This paper develops some of the themes from the author’s Guest Series on Third Party Funding on OGEMID. During that discussion, particularly on the use cost of capital in quantification of damages, it became clear that many of the concerns that legal practitioners exhibit about Third Party Funding stem from misconceptions about how to apply the cost of capital in general.
During the OGEMID exchanges the discussants appeared familiar with the concept of the cost of capital, but for present purposes we adopt the following as a definition: the cost of capital is the expected annualized return that an investor hopes to receive from an investment. It is not a guaranteed return; simply that which the investor hopes to achieve.
We believe that when the principle of full reparation is used to guide the award of compensation in investment treaty arbitration, the tribunal must think about the capital supplied from the moment of investment to the time of award. This necessitates considering pre-award interest in tandem with damages using a common approach to the cost of capital.
What was more uncertain during the OGEMID discussion was current legal thinking on how the cost of capital concept is or should be used. In particular, discussants seemed to (i) mix cost of capital measures particular to the claimant, with those applicable to the respondent, without any clear legal principle as to which rate is apposite. There also appeared to be little consensus on (ii) what is the correct time at which to measure the cost of capital.