Leaping to the quantum: known unknowns in damage calculation
May 2017 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION
Financier Worldwide Magazine
An attentive review of the investment arbitration decisions, dealing with the calculation of damages for breaches of treaty protections, both new and old, will reveal that an unsettling number of tribunals have reduced the legal standards and tests applicable to the assessment of the damages caused by an international wrongful act to little more than an act of cartomancy.
The ingredients for this disappointing result can be listed as follows: (i) a breach of treaty law – for example, an investment treaty; (ii) a compensation standard that requires the determination of a fair market value – for example, the one usually prescribed in an investment treaty for expropriatory breaches of an affected asset; (iii) an affected asset consisting of a going concern, such as a company with some proven record of stable profitability from which to estimate future cash inflows; (iv) any degree of uncertainty arising from future economic factors affecting said asset – for example, market trends, commodity pricing forecasts, exchange rate variations, product obsolescence ratios or the like; and (v) a chess set of lawyers acting as counsel and arbitrators who feel they can overcome those uncertainties through anything other than a deep understanding of the laws, principles and workings of micro- and macro-economy.
With very few exceptions, investment tribunals reaching this result have expressed a recurrent desire to ‘split the baby’ between the two ends of the wide arch separating the positions adopted by the litigating parties, usually heard to the accompaniment of a professed incapability to develop a fluent conversation with the economic analysis toolset necessary to predict with certainty the future behaviour of economic variables, which some tribunals feel they cannot be expected to be conversant with.
In the view of those tribunals, the existence of an international wrongful act necessitates the assumption that damages were caused as a consequence, and that any evidentiary or argumentation shortcomings on the matter of quantum calculations should be forgiven or, even, substituted by a caring, and unfettered, discretionary decision from the tribunal when assessing the amount of damages to be awarded. This has led some tribunals faced with a situation where a claimant prevailed on issues of liability while its case on damages was untenable, to either allow a further round of submissions on damages so that claimant can have a new chance to prove its case on damages, or else substitute their own discretion for the burden to prove the damages. Either of these results is equally improper, and challenges fundamental notions of equality of arms and due process.
As a starting point, where a tribunal assumes the role of estimating damages at its own discretion, it dissolves the very concept of burden of proof, as it relieves the party alleging having experienced damages of the burden to actually prove them, and may easily impinge on the parties’ right to be heard, by preventing them from rebutting any calculations or assumptions made by the tribunal without consulting the parties. In short, these techniques obliterate the need for evidence of the causal link between the wrongful act and the damages argued to have resulted as a consequence, such that the expression “to have resulted as a consequence” vanishes into thin air. This would constitute an excess of the tribunal’s powers that could – and should – result in annulment under both the ICSID Convention and (relevant to those non-ICSID awards on damages issued in this way) the annulment rules contained in the relevant arbitration statutes of most modern jurisdictions, and those governing the setting aside of awards.
The situation would not be terribly different where a tribunal condones the deficient presentation of a case on damages by the party prevailing on issues of liability by re-enacting the damages’ portions of the proceedings. In practice, this amounts to rewarding those deficiencies with the ability to undo and re-do any ill-constructed arguments, and also usually to submit any new evidence that could overcome the objections and defences argued by the liable party during the proceedings proper, including new reports by the valuation experts after they have been cross-examined by opposing counsel. It is easy to see why this defies the logic underlying the architecture of arbitration proceedings: if an expert or witness cannot be ‘led’ by counsel to provide a specific answer in re-direct examination after it has been cross-examined, it is outrageous that the expert or witness can submit a full, fresh, doctored piece of written evidence after that cross-examination. Outrage becomes frustration when this new chance to submit further reports or statements is granted, based on the premise that cross-examination was so successful that the evidence originally offered has become untenable. The damage caused to the proceedings tears and shreds its very fabric, making any resulting decision annullable, as well as unenforceable.
Whether the tribunals engaged in these practices realise it or not, their conduct effectively ceases to apply the law governing the dispute and the burden of proof when it comes to the issues of damages, alleviating the evidentiary requirements or assuming a role reserved to the parties in the submission and proving of their respective cases, thereby providing additional grounds for annulment or resisting enforcement of their award.
To assume that damages in every case and instance followed from any international wrongful act simply negates the existence of the various other remedies known to international law, of which investment law is a sub-class. Also, it entails adopting a legal approach to the need for evidence which seems to be based only on momentum, and not on any law except Newton’s First Law of Motion.
On the contrary, the object and purpose of any treaties – including an offer to arbitrate investment disputes, force us to avoid assuming that liability exists simply because jurisdiction was found to exist, or that damages were caused and can be awarded simply because liability was forced to exist, or even that an award can be enforced simply because a finding of damages was awarded by the tribunal. To the extent a tribunal is competent to decide on any of those matters – and it is unlikely it will be competent to decide on the actual enforceability of its award – it must be satisfied, in accordance with the rules and laws governing its workings, that the relevant test has been satisfied without violence to the procedural rules in place.
Diego Brian Gosis is a partner at GST LLP. He can be contacted by email: firstname.lastname@example.org.
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Diego Brian Gosis