TagTime with Funke Adekoya SAN – Damages and Costs: Can Fair Compensation Be Too Much?*

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Author: Woohyung (Mark) Choe**

Costs and Damages
Investment Disputes

This is a summary of a May 27, 2020 TagTime series webinar lecture by Funke Adekoya SAN[1], titled “Damages and Costs: Can Fair Compensation Be Too Much?”[2]

Adekoya talked about damages and costs in arbitration awards through the perspective of developing and emerging countries. Often, arbitration tribunals award successful parties astronomical awards while developing countries, who are increasingly exposed to investment treaty arbitrations, end up on the other side as respondents struggling to fathom the scale of the damages and costs that they need to compensate.

Damages awards are based on proof and thus one might presume that they are “fair”. However, there are different modes of calculation for damages: the income approach (discounted cash flow (DCF) value) and the asset liquidation-based approach (actual investment). Claimants regularly use the DCF method to calculate damages incurred while respondents will try to convince the court that an alternative method should be used after arguing that the claimant’s calculation is inappropriate and unreasonable. The contrasting defense arguments by Nigeria and Russia in the following two arbitration cases show how important it is for respondent countries to not merely assume that the burden of proof is only on the claimant when proving damages and to be proactive in preparing alternative proposals and methods to the tribunal to reduce damage awards.

In both P&ID v. Nigeria[3] and Yukos v. Russia,[4] the claimants were successful in their claims and the tribunal ruled that Nigeria and Russia had to compensate the claimant for damages through paying huge amounts, US $6.5 billion and $50 billion awards respectively. Despite the astronomical damage awards, Russia was able to successfully challenge Yukos’ DCF present net value calculation method and persuade the tribunal that its comparative market capitalization valuation method was the more reasonable method. Russia, as the respondent seeking to reduce damages, used experts to propose adjustments on the errors of the claimant’s calculation and further provided an alternative method for the tribunal to adopt. In contrast, Nigeria merely attacked P&ID’s DCF method and failed to provide an alternative method for the tribunal to adopt. The tribunal, thus, had no option but to use the claimant’s DCF method.

A guidance used by some tribunals in determining whether or not to use the DCF method in calculating damages is determining whether the harmed business had been operating as a “going concern”. This requires looking into whether the claimant’s business has shown evidence of past data showing a stream of revenue and some certainty that it would have generated revenue if it were not for the respondent’s breach of contract. In Tidewater Investment SRL v. Bolivarian Republic of Venezuela,[5] the tribunal said that the DCF method is the most appropriate method of valuation for the business that is a going concern. Unless there is some reasonable past data supporting future certainty of the business, the claimant’s business is not a going concern and the more reasonable valuation method would be looking at the fair market value of the asset liquidation or book value through focusing on the actual investment made by the claimant.

Lastly on damages, Adekoya addressed moral damages. Moral damages are often part of the compensation awards in civil law countries. Moral damages compensate for harm on emotions, honor, and reputation. However, when the amount of moral damages is large, it can be difficult to distinguish them from punitive damages, which are not allowed in arbitration damage awards. In the perspective of developing countries, it is imperative to be aware that moral damages are fault based. White farmer claimants won moral damages against Zimbabwe because the tribunal concluded that the Zimbabwean police failed to protect white farmers from being attacked for several years on its jurisdiction. The Zimbabwean government was indirectly at fault for such harm done on the farmers and was thus liable for moral damages. Also, cases like Al-Kharafi & Sons Co. v. Libya,[6] where the tribunal awarded the claimant $30 million in moral damages for reputational harm in the stock market and in the business world, bring up the question of fairness and whether the arguably excessive moral damages effectively amount to punitive damages.

Dispute over costs of arbitration is also a great concern for developing countries. UNCITRAL Rules Art. 40 limits arbitration costs by requiring them to be “reasonable”. [7] This gives much discretion for the tribunal to decide how and by whom the expenses should be paid per ICSID Convention Art. 61(2).[8]

Developing countries should be aware of what Adekoya calls the “fairness principle” in costs award. Fair arbitration costs depend on how the parties have conducted and behaved during the proceedings. In 2010, arbitration rules changed from giving parties a full opportunity to be heard to giving parties a reasonable opportunity to be heard. In this context, the definition of “reasonable” includes legal and counseling cost considerations. Excessive legal counseling hours or number of lawyers involved can be challenged by opposing parties and the tribunal will look at the proportionality of resources used to determine “reasonable cost”.

Arbitration tribunals generally do not take into consideration third-party finance arrangements. For example, a claimant can be financed by a third-party throughout the arbitration proceeding. But when the tribunal rules that the claimant is the successful party and awards damages, it disregards the presence of third-party. It is assumed that the successful party itself has paid for the proceedings. However, there was a case in Russia where the tribunal refused to award full recovery to the successful party because it was financed by a third party. Therefore, Adekoya warns that there might be cases where third-party finance arrangements can actually influence arbitration rulings.

Finally, Adekoya discussed the tribunals’ discretion in cost shifting. Cost shifting can occur if a party is not 100% successful in its claims and when the respondent is partly successful in its defenses. In cost shifting, tribunals take into consideration the behavior and conduct of the parties. Unreasonable and disruptive behaviors can be penalized through cost shifting and cost awards. In Generation Ukraine v. Ukraine, the claimant failed in its claims and had to bear the arbitration costs of the respondent. [9] The tribunal criticized the claimant’s claims by saying they were legally incoherent and rather burdened the tribunal with irrelevant fact and claims. Nevertheless, the tribunal limited the costs award to the respondent because the respondent had also shown bad behavior by not satisfactorily substantiating its own arbitration and overstating uncorroborated legal, expert and business trip costs. In contrast, the tribunal in LETCO v. Liberia clearly stated that the respondent was being ordered to pay the full cost to the claimant due to the bad faith and inappropriate procedural behavior the respondent showed during the proceeding. [10]

[1] Funke Adekoya SAN is a founding Partner at Nigerian law firm ǼLEX, one of the largest full service commercial law firms in Nigeria where she heads the Dispute Resolution practice group. She is a Fellow of the Chartered Institute of Arbitrators, also a Chartered Arbitrator, a past Chairman of its Nigerian Branch, and a member of the ICCA Governing Board. Funke has over 45 years’ experience in Litigation and Arbitration. She received her legal education at University of Ile, Nigeria and Harvard Law School (LL.M.). She was elevated to the rank of Senior Advocate of Nigeria (SAN) in 2001. She has been a member of Nigeria’s Body of Benchers since 1999 and was elevated to Life Bencher in March, 2007. She is also a frequent speaker at conferences in the fields of litigation and arbitration.

[2] Funke Adekoya SAN, Damages and Costs: Can Fair Compensation Be Too Much?, TagTime (May 27, 2020), available at https://member-delosdr.org/video-tagtime-funke-adekoya-san-on-damages-and-costs-can-fair-compensation-be-too-much/.

[3] Federal Republic of Nigeria v. Process & Indus. Devs. Ltd. [2020] EWHC 2379 (Comm).

[4] Yukos Universal Ltd. (Isle of Man) v. Russian Federation, Case No. ‎2005-04, Final Award (Perm. Ct. Arb. 2012), https://www.italaw.com/sites/default/files/case-documents/italaw3279.pdf.

[5] Tidewater Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award (March 13, 2015), https://www.italaw.com/sites/default/files/case-documents/italaw4206_0.pdf.

[6] Al-Kharafi & Sons Co. v. Libya, Final Arbitral Award (Cairo Regional Ctr. for Int’l Com. Arb., March 22, 2013), https://www.italaw.com/sites/default/files/case-documents/italaw1554.pdf.

[7] UN Comm’n on Int’l Trade Law [UNICTRAL], Arbitration Rules, art. 40, U.N.Doc. A/31/98 (Dec. 15, 1976, as revised in 2010).

[8] Convention on the Settlement of Investment Disputes between States and Nationals of other States, art. 61(2), Oct. 17, 1966, 575 U.N.T.S. 159.

[9] Generation Ukraine, Inc. v. Ukr., ICSID Case No. ARB/00/9, Award (Sept. 16, 2003), https://www.italaw.com/sites/default/files/case-documents/ita0358.pdf.

[10] Liberian E. Timber Corp. v. Republic of Liber., ICSID Case No. ARB/83/2, Award (March 31, 1986), https://jusmundi.com/en/document/decision/en-liberian-eastern-timber-corporation-v-republic-of-liberia-award-monday-31st-march-1986.

* This post is part of a series summarising Delos Disputes Resolution’s TagTime webinars. A list of past TagTime webinars is available at https://delosdr.org/index.php/past-webinars/.
** J.D. Candidate 2022, Columbia Law School