The crisis of excessive damages in international arbitration

Abstract This article focuses on what has become an increasingly hot topic in international arbitration: the problem of excessive damages in commercial and investment arbitrations. Such damages harm international arbitration. Very large awards of damages are rendered. It is in the investor-state arbitration field that so-called Mega-Awards have been most criticized for their ‘crippling’ impact on states resulting from the application of full reparation without taking into account the financial capacity of states and their ‘chilling’ effect on government regulations planned, for example, on introducing strict environmental rules. The article addresses the causes of the ‘crippling’ impact or ‘chilling’ effect of arbitral awards due to ‘excessive’ damages. For the most part, these inflated damages and their effects should not occur when income-based valuations are decided by arbitral tribunals with economic realism. Excessive damages mostly arise when tribunals make use of income-based valuation methods—generally the discounted cash flow (DCF) method—without ensuring that the scenario is realistic. ‘Excessive damages’ are excessive relative to the economic reality of the loss. The article discusses how experts reach valuations leading to excessive damages and the duty of arbitral tribunals to exercise informed, independent business judgement in addressing the evidence of experts.