Contemporary and Emerging Issues on the Law of Damages and Valuation in International Investment Arbitration [1 ed.] 9789004357792, 9789004357785

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Contemporary and Emerging Issues on the Law of Damages and Valuation in International Investment Arbitration

Nijhoff International Investment Law Series Series Editors Prof. Eric De Brabandere (Leiden University) Prof. Tarcisio Gazzini (University of East Anglia) Prof. Stephan W. Schill (University of Amsterdam) Prof. Attila Tanzi (University of Bologna) Editorial Board Andrea K. Bjorklund (Montreal) – Juan Pablo Bohoslavsky (El Bolsón, Río Negro) – Chester Brown (Sydney) – David Caron (London) – Patrick Dumberry (Ottawa) – Michael Ewing-Chow (Singapore) – Susan D. Franck (Lexington) – Ursula Kriebaum (Vienna) – Makane Mbengue (Geneva) – Catherine A. Rogers (Carlisle) – Christian Tams (Glasgow) – Andreas Ziegler (Lausanne)

VOLUME 11

The titles published in this series are listed at brill.com/iils

Contemporary and Emerging Issues on the Law of Damages and Valuation in International Investment Arbitration Edited by

Christina L. Beharry

LEIDEN | BOSTON

The Library of Congress Cataloging-in-Publication Data Names: Beharry, Christina L., editor. Title: Contemporary and emerging issues on the law of damages and valuation  in international investment arbitration / edited by Christina L. Beharry. Description: Leiden ; Boston : Brill Nijhoff, 2018. | Series: Nijhoff  international investment law series ; volume 11 | Includes bibliographical  references and index. Identifiers: LCCN 2017060537 (print) | LCCN 2018000741 (ebook) | ISBN  9789004357792 (E-book) | ISBN 9789004357785 (hardback : alk. paper) Subjects: LCSH: International commercial arbitration. | Investments,  Foreign—Law and legislation. | Damages. Classification: LCC K2400 (ebook) | LCC K2400 .C6675 2018 (print) | DDC  346/.092—dc23 LC record available at https://lccn.loc.gov/2017060537

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. issn 2351-9542 isbn 978-90-04-35778-5 (hardback) isbn 978-90-04-35779-2 (e-book) Copyright 2018 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi, Brill Sense and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents Preface xi Christina L. Beharry Notes on Contributors xv

Part 1 Standing, Procedure, and Other Preliminary Considerations 1 Procedural Tools to Facilitate the Quantification of Damages in Investor-State Arbitration 3 Adam Douglas 1 Introduction 3 2 How Can One Claim Be Worth Such Widely Different Amounts? 5 3 Procedural Tools to Facilitate the Assessment of Quantum 8 4 Conclusion 26 2 Third-Party Financing in Investment Arbitration 27 Victoria Sahani, Mick Smith and Christiane Deniger 1 Introduction 27 2 The Main Features of Third-Party Funding 27 3 Disclosure of Third-Party Funding 40 4 Jurisprudence on Disclosure of Third-Party Funding 42 5 Not-for-Profit Funding 48 6 The Effect of Third-Party Funding on Costs and Security for Costs 50 7 Third-Party Funding and Quantum Calculations 52 8 Settlement 55 9 Conclusion 56 3 Reflective Loss and Its Limits under International Investment Law 57 Mark A. Clodfelter and Joseph D. Klingler 1 Introduction 57 2 Claims for “Ordinary” Reflective Loss 58 3 Claims for More Extended Forms of Reflective Loss 74 4 Conclusion 80

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Part 2 Legal Considerations 4 Causation and Injury in Investor-State Arbitration 83 Patrick W. Pearsall and J. Benton Heath 1 Causation in the Framework of State Responsibility 86 2 Law and Fact in the Causation Analysis 94 3 Causation in Action: The Lemire and Rompetrol Cases 101 4 Conclusion 110 5 Assessing Compensation and Damages in Expropriation versus Non-expropriation Cases 111 Irmgard Marboe 1 Introduction 111 2 The Applicable Law 112 3 Expropriation under International Investment Law 119 4 Protection of Foreign Investors against Non-expropriatory Actions by States 134 5 Conclusion 140 6 Moral Damages 142 Patrick Dumberry 1 Introduction 142 2 The Concept of Moral Damage 144 3 Moral Damages in Investor-State Disputes 146 4 Conclusion 167

Part 3 Valuation Considerations 7 Approaches to Valuation in Investment Treaty Arbitration 171 Noah Rubins, Vasuda Sinha and Baxter Roberts 1 Principles Underlying Valuation 172 2 Methods for Quantifying Loss 185 3 Novel Approaches to Valuation of Loss 200

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Discounted Cash Flow Method 205 Kai F. Schumacher and Henner Klönne 1 Introduction to the Discounted Cash Flow Method 205 2 Overview of the DCF Method 206 3 How to Deal with Uncertainty or Speculation? 210 4 The Duration of the Loss Period 215 5 The Key Discount Rate Parameters 217 6 Premiums and Discounts 227 7 Cross-Checks to Market References 228 8 Conclusion 229

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Measuring Country Risk in International Arbitration 231 James Searby 1 Technical Aspects of Country Risk 231 2 Country Risk in Investment Arbitration 249 3 Current Uncertainties and Potential Solutions 260

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10 Valuation Techniques for Early-Stage Businesses in Investor-State Arbitration 262 Garrett Rush, Kiran Sequeira and Matthew Shopp 1 Early-Stage Investments in Investor-State Arbitration: Guidelines and Applications 263 2 Specialized Tools and Techniques Employed to Value Early-Stage Investments 273 3 Conclusion and Recommendations 291 11

Valuing Natural Resources Investments 293 Richard Caldwell, Darrell Chodorow and Florin Dorobantu 1 Introduction 293 2 The Prevalence of Investor-State Disputes in the Natural Resources Sector 294 3 Industry Valuation Standards and Key Drivers of Investment Value 295 4 The Use of the DCF Method in Valuing Pre-Production Investments 300 5 Challenges in Applying the Comparables Method to Extractive and Renewables Investments 307 6 The Relevance of Share Prices to Damages Assessments 316 7 Conclusion 321

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Part 4 Damages from a State Perspective 12

Principles Limiting the Amount of Compensation 325 Borzu Sabahi, Kabir Duggal and Nicholas Birch 1 Limits on Compensation 325 2 Conclusion 346

13

Counterclaims and State Claims 347 Jeremy K. Sharpe and Marc Jacob 1 Introduction 347 2 Responses to International Investment Claims 347 3 The Right to Present Counterclaims 352 4 Procedural and Practical Issues 360 5 Re-balancing the Asymmetrical System of Investment Treaty Protection 365 6 Treaty-drafting Choices 367 7 Conclusion 368

Part 5 Adjustments to Damages and Post-Award Issues 14

Approaches to the Award of Interest 371 Mark Beeley 1 The Historical Picture and the Jurisdictional Underpinning of the Award of Interest 373 2 The Dilemmas of the Modern Tribunal 378 3 The Current State of Play 378 4 Problems for the Future? 395

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The Allocation of Costs in Investment Treaty Arbitration 398 Matthew Hodgson and Alastair Campbell 1 Introduction 398 2 The Current Approach 400 3 Additional Considerations and Potential Reform 417 4 Adoption of a Default Rule 425

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Post-award Challenges of Damages Assessments 428 Christina L. Beharry 1 Types of Defects in Damages Awards 429 2 Post-award Remedies 431 3 Potential Ways to Avoid Making Errors 457 4 Concluding Remarks 458

Appendix: Table of Cases 461 Index 482

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Preface The rise of investor-State disputes over the past two decades has generated a large body of case law involving complex legal and financial issues. At the heart of these cases are multi-million dollar claims. These high-profile and increasingly high-stakes disputes have reinvigorated discussions about the principles and methodologies applicable to damages claims under investment treaty law. Understanding damages and valuation issues in international investment arbitration is important for counsel, claimants, respondents, experts, and arbitrators alike. Lawyers must be conversant with financial concepts and methodologies to engage with valuation experts. Would-be claimants need to know the most likely amount recoverable through investment arbitration and, conversely, States must know the extent of their financial exposure. Experts meanwhile must ensure that their damages models correspond with legal principles on damages, and arbitrators are compelled to make sound judgments on complicated damages claims so as to shield their awards against possible challenges. Simply put, damages is no longer an esoteric or niche topic. It is integral to practicing in this area of law. While firmly rooted in public international law, investment arbitration— as a hybrid between commercial arbitration and traditional State-to-State dispute resolution—has emerged as a distinct discipline in its own right. Given the blending of private and public actors, the treatment of damages in international investment disputes calls for a distinctive approach. In developing this approach, practitioners often draw from these two fields, which—due to their philosophical and practical differences—is often a source of tension. This book seeks to identify the main questions confounding tribunals through a collection of papers on contemporary and emerging issues on the law of damages and valuation in international investment arbitration. It provides both an updated take on what can be thought of as long-standing damages topics but also explores novel or understudied ones. With regard to traditional topics, this book takes stock of new developments and current practices—concerning, for example, the competing standards of compensation, popular methods for quantifying damages, and the application of interest and the allocation of arbitration costs—that have featured in investor-State cases over the past 50 years. In addition, many of the chapters in this volume go beyond conventional topics and provide a close examination of emerging areas on damages in international arbitration. It examines, for example, cutting-edge issues on procedural, legal, and valuation considerations. The fact that new and emerging

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issues are found across all those dimensions is testament to the growing complexity of the field. In terms of procedure, the book discusses, inter alia, procedural tools to minimize differences in valuations and post-award remedies available to address defects in damages awards. Insofar as legal issues are concerned, one contribution delves into the role played by causation in establishing a damages claim, a topic which—as the chapter makes clear— has been insufficiently studied and is often misunderstood. Valuation is perhaps the topic within the subject of damages in investment arbitration that has seen the most robust growth. While the fundamental question— determining quantum—remains unchanged, the greater depth and sophistication of techniques calls for renewed attention to the subject. Several chapters provide up-to-date treatment on many of these issues, such as the divergent approaches in assessing lost profits, the different ways of estimating a country risk premium, and under-utilized valuation tools borrowed from the world of finance. In keeping with the spirit of the book of gauging contemporary and emerging issues, not all traditional damages topics have their own stand-alone chapter. This does not mean that the book is silent on those topics. On the contrary, some of those topics are touched upon in multiple chapters. A thematic index follows the collection of papers to facilitate the task of readers interested in a specific topic that is not the subject of a dedicated chapter. This volume also attempts to present a balance of perspectives on legal damages and quantum issues through the voices of leading academics, practitioners, and experts in international investment arbitration. This inter-disciplinary approach helps shed light on issues from different angles and brings attention to areas where there may be differences between legal and economic theory—due, for example, to evidentiary principles, defenses limiting damages, or even equitable considerations. These contributions underscore the lack of a consensus view on a number of fundamental questions, such as: What is the degree of certainty required for an award of lost profits? Is the applicable standard for a treaty breach full reparation or fair market value? And what are the practical implications of the Chorzów Factory case on valuation? As with any collaborative effort, the views expressed herein reflect the analysis and conclusions of the authors alone. Consequently, while the contributions from the authors in this book provide insights on many of these issues, it can be expected that counsel and experts will continue to spar over such essential questions. This book is divided into five parts, each focusing on a common theme. Part 1 deals with “Standing, Procedure, and Other Preliminary Considerations.” The subjects covered here underscore the interconnectedness of damages to other

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procedural, jurisdictional, and substantive aspects of a case. These chapters address the use of procedural devices to narrow the disparities in valuation claims, ensure efficient case management, and lower costs (Chapter 1) as well as the implications surrounding the emergence of new actors bankrolling or making investment claims (Chapters 2 and 3, respectively). Part 2 of the book takes an in-depth look at “Legal Considerations”—such as causation (Chapter 4), standards of compensation for different treaty breaches (Chapter 5), and damages for non-material losses (Chapter 6)—that are central to the assessment of damages. These guiding principles, while familiar to lawyers, are not always well-understood and are oftentimes misapplied. This series of chapters explores the extent to which these concepts have evolved and been delineated in the jurisprudence. General financial concepts that underlie the quantification of damages and recent developments in the methods for valuing losses are covered in Part 3—“Valuation Considerations.” This part of the book examines new trends in the application of common valuation approaches and the use of alternative financial techniques to calculate damages in international investment arbitration (Chapters 7, 8, and 9). The specific challenges posed by early stage investments, which have been a common feature of many recent cases, are also explored (Chapter 10). To illustrate this discussion, Chapter 11 focuses on quantification issues in the natural resources sector—involving renewable energy, mining, and oil and gas projects—that have featured prominently in the recent generation of investor-State cases. This chapter provides an overview of these industries, advises on the most viable valuation methods for each type of project, identifies the main challenges in valuing such investments, and highlights possible divergences in valuations conducted in the context of litigation. Part 4 focuses on “Damages from a State Perspective.” As the respondent in these cases, States have become increasingly critical of the investor-State dispute settlement system. Chapters in this part of the book discuss the various defenses used to limit the amount of damages awarded against respondents (Chapter 12) and explore more recent attempts to re-balance the power asymmetries of the current system through State claims and counterclaims (Chapter 13). The book concludes in Part 5 with chapters relating to “Adjustments to Damages and Post-Award Issues.” The chapters on interest (Chapter 14) and costs (Chapter 15) examine the various approaches reflected in recent cases, evaluate whether these practices afford adequate compensation to injured parties, and suggest a path for moving forward. The final essay (Chapter 16) rounds off the book by examining the main procedural mechanisms used by

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parties to resolve disputes over damages awards and evaluates their suitability for fixing errors and settling disagreements. And now for a few words of gratitude. I owe a tremendous debt to every single contributor for their participation in this project and for sharing their expertise. Thanks also to the readers—Jeffrey Cohen, Roula Harfouche, Derek Smith, and Kenneth Figueroa—for generously dedicating their time to review and provide comments on draft chapters. I would also like to acknowledge the efforts of my current and former colleagues from Foley Hoag—Anna Avilés-Alfaro, Patricia Cruz-Trabanino, and Melinda Kuritzky—who assisted me with the production of this book. Their commitment and meticulous attention to detail alleviated many of the burdens implied by a project of this nature. This volume would also not have been possible without the support of our Department Chair, Paul Reichler. Finally, I would like to thank my family. I am incredibly grateful to my husband, Oscar, for his boundless enthusiasm for this venture, to our children, Beatrice and Hugo (who joined our family during the making of this book) for their patience during my absences, and finally, to my mother for her constant encouragement and sound advice over the years. Washington, D.C. October 2017

Notes on Contributors Mark Beeley is a Partner, solicitor-advocate, and Barrister based in the London and Dubai offices of Vinson & Elkins. Sitting in the International Dispute Resolution group, he acts as arbitrator, arbitration counsel, and advocate, with a particular focus on disputes arising from the energy sector, or involving the Middle East, Africa, and India. In the courts, Mr. Beeley has acted as both solicitor and counsel in proceedings before the English High Court and the Dubai International Financial Centre Court. As part of his practice, he has acted in investor-State cases under the ICSID, UNCITRAL, LCIA, and ICC rules (including in annulment proceedings). He has a particular interest in the calculation of interest and the award of costs, subjects on which he has regularly written and spoken. Christina L. Beharry is Counsel in the International Litigation and Arbitration Department of Foley Hoag. She advises clients on an array of international law issues, including investment arbitration, treaty interpretation, economic sanctions, human rights, maritime delimitations, and international environmental law. She has significant experience in investment treaty arbitration, representing clients across different regions in disputes involving diverse sectors such as mining, oil and gas, renewable energy, chemicals, agriculture, forestry, healthcare, and tobacco. She works extensively with experts on complex financial matters related to the valuation of businesses, environmental damage, and compensation for adverse human health impacts. Ms. Beharry previously served as Counsel in the Department of Foreign Affairs and International Trade (DFAIT), where she represented the Canadian government in investment disputes under NAFTA Chapter 11, assisted in the negotiation of international treaties, and advised other departments on the compliance of regulations with Canada’s international obligations. Prior to DFAIT, Ms. Beharry worked at Industry Canada, where she contributed to the development of new legislation on corporate governance, bankruptcy, and foreign direct investment. Ms. Beharry holds degrees from the London School of Economics, Cambridge University, and Columbia University. She is qualified to practice in Ontario, New York, the District of Columbia, and England and Wales.

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Nicholas J. Birch is an Associate at the Law Offices of Stewart and Stewart in Washington, D.C. and a JD/MBA graduate from Georgetown University. Mr. Birch has practiced in trade remedies and international investment law. He has also been involved in research and writing on international investment, arbitration, and trade law and development, and has been featured in multiple books and articles. Richard Caldwell is a Principal in The Brattle Group’s London office. He is an economics and financial expert, with experience valuing businesses and financial instruments across a range of industries and in a range of settings. He routinely provides economic and financial advice to private clients and expert testimony in litigation. Mr. Caldwell has testified before the U.K. Competition Appeals Tribunal on the level of returns for network companies, and testified on damages and financial issues before tribunals set up under the rules of the Energy Charter Treaty, the LCIA, ICSID, UNCITRAL, Dutch law, and Swiss law. Mr. Caldwell is currently advising numerous investors in renewables across Europe, bringing international claims in relation to retroactive changes in renewable energy support schemes. Mr. Caldwell’s testimony on damages was cited favorably and formed the basis of the damages award in the recent EISER Infrastructure decision, one of the first in a series of arbitrations against Spain. Mr. Caldwell regularly teaches a core corporate finance and valuation course in the Masters in Finance program at the London Business School and has degrees in Engineering from Cambridge University. Alastair Campbell is an Associate based in Allen & Overy’s London office, specializing in international commercial arbitration and investment treaty arbitration. He has acted for a range of banking and corporate clients in cross-border commercial and investment treaty arbitrations under all the major institutional rules, involving jurisdictions such as Singapore, Thailand, the Philippines, and the United States. Mr. Campbell has experience in disputes within the construction, energy, finance, and pharmaceuticals sectors. Mr. Campbell’s recent invest­ment treaty cases include successful claims for Dunkeld International Investment against Belize (resulting in an award of nearly US $200 million including interest and costs); Eiser Infrastructure Limited in an ECT case against the Kingdom of Spain related to renewable energy installations (leading to an award of €128 million in compensation plus interest); and the Islamic Republic of Pakistan, in the successful defense of claims valued at $575 million, arising from alleged interference in gas import operations at an LPG terminal.

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Darrell Chodorow is a Principal in The Brattle Group’s Washington, D.C. office. He has been advising clients for more than 25 years on economic, valuation, and regulatory matters in the context of disputes and commercial planning. His experience covers a wide variety of industries including oil and gas, electricity, mining, chemicals, financial services, gaming, consumer products, media, telecommunications, and transportation. He has deep expertise in natural resources, having advised on acquisitions, investment evaluation, policy, and regulatory design in the energy sector. Mr. Chodorow has acted as an expert witness in investor-State and commercial arbitration matters before ICSID, PCA, LCIA, ICC, AAA, and ad hoc tribunals. His work has involved assets in Africa, Asia, Australia, Europe, North America, and South America. He has acted as an expert in matters before U.S. federal courts, the U.S. Tax Court, the Delaware Court of Chancery, the Superior Courts of California and New Jersey, and the District Court of Cyprus. He has been named as a leading expert witness by Who’s Who Legal in the areas of construction (quantum and delay) and arbitration. He holds an MBA from Yale University and a BA in economics from Brandeis University. Mark A. Clodfelter is a Partner at the Washington, D.C. office of Foley Hoag. He has represented a wide range of governmental and private parties in investor-State, State-toState, and commercial disputes before panels of the ICSID, the Permanent Court of Arbitration, the ICC International Court of Arbitration, the Arbitra­tion Institute of the Stockholm Chamber of Commerce, the American Arbitration Association, and under the UNCITRAL Arbitration Rules, as well as before the UN Compensation Commission and the Iran-U.S. Claims Tribunal. From 2000–2007, Mr. Clodfelter served as the U.S. State Department’s Assistant Legal Adviser for International Claims and Investment Disputes and, as a member of the Senior Executive Service, led the representation of the United States in international arbitration proceedings. He taught International Commercial Arbitration for seven years as an Adjunct Professor of Law at the Georgetown University Law School. He has served as an arbitrator in investment treaty and international commercial cases and is a member of the ICSID Panel of Arbitrators, the Panel of Arbitrators of the Kuala Lumpur Regional Centre for Arbitration, and the International Roster of Neutrals of the International Center on Dispute Resolution (ICDR). Christiane Deniger is a Senior Case Assessor at Calunius Capital LLP, which acts as the sole advisor to the Calunius Litigation Risk Funds. Before moving to Calunius, she practiced

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law in the international dispute resolution departments of Dewey & LeBoeuf LLP (previously LeBoeuf Lamb Greene & MacRae LLP) and Fried, Frank, Harris, Shriver & Jacobson LLP from 2007 to 2016. She has published articles in International Corporate Rescue, Litigation Funding, among other legal journals, as well as edited and wrote for the Fried Frank International Arbitration Review. She earned her joint honors law with politics degree at Trevelyan College, the University of Durham, completed her LPC at the College of Law, and is licensed to practice law in England and Wales. Florin Dorobantu is a Principal in The Brattle Group’s New York office. He is a financial economist with expertise in valuation and structured finance. Dr. Dorobantu has performed valuation analyses in a variety of industries, including mining, oil and gas, telecommunications, financial services, large project engineering and construction, and consumer products. He has experience conducting complex discounted cash flow analyses, including building cash flow forecasts, estimating the impact of business and financial risks on cash flows and discount rates, and incorporating the value of real options in the valuation of long-lived assets. In disputes related to structured investments, he has analyzed a broad range of instruments, including interest rates and currency derivatives, asset-backed securities, leveraged loans, ETFs, and structured notes. Dr. Dorobantu has testified on damages in both investor-State and commercial arbitration matters before ICSID, ICC, and the PCA, and has advised clients in ICSID, LCIA, and ICC arbitration proceedings, as well as in U.S. litigation matters and regulatory proceedings. He was recognized as a leading quantum expert by the Who’s Who Legal guide to consulting experts. Dr. Dorobantu holds a Ph.D. in Economics from Duke University and BA in Economics and Business Administration from the American University in Bulgaria. Adam Douglas is Counsel with Global Affairs Canada in its Trade Law Bureau. His practice focuses on public international law, investor-State arbitration, and trade and investment policy. Mr. Douglas has public and private sector experience in international arbitration proceedings conducted before panels administered by the ICSID, PCA, and ad hoc tribunals under the UNCITRAL Arbitration Rules. He has represented the Government of Canada in more than a dozen investorState arbitrations in the areas of oil and gas, energy regulation, telecommunications, pharmaceuticals, and transportation. He also advises the government during the negotiation of free trade agreements and foreign investment protection agreements, and instructs government ministries on Canada’s trade and investment obligations in relation to potential claims. Mr. Douglas teaches a

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graduate course on investment arbitration litigation strategy at the University of Ottawa. Kabir Duggal is a Senior Associate in Baker McKenzie’s International Arbitration Practice Group in New York focusing on international investment law. He also acts as a Consultant for the United Nations Office of the High Representative for Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UN-OHRLLS). Mr. Duggal is a Lecturer-in-Law at the Columbia Law School, teaching “International Investment Law and Arbitration.” He has published several articles and books and is regularly invited to speak at conferences globally. He is the Managing Editor for Columbia Law School’s The American Review of International Arbitration, an editor for investmentclaims.com, hosted by Oxford University Press, a peer reviewer for the ICSID Review, and an Associate Editor for Brill Nijhoff’s international law and arbitration section. He is a Fellow at the Columbia Center on Sustain­able Development. Mr. Duggal has been awarded the inaugural “Diversity Fellowship” by the American Bar Association, Section of International Law, and serves on the Chartered Institute of Arbitrators Young Members Steering Committee. Mr. Duggal also sits as an arbitrator and mediator. Patrick Dumberry is an Associate Professor at the University of Ottawa (Civil Law Section). He holds a B.Sc. in Political Science and an LL.B. (Université de Montréal), as well as a D.E.S. and a Ph.D. (Graduate Institute for International Studies, Geneva, Switzerland). Professor Dumberry practiced international law and international investment arbitration with law firms in Geneva (Lalive), Montreal (Norton Rose), as well as with Canada’s Ministry of Foreign Affairs (Trade Law Bureau). His publications include three books, “State Succession to International Responsibility” (Martinus Nijhoff Publ., 2007, which received the prize “High Technical Craftsmanship and Utility to Practicing Lawyers and Scholars” in 2008 from the American Society of International Law); “The Fair and Equitable Treatment Standard under International Law: A Guide to NAFTA Article 1105 Case Law” (Wolters Kluwer, 2013); and “The Formation and Identification of Rules of Customary International Law in International Investment Law” (Cambridge University Press, 2016). His next book is entitled “A Guide to State Succession in International Investment Law” (Elgar Publ., 2018). He is the author of more than 60 publications in specialized journals and collective books in the field of international law and international investment arbitration.

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J. Benton Heath is an Attorney-Adviser with the U.S. Department of State’s Office of the Legal Adviser in Washington, D.C., and was previously an Associate with the international arbitration group of Curtis, Mallet-Prevost, Colt & Mosle in New York. He has experience representing States and State-owned enterprises in matters before commercial and investor-State arbitral tribunals, the Iran-United States Claims Tribunal, and the International Court of Justice, as well as in U.S. litigation concerning the recognition and enforcement of arbitral awards. His work on international law and global governance has appeared in the American Journal of International Law, the Harvard International Law Journal, the Vanderbilt Journal of Transnational Law, and the New York University Journal of International Law and Politics, among others. He holds a JD and LL.M. from New York University School of Law and was a law clerk to Judge Robert D. Sack of the U.S. Court of Appeals for the Second Circuit. Matthew Hodgson is a Partner in Allen & Overy’s Hong Kong office, where he specializes in international commercial arbitration, investment treaty arbitration, and public international law. He has acted as counsel and advocate in many disputes worldwide, including under all major arbitral rules. Mr. Hodgson is admitted to practice in England and Wales, Hong Kong, and New York. He has particular experience in disputes relating to energy and infrastructure projects, financial instruments (including derivatives), joint ventures, distribution agreements, post-M&A matters, and construction disputes. He is well-known for his investment treaty work. This has included successfully representing investors in ICSID claims against Sri Lanka and the Philippines, and representing the governments of Azerbaijan, Kyrgyz Republic, Pakistan, and Poland in six separate treaty claims. Mr. Hodgson has been recognised as a leading arbitration practitioner by Chambers & Partners and Legal 500 since being identified as a “rising star” in 2012 (Chambers Global). Who’s Who Legal lists him in their Future Leaders—Arbitration 2017 rankings, describing him as “a talented advocate with a big future ahead of him.” Marc Jacob advises and represents governments and companies in international disputes. He is a member of the international arbitration and public international law groups at Shearman & Sterling LLP and resident in its Frankfurt office. Dr. Jacob has served as counsel in numerous arbitrations conducted under most major institutional rules, especially in the areas of foreign direct investment and international commerce. He is a former senior fellow at the Max

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Planck Institute for International Law. He has significant experience in a broad range of international law subjects, and in acting for and against States and State entities. Dr. Jacob is listed in publications such as Euromoney’s Rising Stars guide. He lectures regularly on public international law and international investment arbitration, including at the University of Tübingen. Joseph D. Klingler is an Associate in the International Litigation and Arbitration Department at Foley Hoag, where he represents sovereign States and state-owned entities in international investment and public international law disputes. His experience includes serving on the legal team representing the Philippines against China in an arbitration brought under the United Nations Convention on the Law of the Sea, and representing Ukraine and India in arbitrations brought under bilateral investment treaties before the International Centre for Settlement of Investment Disputes and the Permanent Court of Arbitration. Mr. Klingler has published in the Harvard International Law Journal and through the American Society of International Law, where he has also presented his research. He is the co-editor of a forthcoming volume on “Canons of Construction and Other Interpretive Principles in Public International Law,” and is currently serving as a Vice-Chair of the International Courts & Judicial Affairs Committee of the American Bar Association Section of International Law. Mr. Klingler graduated magna cum laude from Harvard Law School in 2014. He also holds a Master’s degree from The Fletcher School of Law and Diplomacy. Henner Klönne is a Senior Vice President at Alix Partners. He has nearly a decade of experience focused on valuations, damages calculations, financial due diligence and transaction services, purchase price allocation, impairment tests, as well as financial analysis including liquidity planning. Prior to joining AlixPartners, Dr. Klönne was a Manager in the advisory services department of an audit company. Dr. Klönne holds a Master’s degree in business administration from the Westfäliche Wilhelms-Universität, Münster. His Ph.D. thesis dealt with the valuation and allocation of synergies in business valuations. Dr. Klönne lectures on accounting and valuation and has authored various publications in these areas. Irmgard Marboe is Professor of International Law at the Department of European, Interna­tional and Comparative Law, Section for Public International Law and International Relations, at the Faculty of Law of the University of Vienna. She

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is the author of “Calculation of Compensation and Damages in International Investment Law” published by Oxford University Press (1st edition 2009, 2nd edition 2017). As Associate Editor of the online journal Transnational Dispute Management (TDM), she edited a special issue on “Compensation and Damages in International Investment Arbitration.” Since 2016, she has been Co-Editorin-Chief of The Journal of Damages in International Arbitration. Other research interests include international space law and Islamic law. She acts as a consultant in investor-State arbitrations, as an advisor to the Austrian Ministry of Transport, Innovation and Technology, and as an external expert to the European Commission in research evaluations. Having studied law and Roman languages at the University of Vienna and the Universidad Complutense de Madrid, she is fluent in French, Italian, and Spanish, in addition to German and English. She teaches international law at European, American, and Australian universities. In the past years, she has spent several months as a visiting scholar at Stanford University, California. Patrick W. Pearsall is the Chair of Jenner & Block’s Public International Law practice. He has extensive experience representing sovereigns and investors in multi-billion dollar international disputes. He has regularly served as counsel in billion-dollar commercial arbitration matters. Mr. Pearsall was in the Office of the Legal Adviser at the U.S. State Department from January 2009 to June 2017 and served as the Chief of Investment Arbitration from 2015 to his departure. He litigated claims on behalf of the United States when disputes were brought under treaties and free trade agreements, such as bilateral investment treaties and FTAs (including the NAFTA and the CAFTA-DR). In addition to his representations as counsel, he has led the negotiations of several bilateral and multilateral treaties and has significant experience on international environmental law and matters related to cross-border infrastructure and energy projects. Mr. Pearsall has received several awards while in government service and is listed in several peer-selected guides featuring the foremost arbitration practitioners in the world. He served as the United States representative to the International Court of Arbitration’s (ICC) Task Force on Arbitration with States or StateOwned Entities and served on its Special Drafting Committee for revisions of the 2012 ICC Rules. He has published and spoken widely on commercial and investor-State arbitration and is in the leadership of several international arbitration organizations. He has worked for both the ICC and for the Hon. Sonia Sotomayor on the United States Court of Appeals. Mr. Pearsall has guest lectured at Columbia Law School, Harvard Law School, and Yale Law School and currently is an adjunct professor at the Georgetown Law Center.

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Baxter Roberts is an Associate in the international arbitration group at Freshfields Bruckhaus Deringer, based in the firm’s Paris office since 2012. He advises States, corporations and non-governmental organizations in a wide range of disputes, including arbitrations under the ICC, UNCITRAL, LCIA and ICSID rules. Mr. Roberts specializes in international commercial and investor-State arbitration, with a focus on clients in the energy, mining, and infrastructure sectors. Mr. Roberts holds an LLB (Hons) and a BA from the University of Western Australia, where he has taught as part of a course on international commercial arbitration. He was admitted as a Barrister and Solicitor of the Supreme Court of Western Australia in 2013. Mr. Roberts’ publications include “A Practical Guide to Investment Treaties—Asia Pacific” (with S.K. Dharmananda and M. Feutrill). He speaks English and French. Noah Rubins is the head of the international arbitration group at Freshfields Bruckhaus Deringer’s Paris office and leads the firm’s CIS/Russia Dispute Resolution Group. Mr. Rubins has advised and represented clients in arbitrations under the ICSID, ICSID Additional Facility, ICC, AAA, SCC, LCIA, ICAC, and UNCITRAL rules. He specializes in investment arbitration, particularly under the auspices of bilateral investment treaties and NAFTA and has also practiced law in New York, Washington, Houston, and Istanbul. He has served as arbitrator in over 35 cases, including two investment treaty disputes adjudicated under the UNCITRAL Rules and one under the ICSID Rules. Mr. Rubins has published widely in the field of arbitration, and is a frequent conference speaker as well. He was Global Professor of Law at the University of Dundee (Scotland) and has also served as an adjunct professor of law at Georgetown Law Center in Washington, D.C. His publications include “Investor-State Arbitration” (with C. Dugan, D. Wallace, and B. Sabahi), “International Investment, Political Risk and Dispute Resolution: A Practitioner’s Guide” (with S. Kinsella), “Allocation of Costs in Investment Arbitration” and “Investment Arbitration in Brazil.” Mr. Rubins received a Master’s degree in dispute resolution and public international law from the Fletcher School of Law and Diplomacy, a JD from Harvard Law School, and a Bachelor’s degree in international relations from Brown University. He speaks English, French, and Russian fluently, and has a working knowledge of Spanish and Hebrew. Garrett Rush is a founding partner of Versant Partners, a specialized dispute consulting firm. He has been appointed an expert in U.S. court, ICC, UNCITRAL, and

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ICSID matters. He has been advising clients facing critical and time-sensitive challenges for over 20 years and across six continents. Mr. Rush has a track record of successful quantum outcomes for a balance of claimants and respondents with multiple $1+ billion awards and other influential precedents. Over the course of his career, Mr. Rush’s work has spanned the telecom, energy, mining, real estate, insurance, and luxury goods sectors. Earlier in his career, Mr. Rush’s work involved valuing and creating revenue enhancements for private equity-backed companies. He also held positions at Arthur Andersen, Deloitte & Touche, and an economic consulting firm where he provided valuations in the context of disputes and quantified the impact of regulations for investors. Mr. Rush holds the internationally-recognized designation of Chartered Financial Analyst. He received a Master of Business Administration from INSEAD (France) and a Bachelor of Science in Economics from The College of William & Mary. Borzu Sabahi is a Partner in the International Arbitration Group of Curtis, Mallet-Prevost, Colt & Mosle LLP in Washington, D.C. He focuses his practice on representing governments, State-owned entities, and companies in complex international arbitration and public international law disputes. He has been recognized as a leading practitioner by Who’s Who Legal of International Commercial Arbitration Lawyers in 2015, 2016, and 2017. He is also an adjunct professor of law at Georgetown University Law Center, where he has taught for the last ten years a seminar on investment treaty arbitration. He is Co-Director of the International Investment Law Center at the International Law Institute (ILI) in Washington, D.C. and Co-Editor-in-Chief of Brill Research Perspectives in International Investment Law and Arbitration. He has published a number of articles and books on various aspects of international investment law and arbitration, particularly on the international law of damages. His publications have been cited by international tribunals and the U.S. Supreme Court. Victoria Sahani is a tenured Associate Professor of Law at Arizona State University Sandra Day O’Connor College of Law. She has published articles in the UCLA Law Review, the Tulane Law Review, the Cardozo Law Review, and the Journal of International Arbitration, as well as book chapters in books published by Cambridge University Press, Brill / Martinus Nijhoff Publishers, and Wolters Kluwer. The second edition of her co-authored book, “Third-Party Funding in International Arbitration” (with Lisa Bench Nieuwveld), will be published by Wolters Kluwer in late 2017. She is a Member of the Executive Council of

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the American Society of International Law (ASIL), the Academic Council of the Institute for Transnational Arbitration (ITA), the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, and the Advisory Council of the Alliance for Responsible Consumer Legal Funding. Prior to academia, Professor Sahani served for five years as Deputy Director of Arbitration and ADR in North America for the International Court of Arbitration of the International Chamber of Commerce (ICC) in New York. She earned her undergraduate and law degrees at Harvard University and is licensed to practice law in New York and the District of Columbia. Kai F. Schumacher a Managing Director at AlixPartners, uses the power of facts and financial analysis to quantify damages in international arbitrations, litigation, and forensic investigations. Mr. Schumacher has been benefiting clients by successfully advising them for almost two decades. He has managed projects dealing with entities from 53 different countries. His recent caseload includes appointments as a party or tribunal-appointed expert witness in ICSID, ICC, SIAC, VIAC, LCIA, and DIS disputes. He has worked in a wide range of sectors, including utilities and energy, oil and gas, chemicals, pharmaceuticals, telecommunications, engineering, private equity, financial services, and media and Internet. Mr. Schumacher’s experience includes breaches of contract, investment disputes, post-M&A disputes, expropriations, shareholder disputes, financial disputes, valuation of financial assets and financial institutions, as well as financial investigations. Mr. Schumacher earned an MBA from the HEC School of Management, Paris, ranking on the Dean’s Honor List, and the Wharton School, Philadelphia. In addition, he is a chartered financial analyst (CFA) and a certified public accountant (CPA). For several years, Who’s Who Legal has consistently listed him as one of the leading expert witnesses in commercial arbitration. James Searby is a Senior Managing Director in FTI Consulting’s economic and financial consulting practice, specializing in the assessment of quantum issues in contentious matters. Mr. Searby has given both written and oral testimony in both national courts and arbitrations under a variety of institutional rules. Mr. Searby has a broad range of experience in high-value cross-border disputes involving, inter alia, alleged expropriation, breach of contract, patent infringement, and shareholder disputes. Mr. Searby’s primary expertise is in the field of valuation, whether of businesses, contracts, damages, intellectual property, or financial assets. He has a strong interest in the technical aspects of valuation,

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such as beta calculations, country risks, marketability restrictions, and valuation standards. Mr. Searby holds an MA in modern history and economics from the University of Oxford and a Master’s degree in business administration from Imperial College at the University of London. He is also a CFA charterholder. From 2011 to 2015, he led FTI Consulting’s international arbitration practice in the Asia-Pacific region. Since 2015, he has led FTI Consulting’s international arbitration practice in Washington, D.C. Kiran Sequeira is a founding partner of Versant Partners, a specialized dispute consulting firm with specific expertise in the valuation of investments in investor-State arbitrations. He has been appointed an expert witness on financial, valuation, and damages issues in over 35 international arbitrations and federal court proceedings. He has assisted businesses, individuals, investors, and governments in valuations and damages assessments within the energy, mining, transport, infrastructure, telecommunications, manufacturing, real estate, construction, and services sectors. Mr. Sequeira’s investor-State arbitration experience includes investments across Asia, Europe, North America, Latin America, Russia/CIS, the Middle East, and Africa. This includes both early stage projects as well as mature/operating companies. Mr. Sequeira received a Master of Business Administration with a concentration in Finance from Johns Hopkins University, a Master of Science in Civil Engineering from Syracuse University, and a Bachelor of Science in Civil Engineering from the University of Mumbai. He is also a licensed professional engineer. Jeremy K. Sharpe is a Partner in Shearman & Sterling’s international arbitration and public international law groups, based in London. He counsels private and sovereign clients on diverse matters of international dispute resolution, public international law, and international investment law and policy. He previously was Chief of Investment Arbitration in the Office of the Legal Adviser at the U.S. Department of State, representing the United States in investor-State and Stateto-State disputes arising under U.S. international investment agreements, including NAFTA and CAFTA, and advising on the negotiation of such agreements. He has served as the Legal Adviser to the U.S. Embassy in Baghdad and as an Attorney-Adviser in the State Department’s Office of African and Near Eastern Affairs and Office of International Claims and Investment Disputes. He previously practiced international arbitration in Washington, D.C. and served as Legal Assistant to Judge Charles N. Brower at the Iran-United States Claims Tribunal in The Hague.

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Matthew Shopp is a founding partner of Versant Partners, a specialized dispute consulting firm. He has over a decade of experience valuing investments and assessing quantum issues in international arbitration. He has been appointed as a financial and damages expert in ICSID, ICC, and LCIA arbitrations. Mr. Shopp has worked on projects around the world in a wide range of industries, including oil and gas, construction, real estate, manufacturing, consumer goods, telecom, and financial services. He has deep experience in developing and frontier economies, with a focus on Asia, the Middle East, Africa, and Latin America. Earlier in his career, Mr. Shopp spent time in the Middle East working with a Fortune 500 corporation on large-scale construction and logistics contracts. He also has experience working with government contractors on compliance and regulatory issues. Mr. Shopp holds an MBA in Finance (honors) and a Bachelor of Science from Pennsylvania State University. Vasuda Sinha is an Associate in the international arbitration group at Freshfields Bruckhaus Deringer. Currently based in Paris, she has previously practiced in Ottawa, Toronto, and London (UK). Ms. Sinha is an experienced litigator with particular expertise in commercial litigation and arbitration, enforcement proceedings across various jurisdictions, cross-border disputes, conflict-of-laws, and jurisdictional disputes. She has advised in arbitrations under various rules, including ICC, SCC and LCIA rules, and has appeared as counsel before various tribunals and courts, including arbitral tribunals and the Supreme Court of Canada. Ms. Sinha has written in a variety of areas, including “International Civil Service Ethics, Professionalism and the Rule of Law” (with L. Sossin). Ms. Sinha holds a JD from the University of Toronto, a BA Hons (with distinction) from Queen’s University and was admitted as a Barrister and Solicitor in Ontario, Canada in 2008. She speaks English, French, and Hindi. Mick Smith is a co-founder of Calunius Capital LLP, established in 2006. He is responsible for deal origination and transaction execution at Calunius. Mr. Smith qualified as a solicitor at Freshfields in 1996. Subsequently, he worked in finance in a variety of investment banking roles. Before his time at Freshfields, he studied mathematics, and then law, at Cambridge University. Mr. Smith is well-known as a writer and conference speaker, not only on all aspects of commercial litigation funding, but also international arbitration, arising from both commercial and investment treaty arbitration.

Part 1 Standing, Procedure, and Other Preliminary Considerations

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Chapter 1

Procedural Tools to Facilitate the Quantification of Damages in Investor-State Arbitration Adam Douglas If they can get you asking the wrong questions, they don’t have to worry about answers. ―Thomas Pynchon, Gravity’s Rainbow

1 Introduction While investment arbitration has matured significantly in the last 20 years, the assessment of damages continues to provoke controversy. When a claimant’s expert values a business at US$1 billion, the respondent’s expert arrives at US$195 million, and the tribunal decides that it is worth US$487 million,1 you would be forgiven for asking how one claim is potentially worth such widely different amounts. The existence of divergent opinions on quantum can leave tribunals in a difficult position when assessing damages; while they are often experts in law, arbitrators are not typically experts in economics or finance. Awards are often perceived as “splitting the baby”2 and tribunals accused of poorly explaining their reasons. Complex valuation challenges can undermine the legitimacy of investor-State arbitration as disputing parties increasingly expect consistent, well-founded methodologies, and valuations grounded in reasonable certainty. The failure to state sufficient reasons is a common ground for challenging the quantification of damages by tribunals.3 While most awards have *  Any opinions contained herein belong to the author, not to the Government of Canada. 1  O I European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award, ¶¶ 668, 820 (Mar. 10, 2015) (representing the values for 100% of the business). 2  S ergey Ripinsky with Kevin Williams, Damages in International Investment Law 122 (2008) (“Given that assessment of damages … may be a complex exercise requiring knowledge of financial analysis and economic models, ‘splitting the baby’ may offer itself as an attractive option when tribunals get lost in the intricacies of valuation techniques.”). 3  See ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States [hereinafter ICSID Convention], art. 52(1)(e) (2006). See also

© koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_002

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survived annulment proceedings with a limited explanation of damages,4 the recent annulment in Mobil v. Venezuela signals caution. In that case, the committee annulled critical aspects of the tribunal’s award of US$1.4 billion for “the failure to state adequate and non-contradictory reasons.”5 While the circumstances of the annulment are particular to that case, tribunals hoping to draft “annulment-proof” decisions should be mindful to explain all of the building blocks for the award, including jurisdiction, liability, and the pinnacle of the award—the amount of compensation due.6 Procedural tools exist to help tribunals navigate divergent expert opinions on issues of quantum and render well-explained awards grounded in reasonable certainty.7 Under most arbitration rules, tribunals enjoy fairly wide discretion over the conduct of arbitration proceedings, subject to the principles of equality and fairness, the parties’ right to due process, and an obligation to avoid unnecessary delay and expense.8 This Chapter will evaluate different procedural tools that can be used separately or in conjunction by tribunals Chapter 16, Christina L. Beharry, Post-award Challenges of Damages Assessments, at Section 2.5.3. 4  See, e.g., MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment, ¶¶ 102–6 (Mar. 21, 2007) (denying annulment even though “the reasons given by Tribunal for an aspect of its quantum decision were extremely succinct”); Rumeli Telekom A.S. & Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Decision of the Ad Hoc Committee, ¶ 178 (Mar. 25, 2010) (denying annulment even though “[t]he figure of US$125 million is baldly stated in the Award, without an explanation of a mathematical calculation undertaken by the Tribunal in arriving at it”). See also Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on the Application for Annulment of the Argentine Republic (Sept. 1, 2009); Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Application for Annulment of the Arbitral Award, ¶¶ 87–93 (Feb. 5, 2002); Duke Energy Int’l Peru Inv. No. 1, Ltd. v. Republic of Peru, ICSID Case No. ARB/03/28, Decision of the Ad Hoc Committee, ¶ 258 (Mar. 1, 2011). 5  Venezuela Holdings, B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Annulment, ¶ 189 (Mar. 9, 2017). 6  Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on Annulment, ¶ 192 (Dec. 27, 2016) (“The Tribunal is entitled to use its discretion and may estimate the correct compensation as long as it explains the process leading to the estimation.”). 7  That an award of damages should be grounded in reasonable certainty corresponds to the more general rule, elucidated in Chorzów Factory, that “reparation must … reestablish the situation which would, in all probability, have existed if that act had not been committed.” Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17, at 47 (Sept. 13) (emphasis added). 8  See, e.g., UNCITRAL Arbitration Rules [hereinafter UNCITRAL Rules], art. 17 (2010).

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to help reconcile divergent expert opinions by narrowing the issues, establishing a strong evidentiary record, and engaging directly with the experts. It will also look at some of the common underlying forces that drive divergent opinions on quantum because, in most cases, it will be difficult to employ the right procedural tools to address conflicting valuations without understanding these forces. Where possible, this Chapter draws from examples and observed practices in international investment arbitration, predominantly in ICSID and UNCITRAL cases. 2

How Can One Claim Be Worth Such Widely Different Amounts?

As of June 30, 2017, ICSID tribunals have rendered 182 awards upholding claims in part or in full.9 A recent study found that valuation experts hired by respondent States quantify damages, on average, at 13% of the amount quantified by claimant experts,10 and that tribunals award on average 37% of the amount claimed by investors.11 These statistics imply what is commonly held—that tribunals routinely grapple with widely divergent views between claimants and respondents on the quantification of damages.12

9   Sixty-four percent of the 619 total registered cases at ICSID resulted in an actual decision. Of those decisions, 46% concerned an award upholding claims in part or in full. ICSID, The ICSID Caseload—Statistics (Issue 2017-2) 7, 13, 15 (2017), https://icsid.worldbank.org/ en/Documents/resources/ICSID%20Web%20Stats%202017-1%20(English)%20Final.pdf. 10  PricewaterhouseCoopers, Damages in international arbitration: Mind the gap (2015), http:// www.pwc.co.uk/services/forensic-services/disputes/2015-international-arbitrationawards-key-findings.html. The study compared the experts’ quantification of only the primary head of claim in each case, so as to ensure a like-for-like comparison of the experts’ positions. 11  PricewaterhouseCoopers, 2015—International Arbitration Damages Research 6 (2015), http://www.pwc.co.uk/forensic-services/disputes/insights/assets/pdf/2015-international -arbitation-damages-research.pdf. The outcome of awards was also broken down in a 2014 study, which found that in around 12% of cases the claimant won more than 50% of what it claimed; and in about 8% of cases the claimant received between 20% and 50% of its claim. See Tim Hart, Study of Damages in International Center for the Settlement of Investment Disputes Cases (Credibility International, 1st Edition, June 2014), 11(3) T.D.M. 1 (2014). 12   P ricewaterhouseCoopers, Engaging expertise: using expert evidence to narrow quantum gaps (2016), http://www.pwc.co.uk/services/forensic-services/ disputes/engaging-expertise.html (“Our recent analysis … highlighted the huge disparity between positions adopted by claimant and respondent experts.”).

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What drives such differences in value? A common explanation is that partyappointed experts are “hired guns” rather than impartial purveyors of financial guidance.13 As experts are most often chosen, instructed, and paid for by one of the parties, questions as to their independence (be it perceived or actual) and the value of their testimony naturally arise. Even though arbitral rules do not expressly create a duty for experts,14 their independence from the parties is paramount because tribunals must often rely on expert opinion when quantifying damages. Whether an expert lacks impartiality is not, however, usually evident and tribunals are often required to nonetheless examine the underlying forces driving opposing views. Below are four examples of such forces. First, experts may be instructed to value damages based on different parameters to correspond with the underlying legal theory of the claim. For example, if a claimant’s claim is that its investment was expropriated illegally, it will ask its expert to value the investment on that basis and not on the basis that it was legally acquired. The respondent, however, will often have a different opinion on the legality of the expropriation and will instruct its expert accordingly. Expert evidence based on such legal assumptions can drive the quantification of damages in opposite directions, for example, in terms of the selection of valuation dates, heads of damages, and interest rates. Second, experts may choose different models on which to base their assessment. Quantifying damages requires judgment as to which techniques to apply 13  Party-appointed valuation experts are often charged with providing a valuation result based not on reasonable inputs and proper methodology, but on their client’s wishes. See, generally, Giovanni De Berti, Experts and Expert Witnesses in International Arbitration: Adviser, Advocate or Adjudicator?, 2011 Austria Y.B. Int’l Arb. 53, 62 (2011). Tribunals also often find themselves refereeing a “battle of the experts.” See Brooks W. Daly & Fiona Poon, Technical and Legal Experts in International Investment Disputes, in Litigating International Investment Disputes: A Practitioner’s Guide 323, 332, 335 (Chiara Giorgetti ed., 2014); Klaus Sachs & Nils Schmidt-Ahrendts, Protocol on Expert Teaming: A New Approach to Expert Evidence, in 15 ICCA Congress Series, Arbitration Advocacy in Changing Times 135, 139 (Albert Jan van den Berg ed., 2011). In recent years, there has been growing concern in common law countries that party-appointed experts used in domestic litigation tend to overlook their duty of independence to the court and instead act as advocates for the party that retained them. This concern has led several common law jurisdictions to advance policies to promote greater independence and objectivity on the part of experts and to reduce the influence lawyers might have over the content of expert testimony. For a helpful discussion of these points, see Doug Jones, Party Appointed Expert Witnesses in International Arbitration: A Protocol at Last, 24(1) Arb. Int’l 137 (2008). 14  Rules often specify that experts are to remain independent, without referring to a duty. See, e.g., ICC Expert Rules, Appointment of Experts and Neutrals, art. 4(3) (2015).

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and how to apply them. Two experts may legitimately disagree on the most appropriate methodology to be applied in a particular circumstance. For example, one expert might adopt a sunk costs approach, which values an investment as the sum of all the money invested up to a particular date. The other party’s expert may disagree and take the view that the appropriate methodology to quantify damages is what the profits of the investment would have been without the unlawful measure. The latter approach would typically employ a discounted cash flow (“DCF”) analysis or some other forward-looking technique.15 Third, differences between the parties on questions of fact will often affect the assessment of loss. For example, experts might be asked to produce a valuation based on different fact patterns that are inherently complex or hotly disputed by the parties and not yet resolved in the arbitration. Different assumed fact patterns will usually lead to different outcomes on quantum. Finally, even if the model and instructions are the same, conclusions may nonetheless vary due to genuine differences of opinion between experts. Generally, the more assumptions that are required in a damages assessment, the less likely that two experts will agree. DCF models, for example, normally involve a wide range of assumptions and inputs—a change to one element can produce a significant change in the value of the business.16 For example, in Occidental Petroleum v. Ecuador,17 the tribunal noted that the experts’ different assumptions on the volume of oil reserves was “the most significant component in the application of the DCF model,”18 which resulted in notably different conclusions in their expert reports. Understanding the underlying forces that drive divergent opinions on quantum will assist tribunals in designing appropriate ways of reconciling or minimizing them. The following section analyzes certain procedural tools that tribunals can employ alongside the disputing parties to help navigate divergent views between valuation experts. It should be noted that some of the 15  PricewaterhouseCoopers, Dispute perspectives: Bridging the gap between experts 3 (2015), http://www.pwc.co.uk/forensic-services/disputes/assets/bridging-the-gap-betweenexperts.pdf. This study shows that the DCF methodology was proposed as a primary valuation methodology in 55 of 95 cases selected from the past 20 years of investment law jurisprudence. It also shows that respondents are less likely to agree with a proposed DCF model, and that tribunals have rejected DCF-based valuations in nearly 40% of the cases in which it was proposed. 16   Id., at 4. 17   Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (Oct. 5, 2012). 18   Id., ¶ 718.

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tools described herein contemplate tribunals taking an active role in managing the evidentiary process for compensation decisions. But one size rarely fits all and thought must be given to the particular circumstances of a case before employing any of the procedural tools discussed. A tribunal should determine its objective, consult with the parties, and take a course of action by the least intrusive means, as some of these tools have the potential to increase the costs and length of the proceedings and may only be justified when the economic stakes in dispute are high.19 3

Procedural Tools to Facilitate the Assessment of Quantum

3.1 Advance Planning Tribunals often address issues relating to damages toward the end of the proceedings. Advance planning, however, can help to establish a strong evidentiary record and can materially reduce the litigation costs of the parties in the arbitration. If it becomes apparent to the tribunal early on that the parties may present expert valuations that will differ widely in approach or results, it should consider employing procedural tools to help reconcile or minimize the differences, or at least to ensure that it will understand why the valuations are so different. By acting early, the tribunal may be able to obtain evidence that can be more readily compared and analyzed. If the tribunal waits for the oral hearings to make these requests, time and cost pressures might adversely affect their ability to elicit useful information.20 Moreover, simple fairness should encourage such advance planning in order to ensure that the parties have notice and an opportunity to be heard.21 If due process rights are violated, the ultimate award may be liable to annulment. In its Damages Protocol, the International Institute for Conflict Prevention & Resolution suggests that tribunals address damages at the time of the initial procedural conference with the parties, and that the arbitrators should consider requiring the parties to articulate their theories of compensation and their defenses.22 In most instances, however, the parties cannot be expected to have fully developed their damages cases at such an early stage; in fact, it is 19   M ark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence 279–80 (2008). 20   Id., at 282. 21   Id. 22  CPR International Committee on Arbitration, Protocol on Determination of Damages in Arbitration, Introduction (2010), https://www.cpradr.org/resource-center/protocols-

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possible that one or both parties will not have engaged a valuation expert by the first procedural meeting. While there may not be any harm in discussing these issues early on, it is perhaps more prudent for a tribunal to take stock of affairs after the first exchange of pleadings and expert reports. At this point in the proceedings, the tribunal should be able to recognize whether the parties are presenting expert valuations that differ widely, and could then extend an invitation to the parties to discuss procedural tools that might help the tribunal navigate the disparity. 3.2 Bifurcating Merits into Liability and Quantum Phases The term bifurcation most often refers to the separation of jurisdictional issues from the merits, but it can also mean splitting the merits into liability and quantum phases, such that the tribunal assesses damages only after it has determined liability. While liability and quantum issues tend to be dealt with simultaneously in international investment arbitration,23 there may be circumstances in which it is appropriate to bifurcate quantum.24 guidelines/protocol-on-determination-of-damages-in-arbitration/_res/id=Attachments/ index=0/CPR-Protocol-on-Determination-of-Damages-in-Arbitration-fnl.pdf. 23  Hilary Heilbron, Assessing Damages in International Arbitration: Practical Considerations, in The Leading Arbitrators’ Guide to International Arbitration 445, 450 (Lawrence W. Newman & Richard D. Hill eds., 2008); Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Procedural Order No. 3, ¶ 17 (Aug. 21, 2007), reproduced in part in the Award, ¶ 116 (June 1, 2009) (“The ICSID Arbitration Rules do not expressly preclude the bifurcation of the merits phase of an ICSID arbitration. It is not however the usual practice of ICSID Tribunals to do so. The Tribunal considers that it would require compelling reasons to order such a bifurcation ….”). 24  Examples where bifurcation of merits into liability and damages phases was granted include: Apotex Holdings Inc. & Apotex Inc. v. United States of America, ICSID Case No. ARB(AF)/12/1, Procedural Order No. 3, ¶ 6 (Jan. 25, 2013) (bifurcating damages because, inter alia, “the Tribunal’s decisions as to the jurisdictional or liability issues may directly impact issues as to damages….”); Burimi S.R.L. & Eagle Games SH.A. v. Republic of Albania, ICSID Case No. ARB/11/18, Procedural Order No. 1 and Decision on Bifurcation, ¶ 13.2 (Apr. 18, 2012) (“[G]iven the significance of the jurisdictional questions, the Tribunal will defer consideration of damages until after it has reached a decision (or award) on jurisdiction and merits.”); CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award, ¶ 264 (Mar. 14, 2003); LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, ¶ 267(e) (Oct. 3, 2006), 21 ICSID Rev—FILJ 203 (2006); Bilcon of Delaware Inc. et al. v. Gov’t of Canada, PCA Case No. 2009-04, Procedural Order No. 3, ¶ 1.2 (June 3, 2009); and Eli Lilly and Co. v. Gov’t of Canada, ICSID Case No. UNCT/14/2, Procedural Order No. 1, ¶ 9.1 (May 26, 2014).

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The tribunal’s power to bifurcate the merits of an ICSID case is derived from Article 44 of the ICSID Convention.25 Most institutional rules confer a similar power.26 The 2010 IBA Rules on the Taking of Evidence in International Arbitration (“IBA Rules”) encourage arbitral tribunals “to identify to the Parties, as soon as it considers it to be appropriate, any issues … for which a preliminary determination may be appropriate.”27 A 2012 report by the ICC Arbitration Commission on saving time and costs in arbitration also states that tribunals should consider “bifurcating the proceedings or rendering a partial award when doing so may genuinely be expected to result in a more efficient resolution of the case.”28 Limited public data is, however, available on the effectiveness of bifurcating the merits into liability and quantum phases. According to one study, the available data “demonstrate[s] that bifurcating proceedings may not necessarily result in parties getting to a final award any more quickly” and that “[t]he assumption that bifurcation is always beneficial in terms of saving costs and time in international arbitration may not always be warranted….”29 For example, in Bilcon v. Canada, the investor filed its claim on May 26, 2008, and quantum was bifurcated at the outset of the proceedings.30 As of the date of writing, the quantum phase is ongoing, nearly a decade after the claim was filed. While the length of these proceedings may not have resulted entirely from splitting the merits into liability and quantum phases, bifurcation has

25  ICSID Convention, art. 44; Suez, Sociedad General de Aguas de Barcelona S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability, ¶ 245 (July 30, 2010) (explaining that “bifurcation of the merits phase of an ICSID case into determination of liability and a determination of damages is not common…. The Tribunal relies on Article 44….”). 26   See, e.g., UNCITRAL Rules, art. 17(1); ICC Arbitration Rules, arts. 22(1)–(2), 24(3) (2013); LCIA Arbitration Rules [hereinafter LCIA Rules], art. 14(1) (2014); ICDR International Dispute Resolution Procedures (Including Mediation and Arbitration Rules), art. 20(3) (2014). 27  IBA Rules on the Taking of Evidence in International Arbitration [hereinafter IBA Rules], art. 2(3)(b) (2010). 28  ICC Commission on Arbitration and ADR, ICC Commission Report: Controlling Time and Costs in Arbitration ¶ 39 (2012), https://cdn.iccwbo.org/content/uploads/sites/3/2015/11/ ICC-Arbitration-Commission-Report-on-Techniques-for-Controlling-Time-and-Costs-inArbitration-2012.pdf. 29  Lucy Greenwood, Does Bifurcation Really Promote Efficiency?, 28(2) J. Int. Arb. 105, 111 (2011). 30   Bilcon v. Canada, supra note 24, ¶ 1.2.

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no doubt played a significant role in prolonging the arbitration.31 The appropriateness of bifurcating the merits into liability and quantum phases will depend on the circumstances of each case. When party-appointed valuation experts have widely divergent views and/ or a large volume of documents and complex technical matters are involved, it might be more efficient for a tribunal to consider questions of liability first, which could obviate the need for a quantum analysis altogether. For example, in Methanex v. United States, the claimant sought damages of approximately US$970 million.32 The tribunal decided to bifurcate the merits into liability and quantum phases, and later determined that the United States was not liable under the NAFTA. Had the tribunal not bifurcated damages, significant time and additional costs would have been incurred in order to address damages issues that ultimately would have not been relevant. Even in cases where the tribunal may ultimately find liability, bifurcating damages can narrow the issues in dispute during the quantum phase. As one commentator notes, with bifurcation “the parties avoid the expense and time involved in submitting evidence and argument on detailed aspects of quantification that may turn out to be irrelevant following the arbitral tribunal’s decision on liability.”33 For example, expert opinions that may otherwise diverge as a result of legal assumptions, such as the lawfulness of an expropriation, would be settled by a decision on liability. Bifurcating damages can also allow tribunals to give advance rulings on issues like the valuation date or complex issues of causation. The tribunal in Suez v. Argentina, for example, referring 31  Similar concerns for delay and additional expenses influenced the tribunal’s decision in Churchill Mining v. Indonesia not to bifurcate damages. See Churchill Mining Plc. and Planet Mining Pty Ltd. v. Republic of Indonesia, ICSID Case No. ARB/12/40 and 12/14, Procedural Order No. 8, ¶¶ 12–7 (Apr. 22, 2014). However, the tribunal subsequently reversed its decision and bifurcated damages after the respondent raised allegations of impecuniosity and forgery against the claimant. See Churchill Mining Plc. and Planet Mining Pty Ltd. v. Republic of Indonesia, ICSID Case No. ARB/12/40 and 12/14, Procedural Order No. 12, ¶ 50 (Oct. 27, 2014) (explaining “considering in particular the Respondent’s assertions on the Claimant’s financial resources and its allegations of forgery as well as the fact that the facts related to the authenticity issue overlap with some on liability but not on quantum, the Tribunal is of the view that it would be fairer and more efficient for it to revise PO8 proprio motu and to bifurcate the present proceedings between a comprehensive liability phase … and a quantum phase.”). 32   Methanex Corp. v. United States of America, UNCITRAL Arbitration Proceeding, Final Award on Jurisdiction and Merits, ¶ 32 (Aug. 3, 2005). 33   N igel Blackaby & Constantine Partasides, Redfern and Hunter on International Arbitration 370 (6th ed. 2015).

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to the “complexity of this case,” decided that it could define “the scope of its investigation with respect to a determination of damages” by first rendering a decision on liability.34 Little is known, however, as to the considerations tribunals take into account when one party requests and the other objects to the bifurcation of damages.35 If the parties agree that damages should be bifurcated, it is unlikely that the tribunal will reject the request. However, where the parties do not agree, factors that a tribunal may consider include whether substantive overlap exists between factual and legal issues in both liability and quantum and whether bifurcation will increase the efficient resolution of the dispute.36 To the extent possible, the parties and tribunal should discuss the possible bifurcation of damages early in the proceedings, which may help the tribunal understand how far apart the parties are and whether liability evidence is linked with evidence of damages. Where substantive overlap exists between factual and legal issues in both the liability and quantum phases, bifurcation may not be appropriate. For example, in Electrabel v. Hungary, the parties agreed to bifurcate damages at the outset of the dispute in the procedural timetable.37 As the case progressed, however, it became clear that it may have been more efficient and costeffective had the proceedings not been divided in this manner, due in part to the fact that the issues underlying liability and quantum were intertwined. In its award the tribunal remarked: “with hindsight, it was at least unfortunate that the Parties agreed, albeit with the Tribunal’s subsequent consent, to

34   Suez v. Argentina, supra note 25, ¶ 244. 35  Inna Uchkunova, Bifurcation Of Proceedings In ICSID Arbitration: Where Do We Stand?, Kluwer Arb. Blog (Aug. 14, 2013), http://kluwerarbitrationblog.com/2013/08/15/ bifurcation-of-proceedings-in-icsid-arbitration-where-do-we-stand. 36  Baiju S. Vasani, Bi-Trifurcation of Investment Disputes, in Arbitration under Inter­ national Investment Agreements: A Guide to the Key Issues 121, 123 (Katia Yannaca-Small ed., 2010). A tribunal tasked with a request for bifurcation should also consider whether it is a tactical rather than a practical proposal. Absent agreement between the parties, the application for bifurcation could be made by a respondent State with a weak case trying to prolong the proceedings. Or, a claimant may oppose bifurcation because they sense that they will have a more persuasive case on liability if they can show not only the respondent’s wrongful conduct but also the harm that the conduct has caused. See Lawrence W. Newman & David Zaslowsky, Grappling With Damages In International Arbitration, 242(63) N.Y.L.J. (Sept. 29, 2009). 37   Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Procedural Order No. 3 (Mar. 27, 2009).

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bifurcate all issues of quantum from all issues of liability. This was also a major factor which caused difficulties for both Parties and the Tribunal.”38 Bifurcating merits into liability and damages phases late in the proceedings, by effectively creating an extra phase after the hearing on merits, will also likely diminish the efficient resolution of the dispute. For example, in Mobil & Murphy v. Canada the tribunal decided proprio motu to establish a separate damages phase despite having already received ten pleadings, twelve expert reports, and nine witness statements on the issue of damages, as well as having held a full hearing on the merits that included issues of quantum. In its Decision on Liability and Principles of Quantum, the tribunal determined that the damages model proposed by the claimants produced speculative results and was even “extremely hazardous.”39 Nevertheless, it invited the claimants to submit further evidence of “any actual damages incurred” within two months of the Decision and provided Canada an equal time to respond, all with the intention of “promptly rul[ing] on the outstanding question of any quantum of damages due to the Claimants in a final Award….”40 The tribunal, however, subsequently granted the claimants’ request for a further round of damages submissions, including additional expert reports and witness statements, and then acceded to their request for another hearing on quantum. The tribunal ultimately awarded the claimants CAD$17.3 million in damages, nearly three years after its Decision on Liability,41 four and half years after the original nonbifurcated hearing on the merits, and seven years after the request for arbitration was filed. The Mobil tribunal’s decision to bifurcate damages on its own initiative thus had adversely impacted the efficiency of the proceedings and increased costs to the parties.42 38   Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Award, ¶ 235 (Nov. 25, 2015). In David Aven v. Costa Rica, the tribunal rejected a request to bifurcate damages because there would “be no significant efficiency achieved in cost or time.” See David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Procedural Order No. 2, ¶ 21 (Feb. 4, 2016). 39   Mobil Inv. Canada Inc. & Murphy Oil Corp. v. Gov’t of Canada, ICSID Case No. ARB(AF)/07/4, Decision on Liability and Principles of Quantum, ¶ 477 (May 22, 2012). 40   Id., ¶ 489. 41  In January 2014, the parties informed the tribunal of ongoing settlement discussions. The parties requested the tribunal to continue drafting its award, but to release it only upon notification by the parties. See Mobil Inv. Canada Inc. & Murphy Oil Corp. v. Gov’t of Canada, ICSID Case No. ARB(AF)/07/4, Award, ¶¶ 25–6 (Feb. 20, 2015). 42  A similar situation arose in Suez v. Argentina where the tribunal decided proprio motu to bifurcate the damages phase at the conclusion of the liability phase after the parties had already made detailed submissions on damages. See Suez v. Argentina, supra note

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To avoid imposing unnecessary costs and delays, it may thus be prudent for the tribunal and the disputing parties to discuss issues pertaining to quantum early in the proceedings to provide the tribunal with a basic understanding of the factual and theoretical bases for the damages claims and any opposition to them. This consultation may help the tribunal determine whether bifurcating the merits into liability and quantum phases will narrow the issues on damages, should liability be found, and thereby promote the efficient resolution of the dispute. 3.3 Meeting and Conferring Another procedural tool that can facilitate a tribunal’s navigation through disparate expert conclusions is restated in Article 5(4) of the IBA Rules. This rule confers discretion on a tribunal to request a meeting and conference between valuation experts to “attempt to reach agreement on the issues within the scope of their Expert Reports” and to “record in writing any such issues on which they reach agreement, any remaining areas of disagreement and the reasons therefore.”43 Borrowed from certain domestic court systems, this method seeks to distill the issues in dispute ahead of the hearing.44 Prior to such a meeting, the experts will likely have only exchanged written reports and their approaches may not be comparable. Depending on the circumstances, a pre-hearing meeting could enable the experts to better understand the bases of their disagreement and, consequently, to more effectively communicate those differences to the tribunal. In some instances, experts may be able to meet at the outset of the proceedings with the objective of agreeing to a limited scope or set of issues for their expert reports or on an appropriate methodology.45 For example, the CIArb Expert Protocol suggests that experts meet before they prepare their 25, ¶ 4. For other examples, see Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, ¶¶ 130–57, 961(d) (Apr. 4, 2016); Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶¶ 126–205, 863(ii) (Sept. 22, 2014). 43  IBA Rules, art. 5(4). A detailed description of how pre-hearing meetings can be conducted is contained in Chartered Institute of Arbitrators, Protocol for the Use of Party-Appointed Expert Witnesses in International Arbitration [hereinafter CIArb Expert Protocol], art. 6 (Sept. 2007), http://www.ciarb.org/docs/default-source/ciarbdocuments/internationalarbitration-protocols/partyappointedexpertsinternationalarbitration.pdf?sfvrsn=8. 44   N athan O’Malley, Rules of Evidence in International Arbitration: An Annotated Guide 153 (2012). 45  Dave Dushyant, Contemporary Practice in the Conduct of Proceedings: Techniques for Eliciting Expert Testimony—How Party-Appointed Experts Can Be Made Most Useful, in

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first report.46 This approach, however, might not always be feasible in terms of timing, as experts will require sufficient time to grasp the underlying issues to engage in meaningful and informed discussions.47 It will therefore more often be prudent to wait until after the experts have exchanged at least one round of written expert reports before requesting them to meet in advance of the hearing.48 Waiting until after the hearing, however, will likely diminish the effectiveness of this procedural tool and add cost to the arbitration. Often the question arises whether the experts should meet in the presence of counsel. Depending on the circumstances, there are likely benefits and drawbacks to either approach; regardless, it is incumbent on the parties to have in their minds a clear purpose for the meeting and the role of the experts in the situation. Experts may not be aware of all the facets of the case and clients do not typically authorize them to make binding commitments. For these reasons, the preference will usually be to have counsel present at such meetings in order to, at the very least, gain an understanding of the issues being discussed and how they might affect the case.49 It is not always clear from awards whether experts have been asked to meet prior to the hearing.50 Anecdotal evidence suggests that while meet12 ICCA Congress Series, International Arbitration 2006: Back to Basics? 813, 816 (Albert Jan van den Berg ed., 2007). 46  CIArb Expert Protocol, Foreword. 47  Daly & Poon, supra note 13, at 368. 48  Dana H. Freyer, Assessing Expert Evidence, in The Leading Arbitrators’ Guide to International Arbitration 429, 440 (Lawrence W. Newman & Richard D. Hill eds., 2008). By waiting until this point in time, the tribunal may also be in a position to provide the experts with a list of questions or issues that it would like them to address. These lists could help the experts to narrow the scope of their reports by focusing them on these questions or issues. There could be time and costs savings by having experts address the same question compared to situations where experts’ ships sometimes pass each other in opposite directions. For example, the experts could be requested to address certain questions that impact damages (e.g., different valuation dates) in a way that will assist the tribunal in making an informed determination. This approach, however, should be exercised cautiously so as not to impose a significant financial burden on either party, and the tribunal must be mindful not to pre-judge any issues. 49  John A. Trenor, Strategic Issues in Employing and Deploying Damages Experts, in The Guide to Damages in International Arbitration 123, 137 (John A. Trenor ed., 2016). 50  Cases in which the tribunal asked the experts to confer and prepare a written report on the areas of agreement and disagreement include: S.D. Myers, Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Procedural Order No. 17, ¶ 12 (Feb. 26, 2001); Chevron Corp. & Texaco Petroleum Corp. v. Republic of Ecuador, PCA Case No. 2009-23, Procedural

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ings of experts are common in domestic litigation, the procedure is less common in arbitration. Counsel often view pre-hearing meetings as “a distraction from more pressing demands”51 because the experts have already expressed their opinions in written form. Additionally, it is common in large investment disputes for there to be several experts on both sides, which could ensnare pre-hearing meetings with auxiliary issues. For these reasons, the utility of having the experts “meet and confer” must be assessed on a case-by-case basis. Counsel should not, however, dismiss the tool outright as it has the potential to help elucidate critical issues resulting in a more targeted proceeding going forward. 3.4 Tribunal-Appointed Experts Given the enormous stakes and the frequent divergence of opinions in complex damages valuations, one might expect that investment tribunals would as a matter of course retain their own tribunal-appointed experts, or perhaps that the disputing parties would suggest that tribunals do so. However, this has not been the conventional practice to date,52 even though tribunals have long possessed the authority to appoint their own independent experts under most arbitration rules.53 The IBA Rules on the Taking of Evidence also provide

Order No. 10, ¶ 5 (Apr. 9, 2012); Achmea B.V. v. Slovak Republic, PCA Case No. 2008-13, Final Award, ¶¶ 61–5 (Dec. 7, 2012); St. Marys VCNA, LLC v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Procedural Order No. 1, ¶ 21.2(c) (Sept. 10, 2012); Anatolie Stati et al. v. Republic of Kazakhstan, SCC Case No. V (116/201), Award, ¶ 118 (Dec. 19, 2013) (citing Procedural Order No. 6, ¶ 1.5). 51  Trenor, supra note 49, at 137. 52  Such appointments are rare in international arbitration. See Sachs & Schmidt-Ahrendts, supra note 13, at 141 (“[T]he standard approach in international arbitration proceedings is to rely primarily on the testimony of party-appointed experts, with tribunalappointed experts being used in exceptional circumstances.”); Daly & Poon, supra note 13, at 335 (“In practice, the use of party-appointed experts is seen as a ‘standard approach’ whereas tribunal-appointed experts are used ‘only in exceptional circumstances.’ This is confirmed by the authors’ review of recently concluded investor-State arbitrations, in which none of the cases reviewed used a tribunal-appointed expert.”) (citations omitted); Rolf Trittmann & Boris Kasolowsky, Taking Evidence in Arbitration Proceedings Between Common Law and Civil Law Traditions—the Development of a European Hybrid Standard for Arbitration Proceedings, 31(1) UNSW L. J. 330, 338 (2008) (explaining that “[t]he [Civil Procedure Rules 1998 UK] … also vests a power in the court to appoint and instruct a single expert. However, other than in German court proceedings, such power is comparatively rarely used in practice.”) (citation omitted). 53   See, e.g., UNCITRAL Rules, art. 29(1); LCIA Rules, art. 21.1.

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guidance on the use of tribunal appointed experts54 and some investments treaties, such as the 2004 Canada Model FIPA and the 2012 US Model BIT, make express reference to the tribunal’s authority to appoint its own independent expert, albeit after consultation with the disputing parties.55 Depending on the circumstances of the case, such an expert can help tribunals understand complicated valuation issues.56 For example, in CMS v. Argentina,57 when differences between party-appointed experts could not be reconciled, the tribunal turned to its own experts to assist it in evaluating the parties’ conflicting positions. The CMS tribunal announced its decision to retain experts “so as to better understand the underlying assumptions and methodology relied upon in the valuation reports offered by the parties’ experts,”58 and relied on their assistance to adjust the valuation methodologies advanced by the parties.59 In its award, the tribunal remarked that it “was ably assisted” by its own experts.60 54  Article 6(1) of the IBA Rules provides: “The Arbitral Tribunal, after consulting with the Parties, may appoint one or more independent Tribunal-Appointed Experts to report to it on specific issues designated by the Arbitral Tribunal. The Arbitral Tribunal shall establish the terms of reference for any Tribunal-Appointed Expert Report after consulting with the Parties. A copy of the final terms of reference shall be sent by the Arbitral Tribunal to the Parties.” Article 6(1) emphasizes consultation with the parties in the appointment of tribunal-appointed experts, with the intention of assuaging concerns over how evidence will be presented in the dispute. See Daly & Poon, supra note 13, at 334. 55   See United States Model Bilateral Investment Treaty, art. 32 (2012); Canada Model Foreign Investment Protection Agreement, art. 42 (2004). 56  In some cases, a tribunal-appointed expert may not be necessary if one of the tribunal members has a sufficient degree of expertise. In this regard, see Crystallex v. Venezuela, supra note 42; and Glencore Finance (Bermuda) Ltd. v. Plurinational State of Bolivia, PCA Case No. 2016–39, Letter from Claimant to Tribunal (Sept. 15, 2016), where the investor in each case appointed John Gotanda—who is generally regarded as a legal expert on damages—as its arbitrator. For a fulsome discussion of this topic, see J. Gregory Sidak, Economists as Arbitrators, 30 Emory Int’l L. Rev. 2105 (2016). 57   C MS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award (May 12, 2005). 58   Id., ¶ 50. 59  Freyer, supra note 48, at 435. 60   C MS v. Argentina, supra note 57, ¶ 418. See also El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Award, ¶¶ 698, 712 (Oct. 31, 2011) (where the tribunal appointed its own expert to review and comment on six areas in which the parties’ experts disagreed. It explained its decision to retain an expert “in view of the number and complexity of the accounting issues relating to the damages assessment, as evidenced by the diverging views given on many relevant questions by the Parties’ experts.”). For other cases where tribunal-appointed experts have been utilized, see Hrvatska Elektroprivreda

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A tribunal-appointed expert may be particularly useful when one of the disputing parties engages an expert but the other does not. For example, in National Grid v. Argentina, the tribunal relied on its own expert because it did not have the benefit of expert evidence from the respondent State.61 The selection of the tribunal-appointed expert was made pursuant to criteria provided by the parties. In contrast to these examples, some tribunals have not been receptive to appointing their own expert. For example, in Siemens v. Argentina, the State requested the tribunal to engage an expert to analyze the accounts of SITS (the domestic entity created exclusively for investing in the project) and to ensure that funds spent were for the purposes of carrying out the investment. The claimant opposed the State’s request because it considered SITS’ audited financial statements to be sufficient evidence of the amounts invested. A majority of the tribunal agreed with the claimant and saw no merit in prolonging the proceedings by appointing an expert. The dissenting arbitrator wrote an opinion specifically concerning the tribunal’s refusal: It should be noted that the present case comprises complex valuation and financial issues, which were amply argued and discussed by the parties and their respective experts, with very complicated opinions and data. In light of the above, a report from an independent expert is necessary in order to calculate and fully support the amount of damages to be awarded, for all of which I find reasonable the request of its appointment and unjustified its refusal, as such a request never seemed impertinent or untimely to me, but rather reasonable, which acceptance would not have implied any inconveniences.62 There are, however, two potential and significant disadvantages to using tribunal-appointed experts. The first is that such experts can impose a significant expense on the arbitration. The parties are responsible for paying the costs d.d. v. Republic of Slovenia, Award, ¶¶ 41–7 (Dec. 17, 2015); Suez, Sociedad General de Aguas de Barcelona S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Award, ¶¶ 7–21 (Apr. 9, 2015); Niko Resources (Bangladesh) Ltd. v. Bangladesh Petroleum Exploration & Production Co. Ltd. (“Bapex”) and Bangladesh Oil Gas and Mineral Corp. (“Petrobangla”), ICSID Case Nos. AB/10/11 and ARB/10/18, Procedural Order No. 7, 2 (Oct. 17, 2014) (where the tribunal appointed a technical expert from the oil and gas industry). 61   Nat’l Grid p.l.c. v. Argentine Republic, UNCITRAL Arbitration Proceeding, Award, ¶ 46 (Nov. 3, 2008). 62   Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Separate Opinion of Domingo Bello Janeiro, at 1 (Jan. 30, 2007).

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of the tribunal-appointed expert63 and employing one will likely increase the costs of the arbitration as well as the duration of the proceedings. The benefits of appointing a tribunal-expert diminish when the amount in dispute does not justify the cost. However, where quantifications diverge widely and the amounts at stake are high, a tribunal-appointed expert may be worth the added expense in order to reach a result that is fair and just.64 The second criticism is that tribunal-appointed experts might become de facto arbitrators. As one commentator aptly notes, “arbitrators must be careful not to delegate their decision-making responsibilities to the experts they appoint, unless the parties agree to this.”65 While the IBA Rules make explicit that the responsibility to quantify damages lies with the tribunal,66 if the disputing parties perceive that the tribunal-appointed expert is exerting too much influence, their willingness to accept the ultimate award may erode.67 One way to manage the expectations of the parties is to define clearly the role of the tribunal-appointed expert in advance of seeking one out. For example, the expert might be engaged to advise the tribunal through a report (i.e., a third opinion on quantification), or it might be engaged “solely for purposes of implementing the tribunal’s decision to ensure that it has properly applied the model in light of the tribunal’s conclusions.”68 Whichever path is chosen, the scope of the tribunal-appointed expert’s role should be defined upfront. 63  IBA Rules, art. 6(8). 64  Sachs & Schmidt-Ahrendts, supra note 13, at 139 (“[Expert reports] are often based on different facts, different scientific approaches and different assumptions, and they address different issues. In other words: it is often difficult, if not impossible, for the tribunal to bridge the gap between the reports without the help of yet another expert.”). 65  Sophie Lamb et al., Procedural Issues, in The Guide to Damages in International Arbitration 107, 119 (John A. Trenor ed., 2016). See also Freyer, supra note 48, at 433–4. 66   See IBA Rules, art. 6(7). 67  This perception may depend on whether the parties come from a civil or common law background. Parties from civil law jurisdictions, who are accustomed to inquisitorial-style proceedings, may be more comfortable with tribunal-appointed experts than their common law counterparts. See, e.g., Joshua B. Simmons, Valuation in Investor-State Arbitration: Toward a More Exact Science, 30(1) Berkeley J. Int’l L. 196, 247–8 (2012). 68  Trenor, supra note 49, at 140. Careful consideration should be given by the disputing parties both to the potential role of a tribunal-appointed expert in the dispute and the qualifications needed by that expert to fulfill that role. Helpful qualifications include: (1) expertise in the relevant field; (2) independence and impartiality; (3) availability; and (4) the ability to perform the designated role within the established financial constraints imposed by the tribunal and the disputing parties. Simmons, supra note 67, at 248. If the tribunal and disputing parties decide that the tribunal-appointed expert should provide an additional valuation, then procedures must be devised to ensure that the

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If it is decided that the tribunal-appointed expert will not provide a third opinion on quantification, concerns over increased costs and the delegation of tribunal powers should decrease. It is perhaps for this reason that the best use of tribunal-appointed experts may be to have them serve as facilitators rather than having them write further reports on quantification. Under this approach, the tribunal-appointed expert would work together with the party-appointed experts to elucidate not only the areas of agreement and disagreement, but also the reasons why the party-appointed experts agree or disagree. In this way, the tribunal-appointed expert does not usurp the role of the party-appointed experts, but rather facilitates communication with the tribunal of the reasons behind the agreements and disagreements in order to help the tribunal understand the underlying forces driving the divergent views on quantum. Using tribunal-appointed experts in this manner would help to narrow the issues, establish a strong evidentiary record, increase effective engagement with partyappointed experts, and ensure greater confidence that decisions on damages are well-founded and grounded in reasonable certainty. If drastically different valuations have become the norm, the use of tribunal-appointed experts as facilitators may offer an optimal solution for providing clarity. In terms of timing, the decision to appoint a tribunal-appointed expert should be made as early as possible in the proceedings. While investor-State tribunals may be able to glean from the request for arbitration that complex valuations are likely to ensue, the extent of any divergence on quantum will not usually be known until after the State responds to the claimant’s valuation. Waiting until the hearing to appoint a tribunal-expert would likely impose too great of a burden on the disputing parties, both in terms of costs and due process. Thus, “as soon as the arbitral tribunal realizes the importance or necessity of appointing an expert, it should initiate the appropriate steps and inform the parties as soon as possible in order to receive their perspectives.”69 parties are given the opportunity to comment on the report and cross-examine the tribunal-appointed expert at the hearing. See Claus von Wobeser, The Arbitral TribunalAppointed Expert, in 12 ICCA Congress Series, International Arbitration 2006: Back to Basics? 801, 802 (Albert Jan van den Berg ed., 2007); Daly & Poon, supra note 13, at 328–9; Chartered Institute of Arbitrators, Practice Guideline 10: Guidelines on the use of Tribunal-Appointed Experts, Legal Advisers and Assessors (2011), http://www.ciarb.org /docs/default-source/ciarbdocuments/international-arbitration-guidelines-2011/2011 tribunalappointedexperts.pdf?sfvrsn=6). 69  von Wobeser, supra note 68, at 807. Some commentators also argue that it may be helpful for the tribunal to request that the party-appointed experts meet and confer as a precursor to the appointment of a tribunal-appointed expert. In this way, tribunal-appointed experts would need to deal only with the most relevant points in contention, which can

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In sum, tribunal-appointed experts may be useful where valuations are complex or where underlying forces are driving widely different conclusions between party-appointed experts. If an arbitral tribunal needs expert technical assistance in order to understand complex valuations and considers that a tribunal-appointed expert would be helpful, it may be in the parties’ best interest to equip the tribunal with the tools it needs to arrive at a proper decision.70 3.5 Expert Presentations An increasingly common and effective procedural tool is an expert’s oral presentation at the hearing, usually in lieu of direct examination. Such presentations offer experts an opportunity to address complex quantum issues with the support of visuals (e.g., PowerPoint slides, charts, figures, tables, and/or spreadsheets), to summarize key positions, and to highlight areas of agreement and disagreement with the other expert. However, the process should not favor experts who are adept at giving presentations or those who have access to better visual support systems. If presentations are to be made, it is important for the parties to agree on the procedures to be followed in advance, such as the use of demonstratives, the scope of the presentation (e.g., no new information), the time allowed for the presentations, and whether hard copies of the presentations should be exchanged before the testimony. 3.6 Expert Conferencing In international arbitration, the most common procedure of hearing oral testimony from experts is for the expert to be questioned briefly by the lawyer who appointed him or her, then to be cross-examined by the lawyer for the opposing party, and finally to be questioned by the tribunal. In some cases, however, tribunals have taken innovative approaches to hearing expert testimony, such as expert conferencing, colloquially referred to as “hot-tubbing.”71 The practice involves valuation experts being questioned in tandem thus allowing the save costs. See O’Malley, supra note 44, at 153. This may be true in some circumstances, but doing so could also risk losing the flexibility of having the tribunal-appointed expert work together with the party-appointed experts to facilitate the tribunal’s understanding of the key issues in dispute. 70   B lackaby & Partasides, supra note 33, at 401. 71  For examples of cases in which expert conferencing was used, see Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award, ¶¶ 107–13 (May 6, 2013); Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, ¶¶ 53, 482, 582 (Mar. 3, 2010); ECE Projektmanagement v. Czech Republic, PCA Case No. 2010-5, Award, ¶ 1.108(c) (Sept. 19, 2013); Philip Morris Asia Ltd. v. Commonwealth of Australia, PCA Case No. 2012-12, Procedural Order No. 15, ¶ 6.2 (Feb. 4, 2015).

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tribunal to question the experts at the same time and enabling the experts to respond directly to each other. Generally speaking, arbitration rules lack specificity with respect to expert conferencing, but are often sufficiently broad to capture the practice.72 To some extent, the IBA Rules fill the procedural gaps by providing useful guidance to tribunals on the handling of expert evidence,73 including expert conferencing.74 While the practice is anecdotally common in arbitration,75 a recent study found that only 5% of investor-State awards refer to it.76 It may of course be that the approach was adopted in more cases but simply not mentioned in the award. The purpose of expert conferencing is to discover crucial points of agreement and disagreement between the experts, test their evidence and narrow differences, clarify technical issues, eliminate weak arguments, encourage debate, and have each expert answer questions from the tribunal immediately.77 Some commentators caution, however, that the process may favor experts who are good advocates and debaters, that it may unwelcomingly require counsel to relinquish control over how their case is presented, and that the process seldom saves time and adds further costs.78 In light of these concerns, the potential use of expert conferencing should be discussed between the parties and the tribunal in advance of the hearing, and specific procedures should be put in place if the parties elect to proceed with the tool. For example, the tribunal and disputing parties should settle on the order of expert conferencing, such as whether it will occur before or after or in lieu of cross-examination,79 and how much time to devote to it. The effectiveness of expert conferencing will depend on the circumstances of the case as well as on the experience of the arbitrators tasked with managing

72   See, e.g., ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules), rules 34–6 (2006); UNCITRAL Rules, art. 28(2). See also Daly & Poon, supra note 13, at 329. 73  von Wobeser, supra note 68, at 805–6. 74  IBA Rules, arts. 5–6. 75   See, e.g., O’Malley, supra note 44, at 257–8; Trenor, supra note 49, at 139. 76  PricewaterhouseCoopers, Dispute perspectives, supra note 15, at 6. 77  Sachs & Schmidt-Ahrendts, supra note 13, at 144; O’Malley, supra note 44, at 257–8; Hilmar Raeschke-Kessler, Witness Conferencing, in The Leading Arbitrators’ Guide to International Arbitration 415, 420 (Lawrence W. Newman & Richard D. Hill eds., 2008); Lamb et al., supra note 65, at 8. 78   G ary B. Born, 2 International Commercial Arbitration 1850 (2009). 79  Some hold the view that expert conferencing should rarely be done in lieu of cross-examination. See, e.g., Trenor, supra note 49, at 139.

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the process.80 A tribunal with a clear objective, an awareness of the issues in dispute, and a list of questions is much more likely to maximize the benefits of expert conferencing and maintain control over the process.81 For this reason, expert conferencing may be well served in combination with pre-hearing meetings,82 which give experts an opportunity to agree on a list of undisputed and disputed issues. These lists can then be used by a tribunal to form an agenda concerning the disputed matters, which can then be circulated to the parties in advance of the hearing.83 At the hearing, the discussion can be directed by the tribunal through questioning while keeping to the agenda.84 Taking the tribunal’s agenda item by item and eliciting the experts’ views and reasons, while assuring an equal opportunity for each expert to comment, can help ensure that fairness is observed and can potentially draw the most from the process. When used effectively, expert conferencing can help tribunals navigate complex and disparate opinions between experts. 3.7 Joint Models and Sensitivity Analyses A tribunal may ask the experts to provide a joint model or sensitivity analysis in order to give the arbitrators a tool to adjust the various assumptions underlying each expert’s conclusions.85 This may help the tribunal understand the key drivers of value in the model (e.g., discount rate, revenue, terminal value) and may provide a range of outcomes based on adjustments to these inputs.86 80  Jones, supra note 13, at 149; Daly & Poon, supra note 13, at 373. 81  Raeschke-Kesslar, supra note 77, at 422; Daly & Poon, supra note 13, at 373. 82  Sachs & Schmidt-Ahrendts, supra note 13, at 141–2; Daly & Poon, supra note 13, at 371. 83  Raeschke-Kesslar, supra note 77, at 426; Daly & Poon, supra note 13, at 371. 84  Trittmann & Kasolowsky, supra note 52, at 339; Daly & Poon, supra note 13, at 373; Trenor, supra note 49, at 139 (“Other procedural issues to consider are whether the tribunal intends to identify in advance the areas of discussion that it expects the experts to discuss and whether expert conferencing will proceed topic-by-topic or all topics at once. It is often useful for the tribunal to prepare a list of questions in advance and, in some cases, useful to provide the list to the experts in advance.”). 85  If the parties are to provide the tribunal with a sensitivity analysis, they should contemplate doing three things: (1) teaching the tribunal how to use the model (which must thus be in a user-friendly format); (2) making sure the model is constructed in such a manner that, when one variable is changed, the rest of the model adapts accordingly; and (3) including accessible equations so that the tribunal can follow the calculations and determine whether the model has been properly constructed. See Kantor, supra note 19, at 303–4. 86   Rumeli Telekom A.S. & Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, ¶ 810 (July 29, 2008) (“The Tribunal is aware that the sensitivity analyses are used as a cross check on the figure adopted by the

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This tool is particularly useful when experts agree on a suitable method for valuing damages. A few cases illustrate the point. In Flughafen Zürich v. Venezuela,87 the experts agreed that the DCF approach was the most suitable methodology to value an investment contract,88 but the difference in the valuations proposed by the experts was still fairly wide (US$44 million versus US$8 million).89 The experts were thus asked by the tribunal to produce a joint model that would show the impact on damages by flexing four key areas on which they were not in agreement. In the process of producing the model (which each expert did separately), the experts resolved one area of disagreement and the tribunal was able to more easily analyze and conclude on the remaining three areas.90 In Occidental Petroleum v. Ecuador,91 the experts agreed that the DCF method was appropriate to establish the fair market value of an oil block in dispute, but disagreed on a number of assumptions. The tribunal responded by inviting the experts “to confer and produce jointly a report estimating the fair market value” and instructed them to make certain assumptions.92 The tribunal relied on the economic model agreed to by both experts in order to reach its decision on quantum.93 A similar approach was also adopted in Tidewater Investment v. Venezuela,94 where the tribunal asked the experts to prepare illustrative tables showing the effect of different assumptions on their calculations. The tribunal commented that these “proved of very considerable assistance to the Tribunal in its deliberations” and “produced a significantly greater convergence in figures than had been the case in the experts’ reports that were filed in the written phase.”95 expert, and not to invalidate the figure. Nevertheless, they demonstrate that the method must be understood as an approximation which is dependent on the validity of the assumptions, and not as a mechanical calculation which will yield a value whose validity is not open to question.”). 87   Flughafen Zürich A.G. & Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, Award (Nov. 18, 2014). 88   Id., ¶ 780. 89   Id., ¶ 841. 90   Id., ¶¶ 818–22. 91   See Occidental v. Ecuador, supra note 17. 92   Id., ¶ 692. 93   Id., ¶ 824. 94   Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award (Mar. 13, 2015). 95   Id., ¶ 198. A portion of the compensation awarded by the tribunal was recently annulled for failing to state sufficient reasons. See Tidewater v. Venezuela, supra note 6, ¶ 192.

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While the approaches taken in Flughafen, Occidental, and Tidewater allowed the tribunals to use expert evidence to reach a decision on quantum, it should be noted that all involved numerous rounds of expert reports, resulting in relatively long expert evidentiary processes. This begs the question of whether the earlier reports were superfluous or whether they were necessary to enable the tribunal to direct the experts on the appropriate methodology and assumptions for a joint model. While the amounts at issue in these cases may have justified the tribunals taking the necessary means to ensure proper valuations, in other cases waiting until late in the proceedings may prove too costly to the disputing parties. Providing the tribunal with a joint model or scenario analysis will also face greater challenges when the experts do not agree on a suitable method for valuing damages. For example, in Walter Bau A.G. v. Thailand,96 the experts disagreed on the proper methodology to value losses arising from a concession agreement, resulting in valuations ranging from €3.1 million to €118.3 million.97 The tribunal ultimately disregarded the experts’ proposals and instead concluded that the DCF approach was the preferable methodology, given that both experts had provided alternate quantum assessments based on a DCF analysis.98 At the request of the tribunal, the experts then produced a joint DCF model, which the tribunal used to quantify damages.99 When a tribunal uses a joint model or sensitivity analysis to reach its own conclusion on damages, the question arises as to what extent the tribunal should consult the parties before making its final determination.100 While a 96   Walter Bau A.G. (In Liquidation) v. Kingdom of Thailand, UNCITRAL Arbitration Proceeding, Award (July 1, 2009). 97   Id., ¶¶ 14.2–14.4. 98   Id., ¶¶ 14.12, 14.23–14.25. 99   Id., ¶ 14.42. See also Abengoa, S.A. & COFIDES S.A. v. United Mexican States, ICSID Case No. ARB(AF)/09/2, Award (Apr. 18, 2013). In that case, the experts disagreed on the methodology to value a hazardous waste treatment facility. The claimant’s expert proposed a DCF analysis, but the respondent’s expert opined that this was not appropriate. Id., ¶¶ 683–4. The tribunal concluded that the DCF model was appropriate and requested a joint model from the experts and an explanation of the impact of the areas of disagreement. Id., ¶¶ 688, 702–4. From this, the tribunal chose its preferred assumptions and used them in the joint model in order to establish its quantification of damages. Id., ¶¶ 707–26. 100  In S.D. Myers, the tribunal decided to perform its own analysis rather than relying on the analysis proposed by either expert. The tribunal requested a joint model to assist it with the “widely differing proposals of two distinguished accountants.” S.D. Myers, Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Second Partial Award, ¶ 175 (Oct. 21, 2002). In its decision, the tribunal explained that while the joint model assisted

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tribunal will need flexibility to make a decision, the disputing parties should generally be given the opportunity to comment on any variables that are integral to the quantification of damages. Thus, while joint models and sensitivity analyses may provide tribunals with helpful tools to reach quantifications that are grounded in reasonable certainty, tribunals should ensure that their conclusions are not ones on which the disputing parties have not had a chance to provide views; otherwise, the damages award may be subject to annulment challenges or set-aside proceedings.101 4 Conclusion The existence of contradictory opinions between valuation experts can leave tribunals in a difficult position when it comes to the assessment of damages; while they are often experts in law, they are not typically experts in quantum. As this Chapter explains, differences in assessments may not always be the result of a lack of impartiality on the part of party-appointed experts, but could be due to the disputing parties’ positions on a number of legal and commercial assumptions, as well as methodological preferences. A tribunal faced with such challenges should assess the underlying forces that drive such divergent conclusions and determine whether there are any procedural tools at its disposal to navigate the disparity. Consideration of any such tools should, to the extent possible, avoid being overly intrusive and costly and thus should be done in consultation with the parties as soon as practicable. As the number of investment disputes grows, so too hopefully will the willingness of tribunals and disputing parties to embrace procedural tools that can facilitate the proper quantification of damages. in its analysis, it had performed its own assessment based on the full evidence presented during the proceedings. Id. Conversely, in some cases, even if the disputing parties agree on an appropriate methodology to quantify damages, tribunals have elected to take their own path. For example, in Tenaris v. Venezuela, the claimant and respondent experts both proposed a DCF analysis as their primary damages valuation methodology but reached diverging valuations of US$239 million and USD$0, respectively. The tribunal ultimately rejected the DCF as a valuation methodology and opted instead to use “with some reluctance” the transaction price from when the plant was sold four years prior to the expropriation, which totaled US$60 million. Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26, Award, ¶ 567 (Jan. 29, 2016). It is difficult to say whether this was a satisfactory result; however, the award may have been more predictable if the parties had less contrasting views on quantum. Id., ¶ 521. 101   See supra note 3, Beharry (Chapter 16), at Section 2.5.

Chapter 2

Third-Party Financing in Investment Arbitration Victoria Sahani, Mick Smith and Christiane Deniger 1

Introduction

This Chapter identifies and explains the effect of third-party funding on the financial aspects of international investment treaty cases. Indeed, the increased visibility of third-party funding coupled with the increasingly novel and complex ways that these arrangements are carried out make it a fascinating development in the world of disputes. Third-party funding is particularly relevant in the context of damages because, ultimately, the magnitude of damages of any claim is one of the determining factors influencing whether a claim will be financed and, if so, at what level. This Chapter explores the different types of third-party funding, how it is obtained, the current state of regulation, the scope of disclosure obligations, the treatment of third-party funding by international investment tribunals, the impact of funding on security for costs applications and quantum calculations, and the influence of third-party funding on settlements. 2

The Main Features of Third-Party Funding

At its most basic, a third-party funder includes any person or entity who provides monetary support to a party involved in an actual or potential dispute, with a view to obtaining a return on the original monetary investment.1 Thirdparty funding can be, and is, provided in all types of disputes across many

1  In addition to the definitions highlighted in this section, there are broader definitions of third-party funding, such as, for example, the definition included in the Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States [hereinafter Canada-EU CETA] (Oct. 30, 2016), 2017 O.J. (L 11). See infra Section 2.3.4. Alternatively, third-party funding can occur in situations where there is no view or objective to obtaining a return on the original monetary investment. These not-for-profit funders are discussed later in this Chapter.

© koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_003

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different jurisdictions. Yet, despite its prevalence, there is currently no provision in arbitration institutional rules explicitly defining third-party funding.2 Recent discussions held by the International Council for Commercial Arbitration and Queen Mary University of London joint Task Force on ThirdParty Funding (“ICCA-QM Task Force”) have brought to light the difficulty in providing an all-encompassing definition of third-party funding. Not only do different jurisdictions take different approaches to, and have different understandings of, third-party funding, but entities, including the International Bar Association (“IBA”),3 the International Chamber of Commerce (“ICC”) Commission on Arbitration and Alternative Dispute Resolution,4 and the ICC Court of Arbitration,5 have also adopted definitions that contain subtle differences. The first entity to promulgate guidelines regarding third-party funding was the IBA in its Guidelines on Conflicts of Interest in International Arbitration, last revised in 2014.6 The IBA centers its definition of a thirdparty funder on the funder’s “direct economic interest in the award….”7 In 2  See Aren Goldsmith & Lorenzo Melchionda, The ICC’s Guidance Note on Disclosure and Third-Party Funding: A Step in the Right Direction, Kluwer Arb. Blog (Mar. 14, 2016), http://kluwerarbitrationblog.com/2016/03/14/the-iccs-guidance-note-on-disclosure-andthird-party-funding-a-step-in-the-right-direction/. 3  International Bar Association, Guidelines on Conflicts of Interest in International Arbitration [hereinafter IBA Guidelines on Conflicts of Interest] 14–5 (Oct. 23, 2014). 4  I CC Commission on Arbitration and Alternative Dispute Resolution, Commission Report: Decisions on Costs in International Arbitration [hereinafter ICC Commission Report] 44 (2015), https://iccwbo.org/publication/decisions-on-costs-in-international-arbitration-iccarbitration-and-adr-commission-report/. 5  The ICC Commission on Arbitration and Alternative Dispute Resolution is the ICC’s rulemaking and research body in the field of international dispute resolution. The global forum comprises more than 690 members from over 90 countries and includes lawyers, in-house counsel, arbitrators, mediators, law professors, and experts in various dispute resolution fields. The commission addresses how new practices, policies, and legislative developments affect international arbitration and other dispute resolution services. The Commission is also responsible for drafting and revising the ICC’s dispute resolution rules and clauses. See ICC, Dispute Resolution Services, https://iccwbo.org/dispute-resolution-services/. The ICC International Court of Arbitration exercises judicial supervision of arbitration proceedings. Its purpose is to ensure proper application of the ICC Rules, as well as assist parties and arbitrators in overcoming procedural obstacles. These efforts are supported by the Court’s Secretariat. See ICC International Court of Arbitration, https://iccwbo .org/dispute-resolution-services/arbitration/icc-international-court-arbitration/. 6  I BA Guidelines on Conflicts of Interest. 7  Id., at 14–5 (General Standard 6, commentary (b)).

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addition, the IBA Guidelines also place a duty on parties to disclose the identity of their third-party funder to the arbitral tribunal.8 Examples of conflicts of interest that the guidelines seek to identify include, among others: repeat appointments of arbitrators in cases funded by the same funder, when a funder hires a law firm for advice and then members of the same law firm act as arbitrators in cases funded by that funder, or arbitrators sitting on the advisory boards of funders. Furthermore, the IBA modified the Non-Waivable Red List, Section 1, and the Orange List, Section 3.4, to include several references to “an entity that has a direct economic interest in the award to be rendered in the arbitration.”9 Practitioners have interpreted and case law appears supportive that this amendment includes third-party funders, as well as other entities that may be financing a party’s arbitration costs.10 The second institution to provide guidance, in December 2015, was the ICC Commission on Arbitration, which issued a Report entitled “Decisions on Costs in International Arbitration.”11 It defines a third-party funder as an “independent party that provides some or all of the funding for the costs of a party to the proceedings (usually the claimant), most commonly in return for an uplift or success fee if successful.”12 The Report then states that a tribunal might 8    Id., at 16 (General Standard 7). 9    Id., at 20, 24 (emphasis added). The IBA Guidelines contain general standards designed to ensure the impartiality and independence of arbitrators in international arbitration. These include the requirement to disclose certain circumstances upon appointment if they exist (or as soon as possible thereafter). A list of circumstances is included in the IBA Guidelines and are coded by color (red, orange, and green). The Red List consists of: (i) “a Non-Waivable Red List” and (ii) “a Waivable Red List.” Id., at 20–1. The IBA Guidelines explain that “[t]hese lists are non-exhaustive and detail specific situations that, depending on the facts of a given case, give rise to justifiable doubts as to the arbitrator’s impartiality and independence[, ]” which is judged “from the point of view of a reasonable third person having knowledge of the relevant facts … [of the case].” Id., at 17. If any Non-Waivable Red List conditions exist, an arbitrator should not accept an appointment. Waivable Red List conditions are also serious, but not as severe, and can be waived by the parties (albeit only expressly). The Orange List consists of a list of situations where an arbitrator has a duty to disclose but can nonetheless act unless the parties make a timely objection. Situations on the non-exhaustive Green List have no appearance or actual conflict of interest and do not require disclosure. 10   K haled Moyeed et al., A Guide to the IBA’s Revised Guidelines on Conflicts of Interest (2015). See Khaled Moyeed et al., A Guide to the IBA’s Revised Guidelines on Conflicts of Interest, Kluwer Arb. Blog (Jan. 29, 2015), http://kluwerarbitrationblog .com/2015/01/29/a-guide-to-the-ibas-revised-guidelines-on-conflicts-of-interest/. 11   See ICC Commission Report. 12   Id., at 17, n. 44.

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consider ordering disclosure of “funding information as is necessary” if it is possible that the non-funded party who wins the case will be unable to recover costs from the funded party due to the funding arrangement.13 And lastly, the ICC Court of Arbitration’s Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration of March 1, 2017 states that a third-party funder is any “entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award….”14 Notably, it appears that the ICC Court of Arbitration adopted a definition of third-party funders that more closely resembles the IBA Guidelines than the ICC Commission’s Report by reference to a “direct economic interest” instead of “funding the costs … in return for an uplift or success fee if successful.” While subtle, this difference highlights the ICC Court of Arbitration’s broader notion that third-party funding can be provided beyond the more common practice of funding the litigation costs of a claim. For example, a third-party funder could simply purchase an interest in the claim enabling the claimant to monetize part of its asset. As explained in greater detail throughout this Chapter, third-party funding has evolved from purely funding the costs of a dispute into a more nuanced and, in certain cases, readily-available financial instrument. While these three definitions may be slightly different, the overarching theme is the same: specifically, the three institutions consider permissible the funding of a claim or providing financing in exchange for a return plus the original investment upon a successful outcome. Beyond this, the three institutions appear to leave additional regulation to individual jurisdictions. 2.1 Types of Third-Party Funding Arrangements In recent years, third-party funders have moved beyond exclusive association with the “David v. Goliath” cases.15 They are continuously developing innova13   Id., ¶ 89. See also id., at 45–6 for a worldwide survey of laws regarding disclosure of thirdparty funding. 14   See International Court of Arbitration, Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration ¶ 24 (Mar. 1, 2017), https://cdn.iccwbo .org/content/uploads/sites/3/2017/03/ICC-Note-to-Parties-and-Arbitral-Tribunals-onthe-Conduct-of-Arbitration.pdf. 15  It is worth highlighting that the first type of litigation funding and some of the funders involved have been in operation for more than 125 years. These are Freight, Demurrage and Defence (“FD&D”) clubs. These FD&D clubs are found around the world. FD&D clubs were established in response to commercial ship-owners finding themselves vulnerable in relation to any claims they had against global trading houses or charterparties. FD&D clubs created mutual before-the-event insurance associations which would

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tive new arrangements and financial products to keep up with the expanding needs of their customers and the changing face of arbitration. It would be impractical to produce an exhaustive list, but, in general terms, the most common types of transaction include: investment; • Capital Monetization an award; and • Portfolio-basedoffinancing. • 2.1.1 Capital Investment A capital investment by a third-party funder provides a certain level of invested funds, normally described as the “funder’s outlay” in exchange, where the case is successful, for the repayment of that funder’s outlay plus either a multiplier of that amount or a percentage of the overall realized proceeds.16 This investment could also take the form of buying shares in the claimant company.17 The funds provided may be used for purposes beyond financing the costs associated with the arbitration, for example, to keep a claimant company active throughout the duration of an arbitration, repay creditors, or finance another aspect of the claimant’s business. These types of investments can be made to support any or all of the jurisdiction, merits, or enforcement phases of an award, providing flexibility to both a claimant and the third-party funder. This investment is made on a nonrecourse basis, meaning that the claimant has no obligation to reimburse the third-party funder if the claim is unsuccessful.

fund the costs of claims. See James Clanchy, Third Party Funding in Arbitration: the first 125 years, LexisNexis Dispute Resolution (May 17, 2016), http://blogs.lexisnexis.co.uk/ dr/third-party-funding-in-arbitration-the-first-125-years/. 16  For example, the dissenting opinion of Dr. Kamal Hossain in Teinver v. Argentina sets out the terms of the funding agreement between the claimants and Burford Capital Limited. From any compensation paid to claimant, Burford Capital Limited would be entitled to receive “40% of the first $100 million[,] 30% of the net recovery amount between $100 million and $500 million[,] 25% of the net recovery amount between $500 million and $800 million[, and] 15% of the net recovery amount above $800 million.” See Teinver S.A. et al. v. Argentine Republic, ICSID Case No. ARB/09/1, Dissenting Opinion of Kamal Hossain, ¶ 20 (July 21, 2017). 17   See, e.g., Press Release, Eco Oro Minerals Corp., Eco Oro Minerals Announces Investment by Tenor Capital (July 22, 2016), http://www.eco-oro.com/s/NewsReleases .asp?ReportID=756943. See also Sebastian Perry, Claimant sells securities linked to ICSID Award, Global Arb. Rev. (Oct. 28, 2011).

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While not impossible in theory, there are no known cases of governments utilizing third-party funding in the context of investment treaty arbitration. This is most likely because third-party funding is provided on the basis of a successful party being awarded monetary damages. The financial upside for States as respondents is limited to counterclaims,18 which have been rarely awarded, or costs that compensate for some of the State’s expenses associated with the arbitration. Thus, it is unlikely that such funding would be attractive to third-party funders given the difficulty in anticipating terms or a return. It is, however, important to note that States or State-owned entities that are claimants in international commercial arbitration (i.e., pursuant to a contract) or investment arbitration (i.e., if the State or State-owned entity is investing in another State) would be eligible for traditional claimant-side third-party funding. 2.1.2 Monetization of an Award If the claim is successful and an award has been issued, the claimant may seek to “sell,” or monetize its award.19 This transaction structure is particularly common where a claimant has taken years to reach a positive award and is suffering from “litigation fatigue.” Monetization enables a claimant to enjoy the financial benefit of the award early without the risks associated with enforcement or set aside proceedings, albeit at a discount to the face value of the award. Similarly, creditors of a company in possession of an arbitral award may also be able to realize value and trade their debt rather than await repayment from the claimant once the award is satisfied.20

18   See, generally, Chapter 13, Jeremy K. Sharpe & Marc Jacob, Counterclaims and State Claims. 19   See, e.g., Press Release, Owens-Illinois, Inc., OI-Reports Second Quarter 2017 Results (July 31, 2017), http://www.o-i.com/Newsroom/O-I-REPORTS-SECOND-QUARTER-2017RESULTS;-Continued-strong-business-performance-and-favorable-non-operationaltailwinds-drive-2017-earnings-guidance-higher/ (stating “a European subsidiary of the Company sold to a third party its right, title and interest in amounts due under its arbitration award against Venezuela. As consideration, the subsidiary received a cash payment of $115 million, and retains a modest potential upside depending upon recovery of the award. In the event the award is partially or completely annulled, the subsidiary may be required to repay up to the entire amount of the cash payment to the third party.”). 20  While it is arguable that a non-party would experience difficulties in certain jurisdictions with enforcement based on standing or public policy, in practice, this type of debt has been freely traded for years even before the advent of mainstream third-party funding and investors are typically secure in the level of risk they are accepting with this type of investment.

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2.1.3 Portfolio-Based Financing Portfolio-based financing provides flexibility and attractive terms for businesses and corporate legal teams to reduce risks and costs across a range of matters. Transaction structures follow a range of models but the key element is that, instead of funding a particular claim for a particular claimant, the third-party funder spreads the risk across multiple claims. Claimants might be large businesses with, for example, multiple competition law claims, in different sectors or jurisdictions. Alternatively, they might be businesses aggregating smaller retail type claims in particular business sectors. Portfolio-based funding is also available to law firms to enable them to finance or de-risk a portfolio of claims where they have taken on risky matters under contingency or conditional fee arrangements with clients.21 In these types of arrangements, the law firm will not be paid, or will be paid a lower percentage of their fees, unless a successful award is rendered, in which case they may be able to claim a success fee from their client. 2.2 Process of Obtaining Funding The process for obtaining third-party funding is relatively straightforward. A claimant, either directly or through their dispute counsel or a third-party broker, approaches a third-party funder with the hope of obtaining funding. This can occur at any stage of the dispute or before a notice of dispute has been filed. The first step is for both parties to sign a non-disclosure agreement. This type of agreement is necessary to ensure that common interest privilege is maintained. In some jurisdictions, it ensures that there is no waiver of attorney-client privilege or attorney work product doctrine. Once the agreement is concluded, the parties are free to begin discussing the breadth, complexity, and value of the potential dispute. Next, the claimant, its counsel, or its third-party broker makes a business case to the third-party funder, explaining why its claim merits an investment. During this process, funding terms are negotiated and agreed upon prior to entering into any exclusivity agreements. Funding terms will generally require the repayment of the third-party funder’s investment plus the greater of a multiple of that investment amount or a percentage of the award if the claim is successful. Both the percentage and 21  For example, this structure could work well in situations where the same law firm is regularly used by the claimant against the same respondent State. A good example of this type of situation is the recent set of solar energy claims arising from the same measures brought against Spain pursuant to the Energy Charter Treaty.

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multiple can be offered on a sliding scale; these figures are affected by the time it takes to obtain an award, the risks involved (including but not limited to the realistic value of the award or enforcement prospects), and the level of investment. The art is in determining an overall percentage in the claim that allows the third-party funder to be as aligned as possible with the claimant and jointly aim for the most positive plausible outcome. Once a conditional litigation funding agreement is signed, the third-party funder will conduct a rigorous due diligence assessment of the claim, by assessing its merits and the quantum as well as instructing its own counsel to assess the claim. The conditional litigation funding agreement will set out the proposed fee structure, address how the parties should approach offers from a respondent to settle the claim, and the circumstances and conditions under which the third-party funder can exit or withdraw from the case, as well as the reporting and updating requirements of the funder, lawyers, and client. Most importantly, it determines a “long stop date,” which provides a period of exclusivity to the third-party funder during which it will determine whether to proceed with the funding. Factors taken into consideration by third-party funders when reaching a decision to proceed with the funding include, inter alia: the value and complexity of a claim, the amount of funding needed, the likelihood of success, whether other entities already have a priority interest in the proceeds of the claim, the jurisdiction in which the arbitration will take place, the arbitral institution, the ease of enforcement, and the location of the assets against which to enforce. By or before the long stop date, the third-party funder will inform the claimant whether third-party funding will be provided. Funding can be confirmed in different ways. Some third-party funders enter into a new binding funding agreement whereas others issue a notice confirming the third-party funder’s intention to fund has become binding (i.e., a conditional funding agreement becomes unconditional). In general, there is rarely more than one third-party funder involved in any given case. It is feasible, however, that where an investor needs an extremely large amount of money that more than one third-party funder could be involved in order to limit their exposure. In such circumstances, an agreement between the third-party funders would need to be reached to regulate how proceeds are paid out and in what order, and which funder has the day-to-day management of monitoring the claim. Current State of Regulation of Third-Party Funding in International Arbitration Over the last decade, third-party funding has gained increased visibility and understanding globally, as evidenced through, on the one hand, the growing tolerance of its use by courts and tribunals across different jurisdictions and 2.3

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through the enactment of legislation, on the other. Such regulation is applicable in international arbitration to the extent that the seat of arbitration chooses to apply its domestic laws to international arbitrations seated there, like in Hong Kong and Singapore. In addition, it is possible that a domestic court deciding whether to recognize, confirm, enforce, or vacate an international arbitration award may apply its own laws on third-party funding to enforce its domestic public policy in accordance with Article V of the New York Convention. Different jurisdictions have chosen different levels of regulation for thirdparty funders, whether through case law, legislation, or self-regulating bodies. This section examines major developments in the regulation of third-party funding under domestic law and international treaties. 2.3.1 Hong Kong On 14 June 2017, the Hong Kong government enacted the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016, which is the same version that had been published in the Hong Kong Gazette on 20 December 2016 (the “Hong Kong legislation”). The Hong Kong legislation explicitly states that third-party funding of arbitration and mediation is no longer prohibited by maintenance and champerty rules in Hong Kong, while the prohibition in domestic litigation remains in place.22 The Hong Kong legislation sets out specific measures and safeguards, proposes a code of practice to be issued, and contains further measures and safeguards aimed at preserving integrity where third-party funding is being used. As with the legislation in Singapore (discussed below), the ambit of the Hong Kong legislation allows for third-party funding in domestic litigation only insofar as it relates to a funded arbitration. It defines “third party funding of arbitration” as the “provision of arbitration funding for an arbitration— (a) under a funding agreement; (b) to a funded party; (c) by a third party funder; and (d) in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement.”23 The definition excludes the direct or indirect provision of arbitration funding

22   See Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance No. 6 (2017) (H.K.); Gov’t of the Hong Kong Special Administrative Region, Department of Justice, Third party funding of Arbitration: Amendments proposed for Arbitration Ordinance and Mediation Ordinance (Dec. 28, 2016), http://www.doj.gov.hk/ eng/public/pr/20161228_pr2.html; Key bills passed in Singapore, as Hong Kong moves towards funding, Global Arb. Rev. (Jan. 11, 2017). 23  Ordinance No. 6, supra note 22, § 98G.

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by lawyers, law firms, or those providing legal services, in order to avoid any conflict of interest. Importantly, the Hong Kong legislation provides that both an advisory body and an authorized body will be established to facilitate the regulatory framework for third-party funding, although a timeframe for creating those bodies has not been given. It is unclear for now whether third-party funding of arbitrations seated in Hong Kong will legally occur before those advisory bodies are set up. The Hong Kong legislation also authorizes the issuance of a code of practice (“HK Code of Conduct”) by the authorized body, once established, setting out standards and practices to be observed with respect to, inter alia, funding agreements, internal procedures of third-party funders (such as sufficient minimum capital requirements), and monitoring measures. The HK Code of Conduct may also specify terms to be included in the funding agreements. A process involving public consultation would have to be followed prior to issuing the HK Code of Conduct. The HK Code of Conduct will not have legally binding effect but will be admissible in evidence where a failure to comply is in question. Finally, the Hong Kong legislation requires any party receiving third-party funding to disclose the existence of such funding to the other parties and the tribunal, in order to avoid conflicts of interest.24 2.3.2 Singapore On 10 January 2017, during its second reading, the Singaporean parliament passed Bill No. 38/2016-Civil Law (Amendment) Bill—Third Party Funding for Arbitration and Related Proceedings, originally introduced on 7 November

24   Id. Mediation Ordinance (Cap. 620), Division 5—Other Measures and Safeguards states at section 98T:  (1) If a funding agreement is made, the funded party must give written notice of— (a) the fact that a funding agreement has been made; and (b) the name of the third party funder. (2) The notice must be given—(a) for a funding agreement made on or before the commencement of the arbitration—on the commencement of the arbitration; or (b) for a funding agreement made after the commencement of the arbitration—within 15 days after the funding agreement is made. (3) The notice must be given to—(a) each other party to the arbitration; and (b) the arbitration body. (4) For subsection (3)(b), if there is no arbitration body for the arbitration at the time, or at the end of the period, specified in subsection (2) for giving the notice, the notice must instead be given to the arbitration body immediately after there is an arbitration body for the arbitration.

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2016.25 The regulation has amended the Civil Law Act (Cap. 43) to permit the funding of the costs of certain prescribed dispute resolution proceedings by qualifying third-party funders. The phrase “dispute resolution proceedings” is defined to mean the “entire process of resolving or attempting to resolve a dispute between 2 or more parties and includes any civil, mediation, conciliation, arbitration or insolvency proceedings.”26 The regulation only permits third-party funding for international arbitration and related court and mediation proceedings. Importantly, it also permits the law minister to prescribe, where necessary or convenient, additional “classes or description of dispute resolution proceedings,” which leaves open the possibility of funding of domestic cases in due course.27 The regulation defines “qualifying third-party funder” as “a Third-Party Funder who satisfies and continues to satisfy such qualifications and other requirements as may be prescribed.”28 This definition was likely kept broad intentionally in order to accommodate future unforeseen qualifications as well as any requirements that might arise once the new law has been “stress-tested” by the market. For the foreseeable future, the regulation of third-party funders is retained by the Singaporean courts to ensure that there are no circumstances that could be considered unethical or immoral. In addition, amendments will be made to Singapore’s Legal Profession (Professional Conduct) rules requiring lawyers to disclose the existence of any third-party funding their client receives. Finally, a third-party funder operating in Singapore will be required to: (i) meet capital adequacy qualifications; (ii) have access to funds immediately within its control; and (iii) invest the funds pursuant to a third-party funding contract enabling the funded party to meet the costs of the dispute resolution proceedings. 25   See Civil Law (Third-Party Funding) Regulations (Cap. 43, 2017) s. 68 (Sing.); Key bills passed in Singapore, as Hong Kong moves towards funding, supra note 22; The Singapore bills: a detailed look, Global Arb. Rev. (Jan. 11, 2017). 26   See Civil Law (Third-Party Funding) s. 68, supra note 25. 27  The explanatory statement to Bill 38/2016 states that its purpose is: (i) to clarify that the law tort of maintenance and champerty is abolished in Singapore; (ii) to clarify that, in certain prescribed categories of dispute resolution proceedings, third-party funding contracts are not contrary to public policy or illegal; and (iii) to provide that a third-party funder that fails to comply with any prescribed qualification or other prescribed requirement cannot enforce its rights from or under the third-party funding contract. It also provides other clarifications, including related amendments to the Legal Profession Act (Cap. 161). See Legal Profession Act (Cap. 161, 2009 Rev Ed) (Sing.). 28   See Civil Law (Third-Party Funding) s. 68, supra note 25.

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2.3.3 England and Wales Lord Justice Jackson, who led the Civil Litigation Costs Review,29 recommended self-regulation for the litigation funding industry, by way of a voluntary code of conduct. Hence, a voluntary Code of Conduct for Litigation Funders (the “Code of Conduct”) was launched in 2011 by the Civil Justice Council, and approved by the Board of the Civil Justice Council, the Master of the Rolls Lord Neuberger of Abbotsbury, and Lord Justice Jackson.30 The Code of Conduct was the result of months of research by a working group established by the Civil Justice Council with the participation of stakeholders including lawyers, academics, and business interests. The Code of Conduct establishes standards for the capital adequacy of funders, sets out the specific, limited circumstances in which funders may be permitted to withdraw from a case, and outlines the way in which the roles of funders, litigants, and their lawyers should be kept separate. In addition, it maintains robust and efficient procedures for handling complaints. Members of the Association of Litigation Funders (“ALF”), the self-regulatory organization charged with upholding the Code, regularly hold meetings to ensure that the Code of Conduct is kept up to date. The Code was last revised in November 2016 and is available on the ALF website. 2.3.4 Treaties Addressing Third-Party Funding Third-party funding is not generally covered in international treaties. At the time of this writing, it appears that only three treaties address the subject. The first treaty to address third-party funding is the Comprehensive Economic and Trade Agreement (“CETA”), ratified by Canada and the European Union.31 It contains the following provisions relating to third-party funding: Article 8.1: Definitions third party funding means any funding provided by a natural or legal person who is not a disputing party but who enters into an agreement 29  Gov’t of the United Kingdom, Review of Civil Litigation Costs: Final Report (Dec. 2009), https://www.judiciary.gov.uk/wp-content/uploads/JCO/Documents/Reports/jacksonfinal-report-140110.pdf. 30  Association of Litigation Funders of England and Wales, Code of Conduct for Litigation Funders (Nov. 2011), http://associationoflitigationfunders.com/wp-content/uploads/2014/ 02/CodeofConductforLitigationFundersNovember20111.pdf. 31   See Canada-EU CETA, arts. 8.1, 8.26.

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with a disputing party in order to finance part or all of the cost of the proceedings either through a donation or grant, or in return for remuneration dependent on the outcome of the dispute. … Article 8.26: Third party funding 1. Where there is third party funding, the disputing party benefiting from it shall disclose to the other disputing party and to the Tribunal the name and address of the third party funder. 2. The disclosure shall be made at the time of the submission of a claim, or, if the financing agreement is concluded or the donation or grant is made after the submission of a claim, without delay as soon as the agreement is concluded or the donation or grant is made.32 Similarly, the European Commission (“EC”) has proposed including provisions regarding third-party funding in the Transatlantic Trade and Investment Partnership (“T-TIP”), which has not yet been concluded.33 The EC’s proposed language is substantively identical to the language in the CETA treaty, discussed above. Finally, the current draft of the EU-Vietnam Free Trade Agreement, Ch. 8, Ch. II, Sec. 3, Art. 2, contains a similar definition of third-party funding.34 Article 11 of the EU-Vietnam Free Trade Agreement provides for a similar disclosure requirement but also requires disclosure regarding the “nature of the funding arrangement….”35 And, it requires that “the Tribunal shall take into account whether there is third-party funding” when making decisions regarding costs and security for costs.36 The text of the EU-Vietnam Free Trade Agreement was published after the negotiations concluded on 1 February 2016, but at the time of this writing, the treaty has not yet been ratified.

32   Id. (emphasis omitted). 33   See Transatlantic Trade and Investment Partnership, European Commission proposed draft [hereinafter T-TIP], ch. II, arts. 1, 8 (Sept. 2015). 34   See Free Trade Agreement between the European Union and the Socialist Republic of Vietnam [hereinafter EU-Vietnam FTA], ch. 8, ch. II, § 3, art. 2 (Feb. 1, 2016). 35   Id., ch. 8, ch. II, § 3, art. 11. 36   Id.

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Disclosure of Third-Party Funding

An international investment tribunal may order a party to disclose its thirdparty funding.37 It may do so pursuant to its own jurisdictional authority over the parties, according to an international guideline or norm, or in response to a request from the opposing side, such as, in conjunction with an application for costs or security for costs.38 Arbitrators may also wish to assess any financial, professional, or personal conflicts of interest related to the third-party funding.39 Both arbitral rules and guidelines may require arbitrators to disclose conflicts of interest, and arbitrators may in turn require disclosure from the parties in the case in order to determine how best to comply with their own disclosure requirements.40 Rules of professional ethics and professional responsibility for lawyers and arbitrators promulgated under national laws or enforced by the attorney bar may require such disclosures as well. Additionally, as discussed above, some investment treaties require funded parties to disclose their funding in order to utilize any dispute settlement mechanisms detailed in the treaty.41 Furthermore, many publicly-held corporations are required to disclose any “material transactions” to the public and their investors under the laws of their home jurisdictions.42 Depending on the nature of the funding arrangement,

37   See, e.g., Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 3 (June 12, 2015). 38   See, e.g., id., ¶¶ 10–3; Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan, ICSID Case No. ARB/10/1, Award (July 2, 2013). 39   See IBA Guidelines on Conflicts of Interest, 13–4 (General Standard 6(b), commentary (b)), 15–6 (General Standard 7(a), commentary (a)), 20–2 (the Orange List, the NonWaivable Red List, and the Waivable Red List). 40   See id., 15–6 (General Standard 7(a) and commentary (a)); ICC Note to Parties and Arbitral Tribunals, supra note 14, ¶ 24. 41   See, e.g., CETA, arts. 8.1, 8.26; T-TIP, ch. II, arts. 1, 8; EU-Vietnam FTA, ch. 8, ch. II, § 3, arts. 2, 11. 42  Jonas von Goeler summarizes these obligations as follows: “Importantly, the presence of a third-party funder may need to be disclosed for reasons not linked to the arbitration proceedings, namely to comply with public disclosure requirements imposed upon listed companies, and following disputes between the parties to the funding agreement ending up in state courts.” See Jonas von Goeler, Third-Party Funding in International Arbitration and Its Impact on Procedure 127 (2016) (emphasis in original).

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a publicly-held corporation entering into a funding arrangement may meet the definition of a “material transaction” that would require disclosure.43 Finally, parties may choose to disclose their own funding arrangements to the opposing side to have a strategic influence on settlement discussions even though its actual effect on settlement outcomes is debatable.44 Disclosure may be made to the tribunal, the opposing parties, the parties’ counsel, the arbitral institution, a government body, or some combination of these. The scope of disclosure ranges from solely the existence of a funding arrangement, to the identity and contact information of the funder, to additional characteristics or terms of the funding agreement to, rarely, part or all of the written funding arrangement where the funding agreement is the subject matter of the dispute or pertinent to the merits of it. Requests for disclosure relating to third-party funding arrangements in international commercial and investment arbitration will likely become more prevalent, and tribunals may become more inclined to grant such requests.45 However, tribunals must be vigilant to ensure that the disclosure of third-party funding does not unduly influence the flow or tone of the arbitral proceedings. For example, the non-funded party may be tempted to present dilatory requests or arguments following the disclosure.46 Equally, funded parties may resist disclosure by making bald assertions of confidentiality or propriety, yet seek to exert pressure on the non-funded party to settle. Thus, tribunals must weigh the need for transparency and the desire to detect and avoid conflicts of interest against the potential for one party to become disadvantaged in the arbitration as a direct result of the information disclosed about third-party funding.47 While the foregoing discussion involved citations to a variety of sources of guidance regarding third-party funding in investment arbitration, the reality is that most tribunals that encounter third-party funding do not even mention the funding in their written awards, and many more cases have undisclosed 43   Id., at 126. 44   See Jean-Christophe Honlet, Recent decisions on third-party funding in investment arbitration, 30 ICSID Rev. 699, 710–2 (2015). 45   Id. 46   Id., at 711–2 (“One can easily see that, if a party becomes aware of the other party’s litigation budget, an incentive might be created to bring dilatory requests or arguments simply to exhaust that budget before the case is over. Cases abound where legitimate claimants threw the towel for budgetary reasons only. Investment arbitration—and international arbitration generally—would have nothing to gain from favouring such tactics, which it spends a great deal of time and energy fighting otherwise.”). 47   Id.

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instances of third-party funding, making it difficult to assess their impact. Thus, there may be one of two scenarios happening. On the one hand, it may be that third-party funding is, for the most part, a behind-the-scenes enterprise having no effect on the tribunal’s deliberations because they are not even aware of its existence. If this is the case, then perhaps more disclosure is needed, at least to ensure that conflicts of interests are detected and addressed. On the other hand, it may be that tribunals are fully aware that third-party funding is taking place, but they are choosing either to ignore it or to take it into account silently without explicitly mentioning it in their awards. If tribunals are aware of thirdparty funding and are ignoring it, then perhaps the concern about third-party funding may be “all smoke and no fire.” If tribunals are instead taking it into account without mentioning it in their awards, then it will be nearly impossible to completely assess the true and full impact of third-party funding. 4

Jurisprudence on Disclosure of Third-Party Funding

Several international investment and commercial arbitration tribunals have weighed in regarding the disclosure of third-party funding. In some cases, the funded party has voluntarily disclosed funding without any adverse consequences, such as in the UNCITRAL case Oxus Gold plc v. Republic of Uzbekistan,48 in which the tribunal stated that the funding had no impact on the arbitral proceeding.49 Due to the secrecy surrounding these arrangements, sometimes, however, voluntary disclosure can be perceived as a mistake by the opposing side.50 In most cases, however, the arbitral tribunal orders disclosure of the identity of the third-party funder and—more rarely—may also order disclosure of the terms of the funding arrangement. For example, a dispute regarding termination of the funding arrangement in the ICSID case S&T Oil Equipment & Machinery Ltd. v. Romania was litigated in U.S. courts, which 48   See Oxus Gold v. Republic of Uzbekistan, UNCITRAL Arbitration Proceeding, Final Award (Dec. 17, 2015). 49   See id., ¶ 127. 50  For example, Jonas von Goeler reported in his book that “[i]n the ICC case X v. Y and Z, for example, the claimant transferred a litigation funding agreement to the respondents without further explanation, leading counsel for the respondents to the assumption that ‘[t]his agreement was sent maybe by mistake.’ ” Goeler, supra note 42, at 126. See also X v. Y and Z, Procedural Order (Aug. 3, 2012), 2 Le Cahiers de l’Arbitrage 399–416 (ICC Arb., 2013).

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required disclosure of the terms of the funding arrangement.51 In this case, there was a dispute over the funding arrangement and the funder, Juridica, ceased paying S&T Oil’s fees and costs in the arbitration. The ICSID tribunal ultimately terminated the proceedings due to this nonpayment.52 In this case, the funding agreement was in dispute, so disclosure of its terms was deemed appropriate. Usually, however, the funding agreement is not in dispute, so disclosure of its terms may not be necessary. For example, in the ICSID case EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, the tribunal ordered the claimant to reveal the identity of its third-party funder for the purposes of checking for arbitrator conflicts of interest, but did not require the claimant to disclose any of the terms of the funding arrangement.53 In that case, the claimant had previously voluntarily disclosed that it was funded by a Luxembourg-based funder, but the claimant did not disclose the identity of that funder until ordered to do so by the tribunal. Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkmenistan, an ICSID case, provides an example of a tribunal ordering a claimant to disclose both the identity of the funder and the terms of the funding arrangement.54 In doing so, the tribunal invoked its “inherent powers to make orders of the nature requested where necessary to preserve the rights of the parties and the integrity of the process.”55 The facts of this case are worth examining. In April 2014, Turkmenistan requested the tribunal to order the claimant to disclose whether it had engaged the services of a third-party funder as well

51   See S&T Oil Equipment & Machinery, Ltd. et al. v. Juridica Inv. Ltd. et al., 456 Fed. Appx. 481, 2012 U.S. App. LEXIS 297 (5th Cir., Jan. 5, 2012) (requiring disclosure of funding arrangement to resolve a dispute between S&T and Juridica regarding termination of the thirdparty funding in the ICSID case S&T Oil Equipment & Machinery Ltd. v. Romania, ICSID Case No ARB/07/13); Bernardo M. Cremades Jr., Third Party Litigation Funding: Investing in Arbitration, 8 T.D.M. 12–5 (Oct. 2011) (discussing these two S&T Oil cases); Nate Raymond, Litigation funding gone wrong; Spat between financer and financed hints at practice’s pitfalls, Am. Law. (Apr. 25, 2011) (discussing the U.S. Fifth Circuit case, S&T Oil v. Juridica). 52   See sources cited in supra note 51. 53   See EuroGas Inc. & Belmont Resources Inc. v. Slovak Republic, ICSID Case No ARB/14/14, Transcript of the First Session and Hearing on Provisional Measures, 145:1–4 (Mar. 17, 2015) (“We think that the Claimants should disclose the identity of the third-party funder, and that third-party funder will have the normal obligations of confidentiality.” (President of the Tribunal, Professor Pierre Mayer)). 54   See Muhammet Çap v. Turkmenistan, supra note 37. 55   Id., ¶ 6.

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as the terms of that arrangement.56 In Procedural Order No. 2, the tribunal refused the request but went on to list several reasons why a tribunal could justifiably order disclosure of third-party funding: It seems to the Tribunal that the following factors may be relevant to justify an order for disclosure, and also depending upon the circumstances of the case: a. b. c. d. e.

To avoid a conflict of interest for the arbitrator as a result of the third party funder; For transparency and to identify the true party to the case; For the Tribunal to fairly decide how costs should be allocated at the end of any arbitration; If there is an application for security for costs if requested; and To ensure that confidential information which may come out during the arbitral proceedings is not disclosed to parties with ulterior motives.57

One year later, Turkmenistan renewed its request for such disclosure to ensure that there were no conflicts of interests with the arbitrators or counsel in the case and to check whether the claimants were “still the actual owners of the claims in this arbitration.”58 In order to bolster its renewed request, Turkmenistan invoked reasons that echoed the newly enacted General Standard 7(a) and the Explanation to General Standard 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration, which took effect in October 2014.59 Turkmenistan also stated that it was considering applying for security for costs due to the presence of the third-party funder.60 In Procedural Order No. 3, the tribunal decided to grant Turkmenistan’s renewed request for the following reasons: First, the importance of ensuring the integrity of the proceedings and to determine whether any of the arbitrators are affected by the existence of 56   Id., ¶ 1. 57   Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Decision on Respondent’s Objection to Jurisdiction under Article VII(2) of the Turkey-Turkmenistan Bilateral Investment Treaty, ¶ 50 (Feb. 13, 2015) (quoting Procedural Order No. 2, ¶ 10 (June 23, 2014)). 58   Muhammet Çap v. Turkmenistan, supra note 37, ¶ 2. 59   Id. 60   Id.

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a third-party funder. In this respect, the Tribunal considers that transparency as to the existence of a third-party funder is important in cases like this. Second, although it has not yet done so, Respondent has indicated that it will be making an application for security for costs. It is unclear on what basis such application will be made, e.g. Claimants’ inability to pay Respondent’s costs and/or the existence of a third-party funder. There are two additional factors which the Tribunal considers support the conclusion it has reached. Claimants have not denied that there is a third-party funder for the claims in this arbitration. It would have been straight forward to do so, just as they denied having assigned any of their rights to another party. Furthermore, and this was not denied by Claimants, Respondent has alleged that the order for costs in favour of Respondent made by the Kılıç Tribunal has not been paid even though the claimant (Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi) has funded the annulment proceedings.61 While the tribunal granted Turkmenistan’s request here, it did not specify in its procedural order which of the terms of the funding arrangement were required to be disclosed and which could stay confidential.62 The case is still pending at the time of this writing, so it is unclear what impact this disclosure will have on the outcome of the dispute. This nevertheless creates uncertainty regarding whether such disclosure could unfairly advantage the party receiving the information with respect to arbitration tactics.63 Similarly, in the PCA case South American Silver v. Bolivia, the respondent “request[ed] the Tribunal to order the Claimant to ‘disclose the identity of the funder of this arbitration, as well as the terms of the funding agreement signed with him.’ ”64 Like in the Muhammet Çap case, it would appear that the parent company of the claimant had earlier voluntarily disclosed the existence of the third-party funding, but not the identity of the funder or the terms of the agreement.65 Like Turkmenistan, Bolivia argued that it was seeking this disclosure and security for costs due to the claimant’s economic situation

61   Id., ¶¶ 9–11 (referring to Kılıç İnşaat İthalat İhracat Sanayi v. Turkmenistan, supra note 38). 62   See Honlet, supra note 44, at 708–10. 63   See id. 64   South Am. Silver Ltd. v. Plurinational State of Bolivia, PCA Case No. 2013–15, Procedural Order No. 10, ¶ 13 (Jan. 11, 2016). 65   Id., ¶ 25.

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coupled with the existence of third-party funding.66 Bolivia also cited the 2014 IBA Guidelines, which state “that third-party funders should be equated with the funded party to verify the existence of conflict of interests, and that the funded party is obliged to disclose any relationship that exists between her (including third-party funders) and the arbitrators.”67 South American Silver (“SAS”), in its reply to Bolivia’s request, agreed to disclose the name of its funder but noted that “the terms of SAS’s funding agreement are irrelevant to the issues in dispute in this arbitration and that the terms of that agreement are confidential, commercially sensitive, and that SAS and the funder would incur prejudice if the Tribunal ordered SAS to disclose the terms of the funding agreement.”68 With respect to Bolivia’s application for security for costs, the tribunal adopted the standard articulated by the majority of the tribunal in RSM v. Saint Lucia and EuroGas v. Slovak Republic that the “the mere existence of a third-party funder is not an exceptional situation justifying security for costs.”69 In the end, the tribunal decided to order disclosure of the name of the funder “for purposes of transparency, and given the position of the Parties,” but determined that there was no basis to order disclosure of the terms of the funding arrangement.70 Finally, it is interesting to note one potential consequence of disclosing third-party funding that involved an allegation of arbitration bias based on an issue conflict.71 The claimant in RSM Production Corporation v. Saint Lucia challenged arbitrator Dr. Gavin Griffith due to controversial statements regarding third-party funding that he made in his Assenting Opinion.72 The claimant’s principal grounds for the challenge were as follows: 66   Id. 67   Id., ¶ 29. 68   South Am. Silver Ltd. v. Plurinational State of Bolivia, PCA Case No. 2013–15, Claimant’s Opposition to Bolivia’s Request for Cautio Judicatum Solvi and Disclosure of Information, ¶¶ 38, 40 (Dec. 14, 2015). 69   South Am. Silver v. Bolivia, supra note 64, ¶ 74 (citing EuroGas Inc. & Belmont Resources Inc. v. Slovak Republic, Procedural Order No. 3—Decision on Requests for Provisional Measures, ¶ 123 (June 23, 2015)). 70   Id., ¶¶ 79, 80, 84. 71  An issue conflict is “an allegation that an arbitrator is biased towards a particular view of certain issues or has already prejudged them.” See ASIL-ICCA, Report of the ASIL-ICCA Joint Task Force on Issue Conflicts in Investor-State Arbitration, Report No. 3, at 1 (Mar. 17, 2016), http://www.arbitration-icca.org/media/6/81372711507986/asil-icca_report_final_5_ april_final_for_ridderprint.pdf. 72   See RSM Prod. Corp. v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Claimant’s Proposal for the Disqualification of Gavan Griffith (Oct. 23, 2014).

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The description of third-party funders as “mercantile adventurers” and the association with “gambling” and the “gambler’s Nirvana: Heads I win and Tails I do not lose” are, in Claimant’s view, radical in tone and negative and prejudge the question whether a funded claimant will comply with a costs award. Additionally, Claimant derives from Dr. Griffith’s determinations that his alleged bias against the funders extends to Claimant as the funded party as well. Claimant contends that the language used by Dr. Griffith cannot be qualified as a neutral discussion of the issues or a mere rhetorical emphasis.73 The other two arbitrators, Professsor Dr. Siegfried H. Elsing (President) and Judge Edward W. Nottingham (Co-arbitrator), rejected the challenge and articulated the following reasoning: The expressions used by Dr. Griffith in his Assenting Reasons, such as “gambling,” “adventurers” and the reference to the “gambler’s Nirvana” are strong and figurative metaphors. However, in our view, these expressions primarily serve the purpose of clarifying and emphasizing the point Dr. Griffith purports to make, namely the paramount importance, in his opinion, of third-party funding of a party in connection with a request for security for costs. We do not regard it to be established that these terms reveal any underlying bias against third-party funders in general or Claimant in particular. The means of expressing a point of view or articulating an argument may vary from one arbitrator to another, and different arbitrators possess varied characteristics, including their habits of drafting decisions and the wording used. As long as such wording does not clearly reveal any preference for either party, it cannot serve as a ground for a challenge. As we require an objective standard to be met, Claimant needs to establish facts indicating Dr. Griffith’s lack of impartiality. However, in this case, the facts presented are that Dr. Griffith issued his Assenting Reasons with the contents as described by Claimant. These facts, however, are as such not sufficient to constitute a lack of impartiality. The underlying arguments, as presented by Dr. Griffith and the wording, in our view, do not cast reasonable doubt upon Dr. Griffith’s capacity to issue an independent and impartial judgment in the present arbitration.74

73   Id., ¶ 42 (citations omitted; emphasis in original). 74   Id., ¶¶ 84, 90.

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This fascinating case is unusual, however, since most arbitrators have not expressed strong views regarding third-party funding in their written awards or procedural orders.75 5

Not-for-Profit Funding

The foregoing cases have all involved traditional for-profit third-party funding. There is another nascent category of funders, however, which may be termed “not-for-profit funders”76 or “ideological funders.”77 These funders are primarily motivated to influence the merits outcome in the case, create a precedent, or change the law, rather than to make a profit, although such funders do sometimes make a profit as well. The most widely known example of such an arrangement is the Bloomberg Foundation’s financial support and the Campaign for Tobacco-Free Kids’ technical assistance to the government of Uruguay for its defense against the tobacco company Philip Morris International in the ICSID case Philip Morris International v. Uruguay.78 In this case, Philip Morris International challenged State regulations on the branding and warning labels of tobacco products.79 75  RSM applied for annulment of the merits award on November 21, 2016; the case is currently pending. See ICSID, Case Details: RSM Prod. Corp. v. Saint Lucia, ICSID Case No. ARB/12/10, https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo= ARB/12/10. 76   See, e.g., Eric De Brabandere & Julia Lepeltak, Third-Party Funding in International Investment Arbitration, 27 ICSID Rev. 379, 382 (2012). 77   See, e.g., Eugene Kontorovich, Opinion: Peter Thiel’s funding of Hulk Hogan-Gawker litigation should not raise concerns, Washington Post (May 26, 2016) (“Anyone who donates to the ACLU or a Legal Aid fund is basically underwriting third-party litigation. Most recently, private profit-motivated litigation finance has emerged as an industry in its own right, unburdened by any concern over the old common law rules…. By current standards, [such] funding should raise no eyebrows—unless one also wants to revisit public interest litigation, class actions and contingent fees…. But if the lawsuit is not frivolous, it is hard to see how the motivations of funders are relevant (or discernible). One would not say a civil rights organization could not accept donations from philanthropists angered by a personal experience with discrimination. All [this] has done is cut out the middleman.”). 78   Philip Morris Brands Sàrl et al. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7. 79   See Press Release, Campaign for Tobacco-Free Kids, Historic Win for Global Health: Uruguay Defeats Philip Morris Challenge to Its Strong Tobacco Control Laws, Statements by Michael R. Bloomberg and Matthew L. Myers (July 8, 2016), http://www.tobacco freekids.org/press_releases/post/2016_07_08_uruguay; Philip Morris v. Uruguay, supra note 78.

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Bloomberg did not expect any monetary reimbursement of its investment; instead, it sought to bring about a certain outcome in the case, namely, to uphold Uruguay’s laws regarding tobacco packaging aimed at reducing the prevalence of smoking. Taking this one step further, Bloomberg Philanthropies and the Bill and Melinda Gates Foundation have partnered together to create the Anti-Tobacco Trade Litigation Fund to help low- and middle-income countries fund their defenses against tobacco companies’ claims under trade and investment treaties.80 The Quasar de Valores case also provides an example of not-for-profit funding. In this case, the funder, Group Menatep Limited, was a former majority shareholder in the Russian oil company Yukos, and by funding the Quasar de Valores case, Menatep was seeking to create a favorable “precedent” in hopes that such a precedent would be applied in its future, much larger, shareholder dispute against Russia under the Energy Charter Treaty.81 This is yet another example of an emerging type of funding in which the funder is pursuing a certain outcome on the merits rather than purely seeking a profit. However, Menatep was certainly funding this case for monetary reasons, since it intended to make a profit in a future case using the precedent created in the Quasar de Valores case, so the term “not-for-profit funder” may not be entirely fitting in this particular case. “Not-for-profit” funding is still relatively rare and, like other forms of third party funding, shrouded in mystery. Nevertheless, the justification for ordering disclosure of “not-for-profit” funding is the same as the justification for disclosure of traditional for-profit funding, even though there may be some unique challenges that have yet to be fully uncovered and analyzed. Furthermore, many not-for-profit funders and the parties they fund are inclined to voluntarily, or even publicly, announce their involvement in the case, perhaps to sway public opinion in their favor or to attract additional funding sources for the funded party or for its cause. In addition, not-for-profit funding may be a viable option for respondents in international arbitration—particularly respondent States in investment arbitration—since a financial return on investment would not normally be required. With time, it may be easier to assess the

80   See Campaign for Tobacco-Free Kids, International: About Us, http://global .tobaccofreekids.org/en/about_us/trade_litigation_fund/; Sabrina Tavernise, New Global Fund to Help Countries Defend Smoking Laws, N.Y. Times (Mar. 18, 2015). 81   See Quasar de Valores SICAV S.A. et al. v. Russian Federation, SCC Case No. 24/2007, Award, ¶ 223 (July 20, 2012).

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impact of not-for-profit funding on international arbitration as more of these cases become public.82 6

The Effect of Third-Party Funding on Costs and Security for Costs

One area in which tribunals often explicitly address third-party funding is in awards regarding costs and security for costs. The power of arbitral tribunals to allocate costs is institutionalized in international investment arbitration and commercial arbitration rules as well as in statutes in several jurisdictions.83 Although third-party funders pay the arbitration costs and expenses of parties, tribunals have ruled that the mere participation of a third-party is not relevant to the allocation of costs at the end of the case. For example, the tribunal in Ioannis Kardassopoulos & Ron Fuchs v. Georgia stated in its award that, “[t]he Tribunal knows of no principle why any such third party financing arrangement should be taken into consideration in determining the amount of recovery by the Claimants of their costs.”84 The ICSID annulment committees in RSM v. Grenada85 and ATA v. Jordan86 also adopted this view. However, a tribunal may deny a winning claimant’s request for an adverse costs award if the funder does not have a contractual right to seek reimbursement of such costs from the claimant. For example, in Quasar de Valores v. Russia, the funder was a former majority shareholder in Yukos, rather than an independent third-party funding company, and there was no contract in place requiring the claimant to reimburse the shareholder. In essence, the funder paid the costs without the claimant agreeing to reimburse those costs. Thus, the tribunal denied the claimant’s request for costs in order to prevent a windfall payment to the claimant.87 If the tribunal had granted the costs request,

82   See, e.g., Brabandere & Lepeltak, supra note 76, at 379. 83  For a review of the costs provisions in all the major international arbitration rules, see ICC Commission Report, at 49–55. 84   See Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/ 05/18 and ARB/07/15, Award, ¶ 691 (Mar. 3, 2010). 85   See RSM Prod. Corp. v. Grenada, ICSID Case No. ARB/05/14 (Annulment Proceeding), Order of the Committee Discontinuing the Proceeding and Decision on Costs, ¶ 68 (Apr. 28, 2011). 86   See ATA Const., Indus. & Trading Co. v. Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2 (Annulment Proceeding), Order Taking Note of the Discontinuance of the Proceeding, ¶ 34 (July 11, 2011). 87   Quasar de Valores v. Russia, supra note 81, ¶¶ 220–5.

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then the claimant would have received “reimbursement” for costs it did not pay—hence, a windfall. This situation may not be the norm, however, as most funding agreements include provisions that require the claimant to reimburse the funder its costs, either from the merits award or from any costs recovered from the losing side or both.88 In such an event, it would not be a windfall for a winning claimant to recover from the losing side costs paid by a third-party funder.89 At least one major third-party funding jurisdiction—England and Wales—has adopted this general approach. The English Commercial Court upheld and enforced an arbitral award granting a winning claimant recovery of the third-party funder’s costs in an arbitration it had funded.90 The reach of this holding might be limited, however, due to the Court’s reasoning that the losing respondent intentionally created the claimant’s crippling financial situation, forcing the claimant to seek third-party funding for the arbitration.91 In the more common situation, in which the respondent’s actions do not necessarily “cause” the claimant to seek third-party funding, it is unknown whether the English Commercial Court would still uphold such a costs award. A recent limitation on England and Wales’ endorsement of recovery of fees, however, is that conditional fees and the premium for after-the-event insurance (which may be considered a form of third-party funding in some circumstances) are no longer recoverable for agreements ratified after 1 April 2013. The legislative purpose for this enactment was to control the skyrocketing costs of civil litigation in England and Wales.92 In addition, it is settled law in England and the United States that if a non-party funder is exercising “control” over the proceedings, the funded party, or the party’s attorney, then the court may issue a costs order directly against that non-party funder.93 While the courts

88  ICC Commission Report, at 17. 89   See, e.g., Supplier v. First distributor, Second distributor, ICC Case No. 7006, Final Award, 4 ICC Bull. 49 (1992). 90   See Essar Oilfields Serv. Ltd. v. Norscot Rig Mgmt. Pvt Ltd. [2016] EWHC 2361 (Comm), ¶¶ [68]–[72]. 91   Id. 92   See Legal Aid, Sentencing and Punishment of Offenders Act 2012, c. 10 (Engl.). 93  The rationale is based on the “real party in interest rule.” See, e.g., Excalibur Ventures LLC v. Texas Keystone Inc. et al. & Psari Holdings Ltd. et al. [2014] EWHC 3436 (Comm), ¶¶ [4], [161]; Arkin v. Borchard Lines Ltd. et al. [2005] EWCA Civ. 655, ¶ [36] (“[w]here … the nonparty not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs.”); Abu-Ghazaleh et al. v. Chaul et al., 36 So. 3d 691 (2009).

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do not clearly define what behavior constitutes “control,”94 it is a best practice for third-party funders to avoid even the appearance of controlling the cases they fund. Finally, it is important to note that third-party funding is not only used by impecunious parties. There are many corporate entities that use third-party funding as a form of corporate finance to raise money for the company, allocate risk, maintain liquidity, or smooth out the dispute resolution costs line item on the company’s balance sheet, especially if the company finds itself with a steady stream of disputes. Third-party funding can also take the form of a type of litigation expenses insurance, such as before-the-event insurance, for a financially sound individual or entity that may expect to be sued in the future. Thus, an order for security for costs is not appropriate simply because the opposing side has a third-party funder, unless there is additional evidence indicating that the funded party is impecunious. This principle was articulated by the tribunals in the RSM v. Saint Lucia, EuroGas v. Slovak Republic, and South American Silver v. Bolivia cases discussed earlier in this Chapter. 7

Third-Party Funding and Quantum Calculations

In deciding whether to fund a case, the third-party funder makes a determination regarding the value of the claim. This valuation could arguably provide an additional data point for the tribunal. In the authors’ view, however, a respondent or the tribunal should not draw inferences about damages in cases where the existence of third-party funding is known. Indeed, tribunals might consciously or unconsciously make assumptions about the merits of a case after learning of the third-party funder’s participation. For example, a tribunal might assume that it would be commercially unviable for a third-party funder to provide funding in cases with less than good chances of recovering damages. In reality, the decision of a funder to fund a given case is a complex process that involves consideration of a number of aspects, including obviously the chance of success and the potential amount of damages, but also the longevity of the claim, the likelihood of appeal or enforcement, and whether the matter concerns novel legal issues, among others. Conversely, where the tribunal or a respondent determines that a claimant has been declined third-party funding, a tribunal may be tempted to draw a 94  For a discussion of the difficulties of defining “control” in the context of third-party funding, see Anthony J. Sebok, What Do We Talk About When We Talk About Control?, 82 Fordham L. Rev. 2939 (2014).

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negative inference that the case is fundamentally flawed. In reality, there are any number of reasons why a third-party funder may decline a meritorious case. For example, the funder may not be able to justify the investment where the ratio of cost to the likely reward is not economically viable or where the respondent might represent too great of an enforcement risk. When seeking to establish potential terms on which to provide thirdparty funding, a funder has to be able to establish a rough estimate of the likely amount of damages that could be awarded. This preliminary calculation is generally completed without the benefit of quantum experts or additional counsel prior to entering into a final litigation funding agreement. As a rule of thumb, the initial calculation of prospective returns is as much an art as a science, where a combination of sunk costs, funding requirement, time to award, and the ease of enforcement all play a part. Generally speaking, the more an individual or company has invested in a project, supported by evidence of that investment, the better it will potentially do in terms of a damages award at the conclusion of a successful investment arbitration. Indeed, tribunals remain reluctant to award hundreds of millions of dollars to investors who only invested a fraction of that amount.95 Even though there will always be a significant degree of uncertainty surrounding the merits phase and quantum phase in any arbitration, third-party funders will seek to limit their exposure to risk by searching for cases that they consider to be “stable” and that hold up to their “stress testing” techniques. For a case to be “stable,” it needs, inter alia, to exhibit a combination of strong legal claims, regardless of whether they relate to expropriation, a breach of fair and equitable treatment provisions or otherwise, as well as substantial sunk costs. In general, the cases that perform the best are ones where the claimant has invested a significant amount of money in the host country and, to a large extent, that money remains invested in the country at the time of the dispute (i.e., the investor has not taken money off the table). Regardless of a case’s strength, however, where there is insufficient evidence of sunk costs, or the claim relies 95   See, e.g., Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 186 (May 29, 2003) (noting 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….”) (citation omitted); Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, ¶ 124 (Dec. 8, 2000), 41 I.L.M. 896 (ruling that “the Tribunal is disinclined to grant Wena’s request for lost profits and lost opportunities given the large disparity between the requested amount (GB£ 45.7 million) and Wena’s stated investment in the two hotels (US$8,819,466.93).”).

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too heavily on speculative returns, a third-party funder is unlikely to invest. That is because tribunals require the amount of investment expenditure to be supported by evidence, inter alia, as to their nature, date, and connection to the investment project.96 Concomitantly, most arbitration lawyers and third-party funders struggle to imagine a situation where large-scale damages are awarded in lost opportunity claims. As a result, third-party funders are generally skeptical of any claim with a disproportionately high damages amount. There remain very few actual bilateral investment treaty cases that result in awards in the billions of U.S. dollars that also avoid challenges and are capable of being readily enforced.97 As a result, the third-party funder’s estimate of damages may be different from the valuation of an investor’s quantum expert. First, a third-party funder’s opinion may reflect different considerations that weigh in the funder’s decision on whether to fund a given case, as discussed earlier. Second, in most valuation reports, an expert seeks to portray the best possible outcome for a claimant by including all factors that could plausibly support the claimed amount. There is simply no incentive for the claimant’s valuation expert to err on the conservative side because tribunals invariably assume that experts are always optimistic and only end up awarding a fraction of the amount claimed.98 A third-party funder, on the other hand, when assessing a claim, seeks to 96   See, e.g., Southern Pacific Prop. (Middle East) Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award, ¶ 200 (May 20, 1992); Biloune & Marine Drive Complex Ltd. v. Ghana Inv. Centre & Gov’t of Ghana, UNCITRAL Arbitration Proceeding, Award on Damages and Costs (June 30, 1990), 95 I.L.R. 211, 223–4. 97  According to the United Nations Conference on Trade and Development (“UNCTAD”), there have been a total of 85 cases since 1997 in which the claimants have claimed in excess of US$1 billion, of which only 6 have been awarded US$1 billion or more (excluding interest), including: Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Occidental Petroleum Corp. & Occidental Expl. & Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Hulley Enterprises Ltd. (Cyprus) v. Russian Federation, PCA Case No. AA 226, Veteran Petroleum Ltd. (Cyprus) v. Russian Federation, PCA Case No. AA 228, and Yukos Universal Ltd. (Isle of Man) v. Russian Federation, PCA Case No. AA 227. See UNCTAD, Investment Dispute Settlement Navigator (July 31, 2017), http://investmentpolicyhub.unctad.org/ISDS/FilterByAmounts. All six awards have been (or are in the process of being) challenged in annulment or set-aside proceedings and/or are subject to resistance in enforcement proceedings. See also Chapter 16, Christina L. Beharry, Post-award Challenges of Damages Assessments, at Section 2.5. 98   See, e.g., PricewaterhouseCoopers, 2015—International Arbitration damages research: Closing the gap between claimants and respondents 2 (2015), https://www.pwc.com/sg/en/ publications/assets/international-arbitation-damages-research-2015.pdf (finding that on average tribunals award only 37% of the amount claimed).

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arrive at what it considers to be the probable award amount or range, in order to establish whether a case is worth the investment. 8

Settlement

The involvement of a third-party funder does not in itself indicate that a case is more likely to settle rather than proceed to trial, or vice versa. Based on the authors’ experience, the likelihood of a third-party funder affecting settlement by the parties is small, as the funder normally would receive payment under the terms of a funding agreement whether damages are paid pursuant to an arbitral award or in the event of a settlement. This can be seen by considering where the case sits in terms of the offered settlement amount versus the current case prospects. There are three basic scenarios to consider, namely whether: (i) the case is on track and the third-party funder and claimant are likely to make a significant recovery; (ii) the case is strong on the merits/liability but the quantum prospects are diminished because damages now appear speculative; and (iii) the case is unlikely to win or generate any meaningful recovery to anyone because the harm now appears small. In any scenario where the settlement offer is in line with current case prospects (i.e., the estimated value of the award), the third-party funder is highly likely to encourage settlement, and if the claimant were to disagree, an independent assessor might be appointed under the funding agreement. It is likely that the independent assessor would agree with the third-party funder’s view that settlement would be the most commercially sound decision. This is vital for both the investor and for the third-party funder as it provides the investor with additional certainty that they will not be forced into any settlement without the benefit of an independent assessment. Under scenarios (i) and (iii) described above, wide disagreement between the claimant and funder is unlikely because it will be fairly obvious to all parties, including the claimant’s lawyers, whether the prospects of the claim remain good or whether they are likely to lose. An offer in scenario (i) will be accepted if large enough. In scenario (iii), a “drop-hands” offer99 would also

99  A “drop-hands” offer refers to an offer made, normally by a defendant to a claimant, to settle a claim on the basis that each party covers all of their own costs.

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likely be acceptable to both claimant and funder, rather than continuing to throw good money after bad. In scenario (ii), disagreement might seem more likely, because a typical funding agreement could see the funder receive most of the proceeds of an award even in the event of a small recovery. But this type of event is one that a funder generally avoids ex ante, by attempting to select only cases where any reasonable damages outcome will see the claimant and funder well-­ compensated under the terms of the funding arrangement. 9

Conclusion

Recent developments and changes in domestic regulations continue to bring third-party funding to the forefront of international arbitration, generally, and investment arbitration, in particular. Third-party funding has graduated from a new funding mechanism to a widespread financing tool used in international arbitration. Third-party funding of claimants in investment arbitration brings to light challenges inherent in the design of the investment arbitration system that will soon need to be addressed. For example, States are already beginning to include provisions in their investment treaties and free trade agreements requiring disclosure of third-party funding. In addition, not-for-profit or ideological funding will likely gain more prevalence in investment arbitration, particularly on the defense side given the public policy issues often involved in these cases. Finally, the modes of third-party funding and the types of entities offering it in international arbitration and investment arbitration are likely to continue to evolve and expand going forward.

Chapter 3

Reflective Loss and Its Limits under International Investment Law Mark A. Clodfelter and Joseph D. Klingler 1

Introduction

Under customary international law and most advanced domestic legal systems, shareholders generally do not have standing to bring claims for harms caused by treatment accorded to the company in which they own shares, whether or not they themselves suffer a loss of share value as a result. Notwithstanding the deep foundations of this rule, investment treaty tribunals have frequently permitted claimants to proceed with claims to recover for so-called “reflective loss” to share value based on the inclusion of the word “shares” within an investment treaty’s definition of an “investment.” In the view of some commentators, however, the protection of “shares” is also consistent with a more limited intent: to grant standing to shareholders to claim for direct infringements of the traditional rights attaching to a share, such as the right to vote or participate in shareholder meetings. Recently, the scope of the debate has expanded beyond these bounds, as shareholders in parent companies have begun to make claims for loss of share value on the basis of treatment accorded, not to the companies in which they own shares, but to subsidiaries of those companies—i.e., separate, downstream companies in which the claimants hold no protected shareholding. The implications of such efforts are serious, since, if successful, they could open a vast new genre of claims to prospective claimants. This Chapter will explore how directly a shareholding must be affected by State action in order for a shareholder to have standing to bring a claim.1 Section 2 will examine the approach taken by most tribunals toward claims by shareholders for so-called “ordinary” reflective loss—that is, loss to the value of a protected shareholding indirectly caused by treatment of the company in which the shares are held. Section 3 will discuss emerging attempts by shareholders to bring claims for even more indirect forms of reflective loss, namely, the alleged loss to the value of a protected shareholding in a parent company 1  Certain issues related to reflective loss fall outside the scope of the authors’ analysis. These include, for example, issues related to the burden of proof and the valuation of damages. © koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_004

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caused by treatment of a downstream subsidiary in which no protected shareholding interest is held. 2

Claims for “Ordinary” Reflective Loss

Reflective Loss under Municipal Law and the Customary International Law of Diplomatic Protection Reflective loss is generally defined as a decrease in the value of a shareholding caused by injury to the company in which the shares are held.2 It is thus characterized by the indirect manner in which the harm is caused, and may be contrasted with the indirect manner in which a shareholding interest may be held.3 It may also be contrasted with certain direct injuries, such as restrictions on a shareholder’s right to vote or participate in shareholder meetings.4 2.1

2  See David Gaukrodger, Investment Treaties as Corporate Law: Shareholder Claims and Issues of Consistency 32 (OECD, Working Paper on International Investment, No. 2013/03, Dec. 11, 2013), http://www.oecd.org/daf/inv/investment-policy/WP-2013_3.pdf (“Shareholders’ reflective loss is incurred as a result of injury to ‘their’ company, typically a loss in value of the shares.”); id. (“References to the ‘company’ refer to the company in which the shareholder owns shares (directly or indirectly).”) (emphasis added). Some formulations also include treatment of the assets of the company in which the shares are held. See, e.g., ST-AD GmbH (Germany) v. Republic of Bulgaria, PCA Case No. 2011–06, Award on Jurisdiction, ¶ 282 (July 18, 2013). 3  Thus, while reflective loss is a species of indirect loss, the shares which suffer such loss may be held directly or, if a treaty so provides, indirectly. See Gaukrodger, supra note 2, at 32 (“References to the ‘company’ refer to the company in which the shareholder owns shares (directly or indirectly).”) (emphasis added). Claimants have, unfortunately, at times confused the indirectness of the manner in which the shares are held with the indirectness of the treatment causing the harm. These concepts are, however, entirely distinct. See, e.g., Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, ¶ 136 (Aug. 3, 2004) (“The arguments on indirect investments revolve around two different meanings of indirect: indirect meaning that the shareholder of the local company controls it through another company, and indirect meaning that a shareholder may claim damage suffered by a company in which it holds shares. These two distinct situations appear intertwined in the parties’ arguments.”) (emphasis added). Reflective loss claims are to be distinguished from direct claims for indirectly held downstream shareholdings which may be covered by a particular treaty. 4  See Gaukrodger, supra note 2, at 3 (reflective loss is “generally contrasted with direct injury to shareholder rights, such as interference with shareholder voting rights.”). See also, e.g., Eda Cosar Demirkol, Admissibility of Claims for Reflective Loss Raised by the Shareholders in Local Companies in Investment Treaty Arbitration, 30(2) ICSID Rev. 391, 397 (2015): A wrongful measure of the host State may deprive the investor from controlling and managing its own shares and from taking advantage of other benefits ensured by its shares. This wrongful measure would violate the shareholder rights of the investor. An

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Claims for reflective loss are brought by shareholders on their own behalf. They are distinct from derivative claims brought by a shareholder on behalf of the company.5 Most advanced systems of domestic corporate law generally prohibit claims for reflective loss. This policy is: based on the view that limiting recovery to the company is both more efficient and fairer to all interested parties. It avoids multiple high-cost claims for the same injury; potentially inconsistent results; complex and expensive efforts to allocate the reflective losses; and risks of double recovery. With recovery by the company in a single case, all interested parties who suffer reflective loss will automatically benefit in accordance with their relative interests in any flow of assets to the company. The no reflective loss principle is based on the assumption that the company has the power to recover the loss (although it may not do so for a variety of reasons) and is better placed to do so.6 In its 1970 Judgment in Barcelona Traction, the International Court of Justice (“ICJ”) famously gave force to the principle against a right to recover for reflective loss in denying Belgium standing to exercise diplomatic protection of Belgian shareholders who owned shares in Barcelona Traction, a Canadian company, and who suffered a loss of share value as a result of allegedly unlawful treatment of that company and its subsidiaries by Spain.7 According to the

investment dispute arising from the violation of such rights involves a direct claim of the shareholder and, therefore, may be brought by the shareholder…. Although different legal systems may provide shareholders with non-identical rights having distinct contents, the main share­holder rights in most of the domestic legal orders are: right to receive dividends; right to attend general meetings and to vote; right to transfer shares; right to object to a variation of rights attached to a class of shares (if shares are divided into classes); right to proceed at law against the directors[; ] and right to participate in distribution of assets on liquidation. 5  It should be noted, however, that tribunals and commentators sometimes refer to reflective loss claims as derivative claims. 6  Gaukrodger, supra note 2, at 8. 7  Barcelona Traction, Light and Power Co., Ltd. (Belgium v. Spain), Judgment, 1970 I.C.J. Rep. 3, ¶ 38 (Feb. 7).

• • • • • •

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Court, which expressly took cognizance of and relied on “the relevant rules of municipal law”8 in reaching its conclusion: a wrong done to the company frequently causes prejudice to its shareholders. But the mere fact that damage is sustained by both company and shareholder does not imply that both are entitled to claim compensation…. Thus whenever a shareholder’s interests are harmed by an act done to the company, it is to the latter that he must look to institute appropriate action[.]… The situation is different if the act complained of is aimed at the direct rights of the shareholder as such…. Whenever one of his direct rights is infringed, the shareholder has an independent right of action…. But a distinction must be drawn between a direct infringement of the shareholder’s rights, and difficulties or financial losses to which he may be exposed as the result of the situation of the company.9 Yet, while recognizing that “the general rule of international law authorizes the national State of the company alone to make a claim”10—a rule which the Court reaffirmed in the Diallo Judgment 40 years later11—the Court made clear that the “protection of shareholders” could be had through “treaty stipulations or special agreements directly concluded between the private investor and the State in which the investment is placed.”12 The ICJ further observed that: States ever more frequently provide for such protection, in both bilateral and multilateral relations, either by means of special instruments or within the framework of wider economic arrangements…. The instruments in question contain provisions as to jurisdiction and procedure in case of disputes concerning the treatment of investing companies by the States in which they invest capital. Sometimes companies are themselves vested with a direct right to defend their interests against States through prescribed procedures.13

8    Id., ¶ 38; see also id., ¶¶ 41, 50. 9    Id., ¶¶ 44, 47. 10   Id., ¶ 88 (emphasis added). 11   Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Judgment, 2010 I.C.J. 639, ¶ 155 (Nov. 30) (“international law has repeatedly acknowledged the principle of domestic law that a company has a legal personality distinct from that of its shareholders.”). See also id., ¶¶ 155–7. 12   Barcelona Traction, supra note 7, ¶ 90. 13   Id.

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Multiple investment tribunals have relied on this language in concluding that particular bilateral investment treaties allow shareholder claims for reflective loss notwithstanding the prohibition on such claims under general international law.14 2.2 Reflective Loss under Investment Treaties The Decision on Jurisdiction in Suez v. Argentina is representative of the kinds of justifications tribunals have offered in finding the principle of reflective loss inapplicable under particular investment treaties. In that case, the tribunal noted that the France-Argentina and Spain-Argentina BITs expressly defined “shares” as investments, and held that the shareholder-claimants were accordingly “entitled to have recourse to ICSID arbitration to enforce their treaty rights.”15 The tribunal also found that the BITs’ protection of shareholdings meant not only that a shareholder could claim protection for direct harms—which would presumably have included “the right to any declared dividend, the right to attend and vote at general meetings, [and] the right to share in the residual assets”16—but that it could also claim for reflective loss to the shares caused by treatment of the company in which the shares were held. This was because, according to the tribunal: Neither the Argentina-France BIT, the Argentina-Spain BIT, nor the ICSID Convention limit the rights of shareholders to bring actions for direct, as opposed to derivative claims. This distinction, present in domestic corporate law of many countries, does not exist in any of the treaties applicable to this case.17 14   See, e.g., Teinver S.A. et al. v. Argentine Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction, ¶ 218 (Dec. 21, 2012) (“First, the Court’s decision was made in the absence of the specific framework of a BIT. The Court noted that such treaties, while not applicable to the Belgian shareholders, could give shareholders a ‘direct right to defend their interests against states.’ This indeed is the Claimants’ case since they brought their claim under a BIT that explicitly protects investments they have made in any kind of assets, including shares.”) (citing Barcelona Traction, supra note 7, ¶ 90). See also, e.g., RosInvestCo UK Ltd. v. Russian Federation, SCC Case No. V (079/2005), Final Award, ¶ 605 (Sept. 12, 2010); CMS Gas Transmission Co. v. Republic of Argentina, ICSID Case No. ARB/01/8, Decision on Jurisdiction, ¶ 43 (July 17, 2003). 15   Suez, Sociedad General de Aguas de Barcelona S.A. & InterAguas Servicios Integrales del Agua S.A. v. Argentine Republic, ICSID Case No. ARB/03/17, Decision on Jurisdiction, ¶ 49 (May 16, 2006). 16   Barcelona Traction, supra note 7, ¶ 47. 17   Suez v. Argentina, supra note 15, ¶ 49. See also Teinver v. Argentina, supra note 14, ¶¶ 211–2.

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In distinguishing the case from the ICJ’s Judgment in Barcelona Traction, the tribunal stated: Barcelona Traction is not controlling in the present case. That decision, which has been criticized by scholars over the years, concerned diplomatic protection of its nationals by a State, an issue that is in no way relevant to the current case. Unlike the present case, Barcelona Traction did not involve a bilateral treaty which specifically provides that shareholders are investors and as such are entitled to have recourse to international arbitration to protect their shares from host country actions that violate the treaty…. The applicable international law on investment between Argentina and France and Argentina and Spain found in the relevant BITs is much more specific and far reaching than was the case in 1970.18 There are, however, numerous problems with the tribunal’s reasoning in the paragraphs excerpted above. First, the fact that a bilateral treaty “specifically provides that shareholders are investors and as such are entitled to have recourse to international arbitration to protect their shares”19 simply does not answer the distinct questions of what rights adhere to share ownership and the types of harm for which shareholders have standing to claim. To borrow Zachary Douglas’ words: The misconception that meanders through the corpus of investment treaty precedents is that the recognition by investment treaties of a shareholding as a covered investment somehow disposes of the question relating to the rights of the shareholder that can form the object of an investment treaty claim. These are entirely distinct issues…. [T]he recognition of a shareholding as a covered investment in the investment treaty settles the question of the capacity of the investor to prosecute a claim against the host state. But this does not mean that the question of substance has been resolved in favour of the admissibility of any and every claim advanced by the shareholder.20 18   Suez v. Argentina, supra note 15, ¶ 50. See also, e.g., RosInvestCo v. Russia, supra note 14, ¶ 605; European Am. Inv. Bank AG (Austria) v. Slovak Republic, PCA Case No. 2010–17, Award on Jurisdiction, ¶ 331 (Oct. 22, 2012). 19   Suez v. Argentina, supra note 15, ¶ 50. 20   Z achary Douglas, The International Law of Investment Claims, ¶ 768 (2009) (some emphasis in original; some emphasis added). See also, e.g., id., ¶ 747; Demirkol, supra note 4, at 400, 403 (“It has been rightly argued that limitations on

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Second, and relatedly, it is not at all clear that a BIT or other instrument must expressly “limit” the rights of shareholders to bring actions for direct claims in order for their rights to be so limited. This is because the inclusion of “shares” in a BIT’s definition of “investment” is frequently the only clear textual basis for concluding that claims for reflective loss are permissible, and because the inclusion of that term is as consistent with an intent to grant shareholders limited standing to protect their shares from direct injuries—a standing which, notably, they do not hold under general international law, under which the State must assert diplomatic protection—as it is with an intent to grant them the much broader standing to protect those shares from reflective loss. The ICJ had no difficulty in rejecting a similar argument in Barcelona Traction: International law may not, in some fields, provide specific rules in particular cases. In the concrete situation, the company against which allegedly unlawful acts were directed is expressly vested with a right, whereas no such right is specifically provided for the shareholder in respect of those acts. Thus the position of the company rests on a positive rule of both municipal and international law. As to the shareholder, while he has certain rights expressly provided for him by municipal law … appeal can, in the circumstances of the present case, only be made to the silence of international law. Such silence scarcely admits of interpretation in favour of the shareholder.21 shareholder claims seeking redress for reflective loss have been overlooked within the framework of international investment law…. [I]t cannot be contended that each and every adverse effect on economic interests gives standing to investors on the ground of an alleged breach of the BIT standards when their claims lack a legal basis.”); Michael Waibel, Coordinating Adjudication Processes 23 (University of Cambridge, Legal Studies Research Papers Series, Paper No. 6/2014, Jan. 2014), https://papers.ssrn.com/sol3/papers. cfm?abstract_id=2386051 (“I argue that the limitations on derivative claims and reflective loss have thus far been improperly overlooked in [international investment law].”); Monique Sasson, Shareholders’ Rights, in SUBSTANTIVE LAW IN Investment Treaty Arbitration: The Unsettled Relationship between International Law and Municipal Law 97, 143–4 (2010) (“Corporations are entities distinct from their members. This principle applies on the municipal level and on the international plane unless a specific provision of municipal or international law allows for corporate personalities to be disregarded and the corporate veil to be pierced. Flowing from this is the principle that a wrong against the corporation does not amount to a wrong against its members, unless, again, there is a specific treaty provision providing such a claim. Based on these two principles, the company alone is entitled to act to redress an injury directed to itself, in the absence of a specific provision enabling other entities to act on its behalf.”). 21   Barcelona Traction, supra note 7, ¶ 52.

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Third, while the tribunal asserts that the “applicable international law on investment” in the BITs concerned was “much more … far reaching than was the case” at the time of Barcelona Traction, it does not justify its suggestion that the law was “much more … far reaching” in relation to the specific issue before it.22 Fourth, the fact that Barcelona Traction concerned diplomatic protection does not diminish its relevance outside that context, because the ICJ’s conclusion in relation to a State’s right to assert diplomatic protection was predicated on the substantive rights held by the shareholders themselves. That is, while the decision was on the issue of standing under the law of diplomatic protection, its conclusions were based upon an underlying lack of a substantive entitlement under international law: In the present case it is therefore essential to establish whether the losses allegedly suffered by Belgian shareholders in Barcelona Traction were the consequence of the violation of obligations of which they were the beneficiaries. In other words: has a right of Belgium been violated on account of its nationals’ having suffered infringement of their rights as shareholders in a company not of Belgian nationality?23 Fifth, while the tribunal asserts that the Barcelona Traction decision has been “criticized by scholars over the years,”24 it fails to explain the ways in which it has been criticized, and—understandably, given the timing—does not address the fact that Barcelona Traction’s central holding was upheld by the ICJ in its Case concerning Ahmadou Sadio Diallo four years after the tribunal’s decision.25 Sixth, the fact that the terms of a BIT are, as many tribunals have correctly noted, lex specialis26 does not in and of itself justify a departure from general international law. The question is, of course, how a BIT, interpreted in accordance with the Vienna Convention on the Law of Treaties, deals with the issue of reflective loss. The fact that a BIT is lex specialis makes clear that it could 22   Suez v. Argentina, supra note 15, ¶ 50. 23   Barcelona Traction, supra note 7, ¶ 35. See also id., ¶ 86 (“Hence the Belgian Government would be entitled to bring a claim if it could show that one of its rights had been infringed and that the acts complained of involved the breach of an international obligation arising out of a treaty or a general rule of law.”). 24   Suez v. Argentina, supra note 15, ¶ 50. 25   Diallo, supra note 11, ¶¶ 155–7. 26   See, e.g., El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Award, ¶¶ 209–10 (Oct. 31, 2011).

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depart from general international law, but has no bearing on whether it actually does. Contrary to the reasoning in the Suez v. Argentina case, there are, moreover, a number of considerations that weigh in favor of interpreting the word “shares” in a BIT’s definition of “investment” as an attempt to grant shareholders the right to directly protect their traditional rights as shareholders27—thereby dispensing with the need under general international law to rely on the States of their nationality to assert diplomatic protection—rather than as an attempt to grant shareholders the much more expansive right to assert claims for reflective loss. First, the Vienna Convention on the Law of Treaties expressly requires an interpreter to take “into account, together with the context…[a]ny relevant rules of international law applicable in the relations between the parties.”28 The rule against reflective loss may well be a “relevant” rule which accordingly must be “taken into account” when construing the import of the term “shares” in a BIT’s definition of investment. Second, the International Court of Justice has expressly held, albeit in a different context, that “an important principle of customary international law” should not “be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so.”29 It seems clear that the rule against reflective loss is an “important principle of customary international law,” and it is certainly questionable whether the mere inclusion of the word “shares” in a BIT’s definition makes “clear” an intention to dispense with that principle.30 This is particularly so, given that, as described above, the inclusion of that word is also consistent with a more limited intent to grant shareholders

27  These include, as noted above, “the right to any declared dividend, the right to attend and vote at general meetings, [and] the right to share in the residual assets….” Barcelona Traction, supra note 7, ¶ 47. 28  Vienna Convention on the Law of Treaties, art. 31(3)(c) (May 23, 1969), 1155 U.N.T.S. 331. 29   Elettronica Sicula S.p.A. (ELSI) (United States v. Italy), Judgment, 1989 I.C.J. Rep. 15, ¶ 50 (July 20). See also Loewen Group, Inc. & Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award, ¶ 160 (June 26, 2003). 30   Cf. Gaukrodger, supra note 2, at 8 (“Typically, the only reference to shares in a BIT is a clause that clarifies that shares are assets that qualify as an investment under the treaty definition of investment…. While treaty provisions in the typical BIT are reduced to a minimum, they have been interpreted in the case law as having an important impact on corporate law principles. The consequence is [that] … shareholders have generally been able to claim for reflective loss in ISDS whereas such shareholder claims are generally barred in national law.”) (emphasis added). See also, e.g., Demirkol, supra note 4, at 402–3.

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standing to protect themselves against infringements of their traditional rights as shareholders. Third, to these issues may be added questions of policy, to which the “case law and commentary has generally paid limited attention….”31 These include, for example, issues of “consistency, predictability, avoidance of double recovery, and judicial economy.”32 Why, then, have investment tribunals generally permitted shareholder claims for reflective loss33 despite heavy criticism from legal scholars?34 Some may have been of the view that the “wide meaning of investment” in the applicable BIT meant that “the provisions of the BIT protect indirect claims.”35 But the breadth of a definition of investment indicates which types of investments are covered; it does not necessarily bear upon the types of harm for which shareholders are meant to have standing to bring a claim. 31   See Gaukrodger, supra note 2, at 11. 32   Id., at 7. 33   See, e.g., RosInvestCo v. Russia, supra note 14, ¶ 608 (“modern investment treaty arbitration does not require that a shareholder can only claim protection in respect of measures that directly affect shares in their own right, but that the investor can also claim protection for the effect on its shares by measures of the host state taken against the company.”); Poštová Banka, A.S. & ISTROKAPITAL SE v. Hellenic Republic, ICSID Case No. ARB/13/8, Award, ¶ 245 (Apr. 9, 2015). For an example of a case in which an investment tribunal refused to permit a particular shareholder to claim for reflective loss, see Enkev Beheer B.V. v. Republic of Poland, PCA Case No. 2013–01, First Partial Award, ¶ 379 (Apr. 29, 2014) (“In conclusion, but most importantly of all, none of these complaints alleged by the Claimant impugn the Respondent’s treatment of the Claimant’s rights derived from its shares in Enkev Polska: all such complaints, as pleaded by the Claimant, are directed solely at the treatment of Enkev Polska itself and its Premises. That suffices to cause the Tribunal to dismiss the Claimant’s claims under Article 3 of the Treaty.”). 34   See Julien Chaisse & Lisa Zhuoyue Li, Shareholder Protection Reloaded: Redesigning the Matrix of Shareholder Claims for Reflective Loss, 52(1) Stan. J. Int’l L. 51, 53 (2016) (“The tribunals’ decisions are heavily criticized by legal scholars for lacking careful reasoning, for wrongfully interpreting the scope of the rights attached to shares, and mostly for disregarding as a whole the policy considerations which underlie the non-reflective loss principle.”). But see id., at 54 (arguing that “allowing recovery for reflective loss is a sound legal principle from a practical, legal, and policy perspective.”). 35   See Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on Jurisdiction, ¶ 73 (Dec. 8, 2003). See also Campbell McLachlan et al., International Investment Arbitration: Substantive Principles ¶ 6.77 (2nd ed. 2017) (“Given the wide definition of investment contained in most bilateral investment treaties, if an ‘investment’ can include shares in a company there is no conceptual reason to prevent an investor recovering for damage caused to those shares which has resulted in a diminution in their value.”).

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Other tribunals have sought to distinguish the Barcelona Traction case and its progeny. At least one tribunal has suggested—relying on the ICJ’s decisions in Barcelona Traction and Elettronica Sicula—that the customary international law on diplomatic protection may not actually prohibit claims on behalf of shareholders by the State of their nationality for reflective losses in cases where the shareholding is held in a company of the same nationality as the host State.36 But such tribunals either ignored, or were decided before, the ICJ’s decision in Diallo, which plainly applied the rule against reflective loss in such circumstances.37 In some instances, claimants have sought to rely on BIT provisions other than those indicating the protection of “shares.” For instance, it has been argued that a BIT’s preamble—or the object and purpose of promoting investment more generally—can have some bearing upon the issue. However, the weight of that argument is to be doubted, for the aim of promoting investment “can be achieved by different means and in varying degrees.”38 At bottom, many tribunals may simply believe that the admissibility of shareholder claims for reflective loss follows by implication from the inclusion of the word “shares” in a BIT’s definition of “investment,” the idea presumably 36   See, e.g., CMS v. Argentina, supra note 14, ¶¶ 43–4; see also AES Corp. v. Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, ¶ 86 (Apr. 26, 2005). 37   Diallo, supra note 11, ¶¶ 16, 155–7. Moreover, while “the ELSI decision of an ICJ Chamber has been interpreted as an improvement with regard to the protection of shareholder rights through proliferation of investment treaties, and, thus, some authors have considered this case to be evidence of the emergence of a general rule of customary international law, this decision does not in fact contradict with Barcelona Traction. Unlike the latter, the former concerned a direct right of shareholders—that is, the right to manage the liquidation of the company.” Demirkol, supra note 4, at 399 (citations omitted; emphasis added). 38   Vladimir Berschader & Moïse Berschader v. Russian Federation, SCC Case No. 080/2004, Award, ¶ 144 (Apr. 21, 2006). See also, e.g., European Am. Inv. Bank v. Slovak Republic, supra note 18, ¶ 326 (the “object and purpose of the BIT is not such that it requires provisions which confer protection upon investors to be given the broadest possible interpretation in order to further the goal of investment protection.”); Saluka Inv. B.V. v. Czech Republic, UNCITRAL Arbitration Proceeding, Partial Award, ¶ 300 (Mar. 17, 2006) (“[T]he protection of foreign investments is not the sole aim of the Treaty, but rather a necessary element alongside the overall aim of encouraging foreign investment and extending and intensifying the parties’ economic relations. That in turn calls for a balanced approach to the interpretation of the Treaty’s substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relations.”).

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being that there is simply no other reasonable explanation for a BIT’s express protection of shareholdings. According to the tribunal in Paushok v. Mongolia, for example, refusing to allow shareholder claims for reflective loss would render BITs “practically meaningless in many instances,” because: a large number of countries require foreign investors to incorporate a local company in order to engage into activities in sectors which are considered of strategic importance (mining, oil and gas, communications etc.). In such situations, a BIT would be rendered practically without effect if it were right to argue that any action taken by a State against such local companies or their assets would be [sic] not be subject to Treaty claims by a foreign investor because its investment is merely constituted of shares in that local company.39 It is, of course, possible that an investor’s only protected investment would be a shareholding. However, many investment treaties allow investors in locally incorporated companies to bring claims directly on the basis of investments owned through that locally-incorporated company, such as rights under investment contracts, by extending its protection to indirect investments.40 Other treaties allow controlling shareholders to claim on behalf of the company in which they own shares, including where the company has a different nationality from that of the shareholders.41 Refusing to grant investors standing 39   See Sergei Paushok et al. v. Gov’t of Mongolia, UNCITRAL Arbitration Proceeding, Award on Jurisdiction and Liability, ¶ 202 (Apr. 28, 2011). See also Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Decision on Jurisdiction, ¶ 244 (Dec. 19, 2012) (“Indeed, setting aside black letter domestic corporate law, what is the economic likelihood of success of a position requiring foreign investors to operate in the Host State’s territory through an investment vehicle structured under domestic corporate law, if this has the effect of taking the shareholders’ investment out of the BIT’s protection?”); ST-AD v. Bulgaria, supra note 2, ¶ 292. 40   See, e.g., Treaty between the United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment, art. I(1)(a) (Nov. 14, 1991) (“ ‘investment’ means every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts….”). 41   See, e.g., North American Free Trade Agreement, art. 1117(1) (1993). This may be compared with the ICSID Convention, where, if the parties agree, the local company can itself bring claims as a “national of another Contracting State.” See ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States, art. 25(2)(b) (2006).

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to claim for reflective losses would not necessarily deprive them of effective redress in such circumstances.42 Moreover, even though the inclusion of the word “shares” in a BIT’s definition of investment may not be independently sufficient to grant standing to shareholders to bring claims for reflective loss, such shareholders would still have standing to bring claims for violations of their traditional rights as shareholders under general international law—rights which, it should be noted, have been invoked in the past, and which are therefore undoubtedly worthy of protection. For example, one of the claims in Foremost v. Iran centered around an alleged breach of Pak Dairy’s obligation to pay declared dividends to all its shareholders. The Iran-U.S. Claims Tribunal concluded that “the withholding by Pak Dairy of the cash dividends declared in 1979 and 1980 and due to Foremost” amounted to a clear breach.43 The tribunal concluded that “the amount of these dividends represent[ed] the correct level of compensation payable by the Government” for the interference with Foremost’s shareholder rights.44 Thus, the fact that an interpretation based on traditional shareholder rights would give significantly reduced effect to the word “shares” is not, in and of itself, a sufficient basis to invoke the principle of effectiveness.45 42  It should, moreover, not be forgotten that the traditional restriction on reflective loss claims may be viewed as an equitable “corollary” of shareholders’ limited liability. See Barcelona Traction, supra note 7, ¶ 42 (“the shareholders’ rights in relation to the company and its assets remain limited, this being, moreover, a corollary of the limited nature of their liability.”). See also id., ¶ 99. 43   Foremost Tehran, Inc. et al. v. Gov’t of the Islamic Republic of Iran et al., Award, 10 Iran-U.S. Cl. Trib. Rep. 228 (Apr. 10, 1986). 44   See id. See also Horst Reineccius et al. v. Bank for Int’l Settlements, Partial Award, 23 R.I.A.A. 183, 188 (Perm. Ct. Arb. Nov. 22, 2002) (“the Board of Directors of the Bank proposed to restrict in the future the right to hold shares in the Bank to central banks and, to this end, to call an Extraordinary General Meeting on 8 January 2001 to amend the Statutes so as to exclude private shareholders against payment of compensation of CHF 16,000…. Three claimants who have disputed the level of compensation, one of whom has also disputed the lawfulness of the Bank’s recall of the privately held shares, have invoked the jurisdiction of the Arbitration Tribunal….”). 45   C EMEX Caracas Inv. B.V. & CEMEX Caracas II Inv. B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/08/15, Decision on Jurisdiction, ¶ 114 (Dec. 30, 2010) (“one must recall that this principle [of effet utile] does not require that a maximum effect be given to a text. It only excludes interpretations which would render the text meaningless, when a meaningful interpretation is possible. Thus, in a number of cases, the International Court of Justice, when interpreting agreements or treaties, has given a very limited effect to the text it had to construe.”) (emphasis added). See also Daimler Fin. Serv. AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, ¶ 164 (Aug. 22, 2012) (“[i]t is for States to decide

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Finally, it is possible to take an intermediate position on the admissibility of claims for reflective loss. Zachary Douglas, for example, asserts that it “cannot be right that any shareholder may bring any type of claim in respect of any prejudice caused to the company by the host state resulting in any diminution of the value of the shareholding.”46 At the same time, however, he concludes that shareholder claims for reflective loss are admissible—if certain conditions are met—where the claimant: can establish a prima facie case that: (i) the assets of the company have been expropriated by the host contracting state party so that the shareholding has been rendered worthless; or (ii) the company is without or has been deprived of a remedy to redress the injury it has suffered; or (iii) the company is without or has been deprived of the capacity to sue either under the lex societatis or de facto; or (iv) the company has been subjected to a denial of justice in the pursuit of a remedy in the system for the administration of justice of the host contracting state party.47 The last three of these exceptional situations arguably reflect parallel principles of municipal law that may already be recognized in international law.48 The first refers to the special case that may be presented in the context of expropriation, which the Barcelona Traction Court considered might actually be a category of direct treatment of the shareholding. However, the Court refrained from addressing the issue because Belgium had not framed its case as one of direct treatment.49 Whatever the appropriate outcome under a particular treaty may be, the fact remains that tribunals have frequently failed to conduct sufficiently rigorous analyses of the issue, often instead relying on questionable premises or how best to protect and promote investment,” and “[t]he texts of the treaties they conclude are the definitive guide as to how they have chosen to do so.”). 46   D ouglas, supra note 20, ¶ 747 (emphasis added). 47   Id., at 397. See also Demirkol, supra note 4, at 15–20. 48   Barcelona Traction, supra note 7, ¶ 64 (“The Court will now consider whether there might not be, in the present case, other special circumstances for which the general rule might not take effect. In this connection two particular situations must be studied: the case of the company having ceased to exist and the case of the company’s national State lacking capacity to take action on its behalf.”). 49   See id., ¶¶ 48–9 (suggesting that a complete deprivation of the economic value of a shareholding could be framed as a direct claim by a shareholder, but noting that Belgium had not so framed its case).

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reasoning,50 or ignoring pertinent principles of interpretation which arguably call their conclusions into question.51 Indeed, one may wonder whether the relative consistency of the case law on this point might be, to some extent, a result of a failure of respondent States to adequately present their objections52—perhaps 50   See, e.g., Suez v. Argentina, supra note 15, ¶ 49 (suggesting that the legal instruments under interpretation allowed shareholder claims for reflective loss because they protected “shares” and did not expressly “limit” the rights of shareholders to bring such claims). See also, e.g., El Paso v. Argentina, supra note 26, ¶ 202 (“ ‘Investment’ covers almost any kind of economic input. It expressly includes ‘shares of stock’ in companies, notably in entities which are incorporated under the laws of the receiving State. There [are no]… restrictions regarding… the character of the claims (taking of the shares, right to a dividend, right to participate in stockholders’ meetings, claims for losses in the value of shares.”) (emphasis added); Urbaser v. Argentina, supra note 39, ¶ 248. According to two commentators, “[a] number of tribunals have” also “not explicitly discussed the nature of shareholders’ rights, but have assumed that the broad meaning of ‘investment’ is so encompassing that it would, without difficulty, allow a shareholder to claim in its own right damage suffered by investing in an enterprise. In doing so, these tribunals have implicitly validated the hypothesis of reflective losses under investment treaties.” Chaisse & Li, supra note 34, at 63. But as noted above, the breadth of a BIT’s definition of “investment” bears upon the types of investments which receive protection. It does not necessarily answer the distinct question of the types of harm to those investments for which claims may be brought. 51   See, e.g., Vienna Convention, supra note 28, art. 31(3) (requiring the interpreter of a treaty to take “into account, together with the context…[a]ny relevant rules of international law applicable in the relations between the parties.”); ELSI, supra note 29, ¶ 50 (“[A]n important principle of customary international law should [not] be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so.”). 52   See, e.g., El Paso v. Argentina, supra note 26, ¶ 203 (“The Respondent asserts that, according to the text of the BIT, the Parties intended to transfer to the BIT, lock, stock and barrel, the regime practised in the area of diplomatic protection and that the only change brought by the BITs was that the individual investors were now being given direct access to an international dispute settlement mechanism. This ‘intention’ is not, however, attested to by anything and the respondent State has not even attempted to prove it.”) (emphasis added); Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, ¶¶ 35–6 (Mar. 28, 2011) (“The Separate Opinion concludes that all of Claimant’s claims should have been dismissed in limine, because the Tribunal lacks jurisdiction ratione materiae to decide a shareholder’s derivative suit, and that the First Decision and the Award exceeded the Tribunal’s powers. Dr. Voss’ point was conceived by him alone; it was never pleaded by Respondent.”) (emphasis added). On the other hand, the fact that respondent States have frequently objected to claims for reflective loss—including in arguably less self-interested third-party submissions—might also suggest that the drafters of the relevant investment treaties never intended to allow such claims. See, e.g., GAMI v. Gov’t of the United Mexican States, NAFTA Arbitration Proceeding, Final Award, ¶ 29

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particularly in the influential early case law.53 Concomitantly, there may be a certain element of path dependency. That is, a tendency might exist among more recent tribunals to cite as persuasive the now-significant volume of jurisprudence allowing claims for reflective loss,54 which perhaps also leads to the assumption that there could be no truly legitimate basis for refusing to allow such claims.55 It is, moreover, not unreasonable to assume that arbitrators would be reluctant to take a controversial position almost uniformly (Nov. 15, 2004) (“The United States in its written observation before this Tribunal accepts that Article 1116 entitles minority shareholders to bring a claim for loss or damage on their own behalf. It argues however that Article 1116 does not reflect ‘an intent to derogate from the rule that shareholders may assert claims only for injuries to their interests and not for injuries to the corporation.’ It refers to Barcelona Traction as authority for the rule. It cites a US Statement of Administrative Action from 1993 as evidence that ‘at least one of the Parties’ to NAFTA understood Article 1116 to cover only direct injury to an investor while Article 1117 envisages injury caused to a local corporation owned or controlled by an investor.”) (emphasis in original). 53   See, e.g., McLachlan et al., supra note 35, ¶ 6.75 (“The issue arose in the first BIT arbitration, Asian Agricultural Products Lt[d.] v Republic of Sri Lanka. In this claim, brought under the UK-Sri Lanka BIT, a Hong Kong corporation held 48 per cent of the shares in a Sri Lankan company that had suffered the loss. It is not clear from the award whether Sri Lanka sought to argue that the claimant was precluded from seeking recovery in circumstances where the loss had been suffered by a subsidiary. However, the Tribunal had no difficulties with allowing the claimant to recover.”) (emphasis added). See also id., ¶ 6.77 (“Neither the AAPL nor the AMT tribunals made reference to Barcelona Traction. It is of course possible that the point was not raised before them….”). 54   See, e.g., Poštová Banka v. Hellenic Republic, supra note 33, ¶ 245 (“As clearly and consistently established by the above referenced decisions—all of which were invoked or discussed by Claimants in their Counter-Memorial on Jurisdiction—a shareholder of a company incorporated in the host State may assert claims based on measures taken against such company’s assets that impair the value of the claimant’s shares.”). See also, e.g., Stanimir A. Alexandrov, “The Baby Boom” of Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals: Shareholders as “Investors” under Investment Treaties, J. World Inv. & Trade 387, 410 (2005) (“Recent ICSID decisions on jurisdictional matters are contributing to the crystallization of the law governing investor-State arbitration. ICSID tribunals have confirmed basic and relatively uncontroversial principles that were sketched out in early arbitrations: that a shareholder has standing independent of the corporation whose equity is held; that the shareholder may claim for measures that affect the company and its assets, not just the shares and shareholder rights as such….”). 55   See, e.g., Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award, ¶ 140 (June 21, 2011) (asserting, after an extremely brief analysis and without addressing all of the Respondent’s arguments, that there is “a substantial case-law showing that claims such

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rejected by previous tribunals (sometimes only implicitly), even if the rationales of those tribunals were frequently not well developed. But even if one were to conclude, on the basis of all the relevant evidence and after careful consideration of the relevant principles of interpretation, that a BIT’s protection of “shares” was indeed intended to allow shareholder claims for reflective loss caused by treatment of the company in which the shares are held, this still would not answer an entirely different question: whether the protection of “shares” also means that a shareholder may claim for reflective loss to its protected shares in one company caused by treatment of an entirely different company, one in which no protected shareholding is held. The two scenarios shown in Figure 3.1 are illustrative of the two types of claims in question:

Figure 3.1 Ordinary and extended reflective loss.

as those presented by Impregilo enjoy protection under the applicable BITs,” and that “[t]he Arbitral Tribunal finds no reason to depart from that case-law.”).

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While the first scenario is far more common, the second is by no means academic. On the contrary, it has already arisen in at least two cases in the investorState context, and there is every reason to believe that it, or variations of it, could arise again in the future. 3

Claims for More Extended Forms of Reflective Loss

As noted above, reflective loss has traditionally been conceived of, if not expressly defined as, loss to a shareholding caused by treatment of the company in which the shares are actually held, whether or not those shares are held directly by the investor in that company or indirectly through a holding company.56 Recently, however, shareholders have begun to test the limits of this traditional understanding, arguing that there is no conceptual reason not to allow claims for more attenuated forms of reflective loss as well. The language used by the tribunal in El Paso v. Argentina provides a helpful example of how loose language in arbitral awards can be exploited. In that case, the tribunal allowed a claim for “ordinary” reflective loss because the relevant BIT covered “shares” and because, according to the tribunal, there were no “restrictions regarding … the character of the claims,” such as “claims for losses in the value of shares.”57 The authors have already raised questions about this line of reasoning as an interpretive matter.58 Yet assuming it is true that the protection of “shares” was meant to grant shareholders standing to claim for ordinary reflective loss absent an express “restriction regarding … the character of the claims,” does this also mean that drafters intended to grant shareholders standing to claim for more extended forms of reflective losses? Specifically, in the absence of an express limitation on the nature of shareholder claims, can a shareholder seek damages in respect of harm allegedly caused to protected shares in one company based on treatment of an entirely different company—such as a downstream subsidiary—in which no protected shareholding is held?

56   See, e.g., Gaukrodger, supra note 2, at 3 (“Shareholders’ reflective loss is incurred as a result of injury to ‘their’ company, typically a loss in value of the shares.”); id., at 32 (“References to the ‘company’ refer to the company in which the shareholder owns shares (directly or indirectly).”) (emphasis added). 57   El Paso v. Argentina, supra note 26, ¶ 202 (emphasis added). See also Suez v. Argentina, supra note 15, ¶ 49; Urbaser v. Argentina, supra note 39, ¶ 248. 58   See supra Section 2.2.

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Claims for reflective loss are not generally allowed under domestic legal systems precisely because the corporate entity has separate legal personality and is itself expected to assert any necessary claims on its own behalf.59 Claims for so-called “ordinary” reflective loss, while often accepted in the investment jurisprudence to date, are unique and controversial precisely because they allow shareholders to assert claims predicated on treatment of the company despite that separate personality. But this interpretation, which allows shareholders to circumvent one legal personality, cannot be automatically equated with the far less intuitive proposition that the protection of “shares” was also meant to allow shareholders to circumvent two or more legal personalities. This is particularly so where the investor holds no protected shareholding in the company directly subjected to the challenged State treatment. Claims for more attenuated forms of reflective loss—that is, claims predicated on shareholdings in companies other than the one directly subjected to treatment—are less likely to arise in circumstances in which the investor also holds a protected shareholding in the company directly subjected to treatment. This is because, in such circumstances, the investor could presumably simply predicate its claim on its protected shareholding in the company directly subjected to treatment, and would likely have no need to rely on any other upstream shareholding. Thus, claims for reflective loss once removed are most likely to arise in situations in which the investor does not have a protected shareholding in the company directly subjected to the State treatment in question, but does have a protected shareholding in a company with a close relationship to that company. Arguably the most important (yet frequently only implicit) rationale behind allowing claims for reflective loss—the idea that refusing to do so would deprive the protection of “shares” of significant effect—simply does not apply with respect to forms of reflective loss extending beyond one legal personality. This is because, even if these more extended claims were deemed inadmissible, so long as “ordinary” reflective loss were accepted, it would still be open to shareholders to claim not only for losses stemming from direct injuries to their protected shareholdings,60 but also for reflective losses to those shareholdings

59   See, e.g., Gaukrodger, supra note 2, at 8 (“The no reflective loss principle is based on the assumption that the company has the power to recover the loss (although it may not do so for a variety of reasons) and is better placed to do so.”). 60   See, e.g., Foremost v. Iran, supra note 43; Reineccius v. Bank for Int’l Settlements, supra note 44, at 188.

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caused by treatment of the company in which the shares are actually held.61 In other words, limiting claims to “ordinary” reflective loss would still indisputably extend very substantial protection to shareholders, thereby rendering appeals to the principle of effectiveness even less appropriate with respect to such extended claims. Nevertheless, this has not stopped claimants from beginning to assert more extended claims. In HICEE v. Slovak Republic, the Dutch-incorporated claimant, HICEE, held an interest in a Slovak company, Dôvera Holding,62 through which it also held interests in two of Dôvera Holding’s subsidiaries, the Slovak companies Dôvera and Apollo.63 According to HICEE, a Slovak law prohibiting Dôvera and Apollo from distributing profits and placing a cap on their administrative expenses destroyed the value of HICEE’s investments in those companies, thereby violating a number of provisions of the Netherlands-Slovakia BIT,64 which protected “shares” invested “either directly or through an investor of a third State.”65 The Slovak Republic objected to this claim, arguing that “the ordinary meaning of the terms ‘either directly or through an investor of a third State’ limits the scope of the Agreement’s protection to investments made ‘directly’ by an investor covered by the Agreement,” or to investments “channeled through an intermediary entity in a third state.”66 In making this argument, it relied on Dutch Explanatory Notes submitted by the Netherlands as a part of its domestic ratification process.67 Those Notes provided, in relevant part, that: The Agreement covers direct investments and investments made through a company in a third country. Normally, investment protection agreements also cover investments in the host country made by a Dutch company’s subsidiary which is already established in the host country (‘subsidiary’-‘sub-subsidiary’ structure). Czechoslovakia wishes to exclude the ‘sub-subsidiary’ from the scope of this Agreement, because this is in fact a company created by a Czechoslovakian legal entity, and 61   See, e.g., RosInvestCo v. Russia, supra note 14, ¶ 608 (“modern investment treaty arbitration does not require that a shareholder can only claim protection in respect of measures that directly affect shares in their own right, but that the investor can also claim protection for the effect on its shares by measures of the host state taken against the company.”). 62   H ICEE B.V. v. Slovak Republic, PCA Case No. 2009–11, Partial Award, ¶¶ 1, 3 (May 23, 2011). 63   Id., ¶ 3. 64   Id., ¶¶ 3, 100. 65   Id., ¶ 34. 66   Id., ¶¶ 48–9. 67   Id., ¶ 37.

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Czechoslovakia does not want to grant, in particular, transfer rights to such a company. This restriction can be dealt with by incorporating a new company directly from the Netherlands. As the restriction is therefore not of great practical importance, the Dutch delegation has consented to it.68 After taking these Explanatory Notes into account, the tribunal found that: [T]he terms of the Agreement are so to be understood and applied that they do not protect investments made by a Slovak corporate entity (in this case Dôvera Holding) in other Slovak corporate entities (namely Dôvera and Apollo), from which it follows that HICEE’s interests in the businesses of Dôvera and Apollo cannot be considered to be ‘investments of investors of the other Contracting Party’ entitled to the protection conferred by the Agreement….69 HICEE’s indirect shareholdings in Dôvera and Apollo—the two downstream subsidiaries that had been directly subjected to the allegedly unlawful Slovak law—were, in other words, excluded from the scope of the BIT’s protection. A different question nonetheless remained: whether HICEE could claim not on the basis of its unprotected, further downstream interests in Dôvera and Apollo, but rather based on its protected intermediate investment in Dôvera Holding, even though its losses had been “sustained via its holdings in Dôvera and Apollo.”70 In ruling that it could not, the tribunal reasoned as follows: The argument [of the Respondent], as the Tribunal understands it, was simply that, if the treaty negotiators specifically wished to exclude a subsidiary/sub-subsidiary structure (as the Dutch Explanatory Notes say), then it strains the reasonable bounds of interpretation to conclude that they nevertheless intended to allow this wolf to come within the scope of the Agreement so long as it was in sheep’s clothing. The Tribunal reaches the same conclusion as the Respondent, but by a different route. As the Tribunal has interpreted the Agreement, it plainly admits a company like Dôvera Holding as an investment in its own right. The consequence is that a claim under the Agreement would lie (in appropriate circumstances) in respect of losses sustained by Dôvera 68   Id., ¶ 38. 69   Id., ¶ 145. 70   Id., ¶ 146 (emphasis added).

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Holding. But it is equally plain that the losses would have to have been sustained as a result of treatment of Dôvera Holding by the Respondent State or its agencies that is found to be in breach of the guarantees which the Agreement establishes.71 According to the tribunal, Once the subsidiary/sub-subsidiary structure is found to lie outside the Agreement’s field of protection, it becomes obvious that treatment meted out to Dôvera Holding’s own investments through one of its local subsidiaries does not meet this requirement, whether or not treatment of that kind might otherwise fall foul of the substantive standards under the Agreement. The health insurance business of the sub-subsidiaries, Dôvera and Apollo, is covered by national law, and not by the terms of the Agreement. It is not enough for the Claimant to say that HICEE suffered a loss via the effect of national law on that business, unless the loss followed in some direct sense from a treaty breach. When the Claimant says that ‘investment treaty jurisprudence’ gives a shareholder standing to pursue claims for damage to the assets of a company in which it holds shares, that is not a proposition that can be upheld by the Tribunal in so sweeping a form, given the default position in international law that the corporate form is recognized as legally distinct from the shareholders, and confers on the corporate entity the capacity to assert claims for damage suffered to it or its property. The true position, as the Tribunal understands it, is that the admissibility of shareholder claims depends upon the provisions of the investment protection treaty in question, and that investment protection treaties very frequently make provision to allow for shareholder claims, either explicitly or by necessary implication. The position, in other words, is controlled by the treaty, and the Tribunal can see no justification for calling into play a supposed proposition of general law in order to change or override what the treaty itself provides.72 The tribunal accordingly rejected HICEE’s claims predicated on its admittedly protected interest in Dôvera Holding as well.73 71   Id., ¶¶ 146–7. 72   Id., ¶ 147 (emphasis added). 73   Id., ¶ 150. See also ST-AD v. Bulgaria, supra note 2, ¶ 284 (“In conclusion, the Tribunal considers that the Claimant made an investment when it acquired its shares of LIDI-R, and that the Tribunal has jurisdiction only to decide whether damages resulted for the

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HICEE is not unique insofar as it raises questions about whether a claimant may claim reflective losses to its shareholding in an upstream company based on treatment of a company further downstream, its shareholding in which is unprotected under the BIT. On the contrary, the authors are aware of at least one non-public decision in which a similar issue has arisen. The outcome of such cases, particularly if made public, is important in settling this issue. If HICEE is ultimately followed, a consensus on the unavailability of certain extended reflective loss claims could begin to form. If, on the other hand, HICEE is not followed, the implications could be sweeping, and would not necessarily only concern circumstances involving a protected interest in an upstream company and an unprotected interest in its downstream subsidiary. If, for example, it is permissible to claim for reflective losses to an upstream interest on the basis of treatment of a downstream subsidiary in which no protected shareholding is held, then there is no obvious basis for denying shareholders standing to claim on the basis of treatment of entirely unrelated business partners, so long as the impact of that treatment on the protected shares is equally foreseeable and proven. Indeed, it is not far-fetched to imagine a situation in which a foreign investor holds a shareholding in a company whose entire business is predicated on its relationship with another company in which the investor holds no interest of any kind. If, as illustrated in Figure 3.2, that business partner (“Company B”) is destroyed through State action, thereby indirectly—yet entirely foreseeably and demonstrably—destroying the value of the foreign investor’s shareholding in the other company (“Company A”), would the shareholder of Company A have the right to bring a claim?

Figure 3.2 Reflective loss through treatment of a business partner.

Claimant from action attributable to the Bulgarian authorities—over which the Tribunal has jurisdiction—in relation to property belonging to LIDI-R, the company in which it owns shares, which affected the value of its shares. Of course, the Tribunal has no jurisdiction to deal, in whatever manner, with property which does not belong to LIDI-R.”) (emphasis added).

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It is submitted that such an extraordinary right—which, it should be noted, could open the door to an entirely new, and unanticipated, genre of claims— should not be inferred from the mere inclusion of the word “shares” in a BIT’s definition of “investment.” And yet there is no obvious principled legal basis for categorically rejecting such claims while simultaneously allowing claims on the basis of a parent-subsidiary relationship in which the investor holds a protected interest in the parent but not the subsidiary. In both scenarios, the direct treatment is of a company in which the investor holds no protected interest. It is difficult to justify attributing legal significance to a parent-subsidiary relationship—but not to a close business relationship in which the effects of treatment of one company on its business partner are equally foreseeable—in such circumstances. 4

Conclusion

This Chapter has explored the right of shareholders to bring claims for reflective loss under investment treaties protecting “shares.” In so doing, it has distinguished between traditional or “ordinary” claims for reflective loss, in which the claim is predicated on a shareholding in the company directly subjected to treatment, and emerging claims for more attenuated forms of reflective loss. Such emerging claims concern losses to shareholdings in one company indirectly resulting from treatment of an entirely different company in which no protected shareholding is held. Regardless of the appropriateness of claims for reflective loss under any particular investment treaty, this Chapter argues that tribunals have failed to conduct sufficiently rigorous analyses of the issue, relying on questionable reasoning and avoiding difficult interpretive issues which arguably undercut their conclusions. As investors begin to make claims for more extended types of reflective loss, the need for a more rigorous analysis of the issues will become even more acute.

Part 2 Legal Considerations

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Chapter 4

Causation and Injury in Investor-State Arbitration Patrick W. Pearsall and J. Benton Heath The concept of causation in international dispute resolution poses tricky theoretical and practical problems. As a theoretical matter, international tribunals are no better equipped than domestic courts to address central philosophical problems that have long attended the determination of whether a causal link exists between the legal wrong alleged and the injury sustained.1 Two centuries later, international investment arbitration tribunals are in many ways at a loss to do better than Hume, who noted that causation “belongs entirely to the soul.”2 The practical problems of arguing causation in investment disputes can be equally vexing. For the claimant, failing to establish an injury caused by the alleged breach of an investment treaty can lead to a finding of liability but no damage.3 Likewise, for the respondent, causation is key to enforcing what it perceives to be the limits on investment treaty obligations, ensuring that * The opinions expressed in this Chapter are the authors’ own and do not necessarily reflect those of the U.S. Government, Jenner & Block LLP, or its clients. 1  For a helpful discussion of the philosophical problems of causation, and the ways in which they intersect with and diverge from the problems of legal theory and practice, see H.L.A. Hart & Tony Honoré, Causation in the Law 9–61 (2nd ed. 1985). 2  D avid Hume, A Treatise of Human Nature 216 (Penguin Classics, 1985) (1739–1740). Hume’s skepticism, which dispensed with the notion that causation inheres in objects or events, has made its way into international legal discourse. See Eduardo Valencia-Ospina (Special Rapporteur), Second Report on the protection of persons in the event of disasters, n. 59, U.N. Doc. A/CN.4/615 (May 7, 2009); René Urueña, Risk and Randomness in International Legal Argumentation, 21(4) Leiden J. Int’l L. 787, 795–800 (2008) (surveying problems of causation identified by Hume, Mill, and Kelsen). 3  See, e.g., Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (Dec. 8, 2016); Victor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2 (Resubmission Proceeding), Award (Sept. 13, 2016); MNSS BV & Recupero Credito Acciaio N.V. v. Montenegro, ICSID Case No. ARB(AF)/12/8, Award (May 4, 2016); Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award (May 6, 2013); Luigiterzo Bosca v. Republic of Lithuania, PCA Case No. 2011–05, Award (May 17, 2013); Mohammad Ammar Al-Bahloul v. Republic of Tajikistan, SCC Case No. V (064/2008), Final Award (June 8, 2010); Nordzucker A.G. v. Republic of Poland, UNCITRAL Arbitration Proceeding, Third Partial and Final Award (Nov. 23, 2009).

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States are not held liable for the attenuated economic ripple effects of a generally applicable regulation, or for the independent actions of the claimant or third parties.4 Despite the high stakes associated with issues of causation, investment tribunals and litigants often treat the question in a cursory manner, and have only recently begun to give the issue more focused attention.5 The structure of argument in international investment cases risks perpetuating confusion, as the division of investment pleadings between “merits” and “quantum” phases does not explicitly leave a place for the causation inquiry.6 And leading works on damages in international arbitration, while acknowledging the importance of causation, seldom present causal analysis as separate and distinct from the issue of quantum.7 4  See, e.g., Methanex Corp. v. United States of America, UNCITRAL Arbitration Proceeding, Amended Statement of Defense of the United States, ¶ 220 (Dec. 5, 2003) (arguing that “[a]bandoning the proximate cause standard would not serve these NAFTA purposes well, but, instead, could lead to uncertainty, defensive actions by States that would discourage foreign investment and a disproportionate and unintended burden upon States as insurers against all forms of investment risk.”). 5  The manner in which international courts and tribunals have dealt with causation has not escaped notice or criticism. See, e.g., Ilias Plakokefalos, Causation in the Law of State Responsibility and the Problem of Overdetermination, 26(2) Eur. J. Int’l L. 471, 486 (2015) (finding that, in the decisions of courts and tribunals, “there is no clarity as to the steps of the reasoning that are being employed in order to establish causation”); Thomas W. Wälde & Borzu Sabahi, Compensation, Damages, and Valuation, in The Oxford Handbook of International Investment Law 1051, 1094 (Peter T. Muchlinski et al. eds., 2008) (noting that awards “[b]y and large… do not discuss the effect of causation on damages in any detail”); Michael Straus, Causation as an Element of State Responsibility, 16 L. & Pol’y Int’l Bus. 893 (1984) (surveying and critiquing decisions of the postwar Mixed Claims Commission and the Iran-U.S. Claims Tribunal). 6  This risk is ably noted by Wolfgang Alschner, Aligning Loss and Liability—Toward an Integrated Assessment of Damages in Investment Arbitration, in The Use of Economics in International Trade and Investment Disputes 283 (Marion Jansen et al. eds., 2017). For the present purposes, we leave aside any causation questions that may arise in the context of a jurisdictional inquiry. 7  Instead, writers frequently treat causation as one of several potential “limitations” on compensation, rather than focusing on it as a distinct element of State responsibility. See, e.g., Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice 170 (2011) (treating causation among other possible “limitations on compensation”); Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence 105 (2008) (addressing “lack of causation” as one of many “limitations on compensation”); Sergey Ripinsky with

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In this Chapter, our aim is to situate the causation inquiry within international investment law. In short, causation plays a critical role in the adjudication of investment claims, as a necessary bridge between the finding of breach and the quantification of damage. Some recent decisions have recognized the important function of the causation inquiry, and have started to treat causation as a distinct “step,” which is separate from both “liability” and “quantum.”8 This developing analytical framework brings some degree of order and clarity to the causation inquiry. It makes clear that causation should be treated as a separate concept in the analysis of investment claims, which can be assimilated neither to the determination of liability nor to the calculation of quantum. In this sense, as one writer puts it, the causation analysis is one of a series of increasingly fine-grained filters, separating compensable from noncompensable loss.9 In other words, the tribunal’s findings on breach will determine the scope of the causation inquiry, but not necessarily its outcome; the findings on causation will, in turn, determine the scope, but not necessarily the outcome, of arguments on quantum. Nevertheless, the “three-step” framework outlined above has proven difficult to apply in practice. Parties and arbitrators sometimes struggle to define the boundaries of the causation inquiry, and the attempt to do so may open new and protracted areas of dispute as the parties struggle to separate causation from arguments going to breach and to valuation. It can also be difficult to manage internal divisions within the causal analysis between legal argumentation and factual evidence, and consequently between the appropriate roles for counsel and expert witnesses. These struggles can fracture tribunals, determine outcomes in cases, and, in some instances, leave arbitrators unable to complete their analysis or award damages. This Chapter proceeds in four parts. Section 1 focuses on the law of State responsibility, which establishes causation as the middle part of a three-step framework, setting external boundaries between causation and the determination of breach, on the one hand, and the calculation of quantum, on the other. Section 2 turns to the internal divisions between the “factual” and “legal” Kevin Williams, Damages in International Investment Law 135 (2008) (addressing causation as one of several “cross-cutting issues”). 8  See, e.g., Pey Casado v. Chile, supra note 3, ¶ 217 (“[T]he assessment of reparation due under international law for the breach of an international obligation consists of three steps— [i] the establishment of the breach, followed by [ii] the ascertainment of the injury caused by the breach, followed by [iii] the determination of the appropriate compensation for that injury.”). 9  Alschner, supra note 6, at 292 et seq.

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elements of the causation analysis. In Section 3, we address two cases—Lemire v. Ukraine and Rompetrol v. Romania—in which contestation over these external and internal dimensions emerged as a key issue. Section 4 concludes. 1

Causation in the Framework of State Responsibility

The three-part structure to international legal remedies—i.e., the assessment of liability, identification of injury, and quantification of damage—is established in the first instance by the general international law of State responsibility. In public international law, “State responsibility” refers to the regime of secondary rules that deal with the consequences of a State’s breach of its international legal obligations.10 An analysis of the structure of these secondary rules, as reflected in the International Law Commission’s (“ILC”) work on State responsibility,11 is helpful to understanding the role of causation and injury. The ILC’s Draft Articles merit close study because, while not themselves a primary source of international law, they have shown themselves to be influential in the work of courts and tribunals.12 10  The distinction between “primary” and “secondary” rules is explained by James Crawford, who acted as the International Law Commission’s final special rapporteur for its project on State responsibility:  [T]he rules on State responsibility may be described as “secondary rules”. Whereas the law relating to the content and the duration of substantive State obligations is determined by primary rules contained in a multitude of different instruments and in customary law, the Articles provide an overarching, general framework which sets the consequences of a breach of an applicable primary obligation. Otherwise the Articles would constantly risk trying to do too much, telling States what kinds of obligations they can have.  James Crawford, Articles on State Responsibility for Internationally Wrongful Acts 3, U.N. Audiovisual Library of International Law (2012), http://legal.un.org/avl/pdf/ha/rsiwa/ rsiwa_e.pdf (emphasis added). 11   Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries [hereinafter ILC Draft Articles] (2001), 2 Y.B. Int’l L. Comm’n 31 U.N. Doc. A/CN.4/ SER.A/2001/Add.1 (Part 2); G.A. Res. 56/83, annex, Responsibility of States for internationally wrongful acts (Jan. 28, 2002). 12   See, e.g., Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia & Herzegovina v. Serbia & Montenegro), 2007 I.C.J. 43, ¶ 460 (Feb. 26); Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, ¶ 147 & n. 142 (Mar. 28, 2011); Responsibilities and Obligations of States Sponsoring Persons and Entities with Respect to Activities in the Area, Case No. 17, Advisory Opinion, 2011 ITLOS Rep. 10, ¶ 169 (Feb. 1). For perspectives on the relationship between the Draft Articles and international law, see David D. Caron, The ILC Articles on State Responsibility: The Paradoxical Relationship

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1.1 Causation in the Law of State Responsibility The law of State responsibility treats causation as a distinct element of the analysis, which is separate from the question of breach (or “liability” for a wrongful act) and the assessment of damages (or “quantum”). While this division may seem intuitive, it does not necessarily track the treatment of causation in some areas of domestic law, and this asymmetry may give rise to some difficulties in practice. For example, in the common law of negligence, causation and harm are treated as elements of the claim, and thus as part of the inquiry regarding liability.13 But international law as a general matter accepts the possibility that, depending on the applicable rule, conduct may be internationally wrongful even in the absence of any damage to the wronged party. The question of causation is thus analytically distinct from the question of whether a breach has occurred in the first place.14 Although the law of State responsibility does not give extensive treatment to causation, the concept stands as a bridge between the separate issues of breach and damages. As reflected in the Draft Articles, the regime of State responsibility encompasses rules for determining the existence of a wrongful act,15 as well as rules addressing the consequences of a wrongful act, such as the obligation to make reparation.16 These two sets of principles align, more

Between Form and Authority, 96 Am. J. Int’l L. 857 (2002) (warning that arbitrators may give “too much authority” to the Draft Articles); Fernando Lusa Bordin, Reflections of Customary International Law: The Authority of Codification Conventions and ILC Draft Articles in International Law, 63 Int’l & Comp. L.Q. 535 (2014) (investigating the basis and authority of ILC Draft Articles); Santiago Villalpando, Codification Light: A New Trend in the Codification of International Law at the United Nations, 8 Anuario Brasileiro de Dereito Internacional 117 (2013) (exploring the tension between the Draft Articles’ apparent authority and their lack of formal validity as a source of international law). 13  This may also be the case with respect to certain particular rules of international law. 14  This aspect of the Draft Articles has been subject to some criticism. Brigitte Stern, for instance, has contended that matters would be greatly simplified if the Draft Articles had acknowledged the concept of a “legal injury”—that is, the injury that arises, ipso facto, from the breach of an international legal obligation. Brigitte Stern, The Elements of an Internationally Wrongful Act, in The Law of International Responsibility 193, 199 (James Crawford et al. eds., 2010); see also Sabahi, supra note 7, at 137, 175 (discussing the concept of “legal damage” suffered “ipso facto” by the invasion of a legal right). This approach, however, would not eliminate the need for a causation inquiry that is separate from the question of breach. 15   See ILC Draft Articles, arts. 1–27 (addressing principles of attribution, breach, and circumstances precluding wrongfulness, among others). 16   See id., arts. 28–41 (dealing with cessation, non-repetition, and reparation). The Articles also address in depth a third subject—the rules for invoking a State’s responsibility for

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or less, with the “liability” and “quantum” phases of an international arbitral proceeding. Causation sits at the inflection point between these two inquiries. The key reference is Article 31, which provides: Article 31. Reparation 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.17

Article 31, while saying little about the content of the causation inquiry, illuminates two key points about the place of causation in the overall structure of an international claim. First, the causal inquiry is, in principle, separate from the question of breach. This is a key feature of the Draft Articles on State Responsibility, which the ILC determined early on would not require actual harm as an element of every internationally wrongful act, unless it was required by the applicable primary rules.18 This distinction between breach and harm is suggested in the text of Article 31, which presupposes a “responsible State”—that is, a State whose conduct has breached an international ­obligation.19 Thus, although certain international legal obligations may require harm as an element of the breach, this is not true of international law as a general matter. Second, in light of the separation between breach and harm, the assignment of damages will depend on a further finding of “injury,” in which causation will play a determinative role.20 The requirement to make reparation does not

wrongful acts—which is outside the scope of this discussion. See id., arts. 42–54 (dealing with invocation and countermeasures). 17   Id., art. 31 (emphasis added); see also id., arts. 34, 36(1), 37(1) (addressing causation in the provisions on reparation, compensation, and satisfaction). 18   See id., art. 2, commentary 9 (“It is sometimes said that international responsibility is not engaged by conduct of a State in disregard of its obligations unless some further element exists, in particular, ‘damage’ to another State. But whether such elements are required depends on the content of the primary obligation, and there is no general rule in this respect.”). 19   See id., arts. 1–2 (defining the conditions under which State responsibility arises for the purposes of the Draft Articles). 20   See, e.g., Andrea K. Bjorklund, Causation, Morality, and Quantum, 32(2) Suffolk Transnat’l L. Rev. 435, 440–1 (2008).

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arise automatically upon a simple finding of breach.21 Rather, Article 31 makes clear that a causal link is a definitional element of an “injury” as understood in international law. As such, it must be established that the damages sought in connection with an internationally wrongful act form part of the “injury caused by” that act. If an “injury” is established, then, pursuant to Article 31, the responsible State is required to make reparation.22 1.2 Causation under Investment Treaties It is necessary to be cautious about inferring broad lessons from the regime of State responsibility in the context of investment treaties. First, the general principles reflected in the Draft Articles will give way, in the event of conflict, to more specific rules governing the legal regime or relationship at issue.23 Moreover, the provisions of the Draft Articles are underdetermined, and often leave substantial room for the regime of primary rules to elaborate or fill in gaps.24 In addition—and perhaps most importantly—the section of the Draft Articles in which causation is addressed is expressly “without prejudice” to rights that may accrue directly to individuals under investment treaties.25 There is nothing in the Draft Articles that restricts the ability of States 21   Compare with ILC Draft Articles, art. 30 (concerning cessation and non-repetition). The commentary to the Draft Articles is not entirely consistent in its description of this scheme. See, e.g., id., art. 31, commentary 4 (stating, in response to the question of whether reparation is an obligation or a right, that “the general obligation of reparation arises automatically upon commission of an internationally wrongful act and is not, as such, contingent upon a demand or protest by any State….”). This comment is best understood in the context in which it was made (i.e., in relation to the question whether a requirement to make reparation is contingent upon a demand by the injured party). 22   Id., art. 31(1); cf. Trail Smelter Arbitration (United States v. Canada), Decision, 3 U.N. R.I.A.A. 1905, 1920 (1941) (“The first question… which the Tribunal is required to decide is as follows: (1) Whether damage caused by the Trail Smelter in the State of Washington has occurred since the first day of January 1932, and, if so, what indemnity should be paid therefor. In the determination of the first part of the question, the Tribunal has been obliged to consider three points, viz., the existence of the injury, the cause of the injury, and the damage due to the injury.”). 23  I LC Draft Articles, art. 55 (“These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law.”). 24   See, e.g., infra Section 2 (discussion on principles of causation). 25  I LC Draft Articles, art. 33 & commentary 4; see also James Crawford, Investment Arbitration and the ILC Articles on State Responsibility, 25(1) ICSID Rev.—FILJ 127, 130 (2010) (“[T]he ILC Articles make no attempt to regulate questions of breach between a state

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to conclude investment treaties that, for example, limit the ability of investors to recover moral damages,26 or restrict the power of tribunals to award certain remedies.27 Most treaties contain no express statements on causation. Treaties that do contain relevant language tend to confirm that the damages claimed must be causally linked to the breach of the investment treaty.28 For instance, the 2004 and 2012 U.S. Model BITs, as well as the investment chapters of recent U.S. FTAs, require a claimant to show “loss or damage by reason of, or arising out of,” the alleged treaty breach.29 In the absence of further guidance from the treaty text, some tribunals have looked to the structure of causation and injury in the Draft Articles.30 Consider how this framework plays out in the context of a typical investment dispute. Claimants in investment cases have argued that the respondent State’s actions have caused any number of harms, including, for example, sunk costs, lost future profits, loss of business opportunities, increased cost of doing business, reputational damage, lower share prices, or the total destruction of their businesses.31 Once a wrongful act is established, the tribunal’s task would be to sort out which, if any, of these injuries are traceable to the treaty breach, rather than to the actions of third parties, to other lawful actions of the respondent State, or to the actions of the claimant itself. and a private party such as a foreign investor. Those rules must be found elsewhere in the corpus of international law, to the extent that they exist at all.”). 26   See, e.g., Lillian Byrdine Grimm v. Gov’t of the Islamic Republic of Iran, Award, 2 Iran-U.S. Cl. Trib. Rep. 78 (Feb. 18, 1983) (determining, by majority, that the jurisdiction afforded in the Algiers Accords for claims arising out of measures “affecting property rights” does not encompass claims seeking “compensation for mental anguish, grief and suffering”). 27   See, e.g., Free Trade Agreement between the United States of America and the Republic of Korea, art. 11.26(1) (June 30, 2007) (permitting the tribunal to award only monetary damages and any applicable interest, or restitution, in which case the respondent must be given the opportunity to pay monetary damages and interest instead); Southern African Development Community Model Bilateral Investment Treaty Template, art. 29.19(a) (July 2012) (similar). 28   See, e.g., Canada Model Agreement for the Promotion and Protection of Investments, art. 22(1) (2004); Mexico Model Agreement on the Promotion and Reciprocal Protection of Investments, art. 11(1) (2008); Model Text for the Indian Bilateral Investment Treaty, art. 23(2) (2015). 29   See, e.g., United States Model Bilateral Investment Treaty, art. 24(1) (2004); United States Model Bilateral Investment Treaty, art. 24(1) (2012); North American Free Trade Agreement, art. 1116(1) (1993). 30   See, e.g., Ripinsky & Williams, supra note 7, at 138. 31   See infra Section 3 (setting out examples).

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This structure may clarify the role of causation in the overall framework of international claims, and it helps to separate causation and other concepts, such as breach and quantum. But this inquiry can also become problematic in the context of a particular dispute, leading to extensive argument and conceptual confusion. One potential flashpoint, as reflected in the Biwater Gauff v. Tanzania case, is the boundary between causation and the other elements of the State responsibility analysis.32 In Biwater, this boundary emerged at the forefront of a disagreement between the majority (Bernard Hanotiau and Toby Landau) and dissenting arbitrator (Gary Born), and the case is therefore illustrative of the conceptual difficulties that arbitrators and counsel may encounter when navigating the causation inquiry.33 In Biwater, the tribunal was unanimous in finding that, although Tanzania had breached the relevant BIT, the claimant was not entitled to monetary damages as a result of those breaches. The claimant in this case, Biwater Gauff Tanzania (“BGT”), held contract rights to supply sewer and water services in Tanzania. Various actions, including some attributable to BGT itself, resulted in the total loss of value of the investment prior to the acts taken by Tanzania that were in violation of the BIT. In other words, BGT’s investment “was the subject of an expropriation by the Republic,” but “by the time that this expropriation took place,… the losses and damage for which BGT claims in [the arbitral] proceedings had already been (separately) caused.”34 The majority treated this as a failure of causation, which thus precluded any inquiry into quantum. Because this case culminated in an expropriation of property, the measure of compensation would ordinarily be pegged to the value of the investment as at the date of the taking.35 The majority reasoned that, “in order to succeed in its claims for compensation, BGT has to prove that the value of its investment was diminished or eliminated, and that the actions BGT complains of were the actual and proximate cause of such diminution in, or elimination of, value.”36 Reviewing the facts and evidence before it, the tribunal determined that the investment was worthless as of the date of the

32   See Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award (July 24, 2008); Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Concurring and Dissenting Opinion of Gary Born (July 18, 2008). 33  For a study of this aspect of the decision, see Bjorklund, supra note 20. 34   Biwater v. Tanzania, supra note 32 (Award), ¶ 485. 35   See id., ¶ 792. 36   Id., ¶ 787.

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taking, and that it had been worthless for some time before.37 It awarded no damages to BGT, reasoning that: in all the circumstances that the actual, proximate or direct causes of the loss and damage for which BGT now seeks compensation were acts and omissions that had already occurred by 12 May 2005. In other words, none of the Republic’s violations of the BIT between 13 May 2005 and 1 June 2005 in fact caused the loss and damage in question, or broke the chain of causation that was already in place.38 The majority viewed this analysis as sounding in causation, not in principles of quantum.39 Turning to the text and structure of the ILC’s Draft Articles, the majority stressed its conclusion that the Republic’s wrongful acts had not “in fact ‘caused injury’ to” BGT’s investment.40 In this regard, the Tribunal reasoned, the phrase “injury caused by the wrongful act” in Article 31, quoted above, “must mean more than simply the wrongful act itself …, otherwise the element of causation would have to be taken as present in every case, rather than being a separate enquiry.”41 For the majority, in other words, “injury” is akin to a particular “head of claim” in the claimant’s damages claim, and the claimant has the burden at the causation stage to establish a causal link between the relevant treaty breach and each head of claim asserted.42 This sets up a relatively neat division between the three “steps” we identified: the liability stage concerns whether a treaty is breached; causation concerns the link between that breach and the individual heads of claim; and quantum concerns the value of each head of claim that has been linked to the breach. The dissenting arbitrator took issue with this framework, agreeing that no damages were due, but finding this to be an issue of quantum, not causation.43 The dissent’s key point of contention, for our purposes, was the notion of “injury” reflected in the Draft Articles. Whereas the majority assimilated 37   Id., ¶ 792. 38   Id., ¶ 798. 39   Id., ¶¶ 801–6 (emphasis in original). 40   Id., ¶ 803. 41   Id. 42   See id., ¶ 805 (“As set out earlier, the conclusions on causation reached by the majority of the Tribunal are based on the lack of linkage between each of the wrongful acts of the Republic, and each of the actual, specific heads of loss and damage for which BGT has articulated a claim for compensation. In other words, the actual loss and damage for which BGT has claimed—however it is quantified—is attributable to other factors.”). 43   See Biwater v. Tanzania, supra note 32 (Dissenting Opinion), ¶¶ 15–31.

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injury to the claimant’s heads of claim, the dissent considered an injury to encompass any impairment of a legal right.44 In particular, the dissent argued that “a state’s expropriation or denial of fair and equitable treatment causes injury to the investor by depriving it of property or procedural or legal rights,” even if it does not cause monetary damage.45 This reasoning, by shifting the conception of “injury,” moves the causation inquiry much closer to the issue of breach.46 Indeed, while the dissent purported to agree that the notion of “injury” must mean more than the wrongful act itself,47 it is hard to see how the dissent could have imagined anything other than an ephemeral distinction: if any impairment of a legal right (i.e., a breach of an international legal obligation) is an injury, then injury will accompany any internationally wrongful act. In the debate between the majority and the dissent in Biwater, the boundaries between breach, causation, and quantum are significant and deeply contested. The very real stakes of this debate, such as potential impacts on claims for moral damages or recovery of costs, are discussed extensively elsewhere.48 Our point is simply that the Biwater case illustrates the ways in which the three-step framework highlighted at the outset of this Chapter, while elegant, intuitive, and potentially illuminating, can also generate serious difficulties in practice.

44   See id., ¶ 17 (“Preliminarily, it should be clear that the Republic’s expropriatory, unfair and inequitable and other wrongful acts caused injury to BGT. Specifically, it is beyond debate that the Republic wrongfully seized City Water’s business, premises and assets at a point in time (1 June 2005) at which the Republic had no right—under either international law or the Lease Contract—to do so. That wrongful seizure clearly caused injury to City Water by depriving it prematurely of the use and enjoyment of its property: whether measured in weeks (to 24 June 2005, as the Tribunal concludes) or months (some longer period which would have obtained in reasonable dealings between contracting parties conducting themselves in good faith) or years (the remaining lease term under the Lease Contract), City Water was wrongfully evicted from its leased premises, and wrongfully denied the use of its assets, its management and its staff, for some ascertainable period of time.”). 45   Id., ¶ 26. 46  Indeed, the dissenting opinion appears to invoke the notion of “legal injury,” which Brigitte Stern had faulted the ILC for failing to account for in the Draft Articles. See Stern, supra note 14. 47   See Biwater v. Tanzania, supra note 32 (Dissenting Opinion), ¶ 28. 48   See, e.g., Bjorklund, supra note 20, at 444–50.

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Law and Fact in the Causation Analysis

Even within the causation “step,” there can be difficulty in separating factual from legal analysis. In many cases, the widely cited distinction between the doctrines of “factual causation” and “legal causation” make this exercise even more complicated. Without attempting to resolve all of the difficult theoretical problems associated with these doctrines, we suggest here that these labels can be misleading insofar as they associate “fact” with one strand of the analysis and “law” with another. This is a critical issue, as a tribunal may find itself faulted for failing to apply the applicable law if it effectively outsources a question of law to a non-legal expert.49 Depending on the factual circumstances and the treaty at issue, identifying the legal standard to be applied to questions of causation may not always be straightforward. In investment cases, the tribunal will often have to conduct the causation analysis by reference to a mix of specific treaty provisions and relevant general principles. The signs may sometimes point in opposite directions. For instance, the ILC observed that the applicable standard of causation may vary among different primary rules of conduct, and it declined to specify the required causal link as a general matter.50 But investment treaties, which establish the primary rules of conduct in investor-State cases, often do not specify a particular legal standard for causation,51 and some treaties have been interpreted to refer to generally applicable principles of causation in international law.52 In general, tribunals have determined that the twin doctrines of “factual” and “legal” causation, which are common to many legal systems, apply in cases

49   See Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on the Application for Annulment of the Argentine Republic, ¶¶ 361–78 (July 30, 2010) (faulting the Enron v. Argentina tribunal for doing so in connection with its analysis of the customary international law “necessity” requirement). 50  I LC Draft Articles, art. 31, commentary 10. For a critique, see Brigitte Stern, The Obligation to Make Reparation, in The Law of International Responsibility 563, 569–70 (James Crawford et al. eds., 2010). 51   But see India Model BIT, supra note 28, art. 23(2) (requiring the claimant to show that damage is foreseeable). 52   See, e.g., Methanex Corp. v. United States of America, UNCITRAL Arbitration Proceeding, Memorial on Jurisdiction and Admissibility of Respondent United States, 19–20 (Nov. 13, 2000) (arguing that the causation language in NAFTA article 1116(1) refers to the wellestablished principle of proximate cause in customary international law).

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arising under investment treaties.53 The former element is generally focused on whether the claimant would have sustained the alleged injury “but for” the respondent’s breach.54 The latter element operates to filter out harms that were “too remote” from the alleged breach, were “not proximate” to the wrongful act, or, in the formulations of some tribunals, were not “foreseeable.”55 There is significant dispute as to which of these competing formulations should apply under investment treaties, and whether there is any material difference between them.56 The distinction between factual and legal causation may helpfully tease out two aspects of the causation inquiry, but it may be misleading insofar as it suggests a clean division between “factual” and “legal” argument on causation. As Professor Michael Moore notes in his critical review of causation doctrine, legal doctrine frequently reflects the association of the former element with fact and the latter with legal policy: The first requirement is that of ‘cause-in-fact’. This is said to be the truly causal component of the law’s two requirements …, because this doctrine 53   See, e.g., Biwater v. Tanzania, supra note 32 (Award), ¶¶ 784–5; Ripinsky & Williams, supra note 7, at 135–40. See, generally, ILC Draft Articles, art. 31, commentary 10 (“Thus, causality in fact is a necessary but not a sufficient condition for reparation. There is a further element, associated with the exclusion of injury that is too ‘remote’ or ‘consequential’ to be the subject of reparation.”); James Crawford (Special Rapporteur), Third report on State responsibility, ¶ 27, U.N. Doc. A/CN.4/507 (Mar. 15, 2000). 54   See, e.g., LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award, ¶ 48 (July 25, 2007). 55   See, e.g., ILC Draft Articles, art. 31, commentary 10 (noting the various formulations in different contexts); S.D. Myers Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Second Partial Award, ¶ 140 (Oct. 21, 2002) (stating that “the harm must not be too remote, or that the breach of the specific NAFTA provision must be the proximate cause of the harm”); Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶ 115 (Aug. 30, 2000); Ronald S. Lauder v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award, ¶ 235 (Sept. 3, 2001); Administrative Decision No. 2, 7 R.I.A.A. 23, 29–30 (U.S.-Ger. Mixed Claims Comm’n 1923); Dix Case, 9 R.I.A.A. 119, 121 (Am.-Venez. Claims Comm’n 1903). 56   See, e.g., Decision No. 7, Guidance Regarding Jus ad Bellum Liability, ¶¶ 7–14, 26 R.I.A.A. 1, at 10 (Eri.-Eth. Claims Comm’n July 27, 2007) (considering various formulations, including “reasonableness,” “proximate cause,” “directness,” and “foreseeability,” and ultimately settling on a “proximate cause” standard that gives “weight to whether particular damage reasonably should have been foreseeable”); Stanimir A. Alexandrov & Joshua M. Robbins, Proximate Causation in International Investment Law, in Yearbook of International Investment Law and Policy: 2008–2009, at 317 (Karl Sauvant ed., 2009).

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adopts what is thought of as the ‘scientific’ notion of causation. Whether cigarette smoking causes cancer, or whether the presence of hydrogen or helium caused an explosion, are factual questions to be resolved by the best science the courts can muster. By contrast, the second requirement, that of ‘proximate’ or ‘legal’ cause, is said to be an evaluative issue, to be resolved by arguments of policy and not arguments of scientific fact.57 Professor Moore’s discussion of the conventional wisdom reveals a trap that may await unwary counsel and adjudicators when dealing with complex matters of causation. While it is no doubt true that “the best science” or expert economic analysis58 may clarify the inquiry into historical causation, questions of legal principle cannot be entirely removed. The common division of causation into “factual” and “legal” elements thus, if oversimplified, could be read as an invitation to delegate to non-legal experts matters that should be resolved by recourse to legal principles. A few examples serve to illustrate the trap.59 The so-called “overdetermination” cases pose one well-known problem—that is, where a particular effect can be attributed to multiple causes.60 Certain problems of overdetermination can cause the widely applied “but for” test to break down, as in the well-known example in which a victim is shot at simultaneously by two hunters acting independently of each other.61 In such cases, it becomes necessary to grapple with the potential application of other tests, such as the notion of a “substantial factor” or a “necessary element of a sufficient set.”62 We take no position on these various competitors for the “cause-in-fact” test; we note only that the 57   M ichael S. Moore, Causation and Responsibility 83 (2009) (emphasis in original). 58   See Alschner, supra note 6, at 301 (arguing that “factual causation is one of the areas where the cooperation between lawyers and economists can be most fruitful in investment arbitration”). 59  We exclude here certain problems of principle that arise in connection with determinations of “proximity,” “remoteness,” or “foreseeability.” As noted above, these concepts are generally regarded as the province of “legal causation,” and thus the need to grapple with issues of principle is ordinarily assumed. 60   See Plakokefalos, supra note 5, at 472–3 (relying on Brigitte Bollecker-Stern, La Prejudice dans la Theorie de la Responsabilite Internationale (1973)). 61   See Summers v. Tice, 33 Cal. 2d 80 (1948); Plakokefalos, supra note 5, at 476–7 & n. 55. 62   See, generally, Leon Castellanos-Jankiewicz, Causation and International State Respon­ sibility 9–10 (ACIL Research Paper No. 2012–07 (SHARES Series), Apr. 3, 2012), http://www .sharesproject.nl/wp-content/uploads/2012/01/Castellanos-Causation-and-International -State-Responsibility1.pdf (referring to various theories).

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very existence of this contest over the appropriate standard indicates that science and expert analysis cannot necessarily eliminate the need to grapple with questions of legal principle, even in the context of “historical” causation. A second set of problems may arise when the “but for” scenario is marked by a substantial degree of uncertainty. For example, a claimant alleging lost profits or other future damages generally has the burden to establish such damages.63 Although establishing future damages can be difficult, given the uncertainty in the but-for scenario, some tribunals have required that lost profits be established to a degree of certainty.64 As the ILC observed, this inquiry blends elements of causation and remoteness with other concerns, such as “evidentiary requirements and accounting principles,” all of which “seek to discount speculative elements from projective figures.”65 The uncertainty associated with claims for lost profits is thus sometimes dealt with as part of a general inquiry into causation, and other times as an element of a more finegrained inquiry into quantum and valuation.66 Other, perhaps more sui generis, issues of uncertainty in the but-for scenario also may arise. This was the case, for instance, in the Micula v. Romania and Chevron v. Ecuador cases. In each of these cases, removal of the respondent’s breach of the investment treaty would have produced a series of consequences that would have impacted the investor’s bottom line in ways that were not easy for the tribunal to sort through. Resolution of the “but for” scenario thus required the tribunal to consider how it would handle this uncertainty, which in each case stretched across different legal orders.

63   See, e.g., ILC Draft Articles, art. 36(2) (“The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.”). 64   See, e.g., Mobil Inv. Canada Inc. & Murphy Oil Corp. v. Gov’t of Canada, ICSID Case No. ARB(AF)/07/4, Decision on Liability and on Principles of Quantum, ¶¶ 437–8 (May 22, 2012) (deciding that future damages must be proved with “reasonable certainty”); S.D. Myers v. Canada, supra note 55, ¶ 173 (Oct. 21, 2002) (“The quantification of loss of future profits claims can present special challenges. On the one hand, a claimant who has succeeded on liability must establish the quantum of his claims to the relevant standard of proof; and, to be awarded, the sums in question must be neither speculative nor too remote. On the other hand, fairness to the claimant require that the court or tribunal should approach the task both realistically and rationally.”); Ripinsky & Williams, supra note 7, at 164–5. 65  I LC Draft Articles, art. 36(2), commentary 32. 66  For instance, as discussed in infra Section 3, the Lemire v. Ukraine tribunal considered in detail questions of causation at an initial stage of the inquiry, but then ruled out certain “speculative” damages later, in its discussion of quantum.

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The question in Micula concerned, in part, the economic effects of a delayed accession by Romania to the European Union. The tribunal had found that Romania had breached its treaty obligations by rescinding certain investment incentives,67 which was a necessary step to Romania’s EU accession.68 The respondent thus argued that, if Romania had maintained the incentives, then its accession to the European Union would have been delayed or would not have happened at all.69 Romania instructed its expert to calculate the economic disadvantages to the claimant if accession had been delayed or had never taken place, which would then be factored into the claimant’s recovery.70 The tribunal, although it agreed that its task was to “reestablish the situation which would, in all probability, have existed” but for the breach,71 rejected this argument, citing both concerns of principle and issues of uncertainty. As a matter of legal principle, the tribunal wondered whether acts “of general application,” such as accession to the European Union, should be understood as “having specific effect with respect to specific persons, such as the mitigation of damage.”72 As to the facts of Romania’s allegation, the tribunal considered that the specific benefits of EU accession to the claimant’s investment had not been proven.73 The tribunal did note that this issue raised particular problems of proof with respect to the “but for” scenario, stating: The Tribunal thus finds that the Respondent has failed to prove the extent, if any, of the benefits of EU accession to the Claimants. This does not mean that the Tribunal is oblivious to the fact that EU accession may have had an effect (whether positive or negative) on the Claimants’ investments. This raises a procedural question, namely which party must bear the consequences of this uncertainty. It is the Claimants’ burden to prove their damage and the Tribunal has found to what extent such damage has been proved. The Respondent has argued that the Claimants’ experts have failed to take into consideration the effects of EU accession, and has endeavored to quantify such effects, but—in the Tribunal’s 67   Ioan Micula et al. v. Romania, ICSID Case No. ARB/05/20, Award, ¶ 872 (Dec. 11, 2013). 68   See id., ¶¶ 777–9, 788–96. 69   Id., ¶ 1163. In particular, Romania’s expert argued that EU accession brought “price stability, increased trade, FDI, reduced risk premia, strong institutions and a marked acceleration in economic growth,” leading to increased sales domestically and abroad, as well as access to duty-free imports through the EU customs union. Id., ¶ 1157. 70   Id., ¶ 1160. 71   Id., ¶ 917. 72   Id., ¶ 1167. 73   Id., ¶¶ 1168–73.

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view—unsuccessfully. First, the effects of EU accession appear to be mixed, both potentially increasing or decreasing the value of the investment. Second, it is legally difficult to see why an alleged advantage, from which the Claimants should have benefitted in any circumstances and which is available to their competitors, including those who are not located in the distressed zones, should be taken into consideration to their detriment.74 The causation problems in the Chevron v. Ecuador case arose in a different context, but arguably have a similar structure to the problems posed in Micula insofar as they deal with the uncertainty of a chain of events in the but-for scenario. In Chevron, the tribunal found that the Ecuadorian courts had breached the investment treaty through their undue delay in adjudicating the claimant’s court cases.75 The question in the “but for” scenario, then, was what would have happened to the claimant’s court cases had they been adjudicated in a manner that the tribunal considered would accord with the treaty.76 The respondent argued that because removal of the delay would not have assured the claimant’s success on the merits of their claims, the claimant consequently had the burden of showing that it would have prevailed in the court cases, and the tribunal in assessing these arguments could not substitute its own judgments for applicable Ecuadorian law and practice.77 The claimant argued that the tribunal had the authority to decide the cases de novo by reference to the relevant laws and contract provisions, and that “it need not engage in the exercise of determining how an Ecuadorian court might have decided those cases.”78 The tribunal agreed with the respondent on this particular point.79 It stated: 74   Id., ¶ 1173 (emphasis added). 75   Chevron Corp. (USA) & Texaco Petroleum Co. (USA) v. Republic of Ecuador, PCA Case No. 34877, Partial Award on the Merits, ¶ 275 (Mar. 30, 2010). 76   Id., ¶¶ 374–88. The tribunal rejected the respondent’s argument that the claimant’s claims should be considered as claims for “loss of chance,” as in the loss of an opportunity to have their claims decided, and that their recovery should be discounted by the probability that they would ultimately fail in court. See id., ¶¶ 378–82. 77   Id., ¶¶ 369–70. 78   Id., ¶ 359. 79   See id., ¶¶ 375, 377. The respondent further argued that, in fact, the claimant’s only loss was that of an opportunity to have its cases adjudicated in a timely fashion, and the value of this loss of opportunity must be discounted by the likelihood that it would not prevail on the merits of the underlying cases. The tribunal rejected this “loss of chance” argument, noting that in the “but for” scenario the claimant could only win or lose; there could be no apportionment on the basis of probabilities. Id., ¶¶ 378–82. On the concept of “loss

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Applying the above principle, and in keeping with the fact that the Claimants’ alleged primary “loss” in this case is the chance for a judgment by the Ecuadorian courts, the Tribunal must ask itself how a competent, fair, and impartial Ecuadorian court would have resolved TexPet’s claims. The Tribunal must step into the shoes and mindset of an Ecuadorian judge and come to a conclusion about what the proper outcome of the cases should have been; that is, the Tribunal must determine what an Ecuadorian court, applying Ecuadorian law, would have done in these cases, rather than directly apply its own interpretation of the agreements.80 These two cases thus illustrate the ways in which considerations of principle— such as questions of procedural fairness, burden of proof, and potentially even the competence of the tribunal—may enter the analysis of the “but for” scenario when deciding questions of causation. In the Micula case, the tribunal was reluctant to enter into an independent analysis of what the economic effects of delayed or foregone EU accession would have been on the claimant’s business, and was content to have the respondent “bear the consequences” of this uncertainty.81 But, in the Chevron case, where damages turned on the uncertain outcomes of subsequent court proceedings, the tribunal was willing to eliminate the uncertainty concerning the future of the local court cases. It did so by stepping into the shoes of an Ecuadorian court and issuing decisions on Ecuadorian law as if it were exercising jurisdiction over the underlying cases, despite any awkwardness that might be associated with assuming such a role.82 Although it is not articulated in these terms in either case, the extent to which a tribunal is or should be willing to spin out the consequences of the but-for scenario is a question of principle, which is not adequately resolved simply by reference to scientific or expert analysis. These problems suggest just some of the questions of principle that tribunals may encounter when confronted with complex questions of so-called “factual” causation. Even setting aside issues of remoteness and foreseeability, investment tribunals attempting to place the claimant in the position that it would have been in absent the breach will find themselves confronting difficult and of chance,” see Kantor, supra note 7, at 74 (referring to Article 7.4.3 of the UNIDROIT Principles of International Commercial Contracts). 80   Chevron v. Ecuador, supra note 75, ¶ 375. 81   See Micula v. Romania, supra note 67, ¶ 1173. 82   See Chevron v. Ecuador, supra note 75, ¶¶ 375, 377.

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complex questions of economics, regulation, and domestic law. Tribunals will not necessarily be able to resolve these questions simply by relying on the conclusions of dueling economics, regulatory, or local legal experts. They will have to rely on principles of international law and the terms of investment treaties to shape their approaches to these issues, and it is not clear that sufficient attention has yet been paid to developing such principles. 3

Causation in Action: The Lemire and Rompetrol Cases

As shown in the foregoing discussion, the issue of causation in international law presents difficult conceptual problems, which, generally speaking, fall along two dimensions. The first dimension, illustrated by the Biwater case, concerns the difficulty of situating the causation analysis between the conceptually distinct inquiries of breach and quantum. The second, discussed above, concerns the difficulty of disentangling factual and legal arguments over causation. The following discussion brings both of these strands together in an extended discussion of two cases—Lemire v. Ukraine and Rompetrol v. Romania—in which issues of causation proved to be critical to the outcome. In these cases, the struggle over the scope and structure of the causation inquiry led to deep disagreement within the tribunal in one case, and to a total breakdown of analysis in the other. The Lemire and Rompetrol awards are similar in many respects. In each case, the acts giving rise to the respondent State’s liability did not lead immediately and obviously to a clear measure of damages. It was therefore necessary, in both cases, to define clearly the “injury” that merited compensation, and to establish the causal link between that injury and the damages claimed. And, in both cases, this inquiry would involve analysis of “historical” causation, as well as principles of “legal” or “proximate” cause. There is also some similarity in the difficulties confronted by each tribunal, although the results diverge. In Lemire, the arbitrators disagreed on the boundaries of the causation inquiry, as well as the appropriate principles for resolving uncertainties in the “but for” scenario. Ultimately, a majority of the tribunal decided it could find a causal link and awarded damages. The Rompetrol case also presented difficulties with resolving the boundaries between breach and causation, and between legal argument and expert evidence. However, in that case, the problems were so pervasive that the tribunal decided it was unable to proceed past a finding of breach, and it awarded no damages.

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3.1 Lemire v. Ukraine The Lemire case arose under the U.S.-Ukraine bilateral investment treaty, and concerned allegations that the respondent State had repeatedly denied bids by the claimant, an investor in the radio broadcasting business, for additional broadcasting frequencies within Ukraine.83 In a separate Decision on Jurisdiction and Liability, the tribunal decided that the respondent had violated the treaty’s fair and equitable treatment provision with respect to several processes in which companies other than the claimant were awarded broadcasting licenses.84 The tribunal held over the question of the “appropriate redress” for the breach, including matters of causation and quantum, for a second phase.85 In addressing the parties’ arguments regarding causation in the second phase, the tribunal immediately faced a problem. The breaches identified by the tribunal amounted to what were essentially procedural irregularities in the process for awarding broadcasting licenses.86 The injury alleged by the claimant, meanwhile, was that, as a result of failing to obtain the licenses, the investment’s “business plans could not be achieved, … its planned development was curtailed, its market position eroded, its capacity to generate profits impaired and its potential market value was never achieved.”87 But it was not immediately obvious that, had the irregularities in the tender process been eliminated, the claimant would have obtained the necessary licenses and fulfilled its business plans.88 This problem led the tribunal to grapple with the kinds of difficulties identified above. With respect to the division between causation, breach, and quantum, the majority and the dissent sparred over the “injury” that would have to be defined at the causation stage. Regarding the internal structure of the causation analysis, the facts as described above entailed uncertainty in the “but for”

83  For a summary of the facts, see Sondra Faccio, The Application of the Principle of Proportionality to Assess Compensation: Some Reflections Arising from the Case of Joseph Charles Lemire v. Ukraine, 13 L. & Prac. Int’l Cts. & Tribs. 199, 202–3 (2014). 84   Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, ¶¶ 421, 513 (Jan. 14, 2010). 85   Id., ¶ 514; see also id., ¶ 425 (noting that “the assumptions underlying the experts’ reports do not coincide with the conclusions reached by the Tribunal in this Decision, and the quantum evidence therefore requires recalibration in accordance with the present decision”). 86   See Lemire v. Ukraine, supra note 12, ¶¶ 158–60. 87   Id., ¶ 161. 88   See id., ¶¶ 168–72.

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scenario, sparking extensive argument as to the appropriate legal principles for resolving that uncertainty. We will take each of these issues in turn. Both the majority and the dissent appeared to agree in principle that causation was a necessary middle step between a finding of breach and the calculation of damages.89 As the majority put it, the tribunal would have to analyze and the claimant would have to prove “two links in the causal chain”: [1] if the tenders had hypothetically been decided in a fair and equitable manner, and Claimant had participated in them, he (and not some of the other participants) would have won the disputed frequencies; [2] with these frequencies, Mr. Lemire would have been able to grow Gala Radio into the broadcasting company he had planned: a FM national broadcaster, for music format, plus a second AM channel, for talk radio.90 The majority ultimately determined that each of these links had been satisfied. First, relying on the investor’s record of success in radio operations in Ukraine at the relevant time, the majority considered that the investor would have been able to obtain the requisite number of FM frequencies, as well as the needed AM channel.91 Second, the tribunal determined that the claimant’s investment “was reasonably well funded… and it had the financial strength and the necessary know how” to develop the business into a successful nationwide operation.92 These conclusions, together, were in the majority’s view sufficient to establish a compensable “injury” caused by the State’s wrongful act. The tribunal then used these findings as the starting point for its quantum analysis, ultimately awarding the claimant $8.7 million in damages.93 89   See id., ¶ 171; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Dissenting Opinion of Jürgen Voss, ¶ 271 (Mar. 28, 2011). 90   Lemire v. Ukraine, supra note 12, ¶ 171. 91   Id., ¶¶ 179, 200–2. 92   Id., ¶¶ 203–7. 93   Id., ¶¶ 253–309. Notably, the tribunal at this stage of the analysis declined to calculate any damages arising from the claimant’s failure to obtain an AM broadcasting license, deeming these calculations too speculative, notwithstanding the fact that the claimant’s injury had been understood to encompass denials with respect to both AM and FM frequencies. Id., ¶¶ 259–61. This additional filtering by the majority reflects the position that an additional limitation for overly speculative damages may apply at the quantum stage, apart from any limitations placed by the causation analysis. See id., ¶¶ 245–9 (accepting that reparation will not be made for overly speculative damage, but stating that “[o]nce

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The dissent, in a 173-page opinion, took issue with several aspects of the majority’s decision, including its framing of the causation analysis.94 The majority’s analysis appeared to suggest that the relevant “injury,” for the purposes of assessing compensation, was the claimant’s inability to use the disputed frequencies “to grow Gala Radio into the [nationwide] broadcasting company he had planned.”95 The dissent argued that this was an odd framing of the injury: if the claimant’s claim is for lost profits arising from the failure to obtain the disputed frequencies, then shouldn’t the tribunal require the claimant to establish the causal nexus between the additional frequencies and the alleged lost profits?96 According to the dissent, the majority’s way of framing the inquiry, by eliding this last step, effectively deferred to the claimant’s business plans when determining the respondent’s scope of liability.97 The disagreement between the majority and the dissent also highlights a difference in approach to the principles of causation. The majority noted that tender offers posed a particular problem for causal analysis, in light of participation of other bona fide third parties who may have been awarded the tender even if the process had been conducted in perfect accordance with the law.98 This was a problem for both historical and proximate causation: it would be difficult to show both that, “but for” the breach, any particular license would have been awarded to claimant, and hence also that the breach was a proximate cause of the claimant’s business difficulties.99 The majority resolved this problem by customizing an approach to causation to suit the case at hand. It decided that, if it can be proven that “in the normal causation has been established,… less certainty is required in proof of the actual amount of damages; for this latter determination Claimant only needs to provide a basis upon which the Tribunal can, with reasonable confidence, estimate the extent of the loss.”). 94  The dispute between the majority and the dissent spilled into the trade press, with Dr. Voss summarizing his concerns in a letter to the Global Arbitration Review. See Lemire v. Ukraine dissenter answers critics, Global Arb. Rev. (May 13, 2011). 95   Lemire v. Ukraine, supra note 12, ¶ 171. 96   Lemire v. Ukraine, supra note 89, ¶ 329. 97   Id., ¶ 330. 98   Lemire v. Ukraine, supra note 12, ¶ 168. Moreover, in Ukraine, the national body deciding on tender awards was not required to explain the reasons for its decisions, adding an additional layer of uncertainty. Id. 99   Cf. Nordzucker v. Poland, supra note 3, ¶¶ 47–66 (finding no causal link between the respondent’s lack of transparency in the process for the sale of sugar plants and the loss of earnings that the claimant had expected to earn as the result of acquiring these plants, and noting, inter alia, that even if the respondent had been fully transparent in the process, it was under no obligation to sell the plants to the claimant).

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[course] of events a certain cause will produce a certain effect, [then] it can be safely assumed that a (rebuttable) presumption of causality between both events exists, and that the first is the proximate cause of the other.”100 This approach appeared to give pride of place to foreseeability—ordinarily a concept that goes to “legal causation”—in the majority’s causal analysis as a whole.101 Applying this approach, the tribunal concluded that, of the more than 80 frequencies on which the claimant could have bid had the tender process been run in accordance with the law, the claimant would have won enough frequencies (14, or about 17%) to effect its plan to become a nationwide broadcaster.102 The dissent faulted the majority for failing to determine whether any particular frequency would actually have been awarded to the claimant.103 The majority’s approach, Dr. Voss argued, was particularly problematic in the context of public tenders. Allowing a tender participant to recover damages for a flawed process—particularly damages for lost profits—on anything less than a near certainty could lead to “liability avalanches,” in which the respondent State would be fully liable to multiple participants in a single tender process.104 For this reason, Dr. Voss argued, domestic and European law sharply limited a tender participant’s ability to recover in these circumstances.105 In this context, it was especially important to have a particularized assessment of each tender offer at the first link of the causal chain, which the majority had not conducted.106 Essentially, the dissent’s argument was that, like the Chevron v. Ecuador tribunal, the majority in this case should have “re-litigated,” on a hypothetical basis, each tender offer to determine whether the claimant would have emerged the victor. Despite the divisions that separated the majority and dissenting opinions, the tribunal’s treatment of causation as a discrete step in the analysis surely brought some degree of clarity to an otherwise divisive case. The tribunal’s approach highlighted the critical steps in its reasoning—clarifying but also

100   Lemire v. Ukraine, supra note 12, ¶ 169. 101   See id., ¶ 170 (“The chain of causation can also be seen from the opposite point of view: offenders must be deemed to have foreseen the natural consequences of their wrongful acts, and to stand responsible for the damage caused.”). 102   Id., ¶¶ 174–9. 103   Lemire v. Ukraine, supra note 89, ¶¶ 296–310. 104   Id., ¶ 284. 105   Id., ¶¶ 274–95. For example, Dr. Voss stated that, under German law the claimant cannot recover lost profits unless it can show that the authority in charge of the tender “had no other lawful choice but to award the contract to claimant.” Id., ¶ 283. 106   See id., ¶¶ 300–3.

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subjecting them to intense criticism.107 This approach to causation also enabled the majority and the dissent to focus at this stage on principles of causation and their relation to the facts, without becoming entangled in lingering controversies concerning the tribunal’s application of the “fair and equitable treatment” standard,108 or, for the most part, in matters of valuation appropriately left to the quantum stage.109 The analysis also clarified the role of the parties’ respective economic experts, which, at least in the instant case, spoke solely to questions of valuation, leaving causation to argument by the parties pursuant to applicable legal principles.110 Nevertheless, this framework by no means resolved all disputes. 3.2 Rompetrol v. Romania The Rompetrol v. Romania case, decided two years after Lemire, provides a counterpoint, in which a tribunal was unable to even embark on the causal analysis outlined above. In Rompetrol, the claimant alleged, in the main, that Romania had breached its treaty obligations by improperly carrying out a corruption investigation that targeted individuals connected with the claimant’s local subsidiary.111 The claimant identified a series of actions by State authorities in connection with the investigation, which it alleged reflected a “campaign of harassment” against the claimant itself.112 The tribunal found some breaches of the treaty’s fair and equitable treatment standard, but not to the same extent that the claimant had alleged. As a general matter, the tribunal rejected the claimant’s allegations that the 107  Indeed, this aspect of the award may have proven influential in the subsequent annulment proceedings. See Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Ukraine’s Application for Annulment of the Award (July 8, 2013) (finding “that the causal link is clearly set out in the Award. The Tribunal’s reasoning on the question of the causal link is perfectly understandable as to how the Tribunal arrived from point A—the breach of the FET standard by Ukraine—to point B—that without such breach it was probable that Claimant would have been able to have a national coverage.”). 108  This is addressed extensively elsewhere. See Lemire v. Ukraine, supra note 84, ¶¶ 256–86; Lemire v. Ukraine, supra note 12, ¶¶ 40–66; Lemire v. Ukraine, supra note 89, ¶¶ 106–49, 429–78. 109  The one exception is the principle that reparation not be awarded for speculative harm, which is briefly touched upon at the causation as well as quantum stage. See, e.g., Lemire v. Ukraine, supra note 12, ¶ 246; Lemire v. Ukraine, supra note 89, ¶¶ 290–2. 110   See Lemire v. Ukraine, supra note 12, ¶ 152. 111   Rompetrol v. Romania, supra note 3, ¶¶ 151–2 (discussing the factual basis of the case, which the tribunal considered to be peculiar in investor-State arbitration). 112   Id., ¶¶ 198–279.

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investigation itself amounted to a campaign of harassment.113 And with respect to many of the specific acts alleged by the claimant to violate the treaty, the tribunal found no breach of the applicable standards.114 But the tribunal did find that certain officials displayed “animus and hostility” toward one of the individuals associated with the investor,115 and that this animus was confirmed by certain episodes in the long-running legal saga, such as the freezing of the claimant’s shares in its Romanian subsidiary,116 and the detention of and repeated attempts to arrest one of the claimant’s associates.117 Nevertheless, the tribunal stopped short of finding that the entire investigation had been unlawful.118 The tribunal accordingly phrased its finding of breach in limited terms.119 It stated that, while the claimant’s evidence fell “well short” of what would be needed to show a “co-ordinated campaign of harassment”, the facts nonetheless demonstrated a “pattern of disregard” by State prosecutorial offices for the “likely and foreseeable effects” of its activities on the interests of the foreign investor.120 The tribunal found that State prosecutors, for an extended period of time, knew that the interests of the investor “stood directly or indirectly in the line of fire”, and yet they took no steps “either to assess or to avoid, minimize, or mitigate that possibility of harm.”121 Accordingly, citing certain procedural irregularities in the investigation, the tribunal held Romania liable for a breach of the treaty, but only “to that limited extent.”122 113   Id., ¶ 276. 114   See id., ¶¶ 232, 254, 261, 265, 269. 115   Id., ¶ 245. 116   See, e.g., id., ¶ 248 (noting that the attachment of claimant’s shares in its Romanian subsidiary, and the prosecutor’s subsequent delay of the legal proceedings to release the attachment, was “cogent confirmatory evidence of prosecutorial animus,” regardless of whether it was a treaty breach in itself). 117   Id., ¶ 251 (“[T]he Tribunal cannot find anything wrongful in a prosecutor resorting to [a lawful pretrial detention] procedure. However, the entire chapter reflects no credit on the DIICOT prosecutors—and Ms. Cristescu in particular—when one puts together cumulatively the procedural defects in their first application, the patently thin grounds advanced by them to justify the need for pretrial detention, their persistence with a second application nine months later with no apparently stronger basis, and finally what appears plainly to be Ms. Cristescu’s defiance of the CSM investigation into the matter for which (see above) the Respondent has offered no explanation.”). 118   See, e.g., id., ¶ 286. 119   See id., ¶ 299(b)–(c). 120   Id., ¶ 276. 121   Id., ¶ 279. 122   Id.

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As the tribunal recognized, this limited finding of breach posed a problem for causal analysis. The claimant’s alleged injury concerned damage to its reputation as the result of the investigations, which further resulted in increased financing costs and loss of business opportunities, as well as the loss of property or funds (e.g., legal costs) in connection with the investigation.123 But as in Lemire, this alleged injury posed overarching problems of causation in light of the specific breach at issue. In particular, because Romania was found to have acted unlawfully only in the manner in which it conducted the investigation, the appropriate measure for damages would be limited to the compensation necessary to put the claimant in the position that it would have been had the investigation been carried out in a manner that was consistent with the treaty. The tribunal, however, found that it was unable to perform this kind of analysis in light of the parties’ evidence and arguments on damages. The claimant presented its damages using an “event study method,” the goal of which is to determine the effect of the impugned investigation and prosecution on the stock price of the claimant’s investment.124 In constructing their method, the claimant’s damages experts proceeded from the starting point that “all the Romanian criminal investigations connected with Rompetrol should be regarded in principle and in their entirety as unlawful.”125 In light of the limited finding of liability, the tribunal noted, this “all-or-nothing approach … ends up leaving the analysis somewhat stranded.”126 Moreover, the tribunal continued, even if the event study method could be rerun on a more limited basis, it was fundamentally ill-suited to the type of breach at issue in the instant case. The basic premise of the method was to examine changes in stock prices in response to public disclosures about the corruption investigation.127 This approach, the tribunal found, was incapable of “differentiating between the market effects of a company’s coming under investigation by the authorities for a legitimate purpose and the asserted incremental effects of illegalities that happened in the course of such an investigation.”128 In other words, the tribunal found itself unable, based on the evidence presented, to link the alleged breach (i.e., procedural irregularities in the

123   Id., ¶ 282. 124   Id., ¶ 283. 125   Id., ¶ 286. 126   Id. 127   Id., ¶ 283. 128   Id., ¶ 286.

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investigation) with the alleged injury to the claimant’s reputation and business. It stated: [D]amages, in the legal sense, must be understood as what is required to make good in monetary terms some enduring alteration for the worse in the economic, financial or commercial position of the foreign investor which can be traced, in a sufficiently direct and proximate way, to the host State’s unlawful course of action, taken as a whole. If so, then it means that the application of the event study method to the present case must be regarded as inherently questionable. … The Tribunal therefore could only accept as a valid technique for the quantification of economic damages one which, proceeding from the prior need to establish by the appropriate standard of proof a sufficient causal nexus between the claimed illegality and the asserted loss, allows a suitably objective comparison then to be made between the status quo ante and the Claimant’s situation at the time that suit is brought. The event study method as advanced in these proceedings fails that test, and no alternative method has been advanced that would put the Tribunal in a position to determine whether any quantifiable economic loss to the present Claimant flowed specifically from the potentially actionable events identified … above.129 The foregoing discussion demonstrates the propensity of the causation analysis to break down when there is a mismatch between the prevailing theory of liability and the data used to conduct the quantum calculation. The tribunal, working with the same broad analytical framework that was at play in the Lemire case, apparently felt unable to even begin the causal analysis. This was not a run-of-the-mill case where the tribunal simply rejected the claimant’s assertion that A led to B, or B to C, on the ground that the evidence was insufficient or the causal relationship too remote. Rather, the tribunal seemed to find itself in a position where it could not take up the causal chain, much less begin working through the links. The Rompetrol case thus cautions litigants to pay careful attention to injury and causation when crafting their theories of damages, and to consider what theories of causation can be adapted when the tribunal adopts a theory of liability other than the claimant’s primary or preferred option. 129   Id., ¶¶ 287–8.

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Conclusion

Perhaps it is best to conclude where we began, with Hume’s admonition that “we are never able, in a single instance, to discover any power or necessary connexion; any quality, which binds the effect to the cause, and renders the one an infallible consequence of the other.”130 Nevertheless, ever an optimistic skeptic, Hume understood the value that experience, over abstract reason, brings to the causation inquiry.131 After all, in uncovering causal links between acts, if “infants, nay even brute beasts, improve by experience,”132 then surely arbitrators and counsel can do the same. In discussing the structures of the causation inquiry, our purpose here was not to provide a schematic for how one should approach the inquiry in any given instance. Instead, this Chapter invites a renewed focus on the inquiry itself. Causation sits within the adjudicatory process of every tribunal’s mandate and therefore necessarily stands beside every litigant seeking to prove his or her case. Its internal and external overlaps, its uncertainties, and its nuances will always fit uncomfortably within any strict structure that legal reasoning might impose. Thus, our project in approaching the causation inquiry in investor-State arbitration was necessarily a modest one. Indeed, the real work of the causation inquiry—as Hume himself knew—is often done simply by posing the question.

130   D avid Hume, An Enquiry Concerning Human Understanding 41 (Hackett Publishing, 2d ed. 1993) (1977). 131   See id., at 37. 132   Id., at 25.

Chapter 5

Assessing Compensation and Damages in Expropriation versus Non-expropriation Cases Irmgard Marboe 1

Introduction

One of the key features of international investment arbitration, and a significant distinction from commercial arbitration, is the possibility of invoking an alleged expropriation before an international tribunal and claiming compensation or damages in this respect. The behavior of States in the exercise of their sovereign power is thereby put under scrutiny. Other acts of States, which are not expropriatory, are also assessed in international investment arbitration, but the unique feature of expropriation is that it is not per se unlawful. It is recognized under general international law, and more specifically also under international investment agreements (“IIAs”), that a State may expropriate foreign private property.1 However, in so doing, the State must fulfill certain conditions, including the payment of compensation.2 Non-expropriation claims address State acts that violate one of the treatment standards foreign investors are accorded via IIAs. These typically include “fair and equitable treatment,” “full protection and security,” “national treatment,” “most favored nation treatment,” “transfer of funds,” and so-called “umbrella clauses.”3 If the State violates these obligations, it commits an unlawful act. The question that arises is to what extent it makes a difference for the standard of compensation whether an expropriation or a breach of another treaty standard occurred. Furthermore, if a State does not comply with the conditions of expropriations set out in the treaty, does it also commit an unlawful act? To what extent is the difference between an expropriation claim and a 1  M alcolm Shaw, International Law 627 (8th ed. 2017); Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law 98 (2nd ed. 2012). 2  Other conditions include that the expropriation must be in the public interest, non-discriminatory, and in accordance with due process. See detailed discussion infra Section 3. 3  For a comprehensive overview, see August Reinisch ed., Standards of Investment Protection (2008).

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non-expropriation claim relevant for the calculation of compensation or damages? And is there, or should there be, a difference between treaty-compliant and non-compliant expropriations as regards quantum? The distinction between damages in expropriation versus non-expropriation cases also becomes relevant if a tribunal only has jurisdiction for one of those claims but not for both. Some bilateral investment treaties limit the jurisdiction of arbitral tribunals to issues of expropriation or to the amount of compensation in expropriation cases. Damages for other violations of the applicable bilateral investment treaty would not be covered. This was, for example, the case in Saipem v. Bangladesh4 and Quasar de Valores v. Russia.5 On the other hand, expropriation may not fall under the jurisdiction of investment tribunals, in contrast to other breaches of the applicable investment treaty. The annulment of the award in Pey Casado v. Chile was specifically based on the lack of distinction between the valuation of the property for the alleged expropriation, which was outside the jurisdiction of the tribunal, and the valuation of damage caused by non-expropriation breaches of the bilateral investment treaty that the tribunal found had occurred.6 In the following, rules and principles for the calculation of expropriation and non-expropriation damages shall be explored first on the basis of the applicable law (Section 2). Then, the distinctive features of expropriation will be explored in more detail, including the difference between “lawful” and “unlawful” expropriation (Section 3). With regard to non-expropriation cases, some thorny issues with regard to the relevant test and some recent examples shall also be analyzed (Section 4). Final thoughts are discussed in the conclusion (Section 5). 2

The Applicable Law

The calculation of damages is guided by the law applicable to the respective dispute. The question of which law is applicable with respect to remedies in investor-State arbitration is not entirely straightforward. Dispute resolution 4  Saipem S.p.A. v. People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Award, ¶ 97 (June 30, 2009). 5  Quasar de Valores SICAV S.A. et al. v. Russian Federation, SCC Case No. 24/2007, Award, ¶ 186 (July 20, 2012). 6  Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Decision on the Application for Annulment of the Republic of Chile, ¶ 283 (Dec. 18, 2012).

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clauses in investment treaties usually refer to the treaty itself and “applicable rules of international law”7 or “applicable rules and principles of international law.”8 With respect to proceedings under the auspices of ICSID, Article 42(1) of the Convention provides: The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.9 These provisions raise the question of which rules or principles of international law are “applicable” to the calculation of compensation and damages in international investment arbitration.10 As international investment treaties are “treaties” under international law,11 the governing law of an alleged breach is “in its nature governed by international law.”12 This seems to be the prevailing

7    See, e.g., United States Model Bilateral Investment Treaty, art. 30 (2012); Canada Model Agreement for the Promotion and Protection of Investments, art. 40 (2004); North American Free Trade Agreement [hereinafter NAFTA], art. 1131 (1993). 8    See, e.g., Austria Model Bilateral Investment Treaty, art. 18 (2008); Energy Charter Treaty (with annexes) [hereinafter ECT], art. 26(6) (Dec. 17, 1994), 2080 U.N.T.S. 95. 9   I CSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States, art. 42(1) (2006) (emphasis added). 10  “Compensation” is the term used in IIAs to denote the amount of money that has to be paid in cases of expropriation. In addition, it is used for the financial form of reparation under the law of State responsibility. However, in the latter case, it actually denotes “damages,” namely the amount to be paid to the victim of an unlawful act who suffered damage, similar to the financial remedy after a breach of contract or a tort under national law. For a detailed discussion of the different meanings and functions of the two terms in various legal systems and languages, see Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law 10–9 (2nd ed. 2017). 11   As Gazzini points out: “BITs squarely fall within the definition of treaty under Article 2(1)(a) of the Vienna Convention on the Law of Treaties (VCLT) as they are international agreements concluded between States in written form and governed by international law.” Tarcisio Gazzini, Bilateral Investment Treaties, in International Investment Law: The Sources of Rights and Obligations 99, 106 (Tarcisio Gazzini & Eric De Brabandere eds., 2012). 12   K enneth Vandevelde, Bilateral Investment Treaties: History, Politics, and Interpretation 445 (2010).

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view in the practice of international investment tribunals13 and in academic writing.14 Under the law of State responsibility, the guiding principle for the assessment of quantum is “full reparation.” Article 31 of the 2001 International Law Commission (“ILC”) Articles on State Responsibility provide: Article 31. Reparation 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.

The ILC refers in its Commentary to Article 31 to the famous dictum of the Permanent Court of International Justice in Factory at Chorzów: The essential principle contained in the actual notion of an illegal act—a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals—is that reparation must, as far as possible, wipe out all the consequences of the illegal act and

13   See, e.g., Amco Asia Corp. et al. v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on the Application for Annulment, ¶ 21 (May 16, 1986), 1 ICSID Rep. 509 (1993); CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Partial Award, ¶ 616 (Sept. 13, 2001); Petrobart Ltd. v. Kyrgyz Republic, SCC Case No. 126/ 2003, Award, 77–8 (Mar. 29, 2005); Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award, ¶ 50 (July 14, 2006); ADC Affiliate Ltd. & ADC & ADMC Mgmt. Ltd. v. Hungary, ICSID Case No. ARB/03/16, Award, ¶¶ 493–4 (Oct. 2, 2006); LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award, ¶ 31 (July 25, 2007); BG Group Plc. v. Republic of Argentina, UNCITRAL Arbitration Proceeding, Final Award, ¶¶ 427–8 (Dec. 24, 2007); Archer Daniels Midland Co. & Tate & Lyle Ingredients Am., Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Award, ¶ 280 (Nov. 21, 2007); Gemplus S.A. et al. and Talsud S.A. v. United Mexican States, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/04/3, Award, ¶¶ 11.9–11.10, 11.12–11.13, 12.51, 13.79–13.80, 13.82–13.83 (June 16, 2010); Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, ¶¶ 147, 151, 155–6 (Mar. 28, 2011). 14   D olzer & Schreuer, supra note 1, at 17; Ole Spielermann, Applicable Law, in The Oxford Handbook of International Investment Law 89, 107–10 (Peter Muchlinski et al. eds., 2008); Christoph Schreuer et al., The ICSID Convention: A Commentary ¶¶ 193–6 (2nd ed. 2009).

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reestablish the situation which would, in all probability, have existed if that act had not been committed.15 However, with respect to the calculation of damages in investor-State arbitration, the argument has recently revived that international law has developed as the law governing inter-State relations and as such could not, or at least not automatically, be applied in the relationship between private persons and States, in particular as regards the law of State responsibility and the remedies contained therein.16 The main support for this argument is found in Article 33(2) of the 2001 ILC Articles on State Responsibility, which states that, with regard to the “Scope of international obligations set out in this Part”: 2. This part is without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State.17 The formulation “without prejudice” raises the question of the extent to which the consequences of a breach of international law as formulated in Part II of the 2001 Articles on State Responsibility (Articles 28 to 41) are relevant to the relation between investors and States.18 The 2001 ILC Articles leave to the primary rules of international law the decision of whether the ultimate beneficiary of rights and remedies could also be non-State entities.19 15   Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17, at 47 (Sept. 13) (quoted in Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries [hereinafter ILC Draft Articles], art. 31, commentary 2 (2001), 2 Y.B. Int’l L. Comm’n 31, U.N. Doc. A/CN.4/SER.A/2001/Add.1 (Part 2)). 16  Martins Paparinskis, Investment Treaty Arbitration and the (New) Law of State Responsibility, 24(2) Eur. J. Int’l L. 617, 621 et seq. (2013); Ronald Goodman & Yuri Parkhomenko, Does the Chorzów Factory Standard Apply in Investment Arbitration? A Contextual Reappraisal, 32(2) ICSID Rev. 304 (2017). 17  G .A. Res. 56/83, annex, Articles on the International Responsibility of States for Internationally Wrongful Acts [hereinafter 2001 ILC Articles] (Jan. 28, 2002). 18  Paparinskis, supra note 16, at 635. 19  I LC Draft Articles, art. 33, commentary 4. The ILC carefully distinguished between primary and secondary norms of international law. The rules on State responsibility are secondary norms of international law, meaning that they only describe the consequences of a breach of an applicable primary obligation. A primary obligation is an obligation resulting from any source of international law, as codified in Article 38(1) of the International Court of Justice, i.e., mainly treaties, customary international law, and general principles

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It is therefore necessary to analyze more closely what kind of rights are accorded to investors under IIAs. In order to achieve the goal of providing a stable and reliable legal framework,20 the agreements provide a variety of substantive standards of protection to foreign investors and, in addition, procedures for dispute settlement. A defining feature of IIAs is that they include procedures for disputes between investors and States in addition to disputes between States. The direct access to international arbitration represents a normative breakthrough with respect to traditional treaties under international law, which were concerned with regulating the relationship between States.21 While the creation of direct rights of individuals by international treaties is not unusual,22 the procedural rights accorded to them remain the exception. Accordingly, human rights treaties are one exception; IIAs are another. A difference between the rights of States and the rights of investors in investment arbitration could exist if the applicable treaties contained specific rules on remedies that are different from those applicable between States under the law of State responsibility. The example of Article 41 of the European Convention on Human Rights shows that this would in principle be possible.23 However, in IIAs such a difference does not seem to exist. By way of example, NAFTA Article 1135, like several other bilateral24 and regional25 investment protection treaties, states under the title “Final Award”: of law. See James Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries 1, 14 (2002). 20   See, e.g., Jeswald Salacuse, THE THREE LAWS OF INTERNATIONAL INVESTMENT 355 (2013); Vandevelde, supra note 12, at 108–14, Dolzer & Schreuer, supra note 1, at 20–7. 21  Gazzini, supra note 11, at 110. 22   See, e.g., Vienna Convention on Consular Relations, art. 36 (Apr. 24, 1963), 596 U.N.T.S. 261 (as discussed in LaGrand (Germany v. United States), Judgment, 2001 I.C.J. 466, ¶ 77 (June 27)); see also Rosalyn Higgins, Problems and Process: International Law and How We Use It 54 (1994). 23  As is well known, Article 41 of the Convention provides: “If the Court finds that there has been a violation of the Convention or the Protocols thereto, and if the internal law of the High Contracting Party concerned allows only partial reparation to be made, the Court shall, if necessary, afford just satisfaction to the injured party.” (emphasis added). See Convention for the Protection of Human Rights and Fundamental Freedoms, as amended, art. 41 (Nov. 4, 1950), E.T.S. 5. 24   See, e.g., U.S. Model BIT, supra note 7, art. 34; Canada Model BIT, supra note 7, art. 44; Austria Model BIT, supra note 8, art. 19. 25   See Comprehensive Economic and Trade Agreement between Canada and the European Union [hereinafter Canada-EU CETA], art. 8.39 (Oct. 30, 2016), 2017 O.J. (L 11); Trans-Pacific

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1. Where a Tribunal makes a final award against a Party, the Tribunal may award, separately or in combination, only: (a) monetary damages and any applicable interest; (b) restitution of property, in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution. A tribunal may also award costs in accordance with the applicable arbitration rules. … 3. A Tribunal may not order a Party to pay punitive damages.26 While Article 1135 of NAFTA does not provide any further guidance on how “monetary damages” should be calculated, it explicitly states that restitution is an available remedy, “separately or in combination.” There is no indication that tribunals should deviate under this formulation from the Chorzów formula, which prescribes: 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.27 In the same vein, the 2001 ILC Articles mention restitution and compensation as two available remedies to be awarded “singly or in combination” in order to achieve “full reparation.”28 The only difference between the treaty provision and the law of State responsibility is that the former leaves a greater choice

Partnership [hereinafter TPP], art. 9.29 (Feb. 4, 2016); ECT, art. 26(8) (slightly different in the formulation but similar in substance). 26  N AFTA, art. 1135. 27   Factory at Chorzów, supra note 15, at 47. 28   See 2001 ILC Articles, art. 34 (on the “Forms of reparation”: “Full reparation for the injury caused by the internationally wrongful act shall take the form of restitution, compensation and satisfaction, either singly or in combination, in accordance with the provisions of this chapter.”).

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to the tribunal and the respondent,29 while the latter sets a clear priority for restitution in Article 36(1): “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.”30 It is also possible that States agree to grant more limited remedies to foreign investors under international investment protection treaties. It could, for example, be explored to what extent the remedies would be different, if international investment law was understood as constituting a species of global constitutional and administrative law.31,32 However, current developments point in another direction. The Trade Agreement between Canada and the EU (“CETA”), which still awaits entry into force at the time of writing,33 provides specific guidance towards the calculation of damages in Article 8.39: Monetary damages shall not be greater than the loss suffered by the investor or, as applicable, the locally established enterprise, reduced by any prior damages or compensation already provided. For the calculation of 29  The Austria Model BIT contains an even larger choice of remedies, namely, in addition to pecuniary compensation and restitution in kind, “a declaration that the Contracting Party has failed to comply with its obligations under this Agreement” and “with the agreement of the parties to the dispute, any other form of relief.” This provision does not limit the tribunal’s competence in awarding remedies, but brings it even more in accordance with the general principles of State responsibility. See August Reinisch, Austria, in Commentaries on Selected Model Investment Treaties 15, 45 (Chester Brown ed., 2013). 30  2001 ILC Articles, art. 31 (emphasis added). 31   Gus Van Harten & Martin Loughlin, Investment Treaty Arbitration as a Species of Global Administrative Law, 17(1) Eur. J. Int’l L. 121 (2006); Stephan Schill ed., International Investment Law and Comparative Public Law (2010); Santiago Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation (2009). 32  A comparative analysis of rules on the liability of States for administrative and legislative acts, including that of the European Union, has shown that the “administrative law” paradigm would not lead to a markedly different solution on the matter of remedies. See Irmgard Marboe, State Responsibility and Comparative State Liability for Administrative and Legislative Harm to Economic Interests, in International Investment Law and Comparative Public Law 377 (Stephan Schill ed., 2010). 33  Canada-EU CETA (Annex to the Proposal for a Council Decision on the signing on behalf of the European Union of the Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States).

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monetary damages, the Tribunal shall also reduce the damages to take into account any restitution of property or repeal or modification of the measure.34 This provision reinforces the principle of “full reparation” and the availability of restitution, but emphasizes the importance of avoiding overcompensation. While this provision is directed toward the protection of respondents against large damages awards, claimants should also be protected, for example against the very high costs often involved with the conduct of international arbitration proceedings: The CETA Joint Committee shall consider supplemental rules aimed at reducing the financial burden on claimants who are natural persons or small and medium-sized enterprises. Such supplemental rules may, in particular, take into account the financial resources of such claimants and the amount of compensation sought.35 The example of CETA shows that in contemporary negotiations States are aware of the possibility to provide more explicit rules with respect to remedies and proceedings. The fact that the EU members and Canada did not depart from the rule of “full reparation” shows that it was their intention, despite the considerable critique and opposition during the negotiations, to retain this concept, which has been applied for decades in investor-State disputes. It remains to be seen whether this adherence will also be upheld in future negotiations, but at this moment, it can be surmised that the remedies available to investors under IIAs are not subject to a different standard than that provided under general international law. 3

Expropriation under International Investment Law

Protection against expropriation by host States has always been one of foreign investors’ major concerns. Changes in political leadership or priorities may seriously threaten the long-term enjoyment of property rights in foreign countries. Expropriations, either direct or indirect, are a means for governments to implement their political and economic choices. Conflicts often arise in the

34   Id., art. 8.39(3). 35   Id., art. 8.39(6).

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area of natural resources over which countries have permanent sovereignty.36 The tensions between safeguarding national sovereignty and attracting and protecting the foreign investment needed to exploit these resources are characteristic of the problems in international investment law. At the international level, governments could hardly agree on general principles concerning the conditions for expropriation despite considerable efforts for many years.37 One of the foremost aims of IIAs is thus to bring clarity between contracting parties on this issue. Expropriation is different from other treatment standards in international investment law in several respects. Firstly, expropriation is characterized by a total deprivation of the enjoyment of property rights. Whether this occurs by a formal transfer of title or not,38 and whether the intention to expropriate or the sole effect is decisive,39 goes beyond the scope of the present Chapter. For the purpose of calculating compensation or damages, it suffices to note that once a tribunal has decided that an expropriation occurred, the investment as a whole has been destroyed. As a result, there is no prospect of the 36   See G.A. Res. 1803 (XVII), Permanent Sovereignty over Natural Resources (Dec. 14, 1962) (generally regarded as a reflection of customary international law). See also Patrick Norton, A Law of the Future or a Law of the Past? Modern Tribunals and the International Law of Expropriation, 85(3) Am. J. Int’l L. 474, 479 (1991); Salacuse, supra note 20, at 325. 37  The failure of the Multilateral Agreement on Investment initiated by the OECD in 1998 is one example of the failure to reach an agreement on a multilateral level. See Muthucumaraswamy Sornarajah, The International Law on Foreign Investment 3 (3rd ed. 2010). Previously, the controversies about the establishment of a New International Economic Order also showed the lack of international consensus. See G.A. Res. 3201 (S-VI), Declaration on the Establishment of a New International Economic Order (May 1, 1974); G.A. Res. 3202 (S-VI), Programme of Action on the Establishment of a New International Economic Order (May 1, 1974); G.A. Res. 3281 (XXIX), Charter of Economic Rights and Duties of States (Dec. 12, 1974). For the development of this discussion, see Marboe, supra note 10, at 46–9. 38  On the distinction between direct and indirect expropriation, numerous authors have published insightful analyses in the past decades. More recent publications, with references to the earlier eminent authors, include: Anne Hoffmann, Indirect Expropriation, in Standards of Investment Protection 151–70 (August Reinisch ed., 2008); August Reinisch, Expropriation, in The Oxford Handbook of International Investment Law 407, 420–56 (Peter Muchlinski et al. eds., 2008); Ursula Kriebaum, Expropriation, in International Investment Law: A Handbook 959, 971–81 (Marc Bungenberg et al. eds., 2015). 39  For a discussion of the expropriatory intent, the “sole effects” doctrine, “police-powers,” legitimate regulation and others see Kriebaum, supra note 38, at 959, 982–1006; Rudolf Dolzer, Indirect Expropriations: New Developments?, 11 N.Y.U. Env’t L. J. 64 (2002).

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former owner continuing his/her business operations in the country and there is no residual value to gain. Secondly, as discussed above, expropriation of foreign property as such is not prohibited under general international law.40 IIAs do not change this situation and leave the sovereign right to expropriate principally untouched. Nevertheless, IIAs increase the level of protection of foreign property by defining more clearly the conditions of expropriation. This enhances legal certainty, which is further reinforced by the possibility of dispute settlement through international arbitration. Thirdly, expropriation is the only treaty standard that contains a measure of compensation and often also includes guidelines on how to assess the amount due, including the valuation date and interest. This characteristic feature of expropriation is frequently highlighted in international arbitration as an advantage of expropriation in relation to other treaty standards. The conditions for expropriation in bilateral treaties have largely developed in a similar way, starting in the post-World War II era with so-called Friendship, Commerce, and Navigation Treaties until the more modern Bilateral Investment Treaties, that were particularly booming in the 1990s.41 Most of them are based on the well-known Hull formula, which requires a public purpose and “adequate, effective and prompt compensation.”42 These conditions are also reflected in multilateral treaties, such as in Article 13 of the Energy Charter Treaty: Investments of Investors 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 40   See Shaw, supra note 1, at 627; Dolzer & Schreuer, supra note 1, at 98. 41   R afael Leal-Arcas, International Trade and Investment Law: Multi­ lateral, Regional and Bilateral Governance 187–90 (2010); Stephan Schill, The Multilateralization of International Investment Law 8–19, 40–4 (2009). 42   See Note of Secretary of State Cordell Hull to Mexican Ambassador Castillo Nájera (Apr. 3, 1940) reprinted in 8 Dig. Int’l L. 1020 (Marjorie Whiteman ed., 1967): “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.”

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discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation.43 In general, these requirements have not posed much difficulty to interpret. For example, the requirement of “prompt” is generally understood as “paid without delay.” If this is not possible, an award of interest may be necessary to compensate for the delay.44 The criterion “effective” means “fully realizable.”45 Some treaties contain more specific definitions on which currencies are acceptable.46 The payment of “adequate compensation” is undoubtedly the vaguest criterion. Since it is the reason for quite some misunderstanding and confusion, this criterion shall be analyzed in more detail. 3.1 Adequate Compensation It is interesting to note that “adequate compensation,” despite its vagueness, is still the most broadly used standard in IIAs.47 Even though the standard allegedly claimed by industrialized States is “full compensation,” it can hardly be found in treaties.48 To provide some guidance on what “adequate” 43  E CT, art. 13; see also NAFTA, art. 1110; Canada-EU CETA, art. 8.12(1); TPP, art. 9.8; Draft Transatlantic Trade and Investment Partnership, art. 5 (2015). 44   See John Gotanda, Interest, in International Investment Law: A Handbook 1142– 53 (Marc Bungenberg et al. eds., 2015). 45   See NAFTA, art. 1110(3): “Compensation shall be paid without delay and be fully realizable.” 46   See id., art. 1110(5): “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.” 47   See Sergey Ripinsky with Kevin Williams, Damages in International Investment Law 507–39 (2008) (table on provisions used in international investment agreements). 48  The few examples that contain the “full compensation” standard include: Agreement between the Arab Republic of Egypt on the one hand, and the Belgo-Luxemburg Economic Union on the other hand, on the Encouragement and Reciprocal Protection of Investments, art. 5 (Feb. 28, 1977) (terminated and replaced by the bilateral treaty of 1999); and Agreement between the Republic of Korea, on the one hand, and the BelgoLuxemburg Economic Union, on the other hand, on the Encouragement and Reciprocal Protection of Investments, art. 5 (Dec. 20, 1974) (terminated and replaced by the bilateral treaty of 2006). The 2011 treaty between Kenya and Slovakia (not yet in force) contains the obligation to provide “prompt and full compensation.” See Agreement between

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compensation means, treaties usually describe it in some detail, as in the case of NAFTA’s Article 1110, which refers to the concept of “fair market value”: (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. 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.49 Similarly, the World Bank in a survey and the subsequent Guidelines on the Treatment of Foreign Direct Investment of 1992 also concluded that “adequate” means “fair market value”: 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.50 Thus, “adequate compensation” has come to be understood to mean “fair market value.” The term “fair market value” is defined by the American Institute for Certified Public Accountants 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 compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.51 the Government of the Slovak Republic and the Government of the Republic of Kenya for the Promotion and Reciprocal Protection of Investment, art. 5 (Dec. 14, 2011). But see Sornarajah, supra note 37, at 128; Matthias Herdegen, Principles of International Economic Law 366–7 (2013). 49  N AFTA, art. 1110(2); see also, Canada-EU CETA, art. 8.12(2). 50  World Bank, Guidelines on the Treatment of Foreign Direct Investment, in Legal Framework for the Treatment of Foreign Investment, vol. 2, Guideline IV(3) (1992). 51   See American Institute for Certified Public Accountants, International Glossary of Business Valuation Terms, in Statement of Standards on Valuation Services, No. 1 [hereinafter AICPA, International Glossary of Business Valuation Terms], at 44 (2015).

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The value of an asset, under this concept, is best represented by the hypothetical price agreed between hypothetical willing buyers and sellers on the valuation date. In international valuation practice, however, the concept of “fair market value” is not generally recognized. The International Valuation Standards Council prefers to differentiate between “market value” and “fair value.” The “market value” represents a basis of valuation, which is characterized as a value in exchange52 between market participants: 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.53 By contrast, “fair value” represents value in exchange between specific negotiating partners, namely 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.”54 As such it requires taking into consideration the specific circumstances of the transaction.55 It follows from these definitions that “fair market value” and “market value” are largely synonymous. The different concept of “fair value” would only be important in the present context if the investment protection treaty mentioned it, which is generally not the case.56 Most investment protection treaties use one of the following terms: “fair market value,”57 “market value,”58 “genuine 52  As to the distinction between “value in exchange” and “value to the holder,” see infra Section 3.1. 53   See International Valuation Standards Council, International Valuation Standards 2013: Framework and Requirements [hereinafter IVSC, International Valuation Standards], ¶ 29 (2013) (emphasis in original). 54   Id., ¶ 38. 55   Id., ¶ 40. 56  An exception is the agreement between Malaysia and the Netherlands, which uses the term “fair and equitable value.” Agreement on Economic Co-operation between the Kingdom of the Netherlands and Malaysia, art. 9 (June 15, 1971). 57   See, e.g., Treaty between the Government of the United States of America and the Government of Mozambique concerning the Encouragement and Reciprocal Protection of Investment, art. 3 (Dec. 1, 1998); Agreement between Japan and the Socialist Republic of Viet Nam for the Liberalization, Promotion and Protection of Investment, art. 9 (Nov. 14, 2003). 58   See, e.g., Agreement between the Government of Australia and the Government of the Republic of Indonesia concerning the Promotion and Protection of Investments, art. 5

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market value,”59 “normal market value,”60 or just “value.”61 Another relatively widespread term is “genuine value,”62 which is not a technical term in valuation practice63 and generally does not have a distinct meaning from market value. By contrast, the term “real value,” which is also sometimes used,64 while not representing a technical term in valuation practice either, might be different from market value.65 Specific treaty interpretation would be necessary to determine whether this different meaning was in fact the intention of the parties to the treaty.66 The tribunal in Rumeli v. Kazakhstan, for example, devoted some attention to the difference between “fair market value” and “real value,” (Nov. 17, 1992); Agreement between the Government of Australia and the Government of the Republic of Chile on the Reciprocal Promotion and Protection of Investments, art. 6 (July 9, 1996). 59   See, e.g., Agreement between the Swiss Confederation and the Republic of India for the Promotion and Protection of Investments, art. 5 (Apr. 4, 1997). 60   See, e.g., Agreement between Japan and the Islamic Republic of Pakistan concerning the Promotion and Protection of Investment, art. 5 (Mar. 10, 1998). 61   See, e.g., Agreement between the Czech Republic and the Republic of Zimbabwe for the Promotion and Reciprocal Protection of Investments, art. 5 (Sept. 13, 1999); Agreement between the Government of the Republic of Finland and the Government of the Republic of Nicaragua on the Promotion and Protection of Investments, art. 5 (Sept. 17, 2003). 62   See, e.g., Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of the Congo for the Promotion and Protection of Investments, art. 5 (May 25, 1989); Agreement on encouragement and reciprocal protection of investments between the Arab Republic of Egypt and the Kingdom of the Netherlands, art. 6 (Jan. 17, 1996). 63  Neither the American Institute of Certified Public Accountants nor the International Valuation Standards Council glossaries contain an entry on “genuine value.” 64   See, e.g., Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China concerning the Promotion and Reciprocal Protection of Investments, art. 5 (May 15, 1986); Agreement between the Republic of Turkey and the Republic of Kazakhstan concerning the Reciprocal Promotion and Protection of Investments, art. 3 (May 1, 1992). 65   The American Institute of Certified Public Accountants mentions “real value” to explain the term “intrinsic value” in the following way: “the value that an investor considers, on the basis of an evaluation or available facts, to be the ‘true’ or ‘real’ value that will become the market value when other investors reach the same conclusion. When the term applies to options, it is the difference between the exercise price and strike price of an option and the market value of the underlying security.” See AICPA, International Glossary of Business Valuation Terms, at 45. 66  If the treaty interpretation according to Article 31 of the Vienna Convention does not lead to a “meaningful result,” preparatory drafts or negotiation protocols as subsidiary means of interpretation can be used to shed some light on the issue. Vienna Convention on the Law of Treaties arts. 31, 32 (May 23, 1969), 1155 U.N.T.S. 331.

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which was the applicable BIT standard for expropriated property, but came to the conclusion that “[n]o particular distinction can be drawn between the two terms.”67 The existence of numerous bilateral and regional IIAs has brought considerable certainty on the conditions for expropriation under international law. They have in common that the “value” of an expropriated asset needs to be developed in an “objective” way, in the sense that hypothetical market participants are chosen as the final arbiter. In practice, this is not so self-evident. As Pratt and Niculita explain, the “word value means different things to different people. Even to the same people, value means different things in different contexts.”68 The objective concept of value is not necessarily prevailing in the full reparation standard under the law of State responsibility. Indeed, the duty to “wipe out all the consequences” in accordance with the Chorzów Factory dictum does not provide an indication of how the financial situation of the victim with and without the breach must be determined. In private law, the “but-for” principle is known as the “differential method,” which is used to determine a specific type of value (i.e., the “interest”) which is distinctly different from the “objective” or “common value.”69 While the latter is the value an asset has for any person, the former is more specifically the value the asset has to the owner, which represents the value the victim has the right to receive. International valuation standards also differentiate between “value to the owner” and “value in exchange,” defining the former as “investment value” or “special value.”70 Following the private law approach, the calculation of “full reparation” would, as a matter of principle, be based on different premises

67   Rumeli Telekom A.S. & Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, ¶ 786 (July 29, 2008). 68  Shannon P. Pratt & Alina V. Niculita, Valuing a Business, in The Analysis and Appraisal of Closely Held Companies 41 (5th ed. 2008). 69  In “Theory on Interest” (“Lehre von dem Interesse”, Schetschke und Sohn, Braunschweig, 1855, 3–18), the well-known German scholar Friedrich Mommsen elaborated on the “differential method” and explained the difference between the “common value” (“Gemeiner Wert”), which any person sees in an asset, and “the interest” (“das Interesse”) of the particular owner. That the “differential method” is not only accepted in Germany but also in other civil law countries is shown in a comparative analysis in Herfried Wöss et al., Damages in International Arbitration under Complex Long-Term Contracts 77–184 (2014). 70  I VSC, International Valuation Standards, ¶ 27(b).

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than fair market value.71 It may thus also need different valuation approaches and methods. However, the rules in investor-State arbitration are not clearly defined in this respect. Tribunals have compared the “but-for” scenario on the basis of the “value in exchange” as well as the “value to the owner.”72 3.2 The Distinction between “Lawful” and “Unlawful” Expropriations For a long time, the distinction between lawful and unlawful expropriations did not play an important role in international practice. Claimants were merely interested in ensuring the State’s compliance with its obligations contained in the treaty with respect to compensation, nothing more and nothing less. The reason was that expropriation of property was usually equal to its physical destruction or at least the destruction of its value. Frequently, the political situation instigating the expropriation went hand in hand with the deterioration of the economic situation so that any business prospects and thus market value vanished, too. The treaty standard providing for compensation in the amount of the value of the property at the time of the expropriation was therefore the maximum claimants could expect.73 However, the destruction of the property or its value is not necessarily the consequence of every expropriation. This was exemplified in ADC v. Hungary. In that case, the Hungarian government had directly expropriated the claimant’s contractual rights to operate two terminals of the Budapest airport, which the investors had acquired together with contracts relating to the renovation and construction of the respective terminals. Subsequently, after the privatization of the airport, the new owners operated the terminals with notable commercial success.74 As a result, the value of the investment rose considerably after the date of the expropriation. The tribunal found that the expropriation was unlawful for various reasons, amongst others, because it did not comply with due process (as the claimants were denied fair and equitable treatment

71  Irmgard Marboe, Compensation and Damages in International Law: The Limits of “Fair Market Value”, 7 J. World Inv. & Trade 723 (2006). 72   See, e.g., Lemire v. Ukraine where the tribunal applied a “value to the owner” approach, emphasizing that “the actual calculation of damages cannot be made in the abstract, it must be case specific.” Lemire v. Ukraine, supra note 13, ¶ 152. See other cases distinguishing between “value in exchange” (objective-abstract value) and “value to the owner” (subjective-concrete value) in Marboe, supra note 10, at 88–100. 73  Audley Sheppard, The Distinction between Lawful and Unlawful Expropriation, in Investment Arbitration and the Energy Charter Treaty 169, 197 (Clarisse Ribeiro ed., 2006). 74   A DC v. Hungary, supra note 13, ¶ 496.

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and full security and protection) and was discriminatory.75 The tribunal was of the opinion that, in such a case, the standard contained in the BIT for lawful expropriations should not be applied. Instead, the customary international law standard for internationally wrongful acts as set out by the PCIJ in Chorzów Factory was pertinent. The tribunal seminally observed: 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 for a lawful expropriation with damages for an unlawful expropriation. This would have been possible if the BIT expressly provided for such a position, but this does not exist in the present case.76 The ADC tribunal referred to Phillips Petroleum v. Iran which some years earlier had noted the following with regard to the difference between lawful and unlawful expropriation: The tribunal believes that the lawful/unlawful taking distinction, which in customary international law flows largely from the Case Concerning the Factory at Chorzow (Claim for Indemnity) (Merits), P.C.I.J. Judgment 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.77 While the possibility of an increase in value was not relevant to the Iranian Revolution, in other political and economic circumstances, an increase in value after the expropriation is not unthinkable, as subsequent arbitral practice has shown. The tribunal in ADC v. Hungary furthermore pointed out that the 2001 ILC Articles had closely followed the reasoning of Chorzów Factory in their formulation of Article 31(1) and in the Commentary thereon.78 Furthermore, it referred to Article 35 of the 2001 ILC Articles and contended that restitution in kind was the preferred remedy for an internationally wrongful act, and 75   Id., ¶ 476. 76   Id., ¶ 481. 77   Phillips Petroleum Co. Iran v. Islamic Republic of Iran & National Iranian Oil Co., Award, ¶ 110, 21 Iran-U.S. Cl. Trib. Rep. 79 (1989). 78   A DC v. Hungary, supra note 13, ¶ 494.

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that, according to Article 36, compensation should be awarded only insofar as the damage caused is not made good by restitution.79 The consequence of this reasoning under the customary international law standard was that, as actual restitution could not take place, “payment of a sum corresponding to the value which a restitution in kind would bear”80 needed to be awarded. Subsequent arbitral practice has largely followed the reasoning of the tribunal in ADC v. Hungary. However, the jurisprudence is not uniform. The ICSID tribunals in Siemens v. Argentina81 and Vivendi v. Argentina82 were amongst the first to confirm the logic of distinguishing between lawful and unlawful expropriation and its consequences. Several other tribunals have followed this approach.83 Some tribunals discussed the distinction but found that it would not have a direct financial impact.84 An outright rejection of the relevance of the distinction is relatively rare.85 The need for a distinction seems thus to be increasingly, but not uniformly, recognized in arbitral practice and in academic writing.86 The issue has gained considerable attention in the wake of the cases against Russia in the 79   Id. 80   Id., ¶ 495 (quoting Factory at Chorzów, supra note 15, at 47) (emphasis omitted). 81   Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award, ¶ 352 (Feb. 6, 2007). 82   Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award, ¶ 8.2.3 (Aug. 20, 2007). 83   Saipem v. Bangladesh, supra note 4, ¶ 201; Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award, ¶ 539 (June 1, 2009); Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, ¶ 514 (Mar. 3, 2010); Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Award, ¶ 253 (July 7, 2011); Quasar v. Russia, supra note 5, ¶ 215; Hulley Enterprise Ltd. (Cyprus), Veteran Petroleum Ltd. (Cyprus), and Yukos Universal Ltd. (Isle of Man) v. Russian Federation, PCA Case Nos. AA 226, AA 228 and AA 227, Final Award, ¶ 1765 (July 18, 2014); ConocoPhillips et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits, ¶¶ 342–3 (Sept. 3, 2013); Venezuela Holdings, B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award, ¶¶ 288–9 (Oct. 9, 2014); Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award, ¶ 142 (Mar. 13, 2015); Quiborax S.A. & NonMetallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, ¶ 326 (Sept. 16, 2015). 84   Bernardus Henricus Funnekotter et al. v. Republic of Zimbabwe, ICSID Case No. ARB/05/6, Award, ¶ 112 (Apr. 22, 2009); Marion Unglaube and Reinhard Unglaube v. Costa Rica, ICSID Case Nos. ARB/08/1 and ARB/09/20, Award, ¶¶ 306–7 (May 16, 2012). 85   See, e.g., Rumeli v. Kazahstan, supra note 67, ¶ 793. 86   See Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Partially Dissenting Opinion of Brigitte Stern, ¶¶ 22–4 (Sept. 7, 2015) (listing arguments and cases raised against the use of hindsight information).

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Yukos affair. The application of the above-mentioned principles led to an award of more than US$50 billion against Russia in July 2014,87 while an evaluation of the Yukos shares at the time of their expropriation would have only been a fraction of this sum.88 This outcome was primarily the result of moving the valuation date from the date of the expropriation to the date of the award, due to the primacy of “restitution” under the law of State responsibility, and by adding dividends and interest on dividends since the date of the expropriation until the date of the award. According to the tribunal, in the case of an unlawful expropriation, the investor should have the choice between the two dates.89 The award was subsequently set aside by a judgment of The Hague District Court finding that the arbitral tribunal lacked jurisdiction.90 While this judgment is under appeal, enforcement proceedings are continuing, albeit with limited success.91 While several voices argue in support of the distinction and its financial consequences,92 others are skeptical.93 The difference in opinion seems to center around the question of what constitutes an “unlawful” expropriation and 87   Hulley Enterprise, Veteran Petroleum and Yukos v. Russia, supra note 83, ¶ 1827. 88  As the case is currently pending before national courts in the Netherlands, no final determination can be made. The outcome will certainly have an influence on future decisions involving unlawful expropriations. 89   Hulley Enterprise, Veteran Petroleum and Yukos v. Russia, supra note 83, ¶ 1769. 90  Hague Dist. Ct., Chamber Com. Affairs, Russian Federation v. Veteran Petroleum Ltd. et al., Case Nos. C/09/477160/ HA ZA 15–1, C/09/477162/ HA ZA 152, and C/09/481619/ HA ZA 15–112 (joined cases), Judgment, Apr. 20, 2016 (Neth.). 91   See Cour d’appel de Paris [Paris Court of Appeals], Seized Funds of the Russian Space Agency Roscosmos, June 27, 2017 (Fr.), in which the Court found that the accounts receivable of the Russian National Space Agency against the French space company Arianespace did not belong to the Russian Federation so that they could not be made the subject of enforcement proceedings for debts of the Russian Federation. 92  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.” Ripinsky & Williams, supra note 47, at 65; see also Marboe, supra note 10, at 80–4. 93  Christina Beharry, Lawful versus Unlawful Expropriation: Heads I Win, Tails You Lose, 3(1) J. Damages Int’l Arb. 57 (2016); Floriane Lavaud & Guilherme Recena Costa, Valuation Date in Investment Arbitration: A Fundamental Examination of Chorzów’s Principles, 3(2) J. Damages Int’l Arb. 33 (2016); Nicholas Birch, Curing Uncompensated Expropriation under Chorzów, 3(2) J. Damages Int’l Arb. 73 (2016); Steven Ratner, Compensation for Expropriations in a World of Investment Treaties: Beyond the Lawful/Unlawful Distinction, 111(1) Am. J. Int’l L. 7 (2017).

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whether this matters for the purposes of calculating damages. One could argue that the violation of any of the four requirements must lead to the conclusion that the expropriation was unlawful, including the non-payment of compensation or maybe even the payment of less than the treaty standard required. According to this view, non-payment of compensation would automatically render the expropriation unlawful. As pointedly put by one author, “the treaty provisions on compensation do not provide for the interpretive space to say that payment includes non-payment.”94 On the other hand, tribunals and commentators have opined that the mere disagreement over the amount of compensation and the ensuing non-payment by the expropriating State does not automatically render the expropriation unlawful.95 This issue came to bear in two cases against Venezuela where ICSID tribunals decided that the expropriations were lawful because they only lacked the payment of compensation. The first tribunal in Tidewater v. Venezuela 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.96 The applicable BIT provided for the “market value of the investment.”97 The tribunal referred to the above-mentioned World Bank Guidelines, according to which the “fair market value” has to be determined “according to reasonable 94  Ratner, supra note 93, at 44–5; see also David Khachvani, Compensation for Unlawful Expropriation: Targeting the Illegality, 32(2) ICSID Rev. 385, 390 (2017). These authors maintain that a violation of the conditions for lawful expropriations must logically lead to its unlawfulness. In addition, arbitral tribunals could lack jurisdiction to decide a dispute that does not concern a “breach” of the treaty but rather the amount of compensation owed. 95  Several eminent authors seem to agree that the mere lack of compensation does not lead to the unlawfulness of the expropriation: Reinisch, supra note 3, at 199; Ripinsky & Williams, supra note 47, at 68–9; James Crawford, Brownlie’s Principles of International Law 624 (2012); Georg Schwarzenberger, International Law as Applied by International Tribunals 666 (1957). 96   Tidewater v. Venezuela, supra note 83, ¶ 141. 97   See Agreement between the Government of Barbados and the Government of the Republic of Venezuela for the Promotion and Protection of Investments, art. 5 (July 15, 1994).

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criteria related to the market value of the investment, i.e., in an amount that a willing buyer would normally pay to a willing seller….”98 The tribunal contended that this standard was also required by customary international law.99 In Venezuela Holdings v. Venezuela, the tribunal found, in the same vein, that “the mere fact that an investor had not received compensation does not in itself render an expropriation unlawful.”100 It applied the BIT standard of “just compensation” which was defined as “the market value of the investments affected” and was said to “correspond to the amount that a willing buyer would have been ready to pay to a willing seller at the time….”101 According to these tribunals, the lawfulness of an expropriation depends on the behavior of the State, whether it accepts or rejects the obligation to pay as such, or whether it took concrete steps to this effect. If the State has made efforts to pay compensation, has started negotiations, has established a commission to determine the amount of compensation, or has made an offer of compensation in good faith, the State should not be blamed for unlawful behavior, even if it has not paid compensation.102 Compliance with the criteria of public purpose, non-discrimination, and due process is therefore of particular importance when deciding whether enhanced reparation might be sought under the Chorzów standard in comparison with the treaty standard. If expropriations are not in compliance with these conditions, it can be argued that the expropriation should not have taken place at all. Reparation must then “wipe out” all the consequences of 98   Tidewater v. Venezuela, supra note 83, ¶ 154. 99   Id., ¶ 152. This is, however, doubtful in the author’s view. The World Bank in its survey of 1992 only attempted to identify and formulate general principles, which may represent a basis for further development of customary international law in this area. World Bank Guidelines, supra note 50, Guideline IV(4). 100   Venezuela Holdings v. Venezuela, supra note 83, ¶ 301. 101   See Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Republic of Venezuela, art. 6 (Oct. 22, 1991); Venezuela Holdings v. Venezuela, supra note 83, ¶ 307. 102  In INA v. Iran, the efforts of the Iranian Government directed at establishing a committee to decide the amount due were apparently sufficient to convince the tribunal of the State’s intention to pay compensation and thus of the lawfulness of the expropriation. See INA Corp. v. Gov’t of the Islamic Republic of Iran, Award, 8 Iran-U.S. Cl. Trib. Rep. 373, 378 (Aug. 12, 1985). The same was true in American International Group v. Iran, where the valuation of another insurance company was at issue. See Am. Int’l Group, Inc. & Am. Life Ins. Co. v. Islamic Republic of Iran & Central Insurance of Iran (BIMEH MARKAZI IRAN ), Award, 4 Iran-U.S. Cl. Trib. Rep. 96, 106 (1983). See also Amoco Int’l Fin. Corp. v. Gov’t of the Islamic Republic of Iran et al., Award, ¶ 147, 15 Iran-U.S. Cl. Trib. Rep. 189 (1987).

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the expropriation and re-establish the situation that would have existed if the expropriation had not occurred. In this case, the primacy of restitution mandates that the property has to be restituted. If this is unfeasible, impracticable or insufficient, compensation should be calculated so as to achieve, as much as possible, the financial restitution in integrum. The minimum to be awarded is the standard of compensation as laid down for lawful expropriations in the applicable treaty (i.e., the value of the investment at the time of the expropriation plus interest up to the day of the award) because compensation for an unlawful expropriation cannot be less than that for a lawful expropriation. There are many different ways of achieving full reparation after an unlawful expropriation. The facts of every case need to be properly reflected so that the scenario with and without the unlawful acts can be compared. No more than the damage actually caused by the unlawful acts should be awarded. A consequent application of these principles will avoid overcompensation. The issue of how to deal with an increase in value of the expropriated property has been the reason for the controversial debate on compensation for expropriation in recent years. To some, applying the approach of the ADC tribunal in all circumstances and automatically shifting the valuation date from the date of the expropriation to the date of the award in all cases of unlawful expropriations seems arbitrary. According to this view, the outcome of an award would then depend on the end date of the arbitration proceedings such that external factors, like commodity prices or the general economic situation in a country, which are entirely unrelated to the unlawful act, would have a significant impact on the amount of the award.103 However, an increase in value has been rare in the past. So far, only in a few cases have tribunals awarded the higher value at the date of the award.104 It seems doubtful whether they provide a sufficient basis for calling into question the above-mentioned principles recognized under the law of State responsibility. 103   See Quiborax v. Bolivia, supra note 86, ¶ 27. See also Beharry, supra note 93, at 93–6 (citing Franklin Fisher & R. Craig Romaine, Janis Joplin’s Yearbook and the Theory of Damages, 5 J. Acct. Auditing & Fin. 2 (1990)). 104  Professor Stern in her Partially Dissenting Opinion in Quiborax v. Bolivia referred to these cases as an “ultraminority position.” See Quiborax v. Bolivia, supra note 86, at 12. However, out of the four cases she mentions, only two have actually resulted in damages representing the higher value at the date of the award, namely ADC v. Hungary and Hulley Enterprises, Veteran Petroleum and Yukos v. Russia. In Siemens v. Argentina, the value was not higher at the date of the award than at the date of the expropriation, and in ConocoPhillips v. Venezuela, no award on damages has yet been rendered. The Quiborax v. Bolivia case, where the majority decided to evaluate quantum as at the date of the award, was thus only the third award in many years of investment arbitration.

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Protection of Foreign Investors against Non-expropriatory Actions by States

Investors are not only protected against expropriations but also against a number of other acts and omissions by host States that can endanger their economic interests. IIAs, which are aimed at encouraging foreign investment, need to address these non-expropriatory State actions in order to fulfill their goal. They generally include a number of standards to address the variety of problems that could arise in the long-term relationship that typically develops between the foreign investor and the host State. Some of these treaty standards are invoked more often and more successfully than others in international arbitration. Some of the standards are interrelated; some are more autonomous.105 It is beyond the scope of this Chapter to discuss the various treaty standards in detail. It shall just be highlighted that, as discussed earlier, the law applicable to violations of treaty obligations is the customary law on State responsibility. A closer look at the relevant test and at some interesting examples will throw some light on how damages are calculated in non-expropriation cases. 4.1 The Relevant Test The legal principles applicable to the calculation of compensation or damages in non-expropriation cases are laid down in the 2001 ILC Articles on State responsibility and their prominent formulation in the dictum of the Chorzów case, as discussed above, even though investment disputes are not between States but between an investor and a State. The difficulty lies in their application in the relevant factual context. According to the Chorzów principle, the amount of damages should “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.”106 This principle is paramount and often quoted because it not only provides guidance on customary international law but also represents a general principle of law “recognized by civilized nations.”107 It is also the most important yardstick, because it is precise, strict, and unchangeable as a principle, but flexible and useful in a myriad of

105  Christoph Schreuer, Introduction: Interrelationship of Standards, in Standards of Investment Protection 1, 4 (August Reinisch ed., 2008). 106   Factory at Chorzów, supra note 15, at 47 (quoted in ILC Draft Articles, art. 31, commentary 2). 107   See Statute of the International Court of Justice, art. 38(1)(c) (June 26, 1945). See also Bing Cheng, General Principles of Law as Applied by International Courts and Tribunals 47 et seq. (1953).

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different scenarios. Most importantly, it can—and must—also be used to avoid overcompensation. Tribunals enjoy a large margin of discretion on how they apply the test and how they compare the two different scenarios with and without the unlawful act. In identifying the relevant scenarios, both legal and economic factors need to be considered. As regards the legal factors, the scope of protection of the legal obligation that was violated must be identified clearly. This is essential for arriving at the correct measure of causality. Only damage “caused” by the unlawful act must be compensated. In this respect, not only factual but also legal causation is required.108 As regards economic factors, various valuation methods can be used for the construction of the “but-for-scenario.” The most widespread in practice are the market approach, the income approach, and the asset-based or cost approach.109 While these three valuation approaches are widely used in expropriation cases, they are also applicable in non-expropriation cases. The difference is, however, that the impairment of the investment by the State is only partial. The effect of the State action can, but need not be the total destruction of the investment or its value. In such situations, the comparison of the real and the but-for scenario can be the reason for considerable disagreement among parties, experts, and tribunal members. The market approach compares prices offered and paid in the market. It is an objective yardstick representing market participants’ estimations of the value of comparable objects. While the market approach may be suitable in expropriation cases, where the value of the investment is totally lost and its equivalent can be assessed by references to market prices,110 in particular if real estate is involved,111 it seems less appropriate in cases of violations of other treaty standards. Yet, reference to market prices can be useful as a cross-check against other valuation approaches that have been accepted. The tribunal in Gold Reserve v. Venezuela, for example, assessing the amount of damages due after a violation of the FET standard, noted that the project did not have a 108  I LC Draft Articles, art. 31, commentary 10. See also Chapter 4, Patrick W. Pearsall & J. Benton Heath, Causation and Injury in Investor-State Arbitration. 109  For an instructive introduction and overview, see Shannon P. Pratt & Alina V. Niculita, The Lawyer’s Business Valuation Handbook (2nd ed. 2010); see also Shannon P. Pratt & Alina V. Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies (5th ed. 2008). 110  This approach was, for example, chosen in all of the cases involving the Yukos demise. See Hulley Enterprise, Veteran Petroleum, and Yukos v. Russia, supra note 83. 111   Funnekotter v. Zimbabwe, supra note 84, ¶ 126; Unglaube v. Costa Rica, supra note 84, ¶ 40.

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history of cash flow112 but it accepted the contention made by both parties that the valuation of a mine could be based on the lost income stream, as it concerned a commodity product for which data, such as reserves and price, was easily ascertained.113 The tribunal therefore relied on the market approach, based on comparable companies, as a check on the income-based valuation to ensure that the compensation awarded was “reasonable.”114 The tribunal in EDF v. Argentina, in its valuation of damages after a FET breach, also relied on the market approach when it used purchase prices of shares offered and paid in the course of the arbitration proceedings to correct data used in the valuation of lost income in order to arrive at a “reasonable” price.115 However, the income approach has the difficulty that it is a forward-looking method that derives its results from a projection of income over the years, discounted by a factor that reflects time value and risk. All of these elements are estimations and are based on assumptions about the future. Tribunals have long been reluctant to apply it due to their refusal to award “speculative damages.” As all projections into the future are inherently speculative, the income approach has only been gradually accepted. An increasing acceptance of this approach began in the expropriation context, when “fair market value” needed to be assessed. Tribunals no longer had to disregard real world valuation models if a “hypothetical willing buyer” and a “hypothetical willing seller” would enter into negotiations using the income method.116 In non-expropriation cases, the income approach has also been increasingly used. In some cases, this was because the treaty violation, though not amounting to an expropriation, resulted in a total destruction of the claimant’s investment. Tribunals then applied the income approach as if it were an expropriation case.117 The income approach can also be used when the investment has not been totally destroyed, but rather only impaired. In such cases, tribunals compared the actual financial situation of the claimant with the situation in absence of the breach and subtracted the two amounts from each other in order to “wipe out all the consequences” of the unlawful act. This was main112   Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 830 (Sept. 22, 2014). 113   Id., ¶ 831. 114   Id., ¶ 832. 115   E DF Int’l S.A. et al. v. Argentine Republic, ICSID Case No. ARB/03/23, Award, ¶ 1238 et seq. (June 11, 2012). 116   Phillips Petroleum v. Iran, supra note 77, ¶ 112. 117   Anatolie Stati et al. v. Kazakhstan, SCC Case No. V (116/2010), Award, ¶ 1617 (Dec. 19, 2013).

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ly the case in the wake of the Argentine crisis, which led the government to introduce emergency measures, including the “pesification” of the terms of contracts and concessions with foreign investors.118 In the different setting of the intra-EU dispute Micula v. Romania, the tribunal considered in its assessment of damages of a FET breach a variety of scenarios in order to assess the effects of the changed legal regime with respect to the lost income.119 This may serve as an example that the construction of the “but-for scenario” may give rise to several options and needs careful analysis both of legal and economic factors. The asset-based or cost approach has long been the preferred method applied by international investment tribunals, because it does not involve projections into the future and does not need comparable market situations. However, it only reflects what an investor has invested and actually spent in a project. By contrast, the Chorzów standard does not require putting the investor in the position he would be in if he had never entered into the investment project (i.e., reliance loss), but instead in the situation he would be in if the unlawful act had not been committed (i.e., expectation loss). The application of the asset-based or cost approach in non-expropriation cases can be regarded as a default mechanism, if other elements of the damage incurred cannot be proven with a sufficient degree of certainty. This is particularly the case when the prospects of an investment are uncertain. In such a situation, claimants may be appropriately compensated by the reimbursement of investments and expenses.120 The valuation of the same investment in an expropriation context might lead to the conclusion that the fair market value of the investment is zero. Instead, in the context of non-expropriation cases and unlawful expropriations, the cost approach should be used to assess the lower limit of the amount of damages to be awarded. In Impregilo v. Argentina, another case of a FET breach, the tribunal rejected the income-based valuation, because it had doubts about the profitability of a concession relating to a risky area with a poor population that in turn resulted in a low rate of collection. However, the investments made were substantial. 118   C MS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award, ¶¶ 421– 38 (May 12, 2005); LG&E v. Argentina, supra note 13, ¶ 59; Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Award, ¶ 412 (Sept. 28, 2007); El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Award, ¶ 703 (Oct. 31, 2011); EDF v. Argentina, supra note 115, ¶¶ 1183–4. 119   Ioan Micula et al. v. Romania, ICSID Case No. ARB/05/20, Award, ¶¶ 890–8 (Dec. 11, 2013). 120  Damages are payable as long as the balance is positive. If the debts exceed the investment, no damages may be payable for lack of causation. See Biwater Gauff (Tanzania) v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, ¶¶ 805–6 (July 24, 2008).

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The tribunal based its award on the capital contributions made by the claimant in order to arrive at full reparation.121 A slightly different approach was taken in Arif v. Moldova, where the tribunal gave the respondent the choice of making use of the possibility of restitution by restoring the affected airport store to the claimant within sixty days to remedy its breach of the FET standard.122 If the respondent took that option, its losses would only amount to the stock actually written off as well as operating costs that had been wasted as a result of the delays in opening the store. In the alternative, the respondent would have to pay all of the costs that the claimant incurred which were wasted due to the interference, in violation of the obligation of fair and equitable treatment, consisting of capital expenditures, operating expenditures, operating costs, and “confectionary stock” written off.123 These examples show that tribunals enjoy broad discretion in deciding how to assess the damages incurred in non-expropriation cases. The “but-for-test” is important and needs to be applied, but there is more than one alternative to arrive at an appropriate result. 4.2 Practical Considerations In the above, the distinction between expropriation and non-expropriation cases has been analyzed as a matter of principle. Before concluding, some practical considerations shall be added briefly. The example of the case Pey Casado v. Chile124 is instructive in this respect. It is one of the rather rare awards that was annulled primarily because of a wrong calculation of damages.125 The background of the dispute was the 1975 confiscation by the government of Chile of the assets of two newspaper publishing companies, formerly owned by the two claimants, in the wake of the military coup. After years of litigation on the national level, the claimants brought the case before an ICSID tribunal

121  The tribunal awarded approximately US$ 21.3 million, plus 6% interest compounded annually. Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award, at 86 and ¶ 381 (June 21, 2011). A similar approach was taken in Siemens v. Argentina, supra note 81, ¶ 360, in relation to a case of unlawful expropriation. 122   Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award, ¶ 572 (Apr. 8, 2013). 123   Id., ¶ 582. 124   Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Award (May 8, 2008). 125   Pey Casado v. Chile, supra note 6.

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under the 1991 BIT between Chile and Spain, in force as of 1994.126 While the original confiscation was not within the jurisdiction of the tribunal ratione temporis, subsequent acts by the Chilean Government deprived the claimants of any compensation for their former property. The tribunal found that the respondent had violated the fair and equitable treatment standard by denying justice to the claimants and discriminating against them. Amongst other findings, it determined that the respondent had paid compensation not to the claimants, but to other persons, who had not been owners of the confiscated assets.127 The first tribunal found that due to the difficulties in obtaining any evidence about the value of the assets, the amount paid to other persons under the title of compensation was the best way to assess the amount of damages that should be awarded. Such an amount would place the claimants in the situation in which they would have been if they had been treated justly and equitably and without a denial of justice.128 However, the annulment committee did not agree with this approach. It partially annulled the award because the parties had never argued this valuation approach, but instead based their valuation on an alleged expropriation.129 In the re-submitted proceedings, the claimants should have provided arguments and evidence for their damages claim. However, instead of concentrating on the “but-for test” in relation to the FET violation, claimants tried to re-submit the expropriation valuation based on a “continuing act” theory.130 The tribunal regretted that the claimants did not set themselves the task of proving what particular injury and damages had been caused to them by the breach of the guarantee of fair and equitable treatment under Article 4 of the BIT, but saw no other course open than to dismiss the claimants’ claims in their entirety.131 The claimants also had to bear 75% of the costs of the resubmission proceedings.132 This result on quantum after the perennial arbitration procedures may seem unsatisfactory from the perspective of the claimants, who had been successful on the merits. It shows, however, the importance of understanding and applying the principles of State responsibility as applied in investor-State arbitration. 126   Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2 (Resubmission Proceeding), Award, ¶¶ 56–80 (Sept. 13, 2016). 127   Pey Casado v. Chile, supra note 124, ¶ 674. 128   Id., ¶ 702. 129   Pey Casado v. Chile, supra note 6, ¶ 269. 130   Pey Casado v. Chile, supra note 126, ¶ 88. 131   Id., ¶ 244. 132   Id., ¶ 256.

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In view of the fact that the acts of the respondent were found to be a “denial of justice” and “discriminatory,” the application of the asset or cost-based approach, as the lower level of damages, would at a minimum have included the amount of costs and expenses spent to combat the unlawful behavior of the State at the national level for many years.133 5

Conclusion

For the valuation of damages in international investment arbitration, it is important to distinguish between the lawful exercise of a State’s sovereignty, i.e., the right to decide on its own political and economic system, and a violation of its obligations under an international treaty. While sovereignty provides wide regulatory power, States, on the other hand, enter voluntarily into international agreements in which they accept certain obligations and thus limit their sovereign rights. With respect to expropriation, States generally do not renounce their sovereign right to expropriate foreign investors entirely, but agree to provide legal certainty as to the conditions of the expropriation and the right of the foreign investors to receive compensation. Such obligations of States are “primary” obligations under international law. If a State violates its international obligations, its international responsibility becomes engaged. While this body of law has developed primarily in the inter-State relationship, it is also applicable in investor-State disputes. The most authoritative codification of the law of State responsibility is the 2001 ILC Articles on the International Responsibility of States for Internationally Wrongful Acts, which, together with the comprehensive Commentary, contain relevant guidelines on the calculation of damages and compensation. The principles enshrined in the 2001 ILC Articles represent “secondary” norms of international law as they deal with the consequences of breaches of international law. The most important principle is the principle of “full reparation” with its requirement to “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,” as the dictum of the Chorzów Factory case prescribes. 133  Such costs have been awarded, for example, in Southern Pacific Prop. (Middle East Ltd.) v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award on the Merits, ¶ 257 (May 20, 1992); Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award, ¶ 274 (Sept. 23, 2003); Siag v. Egypt, supra note 83, ¶ 593; and Swisslion DOO Skopje v. Former Yugoslav Republic of Macedonia, ICSID Case No. ARB/09/16, Award, ¶ 275 (July 6, 2012).

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In expropriation cases, there is controversy over the extent to which the conditions contained in IIAs are relevant for the calculation of compensation. While “adequate compensation” is usually provided under these agreements, the “full reparation” standard under the law of State responsibility may lead to enhanced compensation. It has been shown that, irrespective of the payment of compensation, the other conditions for “lawful” expropriations, such as public purpose, non-discrimination, and due process, are decisive as to whether only the treaty standard or the enhanced standard under the law of State responsibility is applicable to the assessment of quantum. In cases of BIT breaches, including non-expropriation cases, the “but-for test” which is required to achieve “full reparation” can and must be applied to avoid over- and under-compensation. This may involve complex considerations of a legal and economic nature. Legal aspects concern the scope of protection under the legal rule that was violated in order to ascertain the relevant causal link between the violation and the harm. As regards economic aspects, several valuation approaches and methods are available to assist tribunals in determining the occurrence and the extent of damages. Failure to do so may lead to inaccurate damages awards. The distinction between expropriation and non-expropriation cases also plays a significant role, if the competent tribunal has only limited jurisdiction to either of those charges.

Chapter 6

Moral Damages Patrick Dumberry 1

Introduction

Moral damage is an elusive concept. As explained in 1923 by the Lusitania tribunal, even if moral damages are “difficult to measure or estimate by money standards,” it nevertheless remains that they are “very real” and must therefore be compensated.1 Under Article 31 of the ILC Articles on State Responsibility, a State must indeed make full reparation for any “injury” (both material and moral damages) caused to another State by an internationally wrongful act.2 In the past, several international tribunals, such as the International Tribunal for the Law of the Sea,3 the United Nations Compensation Commission,4 the Ethiopian–Eritrea Claims Commission,5 as well as different human rights 1  Lusitania Cases (United States v. Germany), Opinion, 7 R.I.A.A. 32, 40 (U.S.-Ger. Mixed Claims Comm’n Nov. 1, 1923). 2  G .A. Res. 56/83, annex, Articles on the International Responsibility of States for Internationally Wrongful Acts, art. 31 (Jan. 28, 2002). 3  For instance, M/V Saiga (No. 2) (St. Vincent v. Guinea), Case No. 2, Judgment, 1999 ITLOS Rep. 10 (July 1) (where the tribunal included damages for injury to the crew of a ship in relation to their unlawful arrest, detention, and other forms of ill-treatment). 4  U.N. Compensation Comm’n, Decision taken by the Governing Council of the United Nations Compensation Commission During its Second Session, at the 15th Meeting held on 18 October 1991: Personal Injury and Mental Pain and Anguish, at 2, U.N. Doc. S/AC.26/1991/3 (Oct. 23, 1991) provides, inter alia that “compensation will be provided for non-pecuniary injuries resulting from … mental pain and anguish….” 5  Agreement on Cessation of Hostilities between the Government of the Federal Democratic Republic of Ethiopia and the Government of the State of Eritrea, June 18, 2000, 2138 U.N.T.S. 86; Agreement between the Government of the State of Eritrea and the Government of the Federal Democratic Republic of Ethiopia for the Resettlement of Displaced Persons, as well as Rehabilitation and Peacebuilding in Both Countries, art. 5, Dec. 12, 2000, 2138 U.N.T.S. 93. See Ethiopia v. Eritrea, Final Award on Ethiopia’s Damages Claims, ¶¶ 64–5, 26 R.I.A.A. 633 (Eri.-Eth. Cl. Comm’n Aug. 17, 2009) (where the Commission noted that it had “weighed some of the considerations identified by Ethiopia, such as the gravity of a particular type of violation, and the extent and consequences of the resulting human injury, in determining the damages to be awarded” and concluded that “it ha[d] done so as an integral element of its damages awards, not by using a separate calculus of ‘moral damage.’ ”).

© koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_007

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bodies6 and international employment tribunals have awarded compensation to individuals for moral damages. Numerous international mixed claims commissions from past decades have also awarded compensation for moral damages suffered by foreign nationals.7 This Chapter examines the rather novel issue of moral damages in the context of international investment law. It offers a tour d’horizon of the more than thirty cases where arbitral tribunals have examined monetary claims for moral damages suffered by foreign investors as a result of alleged treaty breaches committed by the host State.8 In 2008 and 2009 alone, no fewer than five arbitration awards discussed the issue, a large number considering there were almost none in any year prior. In one such case, Desert Line Projects LLC v. Yemen, the tribunal awarded US$1 million in compensation to the claimant.9 The tribunal held that Yemen should provide compensation to a corporation for its officers’ psychological suffering (arising from, in this case, the “stress and anxiety of being harassed, threatened and detained”),10 which directly resulted from physical actions (i.e., physical duress) and other related measures of coercion, interference, or intimidation conducted by army and police forces.11 The award marks the very first time where compensation for moral damages was both discussed in any significant way and awarded in the context of an investment treaty arbitration.12 Since then at least two other tribunals have done so. 6    Velásquez Rodríguez Case, Compensatory Damages, Judgment, Inter-Am. Ct. H.R. (ser. C) No. 7, ¶¶ 39, 50–2 (July 21, 1990); Godínez Cruz Case, Compensatory Damages, Judgment, Inter-Am. Ct. H.R. (ser. C) No. 8, ¶¶ 37, 48–50 (July 21, 1989). 7    See Affaire Chevreau (France c. Royaume-Uni) [Chevreau Case (France v. United Kingdom)], Award, 2 R.I.A.A. 1113 (June 9, 1931); Di Caro (Italy v. Venezuela), Decision, 10 R.I.A.A. 597 (It.-Venez. Mixed Cl. Comm’n May 7, 1903); Heirs of Jean Maninat Case (France v. Venezuela), Decision, 10 R.I.A.A. 55 (Fr.-Venez. Mixed Cl. Comm’n July 31, 1905); Gage Case (United States v. Venezuela), Decision, 9 R.I.A.A. 226 (U.S.-Venez. Mixed Cl. Comm’n Feb. 17, 1903); Dispute Concerning Responsibility for the Deaths of Letelier and Moffitt (United States/Chile), Decision, 25 R.I.A.A. 1 (Chile-U.S. Comm’n Jan. 11, 1992). 8   This topic is examined in detail in Patrick Dumberry, Compensation for Moral Damages in Investor-State Arbitration Disputes, 27 J. Int’l Arb. 247 (2010); Patrick Dumberry, Moral Damage, in International Investment Law: A Handbook 130 (Marc Bungenberg et al. eds., 2015). 9    Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award, at 69 (Feb. 6, 2008). 10   Id., ¶¶ 179, 286. 11   Id., ¶ 290. 12  One earlier case involving compensation for moral damages, S.A.R.L. Benvenuti & Bonfant SRL v. People’s Republic of the Congo, ICSID Case No. ARB/77/2, Award (Aug. 8,

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In recent years, other tribunals have had the opportunity to address a number of specific issues related to moral damages. For instance, the Lemire v. Ukraine13 award specifically examined the “exceptional circumstances” under which a tribunal may award compensation for moral damages.14 The Bernhard von Pezold v. Zimbabwe award also analyzed the question as to whether or not a corporate claimant may be awarded compensation for moral damages.15 Finally, the cases of Europe Cement16 and Cementownia17 have raised the unprecedented issue of the proper remedy for moral damages suffered by a State in international investment law.18 The present Chapter examines these unsettled issues. 2

The Concept of Moral Damage

The concept of moral damage is admittedly vague and uncertain. In the abovementioned 1923 Lusitania case, which involved the sinking of the British liner Lusitania by a German submarine during the First World War, killing 1,198 people (including 128 U.S. nationals), the U.S.–Germany Mixed Claims Commission referred to the following examples of moral damages: “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….”19 In its Commentaries to its Draft Articles on State Responsibility, the ILC provides the following illustration of the type of moral damages affecting an 1980), 8 Y.B. Com. Arb. 144, 150 (English translation of French original), will be discussed below. 13   Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, ¶¶ 310–45 (Mar. 28, 2011). 14  The issue is examined in Patrick Dumberry & Sébastien Cusson, Wrong Direction: “Exceptional Circumstances” and Moral Damages in International Investment Arbitration, 1 J. Damages Int’l Arb. 33 (2014). 15   Bernhard von Pezold et al. v. Zimbabwe, ICSID Case No. ARB/10/15, Award, ¶¶ 897–923 (July 28, 2015). 16   Europe Cement Inv. & Trade S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/07/2, Award (Aug. 13, 2009). 17   Cementownia “Nowa Huta” S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/06/2, Award (Sept. 17, 2009). 18  This issue is discussed in Patrick Dumberry, Satisfaction as a Form of Reparation for Moral Damages Suffered by Investors and Respondent States in Investor-State Arbitration Disputes, 3 J. Int’l Disp. Settlement 205 (2012). 19   Lusitania Cases, supra note 1, at 40.

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individual that can be compensated: “[n]on-material damage is generally understood to encompass loss of loved ones, pain and suffering as well as the affront to sensibilities associated with an intrusion on the person, home or private life.”20 A more comprehensive definition of moral damages was developed by Stephan Wittich: First, it includes personal injury that does not produce loss of income or generate financial expenses. Secondly, it comprises the various forms of emotional harm, such as indignity, humiliation, shame, defamation, injury to reputation and feelings, but also harm resulting from the loss of loved ones and, on a more general basis, from the loss of enjoyment of life. A third category would embrace what could be called non-material damage of a ‘pathological’ character, such as mental stress, anguish, anxiety, pain, suffering, stress, nervous strain, fright, fear, threat or shock. Finally, non-material damage would also cover minor consequences of a wrongful act, e.g., the affront associated with the mere fact of a breach or, as it is sometimes called, ‘legal injury.’21 To this list some international investment tribunals have added another specific type of moral damages: injury to the credit and reputation of a legal entity, i.e., a corporation. This controversial question is examined below.22

20  Int’l Law Comm’n, Rep. on the Work of Its Fifty-Third Session, including Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentary [hereinafter ILC Draft Articles], at 101, U.N. Doc. A/56/10(SUPP) (Nov. 2001). See also Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, art. 28 in Louis B. Sohn & R.R. Baxter, Responsibility of States for Injuries to Economic Interests of Aliens, 55 Am. J. Int’l L. 545, 548–84 (1961) (“Damages for bodily or mental harm, for mistreatment during detention, or for deprivation of liberty shall include compensation for past and prospective: (a) harm to the body or mind; (b) pain, suffering and emotional distress….”). 21  Stephan Wittich, Non-Material Damage and Monetary Reparation in International Law, 15 Finnish Y.B. Int’l L. 321, 329–30 (2004) (citation omitted). 22   See infra Section 3.1.1.

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Moral Damages in Investor-State Disputes

3.1 Claims Submitted by Investors Investors have claimed compensation for moral damages in several disputes. Since the Desert Line award, more than 30 decisions have addressed claims related to moral damages and a number of cases involving the issue are presently pending. In the recent Al-Kharafi v. Libya award, the tribunal awarded an unprecedented amount of some US$30 million in compensation for moral damages suffered by the claimants as a result of loss of reputation (the total amount awarded to the claimant was US$935 million).23 However, the legacy of this award is likely to remain limited in view of its very succinct discussion of the relevant issues and the very large amount of money awarded. At the time of writing, the “mapping” of awards that have dealt with moral damage claims can be summarized as follows: – No tribunal has expressly refused, as a matter of principle, to award compensation to an investor for moral damages; – One tribunal simply decided not to address the allegation raised by the claimant;24 – Four other tribunals also refused to examine claims on the ground that they lacked jurisdiction over the disputes;25 – Another tribunal dismissed the claim submitted by an investor because of its late filing;26 – In twenty-four cases, tribunals have dismissed moral damages claims submitted by investors based on lack of evidence,27 including seven cases where 23   Mohamed Abdulmohsen Al-Kharafi & Sons Co. v. Libya et al., Ad Hoc Arbitration Proceeding, Final Arbitral Award, 369 (Mar. 22, 2013). 24   Helnan Int’l Hotels A/S v. Arab Republic of Egypt, ICSID Case No. ARB/05/19, Award (July 3, 2008). 25   Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, ¶ 17.6 (Sept. 16, 2003), 10 ICSID Rep. 236 (2006); Zhinvali Dev. Ltd. v. Republic of Georgia, ICSID Case No. ARB/00/1, Award, ¶¶ 278–84 (Jan. 24, 2003), 10 ICSID Rep. 3 (2006); Société Civile Immobilière de Gaëta v. Republic of Guinea, ICSID Case No. ARB/12/36, Award (Dec. 21, 2015); Caratube Int’l Oil Co. LLP v. Republic of Kazakhstan, ICSID Case No. ARB/08/12, Award (June 5, 2012). 26   Bernardus Henricus Funnekotter et al. v. Republic of Zimbabwe, ICSID Case No. ARB/05/06, Award, ¶¶ 139–40 (Apr. 22, 2009). 27   Iurii Bogdanov et al. v. Republic of Moldova, SCC Arbitration Proceeding, Arbitral Award, § 5.2 (Sept. 22, 2005); M. Meerapfel Söhne AG v. Central African Republic, ICSID Case No. ARB/07/10, Award, ¶¶ 414, 431–5 (May 12, 2011); Société Ouest Africaine des Bétons

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tribunals considered that the alleged moral damage did not meet the “exceptional circumstances” threshold required to award compensation;28

Industriels (SOABI) v. Senegal, ICSID Case No. ARB/82/1, Award, ¶¶ 6.22, 10.02 (Feb. 25, 1988), 2 ICSID Rep. 190 (1993); Técnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 198 (May 29, 2003), 10 ICSID Rep. 134 (2006); Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award, ¶¶ 289–93 (May 6, 2013); Victor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Award, ¶¶ 27, 266, 689, 704 (May 8, 2008) (see also Victor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2 (Resubmission Proceeding), Award, ¶ 243 (Sept. 13, 2016)); Valeri Belokon v. Kyrgyz Republic, UNCITRAL Arbitration Proceeding, Award, ¶¶ 317–8 (Oct. 24, 2014); AHS Niger et al. v. Republic of Niger, ICSID Case No. ARB/11/11, Award, ¶¶ 148–9 (July 15, 2013); Oxus Gold v. Uzbekistan et al., UNCITRAL Arbitration Proceeding, Award, ¶¶ 895, 901 (Dec. 17, 2015); OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award, ¶¶ 908–17 (Mar. 10, 2015); Hassan Awdi et al. v. Romania, ICSID Case No. ARB/10/13, Award, ¶¶ 460–6, 501–3, 516 (Mar. 2, 2015); Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No. ARB/11/33, Award, ¶¶ 249–56 (Nov. 3, 2015); Renée Rose Levy de Levi v. Republic of Peru, ICSID Case No. ARB/10/17, Award, ¶¶ 277, 506 (Feb. 26, 2014); Quiborax S.A. & NonMetallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, ¶¶ 597–819 (Sept. 16, 2015); Convial Callao S.A. & CCI—Compañía de Concesiones de Infraestructura S.A. v. Republic of Peru, ICSID Case No. ARB/10/2, Final Award, ¶¶ 233–6, 357 (May 21, 2013). To that list should be added Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, ¶¶ 807–8 (July 24, 2008), where the majority of the tribunal dismissed the investor’s claim because Tanzania’s violation of the BIT caused no actual damage. In his Concurring and Dissenting Opinion, Gary Born concluded that the host State’s actions had caused a moral damage to the investor. Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Concurring and Dissenting Opinion of Gary Born, ¶¶ 32, 33 (July 18, 2008). The majority of the tribunal disagreed with Mr. Born and stated that it would have been “inappropriate” to award any such moral damages in the circumstances of the case and in light of the investor’s conduct. The majority also noted that the claimant made no such claim. 28   Antoine Abou Lahoud & Leila Bounafeh-Abou Lahoud v. Democratic Republic of the Congo, ICSID Case No. ARB/10/4, Award, ¶¶ 620–4 (Feb. 7, 2014); Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award, ¶¶ 590–2 (Apr. 8, 2013); Inmaris Perestroika Sailing Maritime Serv. GmbH et al. v. Ukraine, ICSID Case No. ARB/08/8, Award, ¶ 428 (Mar. 1, 2012); Lemire v. Ukraine, supra note 13, ¶¶ 310–45; Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Award, ¶¶ 274–85 (July 7, 2011); Anatolie Stati et al. v. Republic of Kazakhstan, SCC Case No. V (116/2010), Award, ¶¶ 1781–6 (Dec. 19, 2013); Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award, ¶ 545 (June 1, 2009).

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– The Benvenuti & Bonfant v. Congo tribunal concluded that the claim submitted by the claimant was unsupported by any evidence, but nevertheless awarded a small amount of money based on ex aequo et bono grounds;29 – In only three cases (Desert Line Project,30 Al-Kharafi,31 and Bernhard von Pezold32), tribunals have awarded compensation for moral damages suffered by investors; and – Finally (as further discussed in Section 3.2), a few cases have addressed the unprecedented issue of the proper remedy for moral damages suffered by a State in international investment law.33 In two cases (Europe Cement34 and Cementownia35), the tribunals declined jurisdiction over the disputes. In another case, the tribunal dismissed a State’s moral damages claim based on lack of evidence36 and, in one other case, the tribunal declined jurisdiction over a counterclaim submitted by a State alleging moral damages.37 In other cases, a counterclaim alleging moral damages was also filed by the respondent State, but one tribunal did not address the issue,38 while the issue was briefly examined by another tribunal.39

29   Benvenuti & Bonfant, supra note 12. The Italian investor claimed some CFA 250 million for “moral damages” as a result of its expropriation in the People’s Republic of Congo (CongoBrazzaville). Despite the lack of evidence of any moral damage, the tribunal nevertheless awarded the investor some CFA 5 million in compensation based on equitable grounds as a result of “measures of which B&B was the object” which had “certainly disturbed [its] activities” (a reference to the occupation of the investor’s premises by the Congolese military, and the institution of criminal proceedings against Mr. Bonfant, an officer of the company). Id., ¶ 4.96. It should be noted that the parties had agreed that the tribunal had the power to decide the dispute ex aequo et bono and that the amount of damage was determined solely on this basis. 30   Desert Line Projects v. Yemen, supra note 9, ¶¶ 290–1. 31   Al-Kharafi v. Libya, supra note 23, § 3. 32   von Pezold v. Zimbabwe, supra note 15, ¶¶ 918–21. 33  This issue is discussed in Dumberry, supra note 18. 34   Europe Cement v. Turkey, supra note 16, ¶¶ 128–35, 177–81. 35   Cementownia v. Turkey, supra note 17, ¶¶ 167–71. 36   Lundin Tunisia B. V. v. Republic of Tunisia, ICSID Case No. ARB/12/30, Award, ¶ 379 (Dec. 22, 2015). 37   Limited Liability Company AMTO v. Ukraine, SCC Case No. 080/2005, Final Award, §§ 35, 116 (Mar. 26, 2008). 38   Occidental Expl. and Prod. Co. v. Republic of Ecuador, LCIA Case No. UN 3467, Final Award (July 1, 2004). 39   Levy de Levi v. Peru, supra note 27, ¶¶ 292–3, 505, 507–10.

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The first comprehensive analysis of the issue of moral damages was made by the Desert Line tribunal. The case of Desert Line Projects LLC v. Yemen involved a company from Oman that was contracted to build roads in Yemen. The tribunal concluded that the overall conduct of Yemen towards the investor fell “well short of the minimum standards of international law”40 and had breached the obligation to provide fair and equitable treatment under the BIT. The tribunal awarded the claimant US$24 million in compensation. The investor also claimed compensation for moral damages in the amount of US$104 million alleging continuing “harassment, threat and theft” by armed groups against the company’s personnel as well as the subsequent arrest and detention by the army of three executives.41 The tribunal summarized the claimant’s contention as follows: the Claimant’s executives suffered the stress and anxiety of being harassed, threatened and detained by the Respondent as well as by armed tribes; the Claimant has suffered a significant injury to its credit and reputation and lost its prestige; the Claimant’s executives have been intimidated by the Respondent in relation to the Contracts.42 The tribunal first noted that the Respondent had “not questioned the possibility for the Claimant to obtain moral damages in the context of the ICSID procedure.”43 The tribunal acknowledged that BITs are “primarily aim[ed] at protecting property and economic values” but added that “they do not exclude, as such, that a party may, in exceptional circumstances, ask for compensation for moral damages.”44 According to the tribunal, “[i]t is generally accepted in most legal systems that moral damages may also be recovered besides pure economic damages.”45 The tribunal noted that it was “difficult, if not impossible, to substantiate a prejudice of the kind ascertained in the present award.”46 Nevertheless, in its decision, the tribunal quoted the aforementioned Lusitania case to show that non-material damages may be “very real” and that, despite their “difficult[y] to measure or estimate by money standards”, there was “no reason why the 40   Desert Line Projects v. Yemen, supra note 9, ¶ 179. 41   Id., ¶¶ 19, 20, 26, 38. 42   Id., ¶ 286. 43   Id., ¶ 289. 44   Id. 45   Id. 46   Id.

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injured person should not be compensated[.]”47 The tribunal also stated that it was “generally recognized that a legal person (as opposed to a natural one) may be awarded moral damages, including loss of reputation, in specific circumstances only.”48 The tribunal concluded that Yemen’s actions had caused moral damages in violation of the BIT: The Arbitral Tribunal finds that the violation of the BIT by the Respondent, in particular the physical duress exerted on the executives of the Claimant, was malicious and is therefore constitutive of a faultbased liability. Therefore, 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 credit and reputation.49 The tribunal held that Yemen was liable to make reparation for “moral damages, including loss of reputation” for US$1 million (without interest).50 It added that this amount for moral damages was “indeed more than symbolic yet modest in proportion to the vastness of the project.”51 The Desert Line award is interesting on many accounts.52 Four questions addressed in the award, and subsequently assessed in later cases, will be examined in the next sections. 3.1.1

Is an Injury to a Corporation’s Reputation a Form of Compensable Moral Damage? The Desert Line award affirmed for the very first time that, similar to many municipal legal orders, an injury to a corporation’s credit, reputation, and prestige is a form of moral damage that can be compensated in an award.53 In a number of recent cases, claimants have sought compensation on this ground, but tribunals have rejected these claims for lack of evidence.54 47   Id. 48   Id. 49   Id., ¶ 290. 50   Id., ¶¶ 291, 297. 51   Id., ¶ 290. 52  These issues are discussed in detail in Dumberry, supra note 8 (2010), at 266. 53   Desert Line Projects v. Yemen, supra note 9, ¶¶ 286, 289, 290. 54   A HS v. Niger, supra note 27, ¶¶ 148–9; Belokon v. Kyrgyz Republic, supra note 27, ¶¶ 317–8; Lahoud v. Congo, supra note 28, ¶ 622; Oxus Gold v. Uzbekistan, supra note 27, ¶¶ 893– 904; Levy de Levi v. Peru, supra note 27, ¶¶ 277, 506; Quiborax v. Bolivia, supra note 27, ¶¶ 601–19.

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It should be added, however, that this type of loss may be reflected in the corporation’s economic losses. As the Rompetrol tribunal concluded, “reputational damages” were “just another example of actual economic loss or damage” and added the following observation: “The very fact, however, that this alternative claim for damages is both notional and widely discretionary prompts a considerable degree of caution on the part of the present Tribunal in facing the proposition that compensable ‘moral’ damage can be suffered by a corporate investor.”55 Thus, while the principle has been affirmed by the Desert Line tribunal, the issue of corporations’ entitlement to moral damages remains an open issue. 3.1.2

Can a Corporation Claim Compensation for Moral Damages for Itself as well as for its Officers? The authority of an arbitral tribunal to award compensation for moral damages suffered by a corporate officer to a corporation is an important issue that has yet to be decisively resolved. The Desert Line award, for example, suggests that compensation can be awarded to a corporation to remediate the moral injury which has actually been suffered by natural persons (i.e., the corporation’s executives).56 Even though these are, in principle, two distinct types of damages, the tribunal’s approach may be explained by the fact that it would have had no jurisdiction over a dispute involving the executives’ own claim for moral damages. Other explanations have been put forward justifying the inclusion of these damages: for example, the tribunal may have concluded that the injury also had an impact on the performance of the company and, therefore, caused it some form of damages;57 or the tribunal may have adopted, by analogy, the doctrine of “corporate espousal,” whereby damage to an employee is considered as done to the corporation itself.58 55   Rompetrol v. Romania, supra note 27, ¶ 289. See also Bogdanov v. Moldova, supra note 27, ¶ 61. 56   Desert Line Projects v. Yemen, supra note 9, ¶¶ 286, 289, 290. 57  Sergey Ripinsky with Kevin Williams, Damages In International Investment Law 311 (2008); Wade M. Coriell & Silvia M. Marchili, Unexceptional Circumstances: Moral Damages in International Investment Law, in 3 Investment Treaty Arbitration And International Law 213 (Ian A. Laird & Todd J. Weiler eds., 2010). See also Juan Pablo Moyano García, Moral Damages in Investment Arbitration: Diverging Trends, 6 J. Int’l Disp. Settlement 485, 498 (2015). 58  Borzu Sabahi, Moral Damages in International Investment Law: Some Preliminary Thoughts in the Aftermath of Desert Line v. Yemen, in A Liber Amicorum: Thomas Wälde—Law Beyond Conventional Thought 253, 259 (Jaques Werner & Arif Hyder Ali eds., 2010). See also Julien Burda, Arbitrage international et réparation des préjudices moraux: quelques

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This approach has been subsequently followed. In the recent case of Bernhard von Pezold et al. v. Zimbabwe, the tribunal first noted that the Desert Line award “affirmed the principle that a corporation can receive damages based on actions that affected members of its staff.”59 The tribunal then acknowledged that while the “harm suffered by the executives is not the harm to the company,” it remains that “on that approach, the physical staff of the company would only ever be able to get relief through domestic courts, which … may be unable to provide justice.”60 The tribunal therefore endorsed the solution adopted by the Desert Line award which “offers a pragmatic solution to an unappealing situation.”61 The tribunal concluded that it was “appropriate that staff members of a company have recourse to competent, fair tribunals that can reflect the consequences of their poor treatment in an award of moral damages in favour of their employer.”62 It added that “this serves not only the function of repairing intangible harm, but also of condemning the actions of the offending State.”63 The tribunal awarded US$1 million in compensation to three companies controlled by the claimants, adding that this was not a significant amount in the context of the overall claim, “but it appropriately reflects the wrongfulness of the actions that occurred in respect of the Border Claimants’ staff.”64 3.1.3

Is Compensation for Moral Damages Limited to “Exceptional Circumstances” Only? The Desert Line tribunal referred to the “exceptional circumstances” under which compensation for moral damages can be claimed under investment treaties.65 The case of Lemire suggests the existence of a high threshold of

enseignements de la sentence CIRDI: Desert Line Projects LCC contre République du Yemen, 48 Revue Libanaise de L’arbitrage Arabe et International 24 (2008) (discussing thepossibility thatthecompanyhad suffered its own moralinjuryasaresultof those sufferedby its officers). For a critical analysis of these arguments, see Inna Uchkunova & Oleg Temnikov, The Availability of Moral Damages to Investors and to Host States in ICSID Arbitration, 6 J. Int’l Disp. Settlement 380, 382–4 (2015). 59   von Pezold v. Zimbabwe, supra note 15, ¶ 913. 60   Id., ¶ 915 (quoting the works of Sabahi and Dumberry). 61   Id. 62   Id., ¶ 916. 63   Id. 64   Id., ¶ 923. 65   Desert Line Projects v. Yemen, supra note 9, ¶ 289.

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seriousness whereby compensation for moral damages is limited to “exceptional cases” when the following conditions are met: – 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.66 In other words, the Lemire tribunal held that compensation should be limited to cases involving “exceptional circumstances” such as when a State’s conduct is considered grave (involving physical threat, illegal detention, or other analogous situations) and results in a person’s substantial deterioration of health, stress, anxiety, and other types of mental suffering. The Lemire tribunal applied this test to the facts of the case wherein the claimant had sought US$3 million in compensation for moral damages resulting from allegedly harassing measures adopted by Ukraine’s broadcasting authorities when rejecting his applications for new radio frequencies. The tribunal noted that the “excessive or disproportionate efforts which an applicant may have incurred when requesting administrative licences, by their nature, are most unlikely to give rise to moral damages, since the injury does not meet any of the three standards required for the existence of moral damages.”67 For the tribunal, Mr. Lemire did not suffer “extraordinary stress or anxiety” as a result of these efforts to obtain new radio frequencies.68 Mr. Lemire also claimed compensation for the disrespect and humiliation caused by the authorities’ constant rejection of his applications. The tribunal acknowledged that these recurring rejections may have caused him “a loss of reputation” but added that “this is not enough: the main question is to determine whether the injury inflicted is substantial.”69 For the tribunal, “the gravity required under the standard [was] not present” since the injury he suffered “[could not] be compared to that caused by armed threats, by the witnessing of deaths or by other similar situations in which Tribunals in the 66   Lemire v. Ukraine, supra note 13, ¶ 333. 67   Id., ¶ 336. 68   Id., ¶ 337. 69   Id., ¶ 338.

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past have awarded moral damages.”70 The tribunal therefore rejected the moral damages claim. The Lemire tribunal was the first one to put forward this high threshold of a severity test therefore limiting the award of compensation for moral damages only to “exceptional circumstances” where the “cause” is grave and the “effect” is substantial. Since then, a number of tribunals have endorsed the test adopted in the Lemire award.71 One interesting case examining the issue is Arif v. Moldova, arising out of a contract between Mr. Arif’s wholly-owned company and the State of Moldova for the exclusive exploitation of duty free stores.72 The tribunal held that Moldova failed to provide fair and equitable treatment to the investor, but rejected the investor’s moral damages claim: for the pain, stress, shock, anguish, humiliation and shame suffered as a result of Moldova’s acts and omissions in relation to his investments, and the fact that he had to leave the country for his own safety, depriving him of the opportunity to personally manage his own business and to pursue new business opportunities.73 The tribunal acknowledged right at the outset that there was “no doubt that moral damages may be awarded in international law… although they are an exceptional remedy.”74 The tribunal criticized some aspects of the Lemire award and concluded that its dictum should not be accepted as the general test to determine whether to award compensation for moral damages:

70   Id., ¶ 339. 71   Tza Yap Shum v. Peru, supra note 28, ¶¶ 274–85; Stati v. Kazakhstan, supra note 28, ¶¶ 1781– 6; Inmaris Perestroika Sailing Maritime Services v. Ukraine, supra note 28, ¶ 428; Lahoud v. Congo, supra note 28, ¶¶ 621–4; Oxus Gold v. Uzbekistan, supra note 27, ¶¶ 895–901; OI European Group v. Venezuela, supra note 27, ¶¶ 908–17; Quiborax v. Bolivia, supra note 27, ¶¶ 617–9; Convial Callao v. Peru, supra note 27, ¶¶ 233–6, 357; von Pezold v. Zimbabwe, supra note 15, ¶¶ 908–9, 920. See also a number of other decisions rendered before the Lemire award: Siag v. Egypt, supra note 28, ¶ 545 (“the recovery of punitive or moral damages is reserved for extreme cases of egregious behavior”); Europe Cement v. Turkey, supra note 16, ¶ 181 (where the tribunal decided not to award any compensation since “it [did] not consider that exceptional circumstances such as physical duress [were] present in this case to justify moral damages.”). 72   Arif v. Moldova, supra note 28, ¶¶ 584–615. 73   Id., ¶ 562. 74   Id., ¶ 584.

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The Tribunal notes 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. The first element, in particular, might reflect the particular circumstances of the Desert Line Projects LLC v Republic of Yemen case but the facts of a single case do not define the availability of moral damages as a remedy. In the Tribunal’s view, the older Lusitania case, the basis of the second factor in Lemire, correctly states the criteria the Tribunal should take into account. This leaves the Tribunal with an element of discretion, but within the general framework that moral damages are an exceptional remedy.75 In the following paragraph, the tribunal reiterated that “[t]he element of exceptionality must be acknowledged and respected”76 and made the following important comment: A breach of a contract or any wrongful act can lead to a sentiment of frustration and affront with the victim. 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. It would systematically create financial advantages for the victim which go beyond the traditional concept of compensation. The fundamental balance of the allocation of risks would be distorted. It would have similar effects if permitted in investment arbitration. The Tribunal is therefore aligning itself to the majority of arbitral decisions and holds that compensation for moral damages can only be awarded in exceptional cases, when both the conduct of the violator and the prejudice of the victim are grave and substantial.77 In sum, while the tribunal recognized that compensation could be awarded in situations where State conduct does not involve any “physical threat and illegal detention” (or other analogous situations), it nevertheless emphasized the requirement that such conduct must be grave. The tribunal also indicated that 75   Id., ¶¶ 590, 591 (citations omitted). 76   Id., ¶ 592. 77   Id.

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it is simply not enough for a State action to result in a person’s deterioration of health, stress, anxiety, or other mental suffering; the prejudice suffered by the victim needs to be substantial. The Arif tribunal therefore ultimately fully endorsed the Lemire award’s three-stage test of “exceptional circumstances.” The tribunal then applied this test to the facts of the case by emphasizing the importance of some specific features of Moldova’s economy and governance when deciding on the availability of moral damages.78 It explained that Mr. Arif invested in 1998 in the emerging market economy of Moldova “during a period when the country transited from a Soviet to a market economy, a difficult and contradictory path indeed, characterized by instability and the unpredictability of economic and political institutions.”79 For the tribunal, Moldova therefore “offered exceptional business opportunities, but at the same time high risks.”80 In a controversial statement open to criticism,81 the tribunal further explained how Moldova’s weak institutions and poor governance could have an impact on the availability of compensation for moral damages: These circumstances do not lower the standard of investment protection provided by a BIT or excuse breaches of that standard. They have, how­ever, an inevitable bearing on what characterizes “exceptional circumstances” as a threshold for the pecuniary compensation for moral damages. The perception of an egregious behavior is different in different business traditions. On the one hand, the loss of reputation as a consequence of governmental and police interference is much less dramatic in countries where the rule of law and protection against administrative discretion are low and any business is exposed to this risk, irrespective of its conduct, and, on the other hand, the individual’s expectations are different and less easily to be shocked.82 In any event, the tribunal concluded that “[n]either Mr. Arif, nor any of his relatives or employees [had] been exposed to physical violence, armed threats, deprivation of liberty or a forceful taking of property.”83 Also, while the search and investigations conducted by the authorities “may have been unpleasant and painful,” the tribunal added that “they were conducted in accordance with 78   Id., ¶ 603. 79   Id., ¶ 604. 80   Id. 81   See analysis in Dumberry & Cusson, supra note 14. 82   Arif v. Moldova, supra note 28, ¶ 606. 83   Id., ¶ 607.

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Moldovan procedural law, upon an order and under the supervision of a judge after a request from a prosecutor, and carefully minuted.”84 Moreover, the Moldovan company owned and controlled by Mr. Arif only ended up having to pay minor penalties for tax irregularities.85 Finally, although the tribunal acknowledged that “the conduct of the Moldovan authorities provoked stress and anxiety” in Mr. Arif, it held that such actions “did not reach a level of gravity and intensity which would allow it to conclude that there were exceptional circumstances which would entail the need for a pecuniary compensation for moral damages.”86 Thus, there is a growing consensus amongst tribunals that compensation for moral damages should only be awarded in “exceptional circumstances.” This trend is all the more surprising considering that this interpretation has been criticized by writers who have recently examined the question in the specific context of investor-State arbitration. In fact, there seems to be a consensus amongst them that the approach adopted by these tribunals regarding the “exceptional circumstances” threshold is not in conformity with established principles of international law concerning reparations.87 This author agrees. To the extent that, under international law, a State must provide full reparation for all damages, it is conceptually difficult to understand why one certain type of damages should be treated differently. Thus, compensation for moral damages share the same function as material damages: to eliminate all consequences of the breach. There is simply no reason why moral damages should not be subject to the same rules as other compensatory damages.88 In turn, this means that an investor is subject to the same conditions for awarding compensatory damages. That is, an investor is required to prove that it has suffered these types of losses, to establish that the State’s conduct has caused moral damages, and to quantify its damages to the requisite level of proof. Logically, no higher threshold of gravity or seriousness 84   Id., ¶ 610. 85   Id., ¶ 611. 86   Id., ¶ 615. 87  Bernd Ehle & Martin Dawidowicz, Moral Damages in Investment Arbitration, Commercial Arbitration and WTO Litigation, in WTO Litigation, Investment Arbitration, and Commercial Arbitration 293, 304, 307, 310 (Jorge A. Huerta Goldman et al. eds., 2013); Conway Blake, Moral Damages in Investment Arbitration: A Role for Human Rights?, 3(2) J. Int’l Disp. Settlement 371, 378–9, 394 (2012); Coriell & Marchili, supra note 57, at 222–3; Sabahi, supra note 58, at 260–1; Merryl Lawry-White, Are Moral Damages an Exceptional Case?, 15(6) Int’l Arb. L. Rev. 236, 239 (2012); Moyano García, supra note 57, at 501–3. 88  Coriell & Marchili, supra note 57, at 214.

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should therefore be required for finding a breach of international law in the context of moral damages claims. Similarly, since the work of the ILC on State Responsibility has long adopted the concept of “objective” responsibility of a State, it follows that fault, malice, or any other intent is also clearly not a necessary precondition for awarding compensation.89 In the author’s view, a State’s fault or malicious intent as well as especially egregious acts should be taken into account by tribunals when they actually quantify the amount of compensation to be awarded to remediate moral damages.90 Thus, the amount of compensation should be proportional to the seriousness of the offence committed by a State and its degree of responsibility. A tribunal may award a greater amount of compensation for moral damages in a situation where the conduct of the State is especially malicious or shocking. Likewise, the amount of compensation should reflect the nature and the extent of the prejudice suffered by the victim. A tribunal should be allowed to award a greater amount of compensation when the prejudice is substantial and significant. This is because the goal of compensation is to cover the actual damage suffered. In other words, while a “grave cause” and a “substantial effect”91 are not sine qua non conditions for awarding compensation for moral damages, they are the most relevant elements for matters of quantification. Moral damages, of course, must be distinguished from punitive damages, a concept which is not recognized under international law.92 A State is not obliged to pay an extra amount of compensation in addition to the actual damages suffered. The amount of compensation awarded is in fact equivalent to the actual damage suffered. Yet, this damage is, of course, likely to be greater when the prejudice is substantial and significant. Ultimately, the goal of awarding compensation remains to remediate the actual damage suffered; it is not to punish the host State. In any event, the “extraordinary circumstances” test will be easily satisfied when the actions taken by the host State clearly warrants compensating moral damages. A prominent example of such a situation is the recent case of Bernhard von Pezold et al. v. Zimbabwe.93 The claimants, members of the von Pezold family who (except for one) were both German and Swiss 89   Id., at 220–3; Lars Markert & Elisa Freiburg, Moral Damages in International Investment Disputes—On the Search for a Legal Basis and Guiding Principles, 14 J. World Inv. & Trade 1, 30–1 (2013). 90   R ipinsky & Williams, supra note 57, at 312; Markert & Freiburg, supra note 89, at 41; Moyano García, supra note 57, at 503. 91   Lemire v. Ukraine, supra note 13, ¶ 333. 92   See discussion in Dumberry, supra note 8 (2010). 93   von Pezold v. Zimbabwe, supra note 15.

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nationals, submitted their claims under the BITs entered into by Zimbabwe with Germany and Switzerland, respectively.94 The claim involved the so-called “Border Claimants,” which the tribunal described as being three “companies incorporated in Zimbabwe, but [which] claim[ed] Swiss nationality through their collective alleged control by the von Pezold Claimants.”95 As explained by the tribunal, the case dealt “primarily” with the “alleged expropriation in the 21st century by Zimbabwe of land and other property held by the von Pezold Claimants further to its Land Reform Programme (‘LRP’).”96 The tribunal explained the background of the case: “Following Zimbabwe’s independence and the election of Robert Mugabe as President in 1980, the land policies of the Rhodesian era which favored the white minority population were reversed and replaced with land policies favouring the black indigenous population.”97 Specifically, at the heart of the moral damages claim was what the tribunal described as the “Invasions” of predominantly white-owned farms by “Settlers” and “War Veterans.”98 Such invasions “were not anticipated and, at the beginning, were disorganized and ‘inchoate’ ” but later as “[they] continued and expanded across Zimbabwe, logistical support and supplies appear to have been provided by organs of the Zimbabwean Government to persons coming onto private land (i.e., the ‘Settlers/War Veterans’).”99 The tribunal referred to the witness statement of one of the claimants, Mr. Heinrich von Pezold, indicating that he “along with [his] staff, were humiliated, threatened with death and assaulted, had firearms put to our heads, and were kidnapped” by War Veterans.100 He also added that “there was a general sense of terror within the farming community; we knew that farmers and farm workers had been killed during Invasions by War Veterans, and that there were a number of instances of rape and threats of rape on the farms by War Veterans.”101 The tribunal concluded that such treatment “warrants moral damages based on the principles outlined by the tribunal in Lemire”: First, the threats of, and actual, physical violence and detainment that Heinrich reported clearly contravene the conduct expected of states.

94   Id., ¶¶ 9–10. 95   Id., ¶ 12. 96   Id., ¶ 2. 97   Id., ¶ 3. 98   Id., ¶¶ 110–2. 99   Id., ¶ 112. 100   Id., ¶ 898. 101   Id.

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Even if the Respondent did not directly perpetrate these actions, the failure of the police to protect Heinrich von Pezold from the Settlers/War Veterans over so many years falls short of the conduct expected of states. Heinrich was entitled to expect the full protection of the law. He did not receive it. Secondly, the events caused Heinrich considerable stress and anxiety. Heinrich not only worried about his own safety but the safety of his staff. It must be remembered that the events contributing to this stress stretched over a number of years. The Tribunal does not doubt the personal toll this took on Heinrich. Finally, the actions perpetrated against Heinrich and his suffering are grave and substantial. Awarding Heinrich moral damages would reflect the harm he specifically suffered. Simply awarding compensation for unlawful expropriation would not be sufficient.102 The tribunal awarded US$1 million for moral damages which it considered to be “appropriate especially given the number of years that Heinrich was exposed to these stresses.”103 The tribunal however concluded that since the other claimants did not reside in Zimbabwe, the fact that they had “fears for Heinrich and their staff” which had “[u]ndoubtedly … caused them great worry” was nevertheless not enough to entitle them to compensation for moral damages.104 The tribunal noted that the Lemire decision requires that the State’s actions “imply physical threats, illegal detention or other analogous situations.”105 The tribunal also awarded US$1 million to companies controlled by the claimants to compensate their moral damages.106 3.1.4

Is Compensation the Proper Form of Remedy for Moral Damages Suffered by Individuals and Corporations? The reasoning of the Desert Line tribunal suggests that monetary compensation is the proper remedy for moral damages affecting an individual or a corporation. In the case of Pey Casado v. Chile, the tribunal refused to award any monetary compensation for moral damages for lack of proof. However, it nevertheless observed that the amount of compensation it awarded for material damages (US$10 million), as well as its finding that Chile had breached the Spain-Chile BIT, and that Mr. Pey Casado had been the victim of a denial of 102   Id., ¶ 920. 103   Id., ¶ 921. 104   Id., ¶ 922. 105   Id. (quoting Lemire v. Ukraine, supra note 13, ¶ 333). 106   Id., ¶ 923.

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justice, constituted in itself “substantial and sufficient moral satisfaction” for him.107 A similar comment was also made by the Lemire tribunal.108 These obiter dicta raise the question of whether or not a tribunal established under a BIT could (or, indeed, should) remediate moral damages suffered by a foreign investor with satisfaction. Article 37(2) of the ILC Articles indicates that the remedy of satisfaction can take different forms such as an expression of regret or a formal apology and even symbolic damages. One of the most common forms of satisfaction is when a juridical body makes a declaration on the wrongfulness of an act committed by a State. Another form of satisfaction, known as “pecuniary satisfaction,” is the award of a “symbolic” amount of monetary compensation. In the author’s view, a mere declaration by a tribunal recognizing the wrongfulness of acts committed by the host State is clearly an insufficient and inappropriate remedy to cover actual moral damages suffered by an investor.109 Monetary compensation remains the appropriate remedy for moral damages affecting an individual or a corporation. This is because such moral damages are, as a matter of principle, “financially assessable.”110 This is undoubtedly the case for some types of moral damages which are indeed easily quantifiable, such as loss of reputation (e.g., loss of business owing to the breach), physical harm (e.g., hospital bills), or detention (e.g., lawyers’ fees). Yet, other types will be more difficult to assess and to quantify (e.g., pain and suffering, mental anguish, or harassment). In such cases, a tribunal may very well be tempted to remedy that damage with satisfaction. Yet, it should be added, more generally, that the remedy of satisfaction in the form of a declaratory judgment that the host State breached a BIT can be an appropriate remedy in some circumstances (unrelated to moral damages).111 Thus, tribunals

107   Pey Casado v. Chile, supra note 27 (2008 Award), ¶ 704. 108   Lemire v. Ukraine, supra note 13, ¶¶ 339, 344. In an obiter dictum, the tribunal mentioned that “the acknowledgement in the First Decision [Decision on Jurisdiction and Liability, 2010] that Ukraine has indeed breached the BIT, and the present award of substantial compensation, are elements of redress which may significantly repair Mr. Lemire’s loss of reputation.” Id., ¶ 339. 109  This is discussed in Dumberry, supra note 18. 110  According to the ILC Draft Articles, “[m]aterial and moral damage resulting from an internationally wrongful act will normally be financially assessable and hence covered by the remedy of compensation.” ILC Draft Articles, at 264 (emphasis added). 111  Christoph Schreuer, Alternative Remedies in Investment Arbitration, 3 J. Damages Int’l Arb. 1, 20–30 (2016).

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have in the past considered that they have the power to make such a declaratory judgment,112 especially in the absence of quantifiable damage.113 The different question of whether satisfaction is the proper form of reparation for moral damages suffered by a State is examined in the next section. 3.2 Claims Submitted by States There are some internationally wrongful acts that may directly affect or injure a State with respect to its honor, dignity, or prestige. One may think, for instance, of insults to State symbols, such as the national flag, a violation of territorial integrity, a violation of the premises of embassies and consulates, an attack on ships and aircrafts, or an attack on heads of State or diplomatic/consular representatives.114 As further discussed below, one kind of wrong which has been raised by States in the context of investment disputes is injury to reputation. Of the three different methods of reparation recognized in Article 34 of the ILC Articles, the remedy of “satisfaction” is considered the appropriate one to deal with “those injuries, not financially assessable, which amount to an affront to the State.”115 Many arbitration tribunals,116 as well as the International Court of Justice (“ICJ”),117 have held that satisfaction is the proper means of reparation for moral damages caused directly to a State. 112   Quiborax v. Bolivia, supra note 27, ¶¶ 535, 552–9; Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/01, Decision on Objections to Jurisdiction, ¶¶ 56, 89 (Aug. 25, 2006). See other cases referred to in Schreuer, supra note 111. 113   Biwater v. Tanzania, supra note 27 (Award), ¶ 807. 114  I LC Draft Articles, at 264–5. 115   Id., at 264; see also id., at 244. 116   Affaire du Manouba (France/Italie) [Manouba Case (France/Italy)], Award, 11 R.I.A.A. 463 (Perm. Ct. Arb. May 6, 1913); Affaire du Carthage (France/Italie) [Carthage Case (France/ Italy)], Award, 11 R.I.A.A. 449 (Perm. Ct. Arb. May 6, 1913); S.S. “I’m Alone” (Canada/United States), Award, 3 R.I.A.A. 1609, 1618 (Jan. 5, 1935); Heirs of Jean Maninat, supra note 7, at 81–2; Case concerning the differences between New Zealand and France arising from the Rainbow Warrior affair, Ruling of 6 July 1986 by the Secretary-General of the United Nations, 19 R.I.A.A. 199, 213; Case concerning the difference between New Zealand and France concerning the interpretation or application of two agreements, concluded on 9 July 1986 between the two States and which related to the problems arising from the Rainbow Warrior Affair, Award, ¶ 109, 20 R.I.A.A. 215 (Apr. 30, 1990). 117   Corfu Channel (United Kingdom v. Albania), Judgment, 1949 I.C.J. Rep. 4, 35 (Apr. 9); Arrest Warrant of 11 April 2000 (Democratic Republic of the Congo v. Belgium), Judgment, 2002 I.C.J. Rep. 3, ¶¶ 11, 75 (Feb. 14); Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia & Herzegovina v. Serbia & Montenegro), Judgment, 2007 I.C.J. Rep. 43, ¶¶ 463, 471 (Feb. 26); Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), Judgment, 2008 I.C.J. Rep. 177, ¶ 204 (June 4).

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While, to date, no investment tribunal has ever awarded compensation to a respondent State for moral damages, the issue was recently addressed in the cases of Europe Cement and Cementownia.118 Both tribunals declined jurisdiction over separate disputes filed by two Polish companies under the ECT based on the companies’ inability to prove their ownership of shares in the same two Turkish corporations which were parties to concession agreements that had been allegedly terminated by Turkey. Both tribunals described the claims as an “abuse of process” by claimants.119 In Europe Cement, Turkey sought US$1 million in compensation for the moral damages it allegedly suffered to its “reputation and international standing”120 as a result of the “jurisdictionally baseless claim asserted in bad faith and for an improper purpose,”121 which caused it “intangible but no less real loss.”122 For Turkey, such compensation would provide “a form of satisfaction, even if the award were never to be paid.”123 Turkey therefore requested the remedy of satisfaction either in the form of monetary compensation (“pecuniary satisfaction”) or (in the event that the amount would not be paid by the investor) in the form of a declaration by the tribunal acknowledging wrongfulness. Although the tribunal first noted that “conduct that involves fraud and an abuse of process deserves condemnation,”124 it ultimately decided not to award any compensation since “it [did] not consider that exceptional circumstances such as physical duress [were] present in this case to justify moral damages.”125 In any event, for the tribunal, “any potential reputational damage” suffered by Turkey would be “remedied by the reasoning and conclusions set out in this Award, including an award of costs….”126 In Cementownia, Turkey argued that “[t]ribunals applying international law may award to a State the remedy of satisfaction where it has suffered an intangible injury, such as injury to its reputation or prestige.”127 It added that 118  The question is examined in Dumberry, supra note 18. 119   Europe Cement v. Turkey, supra note 16, ¶ 175; Cementownia v. Turkey, supra note 17, ¶¶ 117, 159. 120   Europe Cement v. Turkey, supra note 16, ¶ 177. 121   Id., ¶ 128. 122   Id. 123   Id., ¶ 135. 124   Id., ¶ 180. 125   Id., ¶ 181. 126   Id. The tribunal ordered that the claimant pay the respondent its full costs for the proceedings, including legal fees (some US$3.9 million) as well as half of the arbitration costs (US$129,000). Id., ¶ 186. 127   Cementownia v. Turkey, supra note 17, ¶ 165 (emphasis added).

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“[i]n investment treaty cases, compensation has been awarded where the injury was inflicted maliciously.”128 In its analysis, the tribunal first noted that “there is nothing in the ICSID Convention, Arbitration Rules and Additional Facility which prevents an arbitral tribunal from granting moral damages.”129 The tribunal distinguished the present claim from the Desert Line award where the “arbitral tribunal decided, on the basis of the obligations contained in the Bilateral Investment Treaty (BIT) between Yemen and Oman, in particular the obligation of security, that exceptional circumstances, such as physical duress suffered by the investor, justified the compensation.”130 In the present case, Turkey requested compensation for moral damages “based merely on a general principle, i.e., abuse of process” and not on a BIT provision.131 For the tribunal, “[i]t is doubtful that such a general principle may constitute a sufficient legal basis for granting compensation for moral damages.”132 The tribunal therefore dismissed Turkey’s claim for pecuniary satisfaction to remedy its moral damage. In any event, the tribunal added that although “[a] symbolic compensation for moral damages” could indicate the tribunal’s condemnation of the claimant’s abuse of process, in the present case it was however more appropriate “to sanction the Claimant with respect to the allocation of costs” (in an amount close to US$5 million).133 Finally, the tribunal mentioned that “[i]n any case, since the Arbitral Tribunal has already accepted the Respondent’s request with respect to the fraudulent claim declaration, the Respondent’s objective is already achieved.”134 Another case where the issue arose in a different manner is Levy v. Peru. Peru requested the tribunal to award compensation for moral damages resulting from the “serious harm on the Respondent’s reputation and … legitimacy” due to actions by the claimant.135 Interestingly, these actions were unrelated to the on-going arbitration proceedings. Such actions included “abus[ing] the administrative and judicial processes available to [the claimant in Peru] by bringing six claims against Peru over ten years, prompting two investigations by the Peruvian Congress, and initiating a lawsuit against the Superintendent in the State of New York,” as well as conducting “a media campaign aimed at 128   Id. (emphasis added). 129   Id., ¶ 169. 130   Id. 131   Id., ¶ 170. 132   Id. 133   Id., ¶ 171. 134   Id. 135   Levy de Levi v. Peru, supra note 27, ¶ 507.

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undermining the credibility of the Respondent and tr[ying] to block the adoption of the Free Trade Agreement between Peru and the United States.”136 The tribunal rejected the allegation that such actions “caused an enormous moral damage to Peru.”137 The reasoning of both the Europe Cement and the Cementownia tribunals supports the view that satisfaction, in the form of a declaration by a tribunal acknowledging wrongfulness, is the proper remedy for any moral damage suffered by a respondent State.138 It should be noted, however, that situations where an investor commits a breach of international law directly affecting a State in its honor and dignity will be very rare in practice.139 Breaches of law typically giving rise to any moral damage to a State will normally occur in a State-to-State relationship rather than in an investor-State context.140 In any event, under most BITs, a tribunal will simply have no jurisdiction over moral damages allegations submitted by a State.141 One reason is because a State will typically raise such allegations in a counterclaim.142 The availability of such claims is limited by the language of the underlying investment treaty or contract.143 Some authors have recently argued that tribunals should award pecuniary satisfaction for moral damages to respondent States which prevail in “particularly egregious cases” filed by investors where “a claim is vexatious or has been brought fraudulently or in bad faith.”144 This is because a respondent State’s 136   Id., ¶ 508. 137   Id., ¶¶ 508–9. 138  On this question, see Moyano García, supra note 57, at 518–9, indicating that monetary compensation could also be awarded. See also Uchkunova & Temnikov, supra note 58, at 391–3. 139  Dumberry, supra note 18. 140  I LC Draft Articles, at 264–5. 141  The reasons are further examined in Dumberry, supra note 18. 142  In AMTO v. Ukraine, Ukraine submitted a counterclaim claiming, inter alia, compensation in the amount of EUR €25,000 for “non-material injury” for its damaged reputation resulting from “unfounded allegations” raised by the investor in the proceedings about the collusion between two Ukrainian State-owned companies. AMTO v. Ukraine, supra note 37, ¶¶ 35, 116, 118. The tribunal dismissed the claim on the ground that it did not have jurisdiction over counterclaims under the ECT. This question is examined in Moyano García, supra note 57, at 513–5; Uchkunova & Temnikov, supra note 58, at 387–9, 394–402. 143   See Chapter 13, Jeremy K. Sharpe & Marc Jacob, Counterclaims and State Claims, at Section 3. 144  Matthew T. Parish et al., Awarding Moral Damages to Respondent States in Investment Arbitration, 29 Berkeley J. Int’l L. 225, 238 (2011). The same position is taken by other writers: Uchkunova & Temnikov, supra note 58, at 391; Moyano García, supra note 57, at 515–8.

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“investment reputation” would be “unfairly tarnished” by baseless arbitration proceedings commenced by an investor (even in cases where the former ultimately prevails) and may result in lost investments.145 In the author’s view, the purportedly tarnished reputation and alleged losses of investments should not be the foundation for allowing tribunals to award compensation for moral damages to respondent States in the context of arbitration proceedings instituted by an investor. This should be the case even when the investor’s claim is frivolous, baseless, and ultimately unsuccessful. Nevertheless, in a recent case, the tribunal seems to have endorsed the possibility of awarding compensation for moral damages to a State in case of “abusive behaviour” committed by an investor.146 In the author’s view, by entering into a BIT, a State knows quite well that it may be the object of an arbitration claim. It is not entirely clear whether the reputation and international standing of a State can be affected by the mere fact of its participation in arbitration proceedings under a BIT.147 It is not easy to envisage any situation where a State would be able to demonstrate in the context of on-going arbitration proceedings that it lost a quantifiable and precise amount of foreign investments directly linked to the specific claim brought by the investor in that case. It may be that a State will lose investments over time as a result of many proceedings brought by different claimants. Yet, the actual quantification of any such loss may be problematic. It will be even harder to show that any such lost investment is directly linked to one specific proceeding. Such linkage may only be possible to demonstrate years after the end of that case. In sum, it remains difficult to conceive of any circumstances where a State would suffer from moral damages in arbitration proceedings.148 In the unlikely event that a State would be able to identify specifically any sort of moral damages suffered (and, most importantly, to quantify it), pecuniary satisfaction may ultimately be considered as an available remedy. Yet, in all

145  Parish et al., supra note 144, at 235–6, 238–9. 146   Lundin v. Tunisia, supra note 36, ¶ 379 (“Le Tribunal reconnaît l’importance de l’image d’un pays pour établir son attractivité auprès des investisseurs étrangers comme destination stable et sûre pour leurs investissements. Il comprend également l’impact négatif que pourrait avoir un arbitrage international d’investissement sur la perception du climat des investissements dans un pays. Il ressort cependant des décisions du Tribunal après un examen des griefs et des arguments des parties, que la Demanderesse n’a pas eu un comportement fautif ou abusif, en introduisant un arbitrage CIRDI dont le droit lui était reconnu par la Convention [Z] pour régler les différends l’opposant à la Défenderesse.”). 147   See Moyano García, supra note 57, at 515–8, referring to recent studies on the question. 148  Dumberry, supra note 18.

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likelihood, a declaration by a tribunal acknowledging wrongfulness will remain the most appropriate remedy. In this context, Turkey, Tunisia, and Ukraine’s recent requests for monetary compensation, as a form of satisfaction, to remediate alleged moral damages are quite surprising. This is because States are generally reluctant to ask a tribunal to somehow quantify any moral injury suffered. For instance, recent litigation cases between States shows that they prefer instead to request an apology from the responsible State or, more frequently, to ask a tribunal to issue a declaration of wrongfulness.149 4

Conclusion

The issue of moral damages is still a rather novel one in the context of investment arbitration. Yet, it has now been examined by investment tribunals in more than 30 cases. The fact that investors may be entitled to compensation for moral damages suffered is no longer controversial. What remains uncertain is the question as to whether or not such compensation for moral damages should only be limited to “exceptional circumstances” where the “cause” is grave and the “effect” is substantial. One issue that seems to be settled is the question of the proper remedy for moral damages depending on who is affected. On the one hand, monetary compensation is the appropriate remedy for moral damages affecting an individual or a corporation. On the other hand, satisfaction, in the form of a declaration of wrongfulness, would be the most appropriate form of reparation to remedy any moral damage suffered by a respondent State even if such issue is, however, unlikely to frequently arise in the context of international investment law. 149   See cases referred to in Dumberry, supra note 18.

Part 3 Valuation Considerations

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Chapter 7

Approaches to Valuation in Investment Treaty Arbitration Noah Rubins, Vasuda Sinha and Baxter Roberts The ultimate goal of the claimant in an investment treaty arbitration is almost always the payment of compensation for the harm it believes it has suffered at a host State’s hands. The respondent, meanwhile, is always intent on, if not defeating the claim altogether, reducing the financial and political impact that will flow from a sizable arbitral award against it. The quantification of damages is therefore a central concern to clients and counsel on both sides of an investment dispute and arguments about damages can occupy a substantial portion of submissions to the arbitral tribunal. Investment protection treaties themselves generally say rather little about the quantification of damages. While the underlying principles of international law are straightforward and subject to relatively little dispute, their application—in particular, the principle of “full compensation”—has yet to coalesce into consistent rules or practice. This is partially due to the wide variety of factual scenarios, industries, asset types, and treaty breaches that have faced arbitral tribunals over the last three decades and to a growing understanding of basic financial concepts that have long been accepted in the fields of accounting and valuation. In this Chapter, we start with a discussion of the basic principles that anchor most investment tribunals in their damages analysis. We then examine various methodologies that have been used to quantify compensation in investment arbitrations, focusing on different types of backward- and forward-looking approaches and the evolution in their treatment by parties and tribunals. In the final section, we explore some methodologies that have yet to take hold in investment arbitration, but may start to see more light as stakeholders become increasingly experienced and innovative in their approaches to quantifying damages. * The authors wish to thank Seohyung Kim, Mark Lee, Ruth McGuinness, and Julia Schulman, interns in the International Arbitration Group at Freshfields Bruckhaus Deringer LLP in Paris, for their assistance. The views expressed in this publication are those of the authors and do not necessarily reflect the views of the firm or its clients.

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The starting point for determining the standard of compensation owed to an investor by a State for a breach is the text of the relevant investment treaty. However, most treaties provide no guidance regarding the appropriate measure of compensation, and to the extent any rules are set out for calculating compensation, this almost always relates only to compensation that a State must provide in order for an expropriation to be considered legal according to the treaty itself. Absent guidance from the relevant treaty, arbitral awards reflect a general consensus that the answer lies in customary international law. In an often-referenced part of the award in ADC v. Hungary, for instance, the tribunal noted that there is “general authority for the view that a BIT can be considered as a lex specialis whose provisions will prevail over rules of customary international law,”1 but that in the absence of specific rules in the bilateral investment treaty (“BIT”) regarding damages for unlawful expropriation, the default standard contained in customary international law will apply.2 Under customary international law, the primary obligation of a State that has violated an investment treaty is to make restitution.3 This approach was articulated in 1928 by the Permanent Court of International Justice (“PCIJ”) in the Chorzów Factory case and has since been codified by the International Law Commission in its Articles on State Responsibility (the “ILC Articles”). It is routinely adopted by arbitral tribunals deciding investment disputes.4 However, in the context of wrongful regulation or even seizure, restitution in the form 1  A DC Affiliate Ltd. & ADC & ADMC Mgmt. Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, ¶ 481 (Oct. 2, 2006), cited with approval in LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award, ¶ 38 (July 25, 2007) and Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, ¶ 509 (Mar. 3, 2010). Cf. Bernardus Henricus Funnekotter et al. v. Republic of Zimbabwe, ICSID Case No. ARB/05/6, Award, ¶ 110 (Apr. 22, 2009). 2  A DC v. Hungary, supra note 1, ¶ 483. This has been recently confirmed in Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award, ¶ 160 (Feb. 7, 2017). 3  Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17, at 47 (Sept. 13). See also Chapter 5, Irmgard Marboe, Assessing Compensation and Damages in Expropriation versus Non-expropriation Cases, at Sections 2 & 3.2. 4  For examples of investment treaty tribunals following the principles set out in the Chorzów Factory case, see CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Partial Award, ¶¶ 616–8 (Sept. 13, 2001); Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, ¶¶ 773–8 (July 24, 2008);

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of a State reversing its conduct and returning the investment to its initial condition is often impossible or impractical. In addition, restitution may also be inadequate in certain circumstances. For example, in the case of an expropriated asset the value of which has significantly depreciated since its taking, the claimant may be left worse off if the asset was returned than if it received damages for the harm suffered. Likewise, for an income-generating business, a return of the asset alone without a damages award may not fully compensate the investor if it lost income from that business during the intervening period. Recognizing the limits of restitution, investment treaty tribunals have shown a marked readiness to depart from this default remedy.5 In cases where a tribunal considers restitution to be impossible, impracticable, or inappropriate, the tribunal must look to a damages award as a substitute. This hierarchy of remedies is well-established under general international law and clearly set out in Article 36 of the ILC Articles. Restitution, or the monetary equivalent of it, fulfills the overarching goal of ensuring that the State makes “full reparation” for its wrong by restoring a claimant investor to the economic position that it would have occupied had the respondent State’s unlawful conduct not occurred.6 In Chorzów Factory, the PCIJ described the obligation to make “full reparation” as follows: “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.”7 The obligation of “full reparation” as expressed in Chorzów Factory and codified in Article 31 of the ILC Articles has been accepted and applied by numerous arbitral tribunals.8

Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award, ¶ 559 (Apr. 8, 2013). 5  See, e.g., Mohammad Ammar Al-Bahloul v. Republic of Tajikistan, SCC Case No. V (064/2008), Final Award, ¶ 52 (June 8, 2010); El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Award, ¶¶ 700–1 (Oct. 31, 2011); Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26, Award, ¶¶ 512–7 (Jan. 29, 2016). 6  Khan Resources Inc. et al. v. Gov’t of Mongolia & MonAtom LLC, PCA Case No. 2011–09, Award on the Merits, ¶ 253 (Mar. 2, 2015). 7  Chorzów Factory, supra note 3, at 47. 8  Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award, ¶ 640 (Aug. 22, 2016); see also Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award, ¶ 8.2.7 (Aug. 20, 2007).

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1.1 Fair Market Value The most common measure of “full reparation” in investment treaty disputes is “fair market value.” In the case of lawful expropriation, the standard of compensation to the investor is usually expressly set out in the treaty and is often prescribed as the fair market value of the investment at the date of expropriation.9 In the case of treaty breaches, including unlawful expropriation, investment treaties are normally silent on the standard of compensation. However, it has become commonly accepted as a matter of international law that full compensation for treaty breaches is to be assessed with respect to the fair market value.10 As will be elaborated in Section 2, the damages analysis in such cases usually involves considering the difference between: (a) the fair market value the investment would have had absent the treaty breach and (b) the fair market value of the investment as a result of the breach. It is generally accepted that the fair market value of an asset is the amount at which a hypothetical willing and able buyer would buy it and the price at which a hypothetical willing and able seller would sell it. According to the American Society of Appraisers’ Business Valuation Standards (2009), fair market value means: The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and hypothetical willing and able seller, acting at arm’s length in an open and

9    See, e.g., Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment [hereinafter U.S.-Argentina BIT], art. IV(1) (Nov. 14, 1991); Agreement Establishing the ASEAN-AustraliaNew Zealand Free Trade Area (with Annexes), ch. 11, art. 9(2) (Feb. 27, 2009), 2672 U.N.T.S. 3; Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Federal Democratic Republic of Ethiopia [hereinafter Netherlands-Ethiopia BIT], art. 6 (May 16, 2003), 2594 U.N.T.S. 175. 10   See, e.g., G.A. Res. 56/83, annex, Responsibility of States for Internationally Wrongful Acts, art. 36 (Jan. 28, 2002); Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries [hereinafter ILC Draft Articles], art. 36, commentary 22 (2001), 2 Y.B. Int’l L. Comm’n 31, U.N. Doc. A/CN.4/SER.A/2001/Add.1 (Part 2); World Bank, Guidelines on the Treatment of Foreign Direct Investment [hereinafter World Bank Guidelines], 7(2) ICSID Rev. 297, 303 (1992); CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award, ¶ 501 (Mar. 14, 2003); El Paso v. Argentina, supra note 5, ¶¶ 702–3.

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unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.11 In its consideration of this concept, the tribunal in Starrett Housing Corp. v. Iran similarly observed that: [fair market value] assumes that the buyer and the seller are reasonable businessmen who are each seeking to maximize their profit and who are well-informed about all relevant factors prevailing on the valuation date. The effect[s] of subsequent events are to be ignored unless they were reasonably foreseeable on the valuation date. Such subsequent events … may be used only to test assumptions made as to the future.12 This approach has since been adopted by innumerable tribunals. It reflects the underlying principle that where there is an actively-traded market for the relevant asset, its market price reflects how it is valued by willing buyers and sellers.13 Although there is general agreement on the meaning of fair market value, the practical task of determining how a damaged or expropriated investment’s value should be quantified gives rise to a number of questions that lie at the heart of disputes about damages in international investment arbitration. In Section 2 of this Chapter, we examine how the full reparation standard has influenced the selection of valuation methods, the arguments advanced by parties, and the decisions of tribunals in recent cases. 11  American Society of Appraisers, ASA Business Valuation Standards 27 (2009), https:// www.appraisers.org/docs/default-source/discipline_bv/bv-standards.pdf?sfvrsn=0. See also International Valuation Standards Council, International Valuation Standards 2017 [hereinafter IVSC, International Valuation Standards 2017] ¶¶ 100.1, 110.1 (draft, Dec. 2016), https://www.ivsc.org/files/file/view/id/811 (noting the OECD’s and the United States Internal Revenue Service’s definition of “fair market value”). For the definition of “fair value” by other valuation organizations, see Financial Accounting Standards Board, Accounting Standards Update: Fair Value Measurement (Topic 820), No. 2011-04 at 16 (¶ 82010-35-2) (May 2011), https://asc.fasb.org/imageRoot/00/7534500.pdf (defined as “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.”); and IVSC, International Valuation Standards 2017, ¶¶ 120.1–120.2. 12   Starrett Housing Corp. et al. v. Gov’t of the Islamic Republic of Iran et al., Final Award, ¶ 18, 16 Iran-U.S. Cl. Trib. Rep. 112 (Aug. 14, 1987). 13   See Charles N. Brower & Jason D. Brueschke, The Iran-United States Claims Tribunal 539 (1998).

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1.2 Variable Considerations 1.2.1 The Valuation Date The valuation date is a factor that straddles the line between fact and law and can significantly influence the damages assessment advocated by each party in an investment treaty dispute and the compensation ultimately ordered by a tribunal. In the case of lawful expropriations, the valuation date is generally the moment immediately before the lawful expropriation occurred. Indeed, this formulation is specifically designated in many investment treaties.14 The reasoning is relatively straightforward: if it was legal for the State to take the relevant asset when it did, then the only legally compensable harm the investor could have suffered is in being deprived of the value of the relevant investment at the moment of expropriation. This timing of the valuation date is also important insofar as it excludes any prejudice to the investor as the result of the asset’s value decreasing due to the expropriation itself. As such, many investment treaties also provide that the valuation date should be the moment immediately before the intended expropriation was announced by the State or otherwise became known to the investor.15 The question of the valuation date is more complex in the context of unlawful expropriation, where the State has expropriated an asset in breach of its obligations to the investor. Historically, in these cases, the valuation date was almost always set just before the expropriation.16 While treating the date of the breach and the date of valuation as coterminous remains the dominant practice, tribunals have started adopting a more flexible approach towards the valuation date. For example, in ADC v. Hungary, the tribunal observed that—in the unique circumstances of the case where 14   See, e.g., U.S.-Argentina BIT, art. IV(1), which provides that compensation for lawful expropriation “shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known, whichever is earlier[.]”. 15   See, e.g., Agreement between the Swiss Confederation and the Government of the People’s Democratic Republic of Algeria on the Reciprocal Protection of Investments, art. 6(1) (Nov. 30, 2004); Agreement between the Government of Canada and the Government of the Eastern Republic of Uruguay for the Promotion and Protection of Investments, art. VIII(1) (Oct. 29, 1997); Netherlands-Ethiopia BIT, art. 6. 16   See, e.g., Phillips Petroleum Co. Iran v. Islamic Republic of Iran & National Iranian Oil Co., Final Award, ¶¶ 110–1, 113, 21 Iran-U.S. Cl. Trib. Rep. 79 (1989); Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. Arb/98/4, Award, ¶ 118 (Dec. 8, 2000), 41 I.L.M. 896; Técnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 192 (May 29, 2003).

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the value of the seized property had “risen very considerably” after the date of expropriation—it was appropriate to compensate the successful claimants for this increase in value: in 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. This kind of approach is not without support. The PCIJ in the Chorzów Factory case stated that damages are “not necessarily limited to the value of the undertaking at the moment of dispossession”.17 In effect, this meant that the tribunal was willing to disaggregate the date of breach (i.e., the date on which the series of State acts ripened into a compensable expropriation) and the date of valuation (i.e., the date on which it considered that the investment should be valued) in order to give effect to the Chorzów Factory imperative of “full reparation.” Other tribunals have adopted similar approaches. For example, the majority of the tribunal in Quiborax v. Bolivia explained why it selected the date of the award as the valuation date: “damages stand in lieu of restitution which would take place just following the award or judgment. It is also easy to understand if one keeps in mind that what must be repaired is the actual harm done, as opposed to the value of the asset when taken.”18 Other tribunals have been even more flexible in their approach to valuation dates, determining that this date can be adjusted to achieve the most favorable compensation for a claimant investor. In some cases involving unlawful expropriation, the tribunal ruled that the claimant was entitled to choose the more favorable valuation date as between the expropriation date and the date

17   A DC v. Hungary, supra note 1, ¶¶ 496–7 (citation and emphasis omitted). Cf. SaintGobain Performance & Plastics Group v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/13, Decision on Liability and the Principles of Quantum, ¶¶ 604–14 (Dec. 30, 2016); Tenaris v. Venezuela, supra note 5, ¶¶ 518, 541. 18   Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, ¶ 377 (Sept. 16, 2015). See also Burlington v. Ecuador, supra note 2, ¶ 326; ConocoPhillips et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and the Merits, ¶¶ 337–43 (Sept. 3, 2013).

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of the award.19 In other cases, the tribunal determined that it must itself adopt the most favorable valuation date for the claimant.20 The valuation date can be particularly tricky in cases of composite acts giving rise to “creeping” expropriation for at least two reasons. First, such cases introduce factual uncertainty about the exact moment of breach. In this vein, the tribunal in Azurix Corp v. Argentine Republic noted: In a case of direct expropriation, the moment when expropriation has occurred can usually be established without difficulty. In the case where indirect or “creeping” expropriation has taken place or, as the Santa Elena tribunal put it, “the date on which the governmental ‘interference’ has deprived the owner of his rights or has made those rights practically useless”, it will be much more difficult for the tribunal to establish the exact time of the expropriation.21 The tribunal ultimately decided to adopt a valuation date where the State’s “breaches of the BIT had reached a watershed.”22 Second, while choosing the date of the last relevant act in a series of intervening acts is attractive for its simplicity, it may unfairly reduce a claimant’s potential recovery where the investment at issue has been progressively devalued as a result of earlier wrongful State actions. The tribunal in Azurix recognized this risk and considered that all State actions constituting creeping expropriation, including those preceding the culminating act, should be assumed away in the counterfactual scenario.23 This approach has been subsequently adopted by other tribunals.24

19   See, e.g., Yukos Universal Ltd. (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award, ¶¶ 1763–9 (July 18, 2014); Kardassopoulos v. Georgia, supra note 1, ¶ 514. 20   Saint-Gobain v. Venezuela, supra note 17, ¶ 611. 21   Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award, ¶ 417 (July 14, 2006). See also Reza Said Malek v. Gov’t of the Islamic Republic of Iran et al., Award, ¶ 114, 28 IranU.S. Cl. Trib. Rep. 246 (Aug. 11, 1992) (citing Int’l Technical Products Corp. & ITP Export Corp. v. Gov’t of the Islamic Republic of Iran et al., Award, ¶ 49, 9 Iran-U.S. Cl. Trib. Rep. 206 (Oct. 24, 1985) (the date of the expropriation is “the day when the interference has ripened into a more or less irreversible deprivation of the property rather than on the beginning date of the events.”)). 22   Azurix v. Argentina, supra note 21, ¶¶ 417–8 (citing with approval Malek v. Iran, supra note 21, ¶ 114, which, in turn, cites Int’l Technical Productions v. Iran, supra note 21, ¶ 49). 23   Id., ¶ 418. 24   See, e.g., Yukos v. Russia, supra note 19, ¶¶ 1760–2.

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The choice of an appropriate valuation date is not formalistic. Just as the ADC tribunal ruled that the date of the breach cannot necessarily be taken as the valuation date, recent awards underscore that the date of the award cannot automatically be taken as the valuation date in every case of unlawful expropriation. For example, in Rusoro Mining v. Venezuela, the parties agreed that the valuation date should be the date on which a nationalization law was adopted.25 The valuation date can also be a complicating factor in cases of treaty breaches other than unlawful expropriation. Some tribunals have preferred to use the date of the award as the valuation date,26 while others have opted to use the date of breach in light of the specific facts of the case. For example, a factspecific approach was adopted by the tribunal in Stati v. Kazakhstan. This case involved a number of State actions that cumulatively gave rise to a FET breach and the tribunal chose to value the investment just before the first act that occasioned “actual, and permanent damages” to the investment.27 Interest­ ingly, the tribunal selected this date on its own initiative, preferring it to the two different dates advocated by the claimants and respondent, respectively. 1.2.2 The Use of Information Post-dating the Treaty Breaches The date at which an asset is valued can impact a range of variables vital to the determination of fair market value, such as the health of the relevant business sector, commodity prices, inflation expectations, currency exchange rates, and stock market prices. This impact is felt in part because of the general rule that valuations should be conducted taking account of all information available to the market at the valuation date, but only that information. Historically, investment treaty tribunals have generally considered the use of “hindsight” to be improper because of the potential distortion to the value of the asset on the selected valuation date.28 That said, an increasing number of investment treaty tribunals in recent years have permitted the use 25   Rusoro v. Venezuela, supra note 8, ¶ 647. 26   See, e.g., El Paso v. Argentina, supra note 5, ¶¶ 706–10; HOCHTIEF Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/07/31, Decision on Liability, ¶ 326 (Dec. 29, 2014). 27   Anatolie Stati et al. v. Republic of Kazakhstan, SCC Case No. V (116/2010), Award, ¶¶ 1493–9 (Dec. 19, 2013). 28   See, e.g., the discussion in Murphy Expl. and Prod. Co. Int’l v. Republic of Ecuador, PCA Case No. 2012–16, Partial Final Award, ¶¶ 480–92 (May 6, 2016); Quiborax S.A. & NonMetallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Partially Dissenting Opinion of Brigitte Stern (Sept. 7, 2015); Rumeli Telekom A.S. & Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, ¶¶ 785–93 (July 29, 2008); Mark Kantor, Valuation for Arbitration:

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of ex-post data in assessing damages.29 A common justification for this is that it better reflects the compensatory principle set out in the Chorzów Factory case. In some cases, tribunals have designated a valuation date immediately before the expropriation and/or treaty breach but permitted the use of data from a later date in the assessment of damages. This approach is argued to result in a more accurate damages calculation insofar as ex-post data brings with it the certainty of hindsight instead of the guesswork involved in exante assumptions about hypothetical future events. For instance, in Flemingo DutyFree Shop v. Poland, the tribunal found that the use of ex-post data allowed for “a more precise assessment of the damages.”30 It also established the applicable discount rate “on the basis of post-valuation date data, instead of calculating the discount rate on the valuation date and allocating pre-judgment interest to reflect the time value of money up to the date of the Award.”31 While the use of ex-post data in this fashion may assist the accuracy of the calculation, it may not result in a fair market value under the Chorzów Factory principles, given that a hypothetical purchaser and seller engaging in a transaction immediately before the expropriation date would certainly not have the benefit of post-transaction data to verify their valuations. This problem, arising from mixing data from different points in time, does not arise when tribunals have adopted a later valuation date such as the date of the tribunal’s award. For example, after determining that the valuation date should be the date of the award, the majority of the tribunal in Quiborax v. Bolivia observed that: Its task is to compensate the Claimants’ actual loss on the date of the award. What matters is that the victim of the harm is placed in the situation in which it would have been in real life, not more, not less. Using actual information is better suited for this purpose than projections based on information available on the date of the expropriation, as it allows to Compensation Standards, Valuation Methods and Expert Evidence 62 (2008). 29   See, e.g., Flemingo DutyFree Shop Private Ltd. v. Republic of Poland, UNCITRAL Arbitration Proceeding, Award, ¶ 865 (Aug. 12, 2016); Yukos v. Russia, supra note 19, ¶ 1769; SAUR Int’l S.A. v. Republic of Argentina, ICSID Case No. ARB/04/4, Award, ¶¶ 261–4 (May 22, 2014); Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award, ¶ 726 (Oct. 5, 2012); ADC v. Hungary, supra note 1, ¶¶ 495–9. See also Manuel A. Abdala & Pablo T. Spiller, Chorzów’s Standard Rejuvenated: Assessing Damages in Investment Treaty Arbitrations, 25(1) J. Int’l Arb. 103 (2008). 30   Flemingo DutyFree Shop v. Poland, supra note 29, ¶ 899. 31   Id.

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better reflect reality (including market fluctuations) when attempting to “re-establish the situation which would, in all probability, have existed if that act had not been committed.”32 Of course, since assumptions are embedded in any valuation exercise, the use of ex-post data does not completely eliminate uncertainty. In this vein, Fisher & Romaine observe that using hindsight “does not place [the claimant] in the position it would have occupied without the violation; it replaces an uncertain world with a particular outcome.”33 Therefore, while it may be tempting to rely on ex-post data whenever it is available, tribunals and parties should be cautious to use such information only when doing so will help give effect to the applicable compensation standard. 1.2.3 Indirect and Consequential Losses A successful claimant may be entitled to compensation for indirect or consequential losses, such as additional expenses the investor incurred as a consequence of the wrongful State action, in addition to the direct loss of the investment’s value. There is no clear distinction between direct and indirect losses and both are recoverable under the Chorzów Factory standard, which requires re-establishing the situation that would have existed absent the breach, including “damages for loss sustained which would not be covered by restitution in kind or payment in place of it.”34 The recoverability of indirect and direct losses is also addressed in the ILC Articles. The commentary to Article 36 states that: “it is well established that incidental expenses are compensable if they were reasonably incurred to repair damage and otherwise mitigate loss arising from the breach.”35 It is interesting that for an expropriation claim, the availability of compensation for consequential loss appears to be one of the practical differences between a lawful and unlawful expropriation. A lawful expropriation is simply subject to compensation for the property in question at market value. An unlawful expropriation is a breach of the treaty, and therefore potentially exposes 32   Quiborax v. Bolivia, supra note 18, ¶ 379 (citing Factory at Chorzów, supra note 3, at 37); see also Burlington v. Ecuador, supra note 2, ¶ 332 (where the majority of the tribunal stated: “[t]he valuation will be closer to reality if the Tribunal decides with ‘maximum information’ rather than ‘maximum ignorance.’ ”) (citations omitted). 33  Franklin Fisher & R. Craig Romaine, Janis Joplin’s Yearbook and the Theory of Damages, 5 J. Acct. Auditing & Fin. 2, 156 (1990). 34   Factory at Chorzów, supra note 3, at 47. 35  ILC Draft Articles, art. 36, commentary 34.

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the State to claims for other losses caused indirectly by the taking of the property in question.36 A number of investment treaty tribunals have considered that, as a matter of principle, consequential losses (or “incidental expenses,” in the terminology used by the ILC Articles) caused by treaty breaches may properly form part of the “full reparation” due.37 In Siemens v. Argentina, for example, the tribunal considered that, in order to wipe out all of the consequences of Argentina’s treaty breaches, it was appropriate to compensate the investor for certain winding-up expenses. These included the costs of maintaining a “skeleton operation” of a local subsidiary following the breach and storage costs during a 20-month delay between the expropriation and transfer of title in certain assets to the host State.38 Other categories of consequential loss that tribunals have been willing to recognize are: professional fees incurred in the course of pursuing or defending domestic legal proceedings,39 loss of reputation or goodwill (which is often associated with “moral damages”),40 the cost of loans made to an affected investment company to cover “operational deficits” after an unlawful

36   See, e.g., Biwater v. Tanzania, supra note 4, ¶ 775 (noting that “the unlawfully expropriated investor is entitled to damages for the consequential losses suffered as a result of the unlawful expropriation.”). 37   See, e.g., Marion Unglaube and Reinhard Unglaube v. Republic of Costa Rica, ICSID Case Nos. ARB/08/1 and ARB/09/20, Award, ¶ 307 (May 16, 2012). 38   Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award, ¶¶ 329, 386–7 (Feb. 6, 2007). 39   Southern Pacific Prop. (Middle East) v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award, ¶ 211 (May 20, 1992), 8 ICSID Rev.—FILJ 328 (1993); Pope & Talbot Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Award in Respect of Damages, ¶ 85 (May 31, 2002); Autopista Concesionada de Venezeula, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award, ¶¶ 274–5 (Sept. 23, 2003). 40   Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award, ¶¶ 289–91 (Feb. 6, 2008); Mohamed Abdulmohsen Al-Kharafi & Sons Co. v. Libya et al., Ad Hoc Arbitration Proceeding, Final Arbitral Award, 368–9 (Mar. 22, 2013); Bernhard von Pezold et al. v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award, ¶¶ 908–23 (July 28, 2015). On moral damages, see also Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice 134–46 (2011). See, generally, Chapter 6, Patrick Dumberry, Moral Damages.

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expropriation,41 and liabilities to third party subcontractors associated with the affected investment project.42 However, not all manner of possible consequential losses have been looked upon favorably by tribunals. Claims by investors for consequential losses have been rejected in relation to tax liabilities in the investor’s place of incorporation,43 diminished sales of goods to third parties,44 and losses of opportunity.45 What is important to recall in the context of indirect loss claims is that causation and proof remain fundamentally important. Both the existence of the harm and a causal link between the wrongful act and the harm have to be proven by the party seeking damages for consequential loss. Speculation is not permitted and will result in claims for consequential losses failing for lack of evidence.46 41   Aguas v. Argentina, supra note 8, ¶ 8.3.17. 42   Société Ouest Africaine des Bétons Industriels (SOABI) v. Republic of Senegal, ICISD Case No. ARB/82/1, Award, ¶ 8.23 (Feb. 25, 1988), 2 ICSID Rep. 190 (1993). Cf. Siemens v. Argentina, supra note 38, ¶ 387. 43   Rusoro v. Venezuela, supra note 8, ¶ 852. 44   Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Award, ¶ 216 (Nov. 27, 2013); cf. id., ¶¶ 218–24 (summarizing the dissenting opinion of Henri Alvarez, who disagreed with the majority on this point). 45  S.D. Myers Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Second Partial Award, ¶ 161 (Oct. 21, 2002); Merrill & Ring Forestry L.P. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Award, ¶¶ 47, 149, 257, 258 (Mar. 31, 2010); Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, ¶¶ 250–2 (Mar. 28, 2011); Ioan Micula et al. v. Romania, ICSID Case No. ARB/05/20, Award, ¶¶ 950–62, 975–88 (Dec. 11, 2013); Flemingo DutyFree Shop v. Poland, supra note 29, ¶¶ 921–31; Burlington v. Ecuador, supra note 2, ¶¶ 269–83. Cf. Sapphire Int’l Petroleum Ltd. v. Nat’l Iranian Oil Co., Arbitral Award (Mar. 15, 1963), 35 I.L.R. 136, 161, 187–90; Gemplus S.A. et al. and Talsud S.A. v. United Mexican States, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/04/4, Award, ¶¶ 13–82–13–100 (June 16, 2010); Jan Paulsson, The Expectation Model, in Evaluation of Damages in International Arbitration 66 (Yves Derains & Richard H. Kreindler eds., 2006). 46   See, e.g., SOABI v. Senegal, supra note 42, ¶ 10.01 (where the claimant’s claim to “general damages for loss of goodwill and loss of commercial financing” was rejected because it was regarded as “wholly hypothetical”). See also Atlantic Triton Co. Ltd. v. People’s Revolutionary Republic of Guinea, ICSID Case No. ARB/84/1, Award, ¶ 3.2 (Apr. 21, 1986), 3 ICSID Rep. 13 (1995); Asian Agric. Prod. Ltd. v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award, ¶¶ 101–8 (June 27, 1990), 4 ICSID Rep. 246 (1997); Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award, ¶¶ 152–6 (Apr. 12, 2002), 18 ICSID Rev. 602 (2003); Tecmed v. Mexico, supra note 16, ¶ 198; Azurix v. Argentina, supra note 21, ¶ 432; PSEG Global Inc. & Konya

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1.2.4 Interest As Article 38 of the ILC Articles confirms, interest is an integral component of full compensation under customary international law.47 However, since Article 38 does not specify an interest rate or a mode of calculation, disputing parties and arbitral tribunals must consider these issues on a case-by-case basis in order to comply with the Chorzów Factory rule and the provisions of the relevant investment treaty. Critically, the valuation date adopted by the tribunal will influence whether both pre- and post-award interest is appropriate. Where the valuation date is the date of breach or otherwise predates the date of award, tribunals will often apply pre-award interest to compensate for “the fact that the Claimants were not in possession of the funds to which they were entitled and thus had either to borrow funds at a cost or were deprived of the opportunity of investing these funds at a profit.”48 Where the valuation date is the date of award, pre-award interest will not be appropriate because there is no need to bring the damages amount forward.49 In practice, tribunals have adopted varying positions on whether a successful claimant should be awarded pre- and postaward interest.50 As with all components to a valuation, the issue of interest must be considered in light of how it will help to give effect to the applicable compensation standard. Accordingly, a critical decision that will affect, inter alia, how interest is calculated, is how the actual loss caused by the State action should be conceived. Various established and developing methods for quantifying loss will be discussed in the next section.

Ingin Electrik Üretim ve Ticaret Ltd. Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award, ¶¶ 322–6 (Jan. 19, 2007); Victor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Award, ¶ 689 (May 8, 2008); Micula v. Romania, supra note 45, ¶¶ 963–8; Flemingo DutyFree Shop v. Poland, supra note 29, ¶ 931. 47  ILC Draft Articles, art. 38; see Chapter 14, Mark Beeley, Approaches to the Award of Interest. 48   Quiborax v. Bolivia, supra note 18, ¶ 513. 49   See, e.g., Burlington v. Ecuador, supra note 2, ¶ 588; Windstream Energy LLC v. Gov’t of Canada, PCA Case No. 2013–22, Award, ¶ 486 (Sept. 27, 2016). See also Sergey Ripinsky with Kevin Williams, Damages in International Investment Law 377 (2008). 50  For example, in Windstream Energy v. Canada, supra note 49, ¶ 486, the tribunal declined to grant post-award interest, while in Saint-Gobain v. Venezuela, supra note 17, ¶¶ 885–6, the investor was awarded post-award interest on the basis that it serves the same purpose as pre-award interest.

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Methods for Quantifying Loss

In broad terms, there are two approaches, each with its own advantages and disadvantages, to quantifying the loss caused by a breach of an investment treaty: methods, which seek to establish the relevant asset’s value • forward-looking at the valuation date as a reflection of its profit-making potential; and methods, which seek to establish value by reference to • backward-looking past investment-related expenditures. It is important to note that alternate valuation methods are not necessarily mutually inconsistent and a tribunal may rely upon them for additional comfort regarding its conclusion on valuation. For instance, alternative valuation methods may be used to cross-check a preferred approach.51 Recent treaty practice also corroborates the reliance on this approach by States. For example, the Slovak Republic-Iran BIT concluded in January 2016 specifically provides that “the tribunal shall base its decision on a comparison of multiple valuation methods, where appropriate.”52 Furthermore, some tribunals use multiple valuation methods together to arrive at a valuation of compensable loss that reflects a weighted-average of those multiple methods.53 Notably, the weighted-average approach has been accepted in principle by tribunals even though it is not a means of calculating fair market value as a matter of financial valuation. 2.1 Forward-Looking Methods The basic premise of forward-looking approaches is that the value of an income-producing asset is the direct consequence of its ability to generate profit for its owner over time. 51   Dunkeld Int’l Inv. Ltd. v. Gov’t of Belize, PCA Case No. 2010–13, Award, ¶ 275 (June 28, 2016). See also Mark Bezant & David Rogers, Asset-Based Approach and Other Valuation Methodologies, in The Guide to Damages in International Arbitration 219, 226–7 (John Trenor ed., 2016). 52  Agreement between the Slovak Republic and the Islamic Republic of Iran for the Promotion and Reciprocal Protection of Investments [hereinafter Slovak Republic-Iran BIT], art. 21(2) (Jan. 19, 2016). 53   See, e.g., Rusoro v. Venezuela, supra note 8, ¶¶ 787–90; Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/23, Award, ¶¶ 615–29, 684–755 (Dec. 12, 2016).

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2.1.1 Discounted Cash Flow Method The discounted cash flow (“DCF”) method is one of the most common tools for calculating damages on the basis of future profitability.54 The basic concept is that an income-producing asset’s value is equal to the present value of its expected future cash flows. This method accounts for expected future revenue and expenses, variable risks that would have affected future revenue, and the time value of money.55 The calculation and application of an appropriate discount rate to projected future cash flows to account for variable risks is frequently a source of dispute in arbitral proceedings. The discount rate is a central variable in any DCF valuation because it is how the value of projected future net revenues as at the valuation date is determined. The discount rate has the effect of reducing the recoverable amount of net revenues projected to accrue after the valuation date by an amount for each year the relevant cash flow is distant in the future. The discount accounts for factors like political risk, industry risk, exchange rate risk, and liquidity risk, as well as the time value of money in general. It can be difficult, however, to quantify the particular risk components of the discount rate, which tends to result in investment treaty tribunals adopting rather impressionistic approaches to what would at first blush appear to be a technical and scientific assessment. Although the DCF method requires a tribunal to consider the value of future cash flows, the fact that a damaged investment may be a business that has no track record of profitability will not necessarily prevent a damages award from being calculated on this basis if there is sufficient information to permit reliable cash flow projections. For instance, in Rumeli Telekom v. Kazakhstan, the tribunal noted that use of the DCF method does not necessarily require the relevant asset being characterized as a “going concern,” which assumes predictable future profits based on historical data. The tribunal recalled that “[t]he overriding objective … [is] to establish the ‘market value’ of the investment, i.e. the amount that a willing buyer would normally pay to a willing seller….”56 The tribunal then determined that “a DCF valuation would likely have formed one of the measures which would have informed a discussion between a willing seller and a willing buyer …” in a hypothetical sale of the relevant business before its expropriation.57 54   See Chapter 8, Kai F. Schumacher & Henner Klönne, Discounted Cash Flow Method, at Section 2. 55  World Bank Guidelines, Guideline IV(6). 56   Rumeli v. Kazakhstan, supra note 28, ¶ 809. 57   Id., ¶ 810.

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Tribunals in investment treaty cases will, however, reject the DCF method if they consider it inappropriate in light of the facts. Although income-based methods are often the preferred choice of claimants because of their ability to capture a wide range of future profits in varied hypothetical situations,58 in certain industries, asset-based and market-based valuation techniques are just as accepted on a day-to-day basis, and have gained currency with arbitrators as a result. Rusoro Mining v. Venezuela is one case where the DCF method was not used to capture the value of the losses incurred by the claimant investor. This case arose from shifts in the legislative and regulatory scheme for the marketing of gold in Venezuela. Beginning in 2009, Venezuela repealed its existing gold export regime and began enacting a series of measures that restricted Rusoro’s ability to sell gold, both domestically and overseas. In 2011, Venezuela nationalized the gold mining industry.59 Venezuela offered to compensate Rusoro for the book value of its assets under the terms of the Nationalization Decree but Rusoro declined, opting to arbitrate the dispute under the relevant investment treaty. The tribunal determined that Venezuela unlawfully expropriated Rusoro’s investment. In quantifying damages, the claimant’s expert offered a valuation comprised of a weighted average of three different methods: 30% a hybrid DCF and comparable transactions method, 50% comparable publicly traded companies method, and 20% pure comparable transactions method. However, the tribunal declined to apply the DCF-based method because the information necessary for a DCF calculation to be appropriate was lacking in this case.60 In particular, the tribunal noted that without the ability to estimate future parameters such as income, expenses, and investments with reasonable certainty, the DCF method may be inappropriate given that even small adjustments in the estimation can yield significantly divergent results. It then went on to describe a number of factual uncertainties that it viewed as dictating against a DCF valuation.61 The tribunal in Vestey v. Venezuela also rejected the DCF method on the facts of the case. There, the claimant operated a cattle farming business in Venezuela that extended over more than 290,000 hectares of land with a herd exceeding 100,000 heads of cattle. In 1999, Venezuela adopted a new constitution 58   Cf. Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award, ¶¶ 342–9 (Apr. 15, 2016). 59   Rusoro v. Venezuela, supra note 8, ¶¶ 161–2. 60   Id., ¶ 759. 61   Id., ¶ 785.

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mandating land reform and, in 2001, it passed a law authorizing the State to recover land for public use without compensation.62 Venezuela served several recovery notices directed toward farms that Vestey operated. Vestey agreed to sell one of its farms and to donate another to the State. After failed negotiations, in 2011, President Chavez ordered the seizure of Vestey’s farms. The tribunal found that Venezuela’s takeover constituted an unlawful expropriation.63 On the issue of valuation, the arbitrators rejected the DCF method that Venezuela advanced. The tribunal determined that an asset-based valuation was more appropriate for a number of reasons, including that “the full value of Vestey’s land [was] not captured by the cash flows that the business generates”64 and that it did not account for the particularly valuable cattle implicated in the business—whose value would only be reflected in the cash flows should they be slaughtered, which was not their primary purpose.65 In addition to the expert evidence put forward by the claimant as to comparable sales transactions involving farmland and the replacement value of certain assets, the tribunal also looked to market practice in determining the appropriate valuation method. In this regard, the tribunal observed: “if the actors … tend to use a certain method of valuation in their transactions, the [fair market value] will be best determined by that method.”66 The tribunal found that the asset-based valuation method was the most suitable approach67 because the method was generally used to value agricultural businesses and had been specifically employed by the government in its valuation of the claimant’s farms during sales negotiations that pre-dated the expropriation. Khan Resources v. Mongolia is another recent example of a tribunal declining to apply the DCF method. The case concerned a series of State measures—adversely affecting exploration and mining licenses held by Khan Resources—culminating in the permanent invalidation of the licenses.68 The tribunal held that the claimants had been deprived of their rights under the licenses through the combined effect of their early termination, in breach of the relevant treaty.69 62   Vestey v. Venezuela, supra note 58, ¶¶ 48, 60. 63   Id., ¶¶ 285, 316. 64   Id., ¶ 351. 65   Id., ¶ 354. 66   Id., ¶ 352. 67   Id., ¶ 353. 68   Khan v. Mongolia, supra note 6, ¶ 86. 69   Id., ¶ 310.

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The claimants’ expert proposed a combination of the DCF and comparables methods, and the respondent’s expert advanced a valuation based on market capitalization. The tribunal rejected the DCF method, taking the view that a number of factors and uncertainties70 made this method “unattractive and speculative” in the circumstances.71 In particular, the tribunal found that it was “far from certain”: (i) that the mine would have actually reached production; (ii) if it did, on what terms the parties would have participated in the venture; and (iii) whether the claimants would still have been involved in the project at all.72 As discussed further below, the tribunal ultimately adopted a valuation approach that took into account various offers made between 2005 and 2010 for shares in the joint venture owned by the claimants.73 2.1.2 Market-Based Approaches Market-based methodologies seek to establish value using information from established markets, such as share prices or company transactions, either with respect to the affected business or similar assets. Market-based approaches are considered to be “forward-looking” in that they assess damages on the basis of the lost opportunity to profit from a sale of the relevant investment—a sale that is normally based upon the future income-making potential of the asset as perceived by the market at the time of the sale. The share price of a public company itself is a forward-looking measurement, as it reflects all current, public information about the company’s prospects. It has been noted that market-based methods have not often been relied on as the primary method of assessing loss; rather, they have been used as a means of assessing the accuracy of other methods.74 However, as discussed below, market-based approaches are being increasingly used as the primary

70   Id., ¶ 392. 71   Id., ¶¶ 392–3. 72   Id., ¶ 393. 73   Id., ¶¶ 410–1. A number of other investment tribunals have rejected the DCF approach where it was not appropriate on the facts of the particular case. See, e.g., Tenaris v. Venezuela, supra note 5, ¶¶ 524–7; Gemplus v. Mexico, supra note 45, ¶¶ 13–72; Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award, ¶ 570 (June 1, 2009); Aguas v. Argentina, supra note 8, ¶ 8.3.13; Tecmed v. Mexico, supra note 16, ¶ 186; Wena Hotels v. Egypt, supra note 16, ¶ 122; Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶ 121 (Aug. 30, 2000). 74  PriceWaterhouseCoopers, International Arbitration damages research 8 (2015), https:// www.pwc.com/sg/en/publications/assets/international-arbitation-damages-research -2015.pdf.

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method for determining an investor’s compensable loss.75 As with any approach to valuation, whether a market-based method should be used and, if so, which variant and subject to what adjustments is highly fact-dependent. 2.1.2.1 Market Capitalization The most direct way to assess the value of a publicly-traded business is to calculate its market capitalization based on the price of a single share on the stock market and the number of issued and outstanding shares at the relevant point in time. More specifically, where an unlawful State act occurs in a single day without warning, it should be relatively easy to determine the resulting damage by calculating the difference in market capitalization on the day before and the day after the wrongful act. Damage to the claimant can then be easily extrapolated by calculating the drop in value pro rata to the claimant’s shareholding. Where applicable and appropriate, looking to the market capitalization of the target company can offer a powerful approach to quantifying damages, since historical share prices are matters of fact rather than assumption. However, reality is rarely so simple. Identifying the relevant date for “actual” and “but for” share price readings can prove difficult where State measures are implemented over time. The analysis can also be complicated by the timing of the relevant information reaching the market. Frequently, such measures, or the threat of adverse government intervention, require reaching so far back in time for a “clean” share price, that the result is simply no longer a good indication of what the price would have been at the valuation date. Adjustments to an old (but “clean”) share price to bring it in line with the economic conditions at the moment of breach can involve many subjective assumptions by the valuer that undermine the utility of the method. Share prices are thus often “contaminated” either by the acts complained of, or by background economic conditions, in ways that are exceedingly difficult to isolate. Moreover, not every stock is traded in sufficient quantities and with sufficient regularity for its market price to reflect its fair value. Some of the frequently encountered complications with “contamination” in the market capitalization method were considered by the Rusoro tribunal. The tribunal dismissed a market capitalization approach because Rusoro’s share price had already been depressed before Venezuela issued its nationalization decree due to a number of State acts related to, but separate from, the final expropriating act. As the tribunal explained: “[t]he Final Market Valuation is deeply contaminated by the Bolivarian Republic’s policy decisions affecting 75   See infra Section 2.1.2.3.

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the gold sector … and by the increased export restrictions imposed by way of the 2010 Measures.”76 Nevertheless, the tribunal found that the company’s market capitalization was indirectly relevant to the enterprise’s fair market value at the relevant time, as a sort of ceiling. The tribunal identified the company’s peak market capitalization before Venezuela had implemented any of the offending measures and included it in a weighted average of valuations later used to calculate the compensation due.77 The tribunal in Khan Resources v. Mongolia also accepted that evidence of the historical equity value of the relevant enterprise may be relevant to determining the fair market value of the lost investment. However, after considering alternative valuation methods advanced by the parties, the tribunal noted that “the only remaining material on the basis of which the Tribunal might estimate fair market value is the various offers that were made between 2005 and 2010 for the shares in the CAUC joint venture or Khan Canada….”78 2.1.2.2 Comparable Companies Where a company that is subject to investment arbitration is privately held, such that no direct stock market price can be identified, the market-capitalization method will not apply for obvious reasons. In such cases, the comparable publicly-traded companies method may be used to establish the value of the relevant asset by reference to market multiples, or the share price of similar publicly-traded companies.79 With this method, a party “seeks to assess the damage to the value of [the claimant’s] stock price by reference to the evolution of stock prices for other, similarly placed[] … companies not affected by [the relevant] expropriatory measures.”80 This approach tends to be more appropriate where the affected investment represents the claimant’s only asset or business and sufficiently similar publicly-traded companies can be identified. Whenever publicly-traded benchmarks are used, it must be demonstrated why the share prices of other companies are probative evidence of the “but-for” market value for the 76   Rusoro v. Venezuela, supra note 8, ¶ 779. 77   Id., ¶ 789. 78   Khan v. Mongolia, supra note 6, ¶ 410(v); see also OAO Tatneft v. Ukraine, UNCITRAL Arbitration Proceeding, Award on the Merits, ¶ 609 (July 29, 2014), where the tribunal preferred “the [value] of the share transactions through which the Claimant acquired direct and indirect ownership [of the company] as the measure of value” of the lost investment made through the relevant company. 79   R ipinsky & Williams, supra note 49, at 212–3; Kantor, supra note 28, at 119. 80   Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, ¶ 804 (Apr. 4, 2016).

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target asset. Factors considered in determining whether two companies are comparable for this purpose include the nature of the businesses, the price of the underlying product, sales and production volumes, and the relevant industry. Given these considerations, this approach is often regarded as more reliable for natural resources than other sectors because the value of these companies or assets is driven largely by the volume, price, and quality of the underlying commodity. Factors such as market structure, branding, etc., are less relevant. With respect to such businesses, it can be more straightforward to calculate from several comparable companies an average “multiple” based on a unit of underlying resource (e.g., dollars per ounce of gold reserves) that can be reliably transferred to the target company to derive its counter­ factual market capitalization. Crystallex v. Venezuela is one case in which market-based methods were considered appropriate for assessing loss in the context of an unlawful expropriation. The claimant entered into a mining contract with a Venezuelan State-owned company, CVG, to develop gold deposits. To begin operations, the claimant needed to obtain a number of permits and authorizations from Venezuelan entities, which were eventually denied. Thereafter, CVG rescinded the mining contract. The tribunal found that the denial of the permit was part of a series of acts that, in combination, gave rise to an unlawful expropriation under the Canada-Venezuela BIT.81 The claimant’s valuation experts used four different valuation methodologies “to produce ‘a consistent assessment of the fair market value of Crystallex’s rights in Las Cristinas,’ ” while the respondent argued in favour of a sunk-costs approach.82 Although the claimant’s first approach to damages looked simply at the evolution of Crystallex’s share price over time (before and after the expropriation), the claimant also advanced a market-multiples model based on allegedly comparable, publicly-traded gold mining companies. The comparators were selected based on operations in countries with a similar risk profile to Venezuela. From the selected pool of stocks, the claimant’s expert derived a median market multiple in terms of “US$ of [enterprise value] per ounce of reserves equivalent of gold,” and calculated the value of the Las Cristinas project based on its gold reserve volume at the valuation date.83 The tribunal accepted this method, considering that it was “widely used” and could “safely be resorted to, provided it is correctly applied and, especially,

81   Id., ¶¶ 674, 708–9. 82   Id., ¶ 766. 83   Id., ¶¶ 793–9.

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if appropriate comparables are used.”84 In response to Venezuela’s criticism that some of the companies used as comparables bore little resemblance to Crystallex, the tribunal commented that: “no two companies will ever be exactly alike. This is a given that must be accepted when using this [type] of methodology. After all, ‘to compare’ is a process made with other objects similar to the subject rather than with identical objects—if those even exist.”85 Although both the Rusoro and Crystallex cases dealt with the expropriation of gold mining assets by Venezuela in roughly the same period of time, the Rusoro tribunal rejected the assessment of loss based on the comparable publicly-traded companies method. According to the tribunal, the combination of the situation in Venezuela in general, “of the Venezuelan gold sector in particular,” and the “very special characteristics” surrounding Rusoro as a Russian-managed company operating in a fraught political environment made it impracticable to identify reasonably similar comparator companies.86 The comparables approach was also deemed unsuitable in Khan Resources v. Mongolia87 because the tribunal found that the companies chosen by the claimants were insufficiently comparable—featuring “companies whose sites [were] based in different countries, under varying climatic, geographical and regulatory conditions”88—to allow the tribunal to make a reliable determination of fair market value for the asset in question.89 “The difficulty of finding truly comparable companies,” the tribunal noted, was one of the “key reasons” why arbitral tribunals are often reluctant to rely on a comparative analysis as the primary method of valuation and which renders this an “unattractive” method.90 2.1.2.3 Comparable Transactions In the comparable transactions method, the value of the relevant asset or enterprise is estimated by examining data from arm’s-length transactions that occurred near the valuation date involving comparable assets or enterprises.91 This method is considered forward-looking in nature, insofar as “the price of 84   Id., ¶ 901. 85   Id., ¶ 902. 86   Rusoro v. Venezuela, supra note 8, ¶ 782. 87   Khan v. Mongolia, supra note 6, ¶¶ 262, 394. 88   Id., ¶ 399. 89   Id., ¶¶ 397–8. 90   Id., ¶ 399. 91   I rmgard Marboe, Calculation of Compensation and Damages in Inter­ national Investment Law ¶¶ 5.53–5.58 (2009); Kantor, supra note 28, at 119.

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a business reflects the cash flows it is expected to generate over its operative life.”92 Questions of market liquidity, and potentially of control premium, therefore fall away. The challenge, however, is in finding a sufficient number of reported transactions at the appropriate time. Damages were assessed in accordance with the comparable transactions method in Windstream Energy v. Canada. In that case, the tribunal found that Canada had unfairly treated the claimant’s investment in an offshore wind electricity generation project in Ontario.93 The investor had not lost the entire value of its investment, but claimed full compensation for harm resulting from the State’s wrongful measures. The tribunal considered the DCF method to be inappropriate because the project was in the “early development stage”—a feed-in tariff contract and a grid connection had been arranged, but the investor did not yet have control of the project site nor a permit to operate.94 The tribunal’s decision to rely on a comparable transactions approach was driven by its assessment that “the evidence relating to comparable transactions [was] the best evidence before it.”95 The tribunal analyzed the evidence of the parties’ experts on comparable transactions involving other early-stage wind energy projects. It then used the investor’s actual sunk costs as a “reality check,” applied several adjustments, and then took the simple average of a resulting range between EUR 18 and 24 million to arrive at a final damages figure of EUR 21 million.96 As noted above, in Crystallex, the claimant proposed the “comparable transaction method” (there referred to as an “indirect sales comparison” or the “market transaction” method) as one of four valuation methodologies for calculating damages.97 Under this approach, the claimant and its expert took prior mine transactions that they argued were comparable and developed a value for the Las Cristinas mine based on a series of adjustments to those prior transactions.98 The Crystallex tribunal had no difficulty accepting that, “in theory,” this method could yield reasonable results and would thus be an appropriate method to value an investment in an international arbitration99 but it held that the valuations presented by the parties were based on assumptions 92   R ipinsky & Williams, supra note 49, at 192–3. 93   Windstream Energy v. Canada, supra note 49, ¶¶ 379–82. 94   Id., ¶¶ 474–5. 95   Id., ¶ 476. 96   Id., ¶¶ 476–85. 97   Crystallex v. Venezuela, supra note 80, ¶¶ 764, 818–22, 906. 98   Id., ¶ 906. 99   Id., ¶ 907.

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deemed “too ‘aggressive’ ” and “unrealistic”100 and therefore not sufficiently comparable to the Las Cristinas project.101 Comparable transaction-based calculations also factored into the valuation approaches offered by the claimants in the Khan Resources and Rusoro cases but were rejected by the respective tribunals on the relevant facts. 2.2 Backward-Looking Methods “Backward-looking” valuation methods seek to quantify a claimant’s loss based on the value of the investment it has actually made. In general terms, backward-looking methods quantify compensation based on the historical costs incurred by the claimant in developing the affected investment—i.e., the “sunk costs” or “investment value”—or the value that was attributed to the assets in the owner’s official accounting records prior to the disputed measures— i.e., the “book value.” The advantage of such valuation methods is the relative certainty they offer since they do not generally involve speculation, projection, or assumption. They also tend to be simpler to apply when compared to the complex forecasting of future cash flows, or the selection and manipulation of data on comparable companies or transactions. In addition, historical cost information is usually readily available. Backward-looking methods are therefore often advanced to minimize the prospect of awarding damages that are speculative or only indirectly supported by the evidentiary record. However, such methods do not take into account the future income-producing capacity of the assets in question, which in most cases represents the fundamental element of value for any business. As a result, in many cases, backward-looking methods risk undercompensating an injured party. 2.2.1 Sunk Investment Costs Cost-based valuation methods have been preferred by some investment treaty tribunals in cases where the relevant investment enterprise was never a going concern, had no track record of profitability, or had no realistic prospect of ever being profitable, irrespective of the State measures.102 In those cases, the 100   Id., ¶ 908. 101   Id., ¶ 909. The tribunal in the Sistem Mühendislik Inşaat Sanayi ve Ticaret A.Ş. v. Kyrgyz Republic case rejected a “multiple transactions” approach for similar reasons. See Sistem Mühendislik Inşaat Sanayi ve Ticaret A.Ş. v. Kyrgyz Republic, ICSID Case No. ARB(AF)/06/1, Award, ¶¶ 162–3 (Sept. 9, 2009). 102   See, e.g., Copper Mesa Mining Corp. v. Republic of Ecuador, PCA Case No. 2012-2, Award, ¶¶ 7.24–7.29 (Mar. 15, 2016); Arif v. Moldova, supra note 4, ¶¶ 576–83; Railroad Dev. Corp.

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tribunals reasoned that forward-looking projections were unhelpful and that “full reparation” for the aggrieved investor could be achieved by recovery of historical capital contributions to the investment project. This approach was particularly prevalent in the early years of investment arbitration, when the assessment of future cash flows had not been established in practice. The sunk-costs approach was accepted by the tribunal in Copper Mesa Mining v. Ecuador. The claimant acquired two mining concessions in Ecuador in 2005 and made a series of significant capital expenditures in relation to the concessions before Ecuador passed legislation in 2008 declaring that mineral substances were “to be exploited to suit national interests” and providing for the termination of certain categories of mining concessions without compensation.103 Subsequently, Ecuador terminated the claimant’s mining concessions, citing the claimant’s alleged historical failures to obtain certain approvals from local communities. The tribunal found Ecuador’s conduct to be in breach of the Canada-Ecuador BIT. In calculating damages, the claimant proposed a weighted average of three valuation methods—one income-based, one market-based, and one costbased—to calculate the fair market value of its lost investment.104 In contrast, the respondent’s damages expert suggested that the claimant’s traded market value was the only reliable proxy for fair market value.105 After noting the “huge differences” in the valuation conclusions reached by the two party-appointed experts and the various methodological uncertainties involved, the only method the tribunal accepted was a cost-based method.106 The tribunal found that the project was in “an early exploratory stage” when affected by the measures and that there was only a “slender” chance that at least one of the two concession areas would have ever progressed past that stage.107 Thus, the tribunal held that the most “reliable, objective, and fair method in

v. Republic of Guatemala, ICSID Case No. ARB/07/23, Award, ¶¶ 269–77 (July 29, 2012); Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award, ¶¶ 379–81 (June 21, 2011); Aguas v. Argentina, supra note 8, ¶¶ 8.3.1–8.3.21; Azurix v. Argentina, supra note 21, ¶¶ 424–38; Wena Hotels v. Egypt, supra note 16, ¶¶ 123–5; Metalclad v. Mexico, supra note 73, ¶¶ 119–22. 103   Copper Mesa Mining v. Ecuador, supra note 102, ¶ 1.110. 104   Id., ¶ 7.5. 105   Id., ¶¶ 7.14–7.15. 106   Id., ¶ 7.24. 107   Id., ¶¶ 7.24–7.29. See also Aguas v. Argentina, supra note 8, ¶¶ 8.3.1–8.3.21 (rejecting the DCF method because the investment was never a going concern in favor of an investment value method to assess the claimant’s damages).

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this case” was to assess the proven historical expenditure made by the claimant in relation to the lost investment.108 Some tribunals have adopted a modified sunk-costs approach, on the basis that the value of an investment will tend to increase over time at an average rate reflecting the risks associated with them. On this view, “bringing forward” the total investment cost to the valuation date using a reasonable annual rate of return (normally at or close to the cost of capital) should provide a reasonable proxy for market value—even if such a calculation is largely divorced from market considerations. For example, in Rusoro Mining v. Venezuela, the tribunal emphasized the importance of increased gold prices and the size of the available reserves109 in reasoning that investment costs did not represent the “genuine value” of Rusoro’s expropriated investment.110 Accordingly, the tribunal preferred an “adjusted investment valuation,” increasing the value of the amounts spent on the project in accordance with the gold mining shares index, with a view to reflecting “the value the investment would have reached on the date of expropriation, simply as a direct consequence of the increase in the price of gold and of gold producing companies, between the dates of investment and the date of expropriation.” This resulted in a US$500 million increase in damages from the sum of investment costs.111 This “adjusted investment value” was then incorporated into a weighted average with several other methods to reach the final damages assessment. However, several recent decisions confirm that it is not always necessary to revert to a backward-looking method where the investment has no clear record of profitability.112 For example, this conclusion was reached by the tribunal in Gold Reserve v. Venezuela where the disputed mining project had not yet reached the production stage and therefore had no track-record of historical cash flows. The tribunal found that the DCF method, which was the approach endorsed by the experts on both sides, could still be “reliably used … because of the commodity nature of the product and detailed mining cashflow analysis

108   Copper Mesa Mining v. Ecuador, supra note 102, ¶ 7.27. 109   Rusoro v. Venezuela, supra note 8, ¶ 775. 110   Id., ¶ 776. 111   Id., ¶ 789. 112   See, e.g., Crystallex v. Venezuela, supra note 80, ¶ 882 (noting that “[t]he cost approach method would not reflect the fair market value of the investment, as by definition it only assesses what has been expended into the project rather than what the market value of the investment is at the relevant time.”).

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previously performed” by the investor, including feasibility studies that showed the future potential of the mineral reserves.113 2.2.2 Book Value The book value approach is based exclusively on accounting documentation prepared in the ordinary course of business by the claimant or its subsidiary in relation to the affected asset. This method seeks to determine the fair market value of the relevant asset by looking at the net book value of the enterprise at the valuation date. Net book value is calculated by subtracting total liabilities from total assets (net of accumulated depreciation, depletion, and amortization) as they appear on the company’s financial statements. In accounting terms, this is usually referred to as the “owner’s equity” or “shareholder’s equity.”114 Where the company at issue is subjected to professional and independent audits, advantages of the book value method include a reasonable assumption in the accuracy of the underlying (audited) data given the potential professional or civil liability for the auditor for material inaccuracies. For companies that have issued debt or equity, the assurance of accuracy is still greater: in most countries, directors and board members will be potentially exposed to personal civil or even criminal liability for a material misstatement about the company’s financial condition in publicly-disclosed financial statements, including the book value of assets. Book value will often understate fair market value, particularly in circumstances where the profit-earning potential of the asset has increased since its acquisition.115 However, book value is a more accurate representation of market value in some industries than others.116 The book value approach was adopted in Siemens v. Argentina.117 The tribunal rejected a lost profits claim as too speculative and reached a final valuation based only on the claimant’s sunk costs. The tribunal noted that “[u]sually, the 113   Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 830 (Sept. 22, 2014). The tribunal in ADC v. Hungary also placed significant emphasis on the investor’s business plan when assessing the parties’ DCF calculations. See ADC v. Hungary, supra note 1, ¶¶ 506–7. 114   K antor, supra note 28, at 231–2. See also Bezant & Rogers, supra note 51, at 222; Ripinsky & Williams, supra note 49, at 221. 115   See, e.g., Am. Int’l Group & Am. Life Ins. Co. v. Islamic Republic of Iran & Central Ind. of Iran (BIMEH MARKAZI IRAN ), Partial Award, 4 Iran-U.S. Cl. Trib. Rep. 96, 109 (1983). 116   See, e.g., Horst Reineccius et al. v. Bank for Int’l Settlements, Partial Award, ¶¶ 195–7, 23 R.I.A.A. 183 (Perm. Ct. Arb. Nov. 22, 2002). 117   Siemens v. Argentina, supra note 38. See also EDF Int’l S.A. et al. v. Argentine Republic, ICSID Case No. ARB/03/23, Award, ¶¶ 689–701, 794–800, 1281 (June 11, 2012).

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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.”118 The tribunal did not favor the approaches taken by either of the parties’ damages experts, but rather started from what it considered to be the best evidence available to it—audited financial statements—and made several adjustments to the calculations made by the claimants’ expert to arrive at a final book value valuation.119 2.2.3 Other Backward-Looking Methods Two other backward-looking valuation methods deserve mention— “replacement value” and “liquidation value.” The “replacement value” or “replacement cost” method considers the amount necessary to replace the assets comprising the affected investment with assets of a similar kind, utility, and condition.120 In Vestey v. Venezuela, the replacement value method was used by the tribunal to calculate the value of vehicles and an airplane that comprised the claimant’s unlawfully expropriated enterprise.121 A similar approach with respect to similar assets was taken by the tribunal in Lahoud v. Democratic Republic of Congo.122 The “liquidation value” method considers the “amounts at which individual assets comprising the enterprise or the entire assets of the enterprise could be sold under conditions of liquidation to a willing buyer less any liabilities which the enterprise has to meet.”123 As its name suggests, this method is reserved for enterprises that are not going concerns and are demonstrably unprofitable, such that their fair market value is only the amount that a liquidator could obtain from a forced sale of individual assets to satisfy creditors of the business.124 This valuation method is uncommon in investment treaty disputes,125 but 118   Siemens v. Argentina, supra note 38, ¶ 355. 119   Id., ¶¶ 362–89. 120   See IVSC, International Valuation Standards 2017, ¶¶ 70.2–70.5. 121   Vestey v. Venezuela, supra note 58, ¶¶ 400–14 (livestock), 424–26 (vehicles and airplane). 122   Antoine Abou Lahoud & Leila Bounafeh-Abou Lahoud v. Democratic Republic of the Congo, ICSID Case No. ARB/10/4, Award, ¶ 572 (Feb. 7, 2014). 123  World Bank Guidelines, Guideline IV(6). 124   See Ripinsky & Williams, supra note 49, at 224–6. 125   Rumeli v. Kazakhstan, supra note 28, ¶¶ 734, 809–11 (rejecting Kazakhstan’s proposal to use the liquidation value method rather than the DCF method because the affected company’s most valuable asset—a license to operate a mobile telecommunication network—had a value “far in excess of its book value” and was “directly linked to its potential to produce future income”); Rumeli Telekom A.S. & Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Decision on Annulment, ¶¶ 178–9

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was adopted by the tribunal in Vestey v. Venezuela to calculate the value of the claimant’s expropriated livestock.126 3

Novel Approaches to Valuation of Loss

As parties, counsel, experts, and tribunals become more sophisticated in their understanding of valuation issues, they also become increasingly creative with respect to approaches to valuation. Two trends can be identified in the area of quantification of damages. First, there has been a move away from backwardlooking in favor of forward-looking (including market-based) methodologies reflecting increasing confidence among arbitrators that the rules of international law require full compensation based upon market indicators and that some degree of subjectivity and uncertainty, while inevitable, is not a bar to recovery. Second, there is an increasing effort to “triangulate” compensation figures by relying on more than one methodology either as a “sanity check” of a primary calculation or in awarding the weighted average of disparate quantifications. Innovative approaches to valuation that may result in more precise damages awards should certainly be encouraged.127 Yet, parties and tribunals should be cautious of new methods that do not help, and indeed may hinder, the quantification of losses. Using a weighted average of different quantifications, as discussed at various points above, is but one example of a developing phenomenon that falls on both sides of the line. Another quantification method that is relatively new to arbitration, although common in various areas of commercial litigation, such as securities litigation, is the event study method. This method seeks to examine changes in stock prices in order to determine how much of the price movement on a

(Mar. 25, 2010) (rejecting Kazakhstan’s application for annulment of the award on the basis of the Tribunal’s decision to adopt the DCF method rather than the liquidated value method); Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award, ¶ 165 (Mar. 13, 2015) (rejecting Venezuela’s proposal to use the liquidation value method rather than the DCF method). 126   Vestey v. Venezuela, supra note 58, ¶¶ 390, 400–14. See also CME v. Czech Republic, supra note 10, ¶¶ 612–9 (where the liquidation value method was used to calculate the residual value of the indirectly expropriated company). 127   See, generally, Chapter 10, Garrett Rush et al., Valuation Techniques for Early-Stage Businesses in Investor-State Arbitration.

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particular day can be attributed to the impugned State act, and how much is due to changes in conditions affecting the market in general.128 The event study method was proposed by the claimant in Rompetrol v. Romania.129 The case relates to the purchase by a group of investors of a controlling stake in Rompetrol S.A.130 The interest was held through The Rompetrol Group B.V. (TRG).131 In May 2004, the National Anti-Corruption Office of Romania opened an investigation into the privatization of S.C. Petromidia Rafinare S.A. (RRC),132 which TRG acquired in October 2000 from the Romanian State.133 As the investigation progressed and broadened, the lead investor was briefly detained.134 TRG argued that the investigation was abusive, non-transparent, and amounted to a campaign of State harassment, in violation of, among other things, the fair and equitable treatment standard and the obligation of protection and security.135 The tribunal ultimately found that Romania had engaged in unfair treatment.136 A portion of RRC’s shares were publicly traded on the Bucharest Stock Exchange. The share price had risen and fallen over an extended period of time, including the significant period during which various Romanian interventions took place. There was no obvious correlation between the drop in the share price and the State’s wrongful conduct. TRG’s experts therefore advanced the event-study method as a way of isolating the impact of Romania’s conduct on TRG’s market value. The expert chose 32 “event days” affecting RRC based on information that would have been available to the market at the time, and then: (i) identified 12 days that were significant; (ii) calculated the excess movement of RRC’s shares on each of those days; (iii) converted that into a

128   See Pamela P. Peterson, Event Studies: A Review of Issues and Methodology, 28(3) Q. J. Bus. & Econ. 36–57 (1989). See also Rosa M. Abrantes-Metz & Santiago Dellepiane, Using an Event Study Methodology to Compute Damages in International Arbitration Cases, 28(4) J. Int’l Arb. 327–42 (2011); Boaz Moselle & Ronnie Barnes, The Use of Econometric and Statistical Analysis and Tools, in The Guide to Damages in International Arbitration 271, 283–6 (John Trenor ed., 2016). 129   Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award (May 6, 2013). 130   Id., ¶ 34. 131   Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Decision on Respondent’s Preliminary Objections on Jurisdiction and Admissibility, ¶¶ 37–9 (Apr. 18, 2008). 132   Rompetrol v. Romania, supra note 129, ¶ 38. 133   Rompetrol v. Romania, supra note 131, ¶ 45. 134   Rompetrol v. Romania, supra note 129, ¶ 38. 135   Id., ¶¶ 39, 46, 50, 53. 136   Id., ¶ 279.

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decrease in market capitalization reduced pro rata to reflect TRG’s holding in RRC; and (iv) calculated a cumulative total.137 TRG’s expert’s report was based on the assumption that the entire Romanian criminal investigation connected with Rompetrol was unlawful. However, the investigations were found not to be per se illegal. The tribunal found that the expert’s event study offered no means of differentiating between the market effects of a company coming under investigation for any legitimate purpose and the asserted incremental effects of illegalities that occurred in the course of such an investigation. As a result, the tribunal rejected this valuation method.138 It noted that its finding was not one of law, but one predicated on the economic and statistical rationale for the method, particularly in relation to the factual matrix: “The test is: what does the method set out to measure, and does it do so with sufficient accuracy and reliability?”139 While it might be appropriate for an expropriation, or a specific regulatory measure, this was not the case for examining the effect of a series of acts and omissions over time. Monte Carlo simulations offer another alternative approach. Monte Carlo simulations provide a method of calculating the range of possible outcomes of a particular project or business. This effectively allows a DCF calculation to be adjusted according to the risk that the assumptions made are incorrect.140 Under this approach, the “expected” cash flows for each year used in the DCF model across the investment’s anticipated lifespan represent a probability-weighted average of all possible outcomes for that year. This approach addresses a recurring criticism of the DCF methodology: that it depends upon the accuracy of a range of assumptions about costs, revenue, and risk, each of which could have realistically materialized in an infinite number of permutations. Probability-weighted approaches like the Monte Carlo analysis are sometimes used in certain situations characterized by a range of possible value outcomes that are asymmetrical around a central forecast case. For example, in the pharmaceutical industry, the difference in value outcome between a drug that fails threshold tests at one of a number of different stages, or is approved for use, are immense, and the expected value of an experimental drug may indeed be best assessed using a probability-weighted approach—particularly 137   Id., ¶ 84. 138   Id., ¶ 286. 139   Id., ¶ 287. 140  William H. Knull et al., Accounting for Uncertainty in Discounted Cash Flow Valuation of Upstream Oil and Gas Investments, 25(3) J. Energy & Nat. Resources L. 268 (2015).

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where there is a scientific basis for estimating the likelihood of failure. A similar approach is sometimes taken in valuing the expected returns from developing an oil or gas field, where individual wells may or may not prove economic to exploit. Although such proposals have begun to be advanced by parties, it does not appear that any investment treaty tribunal has yet adopted a Monte Carlo analysis in the quantification of damages. Use of a Monte Carlo simulation is, however, also open to criticism. For instance, where there is a well-developed business model and the single profit forecast for a DCF calculation reflects an unbiased estimate of future profit, a probability-weighted analysis like the Monte Carlo method will likely be inapposite. The English High Court has criticized the Monte Carlo method for offering a “mechanistic probability calculation” rather than a range of values that would be helpful for determining the appropriate amount of compensation.141 Additional movement in approaches to valuing damages in investment arbitrations is evidenced in recent treaty practice, which suggests that the standards, methods, and limits on compensation for treaty breaches is a topic that is more likely to feature in the next generation of investment treaties. For example, Article 21 of Slovak Republic-Iran Bilateral Investment Treaty, concluded in January 2016, provides that: 2.

3.

Any award of damages shall be determined in accordance with the generally recognized international principles of valuation and taking into account, inter alia, an equitable balance between the public interest and interest of those affected, the purpose of the measure, the current and past use of the property, the history of its acquisition, the amount of capital invested, depreciation, duration as a going concern of the undertaking, its record of profitability, capital already repatriated, replacement value and other relevant factors. Compensation shall neither include losses which are not actually incurred nor probable or unreal profits. Compensation may be adjusted to reflect aggravating conduct by an investor or conduct that does not seek to mitigate damages. In establishing the just quantum of damages, the tribunal shall base its decision on a comparison of multiple valuation methods, where appropriate. No punitive or moral damages may be awarded by the tribunal.142

141   Re Bluebrook Ltd. et al. [2009] EWHC 2114 (Ch), ¶ 45. 142  Slovak Republic-Iran BIT, art. 21(2)–(3).

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That is, just as tribunals are developing more sophisticated and nuanced approaches to damages, so too, it appears, are treaty drafters. Moreover, as the body of case law in this field grows and the specialization and expertise of legal counsel and financial experts in investment treaty disputes deepens, we expect to see a greater diversity of approaches to valuation being tested in the future by claimants.143

143  Another example of a novel approach to quantification in the context of investment treaty disputes is the “real options” approach, which involves extending a normal DCF approach to take into account options that are embedded into long-term projects such as natural resources projects. For further discussion of this approach, see José Alberro & Christo A. Pirinsky, The Value of Natural Resources: A Real Options Approach, 14(1) T.D.M. (2017).

Chapter 8

Discounted Cash Flow Method Kai F. Schumacher and Henner Klönne 1

Introduction to the Discounted Cash Flow Method

Damages—if any—are usually calculated to determine the amount necessary to put the claimant in the position it would have been in had the respondent’s wrongful act not occurred.1 Typically, damages cannot be quantified by mere observation or some readily available analysis. Instead, damages most often are calculated by taking the market value of the asset in dispute without the wrongful act (a situation known as the “but-for scenario”) and deducting the actual market value as at the same valuation date.2 As a consequence, two market values—one “as expected” and one “as-is”—must be determined. Then, the difference between those two values must be calculated to derive the damages. This valuation approach is known as the “differential method.” It is applicable to most valuation methods. What sounds like a straightforward task in theory, in practice, often leaves arbitrators with widely differing valuations presented by opposing quantum experts. The divergence stems partly from differences in the valuation method used to derive the value of a business or asset. Different valuation methods might come to (slightly) differing results. However, in recent years, the discounted cash flow method (“DCF method”), which discounts future cash flows to the present value, has become increasingly popular for the quantification

*  The opinions expressed are those of the authors and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its other professionals or clients. 1  See Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence 16 (2008); Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law 31–2 (2009); see also Richard M. Wise, Quantification of Economic Damages 5 (McGill University, The Law of Damages, Oct. 18–19, 1996), http://www.wiseblackman.com/english/pdf/ Article15.pdf. 2  Unfortunately, there is no consistent definition regarding the term “market value” and how it relates to similar definitions such as “fair market value.” Practitioners, academics, and valuation standards use the terms inconsistently.

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of damages in international arbitrations.3 For example, in the recent award of Rusoro Mining Ltd. v. Venezuela, the tribunal observed that “[v]aluations based on the DCF method have become usual in investment arbitrations, whenever the fair market value of an enterprise must be established.”4 The DCF method has also become quite common for the valuation of other assets. In the authors’ experience, arbitrators are more often confronted with differing results stemming from different assumptions and applications of the DCF method than from differing valuation methods. This Chapter provides guidance for arbitrators and legal counsel to better understand the reasons for the differences in damages derived by opposing experts using the DCF method. Section 2 of this Chapter elucidates the basic concepts of the DCF method, provides a short introduction to the variety of DCF methods seen in practice, and gives an overview of the main components of the DCF method that are most often disputed in investment treaty arbitrations. The Chapter then analyzes: how to deal with uncertainties or “speculation” inherent in new or expanding businesses (Section 3), how the duration relevant for compensation is best approximated (Section 4), the key drivers of discount rates (Section 5), the role of premiums and discounts, and in particular illiquidity discounts which are sometimes applied (Section 6), and helpful cross-checks to market references or previous transactions which may indicate if damages are in the right ballpark (Section 7). 2

Overview of the DCF Method

The DCF method represents the so-called “income approach.” It is not only the most frequently proposed valuation method in investor-State arbitrations,5

3  See PricewaterhouseCoopers, 2015—International arbitration damages research, 3 (2015), https://www.pwc.com/sg/en/publications/assets/international-arbitation-damagesresearch-2015.pdf. 4  Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award, ¶ 758 (Aug. 22, 2016). However, the tribunal rejected the DCF calculation and opted to use a weighted average of three other valuation methods (i.e., maximum market value, book value, and adjusted investment value) in awarding damages to the claimant. 5  See PricewaterhouseCoopers, Dispute perspectives: Discounting DCF? [hereinafter Price­ waterhouseCoopers, Dispute perspectives] 3 (2016), https://www.pwc.co.uk/tax/assets/dis pute-perspectives-discounting-dcf.pdf.

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but is also both commonly used to evaluate international investments6 and applied in business valuations.7 The reason for the success of the DCF method in practice is quite simple. The DCF method can be applied to almost all businesses and assets which are expected to be generally profitable and where the business itself is profit-­ oriented.8 Its flexibility for investment disputes and many other valuation settings like commercial disputes often makes it the preferred option for quantum experts. Moreover, it can be adjusted to value the asset, the investment project, a business segment, or the business entity in dispute.9 In addition, it can be adjusted for any valuation date.10 By contrast, other valuation approaches may have limitations that do not apply to the DCF method. For example, other approaches might only be used to value the entire company (rather than a part of it), might conflict with the full reparation principle from the judgment of the Permanent Court of International Justice in the Chorzów Factory case,11 require information that is rarely available,12 or, if available, may not be comparable due to the lapse of time. 6    See Tom Keck et al., Using Discounted Cash Flow Analysis in an International Setting: A Survey of Issues in Modeling the Cost of Capital, 11 J. Applied Corp. Fin. 82 (1998). 7    See International Valuation Standards Council, IVS 200: Businesses and Business Interests ¶ 60.1 (draft, June 2, 2016), https://www.ivsc.org/files/file/view/id/676. 8   Consequently, the evaluation of a not-for-profit business with the DCF method would probably be inappropriate. 9   A clear definition of the valuation subject is an essential parameter for an appropriate damages calculation. 10  Although the valuation date is a legal determination, it is also a technical factor influencing the DCF method. Future cash flows are discounted to this date and historical cash flows are compounded to this date. 11  For instance, when tribunals compensate claimants with the investment sum made, they may have neglected to consider that business decisions are usually only made if the wealth of the stakeholders is increased due to the investment. This applies at least to the time when the investment decision was made; otherwise, the investment would not have been made in the first place. See Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17 (Sept. 13). 12  The market approach to damages, which refers to prices observable in the market (e.g., for active publicly traded stocks, recent transactions of the company in dispute, and recent observable transactions in substantially similar companies), is generally the preferred method to calculate damages. As Ripinsky and Williams explain: “Where there is an active market for a particular asset, tribunals will generally have little difficulty in establishing its value. Here ‘no formal theory of value is needed. We can take the market’s word for it.’” See Sergey Ripinsky with Kevin Williams, Damages in International

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What may be less commonly known is that there are various sub-methods that use discounted cash flows in valuation. A study by Professor Fernández of the IESE Business School showed that there are ten different sub-methods of discounting cash flows in valuation settings.13 All these variations involve calculating the value of future cash flows at a certain reference date—the socalled “present values.” Moreover, they all provide a similar result14 if the same assumptions are chosen. Consequently, as long as the application of the submethods is not mixed, the kind of DCF method chosen is not necessarily material to the damages outcome. At its most basic level, the DCF method calculates the present value of future cash flows. As a general principle, present values are derived by discounting the cash flows (in the numerator) to a reference date using a specified discount rate (in the denominator),15 as illustrated in the following formula: Present value = CF1 + CF2 + ... + CFn (1 + d) (1 + d)2 (1 + d)n Where: CF = cash flow projected for the year/period of operations n = number of years/periods d = discount rate The discount rates used to derive compensation primarily reflect: (1) the time value of money associated with the cash flow of a future period and (2) the Investment Law 189 (2008). However, the market approach is often not applicable in investment disputes due to the lack of comparability. Often, the investments are too unique for an applicable reference to a market price to exist. See also Khan Resources Inc. et al. v. Gov’t of Mongolia & MonAtom LLC, PCA Case No. 2011-09, Award on the Merits, ¶ 399 (Mar. 2, 2015) (in which the tribunal correctly stated that the comparable companies method is hardly chosen by tribunals as the sole or primary valuation methodology due to a lack of comparability with the valuation subject). 13  The ten methods are: “free cash flow; equity cash flow; capital cash flow; APV (adjusted present value); business’s risk-adjusted free cash flow and equity cash flow; risk-free rate-adjusted free cash flow and equity cash flow; economic profit; and EVA.” See Pablo Fernández, Valuing Companies by Cash Flow Discounting: Ten Methods and Nine Theories, abstract without numbering (IESE CIIF Working Paper No. 451, Jan. 2006), http://www .iese.edu/research/pdfs/di-0451-e.pdf. 14   See id. 15  In a pure ex-post damages calculation, the actual past cash flows might be compounded rather than discounted to the reference date. However, this Chapter will not discuss this specific element in more depth.

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riskiness of the cash flows to be discounted. The most important rule for arbitrators assessing the discount rate is that it must follow the “equivalence principle.” In this context, the equivalence principle requires that the discount rate should be (more or less) equivalent to the cash flows to be discounted. In other words, the denominator and the numerator in the DCF calculation should match from a financial perspective, for example, in terms of maturity, currency, and risk. Due to its importance in correctly applying the DCF method, the discount rate will be discussed in more detail in Section 5. There are two variations of the DCF method that are most frequently seen in damages valuation in international arbitration: (1) free cash flows discounted at the weighted average cost of capital (“WACC”) (often referred to as the “cash flow to the firm” (“FTF”) or the “WACC approach”) and (2) the cash flows attributable to equity holders discounted at the required return on equity (often referred to as the “cash flow to equity” (“FTE”) or the “equity approach”). The major difference between those two dominant approaches is how the equity stake is derived. In the WACC approach, the value of the whole firm, which comprises of both equity and debt, is determined. Thus, the WACC approach requires the deduction of the market value of the debt as of the reference date in coming to the value of equity. In the equity approach, the value of the equity is directly derived. While both variations apply the same concept of discounting cash flows, each requires the determination of different cash flows and different discount rates. In the WACC approach, the cash flows represent the cash flows to both equity and debt holders, so that interest payments do not reduce the cash flows. Following the equivalence principle, cash flows are discounted with the WACC which represents the weighted average discount rate required from equity and debt investors. In the equity approach, the cash flows (i.e., the numerator) represent only the cash flows related to the equity investors. Once again, in accordance with the equivalence principle, the discount rate has to correspond to the riskiness of such cash flows to only equity investors. Due to the hierarchy of profit distribution, equity investors bear a higher risk because they receive the remainder of the profits only after the debt investors have been paid. Consequently, they require higher compensation for their risk, i.e., a higher return. Regardless of the sub-method applied, the key steps when performing a damages valuation using the DCF method are as follows:16

16   See International Valuation Standards Council, IVS 105: Valuation Approaches and Methods ¶ 50.4 (draft, Apr. 7, 2016), https://www.ivsc.org/files/file/view/id/648.

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(1) Choose the most appropriate type of cash flow for the subject asset taking into account the specific case and the availability of data (e.g., FTF vs. FTE, or real or nominal cash flows); (2) Determine the most appropriate valuation period (i.e., duration of the cash flows) and valuation intervals (e.g., daily, weekly, monthly, or yearly cash flows); (3) Determine whether a terminal value17 is appropriate for the subject asset or whether damages should be derived solely for a limited period; (4) Prepare the cash flows expected “but for” the harming event for that period; (5) Collect the actual cash flows for the same period;18 (6) Determine the appropriate discount rate(s)19 in accordance with the equivalence principle; and (7) Apply the discount rate to the forecasted future cash flows, including the terminal value, if any. Arbitrators could apply similar steps to verify and assess the reasonableness of the damages derived by a quantum expert using the DCF method. 3

How to Deal with Uncertainty or Speculation?

In many investment disputes, the DCF model might be the only reasonable solution in situations where market-based techniques are not available or not comparable and cost-based methods do not suffice to make full reparation. However, many arbitrators still consider: (1) the DCF method itself and/or (2) its applicability absent certain preconditions as inappropriate, speculative, or too uncertain. A recent study found that in about one-third of the investment disputes analyzed where the DCF method was the primary quantification method 17  “Terminal value” refers to the years after a detailed planning in which planning on a yearby-year basis becomes meaningless. See Tim Koller et al., Valuation: Measuring and Managing the Value of Companies 144 (6th ed. 2015). 18  It should be noted that the “actual” cash flows and/or the “but for” cash flows might have to be adjusted for events and consequences unrelated to the dispute. This holds true especially in investor-State arbitrations where certain measures of the respondent might be lawful. 19  More than one discount rate might be applicable where the quantum expert evaluates damages for different scenarios, for multiple assets, or with period-specific discount rates reflecting the specific shape of the yield curve.

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proposed, the tribunal rejected the methodology20 based on the perception that the DCF-based damages were “too uncertain” and/or “speculative.”21 In particular, tribunals have either considered the “assumptions or data about potential revenues, expenses, growth rates and risks to be too uncertain and speculative”22 or that a track record of less than three years was insufficient to constitute a “going concern.”23 In the Khan Resources v. Mongolia award, for example, the tribunal concluded that “there are a number of additional factors and uncertainties which, in the Tribunal’s view, make the use of the DCF method unattractive and speculative.”24 The uncertainties listed by the tribunal are representative of the preconditions which other tribunals have considered necessary to apply the DCF method.25 They comprise of the following questions: (1) Is the investment a business, project, or asset already in production, such as a start-up, or is it an established business where the going concern has to be assessed? (2) How has the financing of the business, project, or asset been established? (3) Has the business, project, or asset been held, restructured, or sold? (4) Are there other contractual or market preconditions like the signing of a supporting agreement that are needed? The tribunal in Khan v. Mongolia noted that “[t]he combination of these factors does not mean, as the Respondents allege, that the … Project had no value in the Claimants’ hands, but it does mean that the level of certainty required for the DCF method to be used has not been attained.”26 Some tribunals have slightly varied the criteria which must be met before damages can be assessed with the DCF method. Most often, the very basic issue of a reliable cash flow forecast, which is conceptually related to the going concern question, has been one of the major obstacles.27 However, from a financial perspective, these 20   See PricewaterhouseCoopers, Dispute perspectives, at 3. 21   See id. 22   See id., at 4. 23   See id. See also Ripinsky & Williams, supra note 12, at 281–2 (citing Técnicas Medioambientals Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2 and Southern Pacific Properties (Middle East) Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/84/3). 24   Khan Resources v. Mongolia, supra note 12, ¶ 392. 25   See id. 26   Id., ¶ 393 (citation omitted). 27   See, e.g., Rusoro Mining v. Venezuela, supra note 4, ¶ 759.

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limitations are not impediments per se to applying the DCF method. In the ensuing sections, each supposed precondition for the DCF method will be analyzed in more detail. 3.1 No Established Business or Going Concern is Needed A frequently observed precondition in investor-State arbitrations is that the DCF method can only be applied to established businesses (i.e., when the going concern of a business is met). Many tribunals have shied away from the DCF method when the business has not been operating for “three years or more.”28 In fact, some tribunals even considered companies operating for slightly more than three years29 as insufficient because there had not been “a number of years of successful performance,”30 i.e., they did not demonstrate a sufficiently profitable business operation. The perceived lack of history makes it difficult for tribunals to assess the cash flow projections of the valuation subject with reasonable certainty.31 While it is correct that the DCF method can only be applied to businesses which are profitable in the future, there is no precondition from a financial perspective with regard to profitability in the past or in the early years. Young companies are often not (or hardly ever) profitable at the beginning of their operations. The reasons for this common observation include the lack of economies of scale (i.e., costs per product or service generally decrease with the size of the business), initial inefficiencies due to the organization’s learning curve, or the need for investments in the brand or customers. However, this does not mean that young companies have no significant value per se or cannot be quantified using the DCF method. The valuation of young companies or start-ups undoubtedly implies more “estimation challenges”32 than established businesses. Consequently, arbitral tribunals are confronted with a more difficult task when they have to quantify the appropriate amount of compensation for a start-up or a business that is not fully established. However, as stated by the United States Court of Appeals for the Ninth Circuit, the difficulty in assessing damages should not be a bar to recovery: 28  PricewaterhouseCoopers, Dispute perspectives, at 4. 29   See, e.g., Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26, Award, ¶ 525 (Jan. 29, 2016). 30   Id., ¶ 524. 31   See, e.g., id., ¶ 527. 32   See Aswath Damodaran, Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges 7 (May 2009), http://people.stern.nyu.edu/adamodar/pdfiles/ papers/younggrowth.pdf.

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Evidence to establish [lost] profits must not be uncertain or speculative…. This rule does not apply to uncertainty as to the amount of the profits which would have been derived, but to uncertainty or speculation as to whether the loss of profits was the result of the [breach] and whether any such profits would have been derived at all.33 In finance, the expectancy value resolves the estimation challenges. By weighting different cash-flow scenarios with their probability, the question no longer becomes whether or not there are lost profits “at all.” Instead, the possible outcomes will be evaluated, usually leading to at least some kind of value. Some tribunals have recognized the risk of under-compensation when not referring to an established valuation approach like the DCF method, especially in cases involving young companies or business ventures. For example, in Gold Reserve v. Venezuela,34 the tribunal agreed with the opposing experts’ position that the DCF method was the most appropriate approach to quantify damages, despite the absence of a history of operations prior to expropriation.35 3.2 The Financing of the Business Need not be Established in Most Cases According to the Khan Resources case, one of the “additional factors and uncertainties which, in the Tribunal’s view, make the use of the DCF method unattractive and speculative”36 is whether the business has or can reasonably be expected to secure financing. The tribunal in Mohammad Ammar Al-Bahloul v. Republic of Tajikistan came to a similar conclusion.37 From a financial perspective, the establishment of a business’ financing is rarely relevant. It might be an issue in cases where, for example, the financial market participants are limited or access to the financial market is highly regulated by the interfering State. In most countries, however, there are multiple public and private financing opportunities, each targeting a certain risk profile of the expected cash flows. Often, and as in the case of established businesses, 33   Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 299 F.3d 769, 790 (9th Cir. 2002) (emphasis omitted). 34   Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 690 (Sept. 22, 2014). 35   See PricewaterhouseCoopers, Dispute perspectives, at 5. The tribunal in Gold Reserve also endorsed the DCF method because of the “commodity nature of the product.” From an economic perspective, however, the future cash flows of mining activities are not “more secure” because they represent a tangible product. See Gold Reserve v. Venezuela, supra note 34, ¶ 830. 36   Khan Resources v. Mongolia, supra note 12, ¶ 392. 37   Mohammad Ammar Al-Bahloul v. Republic of Tajikistan, SCC Case No. V (064/2008), Final Award (June 8, 2010).

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the issue is not if the financing could have been established, but rather, on what terms38 (e.g., the interest rate and one-time debt financing costs for which lenders might ask). When financing is sought for business ventures in riskier countries or with highly fluctuating cash flow profiles, debt investors will normally ask for a larger share of the entity’s cash flows, thus reducing any compensation distributable to equity investors. As a result, the absence of established financing should only preclude the application of the DCF method in rare cases. However, if the financing of a project, business, or asset remains pending, this will increase the risk for equity investors, leading to lower damages through the application of a higher discount rate. The Question of Whether the Business Would Have Been Held, Restructured, or Sold is Rarely Relevant The valuation subject’s specific use may impact quantum. However, profitoriented investors will usually follow the use that maximizes net future cash flows. Why, for example, would an investor sell its asset for less than the market value? Indeed, the question of whether a business would have been held or sold should most often lead to a similar result. Similarly, why should an investor not restructure its business if the restructuring yields higher future cash flows? A restructuring would likewise only be assumed if it is required, and thus benefits the business. Consequently, the application of the DCF method might only be impacted if the profit-maximizing use is not reasonably possible, if it conflicts with the law, or if it is not financially reasonable. After all, full reparation is only achieved when the highest and best use of the valuation subject is reflected in the damages calculation. This principle is also applicable to the evaluation of the market value of businesses. As the International Valuation Standards Council confirms: 3.3

The Market Value of an asset will reflect its highest and best use. The highest and best use is the use of an asset that maximises 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.39

38  It is, however, possible that the financing terms attributable to a project are so unattractive that they render the project unprofitable for an equity investor. 39  International Valuation Standards Council, IVS 104: Bases of value ¶ 30.3 (draft, Apr. 7, 2016), https://www.ivsc.org/files/file/view/id/646.

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Consequently, the question of whether the business would have been held, restructured, or sold should also rarely impact the DCF method. 3.4 The Precondition of Other Supporting Agreements is not Absolute Another factor which, in the view of some tribunals, is necessary before the DCF method can be used is the precondition that one or more supporting agreements,40 such as investment agreements, joint venture agreements, supply agreements, or offtake agreements, be in place. From an economic perspective, it is quite common that several additional agreements are needed to promote the business. However, the lack of such an agreement does not automatically preclude the use of the DCF method so long as it can be assumed that there are market participants who would have filled the gap. Therefore, only in countries with highly regulated or ineffective markets would the absence of an agreement at the time of the interference be an obstacle to the valuation. What is more, this impediment is not specific to the DCF method and would likely interfere with all damages valuation methods. Accordingly, the DCF method is a versatile valuation tool that can be applied in many different situations. Notwithstanding this, however, valuation experts continue to dispute key inputs that have a significant effect on quantum. Some of the key drivers of value under the DCF method will be discussed in the sections that follow. 4

The Duration of the Loss Period

When calculating lost profits with the DCF method, the duration of the loss period is a key factor which drives damages. It is therefore often disputed in investment arbitrations. In general, the cash flows to be discounted should be estimated over the loss period, which normally begins on the date of the wrongful act. However, the end date of the loss period can vary. As such, the amount of damages derived is directly affected by the length of the loss period assumed. As one may expect, the longer the damages period, the higher the damages. In addition, the specific duration of the damages period usually depends on the valuation subject.

40   See Khan Resources v. Mongolia, supra note 12, ¶ 392.

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In the case of an expropriated business, the loss period is often unlimited, because businesses are often assumed to have an infinite lifetime.41 After a certain number of years, however, an infinite loss period might not materially increase damages. The reason for this perhaps surprising effect is the time value of money and risk contained in the discount rate, which reduces the present value of the cash flow the further in the future the cash flow is expected to occur. When this effect sets in depends on the development of the cash flows over time as well as the discount rate. As a rule of thumb, and under the current market conditions, it can be assumed that cash flows generated about 30–40 years after the valuation date are no longer material to the total damages.42 Figure 8.1 illustrates the accumulation of damages applying three different discount rates over a fifty-year projection period. Line A, which represents cash flows discounted with the highest discount rate, illustrates that total damages are not only lower compared to line B and line C but also flatter, indicating lower incremental damages from the additional cash flows:43

Figure 8.1 Illustration of monetary damages in relation to different discount rates over projected time period.

41   See, e.g., the valuation standard set by the German Certified Public Accountants Asso­cia­ tion, i.e., Institute of Public Auditors in Germany, Principles for the Performance of Business Valuations (IDW S 1) [hereinafter Institute of Public Auditors in Germany, Principles for the Performance of Business Valuations] 19 (Apr. 1, 2008). 42  For the impact of the terminal value after 20, 40, and 50 years, see Pedro M. Nogueira Reis & Mário Gomes Augusto, The Terminal Value (TV ) Performing in Firm Valuation: The Gap of Literature and Research, 9 J. Mathematical Analysis & Applications 1623 (2013). 43  The curves are calculated with damages of 1.000 monetary units p.a. and a growth rate of 1.0%. The assumed discount rate is 5.0% (line C), 10% (line B), and 20% (line A).

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For cases involving a contract or a grant with a specific lifetime, the cash flow period is usually limited. It most often represents the remaining term of the agreement in dispute.44 Renewal options and prolongations have to be considered on a case-by-case basis. For cash flows involving a specific asset, the useful life of that asset is usually the basis of the loss period.45 More often than not, the cash flow periods in valuing the “but for” and “actual” scenarios are based on the same contractual or economic principles and thus do not differ with regard to the number of cash flow periods. In investment arbitrations, however, the cash flow periods applicable to the “but for” scenario and the “actual” scenario might be different, for instance, if the State’s disputed interference represents a change in regulations. An example would be the renewable energy feed-in tariffs (“FITs”), which have been granted in several European States in the last decade. Some States have retroactively reduced the grant period.46 In such cases, investors have assumed a longer period of authorized FITs when calculating compensation. A central area of divergence might then stem from a shorter cash flow period in the “actual” scenario compared to the “but for” scenario.47 5

The Key Discount Rate Parameters

By discounting, the value of future cash flows is “transformed” into the value of these cash flows as of the valuation date. Put differently, “[c]apitalisation involves the conversion of income into a capital sum through the application of an appropriate discount rate.”48 Consequently, the value of cash flows occurring at different times can be assessed and compared. 44   See Richard A. Pollack et al., Calculating Lost Profits 23 (2012). 45   See, e.g., International Accounting Standards Board, International Accounting Standards, IAS 38.90 (Intangible Assets) (2004). 46   See Ministerio de Industrias, Turismo y Comercio, Real Decreto 1565/2010 [Ministry of Industry, Tourism and Trade, Royal Decree 1565/2010], 283 B.O.E. 97428 (Nov. 23, 2010) (Spain), where the Spanish Government, inter alia, changed the period of remuneration granted for certain renewable energy sources under Royal Decree 661/2007 from the entire lifespan to a maximum of 25 years. This Royal Decree was later superseded by subsequent regulatory changes. 47  Divergences in the expected periods of the authorized FITs are, for example, discussed in the case Eiser Infrastructure & Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Final Award, ¶¶ 443–52 (May 4, 2017). 48   International Valuation Standards Council, International Valuation Standards, IVS Framework 26–7 (2011).

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In addition, the discount rate “neutralizes” the uncertainty inherent in the future cash flows. Future cash flows cannot be forecasted with certainty because the future itself is uncertain. The discount rate represents the return on a comparable alternative investment to the valuation subject. Accordingly, the discount rate must be equivalent to the cash flow to be capitalized with regard to maturity, risk, currency, and taxation.49 As indicated before, the Weighted Average Cost of Capital (“WACC”) approach, which relies on the WACC as the discount rate, is quite often used. The WACC is calculated by weighting each category of capital proportionately and comprises of several parameters.50 In the following sections, the most important parameters, namely, (1) the cost of equity, (2) the cost of debt, and (3) the weight given to each of these two costs (which is called “the debt-toequity ratio”), will be discussed separately. Moreover, due to its importance, the growth rate, which is often a deduction to the WACC in quantifying unlimited loss periods, will also be considered. The country risk premium, a muchdebated component, will be presented in a separate Chapter of this book.51 5.1 Cost of Equity The cost of equity—that is, the return an investor requires for owning a company and bearing the risk of the ownership—is one of the parameters that differs in almost all disputes between opposing quantum experts. The difference 49  Lost profit calculations are typically prepared on a pretax basis. See Pollack et al., supra note 44, at 51. The widespread assumption is that awards related to lost profits are generally taxable as ordinary income. In many jurisdictions, an after-tax lost profit calculation would result in a double counting of taxes. 50  Technically, the WACC is derived from the following formula: E D WACC = V × re + V × rd (1 – T)

 Where:  re = cost of equity  rd = cost of debt  E = equity market value  D = debt market value  V = total market value  E/V = percentage of financing that is equity  D/V = percentage of financing that is debt  T = tax rate For post-tax valuation, the deductibility of interest must be taken into account. 51   See, generally, Chapter 9, James Searby, Measuring Country Risk in International Arbitration.

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does not usually stem from the use of different approaches on calculating the cost of equity, but rather from the use of differing reference data or assumptions underlying the reference data. The approach applied to derive the cost of equity is usually the Capital Asset Pricing Model (“CAPM”). It reflects the costs of equity of a company.52 The CAPM is still the prevailing standard in valuation practice.53 Despite some critique,54 no theory is more frequently used. The advantage of the CAPM is that it is based on capital market data which is generally accepted and verifiable. Thus, in theory, the CAPM enables arbitrators to verify this portion of the discount rate. However, this verification requires arbitrators to have a deep understanding of corporate finance and access to capital market data. Both are needed to identify and assess the nuances in the data used by the opposing experts. The CAPM itself consists of three components,55 which might vary according to the reference data used. The largest areas of potential difference are the beta factor and the growth rate. The market risk premium and the country risk 52  For damages calculations, the valuation focus might be on individual assets. The risk structure of these assets usually differs from the risk structure of an entire company. However, asset-specific costs of equity most often cannot be determined directly from capital market data. Therefore, asset-specific premiums or discounts usually have to be applied to the cost of equity for the entire company. 53   See Koller et al., supra note 17, at 292; John R. Graham & Campbell R. Harvey, The theory and practice of corporate finance: evidence from the field, 60 J. Fin. Econ. 187, 201 (2001). Other models used to estimate the cost of equity, like the Fama-French three-factor model and the arbitrage pricing theory model, are rarely used and are only of theoretical value. See Koller et al., supra note 17, at 294–7. 54   See Koller et al., supra note 17, at 282. The main criticism of the CAPM is that the underlying assumptions are not compatible with reality, i.e., (i) the absence of personal and corporate taxes; (ii) all risky assets are marketable; (iii) all investors have common expectations about cash flows; (iv) investors plan only one period ahead; (v) investors can borrow or lend as much as they want at the risk-free rate. See Kenneth V. Peasnell, The Capital Asset Pricing Model, in Issues in Finance 35 (Michael Firth & Simon M. Keane eds., 1986). 55  Under the CAPM, the cost of equity equals the risk-free rate plus the asset’s beta times the market risk premium: re = rf + β × mrp Where:  re = cost of equity  rf = risk-free rate β = beta factor (sensitivity to the market)  MRP = market risk premium

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premium might also differ, while the so-called “risk-free” rate and the debt-toequity ratio often lead to no significant differences. The starting point for the CAPM formula is the quasi risk-free rate, which will be discussed first. 5.1.1 (Quasi-)Risk-Free Rate Cash flows can be considered secure if there are no risks associated with them.56 Then, only one parameter of the cost of equity has to be applied for discounting under the equivalence principle—the so-called “risk-free rate.”57 The risk-free rate represents the time value of money without any adjustments for potentially “risky” cash flows. In finance theory, a cash flow is considered “risky” if it might deviate from its expected value. The more a cash flow might deviate, the riskier it is. As mentioned above, the risk-free rate must be equivalent to the cash flow to be capitalized, especially with regard to its maturity and currency. Accordingly, the risk-free interest rate should be determined: (1) as of the valuation date, and (2) from spot rates with a maturity equivalent to the damages period and in the currency of the cash flows. Completely risk-free capital investments do not exist. The interest rates assumed to be “risk-free” are derived therefore from the interest rates for government bonds issued for countries with the best ratings (e.g., an AAA rating by the rating agency Standard & Poor’s). These debtors are considered to have the highest possible creditworthiness and consequently reflect best what should be “risk-free” in theory. The empirical data necessary for the calculation of the yield curve representing quasi risk-free rates is published by central banks like the European Central Bank or financial information service providers like Bloomberg LP. The risk-free rate can be derived as a uniform interest rate over the entire damages period or as a period-specific risk-free rate. In the latter case, the period-specific risk-free rate follows the shape of the yield curve, which is almost never uniform for different maturities. Each cash flow is then discounted with the interest rate for the respective maturity. 56  Secure cash flows are expected to be earned with a 100% probability. 57   See Aswath Damodaran, Valuation Approaches and Metrics: A Survey of the Theory and Evidence 7–8 (Nov. 2006), http://people.stern.nyu.edu/adamodar/pdfiles/papers/valuesurvey.pdf.

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5.1.2 Market Risk Premium The market risk premium is the difference between the market’s required return for equities and the risk-free rate.58 In other words, the market risk premium represents the premium that investors demand for investing in a stock market portfolio compared to a quasi “risk-free” investment. The return on stocks must be higher than the return on quasi risk-free securities. As investors are risk-averse, they demand a premium for holding riskier equities rather than quasi risk-free debt instruments. Because the market’s expected return is not observable, a model is used to estimate the market risk premium. In general, the market risk premium can be: (1) derived from observable capital market returns of the past (historical approach), (2) estimated by using analysts’ forecasts (forward-looking approach), (3) calculated from the implicit capital costs in stock prices (forward-looking approach), or (4) estimated by the required return of investors (forwardlooking approach).59 In valuation practice, the market risk premium is most often estimated by looking at historical premiums earned by stock price indices compared to risk-free securities over long time horizons.60 In order to determine market risk premiums from empirically observed (“historical”) returns, a number of parameters have to be defined, so there is some room for discretion in its

58   See Koller et al., supra note 17, at 279. 59   See id., at 272; Andreas Dörschel et al., Der Kapitalisierungszinssatz in der Unternehmensbewertung: Praxisgerechte Ableitung unter Verwendung von Kapitalmarktdaten 89 (2009). See Pablo Fernández et al., Market Risk Premium used in 71 countries in 2016: a survey with 6,932 answers 10 (May 9, 2016), http://didattica .unibocconi.it/mypage/dwload.php?nomefile=MRP2016_Fernandez20170213193256.pdf. 60  Estimating the future market risk premium using historical data is sometimes criticized given that a past-oriented approach is not really compatible with a future-oriented valuation. See Holger Daske et al., Estimating the expected cost of equity capital using analysts’ consensus forecasts, 58 Schmalenbach Bus. Rev. 2 (Jan. 2006). See also Institute of Public Auditors in Germany, WP-Handbuch 2014, Bd. II—Kapitel A Unternehmensbewertung [hereinafter Institute of Public Auditors in Germany, WP-Handbuch 2014] 111-2 (2014). A proposed alternative is to refer to forward-looking approaches. Implicit equity costs, for example, are based on earnings and dividend estimates from financial analysts as well as some simplifying assumptions. See Florian Dausend & Dirk Schmitt, Implizite Schätzung der Marktrisikoprämie nach Steuern für den deutschen Kapitalmarkt, 2 Corp. Fin. 459 (2011). However, the underlying estimates might be overly simplistic.

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determination.61 Most experts rely on studies and observations from neutral institutions like business schools or information providers in practice.62 For a long time, studies have shown that in mature, AAA-rated countries, such as Australia, Switzerland, the United Kingdom, Germany, Canada, or Sweden, a general market risk premium of about 4.5% to 5.5% was standard.63 However, since current interest rates are exceptionally low, a market risk premium at this level leads to disproportionately low capital costs. That is why market risk premiums have often been adjusted in recent years to a range of about 5.0% to 6.0%.64 The spread of about 1.0% might have a significant impact on damages worth millions of U.S. dollars. If opposing quantum experts have different views on whether to apply a pre- or post-financial crisis market risk premium, then the question of the market risk premium might become even more critical. 5.1.3 Country Risk Premium The market risk premium described above applies to developed and theoretically risk-free markets. For the valuation of companies located in other countries, it is typical to face additional risks caused by the greater volatility in the specific capital market. Furthermore, in comparison to mature AAA-rated markets, the risk exposure of assets and businesses in less secure or less developed countries is elevated due to increased political, economic, environmental, and social risks. Often, no reliable empirical data exists on market risk premiums for less developed or young capital markets. As a result, the additional risk is generally

61  This discretion includes, in particular, the determination of the market portfolio (and the risk-free bond), the length of the observation period, the periodicity (and the respective retention period within the observation period), the treatment of statistical outliers, and the kind of average return (arithmetic vs. geometric average). For details on each parameter, see, e.g., Dörschel et al., supra note 59, at 91–108. For a full description of the most relevant statistical issues, see Koller et al., supra note 17, at 805–8 (app. F). 62  Some of these studies are based on surprisingly long time series which are hardly comparable to today’s market environment. 63   See Ibbotson® SBBI, 2009 Valuation Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation 1926–2008, at 129 (2009); Koller et al., supra note 17, at 278; Institute of Public Auditors in Germany, WP-Handbuch 2014, at 124–5. 64  Similarly, Professor Damodaran increased the equity risk premium to 6% for mature markets. Until 2012, he assumed an equity risk of 5%. See Aswath Damodaran, Country Risk: Determinants, Measures and Implications—The 2016 Edition 96–7 (July 21, 2016); Fernández et al., supra note 59, at 3–4.

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taken into account in the form of an additional country risk premium.65 Given its potentially significant impact on damages, country risk premium has become a topic of frequent debate in investor-State arbitration. Accordingly, a separate chapter has been dedicated to the topic in this publication.66 5.1.4 Beta-Factor In investment arbitrations, the beta-factor is usually one of the most contentious drivers of the discount rate. Based on the authors’ experience, it can often lead to differences in the valuation outcome of more than 10%. The so-called “beta-factor” or “beta” is needed in addition to the market risk premium to take into account the specific risk structure of the venture. The beta reflects the additional return required to compensate for the investor’s exposure to the more specific (i.e., systematic or undiversifiable) risk of a company. In particular, it reflects the risk of the industry in which the company operates, combined with the risk to equity holders caused by the company’s financial leverage.67 For companies listed on a stock exchange, the beta can be directly derived.68 Most often, however, the valuation subject is not listed on a stock exchange and comparable companies have to be identified.69 These companies are often called “peer group companies.” The average of their beta factors is used as a proxy for the beta of the valuation subject. Usually, the selection of the peer group is one of the most contested steps between experts. It requires a subjective assessment of how many companies should be included in the peer group, and which companies are considered most comparable with regard to the specific industry, geographic reach, markets served, and liquidity among other factors. When quantum experts disagree widely on the beta, arbitrators 65   Id., at 54–70. 66   See supra note 51, Searby (Chapter 9). 67   See Koller et al., supra note 17, at 278–80. The beta determined with historical capital market data reflects the capital structure of each company. These betas are often referred to as “raw” betas or “levered” betas. See Roger J. Grabowski et al., 2016 International Valuation Handbook: Guide to Cost of Capital 41 (2016). However, the capital structures of the peer group companies usually differ materially. Consequently, the inherent financial risks are extracted for all companies which leads to “unlevered” betas. The unlevered beta would then have to be re-levered with the capital structure of the valuation subject to consider its specific financial risk. 68  However, the beta is only of value if the liquidity of the underlying stock is given. Without reasonable liquidity, stock prices may be outdated or may be influenced by speculators driving stock prices up or down for individual purposes. 69   See Sanjeev Bhojraj & Charles M.C. Lee, Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms, 40 J. Acct. Res. 407, 408–10 (May 2002).

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should examine the individual peer group companies and verify which best reflect the valuation subject in dispute. Theoretically, the beta, like the market risk premium, should be estimated on a future-oriented basis. In practice, however, historical data is once again the starting point to estimate the beta.70 Technically, the empirical beta is measured with a statistical comparison. This comparison estimates the share price movements of the valuation subject in relation to movements of the general financial market portfolio (i.e., regression analysis).71 Ideally, the market portfolio would cover all risk-bearing investments, including gold, art, real estate, and international equities, and thus provide for diversification. Because such a far-reaching portfolio is not available, and consequently, the return of such a broad market portfolio cannot be determined, it is common practice to use the broadest possible stock index as a proxy for the market portfolio.72 The selection of the index can also impact the beta. For instance, it would make a difference whether the chosen reference is a local index of each peer group company or the MSCI World, which is comprised of indices from several countries. Besides the selection of the index, it is also necessary to define the period over which the beta factor is to be determined and the relevant time intervals. In practice, it is common to determine betas: (1) over a period of one to five years, and (2) to use monthly, weekly, or daily returns.73 Although the selection of these parameters should not theoretically influence the level of the beta, empirical evidence shows that these parameters could have a material

70   See Institute of Public Auditors in Germany, WP-Handbuch 2014, at 126. 71  The beta factor applicable to a company is defined as the covariance between the equity return of the company to be valued and the return on the equity index (as a proxy for the return of the market portfolio), divided by the variance of the return of the equity index. See Institute of Public Auditors in Germany, Principles for the Performance of Business Valuations, at 25. The market model is the most common regression used to estimate a company’s beta. This model assumes a linear relationship between the return on the market portfolio and the return on the stock. See Koller et al., supra note 17, at 297. 72   See Koller et al., supra note 17, at 298. 73   See Institute of Public Auditors in Germany, WP-Handbuch 2014, at 127. In doing so, various aspects have to be taken into account, like statistical modeling aspects as well as the characteristics of the company to be valued. The five-year beta based on monthly returns is used, for example, by the information service provider Ibbotson Associates, the London Business School Risk Measurement Service, and some analysts. Academic studies often use daily returns. In addition, a two-year beta based on weekly returns is published by the financial information service provider Bloomberg L.P.

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impact.74 Consequently, the beta factor provides room for individual discretion and, thus, should be closely analyzed by arbitrators when opposing experts calculate beta factors that differ by more than about 0.1. Based on the authors’ experience, differences above this threshold can be telling. 5.2 Cost of Debt The differences between opposing quantum experts with regard to the cost of debt are usually less problematic.75 Moreover, the cost of debt is only applicable to the DCF method under the WACC approach. Therefore, the cost of debt will only be introduced conceptually. The WACC blends the costs of equity with the after-tax costs of debt.76 Normally, all interest-bearing instruments are considered in calculating the cost of debt. However, there is some discretion as to what the expert might include in the cost of debt. The costs of debt are calculated as the weighted average cost of each form of debt.77 In practice, the interest rate is typically determined by the interest rate of listed debt instruments, like bonds issued by companies with comparable credit ratings, or, if available, by the actual debt interest rate of the valuation subject for a similar maturity and risk profile. 5.3 Debt-to-Equity Ratio The WACC is determined by the return on equity and debt capital weighted by the equity and debt ratios at market values. The exact market values of debt and equity arise only through complex iterative valuations. For the purpose of damages calculations, a simplified estimation of the debt-to-equity ratio is sometimes applied.78 In these cases, the peer group’s debt-to-equity ratio might serve as an unbiased proxy of the financial risk observable in the relevant

74  Institute of Public Auditors in Germany, WP-Handbuch 2014, at 127. 75  The cost of debt is usually determined by the terms of the lenders. These terms are more transparent and easier to analyze and verify than the cost of equity. 76  The tax benefit from the deductibility of borrowed interest must be taken into account by correcting the debt rate by the factor (i.e., 1-tax rate). 77  In the case of non-interest-bearing borrowings (primarily pension provisions eligible in certain countries), an interest rate of loans with comparable lifetimes should be used; see Institute of Public Auditors in Germany, Principles for the Performance of Business Valuations, at 28. 78  Often, experts rely on this simplified estimation when the observable debt is also related to other business segments, assets, etc., that are not considered in the damages calculation.

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industry.79 As an alternative, healthy capital structures of established companies are often in the range of 60–100% equity and 0–40% debt. 5.4 Growth Rate Together with the beta-factor and the country risk premium, the growth rate provides substantial room for discretion. Similar to the beta, it could be one of the main drivers of material discrepancies between quantum experts’ opinions. Due to the subjective assessment of the annualized growth prospects, differences usually range between 0.5–3.0% of the discount rate. However, for a number of investment arbitrations, the growth rate is of less importance where the damages period is limited. The rationale for increasing the value of future cash flows by applying a growth rate stems from the going concern assumption, business growth opportunities, and possible market growth in nominal terms (i.e., which includes general inflation of prices). For the first years, this growth is usually implicitly included in the cash flows planned for the damages period. However, if a damages period is extremely long or unlimited, the DCF calculation is most often split into two phases. In the first phase, the cash flows are forecasted in detail. In the second phase, a normalized cash flow is derived, which excludes onetime and special effects.80 This second phase is also often referred to as the “terminal value.” It accounts for the fact that after a limited number of years, the projected cash flows are expected to have stabilized. In this second phase, the expected growth in cash flows may be reflected in a “growth rate” that is included in the discount rate. Such a growth rate is equivalent to extrapolating cash flows with a certain average annual growth. This is a pragmatic shortcut to avoid modelling an unreasonably long damages period. Financially, it represents the growth in volume and prices over time. This is effectuated by reducing the discount rate in the terminal value by such a growth rate,81 which is perhaps less intuitive for something that increases the values and, consequently, damages.

79  Alternatively, insofar as the valuation object is listed on a stock exchange, the debt-toequity ratio could be calculated as the relation of the stock market value of the equity to the market value of the carrying amount of debt. 80  If one-time or special effects have to be considered, they have to be financially transformed into an annual equivalent. Typical one-time or special effects include restructuring costs or income from the reversal of accruals. 81   See Institute of Public Auditors in Germany, Principles for the Performance of Business Valuations, at 20–1.

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Premiums and Discounts

Generally, the advantage of the DCF method is that it allows for the inclusion of most peculiarities in the calculation—either in the cash flow or sometimes even in the discount rate. Thus, the need for further adjustments is limited. However, in certain cases, premiums and discounts might be appropriate. The most popular adjustment concepts sometimes applicable to the DCF method are the “illiquidity discount” and the “control premium.”82 Despite its recurrence in valuation analyses, however, the control premium is less of an issue in investment arbitrations.83 Consequently, the following discussion is limited to the illiquidity discount. When valuing an asset that is supposed to be bought or sold via a private sale, it may be relevant to consider the extent to which the investment is liquid84 or marketable. Market liquidity risk relates to the (in)ability of trading at a fair price with immediacy.85 Liquidity in a market ensures that an asset can be sold: (1) rapidly, (2) with minimum transaction costs, and (3) at a competitive price.86 In other words, (il)liquidity risk constitutes the risk of declining profits because of restrictions on selling an asset instantly at or at least close to market prices. Consequently, the theoretical reasoning behind an illiquidity discount is that investors should be willing to pay higher prices (i.e., a price premium) for more liquid assets than for otherwise similar but less liquid assets.87 Stated differently, “[b]oth the theory and the empirical evidence

82  “When using an income approach it may also be necessary to make adjustments to the valuation to reflect matters that are not captured in either the cash flow forecasts or the discount rate adopted. Examples may include adjustments for the marketability of the interest being valued or whether the interest being valued is a controlling or noncontrolling interest in the business.” International Valuation Standards Council, IVS 200: Businesses and Business Interests, supra note 7, ¶ 60.10. 83  Control premiums are more relevant in shareholder disputes as a shareholder or a group of shareholders often acquire or lose control over an asset or company. 84  The concepts of liquidity and illiquidity refer to the degree of ease and certainty with which assets can be converted into cash. 85   See Kleopatra Nikolaou, Liquidity (Risk) Concepts: Definitions and Interactions 18 (European Cent. Bank, Working Paper No. 1008, Feb. 2009), https://www.ecb.europa.eu/ pub/pdf/scpwps/ecbwp1008.pdf?e87aba3a52137adea91048bf54801968. 86   See id., at 14–5. 87   See Aswath Damodaran, Marketability and Value: Measuring the Illiquidity Discount 2, 17 (July 2005), http://people.stern.nyu.edu/adamodar/pdfiles/papers/liquidity.pdf.

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suggest that illiquidity matters and that investors attach a lower price to assets that are more illiquid than to otherwise similar assets that are liquid.”88 The degree of liquidity of an asset varies depending on the type and characteristics of the company or asset being valued as well as on prevailing market conditions. For instance, the liquidity risk of actively traded equity stocks listed on regulated markets with high trading volumes is negligible. In contrast, liquidity risk might be relevant in the valuation of assets not listed on an organized exchange or traded in an active market. For many tangible and intangible assets, observable market prices do not exist. If an asset is not liquid, it is appropriate to consider whether and to what extent its value needs to be adjusted to reflect this economic condition.89 In business valuation, this aspect is referred to as an “illiquidity discount,” a “marketability discount,” or, less commonly, as a “fungibility discount.” The question of whether such a discount has to be considered in an investment arbitration is always case-specific. While the application of illiquidity discounts is widely accepted in theory as well as in practice, determining their appropriate size is fairly challenging in most cases, and thus often highly controversial. Because of its inherent subjectivity, the underlying assumptions should be derived with the utmost care and accuracy and should be made transparent to the tribunal. This applies even more to situations in which the dispute is not related to equity shares, but to tangible or intangible assets. In such cases, there is typically little if any relevant market data available, such that applicable illiquidity discounts are determined entirely on the basis of the quantum expert’s subjective assessment. 7

Cross-Checks to Market References

As mentioned above, tribunals often reject the DCF method because they perceive the underlying assumptions and input parameters to be excessively speculative and therefore do not consider the resulting valuation outcome to be sufficiently reliable.90 As a consequence, tribunals increasingly favor less complex and seemingly more reliable market approaches when confronted with the DCF method.91 This preference for market-based approaches is principally 88   Id., at 34. 89   See Shannon P. Pratt & Alina V. Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies 416–57 (5th ed. 2007). 90   See PricewaterhouseCoopers, Dispute perspectives, at 5. 91   See, e.g., Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award, ¶¶ 350–6 (Apr. 15, 2016). Even if sufficiently comparable market price information

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justified because current price information from active markets generally constitutes the strongest evidence of intrinsic value. In practice, market-based approaches are generally only preferable when the existing market information relates to transactions that occurred in close proximity to the valuation date and are directly comparable to the valuation subject. Comparability is, however, often limited. But even when those marketbased approaches do not qualify as a primary valuation approach, they could serve as a cross-check for the valuation conclusion generated by the DCF method. In these cases, market-based approaches like recent transactions, listed prices, or transaction multiples may be used as a secondary method in order to verify the overall reasonableness of the DCF valuation and the underlying assumptions.92 The supplementary use of market-based information can be of particular value for arbitrators in assessing the relative appropriateness of the conclusions drawn by opposing quantum experts, especially if they come to remarkably different conclusions when applying the same DCF methodology. Market-based approaches may be easier to understand and to assess, but can usually only serve as a proxy. Moreover, their simplified application can also facilitate potential manipulation. When properly utilized, however, marketbased approaches can provide a ballpark range for damages which could help tribunals question “extreme” DCF valuation results presented by one or even both experts. 8 Conclusion The DCF method is increasingly used to determine damages in investment treaty arbitrations. There is a good reason why quantum experts most often apply this method when calculating damages: the DCF method is a powerful and adaptable valuation tool which can be adjusted to the specifics of almost every case. is available, one has to be cautious when drawing direct conclusions about value from those data because of the notion that price does not necessarily equal value. Prices are always driven by market-specific or transaction-specific characteristics such as market liquidity at the time of the transaction or the relative negotiating power of the parties involved in the transaction. 92   See, e.g., Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/23, Award, ¶¶ 622, 626 (Dec. 12, 2016) (dismissing both experts’ valuation conclusions generated by the DCF method). See also Institute of Public Auditors in Germany, Principles for the Performance of Business Valuations, at 33.

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In many investment disputes, the DCF model might be the only reasonable solution in situations in which market-based techniques are not available or not comparable and cost-based methods do not provide full reparation. However, many arbitrators still consider: (1) the DCF method itself and/or (2) its applicability absent certain preconditions inappropriate, speculative, or too uncertain. As shown above, these objections are usually unfounded. Notwithstanding this, the application of the DCF method in relation to very young companies can present additional challenges. The most apparent strength of the DCF method is the possibility to separate the effects related to the harm from other effects. This functionality stems from the number of parameters that can be adjusted to best reflect the circumstances of the case at hand. While the possibility of making adjustments to the input parameters is one of the greatest advantages of the DCF method, it is also one of its greatest weaknesses. By its very design, the DCF method requires the adjustment of several parameters which are susceptible to being misapplied or manipulated by one or both opposing experts. As a result, disputes often arise in relation to factors such as the certainty of the cash flows, the length of the loss period, major components of the discount rate, and the application of premiums and discounts, which have been discussed in greater detail in this Chapter. Market-based approaches have consequently served a supplementary role in cross-checking valuation conclusions produced by the DCF method. This Chapter has endeavored to equip arbitral tribunals and legal counsel with a broader and deeper understanding of the DCF method in order to critically evaluate quantum assessments and to minimize the misunderstandings and misrepresentations sometimes seen in investor-State arbitrations.

Chapter 9

Measuring Country Risk in International Arbitration James Searby Country risk is the incremental, non-diversifiable risk of investing in a given country.1 Today, there is no settled view of what contributes to country risk, how to measure it, or how to incorporate it into a valuation. Nonetheless, country risk often plays a key role in the monetary compensation awarded in international arbitration. This Chapter seeks to introduce country risk to a non-technical reader, albeit somebody familiar with investment treaty arbitration, whether as a student or practitioner. It is divided into two broad sections. The first section describes the technical aspects of country risk, beginning with a discussion of risk in finance and the sources of country risk. There then follows an introduction to the Capital Asset Pricing Model, which can be adjusted to include an explicit country risk premium (“CRP”) in a cost of capital or discount rate. We then consider the various ways of calculating country risk and how to introduce them into the discount rate used in a valuation. The second section considers country risk in the context of investment arbitration and reviews the main legal principles that apply to country risk and how tribunals have treated country risk in publicly available awards. The Chapter closes with some thoughts on possible steps to take the study of country risk forward. 1

Technical Aspects of Country Risk

1.1 Risk in Finance Financial markets routinely put a price on future investment returns, whether dividends or buybacks of stocks or principal and interest payments from 1  “Non-diversifiable” in this context signifies that a risk cannot be mitigated by investing in a variety of assets in which different risk and return characteristics lead the overall portfolio to have a lower relevant risk for a given level of expected return. Non-diversifiable risks are also known as “market risks.” There is a brief discussion of the empirical evidence as to whether country risk can itself be diversified later in the Chapter.

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bonds. Companies perform a similar exercise when allocating capital between the different investment projects they might undertake, as do actuaries when considering the value of a retirement annuity or life insurance policy. The expression of future cash flows in today’s money is part and parcel of the modern financial landscape. In most market conditions, the price that somebody will pay today for the rights to a future payment is lower than the promised amount of that payment: a payment of US$100 in, say, a year’s time is worth less than US$100 today.2 That lower value reflects two independent concepts. The first concept is the “time value of money,” which describes the fact that US$100 available today can be invested so that its holder can be confident of having more than US$100 in a year’s time. If interest rates were 10%, one would have US$110 in a year’s time given US$100 today; if interest rates were 5%, one would have only US$105 instead. Considered another way, to be confident of having US$100 in a year’s time, one would need to invest US$90.91 today at 10% interest or US$95.24 today at 5% interest.3 The value, today, of US$100 promised in a year’s time, all else equal, is lower with a higher time value of money because it can be obtained with a lower investment. In financial language, it is more heavily discounted. The second concept is “risk,” which refers to the possibility that the actual payment in a year’s time will be different from the promised or expected payment. For a layperson, the term “risk” may be principally associated with unwelcome events and negative outcomes, such as a payment being less than the promised amount, or paid later than promised, or not paid at all. To a financial practitioner, however, “risk” means something different, namely the variability of outcomes—positive or negative—in relation to an “expected” or “most likely” outcome.4,5 Such risks are particularly relevant when considering

2  At the time of writing, certain government and even corporate bonds are being priced above their face value, so that the associated interest rates, i.e., the promised yield in nominal terms, are negative. If history is a guide, this situation is unlikely to be sustained and interest rates will again become positive at all maturities. 3  These figures are calculated as: US$90.91 × 1.10 = US$100 and US$95.24 × 1.05 = US$100. 4  Variability of outcomes in relation to an expected “central tendency” or average is calculated mathematically using a standard deviation, a measure of the dispersion of the values in a dataset. 5  Note that the possibility of a payment in excess of the expected amount is not necessarily viewed favorably by an investor. For example, if the investor knew that the investment would offer a higher return, she might have invested a lower amount initially and put the spare cash into a different investment offering different expected benefits.

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equity instruments, which offer potentially unlimited upside as well as downside outcomes.6 To illustrate, imagine that there is an investment, Investment A, which is certain to pay out US$100 in a year’s time. Now imagine an alternative investment, Investment B, which has a 50% chance of paying out US$110 in a year if the economy does well and a 50% chance of paying out US$90 if the economy performs poorly. Both investments have an “expected value” of US$100,7 but Investment B has greater uncertainty (equally positive and negative) as to the actual outcome. It is an axiom in finance that people are assumed to be risk averse, i.e., to prefer more certain or less variable outcomes, all else equal. For that reason, a financial analyst would conclude that Investment B is less valuable (i.e., more heavily discounted) today than Investment A, even though it has the same expected value in a year’s time. Put another way, an investor would require a higher expected return for investing capital in Investment B than in Investment A. The extent of the higher expected return would be referred to by a financial practitioner as a “premium for risk.”8 A country risk premium can be understood as the premium for risk associated with investing in a country where the potential outcomes are more variable than those available from investing in a low-risk benchmark country such as the United States, Germany, or the United Kingdom.9 A higher country risk premium, all else equal, suggests that investment returns in that country will be more variable. Country risk is important in the context of foreign direct investment. For example, if a company has a choice between constructing a factory in its home market (say, Country A) which is a mature and stable economy or constructing one in a foreign market (say, in Country B), it will seek a higher return 6  In contrast, no debtor is ever likely to pay more than they are promised, placing a ceiling on expected returns. Some upside could arise in respect of debt returns if, say, the actual level of default on a portfolio of debts was lower than the expected level. 7  The expected value of an unknown future outcome is the sum of each of the potential outcomes multiplied by its probability. In this example, Investment A’s expected value is US$100 × 100% = US$100; Investment B’s expected value is US$110 × 50% + US$90 × 50% = US$100. 8  In this example, Investment A is a fixed income investment, while Investment B has equitylike characteristics. The example illustrates why it is unusual for the cost of equity to be lower than the cost of debt, even if the expected payments involve the same amount and timing. 9  Use of the United States as the benchmark reflects, inter alia, the availability of a long and rich series of financial data, the global significance of the U.S. economy, and the importance of the U.S. dollar to the global financial system. Germany is often used as the benchmark if the country being studied issues bonds denominated in Euros.

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on a Country B investment because it perceives greater risk in that country than in Country A. In other words, if expected returns were the same in Country A and Country B, all else equal, investors would keep their money in Country A. Country risk is the counterparty to the higher expected returns sought by investors in foreign markets. 1.2 The Sources of Country Risk The term country risk is used in a variety of contexts and there is no agreed list of factors that determine country risk. As used by the Organization for Economic Co-operation and Development (“OECD”), for example, it encompasses “transfer and convertibility risk (i.e. the risk a government imposes capital or exchange controls that prevent an entity from converting local currency into foreign currency and/or transferring funds to creditors located outside the country) and cases of force majeure (e.g. war, expropriation, revolution, civil disturbance, floods, earthquakes).”10 Euromoney, a monthly finance magazine, indicates that its own evaluation of country risk includes assessments of “political risk, economic performance/ projections, structural assessment, debt indicators, credit ratings, access to bank finance and access to capital markets.”11 Other organizations may include more, fewer, or different factors in their country risk measures. As used in this Chapter, country risk includes any factor that might differentiate the risks of investing in one country from those of investing in another, all else equal. Potentially, the sources of such risks are very broad. Here, I choose to group them into three categories: political, macroeconomic, and structural. Political risks are those associated with government policies, per se, or the possibility that those policies may change, favorably or adversely. Governments may pass laws that influence business regulation, labor market conditions, taxes, or trade barriers, to name a few, and as the risk that these may be altered (potentially in unpredictable ways) increases, so too does the degree of political risk. Corruption is another key political risk factor, because it acts like a tax on business, but one in which the costs are neither explicit nor predictable. Political risk factors are usually largely under governmental control, even if the

10   See OECD, Country Risk Classification (Apr. 20, 2017), http://www.oecd.org/trade/ xcred/crc.htm. 11   E uromoney, About Euromoney’s Country risk ratings (2017), http://www .euromoney.com/Poll/10683/PollsAndAwards/Country-Risk.html.

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individual policy choices made are themselves the product of compromise and trade-offs with other policy objectives.12 Macroeconomic risks include high or volatile inflation, high or volatile interest rates, volatile currency exchange rates, or high rates of public or aggregate private indebtedness. Although it is often possible to use policy measures to reduce macroeconomic risks, the reduction itself may impose an economic cost that constrains available policy choices. For example, measures intended to reduce inflation in western economies in the early 1980s were often associated with increases in unemployment.13 In some countries, particularly those with independent central banks, elements of economic policy may also fall outside of day-to-day political control. Macroeconomic policy choices often take time to have an appreciable impact. What I have termed structural risks are factors present in a country that are either permanent or only subject to change over extended periods of time. Structural features, such as the availability of adequate infrastructure, the presence of a suitably educated workforce, a concentration of output in a narrow range of industries, or the strength of the rule of law, are the product of investments and policy choices over decades (or even centuries). It might take a generation to upgrade a nation’s education and training, to make peace with rebels, or to build a robust electricity distribution system. Social factors, such as consumer preferences for locally made products, may increase the risks associated with launching new products from abroad. Other risks, such as the risk of earthquakes, can never be removed, though government policies such as appropriate and enforced construction standards, may mitigate them in time. Every country has some degree of political, macroeconomic, and structural risk. In mature economies with sophisticated financial markets, the risks (and expected returns that investors require for exposure to those risks) are reflected in the promised nominal yield on government securities and/or within the observed equity market risk premium that compensates investors for the greater risk associated with holding equities rather than bonds. Countries that are at an earlier stage of economic development generally experience greater volatility in their economic outcomes: good years will exhibit stronger growth than in mature economies while bad years will see deeper recessions. That observation is likely to hold even if the average or expected 12  For example, a government that raises taxes to pay for social programs may need to accept lower business investment and employment, at least in the short- to medium-term. 13  The economic and social consequences of “austerity” policies on certain Eurozone countries offer a more recent example.

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rate of economic growth exceeds the level available in a mature economy. Those risks may be compounded in some countries by political instability, demographic change, or exposure to natural disasters. 1.3 Country Risk and the Cost of Capital There are three main ways in which to value an asset: by reference to the income that the asset generates (“income-based approach”), to the prices at which similar (or identical) assets change hands (“market-based approach”), or to the cost of replicating the asset (“cost-based approach”). Arbitral tribunals have used all three methods, depending on the facts of the case and the strength of the available evidence.14 It is only possible to apply an explicit country risk premium in a forwardlooking, income-based approach.15,16 For that reason, country risk is generally only an issue for tribunals that are contemplating a loss that extends into the future when viewed from a given date of valuation and is potentially relevant in both commercial and investment arbitration. The most common income-based valuation approach is the discounted cash flow (“DCF”) method, in which a series of projected future cash flows is discounted and added up to calculate a present value, i.e., the cash flows’ value in “today’s money.”17 Before accounting for taxes and capital structure, the appropriate discount rate to apply to the cash flows is the opportunity cost of capital applicable to the asset being valued. In finance, relevant risk and expected return are correlated, such that investments with higher expected returns have higher relevant risk. All else equal, an asset’s cost of capital is equal to the expected return on assets with similar relevant risk. The Capital Asset Pricing Model (“CAPM”) is commonly used to calculate a company’s opportunity cost of equity capital. The model is based on several assumptions that are unlikely to hold at all times (for instance, that markets 14   See, generally, Chapter 7, Noah Rubins et al., Approaches to Valuation in Investment Treaty Arbitration. 15  Forward-looking approaches calculate damages from the date of valuation. Income arising prior to the date of valuation does not generally require discounting. 16  Market-based approaches do not explicitly reveal the country risk premium assumptions embedded in transactions. Although country risk is present in market prices, it is not directly observable. Some might consider that the difficulties associated with measuring country risk premium in income-based valuation, as discussed below, suggest that greater weight should be placed on market-based evidence in emerging markets. Cost-based approaches do not embody any risk assessment. 17   See, generally, Chapter 8, Kai F. Schumacher & Henner Klöenne, Discounted Cash Flow Method.

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are completely efficient) but remains popular, in part because of its structural simplicity. Unlike a company’s opportunity cost of debt, which may be capable of estimation from the rate of interest paid on its debts, a company’s cost of equity may not be observed directly from its accounts and must be inferred from market data (if it is publicly listed) or estimates of the expected returns available on similar investments (if it is not). The CAPM, in its basic form uses only three elements in its calculation of an asset’s opportunity cost of capital, namely: “risk-free” rate (r ), which is normally equated with the promised yield · inthenominal terms available on a security issued by a sovereign with a high f

credit rating, such as the United States (e.g., Treasury bills), Germany, or the UK. The model assumes that the risk-free rate is the minimum investment return available and reflects the time value of money, expected inflation, and a minimal default risk; the “market risk premium” (MRP), which reflects the additional expected compensation required by investors for investing in a value-weighted, diverse portfolio of “risky” assets (e.g., equities, corporate bonds, commodities, real estate, etc.) rather than in government bonds.18 Also known as “systemic risk,” market risk cannot be diversified away by investing in multiple assets in the same market; and the “beta” (Β) of the asset, which is a measure of the behavior of the asset’s returns in relation to the market’s returns.19 An asset’s beta is used to quantify the extent to which its returns vary with those of the market as a whole. An asset that is more volatile than the market has a beta of more than 1. For example, an asset whose returns tend to rise (or fall) in value by 1.3% when the market’s returns rise (or fall) by 1%, would have a beta of 1.3. Conversely, an asset that does not vary as much as the market has a beta of less than 1.

· ·

These three elements are combined in the following formula, which yields the cost of capital for any asset: Cost of capital = rf + Β * MRP 18  In practice, an equity market index (such as the S&P 500) is commonly used, if what is sought is a cost of equity rather than an assessment of returns on all risky assets. 19  Formally, the beta is the covariance of the asset’s expected returns against the market’s expected returns, which is inferred from statistical calculation over a period of historical data.

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In countries with well-developed financial markets, it is usually assumed that investors require no other compensation for risk when investing in liquid publicly traded assets.20, 21 Elsewhere, it may be necessary to consider country risk. This is done by adding a country risk premium to the cost of capital calculated using the CAPM, as explained below.22 In principle, a higher cost of capital, or discount rate, will reduce the present value of any given future cash flows. The effect of a country risk premium, therefore, is a reduction in the value of the asset, all else equal. It is fair to ask, however, if country risk is relevant at all—in other words, whether country risk is diversifiable. If investors could avoid the risk of investing in any given country by investing in multiple countries, the risks and returns of which would balance each other out over time, then there would be no need to measure country risk at all. The empirical evidence on this point, however, suggests that country risk does exist because: are not, in fact, globally diversified but retain a “home bias” toward · investors their home market. So long as that is the case, the “marginal investor” in a particular stock is not likely to be diversified and so retains some exposure to country risk;23 and risks and returns do not fully balance out over time. As financial markets have become more interlinked in the last 30 years, there has been an increase

·

20  When the firm in question is small, a size premium may be added to the cost of capital. Various surveys of size premiums are available from, for example, Morningstar/Ibbotson or Duff & Phelps. There is evidence, however, that since its discovery, the size premium has ceased to be statistically significant. See, e.g., David Rogers, The Size Premium Is 35: Has It Grown Up?, Global Arb. Rev. (Oct. 16, 2015). Other practitioners dispute whether it ever existed. See, e.g., Aswath Damodaran, The Small Cap Premium: Where is the Beef?, Musings on Markets (Apr. 11, 2015); Clifford Ang, Why We Shouldn’t Add a Size Premium to the CAPM Cost of Equity, QuickRead (Feb. 15, 2017). 21  If the firm is privately held, a liquidity or marketability discount may also be applied to reflect the costs associated with a disposal of the investment. Discounts for lack of liquidity or marketability are usually a matter of judgment for valuation practitioners. Some practitioners apply a separate discount for minority interest in certain circumstances. 22  There is continued debate as to whether the premium should be applied equally to debt and to equity, or whether country risk premiums for equity should exceed those for debt. 23  René M. Stulz, Globalization, Corporate Finance, and the Cost of Capital, 12(3) J. Appl. Corp. Fin. 8 (1999) (cited in Aswath Damodaran, Country Risk: Determinants, Measures and Implications—The 2015 Edition 46 (July 2015)).

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in the correlation of returns across markets, particularly on the downside in times of market stress (i.e., when everything falls at once).24 It therefore appears that there is a non-diversifiable element of country risk. Country risk is not, however, a “bucket” into which the agnostic analyst can dump all risks that are not easily quantifiable. Rather, care should be taken to exclude identifiable risks that are diversifiable, or which may be quantifiable in expected cash flows. If an investor seeks exposure to a certain country, it exposes itself to certain risks that are a feature of investing in that country and which cannot be avoided other than by not investing in that country. The next section deals with the various approaches to measuring those risks. 1.4 The Measurement of Country Risk There are many measures of country risk available from private companies or governmental bodies that perform risk analyses of countries around the world. For example, the Economist Intelligence Unit provides assessments of country risk both overall and across a number of different categories. For each category of risk, a country is assigned a risk rating of between A and E and a risk score of between 1 and 100.25 In contrast, the OECD classifies countries for risk on a scale from 1 to 7.26 Rankings and scores of this type, however, are not directly useful for the purposes of valuation because they cannot be used in the CAPM. There have also been a variety of surveys over the years that have sought to identify the values that investors place on country risk. For example, since 2010, the IESE Business School has conducted an annual survey of academics, analysts, and corporate managers about the market risk premium that they

24  Li Yang et al., International correlations across stock markets and industries: Trends and patterns 1988–2002, 16(16) Appl. Fin. Econ. 1171–83 (2006); Clifford A. Ball &. Walter N. Torous, Stochastic correlation across international stock markets, 7 J. Empirical Fin. 373–88 (2000); François Longin & Bruno Solnik, Extreme Correlation of International Equity Markets, 56(2) J. Fin. 649–76 (2001). 25  For example, according to The Economist Intelligence Unit, Australia has a risk rating of A and a risk score of 14, China has a risk rating of C and a risk score of 44, and Venezuela has a risk rating of D and a risk score of 80. See The Economist Intelligence Unit, Country, http://country.eiu.com/All. 26  For example, according to the OECD, China has a risk classification of 2 and Venezuela has a risk classification of 7. See OECD, Country Classifications (June 23, 2017), https://www .oecd.org/tad/xcred/cre-crc-current-english.pdf. The OECD does not provide risk classifications for high income OECD or non-OECD Euro area countries.

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use in a range of countries.27 In principle, the excess market risk premium for Country A over Country B provides evidence of the quantum of country risk. The survey evidence suggests that practitioners consider that country risk exists. Actual proof of country risk, however, must be derived from empirical evidence. The five general approaches taken in the calculation of country risk premiums in the financial literature are set out below. 1.4.1 International CAPM There are several variations of the international CAPM model. In one version, the returns of individual assets are regressed against the world market to identify their own beta. In this model, there would be no need for a country risk premium as it is embedded in the beta of individual stocks. If country risk premiums were present, emerging market companies should have higher betas than mature economy companies. In an alternative version, just as an individual stock’s behavior can be assessed in relation to the market, a national stock market can be assessed in relation to the “world market.” This version of the model requires two betas, one based on the returns of a national market relative to the world market and one based on the asset’s returns against its national market. The country beta in the model may be used as a measure of country risk. In a further variation, Fama & French proposed a multi-factor CAPM in which the behavior of multiple factors is used in the analysis.28 An elaboration of Fama & French’s approach was suggested by Bekaert & Harvey, in which the behavior of markets was segmented by regions.29 Multifactor models of this 27  The number of countries varies from one year to another. For example, in 2015, there were 41 countries; in 2016, 71 countries. See Pablo Fernández et al., Market Risk Premium used in 71 Countries in 2016: a survey with 6,932 answers (May 9, 2016), http://didattica.unibocconi .it/mypage/dwload.php?nomefile=MRP2016_Fernandez20170213193256.pdf. 28  Eugene F. Fama & Kenneth R. French, Common risk factors in the returns on stocks and bonds, 33 J. Fin. Econ. 3, 55 (1993). In the original Fama & French model, there were two additional factors, namely the incremental returns of small companies in excess of the returns on large companies (i.e., a size premium) and the incremental returns of high book-to-market ratio companies (“value stocks”) over low book-to-market ratio companies (“growth stocks”). The persistence of these excess returns is not universally accepted, particularly on a risk-adjusted basis. In 2015, Fama & French added two further factors to the model related to profitability and investment, set out in Eugene F. Fama & Kenneth R. French, A five-factor asset pricing model, 116 J. Fin. Econ. 1 (2015). 29  Geert Bekaert & Campbell R. Harvey, Time-varying world market integration, 50(2) J. Fin. 403 (1995).

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type are time-consuming and costly to implement. Despite their theoretical appeal, therefore, data regarding their effectiveness is difficult to come by and practitioners often prefer a simpler approach.30 1.4.2 Credit Risk Models Credit risk models, such as the one proposed by Erb, Harvey, and Viskanta, assume that credit ratings are a proxy for country risk and that a numerical credit risk score can be regressed against country stock market returns to yield a measure of country risk.31 The authors analyzed returns from 47 markets to derive a relationship between credit risk ratings and market returns, which they then applied to 88 other countries for which insufficient stock market data existed.32 Credit risk models rely on a relatively small sample of data from countries with adequately efficient markets but low credit ratings to make inferences about the risks of investing in other countries with similarly low credit ratings but no efficient markets. Although the ability to make inferences about countries without good quality stock market data is one of the appealing aspects of the approach, the actual data sample on which the inferences are based is quite small. In addition, a credit risk score is based on a survey of bankers or the opinion of an analyst rather than being ground out in financial markets by participants using their own money and judgment. Like survey data, it is therefore exposed to an element of subjectivity. 1.4.3 Sovereign Spread Models Other practitioners have proposed that a premium tied to differences in government bond yields should be used as a measure of country risk. With respect to government securities, there are three potential sources of evidence about such premiums: i.

Foreign currency denominated bond markets: for example, if 10-year U.S. treasury bonds yield 1.5% and the 10-year U.S. dollar bonds of a foreign country yield 4%, then one measure of the country risk premium would be 2.5% (i.e., 4% minus 1.5%).

30   See, e.g., Damodaran, supra note 23, at 49 (Table 15). This shows that, against the global market, large Indian and Brazilian companies (counter-intuitively) have lower betas (against the global market) than large American or Japanese companies. Evidence supporting the accuracy of the other versions of the model is sparse. 31  Claude Erb et al., Expected Returns and Volatility in 135 Countries, J. Portfolio Mgmt. 46 (1996). 32  Morningstar/Ibbotson’s annual cost of capital report has adopted a similar approach.

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ii.

Credit Default Swaps (“CDS”) market spreads: CDS trade at prices that reflect the cost of insuring against default on the part of the issuer. For example, if the cost of insuring US$10 million of bonds issued by a foreign country against default is US$200,000 a year, then the CDS market spread for the foreign country would be 2%. iii. Credit ratings: issued by Moody’s, Standard & Poor’s, or Fitch may be used to infer sovereign spreads for countries that do not issue foreign currency denominated debt or for whom CDS are not traded. In such cases, the country risk premium is assumed to be equal to the premium (as calculated by either of the two methods immediately above) of the bonds of a country (or sometimes a corporation) with the same credit rating.

Each of these approaches yields what is known as a “sovereign default spread.” There is debate as to whether sovereign default spreads, however measured, are an appropriate method of measuring the country risks faced by investors. While the risk of sovereign default may be relevant to the returns of foreign investors who have lent to governments, the consequences of sovereign default for investors in other asset classes such as equities, natural resources, or real estate are uncertain. It is also likely that those other investors face different risks than investors in government bonds. Those risks might be higher or lower, in the aggregate. Most of the time, sovereign default spreads seem likely to understate the actual risks to which investors in private sector assets are exposed; in contrast, when a sovereign faces imminent default, or is actually in default, the sovereign default spread may rise steeply to levels that probably exceed a private investor’s actual risk.33 Although they are widely used as a measure of country risk, sovereign default spreads seem unlikely to be well-correlated with the risks faced by investors in other asset classes. 1.4.4 Relative Standard Deviation Approaches A further way of considering a foreign investor’s potential risks may be to compare the premium for risk demanded by the foreign country’s stock market to 33  The spike is caused by uncertainty over the terms of any restructuring of the sovereign’s debt. Past restructurings have required investors to incur losses of less than 10% to more than 90% of the face value of their bonds. See Sebastian Edwards, Sovereign Default, Debt Restructuring and Recovery Rates: Was the Argentinean “Haircut” Expensive? (NBER, Working Paper No. 20964, Feb. 2015), http://www.anderson.ucla.edu/faculty/sebastian .edwards/Papers%20Files/Sovereign%20Default,%20Debt.pdf. The effects of government default on private businesses can vary widely depending on the government’s response to its inability to meet its obligations to creditors.

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the premium for risk demanded in a mature economy’s stock market.34 The extent of the foreign country’s greater risk, if any, can be assessed by measuring the volatility of its stock market, expressed mathematically as the standard deviation of returns, in relation to the volatility of a mature equity market, such as that of the U.S.35,36 The resulting ratio is then multiplied by the mature equity market risk premium, as shown in the equation below. Relative Standard Deviation = MRP us ×



σForeign country σus

A hybrid method compares the standard deviation of returns on foreign currency equities to the standard deviation of returns on foreign currency bonds and multiplies the result by the sovereign default spread. The calculation implicitly assumes that investors have a choice between local currency bonds and local currency equity investments rather than, as in the previous calculation, a choice between foreign equities and U.S. equities. The advantage of this approach is that it does not require any currency conversion.

σEquity

Country risk premium = Sovereign default spread  × σ Bonds

1.4.5 Implied Equity Market Risk Premium Lastly, one can directly estimate the implied equity market risk premium for the foreign country and compare it to the implied equity market risk premium for, say, the U.S. to derive a measure of country risk premium. The implied equity market risk premium is derived at any given date from the current value of a country’s stock market given expectations about future dividends and riskfree rates. This approach is advocated by the investment bank J.P. Morgan.37

34  This is known as the “relative volatility approach.” One key assumption made by these methods is that the relatively short history of stock market returns observable in these markets is reflective of the long-run risks of investing there. 35  Note that both sets of returns should be expressed in a common currency, such as U.S. dollars. 36  As noted above, standard deviation is a measure of the variability, or dispersion, in a set of data, in comparison to the central tendency, average, or “mean” of the set of data. 37  J.P. Morgan, Time to rethink hurdle rates: Understanding political risk premia in a new financial environment (Jan. 2012), https://www.jpmorgan.com/jpmpdf/1320693982840.pdf.

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1.4.6 Discussion There is a lack of detailed empirical research to identify which of these methods, if any, is superior and/or the conditions in which one method should be preferred over another. The criticisms of the various models may be grouped into three main categories: use of historical data, causation versus correlation, and data quality. As to the use of historical data, three of the models—international CAPM, credit risk models, and relative standard deviation—rely on analysis of historical market data. In contrast, methods relying on sovereign spreads or implied equity market risk are forward-looking. The use of historical data may be problematic because the past behavior of foreign market returns in relation to, for example, U.S. returns is not necessarily a good guide to investors’ expected or required returns in foreign markets today. That is because the future pattern of either U.S. or foreign returns may have changed. Indeed, it might be unusual if the relationship stayed unchanged.38 As to correlation and causation, the mere existence of a statistical relationship between historical foreign and U.S. stock market returns does not imply that there is a causal relationship between them, let alone one that survives the period in which it is observed. For example, in times of market stress, there is evidence that returns cluster together and become more correlated than they are at other times. In another example, emerging markets with very different economies often rise and fall together cyclically, a cycle that depends in part on policies and market conditions adopted in developed economies. This cycle arises independently of country risk in emerging markets but affects the market data used to make calculations and inferences about it. For methods that seek to infer country risk from credit ratings, it is not clear that the factors measured by credit ratings are determinative of country risk even if they are correlated with it. As to the use of appropriate data, the main concerns are that the market must be reasonably efficient, the economy must be reasonably diversified, the currency must be reasonably stable over time, and the data used must be reliable. 38  This issue is part of a wider debate about whether or not investors’ expectations are stable over time, which they must be if historical returns are to be a good guide to current expected future returns. If they are not stable, risk premiums change over time and use of historical data may be inappropriate. If the historical data series is relatively short, which it may be for many emerging economies, a further concern is the potential statistical error of the sample estimates of returns.

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As to efficiency, the market being studied must possess sufficient liquidity to enable investors to enter and exit quickly without the market moving against them, it must be sufficiently large to be investable,39 there must be few significant capital controls, and there must be few restrictions on the ownership of shares or the control of companies. Many developing countries, even if they have stock or bond markets, are likely to fail one or more of these criteria. The pitfalls of inefficiency are illustrated by empirical evidence relating to the international CAPM, which indicates that some Central American countries’ securities markets have been less risky than the US.40 It may be surmised, however, that their lower volatility (or standard deviation) reflected lower liquidity (i.e., less trading and fewer changes in market prices) rather than reduced risks of doing business. As to the diversification of the economy, if a country is very exposed to commodity prices, equity returns may be volatile because commodity prices are volatile and not because country risk is elevated. In those circumstances, it can be difficult to isolate the effect of commodity price movements from the factors driving risk in the country itself. As to currency, returns expressed in dollars are themselves subject to volatility in the foreign country’s exchange rate against the U.S. dollar, which may reflect U.S. government or U.S. Federal Reserve policies as well as those of the foreign country. It is difficult, however, to control for this effect or to determine the extent to which the present exchange rate reflects U.S. dollar weakness (or strength) or foreign currency strength (or weakness). As to data quality, the observation applies principally to the implied market risk premium approach, which relies on estimates of expected future dividend payments. If analyst coverage is thin, estimates may be biased by the views of one or two analysts, leading to a misestimation of the market premium implied by current prices. In addition, practitioners ought to take note of the context of the valuation at the relevant date—including, inter alia, its macroeconomic environment, industry, risk exposures and, perhaps, the owner’s circumstances—before deciding on the appropriate measure of the country risk premium. Finally, it 39  “Investable” in this context signifies that it must be possible to invest in the market in sufficient volume to construct a balanced portfolio. For example, if Company A’s shares represent 10% of the market, it should be readily possible to construct a reasonably-sized portfolio containing this weighting of Company A’s shares. 40  Damodaran, supra note 23, at 62–3. Although the observations shown are limited to the relatively short period over which Professor Damodaran performed his analysis, the results of the analysis are not consistent with the international CAPM.

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should be recognized that every estimate of country risk premium is subject to measurement error and thought should be given to the extent to which each estimate might contain the lowest errors in light of the facts and data available in a particular case. Given the above, it is apparent that the choice of an appropriate measure of country risk is a matter of judgment that depends on the available data, the date of valuation, and the overall circumstances in which the valuation is being made. If sufficient data is available, it may be appropriate to use more than one of these methods and to draw appropriate conclusions based on conditions prevailing in the relevant country and in financial markets at the date of measurement. 1.5 Applying Country Risk in Valuation There are three main points to address when applying country risk in a discounted cash flow forecast, namely: that cash flow forecasts reflect all possible outcomes weighted by · ensuring their relative likelihood. Giving effect to this will require estimates of the

likelihood and possible financial effect of all sources of uncertainty arising from an investment in a particular country; adding a country risk premium that reflects the incremental non-­diversifiable risks associated with an investment in that country, relative to a mature economy; and assessing the exposure of the asset to diversifiable country risks in the country.

· ·

Thought should be given to all three points, which could be relevant to any given valuation, although care should be taken to account for different risks appropriately. As to the first point, an asset’s projected cash flows should reflect the central tendency of expected outcomes as a matter of good practice. For example, if there is a 60% chance of a change of government and the opposition party has said it will increase taxes, the weighted average effect of the potential tax change can be reflected in the investor’s expected cash flows. In principle, a change in taxes causes a one-off change in cash flows and this can be easily incorporated into a financial model. Through casual observation, one can see that public markets follow such a process. For example, as elections approach in a country, stock prices may move up or down in anticipation of the victory of one party or another and the associated policies being implemented. Once the election result is confirmed

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and uncertainty is removed, there will be a one-off removal of the probability of an alternative result, which causes a sudden rise or fall in the market. Markets behave in this way because they price in the expected impact of potential outcomes and the probability that they will occur. From the above, it is implicit that probability-weighted expected outcomes are incorporated in cash flows and not in the country risk premium. A weighted average projected outcome, however, is silent about the potential dispersion of results, which is reflected in the discount rate applied to the cash flows. As to the second point, non-diversifiable risks should be included in the country risk premium as an adjustment to the discount rate.41 In principle, the country risk premium should be added to both the cost of debt and the cost of equity of the asset being valued.42 There are, however, three ways in which the premium can be applied, namely: one might add the country risk premium to the cost of capital, im· first, plying that it should be added equally to the cost of debt and the cost of equity.43 A further implication of this approach, characterized by Professor Aswath Damodaran as the “bludgeon approach,”44 is that all investments in a given country are equally exposed to country risk; second, a refinement of this approach (also suggested by Professor Damodaran) in those cases when a sovereign default spread is used as a proxy for country risk, is to add the sovereign default spread to the cost of debt and the sovereign default spread multiplied by a “relative equity market volatility” factor to the cost of equity.45 The assumption being made is that equity is more exposed to country risk than debt; or

·

41  As noted above, the risks present in sovereign default spreads and equity market risk premiums may not be the same. 42  Where an asset is already paying market-determined interest rates in a foreign currency, it may be appropriate to assume that these incorporate a country risk premium. 43  The CRP may be accounted for in the cost of capital using the Weighted Average Cost of Capital (“WACC”). The formula for calculating the WACC is: WACC = (Cost of debt + CRP) × (Debt/Total Capital) × (1 – Taxes) + (Cost of equity + CRP) × (Equity/Total Capital). 44  Aswath Damodaran, Measuring Company Exposure to Country Risk: Theory and Practice 17 (Sept. 2003), http://people.stern.nyu.edu/adamodar/pdfiles/papers/CountryRisk.pdf. 45  The factor is estimated as the volatility of the S&P Emerging BMI Index (an emerging markets equity index) divided by the volatility of the BAML Public Sector US Emerging Markets Corporate Plus Index (an emerging markets corporate bond index). Prior to 2015, Professor Damodaran estimated this factor to be 1.5. In 2016, it was 1.4 and, in 2017, 1.21.

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one might add the country risk premium to the mature market eq· third, uity risk premium before multiplication by the beta.46 The same approach

can be taken to calculating the cost of debt.47 This approach assumes that the investment is exposed to country risk to the extent that it is exposed to market risk. In other words, as market risk rises, country risk is also assumed to rise.

As to the third point—assessing the exposure of the asset to country risk— it is likely that some assets are more exposed to country risk than other assets. Viewed in this way, it may be seen that a country risk premium is the weighted average of the risk premiums of the economic activities within it. Let us say that an economy produces an equal value of two goods, namely, crude oil and telecommunications services. Crude oil is a global commodity that can be sold anywhere in the world for a price denominated in U.S. dollars. Producers are exposed to global economic conditions and the global supply of and demand for oil, of which their host country is likely to represent only a small portion. In contrast, telecommunications are largely consumed locally, usually priced in local currency, subject to domestic regulation, and exposed to the national economic cycle of the country. In this example, it is apparent that the country risk exposure of crude oil is lower than the country risk exposure of telecommunications. In this simplified example, the country risk premium of the country would be the average of the country risk premiums for oil and telecommunications. Professor Damodaran suggests that the country risk premium could be multiplied by a factor (which he refers to as “lambda”), that expresses the exposure of an individual asset to country risk.48 One way he suggests of calculating lambda is to consider the proportion of sales generated outside the country.49 Let us assume that 80% of a country’s production is consumed domestically, while 20% is exported. If an oil producer in that country sells only 60% 46  The Cost of Equity is calculated as follows: Cost of equity = Risk-free rate + Equity Beta (Mature Market Equity Risk Premium + Country Risk Premium). 47  The Cost of Debt is calculated as follows: Cost of debt = Risk-free rate + Debt Beta (Credit risk premium + Country Risk Premium). 48  The Expected Return is calculated as follows: Expected Return = Risk-free rate + Beta (Mature Market Equity Risk Premium) + Lambda (County Risk Premium). 49  Other ways might be the proportion of production located inside the country or the extent to which input costs or output prices might be hedged.

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of its output locally, its lambda would be 0.75 (= 60%/80%); if a telecommunications company in that country sells 96% of its output locally, its lambda would be 1.2 (= 96%/80%). If the country risk premium were 5%, therefore, the oil refinery’s country risk premium would be 3.75%, while the telecommunications company’s would be 6%.50 Professor Damodaran’s logic in applying a factor to measure an asset’s exposure to country risk is intuitively reasonable but there is no accepted way to calculate such a factor or empirical evidence that one method of calculation is superior to any other, suggesting that the approach taken should reflect the circumstances of each case. Professor Damodaran’s “lambda” might also be diversifiable: a diversified investor would be presumed to be exposed to the (weighted average) country risk premium for the country as a whole rather than a sector- or asset-specific country risk premium. In general, the exposure of a given asset to country risk is likely to be a function of the location of customers, the location of production, and the availability and use of risk-management products, such as commodity price hedges and political risk insurance. The actual exposure of an asset and its owner to country risk must be carefully considered in each case. To summarize, therefore, a prudent analyst should: to incorporate all possible outcomes, weighted by their relative likeli· seek hood, directly into cash flows by means of careful scenario analysis; the most appropriate assumptions to use when incorporating the · identify country risk premium into the discount rate; and whether it is possible to identify the extent to which an asset is · consider exposed to country risk and, if it is, to apply a reasoned factor (or range of factors) to reflect its exposure.

As with other aspects of country risk, an expert should be prepared to explain to an arbitral tribunal why the approaches and methods chosen are appropriate to the facts of the case in question. 2

Country Risk in Investment Arbitration

2.1 Legal Principles Relating to Country Risk Country risk may be relevant to a valuation in any cross-border dispute in which the claimant’s loss is calculated by reference to lost future cash flows at 50  The country risk premiums are calculated as follows: 3.75% = 0.75 × 5%; 6% = 1.2 × 5%.

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the date of valuation. In principle, the dispute might relate to an expropriation (lawful or unlawful), to a breach of the fair and equitable treatment standard, to a contractual breach (including in a commercial contract), or in any other circumstances where the claimant may have suffered a diminution in or loss of value.51 When conducting a valuation in a legal context, country risk is ordinarily measured as at the date of valuation. In cases of lawful expropriation, the date of valuation is normally taken to be a date “immediately before the time at which the taking occurred or the decision to take the asset became publicly known,” because knowledge of the impending expropriation will itself affect the value of the asset. This principle is often explicitly set out in international investment agreements, has been widely accepted in arbitral awards, and is consistent with World Bank Guidelines.52 For that reason, in cases of lawful expropriation, it is normally the case that the valuation includes the country risk premium at a point in time immediately prior to the date of expropriation. For example, the tribunal in Venezuela Holdings B.V. v. Venezuela held (based on Article 6(c) of the NetherlandsVenezuela BIT) 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.53 In cases of unlawful expropriation, or other breaches of an investment treaty, the claimant’s loss might also be assessed at the date of the award. Legal practitioners disagree, however, as to whether the claimant’s compensation should 51  This section offers the observations of a financial expert. I understand that past awards have no precedential value and that any conclusions drawn from them should be treated with caution. 52   I rmgard Marboe, Calculation of Compensation and Damages in International Investment Law ¶¶ 3.254–3.255 (2009). See also World Bank, Guidelines on the Treatment of Foreign Direct Investment, Guideline IV(3), 31 I.L.M. 1379, 1382 (1992) (cited in Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law 274 (2008)). 53   Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award, ¶ 365 (Oct. 9, 2014).

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be calculated as its loss at the date of breach and brought to the date of award through the addition of pre-award interest, or whether the claimant’s loss should be assessed at the date of award,54 or whether, in fact, claimants have a choice between the two.55 The actual date of valuation in other cases, such as international commercial arbitration, may depend in large part on the facts and applicable law of an individual case. Tribunals often determine the date of expropriation as the point in time when the claimant has been fundamentally deprived of its property rights. As the tribunal in International Technical Products v. Iran put it: “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.”56 This is an assessment that must depend on the facts and, in cases of indirect or “creeping” expropriation, tribunals appear to have exercised some discretion in their selection of the date of valuation.57 For example, the tribunal in Phillips Petroleum v. Iran noted that in an indirect expropriation: [t]he Tribunal … must determine [the date of taking] on its own, based on the facts of the case. The Tribunal has previously held that in circumstances where the taking is through a chain of events, the taking will not necessarily be found to have occurred at the time of either the first or 54   A DC Affiliate Ltd. & ADC & ADMC Mgmt. Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, ¶ 497 (Oct. 2, 2006); ConocoPhillips et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits, ¶¶ 343, 401 (Sept. 3, 2013); Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award, ¶ 352 (Feb. 6, 2007). Those advocating a choice of valuation dates say that it is necessary to prevent the unjust enrichment of the respondent and/or to give effect to the principle of restitution by restoring the injured party to the financial position it would have occupied absent the illegal act(s) or omission(s) at the date of the award. 55   Yukos Universal Ltd. (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award, ¶ 1763 (July 18, 2014). 56   Int’l Technical Products Corp. & ITP Export v. Gov’t of the Islamic Republic of Iran, Award, 9 Iran-U.S. Cl. Trib. Rep. 206, 240–1 (1985). 57  An indirect expropriation is one in which there is a number of acts or omissions, none of which is sufficient on its own to constitute an expropriation, but which together have that effect. See, e.g., Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, ¶¶ 20.22, 20.26 (Sept. 16, 2003); Siemens v. Argentina, supra note 54, ¶ 263; Pope & Talbot Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Interim Award, ¶ 83 (June 26, 2000); Phillips Petroleum Co. Iran v. Islamic Republic of Iran & National Iranian Oil Co., Award, 21 Iran-U.S. Cl. Trib. Rep. 79, 100 (1989); Compañía del Desarrollo de Santa Elena, S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Award, ¶ 76 (Feb. 17, 2000).

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the last such event, but rather when the interference has deprived the Claimant of fundamental rights of ownership and such deprivation is “not merely ephemeral”, or when it becomes an “irreversible deprivation.”58 The tribunal in Compañía del Desarollo de Santa Elena v. Costa Rica held a similar view, namely that the assessment of loss should be conducted “as of the date on which the governmental ‘interference’ has deprived the owner of his rights or has made those rights practically useless.”59 It further noted that “[t]his is a matter of fact for the Tribunal to assess in the light of the circumstances of the case.”60 It appears to be generally accepted that claimants are not protected from exposure to general business risks by the operation of international investment agreements. Thus, an investor entering a risky foreign country is presumed to know at the date of investment that the foreign country is a riskier place to do business than, say, the United States, and that its investment is exposed to the ordinary risks of doing business in that country. In principle, therefore, the value of the investment at a given date should reflect the general business risks pertaining to the host State of the investment. As the tribunal in AMT v. Zaire put it, it would unjustly enrich investors in risky countries if they were treated like investors “constructing a castle in Spain or a Swiss chalet in Germany” just because they believed (rightly or wrongly) that the risks of investing in a particular country were low.61 The tribunal in CMS v. Argentina explicitly pointed out that international investment agreements offer some, but not total, protection against government actions that affect the value of the investment: The crisis had in itself a severe impact on the Claimant’s business, but this impact must to some extent be attributed to the business risk the Claimant took on when investing in Argentina…. Such effects cannot 58   Phillips Petroleum v. Iran, supra note 57, at 116 (internal citation omitted). See also Amoco v. Iran, in which the tribunal selected a date of valuation of July 31, 1979, well in advance of the date of the final act of expropriation on January 8, 1980, although the claimant had lost effective control of the facility even earlier when oil exports ceased in November 1978. Amoco Int’l Fin. Corp. v. Gov’t of the Islamic Republic of Iran et al., Award, ¶¶ 181–2, 15 Iran-U.S. Cl. Trib. Rep. 189 (1987). 59   Santa Elena v. Costa Rica, supra note 57, ¶ 78. See also Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award, ¶ 313 (July 14, 2006). 60   Santa Elena v. Costa Rica, supra note 57, ¶ 78. 61   Am. Mfr. & Trading (AMT), Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award, ¶ 7.15 (Feb. 21, 1997).

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be ignored as if business had continued as usual. Otherwise, both parties would not be sharing some of the costs of the crisis in a reasonable manner and the decision could eventually amount to an insurance policy against business risk, an outcome that, as the Respondent has rightly argued, would not be justified.62 Put another way, investment agreements do not protect against all manner of governmental actions (including lawful expropriation); in that regard, foreign investors must be presumed to be aware of the risk of adverse governmental actions (among other things) at the date of their investment.63 Nor are foreign investors protected specifically against “political risks.” As the tribunal in Tidewater v. Venezuela stated: 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.64 Although investors are presumed to be exposed to general business risks, there has been debate as to whether investors should be shielded from a State’s propensity to expropriate and, if so, how such a propensity ought to be excluded from the assessed country risk premium. The tribunal in Gold Reserve v. Venezuela agreed with the claimant on this point, finding that it would not be “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.”65 In this respect, the Gold Reserve tribunal was following in the footsteps of the earlier case of Phillips Petroleum v. Iran, which held that the determination of the fair market value of an asset must:

62   C MS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award, ¶ 248 (May 12, 2005). 63   See also Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award, ¶ 184 (Mar. 13, 2015). 64   Id., ¶ 186. 65   Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 841 (Sept. 22, 2014).

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involve an evaluation of the effect on the price of any other risks likely to be perceived by a reasonable buyer at the date in question, excluding only reductions in the price that could be expected to result from threats of expropriation or from other actions by the Respondents related thereto.66 More recently, the tribunal majority in the Saint-Gobain Performance Plastics v. Venezuela case, however, endorsed the approach adopted in the Tidewater award.67 The tribunal majority also went further than the Tidewater tribunal in ruling that normative considerations were not relevant to an assessment of fair market value if they would not have been taken into account by a willing buyer: The notion of fair market value … requires the elimination of the specific measure that was subject of the Tribunal’s finding on liability, i.e., in this case Respondent’s failure to comply with its obligation to pay prompt and adequate compensation to Claimant. However, it does not require, and in fact does not allow for, a correction of the economic willing-buyer perspective on the basis of normative considerations. … Consequently, the majority of the Tribunal agrees with Respondent that the country risk premium must reflect all political risks associated with investing in Venezuela, including the alleged general risk of being expropriated without payment of (sufficient) compensation.68 In a separate Concurring and Dissenting Opinion, Judge Charles Brower disagreed with this finding and stated that: “[t]o reduce the recovery to the injured Claimant by applying a ‘fair market value’ that incorporates the very risk of which the Claimant purportedly is being relieved by the Tribunal is to deny the Claimant the full compensation to which it is entitled.”69

66   Phillips Petroleum v. Iran, supra note 57, at 123. 67   Saint-Gobain Performance Plastics Europe v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/13, Decision on Liability and Principles of Quantum, ¶¶ 717–23 (Dec. 30, 2016). Despite the tribunal’s determination of liability and economic factors for assessing damages, the tribunal refrained from fixing a specific amount of compensation, opting instead to give the parties two months to reach an agreement on the sum of damages. 68   Id., ¶¶ 719, 723. 69   Saint-Gobain Performance Plastics Europe v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/13, Concurring and Dissenting Opinion of Charles Brower, ¶ 3 (Dec. 30, 2016).

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The fact that the investment was made after President Chávez came to power may have indicated to the tribunal majority that the investor accepted an elevated level of country risk from the outset. It is apparent, nonetheless, that no consensus on the issue has yet been reached. An alternative might be that the risk of future expropriation should be excluded only from the valuation of investments made prior to the State’s adoption of a nationalization policy, of which later investors may be presumed to be aware. The tribunal in Flughafen Zürich A.G. y Gestión e Ingeniería IDC S.A. v. Venezuela appears to support such a proposition, noting that: “[a] Government that through the adoption of new political attitudes, adopted after the investment was materialized, which increases the country risk, cannot benefit from a wrongful act attributable to it, that reduces the compensation payable.”70 This may imply that, even if the valuation date is held to be at a later date, the appropriate measure of country risk premium might be that pertaining at the date of investment or at least at a date prior to the government adopting “new political attitudes” that increase country risk. In the Flughafen case, the tribunal found that the investment had been held for only a brief period between the date of investment and the date of expropriation/valuation and, therefore, that the quantification of the country risk premium would not have been significantly altered between those dates. The comment above notwithstanding, therefore, the tribunal used a measure of country risk at the valuation date (in this case, the day the investors lost control of the business). If an earlier, lower measure of country risk premium were used, the effect would be an increase in the amount that would be awarded to the claimant, all else equal. Based on the foregoing discussion, two additional considerations from an economic perspective are warranted. First, although it is mathematically simple to alter the country risk premium independently from the rest of the data used in a DCF projection, a valuator would need to be satisfied that the alteration of the country risk premium did, in fact, leave all else equal without violating the integrity of the valuation. In the author’s view, any assessment would need to take account of the facts in each case. Second, it is very difficult empirically to break down a measure of country risk into the constituent elements that underpin it at a given date. As of the date of writing, the author is unaware of any publicly available study that has sought to identify either the factors relevant to country risk or the extent to which they contribute to it. Even if it were possible to identify all the 70   Flughafen Zürich A.G. & Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, Award, ¶ 905 (Nov. 18, 2014) (original text in Spanish).

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contributing factors underlying country risk, the task of identifying the specific impact of the acts complained of on the value of an asset may always require an element of judgment from experts and tribunals. In sum, the awards to date offer a range of potential solutions to the question of whether to exclude from country risk the impact of general expropriation risk. Present solutions respond to the evidence presented to tribunals as to the appropriate valuation standard, the factual circumstances, and the assessed date for measuring country risk. As with other damages issues, presented with different evidence, future tribunals might continue to reach different conclusions on this central issue. 2.2 Tribunals’ Assessments of Country Risk The number of publicly available awards in which country risk has been a factor is relatively small, whether because potentially relevant claims were dismissed at the jurisdictional or merits phase of proceedings, or because the tribunal’s decision on quantum did not rely on a DCF valuation, or because the issue was not raised by the parties. One of the earliest awards in which a country risk premium was used in a DCF calculation and accepted by the tribunal was CMS v. Argentina in 2005. In that case, the claimant’s expert used a country risk premium of 5.21%, calculated as the incremental premium over the interest rate on U.S. Treasury bonds of debt issued by TGN (the firm in which CMS had invested).71 Although the tribunal did not agree that the premium should be applied equally to both debt and equity, an incremental premium of 1.05% was incorporated in the discount rate adopted by the tribunal, at least part of which reflected the tribunal’s perception of country risk at the date of valuation.72 More recent tribunals have adopted country risk premiums calculated using a variety of approaches. A summary of the rates used in those cases is shown in Table 9.1. It should be noted that the country risk premiums shown are unlikely to be comparable to one another given that they were rendered at different dates and concern different countries and industries. It is apparent from the table that:

71  I understand that the risk premium was sourced from Professor Damodaran’s website, which relied on a default risk spread approach, multiplied by 1.5. See Riskless Rates and Risk Premiums, Damodaran Online, http://people.stern.nyu.edu/adamodar/pdfiles/ valn2ed/ch7.pdf. 72   C MS v. Argentina, supra note 62, ¶¶ 454–5.

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have been presented with—and have accepted—country risk pre· tribunals miums reliant on a variety of different approaches;73 be inferred, perhaps unsurprisingly, that there is no generally accept· itedmay approach to the calculation of country risk premiums in investor-State

arbitration, on the part of either experts or tribunals; and tribunals have generally preferred respondents’ estimates to the (frequently much lower) risk premiums put forward by claimants, reflecting a consensus that BITs do not serve to protect claimants from the ordinary risks of doing business in a particular country.74

·

There are two occasions shown in the table in which tribunals chose not to use the respondent’s country risk premiums. First, in the Gold Reserve case, referred to above, the tribunal sought to exclude the risk that a State might have a propensity to expropriate from its assessment of the “genuine risks” faced by the business.75 Accordingly, it selected a rate between the claimant’s and respondent’s estimates based on an equity analyst’s estimate from around the date of valuation.76 Second, in EDF v. Argentina, the tribunal agreed fully with claimant’s expert. In that case, the claimant’s expert said that the sovereign default spread approach was unreliable in times when a sovereign was either approaching or in default as Argentina was at the relevant valuation dates. In those circumstances, the tribunal agreed with claimant’s expert that a relative standard deviation approach was superior to one based on sovereign default spreads. If it were agreed that investors are exposed to general business risks, notwithstanding the presence of BITs, expert estimates of country risk premium may converge to some degree, thereby lending greater predictability in this area.

73  Other sources have also been relied upon, but the awards do not always describe them in detail. 74   Tidewater v. Venezuela, supra note 63, ¶¶ 184–6; Saint-Gobain v. Venezuela, supra note 67, ¶¶ 705, 723. 75   Gold Reserve v. Venezuela, supra note 65, ¶ 842. 76  The tribunal’s interpretation of the analyst report was subsequently challenged by the respondent. The tribunal later confirmed its original interpretation. See Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Decision Regarding the Claimant’s and the Respondent’s Requests for Corrections, ¶¶ 47–50 (Dec. 15, 2014).

258 Table 9.1

Searby Country risk premiums in ICSID awardsa

Claimant

Respondent

Industry

Valuation Date

Claimant’s CRP

Lemire EDF Flughafenb Venezuela Holdingsc Gold Reserve

Ukraine Argentina Venezuela Venezuela Venezuela

Radio Utilities Airports Oil and gas Mining

01/2001 12/2001 12/2005 06/2007 04/2008

0% 4.8% 0.95% 0% 1.5%

Tidewaterd

Venezuela

Transport

05/2009

1.5%

OI European Group Quiborax

Venezuela Bolivia

Glass Mining

10/2010 06/2013

2% 2.67%–4.24%

Rusoro

Venezuela

Mining

08/2016

1.5%

Saint-Gobain

Venezuela

Chemicals

05/2010

4.5%

a Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award (Mar. 28, 2011); EDF Int’l S.A. et al. v. Argentine Republic, ICSID Case No. ARB/03/23, Award (June 11, 2012); Flughafen Zürich v. Venezuela, supra note 70; Venezuela Holdings v. Venezuela, supra note 53; Gold Reserve v. Venezuela, supra note 65; Tidewater v. Venezuela, supra note 63; OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award (Mar. 10, 2015); Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award (Sept. 16, 2015); Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award (Aug. 22, 2016); Saint-Gobain v. Venezuela, supra note 67. b Claimant’s figure of 0.95% is identified as being the CRP that would give the same valuation result as the claimant’s actual assumption of a real 3% increase in wage costs. The author

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Measuring Country Risk in International Arbitration

CRP method used by Claimant’s Expert

Respondent’s CRP

CRP method used by Respondent’s Expert

Expert Relative Volatility Expert Expert Expert, citing “independent analysts” Expert

7.43% Not known 7.9% 11.1% 6.7%–16.4%

Sovereign default risk Not known JP Morgan, 2001–05 Not known Not known

Expert Expert

14.76% equity, 11.89% debt 6% 9.75%–17.61%

Expert

16.46%

Morningstar, cross-checked to sovereign default risk Sovereign default risk Sovereign default risk, Morningstar N/A

Sovereign spread

14.3%–15.4%

Morningstar / “bludgeon method” including 1.5 times multiple

Award

7.43% 4.8% 7.9% 9.3% 4% 14.75% 6% 9.75% N/A (DCF not relied on) 10.26%

understands that the claimant argued that the 3% increase in real wages was necessary to stave off labor disputes. c Inferred as the difference between the tribunal’s discount rate of 18% and the claimant’s discount rate of 8.7%. The tribunal did not explicitly state the country risk premium that it was using. Note that this was incorrectly referred to as a country risk premium of 18% in Tidewater v. Venezuela, supra note 63, ¶ 187. d The Tidewater decision was partially annulled on the grounds that the tribunal in that case had not appropriately incorporated the 14.75% country risk premium in its valuation. See Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on Annulment, ¶¶ 64–8, 186–91, 204, 218, 230 (Dec. 27, 2016).

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Current Uncertainties and Potential Solutions

Although there is little evidence as to how country risk is applied by investors to their investments at the time of making them, it is intuitively reasonable to assume that some countries have a riskier commercial climate than others. There is no consensus, however, as to how country risk should be measured or even which features of a country’s political system, economy, or business/ regulatory environment contribute most to it. In the author’s opinion, further empirical work is required: test for the existence of country risk, in its purely financial meaning as the · toincremental non-diversifiable risk associated with investing in a given State; to determine measures of country risk are most appropriate to use in · a given set of which circumstances; and to understand the sources of country risk and the relative contribution of · each source to each of the measures of country risk. From such analysis, it may be possible to identify the impact of expropriation risk and/or other political risks on country risk premiums.77 One of the issues likely to continue to frustrate analysis of country risk is that it is precisely those countries with the least developed financial markets that are likely to have the highest risk premiums and, so long as foreign investors have high perceptions of risk, foreign investment in them is likely to be constrained by investors’ risk aversion. Once a country has developed financial markets, by contrast, its investment risk will tend to reduce but by then it is too late to quantify and assess the factors leading to elevated country risk perceptions. Eventually, tribunals may clarify the appropriate date at which to measure the country risk premium, whether at the date of valuation (as in Venezuela Holdings v. Venezuela and Santa Elena v. Costa Rica) or before the time when a change in the stance of the government toward foreign investors became apparent (as alluded to in Flughafen v. Venezuela), and the circumstances in which it is appropriate to take each approach. Tribunals may also reach a firm

77  In principle, there is no reason why expropriation risk is non-diversifiable as it should be uncorrelated across countries. If that were so, an adjustment should be made to the cash flows and not to the discount rate. In practice, diversification may not take place—either in general or in the case of a specific investor—which may mean that expropriation risk is, in practice, included in the country risk premium in the discount rate.

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consensus on whether the impact of general expropriation risk on a given country risk premium should act to reduce claimants’ compensation. Until now, financial analysis has been hindered by an absence of empirical analysis. Today, however, the growth of capital markets around the world means that data is available for more countries than ever before. In addition, longer data series are available for existing countries. Finally, the development of broad databases (such as the World Bank’s Economic Indicators Database) means that financial data need not be considered in isolation from broader social indicators. As a result, it may be possible in the future to provide firmer evidence about country risk for a wider range of countries. A better understanding of the drivers of country risk may make its measurement less contentious, providing support for an emerging legal consensus as to its appropriate treatment in the context of investment disputes.

Chapter 10

Valuation Techniques for Early-Stage Businesses in Investor-State Arbitration Garrett Rush, Kiran Sequeira and Matthew Shopp Investments in early-stage companies and projects made up approximately one-third of investor-State arbitrations in recent years. Despite this prevalence, the valuation of early-stage investments is an area where there remains a gap between the valuation tools and techniques used in investor-State arbitration and those used in commercial settings. There is, therefore, a potential opportunity to bridge (or at least narrow) this gap by gaining a better understanding of the tools and techniques used by investors in a non-litigation context to value early-stage projects and businesses. These techniques include: scenario analysis, Monte Carlo simulation, real options analysis, and future-based valuation metrics. Valuation of investments in the commercial world is inherently forwardlooking—the value today is based on the returns the investor expects the project to earn in the future. The common element among the techniques we describe is that they enhance forward-looking projections by either accommodating more information, disciplining the process of making a projection, and/ or illuminating the degree of uncertainty associated with the projection, all of which may help legal practitioners to present a multi-faceted quantum case and tribunals to make better-informed decisions. To be clear, the suite of techniques used to evaluate early-stage investments is not a panacea. The tools and techniques in this Chapter will not be applicable in every instance; they also can have shortcomings, which we identify. Nonetheless, these methods could either be used in conjunction with other traditional valuation approaches, as reasonableness checks, or, in some cases, as standalone approaches. At a minimum, the value of these techniques for practitioners is the new perspectives they provide, the disciplined thinking they promote, and the questions they prompt. All investments have their own unique characteristics of varying relevance, and all arbitrations involve specific facts and circumstances that call for a unique combination of legal and economic considerations. However, we believe that broadening the set of financial and economic tools available to practitioners could improve the accuracy and reliability of damages in investor-State arbitrations involving early-stage investments. © koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_011

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The remainder of this Chapter is divided into three sections. In Section 1, we review the frequently cited international arbitration guidelines relevant to early-stage investment valuation. In Section 2, we introduce the tools and techniques used to value early-stage investments in commercial settings. Lastly, in Section 3, we offer a list of questions that can help practitioners evaluate the relevance of these tools and techniques. 1

Early-Stage Investments in Investor-State Arbitration: Guidelines and Applications

1.1 Applicable Guidelines An “early-stage investment” in the context of investor-State arbitration often means a business or investment that does not have a significant history of ongoing business operations, typically measured as two to three years, but may be as many as five. We conducted a review of 300 ICSID claims registered from 2009 to late 2016. This review revealed that nearly one-third of the arbitrations involved investments that meet the definition of “early stage.”1 The subject investments ran the gamut of geographies, industries, and investor type with no clear patterns. Table 10.1 below summarizes the results from this study. The significant proportion of early-stage investments in investor-State arbitrations is not surprising. By their nature, early-stage investments are prone to the types of situations where State actions could disrupt the investment’s operations or ownership: the election of a new government with its own priorities and relationships; a petroleum or mineral development license that results in a significant discovery; or a start-up company operating in a nascent industry where the regulatory frameworks are still developing. It seems likely that shared characteristics of early-stage investments—for example, minimal experience operating in the country, changing timelines, or in-process

1  Case awards and descriptions were drawn from the following websites: Investment Arbitration Reporter, http://www.iareporter.com/, ITALaw, http://www.italaw.com/ search/site, ICSID, Cases—Advanced Search, https://icsid.worldbank.org/apps/ ICSIDWEB/cases/Pages/AdvancedSearch.aspx, and UNCTAD, Investment Dispute Settlement Navigator (July 31, 2017), http://investmentpolicyhub.unctad.org/ISDS. Cases identified as early-stage are defined as those in which planned or approved projects lasted less than five years including those that never started (e.g., the State took over the project, the license was revoked, or the contract was cancelled), projects that were started but never finished construction or were at the planning stage (e.g., the investor could not secure necessary permits, the State stopped payments or cancelled the contract), and projects that finished development but never started operating.

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Table 10.1 ICSID arbitrations involving early stage investments (2009–2016) Year

Cases Reviewed

# Early Stage

% Early Stage

2016 2015 2014 2013 2012 2011 2010 2009 Total

26 51 39 43 50 39 27 25 300

5 11 15 13 12 14 7 9 86

19% 22% 38% 30% 24% 36% 26% 36% 29%

financing—will continue to expose them to the types of State actions that have historically led to investor-State arbitration claims. Because early-stage investments are likely to remain a significant proportion of investor-State arbitrations, it is important that practitioners—parties, counsel, independent experts, and tribunals—have a better understanding of the tools available to assess financial and valuation evidence for these types of investments. The debate around the valuation of early-stage investments in investor-State arbitration typically revolves around the degree of certainty in the quantum analysis. These debates often reference published guidelines. These frequently referenced guidelines for assessing compensation in international arbitration suggest a reluctance to award damages without sufficient certainty as to the future performance of the investment. For example, the ILC Articles explain that: [i]n cases where lost future profits have been awarded, it has been where any anticipated income stream has attained sufficient attributes to be considered a legally protected interest of sufficient certainty to be compensable. This normally has been achieved by virtue of contractual arrangements, or, in some cases, a well-established history of dealings.2

2  Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries [hereinafter ILC Draft Articles], art. 36, commentary 27 (2001), 2 Y.B. Int’l L. Comm’n 31, U.N. Doc. A/CN.4/SER.A/2001/Add.1 (Part 2) (internal citations omitted).

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As the ILC Articles indicate, future cash flows may attain a sufficient degree of certainty where there is a contractual relationship or a “well-established history of dealings.” While this guidance is not specific, it is commonly accepted that a certain number of years of historic operations with a certain consistency of cash flow would offer “sufficient certainty” under this guideline. Similarly, the UNIDROIT Principles of International Commercial Contracts reference a “reasonable degree of certainty” threshold for awarding damages related to “future harm.” Article 7.4.3 (Certainty of Harm) 1. 2. 3.

Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty. Compensation may be due for the loss of a chance in proportion to the probability of its occurrence. Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.3

Notably, while the UNIDROIT Principles reference a “reasonable degree of certainty” threshold, they also introduce the potential to formulate damages based on the “probability of its occurrence,” often referred to as a “loss of a chance.” The approaches we discuss in Section 2 combine the concepts of the probability of future profits with estimates of future profits and current investment value. For many practitioners, determining whether an early-stage investment has attained the necessary attributes for awarding damages based on the “reasonable certainty” of future profitability hinges on the notion of a “going concern.” This term is defined in the World Bank Guidelines on the Treatment of Foreign Direct Investment (the “WB Guidelines”): [A] ‘going concern’ means an 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….4 3  U NIDROIT Principles of International Commercial Contracts, art. 7.4.3 (2010). 4  World Bank, Guidelines on the Treatment of Foreign Direct Investment, in Legal Framework for the Treatment of Foreign Investment [hereinafter World Bank Guidelines], vol. 2, Guideline

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By contrast, “going concern” in the commercial context does not include the factors described in the first half of the WB Guidelines’ definition—i.e., how long an enterprise has been in existence or the “data” generated by it. Rather, the commercial definition, consistent with the latter half of the WB Guidelines’ definition, is a forward-looking criterion based solely on expectations of income production.5 The WB Guidelines also warn that even when there is a going concern with established profitability, income-based valuations (like the discounted cash flow method) can be prone to bias: “particular caution should be observed in applying this method as experience shows that investors tend to greatly exaggerate their claims of compensation for lost future profits.”6 In some instances, the WB Guidelines have led practitioners to be skeptical of forward-looking valuation analyses even though the subject investment may not be inherently speculative. Early-stage investments are even more susceptible to this skepticism as there is less precedent information that can be relied upon. The unsatisfactory solution offered by the WB Guidelines for companies without demonstrated profitability is to side-step the use of projections by applying a liquidation value approach, typically reserved for businesses in distress or bankruptcy in a commercial setting.7 Therefore, while the question of whether profits would have been made will be a subject of debate based on case-specific considerations, the “certainty IV(6) (1992). Tribunals referencing the World Bank Guidelines’ “going concern” definition include: Phelps Dodge Corp. & Overseas Private Inv. Corp. v. Islamic Republic of Iran, Award, 8, 10 Iran-U.S. Cl. Trib. Rep. 121 (1986); Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶¶ 116, 118–20 (Aug. 30, 2000); and Asian Agric. Prod. Ltd. v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award, ¶¶ 90–107 (June 27, 1990), 4 ICSID Rep. 246 (1997). 5  There are slight variations in the definitions of going concern used by accounting bodies. However, they commonly refer to the assumption that an entity will remain in business for the “foreseeable future” and that there is not “substantial doubt” that this is the case. 6  World Bank Guidelines, ¶ 42. 7  The World Bank Guidelines suggest, as an alternative to valuations and damages based on projections, that a potential fallback position is the use of “liquidation value”: “For an enterprise lacking profitability … an example of an appropriate valuation method [is] one which looks to the assets’ liquidation value. This method values an enterprise with demonstrated lack of profitability as the sum of the amounts at which the individual assets comprising the enterprise could be sold less any liabilities that the enterprise might have to meet.” Id., ¶ 43 (emphasis added). Liquidation value is a concept commonly used in bankruptcy proceedings to describe the amount of funds left over after selling the assets of a business individually (i.e., not as part of a going concern) and paying off liabilities attached to those assets.

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required for computation of those lost profits” is at least partially a function of the case documentation and expert analysis.8 The techniques we discuss in Section 2 below address some of the shortcomings in the various authoritative guidance for valuing early-stage companies, including: addressing “reasonable certainty,” developing a valuation consistent with a commercial definition of a “going concern,” and exposing biases in projections. 1.2 Financial Concepts Almost universally, investment treaties call for compensation to be based on the “fair market value” (“FMV”) of the investment or the equivalent.9 The FMV standard is defined in multiple sources. These definitions include the following core elements: (i) FMV is based on a transaction between a hypothetical willing and able buyer and a hypothetical willing and able seller (i.e., both parties are genuinely interested and financially capable of executing the transaction), (ii) FMV is based on a transaction assumed to be at arm’s length in an open and unrestricted market (i.e., neither party has an advantage based on the structure of the market), (iii) FMV does not incorporate a compulsion to buy or sell by

8  Mark Kantor takes up this same point in his text on compensation in international arbitration. Practitioners should be wary of situations where the analysis, rather than the investment, is the source of uncertainty:  Careful lawyers may seek to draw a distinction between, first, the level of certainty that must be shown regarding whether profits would have been made but for the injury to the business and, second, the level of certainty required for computation of those lost profits. Many courts do not require the same level of certainty for the amount of damages, as compared with the fact of damages.  M ark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence 72–3 (2008). See also, e.g., Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, ¶ 246 (Mar. 28, 2011). 9  Terms other than fair market value are sometimes used, however they are generally interpreted as having the same meaning as fair market value. For example, the CME v. Czech Republic tribunal explained that “genuine value” in the Netherlands-Czech BIT expropriation clause should be interpreted as “fair market value”: “Today [the 2200 BITs and several multilateral treaties] are truly universal in their reach and essential provisions. They concordantly provide for payment of ‘just compensation,’ representing the ‘genuine’ or ‘fair market’ value of the property taken.” CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award, ¶ 497 (Mar. 14, 2003). See also Bernardus Henricus Funnekotter et al. v. Republic of Zimbabwe, ICSID Case No. ARB/05/6, Award, ¶ 130 (Apr. 22, 2009); Rumeli Telekom A.S. & Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, ¶¶ 785–6 (July 29, 2008).

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either party, (iv) FMV assumes that both parties have reasonable knowledge of the relevant facts, and (v) FMV takes place on a specific date.10 In determining FMV, the valuation analysis should reflect reasonable expectations, as they would have existed, as of the valuation date—i.e., simulating real-world knowledge as of a certain date. Therefore, the FMV standard provides a practical framework that mimics the real world under sanitized and simplified circumstances. The standard does this by removing some of the potential complications in the valuation analysis, like asymmetrical information between the seller and buyer and subjectivity around unique attributes and motivations of the buyer or seller. Accordingly, it might be expected that valuation experts (and arbitrators) employing the FMV standard would make use of and/or imitate “real world” valuation analyses, at least as a starting point. Such guidance in the broader context of expert testimony, was described in a landmark U.S. case: [a]n important test for deciding whether a problem with proposed expert testimony is disabling, or merely a weakness, is whether the expert “employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.”11 For valuations in the context of international arbitrations, “real world” rigor and analysis has useful implications. In this respect, a valuation report should describe the process followed and explain the incorporation of relevant information. If, for example, there is a comparable company that yields a value inconsistent with the subject investment, real-world buyers and sellers would want an explanation. Simply labeling the comparable company as an “outlier” would not be satisfactory. Similarly, if there are valuation tools and approaches that would contribute to the valuation analysis, they should be employed and not ignored. For the most part, valuations in investor-State arbitrations follow this framework. Tribunals and parties call for the disclosure and explanation of relevant valuation information in a process similar to transaction due diligence. In turn, valuation experts employ multiple approaches using this information, including the traditional approaches such as the Discounted Cash Flow (“DCF”) Approach, Comparable Public Company Approach, and Comparable

10  American Society of Appraisers, ASA Business Valuation Standards 27 (2008). 11   Apple, Inc. v. Motorola, Inc. et al., 2012 WL 1959560, at 3 (D.Ill. May 22, 2012) (citing Kumho Tire v. Carmichael, 526 U.S. 137, 152 (1999)).

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Transaction Approach (the latter two approaches are often grouped together and termed the “Market Approach”). While we recognize that valuations in international arbitrations cannot ignore their legal context, the valuation techniques used by investors should not be overlooked, and may even provide useful tools within the legal valuation framework. Public and private financial markets are made up of investors who are continuously conducting valuations and using them to inform their decisions to buy, sell, or hold investments. Among these investments are those with limited or no history of generating cash flows and in many cases still awaiting funds to launch. In a survey conducted by Duke University researchers of nearly 400 chief financial officers (“CFOs”), 75% used a DCF Approach to evaluate and invest in new projects.12 CFOs typically coupled the DCF with other approaches, but in 25% of the cases relied on approaches other than the DCF, such as the Market Approaches. Out of necessity, investors and academics have developed and refined techniques for valuing early-stage investments. While analysis in the context of international arbitration will always be constrained by legal principles such as “reasonable certainty,” commercial tools and techniques, when properly employed and implemented, can provide additional information to reduce uncertainty and improve the reliability of valuation results. Armed with the additional (and potentially higher quality) valuation evidence that these techniques can contribute, practitioners will be better positioned to implement valuations that more closely align with the FMV standard and simulate the analysis and decision-making process of realworld investors. 1.3 Valuation Approaches of International Tribunals As described above, uncertainty (or perceptions of uncertainty) around projected economic performance have led some international tribunals to abandon damages analysis based on projected financial performance, opting instead for a backward-looking measure of compensation based on, for instance, the amount of funds invested and book value. For example, in the 2007 award of PSEG Global Inc. v. Republic of Turkey, a case related to a start-up power project, the tribunal summarized the general reluctance of tribunals to award damages based on future profits for a young untested project or company:13 12  John Graham & Harvey Campbell, How Do CFOs Make Capital Budgeting and Capital Structure Decisions?, 15(1) J. Applied Corp. Fin. 8–23 (2002). 13  The PSEG v. Turkey tribunal noted the persuasiveness of other awards on this topic: “The Respondent convincingly invoked in support of its objections to this approach the awards

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ICSID Tribunals are “reluctant to award lost profits for a beginning industry and unperformed work.” [A lost profits] measure is normally reserved for the compensation of investments that have been substantially made and have a record of profits, and refused when such profits offer no certainty.14 Rather than awarding lost profits, the tribunal turned to claimants’ investment expenses (also referred to as “amounts invested” or “wasted costs”) and applied interest to those amounts as the basis for damages. Similarly, in the 2000 award of Metalclad Corp. v. United Mexican States, a case related to the development of a hazardous waste landfill, the tribunal refused to award projected future profits as it deemed them “wholly speculative.”15 The tribunal explained that “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.”16 The tribunal further decided to “not award lost profits because the claimants could not provide any realistic estimate of them.”17 Again, as in PSEG v. Turkey, the tribunal awarded damages based on a backward-looking measure—“Metalclad’s actual investment in the project.” Tribunals have taken a similar approach toward investments with a relatively short history of operations. In Wena Hotels v. Egypt, for example, the tribunal refused to base its award of damages on future profits of a hotel in circumstances where the hotel had been operating only for a year and a half, concluding that future profits based on this track record were “too speculative.”18 Again, the tribunal awarded damages based on the claimant’s actual investment.19 in AAPL and Metalclad, which required a record of profits and a performance record, just as the awards in Wena, Tecmed and Phelps Dodge refused to consider profits that were too speculative or uncertain. The Respondent also convincingly noted that in cases where lost profits have been awarded, such as Aminoil, this measure has been based on a long history of operations.” PSEG Global Inc. & Konya Ilgin Elektrik Üretim ve Ticaret Ltd. Șirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award, ¶ 311 (Jan. 19, 2007) (internal citations omitted). 14   Id., ¶ 310. In this case, the loss of profits was calculated by the claimants as the value of the concession to the claimants. 15   Metalclad v. Mexico, supra note 4, ¶ 121. 16   Id., ¶ 120. 17   Id., ¶ 122. 18   Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, ¶ 123 (Dec. 8, 2000). 19   Id., ¶ 125.

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Likewise, the tribunal in Tecmed v. Mexico reached a similar conclusion in respect of lost profits based on two years’ worth of operations, and instead applied the amount invested by claimant (i.e., acquisition value plus two years of investment).20 The reluctance of tribunals to award damages based on standard forwardlooking valuation measures (e.g., the DCF and Market-based approaches) is not universal. Other tribunals determining the amount of compensation and damages associated with early-stage projects have employed forward-looking measures as a basis for damages. For example, in Ioannis Kardassopoulos v. Republic of Georgia, the tribunal determined that, even though claimants had not started construction of an oil pipeline and had relatively little experience with such projects, the termination of their concession did not inhibit the use of a projection for the 30–year concession period.21 This decision was influenced by the fact that a third party had prepared the projections prior to the valuation date. In Abengoa y COFIDES v. Mexico, the tribunal applied a DCF approach to value a hazardous waste facility that had been in operation for four months. The tribunal, which noted that the DCF method “involves some measure of uncertainty” nevertheless employed it, swayed by the fact that the DCF was based on a business plan that had been approved by a bank that provided financing for the project.22 In Quiborax v. Bolivia, the existence of reserves on the property was reassurance enough for the tribunal to apply a DCF analysis for a mine that had been operational for two years. As the tribunal explained: there is sufficient evidence in the record to make a projection of the future cash flows that would have been generated by the concessions with reasonable certainty. In particular, there is sufficient evidence of the reserves found in the concessions, prospective future sales (arising from the Supply Contract between Quiborax and RIGSSA in 2001) and 20   Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/ 00/2, Award, ¶¶ 123, 186, 195 (May 9, 2003). 21   Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, ¶ 544 (Mar. 3, 2010). 22   Abengoa S.A. y Cofides S.A. v. United Mexican States, ICSID Case No. ARB(AF)/09/2, Award, ¶ 685 et seq. (Apr. 18, 2013) (original in Spanish). See also Filip Balcerzak & Luke Eric Peterson, DCF method used to value waste plant that operated for mere months; arbitrators ask if investor added to harm due to poor consultation with locals, Inv. Arb. Rep. (May 21, 2014).

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sufficient information on prospective prices and costs to justify valuing the concessions on the basis of the DCF method.23 The tribunal also pointed out that the approach taken by other tribunals, which used sunk costs as a basis for assessing damages, was not necessarily relevant. It noted: While a disparity between sunk costs and the future profitability of the investment may be one factor among others to reject the DCF method, there is no authority to suggest that damages should be quantified on the basis of sunk costs because of that disparity only.24 Lastly, in Gold Reserve v. Venezuela, even though project construction had not commenced (i.e., it was a development-stage project), the tribunal employed a discounted cash flow valuation that relied on projected cash flows. The tribunal explained: Although the Brisas Project was never a functioning mine and therefore did not have a history of cashflow which would lend itself to the DCF model, the Tribunal accepts the explanation of both Dr Burrows (CRA) and Mr Kaczmarek (Navigant) that a DCF method can be reliably used in the instant case because of the commodity nature of the product and detailed mining cashflow analysis previously performed.25 The “detailed mining cashflow analysis” in this case was a public filing made in March 2008, just prior to the April 2008 valuation date. While the experts employed different assumptions to alter the original cashflow analysis, the reliance placed on it by both experts was likely a key reason the tribunal 23   Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, ¶ 347 (Sept. 16, 2015). 24   Id., ¶ 345. 25   Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 830 (Sept. 22, 2014). The tribunal goes on to further explain: “The Tribunal notes that the DCF method is a preferred method of valuation where sufficient data is available. This conclusion is supported by the CIMVal Guidelines to which both experts referred. In the present cases, many of the arguments in favour of a DCF approach (a commodity product for which data such as reserves and price are easily calculated) mitigates against introducing other methods such as comparable transactions or market capitalization, unless close comparables can be found.” Id., ¶ 831 (citation omitted).

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overlooked the early-stage nature of the project in favor of contemporaneous projections and subsequent analysis. It is clear that investor-State arbitral tribunals often have different levels of comfort and confidence in applying forward-looking valuation approaches for early-stage investments. Although the facts and circumstances of individual arbitrations will invariably lead to different outcomes, the inconsistency between the valuation methods implemented by arbitral tribunals in the case of early-stage investments suggests that it may be useful to introduce arbitration practitioners to some ways that these investments are evaluated by real-world market participants, as discussed in Section 2 below. 2

Specialized Tools and Techniques Employed to Value Early-Stage Investments

Before introducing the tools used by investors to value early-stage investments, it is worthwhile to briefly revisit the two standard forward-looking approaches for valuing a business or investment: (i) the DCF Approach and (ii) the Market Approach. The DCF (or Income) Approach is the practical application of the fundamental financial theory that the present value of an investment stems from the value of future cash flows the investment will generate. The primary steps to implement a DCF Approach include: (1) projecting the investment’s financial performance over an explicit period (e.g., five to ten years after the valuation date) until it reaches a steady state of consistent year-to-year performance, (2) estimating a “terminal value” to establish the value at the end of the projection period, and (3) estimating a discount rate to be applied to the annual cash flows and terminal value to bring all of the cash flows to a single valuation date. Cash flows need to be discounted to account for timing (i.e., it is preferred to receive cash sooner rather than later) and risk (i.e., cash that is certain is preferred to cash that is uncertain or variable). In Table 10.2, we depict a simplified DCF analysis of an early-stage investment. In the first year or years of an early-stage investment, it is typical to have a negative cash flow (i.e., net cash outflow) reflecting up-front investments, nascent customer demand, and undeveloped operational efficiency. In this example, starting in year one, the investment generates positive cash flows. The positive cash flows extend into the future (in this case we limit the projection to five years of positive cash flow). After year five, the investment reaches a steady state in which cash flow, growth, and risks are assumed to be constant.

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Table 10.2 Example of a simplified DCF analysis Calculation Logic Year

0

1

2

3

4

5

12

13

13

14

15

[A] [B] [C] [D] = 1 / (1 + B)c

Free Cash Flows (10) Discount Rate 15% Discount Periods 0 Discount Factors 1.0

[E] = A * D

Discounted Free Cash Flow

(10) 10

[F] = Σ(E)

Total Value

90

1 0.9

Terminal Value*

2 0.8

3 0.7

4 0.6

5 0.5

9

9

8

7

57

* Long-term Growth Rate equal to 3%.

In this example, the cost of capital is 15%. The cost of capital (or discount rate) used in the DCF is typically derived from market data for similar investments such that it reflects the returns that investors would demand for cash flows with a similar risk profile. The cost of capital is incorporated into the model as a discount applied to each successive year’s cash flow increases such that by year five, cash flows are discounted by a factor of 50% (i.e., a 50% reduction to the cash flow relative to year zero).26 The total value is the sum of the discounted cash flows over the project life which in this hypothetical case equals $90 million. While this example is simplified, it includes the essential elements of a discounted cash flow analysis. 26  Line A in the table shows the “Free Cash Flows” or the cash flows that are “free” or available for distribution to investors. These are typically projected based on market analysis. Line B is the discount rate. This is typically estimated based on the cost of capital for comparable projects or investments. Line C shows the number of periods over which the cash flows are projected and discounted. Line D is the discount factor, or the result of calculating the impact of the cost of capital over time. This is the discount to be applied to the cash flows every year to bring the cash flows to a present value. Line F is the sum of the cash flows, or the total value for the project. In this example, the terminal value is calculated using the final year of cash flows, a long-term growth rate (in this case 3%), and the discount rate.

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Techniques for Valuing Early-Stage Investments under the DCF Approach The principal challenge to an assessment of an early-stage investment is risk. There are two ways of incorporating risk into a DCF model: either via the discount rate or an adjustment to expected cash flows.27 While the risk related to more established investments is typically reflected in the discount rate, the techniques used for valuing early-stage investments often focus on transparent adjustments to the expected cash flows. The three techniques discussed below use such adjustments to the expected cash flows: scenario analysis, Monte Carlo simulation, and real options. These approaches can be well-suited to valuing early-stage projects since they are often employed in the actual planning and management of these types of projects. Prior to examining each technique, there are three general points the reader should understand about the presentation of these techniques in this Chapter. First, the goal of this discussion is to help the reader understand how these methods work, their objectives, and any underlying assumptions to evaluate their merits. Second, these approaches complement one another. Indeed, these three approaches can be used (either individually or collectively) as reasonableness checks on a traditional DCF Approach or Market Approach. Third, a novel or alternative valuation approach does not solve or remedy the problem of limited, unreliable, or no information. The adage of “garbage in, garbage out” still applies, no matter what techniques are employed.28 With this context, we introduce the three techniques and explain each in turn. 2.1

2.1.1 Scenario Analysis The first technique that can assist with early-stage investments is an approach called “scenario analysis.” A scenario analysis disaggregates the expected cash flow of the traditional DCF Approach into component scenarios. Developing a scenario analysis involves a four-step process:29 27  Aswath Damodaran, Risk Adjusted Value, http://people.stern.nyu.edu/adamodar/pdfiles/ valrisk/ch5.pdf. 28  From a practical standpoint, limitations with regard to the depth, quality, and amount of information available for early-stage investments may limit the valuation practitioner’s ability to implement these techniques. 29   See, e.g., Aswath Damodaran, Damodaran on Valuation: Security Analysis for Investment and Corporate Finance 154–5 (2nd ed. 2006); Aswath Damodaran, Valuation: Measuring and Managing the Value of Companies 326–30 (6th ed. 2015).

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Identify the Scenarios. Each scenario should be based on a consistent set of assumptions that reflect one possible path.30 These scenarios may reflect, for example, different macroeconomic conditions, competitive market evolutions, and possible capital investment choices. The set of assumptions should be realistic and internally consistent—one may not be able to assume high-growth without commensurate capital investment and maybe even lower prices (or profits). For example, if we assume that the early-stage project depicted in the table above is a new mobile telecom provider, it would be inconsistent to assume high subscriber growth coupled with prices that are also higher than the competitors in the market.31 The highest cash flow scenario will likely correspond to a set of assumptions that are optimistic, but that form a cohesive narrative. The low scenario will correspond to a pessimistic set of consistent assumptions and may even include bankruptcy or liquidation. Forecast Cash Flows. Each scenario will yield different cash flow projections based on the assumptions. Assign a Probability to Each Scenario. The valuer must estimate how likely each scenario is such that the sum of all the probabilities applied to the scenarios totals 100%. Valuation Conclusion. Apply the probabilities in (3) to the projected cash flows in (2) to yield a single expected value.

The resulting value from the process described above should not, in theory, be noticeably different than the value from a traditional DCF approach, assuming the traditional DCF truly reflects the expected cash flows. Thus, even if a scenario analysis is not used as a standalone technique, it can be a useful reasonableness check on the projected cash flows in a traditional DCF. As we demonstrate below, the scenario analysis approach can provide greater transparency and discipline than the traditional DCF Approach. A scenario analysis may be particularly suited for valuation of early-stage companies for the following reasons: (1) it replicates the actual uncertainty and thought process of an early-stage investor who considers multiple possible paths and associated outcomes—rather than a single path, (2) it requires 30  Scenario analysis is not synonymous with a sensitivity analysis, which is a mathematical exercise used to test the impact on the valuation result by changing individual assumptions. Sensitivity analyses are discussed in more detail below. 31  This assumes, however, the absence of specific factors that would justify such a situation, such as a new product offering or other differentiating characteristics (i.e., assuming all other factors are equal).

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a greater understanding of the primary drivers of value which disciplines the analysis behind the projection, (3) it requires a discussion of what is possible versus only what is most likely (albeit subjectively) by forcing the valuer to develop multiple future paths, and (4) it disciplines the valuation away from extremes (e.g., an overly optimistic (or pessimistic) scenario in a traditional DCF analysis will be exposed as such when one cannot realistically advance any scenarios that are more optimistic (or pessimistic)). In Figure 10.1, we depict a scenario analysis using the same project depicted above in the example of the “traditional DCF.” In this example, we implement three different scenarios, but in practice there is no limit to the number of possible scenarios. In this case, the example scenarios are as follows: Scenario 1 reflects an optimistic scenario, Scenario 2 reflects the most likely scenario, and Scenario 3 reflects a pessimistic scenario. Figure 10.1 shows that the cash flows for the traditional DCF do not necessarily correspond with any one scenario. This demonstrates an important aspect of both the traditional DCF and scenario analyses. The expected cash flow of the traditional DCF should be consistent with the weighted average probability of the different scenarios. This is not necessarily a set of assumptions corresponding to any one scenario. The additional transparency in a scenario analysis can reveal whether or not the expected cash flows in the traditional DCF contains an upward or downward bias. Given these characteristics, why is scenario analysis not commonly applied in international arbitration? There could be a number of potential explanations. Most tribunals will need to determine a single value for the investment, and parties may view scenario analysis as counter-productive to that goal.

Figure 10.1

Depiction of a traditional DCF versus scenario analysis.

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For instance, both the claimant and the respondent could be dissuaded by the possibility that the extreme scenarios may be misinterpreted by a tribunal. From the perspective of the claimant, there could be a concern that the respondent will focus heavily on the low scenario, and attempt to inflate the probability of such a scenario. From the perspective of the respondent, there could be a mirrored concern that putting forth a high scenario as part of a broader scenario analysis may establish common ground around a more optimistic set of assumptions. However, with a better appreciation of scenario analysis and the role it can play in the valuation process, a well-informed tribunal should appreciate that the scenarios at either end of the spectrum are meant to be factored into a broader and more holistic analysis. A second explanation may derive from the perception that a scenario analysis is more subjective than a traditional DCF analysis. There are two responses to this: (i) a scenario analysis can be complemented with other valuation approaches that will be a test on its reasonableness, and (ii) the perceived subjective element—the choice of precise probabilities to assign to scenarios—are transparent and easy to change. Therefore, arbitrators and other practitioners can adjust these probabilities without having to delve deeply into the modeling. 2.1.2 Monte Carlo Simulation Another technique used by investors to value early-stage investments is the Monte Carlo simulation. In some ways, the Monte Carlo simulation is a more advanced version of the scenario analysis described above. The Monte Carlo simulation, originally developed by physicists at the Los Alamos Laboratory in New Mexico and code-named after the Monegasque casino, uses a combination of computing power and the law of large numbers to derive a result based on many scenarios.32 The law of large numbers dictates that the average of the results obtained from a large number of trials should be close to the expected cash flow.33 Recall that this is the same expected cash flow that should be the centerpiece of the traditional DCF Approach and the result of the weightings applied to the scenarios, as discussed above. In the scenario analysis example shown above, three scenarios and a probability weighting were used to represent a full range of outcomes. The Monte Carlo simulation, aided by different spreadsheet-based applications for 32  Robert L. Harrison, Introduction To Monte Carlo Simulation 17–21 (AIP Conf. Proceedings 1204, 2010), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2924739/pdf/nihms219206 .pdf. 33   Id.

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predictive modeling, allows the valuer to efficiently simulate thousands of scenarios. The valuer assigns probability distributions to model inputs (reflecting the range of uncertainty for each). The valuer also identifies and quantifies relationships between the different inputs. Using our mobile phone example, the operating costs will be related to the number of subscribers—the more subscribers, the higher the costs. However, we also know that the cost per subscriber will likely fall as more subscribers are added as some of the costs are fixed. While such analysis has subjective elements, the granularity forces the valuer to explain the inner workings of the projection and thus infuses more discipline into the analysis. The relationships are often based on observations of historical industry and market relationships. The result is a range of valuation outcomes and their probability distribution. Figure 10.2 shows three key inputs in the DCF analysis for a hypothetical mobile phone service: average prices, operating costs, and subscribers. For each assumption, there is a range of potential inputs that follows a normal distribution.34 This distribution, in the case of the prices, shows that, for the first year, the most probable single price (or median of the distribution) is $20. In addition, 68% of the expected prices will be between $17 and $23 (one standard deviation), and 95% will be between $14 and $26 (two standard deviations).35 A similar distribution is established for operating costs and subscribers, as shown in Figure 10.2. After establishing the key assumptions, their distributions, and the relationships between them, the valuer starts the Monte Carlo simulation which will run thousands of individual DCF analyses using different combinations of

Figure 10.2

DCF input distribution examples.

34  Normal distributions are often applied in social sciences to represent random variables with unknown distributions. The normal distribution reflects the central limit theorem. The central limit theorem states that when independent random variables are added, their sum falls into a normal distribution even when the component variables themselves are not normally distributed. 35  These prices, costs, and subscribers are illustrative only and do not correspond to any actual figures.

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assumptions derived from the distributions shown above. The result is a distribution of values for the project, shown in Figure 10.3, where the horizontal axis shows the range of outcomes and the vertical axis shows the probability (the higher the curve, the higher the probability) such that the area under the curve represents 100% of the outcomes. The expected outcome, or highest probability outcome, is therefore represented by the peak of the distribution, shown below at $90 million.

Figure 10.3

Example of a distribution of value (value in millions).

The results of the Monte Carlo simulation shown above also demonstrate that 68% of the results fall between $77 and $104 million (one standard deviation) and 95% of the results fall within $65 and $119 million (two standard deviations). The prospect of conducting a Monte Carlo simulation can be daunting since there are potentially hundreds of variables in a projection that can be altered. A useful tool to assist the valuer in making the choice of variables to focus on is a tornado diagram. Indeed, a tornado diagram is useful not only for a Monte Carlo simulation, but any DCF analysis. A tornado diagram is a bar chart meant to provide a comparison of factors that are most important to valuation or, in short, a visual sensitivity analysis. Figure 10.4 is an example of a tornado diagram. The width of the bars in the diagram represents the resulting valuation range corresponding to the range of an input. In this example, we see that the range of potential prices results in a total value between $75 million and $108 million. This range is based on a distribution of possible prices developed by the valuer. The valuer could use the experience observed in comparable services, a range of estimates provided by analysts or industry experts, or another

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281

Example of a tornado diagram (value in millions).

source that represents high and low bounds (similar to the ranges used in the scenario analysis described above). The example tornado diagram demonstrates that prices are the most influential of the three variables shown. The range of operating cost assumptions, in contrast, has a relatively smaller impact on the value. This diagram and the underlying sensitivity analysis can help direct the analysis, whether a traditional DCF or Monte Carlo simulation is used. The potential advantage of Monte Carlo simulation over the traditional DCF and even the scenario analysis is that it allows the reviewer to visualize the risk inherent in the investment via the range and interaction of key assumptions. The method has been used in U.S. proceedings where its benefits in situations of inherent uncertainty were noted. For example, in Lyondell Chemical Co. v. Occidental Chemical Corp., the judge observed: [Monte Carlo simulation] is particularly useful when reaching an exact numerical result is impossible or infeasible, and the data provide a known range—a minimum and a maximum, for example—but leave the exact answer uncertain. Seventy years after its discovery by physicists involved with nuclear weapons research, Monte Carlo analysis is now at home not only in the physical sciences but in a wide variety of fields including, for instance, the world of high finance.36

36  Ian Ratner et al., Valuing Contingent or Disputed Assets and Liabilities in Solvency Opinions, 30(5) Rev. Bank. & Fin. Serv. 56–7 (May 2014) (citing Lyondell Chemical Co. v. Occidental Chemical Corp., 608 F.3d 284, 294 (5th Cir. 2010)).

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On appeal, the application of the Monte Carlo method was challenged, but the court expanded on the general support for the approach reached by the lower court, stating that: just because a Monte Carlo simulation produces a range of outcomes, rather than one single numerical value, does not mean it is speculative. If anything, Monte Carlo analysis provides greater certainty than the basic alternatives: using one of the three data points or using the arithmetic average of all three.37 Therefore, just as the Monte Carlo method is used by investors to better understand the range and interrelationship of inputs in the valuation model, so too could it be employed in investor-State arbitrations.38 Even if there is uncertainty regarding the ranges and probabilistic statements that form part of the Monte Carlo inputs, the outputs provide information about uncertainty and its underlying cause(s) that can inform the discussion of risk in early-stage investment valuation. In a traditional DCF analysis, there is little discussion of establishing a reasonable range for input assumptions. Rather, the analysis revolves around a single choice. In Monte Carlo simulation, such discussion is central to the analysis. Likewise, a traditional DCF analysis does not show a resulting range and those assumptions which have the most impact on the result. Again, this is the output of a Monte Carlo simulation. Therefore, a Monte Carlo simulation puts the essential elements of analyzing an early-stage investment front and center rather than burying them as is often the case in a traditional DCF. 2.1.3 Real Options Valuation The third approach is the real options approach, so-called because the approach borrows tools created for valuing financial options that are publicly traded.39 The difference is that the real options approach is used to value and analyze “real” (i.e., non-financial) options that are not exchanged on a market. One characteristic of investments that is not captured in the traditional DCF analysis is the role of choice and the value of flexibility, or options, inherent 37   Id. 38  To our knowledge, a Monte Carlo simulation has not been used in investor-State arbitration to derive a valuation although it has been referenced. See, e.g., Bear Creek Mining Corp. v. Republic of Peru, ICSID Case No. ARB/14/21, Expert Report of Graham A. Davis & Florin A. Dorobantu, ¶ 60 (Oct. 6, 2015). 39  An option, in the financial sense, is the right to buy or sell an asset at a specified price on or before a certain date.

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in some investment projects. Many projects, particularly early-stage ones, can be modified over time in response to changes in circumstances. The ability for management to adapt has value. This is common sense, as an investor would prefer, and therefore value more, a project with flexibility as compared to the same project without flexibility. Therefore, the real options approach is particularly well-suited for early-stage investments since it is consistent with the way investors think about these investments. Professor Damodaran summarizes the real options approach relative to the other approaches already described: [m]anagers can alter the way they run businesses after observing what occurs in the real world; an oil company will adjust exploration and production to reflect the price of oil in each period. Since analysts have to estimate the expected cash flows in all future periods, it is difficult to build learning into the model. This is why real-options practitioners believe that discounted cash flow valuations, even done right, understate the values of businesses where learning has significant value.40 Because incorporating the value of learning into the model plays such an important part in a real options approach, there are certain situations which lend themselves to this framework—those where there is an embedded option. These include options to expand, scale down, or delay a project. For a new product or service where the market is largely unknown, investors have an option of observing the market’s reception of a product. If demand is strong, the investor can increase its investment and expand production. Likewise, if demand is weak, there is an embedded option to alter the product or even abandon it (to be clear, the option to abandon could still be costly, but recognition of this option and when it makes sense to exercise, will mitigate losses). Lastly, there is an option to delay or to monitor a contingency that affects the product. Some examples of this are deferring the project until conditions are better, staging a project to reveal better information, or contracting a project to prune away uneconomic elements. Examples abound in everyday life where we pay more to access flexibility regarding things such as airline tickets, mortgages, and car leases. There are multiple ways of implementing a real options approach. The most popular and transparent method is by using binomial lattices. Figure 10.5 is an illustration of a binomial lattice for the simplified valuation previously described. 40   D amodaran, supra note 29 (2006), p. 154.

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Example of a binomial lattice.

Figure 10.5 shows the essential elements of a binomial lattice. This example depicts a binomial lattice for the mobile telecom provider without options. At the far left is the current value corresponding to the value we showed above in the prior example—a current value of $90 million for a mobile telecom provider. The starting value in a real options analysis is usually derived from a traditional DCF or Market Approach but is then adjusted to account for the presence of one or more options, as explained below. Moving left to right shows the range of potential changes in value over time, based on the standard deviation of the investment and the time value of money. The annual variance in potential value is the most significant assumption in the binomial lattice. This variance can be derived in a number of ways including through a Monte Carlo analysis or historical industry trends or averages (e.g., the variance of equity returns in a specific industry). In each time period, the value is expected to fall within the assumed variance; the binomial lattice shows the bounds of possible value. With each successive

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year, the lattice grows wider, reflecting the fact that variance over time creates a wider range of possible values. Once the lattice is complete through an explicit projection period, it can be viewed right to left such that each node combined with another node results in the prior period price.41 Undoubtedly, one welcome characteristic of option pricing is that there may be no need to estimate a cost of capital. As the lattice demonstrates, risk is incorporated in the model based on the variance in prices. A riskier asset will have a wider lattice than a less risky asset. A complete lattice, such as the one above, can help reveal potential real options and their value to the project. For example, suppose that there are significant assets in the mobile telecom provider that make all or part of it attractive to other market players. Over the next few years, it would be possible to exit the business for $80 million. This is below the DCF value of the investment of $90 million, so in the first year it does not make sense to exit. However, over the following years, it is possible that the value could drop below $80 million. If investors have an option to exit the project for an amount greater than its value to them, such an option has value and, in turn, an impact on the value of the project today. Figure 10.6 below illustrates the adjusted binomial lattice that reflects this option with the nodes affected highlighted by the shaded box. Figure 10.6 shows the impact of an investor’s ability to exit an investment before the end of a project’s operating life. In order to create this lattice, we started from right to left (the opposite direction of how we calculated the original lattice), and we replaced all of the nodes with values less than $80 million with the $80 million exit value. As we continue to move right to left, the value of the option flows through to prior year values. Ultimately, we arrive at the value today—the value at the far left. The value with the option is $94 million, or stated differently, the value of the option to sell is $4 million. Similar to the example above, we could also test for an option to expand the project. At certain higher prices, it becomes economical for investors to consider expansion to reach more customers or cover a larger geography, for example. The option to expand will require more capital investment and potentially more time at the outset of the investment (i.e., building more factory 41  For example, consider that the value in Year 1 of $90 million is the result of a potential upward movement to $109 million and downward movement to $81 million (reflecting an assumed standard deviation of 15% and risk-free rate of 5%). If we average the two prices and discount by the risk-free rate (assumed to be 5% in this case), we arrive at the value today of $90 million. The same principle applies throughout the lattice where one can derive the preceding or proceeding nodes (i.e., with a single price one can fill in a lattice) with the standard deviation and risk-free rate.

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Example of a binomial lattice with an option.

capacity). The binomial lattice allows us to check whether there is value in exercising such an option and whether having this option in the future justifies, for example, investing in more capacity, albeit potentially unused capacity, at the start of the project. As these examples show, the exercise of exploring real options can help reveal sources of value that are not revealed using the traditional DCF model and may prompt a review of the DCF and the expected cash flow used. This is particularly useful with early-stage projects where there are often embedded real options and flexibility that real-world investors consider. A traditional DCF may not capture a value consistent with the investment. If, for instance, investors made a higher capital investment to secure an option to expand, and the project were valued using a traditional DCF, then the traditional DCF may undervalue the project by leaving out that option value. There are several reasons why valuations based on real options are not more prevalent. First, the real world does not often cooperate by providing a clean set of inputs for implementing this approach. In particular, the volatility of the

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underlying asset requires its own robust analysis and competitive movements can also be difficult to predict. Second, projects are not always able to take advantage of embedded options, in that the operation and execution of a project may not change materially with a changing market or project-specific conditions, even for projects where real options may seem well-suited. For instance, for capital-intensive metallic mining projects that are often referenced as wellsuited for a real-options approach, the cost of mobilizing or demobilizing a mine site can be substantial, such that the mining operation may continue as per the original project plan even if there is an unforeseen decline in prices. This is because the cost of suspending and/or restarting operations (and the risk of losing skilled personnel) can often outweigh the adverse economics of operating in a low-price environment. Likewise, an option to expand may be limited by practical limitations such as skilled labor availability, lead time to purchase equipment, or other resource constraints. Third, the validity of the approach can be lost when the value of flexibility is over-emphasized such that an early stage project with many options, but little advancement, is considered superior to a more advanced project. However, even if it is impractical to fully implement a real options approach, the concept can still be used to test a traditional DCF Approach for the presence of real options. If there are identifiable and exercisable real options, then the traditional DCF Approach could undervalue the project. For instance, in conjunction with a scenario analysis or Monte Carlo simulation, a valuer can assess whether there is flexibility that will allow a project to take advantage of optimistic outcomes, or, alternatively, mitigate the effects of pessimistic scenarios. Whether the real option approach is formally implemented as a valuation approach, or just used to test a traditional DCF Approach, an understanding of this framework is a useful addition to the toolkit for analyzing early stage investments.42 Specialized Techniques for Valuing Early-Stage Investments under the Market Approach The underlying premise of the Market Approach to valuation is that an investment can be valued by reference to the traded value of other investments with similar characteristics. Using the market value of comparable publicly traded 2.2

42   Glamis Gold v. United States is one example where the parties debated the existence of real options, and therefore whether the value was understated, but did not explicitly value the options. Glamis Gold Ltd. v. United States of America, UNCITRAL Arbitration Proceeding, Final Award, ¶ 466 (June 6, 2009).

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companies or private transactions, the analyst can derive a relative value conclusion for the subject investment. A relative valuation often relies on a measure that is a ratio of value to cash flows or value to assets. If a company or investment is analogous to the subject company or investment, i.e., has the same growth and risk characteristics, then one would expect it to have similar relative value. This exercise clearly will be more difficult to implement when the investment has little or no operating history and has not yet generated consistent financial results. These issues notwithstanding, real-world investors frequently rely on the Market Approach to value early-stage investments by adopting techniques which are based on projected results rather than historical data and relying on operational rather than financial metrics. We address each in turn. 2.2.1 Forward-Looking Financial Metrics In a typical Market Approach valuation of a mature investment, the practitioner often relies upon recent historical data (e.g., the prior year’s financial metrics) or forecast data for the next accounting period (e.g., estimated financial metrics for the following year). This is a sensible approach for investments that have the benefit of a long track record of operational and financial results and are in a stable phase of their corporate lifecycle. However, because early-stage investments, by definition, do not have a long track record, recent historical data is frequently unavailable or does not reflect the company’s potential. Similarly, forecast metrics for a year or two in the future may not be particularly relevant for many early-stage investments, as they will still be in the high-growth phase and the short-term financial metrics will not reflect the investment’s long-term, stable performance. The solution that industry and market participants have arrived at to value early-stage investments that are still years away from reaching their long-term potential is to apply the relevant valuation multiples to the company’s projected performance many years in the future. For example, rather than comparing the enterprise value (“EV”) to earnings before interest, taxes, depreciation and amortization (“EBITDA”) from the most recent year or the upcoming year, the valuation could instead be based on projected EBITDA for several years in the future when the company is assumed to be performing more in line with its long-term potential.43 Two important caveats apply to the use of forward-looking valuation metrics in valuing early-stage companies. First, the use of valuation metrics 43  EBITDA is relied on by investors as a proxy for cash flow. Enterprise value is the value of the entire firm — i.e., financed by debt and equity.

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from future periods exposes the overall valuation results to errors in the forecast of future results. The likelihood and severity of forecasting error increases over the long-term, especially in the case of early-stage investments with high future growth rates. It is therefore important that the forecast relied upon in the valuation is well-considered and backed by thorough analysis. Fortunately, the tools and techniques discussed earlier in the section on the DCF Approach can assist in the development and evaluation of reliable projections of the investment’s future performance. Second, the timing difference between the current date and the future date of the valuation metrics must be correctly accounted for in the analysis. If no adjustment is made for timing, the early-stage investment could be incorrectly valued because it does not appropriately account for factors that affect the value of financial metrics (such as EBITDA) that occur in different periods (e.g., the time value of money and the risks inherent in realizing expected future cash flows). Ensuring that the valuation does not suffer from a timing mismatch can be accomplished in two ways: (i) financial metrics from the same future time periods can be used to derive the relative value of comparable companies;44 and (ii) the valuation result can be reduced by an adjustment factor that reflects the discount for time value and uncertainty associated with the projected future results used in the analysis.45 2.2.2 Non-Financial Valuation Multiples Another technique used by investors to evaluate early-stage investments using the Market Approach is the use of non-financial valuation multiples which may be more immediately applicable and feasible to implement for companies 44  For example, if the subject company’s valuation is based on the projected EBITDA from five years in the future, the EV/EBITDA valuation multiples for the comparable companies should be calculated as their current values divided by their projected EBITDA from five years in the future. However, even if this methodology can be implemented, the valuation may still be subject to a higher likelihood of error due to the additional uncertainty associated with projecting the comparable companies’ future results. 45  For example, if the company has not yet commenced operations and the future valuation metric used in the analysis (for instance, the EBITDA from five years in the future, referenced in the previous example) is associated with a mature company, the valuation practitioner would apply a discount factor reflecting the difference in values between start-ups and mature companies. Later, this section discusses some of the factors that might contribute to this discount (e.g., the stage of the company’s lifecycle in relation to the comparable companies, the survivor bias inherent in using the value of comparable companies and transactions, and the probability of the subject company reaching various levels of success or failure in the future).

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without a track record of financial results. If early-stage investments have not yet commenced operations, there may not be financial statistics available to use in a Market Approach valuation. For instance, a start-up company may not yet have any sales revenue and operate at a loss with negative EBITDA and net income. In that case, three of the most commonly used valuation multiples— EV/EBITDA, Price/Earnings, and EV/Sales—would not be useful in determining the value of the investment under the Market Approach. Unlike financial valuation multiples, operational valuation multiples are based on the non-monetary measures of the company’s performance and the ability to generate value. Examples of typical operational valuation multiples that could apply to early-stage investments include EV/Subscribers or EV/ Mineral Resources (e.g., valuing telecom or mining operations, respectively). As with the use of future valuation metrics, relying on operational multiples to value early-stage companies requires caution to ensure the valuation results are accurate. One factor that can lead to errors in valuations based on operational multiples is that market value is ultimately related to how much money a company can generate. Operational valuation multiples are one (or more) degree(s) of separation from the financial value drivers that are more directly related to value. If the operational metrics do not translate to financial success at the same rate as the comparable companies, then there is a risk that the valuation will be incorrect. Thus, it is important for the valuation practitioner to understand how the subject company’s operational performance will translate to financial success, particularly in the case of early-stage investments where there are limited or no track record of financial results. In many cases, however, accurate valuation results can be reached using operational valuation multiples by carefully analyzing the actual and expected financial performance of the relevant companies and selecting appropriate comparable companies that are expected to be sufficiently similar to the subject investment. Another cause of increased error in early-stage company valuations based on operational multiples is that it can be more difficult to assess the comparability of companies’ non-financial characteristics and metrics. Even if companies are very similar with respect to their operational activities and metrics, they may not have much in common with respect to other factors that influence comparability and relative value. Careful consideration and analysis of comparability is particularly important in the case of valuing early-stage investments, especially when the valuation is based on operational multiples that are one step removed from the financial metrics that most directly affect the investment’s value. That is not to say that the exercise is futile. In many situations, there are sufficiently comparable companies and transactions available to conduct a Market Approach valuation. The challenge for the expert—and

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the tribunal—is to ensure that the selection of comparable companies is sufficiently robust to produce an accurate and reliable valuation result. 3

Conclusion and Recommendations

In this Chapter, we describe a gap (in some cases) between valuation in the commercial and arbitral contexts in relation to the valuation of early-stage projects. To bridge that gap, we turn to tools used in the real world that have the potential to increase the level of confidence arbitrators have in early-stage project valuations. It is not practical or realistic that legal practitioners know how to implement these tools, but knowing their capabilities can provide better perspectives for questioning and understanding the valuation analyses they review. It should be emphasized that the value in these tools is not necessarily in their results, but the disciplined thinking they promote. The following are some of the practical questions raised by these tools that can help in the review of a valuation: 1.

2.

3.

Scenario Analysis a. Is the valuer using the expected cash flow, a most likely scenario, or something else? b. If the valuer claims to be using the expected cash flow, can the valuer provide a realistic set of assumptions that produces a valuation higher and lower than the one put forth? c. Have the probabilities of expected outcomes been adequately and reasonably considered? Monte Carlo Analysis a. What are the most impactful assumptions in the valuer’s analysis (judged by their effect on the valuations)? b. What is a realistic range for these assumptions? c. How are these assumptions correlated? d. What are the valuation results across these ranges and correlations? Real Options a. Are there real options embedded in the project? b. Can the project be expanded, delayed, or changed based on market factors? c. What can the project do to take advantage of optimistic outcomes and/or mitigate pessimistic outcomes? d. Do any aspects of the investment reflect accommodations for real options (i.e., higher costs in exchange for increased flexibility)?

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Forward-Looking Financial Metrics a. Are forward-looking financial metrics and valuation multiples available? b. What do they imply about the growth (and risk) of the project/ market? c. Is this growth consistent with the assumed growth using other approaches? Non-Financial Valuation Multiples a. What operational multiples are used in the industry? b. What do they suggest about the value? c. If these non-financial multiples result in a different value, why is this the case?

With the valuation techniques described above and the questions they provoke, it is the authors’ hope that the valuation of early-stage investments in arbitration benefits from the approaches used in commercial settings.

Chapter 11

Valuing Natural Resources Investments Richard Caldwell, Darrell Chodorow and Florin Dorobantu 1 Introduction This Chapter focuses on current issues arising in the quantum analysis for natural resources investments. We analyze the extractive industries, such as mining and oil and gas, and the renewable energy industry. These industries are considered together because they are frequently the subject of investorState disputes, often involve licenses or regulatory regimes overseen by States, require large amounts of upfront investment, and produce commodities that are sold into well-developed markets. Quantum calculations in these industries follow general valuation principles but often require separate consideration of industry-specific features. An expropriation claim, whether full or partial, often requires the valuation of the entire expropriated investment. The same is true in matters involving fair and equitable treatment (“FET”) and other claims, which arise from measures that are alleged to have deprived claimants of the full value of their investment. Even in cases where valuing the affected asset as a whole is not necessary, quantum calculations rely on methods, inputs, and assumptions underlying a traditional valuation analysis. In this Chapter, we first describe the reasons for the prevalence of natural resources investment claims (Section 2) and then summarize the relevant industry valuation standards and key drivers of investment value (Section 3), before discussing three key damages issues often debated in extractive and renewable energy cases. We analyze the underlying financial and economic fundamentals of each issue, review the principal legal authorities, and develop conclusions. We conclude that: (i) reliable cash flow projections can often be developed for extractive and renewables projects, making the discounted cash flow (“DCF”) method superior to other valuation methods for many projects, even for some early-stage projects (Section 4); (ii) the market approach (comparable transactions/comparable companies methods) is often unreliable because

* The views and opinions expressed herein are strictly those of the authors and do not represent the views or opinions of The Brattle Group or any of its other employees.

© koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_012 .

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it can fail to account for individual project characteristics (Section 5); and (iii) when claimants in these sectors have publicly traded shares, share prices can provide useful information about potential value (Section 6). 2

The Prevalence of Investor-State Disputes in the Natural Resources Sector

The natural resources sector has accounted for nearly a quarter of all investorState arbitrations reported by UNCTAD and an even higher proportion among recent cases.1 Damages claims in natural resources disputes are disproportionately large. Natural resources cases comprised 49 of the 146 (34%) investment cases known to UNCTAD with claims in excess of $500 million.2 Many, often large, claims arise in the natural resources sector because of the nature of the investments: are frequently counterparties in natural resources investments and · States are therefore the likely respondents when disputes arise. States, for ex-

ample, are typically responsible for granting exploration and extraction licenses for mining and oil and gas investments, and are often joint-venture partners or counterparties to purchase agreements or production sharing contracts. Similarly, in the renewables industry, State subsidies and other regulatory programs can be essential to an investment’s economic viability and changes to these regulatory schemes have triggered recent cases. Projects typically involve large, upfront investments. There are even megaprojects,3 like the Kashagan oil field in the Caspian Sea, which required $50 billion in investment over 16 years.4 Similarly, Spain saw well over

·

1  U NCTAD reports 817 investor-State cases through July 31, 2017. There are 182 natural resources cases comprised of extraction of crude oil and natural gas (64 cases), mining and quarrying (65 cases), and renewables (53 cases). Among the 449 cases filed since 2010, 129 (29%) involved investments in this sector. UNCTAD, Investment Dispute Settlement Navigator (July 31, 2017), http://investmentpolicyhub.unctad.org/ISDS. The statistics exclude cases involving mining support service activities. 2  Id. 3  Megaprojects are projects that require very significant upfront investment or expect unusually high production levels. 4  Nariman Gizitdinov, Oil From $50 Billion Kashagan Field Starts Flowing to Export, Bloomberg (Oct. 14, 2016).

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€40 billion of investment in renewables between 2007 and 2013.5 Once some or all of the upfront investment in these types of projects has been made, they can have substantial value, creating strong incentives for investors and States to protect their economic interests. Projects are frequently sponsored by foreign investors with access to global capital markets. For example, output from Canadian mines accounted for less than 5% of the production value of global mining output,6 but 57% of the world’s publicly traded mining companies are listed in Canada.7 Projects are often located in countries where the risk of political interference is high, according to international risk surveys.8 This feature particularly applies to extractive projects and less to renewables. Projects can be subject to changes in the political and regulatory landscape or incite social opposition due to environmental or cultural concerns.9 For example, foreign investors in mining and hydrocarbon projects may benefit from significant increases in commodity prices or unanticipated resource discoveries, drawing political scrutiny. Similarly, renewables projects often depend on government subsidies and regulatory support schemes for which political backing may diminish over time.

· · ·

3

Industry Valuation Standards and Key Drivers of Investment Value

Fair market value (“FMV”) is the typical valuation standard in investment treaty cases, as referenced in the relevant treaty or implied from customary 5  Press Release, Revista Eólica y del Vehículo Eléctrico (reve), ANPIER, APPA, PROTERMOSOLAR Y UNEF denuncia la expropiación de las energías renovables (eólica, termosolar y eólica) [ANPIER, APPA, PROTERMOSOLAR and UNEF Denounce the Expropriation of Renewable Energy Investments (Photovoltaic, Wind and Thermal Solar)] (July 19, 2013), https://www .evwind.com/2013/07/19/anpier-appa-protermosolar-y-unef-denuncian-la-expropiacion-delas-energias-renovables-eolica-termosolar-y-eolica/. 6  International Counsel on Mining & Metals, Role of mining in national economies 22 (3rd ed. 2016). 7  The Mining Association of Canada, Facts and Figures of the Canadian Mining Industry 36 (2016). This reflects companies traded on the Toronto Stock Exchange or the TSX Venture Exchange. 8  See, e.g., PRS Group, International Country Risk Guide (ICRG), https://www.prs group.com/about-us/our-two-methodologies/icrg. 9  See, e.g., Romanian village blocks Canadian firm from mining for gold, Guardian (Jan. 14, 2016) (referring to Gabriel Resources Ltd. & Gabriel Resources ( Jersey) v. Romania, ICSID Case No. ARB/15/31).

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international law.10 There are three primary valuation approaches: the income approach (e.g., the DCF method), the market approach (e.g., comparables), and the cost approach. These methods were discussed in Chapter 7. In this section, we discuss industry-specific valuation standards and the key value drivers for extractive and renewable investments. This discussion of the key drivers of value focuses on natural resources projects as a whole, as opposed to particular issues raised in the valuation of debt or equity investments. The valuation of debt or equity would need to consider the specific financing arrangements for a project, and use standard valuation techniques to allocate value among the relevant types of investor. Extractive projects vary in their financing structure depending upon the type of entity pursuing the project (e.g., junior mining companies tend to have little debt, while large mining companies often fund their overall business with a mix of debt and equity). Renewable projects tend to be financed by large amounts of dedicated long-term project finance.11 3.1 Valuation Standards and Key Value Drivers in Extractive Industries Certain professional organizations have published standards and guidelines related to valuation in the extractive industries. In the mining industry, these include the CIMVal Standards and Guidelines (Canada), the VALMIN Code (Australia), and the SAMVAL Code (South Africa). These groups provide guidance on the use of valuation approaches for certain types of properties. For example, CIMVal recommends certain approaches for valuing mineral properties at different stages, summarized in Table 11.1.12 Similar types of guidance exist for oil and gas properties, such as that contained in “Perspectives on the Fair 10  Fair market value is the price at which an asset would trade in an arm’s-length transaction between a willing buyer and a willing seller that are knowledgeable of the relevant facts and are not under a compulsion to transact. See, e.g., World Bank, Guidelines on the Treatment of Foreign Direct Investment, in Legal Framework for the Treatment of Foreign Investment, vol. 2, Guideline IV(5) (1992). When treaties refer to other terms, such as “genuine value” or “actual value,” tribunals have generally interpreted them to mean FMV. Sergey Ripinsky with Kevin Williams, Damages in International Investment Law § 6.1 (2008). See also discussion in Chapter 5, Irmgard Marboe, Assessing Compensation and Damages in Expropriation versus Non-expropriation Cases, at Section 3.1. 11  The finance is typically non-recourse, meaning that it must be repaid by the cash flows generated by a project itself and that the lender has no recourse to ultimate project sponsors. 12  Special Committee of the Canadian Institute of Mining, Metallurgy and Petroleum on Valuation of Mineral Properties (“CIMVal”), Standards and Guidelines for Valuation of

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Valuing Natural Resources Investments Table 11.1 CIMVal valuation guidelines for different types of mineral properties Valuation Approach

Exploration Properties

Mineral Resource Properties

Development Properties

Production Properties

Income Market Cost

No Yes Yes

In Some Cases Yes In Some Cases

Yes Yes No

Yes Yes No

Market Value of Oil and Gas Interests,” published by the Society of Petroleum Evaluation Engineers in the United States.13 As explicitly noted by CIMVal, the guidelines are recommended, but not mandatory.14 In response to a recent consultation, for example, the Canadian Securities Administrators (“CSA”) concluded that “[they] do not think it is appropriate for the securities regulatory authorities to impose or endorse specific valuation methodologies.”15 The lack of precise rules on the use of specific methods is appropriate given that the best valuation approach(es) will depend on the particular circumstances of a property. For example, CIMVal states that the market approach is appropriate for “Mineral Resource Properties,” which are properties that have not yet demonstrated economic viability through a feasibility or pre-feasibility study.16 Applying the market approach for Mineral Resource Properties would require the identification of reliable comparables, which can be a challenging and sometimes impossible task, as discussed in Section 4. For this reason, the industry valuation guidelines recognize that the valuator must have discretion in determining which method(s) to apply in a given case. Mineral Properties 22 (Feb. 2003), http://web.cim.org/standards/documents/Block487_ Doc69.pdf. 13   S ociety of Petroleum Evaluation Engineers, https://secure.spee.org/. 14  CIMVal, Standards and Guidelines for Valuation of Mineral Properties, supra note 12, comment P.2.2. The standards are mandatory for valuation reports compliant with CIMVal, but do not prescribe valuation methods. Conversely, the guidelines address valuation methods, but are not mandatory. 15  Repeal and Replacement of National Instrument 43-101 Standards of Disclosure for Mineral Projects, Form 43-101F1 Technical Report, and Companion Policy 43-101CP, appendix C (at 25) (2011), 34 O.S.C. Bull. (Supp-2) (Can. Ont. Sec. Com.). 16  CIMVal, Standards and Guidelines for Valuation of Mineral Properties, supra note 12, at 22.

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None of the valuation guidelines were designed with investment arbitration in mind, and we are aware of no investment treaties or other legal authorities that bind tribunals to them. Adhering strictly to the recommendations provided by these guidelines may, in some arbitral contexts, lead to unreasonable damages estimates, in part because damages analyses must reflect the relevant factual circumstances and legal theories, and reconstruct “but-for” and “actual” scenarios. Such guidelines must be used only where appropriate and, when used, applied with care to accommodate the specific factual circumstances and legal framework relevant in any arbitration. The fundamental drivers of fair market value are similar for a wide variety of extractive projects. They include: volume and production rate.17 The value of an extractive · Reserve/resource project is a direct function of the quantity of reserves and resources con-

tained and the expected timing of when they would be produced. Quality of reserves/resources.18 The quality of extractive reserves/resources relates to the certainty with which deposits have been identified and can be economically extracted. All else equal, reserves have a higher level of certainty, and therefore value, than resources. Commodity characteristics. Despite the name, commodities are not directly interchangeable, and the value of output from a project will depend on its characteristics. For example, different crude oils have different chemical properties such as sulfur content and gravity that affect their value in refining. Geological characteristics. Projects with different geological characteristics may require different extraction technologies for the same commodity, such as shale gas and conventional gas projects. Geological characteristics such as

· · ·

17  Reserves and resources are specifically defined terms. For example, a “Mineral Resource” is defined by the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) as a “concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade or quality and quantity that there are reasonable prospects for eventual economic extraction.” Canadian Institute of Mining, Metallurgy and Petroleum, CIM Definition Standards—For Mineral Resources and Mineral Reserves 3 (May 10, 2014), http://www.crirsco.com/docs/cim_definition_standards_20142.pdf. 18  Depending on the level of confidence and geographic knowledge, resources are further categorized as inferred, indicated, or measured in order of increasing confidence. “Mineral reserves” are defined more narrowly as “the economically mineable part of a Measured and/or Indicated Mineral Resource.” Id., at 5. Reserves are sub-divided into probable and proven in order of increasing confidence.

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the ore grade of a mineral deposit,19 or the pressure or water saturation of hydrocarbon deposits, can affect a project’s operating costs. Access to input markets. Projects located in remote, hard-to-access areas would be expected to have higher capital expenditures and operating costs. Access to output markets. The location of a project may affect the amount of ancillary infrastructure a developer must build and/or impact transportation charges to reach buyers.20 Fiscal terms. Royalties and taxes capture a portion of a project’s total value, and therefore may have a significant impact on the value of an investor’s stake in the project. Development spending. Extractive projects often require large upfront investments. The value of a project will depend upon what portion of those investments remains to be made as of the valuation date. Price outlook. Expectations about future commodity prices have a substantial impact on the value of extractive assets and can fluctuate over time. Commodities are often traded on a spot and forward basis in financial markets, providing evidence of market expectations for future prices.

3.2 Key Value Drivers of Renewable Energy Projects There are no valuation standards for the renewables industry, unlike in extractive industries. Nevertheless, the valuation exercise in renewables can now benefit from a rapidly growing history of transaction evidence, involving both the purchase and sale of investment interests in mature operating renewable energy plants and project development rights. Significant investment is also routinely evaluated and approved, usually on the basis of the income approach, where investors compare the necessary upfront investment with the stream of cash flow that a plant might hope to generate under a particular support scheme or regulatory regime. The fundamental drivers of fair market value for renewable energy projects are broadly similar to those for extractive projects. They include: capacity and production. The value of renewables projects depends · Installed in part on installed capacity, which measures the plant’s maximum ability to produce electricity each hour. However, renewables tend to produce intermittently—a wind farm produces when the wind blows and a solar

19  The ore grade is the concentration of mineral in the ore. 20  This issue is highlighted by North Dakota’s Bakken oil fields. Bakken oil production generates the by-product of natural gas (“associated gas”). A lack of local demand and pipeline capacity has caused producers to flare much of this associated gas.

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farm produces when the sun shines. The extent of intermittency varies by technology (e.g., wind can produce at night, while solar cannot) and plant location (e.g., solar is more effective in sunny Spain than in the United Kingdom). Two renewable projects may therefore have the same capacity, but produce significantly different volumes. A valuation must account for both considerations. The support scheme. Many renewable projects would not have been viable if they sold their production at market prices and thus were built on the promise of continued financial support. This support may come in different forms such as a dedicated Feed-in-Tariff (“FIT”) that provides a fixed payment per unit of production, or a certain amount in excess of the market price. Another common form is a renewable certificate scheme, in which renewable energy generators earn certificates and then sell them to energy suppliers. Suppliers in such schemes ultimately have obligations to source a certain proportion of their supply from renewable sources and pay a penalty if they fail to do so. Renewable projects may also receive tax breaks that enhance value. The support scheme determines the ultimate level of remuneration received by a plant. Development spending. Renewable energy projects often require large upfront investments. Like in the extractive sector, the value of a project at any moment will depend upon how much upfront investment remains outstanding as of the valuation date. Technology and vintage. The upfront construction costs for renewable projects vary across technologies and have even varied across time for the same technology. For example, offshore wind farms typically cost more to build than onshore ones. Solar farms used to cost more than wind farms. The costs of both wind and solar farms have declined significantly over the past decade, but the costs of solar have declined further and faster. Costs have fallen so far that both wind and solar photovoltaic projects are now close to grid-parity, meaning that they are close to viable without explicit support. Reflecting these differences and developments, support schemes typically provide different levels of remuneration to different technologies and vintages of the same technology.

·

· ·

4

The Use of the DCF Method in Valuing Pre-Production Investments

Many extractive sector and renewable energy investment cases involve alleged treaty violations that occur before the investment at issue has reached production or developed a long track record of operations. For example, more than

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half of the investment cases in the mining industry to date concerned projects that had not reached production or had less than three years of operating history.21 Many of the cases brought by investors in Spanish and Italian renewables involve plants that had just become operational at the time of the alleged violations.22 The value of any investment depends on its ability to generate future cash flows. Potential buyers would not assign any value to investments that promise no future cash flow.23 Of course, market participants routinely assign value to early-stage opportunities that require many years of investment to reach production and to generate cash flows. FMVs inherently reflect future cash flow potential,24 and investors routinely assess this potential for early-stage investments in the extractive and renewable energy sectors using the DCF method. For their part, investment arbitration tribunals have come to regard the DCF method as a standard tool to quantify damages under the FMV standard for investments with a record of profitable operations.25 However, tribunals 21  These figures are drawn from the authors’ analysis of information from UNCTAD and individual case research. UNCTAD, Investment Dispute Settlement Navigator, supra note 1. 22  In Spain, the incentives that spurred investments in renewables were introduced in 2007 and modified in 2013. Given the time needed for planning and construction, these kinds of projects did not have a long history of operations at the time of the alleged treaty violation. 23  An asset could have negative market value if it is expected to generate losses. However, the asset’s owner can avoid such losses by discontinuing operations, bringing the asset’s value up to zero. Exceptions can arise, for example, when the option to discontinue operations is not available. 24  There are exceptions to this concerning assets that can be easily replaced and are produced by competitive suppliers (e.g., a truck or a commercial plane), the prices of which are driven mainly by production costs. Such assets are rarely the object of investment disputes and can be valued by reference to the observable price of the replacement asset. 25  The World Bank Guidelines on the Treatment of Foreign Direct Investment suggest that in the case of expropriation, unilateral actions, or contract termination, a determination of FMV would be reasonable “for a going concern with a proven record of profitability, on the basis of the discounted cash flow value.” World Bank Guidelines, supra note 10, at 42. In CME, decided in 2003, the Tribunal referred to the DCF method as “the most widely employed approach to the valuation of a going concern….” CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award, ¶ 103 (Mar. 14, 2003). Similarly, in the recent Quiborax award, the tribunal noted that “the DCF method is widely accepted as the appropriate method to assess the FMV of going concerns with a proven record of profitability.” Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, ¶ 344 (Sept. 16, 2015).

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have been more reluctant to use the DCF method to compute damages for early-stage investments, which lack a long track record of operations. Tribunals appear concerned over the potential for speculation and the possibility of a socalled “Cinderella effect.”26 The DCF method and its reliability are a common topic in extraction and renewables arbitrations because many of these cases involve early-stage investments. The rejection of DCF-based valuations often reflects a legal conclusion that such damages are too speculative or uncertain.27 From an economic perspective, the degree of uncertainty in an FMV estimate based on the DCF method depends on how reliably cash flows can be projected and how well risks can be quantified.28 Projects in the extractive and renewables sectors, even pre-production projects, often exhibit characteristics that facilitate the development of reliable cash flow forecasts and risk adjustments. These characteristics explain the routine use of the DCF method by developers for valuing such projects. First, output from extractive and renewable energy projects is often sold into well-developed commodity markets. While some uncertainty about the eventual production levels and costs remains, sales of oil, coal, metals, and electricity depend more on pricing than on specific customer relationships.29 For example, it is highly likely that a particular oil field will be able to sell its 26  The “Cinderella effect” refers to the use of over-optimistic assumptions to make poor and low-value assets look high-value. See Ripinsky & Williams, supra note 10, § 6.2.2. 27  For a detailed discussion of this legal standard, see Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence 70–102 (2008). 28  The specific implementation of the DCF method can matter as well. The DCF method often is implemented in a static manner that reflects the risks expected as of the valuation date. However, in the real world, risks will evolve or be resolved over the life of the asset, and managers have the ability to respond. For example, if prices turn out to be lower than expected, managers can decide to cease or defer development. Alternatively, if prices exceed expectations, reserves not previously deemed economically recoverable may become economically viable and worth developing. Investors sometimes account for the value of this managerial flexibility using Monte Carlo (also known as dynamic DCF) and real-options techniques. These income approaches are discussed in Chapter 10, Garrett Rush et al., Valuation Techniques for Early Stage Businesses in Investor-State Arbitration, at Section 2.1. 29   Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶ 120 (Aug. 30, 2000), 16(1) ICSID Rev.—FILJ 168 (2001) (citing Sola Tiles, Inc. v. Gov’t of the Islamic Republic of Iran, Award, 14 Iran-U.S. Cl. Trib. Rep. 223, 240–2 (1987) and Asian Agric. Prod. v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award (June 27, 1990), 4 ICSID Rep. 246, 292 (1990)).

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crude oil production in the global market and obtain the prevailing market price. Likewise, a renewables project is likely to be able to sell its output in the power market and obtain the FIT or a combination of the prevailing power market price plus a supplement. The presence of well-developed markets in these sectors, plus defined support mechanisms in renewables, therefore reduces revenue uncertainty. Second, for commodities such as crude oil, natural gas, and many metals, market information about future prices exists based on observed pricing in spot and forward markets. For these commodities, exchange-traded futures contracts and over-the-counter forward markets depend in part on market expectations of future prices and the costs of storage.30 These sources can therefore provide an objective basis to develop cash flow projections and make adjustments for price risk over the horizon for which futures contracts exist.31 Moreover, the existence of historical data for both spot and futures prices permits the selection and calibration of rigorous statistical models that may allow the valuator to extend projections beyond the horizon for which futures contracts exist.32 Third, renewable projects also enjoy guidance on prices. Renewables support schemes were designed to stimulate investment, in part by reducing investment risks. The designers often attempted to permit investors to forecast 30  In the spot market, commodities are traded for immediate delivery. In futures and forward markets, commodities are traded for delivery at future dates. A futures contract obligates the parties to exchange a standard quantity and quality of the underlying commodity at a future delivery date for a price determined when the contract is traded. Futures contracts are marked to market and settled daily. Examples include Brent and WTI crude oil futures, which trade on the New York Mercantile Exchange (“NYMEX”) and the Intercontinental Exchange, copper futures, which trade on COMEX and the London Metals Exchange (“LME”), and precious metals futures, which trade on the LME and COMEX. Forward transactions are similar to futures, but are not standardized or exchange-traded and are not settled until expiry. See Robert S. Pindyck, The Dynamics of Commodity Spot and Futures Markets: A Primer (Center for Energy and Environmental Policy Research, Working Paper No. 01-002, May 2001), https://dspace.mit.edu/bitstream/handle/1721.1/44974/2001-002 .pdf?sequence=1. 31  The maturities for which futures contracts exist vary by commodity, but have generally increased over time. Currently, the longest maturities available are ten years for LME copper contracts, eight years for NYMEX WTI crude contracts, seven years for ICE Brent and WTI crude contracts, and six years for COMEX gold contracts. 32  Of course, it remains possible that future price developments diverge from past experience, and thus that reality diverges from forecasts based on historical data and a statistical model. Long-dated forecasts therefore tend to be more uncertain than short-dated forecasts, given the possibility for the evolution of historical relationships.

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likely investment payoffs, and thus make informed decisions about which investments and technologies to pursue. Indeed, host governments often forecasted investment cash flows themselves to determine the optimal level of FITs or to ascertain the investment returns implied by particular levels of support. Project finance lenders similarly sized dedicated non-recourse loans based on cash flow projections. Fourth, owners of extraction and renewable energy projects often conduct detailed technical analyses, such as feasibility or pre-feasibility studies, as part of their routine investment appraisal, financing, and decision-making process. These technical studies are often performed in accordance with standard practice and can provide detailed information about many of the inputs necessary for a DCF valuation: quantity and quality of the natural resources, intended operating procedures and production schedule, and the anticipated capital and operating costs. This information, if reliable, can feed directly into a DCF analysis. The technical information is prepared, in some cases, by independent engineers and contractors. Publicly traded mining and oil and gas companies are subject to disclosure rules, which may require the publication of independent reserve estimates and other technical reports.33 Numerous independent bodies have also assessed the costs and operating performance of different types of renewables, for the purposes of support scheme design.34 Host governments sometimes published their own estimates to justify the levels of remuneration provided. Depending on the circumstances of the case, such information can provide tribunals with some comfort about the reliability of the DCF analysis and of the input assumptions for early-stage investments. 33  For example, mining companies listed on a Canadian Stock Exchange are subject to National Instrument 43–101 Standards of Disclosure for Mineral Projects and oil and gas companies are subject to National Instrument 51-101 Standard of Disclosure for Oil and Gas Activities. See 43–101—Standards of Disclosure for Mineral Projects (2011), 34 O.S.C. Bull. 7043 (Can. Ont. Sec. Com.); 51–101—Standards of Disclosure for Oil and Gas Activities (2008), 31 O.S.C. Bull. 420 (Can. Ont. Sec. Com.). However, the publication of such reports does not guarantee their reliability, and the reports may be the subject of disputes among experts. 34  Market participants routinely compute the “levelized costs” of different renewables technologies. Levelized costs are equivalent to the average price that an installation must receive over its investment lifetime for investors to achieve a reasonable return. Computing levelized costs facilitates comparison of costs across different technologies, which may involve greater or lesser upfront investment and correspondingly greater or lesser production levels. Computing levelized costs requires a forecast of production and cost levels over the life of an installation, in the same way as a typical DCF valuation.

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Considering these factors, some tribunals have relied on the DCF method for investments in the extractive and renewable sectors that had a limited track record of operations. Examples include Gold Reserve v. Venezuela, concerning a gold mining project in the pre-construction stage;35 Quiborax v. Bolivia, concerning a ulexite mine with a two-year operating history as of the valuation date;36 and EISER Infrastructure Limited v. Kingdom of Spain, concerning a justcompleted concentrated solar power plant.37 Other tribunals have rejected the DCF method for early-stage extractive investments and reverted to sunk costs38 or adopted other methods.39 A recent analysis of arbitral awards found that tribunals rejected the DCF method in 22 out of 59 cases in which it had been proposed by one or both parties, most often citing the lack of a track record.40 The tribunals in these cases generally assessed damages with reference to historical, or sunk, investment costs.41 The historical cost method shares similarities with the cost approach to valuation, which is based on the principle that a buyer will pay no more for an asset than the cost to obtain a similar asset, i.e., its replacement cost.42 On the one hand, the historical cost method avoids the need for detailed forecasts of project cash flows or reliable comparable assets. It also avoids claims of speculation because historical costs are often a matter of fact, not opinion.43 On the other hand, however, historical cost and the FMV standard may bear only a weak relationship. Historical cost is an inherently backward-looking measure, 35   Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 830 (Sept. 22, 2014). 36   Quiborax v. Bolivia, supra note 25, ¶ 347. 37   Eiser Infrastructure Ltd. & Energía Solar Luxemburg S.à R.I. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Final Award, ¶¶ 139–50 (May 4, 2017). 38   See, e.g., Anatolie Stati et al v. Kazakhstan, SCC Arbitration V (116/2010), Award, ¶¶ 1684–92 (Dec. 19, 2013) (in relation to the Contract 302 properties). 39   See, e.g., Khan Resources Inc. et al. v. Gov’t of Mongolia & MonAtom LLC, PCA Case No. 201109, Award on the Merits, ¶ 393 (Mar. 2, 2015). 40  PricewaterhouseCoopers, Dispute perspectives: Discounting DCF? 2–3 (2016), https:// www.pwc.co.uk/tax/assets/dispute-perspectives-discounting-dcf.pdf. The analysis includes cases outside the natural resources sector. 41   Id., at 3. 42  International Valuation Standards Council, International Valuation Standards 2017, at 42–3 (¶ 60.1) (2017). 43  Accounting records provide information about costs incurred, but the link between some items of expense and the investment at issue is not always clear and can be subject to dispute. In addition, the accounting rules under which financial statements are prepared can influence the extent to which project-specific costs are disclosed.

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while FMV is inherently forward-looking, reflecting market expectations about an asset’s potential value generation. Historical cost asks “what did the asset cost?” rather than “what is the asset worth?” This difference in perspective was explicitly recognized by the Crystallex v. Venezuela tribunal.44 In addition, natural resources investments have certain characteristics that increase the likelihood of a divergence between historical costs and FMV. Differences can arise due to changes internal to an asset, such as the resolution of reserve uncertainty through additional exploration activities or the completion of construction for an extractive project.45 Divergences can also arise due to external considerations such as changes in market conditions that affect the asset’s value. For example, the value of extractive and renewable projects depends on commodity prices and the level of long-term interest rates. Fluctuations in commodity prices and interest rates can prompt a divergence between the FMV and the underlying costs of investment. Such differences can emerge even in the absence of significant development effort and may cause historical cost to overstate or understate FMV.46 The divergence between sunk costs and FMV may be larger or smaller depending on the precise circumstances of investment, requiring careful case-bycase examination. The difference may be smaller if the sunk cost in question is the price paid by an investor to acquire a mine or renewables plant mid-way or after the completion of development. The acquisition price would inherently reflect the FMV of the mine or plant at the transaction date. In contrast, the difference between sunk costs and FMV may be greater if important uncertainties have been resolved in the interim period. For example, FMV is likely to change significantly relative to costs as development reveals important new information about the quantity and quality of resources or the costs to develop a project, or if the parameters of a renewables support scheme were updated during construction. Ultimately, valuation experts and tribunals must consider case-specific information to determine the most reliable valuation method. Several 44   Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, ¶ 882 (Apr. 4, 2016). 45  Market participants also consider a process of de-risking for renewables assets, and in response reduce the required return for mature assets relative to early stage assets. The process of de-risking is consistent with the emergence of a FMV to book value premium for assets after the completion of construction. 46  For an example where these factors have been explicitly recognized by a tribunal, see Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award, ¶ 772 (Aug. 22, 2016).

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distinguishing characteristics of extractive and renewables investments, as discussed above, can make developing cash flow projections reliable even when a track record of operations is not available. Conversely, the historical cost method may not be a reliable indicator of FMV, because the FMV of natural resources and renewable investments can be highly sensitive to market movements and the resolution of risks through exploration and development activities. 5

Challenges in Applying the Comparables Method to Extractive and Renewables Investments

Market transactions provide an obvious source of information concerning FMV. The comparables method estimates FMV based on the observed prices of comparable assets in market transactions. The underpinning economic theory is the “law of one price,” which posits that comparable assets should transact at similar prices.47 The market approach is easily understood in the context of real estate. The value of a house is assessed with reference to the prices of nearby houses in recent transactions. However, houses often differ in size or quality. Valuators often control for differences in size by focusing on relative valuation multiples, such as a price-per-square-meter. Experts might then expect better quality houses to have higher multiples than worse quality houses—e.g., a house with a better view or larger lot would attract a higher multiple. Experts may therefore seek to adjust observed multiples to account for possible differences in quality, although quality differences may themselves be difficult to identify systematically. Analogous approaches can be used to value complex assets, such as businesses. Reliable application requires observation of the prices paid for comparable businesses (known as “precedent transactions”). Comparables may also come from publicly traded companies, where the value of the business can be inferred from the observed stock price.48

47  If comparable assets do not trade at similar prices, market participants may be able to arbitrage price differences, causing the price differential to disappear. 48  The market value of equity in a publicly traded company, called the market capitalization, is equal to the number of shares outstanding multiplied by the share price. If the company has debt, the value of its net debt is added to the equity market capitalization to arrive at the company’s enterprise value, which reflects the market value of its productive assets. The calculation follows from a fundamental economic identity known as the

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Observed values are translated into multiples, which express value in relative terms using a statistic that is a driver of the asset’s size and market value, such as earnings. The use of multiples facilitates value comparisons across assets by controlling for differences across the statistic used to create the multiple. Multiples may be derived using a variety of different measures, such as earnings (e.g., EBITDA49 or earnings-per-share), revenues, reserves or production (e.g., barrels of oil, MWh50 of electricity, or ounces of gold), or production capacity (e.g., MW of power generation capacity). For example, the observed FMV of $1,000 for Oilfield #1 with 50 barrels of reserves reflects a multiple of $20-per-barrel of reserves. This multiple may be used to estimate the implied value of Oilfield #2 that is comparable except for having reserves of 100 barrels. Table 11.2 illustrates this calculation. The comparables method is appealing because it is intuitive to use relative measures to translate values across assets. The approach appears simple, reflects common market discourse, and requires no explicit assumptions to forecast future cash flows or account for risk. However, the relative ease of this calculation can be deceptive, because the use of comparables carries with it numerous implicit and strong assumptions necessary to underpin the reliability of the approach. The FMV observed for a transaction incorporates the market expectations about key characteristics such as the underlying asset’s future output and lifetime, expected prices, capital expenditures, operating costs, risks, and discount rate. When the observed FMV of one asset is converted into a valuation Table 11.2 Illustration of comparables methodology

Observed Transaction Value Reserves in Barrels Value per Barrel Implied Value of Oilfield #2

Oilfield #1

$1,000 50 $20 N/A

Oilfield #2

N/A 100 $20 $2,000

company’s economic balance sheet: the market value of assets equals the market value of claims on those assets (i.e., debt and equity). 49  Earnings Before Interest, Taxes, Depreciation, and Amortization (or “EBITDA”) is a measure of cash flow generated by a business or asset. 50  MegaWattHours (“MWh”) represents the maximum amount of electricity that can be produced by a one MegaWatt (“MW”) plant over the course of one hour.

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metric that is used to value another asset, all of these expectations about future performance and risks are transferred to the asset being valued. Using the observed value-per-barrel of reserves from Oilfield #1 to estimate the value of Oilfield #2 in the illustration above implicitly assumes that the two assets are the same across key aspects, such as those shown in Table 11.3. The reliability of comparables valuation is a direct function of the extent of comparability among assets for which the FMV can be observed. On one hand, it is desirable to widen the comparables set and use as many as possible. On the other, the chosen comparables need to be truly comparable, otherwise they risk biasing the entire exercise. The problem, as illustrated in the example above, is that true comparability can involve numerous dimensions. Table 11.3 Illustration of implied comparability assumptions Characteristic

Assumed Comparability

Price

Price expectations as of the Oilfield #1 transaction date are comparable to those existing on the valuation date for Oilfield #2. Both fields’ reserves and resources share the same level of geological certainty. Both fields possess the same potential to yield additional resources through expansion. The crude oil produced from both fields will be comparable and the production profile will be similar across time. The crude oil produced from both fields will be of comparable quality, and therefore command a similar price. Both oilfields are at a similar stage of development and will require similar levels of upfront capital expenditures-per-barrel. Both oilfields will experience the same operating costper-barrel once development is complete. Both oilfields face similar transportation and gathering costs, and similar royalty and taxation rates. Both oilfields face similar risks associated with permitting, geology, production technology, etc.

Resource Certainty Expansion Opportunities Production Volume

Crude Quality

Stage of Development

Operating Cost Location Project Risk

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In our experience, true comparability is rare in many cases and adjustments to transaction values may be required. The reasonableness of the necessary adjustments depends upon their number, complexity, and the magnitude of their impact on value. Moreover, the need for adjustments can undermine the apparent objectivity, simplicity, and reliability of market evidence gleaned from transaction evidence. 5.1 Comparables for Operating Assets Comparables valuation for operating assets is often conducted using multiples of earnings, such as EBITDA. EBITDA approximates the cash flows generated by a project or business that can be used to pay debt or taxes, make additional capital investments, or distribute to shareholders. It reflects the revenue and cost drivers of the project or business. While EBITDA is not perfect,51 its use allows simple comparisons across assets or companies with differences in capital structure and accounting methods. EBITDA is translated into the valuation metric of “enterprise-value to EBITDA.” Enterprise value (“EV”) reflects the total value of the equity and debt of a project or business.52 The application of this method relies on the inherent assumption that comparable assets will have a similar relationship between their EBITDA and enterprise value, regardless of the particular financing structure adopted. Comparability may be improved by normalizing EBITDA to exclude non-recurring revenues and expenses, and ensuring that key aspects are defined consistently. Other multiples are also possible and relate to measures of size, such as EV per barrel of reserves or MW of installed capacity. These multiples provide a sense of the average valuation level for a single unit of capacity. Unlike EV / EBITDA, they do not consider whether one asset could be more or less profitable than another. In general, comparability tends to be somewhat easier to establish among operating assets than among pre-production assets. EBITDA multiples help control for differences in current profitability across assets. However, establishing comparability requires similarity in future conditions as well. In the extractive industries, future profitability of an asset is influenced by its remaining life, production decline rates, decommissioning or reclamation costs, fiscal terms, and potential expansion opportunities. Many of these factors apply in the renewables sector, but there are some additional considerations, such as 51  For example, EBITDA may not capture differences in capital expenditure requirements, technology employed, and tax circumstances, or may reflect non-recurring items. 52  Using EV allows comparison across companies with different capital structures.

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plant vintage, which reflects the fact that otherwise similar plants may have obtained different levels of support due to coming online at different times. Consider the example of shale gas production. Two projects with similar production rates and profitability today may appear to be closely comparable. However, if one project is in its first year of production and the other is in the fourth year, the assets could have substantially different valuations even if each has a remaining life of 50 years or more. This is because shale gas projects tend to have steep production decline rates during the first few years of operations, after which decline rates become more stable, so the future decline in profitability of the first project would be far steeper than it would be for the older project. Simple valuation metrics such as EV / EBITDA generally fail to capture the impact of such differences. 5.2 Comparables for Pre-Production Assets When attempting to apply the comparables method to value pre-production assets, no measure of profitability is available. Therefore, typical practice is to develop valuation metrics that are deemed to be a proxy for the ability to generate revenues and profits in the future. In the extractive industries, the most common proxies tend to be value-perunit of reserves.53 The quantity of reserves and resources for an extractive asset often has been determined and evaluated in accordance with relatively standard practices, as discussed above. Therefore, it is not uncommon to be able to characterize extractive transactions in terms of value-per-barrel of oil for oil projects and value-per-ounce of gold for gold projects. For renewables—where the focus is on value per MW of installed capacity—installed capacity is readily available from project design criteria. Using a metric like value-per-barrel of oil reserves assumes that a barrel of reserves at different properties has the same value. Such reserve metrics are one-sided because they inherently reflect a project’s potential revenues without accounting for differences in capital or operating costs. This one-sidedness raises the bar on the required level of comparability among the properties: a reliable valuation needs to ensure that the properties have comparable costs, in addition to other factors discussed above.54 Similar one-sidedness is present in respect of the value per MW of renewable projects, where valuators have to examine whether the comparable assets are exposed to similar levels of natural 53  These calculations sometimes consider resources, either when reserves have not been quantified or resources exist in excess of reserves. In general, material classified as resources in excess of reserves can also have economic value. 54  Some metrics, such as EBITDA multiples, have already accounted for operating costs.

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resources (e.g., solar irradiation or wind strength), are similarly productive (e.g., efficiency levels of new plants tend to exceed those of older plants), and enjoy the same level of support. Extractive assets that produce a single product are the least complicated because the value can be quoted directly in terms of the quantity of that product, such as dollars-per-barrel of oil reserves or per-ounce of gold reserves. However, extractive projects often produce more than a single product. For example, hydrocarbon projects may contain both oil and gas (among other products) and mining projects may contain a mix of metals. For projects with multiple products, the valuation metric may convert all of the projects’ outputs into “equivalent reserves.” For example, in public reporting, an oil-dominant project that contains gas tends to be evaluated using barrel-of-oil-equivalent (“BOE”), with each unit of gas being converted into an assumed equivalent in barrels of oil.55 For mining projects, the reserves of a secondary metal may be converted into equivalent units of the primary metal based on relative prices. Equivalence adjustments introduce potential new errors into the valuation metric because the adjustments may not accurately reflect how the mix of products translates into a project’s ultimate profits.56 However, there often are no reliable comparable transactions. In such circumstances, it may be reasonable to consider offers to transact comparable assets or the subject asset itself.57 For example, in Stati v. Kazakhstan, involving an upstream oil and gas concession and a downstream liquefied petroleum gas (“LPG”) plant that was under construction, the tribunal valued the LPG plant based on an offer made by the State-owned KazMunaiGaz, while rejecting estimates based on the DCF method and sunk costs.58 That said, it is important to 55  This is often done assuming 6 Mcf of gas is equivalent to one barrel of oil. See, e.g., Exxon Mobil Corp., Annual Report (Form 10-K), 5 (Feb. 25, 2015). The use of this conversion rate reflects roughly equivalent total energy content, although this does not necessarily reflect equivalent value. 56  As an example, the conversion requires knowing the relative value of, say, an ounce of gold and a pound of copper. But this relative value is not constant over time because it depends on the relative market prices of the two commodities. Because the outputs will usually be extracted over a long period, there is no single conversion ratio of gold into copper that results in market value equivalence. In addition, deposits with multiple metals may face complexities that reduce recovery rates or increase processing costs. 57  This was recognized in International Valuation Standards 2017, supra note 42, 32 (¶ 30.3). 58   Stati v. Kazakhstan, supra note 38, ¶¶ 1746–7. The Khan Resources v. Mongolia award was also tied to an offer, but this offer had been accepted before the agreed transaction was derailed by the failure to receive regulatory approval. See Khan Resources v. Mongolia, supra note 39, ¶¶ 413, 421.

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consider such offers with care because an offer does not reflect an agreement on price or other terms between a willing buyer and a willing seller. Therefore, an offer does not necessarily meet the standard definition of FMV and the information derived from offers is best used in conjunction with other valuation methods. 5.3 Arbitral Practice Parties and tribunals in extractive industries cases rarely have relied on the market approach as the main method to establish the fair market value of extractive properties, likely reflecting the challenges discussed above, particularly for pre-production assets. The market approach was proposed by the parties in only 11 of the 27 extractive sector cases decided in favor of the investor, and of those, only seven involved the valuation of extractive properties.59 One award used an average that included a market approach estimate;60 another cited the market approach as useful but only to confirm the reliability of the DCF result;61 while the other five rejected the comparables method and used an alternative.62 In renewables arbitrations, we know of no case where the issue of comparable transactions has been explicitly discussed in relation to a damages award. Tribunals in extraction cases often cite a lack of true comparability between the investment at issue and the comparables proposed by the parties. For example, the tribunal in Occidental v. Ecuador rejected the use of comparable transactions entirely due to a lack of true comparability: Having considered the parties’ arguments and the evidence of their respective witnesses and experts, the Tribunal agrees with the Claimants that “each oil and gas property presents a unique set of value parameters”. Therefore, the Tribunal concludes that it can derive no assistance from 59  These figures are drawn from the authors’ analysis of awards based on UNCTAD’s identification of cases. UNCTAD, Investment Dispute Settlement Navigator, supra note 1. Three of the 11 cases involve shares in Yukos, a large integrated oil & gas company, and a fourth involves an oil refinery. In addition, the total includes three cases for which we could not determine the valuation methods used by the parties. 60   Crystallex v. Venezuela, supra note 44, ¶¶ 916–7. 61   Gold Reserve v. Venezuela, supra note 35, ¶¶ 831–2. 62   Rusoro v. Venezuela, supra note 46, ¶ 782; Copper Mesa Mining Corp. v. Republic of Ecuador, PCA Case No. 2012-2, Award, ¶¶ 7.5, 7.24 (Mar. 15, 2016); Khan Resources v. Mongolia, supra note 39, ¶ 399; El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Award, ¶¶ 711–2 (Oct. 31, 2011); Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award, ¶ 787 (Oct. 5, 2012).

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an analysis of the seven transactions which the Respondent has submitted as comparable sales.63 Taking a slightly different approach, the tribunal in Gold Reserve chose to rely on the DCF method rather than comparables, in part because of concerns about a lack of comparability. However, it did not ignore comparables entirely. Rather, the tribunal proceeded to find comparable transactions useful as a “cross-reference as to the reasonableness of the DCF valuation” and was ultimately comforted that the comparables “produced value reasonably similar” to the DCF valuation on which the tribunal ultimately relied to award damages.64 The tribunal in Crystallex also rejected a valuation estimate based on comparable transactions because it deemed the large number of adjustments needed to account for differences across assets speculative.65 Nevertheless, the tribunal did adopt a method based on the value of publicly traded comparable companies on the valuation date (in addition to an estimate based on the claimant’s market capitalization). The method involved an analysis of the EV-to-resources multiple of a sample of 73 publicly traded companies on the valuation date, with respect to which the tribunal stated: the Claimant and its experts have identified sufficiently comparable companies to find their EV/Resource multiple. While the Tribunal has noted the Respondent’s criticism that some of the 73 companies used as comparables seem to bear little resemblance to Crystallex, no two companies will ever be exactly alike. This is a given that must be accepted when using this kind of methodology. After all, “to compare” is a process made with objects similar to the subject rather than with identical objects—if those even exist.66 The award does not contain sufficient detail to ascertain what precise criteria the tribunal used to assess comparability. Comparability can be challenging, but the comparable companies method has one distinct advantage over the comparable transactions method. The 63   Occidental v. Ecuador, supra note 62, ¶ 787. Similarly, the tribunal in Khan Resources v. Mongolia rejected the use of comparables, stating that “[t]he difficulty of finding truly comparable companies in the present case makes this method unattractive.” Khan Resources v. Mongolia, supra note 39, ¶ 399. 64   Gold Reserve v. Venezuela, supra note 35, ¶¶ 831–2. 65   Crystallex v. Venezuela, supra note 44, ¶ 909. 66   Id., ¶ 902.

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comparable companies method relies on share prices observed daily in the stock market, and as a result can provide market values of the comparable companies on the valuation date relevant in the arbitration. In contrast, the comparable transaction method indicates value only on the dates of the respective transactions, which generally differs from the valuation date. The comparable transactions method therefore can be less reliable (all else constant) in a rapidly changing market environment. The valuations of otherwise comparable projects may be rendered out-of-date for the purposes of the damages exercise by significant changes in commodity prices, interest rates, or costs between the transaction dates and the valuation date.67 Another limiting factor in the use of comparables is that companies or projects located in different countries may reflect different risks. Tribunals have treated country risk in diverse ways in investment treaty cases.68 For example, the Gold Reserve award states that “[t]he Tribunal agrees … 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.”69 Other tribunals have taken the opposite view and relied on valuations that reflect the market’s perception concerning a State’s propensity to expropriate.70 These differences in the treatment of country risk introduce another element of comparability, which in the end may eliminate many or all of the candidate transactions or companies. In conclusion, the market approach may be widely used in valuation practice, but it has not been used extensively as the basis for damages awards in 67  In Crystallex, the 16 transactions used by the Claimant’s expert occurred between January 2006 and February 2012, a period during which gold spot prices increased from about $600/oz to about $1,800/oz. Id., ¶ 819. Changes in market price expectations typically have large and disproportionate effects on project values, particularly for pre-production projects (as was the case in Crystallex). It would not be surprising for a 20% increase in prices to double the market value of a project, all else constant, because of operational leverage (i.e., because profit margins are lower than prices, a $1 increase in price has a larger percentage effect on margin, and therefore on market value, than it does on the price itself). 68  This is a debated issue for which no consensus currently exists. For a discussion of economic aspects, see Florin A. Dorobantu et al., Country Risk and Damages in Investment Arbitration, 31(1) ICSID Rev. 219–31 (2016); see also Chapter 9, James Searby, Measuring Country Risk in International Arbitration. For a discussion of legal aspects, see Markus Burgstaller & Jonathan Ketcheson, Should Expropriation Risk Be Taken into Account in the Assessment of Damages?, 32(1) ICSID Rev. 193–215 (2017). 69   Gold Reserve v. Venezuela, supra note 35, ¶ 841. 70   See, e.g., Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award, ¶ 365 (Oct. 9, 2014).

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investment treaty cases. Tribunals have been justifiably concerned about the existence of true comparability. This underscores the need for parties and experts who rely on such methods to conduct a thorough analysis of comparability and to demonstrate that the assets are sufficiently similar across all key drivers of market value, including, when appropriate, the risk profile of the host State and the protections available to investors. 6

The Relevance of Share Prices to Damages Assessments

Valuation methods like DCF and comparables are necessary because the FMV of investments is often not observed directly. Large projects, like those that are often the subject of investment cases, do not transact frequently, and even when they do, it may be that no transaction occurred close enough to the valuation date to provide a timely observation of value. However, some investments subject to investment arbitration may be owned by publicly traded companies. In these cases, stock prices may, under certain conditions, provide objective and timely information about the investment’s FMV and the valuation impact of an alleged breach. Share prices represent objective market prices, established under the conditions typically required of FMV, and can be observed directly. Share prices therefore avoid the need for the assumptions inherent in other valuation methods. This advantage was explicitly recognized by the Crystallex tribunal, which relied on the claimant’s enterprise value as a measure of the FMV of the expropriated investment, which was the company’s only asset: 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.71 The tribunal in Khan Resources v. Mongolia found share prices to be informative for the same reason:

71   Crystallex v. Venezuela, supra note 44, ¶ 890.

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The market capitalization approach advocated by the Respondents on its face has much attraction. The Tribunal accepts that Khan Canada ultimately held the investment that is the subject of this dispute and that it was essentially a “single-project” company. The market capitalisation of Khan Canada should, therefore, reflect the market’s (i.e., a willing buyer’s) view of the value of the company and its interest in the Dornod Project…. Absent countervailing factors, this should be the simplest and most accurate reflection of the value of the Claimants’ interest in the Dornod Project and is preferable to the approximations and estimations provided by the DCF and market comparables methodologies….72 The claimant’s publicly traded share price can be used to quantify damages when three conditions are met: (1) the investment at issue represents a large portion of the claimant’s business, (2) share prices incorporate value-relevant information, and (3) adjustments can be made to exclude the impact of the alleged treaty violations, if needed. If a claimant effectively owns a single project, the company’s stock price provides a direct estimate of that project’s FMV. In the case of an outright taking, the quantum calculation may be as simple as calculating the firm’s enterprise value on the date preceding the release of public information about the impending expropriation.73 In Crystallex, for example, the tribunal relied in part on this method, highlighting the company’s single-asset nature as one reason why the method was reliable.74 When the claimant owns other assets, a valuation based on the share price may serve as a check on other methods. The company’s enterprise value before the alleged treaty violation provides an upper bound on the FMV of the investment unless the market is already anticipating such violations. The drop in

72   Khan Resources v. Mongolia, supra note 39, ¶¶ 400–1 (citations omitted). 73  It is commonly accepted that for damages purposes, the valuation should exclude the impact of the alleged treaty violation. See, e.g., Ripinsky & Williams, supra note 10,  § 6.3.4(a). 74   Crystallex v. Venezuela, supra note 44, ¶ 890 (“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 [Mine Operation Contract] 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.”) (citations omitted).

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enterprise value due to news of the disputed conduct may represent a lower bound on its economic impact on the investment.75 There are instances when, even for a publicly traded single-asset company, share prices may not provide a reliable assessment of the FMV of a claimant’s loss. For example, the shares of a company may be highly illiquid, and therefore may not reflect all relevant market information relating to the FMV of an asset. Share prices may also reflect the impact of treaty violations that should be excluded when computing damages. Both of these concerns were noted in Khan Resources, which led the Tribunal to reject the use of share prices despite recognizing that share prices in general could provide a reliable means of estimating damages.76 Share prices are informative when they incorporate the available information about the investment’s future cash flows. This depends on whether: (1) market participants have access to substantially all value-relevant information and (2) prices incorporate that information through trading by informed investors. Economists refer to the ability of share prices to reflect information as “market efficiency.” Whether this is the case for a particular stock depends on multiple factors that a tribunal may need to evaluate, including the stock’s trading volume,77 the magnitude of trading costs,78 the extent to which the stock is held by institutional investors,79 the historical behavior of the share 75  The remaining FMV of the company reflects the residual value of its assets, but may also reflect the investor’s hopes of recovery through, for example, a potential arbitration proceeding. At an extreme, if there were no doubt about the tribunal’s jurisdiction or the State’s liability, no enforcement risk, and pre-award interest were expected to provide full compensation for any payment delay, the treaty violation would have no impact on the company’s share price.  The drop attributable to the alleged treaty violation needs to be separated from changes due to other market events. This can be done through a technique called event study analysis, which first estimates a statistical model of the company’s share price (based, for example, on a market or an industry index) and then calculates the impact of a particular event as the difference between the share price predicted by the model and the actual share price, provided the effect is statistically significant. 76   Khan Resources v. Mongolia, supra note 39, ¶ 407. 77  Metrics include the average percentage of shares outstanding that trades daily and the fraction of trading days with no trading. 78  One measure of trading costs is the bid-ask spread, which is the difference between the price of the highest buy order and lowest sell order pending in the market at any given time. A higher bid-ask spread indicates higher trading costs. 79  Institutional investors include primarily asset management funds, which are presumed to have the access and knowledge to gather and analyze information about their investments. Stocks with higher institutional holding are easier to sell short, which facilitates the transmission of negative information into prices.

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price when unexpected news about the company became public, and the quantity and quality of information available to market participants. Adjustments would be needed to a share price measure if unlawful acts of the State had depressed the share price prior to the relevant valuation date for damages. An event study analysis can help quantify the impact of the acts at issue on a company’s share price and determine “but-for” share prices.80 Reliable use of the event study method requires: (1) identification of the specific State acts that ought to be excluded, (2) identification of when each act became public knowledge, and (3) the absence of any confounding events, which could have affected the stock price movements at the same time as the alleged violations.81 Event study analysis is a well-established technique and is routinely used in securities litigation,82 but has been used to a lesser extent in investor-State arbitration. However, it was used by the claimants in The Rompetrol Group N.V. v. Romania to estimate damages. The Rompetrol tribunal recognized the usefulness of the event study technique in general, but found that the specific event study applied by claimants had failed to establish a direct link between the alleged breaches and the observed changes in Rompetrol’s share price.83 A more simplistic approach is to start with the company’s share price prior to the first excludable State act and replace all subsequent price changes up to the valuation date with the changes in an index reflecting the performance of the industry or a group of benchmark companies. This method effectively assumes that, but for the excludable State acts, the company’s share price would have moved with the selected index. The Crystallex tribunal adopted this approach, and used an index of gold mining company share prices as a proxy for the but-for evolution of the claimant’s share price.84 80   See John Y. Campbell et al., The Econometrics of Financial Markets 149–80 (1997). 81  An example of a confounding event would be the release of exploration results on the same day as the government’s public announcement that it is considering revoking the company’s mining license. The news about exploration results may offset or amplify the negative effect of the threat of license revocation, making it impossible, in general, to identify each effect separately. 82   See Nicholas I. Crew et al., Federal Securities Acts and Areas of Expert Analysis, in Litigation Services Handbook: The Role of the Financial Expert (Roman L. Weil et al. eds., 5th ed. 2012). 83   The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award, ¶¶ 287–8 (May 6, 2013). 84   Crystallex v. Venezuela, supra note 44, ¶ 891. In Rusoro, the tribunal used the index method to adjust the historical acquisition price forward until the valuation date. Rusoro v. Venezuela, supra note 46, ¶¶ 679–82.

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Compared to the event study approach, this method has at least two drawbacks. First, it ignores the impact of company-specific developments that are unrelated to the alleged violations. For example, a claimant’s investment could have lost value relative to an industry index if new drilling revealed that previous expectations were overly optimistic. Second, the implicit assumption is that a company’s share price should react to industry-wide factors in the same way as the industry index. For example, if a 10% increase in gold prices translates into a 15% increase in the index, the method assumes that the claimant’s stock price would have also increased by 15%. But such an assumption may not be warranted because changes in commodity prices will have different impacts on different assets. We note that share prices can reflect not only actual treaty violations but also expectations of the risk of future treaty violations. As discussed above, in some cases, tribunals have held that the risk of such future unlawful acts should be excluded when calculating damages.85 Under this legal view, adjustments to share prices may not be possible because the manifestation of the risk is not limited to a specific period that can be excluded from analysis.86 The share price approach is most likely to prove useful for investments in the mining industry. Many publicly traded junior mining companies effectively own a single project and thus the share price provides a direct indication about the FMV of the single project. This feature of junior mining companies is due in part to the existence of well-developed and liquid equity markets focused in Canada and Australia, which account for the majority of the listed mining companies worldwide. Equity markets provide funding for risky investments in exploration and development that would not typically attract debt financing. As a result, the mining industry is segmented into junior mining companies, which focus on exploration and development and often have single-asset portfolios, and the majors (companies like Rio Tinto, BHP Billiton, Vale, Barrick Gold, and Newmont), which own numerous projects and sometimes acquire development-stage projects from juniors and bring them into production. 85   See, generally, Dorobantu et al., supra note 68; Burgstaller & Ketcheson, supra note 68; Gold Reserve v. Venezuela, supra note 35; Venezuela Holdings v. Venezuela, supra note 70. 86  While not explicitly addressed in the award, this may explain why the Gold Reserve tribunal’s DCF-based FMV determination ($713 million) substantially exceeded claimant’s enterprise value at the valuation date (approximately $300 million). Gold Reserve v. Venezuela, supra note 35, ¶ 848. The Gold Reserve award further shows the significant impact of the tribunal explicitly excluding the impact of some country risks on damages by limiting the country risk premium incorporated into the DCF model discount rate.

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Share prices of mining and oil and gas companies are likely to reflect the considerable information that is available. As discussed above, mining and oil and gas companies are, in many jurisdictions, subject to disclosure requirements beyond those generally applicable to public companies. These additional requirements impose disclosure obligations and set disclosure standards that make the information disclosed more comparable across assets and more easily understandable by investors. Although the extent to which share prices reflect all information relevant to a FMV determination is a case-specific inquiry, extractive sector projects are somewhat less susceptible to concerns that a buyer or seller of the project at issue would rely on material private information not available to public markets. For their part, renewables assets are often owned by private companies and investment funds, and therefore lack an observable stock price. Some renewables investments are owned by relatively large publicly traded energy companies, utilities, and construction firms. Some companies have even set up traded subsidiaries or spin-offs dedicated to renewables, such as Enel Green Power, Iberdrola Renewables, and Saeta Yield. However, we know of no publicly traded renewables firm with a single investment asset, analogous to junior mining companies, where the share price provides a direct measure of the FMV of a particular asset. Most traded renewables firms have a diverse portfolio of renewables assets of different types and in different locations, and the value of any particular asset is likely to be small relative to the overall firm. In summary, when the investment at issue is held by a publicly traded company, the claimant’s stock price can provide a direct and objective measure of the market’s valuation of that asset. This is the case when the claimant is a single-asset company or the investment is large relative to its other assets, the share price reflects the available value-relevant information, and adjustments can be made to exclude the impact of the alleged treaty violations. The approach is most likely to be applicable in mining cases, where junior companies often own a single large project and securities regulations (as is the case in many jurisdictions) provide for extensive public disclosure of value-relevant information. 7 Conclusion Natural resources investments are the subject of a large share of investor-State disputes. Standard valuation methods should be considered in these disputes, but the ability to apply them reliably is often affected by the special circumstances surrounding these assets. Reliable cash flow projections can often be

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developed for extractive and renewables projects, making the DCF method superior to other valuation methods, even for some early-stage projects. The market approach based on comparable transactions or companies should also be considered, but differences across natural resources projects are common and cannot always be accounted for through adjustments. Finally, where claimants in the natural resources sector have publicly traded shares, those share prices can provide useful information about investment value.

Part 4 Damages from a State Perspective

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Chapter 12

Principles Limiting the Amount of Compensation Borzu Sabahi, Kabir Duggal and Nicholas Birch 1

Limits on Compensation

The full reparation principle1 in international law requires compensating the aggrieved party for all losses caused by an internationally wrongful act. The com­pensation awarded, however, cannot exceed the actual loss suffered. International tribunals have relied on a number of principles to establish and limit the quantum of the “actual loss” within the boundaries of the full reparation principle. In this Chapter, we examine those principles: investor’s contributory fault, causation, failure to mitigate, counterclaims and set-offs, limitations on awarding speculative damages, limitations arising from the scope of property contractual rights, and the prohibition of double recovery.2

1   The full reparation principle as prominently encapsulated in a Permanent Court of International Justice (“PCIJ”) dictum in the Chorzów Factory case provides that: “[R]eparation must, 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. 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.” Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17, at 47 (Sept. 13). This ruling has been recognized by arbitral tribunals as expressing customary international law and many have referred to it. See, e.g., ADC Affiliate Ltd. & ADC & ADMC Mgmt. Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, ¶¶ 484–99 (Oct. 2, 2006); Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, ¶¶ 847–8 (Apr. 4, 2016). See also Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice 47–53 (2011). 2  Similar themes are explored in an earlier publication written by the authors. See Borzu Sabahi et al., Limits on Compensation, in International Investment Law: A Handbook (Marc Bungenberg et al. eds., 2015).

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1.1 The Investor’s Contributory Fault The principle of contributory fault is also (loosely) referred to as comparative fault, contributory negligence, and “contribution to the injury” in the ILC Articles.3 Under this principle, the claimant’s contribution to the injury, whether deliberate or negligent, will be taken into consideration in deciding the amount of damages that the claimant may recover.4 In addition to the ILC Draft Articles, tribunals have recognized and applied this principle.5 Tribunals typically invoke contributory fault when an investor acts in a reckless manner and/or has exercised bad or poor business judgment. As noted by one tribunal: “Bilateral Investment Treaties are not insurance 3  See Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries [hereinafter ILC Draft Articles], art. 39 (2001), 2 Y.B. Int’l L. Comm’n 31, U.N. Doc. A/ CN.4/SER.A/2001/Add.1 (Part 2). See also Gemplus S.A et al. and Talsud S.A. v. United Mexican States, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/04/4, Award, ¶ 11.12 (June 16, 2010) (“Article 39 of the ILC’s Articles on State Responsibility precludes full or any recovery, where, through the wilful or negligent act or omission of the claimant state or person, that state or person has contributed to the injury for which reparation is sought from the respondent state.”). 4  See Sergey Ripinsky with Kevin Williams, Damages in International Investment Law 331 (2008) (“if the loss of an investment is wholly or partially caused by claimant’s bad business judgment, then the respondent State should not be held liable for the relevant part of the loss.”). 5  See, e.g., AGIP S.p.A. v. People’s Republic of the Congo, ICSID Case No. ARB/77/1, Award, ¶ 99 (Nov. 30, 1979), 1 ICSID Rep. 306 (1993) (noting that compensation could be limited by contributory negligence of the investor); MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award, ¶ 242 (May 25, 2004) (noting that the investment decisions was one that the “wise investor would not have” made); Bogdanov et al. v. Republic of Moldova, SCC Arbitration Proceeding, Arbitral Award, § 5.2 (Sept. 22, 2005) (“The Arbitral Tribunal does not find that the Respondent is liable for payment of damages corresponding to the entire loss, and that the Local Investment Company must be deemed partially responsible for the loss because it did not ensure that the Privatization Contract contained an appropriately precise regulation of the compensation.”); RosInvestCo UK Ltd. v. Russian Federation, SCC Case No. V (079/2005), Final Award, ¶¶ 634–5 (Sept. 12, 2010) (“While these contributions of Yukos to its own demise do not change the conclusion that Respondent breached the IPPA with regard to Claimant’s shares, they may be relevant in the consideration later in this Award of the quantum of any damage due to Claimant which will be examined hereafter in this award.”). For the ICJ jurisprudence, see LaGrand (Germany v. United States), Judgment, 2001 I.C.J. 466, ¶¶ 57, 116 (June 27); S.S. “Wimbledon” (United Kingdom et al. v. Germany; Poland intervening), Judgment, 1923 P.C.I.J. (ser. A) No. 1 (Aug. 17). For writings of the commentators, see Campbell McLachlan et al., International Investment Arbitration: Substantive Principles 341 (2008); Ripinsky & Williams, supra note 4, at 331, 337.

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policies against bad business judgments … they cannot be deemed to relieve investors of the business risks inherent in any investment.”6 For example, in MTD v. Chile, the investors had failed to conduct full due diligence before making their investment, including a reasonable vetting of a local business partner.7 The majority held that the investors’ actions had contributed to the injury and, therefore, reduced the amount of compensation by 50%.8 Similarly, in Occidental v. Ecuador, the claimants failed to obtain certain necessary government approvals for a partial transfer of ownership, which ultimately lead to the cancelation of the claimants’ petroleum exploration rights. Although the tribunal held that the cancellation was a disproportionate response, and hence a wrongful act, it also held that the claimants’ material failure had “provoked” this response, and so it reduced the award by 25%.9 Dissenting arbitrator Stern, however, disagreed with this percentage and believed that award should have been reduced by 50%.10 In the Yukos award, the tribunal also considered that the claimants had contributed to the loss of their investment by their abusive channeling of revenue through Russia’s low-tax regions and their misuse of the Cyprus-Russia tax treaty, all of which was aimed at reducing Yukos’ tax burden.11 Accordingly, in “the exercise of its wide discretion,” the tribunal set the claimants’ contributory fault at 25% for “the prejudice which they suffered,” an outcome it found “fair and reasonable in the circumstances of the present case.”12 6    Emilio Agustín Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Award, ¶ 64 (Nov. 13, 2000), 16 ICSID Rev.—FILJ 248 (2001). See also Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award, ¶¶ 426–9 (July 14, 2006); Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability, ¶ 309 (Dec. 27, 2010); Waste Mgmt., Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, ¶ 177 (Apr. 30, 2004). 7   M TD v. Chile, supra note 5, ¶ 178. 8    Id., ¶ 243. 9  Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award, ¶¶ 662–87 (Oct. 5, 2012). See, generally, Borzu Sabahi & Kabir Duggal, Occidental Petroleum v Ecuador (2012): Observations on Proportionality, Assessment of Damages and Contributory Fault, 28(2) ICSID Rev. 279 (2013). 10   Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Dissenting Opinion of Brigitte Stern, ¶¶ 7–8 (Sep. 20, 2012). 11   Yukos Universal Ltd. (Isle of Man) v. Russian Fed’n, PCA Case No. AA 227, Final Award, ¶¶ 1607–37 (July 18, 2014). The tribunal held that while the claimants had contributed to its loss, the Russian government then used claimants’ tax issues “as a pretextual justification” to wrongfully seize the investment. Id. ¶ 1615. 12   Id. ¶ 1637. More recently, the tribunal in Garanti Koza v. Turkmenistan declined to award the full amount of damages sought by claimant for the work performed on a bridge project, reducing it by about 40%, because claimant was partly responsible for its inability

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The tribunal’s “discretion” to reduce damages derives from the inherent power of international tribunals to decide claims, including quantifying damages. As noted by the MTD Annulment Committee, tribunals may have a “corresponding margin of estimation” to make this apportionment based on their best judgment.13 The percentage (or the amount) by which tribunals should reduce damages for contributory fault, however, has not received careful attention and is not based on any particular formula. In practice, tribunals—after setting out relevant contributory fault factors—have used their discretion to apportion the fault for the injury rather than on the basis of specific facts, such as the straight 50% reduction in the MTD award,14 or 25% in the Occidental case (by the majority) and in the Yukos case. Admittedly, apportioning injury between multiple causal factors—when the different factors were all essential and lead to the same injurious outcome— is not easy and ultimately the reductions mentioned above seem subjective.15 Arbitral tribunals should consider using damages experts to quantify the necessary reductions with more precision. Using the experts seems particularly justified in mega cases where the reductions reach hundreds of millions (or billions, as in the case of Yukos). 1.2 Causation The party who seeks reparation (including damages) must establish a causal link between its losses and an internationally wrongful act.16 Causation is a to complete the work on the project which ultimately led to termination of the contract. Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, Award, ¶¶ 430–1 (Dec. 19, 2016). 13   See Yukos v. Russia, supra note 11, ¶ 1636 (agreeing with the MTD Annulment Committee on the difficulties of apportioning fault but recognizing that “the Tribunal, as other tribunals have done, must reach a decision….”). 14  The MTD tribunal awarded the claimants 50% of the value of the investment minus the residual value (based on an offer to buy the remaining investment made by claimants’ local partner). MTD v. Chile, supra note 5, ¶ 246. 15   See MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment, ¶ 101 (Mar. 21, 2007) (“As is often the case with situations of comparative fault, the role of the two parties contributing to the loss was very different and only with difficulty commensurable….”). George Kahale assimilated the arbitral tribunals’ practice of apportioning losses in this fashion to bargaining in a “Turkish bazaar.” See George Kahale III, Keynote Speaker Transcript, in 8 Investment Treaty Arbitration and International Law 191, 193 (Ian A. Laird et al. eds., 2015). 16   See, generally, Chapter 4, Patrick W. Pearsall & J. Benton Heath, Causation and Injury in Investor-State Arbitration.

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general principle of law17 and is included in ILC Draft Article 31.18 Some investment treaties like NAFTA codify this principle by specifically limiting the amount of recoverable damages to those which occur “by reason of, or arising out of” a wrongful act.19 The determination of the causation has both factual and legal aspects.20 Its factual element requires establishing with evidence that a wrongful act actually caused the aggrieved party’s losses. Only losses caused by the wrongful act may be compensated; losses caused by other events cannot be compensated. Establishing the factual link between a loss and a wrongful act does not end the inquiry; legal causation then operates to limit the extent to which the factual chain of events leading to a loss should be followed.21 Commentaries 9 and 10 on Article 31 explain legal causation as follows: 17   B in Cheng, General Principles of Law as Applied by International Courts and Tribunals 241 et seq. (1953). 18  ILC Draft Articles, art. 31 (“1. The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. 2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.”). See also id., commentary 9 (“Paragraph 2 addresses a further issue, namely the question of a causal link between the internationally wrongful act and the injury.”). In other words, “Respondent States should be held responsible for the harm they cause, but not more than that.” Andrea K. Bjorklund, Causation, Morality, and Quantum, 32 Suffolk Transnat’l L. Rev. 435, 449 (2009). 19  North American Free Trade Agreement, art. 1116(1) (1993) (“An investor of a Party may submit to arbitration under this Section a claim that another Party has breached an obligation … and that the investor has incurred loss or damage by reason of, or arising out of, that breach.”) and art. 1117(1) (“An investor of a Party, on behalf of an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly, may submit to arbitration under this Section a claim that the other Party has breached an obligation under: (a) Section A or Article 1503(2) (State Enterprises), or (b) Article 1502(3) (a) (Monopolies and State Enterprises) where the monopoly has acted in a manner inconsistent with the Party’s obligations under Section A, and that the enterprise has incurred loss or damage by reason of, or arising out of, that breach.”). 20   See ILC Draft Articles, art. 31, commentary 10. 21   See Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, ¶ 382 (Sept. 16, 2015) (“The harm for which reparation is sought must be caused by the wrongful act. It is generally accepted that factual causation is not sufficient. An additional element linked to the nature of the cause, sometimes called ‘cause in law’ or adequate causation is required.”) (citations omitted). See also Sabahi, supra note 1, at 172 (“The legal aspect of causation, and whether a particular cause is proximate, reflects certain policy choices on the part of the law makers or those who apply the law. Such choices may weaken a factually established causal link, or strengthen a relatively tenuous causal link. Legal proximity limits the extent to which factual proximity

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It is only ‘[i]njury … caused by the internationally wrongful act of a State’ for which full reparation must be made. This phrase is used to make clear that the subject matter of reparation is, globally, the injury resulting from and ascribable to the wrongful act, rather than any and all consequences flowing from an internationally wrongful act. … Thus, causality in fact is a necessary but not a sufficient condition for reparation. There is a further element, associated with the exclusion of injury that is too ‘remote’ or ‘consequential’ to be the subject of reparation. In some cases, the criterion of ‘directness’ may be used, in others ‘foreseeability’ or ‘proximity.’22 Arbitral tribunals have used various tests of legal causation to limit the amount of recoverable damages.23 Under the foreseeability test, for example, “offenders must be deemed to have foreseen the natural consequences of their wrongful acts, and to stand responsible for the damage caused.”24 In other words, offenders cannot be held responsible for unforeseeable consequences. (ie, the normal consequence of an event) should be followed. It may provide concrete answers when establishing factual proximity with precision is not possible.”); see, generally, Stanimir A. Alexandrov & Joshua M. Robbins, Proximate Causation in International Investment Disputes, in Yearbook on International Investment Law & Policy: 2008–2009, at 317 (Karl Sauvant ed., 2009). 22  ILC Draft Articles, art. 31, commentary 9 & 10 (emphasis added; citations omitted). See also Alexandrov & Robbins where the authors explain that: “[a]n alternative test focuses on foreseeability. If a wrongdoer could or should reasonably anticipate that his/her action will lead to a particular type of harm, he/she will be liable for such harm. If not, the harm will not be deemed to have been ‘proximately caused.’” The authors go on to explain an intervening cause as follows: “A second common purpose of the doctrine is to address situations in which there is an ‘intervening cause’ of harm.” Supra note 21, at 319–20. 23   See also CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Partial Award, ¶¶ 583–5 (Sept. 13, 2001) (applying foreseeability); CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Dissenting Opinion of Jaroslav Hándl, at 20–1 (Sept. 13, 2001); Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, ¶ 469 (Mar. 3, 2010) (applying “remoteness or foreseeability of damage”). There is no clear distinction between the different “tests” that tribunals and commentators refer to in determining causation, and terms such as “foreseeability” and “proximity” may be used to indicate the same concept. See Borzu Sabahi, Calculation of Damages in International Investment Law, in New Aspects of International Investment Law (Philippe Kahn & Thomas W. Wälde eds., 2007). 24   Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, ¶ 170 (Mar. 28, 2011).

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Application of the foreseeability test was at the center of Quiborax v. Bolivia. In that case, the tribunal found Bolivia liable for illegally expropriating claimant’s investment. The majority of the tribunal then moved the valuation date to the date of the award.25 This enabled the claimant to use hindsight in assessing damages and take into account all the events that had an impact on value (with the exception of the expropriation itself) including fluctuations in the ulexite market.26 Because ulexite prices had appreciated after the expropriation, this increased the value of investment. The majority held that the fluctuations were “foreseeable” and therefore had to be considered in assessing damages.27 Professor Stern, however, dissented and noted that the “fluctuations” were an “externality as far as the consequences of the illegal act is concerned,” because the illegal act did not cause those events. She further noted that: It is quite clear that the fluctuations of the market do not flow from the illegal act, it is an independent event, although it might indeed aggravate—or diminish—the injury…. The question here is the combined existence of an illegal act and of fluctuations in the market…. The fluctuations of the market are not a foreseeable consequence of the illegal act, they constitute an external event, which indeed is foreseeable, just as is foreseeable the ever changing nature of human life.28 A key point in Professor Stern’s opinion is the distinction between “injury” and “all consequences” flowing from a wrongful act. Only the “injury” can be repaired, not “all consequences.” For Professor Stern, market fluctuations fall within the latter category and therefore cannot be taken into account. This interpretation may provide more certainty in assessment of damages and would protect both parties in the event that the so-called “externalities” drive

25   Quiborax v. Bolivia, supra note 21, ¶ 370. 26  Ulexite is a mineral known as “TV rock” and has different industrial uses. 27   Quiborax v. Bolivia, supra note 21, ¶ 383 (“Subject possibly to special circumstances, the expropriation of a going concern appears objectively capable of causing the loss of future profits which may fluctuate according to the evolution of the economy and the market. If one focuses on foreseeability in this context, then it is equally clear that losses of future profits determined by the fluctuations of the market are objectively foreseeable. As a result, the majority is satisfied that the test of foreseeability (to the extent that it is deemed part of causation) is met in the circumstances before it.”). 28   Quiborax S.A. & Non Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Partially Dissenting Opinion of Brigitte Stern, ¶ 99 (Sept. 7, 2015).

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the value too high or too low. It remains to be seen whether other tribunals follow it. 1.3 Mitigation of Damages The party seeking to recover compensation has a duty to mitigate its losses as a general principle of law.29 As one tribunal explained: “Mitigation of damages, as a principle, is applicable in a wide range of situations. It has been adopted in common law and in civil law countries, as well as in International Conventions and other international instruments….”30 The harmed party must take reasonable steps to reduce its losses, or else it may find its recovery limited to only those losses it could not have prevented through timely action. “Even the wholly innocent victim of wrongful conduct is expected to act reasonably when confronted by the injury.”31 What steps are reasonable in any given case will differ, although common ones would include renegotiation of contracts, redeployment of resources, or even the abandonment of a losing investment.32 The failure to take reasonable steps to mitigate damages does not itself create responsibility, but may reduce the compensation due to a claimant that had the opportunity to limit its losses.33 For example, in BRIDAS v. Turkmenistan, a tribunal held that the 29   See ILC Draft Articles, art. 31, commentary 11. This principle is also contained in the UNIDROIT Principles of International Commercial Contracts [hereinafter UNIDROIT Principles], art. 7.4.8 (2004). See also Gabčíkovo-Nagymaros Project (Hungary v. Slovakia), Judgment, 1997 I.C.J. 7, ¶¶ 80–1 (Sept. 25); Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award, ¶ 167 (Apr. 12, 2002) (“The duty to mitigate damages is not expressly mentioned in the BIT. However, 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….”); Hrvatska Elektroprivreda d.d. v. Republic of Slovenia, ICSID Case No. ARB/05/24, Award, ¶ 215 (Dec. 17, 2015) (“With regard to the second issue, that of mitigation, the Tribunal finds that general principles of international law applicable in this case require an innocent party to act reasonably in attempting to mitigate its losses.”). 30   A IG Capital Partners, Inc. & CJSC Tema Real Estate Co. v. Republic of Kazakhstan, ICSID Case No. ARB/01/6, Award, ¶ 10.6.4(1) (Oct. 7, 2003). See also CME Czech Republic B.V. v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award, ¶ 482 (Mar. 14, 2003) (“One of the established general principles in arbitral case law is the duty of the party to mitigate its losses….”) (citation omitted). 31   See ILC Draft Articles, art. 31, commentary 11. 32   Id. 33   See Thomas W. Wälde & Borzu Sabahi, Compensation, Damages, and Valuation, in The Oxford Handbook of International Investment Law 1052, 1096 (Peter Muchlinski et al. eds., 2008). A recent tribunal, for example, concluded that the failure

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respondent had wrongfully repudiated a hydrocarbons joint venture with an Argentinian company, but reduced the amount of the award because of the claimant’s failure to mitigate damages. The claimant had continued to incur the costs of operating the oil field even after the respondent made it impossible for the joint venture to earn any revenues.34 The tribunal reduced the US$495 million award by US$50 million for the amount of the damages it held was due to the claimant’s failure to mitigate by cutting costs or obtaining revenues.35 1.4 Counterclaims and Set-offs The respondent State could also assert a counterclaim, which may establish the claimant’s responsibility for some wrongful act and entitle the respondent to a setoff against the compensation due. Counterclaims are distinct from defenses because counterclaims do not respond to any allegations made by the claimant, but rather are the respondent State’s distinct allegations of claimant wrongdoing, arising out of the same subject matter.36 A necessary question in international investment arbitration is a tribunal’s jurisdiction over the counterclaims in question.37 A counterclaim must fall to exhaust local remedies, in the absence of an express provision requiring it, would not generally breach the requirement to mitigate damages. See Dunkeld Int’l Inv. Ltd. v. Gov’t of Belize, PCA Case No. 2010-13, Award, ¶ 197 (June 28, 2016) (“The Tribunal agrees with the Claimant that recourse to local remedies is not strictly linked to the mitigation of losses, such that any duty to mitigate should require the exhaustion of local remedies or require a party to prefer a local remedy to one that may be available to it through international arbitration. Nevertheless, it may be the case that local administrative procedures may offer a remedy that appears more rapid or certain than that of an international claim, such that a party would be derelict in failing to attempt the local process.”). 34   B RIDAS S.A.P.I.C. et al. v. Gov’t of Turkmenistan et al., ICC Case No. 9058/FMS/KGA, Third Partial Award and Dissent, at 13 (Sept. 2, 2000). The respondent government had banned the claimant from exporting the joint venture’s production, the source of its revenue. During the arbitration, the tribunal had even taken unusual steps “to work with the parties to assist them in limiting the economic consequences of their dispute.” Id., at 12. However, the tribunal found that “[t]here was great reluctance on both sides to take any step that might give or could be perceived as giving an advantage to the other side.” Id. The respondent had agreed in principle to lifting the export ban to allow the joint venture to resume exports and produce revenue, but the claimant refused to agree to the joint operation of the venture and so precluded the tribunal’s arrangement. Id., at 13. 35   Id., at 13. 36   See Chapter 13, Jeremy K. Sharpe & Marc Jacob, Counterclaims and State Claims, at Section 2.2. 37   See, e.g., ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States [hereinafter ICSID Convention], art. 46 (2006) (“Except as the

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within the scope of the parties’ consent to arbitration. Generally, there must be a “necessary close connection between [the] counterclaim and the primary investment dispute,” such that the submission of the counterclaims may reasonably be considered within the scope of the parties’ consent to arbitration.38 What constitutes such a close connection depends on the facts and the governing law of the particular case.39 Jurisdiction over counterclaims has been accepted, for example, over alleged breaches by the claimant of the same contract which the claimant accused the respondent of breaching.40 Jurisdiction over counterclaims, however, has been denied where it was based on violations of host States’ tax, employment, or environmental laws and if they did not have a “close connection” with the primary claim.41 parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly 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.”). 38   Saluka Inv. B.V. v. Czech Republic, UNCITRAL Arbitration Proceeding, Decision on Jurisdiction over the Czech Republic’s Counterclaim, ¶ 27 (May 7, 2004). See also ICSID Convention, art. 46; Sergei Paushok et al. v. Gov’t of Mongolia, UNCITRAL Arbitration Proceeding, Award on Jurisdiction and Liability, ¶ 693 (Apr. 28, 2011). 39   Saluka v. Czech Republic, supra note 38, ¶ 63. 40   See Zeevi Holdings v. Republic of Bulgaria & Privatization Agency of Bulgaria, Case No. UNC 39/DK, Final Award, ¶¶ 1217–23 (Oct. 25, 2006) (where the tribunal ordered a US$12,789,856.21 offset for the claimant’s breach of contract). See also Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award, ¶ 1153 (Dec. 8, 2016) (where the tribunal accepted jurisdiction over counterclaims on human rights violations because Article X of the applicable BIT expressly permitted the host State to submit a claim or counterclaim to international arbitration. The tribunal ultimately rejected the counterclaim on the merits). 41   See Saluka v. Czech Republic, supra note 38, ¶¶ 59–82. See also Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award, ¶ 333 (Apr. 15, 2016) (“[The ICSID Convention] requires that a counterclaim be ‘within the scope of the consent of the parties and […] otherwise within the jurisdiction of the Centre.’ The scope of the consent to arbitrate is provided in Article 8 of the BIT. It is limited to ‘[d]isputes between a national or company of one Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement in relation to an investment of the former….’ The Respondent’s request to be awarded title over Agroflora’s assets does not concern an obligation of Venezuela under the BIT and thus falls outside the scope of the consent to arbitrate. In the Tribunal’s view, this is a matter to be dealt with by the local courts in application of municipal property law.”). Cf. Wälde & Sabahi, supra note 33, at 1097–8 (“Counterclaims may be raised based upon the violations of a host state’s tax laws. Or they may be based upon an investor’s alleged breach of domestic safety, employment, and environmental laws, which would render him liable to pay penalties which can be offset

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The issue was recently considered in Burlington v. Ecuador where Ecuador sought to recover US$2.6 billion in damages for “tremendous environmental harm” caused to its oil fields.42 The disputing parties in a separate agreement agreed to allow Ecuador to submit the counterclaims to the tribunal. The tribunal clarified that the counterclaims were otherwise within its jurisdiction.43 After examining in detail the counterclaims, which were based on Ecuadorian laws, the tribunal awarded US$41 million to Ecuador.44 Burlington, however, is unique in that the jurisdiction over the counterclaim was established through a separate agreement. 1.5 Necessity The state of necessity is a defense in the customary international law of State responsibility.45 This defense does not eliminate the obligation, but makes the non-performance of the obligation legal for the period of necessity.46 Once that period has elapsed, the obligation is again in force. As necessity justifies the commission of wrongful acts, it is “only rarely … available,” and “is subject to strict limitations to safeguard against possible abuse” under customary international law.47 To preclude liability, the wrongful act must be “the only way” to protect an “essential interest against a grave and imminent peril.”48 The act cannot injure “an essential interest” of the wronged against the compensation due. If the issue is inextricably linked with the compensation issue and if the government raises it in the context of the investment dispute, the tribunal should normally have jurisdiction to consider such counter claims, at least if they are apt to reduce the compensation due.”) (citations omitted). 42   Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims, ¶ 55 (Feb. 7, 2017). 43   Id., ¶ 60. 44   Id., ¶ 1099. Similarly, in Perenco v. Ecuador, Ecuador brought a US$2.2 billion counterclaim against claimant in order to remedy environmental damage caused to two oil blocks based on Ecuadorian law and the Participation Contracts. The claimant apparently did not object to the tribunal’s jurisdiction but later objected to the admissibility of those claims. The tribunal ultimately rejected those objections. See, generally, Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Perenco’s Application for Dismissal of Ecuador’s Counterclaims (Aug. 18, 2017). 45  ILC Draft Articles, Chapter V. See also Andrea K. Bjorklund, Emergency Exceptions: State of Necessity and Force Majeure, in The Oxford Handbook of International Investment Law 461–92 (Peter Muchlinski et al. eds., 2008). 46  ILC Draft Articles, art. 25, commentary 1. 47   Id., art. 25, commentary 2. 48   Id., art. 25(1)(a).

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State “or of the international community.”49 Where the “obligation in question excludes the possibility of invoking necessity” or the respondent contributed to the emergency situation in question, necessity cannot be invoked to preclude liability.50 It is important to note that while necessity may preclude wrongfulness, it does not seem to preclude compensation. ILC Article 27 states that “[t]he invocation of a circumstance precluding wrongfulness in accordance with this chapter is without prejudice to: (…) (b) the question of compensation for any material loss caused by the act in question.” In addition, investment treaties may contain provisions which function in much the same way. These provisions seem to excuse a breach of the obligations created by the treaty if certain conditions are met,51 and hence result in no compensation during the state of necessity. In LG&E v. Argentina, for example, the tribunal noted that the defense of necessity applied for a period of 17 months (December 1, 2001 until April 26, 2003), during which Argentina was not held liable for compensation.52 The application of this defense has received a mixed response from arbitral tribunals. For example, the Argentine Republic had raised this defense in all investment treaty cases that it faced in the aftermath of the financial crisis of 2001–2003. Six tribunals rejected the defense.53 However, in two cases, LG&E 49   Id., art. 25(1)(b). 50   Id., art. 25(2). 51  For example, Article XI of the Argentina-U.S. BIT allows acts taken “for the maintenance of public order, … of international peace or security, or the Protection of [the State’s] own essential security interests.” Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, art. XI (Nov. 14, 1991). The relationship between the rules governing necessity under customary international law as stated in the ILC Articles and those found in investment treaties, including the effect on compensation, has been a major point of contention in a series of cases, and the subsequent annulment of certain of these decisions, arising from the Argentine financial crisis in the early 2000s. 52   LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (Oct. 3, 2006), ¶¶ 226, 228, 267. 53  The six cases include: (i) CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award, ¶¶ 304–31, 353–94 (May 12, 2005) (this award was not subsequently annulled—CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic, ¶¶ 101–36 (Sept. 25, 2007)); (ii) Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award, ¶¶ 288–345 (May 22, 2007) (this award was subsequently annulled); (iii) Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Award, ¶¶ 328–97 (Sept. 28, 2007) (this award was subsequently annulled); (iv) BG Group Plc v. Argentine Republic, UNCITRAL

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and Continental Casualty, the tribunals accepted the defense and reduced the amount of compensation due to the claimants.54 Two annulment committees in Sempra and Enron annulled the original awards (which had also rejected the defense), because they had not properly applied the relevant principles on state of necessity.55 In both cases, the tribunals have been reconstituted and it remains to be seen whether Argentina’s necessity defense will be accepted and, if so, whether compensation will be reduced on that basis.56 1.6 Claim for Damages that Are Speculative, Uncertain, or Hypothetical Tribunals have recognized that computation of damages is not an exact science and is therefore subject to a tribunal’s overall discretion. This discretion, however, does not extend to speculative, uncertain, or hypothetical damages.57 This has been famously described by the Amoco tribunal in the following words: “[o]ne of the best settled rules of the law of international responsibility of States is that no reparation for speculative or uncertain damage can be awarded.”58 Tribunals apply the general rule that the burden of proof is on Arbitration Proceeding, Final Award, ¶¶ 388–412 (Dec. 24, 2007); (v) Nat’l Grid p.l.c. v. Argentine Republic, UNCITRAL Arbitration Proceeding, Award, ¶¶ 205–62 (Nov. 3, 2008); and (vi) Suez, Sociedad General de Aguas de Barcelona S.A. & InterAguas Servicios Integrales del Agua S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability, ¶¶ 229–43 (July 30, 2010). 54   See LG&E v. Argentina, supra note 52; Continental Casualty Co. v. Argentine Republic, ICSID Case No. ARB/03/9, Award (Sept. 5, 2008). 55   Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Decision on the Argentine Republic’s Application for Annulment of the Award, ¶¶ 328–97 (June 29, 2010); Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on the Application for Annulment of the Argentine Republic, ¶¶ 347–405 (July 30, 2010). 56  The resubmission proceeding for the Sempra case was registered on November 12, 2010 and the tribunal was constituted on April 21, 2011. The case was subsequently discontinued pursuant to ICSID Rule 44 on April 3, 2015. The resubmission proceeding for the Enron case was registered on October 18, 2010 and the tribunal was constituted on June 29, 2011. While the case is pending, the parties have agreed to suspend the proceedings. 57   See, e.g., ADC v. Hungary, supra note 1, ¶ 521; Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 686 (Sept. 22, 2014); Khan Resources Inc. et al v. Gov’t of Mongolia & MonAtom LLC, PCA Case No. 2011-09, Award on the Merits, ¶ 375 (Mar. 2, 2015). 58   Amoco Int’l Fin. Corp. v. Gov’t of the Islamic Republic of Iran et al., Partial Award, ¶ 238, 15 Iran-U.S. Cl. Trib. Rep. 189 (1987). See also LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award, ¶¶ 88–90 (July 25, 2007) (“[The tribunal] can only award compensation for loss that is certain…. Prospective gains which are highly conjectural,

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the party making an allegation; therefore, a claimant would need to prove the damages while the respondent would need to demonstrate that the damages are speculative or uncertain.59 When it comes to the standard of proof, however, tribunals clarify that damages is not a precise science; the actual damages need to be computed only with a reasonable certainty.60 ‘too remote or speculative’ are disallowed by arbitral tribunals.”); CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Separate Opinion of Ian Brownlie, ¶ 66 (Mar. 14, 2003) (“The principle denying recovery for speculative benefits has long been recognised in the practice of international tribunals….”); Murphy Exp. & Prod. Co.—Int’l v. Republic of Ecuador, PCA Case No. 2012-16, Partial Final Award, ¶ 487 (May 6, 2016) (“[The tribunal’s] approach is consistent with the general requirement for awarding damages for violations of international obligations that any compensable damage must not be too speculative, remote, or uncertain.”); Crystallex v. Venezuela, supra note 1, ¶ 886. This principle has also been recognized in Article 7.4.3(1) of the UNIDROIT Principles: “Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty.” UNIDROIT Principles, art. 7.4.3(1). 59   See, e.g., Gold Reserve v. Venezuela, supra note 57, ¶ 685 (“The Tribunal agrees with the Parties that Claimant bears the burden of proving its claimed damages.”); Crystallex v. Venezuela, supra note 1, ¶ 864 (“as a general matter, it is clear that it is the Claimant that bears the burden of proof in relation to the fact and the amount of loss.”) (emphasis omitted); Hrvatska Elektroprivreda v. Slovenia, supra note 29, ¶ 243 (“The burden of proving that costs had been passed onto consumers lies with the party asserting this fact. It is therefore the responsibility of the Respondent in this instance to prove the allegation if it wishes the Tribunal to accept it. The Respondent might have proved the allegation by relying on any direct evidence cited by Mr Jones or by producing its own evidence. The Tribunal notes that it is not the responsibility of the Claimant to disprove allegations to this effect made without evidence.”). 60   See, e.g., Mobil Inv. Canada Inc. & Murphy Oil Corp. v. Gov’t of Canada, ICSID Case No. ARB(AF)/07/4, Decision on Liability and on Principles of Quantum, ¶ 437 (May 22, 2012) (“The Majority of this Tribunal accepts that the Claimants do not have to prove the quantum of damages with absolute certainty. The Majority further accepts that no strict proof of the amount of future damages is required and that ‘a sufficient degree’ of certainty or probability is sufficient. However, the amount claimed ‘must be probable and not merely possible.’”); Gold Reserve v. Venezuela, supra note 57, ¶ 685 (“The Tribunal finds no support for the conclusion that the standard of proof for damages should be higher than for proving merits, and therefore is satisfied that the appropriate standard of proof is the balance of probabilities. This, of course, means that damages cannot be speculative or merely ‘possible’, as both Parties acknowledge.”); Hrvatska Elektroprivreda v. Slovenia, supra note 29, ¶ 175 (“The standard of proof required is the balance of probabilities and damages cannot be speculative or uncertain. However, scientific certainty is not required. Naturally, some degree of estimation will be required when considering counterfactual scenarios and this, of itself, does not mean that the burden of proof has not been satisfied.”).

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Unless there were special situations, tribunals have typically applied this principle in the following situations: 1.

When a business is in its initial stages and does not have a consistent track record of profitability, tribunals have generally refused to apply the discounted cash flow method because it would be speculative and would assume that the business was ongoing. For example, the tribunal in the Levitt v. Iran case noted: In the present instance, however, the basis of the claim for $19,456,100 under this head is highly speculative…. By the time the Contract came to an end only the initial stages of clearing and grading had been completed, and no construction work had begun on the buildings. The project had therefore reached only a very early stage…. For these reasons the Tribunal finds that the Claimant has not established with a sufficient degree of certainty that the project would have resulted in a profit. The claim in this respect is therefore dismissed.61

2.

Arbitral tribunals have refused to award compensation where the damage is yet to materialize. In Occidental v. Ecuador, for example, the tribunal rejected a claim for damages that would arise from claimant’s likely

61   See Levitt v. Gov’t of the Islamic Republic of Iran et al., Award, ¶¶ 56, 58, 14 Iran-U.S. Cl. Trib. Rep. 191 (1987). See also Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶¶ 120–1 (Aug. 30, 2000) (“[W]here 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…. The Tribunal agrees with Mexico that a discounted cash flow analysis is inappropriate in the present case because the landfill was never operative and any award based on future profits would be wholly speculative.”); Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award, ¶ 8.3.3 (Aug. 20, 2007) (“[T]he net present value provided by a DCF analysis is not always appropriate and becomes less so as the assumptions and projections become increasingly speculative. And, as Respondent points out, many international tribunals have stated that an award based on future profits is not appropriate unless the relevant enterprise is profitable and has operated for a sufficient period to establish its performance record. The Tribunal notes that even in the authorities relied on by Claimants, compensation for lost profits is generally awarded only where future profitability can be established (the fact of profitability as opposed to the amount) with some level of certainty.”) (citations and emphasis omitted).

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payment of certain VAT to Ecuador and the latter’s likely failure, in the future, to refund the VAT to which claimant was entitled.62 Arbitral tribunals have also refused to apply income-based approaches, such as the discounted cash flow method or to award lost profits, where the projects in question were not completed because of the speculative nature in computing damages.63 Finally, in computing the amount of future lost profits, arbitral tribunals, in the absence of provisions providing for automatic renewal of investment contracts, generally refuse to assume such contracts would have been renewed.64

62   Occidental Expl. & Prod. Co. v. Republic of Ecuador, LCIA Case No. UN 3467, Final Award, ¶ 114 (July 1, 2004). In other cases as well, tribunals have rejected claimants’ prayer for future losses that have not occurred. See LG&E v. Argentina, supra note 52, ¶ 89 (“[L]ost future profits have only been awarded when ‘an anticipated income stream has attained sufficient attributes to be considered legally protected interests of sufficient certainty to be compensable.’ Prospective gains which are highly conjectural, ‘too remote or speculative’ are disallowed by arbitral tribunals.”) (citations omitted; emphasis in original). 63   See, e.g., Dadras Int’l & Per-Am Const. Corp. v. Islamic Republic of Iran & Tehran Redevelopment Co., Award, ¶ 276, 31 Iran-U.S. Cl. Trib. Rep. 127 (1995) (“The Tribunal therefore finds that the damages claimed by Per-Am as compensation for lost profits under the Contract are unduly speculative, and that 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. Consequently, Per-Am’s claim for lost profits is dismissed for failure of proof.”); Asian Agric. Products Ltd. v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award, ¶ 107 (June 27, 1990), 4 ICSID Rep. 246 (1997) (“[T]he Tribunal’s opinion is established on considering the assumptions upon which the Claimant’s projection were based in the present case insufficient in evidencing that Serendib was effectively by January 27, 1987, a ‘going concern’ that acquired a valuable ‘goodwill’ and enjoying a proven ‘future profitability’, particularly in the light of the fact that Serendib had no previous record in conducting business for even one year of production.”). 64   See, e.g., Gemplus v. Mexico, supra note 3, ¶ 12–49 (“There was a possible extension thereafter of not more than ten more years, subject (inter alia) to the discretion of the Secretariat. Whilst the exercise of that discretion was not unfettered under Mexican law, the Tribunal considers that the Claimants’ claim for this second period of ten years is far too contingent, uncertain and unproven, lacking any sufficient factual basis for the assessment of compensation under the two BITs.”). See also CMS v. Argentina, supra note 53 (Award), ¶¶ 196–9 (where the tribunal noted that the right to extension of a license is “conditional and subject to a number of steps”); Rumeli Telekom A.S. & Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, ¶¶ 766–8 (July 29, 2008) (where although claimants had argued that the contract

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1.7 Limitation Arising from Scope of Property and Contractual Rights In international law, the protection of foreign investment property rights is normally created pursuant to the domestic law of a particular State. A license to operate a telecommunications business, for example, is granted under the law of the host State. Similarly, a concession to exploit hydrocarbon resources is governed by the host State’s laws. If the host State law or the terms of the concession set limits on the scope of rights granted under the license or the concession—e.g., limitations on duration of a license,65 or on the maximum rate of return that an investment could achieve,66—those limitations constitute an integral part of the property rights and cannot be dispensed with by reference to international law. In other words, the source of law that creates a right should determine the scope of that right. Therefore, while international law may provide protection for the rights created pursuant to domestic law, it cannot change their scope or configuration; it only protects them with all their limitations. The implication of this important principle for the assessment of damages, whether under the Chorzów standard or under treaty provisions on compensation for expropriation, is that limitations which domestic law places on a property or contractual right must be taken into account. Several tribunals have recognized this principle. In Siag v. Egypt,67 for example, the tribunal held that, in determining the amount of compensation for the expropriation of the claimants’ property, it had to take into account the terms of the claimants’ contract. This agreement provided that, in the event of a sale of the property, the claimants were entitled to retain only 50% of the sale proceeds (the remainder of which would be paid to the State). The tribunal ruled that, “it is important to bear in mind also the terms upon which that interest was held…. [T]he Tribunal does accept that

would be renewed, they prepared their base compensation ignoring the possibility for renewal which the tribunal ultimately adopted). 65   Emmis Int’l Holding, B.V. et al. v. Hungary, ICSID Case No. ARB/12/2, Award, ¶¶ 159, 168, 194, 255 (Apr. 16, 2014) (holding that Hungary’s failure to renew a limited duration broadcasting license did not amount to an indirect expropriation, because the only property rights that claimant had were the broadcasting rights that expired). 66  A DC v. Hungary, supra note 1, ¶ 509 (tribunal enforced the cap on the internal rate of return that the parties had agreed upon in their contract even though it was established that the business was capable of achieving a higher rate of return but for the contractual cap). 67   Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/ 05/15, Award (June 1, 2009).

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[the contractual term] had an effect on the value of the asset in the Claimants’ hands.”68 This issue was also at the center of Venezuela Holdings et al. (ExxonMobil subsidiaries) v. Venezuela,69 which involved a long-term contract to extract heavy oil in the Orinoco Oil Belt of Venezuela. The contract, as required by Venezuelan Congressional Authorizations, contained certain key terms including indemnity provisions, which set limits on the amount of recoverable compensation in the event that the Venezuelan government adopted measures affecting the project, including nationalization. Venezuela nationalized the project in 2007. ExxonMobil subsidiaries started an ICC arbitration under the contract and an ICSID arbitration under the Netherlands-Venezuela BIT. The ICC tribunal applied the limitations in the contract and awarded substantial damages to claimants. Venezuela, throughout the ICSID proceeding, maintained that the indemnity provisions must be taken into account in determining fair market value under international law because they were fundamental terms and conditions of the project that defined the scope of the claimants’ rights. The tribunal dismissed that argument and sided with the claimant on the basis of the principle that Venezuela could not rely on its domestic law to evade its international obligations.70 The annulment committee in that case, however, annulled that portion of the award because the tribunal had failed to consider contractually agreed limitations which were also mandated by congressional authorizations. The committee held that in assessing fair market value, the contractual limitation (or price cap) “seem[ed] to be a necessary and inevitable element in any willing buyer/willing seller analysis, and … that precise proposition had been put in argument by Venezuela.”71 68   Id., ¶¶ 577–8. Likewise, the ICSID tribunal in Kardassopoulos noted that although compensation was payable under a treaty, “[t]his finding is without prejudice to a host State and an investor’s ability to contractually limit the compensation which may be owed following an expropriation where a treaty is also in play. Indeed, the Tribunal is loathe to accept the categorical denial of such an arrangement urged by the Claimants as a matter of law.” Kardassopoulos v. Georgia, supra note 23, ¶ 481. 69   Venezuela Holdings, B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award (Oct. 9, 2014). 70   Id., ¶ 225. 71   Venezuela Holdings, B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Annulment, ¶ 184 (Mar. 9, 2017). See also ConocoPhillips Petrozuata B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Dissenting Opinion of Georges Abi-Saab to Decision on Jurisdiction and the Merits of September 3, 2013, ¶ 28 (Feb. 19, 2015) (“Clearly, any new rights or obligations attaching to an already existing investment in the form of contractual rights, which flow from sources extraneous to

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1.8 Double Recovery Another basis to limit the amount of compensation or damages that may be payable is the general prohibition against double recovery for the same loss. This may arise where an investor initiates multiple proceedings under various domestic and international forums which have the same underlying basis.72 Thus, while an investor might commence a domestic action, a commercial arbitration, and an investor-State arbitration for the same underlying State conduct, it would not be able to recover damages three times and an investor-State tribunal will take into account any other compensation that might be awarded by another judicial or arbitral body. This general rule is however subject to a caveat that investor-State tribunals will reduce damages only for the same loss. In other words, the mere existence of multiple proceedings would itself not be a basis to reduce damages if the damages relate to different losses.73 the contract that serves as legal title to the investment—such as a BIT or general international law (apart from jus cogens limitations)—come only as additional guarantees to buttress and reinforce the observance of the terms of the contract, but in no circumstances to revise or supplant them. In other words, the BIT can add to the protection of the contractual rights, but cannot change their configuration, i.e. their content, scope and limitations.”) (emphasis omitted). 72  The possibility of parallel proceedings leading to double recovery was raised in the twin arbitrations of Ronald S. Lauder v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award (Sept. 3, 2001), and CME v. Czech Republic, supra note 30. The Lauder tribunal discounted the possibility, stating that double recovery would not occur as long as the second tribunal took note of the first’s award. Lauder v. Czech Republic, ¶ 172. See also Chevron Corp. (USA) & Texaco Petroleum Corp. (USA) v. Republic of Ecuador, PCA Case No. 34877, Partial Award on Merits, ¶ 557 (Mar. 30, 2010) (addressing concerns of recovery for the same injury in both international arbitration and domestic proceedings). See, generally, Katia Yannaca-Small, Parallel Proceedings, in The Oxford Handbook of International Investment Law 1008 (Peter Muchlinski et al. eds., 2008); August Reinisch, The Issues Raised by Parallel Proceedings and Possible Solutions, in The Backlash Against Investment Arbitration 113 (Michael Waibel et al. eds., 2010). 73   See, e.g., Suez, Sociedad General de Aguas de Barcelona S.A. & Vivendi Universal S.A v. Argentine Republic, ICSID Case No. ARB/03/19, Award, ¶ 38 (Apr. 9, 2015) (“While international law requires full compensation for injury, it does not allow for more than full compensation. In addition to the present cases, which were begun in 2003, the Claimants brought an action in 2006 in the Argentine courts against the Argentine State for breach of the Concession Contract by virtue of ‘termination through the fault of the Conceding Authority.’ … [N]either Argentina nor the Claimants have offered any evidence that the Argentine courts have either awarded or are about to award compensation to AASA for the termination of the Concession. Consequently, no actual double recovery has been established so far. In the present situation, if this Tribunal should award damages to the Claimant, that fact alone would not result in a double recovery for the Claimants.”)

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There are other situations where issues relating to double recovery may also be implicated. These include where: (1) both sunk costs and future lost profits are double-counted when applying forward-looking valuation approaches such as the discounted cash flow method;74 (2) damages sought under one heading may be included under another heading;75 (3) moral damages, if any are awarded, overlap with the injury also compensated by material damages;76 or (emphasis omitted); Chevron v. Ecuador, supra note 72, ¶ 557 (“[T]he Tribunal decides that the Claimants’ recovery should not be reduced based on the uncertain possibility of a favorable outcome in the national court proceedings….”); Bernhard von Pezold et al. v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award, ¶ 937 (July 28, 2015) (“[T]he Tribunal does not consider that the existence of two separate but related arbitrations can act as a bar to recovery. For the Tribunal to refuse to grant relief in either arbitration simply because two sets of Claimants share overlapping rights under international law would render an injustice to both sets of Claimants.”); Lauder v. Czech Republic, supra note 72, ¶ 174 (“[T]here is no abuse of process in the multiplicity of proceedings initiated by Mr. Lauder and the entities he controls. Even assuming that the doctrine of abuse of process could find application here, the Arbitral Tribunal is the only forum with jurisdiction to hear Mr. Lauder’s claims based on the Treaty. The existence of numerous parallel proceedings does in no way affect the Arbitral Tribunal’s authority and effectiveness, and does not undermine the Parties’ rights. On the contrary, the present proceedings are the only place where the Parties’ rights under the Treaty can be protected.”). 74   See, e.g., Suez v. Argentina, supra note 73, ¶ 104 (“The Claimants are also asking for compensation for declared but unpaid dividends, valued as of December 30, 2012, at USD 4.6 million. As retained earnings, they constituted part of the equity of AASA. The Tribunal considers that the value of unpaid dividends is included in the value of the shareholders’ equity in AASA, which was determined above, and that to grant recovery of such separate amounts for unpaid dividends would be to allow the Claimants a double recovery. The Tribunal therefore rejects the claim for unpaid dividends.”). 75   See Louis T. Wells, Double-Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Karaha Bodas Company in Indonesia, 19(4) Arb. Int’l 471, 474 (2003). 76  For example, if an aggrieved investor is compensated for the fair market value of its company and that valuation includes elements of the company’s goodwill, then the compensation repairs losses relating to damage to the company’s reputation. In this case, the investor should not be able to recover additional moral damages relating to the reputation of the business. On the differentiation between the two, see Jennifer Cabrera, Moral Damages in Investment Arbitration and Public International Law, in 3 Investment Treaty Arbitration and International Law 197, 207–8 (Ian A. Laird & Todd J. Weiler eds., 2009).

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(4) the investor has the opportunity to re-invest the compensation and earn returns higher than those that it would have earned under a long-term contract for which it is being compensated.77 In these situations, a tribunal might have to be careful to ensure that the damages do not result in a windfall because the purpose of awarding damages is to ensure that an investor is made “whole” but does not benefit beyond that. 1.9 Equity In addition to the various principles discussed above, compensation may also be reduced by the application of equity. Equity appears in international law both as a general principle of law and as equity ex aequo et bono, the latter requiring specific permission of the parties for the tribunal to decide the case based on notions of fairness rather than legal principles.78 The application of equity by arbitral tribunals may not be expressed explicitly as ex aequo et bono, but is often a necessary part of the discretion of tribunals in awarding compensation. As there is no precise science in valuing losses, a tribunal deciding between equally plausible valuations and assumptions may make its decision based on general principles of equity.79 While a few tribunals have admitted resorting to equity,80 others have used language which implies similar equitable 77  In Himpurna the tribunal noted that, “[i]n cases of breach of long-term contracts, the prospect of reinvestment of recovered funds in profitable activities elsewhere is an obviously realistic possibility. A claimant may in theory be better off in the end because it was able to cash in early. Especially when the contract breached had an intended duration of decades, the prospect of double recovery arises.” Himpurna California Energy Ltd. v. PT (Persero) Perusahaan Listruik Negara, Final Award, ¶ 570 (May 4, 1999), 25 Y.B. Comm. Arb. (2000); Patuha Power Ltd. v. P.T. (Persero) Perusahaan Listruik Negara, Final Award, ¶ 477 (May 4, 1999). See also Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award, ¶ 357 (Sept. 23, 2003) (where the tribunal took into consideration the fact that the bridge was not even built; “[o]therwise, Aucoven would obtain the same compensation that it would have received had it built the Bridge and, for that purpose, invested the amounts forecast.”). 78   See Statute of the International Court of Justice, art. 38(2) (June 26, 1945), 33 U.N.T.S. 993. 79  Wälde & Sabahi, supra note 33, at 1103–5. 80   See, e.g., Compañía del Desarrollo de Santa Elena SA v. Costa Rica, ICSID Case No. ARB/ 96/1, Final Award (Feb. 17, 2000), ¶ 92 (quoting the Phillips Petroleum case, where it noted that “the Tribunal was required to exercise its own judgment, taking into account all relevant circumstances, including equitable considerations[.]”). See also Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence 116 (2008) (“The use of equitable considerations in

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considerations.81 The apportionment of damages in proportion to the parties’ fault may fall within the exercise of equity.82 2 Conclusion The principles outlined in this Chapter are those that have the potential to limit the amount of compensation awarded. The fundamental purpose of these principles is to prevent over-compensation of a claimant, which would be contrary to the principles of reparation upon which international investment arbitration awards are based. How these principles are applied by a given tribunal will depend on a combination of factors, including the facts of the individual case, the conduct of the parties, the underlying treaty, and possibly other equitable considerations. And while some of the principles discussed have been well established in international investment arbitration, others remain ambiguous to some degree and will likely continue to be debated by parties, counsel, and tribunals alike in the coming years.

the computation of compensation amounts is not uncommon, even if it is not always admitted…. It also lies just beneath the surface of many judicial and arbitral decisions.”). 81   See, e.g., CMS v. Argentina, supra note 53 (Award), ¶ 248 (where the tribunal stated the assumptions chosen in valuing the losses should have the parties “sharing some of the costs of the crisis in a reasonable manner.”). 82   See supra Section 1.1 on Contributory Fault.

Chapter 13

Counterclaims and State Claims Jeremy K. Sharpe and Marc Jacob 1 Introduction The presentation of counterclaims and State claims has become increasingly prominent in international investment arbitration. In particular, the possibility of such claims appears to embody a more attractive, socially minded, and democratic investment regime. This contribution to the topic does not seek to cover every issue arising from such cross-claims, but to demonstrate the richness of the issues, describe the general framework, and set out important practical considerations and consequences. Accordingly, Section 2 will describe the main responses to international investment claims: defenses, set-offs, and counterclaims. The remainder of the Chapter will focus on counterclaims and, to a lesser extent, set-offs. Collectively, these can be referred to as “crossclaims.” Section 3 will discuss the jurisdiction and admissibility requirements applicable to counterclaims. Section 4 will then explore procedural and practical issues surrounding the filing of counterclaims. Section 5 will consider perceived asymmetries in investor-State arbitration, and Section 6 will address how States may reduce such asymmetries through their treaty-drafting choices. Section 7 concludes. 2

Responses to International Investment Claims

Defenses, set-offs, counterclaims—different terms mean different things to different people,1 and none of the possible typologies are entirely satisfactory in 1  See, e.g., Franz Sedelmayer v. Russian Federation, SCC Arbitration Proceeding, Award, at 16 (July 7, 1998) (“The parties are at dispute to whether or not the Respondent has filed a counterclaim in this arbitration.”); Zeevi Holdings v. Republic of Bulgaria et al., Case UNC 39/DK, Final Award, ¶ 1219 (Oct. 25, 2006) (noting that a respondent had “raised the counterclaims for set-off p[u]rposes only”); Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17, at 38 (Sept. 13) (observing that Poland had formulated a “counter-case” in the form of a “counter-claim” which in fact, however, sought to reduce Germany’s indemnity claim and the loss allegedly suffered).

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all situations.2 In practice, parties thus sometimes choose to play it safe, for example, by pleading a set-off as a counterclaim in the alternative. Labels have their limits, but some conceptual clarification is helpful. The following overview outlines some of the most commonly encountered responses to a claim made under an international investment agreement (“IIA”). 2.1 Defenses A defense is an assertion of fact or law that intends to relieve a respondent from liability. In investment arbitration, the host State routinely contests that a claim is permissible and tenable. Typically, in addition to raising any preliminary objections, the State will try to disprove the investor’s particulars of a claim or—usually implicitly and intending that its opponent will fail—request the claimant to make good a point by relying on the evidentiary burden. In addition to refuting certain facts or refuting that certain facts amount to treaty breaches, this also covers arguments that generally applicable circumstances preclude wrongfulness in a specific situation, for example, where State measures were driven by necessity or force majeure.3 Such all-purpose defenses continue to receive considerable attention in international legal practice and academic writing.4

2  The most widely used law dictionary in the United States, for example, defines a defense as “[a] defendant’s stated reason why the plaintiff or prosecutor has no valid case; esp., a defendant’s answer, denial, or plea”; a set-off as “[a] debtor’s right to reduce the amount of a debt by any sum the creditor owes the debtor; the counterbalancing sum owed by the creditor”; and a counterclaim as “[a] claim or relief asserted against an opposing party after an original claim has been made; esp., a defendant’s claim in opposition to or as a setoff against the plaintiff’s claim.” See Black’s Law Dictionary 402, 482, 1496 (9th ed. 2009). 3  See G.A. Res. 56/83, annex, Articles on the International Responsibility of States for Internationally Wrongful Acts, arts. 21–5 (Jan. 28, 2002). 4  See, e.g., Bernhard von Pezold et al. v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award, ¶¶ 624, 668 (July 28, 2015) (rejecting the defense that Zimbabwe had no reasonable choice other than to accelerate land reform and expropriate land without compensation); Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award, ¶¶ 716–8 (Dec. 8, 2016) (accepting that at one point a state of emergency existed in Argentina justifying emergency devaluation, default, and pesification measures); see, generally, Federica I. Paddeu, Circumstances Precluding Wrongfulness, in Max Planck Encyclopedia of Public International Law (Sept. 2014). See also Chapter 12, Borzu Sabahi et al., Principles Limiting the Amount of Compensation.

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2.2 Set-offs At its most basic, a set-off is a deduction of sums owed against sums due to be paid, i.e., a mutual offsetting of debts.5 A claimant and respondent who are indebted to each other are freed from performance to the extent that their claims are countervailing. There is no actual counter-performance, only a virtual accounting for reciprocity. While it is possible to think of every monetary cross-claim by a respondent as a set-off against a claimant’s claim,6 a counterclaim is more distinctly an independent cause of action that essentially (if not technically) turns the claimant into a respondent for that particular plea in the same proceeding. A set-off stricto sensu aims to lessen or extinguish the original claim, whereas a counterclaim might seek payment or performance—and possibly enforcement— beyond the primary claim.7 In either case, however, the party asserting the counterclaim or set-off carries the burden of proof. In short, and with the caveat that there is no uniform understanding worldwide, a set-off is purely protective and not a separate action.8 As a result, it is also possible for a claimant to plead a set-off against a respondent’s counterclaim. The Desert Line Projects arbitration, a case concerning road construction contracts, illustrates a set-off in the narrow sense. An ICSID tribunal took into account money already paid by Yemen to an Omani investor under an 5  The Supreme Court of the United States put this pragmatic concept in the following terms: “The right of setoff (also called ‘offset’) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.’” Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995). See also Klaus Peter Berger, Set-Off, ICC Bull. (Special Supplement) 17 et seq. (2005) (observing that “[s]et-off avoids the unnecessary formalism of performing debts which two parties owe each other…. Instead of having money in the bank, that party is merely freed from performance of a contractual duty vis-à-vis the party declaring the set-off.”); Christiana Fountoulakis, Set-Off Defences in International Commercial Arbitration: A Comparative Analysis 7 (2011). 6  See Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice 178 (2011) (“Counterclaims, if successful, may entitle the respondent to a ‘set-off’ whereby the amount of compensation due claimant is reduced by the amount of the successful counterclaims.”). 7  See Amco Asia Corp. et al. v. Republic of Indonesia, ICSID Case No. ARB/81/1, Award, ¶¶ 142–5 (Nov. 20, 1984); Fountoulakis, supra note 5, at 20–1; David D. Caron & Lee M. Caplan, The UNCITRAL Arbitration Rules: A Commentary 424 (2nd ed. 2013). 8  See Stooke v. Taylor [1880] 5 Q.B. 569, at 575 (a “shield not a sword”). For that reason, a set-off can also be termed a defense.

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(internationally ineffective) settlement agreement when considering the outstanding amount owed by the State under a Yemeni arbitral award.9 The tribunal balanced the sum against Yemen’s remaining debt at the damages stage, while dismissing the State’s separate counterclaims based on unperformed works and a failure to maintain bank guarantees.10 2.3 Counterclaims and State Claims A State defending an investment dispute will sometimes have a claim against the investor. Instead of going through the expense and trouble of bringing an action in a separate forum (and possibly risking conflicting outcomes), a State seeking to press its claim against an investor may try to bring a counterclaim in the same arbitral proceeding. Yet, IIAs are often considered to be one-sided in that they are reciprocal promises given by Contracting States that focus on substantive and procedural rights of investors.11 State claims in investment arbitration thus have been a source of some trepidation and uncertainty.12 In the words of the International Court of Justice, “the thrust of a counter-claim is … to widen the original subject-matter of the dispute by pursuing objectives other than the mere dismissal of the claim.”13 This distinguishes a counterclaim from a defense on the merits. At the same time, as discussed, not every claim other than a claim by the claimant against the respondent is a counterclaim. A claim that is subsidiary to the primary action, for instance, a claim for arbitration costs, is not a counterclaim, even though it also serves to vindicate the respondent’s interests.14 The counterclaim is typically, but not inevitably, included in the same written pleading as the defense, unless authorized otherwise.15 The document that is filed is then named accordingly, although there is no uniform 9    See Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award, ¶ 223 (Feb. 6, 2008). The tribunal considered that the measure of damages should include the amounts that would have been paid had the Yemeni arbitral award been respected. 10   Id., ¶ 247. 11   See Marc Jacob, Investments, Bilateral Treaties, in Max Planck Encyclopedia of Public International Law ¶¶ 1, 77 (June 2014). 12   See infra Section 5. 13   Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia & Herzegovina v. Yugoslavia), Order on Counter-Claims, 1997 I.C.J. Rep. 243, 256 (Dec. 17). 14   See Limited Liability Company AMTO v. Ukraine, SCC Case No. 080/2005, Final Award, ¶ 116 (Mar. 26, 2008). 15   See, e.g., UNCITRAL Arbitration Rules [hereinafter 2010 UNCITRAL Arbitration Rules], art. 21(3) (2010); ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules)

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practice. In ICSID parlance, for example, it becomes a counter-memorial and counterclaim.16 Bringing a counterclaim does not change the parties’ basic procedural position or appellation. According to the ICSID Arbitration Rules, the claimant remains the “requesting party” and the respondent is, in that respect, simply the “other party” presenting a counterclaim.17 That said, a counterclaim is in essence treated as if it were a claim, notwithstanding that it did not commence proceedings.18 This sets it apart from a defense and provides a useful starting point for procedural issues. It follows from this independent nature that the claimant has to serve a defense to the counterclaim, routinely combining this with its reply to the State’s defense. Failing this, the respondent State can apply to the tribunal to render an award in default.19 Moreover, as would be the case for a primary claim, a respondent has to plead sufficiently specific and clear allegations of fact and law and carry the evidentiary onus on matters ranging from the tribunal’s competence to hear the cross-claim in the first place to quantifying the counterclaim.20 If it does so, “the State is entitled to full reparation in accordance with the requirements of the applicable law.”21

[hereinafter ICSID Arbitration Rules], rule 40(2) (2006). See also infra Section 4.1 (on the timing of cross-claims). 16  ICSID Arbitration Rules, rules 31(1) and 40(2). See, e.g., Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim, ¶ 11 (Aug. 11, 2015) (“On 5 December 2011, Ecuador filed a Counter-Memorial on Liability and Counterclaims….”). 17  ICSID Arbitration Rules, rules 31 (on the written procedure), 40 (on ancillary claims). For the sake of convenience and clarity, the respondent may well however be referred to as the “counter-claimant” and the claimant as the “counter-respondent.” 18   See 2010 UNCITRAL Arbitration Rules, art. 21(4) (clarifying that the rules concerning the contents and supporting materials of statements of claim also apply to counterclaims). 19   See, e.g., ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States [hereinafter ICSID Convention], art. 45(2) (2006); ICSID Arbitration Rules, rule 42. 20   See Saluka Inv. B.V. v. Czech Republic, UNCITRAL Arbitration Proceeding, Decision on Jurisdiction over the Czech Republic’s Counterclaim, ¶ 34 (May 7, 2004); Oxus Gold plc v. Republic of Uzbekistan, UNCITRAL Arbitration Proceeding, Final Award, ¶ 922 (Dec. 17, 2015). On the evidentiary onus and possible burden shifting, see Jeremy K. Sharpe, Drawing Adverse Inferences from the Non-Production of Evidence, 22 Arb. Int’l 549, 552–3 (2006). 21   Perenco v. Ecuador, supra note 16, ¶ 34.

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The Right to Present Counterclaims

Arbitration is, of course, a creature of consent, and all international law tribunals are tribunals of attributed and limited—as opposed to original and general—competence.22 A counterclaim must pass two principal thresholds before it can be adjudicated. First, the counterclaim must come within the tribunal’s jurisdiction. Second, it must be admissible. 3.1 Jurisdictional Requirements Fundamentally, the instruments governing the tribunal’s jurisdiction must afford a respondent State the possibility to bring a cross-claim against the party initiating proceedings.23 A State cannot use a counterclaim as a back door to refer a claim to an international tribunal that exceeds the accepted limits of the latter’s jurisdiction.24 The Claims Settlement Declaration establishing the Iran-U.S. Claims Tribunal, for instance, has allowed a vast number of counterclaims to be filed over the years. Its broad terms grant jurisdiction over any counterclaim that “arises out of the same contract, transaction or occurrence that constitutes the subject matter of that national’s claim….”25 By the same token, claims arising solely by operation of law (e.g., counterclaims for taxes, customs duties, or social security) and not from contractual obligations (e.g., counterclaims for services rendered or defective performance) have been excluded.26 In investment arbitration, this will in the first instance typically depend on the proper construction of the relevant IIA. Plainly, parties can limit or waive the procedural right to bring a counterclaim.27 One straightforward way for treaty parties to do so is to expressly limit arbitral dispute resolution to “violations of 22   See, e.g., Abaclat et al. v. Argentine Republic, ICSID Case No. ARB/07/5, Dissenting Opinion of Georges Abi-Saab, ¶ 7 (Oct. 28, 2011) (recalling that “all international adjudicatory bodies are empowered from below, being based on the consent and agreement of the subjects …”). 23   See 2010 UNCITRAL Arbitration Rules, art. 21(3) (stipulating that the respondent may make a counterclaim or rely on a set-off “provided that the arbitral tribunal has jurisdiction over it.”); ICSID Convention, art. 46 (permitting such claims in principle “provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.”). 24   See Application of Genocide Convention, supra note 13, at 257. 25   See Claims Settlement Declaration, art. II, ¶ 1, reprinted in 1 Iran-U.S. Cl. Trib. Rep. 9 (1981). 26   See Charles N. Brower & Jason D. Brueschke, The Iran-United States Claims Tribunal 99–101 (1998) (with further examples). 27   See, e.g., ICSID Convention, art. 46 (“Except as the parties otherwise agree….”).

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the treaty.”28 That rules out counterclaims for a breach of contract or infringements of the host State’s domestic law. Conversely, the disputing parties can consent to the tribunal’s jurisdiction to hear State counterclaims, as was the case for Ecuador’s claims in the Burlington arbitration.29 Tribunals necessarily undertake a case-by-case assessment of the common will of the treaty parties when examining the jurisdictional basis of a counterclaim.30 If the arbitration clause is neutral as to the identity of the claimant or respondent and in relation to the nature of the investment dispute, a respondent State generally may raise a counterclaim. Permissive dispute resolution clauses might employ language along the lines of “either” party being able to submit “any (legal) dispute arising between” the parties to international arbitration, for example.31 In the Inmaris arbitration, for instance, the tribunal entertained Ukraine’s counterclaim relating to costs paid during a charter, because the applicable BIT granted the tribunal adjudicative power over “differences of opinion” (“Meinungsverschiedenheiten” in the German original, i.e., disputes) “with regard to investments between either Contracting Party and a national or company of the other Contracting Party.”32 Likewise, the tribunal in Al-Warraq, an UNCITRAL arbitration based on the investment agreement of the Member States of the Organization of the Islamic Conference, considered the arbitration terms to be sufficiently wide to also permit States to resort to arbitration either by initiating arbitration or by bringing

28   See Emmanuel Gaillard, Improving Investment Arbitration: Two Proposals, in Liber Amicorum en L’Honneur de William Laurence Craig 74 (2016). 29   See Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims, ¶ 60 (Feb. 7, 2017) (recalling the parties’ agreement that the arbitration was the “appropriate forum for the final resolution of the Counterclaims arising out of the investments made by Burlington Resources and its affiliates … so as to ensure maximum judicial economy and consistency.” (citing Agreement between Burlington et al. and Ecuador (May 26, 2011)). 30   See, e.g., Marco Gavazzi & Stefano Gavazzi v. Romania, ICSID Case No. ARB/12/25, Decision on Jurisdiction, Admissibility and Liability, ¶ 154 (Apr. 21, 2015) (focusing on “the letter of the BIT”). 31   See, e.g., Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United Republic of Cameroon for the Promotion and Protection of Investments, art. 8(1) (June 4, 1982), which allows reference to ICSID of “any legal dispute arising between that Contracting Party and a national or company of the other Contracting Party” concerning an investment. 32   See Inmaris Perestroika Sailing Maritime Serv. GmbH et al. v. Ukraine, ICSID Case No. ARB/08/8, Award, ¶ 432 (Mar. 1, 2012) (but dismissing the counterclaim on the merits).

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a counterclaim.33 It is notable that the Al-Warraq arbitrators expressed some disquiet on account of what they considered to be the “inherently asymmetrical character” of an investment treaty, but in the end they considered this to be a matter of the proper interpretation of the relevant clauses. Conversely, if a State’s counterclaim lies outside the scope of consent to arbitrate, it will not be heard by a tribunal. In Rusoro Mining, for example, Venezuela argued that the claimant investor had failed to adhere to a mining plan and that Venezuela had suffered damage through the alleged breach of contract. The tribunal, however, refused to entertain the State’s plea, including because the applicable Canada–Venezuela BIT at several points exclusively confined arbitration proceedings to claims advanced by foreign investors regarding host State measures, thus excluding claims by the host State itself.34 The Vestey case, an ICSID dispute about a cattle farming business in Venezuela, further illustrates that State counterclaims must come within the four corners of the parties’ agreement to arbitrate. The tribunal held that the State’s request to be awarded title over certain assets did not involve an obligation of the State under the IIA, which was an express precondition for the tribunal’s jurisdiction.35 33   Hesham Talaat M. Al-Warraq v. Republic of Indonesia, UNCITRAL Arbitration Proceeding, Final Award, ¶¶ 659–61 (Dec. 15, 2014). Notwithstanding its ambiguous opening, Article 17 of the Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organization of the Islamic Conference affords each party the right to resort to arbitration: “Until an organ for the settlement of disputes arising under the agreement is established, disputes that may arise shall be entitled through conciliation or arbitration in accordance with the following rules of procedure: … a) If the two parties to the dispute do not reach an agreement as a result of their resort to conciliation, or if the conciliator is unable to issue his report within the prescribed period, or if the two parties do not accept the solutions proposed therein, then each party has the right to resort to the Arbitration Tribunal for a final decision on the dispute.” 34   See Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award, ¶¶ 627–9, 632 (Aug. 22, 2016). Article XII of the respective treaty provided, among other things, that “a dispute is considered to be initiated when the investor of one Contracting Party has delivered notice in writing to the other Contracting Party alleging that a measure taken or not taken by the latter Contracting Party is in breach of this Agreement.” Agreement between the Government of Canada and the Government of the Republic of Venezuela for the Promotion and Protection of Investments, art. XII (June 25, 1982). Moreover, “[i]f a dispute has not been settled amicably within a period of six months from the date on which it was initiated, it may be submitted by the investor to arbitration….” Id. 35   See Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award, ¶¶ 333–4 (Apr. 15, 2016). Article 8 of the UK-Venezuela BIT concerned in relevant part

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A narrowly drafted arbitration clause likewise precluded a counterclaim based on domestic law in Roussalis, a case arising from the privatization of former State-owned property in Romania. The majority stressed that the Greece-Romania BIT only provided for arbitration of disputes “concerning an obligation of [the other Contracting Party] under this Agreement, in relation to an investment of [an investor of a Contracting Party]” and thus concluded that counterclaims concerning investor obligations could not be advanced.36 In light of what is sometimes called the “double-barreled” nature of ICSID proceedings (i.e., ICSID arbitration being premised on consent under both an IIA and the ICSID Convention),37 a counterclaim in such proceedings must further fall within the jurisdiction of “the Centre” in addition to meeting the independent parameters of the IIA.38 The well-known, albeit perennially contentious, conditions for jurisdiction in ICSID arbitration are found in Article 25 of the ICSID Convention. If a tribunal lacks jurisdiction over an investor’s claims, the tribunal will also be deprived of jurisdiction over any counterclaims. The tribunal in the resubmitted Fraport case, for instance, declined jurisdiction to hear the respondent State’s counterclaims following the dismissal of the investor’s claims, citing “the absence of consent to arbitration by the State for failure to satisfy an essential condition of its offer of this method of dispute settlement.”39 The tribunal in Metal-Tech similarly concluded that its lack of jurisdiction over the claimant’s illegally made investments vitiated the parties’ consent to arbitrate the State’s

“[d]isputes between a national or company of one Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement in relation to an investment of the former….” Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Venezuela for the Promotion and Protection of Investments, art. 8 (Mar. 15, 1995). 36   Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award, ¶¶ 866–9, 876 (Dec. 1, 2011). Professor Michael Reisman, one of the arbitrators in the case, would have allowed the counterclaim on the basis that parties electing ICSID proceedings in principle accept counterclaims by virtue of Article 46 of the Convention. In his view, this was more efficient and provided a neutral forum for the investor facing the counterclaim. 37   See Global Trading Resource Corp. & Globex Int’l, Inc. v. Ukraine, ICSID Case No. ARB/09/11, Award, ¶ 43 (Dec. 1, 2010). 38   See Antoine Goetz et al. v. Republic of Burundi, ICSID Case No. ARB/01/2, Award, ¶ 275 (June 21, 2012); Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, ¶¶ 408–9 (Oct. 4, 2013). 39   Fraport AG Frankfurt Airport Serv. Worldwide v. Republic of the Philippines, ICSID Case No. ARB/11/12, Award, ¶¶ 467–8 (Dec. 10, 2014).

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counterclaims, because “the State’s offer to arbitrate did not extend to this ‘non-investment’ and the investor’s acceptance included this limitation.”40 3.2 Admissibility Requirements A counterclaim must not only be within the jurisdiction of a tribunal; it must also be admissible. The distinction between jurisdiction and admissibility is occasionally neglected or blurred. But it is sound in principle, established in international legal practice, and capable of having real ramifications. For instance, admissibility will not be raised by a tribunal proprio motu. It is for the parties to challenge any of the conceivable requirements regarding the claims that are being brought. For example, a respondent State might object to a claim being heard because the claimants engaged in corruption, fraud, or illegality. Even if one takes the view that this is not contrary to an express or implied precondition of the tribunal’s jurisdiction (e.g., because there was no legality clause in the BIT or one considered the ICSID Convention not to implicitly require that any claim be brought in good faith and free from illegality), the claim might be argued to be defective such that it should not be heard according to various maxims that judicial and arbitral bodies do not lend their assistance to such behavior (e.g., nemo auditur propriam turpitudinem allegans). But the tribunal will not normally start to examine by itself whether there are any such “good reasons” in the wider factual matrix as to why the claims should not be heard; indeed, it is difficult to see how it could. By contrast, even if the parties have not objected to the tribunal’s exercise of jurisdiction, it is the essential duty of a tribunal established on the basis of a treaty—and solely of that tribunal—to verify at the outset its carefully delimited jurisdiction under that treaty. Without this consent of the subjects of its constitutive instrument, a tribunal has no power whatsoever to exercise its judicial function. In other words, unless the parties properly submit on their terms to what would otherwise be an infringement of sovereign immunity or party autonomy, there simply is no tribunal as a matter of international law.41 What is more, some admissibility defects—e.g., ripeness of a claim—can be cured. One way to tell the two apart is that whenever a claim is said to be barred for reasons beyond the title of jurisdiction (here, an IIA’s

40   See Metal-Tech v. Uzbekistan, supra note 38, ¶ 411. 41  This is of course subject to the very rare instances of tribunals created by international organizations by virtue of devolved powers (e.g., international criminal tribunals), where a requirement of direct consensual submission would usually defeat the whole enterprise.

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dispute resolution provision or Article 25 of the ICSID Convention), the objection is one of admissibility.42 Here, key considerations are whether allowing the cross-claim would be efficient, consistent, and fair. All other things being equal, these considerations may be more likely to be satisfied in the case of a set-off than a counterclaim. To be admissible, arbitral tribunals require, among other things, that a counterclaim have a sufficiently close connection with the original claim brought by the investor, i.e., the object of the investment claim.43 Like the jurisdictional threshold, such a proximity precondition is also reflected in the Rules of Court of the International Court of Justice.44 This nexus test is sometimes also framed as a jurisdictional precondition,45 likely because fairness also involves consent to the presentation of cross-claims. In a nutshell, a counterclaim must not infringe due process rights or compromise the proper administration of justice. In ICSID proceedings, this admissibility requirement is encapsulated in Article 46 of the Convention and Rule 40 of the Arbitration Rules, according to which the counterclaim must “aris[e] directly out of the subject-matter of the dispute.”46 It has been pointed out that, rather than being superfluous, 42  In other words, admissibility is relevant even if a tribunal has jurisdiction. Jurisdiction in turn strikes at the tribunal’s ability to rule on the admissibility (and merits) of a claim. See Northern Cameroons (Cameroon v. United Kingdom) (Preliminary Objections), Judgment, 1963 I.C.J. Rep. 15, 97, 102–3 (Dec. 2) (separate opinion by Fitzmaurice, G.); Oil Platforms (Iran v. United States), Judgment, 2003 I.C.J. Rep. 161, 177 (Nov. 6); HOCHTIEF Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/07/31, Decision on Jurisdiction, ¶ 90 (Oct. 24, 2011) (“Jurisdiction is an attribute of a tribunal and not of a claim, whereas admissibility is an attribute of a claim but not of a tribunal.”). 43   See Goetz v. Burundi, supra note 38, ¶¶ 275, 283; Metal-Tech v. Uzbekistan, supra note 38, ¶ 407; Anne K. Hoffmann, Counterclaims, in Building International Investment Law in the First 50 Years of ICSID 505 (2016). Other possible bars include late introduction, see infra Section 4.1. 44   See Rules of Court, art. 80(1), 1978 I.C.J. Acts & Docs. (“The Court may entertain a counter-claim only if it comes within the jurisdiction of the Court and is directly connected with the subject-matter of the claim of the other party.”). 45   See, e.g., Saluka v. Czech Republic, supra note 20, ¶ 76; Sergei Paushok et al. v. Gov’t of Mongolia, UNCITRAL Arbitration Proceeding, Award on Jurisdiction and Liability, ¶ 693 (Apr. 28, 2011); Oxus Gold v. Uzbekistan, supra note 20, ¶ 954. The International Court of Justice on the other hand considers the direct connection test an admissibility requirement: Jurisdictional Immunities of the State (Germany v. Italy), Order on Counter-Claims, 2010 I.C.J. Rep. 310, 315–6 (July 6). 46   See Goetz v. Burundi, supra note 38, ¶ 283 (juxtaposing this with Article 25 of the Convention, which demands a direct relationship of the dispute with the investment)

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“subject-matter” is distinct and possibly narrower than the “investment” notion employed by the Convention as its jurisdictional bedrock.47 At the same time, “subject-matter” is sufficiently supple to cover a shared factual situation, and there is no indication that a deliberately demanding hurdle was intended.48 In the Al-Warraq case, for example, the tribunal considered Indonesia’s counterclaim to be appropriately related to the primary claims, because it concerned the same bank bailout and criminal proceedings that the claimant had impugned.49 The Saudi Arabian claimant was an indirect shareholder in an Indonesian bank that suffered liquidity problems. As a preventative measure, the government bailed out the bank and issued a new class of shares. Indonesian authorities also prosecuted the claimant for his alleged corrupt involvement in the bank’s troubles. He was tried in absentia. The claimant averred that Indonesia’s treatment had fallen short of its international obligations, including by expropriating his investment and failing to accord fair and equitable treatment. The respondent State in turn argued that the bailout and its consequences had, inter alia, resulted from the claimant’s fraudulent activities. By a majority, the tribunal ultimately ruled that Indonesia had breached the FET standard but that the claimant was not entitled to damages. Moreover, although it permitted the counterclaim, the tribunal dismissed it on the merits. Similarly, the tribunal in Goetz allowed Burundi’s counterclaim because it concerned the alleged prejudice resulting from the same suspension of a freezone certificate and bank closure that was central to the primary claim.50 The Urbaser tribunal even allowed the presentation of Argentina’s human rights-related counterclaim, as it was “based on the same investment” and concerned “the same Concession.”51 The Argentine Republic had argued that the claimants had, through their concession contracts and the relevant regulatory (original text in French: “L’article 25 exige une relation directe avec un investissement, l’article 46 un rapport direct avec l’objet du différend.”). 47   See Pierre Lalive & Laura Halonen, On the Availability of Counterclaims in Investment Treaty Arbitration, 2 Czech Y.B. Int’l L. 141, 144 (2011). 48  Similarly, the International Court of Justice did not accept the restrictive view that a counterclaim must “counter” the principal claim, i.e., necessarily influence or diminish it, as had been suggested by its dissenting Vice-President in the Genocide case based on what he considered to be the “general and natural meaning of the term.” Rather, the issue was one of sufficient connection as a matter of law and fact. See Application of Genocide Convention, supra note 13, at 258. 49   See Al-Warraq v. Indonesia, supra note 33, ¶¶ 667–8. 50   See Goetz v. Burundi, supra note 38, ¶ 285. 51   See Urbaser v. Argentina, supra note 4, ¶ 1151.

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framework, assumed investment obligations, including in respect of the basic right to water and sanitation under international law.52 In response to a claim based on supposed utility regulation breaches and prevention of income collection, Argentina thus counterclaimed in the amount of more than US$400 million for damage arising from investments that the claimants had failed to make. The tribunal took the view that the investors’ obligations had their source in the concession and domestic law, rather than international law. In the end, the tribunal rejected the counterclaim, because, inter alia, the claimant’s lack of performance did not correlate to the alleged violation of the population’s right to water.53 In other cases, by contrast, the close link test has led to the inadmissibility of matters covered by the domestic law of the respondent State. In Oxus Gold, for example, the tribunal refused to adjudicate a counterclaim for damages caused by the claimant’s purported misconduct in the operation of a joint venture, which the claimant did not specifically control and which more properly concerned distinct questions of Uzbek currency restrictions.54 In Paushok, the tribunal similarly considered Mongolian tax law issues to lack a reasonable nexus to the investors’ IIA and public international law claims.55 Multiple agreements can impact the matter, in particular if dispute resolution provisions do not adequately address the issue, as is often the case. An exclusive jurisdiction clause can bar a counterclaim based on a breach of contract.56 Further, a treaty claim based on a contract may be within the tribunal’s jurisdiction, but it can be premature and thus inadmissible before being litigated in the contractual forum. Conversely, the parties may jointly agree to have otherwise inadmissible counterclaims resolved in the same arbitration, to “ensure maximum judicial economy and consistency.”57

52   Id., ¶¶ 1212–3. 53   Id., ¶ 1220. 54   Oxus Gold v. Uzbekistan, supra note 20, ¶¶ 955–6. 55   See Paushok v. Mongolia, supra note 45, ¶ 694 (concluding that the counterclaims “do not arise out of an investment contract or other contract to which the foreign investors are a party and that the foreign investors would have breached,” but “out of Mongolian public law and exclusively raise issues of non-compliance with Mongolian public law, including the tax laws of Mongolia.”). 56   See Oxus Gold v. Uzbekistan, supra note 20, ¶ 957 (noting that the forum selection and choice of law clauses in the Special Dividend Agreement, on which the counterclaim was based, limited the tribunal’s jurisdiction). 57   See Burlington v. Ecuador, supra note 29, ¶ 60 (citing an agreement concluded between the disputing parties).

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Procedural and Practical Issues

4.1 The Timing of Counterclaims A claimant bringing an investment claim may be surprised to find out—often years after a disagreement first arose—about a counterclaim by the respondent State. Whether or not this is thought of as opportunistic or suggestive of a meritless ruse, the legal effect of any such passage of time is a distinct issue from the optics of bringing such a claim.58 Indeed, it is worth recalling that the investor routinely decides whether and when to bring an international investment claim. At the same time, it is important not to forget that a State typically has other means to address such issues and is unlikely to be enamored by the prospect of submitting its claims to essentially external legal proceedings on an equal footing with a private entity. In the interest of fairness and procedural economy, procedural rules often propound that a cross-claim should be presented as early as possible. This helps to avoid ambushes and seeks to deter frivolous or meritless cross-claims. Rule 40(2) of the ICSID Arbitration Rules thus permits submission of a crossclaim no later than in the counter-memorial, unless the tribunal considers later presentation justified after having taken into account the views of the other party. In the Micula case, for example, the tribunal not only dismissed Romania’s request on the merits but also found that the record evinced no good cause for advancing this ancillary claim more than three years after Romania’s counter-memorial.59 In a similar vein, the UNCITRAL Rules allow for the submission of crossclaims at a later stage than the statement of defense, provided however that the delay is justified in that particular situation.60 Circumstances justifying late presentation might include the emergence of novel facts or exceptional domestic political developments precluding earlier submission.61 Further reasons for delay, if perhaps slightly embarrassing for counsel, could be a particularly voluminous record or complex case. Unless considered dilatory or deliberately uncooperative, a change in government 58   See Urbaser v. Argentina, supra note 4, ¶ 1150 (finding that the claimant’s “surprise and disappointment has no legal effect given the provision of Arbitration Rule 40(2) permitting submission of a counterclaim no later than in the counter-memorial.”). 59   See Ioan Micula et al. v. Romania, ICSID Case No. ARB/05/20, Award, ¶¶ 1290–1311 (Dec. 11, 2013). 60   See 2010 UNCITRAL Arbitration Rules, art. 21(3). 61   See Christoph Schreuer et al., The ICSID Convention: A Commentary 735–7 (2007) (with further references).

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or legal representation might also receive a degree of indulgence. A tribunal will usually take into account the potential prejudice the delayed submission causes, as well as the effect this will have on the procedural calendar and the further conduct of the proceedings.62 Ultimately, the nub of the matter is whether the parties had sufficient opportunity to consider and put forward their respective cases fairly and adequately. 4.2 Withdrawal or Discontinuance of the Primary Claim As described above, arbitral tribunals require that a cross-claim be sufficiently connected to a primary claim. In a situation where the claimant gives up the primary claim, is an otherwise valid cross-claim still viable? The answer depends on the nature of the cross-claim. If, on the one hand, a State advances a separate counterclaim that the tribunal is competent to hear, there is much to be said for deciding this claim even if the primary claim is withdrawn, settled, or otherwise discontinued.63 A monetary set-off, on the other hand, is only a shield against—and limited to—the claimant’s demand. If the latter falls away (including, for instance, when a defense succeeds in full), there is no longer a need to try to reduce or extinguish that claim. This makes it difficult to see a legitimate point in continuing the arbitration and adjudicating upon the set-off, which is the ultimate yardstick guiding the practice of arbitral tribunals.64 It follows from this that care needs to be taken as to how a party faced with a primary claim formulates its own grievances. Of course, the nature of a crossclaim may sometimes make it difficult to plead it otherwise. For example, presenting an alleged breach of human rights that may not even involve a claim for monetary compensation as a counter-balancing of mutual debt, i.e., a setoff stricto sensu, will likely be on the far end of the plausibility spectrum. It is nevertheless a counsel of prudence to consider pleading a counterclaim and set-off in the alternative, especially with a view to avoiding the narrower classification as a set-off which will not be heard if the tribunal dismisses the primary claim. This distinction is consistent with rules such as Article 46 of the ICSID Convention, which obliges a tribunal that is properly seized to decide

62   See Caron & Caplan, supra note 7, at 425. 63   See id., at 424 (with further references). 64   See, e.g., Interfirst Bank Dallas, N.A. ( formerly First National Bank in Dallas) v. Islamic Republic of Iran et al., Award, ¶ 8, 16 Iran-U.S. Cl. Trib. Rep. 291 (1987) (holding that the set-off “has become moot” where the claim had been withdrawn).

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cross-claims.65 This can be understood as a facet of the general principle that an award should deal with “every question submitted” to a tribunal, as stipulated by Article 48(3) of the ICSID Convention.66 But such maxims do not compel a tribunal to comment on issues or arguments without impact on the award, which would be unreasonable and wasteful.67 That is the case when a crossclaim is confined to an original demand that is no longer live. 4.3 Claims Involving Third Parties It is a corollary of the consensual nature of arbitration that counterclaims can only be made by or against parties to the same arbitration.68 In practice, counterclaims often tend to trace the main claim closely, such as when a State asserts deficient performance by the claimant (e.g., failing to ensure hydrocarbon exploration blocks are in good order) or wrongdoing in the course of the investment activity (e.g., fraudulent misrepresentations or pricing schemes, breaches of investment obligations based both on domestic and international law, or violations of environmental regulations).69 This highlights the claimant’s tactical advantage of being able to decide who to involve—and, perhaps more importantly in investment arbitration, who not to involve—in the suit. Notwithstanding such privity obstacles, third-party situations can sometimes also be brought to bear on a dispute as a damages issue, provided that liability can be established. In accordance with the general principle of wiping out the consequences of unlawful conduct (restitutio in integrum), settled case law illustrates that compensation can be due where third parties make a claim

65  Article 46 of the ICSID Convention, states in relevant part: “the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims….” 66   See Schreuer et al., supra note 61, at 740. 67   See, e.g., Standard Chartered Bank v. United Republic of Tanzania, ICSID Case No. ARB/10/12, Award, ¶ 273 (Nov. 2, 2012) (citing further case law). 68   See Saluka v. Czech Republic, supra note 20, ¶ 49 (calling this a “cardinal principle” of bringing counterclaims). 69   See, e.g., Burlington v. Ecuador, supra note 29, ¶ 890 (alleged failure by the foreign investor to maintain hydrocarbon infrastructure in good working condition) and ¶ 80 (pollution purportedly caused by the energy company claimant); Metal-Tech v. Uzbekistan, supra note 38, ¶ 393 (counterclaim for revenue lost as a result of unlawfulness in the making of the investment, including misrepresentations and corruption in violation of the law of Uzbekistan); Urbaser v. Argentina, supra note 4, ¶¶ 1156–7 (counterclaim against a utility concessionaire based on international law and the human right to water).

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for services that were promised but not provided.70 The same applies to past or future claims against the prevailing party by subcontractors or suppliers involved in the investment.71 Just as elsewhere, wrongdoing in cross-border disputes involving a State can have knock-on effects. This is particularly likely in case of complex, multicontract investment projects that directly or indirectly involve a multitude of entities such as lenders, consultants, suppliers, or consumers. Although these third parties may not be able to become a party to the dispute, they might have claims against one of the disputing parties, often the side that was wronged but now finds itself incapable of meeting its own obligations. Accordingly, while the arbitral tribunal would not normally have jurisdiction over the third party, the latter’s claims can essentially become part of a damages claim in the arbitration by the side liable to the third party, provided that basic principles for the recovery of damages are heeded, including remoteness, mitigation, causation, and/or contributory fault. The paradigmatic situation here concerns harm suffered by claimant investors, for instance, when an expropriation causes a sub-contractor to lose business or makes it impossible for the investor to deliver promised goods or services. Be that as it may, there is little to suggest that this basic concept should be any different for a counterclaim by a respondent State. 4.4 Damages, Interest, and Costs Remediation principles for successful counterclaims generally correspond to those applicable to primary claims. Notably, and as discussed above, a set-off is capped by the totality of the primary claim, whereas this is not the case for an independent counterclaim. All the same, it is important to watch out for possible permutations, as counterclaims in particular may be governed by domestic law. In such a situation, the respective national law on damages and interest will apply. This was the case in Burlington, where the tribunal applied Ecuadorian law to the question of whether simple or compound interest should be granted on the sums awarded in respect of Ecuador’s counterclaims.72 Unlike the investors’ 70   See Société Ouest Africaine des Bétons Industriels v. Republic of Senegal, ICSID Case No. ARB/82/1, Award, ¶ 12.05 (Feb. 25, 1988) (albeit concerning indemnification of the investor). 71   See Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award, ¶¶ 387, 403 (Feb. 6, 2007) (again regarding the investor). 72   See Burlington v. Ecuador, supra note 29, ¶¶ 1093–5 (deferring to Ecuador’s interpretation of its own law where this was not sufficiently clear).

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international treaty claims, the law of Ecuador governed Ecuador’s environmental counterclaims which were actions rooted in domestic tort law. The State’s infrastructure counterclaims were governed by Ecuadorian law according to the choice of law clause contained in the production sharing contracts. To ensure judicial economy and consistency, the parties had agreed that the arbitration in question was the proper forum to finally and bindingly resolve the counterclaims arising out of the claimant’s investments. The claimant therefore did not challenge the tribunal’s jurisdiction over Ecuador’s counterclaims, and Ecuador waived its right to file the counterclaims in other forums. To give another example, depending on the applicable law, a set-off might operate retrospectively from when the right arose or prospectively from the tribunal’s decision, which can impact damages and interest. If the time of the setoff is when the counterbalancing debt came to exist (i.e., the set-off operates retrospectively), this reduces the principal amount on which any pre-award interest would be calculated over time. At the same time, however, the wronged party’s gross entitlement to damages might increase depending on the foreseeable harm caused by the wrongdoer, e.g., if funds were unavailable to invest or meet certain obligations. On the other hand, if the set-off only applies at the time of the award (i.e., has prospective effect), the award debtor simply deducts the amount of his cross-claim from the sum awarded to the creditor. The costs of a counterclaim are part of the costs of an arbitration and are thus resolved in accordance with the applicable arbitration rules.73 While these may proceed from different starting points, they typically afford tribunals considerable discretion when it comes to apportioning costs.74 In practice, tribunals either ask each side to bear its own costs or award some (or less frequently, all) costs to the prevailing party. In that respect, should both sides succeed with their claims and the tribunal be minded to have costs follow the event (i.e., apply the “loser pays” principle), there is force in the proposition that, in case of a set-off, the claimant should recover costs in proportion to the net sum awarded. Correspondingly, if the set-off succeeds in full, the tribunal may decide to award costs in full on the basis that the party pleading the set-off has defeated the claim in its entirety. In case of a counterclaim, the claimant should ordinarily recover the costs of its claim and the respondent the costs of its counterclaim. All the same, 73  By contrast, “the request of an award of costs cannot properly be considered a counterclaim,” and thus “the dismissal of the counterclaims does not affect the Tribunal’s discretion to allocate costs.” Fraport v. Philippines, supra note 39, ¶ 468. 74   See Chapter 15, Matthew Hodgson & Alastair Campbell, The Allocation of Costs in Investment Treaty Arbitration, at Section 2.1.3.

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costs implications are notoriously difficult to disentangle and predict in practice, given their characteristically discretionary element, the variation in approaches between different legal traditions, and the preferred approaches of arbitrators. 5

Re-balancing the Asymmetrical System of Investment Treaty Protection

BITs are frequently said to have an “inherently asymmetrical character”:75 investors are typically given the procedural right to sue States while undertaking no substantive obligations, whereas States undertake substantive obligations while receiving no procedural right to sue investors.76 The Rusoro Mining tribunal, interpreting the Canada–Venezuela BIT, put this asymmetry in stark terms: The literal wording of Art. XII does not leave room for doubt: the Treaty affords investors, and only investors, standing to file arbitrations against host States; and the purpose of the arbitrations is for arbitrators to adjudicate disputes relating “to a claim by the investor that a measure taken or not taken by [the host State] is in breach of this Agreement”, by applying the Treaty and applicable rules of international law.77 The Urbaser claimants invoked this asymmetry when arguing that “host States cannot rely on the violation of the provision of any such Treaty as [a] basis to sue an investor,” as this “would run counter to the object and purpose of treaty arbitration, which is to grant the investors a one-sided right of quasijudicial review of national regulatory action.”78 The Urbaser tribunal, however, rejected any such asymmetry in the Spain–Argentina BIT. That agreement covered disputes “arising between” the parties “in connection with investments.”79 75   See Al-Warraq v. Indonesia, supra note 33, ¶ 659; James Crawford, Treaty and Contract in Investment Arbitration 17 (Nov. 29, 2007), reprinted in 24(3) Arb. Int’l 351 (2008). 76   See, e.g., Roussalis v. Romania, supra note 36, ¶ 871. In that respect, little turns on whether IIAs grant rights to the treaty parties only or to the investors, as the latter are in any event permitted to enforce their home State’s rights. Moreover, recent decisions on waiving treaty rights suggest that investors are direct beneficiaries of IIAs, rather than intermediaries or agents. See, e.g., MNSS B.V. & Recupero Credito Acciaio N.V. v. Montenegro, ICSID Case No. ARB(AF)/12/8, Award, ¶ 163 (May 4, 2016). 77   Rusoro v. Venezuela, supra note 34, ¶ 627 (alteration in original). 78   Urbaser v. Argentina, supra note 4, ¶ 1120 (citing the claimants’ arguments). 79   Id., ¶ 1143.

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This “simple wording,” the tribunal concluded, “is completely neutral as to the identity of the claimant or respondent” in any such investment dispute arising between the parties.80 The BIT thus generally permitted State counterclaims against claimant investors. Simultaneously, the tribunal rejected the defeatist view that investment treaty protection inevitably must be a lopsided affair. The Saluka tribunal concluded similarly. There, the applicable BIT’s dispute resolution provision covered “[a]ll disputes” between the investor and the respondent State.81 Such broad language contains “no implication” that the provision applies only to disputes brought by investors.82 The tribunal thus concluded that the jurisdiction conferred upon it by the BIT and the UNCITRAL Arbitration Rules is “in principle wide enough to encompass counterclaims.”83 A small number of IIAs expressly allow State counterclaims against investors for breach of obligations specified in the treaty.84 Broad investor obligations may give rise to equally broad State counterclaims. Merely imposing obligations on investors itself, however, does not permit claims against an investor. In every case, the investor must separately consent to arbitration, typically by first commencing arbitration against the State. As such, the mere inclusion of investor obligations in IIAs cannot eliminate concerns about the inherent asymmetry in such agreements. Whether or not the concept of “balancing” is considered appropriate in litigation and irrespective of more far-reaching systemic concerns, the presentation of counterclaims can compel arbitrators and the opposing side to confront issues that would otherwise not have been raised. This facilitates more comprehensive and consistent dispute resolution. In addition, the very possibility for States to vent grievances reduces pressure on the regime’s legitimacy.85 At the same time, arbitrators have sufficient tools at their disposal to avoid dilatory tactics and obfuscation.

80   Id. 81   Saluka v. Czech Republic, supra note 20, ¶ 39. 82   Id. 83   Id. The tribunal nonetheless concluded that it lacked jurisdiction over the State’s counterclaims, as any claims based on violations of Czech law were outside the scope of the applicable BIT, and the share purchase agreement at issue was between different parties and, in any event, required arbitration in another forum. 84   See, e.g., Investment Agreement for the COMESA Common Investment Area, art. 9 (2007) (allowing a respondent State to assert counterclaims against the “investor bringing the claim” if the investor has failed to comply with obligations under the agreement, including the investor’s obligation “to comply with all applicable domestic measures”). 85   See, e.g., Andrea K. Bjorklund, The Role of Counterclaims in Rebalancing Investment Law, 17 Lewis & Clark L. Rev. 461, 476 (2013); Ştefan Dudas, Treaty Counterclaims Under the

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All States, of course, also remain free to address perceived asymmetries in their new IIAs, to which we turn next. 6

Treaty-drafting Choices

The French government recently observed that “[t]he possibility for arbitral tribunals to adjudicate counterclaims would help rebalance the rights of States and of investors in disputes brought before an arbitral tribunal.”86 Increasing the availability of State counterclaims rests not with changes to arbitral rules, which typically allow such counterclaims,87 but with IIAs themselves, which frequently exclude them. States wishing to reform their IIA practice can find practical guidance in newer IIAs and the many published arbitral awards and decisions on State counterclaims. First, States may wish to expressly include a right to make counterclaims. The South African Development Community (“SADC”) Model BIT, for instance, provides: “A Host State may initiate a counterclaim against the Investor before any tribunal established pursuant to this Agreement for damages or other relief resulting from an alleged breach of the Agreement.”88 Second, States may wish to give “either party” the right to submit to arbitration “any dispute” as between them. Such language repeatedly has been found broad enough to allow for State counterclaims.89 Finally, States may wish to specify the grounds on which State counter­ claims may be brought. There appears little point in authorizing State counterclaims without specifying the scope of such claims. This may include breaches of the IIA, national law, or underlying investment contracts. For instance, the Model BIT of India explicitly permits counterclaims for breaches of the obligations set out in its own provisions on corruption, transparency, taxation, and host State law compliance.90 Further options include joint stateICSID Convention, in ICSID Convention After 50 Years: Unsettled Issues 385 (Crina Baltag ed., 2016). 86  Gov’t of France, Towards a new way to settle disputes between states and investors (May 2015), http://www.diplomatie.gouv.fr/IMG/pdf/20150530_isds_papier_eng_vf_ cle09912d.pdf. 87   See, e.g., ICSID Convention, art. 46; 2010 UNCITRAL Arbitration Rules, art. 21(3); UNCITRAL Arbitration Rules, art. 19(3) (1976). 88   See, e.g., Southern African Development Community Model Bilateral Investment Treaty Template with Commentary, art. 19.2 (July 2012). 89   See supra Section 3.1. 90   See Model Text for the Indian Bilateral Investment Treaty, art. 14.11(i) (2015).

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ments of interpretation or the execution of jurisdictional agreements setting out the scope of permissible counterclaims. Each approach has important practical and policy consequences, not to mention its own prospects of being realistically achievable.91 7 Conclusion The recent uptick in State counterclaims coincides with a period of active reform of IIAs. Some 110 States recently have reviewed their IIAs, and at least 60 States have developed (or have begun developing) new or revised model IIAs.92 Motivations vary, but many States undoubtedly seek greater balance between investor and host-State interests, including to help increase the fairness, efficiency, and legitimacy of the process. The availability of State counterclaims is increasingly perceived as integral to that effort. Given perennial confusion over the application and scope of counterclaims, States are well advised to ensure clear drafting to effectuate their policy goals.

91   See, e.g., UNCTAD, Investor-State Dispute Settlement: A Sequel, in UNCTAD Series on Issues in International Investment Agreements II, at 115–21 (2014). 92   See, e.g., UNCTAD, Taking Stock of IIA Reform, in UNCTAD IIA Issues Note No. 1, at 5 (Mar. 2016); see, generally, id., at 5–8.

Part 5 Adjustments to Damages and Post-Award Issues

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Chapter 14

Approaches to the Award of Interest Mark Beeley As already noted in this book, it is accepted wisdom amongst most lawyers that the remedy for a violation of an international law obligation should be full restitution (restitutio in integrum), i.e., the restoration of the wronged party to the position it would have been in but for the wrongful act.1 It is equally accepted wisdom (at least among economists) that full restitution is not achievable without the award of interest, at an appropriate rate and, in particular, compounded at appropriate rest periods.2 In the same way that future damages must be discounted to avoid over-compensating claimants, past damages need to be positively adjusted by way of interest to ensure that under-compensation does not occur. The economist would therefore say that, in order for a tribunal’s award to achieve its stated objective of making the injured party whole again, interest must be awarded in addition to damages, and that interest must be compounded properly. While economists and lawyers might differ as to how they view the world of damages, if full restitution is truly the legal goal, regard must be had to the true economic impact of the award of interest. While today, there is near-universal recognition that interest is generally appropriate, in the past, however, there long remained a tendency among investment treaty tribunals and legal scholars (mirroring a similar tendency among domestic judges and commercial tribunals) to regard the calculation of interest, and particularly of compound interest, with suspicion. This suspicion was driven by at least three factors: (i) lingering concerns of awarding “windfalls”; (ii) a backdrop of domestic common law provisions against usury and/or prohibiting the award of anything more than “simple” interest, often at a capped rate; and (iii) a reluctance to fully engage with the mathematics, leading to historically truncated reasoning on the basis upon which interest was awarded. 1  See Chapter 7, Noah Rubins et al., Approaches to Valuation in Investment Treaty Arbitration, at Section 1.1; see also Chapter 5, Irmgard Marboe, Assessing Compensation and Damages in Expropriation versus Non-expropriation Cases, at Section 2. 2  Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. By contrast, simple interest is the application of interest to a fixed principal at a steady rate, allowing the calculation of interest which would be the same, for example, on both day 1 and day 1001.

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As the annulment committee in Wena Hotels v. Egypt observed: “As an extended practice shows, international tribunals and arbitration panels usually dispose of a large margin of discretion when fixing interest. It is normal, therefore, that very limited reasons are given for a decision which is left almost entirely to the discretion of the tribunal.”3 No doubt tribunals will continue to exercise wide discretion in this area, or, as the tribunal in Rusoro v. Venezuela expressed, “retain a certain margin of appreciation.”4 The search for a modern trend is set against the backdrop of an international judicial and arbitral body of practice which was described in June of 2000 as “anarchical” by Professor James Crawford5 and which, for the better part of 75 years, relied primarily on the views of State-to-State tribunals from the 1920s and 1940s, when damages (let alone interest) were rarely awarded at all in such cases. The explosion of investor-State arbitration (in which damages are the norm) since the early 2000s has, however, brought a new focus on this key element of damages, opening up an important source of compensation for claimant and, in some circumstances, respondent parties. In cases where principal damages sums run tens, if not hundreds, of millions of dollars and take years to resolve, the interest component of any award can (much like lawyers’ costs) rapidly overtake the principal sum awarded as a direct consequence of the original harm itself.6 Despite this, “interest has traditionally been given short shrift. Valuation experts often do not opine on the appropriate interest rate, memorials give it cursory treatment and awards typically fail to give a fully reasoned explanation for the rate applied.”7 Such an approach leaves value on the table 3  Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Application for Annulment, ¶ 96 (Feb. 5, 2002), 41 I.L.M. 933. 4  Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award, ¶ 642 (Aug. 22, 2016) (noting however, “[t]his should not be confused with acting ex aequo et bono, because the Tribunal’s margin of appreciation can only be exercised in a reasoned manner and with full respect to the principles of international law for the calculation of damages.”) (citation omitted). 5  James Crawford (Special Rapporteur), Third report on State responsibility ¶ 212, U.N. Doc. A/ CN.4/507/Add. 1 (June 15, 2000). 6  See, e.g., Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Award (Feb. 17, 2000); Gov’t of the State of Kuwait v. Am. Independent Oil Co. (AMINOIL), Ad Hoc Arbitration Proceeding, Final Award (Mar. 24, 1982), 21 I.L.M. 976; Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award (Dec. 8, 2000), 41 I.L.M. 933. 7  Christina L. Beharry, Prejudgment Interest Rates in International Investment Arbitration, 8(1) J. Int’l Disp. Settlement 56–78 (2017) (citations omitted). The point is underscored by

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for claimants, exposes respondents to interest claims without proper economic underpinning, and generally stunts the development of this important element of damages. Thankfully, recent tribunals have done a better job of rising to the challenge, in that they have taken their calculators out and expressed a greater willingness to award interest in more sophisticated ways than on a “black box” basis. This Chapter seeks to examine the modern practice of investment treaty tribunals on this issue (described by one tribunal as “varied and inconsistent, falling short of providing clear guidance”8), and asks whether such tribunals are actually fully restoring parties to the position they would have been in or not, in the context of the award of interest. In doing so, it will first look at historical practices before turning to the questions facing modern tribunals. The next section will examine current practices in investment treaty cases with respect to setting interest rates, the choice between simple and compound interest, approaches to selecting rest periods, and the starting period for the running of interest. This section will be followed by a brief discussion of postaward interest. The Chapter ends with a prediction regarding the questions that will remain open for settlement by future tribunals (and for argument by parties in the meantime). It also concludes that it is perhaps inevitable that there will continue to be debate on the question of what exactly restitutio in integrum means in any given case, although tribunals have made major advances in achieving it. 1

The Historical Picture and the Jurisdictional Underpinning of the Award of Interest

In the initial era of investment treaty claims, tribunals began their analysis of interest with the question of whether to even grant it. Given this starting point, the fact that there are any consistent trends at all in the award of interest by investment tribunals may be surprising; yet any study certainly reflects a degree of convergence with the explosion of investor-State arbitration in this century. The previous lack of consistency, which is explored below, resulted in part from the limited express guidance given to tribunals on the matter of interest.

the fact that interest takes up only 30 pages out of the 404 in Sergey Ripinsky with Kevin Williams, Damages in International Investment Law (2008). 8  Murphy Expl. & Prod. Co.—Int’l v. Republic of Ecuador, PCA Case No. 2012-16, Partial Final Award, ¶ 514 (May 6, 2016) (citation omitted).

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This uncertainty no doubt comes from the lack of clear empowerment of tribunals to award interest on any principled basis. Outside the arena of international law, the power to award interest (and the scope of the accompanying discretion) is traditionally dealt with as a procedural matter in domestic arbitration legislation,9 where there is specific provision beyond the default rules which apply to domestic litigations.10 Absent a common and consistent domestic law seat for investment treaty arbitrations, the equivalent must be the rules governing the arbitration or the clauses making up the arbitration agreements. The relevant arbitration agreements (typically found in the applicable treaty) offer little concrete guidance. To the extent that bilateral investment treaties (“BITs”) do expressly deal with interest, they typically only do so by way of a passing reference to the tribunal’s power to award damages, which includes the award of interest11 or in the context of substantive provisions dealing with protection from expropriation.12 This second type of provision goes no further than underscoring the requirement for “prompt,” “adequate,” and “effective” compensation for the expropriation to be lawful. Even in these cases, however, there is little consistent mandate, with provisions variously, and potentially conflictingly (or at least ambiguously), requiring interest at an “appropriate market rate,”13 a “commercial rate established on a market basis,”14 the “prevailing commercial rate,”15 a “normal commercial rate,”16 the “usual bank interest,”17 9    See, e.g., Arbitration Act 1996, c. 23, § 49 (Eng.); Federal Act on the Amendment of the Swiss Civil Code (Part 5: Swiss Code of Obligations), arts. 105–6 (Mar. 30, 1911). 10  As, for instance, is the case in New York. 11   See, e.g., Agreement between the Government of Canada and the Government of the Republic of Ecuador for the Promotion and Reciprocal Protection of Investments, art. 13(9) (Apr. 29, 1996). 12   See, e.g., Agreement between Japan and the Republic of Peru for the Promotion, Protection and Liberalization of Investment, art. 13(3) (Nov. 21, 2008). 13  Agreement between the Government of Australia and the Government of the Republic of Chile on the Reciprocal Promotion and Protection of Investments, art. 6(2) (July 9, 1996). 14  Agreement between the Kingdom of Spain and the Republic of Albania on the Promotion and Reciprocal Protection of Investments, art. 5(3) (June 5, 2003). 15  Agreement between the People’s Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments, art. 4(2) (Dec. 1, 2003). 16  Agreement between the Government of the Argentine Republic and the Government of New Zealand for the Promotion and Reciprocal Protection of Investments, art. 6(2) (Aug. 27, 1999). 17  Agreement between the Federal Republic of Germany and the Kingdom of Cambodia concerning the Encouragement and Reciprocal Protection of Investments, art. 4(2) (Feb. 15, 1999).

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the “market rate of the currency of indemnification,”18 or numerous other terms. Crucially, however, the treaty drafters stop short of telling a tribunal how it may identify or apply such a rate. Similarly, some multinational investment treaties offer general authority, but no real guidance as to how interest should be approached. The North American Free Trade Agreement, for example, empowers a tribunal to award interest as part of damages—but gives no guidance for doing so.19 The Energy Charter Treaty likewise only notes that a tribunal may include interest as part of its award,20 as does the Dominican Republic-Central America Free Trade Agreement.21 Such treaties do, of course, contain references to suites of arbitral rules, but these do not advance the position. Neither of the two most common choices for investor-State arbitrations, the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules and the International Centre for Settlement of Investment Disputes (ICSID) Arbitration Rules, contain any detailed provisions as to when or how an investment treaty tribunal should apply interest. Accordingly, in the absence of a clear and specific mandate in the sources of procedural power, tribunals must inevitably fall back on substantive international law, often nebulous and uncodified, to provide a reasoned basis for awarding interest and to obtain some guidance as to how that should be done. In this regard, tribunals have, at least, been clear that interest is a sub-species of damages for this purpose, and accordingly within their inherent powers to award: [C]laims for interest are part of the compensation sought and do not constitute a separate cause of action requiring their own independent jurisdictional grant…. [The Tribunal] has regularly treated interest, where sought, as forming an integral part of the “claim” which it has a duty to decide…. Indeed, it is customary for arbitral tribunals to award interest 18  Accord entre l’Union économique belgo-luxembourgeoise et la République orientale de l’Uruguay concernant l’encouragement et la protection réciproques des investissements [Agreement between the Oriental Republic of Uruguay and the Belgium-Luxembourg Economic Union on the Promotion and Reciprocal Protection of Investments], art. 4(3) (Nov. 4, 1991) (original text in French: “Elles porteront intérêt au taux du marché de la devise utilisée….”). 19  North American Free Trade Agreement, art. 1135(1) (1993). 20  Energy Charter Treaty (with annexes), art. 26(8) (Dec. 17, 1994), 2080 U.N.T.S. 95. 21  Dominican Republic-Central America Free Trade Agreement, ch. 10, art. 10(1)(a) (Aug. 5, 2004).

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as part of an award for damages, notwith-standing the absence of any express reference to interest in the compromis. Given that the power to award interest is inherent in the Tribunal’s authority to decide claims, the exclusion of such power could only be established by an express provision….22 As is considered elsewhere in this publication, there is no “one size fits all” approach to the quantification of damages in investor–State arbitration. Attempts to define the many and varied ways in which damages can be claimed and assessed can, and have, filled entire books.23 To the extent that there is any unifying (if broad-brush) theory of the proper approach to be taken, it is the diktat that, in the event of a violation of international law or an international treaty obligation, the injured party should receive restitution in integrum, which, as explained in the oft-cited case of the Factory at Chorzów, equates to “the obligation to restore the undertaking and, if this be not possible, to pay its value at the time of the indemnification, which value is designed to take the place of restitution which has become impossible.”24 In other words, the goal is to make the wronged party entirely whole. As such, it should come as no surprise that, in the modern era, it is generally recognized that where a party has been deprived of the use of its money and assets, then the time value of the lost money requires a larger sum to be paid today in compensation than would have been payable if the culpable party had settled the dispute the day before. Or, as artfully put by the tribunal in Vivendi v. Argentina: “The object of an award of interest is to compensate the damage resulting from the fact that, during the period of non-payment by the debtor, the creditor is deprived of the use and disposition of that sum he was supposed to receive.”25 The obligation of tribunals under the substantive law of the arbitrations (i.e., international law) in making full reparation, that requires consideration of interest, appears to be recognized by Article 38 of the Draft Articles on 22   Islamic Republic of Iran v. United States of America, Decision, ¶ 12, 16 Iran-U.S. Cl. Trib. Rep. 285 (Sept. 30, 1987). 23   See, e.g., Ripinsky & Williams, supra note 7; Irmgard Marboe, Calculation of Compensation and Damages in International Investment Treaty Law (2009); Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (2011); and, of course, this book. 24   Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17, at 48 (Sept. 13). 25   Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award, ¶ 9.2.3 (Aug. 20, 2007).

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Responsibility of States for Internationally Wrongful Acts.26 That provision establishes two principles: 1. 2.

Interest on any principal sum due under this chapter shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set so as to achieve that result. Interest runs from the date when the principal sum should have been paid until the date the obligation to pay is fulfilled.27

Although this would seem to be a clear statement that interest should be paid, the accompanying Commentary to the Draft Articles proceeds to muddy the waters. The commentaries on this article open with the clear statement that the drafters did not regard interest as a mandatory or crucial part of reparation: “[i]nterest is not an autonomous form of reparation, nor is it a necessary part of compensation in every case…. Nevertheless, an award of interest may be required in some cases in order to provide full reparation for the injury caused by an internationally wrongful act….”28 This conditionality (and focus on the discretionary words “when necessary”) leads to the argument typically utilized by respondents that interest is unjust, or should only be awarded in special circumstances. However, as the survey described below reflects, these arguments have rarely succeeded in the modern era of financially sophisticated tribunals and counsel, who appear to accept that interest is “necessary” in most cases, and, in fact, that the burden is now on the party opposing its application to show that an exceptional case exists to deny interest being awarded. Accordingly, the true battleground has shifted from the question of whether interest should be awarded at all to one of how much interest should be awarded, and on what basis. Inevitably, both parties take extreme and polar positions, requiring tribunals to establish a principled approach as the middle ground.

26  The Articles on State Responsibility were adopted by the International Law Commission at its fifty-third session in 2001. Int’l Law Comm’n, Rep. on the Work of Its Fifty-Third Session, including Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentary [hereinafter ILC Draft Articles], art. 38, U.N. Doc. A/56/10(SUPP) (Nov. 2001). 27   Id., art. 38(1)–(2). 28   Id., art. 38, commentary 1 (emphasis added).

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The Dilemmas of the Modern Tribunal

It is now almost universally accepted that to achieve the traditional measure of international law reparation in full, interest must (in the vast majority of cases, at least) be awarded. The tribunal must then make a ruling on the following elements which will make up that interest calculation: (i) At what rate? (ii) Should that rate be applied on a “simple” or “compound” basis? (iii) If compounded, with what rest periods? (iv) For which period? (v) Should a different approach be taken as between pre-award and postaward interest? As discussed below, an emerging trend appears to be that interest should be normally awarded and compounded. But as to rates and rests (i.e., the periods between each event of compounding), the field remains fully open for the parties to persuade the tribunal. 3

The Current State of Play

In the course of preparing this Chapter, the author reviewed all English language29 investor–State final awards rendered between 2011 and August 2017 that were available from public and private sources. This produced a sample population of some 60 final awards which contained damages granted in favor of claimant entities. From that review, the following broad trends may be observed: (i) interest on damages owed was overwhelmingly awarded by all but 3 tribunals;30 (ii) of those tribunals that awarded interest, the vast majority (some 89%) awarded interest on a compound basis; and

29  This includes awards rendered in other languages with freely available English language translations. 30   See, e.g., Inmaris Perestroika Sailing Maritime Services GmbH et al. v. Ukraine, ICSID Case No. ARB/08/8, Award (excerpts) (Mar. 1, 2012) (limiting interest to only a portion of the recoverable damages).

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(iii) of those tribunals that awarded compound interest, there was a significant preference (some 69%) toward compounding on an annual basis, with the next most popular option (22%) being compounding on a sixmonth basis, and the remainder choosing either quarterly or monthly compounding. Interestingly, there was almost no uniformity in terms of the interest rate selected by the tribunals, with a broad spread of individual rates and reference rates being adopted. Across the 57 awards where interest was awarded, 24 different approaches to interest rates were identified, including three cases where a simple lump sum reflecting pre-award interest was granted.31 Of those tribunals that did indicate interest rates, a rate based on the London Interbank Offered Rate (“LIBOR”) was often adopted (Figure 14.1). By far, the most popular choice32 (at approximately 22%) was “LIBOR + 2%” although the awards generally failed to identify which specific LIBOR rate (e.g., the annual, monthly, or quarterly rate, nor the currency associated with that rate) was intended. LIBOR proves a common reference rate for the remaining tribunals, with one-year LIBOR + 4% being utilized in 8% of cases,33 and individual tribunals picking 90-day LIBOR + 2%,34 six-month LIBOR + 1%,35 90-day LIBOR + 4%,36 30-day LIBOR + 1%,37 and simple “LIBOR” on one occasion.38 Reference to U.S. Treasury Bills rates proved to be the second most popular starting point, with 25% of tribunals picking some variation of this rate:39 the 31  In other words, the tribunals in those cases arrived at a lump sum figure which it judged to fairly reflect the lost time value of money without explaining its reasoning. 32   See, e.g., Khan Resources Inc. et al. v. Gov’t of Mongolia & MonAtom LLC, PCA Case No. 201109, Award on the Merits (Mar. 2, 2015); Oxus Gold plc v. Republic of Uzbekistan, UNCITRAL Arbitration Proceeding, Final Award (Dec. 17, 2015). 33   See, e.g., OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award (Mar. 10, 2015). 34   British Caribbean Bank Ltd. v. Gov’t of Belize, PCA Case No 2010-18, Award (Dec. 19, 2014). 35   Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award (Apr. 4, 2016). 36   Standard Chartered Bank (Hong Kong) Ltd. v. Tanzania Electric Supply Co. Ltd., ICSID Case No. ARB/10/20, Award (Sept. 12, 2016). 37   S GS Société Générale de Surveillance S.A. v. Republic of Paraguay, ICSID Case No. ARB/ 07/29, Award (Feb. 10, 2012). 38   Swisslion DOO Skopje v. Former Yugoslav Republic of Macedonia, ICSID Case No. ARB/09/16, Award (July 6, 2012). 39   See, e.g., Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Award (Nov. 27, 2013); Hulley Enterprises Ltd. (Cyprus) v. Russian Federation, PCA Case No. AA 226, Final Award

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Approaches to interest rates.

six-month Treasury Bill rate being used on three occasions, the ten-year yield, and one-year yield each being preferred on two occasions, and the 90-day and 180-day rates each being selected once. An equal number of tribunals elected to simply impose a fixed interest rate, ranging from a low of 0.0056% to a high of 9%40 (with a mean of 4.93% and a median of 6%). Other reference points included LIBOR’s Euro cousin, the EURIBOR,41 and the U.S. Prime lending rate42 (an equivalent to the UK “base rate”). The next section will proceed to consider: (1) the elements underlying the computation of interest in investor-State cases, (2) whether the current trends

(July 18, 2014); Copper Mesa Mining Corp. v. Republic of Ecuador, PCA Case No. 2012-2, Award (Mar. 15, 2016). 40   See Tenaris S.A. & Talta—Trading e Marketing Sociedad Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26, Award (Jan. 29, 2016). 41   See, e.g., Hrvatska Elektroprivreda d.d. v. Republic of Slovenia, ICSID Case No. ARB/05/24, Award (Dec. 17, 2015). 42   See, e.g., TECO Guatemala Holdings LLC v. Republic of Guatemala, ICSID Case No. ARB/ 10/17, Award (Dec. 19, 2013).

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are appropriate, and (3) whether a more rigorous approach should be taken in the selection of these components. 3.1 Rates As to the appropriate interest rate to impose, the question is really: what interest rate fairly reflects the period of time for which there has been a loss of the enjoyment of the violated right and/or the loss of the use of the proceeds from prompt compensation for that violation? An argument could be made that this is an entirely case-specific inquiry, which should be examined as a matter of fact. What did this particular claimant have planned for its capital? Would it have sat in a sleepy interest bearing account, or would it have been invested in a risky new venture? Would that venture have succeeded? Or would it have been a spectacular flop? Clearly, this sort of analysis opens the door to a world of near-hopeless speculation, and puts the respondent at the mercy of how imaginative claimants were planning to be, and claimants at the mercy of the tribunal’s assessment of how an entirely theoretical investment would have performed. Such an assessment, by its nature and as a matter of practicality and costs, would very likely be made without the benefit of meaningfully tested evidence, and would represent little more than the tribunal’s best guess. In answering the questions posed above, a respondent might argue that interest awarded at the cost of replacing absent capital exposes it to usurious interest rates: why should the respondent pay such rates, which no reasonable borrower would ordinarily agree to (or for unconventional and expensive financing like overdraft facilities)? A claimant might counter that it has become a victim of just such a usurious interest rate itself, having been forced into the market to take whatever terms were available to it. An analogy can be drawn with arguments around the cost of litigation funders: a respondent might contend that it really should not be paying for the substantial gain of a speculative investor, whereas the claimant would likely maintain that this is just its cost of capital. While the legal adage is that one must take his victim as he finds him, this is generally thought to be—at least from a pragmatic point of view—a step too far in the case of interest, and certainly removes any sort of predictability from the process. Faced with such arguments, the majority of tribunals have adopted one of three broad approaches: (i) selecting a proxy borrowing rate (whether on a commercial or sovereign debt basis); (ii) tying an appropriate interest rate to the rate of return on an investment the claimant argues it has lost out on

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(essentially applying the discount factor that would be applied to any forwardlooking damages in a discounted cash flow in reverse fashion); or (iii) applying a flat, even sui generis, interest rate. 3.1.1 Comparable Borrowing Rates As noted in the analysis of recent awards above, by far the greater preference is to tie interest to a comparable borrowing rate—with tribunals selecting either a “commercial” lending rate43 or using a sovereign lending rate (e.g., the yield from treasury bills or other forms of gilts44) as a reference point. “Comparable” in this sense refers to the search for a proxy for what interest the claimant might have earned had the damages been in its hands all along. Recent general practice trends toward selecting a LIBOR for dollar-denominated damage awards (which remains the applicable currency in the vast majority of investment treaty cases) or using U.S. Treasury Bills as a reference point. The choice appears to be largely driven by the question of whether or not the claimant should be awarded interest based on a commercial rate (which inevitably reflects the fact that there is repayment risk) or whether a “risk-free” rate (in the form of State-backed debt instruments) is a better proxy.45 In selecting a comparable borrowing rate for the investor, the tribunal seeks to identify the rate a reasonable party in the claimant’s shoes might have achieved and does not typically ask at what rate the claimant had to borrow replacement sums, if it did so at all.46 This approach leads to more certainty for all concerned and focuses on the objective (or perhaps “average”) lost time value of money rather than the vagaries of how well-heeled a particular claimant may be, or how canny it might have been (judged retrospectively) in theoretically investing its capital in high interest-bearing accounts. As noted by the Iran-U.S. Claims Tribunal: “[borrowing] rates vary depending on the credit rating of each particular party, not all of whom are able to borrow at the prime

43  However, in reality this is more often equated with an inter-bank lending rate plus an upward adjustment to reflect a notional borrowing rate that an investor, rather than a financial institution, might have obtained. 44  Gilts are government-issued bonds. 45  However, it is perhaps doubtful that sovereign debt can really be regarded as risk-free given the various sovereign defaults that have occurred over the last twenty years, giving rise to a host of investor-State claims. 46  Such actual borrowing cost might well form a separate head of direct damages, giving rise to the need for tribunals to avoid double counting and to ensure that interest is only awarded once.

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rate, and some whose credit standings may change during the relevant period. Also, not all parties who suffer from delayed payment actually borrow.”47 For similar reasons, claimants are generally not allowed access to the sovereign borrowing rate which the respondent could have offered investors during that period (based on the so-called “coerced loan theory”48). This approach has been routinely rejected by tribunals,49 for three main reasons. First, some hold the view that it is unfair to compare a compensatory award with a default riskweighted bond because a compensatory award carries far greater uncertainty in collection, as well as requiring an investor to go through the uncertainty and delay of proving its claim.50 Second, the use of a developing State’s borrowing rate, which may reflect a premium to attract investment, may give rise to concerns of overcompensation.51 Third, by picking such a rate, the tribunal would, in effect, be reversing the measure of damages. Rather than asking to what degree the claimant has been harmed, the question becomes: by what 47   Sylvania Technical Systems, Inc. v. Gov’t of the Islamic Republic of Iran, Award, 8 Iran-U.S. Cl. Trib. Rep. 298, 321 (June 27, 1985). 48   See, e.g., Michael S. Knoll & Jeff M. Colón, The Calculation of Prejudgment Interest 8 (University of Pennsylvania Law School, Public Law and Legal Theory Research Paper Series, Research Paper No. 06–21, May 31, 2005), http://scholarship.law.upenn.edu/cgi/ viewcontent.cgi?article=1113&context=faculty_scholarship. See also James M. Patell et al., Accumulating Damages in Litigation: The Roles of Uncertainty and Interest Rates, 11 J. Legal Stud. 341, 342 (1982). 49   See, e.g., Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, ¶¶ 517, 526 (Sept. 16, 2015); Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award, ¶ 205 (Mar. 13, 2015); Khan Resources v. Mongolia, supra note 32, ¶¶ 278, 282, 425; Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award, ¶¶ 393, 396 (Oct. 9, 2014); Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶¶ 850, 853 (Sept. 22, 2014); Yukos Universal Ltd. (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award, ¶ 1679 (July 18, 2014); SAUR Int’l S.A. v. Argentine Republic, ICSID Case No. ARB/04/4, Final Award, ¶ 428 (May 22, 2014); Anatolie Stati et al. v. Republic of Kazakhstan, SCC Case No. V (116/2010), Award, ¶¶ 1841, 1854 (Dec. 19, 2013); Chevron Corp. (USA) & Texaco Petroleum Co. (USA) v. Republic of Ecuador, PCA Case No. 34877, Partial Award on the Merits, ¶ 555 (Mar. 30, 2010); LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award, ¶ 102 (July 25, 2007); PSEG Global Inc. & Konya Ilgin Elektrik Üretim ve Ticaret Ltd. Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award, ¶ 346 (Jan. 19, 2007). 50   See, e.g., SAUR v. Argentina, supra note 49, ¶ 428. 51  Such an approach was considered to risk awarding interest which was not “commercially reasonable” in the Khan Resources case. See Khan Resources v. Mongolia, supra note 32, ¶ 425. Similarly, it was found to have potentially resulted in “excessive compensation” in Yukos. See Yukos v. Russia, supra note 49, ¶ 1679.

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measure has the respondent been unjustly enriched? The unjust enrichment paradigm assumes that the respondent, in committing the wrong and not promptly paying compensation has effectively awarded itself a “back door” loan, and therefore an interest calculation based on a coerced loan functions as a disgorgement measure. This approach lacks general support, and, even where it has been recognized, it is almost never considered a “default rule.” Accordingly, it makes perfect sense that tribunals have been loath to apply it. The rationale was rejected by the tribunal in Chevron v. Ecuador and has been frequently rejected by tribunals ever since.52 As the Murphy tribunal put it: “Embracing this view would mean that Respondent’s risk characteristics, and not Claimant’s actual loss, would be determinative. This would run counter to the fundamental premise of the notion of compensation, which is to restore the position Claimant would have enjoyed absent the breach.”53 3.1.2 Alternative Approaches The other two potential approaches to divining a rate, namely the cost of capital/investment return or imposing a “fair” fixed rate, have not received the same level of support from modern tribunals, although awards certainly are, from time to time, made on this basis. The fixed rate approach borrows from: (i) national law where fixed interest statutes may exist,54 (ii) vague application of general principles of law, or (iii) is exercised, effectively deus ex machina, by tribunals as a matter of discretion.55 As explored by Beharry, however, this approach: lacks any justification. There is no basis to assume that any fixed rate would compensate a claimant for the delay in payment. Furthermore, interest rates fluctuate sharply over time so it would not be reasonable to select an absolute rate…. For example, the 10-year Treasury rate declined from 8.5% in 1990 to 6.0% in 2000 to 3.2% in 2010. This provides a cautionary tale about using rates that approximated the risk-free rate 52   Chevron v. Ecuador, supra note 49, ¶ 555. See also Rusoro v. Venezuela, supra note 4, ¶ 835. 53   Murphy v. Ecuador, supra note 8, ¶ 516. 54  By way of example, New York State law stipulates pre-judgment interest at a simple 9% rate. See NY CLS CPLR § 5004 (2017). 55   See, e.g., Southern Pacific Prop. (Middle East) Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award on the Merits, ¶ 223 (May 20, 1992); Sapphire Int’l Petroleums Ltd. v. Nat’l Iranian Oil Co., Arbitral Award (Mar. 15, 1963), 35 I.L.R. 136, 190; S.S. “Wimbledon” (United Kingdom et al. v. Germany; Poland intervening), Judgment, 1923 P.C.I.J. (ser. A) No. 1, at 32 (Aug. 17); Asian Agric. Prod. Ltd. v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award, ¶ 113 (June 27, 1990), 4 ICSID Rep. 246 (1997).

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at some point in time as the basis for setting pre-judgment interest for a different time period.56 Interest rates based on expected rates of return from the investment (had the violation not occurred) have similarly not found general favor, although again, they have from time to time been awarded.57 The general view has been, however, that such an approach is overly speculative, with past returns being no guarantee of future returns. Moreover, the approach ignores the fact that investment returns typically vary over time and are not achieved on a consistent linear basis given that the initial cost of capital is only recouped over several years, and it is only after this that any which profits can be seen.58 For similar reasons, attempts to claim interest based on the cost of capital have received limited support from tribunals.59 3.1.3 Suggested Approach: Commercial Reference Rate If, then, the better approach is to award interest based on a commercial reference rate, how should a tribunal then determine the reference rate it will apply? The approach of the tribunal in Rusoro v. Venezuela is a useful example, in keeping with the developing “trend” of adopting LIBOR (with an adjustment factor) in such circumstances. In that case, the claimant had claimed interest at Venezuela’s sovereign debt rate, and Venezuela in turn had sought to limit interest to short-term U.S. Treasury Bills—which, as the tribunal noted, would “practically offer no return.”60 The tribunal rejected both proposals, finding that “[n]either party has shown that any of these rates is used in a ‘normal’ ‘commercial’ environment.”61 The tribunal concluded that the better approach to selecting a “normal commercial rate” would be to select the one-year LIBOR 56  Beharry, supra note 7, at 77. 57   See, e.g., Aguas v. Argentina, supra note 25, ¶ 9.2.8; SAUR v. Argentina, supra note 49, ¶ 430. 58   See Nat’l Grid plc v. Argentine Republic, UNCITRAL Arbitration Proceeding, Award, ¶ 293 (Nov. 3, 2008). 59   See, e.g., Hrvatska v. Slovenia, supra note 41; Hassan Awdi et al. v. Romania, ICSID Case No. ARB/10/13, Award (Mar. 2, 2015); Guaracachi Am., Inc. & Rurelec PLC v. Plurinational State of Bolivia, PCA Case No. 2011–17, Award (Jan. 31, 2014); TECO v. Guatemala, supra note 42; EDF Int’l S.A. et al. v. Argentine Republic, ICSID Case No. ARB/03/23, Award (June 11, 2012); Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Award (July 7, 2011); Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award (May 22, 2007); Aguas v. Argentina, supra note 25, ¶ 9.2.7. 60   Rusoro v. Venezuela, supra note 4, ¶ 834. 61   Id., ¶ 835.

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rate, with an appropriate additional margin (including a floor that would ensure a minimum level of compensation). Accordingly, it ordered Venezuela to pay: “interest … accrued between 16 September 2011 and the date of actual payment, calculated at an interest rate p.a. equal to USD LIBOR for one year deposits, plus a margin of 4%, with a minimum of 4% p.a., to be compounded annually.”62 Its reasoning is instructive: LIBOR is an international commercial benchmark: the interest rate at which banks can borrow funds from other banks in the London interbank market. LIBOR is published daily for different maturities and currencies and is universally accepted as a valid reference for the calculation of variable interest rates. Since the compensation is expressed in USD, the appropriate rate of reference for the calculation should be the LIBOR rates for one year deposits denominated in USD, calculated as of the date of expropriation. The rate shall be adjusted every year thereafter, to reflect the changing conditions. LIBOR reflects the interest rate at which banks lend to each other money. Loans to customers inevitably 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. In the present market situation of ultra-low interest rates, the Tribunal finds that a margin of 4% is appropriate, and that (whatever the LIBOR rate for one year deposits) a minimum of 4% p.a. interest should in any case be payable.63 The above approach reflects the most popular current trend. Nevertheless, a large number of tribunals have taken up the second-most-popular option, that is, reference to U.S. Treasury Bills. For instance, the tribunal in Vestey Group Ltd. v. Venezuela64 summarized the arguments relating to the various approaches before adopting a risk-free rate. It dismissed a claim for interest at Venezuela’s borrowing rates (for now familiar reasons). It similarly dismissed 62   Id., ¶ 904(7). The author respectfully suggests that this is close to (and perhaps) the model form for an award of interest—i.e., a clearly specified reference rate (identifying the fact that it is the annual rate and the rate applicable to U.S. dollars) along with a clear direction to compound at specific rests as well as the period in which interest will run. 63   Id., ¶¶ 837–8 (citation omitted). 64   Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award (Apr. 15, 2016).

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an alternative claim for interest based on the weighted average cost of capital for the lost project. The tribunal reasoned that the weighted average cost of capital “reflects a variety of risks associated with doing business” but that “[a]fter the expropriation, Vestey was no longer doing business in Venezuela and did not assume these risks.”65 The application of a LIBOR-based borrowing rate was also rejected by the tribunal (who appeared to regard reference to a theoretical commercial borrowing rate as risking giving the claimant a windfall). It explained that: “This could indeed be an appropriate rate if the Claimant had to borrow funds because it did not receive the expropriation indemnity on time. In the present circumstances, there is no indication in the record to this effect, with the result that the Tribunal discards this possibility.”66 Ultimately, the Vestey tribunal concluded that it should “resort to a risk free rate applicable to US currency debt, i.e. the six-month US Treasury bond rate.”67 In making this decision, it also concluded that there was no basis to assume that a sovereign State would default on honoring an award68 (thereby justifying, in its mind, a risk-free assessment). Such an assumption may raise eyebrows in light of the apparent reluctance of some States in recent years to honor awards voluntarily and in full. This approach unfortunately leads back to an assessment of the circumstances of the individual claimant and requires the tribunal to enter into counterfactual speculations as to how money would have been used (or not used). In this example, the selection of a risk-free rate produced a more favorable result for the State than the application of a commercial rate. However, if the logic were to hold, it would also expose States to far higher interest claims in circumstances where desperate claimants were forced to take out exploitative loans. This level of uncertainty should be avoided, and the better course is that followed by the Rusoro tribunal. 3.2 Simple v. Compound Having determined the rate of interest, the next logical question is whether that rate should apply on a simple or compound basis. This question was, for many years, one of the more significant and debatable areas of attack for a respondent party seeking to minimize its exposure (much to the bewilderment

65   Id., ¶ 441. 66   Id., ¶ 442. 67   Id., ¶ 446. 68   Id., ¶ 445.

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of economists who saw the award of simple interest to be something significantly short of restoring the parties to the proper position). The historic practice in State-to-State tribunals was perhaps summarized best by Whiteman in her review of international practice up to the 1940s: 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, have been granted, tribunals have been almost unanimous in disapproval of its allowance.69 The Commentary on the Draft Articles reflects the traditional reservation in this regard: The general view of courts and tribunals has been against the award of compound interest, and this is true even of those tribunals who hold claimants to be normally entitled to compensatory interest. For example, the Iran-United States Claims Tribunal has consistently denied claims for compound interest, including in cases where the claimant suffered losses through compound interest charges on indebtedness associated with the claim.70 Indeed, that tribunal produced awards variously: (i) holding that there must be “special reasons for departing from international precedents which normally do not allow the awarding of compound interest”71 and (ii) ignoring/overriding contractual clauses which specified that interest should be awarded.72 As of 2001, the authors of the Commentaries on the Draft Articles thought it fair to record that: The preponderance of authority thus continues to support the view expressed by Arbitrator Huber in the British Claims in the Spanish Zone of Morocco case: ‘the arbitral case law in matters involving compensation of one State for another for damages suffered by nationals of one within 69   M arjorie Millace Whiteman, 3 Damages in International Law 1997 (1943). 70  ILC Draft Articles, art. 38, commentary 8. 71   R.J. Reynolds Tobacco Co. v. Gov’t of the Islamic Republic of Iran, Award, 7 Iran-U.S. Cl. Trib. Rep. 181, 191–2 (July 31, 1984) (citing Whiteman, supra note 69, at 1997). 72   Anaconda-Iran, Inc. v. Gov’t of the Islamic Republic of Iran, Interlocutory Award, 13 Iran-U.S. Cl. Trib. Rep. 199, 235 (Dec. 10, 1986).

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the territory of the other … is unanimous … in disallowing compound interest. In these circumstances, very strong and quite specific arguments would be called for to grant such interest.’73 This hesitance to award compound interest was fueled by the fact that there is little convergence under domestic law or in international practice on this position.74 Even in commercially “progressive” jurisdictions such as England, the power of the commercial courts to award compound interest was only recently definitively recognized by the highest court this past decade.75 In other common law jurisdictions (such as Australia, where compound interest is statutorily prohibited),76 this would still be controversial, viewed as granting windfalls or being tinged with concepts such as usury. Thus, compounding of interest, while understood by economists to be necessary to make interest truly compensatory, in accordance with the stated goal of restitution under international law, remained (and to some extent still remains) the source of misgivings by many lawyers and thus by many tribunals. The decision as to whether or not to compound can have significant practical effects. By way of illustration, Professor Gotanda pointed to the AMINOIL award: in Kuwait v. American Independent Oil Co. (AMINOIL), the arbitral tribunal awarded interest, compounded annually, at a rate of seventeen and one half percent for a period of five years. This amounted to U.S.$96.7 million in interest on an award of U.S.$83 million. If the tribunal had awarded simple interest instead of compound interest, the total amount of interest would have been U.S.$72.6 million. Thus, an award of simple

73  ILC Draft Articles, art. 38, commentary 8 (citing British Claims in the Spanish Zone of Morocco, 2 R.I.A.A. 615, 650 (1924)). 74  For a brief discussion of the history of interest awards, see Nigel Blackaby & Constantine Partasides, Redfern and Hunter on International Arbitration ¶¶ 9.79–9.81 (6th ed. 2015). 75   See Sempra Metals Ltd. v. Her Majesty’s Commissioners of Inland Revenue & another [2007] UKHL 34. 76   See Supreme Court Act 1933, § 69(2)(a) (Austl. Cap. Terr.); Supreme Court Act 1970,  § 94(2)(a) (N.S.W.); Supreme Court Act 1979, § 84(2)(a) (N. Terr. Austl.); Supreme Court Act 1995, § 47(3)(a) (Queensl.); Supreme Court Act 1935, § 30C(4)(a) (S. Austl.); Supreme Court Act 1986, § 60(2)(a) (Vict.).

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interest would have resulted in the claimant receiving U.S.$24.1 million less than it did.77 Despite these misgivings and a firm trend line against compounding for the better part of a century, the modern practice in investment treaty arbitration leans towards routinely awarding such interest. The watershed moment for compound interest in investment treaty jurisprudence came in 2000 with the award in Santa Elena v. Costa Rica.78 In what has since been described as a “turning point in jurisprudence,”79 the tribunal articulated the following principles: the determination of interest is a product of the exercise of judgment, taking into account all of the circumstances of the case at hand and especially considerations of fairness which must form part of the law to be applied by this Tribunal. In particular, where an owner of property has at some earlier time lost the value of his asset but has not received the monetary equivalent that then became due to him, the amount of compensation should reflect, at least in part, the additional sum that his money would have earned, had it, and the income generated by it, been reinvested each year at generally prevailing rates of interest. It is not the purpose of compound interest to attribute blame to, or to punish, anybody for the delay in payment made to the expropriated owner; it is a mechanism to ensure that the compensation awarded the Claimant is appropriate in the circumstances.80 This statement has been followed by growing numbers of investment treaty tribunals in the years which have followed, until becoming, in the words of the Murphy v. Ecuador tribunal, a jurisprudence constante in investor-State cases, having outgrown its origins as a measure of compensation for expropriation and applying now to violations of other treaty obligations with equal force.81 What has led to this significant change? Part of the answer to this question likely lies in the fact that, in the last 15 years, both tribunals and counsel have 77  John Yukio Gotanda, Compound Interest in International Disputes, Oxford U. Comparative L. Forum (2004), http://ouclf.iuscomp.org/compound-interest-ininternational-disputes/. 78   Santa Elena v. Costa Rica, supra note 6. 79   R ipinsky & Williams, supra note 7, at 385. 80   Santa Elena v. Costa Rica, supra note 6, ¶¶ 103–4. 81   Murphy v. Ecuador, supra note 8, ¶ 520.

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demonstrated a greater willingness to engage with financial concepts underpinning the award of interest and therefore have gained a greater understanding of the basis upon which it is awarded. As damages models are built on forward-looking valuation methods such as discounted cash flows, legal practitioners have come to understand that interest is simply the flipside of (and just as necessary as) the discounting of the future value of money. In other words, interest is the reflection of the loss of the past time value of money, in contrast to discounting which reflects the value of having tomorrow’s money today. Once that concept is internalized by tribunals, the historic arguments that compounding produces windfall damages, and therefore is somehow unfair, begin to fall rapidly away. There will then be a realization that failing to compound will, in most circumstances, produce a windfall for the losing party, as it will not be made to bear the true consequences of either its violation or failure to promptly remedy that violation. At the same time, the interest rate and compounding interval must be carefully selected to avoid having a disproportionate effect on the damages award resulting in overcompensation. The starting point should be that, in the “real” world, i.e., the world of commerce and finance, separated from the sometimes stale or rarified concerns of investment treaty arbitration, compounding is used as a matter of course to reflect delays in paying money. This starts at a personal level (for example, credit card debts attract compound interest on a monthly basis) and extends to typical corporate finance transactions. A “standard” corporate or government bond accrues compound interest every six months.82 Similarly, a “normal” line of revolving credit (such as one an investor might have to draw upon when faced with the circumstances which have forced it to bring an investor-State claim) is generally subject to compounding. As put by Professor Gotanda: “One cannot imagine that a sophisticated businessman … would invest his companies’ funds in instruments yielding simple rates of interest. Nor is it conceivable that … [his] lenders [w]ould provid[e] his companies with capital at simple rates of interest.”83 In practice, “[s]imple interest is generally applicable only to short-term situations of one year or less.”84 It is, of course, a rare investment treaty arbitration indeed in which a claimant can expect to receive payment of an award in his favor within 12 months of the commission of the wrongful act.

82  Richard E. Walck & Mark Beeley, Approaches to the Award of Interest by Arbitration Tribunals, 30(1) Arbitrator & Mediator 19 (2011). 83  Gotanda, supra note 77. 84   Paul D. Kimmel et al., Financial Accounting: Tools for Business Decision Making, appendix D (5th ed. 2009).

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In short, the claimant has “lost” the time value of his money if he is awarded only simple interest, as he will receive less by way of compensatory value than he could have objectively been expected to make had he received the monies promptly. Similarly, if he has had to borrow funds to replace the monies he should have been paid, then the almost certain cost of that borrowing would have been imposed on a compound basis. Accordingly, if he is compensated on the basis of simple interest, without a supplementary award of damages reflecting his borrowing costs, he has not received full restitution on both counts. This creates a counter-incentive to the normal objective for treaty violations to be avoided, or for compensation to be paid promptly where such avoidance is not possible or practical. 3.3 Rests While the arguments for compounding have now become generally accepted, there is still much debate as to the periods (“rests”) upon which compounding should be performed (i.e., how often accrued interest should be rolled up into the principal to allow more interest to start being earned on the combined amount). Tribunals do not follow any uniform approach, varying from monthly to annual compounding, or picking something in between. If a benchmark rate is selected and calculated properly, this should not matter. However, too often the rest period is picked without understanding how benchmark rates are intended to operate. Most benchmark rates, such as LIBOR, EURIBOR, or Treasury rates, are available for varying durations (e.g., 30-day, 90-day, 180-day, or annually). The yield curve for these rates generally (but not always) gives a lower rate for shorter durations—i.e., the more frequent compounding is offset by the lower interest rate. However, where there is a mismatch between the rate chosen and compounding period applied, the result could either under- or over-compensate the investor (at least if judged by the standards of economists). By way of example, in Crystallex v. Venezuela,85 the tribunal selected the six-month USD LIBOR rate, but ordered compounding on a yearly (rather than a six-month) basis.86 This has led to a lower overall interest rate than the six-month rate was designed to yield. The proper approach is to apply the “rest” or compounding period for which the chosen rate is designed. Again, when faced between a plea by the claimant for compounding on a six-month basis and an argument that there should be no compounding at all by Venezuela, the Rusoro tribunal took its own course by selecting an annual LIBOR rate. It explained that: 85   Crystallex v. Venezuela, supra note 35. 86   Id., ¶ 938.

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Loan agreements in which interest is calculated on the basis of LIBOR plus a margin usually include a provision that unpaid interest must be capitalised at the end of the interest period, and will thereafter be considered as capital and accrue interest. The financial reason for this provision is 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. This principle implies in our case that, if Claimant were to take out a LIBOR loan to anticipate the amounts to which it is entitled under the Award, the bank would insist that unpaid interest be capitalized at the end of each interest period. Consequently, if Claimant is to be kept fully indemnified for the harm suffered, interest owed under the Award should be capitalised at the end of each annual interest period. The Tribunal, thus, decides that due and unpaid interest shall be capitalized annually….87 Thus, the tribunal concluded that compounding of the annual LIBOR rate should also occur annually. This is the correct approach, in this author’s view, which tribunals should be mindful of when applying a benchmark rate. 3.4 From When Does Interest Begin to Run? Although respondents often seek to argue that interest should not start to accrue until either there is an award on liability or from when damages are quantified, when surveying modern awards, there is little, if any, remaining debate on this point. As clearly stated by the Quiborax tribunal: “Interest must be calculated from the date … the loss was suffered.”88 The economic justification for the emergence of this rule is clear. As explained by Colón and Knoll, writing in 2007: there is some controversy when the prejudgment interest period begins. Both courts and tribunals have used several dates, including the date of incident, the date of harm, and the date of filing. Because the goal of the prejudgment interest is to place the parties, especially the successful claimant, in the same position they would have been in had the respondent immediately paid the claimant, the best choice is the date of harm.89 87   Rusoro v. Venezuela, supra note 4, ¶¶ 842–3. 88   Quiborax v. Bolivia, supra note 49, ¶ 515 (emphasis added). 89  Jeffrey M. Colón & Michael S. Knoll, Prejudgment Interest in International Arbitration, 4(6) T.D.M. 7 (2007) (citations omitted).

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Allowing interest to begin to run from a date later than the moment the harm occurs (i.e., the date of the violation of the treaty obligation) would “be reasonably termed the ‘free lunch’ approach.”90 There is no obvious justification to allow a respondent a grace period from interest based around the date the harm has occurred (in contradistinction, and as discussed below, there might be justification to grant a period post an award being rendered to take account of the practicalities of arranging payment). Nor is there any obvious, principled way this could be achieved if there was a justification. Interest will generally continue to accrue, normally with each passing day, until it is paid in full. However, some tribunals treat the interest which accrues before and after the date of the award in different ways. 3.5 Post-award Interest—A Different Animal? Historically, it was thought that there should be different approaches between the award of pre- and post-award interest. This has been driven by the public policy interest in ensuring awards are paid91 as well as the distinction in some legal systems between an award for a certain quantified sum on the one hand, and a claimed, but not (yet) proven, amount for damages on the other. However, in terms of modern jurisprudence, the 2016 Murphy v. Ecuador tribunal reflected the current trend of applying the same rate for both types of interest: “As regards post-Award interest, the Tribunal sees no reason to depart from its determination of the appropriate rate in respect of pre-Award interest.”92 This principle of equality is disturbed by the occasional decision to delay the commencement of post-award interest accruing until some short period of time after the award is rendered.93 This no doubt reflects a recognition (whether spoken or unspoken) that although awards may have immediately 90  Walck & Beeley, supra note 82, at 27. 91  As expressed by the tribunal in Hrvatska v. Slovenia, supra note 41, ¶ 554: “one of the purposes of awarding post-award interest is to incentivize parties to honor their liability under the award in an expedient fashion.” For a discussion as to the extent to which international law damages may contain a punitive element see Marboe, supra note 23, ¶¶ 2.92–2.95. 92   Murphy v. Ecuador, supra note 8, ¶ 523. Similar findings were also reached by the more conservative (from the point of view of the award of interest) tribunal in Vestey v. Venezuela, supra note 64, ¶ 448. 93   See, e.g., the awards in: (i) LG&E v. Argentina, supra note 49; Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award (Feb. 6, 2007); and Wena v. Egypt, supra note 6, allowing a 30-day grace period; and (ii) Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award (July 14, 2006); Emilio Agustín Maffezini v. Kingdom of Spain, ICSID

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binding effect, it may not always be practical to expect governments or, indeed, commercial entities to be able to make the payments required in a scintilla temporis. The counter-argument, of course, is that this is a problem of the losing party’s own making. That said, while the theory that post-award interest should be granted appears sound and well-accepted, there have been notable warning shots that parties must actually request such relief rather than simply assume an entitlement to it. In two awards against Argentina, the failure to specifically plead a claim for such interest (and, in particular the affirmative pleading for interest to be imposed “until the date of the Award”) was found to be fatal to any attempt to claim post-award interest.94 This is an unsurprising proposition—ask and you will (or may) receive; do not ask, and do not be surprised that you did not get it. 4

Problems for the Future?

It thus appears that there are some converging trends in investment treaty awards. Today, interest is almost universally awarded on damages. It is also typically awarded on a compound basis running from the date of the breach, and is most often based on a commercial lending rate, rather than a so-called “risk-free” rate, although that approach is by no means unheard of (and, indeed, the use of treasury bills, the second most popular choice of interest rates, shows the attraction of that approach). But is that the end of the enquiry? Thanks to the enterprising minds of counsel, of course not. By way of example, in circumstances where the supposedly objective standards are proved to have been manipulated for unscrupulous ends, where does that leave historic awards which have not yet been satisfied? Given the recent cases brought against major banks (and their traders) for manipulation/fixing of the LIBOR rates, is there an argument that an award of interest based on LIBOR should be adjusted post-hoc to reflect what LIBOR might have been but for the improper manipulation? No doubt this issue (including considerations of finality, res judicata, functus officio, and the question of whether an award should be interpreted literally or in accordance with its spirit) will be litigated Case No. ARB/97/7, Award (Nov. 13, 2000); and Am. Mfr. & Trading (AMT), Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award (Feb. 21, 1997), allowing 60-day grace periods. 94   Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Award (Sept. 28, 2007); Enron v. Argentina, supra note 59.

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in enforcement proceedings in the coming years. Similarly, recent suggestions that LIBOR may be phased out by 2021 raise questions both as to what rate will tribunals default to going forward, and also how uncollected awards with interest accruing based on LIBOR will be calculated in the future. Similarly, should the principles discussed in this Chapter be applied to claims which are monetary proxies for more nebulous harms such as moral damages? The jurisprudence in this area is extremely sparse.95 In Desert Line v. Yemen,96 although the tribunal granted moral damages, it expressly stated that pre-award interest was not to run on that element of the award although post-award interest would run on the lump sum calculated.97 This seems an appropriate approach in circumstances where the assessment of loss is inevitably imprecise and a proxy for the intangible loss suffered. Concomitantly, interest should only run on such a sum when it has become certain and definitely quantified.98 Despite the convergence seen to date, there remain a number of “open” areas in which parties are arguing from effectively a blank canvas. For instance, should interest be awarded on legal costs where a losing party is ordered to bear the costs of the winning party?99 If so, should this commence from the date of the award, or run from the time each monthly lawyers’ invoice was received (or paid, which could be a different matter entirely!)? In a world where treaty claims run for years, this can have a significant effect on the outcome, particularly with compounding. The interest element may over time multiply the fees several times, creating a significant penal element. How does this uncertainty affect the willingness of parties to litigate claims? Would the risk of a cost reversal have a chilling effect on the willingness of third party funders to stand behind would-be claimants? Would claimants be less likely to bring speculative claims against States in such circumstances?100 And are 95   See, generally, Chapter 6, Patrick Dumberry, Moral Damages. 96   Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award (Feb. 6, 2008). 97   Id., ¶¶ 291, 298. 98  An opposing approach was taken in S.A.R.L. Benvenuti & Bonfant v. Gov’t of the People’s Republic of the Congo, ICSID Case No. ARB/77/2, Award (Aug. 15, 1980), 1 ICSID Rep. 330, 361–2 (1993). However, this was expressly premised on the tribunal exercising its power to rule ex aequo et bono, and not on the basis of any (more) reasoned approach. 99   See, e.g., Vestey v. Venezuela, supra note 64, ¶ 458. No ruling was given on this point following a general decision that each party should bear its own legal costs. The same circumstance arose in Crystallex v. Venezuela, supra note 35. 100   See the decisions of the tribunals in Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No. ARB/11/33, Award (Nov. 3, 2015); Transglobal Green Energy LLC & Transglobal

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any of these outcomes a bad thing? Such claims are now being asserted, and, in some cases, granted. For example, the tribunal in Hrvatska awarded interest on costs,101 though sadly without any discussion by the tribunal as to why that should be done. Similarly, two 2017 cases have seen States both win their costs for successfully defending claims and obtain an award of interest on those costs, but with interest only being applied on a post-award basis.102 It is perhaps inevitable that, as precision comes to some areas regarding the award of interest, new black boxes will open up.

Green Panama, S.A. v. Republic of Panama, ICSID Case No. ARB/13/28, Award (June 2, 2016); and Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Request for a Supplementary Decision (Mar. 28, 2017), where claimants were required to pay interest on the legal costs of the respondent States. 101   Hrvatska v. Slovenia, supra note 41, ¶ 613. 102   Ansung Housing Co., Ltd. v. People’s Republic of China, ICSID Case No. ARB/14/25, Award, ¶ 169 (Mar. 9, 2017), in which interest was awarded on costs if not paid within 90 days at a rate of 90-day LIBOR + 2%, compounded quarterly; and Blue Bank Int’l & Trust (Barbados) Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/20, Award, ¶ 215 (Apr. 26, 2017), in which interest on costs not paid within 30 days was awarded on a 5% per annum simple basis.

Chapter 15

The Allocation of Costs in Investment Treaty Arbitration Matthew Hodgson and Alastair Campbell 1 Introduction The cost of bringing or defending an investment treaty claim is substantial.1 Indeed, two-thirds of stakeholders in a recent survey on international arbitration regard cost as arbitration’s “worst” feature.2 It is not difficult to see why. A study of investment arbitration awards available as of May 31, 2017 found that median party costs are in the realm of US$3.4 million for claimants and US$2.8 million for respondents,3 while median tribunal costs are around US$750,000 in total.4 Moreover, both party and tribunal costs have increased significantly over time, and this trend shows no signs of reversing.5 The mean investment treaty award (excluding the Yukos award, which at over US$50 billion has a significant distortive effect) is approximately US$110.9 million, with the median falling around US$19.9 million.6 In this context, the 1  For an examination of the average costs in treaty proceedings through May 31, 2017, see Matthew Hodgson and Alastair Campbell, Damages and costs in investment treaty arbitration revisited, Global Arb. Rev. (Dec. 14, 2017), https://globalarbitrationreview.com/ article/1151755/damages-and-costs-in-investment-treaty-arbitration-revisited. Many of the facts and figures relied on in this Chapter are derived from this study and its predecessor. 2  Queen Mary University of London and White & Case, 2015 International Arbitration Survey Improvements and Innovations in International Arbitration, 7 (2015), http://www.arbitration .qmul.ac.uk/docs/164761.pdf. 3  In some cases, party costs are significantly higher than these averages. For example, in Libananco v. Turkey, the claimant’s total costs were US$24.4 million and the respondent’s total costs were US$35.7 million. Libananco Holdings Co. Ltd. v. Republic of Turkey, ICSID Case No. ARB/06/8, Award, ¶¶ 558, 559 (Sept. 2, 2011). 4  Hodgson & Campbell, supra note 1. 5  In awards rendered between the end of 2012 and May 31, 2017, median claimant costs were US$4.2 million and median respondent costs were US$3.4 million. Hodgson & Campbell, supra note 1. This is a slight change over US$3.1 million for claimants and US$2.3 million for respondents in awards up to the end of 2012. 6  Hodgson & Campbell, supra note 1.

© koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_016

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allocation of these costs can have a significant impact on the practical outcome of a dispute from the perspective of an investor or a State. A victory will be far less meaningful if the cost of obtaining that victory is large compared to the sum awarded, and a defeat can be even more ruinous if compounded by a significant adverse costs award.7 The likely costs of a proceeding, and the possibility of recovering those costs, will therefore form part of the risk/reward assessment that parties make at the outset of a treaty claim and will influence any considerations of settlement. However, despite the practical significance of costs awards, tribunals have generally devoted little attention to the subject, with the average award containing just ten paragraphs addressing this issue.8 In addition, investment treaty tribunals have historically taken divergent approaches to the allocation of costs. Absent any guidance, arbitrators with different legal backgrounds might seek inspiration from their own training and experience when approaching questions of costs. For example, arbitrators from the United States, where parties generally pay their own way in litigation, may favor a different approach than arbitrators from England and Wales, where the losing party usually pays the winner’s costs. More recently, the “relative success” approach, which attempts to apportion costs based on the success of each party’s arguments in the arbitration, has emerged. These factors, namely: (i) the brevity with which costs issues have been considered, and (ii) the fundamental divergence in arbitrators’ approaches to questions of costs, have contributed to a lack of clarity and transparency surrounding the calculation and allocation of costs in investment treaty arbitration. As a result, it is difficult to predict the scale and outcome of any costs award and parties may, therefore, find it difficult to conduct the necessary risk/ reward assessment (insofar as questions of costs are concerned) with any confidence as to its accuracy. This unpredictability is undesirable and, in light of the increased public scrutiny of investment treaty arbitration, it is important that the institutions supporting the system are able to defend all aspects of awards made under their mechanisms. However, the most commonly applied rules in investorState disputes, the ICSID Arbitration Rules, do not take any default position, leading to unnecessary uncertainty. In light of the escalating costs of investment treaty arbitration, this unpredictability is unsustainable. 7  See, e.g., Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Award ¶ 12.1(4) (Oct. 14, 2016), in which the losing claimant was ordered to pay US$8 million towards the respondent’s legal costs. 8  Hodgson & Campbell, supra note 1.

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This Chapter will first focus on the three most common ideological approaches to the apportionment of costs, namely: “pay your own way,” “costs follow the event” (or “loser pays”), and “relative success.” We then review how these principles are reflected in the institutional rules, and how they are applied (and deviated from) in practice, before moving on to discuss additional considerations such as: (i) whether interest can be awarded on costs; (ii) recent developments in third-party funding, particularly with respect to differing opinions on whether legal costs, contingency fees, and success fees can be shifted to the losing party; and (iii) the manner in which modern investment treaties have attempted to address costs by adopting a default position. Finally, we conclude by arguing that ICSID should follow the lead of the 2010 UNCITRAL Arbitration Rules and adopt “costs follow the event” as a default rule, albeit with sufficient flexibility for tribunals to take the circumstances of the case into account. This approach accords more closely to the standard of compensation under international law generally, and may also have the effect of discouraging unmeritorious claims. 2

The Current Approach

Some foresight of the potential recovery of costs is an important consideration for any party at the outset of proceedings. However, as explained below, ICSID tribunals receive very little guidance on how to approach the allocation of costs and, as a result, have taken varying approaches to the issue. Such foresight is, therefore, hard to come by. By contrast, the UNCITRAL Rules contain a default rule and, although tribunals still retain broad discretion to allocate costs as they see fit, the adoption of a default rule for tribunal costs (and, in the 2010 Arbitration Rules, for party and tribunal costs)9 appears to have led to more consistent decision-making. 2.1 Costs Awards in Principle 2.1.1 Sources of the Costs Incurred in Investment Treaty Arbitration Although the sources of the costs incurred during the conduct of an investment treaty arbitration can be multiple and various, they can generally be placed into two broad categories:

9  See infra Section 2.1.3.2.

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(i) Tribunal costs—the direct costs of the proceeding itself, which include the fees and expenses of the arbitral tribunal, as well as the costs incurred for use of the institution’s facilities;10 and (ii) Party costs—the expenses incurred by the parties in connection with the proceedings, including the costs of legal representation as well as any expert or factual witnesses.11 2.1.2 Allocation of Costs in Principle Tribunals generally adopt one of three starting principles when making a decision on costs. 2.1.2.1 Pay Your Own Way The “pay your own way” principle dictates that each party should bear its own costs of the proceeding and that there should be no costs allocation in favor or against any party. This is the default approach under Article 64 of the Statute of the International Court of Justice12 and has been endorsed by a number of ICSID tribunals.13 It also accords with the predominant practice of courts in the United States. The principle is based on the premise that no party should be discouraged from pursuing or defending its legitimate legal rights for fear of an adverse costs award. Each party’s costs are seen simply as a cost of doing

10  ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States [hereinafter ICSID Convention], arts. 59 and 60 (2006). UNCITRAL Arbitration Rules [hereinafter 2010 UNCITRAL Rules], art. 40(2)–(f) (2010). In ICSID proceedings, the parties are obliged to pay advances to ICSID to cover the fees and expenses of the arbitrators, and the party instituting the proceedings must also pay a lodging fee. The funds requested from the parties to cover the costs of the proceedings are not based on the amount in dispute, but instead reflect the actual fees and reasonable expenses of the tribunal along with the services and expenses of ICSID. See ICSID, Costs of Proceedings, https://icsid.worldbank.org/en/Pages/services/Cost-of-Proceedings .aspx. This can be contrasted with the position under the ICC regime, where tribunal costs are based on the amount in dispute. See ICC, Cost Calculator, https://iccwbo.org/ dispute-resolution-services/arbitration/costs-and-payments/cost-calculator/. 11  ICSID Convention, arts. 61(1), (2). See also 2010 UNCITRAL Rules, art. 40(2)(d) and (e). 12  Statute of the International Court of Justice, art. 64 (June 26, 1945), 33 U.N.T.S. 993 (“Unless otherwise decided by the Court, each party shall bear its own costs.”). 13   See, e.g., M.C.I. Power Group L.C. & New Turbine, Inc. v. Republic of Ecuador, ICSID Case No. ARB/03/6, Award, ¶ 372 (July 31, 2007); Alasdair Ross Anderson et al. v. Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award, ¶¶ 62–4 (May 19, 2010).

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business. From the respondent’s perspective, there is also the sense that a costs award against the State may be offensive when funded by the public purse.14 Historically, “pay your own way” has been the dominant approach to the allocation of costs in investment treaty arbitration. In cases before 2006, some 66% of investment tribunals declined to adjust costs. Between 2006 and the end of 2012, however, that figure declined to 51%, and between the end of 2012 and May 31, 2017, it again declined to 36% as the “costs follow the event” and “relative success” approaches have gained traction.15 The historical dominance of “pay your own way” is somewhat confounding since two of the top three nations that have historically contributed the highest number of arbitrators to ICSID tribunals, the United Kingdom and France,16 both favor some form of the “costs follow the event” approach in domestic litigation.17 However, the historical trend could be explained by the approach under Article 64 of the Statute of the International Court of Justice and the early drafts of the ICSID Convention, which included “pay your own way” on the basis that arbitration proceedings are (or, at least, were supposed to be) “friendlier” than litigation proceedings.18 2.1.2.2 Costs Follow the Event The “costs follow the event” (or “loser pays”) approach dictates that a party that has successfully defended its rights in an arbitration should recover its reasonable costs of doing so. Otherwise, that party will have suffered a loss caused by the party whose position was flawed. This approach is aligned with the general rule on damages in international law based on the full reparation standard, as expressed by the Chorzów Factory case. In this oft-cited decision, the tribunal recognized that “reparation must, 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 14  Although it is worth acknowledging that the “pay your own way” approach nevertheless requires the State to pay its own legal fees even if it wins the case—a notion which can also offend the sensibilities of States. 15  Calculated using underlying data from Hodgson & Campbell, supra note 1. 16  ICSID, The ICSID Caseload—Statistics (Issue 2017–2), 22 (2017), https://icsid.worldbank. org/en/Documents/resources/ICSID%20Web%20Stats%202017-2%20(English)%20 Final.pdf. 17  In the United Kingdom, for example, this is set out in Civil Procedure Rules, rule 44.2(2)(a) (2017) (UK). 18  ICSID, History of the ICSID Convention, Vol. II-1, at 177 (¶ 11) (1968). The “friendly” nature of arbitration was also referenced in the Seventh Session of the Consultative meeting of Legal Experts. See id., at 351.

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not been committed.”19 In the context of costs, an award will not wipe out all the consequences of a State’s illegal act unless the investor is also awarded its costs of bringing the claim. On the other side of the coin, the “costs follow the event” principle allows a State to recover the costs of defending unmeritorious claims. “Costs follow the event” can also be justified on the basis that it may encourage parties to take a reasonable approach in conducting the proceedings (e.g., avoiding unnecessary costs and delays) and to settlement so as to avoid any adverse costs decision. In other words, a party is incentivized to behave reasonably if unreasonable behavior will lead to an adverse costs award at a later date. This approach has been adopted by a number of investment treaty tribunals20 and, in recent years, there has been a discernible trend towards at least some adjustment of costs in favor of the successful party.21 However, a full adjustment of costs, as required by a strict interpretation of this principle, remains relatively rare (in just 17% of awards),22 possibly because of the potentially severe consequences of such an order where the parties’ costs are significant. Nevertheless, in certain circumstances (for example, where a party acts in bad faith), tribunals have seen fit to make a fully adjusted costs award.23 2.1.2.3 Relative Success The “relative success” principle dictates that costs should be apportioned based on the relative success of each party’s arguments in the arbitration. Therefore, under the “relative success” approach, an investor that defeats a jurisdictional objection but is unsuccessful on the merits may be able to recover some of the costs of the jurisdictional phase. This approach can therefore be seen as

19   Factory at Chorzów (Germany v. Poland) (Merits), 1928 P.C.I.J. Rep. (ser. A) No. 17, at 47 (Sept. 13). 20  See, e.g., ADC Affiliate Ltd. & ADC & ADMC Mgmt. Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, ¶ 542 (Oct. 2, 2006); Gemplus S.A. et al. and Talsud S.A. v. United Mexican States, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/04/4, Award, ¶ 17–24 (June 16, 2010). 21   See, e.g., Flughafen Zürich A.G. & Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, Award, ¶ 989 (Nov. 18, 2014). 22  Hodgson & Campbell, supra note 1. 23  See, e.g., Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/02, Award, ¶ 588 (Oct. 31, 2012).

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a variation on the “costs follow the event” principle. Again, this approach has found support from a number of ICSID tribunals.24 While “relative success” has the appeal of charting a middle ground between the all-or-nothing result of the “pay your own way” and “costs follow the event” principles, the task of assigning costs to each issue raised in the proceedings is difficult, if not impossible. The issues and the factual bases for different arguments frequently overlap.25 Alternatively, whilst tribunals could, in theory, assign costs based on a party’s success at the different stages of proceedings, such an approach is unlikely to correspond closely to the relative success of the parties’ arguments.26 Moreover, such an approach does not differ significantly from “costs follow the event” in practice because it simply performs a “costs follow the event” analysis at a more granular level. 2.1.3 Approaches to Costs under Institutional Rules 2.1.3.1 The ICSID Convention and Arbitration Rules As described above, the current ICSID regime gives tribunals broad discretion in deciding how costs should be allocated between the parties. Article 61(2) of the ICSID Convention provides that: In 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.27

24   See, e.g., EDF (Services) Ltd. v. Romania, ICSID Case No. ARB/05/13, Award, ¶ 328 (Oct. 8, 2009); Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award, ¶ 402 (Feb. 6, 2007). 25  For example, the decisions of domestic courts might be relevant both to jurisdictional arguments and to fair and equitable treatment and/or denial of justice arguments on the merits. 26  A claimant may make many unsuccessful arguments on the merits, but ultimately succeed on some aspects of its claim. In these circumstances, it has succeeded on the merits but an award of costs in the claimant’s favor does not reflect the relative success of the parties’ arguments because the respondent has successfully defended the majority (but not all) of the claimant’s claims. 27  ICSID Convention, art. 61(2). Article 58(1) of the ICSID Additional Facility Rules takes a similar approach, but also provides for the tribunal to “call on the Secretariat and the parties to provide it with the information it needs in order to formulate the division of the

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Rule 28 of the ICSID Arbitration Rules (2006) provides some further detail, stating that: Without prejudice to the final decision on the payment of the cost of the proceeding, the Tribunal may, unless otherwise agreed by the parties, decide: (a) at any stage of the proceeding, the portion which each party shall pay, pursuant to Administrative and Financial Regulation 14, of the fees and expenses of the Tribunal and the charges for the use of the facilities of the Centre; (b) with respect to any part of the proceeding, that the related costs (as determined by the Secretary-General) shall be borne entirely or in a particular share by one of the parties.28 Tribunals have regularly noted the broad discretion provided to them under Article 61(2) of the ICSID Convention to allocate party and tribunal costs as they see fit.29 However, in the absence of a default rule or more extensive guidance regarding the allocation of costs, ICSID tribunals are largely left to their own devices. As set out in more detail in Section 2.3 below, this has led to divergent approaches and uncertainty for the system’s users. 2.1.3.2 The UNCITRAL Arbitration Rules Under the UNCITRAL Arbitration Rules of 1976, the costs of the arbitration— with the important exception of the costs of legal representation and assistance—were to be borne “in principle” by the losing party.30 On the other hand, tribunals had a broad discretion to apportion party costs “if … that apportionment [was] reasonable.”31 Under the 1976 Rules, UNCITRAL tribunals cost of the proceeding between the parties.” ICSID Arbitration (Additional Facility) Rules, art. 58(1) (2006). 28  ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules) [hereinafter ICSID Arbitration Rules], rule 28(1) (2006). 29   See, e.g., Pac Rim v. El Salvador, supra note 7, ¶ 11.16. 30  The majority of the delegates drafting the 1976 Rules “preferred to leave the arbitrators free to decide if compensation should be made” in relation to party costs. UNCITRAL, 9th Session, Summary Record of the 13th Meeting held on Apr. 20, 1976, at ¶ 20, UN Doc. A/CN.9/9/C.2/SR.13 (Apr. 22, 1976) (emphasis added). 31  UNCITRAL Arbitration Rules, art. 40 (1976) (emphasis added). Article 40 provides as follows:  (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

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were therefore given scant guidance regarding the allocation of party costs. Despite this, as of May 31, 2017, some two-thirds (70%) of tribunals constituted under the UNCITRAL Arbitration Rules made some form of adjusted costs order compared to only 45% of ICSID tribunals.32 Such a marked difference suggests that, even though the 1976 Rules only provided for “costs follow the event” in relation to tribunal costs, tribunals applying these rules have generally adopted the same approach when considering party costs. This suggests the guidance provided in the rules has had a recognizable influence on tribunals’ approach to party costs. The 2010 revision to the UNCITRAL Arbitration Rules removed this distinction between party and tribunal costs, and adopted “costs follow the event” as the starting point for all decisions on costs: 1.

2.

The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. 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. The arbitral tribunal shall in the final award or, if it deems appropriate, in any other award, determine any amount that a party may have to pay to another party as a result of the decision on allocation of costs.33

This revision establishes a default position, thus providing clear guidance to tribunals. As Caron and Caplan note, the 2010 Rules create an “unequivocal preference for the ‘loser pays’ rule.”34 One would therefore expect that, in most disputes, costs will be allocated on a “costs follow the event” basis. Importantly, 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.  Id. 32  Hodgson & Campbell, supra note 1. Notably, in recent years, a greater proportion of ICSID tribunals have made some adjustment, with 61% of awards issued between the end of 2012 and May 31, 2017 including an adjusted costs order. 33  2010 UNCITRAL Rules, art. 42. 34   D avid D. Caron & Lee M. Caplan, The UNCITRAL Arbitration Rules: A Commentary 866 (2nd ed. 2013).

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however, tribunals constituted under the 2010 UNCITRAL Arbitration Rules retain the discretion to depart from this default position if they consider it appropriate in the circumstances of the case. This formulation is, of course, unlikely to lead to total uniformity among tribunals constituted under the 2010 UNCITRAL Arbitration Rules. Indeed, in one of the few published decisions under the new rules, the tribunal effectively treated “pay your own way” as the normal position for the allocation of tribunal costs, finding that each party should bear its own share of those costs because they conducted the arbitration in a “highly professional and constructive manner….”35 Conversely, another tribunal constituted under the 2010 Rules saw no circumstances “that would warrant a reversal of the presumption” in favor of “costs follow the event,” and ordered the loser to bear the costs of the prevailing party.36 Similarly, some tribunals constituted under the 1976 Rules (which, at least in relation to tribunal costs, are broadly similar to the 2010 Rules) emphasized their “wide discretion” to allocate costs as they saw fit,37 whilst others noted that they could not deviate from the “costs follow the event” principle unless they had a “compelling reason” to do so.38 Ultimately, the effect of the revised rule remains to be seen due to the relatively small number of published decisions under the 2010 Rules. Nevertheless, the authors suggest that an approach that offers at least some guidance to tribunals in the form of a default rule could have a significant impact and is preferable to ICSID’s current approach, which can lead to disparate decisionmaking and uncertainty for the system’s users. A default rule (from which tribunals have the power to depart) provides more certainty for parties whilst preserving the flexibility and tribunal discretion associated with arbitration. 2.1.3.3 The Stockholm Chamber of Commerce Rules Although less widely used than the ICSID Rules and the UNCITRAL Rules, the Stockholm Chamber of Commerce (“SCC”) Rules also give tribunals broad

35   Windstream Energy LLC v. Gov’t of Canada, PCA Case No. 2013–22, Award, ¶ 513 (Sept. 27, 2016). 36   ST-AD GmbH (Germany) v. Republic of Bulgaria, PCA Case No. 2011–06, Award on Jurisdiction, ¶¶ 426–9 (July 18, 2013). 37   Econet Wireless Ltd. v. First Bank of Nigeria et al., Award, ¶ 44 (June 2, 2005), 31 Y.B. Comm. Arb. 49, 64 (2006). 38   Methanex Corp. v. United States of America, UNCITRAL Arbitration Proceeding, Final Award on Jurisdiction and Merits, Part V, ¶ 5 (Aug. 3, 2005).

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discretion regarding the allocation of tribunal and party costs. The 2017 revision to the SCC Rules provides that: Unless otherwise agreed by the parties, the Arbitral Tribunal may in the final award, at the request of a party, order one party to pay any reasonable costs incurred by another party, including costs for legal representation, having regard to the outcome of the case, each party’s contribution to the efficiency and expeditiousness of the arbitration and other relevant circumstances.39 Notably, this rule does offer some guidance on the allocation of costs, but stops short of adopting a default position. Interestingly, unlike the ICSID Arbitration Rules and the UNCITRAL Arbitration Rules (which both use the mandatory “shall”), an SCC tribunal “may” award costs only if a request is expressly made by one or both parties. Once the request has been received, the tribunal has discretion to have regard to “the outcome of the case, each party’s contribution to the efficiency and expeditiousness of the arbitration and other relevant circumstances.”40 In practice, however, it is extremely unlikely that either party will forget or decline to request an apportionment of costs in its favor, so this quirk of the SCC Rules is unlikely to have any practical effect. Unsurprisingly, as is the case with other sets of institutional rules, this broad discretion has led to a range of approaches by SCC tribunals. Some have decided that the parties should pay their own way,41 some have preferred a “costs follow the event” approach,42 and others have taken the relative success of the parties into account.43 2.2 Costs Outcomes in Practice Despite a welcome move toward providing more substantial reasoning in decisions on costs, tribunals, particularly those constituted under the ICSID 39  SCC Arbitration Rules, art. 50 (2017). 40  The reference to “each party’s contribution to the efficiency and expeditiousness of the arbitration” was added in the 2017 version of the SCC Rules and expressly allows tribunals to take the parties’ conduct in the proceedings into account. Id. If, for example, one of the party’s conduct unnecessarily adds to the cost of the proceedings, the tribunal has express authority to consider this in its costs order. 41   See, e.g., RosInvestCo UK Ltd. v. Russian Federation, SCC Case No. V (079/2005), Final Award, ¶ 701 (Sept. 12, 2010). 42   See, e.g., Anatolie Stati et al. v. Republic of Kazakhstan, SCC Case No. V (116/2010), Award, ¶ 1882 (Dec. 19, 2013). 43   See, e.g., Limited Liability Company AMTO v. Ukraine, SCC Case No. 080/2005, Final Award, ¶¶ 121–2 (Mar. 26, 2008).

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Arbitration Rules, have failed to develop a uniform practice, either as regards their chosen starting point on costs or their reasons for departing from that starting point. As discussed in more detail below, “pay your own way” has fallen out of favor and the majority of tribunals now adopt either “costs follow the event” or “relative success” as a starting principle for their orders on costs. Although the reasons for this trend are not clear, it may reflect the tendency by some tribunals to view modern investment treaty arbitration as more closely resembling international commercial arbitration (in which “costs follow the event” is the standard approach)44 than State–State arbitration (where “pay your own way” is standard). In addition, it is not uncommon for a tribunal expressly to adopt one of the three main principles as a starting point on costs, but then make an award which does not reflect the chosen principle. While the broad discretion accorded to tribunals under the major institutional arbitration rules allows them to depart from their chosen starting principle in appropriate circumstances, tribunals regularly do so without providing any significant analysis to support their decision. As discussed below, this trend is most pronounced for tribunals adopting the “relative success” principle as their starting point. Again, the provision of more substantial reasoning would be a welcome development. 2.2.1 Pay Your Own Way The drafting history of the ICSID Convention shows that the initial drafts of Article 61 took a “pay your own way” approach. Earlier drafts also included the proviso that, if the arbitral tribunal determined a party had acted frivolously or in bad faith, this conduct could be taken into account against it when apportioning costs.45 However, in response to proposals from Austria and Brazil to adopt a “costs follow the event” approach, the drafters reached a compromise position whereby ICSID tribunals are, as set out above, given very broad discretion.46 Nevertheless, the “pay your own way” approach has historically been the de facto default position for many investment tribunals. For example, drawing a distinction with the position in commercial arbitration, the tribunal in EDF v. Romania noted that: 44  Queen Mary University of London and White & Case, 2012 International Arbitration Survey Current and Preferred Practices in the Arbitral Process, 40 (2012), http://www.arbitration .qmul.ac.uk/docs/164483.pdf. 45  ICSID, History of the ICSID Convention, Vol. I, at 275–6 (1970) (First Draft (Doc. 43), Preliminary Draft (Doc. 24), and Working Paper (Doc. 6)). 46   Id.; ICSID, History of the ICSID Convention, Vol. II-2, at 873 (1968).

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the traditional position in investment arbitration, in contrast to commercial arbitration, has been to follow the public international rule which does not apply the principle that the loser pays the costs of the arbitration and the costs of the prevailing party. Rather, the practice has been to split the costs evenly, whether the claimant or the respondent prevails.47 Tribunals following this approach have been reluctant to adjust their costs orders in the absence of “exceptional circumstances.” As Professor Domingo Janeiro explained in his separate opinion in Siemens v. Argentina: I must dissent from the majority, regarding the allocation of the costs of the proceeding. In my humble opinion always also in agreement with prevailing arbitration practice, I consider that the costs of the proceeding should be allocated equally, unless under exceptional circumstances. In this case, neither Claimant has prevailed in all of its claims, nor have there been exceptional circumstances.48 Of course, this raises the question: what kind of “exceptional circumstances” will, in the minds of those favoring a “pay your own way” approach, justify a departure from that approach? Clearly, a defeat—even a categorical one—is not sufficient unless one party prevails in every aspect of the arbitration. The tribunal in Anderson v. Costa Rica listed “procedural misconduct, the existence of a frivolous claim, or an abuse of the BIT process or of the international investment protection regime” as examples of special or exceptional circumstances which would justify a departure from the “pay your own way” approach.49 The tribunal in Omer Dede v. Romania considered that an “unreasonable argument, exaggerated claim, or obstructionist tactics” could also qualify as special or exceptional circumstances.50

47   E DF v. Romania, supra note 24, ¶ 322. Note, however, that the tribunal ultimately preferred the “commercial arbitration” approach to costs and ordered that the claimant should pay US$6 million towards the respondent’s costs. See id., ¶¶ 327–9. 48   Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Separate Opinion of Domingo Bello Janeiro, at 2 (Jan. 30, 2007). It is difficult to discern the majority’s reasoning on costs because the issue, which is dealt with in a single paragraph, merely states that each party is to bear its own costs and that the respondent shall be responsible for 75% of ICSID’s costs. 49   Anderson v. Costa Rica, supra note 13, ¶ 63. 50   Ömer Dede & Serdar Elhüseyni v. Romania, ICSID Case No. ARB/10/22, Award, ¶ 269 (Sept. 5, 2013).

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While there is ample support for the first set of circumstances, there is often a fine line between an arguable, but ultimately incorrect position on one hand and an “unreasonable” argument on the other. Accordingly, if tribunals are to allocate costs due to an “unreasonable argument,” the threshold for reaching such a decision should be a high one. For example, the evidence suggests that the quantum of most investment treaty claims is exaggerated: the mean amount claimed by successful claimants (excluding the Yukos award) is US$415.1 million but the mean amount awarded is just US$110.9 million.51 Yet it is unclear that there is any significant increase in costs in a case where the tribunal concludes that damages should be reduced by 50% compared to a reduction of, say, 10%. Again, therefore, there should be a high threshold if a tribunal is to allocate costs on the basis of an exaggerated claim.52 The “exceptional” nature of the circumstances described above (or, at least, the high threshold required before an adjustment will be made) is reflected in the practice of tribunals expressly favoring the “pay your own way” approach, with just 12% making any subsequent adjustment to their order on costs.53 2.2.2 Costs Follow the Event As many tribunals have commented, there has been a discernible trend away from a pure “pay your own way” approach towards “costs follow the event” (or some modified version of it) in recent years. For example, the tribunal 51  Hodgson & Campbell, supra note 1. A PricewaterhouseCoopers survey of 95 investment treaty awards arrived at a similar conclusion, finding that tribunals awarded only 37% of the amount claimed. See PricewaterhouseCoopers, 2015—International Arbitration damages research (2015), https://www.pwc.com/sg/en/publications/assets/internationalarbitation-damages-research-2015.pdf. 52  There may, however, be circumstances where a flawed quantum analysis might discourage the tribunal from making a fully adjusted costs order. For example, in Siag v. Egypt, the tribunal found that the claimants’ DCF analysis was unsupported and declined to allow the claimants to recover the relevant expert’s fees. Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award ¶ 626 (June 1, 2009). Similarly, the tribunal in Yukos v. Russia reduced its costs award in light of the fact that the claimants’ experts’ fees were “plainly excessive” and the experts were “of limited assistance to the Tribunal in its determination of Claimants’ damages.” Yukos Universal Ltd. (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award, ¶¶ 1883–4 (July 18, 2014) (emphasis added). 53  Matthew Hodgson, Cost allocation in ICSID arbitration: theory and (mis)application 2 (Columbia FDI Perspectives No. 152, July 20, 2015), https://academiccommons.columbia. edu/catalog/ac:192919.

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in ADC v. Hungary, having assessed compensation in accordance with the Chorzów Factory standard, assessed costs from “the starting point that the successful party should receive reimbursement from the unsuccessful party” and, in doing so, declined to treat “pay your own way” as the default approach to costs.54 Although this trend has occurred in tandem with an increase in party costs, it is unlikely that arbitrators are subconsciously favoring “costs follow the event” as a result of rising costs. Modern investment treaty cases are rarely open and shut and, even in relatively clear-cut cases, there are likely to be instances where both parties to the dispute have conducted themselves imperfectly. Cases involving bribery and corruption are perhaps the most extreme example of this. If the tribunal finds there have been serious issues of bribery and corruption going to the heart of the case, the claim is likely to be dismissed. However, in such cases, tribunals have not always ordered that the claimant should pay the State’s costs.55 In this regard, the reported position of the majority in Spentex v. Uzbekistan is noteworthy.56 The tribunal was unanimous in dismissing the claimant’s claims on the basis of a finding of corruption, but it did not view the respondent as the prevailing party due to its role in the corruption: both parties had behaved imperfectly. Accordingly, the majority recommended that the respondent make a US$8 million donation to a United Nations anti-corruption fund, warning that failure to do so would lead to an adverse costs order (conversely, if the respondent made the recommended contribution, the majority would follow the “pay your own way” approach). While this is undoubtedly an innovative approach, tribunals do not have the power to order a party to make a payment to a third party. In circumstances where the costs consequences of not making the “recommended” payment were severe, it is difficult to see past the dissenting arbitrator’s argument that 54   A DC v. Hungary, supra note 20, ¶ 533. See also PSEG Global Inc. & Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award, ¶ 352 (Jan. 19, 2007). 55  For example, in Metal-Tech v. Uzbekistan, the tribunal found that the parties should bear their own costs. Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, ¶ 420 (Oct. 4, 2013). See also World Duty Free Co. Ltd. v. Republic of Kenya, ICSID Case No. ARB/00/7, Award, ¶¶ 189–91 (Oct. 4, 2006). 56  As of the time of writing, the award is not publicly available. The comments in this Chapter are based on a report by Investment Arbitration Reporter. See In An Innovative Award, Arbitrators Pressure Uzbekistan—Under Threat of Adverse Cost Order—to Donate to UN Anti-Corruption Initiative; Also Propose Future Treaty-Drafting Changes that Would Penalize States for Corruption, Inv. Arb. Rep. (June 22, 2017).

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the majority’s “recommendation” essentially amounted to an order. Moreover, the claimant, having engaged in corruption and having had its claims dismissed, could potentially recover (or fail to recover) a significant portion of its costs for reasons unrelated to its own conduct. Even absent corruption, an investor may fail on a finely-balanced point of jurisdiction having suffered serious and obvious mistreatment at the hands of the State. In these circumstances, a multi-million dollar adverse costs award may seem like a harsh outcome when the investor has clearly suffered mistreatment and brought, but ultimately did not succeed on, an arguable case. Indeed, many tribunals purporting to adopt a “costs follow the event” approach, which in its purest form would lead to a full allocation of costs in favor of the victor, ultimately recoil from the harsh results that a strict application of this approach can produce.57 A recent survey has found that less than half of tribunals adopting the “costs follow the event” approach actually make a fully adjusted costs order (46%), with a similar number (42%) ordering the losing party to pay only some of the winner’s costs.58 In the remaining 12% of awards adopting “costs follow the event” reasoning, tribunals made no adjustment to costs at all, ordering that the parties should pay their own way despite purporting to adopt a “costs follow the event” approach. One possible explanation for the trend toward “costs follow the event” is that, over time, investment treaty arbitration has become more adversarial and more closely aligned with international commercial arbitration. It is certainly difficult to perceive the “friendly” method of dispute resolution envisaged by Aron Broches in the typical investment treaty proceeding. This was recognized by the tribunal in EDF v. Romania, which noted that: the investment arbitration tradition of dividing the costs evenly may be changing, although it is a bit early to know whether a different approach is evolving…. In the instant case, and generally, the Tribunal’s preferred approach to costs is that of international commercial arbitration and its growing application to investment arbitration. That is, there should be an allocation of costs that reflects in some measure the principle that the 57  For example, the tribunal in Pey Casado v. Chile found that the “common solution” of costs follow the event “would not be appropriate,” and ordered the unsuccessful respondent to bear US$2 million of the claimants’ costs, or around 13% of the US$14.6 million of costs that were claimed. Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No ARB/98/2, Award, ¶ 730 (May 8, 2008). 58  Hodgson, supra note 53, at 2.

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losing party pays, but not necessarily all of the costs of the arbitration or of the prevailing party.59 Thus, it may be that tribunals are moving away from the more “traditional” approach to costs associated with the (apparently) friendlier arbitration of StateState disputes. The reason could be that the more commercial and adversarial nature of modern investment treaty arbitration is having an impact on arbitrators’ approach to costs. 2.2.3 Relative Success As set out above, the results of a pure “costs follow the event” approach can appear harsh. For example, in Oostergetel v. Slovak Republic, a pure “costs follow the event” approach would have seen the claimants (whose party costs were in the region of US$1.8 million), paying the respondent’s party costs of over US$15 million. However, the tribunal recognized this “striking” discrepancy and, despite noting that the UNCITRAL Rules favor the “costs follow the event” approach, ordered the claimants to pay only around US$2.6 million of the respondent’s costs.60 The potential for unjust results might explain why the “relative success” approach has gained so much traction such that, in a recent survey of investment treaty awards, 38% of all tribunals justified their decision on costs by reference to the relative success of the parties on the issues in dispute.61 Conceptually, “relative success” can be seen as a variation on the “costs follow the event” principle whereby the cost of arguing an issue is borne by the unsuccessful party. Thus, at a very high level, in a hypothetical claim that is dismissed on the merits, the respondent will bear the cost of the jurisdictional phase, but the claimant will bear the cost of the merits phase. This approach should lead to a partial costs order in favor of the successful party, since one party will typically succeed on most, but not all, key issues. However, in reality, 65% of tribunals expressly choosing to adopt the “relative success” approach as their starting point ultimately made an 59  E DF v. Romania, supra note 24, ¶¶ 325–7. The International Thunderbird v. Mexico tribunal has also said that “the same rules should apply in international investment arbitration as apply in other international arbitration proceedings[,]” although it ultimately appears to have endorsed the “relative success” approach. See Int’l Thunderbird Gaming Corp. v. United Mexican States, UNCITRAL Arbitration Proceeding, Award, ¶ 214 (Jan. 26, 2006). 60   Jan Oostergetel & Theodora Laurentius v. Slovak Republic, UNCITRAL Arbitration Proceeding, Final Award, ¶ 339 (Apr. 23, 2012) (original sums in Euros). 61  Hodgson, supra note 53, at 1.

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unadjusted costs award, simply ordering that the parties’ costs should lie as they fall.62 This suggests that tribunals might be using “relative success” as an analytical shortcut to an unadjusted costs order. It is tempting to interpret this as a convenient way of simply preserving the status quo at the time of the award. This is supported by the fact that, in cases where tribunals do not offer any reasoning on costs other than a bare reference to “relative success,” the number of tribunals ultimately making an unadjusted costs order is even higher (83%).63 This can perhaps be explained by the significant practical difficulties in conducting a true “relative success” analysis. First, how granular should the tribunal’s approach to defining the issues be? On one hand, the tribunal could easily define the issues simply as “jurisdiction” and “the merits” but, on the other hand, the tribunal could consider each alleged breach of the treaty separately, or could even consider each argument on the issue separately. Second, while it may be relatively simple to ascertain which party has won or lost on each issue, how should this be translated into practical consequences in terms of costs? If a claimant makes claims under a broad range of treaty standards such as fair and equitable treatment, full protection and security, expropriation, free transfer of funds, and so on, but only succeeds on one of those claims, what proportion of its costs should it recover? How should a reduction in quantum claimed versus quantum awarded be taken into account? Third, properly engaging the “relative success” approach would require a more rigorous approach to costs schedules by parties and a more forensic investigation into those costs by tribunals. In practice, costs schedules in international arbitration are high-level and show the total time spent by each party’s legal representatives, split out by fee earner, and possibly by phase of the arbitration (e.g., jurisdiction, merits, damages) or stage of the proceedings (e.g., exchange of written pleadings, oral hearing, post-hearing brief), along with details of any disbursements and additional charges incurred. A fullblown “relative success” analysis would require a much more detailed review of billing narratives spanning a number of years at a potentially prohibitive cost. Further, in cases where the amounts in question are high and contested by the parties, a hearing on costs might be called for, leading to further expenses and delays. Ultimately, a proper implementation of the “relative success” approach is fraught with difficulty in practice. It is therefore likely to take considerable time and contribute further to rising costs. 62   Id., at 2. 63   Id.

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2.3 Reasons for Deviating from the Three Main Principles As the foregoing sections demonstrate, whatever the starting principle adopted by a tribunal, this does not necessarily pre-determine the outcome on costs. Indeed, the broad discretion accorded to tribunals allows them to deviate from their chosen starting point in appropriate circumstances. For example, 36% of tribunals have deviated from their chosen starting principle on the basis of good or bad procedural conduct by the parties64 and 15% of tribunals have cited the complexity, novelty, or arguability of the claims at issue as a reason for deviation.65 Other, albeit less frequently cited, reasons for deviating from the normal starting principles include settlement efforts,66 the State’s protection of the public interest,67 and the economic conditions prevalent in the host State.68 Each of these reasons is, depending on the circumstances of the case, an entirely valid reason for a tribunal to depart from its chosen starting principle. All too often, however, tribunals do not engage in any detailed analysis of why the conduct of the parties or the complexity of the dispute should have an effect on their decisions on costs. It is conceivable, for example, that the parties to a dispute will argue interesting, complex, and novel points of law that, ultimately, do not form a significant part of the tribunal’s decision. It seems fair that the 64   See, e.g., Robert Azinian et al. v. United Mexican States, ICSID Case No. ARB(AF)/97/2, Award, ¶ 126 (Nov. 1, 1999), in which the tribunal took into account the “efficient and professional manner” in which the Claimants presented their case when deviating from a pure “costs follow the event” approach. 65  In Impregilo v. Argentina, the tribunal noted that “the present case has given rise to a number of important and complex legal issues and that both Parties have raised weighty arguments in support of their respective positions.” Despite choosing “relative success” as its starting principle, the tribunal ultimately ordered that the parties’ costs should lie as they fall. Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award, ¶ 385 (June 21, 2011). 66   Piero Foresti et al. v. Republic of South Africa, ICSID Case No. ARB(AF)/07/01, Award, ¶ 119 (Aug. 4, 2010). 67   Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award, ¶ 621 (Feb. 7, 2017). 68  In Funnekotter v. Zimbabwe, the tribunal noted that “[i]n different circumstances, the Tribunal would be minded to follow the general practice in international arbitration that, as submitted by the Claimants, [the] successful party under an award should recover its legal costs. However, such an approach would not be completely appropriate, in the present case, taking into account the situation in Zimbabwe in 2001/2002.” Bernardus Henricus Funnekotter et al. v. Republic of Zimbabwe, ICSID Case No. ARB/05/6, Award, ¶ 147 (Apr. 22, 2009). See also Matthew Hodgson, Costs in Investment Treaty Arbitration: The Case for Reform, 11(1) T.D.M. 5 (Jan. 2014).

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costs of arguing such points should be shared, but tribunals rarely delve into such detail when citing the novelty or complexity of the parties’ arguments as a reason for departing from their chosen starting principle. It could be argued that the major institutions could encourage more transparent and consistent decision-making by supplying tribunals with a list of “special factors” that might justify departing from the chosen starting principle. However, in order to avoid curtailing tribunals’ discretion on costs, such a checklist would have to be so broadly drafted that it would be unlikely to provide any meaningful guidance. Moreover, it could actually discourage detailed analysis by making the tribunal’s decision little more than a “tick-box” exercise. Instead, tribunals should retain the flexibility to take into account the circumstances of the case, but they should also be encouraged to be more rigorous in their analysis of exactly how those particular circumstances impacted the cost of the proceedings. 3

Additional Considerations and Potential Reform

3.1 Interest on Costs It is curious that, despite the rising expense of investment treaty arbitration, parties have not regularly sought to recover interest on their costs. As the tribunal in Canfor v. United States put it, “interest over costs of arbitration is rarely claimed in international arbitration, although the rationale for that practice is not entirely clear.”69 Indeed, in cases where it is claimed,70 tribunals have had little difficulty in awarding interest on costs at the same rate as the interest awarded on damages.71 Presumably, this is for the same reason: that full reparation in accordance with Chorzów Factory requires the payment of interest. Otherwise, the successful party, whether claimant or respondent, would not be made whole.72 69   Canfor Corp., Tembec Inc. et al. and Terminal Forest Products Ltd. v. United States of America, UNCITRAL Arbitration Proceeding, Joint Order of the Costs of Arbitration and for the Termination of Certain Arbitral Proceedings, ¶ 189 (July 19, 2007). 70  Notably, the tribunal in Murphy v. Ecuador felt that in the absence of a specific claim from the claimant, it was not able to award interest on costs. Murphy Expl. & Prod. Co.—Int’l. v. Republic of Ecuador, PCA Case No. 2012-16, Partial Final Award (May 6, 2016). 71   S.D. Myers, Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Final Award (Concerning the Apportionment of Costs Between the Disputing Parties), ¶¶ 50–1 (Dec. 30, 2002); Yukos v. Russia, supra note 52, ¶ 1690. 72   LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award, ¶ 55 (July 25, 2007).

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However, while the identification of the date from which interest should run can be relatively simple in the context of damages, it is more complicated in the context of costs because costs, by their nature, are incurred over a (sometimes considerable) period of time. Perhaps as a result of this added complexity, tribunals awarding interest on costs have invariably chosen to use the date of the award as the date from which interest will accrue. For example, in the Yukos arbitration, where pre-award interest on party costs (which amounted to tens of millions of dollars and began to accrue many years prior to the final award) could have been significant, the tribunal granted post-award interest only.73 In light of the substantial cost of many modern investment treaty arbitrations, parties could be more alive to the prospect of obtaining interest on their legal costs. However, perhaps due to the rarity of such claims, it is not yet clear whether parties will be able to obtain both pre- and post-award interest on costs. In theory, the authors do not see any reason why pre-award interest on costs should not be granted, although the calculation of such sums is undoubtedly a complicated exercise. 3.2 Third Party Funding In recent years, the use of third party funding in investment treaty arbitration has increased dramatically, and arbitrators are increasingly grappling with novel and complex legal issues associated with funding arrangements, including their impact on the allocation of costs. 3.2.1

The Impact of Third Party Funding on the Allocation of Legal Costs In a typical third party funding arrangement, a party to the dispute will assume an obligation to reimburse the costs paid by the funder, usually with a “success fee,” if that party wins the arbitration.74 In this scenario, the funded party should ordinarily be entitled to its legal costs so that these can be passed on to the funder in accordance with the contractual arrangement in place. The fact that the funder ultimately footed the bill for legal fees in the first place should not have any effect on a tribunal’s reasoning on costs. In other words, it should make no difference how the party funded the litigation; whether by loan, insurance, or its own accounts. In this sense, the funding arrangement should be considered irrelevant to the successful party’s entitlement to recover 73   Yukos v. Russia, supra note 52, ¶ 1690. 74  Chapter 2, Victoria Sahani et al., Third-party Financing in Investment Arbitration, at Sections 2 & 2.1.

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its legal costs (although, as discussed below, the treatment of any “success fee” is a more nuanced issue). As the tribunal in Kardassopoulos v. Georgia noted, in adopting the “costs follow the event” principle: The Tribunal knows of no principle why any such third party financing arrangement should be taken into consideration in determining the amount of recovery by the Claimants of their costs.75 However, this view is not universally held and there may be some limitations on the recovery of legal fees. In Siag and Vecchi v. Egypt, involving a US$230 million claim, the claimants incurred legal costs of just over US$6 million.76 While the majority found that the claimants’ legal costs (albeit not the costs of one of their experts) were reasonably incurred and should be borne by the respondent, Professor Orrego Vicuña dissented on this point. He argued that, in light of the fact that the claimants “agreed to pay attorney’s fees only on a successful recovery” meant that the claimants had accepted “a degree of risk that should not be entirely shifted to the Respondent.”77 Further, the argument that a funded party should be able to recover all of its legal costs does not appear to hold in the unusual scenario where the funded party does not have any obligation to reimburse the funder. For example, in Quasar de Valores v. Russia, the tribunal denied the successful claimants recovery of the cost of the arbitration because the funder had no contractual right to recover its expenditure from the claimants.78 3.2.2 The Allocation of Success Fees and Other Funding Costs If a tribunal does award a funded party its legal costs, should the tribunal also order the losing non-funded party to pay the funder’s success fee? A draft report produced by an ICCA-Queen Mary University Task Force (“ICCA-QMUL”) argues that it would not be appropriate for a tribunal to award such costs, as the 75   Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, ¶ 691 (Mar. 3, 2010). See also RSM Prod. Corp. v. Grenada, ICSID Case No. ARB/05/14 (Annulment Proceeding), Order Discontinuing the Proceeding and Decision on Costs, ¶ 68 (Apr. 28, 2011); ATA Const., Indus. & Trading Co. v. Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2 (Annulment Proceeding), Order Taking Note of the Discontinuance of the Proceeding, ¶ 34 (July 11, 2011). 76   Siag v. Egypt, supra note 52, ¶¶ 504, 605. 77   Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/ 05/15, Dissenting Opinion of Francisco Orrego Vicuña, at 6 (May 11, 2009). 78   Quasar de Valores SICAV S.A. et al. v. Russian Federation, SCC Case No. 24/2007, Award, ¶ 223 (July 20, 2012).

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success fee “is not linked to the arbitration proceedings as such.”79 The Report explains that the “success portion payable to a third-party funder results from a trade-off between the funded party and the funder, where the funder assumes the costs and risk of financing the proceedings and receives a reward if the case is won.”80 However, a 2015 ICC Report took the opposite position. It noted that if a cost was incurred specifically to pursue the arbitration, has been paid or is payable, and was reasonable, it may be recoverable.81 There are strong arguments against ordering the losing party to pay a funder’s success fee. Indeed, compelling a State to pay compensatory damages as well as reimburse the investor for a success fee based on the proceeds of the damages award raises concerns about double counting. In addition, as the ICCA-QMUL point out, a success fee is based on a funder’s decision as to a suitable rate of return, rather than the investor’s loss. Nevertheless, in the extreme case where the State has deliberately targeted an investor and caused such losses that an investment treaty claim would not have been possible but for a reasonable funding arrangement, the investor’s need for funding does not appear to be too far removed from the respondent’s conduct for the purposes of a Chorzów Factory analysis (provided that the requirements of causation and reasonableness are met). Indeed, the United Kingdom courts have recently upheld the decision of a sole arbitrator under the ICC Rules that, when faced with a similar set of circumstances, ordered a losing non-funded party to pay the funded party’s costs, including a success fee that amounted to 300% of the sum advanced by the funder.82 In doing so, the court noted (albeit obiter) that the words “legal and other costs” in Section 59(1)(c) of the Arbitration Act of 1996 are broad enough to encompass a success fee.83 Whether this kind of success fee would be considered

79  ICCA-QMUL TPf Task Force, Draft Report on Security for Costs and Costs 10 (Nov. 1, 2015), http://www.arbitration-icca.org/media/6/09700416080661/tpf_taskforce_security_for_ costs_and_costs_draft_report_november_2015.pdf. 80   Id. However, the report notes that funding costs “may be claimed as damages where permitted by the applicable substantive law” but it remained “unclear whether such funding costs would meet the relevant tests for causation and foreseeability.” Id. 81  ICC Commission on Arbitration and Alternative Dispute Resolution, Commission Report: Decisions on Costs in International Arbitration 17 (2015), https://cdn.iccwbo.org/content/ uploads/sites/3/2015/12/Decisions-on-Costs-in-International-Arbitration.pdf, in particular ¶¶ 92–3. 82   Essar Oilfield Serv. Ltd. v. Norscot Rig Mgmt. Pvt Ltd. [2016] EWHC 2361 (Comm), ¶ 5. 83   Id.

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reasonable or proportionate by investment treaty tribunals is likely to depend on the circumstances of each case.84 Interestingly, Article 40(2)(f) of the 2010 UNCITRAL Rules also refers to the “legal and other costs” incurred by the parties in relation to the arbitration and, under Article 42(1), these costs are to be borne “in principle” by the unsuccessful party. Article 61(2) of the ICSID Convention is similarly broad, referring only to the “expenses incurred by the parties in connection with the proceedings.” It is therefore possible that, in extreme circumstances and where requirements of causation and reasonableness are met, an international investment tribunal could follow the same reasoning. 3.2.3 Costs Orders against Funded Parties If the non-funded party prevails in the arbitration and is awarded some or all of its costs, it is possible that the funded party will have trouble meeting that costs order without help from the funder. But the funder, having lost, will obviously not want to make any further contributions without the possibility of an up-side. In this scenario, could a tribunal make a costs order against the third party funder? It is possible that a non-funded party may apply in the proceedings for interim measures, such as security for costs from the funder or some form of insurance, to safeguard its position.85 Although this has occurred in the English courts (where a funder was joined to proceedings and ordered to pay the defendant’s costs),86 in the authors’ view, it seems unlikely to happen in 84  Some commentators have pointed out that, if the recoverable costs in an arbitration include any costs that have been incurred by reason of participating in the arbitration, a party could also recover fees under a damages-based agreement with the claimant’s law firm, an after-the-event insurance premium, or an uplift in a conditional fee arrangement. Recoveries of this nature, however, go beyond what a funded party can recover in English litigation. See, e.g., James Freeman & Olga Owczarek, Costs of third-party funding awarded in arbitration (Oct. 19, 2016), http://www.allenovery.com/publications/en-gb/Pages/ Costs-of-third-party-funding-awarded-in-arbitration.aspx. 85  As noted by the ICC Commission Report: “If there is evidence of a funding arrangement that is likely to impact on the non-funded party’s ability to recover costs, that party might decide to apply early in the proceedings for interim or conservatory measures to safeguard its position on costs, including but not limited to seeking security for those costs or some form of guarantee or insurance. Such measures may be appropriate to protect the non-funded party and put both parties on an equal footing in respect of any recovery of costs.” See ICC Commission Report, supra note 81, ¶ 90. 86   Excalibur Ventures LLC v. Texas Keystone Inc. et al. & Psari Holdings Ltd. et al. [2014] EWHC 3436, ¶¶ 4, 161. Sections 51(1) and (3) of the Senior Courts Act 1981 provide that “[t]he

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investment treaty arbitration.87 Third party funders, whilst frequently heavily involved in proceedings behind the scenes, cannot be interpreted as providing consent to arbitrate. They are therefore outside of an investment treaty tribunal’s jurisdiction and cannot be subjected to a costs order unless some form of security or guarantee is posted early in proceedings and the funder is contractually tied to that security or guarantee. Indeed, many funders now write an agreement to be bound by any adverse costs orders into their standard terms. However, this necessarily affects the risk taken on by the funder and is factored into their pricing arrangements. 3.3 Potential for Reform Criticisms of the lack of consistency in tribunals’ approach to costs are nothing new, and the most recently negotiated treaties (and current draft agreements) are indicative of a desire for a clearer approach to costs.88 Many of the more significant modern treaties have attracted substantial attention in mainstream media and, as a result, these treaties are subject to greater public scrutiny than ever before. Whatever their fate in a potentially anti-free trade political climate, these modern treaties give States an opportunity to re-assess the appropriate approach to costs and offer some guidance as to what a reformed approach by arbitral institutions like ICSID might look like. 3.3.1 Approaches Taken in Recent and Draft Investment Treaties 3.3.1.1 Comprehensive Economic and Trade Agreement The Comprehensive Economic and Trade Agreement (“CETA”) provides for the possibility of arbitration under the ICSID Convention or the ICSID Additional court shall have full power to determine by whom and to what extent the costs are to be paid.” Id., ¶ 61 (emphasis added). This appears to go beyond the discretion conferred on investment treaty tribunals constituted under the ICSID or UNCITRAL Rules. 87  In RSM v. Saint Lucia, an ICSID tribunal ordered security for costs on the basis that the claimant was both impecunious and funded by a third party. The funder, however, was not liable for such security and, when the claimant’s funding was withdrawn and it was unable to post security for costs, the proceedings were suspended. RSM Prod. Corp. v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Suspension or Discontinuation of Proceedings (Apr. 8, 2015). It has since been reported that, in July 2016, the tribunal issued a final award dismissing the case “with prejudice” (see Investor’s Failure to Post Security Bond Leads to “With Prejudice” Termination of Arbitration with St. Lucia, Inv. Arb. Rep. (July 27, 2016)). 88  For an analysis of the number of treaties containing provisions relating to the allocation of costs, see Joachim Pohl et al., Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey (OECD, Working Paper 2012/02, 2012), https://www .oecd.org/investment/investment-policy/WP-2012_2.pdf.

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Facility Rules, and, as regards costs, creates a strong presumption in favor of “costs follow the event.” Tribunal costs shall be allocated on this basis except in exceptional circumstances, and party costs shall also be allocated on this basis unless that apportionment is unreasonable.89 However, the CETA also suggests that apportionment on a pure “costs follow the event” basis is automatically unreasonable if only parts of the claim were successful. In such circumstances, “the costs shall be adjusted.”90 An element of the “relative success” approach is therefore enshrined in the treaty. Notably, however, the drafting implies that this “relative success” exercise is only compulsory in relation to unsuccessful claims (as opposed to unsuccessful defenses), thus creating an apparently asymmetrical position between the parties.91 Tribunals may, therefore, look to interpret the word “claims” broadly. This focus on “relative success” is, perhaps, unfortunate in light of the criticisms made above, but the drafting does seem to direct tribunals towards a more detailed analysis of which claims (or parts thereof) were successful and which were not. Tribunals must then adjust costs “proportionately” rather than simply revert to a “pay your own way” approach. However, while this detailed analysis is desirable in theory, there is a risk that it will prove difficult in practice given the challenges of identifying the costs of different issues, as discussed above. 3.3.1.2 EU-Singapore Free Trade Agreement Article 9.26 of the EU-Singapore Free Trade Agreement (the “EUSFTA”)92 takes a similar approach, creating a strong presumption in favor of the “costs follow the event” principle but with an automatic “relative success” approach for unsuccessful parts of the claimant’s claims.93 While the EUSFTA apparently goes further than the CETA, by making “costs follow the event” automatic in claims which are “manifestly without legal 89  Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States, art. 8.39(5) (Oct. 30, 2016), 2017 O.J. (L 11). 90   Id. (emphasis added). 91  For example, a respondent might succeed on only one of many jurisdictional defenses, thus defeating the claim at the jurisdictional phase. The drafting of the treaty appears to imply that this would not automatically have any costs consequences for the respondent, whereas the claimant that succeeds on only one of many claims would automatically have its costs adjusted. 92  On May 17, 2017, the Court of Justice of the European Union decided that the EUSFTA must be submitted for ratification in all Member States, a decision which could affect any future EU trade agreement, including the CETA. 93   E uropean Commission, EU-Singapore Free Trade Agreement (June 29, 2015), http://trade.ec.europa.eu/doclib/press/index.cfm?id=961.

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merit” or “unfounded as a matter of law,” these provisions appear to be unnecessary. Tribunals constituted under the EUSFTA already have an obligation to apply the “costs follow the event” approach unless there are “exceptional circumstances” (in the case of tribunal costs), or if such apportionment “is not appropriate in the circumstances of the case” (in the case of party costs). If a claim or parts of a claim are dismissed as being manifestly without legal merit or unfounded as a matter of law, it is difficult to conceive of any circumstances which would permit a tribunal to depart from the mandatory “costs follow the event” approach. 3.3.1.3

Transatlantic Trade and Investment Partnership Agreement and the Trans-Pacific Partnership It may be premature to say whether the proposed Transatlantic Trade and Investment Partnership agreement (“TTIP”) and the already-signed (but not yet ratified) Trans-Pacific Partnership (“TPP”)94 might ever see a dispute because of the uncertain future of free trade agreements in today’s political climate. Nevertheless, the drafts and discussions surrounding these treaties provide further evidence as regards the modern approach to costs. TTIP’s drafts follow a similar approach to that found in both the EUSFTA and CETA, namely a hybrid of the “costs follow the event” and “relative success” approaches. However, it also contains some unique proposals which might have some impact on costs. The possibility of appeal, for example, can only add to already ballooning party costs. On the other hand, the introduction of a standing investment court is unlikely to have a significant impact on arbitration costs, as tribunal costs are generally a small fraction of party costs.95 One proposal suggested that there might be a maximum amount of party costs that could be recovered from an unsuccessful claimant.96 This reflects a concern that “costs follow the event” may prove punitive for the unsuccessful party and may even put smaller claimants off using the system altogether.

94   N ew Zealand Foreign Affairs & Trade, Trans-Pacific Partnership (Jan. 26, 2016), https://www.tpp.mfat.govt.nz/text. 95  Mean tribunal costs are US$930,000, or just under US$465,000 for each party, whereas mean party costs are around US$6 million for claimants and US$4.9 million for respondents. For median costs, see supra Section 1 & note 5. See also Hodgson & Campbell, supra note 1; Hodgson, supra note 53, at 1. 96  European Union’s proposal for Investment Protection and Resolution of Investment Disputes, Transatlantic Trade and Investment Partnership ¶ 5 (Nov. 12, 2005), http://trade .ec.europa.eu/doclib/docs/2015/november/tradoc_153955.pdf.

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It may also create a de facto limit on what parties are willing to spend, thus encouraging efficient and cost-effective behavior. The TPP, by contrast, does not set a default approach to costs, instead deferring to the “applicable arbitration rules” (although it does provide that, in “frivolous” cases, the tribunal “may” award costs to the prevailing party). Article 9.23(6) of TPP is also interesting in that it suggests that a tribunal could make an interim costs order, rather than waiting for a final award. This approach has much to offer, as it has the potential to discourage dilatory tactics and encourage compliance with a tribunal’s procedural orders. Indeed, recent ICSID jurisprudence confirms that tribunals may already be willing to make interim costs orders in response to frivolous challenges or dilatory tactics. In Favianca v. Venezuela, for example, following repeated unsuccessful challenges to the chairman, the tribunal “[d]ecide[d] that the Respondent shall be responsible for the costs associated with the [proposal] and that an order to that effect will be made in the award to be issued by the Tribunal in these proceedings.”97 While this is a commendable approach, an interim costs order with immediate teeth, such as that contemplated under TPP, would prove a more meaningful deterrent against dilatory tactics. However, this may require a change in the relevant institutional rules. 4

Adoption of a Default Rule

A default rule gives parties contemplating or responding to proceedings some foresight of the likely consequences of their actions in terms of costs, and allows them to make a properly informed decision as to whether to commence, continue, or settle a claim. It also avoids each tribunal being required to make what is essentially a policy decision on cost allocation for itself. These benefits appear to have been recognized by the drafters of recent rules and treaties, with UNCITRAL adopting a “costs follow the event” approach in some form since 1976, and CETA, EUSFTA, and TTIP all adopting the same default rule, albeit with elements of the “relative success” principle. In this regard, ICSID is now something of an outlier, with UNCITRAL adopting a default rule and the SCC offering at least some guidance for tribunals. 97   Fábrica de Vidrios Los Andes, C.A. & Owens-Illinois de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/21, Decision on the Third Proposal to Disqualify L. Yves Fortier, ¶ 63 (Sept. 12, 2016). Notably, despite this adverse costs order, Venezuela challenged Mr. Fortier for a fourth time, again unsuccessfully. There is therefore evidence that such orders may not always act as a significant deterrent.

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In order to align itself with the other major institutions, and in order to promote clarity and consistency, ICSID should therefore follow suit and adopt a default rule in relation to the allocation of costs.98 The key question is, therefore, which approach should ICSID follow? Some commentators have argued that “pay your own way” is most appropriate on the basis that ICSID’s agenda attaches particular importance to the availability of arbitration to potential claimants. Small and medium-sized entities may, Vasani and Ugale argue, be put off by the risks inherent in a “costs follow the event” rule.99 However, given that costs may form a substantial part of a small or medium-sized investor’s claim, investors may, in fact, be put off by a “pay your own way” rule, even when they have a strong claim. Claims would have to reach a certain size before becoming economically viable. Moreover, it is not clear that a “costs follow the event” approach would necessarily decrease the availability of arbitration. Indeed, a small business with a strong claim may well be encouraged by a default rule dictating that it should recover its costs. A review of recently negotiated treaties might suggest that “relative success” should be the standard approach for ICSID arbitrations. However, as set out above, there is a significant risk of misapplication of this principle in practice. It requires an in-depth analysis of the issues and tribunal practice to date indicates that “relative success” is often used as a shortcut to an unadjusted costs order. While the drafting in CETA and EUSFTA appears to require tribunals to conduct some analysis by stating that costs “shall be adjusted, proportionately, to the number or extent of the successful parts of the claims,” it remains to be seen whether this will lead to detailed issue-by-issue reviews. A pure “costs follow the event” approach has three main advantages. First, it is consistent with the treatment of damages in investment treaty arbitration generally, which is to wipe out the consequences of the unlawful act (or unmeritorious claim). A wronged investor will not be made whole unless it can recover its reasonable costs and a State defending an unmeritorious claim should not be forced to expend significant sums out of the public purse. Secondly, a default “costs follow the event” approach is likely to discourage 98  Notably, ICSID has recently added the issues of security for costs and the allocation of costs to the agenda for consultation ahead of possible amendments to its Rules. The last amendments, which came into effect in 2006, were adopted after a two-year period of analysis and consultation. 99  Baiju S. Vasani & Anastasiya Ugale, Cost allocation in investment arbitration: Back toward diversification, n. 8 (Columbia FDI Perspectives No. 100, July 29, 2013) (citing IBRD, Settlement of Investment Disputes, Consultative Meeting of Legal Experts held on Feb. 17–22, 1964, Summary Record of Proceedings, Report No. Z-9, at 81 (June 1, 1964)).

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frivolous and speculative claims, and may encourage those in a weak position to take a reasonable approach to settlement discussions. Finally, it is much simpler to implement in practice than a “relative success” approach. Of course, any amendment to the ICSID Rules should not remove the tribunal’s discretion entirely. The circumstances of the case may dictate that deviation from “costs follow the event” is necessary. But a default position would go a long way to remedying the current uncertainty for the system’s users, would bring ICSID in line with other major arbitral institutions, and may encourage proper behavior by the parties.

Chapter 16

Post-award Challenges of Damages Assessments Christina L. Beharry At the end of a long process of written and oral submissions, the parties will obtain an award for their efforts. Around half of all cases decided on the merits end in an award against the State.1 When a tribunal upholds a claim, it will award an investor damages except where, for example, the tribunal has found no causation or reasonable certainty regarding the loss. The large sums awarded2 combined with the factual complexity of investment disputes have naturally given rise to conflicts over the damages analysis set out in awards. Parties are increasingly resorting to various mechanisms under the governing arbitration rules to resolve these complaints.3 When successful, these applications can have a dramatic effect on damages awards. * The opinions expressed herein are solely those of the author and do not necessarily reflect the views of Foley Hoag LLP or its clients. 1  According to the International Centre for Settlement of Investment Disputes (“ICSID”), of the cases decided by a tribunal, 46% resulted in an award upholding the claims in full or part, 53% dismissed all claims or declined jurisdiction, and 1% of awards decided that the claims were manifestly without legal merit. ICSID, The ICSID Caseload—Statistics (Issue 2017–2), at 14, 15 (2017), https://icsid.worldbank.org/en/Documents/resources/ICSID%20Web%20 Stats%202017-2%20(English)%20Final.pdf. These statistics generally track an UNCTAD study which found that approximately 36% of all concluded cases were decided in favor of the State (i.e., claims were dismissed on either jurisdictional grounds or on the merits) and about 27% were decided in favor of the investor with monetary compensation being awarded. The remaining cases were discontinued, settled, or resulted in a draw. Of the cases decided on the merits, however, around 59% were decided in favor of the investor whereas 41% were in favor of the State. See UNCTAD, Investor-State Dispute Settlement: Review of Developments in 2016, 1 IIA Issues Note 5 (May 19, 2017), http://unctad.org/en/PublicationsLibrary/ diaepcb2017d1_en.pdf. 2  The financial stakes in international investment cases are not trivial. According to a 2015 PricewaterhouseCoopers survey, most awards range in sums up to $100 million. See PricewaterhouseCoopers, 2015—International arbitration damages research 3, 9 (2015), https://www.pwc.com/sg/en/publications/assets/international-arbitation-damagesresearch-2015.pdf. 3  At ICSID alone, there have been 98 decisions using one of the post-award remedies out of 254 reported awards. See ICSID, Cases—Advanced Search, https://icsid.worldbank.org/en/

© koninklijke brill nv, leiden, 2018 | doi 10.1163/9789004357792_017

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For example, Venezuela succeeded in reducing the damages awarded to Exxon Mobil by US$1.4 billion,4 Ecuador chopped off US$1 billion from the amount awarded to Occidental,5 and Russia obtained a set-aside of the historic US$50 billion Yukos award.6 This Chapter examines the main remedies available to parties under the major arbitration rules for resolving disputes involving damages assessments in investment treaty awards. The Chapter begins in Section 1 by describing the different situations that have given rise to challenges. This is followed in Section 2 with a discussion of the five post-award remedies available under the major arbitration rules—specifically, corrections, interpretation, supplementary decision, revision, and annulment—and evaluates how applications filed pursuant to these procedures have fared in practice.7 Each type of challenge has a distinct purpose and the type of procedure chosen will therefore depend on the nature of the defect. Section 3 proposes measures that parties, tribunals, and arbitral institutions may employ to avoid serious mistakes in the damages analysis. A brief Section 4 concludes. 1

Types of Defects in Damages Awards

It is widely accepted that tribunals have wide discretion in the assessment of damages. It is equally well understood that an award is final.8 This discretion,

Pages/cases/AdvancedSearch.aspx. Notably, this figure excludes cases administered under the Additional Facility Rules that States challenged in set-aside proceedings. 4  Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Revision (June 12, 2015). 5  Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Decision on Annulment of the Award (Nov. 2, 2015). 6  See Hague Dist. Ct., Chamber Com. Affairs, Russian Federation v. Veteran Petroleum Ltd. et al., Case Nos. C/09/477160/ HA ZA 15-1, C/09/477162/ HA ZA 152 and C/09/481619/ HA ZA 15-112 (joined cases), Judgment, Apr. 20, 2016 (Neth.). 7  An award of damages can also be challenged through set-aside proceedings before national courts in non-ICSID Convention cases. The grounds for set-aside of an arbitral award are set out in the national law of the seat of arbitration, which may be based on the UNCITRAL Model Law. Given the domestic legal framework through which these challenges operate, set-aside is outside the purview of this Chapter. 8  I CSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States [hereinafter ICSID Convention], art. 53(1) (2006).

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however, is not without limits.9 Nor is the principle of finality without exception. It is therefore open to both parties to seek the modification, clarification, or nullification of an erroneous or otherwise faulty decision. The availability and suitability of a remedy turns on the type and magnitude of the defect. Parties have challenged awards of damages on various grounds. Although there is some overlap, three broad categories of challenges can be observed with respect to damages in investor-State cases. The first type relates to defects in the scope of the damages award. This kind of challenge arises most commonly in relation to the meaning of “investor,” “investment,” or “claim.” For example, a party may argue that the tribunal awarded compensation to the wrong entity. Alternatively, a party might allege that the investment contract limited the amount of potential damages or, conversely, that the tribunal omitted to award damages in relation to a certain investment or claim. Similarly, one or both parties may contend that the award contains some ambiguity that renders the extent of its obligations unclear. The second type of challenge concerns errors in the calculation of damages. Such errors include computational mistakes, the use of approximations, the misapplication of the valuation methodology, failing to make necessary adjustments, the misinterpretation of financial data, or the adoption of incompatible assumptions. The third group of challenges relates to defects in the process of arriving at the award. Due to its procedural nature, a party will bring this kind of challenge as a request for annulment under Article 52(1) of the ICSID Convention. A party might assert, for instance, that the tribunal did not afford it the opportunity to present its case or to respond to a new argument in the award. Annulment may also be sought where the tribunal allegedly failed to apply the proper law or acted impermissibly ex aequo et bono. Another common ground for annulment is that the tribunal failed to state the reasons for its decision or the reasons provided are contradictory or inadequate. Most international arbitration rules provide a similar set of post-award remedies to deal with deficiencies. The main procedures are corrections, interpretation, and additional or supplementary awards. Each mechanism is intended to address a distinct type of defect: The power to interpret anticipates an interpretative difference arising from the award requiring clarification. The power to correct addresses 9  Archer Daniels Midland Co. & Tate & Lyle Ingredients Am. Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Decision on the Request for Correction, Supplementary Decision and Interpretation, ¶¶ 37, 44 (July 10, 2008).

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‘clerical, arithmetical or similar errors’. The power to supplement addresses the omission to decide ‘any question’ in the Award.10 The ICSID Convention provides two additional remedies: revision and annulment. Revision applies where new facts have emerged after the tribunal has rendered the award that may have led to a different outcome if the tribunal had been aware of it. Annulment focuses on the process of reaching a decision rather than the substance of that decision. If granted, an annulment results in the total or partial revocation of the award. Thus, the procedure chosen will depend not only on the nature of the defect but also the objective of the request. While “[t]he distinction between these … powers is clear at a conceptual level,” as the ADM v. Mexico tribunal recognized, “[p]arties might differ in their perception of the nature of the power required to remedy an alleged defect.”11 Accordingly, there has been a great deal of variation in the ways that parties have framed their requests. For example, not only have parties used different procedures to address analogous deficiencies, some have also submitted multiple requests concurrently using different procedures. As discussed in Section 2, tribunals have been more receptive to certain types of requests and defects than others. 2

Post-award Remedies

International arbitration rules offer different options for dealing with defects in damages awards. Post-award remedies are particularly well-suited to these challenges—one of which explicitly contemplates the correction of arithmetic errors. Apart from differences in their availability, there are also some mechanical differences across arbitration rules. Some challenges are dealt with by the original tribunal while others are heard by a new panel of arbitrators. These remedies are also subject to varying conditions and time limits. They are, however, generally available only for awards but not procedural orders, decisions on jurisdiction, or decisions on provisional measures. Over the last half-century, the steady rise in post-award applications has contributed to the development of a considerable body of case law. These cases show that the decision to modify or reverse an award is not taken lightly. A tribunal or annulment committee will therefore not entertain a disguised 10   Id., ¶ 10. 11   Id., ¶¶ 10–1.

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appeal of an award. But a number of recent decisions show that, when accepted, these remedies can have a profound impact on an award. 2.1 Interpretation An application for an interpretation is a post-award remedy found in most international arbitration rules.12 It provides a formal procedure for an interpretation by the original court or tribunal when a dispute arises between the parties over the meaning or scope of the judgment or award. Decisions on interpretation have been rather limited, particularly on issues relating to damages and valuation. A request for interpretation differs from other post-award remedies in the sense that it does not seek to correct an error or to undo the award. However, an interpretation could be relevant to the quantification of damages by affecting the implementation of the award. The jurisprudence establishes two conditions governing the admissibility of an application for interpretation: “first, there has to be a dispute between the original parties as to the meaning or scope of the award; second, the purpose of the application must be to obtain an interpretation of the award.”13 Although noted in the context of Article 50 of the ICSID Convention, these conditions were derived from decisions of international courts, and are likely also applicable to other institutional rules. 12   See, e.g., Statute of the International Court of Justice, art. 60 (June 26, 1945), 33 U.N.T.S. 993; ICSID Convention, art. 50; ICSID Arbitration (Additional Facility) Rules [hereinafter ICSID Additional Facility Rules], art. 55 (2006); UNCITRAL Arbitration Rules [hereinafter 2010 UNCITRAL Arbitration Rules], art. 37 (2010); ICC Rules of Arbitration [hereinafter ICC Arbitration Rules], art. 36(2) (2017); ICDR International Dispute Resolution Procedures (Including Mediation and Arbitration Rules) [hereinafter ICDR Arbitration Rules], art. 33 (2014); Arbitration Rules of the Singapore International Arbitration Center [hereinafter SIAC Arbitration Rules], rule 33.4 (2016); Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce [hereinafter SCC Arbitration Rules], art. 41 (2010); Dubai International Arbitration Centre Arbitration Rules [hereinafter DIAC Arbitration Rules], art. 38 (2007). 13   Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Application by Wena Hotels Ltd. for Interpretation of the Arbitral Award dated December 8, 2000, at ¶ 76 (Oct. 31, 2005). See also Interpretation of Judgments Nos. 7 and 8 (Chorzów Factory), Judgment, 1927 P.C.I.J. (ser. A) No. 13, at 10 (Dec. 16); Request for Interpretation of the Judgment of November 20, 1950 in the Asylum Case (Colombia v. Peru), Judgment, 1920 I.C.J. 395, 402 (Nov. 27); Application for Revision and Interpretation of the Judgment of February 24, 1982 in Continental Shelf (Tunisia v. Libya), Judgment, 1985 I.C.J. 192, 223 (Dec. 10).

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The first condition requires the existence of a “dispute.” According to the Wena Hotels v. Egypt case, a dispute must be sufficiently concrete to be susceptible to a specific request for interpretation.14 In other words, the dispute must not relate to a general complaint about the award’s lack of clarity. There should instead be a “divergence of views on definite points in relation to the award’s meaning or scope.”15 A dispute therefore presupposes a certain degree of communication between the parties demonstrating a difference of opinion. However, there is no particular formality required for this communication.16 Furthermore, the dispute must relate to the meaning and scope of the operative part of the award.17 That is, the dispute should also have some practical relevance to the award’s implementation. Merely theoretical discussions about the award’s meaning or scope are therefore not sufficient.18 Obligations relating to the execution of the award, such as the payment of monetary compensation, interest, or costs, would seemingly fit within this requirement.19 The second condition concerns the application’s objective. The purpose of the application must be to “clarify points which had been settled with binding force”; but it “must not concern new points which go beyond the limits of the award, or facts arising subsequent to an award….”20 That is, the applicant must not seek a new decision or invoke new arguments.21 Minnotte v. Poland illustrates this point. The claimant had requested an interpretation to determine whether the award followed the “costs follow the event” principle in light of the respondent’s unsuccessful defenses and other circumstances. In rejecting the request, the tribunal explained: the complaint is not that it is unclear what this Tribunal decided: it is that on the basis of the facts in this case the Tribunal could and should have come to a different conclusion, even applying the principles that the Tribunal’s award indicated that it was applying. That is not a request for

14   Wena Hotels v. Egypt, supra note 13, ¶ 81. 15   Id. (citation omitted). 16   C hristoph H. Schreuer et al., The ICSID Convention: A Commentary 867–8 (2nd ed. 2009). 17   Wena Hotels v. Egypt, supra note 13, ¶ 82. 18   S chreuer et al., supra note 16, at 868 (citations omitted). See also Wena Hotels v. Egypt, supra note 13, ¶ 87. 19   See, e.g., Wena Hotels v. Egypt, supra note 13, ¶ 98. 20   S chreuer et al., supra note 16, at 868. See also Wena Hotels v. Egypt, supra note 13, ¶ 129. 21   Marvin Roy Feldman Karpa v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Correction and Interpretation of Award, ¶¶ 10–1 (June 13, 2003).

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interpretation of its decision. It is a request that the Tribunal reconsider and alter its decision.22 Thus, a request for interpretation must only decide a request to clarify the meaning of an award. This is likely why requests must be made to the original tribunal. A peculiar feature of the ICSID system is, however, that if the original tribunal is unavailable, a new tribunal will be constituted.23 In such circumstances, the arbitrators must be careful to ascertain the meaning of the original award, not to rewrite it.24 2.2 Rectification The correction or rectification of an award is the classic post-award remedy for dealing with a quantum error and is available under the major arbitration rules.25 Although an error can be broadly defined,26 this remedy is designed to correct only “clerical,” “computational,” “arithmetic,” “typographical,” or similar errors. However, it does not afford substantive review of the merits or reconsideration of the credence accorded by a tribunal to arguments and evidence.27 Simply put, rectification “in no way consists of a means of appealing

22   David Minnotte & Robert Lewis v. Republic of Poland, ICSID Case No. ARB(AF)/10/1, Decision on the Request for Interpretation of the Award, ¶ 12 (Oct. 22, 2014). 23  ICSID Convention, art. 50(2). 24  Aron Broches, Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965, Explanatory Notes and Survey of its Application, 18 Y.B. Com. Arb. 627, 684–5 (1993). 25   See, e.g., ICSID Convention, art. 49(2); ICSID Additional Facility Rules, art. 56(1); 2010 UNCITRAL Arbitration Rules, art. 38; ICC Arbitration Rules, art. 36; LCIA Arbitration Rules, art. 27.1; SIAC Arbitration Rules, rule 33.1; ICDR Arbitration Rules, art. 33.1; SCC Arbitration Rules, art. 41(1); China International Economic and Trade Arbitration Commission Arbitration Rules [hereinafter CIETAC Arbitration Rules], art. 53 (2015); DIAC Arbitration Rules, art. 38.2. 26  An “error” is defined as: “An assertion or belief that does not conform to objective reality; a belief that what is false is true or that what is true is false.” See Black’s Law Dictionary 621 (9th ed. 2009). 27   S chreuer et al., supra note 16, at 849–50. See also Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Decision Regarding the Claimant’s and Respondent’s Requests for Corrections, ¶ 37 (Dec. 15, 2014); Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision of the Ad Hoc Committee on the Request for Supplementation and Rectification of Its Decision on Annulment, ¶ 25 (May 28, 2003).

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or otherwise revising the merits of the decision”28 but rather it allows the tribunal to correct mistakes that may have occurred in the drafting process. While there is some variation across arbitral rules, a request to correct an award follows the same general pattern: the moving party usually sends the request to the registrar and the other party. The request sets out exactly what points the party wishes to have corrected. The other party is normally afforded an opportunity to respond. Once an error is established, it is generally mandatory29 to make the correction and the decision on rectification will form part of the award. Cases decided under the ICSID Convention suggest that rectification is only available if two conditions are met: First, a clerical, arithmetical or similar error in an award or decision must be found to exist. Second, the requested rectification must concern an aspect of the impugned award or decision that is purely accessory to its merits.30 This test underscores the ancillary nature of the errors that are subject to a request for rectification. The reason for only correcting obvious mistakes is “to ensure that the true intentions of the tribunal are given effect in the award, but not to alter those intentions, amend the legal analysis, modify reasoning or alter findings.”31 This approach is said to support the objective of finality by “avoid[ing] … continuous debate about the correctness, completeness and meaning of the award with resultant delay, uncertainty and cost.”32 Accordingly, corrections have been limited to relatively perfunctory matters that the non-moving party is unlikely to oppose.33 For example, parties have successfully sought rectification to:

28   Aguas v. Argentina, supra note 27, ¶ 11. 29   S chreuer et al., supra note 16, at 853. In contrast to the mandatory language in Article 49(2) of the Convention, the correction of awards is stated in less prescriptive language under Article 56(1) of the ICSID Additional Facility Rules. 30   Aguas v. Argentina, supra note 27, ¶ 25. 31   Gold Reserve v. Venezuela, supra note 27, ¶ 38 (citation omitted). 32   Id., ¶ 36. 33   Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Ecuador’s Motion for Reconsideration, ¶ 65 (Apr. 10, 2015).

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the name of counsel34 or fix an incorrect reference to a lawyer’s · Include affiliation;35 the designation of an individual from counsel to expert36 or fix the · Change misidentification of a witness;37 Correct the payee in the dispositif of an award;38 · Rectify inaccurate characterization of a party’s legal position;39 · Correctthe the place of arbitration;40 and · Amend an award payments made by a party to the institutional · arbitration body41 toor reflect to counsel.42 In relation to damages and quantum issues, parties have sought rectification for: (1) computational errors, (2) methodological errors, (3) the misinterpretation of the evidence, and (4) the misapplication of the legal standard. As discussed below, tribunals have—with the exception of arithmetic errors— largely resisted attempts to correct alleged errors in the damages analyses or quantum calculations.

34   Noble Ventures Inc. v. Romania, ICSID Case No. ARB/01/11, Rectification of Award (May 19, 2006); Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Rectification of the Decision of the Ad Hoc Committee on the Application for Annulment of Mr. Soufraki (Aug. 13, 2007). 35   Industria Nacional de Alimentos, S.A. & Indalsa Perú, S.A. ( formerly Empresas Lucchetti, S.A. & Lucchetti Perú, S.A.) v. Republic of Peru, ICSID Case No. ARB/03/4, Decision on the Rectification of the Decision on Annulment of the Ad Hoc Committee (Nov. 30, 2007). 36   Philip Morris Brands Sàrl et al. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Decision on Rectification (Sept. 26, 2016). 37   Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Rectification of Award, ¶ 8 (June 8, 2000). 38   Archer Daniels v. Mexico, supra note 9, ¶ 23. See also Feldman v. Mexico, supra note 21, ¶¶ 12–4. 39   Emilio Agustín Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Rectification of the Award, ¶¶ 8–12, 21(1) (Jan. 31, 2001). 40  The tribunal in Howard v. Canada corrected its termination order to reflect the fact that there was no agreement between the parties on the place of arbitration and to substitute “The Hague, the Netherlands” with “Toronto, Canada.” Melvin J. Howard et al. v. Gov’t of Canada, PCA Case No. 2009-21, Correction of Order for the Termination of the Proceedings and Award on Costs (Aug. 9, 2010). 41   See Guaracachi Am., Inc. & Rurelec PLC v. Plurinational State of Bolivia, PCA Case No. 2011– 17, Letter from Tribunal to the Parties on Correction of the Award (Mar. 3, 2014). 42   Liberian Eastern Timber Corp. v. Republic of Liberia, ICSID Case No. ARB/83/2, Decision on Rectification (June 10, 1986), 2 ICSID Rep. 380 (1993).

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2.2.1 Arithmetic Errors Applying for rectification in relation to an outright mathematical error in the computation of damages is generally uncontentious. This kind of error may occur, for example, when a tribunal has incorrectly transcribed a value in a mathematical equation or a technical problem occurs in the application of the methodology. Railroad Development v. Guatemala illustrates this kind of error. The claimant pointed out two arithmetical mistakes in the tribunal’s calculations. One mistake related to the tribunal’s miscalculation of the net present value (“NPV”) of rental income generated from leased land. The tribunal agreed that it had made an error and recalculated the NPV using the discount rate set out in the award.43 The tribunal dismissed the other alleged error—concerning the tribunal’s failure to discount income received post-Lesivo (i.e., the impugned measure) at the same rate—as an improper ex post attempt to alter the “unfavorable mathematical implications” of its pleadings.44 Similarly, in ICC Case No. 11786, the tribunal corrected a partial award on the basis that the Excel spreadsheet used to compute damages did not properly implement the method described in the reasoning of the award.45 Tribunals are likely to correct errors of this nature because they are obviously wrong.46 2.2.2 Methodological Errors Tribunals have been less amenable to grant requests based on implementation errors. This kind of error can happen in different ways. For example, a tribunal may have used inputs that are incompatible with other assumptions, it may have misunderstood the significance of certain factual information on damages, or it may have misapplied the stated methodology. 43   Railroad Dev. Corp. v. Republic of Guatemala, ICSID Case No. ARB/07/23, Decision on Claimant’s Request for Supplementation and Rectification of Award, ¶ 43 (Jan. 18, 2013). 44   Id., ¶ 47. 45   Tobias Zuberbühler et al. eds., Swiss Rules of International Arbitration: Commentary 310 (2005). 46  The İçkale case provides an unusual example where a calculation error was not corrected. The tribunal denied a request to adjust calculations in the award that were made to determine whether Turkmenistan’s Supreme Court Directive had an expropriatory effect. As such, the calculations were “qualitative determinations” and were not intended to provide a precise quantification of the assets. The tribunal never reached this point because it concluded that the claimant had failed to prove the Directive was excessive and expropriatory. See İçkale İnşaat Ltd. Şirketi v. Turkmenistan, ICSID Case No. ARB/10/24, Decision on Claimant’s Request for Supplementary Decision and Rectification of the Award, ¶¶ 121–3 (Oct. 4, 2016).

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The Gold Reserve v. Venezuela case provides a good example of an unsuccessful implementation error. Venezuela argued that the tribunal erred in using rough approximations to estimate the effects of its adjustments on the value of the Brisas mining project using the claimant’s expert’s discounted cash flow (“DCF”) method. The respondent argued that the difference between the rough approximation approach and the precise results calculated by re-running the DCF model was well over US$100 million. The tribunal rejected the request, noting its understanding that this approach would not yield a “precise figure” so it could not be considered an error.47 This outcome is perhaps regrettable given that any miscalculation could have been avoided or subsequently corrected if the experts had been asked to re-run the model. Similarly, Tenaris v. Venezuela involved a request to rectify the quantum of damages. There, the tribunal awarded damages based on Talta’s share of the purchase price of the Matesi plant and the portion of the Talta loan which Matesi had not yet repaid.48 Venezuela argued that the tribunal erred by not reducing the enterprise value by the amount of the company’s existing debts. The claimants objected, arguing, inter alia, that the respondent was seeking to change the methodology from an equity-based to an asset-based valuation. In rejecting the request, the tribunal stated that: “it is both the methodology itself and the computations that flow from it, which are called into question, rather than a mere clerical or arithmetical error arising out of its application.”49 2.2.3 Misinterpretation of Quantum Evidence Another situation that has given rise to quantum-related rectification requests concerns the alleged misinterpretation of quantum evidence. In Gold Reserve v. Venezuela, the respondent argued that the tribunal had relied on the flawed analysis of the country risk premium contained in a market analyst report used by the claimant’s expert.50 The issue was whether the claimant’s expert had made a “simple transcription error” in adopting a 4% premium rather than 47   Gold Reserve v. Venezuela, supra note 27, ¶¶ 52, 56. To support its approach, the tribunal relied on an extemporaneous statement made by the respondent’s expert at the hearing in response to a tribunal question. While recognizing that it was “a little complicated,” the expert explained that “the Tribunal could do a ‘back-of-the-envelope calculation and probably come up with a reasonable adjustment factor without having to actually rewind the model.” See also Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, ¶ 842 (Sept. 22, 2014). 48   Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26, Decision on Rectification, ¶¶ 11–2 (June 24, 2016). 49   Id., ¶ 109. 50   Gold Reserve v. Venezuela, supra note 27, ¶¶ 49–50.

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the 5% premium that respondent asserted was assumed in the report. The tribunal accepted the claimant’s explanation that it had not made an arithmetical error because it would have been incorrect to add 3.2% (i.e., country risk premium for Venezuela) to the US country premium of 1.8% as the latter had already been taken into account in the calculation. “To do so again would be double counting,” in the tribunal’s view. In this case, there were two plausible ways to interpret the analyst report. If there was no alternative interpretation, the result may have been very different. Thus, short of an irrefutable error, tribunals are unlikely to grant a rectification request if a colorable argument can be made in support of the original decision based on competing interpretations of the quantum evidence. 2.2.4 Misapplication of Legal Standard Challenges regarding the misapplication of the applicable legal standard are rarely observed in practice. Indeed, it is difficult to conceive of a scenario where such a request would not be tantamount to challenging the merits of an award. The British Caribbean Bank v. Belize case illustrates this difficulty. The respondent asked the tribunal to correct the computation of fair and equitable treatment damages in the award and to grant no compensation. In the alternative, it requested the tribunal to adjudicate the claims using the standard of compensation under the Treaty (i.e., fair market value) instead of the Chorzów Factory case.51 The tribunal denied the request. It reasoned that Article 36 of the UNCITRAL Arbitration Rules “applies only to the correction of unintentional errors of a technical nature and does not extend to the revision of the reasoning or substance of a tribunal’s award.”52 Because its “decision to apply the Factory at Chorzów standard to the calculation of damages” formed part of the reasoning of the award, the tribunal concluded it was “not eligible for correction.”53 The existence of an error requires a case-by-case analysis. In practice, tribunals are generally reluctant to accept a request to correct errors apart from an obvious computational error. While attempts to appeal or re-open issues are clearly impermissible, it is incumbent on tribunals to ensure that genuine errors affecting the calculation of damages are fixed. Ensuring the accuracy of a 51   British Caribbean Bank Ltd. v. Gov’t of Belize, PCA Case No. 2010-18, Decision on the Respondent’s Motion Pursuant to 1976 UNCITRAL Arbitration Rules, Articles 36 and 37, ¶ (E) (Mar. 7, 2015). 52   Id., ¶ (T). 53   Id., ¶ (U).

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damages award is essential to the integrity of the arbitral system, particularly when scarce public resources are involved. 2.3 Supplementary Decision A request for a supplementary decision or additional award arises when the tribunal has omitted to decide a claim or question presented in the proceedings. Like corrections, this remedy is available under most arbitral rules, although there are some differences in their availability, conditions, and procedures.54 For example, this remedy must be granted if the request is considered justified under some rules, but it is discretionary under other rules.55 Cases decided under Article 49(2) of the ICSID Convention make up the majority of publicly available decisions on this remedy and will be the focus of this section.56 A request for a supplementary decision is reserved for “unintentional omissions of a technical nature.”57 As with interpretation and rectification, supplementation cannot be used to appeal or modify an existing decision.58 Nor does this remedy empower a tribunal to supplement the reasons for its decision. It also logically follows that a tribunal cannot decide an issue that a party did not submit to it.59 Thus, the power of supplementation does not permit a tribunal “to consider new evidence, to hear new arguments, to rehear an issue, or to modify or supplement its original reasoning.”60

54   See, e.g., ICSID Convention, art. 49(2); ICSID Additional Facility Rules, art. 57(1); 2010 UNCITRAL Arbitration Rules, art. 39; LCIA Arbitration Rules, art. 27.3; SIAC Arbitration Rules, rule 33.3; ICDR Arbitration Rules, art. 33.1; SCC Arbitration Rules, art. 42; CIETAC Arbitration Rules, art. 54; DIAC Arbitration Rules, art. 38.4. 55  For example, a tribunal must make an additional award if the request is considered justified under Article 39(2) of the 2010 UNCITRAL Arbitration Rules, Article 27.3 of the LCIA Arbitration Rules, Rule 33.3 of the SIAC Arbitration Rules, Article 42 of the SCC Arbitration Rules, and Article 38.4 of the DIAC Arbitration Rules. However, a supplementary decision is discretionary (unlike rectification) under Article 49(2) of the ICSID Convention. 56   See infra Section 2.5.3, for a discussion regarding the relationship between Article 49(2) on supplementation, Article 48(3) requiring a tribunal to deal with every question submitted to it and to state the reasons on which it is based, and Article 52(1)(i) providing for annulment due to a failure to state reasons. 57   S chreuer et al., supra note 16, at 864. 58   Aguas v. Argentina, supra note 27, ¶ 11. 59   Victor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Decision on the Republic of Chile’s Request for Supplementation of the Annulment Decision, ¶ 56 (Sept. 11, 2013). 60   Archer Daniels v. Mexico, supra note 9, ¶ 12.

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Unlike other arbitration rules, which provide for an additional award for any “claim” (as well as sometimes counterclaims61), Article 49(2) of the ICSID Convention refers to “any question which [the tribunal] had omitted to decide in the award….”62 Although the term is not defined in the Convention, a “question” is generally interpreted to mean “an issue in controversy” or a “matter to be determined.”63 As Schreuer explains: Supplementation … will be useful where the omission is due to an oversight on the part of the tribunal which is likely to be corrected by it once this oversight is pointed out. This oversight should however concern a “question” before the tribunal; that is, an issue that affects the award and is of sufficient importance to justify the procedure leading to a supplemental decision. Typical examples would be the inadvertent omission of an item in the calculation of damages or of a factor determining costs.64 Requests for supplementation have been unsuccessful where the tribunal determined that it had already decided the question. In LG&E v. Argentina, for example, the claimants requested a supplementary decision concerning damages sustained after the cut-off date for calculating accrued losses. The tribunal denied this request, finding that it had dealt with these arguments at length in the award. It also declined to hear further evidence of the respondent’s obligations after this date stating that: “[t]he supplementation process is not a mechanism by which parties can continue proceedings on the merits or seek a remedy that calls into question the validity of the Tribunal’s decision.”65 A challenge will also fail where it amounts to an attempt to amend a party’s argument. In the İçkale v. Turkmenistan case, for example, the claimant sought a supplementary decision on the basis that the award neglected to take into account five seawater pumps and a significant amount of cement that was allegedly confiscated by authorities in Turkmenistan. The tribunal denied the 61   See, e.g., LCIA Arbitration Rules, art. 27.3; CIETAC Arbitration Rules, art. 54.2; DIAC Arbitration Rules, art. 38.4. 62  ICSID Convention, art. 49(2). 63   B lack’s Law Dictionary, supra note 26, at 1365–6. See also Perenco v. Ecuador, supra note 33, ¶ 58. 64   S chreuer et al., supra note 16, at 853. 65   LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Claimant’s Request for Supplementary Decision, ¶ 16 (July 8, 2008). See also Archer Daniels v. Mexico, supra note 9, ¶¶ 25–30 (finding the investors’ application essentially sought a reversal of the tribunal’s determination that they were not entitled to recover lost profits on U.S.-origin high fructose corn syrup distributed through their Mexican facilities.).

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request, finding that “the claims … were not presented on the basis of these having been expropriated by the Supreme Court Directive; the Parties did not address the claims as such and accordingly the Tribunal did not omit deciding the issue.”66 Although the claimant had included the pumps and cement in a separate “cost claim,” the tribunal was unable to agree that this was merely a matter of presentation. Instead, the tribunal concluded that this reflected the distinction between İçkale’s assets and materials (i.e., consumables) that would have been incorporated in the project. Another set of cases involving the application of post-award interest illustrates the importance of ensuring a question is properly before the tribunal. For instance, in Enron v. Argentina, having found that the claimant did not specify whether interest should be ordered until the date of payment of the award in its oral and written submissions, the tribunal concluded that “there was no claim, either express or implied … for post-award interest, and hence none could be awarded.”67 As the tribunal noted: “this cannot be done if not requested, as this would amount to an excess of power which, as the Respondent explains, can result in a decision that is ultra petita and thus subject to the sanction of an annulment.”68 By contrast, El Salvador was awarded post-award interest on costs granted to it in the Pac Rim case. Acknowledging that the request had been made throughout the proceedings, the tribunal stated that it “somehow … inadvertently overlooked this claim….”69 The tribunal corrected the omission, noting that “[t]here was no deliberate intent by the Tribunal not to decide such a claim or to decide it, sub silentio, adversely to the Respondent in the Award.”70 In sum, a supplementary decision can be helpful where a key matter is left unresolved in the award. To avoid this situation, a tribunal may request the parties to summarize the questions to be decided prior to the close of the proceedings. These questions could then be used as a checklist against the issues covered in the award.

66   İçkale v. Turkmenistan, supra note 46, ¶ 107. 67   Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on Claimants’ Request for Rectification and/ or Supplementary Decision of the Award, ¶¶ 33–9, 56 (Oct. 25, 2007). See also Pey Casado v. Chile, supra note 59. 68   Enron v. Argentina, supra note 67, ¶ 42. 69   Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Request for a Supplementary Decision, ¶ 1.16 (Mar. 28, 2017). 70   Id., ¶ 1.18.

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2.4 Revision Revision is a relatively uncommon remedy as it rarely features in international arbitration rules. Two notable examples of revision provisions are Article 61 of the Statute of the International Court of Justice and Article 51 of the ICSID Convention. Despite its absence in other instruments, it can be argued that international tribunals possess inherent powers to reopen proceedings in order to revise awards.71 The remedy—which applies where new and decisive facts have subsequently emerged after the award—is subject to five conditions.72 First, the new element must be one of fact, not law.73 Second, the new fact must be decisive in the sense that it could have led to a different decision if the tribunal had been aware of it.74 Examples of decisive facts include “a finding that a party had not committed an illegal act for which it is held responsible … [and] [f]acts that affect the calculation of damages….”75 Third, the fact must have existed at the time of the award and must have been unknown to the tribunal and the party applying for revision. Fourth, the applicant’s ignorance of the newly discovered fact must not be due to its negligent preparation or presentation of the case. Fifth, the application must be brought within the time period prescribed under the applicable rules.76 Two revision cases filed under the ICSID Convention illustrate the application of these conditions. Both cases involved unsuccessful attempts to revise the tribunals’ damages calculations. In the first case, Tidewater v. Venezuela, the State sought revision of an award that determined that Tidewater was entitled to compensation for the expropriation of its oil services business in 71   S chreuer et al., supra note 16, at 879. 72   Venezuela Holdings v. Venezuela, supra note 4, ¶ 3.1.3. See also Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on the Application for Revision, ¶ 25 (July 7, 2015). 73   Application for Revision of the Judgment of 11 July 1996 in Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia & Herzegovina v. Yugoslavia) (Yugoslavia v. Bosnia & Herzegovina) (Preliminary Objections), 2003 I.C.J. Rep. 7 (Feb. 3). 74   Application for Revision of the Judgment of 11 September 1992 in Land, Island and Maritime Frontier Delimitation (El Salvador/Honduras, Nicaragua intervening) (El Salvador v. Honduras), 2003 I.C.J. Rep. 392 (Dec. 18). 75   S chreuer et al., supra note 16, at 883. 76   See, e.g., Article 51(2) of the ICSID Convention which stipulates that an application must be brought within 90 days of discovery of the new fact and no later than three years after the award was rendered. Similarly, Articles 61(4) and (5) of the ICJ Statute require an application to be made within six months of discovering the new fact and no later than ten years from the date of the judgment.

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the amount of US$46.4 million.77 Venezuela argued that the tribunal had miscalculated damages by using a figure that was incorrectly transcribed from a document submitted by the claimant’s valuation expert. It submitted that this constituted the discovery of facts that were of such a nature as to decisively affect the amount of compensation that the tribunal would have awarded. Venezuela argued that it was not appropriate to bring an application for rectification because the “error ‘require[d] review and analysis by the Tribunal’ and ‘[could not] easily be corrected without a substantive review by the Tribunal.’”78 The tribunal, however, concluded that such an error could not constitute a new fact nor was it discovered since the award was rendered because this fact was contained in a document in the record and “the Tribunal … must be taken to be aware of every fact established by the material before [it].”79 Therefore, the first element of the test had not been met and the application was dismissed. But even if (for the sake of argument) it could be considered a new fact, it would not have decisively affected the award because the tribunal had taken its own approach in determining quantum.80 The second case also involved a request for revision by the respondent in Venezuela Holdings v. Venezuela.81 The application stemmed from an ex parte order and judgment the claimants had obtained from a U.S. federal court for the full amount of the award. Venezuela argued that the claimants had failed to mention before the court that recovery should be reduced by the full amount paid in satisfaction of a parallel ICC arbitration, which showed that the claimants had no intention of honoring their representations made before the award to avoid double recovery. Had those facts been known, they would have decisively affected the relief granted in the award. The tribunal held that these “intentions and strategy” did not constitute events that could be considered “facts” within the meaning of Article 51(1).82 Moreover, the tribunal held that the application was inadmissible because the facts relied on arose after the award was rendered and had no connection to pre-award facts. While revision offers a potentially robust tool for altering quantum, parties have not taken advantage of it as much in practice. This may be explained in part by the conditions that must be met before this remedy can be applied. It is also likely that tribunals are reluctant to grant this relief absent exceptional 77   Tidewater v. Venezuela, supra note 72. 78   Id., ¶ 31. 79   Id., ¶¶ 27–39. 80   Id., ¶¶ 59–63. 81   Venezuela Holdings v. Venezuela, supra note 4. 82   Id., ¶¶ 3.1.21–3.1.23.

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circumstances to avoid interfering with the principle of res judicata and the objective of finality, both of which are sacrosanct in international arbitration. 2.5 Annulment The final procedure that will be discussed is annulment. This procedure, which only applies to arbitrations conducted under the ICSID Convention, is governed by Articles 50, 52 and 55 of the Convention and Rules 50 and 52–55 of the ICSID Arbitration Rules. Annulment is an exceptional remedy designed to correct egregious procedural errors in the decision process,83 as distinguished from an appeal. Put simply, annulment is not concerned with the substance of an award but rather with the process by which a tribunal reached its decision.84 A party can apply for annulment before an ad hoc committee within 120 days from the date on which the award was rendered.85 Article 52(1) sets out the five grounds of review: Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) (b) (c) (d)

that the Tribunal was not properly constituted; that the Tribunal has manifestly exceeded its powers; that there was corruption on the part of a member of the Tribunal; that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based.86 The annulment process provides a limited exception to the principle of finality by permitting an ad hoc committee to fully or partially annul an award on these grounds. However, a committee must not rule on a tribunal’s finding of

83  Veijo Heiskanen & Laura Halonen, Post-Award Remedies, in Litigating International Investment Disputes: A Practitioner’s Guide 497 (Chiara Giorgetti ed., 2014). 84   Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Decision of the Ad Hoc Committee on the Application for Annulment of Mr. Soufraki, ¶ 20 (June 5, 2007). 85  An exception is made in cases of corruption. Under Article 52(2) of the ICSID Convention, an “application shall be made within 120 days after discovery of the corruption and in any event within three years after the date on which the award was rendered.” 86  ICSID Convention, art. 52(1).

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fact or law, which is the task of a new tribunal if either party re-submits the dispute. According to a recent study, annulment proceedings have been instituted in nearly 40% of cases87 and have been initiated slightly more often by States. Of note, more annulment applications have been registered since 2001 than in prior years.88 This surge in annulment applications is partly a reflection of the higher number of awards issued in the last 15 years.89 Despite its recent popularity, ad hoc committees have accepted annulment requests (in whole or part) in only 17% of these cases.90 The increase in annulment applications has generated a considerable body of jurisprudence. This section will focus on the grounds most relevant to damages and quantum: (1) a manifest excess of power, (2) a serious departure from a fundamental rule of procedure, and (3) a failure to state reasons. 2.5.1 Manifest Excess of Powers For a party to bring an application under Article 52(1)(b), it must meet two conditions: (1) there must be an excess of powers, and (2) that excess must be manifest. An excess of powers can occur in two ways. One involves the original tribunal going beyond the scope of the parties’ agreement by deciding points that were not submitted to it or, conversely, where it failed to exercise jurisdiction conferred on it.91 Second, an excess of powers can occur where the tribunal failed to apply the law agreed by the parties. The excess of power must also be “manifest.” This requirement has been interpreted as being either facially obvious92 or so severe as to be capable of 87  As of 2016, annulments have been sought in 87 cases (or 90 proceedings given that annulments were sought a second time in three cases) out of 228 awards rendered (i.e., 38% of cases). See ICSID, Updated Background Paper on Annulment for the Administrative Council of ICSID 10 (May 5, 2016), https://icsid.worldbank.org/en/Documents/resources/ Background%20Paper%20on%20Annulment%20April%202016%20ENG.pdf. 88   Id., at 10–1. 89   See id., at 11. 90   Id., at 24. Only 2% of all ICSID awards have led to a full annulment and 4% have led to a partial annulment. See id., at 63. 91   Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on Annulment, ¶ 86 (July 3, 2002). 92   Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Application by the Arab Republic of Egypt for Annulment of the Arbitral Award dated December 8, 2000, at ¶ 25 (Feb. 5, 2002), 41 I.L.M. 933; CDC Group plc v. Republic of Seychelles, ICSID Case No. ARB/02/14, Decision of the Ad Hoc Committee on the

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affecting the outcome of the case.93 In reality, the distinction may be artificial given that a manifest excess of power likely implies that it is both obvious and serious. Annulment requests relating to damages analyses and calculations have been framed as both a manifest excess of powers in the exercise of its jurisdiction and application of law. With respect to jurisdiction, a tribunal exceeds its power where it incorrectly concludes it has jurisdiction, goes beyond the scope of its jurisdiction, or rejects its jurisdiction. A damages award may be attacked indirectly by arguing that the tribunal lacked jurisdiction over the dispute, a party, or the alleged investment. In Klöckner v. Cameroon, for example, the investor questioned the tribunal’s competence to hear the respondent’s counterclaim because it lacked jurisdiction over disputes arising under the Management Contract.94 The source for the tribunal’s jurisdiction was the Protocol of Agreement whereas the Management Contract, which set out technical and commercial obligations, only provided for ICC arbitration. The ad hoc committee disagreed, concluding that the tribunal’s interpretation that the parties did not derogate from the Protocol’s ICSID arbitration clause in the absence of “completely precise and unequivocal contractual provisions” was tenable and not arbitrary.95 Such cases of doubt or uncertainty should, the Committee stated, “be resolved ‘in favorem validitatis sententiae’….”96 Similarly, in the CMS v. Argentina case, Argentina argued that the tribunal exceeded its powers by exercising jurisdiction over claims brought by a company’s shareholder for income lost by the company. The committee, however, determined that CMS qualified as an investor having made a qualifying investment.97 Application for Annulment, ¶¶ 41–2 (June 29, 2005); Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on the Application for Annulment of the Argentine Republic, ¶ 68 (Sept. 1, 2009). 93   Soufraki v. United Arab Emirates, supra note 84, ¶ 40. See also Libananco Holdings Co. Ltd. v. Republic of Turkey, ICSID Case No. ARB/06/8, Decision on Annulment (excerpts), ¶ 102 (May 22, 2013); Malicorp Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/08/18, Decision on Annulment, ¶¶ 53–4 (July 3, 2013). 94   Klöckner Industrie-Anlagen GmbH et al. v. United Republic of Cameroon & Société Came­ rounaise des Engrais, ICSID Case No. ARB/81/2, Decision on Annulment (May 3, 1985). 95   Id., ¶ 52(b). 96   Id., ¶ 52(e). 97   C MS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic, ¶¶ 74–5 (Sept. 25, 2007).

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More recently, the ad hoc committee in Occidental Petroleum presided over a claim regarding the tribunal’s exercise of jurisdiction over an investment.98 Building on Professor Stern’s dissent, Ecuador argued that the tribunal manifestly exceeded its powers by assuming jurisdiction over the 40% interest in the investment that had been transferred in violation of the Participation Agreement to a third company, Alberta Energy Corp. (“AES”) (and later to the Chinese company, Andes), and awarding compensation to OPEC for 100% of the value of the oil field known as Block 15. The committee upheld the complaint, finding that the tribunal lacked jurisdiction under the BIT and Participation Agreement over AES and Andes.99 In so doing, the committee wiped out US$700 million of the original US$1.76 million award. Parties have also sought annulment of damages awards based on a tribunal’s failure to apply the proper law or by acting ex aequo et bono. Conversely, an erroneous application of the law will not generally amount to an annullable error.100 In analyzing an alleged erroneous application of the proper law, the following three-part test may be applied: (1) What law was applicable to the given issue under Article 42(1) of the Convention?, (2) What law did the tribunal purport to apply?, and (3) Was there any basis for concluding that the tribunal’s decision involved a manifest failure to apply the applicable law?101 Although simple on its face, the application of this test has proved more challenging in practice. Tribunals have shown varying degrees of deference towards arbitral awards. Amco I exemplifies one end of the spectrum. There, Indonesia argued that the tribunal had failed to apply domestic law, which was the applicable law under Article 42(1), when it calculated the shortfall in the amount Amco was required to invest.102 The committee agreed, concluding that the tribunal’s calculation was faulty because only amounts recognized and registered by the competent Indonesian authority were investments within the meaning of the Foreign Investment Law. Because the committee did not consider itself competent 98   Occidental v. Ecuador, supra note 5. 99   Id., ¶ 255. 100   Cf. Soufraki v. United Arab Emirates, supra note 84, ¶ 86 (“Misinterpretation or misapplication of the proper law may, in particular cases, be so gross or egregious as substantially to amount to failure to apply the proper law.”). See also Schreuer et al., supra note 16, at 965. 101  M TD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment, ¶ 59 (Mar. 21, 2007). 102   Amco Asia Corp. et al. v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on the Application for Annulment (May 16, 1986), 1 ICSID Rep. 509 (1993).

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to recalculate the amount of damages, it annulled the entire decision. The decision has been criticized for involving an erroneous application of the law rather than the non-application of the applicable law. According to some commentators, this decision (along with other early cases) “sparked concerns that the ad hoc panels were actually reviewing the merits of the case and ignoring the fundamental principle of finality.”103 Ad hoc committees have shifted to the other end of the spectrum in the ensuing generation of annulment cases. For example, in Wena Hotels v. Egypt, the State argued that by awarding interest at 9% compounded quarterly, the tribunal neglected to apply provisions of the Egyptian Civil Code that would have limited the award of interest. The Committee held that there was no manifest excess of powers in selecting the legal rule to apply on interest. It concluded that the tribunal had correctly identified the sources of applicable legal norms and was entitled to refer to international law as a matter of its discretion,104 including in the event of an inconsistency between Egyptian law and international standards. However, the recent Venezuela Holdings case shows some signs that this deferential approach may be easing. Venezuela challenged inter alia the tribunal’s approach for assessing compensation in relation to the expropriation of the Cerro Negro project. The parties did not dispute that the project had been expropriated nor the obligation to pay compensation. Rather, Venezuela argued that the tribunal erred in failing to apply the Price Cap in the contract that governed the amount of compensation to be granted for an adverse governmental action. The tribunal nonetheless held that the Price Cap was only applicable to the Venezuelan State entity Lagoven CN and that the State could not use its internal laws as a justification for failing to perform its obligations under a treaty. However, the committee determined that there was no ex post facto attempt to override an established international obligation because the conditions for approval of the project had been laid down in advance based on terms negotiated with the investor.105 Significantly, the committee held that the applicability of the Price Cap as a matter of contract law was separate from its relevance for the assessment of compensation.106 The tribunal erred in failing to appreciate that the 103   C hristopher F. Dugan et al., Investor-State Arbitration 632 (2008). 104   Wena Hotels v. Egypt, supra note 92, ¶ 53. See also Azurix v. Argentina, supra note 92, ¶¶ 317–9. 105   Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Annulment, ¶ 161 (Mar. 9, 2017). 106   Id., ¶ 166.

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investment, as an item of property, must be ascertained in accordance with national law before any assessment of its value could be made.107 Consequently, the committee found that the tribunal had manifestly exceeded its powers to the extent that it held that customary international law regulated the determination and assessment of compensation due to the Mobil parties.108 The committee, however, emphasized that it was not determining the impact of the Price Cap on compensation, but rather its decision was only directed at the process of arriving at compensation. This conclusion had a dramatic effect on the damages award by effectively nixing US$1.4 billion of compensation.109 As these cases demonstrate, Article 52(1)(b) affords ad hoc panels a great deal of latitude that can significantly affect damages’ conclusions by altering the contours of a tribunal’s jurisdiction. In light of the Venezuela Holdings case, it is likely that parties will continue to avail themselves of this potentially potent remedy. 2.5.2 Serious Departure from a Fundamental Rule of Procedure An annulment request may be brought under Article 52(1)(d) where the tribunal has seriously departed from a fundamental rule of procedure. There are three requirements to establish this ground: (i) the procedural rule must be fundamental, (ii) the tribunal must have departed from it, and (iii) the departure from the rule must be serious.110 First, a procedural rule is fundamental if it is essential to the integrity of the arbitral process. Put differently, rules of fundamental procedure encompass principles of natural justice rather than ordinary arbitration rules.111 Examples of fundamental rules include the fair and equal treatment of parties,112 the right to be heard,113 the right to an independent and impartial tribunal,114 the right to state a claim or defense,115 the right to produce all arguments and 107   Id., ¶ 168. 108   Id., ¶ 188(a). 109  The Committee, however, stated that it was “up to the Parties to take the necessary steps thereafter to put the resulting situation into practical effect.” See id., ¶ 191. 110   Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Decision on the Application for Annulment of the Republic of Chile, ¶ 72 (Dec. 18, 2012). 111   Wena Hotels v. Egypt, supra note 92, ¶ 57 (stating “[t]he said provision refers to a set of minimal standards of procedure to be respected as a matter of international law.”). 112   Pey Casado v. Chile, supra note 110, ¶ 73. 113   Aguas v. Argentina, supra note 91, ¶ 85. 114   Klöckner v. Cameroon, supra note 94, ¶ 95. 115   Wena Hotels v. Egypt, supra note 92, ¶¶ 56–7.

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evidence,116 the proper treatment of evidence and allocation of the burden of proof,117 and secrecy of the deliberations among tribunal members.118 The second requirement concerning the tribunal’s departure from a fundamental procedural rule is a factual issue. Such determinations are made on a case-by-case basis, requiring the committee to examine the full record.119 As to the third requirement, there are different interpretations regarding the seriousness of the departure. Some tribunals have focused on the nature of the deprivation. According to this view, articulated in MINE v. Guinea, “the departure must be substantial and be such as to deprive a party of the benefit or protection which the rule was intended to provide.”120 Other ad hoc panels have required the departure to have a material impact on the outcome of the award for the annulment to succeed.121 Challenges to the damages analysis under Article 52(1)(d) are often raised as a violation of the right to be heard. One of the earliest cases to consider this argument was Klöckner I where the claimant complained that the tribunal “bas[ed] its decision on arguments not advanced or at the very least not developed by either of the parties or at any rate not discussed by the parties.”122 The committee denied the request, holding that a tribunal was not prohibited from choosing its own argument per se. The “real question” according to the committee was “whether, by formulating its own theory and argument, the Tribunal goes beyond the ‘legal framework’” established by the parties.123 It reasoned that: Within the dispute’s “legal framework,” arbitrators must be free to rely on arguments which strike them as the best ones, even if those arguments were not developed by the parties (although they could have been)…. 116   Id. 117  A MCO v. Indonesia, supra note 102, ¶¶ 90–1. 118   Klöckner Industrie-Anlagen GmbH et al. v. United Republic of Cameroon & Société Camerounaise des Engrais, ICSID Case No. ARB/81/2 (Resubmission Proceeding), Decision on Annulment, ¶¶ 6.01–6.53 (May 17, 1990). 119   Pey Casado v. Chile, supra note 110, ¶ 74. 120   Maritime Int’l Nominees Establishment (MINE) v. Gov’t of Guinea, ICSID Case No. ARB/ 84/4, Decision of the Ad Hoc Committee (excerpts), ¶ 5.05 (Dec. 22, 1989), 5 ICSID Rev.— FILJ 95 (1990). 121   Wena Hotels v. Egypt, supra note 92, ¶ 58 (“the violation of such a rule must have caused the Tribunal to reach a result substantially different from what it would have awarded had such a rule been observed.”). 122   Klöckner v. Cameroon, supra note 94, ¶ 89. 123   Id., ¶ 91.

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Any other solution would expose arbitrators to having to do the work of the parties’ counsel for them and would risk slowing down or even paralysing the arbitral solutions to disputes.124 This approach has been subsequently followed in other cases,125 including the Pey Casado v. Chile case. In that case, Chile argued, inter alia, that the tribunal had introduced a damages calculation for the first time in the award without affording it the opportunity to be heard in response.126 The only discussion of damages by the parties, it contended, related solely to the expropriation claim. Yet, the tribunal adopted the expropriation-based calculation of damages in awarding compensation for the denial of justice and discrimination claims. The committee found that Chile had been deprived of its right to present arguments on the standard applicable to the calculation of damages for a breach of the fair and equitable treatment (“FET”) obligation. Notably, the committee concluded that certain opportunities to address FET damages in the proceedings—arising from a question raised by an arbitrator during the jurisdictional hearing and post-hearing exchanges—did not provide a sufficient basis for the State to know that the tribunal would use the confiscation valuation to evaluate damages resulting from a breach of the FET provision.127 This approach went beyond the legal framework established by the parties.128 The committee stressed, however, that the annullable error was in the process that the tribunal followed in reaching its conclusion, not in the way it calculated the amount of damages.129 Similarly, the TECO v. Guatemala committee found a serious departure from a fundamental rule of procedure where the tribunal denied the investor’s claim for interest on historical damages on account of unjust enrichment. Although the committee agreed with Guatemala that the tribunal is not required to communicate, consult, or check with the parties with respect to its analyses and conclusions, this rule was subject to exceptions. One exception is “when a tribunal effectively surprises the parties with an issue that neither party has invoked, argued or reasonably could have anticipated during the proceedings.”130 124   Id., ¶ 91. 125   See, e.g., Wena Hotels v. Egypt, supra note 92, ¶¶ 69–70. 126   Pey Casado v. Chile, supra note 110, ¶ 246. 127   Id., ¶¶ 263–6. 128   Id., ¶ 268. 129   Id., ¶ 271. 130  T ECO Guatemala Holdings LLC v. Republic of Guatemala, ICSID Case No. ARB/10/23, Decision on Annulment, ¶ 184 (Apr. 5 2016).

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Here, neither party had raised the concept of unjust enrichment nor had it ever arisen at any stage of the proceedings. Accordingly, unjust enrichment did not form part of the legal framework established by the parties and “was not something that the Parties could reasonably have anticipated, as there was nothing to suggest that the Tribunal was concerned with it.”131 In sum, the jurisprudence creates a clear dividing line. If a tribunal exercises its discretion within the confines of the legal framework developed by the parties, there is likely little basis to object to an argument that could have been anticipated, analyzed, or developed in written and oral submissions. Parties would be well-advised to “advanc[e] other, subsidiary hypotheses or interpretations alongside their main arguments, even if only ‘ex abundati cautela’….”132 But where a tribunal strays from the parties’ framework, Article 52(1) provides an important safeguard to preserve the right to be heard. 2.5.3 Failure to State Reasons The purpose of Article 52(1)(e) is to ensure that parties can understand the tribunal’s reasoning. The ability to understand how the tribunal applied the facts to the law is critical to the system’s legitimacy.133 Article 48(3) of the ICSID Convention also reflects this objective, requiring that the award deal with every question submitted to it and to state reasons on which it is based. The failure to deal with a question will not necessarily result in an annulment;134 this will depend on the nature of the unaddressed question. Other post-hearing remedies such as interpretation and supplementation— relating to the meaning or scope of the award or for an inadvertent omission of a technical nature—may provide adequate redress. The conditions for this ground will be satisfied only if: (1) the failure to state reasons “leave[s] the decision on a particular point essentially lacking in any expressed rationale,” and (2) that point is “necessary to the tribunal’s decision.”135 As to the first condition, the MINE annulment committee clarifies that “the requirement to state reasons is satisfied as long as the award enables one to 131   Id., ¶ 190. 132   Klöckner v. Cameroon, supra note 94, ¶ 90. 133   Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on Annulment, ¶ 165 (Dec. 27, 2016) (“The legitimacy of an arbitral decision to invalidate a sovereign act would be severely undermined if the tribunal did not have to explain why the act contradicts the law.”). 134  ICSID, History of the ICSID Convention, Vol. II-2, at 849 (1968). 135   Aguas v. Argentina, supra note 91, ¶ 65.

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follow how the tribunal proceeded from Point A. to Point B. and eventually to its conclusion….”136 The Pey Casado decision further explains that the omission of an “express rationale for the conclusions” can be “due to a complete absence of reasons or the result of frivolous or contradictory explanations.”137 The second condition requires that the conclusion relate to a “pivotal or outcome-determinative point.”138 In other words, Article 52(1)(e) provides a remedy where a tribunal has disregarded facts and arguments that go to the basis of the award.139 Of all the annulment grounds, Article 52(1)(e) arguably comes the closest to a substantive appeal. By examining the reasoning of awards, ad hoc committees risk applying a substantive test of adequacy or correctness. As a result, annulment committees have sought to distinguish between the existence of reasons and their correctness or quality. As the ad hoc committee in Vivendi I stated: it is well accepted both in the cases and the literature that Article 52(1) (e) concerns a failure to state any reasons with respect to all or part of an award, not the failure to state correct or convincing reasons…. Provided that the reasons given by a tribunal can be followed and relate to the issues that were before the tribunal, their correctness is beside the point….140 Nevertheless, this dividing line has proven difficult to pinpoint in practice. Committees have struggled particularly with the adequacy of the reasons set out in awards. While some annulment panels have no difficulty assessing the sufficiency of the reasons in an award, others have been critical of this approach. For example, in Klöckner I, the ad hoc committee took issue with the tribunal’s use of approximations in calculating the parties’ respective obligations. In annulling this part of the award, the committee stated that: 136  M INE v. Guinea, supra note 120, ¶ 5.09. 137   Pey Casado v. Chile, supra note 110, ¶ 86. See also Amco Asia Corp. et al. v. Republic of Indonesia, ICSID Case No. ARB/81/1 (Resubmission Proceeding), Decision on Annulment, ¶¶ 7.56–7.57 (Dec. 17, 1992). 138   Pey Casado v. Chile, supra note 110, ¶ 86. 139   S chreuer et al., supra note 16, at 861–2 (citing Amco v. Indonesia, supra note 102, ¶¶ 34–6). See also Wena Hotels v. Egypt, supra note 92, ¶ 101 (explaining that Article 52(1)(e) applies to cases where “the Tribunal omitted to decide upon a question submitted to it to the extent such supplemental decision may affect the reasoning supporting the Award.”). 140   Aguas v. Argentina, supra note 91, ¶ 64 (citation omitted). See also Soufraki v. United Arab Emirates, supra note 84, ¶ 128.

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it is difficult to find any legal reasoning as required by provisions of Articles 52(1)(e) or 48(3). Instead, there is really an “equitable estimate” (to use the Tribunal’s own words …) based on “approximately equivalent” estimates or approximations, which is in any case impossible to justify solely on the basis of the Award’s explanations….141 Meanwhile ad hoc committees at the other extreme refuse to critique a tribunal’s reasoning, opting instead, in some cases, to infer reasons from the considerations and conclusions set out in an award.142 This approach arguably goes a step too far by turning ad hoc panels into mind readers.143 Indeed, the TECO v. Guatemala committee rejected this approach. It “struggled to understand the Tribunal’s line of reasoning” with respect to its determination of the loss of value claim.144 It found a failure to state reasons even though it was “inclined to think that the Tribunal dismissed the loss of value claim because [the investment’s] but for value could not be determined with sufficient certainty.”145 The fact that “the Tribunal made no attempt to calculate the company’s actual value” combined with “its statement that it possessed no information on how the [transaction] price had been determined”—even though it was actually in the record—meant that the committee was “left guessing as to the Tribunal’s actual line of reasoning….”146 Likewise, annulment committees have had less difficulty applying Article 52(1)(e) where the award includes contradictory reasons. As the Klöckner I panel explained: “it is in principle appropriate to bring this notion under the category ‘failure to state reasons’ for the very simple reasons that two genuinely contradictory reasons cancel each other out.”147 An example of 141   Klöckner v. Cameroon, supra note 94, ¶ 176 (citations omitted). 142   See, e.g., Wena Hotels v. Egypt, supra note 92, ¶ 81 (“The Tribunal’s reasons may be implicit in the considerations and conclusions contained in the award, provided they can be reasonably inferred from the terms used in the decision.”). See also Schreuer et al., supra note 16, at 1003 (“The jurisprudence on Art. 52(1)(e) confirms that ad hoc committees are inclined to reconstruct missing reasons where the result reached by the tribunal appears capable of explanation in the light of the reasons actually supplied. An award will not be annulled if the reasons for a decision, though not stated, are readily apparent to the ad hoc committee.”). 143   See, generally, Stephanie Mullen & Elizabeth Whitsitt, Quantum, annulment and the requirement to give reasons: analysis and reform, 32 Arb. Int’l 59 (2016). 144  T ECO v. Guatemala, supra note 130, ¶ 128. 145   Id., ¶ 137. 146   Id. 147   Klöckner v. Cameroon, supra note 94, ¶ 116 (emphasis in original).

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this situation is MINE v. Guinea,148 where the respondent pointed out that the tribunal chose its own method to calculate lost profits based on hypotheses, which it had previously rejected.149 The committee annulled this portion of the award stating: “[h]aving concluded that theories ‘Y’ and ‘Z’ were unusable because of their speculative character, the Tribunal could not, without contradicting itself, adopt a ‘damages theory’ which disregarded the real situation and relied on hypotheses which the Tribunal itself had rejected as a basis for the calculation of damages.”150 The jurisprudence reveals a tension between the deference accorded to awards and the obligation of tribunals to explain their decisions.151 Article 52(1)(e) focuses on the latter by requiring the inclusion of clear and carefully stated reasons in awards—which is important to maintaining transparency and legitimacy in arbitration proceedings. The reasons provided should set out why the tribunal has adopted its decision and, in the context of damages, provide an explanation of, for example, its selection of a particular valuation method and inputs, interest rate, and cost allocation. Awards that do not contain reasons or whose reasons are inconsistent with the evidence would be at risk of annulment. Despite curtailing the grounds for annulment, Article 52(1) has afforded a surprisingly ample basis for challenging the process by which a tribunal has arrived at a certain damages conclusion. In addition, the effects of annulment on damages can be far-reaching. Not only can an ad hoc committee annul part or all of an award relating to damages, but some committees have even amended or replaced numbers.152 For example, the Occidental Petroleum committee decided that it could substitute the tribunal’s figures with the correct ones “[i]f this task can be performed without further submissions from the Parties and without additional marshaling of evidence….”153 While this interpretation of annulment committee powers is likely not without controversy, it nevertheless demonstrates that annulment can be a potentially robust tool for rectifying errors in the damages analyses. 148  M INE v. Guinea, supra note 120. 149   Id., ¶ 6.107. 150   Id. See also Tidewater v. Venezuela, supra note 133, ¶ 189. 151   See, e.g., MTD v. Chile, supra note 101, ¶ 101. See also Rumeli Telekom A.S. & Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Decision on Annulment, ¶ 179(5) (Mar. 25, 2010). 152   Cf. Tidewater v. Venezuela, supra note 133, ¶¶ 208, 212. 153   Occidental v. Ecuador, supra note 5, ¶ 299.

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Potential Ways to Avoid Making Errors

Section 2 focused on the different types of post-award remedies available to parties where a tribunal has made a mistake, violated a procedural rule, or omitted to decide an issue or decided it in an unclear way. Of course, it would be more desirable for tribunals to avoid making these missteps in the first place. This section explores different strategies that parties, tribunals, and even administering bodies can adopt to reduce the likelihood of making errors and to increase transparency with respect to damages. The first set of strategies increases the involvement of damages experts in the quantification of damages. Prior to closing the proceedings, a tribunal may ask the parties to complete a sensitivity analysis or a joint valuation model.154 The objective here would be to give the tribunal tools for calculating damages. In building the model, the experts would have to take care to ensure the program prevents the use of incompatible inputs. Alternatively, a tribunal could provide the relevant inputs to the experts to calculate damages at the end of the proceedings. This may require a partial award on liability to be rendered before the tribunal can issue the final award on damages. A third option might be to allow the parties and their experts to review the tribunal’s calculations in advance of the final award. Although this is not the normal practice of tribunals, there does not appear to be any legal impediment against it. In fact, Article 10.20.9(a) of the Dominican Republic-Central America Free Trade Agreement permits any disputing party to request the tribunal to transmit its proposed decision or award on liability to the disputing parties and nondisputing parties. The provision guards against delays by imposing a 60-day time limit for the parties to comment on “any aspect” of the proposed decision or award and gives the tribunal an additional 45 days to issue the decision or award. Another set of proposals concerns the use of non-party appointed experts. The most obvious option would be for the tribunal to hire its own expert (or panel of experts).155 The rationale for a tribunal-appointed expert is to provide arbitrators with more direct access to independent and objective financial advice. The expert could assist the tribunal in evaluating data and ensuring 154  Chapter 1, Adam Douglas, Procedural Tools to Facilitate the Quantification of Damages in Investor-State Arbitration, at Section 3.7. 155   See Brooks Daly & Fiona Poon, Technical and Legal Experts, in International Investment Disputes in Litigating Investment Disputes: A Practitioner’s Guide 335–6 (Chiara Giorgetti ed., 2014). See also supra note 154, Douglas (Chapter 1), at Section 3.4.

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that the right questions are asked and answered. However, the use of tribunalappointed experts is fraught with its own problems. A frequent complaint is that the tribunal-appointed expert may exercise undue influence over the tribunal through ex parte communications and become a de facto fourth arbitrator. Even if the parties were amenable to the tribunal hiring its own expert, it is likely that the arrangement would lead to higher costs, as few parties would relinquish the use of their own expert. A slight variation on these propositions would be to enlist a financial expert or experts within the administering body or on the tribunal itself. If the administering body had dedicated staff with a background in economics, they might be able to provide some oversight with respect to financial aspects of the award. For example, draft ICC awards are routinely scrutinized by the Court as a form of quality control.156 While the practice has been criticized for contributing to delays, the use of strict time limits and narrowing the scope of review could deter the prolongation of proceedings. This may, however, require changes to the applicable arbitration rules. A more immediate measure that parties could take would be to appoint an arbitrator with a quantitative background. In addition to assisting with complex issues of quantification, individuals with a financial or economic background could weigh in on legal issues that involve the assessment of economic activities (e.g., the determination of an “investment,” “like circumstances,” the degree of interference for an expropriation, and causation).157 Some arbitration rules, such as the ICSID Convention, do not require parties to appoint a panelist with legal training.158 In Aguas del Tunari v. Bolivia, for instance, the respondent made the unconventional choice of appointing an economist as its arbitrator. Since the case settled, it is not possible to evaluate the impact of this decision. In cases where complicated economic issues are central to the dispute, this might be a strategic choice. 4

Concluding Remarks

Various tools are available for parties to fix defects in damages awards. Although misuse of these remedies as a stalling tactic is a valid concern, the drafters of international arbitration rules deemed the availability of remedies for errors in arbitral awards to outweigh this risk. One strong justification is that correcting

156  ICC Arbitration Rules, art. 34. 157  Mullen & Whitsitt, supra note 143, at 78–9. 158   See ICSID Convention, art. 14(1).

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errors affecting the amount of damages paid from public coffers is important for maintaining the legitimacy of investor-State dispute settlement. The choice of remedy will depend on the nature of the problem and the objective of the request. Some remedies merely seek clarification for the purpose of implementing the award. Others involve a minor alteration of the award but do not change the substance of a decision. And another set of remedies can potentially have a strong impact on the award by either reducing the amount of damages or annulling an award. Parties have encountered varying levels of success depending on the type of remedy sought. For example, straightforward calculation errors have generally fared better than annulment requests. This Chapter also explored different strategies that tribunals and parties can adopt to proactively prevent serious mistakes from occurring in the drafting of awards. With such significant sums at stake, it would be in the interests of all stakeholders to explore creative ways to ensure the accuracy of damages awards.

Appendix: Table of Cases International Investment Arbitration Cases Abaclat et al. v. Argentine Republic, ICSID Case No. ARB/07/5, Dissenting Opinion of Georges Abi-Saab (Oct. 28, 2011) 352 Abengoa, S.A. & COFIDES, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/09/2, Award (Apr. 18, 2013) 25, 271 Achmea B.V. v. Slovak Republic, PCA Case No. 2008–13, Final Award (Dec. 7, 2012) 16 ADC Affiliate Ltd. & ADC & ADMC Mgmt. Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16, Award (Oct. 2, 2006) 114, 127–129, 133, 172, 176–177, 179–180, 198, 251, 325, 337, 341, 403, 412 Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No. ARB/11/33, Award (Nov. 3, 2015) 147, 396 AES Corp. v. Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction (Apr. 26, 2005) 67 AGIP S.p.A. v. People’s Republic of the Congo, ICSID Case No. ARB/77/1, Award (Nov. 30, 1979), 1 ICSID Rep. 306 (1993) 326 AHS Niger et al. v. Republic of Niger, ICSID Case No. ARB/11/11, Award (July 15, 2013) 147 AIG Capital Partners, Inc. & CJSC Tema Real Estate Co. v. Republic of Kazakhstan, ICSID Case No. ARB/01/6, Award (Oct. 7, 2003) 332 Alasdair Ross Anderson et al. v. Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award (May 19, 2010) 401 Am. Mfr. & Trading (AMT), Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award (Feb. 21, 1997) 252, 395 Amco Asia Corp. et al. v. Republic of Indonesia, ICSID Case No. ARB/81/1, Award (Nov. 20, 1984) 349 Amco Asia Corp. et al. v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on the Application for Annulment (May 16, 1986), 1 ICSID Rep. 509 (1993) 114, 448, 451 Amco Asia Corp. et al. v. Republic of Indonesia, ICSID Case No. ARB/81/1 (Resubmission Proceeding), Decision on Annulment (Dec. 17, 1992) 454 Anatolie Stati et al. v. Republic of Kazakhstan, SCC Case No. V (116/2010), Award (Dec. 19, 2013) 16, 136, 147, 154, 179, 305, 312, 383, 408 Ansung Housing Co., Ltd. v. People’s Republic of China, ICSID Case No. ARB/14/25, Award (Mar. 9, 2017) 397 Antoine Abou Lahoud & Leila Bounafeh-Abou Lahoud v. Democratic Republic of the Congo, ICSID Case No. ARB/10/4, Award (Feb. 7, 2014) 147, 150, 154, 199 Antoine Goetz et al. v. Republic of Burundi, ICSID Case No. ARB/01/2, Award (June 21, 2012) 355, 357–358

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Apotex Holdings Inc. & Apotex Inc. v. United States of America, ICSID Case No. ARB(AF)/12/1, Procedural Order No. 3 (Jan. 25, 2013) 9 Archer Daniels Midland Co. & Tate & Lyle Ingredients Am., Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Award (Nov. 21, 2007) 114 Archer Daniels Midland Co. & Tate & Lyle Ingredients Am., Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Decision on the Request for Correction, Supplementary Decision and Interpretation (July 10, 2008) 430–431, 436, 440–441 Asian Agric. Prod. Ltd. v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award (June 27, 1990), 4 ICSID Rep. 246 (1997) 72, 183, 266, 270, 302, 340, 384 ATA Const., Indus. & Trading Co. v. Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2 (Annulment Proceeding), Order Taking Note of the Discontinuance of the Proceeding (July 11, 2011) 50, 419 Atlantic Triton Co. Ltd. v. People’s Revolutionary Republic of Guinea, ICSID Case No. ARB/84/1, Award (Apr. 21, 1986), 3 ICSID Rep. 13 (1995) 183 Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award (Sept. 23, 2003) 140, 182, 345 Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on Jurisdiction (Dec. 8, 2003) 66 Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award (July 14, 2006) 114, 178, 183, 196, 252, 327, 394 Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on the Application for Annulment of the Argentine Republic (Sept. 1, 2009) 4, 447, 449 Bear Creek Mining Corp. v. Republic of Peru, ICSID Case No. ARB/14/21, Expert Report of Graham A. Davis & Florin A. Dorobantu (Oct. 6, 2015) 282 Bernardus Henricus Funnekotter et al. v. Republic of Zimbabwe, ICSID Case No. ARB/05/06, Award (Apr. 22, 2009) 129, 135, 146, 172, 267, 416 Bernhard von Pezold et al. v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award (July 28, 2015) 144, 148, 152, 154, 158–160, 182, 344, 348 BG Group Plc v. Argentine Republic, UNCITRAL Arbitration Proceeding, Final Award (Dec. 24, 2007) 114, 336 Bilcon of Delaware Inc. et al. v. Gov’t of Canada, PCA Case No. 2009–04, Procedural Order No. 3 (June 3, 2009) 9–10 Biloune & Marine Drive Complex Ltd. v. Ghana Investments Centre & Gov’t of Ghana, UNCITRAL Arbitration Proceeding, Award on Damages and Costs (June 30, 1990), 95 I.L.R. 211 54 Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Concurring and Dissenting Opinion of Gary Born (July 18, 2008) 91–93, 147 Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award (July 24, 2008) 91–93, 95, 101, 137, 147, 162, 172, 182

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Blue Bank Int’l and Trust (Barbados) Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/20, Award (Apr. 26, 2017) 397 British Caribbean Bank Ltd. v. Gov’t of Belize, PCA Case No 2010–18, Award (Dec. 19, 2014) 379 British Caribbean Bank Ltd. v. Gov’t of Belize, PCA Case No. 2010–18, Decision on the Respondent’s Motion Pursuant to 1976 UNCITRAL Arbitration Rules, Articles 36 and 37 (Mar. 7, 2015) 439 Burimi S.R.L. & Eagle Games SH.A. v. Republic of Albania, ICSID Case No. ARB/11/18, Procedural Order No. 1 and Decision on Bifurcation (Apr. 18, 2012) 9 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (Feb. 7, 2017) 335, 353, 359, 362–363 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award (Feb. 7, 2017) 172, 177, 181, 183–184, 416 Canfor Corp., Tembec Inc. et al. and Terminal Forest Products Ltd. v. United States of America, UNCITRAL Arbitration Proceeding, Joint Order of the Costs of Arbitration and for the Termination of Certain Arbitral Proceedings (July 19, 2007) 417 Caratube Int’l Oil Co. LLP v. Republic of Kazakhstan, ICSID Case No. ARB/08/12, Award (June 5, 2012) 146 CDC Group plc v. Republic of Seychelles, ICSID Case No. ARB/02/14, Decision of the Ad Hoc Committee on the Application for Annulment (June 29, 2005) 446 Cementownia “Nowa Huta” S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/06/2, Award (Sept. 17, 2009) 144, 148, 163, 165 CEMEX Caracas Inv. B.V. & CEMEX Caracas II Inv. B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/08/15, Decision on Jurisdiction (Dec. 30, 2010) 69 Chevron Corp. (USA) & Texaco Petroleum Co. (USA) v. Republic of Ecuador, PCA Case No. 34877, Partial Award on Merits (Mar. 30, 2010) 99, 343, 383 Chevron Corp. & Texaco Petroleum Corp. v. Republic of Ecuador, PCA Case No. 2009–23, Procedural Order No. 10 (Apr. 9, 2012) 15 Churchill Mining Plc. and Planet Mining Pty Ltd. v. Republic of Indonesia, ICSID Case No. ARB/12/40 and 12/14, Procedural Order No. 8 (Apr. 22, 2014) 11 Churchill Mining Plc. and Planet Mining Pty Ltd. v. Republic of Indonesia, ICSID Case No. ARB/12/40 and 12/14, Procedural Order No. 12 (Oct. 27, 2014) 11 CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Partial Award (Sept. 13, 2001) 114, 172, 330 CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Dissenting Opinion of Jaroslav Hándl (Sept. 13, 2001) 330 CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award (Mar. 14, 2003) 9, 174, 200, 267, 301, 332, 343 CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL Arbitration Proceeding, Separate Opinion of Ian Brownlie (Mar. 14, 2003) 337–338

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Appendix

CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Decision on Jurisdiction (July 17, 2003) 61, 67 CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award (May 12, 2005) 17, 137, 252–253, 256, 336, 340, 346 CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic (Sept. 25, 2007) 336, 447 Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on Annulment (July 3, 2002) 446, 454 Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision of the Ad Hoc Committee on the Request for Supplementation and Rectification of Its Decision on Annulment (May 28, 2003) 434 Compañía de Aguas del Aconquija S.A. & Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award (Aug. 20, 2007) 129, 173, 339, 376 Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Award (Feb. 17, 2000) 178, 251–252, 260, 345, 372, 390 Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Rectification of Award (June 8, 2000) 436 ConocoPhillips et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits (Sept. 3, 2013) 129, 133, 177, 251 ConocoPhillips et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Dissenting Opinion of Georges Abi-Saab to Decision on Jurisdiction and the Merits of September 3, 2013 (Feb. 19, 2015) 342 Continental Casualty Co. v. Argentine Republic, ICSID Case No. ARB/03/9, Award (Sept. 5, 2008) 337 Convial Callao S.A. & CCI—Compañía de Concesiones de Infraestructura S.A. v. Republic of Peru, ICSID Case No. ARB/10/2, Award (May 21, 2013) 147, 154 Copper Mesa Mining Corp. v. Republic of Ecuador, PCA Case No. 2012–2, Award (Mar. 15, 2016) 195–197, 313, 380 Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award (Apr. 4, 2016) 14, 17, 54, 191–194, 197, 306, 313–317, 319, 325, 338, 379, 392, 396 Daimler Fin. Serv. AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award (Aug. 22, 2012) 69 David Aven et al. v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Procedural Order No. 2 (Feb. 4, 2016) 13 David Minnotte & Robert Lewis v. Republic of Poland, ICSID Case No. ARB(AF)/10/1, Decision on the Request for Interpretation of the Award (Oct. 22, 2014) 433–434 Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award (Feb. 6, 2008) 143, 146, 148–152, 155, 160, 164, 182, 349–350, 396

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Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/02, Award (Oct. 31, 2012) 403 Duke Energy Int’l Peru Inv. No. 1, Ltd. v. Republic of Peru, ICSID Case No. ARB/03/28, Decision of the Ad Hoc Committee (Mar. 1, 2011) 4 Dunkeld Int’l Inv. Ltd. v. Gov’t of Belize, PCA Case No. 2010–13, Award (June 28, 2016) 185, 333 ECE Projektmanagement v. Czech Republic, PCA Case No. 2010–5, Award (Sept. 19, 2013) 21 EDF Int’l S.A. et al. v. Argentine Republic, ICSID Case No. ARB/03/23, Award (June 11, 2012) 136–137, 198, 257–258, 385 EDF (Services) Ltd. v. Romania, ICSID Case No. ARB/05/13, Award (Oct. 8, 2009) 404, 409–410, 413–414 Eiser Infrastructure & Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Final Award (May 4, 2017) 217, 305 El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB/03/15, Award (Oct. 31, 2011) 17, 64, 71, 74, 137, 173–174, 179, 313 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Procedural Order No. 3 (Mar. 27, 2009) 12 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Award (Nov. 25, 2015) 12–13 Eli Lilly and Co. v. Gov’t of Canada, ICSID Case No. UNCT/14/2, Procedural Order No. 1 (May 26, 2014) 9 Emilio Agustín Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Award (Nov. 13, 2000), 16 ICSID Rev.—FILJ 248 (2001) 327, 394–395 Emilio Agustín Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Rectification of the Award (Jan. 31, 2001) 436 Emmis Int’l Holding, B.V. et al. v. Hungary, ICSID Case No. ARB/12/2, Award (Apr. 16, 2014) 341 Enkev Beheer B.V. v. Republic of Poland, PCA Case No. 2013–01, First Partial Award (Apr. 29, 2014) 66 Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award (May 22, 2007) 94, 336, 385, 395, 442 Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on Claimants’ Request for Rectification and/or Supplementary Decision of the Award (Oct. 25, 2007) 442 Enron Creditors Recovery Corp. ( formerly Enron Corp.) & Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on the Application for Annulment of the Argentine Republic (July 30, 2010) 94, 337 EuroGas Inc. & Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14, Transcript of the First Session and Hearing on Provisional Measures (Mar. 17, 2015) 43

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EuroGas Inc. & Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14, Procedural Order No. 3—Decision on Requests for Provisional Measures (June 23, 2015) 46, 52 Europe Cement Inv. & Trade S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/07/2, Award (Aug. 13, 2009) 144, 148, 154, 163, 165 European Am. Inv. Bank AG (Austria) v. Slovak Republic, PCA Case No. 2010–17, Award on Jurisdiction (Oct. 22, 2012) 62, 67 Fábrica de Vidrios Los Andes, C.A. & Owens-Illinois de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/21, Decision on the Third Proposal to Disqualify L. Yves Fortier (Sept. 12, 2016) 425 Flemingo DutyFree Shop Private Ltd. v. Republic of Poland, UNCITRAL Arbitration Proceeding, Award (Aug. 12, 2016) 180, 183–184 Flughafen Zürich A.G. & Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, Award (Nov. 18, 2014) 24–25, 255, 258, 260, 403 Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award (Apr. 8, 2013) 138, 147, 154, 156–157, 172–173, 195 Franz Sedelmayer v. Russian Federation, SCC Arbitration Proceeding, Award (July 7, 1998) 347 Fraport AG Frankfurt Airport Serv. Worldwide v. Republic of the Philippines, ICSID Case No. ARB/11/12, Award (Dec. 10, 2014) 355, 364 Gabriel Resources Ltd. & Gabriel Resources ( Jersey) v. Romania, ICSID Case No. ARB/15/31 295 GAMI v. Gov’t of the United Mexican States, NAFTA Arbitration Proceeding, Final Award (Nov. 15, 2004) 71 Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, Award (Dec. 19, 2016) 327–328 Gemplus S.A et al. and Talsud S.A. v. United Mexican States, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/04/4, Award (June 16, 2010) 114, 183, 189, 326, 340, 403 Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award (Sept. 16, 2003), 10 ICSID Rep. 236 (2006) 146, 251 Glamis Gold Ltd. v. United States of America, UNCITRAL Arbitration Proceeding, Final Award (June 6, 2009) 287 Glencore Finance (Bermuda) Ltd. v. Plurinational State of Bolivia, PCA Case No. 2016–39, Letter from Claimant to Tribunal (Sept. 15, 2016) 17 Global Trading Resource Corp. & Globex Int’l, Inc. v. Ukraine, ICSID Case No. ARB/09/11, Award (Dec. 1, 2010) 355 Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No ARB(AF)/09/1, Award (Sept. 22, 2014) 14, 135–136, 197–198, 213, 253, 257–258, 272, 305, 313–315, 320, 337–338, 383

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467

Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Decision Regarding the Claimant’s and the Respondent’s Requests for Corrections (Dec. 15, 2014) 257, 434–435, 438 Gov’t of the State of Kuwait v. Aminoil, Ad Hoc Arbitration Proceeding, Final Award (Mar. 24, 1982), 21 I.L.M. 976 270, 372, 389 Guaracachi Am., Inc. & Rurelec PLC v. Plurinational State of Bolivia, PCA Case No. 2011– 17, Award (Jan. 31, 2014) 385 Guaracachi Am., Inc. & Rurelec PLC v. Plurinational State of Bolivia, PCA Case No. 2011–17, Letter from Tribunal to the Parties on Correction of the Award (Mar. 3, 2014) 436 Hassan Awdi et al. v. Romania, ICSID Case No. ARB/10/13, Award (Mar. 2, 2015) 147, 385 Helnan Int’l Hotels A/S v. Arab Republic of Egypt, ICSID Case No. ARB/05/19, Award (July 3, 2008) 146 Hesham Talaat M. Al-Warraq v. Republic of Indonesia, UNCITRAL Arbitration Proceeding, Final Award (Dec. 15, 2014) 353–354, 358, 365 HICEE B.V. v. Slovak Republic, PCA Case No. 2009–11, Partial Award (May 23, 2011) 76–79 HOCHTIEF Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/07/31, Decision on Jurisdiction (Oct. 24, 2011) 357 HOCHTIEF Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/07/31, Decision on Liability (Dec. 29, 2014) 179 Hrvatska Elektroprivreda d.d. v. Republic of Slovenia, ICSID Case No. ARB/05/24, Award (Dec. 17, 2015) 17–18, 332, 338, 380, 385, 394, 397 Hulley Enterprise Ltd. (Cyprus) v. Russian Federation, PCA Case No. AA 226, Final Award (July 18, 2014) 54, 129–130, 133, 135, 379 Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Decision of the Ad Hoc Committee on the Application for Annulment of Mr. Soufraki (June 5, 2007) 445, 447–448, 454 Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Rectification of the Decision of the Ad Hoc Committee on the Application for Annulment of Mr. Soufraki (Aug. 13, 2007) 436 İçkale İnşaat Ltd. Şirketi v. Turkmenistan, ICSID Case No. ARB/10/24, Decision on Claimant’s Request for Supplementary Decision and Rectification of the Award (Oct. 4, 2016) 437, 441–442 Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award (June 21, 2011) 72, 137–138, 196, 416 Industria Nacional de Alimentos, S.A. & Indalsa Perú, S.A. ( formerly Empresas Lucchetti, S.A. & Lucchetti Perú, S.A.) v. Republic of Peru, ICSID Case No. ARB/03/4, Decision on the Rectification of the Decision on Annulment of the Ad Hoc Committee (Nov. 30, 2007) 436

468

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Inmaris Perestroika Sailing Maritime Serv. GmbH et al. v. Ukraine, ICSID Case No. ARB/08/8, Award (Mar. 1, 2012) 147, 154, 353, 378 Int’l Thunderbird Gaming Corp. v. United Mexican States, UNCITRAL Arbitration Proceeding, Award (Jan. 26, 2006) 414 Ioan Micula et al. v. Romania, ICSID Case No. ARB/05/20, Award (Dec. 11, 2013) 97– 100, 137, 183–184, 360 Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award (Mar. 3, 2010) 21, 50, 129, 172, 178, 271, 330, 342, 419 Iurii Bogdanov et al. v. Republic of Moldova, SCC Arbitration Proceeding, Arbitral Award (Sept. 22, 2005) 146, 151, 326 Jan Oostergetel & Theodora Laurentius v. Slovak Republic, UNCITRAL Arbitration Proceeding, Final Award (Apr. 23, 2012) 414 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability (Jan. 14, 2010) 102 Joseph Charles Lemire v. Ukraine, ICSID Case No ARB/06/18, Award (Mar. 28, 2011) 71, 86, 97, 101–106, 108, 114, 127, 144, 147, 152–156, 158–161, 183, 258, 267, 330 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Dissenting Opinion of Jürgen Voss (Mar. 28, 2011) 71, 103–105 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Ukraine’s Application for Annulment of the Award (July 8, 2013) 106 Khan Resources Inc. et al v. Gov’t of Mongolia & MonAtom LLC, PCA Case No. 2011–09, Award on the Merits (Mar. 2, 2015) 173, 188, 191, 193, 195, 208, 211, 213, 215, 305, 312– 314, 316–318, 337, 379, 383 Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan, ICSID Case No. ARB/10/1, Award (July 2, 2013) 40, 45 Klöckner Industrie-Anlagen GmbH et al. v. United Republic of Cameroon & Société Camerounaise des Engrais, ICSID Case No. ARB/81/2, Decision on Annulment (May 3, 1985) 447, 450–451, 453–455 Klöckner Industrie-Anlagen GmbH et al. v. United Republic of Cameroon & Société Camerounaise des Engrais, ICSID Case No. ARB/81/2 (Resubmission Proceeding), Decision on Annulment (May 17, 1990) 451 LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (Oct. 3, 2006), 21 ICSID Rev.—FILJ 203 (2006) 9, 336, 340 LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award (July 25, 2007) 95, 114, 137, 172, 337, 383, 394, 417 LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Claimant’s Request for Supplementary Decision (July 8, 2008) 441 Libananco Holdings Co. Ltd. v. Republic of Turkey, ICSID Case No. ARB/06/8, Award (Sept. 2, 2011) 398

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Libananco Holdings Co. Ltd. v. Republic of Turkey, ICSID Case No. ARB/06/8, Decision on Annulment (May 22, 2013) 447 Liberian Eastern Timber Corp. v. Republic of Liberia, ICSID Case No. ARB/83/2, Decision on Rectification (June 10, 1986), 2 ICSID Rep. 380 (1993) 436 Limited Liability Company AMTO v. Ukraine, SCC Case No. 080/2005, Final Award (Mar. 26, 2008) 148, 165, 350, 408 Loewen Group, Inc. & Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award (June 26, 2003) 65 Luigiterzo Bosca v. Republic of Lithuania, PCA Case No. 2011–05, Award (May 17, 2013) 83 Lundin Tunisia B. V. v. Republic of Tunisia, ICSID Case No. ARB/12/30, Award (Dec. 22, 2015) 148, 166 M. Meerapfel Söhne AG v. Central African Republic, ICSID Case No. ARB/07/10, Award (May 12, 2011) 146 M.C.I. Power Group L.C. & New Turbine, Inc. v. Republic of Ecuador, ICSID Case No. ARB/03/6, Award (July 31, 2007) 401 Malicorp Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/08/18, Decision on Annulment (July 3, 2013) 447 Marco Gavazzi & Stefano Gavazzi v. Romania, ICSID Case No. ARB/12/25, Decision on Jurisdiction, Admissibility and Liability (Apr. 21, 2015) 353 Marion Unglaube and Reinhard Unglaube v. Republic of Costa Rica, ICSID Case Nos. ARB/08/1 and ARB/09/20, Award (May 16, 2012) 129, 135, 182 Maritime Int’l Nominees Establishment v. Republic of Guinea, ICSID Case No. ARB/84/4, Decision of the Ad Hoc Committee (excerpts) (Dec. 22, 1989), 5 ICSID Rev.—FILJ 95 (1990) 451, 454, 456 Marvin Roy Feldman Karpa v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Correction and Interpretation of Award (June 13, 2003) 433, 436 Melvin J. Howard et al. v. Gov’t of Canada, PCA Case No. 2009–21, Correction of Order for the Termination of the Proceedings and Award on Costs (Aug. 9, 2010) 436 Merrill & Ring Forestry L.P. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Award (Mar. 31, 2010) 183 Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (Aug. 30, 2000), 16(1) ICSID Rev.—FILJ 168 (2001) 95, 189, 196, 266, 270, 302, 339 Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (Oct. 4, 2013) 355–357, 362, 412 Methanex Corp. v. United States of America, UNCITRAL Arbitration Proceeding, Memorial on Jurisdiction and Admissibility of the United States (Nov. 13, 2000) 94 Methanex Corp. v. United States of America, UNCITRAL Arbitration Proceeding, Amended Statement of Defense of the United States (Dec. 5, 2003) 84

470

Appendix

Methanex Corp. v. United States of America, UNCITRAL Arbitration Proceeding, Final Award on Jurisdiction and Merits (Aug. 3, 2005) 11, 407 Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award (Apr. 12, 2002), 18 ICSID Rev. 602 (2003) 183, 332 MNSS B.V. & Recupero Credito Acciaio N.V. v. Montenegro, ICSID Case No. ARB(AF)/12/8, Award (May 4, 2016) 83, 365 Mobil Inv. Canada Inc. & Murphy Oil Corp. v. Gov’t of Canada, ICSID Case No. ARB(AF)/07/4, Decision on Liability and on Principles of Quantum (May 22, 2012) 13, 97, 338 Mobil Inv. Canada Inc. & Murphy Oil Corp. v. Gov’t of Canada, ICSID Case No. ARB(AF)/07/4, Award (Feb. 20, 2015) 13 Mohamed Abdulmohsen Al-Kharafi & Sons Co. v. Libya et al., Ad Hoc Arbitration Proceeding, Final Arbitral Award (Mar. 22, 2013) 146, 148, 182 Mohammad Ammar Al-Bahloul v. Republic of Tajikistan, SCC Case No. V (064/2008), Final Award (June 8, 2010) 83, 173, 213 MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award (May 25, 2004) 326–327 MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment (Mar. 21, 2007) 4, 328, 448, 456 Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 2 (June 23, 2014) 44 Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Decision on Jurisdiction (Feb. 13, 2015) 44 Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 3 (June 12, 2015) 40, 43–44 Murphy Expl. & Prod. Co. – Int’l v. Republic of Ecuador, PCA Case No. 2012–16, Partial Final Award (May 6, 2016) 179, 338, 373, 384, 390, 394, 417 Nat’l Grid p.l.c. v. Argentine Republic, UNCITRAL Arbitration Proceeding, Award (Nov. 3, 2008) 18, 336, 385 Niko Resources (Bangladesh) Ltd. v. Bangladesh Petroleum Expl. & Prod. Co. Ltd. (“Bapex”) and Bangladesh Oil Gas and Mineral Corp. (“Petrobangla”), ICSID Case Nos. AB/10/11 and ARB/10/18, Procedural Order No. 7 (Oct. 17, 2014) 18 Noble Ventures Inc. v. Romania, ICSID Case No. ARB/01/11, Rectification of Award (May 19, 2006) 436 Nordzucker A.G. v. Republic of Poland, UNCITRAL Arbitration Proceeding, Third Partial and Final Award (Nov. 23, 2009) 83, 104 OAO Tatneft v. Ukraine, UNCITRAL Arbitration Proceeding, Award on the Merits (July 29, 2014) 191 Occidental Expl. & Prod. Co. v. Republic of Ecuador, LCIA Case No. UN 3467, Final Award (July 1, 2004) 148, 340

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Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Dissenting Opinion of Brigitte Stern (Sept. 20, 2012) 327 Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (Oct. 5, 2012) 7, 24–25, 54, 180, 313–314, 327 Occidental Petroleum Corp. & Occidental Expl. and Prod. Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Decision on Annulment of the Award (Nov. 2, 2015) 429, 448, 456 OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award (Mar. 10, 2015) 3, 147, 154, 258, 379 Ömer Dede & Serdar Elhüseyni v. Romania, ICSID Case No. ARB/10/22, Award (Sept. 5, 2013) 410 Oxus Gold plc v. Republic of Uzbekistan, UNCITRAL Arbitration Proceeding, Final Award (Dec. 17, 2015) 42, 147, 150, 154, 351, 357, 359, 379 Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Award (Oct. 14, 2016) 399, 405 Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Request for a Supplementary Decision (Mar. 28, 2017) 397, 442 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Ecuador’s Motion for Reconsideration (Apr. 10, 2015) 435, 441 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim (Aug. 11, 2015) 351 Perenco Ecuador Ltd. v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on Perenco’s Application for Dismissal of Ecuador’s Counterclaims (Aug. 18, 2017) 335 Petrobart Ltd. v. Kyrgyz Republic, SCC Case No. 126/2003, Award (Mar. 29, 2005) 114 Philip Morris Asia Ltd. v. Commonwealth of Australia, PCA Case No. 2012–12, Procedural Order No. 15 (Feb. 4, 2015) 21 Philip Morris Brands Sàrl et al. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Decision on Rectification (Sept. 26, 2016) 48, 436 Piero Foresti et al. v. Republic of South Africa, ICSID Case No. ARB(AF)/07/01, Award (Aug. 4, 2010) 416 Pope & Talbot Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Interim Award (June 26, 2000) 251 Pope & Talbot Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Award in Respect of Damages (May 31, 2002) 182 Poštová Banka, A.S. & ISTROKAPITAL SE v. Hellenic Republic, ICSID Case No. ARB/13/8, Award (Apr. 9, 2015) 66, 72 PSEG Global Inc. & Konya Ilgin Elektrik Üretim ve Ticaret Ltd. Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award (Jan. 19, 2007) 183, 269–270, 383, 412 Quasar de Valores SICAV S.A. et al. v. Russian Federation, SCC Case No. 24/2007, Award (July 20, 2012) 49–50, 112, 129, 419

472

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Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Partially Dissenting Opinion of Brigitte Stern (Sept. 7, 2015) 129, 133, 179, 331 Quiborax S.A. & Non-Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award (Sept. 16, 2015) 129, 147, 154, 162, 177, 180–181, 258, 272, 301, 305, 329, 331, 383, 393 Railroad Dev. Corp. v. Republic of Guatemala, ICSID Case No. ARB/07/23, Award (July 29, 2012) 195–196 Railroad Dev. Corp. v. Republic of Guatemala, ICSID Case No. ARB/07/23, Decision on Claimant’s Request for Supplementation and Rectification of Award (Jan. 18, 2013) 437 Renée Rose Levy de Levi v. Republic of Peru, ICSID Case No. ARB/10/17, Award (Feb. 26, 2014) 147–148, 150, 164 Robert Azinian et al. v. United Mexican States, ICSID Case No. ARB(AF)/97/2, Award (Nov. 1, 1999) 416 Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Decision on Respondent’s Preliminary Objections on Jurisdiction and Admissibility (Apr. 18, 2008) 201 Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award (May 6, 2013) 21, 83, 86, 101, 106, 108–109, 147, 151, 201–202, 319 Ronald S. Lauder v. Czech Republic, UNCITRAL Arbitration Proceeding, Final Award (Sept. 3, 2001) 95, 343–344 RosInvestCo UK Ltd. v. Russian Federation, SCC Case No. V (079/2005), Final Award (Sept. 12, 2010) 61–62, 66, 76, 326, 408 RSM Prod. Corp. v. Grenada, ICSID Case No. ARB/05/14 (Annulment Proceeding), Order Discontinuing the Proceeding and Decision on Costs (Apr. 28, 2011) 50, 419 RSM Prod. Corp. v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Claimant’s Proposal for the Disqualification of Gavan Griffith (Oct. 23, 2014) 46 RSM Prod. Corp. v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Suspension or Discontinuation of Proceedings (Apr. 8, 2015) 422 Rumeli Telekom A.S. & Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award (July 29, 2008) 23, 125–126, 129, 179, 186, 189, 199, 267, 340 Rumeli Telekom A.S. & Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Decision on Annulment (Mar. 25, 2010) 4, 199, 456 Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award (Aug. 22, 2016) 173, 179, 183, 185, 187, 190–191, 193, 195, 197, 206, 211, 258, 306, 313, 319, 354, 365, 372, 384–385, 387, 392–393 S&T Oil Equipment & Machinery Ltd. v. Romania, ICSID Case No. ARB/07/13 42–43 S.A.R.L. Benvenuti & Bonfant v. Gov’t of the People’s Republic of the Congo, ICSID Case No. ARB/77/2, Award (Aug. 15, 1980), 1 ICSID Rep. 330 (1993) 143, 148, 396

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473

S.D. Myers, Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Procedural Order No. 17 (Feb. 26, 2001) 15 S.D. Myers Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Second Partial Award (Oct. 21, 2002) 25, 95, 97, 183 S.D. Myers, Inc. v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Final Award (Concerning the Apportionment of Costs Between the Disputing Parties) (Dec. 30, 2002) 417 Saint-Gobain Performance & Plastics Group v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/13, Decision on Liability and the Principles of Quantum (Dec. 30, 2016) 177–178, 184, 254, 257–258 Saint-Gobain Performance Plastics Europe v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/13, Concurring and Dissenting Opinion of Charles Brower (Dec. 30, 2016) 254 Saipem S.p.A. v. People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Award (June 30, 2009) 112, 129 Saluka Inv. B.V. v. Czech Republic, UNCITRAL Arbitration Proceeding, Decision on Jurisdiction over the Czech Republic’s Counterclaim (May 7, 2004) 334, 351, 357, 362, 366 Saluka Inv. B.V. v. Czech Republic, UNCITRAL Arbitration Proceeding, Partial Award (Mar. 17, 2006) 67 Sapphire Int’l Petroleum Ltd. v. Nat’l Iranian Oil Co., Arbitral Award (Mar. 15, 1963), 35 I.L.R. 136 183, 384 SAUR Int’l S.A. v. Argentine Republic, ICSID Case No. ARB/04/4, Award (May 22, 2014) 180, 383, 385 Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Award (Sept. 28, 2007) 137, 336–337, 395 Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Decision on Argentina’s Application for Annulment of the Award (June 29, 2010) 337 Sergei Paushok et al. v. Gov’t of Mongolia, UNCITRAL Arbitration Proceeding, Award on Jurisdiction and Liability (Apr. 28, 2011) 68, 334, 357, 359 SGS Société Générale de Surveillance S.A. v. Republic of Paraguay, ICSID Case No. ARB/07/29, Award (Feb. 10, 2012) 379 Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction (Aug. 3, 2004) 58 Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Separate Opinion of Domingo Bello Janeiro (Jan. 30, 2007) 18, 410 Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award (Feb. 6, 2007) 129, 133, 138, 182–183, 198–199, 251, 363, 394, 404 Sistem Mühendislik Inşaat Sanayi ve Ticaret A.Ş. v. Kyrgyz Republic, ICSID Case No. ARB(AF)/06/1, Award (Sept. 9, 2009) 195

474

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Société Civile Immobilière de Gaëta v. Republic of Guinea, ICSID Case No. ARB/12/36, Award (Dec. 21, 2015) 146 Société Ouest Africaine des Bétons Industriels (SOABI) v. Senegal, ICSID No. ARB/82/1, Award (Feb. 25, 1988), 2 ICSID Rep. 190 (1993) 146–147, 183 South Am. Silver Ltd. v. Plurinational State of Bolivia, PCA Case No. 2013–15, Claimant Opposition to Respondent Request for Cautio Judicatum Solvi and Disclosure of Information (Dec. 14, 2015) 46 South Am. Silver Ltd. v. Plurinational State of Bolivia, PCA Case No. 2013–15, Procedural Order No. 10 (Jan. 11, 2016) 45–46 Southern Pacific Prop. (Middle East Ltd.) v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award (May 20, 1992), 8 ICSID Rev.—FILJ 328 (1993) 54, 140, 182, 211, 384 Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award (Dec. 1, 2011) 355, 365 St. Marys VCNA, LLC v. Gov’t of Canada, UNCITRAL Arbitration Proceeding, Procedural Order No. 1 (Sept. 10, 2012) 16 ST-AD GmbH (Germany) v. Republic of Bulgaria, PCA Case No. 2011–06, Award on Jurisdiction (July 18, 2013) 58, 68, 78, 407 Standard Chartered Bank Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/10/12, Award (Nov. 2, 2012) 362 Standard Chartered Bank (Hong Kong) Ltd. v. Tanzania Electric Supply Co. Ltd., ICSID Case No. ARB/10/20, Award (Sept. 12, 2016) 379 Suez, Sociedad General de Aguas de Barcelona S.A. & InterAguas Servicios Integrales del Agua S.A. v. Argentine Republic, ICSID Case No. ARB/03/17, Decision on Jurisdiction (May 16, 2006) 61–62, 64, 71, 74 Suez, Sociedad General de Aguas de Barcelona S.A. & InterAguas Servicios Integrales del Agua S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability (July 30, 2010) 10–13, 337 Suez, Sociedad General de Aguas de Barcelona S.A. & Vivendi Universal S.A v. Argentine Republic, ICSID Case No. ARB/03/19, Award (Apr. 9, 2015) 18, 65, 343–344 Swisslion DOO Skopje v. Former Yugoslav Republic of Macedonia, ICSID Case No. ARB/09/16, Award (July 6, 2012) 140, 379 Técnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (May 29, 2003), 10 ICSID Rep. 134 (2006) 53, 147, 176, 183, 189, 211, 270–271 TECO Guatemala Holdings LLC v. Republic of Guatemala, ICSID Case No. ARB/10/17, Award (Dec. 19, 2013) 380, 385 TECO Guatemala Holdings LLC v. Republic of Guatemala, ICSID Case No. ARB/10/17, Decision on Annulment (Apr. 5 2016) 452, 455 Teinver S.A. et al. v. Argentine Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction (Dec. 21, 2012) 61

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475

Teinver S.A. et al. v. Argentine Republic, ICSID Case No. ARB/09/1, Dissenting Opinion of Kamal Hossain (Apr. 8, 2016) 31 Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26, Award (Jan. 29, 2016) 26, 173, 177, 189, 212, 380 Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26, Decision on Rectification (June 24, 2016) 438 Tenaris S.A. & Talta—Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/23, Award (Dec. 12, 2016) 185, 229 Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award (Mar. 13, 2015) 24, 129, 131–132, 200, 253, 257–258, 383 Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on the Application for Revision (July 7, 2015) 443–444 Tidewater Inv. SRL & Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Decision on Annulment (Dec. 27, 2016) 4, 259, 453, 456 Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/01, Decision on Objections to Jurisdiction (Aug. 25, 2006) 162 Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability (Dec. 27, 2010) 327 Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Award (Nov. 27, 2013) 183, 379 Transglobal Green Energy LLC & Transglobal Green Panama, S.A. v. Republic of Panama, ICSID Case No. ARB/13/28, Award (June 2, 2016) 396 Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Award (July 7, 2011) 129, 147, 154, 385 Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Decision on Jurisdiction (Dec. 19, 2012) 68, 71, 74 Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (Dec. 8, 2016) 83, 334, 348, 358, 360, 362, 365 Valeri Belokon v. Kyrgyz Republic, UNCITRAL Arbitration Proceeding, Award (Oct. 24, 2014) 147, 150 Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award (Oct. 9, 2014) 54, 129, 132, 250, 258, 260, 315, 320, 342, 383 Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Revision (June 12, 2015) 429, 443–444 Venezuela Holdings B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Annulment (Mar. 9, 2017) 4, 342, 449–450

476

Appendix

Vestey Group Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award (Apr. 15, 2016) 187–188, 199–200, 228, 334, 354, 386–387, 394, 396 Veteran Petroleum Ltd. (Cyprus) v. Russian Federation, PCA Case No. AA 228, Final Award (July 18, 2014) 54, 129–130, 133, 135 Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Award (May 8, 2008) 138–139, 147, 161, 184, 413 Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Decision on the Application for Annulment of the Republic of Chile (Dec. 18, 2012) 112, 138, 450–452, 454 Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2, Decision on the Republic of Chile’s Request for Supplementation of the Annulment Decision (Sept. 11, 2013) 440, 442 Víctor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2 (Resubmission Proceeding), Award (Sept. 13, 2016) 83, 85, 139 Vladimir Berschader & Moïse Berschader v. Russian Federation, SCC Case No. 080/2004, Award (Apr. 21, 2006) 67 Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Procedural Order No. 3 (Aug. 21, 2007) 9 Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Dissenting Opinion of Francisco Orrego Vicuña (May 11, 2009) 419 Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award (June 1, 2009) 129, 140, 147, 154, 189, 341, 411, 419 Walter Bau A.G. (In Liquidation) v. Kingdom of Thailand, UNCITRAL Arbitration Proceeding, Award (July 1, 2009) 25 Waste Mgmt., Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award (Apr. 30, 2004) 327 Wena Hotels Ltd v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award (Dec. 8, 2000), 41 I.L.M. 896 53, 176, 189, 196, 270, 372, 394 Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Application for Annulment (Feb. 5, 2002) 4, 372, 446, 449, 450–452, 454–455 Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on the Application by Wena Hotels Ltd. for Interpretation of the Arbitral Award dated December 8, 2000 (Oct. 31, 2005) 432–433 Windstream Energy LLC v. Gov’t of Canada, PCA Case No. 2013–22, Award (Sept. 27, 2016) 184, 194, 407 World Duty Free Co. Ltd. v. Republic of Kenya, ICSID Case No. ARB/00/7, Award (Oct. 4, 2006) 412 Yukos Universal Ltd. (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award (July 18, 2014) 54, 129–130, 133, 135, 178, 180, 251, 327–328, 383, 398, 411, 417– 418, 429

Appendix

477

Zeevi Holdings v. Republic of Bulgaria & Privatization Agency of Bulgaria, Case No. UNC 39/DK, Final Award (Oct. 25, 2006) 334, 347 Zhinvali Dev. Ltd. v. Republic of Georgia, ICSID Case No. ARB/00/1, Award (Jan. 24, 2003), 10 ICSID Rep. 3 (2006) 146

Iran-U.S. Claims Tribunal Cases Am. Int’l Group, Inc. & Am. Life Ins. Co. v. Islamic Republic of Iran & Central Ins. of Iran (BIMEH MARKAZI IRAN), Award, 4 Iran-U.S. Cl. Trib. Rep. 96 (1983) 132, 198 Amoco Int’l Fin. Corp. v. Gov’t of the Islamic Republic of Iran et al., Partial Award, 15 Iran-U.S. Cl. Trib. Rep. 189 (1987) 132, 252, 337 Anaconda-Iran, Inc. v. Gov’t of the Islamic Republic of Iran et al., Award, 13 Iran-U.S. Cl. Trib. Rep. 199 (Dec. 10, 1986) 388 Dadras Int’l & Per-Am Const. Corp. v. Islamic Republic of Iran & Tehran Redevelopment Co., Award, 31 Iran-U.S. Cl. Trib. Rep. 127 (1995) 340 Foremost Tehran, Inc. et al. v. Gov’t of the Islamic Republic of Iran et al., Award, 10 Iran-U.S. Cl. Trib. Rep. 228 (Apr. 10, 1986) 69 INA Corp. v. Gov’t of the Islamic Republic of Iran, Award, 8 Iran-U.S. Cl. Trib. Rep. 373 (Aug. 12, 1985) 132 Interfirst Bank Dallas, N.A. ( formerly First National Bank in Dallas) v. Islamic Republic of Iran et al., Award, 16 Iran-U.S. Cl. Trib. Rep. 291 (1987) 361 Int’l Technical Products Corp. & ITP Export Corp. v. Gov’t of the Islamic Republic of Iran et al., Award, 9 Iran-U.S. Cl. Trib. Rep. 206 (Oct. 24, 1985) 178, 251 Islamic Republic of Iran v. United States of America, Decision, 16 Iran-U.S. Cl. Trib. Rep. 285 (Sept. 30, 1987) 376 Levitt v. Gov’t of the Islamic Republic of Iran et al., Award, 14 Iran-U.S. Cl. Trib. Rep. 191 (1987) 339 Lillian Byrdine Grimm v. Gov’t of the Islamic Republic of Iran, Award, 2 Iran-U.S. Cl. Trib. Rep. 78 (Feb. 18, 1983) 90 Phelps Dodge Corp. & Overseas Private Inv. Corp. v. Islamic Republic of Iran, Award, 10 Iran-U.S. Cl. Trib. Rep. 121 (1986) 266, 270 Phillips Petroleum Co. Iran v. Islamic Republic of Iran & National Iranian Oil Co., Award, 21 Iran-U.S. Cl. Trib. Rep. 79 (1989) 128, 136, 176, 251–254, 345 R.J. Reynolds Tobacco Co. v. Gov’t of the Islamic Republic of Iran, Award, 7 Iran-U.S. Cl. Trib. Rep. 181 (July 31, 1984) 388 Reza Said Malek v. Gov’t of the Islamic Republic of Iran, Award, 28 Iran-U.S. Cl. Trib. Rep. 246 (Aug. 11 1992) 178 Sola Tiles, Inc. v. Gov’t of the Islamic Republic of Iran, Award, 14 Iran-U.S. Cl. Trib. Rep. 223 (1987) 302

478

Appendix

Starrett Housing Corp. et al. v. Gov’t of the Islamic Republic of Iran et al., Final Award, 16 Iran-U.S. Cl. Trib. Rep. 112 (Aug. 14, 1987) 175 Sylvania Technical Systems. Inc. v. Gov’t of the Islamic Republic of Iran, Award, 8 Iran-U.S. Cl. Trib. Rep. 298 (June 27, 1985) 383

Other International Arbitration Cases Administrative Decision No. 2, 7 R.I.A.A. 23 (U.S.-Ger. Mixed Claims Comm’n, Nov. 1, 1923) 95 Affaire du Carthage (France/Italie) [Carthage Case (France/Italy)], Award, 11 R.I.A.A. 449 (Perm. Ct. Arb. May 6, 1913) 162 Affaire du Chevreau (France c. Royaume-Uni) [Chevreau Case (France v. United Kingdom)], Award, 2 R.I.A.A. 1113 (June 9, 1931) 143 Affaire du Manouba (France/Italie) [Manouba Case (France/Italy)], Award, 11 R.I.A.A. 463 (Perm. Ct. Arb. May 6, 1913) 162 British Claims in the Spanish Zone of Morocco, 2 R.I.A.A. 615 (1924) 388–389 Case concerning the differences between New Zealand and France arising from the Rainbow Warrior affair, Ruling of July 6, 1986 by the Secretary-General of the United Nations, 19 R.I.A.A. 199 (July 6, 1986) 162 Case concerning the difference between New Zealand and France concerning the interpretation or application of two agreements, concluded on 9 July 1986 between the two States and which related to the problems arising from the Rainbow Warrior Affair, Award, 20 R.I.A.A. 215 (Apr. 30, 1990) 162 Decision No. 7, Guidance Regarding Jus ad Bellum Liability, 26 R.I.A.A. 1 (Eri.-Eth. Claims Comm’n July 27, 2007) 95 Di Caro (Italy v. Venezuela), Decision, 10 R.I.A.A. 597 (It.-Venez. Mixed Cl. Comm’n May 7, 1903) 143 Dispute concerning Responsibility for the Deaths of Letelier and Moffitt (United States/ Chile), Decision, 25 R.I.A.A. 1 (Chile-U.S. Comm’n Jan. 11, 1992) 143 Dix Case, 9 R.I.A.A. 119 (Am.-Venez. Claims Comm’n 1903) 95 Ethiopia v. Eritrea, Final Award on Ethiopia’s Damages Claims, 26 R.I.A.A. 633 (Eri.-Eth. Cl. Comm’n Aug. 17, 2009) 142 Gage Case (United States v. Venezuela), Decision, 9 R.I.A.A. 226 (U.S.-Venez. Mixed Cl. Comm’n Feb. 17, 1903) 143 Heirs of Jean Maninat Case (France v. Venezuela), Decision, 10 R.I.A.A. 55 (Fr.-Venez. Mixed Cl. Comm’n July 31, 1905) 143, 162 Horst Reineccius et al. v. Bank for Int’l Settlements, Partial Award, 23 R.I.A.A. 183 (Perm. Ct. Arb. Nov. 22, 2002) 69, 75, 198

Appendix

479

Lusitania Cases (United States v. Germany), Opinion, 7 R.I.A.A. 32 (U.S.-Ger. Mixed Claims Comm’n Nov. 1, 1923) 142, 144, 149, 155 S.S. “I’m Alone” (Canada/United States), Award, 3 R.I.A.A. 1609 (Jan. 5, 1935) 162 Trail Smelter Arbitration (United States v. Canada), Decision, 3 R.I.A.A. 1905 (Apr. 16, 1938 and Mar. 11, 1941) 89

International Commercial Arbitration Cases BRIDAS S.A.P.I.C. et al. v. Gov’t of Turkmenistan & Concern Balkannebitgazsenagat, ICC Case No. 9058/FMS/KGA, Third Partial Award and Dissent (Sept. 2, 2000) 332–333 Econet Wireless Ltd. v. First Bank of Nigeria et al., Award (June 2, 2005), 31 Y.B. Comm. Arb. 49 (2006) 407 Himpurna California Energy Ltd. v. PT (Persero) Perusahaan Listruik Negara, Ad Hoc Arbitration Proceeding, Final Award (May 4, 1999), 25 Y.B. Comm. Arb. (2000) 345 Patuha Power Ltd. v. P.T. (Persero) Perusahaan Listruik Negara, Ad Hoc Arbitration Proceeding, Final Award (May 4, 1999) 345 Supplier v. First distributor, Second distributor, ICC Case No. 7006, Final Award, ICC Bull. 49 (1992) 51 X v. Y and Z, Procedural Order (Aug. 3, 2012), 2 Le Cahiers de l’Arbitrage 399 (ICC Arb., 2013) 42

International Court of Justice Cases Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Judgment, 2010 I.C.J. Rep. 639 (Nov. 30) 60, 64, 67 Application for Revision and Interpretation of the Judgment of February 24, 1982 in Continental Shelf (Tunisia v. Libya), Judgment, 1985 I.C.J. Rep. 192, 223 (Dec. 10) 432 Application for Revision of the Judgment of 11 July 1996 in Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia & Herzegovina v. Yugoslavia) (Yugoslavia v. Bosnia & Herzegovina) (Preliminary Objections), Judgment, 2003 I.C.J. Rep. 7 (Feb. 3) 443 Application for Revision of the Judgment of 11 September 1992 in Land, Island and Maritime Frontier Delimitation (El Salvador/Honduras, Nicaragua intervening) (El Salvador v. Honduras), Judgment, 2003 I.C.J. Rep. 392 (Dec. 18) 443 Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia & Herzegovina v. Yugoslavia), Order on Counter-Claims, 1997 I.C.J. Rep. 243 (Dec. 17) 350, 352, 358

480

Appendix

Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia & Herzegovina v. Serbia & Montenegro), Judgment, 2007 I.C.J. Rep. 43 (Feb. 26) 86, 162 Arrest Warrant of 11 April 2000 (Dem. Rep. Congo v. Belgium), Judgment, 2002 I.C.J. Rep. 3 (Feb. 14) 162 Barcelona Traction, Light and Power Co., Ltd. (Belgium v. Spain), Judgment, 1970 I.C.J. Rep. 3 (Feb. 7) 59–65, 67, 69, 70, 72 Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), Judgment, 2008 I.C.J. Rep. 177 (June 4) 162 Corfu Channel (United Kingdom v. Albania), Judgment, 1949 I.C.J. Rep. 4 (Apr. 9) 162 Elettronica Sicula S.p.A. (ELSI) (United States v. Italy), Judgment, 1989 I.C.J. Rep. 15 (July 20) 65, 67, 71 Gabčíkovo-Nagymaros Project (Hungary v. Slovakia), Judgment, 1997 I.C.J.Rep. 7 (Sept. 25) 332 Jurisdictional Immunities of the State (Germany v. Italy), Order on Counter-Claims, 2010 I.C.J. Rep. 310 (July 6) 357 LaGrand (Germany v. United States), Judgment, 2001 I.C.J. Rep. 466 (June 27) 116, 326 Northern Cameroons (Cameroon v. United Kingdom) (Preliminary Objections), Judgment, 1963 I.C.J. Rep. 15 (Dec. 2) (separate opinion by Fitzmaurice, G.) 357 Oil Platforms (Iran v. United States), Judgment, 2003 I.C.J. Rep. 161 (Nov. 6) 357 Request for Interpretation of the Judgment of November 20, 1950 in the Asylum Case (Colombia v. Peru), Judgment, 1920 I.C.J. 395 (Nov. 27) 432

Permanent Court of International Justice Cases Factory at Chorzów (Germany v. Poland) (Merits), Judgment, 1928 P.C.I.J. (ser. A) No. 17 (Sept. 13) xii, 4, 114–115, 117, 126, 128–129, 132, 134, 137, 140, 172–173, 177, 180–181, 184, 207, 325, 341, 347, 376, 402–403, 412, 417, 420, 432, 439 Interpretation of Judgments Nos. 7 and 8 (Chorzów Factory), Judgment, 1927 P.C.I.J. (ser. A) No. 13 (Dec. 16) 432 S.S. “Wimbledon” (United Kingdom et al. v. Germany; Poland intervening), Judgment, 1923 P.C.I.J. (ser. A) No. 1 (Aug. 17) 326, 384

Inter-American Court of Human Rights Cases Godínez Cruz Case, Compensatory Damages, Judgment, Inter-Am. Ct. H.R. (ser. C) No. 8 (July 21, 1989) 143 Velásquez Rodríguez Case, Compensatory Damages, Judgment, Inter-Am. Ct. H.R. (ser. C) No. 7 (July 21, 1990) 143

Appendix

481

International Tribunal for the Law of the Sea Cases M/V Saiga (No. 2) (St. Vincent v. Guinea), Case No. 2, Judgment, 1999 ITLOS Rep. 10 (July 1) 142 Responsibilities and Obligations of States Sponsoring Persons and Entities with Respect to Activities in the Area, Case No. 17, Advisory Opinion, 2011 ITLOS Rep. 10 (Feb. 1) 86

Foreign Law Cases Abu-Ghazaleh et al. v. Chaul et al., 36 So. 3d 691 (2009) 51 Apple, Inc. v. Motorola, Inc. et al., 2012 WL 1959560 (D. Ill. May 22, 2012) 268 Arkin v. Borchard Lines Ltd. et al. [2005] EWCA Civ. 655 51 Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995) 349 Essar Oilfields Serv. Ltd. v. Norscot Rig Mgmt. Pvt Ltd. [2016] EWHC 2361 (Comm) 51, 420 Excalibur Ventures LLC v. Texas Keystone Inc. et al. & Psari Holdings Ltd. et al. [2014] EWHC 3436 (Comm) 51, 421 Kumho Tire v. Carmichael, 526 U.S. 137, 152 (1999) 268 Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 299 F.3d 769 (9th Cir. 2002) 213 Lyondell Chemical Co. v. Occidental Chemical Corp., 608 F.3d 284 (5th Cir. 2010) 281 Re Bluebrook Ltd. et al. [2009] EWHC 2114 (Ch) 203 Russian Federation v. Veteran Petroleum Ltd. et al., Case Nos. C/09/477160/ HA ZA 15–1, C/09/477162/ HA ZA 152 and C/09/481619/ HA ZA 15–112 (joined cases), Judgment, Apr. 20, 2016 (Hague Dist. Ct., Chamber Com. Affairs, Neth.) 130, 429 S&T Oil Equipment & Machinery, Ltd. et al. v. Juridica Inv. Ltd. et al., 456 Fed. Appx. 481, 2012 U.S. App. LEXIS 297 (5th Cir., Jan. 5, 2012) 43 Seized Funds of the Russian Space Agency Roscosmos, June 27, 2017 (Cour d’appel de Paris [Paris Court of Appeals], Fr.) 130 Sempra Metals Ltd. v. Her Majesty’s Commissioners of Inland Revenue & another [2007] UKHL 34 389 Stooke v. Taylor [1880] 5 Q.B. 569 349 Summers v. Tice, 33 Cal. 2d 80 (1948) 96

Index Actual market value (see Differential method, Quantifying losses) Annulment (see Post-award remedies) Applicable law 94, 112–119 Articles on State Responsibility for Internationally Wrongful Acts  86–89, 114–115, 142, 172, 264–265 International investment agreements  111, 172, 252 Arbitrators Discretion (see Discretion in assessing damages) Expertise in damages 17 n. 56, 204, 458 Articles on State Responsibility for Inter­nationally Wrongful Acts (see Applicable law) Distinguishing primary versus secondary rules 86 n. 10, 115 n. 19, 140 Injury 86, 88–89 Asset-based approaches (see Backwardlooking valuation) Book value 187, 195, 198–199, 269 Investment expenses (or amounts invested, sunk costs, wasted costs) 7, 53, 90, 192, 195–198, 270, 272, 305–306, 312, 344 Liquidation value 199, 200 n. 126, 266 Replacement value 188, 199, 301 n. 24, 305 Backward-looking valuation 185, 195–200, 269, 305 Beneficiary of payment of the award 442 Bifurcation of quantum phase 9–14 Authority of tribunal to bifurcate 10, 99 Relevant considerations 5, 11–12, 192 Tactical strategies 12 n. 36 Timing 9 n. 24, 12–14 Burden of Proof (see Evidence) But-for scenario (see Differential method, Quantifying losses) Calculation of Damages (see Backward-looking valuation, Forward-looking valuation, Discounted cash flow, Heads of damages, Quantifying losses, Scenario analysis, Sensitivity analysis, Valuation methods)

Capital asset pricing model (see Country risk, Discounted cash flow method—Discount rate) 219, 231, 236 Components Beta 219, 223–225, 237, 240, 248 n. 48 Country risk premium 218, 222–223, 231, 233, 240–243 Growth rate 218–219, 226 Market risk premium 219, 221–222, 237 Risk-free rate 219–221, 237 Criticisms of CAPM 219–220 Case management Bifurcation (see Bifurcation of quantum phase) Conference between experts 14–16 Causation Causation-in-fact (or “but-for”, “historical” causation) 97, 101, 329 Intervening causes 326–328, 330 n. 22 Investment treaties and causation 40, 71 n. 52, 89–95 Legal inquiry 87 n. 14, 93 n. 46 Overdetermination 96, 328 Principle limiting damages 84 n. 7, 134 Proximate cause (or legal cause) 96, 329–332 Chorzów Factory case 114–115, 128, 172, 177, 180, 207 Comprehensive Economic and Trade Agreement (“CETA”) 27 n. 1, 38, 116 n. 25, 118–119, 422–423 Corruption 106, 234, 362 n. 69, 367–368, 412–413, 445 n. 85 Costs Apportionment, approaches to Costs follow the event 364, 400–403, 406–409, 411–414, 419, 422, 426–427, 433 Pay your own way 399–402, 407, 409–411 Relative success approach 399, 403–404, 409, 414–415, 423, 426 Arbitration Rules 357, 366, 399–400, 404–408, 425 Corruption cases, allocation of costs in  412–413

index Counterclaims, on 364–365 Current trends 403, 409, 411, 413 Factors determining costs approach 408–413, 416–417 Interest, on 184, 372 n. 2, 396–397, 417–418 International investment treaties 119, 422–425 Moral damages, in lieu of 163–164 States, awarded to 32, 378–379, 399 n. 7 Third party, payment of costs to 27, 412–413, 417, 422 Third-party funding Legal costs 418–419 Security for costs 50, 420 n. 79, 421–422, 426 n. 98 Success fees 419–421 Costs-based methods (see Backward-looking valuation) Counterclaim (see State defenses, Crossclaims, Set-off) Applicable law Arbitration rules 50 n. 83, 117, 350–352, 357, 360–362, 364, 425, 458 Domestic law 35, 60 n. 11, 353, 355, 359, 363, 365 International investment agreements 12 n. 36, 111 n. 1, 250, 252, 348, 353, 365–366, 368 n. 91, 422 n. 88 Costs of counterclaim 364–365 Interest on counterclaim 363–364 Moral damages 142, 143 n. 8, 148, 165 Nature of a counterclaim Distinguishing from a defense 333, 350 Distinguishing from a set-off claim  325, 347–348 Threshold requirements Admissibility 67, 70, 78, 335 n. 44, 347, 356–359 Jurisdiction 333–335, 352–357 Third party claims 31, 33, 43, 47, 362–363 Timing of counterclaims 359 n. 43, 360, 361 Treaties, options for drafting provisions on counterclaims in 56, 78, 336, 365–368

483 Withdrawal or discontinuance of primary claim, effect of 355–356, 361–362 Counterfactual scenario (see Differential method, Quantifying losses) 178, 338 n. 60 Country risk premium (see Discounted cash flow method—Discount rate) Application Beta 219, 223–225, 237, 240, 248 n. 48 “Bludgeon approach” 247 Lambda 248–249 Sovereign default spread 242–243, 247, 257 Factors for determining country risk  234–236, 253–256, 260 Measures of country risk Qualitative country risk assessments 239–240 Quantitative country risk assessments 239–242 Risk General business risk 252–253 Non-diversifiable risks 223, 231, 246–247 Propensity to expropriate 253–256, 315, 320 Risk management products 249 Cross-claims (see Counterclaims, Set-off, State claims) Customary international law 57–58, 65, 67, 71 n. 51, 87 n. 12, 94 n. 49, 115 n. 19, 120 n. 36, 128–129, 132, 134, 172, 184, 325, 335–336, 450 Damodaran, Aswath 222 n. 64, 245 n. 40, 247–249, 256 n. 71, 283 Differential method 126, 205 Discounted cash flow method 186, 205, 300–307, 339–340, 344, 438 Cost of capital (see Weighted average cost of capital) 209, 218, 236, 247 n. 43 Cost of debt 218, 225, 233 n. 8, 237, 247 n. 43, 248 n. 47 Cost of equity 218–220, 225 n. 75, 236, 247, 248 n. 46 Arbitrage pricing theory model 219 n. 53

484

index

Discounted cash flow method (cont.) Capital asset pricing model (“CAPM”) 219, 231, 236 Fama & French model 219 n. 53, 240 Debt-to-equity ratio 218, 225 Discount rate 186, 208–209, 214, 216, 218, 226–227, 230, 247, 273, 275 Beta 219, 223–225, 237, 240, 248 n. 48 Capital asset pricing model (“CAPM”) 219, 231, 236 Country risk premium 218, 222–223, 226, 233, 238 Equivalence principle 209–210, 220 Growth rate 211, 218–219, 226 Market risk premium (or equity risk premium) 221, 222 n. 64, 235, 237, 248 Marketability (or liquidity) discount  194, 227–228, 238 n. 21 Minority interest discount 227, 238 n. 21 Reasonable certainty (see Evidence) Risk 208 n. 13, 209, 211, 213–214, 216, 218, 219 n. 52, 220–228, 275 Size premium 238 n. 20 Terminal value 210, 216, 226, 273, 274 n. 26 Weighted average cost of capital (see Discounted cash flow method— Cost of capital) 209, 218, 225, 247 n. 43 Speculative assumptions 211, 229, 236 Sub-methods of discounting cash flows  208 Cash flow to the firm (“FTF”) 209–210 Cash flow to equity (“FTE”) 209–210 Uncertainty (see Evidence, State defenses) Young investments, valuation of (see Early stage investments) Discretion in assessing damages 138, 180, 212, 272, 328, 331, 337, 345, 364, 372, 384, 404–405, 407, 429, 453 Double recovery 59, 66, 325, 343–344, 444

Energy Charter Treaty (“ECT”) 33 n. 21, 49, 113 n. 8, 121, 127 n. 73, 375 n. 20 European Convention for the Protection of Human Rights 116 n. 23 European Court of Human Rights (“ECtHR”) 116, 357 Event studies 108–109, 200–202, 318 n. 75, 319 Evidence Availability of evidence 146, 150, 275 n. 28, 288, 290 Burden of proof 99, 338 n. 59, 349, 351, 377 Business plans 102, 104, 198 n. 113, 203, 271–272, 304 Standard of proof Balance of probabilities 338 n. 60 Reasonable certainty 4 n. 7, 20, 26, 97 n. 64, 137, 212, 264–265, 267, 269, 271, 338, 428, 455 Ex aequo et bono 148 n. 29, 345, 372 n. 4, 396 n. 98, 430, 448 Exchange rate 179, 186, 235, 245 Expectancy value 213, 233 Experts Divergence of opinions, reasons for 5–8, 205–206 Duty to tribunal 6 Expert-conferencing 21–23 Joints models 7, 23–26, 457 Oral presentations 21 Pre-hearing meeting between experts 14–16, 23 Tribunal-appointed experts 16–21, 457–458 Expropriation 111–112, 119–121, 122 n. 46, 126–141 Lawful 112, 127–129, 130 n. 92, 131, 133, 141, 174, 176, 181, 250, 253, 374 Unlawful 112, 127–133, 137, 160, 172, 174, 176–177, 179, 181–182, 188, 192, 250 Creeping expropriation 120 n. 38, 178, 251 Direct expropriation 178, 251, 341 n. 65

Early stage investments, valuation of 194, 212–213, 230, 262–264, 266, 269, 273, 275, 278, 283, 287–292, 300–307

Fair market value 24, 123–124, 126–127, 131, 136–137, 174–175, 179–180, 185, 188, 191–194, 196, 197 n. 112, 198–199, 205 n. 2,

index 206, 253–254, 267, 270, 295, 296 n. 10, 298–299, 342, 344 n. 76, 439 Forward-looking valuation 205, 266, 273, 288–289, 344, 391 Full reparation Consequential losses 181–183 Costs 402–403, 411–412, 426 Ex post data, use of 129 n. 86, 179–181 Indirect losses 181, 183 Interest (see Interest) 184, 363–364, 371, 417–418 Valuation date 130, 133, 176–180, 184 Going Concern 186, 195, 199, 212–213, 267, 301 n. 25 Heads of damages Incidental expenses (or indirect losses, consequential losses) 181–182 Lost opportunity 54, 79, 99 nn. 76, 108, 183, 189, 265 Lost profits 97, 215, 264–265, 269–270, 339–340, 344 Hot-tubbing experts (see Experts— Expert-conferencing) Income-based approaches (see Discounted cash flow method) 136, 236 Indexing 197, 319–320 Inherent powers 328, 375, 443 Interest Applicable rules Arbitration rules 117, 164, 351, 357, 360, 364, 366, 375, 406, 425 Bilateral investment treaties 112, 326, 374–375 Domestic law 341, 359, 363, 374, 384, 389, 448 International law 365, 371, 374–377, 389, 449 Compounding 371–372, 378, 387–392 Costs, application of interest on 371 n. 2, 396–397, 417–418 Current trends 378–380, 390, 393–394 Duration 393–395 Inherent powers 375 Post-award interest 394–395 Pre-award interest 393–394

485 Consequence of failure to request 184, 394, 396, 418, 442 Grace period 394–395 Purpose compared to post-award interest 184, 251, 318, 394, 417 n. 70, 418 Rates 379, 381–387 Borrowing rates 379–384, 386 Fixed rates 380, 384–385 LIBOR 379, 382, 385–387, 392–396 Return on investment 381, 385 Risk-free rate 382, 386–387, 395 Rest periods 379, 392–393 Simple Interest 371, 388–389, 392 Supplementary decisions on interest  442 International investment treaties Counterclaims against foreign investors 333–334, 347, 352–354, 359, 362, 367–368 Guidance on calculating damages  118–119, 122 n. 46, 185, 457 Provisions limiting damages 66, 76, 78, 89, 94 n. 51, 117 n. 28, 118, 131, 172, 336, 367–368 Liquidation Value 199, 200 nn. 125–126, 266 Loss of chance (or loss of opportunity)  54, 79, 99 nn. 76, 108, 183, 189, 265 Lost profits (see Discounted cash flow method, Forward-looking valuation, Heads of damages, Market-based approaches) Market-based approaches 135, 189–195, 207 n. 12, 228–229, 236, 296, 307–316 Comparable public company approach 191–193, 268, 314–315 Comparable transaction approach  187–189, 193–195, 228, 272 n. 25, 293–294, 312–315 Market capitalization 189–191, 200–201, 307, 314, 316–321 Offers to purchase 89, 191 n. 78, 294, 312 n. 58 Secondary method 189, 207 n. 12, 228–229, 313, 315 Market risk premium 219, 221–224, 235, 237, 239, 240, 243, 245, 247 n. 41

486 Mining projects Junior mining companies 296, 320–321 Methods of valuation Asset-based approaches 305–307 Discounted cash flow method 300–307 Market-based approaches 307–316 Key drivers of value 298–299 Offers to transact 312 Operating projects 310–311 Pre-production projects 302, 311–313, 315 n. 67 Stock prices (see Market-based approaches—Market capitalization) 320–321 National Instrument 43–101  297 n. 15, 304 n. 33 Monte Carlo simulation 202–203, 262, 275, 278–282, 287, 302 n. 28 Moral damages Abuse of process 163–164 Awards of moral damages Human rights cases, in 142 State-to-State cases, in 142, 162, 165 Bernhard von Pezold et al. v. Zimbabwe  144, 148, 152, 158 Credit 144, 145, 149, 150, 153 Desert Line v. Yemen 143, 148–152, 155, 396 “Exceptional Circumstances” threshold 144, 147, 152–154, 156–157, 167 Fault-based liability 150, 158 Harassment 106–107, 149, 161 Honor 162, 165 Investment reputation of States 162–163, 165–166 Lemire v. Ukraine 86, 97 n. 66, 101–102 Lundin v. Turkey 148 n. 36, 166 n. 146 Non-material damage 145 Pey Casado v. Chile 112, 138, 160, 413 n. 57 Prestige 149–150, 162–163 Punitive damages 117, 154, 158, 203 Reputation 108–109, 144–146, 149–150, 153, 156, 161–164, 165 n. 142, 166, 182, 344 n. 76 Satisfaction Declaration of wrongfulness 149, 161, 165, 167 Pecuniary satisfaction 161, 163–166

index State’s level of development, impact of 156, 194 Natural resources 119–120, 192, 204 n. 143, 292–295, 306 North American Free Trade Agreement (“NAFTA”) 11, 72 n. 52, 84, 94 n. 52, 116–117, 122 nn. 45–46, 329, 375 Oil and Gas disputes Key drivers of value 298–299 National Instrument 51–101 304 n. 33 Pre-production projects, valuing 203, 311–313, 315 n. 67 Comparables 307–316 DCF method 248–249, 300–307 Sunk costs 305–306, 312 Prices 299, 309, 316 Resources and reserves 298, 309, 311 Post-award remedies Annulment 445–456 Correction 434–440 Interpretation 432–434 Revision 443–445 Supplementary decision 440–442 Relationship with failure to state reasons 440 n. 56, 453 Proof (see Evidence) Punitive damages 117, 158, 394 n. 91, 424 Quantifying losses Backward-looking approaches 185, 195–200, 269, 305–306 Cross-checks (or reality check, triangulation) 135, 185, 189, 194, 200, 206, 228, 275, 313–314 Differential method 126, 205 Actual market value 126, 205, 217 But-for scenario 97, 127, 135, 137, 205, 217 Forward-looking approaches 171, 185, 221 n. 60, 236 n. 15, 273 Guidance from international investment agreements 117–118, 122 n. 46, 185, 457 Valuation methods (see Asset-based approaches, Discounted cash flow

487

index method, Income-based approaches, Market-based approaches) Value in exchange 124, 126–127 Value to the owner 126–127 Weighted average of different approaches 185, 187, 191, 196–197, 200, 206 n. 4 Real options valuation 204 n. 143, 282–287, 302 n. 28 Reasonable certainty 4 n. 7, 20, 26, 97 n. 64, 137, 212, 264–265, 267, 269, 271, 338, 428, 455 Reflective loss Barcelona Traction case 59, 62, 64, 67, 72 Diallo case 60, 67 Extended forms 74 Municipal law 60, 63, 70 Remedies Global constitutional and administrative law 118 Monetary damages 90 n. 27, 91, 117–119 Restitution 90 n. 27, 117–119, 129–130, 133, 138, 172–173, 177, 181, 371, 392 Satisfaction 161–167, 444 Remedies for quantification errors (see Post-award remedies) Renewable energy disputes 299–300, 303–304, 311, 313, 321 Comparable transactions 194, 313 DCF method, implementation of  217 n. 47, 302–305 Key drivers of value 299–300 Stock market approach, inapplicability of 316 Restitutio in integrum (or restitution) For investors 117–119, 128–129, 133, 138, 172–173, 295, 304, 376 For States 366 Risk in finance International investment treaties not a guarantee against all business risks 252–253, 257, 327 Relationship between risk and return on investment 209, 236, 238 Time value of money 186, 208, 220, 232, 237, 284, 289 Variability of outcomes Premium for risk 233, 242–243

Standard deviation 242–245, 257, 285 n. 41 Volatility of countries at early stage of economic development 235, 243 Satisfaction 88, 116 n. 23, 117 n. 28, 144 n. 18, 161–167, 444 Scenario analysis 25, 249, 262, 275–278, 281, 287, 291 Sensitivity analysis 23, 25, 276, 280–281, 457 Set-off Distinguished from a counterclaim  349–350 Recovery of costs 364 Relationship to the primary claim 361, 363 Timing of set-off on damages, impact of 348–349, 352 n. 23, 357, 361, 363–364 Settlement 13 n. 41, 41, 55–56, 399, 403, 416, 427 Shareholder claims (see Reflective loss) Speculative damages (see State defenses) Standard of compensation 111, 128, 133, 172, 174, 400, 439 Bilateral investment treaties 113 n. 11, 116 n. 24, 118, 124–126, 128, 131–132, 139 Customary law rules 114–118, 134, 172–173, 325 n. 1 Fair market value 123–124, 126–127, 131, 136–137, 174–175, 205 n. 2, 267, 295–296 Fair value 124, 175 n. 22 Full compensation 122, 171 Full reparation 114, 117, 119, 126, 133, 138, 140–141, 173, 207, 325, 371 Just satisfaction 116 Market value 124–125, 127, 131–132, 205 n. 2 Valuation date 121, 124, 130, 133 State claims (see Counterclaims, Crossclaims, Set-off) 350, 365–367 State defenses Bad business decisions 326–327 Contributory fault 325–328, 346, 363 Double recovery 59, 66, 325, 343–345, 444 Equity 345–346 Limits on scope of investment 341–342, 449–450 Mitigation 98, 332–333, 363

488 State defenses (cont.) Necessity 335–337, 348 Speculative or uncertain damages  54–55, 97, 103 n. 93, 136–137, 195, 213, 218, 270, 302, 325, 337–340, 385 Fact versus amount of loss 7, 11 n. 31, 103 n. 93, 267 n. 8, 338–339 Historical operations 136, 138, 195, 212–213, 265, 269–271, 339, 348, 452 State’s level of economic development  235, 243, 417 Systemic risk (see Market risk premium) Telecommunications 248–249, 276, 279, 284 Third party claims 55, 79–80, 362–363 Third-party funding Disclosure of Funder’s identity 40 Funding arrangement 34, 36–37, 41, 46 Governments, funding of 32, 49–50 Not-for-profit funders 48–50 Process of obtaining funding 33–34 Rules on funding Arbitral rules 28–30 Domestic arbitration law 34–38 Treaties 38–39 Security for costs 27, 39–40, 44–47, 50, 52, 418–422, 426 Types of arrangements 30–33 Time value of money 180, 186, 208, 216, 220, 232, 237, 284, 289, 379, 382, 391 Tribunal-appointed experts 16–21, 457–458

index Types of claims Expropriation clause, breach of (see Expropriation—Unlawful) Direct expropriation 178, 251, 341 n. 65 Indirect or creeping expropriation  120 n. 38, 178, 251, 341 n. 65 Non-expropriation obligations, breach of 112–119, 134–140, 179 Uncertainty (see State defenses) UNIDROIT Principles of International Commercial Contracts 265, 332 n. 29, 338 n. 58 Unjust Enrichment 251 n. 54, 252, 384, 452–453 Valuation date 205–207, 216–217, 220, 229 Appropriate date to measure country risk 250–251, 260 Compounding historical cash flows  207 n. 10 Date of award 130, 133, 176–179, 184, 250–252 Date of breach 133, 176–179, 184, 250–252, 331 Mixing financial data 180, 261 Use of ex-post data 129 n. 86, 180–181, 331 Valuation Methods (see Quantifying losses) Weighted average cost of capital (see Discounted cash flow method— Discount rate) Windfalls 289, 371 World Bank Guidelines on the Treatment of Foreign Direct Investment 123, 131–132, 174 n. 10, 250 n. 52, 265–266, 301 n. 25