Arbitral tribunals in investor-state arbitrations have utilized a range of methodologies to estimate damages suffered by investors as a consequence of treaty violations by sovereigns. If the state expropriated a business or property in which claimant had invested, or otherwise destroyed its value, it is customary to compensate claimant by an award equal to the fair market value of the asset by utilizing, separately or in combination, the income and the market approaches to valuation. The income method (a.k.a. the discounted cash flow (“DCF”) approach) typically entails discounting the anticipated future cash flows that the investment would have generated but-for the offending measure at a discount rate that reflects all the project’s risks.
The DCF methodology is commonly used by economists to value businesses. However, some tribunals have expressed reluctance to employ it unless the business or property in which the claimant invested was a “going concern” as of the valuation date. In some cases, this is defined as a concern that has an earnings history of at least 2-3 years. The unease of these tribunals, sometimes expressed and sometimes implicit, is that calculating cash flows into the future is speculative unless the concern has a track record of earning profits. In those cases, these tribunals limit recovery to sunk costs — the amount of money invested by claimant in the business or property — or look at other measures such as a current property valuation.