This paper presents one side of the argument on whether damages and compensation in investment treaty arbitrations should be limited by indexing clauses typical in many energy deals.2 The position presented in this paper is that indexing clauses should be given full effect in determining compensation due in investment treaty awards. This position is supported by considerations of applicable international legal principles and common techniques used in valuating damages caused by breaches of treaty, all of which require that indexing clauses preexistent to the wrongful act being reparated be taken into consideration.
In order to better explain why indexing clauses are properly considered in setting compensation, this paper also explores the purpose and function of such clauses through a discussion of business risk.
Indexing clauses are a response to risks faced in investment and serve as a contractual allocation of risk between parties. Parties enter into indexing clauses in order to balance various risk and reward interests between themselves, and the parties’ settled positions, as reflected in the contract, should not be adjusted due to a later wrongful act under the well-settled principles of international law on reparation.
To provide a more concrete presentation of the concepts presented in this paper and its sister paper taking the contrary stance on this issue,3 we have adopted a set of three hypothetical situations in which the question of the proper treatment of indexing clauses could arise in investment treaty arbitration. The first is the “simple” situation, in which the claimant and the respondent State (or a State owned enterprise (“SOE”))4 had entered into a contract for the State to offtake the claimant’s production at an indexed rate. A common example of this would be in electricity generation, where the State contracts to purchase the production of the claimant’s investment in a power plant at a rate indexed to inflation or some separate measure such as the cost of fuel.