Remedies in Investor-State Arbitration: A Public Interest Perspective

It would be strange indeed, if the outcome of acceptance of a bilateral investment treaty took the form of liabilities ‘likely to entail catastrophic repercussions for the livelihood and economic well-being of the population’ of [the host state].”

This quote from Professor Brownlie’s Separate Opinion on the Issues at the Quantum Phase in CME v Czech Republic[1]points to the potentially deleterious impact of an award of damages in investor-state arbitration and, more generally, highlights the potential intersection between the remedies awarded in investor-state arbitration and matters of public interest.[2] While an extensive body of literature maps the tensions between regulatory sovereignty and investor protection in international investment law and analyses the balancing of private and public interests in arbitral practice, only a small sub-set of this literature makes reference to public interest considerations at the remedies stage of the investor-state arbitration process.[3] Conversely, the literature on the remedies awarded in investor-state arbitration is primarily aimed at describing the mechanics of the complex valuation methods that have been applied by investment treaty tribunals in assessing damages rather than in considering the potential role of the remedies stage from a public interest perspective.

This trend, with few exceptions, appears to be mirrored in arbitral practice. Concepts such as the public interest, regulatory autonomy or sustainable development have seldom been referred to by investor-state tribunals when deciding on the quantum of damages or compensation to be awarded to claimant investors.[4] The references that do exist have generally denied the relevance of such considerations at the remedies stage, at least in the specific circumstances of the case at hand.[5] This is true for both the existing standards of ‘fair market value’ for lawful expropriations and ‘full reparation’ for unlawful expropriations, which derive from the rules on state responsibility under international law.

For example, in deciding on the quantum of compensation to award for a lawful expropriation based on the ‘fair market value’ standard, the tribunal in Santa Elena v Costa Rica noted that the fact that property was taken for a legitimate public purpose, in this case the protection of the environment, does not alter the level of compensation that must be paid. The same tribunal also noted that the international source of the obligation to protect the environment makes no difference to the the level of compensation payable.[6]

Similarly, in relation to the ‘full reparation’ or Chorzów Factory standard[7] applicable to unlawful breaches, the only substantial explicit recognition of public interest considerations has come in the form of the distinction drawn between lawful and unlawful expropriations in ADC v Hungary and in subsequent awards.[8] Prior to the ADC award, arbitral tribunals generally applied the relevant treaty standard for lawful expropriation to determine the quantum of damages for unlawful expropriations, even in the case of multiple treaty breaches.[9] However, in ADC v Hungary the ‘full reparation’ standard rather than the standard set out in the relevant investment treaty was applied. The investor possessed a series of development rights at Budapest airport, which were expropriated just as passenger traffic was about to substantially increase. Since the value of the investment had increased between the date of the taking and the date of the award, that extra amount was awarded in accordance with the ‘full reparation’ standard. The ADC tribunal did, however, note that such an increase in value between the date of the taking and the date of the award was unusual, if not unique.

Despite the current lack of reference to public interest considerations in determining the quantum of damages or compensation to be awarded to claimant investors, there is a close connection between the design and application of a remedy and how the rights which that remedy protects are balanced with public policy goals.[10] This ‘social’ function of remedies has been recognised in public law cases in domestic legal systems in which a balancing of the interests of the injured party as against the interests of the public generally occurs in deciding on the extent of the remedy to be awarded.[11] In investor-state arbitration, while some (but by no means all) tribunals have recognised that host state and investor interests should be balanced in assessing liability at the merits stage and have applied proportionality testing to achieve this, this normative choice has not discernibly affected the approach of those tribunals to assessing the quantum of damages or compensation payable by the host state.

I would argue that, in order to ensure an optimal balance between host state and investor interests, the normative basis deemed appropriate to the merits stage should in fact carry through to the remedies stage.[12] This would accord tribunals greater flexibility to recognize the ‘shades of grey’ which may exist in the relationship between the investor and host state as opposed to requiring an ‘all or nothing’ approach to liability. Such flexibility is much needed given that the lack of flexibility displayed by arbitrators in interpreting long-term contracts and investment treaties when dealing with fundamental changes in circumstances (such as a situation of economic turmoil) has been identified as a key factor underlying the backlash against investment arbitration.[13]

In fact, the remedies stage can be seen as a ‘natural home’ for the balancing of interests given that investment treaty tribunals are accorded a much greater degree of discretion at the remedies stage than at other stages of the arbitral process. This allows tribunals to approximate compensation or damages or to rely on ‘equitable considerations’ or ‘equitable principles’ in justifying a particular award.[14] For example, in AMT v Zaire the tribunal stated that it was exercising “its discretionary and sovereign power to determinate (sic) the quantum of compensation….taking into account the circumstances of the case before it.”[15] Similarly, in Santa Elena v Costa Rica “proceeded by means of a process of approximation” based on the parties’ submissions as to the value of the property on the date of the expropriation.[16]

In any event, application of the ‘fair market value’ and ‘full reparation’ standards involves a significant element of arbitral discretion.[17] For example, investment treaty tribunals must commonly determine a ‘fair market value’ in respect of a unique asset which the seller does not want to sell and for which no willing buyer is likely to appear following an expropriation,[18] which means that the market value of the asset must be constructed by inference from a range of other evidence. Similarly, applying the ‘full reparation’ standard involves plotting the hypothetical alternative course of events which would have occurred had the unlawful act not occurred: an exercise which requires a certain margin of discretion to be afforded to arbitrators.[19]

Thus, the existing valuation standards of ‘fair market value’ and ‘full reparation’ should be critically evaluated to determine the extent to which they can already accommodate public interest considerations, given the discretion which arbitrators can exercise in applying these standards and in evaluating damages or compensation generally. These valuation standards have the advantage of bringing a level of certainty to the valuation process (at least in theory) and this should not be blithely sacrificed. For example, it may be the case that economic difficulties on the part of the host state can, in many cases, be adequately reflected within the calculation of damages or compensation according to these standards. Thus, in applying the ‘full reparation’ standard, the hypothetical situation of the investor had the wrongful act not occurred would have been (most likely adversely) affected by host state economic conditions and this should be reflected in the damages calculation. Similarly, the economic conditions prevalent in the host state at the time of the expropriation will generally affect the ‘fair market value’ of the expropriated asset.[20]

In relation to the possibilities for new or renegotiated international investment agreements (IIAs), it is interesting to note that UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD)^[21] includes a number of options relating to the remedies stage in its menu of drafting options for policy-makers, several of which would require derogation from prevalent existing valuation standards. For example, IPFSD suggests a policy option providing for the amount of compensation to be “equitable in light of the circumstances of the case” and goes onto suggest that specific rules on damages for treaty breach could be delineated, such as excluding the recoverability of punitive and/or moral damages, limiting the recoverability of lost profits (up to the date of the award) or ensuring that the amount of damages payable is commensurate with the country’s level of development.[22] IPFSD also suggests that future IIAs could provide that non-compliance with universally recognized standards, such as the International Labour Organization’s Tripartite Multinational Enterprises Declaration,[23] the UN Guiding Principles on Business and Human Rights,[24]or with applicable Corporate Social Responsibility standards,[25] may be considered by a tribunal when interpreting and applying treaty provisions and when determining the amount of damages due to the investor.[26]

Some of IPFSD’s suggestions are likely to prove more workable than others and a number may be perceived to overly dilute the protection afforded to foreign investors under IIAs. In addition, since it is not the function of IPFSD to do so, no guidelines or suggestions are given as to how reforms to future IIAs that affect the various stages of the arbitral process could inter-relate and, in particular, how reforms relating to the merits stage could inter-relate with remedies-related provisions. However, IPFSD’s inclusion of remedies-related suggestions in its menu of policy options is to be welcomed as it opens up for discussion the role of remedies in investor-state arbitration from a public interest/sustainable development perspective.

In conclusion, despite the growing body of literature on both the balancing of private and public interests in investor-state arbitration and an increasing awareness on the part of investor-state arbitration tribunals that public interests may need to be taken into account in applying and interpreting investor rights, the remedies stage has remained largely unexamined from this perspective. Likewise, the question of whether balancing of public and private interests at the remedies stage could ameliorate some of the difficulties associated with balancing of interests at the merits stage has not been comprehensively addressed. It is submitted that these are issues worth exploring as part of an integrated approach to the promotion of sustainable development concerns in investor-state arbitration and, more generally, in international investment law.

Author: Margaret Devaney is a PhD student at the Centre for Commercial Law Studies, Queen Mary University of London.