The concept of moral damages has been judicially observed in the field of international investment arbitration. Firstly introduced in the Lusitania Cases, moral damages can be referred to the form of damages to repair for an injury resulting out of a non-material harm, i.e., harm which is not pecuniary in nature. Moral Damages can be awarded for various reasons, ranging from physical duress and psychological violence to aspects such as loss of creditworthiness and reputation of the investor owing to state action. As per the ICSID Tribunal in the case of Desert Line v. Yemen, moral damages are only awarded under exceptional circumstances. However, there is no clear definition explaining what constitutes the term ‘exceptional circumstances’.
Provided that moral damages are only awarded in exceptional circumstances, concerns are raised over the threshold under which moral damages should be awarded owing to reasons concerning loss of reputation or creditworthiness. Loss of reputation and creditworthiness occur due to reasons such as inspections conducted by the state authorities against regulated entities in order to intimidate such entities. Separately, such loss of reputation can also be attributed to negative statements made by the state or its officials against the regulated entity, possibly leading to its negative impression in the market among consumers, thereby causing reputational and financial loss to the entity.
Recently, in the case of BSG v. Guinea before the ICSID, a counterclaim for rewarding moral damages was raised by Guinea. To briefly summarize the case, claims regarding expropriation and discriminatory treatment were bought up by BSG (the Claimant). BSG claimed that there was expropriation of its investment as Guinea revoked its mining rights over two mining areas of prominence, and that it suffered discriminatory treatment by the government during its review of mining rights.
The Respondent State, on the other hand, raised counterclaims against BSG, alleging that the acquisition of mining rights in the first place involved corruption by the BSG officials and requested the tribunal to award moral damages in order to provide compensation for the harm caused by BSG’s false public statements, wherein they stated that Guinea intended to extort money from BSG. In this case, a claim for moral damage was raised due to the damage caused to the reputation of Guinea.
Although the tribunal did not proceed with the merit of the claims owing to reasons concerning inadmissibility, the counterclaims submitted by Guinea do raise an important question regarding the threshold under which a claim for moral damages should be sustained owing to the loss of reputation of an investor or a regulated entity. In this article, the author intends to analyse the threshold of reputational damage that would make a reasonable claim for moral damages to succeed in the field of investment arbitration.
- Tracing the evolution of the threshold
The tribunals have interpreted the notion of “exceptional circumstances” giving cause to loss of reputation in many ways. The first such interpretation was given by the ICSID Tribunal in the case of Lemire v. Ukraine. In this case, the Claimant argued that he was entitled to moral damage as the state was the state was disproportionate in its approach to award radio frequencies to him and that the state conducted unscheduled inspections, which lead to a loss of his reputation alongside a feeling of humiliation.
The tribunal opined that these facts did not give rise to the exceptional circumstances under which moral damages are awarded, despite the other substantial grounds of awarding of moral damages were present. The Tribunal went on to compare these facts with injuries suffered owing to armed threats and witnessing of deaths, such as in the case of Desert Line v. Yemen. Although it is agreeable that Tribunals have in fact awarded moral damages for reasons such as anxiety and distress caused to investors due to armed threats, but that should not negate awarding of moral damages for other reasons. For instance, if a state uses unscheduled investigations without any cause or as a tool to intimidate or harass the investor, it should ideally lead to awarding of moral damages. This is because that it would not only induce stress and anxiety to the investor, but may also potentially lead to a loss of reputation, which may consequently lead to lack of business opportunities and cause financial stress.
With this concern in mind, tribunals started to take a different approach with time. This change in approach could be witnessed from the observations that arose from the case of Al Kharafi v. Libya. In that case, the claimant sought moral damages for the losses that it incurred as a result of the defendant’s abusive cancellation of an important project that the government previously approved of. In this duration, the plaintiff had negotiated and executed multiple contracts with various international companies. Given the abusive cancellation, the claimant suffered damage to its reputation in the stock market, as well as in the business and construction markets in Kuwait and also globally. Seeing this loss of reputation, the Tribunal awarded thirty million US dollars in compensation for moral damages.
Seeing this, an evolving approach could be observed through multiple awards over the question of moral damages due to loss of reputation owing to state action. Despite the shift towards a more liberal approach in the awarding of moral damages, there is no clear indication of what constitutes the rightful standard when it comes down to awarding of moral damages. This indicates a continuation in the search of a common ground.
- The search for a common ground
When the existing jurisprudence does not show the applicability of a common standard, it becomes difficult to predict the applicability of a certain standard in the future. This could present some serious problems as the future tribunals will have a wide margin of discretion to apply their own interpretation. In such situations, we must look down to the intent that has been shown by the state, regardless of the gravity of the loss of reputation that may be caused from it. Even if the state’s act could potentially lead to a reputational loss, the tribunal should award moral damages for the same.
Simply, if the acts conducted by a state are in bad intent, i.e., if their purpose if not genuine and are inclined towards harming the investor, it should give a case to moral damages. This would significantly differ from the standard applied by the ICSID Tribunal in the case of Lemire v. Ukraine, in which the Tribunal noted that since the injury inflicted as a result from the state’s wrongdoing was not substantial, as a result of which, the claimant was not entitled to moral damages in that case.
However, there is a need to shift from this approach and define a clear standard under which moral damages could be awarded. A reference could be sought from the case of Swisslion v. Macedonia. In this case, the investor sought moral damages as the state publicized criminal investigations against the investor, despite the public prosecutor dropping the charges against the investor as they were found to be without merit. However, in the course of publicizing the investigations, the findings of the prosecutor were not published by the Ministry of Interior. The ICSID Tribunal noted that it could reasonably be expected that the announcement of the investigation by the state could cause problems for the Claimant and its businesses in Macedonia.
This finding shows the difference in approach that has been taken by tribunals in due course of time, and Swisslion judgment could set a benchmark of the standard that should be followed. Unlike the judgment in Lemire, here the tribunal assessed the possible loss of reputation as a result of publicizing the investigations. Thus, the tribunals should take a more liberal approach when it comes to awarding moral damages.
Despite varying approaches adopted by the tribunals for granting moral damages, it could be ascertained that the tribunals must have a definite standard to refer to and not be given a wide margin of discretion to determine a case for moral damages arising out of a reputational loss. As discussed above, the most reasonable threshold would involve seeing the intent of the state, and if the same is in bad faith despite the gravity of the state’s wrong being unascertained, the tribunals should be more keen to award moral damages in such circumstances. This inclination towards a more liberal approach would hold the states back from creating a negative business atmosphere for investors, and thereby promote healthy investment practices.