Speakers GAR Live Energy explored why claimants in investment treaty cases often receive damages that fall far below the amount claimed and the extent to which experts and tribunals are responsible.
“International arbitrations – it's all about the money,” said the panel’s chair Stephen Jagusch QC of Quinn Emanuel Urquhart & Sullivan in London, who acknowledged that claimants seek to extract the highest amount of damages possible.
Yet, in practice, data indicates that tribunals regularly award only a fraction of the claimed amount: studies by US academic Susan Franck and PricewaterhouseCooper indicate as little as between 25% and 30%.
Richard Edwards of FTI Consulting in London confirmed this. He said that in a study he conducted of 16 investor-state cases, 14 of the tribunals awarded on average 40% of the damages requested. However, the percentages varied dramatically across the 14 cases from 100% in one to less than 10% in three.
What is telling, he said, is that in almost all cases the experts’ views of the loss incurred differed radically. In the majority, the respondent’s experts considered the loss to be nil or failed to put forward an estimate of the loss.
There may be several reasons why experts disagree with each other, speakers argued. First, forecasting is an inherently unpredictable business and there is a lack of consensus among legal practitioners and experts on how to value damages, meaning different valuations are likely.
The adversarial process may also contribute to experts disagreeing. They are often instructed by counsel to assume certain facts or to work within a particular legal framework, said Edwards. The result is that they end up answering entirely different questions from each other and reaching conflicting opinions.
Of course, there are times when they have “genuine differences” – as Boaz Moselle of Cornerstone Research in London said appeared to be the case in the ICSID energy dispute of Rompetrol Group NV v Romania.
In that case, Rompetrol’s experts performed an “event study,” examining how the company’s share price reacted to state announcements about acts that the company alleged were treaty breaches. Romania’s experts argued that the study had looked at the wrong shares, incorrectly selected which events to study and misinterpreted the results of the analysis.
At other times, experts may be biased, Edwards said. A party may appoint a particular expert because he or she has a pre-formed view on an issue or the expert may become biased during the course of the arbitration as he or she is fed a narrative by appointing counsel.
According to Mark Beeley of Vinson & Elkins in London, those who regularly acts for claimants in investment treaty disputes see expert opinions as part of an arsenal of weapons used by states to “deliberately drag down damages.”
The first step in the respondent’s plan of attack is to advance a series of arguments that “soften up the arbitrators and pull on their heartstrings,” he said. Such arguments include allegations that an award of damages will bankrupt the state or hit the pockets of the poor.
After that, the experts are deployed, Beeley said. Those acting for respondents frequently argue that the claimant is seeking damages on a "speculative" basis. They also refuse to provide their own alternative valuation, despite finding flaws with the claimants’ experts and their methodology.
“It is far easier to knock something down, than it is to build something up,” Beeley said, before wryly acknowledging that he will never be appointed as an arbitrator by a respondent.
Giving the alternative view was Benard Preziosi Jr of Curtis Mallet-Prevost Colt & Mosle in London, a firm that acts exclusively for states.
He observed that claimant counsel and experts are not without fault, as it emerged in a high profile ICC dispute between Exxon Mobil and PDVSA, in which Curtis represented the Venezuelan oil company. In that case, a London court issued a 2008 freezing order in favour of ExxonMobil based on its claim that it had sustained US$12 billion worth of damages. Yet, two years later, the company filed an ICC claim for only US$7 billion.
In between, Preziosi said, the claimant-appointed experts had switched from adding up cashflows without discounting to using discounting, future cashflows and a risk-free rate to calculate damages. Claimant’s counsel may have also thought they would get credit for switching from an “indefensible” claim to only a “slightly outrageous” claim.
Even the percentage of damages that claimants are getting is often more than they should, he suggested. This is because “claimants exaggerate and, the bigger the case, the bigger the exaggeration.”
Of course, the award of damages is not just down to the experts but the findings of the arbitrators themselves. According to Moselle, it is common for them to dismiss a significant part of a claim after finding that the acts complained of do not merit compensation, as in Rompetrol v Romania.
The assessment of damages may also hang on a question of law. In the Yukos case, the tribunal had to decide between two key dates to use as a basis for their assessment, which would give rise to potential difference of over US$30 billion. Like the merits of a case, this was decided on the basis of law, irrespective of the experts’ views.
A general problem is that arbitrators are not educated to understand complicated financial theories and can be “befuddled” by them, Beeley said. They may also be hampered in their ability to award damages by the “cuckoo in the nest” – “a rogue arbitrator who takes advantage of the fact that tribunals generally want to reach a consensus.” Such an arbitrator allows the tribunal to agree on the merits of the dispute but demands a more sceptical approach to damages.
For Siegfried Elsing, a German arbitrator and partner at Orrick Herrington & Sutcliffe in Dusseldorf, it’s not a problem that tribunals are awarding only a small amount of damages claimed and experts and arbitrators are generally behaving as they should.
Experts share certain similarities with counsel in that they are party-appointed and their work is not an exact science. Just as tribunals are not expected to accept all the submissions of counsel, they do not have to completely follow the experts, he said.
However, Elsing said that steps can be taken to close the gap between experts. For example, tribunals can ask them to address a list of agreed issues or provide their own valuation of damages if they criticise the methodology of the other side.
Tribunals can also appoint their own experts, instead of relying on party-appointed ones, to remove the risk of bias.
Arbitral institutions can do their part by making quantum awards public whenever they can, he added. Having a greater number in the public domain would lead to more predictable outcomes in relation to damages.
Jagusch, meanwhile, raised the question of whether experts should occasionally resist the instructions of counsel, especially if they are asked to make questionable assumptions in their assessment of damages.
Edwards responded that experts should not accept instructions they know to be unreasonable. Moselle said that while he would not "push back" on questions of law, “it is different if a lawyer is trying to instruct me on economics.” Experts might also be in a position to challenge facts based on their experience of advising on a particular industry or sector, he said.
Asked a further question by Jagusch, whether anyone had experienced a respondent's expert landing on a subject variable that was more favourable to the claimant than that offered by the claimant, not a single hand was raised. Perhaps this points to "moral hazard" in the use of party-appointed experts, he said, using a famous phrase of Jan Paulsson's in relation to the problem of biased party-appointed arbitrators.
Jagusch concluded by asking the experts present if they were generally satisfied with the quality of tribunals' analysis in damages awards.
“It’s a mix,” said Edwards. In some, tribunals appear to pick a number that is totally at odds with the reasoning that preceded it. In others, they ignore experts who sought to “muddy the waters” and demonstrate a sophisticated understanding of finance theory.
Moselle agreed that the results are varied. A “good decision” is one in which arbitrators understands the quantum issues and make a series of high-level decisions to reach the final valuation, he said.
GAR Live Energy was held at Clyde & Co in London on 15 June and chaired by Jagusch and UK arbitrator Juliet Blanch. The conference was supported by Vinson & Elkins, 20 Essex Street, Cornerstone Research, Curtis Mallet-Prevost Colt & Mosle and FTI Consulting.
Geotext Translations and RGL Forensics were associate sponsors. International Lawyers Network, ArbitralWomen and Newton Arbitration were supporting organisations.