Standard of Compensation for Violation of Fair and Equitable Treatment Matthew Weiniger Partner, Herbert Smith LLP, London 9 September 2005

2 Standard of Compensation - Introduction Case Concerning the Factory at Chorzow (PCIJ, Series A, No. 17, Sept. 13, 1928): “reparation must, as far as possible, 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” Customary international law Draft ILC Articles on State Responsibility (Article 31(1)): “obligation to make full reparation for the injury caused by the internationally wrongful act”

3 Expropriation v Breach of Fair and Equitable Treatment Standard of compensation clear in expropriation cases: - “prompt, adequate and effective” - “fair market value” Two categories for breach of fair and equitable treatment: 1. Breach not leading to total loss of investment: - SD Myers v Government of Canada (Damages Award, 21 Oct 2002) - MTD Equity Sdn Bhd and Anr v Republic of Chile (ICSID Case No. ARB/01/07, Award of 25 May 2004) 2. Breach leading to loss equivalent to total loss of investment: - CMS Gas Transmission Company v The Argentine Republic (ICSID Case No. ARB/048, Award of 12 May 2005) - AAPL v Sri Lanka (4 ICSID Reports, p. 246)

4 Category 1 - SD Myers v Canada Closure of US/Canadian border to export of waste materials Measure introduced to protect Canadian waste disposal industry Chorzow principle used as starting point Analysis based on loss of net income stream “To be recoverable, a loss must be linked causally to interference with an investment located in a host state” (Damages Award, para 18)

5 Importance of remoteness “…compensation should be awarded for the overall economic losses sustained by [the Claimant] that are a proximate result of Canada’s measure, not only those that appear on the balance sheet of its investment” (Damages Award, para 122) Claim for loss of profit recoverable subject to remoteness Contractual concept of foreseeability not appropriate Claim for loss of opportunity rejected

6 Category 1 - MTD v Chile Investment approved but later rejected by Chile Chorzow principle applied Chile alleged failure to mitigate Claimant’s argument for indirect expropriation rejected Tribunal determined expenditures related to project investment

7 Business Risk Claimant’s own actions increased transaction risks “The BITs are not an insurance against business risk and the Tribunal considers that the Claimants should bear the consequences of their own actions as experienced businessmen. Their choice of partner, the acceptance of a land valuation based on future assumptions without protecting themselves contractually in case the assumptions would not materialize…are risks that the Claimants took irrespective of Chile’s actions” (Award, para 178) Tribunal reduced compensation payable by 50%

8 Category 2 - CMS v Argentina Alleged expropriation of gas transportation business of TGN, an Argentinean company CMS invoked provisions of 1991 US-Argentina BIT “How does one weigh the significance of a legal guarantee in the context of a collapsing economic situation” (Award, para 165) No indirect expropriation, but breach of fair and equitable treatment

9 Underlying value to investment “the cumulative nature of the breaches…is best dealt with by resorting to the standard of fair market value. While this standard figures prominently in respect of expropriation, it is not excluded that it might also be appropriate for breaches different from expropriation if their effect results in important long- term losses” (Award, para 410) Discounted cash flow method adopted TGN is ongoing company with a record of profits “DCF techniques have been universally adopted, including by numerous tribunals, as an appropriate method for valuing business assets…there is adequate data to make a rational DCF valuation of TGN” (Award, para 416)

10 Category 2 - AAPL v Sri Lanka Armed insurgents destroyed company’s only asset Breach of duty to provide full protection and security Tribunal drew up “comprehensive balance sheet”

11 No underlying value to investment No record of profits “A reasonable prospective purchaser would…be at least doubtful about the ability of the Company’s balance sheet to cease being in the red…” (Award, para 97) No compensation for intangible assets