States defences to damages in international arbitration

Most of the arbitration practitioners and jurisprudence agree that ILC Articles on Responsibility of States for Internationally Wrongful Acts (“ILC Articles”) adopted in 2001 are the most authoritative document on the law of state responsibility. The ILC Articles are intended to cover all aspects of state responsibility under international law. However not all articles of the ILC articles are of direct importance to investment arbitration and this paper will focus on those that are of importance for our research.

Under international law, the standard of full reparation has the goal to reinstate the position of the injured party by eliminating all consequences of the illegal act. This principle is derived from the notable Chorzów Factory Case. As a rule, and in order to avoid overcompensation, the amount of damages must not be higher than the loss actually incurred. The amount of damages will depend on a number of factors, “including the facts of the case, the conduct of the parties, the underlying treaty, and possibly other equitable considerations”.2 Arbitral tribunals rendering decisions and awards under international law take into account these principles in order to properly evaluate claimant’s damages claim.

Usually, the state will argue that the damages claim should be rejected, or that the amount should be reduced due to contributory fault or the claimant’s failure to mitigate the costs. In its defence, the state might argue that investment risk should be taken into account for the evaluation of damages since there is a threat of overcompensation. The state might further assert that the claimant is operating in an area of public interest which makes the future state intervention into its affairs expected or at least not surprising. State can also argue that the state of necessity prompted the state’s intervention into the business of claimant or that the investor was involved in corruption when making the investment or during the investment.