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Calculation of Compensation and Damages in International Investment Law, 2nd Edition by Marboe, Irmgard (30th March 2017)

1 Introduction

From: Calculation of Compensation and Damages in International Investment Law (2nd Edition)

Irmgard Marboe

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. date: 17 January 2019

Subject(s):
Compensation — Damages — Awards

(p. 1) Introduction

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

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

1.03  There is now a better understanding that the traditional scepticism concerning numbers among lawyers is no longer acceptable. Claimants are not predominantly interested in the legal foundations of their claim but are above all concerned with the question of how much they can expect to receive after a possibly long-lasting and uncomfortable legal procedure.5 A fairly precise estimate of the amount of money to be expected is of the greatest importance to evaluate the risks of such a costly undertaking as international judicial proceedings.

1.04  The difficulties of calculating compensation and damages in investor–state disputes are also rooted in the multifaceted nature of international investment law. On the one hand, it forms part of public international law, as the legal framework is shaped by international treaties and customary international law. On the other hand, some authors have argued that international investment law should be understood as constituting a species of global constitutional and administrative law.6 Others have highlighted the contractual nature of international investment law with its various types of bilateral agreements between states, and between (p. 3) investors and states.7 In addition, there are similarities, but also divergences between international investment arbitration and international commercial arbitration.8

1.05  In the light of the above, the calculation of compensation and damages continues to present a particular challenge. Which rules and principles are to be followed? Compensation and damages are concepts that are used and applied in all of the above-mentioned legal frameworks, but in rather different ways. How can international investment arbitration reconcile these different approaches?

1.06  With respect to administrative law, the right of individuals to receive compensation or damages from the state is subject to many contingencies. While in cases of direct expropriation, the rules are more or less settled, the matter is much more complicated in the area of state liability for wrongful state acts. European law refers to the ‘common principles of law’ with respect to its liability for damage caused by unlawful acts of its institutions or servants.9 Yet, there is considerable jurisprudence10 and academic writing11 that such ‘common principles’ are not easy to detect. One of the few common principles is that the liability for damages of the state towards individuals is more limited than in the relationship between (p. 4) individuals themselves.12 In addition, liability for legislative acts is accepted only in a rather restrictive way so as not to interfere unduly with the state’s regulatory power.13

1.07  In the area of contract law, other principles prevail. According to what has been described as ‘rectificatory’ or ‘corrective’ justice, after Aristotle’s Nicomachean Ethics, what one has gained, the other has lost and must be compensated in order to equalize injustice.14 The equilibrium of contractual rights and duties should be safeguarded, if possible, with respect to the time of the agreement.15

1.08  Economic considerations play an important role for general preventive reasons. The financial consequences of certain behaviour should be assessable beforehand. Only then can jurisprudence fulfil its task of upholding and securing the rule of law.16 If the amounts do not turn out in a comprehensive and consistent manner, this chance is lost.

1.09  This is especially relevant in the international context. In the area of international investment disputes, numerous different tribunals are dealing with the quantification of compensation or damages and they apply a large variety of valuation approaches. It is often not clear beforehand which tribunal will apply which approach and why. The lack of a more uniform practice and more foreseeable criteria leads to uncertainty. As a consequence, claimants may be tempted to overstate their claims, anticipating that a tribunal might decide just to ‘split the baby’.17

1.10  Even though the calculation in the concrete case is only directly relevant for the parties, it has its external effects. The calculation of the respective individual claims (p. 5) also contributes—or not—to legal certainty. The better an award on compensation and damages is reasoned and explained, the more chance it has of being considered legally and morally acceptable, not only to the state party to the dispute but also to the outside world.18 Economically adequate and comprehensive calculation certainly serves a useful public policy purpose.19

1.11  Environmental organizations and other non-governmental organizations (NGOs) have been warning of the so-called ‘chilling effect’ of high compensation or damages awards in investment disputes.20 Out of fear of being confronted with astronomical claims from financially powerful investors, some states have refrained from utilizing useful and desirable measures in the common interest such as environmental or employment regulations. This has the effect of hampering social development in these countries.

1.12  Economic difficulties and crises of host states also have played a role in the investor–state arbitration.21 While the first awards against Argentina have tended to reject the justifications for the emergency measures taken, the subsequent successful annulment proceedings and a few other awards did not follow this tendency. The difference between the non-precluded measure (NPM) provisions contained in many investment protection treaties and the customary international law rule on the state of emergency as a ‘ground for precluding wrongfulness’ with its strict conditions formulated in Article 25 of the Articles on State Responsibility22 appears now to have gained more ground. It will be discussed how this affects the quantum aspects in investment arbitration cases.

1.13  On the other hand, the size of the amounts awarded in investment arbitration has increased over the past years.23 This is connected to the size of the projects under (p. 6) dispute, but in the absence of an upper limit in the scale of foreign investment, the awards of compensation or damages may continue to result in ‘astonishing amounts’.24

1.14  Finally, it is important to consider the time factor. The period of time between the event giving rise to the claim and the assessment or payment of the amount of compensation or damages has an important influence on their value, which can be taken into account through an award of interest. However, the rate and the period of interest as well as the question of whether interest should be compounded are often not appropriately considered, although in this respect too, considerable progress can be observed in the past few years.

1.15  The role of experts regarding questions of evaluation and calculation also needs to be highlighted. Usually, the parties present their own expert reports. More rarely, experts are also appointed by the tribunal. However, the decision about the amount of compensation or damages must not be delegated to the experts.25 In order to assess the figures submitted by experts, an understanding of the methods and a willingness to consider them are important.26

1.16  In international investment arbitration, expropriations, violations of treatment standards contained in international investment protection treaties, and breaches of contract are at issue, when disputes arise between foreign investors and host states. The dual character of the state as a sovereign on the one hand and as an actor in the private business sector on the other poses several problems. While the state’s sovereignty and responsibilities for public welfare must be safeguarded, the state must also comply with legal obligations entered into for the promotion and protection of foreign investment. Generally, it is in the interest of the host state to create and maintain a reliable legal framework for foreign investors. In the developing and in the developed worlds, private foreign investment is regarded as an essential means for economic prosperity and development.

1.17  The following chapters will analyse how modern international investment tribunals have dealt with this dilemma. Some important older decisions of claims or (p. 7) arbitral commissions will also be analysed insofar as they are still influential for the question of calculating compensation or damages. Furthermore, the International Court of Justice and its predecessor, the Permanent Court of International Justice, have made important pronouncements on the duties of states concerning foreigners and on state responsibility. Their judgments will also briefly be reflected.

1.18  As regards investor–state arbitration, the focus will be on arbitrations initiated under the auspices of the International Centre for Settlement of Investment Disputes (ICSID), but will also include arbitrations under the UNCITRAL rules and other ad hoc arbitrations. Furthermore, the jurisprudence of the Iran–US Claims Tribunal will be analysed, as it had to deal with the specific financial aspects of the investor–state relationship on many occasions. Some thought is also given to the practice of the UN Compensation Commission which had to assess, inter alia, business losses of private individuals as a consequence of Iraq’s invasion of Kuwait in 1990. Finally, the practice of the European Court of Human Rights (ECtHR) is occasionally referred to as far as it contains identifiable guidelines for the assessment of damages after violations by states of their international obligations. This is the case in particular with the right to property as contained in Article 1 of the First Protocol of the European Convention on Human Rights (ECHR).

1.19  As a starting point, Chapter 2 will analyse the concept of compensation and damages on the basis of legal rules applicable in international investment disputes. Chapter 3 is dedicated to the most important valuation standards and criteria which can be identified on this basis. Chapter 4 will then introduce some of the internationally recognized valuation standards and approaches from the economic perspective. The scope of Chapter 5 will be to combine the two approaches and assess whether and how the different valuation methods used in economic practice are reflected and applied in international jurisprudence. Chapter 6 will then deal with the issue of interest and address both pre-award and post-award interest. Some concluding remarks will be outlined in Chapter 7. The four Annexes contain analytical tables of cases, which were significant in terms of calculation of compensation and damages in investor–state arbitration since 2008.27(p. 8)

Footnotes:

1  The notable exceptions include R Lillich (ed.), Valuation of Nationalized Property in International Law, vols 1–4 (Charlottesville: University Press of Virginia, 1972–87). A few articles appeared on specific aspects of the issue of valuation, such as M Ball, ‘Assessing Damages in Claims by Investors Against States’ (2001) 16 ICSID Rev.-FILJ 408; P Friedland and E Wong, ‘Measuring Damages for Deprivation of Income-Producing Assets: ICSID Case Studies’ (1991) 6 ICSID Rev.-FILJ 400; W Lieblich, ‘Determination by International Tribunals of the Economic Value of Expropriated Enterprises’ (1990) 7 Journal of International Arbitration 37; W Lieblich, ‘Determining the Economic Value of Expropriated Income-Producing Property in International Arbitrations’ (1991) 8 Journal of International Arbitration 59; S Khalilian, ‘The Place of Discounted Cash Flow in International Commercial Arbitration: Awards by Iran–U.S. Claims Tribunal’ (1991) 8 Journal of International Arbitration 31; C F Amerasinghe, ‘Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice’ (1992) 41 ICLQ 22. A few books appeared in German, such as R Hefele, Ermittlung der Entschädigung bei Enteignung von Direktinvestitionen im Ausland nach modernem Völkerrecht (Munich: Herbert Utz Publishers, 1991); H Bergmann, Die völkerrechtliche Entschädigung im Falle vertragsrechtlicher Positionen (Baden-Baden: Nomos, 1997); M Schäfer, Entschädigungsstandard und Unternehmens bewertung bei Enteignungen im allgemeinen Völkerrecht (Heidelberg: Verlag Recht und Wirtschaft, 1997); and in French, such as J Ortscheidt, La réparation du dommage dans l’arbitrage commercial international (Paris: Dalloz, 2001); on the valuation practice of the European Court of Human Rights (ECtHR) see, in particular, G Dannemann, Schadensersatz bei Verletzung der Europäischen Menschenrechtskonvention (Cologne et al: Heymanns, 1994).

2  Usually ascribed to Macer, Dig 49, 8, 1 para. 2; see A Murillo Villar, ‘La motivación de la sentencia en el proceso civil romano’ (1995) 2 Cuadernos de Historia de Derecho 11, 28. Waelde and Sabahi note that the question of compensation and damages is often ‘the poor cousin’ when the battle royal rages first about jurisdiction and then about the merits. T Waelde and B Sabahi, ‘Compensation, Damages, and Valuation’ in P Muchlinski et al (eds), The Oxford Handbook of International Investment Law (Oxford: Oxford University Press, 2008) 1049, 1051.

3  See, e.g., Y Derains and R Kreindler (eds), Evaluation of Damages in International Arbitration (Paris: International Chamber of Commerce, 2006); T Waelde and B Sabahi, above, n. 2; S Ripinsky and K Williams, Damages in International Investment Law (London: British Institute of International and Comparative Law, 2008); M Kantor, Valuation for Arbitration (Alphen aan den Rijn: Kluwer Law International, 2008); A Bjorklund, I Laird, and S Ripinsky (eds), Investment Treaty Law. Current Issues III (London: BIICL, 2009); H Wöss, A San Román Rivera, P Spiller, and S Dellepiane, Damages in International Arbitration Under Complex Long-Term Contracts (Oxford: Oxford University Press, 2014). In 2014, the Journal of Damages in International Arbitration was founded which aims ‘to provide a forum for the free exchange of ideas concerning the calculation of damages, the difficulties and the challenges therein’. See J Gotanda and R Walck, ‘Editors’ Note’ (2014) 1 Journal of Damages in International Arbitration v. Numerous articles published in this Journal are referred to in this book. In M Bungenberg, J Griebel, S Hobe, and A Reinisch (ed), International Investment Law (Baden-Baden et al: Nomos et al, 2015), the chapter on ‘Restitution, Damages and Compensation’ encompasses more than 120 pages in nine subchapters.

4  A study by PWC in 2015 analysing ninety-five awards between 1990 and 2015 shows that the number of pages dedicated to explaining the basis for the quantification of damages has risen from eight in pre-2000 to thirty-four pages in 2011–15. Tribunals are also addressing more complex valuation issues. See PricewaterhouseCoopers, 2015—International Arbitration Damages Research—Closing the Gap between Claimants and Respondents, available at <http://www.pwc.co.uk/services/forensic-services/disputes/2015-internationalarbitration-damages-research-closing-the-gap-between-claimants-and-respondents.html>; reprinted in ( 2016) 3 Journal of Damages in International Arbitration 99, 104.

5  Gotanda notes that ‘what is of primary concern to the aggrieved parties most often is not the issue concerning jurisdiction and the merits of the various substantive claims, around which lawyers build sophisticated legal arguments, but the result, typically measured by the amount of money recovered’. J Gotanda, ‘Damages in Private International Law’ 326 RdC (2007) 73, 83.

6  G Van Harten and M Loughlin, ‘Investment Treaty Arbitration as a Species of Global Administrative Law’ (2006) 17 EJIL 121; S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010); S Montt, State Liability in Investment Treaty Arbitration. Global Constitutional and Administrative Law in the BIT Generation (Oxford: Hart Publishing, 2009).

7  A van Aaken, ‘International Investment Law between Commitment and Flexibility: A Contract Theory Analysis’ (2009) 12 Journal of International Economic Law 507; J Salacuse, The Three Laws of International Investment. National, Contractual, and International Frameworks for Foreign Capital (Oxford: Oxford University Press, 2013).

8  C Knahr, C Koller, W Rechberger, and A Reinisch (eds), Investment and Commercial Arbitration—Similarities and Divergences (Utrecht: Eleven, 2010).

9  See Article 340(2) of the Treaty on the Functioning of the European Union (TFEU) which provides: ‘In the case of non-contractual liability, the Union shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by its institutions or by its servants in the performance of their duties.’

10  The Court of Justice of the European Union has in its well-known judgments in Francovich and Brasserie U Pecheur/Factortame elaborated general principles of state liability for breaches of European law which are designed after this model, thus also based on the general principles common to the laws of the member states. This case law has developed over time, but the condition that the breach must be ‘sufficiently serious’ to trigger liability has been criticized repeatedly. Out of the numerous cases dealing with principles of the liability of the EU and its member states see, in particular, Case 5/71, Zuckerfabrik Schöppenstedt v Council [1971] ECR 975, 984, para. 11; Cases C-6 and 9/90, Francovich and Bonifaci v Italy [1991] ECR I-5357; Brasserie du Pecheur SA v Federal Republic of Germany; R. v Secretary of State for Transport, ex parte Factortame Ltd (No. 4) [1996] ECR I-1029; Laboratoires Pharmaceutiques Bergaderm and Goupil v Commission, Judgment of 4 July 2000, Case C-352/98.

11  A Bradley and J Bell, ‘Governmental Liability: A Preliminary Assessment’ in J Bell and A Bradley (eds), Governmental Liability: A Comparative Study (London: BIICL, 1991) 1–2; F Fines, ‘A General Analytical Perspective on Community Liability’ in Tom Heukels and Alison McDonnell (eds), The Action for Damages in Community Law (The Hague: Kluwer Law, 1997) 11; M Andenas and D Fairgrieve, ‘Misfeasance, Governmental Liability and European Influences’ in D Fairgrieve, M Andenas, and J Bell (eds), Tort Liablity of Public Authorities in a Comparative Perspective (London: BIICL, 2002) 183; D Fairgrieve, State Liability in Tort. A Comparative Law Study (Oxford: Oxford University Press, 2003); C Booth, The Negligence Liability of Public Authorities (New York: Oxford University Press, 2006); I Marboe, ‘Principles of State Liability and their Applicability in Investment Arbitration’ in M Kantor (ed.), Ten Years of Transnational Dispute Management, TDM 4 (2013) <http://www.transnational-dispute-management.com>.

12  In this respect, the fear of ‘opening the flood gates’ is frequently raised. See I Marboe, ‘State Responsibility and Comparative State Liability for Administrative and Legislative Harm to Economic Interests’ in S Schill (ed.), International Investment Law and Comparative Public Law (Oxford: Oxford University Press, 2010) 377, 409.

13  See the argument of G A Darmon in Vreugdenhil II: ‘In many, if not all, Member States the conditions for liability for legislative action are appreciably different from those concerning administrative action.’ Case C-282/90, Vreugdenhil v Commission (Vreugdenhil II), [1992] ECR I-1937, 1958; see also A Arnull, ‘Liability for Legislative Acts Under Article 215(2) EC [now: 340 (2) TFEU]’ in T Heukels and A McDonnell (eds), The Action for Damages in Community Law (The Hague: Kluwer Law, 1997) 129; I Marboe, above, n. 12.

14  Aristotle, Nicomachean Ethics, translated by W D Ross (Stilwell: Digireads, 2005) Book V, 4; this argument is expanded in more detail by H Wöss et al, above, n. 3, 13–14.

15  A van Aaken, above, n. 7, 508 et seq.

16  Waelde notes that the compensation payable adds to the ‘signalling effect of a tribunal award’. T Waelde, ‘The Specific Nature of Investment Arbitration’ in P Kahn and T Waelde (eds), New Aspects of International Investment Law (The Hague: Martinus Nijhoff Publishers, 2007) ch. 2.

17  PWC analysed in its 2015 study whether the concern that tribunals tend to ‘split the baby’, i.e. award an amount in between the two amounts presented by claimants and respondents, was supported by evidence. The study showed that in only 18% of cases did tribunals award an amount between 40 and 60% of the amount claimed. There were significantly more cases where the tribunals’ position on damages was much closer to one party’s position (typically the respondent) than the middle ground. On average the amount awarded represented 37% of the amounts claimed. See PWC, above, n. 4, 102–3.

18  See the analysis by J Branson, ‘Damages in Investment Arbitration—A Revolutionary Remedy or Reward for Rich Corporations at the Expense of the World’s Poor? A Fundamental Examination of Chorzów’s Children’ (2016) 3 Journal of Damages in International Arbitration (forthcoming).

19  This has also been emphasized by M Reisman and R Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2003) 75 BYIL 115, 137.

20  N Bernasconi-Osterwalder, ‘Who Wins and Who Loses in Investment Arbitration? Are Investors and Host States on a Level Playing Field?’ (2005) 6 JWIT 69 et seq.

21  That very high amounts could pose a problem for the economy of smaller states has been robustly argued by Arbitrator Brownlie in his Separate Opinion in CME v Czech Republic. See Separate Opinion on the Issues at the Quantum Phase of: CME v Czech Republic by Ian Brownlie of 14 March 2003, paras 74 et seq. Similar issues have been raised in the context of the ICSID proceedings against Argentina. See, in particular, CMS Gas Transmissions Company v Argentine Republic, Award of 12 May 2005, 44 ILM (2005) 1205 and LG&E Energy Corp et al v Argentine Republic, Award of 25 July 2007. For further details of the discussion see Chapter 3, Section D(2), paras 3.326 et seq.

22  See the critique on the practice of the early awards decided against Argentina by W Burke-White and A von Staden, ‘Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’ (2008) 48 Virginia Journal of International Law 307.

23  The PWC study in 2015 showed that 100% of the awards until 2000 amounted to less than US$100 million. Between 2006 and 2010, 81%, and between 2011 and 2015, 79% of the amounts were less than US$100 million. These results demonstrate the tendency towards larger awards. Yet, the research also shows that the overwhelming majority of awards continue to be for amounts below US$100 million. Only three of the awards reviewed in the last five years were for amounts in excess of US$1 billion, and five for amounts greater than US$100 million but less than US$1 billion. See PWC, above, n. 4, 109.

24  See Mark Kantor, ‘Fifty Billion Dollars; The Yukos Damages Awards’ (2015) 2 Journal of Damages in International Arbitration 91: ‘What does it mean for the presentation and evaluation of damages evidence when an arbitral tribunal orders the losing respondent to pay the astonishing amount of more than US$50 billion?’

25  N Ulmer, ‘Assessing Damages—Are Arbitrators Good at It? Should They Be Assisted by Experts? Should They Be Entitled to Decide ex aequo et bono?’ (2005) 6 JWIT 11; R Walck, ‘Logic and Ethics in the Practice of Expert Witness Services’ (2016) 3 Journal of Damages in International Arbitration 149.

26  This may also serve to emphasize the acceptance and enforceability of a tribunal award. See W Lieblich, ‘Determining the Economic Value of Expropriated Income-Producing Property in International Arbitrations’ (1991) 8 Journal of International Arbitration 59, 74.

27  The book by Ripinsky and Willians contains tables of relevant cases until 2007. See Ripinsky and Willians, above, n. 3, 405–505. It therefore seemed useful to continue this chronology from the year 2008.