Investor Conduct (Damages)

International law recognises the relevance of the conduct of the injured party in the determination of reparation. For example, the investor-State dispute mechanism does not protect the investor from its own “bad business judgments”.¹ In this context, arbitral tribunals have considered two factors,² which are normally addressed separately:³ the investor’s contributory fault and its duty to mitigate its losses.

Article 39 of the ILC Articles on State Responsibility provides that “[i]n the determination of reparation, account shall be taken of the contribution to the injury by wilful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought.” Arbitral tribunals have interpreted Article 39 of the ILC Articles on State Responsibility in the sense of requiring that the claimants’ conduct be taken into account in determining compensation.⁴

The same principle has also been recognised without a reference to the ILC Draft Articles.⁵

However, not every contribution triggers a reduction of damages; it must be material and significant.⁶ As explained in the Commentary to the ILC Articles, Article 39 embodies a restrictive notion of contributory fault.⁷

Investment arbitration tribunals have reduced the amount of damages awarded to investors by a percentage as a result of their contributory fault to reflect investors’ role in the events leading to a loss.⁸

For instance, in MTD v. Chile, the tribunal considered that the claimants contributed to their losses; as a result “the Claimants should bear part of the damages suffered” and awarded them only 50% of the damages they had suffered.⁹ The ICSID annulment committee upheld the validity of this finding and noted the margin of estimation that tribunals enjoy when apportioning fault.¹⁰ This discretionary power was acknowledged by subsequent tribunals.¹¹

Moreover, in Copper Mesa v. Ecuador, the tribunal took into account the claimant’s negligent conduct and reduced the amount of damages awarded by 30%.¹² In Occidental v. Ecuador, the Tribunal held that “an award of damages may be reduced if the claiming party also committed a fault which contributed to the prejudice it suffered and for which the trier of facts, in the exercise of its discretion, considers the claiming party should bear some responsibility.” As a result, the tribunal reduced the compensation awarded by 25%.¹³ Similarly, in Yukos v. Russia, the tribunal considered that the claimants had “contributed to the extent of 25 percent to the prejudice which they suffered as a result of Respondent's destruction of Yukos.”¹⁴

The burden of proving that an intervening event (e.g., a factor attributable to the victim or a third party) caused the damage alleged is on the respondent State¹⁵ unless the injury can be shown to be severable in causal terms from that attributed to the State.¹⁶ Arbitral tribunals have considered that in order to exclude or reduce compensation due to the investor’s contributory fault “it is necessary not only to prove said omission or fault, but also to establish a causal link between the omission or fault and the harm suffered.”¹⁷

An investor’s failure to mitigate losses is another factor that can be taken into account when determining damages. In this vein, many arbitral tribunals accepted the duty to mitigate argument alleged by the Respondent,¹⁸ while others rejected it.¹⁹

The Commentary to the ILC Articles notes that the question of mitigation of damages is “[a] further element affecting the scope of reparation” and that “a failure to mitigate by the injured party may preclude recovery to that extent”.²⁰ The principle that claimants must take reasonable steps to mitigate their losses is a well-established principle in investment arbitration,²¹ and as the Middle East Cement v. Egypt tribunal noted, it “can be considered to be part of the General Principles of Law which, in turn, are part of the rules of international law.”²²

This duty to mitigate arises “from the moment that [the investor] was aware of the circumstances giving rise to the breach.”²³

The burden of proof of the facts establishing a duty to mitigate and the failure of the claimant to carry out this duty is on the respondent State.²⁴ Case law requires “compelling evidence”.²⁵ (See also Standard of Proof)

The obligation is not without limits as it cannot require a claimant to accept unfavorable alternatives,²⁶ or impose obligations that are not required under the applicable investment treaty (such as exhaustion of local remedies).²⁷