The United Nations Conference on Trade and Development (“UNCTAD”) has recently published a note on compensation and damages in investor-state dispute settlement (“ISDS”) proceedings.

The UNCTAD Note:

• provides data demonstrating a steep rise in damages awarded in ISDS proceedings, noting the average claim now stands at USD 1.1bn and the average damages awarded at over USD 250mn.
• records that 98% of ISDS cases are based on old-generation international investment agreements (“IIAs”) that typically lack any guidance on compensation; and
• considers the role treaty reform in this field has in contributing to the future of ISDS.

Key Trends in the quantification of damages

UNCTAD records a rapid growth in the average size of damages awards, based on the UNCTAD ISDS Navigator Database as at 15 August 2024. The average value of damages awards has quadrupled from an average of USD 68mn in the period 2000-2009 to over USD 250mn in the last decade, with damages in excess of USD 100mn awarded in nearly a quarter of successful cases, and damages exceeding USD 1 bn awarded in approximately 5% of successful cases. The note considers a number of reasons for the increase, including the valuation methods used and the increasing value of investors’ claims (with average claims now exceeding USD 1.1bn)

Valuation methods and the use of DCF analysis 

UNCTAD notes that tribunals have often relied on the “full reparation” standard reflected in Article 36 of the International Law Commission’s 2001, Articles on Responsibility of States for Internationally Wrongful Acts (“the ARSIWA”), which provides that states must make full reparation for an injury caused by an internationally wrongful act. This includes breaches of IIAs. The PCIJ clarified in its 1928 judgment in the Chorzow Factory case that “full reparation” for a breach of international law “must, 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.” 

The note considers a divergence between ISDS tribunals and other international courts and tribunals on what constitutes a “compensable injury”. ISDS tribunals tend to adopt a broader approach and use the fair market value of the underlying investment as their reference point even for non-expropriatory breaches. UNCTAD notes that ISDS tribunals more frequently use income-based valuation methods such as Discounted Cash Flow (“DCF”) to measure compensation, whereas general international law is cautious in its use of income-based methods due to their reliance on projections.

UNCTAD’s proposal: address damages in treaty drafting?

As UNCTAD notes, it remains open for states to change the status quo by drafting treaties which specifically address compensation rules. UNCTAD highlights four main threads of reform:

• “balancing compensation rules” by providing guidance on the relevant circumstances to be considered in the assessment of damages, such as investor conduct, the State’s conduct in breaching the treaty, the enrichment of the state, and public policy considerations behind a given measure. See e.g. Türkiye– UAE BIT (2023), article 13.24.
• “limiting the scope of recoverable loss” by providing guidance on what “full reparation” means with respect to different protection standards, addressing issues of causation, and excluding certain types of losses  that are not directly linked to a treaty breach, or that are unforeseeable, speculative or hypothetical, and See e.g. India-Kyrgyzstan BIT (2019), article 23.2.
• addressing the valuation techniques and factors to be considered in determining fair market value. For example, under article 12.2 of the Columbia-Spain BIT (2021), valuation should be based on “information on recent market transactions on comparable assets and commercial and/or administrative records related to the value of the investment”, as opposed to income-based approaches.
• “disincentivizing excessive claims” by allowing tribunals to apportion costs based on a finding that a claim was excessive, or by lowering the value of an award proportionate to the delta between the amount claimed and the amount awarded. See e.g. Pacific Alliance–Singapore FTA (2022), article 8.32.4, and Columbia Model BIT (2017).

However, as UNCTAD highlights, the majority of IIAs in existence do not contain any such provisions and, for now, investors, tribunals and states will continue to grapple with these issues. Whether, going forward, states act on suggestions such as those in the UNCTAD note as part of broader reforms to ISDS system remains to be seen.