The Phenomenon of Zero Damages Cases in Investment Arbitration

In investor-State dispute settlement ("ISDS"), there have been awards in which compensation has reached billions, such as in the Tethyan v. Pakistan, Occidental v. Ecuador, and Yukos v. Russia cases. This has led to widespread criticism, as so-called mega-awards pose significant financial challenges for the respondent States. These are not isolated cases. As Matthew Hodgson et al point out, the average amount of damages awarded has shown an upward trend over time.

There is yet another side to the story. In cases such as Eco Oro v. Colombia, tribunals have unusually concluded that no compensation should be awarded to the claimant despite a finding of State responsibility. This post posits that such a "zero-damages" award occurs when the element of causation is not properly established by the claimant.

Relevant Doctrine in Determining Damages

Full reparation is the standard that legal doctrine and arbitral tribunals refer to as a locus classicus to explore the duty to make reparation. This standard was developed in 1928 by the Permanent Court of International Justice ("PCIJ") in the Chorzow Factory case and taken up by the Draft Articles on the Responsibility of States for Internationally Wrongful Acts ("ARSIWA"), specifically in Article 31.

Paragraph 2 of Article 31 of ARSIWA provides that harm is that which is caused by the internationally wrongful act of the State. In other words, there is a requirement to establish a causal link between the harm and the State's violation, whereby the State is required to compensate only for losses that are attributable to it.

Case Study: Zero Damages

A. Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania

In its award, the arbitral tribunal found that expropriation had occurred due to the manner in which Tanzania acted to terminate a lease agreement related to a water and drainage system project, as well as a violation of the fair and equitable treatment standard ("FET").

Despite finding a breach of the bilateral investment treaty ("BIT") between UK and Tanzania, the tribunal found liability, but considered the damages claimed by the investor not supported by causation. The tribunal concluded that, for the period between the occurrence of the unlawful acts and the date of expropriation, Biwater Gauff's investment no longer had any economic value. In particular, the termination of the lease agreement was inevitable as a result of external factors unrelated to the unlawful acts attributable to Tanzania. Consequently, the tribunal determined that:

[T]he conclusions on causation reached by the majority of the Tribunal are based on the lack of linkage between each of the wrongful acts of the Republic, and each of the actual, specific heads of loss and damage for which [Biwater Gauff] has articulated a claim for compensation.

B. Infinito Gold Ltd. v. Costa Rica

The arbitral tribunal concluded in its 2021 award that Costa Rica's actions violated the Canada-Costa Rica BIT by failing to provide FET. Despite finding the violation of the treaty, the tribunal decided not to award compensation because the unlawful acts did not cause quantifiable damage. It was found that Infinito Gold was prevented from applying for a new mining concession, which constituted a loss of opportunity.

In this regard, the arbitral tribunal determined that Infinito Gold had not provided evidence that could quantify compensation for this loss of opportunity. Given that there was inherent uncertainty and regulatory risk in the application process (as it could have been rejected), the quantification was deemed highly speculative, preventing an award of damages.

C. Pawlowski AG and Projekt Sever s.r.o. v. Czech Republic

The arbitral tribunal concluded in its award that the Switzerland-Czech Republic BIT had been breached by arbitrary and unreasonable acts, specifically in relation to payment requests by the Benice district of the city of Prague regarding the development of a residential project. The tribunal determined that these requests had no legal basis in Czech law, were not supported by any formal administrative procedure, and the amounts demanded were determined in a discretionary manner. Therefore, the claimant was entitled to consider them “irregular, improper, and even indicative of, or as an invitation to engage in, conduct that is unlawful.”

However, the tribunal refused to award damages on two grounds: First, although the tribunal found the payment requests to be arbitrary and unsupported by Czech law, it concluded that these irregular demands did not, in practice, impede the progress of the residential development and therefore produced no actual damage. Second, the claimant's valuation model rested on the assumption that changes to urban planning regulations were themselves unlawful; as the arbitral tribunal did not consider those regulatory changes to be wrongful, the valuation model failed to account for a causal link between the alleged injury and an internationally wrongful act.

Why Damages Models Fail: Causation Gaps

Based on the findings of the abovementioned cases, this section explains why a valuation model may fail to support a claim for damages given issues of causation.

Models fail because they do not adequately quantify the damage caused by treaty violations, because the damage was inevitable regardless of the violation, or because the event on which the damages model is based was not considered a violation. In these three scenarios, tribunals conclude that there was no causal link between the claimed damages and a breach of the treaty.

The first situation is illustrated in Infinito Gold v. Costa Rica, as the violations were not linked to a quantification that would allow the tribunal to effectively determine the amount of monetary compensation. Indeed, the violation centered on a “loss of opportunity”, which the tribunal found to be non-compensable due to the impossibility of providing a credible and reliable quantification of such a breach. Therefore, this first scenario occurs when claimants fail to provide an appropriate quantification of the breach found by the tribunal.

The second situation arose in Biwater Gauff v. Tanzania, where it was determined that, regardless of the violation, the damage was inevitable and therefore not attributable to the respondent State. The latter, bearing in mind that the termination of the lease agreement was unavoidable, no matter the violation of the BIT. Where damage results from independent factors, rather than from the treaty breach itself, tribunals may appropriately conclude that a zero damages award is due.

The third situation occurred in Pawlowski v. Czech Republic, where it was determined that the model of damages was based on an act that was not considered unlawful. In that case, the claimant relied on the assumption that changes to urban planning regulations were illegal, and the tribunal found that they were not illegal per se. As a result, the claim for damages was dismissed due to the lack of a causal link between the unlawful act and the alleged damage, leading the tribunal to award zero damages.

Therefore, in order to satisfy the causation requirement, the model must account for a clear link between the alleged damage and the violation of the treaty. By the same token, a respondent State can avoid the imposition of compensation if it successfully disproves the chain of causation, demonstrating that, even where a treaty breach is established, the impugned conduct did not, in fact, give rise to any compensable harm.

Conclusions

The causation test acts as a fundamental limit on investor claims, preventing States from being ordered to pay compensation for damages they did not cause or for unlawful acts they did not commit. This aspect constitutes a relevant counterweight to one of the most recurrent criticisms of the ISDS system: the imposition of exorbitant amounts on States for reparations.

As arbitral tribunals navigate between mega-awards and zero-damages decisions, causation emerges not as a mere technical consideration linked to the well-known principle of full reparation, but as a decisive “gatekeeper” of compensable claims in investment arbitration, quietly reshaping an urgent balance between investor protection and State responsibility.