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Calculation of Compensation and Damages in International Investment Law by Marboe, Irmgard (2009-08-20)

1 Introduction

From: Calculation of Compensation and Damages in International Investment Law

Irmgard Marboe

Subject(s):
Awards — Compensation — Damages

(p. 1) Introduction

1.01  The issue of calculation has traditionally attracted relatively little attention in legal writing and practice. The main interest of juridical analysis has usually concentrated on the legal foundations of claims but less on the question of the concrete amount that would be awarded in the end. Hereby, a wrongful interpretation of the Latin verdict of iudex non calculat1 likely manifests.

1.02  Only recently an increased awareness of this matter appears to have developed which is recognizable through a growing number of publications around calculation and evaluation matters.2 There is now a certain understanding that the (p. 2) traditional scepticism concerning numbers among lawyers represents a deficit for a variety of reasons. On one hand, claimants are not only interested in the legal foundations of their claim but are concerned above all with the question of how much they can expect to receive after a possibly long-lasting and uncomfortable legal procedure.3 The fairly precise estimate of the expected amount of money is of the greatest importance to evaluate the risks of such a costly undertaking as an international judicial proceeding.4

1.03  Furthermore, economic considerations play an important role for general preventive reasons. The financial consequences of certain behaviour should be assessable beforehand. They should reflect the loss actually incurred and come as close as possible to the reality of the situation. Only then can jurisprudence fulfil its task of upholding and securing the rule of law.5 If the amounts do not turn out in a comprehensive and consistent manner, this chance is lost.

1.04  This is especially relevant in the international context. It appears to be very difficult to survey how the different dispute settlement institutions have reached their results on valuation matters. This is also due to their diversity. In the area of international investments, numerous different courts and tribunals are confronted with the question of calculation of compensation or damages. Furthermore, the financial outcome is often difficult to comprehend because the underlying guidelines or principles are not explained clearly enough. The calculations, which are often based on expert opinions, frequently lack adequate reasoning and the supporting documentation is hardly accessible.(p. 3)

1.05  Naturally, the findings on the legal foundations are the basis for decisions on monetary claims and contain the essential criteria for their determination. But the analysis cannot stop at this point. Very often, juridical reasoning leads to relatively undefined terms like ‘full compensation’ or ‘(fair) market value’ which in themselves do not offer any answer to the calculation. Especially terms like ‘value’ or ‘profit’ need interpretation since they have different meanings in various contexts and disciplines.

1.06  Even if 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 in jurisprudence also contributes—or not—to legal certainty. Amounts which are too low favour the perpetrator and may induce others in similar situations to observe the law less carefully. Compliance with the law then seems less attractive and the risk of conviction will be more easily taken into account.6

1.07  In the field of international investment, notorious underestimation of losses can act as a deterrent for future investors and disturb the investment climate in the long run. On the other hand, amounts which are too high have the effect that investors do not strive sufficiently for constructive solutions in crisis situations. Environmental organizations and other NGOs have been warning of the so-called ‘chilling effect’ of high compensation or damages awards in investment disputes.7 Out of fear of being confronted with astronomical claims from financially powerful investors, some States would refrain from useful and desirable measures in the common interest such as environmental or employment regulations. This would hamper social development in these countries.

1.08  Although in international jurisprudence the amounts awarded often remained below the actual loss suffered, recent decisions also point in another direction.8 The practice to date is, however, still too inconsistent so that distinct effects have not yet been measured precisely. Nevertheless, it must be stressed that (p. 4) economically adequate and comprehensive calculation could and should have a general preventive function.9

1.09  Finally, it has to be pointed out that the time factor also plays an important role. The period of time between the event giving rise to the claim and the assessment or payment of the amount has an important influence on the value of the amount of money. The loss of value over time can be taken into account through an award of interest. However, the issue of the rate and the period of interest as well as the question of whether interest should be compounded are often not appropriately considered.

1.10  In addition, inflation and the unsteady exchange rates have undeniable effects on money awards, especially in international disputes. These questions are frequently not taken into account or are difficult to comprehend as regards the result as well as the reasoning. In many cases the outcome appears inadequate from an economic viewpoint.

1.11  It is, therefore, increasingly important in today’s modern world, where economic considerations determine important developments and decision-making processes on an international level, that lawyers too understand the functionality of economic processes. In the case of a dispute, they should not only analyse if and why a claim is founded but also explain how much the claimant should receive and why.

1.12  Of course, the role of experts regarding questions of evaluation and calculation is important. Usually the parties present their own expert reports. Sometimes experts are also appointed by the court or the tribunal. This expertise should not and cannot be relinquished. But the decision about the amount of compensation or damages must not be delegated to the experts.10 In order to assess the figures submitted by experts, a basic understanding of the methods and a willingness to consider them is of vital importance.11

1.13  The present study examines the financial assessment of claims in the context of international investment disputes. Usually, this means that the parties to the dispute are, on one hand, the natural or juridical person and on the other, a sovereign State. This inequality of the legal subjects concerned leads to specific (p. 5) problems, as, for example, the relationship between international and national law, the extent and boundaries of national sovereignty, and aspects of the responsibility of States for internationally wrongful acts.

1.14  In the past, the main issues in this context concerned payments of compensation after expropriations or nationalizations. Today, by contrast, different types of violations of international law, indirect expropriations, and breaches of contract stand for most cases of private claims against States. The present study is dedicated to the question of how in these cases the amount of compensation or damages is to be calculated. The emphasis lies on the calculation of material damage. Compensation for immaterial damage will only selectively be addressed.

1.15  The double character of the State as a sovereign on one hand and as an actor in the private business sector on the other, poses a special problem in investor-State arbitration. On one hand, the State’s sovereignty and responsibilities for public welfare must be safeguarded.12 On the other hand, the State must also comply with legal obligations entered into with other States for the protection of foreign investment, usually by bilateral treaties, and the vested rights of foreign investors. Usually it is also in the interest of the host State to create and maintain a reliable legal framework for foreign investors. Both in the developing as in the developed worlds, private foreign investment today is regarded as an essential means for economic welfare and development.

1.16  In the following chapters we will analyse how international courts and tribunals have dealt with this dilemma. We will concentrate on judicial proceedings between individuals and States where this issue becomes apparent. The main focus will be on investor-State arbitration. However, some important older decisions of claims or arbitral commissions will also be analysed as far 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, therefore, also be reflected for the purpose of the present study.

1.17  As regards investor-State arbitration, the focus will be on arbitrations initiated under the auspices of the International Centre for Settlement of Investment (p. 6) 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 on many occasions to deal with the specific financial aspects of the investor-State relationship. 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 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.

1.18  The point of departure of the present study will be to analyse the concept of compensation and damages on the basis of the 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 see whether and how the different valuation methods as 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 finally be outlined in Chapter 7.

Footnotes:

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.

Initiatives on the issue include the Global Arbitration Forum in Geneva in December 2004 on the topic of ‘Damages in international arbitration’, published in (2005) 6 JWIT 7, and the 25th Annual Conference of the ICC in November 2005 on this topic, see Y Derains and R Kreindler (eds), Evaluation of Damages in International Arbitration (Paris: International Chamber of Commerce, 2006). A discussion in the online-forum OGEMID (Oil-Gas-Energy-Mining-Infrastructure Dispute Management [OGEMID@JISCMAIL.AC.UK]) was followed by a ‘Special TDM Issue on Compensation and Damages’ in November 2007, edited by the author of this book, see 〈http://www.transnational-dispute-management.com/samples/toc.asp?key=21〉. See also T Waelde and B Sabahi, above, n1. Most recently, the British Institute of International and Comparative Law has initiated a research project on the subject which culminated in the publication of a book by S Ripinsky and K Williams entitled Damages in International Investment Law (London: British Institute of International and Comparative Law, 2008). Important earlier studies have been published by R Lillich (ed), Valuation of Nationalized Property in International Law, vols 1–4 (Charlottesville: University Press of Virginia, 1972–1987). 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 Unternehmensbewertung 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 see, in particular, G Dannemann, Schadensersatz bei Verletzung der Europäischen Menschenrechtskonvention (Cologne et al: Heymanns, 1994).

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.

In this respect there is an urgent need for more information, in particular for legal counsel who have to advise their clients not to claim amounts which are too small or too large. With regard to this problem of insecurity, see C Huber, Fragen des Schadensberechnung (Vienna: Springer Press, 1995) 1.

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.

This has been emphasized by Lou Wells in the context of a very high arbitral award against Indonesia: ‘Excessive awards to investors have serious implications. […] [S]uch awards create incentives for inappropriate corporate behaviour. […] [S]uch awards encourage investment in projects with great political risk, and behaviour on the part of the investor that increases the likelihood that the project will be taken.’ L Wells, ‘Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Kahara Bodas Company in Indonesia’ (2003) 19 Arbitration International 471, 478.

See 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.

After the arbitration on Karaha Bodas criticized by Lou Wells, above, further cases have been decided involving several hundreds of millions of dollars, such as, for example, CME Czech Republic v Czech Republic, Final Award on Damages, 14 March 2003, (2006) 9 ICSID Reports 121; see T Waelde, ‘Introductory Note to Svea Court of Appeals: Czech Republic v CME Czech Republic B.V.’ (2003) 42 ILM 915. In recent years, a number of cases under the auspices of ICSID have involved multi-million dollar awards, in particular against Argentina.

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.

10  P Friedland and E Wong, ‘Measuring Damages for Deprivation of Income-Producing Assets: ICSID Case Studies’ (1991) 6 ICSID Rev.-FILJ 400, 429; 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.

11  This may also serve the acceptance and the 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.

12  That very high amounts could pose a problem for the economy of smaller States has been vividly 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 〈http://www.investmentclaims.com/IIC_295_(2007).pdf〉. For further details of the discussion see below, Chapter 3, Section D(2), paras3.326 et seq.