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Dr Caroline Breton

Associate Researcher - University Paris Nanterre

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Damages: General Concept

I. Obligation of reparation

1.

To provide reparation is an obligation resulting from the breach.1 In case of non-investment treaty claims, the rules applicable to reparation should be determined in accordance with the relevant provisions of the contract or domestic law on which the request for arbitration is based. In case of investment treaty claims, and in the absence of any lex specialis provision on reparation in the treaty itself, the principles of customary international law as codified by the International Law Commission in the Articles on Responsibility of States for Internationally Wrongful Acts are applicable.2 In this context, the obligation of reparation arises for the responsible State as soon as it commits an internationally wrongful act. It is thus conceived as “the immediate corollary of a State’s responsibility”.3

II. Principle of full reparation

2.

The obligation of reparation must be assessed in the light of the principle of full reparation. Making full reparation for the injury caused by an internationally wrongful act4 is a “principle of international law, and even a general conception of law”.5 The principle implies that reparation “must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.6 The reparation is considered “full” – whatever its form – if it covers all injuries caused by the internationally wrongful act.7

III. Articulation of the different forms of reparation

3.

Article 34 of the ILC Articles8 organises the different forms of reparation according to a hierarchical principle giving primacy to restitution over compensation or satisfaction.9 The availability in investment arbitration of restitution as a form of reparation has been questioned10 even though public international law does not limit the powers of judges or arbitrators to order non-pecuniary reparation.11 Most arbitral tribunals now find that they have the necessary jurisdiction and powers to award restitution.12 Nevertheless, restitution is still difficult to grant in so far as it appears either impracticable13 or disproportionate in light of the State’s sovereignty.14 Moreover, the form of reparation depends on the wording of the primary rule,15 the nature and extent of the injury and the investor’s choice.16 Monetary compensation remains investors’ preferred option, even if in some cases they seek restitution.17 Restitution, compensation and other non-compensatory remedies18 may also be granted jointly in order to achieve full reparation or as alternatives, with compensation only being provided in the event of failure of restitution.

IV. Limits to the principle of full reparation

4.

The principle of full reparation is evaluated in the light of the notion of proportionality:19 the reparation must be proportional to the damage actually suffered by the investor.

V. Damages that give rise to reparation

5.

In order to give rise to reparation, the damage must be legal (i.e., caused by the wrongful act committed by the host State); actual (i.e., the reality of its existence must be established and the damage must be not only hypothetical); economic and quantifiable (i.e., likely to be subject to a monetary evaluation, especially in order to be compensated).20 In addition, the responsible State is not – or not fully – liable for damages that the investor could reasonably have mitigated21 or that occurred in the context of a crisis (for example, damages resulting in times of and caused by armed conflicts22 or exceptional circumstances such as a state of necessity23).

6.

Two categories of damages are repairable: material damages and moral damages. Material damages are of a patrimonial nature and have a pecuniary value (i.e., total loss or partial decrease in the value of the investment; loss of capital spent on investment; incidental expenses incurred as a result of the unlawful act; loss of profits). Material damages may include the damnum emergens (i.e., actual loss), as well as the loss of future profits.24 Material damages can also include interest. moral damages suffered by the investor are immaterial, non-economic or extrapatrimonial in the sense that they do not directly affect the investor’s assets (i.e., injury caused by the breach of the investor’s personal rights such as physical threats or arbitrary arrest; loss of reputation, credit or prestige).25

7.

The injury must be precisely defined by the investor. Pursuant to the non ultra petita principle, tribunals cannot grant more compensation than requested by the parties.

VI. Valuation of the quantum of compensation

8.

The quantum of compensation is primarily delimited by the nature and extent of the damages caused to the investor. Different factors are to be taken into account: the violation, the nature and the value of the investment. Once the compensable damages are defined, the value of the damages must be established. The valuation principles and methods are highly diverse (i.e., market-based multiples approach; income-based approach including the discounted cash flow method, the capitalised cash flow method and the adjusted present value method; asset-based approach including the net book value method, the replacement value method or the liquidation value method; sunk-costs approach) and depend on the specific circumstances of the case. But they are primarily structured around the idea of comparing the investor’s situation as it results from the unlawful act (the “actual scenario”) with what it would have been if it had not occurred (the “but-for scenario”). The quantum of compensation (which must correspond to the amount of damages calculated) is definitively determined only after taking into account the risk of double recovery26 and, possibly, considerations of equity.27

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