Foro de Arbitraje 2011
Unique Considerations regarding
Damages in Investment and
Commercial Arbitration
Craig S. Miles
King & Spalding, Houston, EUA
Mexico City
2 September 2011
Topics
• Lawful vs. “unlawful” expropriation in investment
arbitration and date of valuation Issues in both
investment and commercial arbitration
• Standard of compensation for non-expropriation
violations in investment arbitration
• Appropriate pre-/post-award interest rates for awards
against sovereigns
• Measuring damages to shareholders in investment
arbitrations (puede ser muy complicado)
• Effect of local company settlements on shareholder
claims in investment arbitrations
“Unlawful” vs. Lawful Expropriation
• Typical expropriation provision: “Investments shall not be
expropriated or nationalized except under due process
of law, in a non-discriminatory manner, and upon
payment of prompt, adequate and effective
compensation payable in freely transferable currency”
• Suppose State acknowledges obligation to compensate
but parties disagree on amount; or State pays in bonds
that are not “freely transferable”
• Does this make the State’s expropriation “unlawful”?
Does it matter? Should it matter?
“Unlawful” vs. Lawful Expropriation:
Date of Valuation
• Where it could matter (also true in commercial cases):
date of valuation (or “date of expectations”)
• Suppose in 2008 State expropriates (or commercial
party breaches obligation related to) barrel of oil due to
be produced in 2011
• In 2008, oil trading at $35/bl
• In 2011, oil trading at $85/bl
• Should Tribunal in assessing damages in 2011 use price
of $35/bl at date of expro/breach in 2008, or current price
of $85/bl? Why or why not?
Standard of Compensation for Non-Expropriation
Treaty Violations (e.g., F&ET)
• Treaties say to use fair market value (“FMV”) for lawful
expropriation
• Treaties generally silent on standard of compensation for
“unlawful” expropriation or other, non-expropriation
Treaty violations
• Customary international law standard = “full
compensation”
• Some tribunals use FMV for non-expropriation violations;
States don’t like it
• Does it matter? Should it matter?
Appropriate Interest Rate to Use for Awards
Against Sovereigns
• Can the whole “lawful” vs. “unlawful” problem be solved
by interest rate?
• Example of Venezuela: expropriated oilfield service
companies in May/June 2009; has not paid
• Assume expropriated oilfield services company was
worth $100 MM in May 2009
• In August 2011, compensation would be:
– $107.5 MM at risk-free rate (~ 3.5%)
– $134.4 MM at risk-free + EMBI (~ 14.3%)
– $130 MM at VZ 10-year bond rate (~ 12.5%)
– $123 MM at VZ 7-year bond rate (~ 10%)
Quantifying Damages to Shareholder in Presence of
HoldCo Debt
$50 or $100?
Claimant
100%
Third-Party
Debts of $50
Hold Co.
50%
50%
$100

Op. Co.
$200
7
Situation A: Investor Bears 100% of Damages
Investor
$60
100%
$30
Hold Co. $90
$60
100%
100%

Op. Co. $100
Lenders $30
Lenders $10
$40
Situation B: HoldCo’s Lenders Also Get Hit
Investor
$50
100%
$20
Hold Co. $80
100%
$10
$60
100%

Op. Co. $100
Lenders $30
Lenders $20
$40
Situation C: Both HoldCo and OpCo’s Lenders Get Hit
Investor
$20
100%
$0
Hold Co. $50
100%
$30
Lenders $30
$60
100%

Op. Co. $100
$10
Lenders $50
$40
Local Company Settlements -- Effect on
Shareholder’s Treaty Arbitration
• BITs protect shareholders in local companies
• When local company settles (e.g., Argentina), what is
effect on BIT claim?
• More often than not shareholder’s interests aligned with
local company and BIT claim will disappear with
settlement
• But what if shareholder is minority shareholder and votes
against settlement?
• Sempra Award: Tribunal took settlement into account in
assessing damages but not did not bar claim; other
Tribunals have suggested claim should be barred