Originally from Journal of Damages in International Arbitration

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I.  INTRODUCTION

Disputes in the energy sector – whether it be in oil, gas or electricity – occur frequently, and they can involve significant sums of money.  This is unsurprising when you consider the vast sums that are expended on the production of oil, gas and electricity.  Investments in exploration and production assets routinely run into the billions of Euros, and the resulting disputes can reach similarly large orders of magnitude.

This article begins with an overview of the methods of quantifying losses in general, whether resulting from temporary impacts or permanent losses of the investment.  From there, I briefly discuss the specific application of those methods to energy disputes.  Finally, I conclude with a case example drawn from the arbitration between Croatia’s Hrvatska Elektroprivreda (“HEP”) and the Republic of Slovenia. 

II.  OVERVIEW OF DAMAGES METHODS

The analysis and quantification of damages is a very fact-specific inquiry.  But we can generalize to a degree, depending on the nature of the impact of the complained action(s).  Some harm is temporary – for example, a temporary interruption of supply of a good or service, or an event that causes a loss of sales and profits for a discrete period.  Other actions, such as revocation of operating licenses, cancellation of a concession or expropriation of an investment, have longer-lasting impact.  The methods used to quantify the harm will follow directly from the nature of that harm.

While parties may agree on the standard of compensation, often citing the award in The Factory at Chorzów,  how to accomplish that can be the subject of considerable disagreement.  Claimants see a project that was sure to succeed, and that would have generated sizeable cash flows.  Respondent is less sanguine, seeing a high-risk, marginal project that entailed significant risk of failure, and for which damages, if any, would be minimal.  And as Kaj Hobér notes, “[w]hen it comes to the method of establishing and calculating ‘full reparation,’ customary international law does not provide much guidance.”