Under international customary law States are required to provide full reparation to investors for harm caused by internationally wrongful acts. This principle was articulated by the Permanent Court of International Justice in the landmark Chorzów Factory case, pursuant to which the goal of full reparation is to wipe out all the consequences of the illegal act,¹ and followed by the International Law Commission’s Draft Articles on Responsibility of States for Internationally Wrongful Acts in Article 31(1).² There is however no indication of what method should be adopted in order to evaluate the exact amount of damages due which equates to wiping out all the consequences of the illegal act.³

As aptly put by the CMS tribunal, “the Treaty offers no guidance as to the appropriate measure of damages or compensation […]. This is a problem common to most bilateral investment treaties and other agreements such as NAFTA.”⁴

BITs and multilateral treaties routinely include standards for calculating damages in cases of lawful expropriation.⁵

A requirement to pay compensation might be a standalone clause,⁶ or might be associated with various qualifiers specifying what the value of the expropriated investment should amount to, such as

• “fair market value”⁷
• “market value”⁸
• “actual value”⁹
• “based on market principles”¹⁰
• “genuine value”¹¹

In more modern treaties, the valuation criteria is explained in greater detail.¹²

Some treaties provide for review of valuation methods employed in assessing the amount of damages due in expropriation claims by the relevant judicial or other independent authority.¹³

In the case of a breach of a treaty such as an unlawful expropriation or breaches of fair and equitable treatment, full protection and security or non-discrimination treatment, there is no indication on the valuation standard which should be used by the tribunal in assessing the damages due.¹⁴ In such case, the tribunal should determine the measure of compensation appropriate to the specific circumstances of the case¹⁵ bearing in mind however that “whatever precise approach is taken, it should reflect the general principle of international law that compensation should undo the material harm inflicted by a breach of an international obligation.”¹⁶

Some tribunals stress that while conducting such exercises, the tribunal should, to the greatest extent possible, extend by analogy certain rules which an underlining treaty provides for calculating damages in cases of expropriation or other violations,¹⁷ such as standard of fair market value.¹⁸

Some new-era model BITs include guidelines for the tribunal on what should be taken into account in cases of awarding damages in cases of treaty breaches.¹⁹

The tribunal in the Crystallex case explained that “[v]aluation is not an exact science. There often is no single value of a business. Rather, there are typically a range of values. Similarly, there is no one methodology best suited for determining the fair market value of the investment lost in every situation. Tribunals may consider any techniques or methods of valuation that are generally acceptable in the financial community, and whether a particular method is appropriate to utilize is based on the circumstances of each individual case. A tribunal will thus select the appropriate method basing its decision on the circumstances of each individual case, mainly because a value is less an actual fact than the expression of an opinion based on the set of facts before the expert, the appraiser or the tribunal.”²⁰

There are three basic approaches to valuation:

• The income-based approach which estimates the value of a business based on e.g. discounted cash flow (DCF);
• The market-based approach which compares the subject of valuation to that of other similar businesses;
• The assets-based approach based on the principle of substitution, i.e., an asset is worth no more that it would cost to replace all of its constituent parts.²¹

The valuation method employed by claimants depends on the circumstances of the case.²² Often, claimants provide valuations of damages due using more than one method.²³

There is no consistency in valuation methods applied by the tribunals. However, according to PwC International Arbitration Damages Research (2017 update),²⁴ the tribunals tend to prefer income based and forward-looking approaches over methodologies reliant on historical figures. Discounted cash flow (DCF) is the most commonly used valuation method in investment arbitration.²⁵ PwC’s International Arbitration Damages Research (2017 update)²⁶ states that it seems that the “[t]ribunals have become increasing comfortable with DCF methodologies over the years but remain unwilling to accept valuations which they consider are based on overly speculative data.”²⁷ In particular, the tribunal in Watkins Holdings observed that “the DCF method is widely favoured in the renewable energy sector given that they have a simple business model with predictable income and costs. The DCF method has been applied in a number Energy Charter claims namely, Eiser,²⁸ Masdar,²⁹ Antin,³⁰ Novenergia,³¹ Foresight.³²”³³

Sabahi, B., Rubins, N., et al., Investor-State Arbitration, 2^nd ed., Oxford University Press, 2019.

Derains, Y. (ed.), Evaluation of Damages in International Arbitration, ICC, 2006.

Marboe, I., Calculation of Compensation and Damages in International Investment Law, 2^nd ed., Oxford International Arbitration Series, Oxford University Press, 2017.

Marboe, I., Damages in Investor-State Arbitration: Current Issues and Challenge, Brill Research Perspectives in International Investment Law and Arbitration, Vol. 2, Issue 1, 2018.

Kantor, M.A., Valuation for Arbitration, International Arbitration Law Library, Vol. 17, Kluwer Law International, 2008

Ripinsky, S., Assessing Damages in Investment Disputes: Practice in Search of Perfect, Journal of World Investment and Trade, Vol. 10, No. 1, 2009.

Simmons, J.B., Valuation in Investor-State Arbitration: Toward a More Exact Science, 30 Berkeley J. Int'l L. 196, 2012.

The Guide to Damages in International Arbitration - Second Edition, Global Arbitration Review.