pellonpää and M Fitzmaurice, above, n. 128, 53, 121 et seq. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 31 (emphasis added). The subsequent references include INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 380 and American International Group v Iran, 4 Iran–US CTR (1983) 96, 107–8. See above, Section A(1)(c). Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 30. See also the valuation of three indirectly expropriated blowout preventers in Oil Fields of Texas v Iran, 12 Iran–US CTR (1986) 308, para. 43. The tribunal referred, in particular, to Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180 et seq and Phelps Dodge Corporation v Iran, 10 Iran–US CTR (1986) 121 et seq. Thomas Earl Payne v Iran, 12 Iran–US CTR (1986) 3, para. 35; Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 31; Phillips Petroleum Iran v Iran, 21 Iran–US CTR (1989) 79, para. 106; Sedco v IMICO, 21 Iran–US CTR (1989) 31, para. 63; Petrolane Inc v Iran, 27 Iran–US CTR (1991) 64, para. 108; Shahine Shaine Ebrahimi v Iran, 30 Iran–US CTR (1994) 170, para. 98; Khosrowshahi v Iran, 30 Iran–US CTR (1994) 76, para. 34; James A Saghi v Iran, 29 Iran–US CTR (1993) 20, para. 79; Vera-Jo Miller Aryeh et al v Iran, 33 Iran–US CTR (1997) 272, para. 215; George Davidson v Iran, 34 Iran–US CTR (1998) 3, para. 117. The expert appointed by the tribunal in Starrett Housing v Iran played an important role on the issue of valuation: 'He [the expert] correctly defined fair market value as the price that a willing buyer would pay to a willing seller in circumstances in which each had good information, each desired to maximize his financial gain, and neither was under duress or threat. He approximately assumed that the willing buyer was a reasonable businessman.' Starrett Housing v Iran, 16 Iran–US CTR (1987) 112, para. 277. In the sense of 'full value' according to the Chorzów judgment, e.g., Sola Tiles v Iran, 14 Iran–US CTR (1987) 223, para. 41; for references to 'market value' see Motorola Inc v Iran, 19 Iran–US CTR (1988) 73, para. 69; Tavakoli v Iran, 33 Iran–US CTR (1997) 206, para. 94. See Article II(1) Claims Settlement Declaration, 1 Iran–US CTR (1982) 9. See, e.g., Kamran Hakim v Iran where the tribunal held: 'In this case … the Tribunal adopts as appropriate the Treaty of Amity standard of compensation … Accordingly, the Tribunal must determine what is the “full equivalent” of the Claimant's 20 percent share in PMMC.' Kamran Hakim v Iran, 34 Iran–US CTR (1998) 67, para. 105. See paras 3.165 et seq. Biloune and Marine Drive Complex Ltd v Ghana Investments Centre, Award on jurisdiction and liability of 27 October 1989 (1994) 95 ILR 183, 210. The tribunal held: 'Under the principles of customary international law, a claimant whose property had been expropriated by a foreign state is entitled to full—i.e. to prompt, adequate, and effective—compensation. This generally means that such a claimant is to receive the fair market or actual value of the property at the time of expropriation, plus interest, and that the compensation must be reasonably made in a form that can be freely repatriated or otherwise satisfactorily deployed.' Biloune v Ghana, Award on damages and costs of 30 June 1990 (1994) 95 ILR 211, 228 (emphasis added).

345) See above, para. 3.135. See also further below, Chapter 5, para. 5.312. 346) Wena Hotels v Egypt, Award of 8 December 2000 para. 118 (emphasis added).

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347) Técnicas Medioambientales v Mexico, Award of 29 May 2003 , paras 151, 174, 187. 348) Middle East Cement v Egypt, Award of 12 April 2002 , para. 107. This was, however, not

349) 350) 351) 352) 353) 354) 355) 356) 357) 358) 359) 360)

361)

362) 363)

364) 365)

366) 367) 368) 369) 370) 371)

372)

appropriately reflected in the calculation. On one hand, the loss from delivery contracts was valued at the contractually agreed minimum although the actual business operation had been much better. On the other hand, the 'market value' of the expropriated ship was determined as the average between the auction price and the scrap value. Ibid, para. 150. The auction appeared to have been manipulated so that another measure of value was needed. It is not clear, however, why the tribunal reduced the scrap value of the ship— which already represented a very low value—even further. The tribunal examined both the possible violation of Article 1105 and of Article 1110. Metalclad v Mexico, Award of 30 August 2000 (2001) 40 ILM 36, paras 101, 112. Ibid, para. 113. Ibid, para. 120. CMS v Argentina, Award of 12 May 2005, para. 264. Ibid, para. 410. Enron v Argentina, Award of 22 May 2007, paras 361, 389. Sempra Energy International v Argentina, Award of 28 September 2007, paras 403–4, 416 et seq. Azurix v Argentina, Award of 14 July 2006, para. 424. El Paso v Argentina, Award of 31 October 2011, para 702. EDF v Argentina, Award of 11 June 2012, para. 1210. Gold Reserve v Venezuela, Award of 22 September 2014, para. 681. The tribunal in Azurix v Argentina, e.g., also included subsequent investments and expenses undertaken by the investor, without reference to their 'value'. Azurix v Argentina, Award of 14 July 2006, para. 430. Also the tribunal in EDF v Argentina, did not strictly apply an objective valuation approach, as it based the valuation on the 'return on investment' of the initital purchase price and also considered a subsequent sale of the shares by the investor in the calculation. EDF v Argentina, Award of 11 June 2012, paras 1238–9, 1302 et seq. See, e.g., Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180, 182–3; see also Phelps Dodge Corporation et al v Iran, 10 Iran–US CTR (1986) 121, para. 28; Harold Birnbaum v Iran, 29 Iran–US CTR (1993) 260, para. 37; Fereydoon Ghaffari v Iran, 31 Iran–US CTR (1995) 60, para. 101 (referring to Birnbaum); Gold Reserve v Venezuela, Award of 22 September 2014, para. 681; Tenaris v Venezuela, Award of 29 January 2016, para. 519; Crystallex v Venezuela, Award of 4 April 2016, para. 845. See, e.g., Técnicas Medioambientales SA v Mexico, Award of 29 May 2003 (2004) 19 ICSID Rev.-FILJ 158, paras 74, 112; CMS v Argentina, Award of 12 May 2005 (2005) 44 ILM 1205, para. 396; Enron v Argentina, Award of 22 May 2007, para. 346. C Gray, Remedies in International Law (Oxford: Oxford University Press, 1987) 206; see also D Collins, 'Reliance Remedies at the International Center for the Settlement of Investment Disputes' (2009) 29 The Northwestern Journal of International Law and Business 195, 216. See I Marboe and A Reinisch, 'State Contracts' in R Wolfrum (ed.), The Max Planck Encyclopedia of Public International Law (Oxford: Oxford University Press, 2012), vol. II, 758, para. 15. See, e.g., Lena Goldfields Arbitration, Award of 2 September 1930, paras 26, 28; Delagoa Bay and East African Railway Company, Award of 30 May 1900; more recent cases include Italia Ukraina v Naftogaz, ICC, Separate Award of 19 October 2010, Final Award of 19 December 2012; Mobil Cerro Negro v Petroleos de Venezuela, ICC, Award of 23 December 2011, paras 650 ff. See also D Bowett, 'State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach' (1988) 59 BYIL 49, 54. 'UN Convention on the International Sale of Goods' (1980) 19 ILM 668; UNIDROIT, Principles on International Commercial Contracts (Rome: UNIDROIT, 1994, 2004, 2010). O Lando and H Beale (eds), Principles of European Contract Law: Parts I and II, Combined and Revised (The Hague: Kluwer Law International, 2000). See H Wöss, A San Román Rivera, P Spiller Pablo, and S Dellepiane, Damages in International Arbitration under Complex Long-Term Contracts (Oxford: Oxford University Press, 2014) 34 et seq. R Jennings, 'Rules Governing Contracts between States and Foreign Nationals' in The Southwestern Legal Foundation (ed.), Rights and Duties of Private Investors Abroad (Dallas: Matthew Bender & Company, 1965) 123, 137–8. Article 73 reads: 'The provisions of the present Convention shall not prejudge any question that may arise in regard to a treaty from a succession of States or from the international responsibility of a State or from the outbreak of hostilities between States.' Vienna Convention on the Law of Treaties of 23 May 1969, UNTS 1980, vol. 1155, 18232, 331. H Wöss et al, above, n. 369, 208 et seq; see also the comparative law and arbitration analysis by J Gotanda, 'Recovering Lost Profits in International Disputes' (2004) 36 Georgetown Journal of International Law 61, 66–7.

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373) See examples of the French, Spanish, and Belgian legal systems in J Gotanda, above,

374) 375) 376) 377)

378)

379)

380) 381)

382) 383) 384) 385) 386) 387) 388)

n. 372, 76–7; in AGIP v Congo, the tribunal held that the application of the French Code Civil required the award of both damnum emergens and lucrum cessans: 'This principle of full compensation for losses is limited in certain circumstances which, in the opinion of the Tribunal, do not exist in the present case'. AGIP SpA v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306, para. 99. E Schön, Allgemeines Vertragsrecht und Kaufvertragsrecht—Ein Rechtsvergleich Österreich, USA, Spanien und UN-Kaufrecht (Frankfurt et al: Peter Lang, 2003) 286 et seq. Article 7.4.21 UNIDROIT Principles of International Commercial Contracts, Article 74 CISG, Article 9.502 PECL. See above, Chapter 2, paras 2.85–2.87. Article 7.1.7 UNIDROIT Principles of International Commercial Contracts, Article 79(1) CISG, Article 8.108 PECL. See G Aldrich, The Jurisprudence of the Iran–US Claims Tribunal (Oxford: Clarendon Press, 1996) 294 et seq; J Westberg, International Transactions and Claims Involving Government Parties. Case Law of the Iran-United States Claims Tribunal (Washington: International Law Institute, 1991) 190 et seq; notable examples are Pomeroy Corporation v Iran, 2 Iran–US CTR (1983) 372, 384; Blount Brothers v Ministry of Housing, 3 Iran–US CTR (1983) 225, 233 et seq; Gould Marketing v Iran, 6 Iran–US CTR (1984) 272, 286; Buckamier v Iran, 28 Iran–US CTR (1992) 53, para. 163; the solutions were sometimes based on 'implicit termination' or force majeure. See below, paras 3.211 et seq. These older cases have become famous because recent investment tribunals have repeatedly referred to them. See, e.g., Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986, 2 ICSID Reports (1994) 343, 371; Amco Asia v Indonesia, Award of 5 June 1990 (Amco II), 1 ICSID Reports (1993) 569, para. 178; Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Final Award of 4 May 1999 (2000) 25 YCA 13, para. 275. The respondent state, Guatemala, had breached its contractual obligations to pay the costs and expenses for the construction work. The delay in payment of loans to the workers led to strikes which made the further operation of the railway impossible. Robert H May (United States v Guatemala), Award of 16 November 1900, reprinted in pertinent part in M Whiteman, above, n. 365, 1704. Ibid, at 1709. Ibid, at 1708. The tribunal in Shufeldt v Guatemala referred to this decision in Robert H May v Guatemala and calculated the amount of damages after the withdrawal of a rubber concession also on the basis of the profits of the past years. The concession, in this case, was originally concluded for ten years, but withdrawn by the Government after six years. Shufeldt Claim (United States v Guatemala), Award of 2 November 1929, 2 RIAA, 1079, 1083, 1099. The arbitrator rejected the argument of the respondent state that it had a sovereign right to regulate concessions and held: '[I]t is a settled principle of international law that a sovereign can not be permitted to set up one of his own municipal laws as a bar to a claim by a sovereign for a wrong done to the latter's subject'. Ibid, at 1098. H Wöss et al, above, n. 369, 247. See the definition of the term 'profit' in Black's Law Dictionary: 'The excess of revenues over expenditures in a business transaction.' B Garner (ed.), Black's Law Dictionary (10th edn, St Paul, MN: Thomson Reuters, 2014) 1404. See R Brealey and S Myers, Principles of Corporate Finance (11th edn, Boston: McGraw-Hill Higher Editions, 2014) 18 et seq. Economic methods of risk management are discussed below, Chapter 5, paras 5.138 et seq. H Wöss et al, above, n. 369, 247 et seq. See also D Bowett, 'State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach' (1988) 59 BYIL 49 et seq; H Wöss et al, above, n. 369, 273 et seq. Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986, 2 ICSID Reports (1994) 343 et seq.

389) The host Government had based it actions on the allegation that the concessionaire

had not appropriately cared for the respective area of forest. However, the tribunal is not always consistent in the legal qualification of these actions which it also refers to as 'expropriation'. See, e.g., ibid, at 375. 390) It referred to a number of earlier cases including Shufeldt v Guatemala, Robert H May v Guatemala, LIAMCO v Libya, Sapphire International v NIOC, Lena Goldfields; Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986, 2 ICSID Reports (1994) 343, 371. 391) Ibid, at 372. 392) Ibid, at 377.

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393) Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Final

394) 395)

396) 397) 398)

399) 400) 401)

402) 403)

404) 405)

406)

Award of 4 May 1999 (2000) 25 YCA 13, para. 240. See also J Paulsson 'The Expectation Model' in Y Derains and R Kreindler (eds), Evaluation of Damages in International Arbitration (Paris: International Chamber of Commerce, 2006) 57, 62 et seq. The case concerned contracts between the claimant and the Indonesian state electricity company PLN in relation to the exploration and development of geothermal resources for the generation of electricity in Indonesia. The so-called Energy Sales Contract of 1994 contained the obligation of the respondent to buy the electricity produced and pay in US dollars until an agreed maximum over thirty years. During the massive economic crisis, however, Indonesia issued a number of presidential decrees containing adaptations or deferrals of a number of infrastructure programmes. The very first invoice on electricity delivered was not paid meaning that the production of electricity was stopped. Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Final Award of 4 May 1999 (2000) 25 YCA 13, paras 24 et seq. Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Final Award of 4 May 1999 (2000) 25 YCA 13, para. 240. The tribunal notes that in cases of expropriation the contractual damnum emergens is not to be compensated. It has to be pointed out, however, that contractual rights may also be expropriated. In the context of expropriations the conceptual approach is usually not about the damnum but the 'value' of the expropriated asset. See above, Chapter 2, Section B(1)(b). Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Final Award of 4 May 1999 (2000) 25 YCA 13, para. 240. Ibid, para. 241. '[W]hile it has full entitlement to question the reality of the claimant's alleged costs, there is little scope for PLN to question their reasonableness. As long as the expenditures were made in rational pursuit of the objectives of the Contract, there is no room to question their cost-effectiveness ex post facto…. In other words, the claimant made its expenditures in reliance on the Contract. It had every incentive to keep those costs low, because all savings would be to its own undiluted benefit. There is no basis for allowing PLN today to seek to impose retrospective spending controls.' Ibid, paras 258, 260 (emphasis in original). Ibid. Ibid, para. 275. See Sapphire v NIOC, Award of 15 March 1963 (1967) 35 ILR 136, 186–7. The tribunal noted that the investments made had been substantial: 'Plant and infrastructure have been built; costly wells have been drilled; sophisticated and expensive studies have been conducted'. Ibid, para. 253. The amounts of the investments undertaken were increased by a multiple in order to account for the passage of time: 'To establish the present value of these sunken costs, the Arbitral Tribunal adopts the multiplier used by PLN's financial expert, Dr. Leininger, namely 0,929665'. Ibid, para. 287. Ibid, para. 242. 'The Arbitral Tribunal is satisfied that what the claimant presents as the “initial project value” reflects the alleged value of future cash flows, discounted to 31 December 1998, which indeed deducts the alleged value, at the same date, of past investments.' Ibid, para. 243. It reduced the amount of lost profits by an alleged 'abuse of rights'. See further below, para. 3.245. Karaha Bodas Company LLC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina) and PT PLN (Persero), Final Award of 18 December 2000, summarized in pertinent part in Karaha Bodas Co v Perusahaan Pertambangan Minyak dan Gas Bumi Negara, 364 F.3d 274, 282–85 (5th Cir 2004). The respondent submitted that a lot of 'wasteful expenditures' had been undertaken: 'KBC spent two years focusing its exploration efforts in an unproductive area in north Karaha and did not profit from earlier resistivity programs which would have saved millions of dollars. KBS is also claimed to have mistakenly shifted its focus at a later stage to a crater area in Telaga Bodas, where it should have expected to encounter adverse chemistry that would render development commercially impracticable.' Karaha Bodas Company LLC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina) and PT PLN (Persero), Final Award of 18 December 2000, para. 86.

407) It applied a multiple of 5.8% with respect to the rate of interest the investor could

have earned otherwise in the meantime. Ibid, para. 107.

408) The submission of the respondent that the project would never have been

profitable due to the high capital costs was not accepted by the tribunal. It regarded it as one out of 'a number of risks', together with the risks of delay, increased costs, and necessary investments as well as a smaller reservoir—which only increased the risk premium but did not put the profits as such into question. Ibid, paras 119, 134. 409) L Wells, 'Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Kahara Bodas Company in Indonesia' (2003) 19 Arbitration International 471. 410) Ibid, at 477.

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411) 412) 413) 414) 415) 416) 417) 418) 419) 420)

421)

422) 423)

424) 425) 426) 427) 428) 429) 430) 431) 432) 433)

434) 435) 436) 437) 438) 439) 440) 441) 442) 443) 444) 445) 446) 447) 448) 449)

Ibid, at 477 (emphasis in original). Railroad Development v Guatemala, Award of 29 June 2012, para. 30. Ibid, para. 239. Ibid, para. 241; see also H Wöss et al, above, n. 369, 276. Railroad Development v Guatemala, Award of 29 June 2012, para. 244. Ibid, para. 270. Ibid, para. 277. There was, however, a dispute about the correct application of the discount rate which was partially rectified in the Decision on the Request for a Supplementary Decision and Rectification of 18 January 2013, para. 43. See also H Wöss et al, above, n. 369, 276. Amco Asia v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569, para. 178; Shufeldt Claim (United States v Guatemala), Award of 2 November 1929, 1099; see also C Gray, above, n. 363, 201. See, e.g., Duke Energy v Ecuador, Award of 18 August 2008. The ICSID tribunal aknowledged the right to damnum emergens and lucrum cessans in principle but recognized as 'commercial losses' merely interest on late payments and on unjustified fines. See also D Collins, 'Reliance Remedies at the International Center for the Settlement of Investment Disputes' (2009) 29 Northwestern Journal of International Law and Business 195. See, e.g., Lieblich, who speaks of 'reliance interest' and 'expectation interest'. W Lieblich, 'Determinations by International Tribunals of the Economic Value of Expropriated Enterprises' (1990) 7 Journal of International Arbitration 37, 47–8; see also D Collins, above, n. 420. Sapphire International Petroleum Ltd v NIOC, Award of 15 March 1963 (1967) 35 ILR 136, 186–7. See Nordzucker AG v Poland, ad hoc Arbitration (UNCITRAL), Second Partial Award of 28 January 2009, para. 95; Third Partial Award of 23 November 2009, para. 65, referring to 'damages possibly suffered as a result of the delay in an alternative investment and of the fruitless costs made for the monitoring of the sales procedure in Poland during another half year'. I Marboe, 'Nordzucker AG v The Republic of Poland. Case Comment' (2015) 16 JWIT 523, 532–3; A Zachariewicz, 'Culpa in Contrahendo in Polish Law' in B Leiderhoff and G Zmij (eds), Tort Law in Poland, Germany and Europe (Munich: Sellier, 2009) 133–50. C Gray, above, n. 363, 201. D Collins, above, n. 420, 216. Ibid. Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Final Award of 4 May 1999 (2000) 25 YCA 13, para. 291. Ibid. Sapphire International Petroleum Ltd v NIOC, Award of 15 March 1963 (1967) 35 ILR 136, 186–7 (emphasis added). Bridas SAPIC v Turkmenistan, Partial Award of 25 June 1999, published in part in D Bishop, J Crawford, and M Reisman, Foreign Investment Disputes. Cases, Materials and Commentary (The Hague: Kluwer Law International, 2005) 1270, 1271. J Gotanda, above, n. 372, 86–7. M Whiteman, above, n. 365, 1837. See, e.g., B Sabahi and L Hoder, 'Certainty in Recovery of Damages for Losses to New or Incomplete Businesses—Three Paradigms: Biloune v Ghana, Gemplus v Mexico, and Siag v Egypt' in B Sabahi, N Birch, I Laird, and J A Rivas (eds), Revolution in the International Rule of Law. Essays in Honour of Don Wallace, Jr (Huntington, New York: Juris, 2014) 497, 499–500. S Ripinsky and K Williams, above, n. 120, 164–70, 280–8. William J Levitt v Iran, 14 Iran–US CTR (1987) 191, paras 56 et seq. Ibid, para. 56. Ibid, para. 58. Dadras International and Per-Am Construction v Iran, 31 Iran–US CTR (1995) 127 et seq. Ibid, para. 276. Ibid, para. 275. Autopista Concesionada de Venezuela CA v Venezuela, Award of 23 September 2003, 10 ICSID Reports 314, para. 352. Ibid, para. 129. Ibid, para. 362. Ibid, para. 351 (footnotes omitted). Ibid, paras 352 et seq. The tribunal concentrated its award on the items presented by the claimants and not disputed by the respondent. It conducted an independent assessment only in regard to items disputed between the parties. Phillips Petroleum and Conoco Phillips, ICC, Award of 17 September 2012, para 235; Mobil Cerro Negro v Petroleos de Venezuela, ICC, Award of 23 December 2011, para. 554. The calculation can nevertheless be a complex task involving the choice of reference prices and numerous other parameters. See Mobil Cerro Negro v Petroleos de Venezuela, ibid, paras 611 et seq. See J Gotanda, above, n. 372, 66 referring to Bucher, 'Law of Contracts', in Introduction to Swiss Law (2nd edn, 1995) 115. Blount Brothers v Ministry of Housing and Urban Development, 3 Iran–US CTR (1983) 225, 228.

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450) Ibid, at 229. 451) Ibid, at 225, 232; see also Exxon Research and Engineering Company v NIOC, 15 Iran– 452) 453) 454) 455) 456) 457) 458) 459) 460)

461)

462) 463) 464) 465)

US CTR (1987) 3, paras 31 et seq; similarly (concerning an employment contract) Theodore Lauth v Iran, 11 Iran–US CTR (1986) 150, 155. Ultrasystems Inc v Iran, 2 Iran–US CTR (1983) 100, 111. Oil Fields of Texas v Iran, 12 Iran–US CTR (1986) 308, paras 46 et seq; Motorola Inc v Iran, 19 Iran–US CTR (1988) 73, para. 28; United Painting Company Inc v Iran, 23 Iran– US CTR (1989) 351, para. 52. Sylvana Technical Systems v Iran, 8 Iran–US CTR (1985) 298, 312 et seq. Ibid, at 319. Autopista Concesionada de Venezuela CA v Venezuela (23 September 2003), 10 ICSID Reports 314, para. 333. Ibid, para. 334. Ibid. The dispute was about contracts on the construction and delivery of trash compactors for different construction projects. Buckamier v Iran, 28 Iran–US CTR (1992) 53, paras 60, 69 et seq, 79 et seq, 113 et seq. The claimant submitted that these contracts had been expropriated during the time of the Iranian Revolution. However, it could not convince the tribunal that acts attributable to the Iranian Government had been the cause of the failure of the business. It referred in particular to the award in Starrett Housing v Iran which had explained that the revolution as such did not give rise to a right to compensation but that this was part of the business risk. Ibid, para. 59. See also J Westberg, International Transactions and Claims Involving Government Parties: Case Law of the Iran–United States Claims Tribunal (Washington: International Law Institute, 1991) 159 et seq; G Aldrich, above, n. 377, 306 et seq; S Schmitz, Allgemeine Rechtsgrundsätze in der Rechtsprechung des Iran–US Claims Tribunal (Frankfurt et al: Peter Lang, 1992) 147 et seq; M Brunetti, 'The Lex Mercatoria in Practice: The Experience of the Iran–United States Claims Tribunal' (2002) 18 Arbitration International 355, 359 et seq. Buckamier v Iran, 28 Iran–US CTR (1992) 53, para. 95. Ibid, para. 146. Concerning the amount of profit the tribunal found the 10 per cent claimed to be a 'moderate margin'. Ibid, para. 163. See above, paras 3.205 et seq. 'Considering the obstacles discussed in paragraphs 131 through 136, supra, it is highly unlikely that, had the Contract not come to a halt, HNB would have earned the profits it expected initially.' Buckamier v Iran, 28 Iran–US CTR (1992) 53, para. 165. The tribunal, therefore, considered even the 'moderate margin' as unlikely and awarded only the relatively small lump sum of US$ 64,000. See also Pomeroy v Iran, 2 Iran–US CTR (1983) 372, 383.

466) Sapphire International v NIOC, Award of 15 March 1963 (1967) 35 ILR 136 et seq. 467) The tribunal formulated this question explicitly: 'Does the loss of this opportunity

give the right to compensation?' Ibid, at 187.

468) The tribunal emphasized: 'The award of compensation for the lost profit or the loss

469) 470)

471) 472) 473) 474) 475) 476)

477) 478)

of a possible benefit has been frequently allowed by international arbitral tribunals (cf. Hauriou, “Les dommages indirects dans les arbitrages internationaux”, in Revue générale de droit international public, vol. 31 (1925) pp. 203 et seq, in particular pp. 211 et seq, and the various precedents cited in this study)'. Ibid, at 186. See also the discussion of including lost opportunities in the quantification of damages after a violation of the fair and equitable treatment standard in Micula v Romania, Award of 11 December 2013, paras 975–88. Ibid, at 188. '[T]he plaintiff has satisfied the legal requirement of proof by showing a sufficient probability of the success of the prospecting undertaken, if they had been able to carry it through to a finish. The plaintiff can therefore claim compensation for “loss of profit”.' They should therefore be awarded in addition to the 'expenses incurred in performing the contract'. Ibid, at 189. Ibid, at 187. Ibid, at 189. Ibid, at 187, 190. Société Ouest Africaine des Bétons Industriels (SOABI) v Senegal, Award of 25 February 1988 (1994) 2 ICSID Reports 164, paras 5.77 et seq and 5.84 et seq. Ibid, para. 7.13. In its reasoning, the tribunal referred to the inconsistencies of the claimant's submissions and in addition to the agreement contained in the contract that the Government should in five years receive 50% of the capital invested. This meant that for a term of ten years, 25% of the yearly net profit must be for the Government. Ibid, paras 7.11 et seq. Ibid, paras 6.27, 9.26, 12.06. In the first case, 82 out of 90 kilometres had already been built, in the second case US$ 93 million had been invested. Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003, para. 361.

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479) Ibid, para. 357; the Arab Investment Court, by contrast, accepted lost profits and 480) 481) 482) 483)

484) 485) 486) 487) 488) 489) 490)

491) 492) 493) 494) 495)

496) 497)

498)

499)

500) 501)

lost opportunities at US$900 million for a touristic project which never started in Mohamed Abdulmohsen Al-Karafi v Libya, Award of 22 March 2013. Reinisch and Marboe, n. 364, paras 33–4. See also the insightful analysis of the relationship of contract and treaty claims in Waste Management v United Mexican States, Award of 30 April 2004, paras 163 et seq. See T Waelde, 'The Umbrella Clause in Investment Arbitration. A Comment on Original Intentions and Recent Cases' (2005) 6 JWIT 183 et seq. A Reinisch, 'Expropriation' in P Muchlinski et al (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 407, 410. Norwegian Shipowners, Award of 13 October 1922, 1 RIAA, 309, 334 (emphasis in original). See also Shufeldt: '[T]he grantee or assignee of a legal and binding contract acquires property rights subject to the terms and conditions of the contract'. Shufeldt Claim (United States v Guatemala), Award of 2 November 1929, 2 RIAA, 1081, 1097 (emphasis added). LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 189. Delagoa Bay and East African Railway Company, Award of 30 May 1900, reprinted in M Whiteman, above, n. 365, 1694 et seq. Shufeldt Claim (United States v Guatemala), Award of 2 November 1929, 2 RIAA, 1079. Lena Goldfields, Award of 2 September 1930, reprinted in pertinent part in (1950) 36 Cornell Law Quarterly 42 et seq. Lighthouses Arbitration (France v Greece), Award of 24 July 1956 (1956) 23 ILR 299–300. Sapphire International Petroleum Ltd v NIOC, Award 15 March 1963 (1967) 35 ILR 136 et seq. Norwegian Shipowners refers to the fair market value. See above, Section A(1)(c). However, the contracts were rather short-term construction and delivery contracts and not long-term investment contracts. See also M Schäfer, Entschädigungsstandard und Unternehmensbewertung bei Enteignungen im allgemeinen Völkerrecht (Heidelberg: Verlag Recht und Wirtschaft, 1997) 154. Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343. Atlantic Triton v Guinea, Award of 21 April 1986 (1995) 3 ICSID Reports 13. Société Ouest Africaine des Bétons Industriels (SOABI) v Senegal, Award of 25 February 1988 (1994) 2 ICSID Reports 164. MINE v Guinea, Award of 6 January 1988 (1997) 4 ICSID Reports 61. A mixture of the two approaches was applied in Middle East Cement v Egypt: 'When measures are taken by a State the effect of which is to deprive the investor of the use and benefit of his investment even though he may retain nominal ownership of the respective rights being the investment, the measures are often referred to as a “creeping” or “indirect” expropriation or, as in the BIT, as measures “the effect of which is tantamount to expropriation” '. Middle East Cement v Egypt, Award of 12 April 2002 , para. 107. For the calculation of the amount to be awarded, however, the tribunal relied only on the provisions of the contract. Ibid, paras 123 et seq. Amco Asia v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569, para. 184. See, e.g., P Friedland and E Wong, 'Measuring Damages for Deprivation of IncomeProducing Assets: ICSID Case Studies' (1991) 6 ICSID Rev.-FILJ 400 et seq; M Ball, 'Assessing Damages in Claims By Investors Against States' (2001) 16 ICSID Rev.-FILJ 408, 420; B Sabahi and L Hoder, above, n. 433, 507 et seq. Also, the publications on the jurisprudence of the Iran–US Claims Tribunal usually distinguish between 'Expropriation Claims' and 'Contract Claims'. See, e.g., J Westberg, International Transactions and Claims Involving Government Parties. Case Law of the Iran-United States Claims Tribunal (Washington: International Law Institute, 1991) 101, 149; G Aldrich, above, n. 377, 171, 277 et seq; R Lillich and D Magraw (eds), The Iran–United States Claims Tribunal. Its Contribution to the Law of State Responsibility (New York: Transnational Publishers, 1998) 185, 267 et seq. The following cases may serve as examples: Ultrasystems Inc v Iran, 2 Iran–US CTR (1983) 100; Pomeroy Corporation v Iran, 2 Iran–US CTR (1983) 372; Blount Brothers v Ministry of Housing and Urban Development, 3 Iran–US CTR (1983) 225; Gruen Associates Inc v Iran, 3 Iran–US CTR (1983) 97; William L Pereira Associates v Iran, 5 Iran–US CTR (1984) 198; Gould Marketing v Iran, 6 Iran–US CTR (1984) 272; Computer Sciences Corporation v Iran, 10 Iran–US CTR (1986) 269; Theodore Lauth v Iran, 11 Iran– US CTR (1986) 150; William J Levitt v Iran, 14 Iran–US CTR (1987) 191; Exxon Research and Engineering Co v National Iranian Oil Company, 15 Iran–US CTR (1987) 3; Motorola Inc v Iran Airlines Corporation v Iran, 19 Iran–US CTR (1988) 73; Seismograph Service Corporation et al v Iran, 22 Iran–US CTR (1989) 3; United Painting Company Inc v Iran, 23 Iran–US CTR (1989) 351; Buckamier v Iran, 28 Iran–US CTR (1992) 53; Dadras International and Per-Am Construction Corporation v Iran, 31 Iran–US CTR (1995) 127. As, for example, highlighted by the respondent and approved by the tribunal in Pluspetrol Peru v Perupetro, ICSID, Award of 21 May 2015, paras 180–2, 202. See, e.g., B Claggett, 'Just Compensation in International Law—The Issues before the Iran–US Claims Tribunal' in R Lillich (ed.), The Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1987), vol. 4, 31, 50.

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502) Amco Asia v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569,

503) 504) 505)

506)

507) 508)

509)

510) 511)

512)

513) 514) 515) 516) 517) 518) 519) 520) 521) 522) 523) 524) 525) 526) 527)

para. 184. To support this argument, the tribunal not only referred to the PCIJ's ruling in Factory at Chorzów but also to Sapphire v NIOC and to the opinions of Arbitrators Holtzmann, Lagergren, and Ameli in INA v Iran. B Sabahi, K Duggal, and N Birch, 'Limits on Compensation for Internationally Wrongful Acts' in M Bungenberg, J Griebel, H Hobe, and A Reinisch (eds), International Investment Law (Baden-Baden: Nomos, 2015) 1115, 1116. See J Crawford, Commentary on Article 39, above, n. 160, 240–1. International law has for a long time recognized this principle; see, e.g., Article 7 of the Jay Treaty of 19 November 1794 regarding the American claims for damage incurred: 'But it is distinctly understood that this provision is not to such losses or damages as have been occasioned by the manifest delay or negligence, or wilful omission of claimants'. J Moore (ed.), History and Digest of the International Arbitrations to which the United States have been a Party (Washington: GPO, 1898), vol. I, 310. See also A Roth, Schadensersatz für Verletzungen Privater bei völkerrechtlichen Delikten (Berlin: Carl Heymanns, 1934) 86. It has been discussed whether contributory negligence can also lead to an exclusion of a claim of damages as, e.g., used to be the case in common law. See Eisenbach Brothers and Co (United States v Germany), Award of 13 May 1925, 7 RIAA 199–200; G Dannemann, Schadensersatz bei Verletzung der Europäischen Menschenrechtskonvention (Cologne et al: Heymanns, 1994) 246. According to Article 39 of the ILC Articles on State Responsibility, '[i]n the determination of reparation, account shall be taken of the contribution to the injury by willful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought'. See B Sabahi, K Duggal, and N Birch, above, n. 503, with further references. See, e.g., Winthrop Neilson (United States v Germany, Award of 21 April 1926, 7 RIAA, 308, 309; B Bollecker-Stern, Le préjudice dans la théorie de la responsabilité internationale (Paris: Editions A Pédone, 1973) 195; G Dannemann, Schadensersatz bei Verletzung der Europäischen Menschenrechtskonvention (Cologne et al: Heymanns, 1994) 241–2. In the ICC proceedings on Southern Pacific Properties (Middle East) v Egypt, the tribunal has, e.g., denied that the claimant has contributed negligently to the damage. SPP (Middle East) Ltd, Southern Pacific Properties Limited v Egypt, ICC Award of 11 March 1983 (1983) 22 ILM 752, para. 66. See also I Seidl-Hohenveldern, 'L'évaluation des dommages dans les arbitrages transnationaux' (1987) 33 Annuaire français de droit international 7, 14–15. Yukos v Russia, Award of 18 July 2014. Ibid, para. 1603, referring to EDF International v Argentina, Award (11 June 2012) para. 1301; Middle East Cement Shipping v Egypt, Award of 12 April 2002, para. 167; AIG Capital Partnersv Kazakhstan, Award of 7 October 2003, ICISD Case No. ARB/01/6, para. 10.6.4. Yukos v Russia, Award of 18 July 2014, para. 1604, referring to MTD v Chile, Award of 25 May 2004, ICSID Case No. ARB/01/7 (see further below) and Iurii Bogdanov, AgurdinoInvest Ltd and Agurdino-Chimia JSC v Moldova, SCC Award (22 September 2005) in which the fault was not sufficiently precisely drafting a contract. Yukos v Russia, Award of 18 July 2014, , para. 1605, referring to Antoine Goetz and others v Burundi, ICSID Case No. ARB/01/2, Award of 21 June 2012, and to Occidental v Ecuador, Award of 5 October 2012, (a case also chaired by Yves Fortier). See B Sabahi, K Duggal, and N Birch, above, n. 503, 1120–1, who deal with it under the same heading. CME Czech Republic BV (The Netherlands) v The Czech Republic, Final Award on Damages of 14 March 2003 , paras 310 et seq. The tribunal protested against the opinion of the respondent's expert that the fact of the 'Joint Tortfeasors' should also be reflected in the calculation. Ibid, paras 450 et seq. Maffezini v Spain, Award of 11 November 2000, para. 64. Azurix v Argentina, Award of 23 June 2006, paras 426–9; Total v Argentina, Decision on Liability of 27 December 2010, para. 309; Waste Management v Mexico, Award of 30 April 2004, para. 177. MTD Equity v Chile, Award of 25 May 2004. Ibid, para. 242. 'To conclude, the Claimants should bear the risks inherent in Mr. Fontaine's offer and 50% of the damages after deducting the present value of such offer from the total amount calculated … above.' Ibid, para. 243. Ibid, para. 246. Occidental Petroleum v Ecuador, Award of 5 October 2012, paras 662–87. B Sabahi and K Duggal, 'Occidental Petroleum v Ecuador (2012). Observations on Proportionality, Assessment of Damages and Contributory Fault' (2013) 28 ICSID Review 279, 288–9. Occidental Petroleum v Ecuador, Award of 5 October 2012, para. 662. Ibid, paras 680, 683. Dissenting Opinion by Brigitte Stern, of 20 September 2013, paras 7–8; see also B Sabahi, K Duggal, and N Birch, above, n. 503, 1121.

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528) Occidental Petroleum v Ecuador, Award of 5 October 2012, para. 686, referring to MTD

Equity v Chile, Decision on Annulment of 21 March 2007, para. 101.

529) Yukos v Russian, Award of 18 July 2014, UNCITRAL PCA Cases No. AA 226, 227, 228, 530) 531) 532) 533)

534) 535) 536) 537) 538)

paras 1594–1637. Ibid, paras 1281–1372. Ibid, para. 1374. Ibid, para. 1600. These were, as identified by the tribunal: (i) Yukos' conduct in some of the low-tax regions; (ii) Yukos' use of the Cyprus Russia DTA; (iii) Yukos' conduct in connection with the YNG auction, notably the procuring of a Temporary Restraining Order by a Texas court; and (iv) Yukos' conduct in connection with its bankruptcy, notably the non-payment of a loan. Ibid, para. 1608. Ibid, para. 1634. Ibid, para. 1636, quoting MTD Equity v Chile, Decision on Annulment, 12 March 2007, para. 101; the tribunal also referred to Occidental v Ecuador, ICSID, ARB/06/111, Award of 5 October 2012, paras 659–87. Yukos v Russia, Award of 18 July 2014, para. 1637. Ibid. Occidental v Ecuador, Award of 5 October 2012, para. 687 (also chaired by Yves Fortier).

539) MTD Equity v Chile, Award of 25 May 2004, paras 243, 246. 540) In Rosinvest v Russia, Yukos' tax evasion strategies were not the focus of the

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tribunal's attention in the damages phase, but rather the timing of the acquisition of the Yukos shares by the claimant. The tribunal stated that it would consider Yukos' contribution to its own demise, including 'ill-advised' actions, such as the bankruptcy proceedings in Houston, in the damages phase. See Rosinvest v Russia, Award of 21 September 2010, paras 634–5. However, it eventually put more emphasis on the 'speculative nature' of the investment and took it into account in its choice of the valuation date. The tribunal in Quasar de Valores, due to its jurisdictional constraints, did not address issues of state responsibility but assessed the amount of compensation for the claimants' investment under the premise of the lawfulness of the expropriation. See Crawford, Commentary, Article 31, above, n. 160, 201, 205; B Sabahi, K Duggal, and N Birch, above, n. 503, 1121; Gabćikovo-Nagymaros Project (Hungary v Slovakia), Judgment of 25 September 1997 (1997) ICJ Reports, 7; ME Cement Shipping and Holding v Egypt, Award of 12 April 2002, para. 167; AIG Capital Partners et al v Kazakhstan, Award of 2 October 2003, ICISD Case No. ARB/99/6, para. 10.6.4(1); CME Czech Republic BV (The Netherlands) v The Czech Republic, Final Award on Damages of 14 March 2003, para. 482. See, e.g., Article 77 CISG; Article 13 UNIDROIT Convention on International Financial Leasing; Article 7.5.8 UNIDROIT Principles on International Commercial Contracts; Article 9:504 PECL. Lord Mustill observes that '[t]his rule appears on all the lists. Various awards are cited in support, including ICC No 2478, Clunet (1975) 925; No 2103, Clunet (1974) 902; No 3344, Clunet (1982) 978; No 2412, Clunet (1974) 892. The awards on mitigation rarely call up the lex mercatoria in so many words; they merely treat the principle as obvious.' M Mustill, 'The New Lex Mercatoria: The First Twenty-five Years' (1988) 4 Arbitration International 86, 113. Ibid. See also B Sabahi, K Duggal, and N Birch, above, n. 503, 1122. In an early international case, Costa Rica Packet, the captain was blamed for not having returned immediately to the ship after his release, and the owner of the ship for not installing a new commander. Costa Rica Packet (Great Britain v Netherlands), Award of February 1897 in J Moore (ed.), History and Digest of the International Arbitrations of which the United States has been a Party (Washington: GPO, 1898), vol. 5, 4948, 4953. T Wälde and B Sabahi, 'Compensation, Damages, and Valuation' in P Muchlinski, F Ortino, Federico, and C Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 1049, 1096; B Sabahi, K Duggal, and N Birch, above, n. 503, 1122, referring to Bridas v Turkmenistan, Third Partial Award and Dissent of 6 September 2000, ICC Case No. 9058/FMS/KGA, paras 45–53, where the tribunal reduced the award by US$ 50 million due to the claimant's failure to abandon an unprofitable oilfield. See Salvioli, who asks for 'diligence moyenne' in order to avoid favouring the injuring party: '[U]ne conduite exclusivement passive de sa part ne l'exempte pas d'une certaine responsabilité mais on ne peut pas être plus exigeant à son égard, sans favoriser outre mesure l'auteur de l'acte illicite'. G Salvioli, 'La responsabilité des Etats et la fixation des dommages et intérêts par les tribunaux internationaux' (1929) 28 RdC 231, 267–8; also A Roth, Schadensersatz für Verletzungen Privater bei völkerrechtlichen Delikten (Berlin: Carl Heymanns, 1934) 88–9; R Laïs, Die Rechtsfolgen völkerrechtlicher Delikte (Berlin: Stilke, 1932) 93.

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549) See Schwarzenberger who was sceptical about the extent of the obligation of the

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injured party. He emphasized that the wrongdoer had committed an unlawful act and that it was difficult to see why the injured party should have the obligation to act. According to him, the principles of good faith and reasonableness, or generally the ius aequum, are the only measure available. G Schwarzenberger, International Law as Applied by International Tribunals (London: Stevens and Sons Ltd, 1957) 663. ICC Award No. 5514, Clunet 1992, 1022, 1024 et seq. Economy Forms Corporation v Iran, 3 Iran–US CTR (1983) 42, 51–3; this was however criticized by Judge Holtzmann, see his Concurring Opinion, 3 Iran–US CTR (1983) 55– 6. Endo Laboratories Inc v Iran, 17 Iran–US CTR (1987) 114, para. 50. See further J Westberg, International Transactions and Claims Involving Government Parties. Case Law of the Iran–United States Claims Tribunal (Washington: International Law Institute, 1991) 195–6. Seismograph Service Coproration v NIOC, 22 Iran–US CTR (1989) 3 et seq, para. 115. Petrolane Inc v Iran, 27 Iran–US CTR (1992) 64, para. 54. See also G Aldrich, above, n. 377, 300 et seq. Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Negara (PLN), Final Award of 4 May 1999 (2000) 25 Yearbook of Commercial Arbitration 13, para. 347. Ibid, para. 343. Ibid. See the discussion of this and similar cases in the context of the Indonesian crisis by M Kantor, 'Limits of Arbitration' (2004) TDM, vol. 1, issue 2. 'My concern is that such a questionable proposition and the manner of its application in this Award prejudices notions of legal security and basic principles of private law … The imposition of a concept described as “abuse of rights” in the absence of findings of malicious intent or lack of good faith on the part of the claimant to further reduce the entitlement to damages is in my opinion an inappropriate and unwarranted penalising of the claimant.' Statement of Arbitrator de Fina (2000) 25 YCA 108. See, e.g., M Kantor 'The Limitations of Arbitration' (2004) TDM, vol. 1, issue 2; J Gotanda, above, n. 372, 104 et seq. This duty to mitigate damages was not applied in the above-mentioned case Karaha Bodas v Pertamina, either. This can be explained by the fact that the damages part of the decision is not reasoned in detail so that the origin of the lost profits—from investment undertaken or not yet undertaken—is not evident. This is, however, surprising as the president of the tribunal has published several times on the duty to mitigate damages. In one case note he has stated, e.g., 'L'obligation pour le créancier d'une obligation inexécutée de minimiser ses pertes est l'un des principes les mieux établis des usages du commerce international et de la lex mercatoria'. Y Derains, 'Note to ICC Award No 5910' (1988) Clunet 1220, 1222 with further references; Y Derains, 'L'obligation de minimiser le dommage dans la jurisprudence arbitrale' (1987) RDAI 375 et seq. Reprinted in pertinent part in (1993) 18 YCA 58. See J Paulsson, 'The Expectation Model' in Y Derains and R Kreindler (eds), Evaluation of Damages in International Arbitration (Paris: International Chamber of Commerce, 2006) 57, 75. See more examples in Y Taniguchi, 'The Obligation to Mitigate Damages' in ibid, at 79 et seq. See, e.g., the Case of the SS Wimbledon before the PCIJ, where Germany submitted that the ship could have continued the journey after only two days, but interrupted it by eleven days. The PCIJ did not agree that the loss could have been mitigated in this way and found that the eleven days of interruption were justified. Case of the SS Wimbledon, PCIJ 1923 Ser A, No. 1, 15, 31; see also G Salvioli, above, n. 548, 266; A Roth, Schadensersatz für Verletzungen Privater bei völker-rechtlichen Delikten (Berlin: Carl Heymanns, 1934) 89. The UNCC has accepted it as a general principle for calculating damages after the unlawful invasion of Iraq into Kuwait. See Decision No. 9, para. 6: 'The total amount of compensable losses will be reduced to the extent that those losses could reasonably have been avoided'. Decision taken by the Governing Council of the United Nations Compensation Commission on 6 March 1992, UN Doc. S/AC.26/1992/9. In its practice, the UNCC has e.g. reduced the amount of damages in a case where the injured party had not offered custom-built products back to the producer by 40%. Report and Recommendations made by the Panel of Commissioners Concerning the First Instalment of 'E3' Claims, 17 December 1998, para. 111. Middle East Cement v Egypt, Award of 12 April 2002 , para. 167. Ibid, paras 168 et seq. This included the export of the cement to other countries or the resumption of the business after the subsequent reinstatement of the permit. This was, however, according to the tribunal, not reasonable. Ibid, para. 169. Amco Asia v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569, paras 78, 79; see also Southern Pacific Properties (Middle East) v Egypt (1992) 3 ICSID Reports 189, para. 245. R Posner, Economic Analysis of Law (New York: Aspen Publishers, 1998) 131. The Iran–US Claims Tribunal emphasized this in Sedco Inc v NIOC, First Interlocutory Award, 9 Iran–US CTR (1985) 248, 278: 'The choice of the date of taking is not without significance because the value of the shareholder's expropriated interest may change dramatically during the surrounding time.' See above, Section A(1).

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571) World Bank, 'Guidelines on the Treatment of Foreign Direct Investment' (1992) 31 ILM

1379, 1382 (emphasis added); similarly also Article 1110 NAFTA: '… the fair market value of the expropriated investment immediately before the expropriation took place and should not reflect any change in value occurring because the intended expropriation had become known earlier'. See also Article 13 Energy Charter Treaty. 572) B Clagett, 'Just Compensation in International Law: The Issues before the Iran–US Claims Tribunal' in R Lillich (ed.), The Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1987), vol. 4, 31, 67, 69–70. In Cuba, even before the nationalizations, the value of the banks was diminished by an order that prohibited all state enterprises from having accounts at, or to otherwise do business with, those banks. See V Rabinowitz, 'The Impact of the Cuban Nationalizations on Compensation and Valuation Standards' in R Lillich (ed.), The Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1987), vol. 4, 133, 142 et seq. 573) But see the valuation date in Mobil Cerro Negro v Venezuela, Award of 9 October

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2014, para. 307, where the tribunal decided that the valuation date should be set 'immediately after the failure of negotiations between the parties and before the expropriation, i.e., on 27 June 2007'. e.g. the Iran–US Claims Tribunal stated in relation to the nationalization of the Iranian insurance industry by the law of 25 June 1979 almost self-evidently, that '[t]he relevant date for valuation is that of the nationalization, 25 June 1979'. American International Group v Iran, 4 Iran–US CTR (1983) 96, 106; see also Aminoil v Kuwait which considered Decree No. 124 of 19 September 1977 'Terminating the Agreement between the Kuwait Government and Aminoil' as the relevant expropriatory act and took its date of issuance as the valuation date. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 175; in Tidewater v Venezuela, the tribunal took the date of the Reserve Law of 7 May 2009 as the valuation date. Tidewater v Venezuela, Award of 13 March 2015, para. 170. The political, social, and economic context has an important influence on international investments in many respects. See P Muchlinski, 'Policy Issues' in P Muchlinski, F Ortino, and C Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 3, 10–15. These need to be taken into consideration also at the quantum stage of investor–state disputes. As regards the relevance of general economic circumstances see below, Chapter 5, paras 5.183 et seq. American International Group Inc v Iran, 4 Iran–US CTR (1983) 96, 107. These circumstances had not been taken into account by the claimant so that the tribunal reduced the amount claimed considerably for this reason. See the discussion of further cases below, Chapter 5, Section B(3)(d), paras 5.139 et seq. American International Group, Inc v Iran, 4 Iran–US CTR (1983) 96, 109. See, e.g., INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 380; Sola Tiles Inc v Iran, 14 Iran–US CTR (1985) 223, para. 63; also along the same lines Thomas Earl Payne v Iran, 12 Iran–US CTR (1986) 3, para. 35; Phelps Dodge Corporation v Iran, 10 Iran–US CTR (1986) 121, para. 30; CBS Inc v Iran, 25 Iran–US CTR (1990) 131, para. 52; Khosrowshahi v Iran, 30 Iran–US CTR (1994) 76, paras 50–1; these cases are dealt with in more detail below. Companía del Desarollo de Santa Elena SA v Costa Rica, Award of 17 February 2000 (2002) 15 ICSID Rev.-FILJ 169 et seq. Ibid, para. 37. Ibid, paras 85 et seq. Both parties' experts accordingly made their valuations from this perspective. Their results, however, differed considerably, namely US$ 1.9 million and US$ 6.4 million respectively. The tribunal eventually chose an amount exactly in between, thus US$ 4.25 million. See the detailed analysis of the time element by C Brower and J Wong, 'General Valuation Principles: The Case of Santa Elena' in T Weiler (ed.), International Investment Law and Arbitration (London: Cameron May, 2005) 747, 760–8. See further details on the issue of pre-judgment interest below, in Chapter 6, Section B(1)(g)(i). Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992 (1992) 3 ICSID Reports 189 et seq. Ibid, para. 218. Ibid, paras 63–4. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 165. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 140, 141 et seq, 162. This date was proposed by the claimant and accepted by the tribunal without further explanation. Ibid, at 210 et seq. Lithgow et al v United Kingdom, 8 July 1986, ECHR Ser A, No. 102, paras 112 et seq. Ibid, para. 19. Ibid, para. 10. Ibid, paras 144 et seq. Ibid, para. 151. Ibid, paras 112 et seq.

597) Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 293.

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Ibid, para. 294. Ibid, para. 296. Ibid, para. 307. Ibid. Tidewater v Venezuela, Award of 13 March 2015, paras 159, 170. Ibid, para. 25. See above, Section A(2). Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 51–2. See the exact wording of these questions above, n. 188. See question No. 1 of the Court, above, n. 188. See question No. 2 of the Court, above, n. 188. See above, paras 3.105–3.108. G Schwarzenberger, International Law as Applied by International Tribunals (London: Stevens and Sons Ltd, 1957) 666; similarly A Roth, Schadensersatz für Verletzungen Privater bei völkerrechtlichen Delikten (Berlin: Carl Heymanns, 1934) 100 et seq. See above, para. 3.100. Papamichalopoulos et al v Greece (just satisfaction) ECHR Ser A, No. 330-B, 31 October 1995. Ibid, para. 36. Ibid, para. 37. Belvedere Alberghiera Srl v Italie (just satisfaction) ECtHR No. 31524/96, 30 October 2003, para. 35. Motais de Narbonne v France (just satisfaction) ECtHR No. 48161/99, 27 May 2003, para. 11. Terazzi SRL v Italie (just satisfaction) ECtHR No. 27265/95, 26 October 2004, para. 37. Brumarescu v Romania (just satisfaction) ECtHR 2001-I, paras 19 et seq. Ibid, para. 19 (emphasis added). Ibid, para. 23 (emphasis added). See similarly Carbonara and Ventura v Italy (just satisfaction) ECHR 24638/94, 11 December 2003, para. 41; Scordino v Italy (just satisfaction) ECHR 43662/98, 6 March 2007, para. 38; Pasculli v Italy (just satisfaction) ECHR 36818/97, 4 December 2007, para. 38. ADC v Hungary, Award of 2 October 2006, para. 497. Ibid. Several tribunals have accepted the difference and awarded damages incurred after the expropriation date, e.g., Siemens A.G. v Argentina, Award of 6 February, para. 353; Compañía de Aguas del Aconquija SA and Vivendi Universal SA v Argentina, Award of 20 August, paras 8.2.4–6, 8.3.20; Unglaube v Costa Rica, Award of 16 May 2012, paras 306–7, 318; Quiborax v Bolivia, Award of 16 September 2015, para. 385. Funnekotter v Zimbabwe, Award of 22 April 2009, para. 112; Saipem v Bangladesh, Award of 30 June 2009, para. 201; Siag and Vecchi v Egypt, Award of 1 July 2009, para. 539; Kardassopoulos v Georgia, Award of 3 March 2010, paras 509–11; Tidewater v Venezuela, Award of 13 March 2015, para. 142. e.g. because the value had not increased, or because claimants and respondents agreed on the valuation date in the past. Yukos v Russia, Award of 18 July 2014. Ibid, para. 1765. Quasar de Valores, Award of 20 July 2012, para. 6; similarly also Saipem v Bangladesh, Award of 30 June 2009, para. 116. Rosinvest v Russia, Award of 21 September 2010, para. 674. By the 'Participation Agreements' the claimant had temporarily transferred the economic interests in the claimant's Yukos shares to a third party, a US company, ibid, para. 290. This did not prevent the claimant from being protected as an 'investor' under the Spanish–Russian BIT, because the claimant had remained at all times the legal and registered owner of the shares. See ibid and para. 323. Rosinvest v Russia, Award of 21 September 2010, para. 672. The tribunal found that, before, the claimant 'had no real economic interest of its own in the Yukos shares during the period the Participation Agreements were in force and thus “had nothing to lose”', ibid. The tribunal thereby took into account the nature of the 'speculative investment in Yukos shares'. See Rosinvest v Russia, Award of 21 September 2010, para. 668. Quasar de v Russia, Award of 20 July 2012, paras 195 et seq; see also I Marboe, 'Quasar de Valores SICAV SA and others v The Russian Federation. Another Chapter of the Yucos Affairs' (2013) 28 ICSID Rev.–FILJ 1–7. The tribunal in Rusoro Mining v Venezuela noted the agreement of the parties on the proper valuation date as the date of the expropriation 'which makes it unnecessary for the Tribunal to address the thorny issue of the appropriate date for calculation in unlawful expropriations'. Rusoro Mining v Venezuela, Award of 22 August 2016, para. 647. See also Abengoa v Mexico, Award of 18 April 2013, para. 694; Flughafen Zürich v Venezuela, Award of 18 November 2014, paras 784–5; OI Group v Venezuela, Award of 10 March 2015, para. 651. Tidewater v Venezuela, Award of 13 March 2015; Crystallex v Venezuela, Award of 4 April 2016, para. 843. Quiborax v Bolivia, Award of 16 September 2015, para. 385. Guiso-Gallisay v Italy, ECHR 58858/00, 22 December 2009, para. 102. Ibid, para. 103.

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658) 659) 660) 661) 662) 663) 664) 665) 666) 667) 668) 669) 670)

671) 672) 673) 674) 675) 676) 677) 678) 679) 680) 681) 682)

Ibid, para. 103. Ibid, para. 105. Ibid. In Guiso-Gallisay v Italy, 'lost opportunities' were assessed at €45,000. Ibid, para. 107. In Guiso-Gallisay v Italy, the Court awarded €15,000 to each of the three applicants. Ibid, para. 110. The practice of including damages for 'lost opportunities' and non-pecuniary damages, including the above-mentioned formulations, has been confirmed in later case law, such as in Dedda and Fragassi v Italy, ECtHR 19403/03, 12 April 2011, paras 15–19. As regards the particularity in the interest decision, see further below, Chapter 6. Guiso-Gallisay v Italy, ECtHR 58858/00, 22 December 2009, para. 95. See ibid, paras 16–18. Ibid, para. 16. Ibid, para. 102. N Birch, above, n. 126, 485. In the same vein J Salacuse, above, n. 247, 328. See above, Section A(2). Guiso-Gallisay v Italy, ECtHR 58858/00, 22 December 2009, para. 91. See the comprehensive analysis of this aspect by M Reisman and R Sloane, above, n. 138. International Technical Products v Iran, 9 Iran–US CTR (1985) 206, 240–1. See, e.g., Foremost Tehran Inc et al v Iran, 10 Iran–US CTR (1986) 228, 249; Phillips Petroleum Company v Iran, 21 Iran–US CTR (1989) 79, 116; Malek v Iran, 28 Iran–US CTR (1992) 246, para. 114; Vera-Jo Miller Aryeh et al v Iran, 33 Iran–US CTR (1997) 272, para. 200; similarly, Starrett Housing v Iran, Interlocutory Award, 4 Iran–US CTR (1983) 122, 155; Phelps Dodge v Iran, 10 Iran–US CTR (1986) 121, para. 20. See, e.g., Starrett Housing v Iran, Interlocutory Award, 4 Iran–US CTR (1983) 122, 155; Starrett Housing v Iran, Final Award, 16 Iran–US CTR (1987) 112, 127. Sedco Inc v NIOC, First Interlocutory Award, 9 Iran–US CTR (1985) 248, 278. In some cases, the date of the appointment of governmental supervisers was not considered as the expropriation date, as some participation rights continued for a certain period of time. In Tippetts, Abbett, McCarthy and Stratton (TAMS) v Iran, e.g., the claimants were partners and 50% owners of a construction enterprise. The nomination of a manager by the Government on 24 July 1979 did not immediately lead to the destruction of the property rights in question as the claimants continued to be able to influence the business operations. Only after having sent letters and telexes between January and February which remained unanswered, was the expropriation deemed to have taken place. The tribunal decided that the expropriation date was 'at least 1 March 1980'. This date was then also chosen as the valuation date. Tippetts et al v TAMS-AFFA et al v Iran, 6 Iran–US CTR (1984) 219, 225. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189. Ibid, para. 84. Ibid, para. 182. Ibid, para. 181. Ibid. M Reisman and R Sloane, above, n. 138, 140 et seq. As Reisman and Sloane put it: 'All this is not to suggest, however, that investors should, or should be entitled to, cry “expropriation” at the first sight of adverse governmental conduct'. Ibid, at 146. Ibid, at 148. Ibid, at 146. Ibid. See above, Section A(3). Article 15 of the Articles of the Responsibility of States for Internationally Wrongful Acts, UN GA Resolution No. 56/83 of 12 December 2001, Annex (emphasis added). See Commentary to Article 15(1): 'Paragraph 1 of article 15 defines the time at which a composite act “occurs” as the time at which the last action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act, without it necessarily having to be the last in the series.' Yearbook of the International Law Commission, 2001, vol. II, Part Two, as corrected, 63. J Crawford, above, n. 160, 143–4. Alpha Projektholding v Ukraine, Award of 8 November 2010. Ibid, 43. Ibid, para. 481. Marion Unglaube and Reinhard Unglaube v Costa Rica, Award of 16 May 2012, para. 315. Ibid. Ibid, para. 316. Ibid, para. 307. Ibid, para. 318. Ibid, para. 318. Ibid, para. 308. Rumeli Telekom, Award of 28 July 2008, para. 708.

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683) 684) 685) 686) 687) 688) 689) 690) 691)

692) 693) 694) 695) 696) 697) 698) 699) 700) 701) 702) 703) 704) 705) 706)

707) 708) 709) 710) 711) 712) 713) 714) 715) 716) 717) 718) 719)

720)

721) 722)

Ibid, para. 788. Ibid, paras 795–6. Ibid, para. 795. Yukos v Russia, Award of 18 July 2014, para. 1761. The claimants argued that this was the date on which the governmental interference had ripened into an irreversible deprivation of their property which constituted 'a point of no return'. Ibid, para. 1696. Ibid, paras 1736–8. Ibid, para. 1762. Quasar de Valores, Award of 20 July 2012, para. 189; see the tribunal's conclusion in para. 215. The tribunal contended that 'the auction on that date … marked a substantial and irreversible diminution of Claimants' investment', that the claimants had 'lost the power to govern the financial and operating policies of Yukos so as to obtain the benefits from its activities' in December 2004, and that Yukos had become 'incapable of operating as a business'. Ibid, para. 1762, with references to other parts of the award and exhibits presented by the parties. See Rosinvest v Russia, Award of 21 September 2010, para. 668; see above, para. 3.298. Article 36 of the ILC Articles on State Responsibility. See above, Chapter 2, Section B(2)(a)(i). Article 34 of the Articles on State Responsibility. See the quotation from Schwarzenberger above, para. 3.287. Amco Asia v Indonesia, Award of 20 November 1984 (Amco I) (1993) 1 ICSID Reports 413, paras 163 et seq; Amco Asia v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569, paras 137 et seq. Amco Asia v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569, para. 186. Ibid, para. 196. Ibid, paras 201 et seq. Ibid, paras 186 and 197. Ibid, para. 186. Ibid. S D Myers Inc v Government of Canada, Second Partial Award of 21 October 2002 (2005) 8 ICSID Reports 124, para. 98. Ibid, paras 222 et seq. CMS v Argentina, Award of 12 May 2005 (2005) 44 ILM 1205, paras 438 et seq. El Paso v Argentina, Award of 31 October 2011, para. 710. The tribunal in Crystallex v Venezuela evaluating the consequences of a simultaneous violation of the provisions on expropriation and fair and equitable treatment took into account that both parties had chosen the date of the expropriation as the valuation date, but noted obiter that 'full reparation may require, under certain circumstances, the valuation date to be fixed at the date of the award'. Crystallex v Venezuela, Award of 14 April 2016, para. 843. See also R Dolzer and C Schreuer, above, n. 2, 295. Delagoa Bay and East African Railway, Award of 30 May 1900, reprinted in pertinent parts in M Whiteman, above, n. 365, 1694. Ibid, 1699. Ibid, 1702. LETCO v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343 et seq. The tribunal referred to the unilateral reduction of the concession area by the Government, rather inconsistently, also as 'expropriation'. Ibid, 375. Ibid, at 374. 'The Tribunal has extrapolated from historical figures an estimate for future prices for each type of tree, assuming that such prices would have evolved similarly to those prices that existed from 1973 to 1985.' Ibid, at 375. Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003, para. 365. Ibid. Ibid, para. 346. H Wöss et al, above, n. 369, 219. Ibid, referring to K Brieskorn, Vertragshaftung und responsabilitécontractuelle: Ein Vergleich zwischen deutschem und französischem Recht mit Blick auf das Vertragsrecht in Europa (Tübingen: Mohr Siebeck, 2010), 284–6, with further references. H Wöss et al, above, n. 369, refer to J O'Brien and R Gay, 'Lost Profits Calculation: Methods and procedures' in N Fannon (ed.), The Comprehensive Guide to Lost Profits Damages for Experts and Attorneys (Portland: Business Valuation Resources, 2011), 352–4. H Wöss et al, above, n. 369, 219. Ibid, referring to G Treitel, The Law of Contract (11th edn, London: Thomson, Sweet & Maxwell, 2003) 959–60, as well as to two cases, The Golden Victory [2007] UKHL 12 (HL) and Johnson v Agnew [1979] 2 WRL 487(HL) 499.

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723) Article 74, 2nd sentence, CISG. See also P Schlechtriem and I Schwenzer, The 724) 725) 726) 727) 728) 729) 730) 731)

732) 733) 734) 735)

736)

737)

738) 739) 740) 741) 742) 743) 744) 745) 746) 747) 748) 749) 750)

Commentary on the UN Convention on the International Sale of Goods (2nd edn, Oxford: Oxford University Press, 2005) Article 74. Article 74, 1st sentence. See UNIDROIT, Principles of International Commercial Contracts (Rome: UNIDROIT 2010) 268; see also H Wöss et al, above, n. 369, 220. H Wöss et al, above, n. 369, 265. Ibid, 267; see also M Abdala and P Spiller, 'Chorzów's Standard Rejuvenated: Assessing Damages in Investment Treaty Arbitration' (2008) 15 Journal of International Arbitration 103–20. See above, Chapter 2, para. 2.74. ADC v Hungary, Award of 2 October 2006, para. 521. A Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd edn, Hoboken, NJ: Wiley, 2012) 2. Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v Republic of Kazakhstan, Award of 28 July 2008 (in the annulment proceeding the lack of reasoning was specifically challenged); Gemplus v Mexico, Award of 16 June 2010 (price at which the property would change hands was only estimated, from this dividends received were discounted); Antoine Abou Lahoud and Leila Bounafeh-Abou Lahoud v Democratic Republic of the Congo, Award of 7 February 2014, para. 600 (DCF method not regarded to bring precise results, thus discretionary power in determining the total amount of sales) paras 14–26. T Wälde and B Sabahi, above, n. 547, 1103–5. See, e.g., Benvenuti & Bonfant v Congo, Award of 15 August 1980, para. 4.4; Atlantic Triton v Guinea, Award of 21 April 1986, at 17; Antoine Goetz & Others v Burundi, Award of 21 June 2012, para. 293. See Article 38, para. 2 of the Statute of the International Court of Justice, 33 UNTS 993. See, e.g., Klöckner v Cameroon, Award of 21 October 1983 (1994) 2 ICSID Reports 2, 77. In the subsequent annulment proceeding, the ad hoc committee questioned this as a decision on equity rather than on law. It also criticized the lack of sufficient reasoning and annulled the award. Klöckner v Cameroon, Decision on Annulment of 3 May 1985 paras 172 et seq; see also Pey Casado v Chile, Decision on the Application for Annulment of 18 December 2012, paras 246–87; in Rumeli v Kazakhstan, the ICSID ad hoc committee did not annul the award on this ground but stated that, although it had denied the respondent's application for annulment in its entirety, the application was not fundamentally lacking in merit. Particularly on the question of damages, it raised a claim that required extended consideration, so that the parties must each bear their own counsel fees and contribute equally to meeting the costs of the annulment proceeding. Rumeli v Kazakhstan, Decision on the Application for Annulment of 25 March 2010, para 184. North Sea Continental Shelf Cases (Federal Republic of Germany v Denmark, Federal Republic of Germany v the Netherlands), Judgment of 20 February 1969, ICJ Reports 1969, 3, para. 85. Judgments of the Administrative Tribunal of the ILO upon Complaint Made against UNESCO, Advisory Opinion of 23 October 1956, ICJ Reports 1956, 100 et seq; quoted, inter alia, in Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 78; and in Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Negara (PLN), Final Award of 4 May 1999 (2000) 25 Yearbook of Commercial Arbitration 13, para. 238; see also R Jennings, 'Equity and Equitable Principles' (1986) 42 Annuaire suisse de droit international 27, 29; I Seidl-Hohenveldern, 'L'évaluation des dommages dans les arbitrages transnationaux' (1987) 33 Annuaire français de droit international 7, 27. Sapphire International Petroleum Ltd v NIOC, Award of 15 March 1963 (1967) 35 ILR 136. The arbitrator emphasized that the US$ 8 million demanded and paid for the concession implied a high probability of the existence of oil reserves in the area. Ibid, at 189. Ibid, at 190. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 200 et seq; see also the analysis of the Iran–US Claims Tribunal in Amoco International Finance Corporation v Iran, 15 Iran–US CTR (1987) 189, para. 206. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 207. Ibid, at 214. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 78. See more details in R Young and W Owen, 'Valuation Aspects of the Aminoil Award' in R Lillich (ed.), The Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1987), vol. 4, 3, 27 et seq. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 178. Ibid. Técnicas Medioambientales SA v Mexico, Award of 29 May 2003 (2004) para. 190, referring to Southern Pacific Properties v Egypt at n. 229. Ibid, with reference at n. 228 to Aminoil v Kuwait and Himpurna California v PLN. Ibid, para. 142.

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751) American International Group v Iran, 4 Iran–US CTR (1983) 96, 109 (emphasis added).

752) 753) 754)

755) 756) 757) 758)

759)

Similarly, the tribunal in Thomas Earl Payne made an 'approximation of the value of claimant's interest' replacing a more accurate calculation of the amount of damages. Thomas Earl Payne v Iran, 12 Iran–US CTR (1986) 3, 15. See, however, the critical commentary by C F Amerasinghe, 'Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice' (1992) 41 ICLQ 22, 64–5. Swisslion v Macedonia, Award of 6 July, para. 344. Impregilo v Argentina, Award of 21 June 2011, para. 371; Unglaube v Costa Rica, Award of 16 May 2012, para. 299. Amco Asia v Indonesia (Amco II), Award of 5 June 1990, para. 238; Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Negara (PLN), Final Award of 4 May 1999, para. 237; Lemire v Ukraine, Award of 28 March 2011, para. 246; Swisslion v Macedonia, Award of 6 July, para. 345; Gold Reserve v Venezuela, Award of 22 September 2014, paras 685–6. Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992 (1992) 3 ICSID Reports 189, para. 215. Funnekotter v Zimbabwe, Award of 22 April 2009, para. 124. This was, however, not accepted by the tribunal which evaluated the damages suffered at the date of dispossession on the basis of the market value. See also B Sabahi, K Duggal, and N Birch, above, n. 503, 1129. See above, paras 3.09 et seq; see also F Francioni, 'Compensation for Nationalisation of Foreign Property: the Borderland between Law and Equity' (1975) 24 ICLQ 255; similarly, B Clagett, 'Just Compensation in International Law: The Issues before the Iran–US Claims Tribunal' in R Lillich (ed.), The Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1987), vol. 4, 31, 89; C F Amerasinghe, 'The Quantum of Compensation for Nationalised Property' in R Lillich (ed.), Valuation of Nationalized Property in International Law (Charlottesville: University Press of Virginia, 1975), vol. 3, 91, 124–5; see also (cautiously of the same opinion) I Seidl-Hohenveldern, 'L'évaluation des dommages dans les arbitrages transnationaux' (1987) 33 Annuaire Français de Droit International 7, 29: '[F]iat justitia pereat (tertius) mundus?'. See Russian Indemnities (Russia v Turkey), Award of 11 November 1912, 11 RIAA, 431; in numerous ICSID proceedings against Argentina after the country's economic crisis in 2001/2, this issue has been discussed. See A Reinisch, 'Necessity in International Investment Arbitration—An Unnecessary Split of Opinions in Recent ICSID-Cases? Comments on CMS v Argentina and LG&E v Argentina' (2007) 8 JWIT 191.

760) See for a comprehensive discussion, W Burke-White and A von Staden, 'Investment

761) 762) 763) 764) 765) 766) 767) 768) 769) 770) 771) 772)

773) 774) 775) 776) 777) 778) 779)

780)

Protection in Extraordinary Times: The Interpretation and Application of NonPrecluded Measures Provisions in Bilateral Investment Treaties' (2008) 48 Virginia Journal of International Law 307. See for a discussion from an economic analysis of law A van Aaken, above, n. 25. Himpurna California Energy Ltd v PLN, Award of 4 May 1999 (2000) 25 YCA 13, para. 318. Ibid, paras 325 et seq. See Statement of Arbitrator de Fina, ibid, at 108; J Gotanda, above, n. 372, 97 et seq. CME Czech Republic BV v Czech Republic, Separate Opinion on the Issues at the Quantum Phase of 14 March 2003 (2006) 9 ICSID Reports 412. Ibid, para. 77. Ibid, para. 79. See further below, Chapter 5, Section A(6), paras 5.65 et seq. CMS v Argentina, Award of 12 May 2005, para. 165. Articles on the Responsibility of States for Internationally Wrongful Acts, UN GA Resolution No. 56/83 of 12 December 2001, Annex. Ibid, para. 331. Ibid, para. 355. The ad hoc committee which had to decide on the application for annulment of the award criticized the tribunal heavily for the lack of distinction between the treaty clause on emergency and the customary law rule of Article 25 on necessity. It did not, however, annul the award for this reason. See CMS v Argentina, Decision on the Application for Annulment of 25 September 2007, paras 101 et seq. LG&E v Argentina, Decision on Liability of 3 October 2006, para. 257. Ibid, para. 266. See A Reinisch, 'Necessity in International Investment Arbitration—An Unnecessary Split of Opinions in Recent ICSID-Cases? Comments on CMS v Argentina and LG&E v Argentina' (2007) 8 JWIT 191. Continental Casualty v Argentina, Award of 5 September 2008, para. 236. Sempra v Argentina, Award of 28 September 2007, paras 344–97. Enron v Argentina, Award of 22 May 2007, paras 303–42. Sempra v Argentina, Decision on the Application for Annulment of 29 June 2010, paras 159–85. By contrast, the ad hoc committee in CMS v Argentina limited itself to heavily criticizing this lack of distinction, but ultimately refrained from annulment. See CMS v Argentina, Decision on the Application for Annulment of 25 September 2007, paras 134–6. Enron v Argentina, Decision on the Application for Annulment of 30 July 2010, paras 347–405.

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781) Burke-White and von Staden, above, n. 760, 33.

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4. International Standards, Bases of Value, and Valuation Approaches

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Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

'4. International Standards, Bases of Value, and Valuation Approaches', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 163 - 212

4.01 Numerous methods and techniques have been developed for the valuation of economic assets. They are often different from country to country, because different national laws and contexts require different forms of valuation for various purposes, such as taxation, financial reporting, mergers and acquisitions, or inheritance. However, the consensus regarding business appraisal professional standards has grown. (1) The modern globalized economy has made it necessary to identify uniform or at least comparable principles. (2) A number of international standards, recommendations, and guidelines provide valuation principles that are applicable internationally. In the following, some of P 164 the most influential standards and references will be introduced. They all emphasize that for any valuation the basis of value has to be identified at the outset. After a short overview of the bases of value potentially relevant for investment arbitration, the various valuation approaches, that is, the market approach, the income approach, and the assetbased approach, will be discussed. Finally, some considerations will be given to the issue of transparency and the use of experts in arbitration proceedings.

A. International Standards 4.02 The globalization of the economy has created the need for internationally comparable standards and principles for the valuation of economic assets. Generally accepted valuation principles are particularly important for the resolution of international investment disputes. 4.03 Traditionally, valuation standards existed only at the national level responding to laws requiring valuation, such as commercial law, corporate law, inheritance law, and tax law, which are inherently national. (3) Attempts have been made to find a better uniformity at least at the regional level. In Europe, the Fédération des Experts Comptables P 165 Européens published a 'Guide for Carrying out Business Valuations' in 2001. (4) The globalization of investment markets made it necessary to find ways of making valuations comparable also at the international level, because otherwise differences among national or regional valuation would increasingly lead to misunderstandings and confusion. A number of international institutions have engaged in international standard setting and the development of guidelines. In the following, the works of the International Valuation Standards Council, the World Bank, the Multilateral Investment Guarantee Agency, and the UN Compensation Commission will briefly be discussed.

(1) International Valuation Standards 4.04 The International Valuations Standards Council (IVSC) is the successor body to the International Valuation Standards Committee which, from the early 1980s until 2007, developed and published the International Valuation Standards. (5) In 2006, the former Committee established a Critical Review Group with a remit of considering how the standards could be improved to meet the requirements of the evolving market for valuation. As a result, the 2011 edition of the International Valuation Standards introduced major changes in style and presentation compared with earlier versions. (6) The most recent edition was published in 2013. (7) 4.05 The IVSC is an independent, not-for-profit, private sector organization to produce and implement universally accepted standards for the valuation of assets across the world in the public interest. (8) Its mission is to establish and maintain effective, highquality international valuation and professional standards, and to contribute to the development of the global valuation profession. (9) Today, institutions and organizations from over fifty countries are members of the IVSC. (10) Representatives meet regularly to review the standards and address how best to promote them across the globe. (11) 4.06 The Council dedicated its work to the development of internationally accepted standards for the valuation of property. In its work, it also incorporates, as appropriate, the work of the International Accounting Standards Board (IASB), another not-for-profit, P 166 public interest organization with oversight by public authorities. (12) Its governance and due process are designed to keep standard setting independent from special interests while ensuring accountability to stakeholders around the world. The IASB works on the international standardization and harmonization of financial reporting which culminated in the promulgation of the International Financial Reporting Standards (IFRS), (13) formerly International Accounting Standards (IAS). (14) 4.07 The International Valuation Standards of 2013 (hereinafter IVS 2013) contain (1) 'The IVS Framework' (serving as a preamble to all the other IVS standards, setting forth generally accepted valuation principles and concepts that are to be followed when applying the other standards); (2) 'IVS General Standards' (setting forth requirements for the conduct of all valuation assignments, except as modified by an Asset Standard or a Valuation Application); (3) 'IVS Asset Standards' (including requirements setting forth any additions or modifications to or modifications of the requirements in the General Standards and a commentary providing background information on the characteristics of each asset type that influence value and identifies the common valuation approaches

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and methods used); (4) 'IVS Valuation Applications' (addressing common purposes for which valuations are required'; and (5) 'Technical Information Papers'. (15) The Glossary which used to be included until the 2007 edition of the IVS does not form part of the standards any more, but is published on the website of the IVSC. (16) It is updated on 1 January and 1 July each year. 4.08 The 'IVS Framework' emphasizes that applying the principles contained in the

P 167 standards does not remove the need for the exercise of judgement, but that it 'must

be applied objectively and should not be used to overstate or understate the valuation result'. (17) It addresses the inherent tension between 'judgement' and 'objectivity' in the following way: The process of valuation requires the valuer to make impartial judgements as to the reliance to be given to different factual data or assumptions in arriving at a conclusion. For a valuation to be credible, it is important that those judgements can be seen to have been made in an environment that promotes transparency and minimises the influence of any subjective factors on the process. (18) 4.09 Under the IVS, it is therefore important that the valuation is 'credible' and free from bias. The IVSC Code of Ethical Principles for Professional Valuers (19) provides an example of an appropriate framework of conduct rules. This does not, however, mean that every valuation requires an 'objective' valuation approach. The 'IVS Framework' also points out that judgement must 'be exercised having regard to the purpose of the valuation, the basis of value and any other assumptions applicable to the valuation'. (20) 4.10 With regard to the 'basis of value' the 'IVS Framework' does not only include the 'Market Value' basis which indicates the most likely price that would be achieved in an hypothetical exchange in a free and open market, but also the 'benefits that a person or an entity enjoys from ownership of an asset' as a second category, which is defined in the IVS as 'investment value' or 'special value'. (21) A third category is 'the price that would be reasonably agreed between two specific parties for the exchanges of an asset', which is defined in the IVS as 'fair value'. (22) It follows that an 'objective' valuation should be one that is credible and free from bias. This objectivity should not be confused with a valuation on the market value basis. 4.11 In the context of international investment arbitration the 'Basis of Valuation' is to be set out by the arbitral tribunal which derives it from the applicable law. In doing so, it defines the scope of work for the valuation experts.

4.12 The International Valuation Standards incorporate different national and regional approaches to valuation. They provide comprehensive guidelines for the assessment of market value, investment value, or special value, depending on the circumstances. (23) This makes them useful for calculating both compensation and damages in international P 168 investment disputes.

(2) World Bank Guidelines 4.13 In its 'Guidelines on the Treatment of Foreign Direct Investment' (24) the World Bank also deals with the issue of valuation. It does so in the context of expropriation and unilateral termination of contracts. (25) In these cases, compensation should be 'adequate, effective and prompt'. (26) Compensation would be considered 'adequate', if it were equivalent to the 'fair market value'. (27) 4.14 Without seeking to impose rigid criteria or hard and fast rules, the Guidelines formulate some proposals for the calculation of fair market value. (28) For a going concern with a proven record of profitability, fair market value should be assessed by the DCF method. The Guidelines give a short explanation on how this method should be applied: [T]he cash receipts realistically expected from the enterprise in each future year of its economic life as reasonably projected minus that year's expected cash expenditure, after discounting this net cash flow for each year by a factor which reflects the time value of money, expected inflation, and the risk associated with such cash flow under realistic circumstances. Such discount rate may be measured by examining the rate of return available in the same market on alternative investments of comparable risk on the basis of their present value. (29) 4.15 For enterprises without profitability, the Guidelines suggest reference to the liquidation value. (30) Other assets should be valued on the basis of their replacement value. (31) Also, the book value method could be applied, but only if it has been assessed recently and, therefore, could be considered as representing an acceptable approximation to the replacement value. (32) 4.16 The World Bank Guidelines are recommendations and do not have a binding character. They enjoy, however, a certain authority due to their truly international character and the diligent studies on which they are based. Before formulating these Guidelines, the World Bank thoroughly analysed international state practice as well as P 169

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P 169 the practice of international courts and tribunals in order to arrive

at results and conclusions which are acceptable as broadly and internationally as possible. (33) 4.17 Despite the generally positive reception of the Guidelines in legal scholarship, (34) it has taken some time until they were recognized in practice. The proposed valuation principles, for example, are not referred to in bilateral investment treaties. More than twenty years after their publication, they have only rarely been reflected in arbitral awards. (35)

(3) MIGA 4.18 The scope of work of the Multilateral Investment Guarantee Agency (MIGA) is to ensure direct foreign investment against political risk. (36) With regard to insurance events like 'expropriation or similar measures' (37) or 'breach of contract' (38) it is necessary to calculate the amount payable to the investor. One may ask if there are general principles which can also be used in other international valuation contexts. 4.19 The basis for payment in this context is a contract between the Agency and the investor. (39) This contract contains special provisions both on the amount payable upon the occurrence of the event insured against and also the amount of the insurance premium. Thus far there is no difference between an ordinary insurance contract and a private insurance company. Article 16 of the MIGA Convention, however, provides that the Agency shall not cover the total loss of the guaranteed investment. According to the Operations Regulations the amount of guarantee for equity interests should not exceed the amount invested plus earnings included in the coverage or, for non-equity direct investments, the value of the resources contributed to the investment. (40) Loans may be P 170 guaranteed in the amount of the principal plus accumulated interest, limited, however, to 99 per cent, while 95 per cent is the upper limit for all other investments. (41) If no other agreement has been reached, compensation upon expropriation is limited to the net book value of the project enterprise or, if the investment consists only in tangible assets, the book value of such tangible assets. (42) 4.20 It follows that the valuation in the context of investment insurance is guided by specific rules which do not reflect the concepts of fair market value or full repararation. On the contrary, the Agency is even explicitely barred from agreeing to pay the full amount of loss incurred. In addition, as in all insurance contracts, the concrete amount guaranteed depends on the amount of the insurance premium and other factors, such as the nature and extent of the risk insured. The determination of the amount payable, therefore, is based on many other conditions besides the 'value' of the investment. The MIGA Convention does not provide for 'full' or 'adequate' compensation, but leaves it to the parties to negotiate the amount payable in case of injury. (43) Nevertheless, some tribunals have relied on the 'insurance value' in international investment disputes. (44)

(4) UN Compensation Commission 4.21 The United Nations Compensation Commission (UNCC) was created in 1991 as a subsidiary organ of the UN Security Council to process claims and pay compensation for losses and damage suffered as a direct result of Iraq's unlawful invasion and occupation of Kuwait. (45) The claims were resolved by panels, each of which was made up of three Commissioners who were independent experts in different fields including law, accountancy, loss adjustment, insurance, and engineering. Technical experts and P 172 consultants assisted the panels in their verification and valuation of the claims. The panels submitted their recommendations on the claims to the Governing Council for approval. (46) 4.22 In its Decision No. 9, the Governing Council published 'Propositions and Conclusions on Compensation for Business Losses: Types of Damages and Their Valuation'. (47) This Decision was to apply to compensation for the loss of earnings or profits and other business losses covered by Security Council Resolution 687 (1991). (48) The basic premise underlying all of the findings concerning business losses is that, pursuant to paragraph 16 of Security Council Resolution 687 (1991), Iraq 'is liable under international law for any direct loss, damage, including environmental damage and the depletion of natural resources, or injury to foreign Governments, nationals and corporations as a result of Iraq's unlawful invasion and occupation of Kuwait'. (49) However, a violation of the duty to mitigate damages by the victim would result in a reduction in the amount of damages. (50) 4.23 The Governing Council stated that the propositions and conclusions contained in this Decision were not intended to be a comprehensive statement of relevant principles. (51) In particular, they must be regarded as an attempt to administer a very large number of claims in an efficient and timely manner. (52) This entailed a rather restrictive consideration of evidence, in particular without hearing the respondent and based mainly on accounting documents. (53) However, the propositions and conclusions in Decision No. 9 represent an interesting approach to the valuation of business losses caused to individuals in a case of state responsibility. They have been applied in a large number of decisions and, therefore, could provide a useful point of reference for other international instances concerned with the valuation of business claims in cases of state responsibility. (54)

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4.24 Decision No. 9 deals first with the issue of contract claims. It notes that Iraq is liable for contract damages under 'general contract law' which includes 'actual losses' and 'lost profits' as far as they can be calculated with reasonable certainty. Liquidated damages could be allowed as long as they did not exceed the loss actually suffered. (55) In any case, Iraq should not be allowed to invoke force majeure or similar contract provisions, or general principles of contract excuse, to avoid its liability. (56) 4.25 Second, the valuation of tangible assets that have been lost because of expropriation, removal, theft, or destruction by Iraqi authorities is addressed. Whether the taking of property was lawful or not should not be relevant for Iraq's liability if it did not provide for compensation. (57) Depending on the type of asset and the circumstances of the case, one of several valuation methods may be used. The Decision refers particularly to book value and replacement value. It points out that replacement value would not normally allow for replacement of an old item with a new one. (58) 4.26 As regards income-producing properties, the valuation principles proposed should be applied on the premise that the business affected was a going concern, that it had the capacity to continue to operate and to generate income in the future. (59) In the event that the business has been rebuilt and resumed, or that it could reasonably have been expected that the business could have been rebuilt and resumed, compensation may only be claimed for the loss suffered during the relevant period. (60) The Governing Council does not rule out book value, but notes that for going concerns the usual valuation method is by reference to the market value of similar properties. Where such market value could not be ascertained, the economic or current value of that asset could be assessed by the discounted cash flow (DCF) method or by the price/earnings (P/E) method. (61) 4.27 The Governing Council noted that the valuation of lost future earnings and profits should focus on past performance rather than on forecasts and projections into the P 173 future. It should be calculated by a multiple of past earnings and profits. (62) This shows the clear preference for the simplified method of 'multiples' rather than the more sophisticated but allegedly more accurate method of discounting future cash flows. (63) 4.28 It is beyond the scope of this book to assess the valuation practice of the UNCC in more detail. (64) Nevertheless, it is notable that in cases of reparations for an unlawful invasion, the valuation of damages incurred to foreign investors poses similar problems to those in international investment disputes.

B. Bases of Value 4.29 The standards and principles on valuation mentioned above share a common premise, namely that value is not a fact but an opinion and, therefore, a relative concept. (65) Pratt, in his influential textbook on business valuation, explains: 'The word value means different things to different people. Even to the same people, value means different things in different contexts … Without carefully defining the term value, the conclusions reached in the valuation report have no meaning.' (66) 4.30 At the beginning of every valuation it is therefore necessary to define the basis of the valuation. The 'basis of value' is defined by the IVS as 'a statement of the fundamental measurement assumptions of a valuation'. (67) The applicable definition of value is a legal question rather than a financial (appraisal) question, as value is defined differently in different legal contexts. (68) 4.31 The basis of valuation describes the fundamental assumptions on which the reported value will be based, for example, the nature of the hypothetical transaction, the P 174 relationship and motivation of the parties, and the extent to which the asset is exposed to the market. The appropriate basis will vary depending on the purpose of the valuation. A basis of value should be clearly distinguished from: (a) (b) (c) (d)

the approach or method used to provide an indication of value, the type of asset being valued, the actual or assumed state of an asset at the point of valuation, any additional assumptions or special assumptions that modify the fundamental assumptions in specific circumstances. (69)

4.32 Valuations may require the use of different bases of value that are defined by statute, regulation, private contract, or other document. (70) Usually, there is more than one method to be applied in order to arrive at the value described in the basis of valuation. (71) As Pratt notes: No single valuation method is universally applicable to all appraisal purposes. The context in which the appraisal is to be used is a critical factor. Different statutory, regulatory, and case precedent standards govern valuation of businesses and business interests under various jurisdictions for diverse purposes. (72) 4.33 The basis of value can be the market value basis, as an objective approach, or other bases of value. (73) The 'basis of value' is a definition of the type of value being sought, in other words, it addresses the questions: 'value to whom?' and 'under what

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circumstances?' (74) 4.34 The basis of value is critical to understanding valuation in the judicial and regulatory context. (75) According to Fishman, Pratt, and Morrison, there are two fundamental premises of value: value in exchange and value to the holder, which can be defined in the following way: Value in exchange: Value in exchange is the value of the business or business interest changing hands, in a real or a hypothetical sale. Accordingly, discounts, including those for lack of control and lack of marketability, are considered in order to estimate the value of the property in exchange for cash or cash equivalent. The fair market value standard and, to some extent, the fair value standard fall under the value in exchange premise.

P 175

Value to the holder: The value to the holder premise represents the value of a property that is not being sold but, instead, is being maintained in its present form by its present owner. The property does not necessarily have to be marketable in order to be valuable. We discuss later, however, that the value to the holder may be more or less than the value in exchange. The standard of investment value falls under the premise of value to the holder, as does, in certain cases, fair value. These two premises represent the theoretical underpinnings of each standard of value. In other words, they represent the framework under which all other assumptions follow. (76) 4.35 These two different premises can be adopted in the investment arbitration context as follows: the first premise, 'value in exchange', refers to the standard in expropriation cases requiring objective–abstract valuation; the second premise, 'value to the holder', describes what has to be assessed in cases of international law violations or breaches of contract, requiring subjective–concrete valuation. (77) 4.36 Furthermore, the valuation date (78) and other premises (79) important for the valuation must be identified. On this basis, the valuation expert must choose the method(s) of valuation, explain the result achieved, and prepare appropriate documentation. The IVS emphasize that it is important that the intended recipient of the valuation advice understands what is to be provided and any limitations on its use before it is finalized and reported. (80) Fishman, Pratt, and Morrison highlight that it is essential for the valuation expert to have a clear understanding of what the appropriate standard of value should be for the given circumstance, which 'includes seeking clarification from legal counsel, preferably in writing'. (81) 4.37 In the context of international investment arbitration, the tribunal identifies the

P 176 basis of valuation as determined by the applicable legal rules. It has been shown in

Chapter 3 that, in case of lawful expropriations, this standard is the fair market value at the expropriation date, thus the hypothetical value in exchange at that date. In case of a violation of an international obligation by the host state, the rules on the law of state responsibility point to the principle of full reparation, thus the value to the owner, evaluated at the time of the award. This is also the standard in breach of contract cases depending, however, on the specific provisions of the contract. The different bases of value shall now be analysed in more detail.

(1) Market Value Basis of Valuation 4.38 The IVS define the 'market value' basis of valuation as follows: Market value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. (82) 4.39 In this context, 'the estimated amount' refers to a price expressed in terms of money payable for the asset in an arm's length market transaction. Market value is the most probable price reasonably obtainable in the market on the valuation date in keeping with the market value definition. It is the best price reasonably obtainable by the seller and the most advantageous price reasonably obtainable by the buyer. This estimate specifically excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangements, special considerations or concessions granted by anyone associated with the sale, or any element of special value. (83) 4.40 The concept of 'market value' presumes a price negotiated in an open and competitive market where the participants are acting freely. (84) The market for an asset could be an international market or a local market. It could consist of numerous buyers and sellers, or could be one characterized by a limited number of market participants. The market in which the asset is offered for sale is the one in which the asset being exchanged is normally exchanged.

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4.41 The 'market value' of an asset, according to the IVS, shall reflect 'its highest and best use'. (85) The highest and best use is the use of an asset that maximizes its potential and that is possible, legally permissible, and financially feasible. The highest and best use may be for continuation of an asset's existing use or for some alternative use. This is determined by the use that a market participant would have in mind for the asset when P 180 formulating the price that it would be willing to bid. Accordingly, the determination of the highest and best use involves consideration of the following: (a) (b) (e)

to establish whether a use is possible, regard will be had to what would be considered reasonable by market participants, to reflect the requirement to be legally permissible, any legal restrictions on the use of the asset, for example, zoning designations, need to be taken into account, the requirement that the use be financially feasible takes into account whether an alternative use that is physically possible and legally permissible will generate sufficient return to a typical market participant, after taking into account the costs of conversion to that use, over and above the return on the existing use. (86)

4.42 In other valuation standards definitions, the 'highest price' is even explicitly mentioned. In the AICPA International Glossary of Business Valuation Terms, for example, 'fair market value' is defined as: the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under an obligation to buy or sell and when both have reasonable knowledge of the relevant facts. [NOTE: In Canada, the term 'price' should be replaced with the term 'highest price'.] (87) 4.43 It is notable that the IVS do not use the term 'fair market value'. In the 2007 edition, the IVS pointed out that it was not necessary and not advisable to put the adjective 'fair' in front of 'market value' as this would bear the risk of confusion with 'fair value'. (88) 4.44 According to the IVS 2013, 'fair value' is the 'estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties'. (89) It notes that this definition is different from that in the IFRS according to which 'fair value' is generally consistent with 'market value': (90) For use in financial reporting under International Financial Reporting Standards, fair value has a different meaning: ii. In IFRS 13 'Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'. (91) 4.45 According to the IVS, for purposes other than use in financial statements, fair value is to be distinguished from market value as follows: Fair value requires the assessment of the price that is fair between two identified parties taking into account the respective advantages or disadvantages that each will gain from the transaction. It is commonly applied in judicial contexts. In contrast, market value requires any advantages that would not be available to market participants generally to be disregarded. Fair value is a broader concept than market value. Although in many cases the price that is fair between two parties will equate to that obtainable in the market, there will be cases where the assessment of fair value will involve taking into account matters that have to be disregarded in the assessment of market value, such as any element of special value arising because of the combination of the interests. (92) 4.46 Examples of the use of 'fair value' include: (a) (b)

determination of a price that is fair for a shareholding in a non-quoted business, where the holdings of two specific parties may mean that the price that is fair between them is different from the price that might be obtainable in the market, determination of a price that would be fair between a lessor and a lessee for either the permanent transfer of the leased asset or the cancellation of the lease liability. (93)

4.47 However, it seems that this strict distinction between 'market value' and 'fair value' is not generally respected or applied in business valuation practice. Pratt and Nicolita note: In the United States, the most widely recognized and accepted standard of value related to business valuations is fair market value. With regard to business valuations, it is the standard that applies to virtually all federal and state tax matters, such as estate taxes, gift taxes, inheritance taxes, income taxes, and ad valorem taxes. It is also the legal standard of value in many

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other—though not all—valuation situations. (94) 4.48 The authors refer to the definition by the American Society of Appraisers according to which 'fair market value' is 'the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts' and point out that this definition is in accordance with that found in the Internal Revenue Code and Revenue Ruling 59–60. (95) 4.49 The Royal Institution of Certified Surveyors also notes that, with regard to the valuation of business and business interest, but also more generally, the 'bases of value' typically encountered are 'fair value, fair market value, market value, open market value, investment value, owner value and net realisable value'. (96) 4.50 It follows that for the purpose of establishing the basis of value, an international tribunal must look carefully at the legal basis for the valuation. If the applicable BIT, for example, refers to 'fair value' and not to '(fair) market value', the difference between the two standards might become relevant. Whether the standards of 'fair compensation' or 'just compensation' which appear in some BITs reflect rather 'fair value' or 'market value' cannot be generally determined. The tribunal must interpret these provisions in application of the rules of treaty interpretation. (97) So far, tribunals tend to interpret the standard of 'fair value' in the same way as 'fair market value'. (98) 4.51 As has been discussed in Chapter 3, the market value or 'objective' basis of value is required in cases of lawful expropriations. (99) Tribunals have also resorted to this basis of value in cases of unlawful expropriations, other violations of international law, or even contractual obligations. In some cases, this was explained by an argumentum e maiore ad minus or by analogy, in other cases the tribunals relied on the submissions of the parties. (100)

(2) Bases Other Than Market Value 4.52 While market value is considered to be a widely accepted basis of value for a wide range of applications, alternative valuation bases might be appropriate in specific circumstances. The IVS point out that there are two other principal categories as 'basis of valuation': (b)

(c)

The second is to indicate the benefits that a person or an entity enjoys from ownership of an asset. The value is specific to that person or entity, and may have no relevance to market participants in general. Investment value and special value as defined in these standards fall into this category. The third is to indicate the price that would be reasonably agreed between two specific parties for the exchange of an asset. Although the parties may be unconnected and negotiating at arm's length, the asset is not necessarily exposed in the market and the price agreed may be one that reflects the specific advantages or disadvantages of ownership to the parties involved rather than the market at large. Fair value as defined in these standards falls into this category. (101)

4.53 In the following section the respective concepts will be explained in more detail in order to find out to what extent they may be useful for the calculation of damages in international investment arbitration. (a) Investment Value or Worth 4.54 The first category of the bases other than market value deals with the concepts of 'investment value' and 'special value'. The IVS define 'investment value' as follows: Investment value is the value of an asset to the owner or a prospective owner for individual investment or operational objectives. This is an entity-specific basis of value. Although the value of an asset to the owner may be the same as the amount that could be realised from its sale to another party, this basis of value reflects the benefits received by an entity from holding the asset and, therefore, does not necessarily involve a hypothetical exchange. Investment value reflects the circumstances and financial objectives of the entity for which the valuation is being produced. It is often used for measuring investment performance. Differences between the investment value of an asset and its market value provide the motivation for buyers or sellers to enter the marketplace. (102) 4.55 In the United Kingdom, the Royal Institution of Chartered Surveyors (RICS), which has adopted the IVS into its national professional valuation standards, (103) explains that 'investment value' is another word for 'worth' which indicates that the operator will derive 'worth' from current and potential net profits from an operational entity operating in the chosen format. While one particular operator may be one potential bidder in the market, the valuer will need to understand the requirements and achievable profits of other potential bidders, along with the dynamics of the open market. (104) The reasons for the difference of opinions about the 'investment value' or 'worth' of an asset include, in particular

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1. 2. 3. 4.

Differences in estimates of future earning power. Differences in perception of the degree of risk. Differences in tax status. Synergies with other operations owned or controlled. (105)

4.56 Individual perceptions are particularly relevant, when an income-based valuation method is applied. In this case, the assumptions and possibilities of one particular investor may differ greatly significantly the perceptions of market participants, which may lead to very different results. Pratt and Nicolita note:

P 181

Investment value reflects the subjective relationship between a particular investor and a given investment. It differs in concept from market value, although investment value and market value indications sometimes may be similar. If the investor's requirements are typical of the market, investment value will be the same as market value. (106) 4.57 The concept of 'investment value' contains a number of elements that can be relevant for valuations in international investment arbitration. First, it is a subjective– concrete concept. This makes it prima facie interesting for use in international damages cases. The valuation experts point out that the value a particular investor attaches to an asset might be different from the market value. This is usually the case if an investor has paid or invested more than the market would consider reasonable. Nevertheless, the investor has done it, for whatever reason. If the state acts unlawfully and destroys or impairs the investment, why should it only pay the market value and not restore the investor the sum he or she has invested? 4.58 This would be particularly questionable if the state has benefited from the overpayment itself, for example, by acceptance of the high price for a concession which, for whatever reason, the investor wanted to acquire. These were the facts of the case in Azurix v Argentina. (107) The tribunal noted that no well-informed investor would have paid the price of US$ 449 million for the concession at the time of the unlawful interference by Argentina in March 2002. (108) It referred to the much lower competing bids at the time of the public tender a few years earlier and set the value of the concession at US$ 60 million. (109) As a result, the Argentine state could keep the overpayment. 4.59 This example shows the importance of distinguishing between 'investment value' and 'market value' of an investment. Yet, investment tribunals are usually not aware of the difference. The tribunal in Vivendi v Argentina, (110) for example, noted: Until their closing argument and Post-Hearing Brief, Claimants did not advance or rely on generally accepted alternative means of calculating fair market value, such as 'book value'—the net value of an enterprise's assets, 'investment value'—the amount actually invested prior to the injurious acts, 'replacement value'—the amount necessary to replace the investment prior to the injurious acts, or 'liquidation value'—the amount a willing buyer would pay a willing seller for the investment in a liquidation process … Of these alternatives, the 'investment value' of the concession appears to offer the closest proxy, if only partial, for compensation sufficient to eliminate the consequences of the Province's actions. (111)

4.60 The tribunal did not differentiate between the 'basis of value' and the different types of 'asset valuation approach', (112) and did not explain why the investment value P 183 could be equivalent to the market value, in particular as the tribunal found the company at the time of the award 'to be of no or nominal value'. (113) Be that as it may, the result was in line with the subjective–concrete valuation approach which would have been warranted anyway in that case. 4.61 Finally, it is important that the investment value, according to the IVS, 'reflects the benefits received by an entity from holding the asset, and, therefore, does not necessarily involve a hypothetical exchange'. (114) This fits particularly well with the circumstances of damages cases, as usually the injured party would not have wanted to sell the property at the date when the unlawful interference happened. It is more appropriate to assume that he or she wanted to keep the asset and continue to benefit from it. (b) Special Value, Synergistic Value, Price 4.62 Further examples of values other than market value addressed by the IVS 2013 are 'fair value', 'special value', and 'synergistic value'. 'Fair value', as already discussed, is often used as an objective value, but may also have subjective elements. (115) The two remaining types of value, 'special value' and 'synergistic value' are clearly subjective values. The IVS explain 'special value' as follows: Special Value can arise where an asset has attributes that make it more attractive to a particular buyer, or to a limited category of buyers, than to the general body of buyers in a market. These attributes can include the physical,

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geographic, economic or legal characteristics of an asset. Market Value requires the disregard of any element of Special Value because at any given date it is only assumed that there is a willing buyer, not a particular willing buyer. (116) 4.63 In the context of international direct investment, specific attributes of assets, such as the physical, geographic, economic, or legal characteristics, are the rule rather than the exception. International investment projects often have unique characteristics. Even if there are tools to calculate an objective value based on market parameters for those projects, the use of an abstract value is rather limited. Even if the standard of compensation upon expropriation refers to a hypothetical sale, this is not the premise under which the investor holds the investment. It is rather the value of the investment to the particular investor that makes him keep or sell the investment. 4.64 Finally, the 'synergistic value' is an 'additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values'. (117) If the synergies are only available to one specific owner or buyer, it is a case of 'special value'. (118) 4.65 Synergistic value is one of the most important reasons why actual buyers pay more for an asset than the market value. This was, for example, shown in CME v Czech Republic where the price for the company offered by a concrete interested buyer was almost double the company's market value as assessed by the tribunal on the basis of the valuation experts' DCF analyses. (119) 4.66 In this context it is appropriate to analyse the significance of 'prices' for valuation purposes. The IVS provide the following definition: Price is the amount asked, offered, or paid for an asset. Because of the financial capabilities, motivations or special interests of a given buyer or seller, the price paid may be different from the value which might be ascribed to the asset by others. (120) 4.67 According to the definition in Black's Law Dictionary 'price' is the 'amount of money or other consideration asked for or given in exchange for something else; the cost at which something is bought or sold'. (121) 'Cost' is defined as the 'amount paid or charged for something; price or expenditure'. (122) 4.68 It follows that price is an historic fact (except when qualified as 'asked' or 'offered'), while value is an opinion. It is only under perfect market conditions that value in use would equate with value in exchange. (123) The market of international investments is not perfect and therefore 'price' and 'value' are different things. The difference between subjective and objective value plays an important role here. 4.69 One of the most convincing arguments to support the need for differentiation between the value of an asset to a particular entity, thus the 'investment value', and the 'market value' is that the difference between the two values motivates buyers and sellers to enter the marketplace. (124) If there were no difference between subjective and objective values, no transactions would take place and there would be no market. It is, therefore, necessary to distinguish carefully between 'price' and 'value'. (c) Contractual Value 4.70 Another category of non-market value basis are valuations 'defined by statute, regulation, private contract or other document'. (125) Valuations based on a 'contract or P 184 other document' are particularly relevant in international investment disputes, because many investment projects involve contracts with the respondent state, state entities, or state-owned enterprises. The provisions of this contract naturally have a decisive impact on the value of the investment. This means that, for valuation purposes, the contractual provisions must be applied, even if the contract itself is not subject to the jurisdiction of the tribunal. (126) 4.71 Contract-based valuations are subjective insofar as the provisions of the contract reflect the specific relationship between the parties. The contract incorporates the intentions of the contracting parties, based on their respective expectations and competences. They might have agreed on specific terms which do not have to have anything to do with an 'objective' market value. (127) Due to the principle of party autonomy the contracting parties are almost entirely free to define the economic conditions of the contract. This includes the possibility of incorporating objective elements, for example, reference to raw material prices, inflation rates, consumer or producer price indexes, but also subjective elements, such as renegotiation clauses. (128) 4.72 Contracts may prescribe different valuation definitions and assumptions, the detailed application of which may require an approach different from that required by general valuation standards. The contract may, for example, include liquidated damages or criteria for setting the price payable under an option. In all cases it is important that the valuer must be informed about all the premises and assumptions relevant for the valuation.

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C. Valuation Approaches 4.73 After the establishment of the basis of value, an appropriate valuation approach and valuation methods must be selected. One or more valuation approaches may be used in order to arrive at the valuation defined by the appropriate 'basis of value'. (129) A valuation approach refers to generally accepted analytical methodologies that are in P 185 common use. Each approach has alternative methods of application. The existing recognized valuation approaches and methods are common to virtually all types of valuation, including real property, personal property, businesses, and financial interests. However, valuation of different types of assets may require different approaches or methods. (130) 4.74 The most common approaches used in practice and discussed in the IVS as well as in academic writing are the market approach (or sales comparison approach), the income capitalization approach (including discounted cash flow analysis), and the asset-based valuation approach (or cost approach). (131) These three approaches 'all are based on the economic principles of price equilibrium, anticipation of benefits or substitution'. (132) However, it is recommended to use more than one valuation approach or method, where there are insufficient factual or observable inputs for a single method to produce a reliable conclusion. (133) In the following, the three different types of valuation approaches shall be briefly introduced. Their application in international judicial practice has advantages and drawbacks (134) which involve a variety of challenges.

(1) Market Approach 4.75 The market or sales comparison approach provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available. (135) In general, an asset being valued is compared with sales of similar properties that have been transacted in the market. Listings and offerings may also be considered as a source of information. (136) With regard to business valuation, the IVS provides: C15. The market approach compares the subject business to similar businesses, business ownership interests, and securities that have been exchanged in the market and any relevant transactions of shares in the same business. Prior transactions or offers for any component of the business may be also indicative of value. C16. The three most important common sources of data used in the market approach are public stock markets in which ownership interests of similar businesses are traded, the acquisition market in which entire businesses are bought and sold, and prior P 186 transactions in the ownership of the subject business. C17. There needs to be a reasonable basis for comparison with and reliance upon similar businesses in the market approach. These similar businesses should be in the same industry as the subject business or in an industry that responds to the same economic variables. Factors to be considered in whether a reasonable basis for comparison exists include the following: • • •

similarity to the subject business in terms of qualitative and quantitative business characteristics, amount and verifiability of data on the similar business, whether the price of the similar business represents an arm's length transaction. (137)

4.76 It is first of all important to find a reasonable basis for comparison. A comparative analysis of qualitative and quantitative similarities and differences between similar businesses and the subject business should be made. (138) When 'anecdotal valuation benchmarks' are used as a short-cut market approach, it is important to show that buyers and sellers place significant reliance on them. (139) Even where this is the case, a cross check should be undertaken using at least one other method. 4.77 A variant of the market approach is the reliance on share prices of publicly traded companies or the use of 'valuation ratios', usually price divided by some measure of income or net assets. (140) In the use of such 'multiples', (141) adjustments may be necessary in order to account for 'differences in risk and expectations of the similar businesses and the subject business' and 'ownership interest and interests in the similar businesses with regard to the degree of control, marketability, or the size of the holding'. (142) 4.78 Market prices seemingly have the advantage of representing a statement of value that is rather easy to find and to understand. On the other hand, one must be careful not to confuse price and value. For the individual decision to buy or sell, price and value are almost inevitably different. (143) It is, therefore, necessary to have a larger number of buyers and sellers to arrive at a price that mirrors the market mechanism of demand and supply. Furthermore, other preconditions of the market are required, such as transparency, and the absence of monopolistic or oligopolistic positions. 4.79 In Europe, for example, information about business transactions is frequently kept The German Federal Court stated that, due to the individual characteristics of every business,

P 187 confidential. Furthermore, the comparability of businesses is put into question.

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there is no market on which a market price could be established. (144) 4.80 In the United States, the above-mentioned conditions are more available and the confidence in market forces is stronger. (145) Relevant data are collected and published on a large scale and represent an important source of information for potential buyers and sellers in the particular industries. The comparative public company approach, for example, compares data of publicly traded companies with similar companies which are not publicly traded. (146) Market prices play an important role for the valuation of individual assets, such as machinery and equipment. (147) 4.81 The comparability criterion seems to be a major problem in the area of foreign direct investment. (148) The businesses in question usually concern large and unique projects, such as the extraction of natural resources or the building (and operating) of infrastructure, such as gas, oil, or water supply, as well as housing or road projects. It is hard to find really comparable projects which could provide suitable market prices. (a) Stock Prices 4.82 It appears to be a rather simple exercise to assess the value of a company that is publicly traded by multiplying the price of a single share by the number of shares issued. (149) The price of the stock seems to be the most reliable and objective indicator of value because

P 188

[t]he public capital markets in the United States (as well as in other countries) reprice thousands of stocks every day, mostly through transactions among financial buyers and sellers who are well-informed (because of stringent disclosure laws, at least in the United States) and have no special motivation or compulsion to buy or sell. This constant repricing gives up-to-the-minute evidence of prices that buyers and sellers agree on for securities in all kinds of industries relative to the fundamental variables perceived to drive their values, such as dividends, cash flows, and earnings. (150) 4.83 However, the total of a company's stock prices does not necessarily reflect the value of the entire company. First, it is generally accepted that discounts and premiums have to be considered depending, in particular, on the number of shares (minority/control) and (lack of) marketability. (151) Furthermore, the prices of publicly traded stock are frequently rather volatile, reflecting not always purely economic but also political and psychological motives. This can partly be explained by the fact that shareholders do not only expect benefits from the dividends but also from an increase in the stock prices. (152) 4.84 Nevertheless, it is the purpose of the stock to balance supply and demand and to facilitate transactions of company shares on a market value basis. If the stock is considerably undervalued, the risk of a 'hostile takeover' emerges. (153) It follows that stock prices are still considered as an important yardstick. 4.85 To conclude, due to the above-mentioned limitations, the use of prices quoted on the stock exchange cannot replace the valuation of an asset using other methods. It can, however, be used in the plausibility evaluation of other methods. In order to balance out irrational movements, it is also recommended not to select a single date but a longer timeframe. (154) (b) Prior Transactions 4.86 The IVS refer to 'prior transactions or offers for any component of the business' (155) as indicative of value under the market approach. However, in addition to the general caveat to avoid confusing value and price, (156) other adjustments may be necessary. This is particularly true when the transactions in the subject business took place a long time ago. In this case, adjustments need to be made for the passage of time and for changed circumstances in the economy, the industry, and the business itself. (c) Multiples

4.87 A simplified variant of the market or comparable company approach is the use of multiples. To arrive at the value of an asset by using multiples, a particular variable of P 189 the company's performance is chosen, such as cash flow, earnings, profits, EBIT, (157) or EBITDA, (158) and multiplied by a certain factor. (159) This factor is primarily derived from sales prices of comparable enterprises. (160) Multiples are regularly published for specific types of enterprises and industries. 4.88 The use of multiples does not only reflect the market approach of valuation but also the income approach as it is based on the assumption that the value of an object is not related to its historical cost but to its future performance. Multiples are relatively easy to employ but also rather inexact. They are also used in valuations by so-called 'rules of thumb'. (161) Valuations by multiples are generally recommended only for smaller businesses but in practice they are also applied to larger enterprises.

(2) Income Approach 4.89 According to the prevailing opinion, the value of an asset is represented by its

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ability to yield financial benefits to its owner. (162) This is true for entire businesses, but also for shares in businesses, immovable property, and intangible assets, such as rents and annuities. For the purpose of valuation, it is, therefore, necessary to estimate expected future financial benefits and discount them to present value. According to the IVS, the 'income approach provides an indication of value by converting future cash flows to a single current capital value'. (163) The explanation in more detail is the following: This approach considers the income that an asset will generate over its useful life and indicates value through a capitalization process. Capitalisation involves the conversion of income into a capital sum through the application of an appropriate discount rate. The income stream may be derived under a contract or contracts, or be non-contractual, eg the anticipated profit generated from either the use of or holding of the asset. (164) 4.90 There are different methodologies to arrive at the present value of future benefits. The most important ones are the capitalization of earnings method and the discounted P 191 cash flow (DCF) method. They are based on the same premises but are different in respect of the relevant income parameters and the choice of the discount rates. Methods that fall under the income approach include: • • •

income capitalization, where an all-risks or overall capitalization rate is applied to a representative single period income, discounted cash flow where a discount rate is applied to a series of cash flows for future periods to discount them to a present value, various option pricing models.

While the first two methods have already been reflected in international investment arbitration practice, this is not the case with the third one. It is a relatively new valuation method, which is primarily applied in portfolio management, in acquisition analysis, and in corporate finance. (165) (a) Basis of Income: Profits, Earnings, Cash Flow? 4.91 The basis for measuring the future income stream in modern valuation practices is usually not future profit or net earnings, but future 'cash flow'. (166) The term 'cash flow' originated in the United States where it was introduced as a new means of valuation of corporate enterprises and stock analysis as an alternative to the widespread price/earnings ratio. The cash flow was regarded as a better indicator of the value than 'earnings', as the latter depends a lot on the accounting principles applied which are different from country to country, making them unsuitable for international comparisons. (167) Furthermore, the principle of reasonable commercial assessment in the accounting discipline tends to underestimate assets and overestimate liabilities. In addition, 'earnings' as an accounting concept often includes a certain element of discretion, known as 'creative accounting'. (168) The DCF analysis, by contrast, excludes those disadvantages by focusing only on the real cash inflows and outflows in a certain period of time. (169) Cash flow analysis, therefore, was increasingly used for a number of different purposes, including the evaluation of the performance of managers and the rating of companies. The so-called 'shareholder value' as an alternative to the focus on earnings per quarter is also closely connected to the cash flow analysis. (170) 4.92 Cash flow is 'cash generated over a period of time by an asset, group of assets, or business enterprise. Usually used with a qualifying word or phrase.' (171) The 'qualifying' words make clear, how the cash flow is derived: 'Free Cash Flows to Equity' are cash flows 'available to pay out to equity owners after funding operations of the business, making necessary capital investments, and increasing or decreasing debt financing.' 'Free Cash Flows to the Firm' are cash flows 'available to pay out to equity holders and debt investors after funding operations of the business enterprise and making necessary capital investments.' 'Nominal Cash Flows' are cash flows 'expressed in monetary terms in a given period or series or periods.' 'Real Cash Flows' are '[n]ominal cash flows adjusted to exclude the effect of price changes over time.' (172) 4.93 The first two definitions show the difference between 'equity value' and 'enterprise value' (also 'entity value' or 'firm value'). The latter two definitions show the different approaches to inflation. Furthermore, income and cash flow can be measured pre-tax or post-tax. In all of these cases it is important that the capitalization or discount rate applied is consistent with the definition of income of cash flow used. (173) 4.94 The net cash flow is a concept that makes the performance of companies more comparable, even on an international level. Sometimes, cash flows are also calculated on the basis of Earnings before Interest and Taxes (EBIT) (174) or Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). (175)

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(b) Going Concern 4.95 Usually, the income approach is used for the valuation of going concerns, that is, operational entities. 'Going concern' is a valuation premise which refers to the value 'in continued use, as a mass assemblage of income-producing assets, and as a going concern business enterprise'. (176) It is contrasted to 'value as an assemblage of assets', (177) 'value as an orderly disposition', (178) or 'value as a forced liquidation'. (179) The RICS Valuation Standards note that '[e]xcept in the case where there are strong indications to P 192 the contrary, the presumption is that of a “going concern” and that the asset will continue to have a useful life for the foreseeable future'. (180) Gabehart and Brinkley describe it as 'a company that has its doors open and is conducting business in an ordinary fashion'. (181) 4.96 The World Bank Guidelines define 'going concern' in the following way: [A]n enterprise consisting of income-producing assets which has been in operation for a sufficient period of time to generate the data required for the calculation of future income and which could have been expected with reasonable certainty, if the taking had not occurred, to continue producing legitimate income over the course of its economic life in the general circumstances following the taking by the State … (182) 4.97 Under the World Bank's definition, the income approach should thus be applied only if the asset has already operated successfully in the past. Similarly, the UNCC proposes a going concern valuation if future earning and profits could be based on prior earnings or profits. (183) This is not entirely in accordance with the IVS and the RICS Valuation Standards which do not put emphasis on past performance but rather on future prospects. (c) Forecasting 4.98 The main problem of the income approach is the forecast of future cash flows. It requires the collection of extensive information and, based on such information, an analysis of the asset's past, present, and future situation. The forecast needs to be checked for plausibility in order to determine its reasonableness and lack of contradiction. (184) It includes an analysis of the company's share in the respective market, general and industry-specific economic conditions, the production, finance, and competition relations and their development in the future. Both negative and positive factors must be included. 4.99 The analysis of past performance serves as the basis for projection of future developments and for carrying out a plausibility analysis. (185) It is necessary to identify the key elements for past success. (186) The data have to be analysed in view of the specific markets, entity-based information, and the financial position of the business, taking account of past and future developments including adjustments for exceptional factors. (187) It is, therefore, essential to analyse to what extent past results can be used P 193 for the forecast. It is not enough to simply transform past data into data for the future. (188) The data obtained are not necessarily representative for the future, because circumstances might have changed or are expected to change. (189) 4.100 It is important to identify the so-called 'value drivers', the factors that determine the success or failure of the company. (190) They result both from economic circumstances—thus the 'market'—and the individual qualities of the valuation object. 4.101 There are various forecasting techniques for processing the data and their projection into the future. Besides intuitive forecast methods, a number of mathematical-statistical techniques have been developed, such as the time series analysis or the regression analysis, stochastic data aggregation, such as the sensitivity analysis, the decision tree analysis, or the so-called Monte Carlo Simulation. (191) 4.102 In order to deal with the inherent uncertainty, usually the projection period is divided into two or more phases. (192) This takes into consideration that the forecast becomes less exact and reliable with the extension of the forecast period. (193) The more immediate first phase usually covers a period of three to five years where there are normally sufficiently detailed forecast data available. (194) The years covered in the subsequent phases are normally based on more or less general projections of the detailed forecasts made for the first phase, (195) but need to be checked and, if necessary, adjusted. (196) Due to the large number of influencing factors it is advisable to prepare a number of different projections in order to highlight the extent of uncertainties of future business profits and to explain how to reflect those uncertainties as an element P 195 of the value calculation. 4.103 At the end of the forecast period, businesses have a terminal value, also termed 'residual value' or 'continuing value', which has to be added to the present value of future income. (197) At the minimum, terminal value represents the liquidation value of the assets at the end of the forecasting period. (d) Discounting 4.104 In order to calculate the present value of the expected aggregate amount of

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income, an appropriate discount rate must be applied. This follows from the financial principle that '[a] dollar today is worth more than a dollar tomorrow'. (198) The 'dollar today' can be invested immediately and yield a return, as a minimum interest on a savings vehicle. Therefore, the discount rate on a future amount of money must be at least equal to the rate of interest on this alternative investment. 4.105 (i) Basic Principles The discount factor helps to calculate the present value of an amount of money expected in the future. (199) It is usually represented by the reciprocal of 1 plus the rate of return.

4.106 It follows that the present value (PV) of future income (C1) can be illustrated by the following formula:

4.107 The rate of return (r) is the reward that investors demand for a delayed payment. In order to arrive at the present value of this delayed payment, the expected payoffs are discounted by the rate of return of alternative investment opportunities. This rate is also termed the discount rate, hurdle rate, or opportunity cost of capital. For calculating the present value of an income stream of a number of years (t), the discounted cash flow (DCF) formula should be applied: (200)

4.108 It follows that the discount factor increases with the distance in time. The longer one has to wait for the money, the lower its present value. (201) 4.109 For the selection of the discount rate it is important to identify the rates on alternative investments available to potential buyers or investors. The greatest difficulty lies in the comparability of the investment, in particular in terms of risk. In this context, risk can be defined as 'the degree of uncertainty as to the realization of expected future economic income'. (202) 4.110 Entrepreneurial engagement is always connected with risk. This risk is represented by a risk premium which investors demand for a risky undertaking, following the financial principle that '[a] safe dollar is worth more than a risky one'. (203) In valuation practice, 'the mechanism by which the assessment of risk is translated into its effect on value normally is the discount rate'. (204) 4.111 However, this is not applied to all types of risk. An enterprise's risk is usually divided into 'systematic' ('market') risk and 'unsystematic' ('specific') risk. (205) The former entails, for example, general economic conditions, environmental risks, and political environment—thus generally events or problems that are equal for all businesses or for the entire industry. Examples of 'unsystematic' risks are risks specific to the company, such as the market position of the company (market share, competition, market barriers, etc.), qualification of management, and the financial situation of the business. (206) 4.112 There are different ways to deal with these different kinds of risks. Two approaches are most prominently employed by valuation experts, namely (1) the 'build-up' procedure, and (2) the 'Weighted Average Cost of Capital (WACC)'. (207) The latter is closely connected to the Capital Asset Pricing Model (CAPM). (208) 4.113 With the first approach, the discount rate is comprised of various components that are added up to 'build up' the discount rate. (209) The first building block is the 'risk-free rate' which should correspond to a generally available savings vehicle, such as government bonds. The second block is the 'systematic risk', an incremental factor that investors request for the additional risk of not investing in savings vehicles but in equity P 196 capital. 4.114 Very simply put, the discount rate, or rate of return that investors require, incorporates the following elements: 1.

2.

A 'risk-free rate' (the amount that an investor feels certain of realizing over the holding period). This includes: a. a 'rental rate' for forgoing the use of funds over the holding period b. the expected rate of inflation over the holding period A premium for risk. This includes: a. b.

systematic risk (that risk that relates to movements in returns on the investment market in general) unsystematic risk (that risk that is specific to the subject investment). (210)

4.115 To induce investors to invest in equities or securities they expect some additional

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return for the risk they incur. The market thus requires an equity risk premium over the risk-free rate. (211) Kantor summarizes the concept of 'equity risk premium' in the following way: An equity investment in a business is acknowledged to be riskier than a debt investment in the same business. Discount rates for investments must therefore incorporate a component to reflect this equity risk premium; a rate of return added to a risk-free rate to reflect the additional risk of equity instruments over risk-free instruments. For U.S. markets, experts often rely on data from Ibbotson Associates for this purpose. (212) 4.116 The risk-free and the systematic risk components together can be regarded as the 'base' discount rate as the most objective and verifiable component of the overall discount rate. (213) The 'unsystematic risk' is far more complicated. Expert witnesses often refer to forecasts for the company prepared for a transaction before the dispute arose, such as seeking finance in the capital markets, considering an M&A transaction, or contemplating an initial public offering of its capital stock. (214) The rate chosen in these circumstances may provide persuasive evidence in the arbitration procedure, because business managers and bankers developing revenue and expenses projections usually take a realistic approach towards formulating their projections. (215) However, the determination of the 'specific risk' component remains a sensitive issue. 4.117 An additional component in the 'build-up' procedure may be added to reflect the

P 197 fact that smaller companies tend to have higher risks than larger companies. (216)

Thus, the so-called 'size premium' would increase the discount rate of smaller companies. However, not all experts accept that a size premium exists. Furthermore, the proper use of a size premium in developing countries is controversial. (217) 4.118 Other characteristics of an investment may also be incorporated into the discount rate, such as the degree of minority ownership versus control position represented by the investment and the degree of ready marketability or lack of marketability. (218) 4.119 (ii) The Capital Asset Pricing Model (CAPM) The second approach to determining the discount rate is to rely more confidently on market forces. The risk of a particular enterprise is, thus, as big as the market participants estimate it. The most widely used types of the DCF method rely on the Capital Asset Pricing Model (CAPM). (219) According to this model, investors can avoid or balance the unsystematic risk by diversification, thus by holding a diversified portfolio of various investments. (220) The market risk, that cannot be diversified, stems from the fact that there are economy-wide perils that threaten all businesses. (221) Koller, Goedhart, and Wessels recommend using a common global market risk premium around the world 'because capital markets have become global, in the sense that a considerable share of all equity trades is now international, and global traders, primarily large institutional investors, draw their capital from and invest it all over the world.' (222) 4.120 The unsystematic or specific risk of a company is, under this approach, not included in the discount rate. Instead, it should be reflected in the forecast, thus, in the numerator of the present value formula. (223) The same may apply for the so-called 'country risk', (224) but there is not yet a uniform rule or practice in this regard. (225) 4.121 The systematic or market risk, on the other hand, is identified on the basis of a comparison with enterprises of the same or similar industries. As a point of reference, the US stock index Standard & Poor's 500, which contains information about the performance of a representative portfolio of publicly traded companies, is frequently used. (226) 4.122 An important function in this respect is the so-called 'beta' factor. It indicates to return. (227) The market rate of return or the 'market risk premium' has a beta of 1. A beta between 0 and 1 means a lower volatility, a beta greater than 1 means higher volatility and, thus, higher risk. Risk-free investments have a beta of 0. The higher the beta, the higher is the risk and thus the required equity risk premium. (228) According to the CAPM, the relation between beta and the market risk premium is linear. This means that an investment with a beta of 0.5 may expect half of the market rate of return. (229) The cost of equity, according to the CAPM, is the expected rate of return of the firm's common stock: (230)

P 198 what extent the returns of a company correlate to changes of the market rate of

(rm-rf) = market risk premium rm = market rate of return rf = risk free interest rate 4.123 The relation between the DCF formula and beta enables future risks to be evaluated. (231) The use of covariances (232) can help to further develop and refine the CAPM. (233) 4.124 The beta is a result of past performances and experiences, both of the enterprise itself and the entire industry concerned. (234) Industry betas give information on the

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different industries' risk sensitivities and are important orientation guides for investors. (235) However, the income approach is directed towards the future, which means that it is necessary to analyse whether the historical beta is also representative for the future, which is not necessarily the case. (236) 4.125 (iii) Inflation It is obvious that rises in prices caused by inflation have an effect on

P 199 the financial benefits. In a way, they increase 'automatically'. It is less obvious,

however, whether the expected rises in prices should be incorporated in the present value calculations or not, and thus, whether the calculation should be in nominal or in real terms. 4.126 Valuation experts largely agree that it would not be appropriate to simply adjust the future income stream by an inflation factor, according to the general formula for calculating nominal future cash flows into real cash flows: (237)

4.127 The reason is that the inflation rate is often not directly reflected in increases in prices or costs of the enterprise. Their fluctuations can deviate quite considerably from the general inflation rate and are often different for various input factors. Furthermore, and more importantly, it has to be pointed out that the discount rate is also a nominal rate which already contains an inflation premium. (238) It follows that, for forecasting and discounting, real terms are only used if the inflation rate is extraordinarily high. (239) 4.128 (iv) Country Risk The valuation may also need to address country risk. On the one hand, there is the general economic situation in a particular country which influences the prospects of an investment. This influence can be positive, by potentially larger growth rates, and negative, by uncertainties regarding suppliers and efficiency. On the other hand, there is the so-called political risk. This includes acts or omissions by the authorities after a change in government or policy. It includes also so-called 'opportunistic behaviour' of host states who expect an economic or political advantage from not fulfilling their obligations in relation to foreign investors. (240) 4.129 So far, there is no generally accepted way to measure country risk. One approach is to add a country risk premium to the discount rate. Some valuation experts calculate the country risk on the basis of the country's US$ sovereign debt over the US$ risk-free rate. (241) This is regarded as one of the easiest and most accessible approaches as the rating assigned to a country's debt is published by rating agencies, such as Standard & Poors, Moody's Investors Service, and Fitch. (242) These ratings measure default risk, rather than P 200 equity risk, but, as Damodaran notes, 'they are affected by many of the factors that drive equity risk—stability of a country's currency, its budget and trade balances, and its political stability, for instance'. (243) Analysts who use default spreads as measures of country risk typically add them on to the cost of both equity and debts of every company traded in that country. (244) 4.130 Another approach for determining a country risk premium to the discount rate is to refer to the relative standard deviation in stock prices, because higher standard deviations are generally associated with more risk. (245) Others use the country default spreads with the country rating as a first step, but then look at the volatility of the equity market in a country relative to the volatility of the country bond used to estimate the spread, thus a combination of default spreads and relative standard deviations. (246) 4.131 An entirely different approach is to model risks explicitly in the cash flow projections. (247) The 'scenario DCF' approach simulates alternative trajectories for future cash flows. (248) The first scenario would reflect 'business as usual' without major distress. The second should reflect cash flows assuming that one or more country risks materialize. (249) This is consistent with the general finance theory according to which cost of capital should not reflect risk that can be diversified. This does not mean that diversifiable risk is irrelevant for a valuation, but the possibility of future events shall be incorporated in the estimation of expected cash flows. This approach arguably provides a more solid analytical foundation and more robust understanding of the value than incorporating country risk in the discount rate. (250) 4.132 Two main arguments can be advanced in favour of the scenario DCF to evaluate country risk: first, country risk does not affect companies in a given country equally, so that there might be significant differences in the effects on different companies. Some companies might be affected more than others, others might even benefit. Natural resources projects, whether exporting or importing raw materials, infrastructure P 201 projects, banks, hotels, retailers, etc. may be affected quite differently by a particular negative development in the country. (251) 4.133 Second, any projection of cash flow in an emerging market will necessarily include some caution as regards future prospects. When discussing and explaining investments in emerging markets managers will inevitably try to identify specific risk factors which might affect the project, also in order to plan to mitigate them. It will help the investors better to address these risks than using a so-called black-box addition to the discount rate. (252) As a result, the cash flows will already include certain identifiable risks, so that adding a country-risk premium to the discount factor would lead to double counting of

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the country risk.

(3) Asset-Based or Cost Approach 4.134 According to the asset value or cost approach, the value of different component parts determines the overall value of an object. The basic concept of the asset-based approach is that, if all assets and liabilities are revalued to current values, the difference between the assets and the liabilities represents the value of the object. (253) The cost approach is explained by the IVS as follows: The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction. This approach is based on the principle that the price that a buyer in the market would pay for the asset being valued would, unless undue time, inconvenience, risk or other factors are involved, be not more than the cost to purchase or construct an equivalent asset. Often the asset being valued will be less attractive than the alternative that could be purchased or constructed because of age or obsolescence. Where this is the case, adjustments may need to be made to the cost of the alternative asset depending on the required basis of value. (254) 4.135 The advantage of this approach is that, in comparison with the income approach, it appears to be less speculative. It looks into the past and not into the future and is seemingly much simpler to apply than the highly complex forecasting and discounting processes. Evidence is usually available and no prognoses about the future are required. 4.136 The disadvantage is, however, that many assets and liabilities, such as certain intangible assets and goodwill, are not appropriately reflected on a company's balance sheet. (255) Furthermore, the asset-based approach does not consider the combination P 203 of the assets, and thus the value of the entity as a whole. Finally, in business reality income-based and market-based valuations are widespread, while asset-based valuations are rarely applied. It follows that valuation guidelines generally do not recommend the asset-based approach. 4.137 The IVS advise against using the cost approach for businesses or business interest, except in the case of early stage or start-up businesses where profits and/or cash flows cannot reliably be determined and adequate market information is available on the entity's assets. (256) 4.138 Others add that the asset-based approach may be used to evaluate holding companies, financial institutions, agricultural businesses, and other asset-intensive businesses, as well as companies that may not be financially viable as operating entities. (257) In any case it is important to establish the present value of the assets and not only their historic cost. In the following, some of the possible methods to do this, namely the (adjusted) book value, the replacement value, and the liquidation value, shall be discussed. (a) Book Value 4.139 The book value is determined on the basis of the balance sheet of the company. The assets appear at their historic cost less annual depreciation. (258) The extent of the depreciation depends on the applicable accounting principles as well as on entrepreneurial decisions in terms of tax optimization and other issues. (259) 4.140 The IVS define 'book value' as 'carrying amount', namely as the 'amount at which an asset is recognised in the financial statements of an entity after deducting any accumulated depreciation and any accumulated impairment losses'. (260) 4.141 The definition in the World Bank Guidelines also contains the difference between an 'enterprise' and a 'taken tangible asset': '[B]ook value' means the difference between the enterprise's assets and liabilities as recorded on its financial statements or the amount at which the taken tangible assets appear on the balance sheet of the enterprise, representing their cost after deducting accumulated depreciation in accordance with generally accepted accounting principles. (261) 4.142 The main problem of using book value for valuation purposes is that the numbers appearing in the accounting books or the balance sheet of the business reflect the application of accounting principles that serve other purposes than those of valuation, such as financial reporting or tax assessment. They are the result of the application of rules and entrepreneurial decisions in the exercise of the discretion granted by such rules. (262) Furthermore, the principle of precaution demands commercial enterprises understate the value of assets and overstate the value of liabilities. (263) It follows that the book value usually understates the value of an asset or a business. 4.143 Valuation experts, therefore, are against using book values for valuation purposes. (264) They emphasize that it is only by coincidence that book value reflects the actual

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value of an object. After a detailed analysis of the relationship of generally accepted accounting principles with questions of value, McCosker comes to the conclusion: Overall, generally accepted principles of accounting result in a book value of owner's equity that usually is less than fair value, occasionally is greater than fair value, and only by coincidence is equal to fair value. Book value is not intended to be an equitable basis for settling nationalization claims and should not be used for that purpose. (265) 4.144 Similarly, Pratt and Nicolita point out that the terms 'book value' or 'net book value' are merely 'accounting jargon', and that 'accounting book value is not a business valuation method at all, although it is popular in buy-sell agreement formulas'. (266) Lieblich argues along the same lines: It is also worth noting that the phrase 'book value' is itself a misnomer, because it has nothing to do with 'value' properly defined, but refers instead to the manner in which certain accounting conventions treat assets recorded on a firm's balance sheet using a variety of assumptions and decisions having little or nothing to do with 'value'. (267) 4.145 In order to overcome the above-mentioned deficiencies, book value is sometimes adjusted or transformed in such a way as to make it more representative of the value of an asset. Scholars, practitioners, and arbitral tribunals have developed different ways of P 204 arriving at an 'adjusted book value' (ABV). 4.146 Stauffer, for example, (268) contends that adjusted book values are more appropriate for valuations in legal disputes because, in contrast to the wilderness of international business transactions, speculative elements have no place in this context. He bases his proposals for adjustment both on an economic theory and on empirical data. The first important adjustment, according to Stauffer, has to be made for inflation. The balance sheets only show the historic cost of an asset—less depreciation—without reflecting the devaluation of money in the meantime. (269) Second, expenses for research and development must be capitalized and not be accounted for as 'expenses'. They contribute considerably to the success of the company and should, therefore, be treated in the same way as the initial investment or other investments in fixed assets. (270) These two adjustments alone would already account for a valuation of 50 per cent above the original book value. (271) Nevertheless, Stauffer proposes a third adjustment of the book value, namely the modalities of accounting for depreciation. He emphasizes that the depreciation should correspond to the real devaluation of the asset, for example, in terms of cash flow generating ability. In the valuation context, the accounting conventions as regards depreciation should be disregarded. (272) 4.147 Stauffer refers to a number of empirical studies that prove that this valuation approach reflects prices actually paid in economic practice. (273) The available data show that the relation of ABV and the enterprise value as assessed by a DCF analysis have been relatively close. The relationship between book value and market value is named after its founder 'Tobin's q' and was originally an indicator for the relative success of an enterprise in relation to its competitors. (274) The respective studies have proven that the 'market value is rarely a large multiple of unadjusted or unconformed NBV'. (275) Furthermore, a comparison of the stock prices of thirty large oil companies with the companies' asset values confirmed that even the stock value of the companies was largely in accordance with the ABV. (276) The reason may, however, also be that, in the P 205 United States, the SEC mandates that oil and gas reserves of public companies are not carried on the balance sheet at historical cost but at their discounted present value on the basis of an income-based valuation method. (277) This is not the case with most other assets. 4.148 Experienced economists point to the fact that the significance of the ABV usually works with companies with normal rates of return. Extraordinarily high or low rates are rather rare and cannot be explained or appropriately reflected by this method. Stauffer notes that extraordinarily high and 'abnormally poor performance must be explained, since, by definition most firms or ventures realize “average” rates of return'. (278) This is also confirmed by Lou Wells who supports the use of the book value method for recently established businesses: (279) When the investment is very recent, or still in process of being made, there is an obvious and often easier alternative to using NPV of future cash flow to determine FMV. If the project was expected to generate 'normal' rates of return for the business, then the amount of investment itself provides a reasonable starting point for determining FMV. In most cases, the FMV of recently acquired assets is unlikely to be substantially different from the cost of those assets. Cost of investment will approximate what a buyer might pay; moreover, the investor who receives his investment back can invest the sum in another project, earn normal returns, and be equally well off. For most unfinished projects, this should end the calculations. (280) 4.149 This means that book value, despite the objections mentioned above, in certain

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circumstances and if appropriately adjusted can nevertheless be useful as a guide or reference for the purposes valuation in international investment arbitration. (b) Replacement Value 4.150 Replacement value represents the most appropriate form of the cost or assetbased approach. Replacement value is generally defined as the current cost of an asset offering similar function and equivalent utility. (281) In contrast to book value it is not based on historical costs but on actual prices on the market. In comparison to the P 206 income-based valuation methods, it has the advantage that it contains less speculative elements. The disadvantage is, however, that it disregards future prospects. 4.151 According to the IVS, the cost approach in the form of the replacement value can be explained as follows: This approach is based on the principle that the price that a buyer in the market would pay for the asset being valued would, unless undue time, inconvenience, risk or other factors are involved, be not more than the cost to purchase or construct an equivalent asset. Often the asset being valued will be less attractive than the alternative that could be purchased or constructed because of age or obsolescence. Where this is the case, adjustments may need to be made to the cost of the alternative asset depending on the required basis of value. (282) 4.152 The World Bank Guidelines recommend using it in particular for valuations which are not dealing with going concerns. (283) The replacement value is useful for many different purposes. (284) It can be applied for determining market value or other values. Usually, a 'depreciated replacement' approach will be appropriate. (285) (c) Liquidation Value 4.153 The third type of an asset-based valuation is the liquidation value. It becomes relevant when the valuation object does not have future profitability and its highest and best use would be the sale of it. It is usually regarded as the lower limit of the value of any asset. The World Bank Guidelines recommend using it for the valuation of companies that do not have a proven record of profitability. (286) The principle is fairly straightforward: the prices that could be obtained for the individual assets in a liquidation sale are decisive. This corresponds to a common definition: 'Liquidation value means the net amount that can be realised (after liquidation expenses) in either an orderly or a forced sale of the business assets or some portion of them'. (287) 4.154 It is, however, not clear under which conditions the liquidation takes place, as regards, for example, timing and marketing. It is obvious that sufficient time and enhanced marketing activities contribute to achieving higher prices for liquidated assets. P 207 In a forced sale scenario, neither of the two conditions works in favour of the owner. (288) How should the different liquidation scenarios be reflected in the valuation? The International Valuation Standards emphasize in their definition of liquidation value that the conditions of the liquidation need to be identified clearly The net amount that would be realized if a business is discontinued and its assets are sold individually. The appropriate bases of value and any appropriate additional qualifying assumptions should also be stated. (289) 4.155 As a general rule, the valuation premise is that all of the assets of the business will be sold individually and that they will enjoy normal exposure to their appropriate secondary market. (290) This scenario can be described as 'value as an orderly disposition': Value in exchange, on a piecemeal basis (not in part of a mass assemblage of assets), as part of an orderly disposition; this premise contemplates that all the assets of the business enterprise will be sold individually, and that they will enjoy normal exposure to their appropriate secondary market. (291) 4.156 By contrast, if such an orderly dispossession is not possible, the value will be determined as 'value as a forced liquidation' Value in exchange, on a piecemeal basis (not in part of a mass assemblage of assets), as part of a forced liquidation; this premise contemplates that the assets of the business enterprise will be sold individually, and that they will experience less than normal exposure to their appropriate secondary market. (292) 4.157 It is characteristic in the liquidation scenario that the sale is an asset-by-asset sale and not a sale of an overall business. (293) Goodwill and other unidentified intangible values attached to the business as a whole are generally not considered. By contrast, intangible assets that can be sold separately, like patents, trade-marks, copyrights, or data bases, may have a positive liquidation value.

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D. Transparency 4.158 Statements about value are generally based on a number of assumptions that have a decisive influence on the result. All the standards and guidance documents on valuation mentioned above emphasize that it is of utmost importance that the P 208 assumptions and premises of the valuation are clearly disclosed and explained. (294) Above all, it is necessary to report on the function of the valuer, the purpose of the valuation, the basis of value, and the valuation date. The choice of the valuation method must be explained, an adequate description of the procedures be carried out, and the scope and quality of underlying data, as well as the extent of estimates and assumptions together with considerations underlying them have to be set out. Working papers must enable a knowledgeable third party to understand the result of the valuation and estimate the effects on the valuation of any assumptions made. To the extent simplifications are considered permissible, these are also to be demonstrated. 4.159 It is important to ensure transparency of the valuation and to shed light on what is frequently an opaque process. (295) In this respect it is most welcome to see the recent developments whereby tribunals delve more deeply into the quantum issues and explain in greater detail the reasoning behind the quantum portion of their award. (296) This could even be strengthened by specific comments by the tribunals on the work of the experts and their valuation models in its award. (297) The high standards of ethics contained in the respective standards for valuation experts and accountants could and should be transferred to judicial proceedings when they reach the stage of determining the amount of compensation or damages. 4.160 Furthermore, it is no longer accepted in international arbitrations that arbitrators rely on their 'discretion' to cover a lack of preparedness to deal with and explain economic principles. In ICSID arbitrations, this failure can amount to a ground for annulment. (298) It is therefore necessary to dedicate sufficient time and attention to the issue of calculation in order to help better understand the assumptions and the results. Fortunately, in recent investment arbitration, a trend in this direction is already notable. However, the lack of clarity in the distinction of different standards and bases of value and the incorrect use of terms still represent a problem. It is therefore necessary to increase these efforts and thereby contribute to more transparency and legal security. It would also help to strengthen the general preventive function of international investment P 209 law.

E. Experts in Arbitration Proceedings 4.161 Employing experts should help the tribunal better understand the complexities involved in calculating compensation and damages (299) and has recently become the rule rather than the exception, even though this increases the costs of resolving the dispute and may slow the process. (300) The issue of how to make the best use of valuation experts has attracted the attention in the international community of scholars and practitioners. (301) The debate is furnished by the different traditions of common law and civil law. While in the United States the use of party-appointed experts is the rule and tribunal-appointed experts are fairly rare, the continental approach is for the tribunal to appoint its own experts. (302) 4.162 In addition, different professional codes or codes of conduct apply to experts in accountancy and other economic analyst, which raises a number of ethical questions. (303) Such codes are also different from country to country which may lead to unequality of arms in international proceedings. Also the interest of experts in future engagements and financial rewards has been identified as a problem in terms of their objectivity and impartiality. Party appointed experts may act as an advocate to further the position of their clients, and try to influence the tribunal in the respective direction. (304) Not only overt bias but also unconscious bias is regarded as a problem in the use of experts in international arbitrations. (305) The Code of Ethical Principles for Professional Valuers' summarize the fundamental principles of the integrity of the valuation process as follows:

P 210

It is fundamental to the integrity of the valuation process that those who rely on valuations have confidence that those valuations are provided by valuers who have the appropriate experience, skill and judgement, who act in a professional manner and who exercise their judgement free from any undue influence or bias. (306) 4.163 The professional valuers are expected to act with 'objectivity', thus not to allow conflict of interest, or undue influence or bias to override professional or business judgement. This does not mean that the valuation expert must always give an 'objective' view on the value, as the objectivity or subjectivity of the value depends on the basis of value as indicated by the legal rules applicable, but rather that the expert must strictly follow the assignment made to him by the party or by the tribunal. On this basis, he or she has to follow the above-mentioned rules of transparency and clarity. 4.164 Nevertheless, the valuations presented by the experts still often lead to divergent opinions of value. (307) What should the tribunal do? In some cases, the tribunals set the amount of compensation exactly halfway between the claimant's and the respondent's valuations, (308) thus appearing to 'split the baby'. (309) This, of course, would encourage

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the parties to overestimate or underestimate the claims. 4.165 One way to avoid this is the so-called 'final offer arbitration'. (310) According to this approach, the tribunal calls for each party to propose to the tribunal the amount of damages that the claimant is entitled to. The tribunal would then choose between the two totals. The advantage of this process is that it forces parties to be more reasonable in their positions or more realistic in their assessment of their positions. It is meant to narrow down the differences between the parties and may even facilitate a settlement of the dispute. 4.166 Another solution could be a tribunal-appointed expert who should evaluate the numbers put forward by the parties. (311) However, the costs of such a tribunal-appointed P 211 expert may be considerable. Furthermore, the parties may be concerned that the independent expert will become de facto the fourth, and decisive, arbitrator on the compensation or damages issue. (312) The continental practice of a tribunal-appointed expert is therefore only advisable in exceptional cases in international investment arbitration. 4.167 This is particularly true in view of the fact that in investment cases, claimants have usually already employed their own party-appointed experts in the process of the preparation and presentation of the claim. The decisive question then appears to be whether the respondent also employs a party-appointed expert or not. If the respondent also does so, to assign a third expert would in effect be a waste of costs and time. The tribunal should rather find a way to assess and examine the two valuation reports, whether by cross-examination or by additional orders to the parties. (313) 4.168 The most appropriate way to deal with this situation would be to compare the two reports and identify those aspects of the valuation where there is agreement and where there is disagreement. The tribunal could also request the experts to develop and submit such lists of agreements and disagreements. (314) On this basis, it can make its own assessment either in an oral hearing or by supplemental reports. 4.169 This way of proceeding would best correspond to and reflect the 'arbitration dynamic'. (315) The outcome of the process may not reflect the absolutely correct number corresponding to the valuation method as prescribed by the legal basis of the claim. However, it is an appropriate way to arrive at a mutually acceptable and at the same time carefully reasoned result. And it has to be kept in mind that also valuation experts concede that '[b]usiness value and valuation is not an exact science. Opinions of value will depend greatly upon the knowledge, skills, and experience of those practitioners doing the appraisal.' (316) 4.170 In order to be in a position to come as close as possible to the most appropriate result, an arbitral tribunal needs basic knowledge about the most important valuation principles and methods which are known and applied in international valuation practice. On this basis, it will be able to perform its task of applying the law and paying attention also to economic principles. The following chapter will look at how international courts P 211 and tribunals have met this challenge in practice.

References 1) 2)

S Pratt and A Nicolita, Valuing a Business. The Analysis and Appraisal of Closely Held Companies (5th edn, New York: McGraw-Hill, 2008) 4. J Fishman, S Pratt, and W Morrison, Standards of Value. Theory and Applications (2nd edn, Hoboken, NJ: Wiley, 2013) 32.

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3)

4)

5)

6) 7) 8) 9) 10) 11) 12) 13) 14)

15) 16)

In the United States, the Uniform Standards of Professional Appraisal Practice (USPAP) were developed as a reaction to the debt crisis in the 1980s. USPAP was adopted by Congress in 1989 and contains standards for all types of appraisal services, including real estate, personal property, business, and mass appraisal. Compliance is required for state-licensed and state-certified appraisers involved in federally related real estate transactions. USPAP is updated every two years so that appraisers have the information they need to deliver unbiased opinions of value. See . In 2007, the American Institute of Certified Public Accountants (AICPA) issued a Statement on Standards for Valuation Services (SSVS) No. 1 on 'Valuation of a Business, Business Ownership Interest, Security, or Intangible Assets'. It establishes standards for AICPA members engaged to estimate the value of a business, business ownership interest, security, or intangible assets in various contexts, including litigation. See . See also M Kantor, Valuation for Arbitration— Compensation Standards, Valuation Methods and Expert Evidence (The Hague: Kluwer, 2008) 13. The full text of the Statement on Standards for Valuation Services No. 1 is reprinted as Appendix 2, 319 et seq; in Germany, the Institute of Certified Accountants (Institut der Wirtschaftsprüfer, IDW) published principles on carrying out business valuations, the Grundsätze zur Durchführung von Unternehmensbewertungen (IDW S1), on 28 June 2000, reprinted in: H Haeseler and F Kros, Unternehmensbewertung: Grundlagen der Bewertung von Unternehmen und Beteiligungen (Vienna: Orac, 2002) 111 et seq; see also the detailed commentary in the IDW Handbook of 2002, see Institut der Wirtschaftsprüfer (ed.), WirtschaftsprüferHandbuch 2002, vol. II (2002) 1–149; in the United Kingdom, the Royal Institution of Chartered Surveyors is the standard setter for valuation. It started early to incorporate international standards into its national standard. See Royal Institution of Chartered Surveyors, RICS Valuation—Professional Standards Global. January 2014 (London: Royal Institution of Chartered Surveyors, 2015). Fédération des Experts Comptables Européens, Guide for Carrying out Business Valuations (Brussels, July 2001), available at . See IVSC, International Valuation Standards (London: IVSC, 2007). These standards have been widely reflected in publications on valuation in international investment arbitration, see, e.g., M Kantor, above, n. 3, 3–4, 8–9, 13, 31, 60, 97, 131, 342; see more recently R Walck, 'Methods of Valuing Losses' in M Bungenberg, J Griebel, S Hobe, and A Reinisch (eds), International Investment Law. A Handbook (Baden-Baden: Nomos, 2015) 1045, 1049; R Walck, 'Logic and Ethics in the Practice of Expert Witness Service' (2016) 3(1) Journal on Damages in International Arbitration 149, 165. IVSC, International Valuation Standards 2011 (London: IVSC, 2011) 5. IVSC, International Valuation Standards 2013 (London: IVSC, 2013). See the website of the IVSC, . See . See . See . See the website of the International Accounting Standards Board (IASB), . International Financial Reporting Standards (IFRS), see ; see also A Mirza et al, IFRS—Practical Implementation Guide and Workbook (2nd edn, Hoboken, NJ: Wiley, 2010). In the European Union (EU), the IFRS (formerly IAS) are binding for all companies listed on the stock exchange since 2005, see Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards [2002] OJ L243/1. This should contribute to a better functioning of the internal market and to the efficient and cost-effective functioning of the capital market as well as to the protection of investors and the maintenance of confidence in the financial markets. Furthermore, the member states are encouraged to expand the use of those standards also to other companies. However, there is some doubt whether the complex IFRS which require the inclusion of a lot of information will be reasonable for small and medium-sized companies. In the United States, the American Securities and Exchange Commission (SEC) still requires compliance with the US-GAAP so that comparability is only to be reached by gradual approximation. However, as Koller states: 'Fortunately, … international accounting differences have rapidly diminished. Most of the world's major economies have now adopted either International Financial Reporting Standards (IFRS) or U.S. generally accepted accounting principles (GAAP), and these two standards are rapidly converging.' T Koller, M Goedhart, and D Wessels, Valuation: Measuring and Managing the Value of Companies (6th edn, New York: Wiley & Sons, 2015) 621. IVS 2013, above, n. 7, 12. IVSC, 'Glossary', see .

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17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35)

36)

37) 38) 39) 40) 41) 42)

43) 44) 45)

46) 47)

IVS 2013, above, n. 7, 12. Ibid. IVSC, Code of Ethical Principles for Professional Valuers (London: IVSC, 2011). IVS 2013, above, n. 7, 12 (emphasis in original). Ibid, at 17. Ibid. See the discussion of the bases of value and valuation approaches further below, Sections B and C. World Bank, 'Legal Framework for the Treatment of Foreign Investment, vol 2, Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment' (1992) 31 ILM 1363. See Section IV, entitled 'Expropriation and Unilateral Alterations or Termination of Contracts', ibid, at 1382–3. Section IV(2), ibid, at 1382. Section IV(4), ibid, at 1382. See World Bank, above, n. 24, 1368 and 1376 et seq. Section IV(6), bullet 2, ibid, at 1383; see the explanation in the above-mentioned Report, (1992) 31 ILM 1363, 1376. Section IV(6), bullet 3, (1992) 31 ILM 1383. Section IV(6), bullet 4, ibid, 1382. Section IV(6), bullet 5, ibid, 1382–3; see the explanation in the above-mentioned Report (1992), ibid, 1363, 1377. World Bank, 'Legal Framework for the Treatment of Foreign Investment, vol. 1, Survey of Existing Instruments' (Washington: World Bank Group, 1992) 7. See, e.g., P Weil, 'The State, the Foreign Investor, and International Law. The No Longer Stormy Relationship of a Ménage à Trois' (2000) 15 ICSID Rev.-FILJ 401 et seq. See, e.g., the rejection of the DCF method in Wena v Egypt, although one of the hotels had already been in operation for eighteen months. Wena Hotels Ltd v Egypt, Award of 8 December 2000 para. 123; see also Técnicas Medioambientales SA v Mexico, Award of 29 May 2003, para. 186. But see the explicit reference to the Worldbank Guidelines in Rumeli v Kazakhstan, Award of 29 July 2008, para. 811, and in Tidewater v Venezuela, Award of 13 March 2015, paras 139, 144, 152–65, 185. See the Preamble of the Convention Establishing the Multilateral Investment Guarantee Agency of 11 October 1985 (1985) 24 ILM 1605; see also I Shihata, 'The Multilateral Investment Guarantee Agency (MIGA) and the Legal Treatment of Foreign Investment' (1987) 203 RdC 95; H Rindler, Der Schutz von Auslandsinvestitionen durch die MIGA.Unter besonderer Berücksichtigung der Beteiligungsgarantie des Bundes und des völkerrechtlichen Investitionsschutzes (Vienna: Manz, 1999) 112 et seq. Article 11(a)(ii) MIGA Convention. Article 11(a)(iii) MIGA Convention. See, e.g., the model Contract of Guarantee for Equity Investments, . See Article 2.07 of the Operational Regulations (as amended, 6 January 2015) . See ibid, Article 2.09. Article 4.4 of the General Conditions of Guarantee for Equity Investments (fifth revision, 1 October 2007), . Article 16 MIGA Convention. See below, Chapter 5, Section D(4), paras 5.302 et seq. . See generally V Heiskanen, 'The United Nations Compensation Commission' 296 RdC (2002) 255; H Van Houtte et al, 'The United Nations Compensation Commission' in P de Greiff (ed.), The Handbook of Reparations (Oxford: Oxford University Press, 2006) 321–89; A Gattini, 'The United Nations Compensation Commission: Old Rules, New Procedures on War Reparations' (2002) 13 EJIL 161–81; N Wühler, 'The United Nations Compensation Commission; A New Contribution to the Process of International Claims Resolution' (1999) 2 Journal of International Economic Law 249–72; N Ulmer, 'Claimant's Expectations from the United Nations Compensation Commission'(1998) 15 Journal of International Arbitration 7–14; P Malanczuk, 'International Business and New Rules of State Responsibility? The Law Applied by the United Nations (Security Council) Compensation Commission for Claims Against Iraq' in K Boeckstiegl (ed.), Perspectives of Air Law, Space Law and International Business Law for the Next Century: Proceedings of an International Colloquium Cologne, 7–9 June 1995 to Celebrate the 70th Anniversary of the Institute of Air and Space Law and the 20th Birthday of the Chair for International Business Law (Cologne et al: Hexmann, 1996) 117–45; R Lillich (ed.), The United Nations Compensation Commission (Irvington, NY: Transnational, 1995). See further R Lillich, above, n. 45. Decision taken by the Governing Council of the United Nations Compensation Commission during the resumed Fourth Session, at the 23rd meeting, held on 6 March 1992. UN Doc. S/AC.26/1992/9.

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Ibid, para. 1. Ibid, para. 2. Ibid, para. 6. Ibid, para. 4. See D Caron and B Morris, 'The UN Compensation Commission: Practical Justice, Not Retribution' (2002) 13 EJIL 183–99. 53) See R Mundkur and M Mucchetti, 'The Intersection of International Accounting Practices and International Law: The Review of Kuwaiti Corporate Claims at the United Nations Compensation Commission' (2001) 16 American University International Law Review 1195–239; see also H Van Houtte et al, 'The United Nations Compensation Commission' in P de Greiff (ed.), The Handbook of Reparations (Oxford: Oxford University Press, 2006) 321–89; a comprehensive and structured analysis of the valuation practice of the UNCC is, however, still missing. 54) On the judicial character of the UNCC see D Campanelli, 'The United Nations Compensation Commission: Reflections on its Judicial Character' (2005) 4 The Law and Practice of International Courts and Tribunals 107–39; C Brower and R Lillich, 'Opinion Regarding the Jurisdiction and Powers of the United Nations Compensation Commission' (1997) 38 Virginia Journal of International Law 25–50. 48) 49) 50) 51) 52)

55) Decision No. 9 taken by the Governing Council of the UNCC, above, n. 47, para. 8:

56) 57) 58) 59) 60) 61) 62) 63) 64)

65)

66) 67) 68) 69) 70) 71) 72)

73) 74) 75) 76)

'Where Iraq itself was a contracting party and breached its contractual obligations, Iraq is liable under general contract law to compensate for all actual losses suffered by the other contracting party, including, inter alia, losses relating to specially manufactured goods. Future lost profits may be compensable in such a case if they can be calculated under the contract with reasonable certainty. An alternative measure of damages may apply where a governing contract specifically provides for a particular measure, except that the amount of compensation provided should not exceed the loss actually suffered.' Ibid, paras 9 and 10. Ibid, para. 12. Ibid, para. 15. Ibid, para. 16. Ibid, para. 17. Ibid, para. 18. Ibid, para. 19. See, for the different possibilities to apply the 'income-approach', below, Chapter 5, Section B. For a comprehensive summary of valuation approaches by the UNCC see IOM (ed.), Property Restitution and Compensation. Practices and Experiences of Claims Programmes (Geneva: IOM, 2008) 181 et seq; for a survey of the so-called 'E 4' claims on business losses see R Mundkur and M Mucchetti, above, n. 53, 1195–239. See above, para. 4.15, the definition of 'value' by the USPAP. See also the definition in the 'Glossary of Terms for International Valuation Standards' in IVSC, International Valuation Standards (London: IVSC, 2013) 421: 'The price most likely to [be] concluded by the buyers and sellers of a good or service that is available for purchase. Value establishes the hypothetical or notional price that buyers and sellers are most likely to conclude for the good or service. Thus, value is not a fact, but an estimate of the likely price to be paid for a good or service available for purchase at a given time.' S Pratt and A Nicolita, above, n. 1, 41. 'IVS Framework' in IVS 2013, above, n. 7, 17; see also 'Glossary, above, n. 16; similarly FEE Guide (2001) 5, 10. A Pratt and A Nicolita, The Lawyer's Business Valuation Handbook (2nd edn, Chicago: ABA, 2010) 1. See 'IVS Framework', in IVS 2013, above, n. 7, 17. Ibid. See ibid. S Pratt and A Nicolita, above, n. 1, 40 (emphasis in original); see also T Copeland et al, Valuation: Measuring and Managing the Value of Companies (New York: Wiley & Sons, 2000) 3–4; S Gabehart and R Brinkley, The Business Valuation Book (New York: Amacom, 2002) 29–30; T West and J Jones (eds), The Handbook of Business Valuation (New York: Wiley & Sons, 1999) 3–4. The IVS 2013 distinguish three categories of the basis of valuation: (1) market value, (2) investment value or special value, and (3) fair value. See IVS 2013, above, n. 7, 17. S Pratt and A Nicolita, above, n. 1, 41. J Fishman, S Pratt, and W Morrison, above, n. 2, 2.0. J Fishman, S Pratt, and W Morrison, above, n. 2, 20–1.

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77)

78) 79) 80) 81) 82) 83) 84) 85) 86) 87) 88) 89) 90) 91) 92) 93) 94) 95) 96) 97) 98) 99) 100) 101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119)

120)

Damodaran seems to only accept 'value in exchange' objective and thus market value as a standard. He rejects the 'bigger fool' theory, which argues that the value of an asset is irrelevant as long as there is a 'bigger fool' around to buy it. As valuation approaches, he only accepts (1) the DCF method, (2) the relative valuation, i.e. multiples, and (3) contingent claim valuation using option pricing models. This is in contrast to the IVS and other authors who would also accept the asset-based approach, which he touches only in passing. The reason may be that Damodaran, at least in his book, Investment Valuation, concentrates only on three purposes of valuation: (1) portfolio management, (2) acquisition analysis, and (3) corporate finance. These contexts are rather different from a situation of investment arbitration, where the question is to evaluate compensation or damage relating to events in the past and not to give advice for investment or managerial decisions for the future. However, for valuations on market value basis in the context of expropriations, his insights are of course most useful. See A Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd edn, Hoboken, NJ: Wiley, 2012) 1–2, 6–9, 22. S Pratt and A Nicolita, above n. 1, 39–40. Other premises include 'value as a going concern, 'value as an assemblage of assets', 'value as an orderly disposition', and 'value as a forced liquidation'. See S Pratt and A Nicolita, above, n. 68, 21–2. See 'IVS General Standards' in IVS 2013, above, n. 7, 26. J Fishman, S Pratt, and W Morrison, above, n. 2, 21. See 'IVS Framework', in IVS 2013, above, n. 7, 18 (emphasis in original). See also 'Glossary', above, n. 16. The different elements of this definition are explained and defined in more detail in 'IVS Framework', in IVS 2013, above, n. 7, 18–19. See 'IVS Framework', in IVS 2013, above, n. 6, 18 (emphasis in original). Ibid, at 20. Ibid. Ibid, at 20. International Glossary of Business Valuation Terms, AICPA Statement, above, n. 3, 44. 'Concepts Fundamental to Generally Accepted Valuation Principles' in IVSC, International Valuation Standards (London: IVSC, 2007) 28. See 'IVS Framework', in IVS 2013, above, n. 7, 21. See also 'Glossary', above, n. 16. Ibid. See 'Glossary', above, n. 16. See 'IVS Framework', in IVS 2013, above, n. 7, 21. Ibid. S Pratt and A Nicolita, above, n. 1, 41; see also Pratt and Nicolita, Lawyer's Business Valuation, above, n. 68, 2; see also J Fishman, S Pratt, and W Morrison, above, n. 2, 22. S Pratt and A Nicolita, above, n. 1, 41–2. See RICS, Valuation—Professional Standards January 2014, above, n. 3, 76, 99. This is even more notable as the IVS 2013 are included as an annex to the same RICS Professional Standards. Articles 31 and 32 of the Vienna Convention on the Law of Treaties. See Khan Resources v Mongolia, Award of 2 March 2015, paras 409, 420. See above, Chapter 2, Section C(1), paras 2.98–2.101. See above, Chapter 3, Section B(1)(b), paras 3.159–3.173. 'IVS Framework', in IVS 2013, above, n. 7, 17. See 'IVS Framework', in IVS 2013, above, n. 7, 20–1; see also 'Glossary', above, n. 16. RICS, Valuation—Professional Standards January 2014, above, n. 3. Ibid, at 88. S Pratt and A Nicolita, above, n. 1, 43; see also S Gabehart and R Brinkley, above, n. 72, 25 et seq; T West and J Jones, above, n. 72, 3. S Pratt and A Nicolita, above, n. 1, 43. Azurix Corporation v Argentina, Award of 14 July 2006. Ibid, para. 426. Ibid, para. 429. Vivendi v Argentina (Vivendi II), Award of 20 August 2007. Ibid, para. 8.3.12-3. See further below, Chapter 5, Section C, paras 5.274 et seq. Vivendi v Argentina (Vivendi II), Award of 20 August 2007, para. 8.3.19. See 'IVS Framework', in IVS 2013, above, n. 7, 21. See the definition above, para. 4.45, as well as the example referred to in para. 4.46 and the subsequent discussion. See 'IVS Framework', in IVS 2013, above, n. 7, 22. Ibid; see also 'Glossary', above, n. 16. See 'IVS Framework', in IVS 2013, above, n. 7, 22. A Scandinavian broadcasting enterprise had agreed to pay US$ 400 million for the company which was shortly afterwards expropriated by the Czech Republic. The tribunal deducted a number of elements from this price, including the synergistic effects, and awarded US$ 200 million as representing the company's market value at the expropriation date. See CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 620. See 'IVS Framework', in IVS 2013, above, n. 7, 13.

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121) B Garner (ed.), Black's Law Dictionary (10th edn, St. Paul, MN: Thompson West, 2014)

1380.

122) Ibid, at 422. See also J Fishman, S Pratt, and W Morrison, above, n. 2, 18. 123) A Baum, N Nunnington, and D Mackmin, The Income Approach to Property Valuation

(London: EG Books, 2006) 69.

124) See 'IVS Framework', in IVS 2013, above, n. 7, 21. 125) See 'IVS Framework', in IVS 2013, above, n. 7, 17. 126) See, e.g., the numerous cases against Argentina under the auspices of ICSID. In many

127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143) 144)

145) 146) 147) 148) 149) 150) 151) 152) 153) 154) 155) 156) 157) 158) 159) 160)

of them, the basis of the investment was a long-term contract which was interfered with by the unlawful Argentine measures. See, e.g., CMS v Argentina, Award of 12 May 2005; LG&E v Argentina, Decision on Liability of 3 October 2003. See Bridas v Turkmenistan, Partial Award of 25 June 1999, published in parts in R D Bishop, J Crawford, and W M Reisman, Foreign Investment Disputes: Cases, Materials and Commentary (The Hague: Kluwer Law International, 2005) 1270 et seq. This is frequently the case in public long-term contracts. See H Wöss, A Rivera, P Spiller, and S Dellepiane, Damages in International Arbitration under Complex Longterm Contracts (Oxford: Oxford University Press, 2014) 34 et seq, 253. See 'IVS Framework', in IVS 2013, above, n. 7, 23. See 'IVS 102 Implementation', in IVS 2013, above, n. 7, 33. See 'IVS Framework', in IVS 2013, above, n. 7, 24 et seq; see also the 'IVS 200 Business and Business Interests', in IVS 2013, above, n. 7, 43 et seq; see also M Kantor, above, n. 3, 8 et seq. 'IVS Framework', in IVS 2013, above, n. 7, 24. See 'Concepts Fundamental to Generally Accepted Valuation Principles', in IVS 2013, above, n. 7, 33. See also T Waelde and B Sabahi, 'Compensation, Damages, and Valuation' in P Muchlinski et al (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 1049. See 'IVS Framework', in IVS 2013, above, n. 7, 24. Ibid. See 'IVS 200 Business and Business Interests', in IVS 2013, above, n. 7, 43. Ibid, at 44. Ibid, at 44. Ibid. See discussion and examples below, paras 4.86–4.87. See 'IVS 200 Business and Business Interests', above, n. 137, 44. See above, paras 4.66–4.69. In an often-quoted judgment the German Federal Court held that there was no market for commercial enterprises, because due to their diversity the formation of a market price was not possible. See judgment by the BGH of 17 January 1973 IV ZR 142/70, DB 1973, 563: 'Es gibt für Handelsunternehmen wegen ihrer individuellen Verschiedenheit keinen Markt, auf dem sich ein Preis bilden könnte'. See also M Schäfer, Enteignungsstandard und Unternehmensbewertung bei Enteignungen im allgemeinen Völkerrecht (Heidelberg: Verlag Recht und Wirtschaft, 1997) 140 with further references. S Gabehart and R Brinkley, above, n. 72, 39–40. T West and J Jones, 'The Market Approach Using Public Company Data' in T West and J Jones (eds), The Handbook of Business Valuation (New York: Wiley & Sons, 1999) 197 et seq. A Bealmear, 'Machinery and Equipment Valuation Approaches and Methods' in T West and J Jones (eds), The Handbook of Business Valuation (New York: Wiley & Sons, 1999) 143 et seq, 146–7. See the detailed analysis of the comparability criterion by M Kantor, above, n. 3, 119–30. See, e.g., IFRS 13:77: 'A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.' S Pratt and A Nicolita, above, n. 1, 264. Pratt and Nicolita, Lawyer's Business Valuation, above, n. 66, 196 et seq. The expected return is the market capitalization rate. If an increase of the dividend is also expected, the valuation must also include a growth rate. See R Brealey and S Myers, Corporate Finance (11th edn, Boston et al: McGraw-Hill, 2014) 80–1. S Pratt and A Nicolita, above, n. 1, 315; T Koller, M Goedhart, and D Wessels, above, n. 14, 5. T Waelde and B Sabahi, above, n. 134, 1049, 1070–1 with further references. See IVS 200 Businesses and Business Interests, in IVS 2013, above, n. 7, 43. See above, Section B(b)(ii), para. 4.68–4.69. Earning before Interest and Taxes. Earning before Interest, Taxes, Depreciations and Amortization. A Damodaran, above, n. 77, 453; S Pratt and A Nicolita, above, n. 1, 203 et seq. See A Damodaran, above, n. 77, 453 et seq. In the chapter on 'Relative Valuation' he deals in detail with the advantages and disadvantages of multiples, emphasizing (at 453) that '[w]hile multiples are easy to use and intuitive, they are also easy to misuse'.

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161) T West, 'Rules of Thumb: What They Are and How to Use Them' in T West and J Jones

(eds), The Handbook of Business Valuation (New York: Wiley & Sons, 1999) 150, 153. 162) S Pratt and A Nicolita, above, n. 1, 56; A Damodaran, above, n. 77, 1; T Koller, M

163) 164) 165) 166) 167) 168) 169) 170) 171) 172) 173) 174) 175) 176) 177) 178) 179) 180) 181) 182) 183) 184) 185) 186) 187) 188)

189) 190) 191) 192) 193) 194) 195)

196) 197) 198) 199)

Goedhart, and D Wessels, above, n. 14, 103; S Gabehart and R Brinkley, above, n. 72, 35–6; W Lieblich, 'Determining the Economic Value of Expropriated IncomeProducing Property in International Arbitrations' (1991) 8 Journal of International Arbitration 59, 61 et seq. See 'IVS Framework', in IVS 2013, above, n. 7, 58 (emphasis in original). Ibid. See A Damodaran, above, n. 77, 6. Ibid, at 11 et seq; S Pratt and A Nicolita, above, n. 1, 56; T Koller, M Goedhart, and D Wessels, above, n. 14, 103. Lieblich, who considered this 'accounting concept' as inappropriate for the purposes of valuation, was critical towards the profits as the basis for measuring future income. See W Lieblich, above, n. 162, 62. See T Sénéchal, 'Forecasting Technique in Business Interruption Claims: Solving the Creative Accounting Dilemma?' (2007) TDM 4(6) . T Koller, M Goedhart, and D Wessels, above, n. 14, 18 et seq. A Rappaport, Creating Shareholder Value: The New Standard for Business Performance (New York: The Free Press, 1986, 2nd edn, 1998). See 'Glossary', above, n. 16. Ibid. See 'IVS 200 Business and Business Interests', in IVS 2013, above, n. 7, 44. This is also called 'operating income'. See S Gabehart and R Brinkley, above, n. 72, 35. Ibid. S Pratt and A Nicolita, above, n. 1, 47; Pratt and Nicolita, Lawyer's Business Valuation, above, n. 66, 11. 'Value in place, as part of a mass assemblage of assets, but not in current use in the production of income, and not as a going-concern business enterprise.' S Pratt and A Nicolita, above, n. 1, 47. Ibid, at 47–8; see further below, at 'Liquidation Value'. Ibid, at 48; see further below, at 'Liquidation Value'. See RICS, Valuation—Professional Standards January 2014, above, n. 3, 99. S Gabehart and R Brinkley, above, n. 72, 28. World Bank Guidelines on the Treatment of Foreign Investment, section IV(6), first indent, (1992) 31 ILM 1363, 1383. Decision No. 9 taken by the Governing Council of the UNCC, above, n. 47, para. 19. T Koller, M Goedhart, and D Wessels, above, n. 14, 190 et seq. Ibid, at 298. A Rappaport, above, n. 170, 50; T Koller, M Goedhart and D Wessels, above, n. 14, 165. T Koller, M Goedhart and D Wessels, above, n. 14, 190 et seq. S Pratt and A Nicolita, above, n. 1, 86: 'The history of the company should put the business in the proper context for the user of the valuation analysis. A relatively brief history will suffice in most cases. The history should indicate how long the company has been in business and some chronology of major changes, such as form of organization, controlling ownership, location of operations, and lines of business. Sometimes predecessor companies are a relevant part of the background. A detailed explanation of the history may be required in some instances, and sometimes certain transactions that fundamentally contributed to the company's composition, as of the valuation date, should be included.' See, to the contrary, however, UNCC Guidelines for Valuation, Decision of the Governing Council No. 9, above, paras 4.26–4.27. A Rappaport, above, n. 170, 50; T Koller, M Goedhart, and D Wessels, above, n. 14, 430 et seq. R Brealey and S Myers, above, n. 152, 254 et seq. T Koller, M Goedhart, and D Wessels, above, n. 14, 188 et seq. Ibid. Ibid. The forecast assumptions must be analysed for their relevance beyond the time horizon of the first phase. This concerns, in particular, changes on the sales and procurement markets, the product and market potential, the market and competitive position of the products, future market opportunities, future marketing costs, reasearch and development costs, pensions, and reflection of cost reduction and restructuring measures. Ibid, at 192 et seq. Ibid. If there are too many uncertainties, the sale in an orderly liquidation can also be assumed which would represent the minimal value at the end of the forecast period. Ibid, at 213 et seq. See R Brealey and S Myers, above, n. 152, 18. For a comprehensive explanation and analysis of practical problems with the selection and application of an appropriate discount rate, see ibid, at 18 et seq, and 105 et seq. Ibid, at 20.

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200) 201) 202) 203) 204) 205)

206) 207) 208) 209) 210) 211) 212) 213) 214) 215) 216) 217) 218) 219) 220) 221) 222) 223) 224) 225) 226) 227) 228) 229) 230) 231) 232) 233)

234) 235) 236)

Ibid, at 24. Ibid, at 20. S Pratt and A Nicolita, above, n. 1, 61. R Brealey and S Myers, above, n. 152, 22. S Pratt and A Nicolita, above, n. 1, 184. Pratt and Nicolita use the terms 'systematic' and 'unsystematic' risk. See ibid, at 185. Brealey and Myers prefer the terms 'market' and 'specific' risk and explain in footnotes that 'market risk' is also called 'systematic risk' or 'undiversifiable risk'. 'Specific risk' is also called 'unsystematic risk', 'residual risk', 'unique risk', or diversifiable risk'. See R Brealey and S Myers, above, n. 152, 174; see also W De Maiseneire and L Keuleneer, 'Valuation of Companies: Discounted Cash Flow, Adjusted Present Value, Decision-Tree Analysis and Real Options' in L Keuleneer and W Verhoog (eds), Recent Trends in Valuation (Chichester: Wiley & Sons, 2003) 7, 12. S Pratt and A Nicolita, above, n. 1, 185–7; see also M. Kantor, above, n. 3, 145 et seq. M Kantor, above, n. 3, 143. See further in detail below. S Pratt and A Nicolita, above, n. 1, 186. Ibid, at 183 (footnote omitted). S Pratt and A Nicolita, above, n. 1, 184. M Kantor, above, n. 3, 148. Ibid, at 144. Ibid, at 155. Doing otherwise 'would quickly put them into the ranks of the unemployed', as Kantor puts it. See ibid, at 157. Pratt and Nicolita, Lawyer's Business Valuation, above, n. 66, 121; S Pratt and A Nicolita, above, n. 1, 184–6. M Kantor, above, n. 3, 153. S Pratt and A Nicolita, above, n. 1, 183. R Brealey and S Myers, above, n. 152, 190 et seq; W De Maiseneire and L Keuleneer, above, n. 205, 7, 12 et seq. R Brealey and S Myers, above, n. 152, 190 et seq. Ibid, at 174. T Koller, M Goedhart, and D Wessels, above, n. 14, 626. S Pratt and A Nicolita, above, n. 1, 187; FEE Guide (2001) 21. T Koller, M Goedhart, and D Wessels, above, n. 14, 630. See the discussion on 'country risk' further in Section (iv). The 'Standard & Poor's 500' is a stock index which consists of a diversified portfolio of different stocks. See S Pratt and A Nicolita, above, n. 1, 187. R Brealey and S Myers, above, n. 152, 178; S Pratt and A Nicolita, above, n. 1, 187; W De Maiseneire and L Keuleneer, above, n. 205, 7, 12. See A Rappaport, above, n. 170, 58; R Brealey and S Myers, above, n. 152, 167. R Brealey and S Myers, above, n. 152, 198. Ibid, at 222. Ibid, at 218 et seq; W De Maiseneire and L Keuleneer, above, n. 205, 7, 14. One of the additional refinements is that the present value of a risky project depends also on the covariance of the cash flows with the market rates of return. See further R Brealey and S Myers, above, n. 152, 175 et seq. The CAPM, already developed in the 1960s, is today widely used in economic practice. It does not, however, consider a number of influential factors. Therefore, other theories have also gained ground, such as the arbitrage pricing theory which also includes macroeconomic factors, such as the level of industrialization, the inflation rate, and the difference between long-term and short-term interest. The different theories have, however, two important aspects in common: a) investors ask higher rates of return for riskier projects, and b) investors dislike taking risks that cannot be diversified. See more details in ibid, at 204 et seq and W De Maiseneire and L Keuleneer, above, n. 205, 7, 15 et seq. R Brealey and S Myers, above, n. 152, 222. See, e.g., the collection by A Damodaran, Betas by Sector, . See also the online data base Betas Intercom, . R Brealey and S Myers, above, n. 152, 222 et seq.

237) Ibid, at 61. 238) T Koller, M Goedhart, and D Wessels, above, n. 14, 129, 209–11; M Kantor, above, n. 3,

146.

239) T Koller, M Goedhart, and D Wessels, above, n. 14, 130. 240) H Wöss et al, above, n. 128, 248 et seq; see also Anne van Aaken, 'International

Investment Law between Commitment and Flexibility: A Contract Theory Analysis' (2009) 12 Journal of International Economic Law 507, 523. 241) T Koller, M Goedhart, and D Wessels, above, n. 14, 729; A Damodaran, above, n. 77, 167–77. 242) A Damodaran, above, n. 77, 167. 243) Ibid. More sceptical about using simply the sovereign risk premium are Koller, Goedhart and Wessels, as in many sectors of the economy, such as consumer goods or raw-materials, cash flows are only weakly correlated with local government bond payments. T Koller, M Goedhart, and D Wessels, above, n. 14, 734.

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244) A Damodaran, above, n. 77, 168. 245) T Koller, M Goedhart, and D Wessels, above, n. 14, 729; A Damodaran, above, n. 77,

246)

247) 248) 249) 250) 251) 252) 253) 254) 255) 256) 257) 258) 259) 260) 261)

262) 263) 264) 265) 266) 267) 268) 269) 270)

271) 272)

169. Damodaran notes, however, while this approach has intuitive appeal, it may be misleading, as some risky emerging markets have low standard deviations for their equity markets because the markets are illiquid. See A Damodaran, above, n. 77, 169. Damodaran believes that the larger country risk premium emerging from this approach is the most realistic for the immediate future, but that country risk premiums will change over time, as countries can mature and become less risky. A Damodaran, above, n. 77, 170–1. T Koller, M Goedhart, and D Wessels, above, n. 14, 721. Ibid, at 723. Ibid, at 721. Ibid, at 723. Ibid, at 721. T Koller, M Goedhart, and D Wessels, above, n. 14, 725. S Gabehart and R Brinkley, above, n. 72, 24; Pratt and Nicolita, Lawyer's Business Valuation, above, n. 66, 109. See 'IVS Framework', in IVS 2013, above n. 7, 25. M Kantor, above, n. 3, 235. See 'IVS Framework', in IVS 2013, above, n. 7, 25. Pratt and Nicolita, Lawyer's Business Valuation, above, n. 68, 113. S Gabehart and R Brinkley, above, n. 72, 24; see also Decision No. 9 taken by the Governing Council of the UNCC, above, n. 47, para. 15. See in this context also the problems of 'creative accounting' as discussed in T Sénéchal, above, n. 168. See 'Glossary', above, n. 16. World Bank (ed.), 'Legal Framework for the Treatment of Foreign Investment', vol. 2 (31 ILM 1363, 1377, 1992). The Guidelines recommend using the book value only in cases where such book value has only recently been assessed. Then it can be regarded as providing an acceptable approximation to the replacement value or other market-related value. See J S McCosker, 'Book Values in Nationalization Settlements' in R Lillich (ed.), Valuation of Nationalized Property in International Law, vol. 2 (Charlottesville: University Press of Virginia, 1973) 36, 48; S Gabehart and R Brinkley, above, n. 72, 24. W Lieblich, above, n. 162, 66 et seq. See, e.g., S Gabehart and R Brinkley, above, n. 72, 24; W Lieblich, above, n. 162, 66 et seq. See J S McCosker, above, n. 262, 36, 51. S Pratt and A Nicolita, above, n. 1, 352; see also J M Risius, Business Valuation: A Primer for Legal Professionals (Chicago: ABA Publishing, 2008) 23. W Lieblich, above, n. 162, 69 with further references. T R Stauffer, 'Valuation of Assets in International Takings' (1996) 17 Energy LJ 459. See ibid, at 483. T R Stauffer refers in particular to the proposals made by B Lev and T Sougioannis, 'Industrial Capitalization Amortization and Value-Relevance of R&D' (1996) 21 J of Acct & Econ 107 et seq. See also T R Stauffer, 'Economic Profitability of Oil Companies' (1993) XVII OPEC Review 163 et seq. The US-GAAP would recognize such booking, if it is disclosed appropriately. This is particularly true for small and medium-sized companies. T R Stauffer, above, n. 268, 468. As, e.g., in the case of an oil rig. Ibid, at 469.

273) In the 1980s, more than 200 oil companies were evaluated for a number of years on

274) 275) 276)

277)

278)

the order of the American SEC. These publications allow a comparison of the book values and the DCF values of the companies which actually were not very different from each other. See ibid, at 475. E Linberg and S A Ross, 'Tobin's “q” and Industrial Organization' (1981) 54 Journal of Business 1. T R Stauffer, above, n. 268, 473 (emphasis in original). 'Oil companies have not sold above conformed book value for almost 20 years. There was considerable variability, however, and a few firms were valued higher than book value in the later 1980s. It was rare, but those are the exceptions which “prove” the rule.' Ibid, at 477. United States Securities and Exchange Commission (SEC), Accounting Series Release No. 253: Disclosure of Oil and Gas Reserves and Operations (1978). See the insightful analysis by J P Boone, 'Oil and Gas Reserve Value Disclosures and Bid-Ask Spreads' (1998) 17 Journal of Accounting and Public Policy 55. Ibid, at 486.

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279) As a variant of the book value method, the repayment of the investment undertaken

280) 281) 282) 283) 284)

285)

286) 287) 288) 289) 290) 291) 292) 293) 294)

295) 296) 297) 298)

299)

300)

301)

302) 303) 304) 305) 306)

is sometimes seen. See P D Friedland and E Wong, 'Measuring Damages for Deprivation of Income-Producing Assets: ICSID Case Studies' (1991) 6 ICSID Rev.-FILJ 400, 405, in footnote 22, referring to Benvenuti & Bonfant v Congo, Award of 15 August 1980 (1993) 1 ICSID Reports 330. L T Wells, 'Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Kahara Bodas Company in Indonesia' (2003) 19 Arbitration International 471, 475. See 'Glossary', above, n. 16; see also World Bank, above, n. 24, 1383; Decision No. 9 taken by the Governing Council of the UNCC, above, n. 47, para. 15. See 'IVS Framework', in IVS 2013, above, n. 7, 25. World Bank, above, n. 24, 1377. The Glossary of the IVS defines the 'cost approach' as: ' 'A valuation approach based on the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction'. See 'Glossary', above, n. 16. See the definition of 'depreciated replacement cost method': 'A method under the cost approach that indicates value by calculating the current replacement cost of an asset less deductions for physical deterioration and all relevant forms of obsolescence.' See 'Glossary', above, n. 16. See also Decision No. 9 taken by the Governing Council of the UNCC, above, n. 47, para. 15: 'Replacement value would not normally allow for replacement of an old item with a new one'. World Bank, above n. 281, section IV(6), third indent, 1383. Pratt and Nicolita, Lawyer's Business Valuation, above, n. 68, 13. S Gabehart and R Brinkley, above, n. 72, 28–9. See 'Glossary', above, n. 16. M Kantor, above, n. 3, 252. S Pratt and A Nicolita, above, n. 1, 47–8. Ibid, at 48. M Kantor, above, n. 3, 252. The standard setters on valuation pay a lot of attention to this aspect and regularly revise and extend their respective rules on valuation reporting and their codes of conduct. See, e.g., the 'IVS 103 Reporting', in IVS 2013, above n. 7, 35-38; 'Code of Ethical Principles for Professional Valuers', above, n. 19; see also S Pratt and A Nicolita, above, n. 1, 486–7. Walck, 'Logic and Ethics in the Practice of Expert Witness Services', above, n. 5. Ibid. H Rosen, 'How Useful Are Party-Appointed Experts in International Arbitration?' (2014) 2 Journal of Damages in International Arbitration 2. As Ball notes, the international community is looking for awards that are not only reasoned, but 'well reasoned'. M Ball, 'Assessing Damages in Claims by Investors Against States' (2001) 16 ICSID Rev.-FILJ 408, 428. He notes that even outside ICSID, there may be grounds for setting aside awards, if they lack appropriate reasoning. So far, only a few cases have noted the failure to state reasons and annulled an award on this ground. Klöckner v Cameroon, Decision on Annulment of 3 May 1985, paras 172 et seq; see also Pey Casado v Chile, Decision on the Application for Annulment of 18 December 2012, paras 35–8. In Rumeli v Kazakhstan, the award was not annulled, but the question of damages had required extended considerations which the tribunal reflected in the decision on costs. See Rumeli v Kazakhstan, Decision on the Application for Annulment of 25 March 2010, paras 155–79, 184. R Walck, above, n. 5, 162; P Wood, 'Lawyers and Economists: Who Rules the World?' (2010) 11 Business Law International 145; H Wöss et al, above, n. 128, 229–32; M Ball, above, n. 298, 418; J Gotanda, 'Damages in Private International Law' (2007) 326 RdC 185. In investment arbitration, the sums are usually sufficiently large so that these potential drawbacks are outweighed by the benefits. See Gotanda, above, n. 299, with reference to A Redfern and M Hunter, Law and Practice of International Commerical Arbitration (1999) 323–4. See H Rosen, above, n. 297; D Jones, 'Party Appointed Experts: Can They Be Usefully Independent?' 8 TDM (2011, Issue 1), 4; M Kantor, above, n. 3, 2, 279 et seq; J Gotanda, above, n. 299, 185; E Baker and A Lavers, 'The Experts in Dispute Resolution: A Common Law Perspective' (2004) 70 Arbitration 11–18; K Rendall, 'Role of the Expert/Adjudicator in Support of Arbitration in International Long-Term Contracts' (1999) 27 International Business Lawyer 201–7. H Rosen, above, n. 297; see also M Kantor, above, n. 3, 3, referring to S Elsing and J Townsend, 'Bridging the Common Law–Civil Law Divide in Arbitration' (2002) 18 Arbitration International 59, 63–4. R Walck, above, n. 5, 151–8, who notes that entire conferences have been dedicated in the past years to address this problem; see also H Rosen, above, n. 297. R Walck, above, n. 5. D Jones, above, n. 301, 5; R Walck, above, n. 5. 'Code of Ethical Principles for Professional Valuers', above, n. 19, 3.

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307) The PWC study on damages in arbitration of 2015 showed that the amount quantified

308)

309) 310) 311)

312) 313) 314)

315) 316)

by respondents' experts was, on average, only 13% of the amount quantified by claimants' experts. PricewaterhouseCoopers, 2015—International Arbitration Damages Research—Closing the Gap between Claimants and Respondents, available at ; reprinted in (2016) 3 Journal of Damages in International Arbitration 99, 100. e.g. Compañía del Desarollo de Santa Elena SA v Republic of Costa Rica, Award of 17 February 2000 (2000) 15 ICSID Rev.-FILJ 169, para. 95; see the commentary by C N Brower and J Wong, 'General Valuation Principles: The Case of Santa Elena' in T Weiler (ed.), International Investment Law and Arbitration (London: Cameron May, 2005) 747, 774. Gotanda, above, n. 299, 168. Ibid, at 184, with reference to E Meth, 'Final Offer Arbitration: A Model for Dispute Resolution in Domestic and International Disputes' 10 American Review of International Arbitration (1999) 383, 389–90. This was, e.g., the case in Starrett Housing Corp v Iran, 16 Iran–US CTR (1987) 112; Shahine Shaine Ebrahimi v Iran, 30 CTR (1994) 170; CMS v Argentina, Award of 12 May 2005, paras 50, 418; Enron Corporation Ponderosa Assets LP v Argentina, Award of 22 May 2007, para. 38; Sempra Energy v Argentina, Award of 28 September 2007, para. 399; National Grid v Argentina, Award of 3 November 2008, para. 46; El Paso v Argentina, Award of 31 October 2011, para. 41. M Kantor, above, n. 3, 310. There are several innovative techniques to cause the experts to collaborate with, or confront, each other, including witness conferencing, 'hot tubbing,' joint expert reports, etc. See R Walck, above, n. 5, 165; see also H Wöss et al, above, n. 128, 230–1. This approach is also endorsed by M Kantor, above, n. 3, 283; H Wöss et al suggest that the tribunal uses 'decision tree methods' to avoid being confused by misleading arguments and to ask the right questions. See H Wöss et al, above, n. 128, 232. T Waelde and B Sabahi, above, n. 134, 1049, 1063–4. D McIver, 'Valuation Issues from an Intermediary's Perspective' in T West and J Jones (eds), The Handbook of Business Valuation (New York: Wiley & Sons, 1999) 29, 30.

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5. Methods of Valuation in International Practice

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A. Market or Sales Comparison Approach

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5.01 The market-based approach of valuation looks at 'the market' as the final arbiter of different perceptions of value. Stock prices, prior transactions, offerings, partial or comparable sales, the comparative company approach and multiples are different variants of the market approach which can be used for the calculation of compensation and damages. It should be recalled that the 'market approach' is different from the '(fair) market value' basis of valuation. The latter is supposed to reflect the price a 'hypothetical willing buyer' would pay a 'hypothetical willing seller', while the former reflects 'actual' prices paid or received in the market. (1)

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

5.02 This difference is not always accurately reflected in international jurisprudence. The Iran–US Claims Tribunal in Amoco International Finance v Iran noted, for example, that 'where the nationalized undertaking is a corporation the capital stock of which is freely traded in the stock exchange', the 'market value' was appropriate to determine compensation for expropriation. (2) By contrast, in the absence of a market, the 'market value' as a valuation basis was inappropriate and artificial, (3) because a 'pyramid of hypotheses' was necessary and the owner of the expropriated asset 'usually is not a willing seller'. (4) However, it is exactly this 'hypothesis' which has to be made in the determination of '(fair) market value'. Conversely, the market approach looks at prices which were paid or offered in reality.

'5. Methods of Valuation in International Practice', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 214 - 326

5.03 International courts and tribunals relied on various variants of the market approach in their assessment of quantum depending on the evidence available and the submissions by the parties.

(1) Stock Prices 5.04 The opinions about the usefulness of prices of stocks and shares of a company for valuation purposes are diverse. On the one hand, there is a certain scepticism due to the frequent and often irrational fluctuations of stock prices. The tribunal in Delagoa Bay put this in the following words:

P 215

[T]he gambling value of securities of any enterprise that is being formed, as also their face value whether paid up or not, may considerably differ either way from their actual and intrinsic value as it would result from the average income which alone constitutes the real value of the enterprise. (5) 5.05 In the Barcelona Traction case, both the claimant and the respondent rejected the stock prices as reliable indicators of the value of the company. (6) The tribunal in Reineccius et al v Bank for International Settlements did not base the valuation of compensation after the expropriation of the bank on the value of its shares, which were traded on various stock exchanges, because it considered this to be an 'unreliable basis'. (7) 5.06 In Lithgow et al v United Kingdom, the claimants argued before the European Court of Human Rights (ECtHR) that a multiple of the price paid for individual shares would not reflect the price a willing buyer would be ready to pay for the entire company. (8) Such a willing buyer would have more information on the company's economic perspectives and would include it in the valuation. Furthermore, in economic practice, a control premium would usually be paid if a majority of the shares of a company was bought. (9) Nevertheless, the Court regarded the stock value as a valid basis for the calculation of compensation and denied a violation of Article 1 of the First Protocol. It conceded, however, that this was not necessarily representing the full market value (10) but nevertheless sufficient and within the state's margin of discretion as regards expropriations of its own nationals. (11) 5.07 The Iran–US Claims Tribunal generally seemed to have a rather positive attitude towards share prices. According to Brower and Brueschke, stock prices were an important factor in the valuation of companies noting that '[w]here there is an actively-traded market for property of a business entity's stock that has been the subject of a taking, the Tribunal has advocated the actual market value as best quantification of the full equivalent'. (12)

5.08 The tribunal in American International Group v Iran stated that 'the valuation should be made on the basis of the fair market value of the shares in Iran America at the date of nationalization'. (13) Nevertheless, due to the lack of an active market at the time of the P 216 expropriation, a different valuation method was applied. (14) In INA v Iran, where the claimant had purchased the shares in an insurance company approximately one year before its nationalization, the tribunal agreed that 'the price paid is a fair measure of the value of the shares on the date of the nationalisation'. (15) In Khosrowshahi v Iran, the Iran–US Claims Tribunal found 'particularly relevant the evidence relating to known trading prices of Alborz shares' and based its valuation on the prices of shares from the stock exchange eight months before the expropriation. (16) However, in order to account for the circumstances of the Iranian revolution and its economic repercussions it made reductions of 25 and 30 per cent. (17)

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5.09 ICSID tribunals also regarded stock prices as an important indicator for the value of an investment, albeit with limits. The tribunal in AGIP v Congo based its valuation of the 50 per cent share of the expropriated company on the 'shares representing 50% of its capital'. (18) This represented, however, only a small part of the claim which also comprised a series of repudiations by the Government of its contractual obligations which were much more substantial. (19) 5.10 The tribunal in CMS v Argentina found that stock prices could be a suitable indicator of the value of a company in principle. (20) However, as the company's shares were not publicly traded on a stock exchange, (21) it rejected the stock prices of another natural gas transporter and three natural gas distributors listed on the Argentine stock exchange as an appropriate valuation reference because it was of the opinion that those companies were not sufficiently comparable. (22) Instead, it decided to apply an incomebased valuation approach. (23) 5.11 In Enron v Argentina, the company's shares were traded on both the Buenos Aires and New York stock exchanges. (24) However, the tribunal found that, when markets were illiquid or the volume of transactions was limited, market capitalization might provide P 217 distorted valuation indications. (25) In this case, longer periods of time should be taken into consideration so as to determine relevant averages. (26) In such a situation, the stock exchange value should be referred to mainly to confirm the result achieved by other valuation approaches. (27) The tribunal in Enron v Argentina clarified that 'the use of market capitalisation is intended only as a reference value and not as a valuation tool itself'. (28) 5.12 Stock prices are likely not appropriate when a subjective–concrete valuation is warranted in order to achieve full reparation. In LG&E v Argentina, the tribunal rejected the reliance by claimants on the stock price and large share purchase values, (29) as it found that the impact on the asset value would not reflect the actual damages incurred by claimants and that the fair market value was not the appropriate valuation base. (30) 5.13 A special application of the stock price for valuation purposes can be the exchangeratio of stock in case of mergers and acquisitions. The tribunal in CME v Czech Republic, while not taking up the argument of the Czech Government, that the damage incurred could be measured on the basis of the slump in the holding company's stock prices, (31) regarded the exchange ratio of 0.5 to 1 between the shares of a prospective buyer's company and the claimant's company as a confirmation of the result of its valuation. (32) 5.14 Stock prices were used by various tribunals dealing with the demise of the Russian overcome jurisdictional hurdles, (33) it decided that the claimants had been expropriated unlawfully by a series of measures from 16 December 2004 until 5 August 2007. (34) The claimant sought compensation 'equal to its share of the real value of the assets that the Russian Federation expropriated from Yukos as of the date of the final award', (35) which amounted to US$ 183.2 million. (36) The claimant had purchased seven million ordinary shares of Yukos on the Russian stock market in November and December 2004, apparently at a price of US$ 11.66 million. (37) The tribunal noted that claimant had made its investment, when '[t]he market was fully informed of Respondent's likely action in respect of Yukos from July 2004'. (38) Due to the fluctuation of Yukos' share price, the determination of the valuation date was decisive. The tribunal found that it should be 24 January 2007, the day on which a 'Participation Agreement' with the claimant's parent company was terminated so that the economic risk was taken over by the claimant. (39) At that point in time, the claimant's investment, measured on the basis of Yukos' stock prices, was US$ 3.5 million, which the tribunal awarded. (40)

P 218 petroleum company Yukos. In Rosinvest v Russia, after the tribunal had

5.15 The fluctuation of stock prices over time is the biggest problem for their use as a reliable valuation measure. Yukos' share prices fluctuated between US$0.42 and 4.32 per share on the Moscow Interbank Currency Exchange (MICEX), and between US$0.44 and 4.27 per share on the Russian Trading System (RTS). (41) Stock prices thus do not reliably represent the value of a company, but often reflect moods of the market. The tribunal in Rosinvest v Russia agreed that the claimant had 'made an investment at such point in time when the market had in fact overreacted to transient events and the price was unjustifiably low'. (42) The use of stock prices in Rosinvest v Russia could be explained by the fact that the claimant held only a minority interest in Yukos, and that the claimant P 219 also based the valuation of the claim on them. (43) 5.16 Consequently, when an investor is only a minority shareholder, stock prices seem to be a practical reference for the assessment of quantum. This is particularly so, when investors themselves present their claims on the basis of stock prices. In Quasar de Valores, another Yukos case, the claimants claimed US$ 2.6 million for their 73,000 shares in Yukos. (44) The tribunal agreed with the claimants' expert that stock prices were the most appropriate reference as 'the value of a portfolio investment is simply given by the market'. (45) The valuation date was the date of the expropriation which the tribunal determined to be 23 November 2007, when Yukos was removed from the Russian United Register of Companies. (46) However, at that date, the value of Yukos was nil. The tribunal therefore aimed at estimating the stock price at that date, had the expropriation not taken place, (47) and assessed an 'expected stock price' on the expropriation date, based on a comparison with four Russian oil companies. (48)

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5.17 The comparison of the development of share prices with other companies in the same industry aims at producing a 'hypothetical stock price'. This was necessary, as the tribunal had determined that the expropriation date was the date at the very end of a series of measures leading to the total deprivation of the claimants' property. As discussed above, (49) a solution for cases of creeping expropriations could be to separate the expropriation date from the valuation date in order to avoid that the state can benefit from the gradual depreciation of the asset by its own acts. On the other hand, both the expropriation and the valuation date could be set at the beginning of the series of measures, when the value of the investment was not yet impaired. (50) In Quasar de P 220 Valores this date could have been the day on which the Russian Tax Ministry issued a resolution demanding payment of 99.4 billion roubles within two days, as proposed by the claimants. The tribunal challenged that date, suggesting that other dates would also be possible, such as the date when the re-audit of Yukos began, when Mr Khodorkovsky was arrested, or even early 2002 before the earliest arguable indication of Yukos being targeted became known. (51) It is certainly a difficult decision to determine the most significant date. In addition, the date proposed by the claimant would have had the advantage that simply the stock price at that date could have been chosen. This stock price was US$ 14. As it was a valuation under the premise of a 'lawful expropriation', (52) no further adjustments and only an additional award of interest would have been necessary. (53) 5.18 The tribunal in Yukos v Russia, in contrast to the two preceding cases did not use stock prices for the valuation of the damages due to the claimants. The claimants presented valuations based on the discounted cash flow (DCF) method, the comparable companies method, and the comparable transactions method. (54) Stock prices were only used to confirm the valuation carried out under these methods. Yukos' enterprise value was based on the market capitalization of Russian state-owned company Rosneft, which had taken over Yukos after its dissolution. (55) 5.19 The tribunal in Crystallex v Venezuela used the stock market approach in combination with market multiples to arrive at the amount of compensation after the expropriation of the claimant's investment in the areas called 'Las Cristinas', one of the largest undeveloped gold deposits in the world. (56) Also in Rusoro v Venezuela stock prices were used in combination with other valuations. (57) The tribunal in Crystallex v P 225 Venezuela made a detailed and informative statement in which it explained why it found that the stock market approach was appropriate and reliable: First, as a general matter, the stock market methodology reflects the market's assessment of the present value of future profits, discounted for all publicly known or knowable risks (including gold prices, contract extensions, management, country risk, etc.) without the need to make additional assumptions. In other words, the use of the stock market approach eliminates the need to resort to such assumptions, as the market factors in all risks and costs associated to the asset. The second reason why in this particular case the stock market may be relied upon is that Crystallex was a one-asset company and the rights which Crystallex enjoyed under the MOC in relation to Las Cristinas were that single asset. Thus, any buyer acquiring the totality of Crystallex's shares would have acquired the entire value of Crystallex's rights under the MOC and would in principle have been interested foremost and possibly exclusively in and valued the company on the basis of that single asset. Third, Crystallex's stock was actively and heavily traded on two main stock exchanges for mining companies so that transactions were occurring with sufficient frequency and sufficient volume to provide pricing information on an ongoing basis that reflects the expectations of a multitude of arm's length buyers and sellers on the underlying value of the company. Reciprocally, as the buyers do first think of the Claimant as a one-asset company, it is obvious that the stock value will reflect that asset valuation. (58) 5.20 It can be concluded that the use of stock prices is multifaceted. On the one hand, the evidentiary value of listed share prices is certainly appreciated. On the other hand, stock prices are highly volatile and often change considerably within short periods of time. It may be argued that it is better to select not a point in time, but longer periods of time, which would allow averaging out at least shorter-term swings in market moods. In any case, stock prices are useful in particular in combination with other valuation approaches or for controlling results achieved by other valuation methods.

(2) Prior Transactions 5.21 Prices actually paid or received in prior transactions appear to be a favoured anchorage for valuation in international arbitration. They seem to represent reliable evidence for the 'value' of an asset. The purchase or sale may have been made some time ago, but the fact that an actual buyer was ready to pay a certain amount of money provides a strong indication of the value of the asset in question. However, it should not be overlooked that 'value' and 'price' are not the same and need to be distinguished. A paid 'price' is a fact and may as such be objectively determined, but it may express the 'value' only to one particular buyer in a particular situation and thus represent a subjective valuation. As noted above, 'price' is a fact, and 'value' is an opinion. (59)

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5.22 Prices obtained for the sale of moveable property have been regarded as particularly appropriate for determining market value, as, for example, the Iran–US Claims Tribunal explained in Gould Marketing v Iran: The Claimant recognized that the … value of six of the Respondent's radios which the Claimant sold to another customer must be deducted from its claims. The contract price of these six radios was U.S. $258,696, which is the best available evidence of their value. (60) 5.23 The acquisition price of a company as a whole, on the other hand, may turn out to be more problematic. One aspect is the time factor. (61) In Phelps Dodge v Iran, the original investment had taken place six years before. (62) Nevertheless, the tribunal awarded the amount paid by the investor without deducting or increasing it. (63) It held that, despite the negative effects of the Iranian revolution, the company could reasonably have been expected to become profitable again in the long term. (64) The price paid, therefore, appeared to best reflect the value of the property in question. (65) 5.24 In CME v Czech Republic, a Scandinavian broadcasting enterprise wanted to purchase the Dutch holding company of the claimant, which held a number of television stations in Middle and East Europe, half a year before the expropriation took place. (66) The claimant argued that '[o]ne of the best possible indicators of an enterprise's fair market value is what an actual willing buyer thinks it is worth'. (67) The contract had been validly concluded between the two companies, which was an important reason for the tribunal to give the valuation by the purchaser particular weight: The Tribunal's view is that the SBS transaction entered into between CME Media Ltd and SBS gives an objective view of the fair market value of CNTS in February/ March 1999 by a third party purchaser on the basis of arms-length negotiations. (68) 5.25 However, the Scandinavian company shortly afterwards withdrew from the contract and paid a contractual penalty of US$ 8.2 million. (69) Also for other reasons, the significance of the actual purchase price for the value of the company could be questioned. The Scandinavian broadcasting firm expected and calculated substantial synergy effects for the merged company from the purchase of a number of smaller television companies in Middle and Eastern Europe, (70) and the purchase price had not been paid in cash but, instead, CME shareholders were being offered shares in SBS, which were subject to the fluctuation of the stock market. (71) Nevertheless, the tribunal found the purchase agreement representing US$ 400 million to be the best available evidence. (72) However, it made certain adjustments connected to the specific conditions of the contract, which led to a considerable reduction of the purchase price offered. (73) 5.26 Only one and a half years after the award, CME announced that 56 per cent of its television channel, TV Nova, was sold for US$ 642 million. (74) This shows that the price an actual willing buyer is ready to pay might differ considerably from the estimated price a hypothetical willing buyer is expected to pay. 5.27 Another example of a prior transaction as a reference for the value of an investment is the price obtained in a public tender. In Técnicas Medioambientales v Mexico, (75) the claimant had bought a piece of land, buildings, and the technical equipment for a landfill from a district authority in 1996. The tribunal took the price paid as an important yardstick for the value of the property in 1998, the date of the expropriation: The Respondent acknowledges that the price obtained in a public tender '… is an efficient manner to determine the price of the assets sold …' … The Arbitral Tribunal finds that upon the 1996 sale the Landfill's market value was US$ 4,028,788, and will take that figure as a starting point for subsequent analysis. (76) 5.28 By contrast, the tribunal in Azurix v Argentina (77) did not take the price paid in a public tender as the best available evidence. As pointed out above, (78) the tribunal found that the price paid for a water and sewerage concession in the amount of 439 million pesos (79) did not represent the fair market value at the time of the unlawful act of the state. It therefore reduced to US$ 60 million the amount to be paid to the successful claimant. (80) 5.29 Despite the fact that prices actually paid for companies or other business assets are often influenced by the perceptions of the individual buyers and concrete circumstances, they have often been as reliable evidence of the market value. However, it has to be kept in mind that 'price' and 'value' are different things so that adjustments may be necessary.

(3) Offerings 5.30 Prices offered for transactions that did not materialize have less evidentiary weight for the 'market value' of an object than prices actually paid. Nevertheless, they may sometimes be considered as appropriate evidence for the value of an asset at some point in time. 5.31 The Iran–US Claims Tribunal in James A Saghi v Iran took a written offer of an

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interested buyer five years before the expropriation date as the basis for the valuation of the market value. (81) It noted: KCC's offer in 1975 to purchase a 45% equity stake in N.P.I…. is potentially important evidence despite the fact that it was made 5 years before the date of the taking. As stated above, the fair market value of a company can best be defined as 'the amount which a willing buyer would have paid a willing seller …' KCC clearly was such a willing buyer and must have been reasonably well informed about N.P.I as a result of the relationship between the companies extending over many years. (82) 5.32 The tribunal found, however, that this amount had to be adjusted, taking into account the negative effects of the Iranian revolution and inflation. (83) 5.33 Other adjustments from prices offered could concern the physical quality and status of maintenance of the assets to be valued. In United Painting v Iran, the Iran–US Claims Tribunal held that the price offered by the Iranian business partner of the claimant for expropriated sandblasting and painting equipment was unusually high in view of the fact that the equipment was used and most likely depreciated over the two years since its purchase for the project. (84) The Iran–US Claims Tribunal thus tended to anchor its valuation on prices offered, (85) but also adjusted them to the extent it found it necessary. 5.34 In Middle East Cement v Egypt, the claimants presented written correspondence about a planned sale of the ship Poseidon for which an advance had already been made. (86) The ICSID Tribunal, however, rejected the valuation by this willing buyer in the amount of US$ 1.324 million and awarded only half of the scrap value of the ship in the amount of US$ 477,718. (87) 5.35 By contrast, the tribunal in Khan Resources v Mongolia found that the true value of the claimants' investment was reflected by three offers made for the mine or for Khan Canada's shares in and around the relevant period. (88) However, it found that all three offers suffered from clear 'value-affecting factors' and therefore needed adjustments to reflect the change in value between the valuation date and the date of any given offer. (89) 5.36 These cases show that the prices contained in offerings of a third 'willing buyer' may play a certain role in anchoring the valuation. Nevertheless, they often need adjustment and are sometimes not at all regarded as a reliable benchmark for the market value.

(4) Partial Sales 5.37 Sometimes, parties present evidence of sales of parts of the company or of equipment and try to extrapolate from these prices an amount for the entire asset. Tribunals have not easily accepted such figures as useful for the assessment of the P 226 amount of compensation or damages. 5.38 In Southern Pacific v Egypt, the claimant submitted that the value of the entire company could be valued on the basis of prior sales of parts of the projects. Concretely, it presented three different transactions and offers: 1. 2. 3.

the sale of 12,500 shares (25 per cent of the company) to two members of the Saudi royal family at a price of US$ 700 per share; the offer of a third member of the Saudi royal family, to buy 7,500 shares at a price of US$ 850 per share; the redemption of a number of shares by SPP (ME) at prices between US$ 598 and US$ 630 per share. (90)

5.39 The tribunal, however, found that the extrapolated amount (between US$ 33 and 42.5 million) was too high, in particular because the book value of the project at the time of expropriation was negative. In addition, the money of Saudi princes likely represented risk capital and other buyers could not easily be found to buy the shares at such prices. The tribunal expressed its scepticism in the following words: In the Tribunal's view, the purchase and sale of an asset between a willing buyer and a willing seller should, in principle, be the best indication of the value of the asset. This is certainly true in the case of a perfectly competitive market having many buyers and sellers in which there are no external controls or internal monopolistic arrangements. In the present case, however, there was a very limited number of transactions and there was no market as such for the shares that were sold. The price at which the shares were sold was privately negotiated. In these circumstances, the Tribunal does not believe that the share transactions can be used to accurately measure the value of SPP (ME)'s investment in ETDC. (91) 5.40 Also in CME v Czech Republic, the tribunal examined whether the price of a share of the enterprise should play a role in the valuation of the entire company. The transaction in question concerned the acquisition of a 5.8 per cent share of the claimant's company by the Czech business partner. The tribunal came to the conclusion that this transaction

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was not representative because it only related to a very small share and was motivated to exclude an offer made by a 'questionable third party'. (92) Furthermore, the transaction had taken place two years before the valuation date. (93) Its extrapolation would have led to a sum US$ 100 million above the amount an actual willing buyer was willing to pay for the entire company. 5.41 In Starrett Housing v Iran, the prices obtained for sales of a number of apartments in a large housing project played an important role for the valuation. (94) These sales, P 227 however, did not represent sales of the company itself but were part of the investor's business operation. The sales prices were, therefore, chosen to estimate the future income based on these sales. The tribunal actually conducted a DCF analysis. (95) 5.42 In Enron v Argentina, the tribunal noted that the price actually paid for 15.2 per cent of the shares of the company and an option to purchase another 4.3 per cent was US$ 148.5 million. (96) The tribunal found that these transactions of 2006, thus one year before the date of the award, 'provide an accurate and realistic base for the estimate of the current fair market value of the company'. (97) It was of the opinion that a market transaction with such characteristics is preferable to the use of the DCF, which implies a number of uncertainties derived from assumptions about the future that may or may not turn out to be true. (98) The tribunal found that the difference between the 'current fair market value' at the time of the award in 2007 and the value of the company in 2001 before the incriminated measures were adopted would represent the damage actually suffered by the claimants. (99) 5.43 The tribunal in National Grid v Argentina noted the inherent difficulties involved in finding comparable transactions given that electricity transmission was a monopoly. (100) However, it found that a transaction involving shares in the Argentinian energy transmission company Transener, in which the claimant had invested, could present a useful point of reference. It held that the transaction involving the sale of Petrobras Energía's 26.32 per cent stake in Transener was as a useful proxy to assess the price of National Grid's shares at the time, subject to some adjustments reflecting the impact of the economic crisis in Argentina and to attempting to carry out the intent and spirit of the regulatory framework of the investment. (101)

(5) Comparable Sales 5.44 Prices actually paid on the market for comparable assets is an important and practical variant of the market approach. In international jurisprudence it has been regarded as particularly significant for the valuation of machinery and equipment and for real estate. The reason is that these assets are usually bought and sold on a large scale so that the prices actually paid may reasonably be deemed to reflect the market value. This 'comparable sales' approach has, therefore, been applied in a number of cases. If the P 228 comparability was not entirely convincing, adjustments were made. 5.45 In Sedco v NIOC, the claimant asserted that comparable oil rigs with less equipment had been sold at higher prices to buyers in Dubai than those to be valued in Iran. The Iran–US Claims Tribunal acknowledged the 'comparable sales' in this case as a 'useful but only approximate guide'. (102) 5.46 With regard to the valuation of real estate, the Iran–US Claims Tribunal frequently asked specialized experts to provide information about prices actually paid in the real property market. (103) However, the tribunals also critically examined these reports. If the criteria of comparability were no longer correct, or if the expert opinions did not convince the tribunal for other reasons, the valuation was only very roughly based on the prices actually paid on the market. (104) 5.47 In Mohtadi v Iran, the Iran–US Claims Tribunal started with the valuation based on market data of the respective real estate, (105) but then took into account 'the particular ownership right or rights affected by the government's actions … less the value retained after the interference had occurred'. (106) 5.48 In international judicial practice also other sources of information on market prices are used for the valuation of real property, for example, published brochures of a real property agency and information obtained from local notaries. (107) 5.49 The tribunal in Funnekotter v Zimbabwe had to evaluate a number of farms which had been expropriated by Zimbabwe by various acts and omissions between 2001 and 2003. (108) The claimants had evaluated the farms as real property with specific agricultural characteristics in the market of 2001/02. The respondent had submitted an evaluation of the properties at less than 10 per cent of that value, in accordance with methods used by the Zimbabwe authorities for valuation of rural lands. The tribunal found that the national valuation method was inapplicable, but also that the assumptions of the claimants' expert were too optimistic in view of the market for rural P 229 properties in Zimbabwe in 2001/02. The tribunal adjusted the claimants' valuation by taking into account the particular characteristics of the different farms, considering the quality of the soils (dry arable land, good or rough grazing, irrigated land), the production of the farms (tobacco, maize, wheat, flowers, vegetables, fruits, cattle, etc.) and the equipment, their importance, and their state (homestead, farm buildings, roads, fencing, irrigation systems, water and electricity facilities, greenhouses, etc.). (109)

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5.50 With regard to moveable assets, the tribunal in Funnekotter v Zimbabwe evaluated them on the basis of the price they could achieve on the market. (110) Some of the figures advanced by the claimants seemed too high, taking into account the economic situation prevailing in Zimbabwe in 2001/02. (111) The tribunal also decided that the age and the state of a number of moveables (such as tractors or vehicles) should be taken into account in respect of their market value. The tribunal thus found it important to attach a realistic value which would be attainable on the market for the moveable assets, in particular in the difficult economic conditions in Zimbabwe at the relevant time. 5.51 As regards the valuation of entire business on the basis of comparable sales, the situation is more complicated. Businesses are often very specific in nature and difficult to compare. (112) Frequently, there are no comparable transactions which could form the basis of a comparison. (113) Furthermore, even if there are, the buyers could have particular motives which are specific and cannot be generalized. (114) 5.52 Nevertheless, the tribunal in Kardassopoulos v Georgia noted its special situation that it had 'available to it three arm's-length, contemporaneous transactions (or potential transactions) to assist in valuing an investment'. (115) It referred to the decision in Sapphire, where the arbitrator held that 'the concessions which must be appraised are P 230 not situated in an area where rights of extraction are often the object of sale transactions', (116) but after assessing transactions in neighbouring territories, concluded that it would be 'difficult to see what other proof could reasonably have been required of the plaintiff'. (117) Also the tribunal in Enron v Argentina had considered market transactions with regard to the claimants' participation in another natural gas transportation company, namely a swap and a share sale transaction. (118) 5.53 While the claimants' expert only ascribed a 10 per cent weight to the comparable sales approach, the tribunal in Kardassopoulos v Georgia found it appropriate to rely entirely on the three comparables to arrive at the fair market value of the claimants' investment. (119) The most significant evidence represented the sale transaction involving the asset in question sixteen days after the expropriation. All of the three transactions or offers were in a rather narrow range of value, namely between US$ 28.1 million and US$ 30.6 million. (120) 5.54 The tribunal in Siag v Egypt relied on the claimants' expert valuation based on comparable projects in the Sinai and the Red Sea. (121) However, in view of the 'uniqueness' of the property and the difficulties connected to it, a 20 per cent discount was applied. (122) 5.55 Determining the market value by comparable sales transactions seems to be a reliable method particularly with regard to real property, even though adjustments may be necessary to address special characteristics. Applying the comparable sales approach to entire businesses is more complicated, because it is difficult to find transactions which are truly comparable for valuation purposes. This is why the comparable sales approach has only rarely been applied with respect to entire companies or comprehensive investment projects. A variant and simplified form of the comparable sales approach is, however, available and also increasingly applied in international judicial practice, namely the comparable companies approach and the use of multiples.

(6) Comparable Companies and Multiples 5.56 The market approach can consist in a valuation of a company with reference to other companies not as a whole, but on the basis of a 'unit of comparison'. (123) While in real estate, the price per square metre (or foot) is a common unit of comparison, in business P 233 valuation the units of comparison usually are in some form of measurement of various items of income-producing capacity or asset value. (124) These units of comparison are called 'multiples'. (125) 5.57 In early cases, international tribunals were only rarely confronted with party submissions referring to multiples. (126) More recently, the use of multiples by claimants has increased and tribunals have become more acquainted with this method. 5.58 In CME v Czech Republic, the use of multiples was discussed in remarkable detail. (127) The US$ 400 million purchase offer of the Scandinavian broadcasting enterprise, which the tribunal considered decisive, (128) was based on a multiples valuation. In a first valuation, a multiple of 9.1 was applied on the 'Station Operating Cash Flow' which led to an amount of US$ 471.76 million for a 99 per cent share of the company. (129) The multiple was based on the Scandinavian company's stock exchange value. (130) In a later valuation, immediately before the conclusion of the purchase contract, a multiple of 8 was applied which resulted in an amount of US$ 409.9 million for the entire company. (131) The tribunal used this figure for its calculation of compensation after the expropriation of the company: (132) The valuation of CNTS at USD 400 million is largely driven by the application of the multiple 8.0, which was selected by SBS (and obviously accepted by CME) in reference to Eastern European operators risk in contrast to other countries, where SBS operated its broadcasting stations … A multiple of more than 8.0 would assume a general investment climate for the 'Eastern European operator', better than given (and experienced by CME) in practice. (133)

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5.59 The claimant's expert confirmed the plausibility of the DCF analysis as applied in the arbitral procedure also by the use of multiples. The expert had selected twenty-nine broadcasting enterprises in the United States, Europe, and Asia and compared their EBIDTA multiples. (134) Eventually, a 10.6 EBIDTA multiple was chosen on the basis of comparable European broadcasting enterprises. (135) This was, however, challenged by the respondent who pointed out that multiples of broadcasting enterprises in Western Europe and in the United States could not be regarded as representative for Eastern European enterprises. (136) 5.60 The case Yukos v Russia is another example for the application of the comparable companies method. The tribunal found that, after an unlawful expropriation under the Energy Charter Treaty, (137) claimants were entitled to three heads of damages: (1) value of claimants' shares, (2) value of the dividends up to the valuation date, and (3) preaward simple interest on these amounts. (138) As regards the value of claimant's shares, the tribunal decided 'that the “corrected” comparable companies figure is the best available estimate for what Yukos would have been worth on 21 November 2007 but for the expropriation'. (139) 5.61 The claimants had used a comparable companies approach, based on data available for a pool of Russian and international oil companies. (140) The companies were deemed to have similar characteristics to Yukos, in particular concerning production, reserves, profitability, revenue growth, and financing structure. The claimants established the ratios between the enterprise value of these companies and relevant operating or financial metrics (EBITDA, reserves, and production) and then applied these ratios to the relevant metrics of Yukos in order to estimate the latter's enterprise value. (141) 5.62 However, the tribunal found that the RTS Oil and Gas index, based on prices of trades executed in securities admitted to trading on the Moscow Stock Exchange, (142) was a more appropriate unit for comparison. (143) In order to arrive at the value of Yukos' shares as of the date of the award, the tribunal multiplied the best available estimate of the value as of the expropriation date (21 November 2007) with a factor that reflected the developments of the RTS Oil and Gas index between 21 November 2007 and 30 June 2014. (144) Based on the index, the tribunal arrived at an adjustment factor of 60.79 per cent. (145) 5.63 The tribunal in Yukos v Russia applied the comparable companies method, because it had more confidence in this method than in the DCF or comparative transaction method. (146) The market approach helped to verify data on value which were publicly available and used in business practice. The case shows the acknowledgement of the advantages of the market approach in the valuation of damages. 5.64 The tribunal in Tza Yap Shum v Peru also used the comparable companies method, but referred to another unit of comparison, namely the book value. (147) The claimant's expert had suggested four comparable fishing companies in Latin America and looked at the ratio between their book value and market price. The multiple calculated on this basis was 1.48 for the year 2004. The tribunal applied this factor to the book value of the company, in which the claimant held 90 per cent of the shares, and thus arrived at the amount to be awarded on the basis of an 'adjusted book value'. (148) 5.65 The above-mentioned practice shows that tribunals have become familiar with the to understand, they have also been in a position to examine the assumptions of the parties and to exercise their own judgement. Even though multiples have the disadvantage of not representing a very precise method, valuations in arbitral proceedings are also approximations. It depends whether the main parameters of the method are acceptable and convincing in a particular case. Furthermore, tribunals may take into consideration that the use of multiples, due to its simplicity and practicability and despite its deficiencies, is widespread in practice so that it may well find that the 'hypothetical willing buyer' would apply it.

P 235 use of multiples in international proceedings. As the concept is fairly easy

B. The Income Approach 5.66 International courts and tribunals have regarded the income approach with scepticism for a long time. The necessary forecasts as well as the discounting process appeared to be barely comprehensible for lawyers who were not specially trained in economic disciplines. This has led one commentator to observe: Si on regarde cette liste de faits futurs que le taux d'escompte doit prendre en considération, on comprend bien la méfiance des juristes devant les calculs d'experts-comptables choisis par les parties qui, tout en arrivant à des résultats fort disparates, assurent pourtant que les facteurs qu'ils emploient anticipent d'une façon exacte ces événements futurs. Ces calculs contiennent tant d'éléments de conjecture qu'ils paraissent aux non-initiés à la science comptable guère moins spéculatifs et tout aussi obscure que les prophéties de Nostradamus. (149) 5.67 It follows that the income approach has frequently been rejected in international

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practice. (150) The main and recurring argument was that prognoses about the future are inherently speculative and that speculative elements cannot be used in the determination of compensation or damages. The tribunal in Amoco International Finance v Iran held in its often-quoted statement, that: '[o]ne of the best settled rules of the law of international responsibility of States is that no reparation for speculative or uncertain damages can be awarded'. (151) 5.68 This reluctance has been predominant despite the fact that the income approach was the most widely used approach in economic reality and, thus, routinely applied by valuation experts in many different contexts. (152) 5.69 One of the arguments was that the income approach, even if it was widely used in business practice, would not be appropriate in international disputes between individuals and foreign states because claimants and respondents in such circumstances could not properly be compared to buyers and sellers in economic life. The Final Award in CME v Czech Republic reflects this discussion: [T]here is no disagreement between the parties as to the fact that each of these methods are among 'the most common means by which buyers and sellers come to conclusions about company value.' However, such 'conclusions about company value' are generally not undertaken in the context of determining the extent to which one party may or may not be liable for damages. (153) 5.70 Arbitrator Brownlie concurs with this opinion and elaborates on it in his Separate Opinion: [T]he commercial methods have a substantial defect. The commercial methods have no relation to the Treaty provisions and thus float in the ether unconnected with the actual subject of compensation, which is the specific violation of the Treaty provisions determined at the first phase of these proceedings … This approach is totally unrelated to the task at hand, which is the calculation of the compensation relating to breaches of the specific Treaty provisions. The DCF locutions simply do not overlap with the language of the Treaty. (154) 5.71 Another argument against the income approach was that it would necessarily lead to a multiple of the investments actually undertaken and would often be disproportionate in relation to them. This could easily lead to unjust enrichment of the investor. (155) However, international practice has also shown that the income approach does not necessarily lead to a higher amount than other valuation methods. This was, for example, P 236 reflected in the parties' submissions in Barcelona Traction. (156) Also, in the ICSID arbitration in Benvenuti & Bonfant v Congo, the investment undertaken was higher than the value of the claimants' shares based on forecast income. (157) This is generally the case when an investment does not have promising commercial prospects. 5.72 The scepticism was, however, not unanimous. Some of the older cases accepted that a calculation of future income was necessarily uncertain but that this could not exclude it from being the object of compensation or damages. The tribunal in Delagoa Bay noted that 'such a computation made in advance on the basis of purely theoretical data cannot hope to be absolutely accurate but only comparatively likely'. (158) 5.73 More recent practice has increasingly acknowledged and applied the income approach as an appropriate method of calculation of compensation and damages. The Iran–US Claims Tribunal in its awards in Starrett Housing v Iran (159) and Phillips Petroleum v Iran (160) paved the way for a broader acceptance in arbitral practice. Under the auspices of ICSID, the tribunal in Amco v Indonesia was the first which based its valuation on the income approach. (161) After an interval of a number of years, more awards followed, such as CMS v Argentina, (162) ADC v Hungary, (163) Enron v Argentina, (164) Sempra v Argentina, (165) LG&E v Argentina, (166) Lemire v Ukraine, (167) El Paso v Argentina, (168) Unglaube v Costa Rica, (169) EDF v Argentina, (170) Occidental v Ecuador, P 238 (171) Abengoa v Guatemala, (172) TECO v Guatemala, (173) Gold Reserve v Venezuela, (174) Mobil Cerro Negro v Venezuela, (175) Flughafen Zürich v Venezuela, (176) OI European Group v Venezuela, (177) Tidewater v Venezuela, (178) Suez v Argentina, (179) and Quiborax v Bolivia. (180) 5.74 The tribunal in Enron v Argentina emphasized the increasing acceptance of incomebased valuation methods not only in business but also in international arbitration practice: Since DCF reflects the companies' capacity to generate positive returns in the future, it appears as the appropriate method to value a 'going concern' as TGS. Moreover, there is convincing evidence that DCF is a sound tool used internationally to value companies, albeit that it is to be used with caution as it can give rise to speculation. (181) 5.75 Outside ICSID, tribunals have also applied the income approach for the calculation of compensation and damages more frequently. Examples include Himpurna California v

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PLN and Karaha Bodas v Pertamina, (182) Bridas v Turkmenistan, (183) National Grid v Argentina, (184) Walter Bau v Thailand, (185) and Mobil Cerro Negro v Argentina. (186) 5.76 NAFTA tribunals have also applied the income approach, for example, in S D Myers v Canada, (187) Archer Daniels v Canada, (188) and Cargill v Mexico. (189) 5.77 Under the ECT, the tribunals in Kardassopoulos v Georgia (190) and Anatolie Stati v Kazakhstan (191) have used an income valuation approach. 5.78 The income approach can be used for both objective and subjective valuations. It has been applied to determine the fair market value standard in expropriation cases, but also in cases of fair and equitable treatment violations. The tribunal in CMS v Argentina pointed out: [T]he Tribunal is persuaded that the cumulative nature of the breaches discussed here is best dealt with by resorting to the standard of fair market value. While this standard figures prominently in respect of expropriation, it is not excluded that it might also be appropriate for breaches different from expropriation if their effect results in important long-term losses. (192) The fair market value standard represented the basis for the application of the income valuation approach, for example, in Enron v Argentina, (193) Sempra v Argentina, (194) Abengoa v Guatemala, (195) Mobil Cerro Negro v Venezuela, (196) Flughafen Zürich v Venezuela, (197) and Tidewater v Venezuela. (198) 5.79 The income approach was also used for the valuation of damages and or full reparation, as, for example, in Amco v Indonesia, (199) Himpurna California v PLN and P 241 Karaha Bodas v Pertamina, (200) SD Myers v Canada, (201) ADC v Hungary, (202) LG&E v Argentina, (203) Lemire v Ukraine, (204) Archer Daniels v Canada, (205) Walter Bau v Thailand, (206) TECO v Guatemala, (207) and Quiborax v Bolivia. (208) 5.80 Despite the notable broader acceptance of the income valuation approach in general, several tribunals still rejected it for various reasons. (209) These include Wena Hotels v Egypt, (210) Pope & Talbot v Canada, (211) Siemens v Argentina, (212) Vivendi v Argentina, (213) and Khan Resources v Mongolia. (214) 5.81 The income valuation approach was also used in combination with other methods, (215) to confirm the result achieved by other approaches or to make up some of the uncertainties connected to it. (216) This is in conformity with international valuation standards according to which using more than one valuation approach or method is especially recommended where there are insufficient factual or observable inputs for a single method to produce a reliable conclusion. (217)

(1) Basis of Income: Profits, Earnings, Dividends, Cash Flows? 5.82 While lost profits may be due as an item of damages to achieve full reparation, it is important to understand the income valuation approach (218) as another way of measuring the value of an asset which is necessary in expropriation cases. (219) 5.83 The most important reason for the application of the income approach is it is widely used in business practice. (220) The basis for valuing future income has however often not been identified very precisely. In arbitral practice, it encompassed 'net earnings', (221) 'future costs and revenues', (222) or 'profits'. (223) 'Cash flows' have not been in the focus of tribunals in their calculation of damages and compensation for a long time. (224) , (225) 5.84 In more recent practice, 'cash flows' are increasingly used as the basis of value of future income. The tribunal in CME v Czech Republic referred to future 'operating cashflows' as the relevant factor for the valuation of future income, describing them as 'cash receipts minus cash payments, such as debt service'. (226) The relevant cash flows should reflect the earnings coming from advertising as the most important source of income (227) and be contrasted with the costs for programme production and acquisition. (228) 5.85 The tribunal in CMS v Argentina entered into the discussion of the identification of the relevant cash flow in some detail. (229) It referred to the two methodologies presented by the claimant's expert. While the expert favoured the computation of 'indirect equity value', the tribunal followed the advice of its own expert and chose the 'direct equity value'. (230) The tribunal presented the two alternatives in the following summarized form: One can start computations with the cash flows to the firm before interest and debt repayments, discount such flows at the weighted average cost of capital (the 'WACC') and add the discounted cash flows to the firm to establish its value; then, the value of debt is subtracted and the residual value is the value of equity ('the indirect equity value'). Alternatively, one can compute first the cash flow to equity (cash flows from operations, minus interest and debt repayments), discount them at the cost of equity ('COE') and add the discounted cash flows to equity to establish the value of equity ('the direct equity value'); then one adds the value of debt to establish the value of the firm. (231)

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5.86 Frequently, tribunals did not explain the basis of income in detail, (232) but basically relied on the claimants expert computations, considering adjustments of certain parameters. (233) However, it has to be borne in mind that assumptions made by the experts may be challenged and changed by the tribunals. (234) 5.87 For the valuation of damages or full reparation, in contrast to fair market value, tribunals may also choose dividends as the basis of income. As the tribunal in LG&E v Argentina found that neither the stock market price of shares nor the DCF would properly account for the accrued loss, (235) it decided to concentrate on the 'dividends' lost as the most appropriate measure of damage and summarized in a procedural order: A calculation will be made of the dividends that would or could have been generated without any change in the tariff system. Dividends received by the Claimants will be subtracted from this figure, after which the damages suffered during the State of Necessity will be subtracted from this amount. (236) 5.88 While international practice increasingly accepts income-based valuation approaches the basis or unit of income referred to is not always clear. Different tribunals P 242 have chosen different bases of income as the relevant measure of compensation or damages. Generally, it can be said that cash flows and the DCF method are an appropriate basis for calculating an objective fair market value, while dividends, earnings, or profits are more suitable to assess the subjective-concrete damage incurred by a party.

(2) Going Concern 5.89 The World Bank Guidelines indicate that the income approach should be applied for valuing 'going concerns'. (237) This was also the practice of the UNCC. (238) On the other hand, the judgment in Factory at Chorzów pointed out that it was sufficient to take the 'normal and duly foreseen development of the industrial activity' for determining the future profitability of the factory, even though the construction of the factory had not yet been completed: The fact that the chemical factory was not only not working but not even completed, at the time of transfer of the territory to Poland, can be of no importance; for chemical industry of this kind was expressly mentioned in the articles of the Oberschlesische Company as one of the objects of that Company's activities …; thus the entry into working of the factory was only the normal and duly foreseen development of the industrial activity which the Oberschlesische had the right to exercise in Polish Upper Silesia. (239) 5.90 Arbitral tribunals have referred to the 'going concern' premise in order to explain the application or rejection of the income approach. The tribunal in Aminoil v Kuwait formulated an often-quoted description of a 'going concern', namely as an 'undertaking itself as an organic totality—or going concern—therefore as a unified whole the value of which is greater than of its component parts …'. (240) 5.91 The Iran–US Claims Tribunal in Amoco International Finance v Iran specified that 'the undertaking was a “going concern” which had demonstrated a certain ability to earn revenues and was, therefore, to be considered as keeping such ability for the future: this is an element of its value at the time of the taking'. (241) The tribunal in Tovakoli v Iran P 243 held that '[i]n determining whether a company is a going concern, the Tribunal generally examines whether it had a reasonable prospect of being able to continue its operations after the Revolution'. (242) 5.92 The qualification as a 'going concern' does not necessarily entail a valuation based on the income approach, nor does the lack of 'going concern' exclude the application of the income approach. (243) In both Aminoil v Kuwait and Amoco v Iran, in the end the asset value was the most important factor in the valuation. The 'going concern' qualification was only reflected as additional item of value for goodwill or likely future profitability. (244) 5.93 It has to be pointed out that, according to international valuation standards, the existence of a 'going concern' is not a condition for the application of an income-based valuation method. (245) It is only important that, in the opinion of the valuer, the asset is likely to yield economic benefits to the owner in the future. 5.94 Several tribunals relied on income valuation methods even though the asset in question was not a going concern. In S D Myers v Canada, the company had not yet started operations, but after it had found that the Canadian export prohibition of a hazardous waste substance between November 1995 and February 1997 constituted a violation of national treatment (246) and fair and equitable treatment, (247) it stated that the P 244 damage suffered by the investor should be determined by the overall economic losses sustained, not only those that appear on the balance sheet of its investment. (248) The loss was measured on the basis of the lost net income stream. (249) 5.95 Nevertheless, the lack of the going concern quality has often led tribunals to reject income-based valuation methods. (250) The absence of past performance was frequently

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reason enough for excluding considerations of future prospects.

(3) Forecasting (a) Analysis of Past Performance 5.96 The analysis of past performance provides an important basis for the valuation of investments based on the income-approach. Tribunals have seen historical data as a strong evidence for future prospects. However, the results of the past cannot simply be projected into the future. Various factors of a political and economic nature must be taken into consideration. (251) 5.97 Assuming a relatively stable economic environment, the first ICSID tribunal in Amco v Indonesia (Amco I) took the results from a fifteen-month period of operation as the 'base period' and used it for its calculation of damages. (252) The second tribunal, Amco II, also took this 'base period' and extrapolated it into the future, but adopted a slightly different approach, namely to divide the calculation into two phases, one before and one after the date of the award. (253) 5.98 The analysis of past performance can also provide an insight into whether there was not only stability but even a potential for growth. In CME v Czech Republic, the tribunal referred to past 'net revenues', 'broadcast cash flow', and 'EBITDA' as relevant data of the company's performance. (254) They showed the considerable success of the broadcasting company and the TV channel, in particular also its constant growth and stability. The tribunal projected that the company would continue to increase its revenues and this was, in fact, confirmed by the subsequent development. (255) 5.99 Particular difficulties arise in times of political or economic turmoil. The analysis of past performance might then not be suitable for estimating future income. With respect P 245 to the effects of the Iranian revolution, the tribunal in Starret Housing v Iran found that the sale of apartments could not simply be projected into the future, but it assumed that the recession caused by the Iranian revolution would not have a long-lasting effect and would be overcome after a while. (256) 5.100 Uncertainty exists also with respect to the fluctuating prices of commodities. To what extent prices of the past are indicative for prices in the future is controversial. Whether this alone disqualifies the income approach can be disputed. While the tribunal in Phillips Petroleum v Iran found that the overall fluctuations of production and prices of oil 'could be expected to be not too significant', (257) the tribunal in Rusoro v Venzuela emphasized that the price at which products could be sold must be 'determined with reasonable certainty'. (258) 5.101 In general, arbitral tribunals have accorded considerable evidentiary weight on the analysis of past performance. The mere projection of past performance into the future will, however, be appropriate only in rare cases. Usually, and in accordance with the income approach valuation method as used in economic practice, adjustments reflecting changed political and economic circumstances are necessary. (b) Value Drivers 5.102 The so-called 'value drivers' are the decisive indicators to estimate future income. It is important for tribunals to understand the most important factors determining the value of the company. Usually the required information will be furnished by valuation experts, which the tribunals must assess. 5.103 The value of petroleum concessions, for example, is driven by the size of the oil reserves and the market price of oil. (259) As regards the oil reserves, the expertise of geologists usually delivers suitable results. (260) More difficult is the prognosis about future oil prices. In this regard, the tribunal in Phillips Petroleum v Iran held: While experience shows that forecasting future crude oil prices is difficult and open to a high risk of being proved wrong by the subsequent realities of the actual market, the Tribunal's objective here is to determine the range of expectations that seemed reasonable in September 1979, not the accuracy of those expectations in fact. (261) 5.104 In Starrett Housing v Iran, the measure of value was the expected profit from the

P 246 sale of apartments. (262) The revenues from the sale of apartments had to be

determined based on the number of apartments to be sold and the prices to be paid. (263) On the other hand, costs and expenses necessary for the development of the site and the construction of the houses had to be deducted. (264) 5.105 The tribunal in CME v Czech Republic needed to identify the value driving factors of a broadcasting company. (265) According to the claimant's expert, the main drivers for valuation were the large audience share (70 per cent at the beginning in 1994/95, and still 55–65 per cent in 1999); the TV advertising market share; international treaties allocating the broadcast spectrum capacity of only four television stations having national coverage (two of the four TV stations being public and subject to advertising restrictions, such as prohibition of interstitials, maximum duration of advertising), the second private TV station being fairly small (audience share at 17 to 18 per cent); structural barriers to

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competition from other regional and foreign broadcasters, primarily because of the language barrier; competition from cable or satellite television being modest because of the costs of installing cable infrastructure and dubbing; and the fact that additional high quality programming for broadcasting would be difficult to acquire since the claimant already had long-term deals with the major US sources of programming. (266) 5.106 A significant value driver is the market share. (267) In this respect the 'first mover' competition advantage plays an important role. Yet, in CME v Czech Republic the tribunal found that it would have been eroded over time because of 'economic logic' and experience together with convergence of European media markets. (268) 5.107 The 'first mover' competition advantage was significant in S D Myers v Canada. (269) The investor had previously operated only in the United States, so that the tribunal looked carefully at its extensive preparatory and successful marketing activities for the P 247 market in Canada. (270) A decisive factor for the calculation was the 'first mover advantage' of the claimant, because the competitive price offered and certain geographical advantages granted high probability that the investment would have been commercially successful. This was so even though the business had only been a 'start-up' venture. (271) After the export ban had been lifted, 50 per cent of the material had been processed by the Canadian competitors. The recognized value drivers included the estimated quantity of material that would have been processed by the claimant. The income actually achieved in the 'window of opportunity' of eighteen months when the border had been open only played a minor role in these calculations. (272) The tribunal took it for granted that the claimant would have been much more successful than it actually was without the unlawful closure of the border due to its specific advantages, its engagement, and its particular know-how. (273) 5.108 In the wake of the Argentinian pesification and other measures in 2002 a number of gas transportation and distribution companies were affected. ICSID tribunals confronted with the task of valuing the damage incurred mainly relied on the tariffs of gas and the consumption patterns as the main drivers of value of the companies' success. In CME v Argentina, the tribunal referred to the demand for gas, the tariff adjustments, and the operations and maintenance expenditures. (274) The tribunal in Enron v Argentina did not discuss the demand for gas explicitly but concentrated mainly on the tariff base and its adjustments. (275) The working capital and investments in fixed assets were considered as being part of the 'tariff base'. (276) The tribunal in Sempra v Argentina addressed the issue of consumption in addition to the tariff adjustments as relevant factors for the valuation. (277) It also found that the 'asset base' of the gas distribution company was a 'major factor' for the quinquennial tariff review foreseen in the concession. (278) The tribunal in LG&E v Argentina referred to the tariff adjustments and the average annual growth of gas volumes as the most important factors for valuation. (279) 5.109 In ADC v Hungary, the respective drivers for valuation of a concession to operate an airport terminal consisted in the 'right to conduct the terminal operations and to collect the terminal revenues'. (280) The fact that the airport in question was one of the fastest P 248 growing airports in the world also played an important role. 5.110 The main value driver for the valuation of the airport concession in Flughafen Zürich v Venezuela was the passenger traffic. In that case, the tribunal found that this traffic should be based on reasonable expectations at the time of the expropriation and not on the actual low passenger traffic. (281) The identification of the appropriate value drivers requires a profound knowledge about the respective industry. In this respect, tribunals depend to a large extent on the specific expertise of valuation experts. (c) Business Plans 5.111 For a reliable forecasting of performance tribunals need most reliable evidence. Business plans of some time in the past represent prima facie rather strong and credible evidence for expected future prospects as they have been drawn up for purposes unrelated to the dispute at hand. (282) They were prepared for and presented to investors and financing institutions to convince them of the viability of the respective project or company. If they were approved, they seemed to be plausible, at least from the perspective as of the date of the presentation. If that date is close to the valuation date, the relevance of such business plans bears considerable evidentiary weight. 5.112 For the valuation of the size of the oil reserves figures contained in business plans prepared for internal and external purposes seem to reflect reliable estimations of the size of the reserves. Such business plans were chosen in Phillips Petroleum v Iran, where the tribunal was confronted with two expert opinions which differed by a factor of two. In order to find a solution to these discrepancies, the tribunal referred to the estimation which the parties had agreed on when establishing a joint company for the exploration and exploitation of oil. It turned out that those estimates were closer to the figures submitted by the claimant than to those of the respondent (283) confirming the evidentiary weight given to business plans made in the past. 5.113 Business plans presented in the course of mergers and acquisitions in the past are also strongly persuasive. The tribunal in CME v Czech Republic based its forecast on negotiations between the claimant and the Scandinavian broadcasting company in connection with the planned acquisition. The plausibility of such prognoses was double-

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P 249

checked by use of studies of independent financial analysts, (284) as well as general economic prognoses and other publicly available information. (285) An important factor was that the prognoses turned out to be correct or even conservative at the time of the award. (286) 5.114 In CMS v Argentina, the claimant's expert report used the forecast figure prepared for internal use in the context of the unchanged regulatory framework. (287) The use of a company's internal forecast prepared in the normal course of business was an acceptable starting point for the valuation of the company by the tribunal which saw 'no reason to reject it'. (288) However, it made a number of modifications to the expert's assumptions. (289) 5.115 In ADC v Hungary, the tribunal relied on the internal business plan of the company which had been discussed and accepted by the owners a few days before the expropriation. It explained that the business plan in this case 'constitutes the best evidence before the Tribunal of the expectations of the parties at the time of expropriation for the expected stream of cash flows'. (290) 5.116 An approved business plan by a bank was the best evidence for the tribunal in Abengoa v Mexico to calculate the loss incurred by the indirect expropriation of the investors' licence for a hazardous waste landfill. The tribunal pointed out that the plan had been elaborated and approved by the bank before the dispute arose. This gave the tribunal the opportunity to apply the DCF method despite the very short duration of the operation of the landfill. (291) (d) Economic Circumstances 5.117 The forecast must also take into account economic circumstances which would have influenced the company's performance even in the absence of the expropriation or the unlawful act. From the perspective of some years, this is often a difficult task. The economic circumstances are constantly changing, and it is important to distinguish between those factors which have to be included in the valuation and those which have to be excluded.

5.118 The criteria as developed by the Iran–US Claims Tribunal in American International Group v Iran, namely to exclude the effects of actions taken by the nationalizing state in relation to the enterprise but to include changes in the general political, social, and P 250 economic conditions, (292) have turned out to be difficult to put into practice. The tribunal itself only arrived at an 'approximation' of the value of the expropriated company, taking into account 'all the relevant circumstances of the case'. (293) 5.119 In Thomas Earl Payne v Iran, the difference between the effects of the actions taken by the state and the general economic changes was fairly obvious. (294) As the enterprise was operating in the distribution of films— particularly of US films—and in the electronic industry, it would have been affected by the new economic circumstances after the Islamic revolution in Iran. (295) This was independent from concrete threats or unlawful behaviour of the Government in relation to the claimant. 5.120 Similarly, the case CBS v Iran concerned the Iranian subsidiary of the New York corporation CBS, which was operating in the music industry in Iran. (296) The tribunal rejected the valuation of the company based on an income valuation approach in its entirety because of the changed social circumstances in Iran, '[i]n particular, in view of the policy of the new Iranian Government against music, especially Western music'. (297) 5.121 The demand of certain products in the future also depends on the development of the specific industry. The prospects of selling luxury products, household articles, or craft supplies will have to be evaluated differently. The tribunal in Sola Tiles v Iran addressed the changed social circumstances (298) and found that in the Iranian society after the revolution the demand for luxury tiles had markedly declined to the point where future prospects of the company no longer existed. (299) Due to the lack of a market for such products, the valuation of goodwill and future prospects of the company was not accepted. (300) On the other hand, the prospects of a company in the wire and cable P 251 industry were not necessarily bad. (301) Nevertheless, the tribunal found that future prospects and goodwill were 'highly speculative' (302) and rejected the application of the income valuation method. (303) 5.122 On the other hand, the Iran–US Claims Tribunal in Khosrowshahi v Iran emphasized that the company's products would also be needed after the revolution in Iran. It explained that the company 'produced a wide variety of basic products including pharmaceuticals, toiletries, household cleaning products and foodstuffs. Even in the midst of revolutionary turmoil, it can be expected that a market for these goods would have continued to exist.' (304) Thus the company did have future prospects according to the tribunal. 5.123 The jurisprudence of the Iran–US Claims Tribunal concerning the distinction between the effects of changes in economic circumstances and the effects of the expropriation or the unlawful act appears to provide useful guidance for the valuation of future prospects. (305) It has also been taken up in cases involving Argentina in the wake of its economic crisis in 2001/02. (306)

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(e) Role of Contracts 5.124 If future prospects are connected to a contract or a concession, the terms of the contract play an important role in the calculation of compensation and damages. Higgins regretted that disputes between host states and foreign investors are often reduced to the controversy between the mere invocation of state sovereignty on the one hand and the principle of pacta sunt servanda on the other. (307) A more flexible approach would include the possibility and legitimacy of alterations or adaptions of contractual provisions in long-term contracts. This would provide more flexibility to tribunals in the valuation of such contracts. 5.125 The arbitral tribunal in Aminoil v Kuwait referred to 'legitimate expectations' which must be taken into account concerning possible alterations of the long-term concession. (308) The expectations of investors concern possible adaptations of terms of the contract P 253 on the one hand, and the possibility of extensions on the other. 5.126 (i) Adaptation of Contractual Provisions Arbitral practice has discussed the adaptation of contractual provisions primarily with respect to long-term oil concessions. But it may play a role also in relation to other long-term contracts. 5.127 In Aminoil v Kuwait, the tribunal was of the opinion that the volatility of the oil price, the policy of petroleum exporting countries in the 1970s, and the numerous nationalizations at the time had an effect on the legitimate expectations of the claimant. (309) In view of the fact that the parties had already renegotiated the contract several times, (310) the tribunal did not accept that the expected future income should be calculated on the basis of the original contract terms. (311) In particular, it rejected the idea that certain very favourable clauses would remain unchanged for the entire duration of the concession. (312) The company should only be entitled to a 'reasonable rate of return' and the 'contractual equilibrium' of rights and obligations should be maintained. (313) 5.128 The Iran–US Claims Tribunal in Phillips Petroleum v Iran concluded that the value of the claimant's interest in September 1979 would have been reduced significantly by virtue of the perceived risk that 'a buyer might encounter irresistible future pressures to modify the JSA in ways that would greatly reduce the anticipated future profitability of those JSA interests'. (314) 5.129 Such considerations play an even more important role, if the contract itself contains revision clauses. This became clear in Autopista v Venezuela where the tribunal did not accept the claimant's submission that the rights and obligations would remain largely unchanged during the thirty-year term of the contract. The concession itself contained provisions on regular updates which, even if interpreted differently by the parties to the dispute, according to the tribunal, showed that the parties had expected the possibility of fluctuating income and the necessity of adaptations. (315) 5.130 The tribunal in Himpurna California v PLN also addressed the issue of legitimate expectations. (316) The respondent, referring to Aminoil v Kuwait, submitted that the serious changes in the economic situation of the country (317) would have compelled adaptations of the contractual provisions with a view to arriving at a 'reasonable rate of return'. The tribunal, however, rejected this argument in this case, (318) because the contract had been explicitly drafted in such a way that the risk of currency devaluation and other state actions had to be borne by the respondent, (319) implying thus a guarantee of purchase by the contracting partner. According to the tribunal, neither force majeure nor clausula rebus sic stantibus could be validly invoked. 5.131 In CMS v Argentina, the tribunal rejected the possibility of the extension of the contact for another ten years (320) as well as the increase in the percentage for maintenance and operation of the gas pipelines. (321) With respect to the agreed contractual possibility of the adaptation of tariffs after the year 2013, the tribunal supposed a decrease in the tariff of 5 per cent in the 'no pesification scenario'. (322) In the 'pesification scenario', by contrast, the tribunal presumed an increase of the tariff to balance the currency devaluation and the departure of the index adjustments. The tribunal held:

P 254

With the disappearance of the US PPI adjustment, it would be strange to say the least that TGN would be left in a situation where, as forecasted by Mr. Wood-Collins, its domestic sales revenue would remain completely flat for the next 22 years; … it is difficult to believe that TGN would not have been able to convince ENARGAS that this was an unacceptable situation and that some increase in the tariff was required on the occasion of its Five Year Reviews. (323) 5.132 Even though the contracts contained purchase guarantees the tribunal was of the opinion that these guarantees could not be regarded as guarantees of a certain quantum of income, but that certain adjustments could have been expected, because 'taking into account the magnitude of the crises faced by Argentina, it would be highly unrealistic to assume that some adjustments to those ship-or-pay contracts would not have been made between the parties concerned'. (324) 5.133 On the other hand, lost profits were awarded in Al-Kharafi v Libya by the Arab

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Investment Court in Cairo despite the fact that the contract had already been breached at a very early stage. Construction work had never started due to assaults against the workers and other problems concerning, inter alia, the ownership of the land. In 2010, the Libyan Minister of Economy aborted the project. Essentially referring to court doctrine and jurisprudence of Libyan law, the Court eventually awarded lost profits for the remaining life of the contract, a period of eighty-three years. (325) 5.134 These cases show that tribunals may include in their valuation of future prospects the possibility that the terms of a long-term contract might change over time. It depends on the particular formulation of the contract and the underlying circumstances—such as express 'guarantees' by host states without which the investor would not have agreed to the contract—whether such possible changes should be considered in the income-based valuation. 5.135 (ii) Extension of Contracts Frequently, long-term contracts or concessions contain provisions of possible extension. This extension can depend on mutual agreement or depend on the fulfilment of certain conditions. This possibility of extension also forms part of the legitimate expectations of the investor. 5.136 If the contract provided for an extension only in case of an agreement between the parties, the arbitral tribunal usually did not include it in the valuation. In Shufeldt, for example, the arbitral tribunal did not accept the possible extension for valuation purposes. (326) In Bridas v Turkmenistan, the tribunal also excluded this possibility and explained:

P 256

It is obvious that as matters now stand, the Turkmenian side would not agree. Based on the conduct of the Claimant both before and in the arbitration, it is the opinion of the arbitrators that a refusal by the Government and the Respondents would be reasonable and the term would not have been extended beyond 25 years. (327) 5.137 In LETCO v Liberia, however, the tribunal found that the timber concession which originally had been concluded for twenty years would have been extended for another fifteen years. (328) The tribunal pointed out that the possibility of extension was formulated in the contract as an option of the concessionaire. He had the right to extend the contract only on the condition that the contractual obligations had been fulfilled and all the taxes and duties had been paid. (329) According to the tribunal, the investor would have fulfilled all these conditions in view of his performance so far. (330) The remaining term of the contract was thus twenty-four years, and the larger portion of the 'lost profits' stemmed from the second period, namely US$ 4,110,809, in comparison to US$ 2,009,380 of the first period. (331) The main reason was that the tribunal assumed only 70 per cent of the variable costs for the second cut (332) and enough capacity to accelerate the production in order to terminate the works until the end of the concession. (333) The tribunal thereby accepted the rather optimistic submissions of the claimant. (334) 5.138 In CME v Czech Republic, the extension of the TV licence was also taken for granted. The respondent had opposed the contention that the licences would have been extended. However, the tribunal referred to the fact that, 'generally, broadcasting licenses in Europe are renewed as a matter of ordinary administrative practice'. (335) The tribunal noted that the parties could identify to the tribunal only one known case (an English broadcasting licence) in Europe in which a broadcasting licence was not renewed, although the licence requirements were fulfilled by the licence owner. (336) Furthermore, the interested buyer, the Scandinavian broadcasting company, had also not seriously considered a non-renewal of the licence. (337) In addition, the tribunal referred to the fact that the Media Council of the Czech Republic had meanwhile extended the licence of the Czech partner enterprise, with which the claimant had collaborated, until 2017. (338) 5.139 It may be concluded that the possibility of the extension of a contract at the time of its conclusion is not always included in the valuation, but that tribunals have taken into account subsequent developments. This is not problematic, if the valuation standard is 'full reparation', both in cases of state responsibility and in breach of contract cases, because the valuation date in these cases should, in principle, be the date of the award. (339) If the standard, however, is supposed to be the fair market value at the expropriation date, later developments should be disregarded. In this case, only the perspectives as of the date of the conclusion of the contract should be considered. (340) (f) Comparison of Two Future Scenarios—'But for' Approach 5.140 The comparison of two future scenarios as a means of determining damages on the basis of a lost income stream is known as the 'sales projections' or 'but for' method: The sales projections, or 'but for', method entails the creation of a performance model for the subject company, complete with growth and return estimates. Using the model, operations for the subject company are projected during the damages period absent (i.e. 'but for') the alleged effects of the defendant's actions. The returns suggested by the model are then compared with the actual results realized by the company during the period. (341) 5.141 If the unlawful act of a state destroys or impairs long-term investments, it appears

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appropriate to measure the damage incurred by a projection of the future income after the breach and compare it with the hypothetical future income without the breach. The difference between those two scenarios is equal to the damage caused by the unlawful act. 5.142 Although this method appears to be a model example of the application of the differential method, arbitral practice has also used it to determine the fair market value. This was also the case after violations of BIT standards other than expropriation. (342) Due to the lack of a BIT standard of compensation for those violations, tribunals applied per analogiam the expropriation standard. (343) Other tribunals applied the 'but for' method on the basis of the customary law standard of full reparation. (344) 5.143 The 'but for' method was repeatedly referred to in cases against Argentina where ICSID tribunals had to evaluate the consequences of the Argentinian emergency measures during its economic crisis in 2002. The acts of the Government included the suspension of P 257 tariff adjustments, the prohibition of increases in tariffs, the calculation of the tariffs in US dollars, and the lifting of the linkage between the US dollar and the peso, the socalled 'pesification'. (345) 5.144 The claimant in CMS v Argentina was affected by these measures insofar as it had invested in operations in the transport and delivery of gas on the basis that it could generate income out of this business in US dollars and that the respective tariffs would be regularly adjusted according to the US producer price index. (346) The tribunal found that the measures of the Argentine Government had not amounted to expropriation (347) but constituted violations of fair and equitable treatment (348) and the umbrella clause contained in the BIT. (349) The damages due should be calculated by a comparison of the fair market value of the investment with and without the unlawful act of the state. 5.145 In order to calculate this difference the tribunal largely followed the claimant's experts, comparing the scenario 'without pesification' with the scenario 'with pesification': Mr. Wood-Collins is the only expert to have estimated the value loss suffered by CMS on its TGN's shares. In doing so, he used the forecasted figures prepared by TGN for its internal use in 2000, in the context of an unchanged regulatory environment. From this basis, he produced two scenarios, one for the 'no regulatory change' context (or 'without pesification', as the Tribunal will describe it) and the other for the 'new regulatory environment' (or 'with pesification'). (350) 5.146 Both scenarios were valued by the DCF method. The tribunal referred, in this context, to the fair market value as defined by the International Glossary of Business Valuation Terms of the American Society of Appraisers. (351) The calculation was rather on the assumption that the investor kept the ownership of the shares. However, the tribunal obliged the claimant to transfer the shares to the respondent for a determined price, at the option of the latter, within one year. (352) 5.147 In Enron v Argentina, the tribunal was also of the opinion that the difference between the fair market value with and without the pesification would best represent the P 258 damage actually caused by the unlawful acts of the Argentine Government. (353) The claimant in this case had also invested in the transport and delivery of gas and based its calculations on a fixed exchange rate between the peso and the US dollar as well as on tariff increases based on the US PPI. The no-pesification scenario was calculated by the DCF method. For valuing the pesification scenario, however, the tribunal referred to a price actually paid for a share of the respective company a few months before the tribunal award. (354) The price actually paid appeared to be the most appropriate measure of value of the company in the pesification scenario. (355) 5.148 In Sempra v Argentina, the claimant had also invested in the gas distribution industry. (356) The tribunal again referred to the fair market value for determining the damage caused by the violation of fair and equitable treatment contained in the applicable BIT. The tribunal explained that it would subtract the value under the pesification scenario from the value without pesification. In addition, it found that socalled 'historical damages' had to be added, namely producer price index adjustments in 2000 and 2001 and the non-payment of subsidies: The damages suffered are then arrived at by first stating the value of the firms under the but-for scenario, from which the value under the pesification scenario is subtracted and the value of the historical damages is added (or Damages = C -B+A). (357) 5.149 It is notable that the tribunal emphasized also taking into account the difficult economic situation in Argentina in the 'but for' scenario. It pointed out that this situation would have affected the investor's income stream even without the respondent's violation of the BIT: This conclusion does not mean that, under the but-for scenario, CGP and CGS would have merrily sailed through the major economic crisis which Argentina suffered and brought home large returns on equity, as if nothing had ever

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happened. In particular, the Tribunal is of the view that CGP and CGS would have been called upon to shoulder some of the burden of the general economic crisis and might have been faced with the need to reduce some of the increases to which they might otherwise have felt they were entitled to; moreover, and in a significant way under the but-for scenario, gas consumption and tariff rates would have been significantly impacted, with the consequent results on the value of the firm. (358) 5.150 The 'but for' approach is also, and even more appropriately, useful for the valuation of damages and full reparation. It almost ideally represents the 'differential method' necessary for assessing losses under a subjective–concrete valuation perspective. (359) The ICSID Tribunal in LG&E v Argentina expressly objected to the application of the fair P 259 market value standard after a violation of the obligation to fair and equitable treatment but also calculated the damage under a 'but for' approach. (360) The calculation of damages was based on the premise that, had Argentina maintained the tariff regime, the dividends received by claimants would have been in effect greater than those actually paid out. The 'but for' calculation was limited to the difference of dividends expected under the no-pesification scenario and dividends actually received, but did not include other elements of damage. (361) 5.151 The 'but for' method can also be applied for damages incurred in the past. In the NAFTA case Mobil v Canada, the tribunal found a breach of Article 1106 concerning the performance requirement prohibition. (362) It evaluated the damages on the basis of incremental spending for research and development in accordance with the incriminated 'Guidelines for Research and Development Expenditures'. The tribunal applied the historic ratio between incremental and ordinary course spending for the valuation of damages. This was a use of the 'but for' approach with regard to the past. Also the tribunal in TECO v Guatemala limited the evaluation of lost cash flows of the electricity distribution company caused by the unlawful unilateral change of tariffs to a period in the past. (363) (g) Valuation Phases 5.152 Valuation experts usually divide the forecast period into various phases. (364) In arbitral practice the division of the forecast period has sometimes been reflected by a separate valuation of the damage before and after the date of the award. This was, for example, the case in the second award in Amco v Indonesia (Amco II) where the tribunal calculated first the damage incurred from the date of the breach until the date of the award and then the damaging effects of the wrongful act from the date of the award in the future: The assessment will be divided into two periods, from July 9, 1980 until the end of 1989; and from 1990 until 1999 … But as to valuation techniques, for 1980–89 the Tribunal will not use the perspective of what the reasonable businessman in 1980 could foresee, because for this period it can use known data for relevant factors … (365) 5.153 For the first phase, the tribunal took the results of a fifteen-month 'base period' and extrapolated them until the date of the award, using known data in respect of inflation, P 260 taxes, and exchange rates. (366) For the second phase, the tribunal still relied on the 'base period' but needed to forecast the other parameters. It did so by taking the average of the inflation rate, taxes, and exchange rate of the last few years and projecting them into the future. (367) By contrast, the tribunal in LETCO v Liberia relied on different data in the 'first cut' and the 'second cut', because the fixed and variable costs would be less than with regard to the former. (368) , (369) 5.154 A division of the forecast period under a DCF analysis was effected in CME v Czech Republic. (370) The first phase related to internal business plans of the company and forecasts by the interested willing buyer, the Scandinavian broadcasting enterprise, until the year 2003. (371) The second phase encompassed the period until 2008 which was still based on verifiable and comparable business data about which the parties did not disagree significantly. Only the third phase after 2008 which had to be regarded in connection with the projected extension of the TV licence, was problematic. The claimant included this third phase in the calculation and extrapolated the forecast for another three years. The value beyond that date was identified as the 'terminal value' or 'continuing value' and was determined by a further extrapolation of the forecasts. (372) The respondent rejected the inclusion of these last two phases as it disagreed with the assumption that the licence would have been renewed and in particular that the licence would have been renewed under the same favourable conditions. Furthermore, it contested the assumptions of the future business opportunities, in particular the advertising market share and the audience share, as far too optimistic, also because of their assumed constant growth rates. (373) The tribunal agreed in principle with the claimant to include the third phase and the terminal value, but disagreed with the weighting of the different phases. It pointed out that the differences in the valuation of the company in the first two phases were only minor, but that in particular the inclusion of the third phase and the 'terminal value' contributed to a gap between the parties' valuations of more than US$ 200 million. (374)

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5.155 The 'terminal value' after the projected valuation phase can be either the going value. (375) Another possibility to define valuation phases is to distinguish between pre-breach and post-breach damages. (376)

P 261 concern value, if there are future prospects of the investment, or the liquidation

5.156 The division of the forecast period into two or more phases has proved to be of assistance to arbitral tribunals in better identifying the different parameters of the valuation. It puts them in a better position to address the points of agreement and disagreement in the parties' valuations. This offers the chance to estimate the future income not only very roughly, but rather to develop and render a better reasoned award.

(4) Discounting and Country Risk 5.157 In arbitral practice, the process of discounting is usually based on the submissions of the parties and the experts. The choice of the discount rate, whether built-up rate or Weighted Average Cost of Capital (WACC), is usually not explicitly ordered by tribunals. Instead, they evaluate the proposed discount rates by the parties. On this basis, they make their own assessments, which have been remarkably more detailed in recent jurisprudence than some years ago. 5.158 With regard to the discount rate the question arises, which risk factors should be reflected in the projection of cash flows and which should be reflected in the discount rate. According to international valuation practice, the 'specific risk' (or 'undiversifiable risk') of a business should not be reflected in the discount rate, but in the cash flow forecast. (377) This allows estimating more precisely the economic prospects of the valuation object. Only the 'market risk' (or 'diversifiable risk') should be reflected in the discount rate. The reality in investment arbitration does not, however, always reflect these considerations. 5.159 A good example where this approach was applied was CME v Czech Republic. In its valuation of the claimant's interest in a TV station, the tribunal followed the abovementioned approach and incorporated the specific risks of the company in its projections of cash flows, and not in the discount rate. (378) The main risk consisted in the loss of market shares to one existing competitor. This risk was assessed on the basis of a due diligence report made by an interested buyer only a few months before. (379) This interested buyer, however, had not reflected the risk by the cash flow projections or in P 262 the discount rate, but by the selection of a lower multiple. (380) In order to confirm this valuation, the tribunal referred to DCF calculations put forward by both parties to the disputes. The tribunal explained the choice of the discount rate by the claimant's expert as follows: Dr. Copeland applied a discount rate based on the weighted average cost of capital in accordance with conventional valuation practice. This calculation is necessary to determine the current value of a stream of cash flow extending into the future. It involves a process of attaching a notional optimal capital structure to a standalone CNTS (here Dr. Copeland used a 30% debt–70% equity structure), determining a risk-discounted return rate on equity and debt, and using that rate to reduce projected future earnings streams to a present value. (381) 5.160 If this approach is followed, it should not be too controversial to identify an appropriate discount rate in most cases. The market risk of an investment in a particular country is known, and so is a company's equity/debt ratio. (382) 5.161 Agreement between the opposing parties' experts on the discount rate should thus not be too surprising. (383) If the discount rate is based on the WACC and the CAPM, (384) only the 'systematic risk' of a company should be reflected in the discount rate. In CME v Czech Republic, the experts not very surprisingly assessed the systematic risk of a TV broadcasting company in the Czech Republic in the same way. The specific or 'unsystematic' risk of the company was reflected in the cash flow forecasts of the parties' experts, (385) which differed considerably and were addressed by the tribunal in detail. (386) 5.162 Similarly, the tribunal in ADC v Hungary applied the DCF method by using the WACC market risk premium, the country risk premium, and the lack of discounts for illiquidity or absence of control. (388) With respect to the 'beta' it agreed that a 'beta' of various representative airports had been applied. (389) It pointed out that the approach and method were reasonable and reliable and in line with the pertinent standard of international law. (390)

P 264 and the CAPM. (387) It rejected the criticisms of the respondent as to the

5.163 Also in CMS v Argentina, the systematic risk was included in the discount rate, while the specific risk was incorporated in the forecasts. (391) The tribunal, however, found that the systematic risk applied by the claimant's experts under the pesification scenario was too high as it assumed that similar shocks of the same magnitude as the pesification shock would be repeated, which the tribunal did not find appropriate. (392) It reduced the discount rate, therefore, from 45.04 per cent to 18 per cent. (393) On the other hand, it slightly increased the discount rate applied for the non-pesification scenario, (394) because the country risk premium was based on debts and, according to the tribunal, shareholders would bear a higher risk than debtholders. (395) The discount rate was

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accordingly increased from 13.34 per cent to 14.5 per cent. (396) 5.164 In Enron v Argentina, the experts of both parties applied the WACC but selected slightly different figures, namely 12.24 and 14.86 per cent respectively. (397) The tribunal's expert suggested using a higher premium for risk than that applied by the claimant, namely 12.6 per cent, apparently reflecting an increased unsystematic risk and inflation. (398) 5.165 In Sempra v Argentina, the tribunal accepted the WACC as presented by the claimant both for the pesification and the non-pesification scenarios. (399) The main reason was that the parties had arrived at relatively similar figures. The tribunal considered that the discount rate under the pesification scenario could have been even larger to reflect the greater uncertainty in the new regulatory context which would have increased the damages suffered by the claimant. (400) It, therefore, decided to apply the figures presented by the claimant, namely 13.77 per cent and 14.12 per cent respectively for the two affected enterprises. (401) 5.166 The tribunal in Alpha Projektholding v Ukraine accepted the discount rate of 12.14 per cent as presented by the claimant's expert. (402) In its reasoning it referred also the debt-to-equity ratio for the determination of the appropriate WACC: The 12.14% figure represented the weighted average cost of capital (WACC) based on the debt-to-equity ratio of the Hotels & Motels category for emerging markets reported in Bloomberg. In response, EBS asserted that 'it would not be correct to apply debt to equity for the agreement, which has “its own” assets but not for the SE Dnipro Hotel. In this specific situation it would have been 100% equity, instead of 60% equity ratio applied which would bring WACC to 14.42% instead of 12.1% applied.' LECG cited several authorities in support of the proposition that 'the target capital structure must be used, instead of that of the actual firms being valued.' (403) 5.167 In EDF v Argentina, the tribunal took made a considerable effort to explain in detail the use of the CAPM and the appropriate discount rate. (404) It also discussed the difficulties in the selection of the correct beta factor: According to LECG, data of beta assessments from developing countries' stock exchanges are highly volatile and unreliable … In addition, betas of several companies are often needed, as this makes the sample much more stable. Respondent's experts also advance that it is difficult to find relevant local companies in the local stock exchange that are comparable with EDEMSA. Finding such views reasonable, the Tribunal is convinced that a more reliable beta value is yielded by estimating the beta for an equivalent company in a developed economy such as the U.S., and then adjusting to reflect the extra return required for investing in a developing economy. In this connection, the Tribunal finds more suitable the raw beta measurements established by Ibbotson, rather than relying on assessment of the few U.S. companies selected by MBG. (405) 5.168 The tribunal noted also the respondent's method in calculating the country risk premium. However, the tribunal was not convinced to render an excessive value of country risk premium and then apply a 10 per cent ceiling to their historical average, as P 265 proposed by the respondent, without sufficient justification. Instead it found that the cost of equity should follow the formula: (406) Applying this formula to the company yielded a cost of capital of 12.97 per cent. (407) 5.169 In the various investment arbitration cases against Venezuela, the country risk was of particular interest for the calculation of compensation or damages and was reflected differently in different awards. However, this does not mean that the results were necessarily inconsistent or contradictive, because the cases concerned lawful expropriations on the one hand, and unlawful acts on the other. It is therefore not surprising that different considerations of country risk may have come into play. 5.170 In two cases, the tribunals found that the expropriations were lawful, namely in Mobil Cerro Negro v Venezuela (408) and Tidewater v Venezuela. (409) If an expropriation is regarded as lawful, the respondent acted in compliance with the applicable legal framework. Under the pertinent rules of international law, compensation should amount to the fair market value of the asset at the time of the expropriation or before the expropriation became known. The valuation should thus follow on an objective, market related, basis and not reflect any change because of the act of the expropriation itself. These considerations may certainly influence the views on country risk and the selection of the discount rate. 5.171 In Mobil Cerro Negro v Venezuela, the claimant's expert suggested a discount rate at the cost of capital of 8.7 per cent. (410) The respondent contended that the CAPM methodology was of little relevance in determining the value of an international oil project because it did not take into consideration the country risk. (411) The claimants

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replied that the country risk was largely composed of the risk of uncompensated expropriation, which could not be taken into consideration in order to evaluate compensation in case of such an expropriation. In addition, the claimants submitted that this would be incompatible with Article 6 of the BIT and the principle of full reparation. (412) Yet, this argument overlooked that the standard of compensation contained in BITs is not the full reparation standard. 5.172 The tribunal was therefore correct to reject the valuation which did not take the

P 266 expropriation risk into account. The respondent's experts, by contrast, had used a

discount rate, which included the confiscation risk and other relevant elements. On this basis, they arrived at discount rates ranging from 18.5 per cent to 23.9 per cent. The tribunal decided to apply a discount rate of 18 per cent, the same rate applied in a previous ICC arbitration. (413) With regard to the inclusion of country risk, the tribunal explained: [C]ompensation must correspond to the amount that a willing buyer would have been ready to pay to a willing seller in order to acquire his interests but for the expropriation, that is, at a time before the expropriation had occurred or before it had become public that it would occur. The Tribunal finds that, it is precisely at the time before an expropriation (or the public knowledge of an impending expropriation) that the risk of a potential expropriation would exist, and this hypothetical buyer would take it into account when determining the amount he would be willing to pay in that moment. The Tribunal considers that the confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate. (414) 5.173 The tribunal in Tidewater v Venezuela noted that 'the element of greatest difference between the approaches of the experts is the premium to be applied to the risk of investing in a particular country, here Venezuela'. (415) The claimants' expert had adopted a country risk premium of 1.5 per cent, in contrast to the respondent's 14.75 per cent. The explanation for the low discount rate was that political risk ought to be excluded from it. The existence of the investment protections contained in the Venezuela–Barbados BIT meant that the 'real risks of the Government acting in a very negative way towards any private investment' (416) should be excluded. To include such risks would confer an illegitimate benefit on the state. 5.174 The tribunal rejected this view pointing out that the BIT did not prohibit all state taking of private property. It only prescribed the state must pay compensation in the amount of the 'market value' of the investment in such a case. (417) [The] Tribunal should consider the value that a willing buyer would have placed on the investment. In determining this value, one element that a buyer would consider is the risk associated with investing in a particular country. Such a factor is not specific to the particular State measure that gives rise to the claim … Rather the country risk premium quantifies the general risks, including political risks, of doing business in the particular country, as they applied on that date and as they might then reasonably have been expected to affect the prospects, and thus the value to be ascribed to the likely cash flow of the business going forward. (418)

5.175 The tribunal's view was that the country risk premium for Venezuela in 2009 of 14.75 would represent a reasonable and rather conservative premium, (419) pointing to the country risk premium of 18 in Mobil Cerro Negro v Venezuela. As the exproprition was P 267 lawful, the valuation must include a country risk premium. 5.176 A different scenario is the valuation of property subjected to an unlawful act by the host state. This question was discussed thoroughly in Gold Reserve v Venezuela (420) and Flughafen Zürich v Venezuela. (421) In both cases, the tribunals found that Venezuela had acted unlawfully. It followed from this under the law of state responsibility 'full reparation' was due for the damage incurred. In this context it seems to be logical that the state should not benefit from its own acts and request a 'country risk' discount in order reduce its payment obligation. 5.177 The tribunal in Gold Reserve v Venezuela found that Venezuela had breached Article 2 of the Canada–Venezuela BIT by terminating the concessions without proper reasoning and by physically seizing the claimant's assets. The tribunal held that the actions of the respondent were 'particularly egregious'. (422) In this case, the tribunal agreed with the claimant's expert that 'it is not appropriate to increase the country risk premium to reflect the market's perception that a State might have a propensity to expropriate investments in breach of BIT obligations'. (423) The tribunal considered, however, that the country risk premium adopted by the expert was too low, as it took into account only labour risks and not other genuine risks that should be accounted for—including political risk, other than expropriation. The tribunal pointed out that the expert had not taken adequate account of these other risks when estimating the country risk premium. The tribunal also noted that no expropriation had occurred and that the claimant's failure to exploit the concessions within the required timeframes provided the legal basis on which the respondent terminated the concessions. The tribunal therefore increased the country

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risk from 1.5 per cent to 4 per cent. It calculated that using a 4 per cent country risk premium resulted in a cost of equity of 11.92 per cent, with a resulting WACC rate of 10.09 per cent, rather than 8.22 per cent as used by the claimant. The tribunal applied this discount rate on the lost projected future cash flows. 5.178 In Flughafen Zürich v Venezuela, the tribunal decided that the measures adopted by Venezuela constituted a 'direct expropriation, more concretely, a nationalization of the investment'. (424) The measures were not lawful, because they were in violation of Venezuelan law, as confirmed by the administrative court, and were not accompanied by the payment of compensation. (425) As regards the discount rate and the country risk premium, the tribunal agreed with the discount rate as proposed by the claimant. It found that a country could not benefit from a wrongful act attributable to it to increase country risk. However, at the time the investments were made in 2004, the country risk P 268 already existed (7.9 per cent country-risk rate). Furthermore, the claimants had used a 15 per cent discount rate when developing their investment business plan. (426) Therefore, the tribunal set the discount rate at 14.4 per cent. This corresponded in fact to the discount rate proposed by the respondent, in contrast to the 4.6 per cent rate submitted by the claimant. 5.179 In conclusion it can be said that the tribunals in the cases against Venezuela calculated compensation and damages in accordance with the principles of international law and international valuation standards. Excluding the country risk in some cases and including it in others is neither contradictory nor inconsistent, even if it seems to be so at first sight. 5.180 A case which does not seem to fit in this line of jurisprudence appears to be OI European Group v Venezuela. (427) In this case, the tribunal held that the expropriation was unlawful, because Venezuela had left the claimant in a state of uncertainty as to which specific assets were being expropriated, such as business assets, companies including liabilities, bank accounts, goodwill, know-how, and technology, which amounted to a lack of due process. (428) With regard to the discount rate the tribunal found that the tables presented by the claimant's expert showed a very low discount rate. The rate of 2 per cent corresponded to Italy, which did not satisfy the tribunal. Instead, country risk should reflect risks of public debt and market volatility. (429) By contrast, it should not reflect the specific expropriation risk. The tribunal increased the country risk to 6 per cent which led to a discount rate of 23 per cent, as opposed to the 20.39 per cent proposed by the claimant. The rather high result was a consequence of the high discount rate used by the claimants. This award does therefore not run counter the line of jurisprudence discussed above. 5.181 This overview of investment arbitration practice shows that the discount rates in recent cases are more reflected upon than previously. They are increasingly based on valuation methods commonly used in business practice, namely the DCF method using WACC and CAPM. The discount rates selected by the parties also reflected the ideas of these models. It follows that the specific or 'unsystematic' risk of the company is generally not reflected in the discount rate, but in the cash flow projections. By contrast, the 'systematic' risk of a company is assessed similarly by the experts. This puts the tribunal in a position to concentrate more on the estimation of the cash flow projections. Country risk forms part of the 'systematic' risk and is therefore predominantly reflected in the discount rate. However, a high discount rate should not help a state to benefit from its own wrongdoing. The difference between lawful and unlawful acts of a host state P 269 should have an influence on the choice of the discount rate.

(5) Inflation 5.182 International practice has not been consistent as regards the reflection of inflation in the income valuation approach. In Phillips Petroleum v Iran, for example, the claimant's expert chose a discount rate of 4.5 per cent which did not include inflation. This was consistent insofar as 'the future expected cash flows are expressed in constant 1979 dollars, the Claimant's discount rate contains no additional factor for inflation'. (430) 5.183 By contrast, the discount factor applied in Amco v Indonesia should not only reflect risk but also inflation. In this regard, the parties submitted diverging numbers, ranging from 3 per cent to 34 per cent. (431) The tribunal eventually chose a risk factor of 4 per cent, (432) increased by an inflation factor of 6.82 per cent which reflected the average inflation between 1985 and 1989. (433) The future profits until the end of the licence were, therefore, discounted by a discount rate of 10.82 per cent to their 'net present value'. (434) 5.184 In more recent awards, tribunals have not separately added an inflation factor to the discount rate as, in accordance with the economic valuation principles, forecasting and discounting should be based on nominal terms and the discount rate already contains an inflation premium. It is therefore prevailing practice to apply discount rates without adding an additional factor for inflation. One exception is Enron v Argentina, where the tribunal's expert suggested increasing the claimant's discount rate to account also for inflation. (435) 5.185 The inflation aspect is also important with regard to the valuation of 'but for' scenarios. (436) In Enron v Argentina, the value of the regulated business in the

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pesification scenario latter should be assessed by reference to a purchase price actually paid by a willing buyer in 2006, because the tribunal found that this price would provide an accurate and realistic base for the estimate of the current fair market value of the business. (437) However, the way the tribunal took the inflation of the peso between 2001 and 2006 into account is not entirely comprehensible. It first assessed that the total net value of the claimants' participation in the regulated business on 31 December 2001, the P 270 day before the emergency measures had been adopted, (438) was US$ 129 million. (439) The price paid for the same interest in 2006 was US$ 62.5 million. (440) It would appear that the inflation between 2001 and 2006 should be taken into account by increasing the value of 2001 by the inflation rate and subtracting from this amount the current value of the interests in order to arrive at the difference between the nonpesification scenario and the pesification scenario. This would have resulted in an amount of damages of approximately US$ 141.3 million. However, the tribunal chose the opposite approach. It decreased the actual value by the inflation rate and subtracted the amount from the US$ 129 million of 2001. This resulted in an amount of damages of only US$ 38.6 million under this item of damages. (441) In doing so, the tribunal effectively passed the burden of the inflation of the peso of an average 14.5 per cent per annum to the victim of the unlawful act. The rate of pre-award interest, by contrast, was only between 4 and 6.5 per cent (based on the LIBOR plus two). (442) 5.186 The influence of inflation on the financial outcome of the valuation is certainly considerable. Nevertheless, in applying the income valuation approach it has turned out to be more appropriate not to include it as a separate parameter. In arbitral practice, nominal figures have usually been taken for the forecast of cash flows while inflation was implied in the discount rate, both under a built-up discount rate or under the WACC/CAPM.

(6) Reasons for Rejecting the Income Approach in International Practice 5.187 Despite the general use of income-based valuation methods in economic practice and by valuation experts, international jurisprudence has long regarded them with reluctance. Even if this has changed in recent years, there are still considerable uncertainties which tribunals feel uncomfortable with. The tribunal in Rusoro v Venezuela summarized six criteria and pointed out that DCF would be appropriate only if all or at least a significant part of them were met: (1) (2) (3) P 271

(4) (5) (6)

an established historical record of financial performance; reliable projections of future cash flows, ideally in the form of a detailed business plan adopted at a time prior to the event giving rise to the claim, prepared by the company's officers and verified by an impartial expert; prices at which the enterprise will be able to sell its products or services can be determined with reasonable certainty; the business plan can be financed with self-generated cash, or, if additional cash is required, there must be no uncertainty regarding the availability of financing; a meaningful WACC, including a reasonable country risk premium, can be established; and the enterprise is active in a sector with low regulatory pressure or the impact of regulation on future cash flows is possible to establish with a minimum of certainty. (443) While some of these criteria are supported by valuation theory and practice, others are more controversial. In the following section, the most important arguments as reflected in arbitral practice are briefly addressed.

(a) Insufficient Past Performance 5.188 Arbitral practice has rejected an income valuation approach when the company was not a going concern or did not have a record of past performance. The main argument was that without a past record future calculations would be wholly speculative. The necessary period of an estimation of future performance of an investment is not entirely clear. 5.189 The Iran–US Claims Tribunal in American International Group v Iran found that even a period of four and a half years was too short for establishing an appropriate forecast for future profitability. (444) It conceded, however, that this was particularly true for the insurance industry where the profits follow a cyclical pattern requiring longer periods of observation. If the business was operating in the past but had experienced losses, such as in CBS v Iran, the Iran–US Claims Tribunal also declined to apply an income-based valuation. (445) 5.190 In Benvenuti & Bonfant v Congo, only one shipment of mineral water had been delivered which was not enough for a 'going concern'. The evaluation of the claimant's company according to the tribunal could thus not be based on its expected earnings, even though the company had already concluded a number of contracts for further deliveries. (446) 5.191 Similarly, the tribunal in Asian Agricultural Products v Sri Lanka found that only two

P 272 shipments of shrimp to Japan were not sufficient to demonstrate that the business had

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'a certain ability to earn revenues' able to keep itself commercially viable as a source of reliable supply on the Japanese market. (447) The tribunal found that to ascertain 'goodwill' requires a prior presence on the market for at least two or three years, which is the minimum period needed in order to establish continuing business connections, and to create and develop the marketing network of the company's products. (448) 5.192 The ICSID Tribunal in American Manufacturing and Trading v Zaire also stated that future profits were 'not at all measurable without solid basis on which to found any profit to take or for predicting growth or expansion of the investment made'. (449) 5.193 In Southern Pacific Properties v Egypt the investor had already sold 386 parcels representing 6 per cent of the project which the tribunal, however, considered to be insufficient for conducting an income-based valuation because the project was still 'in its infancy'. (450) In the tribunal's view, 'the DCF method is not appropriate for determining the fair compensation in this case because the project was not in existence for a sufficient period of time to generate the data necessary for a meaningful DCF calculation'. (451) 5.194 In the NAFTA arbitration on Metalclad v Mexico, the application of the incomebased valuation was also rejected because the hazardous waste fill had not yet started operation. Although the claimant had put forward a DCF calculation, the tribunal rejected it and followed the respondent's argument that a discounted cash flow analysis would be inappropriate because the landfill had never been operative and any award based on future profits would have been 'wholly speculative'. (452) More generally, the tribunal noted: Normally, the fair market value of a going concern which has a history of profitable operation may be based on an estimate of future profits subject to a discounted cash flow analysis … However, where the enterprise has not operated for a sufficiently long time to establish a performance record or where it has failed to make a profit, future profits cannot be used to determine going concern or fair market value. (453) 5.195 In Wena Hotels v Egypt, the ICSID Tribunal rejected the DCF method because of the

P 274 short duration of the operation and the lack of sufficient data. (454) The tribunal

agreed with Egypt that, 'in this case, Wena's claims for lost profits (using a discounted cash flow analysis), lost opportunities and reinstatement costs are inappropriate— because an award based on such claims would be too speculative'. (455) One of the claimant's hotels had operated for eighteen months, but the renovation works at the other had not yet been completed. (456) On the other hand, it might be recalled that the ICSID tribunal in Amco v Indonesia found fifteen months of operation of the hotel as sufficient for applying an income-based valuation method. (457) 5.196 The tribunal in Técnicas Medioambientales v Mexico considered the more than twoyear period of operation of the hazardous waste fill to be too short to conduct a DCF analysis: The non-relevance of the brief history of operation of the Landfill by Cytrar—a little more than two years—and the difficulties in obtaining objective data allowing for application of the discounted cash flow method on the basis of estimates for a protracted future, not less than 15 years, together with the fact that such future cash flow also depends upon investments to be made— building of seven additional cells—in the long term, lead the Arbitral Tribunal to disregard such methodology to determine the relief to be awarded to the Claimant. (458) 5.197 Several other tribunals have rejected the income approach, because of a lack of past performance and reliable data on which a meaningful projection of future income could be made. (459) Nevertheless, it has to be pointed out that a number of investment tribunals have applied an income valuation approach in cases were there was no track record. This is not only true for cases where the valuation could be based on solidly formulated long-term contracts but also in cases where the future profitability depended on economic circumstances, such as consumer demand and expenditure. The tribunal in Enron v Argentina noted in this respect that 'the calculation of such value is based on reasonable estimates of future demand, revenue and expenditures and excludes consideration of past performance or returns. Historical return on investment is therefore irrelevant for determining damages.' (460) (b) No Future Prospects 5.198 Unlike the lack of past performance, the lack of future profitability is a real barrier for the application of the income approach. Valuation experts would agree that, in this case, a valuation based on future cash flows or profits would be inappropriate. International tribunals have also based their rejection of this method on this ground. 5.199 The tribunal in Siemens v Argentina did not find that it was likely that the investment concerning the production and distribution of electronic identity cards in Argentina would have been profitable, even without the unlawful act. (461) In Impregilo v Argentina, the tribunal pointed out that the water and sewage concession in the province

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of Buenos Aires concerned a poor area with a limited collectivity rate. (462) The tribunal rejected to apply an income-based valuation due to its doubts on the profitability of the concession. Several other tribunals have also rejected the income approach on the basis of lack of future prospects. (463) (c) Divergence of Amount of Investment and Expected Profits 5.200 Tribunals sometimes referred to the striking divergence between the amounts invested and the present value of future income as an argument to reject the incomebased valuation approaches. The Iran–US Claims Tribunal held in Amoco International Finance v Iran: With the DCF method as used in this Case, the alleged value of the undertaking has no relation whatsoever to the value of these elements—and therefore to the investment made in order to create the concern and to maintain its profitability. The replacement value, that is the investment necessary to create a similar undertaking, is no more taken into consideration. The capitalization of the future earnings will probably amount to a much higher figure, which could lead to unjust enrichment for the beneficiary of such compensation, since he could hypothetically, establish a similar enterprise with comparable earnings, spending only a portion of the compensation received … (464) 5.201 In the arbitration in SPP v Egypt before the ICC, (465) the investors had invested US$ 5 million but claimed an amount of US$ 42.5 million based on a DCF calculation. The P 275 tribunal held: 'The calculation put forward by the Claimants produces a disparity between the amount of the investment made by the Claimants and its supposed value at the material date'. (466) 5.202 The ICSID Tribunal in Wena Hotels v Egypt referred to this award and explained its rejection of the DCF method also by the considerable divergence of the sum invested in the amount of US$ 8.8 million and the claimed £45.7 million for lost income and business opportunities. (467) This was later taken up by the ICSID Tribunal in Autopista v Venezuela in order to explain its rejection of the claim to lost profits under the terminated concession contract. (468) 5.203 Similarly, the ICSID Tribunal in Técnicas Medioambientales v Mexico noted the big difference between the amount invested and the alleged value of the landfill based on future expected cash flows: The Arbitral Tribunal has noted … the considerable difference in the amount paid under the tender offer for the assets related to the landfill—US$ 4,028.788— and the relief sought by the Claimant, amounting to US$ 52,000.000, likely to be inconsistent with the legitimate and genuine estimates on return on the Claimant's investment at the time of making the investment. (469) 5.204 From a valuation perspective, this argument is, however, not persuasive. The amounts invested and the value of the investment are not always proportional to each other. (470) On the contrary, if an investment turns out to be particularly promising the host state could be motivated to expropriate it or to otherwise impair it. Great care must therefore be taken not to link the amount of compensation or damages closely to the investment actually undertaken, if the investment has good future prospects. (d) Divergence of Submissions by the Parties 5.205 The estimations of the parties in view of future economic factors and developments which play the decisive role in income-based valuation methods may be very different. If these differences are too big, tribunals have sometimes been inclined to reject the income valuation method altogether. This is particularly true if the disparities cannot be P 276 verified or assessed by other evidence. 5.206 The ICSID Tribunal in Técnicas Medioambientales v Mexico, for example, rejected the DCF method and noted 'the remarkable disparity between the estimates of the two expert witnesses upheld throughout the examination directed by the parties and the Arbitral Tribunal at the hearing held on May, 20–24, 2002'. (471) 5.207 Also in CME v Czech Republic, the different DCF calculations by the parties resulted in a gap of roughly US$ 210 million. The tribunal thus did not base its calculation of damages on the DCF method, but only applied it as a confirmation of its valuation based on the market approach. (472) 5.208 In Crystallex v Venezuela, the investor claimed US$ 3.16 billion as representing the fair market value of its investment at the time of the expropriation, while the respondent contended that no compensation or damages at all should be awarded, because the claimant's claim was entirely speculative and unsupported. (473) The tribunal agreed that the income approach was not reliable and excessively speculative in this case. Also the tribunal in Tenaris v Venezuela was confronted with largely diverging amounts resulting from the parties' calculations (US$ 239 million as opposed to zero) and rejected

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the DCF method, which it found to be tainted by too much uncertainty. (474) (e) The Financial Situation of the Company 5.209 In order to assess the future prospects of a company, some tribunals have taken its financial position into consideration. The ICSID Tribunal in Asian Agricultural Products v Sri Lanka, for instance, had certain doubts about the financial situation of the company and mentioned it as a further reason for the rejection of the income approach. It noted that the company was incurring losses and was under-capitalized. (475) 5.210 The tribunal in Wena Hotels v Egypt also raised doubts on the financial position of the investor's project and noted that 'there is some question whether Wena had sufficient finances to fund its renovation and operation of the hotels'. (476) In Rusoro v Venezuela, the tribunal noted that the business plan presented by the claimant required additional funding in an amount of USD 310 million but that there was no certainty that Rusoro would have been able to secure the financing for this new investment. (477) 5.211 The availability of sufficient financial means, however, should not be regarded as a

P 278 decisive factor for the acceptance of the income valuation approach. The use of

external finance is frequently inevitable for economic operations and investments, in particular also for opening-up and developing market opportunities. This aspect should therefore only be used as an additional argument. (f) Valuation Procedure too Expensive 5.212 The procedure of forecasting and discounting the future economic benefit of a business usually requires considerable time and money, including by the employment of valuation experts. It may therefore not be appropriate in all cases to deploy such a complex valuation procedure. If the business or asset is not particularly valuable, the income valuation procedure might not be worthwhile. International investment arbitration has only rarely dealt with very small projects but it is nevertheless useful to keep this aspect in mind. 5.213 The Iran–US Claims Tribunal in INA v Iran was confronted with a claim of US$ 285,000 which was only slightly above the minimum limit of claims of the jurisdiction of the tribunal in the amount of US$ 250,000 according to Article III(3) of the Claims Settlement Declaration. (478) Although valuation based on the income approach was in principle feasible and would most probably have led to a higher amount, the claimant renounced undertaking a DCF calculation and only claimed the amounts originally invested. The tribunal noted that: 'INA considers, however, that the expense of such a valuation was not warranted in view of the relatively small amount involved in this case. INA therefore claims only an amount equal to its purchase price for the shares.' (479) 5.214 It largely depends on the difference between the economic situation of the company at the time when the investment was made and at the valuation date. If the difference is not too large, the value at the time of the investment could be suitable indicator. In addition, later performance of the company itself or of comparable companies can also be taken into account. (480) 5.215 The best alternative to the application of a complex and expensive income valuation method would be to present the price paid or offered in a recent or planned arm's-length transcation involving the valuation object. Despite the notable difference between 'value' and 'price' as a matter of principle, an agreed price generally finds broad acceptance as evidence of the value of an asset in question. (481)

C. The Asset-Based or Cost Approach 5.216 The advantage of the asset-based or cost approach is that it seems to be far less difficult to apply than the income approach with its complex forecasting and discounting processes. It looks into the past and not into the future so that is does not involve 'speculative' elements. (482) These virtues are generally highly appreciated in arbitral practice. Despite the increasing acceptance of the market and the income approaches, valuation on the basis of assets or costs has remained an attractive option. However, there are also a number of drawbacks of this valuation approach. (483)

(1) Book Value 5.217 Book value has generally been regarded as inappropriate for determining the value of an asset. The tribunals in Aminoil v Kuwait and LIAMCO v Libya, for example, held that book value should not be applied even in cases of lawful expropriations. (484) The tribunal in Aminoil v Kuwait emphasized that book value would not be acceptable in particular for investments made many years ago. (485) 5.218 Similarly, the Iran–US Claims Tribunal noted that the 'book value method is used mainly for liquidation purposes'. (486) The tribunal made clear that in the case of valuation of companies, future prospects and combination effects must be included in the valuation. However, the allegation that book value is used for 'liquidation purposes' may be questioned as liquidation value is usually defined as the net amount that can be realized in either an orderly or a forced sale of the business assets or some portion of them. (487) This definition does not coincide with the definition of book value.

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5.219 The rejection of book value for valuation purposes has been reiterated by the Iran–

P 279 US Claims Tribunal in various cases. (488) In Amoco International Finance v Iran, the

tribunal held that 'the theory that net book value is the appropriate standard of compensation in all cases of lawful expropriation overlooks the fact that a nationalized asset is not a collection of discrete tangible goods (equipment, stocks, and possibly, grounds and buildings). It can include intangible items as well, such as contractual rights and other valuable assets, such as patents, knowhow, goodwill, and commercial prospects.' (489) 5.220 ICSID tribunals occasionally did refer to the book value, sometimes as the starting point of the valuation. The tribunal in Asian Agricultural Products Ltd v Sri Lanka, for example, accepted only the amounts appearing in the balance sheet of the company for the calculation of damages after a breach of the respondent's treaty obligations. The assets were compared with all the outstanding indebtedness thereof at the relevant time. (490) 5.221 The ICSID Tribunal in Siemens v Argentina found the book value to be an appropriate measure of damage when the investment was made not long ago. It pointed out that 'the book value method applied to a recent investment is considered an appropriate method of calculating its fair market value when there is no market for the assets expropriated'. (491) The tribunal apparently relied on the submissions of the claimant who had demanded the book value plus an amount to reflect lost profits. (492) The tribunal did not find it likely that the investment would have been profitable, so that it awarded only book value. It also and added expenses incurred and consequential damages. (493) In Tidewater v Venezuela, the tribunal rejected the contention that the expropriation was unlawful because compensation under the national Reserve Law was limited to book value. (494) Referring to the World Bank Guidelines it held that, in some cases, the appropriate valuation may indeed be the book value. (495) 5.222 In the ad hoc arbitration Reineccius v Bank for International Settlements, (496) the a bank compared to other companies. The tribunal found that the balance sheet gives a fairly accurate picture of the actual worth of the enterprise. (497) It pointed out that the balance sheet offers a relatively exact picture of the value of the enterprise. It noted, however, that the value of the 'fully amortised buildings and land … would always be open to discussion'. (498) This demonstrates the problem of the book value. Although the buildings and the land no longer had any book value, they were not completely worthless. In the case at hand the book value calculation was in accordance with the submissions of the parties, the statutes of the bank, and its previous valuation practice. (499)

P 280 tribunal referred to the book value as the best available evidence for the value of

5.223 Generally, it is rather unusual and rare that international practice has relied on the book value for determining the value of entire companies or investment projects. This is in accordance with international valuation principles and meets the concerns of the valuation experts. (a) Acceptance of Book Value for Particular Items 5.224 While book value as a measure of value for entire companies or projects has predominantly been rejected in international practice, it has not infrequently been applied for the valuation of smaller items. The Iran–US Claims Tribunal, for example, referred to it with regard to plant and equipment. In William Pereira v Iran, the office premises and the company car were valued under the book value. (500) In Computer Sciences v Iran, (501) Dames and Moore v Iran, (502) and United Painting v Iran, (503) the tribunals applied the book value for valuing office equipment in accordance with the claimants' submissions. The claimant in Sedco v NIOC claimed the application of book value on parts of the expropriated enterprise, in particular on the inventory. (504) In relation to immoveable assets, however, it asked for adjustments for inflation. (505) 5.225 In Eastman Kodak v Iran the Iran–US Claims Tribunal did not accept the book value method as submitted by the claimant. (506) Rather, it relied on the liquidation value for P 281 valuing the plant and equipment. Despite the fact that this represented only a small portion (US$ 400,000) of the (inflation-adjusted) book value (US$ 3.2 million), (507) the tribunal was correct in applying it because the liquidation value better corresponded to the economic reality than the book value. However, the book value was applied with regard to 'outstanding promissory notes' as long-term investments of Eastman Kodak in its subsidiary Rangiran. In accordance with the principle of precaution, the obligations were considered at 50 per cent of their nominal value in order to account for the uncertain economic situation of the company at the time. (508) (b) Adjustment of Book Value 5.226 Book value can be adjusted to account for its above-mentioned deficiencies and to make it more representative for the value of an asset. (509) The Iran–US Claims Tribunal has done so on several occasions. In Sedco v NIOC, the claimant submitted a valuation of the expropriated oil rigs on the basis of the 'current net book value' which referred to the book value as adjusted for inflation. (510) The tribunal noted that this current net book value would represent 91.7 per cent of the 'actual value'. (511) It did not, however, explain what it understood by 'actual value', the replacement value, the market value, or the liquidation value.

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5.227 In Sedco v IMICO, the claimant submitted a valuation of buildings, equipment, and machinery also on the basis of the 'current net book value'. (512) The tribunal agreed, in principle, that the 'current net book value' would reflect the market value better than historic costs but it contended that in the concrete case at hand this value would be too high in light of the actual economic situation. It concluded that it would have been difficult to sell the assets and then only for less than the estimated current net book value. (513) It follows that the tribunal actually referred to the liquidation value of the barges. It eventually reduced the current net book value by approximately one quarter. P 282 (514) From this amount it deducted outstanding debts of the company so that the claimant did not receive any compensation for its expropriated barges. (515) 5.228 In Tavakoli v Iran too, the Iran–US Claims Tribunal referred to the 'adjusted net asset value', (516) but then valued the different assets on the basis of their achievable sales prices which again represented a valuation based on the liquidation value. (517) In Shahine Shaine Ebrahimi v Iran, (518) the tribunal asked for a valuation based on book values as adjusted by inflation, but also included the future prospects of the asset. (519) In order to arrive at values more closely related to the market, several complex adjustments were necessary, such as the valuation of outstanding accounts receivable and open contracts. (520) As far as intangible assets were concerned, the expert expressed the opinion that this would only be appropriate if extraordinary returns could be expected because 'equipment is likely to be worth more than its replacement cost if (and only if) the firm can use it to earn an abnormal rate of return—that is, a rate of return in excess of the cost of capital'. (521) With respect to the revolutionary turmoil in Iran the expert even noted a negative goodwill as of 13 November 1979. (522) 5.229 In Siemens v Argentina, the tribunal decided to apply the book value for the valuation of damages, but considered adjustments concerning interest, (523) supplementary tax entries, (524) and risk allocation. (525) With regard to the latter it pointed out that 'since the Tribunal has allowed compensation for consequential P 283 damages, as explained later, the provisioning for risks related to Contract termination would lead to double counting and is disallowed for purposes of the book value calculation'. (526) 5.230 The tribunal in Tza Yap Shum v Peru also applied an 'adjusted book value' by using a factor derived from four Latin American comparable companies' book value/market price ratio. (527) 5.231 Already this brief overview shows that arbitral practice has often not carefully distinguished between the various asset valuation approaches—the book value, the liquidation value, and the replacement value. Furthermore, when adjustments were necessary, they were often no less complicated and dependent on judgement than the application of other methods. (c) 'Sunk Investment' and Wasted Costs 5.232 The repayment of investments undertaken—the 'sunk investment' (528) —is sometimes referred to as a variant of the book value method. (529) This is not entirely correct as the book value by definition is reduced by depreciation, which is not the case if the entire sum of the investment undertaken is paid back more than one year later. 5.233 International practice has been diverse in its acceptance of the sunk investment as a means for calculating compensation or damages. The tribunal in Norwegian Shipowners was 'adverse to the view that the compensation should be based upon the mere reimbursement of expenses', because the 'reimbursement of expenses, disproportionate to the value of their property, cannot form the basis of just compensation.' (530) 5.234 However, several international tribunals have based their valuation on sunk investments, both for the valuation of the fair market value and for calculating damages. This was particularly so when the application of other valuation methods appeared to be too speculative. 5.235 The UNCC has frequently relied on the amounts of investments and expenses undertaken in its practice of evaluating claims against Iraq, as those amounts were P 284 relatively easy to prove. (531) In view of the insecure situation in Iraq after the invasion, the application of other methods, such as income-based valuation methods, was hardly feasible. 5.236 In Phelps Dodge v Iran, the Iran–US Claims Tribunal rejected reference to the going concern value because the construction of the wire and cable production factory had just been completed at the time of the expropriation and production had not yet started. Taking into account all relevant evidence, the tribunal concluded 'that the value of Phelps Dodge's ownership interest in SICAB on 15 November 1980 was equal to its investment …'. (532) 5.237 Similarly, the ad hoc tribunal in Biloune v Ghana decided that a valuation of the fair market value of the investment on the basis of expected profits was not appropriate. (533) The claimant had claimed either (1) the loss of the 'contractual rights to develop and operate the Marine Drive Project' (534) or (2) the 'historical investment value of the project'. (535) Due to the early termination of the project by the expropriation, the tribunal regarded the total amount of investments undertaken as the best measure of the

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fair market value of the property. (536) Furthermore, the tribunal awarded interest and costs to the claimant. (537) 5.238 In other cases of indirect expropriations, the repayment of the investments made was reasoned in a similar way. The NAFTA Tribunal in Metalclad v Mexico rejected the application of the DCF method, (538) calculated the fair market value on the basis of the claimant's actual investment in the project, and agreed 'with the Parties that the fair market value is best arrived at in this case by reference to Metalclad's actual investment in the project'. (539) 5.239 The argument of the ICSID Tribunal in Wena Hotels v Egypt was almost identical because, of the two hotels in Luxor and Cairo, only one had been operating for a couple of months. With regard to the valuation method the tribunal agreed 'with the Parties that the proper calculation of the “market value of the investment expropriated immediately before the expropriation” is best arrived at, in this case, by reference to Wena's actual investments in the two hotels'. (540) 5.240 The repayment of investment in those cases can, however, not be properly considered as an application of the book value method. The investments had already P 285 been made a number of years ago and the tribunals did not refer to any depreciation which should be taken into account or, on the other hand, be added back. Rather, the repayment can be more properly understood as the 'restitution' of the investments undertaken. The ICSID Tribunal in Vivendi v Argentina referred to this as 'investment value'. (541) It calculated the amount of damages by adding up all the amounts of investments and expenses undertaken later. (542) Also the ICSID Tribunal in Siemens v Argentina allegedly applying the 'book value' added up all the investments undertaken for the project, minus amounts disallowed on account of excessive interest rates, tax credits, and risk associated with the contract termination. (543) 5.241 In Meerapfel v CAR, after the tribunal had found that there had been an indirect expropriation by a series of measures, it declined the claimant's claim for compensation for the lost tobacco harvest, as determined by the average price of the tobacco. (544) It found that there was no future profitability of the investment so that the damage caused by the CAR was already fully repaired by the amount representing the investment. (545) 5.242 It is, however, doubtful whether the amount of investments actually undertaken is in fact a substitute for the fair market value. It is not certain that a hypothetical willing buyer would pay to the investor all the expenses actually spent. He would only do so if the value of the investment actually was equal to the expenses undertaken. This is not necessarily the case. 5.243 However, as the cases mentioned were not concerned with lawful expropriations, the fair market value was not decisive anyway. What is important in cases of state responsibility such as those quoted above, is the customary international law standard of full reparation. (546) In this respect, the tribunals might well find that full reparation could best be achieved by a repayment of investments and expenses undertaken plus an appropriate rate of interest. Whether this also corresponds to the fair market value of the investment is only of secondary importance. (547) 5.244 The concrete damage incurred, by contrast, can be represented by the investments actually undertaken, if additional financial loss in the form of lost profits has not been suffered. This is the case when the investment would not have been profitable even in the absence of the unlawful act of the state. This can be assessed from the perspective of the P 286 date of the award with the benefit of hindsight. 5.245 International tribunals have applied the sunk investment approach in particular with respect to violations of treaty standards, such as fair and equitable treatment or full protection and security. In Pope & Talbot v Canada, damages had to be calculated after a violation of NAFTA Article 1105 (fair and equitable treatment). (548) The closure of the border by the Export Control Regime on the export of timber had, according to the tribunal, not amounted to an expropriation. (549) The tribunal decided that the unlawful interference lasted for only seven days, for which reason the amount of damages was rather modest. The only items of damages accepted were the 'out of pocket expenses' which consisted mainly in costs for legal advice, lobbying, and experts. (550) It did not award an amount for lost profits because the company had enough inventory stock to bridge the seven-day gap. (551) 5.246 The tribunal in MTD v Chile also awarded only investments actually undertaken and expenses incurred after a violation of the BIT between Malaysia and Chile with respect to the obligation to fair and equitable treatment. (552) The foreign investors' construction project had first been approved by the competent central authorities, but was later rejected for not being in accordance with the urban planning and zoning regulations of the regional Government. (553) Before calculating the amount of damages payable, the tribunal emphasized the difference between compensation upon expropriation and the standard of reparation enounced by the PCIJ in Factory at Chorzów: The Tribunal first notes that the BIT provides for the standard of compensation applicable to expropriation, 'prompt, adequate and effective' (Article 4(c)). It does not provide what this standard should be in the case of compensation for

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breaches of the BIT on other grounds. The Claimants have proposed the classic standard enounced by the Permanent Court of Justice in the Factory at Chorzów: compensation should 'wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that had not been committed.' The Respondent has not objected to the application of this standard and no differentiation has been made about the standard of compensation in relation to the grounds on which it is justified. Therefore, the Tribunal will apply the standard of compensation proposed by the Claimants to the extent of the damages awarded. (554) 5.247 The tribunal awarded (1) the restitution of the original investment, (2) expenses incurred in connection with the project, and (3) financial costs insofar as they were P 287 caused by the behaviour of the respondent. (555) The residual value of the investment was deducted from the resulting amount as well as 50 per cent for 'contributory negligence'. (556) 5.248 In Impregilo v Argentina, the tribunal rejected the income-based valuation due to its doubts on the profitability of the concession in a risk area with a poor population and a low collectivity rate. Nevertheless, the investments made were substantial, and the tribunal based its award on the capital contributions made by the claimant. (557) 5.249 The tribunal in Arif v Moldova made two alternative valuations of wasted costs, depending on whether the respondents made use of the restitution order in the award to restore the affected airport shop to the claimant at satisfactory conditions within sixty days. (558) If that was the case, the costs wasted would only amount to the stock actually written off and operating costs that have been wasted as a result of the delays in opening the store. If the offer was not satisfactorily made, the respondent should pay all of the costs that the claimant incurred and which were wasted due to the interference in violation of the obligation of fair and equitable treatment, consisting of capital expenditure, operating expenditures, operating costs, and confectionary stock written off. (559) 5.250 In Hassan Awdi v Romania, another case of a violation of fair and equitable treatment, the tribunal rejected the DCF method proposed by claimants due to the company's history of losses. (560) It found that compensation must be based on sunk costs being the 'amount invested by Claimants regarding Rodipet in the expectation that such amount would have been earned back had Law 442 remained in force'. (561) 5.251 Also, violations of contracts have sometimes resulted in awards of expenses undertaken only. In Atlantic Triton v Guinea, (562) the calculation of the damage incurred comprised all of the costs and expenses necessary for the renovation and conversions of three Norwegian ships for the purpose of fishing in the tropical sea. The project had never been profitable as it had not been possible to use the ships gainfully. The tribunal only awarded expenses undertaken for the conversion of the ships and partly for personnel P 288 and management. 5.252 The ICSID Tribunal in PSEG v Turkey decided that expenses incurred must be refunded even though the investment had not been finally agreed upon. (563) It maintained that already during the preparatory stage of a planned investment the investor had been treated grossly unfairly, which amounted to a violation of the obligation of fair and equitable treatment. (564) The tribunal awarded all the investments undertaken and expenses incurred in the course of the preparation and negotiation of the project.

(2) Replacement Value 5.253 Replacement value is the most appropriate form of the asset-based or cost approach, as it does not refer to historical but to actual prices. The ICJ in the Corfu Channel Case, valued the damage caused to the British ships HMS Saumarez and HMS Volage by the explosion of mines on the basis of the costs to repair or to replace the ships. (565) With regard to the destruction of the ship Saumarez, the Court considered 'the true measure of compensation in the present case to be the replacement cost of the Saumarez at the time of its loss'. (566) The decisive factor for the calculation was the amount of money necessary to repair or to replace the ships. (567) In calculating the amount of damages the Court noted that certain elements of the ships were still usable, and that even a totally destroyed shipwreck still had scrap value. This scrap value was deducted from the replacement cost. (568) 5.254 The 'depreciated replacement value' has been referred to in Aminoil v Kuwait. (569) In this case, the depreciation was taken from experts' reports on the net book value (570) and not on contemporary market data. In Phillips Petroleum v Iran, the tribunal used the 'depreciated replacement value' of the company's fixed assets to support and confirm the valuation result of the DCF method. (571) 5.255 On the other hand, there might be circumstances where the depreciated replacement cost is not appropriate. In order to restore the victim's financial position, it might not be sufficient to award a depreciated replacement value. For arriving at 'full P 290 reparation' it might be necessary to replace a used item by a new one. While this is generally recommended for the valuation of intangible assets, (572) it may also be

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appropriate for tangible assets. 5.256 In Oil Fields of Texas, (573) for example, after an indirect expropriation of three blowout preventers, the Iran–US Claims Tribunal awarded an amount of money which should put the claimant in the position to buy new items of such an equipment. It explained this in the following way: The question whether the equipment at issue was used or new is not as such determinative as to its value. Rather, as the Claimant seeks and is entitled to its replacement value, what has to be determined is the amount it would have cost to replace the three blowout preventers that had been leased to and were retained by NIOC, based on the market conditions for such equipment at the time. The evidence shows that as of the beginning of July 1979, the equipment in question was in great demand and that new equipment of the type leased under the Lease Agreement was not readily available. There is evidence that in 1979, one would have to wait eighteen months to obtain a new blowout preventer. In addition, as evidenced by the Lease Agreement, the equipment commanded significant rental income. (574) 5.257 As an additional argument for the correctness of the principle of 'new for old' in this case, the tribunal referred to the amount paid by an insurance company for another blowout preventer destroyed by a fire. This amount had been equivalent to the value of a new blowout preventer. (575) Arbitrator Mostafavi, however, did not agree and explained in his Dissenting Opinion that he found that the claimant was unjustly enriched, because all the claimant could possibly have been entitled to receive was comparable and equivalent equipment in place of the equipment, and not better and more sound equipment. (576) 5.258 Also in Petrolane Inc v Iran, the tribunal found the price of new drilling equipment as replacement for the used equipment to be an appropriate basis for the calculation of compensation for expropriated drilling equipment and referred to the actual conditions of the market and the shortage of comparable equipment: While the Tribunal has some doubts that used directional drilling equipment, even when maintained as good as new, would normally have the same fair market value as new directional drilling equipment, the only evidence in the Case … indicates that the Claimant's used equipment did have such a value as a result of the unusual circumstances at the time. (577) 5.259 The respondent had not submitted alternative valuation proposals so that the tribunal adopted those of the claimant. Only the value of used fittings was deducted, such as the so-called 'stabilizer sleeves', which were regarded as wear and tear elements and, therefore, not subject to replacement. (578) 5.260 The ICSID Tribunal in Lahoud v DRC found the replacement value appropriate to assess material damage in the form of equipment and stock, as submitted by the claimants. (579) However, it was not entirely satisfied with the claimants' experts listing, in particular concerning the reflection of amortization of used equipment. In order to find a consistent relation to the sums appearing on the balance sheet, it applied an average of 47 per cent to the gross book value of the different items. (580) 5.261 The replacement value aims at the physical restoration of destroyed or lost assets. It therefore appears beneficial to the injured person, in particular if the valuation follows the 'new for old' approach. Yet, the replacement value as an asset-based valuation approach still does not take into consideration the loss of income opportunities.

(3) Liquidation Value 5.262 International arbitration has referred to the liquidation value not only in cases where the investment in question had no future prospects, (581) but also when the claimants explicitly based their claims on it. (582) However, tribunals have not always assumed a liquidation scenario, but applied, in fact, adjusted book value or other values, including insurance value. (583) 5.263 Tribunals usually used the liquidation value when they considered that the valuation object had no future prospects and an application of the income-based valuation approach would not be appropriate. The liquidation value was, however, not always applied in accordance with international valuation standards according to which it is the 'net amount that would be realized if a business is discontinued and its assets are sold individually'. (584) 5.264 The Iran–US Claims Tribunal applied the liquidation value in the above-mentioned sense when it found that due the Iranian revolution or other social and economic circumstances the company would not be profitable in the future. In Sola Tiles v Iran it held that the company which was selling luxury tiles would not have future business P 291 prospects. (585) It decided that the value of the company should only be determined on the basis of its tangible assets, such as its showrooms, its stock inventory of tiles and furniture, as well as its accounts receivable. (586)

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5.265 In Tavakoli v Iran, the tribunal also valued the tangible assets of the company under the assumption of the dissolution of the company and the sale of its assets. (587) However, it was of the opinion that the valuation of the individual assets must take into account how they could be used in the future. (588) In this respect, the tribunal cautiously assumed positive prospects and concluded 'that WIG was a going concern on the date of expropriation … [T]his would have some impact on the amount for which WIG would have been able to sell its assets'. (589) It thus referred to the liquidation value, but at the same time conceded that the company had been a going concern, which appears somewhat paradoxical. The claimants had requested a valuation on the basis of the adjusted book value (590) which was, however, rejected by the tribunal. It eventually evaluated the individual items of the company's tangible assets on the basis of their market prices. (591) 5.266 The valuation of the ICSID Tribunal in Middle East Cement v Egypt may also be referred to in the present context. The tribunal had to value the expropriated ship which in the meantime had been auctioned in Egypt. It did not consider the resulting auction price as representative for the market value of the ship, in particular because the auction procedure had been defective (592) and comprised a very negative description of the condition of the ship and its equipment. (593) The claimant had requested the insurance value of the ship or the amount an interested willing buyer was ready to pay a couple of years before. (594) Nevertheless, the tribunal ascertained the scrap value of the ship which was equal to the price per ton of scrap multiplied by the overall weight of the ship. P 292 (595) However, instead of taking the scrap value as the lower limit of a 'liquidation value', the tribunal reduced this scrap value even further. (596) The facts of the case do not suggest that the ship was ready for the scrap heap. The scrap value should thus, if at all, be regarded as representative for the lower limit of the valuation. While the tribunal had declared the auction unlawful, (597) it still reduced the achieved price by almost 50 per cent. 5.267 Whether a sales price achieved in a liquidation sale could be representative for the market value was also discussed in Tenaris v Venezuela. (598) The investor had acquired a shareholding in Matesi Materiales Siderurgicos (Matesi), a Venezuelan company which produced high quality hot briquetted iron, a component used in the production of steel. Pursuant to several Presidential Decrees, Matesi was nationalized on 30 April 2008. The ICSID Tribunal rejected both the DCF method and the market multiples approach and decided that the price originally paid by the investor for the shareholding in Matesi in March 2004 would best represent the fair market value of the investment at the time of the expropriation. While the evidence showed that the sale had been part of a liquidation process of the previous owner of the plant, the tribunal found that the involvement of a financial adviser and the professional preparation and implementation of the sales process was sufficient to ensure that the sale was 'freely entered into by the buyers and seller, at arm's length, in a reasonably open market, with both the seller and the buyers having reasonable knowledge of the relevant facts and other market circumstances', (599) and not a sale under distress or compulsion. The fact that four years had passed between the date of the transaction and the expropriation did not alter the conclusion of the tribunal. The reasoning in this regard is not in line with the liquidation premise. Generally, the liquidation should be assumed as of the valuation date and not four years before. The tribunal in fact applied a sunk investment approach. 5.268 International tribunals have referred to the liquidation value in particular when claimants relied on it in their submissions. However, rather rarely was the liquidation value determined by the price achievable in an orderly liquidation, as the economic definition would require. (600) 5.269 The Iran–US Claims Tribunal referred to the liquidation value in Tippetts v TAMSAFFA, (601) which concerned the valuation of the claimant's shares in the Iranian enterprise TAMS-AFFA which had been created for the planning and undertaking of construction works at the international airport in Tehran. The tribunal had found that the institution of managers by the Government constituted an indirect expropriation. (602) P 293 The tribunal noted that the 'Claimant in the instant case seeks only dissolution value of its interest in TAMS-AFFA, i.e. the value of TAMS-AFFA after collection of all assets and the discharge of all obligations'. (603) The tribunal conducted a 'very rough evaluation of the assets and liabilities involved' (604) and arrived at a lump sum which was awarded without further reasoning. 5.270 In Harold Birnbaum v Iran, the Iran–US Claims Tribunal valued the claimant's 8.6 per cent share in the company AFFA by reference to the 'liquidation value' although the claimant in this case had asked for an 'adjusted net asset value'. (605) The tribunal found that the value as defined and applied by the claimant (606) would be equivalent to the 'dissolution' or 'liquidation value'. (607) Yet, it based its valuation on historic purchase prices and increased it by an inflation factor of 25 per cent. This basically resulted in an adjusted book value. (608) Furthermore, the tribunal valued irrecoverable accounts receivable (609) and offset open tax liabilities. (610) The tribunal in Fereydoon Ghaffari v Iran, confronted with the same facts as in the previous cases, (611) emphasized that it was necessary to avoid 'conflicting decisions' and, (612) therefore, stayed with the approach taken in Tippetts et al v TAMS-AFFA. 5.271 The tribunal in Sedco Inc v NIOC explained its application of the liquidation value in

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remarkable detail. (613) The claimant had based its claim on the liquidation value, of its assets—most of which were movable—on the open market'. (614) However, in carrying out the valuation the tribunal actually did not use the liquidation value, but instead, for some oil rigs referred to their insurance value, (615) and for another group of oil rigs to an adjusted book value. (616)

P 294 assuming, 'in effect, the winding up of SEDIRAN's affairs and the dispositions

5.272 Similarly, in Sedco v IMICO the claimant had requested its shares in the Iranian shipbuilding company IMICO to be valued on the basis of the liquidation value. (617) The Iran–US Claims Tribunal partly applied adjusted book values, (618) but also referred to possible sales prices for the barges, stock, and inventory and thus effectively used the liquidation value. (619) 5.273 The liquidation value was prominently present in the jurisprudence of the Iran–US Claims Tribunal reflecting the political and economic circumstances of the Islamic Revolution. By contrast, in more recent investment arbitration practice claimants are rather reluctant to rely on the liquidation value. They likely avoid the liquidation scenario, even if prospects are uncertain. The minimum claimed tends to be the sunk investment, rather than the liquidation value.

D. Other Approaches 5.274 In addition to the above-mentioned three main valuation methods, other approaches have also been used in international investment arbitration practice by use of different arguments.

(1) Mixed Methods 5.275 Due to the traditional scepticism towards income-based valuation approaches,

P 295 tribunals frequently started with asset- or cost-based valuation. If this on its own

seemed to be insufficient and inappropriate under the circumstances, tribunals sometimes increased the resulting figure by an extra amount in order to account for the loss of income opportunity. This 'mixed approach' was not always based on precise calculations but rather reflected an overall assessment. 5.276 In LIAMCO v Libya, for example, the arbitrator first determined the asset value by reference to the book value. (620) In addition, for the loss of the concession rights a lump sum (621) which according to the tribunal was necessary to account for 'the great initial expenses and risks taken by LIAMCO in their pioneer works and subsequent activities' (622) was awarded. 5.277 The tribunal in Aminoil v Kuwait started by valuing the 'fixed assets' by a 'depreciated replacement value'. (623) The valuation of the 'non-fixed assets' was based on a common report of the parties. The tribunal aimed at determining the value of the company as a going concern, (624) without, however, clearly distinguishing between the different items of value. In the end, it awarded a lump sum (625) which makes it is impossible to discern how it weighted the different elements. 5.278 After the Iran–US Claims Tribunal in Amoco International Finance v Iran had explicitly rejected the DCF method, (626) it nevertheless demanded information on 'the estimated value of Khemco's intangible assets at the same date, including goodwill and commercial prospects'. (627) It remains open, however, how the tribunal would have valued the company because the parties eventually terminated the dispute by agreeing on the valuation issue. (628)

5.279 The award in Sedco v NIOC may also be mentioned in the present context. (629) The claimant submitted that the expropriation of its oils rigs had not only led to a loss of the value of those oil rigs but also to the loss of income from their rental. (630) The tribunal, P 296 in addition to awarding the replacement value of the oil rigs, increased this amount by an award of lost profits for the period of time necessary to put the new rigs in place. The loss of income was calculated from sixty days after the expropriation because this was the approximate time necessary to remove the rigs and install them somewhere else. The tribunal accepted the approach submitted by the claimant in principle and noted that the award of lost profits in addition to the asset value was justified because it appeared 'to be a direct loss resulting from the unavailability of the rigs to Claimant for use elsewhere'. (631) 5.280 The ICSID Tribunal in Benvenuti & Bonfant v Congo also valued the assets and the lost income separately and added them together. (632) The point of departure was the amount of the original investment, as alleged by the claimant, because this would represent the best and most 'objective' criterion. (633) 5.281 In Southern Pacific Properties v Egypt, the tribunal had first rejected the DCF method, (634) but found that possible future income should not be neglected. The tribunal assumed that the value of the project at the expropriation date was higher than just the out-of-pocket expenses incurred so far. As a confirmation, the tribunal referred to the 383 parcels already sold. Although these amounted to only 6 per cent of the project, they had yielded US$ 10,211,000 which was more than twice the amount of expenses incurred so far. (635) The tribunal concluded that it was necessary to reflect the 'loss of

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making a commercial success out of the project' and increased the amount awarded accordingly. (636) 5.282 In American Manufacturing and Trading v Zaire the value of the destroyed buildings and other assets as determined by an expert was supplemented by an amount of P 298 approximately the same size for the loss of the business opportunity. (637) The tribunal did not explain how it arrived at this amount, but only noted that it intended to 'opt for a method that is most plausible and realistic in the circumstances of the case, while reflecting all other methods of assessment which would serve unjustly to enrich an investor'. (638) 5.283 In Sedelmayer v Russia, the tribunal found that the 'actual value' of the expropriated investment consisted in the value of tangible assets, such as office equipment and vehicles. In addition, the twenty-five-year contract to commercially use the buildings in the so-called 'Stone Island' in St Petersburg had to be evaluated. (639) It was valued by its 'rental value' estimated at US$ 372,000 per year. In view of the long duration of the twenty-five-year contract and taking into account the costs for maintenance and similar works plus the partially private use, the tribunal awarded a lump sum of US$ 1.5 million for this additional item of compensation. 5.284 The ICSID Tribunal in Técnicas Medioambientales v Mexico also engaged in valuing the future prospects of the investment in addition to the asset value. (640) It found that the investment had been productive and had added value to the landfill in question. (641) It thus found it appropriate to increase the asset-based value by an amount of lost profits. The tribunal added two years' lost profit. The reasoning behind the choice of the two-year period is, however, not entirely clear. The tribunal considered that due to increased protests of the population against the landfill, (642) 'an informed buyer of the Landfill would have assumed that it had to be relocated due to community pressure and that such relocation might take about two years'. (643) It is not evident why the profits during the period of relocation should be an appropriate measure of the lost income opportunity, because during this period certainly no profits would have been earned. The result might be compromise between the submission of the claimant who relied on the DCF method (644) and those of the respondent who found the net earnings of one year an appropriate measure of lost profit. (645) 5.285 The inappropriateness of the combination of asset-based valuation and incomebased valuation was highlighted in Siemens v Argentina, where the claimant had asked, first, for the value of lost assets and, second, for lost profits based on the DCF method. The tribunal rejected this approach and clearly pointed out that, normally, 'the two methods are regarded as alternative means of valuing the same object. Here, however, Siemens's expert has applied the two in tandem …'. (646) 5.286 Despite the conceptual flaws, the combination of asset-based and income-based methods and the damnum emergens/lucrum cessans dichotomy have continued to be applied in international arbitration practice. (647) However, as it entails the risk of double counting, it is not recommended. (648) 5.287 A combination of asset-based valuation and income-based valuation may in principle be modified in one way or another in order to avoid the above-mentioned deficiencies. (649) However, in economic valuation practice mixed approaches are not used. Tribunals may exercise their discretion, in order to account for the 'loss of a chance' or 'loss of opportunity'. An example might be start-up companies with a business model that is not existent on the market, where there are no comparable companies, and many factors concerning future prospects are uncertain. (650) However, on the basis of internationally accepted valuation principles the asset-based approach and the incomebased approach should be used alternatively and not cumulatively. An option to combine various valuation approaches is to accord them a respective weight. Such a combination, which is increasingly used in international practice, allows for controlling the outcomes of the respective methods and for finding the most appropriate result.

(2) Contract-based Valuation 5.288 Contracts play an important role for the valuation of investments. In international disputes they have sometimes rendered the valuation simple, for example, when the contract foresaw an anticipated redemption price or liquidated damages. In Delagoa P 299 Bay, the calculation of damages after an unlawful unilateral termination of a railway concession could be based on the calculation of profits for the remaining thirty-five years of the concession, (651) increased by the redemption price as agreed between the parties as of the end of the concession. (652) The contract provided that this redemption price should be the average of the profits of the last seven years multiplied by 20. (653) The tribunal, therefore, calculated an 'anticipated redemption'. (654) 5.289 Also, in Lena Goldfields the tribunal applied a provision in the contract for the calculation of damages. (655) The parties had agreed that, in case the government wanted to get the concession rights back, it must pay an 'optional redemption price'. This price was defined in Article 84 of the concession contract as follows: [T]he purchase price is to be 'determined by multiplying the average annual income by the number of years remaining to the end of the concession, with

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discount of incomes intended to be paid in advance' (i.e., under the redemption) 'of 5 per cent per annum,' and that 'on calculating the income Lena is bound to be guided by the methods generally adopted in large mining and metallurgical enterprises of England and the U.S.A.' These methods the Court has followed in its calculations. (656) 5.290 This meant that the average profits of the past years must be multiplied by the number of remaining years. This amount should be discounted by 5 per cent in order to account for the early payment. It is not clear if and how the tribunal actually complied with this provision because precisely this part on the calculation of damages has P 300 remained unpublished. (657) It referred, in addition to the contractual provision, to the role of good commercial management, technical skill, and up-to-date development for the generation of future profits. (658) 5.291 In Lighthouses Arbitration, the concession contract provided for a right of the grantor state at any time to put an end unilaterally to the lighthouses concession under the condition of first paying the concessionaire or at least guaranteeing the payment of compensation as previously determined by the parties or, in case of disagreement, by arbitration. (659) The tribunal attempted to determine the amount of compensation most likely agreed between the parties twenty years before the expiration of the concession. It came to the conclusion that it would be based on the amount of profits to be expected until the end of the concession and held that compensation 'must be assessed on the basis of the data available at the date of the termination by calculating the annual profits which Callas & Michel would have derived from the concession had they operated it over the twenty years in question'. (660) 5.292 In Autopista v Venezuela, the concession agreement contained a clause entitling the claimant to recover its lost profits in the event of a valid termination. (661) The parties were in principle in agreement that the amount of lost profits should be calculated on the basis of expected cash flows under the concession agreement. There was disagreement, however, as to whether the cash flow should be related to the investments planned or only to those actually undertaken. (662) Yet, the tribunal did not award any lost profits, because it found that it was very unlikely that the project would have been profitable at all. (663) 5.293 The ICSID Tribunal in PSEG v Turkey held that it would have no difficulty in calculating future profits on the basis of a self-contained and fully detailed contract, (664) even without a past performance record. (665) However, the essential commercial terms of the contract necessary for calculating future profits had never been finalized P 301 between PSEG and Turkey (666) so that the tribunal did not award lost profits at all. 5.294 The ICSID Tribunal in Siag v Egypt evaluated the claimants' investment in a hotel development project on the basis of comparable projects in the Sinai and the Red Sea. (667) The tribunal found that the claimants had suffered an unlawful expropriation and a violation of the provisions on fair and equitable treatment as well as on full protection and security contained in the BIT between Italy and Egypt. (668) However, in its valuation of the claims for the BIT violations, the tribunal referred also to the contract between Siag Touristic and Egypt, which was the basis of the claimants' investment. (669) According to this contract, Egypt should receive 50 per cent of the value of land, should Siag Touristic transfer title of the property to a third party. The tribunal found that this contractual provision had the effect that immediately prior to the expropriation, Siag Touristic's beneficial interest in the property was only 50 per cent. It therefore reduced the amount derived from the comparable sales method by 50 per cent. (670) 5.295 In many other investment disputes, the damage incurred was defined by an underlying contract, sometimes with reference to external economic parameters. This is the case for almost all concession contracts, where the price for the services is not paid directly by the state but by the consumers, such as, for example, for water and electricity supplies. (671) Other contract cases are specifically concluded between the parties and establish mutual obligations which are then decisive for the valuation by the tribunal. (672) Long-term complex investment contracts require particular expertise and usually also the help of valuation experts. (673) An important aspect is, whether the contract contains specific assurances against risks, including expropriation risk. 5.296 Contracts reflect the specific relationship between the parties. It follows that the exact terms of the contract are crucial for role in the calculation of damages. In case of P 302 long-term contracts it is advisable to include provisions on 'redemption prices' or similar mechanisms that allow prior estimation of the 'cost' of a breach, as was remarkably the practice in some of the older concessions contracts. This would facilitate the work of the tribunals and at the same time assure the respect of the parties' intentions and expectations at the time of the conclusion of the contract.

(3) Court and Arbitral Decisions 5.297 Investment tribunals are sometimes confronted with national court or arbitral decisions in favour of a foreign investor which were not respected by the host state. In case of the existence of a BIT between the respective state and the home state of the investor, recourse to international arbitration is possible and can lead to an award of

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compensation or damages reflecting the amount decided by the national court or arbitral tribunal. The question arises, whether additional damage can or will be awarded. 5.298 In Desert Line v Yemen, the claimant, a construction company was engaged in the building of asphalt roads in Yemen. It resorted to national arbitration after several breaches of contract and was awarded a substantial sum, which the respondent failed to pay. The respondent then coerced the claimant, including through physical duress, into signing a Settlement Agreement for a much lower sum. The claimant turned to ICSID arbitration, and the tribunal decided that the conclusion of the Settlement Agreement contravened the fair and equitable treatment standard under Article 3 of the BIT between Oman and Yemen. (674) The ICSID Tribunal awarded, as the principal, the amount fixed by the Yemeni arbitral tribunal. In addition, an amount of US$ 1 million was awarded for 'moral damages'. (675) The tribunal reflected the exceptional circumstances and the physical pressure which was exerted to the executives of the claimant company. The award of 'moral damages' is thus one possibility to address the additional harm done to investors by not respecting national arbitral award. This has, however, remained an exception. 5.299 The tribunal in Saipem v Bangladesh concerned a pipeline project, based on a contract between Saipem and Petrobangla, a state entity, sponsored by the World Bank and largely financed by the International Development Agency. Due to significant delays, ICC arbitration was instituted, but heavily attacked by Petrobangla before national courts. The ICC award was rendered on 9 May 2003. Upon an application by Petrobangla, the Supreme Court of Bangladesh held that the award was 'a nullity' and 'non-existent' so that it could neither be set aside nor be enforced. (676) The ICSID Tribunal found that the P 303 respondent had committed a violation of Article 5 BIT by the decision of local courts, including the Supreme Court, to revoke the authority of the ICC arbitrators. Compensation due under the BIT should be 'immediate full and effective' and 'be equivalent to the real market value of the investment …'. (677) The tribunal, however, decided that the BIT standard was not applicable because it set out the measure of compensation for lawful expropriation, which this one was not. Consequently, the tribunal applied the principles of customary international law as set out in Chorzów Factory. (678) The tribunal found that the amount awarded in ICC award constituted the best evaluation of the compensation due under the Chorzów Factory principle. (679) As a result, the tribunal awarded the amount of the ICC award, plus interest. However, costs, and legal and related expenses incurred by Saipem in local court proceedings to defend itself were not awarded, because they 'are not part of Saipem's initial investment' and have not 'been the object of an expropriation'. (680) As a result, the claimant did not receive anything more than if the respondent had immediately complied with the ICC award. This appears unsatisfactory. However, the tribunal found itself bound by the narrow jurisdictional clause in the underlying Bangladesh–Italy BIT. 5.300 White Industries v India, an arbitration under UNCITRAL rules, concerned the development of a coal mine in Piparwar, India. After an ICC arbitration award on 27 May 2002 in White's favour, White attempted to enforce the award in the Indian courts. However, Coal India attempted to have the ICC Award set aside on various grounds and delayed enforcement for more than nine years. (681) The UNCITRAL tribunal concluded that the nine years of the set aside application, and the Supreme's Court inability to hear White's jurisdictional appeal for over five years amounted to undue delay and a breach of India's BIT obligations. (682) As regards the calculation of damages, the tribunal referred to the Chorzów Factory case and found that the claimant must be restored to the position it would have enjoyed had the breach of the BIT not occurred. (683) The tribunal ordered the amount payable under the ICC Award plus interest, and in addition costs and fees incurred in the ICC arbitration. The respondent was ordered to pay the costs and expenses of the claimant's witnesses. (684) Again, the claimant did not receive anything for costs incurred for the litigation before the Indian courts. 5.301 The investment arbitration cases involving national court and arbitral decisions P 304 show that the principle of full reparation under the Chorzów Factory is regularly

referred to as the appropriate standard. However, whether full reparation is achieved, if successful claimants do not receive anything in addition to the original award remains an open question. The award of moral damages, as decided in Desert Line v Yemen, has remained an exception and is not warranted in all cases. Material damages are certainly incurred during years of litigation before national instances. At least, all of the costs of the investment arbitration should be awarded to the successful claimants. Withe Industries v India did show some flexibility and decided that the respondent had to pay the costs and expenses of the claimant's witnesses, but this still falls short of full reparation for the damage incurred.

(4) Insurance Value 5.302 Assets are also valued in the context of insurance contracts. However, as mentioned above, (685) the amount insured depends on many factors relatively unrelated to the 'value' of the object. Article 16 of the MIGA Convention even expressly states that the contracts have to be concluded in such a way that, in case the event insured against occurs, there will only be partial compensation. (686) This will motivate the insured person to act prudently.

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Article 16 provides that the Agency cannot cover under a contract of guarantee the total loss sustained by an investor. This provision is designed to discourage possible irresponsible conduct by investors relying on total loss cover (commonly referred to as 'moral hazard'). (687) 5.303 The percentage of indemnification is based on the practice of national investment insurance agencies and lies usually between 70 and 95 per cent. (688) 5.304 In addition, the enterprise's risk managing approach plays an important role. (689) Companies usually buy insurance against a variety of hazards, including fire, accidents, third party liability, and others. (690) They generally use insurance policies to reduce their diversifiable risk, but find others ways to avoid macro risks. (691) These choices and approaches have their own logic and specific reasons, but are usually not suitable P 305 indicators of the value of the company. 5.305 The investor can, for many different reasons, decide to insure less than the full value of the business. Also, the insurer might establish certain conditions. (692) The insurance value is, therefore, of little significance for the value of an asset. 5.306 Nevertheless, arbitral practice has sometimes referred to the insurance value for the calculation of compensation or damages. The Iran–US Claims Tribunal found in Sedco v NIOC that it was a 'helpful and independent indication' for establishing the fair market value of the expropriated oil rigs. (693) In Oil Fields of Texas v Iran, the value of the destroyed and expropriated oil blowout preventer was confirmed by reference to the insurance proceeds on a similar destroyed blowout preventer. (694) In other cases, the insurance value was correctly excluded as 'irrelevant' for the purpose of calculating compensation or damages in investor–state arbitration. (695)

(5) Tax Value 5.307 The valuation of assets for taxation serves specific purposes. These purposes are defined by national politics and incorporated in national tax laws and regulations. The tax value of an asset is therefore hardly significant for its economic value. It seems, therefore, obvious that it cannot be useful for the purposes of calculation of compensation or damages in international investment arbitration. 5.308 Nevertheless, in some investment protection treaties, the 'declared tax value' is mentioned as one possible parameter of the value of expropriated property. NAFTA Article 1110, paragraph 2 provides that '[V]aluation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.' (696) 5.309 The Iran–US Claims Tribunal in Fereydoon Ghaffari v Iran, however, did not accept the 'real estate tax assessments' (697) put forward by the respondent as appropriate evidence for the evaluation of the amount of damages:

P 306

The tax assessments … do not explain the basis for the calculation of the tax. In particular, these assessments are silent as to whether the tax was calculated based on rent that had in fact been paid to the person whom the assessment identify as 'taxpayers', or whether, on the contrary, the tax amount was based on the average rent prevailing in downtown Tehran for property in the same range as AFFA's office building. (698) 5.310 The ICSID Tribunal in Metalclad v Mexico, by contrast, considered it as appropriate evidence for the amount of investments undertaken by the claimant. (699) The respondent contended that this tax statement in itself would not provide sufficient evidence that the investments had actually been made. Yet, the tribunal held 'that the tax filings of Metalclad, together with independent audit documents supporting those tax filings, are to be accorded substantial weight'. (700) Consequently, the tribunal awarded the amount of the investments undertaken on the basis of the claimant's tax filings. 5.311 In Gemplus v Mexico, the relevance of the 'declared tax value', as it appeared in the applicable BIT between Mexico and France, was discussed as a possible valuation approach, not only for compensation upon expropriation but also for the violation of the fair and equitable treatment standard. (701) The respondent submitted that the tribunal should apply the declared tax value on the basis of claimants' tax returns prior to the BIT breaches. The claimants, however, successfully contested the usefulness of the declared tax value, because the tax figures did not represent the value of the investment, they were not obtained by carrying out the due diligence necessary to conduct an asset-based valuation, they did not reflect intangible assets, and they failed to account for liabilities. (702) 5.312 International practice only rarely relies on tax values for valuation purposes. Financial statements made for the assessment and paying of taxes are mainly used to confirm a claim based on other evidence. They may also be used as evidence that certain investments or payments have actually been made or received. Much depends on the particular national tax law, which is usually unrelated to the valuation criteria in international investment disputes. In addition, tax regulations generally lead to a relatively rapid depreciation of assets, but this cannot mean that economic assets not

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having any tax value at all after a certain period of time are expropriated or destroyed without triggering the right to receive compensation or damages. (703)

E. Consequential Damages 5.313 The compensability of consequential damage is one of the most important

P 308 differences between the objective–abstract and the subjective–concrete valuation

approach. While the former aims at replacing only the value of the property deprived, impaired, or destroyed, the subjective approach also considers further consequences and damage resulting from the unlawful act. According to the principle of full reparation, consequential damage be included in the calculation. 5.314 However, it is not always evident what represents 'damages for loss sustained which would not be covered by restitution in kind or payment in place of it' as the PCIJ formulated it in Factory at Chorzów. (704) In particular, the necessary causal link is crucial to avoid both under- and overcompensation. (705) International courts and tribunals are seriously concerned to avoid decisions based on speculative and uncertain developments, (706) which is especially relevant in respect of consequential damages. (707) 5.315 In order to limit the extent of consequential damages, sometimes the distinction has been made between 'direct' and 'indirect' damages. (708) Another proposal refers to the criterion of 'adequacy', according to which only damage 'adequately' caused should be compensated, referring to the 'natural' or 'normal' course of events. (709) Others have underlined the Roman law principle of in jure causa proxima non remota inspicitur incorporated in the 'principle of proximate causality'. (710) 5.316 International practice seems so far to have awarded consequential damages, when they were 'adequately caused', (711) 'established', (712) and/or 'reasonable'. (713) A variety of different types of damage have been accepted as compensable in international practice.

(1) Liability to Subcontractors 5.317 Consequential damage can consist in payments to subcontractors. If such payments have not yet been made, they do not represent damage actually incurred, but they might be future or even 'potential' damage caused by the unlawful act. If the amount of money due to subcontractors is not evident at the time of the investment arbitration, either because the subcontractor has not presented its final bill or the amount is disputed, this element of damage might appear 'uncertain' or 'speculative'. Nevertheless, a few tribunals have included the 'potential liability' to subcontractors as an item of damages in their awards. 5.318 The ICSID Tribunal in Société Ouest Africaine des Bétons Industriels (SOABI) v Senegal was confronted with a claim for damages for 'architectural fees' which the investor had to pay to a subcontractor on the basis of an architecture, city planning, and engineering contract for implementing the investment project, a 15,000 unit housing project in Senegal. (714) However, the extent of the amounts payable to the architects was disputed because the premature termination of the contract had led to only partially executed services. (715) The tribunal stated with regard to amounts payable by the respondent on the basis of such a 'potential liability' of the investor:

P 309

Only the Senegalese courts have jurisdiction to rule on a dispute between BEHC and SOABI, arising from the BEHC contract. On the other hand, this Tribunal has jurisdiction to rule on the dispute between SOABI and the Government concerning the latter's obligation to indemnify the former owner for its loss. In keeping with jurisdictional considerations, it is appropriate for the Tribunal to take as its point of departure, in determining the amount owed by the Government, the amount which SOABI will ultimately be ordered to pay (or which will be settled upon by mutual consent of the parties). (716) 5.319 The tribunal then ordered the Government to reimburse SOABI for any amount that the latter might be obliged to pay to BEHC (following a judgment of the Senegalese courts or settlement among the three parties concerned) and set an upper limit of this 'potential liability', based on its own calculations. (717) 5.320 The tribunal in AAPL v Sri Lanka recommended that the parties should conclude an agreement to transfer all the shares in the project company to the Government of Sri Lanka or a governmental entity with the understanding that said transfer should entail 'in exchange the passing of any potential liability' to the new owner of the shares. (718) 5.321 The ICSID Tribunal in Siemens v Argentina rejected the 'potential liability' represented as an item of damages, (719) but noted that Argentina had affirmed that it had taken the necessary measures to ensure that the subcontractors' claims were transferred to Argentina. So the tribunal decided: The Tribunal acknowledges this affirmation and decides that Argentina should hold the Claimant, its subsidiaries and affiliates, wherever located, harmless from, and indemnify same in respect of, any claims heretofore or hereafter

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asserted against any of them by any of the following subcontractors to SITS in relation to the Contract: … (720) 5.322 In other cases, tribunals have generally accepted potential liability but rejected them in the concrete circumstances because of lack of sufficient evidence. (721) It can therefore be concluded that international practice recognizes potential liability as a consequence of an unlawful act in principle, but tends to reject it frequently because of lack of proof.

(2) Costs for Damage Limitation, Repair, and Maintenance 5.323 The expenses incurred for mitigating damage and for repair and maintenance works as an item of damages tend not to be controversial as a matter of principle. Nevertheless, in international proceedings it is not always easy to establish their extent P 310 and the causal link with the unlawful act by appropriate evidence. 5.324 The UN Compensation Commission has developed a rich jurisprudence in this respect. Being very restrictive concerning awards on lost profits, it made considerable efforts to comprehensively acknowledge all costs and expenses actually incurred by numerous affected individuals as a consequence of Iraq's invasion of Kuwait. Decision No. 7 provided that expenses incurred for the untimely departure or for an unintended prolonged stay of a company's personnel should be taken into account. (722) Respective transport, travel, residence, and other costs have, therefore, been regularly accepted. (723) Also 'project termination costs', such as costs for the protection of assets were accepted as consequential damages. (724) In addition, costs for personnel who had become unnecessary after the invasion were recognized, (725) in particular, if the resulting turmoil had rendered productive work impossible. (726) The necessary evidence was usually available because of the transfer of the company's account books and other records. 5.325 The Iran–US Claims Tribunal also recognized in principle the compensability of 'termination costs' (727) and 'repatriation costs'. (728) In particular, it accepted storage costs as well as costs for personnel necessary for maintaining the operation of the business or for its dissolution. (729) Also, losses caused by sales of items below their market value have been awarded as consequential damages. (730) The same was true for costs for a necessary bank loan. (731) 5.326 In many cases, however, the application of a strict standard of evidence excluded certain costs from being considered in the damages award. (732) For example, in Pope & P 311 Talbot v Canada the tribunal argued that the costs for personnel were—in absence of solid proof to the contrary—part of the ordinary business expenses regardless of how long the staff was occupied with the consequences of the unlawful act. (733) Also the tribunal in Siag v Egypt decided that 'salaries and benefits' as well as interest for 'bank loans' were not caused by the unlawful acts and/or could not be supported by sufficient evidence. (734) On the other hand, 'construction costs' were accepted as an item of 'discrete damages'. (735)

(3) Costs and Expenses of Pursuing the Claim 5.327 Costs and expenses connected with the pursuance of a claim in international investment disputes can sometimes by considerable. (736) They encompass not only costs for legal representation and arbitration fees, but also expenses in connection with the gathering of information and evidence and include travel and hotel costs as well as costs for expert reports for substantiating the claim. These expenses are too often merely regarded as 'costs' and are consequently only included in the decision on costs. Frequently, tribunals refer to their 'discretion' with regard to the issue of costs (737) and do not engage in further reasoning. (738) 5.328 As Gotanda notes, international tribunals are somewhat reluctant to shift costs and fees. (739) The reason might be that the practice of awarding costs and fees varies P 312 significantly from country to country. (740) The majority of countries follow the principle that 'costs follow the event'. (741) Under this principle, the prevailing party is entitled to all costs incurred in litigating the dispute, or at least a portion of them. (742) The most notable exception to the majority rule is the practice in the United States, where parties are generally required to bear their own expenses, including attorney's fees. (743) 5.329 The practice of the Iran–US Claims Tribunal largely reflects the American approach. Generally, the prevailing party did not get an award of costs in its favour. (744) Judge Aldrich explained this by the fact that American claimants usually had much larger amounts of expenses and costs than the Iranian parties and that they would have to bear those costs also, if they had litigated their case before American courts. (745) 5.330 Other international instances also often make each party responsible for its own costs and decide that the parties should share the costs of the proceedings equally between themselves. (746) This seems to be unsatisfactory in view of the aim to achieve full reparation. Instead of being made whole, the injured party has to spend a large part of the amount awarded on litigation costs. Also general preventive reasons speak against this practice because a respondent would not face an additional financial disadvantage

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for its unlawful behaviour. 5.331 In order to remedy this situation, the expenses and costs—at least those outside the arbitral process itself—could be regarded as 'damage caused by the unlawful act', and thus as 'consequential damage'. In the following, some arbitral tribunals which have chosen to award costs as an item of damages shall be presented. 5.332 In Robert H May, the tribunal considered the expenses incurred by the claimant in pursuance of his claim as damnum emergens which would have to be compensated in full. (747) The tribunal referred to the troubles connected with international arbitral proceedings:

P 313

It has taken Mr. May just over two years to obtain a settlement of his claim against the Guatemalan Government. He has had to undertake journey upon journey to bring the matter before the United States Government, and to induce them to intervene in his favour; he has had to engage, at heavy rates, the services of eminent lawyers, whose reputation would insure a hearing from overworked officials, and whose opinions, based upon the stern logic of facts, would have weight with the legal advisers of his Government. Many of the leading witnesses were scattered over the face of the world, and May has had to undergo the expenses of reaching them … For all these and for other causes, which it would take too long to enumerate, I hold that Mr. May is entitled to substantial damages from the Government of Guatemala, who are legally responsible for the two years' delay in the settlement of their debt to him. (748) 5.333 The tribunal in Shufeldt also accepted the loss of income of the claimant while he was pursuing his claim as compensable damnum. (749) Similarly, the tribunal in Dr Marion Cheek awarded 3 per cent of the principal as 'costs of recovering the amount'. (750) 5.334 In more recent investment arbitration, tribunals have not entered into details of the discussion of the expenses for pursuing the claim. From time to time, however, they recognized that these expenses must be reflected in the award of damages. For example, the ICSID Tribunal in Southern Pacific Properties v Egypt should actually have assessed the objective 'value of the property' after a lawful expropriation. Nevertheless, it counted together a number of items of damages, including more than US$ 5 million for 'legal, audit, and arbitration costs'. (751) It admitted that this was a 'high figure' but said that it was justified by the 'extraordinary length and complication of the proceedings in this case'. (752)

5.335 Also in Autopista Concesionada v Venezuela, the costs for pursuing the claim were recognized as 'out of pocket expenses'. (753) These costs encompassed costs for legal representation outside the arbitral proceedings because the claimant had to fight a number of legal proceedings against it under national law. (754) Furthermore, the tribunal accepted certain administrative costs of the claimant as compensable damage, because the non-fulfilment of Venezuela's contractual obligation had caused a provable increase of those costs. Among these were negotiations with banks about loans in order to keep the project alive despite the respondent's breaches. (755) This contrasts, for example, with the decision in Pope & Talbot v Canada where the tribunal had considered P 314 management time to be a fixed cost because the managers received annual salaries that 'did not vary in respect of the issues or matters to which each of them devoted their working time'. (756) 5.336 In Siag v Egypt, legal expenses incurred before domestic courts were accepted as an item of damages, even despite the lack of invoices, receipts, or other documents. (757) The ICSID Tribunal found that there was 'no doubt that the claimants had to employ Egyptian lawyers as well as in-house lawyers' (758) during the long period of litigation. The estimate presented by the claimants was 'in excess of USD 2,500,000' of which the tribunal awarded US$ 1 million in addition to the US$ 6,000,000 for the costs incurred in the ICSID arbitration. (759) 5.337 The tribunal in Swisslion v Macedonia found a 'minor breach' of the fair and equitable treatment standard of the BIT, on the basis of a series of measures by the respondent that collectively amount to a composite act. (760) The claimant claimed compensation in the amount of € 19,013,000 on the basis of the DCF method, alternatively the value of actual investments plus interest. (761) The tribunal only arrived at an 'appropriate estimation of damages' having regard to the professional fees incurred by Swisslion in the two local proceedings which were part of the composite act. (762) It eventually arrived at an amount of damages that should compensate the legal costs the investor incurred contesting the securities regulation and criminal investigation measures, the diversion of its management's time in responding to heightened controls imposed by the Ministry of Economy, and an allocation of lost sales resulting from the investor's reputational damage. (763) This resulted in a comparatively modest amount of € 350,000. The tribunal in this case based its calculation of damages almost exclusively on the amount of legal expenses incurred by the investor in proceeding at the national level to fight against the unlawful measure. Even if the amount seems modest, it shows that investment arbitration is also open for 'minor breaches' of BIT standards with corresponding 'minor' awards.

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5.338 On the other hand, the very high award on costs in the amount of US$ 10 million in CSOB v Slovakia shows that legal expenses can be an important part of the damage caused. (764) The tribunal awarded them as 'costs' to be paid to the prevailing claimant, thus not as 'damages', but noted that CSOB's employees had prepared specific P 315 contributions that were caused by the proceedings, including several statements filed with the tribunal which justified the request for recovery of the associated costs. (765) 5.339 Both the 'loser pays' principle and the principle of full reparation were evoked in ADC v Hungary. (766) The tribunal found first that, in the present case, it could 'find no reason to depart from the starting point that the successful party should receive reimbursement from the unsuccessful party'. (767) The tribunal then emphasized that 'were the Claimants not to be reimbursed their costs in justifying what they alleged to be egregious conduct on the part of Hungary it could not be said that they were being made whole'. (768) 5.340 The combination of the aspect of full reparation and the 'loser pays' principle was referred to also in Desert Line v Yemen. (769) The tribunal awarded US$ 400,000 for legal expenses to the claimant and divided the arbitration costs 30:70 in favour of the claimant. In its reasoning, the tribunal explained: On the one hand, a party injured by a breach must be fully compensated for its losses and damages, which include arbitration costs and its own legal expenses. On the other hand, the 'loser-pays' principle is not absolute, in particular when the Claimant succeeds only partially. (770) 5.341 The principle of full reparation or the 'loser pays' principle should in principle include damage caused by costs and expenses paid in pursuing claims at the national and the international level. This may contribute to the better implementation of legal rights and obligations and generate important general preventive effects. In addition, the proportionate allocation of costs could also contribute to a realistic valuation by claimants because the issue of whether or not they prevail is usually measured in terms of the proportion of the amount claimed.

F. Moral Damages 5.342 For a long time, moral damages have not figured prominently in investment arbitration. Investor–state disputes were regarded as purely economic matters concerning damage to property, contracts, or other business interests so that they focused almost exclusively on material damage. However, increasingly investors turn to tribunals claiming reparation also for non-material damage, in particular since an ICSID P 317 Tribunal in Desert Line v Yemen awarded such damages in 2008. (771) This was only the second time that an investment tribunal had awarded moral damages after the tribunal in Benvenuti & Bonfant v Congo in 1980, which was authorized by the parties to decide ex aequo et bono. (772) Since then, claimants have frequently put forward claims for moral damages, but so far, no other investment tribunal has found them sufficiently substantiated. (773) 5.343 Claims for moral damages are in principle recognized in almost all national legal systems and under the law of state responsibility. The general principle under the law of state responsibility is enshrined in Article 31 of the Articles on States Responsibility according to which compensable '[i]njury includes any damage, whether material or moral, caused by the internationally wrongful act'. (774) The Commentary distinguishes 'material' damage as 'damage to property or other interests of the State and its nationals which is assessable in financial terms' from 'moral' damage which 'includes such things as individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one's home or private life'. (775) It follows that under the law of state responsibility 'moral damage' is equivalent to 'non-material damage'. The ILC text does not differentiate more precisely between 'moral damage' and the more neutral concepts of 'non-material' or 'immaterial' damage. This has led to the concern that under the disguise of 'moral' damage in effect 'punitive' damages could enter through the backdoor. (776) 5.344 The availability of moral damage in international law has been explained by the United States–Germany Mixed Claims Commission in its often-quoted decision in the Lusitania case in the following way: That one injured is, under the rules of international law, entitled to be compensated for an injury inflicted resulting in mental suffering, injury to his feelings, humiliation, shame, degradation, loss of social position or injury to his credit or to his reputation, there can be no doubt, and such compensation should be commensurate to the injury. Such damages are very real, and the mere fact that they are difficult to measure or estimate by money standards makes them none the less real and affords no reason why the injured person should not be compensated therefor as compensatory damages, but not as a penalty. (777) 5.345 The Lusitania decision combines damage incurred by a natural person, such as 'suffering, injury to feelings, humiliation, shame, degradation', with injury to 'credit or

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reputation', which can also affect a legal entity and have measurable financial consequences. While different types and definitions of moral damages have been identified in academic writing, (778) three types can most practically be distinguished in investment arbitration, as summarized by Sabahi: (1)

(2) (3)

Damage to personality rights of individuals. These include 'individual pain and suffering, loss of loved ones, or personal affront associated with an intrusion on one's home or private life'. This is the typical type of non-material damage that natural persons suffer. Corporations, as juridical persons, cannot suffer such damages. Damage to reputation. This type of damage seems to have a dual character, as it may have clear monetary consequences and hence in some cases be considered as material. 'Legal damage'. That is the harm that results from the ipso facto violation of an international obligation. (779)

5.346 The first type of damages are not problematic, if the investor and claimant is a natural person. But can they also be rightfully claimed by legal entities, which are the majority of claimants in investor–state arbitrations? Can a company claim moral P 321 damages for injury suffered by its organs or employees? Commentators note that the tribunal in Desert Line v Yemen 'seems to answer this question in the affirmative' (780) and 'displayed considerable flexibility on this issue'. (781) A sound theoretical basis for awarding moral damages to a legal entity for the injury suffered by its organs or employees seems however still to be lacking. One proposal is to refer by analogy to the doctrine of state espousal based on the 'Vattelian fiction that injury to an individual is equal to the injury of the home state of the individual'. (782) This analogy could be used to formulate a doctrine of 'corporate espousal' according to which damage to an employee of a corporation would be considered as damage to the corporation itself. (783) Another consideration is that harassment of the executives affected the performance of the company and/or that investment arbitration is the only forum where the executives could (indirectly) obtain redress for the harm suffered. (784) 5.347 So far, tribunals have not entered more deeply into the discussion on the jurisdiction and admissibility of moral damages and have, with a few exceptions, (785) not questioned their competence in principle to award such damages. (786) They seem to follow the overall reasoning of the tribunal in Desert Line v Yemen according to which moral damages are 'generally accepted in most legal systems' and that there are 'no reasons to exclude them'. (787) 5.348 The tribunal in Desert Line v Yemen did not differentiate between types (1) and (2) of moral damages mentioned above, despite their distinct character. It decided that the respondent shall be liable to reparation for the injury suffered by the Claimant, whether it be bodily, moral or material in nature. The arbitral tribunal agrees with the Claimant that its prejudice was substantial since it affected the physical health of the Claimant's executives and the Claimant's credits and reputation. (788) 5.349 It can be concluded that it is not entirely settled on which ground arbitral tribunals may award moral damages for injury done to a company's organs or employees—type (1) moral damages as mentioned above. On the other hand, other non-material damage, such as loss of credit or reputation—type (2) moral damages—can certainly be made subject of a claim for moral damages by a company in investment arbitration. 5.350 As regards type (3) moral damages—'legal damage' sustained from the ipso facto violation of an international obligation (789) —the question arises, whether such immaterial damage can justify a separate claim for indemnification or whether the award of a tribunal deciding on liability and damages in favour of the investor is a sufficient remedy. The injury caused to a state by a violation of international law is excluded from compensation as not 'financially assessable' and is generally the subject matter of 'satisfaction'. (790) A declaration of the wrongfulness of the act by a competent court or tribunal is one of the most common forms of satisfaction. (791) 5.351 Tribunals seem to apply this logic of 'satisfaction' in investment arbitration as well. The tribunal in Pey Casado v Chile decided that 'the issuance of the present award, in particular because of its recognition of the rights of the claimants and of the denial of justice of which they were victims, constitutes in itself substantial and sufficient moral satisfaction'. (792) Similarly, the tribunal in Lemire v Ukraine decided that 'the moral aspects of [Mr Lemire's] injuries have already been compensated by the awarding of a significant amount of economic compensation'. (793) 5.352 If the investor does not receive any damages because material loss caused could not be proven, this logic would not apply. However, tribunals have so far not compensated mere 'legal damage' by an award of moral damages. (794) An option might be an allocation of costs by which the successful claimant is completely held harmless. (795) This solution has been chosen in cases where host states rejected 'frivolous' procedures by foreign investors and claimed 'moral damages' for the damage and

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alleged loss of reputation incurred. The tribunals in Europe Cement v Turkey, (796) Cement v Cementownia 'Nowa Huta' v Turkey, (797) Iberdrola v Guatemala, (798) and Transglobal Green Energy v Panama (799) supported the respondents' view that the claims were illfounded and an abuse of process so that the claimants had to pay all of the costs of the arbitration and the legal costs of the respondent. 5.353 The reasons why tribunals have not awarded moral damages since Desert Line v Yemen again is the high threshold that has been established in jurisprudence. The tribunal in Desert Line v Yemen found that moral damages may 'in exceptional circumstances' (800) be claimed and highlighted the 'physical duress exerted on the executives of the Claimant, which was malicious and, therefore, constitutive of a faultbased liability'. (801) 5.354 The criterion of 'malicious' and 'constitutive of fault based liability' is notable as, under the general law of state responsibility, the responsibility of a state is independent from any mental element of conduct, such as intention to harm. (802) The reference to 'fault' can imply that tribunals, in such cases of egregious behaviour, can use their discretion in order to award a higher amount of damages. However, this argument comes close to calling for punitive damages, which are generally not available under international law. (803) 5.355 The criterion of 'exceptional circumstances' was analysed in more detail by the tribunal in Lemire v Ukraine, (804) which summarized the decisions in Lusitania, Desert Line v Yemen, and Siag v Egypt (805) as follows: The conclusion which can be drawn from the above case law is that, as a general rule, moral damages are not available to a party injured by the wrongful acts of a State, but that moral damages can be awarded in exceptional cases, provided that • • •

the State's actions imply physical threat, illegal detention or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act; the State's actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and both cause and effect are grave or substantial. (806)

5.356 Several tribunals have referred to these criteria as the international 'standard' for an award of moral damages and denied the 'exceptional circumstances'. (807) The tribunal in Arif v Moldova, however, was more sceptical and noted that the formulation of the principles of the award of moral damages in Lemire was based on a limited discussion of three cases, with no broader consideration of underlying principles or policies. The statement might serve as a summary of the issues in these cases, but it should not be taken as a cumulative list of criteria that must be demonstrated for an award of moral damages. (808) 5.357 The tribunal preferred to go back to the older Lusitania case which 'leaves the Tribunal with an element of discretion, but within the general framework that moral damages are an exceptional remedy'. (809) It emphasized the need to restrict moral damages to exceptional cases, because a 'pecuniary premium for compensation for such sentiment, in addition to the compensation of economic damages, would have an enormous impact on the system of contractual and tortious relations'. (810) It would 'systematically create financial advantages for the victim which go beyond the traditional concept of compensation'. (811) Moral damages should be limited to cases 'when both the conduct of the violator and the prejudice of the victim are grave and substantial'. (812) 5.358 According to the tribunal in Arif v Moldova, the dividing line between normal and

P 323 exceptional in commercial life must be determined by a precise appreciation of the

facts. (813) In this regard, the tribunal took the situation in an emerging market economy characterized by instability and unpredictability, as well as weak economic and political institutions into account. (814) These criteria and the tribunal's noting of 'the necessity of mental fortitude' (815) of which the claimant must have been aware of, however, do not lower the high threshold for moral damages as set previously by the tribunal in Lemire v Ukraine. (816) 5.359 With regard to the quantification of damages for moral injury, the umpire in Lusitania, noted that 'it is manifestly impossible to compute mathematically or with any degree of accuracy or by any use of any precise formula the damages sustained', (817) but that 'compensation must be adequate and balance as near as may be the injury suffered'. (818) He provided some guidance as to what should be considered in the determination of an award of moral damages, such as the amount of lost earnings and other pecuniary loss of a deceased after a fatal injury, but also 'the amount which will reasonably compensate an injured man for suffering excruciating and prolonged physical pain; and many other inquiries concerning elements universally recognized as constituting recoverable damages'. (819)

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5.360 It is certainly difficult to evaluate human pain and suffering, the type (1) damages as identified above, by pecuniary means. In addition to the 'arbitrators' collective understanding of what is equitable, reasonable and proportionate', (820) guidance can be taken from human rights jurisprudence. (821) The ICJ in Diallo awarded US$ 85,000 for 'moral and mental harm, including emotional pain, suffering and shock, as well as the loss of his position in society and injury to his reputation as a result of his arrests, detentions and expulsion by the DRC', as alleged by the claimant. (822) In arriving at that amount, the ICJ looked at the practice of the United Nations Human Rights Committee, the African Commission on Human and People's Rights, the ECtHR, and the InterAmerican Court of Human Rights. (823) 5.361 As regards compensation for damages to reputation, referred to as type (2) damages above, including loss of goodwill, creditworthiness, or even business opportunities, quantification appears to be easier, because they have an economic underpinning and can be substantiated by evidence. 5.362 In Benvenuti & Bonfant v Congo, the tribunal was confronted with a claim for 'compensation for intangible loss' by the claimant, who submitted that it had lost work and investment opportunities in Italy, was no longer able to resume its own activities in Italy by reason of lack of capital having invested all its financial resources in Congo, had lost its credit with suppliers and banks, and had suffered the loss of its own organization and management level following its forced and hasty departure from the Congo. The tribunal noted the lack of evidence capable of establishing the truth of the claims under this head and also doubted certain statements and allegations, but due to its authorization to decide ex aequo et bono it awarded an amount of 5,000,000 CFA (approximately € 7,600). The tribunal awarded this sum as damages for intangible loss taking into account the measures which the claimant was subjected to and the proceedings resulting therefrom, which had disturbed the claimant's activities. (824) 5.363 The claimant in Desert Line v Yemen referred to the Fabiani Case and asked for 40 million Omani Rials (approximately US$ 104 million) for 'moral damages including loss or P 324 reputation'. (825) The tribunal observed that it was difficult, if not impossible, to substantiate a prejudice of the kind ascertained in the present award. However, it referred to the Lusitania case and confirmed that non-material damages may be 'very real, and the mere fact that they are difficult to measure or estimate by monetary standards makes them none the less real and affords no reason why the injured person should not be compensated'. (826) The tribunal reduced the amount claimed significantly and awarded US$ 1 million for moral damages, including for loss of reputation, without interest. The tribunal conceded that '[t]his amount is indeed more than symbolic yet modest in proportion to the vastness of the project'. (827) 5.364 Damages for loss of reputation, goodwill, creditworthiness, or business opportunities have a dual character and can be part of a claim for material and for moral damage. As the threshold for moral damages is high, it might be possible to formulate some of those claims as material damages. The submission of sufficient evidence may be a challenge, (828) but in a few cases tribunals have accepted such damages. 5.365 Some older arbitral awards are noteworthy in this respect. In Shufeldt, the tribunal awarded a lump sum of US$ 35,000 for 'loss of time, injury to credit, and grave anxiety of mind on account of the cancellation of the contracts'. (829) The tribunal in Robert H May emphasized the troubles the claimant had suffered because of the unlawful behaviour of the state: [H]e has been entirely debarred from seeking remunerative work, and his credit, which, on the showing of this Government, was so excellent to cause his pay checks to be received as cash by all his neighbors, is nearly, if not entirely, suspended until the decision of the arbitrator be known. (830) 5.366 Similar considerations have appeared more recently in Funnekotter v Zimbabwe. (831) The claimants submitted that each of them must be compensated in the amount of US$ 40,000 for the disturbance to them and their families from the decisions taken by the Zimbabwe authorities. (832) The claimants had owned large commercial farms in Zimbabwe, but were deprived of their properties between 2001 and 2003 through the invasion by settlers, war veterans, and various legal and administrative acts by the host P 326 state. The tribunal agreed that the claimants 'must obtain reparation for the disturbances resulting from the taking over of their farms and for the necessity for them to start a new life often in another country'. (833) It evaluated the damages in this respect for each claimant at € 20,000, in addition to the amount of compensation for the expropriated properties. Claimants later brought forward further claims asking for '100,000 Euros for moral damages', (834) which the tribunal rejected. However, it noted that this was because those claims were formulated only at a very late stage of the proceedings and 'that those new claims partially concerned damages already compensated by the allocation of disturbances indemnity'. (835) It follows that the tribunal regarded the 'disturbances indemnity' at least 'partially' as compensation for moral damages. (836) 5.367 The tribunal in Swisslion v Macedonia also based an award of 'reputational damage' on economic considerations. (837) It held that the uncertainty surrounding the investment

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as a result of the acts of the respondent state, including criminal charges, clouded the prospects of the company. The tribunal found the estimate of the claimant's experts suitable for evaluating part of the measure's impact on the claimant based on loss of export sales and loss of domestic sales, amounting to € 0.3 million and € 0.06 million respectively. (838) The tribunal found that two-thirds of the losses could be attributed to the measures found to have been contrary to the fair and equitable treatment violation. It also added legal fees incurred at the national level and diversion of management time, awarding a total of € 350,000 to the claimant. (839) 5.368 As regards quantification for mere 'legal damage', identified as moral damage type (3), in addition to the above-mentioned solution through an award on costs, (840) resort can be made again to the ECtHR. As that Court has recently changed its jurisprudence with respect to the distinction between lawful and unlawful expropriations, (841) it has increased the role of moral damage in this context. An amount of 'non-pecuniary damage' should be awarded to account for the frustration caused by the unlawful act, as it explained in Guiso-Gallisay v Italy: The Court considers that the feelings of powerlessness and frustration arising from the unlawful dispossession of their property has caused the applicants considerable non-pecuniary damage that should be compensated in an appropriate manner. Ruling on an equitable basis, as required by Article 41 of the Convention, it decides to award EUR 15,000 to each of the applicants under this head, or EUR 45,000 in total. (842) 5.369 This formulation and the practice of awarding non-pecuniary damage has since then been repeated by the ECtHR in cases of unlawful expropriation. (843) Such practice of using 'non-pecuniary damage' is not directly transferable investment arbitration for a number of reasons. Most importantly, the ECtHR has the competence to award 'on an equitable basis' pursuant to Article 41 of the European Convention on Human Rights (ECHR), which arbitral tribunals usually do not have. This should however not rule out the possibility that they can use their existing competence to award 'full reparation' for injury, not forgetting the 'feelings of powerlessness and frustration' and also loss of reputation and business opportunities which are inherently connected to a violation of an international obligation. This could avoid the situation whereby successful claimants, when material damages cannot be awarded due to lack of sufficient evidence or P 326 causation, do not receive any damages at all.

References 1)

2) 3) 4)

5) 6)

7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17)

See also M Kantor, Valuation for Arbitration (The Hague: Kluwer, 2008) 13: 'Arbitrators should be aware that references to the Market-Based Approach are occasionally confused with references to the similar sounding concept of market value. These are, however, different concepts; the Market-Based Approach, like the IncomeBased and Asset-Based Approaches, is just one means of determining the market value of a business.' Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 218. Ibid, para. 219. Ibid. This confusion of market value standard and market approach of valuation is also reflected in the commentaries of this practice. See, e.g., M Pellonpää and M Fitzmaurice, 'Taking of Property in the Practice of the Iran–US Claims Tribunal' (1988) 19 Netherlands Yearbook of International Law 53, 133. Delagoa Bay and East African Railway Company, Award of 30 May 1900 in M Whiteman, Damages in International Law, vol. 3 (Washington: Government Printing Office, 1943) 1694, 1699. See the detailed analyses by G White, 'The Problem of Valuation in the Barcelona Traction Case' in R Lillich (ed.), Valuation of Nationalized Property in International Law, vol. 1 (Charlottesville: University Press of Virginia, 1972) 43, 57. Reineccius v Bank for International Settlements, Award of 22 November 2002, para. 196. Lithgow et al v United Kingdom, 8 July 1986, ECHR Ser A, No. 102, paras 98, 129. Ibid, paras 98, 129, 148 et seq. Ibid, paras 121, 129. Ibid, paras 112 et seq, with references to James et al v United Kingdom, 21 February 1986, ECHR Ser A, No. 98, paras 58 et seq. C N Brower and J Brueschke, The Iran–US Claims Tribunal (The Hague et al: Martinus Nijhoff Publishers, 1998) 539. American International Group v Iran, 4 Iran–US CTR (1983) 96, 106. Ibid, at 108–9. INA v Iran, 8 Iran–US CTR (1985) 373, 380. Khosrowshahi v Iran, 30 Iran–US CTR (1994) 76, para. 47. Also with respect to the second expropriated company the tribunal considered the stock price as 'particularly relevant'. Ibid, para. 88. Ibid, paras 52 and 78.

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18) 19) 20)

21) 22) 23) 24) 25) 26) 27)

28) 29) 30) 31)

32) 33)

34) 35) 36) 37) 38) 39)

40) 41)

42)

AGIP v Congo, Award of 30 November 1979, para. 18. From the published parts of the award, however, it is not clear how the tribunal arrived at the amount of FF 2.8 million. Only the debts from deliveries amounted to LIT 202,807,838, US$ 333,297.76, and FF 968,071.86. The sum payable by AGIP as 'guarantor' alone amounted to FF 16,688.388. Ibid, at 328–9. The tribunal held: 'In the case of a business asset which is quoted on a public market, that process can be a fairly easy one, since the price of the shares is determined under conditions meeting the above mentioned definition'. CMS v Argentina, Award of 12 May 2005, para. 402. Ibid, para. 412. Ibid. See further below, paras 5.177 et seq. Enron v Argentina, Award of 22 May 2007, para. 381. Ibid, para. 383. Ibid. See also T Waelde and B Sabahi, 'Compensation, Damages and Valuation' in P Muchlinski, F Ortino, and C Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 1047, 1071. The tribunal in Enron v Argentina first concluded that to use the stock value of December 2001 would result in grave distortion, since at that point the unfolding crisis had led to wide speculation. The tribunal accordingly referred to a range of stock prices between September and November 2001. The figures resulting from the DCF analysis as submitted by the claimant were systematically below the stock exchange prices. The tribunal was accordingly satisfied that the figures resulting from DCF did not show unreasonable differences to the stock market value. Secondly, the tribunal referred to the price actually paid for a small share of the company in 2006. This price, if extrapolated, would have resulted in a value of US$ 762.5 million. The stock exchange value, however, at this time was US$ 855 million. The tribunal found that this might be explained by the fact that price was negotiated in 2004 and executed in 2006. The tribunal noted that the stock market value of the company in 2004 floated between US$ 589 million and US$ 869 million. Therefore, the extrapolated sum fell well within this range. Enron v Argentina, Award of 22 May 2007, paras 425–8, 437. Ibid, para. 424. LG&E v Argentina, Award of 25 July 2007, para. 34. Ibid, paras 36–7. As the decisive event, one could specify the press announcement of the suspension of CNTS's operations. Accordingly, the difference between the stock value before and after this announcement could be regarded as the proper measure of damage incurred. On this basis, the loss of value was US$ 52.2 million compared to the loss of value as measured by the tribunal in the amount of US$ 289.5 million. See CME v Czech Republic, Final Award on Damages of 14 March 2003, paras 331 and 620. Ibid, paras 550–1. The tribunal noted that this was also in accordance with the valuation by the tribunal, considering that the offer of SBS also included a 'price of peace' in the amount of US$ 125 million. Ibid, para. 552. Jurisdiction was established by use of the MFN clause in Article 3 of the UK–Soviet BIT in comparison with its Article 8 providing for international arbitration only 'concerning the amount of compensation … or concerning any other matter consequential upon an act of expropriation' with Article 8 of the Denmark–Russia BIT allowing 'any dispute which may arise between an investor…' to be brought before international arbitration. Rosinvest v Russia, Award on Jurisdiction of 5 May 2007, paras 124–39. Rosinvest v Russia, Award of 12 September 2010, para. 633. Ibid, para. 638. Ibid, para. 639. Rosinvest v Russia, Award on Jurisdiction of 5 May 2007, para. 2; Rosinvest v Russia, Award of 12 September 2010, para. 5. Rosinvest v Russia, Award of 12 September 2010, para. 665. See on the issue of the choice of the valuation date above, Chapter 3, Section C; and also I Marboe, 'Valuation in Cases of Expropriation' in M Bungenberg, J Griebel, S Hobe, and A Reinisch (eds), International Investment Law. A Handbook (BadenBaden: Nomos, 2015) 1057, 1071. Rosinvest v Russia, Award of 12 September 2010, paras 675–6. The respondent pointed out that one year later the prices fluctuated considerably, from US$1.17 in September 2005, US$1.63 in November 2005, US$2.01 in December 2005, and the high as of February 2006 was US$2.25 on the Moscow Interbank Currency Market. The fluctuations were similar at the Russian Trading Stock. Rosinvest v Russia, Award of 12 September 2010, para. 666. It is even more difficult to understand why the tribunal did not see this 'unjustifiably low' price of US$ 11.66 million for the shares in 2004, plus interest, as the minimum to be awarded. Instead, the tribunal determined the much lower aggregated stock price of US$ 3.5 million as of January 2007, including interest only from that date, long after the expropriatory acts started and even after the institution of arbitral proceedings in October 2005.

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43)

44) 45) 46)

47) 48) 49) 50) 51) 52) 53)

54) 55)

This is however not entirely clear from the published parts of the award. The tribunal only noted that 'Claimant relies on the LECG Report to demonstrate that Claimant's share of the real value of Yukos' expropriated assets could conservatively be valued at US$ 183.2 million, as at 31 August 2009' (emphasis added). Rosinvest v Russia, Award of 12 September 2010, para. 639. Quasar de Valores v Russia, Award of 20 July 2012, para. 187. Ibid, para. 205. Ibid, para. 226. As regards the choice of the valuation date, see more in detail above Chapter 3, Section 3, and I Marboe, 'Quasar de Valores SICAV S.A. and others v. The Russian Federation. Another Chapter of the Yukos Affair' (2013) 28 ICSID Review 247, 251–2. The claimants' expert produced a comprehensive report in which he laid down the hypothetical development of Yukos' stock prices in comparison with four Russian oil companies. Quasar de Valores v Russia, Award of 20 July 2012, para. 210. Ibid, para. 193. See above, Chapter 3, Section C(1)(c). This can be argued on the basis of Article 15 of the ILC Articles of the Responsibility of States for Internationally Wrongful Acts, UN GA Resolution No. 56/83 of 12 December 2001, Annex. See the discussion above, Chapter 3, Section C(1)(c). Quasar de Valores v Russia, Award of 20 July 2012, para. 207. Ibid, para. 215. The tribunal applied the method of 'projected stock value' as of 23 November 2007 as presented by the claimant's expert and only challenged a few assumptions. Most importantly, it took a different reference date. Instead of 14 April 2004, the date of the tax resolution, it chose 19 December 2003, when the claimants made their first investment. This resulted in a 'projected stock price' of US$ 27.76 per share. The tribunal conceded that the 'downward adjustment might lack precision' but found that under the present circumstances it adequately compensated the claimants and avoided a windfall being awarded. Ibid, para. 217. While it was a downward adjustment of approximately 23% in respect of the claimants' valuation, it was still almost 50% higher than the stock price at the date of the tax resolution. But, overall, the claimants were not over-compensated by the award of approximately US$ 2.02 million, because they did not receive any reimbursement of their costs, which amounted to US$ 14 million. Even if this amount appears high, the comprehensive valuation expert report alone must have been a significant part of it. The reason for the rejection of the claim for costs was that the proceeding had been financed by a third party, Menatep. The tribunal thus found that the claimants had not incurred any costs, and that Menatep was the claimants' 'Good Samaritan'. Ibid, para. 224. See more in detail on this issue, I Marboe, above, n. 46, 253. Yukos v Russia, Award of 18 July 2014, para. 1713. The result of this calculation was an enterprise value of about US$ 4.5 billion lower than the enterprise value calculated on the basis of the other methodologies. Ibid, para. 1719.

56) Crystallex v Venezuela, Award of 4 April 2016, para. 6. 57) Rusoro v Venzuela, Award of 22 August 2016, paras 787–90. 58) Ibid, para. 890. The tribunal considered that the claimant's stock market method,

59) 60) 61)

62) 63) 64) 65) 66) 67) 68) 69) 70)

with the adjustments made above, provided a reasonable and reliable basis to quantify the claimant's damages. The application of the variables led to a figure of US$ 1,295.16 million. Ibid, para. 895. See above, Chapter 4, Section B(2)(b), in particular at para. 4.68. Gould Marketing v Iran, 6 Iran–US CTR (1984) 272, 286. In some early cases, offerings which had been made a long time before had also been used as references for the valuation. For instance, in De Sabla, the offer of an interested buyer for the expropriated land had been made twenty-one years before the valuation date and the tribunal did not consider inflation or other value influencing factors. Marguerite de Joly de Sabla (United States v Panama) 29 June 1933, 6 RIAA, 358, 368. The Panamanian Commissioner dissented, because he found that the evidence submitted was insufficient. Marguerite de Joly de Sabla (United States v Panama) Dissenting Opinion of the Panamanian Commissioner, 6 RIAA, 370. Phelps Dodge v Iran, 10 Iran–US CTR (1987) 121, para. 1. Ibid, para. 31. Ibid, para. 30. M Pellonpää and M Fitzmaurice, above, n. 4, 149. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 100. Ibid, para. 140, referring to C N Brower and J Brueschke, above, n. 12, as well as to the cases INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 382–3, and James A Saghi v Iran, 29 Iran–US CTR (1993) 20, 49. CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003, para. 514. Ibid, para. 155. Ibid, para. 517. This was one of the respondent's arguments, see para. 354, but also supported by Brownlie in his Separate Opinion, CME v Czech Republic, Separate Opinion Brownlie on the Issues at the Quantum Phase of 14 March 2003 (2006) 9 ICSID Reports 412, para. 103.

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71) 72)

73) 74) 75) 76) 77) 78) 79) 80) 81) 82) 83)

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85)

This was another of the respondent's arguments and supported by Brownlie, see CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003, para. 355; Brownlie in his Separate Opinion, above, n. 70, para. 103. 'The comparison of the two SBS board meeting presentations of 19 February 1999 and 29 March 1999 clearly spell out that the estimated value of CNTS as a basis for the merger transaction was USD 400 million for a 100% shareholding in CNTS.' CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003, para. 528. The tribunal fixed the market value of the expropriated company at US$ 290 million. The deduction was caused by the 'Zelezny Factor' and the 'Residual Value' of the company. Ibid, para. 620. See Financial Times of 4 December 2004: 'CME Agrees $642m Czech TV Station Deal'. Técnicas Medioambientales SA v Mexico (2004) 19 ICSID Rev.-FILJ 158. Ibid, para. 191. The tribunal made certain adjustments to account for the developments between 1996 and 1998, including subsequent investments and the profitability of the company. Azurix Corp v Argentina, Award of 14 July 2006, . See above, Chapter 4, Section B(b)(i), para. 4.71. Azurix v Argentina, Award of 14 July 2006, para. 41. This was, according to the claimant, equivalent to US$ 449 million. Ibid, para. 411. Ibid, para. 429. James A Saghi v Iran, 29 Iran–US CTR (1993) 20, para. 81. Ibid, para. 91. Ibid, paras 97 et seq. The negative impacts of the revolution were considered more important than the positive ones so that the amount awarded was slightly above the price offered, but due to inflation represented less than the value of 1975. The tribunal awarded US$ 5.5 million, which was slightly above the offer at US$ 4.75 million in 1975. James A Saghi v Iran, 29 Iran–US CTR (1993) 20, paras 81 and 103. The tribunal referred to the prices offered for the equipment by the Iranian business partner, but reduced them because the items sold had been the more valuable and well-preserved items. United Painting Company Inc v Iran, 23 Iran–US CTR (1989) 351, paras 73–4. This was, however, not always the case. In Sola Tiles v Iran it referred to the valuation of an interested willing buyer who had valued the entire company for investment purposes one year before the expropriation, but did not, however, base its calculation of the amount to be awarded to the claimant on that offer. Sola Tiles Inc v Iran, 14 Iran–US CTR (1987) 223, paras 53 et seq.

86) Middle East Cement v Egypt, Award of 12 April 2002, para. 148. 87) Ibid, para. 150. 88) Khan Resources v Mongolia, Award of 2 March 2015, paras 411 et seq. The tribunal 89) 90) 91) 92) 93) 94) 95) 96) 97) 98) 99)

100) 101) 102) 103) 104) 105) 106)

had first discussed and rejected the DCF method, the market comparables approach, and the market capitalization approach. See ibid, paras 391–409. Ibid, para. 418. Southern Pacific Properties v Egypt, Award of 20 May 1992, para. 192. Ibid, para. 197. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 610. Ibid, para. 611. Starrett Housing Corporation v Iran, 16 Iran–US CTR (1987) 112, paras 309 et seq. See below, paras 5.79 et seq. Enron v Argentina, Award of 22 May 2007, para. 430. Ibid, para. 431. Ibid. The application of the 'differential method' in this case was correct in principle. However, the tribunal compared the two values as of the date before the measure and not as of the date of the award. As a result, the claimant had to bear the burden of the inflation of the peso. The restitution approach as formulated by the PICJ in Factory at Chorzów was clearly not met. This resulted in considerable undercompensation of the claimants. See further below, para. 5.244. National Grid v Argentina, Award of 3 November 2008, para. 287. Ibid, para. 287. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 76. The tribunal considered the insurance value to be the better reference for the value of the oil rigs in this case. Ibid, paras 41 and 76–7. See further below, para. 5.380. Mohtadi v Iran, 32 Iran–US CTR (1996) 124, paras 93 et seq; Moussa Aryeh v Iran, 33 Iran–US CTR (1997) 368, para. 98; George Davidson v Iran, 34 Iran–US CTR (1998) 3, paras 112 et seq; Kamran Hakim v Iran, 34 Iran–US CTR (1998) 67, paras 114 et seq. Mohtadi v Iran, 32 Iran–US CTR (1996) 124, paras 98 et seq; Kamran Hakim v Iran, 34 Iran–US CTR (1998) 67, paras 125 et seq. Mohtadi v Iran, 32 Iran–US CTR (1996) 124, paras 98 et seq. Ibid, para. 102. In doing so, the tribunal actually determined the individual and concrete damage incurred, only roughly based on comparable sales.

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107) See, e.g., Motais de Narbonne v France (just satisfaction) ECHR No. 48161/99, 27 May

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114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126)

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2003, para. 22; Papavstravou v Greece (just satisfaction) ECHR No. 46372/99, 18 November 2004, para. 7, referring to a national court judgment that had determined the amount of compensation for an expropriated real property in the same vicinity expropriated for the purposes of the Olympic Games in 2004. Funnekotter v Zimbabwe, Award of 22 April 2009, para. 98. Ibid, para. 132. These led to a reduction of approximately 30% of the value as claimed by the claimants. Ibid, para. 135. Ibid. The tribunal in Occidental v Ecuador decided that it could derive no assistance from an analysis of seven transactions which the respondent had submitted as comparable sales. It agreed with the claimants that 'each oil and gas property presents a unique set of value parameters'. Occidental v Ecuador, Award of 5 October 2012, para. 787. Commentators were critical of this decision, however, arguing that the tribunal had not properly analysed this point. See B Sabahi and K Duggal, 'Occidental Petroleum v Ecuador (2012). Observations on Proportionality, Assessment of Damages and Contributory Fault' (2013) 29 ICSID Review, 279, referring to M Kantor, 'Money Column: It Just Can't Compare' (2013) 8(1) GAR. For this reason, the tribunal in Yukos v Russia did not apply it. It noted that 'both Parties agree that, in fact, there were not comparable transactions'. Yukos v Russia, Award of 18 July 2014, para. 1785. See also the rejection of the comparable sales valuation due to a lack of comparable transactions in Al-Bahloul v Tajikistan, Award of 8 June 2010, para. 97. The tribunal in Kardassopoulos v Georgia discussed the offer of a particular buyer which was based on a 'special interest' and a 'strategic value that it attached to GTI's rights'. Kardassopoulos v Georgia, Award of 3 March 2010, para. 598. Ibid. Sapphire v NIOC, Award of 13 March 1963, (1967) ILR 136, 161. Ibid, at 189. Enron v Argentina, Award of 22 May 2007, para. 387. Kardassopoulos v Georgia, Award of 3 March 2010, para. 603. The tribunal thus awarded US$ 15.1 million to each of the two claimants. Ibid, para. 645. Siag v Vecchi, Award of 1 July 2009, paras 573–5. Ibid, paras 575–6, 584. In addition, a contractual provision was applied that led to a reduction of the amount by 50%. See in more detail below, para. 5.294. S Pratt and A Nicolita, The Lawyer's Business Valuation Handbook (2nd edn, Chicago: ABA, 2010) 86. Ibid. T Koller, M Goedhart, and D Wessels, Valuation. Measuring and Managing the Value of Companies (5th edn, New York: Wiley & Sons, 2010) 130. In Thomas Earl Payne, the claimant valued his two enterprises in the film and electrical industries on the basis of a multiple of the net average earnings of the three years before the taking and suggested 'a multiple of 10 times net average earnings for the three years preceding the taking'. Thomas Earl Payne v Iran, 12 Iran– US CTR (1986) 3, para. 31. The tribunal, however, doubted that the average earnings of the company over the past three years could be a reliable indicator for its future prospects. Ibid, para. 36. The claimant in Phelps Dodge v Iran tried to base the value of his business in the wire and cable production industry on an earnings multiplier derived from comparative earnings multipliers of US enterprises in the same industry. The tribunal, however, rejected the valuation by multiples in this case because it did not find that US enterprises were sufficiently comparable to start-up enterprises in the same business in Iran. Phelps Dodge Corporation v Iran, 10 Iran–US CTR (1986) 121, para. 29. CME v Czech Republic, Final Award on Damages of 14 March 2003, paras 166 et seq. See above, at paras 5.24–5.25. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 515. The multiple 9.1 corresponded to 80% of the internal multiple of the Scandinavian company to reflect the Eastern European risk because as an Eastern European Operator, CME's private market multiples would be at a 15–25% discount to the corresponding SBS multiples. Ibid, para. 516. This multiple was, however, slightly increased on the basis of financial market analyses. This 'intrinsic share value' of US$ 35 per share was US$ 7.5 higher than the contemporary stock price. Ibid, para. 516. Ibid, para. 523. In the course of the proceedings, the claimant argued in favour of higher multiples (11.3 or 12) which were, however, not accepted by the tribunal. See ibid, para. 526. Ibid, paras 561–2. The experts refer to this as a 'trading multiple analysis'. CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, paras 166 et seq. Ibid, para. 166.

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136) The respondent contended that 'Dr. Copeland has failed to recognize the fact that

137)

138) 139) 140) 141) 142)

the capital markets simply do not value Central and Eastern European companies on the same trading multiples as established Western European Broadcasters'. Ibid, para. 367. The tribunal confirmed its jurisdiction in this case on the basis of a provisional application of the Energy Charter Treaty. See Yukos v Russia, Interim Award on Jurisdiction and Admissibility of 30 November 2009, para. 601. However, this Interim Award was challenged by Russia before the Hague District Court, which decided to squash the Interim Award and the Final Award, because the tribunal wrongly declared itself competent in the arbitration. See The Russian Federation v Veteran Petroleum Limited, Yukos Universal Limited, and Hulley Enterprises Limited, The Hague District Court, Chamber of Commercial Affairs, Judgment of 20 April 2016, para. 5.96. This judgment is under appeal at the time of writing. Yukos v Russia, Award of 18 July 2014, para. 1778. Ibid, para. 1784. The Russian oil companies were Rosneft, Gazprom Neft, Lukoil, TNK-BP, and Surgutneftegaz, and the international oil companies were BP, Chevron, ConocoPhilips, Exxon-Mobil, Royal Dutch Shell, and Total SA. Ibid, para. 1715. The net income, EBITDA, reserves, and production of Yukos were derived from the 'pro-forma financial statements' established in the context of the DCF method. Ibid, para. 1715. It included the preferred or common shares of nine Russian oil and gas companies, the most important of which are Gazprom, Lukoil, Novatek, Rosneft, and Surgutneftegaz. Ibid, para. 1788.

143) It noted that the methodology for establishing the index as well as its current and

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historical values were transparent and publicly available on the webpage of the Moscow stock exchange, and that both parties had referred to it as a reliable indicator reflecting the changes in the value of Russian oil and gas companies. Ibid, para. 1788. The index on the latter date was taken from an average between 6 January 2014 to 24 June 2014 in order to eliminate random fluctuations. Ibid, para. 1821. By applying this factor to the amount of US$ 61.076 billion, which was the value of Yukos at the expropriation date, the tribunal arrived at an equity value of Yukos as of 30 June 2014 in the amount of US$ 42.625 billion. Ibid. The claimants' share in Yukos was 70.5%, so that the calculated pro rata share was US$ 30.049 billion. Ibid, para. 1822. With regard to the DCF method, the tribunal noted that the claimants' expert had admitted that his analysis was influenced by his own pre-determined notions as to what would be an appropriate result. As regards the comparative transactions method, both parties agreed that there were no comparable transactions. Ibid, para. 1785. Tza Yap Shum v Peru, Award of 7 July 2011, para. 264. The adjusted book value was US$ 873,673,60, of which 90% amounted to US$ 786,306,24. This was the total amount awarded, as the tribunal rejected further claims for moral damage. See further below, Section C(1)(c). I Seidl-Hohenveldern, 'L'évaluation des dommages dans les arbitrages transnationaux' (1987) 33 Annuaire français de droit international 7, 24; explicitly quoted in Asian Agricultural Products Ltd v Sri Lanka, Award of 27 June 1990 (1997) 4 ICSID Reports 246, para. 104. See also S K Khalilian, 'The Place of Discounted Cash Flow in International Commercial Arbitration: Awards by Iran–U.S. Claims Tribunal' (1991) 8 Journal of International Arbitration 31 et seq. See, e.g., Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 238; Phelps Dodge Corp v Iran, 10 Iran–US CTR (1986) 121, para. 30; Metalclad v Mexico, Award of 30 August 2000 (2001) 40 ILM 36, para. 121; and Wena Hotels v Egypt, Award of 8 December 2000, para. 122. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 238; see also Phelps Dodge Corp v Iran, 10 Iran–US CTR (1986) 121, para. 30; Metalclad v Mexico, Award of 30 August 2000, para. 121; and Wena Hotels v Egypt, Award of 8 December 2000, para. 122. Kantor notes: 'The contrast between the preference among international investment tribunals for Asset-Based methods and the preference among valuation organizations and professionals for Income-Based methods is striking'. M Kantor, above, n. 1, 53. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 359 (emphasis in original). CME v Czech Republic, Separate Opinion Brownlie on the Issues at the Quantum Phase of 14 March 2003, paras 97, 99. See the argumentation of the tribunal in Amoco International Finance v Iran: 'The capitalization of the future earnings will probably amount to a much higher figure, which could lead to unjust enrichment for the beneficiary of such compensation, since he could, hypothetically, establish a similar enterprise with comparable earnings, spending only a portion of the compensation received, and earn additional revenues with the remaining part', Amoco International Finance Corporation v Iran, 15 Iran–US CTR (1987) 189, para. 231.

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156) In Barcelona Traction Light and Power Company (Belgium v Spain), even though no

157)

158) 159) 160) 161) 162) 163) 164) 165) 166) 167) 168) 169) 170) 171) 172) 173) 174) 175) 176) 177) 178) 179) 180) 181) 182)

183) 184) 185) 186) 187) 188)

judgment on the merits could be achieved, valuation matters played an important role. The parties referred to all three valuation approaches in their submissions. Spain relied on the income approach in order to show that the damage was minimal due to the lack of future profitability. Belgium, by contrast, relied on the asset approach in order to get reparation for the tangible assets lost. Both parties rejected the market value in the form of stock prices as a reliable indicator for the value of the company. See further G White, above, n. 6, 43 et seq. The 40% of the investment actually undertaken which represented the claimants' share amounted to CFA 122,000,000, while the valuation based on forecast income was CFA 110,098,936. Benvenuti & Bonfant v Congo, Award of 15 August 1980, para. 4.78. Delagoa Bay and East African Railway Company, Award of 30 May 1900, reprinted in pertinent part in M Whiteman, above, n. 5, 1694, 1699. Starrett Housing Corporation v Iran, Final Award, 16 Iran–US CTR (1987) 112, 201–24. Phillips Petroleum Company Iran v Iran, 21 Iran–US CTR (1989) 79, 122–45. Amco Asia v Republic of Indonesia (Amco I) Award of 20 November 1984 (1993) 1 ICSID Reports 413, 501–6; Amco Asia v Indonesia (Amco II) Award of 5 June 1990 (1993) 1 ICSID Reports 569, 609–27. CMS v Argentina, Award of 12 May 2005, paras 416–69. ADC v Hungary, Award of 2 October 2006, paras 501–16. Enron v Argentina, Award of 22 May 2007, paras 405–36. Sempra v Argentina, Award of 28 September 2007, paras 416–66. LG&E v Argentina, Award of 25 July 2007, paras 59–101. Lemire v Ukraine, Award of 28 March 2011, para. 254 (both parties agreed on DCF). El Paso v Argentina, Award of 31 October 2011, paras 682–7, 711–42 ('but for' values of the stakes in the companies representing the fair market value with and without the effect of the measures). Unglaube v Costa Rica, Award of 16 May 2012, para. 309 (income capitalization approach based on the property's highest and best use). EDF v Argentina, Award of 11 June 2012, paras 1238 et seq (both parties agreed on DCF, but submitted very different DCF models). Occidental v Ecuador, Award of 5 October 2012, paras 708 et seq ('but for' DCF). Abengoa v Guatemala, Award of 18 April 2013, para. 688 (DCF is the 'only method to fully compensate Claimant' despite very short time of operation). TECO v Guatemala, Award of 19 December 2013, para. 748 (damages for lost cash flows by comparing the effects of tariffs). Gold Reserve v Venezuela, Award of 22 September 2014, para. 832 (DCF valuation with reference to comparable companies and transactions would result in a reasonable methodology). Mobil Cerro Negro v Venezuela, Award of 9 October 2014, paras 307–74 (applies DCF on basis of submission by the parties making its own adjustments). Flughafen Zürich v Venezuela, Award of 18 November 2014, para. 783 (applied DCF method as agreed by both parties; validated by comparison of comparable companies and transactions). OI European Group v Venezuela, Award of 10 March 2015, paras 784–97 (both parties agreed on use of DCF method, but paired with additional methodologies, such as comparable companies/transactions). Tidewater v Venezuela, Award of 13 March 2015, para. 165 (DCF method, since company was a proven going concern). Suez v Argentina, Award of 9 April 2015, paras 95 et seq (DCF method should be applied; tribunal discusses Free Cash Flow, Adjusted Present Value, and Flow to Equity, applying the latter two which arrived at nearly identical results). Quiborax v Bolivia, Award of 16 September 2015, paras 343–7, 364–502 (sufficient record of operations and prospective profitability to justify applying the DCF method to value the concessions). Enron Corp v Argentina, Award of 22 May 2007, para. 385 (footnotes omitted). Himpurna California Energy Ltd v Indonesia, Final Award of 4 May 1999 (2000) 25 YCA 13; Karaha Bodas v Pertamina, Arbitral Tribunal, Final Award of 18 December 2000, summarized in pertinent part in Karaha Bodas Co v Perusahaan Pertambangan Minyak dan Gas Bumi Negara, 364 F.3d 274, 282–5 (5th Cir 2004). Bridas SAPIC v Government of Turkmenistan, Partial Award of 25 June 1999, excerpts reprinted in R D Bishop, J Crawford, and W M Reisman, Foreign Investment Disputes. Cases, Materials and Commentary (The Hague: Kluwer, 2005) 1270 et seq. National Grid v Argentina, Award of 3 November 2008, paras 275 et seq (comparable transactions method, but also looking at DCF). Walter Bau v Thailand, Award of 1 July 2009, para. 14.21 (DCF method most appropriate in the present case). Mobil Cerro Negro v Argentina, ICC Award of 23 December 2011, paras 770–8 (accepting data and historical results, but applying 18% discount rate). S D Myers Inc v Government of Canada, Second Partial Award on Damages of 21 October 2002, paras 220–301. Archer Daniels v Canada, Award of 21 November 2007, paras 287–93 (quantum of damages depends on the amount of lost profits that have been proved).

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189) Cargill v Mexico, Award of 18 September 2009, paras 538–40 (present value of net 190) 191) 192) 193) 194) 195) 196) 197) 198) 199) 200)

201) 202) 203) 204) 205) 206) 207) 208) 209) 210) 211) 212) 213) 214)

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lost cash flows equal to 'but for' quantity of HFCS that would have been sold, multiplied by the price of HFCS). Kardassopoulos v Georgia, Award of 3 March 2010, para. 595 (valuation of claimants' 50% interest in GTI's rights, based on the income and market approach). Anatolie Stati v Kazakhstan, Award of 19 December 2013, para. 1617 (parties and tribunal agree that DCF method is appropriate for calculation). CMS v Argentina, Award of 12 May 2005, para. 410. Enron v Argentina, Award of 22 May 2007, para. 384. Sempra v Argentina, Award of 28 September 2007, paras 404, 416. Abengoa v Guatemala, Award of 18 April 2013, para. 688. Mobil Cerro Negro v Venezuela, Award of 9 October 2014, paras 307–8. Flughafen Zürich v Venezuela, Award of 18 November 2014, paras 739, 741. Tidewater v Venezuela, Award of 13 March 2015, para.145. Amco Asia Corp v Indonesia (Amco II), Award of 5 June 1990. Himpurna California Energy Ltd v Indonesia, Final Award of 4 May 1999 (2000) 25 YCA 13. Karaha Bodas Co, LCC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina) and PT PLN (Persero), Final Award of 18 December 2000 (2001) 16 International Arbitration Report, C-2. S D Myers v Canada, Second Partial Award on Damages of 21 October 2002, paras 94, 174. ADC v Hungary, Award of 2 October 2006, para. 514. LG&E v Argentina, Award of 25 July 2007, paras 37–45, 59. Lemire v Ukraine, Award of 28 March 2011, para. 152. Archer Daniels v Canada, Award of 21 November 2007, paras 275–87. Walter Bau v Thailand, Award of 1 July 2009, para. 14.28. TECO v Guatemala, Award of 19 December 2013, para. 719. Quiborax v Bolivia, Award of 16 September 2015, para. 326. See in more detail below, paras 5.246 et seq. Wena Hotels v Egypt, Award of 8 December 2000. Pope & Talbot and Canada, Award in Respect of Damages of 31 May 2002, para. 84. Siemens v Argentina, Award of 6 February 2007, paras 355–7. Vivendi v Argentine Republic (Vivendi II), Award of 20 August 2007, para. 8.3.11. Khan Resources v Mongolia, Award of 2 March 2015, para. 423. See also Siag v Egypt, Award of 1 July 2009, para. 566; Bahloul v Tajikistan, Award of 2 September 2009, para. 98; Railroad Development v Guatemala, Award of 29 July 2012, para. 269; Tza Yap Shum v Peru, Award of 7 July 2011, paras 261–3; Impregilo v Argentina, Award of 21 June 2011, para. 373; Meerapfel v Moldova, Award of 21 May 2011, para. 393; Arif v Moldova, Award of 8 April 2013, para. 576; Abengoa v Mexico, Award of 18 April 2013; Hassan Awdi v Romania, Award of 2 March 2015, para. 514; Tenaris v Venezuela, Award of 29 January 2016, para. 527. CME v Czech Republic, Final Award on Damages of 14 March 2003, see above, paras 5.24–5.26 and paras 5.58–5.59; Gold Reserve v Venezuela, Award of 22 September 2014, para. 832; Flughafen Zürich v Venezuela, Award of 18 November 2014, para. 783; OI European Group v Venezuela, Award of 10 March 2015, paras 784–97. The tribunal in Gold Reserve v Venzuela found that the DCF method was not reliable, since the Brisas Project had never been a functioning mine with a history of cash flows, but that also the comparables method was not appropriate, since the comparables were not sufficiently similar. It found, however, that the DCF valuation with reference to comparable companies and transactions would result in a reasonable methodology. Gold Reserve v Venezuela, Award of 22 September 2014, para. 832. IVSC, International Valuation Standards (London: IVSC, 2013) 24. The DCF method is not equal to lucrum cessans and asset value does not represent damnum emergens, as the tribunal in Amoco International Finance v Iran put it. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 229. See S K Khalilian, 'The Place of the DCF-Method in International Commercial Arbitrations: Awards by the Iran-United States Tribunal' (1991) 8 Journal of International Arbitration 31 et seq; similarly C Chatterjee, 'The Use of the DCF-Method in the Assessment of Compensation. Comments on the Recent World Bank Guidelines on the Treatment of Foreign Direct Investment' (1993) 10 Journal of International Arbitration 19 et seq. '[T]he Claimant's calculations of anticipated revenues [are not considered] as a request to be awarded lost future profits, but rather as a relevant factor to be considered in the determination of the fair market value of its property interest at the date of the taking.' Phillips Petroleum Co Iran v Iran, 21 Iran–US CTR (1989) 79, para. 112. 'The Tribunal recognizes that a prospective buyer of the asset would almost certainly undertake such a DCF analysis to help it determine the price it would be willing to pay and the DCF calculations are, therefore, evidence the Tribunal is justified in considering in reaching its decision on value.' Phillips Petroleum Co Iran v Iran, 21 Iran–US CTR (1989) 79, para. 112. Phillips Petroleum Co v Iran, 21 Iran–US CTR (1989) 79, para. 112.

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222) Starrett Housing Corporation v Iran, 16 Iran–US CTR (1987) 112, para. 273. The income-

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based calculation only concerned the smaller part of the claim amounting to US$ 2.5 million, while the greater part consisted in the repayment of loans in the amount of US$ 33.9 million. The tribunal in Amco v Indonesia found the 'average monthly net profit of the hotel for the fifteen month period' a sound base for calculating the amount of damages. Amco v Indonesia (Amco II), Award of Award of 5 June 1990, para. 202. The tribunal in Amco v Indonesia denied 'entitlement to cash flow' and consequently identified the amount to be awarded as 'US present Value of Profits'. Ibid, paras 223–4. As regards the definition and qualities of cash flows see above, Chapter 4, Section C(1)(a). CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 160. The starting point of the valuation was the balance sheets between 1994 and 1999, in accordance with US-GAAP. Ibid, paras 123 et seq. The advertising market share was, therefore, the most important element for the projected cash flow. Ibid, para. 578. Ibid, paras 593–4. CMS v Argentina, Award of 12 May 2005, paras 430–3. Ibid, para. 433. Ibid, para. 430. See, e.g., the tribunal Enron v Argentina, which just endorsed the DCF method as a reliable approach to calculate damages. Enron v Argentina, Award of 22 May 2007, para. 386. These adjustments may concern assumptions relating to both the forecasting and the discount rate. See above, Chapter 4, Section C(2). Tribunals have become more active in challenging the assumption of experts. They have engaged in detailed discussions on various parameters and also asked the experts for submitting models which would allow changing certain assumptions. On the role of experts in arbitration proceedings see in more detail Chapter 4, Section E. LG&E v Argentina, Award of 25 July 2007, para. 59. Ibid. World Bank Guidelines on the Treatment of Foreign Investment, section IV(6), first indent (1992) 31 ILM 1363, 1383; see above, Chapter 4, Section A(2)(b). See above, Chapter 4, Section A(4). Case Concerning the Factory at Chorzów, PCIJ 1928 Ser A, No. 17, 54. Aminoil v Kuwait (1982) 21 ILM 976, para. 178; council to the parties later commented on this award, see R Young and W Owen, 'Valuation Aspects of the Aminoil Award' in R Lillich (ed.), The Valuation of Nationalized Property in International Law, vol. 4 (Charlottesville: University Press of Virginia, 1987) 3 et seq; A Redfern, 'The Arbitration between the Government of Kuwait and Aminoil' (1984) 55 BYIL 65 et seq; see also D Bowett, 'Claims between States and Private Entities: The Twilight Zone of International Law' (1986) 35 Catholic University Law Review 929 et seq; see also American International Group v Iran, 4 Iran–US CTR (1983) 96, 109. Amoco International Finance v Iran, 15 Iran–US CTR (1987) 189, para. 203. It specified that '[g]oing concern value encompasses not only the physical and financial assets of the undertaking, but also the intangible valuables which contribute to its earning power, such as contractual rights (supply and delivery contracts, patent licences and so on), as well as goodwill and commercial prospects'. Ibid, para. 255. Ibid, para. 95. The tribunal referred to the consistent jurisprudence in this respect, in particular to Phelps Dodge Corp et al v Iran, 10 Iran–US CTR (1986) 121 ('manufacturing company had not yet commenced production'); Sola Tiles v Iran, 14 Iran–US CTR (1987) 223 ('Revolution adversely affected the market for luxury tiles'); Motorola v Iran National Airlines Corporation, 19 Iran–US CTR (1988) 73 ('limited market for sophisticated communications equipment after the Revolution'); CBS v Iran, 25 Iran–US CTR (1990) 131 ('market for western music detrimentally impacted by Revolution'); Faith Lita Khosrowshahi v Iran, 30 Iran–US CTR (1994) 76, para. 44; Shahine Shaine Ebrahimi v Iran, 30 Iran–US CTR (1994) 170, para. 97. In Amoco International Finance v Iran, the 'going concern value' was also sharply distinguished from income-based calculation techniques, such as the DCF method. Amoco International Finance v Iran, 15 Iran–US CTR (1987), paras 227 et seq. In Tavakoli v Iran, the going concern test was made in order to assess the value of the company under a hypothetical liquidation. Tavakoli v Iran, 33 Iran–US CTR (1997) 206 et seq. In Aminoil v Kuwait, the tribunal based the valuation on a 'depreciated replacement value' of the tangible assets. Aminoil v Kuwait, Award of 24 March 1982, paras 166–7. In Amoco International Finance v Iran, the tribunal did not decide upon the valuation but only gave instructions for the valuation at a later stage. The amount payable to the claimant was later agreed between the parties, but the Award on Agreed Terms does not allow a more thorough interpretation of how this result was reached. See Amoco International Finance v Iran, Award on Agreed Terms, 25 Iran–US CTR (1990) 314, 317.

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245) The reason is that any value of any asset, in economic practice, is to be valued on

246) 247)

248) 249) 250) 251) 252) 253)

254) 255) 256) 257) 258) 259) 260) 261) 262)

263)

264) 265) 266) 267) 268) 269)

270) 271) 272) 273) 274) 275) 276) 277) 278) 279) 280) 281) 282) 283)

the basis of its future profitability. See above, Chapter 4, Section C(2). If there is no future profitability, a willing buyer would simply not buy the asset and a rational owner would sell the assets under the liquidation premise. See above, Chapter 4, Section C(3)(c). As contained in NAFTA Article 1102, S D Myers Inc v Canada, Partial Award of 13 November 2000 (2005) 8 ICSID Reports 18, para. 256. As contained in NAFTA Article 1105. Ibid, para. 268. The arguments submitted by the respondent that the export prohibition was a measure for environmental protection was not accepted by the tribunal. It found that the reason was rather the intended protection of the national waste disposal industry. Ibid, paras 251 et seq. S D Myers Inc v Canada, Second Partial Award of 21 October 2002 (2005) 8 ICSID Reports 124, para. 122. Ibid, para. 174. See the discussion of cases below, paras 5.247 et seq. See Chapter 4, Section C(2)(c). Amco Asia v Indonesia (Amco I), Award of 20 November 1984, para. 274. After the annulment of the first award of 20 November 1984 by the ad hoc Committee on 16 May 1986, a second tribunal decided on the final award. A second application of annulment was rejected on 17 December 1992. Amco Asia Corp v Indonesia (Amco II), Award of 5 June 1990, paras 203, 284. CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, para. 124. Ibid, paras 129, 131–2. Starrett Housing Corporation v Iran, 16 Iran–US CTR (1987) 112, para. 305. The prices actually paid after 1980 confirmed this assumption. Ibid, para. 316. Phillips Petroleum Co Iran v Iran, 21 Iran–US CTR (1989) 79, para. 163. Rusoro v Venezuela, Award of 22 August 2016, para. 759. See, e.g., LIAMCO v Libya (1982) 62 ILR 141, 213 et seq; Phillips Petroleum Co Iran v Iran, 21 Iran–US CTR (1989) 79, paras 117 et seq. See, e.g., Phillips Petroleum Co Iran v Iran, 21 Iran–US CTR (1989) 79, para. 119. Ibid, para. 125. 'Thus, to arrive at the Project's fair market value, the Expert (i) calculated the remaining revenues in the Project, (ii) calculated the remaining costs in the Project, and (iii) applied a discount rate to the resulting cash flow. This discount rate was based on return on capital expected by a reasonable businessman on 31 January 1980 as well as on the expected rate of inflation, rate of real interest, and rate of risk.' Ibid, para. 32. The tribunal noted: 'The valuation method adopted by the Expert required a determination of the total amount of revenues that a reasonable businessman purchasing the Project on 31 January 1980 would expect to receive from the completed Project. The revenues would be derived from sales and resales of apartments, sales of extra parking spaces, and sales from heavy duty construction equipment.' Ibid, para. 302. Ibid, paras 324 et seq. Income taxes were reflected only after the discounting process. Ibid, para. 345. Sometimes, taxes are already deducted from the beginning. See the 'indirect' determination of cash flows above, para. 5.88. CME Czech Republic v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, paras 109 et seq. Ibid, paras 116 et seq. See, ibid, para. 565. Ibid, paras 565, 571. The tribunal noted: 'The Tribunal has taken due notice of SDMI's successful experience of seizing marketing opportunities in the USA, but at the same time acknowledges that the Canadian market had certain distinctive features'. Ibid, para. 173. Ibid, para. 182. Ibid, paras 182 et seq. Ibid, para. 226. It, therefore, awarded an amount of CAN$ 6.05 million, plus compound interest. Ibid, para. 301. CMS v Argentina, Award of 12 May 2005, paras 442 et seq. Enron v Argentina, Award of 22 May 2007, paras 408 et seq. Ibid, para. 410. Sempra v Argentina, Award of 28 September 2007, paras 416 et seq. Ibid, para. 418. LG&E v Argentina, Award of 25 July 2007, para. 100. ADC v Hungary, Award of 2 October 2006, para. 115. Flughafen Zürich v Venezuela, Award of 18 November 2014, paras 855–8. The tribunal in Rusoro v Venezuela pointed out that the business plan should be 'adopted in tempore insuspecto, prepared by the company's officers and verified by an impartial expert'. Rusoro v Venezuela, Award of 22 August 2016, para. 759. See Phillips Petroleum Co Iran v Iran, 21 Iran–US CTR (1989) 79, paras 119, 120–1, and 124.

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284) CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003

(2006) 9 ICSID Reports 246, para. 1.62.

285) Ibid, para. 163. 286) Ibid, para. 131. This also concerned the inflation rate which was was only 4.5% rather 287) 288) 289) 290) 291) 292) 293) 294) 295) 296) 297) 298) 299)

300)

301) 302) 303)

304) 305) 306) 307)

308)

than 7.8%. This, however, had little impact as both the forecasting and the discounting were based on nominal figures. Ibid, para. 163. CMS Gas Transmissions Company v Argentine Republic, Award of 12 May 2005 (2005) 44 ILM 1205, para. 422. Ibid. Ibid, paras 439 et seq. ADC v Hungary, Award of 2 October 2006, para. 507. Abengoa v Mexico, Award of 18 April 2013, para. 691. American International Group v Iran, 4 Iran–US CTR (1983) 96, 107; see above, Chapter 3, Section C(1)(a), para. 3.273. American International Group v Iran, 4 Iran–US CTR (1983) 96, 109. Thomas Earl Payne v Iran, 12 Iran–US CTR (1986) 3. 'Also, it must be observed that Berkeh was clearly seriously affected by the new restrictions on the importations of films imposed by the Iranian Government.' Ibid, para. 35. The business included in particular 'manufacturing, importing, exporting and marketing tapes and records, and publishing music, in Iran'. CBS Inc v Iran, 25 Iran– US CTR (1990) 131, para. 12. Ibid, para. 52. The tribunal came to the conclusion that the company had 'no value'. For this reason, it did not even address the issue of expropriation any longer. Ibid, para. 60. Sola Tiles Inc v Iran, 14 Iran–US CTR (1987) 223 et seq. 'Simat's trade consisted largely of selling specialised luxury tiles, the market for which depended in large measure on the continued construction of luxury houses and apartments. The question presents itself—though neither party offered evidence on this point—whether Simat could have expected to continue importing large quantities of tiles without experiencing problems …'. Ibid, para. 63. 'The impact of such development on the value of the goodwill element of Simat's business by the time of the expropriation in 1979 must have been dramatic. Given the picture that emerges, Simat's prospects of continuing active trading after the Revolution were not, in the view of the Tribunal, such as to justify treating Simat as a going concern so as to assign any value to goodwill.' Ibid, para. 64. Phelps Dodge Corporation et al v Iran, 10 Iran–US CTR (1986) 121, para. 30. Ibid. '[T]he Tribunal could not properly ignore the obvious and significant negative effects of the Iranian Revolution on SICAB's business prospects, at least in the short and medium term.' Ibid, para. 30. See also the critical comments by M Pellonpää and M Fitzmaurice, above, n. 4, 149. Khosrowshahi v Iran, 30 Iran–US CTR (1994) 76, para. 44. See, e.g., M Pellonpää and M Fitzmaurice, above, n. 4, 147; J Westberg, International Transactions and Claims Involving Government Parties. Case Law of the Iran–United States Claims Tribunal (Washington: International Law Institute, 1991) 244 et seq. See above Chapter 3, Section D(2), and below Section (f), paras 5.140 et seq. R Higgins, 'The Taking of Property by the State' (1982) 176 RdC 259, 269. See also R Dolzer, 'New Foundations of the Law of Expropriation of Alien Property' (1981) 75 AJIL 553, 579–80; similarly, I Seidl-Hohenveldern, 'International Economic Law' (1986) 198 RdC 9, 181; I Seidl-Hohenveldern, above, n. 149, 7, 28. 'Both Parties to the present litigation have invoked the notion of “legitimate expectations” for deciding on compensation. That formula is well advised, and justifiably brings to mind the fact that, with reference to every long-term contract, especially such as involve an important investment, there must necessarily be economic calculations, and the weighing up of rights and obligations, of chances and risks, constituting the contractual equilibrium.' Aminoil v Kuwait, Award of 24 March 1982, para. 148.

309) Ibid, paras 148 et seq. 310) It rejected, however, the idea that the widespread practice of renegotiations of oil

concessions had created new customary law in this respect. Ibid, paras 154 et seq.

311) Ibid, paras 148 et seq. 312) Ibid, para. 154. Fitzmaurice, however, rejected in his Separate Opinion the idea of

factoring in such renegotiations because the parties to a contract would normally only agree on changes to the terms of the contract, if the disadvantages are balanced by advantages. Aminoil v Kuwait, Separate Opinion Fitzmaurice (1982) 21 ILM 1043, para. 28. In contrast, I Seidl-Hohenveldern argues that economic constraints could also lead to less favourable results after the negotiations which would have a negative influence on future prospects. I Seidl-Hohenveldern, above, n. 149, 24. 313) Aminoil v Kuwait, Award of 24 March 1982, para. 148. 314) Phillips Petroleum Co Iran v Iran, 21 Iran–US CTR (1989) 79, para. 153; see also Amoco International Finance Corp v Iran, 15 Iran–US CTR (1987) 189, para. 263.

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315) Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003,

, para. 356.

316) Himpurna California Energy Ltd v PT (Persero) Perusahaan Listruik Nagara (PLN), Final

Award of 4 May 1999 (2000) 25 YCA 13, paras 234 et seq.

317) The tribunal referred several times to the respondent's submission describing the

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322)

323) 324) 325) 326) 327) 328) 329) 330) 331) 332) 333) 334) 335) 336) 337) 338) 339) 340) 341) 342) 343) 344) 345) 346) 347)

catastrophic economic situation of Indonesia at the time: '1998 to 1999, the Indonesian economy contracted by 15%, resulting in more than 5 million workers losing their jobs. The rupiah … has lost more than 80% of its value since the crisis first erupted. Out of a popluation of 200 million, the number of seriously poor people in Indonesia is projected to reach 130 million in 1999 as a result of the impact of the decline in job opportunities and an inflation rate that exceeded 75% last year.' Ibid, para. 182. Ibid, para. 294. '[T]he Parties to the ESC did not rely on the Civil Code, but chose—as they had every right to do—to fashion a contractual allocation of risk … that only the claimant may claim that an act of the GOI [Government of Indonesia] constitutes an event of force majeure. Thus, the Parties rejected the possibility that PLN could rely on a governmental act—even in response to an economic crisis, as with Presidential Decree 39/1997—to undo its contractual obligations.' Ibid, paras 193–4. CMS v Argentina, Award of 12 May 2005, para. 439. '[D]uring a period of steep decline in sales, it would be unrealistic to expect that there would not be an appreciable increase in the proportion of O&M to sales. There is a significant amount of rigidity in this type of expenditures in a regulated industry where the maintenance of safety has to be paramount …, even when growth in sales has returned, the requirements for safety do not decrease and with aging equipment, maintenance expenditures will tend to rise rather than decline.' Ibid, paras 460–1. Under the no pesification scenario the clamaint's expert assumed an average yearly revenue increase which by 2027 would have amounted to close to a 100% rate of return. The tribunal found it unlikely that the competent Argentine authority would have allowed for such returns: 'While the Tribunal is willing to concede that a certain amount of recuperation might have been allowed by ENARGAS, it is difficult to conceive that it could have tolerated the kind of escalation described above, without making downward adjustments to the tariff on the occasion of its Five Year Review starting in 2013'. Ibid, para. 456. The tribunal noted that the respondent had already offered a 7% tariff increase. It, therefore, assumed a 5% increase on the occasion of each five-year tariff review. Ibid, para. 457. Ibid, para. 444. The Arab Investment Court awarded damages in the amount of US$ 900 million. See Al-Kharafi & Sons Co v Libya, Final Arbitral Award, 22 March 2013, Cairo Arab Investment Court, 374 et seq. Shufeldt Claim (United States v Guatemala), Award of 2 November 1929, 2 RIAA, 1079, 1083. Bridas SAPIC v Turkmenistan, Partial Award of 25 June 1999, published in part in R Bishop, J Crawford, and W Reisman, above, n. 183, 1270, 1272. LETCO v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 373. Ibid, at 373. On this basis, the calculation of future profits included not only the revenues from the so-called 'first cut' but also from a 'second cut' of timber after several years. Ibid. This resulted in US$ 6,120,189 as lost profits, in comparison to the net patrimonial worth of US$ 1,975,715. Ibid, at 377. Ibid, at 376. Ibid, at 375, 376. This may be explained by the fact that the respondent ceased to participate in the proceedings after the nomination of the arbitrator. See ibid, at 354 et seq. CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, para. 605. Ibid, para. 605. Ibid. Ibid. See above, Chapter 3, Section C(2)(b). See above, Chapter 3, Section C(1)(a). S Pratt and A Nicolita, Valuing a Business: The Analysis and Apprasial of Closely Held Companies (5th edn, New York: McGraw-Hill, 2008) 1025. See, e.g., CMS Gas Transmissions Company v Argentina, Award of 12 May 2005 (2005) 44 ILM 1205, para. 410. See above, Chapter 3, Section B(1)(b), paras 3.152 et seq. LG&E v Argentine Republic, Award of 25 July 2007, paras 36, 58. See A Reinisch‚ 'Necessity in International Investment Arbitration—An Unnecessary Split of Opinions in Recent ICSID-Cases? Comments on CMS v Argentina and LG&E v Argentina' (2007) 8 JWIT 191. CMS v Argentina, Award of 12 May 2005, para. 57. Ibid, paras 263–4.

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348) 349) 350) 351) 352)

353) 354) 355) 356) 357) 358) 359) 360) 361) 362) 363) 364) 365) 366) 367) 368) 369) 370) 371)

Ibid, para. 281. Ibid, para. 303. Ibid, para. 422. Ibid, para. 402. 'Moreover, the Tribunal concludes that the Claimant must transfer to the Respondent the ownership of its shares in TGN, upon payment by the Respondent of the additional sum of USD 2,148,100 … the Government of Argentina will have a time limit of one year from the date of this award to purchase CMS' shares in TGN.' Ibid, para. 469. Enron Corporation and Ponderosa Assets v Argentine Republic, Award of 22 May 2007, , para. 361. Ibid, para. 389. This value had, however, to be adjusted for inflation. This has resulted in a further reduction of the claimant's remedy. See below, para. 5.244. Sempra Energy International v Argentine Republic, Award of 28 September 2007, . Ibid, para. 412. Ibid, para. 436. See above, Chapter 3, Section B(1)(a). LG&E Energy Corp et al v Argentina, Award of 25 July 2007, , para. 35. Ibid, para. 60. Mobil v Canada, Award of 22 May 2012, paras 427, 487. The tribunal awarded 'lost profits' between 2008 and 2010 'as the the difference between the actual historical results and the cash flow projection made'. TECO v Guatemala, Award of 19 December 2013, para. 335. See above, Chapter 4, Section C(2). Amco Asia Corp v Indonesia, Award of 5 June 1990 (Amco II) (1993) 1 ICSID Reports 569, para. 196. Ibid, paras 201 et seq. Ibid, paras 267 et seq. Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 373; see already above para. 5.137. Ibid, at 376. CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, paras 572 et seq. Ibid, paras 514 et seq.

372) CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 576. 373) Arbitrator Brownlie largely agreed with these contentions in his Separate Opinion. 374) 375) 376) 377) 378) 379)

380) 381) 382) 383) 384) 385)

CME v Czech Republic, Separate Opinion Brownlie on the Issues at the Quantum Phase of 14 March 2003, para. 70. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 574. The two parties did, however, concur that the residual value of the company would amount to 60% of the total value of the company. Ibid, para. 576. The tribunal in Alpha Projektholding v Ukraine decided that the terminal value of the investment should not be evaluated as a going conern but at its liquidation value. See Alpha Projektholding v Ukraine, Award of 8 November 2010, paras 501–8. Railroad Development v Guatemala, Award of 29 June 2012, para. 277. See Chapter 4, Section C(2)(d). CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, para. 117. This due diligence report made reference to the fact that the owner of the only competitor was at the same time a business partner of the company to be valued. Therefore, the report primarily addressed the risk that this partner would not continue to cooperate in the future. See CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, para. 518. Ibid, paras 514 et seq. Ibid, para. 164. In CME v Czech Republic, the tribunal accordingly noted that '[t]he experts agreed on the same discount rate of 10.83%'. Ibid, para. 564. But see N Rubins and S Kinsella, International Investment, Political Risk and Dispute Resolution: A Practitioner's Guide (Dobbs Ferry, NY: Oceana, 2005) 256. See above, Chapter 4, Section (2)(d). The tribunal noted that the claimant's expert considered the following factors in the DCF analysis: (i) the company's future operating cash flows, (ii) the 'continuing value' of the company based on expected cash flows growing at a constant rate after the forecast period; and (iii) a discount rate, based on a company's weighted average costs of capital. See CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, para. 160. The assumptions of the claimant's expert were contrasted by the respondent's expert, in particular, by a reduction of the forecast period, a reduction of the growth rate of the Czech gross TV advertising market and the company's share of this advertising market, an increase of the growth of net advertising expenditure and production costs as well as a reduction of the 'first mover' advantage. See ibid, paras 360 et seq.

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386) The value based on the forecasts according to the claimant's expert amounted to

387) 388) 389) 390)

391)

392) 393) 394)

395) 396) 397) 398) 399) 400) 401) 402) 403) 404) 405) 406) 407) 408) 409) 410) 411) 412) 413) 414) 415) 416) 417) 418) 419) 420) 421) 422) 423) 424) 425) 426) 427) 428) 429) 430) 431) 432)

US$ 556 million, while according to the respondent's experts, the forecasts only resulted in a value of the company of US$ 335 million. See CME Czech Republic BV v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, paras 165, 178, and 345. See the tribunal's analysis at paras 563 et seq. The claimant's expert had argued that the cost of equity was equal to the return on risk-free securities, plus systemic risk of the investment (beta), multiplied by the market risk premium. ADC v Hungary, Award of 2 October 2006, para. 511. Ibid, para. 511. Ibid. The tribunal was very satisfied with the way the damages claim was presented: 'The Tribunal would like to point out here that the LECG reports are, in the Tribunal's view, an example as how damages calculations should be presented in international arbitration; they reflect a high degree of professionalism, clarity, integrity and independence by financial expert witnesses. LECG's valuation is fully validated by the amount of the acquisition by BAA of Budapest Airport Rt. on December 22, 2005 …'. Ibid, para. 516. The tribunal noted: 'The impact of the measure is already impounded in the cash flows being valued, pesified tariffs translating into much lower dollar cash flows. That negative event has taken place and has had its negative impact upon cash flows, current and future, but some kind of normalcy should rule the future. Already, there are encouraging signs in that regard in the Argentine economy.' CMS v Argentina, Award of 12 May 2005 (2005) 44 ILM 1205, para. 451. Ibid. Ibid, para. 452. The claimant's expert 'used a 'risk-free' rate of 5.94, a country risks premium of 5.21% based on the equity risk premium of TGN's debt over the US Treasury rate, and a 2.296% equity risk premium (market equity risk premium of 5.6% multiplied by TGN's beta factor of 0.41)'. Ibid, para. 454. Ibid. Ibid, para. 455. Enron v Argentina, Award of 22 May 2007, para. 411. The tribunal noted: 'While the ENARGAS did not reach a final determination on this matter [the calculation of tariffs], the figures discussed at the time reflected the options available and its most likely outcome'. Ibid, para. 412. Sempra v Argentina, Award of 28 September 2007, para. 431. Ibid. Ibid, at 431 and 458. Alpha Projektholding v Ukraine, Award of 8 November 2010, para. 483. Ibid, para. 482, footnotes omitted. EDF v Argentina, Award of 11 June 2012, paras 1244–85. Ibid, para. 1250. Ibid, para. 1267. Ibid, para. 1268. Mobil Cerro Negro v Venezuela, Award of 9 October 2014. Tidewater v Venezuela, Award of 13 March 2015. Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 361. Ibid, para. 362. Ibid, para. 363. Ibid, para. 367. Ibid, para. 365. Tidewater v Venezuela, Award of 13 March 2015. Ibid, para. 183. Ibid, para. 185. Ibid, para. 186. Ibid, para. 190. Gold Reserve v Venezuela, Award of 22 September 2014. Flughafen Zürich v Venezuela, Award of 18 November 2014. Gold Reserve v Venezuela, Award of 22 September 2014, para. 615. Ibid, para. 841. Flughafen Zürich v Venezuela, Award of 18 November 2014, para. 509. Ibid, para. 511. Ibid, para. 882. OI European Group v Venezuela, Award of 10 March 2015. Ibid, paras 399–403. Ibid, para. 782. Phillips Petroleum Corporation v Iran, 21 Iran–US CTR (1989) 79, 133 at n 39. Amco Asia Corp et al v Republic of Indonesia (Amco II), Award of 5 June 1990 (1993) 1 ICSID Reports 569, paras 270 et seq. 'After studying all the factors involved and in particular the fact that the projected hotel earnings have been based on known historic results, the trend in the US dollar and rupiah exchange rate, and given that Amco will receive in 1990 compensation paid in United States dollars, the Tribunal is of the view that a 4% risk factor should be adopted.' Ibid, para. 281.

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433) Ibid, paras 270 et seq. 434) Ibid, para. 282. 435) Enron Corporation and Ponderosa v Argentine Republic, Award of 22 May 2007, para. 436) 437) 438) 439) 440) 441) 442) 443) 444)

445)

446)

447) 448) 449) 450) 451) 452) 453)

454) 455)

456) 457) 458) 459)

460) 461) 462) 463)

464) 465)

411. Ibid. Ibid, para. 429. Ibid, paras 403 and 405. Ibid, para. 423. Ibid, para. 430. Ibid, para. 438. Ibid, para. 452. Rusoro v Venezuela, Award of 22 August 2016, para. 759. '[T]he company had been conducting its business for a little more than 4½ years, and such a short period must be deemed to provide an insufficient basis for projecting future profits.' American International Group v Iran, 4 Iran–US CTR (1983) 96, 108. The claimant has submitted such a valuation on one hand on the basis of a 'pro forma after-tax profit' derived from the results of CMS subsidiaries in the world, and on the other on marketing plans developed at the beginning of the operations in Iran. Both approaches were rejected because they did not reflect 'the specific situation in Iran at and after the time of the revolution'. CBS Inc v Iran, 25 Iran–US CTR (1990) 131, para. 52. The tribunal did, however, consider future profitability: 'As to the last three years, the Tribunal considers on the other hand, that if the contract had been performed as agreed PLASCO would have made sufficient profits to pay the 5% dividend'. Benvenuti & Bonfant v Congo, Award of 15 August 1980, para. 4.71. Asian Agricultural Products v Sri Lanka, Award of 27 June 1990, para. 105. Ibid, para. 103. American Manufacturing and Trading v Zaire, Award of 21 February 1997 (1997) 36 ILM 1531, para. 7.14. Ibid. Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992 (1995) 3 ICSID Reports 189, para. 188. Metalclad Corp v Mexico, Award of 30 August 2000 (2001) 40 ILM 36, para. 121. Ibid, paras 119–20. The tribunal referred explicitly to earlier ICSID awards, such as AGIP v Congo, Benvenuti & Bonfant v Congo, and Asian Agricultural Products Ltd v Sri Lanka, and to awards by the Iran–US Claims Tribunal, such as Sola Tiles v Iran and Phelps Dodge v Iran. The reference to AGIP v Congo, however, is not fully persuasive as the tribunal acknowledged the claim to lost profits but awarded only the symbolic amount of FF 3 as claimed by the claimant. See AGIP SpA v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306, para. 100. Wena Hotels Ltd v Egypt, Award of 8 December 2000 (2002) 41 ILM 896, para. 123. Ibid, para. 122. The tribunal mentioned only in an endnote that the expert report of the claimant referred to a 'profit' of the hotel in Luxor of £4 million and for the Nile Hotel of £21.3 million, whereas the respondent's expert presumed a profit for the Luxor Hotel at less than £10,000 and for the Nile Hotel a loss. It is not entirely clear, however, whether these figures should represent actual 'profits' of the hotel or the 'value' based on the DCF method. Ibid, para. 115, endnote 269. The tribunal referred to the awards in Metalclad v Mexico, Southern Pacific Properties v Egypt, and American Manufacturing and Trading v Zaire which had also rejected the income valuation approach. Ibid, para. 123. Wena Hotels v Egypt, Award of 8 December 2000 (2002) 41 ILM 896, para. 123. See above, para. 5.117. Técnicas Medioambientales v Mexico, Award of 29 May 2003, para. 186. Siag v Egypt, Award of 1 July 2009, para. 566; Bahloul v Tajikistan, Award of 2 September 2009, para. 98; Gemplus v Mexico, Award of 16 June 2010, paras 13.70–2; Meerapfel v Moldova, Award of 21 May 2011, para. 393; Impregilo v Argentina, Award of 21 June 2011, para. 373; Tza Yap Shum v Peru, Award of 7 July 2011, paras 261–3; Arif v Moldova, Award of 8 April 2013, para. 576; Abengoa v Mexico, Award of 18 April 2013; Hassan Awdi v Romania, Award of 2 March 2015, para. 514. Enron v Argentina, Award of 22 May 2007, para. 369. Ibid, paras 379 et seq. Impregilo v Argentina, Award of 21 June 2011, paras 317–18. See, e.g., Bahloul v Tajikistan, Award of 2 September 2009, para. 98; Impregilo v Argentina, Award of 21 June 2011, para. 373; Meerapfel v Moldova, Award of 21 May 2011, para. 393; Railroad Development v Guatemala, Award of 29 July 2012, para. 269; Khan Resources v Mongolia, Award of 2 March 2015, para. 423; Tenaris v Venezuela, Award of 29 January 2016, para. 527 (uncertain future prospects). Amoco International Finance Corporation v Iran, para. 231. SPP (Middle East) Limited, Southern Pacific Properties Limited v Arab Republic of Egypt, General Company for Tourism and Hotels, ICC Award of 11 March 1983 (1983) 22 ILM 752. This award, however, was later invalidated by a French court because of lack of consent to jurisdiction of the ICC by the respondent. The calculation of damage was not directly affected and is, therefore, still of —at least academic— interest.

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466) Ibid, para. 65. The tribunal referred to difficulties of the project from the outset,

467) 468) 469) 470)

471) 472) 473) 474) 475) 476) 477) 478) 479) 480) 481) 482) 483) 484)

485)

486)

487) 488)

489) 490)

491) 492) 493) 494)

including protests from environmentalists and the impending cancellation of contracts, so that the future prospects from the beginning had to be regarded as being significantly reduced. It therefore based its valuation on the amount of investments made, increased by an 'incremental factor' which would correspond to the actual increase in value of the project at the time of the expropriation. See ibid, at 783; see also the affirmative comments by I Seidl-Hohenveldern, above, n. 149, 7, 23–4. Wena Hotels v Egypt, Award of 8 December 2000, para. 123. Ibid, para. 123; Autopista Concesionada v Venezuela, Award of 23 September 2003, para. 359. Técnicas Medioambientales v Mexico, Award of 29 May 2003, para. 186. As the tribunal in Gemplus v Mexico noted: '[I]t is wrong in principle to base such returns on the relatively small contributions made by the Claimants as the Concessionaire's minority shareholders. The Tribunal does not consider that the value of the Claimants' shares, on the facts of this case, bore any material relationship to the Concessionaire's future returns (or profits): this was to be a lucrative investment for the Claimants, albeit subject to high risks.' Gemplus v Mexico, Award of 16 June 2010, paras 13–73. Técnicas Medioambientales v Mexico, Award of 29 May 2003, para. 186. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 596. Crystallex v Venezuela, Award of 4 April 2016, paras 719–20, 758–63. Tenaris v Venezuela, Award of 29 January 2016, paras 521–7. Asian Agricultural Products v Sri Lanka, Award of 27 June 1990, para. 103. Wena Hotels v Egypt, Award of 8 December 2000, para. 124. Rusoro v Venezuela, Award of 22 August 2016, para. 785. 1 Iran–US CTR (1981–82) 10. INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 380. In INA, the tribunal held the claimant's proposal to value the shares on the basis of the purchase price of 1978 'not only reasonable but, in fact, conservative'. Ibid, at 383. Tenaris v Venezuela, Award of 29 January 2016, paras 551–6; see also S Ripinsky and K Williams, Damages in International Investment Law (London: BIICL, 2008) 189; Kantor, above, n. 1, 17–18. See above, Chapter 4, Section (3). See above, Chapter 4, Section (3). Arbitrator Mahmassani in LIAMCO v Libya found that the respondent's suggestion to calculate compensation on the basis of the 'net book value' was one of 'two irreconcilable unacceptable extremes'. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 208; Aminoil v Kuwait, Award of 24 March 1982, paras 155 et seq; see also C Gray, Judicial Remedies in International Law (Oxford: Oxford University Press, 1990) 205. Due to the time which had passed since the beginning of the concession (1948) and the investments made later, there was no relationship between the book value and the actual value at the time of the expropriation in 1977. According to the tribunal, the net book value may be suitable only in case of a recent investment. Aminoil v Kuwait, Award of 24 March 1982, para. 165. American International Group v Iran, 4 Iran–US CTR (1983), 96, 109. This was later taken up by other tribunals, see, e.g., Thomas Earl Payne, 12 Iran–US CTR (1986) 3, para. 30; Khosrowshahi v Iran, 30 Iran–US CTR (1994) 76, para. 34; Vera-Jo Miller et al v Iran, 33 Iran–US CTR (1997) 272, para. 216. See S Pratt and A Nicolita, above, n. 123, 12. Amoco International Finance Corporation v Iran, 15 Iran–US CTR (1987) 189, para. 255; Motorola Inc v Iran Airlines Corporation v Iran, 19 Iran–US CTR (1988) 73, para. 68; in Starrett Housing Corporation v Iran, the tribunal held: 'As noted, the Expert made his valuation in three stages. First, he determined Shah Goli's adjusted book value on the date of taking. Then, recognizing that this book value does not represent fair market value, he determined the price a reasonable buyer would pay for the Project.' Starrett Housing Corporation v Iran, 16 Iran–US CTR (1987) 112, para. 279 (emphasis added). Amoco International Finance Corporation v Iran, 15 Iran–US CTR (1987) 189, para. 255. Asian Agricultural Products Ltd v Sri Lanka, Award of 27 June 1990, para. 98. Further claims of the investor were rejected so that the calculation remained limited to the book value. Ibid, para. 99. Friedland and Wong, however, find that the claimant was indemnified by the placement value of the assets. P D Friedland and E Wong, 'Measuring Damages for Deprivation of Income-Producing Assets: ICSID Case Studies' (1991) 6 ICSID Rev.-FILJ 400, 421. Siemens v Argentina, Award of 6 February 2007, para. 355. This lucrum cessans, according to the claimant, should be calculated under the DCF method. Ibid. The tribunal referred to the 'skeleton operation', which was maintained after the expropriation and to 'unpaid bills for services rendered'. Ibid, para. 386. Tidewater v Venezuela, Award of 13 March 2015, para. 143.

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495) Ibid, para. 145; see also Mobil Cerro Negro v Venezuela, Award of 9 October 2014,

para. 303.

496) Reineccius et al v Bank for International Settlements, Award of 22 November 2002,

para. 195.

497) Ibid, para. 197, referring to an internal paper submitted by the respondent entitled

'Valuation Report and Suggested Transaction Price Range'.

498) Ibid. 499) 'Having determined that a proportionate share of net asset value is the method

500) 501) 502) 503) 504) 505) 506) 507) 508) 509) 510) 511)

512) 513) 514) 515)

516)

517)

518) 519) 520) 521) 522)

523) 524) 525) 526) 527) 528)

required by the Constituent Instruments as confirmed by the past practice of the Bank ….' Reineccius et al v Bank for International Settlements, Award of 22 November 2002, para. 195. William L Pereira Associates v Iran, 5 Iran–US CTR (1984) 198, 227. Computer Sciences Corporation v Iran, 10 Iran–US CTR (1986) 269, 303; see also J A Westberg, above, n. 305, 251; D Shelton, Remedies in International Human Rights Law (3rd edn, Oxford: Oxford University Press, 2015) 155. Dames and Moore v Iran, 4 Iran–US CTR (1983) 212 et seq. United Painting Company Inc v Iran, 23 Iran–US CTR (1989) 351 et seq. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, paras 88 et seq, 314 et seq. Ibid, paras 304 et seq. See further below, para. 5.302. Eastman Kodak Company v Iran, 27 Iran–US CTR (1991) 3, para. 58. Ibid, paras 15, 19. Ibid, para. 52. See above, Chapter 4, Section C(ii). Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 297. The tribunal noted: 'On that basis, i.e., of current net book value representing approximately 91.7% actual value, the resulting value would have to be revised from $76,600.000 to approximately $62,500.000. The value resulting from this analysis of the relationship of current net book value to actual value falls within the fairly wide range of values suggested by the various indications adduced by Claimant. It appears reasonable in view of the record. The Tribunal therefore finds $ 62,500.000 to be appropriate valuation of the SEDIRAN rigs.' Ibid. According to Westberg, the tribunal revised this value on the basis of its own judgment. However, an estimation by Deloitte Haskins & Sells submitted later by the claimant also contained this reduction. See J A Westberg, above, n. 305, 248. The claimant submitted that the book value without adjustments would only reflect historical cost minus an arbitrary depreciation factor. Sedco v IMICO, 21 Iran–US CTR (1989) 31, para. 59. Ibid, para. 60. '[T]he tribunal finds it equitable to reduce their value by approximately $6,500.000. Thus the Tribunal estimates the fair market value of IMICO's buildings, equipment, and machinery at about U.S. $17,000.000.' Ibid. Ibid, para. 63. Arbitrator Aldrich concurs in his separate opinion with this approach but rejected the deduction of tax obligations because they were not owed directly by Sedco but by IMICO. Sedco v IMICO, Separate Opinion Aldrich, 21 Iran–US CTR (1989) 61. The tribunal held: 'This value includes no amount in respect of WIG's future earnings, goodwill or other intangible value, but just the value of WIG's tangible assets, securities and accounts receivable, less its liabilities as of 16 November 1979'. Tavakoli v Iran, 33 Iran–US CTR (1997) 206, para. 92. The tribunal explained: '[A]lthough bearing in mind that the economic environment in Iran after the Revolution was less buoyant than it had been previously and that this would have some impact on the amount for which WIG would have been able to sell its assets'. Ibid, para. 129, referring to Tippetts et al v TAMS-AFFA and Harold Birnbaum v Iran, Tavakoli v Iran. Shahine Shaine Ebrahimi v Iran, 30 Iran–US CTR (1994) 170, paras 103 et seq. 'The Tribunal agrees with the Parties and the Expert that the book value of GB's fixed assets must be adjusted.' Ibid, para. 145. Ibid, paras 108 et seq, 158 et seq. Ibid, para. 155. Ibid. Arbitrator Allison, however, heavily criticized this in his Separate Opinion. He maintained that even in the absence of future prospects—which in this case was not evident in view of the positive result of the company in the past and the realistic expectations of the ongoing apartment project—the Iran–US Claims Tribunal in its practice had always considered it as the minimum to award the value of the particular assets. A diminution of this value because of a 'negative' goodwill would also be against the parties' contentions as the respondent had also submitted a goodwill of 'zero' and thus not a negative figure. Shahine Shaine Ebrahimi v Iran, Separate Opinion Allison, 30 Iran–US CTR (1994) 236, paras 53 et seq, 64 et seq. Siemens AG v Argentine Republic, Award of 6 February 2007, paras 368 et seq. Ibid, para. 373. Ibid, para. 374. Ibid. Tza Yap Shum v Peru, Award of 7 July 2011, para. 264. This valuation can also be regarded as an application of the comparable companies or multiples method. M Kantor, above, n. 1, 49 et seq.

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529) P D Friedland and E Wong, above, n. 490, 405. 530) Norwegian Shipowners' Claim, Award of 13 October 1922, 1 RIAA, 309, 338. 531) See, e.g., Reports and Recommendations made by the Panel of Commissioners

532) 533) 534) 535) 536) 537) 538) 539) 540) 541) 542) 543) 544) 545) 546) 547) 548) 549) 550) 551) 552) 553) 554) 555) 556) 557) 558) 559) 560) 561)

562) 563) 564) 565) 566) 567) 568) 569) 570) 571)

concerning the First Instalment of 'E2' Claims, 3 July 1998, S/AC.26/1998/7; Reports and Recommendations made by the Panel of Commissioners concerning the First Instalment of 'E3' Claims, 17 December 1998, S/AC.26/1998/13; Reports and Recommendations made by the Panel of Commissioners concerning the First Instalment of 'E4' Claims, 19 March 1999, S/AC.26/1999/4. Phelps Dodge Corporation et al v Iran, 10 Iran–US CTR (1986) 121, para. 31. Biloune v Ghana (Jurisdiction, Liability), Award of 27 October 1989 (1994) 95 ILR 183, 211. Biloune v Ghana (Damages and Costs), Award of 30 June 1990 (1992) 95 ILR 211, 218. Ibid, at 229. Ibid. Ibid, at 229–30. Metalclad Corp v Mexico, Award of 30 August 2000, para. 120; see above, para. 5.194. Metalclad Corp v Mexico, Award of 30 August 2000, para. 122. Expenses undertaken in the preparation of the investment have, however, not been accepted as damage. Ibid, para. 125. Wena Hotels v Egypt, Award of 8 December 2000, para. 122. Vivendi v Argentina (Vivendi II), Award of 20 August 2007, para. 8.3.13; see above, Chapter 4, Section B(b)(i), para. 4.72. Vivendi v Argentina (Vivendi II), Award of 20 August 2007, para. 8.3.18. Siemens v Argentina, Award of 6 February 2007, para. 375. Meerapfel v CAR, Award of 21 May 2011, para. 385. Ibid, para. 393. See above, Chapter 3, Section B(1)(a). It is important only insofar as the fair market value represents the lower limit of the amount of damages due. See above, Chapter 3, Section A(5)(c), para. 3.321. Pope & Talbot v Canada, Interim Award of 26 June 2000, paras 105 et seq. Ibid, para. 105. The accepted 'heads of damages' were: investor's out of pocket expenses, legal fees and disbursements, accountant's fees and disbursements, and a lobbyist. See Pope & Talbot v Canada, Award in Respect of Damages of 31 May 2002, paras 85 et seq. Ibid, para. 84. MTD Equity v Chile, Award of 25 May 2004, paras 215 et seq. Ibid, paras 163 et seq. Ibid, para. 238. Ibid, para. 240. Ibid, para. 243. The tribunal awarded approximately US$ 21.3 million, plus 6% interest annually compounded. Impregilo v Argentina, Award of 21 June 2011, para. 381. Arif v Moldova, Award of 8 April 2013, para. 572. Ibid, para. 582. Hassan Awdi v Romania, Award of 2 March 2015, para. 514. Ibid. With regard to the claimants' investment in 'Casa Bucur', the tribunal rejected that claimants lost their investment due to the BIT breaches and therefore only accepted reimbursement of the price paid as overall compensation for the breach of the fair and equitable treatment standard. Ibid, para. 463. Atlantic Triton Company Limited v Guinea, Award of 21 April 1986 (1995) 3 ICSID Reports 13, 28. PSEG v Turkey, Award of 19 January 2007, paras 316 et seq. Ibid, para. 256. The Corfu Channel Case (United Kingdom v Albania) (Merits), ICJ Reports 1949, 4, 12 et seq. The Corfu Channel Case (United Kingdom v Albania) (Assessment of the Amount of Compensation), ICJ Reports 1949, 243, 249. Ibid, at 248 et seq. Ibid, at 249. Aminoil v Kuwait, Award of 24 March 1982, para. 178. Ibid, paras 175 et seq. Phillips Petroleum Corporation v Iran, 21 Iran–US CTR (1989) 79, para. 161. The tribunal used information from the International Financial Statistics of the IMF which led to an increase of the net book value by 35 to 40%. This is not, however, a determination of a replacement price but rather an inflation-adjusted book value.

572) S Pratt and A Nicolita, above, n. 123, 370. 573) Oil Fields of Texas Inc v Iran, 12 Iran–US CTR (1986) 308. 574) Ibid, para. 44. See also Petrolane Inc v Iran, 27 Iran–US CTR (1991) 64, para. 108 and

discussion below, paras 5.334 et seq.

575) Oil Fields of Texas v Iran, 12 Iran–US CTR (1986) 308, para. 45. 576) Oil Fields of Texas Inc v Iran, Dissenting Opinion Mostafavi, 12 Iran–US CTR (1986) 324,

334.

577) Petrolane Inc v Iran, 27 Iran–US CTR (1991) 64, para. 108. 578) Ibid, paras 107–8.

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579) Lahoud v DRC, Award of 7 February 2014, para. 572. 580) Ibid, para. 579. 581) This was the case, e.g., in Sola Tiles Inc v Iran, 14 Iran–US CTR (1987) 223, para. 63;

582)

583) 584) 585) 586) 587) 588) 589) 590)

591) 592)

593)

594) 595) 596) 597) 598) 599) 600) 601) 602) 603) 604) 605) 606)

607) 608)

609) 610)

611) 612)

Tavakoli v Iran, 33 Iran–US CTR (1997) 206, paras 131 et seq; Middle East Cement Shipping and Handling Co SA v Egypt, Award of 12 April 2002 (2003) 18 ICSID Rev.-FILJ 602, para. 143. e.g. Tippetts et al v TAMS-AFFA, 6 Iran–US CTR (1984) 219, 226; Harold Birnbaum v Iran, 29 Iran–US CTR (1993) 260, para. 40; Fereydoon Ghaffari v Iran, 31 Iran–US CTR (1995) 60, para. 101; Kamran Hakim v Iran, 34 Iran–US CTR (1998) 67, para. 124; Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180, 182; Sedco v IMICO, 21 Iran–US CTR (1989) 31, para. 58. See, for a more detailed discussion of the cases, below, paras 5.302 et seq. IVSC, Glossary, 'Liquidation Value' . Sola Tiles Inc v Iran, 14 Iran–US CTR (1987) 223, para. 60. Ibid, para. 60. Tavakoli v Iran, 33 Iran–US CTR (1997) 206, paras 131 et seq. Concerning the significance of the going concern quality of the enterprise see above, para. 5.107. Tavakoli v Iran, 33 Iran–US CTR (1997) 206, para. 129 (emphasis added). The claimants had shares in the Iranian company WIG (Western Industrial Group) which developed an industrial area near the city of Kermanshah. Due to the revolutionary changes in Iran they did not see significant future prospects for the company and requested an adjusted net asset value. Ibid, para. 92. See, e.g., the orientation on prices previously paid for real property sold by the company. Ibid, para. 134. The deficiency of the auction was so striking that it has been regarded as a violation of due process of law and an indirect expropriation. See Middle East Cement Shipping and Handling Co SA v Egypt, Award of 12 April 2002 (2003) 18 ICSID Rev.-FILJ 602, para. 143. The ship was described as being 'covered with rust, not having winches and nonoperating in its present condition'. It also lacked in particular a description of its rather valuable technical equipment on board, such as a number of cranes. Ibid, para. 147. The insurance value was US$ 5 million and the price agreed between Mubarak Shipping Co and Transbulk Shipping SA in 1990 was US$ 1.324 million. Ibid, para. 148. The value of the equipment and the cranes were, thus, not included in the scrap value. Ibid, para. 149. Ibid, para. 150. Ibid, para. 147. Tenaris v Venezuela, Award of 29 January 2016, paras 264–6. Ibid, para. See above, para 4.153–7. Tippetts et al v TAMS-AFFA, 6 Iran–US CTR (1984) 219. See above, Chapter 3, Section A(3), para. 3.51. Tippetts et al v TAMS-AFFA, 6 Iran–US CTR (1984) 219, 226. Ibid. Harold Birnbaum v Iran, 29 Iran–US CTR (1993) 260, paras 39, 40. The tribunal noted: 'The Claimant proposes to determine his share of AFFA's “adjusted net asset value” as follows. He calculates the value of AFFA's tangible assets, including fixed assets, securities, and accounts receivable, on the date of the deprivation and subtracts AFFA's liabilities on that date; this operation yields AFFA's net worth. The Claimant then calculates the value of his 8.6% gross share on the basis of AFFA's net worth. Finally, he arrives at his net share value by subtracting from his gross share value the amount by which his liabilities to AFFA exceeded AFFA's liabilities to him.' Ibid, para. 39. Ibid, para. 40. The tribunal emphasized that the consequences of the Islamic revolution which 'temporarily depressed the commercial real estate market in Tehran' should not be ignored. However, due to the absence of information on contemporary market prices the tribunal only reduced the inflation factor from 40.9% to 25%. Ibid, para. 63. Ibid, paras 73 et seq. This is, however, not directly connected to the determination of the liquidation value, but the tribunal treated it that way. Ibid, para. 143; see also Fereydoon Ghaffari v Iran, 31 Iran–US CTR (1995) 60, para. 101; Kamran Hakim v Iran, 34 Iran–US CTR (1998) 67, para. 124. Fereydoon Ghaffari v Iran, 31 Iran–US CTR (1995) 60, para. 101. Harold Birnbaum v Iran, 29 Iran–US CTR (1993) 260, para. 71; Fereydoon Ghaffari v Iran, 31 Iran–US CTR (1995) 60, para. 30. See, in a different context, Tavakoli v Iran, 33 Iran–US CTR (1997) 206, para. 74. The tribunal in this case referred to the award in Kiaie v Iran where the expropriation of the respective company had already been decided upon. Kiaie v Iran, 32 Iran–US CTR (1996) 42, para. 37.

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613) See in respect of this case, the three following awards of the Iran–US Claims

614) 615) 616) 617)

618) 619)

620) 621)

622) 623) 624) 625) 626) 627) 628) 629) 630) 631)

632) 633) 634) 635)

636) 637)

638) 639) 640)

Tribunal: Sedco Inc v NIOC, First Interlocutory Award, 9 Iran–US CTR (1985) 248; Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180; Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23. Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180, 182. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 76; see further below, paras 5.302–5.306. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 297; see above, paras 5.226–5.231. 'In its pleadings and at the Hearing the Claimant made it clear that it does not seek to recover the “going concern” value of its investment in IMICO. Rather, it seeks a share of IMICO's dissolution value, which it proposes to determine by calculating the value of IMICO's fixed assets, accounts receivable, and liquid assets on the date of expropriation and subtracting IMICO's liabilities on that date.' Sedco v IMICO, 21 Iran–US CTR (1989) 31, para. 58. This included buildings, technical equipment, and machinery. Ibid, para. 59. 'Evidence presented by the Respondents concerning the considerable amount of obsolete stocks (“dead stocks”) in the warehouse, and the customary price resistance by potential buyers and physical shortage encountered when seeking to sell a warehouse inventory require a downward adjustment of the Claimant's estimate.' Ibid, para. 61. The book value included reductions because of depreciation and amortization. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 211. The tribunal, 'applying the measure of “equitable compensation” hereabove adopted, has reached the conclusion that a lump sum of $66,000,000 (sixty six million American dollars) should be a reasonable equitable indemnification for the nationalization of the concession rights of LIAMCO's interest in Concession No. 20, Raguba field'. Ibid, at 214. Ibid, at 213. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 178(3); see above, para. 5.254. As to the often-quoted defintion of the 'going concern', see above, para. 5.104. '… a sum estimated at $ 206,041,000.' Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 178(3). Amoco International Finance Corporation v Iran, 15 Iran–US CTR (1987) 189, paras 232 et seq, 248 et seq. Ibid, para. 267. The award eventually agreed upon was US$ 60 million. Amoco International Finance Corporation v Iran, Award on Agreed Terms, 25 Iran–US CTR (1990) 314, 315. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, paras 78 et seq. Ibid, para. 81. Sedco Inc v NIOC, Second Interlocutory Award, 10 Iran–US CTR (1986) 180, 182, at n. 6. The period of lost profits eventually awarded was nine months. It was, however, not based on the numbers submitted by the claimant for lost rental in Dubai, namely US$ 5,000 per day, but on the rents asked by the company itself previously in Iran, namely US$ 3,787 per day. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 85. The respondent had alleged that the figures presented by the claimant had been manipulated and that in fact it could have expected a profit much lower than the daily amount claimed. Ibid, para. 82. Benvenuti & Bonfant v Congo, Award of 15 August 1980 (1993) 1 ICSID Reports 330, 366. Ibid, para. 4.78. See above, para. 5.193. The tribunal noted: '[T]he value of the Claimant's investment in May 1978 when the project was cancelled exceeded their out of pocket expenses by at least $ 3,098.000'. Southern Pacific Properties (Middle East) v Egypt, Award of 20 May 1992 (1992) 3 ICSID Reports 189, para. 218. Ibid, paras 213 et seq. While the loss of assets amounted to US$ 4,452.500 according to the tribunal appointed expert, the award totalled US$ 9 million. American Manufacturing and Trading Inc v Zaire, Award of 21 February 1997 (1997) 36 ILM 1531, paras 7.19 et seq. Arbitrator Mbaye appended a 'Declaration' in which he criticized this imprecise approach. While he concurred with the considerations of the tribunal as a matter of principle, he found that the amount of US$ 9 million by far exceeded the damage actually incurred by the investor. He stated that the total amount of damages should not have gone beyond US$ 4 million. American Manufacturing and Trading Inc v Zaire, Declaration by Kéba Mbaye, arbitrator (1997) 36 ILM 1561. American Manufacturing and Trading Inc v Zaire, Award of 21 February 1997 (1997) 36 ILM 1531, para. 7.15. Sedelmayer v Russia, Award of 7 July 1998, , paras 3.1.1 et seq. The tribunal has rejected the DCF method as not appropriate in the present case. See above, para. 5.256.

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641) 'It cannot be denied that the investment in the Landfill was productive and added

642) 643) 644) 645)

646) 647)

648)

649) 650) 651)

652) 653) 654) 655)

value to the former Landfill's operation as well as goodwill, or that the Claimant was deprived of its investment's profits, and value added and goodwill, or that the Claimant's losses also include lost profits.' Técnicas Medioambientales SA v Mexico, Award of 29 May 2003 (2004) 19 ICSID Rev.-FILJ 158, para. 194. Ibid, para. 193. Ibid, para. 195. The DCF method was rejected by the tribunal. Ibid, para. 194. See above, para. 5.256. 'Such increased productivity is necessarily based on Cytrar's managerial and organizational skills and on gaining new clients, to the extent that the Respondent is willing to acknowledge at least net income for one additional year for an amount of US $ 314,545.' Ibid, para. 194. Siemens v Argentina, Award of 6 February 2007, para. 355. Pey Casado v Chile, Award of 8 May 2008, paras 680–3; Duke Energy v Ecuador, Award of 18 August 20018, para. 444; Alpha Projektholding v Ukraine, Award of 8 November 2010, para. 513; Micula v Romania, Award of 11 December 2013, paras 1238 et seq (the tribunal awarded the full amount of direct damages for increased costs, and also accepted lost profits due to higher costs for raw material); Lahoud v DRC, Award of 7 February 2014, paras 573 et seq. See also S Ripinsky and K Williams, Damages in International Investment Law (London: BIICL, 2008) 233, calling the combination of asset-based and income-based valuation a 'hybrid approach'. See also S Ripinsky, 'Damnum Emergens and Lucrum Cessans in Investment Arbitration: Entering through the Back Door' in A Bjorklund, I Laird, and S Ripsinsky, Investment Treaty Law. Current Issues III (London: BIICL, 2009) 47, 59–60. See the claimant's submissions in Railroad Development v Guatemala, Award of 29 June 2012, para. 244. See S Ripinsky and K Williams, above, n. 648, 234. Delagoa Bay and East African Railway Company, Award of 30 May 1900, reprinted in pertinent part in M Whiteman, above, n. 5, 1694 et seq. The reason for the unilateral termination was that the respondent had demanded to prolong the railway by eight kilometres which the concessionaires could not do in the remaining eight months. Ibid, at 1697. The tribunal found: 'It is therefore in light of the report of the technical experts that an appraisement of the line must be made and the indemnity for those who where dispossessed fixed, which indemnity must in principle be reckoned according to the capitalized income'. Ibid, at 1699. Ibid. Ibid. Ibid. The tribunal claimed to apply the principle of 'unjust enrichment' which was, however, due to the obvious contractual bases of the claim, not entirely comprehensible: 'The Court further decides that the conduct of the Government was a breach of the contract going to the root of it. In consequence, Lena is entitled to be relieved from the burden of further obligations thereunder and to be compensated in money for the value of the benefits of which it had been wrongfully deprived. On ordinary legal principles this constitutes a right of action for damages, but the court prefers to base its award on the principle of “unjust enrichment”, although in its opinion the money result is the same.' Lena Goldfields, Award of 2 September 1930 (1950) 36 Cornell Law Quarterly 42, para. 25. In respect of this rather complicated formulation and reasoning see C Schreuer, 'Unjustified Enrichment in International Law' (1974) 22 American Journal of International and Comparative Law 281, 288 ICSID Rev.-FILJ 9.

656) Lena Goldfields, Award of 2 September 1930 (1950) 36 Cornell Law Quarterly 42, para.

657)

658) 659)

660) 661)

26; see also W Lieblich, 'Determination by International Tribunals of the Economic Value of Expropriated Enterprises' (1990) 7 Journal of International Arbitration 37, 41– 2. According to Clagett, the tribunal applied in the unpublished part of the decision the discounted cash flow method. See B Clagett, 'Just Compensation in International Law: The Issues before the Iran–US Claims Tribunal' in R Lillich (ed.), The Valuation of Nationalized Property in International Law, vol. IV (1987) 31, 63. However, the published parts show that the tribunal referred to the 'annual profits'. It is not clear which method was applied. Schäfer suggests that it was a capitalization of earnings method. See M Schäfer, Entschädigungsstandard und Unternehmensbewertung bei Enteignungen im allgemeinen Völkerrecht (Heidelberg: Verlag Recht und Wirtschaft, 1997) 155. Lena Goldfields, Award of 3 September 1930 (1950) 36 Cornell Law Quarterly 31, para. 26. Lighthouses Arbitration (France v Greece), Award of 24 July 1956 23 ILR (1956) 298, 300. The tribunal held that Greece had not made adequate increases in the tariffs to compensate for the loss caused by the devaluation of the drachma which constituted a breach of the concession contract. Ibid, at 346. Ibid, at 300. Autopista Concesionada v Venezuela, Award of 23 September 2003, para. 354.

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662) Ibid. While the claimant argued that a real return of 15.21% had been agreed on the 663) 664) 665) 666) 667) 668) 669) 670) 671)

672)

673) 674) 675) 676) 677) 678) 679) 680) 681) 682) 683) 684) 685) 686)

687) 688) 689) 690) 691) 692) 693) 694) 695)

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697) 698)

basis of the entire term of the project, the respondent maintained that this percentage should only be applied on investments actually undertaken. See above, Chapter 3, Section B(2)(c), para. 3.210. PSEG v Turkey, Award of 19 January 2007, para. 312. Ibid. Ibid. See above, para. 5.54. Siag v Vecchi, Award of 1 July 2009, paras 443 et seq. Ibid, paras 577–84. Ibid, para. 584. This amount was increased by an award of 'discrete damages' and costs for legal expenses. See below, para. 5.336. See, e.g., CMS v Argentina, Award of 12 May 2005; Enron v Argentina, Award of 22 May 2007; Azurix v Argentina, Award of 2007; Vivendi v Argentina (Vivendi II), Award of 20 August 2007; El Paso v Argentina, Award of 2007; Suez v Argentina, Award of 30 July 2010; Chevron v Ecuador, Award of 31 August 2011; EDF v Argentina, Award of 11 June 2012; Impregilo v Argentina, Award of 21 June 2012; Railroad Development v Guatemala, Award of 29 June 2012; SAUR v Argentina, Award of 22 May 2014; Gold Reserve v Venezuela, Award of 22 September 2014; Mobil Cerro Negro v Venezuela, Award of 9 October 2014; Flughafen Zürich v Venezuela, Award of 18 November 2014; Hassan Awdi v Romania, Award of 2 March 2015; Tidewater v Venezuela, Award of 13 March 2015. Duke Energy v Ecuador, Award of 18 August 2008, para. 444; SGS v Paraguay, Award of 10 February 2012, para. 182; Deutsche Bank v Sri Lanka, Award of 31 October 2012, para. 572; Italia Ukraina v Naftogaz, Award of 19 December 2012, para. 18.2; SAUR v Argentina, Award of 22 May 2014, paras 365 et seq; Pluspetrol v Perupetro, Award of 21 May 2015, para. 204. See H Wöss, A Rivera, P Spiller, and S Dellepiane, Damages in International Arbitration under Complex Long-Term Contracts (Oxford: Oxford University Press, 2014) 246 et seq. Desert Line v Yemen, Award of 6 February 2008, para. 194. Ibid, para. 291. See further below, Section F. Saipem v Bangladesh, Award of 30 June 2009, para. 50. Ibid, para. 201. Ibid. Ibid, para. 202. Ibid, para. 205. White Industries v India, UNCITRAL, Award of 30 November 2011, para. 3.2.54. Ibid, para. 11.4. Ibid, para. 14.3.3. Ibid, para. 15.1.2. See the conditions of insurance under the MIGA, above, Chapter 4, Section A(3)(c), paras 4.37 et seq. See Article 16 of the MIGA Convention: 'The terms and conditions of each contract of guarantee shall be determined by the Agency subject to such rules and regulations as the Board shall issue, provided that the Agency shall not cover the total loss of the guaranteed investment. Contracts of guarantee shall be approved by the President under the direction of the Board.' (1986) 1 ICSID Rev.-FILJ 145 et seq, 158–9. Commentary on the Convention Establishing the Multilateral Investment Guarantee Agency (1986) 1 ICSID Rev.-FILJ 193 et seq, para. 10. Ibid. See R Brealey and S Myers, Principles of Corporate Finance (11th edn, Boston et al: McGraw-Hill Higher Editions, 2014) 659 et seq. Ibid, 662. Ibid. C Hunt, 'Valuation Experience of Government Investment Insurance Operations' in R Lillich (ed.), The Valuation of Nationalized Property in International Law, vol. 3 (Charlottesville: University Press of Virginia, 1975) 69, 87–8. Sedco Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, para. 76. Oil Fields of Texas Inc v Iran, 12 Iran–US CTR (1986) 308, paras 31 et seq. As regards the replacement value approach taken in the first place, see above, paras 5.256– 5.257. Phelps Dodge Corporation et al v Iran, 10 Iran–US CTR (1986) 121, paras 15, 17; see also I Seidl-Hohenveldern, 'Subrogation under the MIGA Convention' (1987) 2 ICSID Rev.FILJ 111, 114–15; also in Middle East Cement v Egypt, an arbitration under the auspices of ICSID, the insurance value of the expropriated ship was not taken into consideration although it had been advanced by the claimant. Middle East Cement Shipping and Handling Co SA v Egypt, Award of 12 April 2002 (2003) 18 ICSID Rev.-FILJ 602, paras 148 et seq. Emphasis added. See also the draft text of Article 8.12 CETA which provides: 'Valuation criteria shall include going concern value, asset value including the declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.' Fereydoon Ghaffari v Iran, 31 Iran–US CTR (1995) 60, para. 47. Ibid, para. 49.

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Metalclad Corp v Mexico, Award of 30 August 2000 (2000) 40 ILM 36, para. 123. Ibid, para. 124. Gemplus v Mexico, Award of 16 June 2010, paras 13.53–4. Ibid, para. 13.41. See also I Seidl-Hohenveldern, above, n. 149, 7, 19. Case Concerning the Factory at Chorzow, PCIJ 1928 Ser A, No. 17, 47. This was, as is well known, discussed in the Alabama arbitration where the US had claimed very high amounts of damages representing the losses of the prolongation of the war. See Alabama Arbitration (United States v United Kingdom), Award of 14 September 1872, in J B Moore, Digest of International Arbitrations of which the United States has been a Party, vol. 1 (Washington: GPO, 1898) 495, 646. Similarly, in Naulilaa (Portugal v Germany), Damages, 30 June 1930, 2 RIAA, 1035 et seq and Trail Smelter (United States v Canada), 16 April 1938, 3 RIAA, 1911, very high amounts for consequential damages had been claimed. 706) See Amoco International Finance Corporation v Iran, 15 Iran–US CTR (1987) 189, para. 238; see above, paras 5.247 et seq and Chapter 3, Section B(2)(c), paras 3.204 et seq. 707) See, e.g., Asian Agricultural Products Ltd v Sri Lanka, Award of 27 June 1990 (1997) 4 ICSID Reports 246, para. 104. 708) Black's Law Dictionary treats 'consequential damages' and 'indirect damages' as synonyms. 'Consequential damages' are accordingly '[l]osses that do not flow directly and immediately from an injurious act but that result indirectly from the act.—Also termed indirect damages' (emphasis in original), see B Garner (ed.), Black's Law Dictionary (10th edn, St Paul: Thomson Reuters, 2014) 472. Umpire Parker early on criticized the sometimes confusing use of the term 'indirect damages'. See War Risk Insurance Premium Claims (United States v Germany), 1 November 1923, 7 RIAA, 44, 62–3; see also Salvioli: 'Il y a des dommages qui doivent être indemnisés, il y en a d'autres qui ne donnent pas lieu à indemnisation. La première catégorie est constituée par les dommages, qui sont la conséquence de l'acte illicite. Ce principle—directement ou indirectement—est acceptée par la jurisprudence internationale, et à la vérité il ne pouvait pas en être autrement. Il n'existe pas de décisions qui après avoir dit, par exemple, qu'un certain dommage est la conséquence d'un acte illicite, affirment—en même temps—qu'il ne doit pas être indemnisé. […] Tout cela est évident quel que ce soit le mot employé.' G Salvioli, 'La responsabilité des Etats et la fixation des dommages et intérêts par les tribunaux internationaux' 28 RdC (1929) 231, 244. 699) 700) 701) 702) 703) 704) 705)

709) E Schneider, 'Consequential Damages in the International Sale of Goods: Analysis of

710)

711)

712) 713)

714) 715) 716) 717) 718) 719) 720)

Two Decisions' (1995) 16 Journal of International Business Law 615–68; L CastellanosJankiewicz, 'Causation and International State Responsibility' (2012) ACIL Research Paper No. 2012-07 (SHARED Series). See the 'Principle of Proximate Causality' in B Cheng, General Principles of Law as Applied by International Tribunals (London: Stevens and Sons Ltd, 1953) 241, 245. See also Administrative Decision No. II of the German–American Mixed Claims Commission: 'This is but an application of the familiar rule of proximate cause—a rule of general application both in private and public law'. 1 November 1923, 7 RIAA, 29. See the German–American Claims Commission: 'It matters not whether the loss be directly or indirectly sustained so long as there is a clear, unbroken connection between Germany's act and the loss complained of. It matters not how many links there may be in the chain of causation connecting Germany's act with the loss sustained, provided there is no break in the chain and the loss can be clearly, unmistakably, and definitely traced, link by link, to Germany's act.' Administrative Decision No. II, 1 November 1923, 7 RIAA, 29–30. See more recently, the ICSID Tribunal in Desert Line v Yemen deciding on the 'loss of business opportunities in Oman and Yemen' claimed by the claimant: 'The Arbitral Tribunal reasons in the same terms as it did in the previous subsection dedicated to the Claimant's inability to exercise the buy-back option. Therefore, it holds that the Claimant was not able to sufficiently establish the adequate causation between the damages it alleges and the alleged illicit behaviour of the Respondent.' Desert Line v Yemen, Award of 6 February 2008, para. 282. See Article 31(2) of the ILC Articles on State Responsibility: 'The compensation shall cover any financially assessable damage including loss of profits insofar as it is established' (emphasis added). See above, Chapter 3, Section B(1), para. 3.115. '[I]ncidental expenses are compensable if they were reasonably incurred.' See J Crawford, The International Law Commission's Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge: Cambridge University Press, 2002) 230; see also S Ripinsky and K Williams, above, n. 648, 306. SOABI v Senegal, Award of 25 February 1988, para. 8.01. Ibid, para. 8.15. Ibid, para. 8.23. Ibid. Asian Agricultural Products v Sri Lanka, Award of 27 June 1990, para. 111. Siemens v Argentina, Award of 6 February 2007, para. 403. Ibid, para. 387.

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721) See, e.g., Southern Pacific Properties v Egypt, Award of 20 May 1992, paras 242–3; 722) 723)

724) 725) 726) 727) 728) 729)

730) 731) 732) 733)

734) 735) 736)

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738)

739) 740) 741) 742) 743) 744) 745) 746)

Middle East Cement v Egypt, Award of 12 April 2002, paras 152–6; PSEG v Republic of Turkey, Award of 19 January 2007, paras 322–6. Article 21(b) of Decision No. 7 of the Governing Council of the United Nations Compensation Commission, 17 March 1992, UN-Doc. S/AC 26/1991/7/Rev 1. See, e.g., Report and Recommendations on the First Instalment of 'E2' Claims, 3 July 1998, paras 133 et seq; Report and Recommendations made by the Panel of Commissioners Concerning the First Installment of 'E3' Claims, 17 December 1998, paras 177 et seq, 283 et seq; Report and Recommendations made by the Panel of Commissioners Concerning the Fourth Instalment of 'E3' Claims, 30 September 1999, paras 195 et seq. Report and Recommendations made by the Panel of Commissioners Concerning the First Instalment of 'E3' Claims, 17 December 1998, para. 346. Report and Recommendations made by the Panel of Commissioners Concerning the First Instalment of 'E3' Claims, 17 December 1998, paras 375 et seq, 398 et seq, 409 et seq. Ibid, para. 121. Ultrasystems Inc v Iran, 2 Iran–US CTR (1983) 100, 111. Sylvana Technical Systems v Iran, 8 Iran–US CTR (1985) 298, 319; Computer Sciences Corporation v Iran, 10 Iran–US CTR (1986) 269, 290. General Electric Company v Iran, 26 Iran–US CTR (1994) 148, paras 56 et seq. See also G Aldrich, The Jurisprudence of the Iran–United States Claims Tribunal: An Analysis of the Decisions of the Tribunal (Oxford: Oxford University Press, 1996) 296; J Crawford, above, n. 713, 230. General Electric Company v Iran, 26 Iran–US CTR (1994) 148, paras 56 et seq. See also J Crawford, above, n. 713, 230. Uiterwyk Corp v Iran, 19 Iran–US CTR (1988) 107, para. 117; Watkins-Johnson Co et al v Iran, 22 Iran–US CTR (1989) 218, para. 114; see also G Aldrich, above, n. 729, 297. See, e.g., McCollough and Co Inc v The Ministry of Post, Telegraph and Telephone et al, 11 Iran–US CTR (1986) 3, 18. The tribunal held: 'The Tribunal considers management time to be a fixed cost. The evidence revealed that the management who were involved in matters covered by the present claim were paid annual salaries that did not vary in respect of the issues or matters to which each of them devoted their working time.' Pope & Talbot v Canada, Award in Respect of Damages of 31 May 2002, para. 82. Siag v Egypt, Award of 1 July 2009, paras 588–92. Ibid, para. 587. Also legal expenses in pursuing the claim were regarded as recoverable damages. See below, para. 5.336. e.g. in CSOB the tribunal awarded the sum of US$ 10 million as a contribution of the costs to the claimant. CSOB v Slovak Republic, Award of 29 December 2004, para. 372. In ADC v Hungary, the claimant received US$ 7.6 million for his costs and expenses. ADC v Hungary, Award of 2 October 2006, para. 542. Article 61(2) of the ICSID Convention provides that: '[i]n the case of arbitration proceedings the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre shall be paid. Such decision shall form part of the award.' Article 40(1) and (2) of the UNCITRAL Rules provide that: '(1) Except as provided in paragraph 2, the costs of arbitration shall in principle be borne by the unsuccessful party. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case. (2) With respect to the costs of legal representation and assistance referred to in article 38, paragraph (e), the arbitral tribunal, taking into account the circumstances of the case, shall be free to determine which party shall bear such costs or may apportion such costs between the parties if it determines that apportionment is reasonable.' As Schreuer et al put it: 'The practice of ICSID tribunals in apportioning costs is neither clear nor uniform'. C Schreuer, L Malintoppi, A Reinisch, and A Sinclair, The ICSID Convention. A Commentary (2nd edn, Cambridge: Cambridge University Press, 2009) Article 61, para. 19. J Y Gotanda, 'Damages in Private International Law' (2007) 326 RdC 313. Ibid. Ibid, at 265. See M Weiniger and N Mackey, 'Costs: Do Recent Trends Represent a Dramatic Shift in Tribunal Practice?' 2007 TDM 4(6) . Ibid. G Aldrich, above, n. 729, 479. The second Chamber generally rejected awarding costs to the prevailing party, while the other two Chambers frequently awarded at least small portions of costs and expenses. Ibid, at 480. Gotanda refers to Craig who commented on this reluctance 'perhaps in order to avoid adding insult to injury'. J Y Gotanda, above, n. 739, 313.

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747) Robert H May (United States v Guatemala), Award of 16 November 1900 in M

Whiteman, above, n. 5, 1704, 1709.

748) Ibid. 749) The tribunal added to the damnum twenty-one different claims, such as expenses

750) 751) 752) 753) 754)

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for animals, buildings, and equipment, which had been made in view of the tenyear term of the contract. The claimant's lost income of two years was also added, as well as a lump sum of US$ 35,000 for 'loss of time, legal costs etc'. Shufeldt Claim (United States v Guatemala), Award of 2 November 1929, 2 RIAA 1079, 1101. Dr Marion Cheek (United States v Siam), Award of 21 March 1889, in M Whiteman, above, n. 5, 1646, 1652. Southern Pacific Properties v Egypt, Award of 20 May 1992, para. 257. Ibid, para. 211. Autopista Concesionada v Venezuela, Award of 23 September 2003, para. 274. However, Venezuela should only make up for those expenses necessary to defend challenges by members of the National Assembly but not those initiated by private competitors. Therefore, the tribunal halved the amount of legal expenses submitted. Ibid, paras 274–5. The tribunal, however, found that the increase in administrative costs in relation to the earlier plans was exaggerated. It therefore accepted Venezuela's submission and reduced the amount by 10% (or US$ 882,000). Ibid, para. 302. See above, para. 5.326. Siag v Egypt, Award of 1 July 2009, para. 593. Ibid. Ibid, para. 631. Swisslion v Macedonia, Award of 6 July 2012, para. 275. Ibid, paras 72–3. Ibid, para. 344. It noted that it was not possible to quantify the damages with certainty, quoting Southern Pacific Properties v Egypt. Ibid, para. 345. Ibid, paras 337, 350. CSOB v Slovak Republic, Award of 29 December 2004, para. 372. Ibid, para. 371. ADC v Hungary, Award of 2 October 2006, para. 533. Ibid. Ibid. Desert Line v Yemen, Award of 6 February 2008, paras 299–304. Ibid, para. 303. Desert Line v Yemen, Award of 6 February 2008, paras 289–91. The tribunal awarded US$ 1 million for 'moral damages, including loss of reputation', without interest. Ibid, para. 291. The tribunal had first rejected the claimant's claim for lost business opportunities in Oman and Yemen due to a lack of proven causation, but then found the claim for moral damages well-founded. The claimant had submitted that its executives suffered the stress and anxiety of being harassed, threatened, and detained by the respondent and by armed tribes. It stated that it had suffered significant injury to its credit and reputation, and loss of prestige. Benvenuti & Bonfant v Congo, Award of 15 August 1980, para. 4.95. As an exception should be mentioned the award in Al-Kharafi v Libya, in which the Arab Investment Court decided that the claimant company was entitled to compensation for the moral damages 'it incurred as a result of the damage to its worldwide professional reputation after the Defendants' abusive cancellation of the important project that they previously approved' at the amount of US$ 30 million, in addition to US$ 900 million compensation for lost profits and opportunities. As the law applicable was the Unified Agreement for the Investment of Arab Capital in the Arab States and Libyan civil law, this award is not directly relevant for traditional investment arbitration, but still interesting. See Al-Kharafi v Libya, Final Arbitral Award of 22 March 2013, Arab Investment Court, 369. (Emphasis added), see Articles on the Responsibility of States for Internationally Wrongful Acts, UN-Doc. A/Res/ 56/83, Annex. J Crawford, above, n. 713, 202, 223. The line between 'moral' and punitive' damages was for example blurred by the ICSID Tribunal in Siag v Eygpt which noted that 'the recovery of punitive or moral damages is reserved for extreme cases of egregious behavior'. Siag v Eygpt, Award of 1 June 2009, para. 545. See also S Jagusch and T Sebastian, 'Moral Damages in Investment Arbitration: Punitive Damages in Contemporary Clothing' (2012) 29 Journal of International Arbitration 45; S Wittich, 'Punitive Damages' in J Crawford, A Pellet, and S Olleson (eds), The Law of International Responsibility (Oxford: Oxford University Press, 2010) 667. Opinion in the Lusitania cases (United States v Germany), Decision of the Mixed Claims Commission of 1 November 1923, 7 RIAA, 32, 40.

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778) P Dumberry, 'Compensation for Moral Damages in Investor–State Arbitration

Disputes' (2010) 27 Journal of International Arbitration 247, 248–9; P Dumberry, 'Moral Damages' in M Bungenberg, J Griebel, S Hobe, and A Reinisch (eds), International Investment Law. A Handbook (Baden-Baden: Nomos, 2015) 1130, 1132; S Wittich, 'NonMaterial Damage and Monetary Reparation in International Law' (2004) 15 Finish Yearbook of International Law 329, 330; S Alexandrov, 'The Present and Future of Moral Damages in Investment Arbitration' in B Sabahi, N Birch, I Laird, and J A Rivas (eds), Revolution in the International Rule of Law. Essays in Honour of Don Wallace, Jr (Huntington: Juris, 2014) 515, 516–17. 779) B Sabahi, Compensation and Restitution in Investor–State Arbitration (Oxford: Oxford University Press, 2011) 136–7 (emphasis in original, footnotes omitted). 780) Ibid, at 139. 781) S Ripinsky and K Williams, above, n. 648, 311. 782) B Sabahi, above, n. 779, 140. The most recent case in which an award of moral

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damages has been awarded to a state whose national has suffered moral injury is the Diallo case, in which Guinea was awarded an amount of US$ 85,000 'for the nonmaterial injury suffered by Mr. Diallo'. See Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) Judgment of 12 June 2012, ICJ Reports 2012, 323, 345. Ibid. S Ripinsky and K Williams, above, n. 648, 311. In Biloune v Ghana, the tribunal denied to have jurisdiction about the arrest and detention of Mr Biloune, because its 'competence is limited to commercial disputes arising under a contract entered into in the context of Ghana's Investment Code … Thus, other matters—however compelling the claim or wrongful the alleged act—are outside the Tribunal's jurisdiction.' Biloune v Ghana (Jurisdiction, Liability), Award of 27 October 1989 (1994) 95 ILR 183, 203. In Generation Ukraine v Ukraine, the tribunal also found that the claim for moral damages was outside its jurisdiction, because the particular cause of action was based on the Ukrainian constitution and not on the breach of the BIT. Generation Ukraine v Ukraine, Award of 16 September 2003, para. 17.6. See also S Alexandrov, above, n. 778, 530. He notes, however, that other tribunals have accepted jurisdiction for moral damages also in cases of breaches of national law, such as the tribunals in Bogdanov v Moldova, SCC Case, Award of 30 May 2010, para. 98, and Bogdanov v Moldova, SCC Case, Award of 22 September 2005, para. 17. Tecmed v Mexico, Award of 29 May 2003, para. 198; Pey Casado v Chile, Award of 8 May 2008, para. 704; Funnekotter v Zimbabwe, Award of 2009, para. 140; Siag v Egypt, Award of 1 June 2009, para. 505; Lemire v Ukraine, Award of 28 March 2011, para. 326; Meerapfel v CAR, Award of 21 May 2011, para. 434; Tzu Yap Shum v Peru, Award of 7 July 2011, para. 281; Inmaris Perestroika v Ukraine, Award of 1 March 2012, para. 428; Arif v Moldowa, Award of 8 April 2013, para. 584; Rompetrol v Romania, Award of 6 May 2013, para. 289; Stati v Kazakhstan, Award of 19 December 2013, para. 1786; Lahoud v Congo, Award of 7 February 2014, para. 620; OI European Group v Venezuela, Award of 2015, para. 905; Quiborax v Bolivia, Award of 16 September 2015, para. 600. Desert Line v Yemen, Award of 6 February 2008, para. 289. Desert Line v Yemen, Award of 6 February 2008, para. 290. See B Sabahi, above, n. 779, 144, with reference to Anzilotti as one of the first scholars to support the idea that the violation of a rule of international law, ipso facto, causes damage. D Anzilotti, 'La Responsabilité Internationale des Etats à Raison des Dommages Soufferts par des Etrangers' (1906) 13 RGDIP 5. J Crawford, above, n. 713, 218. It can, however, also take the form of the payment of an amount of money, such as the US$ 2 million in the Rainbow Warrior affair 'recommended' by the arbitral tribunal to be paid by France to set up a fund to promote close and friendly relations between the citizens of New Zealand and France. In re Rainbow Warrior, Decision of 30 April 1990, 217, 275. J Crawford, above, n. 713, 233. The award or judgment in itself is not sufficient, it must be accompanied by an explicit declaration which is clear and self-contained. Ibid, with reference to the Corfu Channel case. Pey Casado v Chile, Award of 8 May 2008, para. 704 (translation from the French original). Lemire v Ukraine, Award of 28 March 2011, para. 233; see also Meerapfel v CAR, Award of 21 May 2011, para. 434. The tribunal in Rompetrol v Romania discussed the claimant's claim to moral damages in this context to a certain detail, but ultimately rejected it. Rompetrol v Romania, Award of 6 May 2013, paras 289–93. The claimant in Biwater Gauff v Tanzania expressly rejected moral damages, even though they had not been claimed or quantified by the claimant. Biwater Gauff v Tanzania, Award of 24 July 2008, para. 808. Arbitrator Born rejected the view that a favourable award was sufficient reparation for moral harm. Biwater Gauff v Tanzania, Award of 24 July 2008, Concurring and Dissenting Opinion, paras 32–3. See B Sabahi, above, n. 779. This was, however, not done in Biwater Gauff v Tanzania or in Rompetrol v Romania. Europe Cement v Turkey, Award of 13 August 2009, para. 182. Cementownia 'Nowa Huta' v Turkey, Award of 17 September 2009, para. 178.

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798) 799) 800) 801) 802) 803) 804) 805) 806) 807) 808) 809) 810) 811) 812) 813) 814) 815) 816) 817) 818) 819) 820) 821)

822) 823)

824) 825)

Iberdrola v Guatemala, Award of 17 August 2012, para. 518. Transglobal Green Energy v Panama, Award of 2 June 2016, para. 130. Ibid, para. 289. Ibid, para. 290. This criterion was taken up in Inmaris Perestroika v Ukraine to deny an award of moral damages. See Inmaris Perestroika v Ukraine, Award of 1 March 2012, para. 428; see also Stati v Kazakhstan, Award of 19 December 2013, para. 1786. See J Crawford, above, n. 713, 84. See S Jagusch and T Sebastian, above, n. 776, 45. Lemire v Ukraine, Award of 28 March 2011, paras 326 et seq. The ICSID Tribunal in Siag v Eygpt had noted that 'the recovery of punitive or moral damages is reserved for extreme cases of egregious behavior'. Siag v Eygpt, Award of 1 June 2009, para. 545. Ibid, para. 333. Tzu Yap Shum v Peru, Award of 7 July 2011, para. 281; OI European Group v Venezuela, 10 March 2015, para. 909. Arif v Moldova, Award of 8 April 2013, para. 590 (emphasis added). See also S Alexandrov, above, n. 778, 526–7. Arif v Moldova, Award of 8 April 2013, para. 591. Ibid, para. 592. Ibid. Ibid. Ibid, para. 603. Ibid, para. 604. Ibid, para. 605. See Lahoud v DRC, Award of 7 February 2014, para. 622; Quiborax v Bolivia, Award of 16 September 2015, para. 618; see also S Alexandrov, above, n. 778, 527. Opinion in the Lusitania cases (United States v Germany), Decision of the Mixed Claims Commission of 1 November 1923, 7 RIAA, 32, 36. Ibid. Ibid. S Ripinsky and K Williams, above, n. 648, 312. National and international courts quantify damages for human rights violations on a regular basis in the exercise of discretion. See E Baginska (ed.), Damages for Violations of Human Rights. A Comparative Study of Domestic Legal Systems (Cham: Springer International Publishing, 2016); D Shelton, Remedies in International Human Rights Law (3rd edn, Oxford: Oxford University Press, 2015) 346–63. Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Respublic of the Congo) Judgment of 12 June 2012, ICJ Reports 2012, 323, 334. Ibid, 335. Judge Greenwood explained in his Declaration that the Court had looked at specific sums awarded by the ECtHR in Al-Jedda v United Kingdom, where it considered a figure of € 25,000 (equivalent to approximately US$ 36,000 at the rate of exchange on the date of that judgment) sufficient for a detention which lasted more than three years. In Lupsa v Romania it considered that a sum of € 15,000 was equitable in respect of both moral and material damage in the case of a man who was unlawfully expelled from the respondent state after residing there for fourteen years, during which he had founded a family and established a business in the country. The Inter-American Court of Human Rights in Gutiérrez- Soler v Colombia awarded US$ 100,000 to a man who had been tortured into signing a false confession, persecuted for an offence he had not committed, and separated from his family for so long that he lost all contact with his child for several years. The Court took also an 'instructive' look at the case of M/V 'Saiga' (No. 2) (Saint Vincent and the Grenadines v Guinea) before the International Tribunal for the Law of the Sea. In that case, Guinea argued that compensation for moral damage in relation to unlawful detention should not exceed US$ 100 per day. Judge Greenwoord noted that this figure seemed to have been derived from arbitral awards given several decades earlier, but that it still stood in marked contrast to the sums claimed by Guinea in the case at hand. Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) Declaration of Judge Greenwood, ICJ Reports 2012, 391, 394. Judge ad hoc Mahiou found on this issue that the judgment had adopted a particularly restrictive view. He submitted that the Court had not sufficiently ascertained what the injuries were exactly and what the amount of compensation was that would fully make good the damage suffered. He noted that a sum greater than US$ 85,000 would have been fairer. The decision on the amount of compensable injuries was the reason that he did not subscribe fully to the solution reached. Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) Separate Opinion of Judge ad hoc Mahiou, ICJ Reports 2012, 396, 398, 400. Benvenuti & Bonfant v Congo, Award of 15 August 1980, para. 4.96. Desert Line v Yemen, Award of 6 February 2008, para. 286. The Fabiani case was an arbitration between France and Venezuela. See Fabiani (France v Venezuela), Award of 30 December 1896, reported in M Whiteman, above, n. 5, 1786. It was also quoted in Compañía del Desarrollo de Santa Elena SA v Costa Rica, Award of 17 February 2000, para. 95 as an early example of an award of compound interest.

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826) Lusitania Case (US v Germany), Award of November 1923, 7 RIAA 32, 42; quoted with

approval in J Crawford, above, n. 713, 223 et seq.

827) Desert Line v Yemen, Award of 6 February 2008, para. 291. Sabahi rightfully criticizes

828)

829) 830) 831) 832) 833) 834) 835) 836) 837) 838) 839) 840) 841) 842) 843)

the rejection of interest on that amount, because 'post-award interest on compensation for moral damages seems appropriate as, at that point, the money belongs to the claimant, and, until the time of payment, the claimant will lose the opportunity to invest it'. B Sabahi, above, n. 779, 146. The ICSID Tribunal SOABI v Senegal rejected the claim to 'general damages for loss of goodwill and loss of commercial financing' because it regarded such damage as 'wholly hypothetical'. SOABI v Senegal, Award of 25 February 1988, para. 10.01; see also Atlantic Triton v Guinea, Award of 21 April 1986, para. 3.2. Shufeldt Claim (United States v Guatemala), Award of 2 November 1929, 2 RIAA, 1079, 1101. Robert H May (United States v Guatemala), Award of 16 November 1900 in M Whiteman, above, n. 5, 1704, 1709. Funnekotter v Zimbabwe, Award of 22 April 2009. Ibid, para. 137. Ibid, para. 138. Ibid, para. 1139. Ibid, para. 140. Ibid. See also B Sabahi, above, n. 779, 143. Swisslion v Macedonia, Award of 6 July 2012, para. 350. See also S Alexandrov, above, n. 778, 518. Swisslion v Macedonia, Award of 6 July 2012, para. 350. Ibid. See above, para. 5.352. See above, Chapter 3, Section C(1)(b), paras 3.300 et seq. Guiso-Gallisay v Italy, ECHR 58858/00, Grand Chamber, Judgment of 22 December 2009 (just satisfaction) para. 102. See, e.g., Dedda and Fragassi v Italy, ECHR 19403/03, Judgment of 12 April 2011, paras 15–19.

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6. Interest

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6.01 Interest represents an important aspect in international proceedings from a financial point of view. Depending on the period of time between the origin of the claim and the actual payment of compensation or damages interest can amount to a considerable portion of the award. Sometimes it may even exceed the principal. (1)

Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

6.02 This importance has long been underestimated. The decisions on interest were often poorly reasoned, and literature addressed it rather scarcely. (2) More recently, the awareness is growing and tribunals and academia devote considerably more attention to it. (3) The main questions with regard to the interest claim are

'6. Interest', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 327 - 406

1. 2. 3.

the rate of interest, the period of interest, and the question of whether interest should be compounded.

6.03 These questions should be answered with regard to the function of interest in the respective legal framework. (4) On this premise, it seems appropriate to differentiate between interest before the judgments or awards ('pre-award interest') and interest after P 329 them ('post-award interest'). (5) The former represents an item of compensation or damages, the latter could be regarded as default charges for the non-payment of a debt. (6) Post-award interest is also meant to encourage prompt compliance with the judgment or the arbitral award. (7) 6.04 Interest represents an important part of compensation or damages, but it is not a separate remedy. Under the law of state responsibility, interest 'shall be payable when necessary in order to ensure full reparation'. (8) Jurisdiction to decide on the interest claim usually follows from the jurisdiction to decide the principal. The Iran–US Claims Tribunal held in this respect: Such claims for interest are part of the compensation sought and do not constitute a separate cause of action requiring their own independent jurisdictional grant. This Tribunal … has regularly treated interest, where sought, as forming an integral part of the 'claim' which it has a duty to decide. (9) 6.05 More recently, the ICSID Tribunal in Vivendi v Argentina (Vivendi II) confirmed: Absent treaty terms or provision in the governing law to the contrary, it is generally accepted that international tribunals may award interest to an injured claimant; indeed the liability to pay interest is now an accepted legal principle. (10) 6.06 The Governing Council of the United Nations Compensation Commission (UNCC) decided that '[i]nterest will be awarded from the date the loss occurred until the date of payment, at a rate sufficient to compensate successful claimants for the loss of use of the principal amount of the award'. (11) 6.07 Sometimes, the competence to award interest is explicitly provided for in an international treaty, such as in Article 1135(1) NAFTA according to which the tribunal 'may award, separately or in combination, only: (a) monetary damages and any applicable interest'. The Energy Charter Treaty (ECT) also contains such a provision in its Article 26(8): 'The awards of arbitration, which may include an award of interest, shall be final and binding upon the parties to the dispute'. 6.08 Article 46 of the ICSID Convention stipulates that the tribunal shall, if requested by a party, 'determine any incidental or additional claims or counterclaims arising directly P 330 out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre'. This may include an award of interest. (12) BITs usually include an explicit reference to interest in their provisions on the amount of compensation in case of expropriation and in their provisions on dispute settlement. (13)

A. The Function of Interest 6.09 In general, interest should compensate the temporary withholding of money. As formulated by the Iran–US Claims Tribunal in McCollough v Ministry of Post, (14) the purpose of interest is 'to compensate for the delay with which the payment to the successful party is made'. (15) This means that, in the first place, interest should address the claimant's financial disadvantage of not being able to dispose of the amount of money. This disadvantage materializes either in loss of profit from alternative investments or in costs for a loan. 6.10 Equally, the debtor gains a financial profit through the withholding of the amount. In the meantime, he or she can yield returns from investing the money or spare the costs of loans. Therefore, the non-payment of an amount of money owed typically results in unjust enrichment of the debtor. The prevention of the debtor's enrichment can thus also be seen as a function of the interest claim.

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6.11 It follows that, for the assessment of the financial consequences of the delay, two different perspectives have to be borne in mind: the first is comparable to a damages claim and leads to a valuation from the perspective of the successful claimant. The second evaluates the enrichment of the debtor gaining an advantage by the temporary non-payment and leads to a valuation from the perspective of the respondent. In both cases, the differential method can be used to assess the amount of interest due. 6.12 In addition, the valuation can be made from the perspective of a non-involved third party. (16) This alternative leads to an objective valuation where neither the concrete P 331 damages of the creditor nor the concrete profits of the debtor are alone decisive. For example, legal or statutory interest, as contained in many legal systems, can be regarded as such an objective solution. But also interest based on significant benchmark rates, such as interbank rates or base rates can be regarded as an abstract valuation of the financial consequences of delayed payment. There are thus several functions and three possible perspectives for the determination of interest in international investment disputes.

(1) 'Prompt' Compensation 6.13 In the context of expropriations of foreign property the claim to interest results from the requirement that compensation has not only to be 'adequate and effective' but must also be 'prompt'. (17) 'Prompt' means 'paid without delay'. (18) Only in exceptional cases are delayed payments permitted and only if they are combined with the payment of interest. According to the World Bank Guidelines, compensation may be paid in installments within a period which will be as short as possible provided that reasonable, market-related interest applies to the deferred payments in the same currency. (19) 6.14 The NAFTA, (20) the ECT, (21) Model BITs, (22) and numerous BITs concluded between states also establish that the payment of compensation has to be 'prompt' or 'without delay', in addition to 'adequate' and 'effective'. Sometimes, the requirement of interest is specifically stated and more precisely defined. Article 1110 NAFTA refers to 'interest at a commercially reasonable rate for that currency from the date of expropriation until the date of actual payment'. (23) Article 13 ECT states that '[c]ompensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment'. (24) 6.15 Similar definitions are contained in the US (25) and in the Canadian Model BITs. (26) Nevertheless, it remains open which market should be relevant. Is it the market of the home state of the investor or of the host state? Or should it be the international financial markets? Should lending rates or borrowing rates be applied? Article 1110 NAFTA refers to the currency in which compensation is due. Differences are made between a 'G7 currency' P 332 and others. (27) Payment in a 'G7 currency' is clearly preferred, but if compensation is paid in another currency, an interest rate must be chosen which ensures that the result remains the same, that is, the 'commercially reasonable rate' for a G7 currency from the date of expropriation. Article 1110(5) NAFTA explains how to achieve this result: If a Party elects to pay in a currency other than a G7 currency, the amount paid on the date of payment, if converted into a G7 currency at the market rate of exchange prevailing on that date, shall be no less than if the amount of compensation owed on the date of expropriation had been converted into that G7 currency at the market rate of exchange prevailing on that date, and interest had accrued at a commercially reasonable rate for that G7 currency from the date of expropriation until the date of payment. (28) 6.16 This explicit differentiation by the type of currency is also found, for example, in the Free Trade Agreement between the United States and Australia (29) and the United States and Chile (30) as well as in the US Model BIT of 2012. (31) 6.17 Although it still remains unclear what exactly is meant by market-related interest, the concrete damage incurred by the expropriated individual or the concrete enrichment of the state does not seem to be decisive. Rather the references to 'market rates' suggest choosing an objective–abstract approach.

(2) 'Full' Reparation (a) State Responsibility 6.18 In cases of state responsibility the duty to pay interest results from the obligation to 'full reparation'. In this respect, Article 38 of the ILC Articles on State Responsibility states: Interest on any principal sum payable under this Chapter shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set as to achieve that result. (32) 6.19 It follows that the function of interest in case of state responsibility is to remedy the

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damage suffered by the injured party as far as money can do in full. According to the Commentary to the ILC Articles, interest is neither a separate form of reparation nor an P 334 indispensable part of compensation in all cases. (33) However, interest must be awarded when it is necessary to make good the damage caused by a violation of international law. (34) This includes damage incurred by the temporary withholding of money. 6.20 In international jurisprudence on inter-state disputes, interest as an item of damages did not receive much attention. Notable exceptions include Illinois Central Railroad v Mexico (35) or Administrative Decision No III of the United States–German Mixed Claims Commission. (36) In the Wimbledon case, the Permanent Court of International Justice awarded interest only for the period between the judgment and the date of payment. (37) The International Court of Justice in the Corfu Channel case did not mention any interest at all. (38) In Diallo, it ordered only post-award interest. (39) 6.21 In the ILC there was essentially agreement that the finer details concerning the interest claim, such as the rate and the period of interest, or the issue of compounding, could not be determined more precisely. (40) The question of whether and how much interest should be awarded was left to be decided on a case-by-case basis. This explains the relatively vague formulation of Article 38. 6.22 The entitlement to interest depends primarily on the valuation method and the date applied for the calculation of the principal. Care must be taken to avoid double counting. (41) The Commentary to the ILC Article points out that lost profits and interest cannot be awarded for the same period since the same capital cannot yield interest and profit at the same time. (42) However, this applies only when lost profits are awarded up to the date of the award and at the date of the award. If they are discounted back to the date of the breach, interest needs to be awarded in order to make the claimant whole. (43) In this context, the question arises how the rate applied for discounting and the interest rate should correlate. (44) 6.23 In general, the principle of full reparation requires a determination of the concrete damage caused by the delay from the perspective of the injured party. (b) Breach of Contract 6.24 Whether and to what extent interest is due after breaches of international contracts is a particularly complex question. The decisions of arbitral tribunals are extremely diverse in this respect. This was noted by the Iran–US Claims Tribunal in McCollough v Ministry of Post: [N]o uniform rule of law relating to interest has emerged from the practice in transnational arbitration, in contrast to the well developed rules regarding the determination of the standard of compensation for damages resulting from a breach of contract, where the rule of full compensation usually is applied. (45) 6.25 However, there seems to be general agreement that also in cases of contract breach the purpose of interest is to make good the damage caused by the temporary withholding of money. The ICC Tribunal in ConocoPhillips v PDVSA explained this rather clearly: [W]hile interest rates may serve different purposes, the purpose of such rates with regard to compensation of damages for contractual breach is generally to ensure full compensation of a claimant by restoring it to the position it would have enjoyed if the contractual breach he suffered had not occurred. (46) 6.26 International codifications of contract law provide formulas to ensure interest for delay in payment, (47) but for any excessive loss caused by the delay, damages can be claimed according to the general rules. The CISG, for example, states: If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74. (48) 6.27 Similarly, Article 9:509, paragraph 2 of the Principles of European Contract Law (49) and Article 7.4.9 of the UNIDROIT Principles of International Commercial Contracts provide for interest insofar as the financial loss caused by the delay is not covered P 336 completely. It can therefore be concluded that, also after breaches of contract, interest aims at full reparation of the damage caused by the delayed payment from the perspective of the injured party.

(3) Prevention of Enrichment 6.28 The temporary withholding of money typically entails a financial advantage for the debtor. In the present context, it is the state who gains this advantage through the withholding of an amount of compensation or damages. The prevention of such enrichment can also be a function of an award on interest. 6.29 In this connection it is remarkable that the PCIJ, to explain the choice of an interest rate of 6 per cent in the Wimbledon case, 'considered that in the present financial situation of the world and having regard to the conditions prevailing for public loans, the

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claimed 6% is fair'. (50) The explicit reference to 'public loans' shows that the Court took into account that the state, in effect, borrowed money from the aggrieved party. The interest rate should consequently correspond to the rate the state would otherwise have to pay for 'public loans'. The Court ordered payment of this interest to prevent the state being unjustly enriched to the detriment of the claimant. 6.30 The ILC in its Articles on State Responsibility did not take the aspect of enrichment explicitly into consideration. The materials and comments on Article 38 show that the issue of an award on interest should primarily be determined from the perspective of the injured party. (51) This does not, however, exclude the notion that the prevention of unjust enrichment of the responsible state could or should play a certain role. 6.31 International investment tribunals, in some cases, referred to the enrichment aspect in their decisions on interest. The ICSID tribunal in Compañía del Desarrollo de Santa Elena, SA v Costa Rica, (52) for example, alluded to this aspect. The compensation for an essentially lawfully expropriated natural reserve had not been paid for over two decades. The tribunal explained the relatively high amount of interest—which even exceeded the amount of compensation itself—by considering that 'the taking state is not entitled unjustly to enrich itself by reason of the fact that the payment of compensation has been long delayed'. (53) 6.32 The Iran–US Claims Tribunal also referred to the prevention of enrichment as an additional function of an interest claim. In Reynolds Tobacco v Iran it emphasized that 'the respondent in such cases has been unjustly enriched by having wrongfully had the use of the claimant's money during that period'. (54) 6.33 If interest is independent from the conditions of a damages claim, in particular without proof of damage actually incurred, the prevention of enrichment might serve as an even better justification for it than the principle of full reparation. (55) International codifications of contract law generally allow interest independent from any evidence of damage actually incurred and thus are in accordance with this approach. (56) 6.34 The prevention of unjust enrichment of the debtor may, even if not explicitly mentioned or recognized, serve as an additional aspect on the question of how interest should be awarded in international investment disputes.

(4) Improvement of Payment Practices 6.35 Interest can serve as an incentive to pay the debt as soon as possible. In case of delay, the amount due increases over time. The function of improving payment compliance is thus also inherent in the interest claim. 6.36 However, the encouragement to prompt payment will only be appropriate and effective if the interest on the delayed payment is not lower than interest which is paid or asked for on the market for the use of the sum of money in the meantime. From an economic point of view, it is not reasonable to pay a debt early, if the profits from interest on invested money or the cost of loans are higher. 6.37 This has to be taken into account in particular with regard to post-award interest. Its specific purpose is to create an effective incentive to comply with a judgment or an arbitral award without delay. (57) Post-award interest has almost a punitive function as is, for example, reflected in the jurisprudence of the ECtHR where interest on the amounts awarded only begins to run after a certain period of time, usually three months. (58) Such 'default interest' can be regarded as a 'penalty' for not meeting the payment terms as P 337 decided by the Court. If payment is effected within the three-month period, no postaward interest has to be paid. In this way, prompt payment is obviously financially rewarded. A number of investment tribunals have also chosen this approach. (59) 6.38 On the other hand, some investment tribunals have not awarded post-award interest at all, as they considered them ultra petita if they had not explicitly been claimed. (60) In doing so, they are renouncing the setting of an incentive to comply promptly with the award. 6.39 In order to create an effective stimulus for prompt payment, interest must not be lower than market interest readily available for financial investments. Furthermore, it should not be lower than interest the debtor has to pay on its loans, either. In the following, we will analyse to what extent these principles are implemented in practice.

B. Pre-award Interest 6.40 Interest which accumulates before and until the judgment or arbitral court decision is usually referred to as 'pre-award interest' or 'compensatory interest'. (61) In French, it is known as 'dommages-intérêts compensatoires', or just 'intérêts compensatoires'. (62) In Spanish, the term 'intereses compensatorios' is used. (63) In German, there is no corresponding term, but interest with relation to damages is called 'Zins(en)schaden' ('interest as damage'). (64) 6.41 Pre-award interest can already be ascertained as an aggregated amount at the time of the decision on damages. As a matter of principle it is not necessary to leave it to the parties to calculate the sum based on the interest rate, the period of interest, and the

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P 338 issue of compounding. For the benefit of transparency and comprehensibility it is

necessary to explain these parameters of the interest calculation clearly, but the tribunal can make the calculation itself as there is no remaining uncertainty preventing it from doing so. (65) This would better reflect the quality of pre-award interest as an integral part of the compensation or damages claim.

(1) Interest Rate 6.42 As regards the choice of the interest rate, tribunals enjoy a large margin of discretion but also need to respect certain principles. This section will examine which rates are in principle available, which rates are the most appropriate, and which rates are commonly applied in practice. 6.43 The Iran–US Claims Tribunal confronted with a very diverse practice of pre-award interest rates, including 6, (66) 8, (67) 10, (68) and 12 per cent, (69) searched for clear and comprehensive criteria for the determination of the interest rate. Eventually, it developed two different approaches, one in the wake of Sylvana Technical Systems v Iran, and the other in the wake of McCollough v Ministry of Post. (70) 6.44 In Sylvana Technical Systems v Iran, the Iran–US Claims Tribunal found that full reparation could best be achieved by referring to the interest the injured party could have obtained by investing in securities in his own country: [T]he Tribunal will derive at a rate of interest based approximately on the amount that the successful claimant would have been in a position to have earned if it had been paid in time and thus had the funds available to invest in a form of commercial investment in common use in its own country. (71) 6.45 The tribunal in McCoullogh v Ministry of Post, by contrast, characterized this as a

P 339 'rigid' solution and found that 'the rate of interest must be reasonable, taking due

account of all pertinent circumstances, which the Tribunal is entitled to consider by virtue of the discretion it is empowered to exercise in this field'. (72) In this respect the following factors should specifically be taken into account: (i) (ii) (iii) (iv) (v) (vi) (vii)

any pertinent contractual stipulations (which, when they exist, are usually followed for the determination of the rates); the rules and principles of the law applicable to the contract; the nature of the facts generating the damage; the nature or level of the compensation awarded, particularly if it extends to the lost profit or includes a profit in the costs to be reimbursed; the knowledge that the defaulting party could have had of the financial consequences of its default; the rates in effect on the markets concerned; and the rate of inflation, etc. (73)

6.46 This enumeration of so many different criteria illustrates factors that could be considered in the determination of interest, but it does not provide a systematic guidance and does not explain the rationale of interest in a given case. (74) 6.47 In the following, several of the relevant criteria for determining pre-award interest will be analysed more closely. First, the usefulness of legal interest rates and the importance of party agreements shall be examined. Furthermore, the possibility of applying market-related interest will be discussed. Finally, we will look at what has been considered to be 'fair' interest, without a particular referential rate, in the practice of international courts and tribunals. 6.48 With regard to market-related interest, interest which must be paid for taking out a loan, either by the claimant or by the respondent, may be considered. From the perspective of the claimant one could also consider the cost of capital as representing the time value of money. 6.49 Market-related interest could also represent the loss from alternative investments. Government bonds play an important role in this respect, as they represent investments from the perspective of the investor and borrowing rates from the perspective of the state. 6.50 Finally, interbank interest, such as the LIBOR or the EURIBOR, have gained increasing importance for many different kinds of financial instruments. Recent international P 340 jurisprudence has taken these developments into account. 6.51 All these types of market-related interest have in common that they take inflation into account. (75) It follows that the devaluation of the amounts of compensation or damages in the course of time does not have to be considered separately. (76) (a) Legal Interest 6.52 Most legal systems contain provisions on legal interest. (77) This reflects the principle that a delay in payment typically entails a financial loss for the creditor and an unjustified advantage for the debtor. Legal interest also serves the function of relieving

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the creditor from proving actual damage caused by delay. He or she can simply refer to the provisions on legal interest as an overall remedy for the financial loss suffered. In this way, the injured party gets a legally protected minimum for the damage incurred by the delay. 6.53 However, in international law such a form of legal interest is not available. There is no legally protected minimum and hardly any guidance for international courts and tribunals confronted with the issue. (78) Treaty provisions dealing with compensation upon expropriation generally contain rather vague references to the question of interest and in particular do not contain precise interest rates. (79) Under the law of state responsibility, the rate is also not defined (80) and has to be determined on a case-bycase basis. 6.54 In international cases of contract breach, the situation seems to be better because choice of law clauses or rules may point to a specific national law and its legal rate of interest. However, in practice, the choice of the law applicable often turns out to be less than straightforward and considerable uncertainty remains. (81) Furthermore, some legal P 341 orders consider interest to be a substantive legal issue while others see it as a procedural issue which renders the matter even more complicated. (82) One can, therefore, agree with Gotanda who noted that '[b]ecause there currently appears to be no consensus as to which of the above rules an arbitrator should apply in a given case, it is virtually impossible to specify which national law will be applied to resolve issues relating to the payment of interest'. (83) 6.55 Nevertheless, many arbitral tribunals have relied on legal interest. (84) The choice of the national law applicable was effectuated on the basis of a variety of different criteria which are hardly representative of general principles. (85) 6.56 In any case, legal interest only is of limited use in the present context. In expropriation and in damages cases, interest should reflect as much as possible economic reality. This results from the above-mentioned functions of interest. As a rule, legal interest cannot serve these functions. This is especially so if they contain fixed interest rates without any connection to the interest rates offered or demanded on the market. They are often not changed for years and do not reflect economic conditions. Depending on the actual situation of the economy, they are sometimes too high and sometimes too low. They also do not take inflation variations into account. 6.57 Even if the legal interest of a given national law points to a market-related benchmark rate, it is questionable whether such interest is useful in the legal framework of international investment disputes. The member states of the European Union, for example, had to introduce market-related legal interest pursuant to Directive 2011/7/EU of the European Parliament and of the Council on combating late payment in commercial transactions. (86) According to this Directive, the minimum legal interest should be eight percentage points above the reference rate, which is the interest rate applied by the European Central Bank to its most recent main refinancing operations; or the marginal interest rate resulting from variable-rate tender procedures for the most recent main refinancing operations of the European Central Bank. (87) Due to the current very low or even negative interest set by the European Central Bank the interest rate is currently around 8 per cent. (88) This is still a relatively high interest rate, which aims at effectively P 342 combating late payment practices negatively disrupting, in particular, business of small and medium size companies (SMEs). 6.58 International practice has largely found legal interest as being inadequate in expropriation and damages cases. The ICSID Tribunal in Southern Pacific Properties v Egypt had initially decided on the application of the Egyptian legal interest rate of 5 per cent. (89) It then stressed, however, that such a rate would not remedy the damage actually incurred. This was, in particular, due to the high inflation between the cancellation of the project in 1978 and the award in 1992, which had caused a considerable loss in relation to the purchasing power of the dollar: The five percent rate of interest which the Tribunal has determined to be applicable in this case does not fully compensate the Claimants for the losses which they incurred as a consequence of being deprived of money owed them between the time when the project was cancelled and the date of this Award. The reason that the five percent rate does not make the Claimants whole is that, since the project was cancelled in 1978, there has been a significant devaluation of the US dollar. (90) 6.59 For this reason, the tribunal, relying on Aminoil v Kuwait, (91) decided to take inflation into account separately. It took a 'deflation factor' from the statistics of the International Monetary Fund on the basis of the US Consumer Price Index and adjusted the various sums by this factor. (92) 6.60 The tribunal emphasized that this adjustment for inflation was only necessary for legal interest, while a market-oriented interest rate would already have included inflation. (93) It chose the rate of 5 per cent on the basis of Egyptian commercial law (instead of 4 per cent according to civil law) because the affected investment was a commercial enterprise. (94) In addition, it referred to the applicability of the Egyptian limitations on interest according to which compound interest was not allowed and

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interest must not exceed the principal. (95) 6.61 It is doubtful, whether national limitations with respect to the principal or regarding compounding are in accordance with international law. If the time between the event giving rise to the claim and the date of payment is very long, it is not evident why interest P 343 should stop accruing as soon as it reaches the amount of the principal. The state in default would gain an unwarranted advantage at the expense of the claimant which is not provided for in the applicable international rules. The incentive to pay the amount promptly would even diminish. The prohibition of compound interest, furthermore, would be inconsistent with economic reality in which compound interest, as opposed to simple interest, is the norm. 6.62 Other tribunals involving Egypt as respondent accordingly did not follow the approach of the tribunal in Southern Pacific Properties v Egypt. The ICSID Tribunal in Wena Hotels v Egypt disregarded Egyptian legal interest and applied market-related interest. (96) It referred, in an endnote (97) to the interest rate government bonds in Egypt were yielding and awarded interest at a rate of 9 per cent. In addition, interest was calculated on a quarterly compounded basis which ultimately accounted for almost one and half times the principal. The ICSID Tribunal in Middle East Cement v Egypt awarded 6 per cent, also compound interest and without a limitation. (98) In Siag v Egypt, the ICSID Tribunal chose the six-month LIBOR rate, as provided for in the applicable BIT for lawful expropriations, compounded six-monthly, also without limitation as regards the amount of the principal. (99) 6.63 There are, however, also cases where the tribunals applied national legal interest rates. The ICSID Tribunal in Amco Asia v Indonesia, for example, referred to Indonesian legal interest when it chose the rate of 6 per cent. (100) In addition, it noted that the interest awarded 'should be considered as part of the compensation granted to the Claimants, in order for the same to come as close as possible to the full compensation prescribed by international law'. (101) 6.64 An example of a non-ICSID case relying on national legal interest rates is CME v Czech Republic where the tribunal based its decision on interest on Czech civil law, (102) reasoning that neither the applicable BIT nor customary international law provided for an interest rate. (103) The Czech interest rate was determined as double the bank rate of the Czech National Bank which corresponded to a rate of 10 per cent. The tribunal considered this rate to be appropriate and sufficient also in relation to the requirements of international law. On the other hand, this served as a reason for not allowing P 345 compound interest: [I]n accord with international law principles and international arbitration practice, the tribunal does not award compound interest since the purpose of compensation—to 'fully' compensate the damage sustained—in this case does not require the awarding of compound interest, having regard to the generous interest provision of the Czech Statute. (104) 6.65 Reference to national legal interest is not necessarily connected to a determined rate of interest. In SOABI v Senegal, the ICSID Tribunal applied Senegalese law in accordance with Article 42 of the ICSID Convention but only concluded from it that interest would have to serve to fully repair the damage, setting the interest rate at 10 per cent. (105) 6.66 Other tribunals pointed out that national rules on legal interest were not applicable in cases of state responsibility. (106) The NAFTA Tribunal in Pope & Talbot v Canada emphasized that it 'was not bound by domestic law', but referred to the legal rate of 5 per cent as a 'helpful benchmark for setting interest'. (107) The legal interest rate of the host state can be regarded as helpful to establish that the interest rate chosen in the award should not be lower than the host state's own legal interest rate. (108) 6.67 It can be concluded that in international investment disputes national legal interest rates are generally not adequate. Usually, legal interest rates cannot fulfil the functions interest claims have in this context. This is all the more true in case of fixed and not market-related legal interest rates. 6.68 However, national legal interest rates can serve as a point of departure or reference. They represent what a state recognizes as the legal minimum itself. Adjustments should then make sure that the above-mentioned functions of interest can be fulfilled. (b) Agreed Interest 6.69 Due to the principle of party autonomy in international arbitration an explicit agreement of the parties on the question of interest plays an important role. The Iran–US Claims Tribunal in Reynolds Tobacco v Iran even characterized the priority of party agreement as a general principle of contract law and pointed out that '[u]nder generally accepted principles of contract law, a contractually stipulated rate of interest is normally binding upon the parties'. (109) 6.70 This party autonomy is only limited as regards disproportional and usurious interest. The Iran–US Claims Tribunal, however, recognized a rather large margin of discretion in this respect. In Anaconda v Iran, for example, the tribunal did not accept the submission

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of the respondent that interest above 12 per cent would be exorbitant. (110) The agreed interbank interest rate plus 2 percentage points, thus 13.16 per cent, was applied with regard to unpaid bills as pre-award interest. (111) However, on the damage caused by costs incurred after the termination of the contract, only 'reasonable interest' at a rate of 10.5 per cent was awarded. (112) 6.71 In Reynolds Tobacco v Iran agreed interest in the form of the LIBOR plus 2 percentage points, thus 13.54 per cent interest, was awarded. (113) The Iran–US Claims Tribunal did not even have a problem, in Reading & Bates Drilling Company v Iran, with granting interest at 18 per cent per annum. (114) On the other hand, an agreement on comparatively low 6 per cent interest was also accepted. (115) It can therefore be concluded that the Iran–US Claims Tribunal generally accepted contractually agreed interest for the calculation of pre-award interest, regardless of whether they were higher or lower than those which would have been awarded without an agreement. (116) 6.72 Also ICSID tribunals widely respected contractual agreements on interest between the parties. In Autopista Concesionada v Venezuela, the ICSID Tribunal applied the interest rate contained in the contract on the construction and operation of a highway for the purpose of deciding interest on losses incurred by the claimant after a justified termination of the contract. The tribunal emphasized that the contract contained a clearcut rule to determine the interest rate and if the respondent wished to apply the legal interest rate of 3 per cent per annum instead, it had to establish that Venezuelan law prohibited the contractual rate. (117) The parties had agreed upon two alternative methods, namely a 10 per cent flat rate or a 'bank rate' which was defined as interest 'calculated monthly at a rate equal to the average lending rate of the five (5) principal banks in the country, in accordance with the latest classification issued by the Banco P 347 Central de Venezuela'. (118) The tribunal applied the latter to pre-termination and post-termination losses, but did not calculate the exact rates, referring only to the methodology of their determination. 6.73 Such a calculation was made by the ICSID Tribunal in CDC v Seychelles which awarded different interest on different loans by setting actual amounts per day: 'From August 25, 2003 interest continues to accrue at the daily rates of £53.63 per day and £557.37 per day on the 1990 Loan Agreement and Guarantee and the 1993 Loan Agreement and Guarantee respectively, making a total of £611.00 per day'. (119) 6.74 Contractually agreed interest was even upheld when the dispute did not concern a breach of contract but an interference with property rights by the state. (120) The ICSID Tribunal in Fedax v Venezuela used the LIBOR at six months as contained in the promissory notes at issue for the calculation of pre-award interest after a violation of the BIT. (121) 6.75 In Pluspetrol v Perupetro, the rate agreed between the parties in the License Agreement for the Exploitation of Hydrocarbons on late payments, namely the US prime rate plus 3 percentage points, was also applied for setting the pre-award interest rate. (122) 6.76 Tribunals have also applied interest rates which were submitted by respondents in the course of the proceedings. Such submissions come close to an 'agreement' on interest, as they imply the acknowledgement of the appropriateness of the respective rate. In Benvenuti & Bonfant v Congo, the tribunal concluded that it was reasonable to apply the interest rate submitted by the respondent also on the sum awarded against it: The Tribunal observes, however, that the Government, in its Memorial in Defence, suggested a rate of interest of 10% in connection with its counterclaim. By virtue of its power to rule ex aequo et bono, the Tribunal considers it equitable to adopt this rate … (123) 6.77 Similarly, the Iran–US Claims Tribunal awarded interest against Iran or Iranian respondents, because they frequently also requested interest in their submissions despite the prohibition of interest in Islamic law. (124) (c) Borrowing Rate 6.78 The damage incurred by the claimant through the delay can be represented by the costs of a loan. If the injured party does not dispose of sufficient financial means, it must either charge its account or take out a loan. Many enterprises make use of debt capital to finance their business. Even if there is enough equity capital, this does not mean that there is always enough liquidity. The capital could be bound up in real estate, machinery, and equipment, which means that current payments must be financed by debt. 6.79 In this sense, Arbitrator Holtzmann argued in favour of borrowing interest as an appropriate reference in his Separate Opinion in Sylvana Technical Systems v Iran. (125) He pointed out that it 'is reasonable to assume that most businesses habitually borrow while fewer regularly invest in certificates of deposit'. (126) 6.80 The borrowing rate of the claimant as the reference rate for pre-award interest is also reflected in international codifications of contract law. The Principles of European Contract Law refer to an average interest rate for short-term loans in the currency as agreed in the contract for prime borrowers at the agreed place of payment:

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If payment of a sum of money is delayed, the aggrieved party is entitled to interest on that sum from the time when payment is due to the time of payment at the average commercial bank short-term lending rate to prime borrowers prevailing for the contractual currency of payment at the place where payment is due. (127) 6.81 Similarly, Article 7.4.9(2) of the UNIDROIT Principles on International Commercial Contracts provides: The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment. (128) 6.82 The decisive interest rate referred to, in this context, is the so-called prime rate. However, other borrowing rates could also be considered. The different possibilities shall briefly be examined in the following. 6.83 (i) Prime Rate The prime rate represents the interest rate that commercial banks charge their most creditworthy borrowers, such as large corporations. (129) This means P 348 that the banks have a very minor risk. Only a few businesses qualify for the prime rate. However, it is the basis and point of departure for negotiations about other loans so that it is also called the 'base rate'. 6.84 In the United States, the base rate refers to the Federal Funds Rate of the American Federal Reserve System and usually lies at 3 percentage points above it. (130) It is relatively similar in all of the larger banks and used as the base lending rate to which a margin is added based primarily on the amount of risk associated with a loan. The US prime rate is currently 3.5 per cent (November 2016). (131) This is relatively low compared to some years ago, when it was 7.75 per cent (September 2007) or 8.25 per cent (June 2006). (132) 6.85 Arbitrator Holtzmann in Sylvana Technical Systems v Iran advocated the prime rate as a representative rate because the differences in rates actually charged would not be very big in practice. He pointed out that 'although the prime rate is not applicable to all businesses, it is generally representative because the difference between it and other lending rates is relatively small'. (133) An additional advantage would be that the prime rate, as opposed to other indexed interest rates, would not fluctuate strongly. (134) 6.86 The prime rate may also be agreed upon in international contracts. This was, for example, the case in Anaconda-Iran v Iran, increased by two percentage points, (135) reflecting the fact that not all businesses actually receive loans under prime rate conditions. 6.87 The Iran–US Claims Tribunal usually referred to the US prime rate. The use of the prime rate of the investor's home state presumes that the investor would have taken out a loan in its home state in order to bridge the gap caused by the delay in payment. 6.88 The prime rate in the currency of the country of the business can also be used. This was, for example, the case in S D Myers v Canada. The tribunal was of the opinion that the borrowing rate of the investor should be decisive, yet not in his home state, but rather in the host state, Canada, because the Canadian dollar had been the currency of account. P 349 (136) The standard Canadian prime rate was accordingly taken as the reference rate, increased by one percentage point. (137) This reflected the fact that the prime rate only represented the minimum interest rate for businesses available only to the most solvent clients but not to all businesses. (138) 6.89 Two percentage point were added to the US prime rate in Teco v Guatemala, (139) while in Pluspetrol v Perupetro it was three percentage points. (140) In Mobil Cerro Negro v Venezuela, (141) Chevron v Ecuador, (142) Mobil Cerro Negro v PDVSA, (143) and Cargill v Mexico, (144) no premium was added to the US or New York prime rate. 6.90 The 'prime' or 'base' rate plays an important role in negotiations about company loan conditions in Anglo-American countries. As such, it seems to be an appropriate basis for the assessment of the damages incurred by delayed payment. However, it must be taken into account that not all enterprises can borrow money from the banks at the prime rate so that an increase by a few percentage points might be necessary. The question then arises, how many percentage points are appropriate. The practice of tribunals is not entirely consistent, but the variations remain rather limited. In addition, the prime rate as such fluctuates less than other commercial benchmarks, for example, the LIBOR. These advantages add to the conceptual logic of the application of the prime rate as a proxy for the borrowing rate of the investor. 6.91 (ii) Borrowing Rate of the Investor While the prime rate represents an approximation of the investor's borrowing rate, one could also think of applying the actual borrowing rate of the investor. As a matter of principle, this could be an appropriate way of remedying the concrete loss incurred by the delay because he or she must finance the funds in the meantime.

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6.92 It appears, however, very difficult to identify the borrowing rate of the investor. Sénéchal has summarized the difficulties in the following way:

P 350

The 'total debt' ratio of a firm is defined as the ratio of short-term and longterm debt, finance leases and preferred stock to the value of the firm (Market capitalization plus book value of debt). In other words, the cost of debt is equivalent to the risk-free rate plus a margin that reflects the credit and market risk of the debt issued by a company. This market risk of debt is often difficult to estimate and depends on many assumptions and variables that could lead to arbitrary results. Second, there is no international standard to arrive at a precise figure for the cost of borrowing. (145) 6.93 It is possible to estimate the cost of borrowing, for example, by averaging the different interest margins over the risk-free rate over the years or by assuming an average debt profile for the company under review. (146) One could also try to obtain the ratio of finance charges over the debt for similar firms over a period of time and take a weighted average. (147) These methods, however, depend on many assumptions and variables and on the exercise of judgement. In order to avoid an arbitrary result the tribunal must become truly acquainted with the internal structures, the risk profile, and finance practices of the company. 6.94 An estimation of the borrowing rate of the investor may be arrived at by using interbank rates and adding additional percentage points. The tribunal in National Grid v Argentina found it appropriate and realistic to assume that the claimant would have applied the sums received either to eliminate existing debts or avoid incurring additional debt. (148) It decided therefore that the appropriate interest rate should be an average interest rate which the claimant would have paid to borrow. As regards the uncertainty of that rate, the tribunal held: In the absence of Claimant's borrowing rate in the record, the Tribunal will utilize a widely recognized conservative measure, which has been adopted in the awards of previous international arbitration tribunals, namely LIBOR plus 2%. (149) 6.95 The tribunal in Tidewater v Venezuela was more straightforward in applying the claimants borrowing rate. (150) It noted that the claimants' expert had pointed out that the parent company of the claimants was able to borrow at rates between 4.35 per cent and 4.47 per cent during the period in question. The tribunal thus considered 'that an interest rate of 4.5% most closely meets the standard agreed between Venezuela and Barbados in Article 5 of the BIT'. (151) In support of that rate, the tribunal pointed out that the claimants had proposed in the alternative either the US prime rate plus 2 percentage point or the LIBOR plus four percentage points. In each case, these both averaged 5.2 per cent.

6.96 The actual borrowing rate of the investor could be an adequate means of compensating the loss incurred over a certain period of time assuming that investors P 351 usually borrow money to finance their activities. However, arbitral practice is rather reluctant to apply this rate. If there is sufficient evidence that an investor had to take out a loan to bridge the lack of financial resources the chances should increase. Interbank rates have been used as an approximation, but tribunals have often not been clear whether this choice was justified by an estimation of the borrowing rate of the investor or as an 'investment alternative'. (152) 6.97 (iii) Cost of Capital of the Investor Another approach could be to refer to the cost of capital of the investor. The cost of capital is an 'opportunity cost', that is the expected rate of return that investors would have to give up by investing in the subject investment instead of investing in available alternative investments that are comparable in terms of risk and other investment characteristics. (153) In order to establish a company's cost of capital a number of factors have to be considered, such as the level of risk-free interest rates, the equity risk premium, and the risk inherent in the anticipated benefit stream. (154) 6.98 As the cost of capital is a measure used for discounting investment cash flows on specific projects and for pricing of products, it depends on a number of assumptions. It has to be borne in mind that the level of political, economic, and business risks to be undertaken by an individual investor is a matter of preference. (155) 6.99 One possibility to eliminate the subjective preferences is to refer to the Weighted Average Cost of Capital (WACC) of the investment as a measure of pre-award interest. Under the underlying Capital Asset Pricing Model (CAPM) the risk premium portion of the expected return on a security is a function of that security's systematic risk. (156) The systematic risk of a particular investment is measured by its beta. (157) The idea behind using the investment's WACC as the pre-award interest rate is that the investor could put his money in an investment of similar qualities during the time of the delayed payment. 6.100 It depends on the information available in a given investment dispute whether the cost of capital or the WACC can be identified in a plausible way. As the function of P 352 interest is to make good the damage caused by delayed payment, the cost of capital approach is not excluded as a matter of principle. Gotanda and Sénéchal noted,

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however, that applying the cost of capital as the pre-award interest rate can easily lead to a 'battle of experts'. (158) Abdala, López Zaidcoff, and Spiller submit in this respect that much of the necessary information will already be used for the quantification of the principal, in particular when a DCF valuation method is applied, so that the challenges involved are not insurmountable. They argue that the cost of capital is the most appropriate pre-award interest rate. Its application would help to avoid undercompensation by 'invalid round trips'—using a high rate for discounting future cash flows and a low pre-award interest rate up to the date of the award. (159) 6.101 Smith and Vikis argue that the cost of capital should be applied for setting the preaward interest rate when compensation is determined on a 'backward basis' which involves looking back in time to assess the sunk investment costs as a reliance loss. (160) In these circumstances the tribunal could maximize certainty of full reparation by winding the clock back to the time the capital was supplied. Dolgoff and Duarte-Silva, by contrast, express doubts against the appropriateness of the cost of capital as the preaward interest rate, most importantly because the cost of capital represents an ex ante expectation involving certain risks, while pre-award interest is an ex post calculation of compensation only requiring time-value adjustments to an awarded damages amount known with certainty. (161) 6.102 Arbitral practice has discussed the use of the cost of capital for determining the interest rate several times. Claimants in the ISCID case PSEG v Turkey submitted the WACC for determining pre-award interest relating to expenses made before and after the wrongful act by the respondent state. (162) The estimated rate was 12 per cent 'based on the opportunity cost to the Project Company at that particular point in time and the length of time since the investment was made until the date of expropriation'. (163) This approach should thus put the investors back in the position they would be in, if they had never made the investment and would have invested in another project. The tribunal's assessment of the principal was based only on historical costs rejecting any damages for lost prospects. Nevertheless, the tribunal was not persuaded by the claimants' argument that the cost of capital offered an appropriate basis for the interest rate:

P 353

As noted above, the cost of equity is based on subjective determinations by the investors. For this reason it does not offer a useful basis for calculating interest that aims at the protection of the value of funds spent rather than the value of expropriated assets, which was in the first place the assumption behind the Claimant's choice. (164) 6.103 The ICSID Tribunal in EDF, SAUR and León v Argentina rejected the WACC because '[n]o evidence has been presented that Claimants could or would have earned the highrisk WACC rate'. (165) Instead it applied the risk-free rate for the ten-year US Treasury bonds. 6.104 In Swisslion v Macedonia, another ICSID Tribunal rejected the claimant's submission to calculate pre-award interest on the basis of its WACC. (166) It explained rather cursorily that the claimant had 'requested an award of interest that would accrue at the rate of its WAAC, specified at 13.3%. The Tribunal did not accept the expropriation claim and considers that an interest award based on the claimant's WAAC is not appropriate.' (167) The tribunal applied instead the LIBOR rate provided for in the BIT for compensation upon expropriation. (168) 6.105 The ICSID Tribunal in TECO v Guatemala also rejected the claimant's proposal to use the WACC for setting pre-award interest. The claimant had suffered damage by the unilateral setting of tariffs for the electricity distribution by the Guatemalan electric power agency (CNEE). (169) The tribunal determined that the damage consisted in the lost cash flows from 2008 until October 2010, when the claimant sold its stakes in the respective Guatemalan electricity company to a Colombian company. The claimant asked for an interest rate of 8.8 per cent based on the electricity company's WACC in October 2010. (170) The tribunal found that applying the WACC of the company postOctober 2010 would not make sense, because the claimant had sold its interest in the Guatemalan company and ceased to assume its operating risks. (171) It agreed with the respondent that a risk-free rate should be applied and chose the US prime rate plus a 2 per cent premium. (172)

6.106 The ICC Tribunal in ConocoPhillips v PDVSA is a notable example which applied the WACC as rate for pre-award interest. (173) The tribunal found the respondent liable for P 354 damages caused by curtailments in production of petroleum imposed by the Government of Venezuela and by the implementation of certain OPEC decisions, which should have been mitigated by contractual arrangements and guarantees. (174) Claimants' expert chose to apply a rate of 10.55 per cent corresponding to the equity cost of the relevant funds. He relied on the CAPM and used data from US capital markets. (175) The tribunal found the approach convincing and noted: In the present case, Claimant 2 is supplier of capital for a project from which it expected to receive certain cash flow, from which it also expected to obtain a rate of return. Under such circumstances, the interest rate to be applied should measure the opportunity cost of capital, i.e. the cash flows Claimant 2 was deprived of as a result of Respondent's contractual breach which, had

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they been timely received by Claimant 2, it would have had the opportunity to apply them to the Project or some alternative productive use. On the contrary, the principle of full compensation would not be satisfied. (176) 6.107 The tribunal pointed out that relying on the cost of equity as well as on the DCF method and the CAPM methods was a widely recognized method of determining the opportunity cost of the lost cash flows or incomes. (177) It emphasized that the LIBOR rate proposed by the respondent, which was contained in an association agreement between the parties, was not directly applicable to the present dispute and that the respondent had not challenged or otherwise provided alternatives to the calculation of the 10.55 per cent interest rate or the mathematics of such calculation. For that reason, the majority of the tribunal did not see a reason to deviate from the calculation provided by the claimant's expert. (178) 6.108 While in principle the application of the cost of capital appears to be economically consistent, tribunals are generally still reluctant to accept it as a basis for pre-award interest. The perception seems to prevail that the cost of capital would only represent the investor's expectations whose business plans and forecasts may be too optimistic. These doubts could be countered by corroborating the investor's expectations by other data, such as historic returns or third party data on the cost of equity in the host country. (179) However, tribunals still tend to prefer rates of risk-free investment alternatives or borrowing rates. 6.109 (iv) Borrowing Rate of the State Late payment of compensation or damages by states can also be regarded as a loan granted by the investor. This approach is referred P 355 to in economic and legal literature as the 'coerced loan theory'. (180) According to this approach, the pre-award interest rate should correspond to the short-term borrowing rate of the respondent. (181) 6.110 It follows that the amount of interest has nothing to do with the claimant's actual loss, but rather depends on the respondent's risk characteristics. (182) It measures the financial effect of the delay from the perspective of the respondent. The borrowing rate of the respondent as a reflection of a 'coerced loan' has several times been argued by claimants, but rarely been applied by tribunals. (183) 6.111 The perspective of the respondent is important when it comes to the prevention of enrichment which is an additional function of the interest claim. While this is only of secondary importance concerning pre-award interest, it becomes more relevant with regard to post-award interest. The 'default risk' of the respondent is mirrored in its borrowing rate. (184) The 'coerced loan theory' would thus better fit to the determination of post-award interest. 6.112 (v) Average Borrowing Rate In Europe, the 'best' borrowing rate for businesses as an equivalent to the Anglo-American prime rate has not played an important role, while the determination of an 'average' borrowing rate has been impeded by the lack of published data. The need for more transparency in business loans was addressed in the 'European Union by Council Regulation (EG) No 2533/98 of 23 November 1998 concerning the collection of statistical information by the European Central Bank'. (185) This Regulation determined that data on business loans in all member states should be collected and published. The European Central Bank then issued further Regulations which defined the data to be submitted more precisely (186) . 6.113 Recent data show that the average borrowing rate for business corporations in the rates are a relatively new phenomenon. They hardly cover inflation. It may therefore be questioned whether their application will appropriately reflect the time value of money. Nevertheless, they represent a 'market-related interest' as it is generally required in case of expropriation compensation. In damages cases it can serve as a point of departure for the calculation of the damage actually incurred by the delay in payment.

P 356 Euro area ranged between 1.28 per cent to 2.65 per cent. (187) Such low borrowing

6.114 Since the average borrowing rate for businesses is not derived from a small number of privileged business loans, as opposed to the prime rate, an increase of the interest rate would not be necessary as a matter of principle. The obvious disadvantage is that data about business interest rates are only collected and published systematically in the EU and not at the international level. (d) Investment Alternatives 6.115 According to the approach formulated in Sylvana Technical Systems v Iran, the rate of pre-award interest should be based on interest the investor could have earned if it had been paid in time and thus had funds available for an alternative investment. (188) The crucial question is which investments represent an adequate alternative for the investor. Interest potentially earned on investment alternatives depends on many factors, most importantly the risk connected to the investment, its maturity, and the currency of the investment. It needs to be established what he or she would have done with the money, if the respondent had paid in due time. 6.116 Frequently it is argued that low-risk or risk-free investment alternatives should be used as a point of reference. This would serve the principles of fairness and transparency as well as the foreseeability of the decision. Gotanda proposed 'a certificate of deposit,

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money market account or commercial savings account. It should be accessible to the average entity in the claimant's position, and generally availed of by similarly situated entities.' (189) A choice of such securities would 'serve the need for consistency and predictability, while eliminating the use of rates that would involve more risk or less liquidity than normally encountered by prudent investors'. (190) 6.117 On this basis, Gotanda formulated the following proposal for the calculation of Arbitration of the United Nations Commission on International Trade Law (UNCITRAL):

P 357 interest to be included in the Model Law on International Commercial

The parties are free to agree on the payment of compensatory interest or the rules of law applicable to a claim for such interest. Failing any such designation by the parties, the arbitral tribunal shall presume that any award of monetary damages shall include interest from the date of default to the date when the award is paid in full … The arbitral tribunal shall presume that interest accrues at a rate corresponding to that of a savings vehicle commonly used in the country of the currency in which payment is to be made and is to be compounded quarterly. (191) 6.118 However, this proposal has not been put into practice. (192) In a later article, Gotanda, together with Sénéchal, developed a new proposal for the selection of an interest rate, namely using a risk-free rate (e.g. government bonds) plus a market-risk premium (as measured by an historical average of the excess of the market return over the risk-free rate). (193) The rationale for using this approach, equivalent to using a market rate of return, is based on the assumption that businesses will generally tend to demand an extra pay-off above the risk-free rate for investing in an asset with some level of risk. (194) The determination of the risk premium is explained as follows: [T]he expected market risk premium is the difference between the risk-free rate and the market-risk (Rm-Rf). The extreme volatility of the stock and bond markets makes a long measurement period essential. Therefore, this risk premium must be a historical average of the excess of the market return over the risk-free rate. Information on market risk is easily available. For instance, the London Business School has determined the risk premia in the U.S. for the period 1900–2001 was 5.6% (geometric mean of risk premia relative to Bills) and the prospective risk premia for U.S. to be 5.3%. (195) 6.119 The calculation of such a market rate of return is quite easy as market rates of return are readily available from financial market public information on a regular basis. (196) 6.120 So far, international jurisprudence has been inconsistent in the selection of investment vehicles as references for the applicable interest rate. The arbitral tribunal in Sylvana Technical Systems v Iran proposed criteria which should lead to more coherence and suggested the six-month certificates of deposit in the United States as an P 358 appropriate point of reference. (197) The tribunal pointed out that these almost riskfree fixed-interest securities with a maturity of six months would be available to all interested persons: [I]t is desirable to have uniformity of treatment of a large number of parties in many cases, and therefore, a rate of interest based on return on investment during the relevant period is more appropriate. Uniformity can be accomplished by basing interest in Awards on the rate of return on certificates of deposit, which are available to all investors at substantially the same rates. (198) 6.121 On this basis, the tribunal ultimately awarded interest at 12 per cent. (199) A number of awards of the Iran–US Claims Tribunal followed these considerations and determined interest accordingly. (200) Interest on this investment vehicle, however, would today only yield 0.6 per cent (end of 2016), (201) and not 12.12 per cent as at the time of Sylvana Technical Systems v Iran. (202) 6.122 In ICSID arbitrations, US six-month certificates of deposit (203) and US Treasury Bills (204) have been referred to relatively frequently. They were considered to be 'an appropriate investment alternative' (205) and 'reasonable and fair'. (206) The tribunal in Occidental v Ecuador noted that the claimants had requested the US Government Treasury Bill rate which reflected a 'prudent, risk-free and conservative re-investment practice'. (207) However, it is doubtful that a reasonable investment alternative for a foreign investor is indeed a risk-free financial instrument denominated in US dollars, in particular in times when the Federal Reserve decides to keep reference interest rates very low. 6.123 The tribunal in Yukos v Russia, after considering with great diligence various options put forward by the claimants (208) and in academic writing, (209) found the investment P 359 alternative approach more convincing than other approaches. It noted that several tribunals had adopted the investment alternative approach using US debt instruments

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even when the claimant was not a US investor. (210) It concluded that, 'in the exercise of its discretion', pre-award interest should be awarded on a rate based on ten-year US Treasury bond rates, which was 3.389 per cent. (211) 6.124 Other tribunals have chosen government bonds of the host state as a reference for the 'investment alternative' of the claimant. The tribunal in Wena Hotels v Egypt, for example, referred to government bonds of the host state. It chose an interest rate of 9 per cent and added in a footnote that '[g]overnment bonds in Egypt are currently yielding 10% …'. (212) A further explanation about the choice of this rate was not given. One interpretation could be that the tribunal assumed that the investor, if he had the money at his disposal, would have invested in Egyptian government bonds. The ad hoc committee, in the subsequent annulment proceedings, confirmed this decision as one of a number of possibilities available to the tribunal within its discretion. (213) 6.125 In Feldman v Mexico, the tribunal also focused on lost interest on investment in the respondent state. The claimant had been discriminated against with regard to tax refunds in violation of NAFTA Article 1102. The tribunal awarded interest on the nonrefunded amounts at a rate 'in accordance with the interest rate paid on Federal Treasury Certificates or bonds issued by the Mexican Government, with a maturity of 28 days …'. (214) 6.126 The tribunal in Quasar des Valores v Russia based the rate of pre-award interest on the 'Russian sovereign medium-term dealt in US Dollars [which] had a yield of 6.434%'. (215) The tribunal noted that the proper measure of interest would be to put claimants into the position they would have been in if there had been compliance with the BIT. The claimant had submitted the respective rate which had not been questioned by the respondent. (216) 6.127 It can be concluded that different investment alternatives have been used as a point of reference for choosing an appropriate rate for pre-award interest in investment arbitration. For the selection of the alternative investment it should be recognized that a P 360 reasonable investor would normally not only invest in risk-free securities but would accept a certain risk in return for a higher interest rate. The approach developed by Gotanda and Sénéchal, namely to choose a risk-free rate plus the market-risk premium, could serve as a solution, but is not yet widely reflected in arbitral practice. One example is the ICSID case Alpha Projektholding v Ukraine. (217) The claimant proposed the twelve-month LIBOR rate, compounded annually, but the tribunal found 'that a more appropriate rate is the risk-free rate plus the market risk premium'. (218) The risk-free rate was the rate for ten-year US treasury bonds, given that the ten-year maturity most closely matches the duration of the cash flows. (219) This rate plus the market risk premium was, according to the claimant's expert, 9.11 per cent in total. The tribunal believed that 'this rate better reflects the opportunity cost associated with Claimant's losses, adjusted for the risks of investing in Ukraine'. (220) It remains to be seen whether other tribunals will follow this approach, in particular in times of very low interest rates on risk-free securities. It will remain a challenge to tribunals to choose an investment alternative that can be assumed to be appropriate and reasonable. (e) Government Bonds 6.128 States may issue bonds in order to finance their national budget deficit. If they are in financial trouble or in urgent need of capital they usually offer high interest rates, while government bonds in stable national economies generally yield relatively low interest. 6.129 Usually, there is also an important secondary market for bonds. They can be bought and sold after the date of issuance. They then have a remaining time to maturity and a market value which may differ from the face value. The nominal interest rate remains the same. The relation between the market value and the nominal interest rate indicates the actual interest rate. The actual revenue from interest on government bonds, therefore, varies depending on the date of assessment. 6.130 The role of government bonds as a reference for the determination of interest rates in international arbitration was particularly interesting in CSOB v Slovak Republic. (221) The claimant had submitted that it could have invested the money in Slovak government bonds. (222) The tribunal, however, pointed out that the rate of up to 42.53 per cent was connected to the high inflation at the time and the relatively high risk. Specific evidence would have been needed to prove that the claimant would have invested the money in P 361 this manner: However, it has not been proven that CSOB would have invested the whole amount from the SI loan in Slovak Government Bonds, e.g. in 1996, when the interest rate was at 42,53%, probably reflecting not only a high inflation of the SKK, but also higher risk of default. (223) The tribunal, consequently, did not accept the Slovak government bonds as a basis for deciding the interest claim. 6.131 On the other hand, the ICSID Tribunal in Wena Hotels v Egypt, in its decision on interest, referred to Egyptian government bonds without asking for specific evidence.

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(224) The consideration of 'government bonds in Egypt' could be interpreted as an assumption that the investor would have invested the money in those Egyptian bonds during the time of the temporary withholding of money. (225) Another explanation could be that the state possessed money which it was no longer entitled to so that it was unjustifiably enriched. The amount of enrichment consisted in the amount of compensation plus interest the state would have otherwise been obliged to pay for government bonds. 6.132 The savings on the interest payment can therefore be interpreted as a charge for a loan that the investor unwillingly grants the state. Interest on such a 'coerced loan' helps to avoid a situation where the withholding of money is more advantageous for the state than prompt payment. (226) These considerations were decisive in the Wimbledon case when the interest rate of 6 per cent with reference to the 'public loans' was chosen by the PCIJ. (227) 6.133 In Tenaris v Venezuela the government bond rate chosen by the tribunal as reference for determining pre-award interest was 9 per cent. (228) The tribunal found that a borrowing rate would be appropriate to reflect the costs to the claimants to borrow (i.e., replace) the amounts expropriated. The claimants had put forward that the interest rate should be equivalent 'to the rate Venezuela would have had to pay to borrow money in April 2008 (9.75%)'. (229) The respondent had argued for a combination of a 4 per cent 'no risk rate' with a country risk premium of 4.6 per cent which would yield 8.6 per cent 'borrowing rate'. The tribunal compared the two borrowing rates submitted by the parties and found that 9 per cent was a reasonable and fair rate for pre-award interest. (230) 6.134 To consider the interest rate of the host state's government bonds represents the possibility of preventing the state's enrichment in an economically adequate manner. It P 362 also creates an incentive for the state to pay promptly. This double effect can be achieved if the bonds of the respondent state and not those of the home state of the investor or of any other state are taken as a reference. 6.135 Interest on government bonds of the United States or other home states of investors are not ideal for representing borrowing costs. Through comparatively low interest rates in stable economies with low inflation, the problem of unjustified enrichment of the respondent is not appropriately addressed. In addition, interest on risk-free government bonds does not adequately account for the damage actually incurred by the claimant. It assumes that the investor would have used the amount of damages, if it had received it on time, for investing in such risk-free securities. This is not a realistic but for scenario to be applied in the calculation of damages. 6.136 Nevertheless, US treasury bonds represent a low risk rate which is frequently applied by arbitral tribunals. (231) Similarly, US certificates of deposit, usually at a maturity of six months, are often preferred to higher risk rates. (232) (f) Interbank Interest 6.137 International contracts and international tribunal awards increasingly refer to socalled interbank interest rates. The most significant interbank rates are the LIBOR (London Interbank Offered Rate) and the EURIBOR (European Interbank Offered Rate). National interbank rates are less important, but also sometimes referred to in international investment arbitration depending on the specific legal framework. (233) Interbank interest rates represent an important benchmark for interest rates for shortterm loans and interest on deposits. Usually, interest rates for loans bear a surcharge on the interbank interest rate which depends on various criteria such as the creditworthiness of the client and the period of the loan. 6.138 International business relations and financial transactions rely to a large extent on the London LIBOR. It represents the interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market. (234) LIBOR is an average interest rate at which so-called 'panel banks' lend funds to one another. The selection of the 'panel banks' is made every year by the ICE Benchmark Administration P 363 (IBA) with assistance from the Foreign Exchange and Money Markets Committee (FX&MMC). (235) The LIBOR is rated in five currencies and for seven maturities. (236) The following table provides a brief overview of the trend of the US$ LIBOR and the Euro LIBOR in the past years: LIBOR (US$)(237) 2000

2005

2008

2009

2010

2012

2014

2016

6 months

6.696% 3.775%

1 year

6.866% 4.033% 3.089% 1.559% 0.923% 1.013% 0.561% 1.251%

3.060% 1.100% 0.519% 0.687% 0.329% 0.929%

LIBOR (Euro)(238) 2000 6 months

2005

2008

2009

2010

2012

2014

2016

4.563% 2.234% 4.724% 1.421% 1.040% 0.755% 0.270% 0.148%

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2000 1 year

2005

2008

2009

2010

2012

2014

2016

4.799% 2.332% 4.822% 1.604% 1.327% 1.072% 0.434% 0.027%

While in 2000, the six-month LIBOR for the US dollar was at 6.7 per cent, in 2005 it fell to 3.8 per cent, arriving at the lowest rate at 0.3 per cent in 2014 and slightly recovering in 2016. The six-month LIBOR for the Euro was not always lower, as can be seen for example in 2008, but beginning of 2016 it was even negative, namely, 0.148 per cent for six months and -0.027 per cent for one-year maturity. (239) This shows that the choice of the currency and the maturity play an important role. (240) 6.138a In Europe, the EURIBOR assumes an important role as a benchmark for interest rates of loans and securities. It is the rate at which Euro interbank term deposits are offered by one prime bank to another prime bank within the European Monetary Union P 364 (EMU) zone. (241) The banks quoting for EURIBOR have been selected to ensure that the diversity of the Euro money market is adequately reflected. Since its first publication in 1998, the EURIBOR has gained growing importance, being used as a reference in a wide range of financial instruments, including loans to SMEs and households. (242) It is also quoted in different maturities from overnight to twelve months. Similarly to the LIBOR, it has also experienced a considerable fluctuation and a decrease in recent years. The sixmonth EURIBOR stood at 3.5 per cent in 2000, rose in 2008 to 4.7 per cent, but fell in 2010 to less than 1 per cent and since then decreased until the beginning of 2016 to as low as 0.061 per cent for six months' maturity and 0.042 per cent for one year. (243) EURIBOR(244) 2000

2005

2008

2009

2010

2012

2014

2016

6 months

3.523% 2.210% 4.708% 2.945% 0.996% 1.606% 0.387% 0.061%

1 year

3.885% 2.351% 4.733% 3.025% 1.251% 1.937% 0.555% 0.042%

6.139 In the present context, two qualities of interbank interest rates are of particular significance: first, they are market-oriented because they reflect actual economic realities on the financial markets. Second, they can be regarded as 'objective' because they reflect neither the perspective of the claimant nor that of the respondent in a given international investment dispute. They are derived from interbank transactions and used as a benchmark for negotiations on interest on loans or investments. 6.140 These qualities predestine interbank interest rates to application in international expropriation cases. According to international law, interest on compensation for expropriation should be market-oriented and appropriate. Because in the case of a lawful expropriation neither the actual loss of the affected person nor the concrete enrichment of the state is determinative, such an intermediate referential interest rate appears to be most appropriate. 6.141 Several BITs contain explicit reference to the LIBOR with respect to the interest payable upon compensation in case of expropriation. For example, the BIT between Italy and Egypt provides in its Article 5, subclause (iv), that 'compensation shall include interest at the current six month LIBOR rate of interest from the date of nationalisation or expropriation until the date of payment'. (245) The ICSID tribunal in Siag v Egypt applied P 365 the LIBOR rate, even though the expropriation was unlawful and other BIT violations had been committed, but it found that 'there is no reason not to hold that they are similarly adequate to compensate in case of delayed payment of compensation for an unlawful expropriation'. (246) It ordered 'that interest should be paid on all sums of damages awarded hereunder, at the six month LIBOR rates applicable from time to time since 23 May 1996 through until the date of payment, with such interest being compounded six-monthly'. (247) 6.142 The BIT between Macedonia and Switzerland also refers to the LIBOR rate in its provision on compensation upon expropriation. (248) The tribunal in Swisslion v Macedonia applied this rate, even though it had rejected the expropriation claim. However, it found that '[the] only provision of the Treaty that makes any reference to a rate of interest is, of course, Article 5, which deals with expropriation. Under that provision, interest is to be calculated on the annual LIBOR basis.' (249) 6.143 In Lemire v Ukraine the applicable BIT between the United States and Ukraine provided in its Article III that compensation upon expropriation should 'include interest at a commercially reasonable rate, such as LIBOR plus an appropriate margin, from the date of expropriation'. (250) The tribunal found that '[a]lthough the rule refers to expropriation, it can be extended without difficulty to compensation for violations of other provisions of the BIT'. (251) While there was agreement between the parties on the generic use of LIBOR as a reference rate, they disagreed on the margin which should be used to increase it. (252) While the claimant proposed 2 per cent 'to keep in line with the practice of ICSID Arbitral Tribunals', (253) the respondent pointed out that there was no justification for the application of a rate of LIBOR plus 2. (254) The tribunal agreed with the claimant and noted that 2 per cent was a 'reasonable margin, which reflects the surcharge which an average borrower would have to pay for obtaining financing based on

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LIBOR'. (255) The tribunal was thus of the opinion that the function of interest in the case at hand was to compensate the claimant for actual or potential borrowing costs. It explained this in more detail as follows:

P 366

As regards the addition of a margin to the LIBOR reference rate, the Tribunal sides with Claimant. LIBOR reflects the interest at which banks lend to each other money. Loans to customers invariably include a surcharge, and this surcharge must be inserted in the calculation of interest to reflect the financial loss caused to Claimant by the temporary withholding of money. A claimant to whom money is awarded would not be fully compensated, if the interest rate applied did not include an appropriate margin. This is acknowledged by Article III.1 of the BIT, which expressly provides that the LIBOR rate should be increased by 'an appropriate margin'. (256) 6.144 It follows from the above that interbank interest rates can not only serve a useful purpose in the context of expropriations, also in damages cases. As here the financial loss actually incurred is determinative, the interbank interest rate in its 'generic' form would not be sufficient. As it is usual practice to add a surcharge on the interbank rates for commercial loans to customers, this should also be done with regard to the interest on an amount of damages. This could adequately reflect the financial loss of the claimant caused by the temporary withholding of money. It assumes that in the meantime the claimant must take out a loan to bridge the gap. The amount of the surcharge should be determined by reference to surcharges actually demanded for business loans. A margin of 2 percentage points appears relatively widely accepted, but also surcharges of 4 percentage points or only 1 percentage point are used in international investment arbitrations. 6.145 The tribunal in Biloune v Ghana was one of the first to choose the six-month LIBOR to remedy the financial loss of the claimant caused by the lapse of time. It calculated the average of the respective LIBOR between the unlawful expropriation and the time of the award. (257) The result was an interest rate of 8.5412 per cent. In this case, no surcharge was added. The corresponding amount was computed and added to the principal sum. (258) The rate of post-award interest was also decided by reference to the six-month LIBOR at the rate applicable at the date of the award. 6.146 In Maffezini v Spain the amount of 30 million pesetas had been unlawfully transferred from a time-deposit account. It is noteworthy that the tribunal did not focus on the concrete interest which the claimant could have earned on that specific account but chose the twelve-month LIBOR for the Spanish peseta for the purpose of setting the interest rate on the amount of damages. The Tribunal finds it reasonable to fix as interest rate the LIBOR rate for Spanish peseta for each annual period since February 4, 1992 and for the proportion that corresponds to the period between February 4, 2000 and the date of the Award. [In accordance with British Bankers Association Financial Data.] (259) 6.147 Another example is MTD v Chile. The claimant requested an interest rate of 8 per

P 367 cent, whereas the respondent state submitted that the interest rate for dollar

investments in Chile or the average annual LIBOR would be appropriate. (260) The tribunal chose the LIBOR and reasoned as follows: This being an international tribunal assessing damages under a bilateral investment treaty in an internationally traded currency related to an international transaction, it would seem in keeping with the nature of the dispute that the applicable rate of interest be the annual LIBOR on November 5 of each year since November 5, 1998 until payment of the awarded amount of damages. (261) 6.148 Subsequent tribunals have frequently awarded LIBOR rates plus additional percentage points. Often it was the six-months LIBOR plus two percentage points. (262) This has been referred to as 'an average interest rate which Claimant would have paid to borrow from that date to the present' (263) or 'a commercially reasonable borrowing rate over the relevant period … consistent with recent practice amongst ISCID tribunals and the prevailing scholarly view'. (264)

6.149 Other tribunals have chosen LIBOR plus four percentage points. (265) In Kardassopoulos and Fuchs v Georgia, the main reason was that the Pipeline Construction and Operating Agreement (PCOA) contained the LIBOR rate plus four percentage points. The tribunal found that 'in order to achieve full reparation in the circumstances of these cases, the PCOA rate … provides the best available evidence of what constitutes a fair commercial rate in the present context, and accordingly the Tribunal decides that it is appropriate to award interest at the rate of LIBOR + 4%.' (266) Interest was compounded semi-annually and resulted in an aggregate amount of pre-award interest that was double the principal. (267) In the NAFTA case Mobil Investments and Murphy Oil v Canada, P 369 the tribunal chose the twelve-months Canadian dollar LIBOR rate plus four percentage points, compounded monthly. (268)

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6.150 At the other end of the spectrum LIBOR plus one percentage point (269) or without any additional percentage point was awarded. (270) Other tribunals have used the LIBOR as a benchmark and added special amendments. (271) The LIBOR without any addition was awarded by the tribunal in Rosinvest v Russia. (272) The tribunal stated that the applicable BIT between the United Kingdom and the USSR of 1989 provided for 'interest at a normal commercial rate'. (273) The tribunal stated that this provision was only applicable to lawful expropriations, but that both parties had relied on it also with regard to a finding of unlawful expropriation. (274) The tribunal considered that 'in view of the term “normal” in Article 5(1), the LIBOR rate should be applicable without any addition'. (275) In view of the function of pre-award interest, it may be questioned whether the interbank rate without any addition is appropriate, but neither the language of the BIT nor the parties provided the tribunal with more guidance. 6.151 The EURIBOR has also been used more frequently in recent years, usually also at a six-months maturity with an addition of two percentage points. (276) As the tribunal in Hrvatska Elektropriveda v Slovenia explained, the EURIBOR seems to be more appropriate in investment disputes within Europe, when the currency of account is Euros: The Tribunal observes that it is common in investment treaty cases to tie the interest rate to LIBOR—although in the present case, where the currency is euros, it is more appropriate to use EURIBOR. This represents an objective, market-orientated rate, well suited to ensuring that the consequences of the breach are indeed wiped out. Although the Tribunal recognises that German bonds provide a valuable benchmark, the complexity of Mr Jones' calculations to determine yield are not practicable. The Tribunal prefers an interest rate that is more simply expressed. For this reason, the Tribunal finds that the average six-month EURIBOR is appropriate in the present case. (277) 6.152 National interbank interest rates have also played a certain role in international arbitral practice. The ICSID Tribunal in Atlantic Triton v Guinea determined that the rate of the pre-award interest should be 9 per cent which corresponded to the interbank interest rate in the United States. (278) The contract under dispute had been concluded between a Norwegian enterprise and the African Republic of Guinea. Since the currency of the contract was the US dollar, 'the Tribunal judging equitably sets the interest rate at 9% which is presently the basic inter-bank interest rate in the United States'. (279) 6.153 In CME v Czech Republic, the claimant submitted that a subsidiary had received a loan at the rate of the Czech interbank interest rate, the PRIBOR (Prague Interbank Offered Rate), for twelve months plus 3.5 percentage points. (280) At the relevant time, the PRIBOR was set at 3.4 per cent which resulted in an interest rate of 7.9 per cent. The tribunal found this irrelevant, since the loan in question was only a very small amount in relation to the size of the amount of compensation or damages to be decided upon in the arbitral proceedings. 6.154 In CSOB v Slovak Republic, the ICSID Tribunal plausibly argued that interest on damages after a violation of a loan agreement between two formerly state-owned banks could best be defined by reference to a national interbank interest rate—in this case— the Slovakian BRIBOR: [T]he Tribunal decides to retain the BRIBOR rate as determined by the National Bank of Slovakia for lending money on a three months basis. In the Tribunal's view, the 3-months BRIBOR rate can be considered under the particular circumstances of the Slovak Republic's obligation to cover SI's losses as a solution most closely based on the trade usages to which the Czech Commercial Code refers … (281) 6.155 In Micula v Romania, the Romanian Interbank Offered Rate (ROBOR) was put forward by the claimants. (282) They argued that ROBOR is the rate at which banks lend to each other, that is set by the market and which accurately reflects Romania's underlying economic conditions. Therefore at times of high inflation, which occurred in Romania in the period relevant to this dispute, it is logical that ROBOR rose accordingly, including to 30% at one point. However, due to the manner in which ROBOR is calculated and applied, it cannot sensibly be contended that it is not an appropriate rate for the calculation of interest when a claimant borrows from Romanian banks and/or borrows in RON. (283) The tribunal agreed in principle with the claimants and found that the appropriate rate should compensate them for their cost of borrowing money during the relevant period. It emphasized that the basis of operations was RON and that the claimants were Romanian P 370 nationals with their principal place of business in Romania, and 'the fact that they could borrow in Euro does not detract that the currency in the place where they operate was and remains RON'. (284) As regards the question of the premium, the tribunal found the argument persuasive that the claimants were not international companies and could not borrow at only two points above the interbank offered rate, as frequently awarded by other investment tribunals. The tribunal thus awarded interest at three-months ROBOR

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plus 5 per cent, compounded on a quarterly basis. (285) 6.156 In Abengoa v Mexico, the tribunal based the rate of 5 per cent interest on the Mexican interbank rate, the Tasa de Interés Interbancaria de Equilibrio (TIEE— Equilibrium Interbank Interest Rate), rejecting the higher legal interest rates of 6 and 9 per cent. (286) 6.157 To summarize, interbank interest has the advantage that the rate is marketoriented and easy to find. International interbank interest rates, such as the LIBOR or the EURIBOR, are international in nature, which makes them particularly appropriate for being used in international proceedings. On the other hand, as has been shown above, interbank interest rates tend to fluctuate quite strongly. The use of an average value over a longer period of time could moderate this disadvantage. 6.158 Interbank interest seems to be a useful and appropriate reference for determining interest on compensation in cases of lawful expropriation. It represents a benchmark for interest on both loans and investments and can, therefore, be regarded as a truly marketoriented objective–abstract interest. However, it is not clear whether the interbank rate should be taken as it is or whether it needs to be increased by a surcharge. Some BITs have included interbank rates in their provision on compensation upon expropriation and suggested to add a premium. How high this premium should be and which criteria should be applied to define it is usually left open. Tribunals seem to interpret the premium as a means to approximate borrowing rates. 6.159 Interbank rates can also be useful in international damages cases. Here, the premium becomes even more important. The damage caused by the delay is usually greater than the interbank interest rate, because customers usually do not receive loans at the interbank interest rate without a surcharge. However, it is not clear how this surcharge should be determined. A number of tribunals have chosen to apply a surcharge of two percentage points, other have applied four or five, again others one or none. An explanation for these choices is often not adequately provided, despite their P 371 considerable impact on the result on the aggregate amount of interest. (g) 'Fair' Interest in Practice 6.160 In the practice of international courts and tribunals, the use of interest rates with no explicit referential rate is rather widespread. Express or implied references to previous cases have resulted in the application of interest rates at 'fair' rates between 5 per cent and 17.5 per cent. This practice includes expropriation and damages cases. 6.161 (i) Expropriation Cases In expropriation cases, compensation should, as a matter of principle, bear interest on a market-related basis. (287) Nevertheless, international practice has frequently recurred to 'fair' or 'reasonable' interest without further explanation. 6.162 The Iran–US Claims Tribunal in its decisions in American International Group v Iran and INA v Iran and awarded interest on the amounts of compensation at a 'reasonable annual rate of 8,5%'. (288) 6.163 In Aminoil v Kuwait, a rate of 7.5 per cent was regarded as 'reasonable'. (289) The tribunal, however, added ten percentage points in order to address the negative impact of currency devaluation which resulted in an annual rate of 17.5 per cent. This generous consideration of inflation was explained by a reference to a 'reasonable rate of return' agreed upon by the parties in the concession contract. The long-term maintenance of the value had been of considerable concern to the parties demonstrated by the inclusion of a 'gold clause' in the contract and later by a currency basket. The intention of the parties was thus accounted for also in the determination of the interest rate. (290) 6.164 In Compañía del Desarrollo de Santa Elena v Costa Rica, the issue of the applicable interest rate was of considerable importance because the expropriation had already occurred twenty-two years before. The tribunal held that 'the amount of compensation should reflect, at least in part, the additional sum that this money would have earned, had it, and the income generated by it, been reinvested each year at generally prevailing rates of interest'. (291) Nevertheless, the tribunal did not decide on a particular interest rate but awarded an aggregate amount of US$ 16 million of which only US$ 4 .15 million represented the value of the investment at the time of the expropriation. The rest was the interest accrued until the time of the award. Considering that interest was compounded this corresponded to an interest rate of 6 per cent. (292) This was also the P 373 interest rate the tribunal chose for post-award interest. 6.165 (ii) Damages The solutions of international tribunals concerning pre-award interest rates in cases of state responsibility vary considerably. Article 38 of the ILC's Articles on State Responsibility provides for a wide margin of discretion in order to achieve full reparation. (293) International practice has identified different rates as 'fair' under this aspect. (294) 6.166 In Wimbledon, the PCIJ referred to the interest rate of 6 per cent as a 'fair' rate referring to the prevailing economic conditions (295) but only applying this rate to postaward interest. (296) 6.167 The interest rate of 6 per cent was frequently referred to as a 'fair rate' in

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subsequent international practice. The ICSID Tribunal in Middle East Cement v Egypt, for example, noted rather cursorily that 'in view of the rates in financial markets during the relevant period, a rate of 6% p.a. is appropriate'. (297) The tribunal in Metalclad v Mexico explained that 'to restore the Claimant to a reasonable approximation of the position in which it would have been if the wrongful act had not taken place, interest has been calculated at 6% compounded annually'. (298) Also without any particular explanation, the ICSID Tribunal in Técnicas Medioambientales v Mexico chose the interest rate of 6 per cent. (299) In Vivendi v Argentina (Vivendi II) the interest rate of 6 per cent was regarded as a reasonable approximation to the returns the investor could have earned if he had invested the money elsewhere. (300) 6.168 The tribunal in Impregilo v Argentina found that the 15 per cent as claimed by the claimant appeared to be excessive. (301) It considered that 6 per cent would be 'adequate and reasonable in the circumstances of this case'. (302) In Desert Line v Yemen, the claimant had claimed 7 per cent compounded, (303) the term rate of his borrowings, but the tribunal without any closer examination considered that 'the appropriate rate of interest in this case is the simple rate of 5% per annum'. (304) 6.169 Higher interest rates were also considered to be 'fair' in international arbitral practice. The tribunal in Antoine Goetz v Burundi demanded a rate 'à un taux commercial raisonnable', (305) which in the subsequent settlement agreement between the parties was set at 8 per cent. (306) 6.170 The arbitral tribunal in Asian Agricultural Products v Sri Lanka considered an interest rate of 10 per cent as 'reasonable and appropriate and in accordance with a long established rule of international law'. (307) 6.171 This corresponds to the approach of the Iran–US Claims Tribunal as adopted in McCollough v Ministry of Post. The arbitral tribunal, after examining various criteria, (308) determined that 'a fair rate of interest to be awarded on all the amounts determined to be due and owing to the Claimant is 10% per annum'. (309) Even though the tribunal had strongly argued against a fixed selection of interest rates, its interest rate of 10 per cent was later frequently taken up without further reasoning. A number of subsequent tribunals did not examine the criteria developed by the tribunal in McCollough v Ministry of Post in more detail but awarded an interest rate of 10 per cent with only succinct reference to this award and the conclusion that 10 per cent would be 'fair'. (310) In the 1990s, the Iran–US Claims Tribunal also regarded lower interest rates as 'fair'. This was, for example, the case with interest rates of 9.75, (311) 9.5, (312) and 8.6 per cent. (313) 6.172 The tribunal in Tenaris v Venezuela found that a rate of 9 per cent would be 'fair and reasonable for pre-award interest'. (314) It arrived at this rate by using the 'borrowing rate' of Venezuela which was approximately 9.75 per cent. Then it noted that the respondent's expert had compared the six-month LIBOR and ten-year Treasury rates and concluded that they were around 4 per cent. To this, he supplemented a factor covering political risk and other macroeconomic factors, the so-called country risk premium. (315) A combination of the 4 per cent 'no risk rate' with a country risk premium of 4.6 per cent would yield an 8.6 per cent 'borrowing rate'. (316) The tribunal determined the 'fair and P 375 reasonable' rate between this rate and the actual borrowing rate of 9.76 per cent.

(2) Dies a quo 6.173 The period of interest represents an additional important aspect for the assessment of interest in international investment disputes. The date from which interest is to accrue (dies a quo) must be determined consistently with the other parameters of the calculation of compensation and damages. If the valuation date is the date of the award, granting pre-award interest would amount to double counting. If the valuation date lies in the past, the start of the interest period is not always clear. (a) Expropriations 6.174 The beginning of the interest period in cases of expropriations is determined by the day on which compensation should have been paid. (317) Ideally, compensation is paid 'promptly' on the date of expropriation or even prior to that date. If payment was not 'prompt', pre-award interest shall compensate this defect. 6.175 In cases of direct expropriations the starting date of interest usually does not pose a major problem. In case of nationalizations of entire industries, it is usually the date of the legal instrument providing for the nationalization. (318) When property is expropriated by a specific legal instrument, such as a decree, (319) or a withdrawal of a concession, (320) tribunals regularly took the date of the respective legal act as the starting date of interest. 6.176 In Southern Pacific Properties v Egypt, the respondent submitted that on the basis of national law, interest could only accrue from the time of the initiation of judicial proceedings. The tribunal did not agree with this approach and held: [I]t is legitimate to apply the logical and normal principle usually applied in cases of expropriation, namely, that the dies a quo is the date on which the dispossession effectively took place, since it is from that date that the deprivation has been suffered. This principle is supported by the doctrine and

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the jurisprudence of international tribunals. (321) 6.177 The decision in LIAMCO v Libya, according to which interest only begins to accrue at the date of the award can, therefore, be regarded as an exception in expropriation cases. The tribunal explained that it was not possible to award interest from an earlier date because the actual amount was only fixed at the time of the issuance of the award. (322) 6.178 As regards indirect expropriations, the determination of the expropriation date— and thereby the beginning of the period of interest—is difficult. (323) This is particularly true in the case of creeping expropriations where the deprivation of property does not occur in a single act but by various acts and omissions by the state over an extended period of time. (324) 6.179 Once the expropriation date is determined, it is generally regarded as being identical with the beginning of the interest period. (325) (b) State Responsibility 6.180 As regards the period of interest in cases of state responsibility, Article 38 of the ILC Articles on State Responsibility states: 'Interest runs from the date when the principal sum should have been paid until the date the obligation to pay is fulfilled'. (326) 6.181 Even though this seems to be a clear provision, it does not answer the question, when interest must start to accrue. It does not clarify 'when the principal sum should have been paid'. (327) It seems only that the date of a specific demand or reminder is not important. (328) The decisive date should rather be the date when the payment should have been effectuated in the first place. But when is the responsible state obliged to pay? Is it the date of the wrongful act? Is it the date when the damage was incurred? Or is it the date when the actual amount of damages has been assessed or is assessable? 6.182 The ILC was conscious of the different options and of the heterogeneity of international practice in this regard. (329) It obviously did not want to define strict rules P 376 or identify more specific guidelines but preferred to allow for further flexibility. The beginning of the interest period should above all be oriented towards achieving full reparation and take into consideration the ways in which the amount of the principal has been calculated. (330) 6.183 Article 38 deals only with compensatory or pre-award interest. Interest which starts to accrue only after the judgment or award is not included in the ILC's text but is regarded as a procedural matter. (331) In the following, a few alternatives for determing the dies a quo shall be analysed. 6.184 (i) Date of the Unlawful Act The date of the internationally wrongful act seemed to many international arbitral tribunals to be the logical and correct consequence of the principle of full reparation after a violation of international law. The ICSID Tribunal in Asian Agricultural Products v Sri Lanka expressed this in a very clear manner and held that 'interest becomes an integral part of the compensation itself, and should run consequently from the date when the State's international responsibility became engaged'. (332) 6.185 A number of other tribunals followed this approach, as for example Emilio Agustín Maffezini v Spain, (333) Técnicas Medioambientales v Mexico, (334) MTD v Chile, (335) CMS v Argentina, (336) Impregilo v Argentina, (337) Swisslion v Macedonia, (338) and Lahoud v DRC. (339) 6.186 However, this date is not always easily ascertainable. In Metalclad v Mexico, for example, the tribunal noted that 'Mexico's international responsibility is founded upon an accumulation of a number of factors'. (340) From the different dates to be considered, the tribunal eventually chose the one on which the application for the construction of the waste fill was rejected by the local authorities. (341) This determination was, however, later invalidated by the Supreme Court of British Columbia. (342) Judge Tysoe was of the P 377 opinion that interest should only start to accrue from the date of the Ecological Decree that declared the area a protected natural reserve two years later. (343) 6.187 (ii) Date of Occurrence of Damage The date of the unlawful act is not always the appropriate dies a quo in order achieve full reparation of the damage caused. Another option is the date the damage actually occurred, as was proposed by ILC Special Rapporteur Crawford. (344) The lack of contemporaneity of the date of the unlawful act and the beginning of the interest period does not pose a major problem as the occurrence of damage is not a precondition of state responsibility. Furthermore, the obligation to pay cannot arise earlier than the damage. The date of the occurrence of damage should, therefore, be the earliest possible date interest could possibly start to accrue. 6.188 A lack of contemporaneity of the unlawful act and the occurrence of damage could be observed in CME v Czech Republic. The unlawful act of the respondent Government consisted in an alteration of the legal conditions for a broadcasting licence long before the lack of protection actually materialized and disrupted the investment. (345) The tribunal decided that the valuation date should be the date when the damage actually occurred (346) which would have also been appropriate for the dies a quo. Yet, as regards the starting date of interest, the tribunal decided to apply Czech law which demanded an

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explicit reminder for the accrual of interest. (347) 6.189 In order to determine the dies a quo when a violation of an international obligation consists in an omission reference may be made to Article 14(3) of the ILC Articles, according to which the breach of an international obligation requiring a state to prevent a given event occurs when the event occurs and extends over the entire period, during which the event continues and remains not in conformity with that obligation. (348) The 'event' the state is obliged to prevent is not necessarily damage. However, its existence is necessary for calculating financial reparation. Interest should, therefore, start to accrue when financially assessable damage occurs. 6.190 Several tribunals have identified the date on which payment obligations became due as the date on which the damage occurred. The ICSID Tribunal in AGIP v Congo, for P 379 example, awarded 'interest on the sums mentioned in headings (a), (b) and (c) as from the date at which the various sums fell due to AGIP or were paid by it, until the date of effective payment by the Government …'. (349) 6.191 Similarly, in Siemens v Argentina the tribunal awarded interest when the financial damage actually occurred, which meant 'as from May 18, 2011, in the case of compensation of the value of the investment, January 1, 2000 in the case of compensation on account of unpaid bills by the Government, and January 11, 2002 in the case of compensation on account of consequential damages, all until the date of dispatch of this Award to the parties'. (350) 6.192 In Abengoa v Mexico, the tribunal ordered interest on the sums for reimbursement of the VAT, with a scaling for different parts of the amount starting from different dates. (351) 6.193 Different starting dates of interest were also identified by the tribunal in Micula v Romania which decided that i. ii. iii.

With respect to the claims for increased cost of sugar and other raw materials, interest shall be calculated from 1 March 2007. With respect to the claim for the lost opportunity to stockpile sugar, interest shall be calculated from 1 November 2009. With respect to the claim for lost profits on sales of finished goods, interest shall be calculated from 1 May 2008. (352)

6.194 The tribunal in Suez v Argentina also decided various starting dates of interest which were the different dates of the valuation of each item of damages for the four claimants. (353) 6.195 (iii) Date of Initiation of Legal Proceedings Another option of the dies a quo is the date on which judicial or arbitral proceedings are initiated, (354) based on national law provisions, (355) submissions by the parties, (356) or the tribunal's discretion. (357) 6.196 The arbitral tribunal in Asian Agricultural Products v Sri Lanka which had decided that interest should run from the date when the state's international responsibility became engaged (358) still calculated interest only from the date at which arbitral proceedings had been initiated. (359) It explained this by reference to the applicable BIT where the state parties had agreed on a three-month period of obligatory negotiations before arbitration could be initiated. During this 'waiting period', in the tribunal's view, no interest should accrue. 6.197 The tribunal in CME v Czech Republic mentioned, in addition to its reference to national law, (360) that the respondent only gained knowledge about the claim for damages at the moment of the initiation of arbitral proceedings. (361) 6.198 The date of initiation of arbitral proceedings is generally not compatible with the various functions of interest and may only with difficulty be justified on legal or economic grounds. (c) Breaches of Contract 6.199 The determination of the dies a quo in contract cases depends on the date the obligation was due under the terms of the contract. Only on this basis is it possible to assess the damage caused by the delay. The date and time of the default can be derived from the contract itself, from factual circumstances of the case, and from factual applicable law. (362) 6.200 The Iran–US Claims Tribunal, in McCollough v Ministry of Post, pointed to the lack of consistency of international practice in the determination of the period of interest (363) and held: This delay, however, varies in relation to the date determined to be the time when the obligation to pay arose. This date can either be the date when the underlying damages occurred, the date when the debt was liquidated, the date of a formal notice to pay, the date of the beginning of the arbitral or judicial proceedings, the date of the award or of the judgment determining the amount due, or the date when the judicial or arbitral decision reasonably should have been executed. (364)

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6.201 While the latter two dates refer to the beginning of moratory or post-award interest, which will be dealt with in the next section, the dates before the award are relevant for the determination of compensatory or pre-award interest. They will be analysed further. P 380

6.202 (i) Date of Breach Whether an act or an omission represents a breach of contract depends above all on the terms of the contract and the circumstances. It can, for example, be the point in time at which it became evident that the contracting partner would not pay the bill for the goods duly delivered, and not the date of the invoice. (365) 6.203 In other cases, the dates of unpaid bills are considered as decisive for the determination of the date of the breach of contract and also for the beginning of interest. (366) When payment advances were not duly paid they could also bear interest as from the date agreed. (367) Generally, the time at which a breach of contract occurs, in the absence of facts or agreements to the contrary, is decisive for the starting of interest. 6.204 (ii) Invoice Dates and Terms of Payment Billing serves the purpose of concretely fixing payment obligations and informing the contracting partner about them. From this moment the extent of the claim of the creditor is known to the debtor. In business practice, however, interest is not charged immediately from this date. Implicit waivers of interest for a certain period are usually implied. (368) This is not the case if the parties expressly excluded it in the contract. (369) It follows that it depends primarily on the terms of the contract whether the billing entails the immediate obligation to pay or not. (370) 6.205 If the parties have agreed on specific payment terms, the debtor cannot be considered to be in default earlier. Only after the lapse of the agreed period of time may interest accrue. 6.206 Similarly, if the debtor had the contractual right to object to the bill within a certain period of time default is not assumed before this period has passed. (371) 6.207 Even in the absence of such an explicit objection period, the debtor was in default only after a certain period of time after which one could reasonably expect that the bill should have been paid. In this sense, the Iran–US Claims Tribunal held in Exxon Research P 382 and Engineering v Iran: Exxon Research also seeks interest on the amounts awarded under the Seventh Refinery Project calculated as from the date the invoices were issued. It appears more reasonable, however, in the absence of any contractual provision in this respect, to award interest based on the assumption that NIOS was obligated to pay the invoices within 30 days of presentation. (372) 6.208 In Bechtel v Iran the Iran–US Claims Tribunal even allowed for a two-month term because it considered 'that it would have been reasonable to allow two months before IEC might have expected to make payment'. (373) 6.209 In case of several open invoices, the date of the most recent invoice was usually decisive. (374) In Sedco v NIOC, however, the beginning of the interest period on several open invoices between 21 October 1978 and 19 December 1979 was set at 21 May 1979, which was the 'midpoint' of the dates of the open invoices. (375) 6.210 In Duke Energy v Ecuador, the tribunal order interest from the date on which each fine became due and payable. (376) 6.211 These examples show the difficulty and complexity of the determination of the dies a quo on the bases of invoice dates and terms of payment. 6.212 (iii) Date of Reminder Another possibility for the selection of the starting point of interest is to make it dependent on a reminder and an explicit claim for interest. This view was reflected in the award of the Permanent Court of Arbitration in the well-known Russian Indemnities case. (377) 6.213 In the course of a comparative legal analysis Gotanda also came to the conclusion that the different national rules on interest have one principle in common, namely that it is not sufficient that default occurs objectively but that the debtor must also have the subjective knowledge and the possibility of being conscious of it. Otherwise, the debtor could assume that the creditor implicitly allows the delay and that no damage occurs because of it. (378) 6.214 Gotanda, therefore, proposes proceeding by a two step-approach: first, it has to be examined whether the parties have already agreed that non-compliance with the obligation must be regarded as default. If such an agreement does not exist, interest should accrue (1) from the time the debtor has been informed about the default or (2) the time of initiation of arbitration, depending on which is earlier. (379) 6.215 This proposal reflects the principle that interest has generally to be paid in case of default but that equitable considerations with regard to the situation of the debtor should also be taken into account. Gotanda explains that this approach 'provides the debtor with an opportunity to resolve the matter promptly. In addition, it encourages the claimant to be diligent in resolving contract claims.' (380)

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6.216 The requirement of an explicit reminder does, however, not appear in international codifications of contract law. Article 7.4.9(1) of the UNIDROIT Principles on International Commercial Contracts states: If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused. (381) 6.217 In the same vein, Article 78 CISG (382) and Article 9:509 PECL (383) do not require a reminder for the purpose of the beginning of the interest period. They refer only to the due date of payment. 6.218 (iv) Termination of Contract The Iran–US Claims Tribunal sometimes assumed an implicit termination of a contract instead of a breach of the same. (384) The beginning of the interest period in these cases was set at the date of the termination of the contract. (385) 6.219 The ICSID Tribunal in Autopista Concesionada v Venezuela dealt with a justified termination of a contract by the investor because the respondent had not fulfilled its contractual obligations. (386) In this case, interest was computed separately on all the amounts spent by the investor (pre-award out-of-pocket expenses, pre-award assets contribution, etc.) from the date when they were actually spent. (387) This resulted in P 383 different interest periods for the different amounts of money. 6.220 (v) Date of Initiation of Legal Proceedings Compensatory interest in contract cases was sometimes only awarded from the date of the initiation of legal proceedings. One could argue that only from this point in time is the exact amount of money claimed known to the debtor. In Atlantic Triton v Guinea the ICSID Tribunal granted pre-award interest only from the date of the formal request for arbitration. (388) The Iran–US Claims Tribunal in Phibro v Iran also calculated interest only from the initiation of arbitral proceedings even though the amounts on the invoices were known to the debtor earlier. (389)

(3) Compound Interest 6.221 The difference between simple interest and compound interest is rather considerable from a financial point of view. While in economic life compound interest on loans and deposits is widely accepted, its application in international investment arbitration is a relatively recent phenomenon. 6.222 In addition, the compounding intervals have to be taken into account, as a brief example illustrates: the amount of € 1 million yields simple interest in the amount of € 600,000 after ten years at an annual interest rate of 6 per cent. The same amount yields interest in the amount of € 790,848, if interest is compounded annually, (390) a difference of € 190,848. If interest is compounded quarterly, the same amount yields interest of € 829,092 in ten years. Thus, the shortening of the compounding interval from one year to a quarter of a year results in an additional € 38,244 in ten years. 6.223 This example shows that compounding and the choice of the compounding interval have a significant financial impact on the amount of money. In economic life, interest is compounded annually, quarterly, monthly, daily, or even continuously. There are no general rules or practices regarding the compounding interval. It depends mainly on the type of financial product and the respective agreements. (391) (a) Repudiation in Early Cases 6.224 In international judicial or arbitral practice, the attitude towards awarding compound interest has gradually changed in the past decades. Until the late 1980s compounding was regularly repudiated, often by reference to Whiteman's considerations of 1943:

P 385

There are few rules within the scope of the subject of damages in international law that are better settled than the one that compound interest is not allowable. Although in rare cases … compound interest, or its equivalent, has been granted, tribunals have been almost unanimous in disapproval of its allowance. This is particularly true when the attention of the tribunal has been especially called to the point. (392) 6.225 Whiteman conceded that in some cases compound interest had been awarded, for example, in Fabiani's Case (393) and in Chemins de Fer Zeltweg-Wolfsberg (394) but held that these were 'rare cases'. (395) The Iran–US Claims Tribunal shared this opinion (396) and rejected claims for compound interest regularly, although they had been claimed repeatedly. (397) 6.226 One of the main reasons given was the rapid accrual which would easily allow interest to exceed the principal. In Anaconda-Iran v Iran, the US prime rate had explicitly been agreed upon in the contract between the parties, which according to the claimant, included compound interest. (398) The arbitral tribunal, however, did not share this view. It maintained that this would lead to a disproportionate financial benefit for the claimant:

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[T]o implement such a contractual clause would cause a benefit, and indeed a profit, to accrue to the successful party, which would be wholly out of proportion to the possible loss that the successful party might have incurred by not having the amounts due at its disposal. (399) 6.227 This categorical rejection has, however, provoked criticism. In Starrett Housing v Iran, (400) Arbitrator Holtzmann pointed out that the damage actually incurred would not be remedied without compound interest. He wrote in his Concurring Opinion: [T]he Respondents were fully aware that Starrett was borrowing money from U.S. banks on a compound basis in order to finance the Project … Starrett, like most contractors, operated on the basis of back-to-back loans and a substantial line of credit with their banks. It is normal commercial practice that banks customarily charge compound interest to finance credit facilities. (401) 6.228 According to Holtzmann, the considerations of Whiteman of 1943 would no longer meet the requirement of modern economic reality and '[w]hether or not such a rule existed before 1943, it is no longer justifiable'. (402) He came to the conclusion that '[m]odern economic reality, as well as equity, demand that injured parties who have themselves suffered actual compound interest charges be compensated on a compound basis in order to be made whole'. (403) 6.229 F A Mann developed these ideas further and maintained that compound interest should generally be recognized as an item of damage: It follows that even in the absence of a clause indemnifying a contracting party against 'direct loss and/or expense,' compound interest reasonably incurred by the injured party should be recoverable as an item of damage. This, it is submitted, should not only be English law, but should be accepted wherever damages are allowed and should, therefore, be treated as a general principle of law. (404) Amongst other considerations, Mann pointed to actual economic realities both in private and in business life: It is a fact of universal experience that those who have a surplus of funds normally invest them to earn compound interest. This applies, in particular, to bank deposits or savings accounts. On the other hand, many are compelled to borrow from banks and therefore must pay compound interest. This applies, in particular, to business people whose own funds are frequently invested in brick [sic] and mortar, machinery and equipment, and whose working capital is obtained by way of loans or overdraft from banks. (405) 6.230 The argument that compound interest rapidly increases the amount of interest and easily exceeds the principal he countered in the following way: Finally, it is completely wrong to attach any significance to the fact that the award of interest or compound interest may lead to the payment of a sum exceeding the capital due from the wrongdoer. This may happen in many cases as a result of the wrongdoer's delaying tactics or the court's work load. But during that period the wrongdoer has enjoyed the fruits of the money withheld. (406) 6.231 In view of the Iran–US Claims Tribunal's negative attitude, Mann pointed out that referential investment alternatives as proposed in Sylvana Technical Systems v Iran, namely the US six-month certificates of deposit, also yielded interest on a compound basis. He then asked 'whether the Tribunal realised that investment in six-months certificates of deposit involves earning compound interest'. (407) 6.232 Brower and Brueschke also noted in their evaluation of the practice of the Iran–US

P 386 Claims Tribunal:

One of the lessons of the Tribunal is that, in the future, in such institutions as the Tribunal, the rule against compound interest might bear reexamination, in particular as an effective remedy to be employed by the Tribunal selectively if confronted with wholly unjustified delaying tactics. The mere threat of such interest might assist the process to run more smoothly. (408) 6.233 Gotanda expanded these considerations on the basis of a comparative legal analysis and came to the following conclusion: Most legal systems award simple interest to compensate a claimant for the loss of the use of money. By contrast, today most financing and investment vehicles available to parties in transnational business involve compound interest. Thus, if the goals of interest are to promote compensation and restitution, then simple interest falls short of attaining those goals. Fortunately, there is no rule of international law prohibiting compound

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interest. (409) 6.234 According to Gotanda, compound interest should not only be awarded if a corresponding agreement of the parties had been concluded, but also if the claimant had to bear financing costs bearing compound interest, or if he proves that he would have earned compound interest: Applying these principles would better compensate a claimant for the loss of the use of money than the traditional practice of awarding only simple interest. Such an approach would also reconcile the practice of awarding interest with modern economic practices. (410) 6.235 With respect to the compounding interval Mann pointed to the diverse practice of banks: The practice as to rests varies considerably. Monthly, quarterly, half-yearly, yearly rests occur, and in a specific case it may be necessary to investigate local practices. But it is likely that a judge who would award quarterly or halfyearly rests would not go far wrong. (411) 6.236 The diversity of compounding intervals on loans and deposits still exists. A survey of the ICC Banking Commission showed that annually, quarterly, monthly, or daily are the most common options. (412) In the absence of a standard compounding period, Sénéchal proposed on the conservative side using a one-year compounding interval. (413) On the other hand, one could also suggest that, if a certain financial product has been chosen as a reference for setting the interest rate, the compounding interval of this instrument should be used by the arbitral tribunal as the compounding interval of pre-award P 387 interest. (b) Increasing Acceptance in Recent Jurisprudence 6.237 One of the first arbitrations that awarded compound interest was Aminoil v Kuwait where interest at a rate of 17.5 per cent was compounded annually. (414) The tribunal did not, however, provide further reasoning for this decision. 6.238 Under the auspices of ICSID, tribunals started awarding compound interest in the 1980s. The tribunal in Atlantic Triton v Guinea decided that 'the interest, calculated at a rate that the Tribunal has set at 9% … shall be capitalized and will itself bear interest at the same rate'. (415) 6.239 A real change of trend towards accepting compound interest became obvious in the year 2000. In February, the tribunal in Compañía del Desarrollo de Santa Elena v Costa Rica dealt with this issue of compound interest in remarkable detail. (416) It referred to a number of cases which had awarded compound interest in the past (417) and relied extensively on the arguments advanced by F A Mann. The most important argument for the tribunal was that the expropriating state would have been unjustifiably enriched, if interest had not been awarded on a compound basis. The tribunal, however, did not set an interest rate and a compounding interval, but awarded a lump sum which included interest exceeding the principal sum of US$ 4.15 million by US$ 11.85 million. (418) 6.240 In August 2000, the tribunal in Metalclad v Mexico awarded compound interest in a case concerning violations of several NAFTA provisions. (419) It awarded pre-award interest annually compounded at a rate of 6 per cent to put the claimant in a financial situation as close as possible to the one he would have been in if the unlawful act had not been committed. (420) Post-award interest, by contrast, should be compounded monthly. (421) 6.241 In November 2000, the tribunal in Maffezini v Spain awarded pre-award interest also compounded on an annual basis. It explained that '[s]ince the funds were withdrawn from a time-deposit account of Mr. Maffezini, it is appropriate in this case to order the payment of interest compounded on an annual basis from February 4, 1992'. (422) P 388

6.242 Finally, in December 2000, the tribunal in Wena Hotels v Egypt awarded compound interest (423) and referred, in particular, to Metalclad v Mexico, according to which compound interest was necessary to put the claimant approximately in the same financial position he would have been in without the unlawful act. (424) Furthermore, it concurred with Gotanda's conclusion that: [A]lmost all financing and investment vehicles involve compound interest … If the claimant could have received compound interest merely by placing its money in a readily available and commonly used investment vehicle, it is neither logical nor equitable to award the claimant only simple interest. (425) 6.243 The tribunal reflected extensively on the arguments of Arbitrator Holtzmanns in Starrett Housing v Iran and the opinion of F A Mann in order to conclude that: 'compound interest may be and, in absence of special circumstances, should be awarded to the claimant as damages by international tribunals'. (426) The tribunal awarded interest compounded on a quarterly basis, which deviated from the earlier ICSID practice but

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which was in accordance with the proposals of Mann (427) and Gotanda. (428) After this changing trend in 2000, compound interest started to be increasingly accepted by international investment tribunals to the extent that compound interest, and not simple interest, became the rule rather than the exception. 6.244 In 2002, the tribunal in Middle East Cement v Egypt awarded interest at 6 per cent compounded annually (429) and supported its decision by reference to the earlier cases pointing out that 'international jurisprudence and literature have recently, after detailed consideration, concluded … that compound (as opposed to simple) interest is at present deemed appropriate as the standard of international law in such expropriation cases'. (430) The tribunal saw 'no reason to repeat the detailed reasoning of or depart from this practice'. (431) In 2003, the tribunal in Técnicas Medioambientales v Mexico, therefore, could already rely on a rather settled international jurisprudence on the issue of compounding. It decided to award interest at a rate of 6 per cent which was to be compounded annually (432) and reasoned: The application of compound interest has been accepted in a number of awards … In connection with this case, in the opinion of the Arbitral Tribunal, application of compound interest is justified as part of the integral compensation owed to the Claimant as a result of the loss of its investment. (433) P 389

6.245 Similarly, the tribunal in MTD v Chile, in 2004, awarded compound interest on an annual basis on the annual LIBOR at specific dates. It emphasized that compound interest was 'more in accordance with the reality of financial transactions and a closer approximation to the actual value lost by an investor'. (434) 6.246 Subsequent practice followed this path. As the tribunal in LG&E v Argentina noted, 'compound interest would better compensate the Claimants for the actual damages suffered since it better reflects contemporary financial practice'. (435) The tribunal in Lemire v Ukraine explained that 'an unpaid lender has to resort to the LIBOR market, in order to fund the amounts due but defaulted, and the lender's additional funding costs have to be covered by the defaulting borrower'. (436) Rarely other considerations also played a role, such as the length and conduct of the proceedings. (437) 6.247 The compounding intervals of pre-award interest in most cases varied between compounded annually (438) or semi-annually. (439) A few tribunals have compounded P 390 quarterly (440) or monthly. (441) Sometimes, no compounding interval was indicated. (442) Benchmark rates and the compounding periods should match so that, for example, interest based on six-month US certificates of deposit is compounded semi-annually, and not annually. (443) 6.248 This brief overview shows that compound interest as opposed to simple interest is predominantly accepted in recent international investment arbitration. It is regarded as better reflecting actual economic realities both for the purpose of remedying the loss actually incurred by the injured party and for the prevention of unjustified enrichment of the respondent state. (c) Exceptions 6.249 Despite the above-mentioned increasing acceptance of compound interest in international practice, some investment tribunals rejected the respective submissions by the parties. The tribunal in Autopista Concesionada v Venezuela, for example, examined whether compound interest should be awarded on the basis of an agreement by the parties, of national law, or of international law. (444) It emphasized that the case had to deal with a breach of contract and not with an expropriation. Consequently, the decisions in Wena Hotels v Egypt and Compañía del Desarrollo de Santa Elena v Costa Rica in favour of compound interest were not considered to be comparable. Furthermore, the tribunal pointed to the award in Compañía del Desarrollo de Santa Elena v Costa Rica which had expressly emphasized the difference between expropriations and cases 'of simple breach of contract' and had held that 'there is a tendency in international jurisprudence to award only simple interest … in relation to breach of contract'. (445) From this, the tribunal drew the conclusion not to award compound interest and held that 'there is no well established principle of international law requiring the award of compound interest in the present case'. (446) 6.250 The distinction between expropriation and other breach of contract was also pointed out in other cases. In Duke Energy v Ecuador, the tribunal decided that the respondent had violated the Power Purchase Agreements by not complying with the payment mechanisms nor with the Payment Trust Agreements and thus had breached both Ecuadorian law and the BIT. As regards the calculation of damages, the tribunal P 391 referred to Ecuadorian law which prohibited compound interest. (447) Also in Pluspetrol v Perupetro, interest was only awarded as agreed in the License Agreement and thus without compounding. (448) 6.251 In other cases only simple interest was awarded, where the subject matter concerned the lack of enforcement of previous arbitral awards that had included an

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award of interest without compounding. These include Desert Line v Yemen (449) and Saipem v Bangladesh. (450) Simple interest was also awarded when compound interest was not claimed by the claimant, such as in SGS v Paraguay. (451) 6.252 The tribunal in CMS v Argentina, another case not involving an expropriation, did not award compound interest, either. (452) It discussed this issue rather briefly and held: The Claimant has requested that the interest should be set at the average rate applicable to U.S. six-month certificates of deposit, compounded semiannually starting on August 18, 2000 … The Tribunal is of the opinion that the U.S. Treasury Bills rate is more appropriate under the circumstances and that interest should be simple for the period extending from August 18, 2000 … (453) 6.253 In the NAFTA case of Archer Daniels v Mexico, the tribunal also decided that the rate of US Treasury Bills would be the most appropriate reference rate for interest and pointed out that 'since this is not an expropriation case, but rather concerns the appropriate compensation to be paid to Claimants for the injury caused as the Respondent's breach of the national treatment and performance requirements obligations under Chapter Eleven, the Tribunal's view is that simple interest is appropriate in the present case'. (454) 6.254 However, in expropriation cases too, tribunals have sometimes rejected compound interest, such as in Abengoa v Mexico (455) and Lahoud v DRC. (456) 6.255 Other tribunals rejected compound interest on the ground that claimants could not prove that they would have earned or spent compound interest. The ICSID Tribunal in CSOB v Slovak Republic pointed out that: [I]t has not been shown convincingly that 'common business practice' in the Slovak Republic supported capitalization of interest. Under these circumstances, awarding compound interest as part of the compensation for CSOB's damage would amount to pure speculation. Therefore, the Tribunal's interest computation does not retain compound interest. (457) P 392

6.256 In some cases, the high amount of the principal seems to raise reluctance on the part of the tribunal to increase it by an amount of compound interest. The CME v Czech Republic, compound interest was rejected on the ground that the 'generous' interest at a rate of 10 per cent would already fully repair the damage incurred by the delay. (458) The tribunal had carefully considered recent arbitral practice and scholarly writing on the issue of compounding which increasingly supported the awarding of compound interest. However, it pointed out that the claimant 'did not demonstrate that it borrowed money from the bank and paid compound interest'. (459) The claimant had, in fact, taken out a loan in Czech crowns at a rate of 12 per cent, but the tribunal found that the loan which only related to a very small sum would not be sufficient to justify the application of this interest, compounded or not, to the entire amount of the award. (460) 6.257 The tribunal in Yukos v Russia found, after awarding US$ 50 billion as principal, that 'in the circumstances of this case, it would be just and reasonable to award Claimants simple pre-award and post-award interest compounded annually'. (461) The tribunal in Rosinvest v Russia had earlier noted that the practice to award compound interest 'is by no means unanimous' (462) and emphasized that the tribunal was not bound to award compound interest and must consider 'the damage done and nature of Claimant's investment in its assessment of the interest due'. (463) The tribunal in Rosinvest v Russia found that applying compound interest to the damages sum in this case 'would be unjust in light of the speculative nature of the investment'. (464) 6.258 The reluctance of some tribunals to award compound interest on various grounds shows that compound interest as an item of compensation or damages is not yet unanimously recognized in international practice. However, there is a tendency to regard compound interest as the rule rather than the exception, in particular after expropriations. In breaches of contract cases, national laws on interest and their limitation may limit the possibility or readiness of tribunals to award compound interest. Simple interest may also only be awarded if they are claimed or if for other reasons the jurisdiction to decide on them is limited. Generally, investment arbitration is increasingly recognizing the reality of compound interest in economic life. Nevertheless, compound interest is still within the discretion of the tribunals and needs to be argued P 395 on a case-by-case basis.

C. Post-award Interest 6.259 Interest which begins to accrue after a judgment or an award is referred to as postaward interest, moratory interest, (465) or default interest. (466) In French it is referred to as 'intérêts moratoires'; (467) in German they are 'Urteilszinsen', (468) 'Prozesszinsen', (469) or 'Zukunftszinsen'. (470) 6.260 Post-award interest is different from pre-award interest in several respects. As

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opposed to the latter, the final amount is not defined, since the fulfilment of the payment obligation still lies in the future. Hence an aggregate amount cannot be calculated, as is the case with pre-award interest. The ILC distinguished it from preaward interest as 'a matter of procedure' and thus did not deal with it in the context of the rules on state responsibility. (471) 6.261 Beyond that, no doubt remains with regard to the payment obligation once a judgment or award has been rendered. The respondent is simply in default if it does not fulfil this obligation. The default may be penalized by interest that is no longer limited by the concrete damage actually incurred by the injured party. For example, the default interest according to Directive 2011/7/EU of the European Parliament and of the Council on combating late payment in commercial transactions amounts to at least eight percentage points above the reference rate. (472) 6.262 Higher interest would be in line with the specific function of post-award interest, namely to serve as an effective incentive to comply with the terms of the judgment or award as expediently as possible. It would also contribute to the effectiveness of international jurisprudence and legal certainty. In view of this, the case can be made to handle post-award interest and pre-award interest in a different manner. (473)

(1) Dies a quo 6.263 The date on which post-award interests starts to accrue can be the date of the award, but also a point in time thereafter to create an incentive for prompt payment. After such a 'grace period', interest could run from the date of the award or from the end of that period. International practice is diverse as regards the setting of the starting date of post-award interest. Often it is decided that pre-award interest should simply continue until payment. (474) (a) Continuation of Pre-award Interest 6.264 The continuation of pre-award interest seems to be most suitable in cases of lawful expropriations since interest 'until payment' (475) is due according to pertinent international law. Yet, in some cases no post-award interest was awarded, (476) and in others, the tribunals differentiated diligently between pre-award interest and postaward interest. (477) 6.265 In the practice of the Iran–US Claims Tribunals, with the exception of a few early decisions, (478) interest regularly accrued 'until the date on which the Escrow Agent instructs the Depositary Bank to effect payment out of the Security Account'. (479) Since a separate trust account had been opened for the American claimants from which sums were paid, it was not necessary to provide incentives for the prompt fulfilment of the arbitration rulings. (480) In cases of claims by Iranian citizens, who did not have the advantage of such a trust account, the end of the interest period was either not established, (481) or lasted until the time of payment (482) or the time of the award. (483) 6.266 In cases of BIT violations and contract breaches, interest also often continues to accrue without differentiation until payment is made. This can be explained by the purpose of interest, both pre-award and post-award, to provide full reparation of the injury caused, as formulated by the tribunal in Amco Asia v Indonesia: [I]nterest thus awarded for the period elapsed between the said date and the date of payment of the sum awarded, should be considered as part of the compensation granted to Claimants, in order for the same to come as close as possible to the full compensation prescribed by international law. (484) 6.267 In Asian Agricultural Products v Sri Lanka, the payment of pre-award interest extended to the date of effective payment after the award. The tribunal decided that 'interest continues to run as a part of the compensation allocated to the Claimant up to the date of the payment of the sum awarded'. (485) The ICSID tribunals in Fedax v Venezuela, (486) Antoine Goetz v Burundi, (487) Técnicas Medioambientales v Mexico, (488) Autopista Concesionada v Venezuela, (489) MTD v Chile, (490) and CSOB v Slovak Republic (491) also did not differentiate between pre-award interest and post-award interest. This was also the case in the NAFTA arbitration in S D Myers v Canada (492) and ad hoc arbitrations, such as CME v Czech Republic (493) and Quasar de Valores v Russia. (494) (b) Date of the Award 6.268 The date of the award as the starting point of interest is appropriate upon two considerations: first, it can be argued that only at the date of the award are the amount of damage and the payment obligation established with certainty so that only then the payment obligation can be fixed. Secondly, if the valuation date is the date of the award, interest only runs from this date. This includes cases where tribunals calculate an aggregate amount of pre-award interest up until the date of the award. 6.269 Under these considerations, only post-award interest may be awarded. The PCIJ explained this in Wimbledon in the following way: [T]his interest, however, should run not from the day of the arrival of the 'Wimbledon' at the entrance of the Kiel Canal, as claimed by the applicants,

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P 396

but from the date of the present judgment, that is to say from the moment when the amount of the sum due has been fixed and the obligation to pay has been established. (495) 6.270 In the view of the PCIJ, such post-award interest was not 'default interest', but rather 'interim interest', since the Court did not want to consider the possibility of noncompliance with its ruling. The German Government was given a period of three months to address the financial and administrative necessities for the payment of the amount of damages. The interest awarded was deemed to compensate only the delay in payment resulting from these three months: The Court does not award interim interest at a higher rate in the event of the judgment not being complied with at the expiration of the time fixed for compliance. The Court neither can nor should contemplate such a contingency. (496) 6.271 The tribunal in LIAMCO v Libya also only awarded post-award interest at a rate of 5 per cent as 'applicable to commercial matters'. (497) It justified this decision by determining that an exact sum was only established at the time of the award. Therefore, no interest could be awarded before this date. (498) The tribunal in Lemire v Ukraine also awarded interest only as of the date of the award, because '[t]his is the date when the actual amount of damages is established, the date when Respondent's obligation to pay the compensation arises and, consequently, the appropriate date for interest to start accruing'. (499) 6.272 Other tribunals awarded only post-award interest because the valuation date was the date of the award and/or any pre-award interest was already calculated up until the date of the award as part of the total amount of compensation or damages. (500)

6.273 Such a practice is generally preferable, as the calculation of post-award interest becomes easier when the amount owed at the time of the award is already established precisely. It would also correspond better to the slightly different function of post-award interest, namely not only to compensate for the financial loss incurred by the passing of time, but also to accelerate compliance with the award and to discourage delaying P 397 attempts. (c) Grace Period 6.274 The function of post-award interest is perhaps best served if the tribunal sets a time limit for the respondent to comply with the award and decides that only thereafter does post-award interest start accruing. This time limit is usually referred to as 'grace period'. (501) Such a grace period creates a clear break between pre-award interest and post-award interest and provides an incentive for expedient compliance with the award. This is particularly true if the grace period is completely free of interest. 6.275 The practice of granting grace periods in investment arbitration is very diverse. In cases of lawful expropriations, where payment of interest 'until payment' (502) should be part of the compensation, grace periods are rather unusual. The ICSID Tribunal in Southern Pacific Properties v Egypt calculated US$ 27,661,000 as the total sum payable, consisting of various main payment sums and pre-award interest. It then held that 'the amount of US $27,661.000 shall earn simple interest of five percent per annum, beginning 30 days after the date on which this Award is notified to the Respondent, until the date of payment'. (503) This gave the respondent a period of thirty days in which no interest accrued and which provided the opportunity to make the necessary arrangements for compliance with the award. Similarly, the ICSID Tribunal in Compañía del Desarrollo de Santa Elena v Costa Rica allowed an interest-free period of time to pay the compensation due after a lawful expropriation, but limited it to twenty-one days. (504) 6.276 The tribunal in Rosinvest v Russia applied a provision of the applicable BIT which stipulated that, in case of expropriation, compensation 'shall be made within two months of the date of expropriation'. (505) The tribunal referred to this as a 'two months grace period expressly provided in Article 5.1' (506) and awarded interest from two months after the valuation date until the date of payment. (507) This grace period thus did not separate pre-award from post-award interest but accentuated that compensation upon expropriation did not require interest from the time of the expropriation if the BIT itself provided for a 'grace period'. 6.277 Grace periods have also been allowed in cases of BIT violations. However, they have

P 398 not always been free of interest. The ICSID Tribunal in Middle East Cement v Egypt

allowed a period of thirty days for compliance with the award. (508) Nevertheless, preaward interest continued to accrue during this time and was added to the principal. (509) 6.278 Such a method was also applied with regard to a forty-five-day grace period in Metalclad v Mexico. (510) Other arbitral tribunals stopped interest accrual in the meantime and allowed a period free of interest. This period lasted, for example, for thirty days in Wena Hotels v Egypt, (511) LG&E v Argentina, (512) and Siag v Egypt, (513) and sixty days in CMS v Argentina (514) and in Lemire v Ukraine. (515) In Yukos v Russia, the tribunal granted a grace period of 180 days before interest would accrue, 'in view of the significant amount of damages which Respondent owes Claimants'. (516)

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6.279 The ICSID award in Maffezini v Spain had an additional refinement. The interest-free period was sixty days. However, if the award was not complied with in this time, postaward interest amounting to 6 per cent, with monthly capitalization would become due as of the date of the award. (517) Post-award interest therefore was owed retroactively only in case of non-compliance. (518) 6.280 The ECtHR in its early jurisprudence on 'just satisfaction' did not award any form of post-award interest. The underlying consideration was similar to that of the PCIJ, which did not want to explicitly consider the possibility of non-compliance by the respondent state. The Court's view in Pine Valley v Ireland on the question of 'Interest on the Courts' Award', was: The applicants also sought interest on the sums awarded (at least, those for pecuniary damage and for costs) for the period between the date of the present judgment and the date of payment … The Court does not consider it appropriate to accede to it in this instance. (519) 6.281 However, it later began awarding post-award interest regularly. As a rule, a period of three months was conceded for compliance with the judgment. (520) This is also the P 399 period of time the PCIJ allowed the German state in Wimbledon. The convicted member state was supposed to be able to meet its payment obligation within this period of time. 'Default interest', as the ECtHR calls it, begins to accrue after this period of time has passed.

(2) Interest Rate 6.282 In cases where post-award interest is determined as a simple continuation of preaward interest, (521) no separate consideration on the rate of post-award interest takes place. Only in cases where tribunal distinguish between the two, a rate of post-award interest has to be established. 6.283 As mentioned above, the PCIJ referred to 'public loans' in the Wimbledon case for the establishment of post-award interest. This reflects the idea of a 'coerced loan' which the claimant grants the respondent and aims to avoid unjust enrichment. (522) In order to create a financial incentive for the state to meet its obligation promptly, a rate higher than applied to pre-award interest may be considered. This does not add a 'punitive' element to the interest rate, because the borrowing rate of the respondent does not represent a punishment but merely reflects the respondent's default risk. (523) 6.284 The interest rate for government bonds was used as a reference for post-award interest in Marvin Feldman v Mexico, where the NAFTA Tribunal awarded 'simple interest at the rate calculated in conformity with the Mexican Government Treasury Certificates interest rates (CETES) at maturity of 28 days'. (524) The tribunal in Wena Hotels v Egypt chose the Egyptian government bonds not only as a reference for pre-award interest, but for post-award interest (525) as well. 6.285 The tribunal in Southern Pacific Properties v Egypt also applied the Egyptian legal interest rate for default (526) but, as opposed to pre-award interest, no 'deflation factor' P 402 was added. 6.286 The arbitral tribunal in Compañía del Desarrollo de St Elena v Costa Rica did not state any reason for the choice of an interest rate of 6 per cent for post-award interest. (527) The tribunals in Metalclad v Mexico (528) and Middle East Cement v Egypt (529) chose the 'fair' 6 per cent rate but did not explain their choice in a more detailed manner. In LIAMCO v Libya the tribunal referred to the 'most usual rate of 5%, applicable to commercial matters'. (530) Post-award interest can therefore be treated as interest for default in commercial cases. 6.287 Also other rates are possible as a reference for post-award interest, such as interbank interest rates. The ICSID Tribunal in LETCO v Liberia chose to base post-award interest rate on international financial markets, namely 'the annual rate of LIBOR at three months'. (531) 6.288 Whether one reference rate is higher or lower than the other is not always clear due to considerable fluctuations of market-related interest. For example, without information on historic interest rates it is not evident whether the pre-award interest set in Maffezini v Spain on the basis of the LIBOR for the Spanish peseta, was higher or lower than the postaward interest which was set at 6 per cent. (532) In National Grid v Argentina, pre-award interest was based on LIBOR plus two percentage points, but post-award interest was awarded at the average rate payable on six-month US Treasury Bills, compounded semiannually. (533) As a rule, borrowing rates are higher than rates on deposits, so that, in this case, pre-award interest was higher than post-award interest. The tribunal explained the choice of this risk-free rate by considering that the function of post-award interest was essentially a protection of the value of the award against inflation. (534) 6.289 In other cases, LIBOR was taken only for post-award interest, as opposed to the riskfree rate on pre-award interest. The tribunal in Occidental v Ecuador found that the US six-month LIBOR, compounded monthly, should be applied to post-award interest, as opposed to pre-award interest based on the US Government Treasury Bill rate. (535) Similarly, the tribunal in Gold Reserve v Venezuela applied the LIBOR plus two percentage

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points to post-award interest, because it considered 'that continuing a risk-free rate would be inappropriate'. (536) 6.290 In CMS v Argentina pre-award interest was calculated on the basis of US Treasury Bills on an annual average, while post-award interest was based on US Treasury Bills on a semi-annual average. The tribunal determined pre-award interest on the basis of historical data precisely, while the rate of post-award interest remained necessarily open: The Tribunal is of the opinion that the U.S. Treasury Bills rate is more appropriate under the circumstances and that the interest should be simple for the period extending from August 18, 2000, to 60 days after the date of this decision or the date of effective payment if before. For this period the interest rate shall be 2.51% which corresponds to the annualized average rate for the U.S. Treasury Bills as reported by the Federal Reserve Bank of St. Louis. Thereafter, the interest shall be the arithmetic average of the six-month U.S. Treasury Bills' rates observed on the afore-mentioned date and every six months thereafter, compounded semi-annually. (537) 6.291 The European Court of Human Rights (ECtHR) has also differentiated between preaward and post-award interest. Since 2004 it has introduced an interesting new approach with regard to post-award interest, namely not to refer any longer to legal interest rates, (538) unexplained currency-based interest rates, (539) or other interest rates. (540) Instead, it now consistently applies the European Central Bank's marginal lending rate to which should be added three percentage points. (541) As the current marginal lending rate is 0.25 per cent, this rate amounts to 3.25 per cent (since March 2016). (542) 6.292 Another benchmark interest of the European Central Bank was used for the new provisions of default interest law in Europe. All EU member countries had to introduce default interest by law (at least) eight percentage points above the interest rate of the most recent refinancing operation of the European Central Bank before the first day of the respective semi-annum basic interest rate. (543) As this rate is currently 0 per cent (since March 2016), (544) an EU-wide default interest rate is at the minimum 8 per cent. 6.293 This relatively high interest rate shows that default interest must fulfil various functions, such as encourageing creditors to show better payment habits, disciplining defaulters, and at least partly also covering the risk of complete default.

(3) Compound Interest 6.294 The increasing acceptance of compound interest in international practice has also extended to post-award interest. This is logical and comprehensible when no difference is made between pre-award interest and post-award interest, (545) or when interest is calculated by the same method despite a certain grace period in between. 6.295 However, due to the slightly different functions of pre-award interest and postaward interest, different solutions as regards the issue of compounding can also be considered, including shorter compounding intervals. This was shown, for example, in Metalclad v Mexico: while pre-award interest was capitalized on a yearly basis, postaward interest was capitalized on a monthly basis after the payment period of forty-five days expired. (546) Also in Maffezini v Spain pre-award interest was compounded annually, while post-award interest was compounded monthly. (547) The tribunal in CMS v Argentina decided that only post-award interest be compounded. (548) 6.296 The tribunal in Occidental v Ecuador discussed the differentiation and awarded pre-award interest at the rate of US Government Treasury Bills, compounded annually, but post-award interest at the US dollar six-months LIBOR rate, compounded monthly: It is not uncommon for tribunals to distinguish between pre- and post-award interest and in the present case it seems appropriate to do so, … the Tribunal considers that it would be fair to order that post-award interest should accrue in favour of the Claimants at the U.S. 6 month LIBOR rate compounded on a monthly basis. (549) P 403

6.297 Similarly, the tribunal in Yukos v Russia awarded simple pre-award interest, but post-award interest, after a grace period of 180 days, on principal and cost compounded annually. (550) 6.298 By contrast, the ICSID Tribunal in Companía de Desarollo de St Elena v Costa Rica, after having made a ground-breaking decision as regards the compounding of pre-award interest, only awarded simple post-award interest. (551) This may come as a surprise and shows that the different functions of interest are not always consistently reflected in the practice of international investment tribunals. 6.299 Shorter compounding intervals lead to higher post-award interest than pre-award interest and can be used as an additional incentive for expeditious payment and prevention of the failure to comply promptly with the award.

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D. Conclusions on Interest 6.300 The decisions on interest in international investment arbitration should reflect the specific functions of interest in the context of calculating compensation and damages. With regard to pre-award interest and post-award interest a differentiated approach might be appropriate. 6.301 In the context of expropriations, the criterion of 'promptness' is relevant for the determination of interest on amounts of compensation paid belatedly. In damages cases, the principle of 'full reparation' is central which means that interest should remedy the concrete loss incurred by the injured party because of the delayed payment. In addition, interest has the function of preventing unjust enrichment of the debtor of a payment obligation. In all cases, an economic approach is preferable. Legal interest with fixed statutory rates is usually not able to fulfil the functions as mentioned. However, the respondent's statutory rate may be used as a helpful benchmark representing the legal minimum recognized by the state itself. 6.302 Interest on amounts of damages could be determined by reference to interest forgone on investment or by interest on loans the injured party has to take out. Concrete damage incurred by the costs of a loan certainly represents an item of damage. If, however, there is no proof of a loan actually taken out or of interest on investment actually forgone, the tribunal can instead choose an appropriate referential interest rate. P 404

6.303 With regard to an appropriate rate on investment alternatives, a variety of securities or bonds can be chosen as a reference. As the behaviour of a reasonable person should be assumed, the referential security should be relatively low-risk. International investment tribunals have frequently chosen the rate of US six-month certificates of deposit or US Treasury Bills as a referential rate on investment. Another option is to choose a risk-free rate (e.g. from government bonds) and increase it by a market-risk premium, as measured by an historical average of the excess of the market return over the risk-free rate. 6.304 With regard to the choice of an appropriate borrowing rate, arbitral practice has sometimes referred to the so-called 'prime' or 'base' rate. In Anglo-American countries this rate is widely used as an important referential interest rate that banks offer their most creditworthy customers. As most enterprises cannot borrow at this rate, surcharges need to be added for a more realistic borrowing rate. The same is true for interest based on interbank rates, such as the LIBOR and EURIBOR. These rates indicate the rate at which banks can borrow from each other on the interbank market. Individuals and companies usually cannot borrow under the same conditions so that a premium of several percentage points seems appropriate. Tribunals have repeatedly applied LIBOR and EURIBOR, usually increased by one, two, or four percentage points. 6.305 In order to prevent unjust enrichment of the debtor, the unsuccessful respondent state should, as a matter of principle, pay interest at a rate at it pays for its debts. This would appropriately reflect the fact that the investor actually gives a loan to the state. However, these rates may be rather high for countries in economic and political difficulties. Tribunals have therefore often rejected them. However, to create an incentive to pay promptly and to avoid unjust enrichment is a particular function of post-award interest. 6.306 Even if international practice has not consistently differentiated between preaward and post-award interest, some tribunals did make a difference and awarded higher post-award interest, including by shorter compounding intervals. 6.307 In addition, the period of interest accrual is important, both from a legal and from a financial perspective. In expropriation cases, interest will accrue from the date of expropriation which is widely recognized in international practice. Under the law of state responsibility interest shall accrue from the date when the principal should have been paid. An explicit reminder is not necessary. In cases of breach of contract the beginning of the interest period depends on various factors, such as the terms of the contract, the law applicable, commercial practice, and the circumstances of the case. 6.308 Finally, it was shown that, in contrast to earlier practice and scholarly writing, international investment tribunals have increasingly awarded compound instead of P 405 simple interest. However, this trend, noticeable since 2000, is not uniform. Tribunals exercise discretion in this respect and tend to award simple interest in cases where already the principal amounts are a very high. 6.309 In order to reflect the particular functions of interest, pre-award interest should not only be determined with respect to the period, rate, and compounding, but also calculated as an aggregate amount as at the date of the award. This would demonstrate that interest represents an integral part of compensation or damages. Post-award interest then could start to run from the time of the award or some time later and could be set in a way that creates an incentive for the respondent to comply promptly with the award. Thereby, interest in international investment arbitration would not only remedy financial losses incurred but also contribute to prompt compliance with awards and P 405 discourage attempts at delay.

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7) 8) 9) 10) 11) 12) 13)

See, e.g., Aminoil v Kuwait where the principal was US$ 83 million and the amount of interest reached US$ 96 million. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, 1042. In Compañía del Desarrollo de Santa Elena v Costa Rica the amount of compensation was US$ 4.15 million; the principal plus interest amounted to US$ 16 million. Compañía del Desarrollo de Santa Elena v Costa Rica, Award of 17 February 2000, paras 95, 107. In Wena Hotels v Egypt too, interest exceeded the principal. The latter was set at US$ 8.8 million; together with interest the total award amounted to US$ 20.6 million. Wena Hotels v Egypt, Award of 8 December 2000, paras 127, 136. In Kardassopoulos and Fuchs v Georgia, the principal for each claimant amounted to US$ 15.1 million, and the aggregate amount of pre-award interest was US$ 30,024,736.83, also for each claimant. Kardassopoulos and Fuchs v Georgia, Award of 3 March 2010, paras 646, 668. Some noteworthy exceptions included J Colón and M Knoll, 'Prejudgment Interest in International Arbitration' (2007) TDM 4(6); T Sénéchal, 'Time Value of Money: A Case Study' (2007) TDM 4(6); J Gotanda, 'A Study of Interest' (August 2007) Villanova University School of Law/Public Law and Legal Theory Working Paper No 2007–10; J Gotanda, 'Compound Interest in International Disputes' [2004] Oxford University Comparative Law Forum 2; C Brower and J Brueschke, The Iran–US Claims Tribunal (The Hague: Martinus Nijhoff Publishers, 1998) 615 et seq; J Gotanda, Supplemental Damages in Private International Law (The Hague: Kluwer Law International, 1997); J Gotanda, 'Awarding Interest in International Arbitration' (1996) 90 AJIL 40; F A Mann, 'Compound Interest as an Item of Damages in International Law' (1988) UC Davis Law Review 577. A Dolgoff and T Duarte-Silva, 'Prejudgment Interest: An Economic Review of Alternative Approaches' (2016) 33 Journal of International Arbitration 99–114; J Gotanda, 'Interest' in M Bungenberg, J Griebel, S Hobe, and A Reinisch (eds), International Investment Law (Baden-Baden: Nomos, 2015) 1142–53; I Uchkunova Inna and O Temnikov, 'A Procrustean Bed: Pre- and Post-Award Interest in ICSID Arbitration' (2014) 20 ICSID Review 648–68; M Beeley and R Walck, 'Approaches to the Award on Interest by Arbitration Tribunals' (2014) 1 The Journal of Damages in International Arbitration 51–76; M Smith and R Vikis, 'Whose Money is it and Should it Matter? An Essay on the Cost of Capital in International Arbitration' (2013) 10 Transnational Dispute Management, issue 4; M Abdala, P L Zadicoff, and P Spiller, 'Invalid Round Trips in Setting Pre-Judgment Interest in International Arbitration' (2011) 5 World Arbitration and Mediation Review 1–19; E Lauterpacht and P Nevill, 'Interest' in J Crawford, A Pellet, and S Olleson (eds), The Law of International Responsibility (Oxford: Oxford University Press, 2010) 613–22; T Sénéchal and J Gotanda, 'Interest as Damages' (2009) 47 Columbia Journal of Transnational Law 491; S Ripinsky and K Williams, Damages in International Investment Law (London: BIICL, 2008) 361–91; M Kantor, Valuation for Arbitration (The Hague: Kluwer, 2008) 261–87. Similar to the functional approach with regard to other valuation issues, see above Chapter 2. With regard to the importance of the function of interest see also I Uchkunova and O Temnikov, above, n. 3, 651–2; A Dolgoff and T Duarte-Silva, above, n. 3, 99; Gotanda, 'Interest', in Bungenberg et al, above, n. 3, 1143; Ripinsky, above, n. 3, 362–3. See M Whiteman, Damages in International Law, vol. III (Washington: Government Printing Office, 1943) 1913; also J Gotanda, 'Awarding Interest in International Arbitration', above, n. 2, 40, and J Gotanda, Supplemental Damages, above, n. 2, 1–2. The European Court of Human Rights (ECtHR) and the Court of Justice of the European Union (CJEU), therefore, use the term 'default interest' or 'intérêts moratoires'. See further below, Section C. For a clear differentiation between preaward interest as an item of damages and post-award interest as default interest on a debt see CSOB v Slovak Republic, Award of 29 December 2004, para. 341; Gold Reserve v Venezuela, Award of 22 September 2014, para. 856. Unglaube v Costa Rica, Award of 16 May 2012, para. 326. Article 38(1) of the Articles on the Responsibility of States for Internationally Wrongful Acts, Resolution of the GA of 21 December 2001, A/Res/56/83, Annex. Islamic Republic of Iran v United States of America, Case No. A 19, Decision of 30 September 1987, 16 Iran–US CTR (1988) 285, para. 12. Vivendi Universal v Argentina (Vivendi II), Award of 20 August 2007, para. 9.2.1. Decision No. 16 of the UNCC Governing Council, Awards of Interest, 4 January 1993, S/AC.26/1992/16, para. 1. C Schreuer, L Malintoppi, A Reinisch, A Sinclair, The ICSID Convention. A Commentary (2nd edn, Cambridge: Cambridge University Press, 2009) Article 46, paras 43 et seq. See Article 6 para. 3 of the US Model BIT 2012: '[T] the compensation referred to in paragraph 1(c) shall be no less than the fair market value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment.' See also Article 34 para. 1 of the US Model BIT 2012: 'Where a tribunal makes a final award against a respondent, the tribunal may award, separately or in combination, only: (1) monetary damages and any applicable interest …'

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14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36) 37) 38) 39) 40)

41)

42) 43) 44)

45) 46) 47) 48) 49) 50) 51)

52)

McCollough & Co Inc v Ministry of Post, Telegraph and Telephone, 11 Iran–US CTR (1986) 3. Ibid, para. 98. Quoted by, among others, J Gotanda, Supplemental Damages, above, n. 2, 13; Schreuer et al, above, n. 12, para. 43. See above, Chapter 2, Section B(1)(b). See above, Chapter 3, Section A. World Bank (ed.), 'Legal Framework for the Treatment of Foreign Investment', vol. 2, Report to the Development Committee and Guidelines on the Treatment of Foreign Investment (hereinafter 'World Bank Guidelines') (1992) 31 ILM 1363, 1383. Ibid. Article 1110 para. 3 NAFTA. Article 14 paras 2 and 1(g) ECT. Article 6 para. 2(a) US Model BIT (2012); Article 4 para. 2 German Model BIT; Article 13 para. 3 Canada Model BIT (2004). Article 1110 para. 4 NAFTA (emphasis added). Article 13 para. 1 ECT (emphasis added). Article 6 para. 3 US Model BIT (2012). Article 13 para. 3 Canada Model BIT (2004). Article 1110 para. 4 NAFTA. Article 1110 para. 5 NAFTA. Article 11.7 Free Trade Agreement USA–Australia. Article 10.9 Free Trade Agreement USA–Chile. Article 6 para. 4 US Model BIT (2012). Article 38(1), Articles on the Responsibility of States for Internationally Wrongful Acts, Annex to General Assembly Resolution 56/83 of 12 December 2001, UN Doc A/Res./56/83. See J Crawford, The International Law Commission's Articles on State Responsibility, Introduction, Text and Commentaries (Cambridge: Cambridge University Press, 2002) 235. The Commentary notes in this respect: 'Interest is not an autonomous form of reparation, nor is it a necessary part of compensation in every case'. Ibid. See, e.g., SGS v Paraguay, Award of 10 February 2012, para. 172. Illinois Central Railroad Co (United States v Mexico), 6 December 1926, 4 RIAA, 134. Administrative Decision No III, 11 December 1923, 7 RIAA, 64, 66. Case of the SS Wimbledon (Great Britain, France, Italy, Japan v Germany), Judgment of 17 August 1923, PCIJ 1923 Ser A, No. 1, 32. The Corfu Channel Case (United Kingdom v Albania), Assessment of the Amount of Damages, Judgment of 15 December 1949, ICJ Reports 1949, 243, 249–50. Case Concerning Ahmadou Sadio Diallo (Guinea v DRC), Judgment of 19 June 2012, ICJ Reports 2012, 322, para. 56. Report of the International Law Commission on the work of its forty-fifth session, UN Doc. A/CN.4/SER.A/1993/Add.1, Yearbook of the International Law Commission 1993, vol. II, Part Two, 73; J Crawford, Third Report on State Responsibility, UN Doc. A/CN.4/507/Add.1, para. 197. This principle was respected, e.g., in Amco Asia v Indonesia (Amco I), Award of 20 November 1984, para. 281; Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 379; S D Myers v Canada, Second Partial Award of 21 October 2002, para. 303. J Crawford, above, n. 33, 239. S Ripsinky and K Williams, above, n. 3, 378. Abdala, Zadicoff, and Spiller argue that tribunals tend to make 'invalid round trips' by using a high discount rate and a low pre-award interest rate and so fail to provide full reparation. M Abdala, P L Zadicoff, and P Spiller, above, n. 3, 3; see also H Wöss, A Rivera, P Spiller, and S Dellepiane, Damages in International Arbitration under Complex Long-Term Contracts (Oxford: Oxford University Press, 2014) 283–5; examples of such invalid round trips allegedly included CMS v Argentina, Award of 12 May 2005, paras 450–5, and El Paso v Argentina, Award of 31 October 2011, para. 747. McCollough v Ministry of Post, 11 Iran US CTR (1986) 3, para. 97. Phillips Petroleum and ConocoPhillips v PDVSA, Award of 17 September 2012, para. 295. See, e.g., Article 9:509(1) PECL or Article 7.4.9(2) of the UNIDROIT Principles of International Commercial Contracts. Article 78 CISG. This implies that legal interest according to the conflict of law rules is applicable. 'The aggrieved party may in addition recover damages for any further loss so far as these are recoverable under this Section.' Article 9:509(2) PECL. Case of the SS Wimbledon (Great Britain, France, Italy, Japan v Germany), PCIJ 1923 Ser A, No. 1, 32. Report of the ILC on the work of its forty-fifth session, UN Doc. A/48/10, Yearbook of the International Law Commission 1993, vol. II, Part II, 73; Report of the ILC on the work of its fifty-second session, UN Doc. A/55/10, 53 and 68–9; J Crawford, above, n. 40, 42; J Crawford, above, n. 33, 235 et seq. Compañía del Desarrollo de Santa Elena v Costa Rica, Award of 17 February 2000 (2000) 15 ICSID Rev.-FILJ 169.

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53) Ibid, para. 101. 54) R J Reynolds Tobacco v Iran, Final Award, 8 Iran–US CTR (1985) 55, 60. 55) See Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents) v Her

Majesty's Commissioners of Inland Revenue and another (Appellants), House of Lords, Judgment of 18 July 2007, [2007] UKHL 34, para. 30; State Bank of New South Wales Ltd v Federal Commissioner of Taxation, Federal Court, Judgment of 9 November 1995, 95 ATC 4734, at 4741; P Birks, Unjust Enrichment (2nd edn, Oxford: Oxford University Press, 2005) 167–8; P Davenport and C Harris, Unjust Enrichment (Sydney: The Federation Press, 1997) 59. 56) See Article 78 CISG, Article 9:509 PECL, and Article 7.4.9 UNIDROIT Principles of International Commercial Contracts. See above, at paras 6.26–7. 57) J Gotanda, Supplemental Damages, above, n. 2, 58. 58) See below, Section C. 59) Examples will be discussed further below, in Section C. 60) Enron v Argentina, Award of 22 May 2007, ICSID Case No. ARB/01/3, para. 452; Sempra 61) 62) 63) 64)

65)

66) 67) 68) 69) 70)

71) 72) 73) 74) 75)

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v Argentina, Award of 28 September 2007, ICSID Case No. ARB/02/16, para. 485. See, amongst many others, M Whiteman, above, n. 5, 1913; J Gotanda, Supplemental Damages, above, n. 2, 1. J Ortscheidt, L'évaluation des dommages dans l'arbitrage commercial international (Paris: Dalloz, 2001) 281. . P Kindler, Gesetzliche Zinsansprüche im Zivil- und Handelsrecht (Tübingen: Mohr Siebeck, 1996) 337; G Graf, 'Die Neuregelung der Rechtsfolgen des Zahlungsverzugs. Eine kritische Analyse des ZinsRÄG' (2002) WBl 437. In the decisions of the CJEU, compensatory interest is translated by the term 'Ausgleichszinsen'. See Cases 27/59 and 39/59 Campolongo v Hohe Behörde [1960] ECR 821, 853 (German version). See I Marboe, 'Zinsen im Europäischen Gemeinschaftsrecht' in H F Köck, A Lengauer, and G Ress (eds), Europarecht im Zeitalter der Globalisierung. Festschrift für Peter Fischer (Vienna: Linde, 2004) 329, 341. See A Dolgoff and T Duarte-Silva, above, n. 3, 99; notable examples include Biloune v Ghana, Award on Damages and Costs, Award of 30 June 1990 (1994) 95 ILR 211, 231; Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 379; Pope & Talbot v Canada, Award in Respect of Damages of 31 May 2002, para. 90; Marvin Feldman v Mexico, Award of 16 December 2002, para. 205; National Grid v Argentina, Award of 3 November 2008, 294; Kardassopoulos and Fuchs v Georgia, Award of 3 March 2010, para. 668; Alpha Projektholding v Ukraine, Award of 8 November 2010, para. 514; Chevron v Ecuador, Award of 31 August 2011, para. 350; Unglaube v Costa Rica, Award of 16 May 2012, para. 325; Phillips Petroleum and ConocoPhillips v PDVSA, Award of 17 September 2012, para. 304; Yukos v Russia, Final Award of 18 July 2014, para. 1823; Pluspetrol v Perupetro, Award of 21 May 2015, para. 219. William L. Pereira v Iran, 5 Iran–US CTR (1984) 198, 224, 226. Nasser Espahanian v Bank Tejarat, 2 Iran–US CTR (1983) 157, 169. Blount Brothers v Ministry of Housing, 3 Iran–US CTR (1983) 225, 235; Dames & Moore v Iran, 4 Iran–US CTR (1983) 212, 224; Morrison-Knudsen Pacific Ltd v Ministry of Roads and Transportation, 7 Iran–US CTR (1984) 54, 89. Gould Marketing v Ministry of Defence, 6 Iran–US CTR (1984) 272, 287. The first approach was elaborated and consistently applied by Chamber One and Two of the Iran–US Claims Tribunal, while the latter was relied upon by Chamber Three. See C Brower and J Brueschke, above, n. 2, 622; see also S Ripinsky and K Williams, above, n. 3, 368. Sylvana Technical Systems Inc v Iran, 8 Iran–US CTR (1985) 298, 320. McCollough & Co Inc v Ministry of Post, Telegraph and Telephone, 11 Iran–US CTR (1986) 3, para. 99. Ibid, para. 100. See also S Ripinsky and K Williams, above, n. 3, 372–3. In Autopista Concesionada v Venezuela, Aucoven's financial expert agreed that the contractual 5-bank interest rate chosen by Aucoven was a nominal rate, which included both a 'real' interest component and a CPI component. The expert testified that 'the 5-bank rate‚ already includes the inflation, so there is no need for further adjustment for inflation in that rate'. Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003, para. 400. See also T Sénéchal, 'Present-day Valuation in International Arbitration: A Conceptional Framework for Awarding Interest' in L Lévy and F de Ly (eds), Interest, Auxiliary and Alternative Remedies in International Arbitration (Paris: ICC Publication, 2008) 219, 226. In a few Islamic countries there is a total or partial prohibition of interest on the basis that interest is not compatible with Islamic Sharia. See the informative overview on the different solutions of Islamic countries in this respect by N ComairObeid, 'Recovery of Damages for Breach of an Obligation of Payment' in Y Derains and R Kreindler (eds), Evaluation of Damages in International Arbitration (Paris: International Chamber of Commerce, 2006) 133.

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78)

79) 80) 81) 82) 83) 84) 85)

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94) 95) 96) 97) 98) 99) 100) 101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116)

In Russian Indemnities it was only established that there is a general principle of law which could be derived from the comparison of different legal systems that interest is generally due for delayed payment. The arbitral tribunal, however, did not go into further detail, such as the rate or other parameters of the interest claim. Russian Indemnities (Russia v Turkey), Award of 11 November 1912, 11 RIAA 421. See above, Section A(1). See above, Section A(2)(a). J Gotanda, 'Awarding Interest in International Arbitrations', above, n. 2, 51. Ibid, 52. Ibid. J Gotanda, Supplemental Damages, above, n. 2, 47 et seq. In view of this problem, Gotanda comments: '[i]n short, using choice-of-law rules to select a national law to resolve an interest claim can often be a difficult process that leads to arbitrary and unpredictable results.' J Gotanda, 'Awarding Interest in International Arbitrations', above, n. 2, 53. Directive 2011/7/EU of the European Parliament and of the Council on combating late payment in commercial transactions of 16 February 2011, [2000] OJ L200/35. See Article 2(7) of the Directive. Since June 2016, the reference rate has been -0.62%. Thus, the default interest rate in the EU is currently not less than 7.48%. Most EU member states have implemented a higher interest rate, such as 8.5% (UK), 8.17% (Germany), 8.05% (France), or 9.08% (Austria). See the website of the European Commission . Southern Pacific Properties v Egypt, Award of 20 May 1992, para. 223. Ibid, para. 237. Aminoil v Kuwait, Award of 24 March 1982, paras 168 et seq. The purchasing power of US$ 100 in May of 1978 was equivalent to the purchasing power of US$ 220.74 in December of 1991. Southern Pacific Properties v Egypt, Award of 20 May 1992, para. 243. Ibid, para. 238. In view of the difficulties with the inadequate Egyptian legal interest one might ask why the tribunal had relied on Egyptian law at all. The reason is that it applied Article 42 of the ICSID Convention for the choice of the law applicable and found that 'interest be determined according to Egyptian Law because there is no rule of international law that would fix the rate of interest or proscribe limitations imposed by Egyptian law'. Ibid, para. 222. Ibid, para. 223. Ibid, para. 224. Wena Hotels v Egypt, Award of 8 December 2000, paras 128–30. Ibid, endnote 289. It held that 'the provision in Egyptian law on which Respondent relies is not applicable to claims based on the BIT, i.e. public international law'. Middle East Cement v Egypt, Award of 12 April 2002, para. 174. Siag v Egypt, Award of 1 July 2009, para. 595. The tribunal noted: 'Indeed, the legal rate of interest according to Indonesian law is of six per cent (6%) per year (Regulation of 30 May 1848, still in force)'. Amco Asia Corp v Indonesia (Amco I), Award of 20 November 1984, para. 281. Ibid. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 631. See ibid, para. 637: 'Neither the Treaty nor international law provide for a [sic] interest rate to be applied'. Ibid, para. 643. Société Ouest Africaine des Bétons Industriels (SOABI) v Senegal, Award of 25 February 1988, paras 6.37, 12.05 et seq. MTD Equity v Chile, Award of 25 May 2004, paras 249–51. Pope & Talbot v Canada, Award in Respect of Damages of 31 May 2002, para. 88. I Uchkunova and O Temnikov, above, n. 3, 655. R J Reynolds Tobacco Co v Iran, 7 Iran–US CTR (1984) 181, 192. See also William L Pereira v Iran, 5 Iran–US CTR (1984) 198, 226; Howard, Needles, Tammen & Bergendoff v Iran, 11 Iran–US CTR (1986) 302. Anaconda-Iran Inc v Iran, Interlocutory Award, 13 Iran–US CTR (1988) 199, para. 137. Anaconda-Iran Inc v Iran, Final Award, 28 Iran–US CTR (1992) 320, para. 121. Anaconda-Iran Inc v Iran, Interlocutory Award, 13 Iran–US CTR (1988) 199, para. 151. R J Reynolds Tobacco Co v Iran, 7 Iran–US CTR (1984) 181, 193. Reading & Bates Drilling Company v Iran, 18 Iran–US CTR (1988) 164, para. 24. William L Pereira Associates, Iran v Iran, 5 Iran–US CTR (1984) 198, 224, 226; Howard, Needles, Tammen & Bergendoff v Iran, 11 Iran–US CTR (1986) 302, para. 148. See also C Brower and J Brueschke, above, n. 2, 626 with further references.

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117) Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003,

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136)

137) 138)

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para. 383. As Article 1.746 of the Venezuelan Civil Code did not contain such a prohibition, the contractual rate was applicable. However, the reasoning of the tribunal is ambiguous. On the one hand, it recalled that there was 'no rule of international law that would fix the rate of interest or proscribe the limitations imposed by [domestic] law', quoting SPP v Egypt, para. 222, but, on the other hand, noted that 'the Tribunal's exclusive reliance on Venezuelan law is justified'. Ibid, para. 386. It is thus unclear whether the tribunal would have upheld a limitation required under Venezuelan law. Ibid, para. 382. CDC Group v Seychelles, Award of 29 June 2005, para. 62. Eastman Kodak Company v Iran, 27 Iran–US CTR (1991) 3, para. 30. The tribunal awarded 8 per cent interest as determined by the promissory notes instead of 10 per cent as claimed by the claimant. Ibid, para. 60. Fedax NV v Venezuela, Award of 9 March 1998, para. 32. Pluspetrol v Perupetro, Award of 21 May 2015, para. 207. SARL Benvenuti & Bonfant v Congo, Award of 15 August 1980, ICSID Case No. ARB/77/2, para. 4.100. See J Westberg, International Transactions and Claims Involving Government Parties. Case Law of the Iran–US Claims Tribunal (Washington: International Law Institute, 1991) 253 et seq; J Gotanda, Supplemental Damages, above, n. 2, 38 et seq. Sylvana Technical Systems Inc v Iran, 8 Iran–US CTR (1985) 298, 321 in fn. 13. Ibid. Article 9:509(1) PECL. Article 7.4.9(2) of the UNIDROIT Principles of International Commercial Contracts. See the website of the US Board of Governors of the Federal Reserve System, ; see also Sylvana Technical Systems v Iran, 8 Iran–US CTR (1985) 298, 321 in fn. 12. See the website of FedPrimeRate.com, . Ibid. See the overview of historical prime rates at the website of FedPrimeRate.com, . Sylvana Technical Systems Inc v Iran, 8 Iran–US CTR (1985) 298, 321 in fn. 13. Ibid. Anaconda-Iran Inc v Iran, Interlocutory Award, 13 Iran–USCTR (1988) 199, para. 135. Therefore, in the Final Award the prime rate of the Chase Manhattan Bank was referred to: '[T]he Tribunal has calculated the average of the prime rate charged by the same bank [the Chase Manhattan Bank] from 1 June 1979 through the date of the final disposition of this Case to be 11.16%, to which 2% must be added in accordance with the Interlocutory Award'. Anaconda-Iran v Iran, Final Award, 28 Iran–US CTR (1992) 320, para. 121. The tribunal noted that 'based on the bids made to potential Canadian customers (and the revenue from the seven completed contracts), the currency of account of the transactions between SDMI/MYERS Canada and their Canadian customers was (or was to be) CAN$'. S D Myers v Canada, Second Partial Award of 21 October 2002, para. 305. Ibid, para. 307. This was also one of the main criticisms of Arbitrator Holtzmann's Opinion in Sylvana Technical Systems Inc v Iran. He pointed out that not all enterprises could borrow in these conditions because 'borrowing rates vary depending on the credit rating of each particular party, not all of whom are able to borrow at the prime rate, and some of whose credit standings may change during the relevant period'. Sylvana Technical Systems Inc v Iran, 8 Iran–US CTR (1985) 298, 321. Teco v Guatemala, Award of 19 December 2013, paras 766 et seq. Pluspetrol v Perupetro, Award of 21 May 2015, para. 207. Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 396. Chevron v Ecuador, Award of 31 August 2011, para. 350. Mobil Cerro Negro v PDVSA, Award of 23 December 2011, para. 854. Cargill v Mexico, Award of 18 September 2009, para. 544. T Sénéchal, above, n. 2. Ibid. Ibid. National Grid v Argentina, Award of 3 November 2008, para. 294. Ibid. Tidewater v Venezuela, Award of 13 March 2015, paras 207–9. Ibid, para. 207. The tribunal in Siag v Egypt chose the LIBOR to counter the higher rates suggested by the claimants based on cost of financing. See Siag v Egypt, Award of 1 June 2009, paras 596–8; see also I Uchkunova and O Temnikov, above, n. 3, 657. S Pratt and A Nicolita, Valuing a Business. The Analysis and Appraisal of Closely Held Companies (5th edn, New York: McGraw Hill, 2008) 181.

154) Ibid, 181–6.

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155) This is one of the reasons why Sénéchal does not recommend using the cost of

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capital as a benchmark for pre-award interest. Other reasons include the fact that the cost of capital model is constructed on the assumption that financial markets are dominated by rational, risk-averse investors, who seek to maximize satisfaction from return on their investment. Other cost of capital assumptions include that the market is efficient, frictionless, and without imperfections such as transaction costs, taxes, and restrictions on borrowing and short selling. In addition, it assumes that investors base their judgement on a common time horizon. See T Sénéchal, above, n. 2, at 135. S Pratt and A Nicolita, above, n. 153, 187. See also above, Chapter 4. S Pratt and A Nicolita, above, n. 153, 187. T Sénéchal, above, n. 76, 228. M Abdala, P L López Zaidcoff, and P Spiller, above, n. 3, 12. M Smith and R Vikis, above, n. 3, 5. A Dolgoff and T Duarte-Silva, above, n. 3, 102. PSEG v Turkey, Award of 19 January 2007, para. 341. Ibid (emphasis added). Ibid, para. 345. The tribunal eventually awarded six-month average LIBOR plus two percentage points, compounded semi-annually. Ibid, para. 348. EDF, SAUR and León v Argentina, Award of 11 June 2011, para. 1325. Swisslion v Macedonia, Award of 6 July 2012, para. 358. Ibid. It did so by explaining that '[t]he only provision of the Treaty that makes any reference to a rate of interest is, of course, Article 5, which deals with expropriation'. Ibid. TECO v Guatemala, Award of 19 December 2013, para. 711. Ibid, para. 762. Ibid, para. 766. Ibid, para. 768. In doing so, the tribunal addressed what Smith and Vikis call the 'factual uncertainty' regarding assumptions on post-breach behaviour of the claimant or the respondent. In case of doubt, tribunals apparently tend to opt for the risk-free rate. See M Smith and R Vikis, above, n. 3, 5. Phillips Petroleum and ConocoPhillips v PDVSA, Award of 17 September 2012, para. 295. Ibid, para. 235. Ibid, para. 291. Ibid, para. 295. Ibid, with references to literature in fn. 243. Ibid, para. 295. M Beeley and R Walck, above, n. 3, 63, referring amongst others to the often-cited Roger Ibbotson's research on historic rates of return, including calculations of international cost of capital. J Colón and M Knoll, above, n. 2, 11; Uchkunov and Temnikov, above, n. 3, 656; A Dolgoff and T Duarte-Silva, above, n. 3, 103–5. This is explained by the fact that the holder of an unsatisfied judgment would be treated in a bankruptcy action like the holder of an unsecured debt. J Colón and M Knoll, above, n. 2, 11. Ibid. See, e.g., Archer Daniels v Mexico, Award of 21 November 2007, para. 294; Railroad Development v Guatemala, Award of 29 June 2012, para. 278; Yukos v Russia, Award of 18 July 2014, para. 1642; Gold Reserve v Venezuela, Award of 22 September 2014, para. 850; Khan Resources v Mongolia, Award of 2 March 2015, para. 423; as regards the awards applying the respondent's borrowing rate see the examples for the rate of 'government bonds' of the respondent state, Section B(1)(e). A Dolgoff and T Duarte-Silva argue that the respondent's borrowing rate is appropriate for post-award interest, because once the award is final, it can become a marketable asset in its own right, devoid of any litigation risk, but still afflicted with default risk. See A Dolgoff and T Duarte-Silva, above, n. 3, 114. Council Regulation (EC) No. 2533/98 of 23 November 1998 concerning the collection of statistical information by the European Central Bank [1998] OJ L318/8. See, e.g., Regulation (EU) No. 1072/2013 of the European Central Bank of 24 September 2013 concerning statistics on interest rates applied by monetary financial institutions (recast) (ECB/2013/14) [2013] OJ L297/51. In September 2016, the interest rate on new loans of over €1 million with a floating rate and an initial rate fixation period of up to three months was 1.28%. The rate for new loans of the same size with an initial rate fixation period of over ten years was 1.70%. In the case of new loans of up to €250,000 with a floating rate and an initial rate fixation period of up to three months, the average rate charged remained at 2.65%. See European Central Bank, Euro Area Bank Interest Statistics: September 2016, Press Release of 3 November 2016, available at . Sylvana Technical Systems v Iran, 8 Iran–US CTR (1985) 298, 320. J Gotanda, 'Awarding Interest in International Arbitration' (1996) 90 AJIL 40, 59. Ibid. Ibid, at 56.

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192) The 2006 updated version of the UNCITRAL Model Law on International Commercial

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201) 202) 203) 204) 205) 206) 207) 208) 209) 210) 211) 212) 213) 214) 215) 216) 217) 218) 219) 220) 221) 222) 223) 224) 225) 226) 227) 228) 229) 230) 231)

232) 233) 234)

Arbitration did not contain a provision on the determination of interest. See . T Sénéchal and J Gotanda, 'Interest as Damages' (2008) Villanova Law/Public Policy Research Paper No. 2008-06, available at . Ibid. Ibid, with references to E Dimson, P Marsh, and M Staunton, 'Global Evidence on the Equity Risk Premium' (2003), available at . Ibid. Sylvana Technical Systems v Iran, 8 Iran–US CTR (1985) 298, 320 et seq. See also J Westberg, International Transactions and Claims Involving Government Parties. Case Law of the Iran–US Claims Tribunal (Washington: International Law Institute, 1991) 258. Sylvana Technical Systems v Iran, 8 Iran–US CTR (1985) 298, 321. Ibid, at 322. See Computer Sciences Corporation v Iran, 10 Iran–US CTR (1986) 269, 304; Oil Fields of Texas v Iran, 12 Iran–US CTR (1986) 308, para. 49; Sola Tiles v Iran, 14 Iran–US CTR (1987) 223, para. 66; Tavakoli v Iran, 33 Iran–US CTR (1997) 206, para. 250; Vera-Jo Miller Aryeh et al v Iran, 33 Iran–US CTR (1997) 272, para. 252; George Davidson v Iran, 34 Iran–US CTR (1997) 3, para. 119. See the website of Bankrate Inc, which surveys approximately 4,800 financial institutions in all fifty US states to provide rate information to consumers, see . Sylvana Technical Systems v Iran, 8 Iran–US CTR (1985) 298, 322. CMS v Argentina, Award of 12 May 2005, para. 471; Azurix v Argentina, Award of 14 July 2006, para. 440; Siemens v Argentina, Award of 6 February 2007, para. 396. LG&E v Argentina, Award of 25 July 2007, para. 104; Occidental v Ecuador, Award of 5 October 2012, para. 842; Gold Reserve v Venezuela, Award of 22 September 2014, para. 853. Siemens AG v Argentina, Award of 6 February 2007, para. 396. Gold Reserve v Venezuela, Award of 22 September 2014, para. 853. Occidental v Ecuador, Award of 5 October 2012, para. 842. The claimants had suggested to use (1) LIBOR plus two or four percentage points, (2) Russian sovereign bonds issued in US$, or (3) the US prime rate plus 2%. Yukos v Russia, Award of 18 July 2014, para. 1642. Ibid, paras 1655–75. Ibid, para. 1684, referring to Alpha Projektholding v Ukraine, Award of 8 November 2010, para. 514 and fn. 666; EDF, SAUR, Leon v Argentina, Award of 11 June 2012, paras 1325 et seq, and Gemplus v Mexico, Award of 16 June 2010, para. 16.24. Yukos v Russia, Award of 18 July 2014, paras 1685, 1686. Wena Hotels v Egypt, Award of 8 December 2000, endnote 289. Wena Hotels v Egypt, Decision on the Application for Annulment of 5 February 2002, para. 53. Marvin Feldman v Mexico, Award of 16 December 2002, para. 205. Quasar de Valores, Award of 20 July 2012, para. 226. Ibid, para. 226. Alpha Projektholding v Ukraine, Award of 8 November 2010, para. 514. Ibid. Ibid, at fn. 666. Ibid, para. 514. CSOB v Slovak Republic, Award of 29 December 2014, para. 314. Ibid. Ibid, para. 332. See above, n. 212. See already the discussion above, para. 6.117. See the discussion on the borrowing rate of the state, above Section B(1)(c)(iv). See above, Section A(1). Tenaris v Venezuela, Award of 29 January 2016, para. 587. Ibid, para. 586. Ibid, para. 587. CMS v Argentina, Award of 12 May 2005, para. 471; LG&E v Argentina, Award of 25 July 2007, para. 104; Archer Daniels v Mexico, Award of 21 November 2007, para. 300; Tzw Yap Shum v Peru, Award of 7 July 2011, para. 290; Unglaube v Costa Rica, Award of 16 May 2012, para. 323; Occidental v Ecuador, Award of 5 October 2012, para. 842; Gold Reserve v Venezuela, Award of 22 September 2014, para. 853; EDF, SAUR and León v Argentina, Award of 11 June 2012, para. 1336, III; Anatolie Satie v Kazakhstan, Award of 19 December 2013, para. 1854; Suez v Argentina, Award of 19 April 2015, para. 117. Azurix v Argentina, Award of 14 July 2006, para. 440; Siemens v Argentina, Award of 6 February 2007, para. 396. See some examples further below. See the Financial Times lexicon .

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235) A panel is made up for each currency consisting of at least eight and a maximum of

236)

237) 238) 239) 240) 241) 242) 243) 244) 245) 246) 247) 248)

249) 250)

251) 252) 253) 254) 255) 256) 257) 258) 259) 260) 261)

sixteen banks which are deemed to be representative for the London money market. Until 2013, the LIBOR was fixed by the British Bankers' Association, but in the wake of the so-called 'LIBOR-Scandal' in 2012 which revealed the manipulation of the LIBOR by a few big US and European banks it became a regulated activity. See the Financial Times lexicon . USD LIBOR, GBP LIBOR, EUR LIBOR, JPY LIBOR, CHF LIBOR; the maturities are overnight (one day), one week, one month, two months, three months, six months, and twelve months. See the website of Global Rates . See the website of global-rates . See the website global-rates . Ibid. See also M Beeley and R Walck, above, n. 3, 75. See the website of the European Money Market Institute . See the website of the European Money Market Institute . See . See the website of the European Money Market Institute . Article 5(iv) Agreement for the Promotion and Protection of Investments between the Republic of Italy and the Arab Republic of Egypt of 2 March 1989. Siag v Egypt, Award of 1 July 2009, para. 597. Ibid, para. 598. Article 5(1) of the Agreement between the Macedonian Government and the Swiss Federal Council on the Promotion and Reciprocal Protection of Investments of 26 September 1996 reads: '…The amount of compensation, including interest calculated on the annual LIBOR basis, shall be settled in a convertible currency and paid without delay to the person entitled thereto without regard to its residence or domicile.' Swisslion v Macedonia, Award of 6 July 2012, para. 358. Treaty between the United States of America and Ukraine concerning the Encouragement and Reciprocal Protection of Investment of 4 March 1994, entered into force on 16 November 1996; see Lemire v Ukraine, Award of 28 March 2011, para. 147. Lemire v Ukraine, Award of 28 March 2011, para. 352. Ibid, para. 354. Ibid, para. 346. Ibid, para. 350. Ibid, para. 356. Ibid, para. 355 (emphasis in original). Biloune v Ghana, Award on Damages and Costs of 30 June 1990 (1994) 95 ILR 211, 230. Ibid, at 231. Emilio Agustín Maffezini v Spain, Award of 13 November 2000, para. 96. MTD v Chile, Award of 25 May 2004, para. 249. Ibid, para. 251. The tribunal, therefore, did not accept the respondent's submission concerning the 'average annual LIBOR' but used the specific LIBOR interest rates at certain key dates at annual intervals, namely '(i) 5.03813% in 1998, (ii) 6.16% in 1999, (iii) 6.71625% in 2000, (iv) 2.24625% in 2001, (v) 1.62% in 2002, and (vi) 1.4925% in 2003'. Ibid, para. 251. This reflected the strong fluctuation of the LIBOR in the period under consideration.

262) PSEG v Turkey, Award of 19 January 2007, para. 348; Enron v Argentina, Award of 22

263) 264) 265)

266)

May 2007, para. 452; Sempra v Argentina, Award of 28 September 2007, para. 486; Rumeli v Kazakhstan, Award of 28 July 2008, para. 818; Continental Casualty v Argentina, Award of 5 September 2008, para. 314; National Grid v Argentina, Award of 3 November 2008, para. 294; Lemire v Ukraine, Award of 28 March 2011, para. 351, see the discussion already above; El Paso v Argentina, Award of 31 October 2011, para. 743; Railroad Development v Guatemala, Award of 29 June 2012, paras 278–9; Lahoud v DRC, Award of 7 February 2014, para. 631; Khan v Resources v Mongolia, Award of 2 March 2015, para. 425; Quiborax v Bolivia, Award of 16 September 2015, para. 517 (but the tribunal did not use six-months LIBOR, instead referring to 'one year LIBOR + 2%', which it deemed a suitable rate for debts in US currency owed outside the United States over the relevant periods). National Grid v Argentina, Award of 3 November 2008, para. 294. Khan v Resources v Mongolia, Award of 2 March 2015, para. 425. Kardassopoulos and Fuchs v Georgia, Award of 3 March 2010, para. 661; Flughafen Zürich v Venezuela, Award of 18 November 2014, para. 965; OI European Group v Venezuela, Award of 10 March 2015, para. 944; Mobil Investments and Murphy Oil v Canada, Award of 20 February 2015, para. 170. Kardassopoulos and Fuchs v Georgia, Award of 3 March 2010, para. 661.

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267) While the principal was for each claimant US$ 15.1 million, pre-award interest

amounted to US$ 30,024,736.83. Ibid, paras 646, 668.

268) Mobil Investments and Murphy Oil v Canada, Award of 20 February 2015, para. 170. 269) SGS v Paraguay, Award of 2012, para. 188 (US$ thirty-day LIBOR rate); Crystallex v

Venezuela, Award of 4 April 2016, para. 934 (six-months average US$ LIBOR rate).

270) This was the case when the BIT provided for it for the determination of

271)

272) 273) 274) 275) 276)

277) 278) 279) 280) 281) 282) 283) 284) 285) 286) 287) 288) 289) 290) 291) 292)

293) 294) 295) 296) 297) 298) 299) 300) 301) 302) 303) 304) 305) 306) 307) 308) 309) 310) 311) 312)

compensation upon expropriation. See already above the discussion of Siag v Egypt, Award of 1 July 2009, para. 597, and Swisslion v Macedonia, Award of 6 July 2012, para. 358. Funnekotter v Zimbabwe, Award of 22 April 2009, para. 144 (adding 'political risk' and arriving at a 10% rate); Deutsche Bank v Sri Lanka, Award of 31 October 2012, para. 575 (based on a nine-month LIBOR rate plus a market-based funding spread based on credit risks associated with DB, based on DB's one-year credit default swap rate of 1.12%). Rosinvest v Russia, Award of 22 September 2010, para. 686. Article 5(1) of the Agreement between the Government of the United Kingdom and the Government of the USSR for the Promotion and Reciprocal Protection of Investments, London, 6 April 1989. Rosinvest v Russia, Award of 22 September 2010, para. 684. Ibid, para. 686. Walter Bau v Thailand, Award of 1 July 2009, para. 16.1; Meerapfel v Central African Republic, Award of 21 May 2011, para. 406; Hassan Awdi v Romania, Award of 2 March 2015, para. 518; Hrvatska Elektropriveda v Slovenia, Award of 17 December 2015, paras 553–4. Hrvatska Elektropriveda v Slovenia, Award of 17 December 2015, para. 553; see also Franck Charles Arif v Moldova, Award of 8 April 2013, para. 620 (although without a premium and not compounded). Atlantic Triton v Guinea, Award of 21 April 1986 (1995) 3 ICSID Reports 13, 30. Ibid. CME v Czech Republic, Award of 14 March 2003, para. 646. CSOB v Slovak Republic, Award of 29 December 2004, para. 344. Micula v Romania, Award of 11 December 2013, paras 262, 1250 et seq. Ibid, para. 1256. Ibid, para. 1270. Ibid, para. 1272. Abengoa v Mexico, Award of 18 April 2013, para. 786. See above, Section A(1). American International Group v Iran, 4 Iran–US CTR (1983) 96, 110. The formulation is almost identical in INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 384. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, 1042. Ibid, paras 169 et seq. Compañía del Desarrollo de Santa Elena v Costa Rica, Award of 17 February 2000, para. 104. This can be calculated by the formula on compound interest. The result on the basis of 6% would be US$ 19.1 million. The tribunal, however, reduced the amount because the investor had retained possession of the piece of land during the entire period and could use it, at least to a limited extent. Ibid, paras 105–6. See above, Section A(2)(a). In Sapphire v NIOC, the arbitrator chose a 'usual rate' of 5% without further explanation. Sapphire International Petroleums Ltd v NIOC, Award of 15 March 1963 (1967) 35 ILR 136, 190. See above, Section A(1). See also R Lillich, 'Interest in the Law of International Claims' in Finnish Branch ILA (ed.), Essays in Honour of Voitto Saario and Toivo Sainio (Helsinki: Finnish Branch ILA, 1983) 51, 58. Middle East Cement v Egypt, Award of 12 April 2002, para. 175. Metalclad v Mexico, Award of 30 August 2000, para. 128. After having dealt with the issue of compounding in some detail, it held that the amount awarded would accrue interest at an annual rate of 6%, compounded annually. Técnicas Medioambientales v Mexico, Award of 29 May 2003, para. 197. Vivendi Universal v Argentina (Vivendi II), Award of 20 August 2007, para. 9.2.8. Impregilo v Argentina, Award of 21 June 2011, para. 383. Ibid. Desert Line v Yemen, Award of 6 February 2008, para. 293. Ibid, para. 295. Antoine Goetz v Burundi, Award of 10 February 1999, para. 135. Ibid, at 519; see also Antoine Goetz v Burundi, Award of 21 June 2012, para. 303. Asian Agricultural Products v Sri Lanka, Award of 27 June 1990, para. 113. See above, para. 6.25. McCollough & Co Inc v Ministry of Post, Telegraph and Telephone, 11 Iran US CTR (1986) 3, para. 104. See also C Brower and J Brueschke, above, n. 2, 623. Harold Birnbaum v Iran, 29 Iran–US CTR (1993) 260, para. 150. Petrolane Inc v Iran, 27 Iran–US CTR (1991) 64, para. 161; James A Saghi v Iran, 29 Iran– US CTR (1993) 20, para. 106.

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313) 314) 315) 316) 317) 318)

319) 320) 321) 322) 323) 324)

325)

Shahine Shaine Ebrahimi v Iran, 30 Iran–US CTR (1994) 170, para. 176. Tenaris v Venezuela, Award of 29 January 2016, para. 587. Ibid. Ibid. As regards the expropriation date see the analysis above, Chapter 3, Section C(1). The arbitral tribunals in American International Group v Iran and INA v Iran, e.g., referred concordantly to the date of the decree of 25 June 1979 on the nationalization of the Iranian insurance industry. American International Group v Iran, 4 Iran US CTR (1983) 96, 110; see also INA Corp v Iran, 8 Iran US CTR (1985) 373, 384. The ICSID Tribunal in Compañía del Desarrollo de Santa Elena v Costa Rica also calculated interest from the date of the expropriating decree. Compañía del Desarrollo de Santa Elena v Costa Rica, Award of 17 February 2000, para. 105. The arbitral tribunal in Aminoil v Kuwait referred to the date of Decree Law No. 124 of 19 September 1977 which withdrew the oil concession. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM, 976, 979, 1042. Southern Pacific Properties v Egypt, Award of 20 May 1992, para. 234. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 215. See above, Chapter 3, Section C(1)(b). This was criticized by Reisman and Sloane because the determination of a date at the end of the chain of acts and omissions would lead to a continuous decrease in value of the property from which the state would benefit. They argue, therefore, in favour of separating the expropriation date from the valuation date. It is not clear whether this means that the beginning of the interest period should also be the valuation date or the expropriation date. See M Reisman and R Sloane, 'Indirect Expropriation and its Valuation in the BIT Generation' (2003) 74 BYIL 115, 146. See also above, Chapter 3, Section C(1)(b). See, e.g., Tippetts et al v TAMS-AFFA, 6 Iran–US CTR (1984) 219, 225, 229; Starrett Housing Corp v Iran, 16 Iran–US CTR (1987) 112, para. 369; Antoine Goetz et al v Burundi, Award of 10 February 1999, 517; Biloune and Marine Drive Complex v Ghana, Award on Damages and Costs of 30 June 1990 (1994) 95 ILR 211, 230; Quasar de Valores, Award of 20 July 2012, para. 226; Flughafen Zürich v Venezuela, Award of 18 November 2014, para. 965; Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 398; OI European Group v Venezuela, Award of 10 March 2015, para. 932.

326) Article 38 para. 2 of the ILC Articles on the Responsibility of States for 327) 328) 329) 330) 331)

332) 333) 334) 335) 336) 337) 338) 339) 340) 341) 342) 343) 344) 345) 346) 347)

Internationally Wrongful Acts, Annex to General Assembly Resolution 56/83 of 12 December 2001, UN Doc A/ Res./56/83. This is also conceded in the Commentary, according to which the question of the 'starting date' still represents one of the 'complex issues'. J Crawford, above, n. 33, 238. This was, however, the proposal of Crawford in the Third Report on State Responsibility, UN Doc A/CN.4/507/Add.1, para. 212. See also the Russian Indemnities case, Affaire de l'Indemnité Russe, Award of 11 November 1912, 11 RIAA, 421, 442. Report of the International Law Commssion on the work of its fifty-second session, UN Doc A/55/10, Supplement No. 10, 68. The Commentary points out that care must be taken not to award interest for the same period for which lost profits have been awarded, as one and the same capital cannot earn profits and interest at the same time. See J Crawford, above, n. 33, 239. The Commentary in this respect says: 'Article 38 does not deal with post-judgment or moratory interest. It is only concerned with interest that goes to make up the amount that a court or tribunal should award, i.e. compensatory interest. The power of a court or tribunal to award post-judgment interest is a matter of procedure.' Ibid, at 239. Asian Agricultural Products v Sri Lanka, Award of 27 June 1990, para. 114. Emilio Agustín Maffezini v Spain, Award of 13 November 2000, para. 96. Técnicas Medioambientales SA v Mexico, Award of 29 May 2003, para. 197. MTD v Chile, Award of 25 May 2004 (2005) 44 ILM 91, para. 247. CMS v Argentina, Award of 12 May 2005, para. 471. Impregilo v Argentina, Award of 21 June 2011, para. 384. Swisslion v Macedonia, Award of 6 July 2912, para. 359. Lahoud v DRC, Award of 7 February 2014, para. 633. Metalclad v Mexico, Award of 29 May 2003, para. 128. Ibid. United Mexican States v Metalclad Corporation, Supreme Court of British Columbia, Vancouver, Judgment of 2 May 2001, . Ibid, para. 134. Report of the International Law Commission on the work of its fifty-second session, UN Doc. A/55/10, Supplement No. 10, 69. CME v Czech Republic, Partial Award on the Merits of 13 September 2001 (2006) 9 ICSID Reports 121, paras 586 et seq. CME v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, para. 492. Ibid, para. 630.

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348) Article 14(3) of the ILC Articles on the International Responsibility of States for 349) 350) 351) 352) 353) 354)

355) 356) 357) 358) 359) 360) 361) 362) 363)

Internationally Wrongful Acts, Annex to General Assembly Resolution 56/83 of 12 December 2001, UN Doc A/ Res./56/83. See also J Crawford, above, n. 33, 140. AGIP v Congo, Award of 30 November 1979 (1993) 1 ICSID Reports 306, 329. Siemens v Argentina, Award of 6 February 2007, para. 403.7. Abengoa v Mexico, Award of 18 April 2013, para. 784. Micula v Romania, Award of 11 December 2013, para. 1329. Suez v Argentina, Award of 19 April 2015, para. 105. In this sense, the ICSID Tribunal in Amco Asia v Indonesia held: 'The Tribunal notes that in international law, the starting point of interest has been generally fixed either at the date of the wrong, or at the date of the presentation of the claim to the competent international authority'. Amco Asia v Indonesia (Amco I), Award of 20 November 1984, para. 281. Ibid, para. 239; Marvin Feldman v Mexico, Award of 16 December 2002, para. 205; CME v Czech Republic, Final Award on Damages of 14 March 2003, paras 631 et seq. Atlantic Triton v Guinea, Award of 21 April 1986 (1995) 3 ICSID Reports 13, 30; following the application of the claimant also Pope & Talbot v Canada, Award in Respect of Damages of 31 May 2002, para. 90. S D Myers v Canada, Second Partial Award of 21 October 2002, para. 303. See above, n. 332. Asian Agricultural Products v Sri Lanka, Award of 27 June 1990, para. 115. See above, n. 102. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 635. See in this respect the comparative analysis by J Gotanda, 'Awarding Interest in International Arbitration', above, n. 2, 42 et seq. McCollough & Co Inc v Ministry of Post Telegraph and Telephone, 11 Iran–US CTR (1986) 3, para. 97.

364) Ibid, para. 98. 365) R J Reynolds Tobacco Co v Iran, Interlocutory Award, 7 Iran–US CTR (1984) 181, 189; 366) 367) 368) 369)

370) 371)

372)

373) 374) 375) 376) 377) 378) 379) 380) 381) 382) 383) 384) 385) 386)

Final Award, 8 Iran–US CTR (1985) 55, 60. Intrend International Inc v Iranian Air Force, 3 Iran–US CTR (1983) 110, 117. Exxon Research and Engineering Co v Iran, 15 Iran–US CTR (1987) 3, para. 68. R J Reynolds Tobacco Co v Iran, Final Award, 8 Iran–US CTR (1985) 55, 60. In Reynolds Tobacco v Iran the tribunal noted that the '[s]eller's occasional or contined [sic] omission to claim interest hereunder shall not be constructed as a waiver'. See Reynolds Tobacco Co v Iran, Interlocutory Award, 7 Iran–US CTR (1984) 181, 191. American Bell International Inc v Iran, Final Award, 12 Iran–US CTR (1986) 170, para. 120. In Bechtel v Iran the parties had contractually agreed on a thirty-day period within which objections to the invoice could be raised. Thus, in the absence of an objection, '[a]ccording to the agreement the amounts became due within thirty days after receipt of the final invoice by IDRO'. Bechtel Inc v Iran, 14 Iran–US CTR (1987) 149, para. 39. Similarly, in American Bell International v Iran a thirty-day period was considered to have been implicitly agreed because the Iranian telecommunication enterprise had the right to object to the invoice within thirty days. Compensatory interest, therefore, could only start to accrue thirty days after the date of the issuance of the invoice. See American Bell International Inc v Iran, Interlocutory Award, 6 Iran–US CTR (1984) 74, 85; Final Award, 12 Iran–US CTR (1986) 170, paras 199, 203. Exxon Research and Engineering Co v Iran, 15 Iran–US CTR (1987) 3, para. 69. Similarly, in Telecommunications Co of Iran v United States, the dies a quo was set exactly at thirty days after the issuance of the invoice although nothing similar had been agreed in the contract. On the contrary, the claimant had asked for interest from the date of the invoice. Telecommunications Co of Iran v United States, 23 Iran–US CTR (1989) 320, paras 59, 73. Bechtel, Inc v Iran, 14 Iran–US CTR (1987) 149, para. 57. American Bell International Inc v Iran, Final Award, 12 Iran–US CTR (1986) 170, paras 199, 208. Sedco, Inc v NIOC, Final Award, 15 Iran–US CTR (1987) 23, 184, in fn. 158. Duke Energy v Ecuador, Award of 18 August 2008, paras 466, 491. Russian Indemnities (Russia v Turkey), Award of 11 November 1912, 11 RIAA 421, 422. J Gotanda, 'Awarding Interest in International Arbitration', above, n. 2, 58. Ibid. Ibid, at 59. UNIDROIT (ed.), Principles of International Commercial Contracts (Rome: UNIDROIT, 2010) 279. See above, n. 48. See above, n. 49. See above, Chapter 3, Section B(2)(c)(ii). Blount Brothers v Ministry of Housing, 3 Iran–US CTR (1983) 225, 235; Exxon Research and Engineering Co v Iran, 15 Iran–US CTR (1987) 3, para. 68. Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003, para. 234.

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387) 388) 389) 390)

Ibid, paras 369 et seq. Atlantic Triton v Guinea, Award of 21 April 1986 (1995) 3 ICSID Reports 13, 30. Phibro Corp v Iran, 26 Iran–US CTR (1989) 320, para. 63. This can be explained by the simple formula on compound interest: .

391) J Gotanda and T Sénéchal, above, n. 3, at fn. 125; see also T Sénéchal, above, n. 76,

231.

392) M Whiteman, above, n. 5, 1997. Some older 'rare cases' are referred to in a footnote.

These cases were later taken up by investment tribunals to show that compound interest was, in fact, already available many years ago. See, e.g., the ICSID Tribunal in Compañía del Desarrollo de Santa Elena v Costa Rica. See further details below, n. 326. 393) Fabiani (France v Venezuela), Award of 30 December 1896, reported in M Whiteman, above, n. 5, 1786. 394) Chemin de Fer Zeltweg-Wolfsberg, (Austria v Yugoslavia), Award of 12 May 1934, 3 RIAA, 1795. 395) See Compañía del Desarrollo de Santa Elena v Costa Rica, see further below, n. 417. 396) R J Reynolds Tobacco v Iran, 7 Iran–US CTR (1984) 181, 191. 397) See, e.g., Sylvana Technical Systems Inc v Iran, 8 Iran–US CTR (1985) 298, 320;

398) 399) 400) 401) 402) 403) 404) 405) 406) 407) 408) 409) 410) 411) 412) 413) 414) 415) 416) 417) 418) 419) 420) 421) 422) 423) 424) 425) 426) 427) 428) 429) 430) 431) 432) 433) 434) 435) 436)

Anaconda-Iran Inc v Iran, Interlocutory Award, 13 Iran–US CTR (1988) 199, paras 138 et seq; Starrett Housing Corp v Iran, 16 Iran–US CTR (1987), 199, para. 370. See also C Brower and J Brueschke, above, n. 2, 620. Anaconda-Iran Inc v Iran, Interlocutory Award, 13 Iran–US CTR (1988) 199, para. 138. Ibid, para. 139. Starrett Housing Corp v Iran, 16 Iran–US CTR (1987) 112. Starrett Housing Corp v Iran, Concurring Opinion Holtzmann, 16 Iran–US CTR (1987) 237, 252. Ibid, at 253. Ibid, at 254. F A Mann, above, n. 2, 584. Ibid, at 585. Ibid. Ibid, at 580. C Brower and J Brueschke, above, n. 2, 629–30. J Gotanda, 'Compound Interest', above, n. 2, text after fn. 324. Ibid. F A Mann, above, n. 2, 585. T Sénéchal, above, n. 76, 231. Ibid, at 233. Aminoil v Kuwait, Award of 24 March 1982 (1982) 21 ILM 976, para. 178(6). Atlantic Triton v Guinea, Award of 21 April 1986 (1995) 3 ICSID Reports 13, 33. As to the interest rate see above, para. 6.142. Compañía del Desarrollo de Santa Elena v Costa Rica, Award of 17 February 2000, paras 97 et seq. In addition to Aminoil v Kuwait, see also Fabiani (France v Venezuela), Award of 30 December 1896, reported in M Whiteman, above, n. 5, 1786, and Chemin de Fer Zeltweg-Wolfsberg (Austria v Yugoslavia), Award of 12 May 1934, 3 RIAA, 1795, para. 98. Compañía del Desarrollo de Santa Elena v Costa Rica, Award of 17 February 2000, para. 104. Metalclad Corp v Mexico, Award of 30 August 2000, para. 128. Ibid. Ibid, para. 131. See further below, para. 6.284. Emilio Agustín Maffezini v Spain, Award of 13 November 2000, para. 277. Wena Hotels v Egypt, Award of 8 December 2000, para. 129. Ibid. Ibid, para. 129 with reference to J Gotanda, 'Awarding Interest in International Arbitration' (1996) 90 AJIL 40, 61. Ibid, para. 129, with references to the above-mentioned considerations by F A Mann, above, n. 2. See above, n. 404–7. See above, n. 409–10. Middle East Cement v Egypt, Award of 12 April 2002, para. 175. Ibid, para. 174 with reference to the above-mentioned ICSID awards of the year 2000. Ibid. Ibid, para. 197. Técnicas Medioambientales v Mexico, Award of 29 May 2003, para. 196. MTD v Chile, Award of 25 May 2004, para. 251. LG&E v Argentina, Award of 25 July 2007, para. 103. Lemire v Ukraine, Award of 28 March 2011, para. 360.

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437) The tribunal in Railroad Development v Guatemala referred to the 'length of these

438)

439)

440) 441) 442) 443)

444) 445) 446) 447)

448) 449) 450) 451) 452) 453) 454) 455) 456) 457)

458) 459) 460) 461) 462) 463) 464) 465)

proceedings because of two jurisdictional phases in which the jurisdictional objections of Respondent were rejected, and several postponement in the procedural calendar at the Government's request'. Railroad Development v Guatemala, Award of 29 June 2012, para. 281. Siemens v Argentina, Award of 6 February 2007, para. 399; Vivendi Universal v Argentina (Vivendi II), Award of 20 August 2007, para. 11.1; Continental Casualty v Argentina, Award of 5 September 2008, para. 314; Gemplus v Mexico, Award of 16 June 2010, para. 16.26; Alpha Projektholding v Ukraine, Award of 8 November 2010, para. 514; Impregilo v Argentina, Award of 21 June 2011, para. 383; EDF, SAUR and León v Argentina, Award of 11 June 2012, disposition no. III; Goetz v Burundi, Award of 21 June 2012, para. 307; Quasar de Valores, Award of 20 July 2012, para. 228; Occidental v Ecuador, Award of 5 October 2012, para. 845; TECO v Guatemala, Award of 19 December 2013, paras 766–7; SAUR v Argentina, Award of 22 May 2014, para. 433; Gold Reserve v Venezuela, Award of 22 September 2014, para. 855; Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 399; Flughafen Zürich v Venezuela, Award of 18 November 2014, para. 962; Khan Resources v Mongolia, Award of 2 March 2015, para. 425; OI European Group v Venezuela, Award of 10 March 2015, para. 953; Quiborax v Bolivia, Award of 16 September 2015, paras 520–1; Crystallex v Venezuela, Award of 4 April 2016, para. 940. PSEG v Turkey, Award of 19 January 2007, para. 348; Enron v Argentina, Award of 22 May 2007, para. 452; Sempra v Argentina, Award of 28 September 2007, para. 486; Rumeli v Kazakhstan, Award of 28 July 2008, para. 818; Funnekotter v Zimbabwe, Award of 22 April 2009, para. 146; Walter Bau v Thailand, Award of 1 July 2009, para. 16.1; Siag v Egypt, Award of 1 July 2009, para. 595; Kardassopoulos v Georgia, Award of 3 March 2010, para. 667; Lemire v Ukraine, Award of 28 March 2011, paras 357 et seq; Tza Yap Shum v Peru, Award of 7 July 2011, para. 291; El Paso v Argentina, Award of 31 October 2011, para. 746; Unglaube v Costa Rica, Award of 16 May 2012, para. 324; Swisslion v Macedonia, Award of 6 July 2012, para. 358; Anatolie and Gabriel Stati v Kazakhstan, Award of 18 December 2013, para. 1855; Hassan Awdi v Romania, Award of 2 March 2015, para. 519; Suez v Argentina, Award of 9 April 2015, para. 117; Hrvatska Elektropriveda v Slovenia, Award of 17 December 2015, paras 559–60; Tenaris v Venzuela, Award of 29 January 2016, para. 594. Micula v Romania, Award of 11 December 2013, para. 1272; Tidewater v Venezuela, Award of 13 March 2015, para. 209. Mobil Investments v Canada, Award of 20 February 2015, para. 170. LG&E v Argentina, Award of 25 July 2007, paras 103, 115; Railroad Development v Guatemala, Award of 29 June 2012, para. 281. See M Beeley and R Walck, above, n. 3, 62, referring to Siemens v Argentina, in which a rate based on six-month US certificates of deposit was compounded annually, not semi-annually. See Siemens v Argentina, Award of 6 February 2007, paras 396–400; see also J Gotanda, 'A Study of Interest', above, n. 3, 25. Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003, paras 394 et seq. Ibid, para. 394. Ibid, para. 395. The tribunal referred to Article 244 of the Ecuadorian Constitution and Article 2140 of the Ecuadorian Civil Code. Duke Energy v Ecuador, Award of 18 August 2008, para. 457. See also the discussion of this case and the arguments about the importance of the distinction between expropriation and breach of contract cases in Occidental v Ecuador, Award of 5 October 2012, para. 838. Pluspetrol v Perupetro, Award of 21 May 2015, para. 207. Desert Line v Yemen, Award of 6 February 2008, para. 298. Saipem v Bangladesh, Award of 30 June 2009, para. 211. SGS v Paraguay, Award of 10 February 2012, paras 169, 197. CMS v Argentina, Award of 12 May 2005, para. 471. Ibid, paras 470–1. Archer Daniels v Mexico, Award of 21 November 2007, para. 298. Abengoa v Mexico, Award of 18 April 2013, para. 787. Lahoud v DRC, Award of 7 February 2014, para. 632. CSOB v Slovak Republic, Award of 29 December 2004, para. 349; similarly the tribunal in Meerapfel v Central African Republic denied compound interest, because the claimant could not prove that he would have earned 12% compound interest, in particular not in the Central African Republic. Meerapfel v Central African Republic, Award of 12 May 2011, para. 405; see also Franck Charles Arif v Moldova, Award of 8 April 2013, para. 619. CME v Czech Republic, Final Award on Damages of 14 March 2003, para. 643. Ibid, para. 646. See above, n. 280. Yukos v Russia, Award of 18 July 2014, 1689. Rosinvest v Russia, Award of 12 September 2010, para. 689. Ibid. Ibid, para. 690. See M Whiteman, above, n. 5, 1313; J Gotanda, Supplemental Damages, above, n. 2, 56; J Crawford, above, n 33, 239.

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466) This is, in particular, the case in the jurisprudence of the ECHR and the ECJ. 467) See, in detail, J Ortscheid, La réparation du dommage dans l'arbitrage commercial

international (Paris: Dalloz, 2001) 220 et seq.

468) R Schmitz, Zinsrecht. Zum Recht der Zinsen in Deutschland und in der Europäischen

Union (Münster: LIT, 1994) 67.

469) 470) 471) 472)

473)

474)

475) 476)

477)

478) 479) 480) 481) 482) 483) 484) 485) 486) 487) 488) 489) 490) 491) 492) 493) 494) 495) 496) 497) 498)

499) 500)

Ibid, at 279. Ibid, at 259. See above, para. 6.183. See Article 2(6) of the Directive 2011/7/EU of the European Parliament and of the Council on combating late payment in commercial transactions of 16 February 2011, [2011] OJ L48/1; see above, para. 6.57. Since June 2016, this interest rate is -0.62%. Thus, the default interest rate in the EU is currently at the minimum 7.48%. See the website of the European Central Bank . Arguments in favour of a different treatment of pre-award and post-award interest are also advanced by A Dolgoff and T Duarte-Silva, above, n. 3, 114, and I Uchkunova and O Temnikov, above, n. 3, 652, 668. They refer to the different types of risks involved and the function of post-award interest to encourage prompt payment. However, some tribunals found that the continuation of pre-award interest beyond the date of the award, without an explicit request, would not be within its jurisdiction. See Enron v Argentina, Award of 22 May 2007, para. 452; Sempra v Argentina, Award of 28 September 2007, para. 485. See above, paras 6.13–6.17. See, e.g., Sedelmayer v Russia, Award of 7 July 1998, para. 3.6.3; Mobil Cerro Negro v Venezuela, Award of 9 October 2014, para. 404; Tidewater v Venezuela, Award of 13 March 2015, para. 217. See, e.g., INA Corporation v Iran, 8 Iran–US CTR (1985) 373, 384, or American International Group v Iran, 4 Iran–US CTR (1983) 96, 110. In Aminoil v Kuwait the tribunal awarded the amount of compensation including interest on the basis of being payable on 1 July 1982, without mentioning post-award interest. Aminoil v Kuwait, 24 March 1982 (1982) 21 ILM 976, para. 179. See, e.g., Southern Pacific Properties v Egypt, 20 May 1992 (1992) 3 ICSID Reports 189, para. 257; Compañía del Desarrollo de Santa Elena v Costa Rica, 17 February 2000 (2000) 15 ICSID Rev.-FILJ 169, para. 111. See further cases and discussion below, paras 6.274 et seq. See, e.g., RayGo Wagner Equipment Company v Star Line Iran Company, 1 Iran–US CTR (1982) 411, 414–15. See, e.g., Sylvana Technical Systems Inc v Iran, 8 Iran–US CTR (1985) 298, 322; McCollough & Co Inc v Ministry of Post, 11 Iran–US CTR (1986) 3, 34; see also C Brower and J Brueschke, above, n. 2, 629 with further reference to jurisprudence. McCollough & Co Inc v Ministry of Post, Telegraph and Telephone, 11 Iran–US CTR (1986) 3, para. 98. Telecommunications Co of Iran v United States, 23 Iran–US CTR (1989) 320, para. 73. Avco Corporation v Iran, 19 Iran–US CTR (1988) 200, para. 142. Ibid. Amco Asia Corp v Indonesia (Amco I), Award of 20 November 1984 (1993) 1 ICSID Reports 413, para. 281. Asian Agricultural Products Ltd v Sri Lanka, Award of 27 June 1990 (1997) 4 ICSID Reports 246, para. 115. Fedax NV v Venezuela, Award of 9 March 1998 (1998) 37 ILM 1391, para. 33. Antoine Goetz et al v Burundi, Award of 10 February 1999 (2000) 15 ICSID Rev.-FILJ 457, 517. Técnicas Medioambientales v Mexico, Award of 29 May 2003, para. 197. Autopista Concesionada de Venezuela v Venezuela, Award of 23 September 2003, paras 405, 408, 411, and 414. MTD v Chile, Award of 25 May 2004, para. 250. CSOB v Slovak Republic, Award of 29 December 2004, para. 352. S D Myers Inc v Canada, Second Partial Award of 21 October 2002 (2005) 8 ICSID Reports 124, para. 306. CME v Czech Republic, Final Award on Damages of 14 March 2003 (2006) 9 ICSID Reports 246, para. 641. Quasar de Valores v Russia, Award of 20 July 2012, para. 228. Case of the SS Wimbledon, PCIJ 1923 Ser A, No. 1, 32. Ibid. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 215. The tribunal held: 'But as, in general law, interest on damages is due on claims of money whose amount is known (abovementioned terms of the Libyan Civil Code) it cannot accrue for unliquidated damages before their judicial ascertainment and liquidation. Consequently, this Tribunal has to apply it only from the time of the final assessment of damages at the date of this Award.' Ibid. Lemire v Ukraine, Award of 28 March 2011, para. 363. LETCO v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 379; Pope & Talbot Inc v Canada, Award in Respect of Damages of 31 May 2002, para. 90; Marvin Feldman v Mexico, Award of 16 December 2002, para. 205; ADC v Hungary, Award of 2 October 2006, para. 520; Yukos v Russia, Award of 18 July 2014, para. 1686.

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501) J Crawford, above, n. 40, paras 210, 212. 502) See, e.g., Article 1110 NAFTA, Article 13 ECT, or Article 6 para. 3 of the US Model BIT 503) 504) 505)

506) 507) 508) 509) 510) 511) 512) 513) 514) 515) 516) 517) 518) 519) 520)

521) 522) 523)

524) 525) 526) 527) 528) 529) 530) 531) 532) 533) 534) 535) 536) 537)

538)

(2012) and Article 13 para. 3 of the Canadian Model BIT (2004). See above, Section A(1). Southern Pacific Properties v Egypt, Award of 20 May 1992 (1992) 3 ICSID Reports 189, para. 257. Compañía del Desarrollo de Santa Elena v Costa Rica, Award of 17 February 2000, para. 111. Article 5(1) of the Agreement between the Government of the United Kingdom and the Government of the USSR for the Promotion and Reciprocal Protection of Investments, London, 6 April 1989; see Rosinvest v Russia, Award of 22 September 2010, para. 43. Rosinvest v Russia, Award of 22 September 2010, para. 691. Ibid, para. 692. Middle East Cement v Egypt, Award of 12 April 2002, para. 175. Ibid, para. 178. Metalclad v Mexico, Award of 30 August 2000, para. 131. Wena Hotels v Egypt, Award of 8 December 2000, para. 130. LG&E v Argentina, Award of 25 July 2007, para. 115. Siag v Egypt, Award of 1 July 2009, para. 631(VI)(b). CMS v Argentina, Award of 12 May 2005, para. 471. Lemire v Ukraine, Award of 28 March 2011, para. 363. Yukos v Russia, Award of 18 July 2014, para. 1691. Emilio Agustín Maffezini v Spain, Award of 13 November 2000, para. 97. Ibid. Pine Valley Developments Ltd and Others v Ireland (just satisfaction), ECHR Ser A, No. 246-B, Judgment of 9 February 1993, paras 21–2. See, e.g., Akkus v Turkey, ECHR 1997-IV No 19263/92, para. 43; Aka v Turkey, ECHR 1998-VI No 19638/92, para. 61; Vasilescu v Romania, ECHR 1998-III No. 27053/95, para. 67; Brumarescu v Romania (just satisfaction) ECHR 2001-I No. 28342/95, para. 31; Beyeler v Italy (just satisfaction) ECHR No. 33202/96, 28 February 2002, para. 31; Iatridis v Greece (just satisfaction) ECHR 2000-XI No. 31107/96, para. 61; Motais de Narbonne v France, ECHR No. 48161/99, 2 July 2002, para. 29; Kartal Makina Sanayi Ve Ticaret Koll Sti v Turkey (No 2) ECHR No. 50011/99, 7 October 2004, para. 27; Ugur et al v Turkey, ECHR No. 49690/99, 7 October 2004, para. 27; Belvedere Alberghiera Srl v Italy (satisfaction equitable) ECHR No 31524/96, 30 October 2003, para. 52; Terazzi SRL v Italy (satisfaction equitable) ECHR No. 27265/95, 26 October 2004, para. 49; Papastavrou et al v Greece (just satisfaction) ECHR No. 46372/99, 18 November 2004, para. 26. See above, Section C(1)(a). See above, para. 6.270. The respondent's borrowing rate can be high, when the economic and political situation of the country is regarded as risky by the financial market. The 'default risk' is the risk that the state may eventually not honour the award. It can thus be appropriate for assessing post-award interest. See A Dolgoff and T Duarte-Silva, above, n. 3, 114. In favour of a higher rate for post-award interest are I Uchkunova and O Temnikov, above, n. 3, 668. More sceptical and cautious to avoid any punitive element are S Ripinsky and K Williams, above, n. 3, 389–90. Marvin Feldman v Mexico, Award of 16 December 2002, para. 206. Wena Hotels v Egypt, Award of 8 December 2000, para. 130. Southern Pacific Properties v Egypt, Award of 20 May 1992, 257. Compañía del Desarrollo de St Elena v Costa Rica, Award of 17 February 2000, para. 111. Metalclad v Mexico, Award of 30 August 2000, 216, para. 128. Middle East Cement v Egypt, Award of 12 April 2002, para. 175. LIAMCO v Libya, Award of 12 April 1977 (1982) 62 ILR 141, 215. Liberian Eastern Timber Corporation (LETCO) v Liberia, Award of 31 March 1986 (1994) 2 ICSID Reports 343, 379. Emilio Agustín Maffezini v Spain, Award of 13 November 2000, paras 96–7. National Grid v Argentina, Award of 3 November 2008, para. 296. Ibid, in fn. 122. Occidental v Ecuador, Award of 5 October 2012, para. 849. Gold Reserve v Venezuela, Award of 22 September 2014, para. 856. CMS v Argentina, Award of 12 May 2005, para. 471; similarly referring to six-months US Treasury Bills for post-award interest after a grace period, LG&E v Argentina, Award of 25 July 2007, para. 115. See, e.g., Iatridis v Greece (just satisfaction), ECHR 2000-XI No. 31107/96, para. 61: 'According to the information available to the Court, the statutory rate of interest applicable in Greece at the date of adoption of the present judgment is 6% per annum'. Similarly, Motais de Narbonne v France, ECHR No. 48161/99, 2 July 2002, para. 31: 'Selon les informations dont dispose la Cour, le taux d'intérêt légal applicable en France à la date de l'adoption du présent arrêt est de 4.26% l'an'.

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539) See the reasoning in Brumarescu v Romania (just satisfaction), ECHR 2001-I No.

540)

541)

542) 543) 544) 545) 546) 547) 548) 549) 550) 551)

28342/95, para. 31: 'As the sums awarded are denominated in United States dollars, the Court considers it appropriate to set the rate of default interest applicable at 6% per annum'. Similarly, Akkus v Turkey, ECHR 1997-IV No. 19263/92, para. 43: '[T]hese amounts, determined in US dollars, shall bear simple interest at an annual rate of 5% from the expiry of the above-mentioned three months until settlement'. See, e.g., Vasilescu v Romania, ECHR 1998-III No. 27053/95, para. 67: '[T]hat simple interest at an annual rate of 3.36% shall be payable on these sums from the expiry of the above-mentioned three months until settlement'. See, by contrast, Aka v Turkey, ECHR 1998-VI No. 19638/92, para. 61: '[T]hese amounts shall bear simple interest at an annual rate of 5.5% from the expiry of the above-mentioned three months until settlement'. See, e.g., Kliafas et al v Greece, ECHR No. 66810/01, para. 41; Kartal Makina Sanayi Ve Ticaret Koll Sti v Turkey (No 2), ECHR No. 50011/99, 7 October 2004, para. 27; Ugur et al v Turkey, ECHR No. 49690/99, 7 October 2004, para. 27; Belvedere Alberghiera Srl v Italy (satisfaction equitable), ECHR No. 31524/96, 30 October 2003, para. 52; Terazzi Srl v Italy (satisfaction equitable), ECHR No. 27265/95, 26 October 2004, para. 49; Papastavrou et al v Greece (just satisfaction), ECHR No. 46372/99, 18 November 2004, para. 26; Guiso-Gallisay v Italy, ECHR No. 58858/00, 22 December 2009, para. 114; Dedda and Fragassi v Italy, ECHR No. 19403/03, 12 April 2011, para. 24. See the website of the European Central Bank, . See above, para. 6.57. See the website of the European Central Bank, . See above, Section C(1)(a). Metalclad v Mexico, Award of 30 August 2000, para. 131. Uchkunova and Temnikov support the selection of shorter compounding intervals on post-award interest. See I Uchkunova and O Temnikov, above, n. 3, 668. Emilio Agustín Maffezini v Spain, Award of 13 November 2000, paras 96–7. CMS v Argentina, Award of 12 May 2005, para. 471. Occidental v Ecuador, Award of 5 October 2012, para. 849. Yukos v Russia, Award of 18 July 2014, paras 1689–92. Companía de Desarollo de St Elena v Costa Rica, Award of 17 February 2000, para. 111: 'In the event that full payment of the amount of this Award is not made …, simple interest on the said sum … shall be payable at the rate of six percent per annum …'.

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Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

'7. Conclusions', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 407 - 416

7. Conclusions 7.01 The increased awareness of the importance of the calculation of compensation and damages in international practice has led to a rich case law and accompanying academic discourse in recent years. The gap between lawyers and economic experts in the area of valuation seems to become smaller and so too is the gap between the legal and economic principles governing the calculation of damages and compensation. One notable development is the growing recognition of the distinction between 'compensation' for lawful expropriations and 'damages'—or 'reparation'—in cases of unlawful acts. While 'compensation' is often referred to as the 'treaty standard'—as contained in an applicable investment protection treaty—'reparation' is recognized as the standard of customary international law in accordance with the principles elaborated by the PCIJ in its seminal judgment in the case Factory at Chorzów and as codified by the ILC in its Articles on State Responsibility in 2001. Numerous tribunals have referred to this distinction, even when they did not find that it would make a practical difference for the calculation in the case at hand. 7.02 While compensation for lawful expropriation is not necessarily only a treaty standard —a customary international law standard of compensation for lawful expropriations might also be discernible—it is a primary obligation under international law. By contrast, the rules on state responsibility are secondary obligations under international law, which determine the consequences of an act of a state in violation of a primary obligation. They include the rules on the form of reparation, but also other important rules, including on circumstances precluding wrongfulness. 7.03 A third group of claims subject to valuation are claims for damages for breach of P 408 contract. These follow in principle the respective national contract law applicable.

However, when it comes to the valuation of damages claims for breaches of long-term investment contracts, the specific provisions of the contract and the generally accepted principle of 'full reparation' of the damage incurred by the injured party have turned out to be more relevant. A limitation or special prerequisite for an award of lost profits under national law is possible in principle, but has not played a practical role in international investment practice. The real valuation problems do not stem from the law applicable, but from factual and practical questions, such as causation, evidence, and the impact of economic conditions in a country over a long period of time. 7.04 The following provides a summary of the most important principles for the valuation of calculation of compensation and damages in investment disputes and of their reflection in international investment arbitration practice.

A. Interrelation between the Claim's Legal Basis and the Valuation Basis 7.05 Under generally accepted international valuation standards, a valuation can only be made on a particular 'basis of value', which is a statement on the fundamental measurement assumptions of a valuation. In arbitral practice this is often referred to as the 'valuation standard'. At the beginning of any valuation it is necessary to define for which purpose and for whom a valuation is being carried out. In the context of international investment disputes the basis of value is determined by the legal rules applicable. As mentioned above, this may be an international investment treaty, international customary law, or a contract. 7.06 The standard of compensation for expropriation is often defined in an investment treaty applicable to the dispute. It has been shown that the respective provisions frequently choose the fair market value as the standard of valuation. (1) This standard reflects the price a hypothetical willing buyer would pay a hypothetical willing seller when both have reasonable knowledge of the relevant facts and neither is under an obligation to buy or sell. This standard corresponds to the 'market value' basis under international valuation standards describing an 'objective–abstract' valuation approach, where the different perceptions of the value by the market participants are balanced. Business valuations are commonly sought and performed under the market value basis. (2) 7.07 However, the fair market value is not the only valuation standard or basis of value, P 409 whether in economic life or under the law applicable in international investment

disputes. It has been shown that the violation of a legal obligation under international law entails the obligation to make 'reparation'. (3) The payment of 'damages' is necessary in cases of breach of contract. (4) The purpose of reparation or damages is to provide 'full reparation'. This means that the injured person shall be put into the financial position he or she would have been in, if that illegal act had not been committed. This principle has been formulated in the context of state responsibility by the PCIJ in Factory at Chorzów and confirmed by the ILC in Articles 31 and 36 on the Responsibility of States for Internationally Wrongful Acts. (5) For contractual obligations, the principle of full reparation is regarded as a general principle of contract law, which is not only contained in national contract laws, but also included in international codifications of contract law, such as the UN Convention on Contracts for the International Sale of Goods (CISG), the UNIDROIT Principles on International Commercial Contracts, and the Principles of European Contract Law (PECL). 7.08 The fact that ILC Articles 31 and 36 on State Responsibility use the term 'compensation' as the form of monetary reparation in the English version of the text has contributed to the persisting lack of awareness of the distinction between 'compensation' as the primary obligation of the international law on expropriations and the secondary obligation to provide 'full reparation' after an unlawful act of a state has been committed. In other languages, such as German, a different term is used which makes this distinction clearer. The reason for the lack of distinction might be that in English the two terms, 'compensation' and 'damages', are often used interchangeably, while in other languages or legal systems the distinction between the different concepts for monetary redress is more precise. This does not, however, change the fact that the legal concept and rules of primary obligations of international law are different from the purposes of secondary rules of international law, even if the words used are identical. 7.09 The secondary obligation to provide 'full reparation' according to Article 31 of the ILC Articles, as enunciated by the PCIJ in Factory at Chorzów, is to 'wipe out all the consequences of the illegal act' and re-establish as far as possible the situation that would 'in all probability, have existed, if that act had not been committed'. (6) This 'Chorzów-standard' requires a comparison of the actual financial situation of the victim with the financial situation he or she most probably would be in without that act. This comparison of the two situations can be termed the 'differential method' after Mommsen who developed the concept in Germany in the nineteenth century for measuring damages

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in civil law litigations. In valuation practice, 'but for' methods are used for the calculation P 410 of damages by a comparison of sales projections.

7.10 The differential method and 'but for' methods help to assess the damage actually incurred by the victim. They do not refer to a 'hypothetical third person' but concentrate on the concrete financial loss suffered by a person injured. It can therefore be regarded as a 'subjective–concrete' valuation approach, as opposed to the 'objective–abstract' valuation approach in cases of lawful expropriations. Such subjective-concrete valuations are not uncommon in business life. They are reflected, for example, in the 'investment value' or 'worth' of an asset or, more generally, as a valuation base 'other than market value'. 7.11 One of the differences between the fair market value standard of compensation upon expropriation and the Chorzów-standard is the valuation date. (7) While in the former case the valuation date is the date of the expropriation, in the latter case the valuation date should be the date of the award. This corresponds best to 'restitution', which is the primary form of reparation under international law. Furthermore, it is the best way the comparison of the actual and the hypothetical financial situation of the injured person can be made in a meaningful manner. Only in cases of unlawful expropriations does the fair market value of the asset at the expropriation date represent the lower limit of the award, because the primary obligation prescribes this limit. With regard to violations of other treaty provisions, such as 'fair and equitable treatment', 'full protection and security', or 'national treatment', or customary law violations, no such lower limit exists. In these cases, the calculation of damages must only be based on the comparison of the two financial situations. The same is true for contract claims where the 'fair market value' is not helpful, because the contractual rights and obligations are individualized as between the parties and not measurable by reference to a hypothetical willing buyer. 7.12 The subjective–concrete approach allows also for considerations of contributory negligence and mitigation of damage. They imply the existence of corresponding duties of the parties, namely the obligation not to be negligent and the obligation to engage in keeping the damage as limited as possible. Furthermore, it provides the basis for compensation of consequential damages and for set-off of benefits. 7.13 The analysis of international practice has shown, however, that the valuations performed are not always in accordance with the principles mentioned above. The objective standard, for example, has sometimes been used in cases where the subjective standard would have been pertinent. This was usually the case when the claimants themselves so requested. Furthermore, the objective standard could be a reflection of the argumentum a majore ad minus, thus regarding the objective standard as the 'minimum' to be awarded and not enquiring about additional subjective damage, if P 411 neither the claimant nor the circumstances so suggested.

B. The Choice of a Valuation Method 7.14 After the establishment of a valuation standard or 'basis of value' it is necessary to choose a valuation approach, which leads to one or more valuation methods. It has been shown that under international valuation standards three approaches are most commonly sought: the market approach, the income approach, and the asset- or costbased approach. All of these valuation methods can be used both for the objective fair market value standard and for the subjective Chorzów standard. In international practice, all three approaches have been regularly applied, often in combination with each other, and for controlling the results. 7.15 The market approach, which provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available, appears in international practice in various forms. The stock exchange value of publicly traded companies, though a strong indicator of 'market value', has been regarded with a certain scepticism, not only because of the volatility of the stock market but also for its disregard of control premiums which a willing buyer would be expected to pay for the entire company. For companies not publicly traded the search for a comparable public company has often remained unsuccessful in international investment disputes. By contrast, prior sales prices of the company or shares in it have been regarded as more reliable indicators of the market value. However, several tribunals did not find the prices paid for only a small number of shares to be representative of the value of the company as a whole. Multiples have increasingly been used by claimants and their experts as a relatively easily understandable way of valuation. Tribunals have become more familiar with this technique and accept it more frequently, but sometimes challenge the choice of the multiples proposed. 7.16 The application of the income approach, which provides an indication of value by converting future profits, income, or cash flows to a current value, has undergone an interesting development. While it has long been regarded as speculative and contingent on too many variables, tribunals in recent awards have increasingly accepted the valuations submitted by claimants based on the income approach. This trend, however, is not unanimous. A few tribunals have still rejected the income valuation approach, mainly because of the lack of a sufficient performance record and/or probability of economic success in the future. (8) Generally, however, it seems that tribunals increasingly recognize that the income approach, even though it depends on forecasts into the future, is the most widely used valuation approach in international business and the basis of numerous investment decisions. It should, therefore, also be reflected in the P 412 disputes about those investments. Several tribunals have, consequently, engaged in the discussion of the different assumptions of the discounted cash flow (DCF) or similar income-based valuation methods. They have done so either by employing their own valuation experts or, if both parties have already done so, by cross-examining and checking the two opposing expert reports for their similarities and differences. In doing so, they have increasingly arrived at well-reasoned calculations of compensation and damages. This does not exclude that, in some cases, certain assumptions or adjustments have not been entirely comprehensible, for example, as regards the issue of inflation. (9) 7.17 The asset- or cost-based approach, which is based on the principle that the value of an asset is best presented by its cost or the cost of obtaining an asset of equal utility, represents the valuation method which is still appreciated by many tribunals because of its allegedly non-speculative nature. Even though it is generally recognized that the costs actually spent or figures appearing on balance sheets do not necessarily have anything to do with the 'value' of an asset, they are still attractive as a measure of calculation of compensation and damages. The lack of speculative elements and complex mathematical and economic considerations seems to outweigh the conceptual flaws of this approach. However, the repayment of 'sunk investment' might also be to the advantage of the injured party because the amounts actually invested do not necessarily reflect the actual value of the investment. If the investor has spent more than the investment was eventually worth, he might not be dissatisfied, if he gets back the investments and expenses undertaken.

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7.18 In addition to the above-mentioned three generally accepted valuation approaches, international tribunals have also applied 'mixed approaches'. Fairly widespread still is the combination of the asset-based valuation with the income valuation approach. This practice is, however, not in accordance with generally accepted valuation principles according to which either the income or the asset- or cost-based approach should be applied. By contrast, a combination of several valuation methods by weighing them and adding them together has been developed as an innovative and acceptable way of dealing with uncertainty. Rather unreliable practices are valuations based on 'insurance value' or 'tax value'. These values reflect the valuation undertaken for specific purposes in specific contexts. They could only in exceptional cases be useful for controlling the valuation based on other methods. 7.19 Incidental expenses and other consequential damages should be taken into consideration, if the valuation standard is 'full reparation'. They include financial consequences as a result of the unlawful act, including costs for reparation, maintenance, or mitigation of damage. Expenses incurred in the pursuance of the claim could also be regarded as consequential damage. An analysis of international practice has shown that P 413 these expenses are sometimes regarded as an item of damages and sometimes part of the 'costs' of the arbitration and, therefore, included in the costs decision. The latter alternative has the disadvantage that tribunals are often reluctant to shift the costs and prefer to rule that each party should bear its own costs. In order to arrive at 'full reparation', however, those costs and expenses should be not be disregarded as part of the harm caused by the unlawful act and be awarded to the successful party accordingly. Some recent tribunals have already reflected and implemented these considerations. 7.20 Finally, moral damages are, as a matter of principle, available in international investment disputes. However, as the analysis of recent arbitral practice has shown, the threshold for such damages is relatively high. Tribunals consistently require 'exceptional circumstances' which have to be assessed in the context of the overall economic, political, and legal situation of the host state. Conversely, the awards for moral damages may be rather low. Even if reference is made to the case law of human rights courts, the amounts awarded serve to provide a symbolic more than economic relief. In order to reflect particularly egregious behaviour by a respondent state which caused nonmaterial damage to the investor, other remedies could be further explored, such as financially assessable loss of reputation and creditworthiness, or appropriate awards on costs.

C. Interest 7.21 An award of interest is a necessary element of any award on compensation and damages in order to reflect the financial loss incurred through the passage of time. It is the task of tribunals to determine the rate of interest, the period of interest, and to decide whether interest should be compounded. In these decisions the particular function of interest should be kept in mind. It is slightly different for pre-award and for post-award interest. 7.22 Interest in cases of lawful expropriations has the function of ensuring 'prompt' payment of compensation. If prompt payment is not made, the award of interest shall balance the delay. Interest also serves to ensure 'full reparation', if damage was inflicted by a violation of an international or of a contractual obligation. Furthermore, it has the function of preventing unjust enrichment of the debtor. 7.23 In order to fulfil these functions, interest should reflect economic realities. Legal interest with statutory rates as provided for in many national laws can hardly achieve this goal. (10) Rather it is necessary to identify what kind of interest, based on economic P 414 realities, should be awarded. 7.24 There are several approaches to choosing an appropriate interest rate: from the perspective of the successful claimant, interest could reflect an investment alternative available. On the other hand, a borrowing rate would be appropriate under the premise that claimants have to borrow money in the meantime. Also the borrowing rate of the respondent state seems to be the suitable, as it actually receives a 'loan' from the successful claimant during the period of non-payment of compensation or damages. The withholding of money effectively represents a 'coerced loan'. 7.25 International practice has so far not provided clear answers as to which approach should be applied on awards of compensation and damages. As regards investment alternatives for the claimant, interest expected from savings vehicles, such as US sixmonth certificates of deposit or US Treasury Bills, were frequently used as a reference. Their rate is, however, rather low and it seems illogical that companies would invest money in such low-interest securities. Some propose that a savings rate be used, namely the risk-free interest rate in securities, increased by a market capitalization rate. 7.26 As companies frequently finance their operations through debt rather than investing in securities, it is probably more appropriate to use the borrowing rate of the claimant. If there is no evidence of a loan actually taken out, its normal borrowing rate could be taken as a reference. In Anglo-American countries the so-called 'prime' or 'base' rate represents an important reference rate. It is the rate that the banks offer to their most creditworthy customers. Most enterprises, however, cannot borrow at this rate, so that an appropriate surcharge needs to be added. The same is true for interest based on interbank rates, such as the LIBOR and EURIBOR. These rates indicate at which rate banks can borrow from each other on the interbank market. Individuals and companies usually cannot borrow under the same conditions. Thus, a premium of several percentage points seems appropriate. Tribunals have increasingly used this approach and applied LIBOR and EURIBOR plus several (usually one, two, or four) percentage points. 7.27 In order to prevent unjust enrichment of the host state, the lower limit of the interest rate should be the respondent state's rate for government bonds. However, these rates may be rather high for countries in economic and political difficulties. Tribunals have therefore often rejected them. Nevertheless, it should be kept in mind that interest, and in particular post-award interest, has the function of providing an incentive for the state to pay the debt as quickly as possible. 7.28 The period of interest plays also an important role for the award on interest. In cases of expropriation, interest starts accruing at the expropriation date. Under the law of state responsibility interest shall accrue from the date, when the principal should have been paid. This date is not entirely clear, however, and raises a number of questions. It seems at least to be clear that an explicit reminder is not necessary. In cases of breach of P 415 contract the beginning of the interest period depends on various factors, such as the agreement of the parties, the law applicable, commercial practice, and the circumstances of the case. In general, the rate and the period of interest should be selected in such a way that 'full reparation' of the damage incurred is achieved. 7.29 Finally, the issue of compound interest has to be resolved. After a long period of rejection of compound interest in international practice and commentaries, this attitude

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changed in 2000. Various tribunals in that year awarded compound interest, mostly on the grounds that, in economic and business reality, both lending and borrowing interest are usually compounded. Nevertheless, some tribunals rejected the award of compound interest, maintaining that the principal was sufficient to make the claimant whole. This was particularly the case when the principal amount was already very high. Nevertheless, the rejection of compounding overlooks the fact that interest also has the function of preventing unjust enrichment and providing an incentive to pay the debt as quickly as possible. This is particularly true for post-award interest. 7.30 The analysis of legal and economic principles and their application in international practice aims at providing some guidance for the valuation of compensation and damages in international investment disputes. The discussion of quantum should not be reserved to the final stage of the proceedings. Many questions require to be clarified at an earlier stage. The necessary information and data should be collected in good time, otherwise this might take additional time and prolong the arbitration process. As early as the beginning of the merits phase, after jurisdiction has been established, a detailed quantification should be prepared. Even if the arbitration is bifurcated and the issue of quantum is postponed, important issues, such as the standard of valuation and the valuation date, need to be decided early. 7.31 In preparing the quantum phases well, the parties can be of considerable help to the tribunal in achieving a well-reasoned and comprehensible award. This is beneficial for its implementation and thus serves the overall goal of the arbitration process, namely to P 415 ensure that the rule of law is observed.

References 1) 2) 3) 4) 5) 6) 7) 8) 9) 10)

See above, Chapter 3, Section A(1)(b). See above, Chapter 4, Section B(1). See above, Chapter 3, Section B(1). See above, Chapter 3, Section B(2). See above, Chapter 2, Section B(2)(a). See above, Chapter 2, Section B(2)(a), para. 2.73. See above, Chapter 3, Section C. See above, Chapter 5, Section B(6). See above, Chapter 5, Section B(5). See above, Chapter 6, Section B(1)(a).

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Appendix 1. Table of ICSID Cases since 2008

Document information

Case

Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

'Appendix 1. Table of ICSID Cases since 2008', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 417 - 484

Investment affected Violations found & measures at issue

Desert Line Projects LLC Desert Line Projects v The Republic of Yemen LLC, a construction company Award of 6 February established under 2008 the laws of Oman, began construction ICSID Case No. of asphalt roads in ARB/05/17 Yemen in 1997; Applicable law: between 1999 and 2002, it started Oman–Yemen BIT several road (1998/2000) construction projects; after nonpayment by respondent, the parties agreed to an arbitration in Yemen. Claimant was awarded almost 20 billion Yemeni Rials, which respondent failed to pay. Respondent P 419 coerced claimant through physical duress into signing a Settlement Agreement for a much lower sum.

Economic loss claimed

Conclusion of Claimant: Settlement (i) Amounts due Agreement under the contravened FET contracts and/or standard under Art. 3 the Yemeni BIT (para. 194) Arbitral Award (ii) Late release of bank guarantees (iii) Illegal blocking of equipment (iv) Inability to exercise a buyback option with respect to a property in Oman that claimant was forced to sell in relation to the contract (v) Loss of business opportunities (vi) Moral damages Moral damages: loss of reputation: 40,000,000 Omani Rial (OR) (about US$ 103,896,120)

Standard of Amount decided & compensation/reparation valuation method Full reparation according Amount awarded: to Art. 31 ILC Articles claimed by claimant (para. 3,585,446,554 Yemeni Rials at the exchange rate of 9 227) August 2004 Yemeni Arbitral Award shall be implemented in = amount of Yemeni Arbitral Award of its entirety, and be fully respected as definitively 19,968,478,429 Yemeni binding on both parties Rials minus payments already made and (para. 205) reductions for Measure of damages uncompleted road works includes the amounts (paras 247–9) that would have been All other claims paid had the Yemeni dismissed due to lack of Arbitral Award been causation respected (para. 246) Moral damage: Moral damages: generally accepted in most legal systems (para. 289)

US$ 1,000,000

including for loss of reputation; in particular the physical duress Non-material damages may be very real, and the exerted on the executives of the mere fact that they are claimant was malicious difficult to measure makes them none the less and therefore real, referring to Lusitania constitutive of faultbased liability; prejudice and ILC Commentary was substantial (para. (para. 289) 290) Claimant's claim 'exaggerated' (para. 290)

Victor Pey Casado et Fondation 'Presidente Allende' v Republic of Chile

P 420

The dispute concerns the consequences of a confiscation by the government of Award of 8 May 2008 Chile, in 1973 in the wake of the military Decision on the coup, of the assets application for of two newspaper annulment of the Republic of Chile of 18 publishing companies, December 2012 Consorcio Award of 13 September Publicitario y 2016 (Resubmission) Periodístico S.A. ICSID Case No. ARB/98/2 (CPP S.A.) and Empresa (Award in French and Periodística Clarín Ltda (EPC Ltda), Spanish) which were owned by the two claimants, Mr Casado, a Spanish national, and Fondation 'Presidente Allende', a Spanish foundation. While the original confiscation was not within the jurisdiction of the tribunal ratione temporis, subsequent acts by the Chilean Government allegedly deprived the claimants of any compensation for their former property.

2008 Award: Violation of FET of Art. 4 BIT by denial of justice (paralyzing or rejecting restitution claims, most importantly concerning a confiscated printing press) and by discrimination (paying compensation not to the claimants, but— based on a restitution and compensation Law of 1998 and Decision No. 43 of 28 April 2000—to other persons, who had not been owners of the confiscated assets) (para. 674).

2008 Award Claimants:

Applicable Law:

2012 Annulment Decision: Award annulled in respect of its decision on damages for serious departure from a fundamental rule of procedure (right to be heard) and failure to state reasons (method of calculation is contradictory).

Spain–Chile BIT (1991/1994)

P 421

2016 Award: Jurisdiction and liability are res judicata, tribunal only needs to decide on damages.

2008 Award: Tribunal rejects standard of compensation for expropriation under Art. 5 BIT, because the expropriation took place in 1973, before the entry into force of the BIT (para. 687).

2008 Award: Amount awarded:

2016 Award:

2016 Award:

2016 Award:

Claimants:

Art. 31 ILC Articles, Chorzów standard, necessary to isolate which conduct was wrongful act and to establish causation (para. 204)

No damages, because claimants have not met the burden of proof (para. 234)

US$ 52,842,081 damnum emergens

US$ 10,132,690.18

Which corresponds to the amount of 343.578,61 UF (inflation-indexed lucrum cessans (para. accounting unit) paid by 683) the government of Chile In accordance with to other persons The tribunal notes the general principles of lack of evidence produced pursuant to the international law and compensation Law of by the claimants, due to Chilean law, based on the difficulties to obtain 1995, based on Decision expropriation under Art. No. 43 of 28 April 2002 proof of their damages 5 BIT, which, however, (paras 689–90); finds that and assigned on 11 April due to temporal reasons the amount paid to other 2002 (paras 694, 699). was not within the persons places the Ad moral damages: jurisdiction of the claimants in the situation tribunal (para. 682) in which they would be, if 'the issuance of the present award, in they had been treated 'to be augmented, in particular, by reparation justly and equitably and particular because of its without denial of justice recognition of the rights for moral damages of the claimants and of (para. 702). inflicted to M. Pey the denial of justice of Casado' (para. 683) which they were victims, constitutes in itself substantial and sufficient moral satisfaction' (para. 704) US$ 344,505,593

US$ 338,3 mio equal to the compensation due for the shares of CPP and EPC Ltda on the basis of FMV at the time of the First Award, 8 May 2008 (paras 89, 109). US$ 94.1 mio in the alternative, based on unjust enrichment (para. 111). Moral damages: 'given the character assassination of Mr. Pey Casado' in the amount of US$ 10 mio, and US$ 500.000 for the Foundation Presidente Allende (paras 114–15).

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Three steps are necessary for the assessment of reparation due under international law: (1) establishment of the breach, (2) ascertainment of the injury caused by the breach, and (3) determination of the appropriate quantum (para. 217)

Tribunal could not permit original, timebarred, expropriation claims to be reintroduced 'by the back door in the guise of a FET breach many years later' (para. 244). Moral damages: burden of proof also necessary and not met (para. 243). Had the tribunal found the claim to material damage established, it would have been prepared to consider the subsidiary and alternative that moral injury was a factor to be taken into account (para. 243).

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v Republic of Kazakhstan

Rumeli and Telsim, 1) telecommunication companies, incorporated in Turkey, had stakes in KaR-Tel, a Kazakhstan limited liability partnership for the provision of mobile 2) telecommunication services.

Claimants:

Expropriation:

Amount awarded:

US$ 227 million

BIT provides for 'real value', FIL for 'FMV'; tribunal holds that in the context of the FIL, 'FMV' must be taken to have a non-technical meaning and to convey a measure of value which can be applied whether or not a FMV in a technical sense can be ascertained in the particular case. No particular distinction can be drawn between 'real vale' and 'FMV' (para. 786).

US$ 125 million

Award of 29 July 2008 Decision on the application for annulment of 25 March 2010 ICSID Case No. ARB/05/16 Applicable law: Kazakhstan–Turkey BIT (1992/1995), Kazakh Law

Once Kar-Tel's success was assured (including by a 15year licence to operate a mobile phone network), several steps were taken which resulted in the expulsion of claimants from the partnership.

P 422

based on a DCF valuation, compares well with the US$ 350 million paid for 100% (para. 799)

Tribunal refers to WB Guidelines, notes that DCF valuation would likely have informed a discussion between a Based on their multiwilling buyer and a million-dollar willing seller in October investment, contribution 2003 (para. 810) so that of know-how and the US$ 228 million can training, and the fact be used as a starting that, a year after the point; yet the price paid valuation of claimants' by an actual buyer one shares by the courts, year later was these were offered for 20 'substantially lower' million US$ and a Valuation date: (corresponding to US$ company purchased 210 million); without KaR-Tel for more than In cases of creeping further explanation, the 350 million US$ (para. expropriation, it may be a tribunal concluded that 717). matter of judgment rather an award of US$ 125 than of direct and clear million would evidence; depends on adequately compensate whether any initial the claimants for the expropriatory act 'was expropriation of their known to be irrevocable' shares and will give them (para. 788). full reparation for the injury caused by the internationally wrongful acts (para. 814).

Measures:

Respondent:

FET:

1)

No compensation should be awarded, because claimants did not make investments in the amount alleged, for reasons of public policy should not benefit from their fraud, and KaR-Tel was insolvent (para. 716).

ILC-Articles and Chorzów principle (paras 789ff)

2)

3)

P 423

Violation of FET (via MFN in BIT) (standard discussed in view of CIL, BITs and arbitral practice, paras 581ff) Expropriation ('creeping' expropriation) in violation of Art. III BIT and Kazakh FIL by the decision of the Investment Committee which was then collusively and improperly communicated and which proceeded via a series of court decisions, culminating in the final decision of the Presidium of the Supreme Court (para. 708); the valuation of the shares was manifestly and grossly inadequate, so that the expropriation was unlawful (para. 706).

Termination of Investment Contract by the Kazakh Investment Committee Compulsory transfer of claimants' 60% stake in KaR-Tel to the benefit of its remaining shareholders, i.e. the local partners Valuation of claimants' 60% share at less than US$ 3,000, whereas, less than a year later KaR-Tel was sold for US$ 350 million

2010 Annulment Decision: Among other reasons, the award was challenged because the calculation of damages allegedly was erroneous, illogical, inconsistent, and insufficient (failure to give reasons). Application for annulment was dismissed in its entirety.

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2010 Annulment Decision: Committee notes that figure of US$ 125 million is stated in the award without an explanation Loss is 'in fact the of the mathematical expropriation of their calculation undertaken shares' so that 'the by the tribunal; however, correct approach is to award such compensation the position as to damages was handled as will give back to with considerable care Claimants the value to (para. 178 ff). them of their shares at the time when the → Estimation of damages expropriation took place' is not an exact science (para. 793). and that the tribunal has a measure of discretion. → Tribunal applied the DCF analysis but made clear that it was only an approximation. → It was right in balancing a number of countervailing considerations.

Case

Investment affected Violations found & measures at issue

Duke Energy Electroquil Partners & Electroquil S.A. v Republic of Ecuador

Duke Energy, incorporated in Delaware, invested in Electroquil, a power generation Award of 18 August 2008 company incorporated in ICSID Case No. Ecuador. The ARB/04/19 dispute arose out of Applicable law: several Power Purchase Ecuador–USA BIT Agreements (PPAs) (1993/1997), and related Ecuadorian Law, agreements entered International Law into between the parties for electric power generation. As of mid-1996, Ecuador started levying a series of fines against Electroquil. In addition, disputes arose with regard to the establishment of the Payment Trusts provided for in the agreements, and with regard to the exemption from taxes and customs duty. Furthermore, a dispute arose in the P 424 context of a local arbitration which claimant initiated in 2001, but respondent declined to participate.

1)

2)

3) 4)

Economic loss claimed

Contractual Claimants: violations of 1) US$ 24,720,904 PPAs (para. damages as a 243) by not result of complying with Ecuador's the payment unlawful conduct, mechanism including provided compound under the PPAs interest until nor with the 2005; Payment Trust Agreements • in the Unjustified alternative imposition of US$ some of the 19,263,434 fines impairment submitted by to the claimants value of (para. 292) claimants' investment Umbrella in clause of BIT Electroquil, (paras 323–5) including FET standard compound in BIT with interest respect to until 2005 Payment 2) US$ 358,954 Trusts (para. 364) costs incurred in local arbitration

Standard of Amount decided & compensation/reparation valuation method With regard to violations of power purchase agreements and unjustified fines (violations 1, 2): Ecuadorian Civil Code: 'compensation for damages includes damages and loss of profits, whether they arise from not having performed the obligation, or from faulty performance, or from delay in performance' (paras 442–3) damages that could have been foreseen at the time of conclusion of the contract; when obligation is to pay an amount of money, no proof of harm, is presumed by the passage of time and reflected in the rate of interest (para. 444)

Amount awarded:

With regard to violations of BIT standards (violations 3, 4): CIL: ILC Articles Art. 31 (1), Chorzów standard (paras 467–8)

Tribunal reached this result by taking the principal amount requested by claimants based on fines and customs duties (US$ 8,300,727) and reduced it based on its findings on liability/having rejected several claims put forward to US$ 5,578,566 (para. 462).

Loss sustained consists in the US$ equivalent of the 'pesified' amount of the LETEs in November– December 2004, as indicated by claimant in an amount of US$ 2.8 million, plus interest thereunder (para. 265).

Amount awarded:

US$ 5,578,566 Compensation consisting of damnum emergens and lucrum cessans (para. 444). 'Commercial losses' (para. 446): Interest for late payments and sums of unjustified fines plus interest (paras 448–9; para. 460) This also encompasses full reparation under the Chorzów standard for violation of the Umbrella clause and avoids risk of double recovery (para. 476).

Broken down as: US$ 7,292,114 nominal unjustified fines +

Rejected interest for most of the late payments under the contracts due to Art. 1161 Ecuadorian Civil Code (para. 280)

US$ 1,008,614 unjustified customs duties + Interest:

US$ 7,233,936 Rejected denial of justice with regard to on fines + alleged unjustified US$ 105,712 customs duties (para. 403) on customs duties + US$ 8,421,050 for late payments

Continental Casualty Company v Argentine Republic

Continental Casualty, incorporated in Illinois, invested in Award of 5 September an insurance 2008 company ICSID Case No. ARB/03/9 incorporated in Argentina, CAN Applicable law: Asegurado de Riesgos del Trabajo, Argentina–USA BIT S.A. It claimed that (1991/1994), legislative measures International Law by Argentina directly and indirectly affected its investment through restructuring, 'pesification', and freezing of bank accounts. P 425

FET standard in BIT; only with regard to treasury bills (LETEs) (para. 304)

Claimant:

Argentina had offered a swap against newly issued securities, namely GDP-linked derivative investments (para. 220).

FET violation:

Expopriation: US$ 46,412,000 US$ 32,653,000 Contracts Observance:

Claimant had not specified whether interest should be compounded; This was regarded as 'As a general principle, US$ 14,631,000 a violation of FET, almost invariably, justice because of late date 1) From devaluation requires that the of the offer of funds due to wrongdoer who has (December 2004) inability of deliberately failed to pay when financial withdrawal (para. compensation should pay conditions were 237). interest for the period evolving towards during it has withheld 2) Loss through normality, the that compensation 'pesification' and reduced percentage unlawfully. Moreover, a restructuring of of the original value wrongdoer …may be Governmental of the debt, and the Loans and LETEs unjustly enriched…' (para. condition that any 308) as well as other rights would be application of waived (para. 221). capital gain tax For all other claims, (para. 247; para. the tribunal accepted 267). applicability of Art. XI BIT (emergency clause) and Art. 25 ILC Articles (para. 236). US$ 20,334,000 Transfers:

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US$ 2.8 million As the equivalent to the 'pesified' amount of LETEs, as indicated by claimant in an amount of US$ 2.8 million, plus interest thereunder (para. 265) Corresponding to claimant's 'capital loss' (para. 305) Rejected: amount due to 'pesification' as well as for default and revocation of contractual rights (para. 304)

Case

Investment affected Violations found & measures at issue

Bernardus Henricus Claimants owned Funnekotter and others large commercial v Republic of Zimbabwe farms in Zimbabwe; between 2001 and Award of 22 April 2009 2003, they were ICSID Case No. ARB/05/6 deprived of their properties through Applicable law: invasion by settlers and war veterans Netherlands– and/or through Zimbabwe BIT various orders (1996/1998), taken by the International Law government under the 1992 Land Acquisition Act; finally an amendment of the Constitution in 2005 formalized the P 426 expropriation of the farms; the owners received no compensation; in addition, the Land Occupiers Act of 2001 regarded certain settlers and war veterans as 'protected occupiers'.

Violation of Art. 6 BIT (expropriation) by not paying just compensation for dispossession. The tribunal observes that the conditions enumerated in Art. 6 are cumulative, i.e. 'if any of those conditions is violated, there is a breach of Article 6'; 'it will not be necessary for it to consider whether … the other conditions provided for in that Article … have also been breached' (para. 98).

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Claimants:

Art. 6(c) BIT:

US$ 10,690,000

'genuine value of the investments affected … (valuation of each farm shall include, but not as production unit at its exclusively, the net asset market value in 2001) value thereof as certified by an independent firm of Consisting of auditors' 1) Immovable 'In certain cases, the net property asset value, i.e., the value 2) Movable assets as recorded in the accounts, will not In addition moral correspond to the damages: US$ 40,000, later €100,000 Euros per genuine value. If the net asset value is lower than person the genuine value, compensation will be higher than the net asset value' (para. 122)

Amount awarded: US$ 8,220,000 Valuation method: 'value of the investment, independently of the origin and past success of their investment' (para. 124) 'Genuine value must be determined on the basis of the market value of the whole farm at the time of expropriation' (para. 130)

→ No need to set aside Art. 6(c) under the MFN clause → Lawful/unlawful distinction irrelevant as 'it is not alleged that there was some increase of the value … between taking and the date of the present award' (para. 112)

Respondent:

Market value of

US$ 872,947

1)

(value of the arable land plus permanent improvements made to it, at replacement costs applying to these costs a depreciation rate)

2)

Immovable property Movable assets

Date: 'Date of dispossession' → Date of issuance of expropriation orders (even though claimants had previously been forced to abandon their farms) (para. 115); in some cases date of entry into force of the Land Occupiers Act of 2001 (para. 119) 'Moral' damages: €20,000 per person for the disturbances resulting from the taking and the necessity for them to start a new life often in another country (para. 138)

Saipem S.p.A. v The People's Republic of Bangladesh

A pipeline project, based on a contract between Saipem and Petrobangla (a Award of 30 June 2009 state entity), ICSID Case No. ARB/05/7 sponsored by the WB and largely Applicable law: financed by IDA, was Bangladesh–Italy BIT significantly delayed. ICC P 427 (1990/1994), arbitration was Bangladeshi Law, instituted, but International Law heavily attacked by Petrobangla before national courts. The ICC award was rendered on 9 May 2003. Upon an application by Pretrobangla, the Supreme Court of Bangladesh held that the award was 'a nullity' and 'nonexistent' so that it could neither be set aside nor be enforced (para. 50).

P 428

The actions of the Bangladeshi courts did not constitute a direct expropriation, but rather a 'measure having similar effects' within the meaning of Art. 5(2) BIT. Such actions resulted in substantially depriving Saipem of the benefit of the ICC Award. The decision of the Bangladeshi Supreme Court that the ICC Award was 'a nullity' was tantamount to a taking of the residual contractual rights arising from the investments as crystallized in the ICC Award. It amounted to an expropriation within the meaning of Art. 5 BIT (para. 129).

Claimants: 1)

2)

3)

Amounts awarded in ICC award: US$ 5,883,770.80 plus 3.375% interest, US$ 265,000.0 + €110,995.92 (costs) Costs, legal fees and related expenses incurred in local court proceedings to defend itself Interest at sixmonths LIBOR from various dates (para. 85)

Respondent: At the time of the alleged expropriatory act (revocation of the authority of the arbitrators), there was no ICC Award → Compensation should be made on basis of what sums remain due under the pipeline contract (para. 198).

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The compensation standard of Art. 5 BIT is not applicable because it sets out the measure of compensation for lawful expropriation which this one is not.

Amount awarded: US$ 5,883,770.80 + US$ 265,000.00 + €110,995.92 = amount of ICC Award (para. 204)

Reasoning: → Tribunal applies the principles of CIL as set out Expropriation of the in Chorzów Factory (para. right to arbitrate the dispute in Bangladesh 201) under the ICC Arbitration → Amount awarded in ICC Rules corresponds to the Award constitutes the value of the award best evaluation of the rendered without the compensation due under undue intervention of the Chorzów Factory the courts of principle (para. 202). Bangladesh. Date: Date of original award plus interest (para. 216). Denied: Costs, legal and related expenses incurred by Saipem in local court proceedings to defend itself, because they 'are not part of Saipem's initial investment' and have not 'been the object of an expropriation' (para. 205)

Case

Investment affected Violations found & measures at issue

Waguih Elie George Siag Claimants invested 1) & Clorinda Vecchi v The in a hotel/resort Arab Republic of Egypt development project; a parcel of Award of 1 July 2009 land was allocated to them in 1989; in 2) ICSID Case No. 1990 construction ARB/05/15 work begun. Applicable law: Claimants allege Italy–Egypt BIT that through a (1989/1994) series of acts and omissions 3) commencing in 1995, Egypt expropriated their investment. The courts of Egypt on several occasions passed orders declaring the taking of the property by Egypt to be invalid and granting declaratory and injunctive relief, but the court orders were never complied with.

Unlawful expropriation in violation of Art. 5 BIT (paras 443ff) Failure to provide full protection (violation of Art. 4(1) BIT), (paras 445ff) Violation of FET in Art. 2 BIT (paras 449ff)

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Claimants:

FMV of the property in May Amount awarded: 1996 = minimum (para. US$ 74,550,794.75 576) 'compensation provisions Valuation method: within Art. 5 BIT are not DCF-method rejected, applicable for present because not a project purposes except as to the which lends itself to a guidance it may provide robust DCF analysis on the appropriate (para. 566) interest rate', because 'it Plus discrete damages: • Uncertain because was not a lawful of short operating expropriation to which Art • Construction history (para. 570) 5 of the BIT applied' (para. costs for 539) • 'moving parts' improvement of that contribute to property 'however, …, in the DCF can change • Salaries and present case the result of absolute benefits, rents distinction between value of a and utility bills, compensation for a lawful business (para. travel and fares, expropriation and 568) costs of studies compensation for an undertaken unlawful expropriation Comparable Sales Valuation: • Bank loans (Siag may not make a significant practical could not repay them because of difference', distinguishing → 20% discount to claimant's expert frozen accounts, this case from Vivendi valuation based on penalty interest at where 'lost profits' were comparable projects in 'arguably recoverable 16% incurred) the Sinai and the Red pursuant to the more • Legal expenses for generous damages regime Sea, in view of the litigation in uniqueness of the under CIL' (para. 541); Egypt's domestic declining 'punitive' or project courts (para. 631) 'moral' damages (paras 544ff) Approximately US$ 200 million (plus interest) based on either a 'lost business opportunity' DCF valuation of the project or a 'comparable transactions' valuation of the property.

Basis for compensation: value of expropriated asset prior to expropriation (para. 542)

P 429 Respondents:

Discrete damages:

Egypt claimed lawful expropriation, compensation based on 'the market value' (Art. 5(iii) BIT). Egypt mentioned two transactions which occurred near in time to the expropriation providing a 'readily ascertained' market value. The first implied a total value for Siag Touristic of US$ 3 million. The second implied a total value for the project of approx. US$ 2,800,000.

• • • •

Construction costs Salaries and benefits Bank loan (penalty interest) Legal expenses

→ under Art. 10 of the contract between Siag and Egpyt any sale of the property to third parties would have resulted in payment of only 50% of the price → 'an award of damages should, as far as possible, put the injured party in the position he or she would have been in had there been no expropriation (para. 582) → claimants only owned 95.27% of property → Final figure: US$ 69.11 million (para. 584) Total Damages US$ 69.11 million for loss of investment US$ 4.44 million for construction work (paras 585ff)

P 430

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US$ 1 million for legal expenses (no invoices presented, but tribunal finds it 'appropriate')

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Gemplus S.A., SLP S.A., Gemplus Industrial S.A. de C.V. v United Mexican States;

Claimants had successfully participated in a consortium for a tender to operate the national vehicle registry in Mexico to protect the property assets of Mexican citizens and to combat crime. Registration was mandatory and should include new and used vehicles. The Concession Agreement was signed in September 1999. In 2000, the Concessionaire faced growing political difficulties, connected to the cost of registering used vehicles amongst others. After national elections, the obligation to register used vehicles was suspended.

Claimants:

Measures of indemnification under both BITs relate to lawful expropriation and do not expressly address compensation for unlawful expropriation,; neither BIT expressly provides for any separate measure of compensation in respect of breach of the FET standards (Part XII, paras 12–13, 12–53)

Talsud S.A. v United Mexican States Award of 16 June 2010 ICSID Cases Nos ARB(AF)/04/3 & ARB(AF)/04/4 Applicable law: France–Mexico BIT (1998/2000) Argentina–Mexico BIT (1996/1998)

Violation of FET, because the respondent's conduct between 25 June 2001 and 13 December 2002 was 'manifestly irrational, arbitrary and perverse, being also conducted in bad faith towards the Claimants and their rights as investors under the two BITs' (Part VII, paras 7–76).

US$ 227,826,772 (Talsud) and US$ 128,933,464 (Gemplus) plus preaward and post-award interest, based on DCFmethod; similar amounts being derived from the market value of shares (Part XIII, paras 13–16).

The market value measure of both BITs is 'consistent with the Valuation date: standard expressed in Unlawful expropriation by the most other treaties and Referring to Article 15 ILC CIL' (Part XII, paras 12–14) Articles with regard to respondent, breaches consisting of a 'indirectly with the Respondent: composite act, Requisition on 25 determines the relevant June 2001 and directly 'asset value and date as 24 June 2001, with the Revocation 'declared tax' value being the first of the acts on 13 December 2002, methods should be in the series, the date in violation of Articles preferred over the DCF 5 (1) of the Argentina method which is wholly preceding the unlawful Requisition of 25 June speculative and BIT and impermissible due to the 2001 (Part XII, paras 12–43 et seq.). lack of a proven track record of profitable operations (Part XII, paras 12–30, XIII, paras 13–46 et seq.);

P 431

Administrative Article 5 (1) of the intervention of the French BIT' (Part VIII, public service of the paras 8–27). national vehicle registry was ordered between 2000 and 2001, which was followed by the requisition of the Concessionaire's operation on grounds of national security. The Concession Agreement was revoked in December 2002.

Amount awarded: US$ 4,483,164 for Gemplus, and US$ 6,458,721 for Talsud = value of the investments at the valuation date (= US$ 5,853,417 for Gemplus, and US$ 8,487,455 for Talsud) minus dividends received ('past payments'). Rejects DCF method, because Concessionaire was not operating as a going concern, lack of sufficient factual basis for estimating future cash flows (Part XIII, paras 13–70 et seq); Yet, the claimants' shares must be valued by reference 'to the Concessionaire's reasonably anticipated loss of future profits' (Part XIII, paras 13–75), including significant uncertainties; the chances of success were less than 50 per cent; tribunal refers to literature and cases to discuss the 'loss of a chance';

Compensation for 'lost opportunity' to make future profits for the remainder of the Concession Agreement of 8.25 years was not 100% and not zero; would be a factor between a willing buyer and seller; plus exercise of 'arbitral discretion' (Part XIII, paras 13–95 et seq)

P 432 Alpha Projektholding GmbH v Ukraine

Alpha, an Austrian limited liability company, had Award of 8 November entered into a 2010 series of commercial arrangements ICSID Case No. regarding the ARB/07/16 reconstruction and Applicable law: renovation of several floors of a Austria–Ukraine BIT (1996/1997), Ukrainian hotel in Kiev. Law The events giving rise to the arbitration include the temporary suspension of payments, the transformation of the hotel from a state-owned enterprise into a state-owned Open Joint Stock Company, the transfer of management of the hotel to the State Administration of Affairs and the cessation of payments to the claimant.

1) Expropriation in violation of Art. 4(1) BIT, because, after the corporatization process in 2003, the state authorities, disenchanted with the arrangement between the claimant and the hotel, ordered the stop in payments.

Claimant: US$ 11,372,000 composed of the following elements, expressed in terms of 2004 NPV: •

•

→ expropriation by substantially and permanently depriving the investment of economic value (paras 372ff, 408ff) 2) • FET under Art. 2(1) BIT (para. 416) → legitimate expectations that the government would not interfere with the contractual relationship between the claimant and the hotel (paras 420ff)

Standard not explicitly discussed. Valuation date:

Date of expropriation (1 July 2004) as the first day of the month after claimant received its last Historical losses payment; while of US$ 371,000 subsequent actions of the (outstanding government perpetuated payments) the non-payment to Forgone income claimant, the of US$ 6,529 million expropriation and other (income claimant BIT violations occurred at the time payment ceased, would have received between never to be resumed (para. 481) 2004 and 2015) Terminal value of the joint activity of US$ 2,567 million

Respondent: Largely agrees with methodology but objects to the minimum monthly payment requirement and the entitlement to terminal value because the improvements belonged to the hotel; proposed discount rate of 14.42% based on debt-equity ratio.

P 433

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Amount awarded: US$ 2,979,232 Total damages: • • • • •

Historical losses of US$ 117.421 + US$ 142.204 Revenue forgone of US $ 2,209,822 US$ 523,151 Terminal value of US$ 34,820 Adjustment to overpayment, US$ 21,937 must be deducted

Discount rate: Tribunal followed claimant's submission on WACC (12.41%), because 'the target capital structure must be used, instead of that of the actual firms being valued' (para. 483).

Case

Investment affected Violations found & measures at issue

Joseph Charles Lemire v Ukraine

Lemire, a US citizen, owned a local radio station, Gala Radio, in Ukraine. He became one of the leading broadcasters in the Kyiv area. Over the years, Gala's main competitors, controlled by powerful Ukrainian investors, were able to obtain between 38 and 56 additional frequencies, while Gala, although it tried incessantly and presented more than 200 applications, was only able to secure a single licence, in a small village in rural Ukraine.

Award of 28 March 2011 Decision on Annulment of 8 July 2013 ICSID Case No. ARB/06/18 Applicable law: USA–Ukraine BIT (1994/1996)

P 434

2013 Decision on annulment: The application for annulment by Ukraine on the basis of manifest excess of powers, departure from a fundamental rule of procedure and failure to state reasons, was rejected.

Economic loss claimed

Violation of FET Claimant: Calculation standard established based on the in Art. II.3 of the BIT comparison of a base scenario, which The executive branch represents the value of of the government Gala Radio as it operates acted wrongfully by today, with four awarding significant alternative hypothetical numbers of radio scenarios under licences directly, different assumptions without transparency what its present value or publicity and would have been, if the without meeting the violation of the FET requirements of or standard had not following the occurred, i.e. 'but for' procedures valuation (para. 122). established in the Ukrainian Law on Applying the DCF Television and methodology, amount Broadcasting (para. claimed ranges between 110). US$ 30,469, 000 and US$ 46,651,000 (currency in US$).

Standard of Amount decided & compensation/reparation valuation method Relief must consist in an order to pay compensation equal to the damages caused (para. 146). FMV is of little use in present arbitration, as the breach does not amount to the total loss or deprivation of an asset (para. 148). Chorzów standard (para. 149ff) Art. 36.2 ILC Articles (para. 151) Calculation 'cannot be made in the abstract' must be 'case specific' (para. 152).

If 'country risk' discount 'Causation' is crucial, factor is applied, sums needs to be 'sufficiently are 10% lower (para. 223). close' (i.e. not too remote) (para. 155). Cross-checked by EBITDA valuation resulting in Proof of causation needs similar numbers (para. (A) cause, (B) effect, and (C) 225) a logical link between the two (para. 157ff). + Moral damages: Comparison of the US$ 3 million 'present value' in five different scenarios (para. Respondent: 218); DCF method; EBITDA Revenues and costs multiples to cross- check; understated; profits also comparable never generated more transactions than US$ 121,000 per year; Damages claimed are disproportionate to the capital invested (less than US$ 1 million in 15 years) (paras 131ff)

Valuation method: Difference between a real 'as is' value and a hypothetical 'but for' value (paras 244, 253). Damages must not be 'speculative' (para. 245), but proved with reasonable certainty; less certainty is required in proof of actual amount, there must be 'reasonable confidence' (paras 246ff).

Loss of a chance? = damage through a foreseeable and proximate chain of events (para. 252). Tribunal notes agreement of both experts with DCF analysis (para. 254), applies it with adjustments; •

•

Cross-check by comparable transactions (mergers and acquisitions) (para. 231)

P 436

Amount awarded: US$ 8,717,850

Discount rate: Discussion about 'country risk' (paras 275ff); should amount to 18.51% for Scenario I and II (as proposed by respondent). Free cash flow estimates as proposed by claimant largely accepted as reasonable (paras 288ff).

→ NPV II minus NPV I results in loss suffered of US$ 8,717,850 (paras 296ff)

Currency of calculations in UAH, only final amount converted in US$ (para. 229).

Comparable transaction: Confirms reasonableness of amount (para. 307ff) Moral damages: Rejected only in 'exceptional circumstances'; and moral aspects of Lemire's injuries already compensated by awarding a significant amount of compensation (para. 344).

M. Meerapfel Söhne AG v Meerapfel Söhne, a Central African Republic Swiss company, was the majority Award of 21 May 2011 shareholder in a joint venture ICSID Case No. (société A), a ARB/07/10 tobacco-farming Applicable law: business in the CAR. Societé A faced Protocol of Agreement various problems in with CAR (Switzerland relation to CAR CAR BIT not customs, tax applicable) authorities, and local shareholders. After civil proceedings in local courts, the claimant entered into a Protocol of Agreement with CAR in 2006 (contained ICSID Arbitration P 437 clause). During the 2006 harvest, CAR requisitioned assets of the claimant and repudiated the Protocol.

Indirect Undisclosed expropriation by a series of measures, such as imposition of taxes, prohibition of exports, non-respect of judicial decisions, requisition of assets, and the repudiation of the Protocol of Agreement (para. 354).

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Under general international law and under the Protocol, CAR is under an obligation to pay prompt and adequate compensation, even if the other conditions are complied with (para. 374). By not paying compensation, CAR has violated its contractual obligations. Moral damages: Concerning the eviction, there was insufficient proof of stress or harm caused to individuals; also the non-observance of CAR's own judgments and the resulting denial of justice did not give rise to moral damages. The resulting damages were primarily financial and not moral and as such already sufficiently compensated by the expropriation claim (referring to Benvenuti & Bonfant, Desert Line, SOABI, Tecmed, and Pey Casado, paras 426ff).

Amount undisclosed Valuation: Value of the lost tobacco harvest, as determined by the average price of the tobacco (para. 385). Tribunal declines lost profits and loss of a chance, as there was no future profitability of the investment. The damage caused by CAR was already fully repaired by the amount representing the investment (para. 393). Expenses for amicable solution: Declined because incurred at the claimant's own risks Moral damages: Although CAR made 'excessive' and 'exaggerated' statements, these were made in an adversarial proceedings and did not cause injury justifying compensation.

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Impregilo S.p.A. v Argentine Republic

The dispute concerns concession of water and sewage services under a Concession Contract concluded between an Argentine company and the Province of Buenos Aires, in which Impregilo S.p.A, a company incorporated in Italy, had a dominating interest.

Violation of BIT through failure to afford FET (para. 331).

Claimant:

Chorzów standard: Impregilo should in principle be placed in the same position as it would have been, had Argentina's FET violation not occurred (para. 361).

On 11 July 2006, the Concession Contract was terminated by the Province of Buenos Aires because of alleged violations of the terms of the contract. It transferred the company's water and sewage service concession to another company (para. 48).

By failing to do so, Argentina aggravated the situation to such extent as to constitute a breach of FET (para. 331).

Award of 21 June 2011 Decision on Annulment of 24 January 2014 ICSID Case No. ARB/07/17 Applicable law: Argentina–Italy BIT (1990/1993), International law

P 438

Loss assessed by a combination of (1) assetThe Emergency Law of based method and (2) 6 January 2002 had income method, dramatic negative attaching more weight to impacts on the the latter (two-thirds) economic prospects and less to the former of the concession, in (one third) particular the 'pesification' of tariffs →US$ 87,156,098 (as of July 2006) and US$ and the freeze of 119,362,503 (as of October tariffs (paras 317ff). Since the disturbance 2008), including an interest rate of 15% of the equilibrium (para. 372) between rights and obligations in the concession was essentially due to the measures taken by the Argentine legislator, it must have been incumbent on the Argentina to act to effectively restore an equilibrium on a new or modified basis (para. 330). Respondent:

Award of 7 July 2011 Decision on Annulment of 12 February 2015

Not possible to evaluate potential losses or gains in precise figures but considers that Argentina should be obliged to restitute the investment as compensation for its FET violation (para. 379) → Compensation to be awarded 'should be based only on the capital contribution made' (para. 381).

Interim measures of 28 January 2005 constitute an indirect expropriation in violation of Art. 4 of the BIT, because they were arbitrary (para. 218).

Claimant: Damages based on the DCF value of TSG: 56,497,500 Sol (app. US$ 17 million)

Not the standard contained in Art. 4 of the BIT, because the established conditions were not met, so CIL has to be applied (para. 253).

15 million Sol (app. US$ 4.5 million)

Respondents: No value, or US$ 771,856 maximum of (= the company's adjusted book value at the time immediately before the expropriation)

P 440

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Amount awarded: US$ 786,306.24 (paras 261–73) Valuation method: • DCF inappropriate basis for compensation because of lack of historical record (three years of operation of which two produced negative results, no benefits to be expected between 2005 and 2008)

Moral damages:

P 439

ICSID Case No. ARB/07/6 In 2004, TSG was subjected to an Applicable law: audit, conducted by Peru's taxing Peru–China BIT authority (SUNAT). (1994/1995), TSG's books and International Law records were held not to adequately reflect values for the raw material used and sales. Back taxes and fines totalling app. 10 million Peruvian solares were imposed. TSG filed a challenge to SUNAT's finding. Nonetheless, SUNAT also imposed interim measures which directed all Peruvian banks to retain the funds of TSG.

Valuation method:

No sufficient degree of probability that the concession, even in the absence of the FET violation, would have been profitable (para. 375).

Concession had no economic value, no compensation would be justified (para. 372).

Application for annulment submitted by Argentina (that the tribunal exceeded its powers) dismissed in its entirety. The Chinese national Tza Yap Shum invested in TSG del Perú S.A.C., a Peruvian company involved in the purchase and exportation of fishmeal, primarily for Asian markets.

US$ 21,294,000

Tribunal doubts profitability of the concession, because it However, it 'cannot be covered a risk area with a established with certainty poor population and a in what situation low collectivity rate Impregilo would have (para. 373). been' 'it would be unreasonable to require precise proof of the extent of the damage sustained' → 'reasonable probabilities and estimates have to suffice as a basis for claims for compensation' (para. 371)

2014 Annulment Decision:

Tza Yap Shum v The Republic of Peru

Amount awarded:

Respondent is obliged to make full reparation for the injury caused (Art. 31(1) ILC Articles), reparation must, as far as possible, wipe out the consequences of the illegal act (Chorzów principle) (para. 254).

• Compensation based on TSG's adjusted book value on 31 December 2004 would best represent the price claimant would have obtained in the market: (1) (2)

Book value of US$ 590.329 Multiplied by a factor taken from comparable companies (LatinAmerican fish companies), at the example of the ratio book value/market price, as proposed by respondent's expert.

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

2015 Annulment Decision: Peru's application for annulment dismissed in its entirety.

El Paso Energy El Paso, a company International Company v incorporated in The Argentine Republic Delaware, had invested in two Award of 31 October Argentine energy 2011 companies (oil Decision on Annulment producing CAPSA and electric power of 22 September 2014 generator CAPEX). ICSID Case No. Starting in ARB/03/15 December 2001, Argentina had taken Applicable law: measures, which allegedly rendered Argentina–USA BIT the investment (1991/1994) worthless and the companies unable to function independently. These measures included the freezing of bank deposits, foreign P 441 exchange controls, the 'pesification', the elimination of adjustment clauses, the forcing of electricity and gas companies to continue performance of their public contracts and the withholdings of hydrocarbon exports. El Paso sold its shares in 2003 and initiated proceedings against Argentina. 2014 Annulment Decision: The Application for Annulment of the Award presented by Argentina dismissed in its entirety.

Moral damages: Rejected, because the conditions as elaborated in arbitral practice (quoting Lemire) were not met by the measures at issue (not sufficiently serious, not physical). Violation of the FET standard under Art. II(2)(a) BIT

Claimant: Claims 'loss in value' of its Argentine assets as a result of the government's measures (para. 688).

While none of the measures taken in isolation would be regarded as violations of the FET (1) standard, the tribunal took an overall view of the situation and analysed the consequences of the general behaviour of (2) Argentina (para. 459). In conclusion, the measure, by their cumulative effect, amounted to a violation of the FET standard (para. 519).

US$ 147,000,000 (DCF method) difference between value of stakes with and without the measures US$ 210,000,000 (transactions method) difference between the hypothetical 'but for' sale price of stakes without measures and sale prices actually obtained from divestiture in 2003.

BIT does not specify the standard for evaluating damages for breach of FET, so the appropriate standard of reparation under international law is compensation for the losses suffered by the party affected, as established by the PCIJ in Chorzów (para. 700), quoting SD Myers (para. 701), but also CMS as regards the 'difference in FMV of the investment resulting from the treaty breach'; FMV as defined in International Glossary of Business Valuation Terms by ASA (para. 702).

Amount awarded:

Value collected by claimant for the sale of the companies shall not be deducted since the DCF calculation departed from the assumption that shares were kept.

No violation of umbrella clause ('the so-called umbrella clause cannot not elevate any contract claims to the status of treaty claims as El Paso cannot claim a contractual right of its own in this case', para. 538)

Respondents:

Valuation date:

Alleged that the loss was caused since El Paso sold shares in bad macroeconomic conditions.

Quoting Amco Asia and Art. 36 ILC Articles, that it should be determined with reference to a date subsequent of that internationally wrongful act (para. 710).

SGS Société Générale de 1996 contract Surveillance S.A. v The between SGS, a Republic of Paraguay Swiss company, and the Ministry of Award of 10 February Finance of Paraguay 2012 on the performance Decision on Annulment of pre-shipment inspection and of 19 May 2014 certification ICSID Case No. services for cargo ARB/07/29 destined for Paraguay (customs Applicable law: duties). SGS claimed Switzerland–Paraguay that Paraguay's failure to pay BIT (1992/1992) invoice violated Art. 11 BIT (umbrella clause).

Violation of Art. 11 (umbrella clause), para. 67.

Claimants:

Marion Unglaube and Reinhard Unglaube v Republic of Costa Rica

Measure tantamount to expropriation, Art. 4(2) BIT with regard to a 75-meter strip at the coast which had been the property of Marion Unglaube:

DCF embodies a wide range of inherently speculative elements (para. 695).

P 442

'Respondent ignores the fact that, in addition to agreeing to the forum selection clause in the Contract, it separately agreed to arbitration in accordance with the BIT. By doing so, Respondent offered to Swiss investors an alternative forum for dispute settlement. The BIT arbitration 2014 Annulment mechanism formed Decision: part of the applicable legal framework and Application by became, in effect, an Paraguay dismissed irrevocable part of in its entirety. the bargain.' (para. 107)

German investor Reinhard Unglaube wanted to extend his eco-tourist Award of 16 May 2012 hotel complex in ICSID Case No. ARB/08/1 Playa Grande, Costa Rica. The ICSID Case No. authorities refused, arguing that the P 443 ARB/09/20 project was in close Applicable law: proximity to the Las Baulas de Germany–Costa Rica Guanacaste BIT (1994/1998) National Marine Park (home to the nesting site of the leatherback turtle, in danger of extinction).

Tribunal did not find expropriation of the remainder piece of land.

Requested damages equal to the sum of unpaid invoices (= US$ 39,025,950.86) plus interest accruing from July 1999 through February 2011 (=US$ 22.5 million, paras 167ff) Respondent: Did not dispute the mathematical calculations, but contested underlying assumptions (mere contract claims, lack of mitigation by not pursuing claims before national courts, by not terminating the contract) (paras 175ff)

Claimants requested compensation for the value of the property at the coast by an 'income capitalization approach based on the Property's highest and best use', namely developing 32 single family residences.

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US$ 43,030,000 Valuation method: DCF method applied, compared the 'actual' and 'but for' values of the stakes in the companies, representing the FMV of each company with and without the effect of the measures. According to the tribunal appointed expert: As regards the WACC, discount rates set at 15.45% for electricity and at 15.43% for hydrocarbons; tribunal discusses oil prices, disadvantages and benefits accruing from pesification and other measures; agrees that a discount rate should be applied to the debt value of the companies.

Extensive discussion of causation. The test was whether there was a 'sufficient link' between the treaty violation and the alleged damage (para. 682). Claimant is entitled to damages equal to the amount of the unpaid invoices plus interest accruing from July 1999 (para. 180) =date of contract termination, not of invoice issuance, as claimed by the Claimant

Amount awarded:

Not apply BIT standard of expropriation compensation, 'binding only with respect to a lawful taking of property' (para. 306) →Chorzów; 'not a matter a great consequence regarding the case before us' (para. 307)

Amount awarded:

Claimant is entitled to the entire amount of the unpaid invoices totalling US$ 39,025,950.86 (para. 182).

Detailed explanation on interest, as a 'virtually universal principles of Respondent had conceded that, if claimant international law and were to prevail on its Art. international arbitration practice', referring also 11, claimant would be entitled to damages (para. to ILC Articles (para. 184); 180). 'Interest is not an independent head of damage, but an aspect of the full reparation due for a loss.' (para. 172)

Compensation for the said property, to pay to the successful claimant only, Marion Unglaube the sum of

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Unglaube had received permits from the government to enlarge the hotel. Precautions were taken to protect the turtles.

References to 'Sales and listings of lots comparable', allotting US$ 5,190.000 to the 75Meter Strip

Detailed discussion whether expropriation was 'lawful' or not (paras 202ff); the requirements 'must be fulfilled cumulatively', or the expropriation will be Unglaube's wife also considered unlawful initiated (para. 204). proceedings, alleging similar Respondent did not breaches. The two make timely cases are treated in arrangements to consolidated determine payment, manner. even though the BIT (and its protocol) was rather detailed (paras 206–9, 223).

Under both the Chorzów approach and the language of the BIT, it finds that the applicable standard is FMV, but (1) higher value and (2) Respondent: incidental expenses are recoverable in case of Has already deposited US$ 750,000 for payment. unlawfulness (para. 307). Rest of payments should Valuation date: be offset by payments made in domestic Important, but problem proceeding. Relies on because of various BIT standard. Expert attempts to expropriate valued the 75-Meter Strip (2003, 2004, 2005, 2008) at US$ 300,000 plus (para. 315) interest (para. 303). Tribunal takes 1 January 2006 (before market peak) (para. 318)

US$ 3.1 million

Claimants:

Amount awarded: US$ 136,138,430

plus interest (total amount payable of US$ 4,065,900.33). Valuation method: Is not 'a going business concern'; tribunal applies FMV; 'highest and best use', development plans for single homes are reasonable (para. 309).

Real estate market volatile, value depends a lot on valuation date; tribunal largely agrees with claimants' suggestions, but does 1 July 2006 (claimant, para. not accept the entire 299) amount, because this would 'implicitly be accepting all of the assumptions and adjustments utilized'; finds it 'fair and reasonable' to value the loss at US$ 3.1 million.

Extensive reference to CDSE award on expropriation for a national park.

P 444

Standard of Amount decided & compensation/reparation valuation method

Also to Funnekotter (2009) and Theodoraki v. Greece (ECtHR 2008). Denying FET valuation (para. 279) and FPS violation (para. 288) EDF International S.A., SAUR International S.A. and León Participaciones Argentinas S.A. v Argentine Republic Award of 11 June 2012 Decision on Annulment of 5 February 2016 ICSID Case No. ARB/03/23 Applicable law: Argentina–France BIT (1991/1993), Argentina– Belgium/Luxemburg BIT (1990/1994)

P 446

EDFI, together with SAUR International and Credit Lyonnais Bank, controlled Edemsa (Empresa Distribuidora de Electricidad de Mendoza S.A.). The claimants claimed losses arising out of governmental mistreatment of their investments in an electricity distribution concession in Argentina's Mendoza province, including the freeze of the tariff regime and the pesification of the contracts with third parties. The claimants distinguished between 'PreEmergency Measures' and 'Emergency Laws and Renegotiations Process'. They asserted breaches of the standards of fair and equitable treatment, expropriation and full security and protection under the applicable BITs. Annulment Decision 2016:

BIT violation (1) with respect to specific commitments undertaken and (2) breach of FET standard (Art. 3 BIT) (para. 994). •

•

Claimants claim that they were entitled to US$ 209 million as 'return of the full amount of their actual investment' (para. 595). In 2004, they sold No their shares for US$ 2 discrimination, million (para. 597). arbitrariness, Taking the difference in and unreasonable the value of 'but for' and or unjustified 'actual' scenarios (para. 603). treatment (para. 1101). Claimants' expert used No violation of the DCF method, full protection applying a 11.34% WACC (para. 640). and security (para. 1108) Alternatively book value: and no US$ 191,335,825 (para. indirect expropriation, 696). Art. 5 BIT (para. 1118).

Tribunal concluded that fairest measure of damages was the 'genuine value' of the investment as established in Art. 5 BIT (on expropriation); as Art. 4 does not provide an 'alternative formulation for determining the value' it 'finds it appropriate to examine the value … had it not been reduced by the Emergency Measures' (para. 1210)

Valuation method: Parties agreed on use of DCF method, but submitted very different DCF models.

Tribunal based valuation on 'return on investment' of the initial purchase price for the shares of US$ 209 million; this was a Valuation date: 'reasonable' price, as several other bids were 31 December 2001 close (para. 1238ff); the As requested by claimant, present value of that which is immediately investment at the before the Emergency valuation date was US$ Measures (para. 705) 147,750,151.

Respondent rejects claims 'since the value today is higher than the value before privatisation' (para. 866); claimants made a bad business decision to sell their investment in EDEMSA before the recovery of the economy (para. 876)

Rejects book value because it is 'dependent on a Application by company's Argentina dismissed accounting in its entirety. standards… no Argentina had also relationship to market values' (para. challenged the 800) calculation of damages, including the applicable standard ('genuine value' as provided for expropriations in the BIT) (paras 353ff).

Relief claimed: at least US$ 123.9 million for injuries caused by the Emergency Laws and failure of renegotiations; or US$ 147.8 million based on their own bid for ENDEMSA, or US$ 125.2 million offered by the second highest bidder; in either event, the actual price received from the sale of EDEMSA needed to be discounted (para. 880). Plus 'historic damages': damages for PreEmergency Measures provincial actions of US$ 7,202,196 million (para. 717) Respondent: Agreed that DCF most appropriate tool (para. 802), but criticised assumptions by claimants (WACC, country risk, beta …) (paras 819ff)

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The terms of the sale of the shares in 2005 for 2 million US$ were assessed against the 'duty to mitigate damages' (para. 1302), because they did not contain a clause how the subsequent raise in tariffs could be reflected; the buyer sold the shares in 2007 for US$ 52.8 million (referring to MTD v. Chile and the duty to mitigate damages → US$ 133.6 million In addition: US$ 2.5 million in damages as a result of Pre-Emergency Measures' adverse impact. Tribunal largely adopted the claimants' expert's model, using its WACC, beta, etc. and taking 31 December 2001 as the valuation date (paras 1183ff).

Case Antoine Goetz & Others and S.A. Affinage des Metaux v Republic of Burundi

Investment affected Violations found & measures at issue

The claimants (Belgian nationals) were the principal shareholders of several Burundian Award of 21 June 2012 companies, the S.A. ICSID Case No. ARB/01/2 African Bank of Commerce (ABC), S.A. Applicable law: AFFIMET, S.A. City Connexion Airlines Belgium/Luxembourg– (CCA) and S.A. CCA Burundi BIT Maintenance. They (1989/1993) (Award in set out that AFFIMET French) had been the holder of a certificate of 'entreprise franche' (open enterprise) which was withdrawn from it in 1995. An ICSID tribunal (Case No ARB/95/3) had decided in 1998 that this withdrawal was P 447 an unlawful taking. The award was followed by a protocol of agreement and a special convention, which provided for the restitution of the benefits of the 'free zone' regime and the reimbursement of taxes paid during the period of withdrawal. Burundi did not comply with its obligations, and the claimants sought various enforcement measures at Belgian and French courts. Burundi took retaliatory measures against AFFIMET and the other companies, which eventually, needed to close down Claimants had to leave the country hastily to escape imprisonment.

As to AFFIMET:

Standard of Amount decided & compensation/reparation valuation method

Claimants request:

The parties authorized the tribunal to use its discretion (to decide ex aequo et bono) in the decision on damages and interest, once the state's responsibility was established (para. 293).

According to a 2001 • annex to the protocol of agreement of 1998, the amount of US$ 3,420,687 was paid by the respondent so that the dispute subject of the earlier arbitration was finally closed (paras 178–9). The retaliatory measures between 2000 and 2002 constituted a violation of the special convention of 1998 and of Art. 3 (1) BIT concerning FET (paras 208–9).

Market value of expropriated investments (para. 298) Plus expenses for their attempts to obtain compensation for expropriated property in the amount of US$ 1,500,000 (para. 290) Plus loss of earnings caused by temporary and then permanent closure of companies (para. 291).

Amount awarded: US$ 1 million (as reparation for measures against ABC); €175,000 (as reparation for measures against AFFIMET, CCA and

The tribunal recognized CCA Maintenance) constant practice in international law that the difficulties encountered in evaluating damages should not prevent the victim from receiving reparation, referring to SSP v Egypt (para. 298).

Alternatively, for the non-respect of the protocol of 1998 the sum of 14.990.778.460 BIF (para. 292) (~ US$ 8.9 million)

As to ABC: Burundi forced ABC to close down for noncompliance with some regulations; the tribunal did not find this reaction justified → indirect expropriation (para. 258) As to CCA and CCA Maintenance: measures by Burundi amounted to FET violation (para. 266)

P 448

Economic loss claimed

Respondent: claimants had not provided any evidence for their damages claims (para. 294). Alternatively, maximum 19,518,957 BIF for AFFIMET, 35,551,691 BIF for CCA and 1,949,583 BIF for CCA Maintenance, totalling 57,020,231 BIF (corresponding to US$ 46,282) (para. 294).

Burundi sought US$ 1 million as counterclaim for ABC's failure to honour the terms of the 'free-zone' certificate. Jurisdiction upheld (para. 285), but claim rejected for lack of evidence (para. 287).

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The tribunal deciding aequo et bono awards these sums, in view of the particular circumstances—Antoine Goetz died in 2005, Alain Goetz had to leave thecountry hastily to escape imprisonment (paras 297–9).

Case

Investment affected Violations found & measures at issue

Railroad Development Corporation v Republic of Guatemala

In 1997, Guatemala granted a concession to the US-based Railroad Development Corporation (RDC) to restore and develop Guatemala's railway system. RDC concluded several contracts with the government railway agency to operate the newly-privatized rails for 50 years. As the progress remained slow and RDC did not finish planned projects, Guatemala declared RDC's contracts to be lesivo, e.g. injurious to the state's interests. RDC claimed that the lesivo declaration constituted an indirect expropriation in violation of CAFTA Art. 10.7.1, that Guatemala violated the minimum standard of treatment of CAFTA (Art. 10.5) and the national treatment standard (Art. 10.3).

Violation of minimum Claimant: standard of US$ 64,035,859 in treatment (Art. 10.5 damages, plus costs and CAFTA). attorneys' fees incurred Guatemala's actions in prosecuting its CAFTA were 'arbitrary, claims (para. 54). grossly unfair, [and] Damages should cover unjust', referring to Waste Management II the FMV of its (para. 235 on arbitrary investment, including nature of the lesivo); the adjusted amount of the investment as of the Tribunal emphasized date of the violations of that the lesivo CAFTA, consequential procedure may be damages of lost profits easily abused by from that date to the Guatemala (para. 233), end of the Usufruct, as it allows the (para. 239). government to ex post facto declare its own regulations illegal.

2013 Decision on the request for a supplementary decision and rectification: Partially accepted: The tribunal rejected the part relating to 'Not Discounting the Actual Rents Received by FVG since the Lesivo Resolution', but rectified the award in para. 277 and para. 283(2). They shall be deleted and replaced by '$6,818,865' and '$5,591,469.30' respectively.

But: Tribunal rejected that lesivo procedure constitutes an indirect expropriation on the part of Guatemala (para. 152) and the claim of violation of national treatment standard (paras 153ff).

Swisslion was a company organized under the law of FYROM, owned by DRD Swisslion AG, incorporated under the Swiss law, whose main business was the production of biscuits and snacks. After parliamentary elections in 2006, the claimant company was faced with various acts and omission by respondent's authorities, including judicial proceeding, in the course of which one of its investment contracts was terminated and a portion of its equity investment in a Macedonian enterprise transferred to the respondent's Ministry of Economy.

Award of 29 June 2012 ICSID Case No. ARB/07/23 Applicable law: Dominican Republic– Central America– United States of America Free Trade Agreement (2003)

P 449

(First dispute resolution under CAFTA rules)

Award of 6 July 2012 ICSID Case No. ARB/09/16 Applicable law: Macedonia– Switzerland BIT (1996/1997)

Standard of Amount decided & compensation/reparation valuation method Not expropriation standard but Art. 31.1 ILC Articles (para. 260)

Amount awarded:

US$ 6,576,861 (investment in phases I and II) + US$ 1,350,429 (operating the railroad for another year after the Lesivo) + '82% (the percentage of shares in FVG held by Claimant) of $4,121,281.62 ($3,379,450.93)–the NPV of Art. 10.5 on the minimum the existing real estate standard of treatment is leases measured over to be interpreted in their remaining life as of accordance with the date of Lesivo–minus customary international 82% of rents paid to FVG law → Art. 31 (1) ILC Articles under such leases postlesivo and until payment by respondent of the compensation here awarded. Because tribunal cannot determine at this time when respondent will pay the award, there will be a need for a final calculation of this amount.' (para. 283.2) Tribunal calculates on bases that shares have to be transferred to Respondent, referring to CMS v Argentina (para. 263)

Reparation due to claimant should be subject to claimant relinquishing its rights under all the contracts Valuation: (since FVG was the party to Amount invested and the the usufruct contracts, the tribunal conditioned lost profits, the payment of the award possibility of double upon the transfer of the counting is avoided by amortizing its sunk costs claimant's shares in FVG to the respondent) (para. over the life of the usufruct after the Lesivo 267) Declaration (para. 244) Concerning the rents for leasing the real estate Prior profitability not required to recover lost → a discount rate of 12.9% profits, possible to plus 2.66 percentage justify on grounds of points plus 1.8 percentage track record of points (the effect of using successful investments FVG's cost of capital), for a in similar circumstances total of 17.36%, would be (para. 246). an appropriate discount rate to calculate the NPV Respondent: of existing leases Claimant applies → Only leases in place at Chorzów in a way that compensates it twice for the time of the Lesivo Declaration taken into its investment; account (para. 275) highlights the speculative character of future profits (paras 251ff).

Restitution:

FET Art. 4(2) BIT

Claimant:

Amount awarded:

Tribunal ascertained a 'minor breach' of the FET standard, on the basis of 'a series of measures that collectively amount to a composite act (para. 275).

Compensation of €19,013,000 (para. 73)

Treaty breach arose from measures by state agencies 'taken prior to or on the margins of the contractual litigation', including the Ministry of Economy's failure to timely respond to the investor's inquiries certain administrative actions taken by Macedonian securities regulators and the publication of information relating to a criminal investigation of the investor (paras 276, 337)

Respondent:

P 450

Swisslion DOO Skopje v The Former Yugoslav Republic of Macedonia (FYROM)

Economic loss claimed

Standard of full reparation (Chorzów) should be applied (para. 243).

On the basis of DCF; alternatively it claimed 'the value of actual investments plus interest' (para. 72). Tribunal should in any event reject the claimant's claim for compensation, because it is 'fundamentally flawed' and 'absurdly exaggerated' (para. 95).

P 451

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Tribunal only arrives at an 'appropriate estimation of damages' having regard to the professional fees incurred by Swisslion in the two local proceedings found to be part of the composite act (para. 344). It held that it was not possible to quantify the damages with certainty, quoting SPP v. Egypt (para. 345).

On payment of the awarded compensation, claimant shall forfeit and renounce all its rights under the Usufruct Contracts and transfer to respondent claimant's shares in FVG. (para. 283.3) Tribunal agreed with respondent that claim of lost profits was speculative (para. 269).

€350,000 plus interest Valuation method: Damages awarded for the legal costs the investor incurred contesting the securities regulation and criminal investigation measures, the diversion of its management's time in responding to heightened controls imposed by the Ministry of Economy, and an allocation of lost sales resulting from the investor's reputational damage (paras 337, 350)

Case

Investment affected Violations found & measures at issue

Occidental Petroleum Corporation and Occidental Exploration and Production Company v The Republic of Ecuador

P 452

Occidental Petroleum Corp. ('Oxy') started business in Ecuador in the mid-1980s under a service contract with Award of 5 October 2012 Petroecuador, Decision on Annulment Ecuador's national oil company. After of the Award of 2 changes in November 2015 legislation, Ecuador ICSID Case No. and Oxy entered ARB/06/11 into a Participation Contract to explore Applicable law: and exploit hydrocarbons in the Ecuador–USA BIT Ecuadorian Amazon (1993/1997) region in 1999. In 2006, the Ecuadorian Minister of Energy and Mines declared the caducidad (termination) of the participation contract by decree of May 2006, in response to the investor's unauthorized transfer of its participation rights to another oil company. The claimants sought compensation for the loss of the contract.

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Violation of the 'principle of proportionality' under Ecuadorian and international law constituting a valuation of the FET standard (Art. II.3(a) BIT), quoting MTD, LG&E, Tecmed, Azurix (paras 404, 452) and a measure 'tantamount to expropriation' (Art. III of the BIT), quoting Metalclad v Mexico (para. 455).

Claimants:

Chorzów standard (claimed by claimant and respondent, paras 582–5, and others);

Amount awarded:

Tribunal also refers to FMV (para. 704ff)

Valuation method:

FET standard as contained in Art. 2 (1) BIT (para. 491) By acting in relation to the Supreme Court Interim Order, the Central Bank's investigation and the Stop-Payment Order of 16 December 2008, Sri Lanka has breached the fair and equitable treatment standard (ibid).

Amount requested by claimants:

Requested full FMV of the Participation Contract (para. 704). Respondent:

Objected to the claim by Tribunal determines 'as raising four issues: mandated by Art. III of the BIT the FMV of this • Impact of law 42 investment (para. 707); (windfall profits reduced by 25% because tax enacted in of wrongful conduct of April 2006) Claimant (para. 825); • VAT Interpretative rejecting unjust Act enrichment (paras 653–4); • Farmout Art. 31 ILC (und Art. 39 ILC Agreement (by on contributory which the negligence); refers to MTD claimant farmed to rely on 'margin of out 40% of its estimation' (para. 686); interest to a third method of valuation DCF party) as applied by experts; • Claimant's alleged tribunal makes fault prior to the adjustments (paras 722ff). caducidad

US$ 1,769,625,000 plus pre-award interest Tribunal determined NPV of the DCFs generated production as of May 2006 → US$ 2.3 billion This sum was reduced by 25%. Even though investor had transferred 40% of its participation rights to another oil company, the majority proceeded to calculate the investor's damages on the basis of 100% of its participation rights, treating the transfer as 'inexistent' or an 'absolute nullity' for purposes of determining damages (paras 634, 655– 6). But tribunal also concluded that investor had failed to seek authorization from Ecuador prior to executing the transfer agreement, and due to 'contributory fault', it reduced the amount by 25% (paras 686–87)

2015 Annulment Decision: application for partial annulment since ratione personae jurisdiction was exercised over a Chinese company, without any entitlement arising out of the Treaty or the Participation Contract. Committee confirmed manifest excess of powers and ordered the partial annulment of the award, reducing also damages.

P 453

Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka

Deutsche Bank (DB) created a specific derivative instrument allowing Award of 31 October Sri Lanka's state2012 owned Ceylon ICSID Case No. ARB/09/2 Petroleum Company (CPC) to limit (or Applicable law: 'hedge') its exposure to oil Germany–Sri Lanka BIT price increases and (1963/1966) variations over one year. When the worldwide oil prices marked a considerable drop in 2008, CPC had to make significant monthly payments to DB in order to cover these price P 454 variations. CPC subsequently defaulted and prompted DB to terminate the agreement and initiate ICSID arbitration proceedings.

Indirect expropriation as contained in Art. 4(2) BIT (para. 524). The taking of DB's rights under the Hedging Agreement was a financially motivated and illegitimate regulatory expropriation by a regulator lacking in independence (ibid).

Contract claim and treaty claim are analytically distinct (referring to US$ 60,846,250 Abaclat, para. 557). Once (amount to which it was the damage issue is reached, the state may entitled according to not refer the investor to Hedging Agreement following the exercise of the contract claim, its right of termination (referring to Nycomb, para. 562). DB has suffered on 3 December 2008). a loss amounting to the sum that it would have received pursuant to the Hedging Agreement if there had not been breaches of the treaty (para. 572)

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Amount awarded: US$ 60,368,993 = loss amount as of the Early Termination Date

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Franck Charles Arif v Republic of Moldova

Franck Charles Arif, a French national, was the owner of Le Bridge Corporation, a Moldovan company, who had won a tender for operating a series of duty-free stores in Moldova. The results of the tender were formalized in an agreement between Le Bridge and the Customs Service of Moldova in 2008. Le Bridge signed lease agreements relating to stores at several border crossings from Romania to Moldova (paras 49ff) and a lease agreement relating to a duty free store at Chisinau Airport. For alleged violations of fire safety regulations, the duty free shops needed to be closed or could not even be opened. In addition, the tender process was challenged and eventually found invalid by domestic judicial decisions.

Claimant:

Chorzów standard, Arts 31–36 ILC Articles (paras 559ff)

Award of 8 April 2013 ICSID Case No. ARB/11/23 Applicable law: France–Moldova BIT (1997/1999)

P 455

Violation of FET (Art. 3 BIT), as regards investment in the airport store, because the actions of the respondent were a breach of the legitimate expectations of the investor of a secure legal framework to operate a duty-free airport store (para. 547). No violation of FET with regard to the investments in the border duty-free; not demonstrated that the delays caused by the fire authorities were not the result of justifiable concerns by the appropriate authorities; challenge of tender process, even though successful before the courts, had not yet led to the closure of the stores; expropriation; denial of justice; unreasonable or arbitrary measures; full protection and security; discrimination rejected.

• • •

Loss of profits in relation to the border stores; Loss of profits in relation to the airport store; and Moral damages

Expert: DCF method (paras 573ff) → Loss of profits calculated as the difference between the actual financial performance of the airport shop (which never opened or earned revenue, but did incur expenses) and the cash flows that the airport shop would have achieved had it not been prevented opening (para. 574); calculated on two bases: loss of profits and wasted costs (identified as alternative claims).

Moral damages: €5,000,000 for the pain, stress, shock, anguish, humiliation and shame suffered as a result of Moldova's acts and omissions in relation to his investments, referring to Fabiani (para. 562). Abengoa, S.A. y COFIDES, The claimant S.A. v United Mexican companies States domiciled in Spain, were owners of a Award of 18 April 2013 Mexican company which was granted (in Spanish) authorizations by ICSID Case No. the municipality of ARB(AF)/09/2 Zimapán for the construction of a Applicable law: hazardous waste landfill and Spain–Mexico BIT treatment plant. (2006/2008)

Indirect expropriation in violation of Art. V of the BIT.

Claimants: 846,400,000 MXN =

559,100,000 MXN (loss of business valuated with Violation of the FET standard pursuant to cash flow) Art. IV of the BIT. + 119,700,000 MXN (for lost profits) +

P 456

Amount awarded:

In relation to the airport store 6,565,429 MDL, if respondent makes a satisfactory proposal to claimant for his investment and the parties agree to the → With remedy of opening and operation compensation suspended of the airport store. If no for a period of 90 days satisfactory restitution occurs, then respondent → Within 60 days, respondent should make shall pay damages of a proposal to claimant for 35,136,294 MDL the restitution of the Valuation method: investment in the airport store, incl. proposals as to Tribunal considers that appropriate guarantees the DCF methodology is for the legality of a new not appropriate for a lease agreement (para. business that never 572) operated (para. 576) Tribunal ordered restitution and compensation as alternatives (para. 571)

Moral damages: Rejected, because Arif was aware of unpredictability of economic and political institutions; that in Moldova state institutions were weak, that governance not yet comparable to the situation in longestablished democracies and market economies (paras 604ff)

→ Damages calculated on wasted costs as proposed by claimant's expert, considering capital expenditures, operating costs, and the stock purchased for the airport shop (para. 577)

No exposal to physical violence, armed threats, deprivation of liberty or a forceful taking of property (para. 607); actions did not reach the necessary level of gravity and intensity (para. 615).

Tribunal and parties refer Amount awarded: to the Chorzów standard 491,809,534 MXN (para. 677) = 403,080,533 MXN (for Expropriation the expropriation) + compensation: 42,45 1,144 MXN (lost Art. V.2(a) of the BIT profits in the period provides for the FMV before the expropriation, para. 746) + 7,878,107.77 Valuation date: MXN (additional expenses for Parties agreed on the valuation date, 12 March transportation and provisions before the 2010 (= date of expropriation date) expropriation) + 17,541,797 MXN (reimbursement of VAT) + 20,857,952.77 MXN (costs of the arbitration)

P 457

The opening of the landfill and treatment plant in the Mexican state of Hidalgo was allegedly stalled through acts by the municipality and certain federal authorities, including Mexico's Ministry of the Environment and Natural Resources and the Ministry of the Interior. Due to protests of the local residents the municipal council of Zimapán withdrew the project's licence to deposit toxic waste at the site. In doing so the council cited irregularities in the granting of the permit by the previous mayor.

167,600,000 MXN (for the costs caused by the actions) + Damages for the rejection of reimbursement of VAT Interest: Pre-award 6% or 9% (based on Mexican commercial and civil law), and post-award 13.5% Respondent: Pre and post-award interest at 4.38%

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FET violation:

Valuation method:

Tribunal considers damages incurred in addition expropriation compensation for unlawful acts between March 2008 and March 2010, thus before the expropriation date (a) lost profits (b) additional expenses

DCF only method to fully compensate claimant, since calculation based on costs would not take into account the lost profits suffered (para. 688), despite the very short time of operation, because business plan approved by a bank is reasonable (paras 689– Discussion of tax 91). Use of multiples treatment of the would be more compensation (paras 770– speculative, lack of 7; rejecting any transparent market consideration of taxes (para. 688). with regard to the amount awarded) Discount rate: Claimants 11.69% based on cost of capital and debt (para. 719); Tribunal 15.01% (respondent proposed 15.01 to 26.16% due to risk, paras 719–20)

Case

Investment affected Violations found & measures at issue

Total S.A. v Argentine Republic

P 458

Total, a company incorporated in France, had a Award of 27 November number of 2013 investments in Decision on Liability of Argentina in gas transportation 27 December 2010 (Transportadora de ICSID Case No. ARB/04/1 Gas del Norte, TGN), hydrocarbons Annulment Decision of 1 exploration and February 2016 production and power generation Applicable law: industries. It France–Argentina BIT alleged that a (1991/1993) number of measures taken by Argentina, most of which derived from or followed Law 25.561/02 (the 'Emergency law'), breached or revoked the commitments it had made to attract investment and upon which Total had relied in making its investments. These measures include • •

•

Economic loss claimed

Breach of FET (A) contained in Art. 3 BIT (paras 184, 346, 444, 455, 461 DoL) Rejected violations of Art. 4 BIT (MFN) and Art. 5 BIT (expropriation). Rejected defences by Argentina relating to the state of necessity. Application for annulment by Argentina dismissed in its entirety. (B)

(C)

the 'pesification'; the abolition of the adjustment of public service tariffs based on the US PPI; and the freezing of the gas consumer tariff

Standard of Amount decided & compensation/reparation valuation method

Losses in the gas transportation sector:

CIL, which requires 'full Amount awarded: reparation for the injury US$269,928,000 caused by its internationally wrongful Losses in the gas • Investment act', referring to Art. 31.1.1 (A) transportation in TGN: ILC Articles, Vivendi II, CMS sector: US$ 95.2 (para. 26); • US$80.3 million (for BIT contains no specific million for 19.2% provision for reparation losses equity for violation of Art. 3; related to stake) Total's • Damages as however, tribunal stake in Technical considers that Art. 5(2) (on TGN; Operator of expropriation) reflects CIL • US$ 4.9 TGN: US$ principles 'relating to the million, for 6.1 million obligation of full losses (para. 89) compensation for related to wrongful damage', so that Losses in the Total's electricity sector: it may guide it in rights as determining the losses of Total's Technical compensation under stake in Central Operator of Puerto and HPDA Article 3 of the BIT (para. TGN. 26); damages under the US$ 485.6 million heading of indirect (B) Losses in the (para. 112) expropriation would not electricity sector: Losses in be different from damages Hydrocarbons: • US$123.3 due to breach of FET taxes on exports standard (para. 198 DoL) million for imposed losses retroactively related to Total's stake in Central Puerto and HPDA. (C) Losses in Hydrocarbons Exploration and

US$7,828,000 + legalcosts *) Tribunal declared that of US§ 77,862.43 (paras also future requests for 181, 183); additional retroactive taxes on exports from Tierra del losses in domestic sales Fuego for the period of natural gas in 2002– 2002–2006 would be in 2004: breach of Art. 3 BIT. Should Total S.A. or Total US$ 112.3 million; Austral be compelled to losses in domestic sales pay any such taxes to of natural gas in 2004– Argentina's tax 2006: authorities, claimant would be entitled to US$ 28.2 million; recover any such taxes with interest (paras 191 limitations of gas 281). exports:

Exploitation (Oil and Gas): •

•

US$2.4 million + $ 381,454 for legal costs (paras 237–8) Five 'Guiding Principles and Methdology' for the calculation of quantum a) b)

c)

e)

CIL, Chorzów Factory, ILC Articles Impact on FMV of Total's investments in Argentina; DCF methodology most reliable way to hypothetical FMV; d) compare two scenarios (counter-factual or 'but-for' and 'actual'). Interest (para. 16).

P 459

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• •

US$7,628,000, for withholding taxes on exports from Tierra del Fuego during the period of 2002–2006, imposed retroactively) losses in domestic sales of natural gas in 2002–2004: US$43 million, due to Argentina's intervention and lack of compliance with the benchmark price. losses in domestic sales of natural gas in 2004–2006: US$8.4 million limitations of gas exports: US$2.4 million

Valuation method: DCF appears to be the method most widely followed; but also APV (as submitted by Argentina) be examined (para. 28); comparing actual and but-for scenario does not lead to uncontested results (para. 29) → some discretion is generally accorded to tribunals (para. 32)

Case

Investment affected Violations found & measures at issue

Ioan Micula, Viorel Micula The Micula brothers, and others v Romania Swedish citizens, were active in the Award of 11 December food and beverage 2013 industry of Romania. In 1999, ICSID Case No. they decided to ARB/05/20 expand their Applicable law: businesses and Sweden–Romania BIT founded a state-of(2002/2003) the-art food production company and brewery

Violation of the FET standard contained in the BIT by the premature revocation of the customs duties exemptions.

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Claimants:

Full reparation on basis of Amount awarded: Art. 31 ILC Articles and as 376,433,229 RON = articulated in Chorzów case (paras 916–17) (a) Increased costs for RON 85,100,000 (for imported raw materials; Respondent did not increased costs of sugar) (b) Lost sales of products dispute the principle of + sugar free of customs full reparation, but RON 17,500,000 (for tax; (c) Financial contends that claimants penalties incurred to the have not met their burden increased costs of other raw materials) + state for delays in tax of proof with payments; RON 18,133,229 (for the lost opportunity to stockpile sugar) + € 613.7 million for:

P 460 (European Food), wheat and corn mills (Starmill) as well as a packaging facility (Multipack). Incentives had been offered by Romania to attract investors, one of which was the exemption from paying customs duties on imported raw materials for the period of 10 years. In 2005, however, Romania revoked this exemption about four years early since it was held to be incompatible with EU state aid laws, which the EU Commission confirmed in the proceedings.

P 461

TECO Guatemala Holdings, LLC v The Republic of Guatemala Award of 19 December 2013 ICSID Case No. ARB/10/23 Applicable law: CAFTADR

P 462

TECO, a company established under the laws of Delaware, held a 24.3% share in Empresa Eléctrica de Guatemala (EEGSA), a Guatemalan company that was entitled under an Authorization Agreement of 1998 to distribute electricity in several departments of Guatemala for a period of 50 years. While the tariffs had been determined in a mutual adoption procedure without disagreement for years, during the tariff review process and pricing for the period 2008–2013, the Guatemalan electric power agency (CNEE) unilaterally set the tariffs for EEGSA, whose complaints before domestic courts were ultimately dismissed by the Constitutional Court. In October 2010, interests in EEGSA were sold to a Colombian company for US$ 605 million (TECO's share was US$181.5 million).

(d) Lost opportunities to complete or initiate incremental investments (malt, can and cogeneration plants); and (e) Lost incremental sales of private-label beer that would have been profitable with completion of the costsaving investments (para. 884).

respect to the damage suffered, and have failed to prove that the damages alleged were caused by Romania's breaches of the BIT (para. 918).

As regards causation, respondent refers to Biwater 'sufficient link between the wrongful act and the damages in question' and that later specified applying causation must be three different methods: proximate (i.e. not too remote or • Method A: inconsequential) (paras accepted (see 921ff). other column) • Method B: claimants would have used existing plant to sell larger quantities = rejected • Method C: claimants would not have expanded into food production as they did in 1999 had they known that the incentives would not last 10 full years = rejected Violation of FET standard under Art. 10.5 of the CAFTA-DR (since the tariff review process for the period 2008–2013 was arbitrary and breached due process).

Tribunal did not mention a particular standard, but referred to the agreement of both parties on the US$ 21,100,552 for cash methodology to be flows lost between August 2008 and October applied to both heads of 2010 (difference between damages, i.e. the 'but for' cash flows based difference between an on the tariffs proposed actual scenario and a 'but by their consultant and for scenario' (para. 719) the ones used by CNEE) Tribunal found in sufficient evidence that + the transaction price US$ 222,484,783 million for would have reflected the loss in value of EEGSA's higher revenues of the shares; based on three company (para. 754). Thus, methods: DCF (60%), it agreed with respondent comparable publicly that the claim in this traded company (30%) respect was speculative and comparable (para. 757). transactions (10%).

RON 255,700,000 (for lost profits on sales of finished goods) Valuation: Claimants suggested three valuation methods, one of which was accepted by the tribunal: •

Method A: expectation model based on direct loss of claimants by being forced to pay higher prices for sugar and other raw materials, as well as the lost profits on sales of finished goods.

Tribunal rejected most of the lost opportunity arguments, but accepted that claimants planned to stockpile amounts of sugar ('but for' scenario).

Claimant:

Amount awarded:

US$ 243.6 million:

US$ 21,100,552

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Valuation: Tribunal confirmed damages for cash flows lost between 2008 and 2010 by comparing the hypothetical scenario based on agreed tariffs and the actual historical results. Second claim concerning loss of share value was rejected: tribunal confirmed that the 2010 sale was based on the existing tariffs unilaterally set by CNEE, however there was insufficient evidence of the existence and quantum of the losses that were allegedly suffered as a consequence (para. 749).

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Respondent: Agreed on methodology to be applied and on DCF model to calculate, but disagreed on three aspects of the 'but for' scenario: the New Replacement Value, the Capital Replacement Factor and the level of capital expenditures.

Antoine Abou Lahoud and Leila Bounafeh-Abou Lahoud v Democratic Republic of the Congo

The claimants, Lebanese nationals, held shares of IMPOREX, a company Award of 7 February established in 2014 Congo. Its main Decision on the Request sectors of activity were (i) electricity, for Annulment of 29 (ii) trade March 2016 exploitation of (in French) wood, and (iii) heavy ICSID Case No. ARB/10/4 machinery and vehicles and their spare parts. The Applicable law: P 463 facilities rented by Investment Law–Congo IMPOREX where (2002) owned by CONGOFRINGO. The facilities were made subject to a ministerial decree of July 1997 and a decision of May 2004 and ultimately owned by the Congolese state. Claimants alleged that they had been banished from the facilities and that their investment was destroyed.

Violation of FET Claimants: standard of Art. 25 of the Investment Code. US$ 763.978 (for material damage caused by Unlawful looting) expropriation pursuant to Art. 26 of + the Investment Code US$ 841,022 (for loss of (because lack of expected profit from public purpose and sales of goods) no payment of + compensation). US$ 17,645,000 (for the value of the company)

Respondent argues that claimants failed to mitigate their damages, but tribunal finds that claimants satisfied this obligation as far as it applied (para. 630).

Amount awarded: US$ 1,728,194 US$ 51,218 + 15,000 + 8,222 (for material damage) + US$ 45,908 (loss of expected revenues) + US$ 1,555,685 (value of the company)

+

Application of Moral Damages Congolese and US$ 3,000,000 international law according to Art. 42(1) of the ICSID Convention, para. 365. Annulment Decision 2016: Application by DRC dismissed in its entirety;

P 464

Noting that the Congolese Investment Code does not propose a standard for compensation, the tribunal refers to the Chorzów standard (para. 556).

respondent to bear all costs of the arbitration and pay 50% of the claimants' cost, plus LIBOR plus 2% interest

Valuation: Material damage: arithmetic mean of replacement value established by IMPOREX (47% of gross book value 2004) and the residual value for each category of assets (para. 579). Lost profits from sale: on the basis of previously achieved sales margins (paras 590ff). Loss in value of the business: tribunal rejecteds DCF method for not bringing precise results; exercises its discretionary power in determining the total amount of sales (30% of the amount argued by claimants) (para. 600). Moral damages rejected.

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Case

Investment affected Violations found & measures at issue

SAUR International S.A. v Saur International Argentine Republic (Sauri), a French company, had won a Award of 22 May 2014 tender in the privatization of (in Spanish) Obras Sanitarias des ICSID Case No. Mendoza (OSM) ARB/04/4 holding the concession of Applicable law: public water Argentina–France BIT services of the Province of (1991/1993) Mendoza. Sauri was a member of a consortium and designated as the Technical Operator. After the 2002 Emergency Measures by Argentina, the Province of Mendoza and OSM signed two MOUs (2005, 2007) in which they defined principles of renegotiation of the concession contract concerning new tariffs and higher fees on revenues. P 465 Due to the delay of the second MOU, the former prices stayed in force. The provincial authorities conducted an administrative intervention, which was followed by a physical takeover of OSM in August 2009. In 2010, the Governor declared the concession contract as terminated, leading to the automatic termination of the technical operator agreement. Gold Reserve Inc. v Bolivarian Republic of Venezuela

Gold Reserve Inc., a mining company incorporated in Canada, purchased Award of 22 September shares of the 2014 Venezuelan Brisas Company and ICSID Case No. thereby obtained ARB(AF)/09/1 two mining Applicable law: concessions in Canada–Venezuela BIT Southeastern Venezuela for the (1996/1998) extraction of gold, copper, and molybdenum. Concessions were granted for 20 years with option of extension for two additional ten-year terms. The concessions were part of a larger Brisas Project, a construction permit was issued in 2007. P 466 Claimants complied with conditions and requested signature by the Venezuelan Ministry of Environment of the Initiation Act. However, the Brisas Project was prohibited and the construction permit was revoked for reasons of public order (para. 24). Extension of the Brisas concession was never granted. In October 2009, Venezuela seized Gold Reserve's assets and occupied the Brisas Project site. The other concession was also terminated by Venezuela, alleging breaches by the claimants.

Violation of FET standard by the breach of the second MOU concluded between the Province of Mendoza and OSM which gave the principles of the first MOU legally binding effect and provided for a revision of tariffs, a price increase, the settlement of outstanding loans and debts, and a waiver of the fees increase (para. 65).

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Claimant:

Full reparation, as supported by the parties, according to Chorzów, which 'includes damnum emergens and lucrum cessans', referring to Art. 36(2) ILC Articles (para. 160).

Amount awarded:

Tribunal agreed with claimant that ex post data could be used for the calculation of the 'as if' scenario, as long as they were foreseeable and not surprising (para. 263).

Two separate categories:

Initially US$ 143,900,000 (for its US$ 72,400,000 investment), subsequently limited to US$ 40,255,000 (because the second MOU excluded claims for damages before signing the MOU, para. 129).

Calculation based on an 'as if' DCF valuation: the value the company would have, had the second MOU not been violated, discounted The delay of the back to the date when it second MOU and the should have entered lack of price increase into force (2007) led to serious financial problems of Respondent: OSM and contributed (1) no damages for to the collapse in the FET, because both provision of drinking parties failed in water (para. 84). their duties during 2007–2009 Expropriation by the (para. 145) cumulative facts of the administrative, (2) no compensation intervention, the for expropriation, termination of the because value as concession contract of the and transfer to a new expropriation concessionaire (para. date in August 84). 2009 was zero (para. 145)

Violation of FET under Art. 2 of the BIT: through not signing Initiation Act without proper reasoning and termination of the concessions; actions were 'particularly egregious' and compensation should reflect the 'seriousness of the violation' (para. 615) No expropriation. No breach of FPS standard.

US$ 39,990,111 (a little more than half of the amount invested, para. 395) Valuation: Investments in shares of OSM and investments as the technical operator.

Shares: DCF model based on income reflecting hypothetical price Sauri had two different increases under the sources of revenue from OSM: (1) dividends from its second MOU (paras 183– 4); cash flow was shares and (2) income as calculated as EBITDA, the technical operator of discount rate 6%, based OSM (para. 135). on the WACC between 6.4% and 10.9%; 6% was also the rate of return guaranteed by the second MOU (para. 305); net debts were deducted, and the resulting amount converted into US$ 20,907,000.

Chorzów standard: best achieved by using 'a FMV methodology', because the consequence of the based on a weighted serious breach was to average method deprive the investor consisting of the DCF totally of its investment; method (50%), the also in accordance with comparable publicly traded company method the submissions of the parties (para. 681) (35%), and the comparable transaction Valuation date: method (15%). 14 April 2008 (= date of Respondent relies on revocation of the DCF method, without construction permit, para. suggesting its own 24) (para. 681) calculation but making adjustments to that presented by claimant.

Technical operator: Tribunal applied claimant's expert's method of calculating OSM's income taking the 3% royalty for Sauri for 2008–2023, which equalled an uncollected revenue of US$ 19,301,000

Claimant:

Amount awarded:

US$ 1,735,124,200

US$ 713,032,000

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Valuation: Tribunal held that DCF method was not reliable since the Brisas Project had never been a functioning mine with a history of cash flows; also comparables method was not appropriate, since comparables were not sufficiently similar. However, DCF valuation with reference to comparable companies and transactions would result in a reasonable methodology (para. 832). WACC: Tribunal disagreed with the WACC models of the parties (8.22% and 16.5%–23.8%) and applied a WACC of 10.09%

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Country risk:

Country risk: Expropriation risk should be excluded: 4%

Claimants claim to exclude expropriation risk, 1.5% would represent normal country risk premium; Respondent: Country risk premium should be 6.7% to 16.4%.

P 467 Mobil Corporation, Venezuela Holdings B.V., Mobil Cerro Negro Holding, Ltd, Mobil Venezolana de Petroleos Holdings, Inc, Mobil Cerro negro, Ltd, and Mobil Venezolana de Petroleos, Inc. v The Bolivarian Republic of Venezuela

P 468

Mobil Corporation (organized under the laws of the Netherlands) invested in two oil production and exploration projects in Venezuela. (The four other claimants, two US companies and two Bahamas Award of 9 October 2014 companies, were its 100% direct and ICSID Case No. indirect ARB/07/27 subsidiaries.) Applicable Law: Following the 2001 Hydrocarbons Law Netherlands– and the 2007 Decree Venezuela BIT Law 5200, all (1991/1993), projects were Venezuelan Investment Law (1999) nationalized by requesting all companies to turn into 'mixed companies' (state owns more than 50%, all production to be sold to the state owned PDVSA) otherwise, Venezuela would 'directly assume the activities of these associations'. After months of failed negotiations, Venezuela seized the investments.

Lawful expropriation in June 2007

Cerro Negro Project: US$ (did not violate due 14.5 billion due to process requirements measures taken before and the mere fact expropriation and loss that an investor had of interests in the not received project due to compensation does expropriation; of which not itself render an measures taken before expropriation the expropriation unlawful; it is not amounts to US$ 53.6 disputed that million (para. 265) negotiations about Expropriation the amount of compensation: DCF compensation took place) (paras 288–306) based on volume of production, oil price, Breach of the FET revenues from other standard contained products, royalties and in Art. 3(1) of the BIT extraction tax, cost of (through the operation and capital production and investment, special export curtailment contributions, and measures from income tax October/November Discount rate: Based on 2006 to April 2007) WACC (= 8.7%) (para. 264) Country risk: Expropriation risk should be excluded

Regarding this dispute, an ICC award was rendered on 23 December 2011.

Flughafen Zürich A.G. and Gestión e Ingeniería IDC S.A. v Bolivarian Republic of Venezuela

P 469

Award of 18 November 2014 (in Spanish) ICSID Case No. ARB/10/19 Applicable law:

The claimants (a Swiss and a Chilean company) negotiated with the Governor of the State of Nueva Esparta a concession to operate the Isla Margarita Airport.

Claimants:

Expropriation under both BITs (para. 509)

For expropriation: 'just compensation' as required in Art. 6 BIT on expropriation (para. 307) For FET violation: 'damages suffered as a consequence of this breach' (para. 265) Valuation date: Expropriation: Immediately after the failure of negotiations between the parties and before expropriation on 27 June 2007 (para. 307)

Amount awarded: US$ 1,600,042,482 = US$ 1,411.7 million (for expropriation of Cerro Negro Project investments) + US$ 179.3 million (for expropriation of investments in the La Ceiba Project) + US$ 9,042,482 (for FET violations between 2006 and 2007) Net of Venezuelan tax

FET violation: period between October 2006 and June 2007

Valuation:

Double recovery:

Tribunals applies DCF on basis of submission by parties making its own adjustments

Tribunal takes note that claimants are willing to make the required reimbursements in order to avoid double recovery in relation to the damages awarded in the ICC arbitration.

Cerro Negro Project:

Discount rate: Tribunal discussed whether 'confiscation risk' should be included or excluded; it considers that the confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate (para. 365); other arbitral tribunals have adopted discount rates in comparable cases between 18.5 to 21% (para. 367); tribunal sets discount rate at 18% (same as ICC award).

Respondent: Country Double recovery will thus risk should be included, be avoided (paras 271, 381, discount rate should be 404.e) 18.5% to 23.9%

As for La Ceiba Project, tribunal confirmed actual investment approach as requested by claimants (para. 385).

Claimants:

Amount awarded:

US$ 652,000 (for costs The adopted incurred in the strategic measures constituted development of the a 'direct airport project, para. 753) expropriation, more + US$ 43,870,615 as value concretely, a nationalization of the of the operating company investment' (para. 509). + US$ 325,743 as value for the services company

Venezuela–Chile BIT (1993/1995), Venezuela– Switzerland BIT (1993/1994)

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Switzerland–Venezuela BIT: Market value of the investment immediately before the expropriatory measures were taken (para. 739)

US$ 9,714,130.5 Valuation: Tribunal applied DCF method–as agreed by both parties; however, validated by comparison of comparable companies and transactions (para. 783).

Case

P 470

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

The contract needed approval by the National Assembly. Pending the decision, the Governor granted the concession by a decree and entered into a contract with the claimants. In 2004, a new Governor challenged the legality of the decree and issued a resolution (Resolución 0001-5) which revoked it and nullified the contract. A few days later, the airport was taken over by the police force. The administrative court declared that the state had violated claimant's due process rights and ordered to return the airport. Nevertheless, the state took over the airport 'for public interest reasons', but recognized the right to compensation of the value of the investment and 50% of the value of lost benefits (para. 86). In 2009, the Supreme Court decided to hand over the airport to the Venezuelan government, despite pending proceeding before the regional administrative court (para. 104).

DCF method applied, based on passenger traffic, operating costs and discount rate.

Chile–Venezuela BIT: 'effective and adequate' (para. 741)

The measures were not lawful, because they were in violation of Venezuelan law, as confirmed by the administrative court, and were not accompanied by the payment of compensation (para. 511). No violation of the FET standard, without prejudice to the findings on denial of justice (para. 599). Denial of justice with regard to the 2009 decision of the Supreme Court to hand over the control of the airport to the government, in contrast to earlier judicial decisions and pending proceedings before the regional administrative court (found by the majority, para. 698)

Discount rate: Proposed 4.6% based on WACC (para. 791), no country risk added Respondent: against the granting of compensation; later agreed on the application of the DCF method; rejected the proposal by the tribunal to agree on a joint expert report, but submitted its own report using the same parameters but different numbers

Passenger traffic, operating costs and the discount rate were three relevant factors to be Tribunal considers this decided: passenger similar, even if less traffic should be based precise (para. 742) on reasonable Tribunal rejects expenses expectations at the time of expropriation, not for the strategic development, because no actual passenger traffic, relation to expropriation as this could not be taken to diminish the (para. 755) value of the expropriated Tribunal also rejects property (paras 855–8). compensation for the services company because 33% expenses-to-totalincome ratio applied in it had no independent relation to other airports value (paras 920–5) operated by claimants in Valuation date: Chile, not in Zürich (para. 874) Expropriation occurred on 30 December 2005, when the Government took over the control of the airport, with the support of police forces (para. 508)

Discount rate:

Discount rate:

Composed of risk- free rate, market risk premium, country risk premium = 17.28%, to be adjusted at real terms (minus inflation) should be 14.4%

14.4% discount rate as proposed by claimant; country could not benefit from a wrongful act attributable to it to increase country risk; yet at the time the investments were made in 2004, the country risk already existed (7.9% country-risk rate), claimants had used 15% discount rate when developing their investment business plan (para. 882).

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Case

Investment affected Violations found & measures at issue

Economic loss claimed

Hassan Awdi, Enterprise Business Consultants, Inc. and Alfa El Corporation v Romania

Claimants (Hassan Awdi and two companies controlled by him) had purchased Rodipet, a press distribution company previously owned by Romania, and Casa Bucur, a historical estate which they turned into a luxury boutique hotel and restaurant. The privatization contract for Rodipet imposed obligations upon the claimants (capital infusions, technical investments) and the respondents (tax benefits and the issuance of a concession for 49 years over land housing press distribution points). The concession was based on Law 442, subsequently declared unconstitutional by the Romanian Supreme Court. The Privatization Contract was terminated due to alleged failures by claimants to comply with obligations. Following a change in restitution laws, the estate was ordered to be returned to former owners and claimants were evicted from the estate by police.

Claimant:

Award of 2 March 2015 ICSID Case No. ARB/10/13 Applicable law: Romania–USA BIT (1992/1994)

P 471

Breach of the FET standard arising out of Art. II(2)(a) BIT: Romania's failure to remedy the repeal of Law 442 and to reimburse the price paid for Casa Bucur to the claimants (para. 440) No violation of obligation not to impair investments by arbitrary or discriminatory measures under Art. II(2)b

No expropriation: The tribunal held that claimants cannot claim expropriation or denial of justice since they had knowledge of the legal risk of restitution.

Standard of Amount decided & compensation/reparation valuation method

Tribunal rejects claimants' analysis and 'Principal claim': conclusions based on €105,597,000 (for Rodipet expropriation, a BIT and Rodipet Courier) violation that has been excluded (para. 514). + €56,318,000 (for Supremo Media) In view of the FET + €1,484,000 (for Balbec violation, it considers appropriate to base Retail) compensation on sunk + cost (para. 514). moral damages in an amount corresponding to 5% of awarded damages but no less than €10,000,000

Amount awarded:

+ US$ 500,000 and €10,000,000 for Casa Bucur (for works performed on the estate and the loss of profit on the hotel and restaurant) (para. 481).

Valuation method:

Tribunal rejects compensation with regard to other companies of the Rodipet Group in the absence of evidence that their involvement had profited Rodipet and had been accepted as falling within the scope of the Privatization Contract (para. 515). Moral damages claims rejected (para. 516).

€7,690,528.59 €7,543,176.59 EUR to Awdi for Rodipet plus interest + €147,352 to Alfa El Corporation for Casa Bucur

DCF method rejected due to Rodipet's history of losses. Compensation must be based on sunk costs being the 'amount invested by Claimants regarding Rodipet in the expectation that such amount would have been earned back had Law 442 remained in force' (para. 514). As for Casa Bucur, the tribunal rejected that claimants lost their investment due to the BIT breaches, only accepted reimbursement of the price paid as overall compensation for breach of the FET standard (para. 463).

P 472

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Case

Investment affected Violations found & measures at issue

OI European Group B.V. v Claimant held Bolivarian Republic of majority interests in Venezuela two Venezuelan companies (OIdV Award of 10 March 2015 and Favianca) which owned glassICSID Case No. packaging ARB/11/25 production, Applicable law: processing and distribution plants. Netherlands– The technology Venezuela BIT used in the plants (1991/1993) was state-of-the-art equipment provided by the OI Group. 2002 legislation provided for legal guarantees for private companies and better exchange rates. On 26 October 2010, President Hugo Chavez issued a Presidential Decree expropriating OIdV's assets. The plants were placed under custody of the National Bolivarian Guard. After unsuccessful amicable settlement procedure, Venezuela turned to the non-amicable, judicial phase of expropriation, in P 473 which claimant refused to participate. The plants were placed under the supervision of a state-owned company. Venezuela also imposed a substantial fine on OIdV for alleged violations of domestic law and granted free access to the plants to third parties despite objection by OI.

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Unlawful expropriation, violation of Art. 6 BIT

Claimant:

Due to Because of lack of due process (Venezuela left claimant in uncertainty which specific assets were being expropriated, such as business assets, companies including liabilities, bank accounts, goodwill, know-how and technology, etc) (paras 399–403).

= US$ 729,821,323 (73% of the companies' market value)

Art. 6(c) of the BIT contains three requirements for compensation after expropriation: 'market value of the investment', valuation date shall be immediately before the measures were taken or became public, and currency be chosen by claimant.

+ Lack of payment of just compensation (excessive and unjustified delays) (paras 425–6).

Arbitrary measures, but no denial of justice (since claimant failed to participate in proceedings) Tidewater group, a supplier of marine transportation services in the Gulf of Mexico, had acquired SEMARCA Award of 13 March 2015 in Venezuela, which ICSID Case No. ARB/10/5 provided services to Venezuela's Applicable law: national oil companies (PDVSA Venezuela–Barbados Petroleo, CVP, and BIT (1994/1995), PetrocSucre) Venezuelan without an official Investment Law (1999) concession, but on P 474 the basis of short1 term contracts. Due to the fall of oil prices in 2008, PDVSA became unable to conduct its payments to SEMARCA (total of US$ 40,000,000). Following the enactment of the Reserve Law of 7 May 2009, which reserved assets and series related to hydrocarbon activities to the state, SEMARCA's assets on Lake Maracaibo, its headquarters and 11 vessels (and later another 4 vessels) were seized.

+ US$ 16,833,383 (excess cash flow) + US$ 54,292,257 (losses out of repatriation of dividends) + US$ 50,566,759 (harm caused to business activities in Brazil) + US$ 68,030,992 (damages of misuse of intellectual property) + US$ 10,000,000 (for moral damages) Discount rate:

Yet, expropriation was in public interest WACC of 20.39% and not Country risk of 2% discriminatory (paras 382, 384, 411).

Violation of FET standard under Art. 3(1) BIT (para. 540).

Tidewater Investment SRL and Tidewater Caribe, C.A. v The Bolivarian Republic of Venezuela

US$ 929,544,714

Expropriation of investment in SEMARCA.

Parties agreed on definition of 'market value' being the price that a hypothetical purchaser would be willing to pay with knowledge of the context in a free market (para. 649).

Amount awarded: US$ 372,461,982 Valuation method: Parties agreed on use of DCF, tribunal agrees with respondent that it should be paired with additional methodologies (e.g. comparable companies/transactions) to achieve the most reliable result. Tribunal applies parameters used by the parties and adds cash flow excess to the resulting market value.

-Beta: sribunal follows claimant's choice (paras 26 October 2010 (= date of 784–97) the Presidential Decree -Discount rate: expropriating OIdV's assets) WACC of 23% Country risk of 6% (based on Moral damages rejected after detailed discussion Damodaran tables; 2% on the standard for 'moral would be equal to Italy damages' (paras 899–917). which is not justifiable, but country risk should reflect risks of public debt and market volatility, not specific expropriation risk) (para. 782). Valuation date:

Respondents:

In addition comparable companies method, referring to EBITDA multiples, which confirms DCF valuation (paras 857–79)

Contended that market value of expropriated assets was US$ 113,807,000 Discount rate: WACC of 25.78% Country risk of 6% Claimants:

US$ 217–234 million (ex post basis) and US$ 103– Tribunal discussed in 141 million (ex ante detail the lawfulness basis) (paras 53,60ff). of the expropriation, Combination of three including its consequences upon methodologies based on valuation, concludes ex ante and ex post approaches: DCF analysis that expropriation assisted by the 'was lawful, since it comparable publicly wants only compensation' (para. traded companies approach plus the 146). comparable transactions approach.

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FMV as standard as contained in Art. 5 BIT and as also required under CIL, as reflected in the WB Guidelines and ILC Articles (paras 151ff) Important to distinguish between lawful and unlawful expropriations, because compensation is different: fair compensation at the date of expropriation vs restitution in kind or monetary equivalent (para. 142).

Amount awarded: US$ 46,400,4000 DCF method applied (para. 165), company was going concern for some fifty years with substantial operating income. Elements: Scope of business (services performed by 15 vessels on Lake Maracaibo)

Case

Investment affected Violations found & measures at issue Tribunal left aside the other causes of action (FET, arbitrary and discriminatory treatment, national treatment, MFN) as they would not add anything to the question of liability or the quantum of damages (paras 148– 50).

Economic loss claimed Discount factor:

Standard of Amount decided & compensation/reparation valuation method

Standard of FMV does not denote a particular Equity risk: 5% (to reflect method of valuation, may investment risk in indeed be the book value relation to risk-free US (para. 145). Treasury bonds) Valuation is necessarily a Country risk: 1.5% matter of 'informed (because political risk estimation' (para. 164). should be excluded; state controls the risks, Valuation date: can increase it and 7 May 2009 (date of obtain an illegitimate Reserve Law) benefit) (para. 183) Ex post/ex ante: Respondents:

Accounts receivables: Outstanding receivables to be included in value of the company Historical cash flows: Include whole period 2006–2009 (even though disproportionally high in 2009), including ex post basis Discount factor:

Equity risk: 6.5% (longTribunal 'is not required term market risk to shut its eyes to events premium) Confirmed DCF as the subsequent to the date of Country Risk: 14.75 only methodology to be injury'. used. (necessary to separate liability and valuation; Discount factor: BIT is not an insurance Equity risk: 6.5% (longpolicy; a hypothetical term arithmetical mean willing buyer would in the industry) include risk of expropriation; this is not Country risk: 14.75% permitting a respondent state to profit from its Business risk: Should be own wrong; the country added, as claimants risk quantifies general depended on a single risk, including political customer risk. Recent decisions have applied 18% (paras 182–90, referring to Mobil Cerro Negro, Himpurna, Lemire) US$ 1.68 million

P 475

Business risk: no additional discount for single customer concentration. Pluspetrol Perú Corporation and others v Perupetro S.A. Award of 21 May 2015 (in Spanish) ICSID Case No. ARB/12/28 Applicable law: Contract (Contrato de Licencia para la Explotación de Hidrocarburos en el Lote 56, 2004)

P 476

Dispute concerns 'License Agreement for the Exploitation of Hydrocarbons in Block 56' (License Agreement) about the amount of royalties payable for natural gas shipments exported from Peru to the coast in the Gulf of Mexico between August 2010 and March 2011. When respondent notified claimants its intention to terminate the License Agreement due to the alleged violation of claimants' contractual obligations, claimants initiated arbitration proceedings to resolve the dispute about the royalties (paras 51–53).

Claimants (!) failed to comply with their obligations to properly calculate the royalty agreed in the License Agreement to the ten shipments of natural gas in dispute.

Respondent: Damages for violation of a contract, both under international law and Peruvian law, which governed the License Agreement (para. 180). In absence of inexcusable negligence and intent, damages should put the injured party in the position it would be in absence of the violation of the obligation (para. 181). Amount claimed: US$ 80,153,962 (royalties due) minus US$ 27,877,732 (royalties paid) = US$ 52,276,230 (para. 183) Alternatively: US$ 48,823.826 (para. 186) Claimants disagreed on interest rate (para. 203).

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Compliance with terms of Amount awarded to the contract with regard Respondent: to the calculation of US$ 48,823,826 royalties. Valuation: Tribunal agreed with alternative valuation by The damages were respondent with calculated as the differentiated calculation difference between the of royalties, depending on royalty paid and the the final destination of royalty that should have the respective shipments been paid based on the (para. 204). factual final destinations of the shipments.

Case

Investment affected Violations found & measures at issue

Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi Universal S.A v The Argentine Republic

P 478

Claimants had established and funded Aguas Argentinas S.A. (AASA), an Argentine company, which was Decision on Liability of granted a 30-year 30 July 2010 concession to operate water and Award of 9 April 2015 waste-water services ICSID Case No. in and around the ARB/03/19 city of Buenos Aires in 1993. Claimants Jointly with faced a number of AWG Group Limited v The legal and regulatory measures (in the Argentine Republic aftermath of the (UNCITRAL) Argentine financial Applicable law: crisis) which led to France–Argentina BIT 'forced' renegotiations of (1991/1993), the concession, and Argentina–Spain BIT Argentina's (1991/1992), unwillingness to Argentina–UK BIT raise the tariff for (1990/1993) water and wastewater services, which destroyed the value of the investment. In 2006, Argentina terminated the concession and transferred the water and wastewater services system to a state entity. Argentina argued this was legitimate due to violations of AASA's obligations pursuant to the concession agreement.

Violation of FET standard (by refusing to adjust tariffs and through its treatment with force of AASA when trying to renegotiate the concession) No direct or indirect expropriation No denial of full protection and security Suez and Vivendi Universal S.A. were incorporated in France, Sociedad General de Aguas de Barcelona S.A. (AGBAR), was incorporated in Spain, and AWG Group Ltd (AWG) was incorporated in the UK so that three BITs were applicable.

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Claimants:

All three BITs provide that tribunal should apply 'relevant principles of international law', thus the tribunal applies CIL (para. 23).

Suez: US$ 186 million (loss on guaranteed debt) +

US$ 132.6 million (loss on ILC Articles and Chorzów equity) + standard (para. 27) US$ 243.7 million (loss on Application of principle of management fees) + 'full compensation': US$ 9 million (loss on Damages = [V without earned but unpaid management fees as of measures]–[V with measures] (para. 28) 2002) + US$ 1.6 million (losses on unpaid dividends) Vivendi: US$ 35.2 million (loss on guaranteed debt) + US$ 25.1 million (loss on equity) + US$ 0.3 million (loss on past due dividends) Sociedad General de Aguas de Barcelona (AGBAR):

US$ 116.5 million (loss on guaranteed debt) + US$ 83.1 million (loss on equity) +

Amount awarded: US$ 404,539,050 Suez: US$ 223,043,289 AGBAR: US$ 123,276,448 Vivendi: US$ 37,261,504 AWG: US$ 20,957,809 Valuation: Tribunal appointed its own expert (para. 12).

Loss on guaranteed debt Undisputed factual total debt guaranteed payments to all multilateral financial institutions of US$ 297,792,408, disagreement only whether legal fees of Valuation period: approximately US$ 6 January 2002 (first 557,000 incurred by the breach of FET) to 2023 (end claimants in making the of the Concession) (para. March 2006 Purchase 36) Agreement should be included. Tribunal confirms they are part of the loss (para. 62). Loss = stream of revenue, 'cash flow', expected to be received over the remaining term of the Concession Contract (para. 29)

Double recovery: Argentina could invoke in respective proceedings, if it had already paid (para. 40).

Loss on Management fees:

'The treaty standard does not apply to unlawful expropriations, which are governed by the full reparation principle as articulated by the PCIJ in the Chorzów case and later expressed in the ILC Articles.' (para. 326)

Amount awarded:

Suez was entitled under a Management Contract to receive fees for the US$ 1 million (loss on Dismissed Suez' claim for management, control, past due dividends) US$ 7 million technology transfer and management fees unpaid know-how. This was AWG: in 2001, because not calculated until 2023 and US$ 19.8 million (loss on caused by Argentina's then discounted to 2001, guaranteed debt) + US$ actions (para. 86). actualizing that value by 14.1 million (loss on applying the Eurodollar equity) + US$ 0.2 million Dismissed claims for unpaid rate, compounded semi(loss on past dividends) dividends, as they were annually until 1 included in the (para. 21) November 2014 (para. 83) shareholders' equity and would represent double Loss on equity:DCF recovery (para. 104). method should be applied; tribunal discusses Free Cash Flow, Adjusted Present Value, and Flow to Equity, applying the latter two which arrived at nearly identical results (paras 95, 101). Quiborax S.A. and NonMetallic Minerals S.A. v Plurinational State of Bolivia

Quiborax S.A. (a Chilean company that supplies borates in South America) became Award of 16 September interested in the 2015 fields of ICSID Case No. ARB/06/2 neighbouring Bolivia as potential Applicable law: additional sources of raw material and Bolivia–Chile BIT entered into a (1994/1999) contract with Compañía Minera Río Grande Sur S.A. ('Rio Grande'), a Bolivian mining company that owned concession rights for a major Bolivian borate field. The contract was restructured and Rio Grande handed over its mining concessions to a separate company called Non Metallic Minerals S.A. ('NMM'). Quiborax then purchased a majority stake in NMM. However, in P 479 2005, NMM's mining concessions were revoked by the Bolivian government.

Unlawful expropriation in violation of Art. VI of the BIT

Claimants:

US$ 61,481,461 (for damages suffered due to the loss of their Violation of FET investment in Bolivia) + standard pursuant to US$ 4 million (for moral Art. IV(1) of the BIT damages) Unreasonable or discriminatory measures in breach of Art. III(2) of the BIT (by impairing the free administration, maintenance, use, enjoyment, extension, transfer, sale, and liquidation of the investments)

DCF analysis is the appropriate method to value the FMV of NMM, since it qualifies as a going concern with a proven track record of profitability. Discount rate: WACC in 2004 and 2013 presented, in the alternative. Country risk: 4.24% in 2004, 2.67% in 2013 (low risk, also because products are sold outside Bolivia) Respondent: FMV must be established by reference to the net amounts invested in accordance with Art. VI(2) of the BIT Discount rate: WACC only in 2004 Country risk: 13.83%

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US$ 48,619,578 Valuation:

The tribunal finds NMM's mining activity to have a 'sufficient record of operations and prospective profitability Valuation date: Date of the to justify applying the Award, using 30 June 2013 DCF method to value the as proxy (majority concessions.' opinion) (para. 385) Tribunal discusses the Moral damages dismissed various sources of cash (tribunal agrees with flows, both for past and Bolivia and Lemire that future cashflows the threshold to award (reserves and resources, moral damages is high, production profile, exceptional remedy, para. prices & costs, other 618). variables). Discount rate: WACC 18.4% Country risk: 9.75% (as published by Damodaran and quoted by both parties, though in a different manner), country risk in 2004 (reflects better the actual risk than the low risk proposed by claimant)

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Hrvatska Elektroprivreda D.D. v Republic of Slovenia

Claimant (the national Croatian electricity company, HEP) was party to agreements with the national electricity company of Slovenia according to which each partner had a right of 50% of the output and a liability of 50% for the plant's debts (the parity principle). Slovenia adopted a number of measures that HEP considered inconsistent with the parity principle. The 2001 Agreement should resolve outstanding disputes and provide that electricity deliveries would resume on 30 June 2002.

Claimant:

Decision on the Treaty Interpretation Issue of 12 June 2009 Award of 17 December 2015 ICSID Case No. ARB/05/24 Applicable law: Croatia–Slovenia Agreement regarding the Investment, Use and Dismantling of Nuclear Power Plant Krško (2001 Agreement) Energy Charter Treaty

P 480

Slovenia violated the 2001 Agreement, because the two 2002 offers were materially different from the Agreement in 2001 (para. 213).

Standard of Amount decided & compensation/reparation valuation method

Claimant argued on basis Amount awarded: of Factory at Chorzów and Art. 31(1) ILC Articles (para. € 19,987,009 plus interest and costs 248). Valuation method: (para. 258) Respondent denied Tribunal appointed an applicability of ILC Valuation: independent expert Articles, instead asked the (para. 41), who called All claims under the Cost of electricity tribunal 'to put in place claimant's model Energy Charter Treaty obtained from other what the Tribunal 'replacement model' and were dismissed (para. sources = 'Factor X' determines the parties the respondent's model 202 (B), Decision on had agreed upon by way 'financial model' (para. Cost of electricity that Treaty Interpretation should have been of financial settlement 275) of 2009). under the 2001 supplied under the 2001 Agreement.' (para. 259) Both parties approached Agreement = 'Factor Y' compensation on the Tribunal refers to Art. 36 same basic calculation: Calculation: of the ILC Articles to point X–Y = € 29.5 million (para. out that the claimant 'can X= factual scenario only recover in 251) Y= counterfactual compensation the loss scenario 'X minus Y' Respondent: that it has actually (para. 348) suffered' (para. 238). HEP would have used imported electricity as the primary replacement for electricity during the period in issue, whose costs had been less than HEP would have paid over the same period under the 2001 Agreement (para. 266) € 29,472,307

Slovenia did not ratify the 2001 Agreement and did not resume deliveries until February 2003.

Tribunal included import costs in the factual scenario (para. 470), resulting in € 21,558,000 as damage caused. Also 'benefits' received by HEP in the factual scenario that would not have existed in the counterfactual scenario considered (para. 471) → € 1.571 million deduction (para. 517).

Tenaris S.A. and TaltaTrading E Marketing Sociedade Unipessoal LDA v Boliavarian Republic of Venezuela

Tenaris (incorporated under the laws of the Grand Duchy of Luxembourg), a supplier of steel Award of 29 January tubes and related 2016 services for the energy industry and ICSID Case No. other industrial ARB/11/26 applications owned Applicable law: Talta (Portugal), Venezuela's only P 481 Belgium/Luxembourg– producer of Venezuela BIT (1988/2004), Portugal– stainless steel pipes for the oil and gas Venezuela BIT industry. Through (1994/1995) Talta, Tenaris held a shareholding in Matesi Materiales Siderurgicos S.A. (Matesi), a company established under the laws of Venezuela, which produces high quality hot briquetted iron, a component used in the production of steel. The companies assert that the use and enjoyment of their investment was lost as a result of indirect expropriation of their investment in, and prenationalisation interference with, their investments in Matesi.

Expropriation in violation of both BITs applicable (paras 493–97) by violating Venezuelan law and the BIT provisions on legal procedure. Quoting ADC v Hungary pointing out that there has not been 'a reasonable chance within a reasonable time to claim its legitimate rights and have its claims heard.' (para. 496)

Claimants: US$ 235.9 million for the taking of claimants' equity stake in Matesi + US$ 27.1 million for the taking of Talta's loan to Matesi (para. 501) Valuation: primarily DCF method analysing both the actual performance of the Matesi plant as well as projections of likely future performance and revenues, discounted back to the date of expropriation (para. 502); alternative valuation use of 'market multiples' from comparable publicly-traded companies, based on (1) market value to book equity and (2) market value to book value of assets (para. 503)

Allegation of BITRespondent: violations in the preFMV as determined by nationalization DCF method is US$ 0 phase dismissed.

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Tribunal quotes BIT provisions on expropriation compensation and finds that this 'language from treaties is very similar to that contained in the ILC Articles, which are currently considered to be the most accurate reflection of customary international law' (para. 515) quoting

US$ 87.3 million adding the FMV of Talta's interest in Matesi (US$ 60.2 million) and the value of the Talta loan (US$ 27.1 million) (para. 570)

Art. 36 ILC Articles (para. 516) and Chorzów (para. 517). 'There is no dispute that the correct date of expropriation is 30 April 2008.' (para. 518) 'The Parties' experts are also in agreement that FMV…' (para. 519).

DCF method rejected for brevity of operation (para. 526), and multiples rejected due to unique market circumstances, similar companies for comparison not available (para. 529).

+ pre-award interest in the amount of US$ 85,501,213.70 = US$ 172,801,213.70

The sales price of US$ 60.2 million for Talta's interest in Matesi, bought in March 2004, was an appropriate reflection of the FMV of Talta's interest in the Matesi plant (para. 566). The Matesi sale took place as part of a liquidation sale (para. 564).

Case

P 482

Investment affected Violations found & measures at issue

Crystallex International Crystallex Corporation v Bolivarian (incorporated in Republic of Venezuela Canada) had made investments in the Award of 4 April 2016 areas called 'Las Cristinas', one of the ICSID Case No. largest ARB(AF)/11/2 undeveloped gold Applicable law: deposits in the world. The dispute Canada–Venezuela BIT arose out of certain (1996/1998) measures taken by Venezuela which affected claimant's investments relating to four mining concessions, Cristina 4, 5, 6, and 7, located within the municipality of Sifontes in the State of Bolivar in the Guayana region in southeast Venezuela. In particular, Venezuela's April 2008 denial of a permit to Crystallex to exploit the gold deposits at Las Cristinas, and the rescission by the Corporación Venezolana de Guyana (CVG), the state-run corporation tasked with stimulating economic activity in the Guayana region, of the Mine Operation Contract (MOC) in February 2011.

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method

Violation of FET standard by frustrating Crystallex' legitimate expectations arising out of the specific promise. Engaged in arbitrary conduct in denying the Permit and rescinding the MOC, and committing several acts lacking transparency and consistency; thereby caused all of the investments made by Crystallex worthless (para. 623).

Claimant:

Compensation requirement of Art. VII (1) US$ 3.16 billion (para. 719) BIT only for compliant in the amount of the FMV expropriations; parties dispute whether also as of 3 February 2011. applicable for BIT Restitution has become violations; discussion impossible. rather theoretical and devoid of significant practical effects (paras 842–3). Tribunal follows BIT standard as full reparation under Chorzów may require valuation at the date of the award (para. 843).

US$ 1,202 million

Expropriation:

Net of applicable taxes.

Violation of Art. VII (1) BIT by not paying or offering compensation (paras 717–18).

Respondent:

Plus Cost approach 'for informative purposes' to show the breadth of the investments made by the claimant (para. 888).

No violation of public purpose, nondiscrimination or due process (quoting ADCstandard of due process, paras 713– 16).

Restitution is not an available remedy. BIT standards, and not CIL, is the applicable standard. Claimant is not entitled to damages other than the FMV at the time of the alleged taking (13 April 2008).

Neither party argued in favour of the date of the award (para. 844). Valuation date: Parties disagreed on expropriation date; tribunal in favour of 13 April 2008 as then events surrounding the permit denial occurred and the mining site came to a standstill (paras 854–8).

But no damages should be awarded, because the alleged damages are 'highly speculative, if not entirely fictional', no causal link (para. 720).

Tribunal considers 4 valuation methods as put forward by claimant: (1) (2) (3) (4)

Stock market approach P/NAV method Market multiples method Indirect sales comparison method

Finds that forward looking methodologies are appropriate to assess FMV. Actually relies on (1) stock market approach and (2) market multiples approach; rejects the other two as not reliable and excessively speculative (para. 916) The two approaches lead to results that are largely consistent with each other, takes the average of the two figures (para. 917).

P 483 Rusoro Mining Limited v Bolivarian Republic of Venezuela

Rusoro (a publicly traded Canadian company) had several gold mining Award of 22 August 2016 rights and projects in Venezuela. In ICSID Case No. 2009 and 2010, ARB(AF)/12/5 Venezuela enacted Applicable law: regulatory measures the Canada–Venezuela BIT increasing percentage of gold (1996/1998) to be sold to the Central Bank of Venezuela at the international price of gold (denominated in USD) at the Official Exchange Rate, and limited the percentage of gold allowable for export. On 16 September 2011, Venezuela adopted a Decree which reserved the gold extraction and exploitation activities to the state (the 'Nationalization Decree'). Negotiations with the affected owners P 484 were set at three months (later extended to six months) to agree on the amount of compensation or on the formation of a 'mixed company' with state equity participation of at least 55%. The Nationalization Decree set the maximum price to be paid at the book value. After failure of negotiations, all of Rusoro's mining rights and other assets were taken over by the Government in April 2012.

Unlawful expropriation, because the respondent complied only with three of the four requirements established in the BIT, but failed to comply with the fourth, 'prompt, adequate and effective compensation'; the respondent's offer in the Decree established a cap which was not foreseen in the BIT or in domestic Venezuelan law, and the concrete offer made to the claimant was significantly below the cap (paras 408–10). Creeping expropriation dismissed (para 438).

Claimant:

Standard:

US$ 966.5 million

(1)

'genuine value' as referred to in Art. VII of the BIT is equivalent to the FMV, as agreed by the parties (paras 647, 751)

(value of the investment)

Valuation date:

Six different approaches for valuation of investment:

(2)

(3)

US$ 2.23 billion (FMV of Rusoro's investment in Venezuela) US$ 85.4 million lost cash flows between 2009 and 2011 pre-award and post-award interest (para. 635)

Using a weighted average of three different methods: (1)

(2)

(3)

16 September 2011, as agreed between the parties (para. 647) Six 'prerequisites' for application of the DCF method: (1) (2)

comparable publicly traded companies (CPTC: (3) 50%) Comparable transactions, using multiples (CT: 20%) (4) DCF (30%)

Respondent: No FET or FPS violation, no US$ 1.5 million (para. violation of Art. VIII of 646) the BIT (transfer of funds), but violation of para. 6 (d) of the Annex to the BIT (restrictions on exportation) (para. 596).

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(5)

(6)

historical record detailed business plan, verified by impartial expert sales prices of products or services determined with reasonable certainty no uncertainty about availability of funding meaningful WACC possible, including reasonable country risk premium regulatory pressure low or impact on cash flows predictable (para. 759)

+ US$ 1,277,002 (cash flows lost through export restrictions)

(1) (2)

(3) (4)

(5)

(6)

amounts invested by Rusoro (US$ 774.3 million) adjusted investment valuation (US$ 1,128,7 million) book value of the investment (US$ 908 million) Maximum market capitalization (US$ 706 million, in 2008) Final market valuation (US$ 125.6 million, in 2011) valuation by claimant's expert (US$ 2.23 billion)

Case

Investment affected Violations found & measures at issue

Economic loss claimed

Standard of Amount decided & compensation/reparation valuation method (1), (5), and (6) eliminated; applied: (4) weighing 25%, (3) weighing 25%, and (2) weighing 50%

P 484

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→ tribunal rejects income approach, accepts market approach (25%), but relies primarily on cost-based approach, i.e. book value and adjusted book value (75%).

Appendix 2. Table of NAFTA Cases since 2008

Document information

Case

Publication

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Investment affected & measures at issue

Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v United Mexican States

Claimants claimed that their investments in the high fructose corn syrup industry in Mexico had been adversely Award of 21 impacted by November Mexico's 2002 2007 adoption of a tax on ICSID Case beverages that No. ARB(AF)/04/5) contain high fructose corn syrup (HFCS).

Bibliographic reference

'Appendix 2. Table of NAFTA Cases since 2008', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 485 - 490

Violations found

Economic loss claimed & valuation by respondent

Breach of Art. 1102 NAFTA (national treatment, paras 193ff, para. 213)

Claimants: Mexico is required to compensate the damage caused by the tax, in accordance with Art. 1135 NAFTA Art. 1106 NAFTA (paras 253ff). (performance requirements, Damages suffered paras 214ff, as investors, as 227) well as as exporters of fructose into Mexico (para. 255)

Standard of Amount decided & compensation/reparation valuation method

Interest & costs

Full reparation (ILC Articles, paras 275ff); referring to S D Myers (NAFTA drafters left standard open), Feldman, Pope & Talbot (considerable discretion, reasonable approaches)

Interest:

•

→ diminution in the FMV of the investment should • be calculated on the basis of lost profits (para. 257)

They alleged that the tax aimed at protecting Mexico's domestic sugar producers by excluding high fructose corn syrup from the soft drink sweetener market; that the imposition of the tax amounted to an indirect expropriation.

Respondent: damages should not be paid for losses suffered in respect of cross border trade in goods or services. The US has submitted in S.D. Myers that losses resulting from reduced imports would not be suffered in the entity's capacity as an investor (para. 256).

Amount awarded: US$ 33,510,091

Simple interest at the rate paid = loss of profits in the for US Treasury period 2002–2006 bills, as the award is in US$, Loss of profits was calculated for triggered by loss of sales; claimants have each month Quantum of submitted evidence from 31 damages in the of the sharp drop in December 2005 present case (= date on sales of HFCS depends on the which damages immediately amount of lost following the date on were profits that have calculated, as which the tax took been proved (para. effect on 1 January submitted by 287) claimants and 2002. not questioned Tribunal rejects the Quantum of damages by respondent) FMV, because it was depends on the until payment. not an amount of lost expropriation Claimants: Rate profits that have (para. 283) of 5.5%, been proved (para. compounded 287) annually (= (The subsequent five current paragraphs are not government disclosed.) bond rate of US$ denominated debt of Mexico) Respondent: Simple interest, rate of US Treasury bills for an award denominated in US$; refers to Article 1110 (expropriation, guidance for interest) Costs: Each party bear its own legal fees and costs and half of the costs of the arbitration.

P 487 Cargill, Inc. v United Mexican States Award of 18 September 2009 ICSID Case No. ARB(AF)/05/2

Cargill was selling high fructose corn syrup in Mexico through its Mexican subsidiary Cargill de Mexico S.A. de C.V. In December 2001 Mexico imposed a 20% tax and an import permit requirement on imported soft drinks containing high fructose corn syrup (HFCS) which was claimed to be an interference with Cargill's investment. HFCS revenues fell 80% over the first three days of the tax.

Breach of Art. 1102 NAFTA (national treatment) Violation of fair and equitable treatment (breach of Art. 1105 NAFTA) Breach of Art. 1106 NAFTA (performance requirements), since it conditioned a tax advantage on the use of domestically produced cane sugar. No expropriation (no breach of Art. 1110), since no radical deprivation of claimant's overall investment.

Claimant: US$ 123,813,029 as damages for the net lost cash flows that Cargill and Cargill de Mexico would have garnered from HFCS sales from January 2002 through 2007 → Calculated net lost cash flow from gross 'but for' lost cash flow (product of quantity of HFCS that would have been sold and the per-unit profits they would have been earned from sales, para. 433) Respondent values the loss at US$ 4,276,000 (para. 443) using the claimant's financial expert's DCF model with slightly lower projection on price plus a deduction for mitigation for claimant's contributory fault.

Tribunal agrees with claimant that the appropriate approach to assessing damages in this proceeding is to determine the present value of net lost cash flows.

Amount awarded:

Interest:

US$ 77,329,240

Rate equal to the US monthly bank loan prime rate from 1 January 2008 until full payment, compounded annually, as claimed by claimant, because claimant 'has effectively loaned this sum to respondent for the duration of this dispute' (para. 544).

Valuation:

Confirmed valuation by claimants with adjustments: PV of net cash flow loss of Difficulties in projecting Cargill from June 2002 the overall market, the to end of December claimant's market share, 2007; detailed and the appropriate price reasoning on and demand in light of adjustments: change claimant's four-year of compensable absence from a period, change of competitive market. growth rate of However, these Mexican HFCS market, projections are not so the claimant's market unusual or difficult that share between employment of the January and June method is inappropriate 2002, market price. in this proceeding (paras Discussion whether 444ff). lost profits under scope of investment protection or merely trade in goods.

P 488

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Respondent: Simple interest based upon US Treasury bills, because award is denominated in US$ Costs: Respondent shall bear all costs of arbitration and half of the claimant's costs of representation, considering the success of the claimant's submissions (para. 547).

Case

Investment affected & measures at issue

Violations found

Economic loss claimed & valuation by respondent

Mobil Investments Canada Inc. and Murphy Oil Corporation v Canada

Dispute relates to two petroleum development projects, the Hibernia and Terra Nova projects in Canada, of which the claimants, both USincorporated companies, held shares. In 2004, the Canadian Newfoundland and Labrador Offshore Petroleum Board adopted Guidelines for Research and Development Expenditures which were alleged to be more restrictive and onerous than the provisions of existing agreements concerning the project. The 2004 Guidelines allegedly require the claimants and other investors in offshore petroleum projects to pay millions of dollars per year for research and development.

Decision (by majority) that the 2004 Guidelines breached Art. 1106 (performance requirement prohibition) and give rise to a right to claim compensation (para. 487 DoL).

Claimants:

Decision on Liability and on Principles of Quantum of 22 May 2012 Award of 20 February 2015 ICSID Case No. ARB(AF)/07/4 See also: (2016) 3 The Journal of Damages in International Arbitration, No. 1

P 489

P 489

No violation of Art. 1105 (FET and full protection and security).

Standard of Amount decided & compensation/reparation valuation method

Guidelines triggered an obligation to make two types of losses expenditures that are claimed: continues over the life of 1) 'incremental the projects. It amounts spending': to a continuing breach resulting in ongoing amounts damage to the claimants' already interests in the spent on R&D or E&T investment (para. 429 DoL). as a result of the → Not only damages that Guidelines. occurred in the past but 2) advance also the incurring of 'shortfall' losses which become losses, quantifiable and must be being the paid sometime in the difference future ('future damages') between (para. 427 DoL) spending undertaken → Apply standard of pursuant to 'reasonable certainty' (para. 439 DoL) the Guidelines → Claimants must prove and the 'that a call for payment spending has been made or that required by damages have otherwise the occurred (i.e. that they are Guidelines. 'actual') (para. 488 DoL). Numbers of losses and expenditures however are not disclosed in the public version of the award.

Amount awarded:

Interest:

1)

The amounts for incremental expenditures shall bear interest at the 12-month CDN LIBOR rate + 4%, compounded monthly (as calculated by claimants and not disputed by respondent) from 23 July 2012 (of the first damages submission) to the date of the Award (earlier interest was already included in the calculation)

2)

Mobil Investments: total: CND 13,893,013 = CND 10,310,605 (compensation for incremental expenditures) + CND 3,582,408 (compensation for shortfall) Murphy Oil: total: CND 3,401,247 = CND 2,273,635 (for incremental expenditures) + CND 1,127,612 (for shortfall)

Valuation: 1)

Respondent: A large part of the claimants' spending would have taken place in the ordinary course of business in the absence of the 2004 Guidelines and is therefore not compensable.

Interest & costs

2)

Incremental spending: whether expenditures claimed were motivated by the Guidelines, whether they would not have been made 'but for' the Guidelines (para. 37). Shortfall is only partially compensable.

→Application of the historic ratio between incremental and ordinary course spending, as suggested by respondent; minor adjustments in calculating the historical ratio of incremental spending (tax benefits), but no deduction for the royalty regime also allowing deductions based on R&D expenditures (para. 147) Money need not have been expended for compensation to be due, but there must be a firm obligation to make a payment (para. 440 DoL).

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Costs: The parties shall bear their own legal costs, costs of arbitration shall be borne in equal share. Because the case involved novel and complex issues concerning the interpretation of NAFTA and the quantification of damages (para. 176);

→ It is fair and appropriate.

Appendix 3. Table of ECT Cases since 2008

Document information

Publication

P 492 Energy Charter Treaty Arbitrations 2008–16

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Bibliographic reference

Case

Investment affected & measures at issue

Violations found Economic loss claimed & valuation by respondent

Standard of Amount decided & compensation/reparation valuation method

Interest & costs

Europe Cement Investment and Trade S.A. (Poland) v Republic of Turkey

Europe Cement Investment and Trade S.A., a company incorporated under the laws of Poland, brought a claim against Turkey concerning the termination on 11 June 2003 of concession agreements granted in 1998 by the Turkish Ministry of Energy relating to the generation, transmission, distribution, and marketing of electricity in certain parts of Turkey.

Dismissed for lack of jurisdiction.

No jurisdiction

No damages awarded.

Costs:

Moral damages:

Claimants shall pay the respondent US$ 3,907,383.14 representing its legal costs and expenses and US$ 129,740 representing its share of the cost of the arbitration.

Award of 13 August 2009

'Appendix 3. Table of ECT Cases since 2008', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 491 - 500

ICSID Case No. ARB(AF)/07/2

Claimant failed to establish that it had an investment in Turkey at the relevant time, the claim of Europe Cement must be dismissed for lack of jurisdiction (para. 145).

Claimant: Not less than $3,800,000,000 (para. 26) Respondent: Moral damages: as an established remedy for moral damage, that in the present case the conduct of Europe Cement in bringing a 'jurisdictionally baseless claim asserted in bad faith and for an improper purpose' had caused the Republic of Turkey 'intangible but no less real loss', quoting Desert Line (para. 128)

No exceptional circumstances such as physical duress are present in this case to justify moral damages. Any potential reputational damage suffered by the respondent would be remedied by the reasoning and conclusions set out in the ward, including an award of costs which is significant. This provides a form of 'satisfaction' for the respondent (para. 181).

Claim to jurisdiction was based on an assertion of ownership which was fraudulent, an award of full costs will compensate respondent for having to defend a claim that had no jurisdictional basis and discourage others from pursuing such unmeritorious claims (para. 185). Interest on costs: 5% simple interest after 30 days, in the event of nonpayment.

Cementownia Claimant, a 'Nowa Huta' S.A. v Polish entity, Republic of Turkey allegedly held shares in the Award of 17 Turkish September 2009 electricity companies ICSID Case No. Çukurova ARB(AF)/06/2 Elektrik A.S. ('CEAS') and Kepez Elektrik Türk A.S. ('Kepez').

P 493

Claims Claimant: No jurisdiction dismissed in their entirety for Not less than US$ 4 billion. two reasons: a) Failure of the Respondent: claimant to Moral damages: prove that it Due to owned or Cementownia's controlled an egregious and investment in accordance with malicious conduct in this case pursuing a baseless claim and making spurious allegations against Turkey with the intent of damaging its international stature and reputation 'there is no principal reason why equivalent relief should not be available to the respondent State in an appropriate case' (para. 165).

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No damages awarded.

Costs:

Moral damages:

Claimant shall bear the arbitration costs as well as the respondent's legal fees and expenses totalling US$ 5,304,822.06. Tribunal applied the 'costs follow the event' principle, making the losing party bear all of the costs of the proceeding and attorney fees due to the claimant's noncooperation, failure of claims and bad faith (para. 177).

The tribunal found that there has been an abuse of process by the claimant. A symbolic compensation for moral damages may indeed aim at indicating a condemnation for abuse of process. However, in the case at hand, the tribunal deems it more appropriate to sanction the claimant with respect to the allocation of costs (para. 171).

Case

Ioannis Kardassopoulos and Ron Fuchs v The Republic of Georgia

Investment affected & measures at issue

Violations found Economic loss claimed & valuation by respondent

On 20 February 2001, a new Electricity Market Law was enacted by Turkey, consistent with the thenexisting EU Directive 96/92. Transmission of electricity would henceforth be operated by a State-owned company, the Turkish Electricity Transmission Joint Stock Company ('TEIAS'). Companies such as CEAS and Kepez, would no longer be allowed to engage in electricity transmissions.

Arts 1(6), 1(7), and 26(1) of the ECT;

Kardassopoulos and Fuchs formed a joint venture (GTI) with the stateowned Georgian Award of 3 March oil company for 2010 cooperating in ICSID Cases Nos. oil exploitation, market ARB/05/18 and development, ARB/07/15 and distribution in 1992; GTI obtained a 30year concession.

Standard of Amount decided & compensation/reparation valuation method

Interest on costs: In the event of non-payment within 30 days of notification of the award, interest be at the 6-month successive EURIBOR rate plus 2% for each year, compounded semi-annually.

b) Claim was fraudulent and brought in bad faith (since it attempted to gain access to international jurisdiction without having made an investment).

In respect of Claimants: Kardassopuolos: No less than FMV as Expropriation, of valuation date unlawful plus US$ 137,901 because not expenses in carried out with compensation due process of commission law and without procedure (para. 66); provision of on basis of 'prompt, determination of adequate and valuation date by effective' tribunal as of compensation November 1995: (para. 408)

Interest & costs

Tribunal contends that Amount awarded: Art. 13 ECT is applicable Kardassopoulos: only for lawful expropriations (para. 502); US$ 15.1 million for the Distancing itself from ADC unlawful expropriation and Siemens, holds that (para. 645) 'there must be a factual Fuchs: basis on which to award such higher recovery. Any US$ 15.1 million for the FET violation (para. 646) such recovery must, furthermore, measure the damage sustained and not impose punitive damages' (para. 513).

P 494

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Interest: Pre-award: To both claimants at the rate of the 6-month LIBOR + 4% in accordance with Art. 38 ILC Articles as a 'fair commercial rate' (para. 659), as contained in Pipeline Construction and Operating Agreement 'PCOA' of 1996 (para. 661) as of the date of the expropriation (20 February 1996) compounded semi-annually to the date of the award.

Case

Investment affected & measures at issue

Violations found Economic loss claimed & valuation by respondent

Applicable law:

In February 1996, Georgia issued a decree (No 178) that terminated GTI's concession and turned rights previously held by GTI to a consortium of transnational oil companies. While a compensation commission was to be established to determine the amount of compensation due, after a change in government the respective commission concluded that the claimants were not entitled to any compensation.

In respect of Fuchs:

Claimant, an Austrian national, allegedly had the ability to build up thirdparty capital necessary for the exploration of hydrocarbons in four areas for which he should have been granted licenses by the respondent. The exploration would have been successful and allowed him to procure further capital for the production, transportation, and sale of the hydrocarbons (para. 28).

2009 Partial Award: Respondent is liable for breach of its obligation under Art. 10(1) ECT ('Promotion Protection and Treatment of Investments') by failing to perform its contractual undertaking to ensucre the licence to carry out solely and exclusively geological exploration and natural resource exploitation pursuant to four agreements signed in 2000 between claimant and the

Claimant:

Respondent did not issue the licences as promised and issued certain hydrocarbon licences for the subject areas to other companies, such as Gazprom and Tethys Petroleum Ltd (para. 30).

State Committee on Oil & Gas of the Republic of Tajikistan.

The expected value (EV) of the four licences was explained as the net present value (NPV) at its probability of success (POS) less the NPV of its probability of failure (being 1—POS) (para. 32); claimant explicitly considered other methods for the calculation of his damage (such as the cost method/asset based approach or the market value) as inappropriate (paras 33, 68).

In respect of Kardassopoulos: Energy Charter Treaty, Georgia– Greece BIT (1994/1996); In respect of Fuchs: Georgia– Israel BIT (1995/1997)

P 495

Mohammad Ammar Al-Bahloul v Republic of Tajikistan Partial Award on Jurisdiction and Liability of 2 September 2009 Final Award of 8 June 2010 SCC Case No. V (064/2008) SCC Arbitration Rules

FET under Art. 2(2) Georgia/Israel BIT (para. 451) (as claimed by claimant)

Standard of Amount decided & compensation/reparation valuation method

US$ 30.2 million

Valuation method:

(para. 543)

Tribunal finds that claimants would likely have sold their shares in 1995 (para. 515) and Respondent: therefore the FMV of the Between US$ 801,985 investment as of that date and US$ 4,974,177 should be decisive (para. 517).

Of claimants' 50% interest in GTI's rights, based on the income and market approach (para. 595):

With regard to FET: Art. 36 ILC Articles should be applied (para. 532), but '[t] here is no basis, in principle, on which to differentiate between the damage caused as between Mr. Kardassopoulos and Mr. Fuchs' (para. 534) so that also the FMV as of 1995 should be applied (para. 537).

•

P 496

•

•

•

Compensatory damages for losses (lost profits, etc.) for the wrongful delay of the issuance of the necessary exclusive licence in the East Soupeteau area in the amount of US$ 27,780,000 in the Rengan area in the amount of US$ 55,160,000 in the Sargazon area in the amount of US$ 87,220,000 in the Yalgyzkak area in the amount of US$ 58,300,000 (para. 35)

Aggregated amount of preaward interest for each claimant is US$ 30,024,736.83. Post-award: To each claimant at the rate of the 6month LIBOR in effect as at the date of the award plus 4%, compounded semi-annually from the date of the award. Costs:

Tribunal finds it appropriate and fair to award the claimants their costs of the arbitrations, including legal fees, experts' fees, administrative fees, and the fees of the tribunal. The tribunal finds the total fees Tribunal rejects assessed by reimbursement of the claimants expenses related to to be pursuit of the reasonable, i.e. compensation US$ 6,235,429, commission process, as well as total totalling US$ 275,803. It disbursements does not consider, 'in assessed, i.e. the absence of any US$ 1,706,868 evidence to the contrary, (para. 692) that these expenses would have been recoverable from the compensation commission' (para. 648). •

•

Tribunal agrees that 'it matters not to a hypothetical willing seller how the buyer proposes to extract profit from an asset, but only what the hypothetical buyer is willing to pay for the investment' (para. 598); Three arm'slength, contemporaneous transactions (or potential transactions) available to assist in valuing the investment in a narrow range of value, i.e. US$ 28.1 million to 30.6 million (para. 598).

Interest & costs

Primarily referring to the ILC Articles, in particular Art. 36 (para. 66);

Amount awarded:

Costs:

No damages ordered.

However, claimant 'has chosen his own methodology': the valuation should be based on the difference in the value the licences would have had without the breach (if issued in 2001) and the value they had in 2009 assuming the licences were issued (para. 68).

Valuation:

Claimant has not prevailed in the second phase of the proceedings, however the respondent shall pay to claimant a portion of its incurred costs (€ 300,000), since the respondent has failed to participate and cooperate in the proceedings (para. 119).

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Tribunal rejected:

Application of DCF method: Generally approved DCF method, however not for this case since claimant's argument contains too many uncertain assumptions ('that he would have been able to acquire financing, that upon exploration he would have found hydrocarbons and that he would have been able to exploit and sell the oil'). This also destroys the causality between Interest: the breach committed and the loss of alleged Claimant has future cash flows. not claimed interest on costs, so that no interest on cost were awarded (para. 120).

Lost profits: Since overly speculative. Comparable sales valuation: Not possible due to lack of comparable transactions. →Tribunal concludes that it cannot order damages due to a lack of a substantiated basis for assessment, although it is established that the respondent has violated the BIT (para. 98).

Respondent shall bear 50% of the arbitration costs amounting to € 524,977 and 8,125 SEK (paras 121–3).

Case

Investment affected & measures at issue

Violations found Economic loss claimed & valuation by respondent

Standard of Amount decided & compensation/reparation valuation method

Interest & costs

Anatolie and Gabriel Stati, Ascom Group S.A., Terra Raf Trans Traiding Ltd v Republic of Kazakhstan

Claimants invested more than US$ 1 billion into oil and gas fields and constructed an important liquefied petroleum gas (LPG) plant. After an accusation of Anatolie Stati by the Moldovan president, the Kazakh President ordered that the Government initiate thorough inspections and audits of Stati's companies. Criminal proceedings were initiated. On 28 April 2009, KMG's general manager, was arrested. Furthermore, the state assessed tax illegalities and imposed punishments. Claimants alleged to have been coerced into selling their investments to the stateowned oil company at a firesale price which they refused to do. Eventually, the Government seized the investments.

Violation Art. 10(1) ECT [FET]: '… was a string of measures of coordinated harassment by various institutions of respondent and has to be considered as a breach of the obligation to treat investors fairly and equitably' (para. 1086)

ICL, Chorzów Standard (para. 1527)

Interest:

Award of 19 December 2013 SCC Case No. 116/2010

P 497 SCC Arbitration Rules

Claimants: US$ 478,927,000 (for Tolkyn fields);

Amount awarded:

US$ 508,130,000 minus 'Since the Tribunal cannot debts of US$ 10,444,899 order restitution and US$ 197,013,000 (for restitution is not a relief → Net amount awarded: Borankol fields); sought by Claimants, the US$ 497,685,101 US$ 96,808,000 (for Tribunal's award should include future cash flows Munaibay Oil); of the assets taken.' (para. US$ 245,000,000 (LPG 1531) Plant) cost plus discretionary portion of US$ 84,077,000; US$ 31,330,000 (contract 302) cost plus discretionary portion of US$ 1,498,017,000

Valuation: (1)

(2)

P 498

(3)

KPM and TNG lost revenue they would have earned from their planned production; The gap in the development efforts depressed the production curve at Tolkyn and Borankol more than it would have been, had claimants been able to develop the fields without respondent's conduct; Claimants were unable to sufficiently respond to the watering issues at the Tolkyn field.

'However, the Tribunal does not agree with Claimants that this approach would automatically mean that no debts of the seized companies can be deducted at all.' (para. 1532) Valuation date: Claimants argue 14 October 2008 (date of President's Order); respondent argues 21 July 2010 (date on which claimants irreversibly lost rights after alleged expropriation); tribunal relies on 30 April 2009 as the valuation date (State sequestration of claimants' KPM and TNG shares and assets →Actual damages occurred)

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At the rate of 6 months US Treasury bills from 30 April 2009 until payment, compounded semi-annually. 'Tribunal agrees with Respondent that according to arbitral practice in comparable cases, the rate of a conservative investment should be used. … as the damages will be awarded in US-Dollars, as confirmed by previous arbitral practice, the Tribunal considers that the rates of 6 months US treasury bills over the relevant period are the appropriate rate.' (para. 1854). 'Claimants could be expected to reinvest their interest gains every 6 months and that, therefore, interest has to be compounded semi-annually.' (para. 1855)

Valuation method:

Costs:

Quantum related to Borankol and Tolkyn fields:

Respondent shall bear 75% and claimants 25% of arbitrations costs, respondent shall also bear 50% of claimant's legal costs (referring to the principle 'costs follow the event', para. 1882)

Parties and tribunal agree that the DCF method is appropriate for calculation (para. 1617). Tribunal applied Deloitte's comparable transactions analysis, leading to a combined asset value (para. 1626). Quantum Related to Contract 302 Properties: Valuation based on claimants' out of pocket investment expenses. Quantum Related to the LPG Plant: Tribunal applies offer made for the LPG Plant by State–owned KMG for US$ 199 million as best source for valuation (para. 1747). No moral damages ordered, threshold of Desert Line case, where armed tribes attacked the investor's premises not met (para. 1784).

Case

Investment affected & measures at issue

Violations found Economic loss claimed & valuation by respondent

Standard of Amount decided & compensation/reparation valuation method

Interest & costs

Hulley Enterprises Ltd (Cyprus) v Russian Federation

The disputes between the parties in the three parallel proceedings involve various measures taken by the respondent against Yukos, a joint stock company incorporated in Russia in 1993, the largest oil company in the Russian Federation that had emerged after the dissolution of the Soviet Union, in the period between July 2003 and November 2007 (para. 63).

Respondent breached its treaty obligation under Art. 13 ECT [expropriation] (paras 1580, 1585). 'Having found Respondent liable under international law for breach of Art. 13 ECT, the Tribunal does not need to consider whether Respondent's actions are also in breach of Article 10 of the Treaty' (para. 1585).

'The nature or extent of the reparation to be made for the breach of an international obligation' (Art. 36/2 PCIJ Statute, identically in Art. 36/2 ICJ Statute);

Amounts awarded:

Pre-award interest:

Chorzów-principle,

Veteran Petroleum Ltd:

UNCITRAL PCA Case No. AA 226 Yukos Universal Ltd (UK–Isle of Man) v Russian Federation UNCITRAL PCA Case No. AA 227 Veteran Petroleum Trust (Cyprus) v Russian Federation UNCITRAL PCA Case No. AA 228 Interim Award on Jurisdiction and Admissibility of 30 November 2009

P 499

The measures complained of include criminal prosecutions, harassment of Yukos, its employees and related persons and entities; massive tax reassessments, VAT charges, fines, asset freezes, and other measures against Yukos to enforce the tax reassessments; the forced sale of Yukos' core oil production asset; and other measures culminating in the bankruptcy of Yukos in August 2006, the subsequent sales of its remaining assets, and Yukos being struck off the register of companies in November 2007 (para. 63).

Amount claimed: The entire value of the investments as well as the benefits the investors should have received from their investments, in total US$ 114.174 billion (para. 73). Respective claimants: Hulley Enterprises Ltd US$ 93.229 billion Yukos Universal Ltd US$ 4.666 billion Veteran Petroleum Ltd US$ 16.279 billion (para. 110) Respondent submits that claimants have failed to establish any entitlement to damages and have not incurred any damages at all (paras 97–104, 111).

ILC Articles (Arts 31, 36, 39)

Hulley Enterprises Ltd: US$ 39,971,834,360 Yukos Universal Ltd: US$ 1,846,600,687 US$ 8,203,032,751

Contributory fault:

Claimants total:

Art. 39 ILC Articles Art. 31 ILC Articles

US$ 50,020,867,798

Not in respect of damages representing the value of shares (valued as of the date of the award, para. 1686);

In respect of the dividend stream 'the average yield Valuation method: Claimants 'should pay a of ten-year US price for Yukos' abuse of Heads of damages: Treasury the low-tax regions by bonds over the (1) Value of some of its trading period from 1 claimants' shares January 2005 to entities, including its questionable use of the (2) Value of the 30 May 2014 as Cyprus–Russia DTA, which dividends up to the applicable contributed in a material the valuation date rate of way to the prejudice (3) Pre-award simple interest, which which they subsequently interest on these the Tribunal suffered at the hand of has amounts (para. the Russian Federation' determined to 1778) (para. 1634). be 3.389 Ad (1): 'corrected' percent.' (para. Valuation date: comparable companies 1687); not figure is the best compounded Tribunal addressed two available estimate for issues: (a) Date of the Post-award expropriation is the date what Yukos would have interest: been worth on 21 of the YNG auction (b) November 2007 but for Claimants have a right to Shall be due the expropriation (para. on damages choose between date of 1784), taking the RTS Oil and costs after the expropriation and and Gas index based on a grace period date of the award in the prices of trades executed of 180 days, at event of an illegal on the Moscow Stock expropriation (paras the rate of the Exchange (para. 1788) 1759–69) 'yield on tenyear US Treasury bonds as of 15 January 2015 and then the dates of compounding yearly thereafter' (para. 1692), compounded annually (para. 1689)

Final Award of 18 July 2014

Ad (2): Starting points are 'Yukos lost cash flows' (ie, free cash flows to equity), as calculated by claimants' expert based on historical information, as adjusted by the tribunal (paras 1793, 1811)

Costs: Respondent, the unsuccessful party, shall bear the costs of the arbitration (para. 1869).

Deduction for contributory Respondent negligence: must 'in the exercise of its reimburse wide discretion' it 'is fair claimants US$ and reasonable' to 60 million as apportion responsibility part of their between claimants and costs as 'fair respondent as 25% and and 75% (para. 1637) reasonable in the circumstances', approximately 75% of the claimants grand total of costs (para. 1887).

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Case

Investment affected & measures at issue

Violations found Economic loss claimed & valuation by respondent

Khan Resources Inc.,

in the Netherlands, and CAUC Holding Company Ltd, an entity incorporated in the British Virgin Islands, were involved in a joint venture known as the Central Asian Uranium Company Ltd, to develop a uranium exploration and extraction project in Dornod ('Dornod Project'). Claimants obtained mining and exploration licenses. Following inspections of the Dornod site by the State Specialized Inspection Agency of Mongolia, several violations of Mongolian law were reported. On 10 July 2009, the mining licenses were suspended for a period of three months for Khan's failure to remedy the alleged violations. The licences were subsequently fully invalidated.

Respondent breached obligations toward the claimants under Art. 8.2 of the Foreign Investment Law in relation to the mining and exploration licenses. Through the operation of the umbrella clause, Article 10(1) of the ECT is violated (para. 366)

Claimant:

Amount awarded:

Interest:

US$ 255 million

US$ 80,000,000

At the rate of LIBOR plus 2%, compounded annually, from 1 July 2009 until the date of payment Reasoning: 'reflects a commercially reasonable borrowing rate over the relevant period … consistent with recent practice amongst ICSID tribunals and the prevailing scholarly view' (para. 425)

Violation of Art. 8.2 of the Foreign Investment Law meant that an expropriation had occurred and that this expropriation was illegal.

Respondent:

Khan Resources B.V., and

P 500

CAUC Holding Company Ltd v The Government of Mongolia

Decision on Jurisdiction of 25 July 2012 Award on the Merits of 2 March 2015 PCA Case No. 2011–09 UNCITRAL Arbitration Rules See also: (2015) 2 The Journal of Damages in International Arbitration, No. 2

Standard of Amount decided & compensation/reparation valuation method

Relevant damages principles are based in two various sources of law (before interest and —the Mongolian Foreign Investment Law and the not subject to Mongolian taxation) ECT, as well as (para. 259)

Claimants could not have brought the Dornod Project into production (para. 266); should tribunal determine that damages are due, they should be limited to the amount that the claimants actually invested in the Dornod Project—i.e. US$ 16.7 million (para. 267)

Valuation: Tribunal finds that the true value of Khan's investment is reflected by three offers made for the mine or for Khan Canada's shares in and around the relevant period (paras 411ff).

Mongolian and customary DCF rejected, because it international law (para. is uncertain: (i) whether 368). the mine would actually have reached Customary international production; (ii) if it did, law principles set out in on what terms the the Chorzów Factory case parties would have apply, as neither the ECT participated in the nor Mongolian law set out venture; and (iii) whether a specific standard of the claimants would still compensation for illegal have been involved in expropriation' (para. 369); the Dornod Project at all. 'fair market value' in this case (para. 370). Market comparables rejected, because the Respondent also refers to comparables proposed the Chorzów Factory were companies in standard (para. 369) and different countries, to the FMV (paras 371, 372). under incomparable Disagreement on the most conditions. appropriate methodology Share prices (Quoted to be used to assess the Market Price—QMP) also FMV of the claimants' rejected because the investment (para. 373). market was already suspicious of Mongolia's Valuation date: motives (para. 407). 1 July 2009 (as agreed by 'Sunk investment' also the parties) (para. 410) rejected, although this approach can serve as a 'bottom line' below which compensation should not fall (para. 409).

P 500

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Interest & costs

Rejects claimants' argument that they have been forced to take an involuntary loan from the government and that the respondent's borrowing rate of 7.14% should be the appropriate interest rate (para. 423). Costs: There are no 'extraordinary factors' that would cause the tribunal to depart from the principle 'costs follow the event' as contained in Art. 42 of the UNCITRAL Rules; all costs of arbitration to be borne by the respondent, as well as a portion of claimant's legal costs (para. 432), in total US$ 9,074,143.51

Appendix 4. Table of Ad hoc Investment Arbitration Cases since 2008

Document information

Publication

Case

Calculation of Compensation and Damages in International Investment Law (Second Edition)

Investment affected & Measures at issue

Violations found

National Grid P.L.C. v Argentine Republic

Legislative 1) measures ('pesification') by Argentina through its UNCITRAL 'Emergency Law' of 6 January 2002 Award of 3 and November accompanying 2008 measures, Applicable causing losses law: to the claimant as shareholder Argentina–UK of a company BIT in (1990/1993), incorporated Argentina, International Companía Law, en Argentine Law Inversora Transmisión Eléctrica S.A. (Citelec), which held shares of the Argentine electric power company Transener.

Bibliographic reference

'Appendix 4. Table of Ad hoc Investment Arbitration Cases since 2008', in Irmgard Marboe , Calculation of Compensation and Damages in International Investment Law (Second Edition), Oxford International Arbitration Series, (© Irmgard Marboe 2017; Oxford University Press 2017) pp. 501 - 516

2)

P 503

FET standard because respondent (a) fundamentally changed the legal framework on the basis of which claimant had made the investment, (b) no meaningful negotiations took place for two years, and (c) respondent required that Transener renounce to the legal remedies it may have as a condition to renegotiate the Consession (para. 179) Protection and constant security to the investment because the changes introduced in the Regulatory Framework by the Measure, which effectively dismantled it, and the uncertainty reigning during the two years preceding the sale of its shares; does not find that this protection is inherently limited to protection and security of physical assets (para. 190)

Economic loss claimed & valuation by respondent

Standard of Amount decided Interest & costs compensation/reparation & valuation method

Claimant:

Art. 5 of the BIT provides only guidance for US$ 112,400,000 (para. 265) expropriation, but the BIT does not provide Loss in share value guidance regarding consisting of compensation standards 1) US$ 59,069,583 as for other kinds of the loss of value of violations; the tribunal its investment as of needs to revert to CIL, i.e. 1 January 2002, to ILC Articles, Art. 31(1): namely the 'full reparation for the difference of the injury' and the Chorzów FMV with and standard (paras 269–70) without the measures, applying Compensation should reflect the 'loss of value of the DCF method the Claimant's shares' in (para. 263) Transener as a result of 2) US$ 22,321,139 for the respondent's the opportunity measures and other cost of equity lost actions (para. 274) between 1 January 2002 and 18 August Measures were taken at a 2004, when time of economic crisis, claimant sold its tribunal must assess the ownership interest; effect of such crisis, based on the rate irrespective of the of 12.94%, which measures (para. 274) was Transener's Valuation date approved return on equity 25 June 2002 3) US$ 31,009,278 for Breach of FET standard the lack of use of the money owed to did not occur at the time the measures were taken claimant from 18 August 2004 to the on 6 January 2002, but when the respondent date of payment; required that companies based on such as the claimant claimant's renounce to the legal historical return on equity, which as remedies they may have recourse as a condition to 10.9% (para. 265) re-negotiate the concession (para. 180).

Amount awarded: Interest:

Respondent:

Yet, 'it is wise, apart from Claimant's DCF analysis, to have access to other data or approaches' (para. 285)

Compensation should be limited to the proceeds of sale of the claimant's shares; claimant negligently overpaid in purchasing its interest in Transener and disposed of its interest in an unnecessarily hurried fashion, thereby incurring self-inflicted financial injury (para. 266)

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US$ 53,592,439.25 Pre-award: LIBOR plus 2% (average = US$ 38.8 interest rate million which claimant would have paid + US$ 14,792,439.25 pre- to borrow). Average 6-month award interest dollar LIBOR rate Valuation method: from 2002 has been 3.15%, Comparable adding 2% to trans​actions method, but also that base rate, the operative looking at DCF. rate to the date Loss of FMV of an of the award shall be 5.15% operating business entity, compounded semi-annually, 'there is resulting in US$ considerable merit' using the 14,792,439.25 DCF method Post-award: (para. 275). Average rate payable on sixProjection of future cash flows month US Treasury bills, is less compounded speculative in present case, as semi-annually. (1) in the 1998 Costs: pre-crisis fiveyear tariff review, Respondent and the rate claimant shall be structures were responsible for approved by 75% and 25% ENRE, and (2) the respectively, of tariffs had the fees and already been expenses. Each agreed to, and party shall bear the power was its own costs and not sold in the counsel fees. private commercial market, but to an agency of the Argentine Government (para. 277).

→ The price offered by Eton Park for the shares of Petrobras Energía as a point of reference for the value of claimant's investment; based on this price, the value would have been US$ 52.9 million (para. 288)— minus the proceeds of sale of the shares to Dolphin, US$ 14 million (para. 290); tribunal's awareness of 'mixing approaches' reflected in fn. 115

Case

Investment affected & Measures at issue

Walter Bau AG Claimant Walter v The Kingdom Bau AG (in of Thailand liquidation), a company in​ UNCITRAL corporated in Award of 1 July Germany, acting through its 2009 insolvency Applicable administrator law: Werner Schneider, was Germany– shareholder in a Thailand BIT P 504 joint venture (2002/2004) company Don Muang Tollway Co. Limited (DMT). DMT became concessionaire under a Concession Agreement for construction of a toll road for 25 years, signed on 21 August 1989 (para. 2.35). Concession Agreement was amended several times; most relevant is Amendment MoA2 in November 1996 (para. 4.26). Respondent decided to reduce tolls charged to drivers, made changes in the road network and temporarily closed the Don Muang Airport.

P 505

Violations found

Economic loss claimed & valuation by respondent

Standard of Amount decided Interest & costs compensation/reparation & valuation method

FET standard through a series of cumulative acts and omission, which taken together constitute a breach of FET obligations (para. 12.43)

Claimant:

Relevant are the legitimate expectations of the claimant at the time of signing MoA2 in 1996 (para. 13.10).

Breach of FET obligations by:

Valuation:

(a)

(b)

(c)

Financial losses due to respondent's refusal to allow an increase in tolls, the reduction of tolls in 2004, the shutdown of the Don Muang Airport.

Internal rate of Return on Lengthy Equity (IRRE), a refusal to calculation of lost raise tolls as returns, on the basis that required by claimant would have the MoA2; earned the expected IRRE on its investment but for Changes to the acts and omissions of the road network which the respondent. went well Discount rate: WACC (para. beyond what 14.34) can be considered as Respondent (para. 14.4) Amount Invested 'traffic management'; Approach (return of sums invested plus pre-award Short-term total closure interest) (para. 14.4), of Don Muang because 'calculation of Airport (para. lost profits is highly 12.44) uncertain or speculative'; quotes several awards where this approach was applied because projects had not started or operated only for a short period and remained of a very speculative nature (Metalclad, PSEG, Tecmed, MTD, Siemens, Wena Hotels, SPP) (paras 14.13ff)

Amount awarded: Interest: €29.21 million

Tribunal rejected methods presented by the Valuation date: parties, because The BIT entered into force claim is based on on 20 October 2004. far more than 'inherently speculative elements':

Damages should start to be calculated from that date (para. 13.2).

The IRRE would automatically assume that intermediate Thus, the tribunal's task is each flows are to determine damages reinvested, not suffered by claimant from at a market rate the entry into force of the but at the IREE, BIT (para. 14.1) which leads to over- and The best way to assess sometimes damages: understatements (a) Estimate fair value (para. 14.7) of the claimant's →DCF method shares on 3 most December 2006 (= appropriate in the sales date of those shares); said the present case value, computed in (para. 14.21) THB, should be → The investor converted into might have Euros at the expected to hold exchange rate in the present effect on that date value ('PV') of (= but-for value) remaining cash (b) Subtract the flows (the price proceeds of sale on received if it 3 December 2006 were to sell its interest), plus (c) Add dividends which would have the compounded value (at the cost been received in 2005 and 2006 had of equity) of MoA2 been applied, dividends compounded to 3 already received December and then (para. 14.22) converted into Euros (para. 14.28)

Discount rate: Cost of Equity (CoE) (para. 14.34)

Cashflows: 'but-for dividends should be based on the forecast of revenues and costs made at the time of signing of MoA2' (para. 14.30), projected on traffic, tolls, and financing Discount rate: CoE, not WACC, of 14.13 (paras 14.35, 14.41)

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at the 6-month successive EURIBOR rate plus 2% for each year, beginning on 3 December 2006 until payment, compounded semi-annually (para. 16.1)

Interest on award on costs at the same rate from the date of the award (para. 16.2) Dies a quo: 3 December 2006 (date of sale of shares by claimant) Costs: Claimant shall pay half the respondent's costs and respondent shall pay half the claimant's costs (para. 15.6) Respondent must pay to the claimant for costs € 1,806,560 (para. 15.8)

Case

Investment affected & Measures at issue

Rosinvestco UK Ltd v The Russian Federation

Claimant, an investment company incorporated under English Stockholm law and based in Chamber of London, Commerce purchased a (SCC) total of 7 million shares of Yukos Award of 12 Oil Company September then traded on 2010 the Moscow SCC Case No. stock exchange Arb.V079/2005 on 17 November and 1 December Applicable 2004. Claimant law: specializes in UK–Soviet BIT purchasing (1989/1991), shares at moments of market distress, judging that the market has P 506 overreacted and undervalued a company's assets.

Denmark– Russia BIT (1993/1996) (p. 106, para. 137) MFN clause applied to establish jurisdiction

Some of these investments turn out to be profitable, and some do not. On 19 December 2004, the RF sized and auctioned Yuganskneftegaz (YNG), the largest production facility of Yukos on the basis of tax assessments it had levied on Yukos. Yukos shares lost all of their value, and Yukos was ultimately cancelled from the company registry.

Violations found

Economic loss claimed & valuation by respondent

Standard of Amount decided Interest & costs compensation/reparation & valuation method

Unlawful expropriation violating Art. 5 BIT by a series of measures from 19 December 2004 to 5 August 2007 (para. 633)

Claimant:

Tribunals followed claimant's claim to apply CIL and the Chorzów standard (paras 637, 663).

In particular, the auction of YNG in which Baikalfinansgroup, a completely unknown company, which was just created before the auction and disappearing right after the auction and assigning its interests to Russian state-owned Roseneft, was rigged (para. 620).

US$ 276.1 million = the value of claimant's shareholding

But followed respondent's argument that claimant had no = value that investment legitimate expectation of would have had absent a return of the quantum it respondent's unlawful sought; at the time of expropriation (para. 45(a)) claimant's investment in 2004, as the market was According to claimant's fully informed of expert: Conservatively respondent's likely action valued at US$ 183.2 in respect of Yukos from million (para. 639) July 2004; it could not Claimant alleged that the accept claimant's alleged optimistic expectations investor may be presumed to understand regarding the future the market risks, when it development of the value of the investment (paras makes the investment. But when an investment 664ff) becomes worthless, not because of market movements, but because of unlawful government actions, an investor does not lose its rights under treaties, such as the UK– Soviet BIT. Yukos would have appreciated, but for the unlawful events of respondent (paras 6, 93). or US$ 220.4 million

Valuation date:

Respondent had submitted that the company, which owned and controlled claimant, Respondent: was a notorious US-based Asked to dismiss 'vulture fund' and an claimant's claims on the archetype of pre-cash merits in their entirety, in Wall Street 'anything the alternative declaring goes' capitalism (para. 5). that claimant is not entitled to any damages Valuation date: (para. 50). 24 January 2007, the date of the termination of the Participation Agreements (Participation Agreements were internal agreements between claimant and its parent company, which transferred some economic interest in the Yukos shares to the latter, but claimant remained the formal and legal owner of Yukos shares, para. 341). Date of the award

P 507

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Amount awarded: Interest: US$ 3.5 million Claimant made a 'speculative investment' in Yukos shares (para. 668). Tribunal found respondent's submission regarding compensation more persuasive. The 'but for' approach used by claimant's expert did not sufficiently take into account the nature of claimant's investment and that claimant made a speculative investment (para. 669).

LIBOR rate until full payment in accordance with Art 5 (1) BIT at a 'normal commercial rate', thus LIBOR without any addition (para. 686); Dies a quo: 24 March 2007 (i.e. date of the termination of the Participation Agreements, plus 2 months' grace period provided in Art. 5 (1) BIT)

Any award of damages that rewards the speculation by claimant with an amount based on an ex-post analysis would be unjust (para. 670).

No compounding, taking into account nature of the investment and that arbitration practice is not unanimous (paras 688ff)

Participation Agreements had the effect to transfer any risks regarding the investment to the parent company. The risk was taken over by claimant only at the time the Participation Agreements were terminated (para. 672).

Claimant had requested LIBOR plus 4%, compounded semi-annually Respondent: One-year LIBOR or EURIBOR uncompounded. Costs:

Each party bears its own. Costs of legal representation Therefore, the (Art. 41 SCC calculation of Arbitration damages should Rules), be applied as arbitration costs from 24 January (Art. 39) shall be 2007, i.e. the borne in equal value of Yukos shares between shares at that claimant and date (para. 674). respondent.

Case

Investment affected & Measures at issue

Chevron Corporation (USA) and Texaco Petroleum Company (USA) v The Republic of Ecuador

P 508

Claimants were entitled to explore oil reserves in Ecuador under a series of agreements with the Ecuadorian Govern​ment since 1964. They UNCITRAL permitted Partial Award TexPet to on the Merits explore and exploit oil of 30 March reserves in 2010 Ecuador's Final Award of Amazon region, 31 August 2011 but required it to provide a PCA Case No. percentage of its 34877 crude oil to the government to Applicable help meet law: Ecuadorian Ecuador–USA domestic BIT consumption (1993/1997) needs. The remainder of the oil could be exported at prevailing international market prices which were substantially higher than domestic prices (para. 128 PA). Between December 1991 and December 1993, TexPet filed several breach of contract cases against the Ecuadorian

Government before national courts, because respondent had misstated domestic needs and consumption and thereby appropriated more oil than it was entitled to at the domestic market price (para. 135 PA). Political turmoil shook Ecuador affecting also the judiciary. Claimants' pending cases had not been decided when they sent a Notice of Arbitration in December 2006.

Violations found

Economic loss claimed & valuation by respondent

Violation of Art. II(7) BIT, requiring that each party 'shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations'.

Claimants:

Such a breach was completed by reason of undue delay at the date of the Notice of Arbitration in 2006. The cases had been pending for 13 to 15 years (para. 270 PA). According to the tribunal, this constitutes a lex specialis with greater specificity than the customary law standard of denial of justice; as there is no evidence that additional damages have been caused by other breaches of the

Standard of Amount decided Interest & costs compensation/reparation & valuation method

Tribunal applies the Chorzów standard, which US$ 649,786,333, including both sides agree to be the compound interest up to controlling authority; the 31 December 2010. tribunal's 'but for' analysis must undo not Direct Damages (US$ only the damages that 354,558,145) have arisen but must also + Ecuadorian Interest restore the liabilities that were avoided but for the (US$ 344,063,760) wrong (para. 308 FA). - 25% tax Tribunal must assess the effect of Ecuadorian taxes = US$ 523,966,429 as part of the situation + Pre-award interest until that would have 13 December 2010 (para. prevailed, if the unlawful 338 FA) act had not been committed (para. 309 FA). Claimant submits that 25% 'general income tax' Total damages: should be applied to both direct damages and Direct damages Ecuadorian interest (para. (='Contract value') 317 FA) + interest at New York Respondent submits that prime rate (as contained in the 1973 Agreement) the 87.31% Unified Tax Rate continued to be applicable despite several • taxes (para. 312 FA) tax reforms (para. 323 FA) Taxes are different: 1)

2)

BIT or of CIL, those claims need no longer be decided (para. 275 PA). After the Notice of Arbitration, Ecuadorian courts had rendered judgements. Yet, theses could only affect questions of causation and damages that follow from that breach (para. 273 PA).

Amount awarded: Interest:

US$ 77,739,696.94 Pre-award: compound Partial Award: interest at the New York prime US$ 698,621,904.84 = rate until date of award, totalling the amount US$ 18,615,672.23 Ecuadorian at the date of the judgments in favour of TexPet award should have rate contained in been rendered 1973 Agreement on 21 December for late 2006, before payments considering the effect of Dies a quo: applicable taxes on principle and 22 December 2006 (one day interest (para. after the Notice 550 PA) of Arbitration) This was Post-award: achieved by compound adding the 'Contract Value' interest at the (US$ 354,558,145) New York prime and the amount rate (annual) of interest at the from the date of New York prime award until payment rate under the On 'Contract Value': 1973 Agreement 87.31% Unified Tax (–344,063,759.84) Rate which (para. 312 FA). continued to be applicable despite Final amount: several tax reforms 'Contract Value'– (para. 327 FA) tax = – On interest: 25% 44,993,428.60 general income tax rate (para. 336 FA) + Interest – tax = US$ 32,746,268.34 (para. 337 FA) Double recovery avoided by claimants' express undertaking to prevent such an outcome, to the extent they are successful before national courts (para. 557 PA).

Valuation date: BIT violation was completed by 21 December 2006, at the date of the Notice of Arbitration (para. 313 FA).

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Case

Investment affected & Measures at issue

Violations found

Economic loss claimed & valuation by respondent

Standard of Amount decided Interest & costs compensation/reparation & valuation method

White Industries Australia Limited v The Republic of India

White Industries Australia Limited (White Industries), headquartered in Sydney, Australia, had entered into a contract with Coal India Limited (Coal India) concerning the development of a coal mine in Piparwar, India. After an ICC arbitration award on 27 May 2002 in White's favour, White attempted to enforce the award in the Indian courts. However, Coal India attempted to have the ICC Award set aside on various grounds and delayed enforcement for more than 9 years.

Obligation to provide 'effective means of asserting claims and enforcing rights', Art. 4(2) of the BIT and Art. 4(5) of the India-Kuwait BIT;

Claimant:

With regard to quantum, tribunal addressed two questions:

UNCITRAL

P 509

Award of 30 November 2011 Applicable law: Australia– India BIT (1999/2000)

'effective means' standard incorporated by the most-favourednation (MFN) provision of the BIT

Tribunal concluded that the nine years of the set aside application, and the Supreme's Court inability to hear White's jurisdictional appeal for over five years amounted to undue delay and a breach of India's BIV obligations (para. 11.4).

Mobil Cerro Negro Ltd v Petroleos de Venezuela SA, PDVSA Cerro Negro SA

P 510

Claimant had entered into a joint venture with PDVSA Cerro Negro (respondent No. 2) to exploit oil ICC resources in the Cerro Negro area Award of 23 in the Orinoco December Oil Basin. 2011 Financial ICC Arbitration incentives and Case No. protections were 15416/JRF/CA included in an Association Applicable Agreement of law: 1997 (AA 1997), Contractual which was approved by the claim (not Venezuelan claim for expropriation Congress. The contractual under international protections provided to law) indemnify claimant for 'any expropriation or seizure' and for other 'Discriminatory Measures' imposed by the Government that caused a 'Materially Adverse Impact' on claimant's cash flow. In addition, respondent No. 1 guaranteed the performance of the AA 1997 by a Guaranty of 28 October 1997.

'Discriminatory Measures' occurred and caused a 'Materially Adverse Impact' as defined in Clause XV of the AA 1997. Respondent No. 2 (PDVSA-CN) is liable for the economic consequences of Discriminatory Measures according to Clause XV.

AUD 4,085,180 payable under the ICC Award;

(a)

+ AUD 4,033,397.07, being interest at the rate of 8% as set out in the ICC Award, from 24 March 1998 (b) to 27 July 2010, on the ICC award, and continuing at a rate of AUD 895.38 per day from 27 July 2010

Was the ICC award enforceable under the laws of India? What compensation required to restore White to the position it would have enjoyed had India's breach of the BIT not occurred? (para. 14.1.1)

Amount awarded: Interest: AUD 4,085,180 payable under the ICC Award + Interest at the rate of 8% from 24 March 1998 until payment + AUD 84,000 payable under the ICC Award

simple interest at 8% per annum until payment, as decided in the ICC Award Dies a quo: 24 March 1998%, as set out in the ICC Award

+ US$ 84,000 payable Conclusions: under the ICC Award for ICC award was the fees and expenses of (a) enforceable under the arbitrators (converted the laws of India to AUD 150,892) (para. 14.2.66) + AUD 500,000 payable (b) White is entitled to under the ICC Award (for be restored to the White's costs in the position it would arbitration); have enjoyed had the breach of the + The costs incurred by BIT not occurred White in pursuing the (see Chorzów Indian court proceedings, Factory case) (para. settlement negotiations 14.3.3) and this arbitration (such costs to be assessed) Referring to Saipem v + Interest on respective Bangladesh (para. amounts (para. 4.7.2) 12.3.3)

(for the fees and expenses

Claimants:

Amount awarded: Interest:

Valuation standard contained in Art. 15 AA The cumulative damages 1997: exceed US$ 10 billion, before any discounting to On the scope of present value (under the arbitration, Art. 15.1(b): contractual formula). 'an award for damages to Material losses caused by: compensate the Foreign

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of the Arbitrators) + AUD 500,000 payable under the Award (for White's costs in the ICC arbitration) No award for costs incurred for litigation before Indian courts.

US$ 746,937,958

Costs: Respondent to bear 86.249.82 AUD for claimant's witness fees and expenses, together with 8% interest from the date of award. Costs of the arbitration otherwise borne equally between the parties. Claimant had submitted that respondent ought to bear the costs and expenses of claimant's witnesses (para. 15.1.2)

Post-award compound interest at the New York prime (US$ 12,681,000 rate (annual) on for 2007 and US$ the principal 894,900,000 for amount the period from from the date of 2008–35) minus award until US$ 96,073,622 payment and US$ 64,569,420 as counterclaim by respondents (para. 865) total of US$ 907,581,000

Case

Investment affected & Measures at issue

Violations found

Economic loss claimed & valuation by respondent

After a change in government, Venezuela tried to regain control over the oil exploitation project gradually from 2004. Ultimately, it seized the project's assets without compensation in 2007.

Respondent No. 1 (1) (PDVSA) is liable for the economic consequences of the same Discriminatory Measures due to the (2) Guaranty of 28 October 1997 in favour of the above Association Agreement.

Standard of Amount decided Interest & costs compensation/reparation & valuation method

Party for the economic consequences of the Discriminatory Measure suffered by it to date and recommendations on amendments to the Agreement that would restore the economic benefit that the Foreign Party would have received repudiation had the Discriminatory Measure not occurred' of Royalty (para. 657) Reduction Agreement Limitation of and respondents' obligation imposition contained in Art. 15.2(a) of extraction (para. 657) tax, Detailed calculation refusal to method to be applied allow contained in Annex G to expansion of Project as the AA 1997, in Arts 7.1 to previously 7.5 (paras 659ff) agreed, In accordance with Art. 7.4, increases in this means to determine whether there was a 5% income difference between the taxes on Orinoco Oil But-For Cash Flow (the Net Cash Flow absent the Belt participants, Discriminatory Measures) curtailment and the Net Cash Flow. The '5% hurdle' has been of production met in the calculation of and exports both parties (para 662). from the Cerro Negro Joint Venture.

direct expropriation of Mobil-CN's interests in Joint Venture measures that preceded expropriation, including (i)

But no breach of AA 1997 (para. 796)

(ii)

(iii)

(iv)

Valuation:

Dies a quo:

Reference (Threshold) Cash Flow less the Adjusted Net Cash Flow at US$ 12,681,000.

As this was not an expropriation claim and not a breach of the AA 1997, the issue of pre-award interest is treated contractually; respondents did not know how much to pay under AA till issuance of award, so only post-award interest awarded (para. 854)

NPV of the Threshold Cash Flow for 2008–35 as of 25 September 2007 amounts to US$ 894.9 million, accepting data and historical results as presented by claimants, but applying a 18% discount rate (paras 770–8)

Costs:

Claimants prevailed with their claim, but failed in substantial part of the quantum; each party could not quantify their claims TR-TROY-CEX-TIT, before these whereby: were decided by TR = total liftings this award (para. multiplied by the 884) Base Price, plus Costs of Joint Revenues procedure TROY = Royalties should be CEX = Chargeable shared equally and each party Expenditures shall bear its TIT = Income own costs (para. Taxes 886) Reference (Threshold) Cash Flow formula, according to Art. 7.3 of Annex G (para. 666):

Taxes:

P 511

Tribunal ordered respondents (para. 896) (i)

(ii)

(iii)

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To pay the aggregate amount of taxes that the tribunal deducted when applying the DCF formula after tax on behalf of Mobile CN To pay on behalf of Mobil CN any additional tax liability Generally to hold Mobile CN harmless from any such tax liabilities

Case

Investment affected & Measures at issue

Quasar de Valores SICAV S.A, Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v The Russian Federation

P 512

The claimants, Spanish investment funds and stock companies, claimed that their investments in Yukos American SCC Depository Receipts were Award on expropriated as Preliminary Objections of a result of 20 March 2009 measures taken by the Russian Award of 20 government July 2012 against the Russian oil SCC No. company Yukos. 24/2007 They allege that the respondent Applicable unlawfully law: dispossessed Spain–Russia Yukos of its BIT assets and (1990/1991) expropriated its shareholders by a variety of abuses of executive and judicial power (para. 3 APO).

Violations found

Economic loss claimed & valuation by respondent

Expropriation, because the Russian Federation's real goal was to expropriate Yukos, and not to legitimately collect taxes (para. 177).

Claimants:

Art. 6 BIT on lawful expropriation is US$ 2,625,810 plus interest applicable (para. 215), (para. 187) 'value' of expropriated Claimants argued that the assets needed to be value was equivalent to assessed. the price of the shares of Yukos as traded on the Claimants had conceded stock market; Yukos had a that they could not, under Tribunal had only value of US$ 83 billion, the terms of the BIT, seek jurisdiction on claimants had 73.000 compensation for calculation of shares, out of some 2.2 unlawful expropriation compensation for billion outstanding (para. 188). 'lawful' shares (para. 187) expropriation; The tribunal accepted in disregards therefore Valuation date: principle the claimants' the lawfulness or not approach compensation of the expropriation 23 November 2007, the be 'consonant with the (paras 178, 186, 215) 'time of the taking', when customary international law standard for recovery Indirect in the event of lawful expropriation can be expropriation and Article the result of a 6 of the BIT (para. 188) pattern of conduct should be represented by (para 45). 'their proportionate share Expropriation may of Yukos' market value'. result from a series Difficult choice of the of actions which valuation date (see also taken individually Rosinvest). may not amount to such.

Yukos was removed from the Unified Register of Companies in the wake of the end of the bankruptcy proceedings (para. 189). Respondent: Questions 23 November 2007 as relevant date, as this was several years after most of the expropriatory events of which claimants complain (para. 190).

Phillips Petroleum Company Venezuela Limited (Bermuda) and ConocoPhillips Petrozuata P 513 B.V. (The Netherlands) v Petroleos de Venezuela, S.A. (Venezuela)

Claimants had invested in extra-heavy oil projects in the Orinoco Belt, the Petrozuata Project and the Hamaca Project, via association agreements. In 2006, at an OPEC Conference,

Standard of Amount decided Interest & costs compensation/reparation & valuation method

Claimants sought relief for the economic harm caused by the OPEC curtailments imposed on the Petrozuata and the Hamaca Projects between November 2006 and May 2007.

Claimants:

US$ 62,280,000 lost income caused by PDVSA's failure to comply with its obligation under the PDSVA Guaranty, causing substantially less income than they were entitled to under the terms of the Side Letter and the The tribunal decided Guaranty, including that the second compound interest until claimant 31 December 2011

Valuation date: Tribunal chose 19 December 2003 as the reference date (when the claimants made their first purchase of Yukos stock) (para. 216).

PDVSA is liable for any damage or loss resulting from Maraven's failure to comply with the obligations under the Petrozuata Side Letter, in particular to absorb the relevant production curtailments (para. 282).

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Amount awarded: Interest: Various amounts, amounting to a total of US$ 2 million, to different claimants (para. 227) Valuation: Stock prices taken as the most appropriate reference, as one can agree that 'the value of a portfolio investment is simply given by the market' (para. 206) Tribunal compared the share prices of Yukos at a variety of dates, starting from December (US$ 10.80), when claimants made their first purchase to November 2007 (US$ 27.76).

6.434% compounded annually (Russian sovereign medium-term dealt in US Dollars had a yield of 6.434%), as claimed by claimant and not contested by respondent (para. 226). Dies a quo: 23 November 2007 (expurgation of Yukos from Russian United Register of Companies) until payment— as claimed by claimant and not contested by respondent (para. 226)

Tribunal conceded that the downward adjustment might lack precision, but adequately compensated claimants for their investments and avoided awarding a windfall (para. 217).

Costs:

US$ 38,500,000

Interest:

representing the 'nominal value of losses' as determined by the claimant's expert (para. 288) plus pre-award interest, updated as of 15 September 2012 amounts to: US$ 66,876,773.81

10.55% representing the cost of equity as claimed by claimants, compounded annually;

Claimants shall bear € 837,655 and respondents € 139,874. Claimants broadly prevailed, but the usual arguments in allocating costs were not applied, because the case was financed by a third party, Menatep (para. 222).

Case

Investment affected & Measures at issue

Violations found

Economic loss claimed & valuation by respondent

ICC

Venezuela announced that it would reduce voluntarily its total oil production level. Further curtailments were decided at subsequent OPEC meetings. The curtailments remained in place between October 2006 and April 2007. In February 2007, Venezuela promulgated a 'Nationalization Decree' requiring all associations to migrate to 'mixed companies' with a state entity owning at least 60% of the shares. Failing an agreement on the terms of transition, the Petrozuata and Hamaca projects passed under the operational and legal control of PDVSA in May/June 2007.

(ConocoPhillips) was protected by the Petrozuata Side Letter and a Guaranty so that PDVSA was liable for damage caused to ConocoPhillips (para. 235).

Valuation:

Italia Ukraina Gas S.p.A (IUGAS), an Italian company, SCC involved in trading and Separate transporting Award of 19 October 2010 natural gas, in 2003, entered Award of 19 into a Gas December Supply 2012 Agreement with SCC Naftogaz Arbitration V (Ukraine's national oil 007/2008 company). After the curtailment See also: of natural gas Quantum P 515 Quarterly 2Q shipment from 2013, Issue 05, Central Asia to Ukraine by 3-5. Russia, Naftogaz agreed to receive supplies only from Gazprom's subsidiary RosUksEnergo (prohibited to resale gas). Naftogaz ceased to supply IUGAS.

Breach of Gas Supply Agreement by Naftogaz in the wake of Russia's curtailment of natural gas shipments from Central Asia to Ukraine.

Award of 17 September 2012 ICC No. 16848/JRF/CA Applicable law: Laws of the Republic of Venezuela (Hamaca Project) and Laws of the Republic of Venezuela and generally accepted principles of international law to the extent that such principles do not contradict the law of the Republic of Venezuela (Petrozuata P 514 Project)

Italia Ukraina Gas S.p.A. v Naftogaz

Standard of Amount decided Interest & costs compensation/reparation & valuation method As regards calculation of pre-award interest:

Size of oil production reductions and the differential export volumes that would have been sold in the absence of OPEC mandates, then valued such volumes from November 2006 to May In contrast, PDVSA 2007 by looking at the was not liable to the average monthly prices at first claimant which the curtailed (Phillips Petroleum) volumes could have been for any such damage sold in the market place, under the Hamaca updated to 31 July 2011 Guaranty (para. 265). ('actualized nominal lost profits') by applying the corresponding project's cost of equity, using the CAPM (10.55% for the Petrozuata Project) (para 272)

'the purpose of such rates with regard to compensation of damages for contractual breaches is generally to ensure full reparation of a claimant by restoring it to the position it would have enjoyed if the contractual breach he suffered had not occurred' (para 295)

Respondent: No entitlement to compensation for damages as a result of the curtailments (para 280).

Claimant: US$ 186 million for contract penalties

Respondent: LIBOR rate, as contained in the Petrozuata Association Agreement (para. 293) Aggregated updated amount of US$ 62,280,000 as of 31 December 2011, further updated at 15 September 2012 to US$ 66,876,773.81 Post-award interest: 10.55%, compounded quarterly, until payment Costs: Arbitration costs shall be equally borne by each side on a 50/50 basis. Each party bears its own legal costs.

Contractual clause on contract penalties

IUGAS argued that penalty should be calculated on the basis of the market value of the gas at or in vicinity of the delivery point → IUGAS requested the tribunal to order Naftogaz to pay contractually agreed penalties in the amount of US$ 168 million plus interest, plus capitalized interest in the amount of US$ 18 million. In the alternative: Contractual penalties in the amount of US$ 204 million plus interest plus capitalized interest in the amount of US$ 20 million (based on an estimated Contract price)

The Separate Award of 2010 condemned Naftogaz to pay contractual penalties to IUGAS, but rejected IUGA's claims for damages for breach of the Contract.

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US$ 12.7 million contract penalties The tribunal rejected IUGAS approaches → Penalty was to be calculated on the basis of the Contract price (and not on basis of substitution costs or a renegotiated price). + Interests to be paid 'in accordance with IUGAS' method of calculation)

Interest: Swedish official reference rate plus 8% per annum ('in accordance with IUGAS' method of calculation') Costs: Each party shall bear its counsel fees and the parties shall equally share arbitration costs.

Case

Investment affected & Measures at issue

Violations found

Economic loss claimed & valuation by respondent

Standard of Amount decided Interest & costs compensation/reparation & valuation method

Mohamed Abdulmohsen Al-Kharafi & Sons Co. v Libya and others

In 2006, claimant had obtained approval and a licence to establish a major touristic investment project in Shabiyat Tajura in Tripoli. The project would have included hotel accommodation, villas and a shopping mall.

Breach of contract (Art. 5 of contract)— breach of obligation to hand over plot of land;

Claimant:

Tribunal referred to Libyan Civil Code, Libyan Supreme Court, UNIDROIT Principles of International Commercial Contracts (2010 edn), international arbitration jurisprudence, in particular jurisprudence of ICC (Case No. 10422, where lost profits were calculated on the basis of net margin).

US$ 5,030,000 in compensation of the value of losses and expenses incurred by the Breach of Libyan Civil office of the plaintiff Arab Code—in particular, company starting the Investment breach of obligation date of its inauguration Court to perform the in Libya pursuant to contract in good Decision No. Award of 22 faith; March 2013 (135) of 2006 until the Breach of Libyan date of its closure Applicable investment law— law: + US$ 1,089,000,000 Decision 203/2010 was an arbitrary The Unified in compensation of lost decision similar to profits after due By 2010, the P 516 Agreement freezing and for the consideration of the claimant had confiscation; Investment of not received the operation and Arab Capital land necessary Breach of Unified management of the in the Arab project for ninety years for the Agreement for the States (the realization of Investment of Arab + US$ 50 million in UA) the project, Capital in the Arab (1980/1981) although compensation of moral States through significant damages to the arbitrary money spent in cancellation of the company's reputation in preparation of investment project the financial and it. By Decision based on decision of business market inside 203/2010, the Minister of Economy Kuwait Minister of (United Agreement and internationally Economy integral part of cancelled the Libyan law and (pp. 53f of award) investment prevails over other licences and laws). annulled the approval of the project.

P 516

Claims brought against State of Libya, Libyan Ministry of Economy, General Authority for Investment Promotion and Privatization Affairs, Libyan Ministry of Finance & Libyan Investment Authority.

Claimant presented four reports to support his claim for compensation: • • •

•

Ernst&Young Report Prime Global Report Report of the Libyan expert Ahmad Ghatour and Assoc. Report of sworn expert Habib AlMasri

Amount awarded: Interest: US$ 935 million

including US$ 30 million compensation for moral damages (pp. 368f), US$ 5 million in value of losses and expenses (pp. 367f), and US$ 900 million in It estimated compensation taking into compensation for lost profits consideration all the resulting from aspects of the material real and certain and moral damages, as well as of the lost profits. lost opportunities. In order to interpret 'lost As regards lost profits', the tribunal referred to doctrine and profit, the tribunal reduced jurisprudence in Libyan the period of investment of 90 years as indicated in the Prime Global Report to 83 years (p. 377). In order to calculate the amount, the tribunal adopted an average of the amounts indicated in the four reports (US$ 2,092 394,150), p. 379, and then reduced the amount to US$ 900 million. law (p. 372), concluding that the law required the compensation of the damage caused by the loss of a certain and real opportunity and damage that certainly occurred or which occurrence in the future is certain (p. 374).

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4% interest rate on all amounts from date of issuance of the arbitral award until payment. Costs: Attorney's fees to be borne by each party, costs for arbitration costs and expenses to be borne by Respondent US$ 1,940,000.

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Calculation of Compensation and Damages in International Investment Law (Second Edition)

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Weiler, Todd (ed.), NAFTA. Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects (New York: Transnational Publishers, 2004). Weiler, Todd, International Investment Law and Arbitration (London: Cameron May, 2005). West, Thomas and Jones, Jeffrey (eds), The Handbook of Business Valuation (New York: Wiley, 1999). Westberg, John A, International Transactions and Claims Involving Government Parties. Case Law of the Iran–US Claims Tribunal (Washington: International Law Institute, 1991). White, Gillian, Nationalisation of Foreign Property (New York: Frederick A Praeger, 1961). Whiteman, Marjorie, Damages in International Law, 3 vols (Washington: Government Printing Office, 1937–1943). Whiteman, Marjorie, Digest of International Law, 15 vols (Washington: Government Printing Office, 1963–73). Wittich, Stephan, Non-material Damage and its Reparation in International Law (Dissertation, Vienna: 2001). World Bank (ed.), Legal Framework for the Treatment of Foreign Investment, Volume 1, Survey of Existing Instruments (Washington: World Bank Group, 1992). World Bank (ed.), Legal Framework for the Treatment of Foreign Investment, Volume 2, Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment (Washington: World Bank Group, 1992); also (1992) 31 ILM 1363, (1992) 7 ICSID Rev.-FILJ 297. World Bank (ed.), World Development Report 2005. A Better Investment Climate for Everyone (Washington: World Bank Group, 2004). Wortley, Ben A, Expropriation in Public International Law (Cambridge: Cambridge University Press, 1959). Wöss, Herfried, Rivera, Adriana San Román, Spiller Pablo T., and Dellepiane, Santiago, Damages in International Arbitration Under Complex Long-Term Contracts (Oxford: Oxford University Press, 2014).

II. ARTICLES IN JOURNALS AND OMNIBUS VOLUMES Van Aaken, Anne, 'Primary and Secondary Remedies in International Investment Law and National State Liability: a Functional and Comparative View' in S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010) 721. Van Aaken, Anne, 'International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis' (2009) 12(2) Journal of International Economic Law 507. Van Aaken, Anne and Kurtz, J, 'Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law' (2009) 12(4) Journal of International Economic Law 859. Abdala, Manuel, Zadicoff, Pablo D López, and Spiller, Pablo T, 'Invalid Round Trips in Setting Pre-Judgment Interest in International Arbitration' (2011) 5 World Arbitration and P 526 Mediation Review 1. Al Faruque, Abdullah, 'Typologies, Efficacy and Political Economy of Stabilization Clauses: A Critical Appraisal' (2007) TDM, vol. 4, issue 5. Alexandrov, Stanimir, 'The Present and Future of Moral Damages in Investment Arbitration' in B Sabahi, N Birch, I Laird, and J A Rivas (eds), Revolution in the International Rule of Law. Essays in Honour of Don Wallace, Jr (Huntington, NY: Juris, 2014) 515–28. Alomar, Rafael, 'Compensation in the Context of Unlawful Expropriations' (2016) 3(1) Journal of Damages in International Investment Arbitration 31, 55–6. Aldrich, George, 'What Constitutes a Compensable Taking of Property? The Decisions of the Iran–United States Claims Tribunal' (1994) 88 AJIL 585. Alzamora, Carlos, 'The UN Compensation Commission: An Overview' in R Lillich (ed.), The United Nations Compensation Commission (Irvington, NY: Transnational Publishers, 1995) 3. Amerasinghe, C F, 'Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice' (1992) 41 ICLQ 22. Amerasinghe, C F, 'Some Aspects of the Quantum of Compensation Payable upon Expropriation' (1993) 87 ASIL Proceedings 459. Amerasinge, C F, 'State Breaches of Contracts with Aliens and International Law' (1964) 58 AJIL 881. Amerasinghe, C F, 'The Quantum of Compensation for Nationalized Property' in R Lillich (ed.), The Valuation of Nationalized Property in International Law, vol. III (Charlottesville: University Press of Virginia, 1975) 91. Andenas, Mads and Fairgrieve, Duncan, 'Misfeasance, Governmental Liability and European Influences' in D Fairgrieve, M Andenas, and J Bell (eds), Tort Liability of Public Authorities in a Comparative Perspective (London: BIICL, 2002) 183. Arnull, Anthony, 'Liability for Legislative Acts Under Article 215(2) EC [now: 340 (2) TFEU]' in T Heukels and A McDonnell (eds), The Action for Damages in Community Law (The Hague: Kluwer Law, 1997) 129. Asante, Samuel K B, 'International Law and Foreign Investments: A Reappraisal' (1988) 37 ICLQ 588. Bachmann, Susanne, 'Enteignung, Entschädigung und Kostenersatz im verwaltungsbehördlichen Enteignungs- und Entschädigungsverfahren' [1991] AnwBl 612. Ball, Markham, 'Assessing Damages in Claims by Investors Against States' (2001) 16 ICSID Rev.-FILJ 408. Ballwieser, Wolfgang, 'Unternehmensbewertung durch Rückgriff auf Marktdaten' in M Heintzen and L Kruschwitz (eds), Unternehmen bewerten (Berlin: Duncker & Humblot, 2003) 13. Beeley, Mark and Walck, Richard, 'Approaches to the Award on Interest by Arbitration Tribunals' (2014) 1(1) Journal of Damages in International Arbitration 51. Beharry, Christina, 'Lawful Versus Unlawful Expropriations: Heads I Win, Tails You Lose' (2016) 3 (1) Journal of Damages in International Investment Arbitration 57. Bernasconi-Osterwalder, Nathalie, 'Who Wins and Who Loses in Investment Arbitration?

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Are Investors and Host States on a Level Playing Field?' (2005) 6 JWIT 69. Binder, Christina and Reinisch, August, 'Economic Emergency Powers: A Comparative Perspective' in S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010) 503. Binder, Christina, 'Changed Circumstances in Investment Law: Interfaces between the Law of Treaties and the Law of State Responsibility with a Special Focus on the Argentine P 527 Crises' in C Binder, U Kriebaum, A Reinisch, and S Wittich (eds), International Investment Law for the 21st Century. Essays in Honour of Christoph Schreuer (Oxford: Oxford University Press, 2009) 608. Birch, Nicholas, 'Curing Uncompensated Expropriation under Chorzów' in B Sabahi, N Birch, I Laird, and J A Rivas (eds), Revolution in the International Rule of Law. Essays in Honour of Don Wallace, Jr (Huntington, NY: Juris, 2014) 475–96. Boone, Jeffery P, 'Oil and Gas Reserve Value Disclosures and Bid–Ask Spreads' (1998) 17 Journal of Accounting and Public Policy 55. Borchard, Edwin M, ' “Responsibility of States” at the Hague Codification Conference' (1930) 24 AJIL 517. Bothe, Michael, 'Die Bedeutung der Rechtsvergleichung in der Praxis internationaler Gerichte' (1976) 36 ZaöRV 280. Bowett, Derek, 'Claims between States and Private Entities: The Twilight Zone of International Law' (1986) 35 Catholic University Law Review 929. Bowett, Derek, 'State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach' (1988) 59 BYIL 49. Bradley, Anthony and Bell, John, 'Governmental Liability: A Preliminary Assessment' in J Bell and A Bradley (eds), Governmental Liability: A Comparative Study (London: BIICL, 1991) 1. Brand, Ronald A, 'Punitive Damages and the Recognition of Judgements' (1996) 43 Netherlands International Law Review 143. Branson, J 'Damages in Investment Arbitration—A Revolutionary Remedy or Reward for Rich Corporations at the Expense of the World's Poor? A Fundamental Examination of Chorzów' Children' (2016) 3(2) Journal of Damages in International Arbitration. Bronkhorst, H J, 'The Valid Legislative Act as a Cause of Liability of the Communities' in T Heukels and A McDonnell (eds), The Action for Damages in Community Law (The Hague: Kluwer Law International, 1997) 153. Brower, Charles N, 'The Iran–US Claims Tribunal United States Claims Tribunal' (1990) 224 RdC 224. Brower, Charles N, 'The Lessons of the Iran–US Claims Tribunal to Claims Against Iraq' in R Lillich (ed.), The United Nations Compensation Commission (Irvington, NY: Transnational Publishers, 1995) 15. Brower, Charles N and Wong, Jarrod, 'General Valuation Principles: The Case of Santa Elena' in T Weiler (ed.), International Investment Law and Arbitration (London: Cameron May, 2005) 747. Brownlie, Ian, 'State Responsibility and the International Court of Justice' in M Fitzmaurice and D Sarooshi (eds), Issues of State Responsibility before International Judicial Institutions (Oxford: Hart Publishing, 2004) 11. Brunetti, Maurizio, 'The Iran–US Claims Tribunal US Claims Tribunal, NAFTA Chapter 11, and the Doctrine of Indirect Expropriation' (2001) 2 Chicago Journal of International Law 203. Brunetti, Maurizio, 'Indirect Expropriation in International Law' (2003) 5 International Law Forum 150. Bungert, Hartwin, 'Vollstreckbarkeit US-amerikanischer Schadensersatzurteile in exorbitanter Höhe' [1992] ZIP 170. Burke-White, William and von Staden, Andreas, 'Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties' (2008) 48 Virginia Journal of International Law 307. Caron, David and Morris, Brian, 'The United Nations Compensation Commission: Practical

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