Quantum Academy: training and certification on assessing damages

Lucas Mejias
TozziniFreire, São Paulo
​​​​​​​lmejias@tozzinifreire.com.br

Report on panel discussion at the 23rd Annual IBA Arbitration Day, Friday 25 March 2022, presented by the IBA Arbitration Committee​​​​​​​

Session Chair/Proponent

Mark Friedman Debevoise & Plimpton, New York

Panellists

David Dearman Ankura, London

Smitha Menon WongPartnership, Singapore

Gabrielle Nater-Bass Homburger, Zurich

The second panel of the 23rd Annual IBA Arbitration Day enlightened the audience with a dynamic and captivating discussion about quantification of damages in international arbitration.

Mark Friedman was the session chair and proponent: he kicked off by addressing the relevance of the topic and its main challenges. In his own words, the matter is of ‘paramount importance in virtually every commercial and investment arbitration’, but is frequently overlooked.

Friedman submitted that the damages claimed in arbitration proceedings have grown in size and complexity over the years. While claims involving more than $100m were exceptional decades ago, ‘billionaire arbitrations’ are becoming more and more frequent nowadays.

According to Friedman, one of the main reasons for this shift is the increasing use of complex methodologies – such as income-based methodologies – in damages assessment. Because of this new trend, damages in commercial and investment arbitrations will continue to grow. In Friedman’s view, the legal community does not have the right training and experience to deal with these economic issues. Consequently, practitioners do not dig into the assessments that support damage quantification in international arbitrations. He also highlighted that several legal issues with relevant impacts in quantification of damages are frequently ignored. A good example is the pre-award interest.

Friedman proposed the creation of a ‘Quantum Academy’ as a solution for this problem. The academy would be composed of lawyers, economists and accountants, and would focus on providing training, with tests and certifications, and developing discussions on relevant matters surrounding damages quantification. The main idea is to build a dedicated damages quantification community that we can trust.

Gabrielle Nater-Bass was the first panellist to speak. She agreed with Friedman on the importance of the issue, as well as on the frequent lack of sufficient consideration by arbitration practitioners. According to Nater-Bass, the matter should be treated with utmost care by those who ‘want to win big’.

In Nater-Bass’s view, while arbitral tribunals normally assess expert reports based on legal parameters, precedents and so on, these reports do not give the necessary attention to legal issues — often ignoring matters such as causation links and limitation of damages.

Nater-Bass’s intervention continued with a presentation about the DIA (Damages in International Arbitration) app, an application designed by a task force put together by the International Council for Commercial Arbitration (ICCA) and the American Society of International Law (ASIL), which aims at fostering ‘a more robust and uniform approach to damages’.

The tool was launched in November 2021; it provides legal and economic standards for damage assessment in different classes of arbitrations (commercial, investment, investor-state) and in different legal systems (civil law, common law). It can be used as a way of understanding the legal and economic approaches suitable to virtually all kinds of arbitrations.  

David Dearman focused his comments on the complexity of methodologies for assessing damages, such as the discounted cash flow methodology. Dearman submitted that lawyers normally tend to ‘keep away’ from discussions on damage quantification due to their complexity. He has seen situations in which there was no challenge to the expert report assessing the damages, and no cross-examination of the expert responsible for the report.

According to Dearman, the way damages are calculated significantly vary depending on certain assumptions and methodologies. Lawyers need to understand these issues to effectively challenge or defend the calculations. He strongly supported the Quantum Academy proposed by Friedman.

Smitha Menon commented on the differences of approach between jurisdictions when setting aside lawsuits. She mentioned Asian decisions setting awards aside because the arbitral tribunal did not use its own expert to calculate the damages. She also addressed the specific situation of Indonesia – where the role of the expert is not clearly defined – and of India, where arbitral tribunals are empowered to decide about the admissibility, relevance and materiality of the expert evidence (although they are not allowed to decide on the matter without any evidence).

The panel ended with an interesting discussion between Dearman and Menon regarding the great responsibility that lies upon experts’ shoulders in terms of quantification of damages. They submitted that experts normally reach widely different conclusions, due to the use of overcomplicated models or different legal and/or factual assumptions, and they should be educated in quantum issues to effectively help the tribunal.