Discounted Cash Flow: A Guide for the International Arbitration Practitioner -ARIA - Vol. 31, No. 1
Ronnie Barnes is a principal in Cornerstone Research's London Office.
Originally from the American Review of International Arbitration (ARIA)
It is increasingly rare to attend an international arbitration conference that does not include a session devoted to the quantum issues that arise in arbitrations. For example, the Fordham International Arbitration Conference on Key Issues in International Commercial and Treaty Arbitration held in November 2019 included a session entitled “Economic Issues in International Arbitration: A Primer,” while earlier the same month, Global Arbitration Review hosted its “GAR Live Advanced Damages Workshop.” It is equally rare for such a session to pass by without a senior statesperson of the arbitration community announcing that they still find grappling with quantum issues among the most challenging aspects of their work.
This article takes a first step in dispersing the fog of confusion that often seems to surround discussions of quantum, or more precisely, of damages methodologies. The scope of the article is deliberately limited. Entire books can be, and indeed have been, written that attempt to cover the waterfront of valuation, damages, and compensation issues in international arbitration. At least two valuable compendia of articles collectively have the same goal, and the Journal of Damages in International Arbitration consists almost entirely of articles and case notes on these topics. By contrast, this article restricts itself to an introductory, but precise, discussion of one particular valuation methodology—the so-called “discounted cash flow” or “DCF” methodology—that is a feature of many quantum expert reports, but that still (by their own admission) seems to be far from fully understood by arbitration practitioners.
A key goal of this article is that "everything should be made as simple as possible, but not simpler." Relatedly, we avoid the use of formulae and mathematical expressions as much as possible, but, in certain places, these are unavoidable if the aim of precision is to have any hope of being attained. In short, we are not seeking to equip our readers to perform their own valuations. Rather, we hope that by the end of the article they will at least feel more confident when faced with an expert's valuation report that they have a grasp of some of the key issues and concepts, and are ale to identify the questions they should be asking.