Compensation Under Investment Treaties: What are the problems and what can be done?

The document argues that compensation awards in investment treaty arbitrations have become excessively large, inconsistent, and disconnected from the actual investments made. It highlights the problematic use of the discounted cash flow (DCF) method to project future earnings and the failure of tribunals to consider public interest or state ability to pay. To address this, the authors suggest reforms such as capping compensation at the amount actually invested or requiring a balance between public and private interests.

• Compensation awards in investment treaty arbitration have increased significantly in scale; while awards in the tens of millions of USD were once considered large, the largest award reached USD 40 billion in Hulley v. Russia, and there are now 50 known cases exceeding USD 100 million.
• Large compensation awards are being granted in regulatory disputes even when investments remain profitable, such as in NextEra v. Spain, where the investor was awarded USD 327 million based on an above-market rate of return they would have received without regulatory changes.
• Tribunals are increasingly awarding high compensation for planned investments that were never built, which may encourage corruption. In Tethyan Copper v. Pakistan, an investor received USD 4 billion plus interest based on estimated income over a 50-year cycle for a mine that was never constructed.
• The use of the discounted cash flow (DCF) method to project future income across an investment's entire life cycle is a primary driver of increased awards, departing from World Bank guidelines and previously accepted principles of international law.
• The complexity of valuation methods like DCF increases litigation costs and disadvantages states lacking in-house capacity. In Tethyan Copper v. Pakistan, the claimant spent USD 4.5 million on financial experts and USD 17.5 million on legal fees for the compensation phase alone, while Pakistan spent nearly USD 10 million.
• Current compensation principles are 'all or nothing' and ignore critical contextual factors, including the public interest rationale for a measure (such as the Netherlands' clean energy transition to shut down coal plants by 2030), investor misconduct, and the host state's ability to pay.
• The authors propose four reform options for states: requiring a balance of competing factors (as seen in the SADC Model BIT, CCIA, and PAIC), capping compensation at the amount actually invested, capping compensation at the lower of the state's gain or the investor's expenditure, or determining compensation according to the host state's laws.

APA

Bonnitcha, J., & Brewin, S. (2020). Compensation Under Investment Treaties: What are the problems and what can be done? International Institute for Sustainable Development. https://www.iisd.org/system/files/2020-12/compensation-investment-treaties-en.pdf

Chicago

Bonnitcha, Jonathan, and Sarah Brewin. Compensation Under Investment Treaties: What are the problems and what can be done? International Institute for Sustainable Development, 2020. https://www.iisd.org/system/files/2020-12/compensation-investment-treaties-en.pdf.

Wikipedia

{{cite report |last1=Bonnitcha |first1=Jonathan |last2=Brewin |first2=Sarah |title=Compensation Under Investment Treaties: What are the problems and what can be done? |publisher=International Institute for Sustainable Development |date=December 2020 |url=https://www.iisd.org/system/files/2020-12/compensation-investment-treaties-en.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{bonnitcha2020compensation, author = {Bonnitcha, Jonathan and Brewin, Sarah}, title = {{Compensation Under Investment Treaties: What are the problems and what can be done?}}, institution = {International Institute for Sustainable Development}, year = {2020}, month = dec, url = {https://www.iisd.org/system/files/2020-12/compensation-investment-treaties-en.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }