Compensation is the most common remedy awarded by international tribunals in investor-state disputes. As explained in the leading decision on the issue in the case concerning the Factory at Chorzów, it covers “any financially assessable damage including loss of profits insofar as it is established”.

In modern treaty-based investment arbitration, almost all bilateral investment treaties (BITs) and multilateral investment treaties contain specific provisions on the standard of compensation for expropriation. The majority of these treaties require “prompt, adequate and effective” compensation. On the other hand, investment treaties do not generally provide a relevant standard of compensation for the breaches of other treaty protections, such as fair and equitable treatment or national treatment. Tribunals interpreted that the failure of investment treaties to specify the standard of compensation gave them considerable discretion, and developed a variety of approaches to compensate an investor.

However, several factors may potentially limit the amount of compensation that an investor may recover. The most commonly recognised limiting principles are lack of causation, contributory negligence and obligation to mitigate damages, which are reviewed below.

Lack of causation

The UN International Law Commission’s Articles on the Responsibility of State for the internationally wrongful act (ILC Articles) are considered by many as a codification of customary international law. Article 31 of the ILC Articles provides that “the responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act” (emphasis added). Thus, there must be a link between the wrongful act and the injury. Generally, the injured investor has the burden of demonstrating that the claimed compensation flowed from that conduct. However, most legal systems limit the length of the causal chain that can be potentially followed from the state action to compensate the injury. In order to describe the extent to which such cause-effect analysis can be followed, arbitral tribunals refer to various terms to qualify causation: direct, proximate, foreseeable, etc. How to measure the extent to which a particular wrongful act contributed to an injury is one of the most challenging issues before arbitral tribunals.

Oct-Dec 2014 issue

Association for International Arbitration