Does ISDS compensate for loss of profit?

In case of expropriation, investment treaties typically provide for compensation in accordance with the “fair market value” of the investment at the time the expropriation takes place.

An assessment of the value of an investment may also include the reasonable and predictable performance of the investment in the future – which will largely be determined by evidence. It is the investor who must be able to convincingly demonstrate  (i) the causal link between the government action and the loss of profit, which in practice can be quite difficult since typically many factors impact the profit of an investment other than a governmental action, and (ii) how much profit the investment in fact had generated, had the measure not taken place.

In practice, government and investor often seek expertise from accountants or other experts in conducting the calculation. It is therefore ultimately a pure question of fact which the tribunal must consider. In some cases, the facts are not very complicated. In others, the issue is very  complex.

It is, however, not very common that investors are fully successful in receiving the full amounts as claimed, even if the investor succeeds on the merits of the case.

For instance, in Metalclad v. Mexico, the tribunal noted that future profit cannot be used in determining the investment value if the investment has not been operating for a sufficiently long period to establish a performance record. In Swembalt v. Latvia, the tribunal rejected investor’s claim for loss of profit due to failure of the investor to provide a basis of its calculation.

To say that ISDS “guarantees compensation for lost profits” is thus disguising the reality. When the investment treaty does not specifically define the calculation of damages, theoretically an investor may receive compensation for loss of profit. But the practical reality is something completely different.