Valuation of contract damages: principles and methods ininternational arbitration practice

International Commercial ArbitrationAustrian/Polish Twin Conference

Warsaw, 17 June 2011

Irmgard MarboeUniversity of Vienna

Irmgard Marboe

Principles

■ Sources: national law, general principles of law (PECL, UNIDROIT Principles, New Lex

Mercatoria, …)

■ “full compensation”:E.g. “The aggrieved party is entitled to damages for loss caused by the other party's non-performance of its

contractual obligations. It is entitled, subject to the provisions of Principle VII.2, to receive such a sum of money by way of damages as will, so far as possible, put him in the same position as if the contract had been performed.” (Principle No. VII.1, New Lex Mercatoria)

Irmgard Marboe

Principles (cont’d)

■ damnum emergens – lucrum cessans

■ positive/performance interest – negative/reliance interest

■ lack of certainty?

Leading Case: Sapphire Arbitration v. NIOC, Award of 15 March 1963, Sole Arbitrator Pierre Cavin

Irmgard Marboe

Valuation Methods

■ Market based approachStock prices, prior transactions, offerings, partial

sales, comparable sales, multiples, …

■ Income based approachDiscounted Cash Flow (DCF) method, Net present

value (NPV), Adjusted Present Value (APV), …

■ Asset based approachBook value, replacement value, liquidation value, …

Irmgard Marboe

DCF-Method

■ Cashflows (not profits, earnings, etc) ■ Projected for a period of time

▪ Defined period(s)

▪ Remainder (terminal value)

■ Discounted for

▪ time value of money

▪ risks (business, financial, country/political, …)

■ Reference to financial markets (CAPM)

■ Formula:

Irmgard Marboe

Do/can/should arbitral tribunals apply these valuation methods in contractual disputes?

■ Does damnum emergens correlate to the asset based approach, lucrum cessans to the

income approach?

■ Is there a role for the market based approach in case of a breach of contract?

■ “Hybrid” approach?▪ Wasted costs plus lost profits▪ Danger of double counting▪ Controversy about Karaha Bodas v. Pertamina, Final Award of 30 September 1999

Irmgard Marboe

Practice

■ Autopista Concesionada Venezuela v. Venezuela

▪ Breach of concession agreement (construction and operation of a highway)

▪ Awarded only out-of-pocket expenses, profits too speculative

■ CMS Gas Transmission v. Argentina

▪ Long-term contract on gas transmission disrupted

▪ FMV is “best suited”, DCF method applied, comparison of two scenarios

■ LG&E Energy Corp. v. Argentina

▪ Long-term contract on gas transportation/distribution

▪ FMV not applicable, PV of “but for”-dividends instead

Irmgard Marboe

Practice (cont’d)

■ SwemBalt AB, Sweden v Republic of Latvia▪ Agreement of lease of berth and land for establishing a floating commercial centre▪ Replacement value of the ship, with reference to

market value, plus furnishings and equipment▪ lump sum for lost profits

■ Petrobart Limited v Kyrgyz Republic▪ One year-contract for the supply of stable gas condensate▪ 75% of the contractual price for delivered goods as

decided by a national court (reduced because of insolvency of the debtor)

Irmgard Marboe

Thank you for your attention!

ao.Univ.-Prof. Mag. Dr. Irmgard Marboe

Department of European, International and Comparative Law

University of Vienna1010 Vienna, Schottenbastei 10-16

Tel. ++43/1/4277/35311, Fax. /35321e-mail: irmgard.marboe@univie.ac.at

http://intlaw.univie.ac.at/