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% Lenders $30 Lenders $10 $30 $60

Situation B: HoldCo’s Lenders Also Get Hit Investor Op. Co. $100  $40 Hold Co. $80 $60 100% 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% 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