By Dr Dogan Gultutan at the City Law School

Introduction

Moral damages are as real as material damages and, accordingly, must be compensated where appropriate in the particular case. This is not new law. The position as regards moral damages and its recoverability was settled over a century ago. In 1923 in the Opinion in the Lusitania Cases, the tribunal confirmed it in the following terms:

“That one injured is under the rules of international law, entitled to be compensated for an injury inflicted resulting in mental suffering, injury to his feelings, humiliation, shame, degradation, loss of social position or injury to his credit or to his reputation, there can be no doubt, and such compensation should be commensurate to the injury. Such damages are very real, and the mere fact that they are difficult to measure or estimate by money standards makes them none the less real and affords no reason why the injured person should not be compensated therefor as compensatory damages, but not as penalty.”

[Opinion in the Lusitania Cases, 40]

Similarly, the Permanent Court of International Justice enunciated in its decision in the Chorzów case the following principle of international law:

“The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.”

[The Factory at Chorzów (Germany v. Poland)]

These seminal decisions were pivotal in paving the way for moral damages awards to claimant investors in investment arbitrations. The first and foremost example is the Desert Line award, an award delivered under the auspices of the International Centre for Settlement of Investment Disputes (ICSID).

In that case the tribunal held that acts and threats of physical violence, coupled with the unlawful arrest and detainment of employees for three days, caused the claimant investor and its employees moral harm and deserved compensation. The tribunal concluded that moral damages are available to investors in investor-state arbitrations, under customary international law principles and that the circumstances of the case before them justified the award. The tribunal reasoned as follows:

“Even if investment treaties primarily aim at protecting property and economic values, they do not exclude, as such, that a party may, in exceptional circum- stances, ask for compensation for moral damages. It is generally accepted in most legal systems that moral damages may also be recovered besides pure economic damages. There are indeed no reasons to exclude them.” [Desert Line, [289]]

The tribunal awarded the investor $1 million. That approach was followed in another ICSID award, where again the investor was awarded $1 million as moral damages: von Pezold.

More recently, however, in Zhongshan v Nigeria, the UNCITRAL tribunal awarded the claimant investor US$75,000 as compensation for moral harm sustained by its employees and officers, resulting from threats, arrest and improper treatment, including physical assault, at the hands of the Nigerian police for a period of up to two weeks. It is difficult to justify such different treatment between sums awarded when the treatment to which the investors in Desert Line and Zhongshan were subjected to were of similar nature.

The author has already commented multiple times elsewhere on the inappropriateness of such differential treatment:

“In respect of the quantification of moral damages awards, the international law arbitrators and judges naturally and unavoidably enjoy a high degree of discretion. However, that discretion is not unlimited and the tribunal or court must seek to grant ‘a remedy [that is] commensurate with the injury received’, which compensation must ‘be adequate and balance as near as may be the injury suffered’. In other words, the compensation awarded must be ‘full, adequate, and complete’. That said, there is a notable difference between the sums awarded by international investment tribunals and international human rights courts, the latter generally speaking in terms of thousands and the former in millions. Such divergence is difficult to explain, let alone justify, given that in both cases one is ultimately concerned with the same form of harm. This supports calls for greater convergence, via cross-fertilisation, between the various disciplines of international law, to ensure fairness and consistency of treatment.” [Gultutan, Moral Damages, 181]

This note considers the very recent award of the ICSID tribunal in Smurfit v Venezuela and to analyse the award from a quantum perspective.

Facts of the case

The facts of the dispute will not be fleshed out in too much detail given the focus of the present paper on issues of moral harm, but a short summary may be made as follows. The investor (Smurfit) claimed that the Venezuelan state expropriated its entire investment, consisting of ownership in corporations and real estate. The expropriation was part of the Venezuelan state’s desire to re-nationalise land in areas of strategic influence where so required by “exceptional circumstances of social interest or public utility so require” [Smurfit, [357]]. The state also allegedly forcefully took over management of various subsidiaries, as well as taking financial policies that specifically targeted investors such as the claimant. The investor also sought moral damages for moral harm suffered by itself and its employees at the hands of the Venezuelan state.

The ICSID tribunal found for the investor, ruling (inter alia) that the state had unlawfully expropriated the relevant investments [Smurfit, [777]]. The tribunal also found Venezuela to have breached the obligation to ensure fair and equitable treatment of the qualifying investments. Most notably for present purposes, the tribunal held that it possessed jurisdiction to determine moral damages claims and awarded $1 Bolivar. The compensation awarded for expropriation and other treaty breaches was US$ 395 million.

Analysis of moral damages award

On the issue of jurisdiction to hear moral damages claims, the tribunal examined the Desert Line and other cases and commented that “while not the general norm, these cases indicate that consideration of moral damages may be examined by investment tribunals and, if warranted by the exceptional circumstances of the case, may be awarded.” [Smurfit, [343]]. It could therefore be said with some comfort that ICSID tribunals are likely to find jurisdiction to hear and determine moral damages claims on the basis of what is now settled case-law confirming such jurisdiction.

Relevantly, the tribunal rejected the host state’s argument that international investment tribunals need states’ consent to have jurisdiction over a claim for moral damages, commenting that:

“The Tribunal disagrees with this characterization. As mentioned above, the Treaty expressly recognizes compensation for damages caused by a breach of obligations. The Parties recognized in general the existence of damages and no specific exclusion to that undefined term is provided.” [Smurfit, [344]]

On the substantive issue of entitlement to moral damages and the appropriate quantum, the tribunal re-confirmed the view that moral damages would only be available in exceptional cases (“The Tribunal agrees that awarding moral damages should be made in “exceptional circumstances,” whether for a natural or legal person. It is a high standard.”) [Smurfit, [739]]. This requirement emanated from the Desert Line award.

The tribunal considered in detail the witness statement and testimony of the employee who had been subjected to “approximately two months of illegal detention, part of that time in a secret prison” [Smurfit, [739]]. The claimant contended that the employees had been subjected to ill-treatment, intimidation, harassment, public humiliation, attempted extortion and physical duress, among other situations. Concluding that “there was no legal basis for the arrest[s]” and being of the view that “being deprived of a fundamental right such as freedom, even more, outside normal legal procedures, and the uncertainty that that entails can certainly produce anguish, anxiety and mental suffering to any human being”, the tribunal held that “both cause and effect [were] grave enough to award moral damages”. [Smurfit, [740], [749] and [750]]

However, the tribunal awarded $1 Bolivar, presumably to serve as a symbolic punishment for its internationally unlawful acts. This was against the claimant’s request for “10% of the sum awarded for moral damages”, which would have equated to circa US$ 40 million [Smurfit, [752]]. The tribunal noted that “the Claimant [had] not provided a full explanation or a methodology in which the 10% figure is grounded” and accordingly dismissed the request. However, ironically, the tribunal did not elaborate why “[I]n light of the circumstances of the case, the Tribunal [found it appropriate to] award[] moral damages in the amount of $1 Bolivar.”

The tribunal’s approach to quantumising moral harm, or more correctly its refusal to properly engage with such, is most unfortunate. If, as the tribunal expressly accepted, moral harm is as real as material damages, the issue of quantification should have been more scientific and fully discussed, possibly with the help of expert evidence. The symbolic award of a mere $1 Bolivar does grave injustice to the moral harm suffered by the claimant investor and its employees. The author has already commented elsewhere on the departure such approach takes from settled and accepted principles of international law [Gultutan, Quantimising Moral Harm]. Moral harm claims are more scientifically analysed by international human rights courts and tribunals, which apply and adhere to the same principles of law [see Gultutan, Moral Damages, 132 et seq]. There is no justification for the differential treatment. Furthermore, it risks and execrates the current fragmentation of sub-branches of customary international law. It is hoped that future tribunal will take these criticism to heart, but it may now be too late given the direction taken in the decided investment cases.

BIBLIOGRAPHY

CASES

  • Atala Riffo and Daughters v Chile (Merits, Reparations and Costs), Judgment, Inter-Am Ct HR (Ser C) No 254 (24 February 2012) (IACtHR).
  • Bernhard Friedrich Arnd Rudiger von Pezold et. Al. v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award, 28 July 2015.
  • Desert Line Projects LLC v. The Republic of Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008.
  • Gonzales Lluy & Ors v Ecuador (Preliminary Objections, Merits, Reparations and Costs), Judgment, Inter-Am Ct HR (Ser C) No 102/13 (1 September 2015) (IACtHR).
  • Joseph Charles Lemire v Ukraine, ICSID Case No ARB/06/18, Award (28 March 2011).
  • Opinion in the Lusitania Cases, United Nations Reports of the International Arbitral Awards, 1 November 1923, Vol. VII 32, 40.
  • Smurfit Holdings BV v Bolivarian Republic of Venezuela, ICSID Case No. ARB/18/49, Award, 23 August 2024.
  • The Factory at Chorzów (Germany v. Poland), Decision on Indemnity, 1928 PCIJ (Ser A).
  • Velásquez Rodríguez v Honduras (Merits), Judgment, Inter-Am Ct HR (Ser C) No 4 (29 July 1988) (IACtHR).
  • Zhongshan Fucheng Industrial Investment Co Ltd v Federal Republic of Nigeria, UNCITRAL, Award (26 March 2021).

BOOKS / ARTICLES / JOURNALS

  • Conway Blake, Moral Damages in Investment Arbitration: A Role for Human Rights? (2012) 3(2) JIDS 371-407.
  • Dogan Gultutan, Moral Damages Under International Investment Law: The Path Towards Convergence (2022, Kluwer Law International).
  • Dogan Gultutan, ‘Moral Damages under International Investment Law: the Difficulty of ‘Quantumising’ Moral Harm’ (2024) 26(2) Asian Dispute Review 67 – 76.
  • Marc Allepuz, Moral Damages in International Investment Arbitration (2013) 17(5) Spanish Arbitration Review 5-15.
  • Merryl Lawry-White, Are moral damages an exceptional case? (2012) 15(6) Int ALR 236-246.
  • Patrick Dumberry, Compensation for Moral Damages in Investor-State Arbitration Disputes (2010) 27(3) J Int’l Arb 247-276.
  • Patrick Dumberry, Satisfaction as a Form of Reparation for Moral Damages Suffered by Investors and Respondent States in Investor-State Arbitration Disputes (2012) 3(1) JIDS 205-242.
  • Patrick Dumberry & Sebastien Cusson, Wrong Direction: ‘Exceptional Circumstances’ and Moral Damages in International Investment Arbitration (2014) 1(2) JDIA 33-75.
  • Stephen Jagusch & Thomas Sebastian, Moral Damages in Investment Arbitration: Punitive Damages in Compensatory Clothing? (2013) 29(1) Arb Int’l 45-62.

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