Insights
Economic damages are seen as the Holy Grail of any international arbitration. The amount of compensation for financial losses is the ultimate goal of the Claimant, who seeks to be compensated for the damages suffered, but that amount is also the main concern for the Respondent, who may be responsible for the losses.
Despite those two conflicting objectives, damages experts assist the parties and the tribunals to reach a fair determination relying on the principles of independence and impartiality. In our experience, although party-appointed experts respect both principles during the overall proceeding, disagreements repeatedly arise over specific economic aspects.
This article highlights key valuation issues that are debated during arbitrations which we have faced on numerous occasions. Some of the most important ones that come up during the quantification of economic damages in international arbitration are biases in financial projections, questions about discount rate, and some secondary concerns.
Arbitration disputes often involve breach of contract claims, ambiguity of terms, performance issues, or early termination, among others. Financial projections in these cases are used to illustrate the financial impact of the claim on the company or asset by showing lost profits or increased costs.
Both performance issues and early termination disputes entail estimates of future financial projections, which have a subjective element, and could lead to biased valuations. The damages expert may fall into the forecast bias of overestimating future financial projections compared to past results.
So, how may the parties and the tribunal be influenced by forecast bias and how can they avoid that? Here are some considerations:
Finally, it is important to keep the big picture in mind and not get lost in the details. Upon completion of the financial projections, the damages expert should consider taking a step back and ask whether the figures are precise or just look precise.
A common question faced during international arbitration proceedings is whether the discounted rate applied by the damages experts fairly represents the investors’ required return given the assumed risk.
Usually, many considerations surround the discount rate, but it is important to keep in mind that the primary goal of the damages awarded is to compensate – not overcompensate – the Claimant for their losses.
The appropriate discount rate will be determined from the perspective of the damages assessed:
In all three of the above approaches, there are some common limitations and challenges related to discount rate, which tend to be debated. They are:
Beyond the previous challenges, the true cost of capital is always reflected by market value, whereas book values may not. Using book values is a quick shortcut, but it will distort the discount rate.
While financial projection bias and discount rate dominate the debate in damages quantification and valuation in international arbitration, there are other secondary issues that also arise.
The valuation aspects in international arbitration may look complex, but the most common issues are easily solved by following what logic dictates.
Our aim in this article is not to provide a damages quantification handbook, it is to empower tribunals, lawyers, and other experts by revising the usual “what if’s” that are critical to maintain the spirit of fairness and impartiality of the tribunal’s award.
It seems difficult to find a consensus on damages issues, since one of the main elements of the quantification of damages is the counterfactual scenario, which by its nature is hypothetical. Therefore, as long as subjectivity remains part of damages quantification, there will be room for debate; and differences of opinions and approaches will persist among damages experts in international arbitration.
We would like to thank our colleagues Sergio Campos Molano, Oscar Hernández, and Susana Cano Alvarez for providing insight and expertise that greatly assisted this research.
Sergio Campos Molano is a Director in J.S. Held’s Economic Damages & Valuations practice in Spain. Sergio has more than nine years of experience at global consulting firms, including KPMG and FTI Consulting. He specializes in business valuations, economic damages in dispute contexts, and forensic accounting across Spain and Latin America. Sergio collaborates with a diverse array of clients across various industries throughout Europe and Latin America, including international corporations, publicly traded companies, and globally recognized law firms. He has testified in both national and international arbitration tribunals.
Sergio can be reached at [email protected] or +34 674 946 206.
Oscar Hernández is a Managing Director and leads J.S. Held’s Economic Damages & Valuations practice in Spain. He has worked for clients from all industries and in different geographical areas in Europe and America, including both international clients, listed and medium-sized companies. Oscar provides consulting and expert services for both plaintiff and defense law firms throughout Spain. He has been retained as an expert in over 400 matters. Oscar also consults with businesses and individuals performing fraud investigations and several other specialized forensic accounting services. Oscar maintains a number of professional affiliations and certifications. He is a Certified Auditor by the Ministry of Economy of Spain, Institute of Chartered Accountants Auditors of Spain. He is also a Founding Member of the Board of the Spanish Chapter of the Association of Certified Anti-Money Laundering Specialists (ACAMS). Oscar is also a member of the Institute of Chartered Accountants Auditors of Spain, the Board of the Spanish chapter of ACFE, the Institute of Internal Auditors of Spain, and the Register of Expert Accountants.
Oscar can be reached at [email protected] or +34 91 062 6273.
Susana Cano Alvarez is a Director in J.S. Held’s Economic Damages & Valuations practice in Spain. She specializes in forensic accounting and the analysis of economic damages. With more than 15 years of experience, Susana provides consulting and expert analysis services for both plaintiff and defense attorneys across Spain. She has been retained as an expert in more than 100 matters. Susana also advises companies and individuals in fraud investigations and other specialized forensic accounting services.
Susana can be reached at [email protected] or +34 91 062 6278.
[1] Top-down approach first looks at the broader economy, then at the industry and to the company level.
[2] Bottom-up approach begins at the individual asset or company level and builds up toward the overall financial outlook.
[3] Journal of Financial Economics, Volume 9, Issue 1, March 1982, Rolf W. Banz, https://doi.org/10.1016/0304-405X(81)90018-0
[4] https://aswathdamodaran.substack.com/p/data-update-3-for-2025-the-times
This article discusses the various independent analyses that experts perform and how these analyses should be integrated when involved in a construction dispute that has progressed to international arbitration. The goal of the article is...
Lost profit damages are calculated when a plaintiff’s business alleges that the defendant’s actions impaired its operations in some manner. Determining lost revenues is a critical component in calculating lost profits. Lost profits are based...
This article focuses on the obstacles facing the UK and EU in meeting their goals of constructing more renewable energy projects, enabling them to significantly reduce greenhouse gas emissions. It examines the growth of renewables...