The Misapprehension of Moral Damages in Investor-State Arbitration

There has been a pervasive failure by investment tribunals to grasp the singularly compensatory nature of moral damages awarded to investors. Critically, this failure to distinguish moral damages from other forms of reparation such as satisfaction and restitution, never mind punitive damages, has led to various doctrinal and practical difficulties in the treatment of moral damages.In 2008, the ICSID Tribunal in Desert Line v. Yemen awarded the claimant moral damages -- the first such award for breaching a bilateral investment treaty. The claimant had been forced by the Yemeni government into an unfavorable settlement of a prior arbitral award, with its employees having been physically arrested and detained in the process. The decision excited much comment in international investment circles for failing to establish clear guidelines and raising the specter of punitive damages. Building on the confusion, tribunals in several subsequent similar cases denied such damages on the grounds that they were punitive. Some welcome clarification arrived by way of the 2011 award in Lemire v. Ukraine, in which the Tribunal concluded that moral damages were appropriate only if the host state's actions involve physical duress, cause mental suffering or loss of reputation, and whose cause and effect are grave. However, while Lemire puts moral damages on a firmer footing, various doctrinal and practical difficulties persist. For example, no tribunal has articulated any systematic method for calculating moral damages, resulting in apparently haphazard awards. Similarly, tribunals have had varied practices in awarding interest on moral damages; while the Desert Line Tribunal declined to award such interest, which it viewed as discretionary, other tribunals have awarded it as a matter of course. Yet other problems are more conceptual in nature, including whether investor corporations should be entitled to moral damages for injury to their employees' suffering -- as was implied in Desert Line -- and of the role of fault in awarding moral damages. The paper explores these various difficulties in detail, and argues further that many of them can be resolved not only by specifically identifying the heads of moral damages at issue, but also treating them as strictly compensatory, rather than punitive, in nature