THE AUTHOR:
Sandra Gradziel, International Arbitration Lawyer
The panel on Damages of the 4th edition of the Washington Arbitration Week (WAW) took place on Thursday November 30, 2023, introduced by Jose Antonio Rivas (Xtrategy LLP, WAW Founder) was moderated by Ian Clemmence (PwC) and presented by the panelists Julie Carey (NERA), Mark Kantor (independent arbitrator), Melissa Stear Gorsline (Jones Day) and Tiago Duarte-Silva (Charles Rives Associates). After introducing his panelists, Ian Clemmence set the stage by giving a quick overview of the PwC’s International Arbitration Damages Study, focusing on trends in damage quantification in international arbitration.
The study reviewed over 180 ICSID arbitration awards from 1990 to 2022, analyzing damage quantification trends. It found that claimants typically seek higher damages, mainly using the income approach, like discounted cash flow (DCF), whilst respondents prefer costs or market approaches with tribunals typically awarding about 40% of what claimants seek in relief. However, the lack of substantial evidence and the speculative nature of some assumptions continue to raise concerns about the reliability of these valuations.
Trend Patterns in Quantifying Damages in International Arbitration: Key Factors and Approaches
Ms. Julie Carey was the first to address the issue. She noted differing opinions in damage quantifications, as both claimants’ and respondents’ experts often present skewed views, detached from economic reality or market trends. Her proposal of allowing experts depositions prior to hearings therefore aimed at narrowing the range of differing opinions, enhancing the quality of cross-examinations, and conducting a more thorough evaluation of assumptions and methodologies.
Concurring with Ms. Carey, Mr. Mark Kantor however, noted that divergences in damage quantifications are not solely due to experts but also to several other key elements. These include initial case instructions and varying assumptions provided by engaging parties. Moreover, factors such as distinct commercial, regulatory, political, and economic assumptions at both micro and macro levels are inherently part of each expert’s stance, often mirroring their client’s viewpoints. Finally, the design and complexity of valuation models also significantly vary as one party might use an intricate model while the other might opt for much simpler methods.
The duty of lawyers to advocate zealously (see, for example, Rule 1.3 ABA) was recalled by Ms. Melissa Stear Gorsline while maintaining candor towards the tribunal, as counsel must balance advocacy for their clients with honesty towards tribunals. She noted that tribunals often receive vast evidence, leading to different narratives and legal interpretations. To mitigate these divergences, she proposes early-stage expert conferencing or ‘hot-tubbing,’ although she recognizes some possible reluctance among non-U.S. practitioners to use it.
Mr. Kantor emphasized the need to address key disputes early on in a case to simplify damage quantification. He suggested that having experts identify major disagreements at the outset could offer the tribunal a targeted checklist, aiding in more efficient case resolution.
Building on Mr. Kantor’s idea, Mr. Tiago Duarte-Silva noted the necessity of shifting focus from valuation method disputes to clarifying key elements of the expert’s mandate, like the valuation date. He believed that this strategy enables technical experts to arrive at agreements more quickly and efficiently.
Technical Overview of Modern Damage Calculation
To gain a deeper insight into the rationale behind tribunal decisions awarding approximately 40% of the claimed amount, Mr. Duarte-Silva identified the complexity and variability in arbitration proceedings. He pointed out the frequent tribunal requests for joint expert reports and noted a growing trend where, following merits assessment, tribunals ask the parties to reevaluate damages with greater precision. This approach narrows down potential scenarios significantly, aiding in a clearer and more focused damage analysis.
Mr. Kantor further drew attention to the significant difference between the mean and median values in damages in U.S. federal courts, emphasizing that averages can be misleading without considering outliers exemplified in “RosInvest v. Russia” where substantial damages were awarded despite a finding of unlawful expropriation.
In his view, a “phased” approach should be employed in addressing damages with the first phase centered on defining the fundamental legal principle of compensation containing three possible options to apply:
- putting the party to its expected position, had the transaction continued, and the unlawful conduct ceased,
- returning the injured party to the position they would have been in if the transaction had never taken place,
- using the unjust enrichment principle.
Following that, the second step would involve choosing the valuation date, followed by the ex ante versus ex post analysis, and finally the application of the reasonable certainty test.
Building on this concept, Ms. Stear Gorsline highlighted the lengthy nature of investor-state cases and proposed an essential shift in strategy. Understanding liability, particularly in cases with multiple treaty violations, is vital for a more efficient second phase of quantum analysis.
Methodology for Damage Quantification
Mr. Clemmence then shifted the discussion to damage quantification (quantum) methods. He raised the question of the income approach, particularly for expropriation cases involving startups with limited financial or operational data. He highlighted the challenge in such scenarios, given that tribunals often reject the income approach as too speculative or uncertain.
On this subject, Ms. Carey recalled the importance of thoroughly understanding the unique factors, historical data, industry-specific considerations, complications, and risks involved in a case. Therefore, in order to support their assessments, experts should use various damage quantification approaches, including income and market approaches. The key is to ensure that the inputs used are reliable and supported by a consensus among experts. Ms. Carey highlighted the need for stable input assumptions and the avoidance of outliers to demonstrate the credibility of the calculations, as well as non-litigation documents and contracts that are less susceptible to market fluctuations.
Mr. Duarte-Silva stressed the importance of experts strengthening their credibility by challenging the opinions of their instructing counsels and avoiding unrealistic damage claims. For him, reports that disregard alternative evaluation methods warrant criticism. Therefore, echoing Mr. Carey, it becomes crucial not to depend solely on the DCF method but to integrate multiple methods to bolster the strength and credibility of valuations.
Mr. Kantor referenced the ICCA-ASIL Damages Task Force’s DIA (“Damages in International Arbitration”) web application launched in November 2021, suggesting its importance as a valuable resource for international arbitration. Indeed, DIA serves as an interactive online platform that offers practical assistance on the fundamental legal, quantitative and procedural elements pertinent to evaluating damages in arbitration. During the discussion, Mr. Kantor quoted the task force’s view on income-based valuation methods like DCF, stressing that lack of historical information shouldn’t automatically disqualify these methods. Instead, the focus should be on the reliability of information for expected cash flow projections.
Ms. Stear Gorsline, on the other hand, opined experts play a crucial role in interpreting contemporaneous documents in arbitration as the tribunals frequently devalue fact witness testimony when it lacks supporting documents. Therefore, industry experts can provide tribunals with valuable insights into historical context and document interpretation, offering an objective perspective based on industry standards and the prevailing macroeconomic conditions.
Conclusion
The panel’s primary focus was the discussion around the varying approaches to valuing damages in the context of Investor-State Arbitration. It delved into the analysis of recent trends in damage quantification methods, the critical obstacles related to quantifying damages, and valuation methods to bolster both the credibility and efficiency of the arbitration process as a whole. Notably, the panelists offered valuable practical insights into the valuation of disputes, the elucidation of essential experts’ role in the arbitral process, and the utilization of multiple damage quantification approaches to enhance the dependability of valuations in the context of international arbitration.
ABOUT THE AUTHOR:
Sandra Gradziel is a lawyer admitted to the Paris Bar, specializing in international projects, litigation, and arbitration. She has gained valuable experience at esteemed law firms such as Gide Loyrette Nouel, August Debouzy, and Rödl & Partner. Sandra holds an LL.M. in International Business Law and Management from ESSEC and a French master’s degree in International Business Law from Aix-Marseille University. She was a former participant in moot court competitions as part of Aix-Marseille’s commercial arbitration team at the Willem C. Vis International Commercial Arbitration Moot.
