Sunk Costs as a Remedy in International Arbitration: Sunken Treasure or Sunken Hopes?
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The aim of compensation award is generally to put the injured party in the position it would have occupied but for the wrongful conduct that caused its injury. Over the past decade, the standard method for measuring economic loss has been the discounted cash flow (DCF) approach. When future expected cash flows are not sufficiently certain, tribunals have resorted to other methods of measuring compensation, including sunk costs. Although often viewed as inferior to the DCF method—at least from the injured parties’ perspective—an award of sunk costs can yield ample compensation in some cases. This panel will explore the concept of sunk costs, including when it is appropriate, the complexities in assessing it, and its value as a form of damages claim compared to other methodologies. It will consider key questions such as:
• Are sunk costs seen as a restitution of the investment made, or are they regarded as a proxy for market value?
• Are sunk costs the amounts invested by the injured party, or at the amount that could not be recouped (where the investment has yielded some revenues)?
• How should tribunals address timing issues, where the investment was made over several years and/or has generated revenues over a number of years?
• Should sunk costs be considered at the local operating company level or at the investor’s level and what’s usually the difference between the two?
• Should proceeds reinvested by the investor be included in a sunk costs claim?
• What standard of proof is usually applicable to sunk costs, and what evidence is usually needed to build a strong claim for “sunk costs”?
• What are the typical challenges to a sunk costs analysis (practical and conceptual)?