Such sums may be “small change” compared to the more conventional forms of economic compensation claimed for treaty breaches. Still, it’s become de rigeur for claimants – and even some states – to tack on claims for a few million Dollars in moral damages.

Arbitrators have been slower to award moral damages. However, in a recently-concluded ICSID arbitration proceeding, a tribunal grappled at considerable length with the claimant’s $3Million (US) moral damages request.

You can find a fuller accounting of the Joseph Charles Lemire v. Ukraine case here, so I won’t rehearse all of its facts. It suffices to mention that Mr. Lemire is a U.S. investor in Ukraine’s radio broadcasting industry, and that he accused Ukrainian broadcasting authorities of unfairly rejecting a long string of applications for new radio frequencies that would have permitted him to expand his radio business.

Arbitrators ultimately held that Ukraine’s treatment of Mr. Lemire did not meet the standards of fairness set out in the U.S.-Ukraine bilateral investment treaty, and awarded him $8.7 Million (US) for his financial losses.

Mr. Lemire made a further request for moral damages, complaining that he had suffered indignity, stress, humiliation and other forms of moral harm as a result of the state’s serial (and legally unfair) rejection of radio licensing applications. He also cited the stress and anxiety occasioned by state-harassment, including a series of (allegedly irregular) inspections, and license renewal delays.

What “exceptional circumstances” would justify moral damages?

In its March 28, 2011 Award, the tribunal debated whether Mr. Lemire’s treatment constituted the type of “exceptional circumstances” that warrant an award of moral damages.

To elucidate the meaning of “exceptional circumstances” the arbitrators looked to certain arbitral awards plead by the parties. They identified three criteria:

• the State’s actions imply physical threat, illegal detention, or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act;
• the State’s actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and
• both cause and effect are grave or substantial

Mr. Lemire’s injuries don’t meet the test

The tribunal acknowledged that Ukraine’s repeated and unfair rejection of Mr. Lemire’s licensing applications had led to some “negative impact” to his reputation and entrepreneurial image. However, the gravity of this harm could not be likened to the hurt caused from armed threats, or by witnessing the deaths of others, or the other types of suffering endured by claimants in earlier cases where moral damages were warranted.

The tribunal also found that the allegedly harassing inspections carried out on Mr. Lemire’s company were not undertaken in order to “intimidate” the foreign investor.

Thus, while the tribunal expressed sympathy for Mr. Lemire’s stress and anxiety, it held that the economic compensation awarded was sufficient to compensate for the moral aspects of his injuries.

Ukraine urged that any moral damages be calculated in line with human rights law

Because Mr. Lemire’s suffering did not rise to the level where moral damages were warranted, arbitrators did not need to address an argument by Ukraine that such damages should be quantified in line with the practice under international human rights law.

Ukraine pointedly noted that Mr. Lemire had offered no explanation for his decision to claim $3 Million (US). Moreover, the government observed that awards of moral damages before international human rights courts and tribunals “are much lower than that requested by Claimant.”

I’ve made a similar argument in a 2009 article, in my Investment Arbitration Reporter newsletter. Frankly, it’s unheard of for human rights tribunals to award 1 Million (US), much less 3 Million (US), even in cases of the gravest indignities such as torture or extra-judicial killing.

I happen to favour the award of moral damages in certain investment treaty cases. Such a remedy can be a crucial one where claimants have suffered grave indignities, particularly when calculable business losses may be minimal. However, I can’t see a principled reason why the same manner of indignities visited upon claimants – be they in human rights or investment law contexts – should result in the award of wildly divergent sums by international tribunals

If arbitrators were to engage in a comparative analysis of the quantification of moral damages it might help, in its own small way, to alleviate the perception that investment treaty arbitration is a system of “concierge-level” international justice that puts aliens (or at least foreign investors) on a privileged plane above all other claimants in international dispute resolution.

The basic principle of State responsibility is, of course, that a State must make full reparation for any injury (whether material or moral) caused to another State or a foreign investor. A tribunal should therefore award an amount of compensation that is exactly equivalent to the actual moral damage suffered and should not award a single dollar in compensation over and above that.

The concept of moral damage is, however, vague and may be subject to different interpretations. The same is true for the quantification of moral damages. Thus, under the exact same circumstances, a certain type of moral damage that is considered by one tribunal to be worth US$10,000 in compensation could very well be deemed worth US$100,000 by another. There are only a select few instances where a tribunal, such as the UNCC, is bound by strict guidelines determining in advance the amount of compensation to be awarded for certain specific types of moral damages (see, UNCC Governing Council Decision no. 3, S/AC.26/1991/3 (23 October 1991); UNCC Governing Council Decision no. 8, S/AC.26/1992/8 (27 January 1992). In all other cases where no guidelines exist, tribunals will necessarily have a great deal of flexibility and discretion to determine what amount should adequately compensate an investor for the moral damage suffered. How should tribunals then exercise such discretion? This is where the issue of culpa matters.

The Desert Line award’s reference to “the physical duress exerted on the executives of the Claimant” which “was malicious and therefore constitutive of a fault-based liability” (para. 290) suggests that the Tribunal considered Yemen’s fault when finding its international responsibility. Similarly, in his concurrent and dissenting opinion in the Biwater v. Tanzania case, Arbitrator Born referred to Tanzania’s “deliberate” conduct causing moral damages to the Investor (para. 33). These statements seem to suggest that fault or malice by the host State is a condition for an award of compensation for moral damage. It should be recalled, however, that the work of the I.L.C. on State responsibility has clearly adopted the concept of the “objective” responsibility of a State whereby “it is only the act of a State that matters, independently of any intention” (J. Crawford, I.L.C.’s Articles on State Responsibility, Introduction, Text and Commentaries, at p. 84). In my view, malice or any other intent is clearly not a necessary precondition for a tribunal to award compensation for moral damages.

The presence of culpa will undoubtedly, however, have an impact on a tribunal’s decision with respect to the consequences of responsibility. Thus, State’s fault or malicious intent will be taken into account by tribunals when they actually quantify the amount of compensation to be awarded to remediate moral damages. This has long been recognised in doctrine as well as by the I.L.C. Special Rapporteur Arangio-Ruiz in his Second Report on State Responsibility (Yearbook ILC, 1989, vol. II, Part one, at para. 145 and 180: “[I]it seems both logical and rational, as recognized by a number of authorities, that the presence or absence of fault, and, if there is fault, the degree of wilful intent or negligence, play some role in the determination of the degree of responsibility and therefore of the forms and degrees of the reparation due”).

Thus, the amount of compensation should be proportionate to the seriousness of the offence committed by a State and its degree of responsibility. A tribunal may award a greater amount of compensation for moral damages in a situation where the conduct of the State is especially malicious or shocking. Simple common sense would dictate such a solution. This does not mean that there exists any higher threshold for finding a breach of international law in the context of moral damages claims. In my view, it is undesirable that only “egregious” State behaviour should result in awarding compensation for moral damages.

One illustration of the approach proposed here is the 1992 case of Letelier and Moffitt where the ad hoc Commission established by the United States and Chile awarded more than US$1 million in compensation for moral damages to three individuals and their heirs. This case arose from the assassination in 1973 in Washington of Mr. Letelier, a Chilean opponent to the Pinochet regime living in exile in the United States, by Chilean secret police agents. In his own “separate concurrent Opinion” Arbitrator Orrego Vicuña indicated that Chile “ha[d] given important steps to satisfy the moral dimension of the human rights situations with which it has had to deal” and that “[t]his positive attitude ha[d] certainly a bearence on the determination of compensation for moral damages.” (UNRIAA, vol. XXV, p. 16). The Commission therefore seems to have taken into account the “positive attitude” of Chile since the regime change in 1990 by awarding less monetary compensation than it would have had otherwise.

Arguably, tribunals should not only take into account the “positive” attitude of States regarding foreign investors but also, quite logically, any other “negative” factors. Any particularly condemnable governmental actions toward a foreign investor could have a bearing on the quantification of the actual amount of compensation to be awarded for moral damages.

When awarding compensation for moral damages, a tribunal is therefore not only wiping out all the negative consequences of a wrongful act. It is also sometimes expressing its strong concerns about a State’s unacceptable treatment of foreign investors, a concern which can be expressed in monetary terms. In such a case, the amount of compensation is not only attributed to remediate damage but also to send a clear message to the host State. There are several earlier examples of international law cases where arbitral tribunals have awarded monetary compensation in circumstances akin to moral damages with the clear intent of condemning unacceptable State conducts (see, Moke v. Mexico, U.S.-Mexico Mixed Claims Commission, 1871, in J.B. Moore, History and Digest of the International Arbitrations, Vol. IV, 1898, p. 4311).

In my view, a tribunal expressing strong concerns about State actions through an award of compensation to remediate moral damages must be distinguished from the notion of punitive damages. The concept of punitive damages is not recognized under international law (I.L.C. Commentaries, p. 243). Investor-State arbitral tribunals have also refused to award punitive damages (see, CMS v. Argentina, at para. 404). On the one hand, a State is not being imposed an extra amount of compensation in addition to the actual damages suffered. The amount of compensation awarded is in fact equivalent to the actual damage. On the other hand, the goal of awarding compensation still remains to remediate the actual damage suffered; it is clearly not to punish the host State. It may be that the concept of “aggravated” damages would in fact be a better term to describe this situation.