Brill | 22 April 2021
Quantum (in)justice: rethinking the calculation of compensation and damages in ISDS
by Toni Marzal
The present article seeks to critically rethink the key issue of how compensation and damages are and should be calculated in the context of investor-State arbitration – the ‘quantum’ question, as is commonly referred to in arbitral practice. We will make three main claims: first that such calculations are premised on a fundamental consensus that presents the work of arbitrators in this area as essentially uncontroversial fact-finding operations and has led to an inflation of awards, second that this consensus is in reality built on a series of myths and unjustifiable assumptions, and third that the realization that this is so should lay the ground for more acceptable calculations.
The present article seeks to critically rethink the key issue of how compensation and damages1 are and should be calculated in the context of investor-State arbitration – the ‘quantum’ question, as is commonly referred to in arbitral practice. We will make three main claims. First, that such calculations are premised on a fundamental consensus that presents the work of arbitrators in this area as essentially uncontroversial fact-finding assessments, and has the effect of justifying a general inflation in the amounts awarded. Second, that this consensus is in reality built on a series of myths and unjustifiable assumptions. Third, that the realisation that this is so should lay the ground for more acceptable principles on quantum, in ways that we will explore.
Until relatively recently, the lack of attention paid to the calculation of compensation and damages in investor-State dispute settlement (ISDS) was still the object of a common complaint.2 How is it possible, it was said, that the question of how much money the State will end up paying the investor, that which matters the most to the parties in dispute, does not occupy a central space in the study of international investment law? That plea, however, has seemingly been answered since around the mid-2000s, with the proliferation of a series of books,3 edited volumes,4 articles5 and even a journal6 dedicated exclusively to this issue. Arbitral practice has also answered the call to take these calculations seriously, with tribunals engaging more and more with the intricate details of valuation, and sometimes addressing quantum issues in a separate award that can extend to several hundreds of pages.7
In parallel, there has been a growing disquiet at the sheer amounts that have been awarded, as these seem to be constantly increasing8 and reaching, in some notable cases, multi-billion figures. Among such mega-awards, as they are sometimes labelled, we may cite TCC v Pakistan (USD 5.84 billion),9 Occidental v Ecuador (USD 2.3 billion),10 Yukos v Russia (USD 50 billion),11 or ConocoPhillips v Venezuela (USD 8.7 billion),12 all of which amount to the staggering fraction of around 2% of the GDP of the respective countries. Exactly what is wrong with these numbers has nevertheless not been clearly articulated. On the side of the apologists, it is often said that they simply reflect the magnitude of the financial interests at stake,13 while on the side of the critics, more often than not they are used as flashy evidence against international investment law as a whole, rather than to challenge the specific principles that guide the calculation of compensation/damages.
Over the last couple of years, however, those principles have finally made their way into the ISDS reform agenda. Within the modernisation process of the Energy Charter Treaty, ‘Valuation of damages’ has been included as one of the approved topics.14 UNCITRAL Working Group III, charged with addressing ISDS reform, has incorporated ‘damages’ as a cross-cutting issue. Concerns nevertheless remain extremely generic – they are identified as the risk that a ‘high amount of damages’ may have a regulatory chill effect,15 and the fear that calculations may be ‘incorrect’.16 And yet, how high is too high, what exactly is ‘correct’? The answer to these questions remains elusive. On the whole, it would seem that the only real problem with the way compensation/damages are currently quantified is that it is unpredictable and incoherent,17 due in great part to the huge discretion wielded by tribunals18 and to the existence of an ‘underdeveloped body of rules’.19 Indeed, the issue around quantum is linked in the UNCITRAL reform agenda to general ‘[c]oncerns relating to the lack of consistency, coherence, predictability and “correctness” of arbitral decisions’.20 Proposed solutions also focus on consistency: it has been suggested that the review for errors of fact and law in a reformed annulment procedure should be expanded in relation to the assessment of damages,21 that the ‘evidence required and the methods used for the calculation of damages’ should be clarified,22 or that ‘valuation criteria shall be based on internationally recognised principles and norms’.23
It is submitted that, contrary to widespread belief, calculations of compensation/damages are actually remarkably consistent in current arbitral practice. Indeed, the said practice has evolved over the last three decades in a very particular direction, one that draws a sharp break with how compensation was approached in the past, and which today can be said to show a rare consensus. Whilst it is true that the specific amount of damages that will be awarded in any particular instance is hard to predict, what principles will be applied to get there are not. It is also the case, as we will explain, that the current consensus has justified the massive inflation of awards that we observe today. The problem with current practice is not, therefore, its supposed inconsistency or excessive discretion, but the questionable assumptions on which it is built, assumptions that lead to unjustifiably large awards. Our aim is not, therefore, to suggest alternative treaty standards that States should incorporate in future investment agreements, as two authors have recently (and interestingly) suggested.24 Our contention is more straightforward: tribunals are wrong to interpret the law in relation to calculation of compensation/damages the way they do.
The article is divided into three main parts. The first seeks to identify how the current arbitral practice has achieved a remarkable consistency, in a way that has generally served to justify the inflation of awards. This consistency derives from the idea, which only became widespread at the beginning of the 90s, that tribunals have almost no margin of appreciation when it comes to quantifying the amount of money owed to the investor in cases of expropriation or breach of investment treaty standards. Quantum, in other words, has come to be seen as a matter of objective necessity, as dictated by a mix of minimal legal materials and economic realities and expertise. The second part will then propose a critique of the current approach, to expose that it is based on a series of contestable choices, none of which are dictated by objective necessity but derive instead, despite pretences to the contrary, from subjective perceptions of what fairness or policy requires. On this basis, arbitral tribunals have constructed a contingent notion of compensable harm that is specific to international investment law, and which determines what it is that investors can claim compensation/damages for. The third and final part will build on this realisation to suggest a more appropriate approach to the calculation of compensation/damages, by treating quantum issues as rights issues. This will involve an assessment of the expectations of investors that, with regards to compensable harm, can be said to be legitimate. We will discuss and illustrate how this alternative approach would work in practice by focusing on one of the questions that is most decisive: the compensability of the loss of future profits, which is currently unjustifiably generous. Such an alternative approach, we insist, is de lege lata – it captures how, in our opinion, the calculation of compensation/damages should be performed today by tribunals, regardless of the possible desirability of treaty reform to correct the excesses that we observe in the case law.