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The Guide to Damages in International Arbitration

Procedural Issues

Introduction

Selecting the most suitable procedures for the efficient development of damages evidence and the ultimate assessment of damages in international arbitration is of considerable importance to parties and arbitrators alike. These issues benefit from early consideration by the parties and the tribunal. In this chapter, we examine five key issues that parties and tribunals may wish to consider when determining the optimal procedure for the determination of quantum in any given case. First, we explore the issue of bifurcation. Second, we discuss those aspects of documentary disclosure that are particularly relevant to damages. Third, we consider certain procedures for the use of witness evidence in relation to damages, including expert evidence. Fourth, we examine the ways in which proactive case management can assist in resolving damages issues. Finally, we consider two less conventional procedures for the determination of damages.

Bifurcation

The parties and tribunal are often required to consider whether damages should be assessed in the same phase as the merits, or whether the proceedings should be ‘bifurcated’ such that damages should fall to be assessed separately, only after the tribunal has determined the merits of the dispute (as well as admissibility and jurisdiction, if these issues are in dispute). In this section, we consider the circumstances in which it might be appropriate for proceedings to be bifurcated, and if so, how the issues of merits and quantum might be divided between phases.

The practice of bifurcation

All major institutional rules allow for proceedings to be bifurcated, either under the general powers conferred upon the arbitral tribunal[2] or, more infrequently, under specific provisions regarding the bifurcation or phasing of proceedings.[3]

Institutions have shown particular interest in this issue in recent years, viewing bifurcation as a possible procedural tool that can allow for a more efficient and cost-effective dispute resolution process. The revised IBA Rules on the Taking of Evidence in International Arbitration were adopted by the IBA Council on 29 May 2010 (the ‘IBA Rules of Evidence’). They advocated a more prescriptive approach to arbitration, inviting the tribunal to promptly identify issues for which a preliminary determination may be appropriate and encouraging the systematic organisation of arbitral proceedings by issues or phases.

In 2012, the ICC Commission on Arbitration in its report, ‘Controlling Time and Costs in Arbitration’ suggested that ‘arbitral tribunals should consider, or the parties could agree on, bifurcating the proceedings when doing so may genuinely be expected to result in a more efficient resolution of the case.’[4]

Is bifurcation effective in reducing the time and costs of dispute resolution?

The limited studies available on the subject of the effectiveness of bifurcation for these purposes are inconclusive. The major institutions do not tend to release specific data on bifurcation. As one author has observed, the only real way to assess the effect of bifurcation is to examine published awards and to compare cases – bearing in mind the myriad variations in complexity.[5]

Based on this sort of case-by-case analysis in the investor-state context, the author of a study in 2011 found that the time for concluding the (then known) 45 bifurcated ICSID cases was 3.62 years, compared to 3.04 years for non-bifurcated cases.[6] Moreover, out of the 19 concluded ICSID Additional Facility cases, for which information was publicly available at the time, 10 bifurcated cases took an average of 3.39 years to reach final award, as compared with 2.96 years for the nine non-bifurcated cases.

Given the limited data available, the difficulty in isolating bifurcation as a variable in proceedings in light of all the other parameters in international arbitration, and the fact that studies tend to focus on investment treaty arbitration awards rather than commercial awards (of which there are many more, but most of which are confidential), it is difficult to draw any general conclusions.

In particular cases, tribunals have initially bifurcated the proceedings in the interest of procedural efficiency, or following agreement by the parties, only to later realise that it would have been faster and more cost-effective to proceed to a single award.[7] Bifurcation can, in such cases, prolong disputes and delay the issuing of the award. For instance, in the NAFTA case of Mobil Investment and Murphy Oil v. Canada,[8] the tribunal decided to bifurcate the liability and damages phases. The majority delivered its award on liability and the principles of quantum in May 2012. It left the assessment of damages, subject to the claimants providing evidence of damages actually incurred, to a subsequent phase of the proceedings. The parties proceeded to file their submissions on damages after receiving extensions of time, and the hearing on damages was ultimately delayed to April 2013. The parties then responded to queries put by the tribunal and subsequently filed their respective statements of costs and responses. In January 2014, the parties agreed to a standstill of the proceedings, pursuant to settlement discussions. In February 2015, the standstill was terminated and the tribunal was requested to issue its award. The tribunal issued its final award on 20 February 2015, almost three years after its decision on liability.

When might bifurcation be appropriate?

The appropriateness of bifurcating the liability and damages phases of a dispute will depend on the circumstances of the dispute. Significant time and cost efficiencies will result where the quantification of claims is likely to be a time-consuming and complex undertaking, and a finding on liability could ultimately be dispositive of the dispute.[9] For instance, in Methanex v. USA, Methanex sought damages of approximately US$970 million plus interest and costs. The tribunal decided to hear jurisdiction and the merits in a first phase, and to bifurcate quantum. Ultimately, the claims failed in the first phase, averting the need to undertake a complex quantification phase.

Bifurcation might also promote the prospects of an early settlement. A finding on liability might encourage the parties to settle,[10] for example, where the scope of the dispute on damages is narrow, or if bifurcation shores up weaknesses in certain aspects of the parties’ arguments as previously articulated.

In addition, bifurcation can sometimes reduce the complexity and scope of the dispute for the purposes of determining quantum, again saving costs and time. For instance, in Suez v. Argentina, the tribunal decided to bifurcate the merits for reasons of judicial economy. The case comprised three consolidated claims arising out of a concession to operate water and waste-water services in Buenos Aires. The tribunal found that Argentina had breached its obligations under three bilateral investment treaties by denying the claimants’ investments fair and equitable treatment. After finding on liability, the tribunal observed that the case was very complex and that the record was extraordinarily voluminous. In addition, each party had engaged financial specialists who had reached vastly different conclusions on damages. In these circumstances the tribunal held that it was appropriate to dedicate a separate phase of the proceedings to damages.[11] In this regard, it was stated that:

the Tribunal by rendering a decision on liability … and thereby defining the scope of its investigation with respect to a determination of damages will be able more efficiently to define the mission of the independent expert that will assist the Tribunal in this determination.[12]

In certain cases, a tribunal’s decision, in the liability phase, on the correct valuation date for assessing damages can result in an important narrowing of issues to be determined during the damages phase. Similarly, cases involving complex questions of causation, or difficult valuation exercises tend to be particularly propitious for bifurcation, though few reported decisions provide reasons for the bifurcation of the damages phase.[13] In Pope & Talbot and SD Myers v. Canada, the investors claimed that the challenged measures affected their ability to export products from Canada. Damages were left to be determined in a standalone phase, presumably on the basis of the complex issues of causation involved.

By contrast, in other disputes, questions of liability and quantum might be so intertwined that bifurcation would result in significant duplication of work, to the extent the issues can be cogently divided at all. Separating issues of causation, mitigation and remoteness into questions of pure ‘liability’ or ‘damages’ may be somewhat artificial and difficult. In certain cases, the fact that damage has been suffered might even affect a finding on liability such that it is impossible for damages to be considered in isolation.[14] In Electrabel v. Hungary, bifurcation of liability and quantum was found to have been ‘at least unfortunate’.[15] The tribunal, upon the parties’ initiative, had determined to bifurcate the liability and damages phases. In turn, the claim relating to the Energy Charter Treaty’s Fair and Equitable Treatment standard arguably combined issues of both liability and quantum. Because of the bifurcation of the merits, the tribunal decided to defer its decision on both liability and quantum in relation to the FET claim to a later phase of the proceedings.[16] In their submissions in the second phase of the proceedings, the parties agreed that loss was not in fact relevant to the issue of liability under the FET claim. By this stage, however, the claim had already been bifurcated to the second phase, and had given rise to a significant volume of submissions and exchanges by the parties.

Nonetheless, it may in appropriate circumstances be possible to establish ‘a broad division between liability and quantum [and] … to determine the principles on which damages should be awarded, while leaving the pure arithmetical calculations to a second stage’.[17] The tribunal in CME v. Czech Republic[18] took this approach. It bifurcated the quantum phase upon the parties’ agreement and left only the amount of monetary damages for determination in the quantum phase.[19]

An unconventional but emerging method for case management in civil trials in the United States is known as ‘reverse bifurcation’, whereby the issue of damages is heard and determined before liability. This can be a useful tool and one on which those involved in international arbitration may wish to draw, [20] particularly for cases in which there is a serious argument that the claimant has suffered little or no damages. An early determination to this effect may lead to early disposal or settlement of the case. Reverse bifurcation might also alert the parties to weak elements of their respective arguments on liability, again encouraging settlement. Where reverse bifurcation is used in arbitration, care will need to be taken to protect the due process rights of the parties and to ensure that neither party’s case on the merits is pre-judged or otherwise unduly prejudiced.

The procedure in a bifurcated damages phase

Careful consideration needs to be given as to what the procedure within a bifurcated damages phase should look like. The damages phase of proceedings can sometimes be just as long and costly as the merits phase, sometimes unjustifiably. In such instances, bifurcation can serve to complicate and prolong the dispute, rather than assist in its swift and cost-effective resolution. For example, in Suez v. Argentina, the tribunal decided proprio motu, at the conclusion of the liability phase, and after the parties had already made detailed submissions on damages (which were later revised), that it would bifurcate the damages phase because of the complexity of ascertaining damages.[21]

One potential pitfall of bifurcation consists in the quantum phase mirroring the liability phase, where this would be disproportionate or otherwise inappropriate. In practice, damages phases will almost invariably involve one[22] or two,[23] rounds of written submissions by the parties as well as the submission of written witness statements and expert opinions on quantum (which will often play a central role in the phase). These submissions are often followed by (or take place concurrently with) document production, and an oral hearing. In some cases, such as in CME v. Czech Republic there may be both an ‘evidentiary hearing’ and a ‘final hearing’.[24] An evidentiary hearing gives the parties the opportunity to provide both factual and expert evidence to the tribunal and for counsel to make legal submissions. A final hearing allows the parties to submit their final pleadings prior to the close of the arbitration. The parties are sometimes then called upon to submit post-hearing submissions on damages.

All of these steps are not necessarily required in a damages phase, and parties and tribunals would be well served to build the procedure for the quantum phase using a ‘bottom-up’ approach, starting with the bare minimum and considering carefully which features are really necessary and proportionate.[25] Nonetheless, there may well also be cases in which the quantum phase ought rightly, by reason of its significance or complexity, to be lengthier and include more procedural steps than the merits phase.

Documentary evidence, disclosure and confidentiality

In this section, we focus on documentary evidence and particular aspects of disclosure in international arbitration that may be relevant to the assessment of damages. In particular, we draw attention to the treatment of confidential information that may be especially relevant to damages issues.

In international arbitration proceedings, the parties will almost invariably seek to submit the documents on which they wish to rely, either through the submission of standalone indexed bundles, or as exhibits to witness statements or pleadings. In relation to damages, parties will often submit various documents accompanying their expert reports (discussed below). For example, where a discounted cash flow method is used, internal evidence of the business such as documents pertaining to operating cash flow and capital expenditures may accompany an expert report. Similarly, the parties may submit market reports and other data as a comparator for determining growth forecasts and for applying the discount rate.[26]

Where one party may have access to documents relevant to the issue of damages that are not in the possession of the other party, it may be appropriate for the proceedings to include a procedure for documentary disclosure. The IBA Rules of Evidence provide a potential defence to disclosure on ‘grounds of commercial or technical confidentiality that the Arbitral Tribunal determines to be compelling’.[27] This potential defence is often of particular relevance to documents relating to damages. Commercial disputes often arise between competitors (such as between joint venture partners in the extractive sectors), or between parties whose businesses legitimately depend upon securing the confidentiality of certain information (for example, gas price review disputes often involve questions of pricing strategy and internal rates of return that can be of utmost sensitivity in the industry).

The parties invoking confidentiality as a defence to production are required to give reasons for each objection and, in some cases, to indicate the documents, if any, that they would be prepared to produce instead of the documents requested.[28] Generally, tribunals require convincing arguments before they grant confidentiality protection. Such arguments may include that the information has industrial significance and may provide the disclosing party with a competitive advantage, that the information contains data and know-how for the development of the project subject to the dispute, or that the information is protected by a specific confidentiality agreement because it involves third-party proprietary technology.[29]

In exceptional circumstances, where the production of a document is objected to, but the tribunal determines that it should not see the document – because of confidentiality concerns – the IBA Rules of Evidence provide that the tribunal may appoint an independent and impartial expert, bound by confidentiality, to decide on the objection.[30] Ultimately, however, determination of the validity of the objection rests with the tribunal.

Treatment of Confidential Information

In practice, where documents are confidential, tribunals have taken a variety of case-specific measures to protect one party’s information, while taking into account the need to secure the other party’s rights of due process. Redaction of documents is a commonly used method, although this will only be helpful where the information to be redacted is not material to the dispute.[31] Where redaction is not appropriate, a tribunal may make protective orders prescribing that access to the document be restricted to certain individuals only. Frequently, these individuals will include members of the tribunal and legal counsel, on the condition that they do not disclose the document to any other person, including the counsel’s client.[32] In these circumstances, however, it may be difficult for legal counsel to assess or test the information if the information is particularly technical and legal counsel are unable to take instructions from their clients in relation to it. The reverse is true when only the tribunal and experts are given access to the document. Accordingly, sometimes access to the document is given to the tribunal, the parties’ counsel and experts, but not the parties.[33] Further, in other cases, the dispute may require that counsel and experts be given additional instructions by the parties themselves, in which case, access may also be given to specified party representatives.[34]

Additional measures used to protect confidentiality include requiring the return or destruction of the documents in addition to restricted access, or restricting access to the visual inspection of the documents rather than circulating them.[35]

Witness evidence

Although the building blocks for a party’s case on damages will often be found in hard data and, therefore, documents, the tribunal will often benefit from witness testimony that explains that hard data.

Witnesses of fact

The lion’s share of the evidence on damages is often given by (or at least presented through) the evidence of expert witnesses.[36] However, witnesses of fact can also play an important role in supporting the appropriateness of any valuation or calculation. For example, members of the parties’ finance departments or those who otherwise have first-hand knowledge of the figures and projections on which the claim for damages is based can be of assistance to tribunals, particularly where the source and meaning of the data is in dispute, or at least not self-evident.[37]

Expert witnesses

Expert witnesses provide the tribunal with their opinion on the parties’ cases on damages. They do so on the basis of their particular expertise, rather than their knowledge of particular facts. There are two principal types of experts used for assessing damages: forensic/advising experts and testifying experts. Forensic or advising experts are often retained where they have had previous involvement in the issues in dispute, and have already generated work product that can form the starting point for the testifying expert’s evidence. The forensic or advising experts may not have a sufficient degree of independence from the party, or may not be experienced in adopting the relevant methodology for the calculation of damages in international arbitration. In contrast, testifying experts will most often be retained by the party’s counsel rather than by the party itself, and will have a greater degree of independence and potentially greater specialist experience to address the subject of their testimony.

Experts from a variety of disciplines are often instructed to give evidence on damages, for instance, accountants, engineers, economists, financial and valuation analysts, business valuation experts and oil market experts. In some cases, a combination of industry experts and valuation or economic experts may be helpful. For example, in Occidental v. Ecuador,[38] 12 experts were appointed including oil and gas consultants and quantum experts. Similarly, in Exxon Mobil v. Venezuela,[39] the claimants appointed eight experts including an oil price forecasting expert and oil reserves evaluation experts. Separate quantum experts were also engaged by the claimants to advise on the extent of damages resulting from production and export curtailments.[40]

Experts are sometimes called upon to report separately to the tribunal, and in other cases to provide an agreed joint statement.[41] For instance, in Occidental v. Ecuador, the experts produced a joint report estimating the fair market value of the investment according to certain agreed parameters. The experts were able to agree to employ a common model and to reach agreement on ‘the most reasonable approaches and methodology for calculating fair market value, consistent with the Tribunal’s instructions’.[42] In turn, the tribunal appeared to accept the experts’ conclusions.[43]

Independence of experts

Experts are most often selected, instructed and remunerated by one party. This gives rise to the question of their independence, and a perception that their testimony may be of limited probative value, despite the fact that their role is not to advocate on behalf of the party instructing them. Expert witnesses must be independent but arbitral rules do not explicitly recognise the existence of a duty as between an expert and the arbitral tribunal.[44] Accordingly, experts must be transparent about the reasons for their conclusions or calculations and should be willing to change their assessment of damages if the underlying facts or assumptions change.[45] Tribunals are often heavily reliant on experts when quantifying damages, and therefore, experts’ credibility is of utmost importance.

Both the IBA Rules of Evidence and the CIArb Protocol require that a party-appointed expert disclose any past or present relationships that may create a conflict of interest with another participant in the arbitration.[46] These types of disclosure regimes are generally accepted in international arbitration as sufficient to address issues of independence and impartiality. Further, the tribunal may sometimes take into account any concerns in this regard in assessing the credibility of, and thereby the weight to be placed on, the evidence of experts.

In contrast, in certain civil law jurisdictions, and under certain institutional rules that are influenced by those civil law jurisdictions, the independence of experts is of such a concern that the default rule is for the tribunal, rather than the parties, to appoint experts. For example, the default position under the Deutsche Institution für Schiedsgerichtsbarkeit (DIS) Rules is that the tribunal appoints the experts unless the parties agree otherwise. In turn, in DIS proceedings, where evidence is given by party-appointed experts, arbitrators sometimes accord less weight to the evidence because of concerns about the experts’ impartiality.[47] We address the issue of tribunal-appointed experts further below.

Witness conferencing

Witness conferencing (colloquially known as ‘hot tubbing’) is an emerging case management tool in international arbitration whereby multiple witnesses are required to give evidence simultaneously, rather than sequentially. The practice involves a simultaneous joint hearing of all witnesses with the aim of addressing divergences in their evidence on the spot.[48] Hearing practices can vary from asking directed questions and asking counter-witnesses to respond, to the use of witness statements as a guide.[49] Such practices give the opposing experts the opportunity to immediately respond to each other’s views in a way that traditional sequential testimony does not allow.

The IBA Rules of Evidence and the ICC ‘Arbitration Commission Report on Techniques for Controlling Time and Costs in Arbitration’ (the ‘ICC Report’) both encourage the use of witness conferencing in appropriate cases. Witness conferencing can potentially enhance efficiency, clarify disputed issues and eliminate weak or irrelevant arguments.[50] Conferencing can also, in principle, draw the tribunal’s attention to the quality and objectivity of an expert’s opinion by offering an immediate contrast between the experts.[51] However, the practice is not without its controversies as detractors have argued that conferencing is too interventionist to be used in arbitration and does little to remedy the gap between the opinions of expert witnesses appointed by the parties.[52]

Pre-hearing meeting of experts

A pre-hearing meeting of expert witnesses to identify areas of agreement and areas in dispute is a method of case management, available under the IBA Rules of Evidence[53] and endorsed in the ICC Report. The aim of these meetings is for expert witnesses to meet (in the absence of counsel) to identify issues in common and refine the issues in dispute, which a tribunal needs to deal with. The CIArb Protocol sets out detailed guidance on pre-hearing meetings between experts, stipulating that they ought to hold a conference to: identify issues on which their opinions will be sought; identify tests or analyses to be conducted; and if possible, to agree upon those issues, and tests, and the manner in which such tests shall be conducted.[54]

Where experts are able to identify common findings, the parties and tribunal are likely to accept those findings, enabling them to focus on the issues in dispute.[55] In this way, pre-hearing meetings of experts can directly reduce costs and delays. However, the practice may prove less fruitful in circumstances where one, or both, of the experts take adversarial positions in an attempt to advocate on behalf of their appointing party. The outcome may be an increase in costs, without the associated benefit of clarifying the issues in agreement. In this respect, where a pre-hearing meeting is being considered, it may be worth requiring that the meeting take place before the experts have submitted their opinions.[56]

Tribunal proactivity

Tribunal proactivity in relation to damages can take several forms, from active case management and the suggestion that the parties be required to articulate their theory of damages early on, to departing from party-proposed approaches to assessing quantum. The latter practice is not without controversy as it may give rise to concerns in relation to the parties’ due process rights. In this section we consider some of these proactive procedures available to tribunals and, where relevant, associated due process considerations.

Proactive case management

In the majority of cases, issues relating to damages are left to be addressed towards the end of the proceedings. Problematically, where damages have not been considered early on in the proceedings, critical points of law or fact may arise which could have been more efficiently dealt with earlier in the proceedings. Issues such as causation, remoteness of loss, mitigation and valuation dates are particularly susceptible to overlap between questions of liability and damages. Additionally, there is increased risk that evidence pertaining to damages presented near the end of the case may be based on previously unarticulated theories of compensation.[57] By contrast, a late examination of the damages phase may eclipse valuable opportunities to narrow the scope of damages issues, or to exclude improbable damages claims, and therefore, to bring about a timely and more cost-effective resolution of the dispute.

Accordingly, tribunals may be well-served by giving at least some consideration to damages issues early on. The International Institute for Conflict Prevention & Resolution has provided detailed guidance in its Damages Protocol on how to raise damages issues with the parties early on. In particular, the Damages Protocol proposes that arbitrators address damages in or around the initial conference with the parties, and that the arbitrators require the parties to articulate their theories of compensation and their defences.[58]

Taking such measures can assist in reducing the scope of the dispute and in pre-empting complex or problematic issues that are likely to result in delay and increased cost later in the proceedings.

Independent tribunal initiatives

There is some disagreement on the extent to which a tribunal may utilise a procedure in international arbitration that is different from the procedures proposed by the parties. In relation to the issue of damages, each party may have a set idea of the procedure that would best allow it to present its case. The tribunal may have a very different view from the parties as to the most appropriate procedure. In this section, we examine the question of tribunal-appointed experts and tribunal-led assessments of quantum.

Tribunal-appointed experts

In a minority of cases in international arbitration,[59] tribunals appoint their own experts, either because they deem any experts already appointed by the parties to be insufficient to allow the tribunal to fulfil its mandate, or because the parties themselves have requested the tribunal to do so.[60]

To a common law lawyer, this approach may seem at odds with the principle of party autonomy and the adversarial litigation process. However, arbitrators from a civil law background may expect that the expert will be selected by, and responsive to, the tribunal rather than the parties, in the interest of the expert’s independence, as explained above.

A number of institutional rules (including the UNCITRAL Arbitration Rules and the LCIA Rules), and some BITs, even make express and specific reference to the possible use of tribunal-appointed experts, after consultation with the parties, though none of the rules require the use of tribunal-appointed experts. The expert, if appointed, is to report to the tribunal on specific issues, determined by the tribunal.[61] Under the US Model Bilateral Investment the tribunal’s discretion is more limited. It can appoint an expert upon the request of a disputing party, or on its own initiative, unless the parties disagree, to address ‘any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding’.[62]

In certain cases, concerns may be raised that the tribunal-appointed experts may become the de facto arbitrator. Accordingly, arbitrators must be careful not to delegate their decision-making responsibilities to the experts they appoint, unless the parties agree to this. While the English courts have not found that tribunal-appointed experts constitute an improper delegation of the tribunal’s powers,[63] the IBA Rules of Evidence have sought to address these concerns by recommending that parties examine the correspondence between the tribunal and the expert, and that the parties should be able to question the expert at the evidential hearing.[64] In a similar concern for transparency (and perhaps a recognition that the expert will ultimately be paid for by the parties), English law, for example, prevents arbitrators from meeting privately with the tribunal-appointed experts regardless of the content of the discussions.[65]

Where an expert is to be appointed by the tribunal, it would normally be appropriate for the parties to be called upon to provide input on the identity of the expert. For example, the parties may each be asked to draw up a list of proposed experts and then for the tribunal to select any overlapping candidates to act as tribunal-appointed experts.[66] Similarly, it would normally be appropriate for a tribunal to provide the parties with an opportunity to comment on the tribunal-appointed expert’s report.[67]

Tribunal-appointed experts can also be useful where the tribunal does not have the benefit of evidence from both parties. This was the case in National Grid v. Argentina, where the tribunal did not have a damages valuation from Argentina. The tribunal-appointed expert did not use its own valuation model but did observe that the claimant’s expert report contained ‘manifest errors’.[68] The tribunal ultimately accepted a number of its own expert’s recommendations on discounted cash flow valuation inputs.[69]

Tribunal-led assessments of damages

In a number of cases, the tribunal may wish to depart from the parties’ assessment of damages and adopt what then becomes, to varying degrees, its own methodology.

In some cases, tribunals may be entirely dissatisfied with the models used by the parties to quantify their damages. For instance, both experts may have failed to consider relevant factors or may have departed from a well-accepted principle of valuation without any justification.[70] In these circumstances, tribunals sometimes choose to adopt their own methodologies and depart from what has been put forward by the parties.

In other cases, tribunals opt to change the calculation methodology and then request that the experts provide recalculated forecasts. In cases where income-based forecasts are presented on the basis of a discounted cash flow valuation, tribunals sometimes request to be provided with the party-appointed experts’ financial model. The tribunal can then input any permutation of figures or assumption drawn from the party-appointed experts’ respective forecasts to arrive at a recalculated forecast of its own.[71] This is a controversial approach and one which the relevant experts may resist because of risks associated with disclosing proprietary information contained in their models.[72]

Alternatively, a tribunal might simply want to test the effect of disputed assumptions by adjusting model inputs and ‘testing the sensitivity of the important components of the calculations.’[73]

In all such types of cases, the tribunal might ultimately find that its mandate is best served through adopting a more interventionist approach. For example, in CMS v. Argentina, the tribunal built its own model with the assistance of its experts. It then ‘tested a number of scenarios by changing different variables … [focusing] on the most important determinants of value (as well as the main sources of uncertainty)’.[74] Ultimately, the tribunal was able to modify the assumptions underpinning the claimant’s expert’s calculation of loss.[75] Similarly, in Enron v. Argentina, the tribunal-appointed expert assisted the tribunal in addressing the parties’ competing positions.[76] Notably, the tribunal found its expert’s approach to be ‘more balanced and realistic’ than that of the party-appointed experts.[77] Accordingly, the tribunal accepted its own expert’s recommendations on several inputs into the discounted cash flow valuation that was used.[78]

Due process

Where tribunals use these sorts of proactive measures, they ought to be particularly mindful of their obligation to ensure that the parties are given the opportunity to be heard. Where due process rights are violated, the relevant award may be liable to annulment. Due process requires that parties have a reasonable opportunity to be informed about, and comment on, the bases for a tribunal’s decision on damages. Accordingly, if after hearing the parties as to the appropriate methodology for calculating damages, a tribunal decides to take a third approach, or to appoint its own expert, the tribunal may at that point find it appropriate to communicate its proposed course of action to the parties and invite their comments or further submissions.[79]

Unconventional procedures

In this final section, we consider two unconventional procedures for determining damages, which certain parties may find of interest, and which tribunals might wish to propose to the parties in appropriate cases.

The first of these procedures is known as ‘baseball arbitration’, a term that originates in the resolution of salary disputes in Major League Baseball in the US.[80] In baseball arbitration, rather than award the actual quantum of damages, the tribunal is mandated to decide between two fixed offers made by the opposing parties. There are two variants of baseball arbitration. ‘Day baseball’ arbitration occurs when the tribunal is aware of the offers submitted by the parties and then chooses between them. By contrast, in ‘night baseball’ arbitration, the submitted offers are kept confidential as between the parties until the tribunal has rendered the award on liability and damages. At this point, the offers are disclosed to the tribunal and the offer closest to the damages awarded is awarded.[81]

A key advantage of baseball arbitration is that it may encourage the parties to make more realistic offers as compared with what their positions on quantum might otherwise be. The method can therefore help parties to settle. Finally, baseball arbitration can accelerate the deliberation process and reduce costs because the tribunal may, for day baseball at least, not be required to include as much detail in the award on damages.[82]

The procedure, of course, has its limits and is likely not to be suitable to most cases. Some commentators have questioned whether baseball arbitration constitutes ‘arbitration’ at all given that the procedure significantly curtails the tribunal’s discretionary powers – a concern that reflects the tension between party autonomy and the tribunal’s adjudicative role.[83] Finally, critics of baseball arbitration argue that limiting the tribunal’s remedial powers can result in ‘arbitrary and unintended’ outcomes and ‘raises enforceability issues in some jurisdictions’.[84]

The second procedure that parties and tribunals may wish to consider is known as ‘high-low arbitration’. Parties can include a high-low clause in their arbitration agreement, or agree to such a clause on an ad hoc basis when a dispute arises, in order to set a floor and ceiling for an award of damages. The tribunal is not necessarily informed of the high-low agreement between the parties. In these circumstances, if quantum assessed by the tribunal exceeds the maximum amount specified by the parties, then the award is fixed at that maximum amount, and, conversely, upon a finding of liability, the quantum cannot be below the minimum.[85] Like baseball arbitration, high-low arbitration has attracted some criticism and may not be suitable for most cases. In particular, it has been suggested that high-low arbitration favours risk-takers and invites parties to gamble, as a ‘“moderately-extreme” position seems to offer the best risk-benefit ratio’.[86]

Conclusion

In this chapter we have outlined some of the procedural issues relevant to the determination of damages in international arbitration. This is certainly an area in which users of arbitration can benefit from counsel and arbitrators striving to devise the optimal procedure in each case, thinking creatively and drawing on past experience where necessary. Early tribunal proactivity in this area may be particularly helpful in cases where the parties themselves (or their counsel) are insufficiently focused on damages issues at the outset of the dispute, and can, at least in some cases, lead to significant savings of time and costs.

Notes

  1. Sophie J Lamb is a partner, and Samuel M Pape and Laila Hamzi are associates in the international arbitration practice group at Latham & Watkins. The views expressed in this chapter are those of the authors alone.
  2. E.g., Article 44 of the ICSID Convention enables a tribunal to determine questions of procedure, including whether or not to bifurcate proceedings. See Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v. The Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability dated 30 July 2010, page 106 paragraph 273. See also, Article 17(1) of the UNCITRAL Arbitration Rules 2010; Article 22(1) and (2) and Article 24(3) of the ICC Rules of Arbitration 2012; Article 13(1) of the HKIAC Administered Arbitration Rules 2013; Article 14(1) of the LCIA Arbitration Rules 2014; Article 19(1) of the SCC Arbitration Rules 2010.
  3.  See, for example, Rule 19.4 of the SIAC Rules 2016; Article 30(3) of the ICDR Arbitration Rules 2014. See also Gary Born, International Arbitration: Law and Practice (Kluwer Law International 2015), 345.
  4. International Chamber of Commerce Commission on Arbitration and ADR, ICC Arbitration Commission Report on Techniques for Controlling Time and Costs in Arbitration (ICC Com No 861-1 ENG 2015) 11.
  5. Lucy Greenwood, ‘Does Bifurcation Really Promote Efficiency?’ (2011) Journal of International Arbitration 28(2) 105, 106-107.
  6. Greenwood (n 5), 107.
  7. Electrabel SA v. Republic of Hungary, ICSID Case No. ARB/07/19, Award dated 25 November 2015.
  8. Mobil Investments Canada Inc and Murphy Oil Corporation v. Canada, ICSID Case No. ARB(AF)/07/4, Award (20 February 2015), paras. 3-26.
  9. Examples of cases where the damages phase was never reached, following bifurcation include: Mondev International Ltd v. United States of America, ICSID Case No. ARB(AF)/99/2, Award dated 11 October 2002; ADF Group Inc v. United States of America, ICSID Case No. ARB(AF)/00/1, Award dated 9 January 2003; Methanex Corporation v. United States of America, UNCITRAL, Preliminary Award of Jurisdiction and Admissibility, pages 86, 90.
  10. This was suggested, for example, in Meg Kinnear et al, ‘An Annotated Guide to NAFTA Chapter 11’ in Meg Kinnear, Andrea Bjorklund and John Hannaford (eds), Investment Disputes under NAFTA (Kluwer Law International 2006), 1135-9.
  11. Suez v. Argentina (n 2), page 106 paragraph 273.
  12. Ibid., page 106 paragraph 272.
  13. Pope & Talbot Inc v. The Government of Canada, UNCITRAL, Statement of Claim, paragraphs 96-104. SD Myers Inc v. Government of Canada, UNCITRAL, Statement of Claim, paragraph 33; Second Partial Award, pages 28-29, paragraphs, 117-122.
  14. Electrabel SA v. Republic of Hungary (n 7) pages 61-62, paragraphs 203-210.
  15. Ibid., page 69, paragraph 235.
  16. Ibid., page 1, paragraph 1(3).
  17. Nigel Blackaby et al. ‘Chapter 6. Conduct of the Proceedings’ in Nigel Blackaby et al., Redfern and Hunter on International Arbitration (Kluwer Law International 2015), pages 353–414 paragraph 59.
  18. CME Czech Republic BV v. The Czech Republic, UNCITRAL, Final Award dated 14 March 2003.
  19. CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award dated 12 May 2005, page 129 paragraph 444.
  20. This was explored by the authors in Thomas Tallerico and J Behrendt, ‘The Use of Bifurcation and Direct Testimony Witness Statements in International Commercial Arbitration Proceedings’ (2003) Journal of International Arbitration 295, 297.
  21. Suez v. Argentina (n. 2), Decision on Liability dated 30 July 2010, page 4 paragraph 7.
  22. See SD Myers v. Canada (n. 13).
  23. See, for instance, ConocoPhillips Petrozuata BV, ConocoPhillips Hamaca BV and ConocoPhillips Gulf of Paria BV v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30 and CME Czech Republic BV v. The Czech Republic, UNCITRAL, Final Award dated 14 March 2003.
  24. CME Czech Republic BV v. The Czech Republic (n. 18).
  25. See the general approach to procedure in international arbitration advocated by David W Rivkin: ‘Towards a New Paradigm in International Arbitration: The Town Elder Model Revisited’ (2008) Arbitration International (24), 375, 378.
  26. See Noel Matthews and Andrew Wynn, ‘Valuation in International Arbitration’ (Global Arbitration Review 2016) http://globalarbitrationreview.com/insight/the-middle-eastern-and-african-arbitration-review-2016/1036970/valuation-in-international-arbitration accessed 12 October 2016.
  27. IBA Rules, article 9(2)(e).
  28. See, for example, South American Silver Limited v. Bolivia, UNCITRAL, PCA Case No. 2013-15, Procedural Order No. 1 (27 May 2014), para. 5.2.1.
  29. See, for example, South American Silver Limited v. Bolivia, UNCITRAL, PCA Case No. 2013-15, Procedural Order No. 2 (1 December 2014), para. 23 and Procedural Order No. 8 (26 August 2015), para. 29.
  30. IBA Rules, article 3.7; Commentary on the New IBA Rules of Evidence in International Commercial Arbitration, p. 23.
  31. On this subject, see, Domitille Baizeau and Juliette Richard, ‘Addressing the Issue of Confidentiality in Arbitration Proceedings: How is this done in Practice?’ in Elliott Geisinger (ed) Confidential and Restricted Access Information in International Arbitration (ASA Special Series No. 43, 2016) 53, p. 55.
  32. See Jeff Waincymer, Procedure and Evidence in International Arbitration (Kluwer Law International, 2012) p. 876.
  33. See Baizeau and Richard (n 31), p. 58.
  34. Ibid., p. 59.
  35. Ibid., pp. 62-63.
  36. In gas price review arbitrations, experts usually provide the majority of the evidence and legal submissions will largely follow the expert evidence. See Mark Levy and Rishab Gupta ‘Gas Price Review Arbitrations: Certain Distinctive Characteristics’ in J William Rowley QC (eds), The Guide To Energy Arbitrations (1st edn Global Arbitration Review 2015) 177.
  37. For an example of an award in which factual evidence in support of damages was relied upon, see SD Myers Inc v. Government of Canada, UNCITRAL, Second Partial Award dated 21 October 2002, paragraphs. 180, 197-205 where the CEO of SD Myers testified as to how profits were generated. Another industry participant gave evidence about his observations on the relevant market while the contested events unfolded.
  38. Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11.
  39. Venezuela Holdings BV, et al (case formerly known as Mobil Corporation, Venezuela Holdings BV, Mobil Cerro Negro Holding Ltd, Mobil Venezolana de Petróleos Holdings Inc, Mobil Cerro Negro Ltd and Mobil Venezolana de Petróleos Inc) v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award of the Tribunal dated 9 October 2014.
  40. Ibid., paragraph 265.
  41. Howard Rosen and Matthias Cazier-Darmois, ‘Expert Evidence’, in J William Rowley QC (eds), The Guide To Energy Arbitrations (1st edn Global Arbitration Review 2015).
  42. Occidental Exploration and Production Company v. The Republic of Ecuador (n 38) paras. 694-702.
  43. Ibid., para. 778.
  44. Rules will usually specify that experts are to remain independent, without referring to a duty. See Article 4(3) ICC Rules for the Appointment of Experts and Neutrals. By contrast, see Article 4(3) of the CIArb Protocol which explicitly imposes a duty on experts, consistent with the rules under English Civil Procedure. See English Civil Procedure Rules Part 35 and its Practice Direction.
  45. Vidja Rajaro, ‘Perspectives And Best Practices In Quantifying Damages, Business Valuations And Expert Witnesses’ (2016) Indian Journal of Arbitration Law.
  46. Article 5(2)(a) of the IBA Rules; Article 4(4)(b) of the CIArb Protocol. See also Mark Kantor, ‘A Code of Conduct for Party-Appointed Experts in International Arbitration – Can One be Found?’, (2010) Arbitration International 26(3) 323.
  47. See Professor Dr Richard Kreindler, Dr Thomas Kopp and Nicole Rothe, ‘International Bar Association Arbitration Guide’ (IBA Arbtration Committee 2013), page 12.
  48. See Trevor M Cook and Alejandro I Garcia, International Intellectual Property Arbitration (Kluwer Law International 2010); See also Wolfgang Peter, ‘Witness ‘Conferencing’’ (2002) Arbitration International (18) 47, 49.
  49. Wolfgang Peter (n 48), 47, 52.
  50. Ibid, 55.
  51. Gregory Bell et al, ‘Expert Witnesses In Arbitration’ (Corporate Disputes Magazine 2012).
  52. Kantor (n 46); For examples of cases in which witness conferencing was used see Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award dated 3 March 2010 and Rompetrol Group NV v. Romania, ICSID Case No. ARB/06/3, Award dated 6 May 2013.
  53. Article 5(4) of the IBA Rules of Evidence enables a tribunal to order the party-appointed experts to meet and to discuss the issues considered or to be considered in their expert reports.
  54. Chartered Institute of Arbitrators, Protocol for the Use of Party-Appointed Expert Witnesses in International Arbitration Article 6(1)(a).
  55. IBA Commentary on the revised text of the 2010 IBA Rules on the Taking of Evidence in International Arbitration, page 20.
  56. As suggested by Jeff Waincymer (n 32) page 963.
  57. CPR International Committee on Arbitration, ‘Protocol On Determination of Damages in Arbitration’, Introduction, available at www.cpradr.org/RulesCaseServices/CPRRules/ProtocolonDeterminationofDamagesinArbitration.aspx.
  58. Ibid.
  59. The Queen Mary University of London School of Arbitration indicates that expert witnesses are appointed by the parties 90 per cent of the time and only 10 per cent of time by the tribunal (n 58), 24.
  60. For example, in Siemens AG v. The Argentine Republic, ICSID Case No. ARB/02/8, Award Dated 17 January 2007, page 115, paragraph 360, the parties took different approaches to what constituted adequate evidence of Siemens’ investment. The claimant considered audited financial statements to be sufficient evidence of the amounts invested. The respondent considered it necessary to demonstrate how each unit of currency was spent. Accordingly the respondent insisted that the tribunal use an expert to analyse the relevant accounts and to ensure that the amounts spent were spent for purposes of carrying out the investment. The tribunal saw no merit in prolonging the proceedings and appointing an expert.
  61. See, for example, Article 21.1 of the LCIA Rules; Article 29(1) of the UNCITRAL Rules.
  62. 2012 US Model Bilateral Investment Treaty, Article 32.
  63. Brandeis (Brokers) Ltd v. Herbert Black and others [2001] All ER (D) 342.
  64. IBA Rules, Article 6.
  65. Kantor (n 46) 279 – 314. See also, Suez v. Argentina (n 2).
  66. See Klaus Sach quoted in Cook and Garcia (n 46), 208.
  67. See e.g., Suez v. Argentina (n 2), page 13 paragraph 16.
  68. National Grid plc v. The Argentine Republic, UNCITRAL, Award dated 3 November 2008, pages 12-13 paragraphs 47-49.
  69. See also Joshua Simmons, ‘Valuations in Investor-State Arbitrations’ in John Moore (ed), International Arbitration Contemporary Issues and Innovations (Martinus Nijhoff 2013) 104; citing National Grid plc v. The Argentine Republic, UNCITRAL, Award dated 3 November 2008, paragraphs 289-290.
  70. Rajaro (n 45), 160.
  71. Kantor (n 46), 301.
  72. Ibid.
  73. Ibid., 302.
  74. CMS Gas Transmission Company v. The Republic of Argentina (n 19) paragraph 436.
  75. Ibid., paragraph 439.
  76. Joshua Simmons, (n 69), 104.
  77. Enron Corporation and Ponderosa Assets, LP v. Argentine Republic, ICSID Case No. ARB/01/3, Award dated 22 May 2007, paragraph 435.
  78. Joshua Simmons, (n 69) 104.
  79. Examples of where tribunals have done this include, Suez v. Argentina (n 2); Occidental v. Ecuador (n 38); National Grid v. Argentina (n 66); and LG & E Capital Corp and LG & E International Inc v. Argentine Republic, ICSID Case No. ARB/02/1, Award (25 July 2007), paragraphs. 8-9.
  80. Josh Chetwynd, ‘Play Ball? An Analysis of Final-Offer Arbitration, Its Use in Major League Baseball and Its Potential Applicability to European Football Wage and Transfer Disputes’ (2009) Marquette Sports Law Review (20) 109, 110.
  81. See Irene Welser and Alexandra Stoffl ‘The Arbitrator and the Arbitration Procedure, Calderbank Letters and Baseball Arbitration – Effective Settlement Techniques?’ in Christian Klausegger and Peter Klein et al. (eds), Austrian Yearbook on International Arbitration (Manz’sche Verlags- und Universitätsbuchhandlung 2016), 94.
  82. Ibid., 96.
  83. Gary Born, International Commercial Arbitration (Kluwer Law International 2009), 282.
  84. Ibid, 281.
  85. Born (n 3), 115.
  86. Christian Buhring-Uhle, Lars Kirchhoff, Gabriele Scherer, Arbitration and Mediation in International Business (2nd edn, Kluwer Law International, 2008), 201.

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