Quantification of ISDS Claims: Theory

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Under international law, a state responsible for the breach of an international obligation is under a duty to make reparation. This general principle, well established as a rule of customary international law, was summarised by the Permanent Court of International Justice (PCIJ) in the often-cited Factory at Chorzów case:

It is a principle of international law that the breach of an engagement involves an obligation to make reparation in an adequate form. Reparation therefore is the indispensable complement of a failure to apply a convention and there is no necessity for this to be stated in the convention itself.[2]

This chapter provides an overview of the various approaches to the quantification of damages in investor–state dispute settlement (ISDS), from historical roots to some of the recent issues that the users of ISDS have encountered in seeking reparation for unlawful conduct by a state.

The obligation of reparation

A state’s obligation of reparation for a breach of its obligations has been confirmed by the International Law Commission (ILC) in the Draft Articles on Responsibility of States for Internationally Wrongful Acts (the Draft Articles on State Responsibility)[3] at Article 31 (Reparation), which states as follows:

  1. The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.
  2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.

It is important to note that despite formally being a soft law instrument (because they were not reduced to treaty form), the Draft Articles on State Responsibility are deemed to be authoritative to the extent that they reflect customary international law and have often been referred to by various international investment tribunals.[4]

The principle of full reparation

The obligation placed on the responsible state is to make ‘full reparation’. As expressed by the PCIJ in Factory at Chorzów, ‘reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’.[5]

Under Article 31(1) of the Draft Articles on State Responsibility, the state’s obligation to make full reparation relates to the ‘injury caused’. Thus, reparation is full, in whatever its form, if it covers all injuries caused by the internationally wrongful act.[6] As recognised in the recent award in Greentech and NovEnergia v. Italy, an arbitral tribunal must do whatever it can to ensure that the injured party is made whole.[7]

Article 31(2) of the Draft Articles on State Responsibility addresses a further issue, that of causation. It states that injury includes any damage ‘caused by’ the internationally wrongful act. It is therefore only where there is a causal link between the wrongful act and the injury that full reparation must be made. In other words, Paragraph 2 makes clear that the subject matter of reparation would be the injury directly resulting from and attributable to the wrongful act, not any and all consequences flowing from the act.[8] In practice, as one tribunal noted, this Article has been equated with the principle that damages that were too remote, speculative or uncertain may not be awarded.[9]

Forms of reparation

Article 34 of the Draft Articles on State Responsibility identifies three forms of reparation: restitution, compensation and satisfaction. Article 34 (Forms of Reparation) states:

Full reparation for the injury caused by the internationally wrongful act shall take the form of restitution, compensation and satisfaction, either singly or in combination, in accordance with the provisions of this chapter.

Thus, full reparation may take the form of restitution, compensation or satisfaction, as required by the circumstances, and a combination of different forms of reparation may be required.[10]

In addition, Article 38(1) of the Draft Articles on State Responsibility expressly provides for the payment of interest ‘on any principle sum due . . . when necessary in order to ensure full reparation’.[11] In the absence of a uniform international approach to questions of quantification and assessment of amounts of interest payable,[12] Article 38 does not offer any specific guidance about the interest rate or the mode of calculation, but simply advises that these shall be set to achieve full reparation.


Restitution is the re-establishment as far as possible of the situation that existed prior to the commission of the internationally wrongful act. This involves re-establishing the original situation to the extent that any changes that occurred in that situation may be traced to the wrongful act.[13]

Importantly, restitution comes first among the forms of reparation because it most closely conforms to the general principle that the responsible state is bound to wipe out the legal and material consequences of its wrongful act.[14] In practice, however, this is challenging to achieve because undoing a wrongful act may be difficult, if not impossible, and because a simple change of policy or a return of expropriated or seized property by way of restitution may cause other damage.


Therefore, where damage cannot be adequately redressed by restitution, compensation for that damage is granted.[15] Compensation generally consists of a monetary payment that is intended to offset the damage suffered by the injured person as a result of the breach.[16] Article 36(2) of the Draft Articles on State Responsibility elaborates that ‘compensation shall cover any financially assessable damage including loss of profits’.

It is well established that an international court or tribunal that has jurisdiction with respect to a claim of state responsibility also has, as an aspect of that jurisdiction, the power to award compensation for damage suffered.[17] In practice, compensation is the most prevalent form of reparation in investor–state arbitration, although non-pecuniary remedies remain possible, such as specific performance and injunctive relief.[18]

Three pitfalls to avoid on quantum

Presenting your client’s case on quantum in a clear and convincing manner is a fundamental part of good advocacy in investment cases.

Quantum issues, particularly in valuation matters using discounted cash flow calculations or other loss assessment methods such as comparable transactions, can be highly complex and technical, and they do not often receive enough attention in the parties’ memorials. Three pitfalls need to be avoided.

First, it is not infrequent to see parties rely on their quantum expert’s report with little, if not very little, explanation on quantum in their memorials. In fact, some parties tend to present their case as if their quantum arguments were essentially delegated to the quantum experts. Quantum experts, however, are not advocates, and have the duty to present an independent and impartial assessment of the losses. Memorials, for their part, should not be a short summary of the quantum expert reports, but rather a didactic, pedagogical and step-by-step roadmap presenting the party’s case and introducing the expert’s conclusions.

Second, parties should refrain from submitting expert evidence that is too speculative, or valuations that are clearly inflated. Arbitrators are sometimes confronted with opposed expert evidence reaching completely incompatible results. I once had a case in which the claimant’s expert had assessed the net present-value of a company at more than US$1 billion while the respondent’s expert opined it had negative value of more than US$500 million! Such a gap between independent experts can only raise eyebrows and weaken each party’s case. Fair-minded and independent experts should have at least some points of common ground on valuation matters; unfortunately that is not always the case.

Third, there should be more coordination between the parties in the presentation of their expert evidence. More effort should be made in agreeing the issues that the experts will have to address, and possibly in agreeing on a common format for their reports. Joint reports, identifying issues of agreement and disagreement with short explanations for the differences between the experts and cross-references to the main reports, are also helpful to the tribunal. In conclusion, the guiding principle for the parties in presenting their quantum case should be: help your tribunal!

With respect to the determination of compensation, the reference point for valuation purposes is the loss suffered by the claimant whose property rights have been infringed. This loss is usually assessed by reference to specific heads of damage relating to (1) compensation for capital value, (2) compensation for loss of profits, and (3) incidental expenses.[19]


Satisfaction is addressed under Article 37 of the Draft Articles on State Responsibility, which states that:

  1. The State responsible for an internationally wrongful act is under an obligation to give satisfaction for the injury caused by that act insofar as it cannot be made good by restitution or compensation.
  2. Satisfaction may consist in an acknowledgement of the breach, an expression of regret, a formal apology or another appropriate modality.
  3. Satisfaction shall not be out of proportion to the injury and may not take a form humiliating to the responsible State.

Satisfaction is not a standard form of reparation; in most cases, the injury caused is fully repaired by restitution or compensation, or both. Article 37 makes clear that satisfaction is an exception, and may be required only where restitution and compensation have not provided full reparation.[20]


Finally, a point to emphasise is that the principle of proportionality is an aspect of all three forms of reparation (i.e., restitution, compensation and satisfaction). Restitution is excluded if it would involve a disproportionate burden (on a state) to the benefit gained by the injured party. In accordance with this principle, compensation is limited to damage actually suffered as a result of the internationally wrongful act and excludes damage that is indirect or remote. Satisfaction must not be out of proportion to the injury suffered.[21]

Relevance of the underlying legal obligation that was breached

For completeness, we observe that in international investment law, the obligation to pay compensation or damages may be based on different legal claims: expropriation or breaches of international law.[22]


A state’s right to expropriate is generally recognised as part of its sovereignty. Nevertheless, there has not always been consensus about the standard of compensation that shall apply in expropriation under international law. A triggering event in this respect is considered to be the nationalisation by Mexico in the 1930s of businesses in the domain of oil and agriculture without distinction as to whether they were held by nationals or foreigners.[23] The episode received the attention of the Secretary of State of the United States, Cordell Hull, who exchanged a series of diplomatic correspondences with the Mexican Ambassador Castillo Nájera about the treatment that Mexico had reserved to US nationals holding businesses in its territory.[24] In one of these exchanges, Mr Hull wrote:

The Government of the United States merely adverts to a self-evident fact when it notes that the applicable precedents and recognized authorities on international law support its declaration that, under every rule of law and equity, no government is entitled to expropriate private property, for whatever purpose, without provision for prompt, adequate, and effective payment therefor.[25]

The standard of ‘prompt, adequate, and effective’ compensation became thus known, and is still today referred to, as the ‘Hull formula’.[26]

Most modern bilateral investment treaties (BITs) and multilateral investment treaties (MITs) contain provisions for lawful expropriation, which set out the standard of compensation required for a lawful expropriation. Historically, capital-importing countries considered that compensation should simply be ‘appropriate’ and awarded on the basis of the domestic law of the host state, without the interference of international law.[27] However, despite the initial opposition of these countries, the vast majority of BITs and MITs currently follow the Hull formula and require compensation to be ‘prompt, adequate, and effective’.[28]

Additionally, many BITs and MITs further clarify that the compensation should amount to the ‘genuine value’, ‘market value’ or ‘fair market value’ of the investment expropriated.[29] Thus, for a lawful expropriation, the standard of compensation usually falls to be determined by the treaty’s provisions.

The use of the fair market value as a basis for compensation for expropriation reflects the standard adopted by the ILC in its commentaries to the Draft Articles on State Responsibility, according to which ‘compensation reflecting the capital value of property taken or destroyed as the result of an internationally wrongful act is generally assessed on the basis of the “fair market value” of the property loss’.[30] In reaching this conclusion, the ILC referred to the awards of investment tribunals, as well as to the 1992 World Bank Guidelines on the Treatment of Foreign Direct Investment, which considered compensation to be ‘adequate’ if ‘based on the fair market value of the taken asset as such value is determined immediately before the time at which the taking occurred or the decision to take the asset became publicly known’.[31]

Breaches of international law

For other breaches of international law related to investment protection, such as breaches of the obligations to provide fair and equitable treatment (FET), full protection and security or most-favoured nation treatment, the default standard of full reparation under customary international law would apply, absent any lex specialis provision on reparation in the applicable treaty.[32]

Similarly, compensation for unlawful expropriation would in principle follow the same standard as other breaches of international law. This approach was adopted, for example, by the arbitral tribunal in ADC v. Hungary, which emphasised that the difference between lawful and unlawful expropriation entailed financial consequences in the following terms:

The BIT only stipulates the standard of compensation that is payable in the case of a lawful expropriation, and these cannot be used to determine the issue of damages payable in the case of an unlawful expropriation since this would be to conflate compensation for a lawful expropriation with damages for an unlawful expropriation.[33]

Based on this reasoning, the tribunal applied the standard of the Factory at Chorzów case to grant compensation for the unlawful expropriation of the investor.[34] Although a minority of arbitral tribunals considered the distinction between lawful and unlawful expropriation to be irrelevant as regards the applicable standard of compensation, it is possible to identify a growing trend in arbitral practice towards the approach followed in ADC v. Hungary.[35]

Valuation methodology

Arbitral tribunals often take the fair market value (FMV) of the lost asset or business as the basis to determine the quantum of the investor’s claim.[36] While the term FMV is rarely defined in investment treaties themselves, arbitral tribunals are generally in agreement that the FMV of an asset corresponds to ‘the price at which property would change hands between a hypothetical willing and able buyer and [a] hypothetical willing and able seller, absent compulsion to buy or sell, and having the parties reasonable knowledge of the facts, all of it in an open and unrestricted market’.[37] How to calculate the FMV of an asset is not normally stipulated in a treaty; as such, tribunals tend to exercise their discretion in choosing the valuation methodology for FMV.[38]

Introduction of three valuation methods

In practice, three valuation approaches are frequently considered in valuing FMV.[39] A brief description of these approaches is set out below.

Income-based approach

The income-based approach refers to the valuation of a business based on the ‘future income that the owner can expect to obtain from the asset’.[40] Under this approach, FMV is calculated by analysing the financial history of a business to make projections about its future profits.[41] The most commonly applied income-based approach is the discounted cash flow (DCF) analysis. As recognised in CMS Gas Transmissions Co v. Argentina, the DCF analysis has been ‘universally adopted, including by numerous arbitral tribunals, as an appropriate method for valuing business assets’.[42]

The DCF analysis requires two inputs: net future cash flow and the discount rate appropriate for the level of risk of the cash flow.[43] Future cash flow is a projection of cash flow for a business minus expected expenses calculated in the way businesses plan for the future (i.e., by considering certain business plans).[44] A discount rate is estimated by considering the time value of money (i.e., cash receivable in the future is worth less than cash today) and the level of risk (i.e., uncertain cash flows are worth less than certain cash flows).[45] Therefore, where the available data permits reasonable estimation of expected cash flow and risks, the DCF analysis is considered to be the ‘almost always suitable’ methodology for the quantification of future losses.[46]

Market-based approach

The market-based approach attempts to value a business by applying market multiples observed from the selling price of comparable assets.[47] A valuation using this approach may provide a realistic snapshot as to what a hypothetical buyer in the market would be willing to pay for a company, as it considers information available from comparable companies or transactions. Therefore, when using the market-based approach it is important to identify a comparable that has similar features and shares economically relevant characteristics – in particular, with respect to risk and growth profiles (i.e., business activities, size, stage of development, financial structure, etc.).[48]

In that regard, applying the market-based approach in an investor–state dispute may prove challenging because these disputes frequently involve unique situations and markets or transactions for which a suitable comparable transaction may not exist.[49] Given this limitation, the market-based approach is often used as a cross-check against the DCF analysis results to ensure that the valuation generated through a cash flow analysis is sound and reasonable.[50] However, in investor–state disputes where tribunals were convinced that an appropriate comparable existed, the market-based approach was relied on as the preferred valuation methodology.[51]

Cost-based approach

The cost-based approach is valuing a business based on the costs incurred in establishing the business.[52] Under this approach, the value of a business can be measured by the difference between total assets and total liabilities (book value) or by ascertaining the cost of replacing the business with a similar asset in an arm’s-length transaction (replacement value).[53]

Standard in choosing the proper methodology

The cost-based approach uses actual and contemporaneous cost information. Hence, among the three approaches, the cost-based approach is least suited to estimate the value of future lost profits, which requires assumptions and approximations. As such, the cost-based approach has been applied in relatively few investor–state disputes.

Instead, the preferred valuation method by arbitral tribunals, when determining the quantum to be awarded to an investor’s prospective lost profit claim, has been the income-based approach, which is better suited to future projection of profit and risk assessment.[54] In the few instances where the cost-based approach was adopted as the primary valuation methodology, tribunals stated that there was insufficient information to quantify the cash flows that would be necessary to properly employ the income-based approach.[55]

Applying different methodologies and valuation dates can result in drastically different valuation outcomes. In Tethyan Copper Company PTY Limited v. Islamic Republic of Pakistan, which involved a mining project at an approval stage, the arbitral tribunal adopted the DCF analysis and calculated the damages by estimating the current market value of the mine (assuming it will be operated throughout its entire life span) and deducting relevant costs[56] from that price.[57] The investor was awarded around US$6 billion in damages. In contrast, in Bear Creek Mining Corporation v. Republic of Peru,[58] which similarly involved a mining project for which the state had cancelled the investor’s licence before the construction of the mine, the arbitral tribunal rejected the application of the DCF analysis and awarded the investor (only) around US$18 million (i.e., the costs actually incurred by the investor prior to the expropriation,[59] also known as ‘sunk costs’).[60] Specifically, the tribunal reasoned that ‘no similar projects operated in the same area, and there was no evidence to support a track record of successful operation or profitability in the future’.[61]

If predictions are too speculative or too uncertain, arbitral tribunals may indeed be reluctant to award damages going beyond the investment’s sunk costs, and thus refuse to apply the DCF method.[62] However, even in the absence of a going concern, some arbitral tribunals have considered that it would in principle be possible to quantify future cash flow projections to allow a DCF calculation if the claimant presents sufficient evidence of a proven record of profitability of comparable businesses operating in similar circumstances.[63]

In short, there is no uniform standard when determining which valuation methodology is appropriate. Arbitral tribunals carry out a case-by-case analysis on which methodology will generate the most appropriate outcome for quantifying the claim sought by the investor.[64] In doing so, tribunals primarily focus on whether one could, with reasonable confidence, reach a reliable conclusion concerning the compensation owed based on a particular valuation method.[65]

Should the DCF analysis be treated as the ‘base approach’?

As mentioned above, tribunals have frequently adopted the DCF analysis in investor–state disputes and referred to it as the most reliable valuation methodology.[66] They have preferred the DCF analysis because it can be tailored to the specific nature of the individual enterprise and because the assumptions and calculations are explicitly set out by the experts on both ends. This allows tribunals to accept or deny specific assumptions or applications of multiples as part of their assessment.

However, some practitioners remain sceptical on whether the DCF analysis fully captures the fair value of a business in an investor–state arbitration. This concern has grown over the past few years because the DCF analysis was considered to contribute to the gradual inflation of the amounts awarded by tribunals for projects that were never developed or operated.[67] The above-cited Tethyan Copper arbitration is a good example of a case in which an investor was compensated for future loss of a mine that was yet to be built and thus had no actual cash flow record.[68]

As a result, tribunals have repeatedly advised that the DCF analysis be used with caution.[69] The Draft Articles on State Responsibility also specifically note this caution by tribunals in the application of the DCF analysis:

The [DCF] method analyses a wide range of inherently speculative elements, some of which have a significant impact upon the outcome (e.g. discount rates, currency fluctuations, inflation figures, commodity prices, interest rates and other commercial risks). This has led tribunals to adopt a cautious approach to the use of the method.[70]

Against this background, the arbitral tribunal in Rusoro v. Venezuela has recently noted that ‘[i]f the estimation of those parameters [under the DCF method] is incorrect, the results will not represent the actual fair market value of the enterprise’ and that ‘[s]mall adjustments in the estimation can yield significant divergences in the results’.[71] Therefore, it warned that ‘valuations made through a DCF analysis must in any case be subjected to a “sanity check” against other valuation methodologies’.[72]

Valuation date

The value of an asset fluctuates over time and hence may vary depending on the reference date for calculating the value of that asset. It is therefore crucial to choose an appropriate valuation date. This date will serve as a cut-off point in which factual information that post-dates that date would not ordinarily be considered in the valuation process. That said, experts sometimes consider the factual information available after the valuation date to validate or check their findings or assumptions, but this is done on a case-by-case basis.

In general, selecting a valuation date involves the application of either ex ante or ex post approaches. Under an ex ante approach, an investor is entitled to damages equal to the value of a business at the date of expropriation (which may be further adjusted at the date of the award), and any subsequent information is considered irrelevant in the course of quantification.[73] In contrast, under an ex post approach, an investor is entitled to damages equal to the value of a business at a later date, which may roughly coincide with the date of the award.[74]

In the past few decades, it has become widespread practice in investor–state disputes that (1) where a lawful expropriation has occurred, valuation is conducted based on the date set out in the BIT, which generally applies an ex ante approach, and (2) where an unlawful expropriation has occurred, the valuation date should be the date of the award (i.e., applying the ex post approach) or another date chosen and justified by the investor.[75]

This distinction is based on the idea that any wrongfully obtained gains by the state shall be disgorged. Commentators further point to the moral notion of fairness and deterrence (i.e., that states should be discouraged from unlawfully expropriating a private entity’s asset in the future).[76]

Valuation principles: peculiar considerations in investor–state claims

In the context of investor–state dispute settlement, peculiar considerations may arise in relation to valuation principles and the quantification of claims. Some of those that are of ongoing concern are briefly described below.

Country risk

A discussion unique to investor–state disputes is whether ‘country risk’ should be accounted for when quantifying damages. In investor–state disputes, country risk can be described as the unforeseeable adverse risk that an investor is inherently exposed to when doing business in a host state that is politically or economically unstable.[77] A common example of a political risk is when a state is exercising its sovereign powers within its national borders against a foreign investor.[78] Economic risks resulting from unexpected changes in the state’s economic growth rate, inflation or exchange rate, etc., or cultural risks that may result in increased transaction costs due to different cultural patterns of behaviour, language or religion are also examples of country risks.[79]

Country risk can be generally translated into damage valuation in the form of a risk premium, whereby the value of an asset is discounted at a certain rate to reflect the risk.[80] In practice, there are conflicting views on whether reflecting country risk by way of a discount rate is appropriate – investors frequently complain that states should not be liable for lower damages due to risks created and controlled by the host country themselves.[81] On the other hand, disregarding country risk entirely may lead to an inaccurate quantification of damages if the investor had indeed assumed such country risk to a certain extent when entering the host state to do business.[82]

The issue of how to deal with country risk in the context of FMV remains currently unsettled. Accordingly, for the time being, arbitral tribunals and quantum experts are encouraged to set out in detail the reasoning on whether or not country risk should be considered when assessing quantum.[83]

Prohibition of double or multiple recovery

The principle that a party is not entitled to double or multiple recovery (i.e., to obtain compensation more than once for the same damage) is widely recognised under international law. In Factory at Chorzów, the PCIJ recognised that the calculation of compensation shall ‘avoid awarding double damages’.[84]

Such a principle plays a particularly important role in the context of investor–state claims when parallel or multiple proceedings are conducted under different regimes. The most typical example is the existence in parallel (although sometimes at different stages of the proceedings) of treaty claims brought by a shareholder for reflective loss before an investment tribunal and contract claims brought by the company in which it invested before a commercial tribunal or a domestic court pertaining to essentially the same facts or damages, or both.[85]

In these circumstances, investment tribunals shall make sure that no double or multiple damages are awarded. For instance, in Impregilo v. Argentina, the arbitral tribunal considered that the prohibition of double recovery would affect the valuation of claims when parallel proceedings are undertaken before different forums:

[i]f compensation were granted to [the company] at domestic level, this would affect the claims that [the shareholders] could make under the BIT, and conversely, any compensation granted to [the shareholders] at international level would affect the claims that could be presented by [the company] before Argentine courts.[86]

Valuation in multiple treaty breaches

Similarly, a peculiarity in terms of valuation principles exists for multiple treaty breaches. The amount of compensation that an investor would obtain as a result of a state’s violation of its treaty obligations does not depend upon the number of the treaty breaches committed by the state.[87] In other words, there exists an overall practical limit to the amount of compensation that an investor is allowed to obtain as damages, regardless of the nature and the quantity of the state’s breaches.

For instance, when expropriation is coupled with the breach of another treaty provision, such as FET, compensation for the violation of the latter is considered to be absorbed by the awarded compensation for expropriation, which – as discussed above – usually corresponds to the FMV of the investment as a going concern.[88] The result is similar in the case of multiple treaty beaches not involving expropriation.[89] This is a logical result of essentially equating multiple breaches of a BIT or international law with a complete loss of the investment. Only in specific and exceptional circumstances, such as in the case of fault liability,[90] have arbitral tribunals acknowledged the possibility to award moral damages to investors, in addition to material damages.

Necessity defence and non-precluded measures provisions

The Draft Articles on State Responsibility recognise that a state’s conduct that would in principle be contrary to an international obligation may be excused in certain circumstances and would not invoke liability of a host state.[91] In the context of investor–state disputes, a circumstance that is often relied upon by states is necessity. In short, necessity denotes an exceptional circumstance ‘where the only way a State can safeguard an essential interest threatened by a grave and imminent peril is, for the time being, not to perform some other international obligation of lesser weight or urgency’.[92] The conditions to uphold a plea of necessity under customary international law are multiple and interpreted strictly by international courts and tribunals.[93] In addition, investment treaties increasingly contain non-precluded measures provisions, limiting the applicability of investment protections if an essential interest of the state is at stake.[94]

To the extent that conduct ceases to be wrongful, it does not in principle generate an obligation to make reparation.[95] However, the question of whether compensation may still be payable to the injured investor is not clear cut.[96] Arbitral tribunals that have awarded compensation, despite upholding a plea of necessity, have generally based their reasoning on Article 27(b) of the Draft Articles on State Responsibility,[97] according to which the invocation of a circumstance precluding wrongfulness ‘is without prejudice . . . to the question of compensation for any material loss caused by the act in question’.

In either case, assuming that compensation is due, it remains to be seen whether the exceptional circumstances invoked by the state for the protection of its essential interests may have an influence on the valuation of damages and the amount of compensation awarded. This approach was followed, for example, by the arbitral tribunals in Sempra Energy v. Argentina,[98] CMS v. Argentina[99] and Enron v. Argentina.[100] In these cases, although Argentina’s plea of necessity was rejected, the tribunals reduced the amount of compensation due to the investor by taking into account the negative impact of Argentina’s economic crisis in determining the market value of the investment under the DCF method.[101] Whether downward adjustments in DCF valuations are justified in similar cases is a particularly relevant question at present times. That is especially so in light of the exceptional measures taken by the vast majority of states in response to the current covid-19 pandemic and their adverse effects on businesses worldwide.


[1] Mino Han, Konstantin Christie and Charis Tan are partners at Peter & Kim. The authors express their gratitude to Sophie Oh and Francesca Dal Poggetto of Peter & Kim for their assistance and contributions to this chapter.

[2] Factory at Chorzów, Jurisdiction, Judgment No. 8, 1927, PCIJ Series A, No. 9, p. 21.

[3] International Law Commission, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries’, Yearbook of the International Law Commission, Volume II, 2001, available at https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf. The Draft Articles on State Responsibility were adopted by the United Nations General Assembly in Resolution 56/83 of 12 December 2001.

[4] G Boas, Public International Law – Contemporary Principles and Perspectives (Edward Elgar, 2021), p. 350 and pp. 282–283. See also S Ripinsky and K Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2015), pp. 32–33.

[5] Factory at Chorzów, footnote 2, p. 47.

[6] C Breton, ‘Damages: General Concept’, Jus Mundi, Paragraph 2, available at https://jusmundi.com/en/document/wiki/en-damages-general-concept.

[7] Greentech Energy Systems A/S, NovEnergia II Energy & Environment (SCA) SICAR, and NovEnergia II Italian Portfolio SA v. The Italian Republic, SCC Case No. V 2015/095, Award of 23 December 2018, Paragraph 548.

[8] Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, footnote 3, Article 31, Paragraph 9.

[9] BG Group Plc. v. Argentina, UNCITRAL, Award of 24 December 2007, Paragraphs 428–429.

[10] id., Article 34, Paragraph 2.

[11] id., Article 38.

[12] id., Article 38, Paragraph 10.

[13] id., Article 35, Paragraph 1.

[14] id., Article 35, Paragraph 3.

[15] id., Article 36(1).

[16] id., Article 36, Paragraph 4.

[17] id., Article 36, Paragraph 2, citing Factory at Chorzów, footnote 2, p. 21; Fisheries Jurisdiction (Federal Republic of Germany v. Iceland), Merits, Judgment, I.C.J. Reports 1974, Paragraphs 71–76; and Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. United States of America), Merits, Judgment, I.C.J. Reports 1986, Paragraph 283.

[18] B Sabahi, N Rubins, et al., Investor-State Arbitration, Second edition (Oxford University Press, 2019), Paragraph 21.13.

[19] Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, footnote 3, Article 36, Paragraph 21.

[20] id., Article 37, Paragraph 1.

[21] id., Article 34, Paragraph 5.

[22] I Marboe, Calculation of Compensation and Damages in International Investment Law, Second edition (Oxford University Press, 2017), Paragraph 2.03.

[23] R Dolzer and C Schreuer, Principles of International Investment Law, Second edition (Oxford University Press, 2012), p. 2.

[24] ibid.

[25] Foreign Relations of the United States Diplomatic Papers, 1938, The American Republics, Volume V, Document 665, available at https://history.state.gov/historicaldocuments/frus1938v05/d665.

[26] e.g., EU–China Comprehensive Agreement on Investment, European Parliamentary Research Service, September 2020, p. 3, available at https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/652066/EPRS_BRI(2020)652066_EN.pdf. See also J Bonnitcha and S Brewin, 'Compensation Under Investment Treaties', International Institute for Sustainable Development Best Practices Series, November 2020, p. 6, available at http://www.iisd.org/system/files/publications/compensation-treaties-best-practicies-en.pdf.

[27] S Ripinsky, K Williams, footnote 4, p. 72.

[28] C McLachlan, L Shore, et al., International Investment Arbitration: Substantive Principles, Second edition (Oxford University Press, 2017), Paragraph 9.09.

[29] id., Paragraph 9.10.

[30] Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, footnote 3, Article 36, Paragraph 22.

[31] id., at footnote 550.

[32] S Ripinsky, K Williams, footnote 4, p. 89.

[33] ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of 2 October 2006, Paragraph 481.

[34] id., Paragraph 499.

[35] See K Christie and R Turtoi, ‘Compensation for Expropriation’, in B Legum (ed.), The Investment Treaty Arbitration Review, Fourth edition (The Law Reviews, 2019) referring to, for example, Siemens A. G. v. The Argentine Republic, ICSID Case No. ARB/02/08, Award of 6 February 2007, Paragraph 352; ConocoPhillips and others v. Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and the Merits of 3 September 2013, Paragraphs 342–343; Hulley Enterprises Limited v. The Russian Federation, UNCITRAL, PCA Case No. AA 226, l, Final Award of 18 July 2014, Paragraphs 1763–1769; Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award of 18 July 2014, Paragraphs 1763–1769; Veteran Petroleum Limited v. The Russian Federation, UNCITRAL, PCA Case No. AA 228, Final Award of 18 July 2014, Paragraphs 1763–1769; Tidewater Inc., Tidewater Investment SRL, Tidewater Caribe, C.A., et al. v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award of 13 March 2015, Paragraphs 141–142; Quiborax SA and Non Metallic Minerals SA v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award of 16 September 2015, Paragraphs 325–330; Caratube International Oil Company LLP and Devincci Salah Hourani v. Republic of Kazakhstan, ICSID Case No. ARB/13/13, Award of 27 September 2017, Paragraphs 1082–1083; Bear Creek Mining Operation v. Republic of Peru, ICSID Case No. ARB/14/21, Award of 30 November 2017, Paragraphs 448–449; UP and C.D. Holding Internationale v. Hungary, ICSID Case No. ARB/13/35, Award of 9 October 2018, Paragraphs 511–512.

[36] See, e.g., Crystallex International Corporation v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award of 4 April 2016, Paragraph 850 (‘[I]t is well-accepted that reparation should reflect the “fair market value” of the investment’).

[37] See, e.g., Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award of 22 May 2007, Paragraph 361; El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award of 31 October 2011, Paragraph 702; Mobil Exploration and Development Inc. Suc. Argentina and Mobil Argentina S.A. v. Argentine Republic, ICSID Case No. ARB/04/16, Award of 25 February 2016, Paragraph 123; Bear Creek v. Peru, footnote 35, Paragraph 597.

[38] M W Friedman, F Lavud, ‘Damages Principles in Investment Arbitration’, in J A Trenor (ed.), The Guide to Damages in International Arbitration, Third edition (Global Arbitration Review, 2018), p. 104.

[39] The three valuation methods are not an exhaustive list of valuation approaches. For instance, there are cases in which FMV was calculated based on the value of outstanding loan amounts or unpaid tax refunds. See id., p. 107, footnote 65 (citing British Caribbean Bank Ltd v. Government of Belize, PCA Case No. 2010-18, Award of 19 December 2014; Occidental Exploration and Production Co v. Republic of Ecuador, LCIA Case No. UN3467, Final Award of 1 July 2004, Paragraphs 205–207).

[40] P Haberman and L Perks, ‘Overview of Methodologies for Assessing Fair Market Value’, in J A Trenor (ed.), The Guide to Damages in International Arbitration, Fourth edition (Global Arbitration Review, 2020), p. 175.

[41] J D Makholm, ‘The Discounted Cash Flow Method of Valuing Damages in Arbitration’, in B Legum (ed.), The Investment Treaty Arbitration Review, Third edition (The Law Reviews, 2018), p. 239.

[42] CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award of 12 May 2005, Paragraph 416.

[43] F Bancel and U R Mittoo, ‘The Gap between Theory and Practice of Firm Valuation: Survey of European Valuation Experts’ (27 March 2014), p. 10.

[44] P Haberman, L Perks, footnote 40, p. 175.

[45] See J B Simmons, ‘Valuation in Investor-State Arbitration: Toward a More Exact Science’, Berkeley Journal of International Law, Volume 30, Issue 1 (2012), p. 221.

[46] P Haberman, L Perks, footnote 40, p. 178. See also Gold Reserve Inc v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award of 22 September 2014, Paragraph 831 (‘The Tribunal notes that the DCF method is a preferred method of valuation where sufficient data is available’).

[47] S Dellepiane, et al., ‘The Applicable Valuation Approach’, in J A Trenor (ed.), The Guide to Damages in International Arbitration, Fourth edition (Global Arbitration Review, 2020), p. 184.

[48] A Wynn and N Matthews, ‘Valuation in International Arbitration’, FTI Consulting White Paper, p. 4, available at https://www.fticonsulting.com/~/media/Files/emea--files/insights/white-papers/valuation-in-international-arbitration.pdf.

[49] J D Makholm, footnote 41, p. 240; see also J B Simmons, footnote 45, p. 223.

[50] See, e.g., Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award of 22 August 2016, Paragraph 760.

[51] See, e.g., Yukos v. Russia, footnote 35, Paragraph 1787 (‘By contrast to all of the other methods canvassed above, the Tribunal does have a measure of confidence in the comparable companies method as a means of determining Yukos’ value’); Crystallex International Corporation v. Bolivian Republic of Venezuela, footnote 36, Paragraph 901 (‘[The market-based] method is widely used as a valuation method of business, and can thus be safely resorted to, provided it is correctly applied and, especially, if appropriate comparables are used’).

[52] M W Friedman, F Lavud, footnote 38, p. 106.

[53] B Wasiak, ‘Replacement Cost Method’, Jus Mundi, available at https://jusmundi.com/en/document/wiki/en-replacement-cost-method.

[54] M W Friedman, F Lavud, footnote 38, p. 106.

[55] Siemens A.G. v. Argentina, footnote 35, Paragraph 355. See also M A Maniatis, et al., ‘Accounting-Based Valuation Approach’, in J A Trenor (ed.), The Guide to Damages in International Arbitration, Fourth edition (Global Arbitration Review, 2020), p. 265.

[56] In that case, the investor had committed to spend on a social investment programme, which involved costs that the tribunal considered should be deducted.

[57] Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1, Award of 12 July 2019, Paragraphs 1177–1178; United Nations, Initial Draft of ‘Possible Reform of Investor-State Dispute Settlement (ISDS): Assessment of damages and compensation’, footnote 30, p. 7, available at http://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/assessment_of_damages_and_compensation.pdf.

[58] Bear Creek Mining v. Peru, footnote 35.

[59] id., Paragraph 594.

[60] J Alberro and G D Ruttinger, ‘“Going Concern” as a Limiting Factor on Damages in Investor-State Arbitrations’, in The Journal of Damages in International Arbitration, Volume 2, No. 1 (2015), p. 1, available at https://www.cornerstone.com/Publications/Articles/JDIA-Going-Concern-as-a-Limiting-Factor.pdf.

[61] Tethyan Copper v. Pakistan, footnote 57, Paragraph 600.

[62] id., Paragraph 604. See also, more recently, William Ralph Clayton, William Douglas Clayton, Daniel Clayton and Bilcon of Delaware, Inc. v. Government of Canada, PCA Case No. 2009-04, Award on Damages, 10 January 2019, Paragraph 278, as well as the decision in Dominion Minerals Corp. v. Republic of Panama, ICSID Case No. ARB/16/13, Award of 5 November 2020. The final award is not public, but the outcome of the decision was reported online (T Jones, ‘Panama escapes bulk of mining claims’, in Global Arbitration Review, 9 November 2020).

[63] See, e.g., Mohammad Ammar Al-Bahloul v. The Republic of Tajikistan, SCC Case No. V 064/2008, Award of 8 June 2010, Paragraphs 74–75, referring to a similar consideration made in Compañia de Aguas del Aconquija SA and Vivendi Universal v. Argentina, ICSID Case No ARB/97/3, Award of 20 August 2007, Paragraph 8.3.3.

[64] F Baena, ‘Valuation of “Non-operational Projects” in Investment Arbitration: Criteria from the Tethyan Copper Award and from Recent ICSID Case Law’, Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Volume 86, Issue 4 (2020), p. 419.

[65] See, e.g., Tethyan Copper v. Pakistan, footnote 57, Paragraph 298; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award of 28 March 2011, p. 246 (‘Once causation has been established, and it has been proven that the in bonis party has indeed suffered a loss, less certainty is required in proof of the actual amount of damages; for this latter determination Claimant only needs to provide a basis upon which the Tribunal can, with reasonable confidence, estimate the extent of the loss’).

[66] See Credibility International, ‘Study of Damages Awards in Investor-State Cases’, Second edition (2021), pp. 47–48. Out of the 122 cases in which Credibility International identified the basis for the award, 37 per cent had adopted a DCF analysis.

[67] Note that approximately half of the 30 largest investor–state dispute awards that had been issued by January 2021 were based on DCF analysis. See Credibility International, footnote 66, p. 50.

[68] See also Process and Industrial Developments Ltd. v. The Ministry of Petroleum Resources of the Federal Republic of Nigeria, ad hoc arbitration, Award of 31 January 2017. Although this case involved a gas processing project that was yet to be constructed, the arbitral tribunal awarded approximately US$6.6 billion plus interest to the investor. The award is currently being challenged in the English High Court. See ‘Corruption and confidentiality in contract-based ISDS: The case of P&ID v Nigeria’, Investment Treaty News, 23 March 2021, available at https://www.iisd.org/itn/en/2021/03/23/corruption-and-confidentiality-in-contract-based-isds-the-case-of-pid-v-nigeria-jonathan-bonnitcha/.

[69] See, e.g., Siemens A.G. v. Argentina, footnote 35, Paragraphs 355–357 (‘DCF method is applied to ongoing concerns based on the historical data of their revenues and profits; otherwise, it is considered that the data is too speculative to calculate future profits’); Vivendi v. Argentina, footnote 63, Paragraph 8.3.3 (‘DCF analysis is not always appropriate and becomes less so as the assumptions and projections become increasingly speculative’).

[70] Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, footnote 3, Article 36, Paragraph 26. See, e.g., J B Simmons, footnote 45, for a detailed discussion on why tribunals should not regress from adopting DCF analysis as the basis for quantification and recommendation on enlisting independent financial experts to reduce any uncertainty or speculative aspect of DCF analysis.

[71] Rusoro v. Venezuela, footnote 50, Paragraph 760.

[72] ibid.

[73] F Lavud and G Recena Costa, ‘Valuation Date in Investment Arbitration: A Fundamental Examination of Chorzów’s Principles’, The Journal of Damages in International Arbitration, Volume 3, No. 2 (2016), pp. 38–39.

[74] id., p. 39.

[75] I Marboe, ‘Calculation of Damages in the Yukos Award: Highlighting the Valuation Date, Contributory Fault and Interest’, ICSID Review – Foreign Investment Law Journal, Volume 30, Issue 2 (2015), p. 2. See, in general, ADC v. Hungary, footnote 33; Yukos v. Russia, footnote 35, at Paragraph 1763 (explaining that ‘in the case of an unlawful expropriation . . . claimants are entitled to select either the date of expropriation or the date of the award as the date of valuation’).

[76] F Lavud, G Recena Costa, footnote 73, pp. 66–67 (‘[B]y applying [such] standard, tribunals further different goals, including fairness and deterrence of future illegal conduct. . . . Mandating wrongdoers to disgorge any ill-gotten gains does not, in principle, amount to a punitive measure’).

[77] M D García Domínguez, ‘Calculating Damages in Investment Arbitration: Should Tribunals Take Country Risk into Account?’, Arizona Journal of International and Comparative Law, Volume 34, No. 1 (2016), p. 98.

[78] id., p. 99.

[79] id., p. 100.

[80] F A Dorobantu, et al., ‘Country Risk and Damages in Investment Arbitration’, ICSID Review – Foreign Investment Law Journal, Volume 31, Issue 1 (2016), pp. 220–221.

[81] M D García Domínguez, footnote 77, p. 113. See also Flughafen Zürich AG and Gestión e Inginería IDC SA v. Bolivarian Republic of Venezuela, ICSID Case No ARB/10/19, Award of 18 November 2014, Paragraph 905 (‘Government that through the adoption of new political attitudes, adopted after the investment was materialised, which increases the country risk, cannot benefit from a wrongful act attributable to it that reduces the compensation payable’ [translated]).

[82] M W Friedman, F Lavud, footnote 38, p. 110 (introducing a string of recent cases involving Venezuela that ‘have adopted this approach, incorporating different amounts of “confiscation risk” into their country risk figures’).

[83] F A Dorobantu, footnote 80, p. 231.

[84] Factory at Chorzów, footnote 2, p. 50.

[85] G Bottini, Admissibility of Shareholder Claims under Investment Treaties (Cambridge University Press, 2020), pp. 13–14.

[86] Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award of 21 June 2011, Paragraph 139.

[87] S Ripinsky, K Williams, footnote 4, p. 99.

[88] ibid.

[89] See, e.g., CMS v. Argentina, footnote 42, Paragraph 410 (‘the Tribunal is persuaded that the cumulative nature of the breaches discussed here is best dealt with by resorting to the standard of fair market value. While this standard figures prominently in respect of expropriation, it is not excluded that it might also be appropriate for breaches different from expropriation if their effect results in important long-term losses.’).

[90] See, e.g., Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award of 6 February 2008, Paragraph 290.

[91] Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, footnote 3, Chapter V.

[92] id., Article 35, Paragraph 1.

[93] id., Paragraph 14.

[94] M McLaughlin, ‘Non-precluded Measures Clauses: Regime, Trends, and Practice’ in Handbook of International Investment Law and Policy, 27 February 2020, p. 6, available at https://ssrn.com/abstract=3690358.

[95] S Ripinsky, K Williams, footnote 4, p. 341.

[96] ibid.

[97] See, e.g., CMS v. Argentina, footnote 42, Paragraphs 388–389.

[98] Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award of 28 September 2007, Paragraph 397.

[99] CMS v. Argentina, footnote 42, Paragraphs 443–446.

[100] Enron v. Argentina, footnote 37, Paragraph 232.

[101] S Ripinsky, K Williams, footnote 4, p. 345.

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