Damages in International Arbitration with respect to Income Generating Assets or Investments in Commercial and Investment Arbitration

The Journal
of Damages in
International Arbitration
2015 • Vol. 2, No.1
2015 • Vol. 2, No.1
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The
Journal of
Damages
in International
Arbitration
ARTICLES
“Going Concern” as a Limiting Factor on Damages in José Alberro and
Investor-State Arbitrations George D. Ruttinger
Dollars and Common Sense: Understanding Neil Steinkamp,
Reasonable Certainty in International Arbitration Elizabeth J. Shampnoi
and Robert Levine
Damages in International Arbitration with Respect
to Income Generating Assets or Investments Herfried Wöss and
in Commercial and Investment Arbitration Adriana San Román Rivera
Damages Issues in the Arbitration of Louis-Alexis Bret and
Energy Trading Disputes Craig S. Miles
Fifty Billion Dollars; The Yukos Damages Awards Mark Kantor
CASE NOTES
Mobil Corporation, Venezuela Holdings, B.V., Mobil Cerro Negro Holding, Ltd.,
Mobil Venezolana de Petróleos Holdings, Inc., Mobil Cerro Negro, Ltd., and
Mobil Venezolana de Petróleos, Inc. v. Bolivarian Republic of Venezuela,
ICSID Case No. ARB/07/27

Gold Reserve Inc. v. Bolivarian Republic of Venezuela,
ICSID Case No. ARB(AF)/09/1
Saur International v. Republic of Argentina, ICSID No. ARB/04/4

THIRD ANNUAL JURIS DAMAGES IN INTERNATIONAL ARBITRATION
CONFERENCE TRANSCRIPT

37
DAMAGES IN INTERNATIONAL ARBITRATION
WITH RESPECT TO INCOME GENERATING
ASSETS OR INVESTMENTS IN COMMERCIAL
AND INVESTMENT ARBITRATION
Herfried Wöss*
Adriana San Román Rivera**
I. INTRODUCTION
This article discusses damages analysis for the interruption of
the income stream in income generating assets or investments due
to breach of contract or the violation of an international legal
standard (international tort), in commercial and investment
arbitration, as applicable. As will be shown in the following
paragraphs, the methodology of damages analysis with respect to
income generating assets in commercial and investment arbitration
is similar. The difference lies in the so-called measure of damages.
For income generating assets, the income stream serves to
recover the investment and to generate profits. Income
generating assets may be electric power plants, hotel resorts, oil
and gas exploration projects, toll highways, production plants and
other investments. In these cases, damages claims may arise from
the breach of contract or international tort, where the damages
analysis is about the effect of the breach or the illegal State
measure on the income stream.
In complex long-term contracts such as joint venture
agreements, concessions for toll roads, BOT (Build-Operate-
Transfer) or PPP (Public-Private Partnership) projects, the
* International Arbitrator, partner, Wöss & Partners, Arbitration & Trade,
Mexico, D.F. – Washington DC – Lima, International Who’s Who of Commercial
Arbitration, Founder of the Investment Arbitration Forum, former visiting
scholar of the Georgetown University Law Center.
** Partner, Wöss & Partners, Arbitration & Trade, Mexico, D.F. –
Washington DC – Lima, attorney at law and financial analyst, M.A. in Finance &
Investment (Exeter), passed first level of the Chartered Financial Analyst
exam, New York.
This Article is from The Journal of Damages in International Arbitration (JDIA), Vol:2, No:1.
© JurisNet, LLC 2015 www.arbitrationlaw.com

38 THE JOURNAL OF DAMAGES IN INTERNATIONAL ARBITRATION
parties contribute assets of any kind, in order to obtain the
income or cash flows, which come from a third party, that is, the
market such as the users or consumers of electricity, toll roads or
water. This leads to a triangular structure or so called
‘synallagmatic triallagma’.1 Such situation is different from typical
synallagmatic contracts such as sales and construction contracts,
where one of the parties receives a good or service in exchange
for a price paid by the other party. In this case, the profits for the
buyer may be generated through collateral transactions with
third parties and are not directly governed by the original
contract, but the lost profits under collateral or subsequent
transactions are the consequence of the breach of the original
contract. These legal differences have implications as regards to
causality, foreseeability and mitigation.
Damages analysis with respect to the interruption of income
stream is challenging due to the element of uncertainty in the
behavior of the market from which the income stream depends.
The determination of the reasonable certainty of the income is the
key element of damages analysis, together with the determination
of the effect of the breach or the illegal State measure on the
income stream.
The lost profits with respect to income generating assets may
be caused by the breach of a complex long-term contract and
resolved through commercial arbitration, by breach of contract
under an umbrella clause or by an illegal State measure through
investment arbitration. Damages are the amount of compensation
for the lost profits, which should place the injured party in the
economic position it would be in but for the breach or the illegal
State measure. This corresponds to the full compensation
principle, which is recognized as a general principle of law2 and
also as international customary law standard.3
1 Stefan Grundmann, ‘Contractual networks in German private law’ in
Fabrizio Cafaggi, Contractual Networks, Inter-firm Cooperation and Economic
Growth (Edward Elgar Publishing 2011) 116-21.
2 Ingeborg Schwenzer, Pascal Hachem and Christopher Kee, Global Sales
and Contract Law (Oxford University Press 2012), para. 44.19.
3 Irmgard Marboe, Calculation of Compensation and Damages in
International Investment Law (Oxford University Press 2009) para. 2.72, with
futher references.

DAMAGES IN INTERNATIONAL ARBITRATION 39
The core of damages analysis is the understanding of the
structure of income stream based investments as developed since
the 1970s by project finance specialists4 and the application by
analogy of the corresponding private law legal principles. Correct
damages analysis aims at a fairly precise determination of
historical losses and a considerable reduction of the element of
estimation as regards future lost income stream or profits
measured at the moment of the award. A deficient damages
analysis leads to erroneous results in damages valuation.
Therefore, the understanding of the correct process of damages
analysis as regards income generating investments in commercial
and investment arbitration is of utmost importance in order to
achieve a reasonable and fair determination of damages.
II. THE STANDARD OF COMPENSATION
It is undisputed among legal systems that the injured party is
entitled to recover all losses incurred due to the breach of
contract or illegal State measure. The principal function of
damages law is to compensate for the loss caused by the breach
or the illegal State measure, by placing the injured party in the
economic position it would be in but for the breach or the illegal
State measure. Full compensation thus requires one to answer
the question of what would be the economic position of the
injured party but for the breach, or the illegal State measure. The
principle of full compensation applied through the but-for
premise is, therefore, the guiding principle for any damages
claim.
The standard of full compensation is recognized in the Factory
at Chorzów case,5 which reflected contemporary State practice at
the beginning of the 20th century.6 Full compensation refers to the
expectation interest as defined by Friedrich Mommsen in his
Doctrine of Interest in 1855, according to which ‘Interest means,
however, damages; and if the expression damages is exclusively
4 Scott L. Hoffman, The Law and Business of International Project Finance
(3rd edn., Cambridge University Press 2008) §1.01.
5 1928 PCIJ Series A, No. 17, 50.
6 Hersch Lauterpacht, The Development of International Law by the
International Court (London, Stevens & Sons 1958) 315-16.

understood as full compensation, both terms coincide in their
meaning’.7
III. TYPICAL AND ATYPICAL SYNALLAGMATIC CONTRACTS AS WELL AS
OTHER INCOME GENERATING ASSETS
Before explaining the differences in damages analysis, it is
important to understand the structural elements of typical
complex long-term contracts such as energy and gas supply
contracts or turnkey construction agreements, and atypical long-
term contracts based on income stream such as joint venture
contracts, BOT and PPP contracts, or any other income generating
assets such as hotel resorts or income-generating investments
without a contractual relationship with a State entity.8
In typical synallagmatic contracts, the essential legal elements
are, on one hand, the delivery of goods or services, and, on the
other, the payment of the price. In complex long-term contracts
based on income stream (synallagmatic triallagmas), the essential
legal elements are the assets of any kind that the parties
contribute, but with the income coming from a third party (i.e.,
the market). This is relevant for the determination of loss and
with respect to foreseeability and mitigation.
The difference is that in typical synallagmatic contracts the
profits of the buyer derive from collateral transactions or
subsequent contracts. In this situation, there is an exchange of
goods or services against money, and the buyer may obtain
profits from a third party through collateral transactions based on
the services or goods received under the original contract.
Atypical synallagmatic contracts (triallagmas) are similar to a
partnership. In this second situation, both parties contribute
assets with the expectation to obtain an income stream or profits
from a third party. The contract regulates the way in which the
parties must act in order to obtain such profits and the way they
would share those profits. The similarity between complex typical
7 Friedrich Mommsen, Beiträge zum Obligationenrecht: Abth. Zur Lehre von
dem Interesse [Contributions to the Law of Obligations: Section The Doctrine of
Interest] (E.U. Schwetschke und Sohn 1855), 27.
8 Herfried Wöss, Adriana San Román Rivera, Pablo T. Spiller, Santiago
Dellepiane, Damages in International Arbitration under Complex Long-term
Contracts (Oxford University Press 2014), para. 3.42, 5.03-4.

synallagmatic and atypical synallagmatic contracts is that in both
cases the ultimate economic purpose is the generation of income
or profits coming from a third party.
In a typical sales or construction agreements, the seller sells
goods or services and the buyer pays the price. If the goods or
services are deficient, the loss for the buyer is either the cost of
cure or the difference in value between a conforming and non-
conforming good or service, which is the damnum emergens. This
situation is normally regulated in detail under the applicable laws
and there are substantial differences between such applicable
laws with French law having the highest level of measure of
damages, which is the cost of cure9 and English law applying the
concept of difference in market values.10 In practice, in case of a
defective swimming pool, under French law the constructor
would have to reconstruct such swimming pool even when the
cost of reparation exceeds the cost of the original works, whereas
under English law, no damages would be awarded if the value of
the house with the swimming pool would be the same with and
without the compliance with the original specifications of the
swimming pool.
The situation is different with respect to complex long-term
contracts based on the income stream from a concession or from
other income generating investments, where the investors receive
the income stream from a third party. Here, the breach of
contract or the illegal State measure (international tort or
violation of an international law standard such as the fair and
equitable treatment standard) impairs the income stream. In
these cases the damages could only be lost profits, or lucrum
cessans,11 which would have been obtained but-for the breach or
the illegal State measure.
9 Solène Rowan, Remedies for Breach of Contract: A Comparative Analysis of
the Protection of Performance (Oxford University Press 2012), 117-8, with
further references.
10 Guenther Treitel, The Law of Contract (11th edn., Thomson, Sweet &
Maxwell 2003) 937-8, 940, 944.
11 John Y. Gotanda, ‘Recovering Lost Profits in International Disputes’, 36
Georgia Journal of International Law (2004-5) 61-112; Robert L. Dunn,
Recovery of Damages for Lost Profits, Vol. 1 (6th edn. Lawpress 2005);
American Bar Association (ABA), Proving Antitrust Damages: Legal and

IV. IMPLICATIONS OF THE DIFFERENT LEGAL SITUATIONS
ON DAMAGES ANALYSIS
There are three basic legal situations which have to be
distinguished for the purpose of damages analysis:
(1) Typical synallagmatic contracts, where the income to be
generated is not governed by the original contract, but
subject to collateral or subsequent contracts of one of the
parties.
(2) Synallagmatic triallagmas mentioned above, where the
legal and economic purpose of the contract is to generate
income which comes from the market, and where there are
detailed rules within the agreement governing such
income stream.
(3) Other investments aimed to generate income, where the
income stream is interrupted by an illegal State measure,
and where the investment is protected under an
International Investment Agreement with the State which
committed the illegal measure, even if there is no contract
with that State.
Loss and causality are the key elements to be analyzed in all
three situations. Significant differences may exist with respect to
the measure of damages and limitations such as foreseeability/
adequacy and mitigation. If the loss is caused by a breach of
contract, it may be subject to commercial arbitration or even
investment arbitration in case of an umbrella clause contained in
an International Investment Agreement. If it is caused by an
illegal State measure in the form of violation of an international
legal standard such as the fair and equitable treatment,
investment arbitration may proceed if the requirements of
jurisdiction are being met. The but-for premise is the framework
for the damages analysis in all these situations.
Economic Issues (2nd edn., American Bar Association 2010) 4, Jonathan M.
Dunitz, ‘Context of the Lost Profits Damages claim’ in Nancy J. Fannon (ed.), The
Comprehensive Guide to Lost Profits: Damages for Experts and Attorneys (BVR
2011) 8; Comments (28) to (31) to Art. 36 of the Articles on State
Responsibility.

V. THE BUT-FOR PREMISE
The but-for premise is based on Friedrich Mommsen’s’
Differenzhypothese as of 1855 which defines the expectation
interest, a term developed by Rudolf von Ihering in 1861,
referring to tortuous liability under the notion of culpa in
contrahendo,12 and further explained in a seminal article by Lon
Fuller with William Perdue in 1936 which lead to the codification
of the expectation and reliance interest in US law.13
The but-for premise has an important temporal notion and
refers to the course of events with and without the breach or the
illegal State measure from the moment of such breach or State
measure until the end of a project or investment, even if the end
of such project or investment occurs after the arbitral award. This
poses significant challenges for damages analysis.
The but-for premise is the analytical framework for the
determination of loss or lost profits in a damages claim. This
premise leads to the reconstruction of the hypothetical economic
situation of the injured party but for the breach or the illegal State
measure in order to compare it with its actual economic situation
after the breach or the illegal State measure.14
The but-for premise starts by establishing the hypothetical
economic performance of a contract or of an investment in the
absence of the breach or illegal State measure and seeks to
determine in monetary terms the difference with the actual
situation as a consequence of the breach or the illegal State
measure. Such difference is precisely the loss to be compensated.
The experts have to determine whether the but-for economic
performance of the claimant would have been superior to the
12 Rudolf von Ihering, Culpa in contrahendo oder Schadensersatz bei
nichtigen oder nicht zur Perfektion gelangten Berträgen, Jahrbücher für die
Dogmatik des heutigen römischen und deutschen Privatrechts IV (1861) 1 et
seq.; Christian Schieder, Interesse und Sachwert, Zur Konkurrenz zweier
Grundbegriffe des Römischen Rechts (Wallstein Verlag 2011) 45-53.
13 Lon L. Fuller and William R. Perdue, ‘The Reliance Interest in Contract
Damages’ (Pt. 1) (1936) 52 Yale Law Journal 52-96; §344(a) and (b) of the
Restatement Second) of Contracts.
14 Wöss et al., Damages in International Arbtitration under Complex Long-
term Contracts, para. 5.08.

actual performance. In order to do this, each of the relevant
contingencies that might affect such performance during the
relevant period of time must be analyzed. The reconstruction of
the hypothetical course of events requires the expert to isolate
the effects of the breach or the illegal State measure from any
other factors which may have affected the business or investment.
Such reconstruction should be in accordance with the evidence
available and would have to prove with reasonable certainty that
there would have been income but for the breach or illegal State
measure. Therefore, if it cannot be proved with reasonable
certainty that there would be income but for the breach or illegal
State measure, there are no lost profits. The most important thing
when reconstructing the hypothetical situation is that the data are
credible. Moreover, the quantification will be weakened if the
defendant can show that it is not consistent with the basic
economic situation.15 Lost profits resulting from the difference
between the hypothetical and the actual scenarios must be
proved with reasonable certainty, which after the application of
the limitations results in the ‘actual loss.’
The but-for premise will also help to determine causation.
Causation is the test used to determine the connection between
the loss and the breach or the illegal State measure. If the
economic situation would have been the same for the injured
party, there would be no loss. With respect to income generating
assets, if the investment would not have been profitable, there
would be no lost profits in spite of the breach of contract or the
illegal State measure. If the investment would have turned sour
because of an economic crisis, there might not be lost profits
caused by the breach or the illegal State measure but the failure of
the investment would be the result of the economic crisis. Loss of
income stream and causality are, therefore, determined through
the but-for premise.
Concurrent causation situations such as contributory
negligence can reduce the scope of causation and, therefore,
reduce the amount of damages. Therefore, causation is not only a
requirement for the recovery of damages, but has also
implications on the amount of damages to be recovered. Partial
causation may lead to a substantial reduction of the damages
15 ABA, Proving Antitrust Damages 57, 61.

claim. Therefore, the causation and the quantification of damages
cannot be separated. They are intimately related and must be
analyzed within the but-for framework.16
The but-for premise can be applied to determine loss and
causation in typical or atypical synallagmatic contracts or in the
case of the interruption of income stream caused by an illegal
State measure. However, the implications will be different with
respect to the measure of damages. The measures of damages are
damnum emergens, lucrum cessans, expectation and reliance
interest, or the fair market value of an investment.
VI. MEASURE OF DAMAGES FOR TYPICAL
SYNALLAGMATIC CONTRACTS
The measure of damages for typical synallagmatic contracts is
cost of cure or difference in value of the deficient good or service
received, which refers to damnum emergens. There are legal
systems such as French law which recognize the cost of cure as
the measure of damages even if such cost is not reasonable.17 For
example, in the case of a swimming pool, already mentioned,
claimant would have the right to obtain the reconstruction of the
swimming pool even if such cost exceeded the original price of
such swimming pool. However, cost of cure does not apply to
income expectations under complex long-term contracts, payment
obligations under take or pay agreement or income generating
investments, as this damnum emerges only applies to the non-
conforming goods or services that can be repaired or replaced.
On the other hand, in typical synallagmatic contracts another
measure of damages that could be applied is the so-called
difference in value. This is recognized under English law where
the test is whether the non-performance would affect the value of
the property. For example, in the case of the swimming pool, the
question to ask is whether the value of the property changes
because of the difference in depth of the swimming pool. In this
16 Leonardo Giacchino and Richard E. Walck, ‘Damages Models to
Accommodate the Necessity Defense’ 27 (1) (2010) The International
Litigation Quarterly, 1, 3-6.
17 Rowan, Remedies for Breach of Contract, 118.

renowned case, the court did not find any difference in value18
and did not award damages, whereas under French law the
damages would have theoretically exceeded the construction cost.
Both cost of cure and difference in value correspond to damnum
emergens, which is the loss to the goods or services received
caused by the breach of the contract.
In typical synallagmatic contracts, lucrum cessans are the lost
profits that cannot be realized from collateral transactions
because of the non-performing good or service received. If the
breach of a typical contract affects collateral transactions, there
would be lost profits (subject to mitigation) which would
correspond to lucrum cessans.19
VII. MEASURE OF DAMAGES FOR INCOME GENERATING
INVESTMENTS UNDER COMPLEX LONG-TERM CONTRACTS
The breach of a complex long-term contract based on income
stream, or the interruption of income stream in an investment
caused by an illegal State measure, results in lost profits.
Therefore, the measure of damages for the interruption of income
stream is the expectation interest for lost profits or lucrum
cessans and there is no room for damnum emergens, which as we
said is the good or services not received or not received in
conformity with the contract.
A. Expectation Interest
The expectation interest protects the legitimate expectations
of the parties in the performance of the contract or the
investment. Under the but-for method, the question is ‘What
would have happened in the absence of the breach or illegal State
measure?’ To answer this question the but-for premise compares
the hypothetical economic situation without the breach or illegal
State measure and the actual situation. The result is the
expectation interest or lost profits.
18 Ruxley Electronics & Construction v. Forsyth, [1996] 1 AC 344.
19 Tractebel Energy Marketing v. AEP Power Marketing, Inc., 487 F.3d 89,
109-10 (2dn Circuit 2007).

With respect to lost profits, there are two main issues: (i) the
reasonable certainty of the income stream, (ii) and the effect of
the breach or illegal State measure on the income stream. As
regards the first, claimant must prove with reasonable certainty
that, according to the evidence available, there would have been
income in the absence of the breach of contract or the illegal State
measure. The reasonable certainty of that income may depend on
the existence of a market, and sometimes on the existence of
natural resources. As regards the second issue, the effect of the
breach or illegal State measure has to be determined based on the
evidence available.20
The determination of the reasonable certainty of an income
stream is particularly challenging in oil and gas projects.21
However, even in such projects there are methods, such as the
Monte Carlo method, which may allow the determination of the
probability of finding such natural resources and the value of
future expected revenues with reasonable certainty,.22
The expectation interest avoids over- and under-compensation
when correctly applied, as it leads to a determination of the
economic and financial parameters that changed precisely
because of the breach of contract or illegal State measure, both
with respect to the past and the future impact on the project.
B. Reliance Interest
This measure of damages is the loss caused by entering into a
contract which was not performed due to its breach. Reliance
interest and expectation interest are mutually exclusive. This
derives from the underlying questions: Under the reliance
interest, the question is ‘what would be the position of the injured
party if it had not entered into the contract?’ Under the
expectation interest, the question is ‘what would be the position
20 ABA, Proving Antitrust Damages 61.
21 Manuel A. Abdala, ‘Key Damages Compensation Issues in Oil and Gas
International Arbitration Cases’ (2009) American University International Law
Review 547-8.
22 Joint Venture Yashlar (Turkmenistan), Bridas S.A.P.I.C. (Argentina) v. The
Government of Turkmenistan (or Turkmenistan, or the State of Turkmenistan
and/or The Ministry of Oil and Gas of Turkmenistan), ICC Case 9151/FMS/KGA,
final award, 18 May 2000, para. 88.

of the injured party but for the breach?’ Certain rules of law such
as the English and German law establish a presumption in favor of
recovery which leads to a reversal of the burden of proof,
whereby the respondent would have to prove that the claimant
would not have recouped its investment in the absence of the
breach or illegal State measure. The respondent would have to
prove that the income stream was not reasonably certain.23
Reliance interest may lead to overcompensation when an
investor is compensated for investments that would have never
been recovered in the absence of the breach or illegal State
measure. Reliance interest may be justified from a legal policy
perspective in a case where the investor enters into a project due
to misrepresentations or misleading information provided by the
respondent. Similarly, bad faith of the respondent, or the difficulty
of obtaining evidence of the reasonable certainty of the income
stream, in particular, when such evidence is under the control of
respondent, could justify the use of reliance interest. This would
be in accordance with the original conception by Rudolf von
Ihering as tortious liability.
If the injured party can prove that it invested in reliance on
misleading information and misrepresentations provided by the
respondent, there should be no need to prove the certainty of the
income stream, but only the investment made in reliance on the
contract, according to the general principle of law omnia
presumuntur contra spoliatorem.24
VIII. THE MEASURE OF DAMAGES IN INTERNATIONAL LAW
(FAIR MARKET VALUE)
Damages in investment arbitration may arise from the violation
of an international legal standard such as the fair and equitable
treatment standard, or the breach of a contract protected under an
umbrella clause contained in an international investment
agreement with or without the violation of an international legal
standard. In these cases the measure of damages is different.
23 Wolfgang Fikentscher and Andreas Heinemann, Schuldrecht, Zehnte Auflage
(De Gruyter 2006) para. 439; Bridas v. Turkmenistan, final award, para. 62.
24 Bridas v. Turkmenistan, final award, paras. 365, 369.

The violation of an international legal standard may occur
through administrative or fiscal measures or changes in the
regulatory framework by the State affecting the income stream of
the investment or project. The decisive issue is that the State’s
conduct violates international law, which occurs in case of illegal
expropriation, the violation of the fair and equitable treatment
standard, discrimination through the violation of the national
treatment and the most favored nation standards and other
standards contained in International Investment Agreements and
under customary international law. State responsibility arises
from international tort.
International damages law has developed through analogy
with private law. International Investment Agreements do not
contain rules on damages. Therefore, it has been necessary to
look at customary international law and general principles of law.
Private law sources and analogies in international law are found in
areas of the international law of tort and the problems of States
responsibility; the measure of damages; and the question of
interest, moratory and compensatory. The notions of causation and
mitigation used in international law also derive from private law.
Customary international law has been identified in the famous
Factory at Chórzow case, which is the most important judicial
decision with respect to international damages law for breach of
an international legal standard as confirmed by the former
Austrian-British judge of the International Court of Justice, Prof.
Hersch Lauterpacht:
‘In the international sphere the principle established in
general jurisprudence to the effect that damages must, as
a rule, include full restitution in integrum did not at first
secure ready acceptance by writers. It was asserted that
the responsibility of States must be limited to damages
arising directly out of the injurious event, to the
exclusion of all indirect and consequential damages … .
The suggestion of a general limitation of the responsibility of
States in this matter was rejected by the Court in the Judgement
in the case concerning the Chórzow Factory. The Court declined to
agree that the compensation due to the German government was
limited to the value of the undertaking at the moment of the
disposition plus interest to the date of the payment. The Court

distinguished between expropriation which was lawful … and
expropriation which had been resorted to in violation of an
international undertaking. In the latter case … [t]he Court laid
down in detail the principles governing compensation in these
cases: ‘Restitution in kind, or, if this 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 cannot
be covered by restitution in kind or payment in place of it.’25
The oft-cited reference to ‘wipe out all consequences of the
illegal act’ establishes the full compensation principle for
damages in international law. Full compensation under the
Chorzów formula means awarding the higher of the value of the
company or investment at the moment of the breach or at the
moment of the award. If the moment of valuation is the date of the
award, lost profits from the date of the breach to the date of the
award have to be added.26
This reference is similar to Mommsen’s but-for premise,
which aims to place the injured in the economic position it would
be but for the breach. However, full compensation under Chorzów
is achieved by awarding the higher of fair market value (FMV) of
the investment at the date of the breach and at the date of the
award, plus historic losses in the latter case. This is different from
Mommsen’s but-for premise, where damages are the economic
difference between the actual and but-for scenarios at the date of
the award.
In the Factory at Chorzów case the objective of shareholders
represented by the German government was to obtain a fair
compensation. In the context of income generating investment,
the Court held that the value of the factory and its accessories,
including intangible property, was independent from the
25 Hersch Lauterpacht, Private Law Sources and Analogies of Law
(Longmans, Greens & Co. Ltd. 1927), p. 6; Hersch Lauterpacht, The
Development of International Law by the International Court, 32; Jean-Flavien
Lalive, Contracts between a State or a State Agency and a Foreign Company,
Theory and Practice: Choice of Law in a New Arbitration Case (1964) 13
International and Comparative Law Quarterly p. 992.
26 Manuel A. Abdala and Pablo T. Spiller, ‘Chorzow’s Standard Rejuvenated:
Assessing Damages in Investment Treaty Arbitrations’ (2008) 25 (1) Journal of
International Arbitration 108.

advantages which each of the companies derived under their
contracts. The question posed by the Court to the experts referred
to the determination of the value of the undertaking at the date of
the expropriation or the date of the award. The reference to the
value of the undertaking under the Chorzów formula has been
considered to refer to the concept of fair market value (FMV) even
if the Factory at Chorzów case does not refer to it expressly.
The notion of FMV was first used in American International
Group v. The Islamic Republic of Iran in 1983, which stated that
‘the valuation should be made on the basis of the FMV of the
shares’,27 and reinforced in Starrett Housing Corporation v.
Government of Islamic Republic of Iran in 1987. In Starrett, the
expert defined FMV ‘as the price that a willing buyer would pay to
a willing seller in circumstances in which each had good
information, each desired to maxmise his financial gain and
neither was under duress or threat.’28
The reference to duress is particularly important in case of
economic crises where there are normally no willing buyers, as
the investment is made for a certain project and normally can
only be used for a particular purpose. The FMV ignores such
duress and threat. The term “willing buyer” is hypothetical and
leads to the preponderant use of the income stream as the basis
for the calculation of damages, as the value of an assets depends
either on what the market is willing to pay for that asset or for its
ability to generate an income stream.
With respect to the measure of damages for illegal
expropriation, according to commentaries 21 and 22 of the
Articles on States Responsibility, compensation reflecting the
capital value of property taken or destroyed is generally assessed
on the basis of FMV of the property lost. The method used to
assess FMV, depends on the nature of the asset. The FMV as a
measure in investment arbitration determines the value of the
company or investment that was lost due to the violation using
different valuations approaches such as asset based, market
based and income based valuations. Income producing assets and
27 (1983) 4 U.S.C.T.R. 106.
28 (1987) 16 U.S.C.T.R. 201.

investments are often valued using income based valuation
methods on the same or similar investments.
The Chorzów formula is an important example of the reception
of private law – in particular the German law notion of the
hypothetical normal course of events (hypothetischer
Normalverlauf), which excludes extraordinary events which may
reduce the damages. The German imperial court (Reichsgericht)
already established that events subsequent to the occurrence of
the loss (überholende Kausalität), which would also have caused
the loss (reserve cause or Reserveursache), should be ignored.
Extraordinary events such as force majeure, which would have
affected the course of events, are not to be taken into
consideration. This is an important deviation from the but-for
premise originally developed by Mommsen, whereby
extraordinary events such as economic crises would affect both
the actual and the but-for courses of events and would be taken
into consideration when calculating damages.29 In the calculation
of the FMV, extraordinary events subsequent to the illegal
measure negatively affecting the income stream or cash flows are
not taken into consideration when calculating damages. This may
have important consequences. Therefore, the measure of
damages in form of the fair market value (FMV) does not follow
precisely the Mommsen but-for premise, but uses the notion of
the hypothetical normal course of events under German law, as
found in the Factory at Chórzow case between Germany and
Poland. The negative effects of a subsequent crisis are likely to be
ignored. The notion of the hypothetical course of events is also
reflected in the choice between the higher FMV as of the date of
the violation or the date of the award, where the possibility of a
failure of the investment is being excluded, which as shown in the
ADC vs. Hungary or the Yukos cases.30
The implications are the following: In investment arbitration,
there are two main differences with respect to commercial
arbitration: (a) the preponderant use of the FMV of the
29 Fikentscher and Heinemann, Schuldrecht, para. 669, 701, 698.
30 ADC Affiliate Ltd and ADC & ADC & ADMC Management Ltd v. The
Republic of Hungary, ICSID Case No. ARB/03/16, paras. 496, 518-19; for
example, Yukos Universal Limited (Isle of Man) and the Russian Federation, final
award, PCA Case No. AA 227, 18 July 2014 paras. 1821-1822.

investment as the measure of damages; (b) the use of the higher
FMV as the date of the violation or the date of the award plus the
award of lost profits between of the valuation and the date of the
award. The approach under the Chorzów standard is explained by
legal policy reasons such as the need to treat international tort
differently from the breach of contract and to avoid opportunistic
behavior of the State. As stated by the PCIJ, it aims to avoid the
State party taking advantage of the economic situation, or the
effect of its own measures on the value of the investment.31
However, this measure of damages should not apply to breach
of contracts protected under umbrella clauses, where there is no
violation of an international legal standard such as the fair and
equitable treatment standard and, therefore, there is no
international tort, but only a breach of the contract.
IX. LIMITATIONS
The following limitations are important when framing a
damages claim: (a) foreseeability, (b) mitigation, and (c) contributory
negligence.
A. Foreseeability
In essence, the test of foreseeability refers to whether the
respondent was aware that the breach could cause lost profits.
The timing of that awareness, however, may be important. Some
rules of law state that foreseeability refers to the moment of the
breach, and others to the moment of the execution of the contract.
In complex long-term contracts, either typical or atypical,
considerable investments are made in order to generate income.
In case of the construction of a plant or an infrastructure project,
the aim is to obtain profits. Those profits may be interrupted by
the breach of the contract by the other party. The issue of
foreseeability of lost profits is apparently complicated from a
legal perspective under typical synallagmatic contracts, as the
collateral transactions are not expressly governed in the original
contract, and they are not the legal object of the contract. However,
even under those contracts the lost profits of the plant owner
31 1928 PCIJ Series A, No. 17, 47, 50.

arising from a defective plant are normally foreseeable and the
issue in these cases is the one of mitigation, as will be shown below.
For example, in case of typical synallagmatic contracts such as
construction agreements, the situation is as follows: First,
payment derives from the buyer or owner and not from a third
party. Second, the loss is caused by deficient characteristic
performance, such as a plant not meeting performance
requirements. Third, the lost profits may derive from collateral
transactions that are not directly contemplated in the
construction agreement. Therefore, the only situation which
gives raise to damages in the form of lost profits is when the
breach causes the interruption of income deriving from collateral
transactions. This leads to the test of foreseeability, where the
question is whether the party in breach would have known at the
moment of the signing of the contract or at the moment of the
breach that by breaching the contract it could have caused lost
profits. In this transaction, it is rather unlikely that the lost profits
due to the breach are not foreseeable. However, that does not
mean that lost profits must be awarded, as mitigation is of
essence. The question is whether the injured party would have
been able to mitigate and therefore, the actual loss would be the
difference in cost with or without mitigation. Under most
applicable laws, there are fairly precise rules regulating damages
claims for synallagmatic contracts with an emphasis on the
compensation of loss and restrictions as regards lost profits
which have to be observed.
With respect to damages in the synallagmatic triallagmas the
breach must affect or interrupt the income stream and therefore
causes a loss, in the form of lost profits. The essential element in
damages analysis is causality which aims to determine the effect
of the breach of an agreement on the income stream of an
investment. Lost profits in these cases are foreseeable, as they are
expressly governed under the contract, and it is not relevant
whether they were foreseeable by the respondent at the moment
of the breach or at the moment of the execution of the contract. In
this case, the test of foreseeability is quite straightforward, as the
legal and economic purpose of the contract is the generation of
income stream and the effect of the breach is normally foreseeable.

Therefore, the test of foreseeability should hardly play a role due
to the express assumption of risk under the contract.32
In situations where the income of the project is interrupted by
an illegal State measure, even if there is no contract between the
owner of the project and the State, the income stream in the
absence of the illegal State measure is protected under the
applicable international law standard. The international law
standard precisely protects against the undue interference of the
State in its investment, and the only relevant consequence for
which the investor may be compensated is precisely for the lost
profits. If the State had known or could have known that the
illegal State measure would cause the lost profits, then the lost
profits were foreseeable. Every investment is made to obtain
profits, so the State may hardly argue that the lost profits caused
by the illegal measure were not foreseeable.
The question of foreseeability does not refer to the certainty of
the amount of lost profits and the fact that lost profits are
foreseeable does not mean that damages should be awarded as,
for example, risk allocation may bar a damages claim.33
B. Mitigation
In general, mitigation is a limitation that applies under most of
the rules of law, where the reasonable expenditures in order to
mitigate the losses are recoverable even if such efforts were not
successful. The duty of mitigation does not apply under French
32 Adam Kramer, ‘An Agreement-Centred Approach to Remoteness and
Contract Damages’ in Nili Cohen and Ewan McKendrick (eds.), Comparative
Remedies for Breach of Contract (Hart Publishing 2005) 250. Adam Kramer,
‘Remoteness: New Problems with the Old Test’ in Djakhongir Saidov and Ralph
Cunnington (eds.), Contract Damages: Domestic and International Perspectives
(Hart Publishing 2008) 277-8.
33 Christoph Brunner, Force Majeure and Hardship under General Contract
Principles: Exemption for Non-Performance in International Arbitration
(Wolters Kluwer 2009) 145-6; Stefan Vogenauer, Art. 5.1.3, paras. 1-4, Harriet
Schelhaas, Art. 7.1.2 paras. 6-7, 11, Jan Kleinheisterkamp, Art. 7.1.7, para. 6, all
in Stefan Vogenauer and Jan Kleinheisterkamp (eds.) Commentary on the
UNIDROIT Principles of International Commercial Contracts (PICC) (Oxford
University Press 2009).

law and countries based on French law, however, a similar result
is achieved through the application of the causality test.34
If the claimant has taken reasonable measures to mitigate the
consequences of the breach, the result of the but-for situation vs.
the actual situation calculation must incorporate the benefit and
cost of mitigation. What is important to mention is that in
collateral transactions of typical synallagmatic contracts,
replacement of goods or services is often feasible, which may lead
to an increase in costs due to mitigation. For example, in case of a
deficient freezing plant, the products may be frozen in another
plant, which would allow the claimant to maintain sales, but at a
lower income, as the costs of freezing in another plant are higher
than the costs of freezing as originally planned. Therefore, the
difference between the cost of internal production and the
external cost of processing could be claimed.
With regards to atypical synallagmatic contracts, mitigation
might not be possible, as the effect on the income stream of
increased taxes, lack of permits, the non-fulfillment of the delivery
of technology by a joint venture partner, often cannot be
mitigated. In the case of an illegal State measure such as an illegal
expropriation, mitigation is not feasible. However, this has to be
examined on a case by case basis. Even if lost profits cannot be
mitigated, still the issue is to prove with reasonable certainty that
there would have been income but for the breach or the illegal
State measure.
The test of mitigation is whether it was reasonable for the
claimant to take a certain mitigation action, not whether that
action was the best alternative available. When quantifying the
effect of failing to mitigate, the respondent will need to build a
new hypothetical situation in which the claimant takes a
reasonable mitigation opportunity that it did not take in the
actual world. The recoverable damages would then be the
difference between the claimant’s hypothetical situation but for
34 Yves-Marie Laithier, ‘Comparative Reflections on the French Law of
Remedies for Breach of Contract’ Damages’ in Nili Cohen and Ewan
McKendrick (eds.), Comparative Remedies for Breach of Contract (Hart
Publishing 2005) 114-16.

the breach and the claimant’s hypothetical situation if it had
mitigated from the breach onwards.35
C. Contributory Negligence
Contributory negligence as regards lost profits is normally a
matter of causality, save where the applicable law establishes a
different category. Income not received due to the fault of the
injured party cannot be considered a consequence of the other
party’s breach. The question is what would be the effect of the
breach on the income stream. If the income stream is affected by
the actions or omissions of the injured party, such an effect was
not caused by the other party’s breach.
When assessing lost profits, there is an overlap between
causality, mitigation and contributory negligence. Causality and
contributory negligence refer back to the breach or the
implementation of the illegal State measure, while mitigation
refers from the moment of the breach onwards.
X. THE RELEVANT DATE FOR THE VALUATION OF
DAMAGES AND INTEREST AS DAMAGES
The selection of the date of damages and to what extent the
damages expert should use ex-post information in his assessment
is of particular relevance in damages valuation. The date of
valuation has to be the most appropriate in the light of the full
compensation principle, which means that compensation has to
restore the economic position that the injured party would have
had at the date of the award.
As already examined by Friedrich Mommsen in his seminal
work on “The Doctrine of Interest” as of 1855, which establishes
the notion of the expectation interest, the date for the assessment
of damages is the ‘time of the judgement’, which is ‘the only
determination of the time which truly corresponds to the essence
of [expectation] interest’.36
35 Djakhongir Saidov, The Law of Damages in International Sales: The CISG
and Other International Legal Instruments (Hart Publishing 2008), 125-132.
36 Mommsen, Zur Lehre von dem Interesse, 3.

Under the but-for method, the difference between the but-for
and the actual economic situation could be assessed at the date of
the breach or at the date of the award. However, in order to fulfil
the full compensation principle, the assessment of damages
should correspond to the date of the award, which is the date in
which the injured party should receive the damages.
If the date of the breach is taken for the damages valuation, in
order to meet the full compensation principle, the lost profits
should be updated from the date of the breach or the illegal State
measure to the date of the award. Similarly, lost profits from the
date of the award till the end of the project have to be discounted
to the date of the award. The discount and updating rate must be
the same in order to avoid over- or under-compensation. But this
difficulty can be avoided if damages are measured as of the date
of award in the first instance.
The primary function of damages is compensation, as
recognized by leading authors, because it helps to restore the
claimant’s economic position it would have had if the breach or
illegal State measure would not have happened. Money loses
value over time through inflation, which has to be compensated
by updating the damages to the moment of the award. This
updating of damages from the date of the breach to the date of the
award is necessary to make the party whole, and it prevents or
avoids unjust enrichment of the respondent.37
According to the full compensation principle, the appropriate
interest rate is the one which would place the injured party in the
economic position it would be but for the breach, at the moment
of the award. Generally, this will be the same rate used to
discount the cash flows. As stated by leading economists and
experts in international arbitration, ‘[w]hen a valuation date is
chosen at a date that is far apart in time from the date of the
award, the selection of the pre-judgment [interest] plays a central
role in the amount of compensation. A wrong interest-rate could
result in a monetary award that does not fully restore the position
37 John Y. Gotanda, ‘A Study of Interest’ in Filip de Ly and Laurent Lévy
(eds.), Interest, Auxiliary and Alternative Remedies in International Arbitrtion,
Dossiers of the ICC Institute of World Business Law (2008) 170-1.

of the damaged party in the absence of the measures’ or the
absence of the breach.38
Companies obtain financing for their operations from the
shareholders or lenders. That money is never provided for free.
The injured party has a financing cost equivalent to its cost of
capital (WACC). ‘For the purposes of discounting future cash
flows as of the date of valuation, it is widely accepted that the
appropriate risk-adjusted discount factor is the weighted average
cost of capital (WACC) of an efficiently managed firm under a
similar market, contractual, and institutional environment.’ ‘The
WACC represents the firm’s cost of raising funds from both
shareholders and lenders in an efficient proportion…, called the
optimal capital structure’.39 Tribunals can avoid under-
compensation by updating the damages from the date of the
breach till the date of the award at the WACC or in any case at the
same rate used to discount the cash flows.
The date of damages valuation and the rate used to discount
and update the damages are very important in order to award
damages properly. For illustrative purposes only, an example is
presented to show how to avoid under-compensation:
Example. A company expects an income based on a business
plan of a project. The plan started in 2000 and it ends in 2010.
The breach occurred in 2002 and the award was rendered in
2006. The relevant question under the but-for premise is “What
would be the economic position of the injured party at the date of
the award?” To determine the lost profits arising from the
difference between the but-for situation and the actual situation
of the injured party at the date of the award, there can be two
approaches: (a) to discount the lost profits to be obtained at the
end of the business plan in 2010 to the date of the award in 2006,
or (b) to discount the lost profits to be obtained at the end of the
business plan in 2010 to the date of the breach in 2002, and to
then update them to the date of the award in 2006. If the latter
approach is chosen, the same rate should be used to discount the
38 Manuel A. Abdala, ‘Key Damages Compensation Issues in Oil and Gas
International Arbitration Cases’ 562.
39 Spiller and Dellepiane in Wöss et al.: Damages in International
Arbitration under Complex Long-term Contracts, para. 6.152.

lost profits or cash flows and to subsequently bring them forward.
If they are not updated at the same rate used to discount the cash
flows (or not updated at all), there would be a violation to the full
compensation principle causing significant under-compensation
to the injured party and unjustified enrichment of the party in
breach.40
Under the but-for premise, the aim is to place the injured
party in the economic position it would be but for the breach or
the illegal measure, which means full compensation. The most
straightforward way to achieve this is to take the date of the
award as the relevant date for the assessment of damages, as this
is the date when the injured party is actually awarded the
damages. By assessing damages at the moment of the award,
problems related to the updating of damages or the
determination of pre-award interest are avoided. This approach
was followed in the case of ADC v. Hungary, which was
considered an illegal expropriation under the respective bilateral
investment treaty.41
The use of the date of the breach as the relevant date for the
determination of damages imposes additional and unnecessary
difficulties when valuating damages. However, if the date of the
breach is chosen, damages should be updated till the date of the
award at the same rate used to discount the cash flows. Cash
flows that are expected to occur after the date of the award
should be discounted to the date of the award, preferably using
the WACC. If such future cash flows are discounted to the date of
the breach, the same discount rate should be used to update them
to the date of the award in order to avoid under-compensation. In
order to avoid under-compensation arbitral tribunals can also
award pre-award interest rate at the same rate used to discount
the cash flows.
In the Yukos cases, the arbitral tribunal confirmed that the
claimant was entitled to the higher of the damages calculated on
the date of expropriation as of 19 December 2004 and the
40 Manuel A. Abdala, Pablo D. Zadicoff, and Pablo T. Spiller, ‘Invalid Round
Trips in Setting Pre-Judgment Interest in International Arbitration’ (2011) 5(1)
World Arbitration and Mediation Review 1-21.
41 ADC v. Hungary, para. 496, 518-19.

anticipated date of the award as of 30 June 2014,42 which follows
the rationale of the Chorzów case.
In order to arrive at the value of Yukos at the relevant
valuation dates, the arbitral tribunal adjusted the Yukos value
calculated as of November 2007 ‘on the basis of the development
of a relevant index’ (the RTS Oil and Gas Index), which refers to
the prices of trades executed in securities admitted to the trading
on the Moscow Stock Exchange and includes preferred or
common shares of nine Russian oil and gas companies. Such index
represents the value of comparable companies.43
The value calculated as of 19 December 2004 applying the
aforementioned index was updated to the date of the award at an
annual interest rate in the amount of 3.389% per annum, which
actually corresponds to the compensation for a legal
expropriation as analyzed in the Factory at Chorzów case.44 This
value was considerably lower than the value of Claimant’s Shares
in Yukos as of 30 June 2014, which was also calculated applying
the aforementioned index between 21 November 2007 and 30
June 2014.45 Dividends and interest on dividends were added
until that moment in accordance with the Chorzów formula, as
Claimant would have received such dividends in the absence of the
expropriation. By correctly applying the Chorzów formula in the
award of damages, the Yukos arbitral tribunal calculated damages
at the moment of the award and the issue of pre-award interest did
not arise. The effect of ‘bringing forward’ or ‘backwards’ the
amount of damages using the same index corresponds in essence
to the application of the same discount and interest rates in order
to avoid over- and under-compensation.
In that case, the arbitral tribunal did not base its valuation on
the generation of income stream as proposed by Claimant but on
42 Yukos Universal Limited (Isle of Man) and the Russian Federation, final
award, PCA Case No. AA 227, 18 July 2014 paras. 1763-1769, 1826-27.
award, 18 July 2014 paras. 1887-88.
44 1928 PCIJ Series A, No. 17, 50.
award, 18 July 2014, para. 1821.

what the market pays for the investment which was the
determined through the relevant stock exchange index.
XI. CONCLUSIONS
Damages analysis requires an understanding of the notion of
income generating assets either in form of income-based complex
long-term contacts or non contract-related investments. Damages
analysis with respect to such assets is similar in commercial and
investment arbitration. However, whereas in commercial
arbitration, the Mommsen but-for premise provides the analytical
method for damages analysis of the lost income stream or lost
profits, there are certain differences in investment arbitration
such as the determination of the loss of the FMV, the treatment of
economic distress under the notion of the FMV and the choice
between the higher value as of the date of the State measure or the
date of the award plus the award of lost profits between the date of
the State measure and the date of the award in case of the latter.

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