Methods for The Evaluation of Compensation for Expropriation in International Investment Arbitration

The standard of compensation, as well as the method by which the compensation is evaluated, have a direct impact on payable compensation. This paper examines both cases of the standards employed to determine the compensation and the calculation methods for the amount to be paid to foreign investors as a result of expropriation. However, the emphasis is made on the methods used to calculate compensation. According to the findings of this research, the decision made on lawfulness or unlawfulness of expropriation by the arbitral tribunal plays a vital role in choosing the standard and method for assessment of compensation. In the case of unlawful expropriation, the arbitral tribunals are more inclined to choose the full reparation standard in order to wipe out all the consequences of the wrongful act. In lawful expropriation, however, the situation is different so that the payable compensation is calculated based on the standard agreed in the relevant treaty. In absence of any agreement in this respect, the compensation is calculated based on the legitimate expectations of the investor as well as the host state’s needs for structural changes and exercise of sovereignty. Concerning the methods of assessment of compensation, the results of this research indicate that there is no one-size-fits-all method. Discounted cash flow, comparable transactions, and book value are the most common methods for calculating the value of expropriated properties. The abovementioned methods provide both advantages and disadvantages. The property value is evaluated based on a specific method in each case depending on some factors such as the type of confiscated property, investment progress rate, validity and reliability of the records, and finally the market situation in terms of competition and openness. Furthermore, this study only focuses on the compensation for the expropriation of foreigners’ properties without considering the indemnity resulting from a breach of contract by the host state.