In All Probability: An Economic Reading of Damages Under Factory at Chorzów

ICSID Review

The 1928 case Factory at Chorzów (Germany v Poland) was a watershed decision in international arbitration. Its importance stems, in large part, from its having set out basic principles for the analysis of damages in matters involving expropriation-related reparations. Yet one area in which ambiguity remains is its famous statement that the reparation for an illegally expropriated asset must “wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed.” How, in light of this statement, should damages experts undertake reparation analysis?

In an article published in ICSID Review, “In All Probability: An Economic Reading of Damages Under Factory at Chorzów,” two Analysis Group consultants – Senior Advisor Jeffrey Cohen and Vice President Federico Temerlin – answer this question by analyzing the underlying economic principles of Chorzów’s directive to value an asset as if it had been placed back in the hands of the original investor. They conclude that Chorzów established a framework for this calculation based on four principles:

  • the assessment of asset value is an economic, rather than a legal, matter;
  • Chorzów prescribes two approaches to this calculation, which the authors label ex ante and ex post;
  • Chorzów does not mandate that claimants are entitled to whichever is the greater amount under the two scenarios; and
  • even in cases where an ex ante approach is required, ex post information may shed light on what damages are reasonable.

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Cohen J, Grgeta E, Temerlin F