Implications of COVID-19 for Damages and Valuations in International Arbitration
The Only Certainty is Uncertainty
Kluwer Arbitration Blog có bài với tựa đề A Black Swan Event? Implications of COVID-19 for Damages and Valuations in International Arbitration. Dưới đây là một số điểm Ngữ lưu ý. Subtitles are mine.
Legal causation
The key question is one of legal causation: how immediate or remote is the chain of events leading from the onset of COVID-19 to the losses suffered by the claimant? The question may arise more particularly in claims relating to (1) breaches due to parties pulling out of M&A transactions, joint ventures, or supply agreements; (2) delays in construction projects; or (3) price adjustment in long-term supply contracts.
Date of breach or award
Traditionally, damages are assessed at the date of breach, disregarding events arising after that date. However, due to the high degree of uncertainty in markets brought about by COVID-19, the value of the assets at the heart of a dispute may have changed in significant and unexpected ways by the time of an award.
Tribunals may therefore prefer to consider all available information and apply their judgement in selecting the right mix of data and inputs to produce a reliable assessment. This may imply a shift in the date of assessment away from the date of breach and towards the date of award, thereby incorporating full knowledge of the pandemic, actual events post-breach, and current expectations of future developments.
An analogue is found in English contract law in the form of the compensatory principle – the principle that damages should only be awarded for losses actually suffered. Despite an accepted practice of valuing damages at the date of breach, the compensatory principle often prevails in limiting damages when events arising after the date of breach have the effect of reducing or erasing the claimant’s losses.
Valuations in the shadow of pandemic
In valuing a business, the three classical approaches are: (1) the income approach, which considers future cash flows the business can generate; (2) the market approach, which considers the valuations at which comparable businesses are traded; and (3) the asset approach, which considers the value of its constituent assets, or the cost to replace them. In light of COVID-19, there are increased difficulties to applying these classical valuation approaches in an uncontroversial manner.
Claimants may project a quick recovery in their businesses’ cash flows and suggest immunity to various sources of risks, while respondents may take a view that the adverse effects of COVID-19 will drag on and reduce the claimants’ losses to a minimum. Such arguments imply that valuations based on the income approach will be even more hotly contested than usual. There may also be few transactions in comparable businesses that occurred under market conditions sufficiently similar to those on the date of breach to act as reference points for the market approach.
Normalized performance metrics
The use of normalised performance metrics, such as normalised earnings, has been proposed as one answer to the above challenges. The idea is that the valuer would ‘strip out’ the effects of COVID-19 from the business’s current performance, to estimate how it will perform in a post-COVID-19 world. Such metrics are sometimes used in other valuation contexts including post-acquisition disputes following allegations of fraud. They should be employed with caution, however, as they represent an approximation that may not be warranted if the business in question is pending restructuring or even liquidation, or if the pandemic’s effects are longer-lasting and more severe than assumed in the valuation.
Government support and quantum of damages
Both crises have also given rise to an environment of extensive governmental support. While there is typically no need to factor such governmental support into a damages calculation, there are instances where the level of support received by a business may become relevant, for example, if a business received a government bailout to address impending insolvency resulting from a failed contract which it would not have received had the contract been performed. Here too, careful thinking is required.