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M. Francisco Franco

Associate - Baker McKenzie

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I. Compensation as a form of reparation


General principles of law dictate that anyone committing an unlawful act must repair the damages resulting from that act. Sovereign States are not exempt from the obligation to repair.


Almost a century ago, the Permanent Court of International Justice (“PCIJ”) (the predecessor of the International Court of Justice) emphasized on the States’ obligation to repair damages and established the standard for such reparation.1


The Court held that reparationmust, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed.”2


With that in mind, the Court found that restitution is the ideal remedy to repair the damages resulting from a State’s wrongful acts.3 The Court noted, however, that restitution might be impossible sometimes.4 It thus held that monetary compensation could serve as an alternative to repair damages when restitution is impossible.5


The International Law Commission has codified the above principles in its draft articles on responsibility of States for internationally wrongful acts, recognizing compensation as an appropriate alternative to restitution.6


Although there has been some debate on whether arbitral tribunals in investor-State disputes have the power to order restitution,7 virtually everyone agrees that investor-State tribunals have jurisdiction to award compensation when the respondent State has breached its treaty obligations.8 On that basis, and because restitution is probably not an option or is inappropriate, compensation is the usual remedy in investor-State arbitrations.9

A. Standard of compensation in investor-State arbitration


Investor-State arbitration tribunals have relied on the PCIJ’s decision in the Chorzów Factory case as guidance to determine the appropriate standard for reparation when the respondent State violates its international obligations.10 See further Restitutio in integrum and Interest rates, Section I.


Thus, investor-State tribunals have held that “compensation should undo the material harm inflicted by a breach of an international obligation.”11


To award compensation, investor-State tribunals must first find that the respondent State has breached its treaty obligations (i.e., committed an international wrongful act). Based on that finding, compensation must seek to eliminate the consequences of the wrongful act.12 In other words, a tribunal may not order compensation without a treaty violation.13

B. Assessment of damages


To determine the amount of compensation, investor-State tribunals must assess the damages that the respondent State’s wrongful acts have caused. The investor will bear the burden of proving such damages. On that basis, tribunals require that the parties establish the damages through reliable evidence.14 Accordingly, tribunals will not award compensation for speculative damages.15 See further Burden of proof, Section III.D.


Thus, when claiming damages parties must submit clear and convincing evidence of the expected income, providing level of certainty to the tribunal with no speculative or uncertain elements.16


Additionally, investor-State tribunals refuse to award punitive damages.17 This is because punitive damages are not compensatory in nature.18 That said, there have been some instances in which tribunals have awarded satisfaction as reparation for moral damages.19


Contrary to punitive damages, satisfaction provides some sort of moral reparation. Satisfaction may consist of an apology or any other kind of acknowledgement from the respondent State.20 Punitive damages, on the other hand, would exceed full reparation because they would over-compensate the investor by awarding more than the actual damages suffered.

II. Relation between breach and causation


Because the focus of reparation is remedial, rather than punitive, tribunals must only award compensation for damages that are a direct consequence of the State’s wrongful act. Thus, the investor must show the relationship between the wrongful act and the injury.21 See further Causation.


The existence of harm does not immediately entitle the investor to seek compensation. Sometimes the injury may be too remote or inconsequential from the State’s wrongful act, making compensation unjust.22


In other words, the burden of proof is directly on the injured party. The claimant must show the existence of a violation and a causal link between such violation and the amount of damages claimed.23

III. Methodology of arbitral tribunals in assessing damages


Investor-State tribunals have accepted and followed these approaches to calculate value:

  1. Income-Based: convert anticipated economic benefits into a single present value amount. See also Discounted cash flow.
  2. Market-Based: compare the business or business interest to similar businesses or businesses interests.
  3. Asset-Based: based on the costs.24

Valuation methodologies are not mutually exclusive, tribunals often use one or more methods when determining amount for compensation and damages.25


Tribunals have full discretion to estimate the correct compensation to award. But they must motivate and explain the process they followed to calculate compensation.26

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