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Valuation of contract damages:
principles and methods in
international arbitration practice
International Commercial Arbitration
Austrian/Polish Twin Conference
Warsaw, 17 June 2011
Irmgard Marboe
University of Vienna
Principles
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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)
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Principles (cont’d)
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damnum emergens – lucrum cessans
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positive/performance interest –
negative/reliance interest
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lack of certainty?
Leading Case: Sapphire Arbitration v. NIOC, Award
of 15 March 1963, Sole Arbitrator Pierre Cavin
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Valuation Methods
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Market based approach
Stock prices, prior transactions, offerings, partial
sales, comparable sales, multiples, …
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Income based approach
Discounted Cash Flow (DCF) method, Net present
value (NPV), Adjusted Present Value (APV), …
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Asset based approach
Book value, replacement value, liquidation value, …
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DCF-Method
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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:
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Do/can/should arbitral tribunals
apply these valuation methods in
contractual disputes?
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Does damnum emergens correlate to the asset
based approach, lucrum cessans to the
income approach?
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Is there a role for the market based approach in
case of a breach of contract?
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“Hybrid” approach?
▪ Wasted costs plus lost profits
▪ Danger of double counting
▪ Controversy about Karaha Bodas v. Pertamina,
Final Award of 30 September 1999
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Practice
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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
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Practice (cont’d)
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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
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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)
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Thank you for your attention!
ao.Univ.-Prof. Mag. Dr. Irmgard Marboe
Department of European, International and Comparative Law
University of Vienna
1010 Vienna, Schottenbastei 10-16
Tel. ++43/1/4277/35311, Fax. /35321
e-mail: [email protected]
http://intlaw.univie.ac.at/
Irmgard Marboe