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Article: June 2017: International Arbitration Update

Business Litigation Reports

Focus on Damages: Arbitral Discretion to Determine Amount of Damages Requires Aggressive Strategy on Both Sides. International arbitration, in both the commercial and investment treaty contexts, has proven an effective forum for contracting parties to resolve disputes. International arbitration’s fact-finding function plainly permits parties to determine whether a wrong has been committed and to assign responsibility for such wrongs. Although determining substantive rights is a key component of the process, in the vast majority of cases parties will not resort to arbitration unless there is a material claim for monetary compensation. For petitioners and respondents alike, damages are central to the arbitral process. A recent decision from the United States District Court for the District of Columbia, Crystallex International Corp. v. Bolivarian Republic of Venezuela, No. 1:16-cv-00661 (D.D.C. Mar. 25, 2017), confirms that arbitrators—confined only by the terms of the Federal Arbitration Act and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards—have significant discretion in setting the amount of damages in an award and on determining how, based on evidence and expert modeling, that amount is calculated. The Crystallex decision demonstrates that arbitrating parties must aggressively pursue and oppose damages and valuation claims during the arbitration itself, without expectation that damages will be set aside or amended by subsequent judicial action.

The Crystallex Decision. Crystallex is a Canadian firm that invested in rights to gold deposits in Venezuela. Ultimately, Venezuela failed to issue mining permits and Crystallex brought claims under the Bilateral Investment Treaty between Canada and Venezuela. In 2016 the ICSID arbitral tribunal determined that Venezuela was liable for denying Crystallex’s investment “fair and equitable treatment” and also for expropriation. Moreover, the tribunal awarded Crystallex $1.202 billion in damages. During the arbitration, Crystallex submitted four separate methods by which to calculate damages: the “stock market” method—assessing Crystallex’s hypothetical stock price valuation but-for Venezuela’s conduct; the “market multiples” method—comparing Crystallex to other market actors not impacted by the conduct; the “P/NAV” method—assessing hypothetical changes to Crystallex’s value; and the “indirect sales comparison” method—comparing the firm’s value to others with similar characteristics. The tribunal accepted the “stock market” and “market multiples” damages models, and reached its final damages conclusion by averaging the results of these two approaches.

In moving to vacate, Venezuela argued that the tribunal acted in “excess of powers” under Article V(1)(c) of the New York Convention by adopting these models. As to the “stock market” model, Venezuela contended that the tribunal improperly assessed actions prior to the technical date of expropriation. The court rejected this argument, finding the model appropriate but concluding that the standard of review for arbitral awards would not permit setting damages aside even if the tribunal had committed a “serious error.” Crystallex, slip op. at 25 (citing Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671-72 (2010)). Although the court was less effusive about the potential merits of the “market multiples” model, the court similarly rejected Venezuela’s vacatur arguments on grounds that “even a serious error is insufficient to permit” disturbing the arbitral award. Id. at 27. Notably, the court did not suggest any concern with the tribunal’s decision to average disparate damages models in reaching its conclusion.

Implications for Petitioners. Petitioners in arbitration, as in litigation, bear the burden of proving claims, including damages. Crystallex demonstrates that, if appropriate, petitioners should consider asserting multiple damages theories in arbitration. Most institutional rules of arbitration provide arbitrators with significant discretion to admit evidence and expert reports. Petitioners in arbitration are well-advised to use these rules not only for entering evidence as to a respondent’s liability, but also for calculating damages. Indeed, the Crystallex tribunal was presented with four discrete damages models and rendered its decision by averaging two of them, which it found were “largely consistent with each other.” Crystallex, slip op. at 7. So long as different forms of damages analysis do not yield results that are materially divergent—i.e., suggesting that the underlying facts in evidence do not credibly point to a common result—petitioners can and should submit multiple damages arguments. Arbitrators’ ability to set the quantum of damages from multiple models, or an average of models, provides a petitioner with the opportunity to bolster its argument for compensation and insulate against potential defenses to a particular damages methodology. Indeed, while establishing damages calculations—and working with the consultants and experts necessary to assess and support those calculations—can be a significant line item in an arbitration budget, the outcome in Crystallex demonstrates that this expense can yield a heightened chance of recovery and will further provide insulation against an eventual judicial challenge to the arbitration award.

Implications for Respondents. Crystallex reinforces the importance of aggressively contesting damages arguments in arbitration. As noted by the Crystallex court, judicial inquires into how an arbitral tribunal derived the sum of damages are “clearly outside of our limited scope of review.” Crystallex, slip op. at 20 (citing Kanuth v. Prescott, Ball & Turben, Inc., 949 F.2d 1175, 1182 (D.C. Cir. 1991). Accordingly, respondents’ best opportunity to eliminate or reduce the potential quantum of damages in an award remains in the arbitral forum itself. Respondents are well-advised to challenge each and every theory of damages presented by petitioners and, in the appropriate case, to consider submitting a competing methodology for measuring damages (provided to the tribunal for use in the hypothetical scenario that petitioner prevails on liability). Although, under most legal regimes, respondents do not have an affirmative duty to disprove damages, respondents must be cautious not to neglect damages arguments—even in cases where there is a likelihood of success in defeating arbitral jurisdiction or prevailing on the merits of a petitioner’s substantive claims. Moreover, respondents should not limit arguments on damages to merits briefing and presentation at the hearing. Including damages arguments throughout the narrative arc of a case helps ensure that arbitrators are primed to hear and assess arguments at the appropriate time.

In many ways, the Crystallex decision is not remarkable: the court applied well-established precedents regarding arbitrators’ competence to set damages in an award. The decision, however, like the underlying ICSID award, reflects the increasing sophistication with which damages arguments are treated in international arbitration. Now, more than ever, petitioners and respondents must aggressively include damages arguments in formulating an arbitration strategy.