Quantum Quarterly
The Damages Newsletter ISSUE 10 | 2Q 2018
A PUBLICATION OF KING & SPALDING’S INTERNATIONAL ARBITRATION GROUP
2018 QUANTUM QUARTERLY I
We are pleased to present the latest Table of
edition of Quantum Quarterly, Contents
a publication of King & Spalding’s
International Arbitration Group. 2. Burlington Resources Inc. v. Republic of Ecuador
In this special “double edition,” we 6. Bear Creek Mining Corp. v. Republic of Peru
dispense with our typical cover interview
in lieu of a tribute to our own Margrete 10. Caratube International Oil Co. LLP and
Stevens, who retired at the end of Mr. Devincci Salah Hourani v. Republic of
February 2018 after more than 10 years Kazakhstan
with the firm.
14. Teinver S.A., Transportes de Cercanías
Next is a veritable treasure trove of S.A. and Autobuses Urbanos del Sur S.A. v.
summaries of 10 damages awards Argentine Republic
published in 2017 and 2018. We hope
you find this edition useful, and as always, 18. Marco Gavazzi and Stefano Gavazzi v.
we welcome any feedback you may have. Romania
All the best.
25. Koch Mineral SÁRL and Koch Nitrogen
Quantum Quarterly Editors International SÁRL v. Bolivarian Republic of
Craig S. Miles Venezuela
[email protected]
30. Eiser Infrastructure Limited and Energia Solar
Silvia Marchili Luxembourg S.A.R.I. v. Kingdom of Spain
[email protected]
34. Murphy Exploration & Production Company—
Quantum Quarterly Contributors International v. Republic of Ecuador
Ginny Castelan
[email protected] 39. Urbaser S.A. and Consorcio de Aguas Bilbao
Oba Thompson Bizkaia, Bilbao Biskaia Ur Partzuergoa v.
[email protected] Argentine Republic
Chris Smith
[email protected] 42. U AB E Energija (Lithuania) v. Republic of Latvia
Jessica Beess und Chrostin 45. International Arbitration Group Contacts
[email protected]
Anisha Sud
[email protected]
II KING & SPALDING
A Tribute The same GAR article noted that in 2007 she was
to Margrete joining a firm with “24 international arbitration
Stevens lawyers worldwide, of whom 10 are partners.” Doak
Bishop, a partner in our Houston office, says that she
We begin this edition brought “instant credibility” to the group. There is no
with a tribute to our better example of the success of Margrete’s vision
former colleague than to contrast the GAR figures from 2007 with
Margrete Stevens, who those at the time of her retirement, when the group
retired from the firm now houses some 100 lawyers (of whom more than
at the end of February 30 are partners) worldwide across 13 offices and
2018. Margrete needs regularly appears at the top of the global rankings.
little introduction to
most of our readers. While at the firm, she assisted a King & Spalding team
acting for US oil company Chevron in its ongoing
She joined King & Spalding in 2007 after almost UNCITRAL dispute with Ecuador over alleged
20 years at ICSID. Prior to joining ICSID, Margrete pollution in the Amazon rain forest. She also assisted
worked for the United Nations High Commissioner the firm in helping Chevron win a USD100 million
for Refugees in Botswana and Malaysia. When award against Ecuador in a separate UNCITRAL
she started at ICSID in 1989, there were only a arbitration administered by the Permanent Court of
handful of cases and three lawyers working on Arbitration for “undue delay” in the country’s courts
them. By the time she left in 2007, the Centre in disputes relating to Chevron’s operations. She
had registered around 150 arbitrations, and the also helped the team working for insolvent member
investor-state dispute-settlement mechanism had companies of Spanish travel group Marsans Group
gained global popularity—in part due to Margrete’s win USD320 million from Argentina in 2017 over the
groundbreaking treatise Bilateral Investment nationalization of two airlines. More important, she
Treaties, which she co-authored with Prof. Rudolf was instrumental in coordinating the group’s offices
Dolzer in 1995. and practice development as the team and brand
rapidly expanded. Says Doak, “She has always been
At the time she joined King & Spalding, an article well organized and warm, with great dignity and
in Global Arbitration Review described Margrete integrity, and highly respected by all.”
as the “de facto leader of the Secretariat” and “an
outstanding figure … immensely knowledgeable Among her many contributions to the practice was
about ICSID rules and procedures.” Margrete was this very publication, which she helped conceive
attracted to King & Spalding because she believed and for which she provided invaluable editorial
the firm’s strong ICSID practice based in the United and administrative support in getting each issue to
States could be parlayed into a global powerhouse publication through the years.
across the spectrum of international disputes.
Ed Kehoe, managing partner of our New York office
and global head of the practice, says, “In addition to
her poise, legal excellence, work ethic, and wealth
of knowledge concerning our industry, Margrete is
one of the finest people with whom I have had the
pleasure to work. I speak for everyone at K&S when
I say that we will miss Margrete dearly and wish her a
long, happy retirement as she continues to travel the
world, now for pleasure, with her husband, Mike.”
2018 QUANTUM QUARTERLY 1
Recent US multinational energy company, ConocoPhillips,
Damages acquired Burlington. In 2001, Burlington, through
Awards its wholly owned subsidiary Burlington Oriente,
acquired a minority interest in the production-sharing
Burlington Resources Inc. contracts for Blocks 7 and 21 (the PSCs) located in
v. Republic of Ecuador the Ecuadorian Amazon. French oil company Perenco
(ICSID Case No. ARB/08/5) operated and held the majority interest in the blocks.
In late 2005, Burlington and Perenco formed a
Date of the Award consortium to jointly pay taxes in accordance with
February 7, 2017 Ecuadorian law (the consortium).
The Parties Ecuador began using production-sharing contracts
Burlington Resources Inc. (Burlington or the in its hydrocarbons industry beginning in the early
claimant),1 Republic of Ecuador (Ecuador or the 1990s, switching from the prior service contract
respondent) model to boost its stagnating hydrocarbons sector.
Under the new model, in exchange for receiving a
Sector share of the oil produced, contractors would assume
Oil (production-sharing contracts in Blocks 7 and 21 the risk of exploration and production.
in Ecuador)
The PSCs contained extensive provisions governing
Applicable Treaty the parties’ interests in the blocks and the oil
Bilateral investment treaty between the United produced from the blocks. Of particular relevance to
States and Ecuador concerning the encouragement the dispute that led to the arbitration were the tax
and reciprocal protection of investments, dated May clauses contained in the PSCs. The parties disagreed
11, 1997 (the BIT or the treaty) as to whether the tax clauses should be construed
as tax-stabilization clauses, the position taken by
Members of the Tribunal Burlington, or as renegotiation clauses, the position
Prof. Gabrielle Kaufmann-Kohler (president), taken by Ecuador.
Mr. Stephen Drymer (the claimant’s appointee),
Prof. Brigitte Stern (the respondent’s appointee) As global oil prices increased significantly beginning
in 2002, a dispute arose between the parties
Background concerning the allocation of oil production dictated
by the PSCs. Under the terms of the PSCs, a majority
Claimant Burlington is a US company involved in of the oil produced from the blocks was allocated to
the exploitation of natural resources. In 2006, a Burlington, allowing Burlington to enjoy more of the
oil price increase than Ecuador did.
In November 2005, Ecuador initiated talks with
Burlington to renegotiate the terms of the PSCs.
Ecuador sought to increase its allocation of oil from
the blocks from 22 percent to 50 percent. Burlington
took the position that “the allocation of oil production
was independent of the price of oil,” and the
negotiations ultimately failed.2
2 KING & SPALDING
Recent Damages Awards
In April 2006, Ecuador enacted Law 42, which The claimant also brought an umbrella-clause claim
amended its Hydrocarbons Law. The purpose of the alleging that Ecuador had breached Article II(3)(c)
law was, according to Ecuador, “to restore equity” of the treaty. The Tribunal issued its decision on
between the state and contractors resulting from jurisdiction on June 2, 2010, and its decision on
the increase in oil prices.3 The new law called for liability on December 14, 2012. In the decision on
“a participation [by Ecuador] of at least 50 percent liability, the Tribunal rejected Burlington’s umbrella-
over the extraordinary revenues caused by such price clause claim for lack of jurisdiction but admitted
difference.”4 This translated into a payment by oil the expropriation claim and declared that Ecuador
companies of 50 percent of the delta between the had committed an unlawful expropriation. Ecuador
market price of oil and the price of oil when the PSCs challenged the liability finding via a motion for
were executed. With respect to Block 7, the Law reconsideration of the decision on liability. On
42 tax resulted in a tax of USD18.28 per barrel of February 7, 2017, the Tribunal issued its decision
oil produced, and with respect to Block 21, a tax of on reconsideration and award (the award)
USD19.72 per barrel of oil produced. Burlington paid and separately issued a decision on Ecuador’s
the Law 42 taxes under protest in late 2006. counterclaims.
In October 2007, following the election of Rafael Correa The award was divided into three parts and resolved
in late 2006, Burlington implemented Decree 662, (i) Ecuador’s motion for reconsideration, which the
which increased the Law 42 tax rate from 50 percent to Tribunal denied; (ii) the quantum of Burlington’s
99 percent. Ecuador again paid the Law 42 taxes—this claims in accordance with the decision on liability;
time at the 99 percent rate—under protest. and (iii) the costs of the arbitration, including
Burlington’s claims and Ecuador’s counterclaims.5
In 2008, PetroEcuador and Perenco attempted to
renegotiate the terms of the PSCs. PetroEcuador Damages
did so on behalf of Ecuador, while Perenco did so on
behalf of the consortium. Burlington was not directly The Tribunal had determined in its decision on
a party to the renegotiations, which ultimately failed. liability that Ecuador had breached the treaty by
unlawfully expropriating Burlington’s investments in
By June 2008, Burlington ceased paying the Law 42 Blocks 7 and 21. In the award, the Tribunal evaluated
taxes. In February 2009, Ecuador began proceedings the amount of compensation due to Burlington for
against the consortium, seeking to collect the Ecuador’s violations of the Treaty.
outstanding taxes. In March 2009, Ecuador began
enforcement actions by seizing crude production and Burlington sought full reparation for the losses it
cargo from Blocks 7 and 21. Ecuador continued to incurred as a result of Ecuador’s unlawful expropriation.
seize crude until June 2009. It divided its losses into three categories. First,
Burlington sought compensation for its “lost contract
In response to the seizures, in July 2009, the conso- rights,” which were the tax dues paid or seized by
rtium decided to cease its operations. In July 2010, Ecuador in relation to Law 42 prior to the expropriation.
Ecuador terminated the PSCs for Blocks 7 and 21. Second, Burlington requested compensation for its lost
profits, which it calculated as the value of Burlington’s
In April 2008, Burlington and its subsidiaries expropriated operating assets. Third, Burlington
initiated an ICSID arbitration against Ecuador. pursued compensation for its lost opportunity to pursue
The claimant argued that Ecuador had breached an extension of the Block 7 PSC. In total, Burlington
Article III of the BIT by unlawfully expropriating the quantified its damages at USD1,515,603,095, including
claimant’s investment in Blocks 7 and 21. pre-award interest.
2018 QUANTUM QUARTERLY 3
Recent Damages Awards
Ecuador contended that the appropriate standard Ecuador contested as “grossly inflated.”7 The Tribunal
for compensation was contained in Article III(1) of the noted that the parties shared common ground that
treaty, not in customary international law. Ecuador the value of the investment should relate to the
also disputed that the Tribunal had jurisdiction over profits associated with the PSCs as of the date of
the pre-expropriation tax debts and the Block 7 PSC expropriation and the remainder of the contractual
extension claims, characterizing both of these heads terms. The Tribunal determined that the lost profits
of damages as contract and not treaty claims. With claim was a compensable loss and addressed
respect to compensation for Burlington’s expropriated Ecuador’s valuation objections separately.
assets, Ecuador contended that Burlington had
inflated these losses. Ecuador also argued that Third, the Tribunal dismissed Burlington’s claim for
any losses awarded would need to be reduced to its lost opportunity in relation to the Block 7 PSC
account for Burlington’s contributory negligence and extension. The Tribunal determined that the claim,
that an award of interest would be unreasonable. while linked to the PSCs, was nonetheless a treaty
Ecuador quantified Burlington’s total damages at claim falling under its jurisdiction. The Tribunal
USD27,597,980, including pre-award interest. nonetheless declined to accept Burlington’s arguments
that it had a compensable right to an automatic
The Tribunal applied the full reparation standard to contract extension of the Block 7 PSC. At best,
each head of loss advanced by Burlington. Burlington had “a right to negotiate such an extension.”8
The Tribunal also noted that Burlington’s internal
First, the Tribunal rejected Burlington’s claim for documents indicated that the company had “assigned
reimbursement of the past Law 42 payments. The zero value to the chance of a contract extension.”9
Tribunal reasoned that it was limited to awarding
damages “arising from and ascribable to” Ecuador’s The Tribunal addressed valuation separately in the
takeover of the blocks.6 The expropriation had award. The Tribunal applied the discounted cash
impacted the value of Burlington’s rights under the flow (DCF) method, utilizing a joint damages model
PSCs prospectively and not retroactively. Since the that the parties’ experts had prepared after the
value of Burlington’s credits for its Law 42 dues had hearing at the Tribunal’s direction. Under the DCF
accrued prior to the date of expropriation, Burlington’s method, Burlington’s investment would be valued
claim for this head of loss failed on the merits. The on the basis of its future cash flows. A majority of
Tribunal acknowledged that Burlington’s subsidiaries the Tribunal determined that in accordance with
may have had a contract claim in relation to the past the full reparation standard, it would value damages
Law 42 payments or coactiva seizures, but since those as of the date of the award. The Tribunal rejected
companies had withdrawn from the arbitration, the Ecuador’s arguments that “valuations must be carried
Tribunal could not consider those claims. out solely on the basis of ex ante information.”10
Instead, the Tribunal considered actual oil prices and
Second, the Tribunal decided Burlington’s claim production data from the blocks between the date of
for lost profits under the PSCs, or the value of its expropriation in 2009 and the date of the award. The
operating assets, in Burlington’s favor. Burlington Tribunal also determined that in calculating this head,
submitted that it was entitled to past lost profits it was required to consider two sets of lost profits:
in additional to future lost profits. It distinguished past lost profits (i.e., profits that would have been
between the losses it had accrued up until the date of earned from the date of expropriation in 2009 until
the award, on the one hand, and the losses it accrued the date of the award) and future lost profits (i.e.,
from the date of the award until the termination profits that would have been earned from the date of
date of the PSCs, on the other hand. Burlington the award until the date of expiration of the relevant
quantified these damages at USD840.9 million, which PSC). The Tribunal also decided that Burlington’s lost
4 KING & SPALDING
Recent Damages Awards
profits would be calculated assuming that Ecuador The Tribunal apportioned the costs of the arbitration
had complied with its contractual obligations— between Ecuador (65 percent) and Burlington (35
including absorption of the Law 42 tax obligations. percent) and ordered each party to bear its own legal
The practical effect was that when calculating the costs and expenses.
production values, the Tribunal ignored the effects
of Law 42. The upshot was that in adjusting the The Tribunal reasoned that although Burlington had
joint damages model to consider actual oil prices, prevailed on some of its jurisdictional and treaty claims,
adjusted “but for” production volumes, and the several of Burlington’s claims were rejected for lack of
elimination of the effects of Law 42 from the date of jurisdiction, or were deemed inadmissible or otherwise
the expropriation onward, Burlington’s total damages meritless. With respect to Ecuador’s counterclaims,
were USD380 million. the Tribunal observed that Ecuador had prevailed
on only a small percentage of its counterclaims. The
Interest and Costs Tribunal rejected Burlington’s contention that Ecuador’s
procedural requests were unreasonable under the
The claimant requested that the Tribunal order Ecuador circumstances, although the Tribunal acknowledged
to pay all the costs and expenses of the arbitration, that Ecuador’s procedural conduct had increased the
including legal fees and expert fees, to be consistent length and cost of the proceedings.
with the principle of full reparation. Ecuador submitted
that the Tribunal should order Burlington to pay all Finally, the Tribunal’s order included payment of
costs and expenses incurred by Ecuador in connection interest at LIBOR plus 2 percent, compounded
with the principal claims. As an alternative, Ecuador annually, with interest accruing from the date of the
requested an order that each side bear its own legal award until payment.
and expert fees and expenses plus half the costs
of the arbitration in relation to the principal claims. 1 King & Spalding represented the claimant.
Ecuador also sought an order that Burlington pay 2 B urlington Resources, decision on liability, December 14, 2012,
PetroEcuador’s legal fees and expenses.
¶ 28.
The Tribunal apportioned costs between Burlington 3 B urlington Resources, decision on liability, December 14, 2012,
and Ecuador taking into account the “State’s
motives and good faith.”11 The Tribunal noted that ¶ 29.
“where the actions of a State have been guided by 4 B urlington Resources, decision on liability, December 14, 2012,
its good faith understanding of the public interest,”
among other considerations, the Tribunal may ¶ 30.
“apportion costs in a manner that alleviates the 5 T he decision on counterclaims is not addressed in this case
burden on the respondent State.”12
summary, which concerns only the award on Burlington
The Tribunal first addressed the costs incurred by Recourses claim.
PetroEcuador. Noting that PetroEcuador was only 6 B urlington Resources, decision on reconsideration and award,
involved in the proceedings due to contract claims February 7, 2017, ¶ 212.
brought by Burlington’s subsidiaries, which were 7 B urlington Resources, decision on reconsideration and award,
subsequently withdrawn, the Tribunal ordered February 7, 2017, ¶¶ 228-231.
Burlington to bear PetroEcuador’s costs in full in the 8 B urlington Resources, decision on reconsideration and award,
amount of USD48,589.72. February 7, 2017, ¶ 271.
9 B urlington Resources, decision on reconsideration and award,
The Tribunal then addressed the costs pertaining to the February 7, 2017, ¶ 282.
parties’ claims and counterclaims. 10 B urlington Resources, decision on reconsideration and award,
February 7, 2017, ¶ 334.
11 Burlington Resources, decision on reconsideration and award,
February 7, 2017, ¶¶ 621-22.
12 B urlington Resources, decision on reconsideration and award,
February 7, 2017, ¶ 621.
2018 QUANTUM QUARTERLY 5
Recent Damages Awards
Bear Creek Mining Corp. v. 2011 (Supreme Decree 032), which effectively revoked
Republic of Peru Bear Creek’s rights under Supreme Decree 083 and
(ICSID Case No. ARB/14/21) prevented the company from proceeding with or selling
the Santa Ana Project. Peru did not consult Bear Creek
in the process of issuing Supreme Decree 032, nor did it
pay the company any compensation.
Date of the Award Following unsuccessful negotiations, Bear Creek filed
November 30, 2017 an international arbitration claim against Peru under
the free trade agreement (FTA) between Canada and
The Parties the Republic of Peru, claiming a violation of its right to
Bear Creek Mining Corp. (Bear Creek or the fair and equitable treatment (FET), full protection and
claimant),1 Republic of Peru (the respondent) security, and protection from expropriation, among
other things.
Sector
Mining Jurisdiction and Liability
Applicable Treaty The Tribunal dismissed a series of jurisdictional
Free trade agreement between Canada and the objections that Peru raised, principally on the grounds
Republic of Peru that the investment was “illegal” because Peru had
used a local proxy to acquire the mining rights and
Members of the Tribunal had commenced initial activity on the site prior to the
Prof. Karl-Heinz Böckstiegel (president), Dr. Michael issuance of Supreme Decree 083. On the merits, the
Pryles (the claimant’s appointee) and Prof. Philippe Tribunal held that Peru had unlawfully expropriated
Sands, QC (the respondent’s appointee) Bear Creek’s investment and, in light of this finding, did
not consider it necessary to render a decision on Bear
Background Creek’s other treaty claims.
This case concerned Peru’s unlawful expropriation Quantum
of the investment of Bear Creek, a Canadian mining
company, in the development of a mining project (the With respect to damages, the claimant argued that
Santa Ana Project) at Santa Ana, which is located should the Tribunal find that Peru lawfully expropriated
close to the border Peru shares with Bolivia. the claimant’s investment, it should award Bear Creek
damages in the amount of at least USD296.6 million.
In November 2007, Bear Creek obtained the This sum, according to the claimant, represented
authorization to acquire, own, and operate a the fair market value (FMV) of the Santa Ana Project.
mining concession at Santa Ana through Supreme FMV is the measure of damages set forth in the FTA
Decree 083-2007 (Supreme Decree 083). Bear for lawful expropriation,2 and, because the FTA is lex
Creek conducted outreach and consultations with specialis, its terms govern compensation.
indigenous populations and proceeded to develop the
mining project. In early 2011, violent protests erupted The claimant further maintained that because the FTA
in the area of the Santa Ana Project, prompting the does not specify the measure of damages applicable to
Peruvian government to issue Supreme Decree 032- unlawful expropriation or other treaty breaches (such as
a violation of the FET standard), the rules of customary
6 KING & SPALDING
Recent Damages Awards
international law apply to fill this lacuna. Customary expropriations), plus additional damages suffered by
international law requires that the Tribunal follow another of the claimant’s projects in Peru, the Corani
the holding in the Chorzów Factory case and award Project, as an alleged direct result of Peru’s unlawful
full compensation, i.e., compensation that would actions against the Santa Ana Project.
wipe out the harm caused by Peru’s unlawful
actions and place the claimant in the position in The claimant’s experts calculated the FMV of Bear
which it would have been “but for that” wrong. The Creek’s investment using the discounted cash flow
claimant argued that pursuant to this formula, it was (DCF) methodology. According to the claimant, the
entitled to an award of the higher of the value of the DCF method was appropriate even though the Santa
investment on the date of the expropriation plus Ana Project had not yet begun production. This is
interest or its value on the date of the award. While the because “[1] the practices employed to assess mineral
claimant acknowledged that the quantification of full resources and reserves are well-established; [2] the
compensation for non-expropriation violations may vary time and costs required to develop and process the
from case to case, it maintained that an emerging trend minerals can be estimated with a reasonable degree
favored basing such damages on the FMV standard, of precision; [3] detailed capital estimates on Santa
plus historical or discrete losses, when applicable. Ana had been conducted; and [4] well-developed
international markets exist for the processed or semi-
On this basis, the claimant argued that should the processed metal products that will absorb a project’s
Tribunal find that Peru unlawfully expropriated Bear entire production immediately,” and therefore mining
Creek’s investment or committed another breach and other extractive projects are different from non-
of the FTA, the claimant would be entitled to an extractive business and can be valued using a DCF
award of at least USD522.2 million. This figure methodology even before production. In making this
represented the sum of the FMV of the Santa Ana argument, the claimant relied on several investment
Project measured just prior to the expropriation treaty cases in which tribunals endorsed DCF for
and without any diminution in value resulting early-stage projects, including Vivendi v. Argentina,
from pre-expropriation unlawful acts and public in which the tribunal rejected the DCF model but
pronouncements of the imminent expropriation nonetheless explained how it could be accepted in
(as provided in the FTA with respect to lawful circumstances similar to Bear Creek’s.
2018 QUANTUM QUARTERLY 7
Recent Damages Awards
Finally, the claimant maintained that awarding it only speculative. The respondent also emphasized that
sunk costs would be manifestly inappropriate and no investor-state tribunal has ever awarded damages
inadequate and would not represent the FMV of its based on a DCF model for a nonproducing asset.
investment.
The Tribunal accepted the claimant’s position that
The respondent, by contrast, initially argued that the FTA did not impose a standard of compensation
should the Tribunal find in favor of Bear Creek, it for unlawful expropriation—the type of breach the
should award the claimant only its amounts invested Tribunal found—and thus the standard provided under
in the Santa Ana Project, namely USD21,827,687. general international law was applicable.
In its post-hearing brief, the respondent amended
its position on damages and argued that the The Tribunal noted that the parties agreed that
Tribunal should award the claimant no more than FMV could be used to quantify damages in such a
USD18,237,592 in the event of a finding of either case, and it recited the claimant’s expert’s definition
lawful or unlawful expropriation. The respondent’s of FMV as “the price, expressed in terms of cash
rationale for this reduction was that the claimant equivalents, at which property would change
should not be reimbursed for expenses incurred prior hands between a hypothetical willing and able
to Peru’s issuance of Supreme Decree 083, which had buyer and a hypothetical willing and able seller,
granted the claimant the right to acquire, own, and acting at arm’s length in an open and unrestricted
operate the mining concession at Santa Ana. market, when neither is under compulsion to buy
or sell and when both have reasonable knowledge
The respondent further argued that should the of the relevant facts.”3 Adopting this definition,
Tribunal find a non-expropriation breach of the FTA, the Tribunal concluded that the claimant had not
there could be no damages at all, because the basis provided sufficient evidence to demonstrate that
upon which Peru issued Supreme Decree 032—i.e., a hypothetical purchaser of the Santa Ana Project
domestic opposition to the Santa Ana Project and would have been able to obtain the necessary social
Bear Creek’s alleged unlawful acquisition of the license to be able to proceed with the project. In
Santa Ana mining concessions (the latter of which consequence, the Tribunal held that the Santa Ana
the Tribunal rejected)—justified its revocation of Bear Project could not (at least in the short term) be
Creek’s rights with respect to the Santa Ana Project. considered viable at the time of the adoption of
Supreme Decree 032.
The respondent did, however, agree with the
claimant that FMV was the appropriate measure of Moreover, the Tribunal noted that Peru, shortly after
damages under the FTA. But with respect to using issuing Supreme Decree 032, had adopted a general
DCF as the method for calculating the investment’s suspension of admissions of mining petitions in the
FMV, the respondent maintained that it could not area of Santa Ana for a period of 36 months and later
be used for the Santa Ana Project because it did continued the suspension by another supreme decree.
not advance beyond project planning prior to the Because of these facts, the Tribunal considered that
issuance of Supreme Decree 032, did not receive the a realization and assurance of the profitability of
requisite permits, failed to obtain a social license and the Santa Ana Project could not be expected in the
community support (and never would have), never foreseeable future, if at all. The Tribunal ultimately held
proceeded to construction, and thus never operated that the Santa Ana Project remained too speculative
profitably. According to the respondent, because of and uncertain to allow for the use of the DCF method
these features, any approach to damages other than and that the appropriate measure of damages should
the “amounts invested” measure would be highly be the amounts-invested approach. The Tribunal
8 KING & SPALDING
Recent Damages Awards
awarded the claimant USD18,237,592 in damages, commercially reasonable rate of interest is a rate
representing the claimant’s expenditures after it equivalent to Peru’s external cost of debt financing
obtained the right to acquire, own, and operate the from private lenders. However, the parties disagreed
mining concession at Santa Ana. as to the calculation of the rate. The respondent
proposed that interest should be at the borrowing
Contributory Fault rate of 0.65 percent per annum or the risk-free rate
of 0.16 percent per annum. The Tribunal disagreed,
A further issue before the Tribunal concerned the holding that neither of these rates is commercial,
claimant’s potential contributory fault in causing the because the respondent could not borrow and the
circumstances that led to Peru’s adoption of Supreme claimant would not lend at either rate.
Decree 032. More specifically, the question arose
whether the claimant’s alleged failure to secure a The claimant’s expert proposed that the respondent’s
social license to operate the Santa Ana mine rendered likely borrowing rate was in the range of 5.1 percent (the
it contributorily at fault for its loss of the related weighted yield to maturity at the expropriation date)
mining rights. Although neither party briefed the issue and 5.6 percent (the coupon rate of the most recently
prior to the hearing, the Tribunal requested that they issued bond) per annum. Without further reasoning,
do so during post-hearing briefs. the Tribunal agreed with the claimant’s expert’s
conservative rate of 5 percent per annum. The Tribunal
The majority of the Tribunal, consisting of Profs. also considered that compound interest is generally
Böckstiegel and Pryles, held that the claimant did accepted in the practice of investment arbitration for
not contribute to its damages. The majority pointed any damages awarded. The Tribunal thus awarded the
out that the claimant complied with the consultation claimant USD18,237,592, plus interest at a rate of 5
procedures under Peruvian law and obtained percent per annum, compounded quarterly, from the
contemporaneous confirmation from Peru that the date that Peru published Supreme Decree 032, on June
claimant’s community outreach and consultation 25, 2011, until the date of payment.
efforts were sufficient and adequate. Prof. Sands,
however, in his partial dissent, maintained that With respect to costs, the Tribunal first observed that
the claimant’s consultation efforts did not comply the FTA and the applicable arbitration rules afforded
with the requirements set forth in the International it a degree of discretion to award costs. The Tribunal
Labour Organization’s Indigenous and Tribal Peoples noted that the vast majority of the arbitration costs
Convention of 1989 (ILO Convention 169) and, were caused by the issues on which the respondent
therefore, that the claimant had contributed to did not prevail, and thus, exercising its discretion, the
its loss, even though he also recognized that ILO Tribunal awarded the claimant 75 percent of its costs,
Convention 169 imposes obligations only on states, amounting to USD5,986,183.29.
not private parties. Prof. Sands reasoned that the
claimant’s responsibilities were, nevertheless, “no less 1 King & Spalding represented the claimant.
than those of the government” and therefore would
have reduced the measure of damages by one—half, 2 A rticle 812 of the FTA provides that “compensation shall
to USD9,118,796. be equivalent to the fair market value of the expropriated
investment immediately before the expropriation took place
Interest and Costs (‘date of expropriation’), and shall not reflect any change
in value occurring because the intended expropriation had
With respect to interest, the Tribunal observed become known earlier. Valuation criteria shall include going
that both parties agreed that the appropriate concern value, asset value including declared tax value
of tangible property, and other criteria, as appropriate, to
determine fair market value.”
3 Award, ¶ 597.
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Caratube International The contract anticipated a five-year exploration period
Oil Company LLP and Mr. and granted CIOC the right to a period of production of
Devincci Salah Hourani 25 years. But in January 2008, the MEMR terminated
v. Republic of Kazakhstan the contract during the exploration period for CIOC’s
(ICSID Case No. ARB/13/13) alleged nonperformance of obligations, and the Kazakh
national security service took de facto control of the
Date of Award Caratube Field in April 2009.
September 27, 2017
The claimants sought damages, arguing that the
Parties termination of the contract was wrongful and
Caratube International Oil Company LLP and amounted to an expropriation in that it was motivated
Devincci Salah Hourani (the claimants), Republic of by political reasons (the fallout between the president
Kazakhstan (the respondent) of Kazakhstan and Rakhat Aliyev, an associate of the
Hourani family) and therefore caused by state action.
Sector (Note that in 2008, CIOC had originally commenced
Oil and gas an arbitration, referred to as the Caratube I arbitration,
but the claim was dismissed for lack of jurisdiction in an
Applicable Treaties award dated June 5, 2012.)
Bilateral investment treaty between the United
States of America and the Republic of Kazakhstan A majority of the Tribunal rejected Kazakhstan’s
jurisdictional objections to CIOC’s claims (but found
Members of the Tribunal that it did not have jurisdiction over the claims of
Dr. Laurent Lévy (president), Prof. Laurent Aynès (the CIOC’s majority shareholder, Hourani) and found that
claimants’ appointee), and Dr. Jacques Salès (the the termination of the contract by the respondent
respondent’s appointee) was unlawful and amounted to expropriation.
Background Quantum
The proceedings arose out of a concession to The claimants claimed compensation in the amount
exploit the Caratube Field, a significant oil field in of USD941.05 million for lost profits, calculated
the Baiganin district of the Aktobe Oblast of the using the fair market value (FMV) of their investment
Republic of Kazakhstan. Caratube International Oil at the date of termination. The claimants used the
Company LLP (CIOC), a Kazakh oil company, took discounted cash flow (DCF) method to value the
over the contract for the exploration and production loss of profits, submitting that DCF was considered
of hydrocarbons in the Caratube Field (the contract) the common method for the valuation of exploration
with the Kazakh Ministry of Energy (MEMR) in companies that have reasonable prospects,
December 2002. particularly where reserves had been confirmed.
As an alternative, the claimants claimed
compensation on the basis of the loss of opportunity
to make the profits, arguing that this should be valued
at 99 percent of the quantified lost profits “given
the commodity at hand and the confirmation of the
reserves by industry experts.”
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Finally, the claimants claimed USD50 million as the full reparation standard set forth in Kazakh law,
compensation for the moral damages caused by the informed against the full reparation standard set
distress that Hourani had suffered, the harm to the forth in customary international law.
claimants’ reputations, and the harassment of CIOC’s
employees. While recognizing that some international tribunals
previously have applied the FMV method in cases
Kazakhstan argued that CIOC was at most entitled of unlawful expropriation, a majority of the Tribunal
to sunk investment costs, which should be reduced determined that the damages incurred by CIOC
to deduct all revenues generated by CIOC between would be appropriately assessed using a full
2002 and 2007 (USD18.4 million), and further reparation standard without FMV, meaning that the
reduced to take into account cessation risk, resulting amount of damages must not exceed the damage
in an amount of damages of USD4.2 million. actually incurred. (Note that for the dissenting
Kazakhstan also argued to apply a discount for lack arbitrator, the compensation should be equal to the
of marketability and to reduce the sunk investment value of the asset at the time of the expropriation.)
costs by 50 percent for alleged contributory fault.
Lost Profit
The Tribunal rejected the claimants’ claim for lost
profits and lost opportunity, deciding instead to The Tribunal recognized that the DCF method is
award sunk costs of USD39.2 million. The Tribunal widely accepted as an appropriate method to assess
also rejected the claimants’ claim for moral damages. lost profits of going concerns with a proven record of
These are discussed in turn below. profitability. But the Tribunal was not convinced that
CIOC ever was a going concern with a proven record
Compensatory Damages of profitability. While CIOC had been in existence
and performed the contract for five years, CIOC had
The Tribunal confirmed that it would assess CIOC’s not realized any profits and instead had a record of
claim for compensatory damages in application of negative cash flows and accounting losses.
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The Tribunal was also not convinced that the The Tribunal found that there was no legal basis
existence and amount of lost profits that the in Kazakh law for an award of compensation for
claimants sought were sufficiently certain (so as to loss of opportunity, but even on the application of
avoid an undue windfall), and its findings on this point international law, CIOC’s claim for lost opportunity
included the following: failed on the merits. The Tribunal stressed that any
damages, including damages for lost opportunity,
• C IOC had not yet made a commercial discovery must be sufficiently certain in order to be recovered.
within the meaning of the contract and therefore
had no vested right to proceed to production, the For essentially the same reasons as those expressed
3D seismic study contained several shortcomings, in relation to the lost-profit claim, the Tribunal
and no exploratory wells had been drilled. found that the claimants did not establish the lost-
opportunity claim with sufficient probability. The
• At the time of termination, CIOC had invested only Tribunal referred in particular to the uncertainties
USD39.24 million, and 94 percent of the total capital relating to the oil reserves.
investment in the project remained to be made.
Sunk Costs
• The claimants did not sufficiently and convincingly
establish that the reserves estimates were A majority of the Tribunal determined that CIOC’s
sufficient proof of the lost profits claim given the compensatory damages claim was most appropriately
deficiencies in the 3D seismic studies; as a result, addressed by an award of sunk costs. The Tribunal
the reserves estimates were unreliable. explained that an award of sunk costs aims to repay all
investment undertaken and expenses incurred and that
• The claimants did not establish with sufficient the records showed that the claimants had invested
certainty that CIOC would have carried out USD39.2 million in the project. The Tribunal rejected
the development plan and produced over 79.9 the respondent’s argument that revenue generated
million barrels of oil as alleged, noting that by CIOC should be deducted, because the records
CIOC had been unable to perform several of showed that this revenue was reinvested. (For the
its contractual obligations under the works dissenting arbitrator, deducting oil sales revenues from
programs and that its contractual performance CIOC’s expenditure was necessary to ensure that the
had been “sub-standard.” compensation awarded did not exceed the damages
that CIOC actually incurred.)
The Tribunal’s findings were not altered by the
claimants’ arguments that the sale of nearby oil fields The Tribunal also rejected the respondent’s
or an alleged arm’s-length offer to buy the Caratube arguments to apply a cessation risk premium, to apply
Field could be usefully relied upon to confirm the a discount for lack of marketability, and to reduce
damages calculation. On this, the Tribunal noted that the sunk investment costs by 50 percent for alleged
there was no evidence to show that the transactions contributory fault. In relation to the latter point, the
were meaningful comparisons or that the arm’s-length Tribunal found that while it had the right to take into
offer was indeed at arm’s length. account contributory fault, it must adopt a restrictive
approach, and a mere contribution to causation is
Lost Opportunity not enough in the absence of willful or negligent
reproachable behavior.
The Tribunal confirmed that even where a lost–profits
claim is not established, a claim for lost-opportunity
was still possible in theory and that reparation for loss
of opportunity would be awarded in proportion to the
probability of its occurrence.
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As a result, the Tribunal found that at the relevant date In relation to the appropriate interest rate, the Tribunal
of valuation (January 31, 2008), CIOC’s sunk investment agreed with the claimants that an interest rate of LIBOR
costs amounted to the entire USD39.2 million. plus 2 percent should be applied. The Tribunal noted
that the claimants had shown that LIBOR had frequently
Moral Damages been used by ICSID tribunals, and the respondent had
not successfully rebutted the claimants’ allegation as to
The Tribunal noted that the claimants’ claim for the suitability of LIBOR in this case. The Tribunal deemed
moral damages was based entirely on the alleged the spread of two percentage points appropriate to fully
acts of harassment, threats, intimidation, and “public compensate for the claimants’ losses.
bashing” by the respondent against the Hourani
family and their relatives. The Tribunal further noted As regards compounding, the Tribunal noted that there
that, while it did not doubt that the claimants had was no uniform practice among international tribunals,
been subject to harassment, the claimants had not but it was satisfied that the use of a semiannual
satisfied the burden of proof with respect to the compounding period was frequently applied and
respondent’s alleged involvement. Given that the appropriate in the present case.
claim for moral damages was based entirely on the
alleged harassment, the Tribunal rejected the claim With respect to costs, the Tribunal cited ICSID
for moral damages. Convention Article 61(2) and Rule 28 of the ICSID
Arbitration Rules, which afford the Tribunal wide
Interest and Costs discretion. The Tribunal also cited the agreement
between the parties as to costs set out in the
The claimants requested an interest rate of LIBOR contract, which stated that costs would be borne by
plus 2 percent, compounded semiannually, from the unsuccessful party or, if neither party was wholly
termination in 2008 until payment of the award. The successful, as specified in the award. The Tribunal
respondent argued that simple interest calculated noted that two main approaches were adopted
using the three-month US Treasury Bond yield plus 1.8 in awarding costs in investment arbitrations: an
percent should be applied from termination in 2008 apportionment of ICSID costs equally and an order
until June 5, 2012, the date of the Caratube I award. that each party bear its own costs, or an order that
the losing party bear all or part of the costs of the
In relation to time, the Tribunal first held that any award proceedings.
of interest should cover the entire period from January
31, 2008, until the date of full payment of the award, In terms of conduct, the Tribunal found that both parties
without any interruptions being justified as a result of generally conducted the arbitration fairly and with high
the Caratube I arbitration. The Tribunal explained that professional standards. In terms of the success of the
the primary function of the award of interest was to parties’ respective cases, the Tribunal found that both
provide full reparation for the damage, which should parties had prevailed on certain issues. The Tribunal
seek to “wipe out” as far as possible all consequences also noted that there was no doubt that CIOC (but not
of the illegal act and to compensate the injured party Hourani) was justified in commencing the arbitration, but
for the loss of the use of its money as a result of the that it had prevailed on only part of its claim (USD39.2
wrongdoing. The Tribunal also noted that while the million out of USD941.05 million sought). As a result, the
claimants could have raised certain of their claims in the Tribunal concluded that it was fair for each party to bear
Caratube I arbitration, they did not have an obligation to its own legal fees, costs, and expenses and to equally
do so, and not doing so did not constitute an abuse of share the costs of the arbitration.
process (contrary to the respondent’s allegations).
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Teinver S.A., Transportes operational difficulties, SEPI entered into a share
de Cercanías S.A. and purchase agreement (SPA) with the Spanish company,
Autobuses Urbanos del Sur Air Comet, whereby Air Comet acquired SEPI’s full
S.A. v. Argentine Republic 99.2 percent interest in Interinvest. At that time,
(ICSID Case No. ARB/09/1) Air Comet was directly owned by two claimants—
Autobuses Urbanos (35 percent) and Transportes de
Date of the Award Cercanías (35 percent)—and by two other Spanish
July 17, 2017 companies—Proturin S.A. (29.8 percent) and Segetur
S.A. (0.2 percent)—which were also members of a
The Parties group of companies known collectively as the Marsans
Teinver S.A., Transportes de Cercanías S.A. and Group. The Marsans Group was a Spanish consortium
Autobuses Urbanos del Sur S.A. (the claimants),1 formerly owned by two Spanish nationals, the late
Argentine Republic (the respondent) Gonzalo Pascual Arias and Gerardo Díaz Ferrán. The
Argentine government also held approximately 5.34
Sector percent of ARSA’s shares.
Aviation
In July 2006, claimant Teinver acquired Proturin’s
Applicable Treaty and Segetur’s collective 30 percent shareholdings in
Bilateral investment treaty between the Kingdom of Air Comet. From July 2006 until they initiated their
Spain and the Argentine Republic (BIT or the treaty) arbitration against Argentina in December 2008, the
claimants together owned 100 percent of Air Comet,
Members of the Tribunal although their share distribution changed several
Judge Thomas Buergenthal (president), Henri Alvarez times during this period—at the time of filing, their
QC (the claimants’ appointee), and Kamal Hossain respective shares were Teinver at 96.77 percent,
(the respondent’s appointee) Autobuses Urbanos at 2.13 percent, and Transportes
de Cercanías at 1.1 percent. In December 2009,
Background Teinver became the sole shareholder in Air Comet.
In 2001, Sociedad Estatal de Participaciones The claimants’ case centered on two main prongs.
Industriales (SEPI), a holding company owned by the First, it was not disputed that Argentina formally
Spanish government, owned Aerolíneas Argentinas nationalized the airlines in December 2008 without
S.A. (ARSA) and Austral-Cielos del Sur S.A. (AUSA) paying compensation, following a failed agreement
(collectively, the airlines or the Argentine airlines) in July 2008 (the July 2008 agreement) by which the
through an Argentine intermediary company called parties were to agree on a price for Argentina to take
Interinvest. SEPI owned 99.2 percent of Interinvest, the airlines back into the state’s hands. This followed
and Interinvest in turn held 92.1 percent of ARSA’s several years of difficult financial performance by
shares and 90 percent of AUSA’s shares. On October the airlines due to what the claimants asserted
2, 2001, after the airlines faced severe financial and were inadequately regulated airfares (the airfare
squeeze) and crippling strikes led by a conflicted
undersecretary who also served as the head of a
union opposed to Spanish ownership of the airlines.
Thus, the claimants’ second main claim was for the
devaluing effect these measures had on the airlines
prior to their eventual nationalization.
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Jurisdiction and Liability treaty breaches before the airlines’ nationalization,
it would owe compensation for the lawful
In a decision on jurisdiction issued in December 2012, expropriation of the airlines in the middle of 2008
the Tribunal rejected Argentina’s objections based amounting to USD445 million, based on the “as
on the claimants’ alleged failure to comply with is” value of AUSA as of January 1, 2008, before
preconditions in the BIT for arbitration. It carried interest as of the award date.
several jurisdictional and admissibility objections to
the merits, including the claimants’ lawyers alleged (b) Scenario 2: If Argentina’s formal expropriation
lack of powers of attorney, the claimants’ alleged was lawful but it breached the treaty before the
loss of standing due to their third-party funding expropriation—specifically the airfare squeeze before
arrangement, and issues of alleged corruption in the the formal expropriation—it would owe USD625
investment emanating from criminal proceedings in million, measured as the as-is value of AUSA plus
Spain involving the Marsans Group. Ultimately, the damages from the airfare squeeze (i.e., USD268
Tribunal rejected all of these objections. million) before interest as of the award date.
On the merits, the Tribunal rejected all the claimants’ (c) Scenario 3: If Argentina’s formal expropriation
claims prior to the nationalization but held that was unlawful and it was liable for pre-expropriation
Argentina behaved unfairly and inequitably by not treaty breaches, the airlines’ value would be as
following the procedures in the July 2008 agreement of the award date (as if the claimants continued
to repurchase the airlines at a price determined by a to operate them), totaling USD1.59 billion
third party, and by instead nationalizing the airlines (USD1.3357 billion for AUSA and USD254.3 million
unilaterally. The Tribunal also found that the eventual for ARSA) with interest through July 31, 2013.5
expropriation of the airlines was unlawful, because
the taking was not “in accordance with the law” and The parties disagreed regarding the claimants’
Argentina failed to pay “adequate compensation.”3 valuation methodologies,6 but the Tribunal declined
to consider the claimants’ scenarios because none
Argentina also submitted a USD1.6 billion precisely reflected the Tribunal’s liability findings.7
counterclaim for alleged losses it suffered because Instead, the Tribunal noted that Scenario 1 was the
of the poor state of the airlines at the time of “most suitable” starting point because it proposed
expropriation.4 The Tribunal agreed with the valuations not based on the airfare squeeze.
claimants and dismissed the counterclaim, inter alia
because Argentina failed to meet the jurisdictional The Tribunal noted that other tribunals have
threshold by not identifying any legal right or consistently applied full reparation, and it concluded
obligation on which it relied. that international law required Argentina to make
reparation to the claimants for its treaty breaches;
Quantum thus, its damages award should seek to put the
claimants in the position they would have been in but
During the merits hearing and in their post-hearing for such breaches.
brief, the claimants structured their damages on the
Tribunal’s finding one of three potential “scenarios” of Despite the claimants including a request for an
liability under the treaty: award of “restitution or the monetary equivalent of
all damages caused,” the Tribunal noted that the
(a) Scenario 1: If Argentina’s formal expropriation claimants initially indicated that they were not seeking
of the airlines was lawful and there were no return of their corporate rights.8 Further, under the
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circumstances, the Tribunal dismissed the request The Tribunal found that the third-party valuations
for restitution in kind as being neither practical nor of the airlines in the record were evidence of their
practicable, considering that the claimants were in value in 2008 and that such valuations were not
bankruptcy and Argentina had been operating the less reliable indicators of value because they were
airlines for several years. not prepared for the arbitration.13 It noted that
the third-party valuations provided support for a
The claimants described Scenario 1 as the minimum general range in values of the airlines before the July
compensation payable by Argentina, representing 2008 agreement, despite the airlines’ worsening
the “fair market value of their investment in the condition between May and July 2008.14 The Tribunal
Argentine Airlines in their ‘as is’ condition as of the observed that because the DCF methodology and
date of nationalization in 2008.”9 The claimants parameters agreed to in the July 2008 agreement
relied on valuations prepared by accounting firms— were a negotiated compromise—the parties agreed
Deloitte, Morgan Stanley, and PwC—in the context to limit both the extent of the costs (through the
of the May 2008 agreement, which concluded that subsidized fuel price with market increases) and the
the average valuation was USD415 million for AUSA projected revenues (by using current fares increased
and USD30 million for ARSA. They also referred to proportionately by projected costs)—the Credit Suisse
a Credit Suisse valuation prepared in the context of valuation (performed under the July 2008 agreement)
the July 2008 agreement. differed from the other third-party valuations
prepared in the context of the May 2008 agreement,
At the hearing, Argentina objected to the third-party which did not have similar negotiated constraints on
valuations on the grounds they were not submitted the cash flow estimates.15
during the merits phase and that Scenario 1 was
never valued by the claimants’ experts; the claimants The Tribunal found that the Credit Suisse valuation
countered by referring to language in the first page was the best approximation of fair market value
of their memorial on the merits10 and asked their of the airlines in July 2008, after considering that
experts to extract from their valuations model a the parties had agreed to the methodology, the
comparison to what the third-party valuators did in Argentine regulator TTN had assessed the valuation,
2008. Accordingly, their expert, Compass Lexecon, and there seemed to be several valid criticisms
adjusted their 2010 value for the additional cash regarding the substance and methodology of TTN’s
flow that AUSA would have generated in 2009 and own DCF valuation.16 Under this valuation, ARSA
2010 “but for” Argentina’s measures and discounted was valued between USD0 and USD60 million,
this value to January 2008 to arrive at a value of while AUSA was valued between USD330 million
USD356 million.11 Compass Lexecon updated this and USD480 million.17
value to USD357 million to reflect the audited 2007
financial statements, and one of the claimants’ The Tribunal expressed satisfaction that the
experts testified that the AUSA valuation was a fair claimants had proven the fair market value (FMV)
proxy for a lawful expropriation valuation.12 Compass of the airlines in 2008 was at least USD330
Lexecon offered no 2008 valuation for ARSA that million (USD0 for ARSA and USD330 million for
did not consider the airfare squeeze. As a result, the AUSA) and that they suffered damages of at least
claimants contended that the convergence of the USD320,760,000, corresponding to their 97.2
valuations confirmed the reliability of their evidence percent shareholding in AUSA.18 The Tribunal
regarding the airlines’ value in 2008. remained unmoved by the claimants’ submission that
they were entitled to the greater of the FMV at the
time of the taking and the FMV at the award date.
16 KING & SPALDING
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Interest and Costs or departure from the approach. The Tribunal also
ordered Argentina to contribute USD3,494,807
The claimants also requested pre- and post-award toward the claimants’ reasonable legal and other
compound interest until the effective date of costs—topping USD17 million—plus interest at the six-
payment; specifically, either LIBOR plus 2 percent month US Treasury bill rate as of the award date.24
or the 8.75 percent rate that Argentina used in its
recent settlement with Repsol, with the post-award 1 King & Spalding represented the claimants.
rate being the weighted average cost of capital rate, 2 Award ¶ 177.
compounded quarterly, until the date of payment.19 3 Award ¶ 1040.
In response, Argentina submitted that any interest 4 Award ¶ 1047.
awarded should be at a risk-free rate using the US six- 5 Award ¶ 1071.
month Treasury bill rate or the rate for US six-month 6 Award ¶¶ 1072-1073.
certificates of deposit, and that compound interest is 7 Award ¶ 1074.
an exceptional award.20 8 Award ¶ 1094.
9 Award ¶ 1102.
The Tribunal declared that compound interest was 10 Award ¶ 1004.
appropriate, as it has become widely accepted 11 Award ¶ 1105.
as an appropriate and necessary component of 12 Award ¶ 1105.
compensation because it better compensates 13 Award ¶ 1106.
for actual damages suffered since it follows 14 Award ¶ 1107.
contemporary financial practice and would have 15 Award ¶¶ 1110-1111.
been available had the amount awarded been paid 16 Award ¶¶ 1111-1112.
promptly.21 It also held that interest would begin from 17 Award ¶ 1112.
December 30, 2008, the date when Argentina’s 18 Award ¶ 1114.
Congress adopted Decree 2347/2008, declaring that 19 Award ¶¶ 1117-1118.
all the rights granted by the shares of the airlines 20 Award ¶ 1119.
were to be exercised by the administrative entity 21 Award ¶ 1125.
appointed by the government until the expropriation 22 Award ¶ 1126.
process had been completed.22 The Tribunal declined 23 Award ¶¶ 1127, 1129.
the claimants’ request to calculate the pre-award 24 Award ¶¶ 1128, 1134, 1146.
interest value while granting interest at the US six-
month Treasury bill rate, compounded semiannually,
on the principal sum awarded as of December 30,
2008, until payment in full.23
Both parties also requested costs awards against the
other, justified, inter alia, by the other side’s conduct
during the proceedings. After considering the various
pleadings and applications during the lengthy and
complex proceedings, the Tribunal determined that
the pro rata or proportional approach was appropriate
because the claimants ultimately succeeded in respect
of a substantial part of their claims, and neither
party’s conduct justified a special costs allocation
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Marco Gavazzi and The Romanian entity responsible for privatizations
Stefano Gavazzi v. (which had contracted with the claimants) had
Romania previously commenced a commercial arbitration
(ICSID Case No. ARB/12/25) against them, claiming breach of contract. In 2007,
the commercial tribunal denied the Romanian entity’s
Date of the Award1 claims, instead awarding the claimants damages
April 18, 2017 for their counterclaims. But the Bucharest Court of
Decision on Rectification Appeals annulled the award in 2009 and held against
July 13, 2017 the claimants in 2011. The claimants unsuccessfully
challenged both of those decisions.
In 2012, the claimants filed a request for arbitration
before ICSID under the Italy-Romania BIT.
Jurisdiction and Liability
The Parties On April 21, 2015, the Tribunal issued its decision
Marco Gavazzi and Stefano Gavazzi (the claimants), on jurisdiction, admissibility, and liability. It found
Romania (the respondent) that it had jurisdiction over the claimants’ claims
but, by majority, declined jurisdiction over Romania’s
Sector counterclaim.2
Steel
On the merits, the majority of the Tribunal found
Applicable Treaty that Romania’s failure to restructure Socomet’s
Bilateral investment treaty (BIT) between Italy and debt constituted a breach of the fair and equitable
Romania treatment (FET) provision of the BIT. The majority of
the Tribunal also held Romania liable for expropriating
Members of the Tribunal the claimants’ investment. Romania’s appointee,
Prof. Hans Van Houtte (president); V. V. Veeder, QC Mauro Rubino-Sammartano, dissented from these
(the claimants’ appointee); and Dr. Mauro Rubino- decisions. The Tribunal dismissed the claimants’
Sammartano (the respondent’s appointee) claims that Romania failed to provide the claimants
with effective means of enforcing their rights or
Background otherwise denied the claimants justice. The Tribunal
reserved the damages issues for a separate quantum
In 1999, the claimants invested in a Romanian phase of the arbitration.3
steel company, S.C. Socomet S.A. (Socomet),
undergoing privatization. The claimants agreed Quantum
to acquire 70 percent of Socomet’s shares,
provided that Socomet’s existing debts would be A. Compensation for Expropriation
rescheduled or forgiven. But Socomet’s debts were
not restructured, and the Romanian government Settlement Documents Do Not Provide an
froze its bank accounts in order to cover the debt. Alternative Valuation
This act and the resulting insolvency prevented the Before discussing the applicable standard of
claimants from reviving Socomet. compensation, the Tribunal determined that certain
18 KING & SPALDING
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documents produced during the parties’ settlement never a going concern and lacked any objective record
negotiations did not reflect “an independent and of any profitability whether past or present.”9 In support
contemporaneous evaluation made by the Claimants of this conclusion, the Tribunal discussed the reasoning
concerning the value of their shares ... shortly after the of several tribunals that had similarly declined to apply
alleged expropriation date.”4 The claimants challenged the DCF method to cases in which the investment was
the authenticity of those documents and, in the too nascent to establish future cash flow. The Tribunal
alternative, argued that they were irrelevant. The also distinguished Gold Reserve v. Venezuela and Enron
Tribunal agreed with the claimants that the documents v. Argentina, which found that certain factors allowed
were irrelevant, reasoning that “[s]ettlement offers the tribunals in those cases to assess future lost profits
reflect complex ‘give-and-takes’ whereby the money with some degree of certainty in spite of the absence of
requested for the transfer of shares includes a cluster of a historical record of profits. The Tribunal’s remarks on
other considerations as well.”5 The Tribunal therefore the DCF method were, however, obiter dicta, because
concluded that it need not determine the authenticity although the DCF method was “extensively debated by
of the two documents submitted by Romania. the Parties,” it was not advocated for by the claimants.
Romania’s appointed arbitrator, Mr. Sammartano, 2. Claimants need not establish that their
dissented on this point, concluding that “a party investment was a going concern in order to
cannot be deprived of the right to prove that a apply the unlevered income method, but the
document—which is challenged—is authentic.”6 He claimants failed to meet their burden of proof.
also found the documents to be relevant.
“ A party cannot be deprived
While of course a settlement proposal may in no way be of the right to prove that
evidence of the amount due to the other party, unless a document—which is
the parties have settled for such amount, it is in my challenged—is authentic.”
opinion a document to be taken into some account in
establishing claimed damages. The claimants instead proposed an “unlevered
income-based evaluation” due to the absence of past
The Tribunal applied the “standards provided for records of Socomet’s cash flow.11 The excerpts of the
by Article 4 of the BIT and, whenever necessary, award do not include the claimants’ characterization
by customary international law.”8 By majority, of the unlevered income-based evaluation, but the
the Tribunal agreed with the claimants that the Tribunal briefly described the method as “tak[ing] into
appropriate valuation date was August 2002, which account the profitability of sectorial comparators.”12
was the date when the claimants were deprived of
their investment. The Tribunal rejected Romania’s argument that the
claimants needed to establish that their business
i. Valuation Methodology was a going concern in order to apply an unlevered
1. In dicta, the Tribunal found that no cash flow- income-based evaluation.
based method could apply when the investment
was not a going concern. Considering the definition of the unlevered income
method (as described by the Claimants’ expert
The Tribunal discussed the applicability of the witnesses), the Tribunal does not accept that a
discounted cash flow (DCF) method in detail,
concluding that “it would be inappropriate in this
case to use any cash flow-based approach to assess
compensation under the BIT when the company was
2018 QUANTUM QUARTERLY 19
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necessary prerequisite for the application of this (‘WACC’) is reliable.”16 According to the Tribunal, the
method is that the entity must be a going concern. figure allocated to the risk that the business plan
The Tribunal observes that the unlevered income would not be fully implemented was too low given
method is based upon general parameters, such as the fact that “these figures included the costs of debt
reference to data from other European comparable and the return on equity” and “the fact that equity
companies, and that such materials are also adjusted holders would not receive dividends when profits were
to the relevant stock exchange, country risk, and reinvested or used to pay debts.”17
market risks, as well as to the usual rate of return on
risk-free assets.13 Third, the Tribunal found uncertainty in the business
plan as to whether Socomet’s shares would be acquired
The Tribunal thus drew a distinction between the by two other companies. In support of this conclusion,
requirements to apply the DCF method and the the Tribunal pointed to the fact that the relevant share
unlevered income method. sale option was never signed and no price was agreed
upon for the purchase of those shares.
While the Tribunal accepted the applicability of the
unlevered income method in principle, it found that 3. The Tribunal decided to apply equitable
the claimants failed to fulfill the other requirements objective principles.
necessary to apply that method. Specifically, the
Tribunal concluded that the business plan on which In addition to finding that the claimants could not
the claimants based their valuation was materially prove the value of their investment, the Tribunal
ineffective for three reasons. further commented that the claimants should have
been aware of their imminent insolvency at the time
First, the Tribunal decided that the claimants’ they drafted the business plan on which they sought
business plan “remained embryonic” because it “was to rely. The Tribunal even acknowledged that it was
never finalised, legally or commercially.”14 possible that the claimants wrote the business plan
intending to use it to support their damages claim.
Second, the Tribunal found that the financing The Tribunal nevertheless held that “[t]his does not
envisaged in the claimants’ business plan was mean that the Claimants’ claims for compensation
“unduly optimistic.”15 The claimants had failed to must be dismissed by the Tribunal without more.”18
establish that they could have obtained sufficient
financing to cover Socomet’s overdue debts, The Tribunal found that there was no doubt that
the costs of refurbishment anticipated in the the claimants suffered loss and that the claimants’
business plan, and the additional working capital difficulty in substantiating that loss arose from the
requirements. The Tribunal doubted whether the respondents’ conduct.
claimants could meet the conditions necessary to
obtain the anticipated financing. Specifically, the The existence of such a difficulty, even in an extreme
Tribunal found that it was uncertain whether the form, provides no justification in refusing any
claimants could obtain the expected buyer-credit compensation to an innocent party, leaving the
from Romania Commercial Bank. wrongful party with the fruits of its wrongdoing.
Tribunals have traditionally resolved such difficulties
More important to the Tribunal with respect to applying a rule of reason, rather than a rule requiring
financing was its cost. The Tribunal “question[ed] absolute certainty in calculating compensation.19
whether the [figure omitted from the award] given
in relation to the weighted average cost of capital Not only do tribunals “traditionally” resolve such
20 KING & SPALDING
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difficulties this way, but the Tribunal further also credit into an increase in capital. The Tribunal
relied on Sistem v. Kyrgyz Republic and ADC v. found that the claimants failed to meet their burden
Hungary to find a “well-established and well-known of proof to show that Socomet’s capital actually
jurisprudence constant to the effect that, however increased. Specifically, the Tribunal determined
difficult, an international tribunal must do its best that the formalities required under Romanian law
to quantify a loss provided that it is satisfied that to increase Socomet’s capital had not been met.
some loss has been caused to the claimant by the Although meeting that standard is not necessary to
wrongdoing of the respondent.”20 establish an investment under the BIT, it is necessary
to establish a capital increase. Thus, the Tribunal
In applying this principle to the case, the Tribunal found that the claimants’ investment in Socomet
referred to the BIT provision addressing compensation did not include a conversion of company debt to an
for expropriation, which included an inexhaustive list increase in capital.
of factors, such as capital invested, its appreciation or
depreciation, current returns, replacement value, “and
other relevant factors.”21
ii. Invested Capital
With respect to the first factor—the claimants’ invested
capital—the Tribunal awarded the amount the claimants
paid to purchase their shares in Socomet. In addition, it
awarded the amount of loans that the claimants made
to Socomet in connection with their investment.
Romania’s appointed arbitrator dissented with
respect to the Tribunal’s award of compensation for
the claimants’ loans to Socomet.
In my opinion loans, (which—as in these proceedings The claimants also alleged that they had invested
have been provided without any mention that in Socomet by paying a group of 12 Italian expert
they were to be converted into investments) may technicians. The Tribunal rejected this claim because
not be treated as investments, i.e. as ‘a form of the only proof the claimants provided was a list
participation in the Company,’ since the lender of the technicians and their prospective salaries
keeps his right to be repaid and in this respect he is that dated from the beginning of the claimants’
a creditor, not an investor.22 investment. Although the Tribunal rejected this claim
based on a lack of evidence, it further explained that
The Tribunal further found that the claimants need it rejected Romania’s argument that any payment
not produce strict evidence of payment but that a to five of these technicians could not qualify as an
reasonable probability of payment was sufficient. investment because those payments were made
in violation of Romanian law. Romania argued that
The Tribunal next rejected the claimants’ argument these technicians’ salaries were illegally paid outside
that a credit from Socomet to a different company Romania. The Tribunal noted that the claimants
called Holdeast was actually a credit to the claimants needed to pay their technicians’ salaries outside
and that the claimants intended to transfer that
2018 QUANTUM QUARTERLY 21
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Romania because Socomet’s Romanian bank The reason why such compensation is so difficult
accounts had been unlawfully frozen. As a result, in this case, subject to causation (addressed
“[t]he argument ... that such payment is illegal under separately below), lies with the Respondent’s own
Romanian law and therefore non-compensable under wrongdoing in violation of the BIT. Where a claimant
the BIT for reasons of illegality must be tempered as the innocent party has difficulty in proving its
by the fact that such breach of Romanian law was compensation, particularly as regards future events,
provoked by the Respondent’s own breach of its because of the wrongdoer’s acts or omissions, the
commitments under the BIT.”23 wrongdoer should not be permitted to escape liability
for compensation as a direct result of the difficulty
Romania’s appointed arbitrator disagreed regarding or resulting uncertainty for which that wrongdoer
the effect of the illegality of the claimants’ payments is responsible. At that point, the evidential burden
to the expert technicians. He found that “this claim regarding uncertainty shifts from the innocent party
in my opinion must be dismissed on the ground of to the guilty party. Otherwise, the guilty party would
breaches of the applicable Romanian law (likely both profit unfairly from its own wrong.29
tax laws and labour laws in this case).”24 He further
explained his view that “[a] contractual breach by a The Tribunal, by majority, quantified the claimants’
party may not ... justify or mitigate a breach of the loss of opportunity at 50 percent of their investment.
law by the other party, even if it helps that party to It based its decision on the unreliability of the
remedy its need for cash.”25 claimants’ business plan as a basis to determine loss
of opportunity. Instead, the Tribunal “turn[ed] to
iii. Loss of Opportunity the only solid data available: the amounts invested
by the claimants.”30 It then decided the probable
The Tribunal found that “it would be wrong in this future return on the claimants’ investment, which it
case as a matter of principle to limit the Claimants’ concluded was based 50 percent on the uncertainty
compensation to the return of its capital invested of the source of the additional capital Socomet would
(with interest) under Article 4(4) of the BIT.”26 The need and the uncertainty as to whether Socomet
Tribunal therefore analyzed the claimants’ loss of would have been successful even if Romania had not
opportunity to make a profit. Noting that neither party breached the BIT.
had argued for loss of opportunity as a standard for
assessing damages (in spite of the Tribunal’s request B. Compensation for Breach of FET Standard of
that they do so), the Tribunal reasoned that it had a Treatment
“duty to adopt that approach” because of its duty to
apply general principles of international law.27 This The Tribunal did not award additional compensation
duty holds even if the parties do not argue a certain for Romania’s breach of the FET standard in the
principle of international law, because the “parties BIT. It reasoned that “the granting of further
have no veto right on the international legal principles compensation ... for breach of the FET standard
to be applied.”28 would duplicate [the compensation awarded for
expropriation] notwithstanding the difference in the
Having determined that loss of opportunity is an dates invoked by the Claimants.”31
accepted standard applicable under international
law, the Tribunal applied that standard to the C. Attribution of Losses
present case. It began by noting that Romania’s
culpability caused a shift in the burden of proof. In spite of Romania’s argument that the claimants
contributed to their losses, the Tribunal determined
22 KING & SPALDING
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that all losses claimed were caused by Romania. • t he state’s actions imply physical threat, illegal
The Tribunal began its analysis with this observation. detention, or other analogous situations in
In international law, where a State has caused damage which the ill treatment contravenes the norms
by a breach of its international obligations, and where according to which civilized nations are expected
the claimant has shown that its losses are sufficiently to act;
and reasonably linked to the State’s breach, causation
is held to have been established. Other possible • t he state’s actions cause a deterioration of
concurrent events that are not attributable to the health; stress and anxiety; other mental suffering
State are irrelevant; such events do not diminish the such as humiliation, shame, and degradation; or
State’s responsibility, nor do they reduce the amount of loss of reputation, credit, and social position; and
compensation for damages due.32
• b oth cause and effect are grave and substantial.34
“T he parties have no veto right
on the international legal The Tribunal found no evidence that would merit
principles to be applied.” an award of moral damages. It observed that while
Romania did deceive the claimants regarding the
One exception to this rule is when the concurrent conditions for their investment, the effect was only
cause is the victim’s fault under the theory of that the claimants had to expend excessive and
contributory fault.33 Romania argued that the disproportionate efforts, which did not meet the level
claimants contributed to their losses by failing to required for moral damages.35
comply with the rescheduling period for Socomet’s
debts, which was imposed by the Romanian The Tribunal further declined to award moral
authorities and which led Romania to freeze damages for criminal allegations against the
Socomet’s bank accounts. But the Tribunal found claimants because those accusations were rejected
that failing to comply with that rescheduling could by the Romanian courts, which were an organ of the
not be held against the claimants because that Romanian state.
rescheduling was in breach of the claimants’ share
purchase contract. After that point, the claimants Finally, the claimants based their request for moral
could not be found to have contributed to their damages on accusations made by Romania during
losses, because Romania’s freezing of Socomet’s the arbitration proceedings, which allegedly harmed
bank accounts had prevented it from running its their business reputation with certain commercial
operations. The Tribunal therefore found that the partners. The Tribunal “sympathize[d] with the
claimants had not contributed to their losses. Claimants’ predicament, but consider[ed] the injury
suffered cannot be compared to that caused by
armed threats, by the witnessing of deaths or by
other similar situations in which tribunals in the past
have awarded moral damages.”35
D. Moral Damages Interest and Costs
The Tribunal rejected the claimants’ request for Over Romania’s objection, the Tribunal awarded the
moral damages. After reviewing prior awards of claimants compound interest. The BIT provided for
moral damages, the Tribunal concluded that moral “interest calculated on a 6–month LIBOR basis” but
damages may be awarded only in exceptional cases, was silent on whether or not that interest should be
in particular in cases where: compounded.36
2018 QUANTUM QUARTERLY 23
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The Tribunal recognized a jurisprudence constante 7 Dissent ¶ 28.
holding that international investment tribunals must 8 Excerpts of Award ¶ 54.
award compound interest unless precluded from 9 Excerpts of Award ¶ 87.
doing so by the express wording of the applicable BIT. 10 Excerpts of Award ¶ 95.
11 Excerpts of Award ¶ 86.
Romania’s appointed arbitrator dissented with 12 Excerpts of Award ¶ 95.
respect to the majority’s award of compound interest. 13 Excerpts of Award ¶ 99.
In his view, the BIT would have to expressly provide 14 Excerpts of Award ¶ 103.
for compound interest for it to apply to damages due 15 Excerpts of Award ¶ 104.
under the BIT. 16 Excerpts of Award ¶ 116.
17 Excerpts of Award ¶ 116.
The Tribunal also awarded costs based on the 18 Excerpts of Award ¶ 116.
relative success of the parties in each phase of 19 Excerpts of Award ¶ 121.
the case. The Tribunal found that the claimants 20 Excerpts of Award ¶ 124.
prevailed in the first (merits) phase of the 21 Excerpts of Award ¶ 126.
proceeding. 22 D issent ¶ 18. The majority either did not address this point
It therefore ordered Romania to pay the claimants’ or its view was not included in the published excerpts of the
costs for that phase. But the Tribunal also found award.
that the claimants were awarded significantly less 23 Excerpts of Award ¶ 196.
compensation than requested in the quantum 24 Dissent ¶ 26.
phase, and therefore it allocated to the claimants 25 Dissent ¶ 25.
one-third of the costs of the damages phase and 26 Excerpts of Award ¶ 199.
the full costs of its damages expert. 27 E xcerpts of Award ¶¶ 210, 213.
28 Excerpts of Award ¶ 210.
Romania’s appointed arbitrator dissented on 29 Excerpts of Award ¶ 224.
this latter point as well. In his view, both parties’ 30 Excerpts of Award ¶ 229.
damages arguments failed, and “the Tribunal has 31 Excerpts of Award ¶ 252.
based its decision on a different basis (on which 32 Excerpts of Award ¶ 269.
it invited the parties’ comments and on which the 33 E xcerpts of Award ¶¶ 271-274.
parties’ submissions were not helpful)”37; therefore, 34 Excerpts of Award ¶ 292.
each party should therefore bear its own costs 35 Excerpts of Award ¶ 296.
incurred in the damages phase. 36 Excerpts of Award ¶ 301.
37 Dissent ¶ 39.
1 I CSID published only excerpts
of the award (hereinafter Excerpts of Award).
2 Excerpts of Award ¶ 1.
3 Excerpts of Award ¶ 1.
4 Excerpts of Award ¶ 46.
5 Excerpts of Award ¶ 47.
6 M arco Gavazzi and Stefano Gavazzi v. Romania, ICSID Case
No. ARB/12/25, Dissenting Opinion with Regard to Quantum,
Apr. 18, 2017 (hereinafter Dissent) ¶ 29.
24 KING & SPALDING
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Koch Mineral SÁRL to the terms of the JIA, FertiNitro Venezuela CEC
and Koch Nitrogen (FertiNitro), Pequiven, and the claimants concluded
International SÁRL v. an offtake agreement in which the claimants and
Bolivarian Republic of Pequiven agreed to purchase on a “take or pay”
Venezuela basis a guaranteed quantity of ammonia and urea
(ICSID Case No. ARB/11/19) produced by FertiNitro at a set discounted price for
their consumption or resale in the local and export
Date of the Award market for a 20-year term. The construction of the
October 30, 2017 plant was completed in December 2001, and other
than in certain periods of interruption, commercial
The Parties production at the plant continued until 2010, when
Koch Mineral SÁRL (KOMSA) and Koch Nitrogen the respondent nationalized the project.
International SÁRL (KNI) (the claimants), the
Bolivarian Republic of Venezuela (the respondent) In addition to seeking compensation for the
nationalization, the claimants submitted that the
Sector: respondent had adopted several prior measures
Hydrocarbons and petrochemicals that caused what they called “historical losses.”
First, the respondent imposed on FertiNitro a
Applicable Treaty series of new taxes that obliged it to allocate
Bilateral investment treaty between the Swiss funds to specific government social programs,
Confederation and the Republic of Venezuela such as through the Organic Law on Science,
Technology and Innovation. Second, in May 1999,
Members of the Tribunal the respondent enacted the Value-Added Tax
V. V. Veeder (president); Hon. Marc Lalonde PC, OC, (VAT) Law, which provided both for a zero tax rate
QC (the claimants’ appointee); and Prof. Zachary for exporters and the right to recover any VAT
Douglas, QC (the respondent’s appointee) paid on the purchase or import of goods and
services. Even though FertiNitro paid substantial
Background amounts of VAT to the respondent, from 2005
onward the respondent delayed the process
In 1998, the claimants, together with Pequiven of recovery of this VAT by FertiNitro. Third,
International Petrochemical Sales Limited in February 2007, the respondent enacted
(Pequiven), Snamprogettu Netherlands BV, and Decree 5,218 (the Urea Decree), which obliged
Polar Uno CA (collectively, the owners), entered into manufacturers, suppliers, and exporters of
a joint investors agreement (JIA) providing for the nitrogenous fertilizers to supply these on a priority
incorporation and capitalization of four Venezuelan basis to the national market under the price
companies for the purpose of owning, constructing, regulations established for their sale. Pursuant to
and operating two ammonia plants and two urea the Urea Decree, on May 2, 2007, the respondent
plants to be located in the Venezuelan state of issued the Urea Resolution, which mandated sales
Anzoátegui (the FertiNitro project). Also, pursuant prices that were substantially less than the costs
of production of urea incurred by FertiNitro.
In addition, the claimants submitted that the
respondent, acting through state-owned Pequiven,
interfered with the management and operation
of FertiNitro and ultimately assumed control over
it. This strategy culminated on October 11, 2010,
when the president of Venezuela announced the
2018 QUANTUM QUARTERLY 25
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nationalization of the company and issued Decree the claimants contended that the standard for
7713, of 2010. This decree provided for the state’s compensation for a lawful expropriation is the one
mandatory acquisition of the assets of FertiNitro, gave provided by Article 6 of the treaty, but the standard
Pequiven the role of carrying out the nationalization, of compensation for an unlawful expropriation is
and ordered Pequiven to occupy the facilities, without full reparation under customary international law.
any provision for compensation. These acts were Ultimately, the claimants and the respondent agreed
carried out without giving any prior notice to KOMSA. that irrespective of the standard used, the quantum
Finally, the claimants alleged the respondent also experts should apply the FMV standard using the
effectively expropriated KNI’s interest in the offtake discounted cash flow (DCF) approach.
agreement without compensation.
With respect to the expropriation of KNI’s interest
Liability in the offtake agreement, the respondent claimed
that the alleged damages were extraordinary,
The Tribunal found the respondent liable under Article unreasonable, unsupported, and outside the
6 of the treaty for the unlawful expropriation of scope of the treaty provisions for the standard of
KOMSA’s interest in FertiNitro, and a majority of the compensation.
Tribunal found that the respondent was also liable for
the unlawful expropriation of KNI’s indirect interest Regarding the parties’ points of disagreement in
in the offtake agreement. The Tribunal, however, respect of their quantum experts’ FMV valuation
dismissed the claimant’s historical losses claim parameters, the claimants identified the following
advanced under Articles 4 and 11 of the treaty, finding three: (1) future cash flow at FertiNitro, (2) the offtake
that the claimants failed to prove the regulations valuation, and (3) the relevant discount rate and
were made in bad faith, arbitrarily, irrationally, or with country-risk premium.
an improper intent to discriminate directly against
FertiNitro or indirectly against KOMSA. With respect to future cash flow at FertiNitro, the
claimants contended that the respondent’s expert
Quantum relied on the average production achieved at
FertiNitro from 2006 to 2008 but failed to use the
The claimants requested full compensation, same information for 2009 and 2010. In addition,
including the lost profits that resulted from the the claimants disputed the respondent’s expert’s
respondent’s expropriation of their investment in the calculation of future turnaround and maintenance
equity of FertiNitro and KNI’s interest in the offtake costs at FertiNitro, since the expert calculated these
agreement. The claimants submitted that as a matter costs on a simple average and also did not account
of customary international law, the full reparation for evidence of serious irregularities through the
standard provided by the Chorzów Factory case is the award of unauthorized contracts by Pequiven’s plant
appropriate standard of compensation. management, which caused these costs to be grossly
inflated. Finally, the claimants disagreed regarding
In contrast, the respondent claimed that the the length of the turnaround period, as their expert
claimants’ quantum claim was vastly overstated used three years, while the respondents used two
and that the claimants were entitled only to the fair and a half.
market value (FMV) of KOMSA’s interest in FertiNitro,
as provided in Article 6 of the treaty. The claimants Regarding the valuation of KNI’s interest in the offtake
countered that the standard provided by Article 6 was agreement, the claimants argued that the respondent’s
not applicable in cases in which the expropriation has expert (1) did not use the correct October 2010
been carried out unlawfully. Accordingly, and citing valuation date, (2) incorrectly used replacement value
the holdings in Hulley Enterprises Limited (Cyprus) v. rather than FMV, and (3) failed to reflect the situations
Russian Federation and ConocoPhillips v. Venezuela, of the Caribbean fertilizer market.
26 KING & SPALDING
Recent Damages Awards
The respondent answered that the valuation of KNI’s The respondent’s expert advanced a high market-
rights under the offtake agreement must exclude the risk rate, country-risk rate, lambda, and liquidity
volumes of production that KNI obtained between adjustments. Also, he cited the plant’s production
October 2010 and February 2012, because otherwise and costs, existing defects in construction, poor
there would be double compensation, considering maintenance in the early years of operation, excessive
that KNI continued purchasing fertilizer products unplanned shutdowns, high maintenance costs
from FertiNitro at offtake agreement prices during owing to the plant’s condition and history, issues with
those 16 months. the supply of gas and electricity to the plant, and
Venezuela’s general adverse economic conditions.
Finally, with respect to the discount rate and country- The respondent argued that Gold Reserve v. Inc.
risk premium, the claimants’ expert used an adjusted Venezuela should not be regarded as appropriate
historical premium that resulted in a total discount and that awards in cases like ExxonMobil, Mobil, and
rate of 10.1 percent, in contrast with the respondent’s Flughafen v. Venezuela establish the correct discount
expert’s rate of 20.4 percent. The claimants rate to use, ranging from 18.5 percent to 21 percent.
contended that their discount rate and country-
risk premium took into account all market and The Tribunal began by establishing the appropriate
country risks that potentially affected the claimants’ standard of compensation. As mentioned above,
investments in Venezuela (and eliminated the impact it noted that both parties agreed that FMV is
of illiquidity), while the respondent’s, in their view, the appropriate standard to be applied to both
used an exaggerated market–risk premium and an KOMSA’s and KNI’s claims for compensation. As
inflated generic country-risk premium that failed to such, it felt it unnecessary to answer the question
reflect FertiNitro’s specific exposure to Venezuelan of whether the standard is the same for a lawful
country risk. On this last point, the claimants made versus an unlawful expropriation. The Tribunal
reference to Gold Reserve v. Inc. Venezuela. then determined that the date for such valuation
should be October 10, 2010, immediately prior to
2018 QUANTUM QUARTERLY 27
Recent Damages Awards
the expropriation decree (for which the parties used depreciation, (5) adjusted exchange rates for
September 30, 2010, as a proxy). PDVSA’s and Pequiven’s debts, and (6) adjusted
inflation rates for income tax. The Tribunal accepted
Despite the agreement in principle on the standard, these adjustments and found that the Advantis
the experts reached significantly different results. report should be accepted as a whole, independent
In addition, the two experts used different factual professional valuation (since Advantis was a valuation
assumptions. The claimants’ expert calculated loss expert retained by Pequiven in the absence of an
of profits from 2010 onward by calculating Tampa/ agreement with the other shareholders on the joint
Nola resale prices less the offtake agreement price appointment of a valuator), taking into account
less transportation costs, while the respondent’s Pequiven would not have submitted to the other
expert excluded the period before February 28, shareholders the second Advantis report if it had
2012, calculating the price differential with the open not considered that it was proposing an FMV for
Caribbean market. Regarding the compensation FertiNitro. Further, both parties’ expert reports were
payable to KOMSA in respect of its expropriated ostensibly based in part on the Advantis report.
interest in FertiNitro, the Tribunal found that the
parties’ experts applied different discount rates and The Tribunal explained how the second scenario of
used different production and costs assumptions. As the Advantis report represented a very significant
to discount rates, the Tribunal found that no MOU or reduction from the claimants’ expert’s valuation
valuation was ever agreed upon or signed between but also represented a significant increase of the
KOMSA and Pequiven, and it then disregarded any respondent’s expert’s valuation. The Tribunal
negotiations or draft MOU valuations, historical therefore concluded that, pursuant to Article 6 of the
construction costs, higher production costs, and treaty, the FMV of KOMSA’s 25 percent expropriated
any other data from 2007 and 2008 for purposes of interest in FertiNitro as of October 10, 2010, was
arriving at an FMV in September and October 2010, USD140.25 million.
concluding that such data was not comparable and
was therefore irrelevant. Next, the Tribunal analyzed the quantum of
compensation payable to KNI in respect of its
In the end, the Tribunal found that neither of the expropriated interest in the offtake agreement.
expert witnesses succeeded in establishing a reliable The Tribunal found that the parties’ experts agreed
FMV of KOMSA’s interest in FertiNitro, so it chose that KNI’s loss was to be assessed by reference to
to rely instead on the report prepared in July 2011 the FMV of its interest in the offtake agreement
by Advantis (Pequiven’s consultant to advise on the on October 10, 2010 (or September 30, 2010).
amount of compensation payable to FertiNitro’s The disagreements, as described above, were in
foreign shareholders). Advantis had presented two connection with (1) the inclusion or exclusion of
scenarios in its report. Under the first scenario, it KNI’s purchases from the FertiNitro plant during the
gave a base value of FertiNitro of USD452 million, period from October 11, 2010, to February 28, 2012,
with KOMSA’s 25 percent interest valued at USD113 and (2) the parties’ different assumptions regarding
million. Under the second scenario, FertiNitro’s market prices, sales volumes from production
“adjusted value” (in accordance with six factors) was from the FertiNitro plant, discount rates, and the
USD561 million, and KOMSA’s 25 percent interest relevant cutoff date for ex post factors. These
was valued at USD140.25 million. differences resulted in the claimants’ expert estimate
of compensation of USD206.5 million, while the
The six adjustment factors considered by Advantis respondent’s was USD56.2 million.
were (1) adjusted prices for ammonia and urea for
2011-2016, (2) 10 percent as the discount for new The Tribunal found that the respondent’s expert
investments for 2011-2016, (3) tax credits reducing valuation was not supported by any factual witness
the effective tax rate for 2007-2010, (4) increased and decided to find against the respondent’s use of
28 KING & SPALDING
Recent Damages Awards
factors occurring after October 10, 2010, since they unless it can be proven that this type of damage
were irrelevant to assessing compensation as of the was actually suffered. In any case, the respondent
relevant date required under the treaty. Nonetheless, contended the compounding should be annual and
the Tribunal reduced KNI’s claim by USD21.7 million, not quarterly. Finally, in respect to the rate, the
since KNI’s purchases during the period from October respondent submitted that a risk-free rate, such as a
11, 2010, to February 28, 2012, operated to reduce six-month US Treasury bill, is appropriate, since the
KNI’s loss as of the relevant date. Finally, the Tribunal claimants’ proposal was inappropriate to calculate
found that KNI and the claimants’ expert were correct interest in an investor-state dispute, as there is no
in identifying the principal replacement supply at US commercial risk involved in a monetary award under
Gulf prices (Nola for urea and Tampa for ammonia) in this kind of arbitration under the ICSID Convention.
a liquid market rather than a mid-Caribbean market
at mid-Caribbean prices in a very limited market, The Tribunal decided to award compound interest,
and that there was no replacement supply available since the reference to “interest” included in Article
to KNI at prices comparable to those in the offtake 6 of the treaty includes compound interest, and
agreement. In respect to assumed freight costs, it confirmed its position by quoting Santa Elena v.
lambda, and discount rates, the Tribunal adopted the Costa Rica. Consequently, the Tribunal ordered pre-
claimants’ expert calculations and did not require any and post-award interest from October 11, 2010, at
reductions to KNI’s claim because of these factors the claimants’ proposed rate but compounded only
invoked by the respondent’s expert. semiannually rather than quarterly.
Finally, in respect to the Urea Decree and the Urea With respect to costs, each side requested the
Resolution, the Tribunal adopted the Advantis Tribunal to order the other to pay all the costs of the
report by assuming that these regulations would arbitration, including all the fees and expenses of
not have continued as of September 2010 ICSID and the Tribunal and all other legal costs and
and therefore did not require any reduction in expenses incurred by the requesting party.
KNI’s claim for this factor. In consequence, the
Tribunal (by a majority) assessed the FMV of KNI’s The Tribunal held that the ICSID Convention grants
expropriated interest in the offtake agreement as of it broad discretion to allocate all costs of the
October 10, 2010, to be USD184.8 million. arbitration, including attorneys’ fees and other costs
of the parties. The Tribunal then considered that
Interest and Costs in light of its holdings, the claimants’ incomplete
success should be reflected in a 25 percent reduction
The claimants argued that under Article 6 of the of the claimants’ recovery of their legal costs without
treaty, the payment of compensation includes separating the legal costs between KOMSA and
“interest at a normal commercial rate,” which KNI. Also, it decided that all the arbitration costs
includes an element of compounding as provided should be borne in full by the respondent with
by Venezuela Holdings v. Venezuela. Also, the no reduction. In sum, the Tribunal awarded the
claimants established that compound interest was claimants USD17,436,085.10 in legal costs and
payable as ICSID jurisprudence constante by making USD628,836.435 in arbitration costs, and it ordered
reference to Gemplus SA v. United Mexican States the same rate and compounding of post-award
and to scholarly commentaries. Finally, the claimants interest on these amounts to accrue from the date of
proposed a rate of LIBOR 3–month US dollar rate plus the award until the date of payment.
2 percent, compounded on a quarterly basis.
The respondent contended that only simple interest
is appropriate, since Article 6 of the treaty does not
explicitly allow the award of compound interest
2018 QUANTUM QUARTERLY 29
Recent Damages Awards
Eiser Infrastructure provided the legal framework for regulation of the
Limited and Energia Solar electrical sector, guaranteeing a reasonable return
Luxembourg S.A.R.I. v. to investors in the sector, but it left the meaning
Kingdom of Spain of the guarantee to be fleshed out by other legal
(ICSID Case No. ARB/13/36) instruments.
Date of the Award In August 2005, Spain approved its 2005-2010
May 4, 2017 Renewable Energy Plan, setting out the government’s
policy for attaining renewable energy targets set
The Parties by the EU. Earlier, in 1998, 2002, and 2004, it
Eiser Infrastructure Limited and Energia Solar adopted a series of decrees to regulate and facilitate
Luxembourg S.A.R.I. (the claimants), Kingdom of production from renewable sources and to provide
Spain (the respondent or Spain) incentives to producers. Royal Decree (RD) 436/2004
regulated “the methodology for the updating and
Sector systematization of the legal and economic regime
Energy (concentrated solar power) of the activity of electric power production under
the special regime.” RD 436/2004 did not succeed
Applicable Treaty in attracting the desired level of investment in
Energy Charter Treaty (ECT) 1994 electricity production from renewables. In February
2007, Spain’s National Energy Commission (CNE)
Members of the Tribunal issued a report on a proposed successor decree
Prof. John Crook (president), Dr. Stanimir A. that became RD 661/2007. A CNE report identified
Alexandrov (the claimants’ appointee), and Prof. elements that were required to promote production
Campbell McLachlan, QC (the respondent’s under the “so-called special regime” and highlighted
appointee) the importance of the proposed decree’s assurances
of stability to investors and their financiers. The
Background regulatory dossier prepared for the proposed decrees
also indicated that future changes in tariffs would not
The case grew out of a failed investment in the be applied to existing facilities. Spain adopted RD
concentrated solar power (CSP) sector in Spain. 661/2007 in May 2007.
The high capital costs of CSP had not been
economically competitive with traditional forms The RD 661/2007 regime had multiple elements that
of power generation utilizing fossil fuels. Spain guaranteed “priority of dispatch” ensuring that all
accordingly determined that to promote the production could be introduced into the grid subject
development of CSP, a regime of state subsidies was to the established tariff. Further, it allowed producers
required. It then adopted extensive measures aimed to annually elect between two different tariffs: a
at promoting CSP and other sources of renewable fixed tariff per unit of production and a premium for
energy in compliance with EU directives and in each unit on top of the market price. It also provided
pursuit of its own national interests. Law 54/1997 on for tariffs based solely on production for the entire
the electric power sector (the 1997 Electricity Law) operational life of the facility without setting limits
on total lifetime payments. Finally, it established caps
and floors for payments under the premium for each
unit on top of the market price and allowed for the
use of gas for up to 15 percent of total generation.
Following the adoption of RD 661/2007, the
claimants were introduced by a third party to
30 KING & SPALDING
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the possibility of investing in the ASTE solar preregistered for the RD 661/2007 regime under RDL
energy project in Spain, then in the initial stages 6/2009. The three registration documents indicated
of development. The initial assessment of the in similar terms that all three plants had been granted
economic potential of solar investments in Spain the RD 661/2007 regime.
prepared by the claimants’ deal team emphasized
the favorable characteristics of RD 661/2007, As of November 2009, more than two years after
contrasting it with the previous regulatory regime. the claimants acquired their interests in the ASTE
projects, Spain’s responsible authorities viewed all
In June 2007, the claimants’ investment committee three plants as subject to the RD 661/2007 regime.
approved initiation of a due diligence review of a The engineering, procurement, and construction
possible investment in the ASTE project. The principal contracts with Elecnor were signed on April 27,
risk identified was the risk of construction not being 2010, for ASTE and on March 3, 2010, for ASTEXOL.
completed within the 36-month window required The construction work began on the ASTE plants.
under RD 661/2007 to qualify for the special regime. A June 2010 Eiser asset review document refers to
Claimants ultimately approved an investment in the Spain’s budget and tariff deficits. As of that time,
ASTE project in August 2007, with the assessment the claimants had invested €124 million in the ASTE
based explicitly on the RD 661/2007 regime. The projects. As of December 16, 2010, the claimants’
project was designed in a manner that would allow half-year review reflected that their total “equity
subsequent addition of storage, resulting in higher investment” in the projects would total €124.3 million.
initial design and construction costs.
In three separate resolutions, dated February 2,
The claimants invested more than €126 million in 2011, and March 1, 2011, the directorate accepted
the course of the planning and work before the the plants’ waiver of their rights to supply power
plants began operation in March and May 2012. prior to August 1, 2012. A new government quickly
The operating companies had multiple interactions took measures aimed at reducing the tariff deficit,
with Spain’s regulatory and licensing authorities, beginning in January 2012 with the adoption of RDL
during which those authorities confirmed the plants’ 1/2012, suspending new registrations for the special
coverage by the RD 661/2007 regime. regime. In 2012, as the plants neared completion and
entry into service, the claimants crossed additional
Article 16 of RD 661/2007 required the claimants to licensing and regulatory thresholds, during which
acquire state licenses before concluding contracts to Spain’s authorities again affirmed their participation
access the electrical grid. On October 30, 2008, the in the special regime under RD 661/2007. On June 8,
ASTE projects received the required state licenses, 2012, the Ministry of Industry, Energy and Tourism
and on March 31, 2009, ASTE concluded a technical issued certifications that all three plants were
agreement with grid operator Red Eléctrica to access registered in the Administrative Register (RAIPRE) for
the electrical grid. Spain subsequently became plants in the special regime, identifying all three as
increasingly concerned by a large and growing “tariff having been classified in the special regime in Group
deficit,” i.e., the financial gap between the costs of b.1.2 under RD 661/2007.
subsidies paid to renewable energy producers and
revenues derived from energy sales to consumers. In December 2012, without prior notice to CSP
On April 30, 2009, Spain promulgated Royal Decree producers, Parliament adopted Law 15/2012, imposing
Law 6/2009 (RDL 6/2009), which introduced a a 7 percent tax (TVPEE) on the total value of all energy
preregistration process (RAIPRE) intended to limit fed into the national grid by electricity producers and
the number of projects potentially eligible for the RD eliminating premiums for electricity generated with
661/2007 regime. A document dated November 26, gas. Royal Decree Law 2/2013 of February 1, 2013
2009, prepared for Eiser’s investment committee, (RDL 2/2013) then eliminated the premium option
indicated that ASTE 1A and 1B had been successfully altogether and canceled the mechanism for updating
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the feed-in tariffs in accordance with the Consumer in reliance on the prior regime. The Tribunal did not
Price Index. On July 12, 2013, the enactment of Royal accept the claimants’ broader contention that RD
Decree Law 9/2013 (RDL 9/2013) amended the 1997 661/2007 gave them immutable economic rights that
Electricity Law and repealed RD 661/2007, thereby could not be altered by changes in the regulatory
eliminating the entire regime of fixed tariffs and regime. Nonetheless, the Tribunal held the ECT did
premiums. In December 2013, Spain adopted Law protect the claimants against the total change that
24/2013, which superseded the 1997 Electricity Law they had experienced. Spain was obliged to act in a
and completely eliminated the distinction between the way that respected the obligations it had assumed
ordinary and special regimes. under the ECT, including the obligation to accord FET
to investors.
The new system is calculated to provide a lower
pretax rate of return that Spain judges to be Taking account of the context and of the ECT’s
reasonable, on the basis of hypothetical assets and object and purpose, the Tribunal concluded that the
costs, without regard to specific existing plants’ FET obligation necessarily embraces an obligation
actual costs or efficiencies. The new measures were to provide fundamental stability in the essential
intended to, and did, accomplish the objective of characteristics of the legal regime relied upon by
significantly reducing the level of subsidies paid to investors in making long-term investments. The
CSP and other renewables generators. The operating claimants could not reasonably expect that there
companies’ financial reports for 2014 showed revenue would be no change whatsoever over decades, but
under the new regime substantially below the level they were entitled to expect that Spain would not
required to cover the plants’ actual financing and drastically and abruptly revise the regime on which
operating costs. The sharp fall of revenue from their investment depended, in a way that destroyed
the levels anticipated under the RD 661/2007 its value. Spain’s actions deprived the claimants of
regime forced the operating companies into debt essentially all the value of their investment. In doing
rescheduling negotiations with their external lenders. so, Spain violated its obligation to accord FET to the
claimants’ investment.
Jurisdiction and Liability
Quantum
Spain raised a series of jurisdictional objections,
all of which the Tribunal rejected. Specifically, it The ECT does not set out a standard of compensation
rejected Spain’s arguments that (1) the ECT does for breaches of the FET obligation. The claimants
not apply to intra-EU disputes; (2) the claimants had sought restitution of the legal and regulatory regime
not made “investments” in the objective sense of risk under which the investments were made or, in the
and return; (3) shareholder claims were inadmissible alternative, damages. In terms of damages, the
under the ECT; (4) the claimants were impermissibly claimants contended that the appropriate measure
challenging tax measures excluded from the ECT; (5) to assess full reparation was the reduction of the fair
the claimants had failed first to submit the dispute market value (FMV) of their investment as measured
to the competent tax authorities prior to filing for by the present value of past and future cash flow
arbitration; and (6) the claimants had failed to comply allegedly lost to them on account of the claimed
with the ECT’s three-month cooling-off period. violations of the ECT.
On the merits, the Tribunal found that Spain’s The Tribunal did not regard restitution in the form of
obligation under the ECT to afford investors fair restoring the RD 661/2007 regulatory regime as an
and equitable treatment (FET) protects investors appropriate remedy, given Spain’s sovereign right to
from a fundamental change to the regulatory take appropriate regulatory measures to meet public
regime in a manner that does not take account of needs. Accordingly, it chose to award damages.
the circumstances of existing investments made
32 KING & SPALDING
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The claimants claimed the following losses, totaling the Tribunal’s conclusion regarding the compensation
€209 million: (i) €13 million for lost cash flow through due to the claimants.
June 2014 and (ii) €196 million in losses projected
over 40 years. Accordingly, the majority of the losses The claimants also claimed €88 million as a tax
claimed, being €196 million, reflected the value of “gross up” on the theory that the damages award
future cash flow. should neutralize the effect of any taxes assessed
against it. The Tribunal determined, however, that
As an alternative damages claim in response to it had received no evidence to show whether or in
Spain’s contention that they were entitled to only a what amount any tax might actually be due on a
reasonable return on their investment, the claimants prospective award. It therefore rejected this claim.
sought €256 million on the basis of an after-tax
estimated return of 9.5 percent on the basis of the Interest and Costs
projected costs of the “marginal plant” of the system.
The ECT does not directly address the question of
The Tribunal agreed with the claimants’ first interest for breaches of Article 10(1). The claimants
approach for determining its damage, i.e., assessing requested pre-award interest from the June 2014
the reduction in the FMV of their investment by valuation to the date of the award at the rate of 2.07
calculating the present value of the cash flow said to percent, compounded monthly, as their benchmark.
have been lost on account of the disputed measures. The claimants also requested that the Tribunal
order post-award interest at a rate higher than 2.07
In relation to the claim for historic losses in the percent, also compounded monthly. The respondent,
amount of €13 million, the Tribunal held that this however, contended that the pre-award rate should
portion of the claim was not covered by the Tribunal’s be a rate equal to the two-year yield on Spanish
decision on liability. bonds, which to June 20, 2014, was 0.60 percent.
With respect to future losses, a key issue included The Tribunal held that interest would be awarded
the damages period, which turned on the useful life from June 20, 2014, to the date of the award at the
of the plants. The claimants’ experts indicated that rate of 2.07 percent, compounded monthly. Further,
projecting a 40-year operational life, rather than 25 the Tribunal awarded interest from the date of the
years as Spain posited, significantly increased the award to the date of the payment at the rate of 2.50
present value of the plants’ projected future revenues percent, compounded monthly.
—by €64 million. Given the totality of the evidence,
including the absence of contemporaneous design In terms of costs, the Tribunal determined that it was
documentation or other evidence showing that the most appropriate for each party to bear its own. This
plants were actually designed to have a 40-year was due to the fact that the case involved a number
service life, the Tribunal elected to base damages of challenging procedural and legal issues, and while
on the assumption of a 25-year operational life. This the claimants had in large measure prevailed on
reduced the claimants’ claim from €196 million to jurisdiction and established a breach of the ECT’s FET
€128 million. standard, the Tribunal did not accept all elements of
their claims.
As support for this figure, the Tribunal noted that
there was no serious dispute that the claimants had Accordingly, the Tribunal concluded that each party
invested on the order of €126 million. The Tribunal’s should bear its own legal and other expenses, its
assessment of the amount of compensation due, respective equal share of the fees and expenses
€128 million, was consistent with the amount the of the members of the Tribunal, and the charges
claimants invested. The Tribunal stressed that this for the use of ICSID’s facilities, amounting to
provided a “reality check” on the reasonableness of USD956,159.58.
2018 QUANTUM QUARTERLY 33
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Murphy Exploration & receive a share of the oil production calculated
Production Company— on the basis of volume of production and without
International v. Republic regard to oil prices.
of Ecuador
Following an increase in oil prices beginning in the
Date of the Award first half of the 2000s, the respondent enacted Law
February 10, 2017 42, entitling it to participate in the consortium’s
profits when the market value of oil exceeded certain
The Parties reference prices. The level of participation was first
Murphy Exploration & Production Company— set at a maximum of 50 percent and was then revised
International (the claimant),1 Republic of Ecuador some months later to 99 percent. In the partial final
(the respondent) award issued on May 6, 2016, the Tribunal found that
the respondent had violated the fair and equitable
Sector treatment (FET) provision of the BIT, based on its
Oil and gas unlawful imposition of the 99 percent participation,
but found no violation for its implementation at
50 percent. The Tribunal awarded the claimant
USD19,971,309.00 for damages incurred for payment
of the levy at 99 percent plus pre-award interest in
the amount of USD7,136,121.00.
Applicable Treaty The Tribunal also ordered that the respondent make
Treaty Between the United States of America and the an “entitlement” payment to the claimant. This
Republic of Ecuador Concerning the Encouragement payment represented the difference between the
and Reciprocal Protection of Investment, signed on fair market value (FMV) of the claimant’s subsidiary
August 27, 1993 (the U.S.-Ecuador BIT or BIT) company, Murphy Ecuador, assuming that the 99
percent levy did not occur,2 but adjusted for the
Members of the Tribunal lawful 50 percent participation under Law 42 (the
Prof. Bernard Hanotiau (presiding arbitrator), Prof. Kaj adjusted sum), and the purchase price of USD78.9
Hobér (the claimant’s appointee), Yves Derains (the million that Repsol YPF Ecuador S.A. (Repsol) paid for
respondent’s appointee) the claimant’s stake in Murphy Ecuador (Repsol Sale
Price or the entitlement).
Background
The Tribunal explained the need for the adjustment in
Claimant Murphy Exploration and Production the partial final award.
Company—International is an oil and gas company
incorporated in the state of Delaware. The Claimant should be compensated for the fair market
claimant’s wholly owned subsidiary, Murphy value of Murphy Ecuador assuming that the wrongful
Ecuador Oil Limited (Murphy Ecuador), was part of act—i.e., Law 42 at 99 percent—did not occur,
a consortium of foreign investors that entered into meaning that Law 42 at 50 percent would still have
a participation contract in 1996 to explore Block been in place at the valuation date of March 2009.
16 (an oil block located in the Amazon region of For Claimant to be restored to a ‘but-for’ scenario, the
Ecuador). According to the claimant, pursuant to fair market value figure of USD87.8 million must be
the participation contract, the consortium would adjusted to account for the fact that Murphy Ecuador
34 KING & SPALDING
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would have continued paying participation under Law In its partial final award, the Tribunal concluded
42 at 50 percent if Law 42 at 99 percent had never that, as it had found that Ecuador breached the
been introduced. FET clause of the BIT, it was “not necessary to
determine Murphy’s claims that Ecuador breached
Because the Tribunal was not able to calculate the other provisions.”4 In its post-award submission, the
adjusted sum at the time of the partial final award, it claimant requested that the Tribunal “reconsider its
ordered the parties to attempt to agree within three position and ... determine its non-FET Treaty claims
months from the date of the partial final award on in relation to Law 42 at 50 percent—especially its
the adjustment needed to arrive at the adjusted sum claim under the Umbrella Clause—and ... declare
and the entitlement. The Tribunal also directed the that Ecuador violated the Treaty by enacting and
parties to attempt to agree on the pre- and post-award enforcing Law 42 at both 99 percent and 50
interest calculations. If the parties could not agree percent.”5 According to the claimant, the Tribunal’s
within the designated time frame, the Tribunal would conclusion that “a finding to the effect that Ecuador
invite submissions and make the necessary findings. breached one of the non-FET Treaty provisions would
have no impact on damages remain[ed] valid in
After the partial final award, the parties were relation to its claims regarding Law 42 at 99 percent;
not able to reach agreement on the calculations however, that conclusion does not hold with respect
requested by the Tribunal and therefore requested to Law 42 at 50 percent.”6 The claimant argued
permission to file post-award submissions. On July 1, that a breach of a non-FET provision with respect
2016, the Tribunal accepted the parties’ request for to Law 42 at 50 percent would have a “substantial
post-award submissions. impact” on the “calculation of the Adjusted Sum and
Entitlement.”7 Finally, according to the claimant, the
Quantum Tribunal retained jurisdiction to decide its non-FET
claims until the final award “because it chose not to
In the final award, the Tribunal determined that the decide those claims in the First Partial Award.”8
differences in the parties’ calculations of the adjusted
sum and the entitlement turned on (1) whether the The claimant argued that if the Tribunal were to
Tribunal should reconsider its position with respect to uphold one of the non-FET claims, there would be no
the claimant’s non-FET treaty claims in relation to Law need for the Tribunal to determine the adjusted sum
42 at 50 percent, (2) whether the value of the adjusted to account for the impact of Law 42 at 50 percent
sum and the entitlement should account for the as called for in the partial final award. According to
extension contract, and (3) whether the sale of Murphy the claimant, such a finding would also entitle it to
Ecuador had a negative or a positive effect on damages. “additional damages” to compensate it for payments
After considering the parties’ arguments with respect made under Law 42 at 50 percent.9
to these issues, the Tribunal determined in its final
award that the value of the entitlement payment was Meanwhile, in the respondent’s view, any damages
zero and the claimant was not entitled to additional calculation incorporating an assumption that Law 42
compensation. at 50 percent was wrongful would be “impermissible”
in light of the Tribunal’s findings on liability in its
1. Whether the Tribunal should reconsider its partial final award. The respondent argued that the
position with respect to the claimant’s non-FET Tribunal had already decided the claimant’s non-FET
treaty claims in relation to Law 42 at 50 percent treaty claims in relation to Law 42 at 50 percent. The
respondent also pointed out the Tribunal’s finding
2018 QUANTUM QUARTERLY 35
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“to the effect that, because the Claimant invoked the In the partial final award, the Tribunal adopted
violation of multiple Treaty provisions as alternative Ecuador’s “future free cash flows of Murphy Ecuador
grounds for finding the Respondent liable under the between March 2009 and January 2012” for the
BIT, ‘once the Tribunal has found that one of those purpose of calculating the FMV of Murphy Ecuador as
alternatives is well-founded, deciding on the other of March 12, 2009.16 According to the claimant, this
grounds is no longer part of the Tribunal’s mission.”10 calculation should be revised to extend beyond January
The respondent also noted that the Tribunal had 2012 (the end of the original term of the participation
already determined that Law 42 at 50 percent “was a contract) to 2018 in light of the extension contract.17
reasonable measure” in light of the circumstances and
had already expressly rejected some of the claimant’s In the claimant’s view, the extension contract
arguments relating to the umbrella clause. Finally, conferred “‘valuable extension rights on the
the respondent argued that the claimant could have Consortium, which Repsol realized at the time of the
pursued a request for an additional award under sale and undoubtedly factored into’ the sale price it
the UNCITRAL Rules if it seriously believed that the paid for its rights under the Extension Contract.”18
Tribunal failed to decide any of its claims. Therefore, the claimant argued that “the Adjusted Sum
must also reflect the value of the contract extension
The Tribunal agreed with the respondent and rejected that is included in the Repsol Sale Price but not
the claimant’s claim, finding that it would be an included in the fair market value of Murphy Ecuador as
“unnecessary and duplicative reexamination of the calculated by Ecuador’s quantum experts and adopted
merits.” The Tribunal reasoned that “the damages by the Tribunal.”19
alleged by the Claimant under its claim for breach
of the FET standard and under the other heads of The respondent rejected the claimant’s position on three
claim are the same. As such, in finding a breach of grounds. First, the respondent claimed that it exceeded
the FET standard under Article II(3)(a), the Tribunal the parameters set out in the partial final award. The
effectively addressed all of the Claimant’s claims respondent pointed out that in the partial final award,
under the Treaty.”13 The Tribunal also stated that the Tribunal called for only an adjustment to Murphy
“Respondent correctly recall[ed] the Tribunal’s Ecuador’s FMV to account for the claimant’s ongoing
observation in the Partial Final Award that ‘since obligation to make Law 42 payments at 50 percent.
Claimant has relied on the violation of several of Second, the respondent argued that the claimant’s
the Treaty’s provisions as alternative grounds for approach to accounting for the extension contract
its claim for compensation, once the Tribunal has in calculating its entitlement “lack[ed] any economic
found that one of those alternative grounds is well- justification.”20 According to the respondent, “Navigant
founded, deciding on the other grounds is no longer provided no explanation as to why ‘the compensatory
part of the Tribunal’s mission.’”14 benefits from the Extension Contract’ received by the
Claimant, by virtue of the USD78.9 million it received
2. Whether the value of the adjusted sum and the as payment for Murphy Ecuador, should be eliminated
entitlement should account for the extension from the actual compensation.”21 In the respondent’s
contract view, by adding the “so-called Extension Value” to the
adjusted sum before deducting the Repsol sale price,
The extension contract is the new contractual the impact of the extension value on the calculation
framework negotiated with Repsol as part of the of the entitlement would be “neutralized.”22 Last,
claimant’s sale of Murphy Ecuador to extend the term the respondent asserted that Navigant’s approach
of the participation contract so that it ended not in contradicted its previous calculation.
2012 but in 2018.15
36 KING & SPALDING
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The Tribunal agreed with the respondent and rejected “set-off” theory wrongly sought to offset a Repsol sale
the claimant’s claim.23 The Tribunal found that “any price that included substantial value for the extension
further adjustment to the fair market value of Murphy against an adjusted sum that included none.31 Third,
Ecuador of USD87.8 million (i.e., an adjustment other the claimant pointed out that the partial final award
than to take into account the Claimant’s ongoing itself does not contemplate that the entitlement
obligation to make Law 42 at 50 percent payments), “could work to the detriment of the award of
would be inconsistent with—and amount to a historical Law 42 payments to Murphy.”32 In the
reconsideration of—the Partial Final Award.”24 claimant’s view, the entitlement implied “something
to be awarded as an additional sum,” and “[h]ad the
3. Whether the sale of Murphy Ecuador had a Tribunal foreseen the possibility that the Adjusted
negative or a positive effect on damages Sum could be less than the Repsol Sale Price—i.e.,
yielding a negative number—the Claimant considers
The respondent argued that the difference that it would have suggested as much in the Partial
between the adjusted sum and the Repsol sale Final Award.”33 Finally, the claimant submitted that
price was negative, and therefore the claimant’s the possibility of an offset was never raised at an
damages awarded under the partial final award for earlier stage of the proceedings and was therefore
historical Law 42 payments at 99 percent should procedurally inadmissible.34
be “offset” in order to avoid overcompensation.25
The respondent noted that it considered that the The Tribunal agreed with the claimant’s first three
parties had agreed that the adjusted sum amounted arguments.35 Specifically, the Tribunal agreed that
to USD57.6 million.26 Given that the Repsol sale the “Respondent’s set-off theory wrongly s[ought]
price was USD78.9 million, in the respondent’s view, to establish a ‘link between the historical Law 42
the claimant’s entitlement had a negative value of payments and the Entitlement’ in order to justify
approximately USD21.3 million.27 According to the an offset.”36 The Tribunal further agreed with the
respondent, “Claimant was paid USD21.3 million claimant that the categories of damages were
more for Murphy Ecuador than its FMV under Law “separate and distinct” and the Repsol sale price
42 at 50 percent.”28 Finally, the respondent argued should mitigate “post-sale forward-looking damages,
that, as a result of the “full mitigation,” no pre- or and not pre-sale historical Law 42 payments.”37
post-award interest was owed to the claimant. It
also requested that the Tribunal order the claimant to “T he Adjusted Sum must also
pay the respondent a portion of its costs of arbitration reflect the value of the contract
and costs of legal representation or order that each extension that is included in
party bear its own costs. the Repsol Sale Price but not
included in the fair market
The claimant rejected the respondent’s proposition value of Murphy Ecuador
that it is liable for having sold its stake in Murphy as calculated by Ecuador’s
Ecuador for a higher price than the respondent’s quantum experts and adopted
estimation of the company’s FMV at the time of the by the Tribunal.”
sale.29 First, according to the claimant, “[T]here is
‘no link’ between the historical Law 42 payments
and the Entitlement that might otherwise justify an
‘offset’ from one category to the other; rather, the two
categories of damages are separate and distinct.”30
Second, the claimant reiterated that the respondent’s
2018 QUANTUM QUARTERLY 37
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The Tribunal therefore rejected the respondent’s 1 King & Spalding represented the 21 F inal Award, ¶ 39 citing the
submission that the negative difference between claimants. respondent’s post-award
the adjusted sum and the Repsol sale price can be submission, ¶ 91, referring to the
“offset” from the claimant’s damages for historical 2 The Tribunal determined that the Third Fair Links Expert Report,
Law 42 payments.38 FMV of Murphy Ecuador as of March ¶ 100.
12, 2009 (when the claimant sold
The Tribunal noted that “if it is assumed that only Murphy Ecuador to Repsol), in the 22 Final Award, ¶ 37.
Law 42 at 99 percent is a breach of the Treaty and absence of Law 42 was USD87.8
no adjustment is to be made to the fair market value million. See Partial Final Award, ¶ 23 Final Award, ¶ 43.
of Murphy Ecuador for the Extension Contract, the 502.
Adjusted Sum—taking into account the Claimant’s 24 Final Award, ¶ 43.
ongoing obligation to make Law 42 at 50 percent 3 Partial Final Award, ¶ 503.
payments—is USD57.1 million. … The difference 25 Final Award, ¶¶ 44-45; 54.
between the Adjusted Sum (USD57.1 million) and 4 F inal Award, ¶ 22 citing Partial Final
the Repsol Sale Price (USD78.9 million) is negative. Award, ¶ 294. 26 Final Award, ¶ 46.
According to the Claimant, its Entitlement is
therefore zero.”39 The Tribunal agreed with the 5 F inal Award, ¶ 22 citing Claimant’s 27 S ee Final Award, ¶ 47 citing
claimant. It also rejected the respondent’s request Post-Award Submission, ¶¶ 11, 18. the respondent’s post-award
for a “further finding by the Tribunal in its final fixing of submission, ¶ 16.
the costs of arbitration.”40 6 Final Award, ¶ 23.
28 F inal Award, ¶ 47 citing the
Costs 7 Final Award, ¶ 23 citing the claimant’s respondent’s post-award
post-award submission ¶ 9. submission, ¶ 16.
The Tribunal noted that it already made awards in the
partial final award for costs incurred up to the date 8 Final Award, ¶ 23 citing the 29 Final Award, ¶ 62.
of its issuance; therefore, the costs decision in the claimant’s post-award submission ¶
final award pertained to only those costs incurred 10. 30 Final Award, ¶ 62 citing
since the time of the partial final award.41 Further, the the claimant’s post-award
decision required an evaluation of who the successful 9 Final Award, ¶ 25 citing the submission, ¶ 26.
party was in respect to the additional phase of the claimant’s post-award submission ¶
proceedings.42 The Tribunal determined that there 19. 31 F inal Award, ¶ 63 citing
was no “clearly successful Party in respect of this the claimant’s post-award
phase of the proceedings” and therefore “the costs 10 Final Award, ¶ 27 citing the submission, ¶ 29.
of arbitration shall be borne equally by the Parties.”43 respondent’s post-award submission,
The Tribunal found “no reason to apportion the costs ¶ 84 referring to partial final award, 32 F inal Award, ¶ 64 citing
of legal representation and assistance between ¶ 294. the claimant’s post-award
the Parties” and decided “each Party shall bear submission, ¶ 27.
its own legal costs in respect of this phase of the 11 Final Award, ¶ 27 citing the
proceedings.”44 respondent’s post-award submission, 33 F inal Award, ¶ 65 citing
¶¶ 6, 86. the claimant’s post-award
submission, ¶ 27.
12 Final Award, ¶ 32.
34 Final Award, ¶ 66 citing
13 Final Award, ¶ 31. the claimant’s post-award
submission, ¶ 28.
14 F inal Award, ¶ 31 citing partial final
award, ¶ 294. 35 See Final Award, ¶ 69.
15 Final Award, ¶ 33. 36 Final Award, ¶ 69.
16 Final Award, ¶ 33 citing partial final 37 Final Award, ¶ 69.
award, ¶¶ 501-502.
38 Final Award, ¶ 70.
17 Final Award, ¶ 33.
39 Final Award, ¶¶ 67-68;
18 Final Award, ¶ 34 citing the the claimant’s post-award
claimant’s post-award submission, submission, ¶ 23.
¶¶ 20, 21.
40 Final Award, ¶ 70.
19 F inal Award, ¶ 34 citing the
claimant’s post-award submission, 41 Final Award, ¶ 77.
¶ 21.
42 Final Award, ¶ 77.
20 F inal Award, ¶ 39 citing the
respondent’s post-award submission, 43 Final Award, ¶ 79.
¶ 91.
44 Final Award, ¶ 80.
38 KING & SPALDING
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Urbaser S.A. and Aires S.A. (AGBA), a company established by
Consorcio de Aguas Bilbao foreign investors and shareholders that included the
Bizkaia, Bilbao Biskaia Ur claimants.
Partzuergoa v.
Argentine Republic The concession ran into difficulties in 2001, when
(ICSID Case No. ARB/07/26) the economic crisis hit the country. In January 2002,
the Argentine Republic took emergency measures,
Date of the Award including the conversion of the tariffs under the
December 8, 2016 concession contract from US dollars to pesos,
using an exchange rate of 1:1 during a time when
the peso had depreciated by more than two-thirds.
The claimants also complained of the respondent’s
alleged failure to reasonably renegotiate the
concession in the light of measures taken in the face
of the state’s economic crisis. The concession was
terminated in 2006, and AGBA became insolvent.
The Parties On July 20, 2007, Urbaser and CABB commenced
Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, an arbitration, arguing that the Argentine
Bilbao Biskaia Ur Partzuergoa (Urbaser and CABB or Republic’s actions breached various provisions of
the claimants), Argentine Republic (Argentina or the the BIT, including the prohibition on unjustified or
respondent) discriminatory measures, the obligation to afford fair
and equitable treatment (FET), and the provisions
Sector against illegal and discriminatory expropriations.
Utilities (water and sewerage)
The respondent denied all of the claims on the basis
Applicable Treaty that AGBA had failed, even before the emergency
Bilateral investment treaty between the Argentine measures were taken, to meet its obligations
Republic and the Kingdom of Spain, dated October 3, concerning the investment and provision of services
1991 (the BIT or the treaty) pursuant to the concession contract.
Members of the Tribunal The respondent also objected to the Tribunal’s
Prof. Andreas Bucher (president), Prof. Pedro J. jurisdiction on the grounds that (1) the BIT required
Martinez-Fraga (the claimants’ appointee), Prof. any such dispute to be first submitted to the
Campbell McLachlan, QC (the respondent’s Argentine courts; (2) neither Urbaser nor CABB had
appointee) the right to enforce actions under the concession
contract, which rightfully and solely belonged to
Background AGBA; and (3) both Urbaser and CABB had engaged
in share acquisition/transfers in AGBA that were
The dispute related to a concession for water and contrary to Argentine law.
sewerage services to be provided in Greater Buenos
Aires Province. In early 2000, by way of a concession The Tribunal rejected the jurisdictional objections
contract (the concession contract), provision of the and assumed jurisdiction by way of a decision on
services was granted to Aguas Del Gran Buenos jurisdiction rendered on December 19, 2012.
2018 QUANTUM QUARTERLY 39
Recent Damages Awards
The respondent also brought a counterclaim (the agency refusing to correct real estate records errors,
counterclaim) on the basis of the claimants’ alleged depriving AGBA of its right to charge previously
failure to provide the necessary investment in the defined tariffs; delays in construction of the UNIREC
concession, thereby violating their commitments and plants, which kept AGBA from expanding the service
obligations under international law with respect to as planned and receiving tariffs from such expansion
the human right to water. The claimants claimed that work; denial of AGBA’s right to charge the connection
the Tribunal did not have jurisdiction to determine and work fees; and burdening AGBA with the costs of
the counterclaim, it was inadmissible, and it should delinquent collections. The claimants contended that
also fail on the merits. In its award, the Tribunal found the respondent had breached the most fundamental
the Argentine Republic had breached Article IV(1) premises underlying the concession.
of the BIT in not affording FET to the claimants. The
Tribunal dismissed all of the claimants’ other claims for The claimants sought compensatory damages of
breaches of the BIT. With respect to the counterclaim, USD152,798,862 to Urbaser and USD163,619,810 to
the Tribunal found it did have jurisdiction to determine CABB, along with interest and costs. The respondent
whether there had been a violation of the human right denied all of the claims on the basis that it had not
to water and sanitation on the part of the claimants committed the breaches as alleged, as found by the
but dismissed the claim on its merits. Tribunal in Impregilo S.p.A. v. Argentine Republic,
ICSID/ARB/07/17 (a case brought by a different
Quantum shareholder in the same underlying investment). The
respondent also noted that the Tribunal in Impregilo
Claimants’ Claim had observed “AGBA, during the first five-year period
failed significantly to carry out its undertakings in
The claimants asserted that they had suffered regard to investments and the expansion of water
important breaches of the regulatory framework and sewage services.”1
at an early stage of the concession, which affected
AGBA’s capacity to receive a return from providing The Tribunal concluded that all of the claimants’
the services. Such breaches included the regulatory claims were based on purely contractual disputes.
40 KING & SPALDING
Recent Damages Awards
Further, no or insignificant expansion work, including Interest and Costs
required extensions and layouts of pipes, was
undertaken by AGBA during the critical period Jurisdiction Phase
between 2000 and 2004 as required. The Tribunal
further found that the emergency measures taken The Tribunal adopted the “loser pays” principle that the
in January 2002 were the only ones available to losing party should make a significant contribution to
the respondent at the time, and the respondent’s the payment of the arbitration fees and the costs and
obligation to ensure its people had access to water expenses incurred by the winning party.
could be reasonably ensured only by also failing to
comply with the respondent’s obligations to AGBA. Finding that all of the respondent’s objections to
the jurisdiction failed, the Tribunal ordered the
In light of the above, while the respondent had respondent to pay all costs incurred by ICSID in
breached Article IV(1) of the BIT in not affording FET relation to the proceeding for the jurisdictional phase,
to the claimants in relation to the renegotiation of including the fees and expenses of the Tribunal. The
the concession contract in the period between 2003 Tribunal also ordered the respondent to pay the
and 2005, the respondent had not breached the claimants USD400,000 as a contribution to their
other articles of the BIT, and the claimants were not legal and other costs in this phase, together with
entitled to the other declarations or to any damages. post-award interest of 3 percent. This payment was
discounted from the approximately USD820,000
Counterclaim incurred on account of the Tribunal’s rejection of the
claimants’ objections to jurisdiction and admissibility
The respondent’s counterclaim was based on the in respect of the counterclaim and the claimants’
claimants’ alleged failure to provide the necessary failed attempt to disqualify arbitrator McLachlan.
investment in the concession, thereby violating
commitments and obligations under international law Merits Phase
based on the human right to water. The respondent
argued that the underinvestment was not only a Again, the Tribunal adopted the loser pays principle
breach of the concession contract but also a violation but found that neither party was ultimately
of the basic human right to water affecting thousands successful. While the claimants did succeed in their
of persons, most of whom lived in extreme poverty. claim for a declaration on the respondent’s breach
of the FET standard, they did not obtain similar
The claimants denied that they had breached any of declarations for the other alleged breaches of the BIT
their investment obligations. Had any breach taken and failed entirely with their damage claims.
place, it was by the concessionaire, AGBA, since
Urbaser and CABB owed no obligation whatsoever to The respondent, while raising serious concerns
the Argentine Republic. about the human rights implications of AGBA’s and
the claimants’ failure to provide investments and
The Tribunal found no evidence of a positive support expansion works, nonetheless failed in its
obligation of the claimants corresponding to the counterclaim.
obligation of states to provide all people living under
their jurisdiction with safe and clean drinking water Accordingly, the Tribunal ordered each party to bear
and sewerage services. Accordingly, the counterclaim its own legal fees and costs and to bear in equal parts
was dismissed. the costs of ICSID, including the Tribunal’s fees and
expenses incurred during the merits phase.
2018 QUANTUM QUARTERLY 41
Recent Damages Awards
UAB E Energija (Lithuania) the lease and in effect seized all of LE’s assets and
v. Republic of Latvia investments without providing any compensation.
(ICSID Case No. ARB/12/33)
Jurisdiction and Liability
Latvia sought to argue that the Tribunal lacked
jurisdiction on two main grounds:
Date of the Award • F irst, that UAB’s authorization of the request
December 22, 2017 for arbitration was invalid because it (a) ignored
a mediation precondition (albeit the six-month
The Parties cooling-off period in the BIT was observed) and
UAB E Energia (Lithuania) (the claimant), Republic of (b) lacked approval from the European Bank for
Latvia (the respondent) Reconstruction and Development (the EBRD),
a main funder of the project.
Sector
Public services • Second, that the request for arbitration was time-
barred because it was issued in September 2012,
Applicable Treaty nearly four years after UAB’s original notice of
Bilateral investment treaty between Lithuania and dispute in August 2008.
Latvia
The Tribunal dismissed both of these objections,
Members of the Tribunal finding that it had jurisdiction to hear the dispute
Dr. Paolo Michele Patocchi (president), Samuel under Article 7 of the Lithuania-Latvia Bilateral
Wordsworth, QC (the claimant’s appointee), and Prof. Investment Treaty of 1996 (the BIT) and Article 25 of
Dr. August Reinisch (appointed by ICSID for Latvia) the ICSID Convention.
Background Latvia also sought to terminate or stay the arbitration
on the basis that proceedings were pending in the
The dispute centered on Latvia’s termination of a Latvian courts. The Tribunal rejected this request
30-year lease agreement entered into between UAB on the basis that (a) the parties in both sets of
and local energy regulator AS Rēzeknes Siltumtiki proceedings were different and (b) the subject
(the regulator), a company wholly owned by the matters of the two proceedings were not the same;
Rēzekne municipality (the municipality). Under the specifically, the local courts were dealing with alleged
lease agreement, UAB was to operate a district contractual breaches rather than alleged breaches
heating system for the city of Rēzeknes (the city). For of BIT obligations, even though there was an obvious
this purpose, UAB established a separate local entity, factual overlap.
Latgales Enerģija (LE). In September 2007, however,
the regulator brought a claim against LE in the local Following an extensive examination of the underlying
Latvian courts seeking payment of certain amounts facts and the conduct of the regulator and the
and obtaining an attachment of assets. Shortly municipality toward LE, the Tribunal held that Latvia
thereafter, the municipality declared an “energy had—in various but not all respects—breached the fair
crisis” and instead appointed state-owned Rēzekne and equitable treatment (FET) standard under Article
Enerģija (RE) to provide thermal energy to the city. 3(1) of the BIT but that such conduct amounted to
In 2008, following local elections, newly elected neither an expropriation of UAB’s investment under
politicians, who opposed privatization, terminated Article 4(1) of the BIT nor measures tantamount to
expropriation. In simple terms, this finding was reached
on the basis that ultimately the revocation of UAB’s
42 KING & SPALDING
Recent Damages Awards
licenses was lawful under Latvian law and justified, premium) in her second expert report and then again
even if certain elements of Latvia’s surrounding to €7,800,000 (when using a 20 percent control
conduct were unfair and inequitable. Accordingly, premium) and €7,440,000 (when using a 10 percent
the Tribunal held that in principle UAB ought to be control premium) in her third report.
compensated, but there is no doubt that the quantum
awarded reflects the fact that the Tribunal upheld only Peer contended that the DCF was based on inflated
a proportion of the breaches alleged. cash flows, because the 30-year lease agreement
was capable of generating no cash flow. Thus,
Quantum Latvia’s position was that the claimant had failed to
demonstrate that the business was profitable at all.
The BIT is silent as to damages, save that it provides Further, Latvia alleged that UAB had failed to prove
that “lawful expropriation” requires compensation. that other alleged breaches of the BIT caused any loss
UAB based its damages claim on the principle that at all and asserted that the compensation claimed was
an “unlawful expropriation” and other breaches riddled with double-counting and a complete lack of
of the BIT require the same compensation as a an attempt on the part of UAB to mitigate. Latvia also
“lawful expropriation,” consistent with principles of argued that the parties had settled their differences
customary international law (i.e., Factory at Chorzow by way of a settlement agreement dated October 25,
case and Articles 31 and 36 of the 2001 ILC Articles 2007 (the settlement agreement), such that UAB was
on States Responsibility)—that is, “full reparation” for foreclosed from compensation in the arbitration.
the harm caused by Latvia’s wrongful acts.
The Tribunal accepted that although it had not found
UAB relied on three expert reports prepared by there to be an expropriation, compensation was
Dr. Serena Hesmondhalgh of The Brattle Group, nevertheless payable in respect of Latvia’s breaches
while Latvia relied on two expert reports prepared of Article 3(1) of the BIT, applying the principles of
by Michael Peer of KPMG. In her first report, customary international law referred to above, as
Dr. Hesmondhalgh, applying a discounted cash long as UAB had met its burden of proof, namely, that
flow (DCF) analysis as of June 3, 2008, valued the losses alleged—requiring “full reparation”—were
total compensation at €9,460,000, revising it caused by Latvia’s intentionally wrongful acts. As a
down, following exchanges of experts’ reports, precursor, the Tribunal disagreed that the settlement
to €7,970,000 (when using a 10 percent control agreement was a bar to compensation. Given that
2018 QUANTUM QUARTERLY 43
Recent Damages Awards
both parties’ experts had opined on a valuation of The claimant sought pre- and post-award interest at
the business as of June 3, 2008, on the assumption the following yearly rates (reflecting UAB’s borrowing
that UAB was the victim of an unlawful expropriation, rates, as opposed to the lower LIBOR provided for
the Tribunal determined their reports were of little in respect of “lawful expropriations” under the BIT),
assistance. The Tribunal found it could not award compounded quarterly: 6.58 percent for 2008, 4.36
damages for a breach of the FET standard on the percent for 2009, 3.73 percent for 2010, 4.13 percent
basis that such breach was one and the same as an for 2011, 2.56 percent for 2012, and onward until
expropriation, as the claimant and its expert had the date of the final award, and at the rate of 2.56
posited. Latvia’s breach of the FET standard was percent, compounded quarterly from the date of the
simply not a collection of acts that amounted to an award until payment by Latvia. Latvia did not answer
expropriation. UAB’s claim for interest, and it was unchallenged
throughout the arbitration. Accordingly, the Tribunal
Having considered the evidence as a whole, the awarded UAB interest from January 1, 2008, at the
Tribunal concluded that UAB had not discharged its rates set out above, although compounded only
burden of proof in relation to future profits nor had it annually, not quarterly, “in view of recent trends in
established that its shares in LE were now worthless investment arbitration.”
due to Latvia’s breach of Article 3(1) of the BIT.
Rather, the Tribunal held that UAB was entitled only Finally, a majority of the Tribunal (Dr. Patocchi
to actual proven loss suffered as a consequence of and Wordsworth) awarded UAB 43 percent of its
the breach. The Tribunal considered and rejected the fees and costs of the arbitration (€1,074,886 and
following alleged heads of loss: USD446,470.21), reflecting UAB’s relative success
in the arbitration by reference to the number of
• First, the “administrative costs” to maintain breaches and the amount of losses claimed against
LE after June 3, 2008, finding that it was the breaches and losses actually established and
entirely a commercial decision on the part of UAB awarded. Prof. Reinisch dissented, opining that
to continue to fund LE in its own interest and was each party should bear its own costs in accordance
not due to any requirement under Latvian law. with “traditional practice in ICSID cases,” given that
UAB’s success was only very partial and neither party
• Second, damages allegedly suffered as a had instigated the arbitration or conducted the
consequence of the regulator’s October 13, proceedings in anything other than good faith and for
2006, decision to deny LE’s proposal for a new bona fide reasons.
tariff, because this decision did not amount to a
breach of Article 3(1) of the BIT.
The Tribunal did, however, agree in principle that UAB Copyright 2018, King & Spalding LLP. All rights reserved.
was entitled to compensation for loans made to LE The information provided in this bulletin is intended to in-
in the amount of €1,310,000 and a guarantee paid to form but is not a substitute for specific legal or other profes-
Danske Bank in respect of LE’s debts in the amount of sional advice where warranted by each situation’s facts and
€1,860,000 (i.e., a total amount of €3,170,000). The circumstances. Under some Rules of Professional Conduct,
Tribunal awarded UAB 50 percent of the above amount this communication may constitute “Attorney Advertising.”
(i.e., €1,585,000), on the basis that the municipality
significantly contributed to the difficult situation LE
found itself in and deliberately did so in breach of
Article 3(1) of the BIT, but it recognized the fact that
LE’s losses primarily arose from its own decision to stop
paying the full price for natural gas and the consequent
revocation of its license by the regulator, which the
Tribunal held did not amount to a breach of the BIT.
44 KING & SPALDING
King & Spalding’s International Arbitration Group Contacts
Atlanta Houston (continued) New York (continued)
Meghan Magruder Kevin Mohr Viren Mascarenhas
[email protected] [email protected] [email protected]
Elizabeth Silbert Reginald Smith Caline Mouawad
[email protected] [email protected] [email protected]
Brian White London Paris John Templeman
[email protected] [email protected]
Abu Dhabi Sajid Ahmed
Adrian Cole [email protected] Joel Alquezar
[email protected] [email protected]
Austin Ruth Byrne
Mike Stenglein [email protected] Vanessa Benichou
[email protected] [email protected]
Frankfurt Nicholas Cherryman
Jan Schaefer [email protected] James Castello
[email protected] [email protected]
Houston Egishe Dzhazoyan
Roberto Aguirre Luzi [email protected] Amy Frey
[email protected] [email protected]
John Savage
Doak Bishop [email protected] Singapore
[email protected]
Stuart Isaacs Wade Coriell
John Bowman [email protected] [email protected]
[email protected]
Thomas Sprange Elodie Dulac
Craig Ledet [email protected] [email protected]
[email protected]
Sarah Walker Simon Dunbar
Silvia Marchili [email protected] [email protected]
[email protected] New York
James Berger Tokyo
Jorge Mattamouros [email protected]
[email protected] Christopher Bailey
Henry Burnett [email protected]
Craig Miles [email protected]
[email protected] Washington, D.C.
Edward Kehoe
[email protected] Kenneth Fleuriet
[email protected]
2018 QUANTUM QUARTERLY 45
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