Compensation under investment treaties

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IISD | November 2020

Compensation under investment treaties

by Jonathan Bonnitcha et Sarah Brewin

1.0 Introduction

The vast majority of investment treaties allow foreign investors to bring claims that the host state has breached the treaty to international arbitration. If the arbitral tribunal concludes that the host state has breached the treaty, it will invariably order the host state to compensate the foreign investor. The legal principles governing compensation—and the way tribunals have interpreted and applied these principles—then determine the amount the host state must pay. In this way, the principles governing compensation have direct, practical implications for states, investors, and other participants in the investment treaty regime.

Read also: Compensation Under Investment Treaties: What are the problems and what can be done?

1.1 Why the Issue of Compensation Deserves the Attention of Policy-Makers

Arbitral jurisprudence on compensation has developed over the past two decades, driven by the rapid growth of investment treaty arbitration. In other areas where arbitral jurisprudence has evolved in unexpected directions—for example, in the case of expansive interpretations of fair and equitable treatment provisions—states have responded by reconsidering the drafting and inclusion of such provisions in their treaties. However, the issue of compensation has not received the same attention.
Because arbitral jurisprudence on compensation can be technical, an impression seems to have developed that questions of compensation are best left to arbitrators.
The principles governing compensation are too important to be left to arbitrators. Hundreds of millions—or even billions—of dollars are often at stake. States should consider whether existing jurisprudence governing compensation reflects the way they intended the investment treaty system to function. If it does not, they should consider options for reform. For several reasons, we suggest that existing jurisprudence governing compensation may not reflect what state parties to investment treaties intended.

1.1.1 The Amounts of Compensation Being Awarded Are Large—and Are Increasing

In the early 2000s, awards of compensation in the tens of millions of USD were considered large. These sums seem quaint in retrospect. Today, the largest award of compensation in investment treaty arbitration is the USD 40 billion awarded in Hulley v. Russia. This was the largest of several related claims arising out of the nationalization ofYukos, in which a total of USD 50 billion was awarded. There are now 50 known cases in which a tribunal has awarded compensation in excess of USD 100 million. These cases are listed in Appendix A.

Large awards pose serious challenges for developing countries. For example, the USD 4 billion award (excluding interest) in the Tethyan Copper v. Pakistan in July 2019 was almost as large as the International Monetary Fund’s (IMF) bailout that had been agreed two months earlier with the intention of saving the Pakistani economy from collapse

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source: IISD