"Beyond Economics: The DCF Method Applied to ISDS"
Juan CarlosBoué, Counsel, Curtis, Mallet-Prevost, Colt and Mosle LLP
Martins Paparinskis, Professor of Public International Law, University College London
Erica Thompson, Associate Professor of Modelling for Decision Making, University College London
Moderator: Kabir Duggal, Lecturer in Law, Columbia Law School; Senior Fellow, CCSI; Senior International Arbitration Advisor, Arnold & Porter
International investment treaties provide that the standard for the assessment of damages is the Fair Market Value (“FMV”) of the asset or the right affected by the measure or action taken by the host state. That is to say, in broad terms, the amount to be paid for the asset/right in question at a certain point in time (the valuation date), absent the prejudicial governmental action/measure. To calculate the FMV, investment tribunals generally rely on the Discounted Cash Flow (DCF) method. Such a method is applied to assess the present value of the investor's expected future cash flows if the dispute had not arisen.
Yet, the DCF method used in investor-state arbitrations faces various criticisms and challenges due to, inter alia, the lax rules of evidence and the particularly speculative nature of this method, especially for early-stage investments or volatile industries, leading to potentially inaccurate damage assessments.
As a consequence, the system has been producing awards that have a catastrophic effect on the respondent countries. A good example of this is the 5 billion dollars plus interest award handed down relatively recently against Pakistan over a mining project that had not even been started.
Given these concerns, there have been debates and calls for reform in the application of the DCF method in investor-state arbitrations. This panel focused on the DCF method applied in investor-state arbitrations, the implications for respondent states, and options for reform.
Local communities play an important role in the dynamics of foreign investment processes, investment projects, and investor-state disputes. As they stand against large-scale projects that threaten to disrupt or destroy their territories, environment, and livelihoods, these communities often emerge as the driving force behind host countries' decisions to modify, delay, or cancel investment projects. When this occurs, foreign investors remain in the privileged position of accessing the ISDS mechanism, initiating claims against host countries for damages when purported breaches of treaty protections are alleged. Yet, international investment law is not disposed to hear the voices of those directly affected by these investments and disputes. Regrettably, local communities find themselves conspicuously absent from the ISDS process, and their rights and interests are often marginalized to the periphery or outright ignored. This is primarily attributed to the overarching objectives of the investment treaty regime: safeguarding foreign investors by insulating them from political risk and securing their profits into the future. In this panel, we discussed a number of investor-state disputes, with a particular focus on the KCA case against Guatemala, the treatment of local communities and social mobilization by ISDS tribunals and decisions, and the concept of a “social license” to operate within these contexts.
In this panel, we discussed Professor Chen Yu’s new book, “Dispute Settlement and the Reform of International Investment Law." The book studies the role of the investor-state dispute settlement (ISDS) mechanism in the legalization, and legitimacy, of international investment law. Providing an interdisciplinary perspective on ISDS through the constructivist theory of international relations, this book argues that reforming ISDS can contribute to the legalization of international investment law, but such a contribution is subject to both “institutional" constraints (i.e. the lack of shared understandings underpinning foundational norms) and “internal” constraints (i.e. international adjudication as a mode of social ordering in solving polycentric problems).
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