Compensation Under Investment Treaties

The report examines the current state of compensation under investment treaties, highlighting a trend toward increasingly large awards driven by the use of forward-looking valuation methods like Discounted Cash Flow (DCF). It identifies systemic issues, including discrepancies between invested amounts and awarded compensation, the complexity of valuation processes, and the disregard for contextual factors such as public interest or a state's ability to pay. The document reviews emerging treaty practices from Africa, India, and the EU and proposes four reform options: balancing rules, capping compensation at the amount invested, integrating gain-based considerations, or applying the host state's domestic law.

• Compensation awards in investment treaty arbitration have grown significantly, with the largest single award reaching USD 40 billion in Hulley v. Russia and a total of USD 50 billion awarded across related Yukos claims.
• The increase in compensation amounts is primarily driven by tribunals' willingness to use the discounted cash flow (DCF) method, which projects an investment's expected future income across its entire life cycle.
• There is a notable discrepancy between the actual amount an investor spends and the compensation awarded; for example, in Tethyan Copper v. Pakistan, the investor was awarded over USD 4 billion despite spending only USD 200–300 million.
• Arbitral jurisprudence is inconsistent regarding the application of the DCF method, as seen in the contrast between Tethyan Copper v. Pakistan (USD 4.087 billion award) and Bear Creek v. Peru (USD 18 million award), despite both involving mining projects in the exploration stage where mines were never built.
• Existing compensation principles often ignore critical contextual factors, such as the strength of the public interest justifying a measure or the host state's financial ability to pay, which can lead to 'crippling' awards.
• New treaty practices are emerging to mitigate large awards, such as the SADC Model BIT, COMESA CCIA, and Pan-African Investment Code, which use a 'balancing approach' to consider public interest and the history of the investment.
• India's 2015 model BIT introduces 'mitigating factors' to reduce damages, including the history of the investment's acquisition and any unremedied harm caused by the investor to the environment or local community.
• The report proposes four reform options: implementing balancing rules, capping compensation at the total expenditure actually incurred by the investor, using a gain-based approach (the lesser of investor loss or state gain), or requiring tribunals to apply the host state's domestic law.

APA

Bonnitcha, J., & Brewin, S. (2020). Compensation Under Investment Treaties. International Institute for Sustainable Development. https://www.iisd.org/sites/default/files/publications/compensation-treaties-best-practicies-en.pdf

Chicago

Bonnitcha, Jonathan, and Sarah Brewin. Compensation Under Investment Treaties. International Institute for Sustainable Development, 2020. https://www.iisd.org/sites/default/files/publications/compensation-treaties-best-practicies-en.pdf.

Wikipedia

{{cite report |last1=Bonnitcha |first1=Jonathan |last2=Brewin |first2=Sarah |title=Compensation Under Investment Treaties |publisher=International Institute for Sustainable Development |date=November 2020 |url=https://www.iisd.org/sites/default/files/publications/compensation-treaties-best-practicies-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}}, institution = {International Institute for Sustainable Development}, year = {2020}, month = nov, url = {https://www.iisd.org/sites/default/files/publications/compensation-treaties-best-practicies-en.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }