Introduction

This paper addresses the standards of applicable law and burden of proof in the context of international investment agreements (IIAs). 1

It should be noted at the outset that investor-state proceedings arising under IIAs are essentially damages proceedings. An investor is entitled to bring to arbitration a claim that the host state of the investment has breached an obligation contained in a IIA, which has caused the investor or its investment to suffer losses or damages in connection with, or arising out of, that breach.

The International Law Commission Articles on responsibility of states for internationally wrongful acts (the ILC Articles on state responsibility) contemplate the following types of remedy in the event that the responsibility of the state has been established: cessation of the internationally wrongful act and assurances of non-repetition (Article 30), and the requirement that a responsible state make full reparation for the injury caused (Article 31), which may take the forms of restitution (i.e. to re-establish the situation that existed before the wrongful act was committed), compensation (which shall cover any financially assessable damage - i.e., the damage capable of being evaluated in financial terms - that is established, and generally consists of a monetary payment) or satisfaction (which may consist in an acknowledgement of the breach, an expression of regret, a formal apology or another appropriate modality), and interest on any principal sum due in order to ensure full reparation (Articles 34-38). 2[Page113:]

This is not always the case in international arbitration. For instance, international commercial agreements such as the Marrakesh agreement establishing the World Trade Organization or the North American Free Trade Agreement (NAFTA) do not contemplate an obligation to make full reparation in disputes involving the states. The aim of the WTO dispute settlement mechanism "is to secure a positive solution to a dispute." In this context, the Understanding on rules and procedures governing the settlement of disputes (the WTO DSU) establishes a hierarchy of remedies, with a clear preference for a "solution mutually acceptable to the parties to a dispute" that is "consistent with the covered agreements" (i.e. the WTO Agreements). 3 The WTO DSU then goes on:

"In the absence of a mutually agreed solution, the first objective of the dispute settlement mechanism is usually to secure the withdrawal of the measures concerned if these are found to be inconsistent with the provisions of any of the covered agreements. The provision of compensation should be resorted to only if the immediate withdrawal of the measure is impracticable and as a temporary measure pending the withdrawal of the measure which is inconsistent with a covered agreement. The last resort which this Understanding provides to the Member invoking the dispute settlement procedures is the possibility of suspending the application of concessions or other obligations under the covered agreements on a discriminatory basis vis-à-vis the other Member, subject to authorization by the DSB [the WTO Dispute Settlement Body] of such measures." 4

Compensation under the WTO DSU does not involve financial compensation, i.e. the payment of damages, but rather usually takes the form of tariff reductions or other types of improved access to the responsible WTO Member's market. It is voluntary and a temporary relief in the event that the WTO Member concerned does not implement the recommendations and rulings of the DSB within a reasonable time. Therefore, it may only be maintained while such situation lasts. The suspension of the application of concessions or other obligations is a form of treaty-regulated countermeasure where no satisfactory compensation has been agreed to. It is also temporary and it is subject to the authorization of the DSB. The NAFTA and other commercial agreements establish somewhat similar rules. [Page114:]

In private commercial arbitration there is a menu of available remedies:

Arbitration awards may cover a range of remedies including:

- monetary compensation;

- punitive damages and other penalties;

- rectification;

- adaptation of contracts and filling gaps;

- restitution and specific performance;

- declaratory relief;

- interest; and

- costs. 5

IIAs typically limit available remedies to restitution of expropriated property or payment of monetary damages, where the host state may choose to pay compensation in lieu of restitution. However, restitution is frequently unavailable or inadequate, and compensation is, thus, the form of reparation most commonly sought in international practice. 6 In Mexico's experience, awards against a host state have been limited to ordering payment of monetary damages.

While the Convention on the settlement of investment disputes between states and nationals of other states (ICSID Convention) gives the Centre a broader jurisdiction such that it extends to "any legal dispute arising directly out of an investment, between a Contracting State … and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre" (Article 25) - and disputes are not limited to claims of breach of an IIA, nor are remedies limited to awarding damages - in practice this has been the case. The majority of investment disputes involving the ICSID Convention are disputes arising under IIAs where a claim for damages is made against the host state in respect of alleged breaches to certain provisions of specific IIAs.

1. Applicable law

The ICSID Convention provides that a tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties or, in the absence of such an agreement, the tribunal shall apply the law of the contracting state party to the dispute (including its rules on the conflict of[Page115:] laws) and such rules of international law as may be applicable (Article 42). A tribunal would thus first turn to the contract between the investor and the host state. In the absence of a clause indicating the choice of law, a tribunal would apply the law of the disputing state and applicable rules of international law.

In LETCO v. Liberia, the tribunal recognized:

"Under the doctrine of party autonomy, parties to a contract are free to choose for themselves the law which is to govern their relationship. This doctrine has gained almost universal acceptance, particularly in international commercial transactions (see Law, 'Applicable Law in International Commercial Arbitration' (1978), p. 71 et seq.) and it is adopted by the ICSID Convention which provides, in Article 42: 'The Tribunal shall decide any dispute in accordance with such rules of law as may be agreed by the parties'." 7

The tribunal added that, "in the absence of any express choice of law by the parties, the Tribunal must apply a system of concurrent law" and explained: "The law of the contracting state is recognized as paramount within its own territory, but is nevertheless subjected [under the ICSID Convention] to control by international law." 8

As already noted, however, IIAs are generally more limited in scope. They usually provide that the governing law shall be the treaty itself, and applicable rules of international law (see, for instance, NAFTA Article 1131). In the absence of such a provision, a tribunal would have to look at the specific rules of procedure: Where the claim is subject to the ICSID Convention, Article 42 would apply; the ICSID Additional Facility (arbitration) rules (Article 54), the UNCITRAL arbitration rules (Article 33) and the Permanent Court of Arbitration optional rules for arbitrating disputes between two parties of which only one is a state (Article 33), inter alia, similarly provide that disputing parties are free to designate the governing law and, failing a designation by the parties, leave it to the tribunal to determine, under conflict of law rules, what such applicable law is.

It should be noted that all those rules refer to a choice of law by the disputing parties, while in IIAs the choice is made by the contracting states, only one[Page116:] of which would eventually become a disputing party in any given case. Thus, a question could arise as to what is the governing law, since one of the disputing parties would have made no such choice. The NAFTA and other international agreements to which Mexico is a party clear up any doubt by providing that "the applicable arbitration rules shall govern the arbitration except to the extent modified by" Section B of Chapter 11 (which regulates investor-state dispute settlement, see NAFTAArticle 1120). Since it is Section B that grants private investors access to international arbitration

- i.e. the right of action conferred can only be exercised in accordance withthe provisions of Section B - there is no room for doubt. If a specific IIA does not contain a similar provision, the issue would nevertheless have to be resolved in the same manner for the same reasons, namely that it is the IIA that grants investors a right of action, which right is subject to the other rules established in the IIA.

Whatever the case, the governing law as determined under the corresponding rules equally applies to issues concerning damages. In the case of IIAs that contain a governing law provision similar to NAFTA Article 1131, where a tribunal has found that a state is liable for breach of the international agreement, then it must look to the corresponding treaty and applicable rules of international law to determine the measure of damages.

At risk of being overly simplistic, it can be said that IIAs generally contain the same types of investment protection: they establish national and most-favoured nation (MFN) treatment clauses; provide for the minimum standard of treatment, including fair and equitable treatment; and include disciplines regarding expropriation. Some agreements also contain other types of protection, for instance, a prohibition against imposing certain performance requirements and restricting transfers.

Yet, only in the case of expropriation do IIAs contain rules regarding the quantification of damages. Whatever the formula used - whether it refers to the fair market value of the investment; full, fair and adequate compensation; prompt, and effective compensation, etc. - IIAs and international law contain specific rules that allow a tribunal to calculate damages in the case of an expropriation that has been carried out in breach of the IIA. While some IIAs may be more specific than others, they generally contain rules for determining the quantum in a case involving an expropriation. [Page117:]

That is not to say that calculating damages in expropriation cases is therefore simple. It may indeed turn out to be a complicated exercise, but there are rules and other guidance to turn to. This is not so in the case of breach of other provisions of IIAs, for instance, a breach of the national treatment obligation.

In S.D. Myers v. the Government of Canada, the tribunal noted in this respect that "by not identifying any particular methodology for the assessment of compensation in cases not involving expropriation, the Tribunal considers that the drafters of the NAFTA intended to leave it open to tribunals to determine a measure of compensation appropriate to the specific circumstances of the case, taking into account the principles of both international law and the provisions of the NAFTA." 9 The S.D. Myers tribunal referred to a "general principle of international law that compensation should undo the material harm inflicted by a breach of an international obligation" and cited the Chorzów Factory case which concluded:

"The essential principle contained in the actual notion of an illegal act - a notion that seems to be established by international practice and in particular by the decisions of arbitral tribunals - is that reparation must, as far as possible, wipeout all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it - such are the principles which should serve to determine the amount of compensation for an act contrary to international law." 10

The S.D. Myers tribunal added that there must be a sufficient causal link between the loss or the damage suffered and the breach complained of, a principle accepted also by the Pope & Talbot tribunal. 11 The breach of the IIA must be the proximate cause of the loss or damage. Indeed, the Pope & Talbot tribunal, while faced with a claim for damages for over US$500 million , awarded damages for a little over US$400 thousand , this having been the only harm suffered in connection with the breach of the duty to provide fair and equitable treatment in what it called "the verification episode." 12[Page118:]

While the S.D. Myers tribunal cautioned that it was not attempting to set out detailed, exclusive principles for calculating the compensation payable, it enumerated the principles it applied as follows:

- the burden is on SDMI [the claimant] to prove the quantum of the losses in respect of which it puts forward its claims;

- compensation is payable only in respect of harm that is proved to have a sufficient causal link with the specific NAFTA provision that has been breached; the economic losses claimed by SDMI [the claimant] must be proved to be those that have arisen from a breach of the NAFTA, and not from other causes;

- damages for breach of any one … provision can take into account any damages already awarded under a breach of another NAFTA provision; there must be no "double recovery". 13

It then summarized: "the Tribunal will assess the compensation payable to SDMI [the Claimant] on the basis of the economic harm that SDMI can legally establish." 14

2. Burden of proof

A claimant, therefore, needs to prove the economic harm it alleges to have suffered. There is a general principle that the burden of proof rests on the party asserting a proposition or a fact. Durward Sandifer has so noted in his book, Evidence Before International Tribunals: "The broad basic rule of burden of proof adopted, in general, by international tribunals […] may be simply stated: that the burden of proof rests upon him who asserts the affirmative of a proposition that if not substantiated will result in a decision adverse to his contention." 15 The tribunal in Asian Agricultural Products v. Sri Lanka, "in order to handle the legal issues related to evidence", referred to a set of "established international law rules" and recognized that, with regard to "the proof of individual allegations advanced by the parties in the course of proceedings, the burden of proof rests on the party alleging the fact". 16 International tribunals have consistently accepted this principle. In United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from India, the WTO Appellate Body noted: "[…] various international tribunals, including the International Court of Justice, have generally and consistently accepted and applied the rule that the party who asserts a fact, whether the claimant or respondent, is responsible for providing proof[Page119:] thereof ". 17 This principle applies to damages as well, as damages are issues of fact that require proof. Because it is the claimant who asserts that it has suffered damages, it is incumbent on it to show that such is the case.

3. Sufficiency of proof

The Asian Agricultural Products tribunal, citing Bin Cheng, noted that "a party having the burden of proof must not only bring evidence in support of his allegations, but must also convince the tribunal of their truth, lest they be disregarded for want, or insufficiency, of proof." 18 International tribunals have accepted that a claimant need only go so far as to establish a prima facie case of breach. In other words, a claimant need only establish a presumption that a treaty obligation has been breached, and then the burden of proof shifts to the responding party to rebut the case. The WTO Appellate Body stated:

"… it is a generally accepted canon of evidence in civil law, common law and, in fact, most jurisdictions, that the burden of proof rests upon the party, whether complaining or defending, who asserts the affirmative of a claim or defence. If that party adduces evidence sufficient to raise a presumption that what is claimed is true, the burden then shifts to the other party, who will fail unless it adduces sufficient evidence to rebut the presumption." 19

The tribunal in Asian Agricultural Products, quoting Sandifer, acknowledged that "in case a party 'adduces some evidence which prima facie supports his allegation, the burden of proof shifts to his opponent'." 20

In Autopista Concesionada de Venezuela v. Venezuela, the tribunal stated that the concessionaire had not satisfied the burden of proving all of the damages alleged, and found that Venezuela had cast sufficient doubt to rebut the prima facie evidence presented by the concessionaire in respect of some of the losses allegedly incurred regarding certain issues. 21 The tribunal seems to have accepted that, just as in respect of liability, only a prima facie case need be established regarding damages.

A question arises, nonetheless, as to whether that proposition applies to damages, or should a claimant fully satisfy a tribunal that it has incurred the loss or damage alleged. The question is one of sufficiency of proof. [Page120:]

Liability naturally involves conduct imputed to the state. Therefore, it can be presumed that the state will normally be able to respond to a prima facie case concerning its own conduct. To the contrary, damages involve information generated and business practices followed by the claimant. Thus, by the same token, it can be presumed that a claimant will be able to furnish sufficient evidence on the damages alleged. Also, such information may not be readily available or even accessible to the responding state.

The fact that these proceedings involve sovereign states is significant as well. Where state responsibility has been established, reparation will almost certainly involve the use of public funds. It is thus incumbent on international tribunals to provide certainty and ensure transparency in the quantification of damages.

In this context, it should be noted that international tribunals have declined to award damages for want of proof. In the Chorzów Factory Case, the Permanent Court of International

Justice (PCIJ), while noting that the German Government had not failed to draw attention to circumstances that were said to prove damage to the German company that had been deprived by the Polish Government of the Chorzów factory - arising from injurious competition of the factory under Polish management since it had become acquainted with, and obtained the means for using, the German company's production processes - declined to award damages alleged to have resulted from such competition because they had been insufficiently proved. 22

In Generation Ukraine v. Ukraine,23 the tribunal severely criticized the claimant for its shortcomings in proving the nature and quantum of its expenditures in the investment project. It began by noting that the claimant was severely handicapped in its efforts to discharge its burden of proof because all the primary documentation evidencing expenditures had been accidentally destroyed, and added that in such a case it was expected that "the claimant would have done everything in its power to furnish the tribunal with other forms of evidence to corroborate its statements on the nature and quantum of its expenditures", but "[i]t transpired that the claimant both comprehensively and conclusively failed to meet this expectation". 24 It criticized the witness and other evidence tendered by the claimant for its lack of credibility and reliability and noted that "no further reliable evidence was forthcoming from the Claimant in relation to its expenditure […] despite the fact that[Page121:] several avenues appeared to be open to the Claimant to obtain such evidence." 25 The tribunal concluded that "the absence of information that must surely have been available to a party making reasonable endeavours" had further undermined the claimant's case. 26

The standard expressed by the Generation Ukraine tribunal also holds true where evidence on the nature and quantum of investments or damages for some reason or other is not available, even absent the extraordinary circumstances of that case. It follows that if a claimant that has lost the evidence supporting its claim for damages must do "everything in its power to furnish the Tribunal with other forms of evidence to corroborate its statements on the nature and quantum of its expenditures", under normal circumstances a claimant should be required to comprehensively support its claim for damages and not be allowed to hold back evidence or even aim at making only a prima facie case in the hope of gaining an advantage and, perhaps, recovering more that the actual economic prejudice suffered.

In GAMI Investments Inc. v. The Government of the United Mexican States, the tribunal in essence dismissed the claim, because GAMI failed to prove the actual damages purportedly suffered. GAMI was a minority shareholder in a Mexican company, GAM, that owned five sugar mills, all of which were directly expropriated by the Mexican Government. Under Mexican law, the government offered compensation at the fair market value of the mills, but GAM chose to challenge the expropriation decree before the Mexican courts (GAM, being a Mexican company owned and controlled by Mexicans, could not bring a NAFTA claim against the Government of Mexico). GAM ultimately withdrew from the judicial proceedings concerning two of the mills - which were then definitively expropriated - and successfully challenged the expropriation of three mills that the government subsequently returned.

GAMI alleged violations to the national treatment (NAFTA Article 1102), minimum standard of treatment (NAFTA Article 1105) and expropriation (NAFTA Article 1110) provisions. It is worth reviewing the tribunal's full reasoning concerning damages in relation to Article 1105:

"83. One cannot fail to observe that GAMI's complaint of alleged unfair and inequitable treatment is not connected with a demonstration of specific and quantifiable prejudice. Mexico's alleged wrongdoing would[Page122:] doubtless have resulted in some short-term decline in the value of its shares in GAM. (There would have been no loss of dividends: GAM's business strategy has never been to distribute earnings to shareholders.) The ultimate duration of this unspecified decline in value is uncertain. It was bound to be reversed to some degree by the return of the three wrongfully expropriated mills and by the prospect of compensation for the two others (the expropriation of which GAM did not challenge). Above all there is consensus as to the positive effect of the more vigorous application of Mexico's Sugar Program.

"84. GAMI did not attempt to prove or even present a theoretical financial analysis of what the short-term decline might have been. GAMI rather proceeds on the basis that the entire value of its investment has been destroyed. This is demonstrably untrue. GAMI's shareholding in GAM remains intact. GAM's principal productive assets have either been restored to it or are the subject of negotiations to determine compensation. The sugar industry is now operating on a better footing. Mr Pinto testified that a tax on soft drinks sweetened by fructose 'has turned out to be a very beneficial measure for the Mexican sugar industry'. GAM has declared itself to be optimistic for the future. Counsel for GAMI declared flatly in final oral submissions that 'the system is working now'. GAMI's failure to make good on its claim of total destruction will be dealt with in detail below when examining its claim of expropriation. But also with respect to the Article 1105 claim it must be noted that GAMI has not sought to quantify the alleged prejudice arising from particular alleged acts or omissions.

"85. GAMI's approach seems to be all or nothing. But no credible cause-and-effect analysis can lay the totality of GAMI's disappointments as an investor at the feet of the Mexican Government. Both sides agree that the economics of sugar are highly distorted and subject to powerful international market forces. No one has suggested that NAFTA entitles an investor to act on the basis that a regulatory scheme constitutes a guarantee of economic success. GAMI can assert only that maladministration of the Sugar Program caused it some prejudice. But the prejudice must be particularized and quantified. GAMI has not done so. The Tribunal does not know if such a demonstration would even be possible in the circumstances given the problem of timing. There are years when[Page123:] the sun shines on the sugar industry. In Mexico in particular the industry has had its ups and downs. Recent developments have apparently been positive. GAMI presumably benefits from them. Absent a complete destruction of its investment GAMI has not identified a particular point in time when a metaphorical snapshot of its prejudice should be taken. It may be that such a demonstration is impossible in this case. At any rate the Tribunal would have been in no position to award damages even if it had found a violation of Article 1105. The Tribunal will nevertheless explain its conclusion that GAMI also failed to establish its claim in principle under Article 1105." 28

Thus, the tribunal dismissed GAMI's 1105 claim having found that its allegation of total destruction of the investment was "demonstrably untrue". The tribunal, perhaps for the sake of completeness, went on to "explain" that GAMI was also unsuccessful in establishing a claim in principle under Article 1105; but it is clear from its award that the fact that it failed to particularize and quantify the actual damage suffered was enough to reject its claim, as it "would have been in no position to award damages even if it had found a violation of Article 1105."

GAMI also alleged that the direct expropriation of GAM's mills had destroyed the value of its shares in GAM and thus resulted in an indirect expropriation of said shares. It claimed damages amounting to the full value of its original investment, even though during the arbitral proceedings GAM successfully recovered three of the five expropriated mills (and began negotiations with the government regarding compensation for the other two).

The tribunal concluded that it did not need to:

"… decide whether partial destruction of shareholding interests may be tantamount to expropriation. It would in any case be necessary to assess the value of shareholdings in GAM at the time of the Expropriation Decree. GAM was and remains in the hands of its owners. Its principal assets had been taken. But Mexican law gave it substantial protections." 29

It added:

"GAMI may have had subjective apprehensions that Mexican judicial remedies would be insufficient. But this Tribunal can only act on the basis of objective findings justified by evidence that GAM's value as an[Page124:] enterprise had been destroyed or impaired […] GAMI has staked its case on the proposition that the wrong done to it did in fact destroy the whole value of its investment." 30

The tribunal noted that GAMI sought to lend credibility to its position by agreeing to relinquish its shares in GAM as a condition of the award it sought. "It [GAMI] suggests that any residual value is therefore of no moment." The tribunal concluded:

"This posture is untenable. The Tribunal cannot be indifferent to the true effect on the value of the investment of the allegedly wrongful act. GAMI has neglected to give any weight to the remedies available to GAM. Assessment of their effect on the value of GAMI's investment is a precondition to a finding that it was taken. GAMI has not proved that its investment was expropriated for the purposes of Article 1110." 31

4. Speculative damages

The ILC has noted that international tribunals "have been reluctant to provide compensation for claims with inherently speculative elements". 32 In his separate opinion on the issues at the quantum phase of in CME v. The Czech Republic, Professor Brownlie concurred: "The principle denying recovery for speculative damages has long been recognized in the practice of international tribunals." 33 There is considerable support for this conclusion. The Iran - US Claims Tribunal stated in Amoco v. Iran:

"One of the best settled rules of the law of international responsibility of States is that no reparation for speculative or uncertain damage can be awarded. This holds true for the existence of the damage and of its effect as well. Such a rule, therefore, applies in the case of unlawful expropriation. A fortiori, the reasoning on which it rests must also apply in the case of compensation for a lawful expropriation. It does not permit the use of a method which yields uncertain figures for the valuation of damages, even if the existence of damages is certain."34

In the Chorzów Factory case, the PCIJ concluded that the damages alleged to have been caused by injurious competition "would come under the heading of possible but contingent and indeterminate damage which, in accordance with the jurisprudence of international tribunals, cannot be taken into account." 35[Page125:]

In this context, while recognizing the validity of certain valuation methods that factor in different elements of risk and probability, such as the discounted cash flow (DCF) method, international tribunals have exercised caution because "[t]he method analyses a wide range of inherently speculative elements, some of which have a significant impact upon the outcome (e.g. discount rates, currency fluctuations, inflation figures, commodity prices, interest rates and other commercial risks)." 36 The Iran - US Claims Tribunal in Amoco questioned whether the method could be used at all: "As a projection into the future, any cash flow projection has an element of speculation associated with it, as recognized by the Claimant. For this very reason it is disputable whether a tribunal can use it at all for the valuation of compensation." 37 The tribunal explained:

"The element of speculation in a short-term projection is rather limited, although unexpected events can make it turn out to be wrong. The speculative element rapidly increases with the number of years to which a projection relates. It is well known, and certainly taken into account by investors, that if it applies to a rather distant future a projection is almost purely speculative, even if it is done by the most serious and experienced forecasting firms…"38

The tribunal addressed the sufficiency of proof supporting the calculation of the discount rate. It questioned certain adjustments made to take into account the differences between the company in question and other oil companies that were used as reference, as well the adjustments made in order to properly weigh certain risks. The tribunal said that it was unable to test the veracity or the importance of the adjustments made for the purpose of comparing the company in question to similar oil companies, and that "no precise information was provided by the Claimant on the technique used in order to translate into figures the general qualitative considerations presented in the expert's report on each of the specific risks" that were taken into account. It added that these "these considerations, indeed, were relatively succinct and not very elaborated" and that "the mere mention that a risk was higher or lower than the average" was "too vague to furnish a valuable indication and to assist the Tribunal to assess the validity of the adjustment" made. 39 The tribunal went on to say:

"In the words of the Claimant's expert, 'there necessarily will be room for some variations in detail and the exercise of expert judgment in applying the [DCF] analysis in a specific instance'. It appears that 'the exercise[Page126:] of expert judgment' is at a peak for the determination of the adjustment of the reference discount rate. With all respect for the undoubted experience of such a distinguished expert, it remains true that expert judgment means subjective judgment, and that the reasons on which it rests in relation to this specific issue have not been fully disclosed." 40

A crucial element in a DCF analysis is the operating record of a company as a going concern. The tribunal in Metalclad Corporation v. The United Mexican States noted:

"Normally, the fair market value of a going concern which has a history of profitable operation may be based on an estimate of future profits subject to a discounted cash flow analysis […] However, where the enterprise has not operated for a sufficiently long time to establish a performance record or where it has failed to make a profit, future profits cannot be used to determine going concern or fair market value." 41

It agreed with the tribunal in Asian Agricultural Products v. Sri Lanka that an enterprise "requires the prior presence on the market for at least two or three years, which is the minimum period needed in order to establish continuing business connections." 42 The Metalclad tribunal considered a discounted cash flow analysis in the circumstances of that case inappropriate because the investment in question (a hazardous waste landfill) had never operated and thus lacked a track record on which future profits could be assessed. It concluded that any award based on future profits would therefore be wholly speculative. 43

In Autopista Concesionada de Venezuela, the tribunal stated that it was disinclined to award lost profits because the claimant had not shown future lost profits with a sufficient degree of certainty under the relevant standards (of both Venezuelan and international law). It referred with approval to a number of cases cited by Venezuela and asserted that international tribunals are reluctant to award lost profits for a beginning industry and unperformed work. It concluded:

"In the present case, the fact remains that Aucoven [the company in question] had no record of profits and that it never made the investments in the project nor built the Bridge required by the Concession Agreement. [Page127:]

In these circumstances, the Tribunal considers that Aucoven's claim for future profits does not rest on sufficiently certain economic projections and thus appears speculative. Hence, it does not meet the standards for an award of lost profits under Venezuelan law, nor would it meet these standards under international law, if the latter were applicable." 44

Other relevant circumstances need to be taken into account. The tribunal in Autopista Concesionada de Venezuela held that "a claim cannot be valued without consideration of its environment, i.e., without consideration of social, economic, political or other factors which may affect it." 45 In Phelps Dodge v. Iran, construction of the factory in question, owned by an Iranian company, SICAB (in turn owned in part and controlled by Phelps Dodge), began in 1976 and concluded in 1978. By late 1978 almost all the equipment was on site and had been installed, and the factory began limited production of certain product lines. Commercial production of all product lines would have been able to begin in mid-1979, but growing unrest in Iran and, ultimately, the outburst of the Iranian Revolution prevented it. In mid-1979 stock of SICAB owned by Iranian nationals was nationalized, as were two Iranian banks that were investors in the company. In November 1980, management of SICAB was transferred to Iranian Government agencies. In light of these circumstances, the tribunal could not agree that at the time of the taking the factory was a going concern "so that elements of value as future profits and goodwill could confidently be valued" and determined that "any conclusions on these matters would be highly speculative." It noted that, "while no diminution in value should be made because of the anticipation of a taking, the Tribunal could not properly ignore the obvious and significant negative effects of the Iranian Revolution on SICAB's business prospects, at least in the short and medium term." 46

The Iran-US Claims Tribunal in Amoco ultimately rejected using the DCF method. It stated that while "projections can be useful indications for a prospective investor, who understands how far it can rely on them and accepts the risks associated with them; they certainly cannot be used by a tribunal as the measure of a fair compensation". 47 Nonetheless, the DCF method has been accepted as an adequate valuation method. Its applicability to a specific case, however, will depend on the specific circumstances, including the performance record, and the degree of certainty provided by the experts, which in turn will greatly depend on the available data and the information concerning the specific techniques employed and decisions made by them. [Page128:]

Conclusion

The question of damages in the context of investor-state arbitration under IIAs has important implications. First, access to international arbitration is contingent on (1) an investor making an allegation of breach of the provisions of an IIA, where (2) that breach has caused the investor or its investment to suffer economic prejudice. This is no trivial matter: as the GAMI case shows, while an investor may get over the access hurdle by simply alleging that it has incurred loss or damage, a substantive claim - not just a particular claim for damages - may be entirely thrown out for failure to prove such prejudice. To paraphrase the GAMI tribunal, even if a claimant were to successfully establish a breach of the agreement, a tribunal may not be in a position to make an award for damages.

Also, because one of the parties will always be a sovereign state - something that is relevant for many other reasons - international tribunals have a responsibility of providing certainty and ensuring transparency in the quantification of damages. Payment of damages in compliance with an award involves the use of public funds, and a state will be accountable to its citizenry. This, in my view, imposes a greater onus on claimants to satisfy tribunals of the actual prejudice suffered, and a greater onus on tribunals as well to accurately and transparently quantify the prejudice. [Page129:]

1
The UNCTAD uses the term international investment agreements. They include "treaties for the promotion and protection of investment (or bilateral investment treaties), treaties for the avoidance of double taxation (or double taxation treaties), other bilateral and regional trade and investment agreements, as well as various multilateral agreements that contain a commitment to liberalize, protect and/or promote investment." See, for instance, World Investment Report 2005, Chapter 1, Note 45. As used in this paper, they exclude double taxation of agreements.

2
See also International Law Commission: Report of the International Law Commission on the work of its Fifty-third session. Official Records of the General Assembly, Fifty-sixth session, Supplement No. 10 (A/56/10), Chapter IV.E.2, p. 244.

3
Understanding on rules and procedures governing the settlement of disputes, Articles 7(3) and 22.

4
Ibid.

5
Redfern, Alan and Martin Hunter: Law and Practice of International Commercial Arbitration. 3rd ed., Sweet & Maxwell, London, 1999, p. 365.

6
See International Law Commission, Report of the International Law Commission on the work of its Fifty-third session, p. 244.

7
Liberian Eastern Timber Corporation (LETCO) v. the Government of the Republic of Liberia, Award of 31 March 1986 (rectified on 14 May 1986), 26 I.L.M. 647, 1987, p. 658.

8
Ibid.

9
S.D. Myersv. the Government of Canada, Partial Award of 13 November 2000, § 309.

10
Case concerning the factory at Chorzów (Claim for indemnity) (The merits), Judgment No. 13 of 13 September 1928, Publications of the Permanent Court of International Justice, Collection of Judgments, Series A.- No. 17, p. 47.

11
S.D. Myers, § 316. Pope & Talbot v. the Government of Canada, Award in respect of Damages of 31 May 2002, § 80.

12
Pope & Talbot, § 81-85.

13
S.D. Myers, § 316-317.

14
Ibid.

15
Durward Sandifer: Evidence before international tribunals. University Press of Virginia, Procedural Aspects of International Law Series, 1975, p. 127.

16
Asian Agricultural Products Limited v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award of 27 June 1990, § 56, Rule (H).

17
United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from India, Report of the Appellate Body, adopted 23 May 1997, WT/DS33/AB/R, p. 14.

18
Asian Agricultural Products, § 56, Rule (I).

19
United States - Measures Affecting Imports of Woven Wool Shirts and Blouses, p. 14.

20
Asian Agricultural Products, § 56, Rule (L).

21
Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award of 23 September 2003, § 268.

22
Chorzów Factory, pp. 56-57. The court did award damages for the deprivation of the factory.

23
Generation Ukraine, Inc.v. Ukraine, ICSID Case No. ARB/00/9, Award of 16 September 2003.

24
Ibid., § 19.1-19.4.

25
Ibid., § 19.5 et seq.

26
Ibid., § 19.26. The tribunal went on to analyze the merits of the claim and rejected all the allegations of breach. It concluded that it could not discern a breach of the BIT by Ukraine and dismissed the claim in its entirety.

27
GAMIInvestments Inc. v. The Government of the United Mexican States, Final Award of 15 November 2004.

28
Ibid., § 83-85.

29
Ibid., § 132.

30
Ibid., § 132-133.

31
Ibid.The tribunal also dismissed GAMI's 1102 claim on the merits.

32
International Law Commission, Report of the International Law Commission on the work of its Fifty-third session, p. 259.

33
CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, Separate opinion on the issues at the quantum phase of, § 66 et seq.

34
Amoco International Finance Corporation v. Islamic Republic of Iran, Partial Award of 14 July 1987, 27 I.L.M. 1320, 1988, § 238.

35
Chorzów Factory,p. 57.

36
International Law Commission, Report of the International Law Commission on the work of its Fifty-third session, p. 258.

37
Amoco,§ 238.

38
Ibid., § 239.

39
Ibid., § 241-243,

40
Ibid., § 244.

41
Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB (AF) 97/1, Award of 30 August 2000, § 119-120.

42
Ibid., § 120.

43
Ibid., § 121.

44
Autopista Concesionada de Venezuela, § 362. The tribunal held that, under the terms of the concession agreement, Venezuelan law was applicable but that it would resolve conflicts between Venezuelan law and international law, if any, in accordance with the latter. It based this conclusion on the parties' agreement that Venezuelan law was consistent with international law and their acceptance that the latter prevailed over the former in case of conflict.

45
Ibid., § 364.

46
Phelps Dodge Corp. and Overseas Private Investment Corp.v. The Islamic Republic of Iran, Award of 19 March 1986, 10 Iran-U.S.C.T.R. 121, § 30-31.

47
Ibid., § 239, in fine.