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Mr Julio Rivera Ríos

Associate - Debevoise & Plimpton LLP

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Reparation

I. Definition

1.

Under international law, a State responsible for an international wrongful act must make full reparation for the injury caused by the internationally wrongful act.1 For such obligation to arise, damage is not required, rather an injury suffices.2 In Chorzów, the leading case in this context, the Permanent Court of International Justice determined that the obligation to make full reparation entails wip[ing] out all the consequences of the illegal act and reestablish[ing] the situation which would, in all probability, have existed if that act had not been committed”.3

II. Reparation and jurisdiction

2.

Tribunals have recognized that issues as to the nature and extent of the reparation warranted by the breach of an international obligation constitute legal disputes per article 25 of the ICSID Convention.4

3.

Additionally, it is well settled that tribunals, which are competent to determine the existence of a treaty breach, also have jurisdiction over its consequences i.e. reparation.5 In this vein, tribunals can refuse to defer reparation matters to domestic courts when they have failed to decide on the amount due for years after the implementation of the disputed measure.6

III. Forms of reparation

4.

Depending on the circumstances and the injury,7 full reparation can take the form of restitution, compensation and satisfaction, which, separately or in combination, will discharge the obligation to make full reparation.8

5.

The responsible State must first endeavor to make restitution, that is to “re-establish the situation which existed before the wrongful act was committed”.9 Investment tribunals have recognized restitution as the primary remedy10 and awarded it in some cases11 but have generally been reluctant in others, given that it may be regarded as an undue interference with the sovereignty of the respondent State12 and due to the practical difficulties in supervising its enforcement.13

6.

Should restitution be impossible or impractical,14 the responsible State must pay compensation that covers “any financially assessable damage including loss of profits insofar as it is established”15 and interest, when appropriate.16 (See further Restitutio in Integrum, Section IV)

7.

Where restitution and compensation are unavailable, the responsible State must provide satisfaction, which can take different forms such as a declaration of wrongfulness or the award of a symbolic monetary compensation.17 States have sometimes requested the remedy of satisfaction for the reputational damage suffered as a result of frivolous claims brought by investors.18

IV. Reparation under customary international law

8.

In the absence of specific rules in the applicable treaty, tribunals have referred to the customary international law standard of full reparation as a “default standard”.19 (See further Restitutio in Integrum)

9.

As such, Chorzów has been cited by a multitude of tribunals.20 Similarly, the ILC articles are often mentioned. Part Two of the ILC Articles on State Responsibility codifies the full reparation principle as applicable to the responsibility for the breach of inter-State obligations.21 Investment tribunals have recognized that Part Two of the ILC Articles is in principle limited to inter-State disputes,22 yet the vast majority routinely invokes its rules on full reparation as a reflection of customary international law applicable to breaches of investment treaties,23 inasmuch as it is not modified or excluded by a special rule to the contrary.24

V. Reparation for breaches of investment contracts

10.

The calculation of damages for breach of contract is determined by the applicable contract law. The principle of full reparation is generally present in national contract laws25 and international codifications26 to which choice-of-law clauses often point. In the leading case Sapphire, the tribunal memorably observed that “the object of damages is to place the party to whom they are awarded in the same pecuniary position that they would have been in if the contract had been performed in the manner provided for by the parties at the time of its conclusion”.27 This has been the position of other tribunals as well.28

VI. Limits of reparation

11.

The obligation to make full reparation should not exceed the injury actually suffered as a consequence of the wrongful act. Investment tribunals strive to avoid overcompensating investors29 namely by:

  1. Demanding evidence of the quantum of damages;30
  2. Requiring proof of causation;31
  3. Excluding speculative or uncertain damages:32 this led tribunals to apply differently valuation methods depending on the case. (See further Compensation, Compensation Standards and Valuation Methods, Valuation Date)
  4. Refusing to award moral damages (for case law, see Moral Damages);
  5. Prohibiting double counting for the same loss;33
  6. Reducing damages to the extent of the investor’s contributory negligence;34 (See further Investor Conduct (Damages))
  7. Refusing to award damages for losses suffered by third parties;35
  8. Precluding recovery to the extent of the investor’s failure to mitigate damages;36
  9. Granting and offsetting damages claimed or awarded, respectively, on counterclaims;37
  10. Excusing or deferring the payment of compensation in necessity cases:38 in some cases, tribunals held the state of necessity precludes the investor from claiming any compensation,39 while others nuanced this approach by considering that state of necessity merely suspends the State’s duty to compensate for as long as the condition of necessity continues to exist.40
  11. Taking into consideration the State’s economic and social situation;41
  12. Only compensating investor’s losses caused by State measures and not suffered as a mere consequence of business risks.42
  13. Enforcing contractual limitations set on damages.43

12.

Although some tribunals may have the power to order respondent States to take necessary measures within their domestic legal framework to remedy harm suffered by investors,44 this power performed within the limits of the applicable investment treaty and can exclude certain types of measures, inter alia, annulling a domestic decision.45

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