In disputes in which the claimant has suffered substantial economic losses, for example the loss of a valuable business or of an ongoing stream of cash flows, questions arise as to how to quantify that loss. In investment treaty arbitration the appropriateness of the use of discounted cash flow (DCF) analysis as a basis for calculating such losses is often at issue.
DCF analysis is a widely adopted business valuation approach among investors, business managers and corporate finance professionals. However, tribunals in investment treaty disputes are sometimes reluctant to rely on it. Conversely, cost-based valuation methods are rarely used in valuation practice while tribunals frequently make awards of damages based on them.
In this article, we consider the usefulness of each of DCF analysis and cost-based approaches as valuation methods and as tools for quantifying losses. We then explore the reasons for the apparent divergence between the attitudes of tribunals and investors to the two approaches, recognising that this is at least in part a matter of law.
This article has been reprinted with kind permission from Global Arbitration Review.