12 - The Role of Customary International Law in International Investment Law Remedies

Summary

This chapter commences by analyzing the relevance the Permanent Court of International Justice’s judgment in the Chorzów Factory case and the prevailing position that it reflects customary international law on the remedies available for treaty breaches. The analysis then focuses on why references to remedies other than compensation (available under customary international law) are rare in investor-state arbitrations and whether there is a place for restitution and/or declaratory awards in international investment law. If claimants choose to seek restitution, tribunals are empowered to make such an award, unless this is explicitly excluded by the underlying treaty or is practically impossible (or at least inadequate) on the facts of the particular case. The ‘Spanish saga’ cases on renewable energy confirm this approach. Satisfaction, a third type of remedy available under customary international law, a declaratory award, is considered as a ‘paper victory’ which, in practice, is tantamount to losing a case. The final part of this chapter analyzes various issues related to compensation itself, in practice the most important remedy in international investment law.

1 Introduction

The growing number of investor-State arbitrations shed a light on the role of customary international law in the context of remedies. In virtually every arbitral award based on international investment treaties, when tribunals find that respondent States have violated their obligations, stemming from the underlying treaties, they make explicit reference to the Chorzów Factory judgment. They find that the principle that an award should ‘wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’ reflects customary international law. Sometimes, additional reference is made to the Draft Articles on Responsibility of States for Internationally Wrongful Acts (ILC Articles) to confirm that the calculations which follow are rooted in customary international law. This is commonly repeated, but often no detailed analysis follows. Instead, tribunals simply proceed to calculate compensation guided by the principle that a methodology should be applied which does not result in a ‘speculative’ outcome.

This chapter analyses some of the issues which arise in this context. First, what is the real meaning of references to the Chorzów Factory judgment in virtually every investment arbitral award? Is customary international law helpful in determining remedies, or is it merely a shortcut which allows the tribunals to proceed to compensation calculations? Second, why are references to remedies other than compensation, which are available under customary international law, so rare in investor-State arbitrations?¹ Is there a place for restitution or declaratory awards in international investment law? Third, what are the differences between the consequences of lawful expropriation and the consequences of treaty breaches in the light of customary international law?

The issues discussed in this chapter are particularly visible in disputes concerning renewable energy and early-stage mining projects, both of which fall within a broad definition of the natural resources sector. Therefore, the final part of this chapter concerns the methodologies available for calculations of compensation for treaty breaches, explained by way of examples of disputes concerning the flagged industries.

2 The Chorzów Factory Judgment as the Textualisation of Customary International Law

In its judgment, issued on 13 September 1928, the Permanent Court of International Justice (PCIJ) observed as follows:

The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it – such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.²

Even back in 1928, this principle was ‘established by international practice’.³ Thus, the first pre-requisite (usus) for considering it as customary international law has been met. In 1987, the US–Iran Claims Tribunal noted that ‘in spite of the fact that it is nearly sixty years old, this judgment is widely regarded as the most authoritative exposition of the principles applicable in this field, and is still valid today’.⁴ It has been confirmed on uncountable occasions since then.⁵ Thus, the second condition, opinio juris sive necessitatis, has also been met.⁶ In the context of investor-State disputes, States not only commonly adopt this position but also enforce and recognise arbitral awards rendered on this basis as final and binding.

The Chorzów Factory principle is reflected in the ILC Articles.⁷ Even though the ILC Articles ‘seek to formulate, by way of codification and progressive development, the basic rules of international law concerning the responsibility of States for their internationally wrongful acts’, their respective provisions codify, not progressively develop, the principle reflected in the Chorzów Factory judgment.⁸

The ILC Articles precisely define that Part Two thereof (which includes remedies) ‘does not apply to obligations of reparation to the extent that these arise towards or are invoked by a person or entity other than a State’.⁹ This ‘is without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State’.¹⁰ Despite that, they have been continuously referred to in investor-State arbitrations.¹¹ Depending on how one assesses the nature of investors’ rights under investment treaties, they are applicable either directly or mutatis mutandis. One possible theoretical approach is that investment treaties create investors’ own substantive and procedural rights (being States’ obligations towards investors, which would allow for Part Two of the ILC Articles being applied only mutatis mutandis).¹² Another possible approach is that investment treaties create procedural rights which can be applied to trigger arbitral proceedings related to alleged breaches of obligations owed to the State of the investor’s nationality (being obligations owed to the other contracting State, and not to the investors themselves, which would allow for Part Two of the ILC Articles being applied directly).¹³

The Chorzów Factory judgment is frequently referred to by arbitral tribunals in cases based on investment treaties.¹⁴ The tribunals consider the Chorzów Factory judgment as reflecting customary international law and, therefore, playing a pivotal role in determining remedies available in investor-State arbitrations. Even though the starting point for determining the remedies available in each case is always the text of the applicable investment treaty,¹⁵ most treaties remain silent on the issue of remedies for their breach, although a few exceptions exist.¹⁶ Thus, customary international law becomes relevant, as it governs issues that are not regulated in an applicable international treaty.¹⁷

The Chorzów Factory principle ‘is precise, strict, and unchangeable as a principle, but flexible and useful in a myriad of different scenarios’.¹⁸ Its biggest advantage sometimes turns out to be its disadvantage – tribunals have frequently failed to sufficiently analyse the application of this customary international law rule. Instead, they often tend to take a ‘shortcut’ and proceed to calculation of compensation, simply observing that this is ‘consistent with the principles set forth’ in the Chorzów Factory judgment.¹⁹

3 Restitution as the Primary Remedy

Under the Chorzów Factory principle, restitution is the default remedy for violations of a State’s international obligations.²⁰ Only when restitution ‘is not possible’ should the ‘payment of a sum corresponding to the value which a restitution in kind would bear’ be awarded.²¹ This is re-affirmed in Article 36(1) of the ILC Articles, according to which a State responsible for an internationally wrongful act ‘is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution’.

Therefore, under customary international law, the broad concept of ‘reparation’ is divided into three subcategories: restitution, compensation and satisfaction, each being a different type of remedy. Restitution is a default remedy and a primary obligation of a State which violates an investment treaty.²² However, sometimes full reparation may only be achieved by combining different forms of reparation.²³

From a theoretical perspective, the possibility of arbitral tribunals awarding restitution in investor-State disputes has been recognised for many years.²⁴ This theoretical possibility has been confirmed as available in investor-State arbitrations.²⁵ In light of the above, it may be surprising that investor-State arbitral awards almost always comprise a compensation payment.²⁶ Only sometimes does this result from a particular substantive law being applicable to the dispute.²⁷ Typically, investment treaties do not address remedies at all, so they also do not preclude the possibility of restitution.

Most probably, the main reason for tribunals paying insufficient attention to restitution is the way in which claims are framed. Claimants have the right to choose which form of remedies they seek.²⁸ The way in which claims are framed binds the tribunals, which cannot go beyond the remedies sought by the claimants.²⁹ It is rare in practice for investors to seek remedies other than compensation.³⁰ It was rightly commented that ‘the ultimate goal of the claimant in an investment treaty arbitration is almost always the payment of compensation for the harm it believes it has suffered at a host State’s hands’.³¹

Recent awards rendered against Spain suggest that this approach may be revisited in practice. In Eiser v Spain, Masdar v Spain, Antin v Spain, RREEF v Spain, RWE v Spain, PV Investors v Spain and Watkins v Spain, the claimants primarily sought restitution and only asked for compensation if restitution was not awarded.³² None of the tribunals in these cases declined the theoretical possibility of awarding restitution.³³ However, each tribunal arrived at the conclusion that restitution was inappropriate on the facts of the particular case.

Such an approach seems to be justified in the Spanish saga cases, which concern alleged violations of investment treaties arising due to changes in the general regulatory framework. Restitution can be replaced by compensation not only where restitution is ‘not possible’ (as expressly stated in the Chorzów Factory judgment and recognised in Art 35 of the ILC Articles), but also if restitution is ‘unavailable’ or ‘inadequate’.³⁴

It would be either impossible, or at least extremely difficult, to comply with an award which ordered the restitution of previously applicable laws and regulations.³⁵ Moreover, the Tribunals in Eiser v Spain, Antin v Spain and Watkins v Spain observed that ordering restitution could give rise to doubts as to the permissibility of limiting State sovereignty.³⁶ The Tribunal in Masdar v Spain concluded that it could ‘unduly burden’ the respondent’s ‘legislative and regulatory autonomy’.³⁷ The Tribunal in RWE v Spain observed that the case was ‘plainly not an appropriate case for restitution’, as it involved regulations ‘generally applicable across a very important sector in Spain’ and restitution ‘would obviously involve a burden to the Respondent out of all proportion’.³⁸

The ‘sovereignty concern’ is well founded in the context of treaty violations caused by changes to generally applicable regulatory frameworks, as happened in the Spanish saga cases. It is less justified in cases concerning treaty breaches targeting a specific, individual investor. In such cases, the approach adopted by Energy Charter Treaty (ECT), North American Free Trade Agreement (NAFTA) and the United States Mexico Canada Agreement (USMCA) provide useful guidance on how to mitigate the sovereignty concern related to restitution by ordering that the respondent ‘may pay monetary damages and any applicable interest in lieu of restitution’.³⁹ This solution is not a deviation from the Chorzów Factory principle.⁴⁰ Arbitral tribunals have the possibility to adopt a similar approach in investment disputes based on investment treaties other than ECT, NAFTA or USMCA. This is certainly so if the claimant presents an explicit request for such relief. However, even if a claimant’s request is framed in a traditional manner – ie, it requests restitution and, only if restitution is impossible, compensation as an alternative – this opens the door for the tribunal to order restitution with the possibility to pay compensation in lieu of restitution.

Alternatively, tribunals can award restitution, stipulate a time limit within which it must materialise and proceed to ordering compensation only if the respondent fails to perform the specific obligation imposed upon it. Although no publicly available arbitral award reveals that this theoretical possibility has already been applied in practice, an analogy can be made from some tribunals’ approach of deferring a decision on compensation to await both parties’ initiative to provide a joint experts’ report, whilst at the same time securing an alternative scenario if the parties cannot or do not wish to reach an agreement.⁴¹

Restitution may occur alongside compensation, not merely as an alternative.⁴² With respect to an income-generating business, a return of the asset alone would not fully compensate the investor, as it would not compensate the income lost by that business in the intervening period.⁴³ In such a case, restitution should take place ‘in combination’ with compensation, as explicitly stated in Article 34 of the ILC Articles.⁴⁴ Only then is the principle of full reparation met.⁴⁵ Similarly, restitution should take place ‘in combination’ with compensation if an expropriated asset has lost its value since it was taken away. Otherwise, the claimant would be in a worse position if the asset were returned to him than if he received compensation.⁴⁶

4 No Place for Declaratory-Only Awards

Satisfaction is a third type of remedy available for the violation of treaty obligations. This remedy comes into play insofar as the injury ‘cannot be made good by restitution or compensation’.⁴⁷ In this sense, an award itself, which declares the wrongfulness of State actions, can constitute satisfaction – a form of reparation.⁴⁸

This remedy has little, if any, relevance in investor-State disputes. First, no investor would ever decide to commence costly arbitral proceedings solely to achieve this purpose. Therefore, a declaratory-only award by itself would be considered a ‘paper victory’ and a de facto loss, rather than one which results in meaningful reparation being granted.

Second, the award must be made public if the claimant is to receive satisfaction within the above meaning. Many arbitral awards remain unpublished, notwithstanding a certain tendency towards transparency.⁴⁹ The fact that an award will remain confidential would require an arbitral tribunal to order the State to issue ‘an acknowledgement of the breach, an expression of regret, a formal apology or another appropriate modality’, rather than simply issuing an award which declares that certain treaty provisions were infringed.⁵⁰

Although theoretically possible, there is nothing in the public domain to suggest that a claim has ever been framed in that manner, ie requesting exclusively declaratory relief.⁵¹ Claimants invariably request declaratory relief in conjunction with compensation (and sometimes restitution).⁵²

5 Compensation for Lawful Expropriation

When looking at compensation, it is important to differentiate between lawful expropriation and violations of investment treaties, including unlawful expropriation.⁵³

Expropriation as such is not prohibited under general international law.⁵⁴ On the contrary, States have a right to expropriate alien property.⁵⁵ Investment treaties do not alter this situation. In fact, most explicitly reaffirm States’ right to expropriate. They do, however, define the conditions which must be met by expropriatory action before it will comply with States’ international obligations. The standard conditions of lawful expropriation include the existence of a public purpose, non-discrimination, due process and ‘prompt, adequate and effective compensation’⁵⁶ (or similar wording having the same meaning).⁵⁷ The last condition is typically accompanied by a determination of the valuation date and applicable interest rate.⁵⁸

The most essential element in defining compensation – adequate – is linked with the objective value of the expropriated investment, which is equated with its ‘fair market value’.⁵⁹ The fair market value is understood as reflecting ‘the price at which a willing buyer would buy, and a willing seller would sell, no party being under any type of duress and both parties having good information about all relevant circumstances involved in the purchase’.⁶⁰ ‘Effective’ means that compensation must be ‘fully realizable’, whilst ‘prompt’ means ‘paid without delay’.⁶¹

The above is not, however, a remedy for an internationally wrongful act.⁶² The applicable legal principles differ between compensation, as one of the conditions of lawful expropriation, and compensation, as a remedy for unlawful expropriation.⁶³

In this context, a question arises whether a failure to fulfil this condition of lawful expropriation (ie the condition of paying ‘prompt, adequate and effective compensation’) by itself means that the expropriation becomes unlawful. Many tribunals have ruled in favour of this approach.⁶⁴ Others have decided that non-fulfilment of the compensation prerequisite does not, by itself, render the expropriation unlawful.⁶⁵ However, the latter cases concerned situations where the respondent States accepted their obligation to pay compensation, but the parties were unable to agree on the amounts due. The Tribunal in Tidewater v Venezuela found that this was ‘not a case where the State took assets without any offer of compensation. The record does not demonstrate a refusal on the part of the State to pay compensation. Rather, it discloses that the Parties were unable to agree on the basis or the process by which such compensation would be calculated and paid’.⁶⁶ Similarly, in Venezuela Holdings v Venezuela the negotiations on compensation took place and the respondent State ‘made proposals during those negotiations’.⁶⁷ This allows the conclusion that expropriation should be considered as legal if all other conditions have been met (aside from the payment of compensation) and the respondent State has made ‘a good faith effort to comply with the compensation requirement’ (even if unsuccessfully).⁶⁸ If, on the other hand, the respondent State declines to pay any compensation at all, the failure to fulfil this condition suffices to consider the expropriation unlawful. In line with the above, any indirect expropriation would always amount to unlawful expropriation, as it is not compensated and involves no attempt to negotiate the amount of compensation payable.

6 Remedies Available for Treaty Breaches

As noted above, compensation for lawful expropriation is linked with the ‘fair market value’ of the expropriated object, typically with the valuation date set immediately prior to expropriation and increased by the applicable interest rate. If an expropriation does not meet the conditions of being lawful, it should not have taken place at all. In such a situation, reparation should ‘wipe out’ all of its consequences. The principle of full reparation rooted in customary international law does not provide any guidelines on how to determine the financial situation of the victim of a treaty breach.⁶⁹

The aim is to put the claimant in the same situation as it would have been ‘but for’ the breach. In the first place, this may justify restitution in kind, as noted above. In the context of compensation, there are two vital differences between the compensation calculated as a condition for lawful expropriation and the compensation calculated as a remedy for unlawful expropriation. These relate to: (i) the date of valuation and (ii) the possibility to use ex post information during the calculation.⁷⁰

As noted earlier, compensation for lawful expropriation is typically calculated on the basis of the fair market value shortly prior to the time at which the asset was taken. Calculating compensation for unlawful expropriation offers more flexibility. It allows the same date to be chosen as would apply in the case of lawful expropriation (ie immediately prior to the taking), but it offers an alternative – ie the date of the award.⁷¹ This is in line with the principle of putting the claimants in the situation they would have been in ‘but for’ the breach. The PCIJ itself noted in the Chorzów Factory judgment that compensation

is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment. This limitation would only be admissible if the Polish Government had had the right to expropriate, and if its wrongful act consisted merely in not having paid to the two Companies the just price of what was expropriated.⁷²

In the words of the US–Iran Claims Tribunal in Phillips Petroleum v Iran, the difference is – apart from restitution – ‘whether compensation can be awarded for any increase in the value of the property between the date of the taking and the date of the judicial or arbitral decision awarding compensation’.⁷³

Another difference is the possibility to make use of ex post information – ie information which became available only after the expropriation took place. In the case of lawful expropriations, calculations are based on data available at the moment just prior to the taking, which reflects ‘the price at which a willing buyer would buy, and a willing seller would sell’ with the knowledge they would have actually had on the valuation date.⁷⁴ Customary international law allows a different approach – ie relying on any available information, including ex post knowledge.⁷⁵ The ‘only subsequent known factors relevant to value which are not to be relied on are those attributable to the illegality itself’.⁷⁶

These differences can result in higher amounts of compensation when compared to compensation for lawful expropriation. As was summarised by the Tribunal in Quiborax v Bolivia: ‘This is easily explained by a reference to restitution: damages stand in lieu of restitution which would take place just following the award or judgment. It is also easy to understand if one keeps in mind that what must be repaired is the actual harm done, as opposed to the value of the asset when taken.’⁷⁷ This may become relevant in practice. For example, with respect to unlawfully taking a mining concession, it would not be surprising if, at the moment of taking, the deposit estimations suggest that a specific amount of mineral resource exists, but subsequently the deposit turns out to be larger, thereby increasing the amount of due compensation.

At the same time, these differences should not result in a lower compensation for unlawful expropriation than for lawful expropriation. It is possible for an expropriated investment to lose its value between the expropriation date and the date of the award. If this occurs, compensation for lawful and unlawful expropriation should be calculated on the same basis, ie based on the value of the asset at the time of expropriation, plus interest.⁷⁸ This is in line with customary international law, which provides that restitution – if possible – should be awarded together with compensation for any loss which is not covered by restitution. If compensation is the only remedy available, the claimant is entitled to compensation ‘in the amount of the asset’s higher value’ between the expropriation date and the date of the award. This is because the State which violated international law bears ‘the risk of unanticipated events decreasing the value of an expropriated asset over that time period’, not the individual who suffered the loss.⁷⁹

An important differentiation in this context arises with respect to a division between unlawful expropriation and other treaty breaches. It goes without saying that the Chorzów Factory principle finds application to all violations of investment treaties’ provisions, not solely unlawful expropriation.⁸⁰

In this context, restitution could play a more important role in the future.⁸¹ In terms of compensation, if violations of multiple standards are found, typically, tribunals consider it sufficient to calculate compensation for unlawful expropriation as covering the whole loss suffered.⁸² This is in line with the Chorzów Factory principle, which requires that no overcompensation takes place.⁸³ It results from a pragmatic approach: typically, other breaches would result in a compensation award of equal or less value than the compensation due in the case of unlawful expropriation.⁸⁴

7 Methodologies of Calculating Compensation in the Light of the Chorzów Factory Principle

Within the legal framework discussed above, when calculating compensation tribunals must decide which methodology to apply. In each case, the choice of methodology is fact dependent. In the words of the Tribunal in Antin v Spain: ‘there are no right or wrong valuation methods, but different methods that are appropriate depending on the specific circumstances of the case’.⁸⁵ Whichever methodology is applied, typically, compensation ‘cannot be determined with mechanical precision’.⁸⁶ What matters is that the arbitrators are comfortable that the methodology applied is not ‘speculative’.⁸⁷ Reluctance towards a speculative outcome is one of the key factors which influences arbitrators when choosing the methodology for calculating compensation.

Keeping in mind the above, it is possible to make a few general comments on the methodologies typically available in investor-State arbitrations. From a theoretical perspective, they can be divided into two classifications: (i) backward-looking and (ii) forward-looking.⁸⁸

Probably the most common backward-looking methodology considers the amounts actually invested (‘sunk costs’) and seeks to return this amount to the investor. The advantage of this methodology is that the outcome is based on actual figures, which avoids any speculation.⁸⁹ The disadvantage is that it does not compensate for lost profits.⁹⁰ As such, it does not place the claimant in a situation in which it would have been ‘but for’ the treaty breach, as required by customary international law. No reasonable investor decides to undertake an investment with the sole purpose of receiving back the amount it originally invested after a period of time.

This shortcoming is partially cured by ordering pre-award interest.⁹¹ This is envisaged by Art. 38 of the ILC Articles, which states that interest may be ‘necessary in order to ensure full reparation’.⁹² Pre-award interest ‘should compensate a claimant for the deprivation of money owed to it between the date of the harm suffered and the award’.⁹³ The economic rationale behind interest is to reflect the ‘cost of money that a lender is willing to be paid to part with his money for a given period of time’.⁹⁴ Pre-award interest, therefore, brings ‘past losses […] to present value’ and compensates for loss stemming from the fact that the investors were not ‘in possession of the funds’ to which they were entitled and they had ‘either to borrow funds at a cost or were deprived of the opportunity of investing these funds at a profit’.⁹⁵ As such, it reflects the time value of money and the decreasing purchasing power of money over time. It does not compensate investors for the fact that they did not obtain a profit from the investment.⁹⁶

For the above reason, ‘sunk costs’ can be used as a ‘reality check’ of the outcome reached by applying other methodologies.⁹⁷ They can serve as the primary methodology only if forward-looking ones are unavailable in a particular case. The two most common forward-looking methodologies are: (i) income based and (ii) market based.⁹⁸

Income-based methodology, also known as the Discounted Cash Flow (DCF) method, calculates the present value of an investment’s anticipated future cash-flows during its useful life.⁹⁹ As such, it provides for a fair market value of a ‘going concern’.¹⁰⁰ It aims at compensating lost profits which the investment was supposed to generate, but was unable to because of the treaty breach.¹⁰¹ Application of this method requires the ability to forecast future earnings.

Market-based methodology determines the value of an investment by comparing it to similar investments traded on the open market. Whilst DCF ‘computes the present value of the business’s future earnings’ directly, the market-based approach does so indirectly ‘because it incorporates market values of comparable businesses’.¹⁰² Application of this method requires the existence of comparable transactions (concerning similar projects or companies, if an investment is implemented through a special purpose vehicle having one asset).¹⁰³

Forward-looking methods are commonly applied in business reality, outside the context of litigation.¹⁰⁴ For example, they are recognised in industry standards for valuating mineral properties.¹⁰⁵ They are based on market indicators. Thus, even though they represent a degree of subjectivity and uncertainty, this in itself should not preclude their application.¹⁰⁶

8 The Curious Case of the Natural Resources Sector

Investor-State arbitration case law reveals the reluctance of arbitral tribunals to apply forward-looking valuation methods to early-stage projects, particularly those which have not yet started to generate any income. With respect to such projects tribunals tend to consider the DCF method as ‘too speculative and uncertain’,¹⁰⁷ ‘unattractive and speculative’,¹⁰⁸ requiring ‘too many unsubstantiated assumptions’ and being ‘overly speculative’,¹⁰⁹ requiring an investment to be ‘a going concern with a proven record of profitability’.¹¹⁰ The tendency with respect to comparable transactions is to consider them as ‘not sufficiently comparable’¹¹¹ or to find that they do not ‘support a clear conclusion’ regarding comparability.¹¹² Instead, tribunals prefer to look at the amounts actually invested (‘sunk costs’)¹¹³ or other backward-looking methods, such as offers actually received in the past to acquire the relevant investment.¹¹⁴

In cases where tribunals have decided not to apply the DCF method to early-stage mining projects, they did not preclude the use of the method per se, but merely decided that it was not applicable to the facts of the given case.¹¹⁵ Rightly so, as the methodology itself is in line with the Chorzów Factory principle.

There are examples to show that the DCF method can also be applied in disputes concerning early-stage mining projects. In Tethyan v Pakistan case, the Tribunal awarded compensation based on a ‘modern DCF’. It observed that, among other matters,

the question whether a DCF method (or a similar income-based valuation methodology) can be applied to value a project which has not yet become operational depends strongly on the circumstances of the individual case. The first key question is whether, based on the evidence before it, the Tribunal is convinced that in the absence of Respondent’s breaches, the project would have become operational and would also have become profitable. The second key question is whether the Tribunal is convinced that it can, with reasonable confidence, determine the amount of these profits based on the inputs provided by the Parties’ experts for this calculation […].¹¹⁶

Both prerequisites were met in the case. The Tribunal in Crystallex v Venezuela observed, in the context of a gold mine project which had not commenced production, that:

the Claimant has established the fact of future profitability, as it had completed the exploration phase, the size of the deposits had been established, the value can be determined based on market prices, and the costs are well known in the industry and can be estimated with a sufficient degree of certainty. […] In this case only forward-looking methodologies aimed at calculating lost profits are appropriate in order to determine the fair market value of Crystallex’s investment.¹¹⁷

This is in line with standard industry practices such as CIMVal Standards and Guidelines 2003. Also, the Tribunal in Gold Reserve v Venezuela, where the experts for both parties used the DCF method, applied it to non-production property.¹¹⁸

This case law reveals that the DCF method can indeed be applied to early-stage mining projects.¹¹⁹ Relevant factors in the fact-assessment include whether a sufficient degree of certainty has been achieved regarding projections of future profitability (such as knowledge of the size of the mineral deposit,¹²⁰ predictability of price fluctuations strengthened by resource type¹²¹ and reliable mining cashflow analysis prepared prior to the dispute having arisen),¹²² combined with the claimant’s standing (such as a historical record of financial performance,¹²³ whether it has a demonstrated commitment and capacity – both financial and organisational – to progress to the production stage).¹²⁴

These observations find support in the Spanish saga case law, concerning investments in the renewable energy sector (which is considered to fall within the field of natural resources).¹²⁵ In most of these cases, when tribunals found that the underlying investment treaty had been infringed, they decided to apply the DCF method.¹²⁶ The tribunals did not consider it too speculative. The lifetime of the investments (power plants) was foreseeable. This can be compared to the expected lifetime of a mine and the production period of a particular deposit. The commodity price (electricity) was foreseeable. This can be compared to the commodity price of natural resources such as gold, copper or gas.¹²⁷ Developing projects in both fields requires large, upfront investments.¹²⁸

In the renewable energy sector, an important element allowing for DCF calculations was the highly regulated nature of the industry, minimising the expected fluctuations of future cash flows. In the words of the Tribunal in Novenergia v Spain, the DCF method ‘is considered particularly suitable for valuating income-streams that are regulated (as opposed to unregulated business that is more exposed to market fluctuations)’.¹²⁹ Thus, the DCF method was applied not only to ‘going concerns’, but also to investments which began generating income shortly prior to the respondent’s regulatory changes, which violated the investment treaty.¹³⁰ This is a major difference between mining and renewable energy disputes. Whereas mining disputes also concern a highly-regulated industry, this factor is not related to State subsidies and, therefore, has limited impact on future cash flows.

9 Conclusions

The Chorzów Factory principle reflects customary international law governing remedies for treaty breaches. As such, it applies to violations of international investment treaties. It entitles claimants in investor-State arbitrations to seek restitution prior to compensation or satisfaction.

Claimants have a right to choose the remedy they wish to seek. If claimants seek restitution, tribunals have the power to award it, unless this is explicitly precluded by the underlying treaty or is impossible (or at least inadequate) due to the facts of a particular case. Restitution was considered as inadequate in the Spanish saga cases, which concerned treaty violations resulting from the adoption of new laws and regulations. Ordering restitution in this context was considered as potentially limiting State sovereignty. Tribunals can award restitution with the possibility to pay compensation in lieu of restitution, to overcome similar concerns in cases concerning individually applied measures.

A declaratory-only award is considered as a ‘paper victory’ and the de facto loss of the case, rather than as having obtained satisfaction, a meaningful form of reparation. Such an award is disproportionate when compared to the costs of arbitral proceedings and its significance is undermined by the confidentiality of the bulk of investor-State arbitral awards.

In practice, claimants rarely consider any remedy other than compensation. The Chorzów Factory principle seems to be used by claimants as a shortcut to proceed to calculating compensation. There is nothing reproachable in this, and the precise manner in which claims are framed is binding on tribunals, which cannot go beyond the remedies sought by the claimants. This explains, however, the reasons why remedies other than compensation – restitution and satisfaction, available under customary international law – are only occasionally considered in investor-State arbitrations.

With respect to compensation, differences exist between compensation for lawful expropriation (compensation is a prerequisite of any lawful expropriation) and compensation as a remedy for unlawful expropriation. The latter can be higher, as it can be calculated as of the date of the award and it can make use of ex post information. This understanding of the customary international law governing compensation appears to be already settled in investor-State arbitral case law.

There is no infallible approach to choosing the methodology for calculating compensation for treaty breaches. However, the choice of forward-looking (income-based) methods is generally available in cases concerning all sectors of the economy, including in disputes concerning early-stage mining projects and renewable energy power plants. There are identifiable patterns in the case law, showing that (i) in principle, arbitral tribunals are reluctant to apply forward-looking valuation methods to early-stage projects, particularly those which have not begun to generate any income, but (ii) if a number of factual elements exist, this initial reluctance can be overturned. This U-turn is easier in renewable energy disputes than in mining disputes, because the highly-regulated nature of the renewable energy industry is closely related to State subsidies, which allow the expected fluctuations of future cash flows to be minimised.