Authors: Gabriel Ortega*
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1. Introduction
The entitlement to compensation for losses of future profits in cases of unlawful expropriation, particularly when the investment is a going concern, remains one of the most fascinating yet contentious issues in the Investor-State Dispute Settlement (ISDS) practice. In September 2024, the United Nations Conference on Trade and Development (UNCTAD) issued an Issues Note (the Note) highlighting a growing trend among ISDS tribunals of adopting a broader understanding of compensable future profits. According to the Note, this approach diverges from the cautious stance taken by other international courts (p. 8), such as the European Court of Human Rights (ECtHR) in Centro Europa 7 S.R.L. and Di Stefano v. Italy, where future profits are compensable only if conclusively established, rather than based on mere conjecture or probability (¶ 219).
ISDS tribunals have long faced criticism for their treatment of compensation in cases of unlawful expropriation. Given the lack of primary investment protection rules contained in International Investment Agreements (IIAs), tribunals have resorted to the full reparation principle as interpreted by the Permanent Court of International Justice (PCIJ) in the Chorzów Factory case. The ruling asserts 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” (p. 47).
Based on this, Toni Marzal has noted that ISDS tribunals usually adopt a wider reasoning that has raised concerns that the quantum assessment often becomes a purely factual analysis (p. 281), in which tribunals have ceased enquiring whether such an entitlement exists. This approach risks turning the inquiry into a fact-finding operation guided by economic and financial expertise (p. 281), rather than one rooted in legal standards. Furthermore, numerous States have acknowledged the unpredictability and inconsistency of damages awards before the United Nations Commission on International Trade Law Working Group III (ISDS Reform) (“Working Group III”), urging the development of guidance to address inconsistencies in damage awards (¶¶ 4-5). The Note’s claim and the prevailing uncertainty surrounding damages, illustrates the absence of a clear and consistent legal threshold, hindering tribunals from conclusively establishing the compensation of future profits.
After a careful examination of case law, there seem to be eight ISDS tribunals that have acknowledged this issue, with two contrasting approaches prevailing. The first approach comes from Prof. Brigitte Stern in her Partially Dissenting Opinion in Quiborax v. Bolivia (“PDO”) where she argued that in cases of unlawful expropriation, valuation should always reflect investors’ legitimate expectations regarding future profits as of the Date of the Expropriation (DoE) (¶ 81). She further contended that post-DoE data and information would inherently incorporate information that do not stem from the unlawful act (¶ 99). The contrary approach, followed by the majority in Quiborax v. Bolivia and other ISDS tribunals – described below in Section 3 – argued that post-expropriation data is objectively foreseeable and thus compensable (¶ 383). Furthermore, they argue that to properly apply the full reparation principle, an ex post valuation of future profits must be conducted.
Based on this dichotomy, and the ongoing reform within the Working Group III, this essay will (i) analyze the legal standard proposed by Prof. Stern, (ii) contrast it with the reasoning of other ISDS tribunals, and (iii) critically evaluate both positions and their drawbacks.
2. Prof. Stern’s legal standard to determine the compensation of future profits
In Quiborax v. Bolivia, the investors claimed that the Bolivian State unlawfully expropriated their mining concessions in the Uyuni Salt Flat and sought full compensation (¶ 313). Both the majority and Stern agreed that because Bolivia’s actions violated the Chile-Bolivia Bilateral Investment Treaty (BIT), the expropriation was rendered illegal, and the investors were entitled to full reparation (¶ 329 and PDO ¶ 2). Nonetheless, with regard to the methodology of valuation of the damages, both diverged fundamentally.
Stern argued that in cases of unlawful expropriation, valuation should always reflect investors’ legitimate expectations existing at the DoE. Hence, the calculation of the due compensation should always assess the damages as seen at the DoE, which entitles investors to their actual loss, plus what they expected at the DoE in terms of future profits and expansion (¶ 81). In her view, real data generated after the expropriation, such as market fluctuations, should not factor into the assessment, as the valuation occurs in a hypothetical but-for scenario. The ex ante approach is usually set forth in IIAs and, prior to 2006, was the preferred stance adopted in those cases where the investment’s value decreases post-expropriation, like the Iran-US cases (¶ 25.37).
To support her argument, Prof. Stern explained that the full reparation principle as seen in Chorzów is the one foreseen in all probability at the DoE, while the majority proposed the full reparation as reconstructed in the world existing at the Date of Award (DoA), which might be completely different due to market fluctuations (¶ 24).
She also contended that the ex post approach was contrary to a fair interpretation of investment law and, in some cases, could result in injustice for the investors (¶ 59). Investments could easily fluctuate in a market through time, which could lead to both increases and decreases. Between the DoE and the DoA, several economic events may occur, which may provide vital information about the state of the market and how it has reacted to a particular injurious act (¶ 109). Such events could have either a positive or negative impact on the value of the undertaking.
Hence, Stern argued that, in cases where a tribunal considers the data produced after the DoE and finds that the investment would have crashed in the market, the compensation would result in injustice for the expropriated investor and contradict the full reparation principle. In contrast, in cases where the investment has risen in value, the solution would contradict a fair interpretation of international investment law, because tribunals would risk appearing biased towards the investors (¶ 59). Furthermore, she contended that even if the majority had relied on the decisions of other ISDS tribunals, their solution suggests applying the harshest damages on the State resembling punitive damages, which are excluded in international law because a legal solution cannot benefit one of the parties (¶ 56).
Furthermore, while both Prof. Stern and the majority agreed on the necessity of a causal link, Stern criticized the majority for not recognizing that the damage in this case was the consequence of the interplay of complementary events – an unlawful expropriation and market fluctuations – and not the consequence of a unique act (¶¶ 90-1). Stern asserted that causation can be either simple, connecting a single unlawful act to its consequences, or complex, which involves multiple causes that contribute to the damage. For her, the case at hand required the analysis of the latter, which necessitated the tribunal distinguishing which causes were linked to the damage.
To determine this sufficient link, tribunals have usually relied on: (i) factual causation, which establishes the link through the construction of a chain of events, and (ii) legal causation, which assesses whether the chain should be cut off at any point, based on certain qualifying terms (p. 171-72). The ILC Commentary on Article 31 has established various qualifying terms, such as remoteness, directness, foreseeability, proximity, or intent that are used to assess which consequences stem directly from the illegal act (p. 93). However, neither the ILC nor any ISDS tribunal has expressed a preference for a particular legal test of causation. What consistently prevails is the exclusion of speculative elements from compensation.
Therefore, by applying foreseeability, Stern concluded that market fluctuations constitute an external event, beyond the control of the wrongdoer, and represented losses that were too speculative or remote. Thus, she found that losses of future profits at the DoA were not the result of the unlawful act, but rather constituted an independent event that may aggravate or mitigate the damage (PDO ¶ 99).
3. The Counterapproach of other ISDS tribunals
Although Stern’s approach seems to offer a compelling argument grounded in justice and the rule of law, was rejected by the majority in Quiborax v. Bolivia, which instead found that market fluctuations were objectively foreseeable. This approach comes from the reasoning of other tribunals described below, that mainly argue that in cases of unlawful expropriation, future profits should be valued at the DoA.
Historically, tribunals were keen to choose the valuation date as the DoE. However, since ADC v. Hungary, tribunals have shifted this stance. The ADC tribunal considered that, due to the investment’s increase after expropriation, the general approach (valuation at the DoE) was inappropriate. Their main argument was that the PCIJ’s reasoning in Chorzów suggested that damages are not necessarily limited to the value of the investment at the DoE (¶ 497). The tribunal further contended that their reasoning also found support in the ECtHR’s analysis in Papamichalopoulos and Others v. Greece, which also relied on Chorzów and found that the expropriated investor was entitled to the higher value of the property at the DoA (¶¶ 37-9). The Siemmens v. Argentina tribunal followed the same assessment and rendered that the investors were entitled not just to the value of their enterprise at the DoE, but also to any greater value that the investment had gained up to the DoA (¶ 352).
The Kardassopoulos v. Georgia tribunal acknowledged that, under certain circumstances – which were not fulfilled in this case – full reparation for an unlawful expropriation might require damages to be assessed as of the DoA only if there is a factual basis supporting a higher recovery (post-expropriation increase) (¶ 514). This decision is in line with the principle that compensation must not impose punitive damages on the State. They further noted that an increase in value may be considered only if the investors would, but for the taking, have retained their investment (¶ 514).
Similarly, in Yukos v. Russia, the tribunal determined that investors should benefit from unforeseen events that increase the value of an expropriated asset up to the DoA, as they have a right to compensation in lieu of restitution (¶ 1769). The tribunal also noted that investors should not bear the risk of unanticipated events that decrease the asset’s value during that period. Finally, the tribunal concluded that, in these types of cases investors should also be able to choose between a valuation at the DoE or the DoA (¶ 1769).
The majority in Quiborax v. Bolivia also found that valuation should be conducted at the DoA on the view that compensation acts in lieu of restitution (¶ 377). In contrast to Prof. Stern’s analysis, the majority found that market fluctuations were objectively foreseeable. Pursuant to the full reparation principle, the majority asserted that their task was to place the investors in the financial position they would have been in real life – not more, not less (¶ 379). Therefore, they decided to conduct an ex post valuation which they argued better reflects reality. The majority recognized the need for a causal link between the wrongful act and the damages claimed, acknowledging that legal causation sometimes requires an additional element, such as foreseeability (¶ 382). What mattered to the majority was to determine whether the wrongful act was objectively foreseeable to cause an increase in the investment, and without much elaboration, the majority found that future profits determined by the fluctuations of the market were objectively foreseeable and compensable to the investors (¶ 383).
The Burlington Resources v. Ecuador tribunal also recognized that the appropriate valuation date was the DoA, based on the reasoning of other ISDS tribunals including the ECtHR (¶ 330). It also acknowledged that conducting an ex post valuation would be more accurate and reliable due to the use of hindsight (¶ 332). However, the tribunal was aware that using hindsight might conflict with causation principles, particularly foreseeability (¶ 333). Nonetheless, the tribunal argued that the use of unforeseen information to quantify lost profits at the DoA does not necessarily break the chain of causation, noting that it is generally accepted that the expropriation of a going concern is objectively capable of causing the loss of its future profit stream, and thus future profits are foreseeable and compensable (¶ 333). Finally, they argued that if the use of an ex ante valuation would be relevant, reasonable and reliable in the circumstances of the case, they would prefer it over an ex post valuation (¶ 334).
The ConocoPhillips v. Venezuela tribunal, citing the Tidewater v. Venezuela tribunal, observed that an ex ante valuation should not specifically shut its eyes to post-expropriation events, if these shed light in more concrete terms (¶ 260). The tribunal emphasized that hindsight can sometimes improve valuation accuracy, as it allows for the assessment of actual lost cash flows rather than mere projections (¶ 260). Further, and most importantly, the tribunal noted that the causal link cannot be reduced to a simple condition of foreseeability, explaining that even unforeseeable facts may be relevant if they establish a causal link to the expropriation. Finally, the tribunal took the stance that facts must fit within a chain of events that, while not necessarily foreseeable at the DoE, emerge as potential consequences of the expropriation (¶ 263).
Lastly, in the recent case Eurus Energy v. Spain, the tribunal found that investors may not only be entitled to compensation for damages incurred at the DoE, but also to compensation of the value at the DoA (¶ 114). Hence, the tribunal argued that, given that there was a considerable increase between the compensation calculated at the DoE and at the DoA, the application of the principles of customary international law, as spelled out in the Chorzów Factory case, does not permit choosing the former, because doing so would not result in full reparation (¶ 114).
4. Critical Analysis of Both Approaches and their Drawbacks
The approaches outlined above represent divergent interpretations of an investor’s entitlement to losses of future profits in cases of unlawful expropriation. Both agree that if the expropriation is attributable to the state, the investor is entitled to compensation for lost future profits, but they differ fundamentally on the extent of the compensation.
Prof. Stern contends that future profits should be assessed strictly based on the investor’s legitimate expectations at the DoE, using only information available up to that point. Any ex post valuation, in her view, would undermine legal certainty. If the investment increases post-expropriation, the state will likely face undue liability; conversely, if the investment decreases post-expropriation, the investor will receive a windfall. Both scenarios contradict the principles of international law and the rule of law.
The opposing stance, upheld by most ISDS tribunals, endorses an ex post valuation, arguing that it better reflects the reality of the financial scenario in which the injured party would have been, had the expropriation not occurred. The use of hindsight does not conflict with causation, and information produced after the DoE can be considered foreseeable in the event that circumstances change after the expropriation. Finally, it appears that the Burlington v. Ecuador and Quiborax v. Bolivia tribunals brought a strong argument to the table, arguing that the preferable approach should be the one that allows for a more relevant, reasonable and reliable compensation.
Both stances trace their roots to Chorzów, yet the rules and standards set forth in the nearly century-old case never had the chance to set forth a solution between both valuation dates and the use of information post-expropriation. This has left room for divergent applications and the absence of an accepted legal criterion, leaving each tribunal to determine the fairest solution.
Perhaps, this is what the rule of law requires, that each tribunal yields its own fair solution that makes sense in its specific context. ISDS tribunals’ principal duty is to resolve disputes between two parties rather than to develop coherent case law. However, we choose to believe and follow what has been stated by Ratner, that the development of a framework for remedies will give some predictability to arbitral awards (p. 23). Ultimately, the question is not one of absolute correctness but of aligning compensation with justice and the rule of law. Given the ongoing reform efforts in the field, this section will highlight some of the drawbacks of both approaches to contribute to the development of a more coherent legal framework.
4.1 Prof. Stern’s Approach: Critical Analysis of its Drawbacks
Prof. Stern’s approach seems to offer a legally coherent and seemingly neutral solution, aligning with international law principles. However, two significant challenges arise when applying her reasoning to cases of unlawful expropriation. First, the wrongdoer (State) is not only obliged to restitute the damage but is also under a continued duty of performance for the breached obligation according to the principles of international law (ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts, art. 29). This is reflected in Yukos, where the tribunal held that the risk of unanticipated events must be borne by the State (¶ 1766). This reasoning suggests that, in unlawful expropriation cases, the State is under a continuous obligation to return the asset beginning from the DoE. By failing to do so, it deprives the investor of the opportunity to dispose of the asset at any moment between the DoE and the DoA.
Khachvani further elaborates that if external factors diminish the asset’s value during this period, they should not be reflected in the amount of the indemnity, given that the injured party was deprived of the possibility to dispose of its asset before such events took place (p. 397). Thus, in these cases, the ex post value of the asset is determinative, with the ex ante value acting as a bottom-line below which the compensation may not fall. Khachvani’s interpretation, however, requires nuance. The obligation for the State to bear all risks should only apply specifically to cases where the expropriation breaches all legal conditions under the applicable IIA. If the State expropriation has solely failed in providing prompt and adequate compensation, the measure of damages would differ.
Second, other international courts have rejected the notion that an ex post valuation is arbitrary or systematically biased in favor of the investor. The Hague Court of Appeal in Yukos dismissed the argument that allowing investors to choose between a DoE or DoA valuation was punitive, holding that this flexibility stems from the illegality of the expropriation. The court found that Chorzów does not preclude ex post valuation, as unlawful takings require an assessment of the actual harm suffered by the investor (¶ 6.4.26). Similarly, the Annulment Committee in Quiborax v Bolivia determined that the ex post approach is not inconsistent with the full reparation principle and falls within the possibilities contemplated by the PCIJ in Chorzów. The tribunal stated that the use of ex post information allows for a more accurate assessment of the loss suffered by the claimants. At the same time, the tribunal must evaluate the loss with reasonable certainty, and if the ex post valuation is not reasonably certain, then tribunals will have no choice but to rely on ex ante valuation (¶ 161).
4.2 The Majority’s Approach: Critical Analysis of its Drawbacks
The majority view on compensation also faces some key challenges. First, while the ruling in Chorzów establishes full reparation as the governing principle, tribunals may have overlooked an implicit, yet quite important limitation in its reasoning. According to Prof. Stern, Chorzów emphasizes that compensation should restore the situation that would “in all probability” have existed without the wrongful act. She argues that this wording implies a certain degree of uncertainty that may exclude the reliance on real, ex post data. Since the PCIJ never fully clarified the scope of this limitation, it is possible that Chorzów intended to restrict compensation to what could be probably assessed at the time of the expropriation rather than incorporating subsequent market fluctuations, knowing the economic hurdles that come with valuation of business in real life.
Second, some recent tribunals have actively rejected the ex post valuation in cases of unlawful expropriation. In Glencore v. Bolivia, the tribunal denied conducting an ex post valuation because they considered it necessary to balance the investor’s entitlement to compensation without necessarily punishing the State for the lapsed time, hence considering the valuation date as the DoE (¶ 502). Similarly, in Karkey Karadeniz v. Pakistan, the tribunal dismissed an ex post valuation, not due to a legal principle, but because the expert evidence supporting the claim was deemed speculative and unreliable (¶ 670). The tribunal acknowledged that both approaches could be valid, provided they led to full compensation. However, it ultimately relied on an ex ante assessment, reinforcing concerns that ex post valuation may sometimes introduce excessive uncertainty.
5. Conclusion: Paving the Way Towards a Legal Criterion
The esoteric topic of damages covers a wide range of complex and uncertain issues that continuously become more controversial. The compensation of future profits in cases of unlawful expropriation, specifically in the case of a going concern, is one of those complex and uncertain issues. As seen, the debate surrounding this issue offers robust arguments for both approaches, grounded in principles of justice and international law. However, at the heart of the debate lies a fundamental agreement: full reparation, as established in the almost centenary Chorzów Factory case, remains the guiding principle. Both Prof. Stern and other ISDS tribunals recognize that compensation must restore the investor to the financial position they would have been in. However, the real point of divergence emerges in the interpretation of how this principle should be applied.
The tension ultimately stems from whether the ex post approach truly restores the injured party or risks turning the ISDS system into a punitive and arbitrary solution. These questions remain open to tribunals’ interpretation and will ultimately be resolved by them. However, certain consideration studied here could guide the resolution of this issue more consistently:
- The full reparation principle in Chorzów contains a key limitation: compensation must reflect an all-probability This may indicate that while tribunals can conduct a valuation at both dates, they must ensure that their choice aligns with this restriction.
- In cases where the investment’s value has declined post-expropriation, ex post valuation could contradict the rule of law and be perceived as biased towards investors.
- However, ISDS tribunals have proven the contrary and found support for their approach in the PCIJ’s reasoning, which suggested that damages are not necessarily limited to the value at the DoE. This analysis has also been adopted by other international courts.
- Furthermore, the decision in Quiborax and Burlington could allow tribunals to avoid more concerns regarding inconsistencies and unpredictability in their decisions, by stating that the prevailing approach shall be the one that is more relevant, reasonable and reliable.
- Finally, the ex post approach would only be possible if there is a factual basis supporting higher recovery and evidence that the investors would have retained the investment, but for the expropriation.
Despite these differences, both approaches emphasize the avoidance of speculative losses. While tribunals such as those in Glencore and Karkey Karadeniz have expressed skepticism towards ex post valuation due to its inherent uncertainties, other ISDS tribunals have emphasized that an ex post valuation allows for a better reflection of economic reality. This divergence highlights a persistent issue: without a coherent legal framework for distinguishing speculative losses from legitimate claims, tribunals will remain divided.
For ISDS to ensure legal certainty and fairness, a more predictable standard must be developed to differentiate between uncertain losses and those that truly reflect the harm suffered. Such a legal criterion can be structured around the established case law principles detailed in this post, Khachvani’s theory of targeting the illegality of the State’s conduct, or Lavaud and Recena Costa’s disgorgement remedy doctrine, which would prevent States from benefiting from unlawful expropriations. Various potential and innovative propositions could bring consistency to ISDS, but if the debate continues, tribunals and practitioners will continue to grapple with the same prerogative, making it impossible to tell apart.
*Gabriel Ortega is a Junior Lawyer at TotalEnergies EP Bolivie. He graduated with honors from Universidad Católica Boliviana San Pablo and is admitted to practice in Bolivia. He is interested in international arbitration and high-stakes compensation disputes.
[1] The author acknowledges Charles Rosenberg, Borzu Sabahi, Marcelo Schoeters, Santiago Soto García and Nicolò Andreotti for their invaluable comments and contributions to this blog post. He is also indebted to Javier Echeverri, in whose class, these ideas first began to take shape. Lastly, he is grateful to María José Rasmussen whose constant encouragement and support have been invaluable. However, all views and opinions expressed here are of the author alone and do not reflect the views of anyone else or any organization he is affiliated with.