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Chapter 8

Compensation for Non-expropriatory Investment Treaty Breaches in the Argentine Gas Sector Cases: Issues and Implications
Kathryn Khamsi*

The measures taken by Argentina to staunch its last financial crisis have elicited an unprecedented number of investment treaty claims.1 Many of these claims have now been decided, among which, a number of cases involving Argentinas privatized gas transportation and distribution sector. CMS, LG&E, Enron, Sempra, and the BG Group have been awarded amounts totaling hundreds of millions of
* Kathryn Khamsi is an Associate at Shearman & Sterling LLP, practicing in the International Arbitration group based in Paris. Previously, she was Legal Advisor to and, eventually, also Coordinator of the Timor Sea Office, the part of the Government of Timor-Leste mandated to conduct maritime boundary negotiations and draft a petroleum investment regime for the country. She has also worked for the International Development Law Organization in Kabul, Afghanistan, and for The Carter Center on matters concerning mining investment contracts in the Democratic Republic of Congo. Kathryn holds an AB from Harvard (cum laude), an LLB and BCL from McGill (with distinction), and an LLM from Columbia (James Kent Scholar). She wishes to thank Jose E. Alvarez and Yas Banifatemi for their insightful comments on previous versions of this article. The views expressed herein do not necessarily reflect the views of Shearman & Sterling LLP or its clients. 1. The majority of these claims have been filed with the International Centre for the Settlement of Investment Disputes, http://icsid.worldbank.org/. Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung, and Claire Balchin, The Backlash against Investment Arbitration: Perceptions and Reality, pp. 165185. #2010 Kluwer Law International BV, The Netherlands.

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Kathryn Khamsi dollars.2 An ICSID Annulment Committee partially annulled the CMS Award but left the amount awarded untouched.3 These casesreferred to here as the Argentine gas sector caseshave attracted significant (and critical) attention, not only because of the magnitude of the awards, but also because, despite almost identical facts and pleadings, the respective tribunals came to significantly different conclusions on certain key issues. By now, the story of the Argentine financial crisis and of the gas sector cases, in particular, is familiar.4 Starting in the late 1980s, in the wake of a prior financial crisis, Argentina adopted broad-reaching reforms. It privatized public utilities, entered into bilateral investment treaties (BITs) to attract investment, and reformed monetary policy, including by pegging the Argentine peso to the US dollar. Among the utilities privatized was Gas del Estado S.E., the states natural gas transportation and distribution monopoly. Under the 1992 Gas Law, the monopoly was broken up into companies licensed either to transport or distribute gas, each of which was then auctioned.5 CMS, LG&E, Enron, Sempra, and BG Group eventually acquired shareholdings in these companies.6 The Gas Law also created regulator ENARGAS and mandated it, among other things, to set transportation and distribution tariffs to be charged by the privatized gas companies.7 By virtue of the Gas Law, together with its implementing regulations8

2. CMS Transmission Co. v. Argentine Republic, ICSID Case No. Arb/01/8, Award (May 12, 2005) (CMS Award); LG&E Energy Corp. v. Argentine Republic, ICSID Case No. Arb/02/1, Decision on Liability (Oct. 3, 2006) (LG&E Decision on Liability); Award (Jul. 25, 2007) (LG&E Damages Award); Enron Corp., Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. Arb/01/3, Award, May 22, 2007 (Enron Award); Sempra Energy Intl v. Argentine Republic, ICSID Case No. Arb/02/16, Award (Sep. 28, 2007) (Sempra Award); BG Group v. Argentina (UNCITRAL), Award (Dec. 24, 2007) (BG Group Award). Unless otherwise indicated, all awards cited are available from http://ita.law.uvic.ca/. A decision on the merits in a further gas sector claim has not yet been rendered. Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, ICSID Case No. ARB/03/13. 3. CMS Transmission Co. v. Argentine Republic, ICSID Case No. Arb 01/08, Decision of the ad hoc Committee on the Application for Annulment (Sep. 25, 2007) (CMS Annulment Decision). Argentina has also challenged the other awards. It filed a request for annulment of the Sempra Award on Jan. 30, 2008, the Enron Award on Mar. 7, 2008, and the LG&E award on Sep. 19, 2008. Details are available from http://icsid.worldbank.org/. Argentina filed to vacate or modify the BG Group Award in US District Court on Mar. 21, 2008 (Case No. 08-0485 (RBW)). 4. The following overview is taken from the Argentine gas sector cases: CMS Award, supra note 2, paras. 5367 and 12751; LG&E Decision on Liability, supra note 2, paras. 3371; Enron Award, supra note 2, paras. 4186 and 9555; Sempra Award, supra note 2, paras. 8231; BG Group Award, supra note 2, paras. 1682. 5. Ley del Gas, Law No. 24.076 of May 1992. 6. CMS Award, supra note 2 para. 58; LG&E Decision on Liability, supra note 2, para. 52; Enron Award, supra note 2, paras. 4754; Sempra Award, supra note 2, paras. 83 and 8892; BG Group Award, supra note 2, paras. 2426. 7. Supra note 5, Art. 2. 8. Adopted on Sep. 28, 1992 by Decree No. 1738/92.

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Compensation for Non-expropriatory Investment Treaty Breaches and the licenses issued thereunder to the companies9 (referred to here as licensees), Argentina made a number of commitments in relation to the tariffs that would be approved by ENARGAS. The tribunals referred to these as stabilization guarantees. Tariffs would be set for five-year periods, at the end of which they would be reviewed and adjusted. They would also be subject to semi-annual adjustment based on the US Producer Price Index (PPI). Additionally, they could be calculated in US dollars and then converted to Argentine pesos at the rate of oneto-one at the time of billing. The tariff system was not to be subject to further control, and the licenses could not be rescinded or modified without the consent of the licensees.10 The late 1990s brought renewed economic malaise to Argentina. Deflation in Argentina, coupled with inflation in the United States, meant that the PPI adjustments would have translated into significantly increased rates for Argentine gas consumers. A six-month postponement of the PPI adjustment was agreed with licensees in January 2000,11 and a further two-year postponement was agreed in July.12 By late 2001, the malaise had developed into full-blown crisis. The Argentine government struggled to maintain the currency peg as money fled the country. After a succession of presidents and amid great social unrest, in January 2002 Argentina passed the Emergency Law.13 Among other things, the law unpegged the Argentine peso and eliminated the right to calculate tariffs in dollars and to PPI adjustments. It also required renegotiation of license terms to adapt them to the new exchange system.14 The impact of these measures was significantly to decrease the tariff revenue of licensees, in particular, as the value of the peso quickly fell against the dollar. This then in turn impacted licensees financing.15 CMS, LG&E, Enron, and Sempra argued that the postponement of the PPI adjustment and the eventual wholesale abrogation of the stabilization guarantees breached the US-Argentina BIT.16 BG Group made a similar challenge under

9. Basic Rules of the License were approved within a model license for natural gas transportation and distribution. Reglas Basicas de la Licencia, adopted by Decree No. 2255/92 on Dec. 7, 1992. 10. See, e.g., CMS Award, supra note 2, paras. 12751. Note that the binding nature of these guarantees, once convertibility was abandoned, was controverted by Argentina. See, e.g., CMS Award, id., para. 129. 11. See, e.g., CMS Award, id., para. 60. 12. Agreement embodied in Decree No. 669/00 of Jun. 17, 2000. See, e.g., CMS Award, id., para. 61. 13. Public Emergency and Foreign Exchange System Reform Law, Law No. 25.561, enacted Jan. 6, 2002. 14. Emergency Law, supra note 13, Art. 9. The modalities for this renegotiation were set out in Decree No. 293/02, Feb. 14, 2002, and subsequently by Decree no. 311/03 of Jul. 3, 2003. 15. See, e.g., Enron Award, supra note 2, paras. 8081. 16. Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, US-Arg. (Nov. 14, 1991) S. Treaty Doc No 103-2 (1991), entered into force Oct. 20, 1994.

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Kathryn Khamsi the UK-Argentina BIT.17 All claimed damages for amounts equivalent to the loss in tariff revenues that would have been earned through the term of the licenses had the guarantees been respected. The tribunals were in substantial agreement on the provisions of the respective BITs that Argentinas measures had, and had not, breached. They all rejected allegations that the measures were tantamount to, or had effect equivalent to, expropriation, as the claimants had failed to prove they had suffered the requisite substantial deprivation. In the words of the LG&E tribunal, the measures did not deny investors the right to enjoy their investment in terms of earnings; claimants had not lost control over their shares, and the investment had not ceased to exist.18 The tribunals all held, though, that the measures breached the fair and equitable treatment guarantee. They agreed that the guarantee protects the legitimate expectations of investors and the stability of the investment framework. They found that investor expectations and the stability of investment framework had been undermined as the emergency measures had entirely transformed the legal environment in reliance upon which claimants had invested.19 The CMS, LG&E, Enron, and Sempra tribunals also found that Argentina had breached the commitment to observe any obligation it may have entered into (the umbrella clause) in the US-Argentina BIT,20 although the CMS Annulment Committee later annulled the CMS tribunals finding in this regard.21 The LG&E tribunal also found that Argentinas measures discriminated against gas distribution companies,22 and the BG Group tribunal found Argentinas measures were unreasonable.23 All other allegations were dismissed.24

17. Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Argentine Republic for the Promotion and Protection of Investments, UK-Arg., Dec. 11, 1990, 1765 U.N.T.S. 33, entered into force Feb. 19, 1993. 18. LG&E Decision on Liability, supra note 2, paras. 198200. See generally id., paras. 185200; CMS Award, supra note 2, paras. 25264; Enron Award, supra note 2, paras. 24450; Sempra Award, supra note 2, paras. 27489; BG Group Award, supra note 2, paras. 25872. Enron and Sempras allegation of direct expropriation was also rejected on the basis that there had not been the requisite permanent transfer of property. Enron Award, Id., para. 243; Sempra Award, Id., paras. 28082. 19. See generally CMS Award, supra note 2, paras. 26684; CMS Annulment Decision, supra note 3, paras. 27475; LG&E Decision on Liability, supra note 2, paras. 11939; Enron Award, supra note 2, paras. 25168; Sempra Award, supra note 2, paras. 290304; BG Group Award, supra note 2, paras. 289310. 20. See generally CMS Award, supra note 2, paras. 296303; LG&E Decision on Liability, supra note 2, paras. 16975; Enron Award, supra note 2, paras. 26977; Sempra Award, supra note 2, paras. 30514. 21. CMS Annulment Decision, paras. 8997. 22. LG&E Decision on Liability, supra note 2, para. 147. 23. BG Group Award, supra note 2, para. 346. 24. For example, remaining claims of arbitrariness (under the US-Argentina BIT) and discrimination were dismissed. CMS Award, supra note 2, at paras. 29095; LG&E Decision on Liability, supra note 2, paras. 16163 (arbitrariness); Enron Award, supra note 2, paras. 27883; Sempra Award, supra note 2, paras. 31820; BG Group Award, supra note 2, paras. 35760.

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Compensation for Non-expropriatory Investment Treaty Breaches However, the tribunals disagreed about whether such breaches could be excused. The LG&E tribunal ruled that they could, albeit only partially. It found that Argentina could rely on Article XI of the US-Argentina BIT, which provides that measures to protect essential security are not precluded, to excuse measures for the period of the crisis. It found that Article 25 of the International Law Commissions Draft Articles on the Responsibility of States for Internationally Wrongful Acts (the ILC Articles)25 supported this conclusion. As such, Argentina did not owe claimants compensation for losses attributable to the period of the crisis.26 The CMS, Enron, and Sempra tribunals, by contrast, ruled that Argentina could not rely on either Article XI or the customary defense of necessity to excuse liability.27 The CMS Annulment Committee severely criticized but did not annul the CMS tribunals findings in this regard.28 The UK-Argentina BIT contained no clause equivalent to Article XI of the US-Argentina BIT, and the BG Group tribunal rejected Argentinas necessity argument.29 The merits of the tribunals respective approaches to this question have been extensively debated.30 The tribunals also adopted quite different approaches to the determination of compensation owed. They agreed only that the relevant standard was full compensation for losses caused but disagreed on the measure of this standard. The CMS, Enron, Sempra, and BG Group tribunals found that the fair market value measure used in expropriation cases should be applied despite of no expropriation having been found. Given the way this value was calculated, the result was that the full amount of lost tariff revenues through the 35-year term of the licenses (ending in 202731) was awarded. The LG&E tribunal, by contrast, found that the future profits claimed had not been established with the requisite degree of certainty and, partly for this reason, rejected the fair market value measure of compensation. It limited compensation to losses accrued to the date of the hearing (in addition to deducting from this amount losses attributable to the period of

25. International Law Commission, Draft Articles on the Responsibility of States for Internationally Wrongful Acts with Commentaries, U.N. G.A. Doc. A/56/10, Chapter V (2001). Having been accepted by the UN General Assembly, the ILC Articles are no longer actually a draft. 26. See generally LG&E Decision on Liability, supra note 2, paras. 20166. 27. See generally CMS Award, supra note 2, paras. 30494; Enron Award, supra note 2, paras. 28845; Sempra Award, supra note 2, paras. 32597. 28. See generally CMS Annulment Decision, supra note 2, paras. 10150. 29. BG Group Award, supra note 2, paras. 38187 and 40712, respectively. 30. See, e.g., Jose E. Alvarez & Kathryn Khamsi, The Argentine Crisis and Foreign Investors: A Glimpse into the Soul of the Foreign Investment Regime, in YEARBOOK ON INTERNATIONAL INVESTMENT LAW & POLICY (Karl P. Sauvant ed., 2008/2009, forthcoming); William W. BurkeWhite & Andreas von Staden, Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties, 48 VA. J. INTL L. 307, 311 (2008); Andrea Bjorklund, Emergency Exceptions to International Obligations in the Realm of Foreign Investment: The State of Necessity and Force Majeure as Circumstances Precluding Wrongfulness, in OXFORD HANDBOOK OF INTERNATIONAL INVESTMENT LAW (Peter Muchlinski & Federico Ortino eds., 2007). 31. See, e.g., CMS Award, supra note 2, para. 197.

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Kathryn Khamsi emergency). These divergences between the cases had a significant impact on the amount of compensation awarded. Yet they have received scant attention. Part I of this paper will provide an overview of the compensation reasoning in the Argentine gas sector cases. Part II will then comment on this reasoning. It will challenge many of the arguments advanced in relation to the measure of compensationnotably, those of the CMS, Enron, and Sempra tribunals in support of the fair market value measurealthough will not criticize the measures adopted themselves. It will then look more closely at the tribunals approach to the certainty required in relation to alleged losses and note the paucity of analysis in all of the awards on this fundamental issue. A brief conclusion will consider the broader implications for the international investment arbitration regime of these divergences and deficiencies in the tribunals compensation reasoning. I. COMPENSATION FOR NON-EXPROPRIATORY INVESTMENT TREATY BREACH: REASONING IN THE ARGENTINE GAS SECTOR CASES

The Standard of Compensation at customary international law is understood to be that set out by the Permanent Court of International Justice in the Chorzow Factory case: . . . reparation must, as far as possible, wipe-out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is 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 would not be covered by restitution in kind or payment in place of it . . . 32 This is essentially codified at Article 31 of the ILC Articles, which requires full reparation for the injury caused by the internationally wrongful act.33 The tribunals in the Argentine gas sector cases all looked to the Chorzow Factory case and the ILC Articles for the standard of compensation to be applied. They all found that damages must compensate any loss suffered as a result of the breach, essentially adopting the full reparation standard.34 In relation to the measure of this standard, the tribunals all noted that the BITs at issue, both of which specifically refer to fair market value as the measure of compensation for expropriation, do not prescribe a measure applicable where other
32. Case Concerning Certain German Interests in Polish Upper Silesia (Germany v. Poland), Merits (1928) P.C.I.J. Series A. No. 17, at 47. 33. Supra note 25. Regarding the requirement of full compensation, see also Commentary No. 3 to Art. 31. 34. CMS Award, supra note 2, para. 402; LG&E Damages Award, supra note 2, para. 45; Enron Award, supra note 2, paras. 359 and 379; Sempra Award, supra note 2, paras. 40001; BG Group, supra note 2, paras. 42426.

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Compensation for Non-expropriatory Investment Treaty Breaches guarantees have been breached.35 The tribunals took different approaches to this measure. The approach of the CMS, Enron, and Sempra tribunals was essentially the same and that of the BG Group tribunal, substantially similar, with the LG&E tribunal differing considerably. II. USE AND CALCULATION OF THE FAIR MARKET VALUE MEASURE IN THE CMS, ENRON, SEMPRA, AND BG GROUP AWARDS

The CMS, Enron, Sempra, and BG Group tribunals determined that fair market value was the appropriate measure of loss to be used, although they arrived at this determination by different means. The CMS and Enron tribunals referred somewhat cryptically to the cumulative nature of the breaches.36 This language was quoted, seemingly approvingly, by the CMS Annulment Committee.37 What the tribunals meant by the cumulative nature of the breaches was not explained, although they seem to have been referring to the fact that Argentinas measures breached more than one BIT guarantee.38 The Enron and Sempra tribunals also referred, in support of the fair market value measure, to a similarity between the breach of the obligation of fair and equitable treatment at issue and indirect expropriation.39 A similar consideration appears to be reflected in the CMS tribunals observation that while the fair market value measure figures prominently in respect of expropriation, it is not excluded that it might also be appropriate for breaches different from expropriation if their effect results in important long-term losses.40 This language was later taken up by the CMS Annulment Committee.41
35. CMS Award, id., para. 409; LG&E Damages Award id., para. 30; Enron Award, id., para. 359; Sempra Award, Id., para. 403; BG Group Award, supra note 2, para. 419. 36. CMS Award, id., paras. 40910; Enron Award, id., para. 363. 37. Supra note 3, para. 154. In fact, it had annulled the finding of umbrella clause breach. Id., paras. 8997. It did not address whether and how the fact that Argentinas breaches were no longer cumulative should impact the damages measure finding. 38. The CMS Award referred to the cumulative nature of the breaches discussed here as being [u]nlike the circumstances in the Feldman case. Supra note 2, para. 410. In Marvin Roy Feldman v. United Mexican States, the tribunal found violation of only one treaty provision, but multiple times by multiple measures. ICSID Case No. ARB(AF)/99/1, Award, Dec. 16, 2002. The Enron Award simply cited the CMS Awards reasoning. Supra note 2, para. 363. 39. Enron Award, id., para. 363; Sempra Award, supra note 2, paras. 40304. The Enron tribunal relied on the similarity to expropriation reasoning in support of the fair market value measure, but later explained its approach differently, stating that it needed to compare the with breach and without breach values of the investment in order to undo the material harm of the breach. Id., para. 380. 40. CMS Award, supra note 2, para. 410. No explanation of what is meant by important or longterm is provided. 41. Supra note 3, para. 154.

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Kathryn Khamsi The BG Group tribunal, by contrast, criticized the CMS tribunals reasoning as scant, and contrary to the principles of treaty hermeneutics, which militate for the conclusion that one should not read into the fair and equitable treatment provision a standard which the parties expressly confined to expropriation.42 Yet though it was disinclined to automatically import the expropriation measure, it found the fair market value measure could be adopted on the basis of customary international law, which left to its discretion the most appropriate manner of achieving full reparation.43 In all four cases, the loss to be compensated was calculated as the difference between the hypothetical fair market value of claimants shareholdings absent Argentinas breaches and the actual fair market value of these shareholdings given Argentinas breaches44referred to here as the without breach and with breach values, respectively.45 There are various methods that can be used to arrive at a fair market value market-based, asset-based, and income-based. Market-based valuation, also referred to as the comparable transaction approach, is based on the price paid in an actual transactionfor example, a sale of the investment or shares of the investment (whether or not on a stock exchange) or sale of a similar investment. Asset-based methods include the net book value method, which calculates the difference between the total assets and liabilities shown on the business books, and the investment method, which identifies amounts invested. Income-based methods calculate the fair market value of an undertaking by looking at its incomegenerating potential. The most frequently used income-based valuation method is the discounted cash flow method. This method arrives at fair market value by calculating future cash flows, including the component of those cash flows that constitutes a recovery by the investor of invested capital (sunk costs) and a return (gross profit) on that equity capital, and discounting them to a present value.46 The rate used for this discounting (the discount rate) is the minimum rate of

42. BG Group Award, supra note 2, para. 421. 43. BG Group Award, supra note 2, paras. 42229. 44. Enron Award, supra note 2, paras. 380 and 389; Sempra Award, supra note 2, paras. 412 and 415; BG Group Award, supra note 2, para. 443. This is never explicitly stated in the CMS Award but is clearly the calculation being made. See, e.g., CMS Award, supra note 2, para. 422. 45. As Enron and Sempra used roughly the date of the Emergency Law as the date on which these values were calculated, they then compensated the historical loss to the date of the Emergency Law due to the suspended PPI adjustments separately. Enron Award, supra note 2, paras. 405 (Dec. 31, 2001 valuation date) and 44548 (compensation for freeze in tariff adjustments); Sempra Award, supra note 2, paras. 209 (Dec. 31, 2001 valuation date) and 46769 (compensation for freeze in tariff adjustments). This issue did not arise in the CMS Award, as the valuation date was set roughly at the date of the second tariff adjustment postponement. Supra note 2, para. 441. BG Groups claim for historical loss was dismissed, seemingly for the same reason. Supra note 2, para. 441 (July 1998 without breach valuation date) and paras. 44852 (dismissing historical loss claim), but note para. 433 (with breach valuation date in 2005). 46. Mark Kantor, VALUATION FOR ARBITRATION: COMPENSATION STANDARDS, VALUATION METHODS AND EXPERT EVIDENCE 199 (2008). Regarding valuation methods, see generally id., at 817.

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Compensation for Non-expropriatory Investment Treaty Breaches return an investor requires in order to commit funds to an investment, and reflects various types of risk.47 In the CMS, Enron, Sempra, and BG Group cases, where there had been a transaction subsequent to the breach, the actual transaction method was used to calculate the without breach fair market value. Thus, the Enron tribunal used the price paid in claimants sale of its shares to determine fair market value in the with breach scenario.48 The BG Group tribunal used an agreement for restructuring the licensees debt as the basis for calculating the with breach value.49 Where there had been a transaction relating to the investment prior to the breach, the actual transaction method was used to calculate the without breach fair market value. Thus, the BG Group tribunal used the price paid in a 1998 sale of shares of the company through which claimant held its investment to determine the without breach value.50 For the remaining calculations of without breach and with breach fair market values, the CMS, Enron, and Sempra tribunals applied the discounted cash flow method.51 In applying this method, they spent considerable time evaluating the variables that went into the discounted cash flow calculation, eventually coming to different views on these variables, and therefore also the quantum of damages owed, from those put forward by the claimants. For example, the CMS tribunal adjusted the hypothetical tariffs that would have been allowed by ENARGAS in the without breach scenario to reflect a positive return for the companyCMS had assumed ENARGAS would require that its investment operate at a loss.52 The Sempra tribunal also increased the tariff variable in the with breach scenario to reflect the terms of memoranda of understanding in relation to renegotiated license terms signed by Argentina and the licensees.53 Also, the CMS, Enron, and Sempra tribunals adjusted variables used by the claimants to better isolate the loss caused by the Argentine breaches from the loss that would have been caused by the financial crisis even absent the breaches.54
47. Regarding discount rates, see Kantor, supra note 46, at 14072. 48. Enron Award, supra note 2, para. 389. This value was verified by reference to stock market values. Id., paras. 43738. 49. BG Group Award, supra note 2, para. 440. 50. Id., paras. 44142. 51. CMS Award, supra note 2, paras. 411, 416, and 421; Enron Award, supra note 2, paras. 385 and 389; Sempra Award, supra note 2, para. 416. The Enron tribunal then verified the value yielded by reference to stock exchange values. Id., paras. 42428. 52. CMS Award, id., paras. 447 and 45657. 53. Sempra Award, supra note 2, paras. 45658. 54. The CMS and Sempra tribunals found that the claimants had not sufficiently factored into their calculation the decrease in demand for gas that would have resulted from the crisis and therefore modified this variable. CMS Award, supra note 2, paras. 44446; Sempra Award, supra note 2, paras. 44649. The Enron tribunal found that claimants assumptions as to tariff adjustments were not a realistic scenario in a crisis context and therefore modified the tariff variable. Enron Award, supra note 2, para. 414. The Enron tribunal also modified claimants tariff base and cost of capital variables, claiming this was to better reflect the reality of the crisis; a claim it did not explain. Id., paras. 40613.

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Kathryn Khamsi The impact of this adjustment was significant. CMS was awarded US $133 million in compensation, rather than the US $261 million it had claimed.55 Enron was awarded US $106 million, rather than the amounts it had claimed, which were a spectrum ranging from US $279 to US $544 million.56 Sempra was awarded US $128 million, rather than the US $209 million it had claimed,57 while BG Group was awarded US $185 million, rather than the US $238 million it had claimed.58 The CMS, Enron, and Sempra tribunals gave the impression, in rejecting Argentinas essential security and necessity arguments, that they would nonetheless reduce the amount of compensation owed by Argentina to take into account the extenuating circumstances in which the BIT breaches had been committed. For instance, the CMS tribunal stated that Argentinas economic crisis, while not excusing liability or precluding wrongfulness from the legal point of view . . . ought nevertheless to be considered . . . when determining compensation.59 Some authors argue that the tribunals did reduce compensation in this manner.60 However, the context of the crisis was considered only in identifying damages actually caused by the breaches.61 Compensation was not otherwise reduced; CMS, Enron, and Sempra were awarded full compensation for the loss caused by the breaches. A. REFUSAL TO COMPENSATE LOST FUTURE PROFITS IN DAMAGES AWARD, AND CONSEQUENT REJECTION OF MARKET VALUE MEASURE LG&E FAIR

THE THE

The LG&E tribunal rejected the fair market value measure of compensation, despite the fact that Argentina had not opposed it.62 It found this measure to be
See also CMS Award, supra note 2, paras. 449 (regarding the exchange rate), 450 (regarding equity discount rates), and 45862 (regarding operations and maintenance expenditures); Enron Award, supra note 2, paras. 41113 (regarding the cost of capital); Sempra Award, supra note 2, paras. 41828 (regarding the asset base), 42937 (regarding the discount rate), and 43845 (regarding tariff increases). CMS Award, supra note 2, paras. 468 and 396, respectively. Enron Award, supra note 2, paras. 450 and 351, respectively. Sempra Award, supra note 2, paras. 482 and 406, respectively. Note that this includes US $16 million in compensation for loss on a loan and US $36 million for non-payment by Argentina of subsidies owed. Id., paras. 466 and 479, respectively. BG Group Award, supra note 2, paras. 444 and 438, respectively. CMS Award, supra note 2, para. 356. See also Enron Award, supra note 2, para. 232; Sempra Award, supra note 2, para. 397. Ioana Tudor, Balancing the Breach of the FET Standard, 4:6 TRANSNATL DISP. MGMT. 12 (2007) (arguing that the tribunal did consider that there were elements of necessity in this case and took them into account at the moment of calculating the compensation) and at 25 (arguing that the tribunal did retain the elements of necessity for the calculation of compensation); Sergey Ripinsky, State of Necessity: Effect on Compensation, 4:6 TRANSNATL DISP. MGMT. 8 (2007) (arguing that even in cases where the necessity was not accepted, the tribunals still reduced compensation on account of Argentinas economic crisis, thereby distributed the loss between the parties). Supra note 54. LG&E Damages Award, supra note 2, paras. 32 and 33, respectively.

55. 56. 57. 58. 59. 60.

61. 62.

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Compensation for Non-expropriatory Investment Treaty Breaches appropriate in cases of expropriation in which the claimants have lost the title to their investment or when interference with property rights has led to a loss equivalent to the total loss of investment.63 The case before it was not such a case.64 There was no correspondence between the situation under analysis and expropriation.65 Capital losses (as distinct from lost profits) that would be reflected in the fair market value measure had not crystallized, as they might have if claimants had sold their interest.66 Therefore, the LG&E tribunal reasoned, fair market value was an inappropriate proxy for the actual loss it was bound to identify.67 Rather, the appropriate measure of this loss was the dividends that were not distributed to LG&E as a result of the breaches.68 The tribunal calculated this loss by identifying the dividends that would or could have been generated without any change in the tariff system and subtracting dividends actually generatedthe without breach and with breach dividends, respectively.69 The hypothetical without breach dividends were calculated based on the dividends actually distributed prior to the state of necessity, rather than on forecasts of future profitability.70 The LG&E tribunal indicated that lost future profits could only be compensated if they could be established with certainty.71 It found that any future loss to LG&Eas opposed to accrued losseswas uncertain and that any attempt to calculate it is speculative.72 The uncertainty, it found, results from the fact that LG&E retained title to its investment and is therefore entitled to any profit that the investment generates and could generate in the future.73 On this basis, the LG&E tribunal distinguished cases where future profits had been awardedall cases involving expropriation.74 No damages for projected lost future dividends were awarded.75 In addition, as contemplated in the LG&E Decision on Liability, damages for lost dividends attributable to the period of necessity were not awarded.
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. Id., para. 35. Id. Id., para. 39. Id., para. 47. Id., paras. 4145. Id., paras. 48, 50, and 58. Id., para. 59. Id., para. 61. Id., paras. 51 and 89. Id., para. 90. Id., paras. 90 and 96. Id., para. 91. The cutoff date was the date of last submission of evidence, for due process reasons. Id., paras. 9495. The tribunal agreed with LG&E as to the continuing nature of Argentinas breach (paras. 65 and 88), and did not discount the possibility, referred to by LG&E, that it might seek periodic and additional relief to remedy this continuing breach (para. 66). However, the Tribunal found in a subsequent decision that such additional relief would have to be sought in new proceedings. LG&E Energy Corp. v. Argentine Republic, ICSID Case No. Arb/02/1, Decision on Claimants Request for Supplementary Decision (Jul. 8, 2008), para. 17.

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Kathryn Khamsi Consequently the US $29 million attributable to this period was deducted.76 In the end, LG&E was awarded US $51 million plus interest,77 rather than the US $248 million originally claimed,78 or the US $284 million that LG&E argued should result from the lost dividends measure including future losses.79 III. ISSUES RAISED BY THE COMPENSATION REASONING IN THE ARGENTINE GAS SECTOR CASES

What is striking about the LG&E Damages Award is that the much-discussed findings on essential security accounted for such a small share of the difference between amounts claimed and amounts awarded. A significant part of the balance is likely due to the tribunals measure of damages and refusal to award lost future profits, issues on which it also diverged considerably from the other tribunals. One might expect that, had the other tribunals also refused to award lost future profits, amounts awarded would, similarly, have been significantly reduced. The balance of this paper will consider these two areas of divergence. A. THE MEASURE COMPENSATION: ITS CHOICE
AND IMPLICATIONS

OF

While many investment treaties indicate how compensation for expropriation is to be measured, they do not give any such indication for losses caused by other treaty breaches. There is widespread agreement that, in light of this silence, identifying an appropriate measure of loss is within the discretion of tribunals.80 As noted above, international law requires that reparation for an illegal act wipeout its consequences. A payment of damages should compensate injury that is caused by the breach, meaning the injury resulting from and ascribable to the wrongful act.81 As found by the BG Group tribunal, as long as principles of causation are respected and damage is not speculative, indirect, remote, or uncertain, it is within the discretion of the tribunal to have recourse to the measure of compensation it deems appropriate.82

76. 77. 78. 79. 80.

Id., paras. 61 and 108, respectively. All amounts have been rounded to the nearest million. LG&E Damages Award, supra note 2, para. 108. LG&E Decision on Liability, supra note 2, para. 74; LG&E Damages Award, id., para. 15. LG&E Damages Award, supra note 2, para. 70. See, e.g., Metalclad Corp. v. The United Mexican States, ICSID Case No. ARB(AF)/97/1 (NAFTA), Award (Aug. 30, 2000), para. 122; S.D. Myers, Inc. v. Canada (NAFTA (UNCITRAL)), Partial Award (Nov. 13, 2000), paras. 31115; MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award (May 25, 2004), para. 238. 81. ILC Articles, supra note 25, Commentary No. 9 to Art. 31. See also supra notes 3233 and accompanying text. 82. BG Group Award, supra note 2, paras. 42829.

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Compensation for Non-expropriatory Investment Treaty Breaches In fact, a vast array of measures and methodologies has been deployed by tribunals to calculate damages for non-expropriatory treaty breaches.83 Given the diversity of measures that may constitute such breaches and the varying types of loss these breaches may occasion, this array is not inappropriate.84 Insofar as the CMS, Enron, Sempra, and BG Group tribunals fair market value measure was aimed at identifying the loss caused by Argentinas BIT breaches and the losses the measure compensated could be sufficiently established, it was as defensible at international law as the measure adopted by the LG&E tribunal. There is little principled basis for the further considerations put forward by the CMS, Enron, and Sempra tribunals in support of the measure adopted. They simply confused the issue pertaining to the nature of the losses. As noted above, the CMS and Enron tribunals suggested that the fact that Argentinas measures breached more than one treaty provision was reason to use the fair market value measure.85 There seems to be little principled basis for this. When unfair or inequitable treatment also amounts to expropriation, it is appropriate to apply damages principles applicable in expropriation cases, including the fair market value measure. Damages for the fair and equitable treatment breach will typically be subsumed in the damages for expropriation. Indeed, this has been the consistent approach of arbitral tribunals.86 However, there appears to be no reason to apply the fair market value measure simply because host state action breaches more than one treaty provision, if there is no expropriation. The suggestion of the CMS and Enron tribunals seems to be that a cumulative
83. See, e.g., S.D. Myers, Inc. v. Canada (NAFTA (UNCITRAL)), Second Partial Award (Oct. 21, 2002), paras. 229300 (setting out and applying a detailed, many-step methodology for calculating the loss of net income stream caused by the temporary ban at issue); Nykomb Synergetics Technology Holding AB v. Latvia, SCC Case 49/2002 (Energy Charter Treaty), Award (Dec. 16, 2003), s. 5.2(b) (making a discretionary award of one-third of the lost tariff revenue suffered by claimants investment to take into account taxes and restrictions on dividends); Occidental Exploration & Production Co. v. Ecuador, London Ct. Intl Arb. Case No. UN 3467 (Ecuador-US BIT (UNCITRAL)), Final Award (Jul. 1, 2004), para. 207 (adding different categories of VAT refunds owed); Petrobart Limited v. Kyrgyz Republic, SCC Arb. No. 126/2003 (Energy Charter Treaty), Award (Mar. 29, 2005), 8485 (awarding 75% of the judgment debt for payments not made); Victor Pey Casado et Fondation Presidente Allende v. Republique du Chili, ICSID ARB/98/2, Sentence Arbitrale (May 8, 2008), para. 693 (finding the amount of compensation for expropriation wrongly paid to third parties in lieu of claimants was the measure of harm from the denial of justice). 84. Llus Paradell, The BIT Experience of the Fair and Equitable Treatment Standard, in INVESTMENT TREATY LAW, supra note 30, at 139 (arguing that this array of approaches may be the ultimate manifestation of the inherently flexible nature of the fair and equitable treatment standard). 85. Supra notes 3638 and accompanying text. 86. See, e.g., Metalclad v. Mexico, supra note 80, paras. 113 and 118; CME Czech Republic B.V. (The Netherlands) v. The Czech Republic (Netherlands-Czech Republic BIT (UNCITRAL)), Partial Award (Sep. 13, 2001), paras. 61518; Final Award (Mar. 14, 2003), paras. 598, 495, and 500; Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award (Dec. 8, 2000), para. 118; Tecnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, Award (May 29, 2003), paras. 18789; Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award (Feb. 6, 2007), para. 349.

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Kathryn Khamsi breach is worse than breach of only one guarantee. Yet, given that guarantees overlap, a measure will frequently breach more than one guaranteeoften, for the same reasons.87 There also seems to be an underlying assumption that the fair market value measure results in greater recovery and that this is somehow deserved when a breach is cumulative. This is difficult to reconcile with the acknowledged standard of full compensation that is said to apply to all breaches and the principle that there should not be double recovery.88 The CMS tribunal also referred to the important long-term losses suffered by CMS in support of the fair market value measure.89 It is unclear why the longterm nature of the losses should argue for a fair market value measureor indeed, what is meant by long-term. In perhaps a similar vein, the Enron and Sempra tribunals supported their use of the fair market value measure by reference to the similarity of Argentinas breach to indirect expropriation.90 This reasoning is equally problematic, in that it ignores (and eviscerates) the normative distinction between the fair and equitable treatment guarantee and the guarantee against expropriation. What distinguishes expropriation is the type of loss it involves. Direct expropriation involves the transfer of some component of title or ownership.91 Indirect expropriation occasions what has been variously described as a substantial deprivation,92 or a deprivation in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property.93 If an investment has been expropriated, it is notionally lost to the investor. While the investor may retain assets, in principle, these assets should have no, or de minimis, ability to generate revenue. In such circumstances, it makes sense to measure the loss occasioned by the breach by the value of the investment.94 By contrast, treaty breaches other than expropriation (or breach of the protection guarantee, if the

87. The LG&E, Enron, and Sempra tribunals, for instance, based their findings of fair and equitable treatment and umbrella clause breach on essentially the same representation and reliance-type reasoning. 88. This was explicitly stated in S.D. Myers v. Canada, Second Partial Award, supra note 83, para. 316. It is also implicit in the approach taken in many other cases, including the cases compensating both expropriation and fair and equitable treatment breach, supra note 86. 89. Supra note 4041 and accompanying text. 90. Supra notes 3941 and accompanying text. 91. See, e.g., Enron Award, supra note 2, para. 243; Sempra Award, supra note 2, para. 281 (both stating that there cannot have been direct expropriation if at least some essential component of property rights has not been transferred to a different beneficiary, in particular the State, referring later to title or ownership). 92. Pope & Talbot Inc. v. Canada (NAFTA (UNCITRAL)), Interim Award (Jun. 26, 2000), para. 102. 93. Metalclad v. Mexico, supra note 80, para. 103. 94. Any residual value of assets should be deducted from the fair market value in calculating damages owed, as it was in MTD v. Chile, supra note 80, para. 244. Some have, though, questioned whether it is even appropriate to use valuation techniques from formal expropriation for indirect expropriation, or regulatory takings, insofar as the latter leave property undisturbed. See Thomas W. Merrill, Incomplete Compensation for Takings, 11 N.Y.U. ENVTL L.J. (2002).

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Compensation for Non-expropriatory Investment Treaty Breaches property is physically destroyed95) will not occasion this type of loss to the investor.96 Rather, the investor will retain an investment with the potential, albeit potentially diminished, to generate value. Thus, in the Argentine gas sector cases, each of the licensees remained a going concern with the potential to generate returns for claimants. In such circumstances, fair market value is not an accurate proxy for the loss caused. Nor will the fact that losses are suffered long-term make it so. For these reasons, the LG&E tribunal abjured the fair market value measure.97 However, the CMS, Enron, Sempra, and BG Group tribunals did not simply apply the fair market value measure used in expropriation cases. Rather, they deducted the with breach fair market value of the investment that remained from the without breach fair market value that would have been the expropriation measure. It is, therefore, a misnomer to refer to the measure used as a fair market value measure. Unlike in expropriation cases, where one can speak of the market value of the thing lost (the business), in the Argentine gas sector cases there was no market for what was lostthe particular level of profits afforded by the stabilization guarantees. The tribunals were not referring to a secondary market for investment treaty claims, or to particularly avant-garde derivative instruments. If anything, the measure applied by the CMS, Enron, Sempra, and BG Group tribunals is a diminution in value measure.98 Despite the confused reasoning, the measure adopted by the CMS, Enron, Sempra, and BG Group tribunals is as defensible at international law as the LG&E tribunals lost dividends measureprovided that the losses it compensates are sufficiently established. The use of the fair market value language by the CMS, Enron, Sempra, and BG Group tribunals deflected attention from the fact that these losses were actually lost future profits and seems to have circumvented the usual analysis in relation to such claims. B. COMPENSATING LOST FUTURE PROFITS: THE REQUIREMENT REASONABLE CERTAINTY AND ITS SATISFACTION

OF

Argentinas Abrogation of the Tariff stabilization guarantees meant that the tariffs that would be approved by ENARGAS would likely be lower than they would have
95. Asian Agricultural Products Ltd. v. Sri Lanka, ICSID Case No. ARB/87/3, Final Award (Jun. 27, 1990); American Manufacturing and Trading, Inc. v. Zaire, ICSID Case No. ARB/93/1, Award (Feb. 21, 1997). 96. Note that the treaty breach in Azurix Corp. v. Argentine Republic, which is frequently given as a counter-example, did not result in this type of loss. Rather, the concession had been taken over since the breach by the state. And indeed, in the tribunal referred to this in adopting the fair market value measure of damages. ICSID Case No. ARB/01/1, Award (Jun. 23, 2006), para. 424. 97. Supra note 6367 and accompanying text. 98. In National Grid v. Argentine Republic, a case very similar to the Argentine gas sector cases involving the electricity sector, the tribunal adopted the same measure of loss, but more appropriately referred to it as reflect[ing] the loss of value of Claimants shares. Award (Nov. 3, 2008), para. 274.

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Kathryn Khamsi been with the guarantees. The loss caused by the Argentine measures was, therefore, a loss of tariff income. Claimants had argued that such losses through 2027 that is, the term of the 35-year licenses99should be awarded. International law will not compensate losses that are speculative.100 Consequently, lost profits will only be awarded where they are established with reasonable certainty.101 Although somewhat of a haze overlies the concept of certainty,102 awards in expropriation and repudiation of contract cases have converged around certain key factors. Lost future profits are compensated less frequently than lost profits that would have accrued prior to judgment.103 Lost future profits tend not to be awarded where the business is not a going concern with an established record of profitability.104 Similarly, where an expropriated business does not have a record of profitability, tribunals have tended not to use the discounted cash flow method of calculating fair market value.105 There is also a greater likelihood that future profits will be awarded where contractual arrangements render an income stream relatively certain.106

99. Supra note 31. 100. ILC Articles, supra note 25, Art. 36(2) (requiring compensation of all damage insofar as it is established). 101. Leading cases in this regard include Phelps Dodge Corp. v. Iran, 10 Iran-US C.T.R. 121 (1986) and Amco Asia Corporation and Others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Award in Resubmitted Case (Jun. 5, 1990), 1 ICSID Reports (1993), para. 168. See generally ILC Articles, supra note 25, Commentary Nos. 27 and 32 to Art. 36. 102. Jan Paulsson, The Expectation Model, in EVALUATION OF DAMAGES IN INTERNATIONAL ARBITRATION, DOSSIERS OF THE ICC INSTITUTE OF WORLD BUSINESS LAW 57, at 58 (Y. Derains & R. Kreindler eds., 2006). 103. ILC Articles, supra note 25, Commentary Nos. 27 and 30 to Art. 36. 104. Starett Housing Corp. v. Islamic Republic of Iran, Award No. ITL 32-24-1 (Dec. 19, 1983); Philips Petroleum Company Iran v. The Islamic Republic of Iran, Award No. 425-39-2 (Chamber Two) (Jun. 29, 1989), 21 IRAN-US COMMON LAW. TRIB. REP. 79. 105. Sola Tiles, Inc. v. Iran, 14 Iran-U.S.C.T.R. 224, 24042 (1987); AAPL v. Sri Lanka, supra note 95; Metalclad v. Mexico, supra note 80, paras. 119 and 121 (determining that the discounted cash flow method was inappropriate, as the concern was never operative and any award based on future profits would be wholly speculative); Wena Hotels v. Egypt, supra note 86, paras. 12324 (finding that claims for lost profits using a discounted cash flow analysis were inappropriate, as an award based on such claims would be too speculative, among other things given the limited history of operation); Tecmed v. Mexico, supra note 86, para. 186 (rejecting the discounted cash flow method, among other things due to the nonrelevance of the brief history of operation). For the inverse principle that fair market value may be calculated by the discounted cash flow where there is such a record, see Benvenuti and Bonfant Srl v. The Government of the Peoples Republic of Congo, 1 ICSID Reports 330; 21 I.L.M. 758; AGIP SPA v. The Government of the Peoples Republic of Congo, 1 ICSID Reports 306; 21 I.L.M. 737. 106. In Siemens v. Argentina, for example, the tribunal appeared to accept as a matter of law that Siemens lost profits could be compensated despite there being no past record of profits. Siemens had argued that lost profits were ascertainable on the basis of commitments made by Argentina and that these should be compensated based on the principles articulated in the cases of breach of investment contracts. Supra note 86, paras. 32627. See generally ILC Articles, supra note 25, Commentary Nos. 27 and 31 to Art. 36.

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Compensation for Non-expropriatory Investment Treaty Breaches These same factors have been considered in determining compensation for investment treaty breaches other than expropriation.107 In such cases, though, as compared with expropriation or a complete repudiation of contract, there is an added uncertainty in relation to lost profits. Where there has been an expropriation, by definition, there is relative certainty that the profits that might have been earned (speculative as they may be) will, in fact, be lost. This will not typically be true of non-expropriation treaty breaches. In the Argentine gas sector cases, for instance, there was additional uncertainty in relation to the profits that might be earned in the with breach scenario. The LG&E tribunal was the only tribunal to address directly this added uncertaintyor, indeed, the requirement of reasonable certainty more generally. And none of the tribunals, in their calculation of the measure adopted, systematically addressed the factors that are understood to generate certainty. It appears difficult to reconcile what the LG&E tribunal might be understood to have sought in the way of certainty with the other awards, in particular the BG Group and Sempra Awards. The LG&E tribunal found uncertainty in relation to profits that might be earned in the with breach scenario, which made future losses too speculative to compensate. It chose the dividends measure of damages specifically in order not to compensate lost future income.108 Of course, it could very well have compensated dividends lost through the balance of the license term applying such measure, as claimants argued it should.109 However, the tribunal could not have limited compensation to accrued losses by applying the fair market value measure (although it could have been so limited doing a discounted cash flow calculation). The remaining tribunals did not explicitly consider whether lost future profits should be awarded. Once the CMS, Enron, Sempra, and BG Group tribunals had determined that a fair market value measure was appropriate, given the nature of the losses, it followed that a method of valuation that reflected future profits would be used.110 Thus, they side-stepped the certainty analysis.
107. See, e.g., Feldman v. Mexico, supra note 38, para. 201 (declining to compensate alleged accrued lost profits, including because claimant did not have a viable business); Nykomb v. Latvia, supra note 83, s. 5.2(b) (rejecting the claim for losses subsequent to the date of the award through the end of the contract term as too uncertain and speculative); PSEG Global, Inc., The North American Coal Corporation, and Konya Ingin Electrik Uretim ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Award (Jan. 19, 2007), paras. 31011 (noting that lost profits are normally reserved for the compensation of investments that have been substantially made and have a record of profits, and refused when such profits offer no certainty) and 313 and 315 (rejecting the claimed lost profits as wholly speculative and uncertain); Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award (Aug. 18, 2008), paras. 48081 (rejecting claim for lost returns that were not proved); AAPL v. Sri Lanka, supra note 95, paras. 9398. 108. LG&E Damages Award, supra note 2, paras. 91 and 51, respectively. See generally supra notes 7374 and accompanying text. 109. LG&E Damages Award, supra note 2, paras. 6970 and 8183. 110. Rumeli Telekom v. Kazakhstan illustrates this. Although the tribunal found that the investment was arguably not a going concern and had no history of profitability, it adopted the discounted

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Kathryn Khamsi These tribunals were not, though, entirely unmindful of certainty concerns in applying their measures of damages. The Enron and BG Group tribunals referred to the question of certainty as motivating a preference for actual transaction values, where these existed, over discounted cash flow calculations.111 The CMS and Enron tribunals both used the going concern language to justify the discounted cash flow method of calculating the fair market value in the without breach scenario.112 And it seems that concern for uncertainties resulting from the ongoing potential of CMSs investment to generate profits motivated the order that CMS offer its shares to Argentina at the with breach scenario price.113 The CMS, Enron and Sempra tribunals also appeared alert to the uncertainties involved in the discounted cash flow calculation (illustrated by the significant impact the tribunals adjustment of variables had on values114). The CMS tribunal found, however, that with the appropriate methodology and the use of reasonable alternative sets of hypotheses, it is possible to arrive at figures which represent a range of values which can be rationally justified.115 As noted above, the CMS tribunal altered a number of the variables put forward by claimants in their discounted cash flow calculations, with the effect that amounts awarded were decreased.116 It indicated it had focused on the most important determinants of value (as well as the main sources of uncertainty), including demand factors and discount rates.117 The other tribunals also altered the variables that went into the discounted cash flow calculations.118 Uncertainties per se do not, however, appear to have influenced the discount rates adopted. One author has suggested that uncertainty as to lost profits in
cash flow method as it found no realistic alternative to value the license. ICSID Case No. ARB/05/16, Award (Jul. 29, 2008), paras. 80611. The approach of claimants expert in Duke Energy v. Ecuador illustrates how the traditionally asset-based investment method of calculating fair market value could be adapted to capture loss of future income. Claimants expert proposed measuring the loss occasioned by the breaches by deducting the amount that the investor would have invested had he known the breaches would occur from the amount actually invested. The respective figures were arrived at by discounting the with breach and without breach cash flows the investor would have anticipated. Supra note 107, paras. 41220. This approach was, however, rejected by the tribunal. Id., paras. 48081. Enron Award, supra note 2, para. 388; BG Group Award, supra note 2, paras. 42829 and 439. CMS Award, supra note 2, paras. 413 and 416 (referring to the licensee as an ongoing company with a record showing profits, and as a going concern, respectively); Enron Award, supra note 2, paras. 38485. It had noted, in determining that the fair market value measure was appropriate, that, precisely because this is not a case of expropriation, the Claimant has offered to transfer its shares . . . to the Argentine Republic. CMS Award, supra note 2, para. 410. In fact, the option price was the with breach amount minus the dividends received since Argentinas offending measures became effective. Id., para. 469. Supra notes 5558 and accompanying text. CMS Award, supra note 2, paras. 41920. Supra notes 52 and 54 and accompanying text. CMS Award, supra note 2, para. 436. Supra notes 5154 and accompanying text.

111. 112. 113.

114. 115. 116. 117. 118.

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Compensation for Non-expropriatory Investment Treaty Breaches expropriation cases can be accounted for by increasing the discount rate.119 Reasoning by analogy, the rate would be decreased for the with breach scenario to account for the possibility that profits allegedly lost might, in fact, be earned.120 Another author has argued that discount rates should be different for the periods reflecting accrued and future lost profits to account for the greater uncertainty in relation to the latter.121 Nor did the tribunals address the uncertainty in relation to profits resulting from the fact that, despite the stabilization guarantees, tariffs under this regime were not predetermined, but rather negotiated and set by ENARGAS.122 Although substituting claimants proposed variables for variables they found more realistic, the tribunals do not appear to have considered that the uncertainty in relation to these variables should reduce recovery from amounts yielded by their calculations. By contrast, while the LG&E tribunal did directly address the issue of certainty in determining the measure of damages, there was no analysis of the factors that normally add certainty in relation to lost profits in applying this measure. The tribunal did not consider whether there was an established record of profitability (presumably, there was) or some factor that would render future income streams relatively unpredictable. Nor was there an analysis of the factors that might have increased the profitability of the licensee (and therefore diminished losses) for example, the prospects of successful renegotiation of the license with the Argentine government. Nor, in fact, was there any analysis of these factors in relation to the accrued losses that the tribunal did compensate. This absence of reasoning could, at the extreme, be read as implying that the requisite certainty in relation to lost future profits can never be established where claimants retain title to an investment with the capacity to generate profits. Read in this manner, the LG&E Damages Award would seem to undermine the principle of full reparation. It would also, in this respect in particular, be difficult to reconcile with the other
119. Abby Cohen Smutny, Compensation for Expropriation in the Investment Treaty Context, 3 TRANSNATL DISP. MGMT. 3 (2006), paras. 1718 (arguing that, [s]trictly speaking, uncertainties need not preclude use of the discounted cash flow method, but rather, where there is high degree of uncertainty as to what future revenues and costs would be, the discounted cash flow method simply calls for application of a higher discount factor to reflect the greater risk). 120. In fact, the Sempra tribunal speculated that the opposite might have been appropriate. Supra note 2, para. 431 (finding [i]t could even be thought that the [cost of equity] should have been larger under the pesification scenario to reflect the greater uncertainty in the new regulatory context, although not increasing the figure put forward by the claimant). 121. Sergey Ripinsky and Kevin Williams go as far as to suggest that discounting of past lost profits may be unnecessary. Sergey Ripinsky & Kevin Williams, DAMAGES IN INTERNATIONAL INVESTMENT LAW 298 (2008). 122. Contrast the consideration of the equivalent tariff regime for electricity in National Grid v. Argentine Republic, supra note 98, para. 277. In this regard, the observation made by the tribunal in PSEG v. Turkey is apposite. It noted that that investment contracts guaranteeing a certain profit might not offer the degree of certainty required to award damages for the loss of such profits, if the contract is subject to adjustment mechanisms and other possible variations with time. Supra note 107, para. 312.

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Kathryn Khamsi Argentine gas sector cases, and in particular with the Sempra and BG Group Awards, where claimants also retained possession of their investment. One author has suggested that the certainty requirement is actually a means by which tribunals reverse engineer a result that is deemed to be fair,123 and the diverging approaches in the Argentine gas sector cases might be understood in this light. This is particularly so, given the failure of all of the tribunals to address the factors that might provide or detract from the requisite certainty. IV. CONCLUSION: IMPLICATIONS OF THE COMPENSATION REASONING IN THE ARGENTINE GAS SECTOR CASES

The Argentine Gas Sector casesand the initial decisions, in particularare said to illustrate many of the challenges faced by (some would say problems with) the investment treaty arbitration system.124 Among other things, they are said to evidence the systems lack of a coherent body of law, the divergent approaches to essential security having thus far been the particular focus of this polemic.125 The present discussion has suggested that, if one is searching for coherence, one might just as well be concerned about the divergent approaches to compensationin particular, the different measures adopted, but perhaps more importantly, the divergent approaches to certainty that drove this difference. Although the question of certainty will always be a matter of appreciation, it is surprising that the issue was dealt with head-on by only one of the tribunals and systematically addressed by none. Yet these divergences in the Argentine gas sector cases had an enormous impact on the respective amounts awarded by the tribunals. Indeed, one might consider them to have effectively undermined what consistency there was among the tribunals as to liability. The present discussion has also pointed out specific elements of the damages reasoning that may undermine established principles of international investment lawfor example, reasoning in the Enron and Sempra awards that eviscerates the established distinction between expropriation and other treaty breaches, or the lack
123. Sergey Ripinsky has suggested that a process of reverse engineering leads to the rejection of the discounted cash flow method. As this method yields a higher number than asset-based methods (see supra note 60 and accompanying text), he suggests that the discounted cash flow method is often shunned in favor of the fairer or more moderate result. The speculative nature of future profits is then alleged, after the fact, to justify the outcome. Sergey Ripinsky, Damnum Emergens and Lucrum Cessans: Is It Relevant?, presented to the 8th Investment Treaty Forum, British Institute of International and Comparative Law, May 11, 2007. 124. Regarding the Argentine Gas Sector Cases as Rorschach test, see generally Alvarez & Khamsi, supra note 30. 125. See, e.g., Brigitte Stern, The Future of the International Investment Law and Policy System: Options for the Way Forward, presented at Whats Next in International Investment Law and Policy? Improving the International Investment Law and Policy System, Columbia University, Oct. 3031, 2007.

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Compensation for Non-expropriatory Investment Treaty Breaches of reasoning by the LG&E tribunal that may be understood to undermine the principle of full compensation. Should the problematic reasoning and divergences in relation to compensation, with their implications for the coherence of the international investment regime, beg a backlash? Or might one be more sanguine? Speaking of the divergent essential security findings in the Argentine gas sector cases, one author argues that there is nothing alarming per se about initial divergences on novel questions of law; with time, the jurisprudence will stabilize.126 The questions relating to compensation addressed by the Argentine gas sector cases were novel. Compared with the wealth of case law on expropriation, there had been few damages awards for non-expropriatory treaty breacha mere dozen or so at the time. There had (and have) been even fewer non-expropriatory investment treaty breach cases that have involved claims for significant lost future profit streams. And the CMS, LG&E, Enron, and Sempra tribunals were the first to deal with damages for breach of the umbrella clausea facet of the cases that, surprisingly, is not addressed by any of the tribunals. An evolution in reasoning may already be observed in cases where compensation for significant lost future profits streams is claimed. Already by the latest of the Argentine gas sector casesthe BG Group Awardthe tribunal had shed some of the less defensible arguments proffered by the CMS, Enron, and Sempra tribunals in support of the diminution in value measure. Furthermore, awards rendered since the Argentine gas sector cases have addressed the question of certainty directly, and the factors understood to lend this certainty, more systematically.127 It seems that, as the issue becomes more familiar, a more coherent and systematic approach to compensation for non-expropriatory treaty breach is being adopted.

` 126. Emmanuel Gaillard, Centre international pour le reglement des differends relatifs aux investissements (CIRDI), Chronique des sentences arbitrales, 1 JOURNAL DU DROIT INTERNATIONAL 255, 339 (2007) (la jurisprudence arbitrale se stabilisera avec le temps et quune divergence jurisprudentielle temporaire sur une question dune grande nouveaute na rien dalarmant en soi). 127. See, e.g., National Grid v. Argentine Republic, supra note 98, paras. 27690; Cargill v. Poland (US-Poland BIT (UNCITRAL)), Award (Feb. 29, 2008), paras. 67886.

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