Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues by

the Vale Columbia Center on Sustainable International Investment

No. 88   February 4, 2013

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])

Managing Editor: Jennifer Reimer ([log in to unmask])

by

Jarrod Wong*

 

There has been a pervasive failure by investment tribunals to grasp the singularly compensatory nature of moral damages awarded to investors. The failure to distinguish moral damages from other forms of reparation such as satisfaction and restitution -- never mind punitive damages -- has led to various doctrinal and practical difficulties in the treatment of moral damages.[1]

 

Moral damages have enjoyed a long history in public international law. In that tradition, the venerable Lusitania decision defined moral damages as compensation “for an injury inflicted resulting in mental suffering, injury to his feelings, humiliation, shame, degradation, loss of social position or injury to his credit or to his reputation,”[2] thereby identifying those injuries remedied by moral damages as mental or reputational injuries. Significantly, that decision emphasized that moral damages “are very real”[3] despite their intangible nature, which “affords no reason why the injured person should not be compensated therefor as compensatory damages, but not as a penalty.”[4] This is still eminently good law, as the International Law Commission has made clear in its Draft Articles on Responsibility of States for Internationally Wrongful Acts. The Draft Articles clarify that states must make full reparation for injury caused, “whether material or moral,” which are “financially assessable and may be the subject of a claim for compensation” rather than satisfaction or restitution, or a fortiori punitive damages.[5]

 

Despite this guidance, investment law has been slow to comprehend moral damages, and then in less than coherent fashion. It was not until 2011 in the ICSID case of Lemire v. Ukraine that an investment tribunal articulated the requirements of moral damages, concluding that moral damages are appropriate only if the host state’s actions involve physical duress, result in mental suffering or loss of reputation, and whose cause and effect are grave.[6] However, while Lemire clarified the elements of moral damages, various doctrinal and practical difficulties persist. For instance, many cases neglect to identify the specific categories of moral damages (mental or reputational injuries), thereby contributing to their uncertainty. Take Benvenuti v. Congo, which involved an Italian investor whose personnel fled Congo after being warned of their imminent arrest. Although unpersuaded that the claimant had suffered moral damages from losing its personnel or credit, the Benvenuti tribunal nonetheless awarded moral damages for “disturb[ances]” caused by the expropriation, but without elaborating on what injuries such “disturbances” inflicted.[7] Separately, a risk of double-counting is present when categories of moral damages are ill-defined; for example, damages awarded for expropriation that are based on fair market value may already factor in loss of reputation. Conversely, neglecting to identify the precise category may lead to a failure to recognize existing moral damages. For example, the majority decision in Biwater Gauff v. Tanzania found moral damages “inappropriate” after determining that no injury was suffered as the investment had already failed at the time of its expropriation.[8] However, this finding conflates economic injury to the investment with moral (i.e., mental or reputational) injury sustained by the investor.

 

A related difficulty concerns the haphazard quantification of moral damages. Various tribunals have suggested that such calculation is “equitable,”[9] satisfied by awarding on the investor’s principal claims,[10] or measured “in proportion” to the investment’s value.[11] However, these approaches are inconsistent with compensation offsetting the particular damages suffered.[12] The task instead must be to affix a sum representing the loss suffered, which in turn requires specific identification of the moral injuries caused.

 

Another difficulty relates to the suggestion that moral damages are premised on “fault-based liability,”[13] which in turn implies that they are punitive. Yet, neither Lusitania nor the Draft Articles require “fault” as an element of moral damages, but rather regard such damages as purely compensatory.

 

In sum, many difficulties relating to moral damages can be ameliorated by identifying the distinct categories of moral damages suffered, and treating them categorically as compensation rather than as satisfaction, restitution or punitive damages.

 

 

The Vale Columbia Center on Sustainable International Investment (VCC), led by Lisa Sachs, is a joint center of Columbia Law School and the Earth Institute at Columbia University. It is the only applied research center and forum dedicated to the study, practice and discussion of sustainable international investment, through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools.

 

Most recent Columbia FDI Perspectives

 

·      No. 87, Ralph Alexander Lorz, “Trying to change the rules for responding to arbitration unilaterally: The proposed new framework for investor-state dispute settlement for the EU,” Columbia FDI Perspectives, January 22, 2013.

·      No. 86, Catharine Titi, “EU investment agreements and the search for a new balance: A paradigm shift from laissez-faire liberalism toward embedded liberalism?,” Columbia FDI Perspectives, January 3, 2013.

·      No. 85, Karl P. Sauvant and Huiping Chen, “A China – US bilateral investment treaty: A template for a multilateral framework for investment?,” Columbia FDI Perspectives, December 17, 2012.

·      No. 84, Saurav Pathak et al., “Inward foreign direct investment: Does it enable or constrain domestic technology entrepreneurship?,” Columbia FDI Perspectives, December 3, 2012.

·      No. 83, Xiaofang Shen, “Untying the land knot: Turning investment challenges into opportunities for all citizens,” Columbia FDI Perspectives, November 19, 2012.

·      No. 82, John Kline, “Evaluate Sustainable FDI to Promote Sustainable Development,” Columbia FDI Perspectives, November 5, 2012.

·      No. 81, Ilan Alon and Aleh Cherp, “Is China’s outward investment in oil a global security concern?,” Columbia FDI Perspectives, October 22, 2012.

·      No. 80, Jo En Low, “State-controlled entities as ‘investors’ under international investment agreements,” Columbia FDI Perspectives, October 8, 2012.

·      No. 79, Lise Johnson, “Absent from the discussion: The other half of investment promotion,” Columbia FDI Perspectives, September 24, 2012.

 

All previous FDI Perspectives are available at http://www.vcc.columbia.edu/content/fdi-perspectives.


Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Vale Columbia Center on Sustainable International Investment
Columbia Law School - Earth Institute
Columbia University
435 West 116th Street, Rm. JGH 645
New York, NY 10027
Ph: (212) 854-0689
Fax: (212) 854-7946

Please visit our website - http://www.vcc.columbia.edu

The Yearbook on International Investment Law and Policy 2010-2011 was released by Oxford University Press in December 2011. For details please see www.vcc.columbia.edu.
The following ebooks are available free of charge from the same website: FDI Perspectives: Issues in International Investment, Inward and Outward FDI Country Profiles, MNEs from Emerging Markets: New Players in the World FDI Market.