I. Notion of lost profits
The loss of profits suffered constitutes a material damage. It corresponds, in a but-for scenario, to profits which the investor would have been entitled if his investment had continued to operate normally, that is, if the host State had not committed any wrongful act. The loss of profits (lucrum cessans) is generally opposed to effective losses (damnum emergens). The loss of profits is both an independent head of claim and an element in determining the amount of compensation (for example, it is used to assess the market value of the investment according to the discounted cash flow method).
II. Principle of compensation for lost profits
The compensation covers any financially assessable damage “including loss of profits insofar as it is established”.1 By taking into account the loss of profits, the standard of full reparation2 is achieved: the compensation puts the wronged party back in the financial situation in which it would have been without the unlawful act having occurred. Arbitral tribunals have long since accepted the principle of compensation for loss of profits.3
III. Categories of recoverable lost profits
Three main categories of recoverable loss of profits can be identified. Firstly, the loss of profits may result from “the temporary loss of use and enjoyment of the income-producing asset”.4 The property title to the asset is not questioned, compensation amounts to “the income to which the claimant was entitled by virtue of undisturbed ownership”5 6 during the period in which he had lost the enjoyment of it. Secondly, the loss of profits may follow “the unlawful taking of income-producing property”.7 The property title to the asset is questioned and compensation generally covers losses incurred between the date of expropriation and the date of settlement of the dispute.8 Thirdly, the loss of profits may relate to concessions and other contractually protected interests.9 Compensation is granted for profits anticipated after the date of settlement of the dispute10 until the right is extinguished (for example, when the future income that the investor can expect is stipulated in the contract).
IV. Conditions of compensation for lost profits
Arbitral tribunals accept approximation in the valuation of the amount of damages,11 but not speculation.12 The loss of profits must be probable and reasonably foreseeable: there must be a reasonable degree of certainty that profits would have been earned but for the commission of the unlawful act. In Micula vs. Romania (I), the tribunal found that the claimants must prove (i) that they “were engaged in a profit-making activity (or, at the very least, that there is sufficient certainty that they had engaged or would have engaged in a profit-making activity but for the revocation of the incentives), and (ii) that that activity would have indeed been profitable (at the very least, that such profitability was probable).”13 Tribunals thus verify whether, prior to the unlawful act, the going concern14 or investment was viable, i.e. whether the investor had recorded profitable operations over a sufficiently long period of time (track record).15
Other criteria may also be used to prove, with reasonable certainty, that the activity could have been profitable. Tribunals may first of all take into account the contract, if any, concluded between the investor and the host State when giving indications of the income or profits to which the investor may be entitled if it is performed under the conditions provided for in the contract.16 However, in many long-term contracts, it is “most difficult if not impossible to calculate such future profits with certainty, particularly if the contract is subject to adjustment mechanisms and other possible variations with time”.17 Tribunals may then examine the degree of progress of the investment project at the time of the commission of the unlawful act18 as well as the importance of the amounts invested compared to the amount required for compensation for loss of profits.19 If the project is at a very early stage and the amount invested by the investor in the project is too small, compensation is excluded. Finally, tribunals may consider the success of other investment projects carried out in similar circumstances.20
If, based on these different criteria, the loss of future profits remains uncertain (especially when the enterprise or activity is recent), tribunals may compensate not for the loss of future profits, but for the loss of business opportunity or loss of chance. In this case, the investor would have had the opportunity to make profits if the intervention of the unlawful act had not deprived him of this opportunity.21 The degree of proof of the loss of opportunity and its amount is higher: “[w]hile it is true that no absolute certainty of proof can be required for such losses in the future, a high threshold of sufficient probability must be applied to a claim for lost opportunity”.22 However, if the lack of evidence is directly attributable to the wrongful conduct of the host State, it is considered that even if it is extremely difficult to assess the value of the loss of opportunity pecuniarily, it would be unfair to deprive or diminish the compensation awarded by failing to take into account the value of the loss of opportunity.23
SPP v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, para. 215; Tecmed v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003, para. 190; Vivendi v. Argentina (I), ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 8.3.16; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Decision of the Ad Hoc Committee, 25 March 2010, para. 142; Lemire v. Ukraine (II), ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 246; Micula v. Romania (I), ICSID Case No. ARB/05/20, Final Award, 11 December 2013, para. 1008; Gold Reserve v. Venezuela, ICSID Case No. ARB(AF)/09/1, Award, 22 September 2014, para. 686; Vivendi v. Argentina (II), ICSID Case No. ARB/03/19, Award, 9 April 2015, para. 30; Crystallex v. Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, paras. 868-871.
S.D. Myers, Inc. v. Government of Canada, Second Partial Award, 21 October 2002, para. 173; Vivendi v. Argentina (I), ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 8.3.3; ADM v. Mexico, ICSID Case No. ARB(AF)/04/05, Award, 21 November 2007, para. 285; Lemire v. Ukraine (II), ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 246; Micula v. Romania (I), ICSID Case No. ARB/05/20, Award, 11 December 2013, para. 1008; Crystallex v. Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, paras. 871-872; Burlington v. Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award, 7 February 2017, para. 281.
SPP v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, para. 188; S.D. Myers, Inc. v. Government of Canada, Second Partial Award (Damages), 21 November 2002, para. 173; Metalclad v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, para. 120; Wena Hotels v. Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, paras. 123-124; Tecmed v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 186; AUCOVEN v. Venezuela, ICSID Case No. ARB/00/5, Award, 23 September 2003, paras. 360-365; Merrill & Ring v. Canada, Award, 31 March 2010, para. 264; Stati v. Kazakhstan, SCC Case No. 116/2010, Award, 19 December 2013, para. 1688; Tidewater v. Venezuela, ICSID Case No. ARB/10/5, Award, 13 March 2015, para. 154-155.