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December 10, 2015
Brattle Economists Publish Paper on the Impact of Country Risk on Damages in Investment Arbitration in the ICSID Review: Foreign Investment Law Journal

Brattle economists recently addressed the impact of country risk on the quantum of damages in investment arbitration. The work, co-authored by Brattle Senior Associate Florin Dorobantu, President and CEO Alexis Maniatis, and former consultant Natasha Dupont, was published in the ICSID Review: Foreign Investment Law Journal.

The treatment of country risk can have a substantial impact on damages in investment arbitration and has important policy implications. While it is generally accepted that compensation for BIT violations should not be reduced by the direct effect of the specific conduct at issue in the arbitration, there is no agreement on how to incorporate the indirect effect that arises from the risk that the State may engage in such conduct in the future. In recent awards, international arbitration tribunals have reached different conclusions on this issue.

The paper provides an economic framework to analyze the implications of different approaches to this risk. The economic framework clarifies how the market value of treaty-protected investments, the economic incentives for States and investors to reduce the incidence of political risk, and the benefits of foreign investment to States and investors, are affected by different treatments of this country risk.

The paper concludes that explicit consideration by both quantum experts and arbitral tribunals of their reasoning on the issue of country risk for actionable State conduct and its impact on quantum will serve the interests of all in the investment arbitration arena. The authors make clear also that the fair market value standard by itself does not resolve the policy or treaty interpretation questions that alternative treatments of country risk pose.

To read the article in its entirety, please visit the ICSID Review website.