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

• 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

• 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

• 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)

• 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

• 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%)

7

Quantifying Damages to Shareholder in Presence of HoldCo Debt

Claimant

Op. Co.

Third-Party Debts of $50 50%

100%

50%

$200

$100

$50 or $100?

Hold Co.

Situation A: Investor Bears 100% of Damages

Investor

Op. Co. $100 $40

Hold Co. $90

$60

100%

100%

100%

Lenders $30

Lenders $10

$30

$60

Situation B: HoldCo’s Lenders Also Get Hit

Investor

Op. Co. $100 $40

Hold Co. $80

$60

100%

100%

100%

Lenders $30

Lenders $20

$20

$50

$10

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

Investor

Op. Co. $100 $40

Hold Co. $50

$60

100%

100%

100%

Lenders $30

Lenders $50

$0

$20

$30

$10

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