An Economic Assessment of Contracts in International Arbitration

Tue May 16 08:39:00 EDT 2017
by Willis Geffert & Bastian Gottschling

NERA Senior Consultant Willis Geffert and Principal Bastian Gottschling authored a chapter examining economics and damages issues in international arbitration in the recently published book, The Use of Economics in International Trade and Investment Disputes. In “An Economic Assessment of Contracts, Requests for Contract Reform, and Damages in International Arbitration,” the authors draw on their experience as economists and international arbitration practitioners to explore two broad topics: first, how economic principles and assessments can aid a tribunal in deciding on the merits of a claim and second, how economists can perform robust damages calculations by ensuring that their calculations reflect the appropriate legal standards and by drawing on proven methodologies from economics and business practices. 

On the first topic, the authors address the sanctity of contracts from an economic perspective and discuss economic standards for judicial contract reform. The authors address how the risks that investors have taken on affect their requests for relief when their deals go sour, exploring a casewhere a claimant requested relief under its contract due to high financing costs following the 2008 financial crisis and a separate case where a claimant purchased a struggling regulated utility in a developing country. 

On the second topic, the authors discuss how economists approach actual damages calculations, drawing on stylized examples of lost profits and loss of shareholder value.  The examples illustrate the complexities of developing the hypothetical world but for the alleged harm, e.g., when the harm has affected the company’s costs, sales prices, and business strategy itself, a situation in which economists may use techniques drawn from competition economics and mergers & acquisitions analysis. Additionally, the economist must align the quantum with legal determinations, e.g., a finding that creeping expropriation has occurred over an extended period of time, slowly eroding the value of an investment. 

Reprinted with permission from Cambridge University Press.