Assessment of Damages and Compensation in the Context of ISDS Reform Proposals

Abstract

This article discusses the possible reforms in the assessment of damages and compensation in international investment arbitration. The article highlights the challenges of the valuation leading to the need for reforms, such as the inflation of awards issued in investment arbitration cases, the major gap between the damages claimed and damages awarded, and the difficulties posed by the large damages awards for the developing states. Other reasons for reforms include arbitral tribunals’ inconsistency in the valuation, the incorrectness of awards and potential conflicts of interests between arbitrators and damages experts. The author further discusses whether the issues of damages and compensation in investor- state disputes fall within the mandate of the UNCITRAL Working Group III, which is argued to be limited to solely procedural issues. The author concludes that the reforms could and should be developed by the Working Group III. The assessment of damages and compensation in investor-state disputes requires a comprehensive reform process based on procedural solutions as well as substantive suggestions, which the Working Group III can devise. Based on the law and economics theories, the author analyzes the appropriate approach of tackling the quantum issues, concluding that the reforms should be implemented through soft law instruments. The article dwells on viable procedural reforms on the quantification of damages and compensation in investment arbitration. The analysis focuses on the reforms prospecting to address the damages experts’ possible conflict of interest, the divergence in the parties’ experts damages amounts and the anchoring effect of the claimants’ requested amounts on arbitrators, as well as on the option of conducting early damages conferences, drawing on the insights from behavioral economics. Lastly, the article discusses substantive reforms options for the valuation that help promote the consistency and correctness of awards. The author considers the options of clarifying the use of the discounted cash flow method and setting standards that require damages to reflect a balance between the competing interests, providing guidance on the investor’s contributory fault, capping compensation to the actually invested amount and the assessment of contextual factors relevant for the calculation of damages.