Originally from Investment Treaty Arbitration and International Law - Volume 3

Compensation for moral damages is available to claimants in investment arbitration – or so one may conclude from the recent award of US$ 1 million for moral damages awarded to an investor in Desert Line Projects v. Yemen. While the Desert Line award, rendered under the auspices of the International Centre for Settlement of Investment Disputes (“ICSID”) in February of 2008, marks the first time that moral damages have been awarded pursuant to a modern investment treaty, moral damages are widely accepted across a variety of domestic legal traditions as well as in international law.

Within the context of investment arbitration, moral damages are meant to compensate for injury to an investor’s intangible or noneconomic interests. Compensation is available to individuals who have suffered intangible harm, such as psychological distress, in many civil law countries, where moral damages may be traced back to the idea of dommage moral under the Code Napoléon. Compensation for intangible injury is also familiar in common law countries, where compensatory damages have long been available to sufferers of mental and emotional distress. Although domestic legal systems vary in which intangible harms they deem compensable, most accept the existence of intangible injuries and a right to a remedy therefor.

In international law, States may be liable in moral damages for the injuries that they have caused to another State’s nationals, or directly to that other State, such as infringement of sovereignty. The principle of State responsibility to compensate for moral injury is recognized by the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (“ILC Articles on State Responsibility”), and finds support in the past practices of mixed-claims tribunals and human rights bodies.

Therefore, to the extent not specifically restricted by treaty, it is natural that an investment arbitration tribunal, convened under the aegis of ICSID and applying rules of international law as allowed by Article 42 of the Washington Convention, should consider itself able to award a claimant moral damages for the intangible “moral” harm that it has suffered in connection with an investment. Nor should international arbitration tribunals adjudicating contract disputes find themselves categorically prohibited from awarding moral damages provided that they are so allowed under the governing law of the respondent State.