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ICSID Arbitration Awards and Cost by W. Wilson, J. Cain and J. Gray

Issue : Vol. 3, issue 5 Published : December 2006

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ICSID ARBITRATION AWARDS AND COST Authored by:

Wayne Wilson, Jason Cain, & Jim Gray INTRODUCTION The purpose of this paper is to analyze the damages, methodologies and fee apportionment decisions in published decisions from The International Centre for the Settlement of Investment Disputes (“ICSID”). This article includes a description of damages methodologies used in ICSID disputes as well as an empirical analysis of their use. Also included is an analysis of interest calculation methods as well as decisions by tribunals related to the division of arbitration fees. ICSID OVERVIEW ICSID was formed in 1966 by the World Bank for the purpose of assisting in the mediation or conciliation of investment disputes between governments and private foreign investors and to promote increased flows of international investment. ICSID is an autonomous international organization with close links to the World Bank. ICSID was established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States on October 14, 1966. Since 1978, ICSID has had a set of Additional Facility Rules authorizing the ICSID to administer certain types of proceedings where either the State party or the home State of the foreign national is not a member of ICSID. The Additional Facility Rules also allow ICSID to conduct fact-finding proceedings if one party desires the Centre to examine and report on facts at issue in the dispute. ICSID provisions are commonly found in investment treaties between governments of member countries and investors from other member countries. Arbitration under the auspices of ICSID is one of the main venues for the settlement of investment disputes under such multilateral trade and investment treaties as: the North American Free Trade Agreement, the Energy Charter Treaty, the Cartagena Free Trade Agreement, and the Colonia Investment Protocol of Mercosur. The number of cases brought before ICSID has increased rapidly over the recent years. As of the date of this report, the Centre has concluded over 106 cases and an additional 104 are pending. As of January 25, 2006, 155 States have signed the Convention of Settlement of Investment Disputes Between States and Nationals of Other States. Of these 155 States, 143 have attained the status of Contracting State.

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0

5

10

15

20

25

30

35

1972 1976 1980 1984 1988 1992 1996 2000 2004

Cases Registered with ICSID

DAMAGES MEASUREMENT Damage measurement can be described as spanning a continuum. One extreme of the continuum is a full and unquestioned expropriation of the Claimant’s investment. We can highlight this situation using a hypothetical automotive tire manufacturing plant, “U.S. Tires.” Assume U.S. Tires is a United States company that built a manufacturing facility in Singapore. Assume Singapore is a signatory on a bilateral investment treaty with the United States and assume U.S. Tires’ agreement with the Government of Singapore included an ICSID arbitration clause. Assume that the plant is later nationalized by the Government of Singapore. This would likely represent a complete expropriation – the government effectively took the asset from the owner and U.S. Tires is potentially due compensation for their loss. The other side of the spectrum would represent a small change to the parties’ original understanding. Continuing with our previous example, assume the Singapore government decided to impose a tax change that reduced the maximum allowable depreciation rate. Such a change might create a small hardship for U.S. Tires by increasing tax burdens. The newly imposed tax law does not necessarily constitute an expropriation, but nevertheless could represent a change to the original operating environment. This change has two distinct impacts;

1) A likely increase in taxes – a real expense, thus reducing profit; and 2) A likely decrease in cash flows and therefore a reduced value of the company.

Most cases heard by the ICSID fall somewhere between these two extreme cases. Damage measurement methodologies that may be used to value the financial impact can be classified into three high-level categories, 1) Evidence Based, 2) Estimate Based and 3) Composite Based. These categories encompass multiple valuation techniques, and

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each category has its strengths and weaknesses, depending on the circumstances of the case. 1) Evidence Based Methodologies Methodologies that fall into the Evidence Based category are those that are based upon historically observable values. They typically do not include any significant estimation in their calculation. They are normally easily supported and verifiable, but because of their historical basis, the relevance of the results decline as the age of the relied-upon data increases. Additionally, in economies with inflation, historic costs tend to understate the fair value of the investment. However, these methodologies can be useful when the period of time between the damaging event and the damage measurement is short or when there is a very short history of operations related to the investment. The following are several types of Evidence Based Methodologies. Cost Basis The Cost Basis method reflects the amount of money originally invested. This methodology is often used in situations where the investment may not have been completed or had a limited production history. Continuing with our example, if U.S. Tires built its tire plant and never began production, U.S. Tires may use the Cost Basis to value the damage it incurred. Out of Pocket The Out of Pocket method is similar to the Cost Basis. It represents the amount of money an organization had to expend in order to comply with a newly established ordinance or requirement. If U.S. Tires incurred a one time expense to install a smoke-stack scrubber to comply with newly enacted air-quality regulations, it may value the amount paid, or U.S. Tires’ out of pocket expenditures, as a damage amount. Fines Fines represent costs incurred as a result of not complying with newly enacted regulations. If U.S. Tires did not install a smoke-stack scrubber, as required by a newly enacted air-quality regulations and incurred a fine as a result, U.S. Tires may value the amount it paid as a fine as damages. 2) Estimate Based Methodologies Methodologies that fall into the Estimate Based category are those that rely on assumptions, predictions, and estimates to determine the fair market value of the investment absent the actions of the respondent. These types of analyses are often used when a large amount of historical data, across various business cycles, is available. Because estimate based methodologies make predictions for future earnings or cash flows, they often produce different values than evidence based methodologies. However, these values may be more indicative of the current fair market value of the investment than an historic cost approach. The following are several types of Estimate Based Methodologies.

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Discounted Cash Flow (“DCF”) The DCF method calculates the fair market value of an investment by equating it to the present value of its future cash flows discounted at an appropriate risk premium rate. Typically, there are two key components of the DCF analysis that requires estimation. The first is the estimated cash flows that are usually based either on historic experience or estimates of future performance. The second is the risk premium rate that is usually based either on an assessment of component risks or observed in a comparable setting and then adjusted. Income Multiplier The income multiplier can be used to establish the value of an investment classified within an industry with well defined standards. Companies or investments within the same industry will often have a market value that is a consistent multiple of their annual income across the industry. For example, it may be the case that tire manufacturing companies in Singapore have a market value that is, on average, 5 times their annual income. If U.S. Tires’ income is predictable, and is subject to the same risks as the other companies in his industry, then U.S. Tires may be able to use this method to establish an estimated market value of its company at 5 times its annual income. This methodology may require an adjustment to the multiplier due to unique risk attributes of the subject company.

Comparables The comparable method values a company or investment based on the recent sale prices of other similar “comparable” companies or investments. This method necessitates the existence of recent transactions involving other comparable investments, with similar characteristics. This method is not unlike the exercise many homeowners engage in when protesting the tax assessment of their homes. An estimated value of their home can be made by comparing it to other similar recently sold homes within their neighborhood. Similarly, if U.S. Tires wished to use the Comparables Method to value its tire factory, it would look to other sales of similar tire factories with similar capacities, or it could establish a standard value based on square footage or production capacity. If most comparable tire factories sell for $7,000 a square foot or for $60,000 per thousand units of production per month, U.S. Tires could apply those figures to its factory’s specifications in order to establish a value. Liquidation Value This method of valuation determines the value for which an investment could be liquidated in a “fire sale” situation. If U.S. Tires valued its tire factory based on the liquidation value, it would value the investment based on the value for which it could sell all of its assets and pay off its liabilities. U.S. Tires’ land and building would sell for X amount, its raw materials would sell for Y amount, and the balance of its assets would sell for Z amount. U.S. Tires also has liabilities it would have to pay, worth amount A. The liquidation value of U.S. Tires is equal to X+Y+Z-A.

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3) Composite Based Methodologies The preceding Evidence and Estimate based methodologies should not be viewed as mutually exclusive. Most damage methodologies will fall somewhere within the spectrum between pure evidence based methods and pure estimate based methods, utilizing a mixture of the two. If the circumstances require, estimates may be introduced into evidence based methodologies, and evidence may also be introduced into estimate based methodologies. Combining the two methodologies can result in a superior valuation. An example of a pure evidence based methodology is a Cost Basis analysis calculated from invoices. The damage amount can be determined by calculating the amount the investor actually paid, based upon a third party document. However, an investor may legitimately introduce an estimate by evaluating the return that an investor could have earned on a similar investment. For example, if U.S. Tires paid $1 million to acquire the land and $2 million to construct its tire factory, the Cost Basis, based on its original investment is clear. However, U.S. Tires may choose to introduce some estimates to this Evidence Based methodology that may estimate additional loss. If other land investments in that particular area in Singapore increased in value at an annual rate of 5% a year from the date purchased, U.S. Tires may include the lost appreciation in its damage value. This primarily Evidence Based methodology would then include both historical cost figures and an estimate of appreciation to which it may be entitled. Similarly, an estimate based methodology such as the Comparables method can include elements of evidence based methodologies. For example, U.S. Tires may have decided to use the Comparables method to value its expropriated tire factory. It may evaluate the sales of two comparable investments: Sam’s Tire Factory, and Ted’s Tire Factory. However, U.S. Tires may have suffered additional damage in the form of fines that were paid to the Singapore government. U.S. Tires may include the fines into its damage value resulting in the inclusion of evidence based calculations in an estimate based methodology. ICSID DECISIONS WE REVIEWED We have reviewed ICSID documents including ICSID Convention, Regulations, and Rules; ICSID Additional Facility Rules; ICSID Schedule of Fees; and forty-five ICSID arbitration decisions. Accordingly, we have concluded,

1) Of the forty-five cases we reviewed, thirty-eight were finalized. Fourteen of these cases, or approximately 37%, resulted in a damage award to the Claimant;

2) The methodologies to calculate the value of the loss preferred by Tribunals in these early cases are based on evidence and compromise; and

3) The costs of arbitration are normally divided equally between the parties.

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1) Tribunal Decisions We reviewed forty-five ICSID arbitration cases. Of these forty-five, fourteen decisions resulted in a damages award to the Claimant. The decisions for the remaining thirty-one cases can be broken down as follows:

• Fourteen decisions resulted in a determination by the Tribunal that either the agreements were not breached, the alleged expropriation did no occur, or the suit involved a request for performance instead of a monetary damage.

• Eight decisions resulted in a determination by the Tribunal that they did not

have jurisdiction to hear the case. Hence, damages were not established by the ICSID.

• Seven decisions did not evaluate the damage claims of the parties. Rather,

they intended only to establish whether or not the ICSID had jurisdiction over the matter. Each of these cases is ongoing and, if jurisdiction is established, will proceed to a damage phase at a later date.

• One case settled prompting the Tribunal’s decision not to render an award, but

instead to only render a decision on liability.1

• One decision has not been published. 2

1 Antoine Goetz and others v Republic of Burundi, ARB/95/3, Introductory Note, pg 455. 2 Patrick Mitchell v Democratic Republic of the Congo, ARB/99/7.

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ICSID Decisions Reviewed

Damage Award31%

No Juristiction18%

Question of Juristiction/Pending

16%

Case Not Published

2%

Only a Question of Liability

2%

Damage Denied31%

2) Damages Measurement The ICSID Convention, Regulations, and Rules and the ICSID Additional Facility Rules are silent with regard to an appropriate methodology the Tribunals must recognize to establish damages. The decision of CMS Gas Transmission Company vs. the Argentine Republic, which involved adjustments of gas tariffs, outlines a framework that future Tribunals can employ.

“The fundamental concept of ‘damages’ is…reparation for a loss suffered; a judicially ascertained compensation for wrong. The remedy should be commensurate with the loss, so that the injured party may be made whole.

The loss suffered by the claimant is the general standard commonly used in international law in respect of injury to property, including often capital, loss of profits and expenses.” “Depending on the circumstances, various methods have been used by tribunals to determine the compensation which should be paid but the general concept upon which commercial valuation of assets is based is that of ‘fair market value’” – “The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

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A problem common to most bilateral investment treaties is the absence of clear guidance as to the appropriate measure of damages or compensation. Tribunals must evaluate the specifics of each case and choose the damage measurement methodology that they believe best provides remedy to the parties involved. Tribunals normally award two components of compensation, damages and interest. Damages Most of the decisions we reviewed were associated with short-term operations and related to non-standard international transactions. In these cases the Tribunals appeared to favor methodologies based on evidence over those based on estimates.

Damages Measurement Methodologies

CompositeBased

(3)

"Solomon Solution"(1)

EvidenceBased

(8)

EstimateBased

(2)

In the Metalclad Corporation v United Mexican States case, involving the expropriation of a landfill facility, the Tribunal rejected the claimant’s DCF analysis declaring,

“…a discounted cash flow analysis is inappropriate in the present case because the [property] was never operative and any award based on future profits would be wholly speculative.” 3

The Tribunal also attempted to suggest an adequate time period on which to base a DCF analysis by stating that any such analysis,

3 Metalclad Corporation v United Mexican States, ARB(AF)97/1, pg 32.

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“requires the prior presence on the market for at least two or three years, which is the minimum period needed in order to establish continuing business connections.” 4

However, in the case Tecnicas Medioambientales Tecmed, S.A. v United Mexican States,5 involving a license renewal dispute for a hazardous waste landfill, the Tribunal agreed with the Respondents who asserted that the Claimant’s discounted cash flow model was unreliable because it relied only on the results of operations for a two-and-a-half year period, suggesting that it may not be an adequate time period for all Tribunals. This disagreement casts uncertainty on the appropriate length of time upon which to base a DCF analysis and it highlights the relative inconsistency across Tribunals. The basis most frequently relied upon in the cases we reviewed was the Cost Basis. In these situations, this method seems to be used because an amount is more easily determinable. The Metalclad Corporation, in their case against the United Mexican States,6 involving the expropriation of a landfill facility, proposed two alternative methods for calculating damages. The first employed a DCF analysis and claimed more than $90 million in damages. The second was comprised of actual investment value, approximately $20 million to $25 million. The Tribunal rejected their DCF methodology and accepted, with modifications, the methodology based on actual investment value. They awarded $16 million, which included the original investment and adjustments for unallowable expenses. The original investment amount was based on tax filings provided by the Claimant. However, Tribunals have not categorically rejected estimate based methodologies. When the circumstances of the case are appropriate, Tribunals will rely on other methodologies, including the DCF methodology. In the case of CMS Gas Transmission v The Argentine Republic, the Tribunal awarded the Claimant approximately $133 million in damages based on their DCF analysis. The Tribunal found that:

“TGN was and is a going concern; DCF techniques have been universally adopted including by numerous arbitral tribunals, as an appropriate method for valuing business assets; as a matter of fact, it was used by the ENARGAS in its 1996/7 tariff review. Finally, there is adequate data to make a rational DCF valuation of TGN.”

Compromise – the “Solomon Solution” Tribunals occasionally employ this remedy, but it remains highly controversial among arbitration participants. This award determination is made by the Tribunal in which they choose an amount between the two parties’ suggested damage values. In cases where Tribunals employ the “Solomon Solution” the Claimant will recover an amount between their damage estimate and that of their opponent. 4 Ibid. 5 Tecnicas Medioambientales Tecmed, S.A. v United Mexican States, ARB(AF)/00/2, pg 75. 6 Metalclad Corporation v United Mexican States, ARB(AF)97/1.

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In the case of Compania del Desarrollo de Santa Elena S.A. v Republic of Costa Rica, involving the expropriation of property that was intended to be used for the development of a tourist resort and residential community, the Tribunal acknowledged that it could not,

“go back in time to 1978 to perform its own appraisal of the Property […] But that we can and must, ‘…make some assessment of the two [1978] appraisals that the parties have provided’.” 7

Therefore, the Tribunal decided to employ a variation of the “Solomon Solution.” They noted,

“Costa Rica’s valuation of [the property] in 1978 was approximately US $1,900,000. Claimant’s 1978 valuation was approximately US $6,400,000. […] It can be safely assumed that the actual and true fair market value of the Property was not higher than the price asked by the owners and not lower than the sum offered by the Government, i.e., that it was somewhere between the two figures. […] The Tribunal has determined that the sum of US $4,150,000 constitutes a reasonable and fair approximation of the value of the Property at the date of its taking.” 8

In addition, an item at issue in the case Middle East Cement Shipping and Handling Co. S.A. v Arab Republic of Egypt related to the valuation of a floating silo used for cement exporting. The Tribunal declared that,

“it would be too time consuming and costly […] to seek some independent expert opinion on the value of [the silo] at the time of the auction, and that it is thus the best procedural method, under these circumstances, to reach an estimate of the value of [the silo.]” 9

The Claimant submitted an estimated value of $864,500 and the Respondent submitted an estimate of $90,936. The Tribunal concluded,

“[A]t least the average between these amounts, i.e., US $477,718.00 can be taken as the market value…” 10

The Solomon Solution may be particularly unsettling to Claimants who feel they have a valid and conservatively calculated damage value that may be reduced once averaged with the Respondent’s aggressively low damage estimate. 7 Compania del Desarrollo de Santa Elena S.A. v Republic of Costa Rica, ARB/96/1, pg 198. 8 Compania del Desarrollo de Santa Elena S.A. v Republic of Costa Rica, ARB/96/1, pgs 198 – 200. 9 Middle East Cement Shipping and Handling Co. S.A. v Arab Republic of Egypt, ARB/99/6, pg 37. 10 Ibid.

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Interest Most of the cases reviewed included a disagreement whether simple or compound interest should be applied to the damages. Over a long period of time, the choice between the two can make a huge difference in the value of the interest payment. Simple Interest Simple interest is calculated by applying an interest rate to an unchanging principle amount each year. The formula for simple interest is i=P*r, where “P” is the principle amount of the damages, “r” is the interest rate, and “i” is the interest payment due for the year. If simple interest is granted on an outstanding balance, spanning multiple years, the interest for one year is calculated and multiplied by the total number of years. For example, if U.S. Tires owed the bank $100 for two years, with simple interest of 3%, it would pay the bank (100 * .03) * 2 = $6 in interest. Compound Interest Compound interest is quite different from simple interest. Each year, interest is calculated both on the principle plus previously accrued interest. For example, assume that U.S. Bank borrowed $100 from the bank. After the first year, the bank earns 3% interest, so U.S. Tires would owe the bank $3 in interest (100*.03). Compound interest departs from simple interest in that the principle amount to include in the calculation is the cumulative amount due to the bank. For example, if Joe made no payments on the loan, after year two, Joe would owe the bank $6.09 in interest ((100+3)*.03), nine cents greater than if the payment were calculated using simple interest. This differential may not appear to be significant; however, when the calculation involves a large sum of money spanning a significant time frame, the impact can be quite large. Keeping all variables equal, compound interest generally results in higher interest charges than simple interest. The application of simple or compound interest is at the discretion of the Tribunal. Out of the fourteen decisions we reviewed, eight decisions granted compound interest, three granted simple interest, two decisions did not disclose the calculation method used, and one did not grant interest.

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Type of Interest Award

Simple(3)

Not Disclosed(2)

No Interest(1)

Compound(8)

In the case of Compania del Desarrollo de Santa Elena S.A. v Republic of Costa Rica case, which involved the expropriation of property that was intended to be used for the development of a tourist resort and residential community, the Tribunal asserted,

“No uniform rule of law has emerged from the practice in international arbitration as regards the determination of whether compound interest or simple interest is appropriate in any given case. Rather, the determination of interest is a product of the exercise of judgment, taking into account all of the circumstances of the case at hand and especially considerations of fairness which must form part of the law to be applied by this Tribunal.” 11

One basis upon which Tribunals make their decisions is found in Article 54 of the ICSID Arbitration (Additional Facility) Rules. Entitled “Applicable Law”, the Article states,

“The Tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the Tribunal shall apply (a) the law determined by the conflict of laws rules which it considers applicable and (b) such international law as the Tribunal considers applicable.” 12

11 Compania del Desarrollo de Santa Elena S.A. v Republic of Costa, ARB/96/1, pg 202. 12 ICSID Additional Facility Rules, Article 54, pg 67.

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Article 54 was considered when making a judgment on the interest due in the case of Autopista Concesionada de Venezuela, C.A. v Bolivian Republic of Venezuela, involving a breach of contract for the construction and maintenance of two major highways. The Tribunal reviewed the Contract and Venezuelan Law to determine if compound interest was allowable. After it was determined that it was not allowable, the Tribunal sought guidance from International Law. Since international law did not require compound interest, the Tribunal awarded simple interest.13 In a separate case, Marvin Roy Feldman Karpa v United Mexican States, a dispute involving delinquent refunds of excise tax, the Tribunal awarded simple interest based on the local laws in force. 14 Independent of the foregoing examples, other Tribunals have decided,

“[T]he amount of compensation should reflect, at least in part, the additional sum that [the investor’s] money would have earned, had it, and the income generated by it, been reinvested each year at generally prevailing rates of interest.” 15

This appears to be consistent with the decision related to expropriation of property in the Middle East Cement Shipping and Handling Co. S.A. v Arab Republic of Egypt case, involving an expropriation of a cement distribution enterprise, in which the Tribunal declared,

“Regarding such claims for expropriation, international jurisprudence and literature have recently, after detailed consideration, concluded that interest is an integral part of the compensation due after the award and that compound interest (as opposed to simple) interest is at present deemed appropriate as the standard of international law in such expropriation cases.” 16

The previous statement is referenced and relied upon to justify compound interest in another expropriation case, Tecnicas Medioambientales Tecmed, S.A. v United Mexican States.17 The Tribunal’s tendency to declare which type of interest to apply to a particular decision, rather than relying on statute, can be seen in the graphic below. Out of the fourteen cases where interest was awarded, the Tribunal made the decision to apply either compound or simple interest in eleven out of fourteen decisions.

13 Autopista Concesionada de Venezuela, C.A. v Bolivian Republic of Venezuela, ARB/00/5. 14 Marvin Roy Feldman Karpa v United Mexican States, ARB(AF)/99/1, pg 85. 15 Compania del Desarrollo de Santa Elena S.A. v Republic of Costa, ARB/96/1, pg 202. 16 Middle East Cement Shipping and Handling Co. S.A. v Arab Republic of Egypt, ARB/99/6, pg 42. 17 Tecnicas Medioambientales Tecmed, S.A. v United Mexican States, ARB(AF)/00/2, pg 79.

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Source for Interest Decision

Tribunal Decision

79%

Statute as Source14%

NotConsidered

7%

Well defined rules related to the appropriate assignment of compound or simple interest do not exist. Tribunals consider relevant guidance and make a judgment considering all the circumstances of the case at hand. 3) Allocation of Arbitration and Representation Costs The cost to arbitrate cases can be classified into two categories, 1) Arbitration costs paid to the ICSID, and 2) Representation costs for each party. The July 6, 2005 ICSID Schedule of Fees outlines costs the parties may incur when engaging in arbitration. Generally, these fees include:

• $25,000 Filing Fee; • $10,000 Administrative Fee; • $3,000 Fee per day, per Arbitrator, Conciliator, or Committee Member; • Direct expenses including travel and subsistence allowances of those

involved; • Charges for special services such as translation or copies; and • $10,000 Fee if the Secretary-General is requested to appoint an arbitrator for

any arbitration not conducted under the Convention or Additional Facility Rules.

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Article 58 of the Arbitration (Additional Facility) Rules states,

“Unless the parties otherwise agree, the Tribunal shall decide how and by whom the fees and expenses of the members of the Tribunal, the expenses and charges of the Secretariat and the expenses incurred by the parties in connection with the proceeding shall be borne.” 18

The fourteen arbitration decisions reviewed indicate that, with few exceptions, the Tribunals generally allocate one-half of the arbitration costs to each party. In addition, the Tribunals generally hold each party responsible for their own representation costs. Both of these conventions can be observed in the Middle East Cement v Egypt case, involving the expropriation of a cement distribution enterprise. Despite Middle East’s victory, the Tribunal decided,

“Taking into account that Claimant succeeded partially with certain of its claims and that Respondent succeeded partially with objecting to the claims, […] the Tribunal decides that each Party should bear any legal fees and costs occurred to it in connection with the proceeding, and that the cost occurring for ICSID and the arbitrators shall be borne in equal portions of 50% by each Party.” 19

Other cases, such as Mihaly International Corporation v Democratic Socialist Republic of Sri Lanka, involving the construction of a power plant, demonstrate that the Tribunal might evenly divide the costs, in the absence of a favorable judgment for either party if the complaint was originally deemed non-frivolous. In this case, the Tribunal declared that they did not have jurisdiction to hear the case and therefore did not render a judgment against, or in favor of, either party. The Tribunal divided all arbitration costs evenly, noting,

“the Tribunal does not say that [the invitation of a proceeding] is frivolous, vexatious, or malicious.” 20

Reasons for an even-split of the arbitration costs include:

• Each party was successful on key points of their respective positions;21 • Neither party was completely successful on key points of their respective

positions;22 • Claimant’s allegations were not frivolous;23 • The victorious party was not completely successful;24 and

18 ICSID Additional Facility Rules, Article 58, pg 68. 19 Middle East Cement Shipping and Handling Co. S.A. v Arab Republic of Egypt, ARB/99/6, pg 43. 20 Mihaly International Corporation v Democratic Socialist Republic of Sri Lanka, ARB/00/2, pg 159. 21 Middle East Cement Shipping and Handling Co. S.A. v Arab Republic of Egypt, ARB/99/6. 22 Tecnicas Medioambientales Tecmed, S.A. v United Mexican States, ARB(AF)/00/2. 23 Mihaly International Corporation v Democratic Socialist Republic of Sri Lanka, ARB/00/2. 24 Autopista Concesionada de Venezuela, C.A. v Bolivian Republic of Venezuela, ARB/00/5.

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• The victorious party imposed administrative hassles and/or delays on the Tribunal.25

Departures from the convention do exist, however. The Waste Management v Mexico case, involving a violation of NAFTA provisions, demonstrates that a Tribunal may choose to require the Claimant to pay the entire arbitration cost, but exclude the costs of the Respondent’s representation. In this case the Tribunal declared that the Claimant failed to comply with procedural requirements therefore it would be unfair to burden the Responding party with the arbitration costs. Nevertheless, the Tribunal determined that the Claimant’s conduct was not reckless or in bad faith that would suggest that they should also be responsible for the Respondent’s representation costs.26 In the case of Hussein Nuaman Soufraki v The United Arab Emirates, a dispute involving the development and management of the Port of Al Hamriya, the Tribunal decided that the Claimant failed to discharge its burden of proof and the Tribunal did not have jurisdiction over the matter. They assigned two-thirds of the arbitration costs to the Claimant, and one third to the Respondent. In the case of Generation Ukraine, Inc. v Ukraine, involving an expropriation of a local investment called “Heneratsiya Ltd.”, the Tribunal rejected each of the Claimant’s assertions, finding for the Respondent. They also noted the Claimant’s:

“written presentation of its case has also been convoluted, repetitive, and legally incoherent. It has obliges the Respondent and the Tribunal to examine a myriad of factual issues which have ultimately been revealed as irrelevant to any conceivable legal theory of jurisdiction, liability, or recovery.”27

Because of the Tribunal’s frustration with the Claimant’s case, they required them to pay the entire cost of the arbitration, and $100,000 for the Respondent’s legal fees. In the supplementary decision for Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v The Republic of Estonia, which involved a licensing dispute, the Tribunal refused to allocate the costs of the arbitration equally to the parties. The Claimant’s original filing against the Respondent was dismissed. Not satisfied with the result, the Claimant filed a request for a supplementary decision alleging that the Tribunal failed to consider several items. In actuality, the items in question were never included in the Claimant’s original submission. Upon the Tribunals second denial, they ordered the Claimant to pay all costs including that of the arbitration and the Respondent’s representation costs.28

25 Ibid. 26 Waste Management, Inc. v United Mexican States, ARB(AF)/98/2. 27 Generation Ukraine, Inc. v Ukraine, ARB/00/9, pg 96. 28 Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v The Republic of Estonia, ARB/99/2.

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According to Article 58 of the Arbitration (Additional Facilities) Rules, unless the parties otherwise agree, the Tribunals are given the final authority to divide the costs of arbitration in the manner they see fit. The win/lose outcome of the arbitration does not appear to be an indicator as to who will bear the costs of the arbitration. Rather, unless there is a significant error, inconvenience, or unreasonable action on the part of one party, it is most likely that each party will bear half of the arbitration costs and their own respective representation cost. SUMMARY ICSID tribunals maintain the authority to measure damages and allocate arbitration costs at their discretion. Because firmly established protocols do not exist, Tribunals have the latitude to examine a myriad of options available to resolve the dispute at hand. For example, Tribunals have the option of employing evidence based methodologies, estimate based methodologies, or a composite methodology to measure damages. In addition, they have the option to grant either simple or compound interest on those damages. Finally, it is at the Tribunal’s discretion as to how they allocate costs. We are able to identify trends in early case decisions; Tribunals tend to measure damages using evidence based methodologies, may employ a “Solomon Solution” resolution, tend to award compound interest, and generally divide the cost of the arbitration equally between the parties. However, because every case is different and ICSID is an evolving venue for dispute resolution, a detailed evaluation of the case’s circumstances, specifics, and implications is vitally necessary for interested parties to establish an argument that is the most equitable and most likely to find favor with the Tribunal.

Transnational Dispute Management

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