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Foro de Arbitraje 2011. Unique Considerations regarding Damages in Investment and Commercial Arbitration Craig S. Miles King & Spalding, Houston, EUA Mexico City 2 September 2011. Topics.

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foro de arbitraje 2011
Foro de Arbitraje 2011

Unique Considerations regarding Damages in Investment and Commercial Arbitration

Craig S. Miles

King & Spalding, Houston, EUA

Mexico City

2 September 2011

topics
Topics
  • Lawful vs. “unlawful” expropriation in investment arbitration and date of valuation Issues in both investment and commercial arbitration
  • Standard of compensation for non-expropriation violations in investment arbitration
  • Appropriate pre-/post-award interest rates for awards against sovereigns
  • Measuring damages to shareholders in investment arbitrations (puede ser muy complicado)
  • Effect of local company settlements on shareholder claims in investment arbitrations
unlawful vs lawful expropriation
“Unlawful” vs. Lawful Expropriation
  • Typical expropriation provision: “Investments shall not be expropriated or nationalized except under due process of law, in a non-discriminatory manner, and upon payment of prompt, adequate and effective compensation payable in freely transferable currency”
  • Suppose State acknowledges obligation to compensate but parties disagree on amount; or State pays in bonds that are not “freely transferable”
  • Does this make the State’s expropriation “unlawful”? Does it matter? Should it matter?
unlawful vs lawful expropriation date of valuation
“Unlawful” vs. Lawful Expropriation: Date of Valuation
  • Where it could matter (also true in commercial cases): date of valuation (or “date of expectations”)
  • Suppose in 2008 State expropriates (or commercial party breaches obligation related to) barrel of oil due to be produced in 2011
  • In 2008, oil trading at $35/bl
  • In 2011, oil trading at $85/bl
  • Should Tribunal in assessing damages in 2011 use price of $35/bl at date of expro/breach in 2008, or current price of $85/bl? Why or why not?
standard of compensation for non expropriation treaty violations e g f et
Standard of Compensation for Non-Expropriation Treaty Violations (e.g., F&ET)
  • Treaties say to use fair market value (“FMV”) for lawful expropriation
  • Treaties generally silent on standard of compensation for “unlawful” expropriation or other, non-expropriation Treaty violations
  • Customary international law standard = “full compensation”
  • Some tribunals use FMV for non-expropriation violations; States don’t like it
  • Does it matter? Should it matter?
appropriate interest rate to use for awards against sovereigns
Appropriate Interest Rate to Use for Awards Against Sovereigns
  • Can the whole “lawful” vs. “unlawful” problem be solved by interest rate?
  • Example of Venezuela: expropriated oilfield service companies in May/June 2009; has not paid
  • Assume expropriated oilfield services company was worth $100 MM in May 2009
  • In August 2011, compensation would be:
    • $107.5 MM at risk-free rate (~ 3.5%)
    • $134.4 MM at risk-free + EMBI (~ 14.3%)
    • $130 MM at VZ 10-year bond rate (~ 12.5%)
    • $123 MM at VZ 7-year bond rate (~ 10%)
quantifying damages to shareholder in presence of holdco debt
Quantifying Damages to Shareholder in Presence of HoldCo Debt

$50 or $100?

100%

Hold Co.

$100

Claimant

Third-Party Debts of $50

50%

50%

Op. Co.

$200

7

slide8

$60

100%

$30

$60

100%

100%

$40

Lenders $30

Lenders $10

Situation A: Investor Bears 100% of Damages

Investor

Hold Co. $90

Op. Co. $100

slide9

$50

100%

$20

$60

100%

100%

$40

$10

Lenders $30

Lenders $20

Situation B: HoldCo’s Lenders Also Get Hit

Investor

Hold Co. $80

Op. Co. $100

slide10

$20

100%

$0

$60

100%

100%

$40

$30

$10

Lenders $30

Lenders $50

Situation C: Both HoldCo and OpCo’s Lenders Get Hit

Investor

Hold Co. $50

Op. Co. $100

local company settlements effect on shareholder s treaty arbitration
Local Company Settlements -- Effect on Shareholder’s Treaty Arbitration
  • BITs protect shareholders in local companies
  • When local company settles (e.g., Argentina), what is effect on BIT claim?
  • More often than not shareholder’s interests aligned with local company and BIT claim will disappear with settlement
  • But what if shareholder is minority shareholder and votes against settlement?
  • Sempra Award: Tribunal took settlement into account in assessing damages but not did not bar claim; other Tribunals have suggested claim should be barred