Valuation in International Arbitration: A Growing Topic in Investor-State Disputes
When determining awards, some international arbitration tribunals have been taking a more detailed look at valuation concepts and ruling in favor of the method they perceive as the clearest and most rigorous.
Globalization has led to an increasing number of cross-border disputes appearing before international arbitration tribunals, such as the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID). In these arbitrations, private investors may bring claims against a state for alleged violations of formal agreements between countries, such as bilateral investment treaties (BITs). Investor-state disputes can result from any of a number of government actions, including expropriation of assets and restructuring of sovereign debt.
With the number of arbitrations on the rise, understanding what arguments different tribunals have found persuasive can be an important part of arbitration strategies. To shed more light on tribunals’ decisions, an Analysis Group research team applied natural language processing (NLP) techniques to case documentation – including awards, expert reports, and arbitral motions – that has become available online from the ICSID and from other sources. Using NLP in this manner provides valuable insights from the publicly available documents.
For example, we have been able to confirm a growing perception that valuation concepts are becoming more frequent topics of discussion in awards. Our programmatic keyword searches reveal that only 39% of ICSID awards from 2000–2004 referenced terms commonly used in valuation (such as discount rate, WACC, cost of equity, country risk, valuation date, and other terms). That number has grown to 70% over the last four years. (See figure.)
Our review of decisions shows that many tribunals have been requiring damages experts to defend their calculations for specific inputs, such as any risk premium associated with a specific country. Not surprisingly, tribunals tend to favor rigorous and clearly explained methodologies.
Interestingly, our research to date also shows no apparent favoritism towards either claimants or respondents in tribunals’ acceptance of valuation inputs. Overall, tribunals appear to give serious consideration to the appropriateness of the methodology, and on occasion they have even decided to use a value in between the opposing experts’ proposals.
In addition, with several recent damages awards being challenged on the basis of alleged calculation errors, the importance of having a rigorous valuation method is only further underscored. ■
Jeffrey A. Cohen, Senior Advisor
Mark Berberian, Manager