Allens

International Business Obligations

Focus: Moral damages in investor-state arbitration

21 July 2011

In brief: A recent award provides a useful reminder that moral damages are available to individuals and corporations in extreme cases and a clear summary of the standard that must be met if they are to be justified. Partner Matthew Skinner and Lawyer Tim Maxwell report.

How does it affect you?

  • The arbitral tribunal's decision in Lemire v Ukraine1 reaffirms that moral damages are available to compensate an individual or corporation that has suffered stress, emotional damage and harm to reputation caused by a State's ill treatment.
  • It also makes clear that such damages will only be available in the most egregious circumstances, where the State's conduct is a substantial, grave contravention of 'the norms according to which civilized nations are expected to act', and the harm suffered is also grave or substantial.
  • Parties to international arbitration are likely to welcome the clarity of this restatement of the relevant principles, and should bear them in mind when considering or responding to a request for moral damages.

Background

Mr Lemire, a citizen of the United States of America, owned a radio station in the Ukraine called Gala Radio, and wished to expand this investment into a national network of Ukrainian radio stations. His claim arose primarily from the failure of the Ukraine to award him more than one radio licence in six years, despite his applying for more than 200. In its Decision on Jurisdiction and Liability, delivered on 14 January 2010, the tribunal found that the Ukraine's practices in allocating radio licences had breached the standard of fair and equitable treatment contained in the bilateral investment treaty between the United States and the Ukraine.

Mr Lemire also sought moral damages on the basis that he had suffered anxiety, pain and suffering as a result of the Ukraine's actions. He argued that the following conduct on the part of the Ukraine's regulator, the National Council, amounted to systematic bias against him and his business:

  • the rejection of all but one of Mr Lemire's applications for new frequencies.
  • the inspection of Mr Lemire's radio station five times in three years. All but one of the inspections were unscheduled, and warnings were issued following the inspections.
  • Mr Lemire's application for an extension of his radio station's licence was delayed until a meeting at which a 10-fold increase in licence fees was also approved.

In its 14 January 2010 decision, the tribunal postponed deciding the quantum of damages, and whether moral damages would be awarded, until the Final Award.

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Decision

The tribunal rejected Mr Lemire's claim for moral damages, stating it had awarded a significant sum to compensate Mr Lemire's economic losses, and considered that the treatment he had received from the Ukraine's regulators was not egregious ill treatment, justifying an award of moral damages. Having considered the key arbitral decisions addressing the issue,2 it found that such damages could be awarded in 'exceptional' circumstances, and went on to state that these circumstances will only arise if:3

  • the State's actions imply physical threat, illegal detention or analogous conduct that 'contravenes the norms according to which civilized nations are expected to act';
  • this conduct causes '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.'

While the tribunal expressed sympathy for Mr Lemire, it held that his injury could not be compared with situations, such as armed threats or the witnessing of deaths, in which tribunals in the past have awarded moral damages to both individuals and corporations. The tribunal noted that the Ukrainian domestic legal system had provided Radio Gala with remedies by annulling the two warnings issued by the government and by reversing the ten-fold increase in licence fees. It also noted that, although a regulator's abuse of investigative powers might amount to intimidation, no intimidation was shown here.

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Relevance of the decision

The decision in Lemire v Ukraine reaffirms that moral damages are available to compensate a party that has suffered stress, emotional damage and harm to reputation caused by a State's ill treatment, but makes plain that such damages will only be available in egregious circumstances. The decision demonstrates both that tribunals are willing to examine the conduct of State organs to determine whether it amounts to intimidation and ill treatment, and that they will not award moral damages, except in exceptional circumstances.

Parties to international arbitration are likely to find the tribunal's clear restatement of the relevant principles useful when considering or responding to a request for moral damages.

Footnotes
  1. Joseph Charles Lemire v Ukraine, ICSID Case No ARB/06/18, Award, 28 March 2011 (Final Award).
  2. In particular Desert Line Projects LLC v Republic of Yemen, ICSID Case No ARB/05/17, Award, 6 February 2008; Waguih Elie George Saig and Clorinda Vecchi v The Arab Republic of Egypt, ICSID Case No ARB/05/15, Award, 1 June 2009; and the Lusitania Cases before the Mixed Claims Commission United States-Germany in Accordance with the Agreement of 10 August 1922.
  3. Final Award, 92.

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