August 10, 2020

Compensation in Investor-State Disputes: How Much Can an Investor Claim?

Holland & Knight Alert
Carlos Vejar | Laura Yvonne Zielinski | Verónica Irastorza | NERA Economic Consulting

Foreign investors currently benefit from a large number of bilateral treaties and trade agreements, which contain investment protection provisions such as protection against direct and indirect expropriation, a guarantee against discrimination, fair and equitable treatment, and full protection and security. In case one or more of these protections is violated, many of these treaties allow for international arbitration to provide the investor with a neutral forum to bring its claims against the host state. While in theory other remedies such as restitution are possible, the almost exclusive remedy in investor-state disputes is monetary compensation. Therefore, the most important question for an investor becomes how much he or she can claim against a state for a treaty violation.

Applicable Standard of Compensation

The applicable standard of compensation always depends on the claim in question under the applicable treaty, but the most generally admitted principle is to compensate the investor in a way that reestablishes the situation that would in all likelihood have existed but for the treaty breach by the host state. In other words, compensation in investor-state disputes seeks to wipe out the consequences of the host state's treaty breach.

Difficulties in Assessing Full Compensation

While this principle sounds clear in theory, its application often faces difficulties, as it does not answer the question of how to calculate such compensation. There is no clear calculation methodology applicable to all cases and situations. Rather, full compensation is assessed differently depending on the circumstances. The losses suffered by investors can consist of 1) the full loss or simply a diminution in the investment's value; 2) losses caused by the temporary interference of the host state with the investment; 3) loss of invested amounts; 4) a reduction of dividends paid to a shareholder or 5) the failure by the host state to restitute certain amounts such as excess taxes. Over time, the case law has developed methodologies to deal with all of these diverse types of situations.

Methodologies of Calculation

The three main methodologies applied by past tribunals can be divided into the following: 1) the market value approach, 2) the income capitalization approach and 3) the asset-based approach. Depending on the factual scenario in question, it may make more sense to assess the market value, for example, of an expropriated investment, or to measure the decrease in the value of an investment reflecting the permanent adverse impact of a host state's illegal measures. The assessment of a lost income stream is a common methodology to assess losses caused to investments by temporary interferences by a host state with an investment. In turn, if an investment project was at an early stage of development, compensation may be based on the financial amount invested. Each case will have individual facts and industry-specific issues with causation that require uniquely tailored economic analyses and inform consideration for the methodology of calculation.1 With regard to claims brought by shareholders, a tribunal may calculate the shareholder's loss by reference to the financial amount of dividends lost by the shareholder as a result of the host state's treaty breach, or, often in cases of destruction of an investment, calculate a shareholder's compensation by focusing on the loss in the share value caused by the host state's illegal acts.

In rare cases, tribunals may award moral damages caused by the host state, for example in the form of injuries to the credit and reputation of a legal entity may be awarded.

Finally, depending on the applicable arbitration rules and the outcome of the proceedings, arbitral tribunals can allocate the costs of the arbitration (including legal costs, and administrative and tribunal fees), and for example order the losing party to pay the winning party's legal fees.

Renewable Energy Cases

In renewable energy cases, the damages have to be determined with caution after analyzing the  specific context. The most common methods to assess damages entail either looking at the recorded book cost or replacement cost of the asset or by determining the income capitalization principally through the "discounted cash flow" (DCF) model. The DCF model is particularly useful for assessing damages associated with an enterprise's lost profits incorporating the investment risk. A recent award against Spain considered that "the DCF method is widely favoured in the renewable energy sector given that they have a simple business model with predictable income and costs."2 Applying this method to Spain's violations of the Energy Charter Treaty, the tribunal in question, by majority, awarded the foreign investors damages in the amount of 77 million euros excluding interest — a large part of the compensation sought by the investors. In another recent case against Spain that also arose out of the reforms to that country's renewable subsidies' regime, the tribunal departed from this approach, however, and found that the investors were only entitled to past but not to future losses.3 This discrepancy shows that damages decisions, even when they arise out of seemingly similar scenarios, are always highly dependent on the factual and evidentiary situation of each specific case.

Important Points to Keep in Mind

In conclusion, foreign investors should keep in mind that only loss directly caused by the treaty breach committed by the host state will be compensated, and any contributory fault by the foreign investor that might have aggravated the damages suffered will be deduced from the compensation amount that will be awarded. Further, foreign investors are usually expected to mitigate their losses to the extent possible, and their failure to do so could be taken into account by a tribunal in calculating compensation.

Compensation will be limited to losses that can be ascertained with reasonable certainty, including future lost profits caused by unlawful conduct. In view of this, investors are well advised to document in a timely manner not only every aspect related to the unlawful conduct by the host state, but also the economic consequences of their investment.

And finally, the quantum of a claim is key to any case, and the earlier investors know exactly how much they will be able to claim, the better prepared they will be for any negotiations with the host state and for making an informed decision on whether to engage in an investor-state arbitration.

The content of this alert was prepared in collaboration with Nera Economic Consulting.

NERA Economic Consulting


1 See Overview – economic damages, Global Arbitration Review, Julie Carey, Christian Dippon and Will Taylor, April 29, 2020.

2 Watkins Holdings S.à r.l. and others v. Kingdom of Spain, International Centre for Settlement of Investment Disputes (ICSID) Case No. ARB/15/44, Award, Jan. 21, 2020, para. 689.

3 BayWa r.e. Renewable Energy GmbH and BayWa r.e. Asset Holding GmbH v. Spain, ICSID Case No. ARB/15/16, Decision on Jurisdiction, Liability and Directions on Quantum, Dec. 2, 2019.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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