Impact of Global Price Volatility on Damages Calculations in International Arbitration

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The global energy and commodity sectors face unprecedented uncertainty. Increased global demand, coupled with supply chain constraints triggered by Russia's invasion of Ukraine, and China's COVID-19 restrictions and its recent reopening of trade have placed extraordinary pressure on global prices. This alert summarises the impact of volatility in the markets on calculating damages in international arbitration.

Quantifying damages in disputes over complex, cross-border projects has always been a key challenge for parties and tribunals. It heavily depends on expert evidence and often involves a multi-layered modelling of projected cash flows of a target business. In the current, volatile markets, a critical issue for tribunals is to determine how, if at all, to account for recent price spikes in this quantification.

Quantifying damages: basic principle

While any valuation is invariably fact-sensitive, in virtually all scenarios – whether in a commercial or investment arbitration context and under different legal systems – the ultimate aim of a damages award will largely be the same: to compensate the claimant by putting them back in the position they would have been in if the breach had never occurred. A key element in determining the sum required to achieve this is determining at what point the affected asset should be re-valued. Choosing a valuation date is therefore critical to the ultimate amount of damages recoverable, and even a slight change in the valuation date may have a significant impact on the resultant figure.

The significance of the valuation date is even more evident in calculations under the discounted cash flow (DCF) method, which involves estimating the future cash flows of a business and discounting them to determine its net present value at a given date. The DCF method is highly sensitive to choosing an appropriate valuation date because it will determine which underlying information, including any available price data, can be used.

Legal framework

The choice of a valuation date depends on a number of factors, including the applicable law, the parties' agreement and the circumstances of a particular case. Where tribunals may typically choose the date of the alleged breach as the valuation date, it is also possible to choose a later date, including the date on which the arbitration award is rendered. This can have significant consequences for the value of a claim, as a quantum award could be considerably higher (or lower) depending on the market conditions at any given point of time between the date of breach and the date of an award.

For example, under English law, a valuation date can be later in time than the date of the breach of contract in several situations, including, but not limited to:

  1. where a breach is latent;1
  2. where substitute performance is not readily available on the market;2 and
  3. where the parties need time to conduct negotiations.3

However, English courts have demonstrated reluctance to permit claimants to merely take advantage of market price fluctuations when deferring the valuation date for damages claims.4

Public international law recognises calculation of the lost profits as at the time of an award,5 which potentially allows tribunals to take account of changes in circumstances that occurred after the breach. However, any damages claims in a treaty-based arbitration will be subject to the "reasonable certainty" standard of proof,6 such that any lost profits claimed would be carefully scrutinised, particularly where anticipated income streams are not proven to be sufficiently certain.7 Nonetheless, recent decisions of investor-State arbitration tribunals have demonstrated flexibility and openness to varying valuation methodologies, including a forward-looking valuation of the "lost opportunity (or chance) to make future profits".8 Therefore, claimants in the investor-State setting potentially have more leeway with arguments based on ex post pricing data.

Similarly, claimants in civil law disputes can typically seek damages calculated as at the date of decision. While approaches will vary from jurisdiction to jurisdiction, as a matter of principle, the date of decision may allow for a more nuanced damages valuation which also accounts for price changes that occurred after the breach.9 However, some civil-law jurisdictions also set important limitations on the amount of recoverable damages, including the foreseeability requirement.10 This requirement may protect defendants from unforeseeable spikes in any given market and, conversely, allow claimants to argue foreseeability of profits from operations on a normally volatile market.


It remains to be seen how tribunals will deal with the ongoing fluctuations and predictive uncertainty in the existing legal framework. However, given the complex issues that arise in determining the quantum for long-term investments, clients and tribunals alike can expect increased attention to be paid to the valuation date in quantum awards going forwards. Therefore, it is important for parties on both sides to carefully develop their quantum cases from the early stages of a dispute in coordination with counsel and quantum experts.

1 A. Kramer, The Law of Contract Damage (2017), p. 279, see, Hirtenstein v Hill Dickinson LLP [2014] EWC 2722 at para. 146 (Leggatt J).
2 A. Kramer, The Law of Contract Damage (2017), p. 474, see , Standard Chartered Bank v Pakistan National Shipping Corporation [1999].
3 Asamera Oil Corporation Ltd v Sea Oil & General Corporation [1979] 1 SCR 633 (SC of Canada).
4 Shepherd Homes Limited v Encia Restoration Limited [2007] EWHC 1710, paras. 722-725.
5 Case Concerning the Factory at Chorzów (Germany v. Poland), 1928 P.C.I.J. (Ser. A) No. 17; ILC Articles on State Responsibility (with commentary), ILC Article 36, comments 28–30.
6 S. Ripinsky, K. Williams, Damages in International Investment Law (2008), p. 164–165.
7 ILC Articles, Article 36, comment 27.
8 Gemplus S.A., SLP S.A., and Gemplus Industrial S.A. de C.V. v. United Mexican States, ICSID Case No. ARB(AF)/04/3, Award, 16 June 2010, para. 13-95; Bilcon of Delaware et al v. Government of Canada, PCA Case No. 2009-04, Award on Damages, 10 January 2019, para. 288.
9 H Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) para. 4.216.
10 See e.g. Article 1231-3 of the French Civil Code; Section 252 of the German Civil Code.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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