*Columbia FDI Perspectives*

Perspectives on topical foreign direct investment issues
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])

*The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the authors do not reflect the opinions of CCSI or our
partners and supporters.*

No. 315   October 4, 2021

*In defense of quantum*
Craig S. Miles* <#m_-634439417571639332_m_-1939092477823850478__edn1>

In a recent *Perspective*
George Kahale, III bemoaned the so-called “dangerous” state of quantum in
the world of investor-state dispute settlement (ISDS) and the alleged
tendency of recent ISDS tribunals to award “surreal” amounts of damages
that respondent states “could not afford to satisfy even if they were
inclined to do so.”

Preliminarily, it should be noted that, whether or not respondent states
could afford to pay such awards is not an issue arising out of, or caused
by, the ISDS system. This suggests that criticism against certain awards
may be aimed at giving cover for states to breach their international
obligations: first, when violating foreign investors’ substantive rights
in-country; and second, by refusing to pay when international tribunals
order them to do so. It is notable in this respect that the two awards
Kahale cites in his piece remain unpaid, as do many other final and
unappealable ISDS awards. This is the *actual* “clear and present danger”
to the ISDS system.

In any event, there is simply no “crisis” of mega claims. An analysis of
ISDS awards shows that states win more often than they lose, and when they
lose, investors are typically awarded only a fraction of the damages they
seek. A recent report publicized in the *Global Arbitration Review*
(analyzing 110 ISDS awards issued from 2017-2020) confirms this: respondent
states won 53% of cases (down slightly from 57% in the prior reporting
period); and in the 47% of cases that investors won, the median amount
awarded was only US$ 39.2 million, representing a mean of just 36% of the
amount claimed. Some might argue that this is evidence of “claim
inflation,” but that is highly simplistic: damages are often reduced not
because the claimant’s quantum case itself was “inflated” but rather
because the tribunal reaches a different liability determination. Moreover,
while some may scoff that even these reduced amounts still present
significant financial burdens for states, such awards are generally
intended to compensate for value and benefits that the state has already
taken for itself.

Even assuming there were a crisis of mega claims, the following two
consideration should be borne in mind. First, it is not correct that there
are few rules to curb claim exaggeration. Claimants have to present
credible quantum claims, and there are significant risks, both in terms of
overall case credibility and cost-shifting, in not doing so. Second, there
is no proliferation of professional experts giving exaggerated claims a
veneer of credibility, nor are counsel and arbitrators ill-equipped to
counter their assessments. Since time immemorial, the primary aim of
dispute resolution is to determine compensation to the injured party. ISDS
is no different—it is just that ISDS disputes often involve investments
worth hundreds of millions (or billions) of dollars for long-term
infrastructure or extractive projects. It is the duty of all ISDS
participants to give quantum issues the careful attention they deserve, and
it is the role of clients to select counsels (and counsels to select
arbitrators and experts) who are best suited to this critical task. Where
they fail to do so, they should bear the blame, not the ISDS system.
Indeed, ISDS cases are bespoke, consensual international arbitrations—there
is no real “system” to blame beyond the individual participants in any
given case. Thus, while quantum issues could often benefit from additional
hearing time—or even a separate hearing—the burden is on the participants
to make this happen.

The use by some tribunals of discounted cash flow (DCF) to value
non-producing projects should not be demonized. Almost all ISDS instruments
require compensation to be based on “fair market value” or similar, and it
is not seriously disputed that real market participants invariably use DCF
as the primary tool of valuation, irrespective of the actual life phase of
an investment. Despite this, a significant majority of ISDS tribunals
rejects the use of DCF for early-stage projects, citing precisely the
reasons Kahale advances. A limited exception has so far arisen in
extractive industries, where ready and transparent market data exist on the
key drivers of valuation. Indeed, cases like *P&ID v. Nigeria*
and *Tethyan v. Pakistan*
involved natural resources (gas and copper, respectively). While one may
criticize the discount rates the tribunals used in conducting the DCF
analysis to assess quantum, it would be misleading to conclude that those
tribunals did not address the issue with due care. In fact, both tribunals
provided detailed reasoning on the selection of the discount rate:
disagreement does not a crisis make.

To conclude, there is no quantum “crisis”. But that is not to say that
current practices are perfect. Parties and tribunals should devote more
time and attention to quantum issues, particularly where liability is clear
or even stipulated (e.g., nationalization cases). This could take the form
of a separate quantum hearing, perhaps with the benefit of a
tribunal-appointed quantum expert. Tribunals can and should engage more
fully with real-market-valuations of assets. And states must be held to
account at the enforcement stage, lest quantum awards—“mega” or
otherwise—be worth less than the paper on which they are written.


* <#m_-634439417571639332_m_-1939092477823850478__ednref1> Craig S. Miles (
[log in to unmask]) is partner in the Houston office of King & Spalding and
one of the founding members of the firm’s International Arbitration
practice. The author wishes to thank Peter Muchlinski, Sophie Nappert and
an anonymous peer reviewer for their helpful peer review.

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Craig S. Miles, ‘In defense of quantum,’
Columbia FDI Perspectives No. 315, October 4, 2021. Reprinted with
permission from the Columbia Center on Sustainable Investment (*
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Riccardo Loschi, [log in to unmask]

*Most recent **Columbia FDI Perspectives*

   - No. 314, George Kahale, III, ‘It’s quantum!,’ Columbia FDI
   Perspectives, September 20, 2021
   - No. 313, Shradha Mani, “FDI and CSR to promote social entrepreneurship
   and sustainable FDI: Lessons from India,” Columbia FDI Perspectives,
   September 6, 2021
   - No. 312, Tomoko Ishikawa, “Materializing corporate social
   responsibility in investor-state dispute settlement,” Columbia FDI
   Perspectives, August 23, 2021

*All previous **FDI Perspectives** are available at

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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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Fax: (212) 854-7946

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*Columbia Center on Sustainable Investment*
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