Publication
Rethinking Damages in Investor-State Arbitration Amid Geopolitical Uncertainty
AG Feature, 2026
How can the strategies and commercial arrangements used by market participants in real-world transactions inform damages assessments and awards in investor-state arbitrations?
In investor-state disputes, quantum experts typically model the “counterfactual” world – a hypothetical scenario in which the alleged action did not occur – to measure how such action affected the value of an investment. These disputes increasingly unfold against a backdrop of geopolitical instability, including shifting trading relationships, volatile commodity markets, and regulatory change surrounding the energy transition. Such factors can introduce risk that may affect the value of an investment distinct from the impact of the alleged conduct and must be accounted for in the counterfactual world. How should quantum experts think about representing such uncertainty in damages assessments?
“The benefit to the tribunal of such a valuation analysis is the transparency into how uncertainty enters the expert’s analysis, which risks are being captured in the counterfactual scenario, and how the conclusion changes if the evidence supports different probabilities.”
In this article, we outline an approach to determining damages in arbitration that borrows from the structure of commercial transactions. Given that damages estimates based on fair market value are intended to approximate a hypothetical transaction between market participants, we explain how quantum experts and tribunals could adapt damages assessments and structure awards to reflect how a willing buyer and seller would transact in real-world commercial settings when material uncertainty remains.
Beyond a single-point damages assessment
Quantum experts often provide a single damages figure as an estimate of the claimant’s losses, and in many cases, a point estimate may be appropriate for the circumstances. But the precision of a single point estimate should not be confused with certainty about that figure or about the assessment of future risk. Instead, it may be useful in some circumstances to incorporate uncertainty into damages estimates, and for tribunals to incorporate them into damages awards. In real-world transactions, buyers and sellers often avoid placing all of the risk associated with future events into one fixed price. Instead, they use contractual terms that shift value between the parties depending on how events unfold.
Consider an oil and gas investor’s hypothetical investment in developing a new oil field. Suppose the investor negotiates with the government for rights to explore the asset at a time when commodity prices are volatile and a potential export restriction is under discussion. The parties could agree to a contract with multiple revenue components for the government: for example, an up-front payment by the investor and a royalty that increases when oil prices exceed certain thresholds. The agreement may also include a provision for a lower royalty, or an extension of drilling milestones, in the event that the export restriction is enacted that materially limits access to equipment or export markets.
In the example above, there is uncertainty around the future price of oil and the likelihood of export restrictions. Part of the value of the transaction to the stakeholders is contingent on future events, and accordingly, the parties negotiate a contract that shares that future risk.
A damages analysis that compresses the same uncertainty into a single figure may obscure how market participants would have allocated the risk in a commercial transaction. Depending on the facts and the applicable legal standard, it may be possible to adopt a more market-consistent approach and model the alternative outcomes explicitly.
Using real-world commercial strategies to inform valuation
Several established valuation tools can make uncertainty more explicit in damages estimates, including probability-weighted scenarios, valuation ranges, decision trees, milestone-based approaches, real-options analysis, and Monte Carlo simulations. These approaches can be especially useful when an asset's future cash flow depends on uncertainty around political or regulatory outcomes, financing conditions, commodity prices, or other developments that are difficult to forecast at the valuation date.
Suppose that the value of an investment in a data license depends on whether a proposed regulatory change on data sharing restrictions is adopted. A quantum expert might estimate present values under three scenarios:
- $65 million present value if the most stringent version of the restrictions is implemented
- $95 million present value if the restrictions apply only to certain data types
- $120 million present value if the existing regime with limited data restrictions remains in place
The expert must then assign a probability to each outcome. One starting point for these probability estimates could be the frequency of comparable regulatory changes. For example, looking at comparable jurisdictions, the expert may find that the most stringent restrictions were enacted in roughly 30% of observations, partial changes occurred in 20%, and the existing regulatory framework remained in place 50% of the time. These probabilities could then be adjusted using contemporaneous, jurisdiction-specific information known on the valuation date, such as pending legislation, public statements, election outcomes, or implementation history. Using illustrative probabilities of 30%, 20%, and 50%, respectively, the probability-weighted value would be $98.5 million. There is likely to be uncertainty about the magnitude of the probabilities, but even the sensitivity of the valuation to these scenario outcomes can be useful information.
The benefit to the tribunal of such a valuation analysis is the transparency into how uncertainty enters the expert’s analysis, which risks are being captured in the counterfactual scenario, and how the conclusion changes if the evidence supports different probabilities. The same framework can help distinguish losses caused by the alleged breach from the regulatory risks that the investment would have faced in any event.
Can the award itself account for uncertainty?
The adoption of approaches used in real-world commercial transactions could extend beyond valuation methodology to the structure of the tribunal’s award. Rather than crystallizing uncertain future events into a single damages award at the award date, a tribunal might, where legally permissible and appropriate based on the facts, consider an event-linked mechanism such as staged payments, an earn-out or royalty-style structure, or a benchmark price-linked payment.
The 2024 award in South32 SA Investments Limited v. Republic of Colombia illustrates the concept. In this matter, the International Centre for Settlement of Investment Disputes (ICSID) tribunal found that Colombia had breached its bilateral investment treaty with the UK based on the way it calculated and collected royalties on South32 subsidiary Cerro Matoso’s nickel mining operation. Rather than simply awarding the claimant a lump sum, the tribunal’s award accounted for uncertainty around potential future losses to the claimant. Specifically, the tribunal awarded South32 approximately $4.5 million for historical damages that had already materialized, as well as a future payment contingent on a future loss. This future payment to South32 represents the potential royalties that South32 would pay to Colombia if Colombia ultimately enforces the royalty measures that the tribunal deemed improper. Rather than estimating today the amount of loss that Colombia’s future enforcement might cause, the tribunal ordered Colombia to hold South32 harmless for specified damages if Cerro Matoso later made payments as a result of those measures.
The award set out a formula for determining the future compensation, including adjustments for taxes and South32's ownership interest. In other words, the tribunal separated crystallized historical loss from a future loss, the materialization of which will depend on subsequent state action.
The remedy was controversial: a dissenting arbitrator challenged the tribunal's authority to award an indemnity for future contingent damages. This shows that such an approach might not be widely accepted by the international arbitration community or by parties to arbitration. But, from a valuation perspective, the decision provides an example of an award that leaves the uncertainty associated with a particular future event unresolved until it actually occurs.
A more realistic treatment of uncertainty
Geopolitical uncertainty does not make valuation impossible. Commercial negotiations and transactions regularly occur in a world of geopolitical uncertainty. Such uncertainty does, however, make it important to identify the risks that were already part of the investment environment, how market participants would have priced or allocated them, and which losses are properly attributable to the alleged claims.
In some cases, a single damages figure will remain the clearest and most reliable measure. In others, scenario analysis or a contingent remedy may better reflect economic reality. If investor-state damages are intended to approximate a market outcome, tribunals and experts may benefit from looking at the valuation methods and risk allocation structures that commercial parties use to deal with uncertainty.