Singapore, 25 June 2019

The training session was opened by Nicolas Bourdon (Partner with Accuracy, France) and Loretta Malintoppi (Independent arbitrator with 39 Essex Chambers in Singapore; Member, ICC Institute of World Business Law). Following the opening remarks, the training was conducted through four substantive sessions, with presentations by two speakers, including questions for discussion with the participants.

The tribunal’s discretion to award damages versus the tribunal’s duty to issue a reasoned decision

On the role of the tribunal in ascertaining damages, Lawrence G.S. Boo (Head of Chambers, Arbitration Chambers in Singapore ; Member of the ICC Court; Adjunct Professor at the Faculty of Law, National University of Singapore) noted that use of party-appointed experts, which is a common practice in international arbitration, results in the presentation of widely divergent figures as the experts work on the basis of assumptions and instructions from the appointing parties. He stressed that the tribunal’s duty to assess damages is non-delegable, and that tribunal, thus, must make an assessment of damages with a reasonable degree of certainty relying on accepted principles applied to the available evidence.

Mr Boo also explained that the tribunal has the power, but not the obligation, to appoint tribunal experts to advise the tribunal, but that this approach is not preferred by the parties due to uncertainties and unpredictability of the outcome. Lastly, he recommended that the issue of damages be considered in the early stages of the arbitration, as this provides the tribunal and counsel a better perspective in dealing with this issue, as the arbitration proceeds.

Lorreta Malintoppi observed that investment treaties generally specify the standard of compensation in case of expropriation, but that this is not the case for the other violations of the treaty standards. She explained that damages questions in the latter case are generally decided by tribunals by reference to principles of public international law such as International Law Commission Article on State Responsibility (2001). She also noted that claimants have increasingly raised claims for moral damages, but these claims generally have not been successful due to the high evidentiary threshold required before investment arbitration tribunals. With regard to recent trends of valuation in investment cases, she first noted that income-based approaches, such as the discounted cash flow (‘DCF’) approach, are increasingly accepted by tribunals.

Second, she noted that tribunals are tending toward providing more extensive reasoning in the valuation parts of their awards. Third, she observed that tribunals are increasingly applying tools such as bifurcation and hot tubbing for quantum issues, but do not appear to be increasing the use of tribunal-appointed expert. Finally, she explained that tribunals are increasingly engaging and pro-active with experts, including asking them to apply different assumptions or to draft joint statements.

Financial approaches to assessing damages

Koh Swee Yen (Partner, WongPartnership, Singapore) emphasised that it is essential for tribunals to understand the legal basis for the damages claimed in determining the most suitable valuation approach, as the legal basis for damages establishes the basic grounds for calculating damages. She noted that the tribunal has complete discretion in choosing amongst the valuation methods, and it is extremely important for the tribunal to understand the asset being valued in selecting the appropriate method. She observed that the DCF method tends to find favor with tribunals, especially where there is available data to reasonably estimate expected future cash flows.

In explaining the DCF method, Ms Koh highlighted several issues in DCF analysis, including the common challenge of double-counting of a risk and calculating country risk in assessing the applicable discount rate. She also stressed the importance of properly assessing the valuation date, given the significant impact changes in the valuation date can have on the quantification of damages.

Nicolas Bourdon began his presentation by explaining that assessing damages is equivalent to performing the valuation of ‘what has been lost’ and, thus, valuation methods used in arbitration are similar to those applied in other environments, such as in M&A transactions or for tax reasons. He then explained the term ‘fair market value’, which is a widely used concept in assessing damages. In doing so, he explained the distinction between fair value, which refers to the price at which asset is exchanged between knowledgeable parties at arm's length transaction, and market value, which refers to the price at which the asset is exchanged between parties in the market. In particular, fair value may take into account value particular to the parties, such as synergies with the parties’ other business interest, whereas market value does not account for value personal to the parties.

Mr Bourdon also presented three classical approaches to arriving at ‘fair market value’ of an asset, as that term is typically used in arbitration – the income approach, the market approach, the cost approach. He introduced the DCF method as a methodology that is commonly applied by financial professionals throughout the world, but he also warned that a DCF analysis is dependent on many variables and relies on numerous assumptions. He explained that the market approach could be applied either when there has not been a sufficiently stable pattern of operating results or sufficiently reliable forecasts available to be used in an income approach. However, a market approach may only be available where it is possible to identify businesses or transitions that are comparable in terms of industry, size and geographical scope.

Damnum emergens, lucrum cessans, and moral damages: How to calculate without double-counting

Kathleen Paisley (Partner, AMBOS Law, Belgium and UK) addressed the importance of consistency and process to robust damage awards. She noted that tribunals are increasingly unlikely to accept fully the opinion of either expert. She explained that early interaction with the parties is important for the tribunal to address the challenge in evaluating damages in a manner that is accurate and consistent.

Ms Paisley recommended consideration of bifurcation, creating a checklist of all damage issues, and using ‘hot tubbing’ as strategies to conduct a robust damages valuation. If the tribunal still does not agree with either parties’ valuation and does not have the information or tools to conduct a robust valuation after the proceedings are closed, she mentioned that the tribunal has discretion to award damages without undertaking a detailed analysis or to ask the parties to address any additional damages issues in post hearing briefs. She also added that being assisted by tribunal-appointed experts or party-appointed experts, acting on instructions by the tribunal, could be an option.

Nicolas Bourdon’s presentation focused on the risk of double counting when considering claims for both damum emergens and lucrum cessans. One option he presented to avoid double counting is the assessment of damages through comparison of cash flows in the but-for scenario and actual cash flows following the conduct underlying the claims. He also explained that claiming moral damages often causes a risk of double count because loss of reputation or market leadership could already be captured in the but-for scenario used to compute the loss of profit.

Award of interest: Considerations for awarding compound post-award interest on costs, material and moral damages

In her presentation, Loretta Malintoppi highlighted that the interest element of an arbitral award is extremely important as interest may easily amount to 15% to 20% of the total amount awarded and may sometimes even exceed the amount of damages. However, tribunals have broad discretion in awarding interest, and in practice, awards frequently have very limited reasoning on interest.

She presented several observations regarding trends in determining an interest award. First, compound interest is now applied in the vast majority of cases as it reflects the economic reality of the investment. Second, interest is typically awarded from the date when the principal sum should have been paid until the obligation to pay is fulfilled. Third, interest is typically awarded at such a rate so as to achieve full compensation of the loss caused by delayed collection of the principle amount. She also addressed awards of interest on moral damages, observing that, if moral damages are properly understood as compensatory, interest should be accorded to compensate for the time value of money to the same extent interest is awarded for material damages.

Matthew Secomb (Partner with White & Case, Singapore) began his presentation with a brief history of the development of interest in ancient history before the advent of currency. Regarding modern practice of awarding interest in international arbitration, he addressed three approaches that the tribunal considers when assessing interest awards. First, the tribunal may simply follow the parties’ agreement in the subject contract. Second, where the parties’ contract is silent on interest, the tribunal can consider a claim for interest as a part of the claimant’s damages claims. If neither of these approaches is available, the tribunal may rely on the applicable law. After pointing out that arbitrators often face incomplete submission regarding interest award by either parties, Mr Secomb presented a check list of issues to be addressed regarding the applicable rate, periods, and calculation method.